(Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)
The Nut Shell
In September 2013 we wrote an article here on Seeking Alpha titled "Avino Silver: Setting Up For A Re-Rate." And right we were judging from the chart below.
As pleasing as it is to be proven correct with a call, it is even nicer when there is still time to alert readers of a last chance to take advantage. So here it is, loud and clear: Avino Silver Is Re-Rating!
We have reason to believe that this move is only half done and ample upside still exists for investors prepared to step in quickly. Our price target is $3, or 50% up from current levels, and we expect this price target to be reached before long.
We have covered Avino Silver (ASM) on Seeking Alpha for some time and readers are kindly invited to refer to our past offerings for details not repeated in the summary below. The article referenced in the starting paragraph is a good starting point, and other articles can be found here and here. The comprehensive company website provides further information.
Despite decades of company history, Avino Silver is a small-cap company with a market capitalization of only $54M at the time of writing. There are only 27.5M shares outstanding, plus 5.75M shares are currently sold in an at-the-market offering. The balance sheet is strong with ample cash and only about $1M in finance lease obligations.
Avino Silver put operations at the Avino mine on care and maintenance in 2001 after 27 years of operation. The recovery of the silver price and the discovery of the San Gonzalo deposit led to re-commencement of mining in 2012. The company processed old stockpiles at first, then switched to processing ore from the San Gonzalo mine. In April 2013, a second circuit was added which has been processing stockpiles so far. Later in 2014, the company plans to resume mining from the old Avino mine tripling throughput from currently 500 tpd to 1,500 tpd.
The market has been skeptical about the company's ability to produce profitably, especially considering the current silver price correction. Monthly updates provided by the company had us convinced (and invested) quite some time ago, but despite the remarkable progress achieved by Avino Silver the market wanted more. That "more" seems to have arrived now in the form of the January production report.
The Catalyst: January Production Report
The chart below illustrates production data collated from the mentioned monthly reports since re-starting silver production at the San Gonzalo mine in 2012. The rightmost bar represents metal production for the month of January. Quite obviously this bar towers above previous monthly bars and has brought about the market move we are currently witnessing.
Avino has finally started to source ore from level 4 at the San Gonzalo mine and is finding higher grades than previously mined from the shallower stopes. Feed silver grades jumped from 285g/t in December to 358g/t in January, and feed gold grades jumped from 1.7g/t to 2.0g/t during the same time interval.
Judging from data buried in the technical reports, we are confident that these improvements are permanent, and should even be exceeded as mining moves deeper in 2014.
And although it was not explicitly stated in the news release, it can be assumed that costs will trend lower as a result of the higher feed grade as well.
To avoid mis-understandings it needs to be emphasized that costs had been very respectable already. Cash costs have trended down throughout 2013 and were last reported as $5.72/oz. Avino also reports all-in sustaining costs and pegged them at $10.51/oz in the last quarterly report. Considering the latest information we are quite certain that all-in sustaining costs will drop below $10/oz from Q1/2014; that's roughly half of the current silver spot price leaving the other half as margins for Avino Silver.
Another Catalyst - Institutional Ownership
In another article on institutional ownership in silver mining stocks last year we noted:
"Avino Silver is another junior miner with Sprott Asset Management as their single dominant institutional holder. Should other institutions decide to follow the lead of this fund then that could provide a perfect storm for the share price [...]."
Institutional investors typically aim at substantial stakes when they decide to invest into a particular company. An institutional entry into a tightly held stock such as Avino Silver will almost automatically drive the price up, and also put a bottom under the share price in the process.
Judging from the high trading volume during the past few days we have every reason to believe that this is exactly what is happening.
Another Catalyst - Upcoming Earning Call
The quoted January production report gave information on the operational performance. As pleasing as these operations numbers are, we believe that some potential investors are still standing on the sidelines waiting for confirmation on costs, cash flow and earnings to be delivered in the next earnings call.
Despite a difficult market, and ongoing investments into the old Avino mine the company has managed to remain cash flow positive and generate $0.08 in earnings per share for the first three quarters in 2013. Extrapolating the available data we estimate the annual 2013 earnings per share to reach a total of $0.12 for 2013, and we are targeting $0.25 for 2014.
This translates into a P/E-ratio of 16.6 and a forward P/E-ratio of 8. If confirmed, this bottom line would put Avino Silver into a class of its own among silver miners.
Confirmation of street estimates in the upcoming earnings report, coupled with a positive outlook for 2014 should provide another boost for the share price.
The Old Avino Mine
And it does not stop with the short-term outlook.
Avino Silver has been de-watering the old Avino underground mine for the best part of 2013 and is nearing the end of this exercise. A mill expansion is also well under way to accommodate ore feed from the Avino mine. Mining will resume later in the year and silver production from this mine is scheduled to start in the fourth quarter this year. Given past experience with this mine and its ore characteristics we do not expect complications during ramp-up.
The ore from this mine contains silver, gold and copper. Grades are lower than at the San Gonzalo mine and costs can be expected to come in above the level seen at the San Gonzalo mine. Nevertheless, we are modeling total production to double by 2015.
Based on all-in sustaining costs we are modeling free cash flow of $20M to $25M from 2015 from the combined output of the San Gonzalo and Avino mines; generated by a company with a current enterprise value of $49M.
Further growth will come from re-processing mineral rich tailings. A PEA was prepared in 2012 considering processing of the oxide tailings only which contain 91 g/t silver and 0.54 g/t gold. The economics of this PEA were compelling. An NPV of $38.6M and an IRR of 54% for a silver price of $20.38 was indicated in this report.
This tailings growth project alone is valued close to the company's current enterprise value. Avino's plans have the oxide tailings deposit in production by late 2016, and our model includes $4M of free cash flow annually from this operation starting 2017.
There are also sulphide tailings stored on the property which have not been included in the company's studies so far, offering some considerable upside to investors.
The table below documents our valuation of Avino Silver based on a discounted cash flow model.
Despite the largely de-risked nature of the San Gonzalo mine, and the low risk of the tailings project we felt that an overall annual discount of 8% was warranted due to the risks involved with bringing the old Avino mine back into production.
The annual cash flows were calculated using AISC and a long-term silver price of $20/oz. We used best estimates for production volume and a 10 year mine life for the two underground operations.
All said and done we estimate a conservative value of $113M for Avino Silver, or $3.50 per share (already including new shares currently issued under the at-the-market offering).
At the time of writing the share price has risen from $1.25 to just under $2.00 in short order. The 64-thousand dollar question therefore needs to be asked: has the rally got legs?
And our answer is a resounding "yes."
We are interpreting this price move as a re-rating. Avino Silver has arrived in the ranks of silver producers, and the market is finally acknowledging this fact.
We are targeting a minimum market capitalization of about 85% of the computed asset value, or a share price of $3.
Catalysts - Summary & Timeline
January production data has acted as a catalyst for the move witnessed in recent trading sessions. This move is still playing out as we are putting the finishing touches to this article.
Avino Silver is not a one-trick pony and several catalysts are ahead to keep the fire under the share price stoked.
Imminent catalysts include:
- Guidance for 2014 should be released shortly. This guidance should reflect the newly accessed higher grades and confirm substantial production growth from the San Gonzalo mine in 2014. Moreover, we expect further cost reductions to be confirmed in this guidance.
- Results for the fourth quarter and the full year of 2013 are due to be reported within a couple of weeks. We expect earnings to beat street expectations.
Short-term catalyst include:
- Judging from the heavy trading volume over the past few days, we suspect that one or more institutions have initiated positions in Avino Silver. If proven correct, then we would expect the high volume to continue for some time to come driving the share price northwards.
Mid-term catalysts include:
- Increasing interest from institutions should lead to increasing coverage by analysts, associated with increasing interest from the retail sector.
- De-watering of the old Avino mine is nearing completion. News flow from this asset should be picking up over coming months culminating in the resumption of production from the old Avino mine in Q4; and doubling of silver production from 2015.
- The San Gonzalo deposit is open in several directions. The newly developed ramp is providing improved access for underground exploration. Judging from available data we can reasonably expect the San Gonzalo resource and reserve to grow substantially in 2014. The particular nature of this deposit leads us to expect higher grades again at depth.
Long-term catalysts include:
- Re-processing of tailings is scheduled to start from 2017. The presently defined resource only includes the oxide portion of the tailings, but not the sulphides. Inclusion of the sulphides requires further studies, and news flow from these studies will further bolster the tailings re-processing project economics.
The current rally has broken through resistance at $1.60 convincingly and is tickling a long-standing open gap just above $2.00 as we are writing this article. We would interpret a break through $2.00 as a buy signal.
From a technical analysis perspective the 100% Fib retracement at $3 would be the next logical target, confirming our price target derived from fundamental data above.
(click to enlarge)
In December 2013 Avino announced an at-the-market offering of 5.75M new shares. Volume has been heavy throughout this rally so far and it can be assumed that some of these new shares are starting to find their way into the market. These sales might take some momentum out of the rally.
The silver price has been mis-behaving for some time and further price volatility is a distinct possibility. Avino Silver operates at a healthy margin at current silver prices, but the company's valuation would still suffer if the silver price was to drop even lower for a prolonged period of time.
Mexico has just modified its tax regime for precious metal miners. Most companies are still chewing through the new rules in order to determine the effects. Avino has invested large sums in its operations and we are expecting the tax burden to remain low for some time to come. More detailed information should become available throughout the year.
Avino Silver is a micro-cap company. Investments in such companies come at an added risk and with increased volatility. Potential investors may take some solace in the fact that Avino Silver trades on the NYSE main board, and that it has a long and un-tainted history as a publicly traded company.
Avino Silver has so far delivered on every promise made with regards to re-starting the old Avino mine. This company produces some of the cheapest silver in Mexico and has a steep growth trajectory ahead of itself. The market has started to wake up to these facts and is re-rating Avino Silver from junior developer status to producer status.
Our analyses are suggesting that the ongoing rally should continue and we are targeting $3 as a fair share price for Avino Silver. This would represent a 50% upside from the current share price and we expect this upside to be realized in short order.