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TABLE OF CONTENTS Aug 25 - 31, 2014 Volume 100 Number 28 - 0 comments

Endeavour Silver's cost cutting boosts balance sheet

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By: Matthew Keevil

VANCOUVER — Glancing at Endeavour Silver’s (TSX: EDR; NYSE: EXK) production and earnings numbers for the second quarter, it doesn’t appear a lot has changed over the past year.

The company broke even during the quarter — much as it did over the same period a year ago — and saw its revenues fall due to lower silver-equivalent production and metal prices.

But dig deeper into Endeavour’s results, and the company is improving its cash position, cutting costs and reducing debt.

Endeavour owns and operates three underground silver–gold mines in Mexico: the Guanacevi mine in Durango state, and the Bolanitos and El Cubo mines in Guanajuato state.

The company’s quarterly silver production was up year-on-year to 1.67 million oz., while gold production dipped 24% to 15,000 oz., which resulted in a silver-equivalent production decline of 6% to 2.6 million oz. Due to a strong first quarter, however, Endeavour’s year-to-date silver production is up relative to 2013 on higher silver grades and recoveries, which offset lower tonnages.

“Lower tonnage processed in [the second quarter] this year compared to last year was primarily the result of returning the leased Las Torres plant near our El Cubo line. Last year, if you recall, we were able to significantly boost the Bolanitos mine production and run those extra ore tonnes over to the Las Torres plant for processing,” president and CEO Bradford Cooke noted during a conference call. “Our quarterly and year-to-date gold production is down compared to last year, and again, that’s directly related to the overproduction from the Bolanitos mine last year, the result of lower grades and tonnage throughput offset partly by higher recoveries.”

Endeavour’s financial results mirrored its operations, with revenue down 23% year-on-year to US$55 million, as realized silver prices fell 6% to US$21.10 per oz. sold. Mine operating cash flow dipped 25% to US$20 million, though cash flow from operations only declined 4% to US$12 million.

But Endeavour cut its all-in sustaining costs by 24% year-on-year to US$20.48 — net of gold credits — as it sharply reined in capital spending. It fulfilled a promise made in early 2013, when Endeavour pledged to focus on reducing operating costs to replenish its balance sheet following the rebuild of its El Cubo mine.

As a result Endeavour has been able to generate substantial free cash flow over the past 12 months and add US$33 million in cash and equivalents to its balance sheet since June 2013.

This translates to a 26% increase in the company’s short-term liquidity since the start of 2014, with cash and equivalents sitting at US$44 million at the end of the second quarter.

“Since completing the rebuild of El Cubo’s mine plant and infrastructure last year, we have focused on trimming our operating costs and expanding our profit margin. And I would like to point out that we’ve been successful at growing our free cash flow and our balance sheet since last year,” Cooke continued, noting that Endeavour repaid US$3 million of its revolving credit line, which left the company with US$29 million in outstanding debt at the end of the quarter.

 “So our outlook to year-end remains positive on both the metal prices, as well as our silver and gold production. We’re also aggressively exploring brownfield targets around all three mines to boost our reserves and resources,” he said.

BMO Capital Markets analyst Andrew Kaip called the results “neutral” and has kept his $6.75-per-share price target on Endeavour’s stock. BMO Research forecasts the company’s 2014 saleable production at 11 million equivalent oz. silver at co-product cash costs of US$11.21 per oz.

“Earnings were broadly in line with BMO Research’s expectations. 2014 remains a key development year at El Cubo, as the company ramps up mining rates over [the second half] to fill plant capacity of 1,550 tonnes per day by year-end,” Kaip noted on Aug. 11.

Endeavour shares have traded within a 52-week range of $3.34 and $7.06, and dropped 6%, or 40¢ after its second-quarter results, to close at $6.43 at press time.

The company has 101.3 million shares outstanding for a $651-million market capitalization.

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The processing plant at Endeavour Silver's Bolanitos silver mine in Guanajuato state, Mexico. Credit:  Endeavour Silver
The processing plant at Endeavour Silver's Bolanitos si...

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