The Perfect Project for Endeavour Silver
When one of the top management teams in the mining industry spends a number of years searching for the ideal acquisition to add a third mining operation to its fold, the wise Fool will anticipate a well-considered transaction that offers a clear road to enhanced shareholder value.
After careful analysis of Endeavour Silver's (NYSE: EXK) recent purchase of AuRico Gold's (NYSE: AUQ) El Cubo mine -- along with an array of nearby properties in Mexico's Guanajuato district and the enticing Guadelupe y Calvo project further north in Chihuahua -- I could see that accretive road laid out before me as plans to improve the struggling operation took shape.
But just last week, and only 10 short weeks into Endeavour's journey as operator at El Cubo, I had the pleasure of touring the mine complex in person to gain a first-hand perspective of both the challenges and the opportunities that lie ahead. Before we turn our gaze to El Cubo, however, let's take a moment to review some key elements of Endeavour's highly successful corporate culture so that we can properly envision their application to this newly added operation.
Mining silver the Endeavour way
I had previously witnessed what I considered "the art of perfection" in silver mining one year earlier, while visiting Endeavour's expanding Bolañitos mine complex. I encourage readers to review that report as an instructive bit of context for this latest post-tour discussion. Since last year, the Lucero mine ramp system has developed briskly into a sprawling underground roadway.
With reflective signs posted at every fork in the road, the mine is noteworthy for the ease with which even a visitor like myself can ascertain his precise location and evacuation route at any time. Every mining operation I have visited touts a serious commitment to safety, but in Endeavour's case there can be no mistaking the concerted actions behind those words. Before entering the portal, miners are reminded by a large banner featuring a group shot of their respective children to remain careful in their work. The ramps are lined with a steady supply of specific safety reminders, many of which feature charming cartoons or memorable sayings to help drive their valuable points home. Trained safety monitors ensure consistent compliance with best safety practices, and after two consecutive mine tours I can state with absolute confidence that safety does indeed form the very nucleus of Endeavour's uncompromising culture of excellence.
Only 10 weeks after closing the El Cubo acquisition, Endeavour is already promoting a safer work environment with frequent safety reminders like this one, which reads: "Sensational offer! Take care of yourself today, and you'll live tomorrow." Photo by Christopher Barker.
Moving out from that nucleus of ensuring safe operations, the next most obvious priority of Endeavour's corporate culture is to deliver consistent execution of the company's phased growth objectives. By pairing remarkable exploration success with a transformative plant expansion from 600 tpd (tons per day) to 1,600 tpd, Endeavour Silver delivered one of the silver industry's more memorable production growth trajectories. Over the past two years, Endeavour's share performance has easily outshined popular bullion proxy iShares Silver Trust (NYSE: SLV) , and crushed even the venerable Silver Wheaton (NYSE: SLW) . From 1.8 million SEOs (silver-equivalent ounces) produced at Bolañitos alone in 2011, Endeavour expects that single operation to yield 3.3 million SEOs in 2013 as mine output begins to make the most of the recently expanded plant capacity. Alongside fellow noteworthy outperformerFirst Majestic Silver (NYSE: AG) , Endeavour's substantial track record of consistently fine execution through multiple growth initiatives provides a roadmap by which investors can chart a reliable course to long-term-value creation through Endeavour's precious shares.
Endeavour's 1,600 tpd plant at Bolañitos. If ever a cleaner, more meticulously maintained silver plant existed, this Fool has yet to see it. Photo by Christopher Barker.
Repeating that success at El Cubo
Amid the aggressive acquisition binge that dominated AuRico Gold's recent past -- not to mention the tragically bungled efforts to keep its flagship Ocampo mine on track -- I think it's fair to say that El Cubo had devolved into something of an afterthought within AuRico's frankly outmatched management team. Deficient efforts at mine planning, supervision, and training each took their toll, yielding corresponding declines in ore grades, productivity, and operating margins.
Without question, the process of transforming El Cubo into an Endeavour-style mining operation will present the most substantial set of challenges the company has yet faced. The Bolañitos precedent does offer a powerful turnaround story from the miniature 50-tpd operation they acquired in 2007, but the El Cubo challenge is of another scale entirely.
For starters, Endeavour must artfully navigate a complex relationship with the relevant miners' union that represents roughly half of the total workforce of more than 900 employees. The vast underground workings at El Cubo feature some 37 production stopes, many of which access small and disconnected reserve blocks. A key aspect of Endeavour's turnaround plan will involve the streamlining and prioritization of mining activities around several of the more sizable reserve blocks. Endeavour proposes that this consolidation of underground activities will provide for improved mine planning and oversight, higher productivity, more effective control of ore grades, and a safer work environment. After only 10 weeks since taking control as operator of El Cubo, those struggling ore grades are already on the rise!
Concurrent with these refocused efforts underground, Endeavour has already begun to more effectively match mining methods and equipment to the particular needs of each respective vein structure in production. I'll have more to say on that point in a forthcoming discussion of Endeavour's transformation process at El Cubo, and I encourage readers to bookmark my article list or follow me on Twitter to stay tuned for my ongoing coverage.
With an unmistakable enthusiasm that emerges each time he goes underground with his rock pick in hand, Endeavour Silver CEO Brad Cooke chips away at a gorgeous segment of high-grade ore in El Cubo's Dolores vein. Cooke estimated likely assays of about 800 SEOs per ton for the vein segment in question. Photo by Christopher Barker.
As if all that were not enough, Endeavour essentially must erect a brand new 1,200 tpd plant at El Cubo before its lease expires on the nearby Las Torres mill next year, and the rush is on to secure long-term production potential through the discovery of new mineralized veins or extensions of the known vein systems. If a run-of-the-mill operator were to tackle a set of challenges this daunting in scale and scope, one might reasonably grow concerned. But Endeavour Silver stands at the pinnacle of its industry with a first-rate corporate culture and battle-tested management team. CEO Bradford Cooke and president and COO Godfrey Walton are each expert at breaking major projects down into realistic and achievable one-year phases. VP for Mexico Operations David Howe clearly commands both the admiration and the respect of his workforce, and his balance of affable approachability with tremendous experience and determination make him ideally suited to the task. Howe has hand-selected his former co-worker Richard Downes as operations manager at El Cubo.
The expanding hoard of high-grade silver ounces underlying Endeavour's precious portfolio of properties are indeed worth a fortune, but the company's greatest asset remains its brilliant management team and the positive corporate culture they embody. I can conceive of no greater means of leveraging that strength than to tackle a challenge like El Cubo, and as an investor I have every confidence they will render that acquisition massively accretive to shareholders in the long run by executing effectively on their ambitious transformation plan. I have remained a delighted Endeavour Silver shareholder since 2007, and my corresponding bullish CAPScall has outperformed the S&P 500 by 90% thus far. I view each dip back into single-digit territory as an opportunity to accumulate shares, and I expect to hold for the long haul through a $20 share price and even well beyond.
- Add Endeavour Silver to My Watchlist
- Add First Majestic Silver to My Watchlist
- Add AuRico Gold to My Watchlist
- Add Silver Wheaton to My Watchlist
- Add iShares Silver Trust to My Watchlist
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