Minera Pitarrilla S.A. de C.V. (EDR) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to Endeavour Silver's conference call and webcast to discuss its acquisition of the Pitarrilla project. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Trish Moran, Interim Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us today for today's announcement. Before we get started, I would ask everyone to view Slides 2 and 3 of our Pitarrilla acquisition presentation to view our cautionary language regarding forward-looking statements and other important disclaimers. On Slide 3, in particular, I would like to point out the language around historical resources. It highlights the fact that Pitarrilla's resources must be referred to by Endeavour Silver as historical because the resource estimate predates the acquisition. Our slide deck is available on our new website at edrsilver.com. To provide you with an overview of the acquisition, on the call today is Dan Dickson, Endeavour Silver's CEO; and Dale Mah, our VP, Corporate Development. They will be making formal remarks. And as well, we have with us today Don Gray, our COO; and Christine West, our CFO. Following their remarks, we will open the call for questions. And now over to Dan.

Thank you, Trish, and hello, everyone. We'll move into the presentation to Slide 4, and I will move through the presentation as we go and speak through the presentation. But we're excited about today. Today marks another key milestone for Endeavour. We are very pleased to announce that we signed a definitive agreement to acquire the Pitarrilla project from SSR Mining. We were one of the last few primary silver companies and Pitarrilla is one of the largest undeveloped silver deposits in the world. There being comprehensive work done by SSR to advance the project. And ultimately, as they rationalize their portfolio, it became an opportunity for us. This acquisition is an excellent fit for us, and we believe Pitarrilla has the potential to provide Endeavour shareholders with another opportunity for long-term value creation. Moving to Slide 5. Pitarrilla has a historic M&I resource of 525 million ounces of silver, grading close to 100 grams per tonne, plus material amounts of lead and zinc. To put this into context, Endeavour's current mineral reserve base is 86 million ounces of silver equivalent with M&I resources of 44 million ounces of silver equivalent, gold being our equivalent. A big gap. As Trish noted, we are treating this resource as a historical resource under 43-101 guidelines. We have a lot of work to do to advance this project and it starts by defining the current 43-101 reserves. Over the next couple of years, Pitarrilla will be a major focus for our exploration team. In terms of value for our shareholders, Pitarrilla, together with Terronera and Parral, will form the key cornerstones of our long-term growth profile. On its own, we believe Pitarrilla will be accretive on a silver equivalent resource per share basis, provide optionality in a rising silver market and help us maintain high exposure to silver. Slide 6 outlines the details of our transaction. As released, we have agreed to acquire all the outstanding shares of a subsidiary of SSR that holds the Pitarrilla concessions, permits and infrastructure for the project. The $70 million purchase price is comprised of $35 million in Endeavour common shares and $35 million in either cash or shares at the election of SSR and agreed to by Endeavour in the case of shares. At the end of the third quarter, we reported more than $100 million in cash and nearly $130 million in working capital, which doesn't include the fair market value of the bullion we accumulated and held at cost. On closing, on a pro forma basis, SSR will own less than 10% of our company if the total consideration was paid in shares. SSR will also receive a 1.25% NSR royalty, where we retain the right to match any offers. The transaction, which is expected to close in the first half of the year, is conditional upon receiving approvals from the TSX, the New York Stock Exchange and the Mexican Federal Economic Competition Commission. Turning to Slide 7, Pitarrilla is located in Durango State, which has a long history of mining and known as a mining-friendly jurisdiction, with several other operating mines, including our Guanaceví mine. Pitarrilla is well situated approximately 160 kilometers north of Durango City, where Endeavour's exploration office and team resides. It's easily accessible with excellent infrastructure, including access to the power grid. A number of key permits are already in place for the underground mining and development, including permits for water use and discharge, general use of explosives and change of soil use. As well, underground mining and development are permitted under the Environmental Impact Statement. While SSR categorized it as a development asset, we are viewing it as an advanced exploration project while we define a current resource and conduct comprehensive verification work over the year. Now over to Dale Mah, our VP of Corporate Development, to give our listeners an overview of the potential of Pitarrilla. Dale?

Thanks, Dan. So just going ahead to Slide 8 now. Before we talk about rocks, I think it's pretty important to understand the history of Pitarrilla. But first off, just congratulations to the SSR team. What they found here in 2002 is, in my view, a world-class deposit. Because it was a grassroots discovery stake by SSR, which is important to point out, since we acquired it unencumbered, that means essentially, there's no streaming agreements, no royalties, other one that we just granted. There's no previous mining, no tailings liabilities, and it's just a very, very clean asset. And in the discovery, there's been over $140 million spent and over 227,000 meters of drilling. All those drilling kind of results in a very well-invested deposit model. So not trying to get too technical, geologically speaking, Pitarrilla, it's an intermediate soil creation at the thermal system. So on Slide 8 there, you can see on the right-hand side of the slide. The cross-section shows the main rock type that are present. The blue rock down at the bottom, those are the marine sediments. Above that is the green that's labeled conglomerate, so that is the most important rock type. And overlying that, there's shades of oranges and yellows, and those are just kind of more recent volcanic rocks. So essentially, what's happening here is that depth, you can see those 3 near vertical structures in that red polygon, those there are the feeder vein that brought mineralization up from the deck. As the fluids encounter the kind of the porous permeable conglomerate layer, the mineralization spreads out. So what we're seeing there is the massive sulfides and strata-bound replacement mineralization. So this horizon, conglomerate horizon is typically 25 to 65 meters high and can be up to full 400 meters of lateral extent. It was the highest-grade portion of the deposit, which was a focus of SSR's 2009 underground PFS. On to the next slide, Slide 9. So on the left-hand side of the slide, you can see the structures again, they extend all the way to surface. As we cross the volcanics, mineralization becomes a bit more disseminated, but they're all vertically extensive pavements with stockworks. So the reports note that mineralization does extend all the way to surface, as you can see by the drill traces in there. So -- and again, on the right-hand side, that's the aerial view. This shows the surrounding area. The Pitarrilla's historic resource estimates as in the center of the map, inside that black oval, is approximately 1.5 or 1.3 kilometers by 600 meters. So you can clearly see the exploration potential in the area. There's at least probably 6 areas that are around it that SSR discovered and drilled and discovered mineralization. So Javelina Creek, for example, that's up in the upper right. Drilling back in early 2000 that hit a vessel -- or one of the vessels there was 77-meter interception of 110 grams per tonne silver. And on the other side at port of Colorado have returned about 60 meters at 130 grams per tonne of silver. And then on to the next, Slide 10. So this gives us a kind of approximate timeline. So moving forward after the transaction closes, our focus will be on confirming this historic resource and developing some drill targets. So we fully anticipate that by the end of the year, we're going to have a current mineral resource estimate that will lead to an economic analysis. We're not sure what that's going to look like at this point, but it's safe to say we're going to evaluate all options, whether it's open pit, underground. And we'll just see whatever makes the most sense for the company. So now, back to you, Dan.

Thanks, Dale. Turning to our last slide. Obviously, we're very excited today. Pitarrilla is a world-class asset and a world-class deposit, and we think it's going to fit really well with ourselves. And over the last 3 years, we've developed an attractive portfolio. In Mexico, we have 2 production assets, Guanaceví and Bolañitos, each performed very well last year and exceeded the upper end of our production guidance as we announced earlier this week. Our development project, Terronera is advancing. Within the next couple of months, we expect to receive committed financing followed by Board approval to proceed with construction. And we have Parral, a very exciting exploration project in Chihuahua State, where we've defined over 40 million ounces of silver, and we've resumed drilling there in 2021 with a lot of success, ultimately advancing towards a preliminary economic assessment. We also recently fired the Briner Gold project in advanced stage exploration property in Nevada, and we're advancing our early exploration properties in Chile. This acquisition of Pitarrilla further enhances our development pipeline as we focus on organically growing our current asset resource base. Our exploration team have a phenomenal track record in growing our resources through the drill bit, and we expect this to continue. Pitarrilla, together with Terronera and Parral, will form the key cornerstones of our long-term growth profile. Pitarrilla is an excellent addition and has the potential to accelerate our vision to become a premier senior silver producer. So we've given a lot of information here to digest for our listeners in quite a short time. I think it's best to open up for questions. Operator?

[Operator Instructions] The first question comes from Heiko Ihle with H.C. Wainwright.

You've hinted this a little bit earlier on the call, but walk us through the geopolitical factors that you see in Durango, please. I mean, in general, the state seems to be quite positive for mining. There's obviously skilled labor. You know the state very well. But maybe just a bit more granularity. Do you -- have you talked to local government? What's the community support at site like? I mean, I've obviously never been to the site, but what are you seeing on the ground?

Yes. Durango is one of the better states from a mining jurisdiction in Mexico, and Mexico itself as a country is a great jurisdiction for mining. The long history of mining in Durango, there's a well-trained workforce throughout Durango's number of assets that are operating. And ultimately, SSR had done a great job in the community and working with initiatives with the group. From a government level standpoint, we've had nothing but positive communication with the governments with regards to Guanaceví. We haven't touched base, obviously, due to confidential information. But our experience in Durango is things will go relatively smoothly. There's always things that need to be worked through and challenges, but that's what we do as a mining company. As far as infrastructure in the state of Durango, it's easy to get to. We do have our exploration office in Durango. We do have our exploration team based out of Durango. So being only 160 kilometers, we've obviously sent out our exploration team. We're excited about it. Looked to know all those items of concerns from a geopolitical standpoint in our due diligence leading up to this acquisition, and we're very comfortable being in that state.

You did a wonderful job. Talking about due diligence leading up to my next question. How was the purchase price established? Were internal models built? Was it just $1 per ounce? Just -- I mean, I don't know how much you can discuss in a public setting like this. But purely out of curiosity, how exactly was this valued on your end?

Yes. It's a fair question. Sometimes hard to answer. It's formulaic, of course. I mean we looked at other deals that happened in the space based on ounces, based on the scope and scale of the project. Obviously, there's not a lot of projects in the world with 525 million ounces of silver defining this deposit with lead and zinc. And it's looking through the historical PFS, the 2009 one from an underground standpoint, looking at the optionality of the open pit standpoint. So it's -- we look at it from an accretion standpoint. It was a competitive process. The SSR did a good job. And we felt like we had to go with our best foot forward to be able to acquire Pitarrilla. We thought it would be transformational to the company long term. And there's a number of measures that we looked at, Dale's worked on. We did use PI as an adviser to help kind of develop the right offer for SSR, so to speak. But there's just a number of things that go into it. Nothing specific that I'll [indiscernible] now.

We might not have been the highest number, but we do have a good relationship with SSR. Done the deal with them in the past. And so valuation is one thing, but it's also just choosing the right partner. So we're excited that they chose us, and we're looking forward to moving forward.

Well, they're going to be a pretty meaningful shareholder. And then just a clarification, I'm pretty certain I know the answer to this. The matching rights to repurchase the NSR has no minimum or maximum dollar amount. This is just a role for essentially whatever the market price that they can get, correct?

Exactly.

The next question comes from Joseph Reagor with ROTH Capital Partners.

So a couple of things. I guess the first one, I mean you kind of partially answered this already that there was a process being run here for this asset. But how long have you guys maybe had your eye on this asset knowing that there might be a process at some point that SSR might be moving in a different direction?

Yes. I mean, obviously, SSR has gone in a different direction with their merger with Alacer and it's effectively the Alacer management team there. And I think when that occurred last year, a lot of people in the silver space have kind of looked at that, and was curious what was going to happen with some of the assets. I mean Pitarrilla has been known as one of the crown jewels in the silver space back till 2009 to 2010. And obviously, with where silver prices went in the last decade, it took a pause. But when that came available and ultimately, when we got involved, which was late last year, and kind of a process started in November, December, but it went relatively quickly for us once we've gone into discussions with SSR. So it's -- like I said, it's one of those assets you always have an eye on. It's just when something like that can shake out, we want to be opportunistic, and we're happy that we were able to be a part of it and now ultimately acquire it.

Okay. And then from the press release, it sounds like this is going to fit in between Terronera and Parral. Is there anything we should read into there on Parral? Is it lessons learned from smaller projects like El Compas that you guys are going to just aim bigger going forward? Is it timeline to potential production? How should we look at what this means for the existing -- the existing asset in the company?

That's a very fair question, but Parral and El Compas are 2 completely different assets. I mean we're looking to grow Parral to be about 60 million, 65 million ounces and ultimately looking for about 2,000 tonnes per day if we can get that into an economic assessment. And Parral delivered some really good drill results this year, and we're expecting that resource to grow. And ultimately, at this point, I wouldn't say Parral behind Pitarrilla. As an exploration team, we're going to look at it. We're going to allocate some funds this year to Pitarrilla to be able to prove out that current resource. But Parral, will continue, and we'll do a preliminary economic assessment on Parral this year. Now what comes first or what comes second, I think that just depends on where we're at in the current climate and where we're at, at the end of the year. We're going to push Parral forward, we're going to push Pitarrilla forward. And ultimately, I think the results of those projects and those studies will dictate which comes next.

Okay, fair enough. And then one final thing. There's a couple of other assets out there that there has been some speculation they may also be on the market is, particularly in Mexico. Does this kind of fill you guys up on a project portfolio basis to the point where you aren't looking for anything else? Or is M&A still top of mind with this acquisition and with the smaller gold project in Nevada?

Yes. I mean, obviously, we've got only so much capacity. But at the same time, when I say we're never closed. Dale still got his title as VP of Corporate Development and his job is to look at projects. And -- it's no different with Pitarrilla. We weren't looking for Pitarrilla but we had an eye on it, and we thought we were being quite opportunistic, and it's a price that's accretive to us and that we liked. And if another project comes out, and available and something that can be accretive to us, absolutely, we'd look at it. And obviously, you don't want to build too much of a pipeline and create capacity issues. And -- but if we can add something that adds cash flow, of course, we'll continue to look.

The next question comes from Mark Reichman with NOBLE Capital Markets.

I was just curious how you might be thinking about the incremental annual exploration expenditures associated with this project, and your goals with respect to the updated current resource estimate and then eventually publishing a PEA, PFS and/or a feasibility study.

Yes. It's a fair question. This year -- sorry, in 2021, we had a budget of about $12 million in our exploration plan. For 2022, we're going to come out with guidance next week, but ultimately, a very similar exploration budget to 2021, where we're going to have to reallocate some of those funds from the other projects into Pitarrilla, but I could see anywhere between $1 million to $2 million this year to prove out the current resource. Now getting into an economic study and the scale of the economic studies we've just been through some for Terronera, and you're probably looking at another $1 million to $2 million to almost $3 million, and that would occur in 2023 with continued drilling. But we'll have to define that over the next kind of 90 days before we close on Pitarrilla. But we have the resources in-house to be able to do that. We do have operating cash flow coming from Bolañitos and Guanaceví. We have a very healthy balance sheet. When it comes to Terronera, we're still working on our debt package that we expect to close here in the next 90 days. So we have sufficient resources available to us to be able to push Pitarrilla forward.

Yes. And I'll also add, with $140 million of historic exploration spending, it's not that we have to drill another 200,000 meters to prove up our resource. The resource is large, and we know it's there. So a few select holes in the right areas, and we'll be able to bring that resource current. So it's basically just fast-tracked exploration.

Just pivoting to kind of valuation. I mean you have 2 producing mines. So some investors will value Endeavour on a DCF basis. But with a large and growing portfolio of currently nonproducing assets, do you think investors should be more focused on enterprise value of the resource?

Every investor is going to have different metrics to how they value the company. And for us, we have a list of different metrics that we look at, discounted cash flow is one of them, but also resources in the ground is another. And it's a combination. There's no right or wrong answer of one or other metric. It's just worth comfortable with that and not investor.

It would add that it'll be easier with a large resource. So you followed Endeavour for a long time. You've had these 2, 3-year mine lives that this keep on growing. But with Terronera with 12 years on it and Pitarrilla, even if you look at -- it's too early for us to say. But even if you look at the last study, those are 15-plus year mine lives. So looking forward, I would say, you look at a company like Endeavour Silver with 2 long-life mines, long-life assets, that's -- those will go -- we could be mining until 2040.

That's very helpful. And then the last question is you already talked about some of the mining permits that are -- exploration mining permits that are in place for this project. And I was just wondering if you could just talk a little bit about the ones that are -- that would still be needed and also maybe elaborate on the collaboration agreement in place with the local community.

Yes. From a permitting standpoint, there's still ways to go. They do have a development ramp that goes in about 800 meters, almost to the deposit but hasn't got to deposit, which is important because it does -- it is their EIS that allows them for mining and development. Water discharge, explosive permits are there. And now until we know what the scale of the production is, all those permits would have to be renewed in due course and have extensions on it. And particularly, I don't want to get into details of what permits are there because we have to go through and see what type of project we have. And then ultimately, with those permits, they'll probably have to be -- not reapplied for, but amended to what we want to do. As far as the collaboration agreements with the communities, it's the local jobs. There's a small town in the area we're working with or they have been historically working with. But it's all related to job focus once the mine comes on.

The next question comes from Cosmos Chiu with CIBC.

Maybe my first question is on -- I don't know if you can answer this, but I'll ask anyways. Clearly, Pitarrilla, it's gone through a number of iterations in terms of technical reports. What levers can Endeavour Silver pull in terms of optimizing it? In the past, I think at one point in time, CapEx was a bit large, and so they talked about the scale. There were always questions about open pit versus the underground, to the extent that you can share with us what can you do beyond what SSR Mining has done?

It's Dale here. I'll take that question. I think it's important to just understand the history and how this project evolved, right? So when it was discovered in 2002, and they proved up a good resource between 2003 on to 2009, when the pre-feasibility study came out and the price of silver went from $4 to probably $10, $15. And then the only thing that worked back then was the higher-grade underground resource. And so that's what -- that's culminated 2009 pre-feasibility study. But by the time 2009 feasibility study came out, silver started moving again up to $20, $30, $40, $50 even. And then you think, okay, well, at $40, $50 silver, all the peroxide silver, those ounces suddenly working out. So then in 2012, they switched gears and put a feasibility study and that made the super pit. It was large and is massive, but it held a lot of ounces. And then naturally again, shortly after they put out that feasibility study, then in 2013, probably mid-2013 kind of silver probably started taking a dive down to the $20 level. And mid-2013 up until just last year, the silver was basically range bound to about $20 or so, between $15 to $20 for those 6 years. And so then the -- when we refer to back to their 2012 feasibility study, it didn't really work at $20 silver. And so for us, it was no fault of SSR, just timing and timing in the markets. And so I think for us, we -- Dan and I are very analytical. So when it comes to us when we evaluate the projects, what we're looking at, what's the best way to study this underground, open pit. We'll just do our -- we'll evaluate, we'll do our methods, we'll put them side-by-side and whichever makes most sense. Obviously, the ones with the lower capital would make more sense, right, in today's market. I think the whole appetite for super pits was out there, it's kind of gone. Everybody would like to see more fiscal responsibilities, keeping it small, keeping it real. This ends up for us putting out a $1 billion CapEx project when you can do something that's smaller and it works.

And ultimately, in that feasibility study from 2012 with the open pit, it was an $800 million CapEx, very difficult in the contracting silver environment to be able to raise capital to do that. I think for us, it gives us fresh eyes for SSR at this point in their life cycle as a company from -- and the rationalization of the portfolio, their focus on gold. And ultimately, this is likely going to be, again, at these prices, potentially more of an underground looking back to that 2009 pre-feasibility study and going something with that scale. Now again, have to go through this whole process of making those studies. But that point of having an underground operation has got lower CapEx upfront, something that's more bite-size or doable for a company our size, is probably the way we're going. But if we're right on where silver prices go 3, 4 years from now, we'll look at everything, Cosmos.

For sure. So remind me again, if you are to just go underground, it wouldn't cannibalize the open pit eventually, right? I forget, it's been so long.

No. Actually, there has been no mining there at all. So -- if you start underground, there's nothing saying that after a conceptual 10-, 15-year underground mine life, there's nothing in there that say that you can't turn it into a cave and then turn it to a pit.

Yes, for sure. Maybe stepping back, a bigger picture question here. As you talked about the history, there's been many different technical reports that were put out for Pitarrilla due to the fluctuating silver price. Again, I don't know if you can answer this, Dan, but what kind of silver price would you use to analyze this? Would it be spot price today? Or would you be a bit more conservative and go a bit lower? Like how would you conceptually think about it?

Yes. To be honest, it's slightly lower than we are today, even though that we do expect the rising silver environment over the next 3 to 4 years. I think once we get there using similar $20 to $25 range and -- or around those prices what we use. But again, we have to get there.

And then one last question. In terms of time line, glad to see that it was in your presentation. But could you give us a bit more to the extent possible, a bit more granularity in terms of like what are we talking about? Is it potentially 5 years out? Are we talking about more like 10 years out in terms of production or you're not sure yet?

Well, ultimately, prices will partly dictate all that, but we think it's something like 5 years out. And obviously, for 2022, we'll be drilling and proving out that resource, in 2023 it's in studies, and likely 2024, more studies. So you're not talking about construction until 2025 and then it depends on scale. If it's underground mine, maybe it takes 2 years. If it's an open pit mine, maybe it takes longer. So you're looking at the 5- to 6-year range if everything goes well and then prices work out well for us. But that's early innings and it's still speculation at this time.

And conceptually, we have one good development team. And so for the next 2 years, they're going to be tied up at Terronera. And so picking up Pitarrilla here is a great asset. So once Terronera is built and it's online, then we just kind of take our development team, apply them over to Pitarrilla and let them go from there. So it slots things quite nicely.

Yes. And then maybe one last question. I don't know if you've thought about this yet, Dan. But in terms of financing, clearly, Pitarrilla could be a game changer as we talked about long mine life, scalable and everything else, but how would you finance it? Have you given any thought? Are you going to need debt financing once again? Or have you run the models to the extent that potentially internal cash flow could help you build it?

Yes, we've looked at it. I mean at the end of the day, the CapEx from the open pit is something that we would -- it's completely a game changer. We'd have to do something completely different than what we've ever done from Endeavour. From an underground standpoint, where it's more bite size, and you're looking at maybe somewhere in the $300 million range or an $800 million range, it's something we can do. But that just comes down to Terronera and the cash flow that we're getting from Terronera, comes down to what the markets are looking like with size and scale for Endeavour, whether Parral's has come on prior to Pitarrilla, we're advancing that. It's just sheer speculation of how we finance it. Clearly, we'd have to finance it. But if there's debt markets available to us, if there's the equity markets available to us, we have to look at it at that time. But right now we don't even know what that CapEx number would be to what would need to eventually be financed. Obviously, over the history of Endeavour, we've always looked at everything, every different function of finance. We've had corporate debt facilities before, we've obviously done equity, some normal course for a junior mining company, and all that set would be on the table moving forward. The good news is Guanaceví and Bolañitos with the cash flow. Guanaceví has got a really nice long mine life and delivering good operating cash flow. And Terronera itself, once it's in production using the prices that we have in our PFS, current prices around now is about $50 million after tax. So Terronera itself will give us significant cash flow. Would it be enough to develop Pitarrilla? We have to get through all those studies to see where we're at.

The next question comes from Ben Whiting with Orex Minerals Inc.

I think that your project at getting at Pitarrilla is an excellent fit for Endeavour Silver, and I think that the knowledge that you have of the geology of that region is certainly a good fit. My questions that I have, the first one is the price that you quoted was the $70 million but there's also the 1.25% NSR. What sort of value should we be considering for the NSR when we're looking at from SSR's viewpoint? They're getting the shares and the cash and the net smelter return, what sort of value would you put on to that?

Yes. If you look at SSR's news release this morning, they valued it using the 2012 PFS. Off the top of my head, I can't recall the price, maybe $25 silver. But they valued it at undiscounted $87 million. Now I think that's a headline number. Right now, it's not a mine. That would clearly be undiscounted. Everyone is going to have different ways to value that, Ben. And it's going to come down to the probability of one day, whether Pitarrilla will be a producing asset, which we think it will be. But what's the time line on that? What's the scale of that? It's doubtful it's going to be a super pit at this point, but you never know.

Yes, I would agree with leaning away from the super pit. Your expertise in underground mining at Guanaceví and elsewhere, that the underground seems to be the most appealing part of it. The areas of Cordon Colorado and Javelina tend to be more oxide material as well. Would you be looking at focusing on open pit for those areas or the underground as your first stage of evaluation?

Yes. Good question, Ben. Thanks for bringing that up. But back on to the royalty thing, I'll just touch on that as well. In this business, you're only worth what somebody is willing to pay, right? So somebody, if SSR gets -- someone approaches them to say, hey, we want the 1.25%, and we'll give you x on it, well it's kind of up to them. Whether they do it tomorrow or after close or just before announcement of construction, for example, right? So it's how long is a piece of string valuation kind of thing on the NSR. So we won't really know until it happens, realistically. Now on to your question about the oxide, good question. And yes, you're 100% correct, Javelina and Cordon are oxide resources. And it does like -- from the surface, it's oxide, so it does have the full spectrum of oxide, sulfide and transition in the middle. If we were to go simple, the flotation, that's what I would do. I would target the high-grade sulfides. In which case, the oxide resources will probably not make it in. Yes, that's probably the easiest way to put it.

Yes, that makes sense.

The next question comes from Henry Westendorp, a Private Investor. Please go ahead.

I guess mainly, I have a comment that congratulations people, this is a game-changing scale of transaction you're doing here. And the amount of silver in the ground is hugely substantial. And in a way, what you have here is an option on the future price of silver. So supplementing the other questions here, I think that you've done a major thing, and I have no questions. Thank you.

Thanks, Henry. I think we're in agreement. We are excited today, and we're excited about this asset. I mean, like we say, it's one of the world's largest undeveloped silver assets and it's in a backyard where we have a lot of experience. So we think it's a big day for Endeavour, and we're excited to share this with our shareholders.

The next question comes once again from Mark Reichman with NOBLE Capital Markets.

I just wanted to follow up on one of the questions that I asked earlier about the exploration. Transactions like these always generally come with some kind of minimums on exploration expenditures. And I think in this case, it's $10 million over 5 years. And so I was just kind of curious, and those always -- seems like companies always spend obviously in excess of the minimums. But -- so do you see the minimums? I mean, do you see that becoming like more back-end loaded? I mean, if you're talking kind of a 6-year time frame to trying to get this developed, it seems like you'll probably incur a fair amount over those 5 years. But I was just kind of curious a little bit more -- a little more detail on kind of how you're thinking about exploration. And then is that maybe one of the -- in terms of like your other projects like at Terronera and Parral. Dan, are you kind of looking at exploration as a kind of a fixed budget unchanging and just kind of moving the parts around? Or would you expect exploration expenditures to go up a little bit?

Yes, first off, over the $10 million over the 5 years, right now in our heads, kind of linear. That's going to change as we get through it and prioritize between Chile or Nevada or Parral. But at this point, we're thinking linear. And I think you're right, like as of right now, with the scale of our production and the cash flow that we have, we do have a capacity of exploration budget. And since I've been in Endeavour now almost 15 years, it's been anywhere between $6 million and $14 million, generally averaging about $10 million to $12 million in that range. And that's what we spent last year. And it's really an allocation in moving funds because, obviously, we went through budgeting process for 2022 back in the fourth quarter of last year. And now we're happy to relook at that and reallocate funds. And so it's a portion of reallocation and maybe an increase in overall exploration budget. But just based on what we have going on from an operations standpoint, we want to do with Terronera, we have capacity and a limit on exploration. So I'd say over the next 2 years, it will take away some maybe from Bruner, maybe from Chile, as we prioritize. But I don't think it will hinder any of those programs for what we have to get done.

Well, it certainly looks like a good fit for your portfolio. So congratulations, and thank you for the call.

Thanks, Mark. Like I say, we think -- we are excited, and we think this is a perfect fit for us, like I say, based on location and what we've historically done and what our exploration team is capable of.

It's Dale back here again, actually. Ben, if you're still on the line, just a follow-up on your oxide question on Javelina and Cordon. So if you look at the drilling on Slide 9, the oxide drilling -- the oxide resource that SSR found at the top is they're really shallow. And they didn't really drill it very well to depth. And we know from some of the sections that conglomerate layer, that basal conglomerate does extend underneath. So there always is that chance, there always is that opportunity that the mineralization does extend the depth and turning to sulfide down closer to that basal conglomerate. So SSR did what they did do. There is actually is an underground ramp that's 700-meter-long underground decline. And so if we get access to the underground, which it is accessible, it's [ 5 by 5 ]. So once you get underground, we start doing some more underground drilling and just try to [indiscernible] any more of those sulfides. It's going to be odd to have a -- one pit that pops up and drops 500 million ounces of silver and just kind of that's it, right? So it's a big system. We know it's a big system. So there's a good chance that there's more around it.

Our next question comes from Ryan Thompson with BMO.

I think most of my questions got answered, but I haven't had a chance to pull up the 2009 technical report yet. Could you kind of just provide a bit of a high-level overview of some of the parameters in that report, maybe just with a focus on the resource. What does the underground resource look like in terms of tonnage, grade, average width, all that sort of stuff.

Sure, it's Dale here, again, I can answer that question. And this is just to clarify, this is on the 2009 PFS. It is -- you can download the entire report off of the SSR website or off of SEDAR. But what it was, it was a 4,000 tonne per day underground operation, had a 12-year mine life. The average grade of silver-only was 171 grams silver. So that's just silver-only, no equivalent. I believe the equivalent on that is lead, zinc, but I believe it's about 4% combined with lead and zinc. Recoveries were good. Again, it's all sulfide locations. So the recoveries were good. Lead recovery was 90%, zinc recovery was 93%, silver recovery was 88%.

Okay. Perfect. That's helpful. And I'm not sure if I caught the number, but I think Dan mentioned something about $300 million as the sort of initial CapEx on the underground scenario. Is that a reasonable number to be thinking about?

Yes, the 2009 feasibility study by SSR is, I think, the CapEx on that was $285 million -- $290 million, call it, $300 million. But I'll say though that the mining method that they chose was room-and-pillar. So it's big bulk underground. So again, one of the things that we'll study with our engineers and our development team is could we be more selective, maybe go smaller kind of higher grade, I would say. But that's just to put that into context.

This concludes the question-and-answer session. I would like to turn the conference back over to Dan Dickson for any closing remarks.

Thanks, operator, and thanks to all our participants on the call. Clearly, a big day for Endeavour, and we're excited again about Pitarrilla. We are going to have our guidance news release come out likely next week for 2022 with regards to production and our exploration budgets. I'll put out some more detail on Pitarrilla and what we plan to kind of allocate towards Pitarrilla for 2022. Again, fits in extremely well to Endeavour's portfolio. It pairs extremely well with Terronera and Parral, and ultimately right in our backyard with our exploration office there. And we're excited to get to work, get this closed over the next 3 months and tuck it into our portfolio. So thanks again for listening, and stay tuned for further events.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.