How Much Upside Is There for Endeavour Silver Corp?

Silver prices gave hope to silver miners when they spurted to $22 per ounce back in February. However, the rise proved to be temporary, and silver settled under the $20 mark. For miners with higher costs like Coeur d'Alene Mines (NYSE: CDE  ) , this is a challenging situation. Meanwhile, several miners still operate profitably in the current environment, and Endeavour Silver (NYSE: EXK  ) is one of them.

Costs drop in the first quarter but could increase going forward
Endeavour Silver recently reported adjusted earnings of $0.05 per share, beating analysts' expectations. The company's performance was fueled by lower costs, as Endeavour Silver reported first quarter all-in sustaining costs (AISC) of $12.15 per ounce. In comparison, Coeur d'Alene Mines' AISC were $19.12 per silver equivalent ounce, leading to an adjusted net loss of $19.5 million. Meanwhile, one of the best-performing silver miners this year, Pan American Silver (NASDAQ: PAAS  ) , reported AISC of $15.54 per ounce.

Endeavour Silver's first quarter costs were greatly helped by higher grades at the Guanacevi mine, which went from 272 g/t in the fourth quarter of 2013 to 350 g/t in the first quarter of 2014. Going forward, Endeavour Silver's costs are likely to increase, and the company guided for full-year AISC at $19 per ounce of silver.

Operating cash flow enough to fund capital spending and reduce debt
Endeavour Silver has outlined a $43.9 million capital spending program for this year. Importantly, the company will be able to fund its capital expenditures from operating cash flow. In the first quarter, Endeavour Silver's cash from operations exceeded its investment spending by $7.9 million, which helped to increase the company's cash position to $44.3 million.

The company carries $32 million of revolving credit facility debt on its balance sheet and expects to reduce this to around $25 million by year-end. Endeavour Silver has enjoyed positive free cash flow for three straight quarters and is likely to continue this trend unless silver prices dip even further.

Endeavour Silver is valued conservatively in comparison with other silver miners. The company is trading at 22 times its future earnings, while Pan American Silver trades at a 36 forward P/E; Hecla Mining (NYSE: HL  ) trades at a 43 forward P/E. Endeavour Silver projects 60% production growth through 2016, fueled by the start of production at its San Sebastian mine and expansions at El Cubo and Bolanitos.

The company is likely to have few problems funding its growth, as it has sufficient operating cash flow. The other possible growth driver, debt, has been expensive for some silver miners recently. For example, Coeur d'Alene Mines pays a 7.875% interest rate on its senior notes due 2021. However, the interest rate would be lower for Endeavour Silver if the company chooses to fund growth projects with the help of debt.

Bottom line
Endeavour Silver is well positioned to deliver a solid year. The recent downside in silver prices has put pressure on the company's shares, but the long-term prospects look good. Despite a 15% rise this year, Endeavour Silver shares are not richly valued by the market and still have plenty of upside.

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