Avino Silver & Gold: A Better Year Ahead

Summary

• Avino Silver & Gold released its Q4 and FY2021 results last month, reporting quarterly production of ~541,400 silver-equivalent ounces, a significant improvement now that operations are ramping up.
• While this still led to a significant decline in production relative to FY2019 levels, the company appears confident that it will produce more than 2.2 million silver-equivalent ounces this year.
• This would represent a return to pre-COVID-19 levels, and the higher silver price should help to offset any margin softness related to sector-wide inflationary pressures.
• After a 25% rally off its lows, I do not see Avino near a low-risk buy point, but I continue to see the stock as a Speculative Buy at US$0.75 as a trading vehicle.

SL_Photography/iStock Editorial via Getty Images

The Q4 and FY2021 Earnings Season for the Silver Miners Index (SIL) has finally ended, and one of the most recent companies to report its results was Avino Silver & Gold (NYSE:ASM). Given that operations were shuttered for most of the year due to a temporary closure, we saw another year of limited production and sales, but 2022 should be a much better year with operations ramping up towards pre-COVID-19 mining rates. After a 25% rally off its lows, I do not see Avino near a low-risk buy point, but I continue to see the stock as a Speculative Buy at US$0.75 as a trading vehicle.

Avino Mine (Company Presentation)

Avino released its Q4 and FY2021 results last month, reporting quarterly production of ~541,400 silver-equivalent ounces [SEOs], a significant improvement on a sequential and year-over-year basis. This increase was helped by the restart of operations in August and a progressive ramp-up towards year-end. The higher Q4 production helped push the company's annual production to ~840,000 SEOs, a 20% improvement from FY2020 levels when operations were temporarily suspended. Let's take a closer look below:

Avino - Quarterly Production Results (Company Filings, Author's Chart)

As the chart above shows, Avino reported a significant increase in tonnes milled during Q4, with the Avino operating reported mill throughput of ~103,500 tonnes, up from just shy of 60,000 tonnes in Q3. This led to a 90% increase in SEO production vs. Q3 2021 levels (~285,500 SEOs), with Avino reporting Q4 production of ~541,400 SEOs. Obviously, this was a welcome development after limited sales for a year leading up to Q3 2021, but as the below chart shows, production was still more than 60% below pre-COVID-19 levels (2019: ~2.4 million SEOs).

Avino - Annual Silver-Equivalent Ounce Production (Company Filings, Author's Chart)

Unfortunately, due to the significant decline in metal sold and the fixed costs of operating a mine, Avino's costs have skyrocketed and are sitting above pre-COVID-19 levels. This is based on all-in sustaining costs [AISC] of $25.60/oz in Q3 and $17.24/oz in Q4, comparing unfavorably to sub $17.00/oz costs in FY2019 and even less favorably to sub $11.00/oz costs in FY2018 ($10.67/oz). However, this is largely due to the lower sales as the mine continues to ramp up, which can take several months, especially with Avino needing to complete hiring and training.

Avino - All-in Sustaining Costs Per Ounce (Company Filings, Author's Chart)

The good news is that we continue to see progress ramping up towards its goal of just over 2,000 tonnes per day. Based on this, the company has provided a production estimate of ~2.4 million SEOs in FY2021, translating to a slight increase vs. FY2019 levels (~2.397 million SEOs produced). The higher sales should help to pull down costs slightly due to the high fixed costs of mining, though I would imagine there will be some offset due to inflationary pressures that were not existent pre-COVID-19.

Financial Results

Given the increase in sales in the most recent period, revenue has finally begun to trend higher, and the mine was able to generate positive income in Q4. This was evidenced by quarterly revenue of $9.3 million and mine operating income of $4.4 million, a significant improvement from the year-ago period. The increase in revenue helped maintain Avino's strong balance, with Avino ending the year with just over $30 million in working capital.

Avino - Quarterly Revenue & Mine Operating Income/Loss (Company Filings, Author's Chart)

Assuming the silver price continues to hold its ground or trend higher, Avino should be able to generate meaningful revenue in FY2021 and see decent margins relative to pre-COVID-19 levels. This is because while Avino may have had slightly lower costs in FY2019 ($17.19/oz), it was working with much lower metals prices than it is today (FY2019 average silver price: $17.40/oz). Hence, even if we see some cost creep due to inflationary pressures, the Avino operation should be quite profitable at $24.50/oz.

Silver Futures Price (TC2000.com)

Notably, Avino's improved balance sheet, thanks to its timely share sale during last year's spike in silver prices in Q1 2021 above US$1.80 per share has helped the company to improve its Avino operation. This includes meaningful investments in constructing a dry stack TSF, the construction of new buildings for its geological team and community outreach, and higher exploration expenditures. Finally, the company is also completing work on its Oxide Tailings Resource to move this to Pre-Feasibility level short-term. Let's take a look at Avino's valuation below:

Valuation & Technical Picture

Based on an updated share count of ~130 million fully diluted shares (post-La Preciosa transaction), Avino's market cap comes in at ~$122 million at a share price of US$0.94. This is a very reasonable valuation for a small-scale silver producer, even if the company is a relatively high-cost producer, with costs likely to come in close to $17.00/oz in FY2022. In fact, based on Avino's ~116 million silver-equivalent ounces at its main operation, the company has a valuation of roughly $1.05 per SEO. This valuation ascribes zero value to cash or the nearby and newly acquired La Preciosa Project until there's high confidence that this resource can be extracted profitably.

Avino's Projects/Operations (Company Presentation)

Having said that, I generally prefer to avoid single-asset producers, and that's especially true when it comes to those in less favorable jurisdictions. Over the past 18 months, I would argue that Mexico is a tricky jurisdiction to operate in, with a permitting dispute at San Jose (FSM) and Great Panther (GPL) still struggling to get updated permits from CONAGUA. This doesn't mean that Avino won't succeed in Mexico, given that every situation is different, and it certainly offers high leverage to silver. Still, if I'm going to buy single-asset producers, I want a major differentiator such as very high margins or a world-class ore body from a grade standpoint, which is not the case with Avino.

Given that Avino doesn't have a clear differentiator relative to peers, I do not see the stock as investable, but the stock is a decent trading vehicle for those looking for silver exposure due to its liquidity relative to peers (2.0+ million shares traded per week). However, after the recent rally, the stock has found itself just above the middle of its new expected trading range. This is based on resistance at $1.11 and support at $0.75. So, while Avino is cheap, its reward/risk ratio is less favorable currently, and 20% above where I noted the stock would be a Speculative Buy at US$0.78.

ASM Daily Chart (TC2000.com)

While I am not elated with the 19% share dilution that came with the La Preciosa acquisition, Avino does have a clean balance sheet, a satisfactory operation, and upside from La Preciosa if it can find a way to extract these ounces profitably. This makes Avino a decent trading vehicle, but the key is to buy at or below support when it comes to micro-cap names, and this would require a dip to US$0.75 or lower. Therefore, while I am currently Neutral on Avino after its sharp rally, I would view the stock as a Speculative Buy at US$0.75 or lower.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GLDD either through stock ownership, options, or other derivatives. 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.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.

Comments

[Akesha]

The future prospects of ASM are excellent according to Investor Observers and Simply Wall St. Even the most pessimistic analyst has the stock price rising over 50% in the next 12 months. That forecast assumes the price of silver to remain very low. The risks that ASM endured are mostly tailwinds now. The number #1 risk is still jurisdiction with Mexico being difficult at times. My personal comment is that Mexico is applying stricter environmental standards to prevent mining companies from taking ores and leaving behind land devastation. I think that this is wholly positive. This forces mining concerns to be more efficient. It may raise initial costs and spur future smoother operations and profitability. ASM is medium risk with explosive potential. Not a good candidate for short term trading unless you are an expert. A suggestion, not investment advice, a safe play would be a longer term buy and hold with an active stop loss in place. If things suddenly go sideways you need protection. I am personally appalled by how many investors are willing to place 100% of their investment on contentious risk of losing it all without protection. From 2012 stock market investors have become lazy thinking that buying the dip is all you need for a successful investment plan.
The rules have changed and few are noticing. ASM is currently 50% undervalued. Along with PMNXF are my favorite 2 picks in the mining sector.

[mrmrre]

Good job on the numbers TD. You may want to take a closer look at LA Preciosa. A very strategic asset for Avino and one for which Coeur paid $384MM. For a proven operator with a mill next door it should have at least a purchase price valuation. I think it’s worth $100MM.

[Taylor Dart]

Hi Trey,

Nice to hear from you as always, and thanks for sharing your view. I'm still on the fence until we see an economic study since I think it's a little tight at conservative metals prices which is what Avino should be using ($22.0/oz silver), but I agree that it's worth what they paid, they certainly got a much better deal than Coeur.