Endeavour Silver - Home - Noble Capital Markets · Endeavour Silver Initiating coverage ......

Feb 15, 2017

Basic Materials

NYQ

EXK

Buy Initiation

Current Price

$4.64Target Price

$5.50

Market Capitalization 590.13M

Shares Outstanding 125.88M

Float 125.82M

Institutional Holdings 31.29%

12-month Low/High $1.57/$5.95

Average 90-day Volume 2,260,000

Fiscal Year End Dec 31

Revenues ($ MIL)

Period 2015A 2016E 2017EQ1 51.1 41.5Q2 47.7 44.5Q3 42.7 42.1Q4 42.0 33.9E 183.6 162.0E 163.9E

EPS ($)

Period 2015A 2016E 2017EQ1 0.01 0.02Q2 (0.01) 0.01Q3 (0.14) 0.04Q4 (1.34) 0.02E (1.47) 0.13E 0.17E

Endeavour SilverInitiating coverage of growing mid-sized precious metal mining company with a Buy

Company is levered to silver prices. Silver production represents approximately 2/3 of production. The shares of Endeavour move quickly when silver prices change. The shares of EXK almost doubled last summer when sliver prices rose on news of the Brexit vote.

Endeavour has several projects in differing stages of development. EXK has three producing mines, three in the development stage and several at the exploratory stage. We believe having mines in different stages gives the company the flexibility to accelerate production should prices rise but still provide cash flow should prices fall.

Balance sheet is strong allowing for a quick ramp up of production should prices rise. The company has $83 million in cash and virtually no debt. Endeavour's strong financial position should help weather periods of low prices and accelerate mine development during boom periods.

Management has a track record of finding value from old mines. Management has made several acquisitions in recent years in which it bought mines towards their end of production, identified new areas of interest based on the geological formation, and increased the value of the mine in a short period of time.

Track record of meeting expectations. At the beginning of each year, management gives guidance regarding metal production and operating costs. The company has a strong record of meeting or beating its projections each of the last four years.

Equity ResearchMichael Heim, CFA, Senior Research Analyst (314) 308-9711 [email protected]

Noble Capital Markets, Inc.Trading: (561) 998-5489 Sales: (561) 998-5491 www.noblecapitalmarkets.com

Refer to the last two pages for Analyst Certification & Disclosures

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Stock Information:

The shares of Endeavour Silver Company are traded on the New York Stock Exchange under the symbol EXK and the Toronto Stock Exchange under the symbol EDR. There were 131 million fully diluted shares as of the end of December 2016.

Positive Features

Declining costs. ESC had been a high cost producer but with cash costs above $10 per silver oz and all-in sustainable costs (AISC) above $20 as recently as 2014. The company has worked hard to lower costs and both cash and AISC costs to a level almost half that of three years ago. With silver prices near $18 per ounce, the company is once again producing positive operating cash flow and earnings.

Mix of producing and developing properties. Endeavour has three working mines with three others in development. We believe a mix of current and future production is attractive because it gives the company flexibility to react to changes in commodity prices.

Strong financial position. ESC has $83 million in cash as of September 30, 2016, and no debt. We believe the company is well positioned to actively develop its properties even in a low commodity price environment.

Track record of meeting expectations. At the beginning of each year, management gives guidance regarding metal production and operating costs. The company has a strong record of meeting or beating its projections each of the last four years.

Leverage to silver prices. The shares of EKX are highly leveraged to changes in silver prices. Should our expectations for higher silver prices in 2017 hold true, we would expect the shares of EKX to perform well.

Investment Risk:

Commodity price risk. Earnings and cash flow will be highly dependent on the price EXK receives for the sale of its precious metals. Prices remain below historical levels but have shown some signs of strength in recent weeks. Further declines in prices would adversely affect results and could result in a reduction in operations.

Foreign currency risk. Operations in Mexico are transacted in Pesos and US Dollars. Changes in foreign currency exchange rates may adversely affect financial results.

Finite asset base. Endeavour’s asset base is finite and the company’s ability to operate as an ongoing concern may be dependent upon management’s ability to identify new resources through exploration and acquisition.

Political risk. Endeavour’s current assets in Mexico lie in areas with a long history of mining and that are

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Endeavour Silver EXK | CURRENT PRICE $4.64 | Buy | 02/15/2017Michael Heim [email protected] (314) 308-9711

generally supportive of the industry. However, a change in government’s support or the rise to power of drug cartel operatives could adversely affect the company’s ability to acquire property, obtain permits, or run operations in a safe and productive manner.

Company History:

The Company was incorporated in 1981 under the name Levelland Energy & Resources, changing its name to Endeavour Gold Corp. in 2002. It changed its name again in 2004 to Endeavour Silver Corp. when it acquired the “Guanacevi Mines” located in Durango, Mexico. Endeavour initially acquired 50% of the mine for $4 million and an agreement to invest another $1 million into the project. ESC purchased the remaining portion of Guanacevi for $3 million in cash and stock installments, completing the purchase in 2008. In 2007, Endeavour Silver purchased the Bolañitos Mines in Guanajuato, Mexico for $3.4 million in cash and stock. ESC followed the Bolañitos mine purchase by acquiring surrounding property and plant for stock. Endeavour Silver has also purchased mines in Guanajuato, Guadalupe, as well as Chihuahua, Mexico, collectively entitled “El Cubo Mines” in 2012.

Corporate Strategy:

The company was formed to acquire and explore early-stage mining prospects. In 2002, the Company reorganized and changed management teams. It revised its business strategy to focus on advanced-stage silver production in Mexico. ESC seeks to employ modern production methods to restart or increase the production of historical mines. It seeks to acquire fully-built facilities with permits in hand, thus reducing the time it takes to bring facilities to production. We believe Endeavour is an opportunistic buyer who has a developed skill set in identifying value in existing, often shut-down properties. It is not unusual for the company to buy a property from a company who thinks the mine is at the end of its life, recognize the promise of a formation, complete a few wells, and then complete a preliminary economic assessment that indicates a value many multiples of the purchase price. We expect the company to continue to grow with the addition of mines, but do not expect Endeavour to make large acquisitions in an attempt to move from a mid-tier producer to a major.

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Source: Company presentation

Asset Description:

Endeavour has three mines in production, three in the development stage and two in the exploratory stage. All assets are in Mexico and lie along the Sierra Madre Occidental Silver and Gold Belt.

Producing Mines

Guanacevi Mine: The Guanacevi mine is located in the state of Durango, Mexico approximately 3.6 kilometers west of the town of Guanacevi. It was acquired in 2004. It is the largest of Endeavour’s mines with 26 million Ag Eq Oz of measured and indicated reserves (27% of firm’s total) based on December 31, 2016 data and 2.1 million of 2015 production (37%). The Project is comprised of 51 mineral concessions for a total property area of 4,172 hectares. The Guanacevi deposits are high-grade, epithermal vein deposits

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typical of that found in other mines in Mexico. ESC completed 690 exploratory drill holes between 2004 and 2015. Endeavour employs 542 laborers and 128 contractors at the Guanacevi Mine. The mine operates on two 10-hour shifts, 7 days a week, whereas the mill operates on a 24/7 schedule. ESC continues to drill exploratory holes on the property to test the range of the project. Recent drilling has focused on the North and South of the play. Operating costs at the mine were $9.43 per ounce with all-in-sustained costs being $16.46 per ounce, making Guanacevi one of Endeavour’s more expensive mines.

Bolanitos Mine Project: The Bolanitos project was acquired in 2007. The Bolanitos Project is located in the State of Guanajuato, Mexico. The mine consists of three operating mines: the Bolañitos, Lucero, and Asuncion mines, which are located near the town of La Luz, about 12 km to the northeast of Guanajuato. Bolanitos is part of the Guanajuato Mining District, an area known for high-grade silver and gold epithermal vein deposits. Measured and indicated resources were 8 million Ag Eq Oz at the end of December 31, 2015. The company continues to drill on the property to expand its resources. Bolanitos processes approximately 550,000 tons of ore per year, producing approximately 3 million Ag Eq Oz. Operating and AISC costs were negative in the most recent reported period due to the translation of favorable gold prices to silver equivalent measurement.

El Cubo Mines: The El Cuba mine was acquired in 2012. The properties are located in Guanajuato and Chihuahua Mexico. Measured and indicated resources were 11 million Ag Eq Oz. Production is located near ESC’s Bolanitos properties. El Cuba processes approximately 600,000 tons of ore per year, producing 2 million Ag Eq Oz. Operating cash costs ($9.74) and AISC ($11.94) are in line with company averages.

Developmental Mines

El Campos: The El Campos properties lie on 3,990 hectares of land. It has a good infrastructure and low capital costs to bring to production. The mine is already permitted. Management expects to complete a preliminary economic assessment in the first quarter of 2017 and make a decision regarding production shortly thereafter. The property includes a five-year renewable lease to process 500 tons per day. The company has not yet discussed a resource estimate for El Campos. We would an estimate to be included in the preliminary economic assessment.

Terronera: The Terronera mine (formerly the San Sebastian Project) is located in Jalisco, Mexico. The property surrounds a producing silver and gold mine entitled Santa Quiteria as well as other closed mines dating back to the 1500’s. Endeavour acquired the option to buy Terronera in 2010 for $2.7 million and a 2% royalty and exercised its option in 2013. Estimated measured and indicated resources are 32 million Ag Eq Oz, making Terronera EXK’s largest mine deposit. ESC completed a preliminary economic assessment (PEA) on the property in 2015 estimating the value to be $49 million with cash costs of $3.93 per Ag Eq Oz

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and AISC of $7.60. Recent drilling results have been very positive and the project could become very important to shareholders.

Parral. The Parral properties consist of three properties (Veta Colorada, La Palmilla and San Patricio) located in the southern Chihuahua, Mexico. ESC acquired the Parral properties in the third quarter of 2016 for $6 million, a 1% royalty fee, additional payments following completion of resource study, and a promise to spend $2 million to develop the property over the next two years. Management indicates a 2019 start up in their presentation. The properties have a long history of production and adequate infrastructure for increased production.

Exploratory Mines

Guadalupe y Calvo. The Guadalupe y Calvo properties were acquired as part of the El Cubo purchase in 2012. They are located near Chihuahua. We have modeled in a 2020 start-up at a cost of $10 million for Guadalupe assuming 500 tons per day processed and a two million tonnage reserve.

Lourdes. Endeavour acquired an option on the Lourdes complex in 2012. It is located near Guanajuato. We have modeled in a 2021 start-up at a cost of $10 million assuming 500 tons per day processed and a two million tonnage reserve.

Model Assumptions

Our models assume a silver price of $18 per ounce and a gold price of $1,300 per ounce in 2017 in line with current prices. We assume prices rise at the rate of inflation every year thereafter. We look for the company to mine 1.38 million tons of raw feed in 2017 with production growing in 2019 with the addition of Terronera and again in 2020 with the addition of Parral. We assume recovery rates of 90%, in line with past performance. We assume a 10% decline rate of production each year at Bolanitos and a 5% decline rate at other mines. We believe the company will report 2017 silver equivalent production of 9.3 million, near the middle range of management guidance. Sales will be slightly above production as the company draws down on inventory. We project production rising to 14 million in five years.

Revenues have been steady in a range of $40-$45 million per quarter or $160-$180 million per year despite volatility in metal prices. We see revenues rising approximately $25 million per year with rising precious metal prices and the addition of new mines. We look for a peak near $275 million in five years at which point declines at the company’s existing mines more than offsets growth at the new mines (subject to revision if the company announces new acquisitions or makes discoveries).

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We assume cash operating costs of $7 per silver ounce and all-in-sustainable costs (ASIC) of $13 per ounce for 2017 and beyond, in line with management guidance. We have assumed cost rates remain constant, although we would note that initial expectations for new mines are below these rates. Approximately 33% of Endeavour’s costs are associated with underground mining labor costs, which are typically denoted in the Mexican Peso. Operating costs have declined due, in part, to a devaluation of the Mexican Peso relative to the US Dollar. We have not assumed any change in currency rates in our models.

Given our assumptions regarding silver prices, we believe the company will generate positive cash flow in 2017 and beyond. Our models indicated EBITDA near $50 million in 2017 jumping to $100 million in future years with the increase in product sold. The company has indicated 2017 capital expenditures of $43.3 million, which will be covered by projected cash flow. We have modeled in capital expenditures of $15 million for 2018-2022 which largely reflects the cost of bringing a new mine to production each of these years. Beyond 2022, we have not factored in any new acquisition, mine developments or exploration costs. We assume maintenance capital expenditures of $2 million annually after 2022 for valuation purposes, but recognize that actual expenditures are likely to be well above that as the company expands its assets.

Financial Position:

The company maintains a large cash position and has no debt. Endeavour’s cash level was $83 million as of September 30, 2016. Given our forecast for positive cash flow, we do not believe the company will need to issue equity or debt unless it makes an acquisition. We believe ESC’s conservative balance sheet is appropriate for companies in the emerging growth stage.

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Company Profile

Endeavour Silver Corporation (Endeavour, Endeavour Silver, ESC or EXK) is a mid-tier precious metal producer producing 9 million ounces of silver equivalent from three mines in Mexico. ESC is headquartered in Vancouver. The company had proven and probably silver equivalent reserves of 17 million, measured and indicated resources of 95 million and inferred resources of 55 million at the end of 2016.

Valuation Summary

We recommend investors BUY the shares of EXK up to our price objective of $5.50 per share. Our price objective is based on a discounted cash flow estimate of existing and estimated mine projects. Our valuation estimate uses an 8% discount rate and current silver and gold prices. A decline in precious metal prices, lower-than-expected production levels, and mine development cost overruns are among the factors that could prevent the stock from reaching our price objective.

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GENERAL DISCLAIMERSAll statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Capital Markets, Inc. ("Noble") and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.

This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results.

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IMPORTANT DISCLOSURESThis publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to another party, without the written consent of Noble Capital Markets, Inc. ("Noble"). Noble seeks to update its research as appropriate, but may be unable to do so based upon various regulatory constraints. Research reports are not published at regular intervals; publication times and dates are based upon the analyst's judgement. Noble professionals including traders, salespeople and investment bankers may provide written or oral market commentary, or discuss trading strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report.

The majority of companies that Noble follows are emerging growth companies. Securities in these companies involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Noble research reports may not be suitable for some investors and as such, investors must take extra care and make their own determination of the appropriateness of an investment based upon risk tolerance, investment objectives and financial status.

Company Specific DisclosuresThe following disclosures relate to relationships between Noble and the company (the "Company") covered by the Noble Research Division and referred to in this research report. Noble intends to seek compensation for investment banking services and non-investment banking services (securities and non-securities related) within the next 3 months. The Company has attended Noble investor conference(s) in the last 12 months. Noble is not a market maker in the Company.

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WARNINGThis report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to Noble Capital Markets, Inc. by an investment advisor, that advisor may receive a benefit in respect of transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by Noble Capital Markets, Inc.. This report may not be reproduced, distributed or published for any purpose unless authorized by Noble Capital Markets, Inc..

U.S. CLIENTSFor purposes of distribution in the United States, this report is prepared for persons who can be defined as "Institutional Investors" under U.S. regulations. Any U.S. person receiving this report and wishing to effect a transaction in any security discussed herein, must do so through a U.S. registered broker or dealer. Noble Capital Markets, Inc. is a U.S. registered broker dealer.

RESEARCH ANALYST CERTIFICATIONIndependence Of ViewAll views expressed in this report accurately reflect my personal views about the subject securities or issuers.

Receipt of CompensationNo part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public appearance and/or research report.

Ownership and Material Conflicts of InterestNeither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.

> NOBLE RATING DEFINITIONS % OF STOCKS COVERED % OF IB CLIENTS

BUY: potential return is >15% above the current price 56% 39%

HOLD: potential return is -15% to 15% of the current price 30% 5%

SELL: potential return is >15% below the current price 0% 0%

Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.

Noble Capital Markets, Inc.225 NE Mizner Blvd. Suite 150Boca Raton, FL 33432561-994-1191

Noble Capital Markets, Inc. is a FINRA registered broker/dealer.Member - SPIC (Securities Investor Protection Corporation)

Report ID: 9724

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