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Endeavour Silver Corp. - On The Move

September 5, 2005

Junior mining investors seem to be a bit depressed these days and many fear they'll have to wait years for any real excitement to kick back into the junior arena, therefore leaving them no other choice but to throw in the towel. Although that terrible sentiment seems to be somewhat justified these days, I strongly believe that something seems to be happening on a positive note since May 2005.

No, I'm not talking about huge excitement yet but it seems some investors recently stepped up to the plate which resulted in noticeable performance gains for some high quality juniors. Now who are these investors? What does it mean? Is the smart money starting to pile in already? Should you do the same? Shouldn't we wait for some real excitement to kick in driven by new highs for gold/silver first?

Sure we can, but it seems to me that, yes, some smart money has indeed begun to aggressively accumulate selected junior mining companies.

Allow me to explain:

As I mentioned, the present situation in the junior mining market is characterized by a widespread disinterest by the general public. But as the downside potential has become limited (due to extreme undervaluation of Gold against its own historical norm, see also Gold & Historical Norm….), so the upside potential has grown (Gold should be trading hundreds of dollars an ounce higher in order to catch up to its own dollar adjusted historic average). It may very well be a good time to consider deploying some investment capital once again into promising junior situations.

Let's go back to May 2005 and see what's been happening since then.

On May 21, 2005 I wrote my piece Gold/HUI Divorce part II which made a strong case for a strong rebound of the gold shares due to the extreme anomalies which were evolved between Gold and the HUI. The HUI was trading around 170 and needless to say that sentiment was as bad as it could get. Many analysts called for a continued HUI drop all the way down to 100. But unfortunately for the HUI bears at that time the Gold/HUI anomalies were stretched to such extremes that a return to more normal Gold/HUI ratios was more likely than a further exaggeration of these extremes.

As always, extremes don't persist for a long period of time and indeed this time it didn't either. The Gold/HUI ratio started moving towards more normal values thereby taking the gold-shares higher. Since this was just a technical rebound from a severe oversold condition it was too early to tell if the May low marked a permanent one.

But suddenly (mid June) many of the high quality juniors started to break-out of their grueling down-trend which had persisted for many months. On June 16 I send the following remark to Bill Murphy of LeMetropolecafe:

Hi Bill, Can't help but think the bottom for the battered juniors is definitely in.

Since mid April many of the juniors managed to break out of their multi-months down-trend channels but were caught next by heavy resistance from their own 50 dma's. This week many juniors have managed to breach this important dma for the first time in more than 6 months. As I've described in my article "Gold/HUI Divorce Part II" Gold stocks tend to move back to their 'long-term' average (200 dma) after extreme 'oversold' conditions as we've witnessed in April/May. If that's the case again today then we're up for a nice junior-ride. END.

That was mid June but still this could be considered as just a technical rebound due to a severe oversold condition. But to my surprise some of the juniors continued to outperform their senior brothers the months to come.

On August 02 I send some follow-up remarks to Bill Murphy of LeMetropolecafe:

Hi Bill, on June 16 I send you a note in where I said: "Can't help but to think the bottom is in for the junior gold shares". Well, despite the summer doldrums which many investors consider to be more boring as watching growing grass many juniors performed extremely well since their nadir end of May (eg Tanrange +76%, Seabridge Gold +89%, Mesina Minerals +115%, Virginia Gold Mines +76%, etc…END.

Although there's no excitement at all among the general junior investor something seems to be happening indeed. Jim Sinclair ( who is considered to be one of world's leading gold experts told his subscribers on June 16:

It is only six short months until 2006 is upon us. In my opinion, 2006 to 2008 will be our best years ever.

Wait until 1/1/06 and you will find you are much too late. Things always start quietly before it becomes apparent. People trying to time the market perfectly are going to be left behind in the comet's debris trail.

The establishment interest has started. It took form last May in the majors and is beginning now in the juniors - not January 1st, 2006. In my view, 2006 is for all practical purposes - TOMORROW! END.

How right Mr. Sinclair proved to be. Not only did his firm appreciate by a stellar +110% since mid May but lots of other juniors did the same.

Now, the upswing of the juniors from mid May to mid June could be considered as a technical rebound from a severe oversold condition but a continued upswing accompanied by high volume falls beyond the scope of a technical rebound, what we're seeing lately is accumulation of some juniors.

Now what makes me comfortable is the August junior performance. It's by far the strongest month so far this year, see table below:

As said before, the general interest from Joe public is non-existent so who is buying when Joe public doesn't?

For Mr. Sinclair it's quite obvious who is buying. He told his readers at on August 13:

Since May the so-called "establishment" has been the primary accumulators of gold shares. This is clear to me because I chart the hits on and the other three major community gold sites.

Even today these hits are not any more bullish than a bottom formation in production. The gold community, if there still is one, is simply not participating in the gold share move other than as positioned observers or sold out bulls that are the world's most committed bears.

The gold shares, without any of the old gold gang, have put on a good performance and are now making technical signs of moving into a hard run to the top, albeit it temporarily. That run could easily be quite spectacular in selected situations that fit the outline given to you yesterday. That top, however, will be temporary before major highs - much higher than you would ever believe - occur as we move into new high ground on those selected shares. END.

It should be obvious that the downside risk for the juniors is fading since it's only a matter of time before gold will make new highs since gold is way undervalued compared to historical averages. (see alsoGold & Historical Norm). Therefore it's my strong believe that investors getting into juniors these days are only facing a penny-downside risk. Sure, when excitement kicks in (eg. gold making new high - >$456 -) all juniors will fly and yes, you can wait for that to happen but you'll find out by then that you're too late chasing the high quality ones since they already left the station.

Another well respected market veteran who subscribes to the view of a limited downside risk is Sprott Asset Management's President John Embry. On August 23 he appeared on Report on Business TV and shared the view that there's limited downside potential here indeed. An excerpt from this interview:

Jim O'Connel (ROBTV):

Investors looking to buy some of these penny-stocks, what's your advice to them?

John Embry:

I think that this is probably a good entry point for anything that is semi-legitimate. In the sense that the stock-prices of lot of this stuff are beaten down to such levels where I think your risk is about 10 to 1 which is what you're always looking for. END.

OK, even if there's minimal downside potential here, why should I invest now since this sector could be moving sideways for months or years to come? Why not wait for gold to make new highs before entering the junior arena again…

Well, fair enough but as we have seen, some juniors are performing well already, so the trick is to recognize which ones are in the pole position? I agree that it is not an easy task. Nevertheless, one I'm quite confident about is Endeavor Silver Corp.


It's my strong belief that Endeavour could do very well in coming years because Endeavor doesn't need new precious metals highs in order to create value for its shareholders and therefore draw some serious investor attention. In other words, Endeavour has tremendous growth potential based on today's precious metals prices. They simply need to do what they say they can do and the company could grow its production up to 10-fold in just two and a half years' time. That would be a remarkable achievement indeed.

Unrealistic expectations? Well, read the facts and judge yourself:

Endeavour Silver Corp. (EDR : TSX.V)

If Endeavour Silver can live up to its own expectations in coming years, it should please its shareholders big-time since they are targeting a 3-fold production increase to 1.3 million ounces per year by March 2006. But that's only the beginning since they're targeting another 3 fold increase to 3.6 million ounces per year by 2007. This achievement would make Endeavour one of the 5 largest primary silver companies in the world.

Please think about that, Endeavour could grow its production 10 fold in just two and a half years' time. No matter how you slice it, this would be a remarkable achievement. But what makes this story so compelling is that if they do so, their revenues/profits should also increase dramatically without the need for higher silver prices.

Too good to be true?

Let's review the facts here and see what they tell us.

  • What is Endeavour Silver Corp?
  • Corporate History
  • Management
  • Projects
  • Production increase
  • Summary of Press Releases
  • Company valuation

What is Endeavour Silver Corp ?

Endeavour Silver Corp. is a silver mining and exploration company focused on expanding its high grade silver production, resources and properties in Mexico. With the acquisition of the Santa Cruz silver mine and Guanacevi process plant in Durango, Mexico, Endeavour has become a new silver producer with substantial growth potential.

Endeavour is targeting a 3-fold increase in production to 1.3 million ounces for the 12 month period ending February 28, 2006. Annual production is projected to triple again to almost 4 million ounces by 2007. This achievement would make Endeavour one of the five largest primary silver companies in the world.

Corporate History

Endeavour was founded in August 2002 by the roll back and change of control of Levelland Energy & Resources (LVL).

When LVL's president Don Coates retired, he turned to Brad Cooke, President of Canarc Resource Corp (CCM-TSX) to take control of LVL. Canarc had been both project partner and shareholder with LVL since the mid '90s. After a 1 for 4 roll back of LVL stock to 2.8 million issued shares, Cooke renamed the company as Endeavour and took a new approach to its historic focus in Mexico. Rather than an exploration focus, new management began looking for historic high grade mines with near term production potential in important but overlooked districts.

In January of 2004, it announced a deal on the Santa Cruz mine and mill, and on-trend exploration ground, in the Guanacevi district of Durango State. The Santa Cruz mine changed Endeavour's profile drastically since it is a company builder that should remain Endeavor's most important asset for years to come.


Company CEO Brad Cooke and President Godfrey Walton are both geologists with 30 years each of exploration experience, both sit on the Board of Directors. In February this year they strengthened Endeavour's management team by adding some new key personnel and promoting from within the company thereby successfully making the transition from an exploration company into an integrated mining company.

I consider good management as one of the key assets a junior mining company can have since they can make or break a company. I mean in order to be successful the company needs good properties, in order to find good properties you need a team of good geologists, in order to build a team of good geologists you'll need good management, it's as simple as that!

Does Endeavour's management fit into that category?

Well, Endeavour's CEO Brad Cooke certainly has a good reputation among many of the mining analysts. Mining analyst Jay Taylor (J. Taylor's Gold & Technology stocks) once said about Brad Cooke:

Your editor (Jay Taylor) has known President, CEO and Director Brad Cooke since the early to mid 1980s. Nothing is more important than management and I believe Brad is about as capable as any junior mining company CEO you will find. Not only does he himself possess solid geological skills but he also has good business sense and people skills. As such he as assembled a team of competent folks around him. END.


The Santa Cruz mine together with the Guanacevi mineral processing plant in Durango, Mexico is Endeavour's most important project. They are located in one of Mexico's leading silver mining districts. Over more than 400 years of mining history, the Guanacevi district produced an estimated +500 million ounces of silver.

Endeavour acquired a 51% interest (EDR paid US$ 3 million for the 51% interest) but can earn a 100% interest by paying an additional US$4 million over the next two years. That's makes a total of US$ 7 million dollars for both the mine and the plant which is a tremendous bargain when you consider that the estimated replacement value of this plant exceeds US$ 19 million according to an engineering audit by Summit Valley Equipment and Engineering Inc. (see also press release here).

The Santa Cruz mine has an historical production rate of about 400,000 oz of silver a year but the mill capacity of the Guanacevi plant has a production capacity of 3.6 million oz silver a year. So it is obvious that Endeavour's priority is to find more ore in order to feed the spare capacity of the Guanacevi mineral processing plant. If they succeed in doing so, Endeavour should grow its production ten-fold in coming years.

Will they succeed?

Production Increase:

At the time of the Santa Cruz mine acquisition, the known silver reserves were almost depleted. That made some analysts very skeptical. They argued:

Fine, you have a mill with a capacity of up to 4 million oz per year silver - but what are you going to mill? Why did the previous owner sell the mill in the first place? Wasn't it because of dwindling reserves and production? Weren't the known silver reserves almost mined out? What was done to explore for new ore?

They were wondering indeed what then Endeavour President Brad Cooke was dreaming about when he acquired the Santa Cruz mine which was a mine without reserves and thus nothing to mine.

Gold analyst Paul van Eeden literally said (Dec 14, 2004):

I had not paid much attention to Endeavour in the past for two reasons: I considered Brad Cooke to be an exploration geologist and not a miner, so was skeptical of his ability to buy an old mine, in need of capital and without mineral reserves, and turn it into a successful business. The second reason was that the mine they bought had no reserves -- and a mine with nothing to mine is a liability, not an asset. END.

But during a private meting with Endeavour CEO Brad Cooke, Paul van Eden changed his tune and became convinced that Brad Cooke would be able to find the missing ore. Van Eeden said:

Given the amount of thought that Brad Cooke had put into the company, and his detailed knowledge on a wide range of issues that I could think of, I was convinced that the mine would not only be in good shape, but that he would be able to find the ore that he was missing. END.

So the idea was quite simple:

After acquisition of the mine/mill find some ore in order to feed the mill.

OK, if it were that simple, why didn't the previous mine-owners search for new ore themselves? Well, the problem for the small scale local miners was their lack of exploration capital. It's almost impossible for them to get access to capital.

That's why the local group who owned the mine decided to sell the controlling interest to Endeavour. The local family group still owns 49% of the mine although Endeavour currently controls 100% of the mine cash-flows and has the right to earn a 100% interest by paying up US$ 4 million over the next three years , see also press release here….

So Endeavour could bring in the required funds in order to finance the required exploration programs but what made Brad Cooke so convinced at that time (Jan 2004) that he could find the missing ore?

Good question, so I asked Brad Cooke himself:

Brad Cooke replied:

When we did our due diligence on the mine, it became apparent there were at least three different areas where previous drilling indicated the potential for new ore but when we asked the owners why they did not explore and develop these areas, they said they never had the money.

When we pointed out they could have re-invested some of the profits that were regularly distributed to their shareholders, their answer was that the profits of the mine belonged to the shareholders. That is why over the 12 year period they operated Santa Cruz, they never drilled any new exploration holes or drove any new development tunnels.

Their sole focus was mining the known reserves and when those started running out, they put the mine and plant up for sale.

From our point of view, they owned over 3 ½ kilometers of prospective strike length on a historic high grade silver vein where little exploration had been done outside of the original Spanish discovery area 400 years ago. We could stand above the Santa Cruz shaft and look northwest only 1 kilometer along the vein at large alteration zone on the next hillside and yet it was basically unexplored.

Since these low sulfidation, epithermal vein silver deposits are well known to occur at regular intervals along major structures, for us it was simply an exercise in drilling the vein out along strike. In fact, we discovered, drilled out, drove an access ramp into, and put into production the new high grade North Porvenir zone in a scant 6 months - unheard of in our business, where feasibility studies and environmental permits normally take years to complete.

OK, but what about other major silver companies, they must have seen the same opportunity right? So why weren't they interested? And if they were, how did Endeavour manage to shrug off those competitors?

Brad Cooke replied:

Two other well known and much larger silver companies actually looked at Santa Cruz before we arrived. The first company did a substantial amount of valuable underground sampling plus three surface drill holes and recommended the acquisition to their head office - head office turned it down as too small and too risky.

The other silver company managed to submit an offer the week after our first visit and when we learned the Mexican owners had already sent a counter offer, we told them we did not want to interfere with negotiations already underway but if things did not work out, give us a call.

When that opportunity came up in January 2004, we told them we would not send them an offer, we would prefer to present it to them in person. We arrived in their boardroom on a Saturday morning at 10 AM and by noontime, we had reached a general agreement. Given our due diligence showed that the mine had plenty of reserve potential and the plant was worth a lot of money, we simply met their asking price - again not often heard of in the Mexican mining business where everything is negotiable. END.

So after striking the deal Endeavor had to go to work in order to live up to their expectations. The strategy was simple, acquire more properties surrounding the area and explore for more ore which then could be used to feed the excess capacity of the Guanacevi plant.

Endeavor subsequently took control of an additional 230 hectares of mineral properties (the original transaction involved 461 hectares and the number of hectares is now 543) covering other veins in the Guanaveci district. These veins all had some limited mining history but had never seen any modern exploration - clearly they represented attractive prospects for development.

So what happened after the acquisition of the Santa Cruz mine? Could Endeavor come up with the missing ore? It seems they could indeed, the pace of action is staggering, see press releases below:

Thu Mar 4, 2004
Four High Grade Silver Zones Identified At Santa Cruz Mine, Mexico

Wed Aug 4, 2004
US $1.1 Million Phase 1 Exploration Program Now Underway at Santa Cruz Silver Mine, Durango,

Tue Oct 12, 2004
Endeavour Intersects High Grade Silver Mineralization in North Porvenir Zone, Santa Cruz Mine, Durango, Mexico

Mon Dec 6, 2004
Underground Sampling Returns Consistently High Grade Silver Vein Mineralization in North Porvenir Zone, Santa Cruz Mine, Mexico

Tue Jan 18, 2005
Underground Sampling Extends High Grade Silver Mineralization, Trial Mining Now Underway at North Porvenir Zone, Santa Cruz Mine, Durango, Mexico

Mon Feb 7, 2005
High Grade Silver Mineralization Intersected By Drilling At North Porvenir Discovery; Silver Production Rate More Than Doubles At Santa Cruz Mine, Durango, Mexico

Tue Mar 8, 2005
Additional High Grade Silver Vein Drill Intercepts From North Porvenir ZoneSanta Cruz Property, Durango, Mexico

Wed Mar 30, 2005
Silver Resources Triple to more than 12 Million Ounces at Santa Cruz Mine, Durango, Mexico

Tue May 10, 2005
Independent Report Confirms Initial 8.6 Million Oz Silver Resource (9.8 Million Oz Silver Equivalents) at Santa Cruz Mine, Durango, Mexico

Mon May 16, 2005
Silver Production Projected to Triple to 1.3 Million Oz in Fiscal Year 2005 from Santa Cruz Mine and Guanacevi Plant, Durango, Mexico

Tue Aug 2, 2005
Silver Production from Guanacevi Project Rises 45% to 121,000 Oz

Wed Jun 29, 2005
Endeavour Acquires Nine Silver Properties From Industrias Penoles, Forms Strategic Alliance for Further Acquisitions in Mexico

Tue Aug 9, 2005
Endeavour Acquires Two More Silver Properties in Guanacevi District; Closes Acquisition of Nine Silver Properties From Industrias Penoles; Lists Shares For Trading on Frankfurt Stock Exchange

Tue Aug 16, 2005
Endeavour Acquires Four More Silver Properties in Guanacevi District;


Summary of Press Releases:

The North Porvenir discovery is believed to have potential of up to 20 million ounces of silver. An independent report has confirmed a new 4.8 million ounce silver resource at North Porvenir and a 3.8 million ounce historic resource in the Santa Cruz mine (not to be relied upon according to Canadian reporting standards).

On top of this, Endeavour signed a strategic alliance with Penoles (one of world's largest silver producers) in June this year which gives Endeavour ownership of another 3 kilometers along the Santa Cruz fault system. These claims add considerable additional potential for the Company to explore.

Furthermore, the deal with Penoles granted Endeavour exclusive rights to review the entire Penoles exploration portfolio of mineral properties in Mexico. Endeavor can negotiate to acquire additional properties from Penoles in return for royalties and shares, not cash.

This is an important development since it establishes Endeavour as the exploration partner of world's largest silver producer (Penoles produces about 48 million ounces silver a year.) It's a win-win situation for both companies since Penoles has too many mining properties for them too properly explore and develop on their own. If those prospects benefit Endeavour they will also benefit Penoles since they now own shares of Endeavour.

So far so good, Endeavor has done just what it said it would do:

  • Endeavour quickly confirmed their exploration concepts (the North Porvenir discovery is believed to host up to 20 million ounces of silver)
  • Endeavour continues to acquire new properties (strategic alliance with Penoles and other recent property acquisitions)
  • Endeavour is on target with their +1 million ounce annualized production target before March 2006 (produced 86,000 oz silver in June).
  • Their expectations to grow beyond +3 million ounces annualized production during 2007 remain realistic.

So a lot has changed since the acquisition of the Santa Cruz mine and the Guanacevi plant in January 2004. Are these developments reflected yet in the share price of Endeavour? Well, since February 2004 Endeavour's share price has been trading around the 2 CAD$ mark and it seems that no further progress has been made since then. Sure, part is due to the lack of overall investment interest since sentiment has been extremely low in recent days due to the failure for the precious metals making new highs this year (see part I of the article). But as explained in part I that will change sooner rather than later and it seems the downside risk is fading each month. As John Embry says:

I think that this is probably a good entry point for anything that is semi-legitimate. In the sense that the stock-prices of lot of this stuff are beaten down to such levels where I think your risk is about 10 to 1 which is what you're always looking for. END.

As mentioned in part I, a few good juniors already left the station and doubled in price since mid-May. Although Endeavor didn't perform that badly since mid May (it appreciated by about 15%), the share price has not kept pace with the company's recent growth.

How come you wonder? Don't investors recognize what is going on with Endeavour? And if they don't will they do anytime soon?

Well, according to mining analyst Lawrence Roulston of Resource Opportunities investors will be realizing soon what is going on with Endeavour Silver, he told his subscribers recently:

At present, Endeavor is valued on the basis of the past production level (400,000 ounces per year) and since the company can only report a modest resource, it presently has a small market value. Over the coming weeks, investors will realize that the company has already achieved an annualized production level in excess of 1 million ounces, with realistic expectations of growing beyond the 3 million ounce level over the next year.

Investors will also soon begin to appreciate the district-scale exploration potential. The strategic alliance with Penoles adds an extremely important bonus that has the potential to add further value. END.

Company Valuation:

A lot has happened since the acquisition of the Santa Cruz mine in January 2004.

So what could be considered a fair valuation of Endeavour today and what could we expect in coming years if Endeavour continues to live up to their expectations just as they did last year?

Although I don't want to speculate about future share price scenarios (since so much depends on future silver prices) I want to highlight the under-valuation of EDR compared to other silver producers expressed in market cap/Oz annual production.

Let me explain:

If we take a look at the major silver producers (Coeur D'Alene, Hecla, Pan American) and their valuations we'll see that they're valued at about $70-$80 per ounce of annual silver production, see chart below :

Now how do we position Endeavour in this picture coming years?

Let's assume that Endeavour will achieve its goal of producing 3.6 million ounces of silver by 2007 (which seems to be a realistic objective). Endeavour is targeting an average per ounce cash cost in the area of US$4 to $5. With current silver prices that would lead to a profit of up US$2 to $3 per ounce silver. This would net Endeavour up to US$ 10.8 million in annual cash flow thereby making Endeavour one of the top 5 primary silver producers in the world.

Now if Endeavor becomes valued as the other major primary silver producers then Endeavor could have a market cap in the range of US$ 288 million (3.6 * $80).

Now compared to Endeavour's current market cap of US$ 37.4 million, that would suggest an increase of 670%. This doesn't mean that Endeavor's share price should increase by 670% as well since management could decide to issue more shares further down the road in order to finance their on-going exploration programs or further acquisitions of additional properties thereby diluting the stock. However it should be obvious that Endeavour has a tremendous growth potential.

When you consider that the possible growth of Endeavour's market cap by 670% in two years time is based on current silver prices (at the time of writing US$ 7.00) it'll be obvious that rising silver prices will amplify this growth potential tremendously. A silver price north of +US$ 10.00 will double the profit margin which would net Endeavour up to US$ 21.16 million in annual cash flow.

It goes far beyond the scope of this article to discuss potential future silver prices but readers interested in studying the precious metals fundamentals can take peek at the Gold Drivers Report summarywhich makes a strong case for higher gold prices the years ahead. Since silver tends to follow gold (silver is often referred to as the poor man's gold) and tends to outperform gold during a gold bull market many analysts do call for much higher silver prices the years ahead. Needless to say what that would do to Endeavour's profit margin.


  • Endeavour acquired the Santa Cruz Mine and the Guanacevi mill in Durango.
  • The Santa Cruz Mine previously produced at 400,000 oz per year silver
  • Existing mill capacity 3.6 million oz per year silver
  • Endeavour's strategy is to find silver ore in order to fill the existing mill capacity. In order to do so Endeavour launched an aggressive exploration program.
  • Endeavour quickly confirmed their exploration concepts (the North Porvenir discovery is believed to host up to 20 million ounces of silver)
  • Endeavour continues to acquire new properties (strategic alliance with Penoles)
  • Endeavour is on target with their +1 million ounce annualized production target before March 2006.
  • Their expectations to grow beyond +3 million ounces annualized production during 2007 remain realistic.
  • Expanding mine production to fill the existing mill capacity makes Endeavour a top 5 primary silver producer in the world.
  • Other top 5 primary silver producers are valued at about US$80 per ounce of annual silver production.
  • If Endeavour were to reach those valuation-levels its market cap could grow to the US$288 million range which translates itself into a 670% growth in two years time.
  • Rising silver prices could explode Endeavour's profit margin.

A single ounce of gold (about 28 grams) can be stretched into a gold thread 5 miles (8 kilometers) long.
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