LONDON (Mineweb) –

Followers of the gold and silver junior to mid-tier sectors will by now be well aware of the recent deal between Endeavour Silver and AuRico Gold whereby the former is to purchase the latter’s El Cubo silver/gold mine near Guanajuato in Mexico for around $200-250 million. From Endeavour’s point of view the addition of a third silver mine to its operating portfolio brings it very much from being a high-end junior silver producer into the mid tier category, on its avowed route to become a plus 10 million oz/year silver miner, while for AuRico the divestment brings it capital for a mining operation which falls outside its main operational focus and which it has, perhaps, let slip a little through being unable to devote sufficient management time to what has been a bit of an anomaly among its mining operations.

As Endeavour’s chairman and CEO, Bradford Cooke pointed out to Mineweb in London recently, Endeavour was the obvious company to buy El Cubo as it already has one of its own major operations nearby, and not only can it bring its expertise from developing this existing Guanajuato mining property into play at El Cubo, but the proximity of the two mines means there is also considerable scope for operational synergies and for cutting costs from economies of scale in the area. Indeed Cooke is extremely enthusiastic over what the acquisition will mean for the future of the company.

From AuRico Gold’s point of view El Cubo is not a core asset, is not a particularly efficient operation and is a depreciating asset as far as its existing reserve is concerned. The company nowadays has a policy of focussing on large, low cost gold assets and El Cubo just does not fit this bill. Endeavour however sees El Cubo as offering great exploration opportunities – particularly in the largely unexplored to date southern section of the property – and notes that productivity at the mine is far poorer than at its existing Guanajuato operations which gives it great scope for cutting costs. El Cubo also has a small leach plant which can be expanded to treat concentrates from the Guanajuato operations which currently are trucked 1,000 km to its Guancevi leach plant to the north.

Under the agreed transaction with AuRico, Endeavour will pay the latter $200 million in cash or a mixture of cash and stock to that value, and there is an additional $50 million of cash payments which could fall due over the next three years should certain gold price targets be reached. The deal is expected to close in mid-June.

But it is the exploration potential, and the prospect of bringing El Cubo’s unit costs down to those being achieved at the nearby Guanajuato mine which has extremely similar mining conditions which is perhaps uppermost in Endeavour’s thinking. Adding El Cubo production to that from Guanajuato and Guancevi would have the potential to bring Endeavour’s silver equivalent output up to well above 6 million ounces a year next year and substantially increases its land holdings and exploration potential in Mexico.

The Endeavour/AuRico transaction also brings Endeavour what it sees as another great potential silver-gold exploration project in the Guadalupe y Calvo prospect in southern Chihuahua state, which it sees as possibly the key to developing a fourth Mexican silver mine. The property contains two major veins up to 60 m wide and 6 km long which it describes as classic epithermal orebodies. It is said to fit well with Endeavour’s growth strategy as it is located in an historic mining district and has good exploration upside to increase silver-gold resources. Endeavour plans to further explore Guadalupe y Calvo with additional drilling before re-assessing its mining potential.

AuRico’s initial PEA on the property suggested a possible combined open pit and underground mining operation producing an average 1.9 million ounces silver equivalent a year for the first 8 years of production at an initial capital cost of $85.6 million. Obviously Endeavour will rework these figures and add further exploration data before any decisions to take this project forward are made – but it does appear to have great potential.

Endeavour continues in a growth phase looking to an eighth consecutive year of growing revenues, cash flow, production and reserves and resources, while it continues to see falling cash costs and a consequent growing profit margin. Cooke noted, however, that the initial impact of the El Cubo transaction would be to raise cash costs because of the latter’s higher cost structure, but expects to bring these back down as synergies and operating efficiencies come into play.

Endeavour is also looking to expand its Guanajuato mine production by 60% to1,600 tonne/day and at Guancevi 20% to 1,200 tonne/day so remains very much in the growth phase. At El Cubo it is already planning to expand mine output 33% to 1,600 tonne/day and targets increasing ore grade to the mill by a massive 50% through substantially reducing dilution.

Endeavour sees its annual silver production without El Cubo rising to 4.3 million ounces this year, and gold output of 26,000 ounces. Adding a full year of El Cubo output into the equation should add around another1 million ounces of silver and nearly 20,000 ounces of gold. At this rate of growth it shouldn’t be too many years before Endeavour achieves its coveted ‘major’ status in the silver mining sector.