Endeavour Silver Corp.: Exhibit 99.2 - Filed by newsfilecorp.com
| MANAGEMENT’S DISCUSSION AND ANALYSIS
(AMENDED) |
| FOR THE QUARTER ENDED JUNE 30, 2013
|
| |
This Management’s Discussion and Analysis (“MD&A”) should
be read in conjunction with the condensed consolidated interim financial
statements of Endeavour Silver Corp. (“Endeavour” or “the Company”) for the
three and six months ended June 30, 2013 and 2012 and the related notes
contained therein, which are prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (“IASB”). In addition, the following should be read in conjunction with
the audited consolidated financial statements for the year ended December 31,
2012 and the related MD&A. Additional information relating to the Company,
including the most recent Annual Information Form, is available on SEDAR at
www.sedar.com, and the Company’s most recent annual report on Form 40-F has been
filed with the US Securities and Exchange Commission (the “SEC”). This MD&A
contains “forward-looking statements” that are subject to risk factors set out
in a cautionary note contained herein. All dollar amounts are expressed in
United States (“US”) dollars and tabular amounts are expressed in thousands of
dollars unless otherwise indicated. This MD&A is dated as of July 31, 2013,
and amended on October 30, 2013 as disclosed in note 17 of the June 30, 2013
amended interim financial statements, and all information contained is current
as of July 31, 2013 unless otherwise stated.
Cautionary Note to US Investors concerning Estimates of
Reserves and Measured, Indicated and Inferred Resource:
This MD&A has been prepared in accordance with the
requirements of the securities laws in effect in Canada, which differ from the
requirements of US securities laws. The terms “mineral reserve”, “proven mineral
reserve” and “probable mineral reserve” are Canadian mining terms as defined in
accordance with Canadian National Instrument 43-101 – Standards of Disclosure
for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining,
Metallurgy and Petroleum (the “CIM”) - CIM Definition Standards on Mineral
Resources and Mineral Reserves, adopted by the CIM Council, as amended. These
definitions differ from the definitions in SEC Industry Guide 7 under the US
Securities Act of 1933, as amended (the “Securities Act”).
Under SEC Industry Guide 7 standards, a “final” or
“bankable” feasibility study is required to report reserves, the three-year
historical average price is used in any reserve or cash flow analysis to
designate reserves and the primary environmental analysis or report must be
filed with the appropriate governmental authority.
In addition, the terms “mineral resource”, “measured mineral
resource”, “indicated mineral resource” and “inferred mineral resource” are
defined in and required to be disclosed by NI 43-101; however, these terms are
not defined terms under SEC Industry Guide 7 and are normally not permitted to
be used in reports and registration statements filed with the SEC. Investors are
cautioned not to assume that any part or all of mineral deposits in these
categories will ever be converted into reserves. “Inferred mineral resources”
have a great amount of uncertainty as to their existence, and great uncertainty
as to their economic and legal feasibility. It cannot be assumed that all or any
part of an inferred mineral resource will ever be upgraded to a higher category.
Under Canadian rules, estimates of inferred mineral resources may not form the
basis of feasibility or pre-feasibility studies, except in rare cases. Investors
are cautioned not to assume that all or any part of an inferred mineral resource
exists or is economically or legally mineable. Disclosure of “contained ounces”
in a resource is permitted disclosure under Canadian regulations; however, the
SEC normally only permits issuers to report mineralization that does not
constitute “reserves” by SEC Industry Guide 7 standards as in place tonnage and
grade without reference to unit measures.
Accordingly, information contained in this MD&A contain
descriptions of Endeavour’s mineral deposits that may not be comparable to
similar information made public by US companies subject to the reporting and
disclosure requirements under the US federal securities laws and the rules and
regulations thereunder.
| |
| |
| 700 West Pender Street, Suite 301, Vancouver, B.C.,
Canada V6C 1G8 |
| Phone: 604.685.9775 | Fax: 604.685.9744| Toll Free:
1.877.685.9775 | Email: info@edrsilver.com
|
| www.edrsilver.com
|
| MANAGEMENT’S DISCUSSION AND ANALYSIS
(AMENDED) |
| FOR THE QUARTER ENDED JUNE 30, 2013 |
| |
Forward-Looking Statements
Certain information contained herein constitutes
forward-looking statements. Forward-looking statements are frequently
characterized by words such as “plan”, “expect”, “forecast”, “project”,
”intend”, ”believe”, ”anticipate”, “outlook” and other similar words, or
statements that certain events or conditions “may” or “will” occur. Forward-
looking statements are based on the opinions and estimates of management at the
dates the statements are made, and are subject to a variety of risks and
uncertainties and other factors that could cause actual events or results to
differ materially from those projected in the forward-looking statements. These
factors include the inherent risks involved in the mining, exploration and
development of mineral properties, the uncertainties involved in interpreting
drilling results and other geological data, fluctuating metal prices, the
possibility of project cost overruns or unanticipated operating costs and
expenses, uncertainties related to the necessity of financing, the availability
of and costs of financing needed in the future, and other factors described in
the Company’s Annual Information Form under the heading “Risk Factors”. The
Company undertakes no obligation to update forward- looking statements if
circumstances or management’s estimates or opinions should change other than as
required by securities laws. The reader is cautioned not to place undue reliance
on forward-looking statements.
Table of Contents
| Three Months Ended
June 30 |
Q2 2013 Highlights |
Six Months
Ended June 30 |
| 2013 |
2012
|
% Change
|
2013
|
2012
|
% Change
|
| Production |
|
|
|
|
|
|
| 1,535,873 |
1,040,026 |
48% |
Silver ounces produced |
3,025,590 |
2,112,517 |
43% |
| 19,914 |
7,695 |
159% |
Gold ounces produced |
34,946 |
14,016 |
149% |
| 1,479,828 |
1,029,626 |
44% |
Payable silver ounces produced |
2,939,533 |
2,091,392 |
41% |
| 18,843 |
7,618 |
147% |
Payable gold ounces produced |
33,552 |
13,876 |
142% |
| 2,610,408 |
1,459,016 |
79% |
Silver equivalent ounces produced(1)
|
4,960,534 |
2,875,697 |
72% |
| 10.53 |
5.46 |
93% |
Cash costs per silver ounce(2)(3)
|
10.29 |
5.86 |
76% |
| 18.18 |
9.98 |
82% |
Total production costs per ounce(2)(4)
|
18.22 |
11.14 |
64% |
| 393,070 |
202,987 |
94% |
Processed tonnes |
769,414 |
396,746 |
94% |
| 96.45 |
86.32 |
12% |
Direct production costs per tonne(2)(5) |
98.01 |
89.31 |
10% |
| Financial |
|
|
|
|
|
|
| 71.3 |
40.4 |
76% |
Revenues ($ millions) |
141.1 |
89.5 |
58% |
| 1,787,571 |
1,075,000 |
66% |
Silver ounces sold |
3,302,648 |
2,175,000 |
52% |
| 25,477 |
5,650 |
351% |
Gold ounces sold |
41,201 |
13,146 |
213% |
| 21.38 |
29.21 |
(23%) |
Realized silver price per ounce |
25.05 |
31.18 |
(20%) |
| 1,297 |
1,599 |
(19%) |
Realized gold price per ounce |
1,417 |
1,648 |
(14%) |
| (0.4) |
7.5 |
(105%) |
Net earnings (loss) ($ millions) |
14.0 |
27.3 |
(49%) |
| (2.7) |
5.9 |
(146%) |
Adjusted net earnings (6) ($
millions) |
10.2 |
25.5 |
(60%) |
| 6.4 |
19.5 |
(67%) |
Mine operating earnings ($ millions) |
25.3 |
42.9 |
(41%) |
| 26.1 |
24.1 |
8% |
Mine operating cash flow(7) ($
millions) |
58.7 |
56.0 |
5% |
| 12.4 |
16.9 |
(27%) |
Operating cash flow before working capital
changes (8) |
37.7 |
43.3 |
(13%) |
| 16.6 |
16.4 |
1% |
Earnings before ITDA (9) |
47.6 |
50.1 |
(3%) |
| 16.9 |
159.0 |
(89%) |
Working capital ($ millions) |
16.9 |
159.0 |
(89%) |
| Shareholders |
|
|
|
|
|
|
| 0.00 |
0.09 |
(100%) |
Earnings per share – basic |
0.14 |
0.31 |
(55%) |
| (0.03) |
0.06 |
(150%) |
Adjusted earnings per share – basic(6)
|
0.10 |
0.29 |
(66%) |
| 0.12 |
0.19 |
(37%) |
Operating cash flow before working capital
changes per share (8) |
0.38 |
0.49 |
(22%) |
| 99,710,933
|
87,999,485 |
13% |
Weighted average shares outstanding |
99,685,615 |
87,870,479 |
13% |
| (1) |
2013 silver equivalents are calculated using a 60:1
ratio, 2012 silver equivalents are calculated using a 55:1
ratio. |
| (2) |
The Company reports non-IFRS measures which include cash
costs net of by-product on a payable silver basis, total production costs
per ounce, all in sustaining costs per ounce and direct production costs
per tonne, in order to manage and evaluate operating performance at each
of the Company’s mines. These measures, some established by the Silver
Institute (Production Cost Standards, June 2011), are widely used in the
silver mining industry as a benchmark for performance, but do not have a
standardized meaning. These measures are reported on a production basis.
See Reconciliation to IFRS on page 18. |
| (3) |
Cash costs net of by-product per payable silver ounce
include mining, processing (including smelting, refining, transportation
and selling costs), and direct overhead, net of gold credits. See
Reconciliation to IFRS on page 18. |
| (4) |
Total production costs per ounce include mining,
processing (including smelting, refining, transportation and selling
costs), direct overhead, amortization, depletion and amortization at the
operation sites. See Reconciliation to IFRS on page 18. |
| (5) |
Direct production costs per tonne include mining,
processing (including smelting, refining, transportation and selling
costs) and direct overhead at the operation sites. See Reconciliation to
IFRS on page 18. |
| (6) |
Adjusted earnings are calculated by adding back
mark-to-market impact of derivative equities held as a liability on the
Company’s balance sheet. See Reconciliation to IFRS on page 16. |
| (7) |
Mine operating cash flow is calculated by adding back
amortization, depletion, inventory write dwons and share-based
compensation to mine operating earnings. Mine operating earnings and mine
operating cash flow is before taxes. See Reconciliation to IFRS on page
16. |
| (8) |
See Reconciliation to IFRS on page 17 for the
reconciliation of Operating cash flow before working capital changes,
Operating cash flow before working capital changes per share. |
| (9) |
See Reconciliation of Earnings before interest, taxes,
depreciation and amortization on page 17 |
Management’s highlights are key measures used by management,
however should not be the sole measures used in determining the performance of
the Company’s operations.
3
HISTORY AND STRATEGY
The Company is engaged in silver mining in Mexico and related
activities including property acquisition, exploration, development, mineral
extraction, processing, refining and reclamation. The Company is also engaged in
exploration activities in Chile.
Historically, the business philosophy was to acquire and
explore early-stage mineral prospects in Canada and the US. In 2002 the Company
was re-organized, a new management team was appointed, and the business strategy
was revised to focus on acquiring advanced-stage silver mining properties in
Mexico. Mexico, despite its long and prolific history of metal production,
appeared to be relatively un-explored using modern exploration techniques and
offered promising geological potential for precious metals exploration and
production.
After evaluating several mineral properties in Mexico in 2003,
the Company negotiated an option to purchase the Guanaceví silver mines and
process plant located in Durango, Mexico in May 2004. Management recognized that
even though the mines had run out of ore, little modern exploration had been
carried out to discover new silver ore-bodies. Exploration drilling commenced in
June 2004 and quickly met with encouraging results. By September 2004,
sufficient high-grade silver mineralization had been outlined to justify the
development of an access ramp into the newly discovered North Porvenir ore-body.
In December 2004, the Company commenced the mining and processing of ore from
the new North Porvenir mine to produce silver doré bars.
In 2007, the Company replicated the success of Guanaceví with
the acquisition of the Bolañitos (formerly described as “Guanajuato”) mines
project in Guanajuato State. Bolañitos was very similar in that there was a
fully built and permitted processing plant, and the mines were running out of
ore, so the operation was for sale. The acquisition was finalized in May 2007
and as a result of the successful mine rehabilitation and subsequent exploration
work, silver production, reserves and resources are growing rapidly and
Bolañitos is now an integral part of the Company’s asset base.
Both Guanaceví and Bolañitos are good examples of Endeavour’s
business model of acquiring fully built and permitted silver mines that were
about to close for lack of ore. By bringing the money and expertise needed to
find new silver ore-bodies, Endeavour has successfully re-opened and expanded
these mines to develop their full potential. The benefit of acquiring fully
built and permitted mining and milling infrastructure is that if new exploration
efforts are successful, the mine development cycle from discovery to production
only takes a matter of months instead of the several years normally required in
the traditional mining business model.
In 2012, the Company acquired the El Cubo silver-gold mine
located in Guanajuato, Mexico. El Cubo has similar challenges to Endeavour’s
past acquisitions, but with two significant exceptions; the property came with
substantial reserves and resources, and the mine was already operating at 1,100
tonnes per day. The Company is focused on improving the mining methods,
increasing brown-fields exploration and refurbishing the existing infrastructure
to maximize the potential of El Cubo.
The Company historically funded its exploration and development
activities through equity financings and convertible debentures. Equity
financings also facilitated the acquisition and development of the Guanaceví and
Bolañitos mines projects. However, since 2004, the Company has been able to
finance more and more of its acquisition, exploration, development and operating
activities from production cash flows. In 2012 the Company obtained a credit
facility to help support its acquisition, exploration and capital investment
programs. The Company may choose to engage in equity, debt, convertible debt or
other financings, on an as needed basis, in order to facilitate its growth.
4
REVIEW OF OPERATING RESULTS
Consolidated Production Results for the Three and Six months
Ended June 30, 2013 and 2012
| Three Months Ended
June 30 |
CONSOLIDATED
|
Six Months
Ended June 30 |
| 2013 |
2012
|
% Change
|
2013
|
2012
|
% Change
|
| 393,070 |
202,987 |
94% |
Ore tonnes processed |
769,414 |
396,746 |
94% |
| 165 |
208 |
(21%) |
Average silver grade (gpt) |
160 |
218 |
(27%) |
| 73.6 |
76.5 |
(4%) |
Silver recovery (%) |
76.6 |
75.9 |
1% |
| 1,535,873 |
1,040,026 |
48% |
Total silver ounces produced |
3,025,590 |
2,112,517 |
43% |
| 1,479,828 |
1,029,626 |
44% |
Payable silver ounces produced |
2,939,533 |
2,091,392 |
41% |
| 1.96 |
1.47 |
33% |
Average gold grade (gpt) |
1.74 |
1.40 |
24% |
| 80.4 |
80.3 |
0% |
Gold recovery (%) |
81.3 |
78.4 |
4% |
| 19,914 |
7,695 |
159% |
Total gold ounces produced |
34,946 |
14,016 |
149% |
| 18,843 |
7,618 |
147% |
Payable gold ounces produced |
33,552 |
13,876 |
142% |
| 2,610,408 |
1,459,016 |
79% |
Silver equivalent ounces
produced(1) |
4,960,534 |
2,875,697 |
72% |
| 10.53 |
5.46 |
93% |
Cash costs per silver ounce(2)(3)
|
10.29 |
5.86 |
76% |
| 18.18 |
9.98 |
82% |
Total production costs per
ounce(2)(4) |
18.22 |
11.14 |
64% |
| 96.45 |
86.32 |
12% |
Direct production costs per tonne(2)(5)
|
98.01 |
89.31 |
10% |
| |
|
|
|
|
|
|
| (1) |
2013 silver equivalents are calculated using a 60:1
ratio, 2012 silver equivalents are calculated using a 55:1 ratio |
| (2) |
The Company reports non-IFRS measures which include cash
costs net of by-product on a payable silver basis, total production costs
per ounce, all in sustaining costs per ounce and direct production costs
per tonne, in order to manage and evaluate operating performance at each
of the Company’s mines. These measures, some established by the Silver
Institute (Production Cost Standards, June 2011), are widely used in the
silver mining industry as a benchmark for performance, but do not have a
standardized meaning. These measures are reported on a production basis.
See Reconciliation to IFRS on page 18. |
| (3) |
Cash costs net of by-product per payable silver ounce
include mining, processing (including smelting, refining, transportation
and selling costs), and direct overhead, net of gold credits. |
| (4) |
Total production costs per ounce include mining,
processing (including smelting, refining, transportation and selling
costs), direct overhead, amortization, depletion and amortization at the
operation sites. |
| (5) |
Direct production costs per tonne include mining,
processing (including smelting, refining, transportation and selling
costs) and direct overhead at the operation sites. |
Consolidated Production
5
Three months ended June 30, 2013 (compared to three months
ended June 30, 2012)
Consolidated silver production during Q2, 2013 was
1,535,873 oz, an increase of 48% compared to 1,040,026 oz, and gold production
was 19,914 oz, an increase of 159% compared to 7,695 oz in Q2, 2012. Metal
production was significantly higher due to the expansion of the Bolañitos mine
above the Bolanitos plant capacity in 2013, the processing of the extra
Bolanitos mine production at the nearby Las Torres plant, and the acquisition of
the El Cubo operation in Q3, 2012. Plant throughput was 393,070 tonnes at
average grades of 165 gpt silver and 1.96 gpt gold compared to 202,987 tonnes
grading 208 gpt silver and 1.47 gpt gold. The change in grades was due to the
increasing significance of the Bolañitos and El Cubo operations, which are lower
silver and higher gold grade mines compared to Guanaceví.
Six months ended June 30, 2013 (compared to six months ended
June 30, 2012)
Consolidated silver production during 2013 was 3,025,590
oz, an increase of 43% compared to 2,112,517 oz, and gold production was 34,946
oz, an increase of 149% compared to 14,016 oz in Q2, 2012. Metal production was
significantly higher due to the expansion of the Bolañitos mine, the processing
of the extra Bolanitos mine production at the Las Torres plant, and the
acquisition of the El Cubo operation in Q3, 2012. Plant throughput was 769,414
tonnes at average grades of 160 gpt silver and 1.74 gpt gold compared to 396,746
tonnes grading 218 gpt silver and 1.40 gpt gold. The change in grades was due to
the increasing significance of the Bolañitos and El Cubo operations, which have
lower silver and higher gold grades compared to Guanaceví.
Consolidated Operating Costs
Cash costs per ounce net of by-product credits, which is a
non-IFRS measure and a standard of the Silver Institute, for Q2, 2013 were
$10.53 per ounce of payable silver compared to $5.46 in Q2, 2012. The
significant rise in costs was due to the significantly lower gold prices which
reduced the gold credit, the lower silver grades and the addition of the higher
cost El Cubo operation, offset by the increasing importance of the lower cost
Bolañitos operation. On a per tonne basis, the costs per tonne increased due to
the appreciation of the Mexican peso year over year (6% higher compared to same
period in 2012 – see Key Economic Trends on page 21), higher wages, and the
addition of the higher cost El Cubo operation, offset by the increasing
relevance of the lower cost Bolañitos operation.
6
Guanaceví Operations
Production Results for the Three and Six Months Ended
June 30, 2013 and 2012
| Three Months Ended
June 30 |
GUANACEVI
|
Six
Months Ended June 30 |
| 2013
|
2012
|
%
Change |
2013
|
2012
|
%
Change |
| 100,781 |
100,208 |
1% |
Ore tonnes processed |
207,434 |
199,171 |
4% |
| 240 |
269 |
(11%) |
Average silver grade (g/t) |
237 |
280 |
(15%) |
| 71.3 |
77.4 |
(8%) |
Silver recovery (%) |
75.9 |
77.8 |
(2%) |
| 555,036 |
669,754 |
(17%) |
Total silver ounces produced |
1,195,653 |
1,396,451 |
(14%) |
| 549,486 |
663,056 |
(17%) |
Payable silver ounces produced |
1,183,696 |
1,382,486 |
(14%) |
| 0.68 |
0.87 |
(22%) |
Average gold grade (g/t) |
0.50 |
0.73 |
(32%) |
| 72.6 |
87.2 |
(17%) |
Gold recovery (%) |
76.8 |
87.2 |
(12%) |
| 1,590 |
2,499 |
(36%) |
Total gold ounces produced |
2,533 |
4,119 |
(39%) |
| 1,574 |
2,474 |
(36%) |
Payable gold ounces produced |
2,507 |
4,078 |
(39%) |
| 650,453 |
805,824 |
(19%) |
Silver equivalent ounces
produced(1) |
1,347,615 |
1,620,741 |
(17%) |
| 16.59 |
8.64 |
92% |
Cash costs per silver ounce(2)(3)
|
16.65 |
10.59 |
57% |
| 23.34 |
13.01 |
79% |
Total production costs per
ounce(2)(4) |
22.93 |
15.46 |
48% |
| 111.21 |
100.81 |
10% |
Direct production costs per tonne(2)(5)
|
112.45 |
107.21 |
5% |
| |
|
|
|
|
|
|
| (1) |
2013 silver equivalents are calculated using a 60:1
ratio, 2012 silver equivalents are calculated using a 55:1 ratio |
| (2) |
The Company reports non-IFRS measures which include cash
costs net of by-product on a payable silver basis, total production costs
per ounce, all in sustaining costs per ounce and direct production costs
per tonne, in order to manage and evaluate operating performance at each
of the Company’s mines. These measures, some established by the Silver
Institute (Production Cost Standards, June 2011), are widely used in the
silver mining industry as a benchmark for performance, but do not have a
standardized meaning. These measures are reported on a production basis.
See Reconciliation to IFRS on page 18. |
| (3) |
Cash costs net of by-product per payable silver ounce
include mining, processing (including smelting, refining, transportation
and selling costs), and direct overhead, net of gold credits. |
| (4) |
Total production costs per ounce include mining,
processing (including smelting, refining, transportation and selling
costs), direct overhead, amortization, depletion and amortization at the
operation sites. |
| (5) |
Direct production costs per tonne include mining,
processing (including smelting, refining, transportation and selling
costs) and direct overhead at the operation sites. |
Endeavour’s acquisition of its first silver mine, at Guanaceví
in 2004, continues to reap rewards for all stakeholders. The mine has since
produced more than 15 million ounces of silver and 38,000 ounces of gold,
revitalized the local community, and helped establish Endeavour’s successful
business model. Although the historic mine was struggling to survive in 2004, it
now has capacity to process more than 1,200 tonnes of high-grade ore per day.
The Company has found five high-grade silver-gold ore bodies along a five
kilometre length of the prolific Santa Cruz vein and developed four new mines,
three of which are still operating. Guanaceví currently includes three
underground silver-gold mines, a cyanidation leach plant, mining camp, and
administration and housing facilities. It provides steady employment for more
than 450 people and engages over 200 contractors.
Guanaceví Production Results
Three months ended June 30, 2013 (compared to three months
ended June 30, 2012)
Silver production at the Guanaceví mine during Q2,
2013 was 555,036 oz, a decrease of 17% compared to 669,754 oz, and gold
production was 1,590 oz, a decrease of 36% compared to 2,499 oz in Q2, 2012.
Metal production was down due to lower metal grades and recoveries. Plant
throughput was 100,781 tonnes at average grades of 240 gpt silver and 0.68 gpt
gold compared to 100,208 tonnes grading 269 gpt silver and 0.87 gpt gold. The
lower grades and recoveries were a function of deeper, lower grade ores being
mined at North Porvenir, increased mining from the lower grade Santa Cruz ore
body and reconciliation of concentrate processed on behalf of Bolañitos in2012.
Daily throughput was below capacity due to unscheduled plant maintenance and
repairs during the quarter. The repairs have been completed in Q3, 2013, which
should allow throughput to return to planned targets.
7
Six months ended June 30, 2013 (compared to six months ended
June 30, 2012)
Silver production at the Guanaceví mine during Q2, 2013
was 1,195,653 oz, a decrease of 14% compared to 1,396,451 oz, and gold
production was 2,533 oz, a decrease of 39% compared to 4,119 oz in 2012. Metal
production was down due to lower metal grades and recoveries. Plant throughput
was 207,434 tonnes at average grades of 237 gpt silver and 0.50 gpt gold
compared to 199,171 tonnes grading 280 gpt silver and 0.73 gpt gold. The lower
grades were attributable to the lower grade ores being mined at depth at North
Porvenir, and increased mining in the lower grade Santa Cruz ore-body.
Guanaceví Operating Costs
Cash costs per ounce net of by-product credits, which is a
non-IFRS measure and a standard of the Silver Institute, for Q2, 2013 were
$16.59 per ounce of payable silver compared to $8.64 in Q2, 2012. The
significant rise in costs was due to the drop in grades at Guanaceví
significantly increasing costs on a per ounce basis and the drop in gold prices
reducing the gold credit. On a per tonne basis, the appreciation of the Mexican
peso year over year (6% higher compared to same period in 2012 – see Key
Economic Trends on page 21) and wage increases have driven the rise in costs per
tonne.
8
Bolañitos Operations
Production Results for the Three and Six Months Ended
June 30, 2013 and 2012
| Three Months Ended June 30
|
BOLAÑITOS
|
Six Months Ended June 30
|
| 2013 |
2012 |
% Change |
2013 |
2012 |
% Change |
| 202,472 |
102,779 |
97% |
Ore tonnes processed |
369,972 |
197,575 |
87% |
| 160 |
149 |
7% |
Average silver
grade (g/t) |
149 |
156 |
(4%) |
| 77.8 |
75.2 |
3% |
Silver recovery (%) |
78.7 |
72.5 |
9% |
| 810,414 |
370,272 |
119% |
Total silver
ounces produced |
1,389,068 |
716,066 |
94% |
| 766,925 |
366,569 |
109% |
Payable silver ounces produced |
1,324,679 |
708,905 |
87% |
| 2.84 |
2.05 |
38% |
Average gold
grade (g/t) |
2.58 |
2.07 |
25% |
| 85.2 |
76.6 |
11% |
Gold recovery (%) |
83.3 |
75.1 |
11% |
| 15,750 |
5,196 |
203% |
Total gold
ounces produced |
25,642 |
9,897 |
159% |
| 14,806 |
5,144 |
188% |
Payable gold ounces produced |
24,424 |
9,798 |
149% |
| 1,755,445 |
653,192 |
169% |
Silver
equivalent ounces produced(1) |
2,927,568 |
1,254,956 |
133% |
| (2.74) |
(0.31) |
665% |
Cash costs per silver
ounce(2)(3) |
(1.61) |
(3.36) |
129% |
| 5.77 |
4.50 |
28% |
Total
production costs per ounce(2)(4) |
5.43 |
2.71 |
100% |
| 75.50 |
72.18 |
5% |
Direct production costs per
tonne(2)(5) |
79.85 |
71.26 |
12% |
| |
|
|
|
|
|
|
| (1) |
2013 silver equivalents are calculated using a 60:1
ratio, 2012 silver equivalents are calculated using a 55:1 ratio |
| (2) |
The Company reports non-IFRS measures which include cash
costs net of by-product on a payable silver basis, total production costs
per ounce, all in sustaining costs per ounce and direct production costs
per tonne, in order to manage and evaluate operating performance at each
of the Company’s mines. These measures, some established by the Silver
Institute (Production Cost Standards, June 2011), are widely used in the
silver mining industry as a benchmark for performance, but do not have a
standardized meaning. These measures are reported on a production basis.
See Reconciliation to IFRS on page 18. |
| (3) |
Cash costs net of by-product per payable silver ounce
include mining, processing (including smelting, refining, transportation
and selling costs), and direct overhead, net of gold credits. |
| (4) |
Total production costs per ounce include mining,
processing (including smelting, refining, transportation and selling
costs), direct overhead, amortization, depletion and amortization at the
operation sites. |
| (5) |
Direct production costs per tonne include mining,
processing (including smelting, refining, transportation and selling
costs) and direct overhead at the operation sites. |
Endeavour's second mine acquisition, Bolañitos, consists of
2,470 hectares encompassing three operating silver and gold mines, located in
two areas about five kilometres apart. The mine is 10 kilometres from the city
of Guanajuato in the state of Guanajuato. When Bolañitos was acquired in 2007,
the cash costs of production were $32 per ounce and the operation was struggling
to produce 300,000 ounces of silver per year. Following investment by the
Company and the execution of management’s business strategy, the cash costs of
production fell to a negative amount while production continued to grow.
Bolañitos’ processing plant was expanded from 500 tonnes per day to 1,000 tonnes
per day in 2011, then from 1,000 tonnes per day to 1,600 tonnes per day in
2012.
Bolañitos Production Results
Three months ended June 30, 2013 (compared to three months
ended June 30, 2012)
Silver production at the Bolañitos mine was 810,414
ounces, an increase of 119% compared to 370,272 oz, and gold production was
15,751 oz, an increase of 203% compared to 5,196 oz in Q2, 2012. Metal
production was up due to higher throughput, grades and recoveries. The Bolañitos
mine averaged 2,305 tonnes per day (tpd), well above the mine plan due to
increased contract mining and changing the mining technique in various parts of
the mine from cut and fill to long hole mining. The Bolañitos plant operated at
its 1,600 tpd capacity, and the extra tonnes were processed at the leased Las
Torres facility near the El Cubo operations. The leased Las Torres facility was
scheduled to be returned in May 2013, however the counterparty requested a later
return date allowing continued access until July 22, 2013. This additional
access allowed Bolañitos production to significantly exceed plan. Going forward,
any mine production in excess of Bolañitos’ plant capacity will be processed at
the newly refurbished El Cubo plant. Plant throughput was 202,472 tonnes at
average grades of 160 gpt silver and 2.84 gpt gold, compared to 102,779 tonnes
grading 149 gpt silver and 2.05 gpt gold.
9
Ore grades were also significantly above prior year and plan,
as mining is now accessing better than planned reserve grades, specifically in
the Daniela vein discovered in 2011. Mine grades are expected to remain above
reserve grades in the next quarter. The increased recoveries are a function of
executing contracts to sell concentrate as opposed to leaching the concentrates
at the Company’s leach facilities at Guanaceví and El Cubo. Selling concentrate
results in higher payable metal production for higher refining charges,
resulting in a financial benefit.
Six months ended June 30, 2013 (compared to six months ended
June 30, 2012)
Silver production at the Bolañitos mine was 1,389,068
ounces, an increase of 94% compared to 716,066 oz, and gold production was
25,642 oz, an increase of 159% compared to 9,897 oz in Q2, 2012. Metal
production was up due to higher throughput, grades and recoveries. In 2012, the
Bolañitos plant was expanded from 1,000 tpd to 1,600 tpd, completed in Q4, 2012.
In 2013, the Bolañitos plant operated at its 1,600 tpd capacity, and the extra
tonnes were processed at the leased Las Torres facility near the El Cubo
operations. The leased Las Torres facility was scheduled to be returned in May,
however the counterparty requested a later return date allowing continued access
until July 22, 2013. This additional access allowed Bolañitos production to
significantly exceed plan. Going forward, any mine production in excess of the
Bolañitos’ plant capacity will be processed at the newly refurbished El Cubo
plant. Plant throughput was 369,972 tonnes at average grades of 149 gpt silver
and 2.58 gpt gold, compared to 197,575 tonnes grading 156 gpt silver and 2.07
gpt gold.
Ore grades were also significantly above prior year and plan,
as mining is now accessing better than planned reserve grades, specifically in
the Daniela vein discovered in 2011. Mine grades are expected to remain above
reserve grades in the next quarter. The increased recoveries are a function of
executing contracts to sell concentrate as opposed to leaching the concentrates
at the Company’s leach facilities at Guanaceví and El Cubo. Selling concentrate
results in higher payable metal production for higher refining charges,
resulting in a comparable financial benefit.
Bolañitos Operating Costs
Cash costs per ounce net of by-product credits, which is a
non-IFRS measure and a standard of the Silver Institute, for Q2, 2013 were
negative $2.74 per ounce of payable silver compared to negative $0.31 in Q2,
2012. The decrease in cash costs was primarily due to increased gold production,
reducing the gold credit. Costs on a per tonne basis have risen due to the
appreciation of the Mexican peso (6% higher compared to same period in 2012 –
See Key Economic Trends on page 21), salary and wage increases, increased
contractor participation and higher refining costs as Bolañitos began selling
concentrate late in Q1, 2013 rather than leaching the concentrate at the
Company’s other operations. These additional costs were offset by increased
tonnage improving economies of scale.
10
El Cubo Operations
Production Results for the Three and Six Months Ended
June 30, 2013 and 2012
| Three Months Ended June 30
|
EL CUBO
|
Six Months Ended June 30
|
| 2013 |
2012 |
% Change |
2013 |
2012 |
% Change |
| 89,817 |
NA |
NA |
Ore tonnes processed |
192,008 |
NA |
NA |
| 93 |
NA |
NA |
Average silver
grade (g/t) |
98 |
NA |
NA |
| 63.5 |
NA |
NA |
Silver recovery (%) |
72.3 |
NA |
NA |
| 170,423 |
NA |
NA |
Total silver
ounces produced |
440,869 |
NA |
NA |
| 163,417 |
NA |
NA |
Payable silver ounces produced |
431,158 |
NA |
NA |
| 1.41 |
NA |
NA |
Average gold
grade (g/t) |
1.45 |
NA |
NA |
| 63.2 |
NA |
NA |
Gold recovery (%) |
75.6 |
NA |
NA |
| 2,574 |
NA |
NA |
Total gold
ounces produced |
6,773 |
NA |
NA |
| 2,463 |
NA |
NA |
Payable gold ounces produced |
6,620 |
NA |
NA |
| 324,866 |
NA |
NA |
Silver
equivalent ounces produced(1) |
847,251 |
NA |
NA |
| 52.41 |
NA |
NA |
Cash costs per silver
ounce(2)(3) |
24.19 |
NA |
NA |
| 59.06 |
NA |
NA |
Total
production costs per ounce(2)(4) |
44.62 |
NA |
NA |
| 127.11 |
NA |
NA |
Direct production costs per
tonne(2)(5) |
117.39 |
NA |
NA |
| |
|
|
|
|
|
|
| (1) |
2013 silver equivalents are calculated using a 60:1
ratio, 2012 silver equivalents are calculated using a 55:1 ratio |
| (2) |
The Company reports non-IFRS measures which include cash
costs net of by-product on a payable silver basis, total production costs
per ounce, all in sustaining costs per ounce and direct production costs
per tonne, in order to manage and evaluate operating performance at each
of the Company’s mines. These measures, some established by the Silver
Institute (Production Cost Standards, June 2011), are widely used in the
silver mining industry as a benchmark for performance, but do not have a
standardized meaning. These measures are reported on a production basis.
See Reconciliation to IFRS on page 18. |
| (3) |
Cash costs net of by-product per payable silver ounce
include mining, processing (including smelting, refining, transportation
and selling costs), and direct overhead, net of gold credits. |
| (4) |
Total production costs per ounce include mining,
processing (including smelting, refining, transportation and selling
costs), direct overhead, amortization, depletion and amortization at the
operation sites. |
| (5) |
Direct production costs per tonne include mining,
processing (including smelting, refining, transportation and selling
costs) and direct overhead at the operation sites. |
The acquisition of the El Cubo mine in July 2012 was a good fit
with Endeavour's business strategy of buying and rejuvenating struggling old
mines in historic mining districts. Unlike Guanaceví and Bolañitos, which had
low throughputs and no reserves, El Cubo offered the potential to quickly become
a core asset for Endeavour, already having a 1,000-tonne-per-day output and a
reasonable reserve/resource mine life. Located in the southeastern part of the
historic Guanajuato mining district, this producing silver and gold mine is only
15 kilometres from Endeavour’s Bolañitos project, creating potential for
significant operational synergies between El Cubo and Bolañitos. El Cubo had
many mine adits, ramps, and shafts, as well as a 400-tonne-per-day leach plant.
It also held a lease (until July 2013) on the adjacent Las Torres mine and
1,800-tonne-per-day flotation plant owned by Fresnillo PLC. Subsequent to
acquisition in Q3, 2012, Endeavour launched a $67-million, 18-month capital
investment program at El Cubo to explore and develop the mine and to rebuild and
expand the plant, tailings facility, water supply, electrical supply, surface
buildings, and surface infrastructure. This facility was substantially completed
in Q2 2013 on time and below budget.
El Cubo Production Results
Endeavour's new mine plan is focused on maintaining the current
tonnage throughput at El Cubo around 1,000-1,200 tpd while progressively
increasing the production grades by reducing ore dilution. The Company has
reorganized the mine operations team to improve supervision and operating
efficiencies, improved safety policies, programs and training to reduce lost
time accidents and created a Mine Rescue Team for a safer environment, which
already performed well in a recent Mine Rescue competition. The Company acquired
new mining equipment, accelerated mine development and commenced
underground drilling. The plant and surface infrastructure reconstruction
program was completed on time and budget in Q2, 2013.
11
During Q2, 2013 the Company announced that the re-commissioning
of the newly rebuilt plant at El Cubo was successfully completed on May 31st,
reaching phase 1 operating capacity of 1,100-1,200 tpd. Work to bring the plant
capacity up to 1,550 tpd is well advanced and should be completed in Q3, 2013.
At that time, management plans to start processing up to 350 tpd of additional
ore from the Bolañitos mine located in the same district as El Cubo only 15
kilometres away.
More than 600,000 hours of work were completed on the plant and
infrastructure with no lost time accidents, an accomplishment of which the
Company is particularly proud. Due to the successful re-commissioning of the El
Cubo plant, Endeavour vacated the nearby leased Las Torres plant to its owner,
Fresnillo plc, on July 22, 2013.
Three months ended June 30, 2013 (compared to three months
ended March 31, 2013)
Silver production at the El Cubo mine was 170,424 oz, an
decrease of 37% compared to 270,445 oz in Q1, 2013 and gold production was 2,574
oz, a decrease of 39% compared to 4,199 oz in Q1, 2013. In Q2, 2013, metal
production fell as management focused its effort on completing the refurbishment
and recommissioning of the El Cubo plant. The Company recommissioned the plant
over four weeks, running lower grade material resulting lower production
compared to Q1, 2013. The Company continues to focus on ensuring that safe,
sustainable mining methods will become part of the culture which over time leads
to improved operating efficiencies.
El Cubo Operating Costs
The Company acquired the El Cubo mine in July 2012, launching a
two-step strategy to make the operations profitable. Since the acquisition, the
Company has invested significantly in the mine and plant operations, improving
safety programs, changing the workplace culture, increasing supervision and
investing capital to improve productivity and reducing mine dilution. Included
in the capital investment is significant exploration to fuel new discoveries and
future mine expansions. The two year operational turn-around program has been
bearing fruit, with production grades slowly climbing, the lost time accident
rate falling and operating costs declining in recent quarters. The costs per
tonne during Q2, 2013 significantly increased from Q1, 2013 due to the scheduled
slowdown of production while management focused on the completion of the plant
refurbishment and the severance of 176 on-site mine contractors. Management is
continuing to evaluate potential cost reductions, while focusing on higher grade
ore zones to improve economics during periods of lower metal prices.
12
Exploration Results
In January 2013, Endeavour commenced an aggressive $16.3
million surface exploration drill program to test multiple exploration targets
at its three mining districts and five district scale exploration properties. A
total of 78,500 metres of surface drilling was planned to test approximately 24
exploration targets. During Q2, 2013, the sharp drop in precious metal prices
prompted management to reduce the size of the 2013 exploration program by 25%.
The amended 2013 program includes 42,000 planned metres drilled for an estimated
$12.1 million.
At Bolañitos, the Company continued drilling at the nearby
Belen prospect as well as along the La Luz vein system northwest of the Lucero
mine.. The La Luz drilling resulted in the delineation of three new mineralized
zones at the Asuncion, La Luz Central and Plateros prospects, the first two
readily accessible for exploitation from nearby historic workings. These zones
are gold-rich extensions of silver mineralized zones in the vicinity of historic
mine workings that each extend 200 metres long and 100 metres deep.
At Guanaceví, one drill rig continued testing the Milache
property six kilometres north of the plant to more fully delineate the
high-grade, silver-gold mineralization discovered on the Santa Cruz vein. The
Company announced in November 2012 that drilling had extended the mineralized
zone 300 metres long by 250 metres deep, still open for expansion north and at
depth.
At El Cubo, drilling has tested several veins in and around the
old mines, and more recently has stepped out along the Villalpando vein system
south of the active mines and some encouraging results have been received to
date. Several high priority targets have been identified south of the active
mines at El Cubo and will be drilled when surface permits are received.
At San Sebastián, Endeavour announced a significant new
resource in the Terronera vein in Q1, 2013 and drilling continues to focus on
increasing the resource so that the deposit is large enough to enter into
economic evaluation and environmental permitting in 2014. During the first half
of 2013, the Company drilled to infill the southeast half of the known
mineralized zone. With the Terronera vein essentially wide open along strike,
and many other outcropping veins yet to be drilled, management views San
Sebastian as having the potential to become a high grade, silver-gold,
underground mine.
At the Panuco property, the drilling in Q2, 2013 continued with
geologically interesting but not yet economically viable results. The Panuco
property is sandwiched between the La Preciosa property of Orko Silver to the
southeast and the San Lucas property of Oremex Silver to the northwest, which
was optioned in 2012. The Panuco and Laberinto properties have excellent
exploration potential both for bulk tonnage, open pit and high-grade,
underground silver-gold deposits.
At the El Inca properties in northern Chile, surface mapping
and target identification were completed in Q1, 2013 and drilling commenced in
Q2, 2013. The El Inca properties have excellent exploration potential for both
bulk tonnage, open pit silver-lead-zinc mines like San Cristobal and high-grade,
underground silver-gold mines like El Penon (south of El Inca in Chile).
Consolidated Financial Results
Three months ended June 30, 2013 compared with the three
months ended June 30, 2012
For the three-month period ended June 30, 2013, the Company’s
mine operating earnings were $6.4 million (2012: $19.5 million) on sales of
$71.2 million (2012: $40.4 million) with cost of sales of $64.8 million (2012:
$20.9 million).
The operating loss was $2.4 million (2012: operating earnings
of $13.4 million) after exploration costs of $5.0 million (2012: $2.1 million)
and general and administrative costs of $3.8 million (2012: $4.0 million).
Earnings before taxes were $2.8 million (2012: $12.0 million)
after mark-to-market gain on derivative liabilities (see adjusted earnings
comment on page 16) of $2.4 million (2012: $1.6 million), a foreign exchange
loss of $2.4 million (2012: $3.4 million), a mark-to-market gain on contingent
liabilities of $5.4 million (2012: $nil), investment and other income of $0.4 million (2012: $0.4 million) and finance costs
of $0.5 million (2012: $5 thousand). The Company realized a net loss for the
period of $0.4 million (2012: net earnings of $7.5 million) after an income tax
provision of $3.2 million (2012: $4.5 million).
13
Sales of $71.2 million for the period represent a 76% increase
over the $40.4 million for the same period in 2012. There was a 66% increase in
silver ounces sold with a 27% decrease in the realized silver price resulting in
a 22% increase in silver sales, and there was a 351% increase in gold ounces
sold with a 19% decrease in realized gold prices resulting in a 267% increase in
gold sales. During the period, the Company sold 1,787,571 oz silver and 25,477
oz gold, for realized prices of $21.38 and $1,297 per oz respectively, compared
to sales of 1,075,000 oz silver and 5,650 oz gold, for realized prices of $29.21
and $1,599 per oz respectively, in the same period of 2012. The realized prices
of silver and gold during the period were within 7% to 8% of the average silver
spot price during the period of $23.10 and the average gold spot price during
the period of $1,414, with differences due to the timing of sales and the
mark-to-market for the concentrate sales that are pending finalization.
The Company accumulated 255,260 oz silver and 1,320 oz gold
finished goods at June 30, 2013 compared to 556,457 oz silver and 7,680 oz gold
at March 31, 2013. The cost allocated to these finished goods is $5.7 million,
net of a $0.5 million write down of the El Cubo finished goods and a $1.0
million write down of the Guanaceví finished goods, compared to $17.3 million,
net of a $0.3 million write-down of the El Cubo finished goods, at March 31,
2013.
Cost of sales for the period was $64.8 million, an increase of
210% over the cost of sales of $20.9 million for the same period of 2012. The
210% increase was a result of a number of factors. The Company sold 66% more
silver ounces during the period compared to the comparative period, experienced
a 204% increase in amortization and depletion as the Company had higher
accumulated cost bases, and the Company experienced additional labour cost
pressures at both the Guanaceví and Bolañitos operations as well as increases in
other input cost. Furthermore, the Company acquired the El Cubo mine in Q3,
2012, a high cost operation which has been operating at a loss since
acquisition, resulting in a reduced gross margin on a consolidated basis. During
the period the Company took an inventory write down to net realizable value of
$2.0 million at the El Cubo mine and $4.4 million at the Guanaceví mine. The
write down for El Cubo was comprised of write downs of both finished goods and
work in process inventories, while the write down for Guanaceví was comprised of
both write down of finished goods and of stockpile inventory.
Exploration expenses increased in Q2, 2013 to $5.0 million from
$2.1 million in the same period of 2012 based on both the timing of the
exploration activities, the addition of exploration activities at the El Cubo
mine and a more aggressive exploration program in 2013. General and
administrative expenses decreased to $3.8 million for the period as compared to
$4.0 million in the same period of 2012 primarily due to decreased corporate
development costs, legal and human resource costs.
A significant number of the Company’s share purchase warrants
are classified and accounted for as a financial liability at fair value with
adjustments recognized through net earnings because these warrants have an
exercise price denominated in a currency which is different from the functional
currency of the Company. During the period, there was a mark-to-market gain on
derivative liabilities (see adjusted earnings comment on page 16) of $2.3
million, while the same period in 2012 had a mark-to-market gain on derivative
liabilities of $1.6 million. The gain was a reflection of the Company’s share
price decreasing from CAN$6.33 at March 31, 2013 to CAN$3.64 at June 30, 2013.
The mark-to-market gain on the contingent liability was a
result of a revaluation, based on the Monte Carlo model, of the contingent
consideration related to the acquisition of Mexgold (El Cubo). A decrease in the
gold price and movement in the forward curve resulted in a $5.4 million
mark-to-market gain during Q2, 2013.
The Company experienced a foreign exchange loss of $2.4 million
during the period compared to a gain of $3.4 million for the same period of
2012. The $2.4 million gain was primarily due to the weakening of the Mexican
peso against the US dollar during the period, which resulted in lower valuations
on the Mexican peso cash and receivable amounts and the Mexican peso denominated
inventory amounts.
There was an income tax provision of $3.2 million during the
period compared to $4.5 million for the same period of 2012 due to the decreased
profitability during the period compared to the same period in 2012, offset by
$1.2 million in expense recognized in the current period on the settlement of
tax disputes.
14
Six months ended June 30, 2013 compared with the six months
ended June 30, 2012
For the six-month period ended June 30, 2013, the Company’s
mine operating earnings were $25.3 million (2012: $42.8 million) on sales of
$141.1 million (2012: $89.4 million) with cost of sales of $115.8 million (2012:
$46.6 million).
Operating earnings were $9.2 million (2012: $32.2 million)
after exploration costs of $9.2 million (2012: $3.9 million) and general and
administrative costs of $6.9 million (2012: $6.7 million).
Earnings before taxes were $21.5 million (2012: $37.1 million)
after mark-to-market gain on derivative liabilities (see adjusted earnings
comment on page 16) of $3.8 million (2012: $1.8 million), a foreign exchange
expense of $1.0 million (2012: gain of $1.2 million), a mark-to-market gain on
contingent liabilities of 7.9 million (2012: $nil), investment and other income
of $2.4 million (2012: $1.9 million) and finance costs of $0.8 million (2012:
$10 thousand). The Company realized net earnings for the period of $14.0 million
(2012: $27.2 million) after an income tax provision of $7.5 million (2012: $9.9
million).
Sales of $141.1 million for the period represent a 58% increase
over the $89.5 million for the same period in 2012. There was a 52% increase in
silver ounces sold with a 20% decrease in the realized silver price resulting in
a 22% increase in silver sales, and there was a 213% increase in gold ounces
sold with 14% decrease in realized gold prices resulting in a 169% increase in
gold sales. During the period, the Company sold 3,302,648 oz silver and 41,201
oz gold, for realized prices of $25.05 and $1,417 per oz respectively, compared
to sales of 2,175,000 oz silver and 13,146 oz gold, for realized prices of
$31.18 and $1,648 per oz respectively, in the same period of 2012. The realized
prices of silver and gold during the period are within 6% to 7% of the average
silver spot price during the period of $26.59 and average gold spot price during
the period of $1,522, with differences due to the timing of sales and the
mark-to-market for the concentrate sales that are pending finalization.
The Company accumulated 255,260 oz silver and 1,320 oz gold
finished goods at June 30, 2013 compared to 611,661 oz silver and 8,934 oz gold
at December 31, 2012. The cost allocated to these finished goods is $5.7
million, net of a $0.5 million write down of the El Cubo finished goods and a
$1.0 million write down of the Guanaceví finished goods, compared to $18.7
million, net of a $1.5 million write-down of the El Cubo finished goods, at
December 31, 2012.
In 2012, the increased significance of Bolañitos substantially
increased the inventory held as concentrate. During Q1, 2013 and Q2, 2013 the
Company executed contracts to sell Bolañitos concentrate rather than leaching
the concentrates at the Company’s leach facilities at Guanaceví and El Cubo,
improving the recovery of contained metal but also raising the processing costs
per tonne. However, the net cost produced is comparable to the leach cost.
Cost of sales for the period was $115.8 million, an increase of
148% over the cost of sales of $46.6 million for the same period of 2012. The
148% increase in the cost of sales was due to a number of factors. The Company
sold 52% more silver ounces during the period compared to the comparative
period, and experienced a 97% increase in amortization and depletion as the
Company had higher accumulated cost bases. In addition, the Company experienced
additional labour cost pressures at both the Guanaceví and Bolañitos operations
as well as increases in other input costs. Furthermore, the Company acquired the
El Cubo mine in Q3, 2012, a high cost operation which has been operating at a
loss since acquisition, resulting in a reduced gross margin on a consolidated
basis. During the period the Company took an inventory write down to net
realizable value (“NRV”) of $3.5 million at the El Cubo mine and $4.4 million at
the Guanaceví mine. The write down for El Cubo was comprised of write downs of
both finished goods and work in process inventories, while the write down for
Guanaceví was comprised of both finished goods and stockpile inventory.
Exploration expenses increased to $9.2 million from $3.9
million in the same period of 2012 based on the timing of the exploration
activities, the addition of exploration activities at the El Cubo mine and a
more aggressive exploration program in 2013. General and administrative expenses
increased to $6.9 million for the period compared to $6.7 million in the same
period of 2012 primarily due to slightly increased corporate development costs,
legal and insurance fees and human resource costs.
A significant number of the Company’s share purchase warrants
are classified and accounted for as a financial liability at fair value with
adjustments recognized through net earnings because these warrants have an
exercise price denominated in a currency which is different from the
functional currency of the Company. During the period, there was a
mark-to-market gain on derivative liabilities (see adjusted earnings comment on
page 16) of $3.8 million, while the same period in 2012 had a mark-to-market
gain on derivative liabilities of $1.8 million. The gain was a reflection of the
Company’s share price decreasing from CAN$7.84 at December 31, 2012 to CAN$3.64
at June 30, 2013.
15
The mark-to-market gain on the contingent liability was a
result of a revaluation, based on the Monte Carlo model, of the contingent
consideration related to the acquisition of Mexgold (El Cubo). A decrease in the
gold price and movement in the forward curve resulted in a $7.9 million
mark-to-market gain during the first half of 2013.
The Company experienced a foreign exchange loss of $1.0 million
during the period compared to a gain of $1.2 million for the same period of
2012. The $1.0 million loss was primarily due to the weakening of the Mexican
peso against the US dollar during the period, which resulted in lower valuations
on the Mexican peso cash and receivable amounts and the Mexican peso denominated
inventory amounts.
There was an income tax provision of $7.5 million during the
period compared to $9.9 million for the same period of 2012 due to the decreased
profitability during the period compared to the same period in 2012, offset by
$1.2 million recognized in the current period on the settlement of tax disputes.
NON-IFRS MEASURES
Adjusted earnings and adjusted EPS are non-IFRS measures that
do not have standardized meanings prescribed by IFRS and therefore may not be
comparable to similar measures presented by other issuers. The Company
previously issued share purchase warrants that have an exercise price
denominated in a currency which is different from the functional currency of the
Company. Under IFRS, the warrants are classified and accounted for as a
financial liability at fair value with adjustments recognized through net
earnings. These adjustments fluctuate significantly quarter to quarter primarily
based on the change in the Company’s quoted share price and have a significant
effect on reported earnings, while the dilutive impact remains unchanged.
Adjusted earnings are used by management and provided to investors as a measure
of the Company’s operating performance.
| Expressed in thousands US dollars |
Three months ended June 30
|
Six months ended June 30
|
| |
2013 |
2012 |
2013 |
2012 |
| Net earnings (loss) for the period |
$(361) |
$7,505 |
13,996 |
27,280 |
| Mark-to-market loss/(gain) on derivative liabilities
|
(2,386) |
(1,632) |
(3,838) |
(1,775) |
| Adjusted net earnings (loss) |
(2,747) |
5,873 |
10,158 |
25,505 |
| Weighted average share outstanding |
99,710,933 |
87,999,495 |
99,685,615 |
87,870,479 |
| Adjusted net
earnings (loss) per share |
($0.03) |
$0.06 |
$0.10 |
$0.29 |
Mine operating cash flow is a non-IFRS measure that does not
have a standardized meaning prescribed by IFRS and therefore may not be
comparable to similar measures presented by other issuers. Mine operating cash
flow is calculated as revenues minus direct production costs and royalties. Mine
operating cash flow is used by management and provided to investors as a measure
of the Company’s operating performance.
| Expressed in thousands US dollars |
Three months ended June 30
|
Six months ended June 30
|
| |
2013 |
2012 |
2013 |
2012 |
| Mine operating
earnings operating earnings |
6,414 |
19,518 |
25,306 |
12,824 |
| Share-based compensation |
202 |
216 |
277 |
275 |
| Amortization and
depletion |
13,149 |
4,328 |
25,223 |
12,824 |
| Write down of inventory to net realizable
value |
6,383 |
- |
7,878 |
|
| Mine operating
cash flow |
26,148 |
24,062 |
58,684 |
56,036 |
Operating cash flow before working capital adjustment is a
non-IFRS measure that does not have a standardized meaning prescribed by IFRS
and therefore may not be comparable to similar measures presented by other
issuers. Operating cash flow before working capital (“WC”) adjustments is
calculated as operating cash flow minus working capital adjustment. Operating cash flow before working capital
adjustments is used by management and provided to investors as a measure of the
Company’s operating performance.
16
| Expressed in thousands
US dollars |
Three
months ended June 30 |
Six months
ended June 30 |
| |
2013 |
2012 |
2013 |
2012 |
| Cash from operating activities |
19,678 |
12,229 |
29,216 |
40,989 |
| Net changes in
non-cash working capital |
7,282 |
(4,659) |
(8,508) |
(2,265) |
| Operating cash
flow before working capital adjustments |
12,396 |
16,888 |
37,724 |
43,254 |
Operating cash flow per share is a non-IFRS measure that does
not have a standardized meaning prescribed by IFRS and therefore may not be
comparable to similar measures presented by other issuers. Operating cash flow
per share is calculated by dividing cash from operating activities by the
weighted average shares outstanding. Operating cash flow per share is used by
management and provided to investors as a measure of the Company’s operating
performance.
| Expressed in thousands US dollars |
Three months ended June 30
|
Six months ended June 30
|
| |
2013 |
2012 |
2013 |
2012 |
| Operating cash flow before working capital
adjustments |
12,396 |
16,888 |
37,724 |
43,254 |
| Weighted average share outstanding |
99,710,933 |
87,999,495 |
99,685,615 |
87,870,479 |
| Operating cash
flow before WC changes per share |
$0.12 |
$0.19 |
$0.38 |
$0.49 |
EBITDA is a non-IFRS financial measure, which excludes the
following from net earnings:
- Income tax expense;
- Finance costs;
- Amortization and depletion
Management believes EBITDA is a valuable indicator of the
Company’s ability to generate liquidity by producing operating cash flow to fund
working capital needs, service debt obligations, and fund capital expenditures.
Management uses EBITDA for this purpose. EBITDA is also frequently used by
investors and analysts for valuation purposes whereby EBITDA is multiplied by a
factor or “EBITDA multiple” based on an observed or inferred relationship
between EBITDA and market values to determine the approximate total enterprise
value of a Company.
EBITDA is intended to provide additional information to
investors and analysts and does not have any standardized definition under IFRS
and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with IFRS. EBITDA excludes the impact of cash
costs of financing activities and taxes, and the effects of changes in operating
working capital balances, and therefore is not necessarily indicative of
operating profit or cash flow from operations as determined by IFRS. Other
companies may calculate EBITDA differently.
| Expressed in thousands US dollars |
Three months ended June 30
|
Six months ended June 30
|
| |
2013 |
2012 |
2013 |
2012 |
| Net earnings (loss) for the period |
(361) |
$7,505 |
13,996 |
27,280 |
| Amortization and depletion – cost of
sales |
13,149 |
4,328 |
25,223 |
12,824 |
| Amortization and depletion – exploration |
33 |
31 |
67 |
59 |
| Amortization and depletion – general &
admin |
46 |
27 |
85 |
44 |
| Finance costs |
531 |
5 |
778 |
10 |
| Current income tax expense |
4,363 |
1,714 |
6,199 |
6,483 |
| Deferred income
tax expense |
(1,158) |
2,787 |
1,295 |
3,410 |
| Earnings before interest, taxes and amortization |
16,603 |
16,397 |
47,643 |
50,110 |
Cash costs per ounce, total production costs per ounce and
direct production costs per tonne are measures developed by precious metals
companies in an effort to provide a comparable standard; however, there can be
no assurance that Endeavour’s reporting of these non-IFRS measures are similar
to those reported by other mining companies. Cash costs per ounce, production costs per ounce and direct
production costs per tonne are measures used by the Company to manage and
evaluate operating performance at each of the Company’s operating mining units,
and are widely reported in the silver mining industry as a benchmark for
performance, but do not have a standardized meaning and are disclosed in
addition to IFRS measures. The following tables provide a detailed
reconciliation of these measures to Endeavour’s cost of sales, as reported in
the Company’s consolidated financial statements.
17
| |
Three months ended June 30,
2013 |
Three months ended June 30,
2012 |
| |
Guanaceví |
Bolañitos |
El Cubo |
Total |
Guanaceví |
Bolañitos |
El Cubo |
Total |
| Direct production costs |
8,703 |
23,644 |
12,399 |
44,746 |
11,535 |
4,355 |
NA |
15,890 |
| Royalties |
356 |
- |
- |
356 |
482 |
- |
NA |
482 |
| Opening finished goods |
(1,780) |
(9,110) |
(2,510) |
(13,400) |
(7,831) |
(5,509) |
NA |
(13,340) |
| NRV cost adjustment |
- |
- |
815 |
815 |
- |
- |
- |
- |
| Closing finished
goods |
3,929 |
753 |
713 |
5,395 |
5,916 |
8,573 |
NA |
14,489 |
| Direct production costs |
11,208 |
15,287 |
11,417 |
37,912 |
10,102 |
7,419 |
NA |
17,521 |
| By-product gold sales |
(2,250) |
(26,572) |
(4,213) |
(33,035) |
(3,951) |
(5,083) |
NA |
(9,034) |
| Opening gold inventory fair market value |
616 |
10,080 |
1,578 |
12,274 |
885 |
6,026 |
NA |
6,911 |
| Closing gold
inventory fair market value |
(456) |
(899) |
(218) |
(1,573) |
(1,306) |
(8,474) |
NA |
(9,780) |
| Cash costs |
9,118 |
(2,104) |
8,564 |
15,578 |
5,730 |
(112) |
NA |
5,618 |
| Amortization and depletion |
2,974 |
5,063 |
5,111 |
13,148 |
3,173 |
1,155 |
NA |
4,328 |
| Share-based compensation |
68 |
67 |
67 |
202 |
107 |
109 |
NA |
216 |
| Opening finished goods depletion |
(717) |
(2,246) |
(925) |
(3,888) |
(2,000) |
(1,656) |
NA |
(3,656) |
| NRV cost adjustment |
270 |
- |
146 |
416 |
- |
- |
- |
- |
| Closing finished
goods depletion |
1,113 |
198 |
137 |
1,448 |
1,617 |
2,154 |
NA |
3,771 |
| Total production costs |
12,826 |
978 |
13,100 |
26,904 |
8,628 |
1,650 |
NA |
10,277 |
| |
|
|
|
|
|
|
|
|
| Throughput tonnes |
100,781 |
202,472 |
89,817 |
393,070 |
100,208 |
102,779 |
NA |
202,987 |
| Payable silver ounces |
549,486 |
766,925 |
163,417 |
1,479,828 |
663,056 |
366,569 |
NA |
1,029,626 |
| |
|
|
|
|
|
|
|
|
| Cash costs per ounce |
16.59 |
(2.74) |
52.41 |
10.53 |
8.64 |
(0.31) |
NA |
5.46 |
| Total production costs per oz |
23.34 |
1.28 |
80.16 |
18.18 |
13.01 |
4.50 |
NA |
9.98 |
| Direct production costs per tonne |
111.21 |
75.50 |
127.11 |
96.45 |
100.81 |
72.18 |
NA |
86.32 |
| |
|
|
|
|
|
|
|
|
| |
Six months ended June 30, 2013
|
Six months ended June 30, 2012
|
| |
Guanaceví |
Bolañitos |
El Cubo |
Total |
Guanaceví |
Bolañitos |
El Cubo |
Total |
| Direct production costs |
20,216 |
39,231 |
22,186 |
81,633 |
22,359 |
10,142 |
NA |
32,501 |
| Royalties |
806 |
- |
- |
806 |
943 |
- |
NA |
943 |
| Opening finished goods |
(1,626) |
(10,442) |
(2,305) |
(14,373) |
(7,865) |
(4,636) |
NA |
(12,501) |
| NRV cost adjustment |
- |
- |
1,946 |
1,946 |
|
|
|
|
| Closing finished
goods |
3,929 |
753 |
713 |
5,395 |
5,916 |
8,573 |
NA |
14,489 |
| Direct production costs |
23,325 |
29,542 |
22,540 |
75,407 |
21,353 |
14,079 |
NA |
35,432 |
| By-product gold sales |
(3,612) |
(43,568) |
(11,221) |
(58,401) |
(6,984) |
(14,686) |
NA |
(21,670) |
| Opening gold inventory fair market value |
455 |
12,789 |
1,560 |
14,804 |
1,577 |
6,701 |
NA |
8,278 |
| Closing gold
inventory fair market value |
(456) |
(899) |
(218) |
(1,573) |
(1,306) |
(8,474) |
NA |
(9,780) |
| Cash costs net of by-product |
19,712 |
(2,136) |
12,661 |
30,237 |
14,640 |
(2,380) |
NA |
12,260 |
| Amortization and depletion |
6,394 |
8,290 |
10,826 |
25,510 |
6,812 |
6,012 |
NA |
12,824 |
| Share-based compensation |
93 |
92 |
92 |
277 |
132 |
143 |
NA |
275 |
| Opening finished goods depletion |
(444) |
(2,698) |
(1,176) |
(4,318) |
(1,830) |
(4,005) |
NA |
(5,835) |
| NRV cost adjustment |
270 |
- |
146 |
416 |
- |
- |
- |
- |
| Closing finished
goods depletion |
1,113 |
198 |
137 |
1,448 |
1,617 |
2,154 |
NA |
3,771 |
| Total production costs |
27,138 |
3,746 |
22,686 |
53,570 |
21,371 |
1,924 |
NA |
23,295 |
| |
|
|
|
|
|
|
|
|
| Throughput tonnes |
207,434 |
369,972 |
192,008 |
769,414 |
199,171 |
197,575 |
NA |
396,746 |
| Payable silver ounces |
1,183,696 |
1,324,679 |
431,158 |
2,939,533 |
1,382,486 |
708,905 |
NA |
2,091,392 |
| |
|
|
|
|
|
|
|
|
| Cash costs per ounce |
16.65 |
(1.61) |
24.19 |
10.29 |
10.59 |
(3.36) |
NA |
5.86 |
| Total production costs per oz |
22.93 |
2.83 |
52.62 |
18.22 |
15.45 |
2.71 |
NA |
11.14 |
| Direct production costs per tonne |
112.45 |
79.85 |
117.39 |
98.01 |
107.21 |
71.26 |
NA |
89.31 |
| |
|
|
|
|
|
|
|
|
18
SUMMARY OF QUARTERLY RESULTS AND TRENDS
The following table presents selected financial
information for each of the most recent eight quarters:
(tables in thousands of US dollars except per share amounts)
| |
2013
|
2012
|
2011
|
| Quarterly Results
|
Q2 |
Q1
|
Q4 |
Q3 |
Q2 |
Q1 |
Q4
|
Q3 |
| Revenue |
71,250 |
69,873 |
66,719 |
51,880 |
40,434 |
49,046 |
17,506 |
38,776 |
| Direct cost |
44,746 |
36,887 |
34,814 |
24,485 |
15,890 |
16,611 |
5,944 |
10,997 |
| Royalties |
356 |
450 |
469 |
454 |
482 |
461 |
516 |
636 |
| Mine operating cash flow |
26,148 |
32,536 |
31,436 |
26,941 |
24,062 |
31,974 |
11,046 |
27,143 |
| Share-based
compensation |
202 |
75 |
124 |
146 |
216 |
59 |
129 |
170 |
| Amortization and depletion |
13,149 |
12,074 |
10,517 |
6,353 |
4,328 |
8,496 |
4,063 |
4,841 |
| Write down on inventory |
6,383 |
1,495 |
2,876 |
3,345 |
- |
- |
- |
- |
| Mine operating earnings |
6,414 |
18,892 |
17,919 |
17,097 |
19,518 |
23,419 |
6,854 |
22,132 |
| |
|
|
|
|
|
|
|
|
| Net
earnings (loss) |
(361) |
14,357 |
14,821 |
16 |
7,505 |
19,775 |
(1,793) |
3,097 |
| (Gain) Loss on derivative liability |
(2,386) |
(1,452) |
(1,881) |
1,728 |
1,632 |
(143) |
250 |
5,777 |
| Adjusted earnings (loss) |
(2,747) |
12,905 |
12,940 |
1,744 |
5,873 |
19,632 |
(1,543) |
8,874 |
| |
|
|
|
|
|
|
|
|
| Basic earnings (loss) per share |
(0.00) |
0.14 |
0.15 |
0.00 |
0.09 |
0.23 |
(0.03) |
0.04 |
| Diluted earnings
(loss) per share |
(0.00) |
0.13 |
0.13 |
0.00 |
0.06 |
0.22 |
(0.03) |
0.04 |
| Adjusted earnings (loss) per share |
(0.03) |
0.13 |
0.13 |
0.02 |
0.06 |
0.22 |
(0.03) |
0.10 |
| Weighted shares
outstanding |
99,710,933 |
99,660,016 |
99,539,282 |
97,666,618 |
87,999,495 |
87,728,391 |
87,241,132 |
85,159,320 |
| |
|
|
|
|
|
|
|
|
| Net earnings (loss) |
(361) |
14,357 |
14,821 |
16 |
7,505 |
19,775 |
(1,793) |
3,097 |
| Amortization and depletion |
13,228 |
12,148 |
10,599 |
6,426 |
4,386 |
8,541 |
4,127 |
4,885 |
| Finance costs |
531 |
247 |
293 |
181 |
5 |
5 |
7 |
8 |
| Current income tax |
4,363 |
1,836 |
5,932 |
3,419 |
1,713 |
4,769 |
(40) |
1,557 |
| Deferred income tax |
(1,158) |
2,453 |
(3,460) |
2,185 |
2,788 |
623 |
583 |
4,293 |
| EBITDA |
16,603 |
31,041 |
28,185 |
12,227 |
16,397 |
33,713 |
2,884 |
13,840 |
19
The following table presents selected production
information for each of the most recent eight quarters:
| Highlights |
2013
|
2012
|
2011
|
| |
Q2 |
Q1
|
Q4 |
Q3 |
Q2 |
Q1 |
Q4
|
Q3 |
| Processed tonnes
|
393,070 |
376,344 |
362,779 |
306,164 |
202,987 |
193,759 |
184,381 |
138,592 |
| Guanaceví |
100,781 |
106,653 |
110,763 |
108,343 |
100,208 |
98,963 |
98,716 |
87,662 |
| Bolañitos |
202,472 |
167,500 |
161,841 |
117,271 |
102,779 |
94,796 |
85,665 |
50,930 |
| El Cubo |
89,817 |
102,191 |
90,175 |
80,550 |
NA |
NA |
NA |
NA |
| Silver ounces
|
1,535,873 |
1,489,746 |
1,235,026 |
1,137,933 |
1,040,026 |
1,072,491 |
1,120,781 |
858,738 |
| Guanaceví |
555,036 |
640,616 |
518,207 |
598,285 |
669,754 |
726,697 |
753,353 |
647,397 |
| Bolañitos |
810,414 |
578,654 |
518,674 |
433,388 |
370,272 |
345,794 |
367,428 |
211,341 |
| El Cubo |
170,423 |
270,446 |
198,145 |
106,260 |
NA |
NA |
NA |
NA |
| Silver grade
|
165 |
154 |
151 |
161 |
208 |
229 |
252 |
263 |
| Guanaceví |
240 |
233 |
215 |
227 |
269 |
292 |
320 |
305 |
| Bolañitos |
160 |
135 |
140 |
148 |
149 |
163 |
173 |
190 |
| El Cubo |
93 |
103 |
96 |
92 |
NA |
NA |
NA |
NA |
| Silver recovery
|
73.6 |
79.9 |
70.1 |
71.8 |
76.5 |
75.2 |
75.0 |
73.4 |
| Guanaceví |
71.3 |
80.2 |
67.7 |
75.7 |
77.4 |
78.2 |
74.2 |
75.3 |
| Bolañitos |
77.8 |
79.8 |
71.3 |
77.7 |
75.2 |
69.5 |
77.1 |
67.9 |
| El Cubo |
63.5 |
79.9 |
71.2 |
44.6 |
NA |
NA |
NA |
NA |
| Gold ounces
|
19,914 |
15,032 |
12,917 |
11,754 |
7,695 |
6,321 |
7,045 |
4,926 |
| Guanaceví |
1,590 |
942 |
1,088 |
2,667 |
2,499 |
1,620 |
1,550 |
1,933 |
| Bolañitos |
15,751 |
9,891 |
8,660 |
7,363 |
5,196 |
4,701 |
5,494 |
2,993 |
| El Cubo |
2,574 |
4,199 |
3,169 |
1,724 |
NA |
NA |
NA |
NA |
| Gold grade
|
1.96 |
1.51 |
1.55 |
1.49 |
1.47 |
1.33 |
1.45 |
1.47 |
| Guanaceví |
0.68 |
0.34 |
0.69 |
0.87 |
0.87 |
0.60 |
0.56 |
0.83 |
| Bolañitos |
2.84 |
2.27 |
2.20 |
2.39 |
2.05 |
2.10 |
2.48 |
2.57 |
| El Cubo |
1.41 |
1.48 |
1.42 |
1.42 |
NA |
NA |
NA |
NA |
| Gold recovery
|
80.4 |
82.3 |
71.7 |
80.1 |
80.3 |
76.2 |
82.0 |
75.2 |
| Guanaceví |
72.6 |
80.8 |
44.3 |
88.0 |
89.2 |
85.3 |
87.2 |
82.6 |
| Bolañitos |
85.2 |
81.0 |
75.8 |
81.7 |
76.6 |
73.6 |
80.3 |
71.1 |
| El Cubo |
63.2 |
86.4 |
77.0 |
46.9 |
NA |
NA |
NA |
NA |
| Cash costs per
oz |
10.53 |
10.04 |
12.25 |
4.70 |
5.46 |
6.26 |
4.05 |
5.03 |
| Guanaceví |
16.59 |
16.70 |
18.20 |
10.99 |
8.64 |
12.38 |
9.82 |
9.61 |
| Bolañitos |
(2.74) |
(0.06) |
(3.73) |
(9.98) |
(0.31) |
(6.63) |
(7.77) |
(9.02) |
| El Cubo |
52.41 |
15.30 |
38.52 |
29.21 |
NA |
NA |
NA |
NA |
| Total cost per
oz(1) |
18.18 |
18.24 |
20.84 |
13.18 |
9.98 |
12.27 |
11.40 |
11.90 |
| Guanaceví |
23.34 |
22.56 |
23.89 |
16.54 |
13.01 |
17.73 |
14.40 |
14.33 |
| Bolañitos |
1.28 |
4.45 |
1.59 |
(5.20) |
4.50 |
0.10 |
5.23 |
4.46 |
| El Cubo |
80.16 |
35.71 |
49.30 |
69.20 |
NA |
NA |
NA |
NA |
| Costs per tonne
|
96.45 |
99.63 |
92.86 |
97.04 |
86.32 |
92.44 |
84.14 |
91.47 |
| Guanaceví |
111.21 |
113.61 |
99.70 |
101.82 |
100.81 |
113.69 |
99.41 |
107.05 |
| Bolañitos |
75.50 |
85.10 |
75.66 |
77.34 |
72.18 |
70.26 |
66.54 |
64.66 |
| El Cubo |
127.11 |
108.85 |
115.25 |
119.32 |
NA |
NA |
NA |
NA |
| |
(1) |
Total Production Cost per ounce |
20
KEY ECONOMIC TRENDS
Metal Price Trends
The prices of silver and gold are the largest single factor in
determining profitability and cash flow from operations, therefore, the
financial performance of the Company has been, and is expected to continue to
be, closely linked to the price of silver and gold. During Q2, 2013, the average
price of silver was $23.10 per ounce, with silver trading between a range of
$27.96 and $18.61 per ounce based on the London Fix silver price. This compares
to an average of $29.38 per ounce during Q2, 2012, with a low of $26.72 and a
high of $32.97 per ounce. During Q2, 2013, the Company realized an average price
of $21.38 per ounce compared with $29.21 for the corresponding period in
2012.
During Q2, 2013, the average price of gold was $1,414 per
ounce, with gold trading between a range of $1,469 and $1,192 per ounce based on
the London Fix PM gold price. This compares to an average of $1,609 per ounce
during Q2, 2012, with a low of $1,540 and a high of $1,677 per ounce. During Q2,
2013, the Company realized an average price of $1,238 per ounce compared with
$1,599 for the corresponding period in 2012.
The major influences on the precious metals prices during Q2,
2013 included weaker investment demand, selling from gold exchange traded funds,
as well as strong US equity and bond markets that pulled investments from other
asset classes, including precious metals. In addition, the precious metal prices
were also affected by an expectation of improving economic conditions, which
could reduce the US Federal Reserve’s quantitative easing program. A sustained
period at current metal prices will have a significant impact on the Company’s
financial position, performance and liquidity, as well as on the carrying value
of the Company’s cash generating units.
Currency Fluctuations
The Company’s operations are located in Mexico and therefore a
significant portion of operating costs and capital expenditures are denominated
Mexican pesos. The corporate activities are based in Vancouver, Canada with the
significant portion of these expenditures being denominated in Canadian dollars.
Generally, as the US dollar strengthens, these currencies weaken, and as the US
dollar weakens, these foreign currencies strengthen.
During Q2, 2013, the Mexican peso reversed its appreciation
trend and depreciated relative to the US dollar. During Q2, 2013, the average
foreign exchange rate was $0.0802 US dollar per Mexican peso, with the peso
trading between a range of $0.0749 and $0.0835. This compares to an average of
$0.0740 during Q2, 2012, with a low of $0.0694 and a high of $0.0786 US dollar
per Mexican peso.
21
During Q2, 2013, the Canadian dollar continued to depreciate
relative to the US dollar. During Q2, 2013, the average foreign exchange rate
was $0.977 US dollar per Canadian dollar, with the Canadian dollar trading
between a range of par and $0.950. This compares to an average of $0.9901 during
Q2, 2012, with a low of 0.960 and a high of 1.019 US dollar per Canadian
dollar.
22
Cost Trends
The Company’s profitability is subject to industry wide cost
pressures on development and operating costs with respect to labour, energy,
consumables and capital expenditures. Underground mining is labour intensive and
33% of Endeavour’s production costs are directly tied to labour. In order to
mitigate the impact of higher labour and consumable costs, the Company continues
to focus on continuous improvement, both by promoting more efficient use of
materials and supplies, and by pursuing more advantageous pricing, while
increasing performance and without compromising operational integrity.
QUARTERLY OUTLOOK
Production Outlook
The Company is on track to deliver another year of strong
organic growth in 2013. First Half production was well ahead of planned
production according to our annual forecast of 5.0 -5.3 million oz silver and
46,000-49,000 oz gold for the year. However, Second Half production will likely
be slightly lower than First Half production due to the return of the leased Las
Torres plant at the end of July and the concurrent reduction of Bolanitos
production from 2,225 tpd to the 1,900 tpd day range. Bolanitos mine production
in excess of the Bolañitos plant capacity will now be processed at the newly
refurbished El Cubo plant.
With the sharp decline of silver and gold prices this year,
management implemented cost reductions and revised its 2013 financial plan in
response to reduced metal price expectations for the year. Metal production is
not expected to be negatively impacted by these measures but the anticipated
reduced value of Endeavour’s gold by-product credits could negatively impact
cash cost guidance.
Endeavour’s capital, exploration, operating and administrative
cost reductions included work force reductions which resulted in one time
severance costs during the Second Quarter, 2013. These cost reductions should
benefit both cash and all-in operating costs starting in Q3, 2013 assuming
current metal prices. Endeavour’s revised spending plans for the Second Half of
2013 now include the following:
- Capital - $6.5-7.5 million
- Exploration - $1.5-2.5 million
- Administrative - $5.5-6.5 million
- Operating - $90-100 per tonne
23
Management is now conducting a second review of company-wide
costs, particularly at El Cubo, to see what expenditures can be reduced further
in response to the latest drop in metal prices. In addition to reducing our
costs per tonne, we are also evaluating our revenues per tonne. One of the
benefits of our high grade, underground mines in general is that they have each
produced higher ore grades at higher cut-off grades in the past. We are
currently redoing our mine plan for El Cubo in particular to try and raise the
cut-off and ore grades faster than scheduled in the original two year
turn-around plan.
Endeavour management will continue monitoring the precious
metals markets and our mine optimization programs in Q3, 2013 prior to making
any revisions to production guidance. The Company has been very proactive in
revising its plans to navigate this lower price environment and will continue to
be responsive to any significant new changes in metal prices.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents have increased from $18.6 million at
December 31, 2012 to $22.3 million at June 30, 2013. The Company had working
capital of $16.9 million at June 30, 2013 (December 31, 2012 - $50.9 million).
The $34.0 million decrease in working capital is primarily a result of an
increase in the revolving credit facility of $30.0 million, which was used
towards expenditures on property, plant and equipment.
Operating activities provided cash of $29.2 million during the
first half of 2013 compared to providing $41.0 million during the same period in
2012. The significant non-cash adjustments to net earnings of $15.2 million were
for amortization and depletion of $25.4 million, share-based compensation of
$1.9 million, a gain on the sale of marketable securities of $1.8 million, a
deferred income tax provision of $1.3 million, a mark-to-market gain on
contingent liabilities of $7.9 million, a mark-to-market gain on derivative
liabilities of $3.8 million, the write down of inventory to net realizable value
of $7.9 million, finance costs of $0.2 million and a change in non-cash working
capital of $8.5 million. The change in non-cash working capital was primarily
due to an increase in accounts receivable due to third party sales of the
Bolañitos and El Cubo concentrate and a reduction in accounts payable and income
tax payable, offset by a reduction in inventories and prepaid expenses.
Investing activities during the period used $55.8 million as
compared to $2.7 million in the same period of 2012, with investments in
property, plant and equipment totaling $60.4 million compared to $21.3 million,
primarily due to increased development and plant expansion expenditures at El
Cubo. There was also $4.6 million in net receipts from short term investments
compared to net receipts in short term investments of $18.7 million for the
first half of 2012.
The Company invested a total of $60.4 million in property,
plant and equipment during the first half of 2013, with all of the amounts
settled for cash. Approximately $10.2 million was invested at Guanaceví, with
$7.0 million spent on mine development, $2.0 million spent on the refining
facilities and $1.0 million on mine equipment. Guanaceví mine development
included 3.5 kilometres of underground development, and the refining facilities
expenditures included $0.7 million on new agitator and the tailing dam
expansion.
Approximately $15.5 million was invested at Bolañitos, with
$8.7 million spent on mine development, $2.0 million on the plant, $4.3 million
on mine equipment and $0.5 million on office equipment, building upgrades and
light vehicles. Bolañitos mine development included 4.6 kilometres of
underground development, and plant expenditures were related to the engineering
and expansion of tailings facilities. The mine equipment expenditure was to
increase the mobile equipment fleet to meet the increased production.
Approximately $32.3 million was invested at El Cubo, with $7.3
million spent on mine development, $21.6 million on the plant rehabilitation and
expansion and $3.5 million on mine equipment. El Cubo mine development included
5.7 kilometres of underground development.
The Company spent $2.3 million on exploration property costs
and capital assets for the exploration and corporate offices. Of this amount,
$2.0 million was spent on the final San Sebastián property payment.
24
As at June 30, 2013, the Company held no short-term investments
and $1.8 million in available for sale investments consisting of marketable
securities.
Financing activities during Q2, 2013 generated $30.3 million,
compared to $1.3 million during the same period in 2012. During 2013 the Company
received $30.0 million in proceeds from the revolving line of credit, $0.4
million was realized from the exercise of stock options and $0.1 million paid in
interest. During the same period in 2012, there was $0.1 million realized from
the exercise of stock options and $1.2 million realized from the exercise of
share purchase warrants.
As at June 30, 2013, the Company’s issued share capital was
$358.2 million, representing 99,741,010 common shares, compared to $357.3
million, representing 99,541,522 common shares, at December 31, 2012. All of the
199,488 common shares issued during the period were issued upon stock option
exercises.
As at June 30, 2013, the Company had options outstanding to
purchase 5,725,350 common shares with a weighted average exercise price of CAN
$5.27 and had share purchase warrants outstanding to purchase 1,249,597 common
shares with a weighted average exercise price of CAN $1.94.
On July 24, 2012, the Company entered into a $75 million
revolving credit facility (“the Facility”) reducing over three years with Scotia
Capital. The purpose of the Facility is for general corporate purposes and is
principally secured by a pledge of the Company’s equity interests in its
material operating subsidiaries, including Refinadora Plata Guanaceví S.A de
C.V., Minas Bolañitos S.A. de C.V. and Compania Minera del Cubo S.A. de C.V. The
interest rate margin on the Facility ranges from 2.75% to 4.25% over LIBOR based
on the Company’s net debt to EBITDA ratio, where EBITDA is adjusted for gains or
losses on derivative liabilities. The Company agreed to pay a commitment fee of
between 0.69% and 1.05% on undrawn amounts under the facility based on the
Company’s net debt to EBITDA ratio. The Facility is subject to various
qualitative and quantitative covenants, including EBITDA leverage ratio,
interest service coverage ratio and tangible net worth calculation; the Company
is in compliance with all such debt covenants as at June 30, 2013. As of June
30, 2013, the Company had drawn $39.0 million on this facility. Subsequent to
period end, on July 24, 2013, as part of the credit agreement the capacity of
the credit facility was reduced to $50.0 million. With the completion of the El
Cubo re-construction, the Company expects to start reducing the outstanding
balance in the second half of the year dependent on the metal price
environment.
Contingencies
On February 18, 2013, the Mexican tax administration published
temporary regulations on the tax amnesty program enacted in December 2012. Under
the tax amnesty, available until May 31, 2013, taxpayers were able to settle tax
liabilities for years 2006 and prior with forgiveness of up to 80% of the
omitted tax and inflation adjustments and up to 100% of interest and penalties.
Further, interest and penalties on qualified liabilities arising after 2007 will
be eligible for a 100% forgiveness of penalties and interest.
Refinadora Plata Guanaceví SA de CV, a subsidiary of the
Company, received a MXN$63 million (US$4.8 million) assessment on May 7, 2011 by
Mexican fiscal authorities for failure to provide the appropriate support for
certain expense deductions taken in the entity’s 2006 tax return. During the
audit process, the Company retained an international accounting firm and
external counsel to expedite the audit process and to ensure the delivery of the
appropriate documentation. Based on the advice of tax advisors and legal
counsel, it is the Company’s view that it provided the appropriate documentation
and support for the expenses however, the Company estimated a potential tax
exposure of $425,000, plus additional interest and penalties of $460,000. On May
30, 2013, under the tax amnesty program the Company paid $561,000 to settle the
dispute.
Metales Interamericanos S.A. de C.V., a subsidiary of
Endeavour, acquired in the El Cubo transaction received a MXN$68 million (US$5.2
million) assessment on August 24, 2010 by Mexican fiscal authorities for failure
to provide the appropriate support for certain expense deductions in the 2006
tax return. Based on the advice of legal counsel, it is the Company’s view the
tax assessment has no legal merit and an appeals process was initiated in 2010.
On May 30, 2013, under the tax amnesty program the Company paid $682,000 to
settle the dispute.
Minera Santa Cruz y Garibaldi SA de CV, a subsidiary of the
Company, received a MXN$238 million (US$18.3 million) assessment on October 12,
2010 by Mexican fiscal authorities for failure to provide the appropriate
support for certain expense deductions taken in the entity’s 2006 tax return.
During the audit process, the Company retained an international accounting firm and external counsel to expedite
the audit process and to ensure the delivery of the appropriate documentation.
Based on the advice of tax advisors and legal counsel, it is the Company’s view
that it provided the appropriate documentation and support for the expenses and
the tax assessment has no legal merit, however as a result of a detailed review
by the Company of its accounting records and available information to support
the deductions taken, the Company has estimated a potential tax exposure of
$40,000, plus additional interest and penalties of $40,000, for which the
Company has made a provision in the consolidated financial statements. The
Company did not elect to use the tax amnesty and will continue the appeal
process.
25
Capital Requirements
At the beginning of 2013 the Company planned to invest $44.9
million at El Cubo, $21.4 million at Bolañitos and $19.5 million at Guanaceví
for a total of $85.8 million on capital projects in 2013, all which were
anticipated to be covered by the Company’s 2013 cash flow and credit facility.
During Q2, 2013, the precious metal prices dropped significantly, prompting
management to defer $16.3 million in capital expenditures across the three
operations. The capital deferrals should not impact forecasted production in
2013.
The original $44.8 million capital budget at El Cubo was
primarily for rebuilding the El Tajo plant ($23.6 million), mine development and
to purchase new underground mining equipment. The revised capital plan includes
halting the construction of new administrative buildings and modifying other
buildings to accommodate administration, delaying certain equipment purchases
and reducing mine exploration for a total cost reduction of $4.0 million. As of
June 30, 2013, the plant re-build was substantially complete, with $21.6 million
spent. In the first half the Company spent $7.3 million on 5.7 kilometres of
underground development and the purchase of $3.5 million of equipment.
Additional underground development is planned for the remainder of the year;
however management is in the process of assessing various mine plans for
optimization in the current price environment.
The original $21.4 million capital budget at Bolañitos was for
the continued mine development of the veins discovered in 2011 and 2012. The
increased production also requires an additional investment in the tailings dam,
totaling $4.2 million. The revised capital plan decelerates mine development and
mine exploration by $3.5 million and defers equipment purchases by $2.7 million.
As of June 30, 2013, the Company had spent $8.7 million on 4.6 kilometres of
underground development, including two ventilation raises and infill drilling.
The Company spent $2.0 million on small plant projects completing the 2012
expansion and tailings dam and spent $4.8 million on mine equipment to help
facilitate the significant increase in mine output.
The original $19.5 million capital budget at Guanaceví included
$12.2 million for underground development, while $2.4 million will be spent on
the tailings dam to ensure there is sufficient capacity into the future. The
remaining investment was for various equipment purchases and upgrades. The
revised capital plan decelerates mine development and mine exploration by $5.6
million. As of June 30, 2013, 3.5 kilometres of underground development was
completed costing $7.0 million, primarily due to infrastructure costs for
pumping water from the Santa Cruz ore zone. Additionally the mine spent $2.0
million related to the plant and tailings and $1.0 million on various mine
equipment. There is sufficient mine capacity allowing management to put a
significant portion of mine development on hold until the price environment
improves.
Contractual Obligations
The Company had the following contractual obligations at June
30, 2013:
| Payments due by
period (in thousands of dollars) |
|
|
|
|
|
Contractual Obligations |
|
Total |
|
|
Less
than 1 year |
|
|
1 –
3 years |
|
|
3 –
5 years |
|
|
More
than 5 years |
|
| Capital Asset purchases |
$ |
3,899 |
|
$ |
3,899 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
| Operating Lease |
|
1,111 |
|
|
267 |
|
|
548 |
|
|
296 |
|
|
- |
|
| Other Long-Term Liabilities |
|
6,516 |
|
|
- |
|
|
921 |
|
|
5,595 |
|
|
- |
|
| Total |
$ |
11,526 |
|
$ |
4,166 |
|
$ |
1,469 |
|
$ |
5,891 |
|
$ |
- |
|
26
Transactions with Related Parties
The Company shares common administrative services and office
space with Canarc Resource Corp., Caza Gold Corp., and Aztec Metals Corp.
(“Aztec”), who are related party companies by virtue of having Bradford Cooke as
a common director. From time to time, Endeavour incurs third-party costs on
behalf of the related parties which is charged on a full cost recovery basis.
The Company had $208,000 receivable related to administration costs outstanding
as at June 30, 2013 (December 31, 2012 – $136,000).
The Company has previously provided an allowance for amounts
due from Aztec totaling $181,000. The balance had accumulated between 2008 and
2011 and related to use of office space, administrative services and property
taxes paid on behalf of a 2007 property transaction.
During the six months ended June 30, 2013, the Company was
charged $90,000 (June 30, 2012 - $351,000) for legal services by Koffman Kalef
LLP, a firm in which the Company’s Corporate Secretary is a partner. As of June
30, 2013, the Company had a payable outstanding of $7,000 relating to these
legal services (December 31, 2012 - $10,000).
Financial Assets and Liabilities
As at June 30, 2013, the carrying and fair values of
Endeavour’s financial instruments by category were as follows:
| |
|
As
at June 30, 2013 |
|
|
As
at December 31, 2012 |
|
| |
|
Carrying |
|
|
Estimated Fair |
|
|
Carrying |
|
|
Estimated Fair |
|
| |
|
value |
|
|
value |
|
|
value |
|
|
value |
|
| |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
22,309 |
|
|
22,309 |
|
|
18,617 |
|
|
18,617 |
|
| Available for sale securities |
|
1,779 |
|
|
1,779 |
|
|
8,520 |
|
|
8,520 |
|
| Trade receivables |
|
3,581 |
|
|
3,581 |
|
|
- |
|
|
- |
|
| Other receivables |
|
25,841 |
|
|
25,841 |
|
|
20,526 |
|
|
20,526 |
|
| Total financial
assets |
|
53,510 |
|
|
53,510 |
|
|
47,663 |
|
|
47,663 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts payable and accrued liabilities |
|
32,138 |
|
|
32,138 |
|
|
38,485 |
|
|
38,485 |
|
| Revolving credit facility |
|
39,000 |
|
|
39,000 |
|
|
9,000 |
|
|
9,000 |
|
| Contingent liabilities |
|
599 |
|
|
599 |
|
|
8,497 |
|
|
8,497 |
|
| Derivative
liabilities |
|
1,498 |
|
|
1,498 |
|
|
5,336 |
|
|
5,336 |
|
| Total financial liabilities |
|
73,235 |
|
|
73,235 |
|
|
61,318 |
|
|
61,318 |
|
Fair value hierarchy:
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value hierarchy establishes three
levels to classify the inputs to valuation techniques used to measure fair
value. Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities. Level 2 inputs are quoted prices in markets
that are not active, quoted prices for similar assets or liabilities in active
markets, inputs other than quoted prices that are observable for the asset or
liability (for example, interest rate and yield curves observable at commonly
quoted intervals, forward pricing curves used to value currency and commodity
contracts and volatility measurements used to value option contracts), or inputs
that are derived principally from or corroborated by observable market data or
other means. Level 3 inputs are unobservable (supported by no or little market
activity). The fair value hierarchy gives the highest priority to Level 1 inputs
and the lowest priority to Level 3 inputs.
27
Financial assets and liabilities measured at fair value on a
recurring basis include:
| |
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
| As at June 30,
2013 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| Available for sale securities |
|
1,779 |
|
|
1,779 |
|
|
- |
|
|
- |
|
| Trade receivables |
|
3,581 |
|
|
3,581 |
|
|
- |
|
|
- |
|
| Total financial
assets |
|
5,360 |
|
|
5,360 |
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Contingent liabilities |
|
599 |
|
|
- |
|
|
599 |
|
|
- |
|
| Derivative
liabilities |
|
1,498
|
|
|
- |
|
|
1,498
|
|
|
- |
|
| Total financial liabilities |
|
2,097 |
|
|
- |
|
|
2,097 |
|
|
- |
|
Available for sale securities
The Company holds marketable securities classified as Level 1
in the fair value hierarchy and as available for sale financial assets. The fair
value of available for sale investments are determined based on a market
approach reflecting the closing price of each particular security at the
reporting date. The closing price is a quoted market price obtained from the
exchange that is the principal active market for the particular security, being
the market with the greatest volume and level of activity for the assets.
Trade receivables
The trade receivables consist of receivables from provisional
silver and gold sales from the Bolañitos and El Cubo mine. The fair value of
receivables arising from concentrate sales contracts that contain provisional
pricing mechanisms is determined using the appropriate quoted closing price on
the measurement date from the exchange that is the principal active market for
the particular metal. As such, these receivables, which meet the definition of
an embedded derivative, are classified within Level 1 of the fair value
hierarchy.
Contingent liability
On July 13, 2012 the Company completed the acquisition of 100%
of the issued and outstanding shares of Mexgold Resources Inc. (“Mexgold”),
thereby acquiring the El Cubo mine. The seller is entitled to receive up to an
additional $50 million in cash payments from the Company upon the occurrence of
certain events as follows:
| |
i) |
$20 million if at any time during the three years
following the acquisition date the Company renews or extends the Las
Torres lease, other than a one-time three month extension after the
current lease expires; |
| |
|
|
| |
ii) |
$10 million upon the simple average of the daily London
Metals Exchange closing prices for gold exceeding $1,900.00 per ounce for
a period of 12 consecutive months at any time during the three-year period
immediately following the acquisition date; |
| |
|
|
| |
iii) |
$10 million upon the simple average of the daily London
Metals Exchange closing prices for gold exceeding $2,000.00 per ounce for
a period of 12 consecutive months at any time during the three-year period
immediately following the acquisition date; and |
| |
|
|
| |
iv) |
$10 million upon the simple average of the daily London
Metals Exchange closing prices for gold exceeding $2,100.00 per ounce for
a period of 12 consecutive months at any time during the three-year period
immediately following the acquisition date. |
The contingent consideration related to the Las Torres lease
was valued based on factoring the probability of the Company negotiating a lease
extension. Management determined the probability of extending the lease to be
highly unlikely, resulting in a Nil value assigned to the liability at
acquisition.
28
The contingent consideration related to metal price targets is
considered a derivative, is recognized at fair value at period end and is
classified as Level 2 in the fair value hierarchy. The contingent consideration
based on the performance of gold prices was valued using a Monte Carlo
simulation. Monte Carlo simulation approaches are a class of computational
algorithms that rely on repeated random sampling to compute their results. Gold
price paths were developed using a mathematical formula based on a stochastic
process with mean reversion to a long term trend line. As of June 30, 2013, the
fair value of the contingent consideration was estimated to be $599 (December
31, 2012 - $8,497).
Derivative liability
Equity offerings were completed in previous periods whereby
warrants were issued with exercise prices denominated in Canadian dollars. As
the warrants have an exercise price denominated in a currency which is different
from the functional currency of the Company (US dollar), the warrants are
treated as a financial liability. The Company’s share purchase warrants are
classified and accounted for as a financial liability at fair value with changes
in fair value recognized in net earnings. The warrant derivative liability is
classified as Level 2 in the fair value hierarchy. The publicly traded warrants
and warrants with similar characteristics were valued using the quoted market
price as of exercise or at period end, from the market with the greatest volume
and level of activity. For the non-publicly traded warrants, the Company uses
the Black-Scholes option pricing model to estimate the fair value of the
Canadian dollar denominated warrants. All warrants outstanding at June 30, 2013
will expire in February 2014.
| Balance at December 31, 2011 |
$ |
13,130 |
|
| Exercise of financial liability |
|
(3,151 |
) |
| Mark to market loss (gain) |
|
(143 |
) |
| Balance at March 31, 2012 |
|
9,836 |
|
| Exercise of financial liability |
|
(2,715 |
) |
| Mark to market
loss (gain) |
|
(1,785 |
) |
| Balance at December 31, 2012 |
$ |
5,336 |
|
| Exercise of financial liability |
|
- |
|
| Mark to market loss (gain) |
|
(3,838 |
) |
| Balance at June
30, 2013 |
$ |
1,498 |
|
| Assumptions used for Black-Scholes estimate for warrant
derivative liability |
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
June 30, 2013 |
|
|
Dec. 31, 2012 |
|
| Outstanding warrants |
|
902,098 |
|
|
902,098 |
|
| Weighted average fair value of warrants at
period end |
|
$1.66 |
|
|
$5.92 |
|
| Risk-free interest rate |
|
1.23% |
|
|
1.12% |
|
| Expected dividend yield |
|
0% |
|
|
0% |
|
| Expected stock price
volatility |
|
57% |
|
|
46% |
|
| Expected warrant life in years |
|
0.7
|
|
|
1.2
|
|
Black-Scholes pricing models require the input of highly
subjective assumptions. Volatility was estimated based on average daily
volatility based on historical share price observations over the expected term
of the warrant grant.
Financial Instrument Risk Exposure and Risk Management
The Company is exposed in varying degrees to a variety of
financial instrument related risks. The Board approves and monitors the risk
management process. The types of risk exposure and the way in which such
exposure is managed is provided as follows:
Credit Risk
The Company is exposed to credit risk on its bank accounts,
money market investments, notes receivable and value added tax receivable
balance. Credit risk exposure on bank accounts and short term investments is
limited through maintaining the Company’s balances with high-credit quality
financial institutions, maintaining investment policies, assessing institutional exposure and continual discussion with
external advisors. The notes receivable credit risk exposure is limited by
continual discussion with external advisors. IVA receivables are generated on
the purchase of supplies and services to produce silver which are refundable
from the Mexican government.
29
Liquidity Risk
The Company ensures that there is sufficient capital in order
to meet short term business requirements. The Company’s policy is to invest cash
at floating rates of interest, while cash reserves are to be maintained in cash
equivalents in order to maintain liquidity after taking into account the
Company’s holdings of cash equivalents, money market investments, marketable
securities, receivables and available cash under the revolving credit facility.
The Company believes that these sources, operating cash flow and its policies
will be sufficient to cover the likely short term cash requirements and
commitments.
Market Risk
The significant market risk exposures to which the Company is
exposed are foreign currency risk, interest rate risk, and commodity price
risk.
Foreign Currency Risk – The Company’s operations in
Mexico and Canada make it subject to foreign currency fluctuations. Certain of
the Company’s operating expenses are incurred in Mexican pesos and Canadian
dollars, therefore the fluctuation of the US dollar in relation to these
currencies will consequently have an impact upon the profitability of the
Company and may also affect the value of the Company’s assets and the amount of
shareholders’ equity. The Company has not entered into any agreements or
purchased any instruments to hedge possible currency risks.
Interest Rate Risk – In respect of financial assets, the
Company’s policy is to invest cash at floating rates of interest and cash
reserves are to be maintained in cash equivalents in order to maintain
liquidity. Fluctuations in interest rates impact the value of cash equivalents.
The revolving credit facility is subject to interest rate risk as amounts
outstanding are subject to charges at a LIBOR-based rate (plus 2.75% to 4.25%
depending on financial and operating measures) payable according to the quoted
rate term. The interest rate charge for the year was approximately 3.2% . As at
December 31, 2012, with other variables unchanged, a 100% change in the interest
rate would be immaterial to the earnings for the year.
Commodity Price Risk – Gold and silver prices have
historically fluctuated significantly and are affected by numerous factors
outside of the Company’s control, including, but not limited to , industrial and
retail demand, central bank lending, forward sales by producers and speculators,
levels of worldwide production, short-term changes in supply and demand because
of speculative hedging activities and certain other factors. The Company has not
engaged in any hedging activities, other than short term metal derivative
transactions less than 90 days, to reduce its exposure to commodity price risk.
Equity Price Risk – Fair values in the Company’s
derivative liabilities related to the outstanding warrants are subject to equity
price risk. Changes in the market value of the Company’s common shares may have
a material effect on the fair value of the Company’s warrants and on net income.
Outstanding Share Data
As of August 1, 2013, the Company had the following securities
issued and outstanding:
- 99,741,010 common shares
- 5,701,550 stock options with a weighted average exercise price of CAN$5.26
per share expiring between January 1, 2013 and May 26, 2018.
- 1,249,597 share purchase warrants with a weighted average exercise price
of CAN$1.94 per share expiring February 26, 2014.
The Company considers the items included in the consolidated
statement of shareholders’ equity as capital. The Company’s objective when
managing capital is to safeguard its ability to continue as a going concern so
that it can continue to provide returns for shareholders and benefits for
other stakeholders. The Company manages the capital structure and makes
adjustments to it in light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or adjust the
capital structure, the Company may issue new shares through private placements,
prospectus offerings, convertible debentures, asset acquisitions or return
capital to shareholders. The Company is not subject to externally imposed
capital requirements.
30
CHANGES IN ACCOUNTING POLICIES & CRITICAL
ACCOUNTING ESTIMATES
Changes in Accounting Policies
The Company has adopted the following new standards, along with
any consequential amendments, effective January 1, 2013. These changes were made
in accordance with the applicable transitional provisions.
Several other new standards and amendments came into effect on
January 1, 2013; however, they do not impact the condensed consolidated interim
financial statements and are not anticipated to impact the Company’s annual
consolidated financial statements.
The nature and impact of each new standard and amendment
applicable to the Company are described below:
IAS 1 Presentation of items of other comprehensive
income (Amendment)
The amendments to IAS 1 introduce a grouping of items
presented in other comprehensive income (OCI). Items that could be reclassified
to profit or loss at a future point in time (e.g. net gain or loss on
available-for-sale financial assets) shall be presented separately from items
that will never be reclassified. This amendment has no impact on the Company’s
presentation as the components of OCI pertain only to net gains or losses on
marketable securities classified as available-for-sale financial assets.
IFRS 10 Consolidated Financial Statements
In May
2011, the IASB issued IFRS 10 Consolidated Financial Statements to replace IAS
27 Consolidated and Separate Financial Statements and SIC 12 Consolidation –
Special Purpose Entities. The new consolidation standard changes the definition
of control so that the same criteria apply to all entities, both operating and
special purpose entities, to determine control. The revised definition focuses
on the need to have both power and variable returns before control is present.
The adoption of IFRS 10 did not result in any change in the consolidation status
of any of the Company’s subsidiaries or investees.
IFRS 11 Joint Arrangements
In May 2011, the IASB
issued IFRS 11 Joint Arrangements to replace IAS 31, Interests in Joint
Ventures. The new standard defines two types of arrangements: Joint Operations
and Joint Ventures. The focus of the standard is to reflect the rights and
obligations of the parties involved in the joint arrangement, regardless of
whether the joint arrangement operates through a separate legal entity. Joint
arrangements that are classified as joint ventures are accounted for using the
equity method of accounting. Joint arrangements that are classified as joint
operations require the venturers to recognize the individual assets,
liabilities, revenues and expenses to which they have legal rights or are
responsible. The adoption of IFRS 11 did not result in any changes to the
Company’s condensed consolidated interim financial statements.
IFRS 12 Disclosure of Interests in Other Entities
In
May 2011, the IASB issued IFRS 12 Disclosure of Interests in Other Entities to
create a comprehensive disclosure standard to address the requirements for
subsidiaries, joint arrangements and associates including the reporting entity’s
involvement with other entities. It also includes the requirements for
unconsolidated structured entities (i.e. special purpose entities). Endeavour
has adopted IFRS 12 effective January 1, 2013. The adoption of IFRS 12 will
result in incremental disclosures in the Company’s annual consolidated financial
statements.
IFRS 13 Fair Value Measurement
In May 2011, the IASB
issued IFRS 13 Fair Value Measurement as a single source of guidance for all
fair value measurements required by IFRS to reduce the complexity and improve
consistency across its application. The standard provides a definition of fair
value and guidance on how to measure fair value as well as a requirement for
enhanced disclosures. Endeavour has adopted IFRS 13 on a prospective basis.
31
IFRS 13 also requires specific disclosures on fair values, some
of which replace existing disclosure requirements in other standards, including
IFRS 7 Financial Instruments: Disclosures. Some of these disclosures are
specifically required by IAS 34 for financial instruments, thereby affecting the
condensed consolidated interim financial statements.
Recently released IFRS accounting standards
Changes in accounting standards
A number of new
standards, amendments to standards and interpretations, are not yet effective
for the year ending December 31, 2013, and have not been applied in preparing
these consolidated financial statements. The following pronouncements are those
that the Company considers most significant and are not intended to be a
complete list of new pronouncements that may affect the financial statements.
IFRS 9 Financial Instruments
In November 2009, the
IASB issued IFRS 9 Financial Instruments as the first step in its project to
replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9
retains but simplifies the mixed measurement model and establishes two primary
measurement categories for financial assets: amortized cost and fair value. The
basis of classification depends on an entity’s business model and the
contractual cash flows of the financial asset. Classification is made at the
time the financial asset is initially recognized, namely when the entity becomes
a party to the contractual provisions of the instrument.
IFRS 9 amends some of the requirements of IFRS 7 Financial
Instruments: Disclosures, including added disclosures about investments in
equity instruments measured at fair value in OCI, and guidance on the
measurement of financial liabilities and de-recognition of financial
instruments. In December 2011, the IASB issued an amendment that adjusted the
mandatory effective date of IFRS 9 from January 1, 2013 to January 1, 2015.
Endeavour is currently assessing the impact of adopting IFRS 9 on Endeavour’s
consolidated financial statements, including the applicability of early
adoption.
Critical Accounting Estimates
The preparation of financial statements requires the Company to
make estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant areas requiring the use of management judgement
relate to the determination of mineralized reserves, plant and equipment lives,
estimating the fair values of financial instruments and derivatives, estimating
the fair value of convertible debenture components, impairment of long-lived
assets, reclamation and rehabilitation provisions, recognition of deferred tax
assets, and assumptions used in determining the fair value of non-cash
share-based compensation.
Mineralized reserves and impairment of long lived assets
Management periodically reviews the carrying value of its mineral
properties with internal and external mining related professionals. A decision
to abandon, reduce or expand a specific project is based upon many factors
including general and specific assessments of reserves, anticipated future
prices, anticipated future costs of exploring, developing and operating a
producing mine, expiration term and ongoing expense of maintaining leased
mineral properties and the period for properties with unproven reserves.
However, properties which have not demonstrated suitable mineral concentrations
at the conclusion of each phase of an exploration program are re-evaluated to
determine if future exploration is warranted and their carrying values are
appropriate.
If an area of interest is abandoned or it is determined that
its carrying value cannot be supported by future production or sale, the related
costs are charged against operations in the period of abandonment or
determination that the carrying value exceeds its fair value. The amounts
recorded as mineral properties represent costs incurred to date and do not
necessarily reflect present or future values.
Provision for reclamation and rehabilitation
Reclamation and closure costs have been estimated based on the Company’s
interpretation of current regulatory requirements, however changes in regulatory
requirements and new information may result in revisions to estimates.
32
The Company recognized the present value of liabilities for
reclamation and closure costs in the period in which they are incurred. These
obligations are measured initially at fair value and the resulting costs
capitalized to the carrying value of the related asset. In subsequent periods,
the liability is adjusted for any changes in the amount or timing and for the
accretion of discounted underlying future cash flows. The capitalized asset
retirement cost is amortized to operations over the life of the asset.
Deferred income taxes
The Company follows the asset
and liability method of accounting for income taxes. Under this method, future
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and losses
carried forward. Future tax assets and liabilities are measured using
substantively enacted or enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. The effect on future tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the substantive
enactment date. Future tax assets are recognized to the extent that they are
considered more likely than not to be realized.
The future income tax provision also incorporates management’s
estimates regarding the utilization of tax loss carry forwards, which are
dependent on future operating performance and transactions.
Share-based compensation
The Company has a share
option plan and records all share-based compensation for options using the fair
value method. The fair value of each option award is estimated on the date of
the grant using the Black-Scholes option pricing model, with expected volatility
based on historical volatility of Endeavour’s stock. The Company uses historical
data to estimate the term of the option and the risk free rate for the expected
term of the option is based on the Government of Canada yield curve in effect at
the time of the grant.
Warrant derivative liability
Equity offerings were
completed in previous periods whereby warrants were issued with exercise prices
denominated in Canadian dollars. As the warrants have an exercise price
denominated in a currency which is different to the functional currency of the
Company (US dollar), the warrants are treated as a financial liability. The
Company’s share purchase warrants are classified and accounted for as a
financial liability at fair value with adjustments recognized through net
earnings. The publicly traded warrants and warrants with similar characteristics
were valued using the quoted market price as of exercise or at period end. For
the non-publicly traded warrants, the Company uses Black-Scholes option pricing
model to determine the fair value of the Canadian dollar denominated warrants.
Business Combinations
On the acquisition of a
business, the acquisition method of accounting is used, whereby the purchase
consideration is allocated to the identifiable assets, liabilities and
contingent liabilities (identifiable net assets) on the basis of fair value at
the date of acquisition. When the cost of acquisition exceeds the fair values
attributable to the Company’s share of identifiable net assets, the difference
is treated as purchased goodwill, which is not amortized but is reviewed for
impairment annually or more frequently where there is an indication of
impairment. If the fair value attributable to the Company’s share of the
identifiable net assets exceeds the cost of acquisition, the difference is
immediately recognized in the income statement. Incremental costs related to
acquisitions are expensed as incurred.
Determination of the fair value of assets acquired and
liabilities assumed and the resulting goodwill, if any, requires that management
make estimates based on the information provided by the acquiree. Changes to the
provisional values of assets acquired and liabilities assumed, deferred income
taxes and resulting goodwill, if any, will be adjusted when the final
measurements are determined (within one year of acquisition date).
When purchase consideration is contingent on future events, the
initial cost of the acquisition recorded includes an estimate of the fair value
of the contingent amounts expected to be payable in the future. When the fair
value of contingent consideration as at the date of acquisition is finalized,
before the end of the 12 month measurement period, the adjustment is allocated
to the identifiable assets acquired and liabilities assumed. Changes to the
estimated fair value of contingent consideration subsequent to the acquisition
date are recorded in the consolidated statement of comprehensive income.
33
CONTROLS AND PROCEDURES
Endeavour’s management, including the Chief Executive Officer and
Chief Financial Officer, has evaluated the Company’s internal controls over
financial reporting to determine whether any changes occurred during the period
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal controls over financial reporting. During the six months
ended June 30, 2013 there have been no changes that occurred that have
materially affected, or are reasonably likely to materially affect, Endeavour’s
internal controls over financial reporting.
34
