Endeavor Silver: Struggling Margins Until Silver Price Rebounds


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It’s been a tough two months for the Silver Miners Index (SIL), with the sector erasing its positive year-to-date performance and falling deep into negative territory, even underperforming the Nasdaq-100 (QQQ) . While some investors might cry manipulation, the fact is that most of this decline is justified, given that silver producers started the year at high valuations and are facing very difficult one-year comparisons on the other. The good news was that these difficult competitions due to the run-in of the “money squeeze” attempt were supposed to end in the second quarter of 2022.

These year-over-year comparison issues are why I warned most producers of money before the end of the second-quarter earnings season. Unfortunately, silver price weakness has hurt this outlook, as it sits well below Q3 2021 levels. One name ultra sensitive to this negative development is Endeavor Silver (NYSE: EXK), a high-cost producer in Mexico. With EXK trading near support ($3.00), a rebound in the stock is entirely possible. However, with margin contraction coming in Q3/Q4, I would view sharp upside as selling opportunities.

Endeavor Money Operations

Endeavor Silver Operations (Company Overview)

Production Q2

Endeavor Silver (“Endeavour”) released its preliminary second quarter results last week, reporting quarterly production of approximately 1.36 million ounces of silver and approximately 9,300 ounces of gold. This resulted in a 27% increase in silver production from Q2 2021 levels, offset by a 17% decline in gold production with no benefit from production at El Compas, which is now in the care and maintenance phase. The increase in the silver equivalent ounce [SEO] production despite operating two mines versus three a year ago was attributed to Guanacevi, which had another phenomenal quarter. At the same time, Bolanitos also recorded a strong increase in silver ounces produced. Let’s take a closer look below:

Endeavor Quarterly Silver Production

Endeavor Silver Quarterly Production (Company Papers, Author’s Table)

Starting with the company’s flagship Guanacevi mine, the mine posted better than expected grades during the period, partially offset by fewer tonnes crushed. During the quarter, silver grades jumped to 465 grams per tonne, while gold grades increased to 1.37 grams per tonne, resulting in an impressive silver equivalent grade of nearly 600 grams per tonne. This compared favorably to the prior year period, with an average silver equivalent grade of approximately 400 grams per tonne on a constant gold/silver ratio basis. Based on this impressive quality performance, mine produced over 1.5 million SEOs during the period.

Production and grades of the Guanacevi mine

Guanacevi mine production and grades (company records, author’s table)

Moving to Bolanitos, the mine also delivered a strong performance, producing ~165,100 ounces of silver, up over 35% from the prior year period (Q2 2021: ~120,000 ounces). This was partially offset by fewer ounces of gold produced (~6,800 vs. ~5,600), but production still increased nicely on an SEO basis. Like Guanacevi, the year-over-year production increase was driven by higher grades, with Bolanitos reporting similar throughput with 37% higher silver grades and similar recoveries ( ~88%).

Following strong second quarter results, Endeavor produced ~2.67 million ounces and ~18,000 ounces of gold in the first half. This put the company on track to easily exceed its January mid-term assumptions of 4.5 million ounces of silver and 33,000 ounces of gold. The improvement in operating results is a welcome surprise and certainly a much better performance than under the previous CEO, with a recent tendency to under-promise and over-deliver. Combined with a weaker Mexican peso, we could see costs falling below the guidance high ($21.00/oz) and below my estimate of $22.50/oz for the year. The problem is that the company does not receive any help from the prize money. Let’s take a look below:

Costs and margins

Endeavor Silver was operating with a profit in the second quarter and should have passed its period of difficult competitions, which could have lightened the weight of the title. Unfortunately, after the recent fall in the price of silver, it will again encounter relatively tough competition in the third quarter. Indeed, the average silver futures price in Q3 2021 was $24.30/oz ($24.56/oz for Endeavor Silver), and we are now starting Q3 2022 below $20.00/oz. Even if we were to see a sharp rebound and the average realized price of Endeavor was at $22.00/oz, that would represent a headwind of around $2.50/oz year on year. another in a period of rising costs due to inflationary pressures.

Silver Futures Prices

Silver Futures Prices (TC2000.com)

Assuming all-in sustaining costs of $21.30/oz in Q3 2021 and an average realized silver price of $22.00/oz, we would see margins plunge $7.10/oz in Q3 2021 at just $0.70/oz, and that hinges on an immediate rebound. in the price of silver. Also, if we see costs rise above this level, we would see a much uglier margin profile in Q3. Therefore, the previous outlook that Endeavor Silver would have an easier back half appears to be misplaced, potentially creating what could be a rough third quarter financial report. Although Terronera would certainly solve this problem, it will take at least two years before this asset comes to the rescue to improve the margin profile.

The bullish side could argue that higher silver prices are on deck and this silver price decline will be short-lived, helping EXK regain positive margins. While that’s a valid point, Endeavor needs more than $21.50/oz to improve its operations. In fact, a silver price of $27.00 per ounce would be more advantageous to allow the company to aggressively drill its properties and increase its reserve base. This is especially true in the case of Bolanitos, which is home to only ~820,000 ounces of silver reserves or barely a year of reserves at Q2 run rate without significant reserve replacement in 2022. So while EXK can get by with $21.50/oz silver price, its operations are less sustainable at these prices.

Evaluation and technical image

Based on a current stock price of $3.15 and approximately 187 million shares, Endeavor has a market capitalization of approximately $590 million. This translates to a P/NAV of 1.0 against its estimated net asset value of $590 million. While this is the cheapest valuation Endeavor Silver has traded at in years, Endeavor is also in the weakest position in two years, priced below $20.00/oz d silver with operating costs expected to exceed $20.50/oz this year.

Some investors will argue that Terronera is a game-changer once it is in commercial production, allowing Endeavor to significantly improve its margin profile. However, I would not rule out cost overruns, suggesting that we could see further stock dilution before commercial production is reached. Also, while Terronera could be in commercial production by Q1 2025, it doesn’t help Endeavor today if the price of silver doesn’t recover strongly. Therefore, it is not the same as a story like Alamos Gold (AGI), which also has significant margin expansion on the horizon, but is currently operating at an AISC margin of around 30%.

Endeavor Silver - Projected Terronera Timeline

Endeavor Silver – Projected Terronera Timeline (Company Overview)

In summary, Endeavor can benefit from being a producer with a relatively low capex project that can transform its margin profile, but I don’t see any investment case here. Indeed it has very slim margins even if the price of silver rebounds and could run at a loss while Terronera is built from a all-in from a cost standpoint unless the price of silver recovers above $23.50/oz. In my view, this increases the risk of stock dilution over the next couple of years, making Endeavor a trading stock solely due to its high silver price sensitivity and potential inability to weather a downturn. Deeper.

Technical picture

Fortunately, from a technical standpoint, EXK found itself sitting on a key support level at $3.00, with no strong resistance up to $4.10. This leaves the stock in a low-risk buy zone for nimble traders. However, Endeavor is not an investment vehicle, and if I was trading the stock from a swing-trading perspective, I wouldn’t be greedy and looking to post strong profits if they materialized. Therefore, if we were to see the stock rally above $3.75 before October, I would view this as an opportunity to take profit.

EXK Daily Chart

EXK Daily Chart (TC2000.com)


Endeavor had a strong performance in the second quarter, benefiting from higher gold and silver grades at Guanacevi, and it is ahead of the 2022 guidance. However, this was completely overshadowed by the fall in the price of silver , leaving Endeavor with wafer-thin margins on existing operations. The silver lining is that the stock is oversold in the short term and could benefit from a strong rebound. However, given that it is one of the weakest producers in the industry from a margin standpoint, I still view EXK as an impossible investment. Therefore, I would view rallies above $3.75 before October as a profit opportunity.

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