Endeavour Silver to acquire Oro Silver Resources

Endeavour Silver’s (TSX: EDR; NYSE: EXK) search for development opportunities to shore up its portfolio of three producing silver mines in Mexico has resulted in an agreement to acquire Oro Silver Resources and its El Compas gold-silver project in Zacatecas, Mexico, in an all-share deal valued at $10.5 million.

Oro Silver is a wholly owned subsidiary of Canarc Resource (TSX: CCM), a company Endeavour Silver founder and CEO Bradford Cooke created in 1998 focused on exploring and developing gold prospects in the Americas. (Cooke set up Endeavour Silver in 2003, to acquire high-grade silver projects in Mexico.)

A preliminary economic assessment of the permitted El Compas project that Canarc completed in February contemplated a seven-year underground mine using a local contractor to produce 18,000 equivalent oz. gold a year.

Mineralized material would be trucked 20 km from El Compas to the government-owned La Plata processing plant. Canarc has already secured a five-year renewable lease option with the government to use the 500-tonne-per-day plant.

The plant was built in September 2013 by the state government of Zacatecas to process minerals from local small miners. It last operated in October 2014.

Endeavour says it would take less than a year to develop the mine and refurbish the plant at a US$10-million capital cost. (The refurbishment would include adding a 50-tonne-per-day-leach and Merrill-Crowe recovery circuit to the plant to make doré bars.) If all went according to plan, El Compas could be in production in 2017.

“El Compas is a high-quality — albeit small — gold-silver mining project,” Endeavour’s CEO Cooke said in a telephone interview. “Canarc was quite nimble to acquire the property cheaply and add significant value in such a short period of time — not only in terms of acquiring the fully permitted mine and leasing an existing plant, but also in re-estimating the resource, completing a preliminary economic assessment and hiring a general manager. That was work well done.”

According to the PEA, payable production over the mine’s life would add up to 115,000 oz. gold and 886,000 oz. silver for a total  126,000 equivalent oz. gold. Cash costs in the study were estimated at US$523 per equivalent oz. gold, with all-in sustaining costs of US$614 per oz. gold.

At metal prices of US$1,100 per equivalent oz. gold and US$14 per oz. silver, the high-grade operation could deliver a US$32.9-million after-tax net present value and an 84.3% post-tax internal rate of return at a 5% discount rate.

Canarc has estimated a  552,000-tonne indicated resource grading 6.55 grams gold per tonne and 66.2 grams silver for 116,000 oz. gold and 1.18 million oz. silver. Inferred resources add another 421,000 tonnes at 4.18 grams gold and 59.9 grams silver for 57,000 contained oz. gold and 812,000 oz. silver.

“The resource is small, so Endeavour probably wouldn’t have done this deal unless we thought there was good exploration and consolidation potential,” Cooke said. “Endeavour Silver has deeper management and deeper pockets than Canarc, so it is better positioned to unfold the full potential at El Compas, and therein lies Endeavour’s rationale for the transaction.”

Cooke points out that Zacatecas is one of Mexico’s largest historic silver districts and that a number of companies are active in the region, including Capstone Mining (TSX: CS) and its Mala Noche mine, 20 km from El Compas, Penoles’ Francisco Madero copper-zinc mine, 30 km northwest, and the Fresnillo silver mine, 50 km northwest.

“Satellite imagery shows a northwest-trending major structure that goes from El Compas right through the Francisco Madero mine, and some geologists postulate it may be responsible for the emplacement of the volcanic rocks and two ore deposits,” Cooke says.

The Zacatecas district is full of historic silver mines, he adds, and property ownership in the district is highly fragmented. “There are junior companies holding small resources scattered throughout the district, all of which are within trucking distance of our plant,” he continues. “If we could pick up some of these smaller resources, we may get production from several sources in the district. We’d have to do deals to get them, but we think this is an opportunity.”

Cooke is confident that the 39.9 sq. km property itself — which hosts multiple gold-silver veins with a history of small scale, underground mining from two old mine workings — offers potential for more discoveries.

So far, exploration efforts have focused on near-surface gold mineralization, but the company believes there may be more mineralization at depth in the El Compas and El Orito veins, and near-surface in several other prospective veins hosted within the Mesozoic volcanic rocks typical of the district.

“There are another dozen or so exploration targets previously identified on the El Compas property — early-stage targets, but with alteration or mineralization that have never been drilled — and around the resource there are parallel veins that appear prospective,” Cooke says. “There are also some areas of the resource that need work to upgrade them for a mine plan.”

Under the transaction with Oro Silver, Endeavour will issue the junior 2.2 million of its shares at $4.89 per share (the 10-day, volume-weighted average price of Endeavour’s shares on the Toronto Stock Exchange).

In addition, Endeavour will assume Canarc’s obligation to pay a total 165 troy oz. gold production to Marlin Gold Mining Ltd. Three payments of 55 troy oz. are due in October 2016, 2017 and 2018.

Of the 28 concessions on the land package, 22 are subject to a 1.5% net smelter return royalty (NSR), and six are subject to a 3% NSR.

Endeavour says its short-term goals at El Compas will be investing in exploration to upgrade and expand the resource, consolidate properties in the district to extend the project’s mine life and refurbish the plant, and re-evaluate the economics of developing the mine.

As for Canarc, Cooke says, the junior turned a good profit on El Compas. “In less than a year, Canarc acquired the El Compas project, did a lot of value-added work and received five times as much as it had invested,” he says. “Their $2-million acquisition and development cost netted the company a $10.5-million return. Canarc’s enhanced treasury allows the company to actively seek substantial merger and acquisition opportunities to create even more value for our shareholders.”

Cooke says both companies will continue to look for new acquisitions.

“Endeavour Silver is focused preferably on bigger opportunities, and that’s primarily my job, and at Canarc, their CEO is also working hard to build out Canarc’s portfolio — thankfully with a much larger treasure chest than it had before the deal.”

Last year, Endeavour’s three mines produced a total of 7.2 million oz. silver and 60,000 oz. gold. Its Guanacevi mine in Durango state, and the Bolanitos and El Cubo mines in Guanajuato state, are all high-grade, underground mines.

Elsewhere in Mexico, Endeavour is advancing its high-grade Terronera project in a historic silver and gold mining district in southwestern Jalisco state, 155 km southwest of Guadalajara and 40 km northeast of the coastal resort town of Puerto Vallarta.

Endeavour acquired an option to buy the property in 2010, kicked off exploration drilling in 2011, discovered the Terronera mineralized zone in 2012, established an initial resource and bought the property in 2013, and continued infill drilling to delineate a more substantial resource in 2014.

In late 2014, Endeavour received approval from the Mexican government for its environmental impact assessment (EIA) for a 500-tonne-per-day project and initiated a prefeasibility study to assess the potential to amend the EIA, and build a 1,000-tonne-per-day, high-grade underground silver gold mine at Terronera.

In May 2015, Endeavour completed a preliminary economic assessment that outlined a 10.3-year mine life and $65.4-million, pre-production capex.

The PEA was based on the company’s October 2014 resource estimate that outlined 2.9 million tonnes grading 211 grams silver per tonne and 1.65 grams gold per tonne, for contained metal of 19.9 million oz. silver and 156,000 oz. gold (30.8 million equivalent oz. silver) in the indicated category. Inferred resources measured 1.2 million tonnes grading 218 grams silver, 1.39 grams gold for 8.5 million oz. silver and 54,000 oz. gold (12.3 million equivalent oz. silver).

Terronera displays a classic low-sulphidation epithermal vein system, and, historically, more than 50 small mines have been been developed within at least 20 veins in the 16 sq. km land package.

While the Terronera silver mines were first discovered in 1542 and have seen several periods of small-scale mining over the last 450 years, little modern exploration was ever carried out in the district, the company says.

The Terronera property also surrounds an underground silver-gold mine called Santa Quiteria, which produces 100 tonnes of ore daily.