Endeavour Silver Beats Expectations
- By Alberto Abaterusso
Endeavour Silver Corp. (EXK) closed first-quarter 2017 reporting an EPS of 5 cents per share, a 230% increase on a year-over-year basis "as a result of higher precious metal prices, foreign exchange gains and tax recoveries," said the company. The Vancouver-based midtier silver producer beat analysts' expectations on EPS by 4 cents, generating a negative surprise of 400%.
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The intrinsic value of EXK
Source: Yahoo Finance
Even though the Canadian miner beat expectations by $2.53 million on first-quarter 2017 revenues, at $36.441 million they were 12.4% lower compared to the same quarter of 2016 because of lower production, reported Endeavour Silver. For the same reason, the company also reported a lower amount in cost of sales, $28.601 million in the first quarter of 2017, versus the comparable quarter of one year ago when Endeavour Silver reported cost of sales of $35.263 million.
During the quarter, Endeavour produced 1,076,974 ounces of silver, a 29% decrease on a year-over-year basis, and 11,724 ounces of gold, a 27% decline on a year-over-year basis. Therefore, the production of silver equivalent also went down 28% to 1,897,654 ounces in the first quarter of 2017 from 2,627,265 ounces in the first quarter of 2016. For the calculation of silver equivalent production's total volume of ounces, 1 ounce of gold was exchanged with 70 ounces of silver. In short, the decline in first-quarter production is still the aftereffect of operating issues the company experienced in 2016 at one of its three Mexican mines, Guanacev?. The company expects Guanacev?'s productivity to rebound to its past levels as well as cost metrics to fall through 2017.
More information about Endeavour Silver's first-quarter silver and gold production can be found in this article.
Having a look at the Endeavour Silver's overall costs situation, the company's reduced activity at its mines completely counterbalanced the reduction in costs operated by the silver producer and the positive effect from a weaker Mexican peso versus the U.S. dollar so the direct production costs per tonne of mineral rose 2% from $74.26 in the first quarter of 2016 to $75.77 in the first quarter of 2017 and the cash costs per ounce of silver rose 2% from $7.63 in the first quarter of 2016 to $$7.81 in the first quarter of 2017.
The all-in sustaining costs (AISC) also increased by 64% to $18.24 per ounce in the first quarter of 2017 from $11.12 per ounce in the first quarter of 2016 mainly because of Endeavour Silver's renewed interest in exploration and development activities to extend the life of its mines. That caused funds used by the company in exploration to increase by 175% to $3.3 million during the first quarter of 2017 from $1.2 million in the first quarter of 2016. The company mainly aims to extend the life of its Guanacev? mine and El Cubo mine, but it is also engaged in other projects such as the El Compas project where Endeavour Silver wants to turn it into its fourth producing mine and Terronera project into its fifth producing mine.
Concerning the most recent drilling activities the company's exploration team undertook at Terronera and which results are explained in this article, Bradford Cooke, the CEO of Endeavour Silver, released the following comment: "The high grade drill results from Terronera released during the first quarter represent a future opportunity to optimize our mine plan at Terronera."
Following the results on gold and silver production, the sale of metals also fell sharply: 1,235,594 ounces of silver and 11,290 ounces of gold were sold, declines of 18% and 26% on a year-over-year basis. The company sold one ounce of silver at $17.79, a 17% increase from the realized price per ounce of one year ago, and sold one ounce of gold at $1,280. The realized price for the sale of one ounce of gold went up 5% compared to that of the comparable quarter of 2016.
After having considered cost of sales, which declined 19% on a year-over-year basis to $28.6 million in the first quarter of 2017, and excluding $4.1 million as depreciation and depletion, the cash flow generated by the company from its producing mines before taxes was $12 million, a 4.3% increase on a year-over-year basis.
Before changes in the working capital item, Endeavour Silver generated cash flow of $8.9 million from its operations in the first quarter of 2017. The figure went up 19% from the same quarter of one year ago. The operating cash flow was $9.667 million and after having considered funds of $9.368 million used as capex during the first quarter, the free cash flow was approximately $300 million.
The company closed the first quarter of 2017 with approximately $70.5 million in cash on hand and securities and a $6.5 million line of credit.
Endeavour Silver is trading around $2.88 per share with a price-sales (P/S) ratio of 2.32. The forward price-earnings (P/E) ratio is 39.53. The stock has lost 18.2% year to date and is trading at 2.65 times the book value and at 12.15 times the EBITDA.
The recommendation rating is 2.4 and the analysts' average target price is $4.70 per share.
Personally, I would pass on buying the stock when I am not sure the increase in the price of the underlying commodities will be sufficient to more than offset the decline in the production and volume of ounces sold because of limited access of workers to Guanacev? and El Cubo, where the company is engaged in development activities to extend the life of mines.
Furthermore, the increase in the prices of gold and silver should be not only well above the assumed prices according to which the company can mine the precious metal at profit, but it should also be high enough to counterbalance the reduction in costs operated by the silver producer as happened in the first quarter.
The company is also engaged in some projects that will enhance the quality of its asset base, the entire production of which comes from underground mining activities involving higher costs; it will take some time before they make an impact on Endeavour Silver's economics.
On Jan. 19, the company reported 10,566,400 ounces of silver and 91,100 ounces of gold in proven and probable reserves defined at a price of $16.29 per ounce of silver and at a gold price of $1,195 per ounce. While the ounces of equivalent silver are 17,399,000 according to a ratio of one ounce of gold for 75 ounces of silver.
Gold and silver are downtrending on the markets: in April gold and silver averaged $1,265.63 per ounce and $18.0382 per ounce; so far for the month of May the average price per ounce of gold is $1,244.73 and of silver is 16.7667.
Disclosure: I have no positions in Endeavour Silver.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Signs with EXK. Click here to check it out.
The intrinsic value of EXK
