As silver prices have stabilized in 2014, shares of Endeavour Silver (EXK 1.30%) have responded accordingly, 42% year to date. The company stated that its target is to become a senior silver producer, which means that its silver production must exceed 10 million ounces annually. Last year, the company produced 6.8 million ounces of silver. Will it achieve its growth target in the near future?
The company has the opportunity to fund acquisitions
Endeavour Silver plans to accomplish its goal through organic growth and strategic acquisitions. As silver prices rise, miners get a chance to receive financing at better rates. Hecla Mining (HL -1.18%) financed its purchase of Aurizon Mines through an offering of $500 million of 6.875% senior notes due 2021 in the first half of 2013. Prior to the acquisition, Hecla was primarily a silver producer. After this move, gold provides more revenue to the company than silver does.
Recently Kinross Gold (KGC -1.68%) announced an offering of $500 million of 5.85% senior notes due 2024. Kinross Gold plans to use the proceeds to repay a portion of its term loan, which is due in August 2017. Although Kinross Gold is not a silver miner, the market dynamics for both silver and gold producers are similar in the current environment. Kinross Gold's rates could provide some insight into what other companies can get from the debt market.
Right now, silver and gold prices are lower than where they were when Hecla Mining used the debt market to fund its purchase. However, it looks like prices may have already bottom. This could lead to more attractive financing options should Endeavour Silver choose the acquisition path.
New Mexican tax could force diversification
Late in 2013, the Mexican government surprised miners with an additional 7.5% tax. This news pressured Endeavour Silver shares, as all three of the company's producing mines are situated in Mexico. What's more, six out of seven of the company's exploration projects are in Mexico too.
This new tax puts additional pressure on Endeavour Silver's cash flow. The company reported that its realized silver price was $23.10 per ounce last year. So far this year, silver prices were unable to hold above the $22 level.
This fact could force the company to diversify its growth. Endeavour Silver finished 2013 with $35 million of cash on the balance sheet, so it does not have enough funds to support meaningful acquisitions. What's positive, though, is that Endeavour Silver managed to stay debt free despite last year's turmoil on the price front. This fact increases the company's chances of getting attractive financing rates should it choose to do so.
Endeavour Silver guided that its 2014 silver production will be 6.5 million–6.9 million of silver ounces in 2014. If the company reaches the high end of its own guidance, it would grow its production by just 1.5% compared to last year's figures.
The company targets a capital budget of $43.9 million together with an exploration budget of $10.7 million. Endeavour Silver's cash flow from operations is likely to cover those costs, as its expected all-in sustaining costs for 2014 are $19 per ounce of silver.
The company's organic growth continues, and it plans to start production at its San Sebastian mine, which holds 11.4 million ounces of silver reserves, in 2016. However, if the company wants to achieve faster growth, it will have to go shopping.