Bradford Cooke
Endeavour Silver
View from the Top

Mine Lives Extended While Operating Costs Reduced

Wed, 10/21/2015 - 15:46

Q: How did Endeavour Silver achieve growth over the last year?

A: In 2014, our management’s primary focus was on minimizing capital and operating costs and maximizing revenue and cash flow to improve our balance sheet during this time of lower precious metal prices. We succeeded in adding US$14.5 million to our balance sheet in the first half of 2014, largely due to operational improvements. At our Guanaceví mine in Durango, we were able to materially increase both ore grades and metal recoveries to maintain its profit margin, putting the mine on track for a record year of production. The Bolañitos mine in Guanajuato has been our cash cow in recent years and while unit costs are now rising, the mine generated significant free cash flow once again in 2014. Our El Cubo mine also in Guanajuato is now at the tail end of a two-year capital investment and operational turnaround program, and the results were evident in the fourth quarter. Mine and plant throughput achieved our goal of almost 1,500 t/d in December, driving unit costs down, and showing the mine is capable of producing up to 1,800 t/d.

Q: Can you give us an update on your exploration results in 2014?

Our exploration team once again delivered positive results, drilling brownfields targets at all three mines. At Guanaceví, the new Santa Cruz Sur discovery is now in planning for development in 2015. At Bolañitos, we expanded the new L-Asuncion discovery and commenced the mine access ramp to develop it for production in 2015. At El Cubo, the new V-Asuncion discovery was expanded and developed into production to drive additional potential expansion in 2015. But perhaps the most exciting new development in exploration was our successful delineation of the new, shallow, thick, rich Terronera discovery at our San Sebastián property in Jalisco state.

Q: What are your expectations for the San Sebastián project?

A: San Sebastián has emerged as a significant new, highgrade, silver-gold discovery for Endeavour Silver that could well become our fourth mine. In 2013, we aggressively expanded the resources and traced the Terronera vein on the San Sebastián property for another five kilometres. 

In 2014, we focused on infill drilling to better delineate the discovery and upgrade the resources from inferred to measured and indicated. In the fourth quarter of 2014, we received the umbrella mine development permit from the government so management is now focused on updating the resource estimate, preparing an initial mine plan, completing an economic scoping study and arranging project financing in order to make a production decision in 2015. Our mine permit has a 2,000 t/d footprint and we plan to build the Terronera mine in two stages. While it is premature to provide firm guidance on our plans for San Sebastián, conceptually Phase 1 construction could entail a 1,000 t/d mine capable of producing about 2 million ounces of silver and 13,000oz of gold per year, with a possible Phase 2 expansion to double the output to 2,000 t/d.

Q: What is your outlook for the company in the next year?

A: We will provide production and cost guidance for 2015 in January, and as usual our focus will be on two areas. The first is to keep reducing costs and enhancing cash-flows by optimizing our three mining operations for lower metal prices, and the second is preparing for our next phase of growth by extending current mine lives and making a production decision at San Sebastián. Our company outlook is naturally tied to the metal price outlook, which looks a bit bleak over the first quarter of 2015 given the recent strength of the US dollar, but should improve materially thereafter. We run our business to benefit shareholders over both the short and long term so we are actively pursuing merger and acquisition opportunities at this time. It is our version of “buy low, sell high”. Endeavour Silver shares have the highest leverage to silver compared to our peers in the silver mining sector, so once the tide turns on metal prices, our financials should outperform those of our peers.

Q: What has been your traditional business model and how is it evolving?

a: Our initial business model was based on breathing new life into tired old mines in historic mining districts that were fully permitted, built and staffed but struggling to survive. When we arrived in Mexico in 2003, we recognized that famous old mining districts with 450 years of production were well exploited but poorly explored. Both our Guanaceví and Bolañitos mines had very low production when we bought them and absolutely no reserves. Through the application of modern science, we were able to make multiple new discoveries of buried ore bodies to drive annual organic growth of resources, production and capacity at each mine. Mining companies can typically only grow by two means: through strategic acquisitions or exploration discoveries. Endeavour Silver has been very successful at both, and we intend to continue to grow through both. San Sebastián is a great example of an exploration discovery that may represent our fourth mine, and we are actively seeking merger and acquisition opportunities to own a fifth mine.

Q: Given the current low metal prices, can you review your cash costs and all-in sustaining costs?

A: If you look at the company’s consolidated cash cost profile over the last ten years, you will see it has been a bit of a rollercoaster. An old mine struggling to survive is typically a high cost mine. The cash operating cost at Guanaceví was around US$6.50 per ounce (net of the gold credits) when we bought Bolañitos in 2007, which had US$32 per ounce cash costs thereby dragging our consolidated cash costs up to US$10 per ounce. Over the course of the following four years as both mines expanded, consolidated costs fell to US$5 per ounce. When we bought El Cubo in 2012, its cash costs were close to $40 per ounce, which meant on a consolidated basis cash costs zoomed up to nearly US$8 per ounce. However we should soon start heading back down toward our long-term target of US$5 per oz as our operating turn around and expansion at El Cubo gains traction.

All-in sustaining costs (AISC) include not only operating costs but also all capital, exploration and administrative costs needed to sustain the mines. For Endeavour Silver, that means all of our expenditures except San Sebastián, which is considered a growth asset. Our AISC costs declined from above US$20 per ounce down to below $18 per ounce during 2014 and they should continue to decline in future years thanks to the completion of our two-year capital investment program at El Cubo, and the maturing of our Guanaceví and Bolañitos mines.

Q: What is Endeavour Silver’s perspective on mergers and acquisitions at this time?

A: The silver sector is a very small space globally. You can count the number of senior miners on one hand and the number of mid-tier producers on the other hand. Additionally, there are about ten juniors so overall, there are only about 20 silver producing companies worldwide, all of which are competing for very few quality M&A opportunities in the silver space. This has led to a shift in company strategies and a diversification of desirable assets. On the M&A front, silver companies are now looking to acquire gold projects due to their ability to outperform silver companies in terms of return on capital and delivering on promises. Hecla bought Aurizon, a gold miner in Quebec, in 2013 and Silver Standard bought the Marigold mine in Nevada in 2014. There are not a lot of attractive, developed silver mines available so companies have to broaden their horizons and include gold in their formula for success. This is precisely what we have been doing. Last year, we made 60% of our total revenue from silver and 40% from gold. We like gold and have no problem taking on more gold exposure, but silver is still our primary metal. So we prefer silver but we will consider gold, we prefer Mexico but will consider Chile and Peru, and we prefer production but will consider exploration and development projects as a means of building a project pipeline to fuel our future growth.