Avino Silver and Gold Mines (NYSEMKT:ASM) is one of those miners that has long existed in Mexico and has a proven track record of 27 years. The company produces silver and gold at a ratio of 60/40. It closed in 2001 due to low metal prices but reopened in 2010 and is continuing to grow production as we speak. One of the most important aspects to take into account is the presence of a long existing infrastructure, including a mill with a replacement value of $40 million. This mill is fully operational now at 250 tpd (San Gonzalo mine) and is being expanded to 1250 tpd next year (Avino mine). For more information, I encourage investors to read the corporate presentation here.
ASM closely follows the silver price as you can see on chart 1, so you're buying an instrument leveraged to the silver price and I'm very bullish on silver in the coming months.
|Click to enlarge|
|Chart 1: Avino Silver and Gold Mines Vs. Silver Price|
Let's talk about the first catalyst: San Gonzalo. What I'm excited about is the grade of the mineral property of this San Gonzalo mine. As we ramp down the slope from level 4 to level 5, the grades will improve at increased depth. It is estimated that recovery rates will be above 90% on level 5, where we have the highest grades for both gold and silver. The resource is estimated at 5 years of full production. Cash costs are at $7.62/ounce at this moment, so these costs will go down when grades improve. Currently they are targeting a 250 tpd of mill throughput and based on the Q4 number (19538 tonnes in Q4 or 212 tpd), they are pretty close to their target (85%). The grades in Q4 are currently 79% for silver and 69% for gold and should go to 90% as I stated before, that's an increase of at least 10% in revenue in the coming months. If their throughput goes up 10% as well, we have an increase of 20% in revenue. If we look at the silver equivalent they produced in Q4 (151373 Ag Eq/quarter), then we can say that they will produce 600000 Ag Eq/annum. This is a lot of silver to produce, but that's not all of it.
The second catalyst is the opening of the Avino property in 2014. The Avino property is going to go into production next year after dewatering of the mine and is expected to stay in production for about 10 years. The total mine output is estimated at the historical amount of 1.5 million tonnes/annum. That's an immediate increase from 600000 Ag Eq/annum to 2.1 million Ag Eq/annum or an almost four fold increase in production.
But that's not all, the third catalyst for ASM is the tailing resource. The Net Present Value of those resources is estimated at $80 million. So you could see another doubling or tripling of the stock price in 2020. The tailing resource will have a mine life of 5 years starting from 2015. Production will increase from 2.1 million Ag Eq/annum to 3.4 million Ag Eq/annum.
So as far as production is concerned, we will have an increase from 600000 Ag Eq/annum to 3.4 million Ag Eq/annum in about 2 years time. Production will increase 6 fold!
Of course, you will ask me, is Avino Silver and Gold Mines actually profitable because it had net losses in 2012 if you look at their balance sheet. Let's try to estimate this.
Their exploration costs were pretty high in 2012 at $1.5 to 2 million and are mainly focused on the mines in Mexico. The company still has about $3 million cash left over. The operating and administrative expenses in full year 2012 are around $1.3 million. In the first 3 quarters of 2012 the company had sales of concentrate of $2.5 million at 100000 Ag Eq (or 133000 Ag Eq/annum), but the net loss was $1.4 million. That means the total costs of exploration and operation was at $3.9 million in the first 3 quarters of 2012. For the full year 2012 the total cost is extrapolated to $5.2 million/annum. If these costs stay roughly the same (mill is just processing more material at approximately the same cost), but production increases from 133000 Ag Eq/annum to 600000 Ag Eq/annum the coming year, then we estimate that the sale of concentrate will go from $2.5 million to $11.3 million. This number is much higher than the costs we talked about ($5.2 million/annum). So Avino Silver and Gold Mines is now highly profitable and I think we will see the net loss turn into a net profit in the next coming quarterly financial reports. And I didn't even account for the rise in the price of silver in the coming year. Also don't forget they are still ramping up their production and improving their grades.
As a final note, let's talk about the leverage. If costs per annum are $5.2 million/annum and sale of concentrate is $11.3 million/annum (as stated before). Then we have a profit of about $5 million/annum (P/E around 10). But if the silver price doubles from here, we will get a profit of around $15 million/annum, that's a three fold increase in earnings. So we are talking about a leverage of 150% here.
There is a lot of positives in this stock, but investing in Avino Silver and Gold Mines does have some risks. First off, you need to know that the silver price can decline and this could negatively impact the profits of the company. Second, the company is still in exploration phase for some of its properties and it is not guaranteed that the exploration of these properties will result in feasible mine production. Third, the dewatering of the Avino mine can only start when permits are gathered. The water is acidic and should be neutralized first. If permits for dewatering aren't received, the project can be delayed.
I think Avino Silver and Gold Mines is a pure growth story. Production will go up 6 fold in just 2 years time. When people see that this company has turned from a net loss to a net profit in the coming year, they will all pile in to buy this stock with both hands. As a matter of fact, Eric Sprott is the largest shareholder in this company and if you've read this article carefully, you know exactly why this is...
Disclosure: I am long ASM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.