Will Endeavour Silver Lead a Great Mining Rally?

It is no secret that precious metal miners have lagged behind bullion prices.  While gold is up 16% this year, gold miner ETFs such as the Market Vectors Gold Miners ETF and Market Vectors Junior Gold Miners ETF are actually down 8% and 24%, respectively.  Newmont Mining, one of the world’s largest gold producers, has been returning value to shareholders by offering a gold-linked dividend.  Furthermore, the miner announced last month that it may consider a share buyback program if the disparity in bullion and equity prices persist.  The situation in silver is similar.  Silver prices are down about 3% for the year, while the Global X Silver Miners ETF is down about 16%.  However, the recent earnings report from Endeavour Silver could spark the long overdue rally in precious metal miners.

Endeavour Silver is a mid-cap silver miner that is focused on the growth of its silver production, reserves, and resources.  On Tuesday, the company reported impressive third quarter results.  Revenue surged 93% for the quarter to $38.8 million.  The surge was a result of both higher silver and gold production, and also higher realized metal prices.  Last week, the company’s CFO Dan Dickson explained, “We’ve seen seven consecutive years of production, reserve, and resource growth, and four consecutive years of revenue cash flow and earnings growth. In that time, we’ve seen falling cash costs, and we expect to continue that for a while and see our profit margins improve even further.”

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Rising input costs are one of the possible explanations as to why precious metal equities are lagging bullion price increases.  Rising oil and labor costs are major expenses for miners. However, Endeavour is overcoming these obstacles.  The company has increased gross margins for the past four consecutive years.  Cash costs on a by-product basis have decreased from $9.38 in 2007, to only $5.71 in 2010.  Dan Dickson elaborated, “We can’t focus on where the price is when we’re operating, all we can do is focus on the cost. That’s where we put all of our time and effort into at the operations, to make sure we keep tight controls on cost.”  Miners may also be underperforming because investors fear falling gold and silver prices.  However, those closest to the mining industry expect higher prices going forward.  Last month, at the annual Gold Denver Forum, Newmont Mining announced that it expects gold prices to hit $2,300 by next year, while AngloGold Ashanti expects $2,200 gold.

The success of undervalued miners has caught the attention of Sprott Management.  The company said in a September article, “The fact remains that both gold and silver continue to trade well below their inflation-adjusted highs in nominal terms, and the market is now beginning to acknowledge the profit potential that precious metals equities offer at today’s bullion prices.  We believe the equities will offer more upside than the bullion over time.” Endeavour started to receive recognition earlier this year when its shares were first listed on the NYSE.  After the most recent earnings report, shares of EXK traded nearly 3% higher, even though bullion prices were mostly flat.  Today, shares are up another 5% as investors realize the growth story taking place in miners.  Endeavour’s ability to overcome cost issues and industry doubts will prove to investors that miners can be very profitable, despite volatile gold and silver prices.

Investors should realize that pull backs in precious metals do occur, but these declines offer great buying opportunities.  In our September 26 Gold and Silver Premium Newsletter we warned, “Shares of Endeavour look poised to test $7.50-$8.00.” On October 4, shares reached $7.55 before finding support.  After testing our support level, shares have rebounded more than 25% to $10.20.

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