Avino Silver: Setting Up For A Re-Rate

| About: Avino Silver (ASM)

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

The Thesis

Avino Silver (NYSEMKT:ASM) is a junior silver mining company with a 45 year history operating the property around the Avino mine in the Durango region in Mexico.

Avino Silver's financial results for Q2/2013 were published on August 30, 2013 and the share price jumped north by almost 8% on a generally red day for silver stocks. For very good reason we believe. In our view this could be the start of a re-rating for Avino. We would like to present a summary of our research on this company in the present article.

The Avino Property

The history of the Avino mine dates back to 1500. This mine was one of the first Spanish silver mines in Mexico with production reported as early as 1500. Output of 16M ounces of silver, 96,000 ounces of gold and 24M pounds of copper has been documented over time. Avino Silver operated the mine for 27 years from 1974, commencing underground operations in 1993. In 2001 the mine became uneconomical and production ceased. By 2006, silver prices were showing strong signs of recovery and Avino Silver started activities to revive the mine. Funds were raised, facilities were refurbished and connected to the power grid, and exploration on the property surrounding the existing mine was initiated. Early last year, an agreement was struck with third parties and full control of the old mine was acquired in exchange for a net smelter royalty.

Production using a 250 tpd circuit first started from stockpiles and soon shifted to ore sourced from the newly discovered San Gonzalo mine. A second 250 tpd circuit was added in April designated to continue processing stockpiled ore. The operation has been running on both circuits for 4 months now (not counting August) and production has stabilized at satisfactory levels of over 70,000 silver-equivalent ounces per month. The diagram below pulled from our data base illustrates the steady increase of monthly production since last year.

The main prize of Avino's land package is the historic Avino mine. The underground mine is being dewatered at the moment. Dry portions of the mine are developed for mining and production is scheduled to start in 2014. Additional 1000 tpd milling capacity is being refurbished for this purpose tripling current milling capacity. There are close to 24M silver-equivalent ounces in indicated resources and further 16M silver-equivalent ounces in inferred resources reported for this mine.

Further growth will come from re-processing mineral rich oxide 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 at the company's current market capitalization. Avino's plans have the oxide tailings deposit in production by late 2015.

Q2/2013 Financial Report

There was a pleasant surprise in the quarterly financial results published today: Avino has managed to generate free cash flow and reported $0.05 earnings per share. We find this remarkable since the silver price has been extremely volatile in this reporting period and several well-established primary silver producers have posted losses.

The company reported net earnings of $0.05 per share. This marks the first profitable quarter in many years for the company and represents a milestone in our view.

The report indicated all-in sustainable costs of $12.80 for the second quarter and $15.93 for the first six months. Cash costs have come down from $14.74 in the first quarter to $11.72 in the second quarter. Considering the relatively small size of the present Avino operation we find this low cost structure truly outstanding. Previous concerns about the company's ability to fund rehabilitation of the old Avino mine from cash flow will need to be put to rest in the light of these results.

We were also pleasantly surprised to see Avino report production costs as All-In Sustainable Costs, or AISC. To the best of our knowledge Avino Silver is the first primary silver producer to use this new metric defined by the World Gold Council a couple of months ago.

The Thesis

There are currently only 27.43M Avino Silver shares on issue with very little institutional holdings. We assume that institutions have been watching Avino's progress and results like this past quarter's should trigger institutional interest. The share price will react very strongly to institutions entering the stock.

The growth potential of Avino is extraordinary. The flawless execution of Avino's plan so far gives confidence in management's ability. We see a high probability of Avino being an emerging mid-cap silver producer with an output of 2M+ silver equivalent ounces per year just from the Avino property within two years. Noting the present market capitalization of just $40M, we see the share price re-rate from present levels in order to reflect this potential in the near future.

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.

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