What’s in store for Endeavour?

SITE VISIT

GUANAJUATO, MEXICO — Endeavour Silver (EDR-T) has a plan.

So far, the plan has worked well: in six years the company has gone from an upstart explorer to a mid-sized silver and gold producer operating two mines in Mexico.

During that time, Endeavour’s geologists have found eight new orebodies at those two operations and have taken at least two of them from discovery to production within six months.

With two mines now running smoothly and turning profits, Endeavour’s manage: acquiring another historic mine that could be made operational in a short period. And it has a specific list of requirements to help ensure success.

By sticking to the plan, Endeavour wants to increase its production to something like 8 million oz. per year within a few years, making itself a perfect acquisition target for a bigger silver company.

The plan

In early 2004, after a few years of searching for the right projects and people, Endeavour made its first big move by inking a deal to purchase the Santa Cruz silver mine and Guanacevi processing plant in Durango state for $7 million. Endeavour’s management says it looked at more than three dozen projects in its search but only Guanacevi, as the project came to be known, fit the bill — a permitted and producing but underperforming operation with strong exploration potential and good infrastructure.

Within six months at Guanacevi, the Endeavour team discovered a new orebody known as North Porvenir, drove an access ramp in to the zone, and defined a 4.8-millionoz. silver resource. The company had the new zone in production before the end of the year.

In its first full year of operations under Endeavour management, Guanacevi produced 950,000 oz. silver and 2,330 oz. gold. Now the operation kicks out some 1.9 million oz. silver and 4,880 oz. gold annually, at an average cash cost of US$8 per oz. silver (net of gold credits).

And the Guanacevi mine area, which came to Endeavour essentially depleted of known mineralization, is now home to 1.3 million reserve tonnes grading 356 grams silver per tonne and 0.54 gram gold per tonne. The mine’s resource count is considerably bigger: 2.2 million indicated tonnes carrying 255 grams silver and 0.53 gram gold plus 1.4 million inferred tonnes averaging 209 grams silver and 0.36 gram gold. All together, the resources contain 27.4 million oz. silver.

The series of events at Guanacevi did not happen by chance. On the contrary, everything Endeavour does, from small silver sales to major project purchases, is done by design. And the company’s next major purchase, Guanajuato, was no exception.

What Guanajuato offers

In searching for a second operation to complement Guanacevi, Endeavour’s chairman and CEO Bradford Cooke says the company wanted to find another Guanacevi — a permitted operation with strong exploration potential and good access to labour and infrastructure. After once again visiting dozens of projects, it came upon Guanajuato.

Mining in Guanajuato is as old as anywhere in Mexico. The area, which is part of the famous Sierra Madre silver-gold belt, has produced more than 1.2 billion oz. silver and 5.2 million oz. gold over 450 years of mine activity.

In June 1548, a group of Spanish livestock herders stumbled upon the San Bernabe vein and the discovery triggered a silver rush. Over the next 10 years, miners found and tapped into essentially all of the near-surface silver and gold in the district, including the locally famous Veta Madre vein.

Surface exploration and open-pit mining, however, only go so far. And the shafts driven into the ground enabled some underground mining, but miners could only chase veins until they pinched away or they could dig blindly in hopes of hitting another seam. As a result, much of the deeper mineralization in the Guanajuato district remained untouched.

Moving ahead 400 years, an explosion in exploration technology was getting underway when Mexico nationalized its mining sector. The law restricted foreign mine ownership to 49%, so international explorers and miners mostly left the country until the signing of the North American Free Trade Agreement re-opened Mexican mining to foreign investment.

“That means there was 30 years of no real modern exploration,” says Cooke. “And that’s why we can still find high-grade, untouched veins and orebodies under cover in such an historic district.”

Mexican mining major Industrias Penoles (IPOAF-Q)ware of Guanajuato’s potential, rehabilitated some of the old shafts and built a processing plant in the late 1990s. Unfortunately for Penoles, just as the operation was getting underway in 1998, the price of silver fell through the floor. The company decided to walk away, leasing the plant and mine to local miners.

“The local operator was doing okay, well enough to keep the mine running and make a bit of money, but there had been no upkeep to the plant,” says Cooke.

Knowing what a bit of plant upkeep combined with modern exploration could do, Cooke and his team inked a deal with the local operator for the exploitation rights and then negotiated an agreement with Penoles to buy the plant and mine. Together, the two deals were worth just over $7 million, two-thirds of which was in shares.

Endeavour immediately put $500,000 into the 11-year-old plant to bring it up to date. Soon after, an independent valuation of the plant pegged its value at $14 million, which, as Cooke enjoys pointing out, means that Endeavour paid for the plant and essentially got the mine for free.

A year later, in 2008, Endeavour spent another $250,000 at Guanajuato to replace a small cone crusher with a larger one and to re-configure some conveyors, a move that increased the plant’s efficiency by about 20%. The plant is now rated at 600 tonnes per day, though Endeavour usually keeps daily throughput between 500 and 550 tonnes.

Those tonnes come from Guanajuato’s three producing mines, known as Cebada, Lucero and Bolanitos. There are also two mines on care and maintenance.

The mines sit within two parallel, north-northwest striking vein sets that are contained within a 25-sq.- km area. The western vein set is known as La Luz and it is home to four mines — Asuncion, Bolanitos, Lucero and Golondrinas — and the Guanajuato processing plant. Just 5 km to the east is the Veta Madre vein set, which is home to Endeavour’s Cebada mine.

Endeavour controls the northern ends of La Luz and Veta Madre, while Great Panther Silver (GPR-T, GPRLF-Q) owns the ground to the south. And there is a third vein set farther to the east, known as El Cubo, which is controlled by Gammon Gold (GAM-T, GRS-N).

The Guanajuato area is essentially laced with veins. The trick is finding and then following those veins that carry significant mineralization. The primary silver-bearing minerals at Guanajuato are: electrum, a natural gold-silver alloy; argentite acanthite, which is silver sulphide; and proustite pyrargyrite, a silver-arsenic sulphide also known as ruby silver for its scarlet colour and crystalline appearance.

The quartz veins that bear those minerals are in some places just a metre wide and in other spots expand to 10 metres.

“We’re chasing pearls on a necklace,” says Cooke. “The high-grade pods are our pearls and the veins are the necklace. The challenge is to keep finding pearls in between dead zones.”

One of the key pearl-bearing veins that Endeavour has found at Guanajuato is called Lucero. An Endeavour geologist named Lucero discovered the vein in September 2008. By November, the company was developing on the vein underground and by January 2009, less than six months after it was discovered, the Lucero vein was in production.

And Lucero carries more gold than most of the veins at Guanajuato. Hits from Lucero include 2.2 metres grading 3.26 grams gold and 413 grams silver, 1.6 metres averaging 13.5 grams gold and 593 grams silver, and 4.9 met
res of 1.46 grams gold and 260 grams silver. And the latest set of results extended the vein 500 metres beyond the current mine workings.

Finding Lucero taught Endeavour a lesson about searching for veins at Guanajuato.

“Lucero is southeast along strike from the Bolanitos mine,” says Barry Devlin, Endeavour’s vice-president of exploration. “Initial surface prospecting indicated there was nothing of interest in the area. But we drilled it anyway, just in case, and hit a good new vein in the footwall of an old vein. Since then, we’ve lowered our standards for surface prospecting and it has worked — our surface work is now more effective.”

Lucero sits between two other interesting areas in the La Luz area of Guanajuato. To the west is Bolanitos South, which as the name implies is the southern extension of the Bolanitos vein. It is the area that has provided Endeavour with the most new resources over the last two years. Some of the better intercepts from Bolanitos South include 5.8 metres grading 5.54 grams gold and 166 grams silver and 6.4 metres averaging 0.92 gram gold and 204 grams silver.

And to the south, Lucero pinches off into a dead zone before opening up again into a new vein that, like Lucero, is named after the geologist who discovered it: Karina. Endeavour has punched two holes into Karina to date and has not released results, but the company has more drilling planned for the area.

Finally, Endeavour is also mining and exploring at the Cebada mine, which is the only Endeavour mine on the Veta Madre vein set. The Veta Madre veins are different from the La Luz veins — they are hosted in sedimentary rock and contain significantly more ruby silver. And multiple mineralizing events in the Veta Madre, each with a different boiling point level, have left behind silver spread over several hundred metres of vertical extent.

Some of Endeavour’s recent drill intercepts from Cebada include 1.2 metres of 442 grams silver and 0.6 gram gold, 1.4 metres of 316 grams silver and 4.5 grams gold, and 1.2 metres of 599 grams silver and 6.4 grams gold. These results show that, even though miners have been pulling silver and gold out the Veta Madre for 400 years, there is still much left in the ground.

“We’re absolutely not worried about running out of places to explore,” says Devlin. “There was no ore here when we bought it and now look what we’ve got. For underground miners, having three to five years of solid reserves proven up ahead of us is great.”

Production, potential

In 2007, the mines at Guanajuato together hosted just 2 million oz. silver in reserves. In 2008, Endeavour completed 21,000 metres of drilling at Guanajuato and hit enough mineralization to boost the reserve count to 15 million oz. In 2009, it repeated that success — even after a slow, money-conserving start to exploration in the wake of the global recession, Endeavour still managed to increase the Guanajuato reserve to 22 million oz. silver with just 4,400 metres of drilling.

There are also several areas that are awaiting a drill. East of Lucero is a new area marked by a nice soil anomaly that has been dubbed La Joya. And north of Bolanitos is an area that has a few low-grade outcrops; Endeavour is working with the landowner to gain access to the area and will start drilling soon.

There is also lots of land in the area that Endeavour has its eye on. And it turns out Penoles, which already owns 5% of the company and likes what Endeavour is doing, owns almost all of the surrounding property. Their relationship certainly makes negotiating deals easier.

“We have options to acquire more land,” says Cooke. “And Penoles doesn’t want cash — they want our shares so they can participate in the process. So that works well for both of us.”

Once Endeavour has increased the Guanajuato resource life from the current six years to 10 years, Cooke says, the company will start a proper process plant expansion. The plant already has more than enough crushing capacity, so the expansion will involve adding milling capacity and flotation circuits, an effort expected to cost $2.5 million. The expanded plant will be able to process 800 tonnes of ore daily.

Guanajuato and Guanacevi together produced 2.6 million oz. silver last year. The target for 2010 is 3 million to 3.5 million oz. And by the end of 2011, Endeavour plans to produce 4 million to 4.8 million oz. of the shiny metal annually.

The company is on track to meet or perhaps beat its 2010 production target, having recently announced record production numbers for the second quarter. In those three months, the Guanajuato operations produced 204,054 oz. silver and 2,858 oz. gold, from 48,124 tonnes grading 166 grams silver and 2.14 grams gold, while the Guanacevi mines kicked out 622,385 oz. silver and 1,602 oz. gold. The numbers represent a 41% increase in silver production and a 61% increase in gold output compared with the second quarter of 2009.

Endeavour is in the enviable position of having two profitable mines as well as a comfortable cash cushion of more than $40 million. The cash, in particular, helps the company earn more from its silver sales because, with cash on hand, the company does not need to sell silver every week. Instead, Endeavour’s president and COO, Godfrey Walton, watches the silver price carefully and makes sales when the time is right. His moves enabled Endeavour to beat the average 2009 price of silver by 5%.

But Endeavour does not want to sit on its money forever. Instead, the company is actively seeking out a third operation to add to its fold. And, as with every Endeavour move, there is a clear plan guiding this next major purchase.

In looking for the next acquisition, Cooke and Walton have three key questions. Could the project support an entire company as a core asset? Is there good potential to grow the resource? How much would Endeavour have to pay for it?

The project needs to answer those questions with two yeses and a reasonable number before Cooke and Walton will even consider it. Because they know where they want to take Endeavour and what it will take to get there.

Endeavour closed recently at $3.42. The company has a 52-week trading range of $1.94-$4.57 and 63 million shares outstanding.