I have written quite a bit about resource related equities lately. When I started to write about individual companies I generally thought that people would read the article, while some made a comment in the comment section. But much to my surprise, I recently have gotten a request. Generally speaking, people that get requests are much more established and well known investors; honestly, I am just some guy who invests in resources. I am pretty good at it, but in terms of established credentials, I am not uber rich, nor have I generated a massive following, so I have to say, I do think this pretty cool that I have already gotten a request when it comes evaluating resource companies. Anyway, that company is called Avino Silver and Gold mines (NYSEMKT: ASM).
On a valuation stand point, I think it's decent. Currently, it's trading at EV/EBITDA ratio of 8, and roughly 5 times its cash per share value, which is calculated to be $0.19-$0.20 per share. When it comes to the company's book value, it's trading at roughly the same price as its book value per share price, which stands at $1.05 per share. So on a valuation stand point this company is decent, but it's not anything to write home about.
In terms of the company itself, let's start with its resource reserves. It didn't post proven and probable estimate, so we will have to go with measured and indicated (M&I), which in my opinion, is also a reliable metric. In terms of the company's overall resources, its silver reserves stands at 13,638,653 ounces of silver at M&I basis, while its gold resources contain 90,758 ounces on an M&I basis.
Its core asset is the Avino property. This property contains roughly 10,835,338 ounces of silver, and 72,207 ounces of gold. This asset makes up the majority of their resource estimates. When it comes to silver, this asset makes up roughly 79 percent of its silver resources, and when it comes to gold, this asset makes up roughly 79 percent of its estimated resources. This resource is made up of three projects, its San Gonzalo mine, the Avino mine, and Oxide tailings project. When it comes to this asset, the first thing that sticks out to me is their deal with Samsung (OTC:SSNLF). In July of 2015, Avino signed an agreement with Samsung, which enables Samsung to buy concentrates of copper, silver, and gold exclusively from the Avino mine for a period of 24 months. In this agreement, Samsung advanced Avino $10 million dollars in August of 2015, and in return, Avino will pay them back on a consecutive month basis starting in June 2016 over a 15 month time period. Interest accrued from this deal stands at a 3 month US Libor rate, plus 4.75 percent interest.
In terms of this assets production, currently, the Avino mine is producing 1,801,997 ounces of silver equivalent production. Remember, the key word is equivalent, in terms of the real silver production, that was calculated at 717,901 ounces.
Its other producing mine is its San Gonzalo mine. This mine is producing roughly 1,218,351 ounces of silver equivalent production, with an all in sustaining cost of $12.14 per ounce. So if you take the same percentage as you did with its Avino mine, this would mean that the San Gonzalo mine is producing roughly 475,156 ounces of silver per year.
The last asset of the Avino property is called Oxide Tailings Resource. This property is estimated to produce roughly 1.4 million ounces of silver equivalents per year, while generating an internal rate of return of 54 percent at a $20 dollar silver price, and $1256 gold price.
Its last asset that has grabbed headlines is called Bralorne Gold mine. This property was acquired in quarter four of 2014. This mining district is estimated to have some of the richest gold mines in British Columbia history. This mine is estimated to contain 43,375 ounces of gold at grades of 9.11 grams per ton. Over the next couple of years, growth from this project will be purely exploration in my opinion.
When it comes to operation costs, currently, its overall cash costs (which is purely extraction costs), is reported at $6.61 per ounce, and it's all in sustaining costs are reported at $9.50 per ounce.
In terms of the company's financials, its current ratio stands at 1.42, its total assets to total liabilities ratio stands at 2.46, so that means for every $1 dollar worth of liabilities it has on the balance sheet, the company contains $2.46 worth of assets. In terms of its cash holdings, Avino is carrying roughly $7.4 million dollars' worth of cash in its treasury. In my opinion, this is a strong balance sheet, especially in this low priced environment.
In terms of its income and cash flow, its income was reduced significantly for the year 2015, were it reported a net income of $483,424 dollars. The year prior, it reported a net income of $2,514,169 dollars. I would attribute this large decline to its foreign exchange costs, and the recent strength of the dollar. In 2014, it had foreign exchange gain of $316,599, while in 2015 it reported a foreign exchange loss of $(833,822) dollars. That is a $1,150,421 reversal. Its tax expense also increased by $1,766,826 dollars for the year 2015, which I also believe contributed to the large drop in net income in 2015.
This year its cash flow wasn't very healthy, were I calculated it to be (7,731,046) dollars. I attribute this to mainly taxes, lower metal prices, and a high exploration budget as well.
I believe that Avino will do well in the long run, but is still in its developmental stage. Last year they spent roughly $26 million dollars in exploration expenses. In a bull market, exploration success can greatly benefit a stock, and send the price significantly higher, but with the Fed talking about raising rates, and normalizing monetary policy (to bad I didn't write this sentence on April Fool's Day), the market isn't focused on resource related equities, despite the nice run up, and in the beginning stages of a bull market, its producers that garner the most attention. That is why I believe the benefits of the company's exploration budget won't be priced into this company's stock until next year at the very earliest. But once it does, Avino's share price will soar in my opinion.
But overall, this company is a low cost producer, with production growth in the pipeline, and has a high beta to silver with a calculated beta of roughly 1.18-2.
What I also liked about the company, is its 2016 outlook. Its stated goals were to improve and maintain profitable mining operations, to advance the Bralorne project towards profitable production, to explore regional targets on the Avino property, followed by other properties in their resource portfolio as well. This will greatly enhance its reserve estimates, which will benefit the stock price later, but if you're looking to take advantage of this new bull market in resource related equities their exploration success will greatly benefit shareholders over the next couple of years, just not right away.
I also believe that many of their costs such as foreign exchange losses, will be corrected when the monetary environment, and forward guidance of the Fed begins to change. My biggest concern is the great increase in their tax bill, I hope they are working on a way to solve this issue, but right now I don't see a quick solution.
Overall, this company is a low cost producer with profitable operations in a low cost environment. It contains production growth, exploration growth all in its pipeline which will great increase shareholder value over the next couple of years. I do have two problems with this company, one is their increased tax bill, which I think can only be solved over time, and solving this will require geopolitically diversifying their assets, so there is no near term solution for this problem. I also don't like how they report their resources on an equivalent basis, to me that is a little shady. But I do think this company will do well over the next bull market in resource related equities.
Disclosure: I am/we are 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.
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