SAN JOSE (SILVERAXIS.com) -- Endeavour Mining Capital [TSX:EDV], the self-proclaimed merchant bank to the global natural resources sector, might have just issued a major warning to natural resource investors by announcing plans to buy back up to 10% of its own shares over the next year. This development could be especially alarming to seasoned shareholders who realize that share buyback programs are typically employed in mature industries in which the prospects for organic or merger-related earnings growth are limited. Does Endeavour really think that earnings growth in natural resources is almost over?
Frank Holmes, Chairman of Endeavour and CEO of U.S. Global Investors, justified the surprising plans by explaining that Endeavour's stock price is just too darned cheap and therefore may represent the best value in the sector. Apparently neither Endeavour's business model nor the growing value of its net assets, comprised mostly of equity stakes in various exploration and mining companies, are fully appreciated by investors.
What we find interesting about this move by Endeavour besides the fact that Holmes can't seem to find any attractively-priced natural resource stocks to invest in, is the fact that Endeavour's net asset value (NAV) of $6.98 Canadian on February 28, 2006 doesn't seem to be that far off from its closing share price on the same day of $5.80 Canadian. After all, Endeavour publishes NAV figures only on a delayed basis once per month, forcing investors to guess at interim NAV amounts. If the true reason for the buyback is that investors have been unresponsive to a persistent discount to NAV, perhaps Endeavour could have attempted to publish a more frequent, even daily, NAV.
Buying back shares presupposes that the NAV discount exists because there is not enough investment interest in the company or because earnings performance is too poor. But average daily volume figures over 100,000 shares and the just reported fully diluted PE ratio of 2 - that's right, T-W-O - quickly dispel these notions.
Another thing that does not add up is the fact that buying back 10% of shares will cost Endeavour $16.6 million Canadian using the share closing price on the date of announcement, yet the most recent interim financial report as of February 28 indicates that Endeavour had a little over $13 million Canadian in the bank. So Endeavour will actually have to liquidate a portion of its investment portfolio in order to fund the buyback program.
Reviewing some of Holmes' recent public statements reveals a hint of concern that gold, silver and uranium based equities might relinquish sector leadership over the next year. What will take their place is unclear not only to us but Endeavour as well.
If Endeavour's latest move does in fact portend a downturn in the mining sector, silver investors may have the most to lose because silver-based investments typically enjoy the greatest upward volatility but also suffer the greatest downward mobility. Add in the fact that silver companies tend to trade at a relatively high multiple to the value of their net assets (apparently unlike Endeavour) and we have some cause for concern. We hope that Holmes and his team are wrong but it might pay to follow their telegraphed advice with at least a portion of our own portfolios.
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