Trip report: Endeavour Silver (TSX:EDR, AMEX:EXK) May 2008
smartinvestment.ca
There are now more than 250 Canadian junior miners active in Mexico. Endeavour Silver was one of the first on the scene with serious aspirations to put old mines back into production. The company also became one of the first to discover just how difficult that goal is to accomplish. The learning curve has been steep, and I think the company is about to take the next step to becoming a significant primary silver producer.
I was part of a group touring the two core operating areas for Endeavour this past weekend. In four years I have been able to participate in about 30-40 such tours, and this was one of the best organized and most thorough. It’s a small point to make, but it reflects well on the caliber of management, and the ability to tell their story will build greater interest for investment, so its important.
The first stop on the trip for me was the City of Guanajuato, located in a historic mining district with over 1 billion ounces of silver production. This puts the region in select company, with perhaps a handful of districts in the entire world that have greater historic production. So it’s a good place for a silver junior to develop a core asset.
Endeavour completed the acquisition of their Guanajuato project from Industrias Penoles in 2007, gaining control of the past producing Bolanitos Mines and a processing plant. The acquisition price was extremely cheap considering the location and high quality of the project, mainly because the remaining resources of the mine were limited. The company has been engaged in a rapid refurbishment program through to the current time, which has been reflected in high operating costs for the project and that has perhaps driven the share price down. But what I witnessed during this part of the tour greatly impressed me.
The decision was made to halt production from most of the underground workings of the mine, to allow an overhaul of the shaft infrastructure and hoist equipment. The existing infrastructure was deemed unsafe and the company chose to invest to bring it up to higher standards rather than risk the health of their workers. That should tell you something about the character of the management. This meant that no significant underground development could be completed while the program was underway, and that the many workers employed at the mine would be laid off. Since experienced mine workers are hard to find, and in consideration of the hardship such a decision would create for the staff, Endeavour management elected to keep the mine shifts on the payroll and do their best to keep them busy during the refurbishment.
Lower grade stockpiled material was run though the mill, and some low grade near-surface stopes were mined with ramp access at that time. The results showed up in low production numbers for the project and high operating costs since the full cost of labour was charged even though limited production occurred.
However, I think it was a great decision for a number of reasons. Exploration work has been ongoing, and the company has outlined new resources that can sustain a higher production rate for the future, and there are a great many targets which have yet to be tested. The mine will also be able to run at a high degree of efficiency and with a ‘safety dividend’ of greater productivity. The shaft refurbishment is now complete at 3 of the 6 shafts serving the mine workings, and access is expected to re-open in June so a greater rate of production will commence shortly.
We rode down one of the shafts in the Cebada Mine to about 130m below the surface, and walked through some of the workings to see the veins where the next round of production will come from. The veins were formed in a low sulfidation environment, so the ore is characterized by extensive quartz deposits bearing banded silver and gold mineralization across widths from one to several meters.
We also visited some shallow historic workings in the San Jose mine through a surface adit, and observed wider intervals of low grade breccia mineralization from the prior operations. This represents a lower cost operating environment and there is significant untested exploration potential further along this vein where the company is working to
prove up additional resources.
It should be noted that the original mines were commonly producing silver above 1000 g/t and as entirely new mineralization is outlined through modern exploration, similar high grade ore is a legitimate possibility.
The mill is in excellent condition, thoroughly modernized and ready to run at full capacity of about 500 tonnes per day. A testament to the efficiency of the operations can be found in the exceptional recovery percentage: currently 88% of the gold and 89% of the silver is carried in the concentrates produced from the 3-stage floatation cell recovery circuit, and the company hopes to achieve 90% efficiency.
The following day we visited the second core operating area for Endeavour, the Guanacevi Mines project in Durango. Again, this is located in a significant producing district and the company was able to gain the property area including former producing mines, plus a large mill and recovery plant.
This project was the first acquisition for EDR back in 2004 and it also came cheaply because there were only limited remaining resources from the previous operator. Within a matter of weeks, the management launched an exploration program that achieved some new discovery zones, and the company commenced mining shortly thereafter. In the years that have passed since then, Endeavour has increased production rates and outlined additional new discovery zones to feed the mill. They have also completed refurbishment and expansion of the recovery plant, and development of a much larger tailings pond was almost complete. So this trend of building value into acquired assets is a factor in the success for both core operating areas. The company has also been active to secure greater property holdings to build their inventory of exploration targets.
We entered the Porvenir Mine through a surface portal and traveled down several levels along a decline ramp to get to several stopes that were in production. These veins are also low sulfidation systems and typically extend across vein widths of about 2m, which is ideal for an underground operation. The operations were very efficient, extracting just the minimum amount of rock mass from the steeply dipping veins that were clearly defined from the host rock.
After several years of exploration work the company has now defined resources at 4 main zones of the mine, and drilling work was ongoing at a brand new fifth target recently acquired which could represent an entirely new high sulfidation deposit. This would provide the added dimension of base metals production to go with the silver/gold mineralization currently mined. The average grades of all zones are in the 300-400 g/t silver range, and that is quite profitable for a mine of this size. An updated resource estimate is underway and will probably establish more than 2 million tonnes in the mineral inventory, enough to keep the operation running at full capacity for several years.
The mill at Guancevi is a vat leaching recovery operation that treats the ore with cyanide to dissolve the contained metals into solution. A dore product is produced and we witnessed several bars weighing about 25kg each that had been poured from the daily recovery. Again, this mill was extremely modern and in excellent condition. An expansion has been completed to roughly double the capacity through the addition of several new, larger leaching tanks. This additional capacity may yield greater recovery percentages since the company will have the luxury of treating the ore for a longer duration.
A floatation cell recovery circuit is also planned in the expansion process, that will allow the company to process sulphide mineralization to produce lead and zinc concentrates.
During the two days of the tour, management answered every question I could throw at them, acknowledging any issues that remained to be resolved. We heard presentations from the geologists and mine engineers at each project, and were provided extensive documentation to outline the current extent of operations and future drilling targets.
I am greatly impressed by what I saw on this tour. I think Endeavour has built the framework for a large, efficient operation. They have proven the ability to rapidly define large new resource areas and develop access for production. The mill facilities are state of the art, and each has additional potential for construction of additional capacity. They have advanced through a difficult learning process and now have the benefit of running larger volumes of ore, producing greater quantities of metal, at lower costs, exactly when the metals are priced at the top of their trends for this cycle. Along the way they have built strong relationships with the local communities and earned the trust of their employees.
Endeavour still has about $25 million in the treasury so they will not run out of cash to maintain the aggressive growth and development. The increase in production set to commence shortly should generate additional free cash flow. I think EDR stock will increase in value to price in the improved operating fundamentals, and that will enable the company to start looking at some tempting acquisition targets later in the year, to build even greater growth in the pipeline. I also believe there is significant potential in the property holdings for much larger resource development, and success at the end of the drill bit will contribute to further upside in the share price.
My comments are to be considered simply as my own personal opinions and observations. The company paid my direct travel expenses during this tour, and I received no compensation whatsoever for my time, or for presenting this report. I own shares of the company, and I plan to buy more shares a few weeks after my articles are published in Investors Digest and a newsletter. I do not consider myself unbiased, but I am independent. I share my report for the benefit of the majority of investors who cannot tour mine projects, and encourage people to complete their own due diligence and assume full responsibility for their own investment decisions.
Cheers!
Mike Kachanovsky
This entry was posted on Friday, May 30th, 2008 at 7:51 am |
