Endeavour Silver Nears Terronera Mine Commissioning while Advancing Pitarrilla Silver Projects

• Endeavour Silver ended Q3 2024 with $55M in cash, plus $35M available from credit facility.
• The company is focused on commissioning the Terronera project, which is expected to double production and cut costs in half when it comes online in the next 2 months.
• The posted Q3 earnings beat analyst consensus despite a trunnion failure that reduced processing capacity and impacted production.
• Endeavour Silver sees long-term growth in industrial silver demand and believes the monetary aspect of silver has picked up in the last 3-6 months, driving prices from $26 to $34.
• Endeavour Silver is open to M&A but wants to focus on assets that generate free cash flow through cycles; it is advancing the Pitarrilla project behind Terronera to drive further growth.

Endeavour Silver, a mid-tier precious metals mining company, is nearing a pivotal moment as it prepares to bring its Terronera silver project online in Mexico. With the potential to double production and slash costs, Terronera represents a transformational growth catalyst for Endeavour. At the same time, strengthening silver fundamentals, marked by rising industrial demand and renewed investor interest, are providing a favourable backdrop.

Q3 Results and Balance Sheet Strength

Endeavour reported third quarter earnings that edged out the analyst consensus by a penny per share. While a trunnion failure at the Guanaceví mine crimped production, the company still delivered a solid quarter. Perhaps more importantly, Endeavour remains on track with the Terronera build-out from a financial perspective. CEO Dan Dickson provided an update on the balance sheet:

"At the end of Q3, we ended up with $55 million in cash. We had another $35 million on our credit facility - the project loan for Terronera that we pulled subsequent to quarter end. So early October we pulled it, it's ultimately $90 million available to us from a cash standpoint."

The Terronera project carries a total price tag of $271 million, of which Endeavour has already spent $258 million. Some of that spend includes pre-paid and advance payments to vendors that will roll off as the mine moves into the commissioning phase over the next two months. With the project over 95% funded and key infrastructure in place, Endeavour appears well-positioned to bring Terronera across the finish line.

Terronera: A Game-Changer

For Endeavour shareholders, Terronera can't come online soon enough. The project is expected to double the company's production profile while cutting all-in sustaining costs (AISC) in half. That step-change should allow for a rapid deleveraging of the balance sheet.

"The plan ultimately will be to pay off that debt in relatively short order," explained Dickson. "It's an 8-year term loan, but there's cash sweeps and ultimately, with higher prices, allows us to pay it back a lot quicker."

Based on the current silver price around $31 per ounce, Terronera could generate upwards of $120 million in after-tax free cash flow in its first full year of production. That would be sufficient to pay off the entire project debt. While Dickson sees value in maintaining some debt to lower the overall cost of capital, he emphasized that surplus cash flow can be redeployed into the next leg of growth - the Pitarrilla project.

Pitarrilla: Filling the Pipeline

Even as Endeavour reaches a major milestone with Terronera, the company is eyeing its next avenue for growth at Pitarrilla. Acquired in 2022, Pitarrilla hosts an indicated resource of over 693 million silver equivalent ounces, making it one of the world's largest undeveloped silver deposits.

"Our goal is to be a senior silver producer," stated Dickson. "Terronera takes us to 15 million silver equivalent ounces and so we've been doing a lot of work at Pitarrilla. We've got news that will come out on Pitarrilla in the coming weeks. We're excited about that."

With a total planned investment of $5 million into Pitarrilla this year, Endeavour is methodically advancing the asset up the development curve. If the project can be brought online on the heels of Terronera, it would cement Endeavour's status as a senior producer and further bolster free cash flow generation.

Interview with CEO Dan Dickson

The Silver Macro Picture

Underpinning the Terronera and Pitarrilla stories is a constructive outlook for silver prices. Endeavour sees two key demand drivers at play - rising industrial demand and a monetary element that has recently reasserted itself.

On the industrial side, silver demand has surged from around 200-250 million ounces 15 years ago to 550 million ounces today. Dickson sees that trajectory continuing as the global economy electrifies and decarbonizes. Silver's unmatched conductivity and other properties make it essential in everything from solar panels to 5G infrastructure and electric vehicles.

"The long-term aspect to silver industrial demand is going to continue to grow," Dickson remarked. "I think there's a lot of data on that and then it's a question of when the US side of things or Western Civilization starts making investments from a gold and silver standpoint. I think that really pushes gold prices higher and then ultimately silver prices will follow."

Indeed, after lagging gold for much of the last two years, silver has begun to outperform. From a low around $26 per ounce in September, silver surged as high as $34 before consolidating. Dickson attributes that move to a reemergence of investor interest in silver's monetary properties.

"The investment side for gold has been there because of central banks," he explained. "The growth in silver has come from the industrial standpoint. I'd say in the last three to six months, we've seen this move quick move through $32 up to $35 and now I think the market's just trying to understand what's happening with the US election and then really figure out a direction."

Risks and Opportunities

Political risk is always a consideration for mining companies operating in foreign jurisdictions. In Mexico, a new administration under President Claudia Sheinbaum took power on October 1st. While it's still early days, Dickson is cautiously optimistic about the operating environment.

"Things have been positive in the first six weeks of her in office and obviously leading up to her taking the seat," he noted. "But time will tell."

Beyond jurisdiction risk, Endeavour will have to navigate the commissioning and ramp-up phases at Terronera. Bringing a new mine online is never without its challenges, but Endeavour has a long track record of operating successfully in Mexico. Barring any major hiccups, Terronera should reach commercial production in the first half of 2024.

On the M&A front, Dickson sees potential for further consolidation in the silver space. He pointed to two large-scale mergers - Pan American Silver's acquisition of Yamana Gold and Hecla Mining's buyout of Alexco Resource - as evidence of a thinning field of pure-play producers. With a relatively small pool of development-stage projects waiting in the wings, Dixon believes scarcity value for silver assets is on the rise.

For Endeavour, M&A cuts both ways. The company could be either a buyer or a seller, depending on how the landscape unfolds.

"We like the path that's in front of us," stated Dickson. "We think Terronera and Pitarrilla together make for a very compelling story […] Whether we find more or whether somebody comes and wants to talk to us about those assets, we're always open. But it's one way or the other and I'm kind of agnostic between the two."

Conclusion

In a precious metals market dominated by gold, Endeavour Silver offers investors a unique vehicle for capitalizing on the emerging bull market in silver. With Terronera poised to drive a step-change in production and profitability, Endeavour is nearing an inflection point in its growth trajectory. Longer-term, the Pitarrilla project waiting in the wings has the potential to vault the company into the top echelon of senior silver producers.

While not without risks, the underlying fundamentals of the silver market appear increasingly robust. The electrification of the global economy is driving structural demand growth for silver's unrivaled properties. At the same time, a emerging monetary tailwind as investors seek haven from currency debasement could further support prices. If Endeavour executes at Terronera and silver prices continue to march higher, the stock could offer significant upside potential for investors.

The Investment Thesis for Endeavour Silver

• Endeavour offers pure-play exposure to silver, an essential and increasingly scarce metal
• Near-term catalyst in the form of the Terronera mine, slated for commissioning by year-end 2024
• Terronera could double Endeavour's production to 15M AgEq oz while cutting costs in half, generating $120M in after-tax FCF in Year 1 at current prices
• Additional growth potential from Pitarrilla (693 million AgEq oz), one of the world's largest undeveloped silver deposits
• Positive silver macro outlook driven by rising industrial demand and re-emerging monetary tailwind
• Solid balance sheet with $55M in cash and $35M in untapped credit to fund Terronera completion
• Rapid deleveraging potential: Terronera could pay off its $120M project debt in first full year of production
• Management aligned with shareholders and committed to focused growth in free cash flow per share
• Valuation remains attractive at an EV/EBITDA of ~4x based on 2024 (Terronera) estimates

Macro Thematic Analysis

The global silver market is at an intriguing juncture. Industrial demand, driven by the accelerating trends of electrification, decarbonization, and digitalization, has been on a steady upward trajectory for the past 15 years. Silver's unmatched properties in conductivity, reflectivity, and malleability make it essential in a range of applications - from solar panels to 5G infrastructure, electric vehicles, and medical devices. This structural demand driver shows no signs of abating.

At the same time, silver's traditional role as a monetary metal is reasserting itself. After lagging gold for much of the past two years, silver prices have begun to outperform, surging from around $26 to as high as $35 per ounce since September. This move appears to be driven by a reemergence of investor interest in silver as a store of value and hedge against currency debasement. On the one hand, industrial demand continues to grow in lockstep with the global economy's shift towards a more electrified, sustainable future. On the other hand, the monetary investment case for silver - which has been largely dormant in recent years - is beginning to awaken. If this trend gains momentum, it could add a potent new source of demand to an already tight physical market.

For investors, the implication is that silver may be poised for a perfect storm of rising demand and constrained supply. With few new mines coming online and a limited pool of pure-play producers, companies like Endeavour Silver that offer leverage to the silver price could be well-positioned to outperform. While risks remain, the asymmetric return potential of silver makes it an intriguing option for investors seeking to diversify their precious metals exposure beyond gold.

Key Takeaway

Endeavour Silver is approaching a major catalytic event with the imminent commissioning of its Terronera silver mine. With the potential to double production and slash costs, Terronera could drive a rerating of Endeavour shares as the company transitions from a junior to a mid-tier producer. Endeavour offers investors unique exposure to silver, a metal that appears poised to benefit from strengthening industrial demand and a reemerging monetary investment case. With an attractive valuation, near-term catalysts, and additional long-term growth potential from the Pitarrilla project, Endeavour could offer compelling risk-reward for precious metals investors.