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Endeavour Silver Is a Hold

- By Alberto Abaterusso

Endeavour Silver Corp. (EXK) fell 1.3% to $2.29 per share Wednesday, following the announcement that it would reduce investment in exploration and development of mineral deposits.

The decision was made because of a decline in metal prices during the current quarter. Since the start of the third quarter to date, gold is 3% lower and silver declined nearly 7% compared to the same period of last year.

The company will also reduce general and administrative costs at its head office and lower mine site costs.

Subsequent to yesterday's fall, Endeavour Silver Corp.'s stock is down 8% for the past year, and the share price is below the 200-, 100- and 50-day simple moving average lines as illustrated in the chart from GuruFocus.

The current share price is over 45% off of the 52-week high of $3.35 and only 18.6% above the 52-week low of $1.94.

The stock is trading at affordable prices, but before considering a buy, it would be best to wait. GuruFocus says that the 14-day relative strength index is almost 40, and this means that the stock has yet reached oversold levels.

Endeavour Silver's decision to cut growth capital may well have an impact further down the road. Therefore, increase the holding only when the stock is once again trading close to its 52-week low.

Yet, the share price could drop to that level in November after the company posts third-quarter financial results. If the company felt it wise to lower growth capital efforts and modify operations to contain costs, this means that the management is fearing missing expectations. If the company misses consensus on the third quarter financial results, that will have a negative impact on the market value of the stock.

Buying Endeavour Silver at no more than $2 per share, you could offer 125-130% growth since analysts are projecting a target price of $4.53 per share within the following 52-weeks of trading. Today, I agree with the 33% of Wall Street analysts that suggest holding Endeavour Silver. The other 67% suggest buying. As a result of six surveys, the recommendation rating is 2.4 out of 5.

A price-book ratio of 2.01 versus an industry median of 1.74 and an EV-to-Ebitda ratio of 10.42 versus an industry median of 9.3 are further indications of a stock that is not trading at a compelling price yet.

The catalyst is an advancement in the profitability of Endeavour Silver's operations, whose main indicator is the Ebitda margin. Over the trailing 12-month timeframe, the margin of the miner was 720 basis points lower than the industry average of 23%. In that period, silver averaged $16.71 per ounce and gold averaged $1,296.96 per ounce.

Thus, investors who may want to buy Endeavour Silver should know that the precious metal must rebound and trade steadily above aforementioned levels, and that the company must reduce costs and increase production.

The company cannot control the price of the commodity, which depends on geopolitical and macroeconomic factors. Looking ahead, the commodity should come back steadily on an up-trending path as a result of an inverse relation with the U.S. dollar that is going down again. Also, strong consumer demand for gold in India will propel the price of the yellow metal. Investors can only hope that expectations are correct.

But the company can control costs and production. The fourth quarter 2018 adjusted mine plans for Guanacevi mine, Bolanitos mine and El Cubo mine should help Endeavour Silver Corp. offset the shortfall expected at the El Compas mine. These assets are located in Mexico. The company is targeting an increase in the material to process at the mill facilities of Guanacevi and El Cubo. The first facility will be fed 1,200 tons of ore per day, up from a current 850 tons, and the second plant will be delivered every day with 1,400 tons of material from a current 1,200 tons.

At El Cubo mine, the opening of new mineral deposits, which are characterized by a high-grade ore, will also support future metal production.

Of course, higher throughput and ore grade will lower costs, as fixed charges will be spread over higher volumes. The decision to cut growth capital and general and administrative costs at the head office should also have a positive impact on the all-in costs item.

Disclosure: I have no positions in any security mentioned in this article.

This article first appeared on GuruFocus.