Endeavour Silver Corp. - On the Move!
No, I m not talking about huge excitement yet but it seems some investors recently stepped up to the plate which resulted in noticeable performance gains for some high quality juniors. Now who are these investors? What does it mean? Is the smart money starting to pile in already? Should you do the same? Shouldn't we wait for some real excitement to kick in driven by new highs for gold/silver first?
Sure we can, but it seems to me that, yes, some smart money has indeed begun to aggressively accumulate selected junior mining companies.
Allow me to explain:
As I mentioned, the present situation in the junior mining market is characterized by a widespread disinterest by the general public. But as the downside potential has become limited (due to extreme undervaluation of Gold against its own historical norm, see also Gold & Historical Norm ...), so the upside potential has grown (Gold should be trading hundreds of dollars an ounce higher in order to catch up to its own dollar adjusted historic average). It may very well be a good time to consider deploying some investment capital once again into promising junior situations.
Let's go back to May 2005 and see what's been happening since then.
On May 21, 2005 I wrote my piece Gold/HUI Divorce part II which made a strong case for a strong rebound of the gold shares due to the extreme anomalies which were evolved between Gold and the HUI. The HUI was trading around 170 and needless to say that sentiment was as bad as it could get. Many analysts called for a continued HUI drop all the way down to 100. But unfortunately for the HUI bears at that time the Gold/HUI anomalies were stretched to such extremes that a return to more normal Gold/HUI ratios was more likely than a further exaggeration of these extremes.
As always, extremes don't persist for a long period of time and indeed this time it didn't either. The Gold/HUI ratio started moving towards more normal values thereby taking the gold-shares higher. Since this was just a technical rebound from a severe oversold condition it was too early to tell if the May low marked a permanent one.
But suddenly (mid June) many of the high quality juniors started to break-out of their grueling down-trend which had persisted for many months. On June 16 I send the following remark to Bill Murphy of LeMetropolecafe:
That was mid June but still this could be considered as just a technical rebound due to a severe oversold condition. But to my surprise some of the juniors continued to outperform their senior brothers the months to come.
On August 02 I send some follow-up remarks to Bill Murphy of LeMetropolecafe:
Although there's no excitement at all among the general junior investor something seems to be happening indeed. Jim Sinclair (JSMineset.com) who is considered to be one of world's leading gold experts told his subscribers on June 16:
How right Mr. Sinclair proved to be. Not only did his firm appreciate by a stellar +110% since mid May but lots of other juniors did the same.
Now, the upswing of the juniors from mid May to mid June could be considered as a technical rebound from a severe oversold condition but a continued upswing accompanied by high volume falls beyond the scope of a technical rebound, what we're seeing lately is accumulation of some juniors.
Now what makes me comfortable is the August junior performance. It's by far the strongest month so far this year, see table below:
As said before, the general interest from Joe public is non-existent so who is buying when Joe public doesn't?
For Mr. Sinclair it's quite obvious who is buying. He told his readers at JSMineset.com on August 13:
It should be obvious that the downside risk for the juniors is fading since it's only a matter of time before gold will make new highs since gold is way undervalued compared to historical averages. (see also Gold & Historical Norm). Therefore it's my strong believe that investors getting into juniors these days are only facing a penny-downside risk. Sure, when excitement kicks in (eg. gold making new high - >$456 -) all juniors will fly and yes, you can wait for that to happen but you ll find out by then that you're too late chasing the high quality ones since they already left the station.
Another well respected market veteran who subscribes to the view of a limited downside risk is Sprott Asset Management's President John Embry. On August 23 he appeared on Report on Business TV and shared the view that there s limited downside potential here indeed. An excerpt from this interview:
OK, even if there's minimal downside potential here, why should I invest now since this sector could be moving sideways for months or years to come? Why not wait for gold to make new highs before entering the junior arena again...
Well, fair enough but as we have seen, some juniors are performing well already, so the trick is to recognize which ones are in the pole position? I agree that it is not an easy task. Nevertheless, one I'm quite confident about is Endeavor Silver Corp.
It's my strong belief that Endeavour could do very well in coming years because Endeavor doesn't need new precious metals highs in order to create value for its shareholders and therefore draw some serious investor attention. In other words, Endeavour has tremendous growth potential based on today's precious metals prices. They simply need to do what they say they can do and the company could grow its production up to 10-fold in just two and a half years' time. That would be a remarkable achievement indeed.
Unrealistic expectations? Well, read the facts and judge yourself:
Endeavour Silver Corp. (EDR: TSX.V)
If Endeavour Silver can live up to its own expectations in coming years, it should please its shareholders big-time since they are targeting a 3-fold production increase to 1.3 million ounces per year by March 2006. But that's only the beginning since they're targeting another 3 fold increase to 3.6 million ounces per year by 2007. This achievement would make Endeavour one of the 5 largest primary silver companies in the world.
Please think about that, Endeavour could grow its production 10 fold in just two and a half years' time. No matter how you slice it, this would be a remarkable achievement. But what makes this story so compelling is that if they do so, their revenues/profits should also increase dramatically without the need for higher silver prices.
Too good to be true?
Let's review the facts here and see what they tell us.
What is Endeavour Silver Corp ?
Endeavour Silver Corp. is a silver mining and exploration company focused on expanding its high grade silver production, resources and properties in Mexico. With the acquisition of the Santa Cruz silver mine and Guanacevi process plant in Durango, Mexico, Endeavour has become a new silver producer with substantial growth potential.
Endeavour is targeting a 3-fold increase in production to 1.3 million ounces for the 12 month period ending February 28, 2006. Annual production is projected to triple again to almost 4 million ounces by 2007. This achievement would make Endeavour one of the five largest primary silver companies in the world.
Endeavour was founded in August 2002 by the roll back and change of control of Levelland Energy & Resources (LVL).
When LVL's president Don Coates retired, he turned to Brad Cooke, President of Canarc Resource Corp (CCM-TSX) to take control of LVL. Canarc had been both project partner and shareholder with LVL since the mid '90s. After a 1 for 4 roll back of LVL stock to 2.8 million issued shares, Cooke renamed the company as Endeavour and took a new approach to its historic focus in Mexico. Rather than an exploration focus, new management began looking for historic high grade mines with near term production potential in important but overlooked districts.
In January of 2004, it announced a deal on the Santa Cruz mine and mill, and on-trend exploration ground, in the Guanacevi district of Durango State. The Santa Cruz mine changed Endeavour's profile drastically since it is a company builder that should remain Endeavor's most important asset for years to come.
Company CEO Brad Cooke and President Godfrey Walton are both geologists with 30 years each of exploration experience, both sit on the Board of Directors. In February this year they strengthened Endeavour's management team by adding some new key personnel and promoting from within the company thereby successfully making the transition from an exploration company into an integrated mining company.
I consider good management as one of the key assets a junior mining company can have since they can make or break a company. I mean in order to be successful the company needs good properties, in order to find good properties you need a team of good geologists, in order to build a team of good geologists you'll need good management, it's as simple as that!
Does Endeavour's management fit into that category?
Well, Endeavour's CEO Brad Cooke certainly has a good reputation among many of the mining analysts. Mining analyst Jay Taylor (J. Taylor's Gold & Technology stocks) once said about Brad Cooke:
The Santa Cruz mine together with the Guanacevi mineral processing plant in Durango, Mexico is Endeavour's most important project. They are located in one of Mexico's leading silver mining districts. Over more than 400 years of mining history, the Guanacevi district produced an estimated +500 million ounces of silver.
Endeavour acquired a 51% interest (EDR paid US$ 3 million for the 51% interest) but can earn a 100% interest by paying an additional US$4 million over the next two years. That's makes a total of US$ 7 million dollars for both the mine and the plant which is a tremendous bargain when you consider that the estimated replacement value of this plant exceeds US$ 19 million according to an engineering audit by Summit Valley Equipment and Engineering Inc. (see also press release here).
The Santa Cruz mine has an historical production rate of about 400,000 oz of silver a year but the mill capacity of the Guanacevi plant has a production capacity of 3.6 million oz silver a year. So it is obvious that Endeavour's priority is to find more ore in order to feed the spare capacity of the Guanacevi mineral processing plant. If they succeed in doing so, Endeavour should grow its production ten-fold in coming years.
Will they succeed?
At the time of the Santa Cruz mine acquisition, the known silver reserves were almost depleted. That made some analysts very skeptical. They argued:
They were wondering indeed what then Endeavour President Brad Cooke was dreaming about when he acquired the Santa Cruz mine which was a mine without reserves and thus nothing to mine.
Gold analyst Paul van Eeden literally said (Dec 14, 2004):
But during a private meting with Endeavour CEO Brad Cooke, Paul van Eden changed his tune and became convinced that Brad Cooke would be able to find the missing ore. Van Eeden said:
So the idea was quite simple:
After acquisition of the mine/mill find some ore in order to feed the mill.
OK, if it were that simple, why didn't the previous mine-owners search for new ore themselves? Well, the problem for the small scale local miners was their lack of exploration capital. It's almost impossible for them to get access to capital.
That's why the local group who owned the mine decided to sell the controlling interest to Endeavour. The local family group still owns 49% of the mine although Endeavour currently controls 100% of the mine cash-flows and has the right to earn a 100% interest by paying up US$ 4 million over the next three years , see also press release here ...
So Endeavour could bring in the required funds in order to finance the required exploration programs but what made Brad Cooke so convinced at that time (Jan 2004) that he could find the missing ore?
Good question, so I asked Brad Cooke himself:
Brad Cooke replied:
OK, but what about other major silver companies, they must have seen the same opportunity right? So why weren't they interested? And if they were, how did Endeavour manage to shrug off those competitors?
Brad Cooke replied:
So after striking the deal Endeavor had to go to work in order to live up to their expectations. The strategy was simple, acquire more properties surrounding the area and explore for more ore which then could be used to feed the excess capacity of the Guanacevi plant.
Endeavor subsequently took control of an additional 230 hectares of mineral properties (the original transaction involved 461 hectares and the number of hectares is now 543) covering other veins in the Guanaveci district. These veins all had some limited mining history but had never seen any modern exploration - clearly they represented attractive prospects for development.
So what happened after the acquisition of the Santa Cruz mine? Could Endeavor come up with the missing ore? It seems they could indeed, the pace of action is staggering, see press releases below:
Thu Mar 4, 2004
Wed Aug 4, 2004
Tue Oct 12, 2004
Mon Dec 6, 2004
Tue Jan 18, 2005
Mon Feb 7, 2005
Tue Mar 8, 2005
Wed Mar 30, 2005
Tue May 10, 2005
Mon May 16, 2005
Tue Aug 2, 2005
Wed Jun 29, 2005
Tue Aug 9, 2005
Tue Aug 16, 2005
Summary of Press Releases:
The North Porvenir discovery is believed to have potential of up to 20 million ounces of silver. An independent report has confirmed a new 4.8 million ounce silver resource at North Porvenir and a 3.8 million ounce historic resource in the Santa Cruz mine (not to be relied upon according to Canadian reporting standards).
On top of this, Endeavour signed a strategic alliance with Penoles (one of world's largest silver producers) in June this year which gives Endeavour ownership of another 3 kilometers along the Santa Cruz fault system. These claims add considerable additional potential for the Company to explore.
Furthermore, the deal with Penoles granted Endeavour exclusive rights to review the entire Penoles exploration portfolio of mineral properties in Mexico. Endeavor can negotiate to acquire additional properties from Penoles in return for royalties and shares, not cash.
This is an important development since it establishes Endeavour as the exploration partner of world's largest silver producer (Penoles produces about 48 million ounces silver a year.) It's a win-win situation for both companies since Penoles has too many mining properties for them too properly explore and develop on their own. If those prospects benefit Endeavour they will also benefit Penoles since they now own shares of Endeavour.
So far so good, Endeavor has done just what it said it would do:
So a lot has changed since the acquisition of the Santa Cruz mine and the Guanacevi plant in January 2004. Are these developments reflected yet in the share price of Endeavour? Well, since February 2004 Endeavour's share price has been trading around the 2 CAD$ mark and it seems that no further progress has been made since then. Sure, part is due to the lack of overall investment interest since sentiment has been extremely low in recent days due to the failure for the precious metals making new highs this year (see part I of the article). But as explained in part I that will change sooner rather than later and it seems the downside risk is fading each month. As John Embry says:
As mentioned in part I, a few good juniors already left the station and doubled in price since mid-May. Although Endeavor didn't perform that badly since mid May (it appreciated by about 15%), the share price has not kept pace with the company's recent growth.
How come you wonder? Don t investors recognize what is going on with Endeavour? And if they don't will they do anytime soon?
Well, according to mining analyst Lawrence Roulston of Resource Opportunities investors will be realizing soon what is going on with Endeavour Silver, he told his subscribers recently:
A lot has happened since the acquisition of the Santa Cruz mine in January 2004.
So what could be considered a fair valuation of Endeavour today and what could we expect in coming years if Endeavour continues to live up to their expectations just as they did last year?
Although I don't want to speculate about future share price scenarios (since so much depends on future silver prices) I want to highlight the under-valuation of EDR compared to other silver producers expressed in market cap/Oz annual production.
Let me explain:
If we take a look at the major silver producers (Coeur D'Alene, Hecla, Pan American) and their valuations we'll see that they're valued at about $70-$80 per ounce of annual silver production, see chart below:
Now how do we position Endeavour in this picture coming years?
Let's assume that Endeavour will achieve its goal of producing 3.6 million ounces of silver by 2007 (which seems to be a realistic objective). Endeavour is targeting an average per ounce cash cost in the area of US$4 to $5. With current silver prices that would lead to a profit of up US$2 to $3 per ounce silver. This would net Endeavour up to US$ 10.8 million in annual cash flow thereby making Endeavour one of the top 5 primary silver producers in the world.
Now if Endeavor becomes valued as the other major primary silver producers then Endeavor could have a market cap in the range of US$ 288 million (3.6 * $80).
Now compared to Endeavour's current market cap of US$ 37.4 million, that would suggest an increase of 670%. This doesn't mean that Endeavor's share price should increase by 670% as well since management could decide to issue more shares further down the road in order to finance their on-going exploration programs or further acquisitions of additional properties thereby diluting the stock. However it should be obvious that Endeavour has a tremendous growth potential.
When you consider that the possible growth of Endeavour's market cap by 670% in two years time is based on current silver prices (at the time of writing US$ 7.00) it'll be obvious that rising silver prices will amplify this growth potential tremendously. A silver price north of +US$ 10.00 will double the profit margin which would net Endeavour up to US$ 21.16 million in annual cash flow.
It goes far beyond the scope of this article to discuss potential future silver prices but readers interested in studying the precious metals fundamentals can take peek at the Gold Drivers Report summary which makes a strong case for higher gold prices the years ahead. Since silver tends to follow gold (silver is often referred to as the poor man's gold) and tends to outperform gold during a gold bull market many analysts do call for much higher silver prices the years ahead. Needless to say what that would do to Endeavour's profit margin.
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Sep 06, 2005
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The author has not been asked nor been paid to write this report though Endeavour Silver does advertise on the author's website golddrivers.com. The author does not own any Endeavour shares at the time of publication (Sept 6).
Readers have to be aware that
the author is not a professional investment advisor so this piece
is not a solicitation to buy or sell and no responsibility can
be had for losses on the basis of this analysis. The reader should
be aware that investing in Gold Mining/Exploration equities is
a risky endeavor with a very real probability of substantial
losses. Before making any investment decision, do your own research
and consult a professional investment advisor. All facts presented
here are retrieved from the public domain and can be verified
easily by readers themselves. Therefore I strongly encourage
readers to do their own research as well and just stay with the
plain reported facts. END.
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