Is Now the Time to Invest in This High Cost Silver Miner?

Latest results indicate that Endeavour Silver Corp. (TSX:EDR)(NYSE:EXK) is an attractive contrarian play on precious metals.

| More on:
The Motley Fool

The sharp decline in silver that sees the precious metal trading at below US$15 an ounce has some pundits claiming that primary silver miners represent an appealing deep-value contrarian investment. One silver miner that recently released some credible second quarter results and hasn’t been garnering much attention from investors is Endeavour Silver Corp. (TSX:EDR)(NYSE:EXK). 

Now what?

Endeavour owns three operational silver mines located in Mexico with total reserves of 54 million silver equivalent ounces. The miner has grown production at a steady clip reporting second quarter output of 2.4 million silver equivalent ounces, which was a 12% year over year increase. That can be attributed to increased mill throughput as well as higher ore grades, notably at Endeavour’s El Cubo operation.

The profitability of Endeavour’s existing operations is underscored by relatively low cash costs of US$7.61 per ounce mined, which were 9% lower than a year earlier.

Nonetheless, all-in sustaining costs (ASICs) for the quarter of US$17.28 were more than double the miner’s cash costs, although they were 16% lower than for the same period for 2017. Such high AISCs are a concern, particularly in an operating environment where silver remains weak and the spot price is significantly lower than those AISCs.

However, that shouldn’t be as worrying as it initially appears, because while AISCs are an important measure of profitability, they include all mining, processing, sales, general and administrative, exploration and reclamation costs as well as other direct overheads and sustaining capital. During prolonged slumps in silver, miners can to a degree dial down those costs to ensure that their operations remain cash flow positive and profitable.

Endeavour is also in the process of implementing a range of strategies aimed at reducing expenses to boost profitability in the current difficult operating environment. This sees the miner forecasting that full-year 2018 AISCs will come in at US$15.50 per silver equivalent ounce, which is the mid-point of its annual guidance.

The strong second quarter production growth leaves Endeavour on target to achieve its 2018 target of 10.2 to 11.2 million silver equivalent ounces, which is around 20% greater than 2017. Such a robust expansion of its precious metals output will help to generate additional revenue that will compensate for lower silver prices.

Endeavour is also in the process of commissioning the El Compas mine in Mexico, which is expected to come online during the second half of 2018 and add up to 1 million ounces of silver equivalent production annually. It is also progressing with the development of the Terronera project, which is expected to receive its final permits during the third quarter 2018. When it commences commercial production in 2020, that project should be exceptionally profitable even if silver remains weak because it has estimated AISCs of around US$5 per silver ounce produced.

While Endeavour needs to reduce operating expenses to be more profitable in the current operating environment, its rock-solid balance sheet enhances its appeal as an investment. The miner finished the second quarter with US$31 million in cash and no long-term debt aside from deferred reclamation and tax liabilities totalling just over US$9 million. This endows Endeavour with considerable financial flexibility, which will help it to survive during a protracted slump in silver. 

So what?

The poor outlook for silver coupled with Endeavour’s high AISCs makes it a less than appealing investment at a time when the white metal is in freefall and has plummeted to less than US$15 an ounce.

Nevertheless, the strength of its balance sheet along with the quality of its operating mining assets, growing production and the fact that it is down by almost 9% since the start of 2018 does give it some contrarian appeal. Any uptick in the price of silver, which appears unlikely for the foreseeable future, will give its market price a healthy boost.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Metals and Mining Stocks

todder holds a gold bar
Metals and Mining Stocks

Canadian Mining Stocks: Buy, Sell or Hold?

Investing in quality gold mining stocks that trade at a reasonable valuation could help you beat the TSX index over…

Read more »

People walk into a dark underground mine.
Metals and Mining Stocks

Is First Quantum Minerals Stock a Buy?

Let's dive into whether First Quantum Minerals (TSX:FM) is worth buying at current levels, or if investors should sit this…

Read more »

nugget gold
Metals and Mining Stocks

Competitive? Beat the Market With These 2 Dividend-Paying Growth Gems

Investors looking to beat the market buying dividend stocks right now need to focus on this right sectors. Here are…

Read more »

nugget gold
Metals and Mining Stocks

A Canadian Billionaire Investor Sold Micron Stock and Bought This TSX Company Instead

Prem Watsa focuses on value over short-term growth.

Read more »

Concept of multiple streams of income
Metals and Mining Stocks

Is Franco-Nevada Stock a Buy for Its 1.2% Dividend Yield?

Gold royalty stocks represent a niche in the precious metals industry. They have different dynamics from mining stocks.

Read more »

todder holds a gold bar
Metals and Mining Stocks

The 1 Mining Stock Canadians Should Buy and Hold Forever

Newmont is a gold mining stock that trades at a cheap valuation, making it a top investment choice for those…

Read more »

Metals and Mining Stocks

Top Canadian Gold Stocks to Buy Now

Canadian gold mining stocks such as Barrick Gold and Kinross Gold are two top investments in October 2024.

Read more »

todder holds a gold bar
Stocks for Beginners

Is the Worst Over for SSR Mining Stock?

SRR Mining stock has been rising higher after recent earnings performance that made a bit of a comeback. So is…

Read more »