Avino Silver and Gold Stocks: A Better Year Ahead (NYSE:ASM)
Fourth quarter and fiscal year 2021 earnings season for the Silver Miners Index (SIL) has finally concluded, and one of the most recent companies to report earnings was Avino Silver & Gold (NYSE:ASM). Since operations have ceased For most of the year we saw another year of limited production and sales due to a temporary shutdown, but 2022 should be a much better year as operations ramp up to pre-COVID-19 mining rates. After rallying 25% from its lows, I don’t see Avino anywhere near a low-risk buy point, but I still see the stock as a speculative buy at $0.75 as a trading vehicle.
Avino released its fourth quarter and fiscal 2021 results last month and reported quarterly production of approximately 541,400 silver equivalent ounces [SEOs], a significant improvement on a sequential and yearly basis. This increase was supported by the resumption of operations in August and a gradual ramp-up towards the end of the year. Higher fourth-quarter production helped push the company’s annual production to ~840,000 SEOs, a 20% improvement from fiscal 2020 levels when operations were temporarily suspended. Let’s take a closer look below:
As the chart above shows, Avino reported a significant increase in tonnes milled in the fourth quarter, with Avino’s reported operating mill throughput of approximately 103,500 tonnes, versus just under 60,000 tonnes in the third quarter. This resulted in a 90% increase in SEO production from 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 chart below shows, production was still more than 60% below pre-COVID-19 levels (2019: ~2.4 million SEOs ).
Unfortunately, due to the significant decline in metals sold and the fixed costs of operating a mine, Avino’s costs have skyrocketed and are above pre-COVID-19 levels. This is based on all-in sustaining costs [AISC] from $25.60/oz in Q3 and $17.24/oz in Q4, compared to the cost of under $17.00/oz in fiscal 2019 and even less favorable at the cost of under 11, $00/oz in FY18 ($10.67/oz). However, this is largely due to lower sales as the mine continues to ramp up, which may take several months, especially if Avino needs to complete hiring and training.
The good news is that we continue to see progress toward the goal of just over 2,000 tons per day. Based on this, the company has provided a production estimate of ~2.4 million SEOs in FY2021, up slightly from FY2019 levels (~2.397 million SEOs produced). The higher sales should help bring costs down slightly due to the high fixed costs of mining, although I imagine there will be some offsetting due to inflationary pressures that weren’t there before COVID-19.
Given the recent increase in sales, sales have finally started to trend upwards and the mine was able to post positive earnings in the fourth quarter. This was evidenced by quarterly revenue of $9.3 million and mine operating income of $4.4 million, a significant improvement over the same period last year. The increase in revenue helped maintain Avino’s strong balance, with Avino ending the year with just over $30 million in working capital.
Assuming silver prices continue to hold or trend up, Avino should be able to generate significant revenues in fiscal 2021 and generate reasonable margins compared to pre-COVID-19 levels. This is because while Avino had slightly lower costs in fiscal 2019 ($17.19/oz), it was operating at much lower metal prices than today (average silver price in fiscal 2019: $17.40/oz). Even if we see some cost increases due to inflationary pressures, Avino should be fairly profitable to operate at $24.50/oz.
In particular, Avino’s improved balance sheet thanks to the timely sale of shares during last year’s first quarter 2021 silver price surge above $1.80 per share has helped the Company improve its Avino operations. This includes significant investments in the construction of a dry-stack TSF, the construction of new buildings for the geological team and public relations, and increased exploration spending. Finally, the Company is also completing work on its Oxide Tailings resource to bring it to interim feasibility levels in the short term. Let’s take a look at Avino’s review below:
Review & Technical Image
Based on an updated share count of approximately 130 million fully diluted shares (post-La Preciosa transaction), Avino’s market capitalization is approximately $122 million at a share price of $0.94. This is a very reasonable valuation for a small silver producer, even if the company is a relatively high-cost producer, likely to cost close to $17.00/oz in FY2022. Based on Avino’s approximately 116 million silver equivalent ounces in its main operations, the Company has a valuation of approximately $1.05 per SEO. This assessment attributes no value to cash or the nearby and newly acquired La Preciosa project until there is high confidence that this resource can be profitably mined.
However, I generally prefer to avoid single-asset producers, and that’s especially true for those in less favorable jurisdictions. Over the past 18 months I would argue that Mexico is a difficult jurisdiction to operate in, with a permit battle in San Jose (FSM) and Great Panther (GPL) still struggling to get updated permits from CONAGUA . That doesn’t mean Avino won’t be successful in Mexico, as every situation is different, and it certainly offers high leverage for silver. However, when I buy single asset producers I want a key differentiator such as very high margins or a world class orebody from a grade perspective, which is not the case with Avino.
Given that Avino doesn’t have a clear differentiator from its peers, I don’t see the stock as investable, but the stock’s liquidity compared to its peers (more than 2.0 million shares traded) makes it a decent trading vehicle for those looking to seek exposure to silver per week). However, after the recent rally, the stock is just above the middle of its new expected trading range. This is based on the $1.11 resistance and $0.75 support. While Avino is cheap, its reward-to-risk ratio is less favorable right now, up 20% from what I noted that the stock would be a speculative buy at $0.78.
While I’m not pleased with the 19% stock dilution that came with the La Preciosa acquisition, Avino has a clean balance sheet, satisfactory operations, and a plus over La Preciosa if it finds a way to extract those ounces profitably. This makes Avino a decent trading tool, but the key is to buy at or below support when it comes to micro-cap names, and that would require a dip to $0.75 or below. Therefore, while I am currently neutral on Avino following its strong rally, I would view the stock as a speculative buy at $0.75 or lower.