If a teenager and a toddler will both grow to a height of six feet, the toddler will grow further and faster to get there. This is why growth-hungry investors look to the juniors of gold and silver, and why I spoke recently with the chairman and CEO of junior silver producer Endeavour Silver
Before I get to the interview, here's some quick background. Simply stated, juniors form the high-voltage component of a four-tiered strategy employed by skilled precious-metal investors:
- Some physical bullion for security.
- Royalty plays for lean cash flow. Royal Gold
(Nasdaq: RGLD) and Silver Wheaton(NYSE: SLW) are the sole U.S.-listed options in this category. - Larger miners for leverage to metal price gains. Goldcorp
(NYSE: GG) has by far the leading growth story among major producers, and Yamana Gold(NYSE: AUY) is the screaming bargain among mid-tier producers. - Junior miners or explorers for a higher-risk chance at truly precious returns.
The Market Vectors Junior Gold Miners ETF
With that in mind, here are some highlights from my recent conversation with Endeavour Silver's Bradford Cooke:
Christopher Barker: I'm a longtime Endeavour Silver shareholder. I've held shares since about 2007, and I intend to keep them for the long haul.
Bradford Cooke: Well, we've enjoyed a good run. It's still very much a work in progress. And I guess my main challenge this year is: Where is my No. 3 mine going to come from? And believe me, we've been working very diligently on that.
Barker: What are some of the parameters involved in your search?
Cooke: Well, in addition to possible mergers in our peer group, there are clearly other opportunities for acquisitions.
We've been at this now for two years. We've looked at almost every junior producing silver company in Mexico. There are only a couple that we like. They have never been interested in us ... they have felt that their shares were far too cheap. Obviously, we'd like to pick up additional production if possible, to quickly move Endeavour Silver out of the ranks of junior producers, and into the ranks of mid-tier producers.
Criterion No. 2 is -- if we can't pick up production -- then we'd at least like to pick up some reserves and resources that we can build mine No. 3 on. We're looking at a couple of those as well; the idea being once we have that (either a merger with a producer, or a merger or acquisition of a resource company), then we turn our attention to that as being potentially mine No. 3.
Having surveyed the field for two years now, there're actually very few that have what we want. We typically would be happy to overpay for a company or an asset that in a year's time we can grow ... and ultimately make it look reasonably priced for our stockholders. Vice versa, we're allergic to underpaying for something we can't do anything with. Usually, if a company is cheap, it's cheap for a reason ... and I can think of several out there.
Barker: Your second-quarter production was excellent. You came in ahead the pace set by your full-year guidance, and that's without the recent plant expansion at Guanacevi.
Cooke: Well, that's right. We went through a low-grade zone at Guanajuato in the first quarter, and so it's really Guanacevi that's outperformed in the first half of 2010. Much to our delight; it wasn't planned. We're in the middle of a plant expansion, and the back end of the plant (filtration, thickeners, etc.) will be ready at the end of August, but the crushing circuit won't be done until the end of September ... so really the improvements in production at Guanacevi were unexpected. It means that we fully expect to meet our targets this year, and we can probably raise our expectations for next year given that the plant is outperforming our expectations.
One other factor is that gold at both mines seems to be improving. So, across the board, we've had generally pleasant surprises on tonnage output in the first half, steady recoveries, better-than-expected gold grades, and we haven't finished our capital build-out yet.
Barker: Could you help to bring my readers up to speed with respect to exploration and development?
Cooke: Basically, our exploration programs had previously been focused mostly on our two existing mine sites. And a change in our exploration approach in the past 12 months has been that we have focused upon acquiring and exploring brand new district-scale opportunities. We actually have a couple more district-scale opportunities that we've been working on all year, and that we do hope to announce. These are large exploration targets that we hope to consummate and announce this quarter.
Barker: Is San Sebastian the most prospective of your exploration properties, or is Parral your better endeavor?
Cooke: Parral is far more advanced than San Sebastian, so they're just different. San Sebastian I like to call our next Guanacevi. Why? Because we end up controlling the entire district. It's an historic district that's never really been drilled, just like Guanacevi was a few years ago. I like Parral because it's a lot more advanced than San Sebastian, and it really does have a shot at being our next mine.
Questions from the CAPS community
Barker: Before our conversation today, I invited readers of my CAPS blog to post questions of theirs, and I wanted to pose a series of questions offered by Motley Fool CAPS member ChrisGraley. First, he was curious to know your overall outlook for the silver price.
Cooke: I consider myself a modest bull on precious metal prices, but I do think we are coming into the next wave up for both gold and silver. More accurately expressed, I think we're looking at the next wave down for paper currencies, and that I think is for the fourth quarter of this year. So for silver, I am looking for some short-term softness (in the $17 range), and by year-end I am expecting to break through and retest the old high of $22. And that's simply a currency-based argument. There's really nothing in global demand to say it should go there, except that these paper currencies are in trouble, and these government debts worldwide finally have to be routed out.
Gold led us into the summertime correction. It's actually been much gentler and shallower than in previous years. Gold typically bottoms in August and starts moving in September in advance of any other commodity. So I'm looking for probably an $1,100 to $1,140 bottom in August, and a fairly aggressive next wave in the fourth quarter ... certainly going through the old high of $1,260, and I'm looking for $1,350, and maybe even as high as $1,500 this year. I'll be even more aggressive next year.
Barker: I also anticipate silver gaining ground on gold on a percentage to close that gold-to-silver ratio a bit.
Cooke: Oh, for sure. The ratio moves in cycles, and we cycled from an original base in around 2001 of 50-55 to one, down to a low of 45 at the peak in 2007, to a trough of 85 during the crisis of 2008. And now we're back in the 65-70 range. And I can easily see it over the next two-to-three year cycle going back and breaking below 45.
Barker: What do you consider Endeavour's main competitive advantages?
Cooke: First and foremost, we had first-move advantage of getting into Mexico in 2003 and identifying fully built and permitted silver mines for sale at a time when the silver price was still depressed. That meant we were able to capture two key strategic assets, at very low prices, before anybody else did.
Second, we have assembled, I think, one of the most professional management groups in the entire sector.
Third, because we were able to bootstrap these mines and live off of cash flow, we haven't had to go to the equity markets each year like many of our competitors. Therefore, we have the fewest number of shares issued in the sector: 62m out after six years. We have a flush treasury, and we're living off of cash flow.
Barker: Which companies do you consider your toughest competitors out there?
Cooke: I admire the work that Jorge Ganoza has done at Fortuna Silver. I admire the work that Bob Archer has done at Great Panther.
Barker: Do you see any important shifts under way in silver demand?
Cooke: Well, we did see a shift from a sector that was dominated by photographic demand in the 1980s and 1990s; to most of the 2000s being dominated by booming electronics offtake as electronic gadgets took off ... especially in India and China. There's not enough silver in each gadget to affect the price of the gadget, but there most certainly are enough gadgets to affect the price of silver.
There's been a shift since 2008, though, and that is directly related to the state of the global economy and global paper currencies. We have now seen in the last few years huge offtake by the ETFs for gold and silver. And that's just the tip of the iceberg, I think, because as these currencies continue to fall in relative value -- as they seek equilibrium relative their countries' debts -- then the things that have eternal value like gold and silver will continue to appreciate in most currencies.
Barker: What advice do you have for investors looking into silver?
Cooke: I think everybody should have some exposure, simply because they have returned to their historic function as the currency of last resort. A lump of gold, you know, doesn't change in value from year to year or century to century. A lump of gold is a lump of gold. It's how we measure -- what we use to buy and sell it -- that changes.
I'm expecting another three to five years in the gold and silver cycle, and I'm certainly not alone in that view. So it's not late in the cycle; these stocks are not overpriced. In fact, if anything, they're underpriced.
Exiting the discussion with an exit strategy
Barker: What are your views on consolidation within the industry?
Cooke: We've talked about consolidation in the junior producers' sector for several years, and the main reason that hasn't happened is that most of the companies, including Endeavour, were just too small. They weren't material enough for senior silvers to care about, and there is no mid-tier in the silver mining sector. That's why Endeavour is so keen to grow into that space. We then fall into the rearview mirror of the senior silvers, and the senior gold/silvers. So yeah, I think there will be a consolidation of the silver sector. Endeavour is trying to be the first, and if we are successful, then I wouldn't be surprised if we see a couple more deals on the heels of ours.
Barker: Is being taken out by a senior silver producer desirable from Endeavour's standpoint?
Cooke: I think there's no question that if you can get all of your shareholders out at the tip of a friendly deal, that's the best way to maximize value for stockholders. That's part of our exit strategy -- to build a company that somebody else will totally want to own.
