Apart from other silver miners, Endeavour Silver (EXK +3.12%) does not plan to grow its production in 2014. The company estimates that it will produce 6.5 million-6.9 million ounces of silver this year, while it produced 6.8 million ounces of silver in 2013. As silver prices remain depressed, production growth could have been a source of additional cash flow for Endeavour Silver. Is the company's strategy viable?
San Sebastian project likely to deliver growth
Endeavour Silver has three operating mines in Mexico and several development projects in the country. Miners with operations in Mexico were recently hit by the new 7.5% mining tax. Endeavour Silver estimates that the tax will have an impact of $3 million at current silver and gold prices. The company has little room for maneuver as not only its operating mines, but also most of its development projects are situated in Mexico.
The project that is the closest to production stage is San Sebastian mine, which holds 11.4 million ounces of indicated silver resources. Endeavour Silver applied its permit application with the government back in December, and expects to receive the permit closer to the end of this year. After the permit is received, the company will be ready to make a decision on mine development.
However, given the current price environment and the new Mexican tax, this decision could be negative as well as positive. Endeavour Silver is reluctant to fund its projects with debt, which helped the company maintain a healthy balance sheet with zero long-term obligations. The company finished the fourth quarter with $35 million of cash on the balance sheet, which is not enough to fund the development of the new mine.
Focus on free cash flow
Thus, the development of San Sebastian will depend on the amount of free cash flow that Endeavour Silver will be able to generate this year. As the company does not expect to grow its production, its cash flow will depend on costs as well as on silver and gold prices. Endeavour Silver expects that its all-in sustaining costs will be around $19 per ounce of silver, slightly higher than $18.31 in 2013.
Sure, silver prices are outside a miner's control. However, this is the most powerful ingredient in the revenue story. Each dollar of upside in silver prices will materially improve Endeavour Silver's performance.
Silver has shown worse dynamics than gold for some time. As a reaction to this reality, silver miners like Hecla Mining (HL +2.92%) and Silver Standard Resources (NASDAQ: SSRI) bought gold mines. Hecla Mining acquired Aurizon Mines in the first half of 2013, and expects to produce 180,000 ounces of gold this year. Gold already has the biggest share in Hecla Mining's revenue mix, and is likely to remain the largest contributor of revenue this year.
Silver Standard Resources has recently announced a purchase of Marigold mine from Goldcorp and Barrick Gold. Silver Standard Resources' move was warmly greeted by investors, and its stock is up as much as 57% this year.
Endeavour Silver plans to allocate $43.9 million on capital spending this year, down from $88.6 in 2013. The 50% cut in capital spending will free almost $44.7 million of cash for the company, which could be later spent on the San Sebastian project.
Bottom line
Endeavour Silver is postponing its production growth to future years. Given the current price environment, this strategy looks reasonable. The focus on funding projects from cash on hand and free cash flow will provide sustainable growth in the future years. However, this year's performance is almost totally in the hands of silver prices.
