CA - Avino Silver: Significant Upside Leverage To Coming Silver And Copper Shortages

2023-06-28 08:10:01 ET

Summary

• Avino Silver & Gold Mines is a small-cap miner with significant silver, copper, and gold reserves, offering the potential for large gains if shortages in physical metal supply appear.
• The company is starting a 5-year plan to rapidly increase production and lower mining costs per silver-equivalent ounce.
• Avino's leverage to rising silver and copper prices during 2024-25 could make it an attractive investment option during an economic recovery phase.

One small-cap precious metals miner I have not written about is Avino Silver & Gold Mines ( ASM ). It owns a Mexican mine and adjacent land positions with sizable silver, copper, and gold reserves/resources. I dare say it may be one of the greatest leverage ideas to possible long-term shortages of mined metals supply in both silver and copper. These two metals are necessary ingredients for green-energy revolution success in combating the toxic gas emissions from fossil fuels. Of course, each metal has other uses and investment viability, meaning you are not solely dependent on huge copper demand for electric-vehicle motors or silver usage in solar panels.

The good news for an ASM investment is the company has begun a 5-year plan to more than double production and lower mining costs per ounce of silver equivalent (using copper and gold as credits). With a decent balance sheet going into the capital spending phase, any sharp price gains in the three metals will spike operating income, while making it easier to access capital for expansion plans.

And, 368 million of silver-equivalent resources in the ground are today available to investors at the super-low "cost" of $0.21 cents per ounce! In essence, you are paying very little upfront to acquire exposure to future mining profits. If you will, it is like a call option on silver/copper/gold prices, without an expiration date. For comparison, larger diversified silver-focused mining companies with U.S. and Canadian assets, producing ore at breakeven to net income for owners [including Hecla ( HL ) and Coeur Mining ( CDE ) as examples], are priced in the $0.30 to $1 per silver-equivalent ounce in the ground range on equity value.

Mining Operations

Avino is already mildly profitable in 2022-23 pulling the three metals out of the ground, with current estimates placing a 30-year to 40-year mine lifespan on its resource base around the flagship property. Below is a chart of the material progress Wall Street analysts are projecting for sales and EPS during 2023-24. Trading at a valuation on sales of 1.5x and EPS less than 10x are discounts of greater than 50% vs. the world's mining majors with comparable resource setups.

In early 2022, the company purchased a land package next door with accretive resources that can easily be incorporated into Avino's existing plant & equipment flow - La Preciosa - from Coeur Mining. These assets taken together, with just $2 million in net corporate long-term liabilities at the end of March ($18 million current assets vs. $20 million total liabilities for ASM), represent tremendous equity value upfront ($78 million in equity capitalization at $0.66 per share), in my opinion.

Cash costs and AISC have been in decline as production reached record levels over the latest 12-month period. While Q1 included some special cost overruns, overall production growth is continuing.

And, 5-year projections by management include an increase of +160% in silver-equivalent ounces mined, from around 3 million annually today to 8 million by 2028.

The revenue contribution from silver and copper presently is 80%, almost equally weighted between the two. However, the breakdown is slated to tilt more heavily in favor of silver over the next five years. I personally believe silver is one of the most undervalued and unappreciated commodities in the marketplace right now with its climbing use in solar panels and other green-energy inventions. I have upside projections for silver to US$50+ an ounce a few years out, which I have mentioned in previous articles since last summer.

Technical Trading Chart

Avino's chart pattern is relatively attractive, with price rising a good +30% over the latest 12 months. Remember, the U.S. equity market has advanced between +4% for the smaller Russell 2000 companies to +13% for the S&P 500 index and +25% for the NASDAQ 100 Big Tech names over the same span. However, a sizable selloff from $1 has occurred since April. The 2-month price dump has really messed with my momentum indicators for underlying strength. So, if you purchase shares, you are mainly betting the long-term metals leverage story is one not to be missed.

On a 10-year graph of weekly moves, shares have not risen at all in price. Three swings above $2 a share have taken place on silver asset sentiment runs higher and/or short-term company successes, in 2014, 2016, and early 2021. I have drawn 1-year and 2-year moving averages. You will notice the largest upmoves have springboarded after breaking above the 2-year MA. If you want to wait until price is back above $0.78 before buying, this strategy makes sense from a technical trading perspective.

The interesting part of the ASM investment proposition is underlying metals prices have been on the rise over the past 12 months. Supporting the current valuation, earnings and cash flow generation, plus a solid growth profile for production, further gains in silver and copper particularly should push the stock quote back over $1 into 2024. In terms of what to watch, both silver and copper are testing their 200-day moving averages over the past week. A turn higher during July would be welcome news for Avino Silver shareholders.

Final Thoughts

Avino Silver's leverage to rising silver and copper prices in particular during 2024-25 is my reason for ownership. I am projecting an economic recovery phase will make clear to everyone a shortage of mined supply for the two metals exists.

You want evidence of a developing shortage in silver supply vs. demand? Already, silver coins and small bullion bars have been selling for the greatest premiums to "spot" prices over the last year (of 20% or more), since the depths of 2008's Great Recession banking and financial crisis. After that instance, silver rose from a low of US$9 an ounce to $49 in 2011.

In addition, the largest inversion spread in forward contract prices favoring short-term deliveries is apparent in the futures trading market. While 1-year prices remain only slighter higher than spot, those looking to take delivery in 2-months are paying dramatic premiums. Below is a graph of this idea, where physical supply has been scarce since November.

Copper inventories are also incredibly absent today. The primary international market for copper trading at the London Metal Exchange has witnessed inventory levels (especially vs. worldwide sales and usage) reaching for all-time lows in April. Today's stocks are HALF of the level witnessed just before the pandemic started in early 2020, and ONE-THIRD the peak of August 2019.

Here's my upside argument to own Avino Silver in a nutshell. Rising production of silver and copper, with flat to falling operating costs to pull each out of the ground, should allow earnings and cash flow to rise precipitously over the next five years. Management is projecting EBITDA to nearly TRIPLE with stagnate metals pricing, good for a +25% compounded rate annually.

Given a 50% rise in silver/copper/gold prices over the next five years, EBITDA could rise from $17 million in 2022 to almost $100 million annually, representing a +45% compounded rate each year. Where else can you find this type of projected growth rate from a company with few net liabilities today? What if precious metals prices double, instead of gaining 50%, over the next five years?

Looking at other miners in the U.S., Mexico, Canada and elsewhere for asset locations, Avino is near the middle of the pack on current "enterprise value" (equity + debt) to forward 2023 EBITDA calculations. However, ASM stands out to me as a top precious metals mining pick because of its extensive long-life resource base and super-conservative balance sheet.

Is Avino without risk? No, there are major risks of running one minor mine in Mexico. Local politics and employment demands are one risk. Mexico is always toying with increasing taxes and regulations on miners. And, issues with ore quality for metals contained can cause unexpected declines in output from time to time.

Then, my forecast of higher metals pricing is not a guaranteed outcome. A major risk is weaker silver/copper/gold prices could negatively impact operating results and investor valuations long term.

But, many of these downside risks appear to be discounted by the lower valuation on resources in the ground, a P/E multiple under 10x, and EV readings of 5x EBITDA. Larger, more diversified peers in the U.S. and Canada are basically selling for double the earnings ratios put on Avino Silver.

My view is intelligent management of its properties could add significant shareholder value. The newly acquired adjacent resources should prolong its mine life, increase production levels, and possibly lower the overall per unit cost of extraction. What's the upside? If EBITDA rises by 5x and net reported income by a similar amount, projections of $3 to $5 a share over time are not farfetched. Such would work out to "potential" gains of +350% to +650% over the next 3-5 years. For the dreamers, an immediate double in precious metals pricing could create a P/E approaching 1x the current price.

Just remember, the higher-risk profile for this investment requires a lower-than-normal weighting for the size of a position in your portfolio. If hiccups in expansion and/or expensive capital raises to increase production appear, share price can always fall to zero in the small mining sector. To me, Avino Silver's upside is worth the risk. I rate shares a Buy and own a stake in my diversified portfolio.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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