Last week’s article took a look at Mexican silver producer First Majestic Silver, a company with an impressive growth outlook, low operating costs and high profit margins. This week’s article compares First Majestic to another promising Mexican silver producer, Endeavour Silver.
Endeavour Silver Corp. (TSE:EDR & NYSE: EXK), is a mid-tier silver mining company with three operating high grade silver mines in Mexico and five exploration projects in both Mexico and Chile.
In similar fashion to First Majestic, Endeavour acquires under-explored/ under-performing mines in historic silver districts and then invests the capital needed to explore for new minable deposits. The company also uses its expertise to revitalize operations and re-open existing mines. In 2004, for example, Endeavour acquired the Guanacevi Mine in Durango, Mexico and has since increased its production from 350,000 ounces per year to 2,512,943 in 2012.
For each of the past eight years the company has grown its production, reserves and resources, and this remains its core focus. The company’s goal is to become “the next premier senior silver mining company” with annual production of more than 10 million ounces. To help it achieve this, expansion programs are under way at all three of Endeavour’s operating silver mines, and the company continues to explore and develop its five district-scale exploration properties. Endeavour is also on the lookout for strategic acquisitions.
In 2012, Endeavour produced 4.5 million ounces of silver and 38,600 ounces of gold at a cash cost of $7.33 per ounce. Production in 2013 is expected to total 5.0 to 5.3 million ounces of silver and between 47,000 and 49,000 ounces of gold.
Endeavour’s production consists of 70% silver and 30% gold (no base metals).
First Majestic Silver vs. Endeavour Silver
The fact that First Majestic Silver and Endeavour Silver both produce exactly the same product, i.e. ounces of silver, makes it possible to compare the two companies, even though, as the table below shows, they differ substantially in terms of market cap, production, etc.
Data from: Google Finance, the Mining Almanac and company websites.
Before we examine the differences between these two companies to try to determine which might make a better investment, let’s take a look at the similarities.
Number of shares outstanding is an area where less is definitely more. It’s often the case that by the time a mining company reaches production it has issued several hundred thousand shares. In the case of First Majestic and Endeavour however, both have kept their shares outstanding to a minimum, which is a sign that they are focused on delivering value to share holders and are mindful of dilution.
Taking a mining company’s market cap and dividing it by its current proven and probable reserves, gives you its Market Cap Per Ounce Of Reserves. This metric tells you how much a company’s ounces of silver (or gold) in the ground are selling for. First Majestic’s in-ground reserves are currently valued at $14 per ounce, while Endeavour’s are valued at $12 per ounce. This tells us that the market is placing a slightly higher value on First Majestic’s ounces, and we will see why in a minute.
A company’s P/E (price/ earnings) ratio, is a common valuation metric that is calculated by dividing a company’s share price by its earnings per share (EPS). Generally a high P/E ratio means that investors are anticipating higher growth in the future, however both First Majestic and Endeavour are selling for low P/E’s. First Majestic’s P/E of 13 (sometimes expressed as “thirteen times earnings”), means that investors buying the stock are paying $13 for each $1 of profit the company makes.
Based on these first three metrics alone it is very hard to determine which company might make a better investment, however the other data points are far more revealing.
Market Cap Per Ounce Of Production, which is calculated by dividing market cap by current production, shows the value the market is placing on the ounces a company currently produces. In this case First Majestic’s ounces are valued at $107 per ounce, while Endeavour’s are only valued at $80.
Subtracting a company’s cash cost from the price of the metal, and then multiplying it by the number of ounces they expect to produce in the coming year, gives you their operating cash flow (OCF), i.e. the money they expect to generate during the year. Dividing the OCF by their market cap gives you the company’s OCF Multiple, which tells you how the market values profitable production. Again First Majestic’s production is valued more highly than that of Endeavour, and scanning further down the table reveals why.
Although First Majestic has a slightly higher cash cost per ounce of production than Endeavour, due to its efficiency and low cost structure, the company generates a higher net profit margin. In fact, First Majestic gets to keep/ reinvest almost three times as much of the money it makes, and in an environment of rising production costs and falling metal prices, high margins are key.
First Majestic’s excellent efficiency is also reflected in its higher return on equity (28.5 vs. 8.9).
Both First Majestic and Endeavour are well run companies with the potential to see much higher valuations. However, right now the precious metals mining sector is suffering from falling metals prices and rising production costs. Sentiment among investors is also the most bearish it has been in years and many companies are struggling to get financing.
No one knows how long it will be before gold and silver prices rise, however at the current levels ($22.50 silver & $1,380 gold), many companies that have high production cost structures, low cash, and high debt are unlikely to survive. Although companies are now cutting costs and conserving cash, it is likely that going forward only the strongest will survive, and this is why investors are willing to pay more for a quality company like First Majestic.