Endeavour Silver is a mid-tier silver producer with assets in Mexico; specifically, 3 high-grade, underground silver-gold mines in Mexico: Guanacevi, Bolanitos, El Compas. Endeavour Silver also owns 2 development projects, Terronera, El Cubo, and a variety of silver exploration tenements: in Mexico, Parral, Lourdes and Guadalupe y Calvo, and in Chile, Cerro Marquez, Aida and Paloma.
Endeavour Silver wants to be a silver turnaround story. They have produced a lot of cash in the past and if they can extend life of mines for their underground projects and get lucky with the drill bit in Chile this could indeed be a story which starts to meet its promise. A long way to go between now and then, and will be interesting to following. The latest numbers to come out of Terronera in a PFS are very impressive: with a base case silver price of $15.97/oz silver and $1,419/oz gold, an 30% IRR and an NPV(5%) of $137M over an initial 10-year mine life. Could this latest potential source of silver production create even more value for shareholders?
Matthew Gordon: Why don't we kick off and give a 1-minute overview of the business, then we'll pick it up from there.
Brad Cooke: Endeavour Silver Corp, founded in 2003, we bought our first mine in early 2004 in Mexico. We discovered a model of purchasing small, high-grade underground vein mines in historic mining districts in Mexico that had closed for lack of ore or money or both, and by bringing the money, the expertise to make new discoveries and fast-track a new mine we were able to build a company. That's the history of Endeavour since 2004.
Matthew Gordon: The underground mining in Mexico - what's been going on? What have the problems been for you?
Brad Cooke: Let's talk about the good times because our 3 operating mines: El Compas, Guancevi, Bolanitos, are all in historic districts, all high grade and until the last couple of years they were actually highly profitable. We pulled USD$160M out free cash flow out of Guancevi from 2005 to around 2016. We pulled over USD$200M of free cash flow out of Bolanitos from 2009 in 2018, but for almost identical reasons, both of those mines fell on hard times because the discoveries we made in the very early years that allowed us to restart those mines, they were originally shallow and thick and rich and over time they became deep, narrow and low grade. Of course, that was in an environment of falling metal prices; 7-year bear market. It was just bad timing. We went from being a low-cost producer to a high-cost producer in the last couple of years. We did launch, over a year ago a complete operating turnaround at all 3 operations. We completed that operating turnaround at Guanacevi in the first quarter and it's back in the money since that time. We're within less than a quarter of completing the operational turnaround in Bolanitos, returning the mines to good health and lower costs have been job number 1 in recent years.
Matthew Gordon: Are you going to be able to continue to reduce costs? Are you going to be able to extend the life of these mines?
Brad Cooke: Actually, the solution solves both problems. Solution-wise, going back to our roots of finding new virgin ore bodies with low surfaces in historic districts. Rebuilding the production profile and the grade profile, that's how you drive the cost down by effectively pushing the reset button by helping the ore bodies.
Matthew Gordon: Why is it taking so long to start that process?
Brad Cooke: We had some discoveries from 5-years ago and were pushing to get them permitted, but especially this administration, which is now 2-years old, really drag their feet and we had to go through that transition from the previous government to the current government in 2018, which really caused delays, so our whole development cycle at Guanacevi was put behind by 1-year and that's really what caused us grief. We were never going to shut the mine down, so we took the operating loss, just trying to develop these new mines and get out of the old mines, but that was completed in the first quarter of this year.
Matthew Gordon: Are you struggling with this new government?
Brad Cooke: The transition 2-years ago into this new government, given they are a far-left socialist party, was not a smooth ride. Now we're hit with COVID, the government departments are sort of operating and it's really just the squeaky wheel gets the grease, we've had to really increase our participation with the government to get things done,
Matthew Gordon: What does that mean?
Brad Cooke: That means that we have our people in government offices regularly, instead of sporadically, trying to move our file from the bottom of the pile to the top. If you make enough noise you get to the top of the pile. Historically, in Mexico, it might have involved money, but of course, none of us foreigners do that. It's not like gringo is showing up at the government office. We have our own people, or 99% Mexican, that's how you get things done - put on a local hat.
Matthew Gordon: The Silver price increased to level which is beyond your wildest dreams given the last few years and then Covid hits production- - fallen ounces, bit of a nightmare scenario, really, isn't it?
Brad Cooke: Actually, the turnarounds that we initiated last year have been very successful. We've seen in the second quarter, which was a COVID quarter, 8 of 13 weeks in the second quarter we were shut down by government mandate - zero production for 8 out of 13-weeks, and yet we are able to come out of the quarter with all 3 mines showing free cash flow - that's the operating turnaround. Of course, the price run - it did drift from $14 to $17, $18 in the second quarter. It really didn't take off till July, it helped but it wasn't the huge sale it is now.
Matthew Gordon: You had an operating loss of USD$13.2M. Net loss of USD$19.2M, it's not all rosy but you’re trying to say it's getting better?
Brad Cooke: Yes, we took most of our slumps in the first quarter.
Matthew Gordon: What were the sorts of things you are having to write down and why?
Brad Cooke: I'd have to go back to our financials but they're just a bunch of little stuff, our biggest costs in Q2 were actually care and maintenance to stand still. We had to send our people home on base wage. We put USD$5M in a pile and burned it in April and May.
Matthew Gordon: That’s tough to do, but everyone is okay?
Brad Cooke: Everybody's fine. Actually, we've been remarkably good at stopping COVID of the gates. We've only had a handful of cases and most of them were caught at the gates and turned away. The biggest drag on our performance right now due to COVID is actually the approximately 60 people who remain at home because we consider them high risk; either age or pre-existing conditions so to be safe we've kept them on the payroll and sent them home. Because we're missing a portion of our workforce, that's remarkable actually, what the rest of our employees are accomplishing - our productivity has tripled.
Matthew Gordon: Moving from low cost to high cost and then back down to low. Is that a model which you intend to continue as part of any organic growth plans or any other kind of growth activity?
Brad Cooke: Currently, our organic growth profile, which is, I think, sector best, which includes 2 projects: Terronera, in Jalisco State and Parral in Chihuahua State. These are the same style of high-grade underground vein mines, but to break out of that model and ensure not years, but hopefully decades for the future for the company, we do need to get into something more world-class. That's the role of our portfolio of prospects that we're proposing to drill at Chile. We have 3 world-class prospects in Northern Chile, and we'll be drilling our high sulphuration Gold project, Paloma in the 4th quarter of this year. That's an attempt to break the mould.
Matthew Gordon: But what is happening with the underground component?
Brad Cooke: The plan is to both reduce costs and extend mine life through the discovery and development of new ore bodies in these historic districts. Last year was the perfect model of that. At Guanacevi we acquired some adjacent land, we were able to put that into production through ore bodies. We've discovered a third. They are now carrying all of the production at Guanacevi, and instead of having a 1-2-year outlook all of a sudden, we've got a 5-year outlook and growing. It's all shallower, thicker and richer ore. If you look at the cost profile, it's also come tumbling down. Our consolidated cost guidance this year was $17.50/oz Silver. None of the Gold credit, All-in Sustaining basis. That basically started the year at $20 and we are targeting finishing the year at $15. We've already accomplished $15 in the 2nd quarter.
Matthew Gordon: How do you change the way that you operate going forward in terms of developing these organically? How can you give confidence to the market?
Brad Cooke: With the development of these new ore bodies, shallower and thicker, we're able to go back to long-haul mining which is a lower unit cost method of mining. It's like a bulk underground mining method compared to cut and fill. Of course, when you are mining 15-year-old or bodies like we were at Buenos V, we were going down 700m vertically at depth, and they're running 1-2m instead of 3-5m - that makes all the difference in the world to your costs. Getting out of those ore bodies, basically admitting that even at current prices they were just not working, was key to our future. Thankfully we were successful in finding new ore bodies that are shallower, thicker and richer. They finally got through the permitting and development phase and they're now carrying the mine for years to come.
Matthew Gordon: Why didn't you get move forward with this exploration phase sooner? What would you put it down to?
Brad Cooke: We model our expenditures every year based on cashflow. In a 7-year bear market of falling prices, you have falling cashflow. There's no question that was an element in our planning. We also ran into government delays in permitting the new ore bodies and had operating losses to get through that permitting. We don't have that type of delay at Bolanitos, which is following the turnaround at Buenos by about 3 quarters. This is the final quarter where we expect the turnaround to be a subtraction. And we did actually generate free cash flow from Bolanitos, thanks to the development of 2 new ore bodies at Bolanitos. It is the same story as the bulk mining - getting out of the original discoveries, which we pretty much mined out and into some new shallower, thicker and richer discoveries that not only extend mine life but drive costs down.
Matthew Gordon: You've got a USD$600M market cap today. Do you think it's a fair reflection of where you're at today?
Brad Cooke: I mentioned our organic growth profile, and if you want to look for value, you don't need to look any further than Terronera, Parall. We don't assign any value to Parall, but Terronera, we published in July some updated economics to build than mine. It'll be our largest lowest-cost mine when it's up and running. At USD$18 Silver and $1,800 Gold, I think the net present value is in the USD$220M range with an IRR up in the 40s. It's a prolifically profitable deposit at much lower prices than these prices, and we're trying to fast-track this best we can.
The impact of Terronera alone, we're on track to do about 6Moz Silver equivalent this year. The only equivalent being Gold. Terronera will come on at 6Moz, which will effectively double our production, halve our costs. The cost profile in the study that we released in July showed cash cost, none of the Gold credit, at 0. Gold basically carries the operation. Silver is free. Even on an All in Sustaining basis, with Royalties, taxes, the life of mine capital and exploration, head office costs, the life of mine All-in Sustaining Costs for Terronera are just over USD$2/oz Silver produced - it's a real game-changer for us.
Matthew Gordon: Do you think people have got long enough memories to remember when you were running the mines efficiently?
Brad Cooke: We are refreshing their memories because Buenos V has come back into the money. Bolanitos is coming back into the money. As I said, we went from low cost to high cost, and now, just at the time when metal prices are going up, our costs are coming down - it's a perfect storm for our cashflow.
Matthew Gordon: How much longer can those 3 mines continue to contribute towards cashflow for you?
Brad Cooke: At Guanacevi, I mentioned the discovery of 3 new ore bodies, and they're going to carry us. Right now, we're running a 5-year model, but there are lots of places to continue drilling to extend the mind life. At Bolanitos, we've been running a 1-year license. We started there in 2007-2008 and we continue to run a 1-year reserve Life and approximately a 1-year resource life. We see enough opportunities that we think we can keep that going for 5-years.
Matthew Gordon: What do you think you're really going to be able to get those costs down to? How much contribution are you expecting from them either individually or as a whole?
Brad Cooke: Bolanitos is already there on a cash basis. Their cash costs were in the very low single digits, All-In cost USD$20 in the second quarter and the difference was we're in a development phase on the new ore bodies and we'll be through that by the end of this quarter.
Matthew Gordon: Let's talk about Terronera.
Brad Cooke: It's okay. 5 is pretty exciting. At the average life of mine will be a diluted grade.
Matthew Gordon: The payback is in under 3 years. What next?
Brad Cooke: We've announced the commencement of Feasibility Study and we're within a week of granting the lead engineer on the Feasibility Study. We will be able to do a press release this week. I will go straight then to selecting the PCM contractors and there's a couple of long-lead items we'd love to get started on. I can't give any guarantees. If you want to de-risk a project, that's the main purpose of the Feasibility Study. The other way to de-risk it is to get started on things that normally run over, time over budget, such as a 2km long main haulage way. You can only put in 2 shifts a day into the haulage way so the earlier you start the better. Clearing off the top of the plant site, we need to clear 200,000 cubic meters off the top of a hill, effectively flatten the top of a hill and that's the material that goes to the toe of tailings facility -getting a head start on that. The construction camp - we're not ready to start construction. And while we're in the feasibility phase, if we can get properly permitted and built in the next 9-months, then as soon as the Feasibility is done we hit the ground running. These are things that we will get started.
Matthew Gordon: The best thing is for you to mine this - you're the guys to do it?
Brad Cooke: I think so. Mining our sweet spot. These are the types of ore bodies we've found and built mines on for 16-years. Terronera just happens to be bigger and better than the others.
Matthew Gordon: Is it not a bit exhausting trying to chase the dream?
Brad Cooke: We are still trying to make money. The short answer is no, but I do have a long list of things I want to do and I'm not going to be here forever. I won't go very far when I move along. If I move away from the CEO role it will probably be up to the chairman's role, but nothing in the short term.
Matthew Gordon: Talk to me about some of these other potential exploration targets.
Brad Cooke: We started drilling Terronera 2-years ago to focus on economic evaluation and we just restarted drilling at Terronera last month. I think there's a whole new chapter to be written in terms of resource upside there as we start testing new veins. The second project in our development pipeline is the Parral project in southern Chihuahua. We stopped drilling there last year, again it was just budget constraints in the bear market. We'd love to get started and that will be in the plans this year. But if we can get started again there next year on infill and step-out drilling, we could take easily a 40Moz resource to 60-80Moz. It is still very much an advanced exploration project where we could create value very quickly through the drill bit. Then stepping out from that, the whole concept of being in Chile for the last 8-years was to break the mould of small, high-grade underground vein mines. It is hard to grow a business when these things are constrained in size, and for us to become a major in the Silver space and with decades of my life we need these big chunky world-class deposits, and you can't buy them. They're just impossible to buy in the Silver space. We lived off of finding ore bodies; every mine we've ever built was a discovery we made, we never did anybody else's ore body. The whole concept of 3 world-class assets in Chile is, let's go see if we can find one for ourselves.
Cerro Marquez, which has turned into actually a porphyry Copper-Gold play, and it's a big system: 6km by 8km footprint. It is an entire volcanic caldera, and we've done enough systematic work to get the Copper majors really turned on. We're in the phase of signing up CAs and doing due diligence and trying to bring on a partner for that one.
Paloma, which is our 5Moz Gold high-sulfonation epithermal target, also in the far north of Chile, we will drill that ourselves this year. Again, it's a big target: 2-3km. A portion of a volcanic caldera. And some great targets. I won't go into the glorious geological detail except to say that everything you want to see on the surface at Paloma, we see. We've got bullseye targets to drill.
The third one which isn't quite ready for drilling, we're waiting for the permit - Aida – it is in the Bolivia/Argentina border. It is in the three corners area Chile, and it's more of a classic Bolivian-style, bulk tonnage, Silver, Lead, Zinc deposit. Think Chinchillas and Pirquitas in Argentina. It's called the Puna operation that Silver Standard has.
Matthew Gordon: What do you make of some of the insider selling that's been going on?
Brad Cooke: I was anticipating that question, and the short answer is no. We've had some long-suffering shareholders and employees, especially employees who haven't seen an option in money for 7-years. When they asked if they could exercise options, I said, go for it. We haven't seen this kind of a run for a long time and the money went to the kitty.
Matthew Gordon: What do you mean, it went into the kitty?
Brad Cooke: They exercised options, so the cash went into the treasury of the company and the employees finally got a reward for all the years of hard work.
Matthew Gordon: But you can understand some of the frustration in the market when they see that sort of thing?
Brad Cooke: I would beg for understanding. We've all come through a bear market. The shareholders are way in the money. We had 4x run on our stock in the last 6-months. Nobody can complain about the performance of the stock, and to be honest the performance of management; we hung in there as best we could, we positioned the company for growth and now we're ready to reap the rewards.
Matthew Gordon: How much do you put down to your ability and planning to have positioned for growth?
Brad Cooke: We were shopping during the bear market. We acquired Parral for USD$6M. We acquired Compass for USD$6.5M. We staked the 3 prospects in Chile in the heart of the bear market. This goes right to the heart of our business model: getting in cheaply, doing value-added work, developing targets, drilling them in the case of Mexico. Building on a fast track, new mines and growing our business. When the bear market hit we obviously had to pull it our horns on that model and be a little bit more patient, but we're back in that upcycle again. This is not a cycle that is going to end this year. I think we are very well-positioned thanks to our work in the bear market, to be a sector leader of for growth. Look at 6Moz this year, 12Moz when Terronera is built. 16Moz when Parral is built. We're talking about superior growth and superior costs. When you look at the cost profile, the existing mines falling, Terronera will cut the consolidated costs in half, and then Parral, which wasn't formally announced as a producer until 1990. Our vision is to simply bring it back on at 4Moz, with costs at around USD$10 all in, again, all accretive to both production and profitability.
Matthew Gordon: What is your outlook on Silver? How do you prepare yourself for when it turns away?
Brad Cooke: I think there are some inconvenient truths about Silver: one of the most inconvenient truths about Silver is after a 7-year bear market, new mines supply approximately balances manufacturing or fabrication demand. When investors come knocking for Silver, as they have in the last year, there is none. That's a really inconvenient truth.
What has to happen, the Silver price has to rise to equilibrate the market. Still, you're pulling new-mined supply out of the ground. You can't do that in months and it's not the primary Silver producers who are the difference makers; we may help to supply price of Silver at the margin, but the bulk of Silver supply comes from the Copper, Lead, Zinc and Gold producers as a by-product. They typically hedge it forward up to a year, sometimes 2 or more. That's Silver has already sold, and you can't just build a Copper mine here. You're talking about a 10-year cycle for most mines.
Silver is that special metal that has a history as money and then people forget its money, it developed in the last 100-years industrial uses, which dominate now the demand for Silver, which means that Silver disappears. It isn't held around necks or fingers or faces. Most Silver is consumed in industrial applications. Then there's this emerging new green rule, and Silver is truly a green metal. You can't have solar photovoltaic power without Silver. You can’t have electric vehicles without Silver. It's not that they use a lot of Silver, but then my cell phone, which was one of the gadgets that drove the revolution in Silver price. This is a quarter gram of Silver in here -that is certainly not enough Silver to affect the price of the gadget but there's no question there are enough gadgets to affect the price of Silver since the year 2000. That was the last wave of demand growth.
Now we're coming into a Green Revolution, and it'll be the current wave: the solar photovoltaic, the electric vehicle demand. If you look at the 10-year forecast for EVs and the fact that each EV is up to 2oz Silver, just on all the electronic circuitry, it is not enough to recycle but most definitely enough for EV’s forecast to have a dramatic impact on the price of Silver.
Last year, 55Moz went into conventional cars last year just for their electronic circuitry. Never mind TVs, just all cars. If you believe the 10-year forecast for EVs, that number has to treble just for automobiles, where's the 100Moz going to come from?
Matthew Gordon: Do you wish you'd kept your finger on the pulse with regards to costs, having seen how easy it was for you to reduce the costs recently?
Brad Cooke: We went through some management changes in 2016-17, at about the same time we were getting frustrated on permitting. In hindsight, if we were able to avoid those management changes, we wouldn't have had such delays.
Matthew Gordon: want to know what you've learned and are you going to be able to keep those costs low going forward?
Brad Cooke: I think our group has been very good at managing the cost profile. Our productivity did fall during the bear market and it's rising in the last year and a half. It's all about people - every business at the end of the day is a people business. When we lost a couple of key people in 2016, it did impact us and we weren't anticipating that, but we came out of it, we survived. We've got a great team and they're doing everything we've asked them to do.
Matthew Gordon: As to what's going on, you seem to be focused on 4 things: keeping costs low, organic growth from what you've got there, extending the life of mines where you can, and then this expansion into Chile. Thanks Brad.
Brad Cooke: Thank you. We are coming into a very exciting period.
Company Website: https://www.edrsilver.com
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Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.