Silver Penny Stock Could Break $10.00 Shortly

When it comes to commodities such as silver, it’s extremely difficult for anyone to predict the future price. Junior mining companies that are involved in the production of silver can only focus on operational efficiencies and avoiding potential pitfalls.

If an investor is long-term bullish on silver prices, it makes logical sense to look at silver stocks, especially the junior mining companies. Junior mining companies in silver tend to overshoot to the upside and downside, so an opportune investor who is patient can take advantage of these swings. One of the more interesting penny stocks involved in silver is Endeavour Silver Corp. (NYSE/EXK; TSX/EDR).

Endeavour is one of several junior mining companies extracting silver primarily in Mexico. This company is relatively young, having formed in 2004; however, it’s extremely well run. The company has had seven consecutive years of increases in silver production. (Source: Endeavour Silver Corp. web site, last accessed November 26, 2012.)

Junior mining companies with proven reserves in silver and the potential for increases in both reserves and earnings over the next few years are quite interesting to me. Endeavour reported financial results for third quarter 2012, which resulted in revenue of $51.9 million, an increase of 34% from the prior year’s quarter. The firm produced 1,137,883 ounces of silver, an increase of 33% from the prior year’s quarter, and 11,754 ounces of gold, an increase of 139% from the prior year’s quarter. (Source: “Endeavour Silver Reports Third Quarter 2012 Financial Results,” Endeavour Silver Corp. press release, November 6, 2012.)

The quarterly financial results also show that realized silver and gold prices were far below current levels. For the third quarter 2012, Endeavour Silver had realized prices for silver at $28.72 per ounce and $1,637 per ounce of gold. The current price of silver is approximately $34.00 per ounce, while the price of gold is approximately $1,750 an ounce. This improvement in the spot price of both commodities will be beneficial to many junior mining companies, including Endeavour Silver, when reporting this fourth quarter’s results in the new year.

One of the areas to pay attention to when conducting due diligence on silver junior mining companies is the cost per ounce of extracting the commodity. For the third quarter, Endeavour Silver reported a decline in the cash cost of seven percent, to $4.70 per ounce of silver, net of gold credits. Whenever you have junior mining companies able to decrease costs, while having the spot price continue to increase, this should be a positive over the coming quarter if they are able to maintain the cost structure.

When looking at junior mining companies involved in a volatile commodity like silver, it helps to have a long-term view. Junior mining companies have significant potential for capital appreciation if the underlying commodity, like silver, resumes its upward bias. Considering the level of money printing worldwide, I think higher silver prices are quite possible over the long term. While trading in junior mining companies that extract silver can be potentially profitable, one must have a thorough and comfortable understanding of where the commodity is going, and have a long enough time horizon to handle the inherent volatility with junior mining companies.

Chart courtesy of www.StockCharts.com

Endeavour Silver peaked in the summer of 2011, and since then, it has been consolidating the massive gains from 2010. The three-year weekly chart above shows the huge move from approximately $3.00 in early 2010 to just under $13.00 in 2011. Clearly, this level of appreciation cannot continue at this rapid pace. Since then, the stock has been consolidating and appears to be building momentum to exceed the $10.00 level. This $10.00 resistance point will be crucial for the stock to be able to retest its multiyear highs.

With the underlying price of silver moving up in recent weeks, if junior mining companies, such as Endeavour Silver, can continue to maintain a low cash-cost per ounce, while also preventing operational issues, they should see strong fourth-quarter results. We still need to see additional capital flowing into these junior mining companies so that the charts could become technically bullish. In the meantime, I would suggest adding Endeavour Silver to one’s watch list.