After Endeavour’s Q2, analysts cut price targets

Endeavour Silver (TSX: EDR; NYSE: EXK) had a tough second quarter, with adjusted earnings plunging below analysts’ expectations due to lower gold and silver prices.

The miner, which operates three underground silver-gold mines, posted a net loss of US$400,000 and an adjusted loss of US$2.7 million, or US3¢ per share, compared to the consensus of an adjusted profit of US2¢ per share and last year’s US7¢-per-share gain.

Cash flow from operations before working capital changes fell 32% to US$11.5 million, despite the miner boasting a strong operational period. 

Silver production was up 48% to 1.53 million oz. and gold output rose 159% to 19,914 oz. in the quarter. The higher production helped lift quarterly revenue by 76% to US$71.3 million. But one of the factors that dampened Endeavour’s earnings were surging production costs. Cash costs net of by-product gold credits jumped 93% to US$10.53 per oz. silver, while cash costs on a co-product basis were US$14.75 per oz. silver and US$854 per oz. gold. The miner explains that the escalating costs resulted from lower gold credit, higher amortization and depletion related to its El Cubo mine acquisition, and a US$6.4-million writedown for its stockpiled ore, concentrate and gold inventories, thanks to the weaker metal prices. Realized silver and gold prices fell 23% and 19% to US$21.38 per oz. and US$1,297 per oz. during the quarter. 

Endeavour’s best-performing mine was Bolanitos in Mexico’s Guanajuato state, as throughput, grades and recoveries increased. Bolanitos churned out 810,414 oz. silver and 15,751 oz. gold, while the mining rate averaged 2,305 tonnes per day — surpassing the mine plan — as the company increased contract mining and revised mining techniques.

“Management responded quickly to the sharply lower metal prices in Q2 2013 by boosting production from the lower cost Bolanitos mine and initiating company-wide cost cutting programs,” said Bradford Cooke, the company’s CEO. These programs were introduced in May and included reducing contractors and employees by 16% and trimming capital, exploration and administrative costs for its three operations in the second half of the year.

At the Guanacevi mine in Durango state, output plunged 17% for silver to 555,036 oz. and 36% for gold to 1,590 oz., owing to lower grades and recoveries. Throughput also dropped below the 1,200-tonne-per-day plant capacity due to unplanned maintenance and repairs during the quarter. Endeavour says throughput should return to normal levels, with the repairs that were completed in July.

Silver and gold production at El Cubo in Guanajuato state fell by more than a third to 170,424 oz. silver and 2,574 oz. gold, as the operator recommissioned the newly built plant and infrastructure at the mine in the second quarter. Endeavour intends to reduce El Cubo’s operating costs with more staff cuts and operational efficiencies, noting that if these measures don’t work it would consider lowering throughput to increase grades, or even putting the operation on care and maintenance.

“We take a conservative view of El Cubo and have cut back our near-term cash flow expectations for the mine. As result we have elected to cut our target to $4 (from $5),” Chris Thompson, a Raymond James analyst, writes in a note. He rates Endeavour as “market perform.”

“We expect 3Q13 will provide a much better gauge on the profitability of EDR’s operations at current prices, given the cost-cutting initiatives implemented near the tail end of 2Q,” he adds, noting better performances are needed from the Guanacevi and El Cubo mines in the second half of the year to improve the company’s cash position.

Endeavour ended the June quarter with US$22.3 million in cash and equivalents, with another US$28 million in inventories and US$39 million drawn from its US$50-million credit facility.

The miner says it’s on track to reach its annual production guidance of 5 million to 5.3 million oz. silver and 46,000 to 49,000 oz. gold, and notes year-to-date production of 3 million oz. silver and 35,000 oz. gold. But it cautions that it may not be able to meet its annual cash cost forecast of US$9 to US$10 per oz. net of gold credits due to the drop in metal prices.

Salman Partners analyst Ash Guglani forecasts Endeavour will generate 5.7 million oz. silver in 2013 at cash costs of US$11.50 per oz., minus gold credits. He has reduced Endeavour’s target price to $5.50 from $8, but has a “buy” rating on the stock.  

To conserve cash, Endeavour has lowered its 2013 exploration budget by 25% to US$12.1 million, of which it will spend up to US$2.5 million in the second half. It has slashed its capital spending for the rest of the year to US$6.5 million to US$7.5 million, and administrative costs to under US$6.5 million.