ASM - Avino Silver & Gold Mines: A Highly Undervalued Mid-Tier Silver Producer

2023-05-19 18:46:14 ET

Summary

• They have high costs and are barely profitable, which is why they are very cheap.
• They have large resources and plan to steadily increase production.
• They are highly leveraged for higher silver prices, with high free cash flow potential.
• This is a speculation stock with very high risk but also extremely well-positioned for high returns.

Introduction

This feels a lot like 2008-2009, with many PM (precious metals) miners selling for extremely low valuations. There are currently 88 stocks on my 10-bagger list. I don't recall ever having this many stocks this cheap, but then, I didn't start my website until 2012.

Back in late 2008 and early 2009, I was looking for the best risk-reward stocks that could provide exceptional returns if gold and silver prices rose. I wanted to speculate and bet on that outcome. Well, we are in a similar period.

A few stocks stand out as viable candidates to bet on. One of those is Avino Silver & Gold Mines (ASM). It has a nice pedigree of being a survivor and has been around for a long time. Plus, it checks most of the boxes I look for when picking PM miners. It doesn't have too many red flags, and its upside potential is off the charts. It's nearly the perfect speculation stock for my investment strategy.

I recognize that PM miners are speculation stocks. So, I never place large bets on a single stock. Instead, I place small bets that I can afford to lose. A company with very high risk isn't going to get 1% of my cost basis. It will be lucky if it can get .5%. Avino is a perfect stock for .5%.

Company Overview

Avino Silver & Gold is a growing mid-tier silver producer in Mexico. They will produce about 3 million oz of silver equivalent in 2023 with break-even costs around $23 per oz (free cash flow). We will have to keep an eye on their costs.

They recently acquired the La Preciosa project (135 million oz at 180 gpt) from Coeur Mining ( CDE ). La Preciosa is located near the Avino mine, so it is a good fit. The cost was 14 million shares (Coeur now owns 10% of Avino), plus $15 million in cash, plus another $5 million this year, plus a potential future cost of $8.8 million based on production.

They plan to truck ore from La Preciosa to the Avino mill, which is about 20 miles away. Production is forecast to increase about 1M oz per year from 2024 to 2028, raising production to around 8M oz in 2028.

Plus, they have a 17M oz tailing project with about an 80% recovery rate. So, that should provide another 1-2M oz from 2024 to 2030. The capex for this project is very low, as will be the costs.

The combined resource of Avino and La Preciosa is 180 million oz of silver and 325 million oz of AGEQ. Their total resources are 350M oz AGEQ. That is a lot of silver equivalent for a company with an FD market cap of $101 million.

They are forecasting decreasing their AISC over the next three years. Plus, they have about $11 million in cash and only $5 million in debt.

If that wasn't enough good news, let's do the math at $100 silver in 2027, when they should reach 7M oz of AGEQ production. Let's assume breakeven costs of $25 AGEQ:$100 - $25 = $75 x 7M oz = $525M FCF x 10 = $5.25B valuation. Wow. Stunning upside potential. It's hard to believe investors only give them a $93M FD mkt cap valuation today.

Company Info

Cash: $11 million

Debt: $5 million

Current Silver Resources: 365 million oz. AGEQ

Estimated Future Silver Resources: 365 million oz. AGEQ

Estimated Future Silver Production: 8 million oz. AGEQ

Estimated Future Silver All-in Costs (breakeven): $25 per oz. AGEQ

Scorecard (1 to 10)

Properties/Projects: 8

Costs/Grade/Economics: 7

People/Management: 7.5

Cash/Debt: 7

Location Risk: 7

Risk-Reward: 8

Upside Potential: 10

Production Growth Potential/Exploration: 9

Overall Rating: 8

Strengths/Positives

Significant upside potential

Steady production growth

Good grade

Good management

Quality properties

Risks/Red Flags

Weak balance sheet

High costs

Management is not elite

Location risk in Mexico

Long wait to reach full production

Valuation ($50 Silver Prices)

Silver production estimate for the long term: 8 million oz. AGEQ

Silver All-In Costs (break-even): $25 per oz. AGEQ

8M oz. x ($50 - $25) = $200 million annual FCF (free cash flow)

$200 million x 10 (FCF multiplier) = $2 billion

Current FD market cap: $93 million

Upside potential: 2,000%

Note: I used a $50 silver price because I am a long-term investor who plans to wait for higher silver prices. I actually consider $50 to be a conservative upper range.

Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).

Note: I used a future FCF multiplier of 10 because I'm confident that investors will bid up its valuation when they have large margins.

Balance Sheet/Share Dilution

Avino does not have a strong balance sheet, but I don't consider this to be a significant red flag. This is a company that has been a survivor. They never accumulate too much debt. If they do get into a situation where they are losing money because of low silver prices, they will likely dilute shares.

I think they could easily survive a protracted downturn of up to two years. Conversely, I think a long period of lower silver prices is unlikely to happen. This insight as an investor with experience gives me confidence that the market is significantly underestimating the value of Avino once silver prices rise. This is what makes the risk-reward so enticing.

Risk/Reward

Considering I am aware of all of the PM miners and analyze nearly all of them (except a few of the microcaps), at this time, very few are as attractive as Avino from a risk-reward standpoint. However, this strong risk-reward is from my assumptions. The first is that silver prices will rise substantially. The second is that I am willing to wait until they expand production from 3 million oz AGEQ annually to 8 million.

This payoff will take a few years to unfold. I am willing to get in early and then patiently wait for it to materialize. As a speculation bet, I will need several assumptions to come true, and I could easily be wrong. In addition to the two factors I mentioned in the prior paragraph, I will need Mexico to remain miner-friendly and Avino's mines to operate without an unexpected issue.

I should mention that perhaps the biggest risks are higher costs and higher taxes. These could zap my potential returns. Also, they could get taken out by a larger PM miner, which is always my worst fear.

Investment Thesis

My thesis is pretty clear for Avino. I want to get in now when it is extremely cheap versus its FCF potential, and then see if they can execute on their production growth plan. If everything falls into place: higher silver prices, higher production, higher FCF, and a higher valuation, then it will have been a successful investment.

Hopefully, the risks do not materialize and the assumptions do. I won't be placing a big bet because you can never have high confidence on a PM miner. Too much can go wrong and usually does. But if I own enough stocks like Avino, some of them should be high-flyers. The key is identifying the potential high-flyers.

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