March 13th, 2009

In the years before the financial crisis gold and silver were following each-other in every up and down-turn, and silver would usually do everything in overdrive. With the big drop of gold this fall, silver naturally fell as well, but much harder. And since, silver has not been able to gain a standing in relation to gold that it had earlier. Through the bull-market in precious metals, silver has from time to time been lagging and there seems to have been doubts about its 'precious' status, but then when gold started going up substantially, silver would quickly follow. Silver has (just like gold) been used as money in the past and although its uses today are largely industrial I doubt that it wouldn't hold somewhat steady with gold even if industrial demand fell, just based on its historic relation to gold. The supply and demand picture for silver and gold is very different, where silver has a very small investment demand (regarded in % of demand), but about 25% of demand from jewellery. Gold on the other hand has demand of ~68% jewellery and investment demand ~19% and the rest for industrial. One could regard jewellery as investments, but that isn't entirely the truth, and in this comparison it almost looks like silver comes out as a gold-equal, because if financial chaos drives people to precious metal investments you might see a somewhat equal increase in both silver and gold, but then as people get poorer all over the world jewellery demand could go down (hurting gold more) and at the same time you might loose industrial demand for both gold and silver (hurting silver more) - this would leave both metals in a fairly equal position for investment-driven appreciation. It is a fact that investment demand for both silver and gold has been growing strongly, and perhaps somewhat stronger for gold - since it is the best exposed of the two. But I beleive we will see a return of the same scenario we've had many times over in the past couple of years - gold takes a dive and silver takes a much stronger dive (which happened this fall) - people are scared and more so by silver than gold, so gold appreciates faster than silver after the crash, but as people feel more safe they start pouring into silver again into the next crazy rally in which silver is able to appreciate more than gold. So basically we end up with the same driving factors for silver and gold, but because silver is historically undervalued (and recently crash-relatedly undervalued) in comparison to gold I think it deserves some extra attention.

A few posts back I presented Arian Silver which is just getting ready to start up operations, and of course there are always problems with the start-up of a mine, so I figured it would be good to take a quick look at a silver-miner that already has some good production and is growing strongly.

Endeavour Silver is just like Arian located in Mexico, and while there is a lot of violence in the country now, I don't think it will hurt the mining industry too much since this is a war between criminals and the government and not between the people and the government.
Quick numbers: Working capital ~$15M, Debt ~$11M, mcap ~$60M. Reserves/resources 42M Oz silver and some gold.
Endeavour has two producing mines which are both high grade silver with gold. The expansion potential would best be described as huge for both. Production in 2008 was 2.3M Oz silver (up 9%) and the company is aiming at an increase to 5-10M Oz per year in only 2 years time; for 2009 they expect production to increase 20% because of recent investments in the mines. Also, for 2009 there is expected a 10.000 Oz gold by-product. Production cost for the last quarter was down to ~$7.50 per Oz, mostly because of the weak peso.
The company has two really good looking exploration-projects and they are currently looking to make more acquistions of producing mines. Because of large investments in the mines and in exploration Endeavour has not seen a positive net profit yet, but considering the low cash-cost the net profit should be good as production ramps up and investment needs for the mines decreases.

I know this review of Endeavour Silver was really short, but I think the picture is pretty clear. If you look at the revenue of production in 2009 (almost 3M Oz + gold) and discount the expenditure of exploration and other investments, there would be a profit of ~$28M based on the latest cash-cost and the current silver/gold price. The mines look like they're going to be in production for a long time and with all the expansion plans, an mcap of $60M is not looking too expensive, especially if silver starts catching up to gold.