Silver of the Sierra Madres, revisited

Bob Moriarty
Archives
May 15, 2006

In August of 2004, I visited a silver mine in Mexico and did a write up about a company. The company was Endeavour Silver and the shares were $1.34 at the time. Today the stock is up 350%. And going higher. It was a good call and recently I took the opportunity to revisit the mine and the company.

Endeavour Silver is one of those ultra-rare birds. It's an actual primary silver producer. When I visited them two years ago they were processing a silver/lead/zinc ore with a flotation circuit, and leaching the high grade tailings in their cyanide circuit. Today they are a pure silver producer. But with zinc up to $1.56 and lead at $.56, one of the ideas Endeavour Silver Chairman and CEO Brad Cooke is considering is opening a mine level containing a high percentage of lead and zinc ore.

Two years ago, in May of 2004, EDR signed a deal to acquire 100% of the producing Santa Cruz silver/lead/zinc mine and the Guanacevi processing plant for a total of $7 million US, spread over four years. Silver was about $6 an ounce and it cost roughly $4.50 an ounce to mine and mill it. It was a good move. Today silver is $14-ish an ounce and Brad's costs have gone down a little to just over $4 an ounce total costs. In a way, his silver mine is turning into the proverbial "Gold Mine."

The Guanacevi mining district is home to over 50 past producing silver mines and in total has produced over 500 million ounces of silver in 470 years of mining. At present only the Santa Cruz mine of Endeavour and two other small mines are still in production. But the area has a large and experienced pool of mining labor.

Once EDR completed the final agreement with their Mexican partners in 2004, Brad and his crew set out to determine how to upgrade the mill and how to deliver more ore for processing. At that point he was pretty much an exploration company trying to make it as a production company. When you go to a gold show and ask some of the gold "Gurus" about the wisdom of actually going into production, they will hold up their fingers in the shape of a cross in order to stop you from hexing them with such unorthodox theory. The average "Gold Guru" doesn't even want to hear about companies going into production.

The "Gold Gurus" want the pure exploration plays and I totally disagree. With these prices, if you aren't thinking about production, you don't have a project, you have a swath of moose pasture. We have $3.70 copper, $1.57 zinc, $.57 lead, silver's over $14 and gold touched $700 for the first time in 26 years just a few days ago.

Exploration makes sense when you can't make money mining. But there are far more projects out there than smart guys to run them. We have been shutting down mines for 30 years and it's about damned time we start opening some mines. Newmont and Barrick aren't going to do it. The rewards and easy money to be made in this cycle is going to be buying the shares of the juniors just going into production. Heresay be damned.

Brad bit the production bullet and he has made a wonderful transition into becoming a full fledged operating mine and mill. He did it the smart way, (and easy way), rather than hire and train his own people, the mining is all contract mining. EDR will begin using their own staff for some of the mining soon as part of a mine optimization program.

Last year's production was about equal to that of the last ten years in total. The mill processed about 102,617 tons to produce just short of a million ounces of silver. Mine operating costs were about $35 a ton and milling costs were about $23 a ton. Metal recoveries in 2005 averaged 76.55 for gold and 74.8% for silver. A cyanide circuit should be able to achieve higher recoveries and Endeavour is in the midst of a major revamp of the crushing circuit in order to achieve a finer grind and to obtain higher recovery of both gold and silver.

The flotation circuit has a present capacity of about 420 tpd and the cyanide leach circuit is capable of about 800 tpd. Flotation is used with the silver/lead/zinc ore and cyanide for the straight silver oxide ore currently being mined. The mill has an operating staff of about 90 people in addition to the 23 or so on the exploration and mining side.

The Endeavour Aliens	The Traveling Hammer	Light at the end of the tunnel	Drill Core

For 2006, EDR envisions mining and milling about 195,000 tonnes of ore with a grade averaging 450 grams of silver and about .61 gram of gold per tonne. They anticipate production of about 2.0 to 2.2 million ounces of silver and about 4,500 ounces of gold. The figures they gave us anticipated a silver price of $8 and gold of $480 with a project cash flow of about $7 million based on a $4.50 all up cost per ounce of silver. Using today's real world prices, you can double that figure and think $15 million US in cash flow and be about right. Imagine that, a silver producer who makes money. What will they think of next?

While I was in Mexico on the tour, EDR announced the completion of a $31 million dollar financing. With almost $40 million in the bank they are well positioned for growth. Brad tells me that he intends to be in the top five silver producers. I'd guess once Guanacevi is optimized, it will top out production somewhere in the 5 million ounces of silver range. That wouldn't put EDR in the top five silver producers. So if they can't grow internally, don't be real surprised if Brad goes out and does some external growth through an acquisition. Do be real surprised if he doesn't.

Drill Core Store	Cash Flow	The Pour	The Pour

We don't own any Endeavour Silver at the present time but we have owned it and made a lot of money on it. I would look to reenter on any significant correction. Brad has a top notch team in place with the management depth to support being in the top five producers and I would be really surprised if he doesn't make it up to the top five within 3-4 years. Endeavour is an advertiser and as such we are biased, you are responsible for your own investment decisions.

I've not said this before even though it's been on my mind. Brad Cooke pioneered the model of exploration/production in Mexico and now ten or more juniors have copied him. Especially after the thrashing the Bolivian based silver stocks have taken, investors need to wake up to the fact that Mexico is one of the best mining countries in the world in terms of political stability, quality of mines in both ore grade, and quantity of mining districts. And the Mexican miners are among the best in the world. Mexican based Canadian juniors should be selling at a real premium to the rest of the market.

Brad Cooke	Where there's muck there's silver	Lots of Balls	Dinner at the beach

By the time you read this I will be on yet another long trip. To Brazil and Argentina with a 2-3 day break in the middle visiting Uruguay. Back for a few hours at home in Miami and then I'm straight off to Ontario. I will return at the end of May and the staff would appreciate it if you didn't send me emails until May 29th.

Endeavour Silver Corp
EDR-T $4.70 Canadian (May 12, 2006)
37.9 million shares outstanding
Endeavour Silver website

Bob Moriarty
President: 321gold
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321gold Inc