Gold and Silver miners (Jr and Exploration)

[Edge83]

Endeavour Silver: A Value Buy Right Now

Jun. 12, 2017 2:58 PM ET|1 comment| About: Endeavour Silver Corp. (EXK)
Quad 7 Capital
Summary

EXK got crushed to enter March losing about 25% of its value.

Q1 earnings are out and there's some things to like.

While costs are a concern, 2017 looks like a positive transitional period for the company and will drive value.

Endeavour Silver (NYSE:EXK) got crushed to enter March losing about 25% of its value, and has been trading sideways around the $3 mark since then. You may recall that this is a name that I recommended profit taking on last spring in 2016, but is a name that I have wrestled with for some time, but up until that implosion, I had maintained a buy rating on pullbacks. For now, it will simply move with metal prices, for the most part. The stock, along with many in the sector experienced meteoric rise in 2016 after being in a bear market for four years. I should reiterate that I was really surprised at first when the company decided to slash production entering 2016; however, upon further consideration, I concluded the long-term survival of the company took precedence and so saving cash was key. This remains true today, however I still have concerns over performance. That said, Q1 numbers were recently out and I want to discuss them.

Specifically, I will discuss the production and finance numbers, as well as the outlook for the name to help determine whether we can expect this name it be range bound. Metals have climbed here in 2017, although this past week or so have pulled back. As far as Endeavour is concerned I did not have any expectations one way or the other for output. That said, I was very surprised to see the magnitude of the decline in production numbers, even though declines were expected. Endeavour churned out silver production that was down year over year at 1,076,974 million ounces for Q1 2017. That, of course, is a 29% decline from last year. While this was planned, it is still an 'ouch' moment on paper. Gold production came in at 11,724 ounces, a big 27% decrease year-over-year. Using a 70:1 ratio for silver to gold, it is important to note that for the quarter, silver equivalent production was 1.9 million ounces. Of course, this is down from last year, but about in line with guidance. As one would obviously expect, the quantity of metals sold were down heavily as well, with just 1,235,594 ounces of silver and 11,290 ounces of gold sold, dropping 18% and 26%, respectively.

As you can imagine with the production cuts and fewer ounces being sold, there was obvious pressure on earnings, although the company delivered a beat versus expectations. Factoring in sales, revenue was down 12% year-over-year to $36.4 million. Thankfully realized silver prices were up 17% to $17.79 per ounce while gold prices were up 5% to $1,280 per ounce sold. This offset somewhat the production declines. Now, it is also worth noting that cash costs were $7.81 per ounce. All in sustaining costs remain pretty high at $18.24 per ounce, rising 64%. I am not a fan of this. Taking into account the expenses, net income was $6.0 million or $0.05 per share. This is a 230% improvement from last year. So, what can we expect going forward? Well, speaking on the quarter, CEO Bradford Cooke stated:

"We are pleased to report significantly higher first quarter earnings for 2017, especially in light of our lower production compared to Q1, 2016 and our increased investments on exploration and development. Our plan to increase production throughout the year bodes well for our financial outlook on the year. We recently made a decision to develop El Compas into our fourth mine and we look forward to giving the green light soon to develop Terronera into our fifth mine. The high grade drill results from Terronera released during the first quarter were not included in our recent resource estimate and pre-feasibility study and represent a future opportunity to optimize our mine plan at Terronera."
While the earnings were up even with lower production, the cost data was a strong concern. Even with planned improvements, I have concerns. However, looking at the pricing of metals the last few months, the price of this stock relative to its assets, the name looks attractive here. The good news is that the company has acquired more development projects for the long-term, but 2017 is going to be shaky. Of course, should gold and silver move significantly one way or the other, then the stock is going to move in tandem. But what keeps me interested here is the acquisition of those two high grade silver-gold development projects in the historic silver mining districts of Zacatecas and Parral, Mexico. The advancement of the Terronera property is exciting and could help with near-term and long-term growth. That makes 2017 a year of transformation for Endeavour as the company is now in a position to potentially build three new mines over the next three years to fuel Endeavour's next phase of organic growth. I rate it a buy here.

https://seekingalpha.com/article/4080892-endeavour-silver-value-buy-right-now