Endeavour Silver: More Share Dilution At Multi-Year Lows

Simply six months in the past, I wrote on Endeavour Silver (TSX:EDR:CA)(NYSE:EXK), noting that there was no approach to justify proudly owning the inventory above US$3.50 on condition that grades had been prone to normalize after a number of quarters above reserve grades and catch-up in sustaining capital which might strain unit prices. Concurrently, the sharp rise within the Mexican Peso was not serving to the H2 margin outlook, and the inventory wasn’t providing any margin of security with the inventory buying and selling at ~1.1x P/NAV. Within the replace, I famous that Capri Holdings (CPRI) was the higher wager at US$37, buying and selling at barely 6x ahead earnings. Since then, Endeavour’s share value has plunged 40% and Capri Holdings has gained 45%, however EXK’s valuation has not improved as a lot because it ought to have on condition that we have seen continued share dilution at unfavorable costs. On this replace we’ll dig into the Q3 outcomes, the inventory’s valuation, and the place the inventory’s up to date purchase zone sits.

All figures are in United States {Dollars} except in any other case famous.

Q3 Manufacturing & Gross sales

Endeavour Silver (“Endeavour”) launched its Q3 outcomes final week, reporting quarterly manufacturing of ~1.15 million ounces of silver and ~9,100 ounces of gold, translating to a 21% and 1% decline in manufacturing year-over-year, respectively. The majority of this manufacturing decline may be attributed to the corporate’s bigger Guanacevi Mine, the place silver-equivalent ounce [SEO] manufacturing plunged 20% attributable to sharply decrease grades (341 grams per tonne of silver vs. 468 grams per tonne of silver in Q3 2022) after an already robust Q2 attributable to not with the ability to mine considered one of its high-grade stopes. This consequence was particularly disappointing on condition that the corporate has guided for grades to stabilize in Q3 and This autumn and be “barely under Q1”. Nevertheless, attributable to mine sequencing modifications to make progress in enhancing working situations (higher air flow and water administration with increased water influx than deliberate into El Curso), grades truly got here in 33% under Q1 ranges.

Not surprisingly, the decrease grades had a big affect on total manufacturing and unit prices, with manufacturing coming in at ~1.29 million SEOs, a 20% decline from the year-ago interval. In the meantime, all-in sustaining prices [AISC] on the mine soared to $29.06/oz (+63% year-over-year) regardless of the good thing about decrease sustaining capital within the interval. On a constructive word, these modifications ought to enhance mine productiveness longer-term at Guanacevi, and the corporate has already seen an enchancment in mine productiveness in This autumn. In line with the corporate, work accomplished in Q3 and into This autumn ought to permit for a constant throughput of 1,200 tonnes per day subsequent 12 months, up from a mean throughput of ~1,160 tonnes per day year-to-date. Nevertheless, from a damaging standpoint, direct working prices per tonne at Guanacevi proceed to rise and are sitting over 11% above 2022 prices year-to-date, which is lapping a 15% enhance in prices final 12 months.

Digging into prices at Guanacevi a little bit additional, year-to-date prices at Guanacevi are significantly increased at ~$187/tonne, up from ~$166/tonne in the identical interval final 12 months and ~$168/tonne in FY2022. A few of this may be attributed to the manufacturing shortfall of ~400,000 ounces vs. the annual mine plan, however that is additionally regardless of Q1 benefiting from very elevated grades relative to reserves (511 grams per tonne) and likewise benefiting from the MXN/USD being above 18/1 for almost all of Q1 vs. decrease charges presently. This isn’t very best in the case of reporting reserves subsequent 12 months and will create the next hurdle, on condition that present useful resource/reserve cut-off grades are between 207 to 254 relying on the zone which does not go away a lot wiggle room relative to direct working prices per tonne of $180.00+. Therefore, it is robust to be optimistic about reserve development at Guanacevi this 12 months.

Shifting over to the corporate’s financials, Endeavour reported a 24% enhance in income to $49.5 million, however this was fully pushed by assist from metals costs. Sadly, working money movement sunk to $3.3 million within the quarter and the corporate reported an adjusted internet lack of $7.3 million. Worse, money movement and income per share can be impacted going ahead on a per share foundation attributable to ~8.2 million shares bought below the corporate’s ATM within the quarter at US$2.85, with a further ~6.8 million shares bought at US$2.44 subsequent to quarter-end. The one silver lining is that Terronera continues to progress nicely (38% full, engineering at 97%) and with this future mine set to be a free money movement machine (~4.0 million ounces of silver each year at sub $6.00/ozAISC even when incorporating inflationary pressures), the continual share dilution may lastly be within the rear-view mirror as soon as it is nearer to first manufacturing.

Prices & Margins

Sadly, the affect of a decrease denominator put a extreme dent in Endeavour’s prices and margins, with the corporate reporting a 46% enhance in all-in sustaining prices and a 70% plus enhance in money prices to $29.64/ozand $17.94/oz, respectively. Endeavour attributed the hovering prices to elevated mine improvement, elevated third-party ore purchases, decrease productiveness and better restore prices, plus increased labor/consumables prices regarding the affect of the stronger Mexican Peso. The consequence was that regardless of lapping simple comparisons due to depressed metals costs final 12 months that contributed to damaging AISC margins in Q3 2022 ($1.03/oz), AISC margins truly worsened year-over-year to -$5.65/oz. And whereas prices will enhance sequentially after a kitchen sink Q3, I might be stunned to see FY2024 AISC under $21.50/oznext 12 months if the USD/MXN continues to hang around under 18/1.

“If we will keep our manufacturing profile, it’s going to permit us to satisfy steering from a price standpoint, and our all-in sustaining price is predicted to be between $19 and $20 this 12 months. That is most likely going to be a little bit bit increased subsequent 12 months due to the inflation elements, however we’ll come out with that steering in January.”

– Endeavour Silver CEO, Dan Dickson, Q3-23 Convention Name

Whereas the current quarterly outcomes had been actually discouraging, Terronera can be a game-changer for the corporate from a margin standpoint, and the corporate hopes to be almost half-complete from a building standpoint by year-end. In actual fact, Endeavour will personal one of many highest-margin silver mines for 2026 in its first 12 months of full manufacturing, serving to to tug down company-wide AISC. That mentioned, and as I’ve highlighted in previous updates, we could also be inching nearer to the primary pour, however the ramp-up will not occur in a single day, which means that the actual advantages within the monetary outcomes will present up beginning in Q2 2025, not This autumn 2024 when first pour is predicted. Let us take a look at the inventory’s valuation under and see the place the inventory’s up to date low-risk purchase zone lies after one other quarter of share dilution.

Valuation

Primarily based on ~212 million absolutely diluted shares and a share value of US$1.98, Endeavour trades at a market cap of ~$420 million and an enterprise worth of ~$390 million, evaluating favorably to an estimated internet asset worth of ~$550 million. This leaves the inventory buying and selling at 0.76x P/NAV, which is without doubt one of the largest reductions to internet asset worth that the inventory has traded at in years, which may doubtless be attributed to the declining funding attractiveness for Mexico, some potential loss in confidence from buyers due to constant share dilution, and the a number of compression we have seen sector-wide attributable to damaging sentiment. In actual fact, whereas EXK could also be low-cost on an absolute foundation vs. its historic multiples, I nonetheless do not see it as low-cost relative to what else is offered, with names like i-80 Gold (IAUX) buying and selling at lower than ~0.35x P/NAV at the next low cost fee in a top-3 ranked jurisdiction (Nevada). In the meantime, within the royalty/streaming area, Sandstorm Gold (SAND) trades at an analogous a number of with superior diversification and margins (~80% gross margins).

Fortuitously, Endeavour Silver is progressing in direction of a metamorphosis with its Terronera Challenge almost 40% full, and I do not suppose it is unreasonable to count on the inventory to commerce at 1.2 P/NAV or increased (nonetheless a reduction to its historic a number of) as soon as the mine comes on-line in This autumn 2024. So, even when we assume the next share rely of 220 million shares (this assumes extra share dilution till Terronera strikes into business manufacturing), I see a good worth for the inventory of US$2.65. That mentioned, I’m in search of a 40% low cost to truthful worth to justify beginning new positions in high-cost producers, and whereas Endeavour could also be arrange for an eventual upside re-rating, buyers might have to attend till Terronera building is full and will see the damaging information of extra share dilution within the interim. Therefore, I would want a pullback under US$1.60 to change into within the inventory from a swing-trading standpoint.

Given this downgrade within the low-risk purchase zone from my earlier replace (associated to continued share dilution and potential for additional share dilution in This autumn), I exited my place final week at US$2.07 for break-even from my entry at US$2.07.

Abstract

Endeavour Silver had a tough Q3 operationally, made worse by important share dilution. This was evidenced by almost 8% share dilution from August to November (~191.5 million shares to ~206.5 million shares), and it is exhausting to rule out additional share dilution between now and business manufacturing at Terronera, particularly if the silver value stays under $24.00/oz. In the meantime, the sharp enhance in prices year-to-date just isn’t very best and will have an effect on reserves at Guanacevi, with the present cut-off grades trying fairly low given the sharp enhance in working prices per tonne year-over-year with little assist from the silver value. Lastly, whereas Guanacevi can be again on monitor in 2024, EXK has famous that prices may very well be negatively impacted subsequent 12 months due to inflation elements, suggesting there may very well be a number of weak margin quarters left on deck till Terronera ramps as much as business manufacturing in Q2 2025. Therefore, I would not count on a significant enchancment in sentiment except the silver value can get again above $26.00/ozand keep there.

So, what’s the excellent news?

For buyers prepared to be affected person, EXK has higher days forward even when we might see extra share dilution within the close to time period, and which means any pullbacks under US$1.57 might present a strong entry into the inventory for the eventual flip in sentiment when Terronera comes on-line. Clearly, there is not any assure that the inventory will drop this low, however I favor to pay the proper value or move fully, and I proceed to see extra engaging bets elsewhere within the sector for now. To summarize, I stay impartial on EXK brief time period, however I might strongly think about going lengthy the inventory on any pullbacks under US$1.60.