Endeavour reports record earnings, output

VANCOUVER — A day after announcing record earnings in 2012, Endeavour Silver (EXK-N) inked a deal to sell bonus concentrate from its overachieving Bolanitos silver-gold mine to local Mexican smelters, in a move that positions the producer to exceed its production guidance for 2013.

Last year was Endeavour’s eighth consecutive year of production growth. At the start of the year Endeavour had two operations in Mexico: the Guanacevi silver-gold mine in Durango state and Bolanitos in Guanajuato state. In July the company added a third mine to its portfolio with the acquisition of the El Cubo silver-gold mine, also in Guanajuato.

In terms of its immediate impacts on Endeavour’s key statistics, El Cubo was a blessing and a curse. On the plus side, the new mine added 1.6 million proven-and-probable tonnes grading 137 grams silver per tonne and 2.19 grams gold per tonne to Endeavour’s reserves. El Cubo’s downside were its high operating costs, which averaged US$35.27 per oz. silver net of gold credits, over Endeavour’s first five-plus months of ownership. Since the company realized an average silver price of US$30.99 over the year, El Cubo was a money-losing addition at first.

But transforming operations like El Cubo is what Endeavour does best. When the company bought Guanacevi in 2004 the mine looked a lot like El Cubo: it was losing money on every ounce of silver it produced, as it dug through the last bits of a depleted resource to send 150 tonnes per day through a plant with four times the capacity. Less than two years later, Endeavour had transformed Guanacevi into an operation sending 1,400 tonnes per day from a replenished resource through a plant with a nameplate 1,200-tonne-per-day capacity to produce silver for US$10 per oz.

The process worked so well that Endeavour bought a second mine, Bolanitos, in 2007. It was a similar story: almost out of ore, Bolanitos was struggling to produce 80,000 oz. silver a quarter and cash costs had reached US$32 per oz. Eight quarters later Endeavour had Bolanitos kicking out 200,000 oz. per quarter, and cash costs were negative.

That pattern of success may be why Endeavour’s share price, which fell for months following the El Cubo acquisition, is now rebounding: after dragging Endeavour’s numbers down, investors expect that an El Cubo turnaround is coming soon. And indeed, El Cubo’s expensive nature pushed Endeavour’s cash costs up 44% in 2012 to US$7.33 per oz. silver, but Endeavour is increasing efficiencies at its new mine, and expects cash costs there to decline throughout 2013.

It costs money to make money, though, and Endeavour is certainly investing capital at El Cubo. In September the company said it would spend US$67 million at the mine over 18 months. Endeavour put US$14.5 million into the operation in 2012, primarily directed at underground mine development, underground drilling and new equipment purchases. This year’s focus will be a rehabilitation and expansion of the plant, and exploration drilling to define new reserves.

El Cubo was not the only Endeavour mine that saw significant spending in 2012: the company also put US$19.3 million into Guanacevi and US$31.3 million into Bolanitos. At Guanacevi, two-thirds of the year’s capital spending went towards 7.3 km of underground mine development, while much of the rest helped Endeavour complete a 20% plant expansion that increased throughput to a daily 1,300 tonnes. At Bolanitos, US$18.5 million funded an exploration program that led to 8.5 km of mine development in the Lucero area. Another US$6.6 million went towards a plant expansion that boosted throughput by 60% to 1,600 tonnes per day.

Despite all that spending, Endeavour still achieved record net earnings of US$42.1 million in 2012. That marks an increase of 124% compared to 2011, even though Endeavour’s average realized silver price declined 13% year-over-year.

It helped that the company’s average realized gold price climbed 7% while its gold output jumped 77% to 38,687 oz. Endeavour’s silver production rose to 4.5 million oz. in 2012, a 20% increase over 2011.

The company had a good year exploring, driven by what CEO Bradford Cooke described as three seminal events.

“We delineated a new, high-grade area in Guanacevi called Milache that is still open to expansion, with another kilometre of strike that will be tested in the first half of the year,” Cooke said. “We drilled out a new high-grade silver-gold discovery at Bolanitos called the Lana vein. And perhaps the most exciting development on the exploration front was our find at the San Sebastian property: the Terronera vein was a grassroots find in a historic district that had never been drilled. Terronera already contains 31 million oz. silver resource, and it remains wide open.”

San Sebastian is a large land package in the historic silver-gold mining district of San Sebastian del Oeste, in Jalisco state.

Endeavour acquired an option to earn into the property in 2010, and has been slowly exploring the district-scale opportunity.

Between exploration drilling and acquiring El Cubo, Endeavour more than replaced the proven-and-probable reserves it depleted through mining in 2012. The company also increased its resources in all categories. Gold reserves and resources rose more than silver counts because the Lana vein at Bolanitos, the Terronera vein at San Sebastian and the El Cubo property in general bear higher gold grades than Guanacevi.

If all goes according to plan, Endeavour should beat 2012’s record output this year.

The company is forecasting production of 5 million to 5.3 million oz. silver and 46,000 to 49,000 oz. gold from its three operations. But the day after releasing this forecast, Endeavour announced a new arrangement that should help it achieve its goals.

There are seven veins with active working faces at Bolanitos, which means the mine can produce 2,000 tonnes per day. However, the plant at Bolanitos can only process 1,600 tonnes per day. Endeavour wants to expand the plant, but rather than rush to complete another expansion, Endeavour’s management took a look around and saw unused capacity at nearby milling facilities.

Since the fourth quarter of last year, Endeavour has been leasing capacity from a mill that sits next door to El Cubo. Las Torres, as the facility is known, has been turning Bolanitos’ extra ore into silver-gold concentrates. However, with the leach circuits at Guanacevi and El Cubo maxed out, Endeavour has not turned the concentrates into doré bars, but has built-up a stockpile.

Now Endeavour has found an outlet for its stockpiled concentrate. The company signed contracts to sell its silver-gold concentrates, at rates the company says are competitive with its own costs to transform the concentrates into saleable metals. The sales contracts will call Endeavour to sell its current concentrate inventory of 1,400 tonnes by the end of March, and in doing so, bank about $20 million.

Endeavour also arranged to sell 500 tonnes of concentrate per month to these buyers over the next six months. Sales proceeds will be used to optimize the Guanacevi and El Cubo facilities.

Endeavour’s share price has struggled of late, falling from its 52-week high of $10.46 in September to a 52-week low of $5.15 in early March. In recent weeks shares have turned around, though, regaining about a dollar to sit near $6.30. The company has 100 million shares outstanding.