Gold and Silver miners (Jr and Exploration)

[Edge83]

Endeavor Silver Is Undervalued

May 15, 2017 4:20 AM ET|14 comments| About: Endeavour Silver Corp. (EXK)
Viking Analytics

Summary

Like all precious metal miners, Endeavor represents a leveraged play on the price of precious metals.

The company has zero debt, significant cash reserves and operates profitably at current prices of silver.

Endeavor is fundamentally less expensive than many of its silver mining peers, and has relatively large measured and equivalent ounces.

We believe that Endeavor is an attractive acquisition target for a larger mining company, especially at current relative valuations.

Endeavor Silver (NYSE:EXK) operates three silver mines in Mexico and has five additional projects in exploration and/or development. Endeavor is similar to another silver miner that we own, Great Panther (NYSEMKT:GPL), in that they both operate mines in Mexico, and both have zero long-term debt and sizable cash balances. We have included two key excerpts from Endeavor's corporate presentation below, which can be viewed in its entirety on this link.

We have shown a price chart of EXK below (in candlesticks), together with the price of the iShares Silver Trust (NYSEARCA:SLV). One can see the tight correlation between the value of EXK shares and the value of the SLV ETF. However, the price range for EXK is a low of $1 per share and a high of $6 per share (a 500% maximum gain). The range of SLV in the same time period has a low of $13.10 and a high of $19.71, a maximum gain of 50%. This demonstrates that an investment in EXK represents significant leverage to the price of silver. If one does not believe that silver and precious metal prices are rising, then one should not purchase precious metal miners.

EXK reported disappointing earnings in early March 2017 which together with the slide in silver prices began a dramatic decline in EXK share prices from a high of $4.84 in late February to a low of $2.84 in early March.
EXK share prices recovered from the lows in March as the value of silver increased, and fell back to current levels when the price of silver again declined.
EXK recorded a significant beat in expected earnings for Q1 2017, and this appears to have helped the company find a temporary bottom in share price.
A break below $2.84/share could open up further downside for EXK investors.

We have created a table to compare the cash mining contribution of several silver miners below. We first calculated a miner's enterprise value, which is the value of equity plus long-term debt, minus cash and cash equivalents.

Then, we calculated the variable contribution from mining activities based upon each company's guidance for mining production and cash cost per ounce and assuming full-year values for gold and silver.

We then took the enterprise value of each firm and divided it by the forecast 2017 cash contribution. A lower value indicates that the company is providing more cash contribution relative to its enterprise value. Both EXK and GPL - on this metric - appear to be undervalued relative to their larger peers. This may mean that both EXK and GPL are attractive and possibly accretive acquisition targets for a larger miner.

As an example, let's consider the relative value of Pan American Silver (NASDAQ:PAAS) to EXK. Since the EV/contribution value for PAAS is 9.07 and the value for EXK is 3.65, then PAAS might be considered to be 248% overvalued to EXK (9.07/3.65 = 248%). Put differently, PAAS could pay a 100% premium for EXK shares and the acquisition could still be accretive.

This metric above does not, of course, take all factors into consideration, such as the ongoing cost of maintaining and increasing mine production. Another item to note from the table above is that Endeavor has considerably more measured and indicated equivalent silver ounces than GPL.

With respect to potential acquisitions, First Majestic (NYSE: AG) has publicly stated that one of its primary goals is to own and control over 20 million ounces of production in Mexico. If First Majestic acquired either EXK or GPL, it would achieve that target immediately.

Conclusion

Endeavor Silver has zero debt, substantial cash reserves, and is profitable at current prices of silver. Endeavor also has relatively substantial measured and indicated silver ounces, and would, therefore, appear to be a great acquisition target for a larger miner.

Continued downside in precious metals pricing could cause EXK to break down below its current support level. On the other hand, a continuing rally in silver and gold prices could enable EXK to outperform its peers.

Any individual mining company, however, presents unique and non-diversified risks. Any investor should do their own research and consider the highly leveraged risks involved before making any investments.

Disclosure: I am/we are long EXK, GPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

https://seekingalpha.com/article/4073155-endeavor-silver-undervalued