Endeavour Silver adjusts to low silver prices

VANCOUVER — Silver prices are sitting around a five-year low after a precipitous fall. And that has changed the business environment for Endeavour Silver (TSX: EDR; NYSE: EXK) and other like-minded, mid-tier miners.

The company’s model of stacking numerous small operations across historic Mexican silver districts made it a notable, and emulated, success story. But now that silver is trading near US$15 per oz. — marking a 69% drop over the past four years — Endeavour has had to adjust its strategy to reclaim positive earnings.

Endeavour now operates three high-grade silver mines in Mexico, and it has seen its production rise over the past decade. In fact, the company set a new output record in 2014 when it produced 7.2 million oz. silver. It’s on the cost side, however, that Endeavour is struggling to get it right.

The company registered an adjusted loss of US$17.2 million, or 17¢ per share, compared to earnings of US$11.1 million, or 11¢ per share, in 2013. Endeavour has had to cope with Mexican tax reform passed in early 2014 that boosted its tax rate to 7.5% on mine revenues. The company incurred a US$4.6-million current tax expense as a result of the reform.

A lot of the red ink can be attributed to operating margins and low commodity prices. Endeavour reported all-in sustaining costs of US$16.79 per oz. in 2014, and was hit with an after-tax impairment of US$56 million related to the carrying value of its newest production vehicle, the El Cubo mine.

Endeavour recently completed a US$67-million expansion at El Cubo to get the mine humming along at 1,500 tonnes per day. When the company picked the operation up in 2012, it was running 1,100 tonnes of ore daily through a leased plant.

“What we’ve accomplished at El Cubo is definitely sustainable,” chief operating officer Godfrey Walton said during a conference call. “We’re working on a variety of plans that we will be coming out with sometime later on in the first quarter. We’re really focusing on the Santa Cecilia zone, where we have narrow veins, but high grades. And then at the new Villalpando area we’ve got some good development going on that should help us maintain those throughput levels.”

Endeavour expects El Cubo to produce between 2.8 million and 3.2 million silver equivalent oz. in 2015. The company reports that the primary consideration of its alternative mine plans is to reduce operating costs at the mine.

Overall production guidance for 2015 is expected to range from 9 million to 10.1 million silver equivalent oz., with all-in sustaining costs, net of gold by-product credits, estimated at US$19 per oz. silver.

Not surprisingly, Endeavour will be cutting exploration and capital costs across the board, which could shift the company’s development strategies. Capital expenditures are expected to drop 26%, or US$11.2 million year-on-year, to US$33 million in 2015. Meanwhile, the company’s annual exploration budget has been slashed by 42% to US$7 million this year.

One previously promising target that will be put on the back burner due to metal prices is the Milache discovery near the company’s flagship Guanacevi operation in Durango state. Endeavour had been drilling out the orebody en route to a production decision, but will instead focus its production on the Santa Cruz, Porvenir Cuatro and North Porvenir zones.

“Milache is not being brought into the mine plan,” Walton elaborated. “We’re looking for little bit higher prices before we start development. There’s about eight months of ramp development before we get into the ore. So I don’t see it actually being in production this year.”

Though brownfield expansions may temporarily be on hold, Endeavour is looking to get a fourth mine off the ground at its Terronera project, 40 km northeast of Puerto Vallarta in Jalisco state. The company picked up the property for $2.8 million in 2013, and hopes to get it into commercial production next year at a cost of US$70 million.

The development decision was triggered by a high-grade, silver-gold mineralized zone discovered in the Terronera vein, which is now over 1,400 metres long and 200 metres deep. Measured and indicated resources at the project total 3.1 million tonnes grading 221 grams silver per tonne and 1.7 grams gold per tonne for 34 million contained silver equivalent oz.

“We have experience from the mill expansion at Bolanitos and rebuilding the El Cubo plant,” chief financial officer Dan Dickson commented. “So we know what plants cost and we know how to do it. At this point we have just started looking at how to finance what we need. Obviously at today’s prices we have less cash flow available to take from our current operations. We’re looking at all sets of alternatives to see what we need and that includes talking with our current lender.”

Endeavour reported cash and equivalents of US$31 million at the end of the 2015, and has US$29 million on a revolving line of credit. The company has traded within a 52-week window of $2.13 and $7.06, and dropped 14% during the two trading days following its annual results before closing at $2.29 per share at press time. Endeavour has 102 million shares outstanding for a $236-million press time market capitalization.