CA - Unlock Silver Potential With Aya Gold & Silver

2023-06-09 12:11:54 ET

Summary

• Aya Gold & Silver Inc. is a strong candidate to take advantage of silver's ability to appreciate over time and of the expected bull market in silver prices later in 2023.
• The company's strong correlation with silver prices and solid growth prospects make it an attractive investment proposition, but investors should wait for a more attractive entry point.
• I believe the stock could get cheaper after the US Federal Reserve's monetary policy meeting in late July 2023, providing a better buying opportunity for investors.

This analysis supports a Hold rating on Aya Gold & Silver Inc. ( OTCQX:AYASF ) ( AYA:CA ) until the stock of this Canadian silver miner with solid growth perspectives becomes cheaper, which I believe will happen sometime after the US Federal Reserve's monetary policy meeting in late July 2023.

A Silver Bull Market in Late 2023 Is Possible

If you want to buy an ounce of silver, you need to pay approximately $24.310 based on the market price of Silver Futures with expirations in July 2023 (SIN3). This price will fluctuate over the coming months as the sentiment driving investors to buy or sell the precious metal is extremely volatile and is affected by changes in certain macroeconomic indicators that have seldom been as unpredictable as at this particular stage of the economic cycle.

In the short term, this analysis factors in the possibility of a silver bull market, likely in the last quarter of 2023, as well as the possibility of a significantly lower silver price in late summer, offering an opportunity to position ahead of the expected uptrend. Consistent with this view, I believe that investors should adopt a strategy that consists of investing in shares of publicly traded US silver miners rather than investing directly in the precious metal to maximize benefits.

Investors should favor stocks of silver miners, which could potentially rise faster than the precious metal when it is in its bullish cycle. Several metrics can be used to measure this attitude of silver stocks, and the correlation coefficient is one of the most popular and easiest to understand.

Aya Gold & Silver Inc. Appears to Be a Very Interesting Candidate in the Silver Mining Industry

To that end, investors should consider Aya Gold & Silver Inc. as this US-listed silver stock has a very strong positive correlation with silver prices. But that's not all. In my opinion, Aya Gold & Silver would allow for strong positioning ahead of the next bull market and peg the value of the investor's portfolio to the price of silver which, albeit cyclically, is increasing over time, as shown by this graphic from Trading Economics.

The latter benefit will be possible thanks to the strong growth prospects that characterize the portfolio of mineral assets that Aya Gold & Silver Inc owns and operates in Morocco. The company's efforts are now focused primarily on the Zgounder property, an area in the Proterozoic Siroua Massif of the Anti-Atlas Mountains, about 265 km east of the Moroccan city of Agadir.

Returning to the strong and positive correlation mentioned above between Aya Gold & Silver shares and the price of the precious metal, the chart below provides proof of this kind of relationship between the two assets. The coefficient has a value of 0.67 against a range of -1.0 and +1.0 and its curve evolves almost exclusively between 0 and +1.0, offering a fair degree of certainty that the Aya Gold & Silver shares will behave accordingly when silver is expected to enter a bull market.

In addition, this analysis also provides a measure of how much Aya Gold & Silver's stock price could rise if silver prices move up. When the weekly returns of an investment in AYASF are placed in a linear equation with the weekly returns of an investment in Silver Futures - July 2023 (SIN3), where AYASF is the output and SIN3 is the input, the model returns the following result: On Average AYASF stock price increases by 1.3x for every change in the silver price. The model was run using 52 weekly returns for the two securities over the past year and no further back in time as the future market is likely to look more like last year than previous periods.

Similar results were obtained for the company's shares that trade on the Toronto Stock Exchange under the symbol AYA:CA.

Short Term Growth Catalysts

The real news is that AYASF's stock price could actually add more than 1.3x to silver's uptrend and I think the momentum should come from operations.

Given the conditions set with an excellent start to 2023, the positive momentum for business operations should continue for the remainder of 2023 and potentially beyond. As reflected in the first quarter 2023 results , silver production is not only growing but is accelerating, producing 474,813 ounces of metal, an impressive 54% year-on-year growth. This is the second-highest quarterly production the company has ever achieved.

As is usual with exceptional increases in production, the parameters used to measure the performance of mining operations indicate that the machine is running at high speed. Year-on-year, recoveries rates (87.1% in Q1 2023) are increasing at 670 basis points, the throughput (72,737 tons were processed by the mill in Q1 2023) is rising at 17.3% and silver grades (235 grams of metal per ton of ore in Q1 2023) are improving at 22% pace.

But it is not only because of these very positive trends that the future of this mine looks bright, also the progress being made in the development of the deposit gives rise to great optimism.

The Zgounder underground mine is currently going through an expansion of mining capacity with the goal of mining 1,200 tonnes of material per day in 2024, a significant increase from the average of 922 tonnes per day in the first quarter of 2023.

Once the mineral target is reached, it will be technologically supported thanks to an ongoing on-site mechanization process. The Zgounder underground deposit has proven and probable reserves of 52.34 million ounces grading 267 grams of silver per tonne of mineral [g/t]. In addition, 17.75 million ounces of silver grading 253 g/t are available at open pits where mining activities are scheduled to begin this quarter.

In short, everything provides ample assurance that the company will deliver strong production growth when silver is expected to be in a bull market and the match could - in my opinion - have strong upside potential for the stock price.

How the Company is Developing Financially

With the exception of gross profit margin, which was slightly lower in the first quarter of 2023 than in the same period of 2022 (20% vs. 24%), all other financial results were significantly positive year-over-year. However, it should be noted that the gross profit margin was impacted by an increase in the cost of sales, likely due to the increase in marketed silver, up 25% year-over-year to 508,204 ounces. Operating expenses were $14.56 per ounce of silver sold, down 5% from the prior year.

Revenue increased 14% to $10.443 million, and the net income saw a positive transition from a loss of $1.96 million to a profit of $1.06 million. Also, Q1 2023 saw a positive change to the operating cash inflow of $4.06 million from the operating cash outflow of $815,000 in Q1 2022 and an increase of 19 percent in cash and restricted cash to $91 million. The debt is less than one million US$.

All of these improvements in financial results came despite the average realized silver price of $20.55 per ounce in the first quarter of 2023, down 9% year-on-year.

So one can imagine what a boost the stock price could possibly get if the company continues to mine larger amounts of silver while the metal price rises above the current price of $24,181 an ounce.

The Outlook for the Silver Price

Silver is viewed by investors as a safe haven, protecting the true value of their assets from an economic downturn and high inflation or other headwinds such as the US regional bank failures that occurred in mid-March 2023. Recently, the price of the ounce has been very sensitive to interest rate hikes, which the US Federal Reserve used to signal a new negative cycle for the economy to combat the elevated inflation.

Silver prices have fallen sharply from $25.85 in early May around the time the Federal Reserve hiked fed fund rates another 25 basis points and increased the target range to 5% to 5.25%. However, there is a chance that monetary policy will pause from raising interest rates at the next meeting on June 14, as suggested by some central bank governors.

And with a 77.1% chance of interest rates unchanged on June 14 versus a 22.9% chance of a rise, the precious metal has resumed its bullish trend, recouping some of the losses it had previously accumulated.

However, after this period in which the Fed will monitor the impact of past rate hikes on the economy, another rate hike is likely at its next meeting on July 26, as a resilient system that continues to create non farm payrolls leaves core inflation very stubborn.

The negative pressure on silver prices from further monetary tightening translates into a higher opportunity cost of holding silver instead of bonds and other fixed-income securities. Investors will want bonds that pay a fixed rate of income, not silver, which instead pays no income.

A lower silver price should drive the decline of Aya Gold & Silver Inc shares about as much as a combination of positive correlation and the silver beta coefficient of 1.3x could boost them during a silver bull market. Shares of Aya Gold & Silver Inc will then likely be valued more attractively by the market than they are now, which I believe will lead investors to a buying decision on this stock approximately between late summer and early fall.

Buying shares of Aya Gold & Silver Inc will be an opportunity to increase exposure to the silver price bull market I expect to see in late 2023 and early 2024 as a result of an expected recession and so increase the likelihood of the position appreciating significantly as a result. The latter is a function of two factors: the positive correlation between the stock and the metal combined with the silver beta of 1.3x, and the strong prospects for the company's operations.

The Stock Valuation

Shares of Aya Gold & Silver Inc were trading at $7.04 apiece giving it a market cap of $855.796 million as of this writing.

Shares are trading below the 50-day simple moving average line of $7.41. However, if there is a rate hike at the mid-June Fed meeting, shares could decline significantly, falling back to the 100-day simple moving average of $6.73, or perhaps even as far as the 200-day moving average of $6.43 as it was after the May 3 rate hike.

According to the 14-day relative strength indicator chart, shares have ample room for both up and down movement.

There is, of course, the risk that these lower prices for Aya Gold & Silver Inc. shares may not materialize as predicted in this analysis, missing an opportunity to expand the position today in anticipation of the upside potential stemming from the highlighted positive growth catalysts.

That risk is small in my view compared to a higher likelihood that stock prices will follow silver's downtrend after July's rate hike. Further monetary policy tightening appears necessary as labor is late in giving the signals the central bank is waiting to change interest rate policy.

Markets are becoming unduly optimistic on the mid-June pause, believing that this is the trigger for a turning point in monetary policy.

In my view, the pause is to avoid excessive US dollar appreciation and further pressure on the US trade deficit, and prevent that deficit from widening too much from current levels that are already quite relevant .

However, I expect that the rate hiking policy will resume after the decision at the mid-June meeting, as speeches by Fed officials also seem to indicate, recently.

A lower price of Aya Gold & Silver Inc. shares allows investors to increase their holdings more easily.

It will be an opportunity to increase the portfolio's exposure to silver's ability to appreciate over time via a miner that has a good long-term prospect in the silver industry.

The company is targeting to produce between 1.7 million and 1.9 million ounces in 2023, which equates to several decades of activity given the volume of ounces held in proven and probable reserves.

Additionally, with the onset of open pit operations, the portfolio is poised to achieve significant cost savings at least in the first decade, with no limitations on the solutions that technology expansion can provide for the operation of the underground deposit at even lower costs in the future.

Meanwhile, the company is also engaged in exploration activities to develop further potential stored in the measured and indicated resources of approximately 96.057 million ounces of silver which are estimated to grade 306 grams of metal per ton of ore.

Zgounder is currently conducting exploration activities consisting of drilling to confirm known mineralized envelopes both vertically and laterally. Among other things, the results are very promising with regard to the concentration of the precious metal in the mineral.

The company's overall resources also include the Boumadine polymetallic deposit, located in the Drâa-Tafilalet region of the Anti-Atlas Mountains. To be more precise the asset is located approximately 240 km from the city of Ouarzazate in western Morocco. There, Aya Gold & Silver Inc. is currently conducting a drill program with the aim of testing various extensions of mineralization throughout the orebody as well as in its central part.

Aya Gold & Silver also trades on the Toronto Stock Exchange and shares changed hands at 9.40 as of this writing, versus the 50-day moving average of 9.98 and the 200-day moving average of 8.67. The 52-week range is between 4.98 and 11.39.

Conclusion

Aya Gold & Silver Inc. is a strong candidate in my view to take advantage of silver's ability to appreciate over time and to take advantage of a bull market in silver prices that I expect later this year.

A silver bull market will occur as investors will likely use the metal as a safe haven asset to protect their portfolio value against the headwinds of an expected recession in late 2023 and early 2024.

Shares of this Canadian silver miner are likely to extend silver price gains due to the positive correlation between the two assets and a high silver beta coefficient, as well as strong operating catalysts gaining momentum as we approach the remainder of 2023.

I think shares will get cheaper from current levels, so investors should wait for that to likely happen after the July 26 Federal Reserve interest rate decision.

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