Silver & Endeavour Silver
Silver Stock Report
by Jason Hommel, March 11, 2005
Silver has a long history of being used as money. Early in the book of Genesis, there are examples of the importance of silver. Silver is valuable as both a metal of commerce and a metal of industrial application. With the silver Denarii, the Roman Empire preserved portraits of the ruling families of Caesars for millenniums. Prior to the 16th century, silver represented wealth, and was reserved only for nobility or for the church. A historic chart of silver from 1344, illustrates silver's value showing the price per ounce as high as $806 in 1477.
See chart here: http://goldinfo.net/silver600.html
Today, the tectonic plates of silver are shifting. Demand is increasing and the supply of silver is decreasing. Although the majority of demand, virtually 95%, is comprised from industrial commodity functions, the root value of silver is that of an intrinsic currency. Yet, in 2004, only about 5% of silver demand was in the form of currency & investment!
With commodity prices rising, and a sea of paper currency and debt raising investment asset risks, the silver story is compelling. The bright metal has limited supply, and potentially unlimited demand. The past decade of stagnant silver prices in a range below $6 per ounce, combined with increased production expenditures, created a lack of capital investment and mining in the silver sector, until recently.
The factors now rumbling in the silver market are increased Asian demand for silver as a commodity as China continues to industrialize. Meanwhile, developed nations such as Japan and the U.S. may have a quantum leap in investment demand for silver as an inflation hedge to the money supply deluge. These magnetic prospects for greater silver demand, combined with limited supply, mean we will see higher silver prices, and significantly greater profits for the companies that mine silver.
Endeavour Silver Corp. (TSX.V: EDR) (EDRGF U.S. pink sheets) is a new silver mining company. Focusing on exploration, development, and acquisition of mineral properties in Mexico, Endeavour has a talented management team with rich experience and notable credentials. Management has experience at Homestake, Echo Bay, Kinross, Eskay-Creek, Shell, Chevron, Noranda, Canarc, Newmont Peru, and many other mines. Some would call this a 'dream team." With corporate offices in Vancouver BC., Endeavour has three silver projects in Mexico, the top silver producing nation in the world.
With a share price of C.D. $2.55 on Friday, March 11, and using the number of shares fully diluted, Endeavour's market cap is only about $71 million Canadian Dollars, or U.S. $59 million. The company has outstanding warrants at the following strike prices, 3.5 million at C.D. $2.00, 1.1 million at C.D. $2.10, and 775k at C.D. $0.35. Option strike prices vary from C.D. $0.22 - $1.60. If these warrants and options were exercised it would increase working capital by C.D. $10 million. Current working capital is C.D. $5 million, providing a nice cushion for explorations, acquisitions, and development.
Endeavor's Capital Structure:
- Shares issued 20.6 million
Based on the shares issued and outstanding (not fully diluted), the market cap is lower, at $53 million Cdn, or $44 million U.S.
Endeavour's main project is the Santa Cruz mine in Mexico. The company signed a formal option in May of 2004 allowing the company to buy up to a 100% ownership before January of 2008, in the producing Santa Cruz silver mine and the Guanacevi mill in Durango, for U.S. $7 million.
In January 2005, Endeavour Silver exercised its first option to acquire 51% of the Santa Cruz mine property and mill, by purchasing 51% of the Minera Santa Cruz y Garibaldi S.A. de C.V. shares, and a 51% of the Guanacevi plant from Metalurgica Guanacevi S.A. de C.V. Price, for $3 million dollars. To completely appreciate the value of the Santa Cruz property, valuations from a recent engineering audit, in which Endeavour received good grades, the Guanacevi process plants calculated substitute value was U.S. $19.4 million, or about 40% of company market cap. Essentially, Endeavour purchased the plant for a value of 40 cents on the dollar, and received the Santa Cruz property free.
Highlights of the Santa Cruz include
-- Current production - 300,000 + oz/yr silver
The structure of the acquisition for the Santa Cruz mine and plants is unique. The Endeavour team has the ability to finance exploration, development, and complete the purchase of the Santa Cruz, from mining profits. With working capital of $5 million, Endeavour is capitalized to purchase the remaining $4 million, 49% position in the Santa Cruz property, with no further share dilution. Canarc Resource Company (CCM -TSX) is a minority shareholder of Endeavour.
What makes Endeavour's management team really shine? Cash Flow on the Santa Cruz. Acquiring the option on the Santa Cruz less than a year ago, production is above 300,000 ounces of silver a year. With a mining cash cost close to $3.50 per ounce, with a modest silver price of $7.30, the company makes $3.70 of profit per ounce of silver mined. Expecting to produce nearly 2 million ounces of silver by the end of 2005, at $3.70 profit per ounce, a year of total mining profits may be around U.S. $7.4 million (of which 51% would be to Endeavour), notable cash flow for a silver exploration company.
The business plan at Endeavour is to be a top 5 silver producer by 2008. Past mine production was 25,000 ounces per month. In December of 2004, monthly production was 66,350 ounces. Endeavour is increasing production to meet their development goals, and expects to finish 2005 with 160,000+ ounces of monthly production, for an annualized 1.92 million ounces of silver. The Guanacevi plant is geared to process 4 million ounces a year. Endeavour plans to develop the Santa Cruz mine sequentially, increasing production by a factor of 12. Endeavour has current silver resources of 5 million ounces. The company will need additional silver resources to maintain increased production of 3.6 million oz./year.
Endeavour employs 250 people. The company plans to assay the eight prospective mineral zones on the Santa Cruz mine property in 2005, to increase inferred resources.
The knowledgeable and experienced management team, and their belief in a rising silver price, makes Endeavour a compelling silver play. They are building silver production, exploring and finding reserves, and acquiring mineral properties in Mexico. With working cash flow from ongoing mining, the company has all the elements to develop Endeavour into a successful silver mining company.
Please do your own research, your due diligence, to confirm anything you may read here, before making an investment decision.
Don Sauder is a business student. Do your own due diligence, this is not investment advice. Sauder has not been paid to write this article by Endeavour, and does not work for the company. Sauder does not currently own shares in Endeavour. You can contact Sauder at firstname.lastname@example.org
I, Jason Hommel, believe management at Endeavour understands silver. They understand that their product, silver, is money. In fact, they are withholding a portion of silver production, and choosing to hold silver as money, in preference to paper money. I think this shows that management has the right perspective.