Avino Silver & Gold Mines (NYSE:ASM) is a small-cap precious metals miner I haven’t written about. It owns a mine in Mexico as well as surrounding land positions with significant silver, copper, and gold reserves/resources. I dare to suggest it is one of the most powerful leverage ideas for potential long-term shortages of mined metals supply in both silver and copper. These two metals are critical to the success of the green energy revolution in reducing hazardous gas emissions from fossil fuels. Of course, each metal has various applications and investment potential, so you are not only reliant on massive copper demand for electric-vehicle motors or silver usage in solar panels.

The company has started a 5-year plan to more than quadruple production and cut mining expenses per ounce of silver equivalent (using copper and gold as credits). With a strong balance sheet entering the capital spending phase, any dramatic price increases in the three metals will boost operating income while making money available for growth plans easier to get.

Furthermore, 368 million ounces of silver-equivalent resources under the ground are now available to investors for the ridiculously low “cost” of $0.21 cents per ounce! In essence, you pay very little money up front to gain exposure to future mining revenues. It is, in effect, a call option on silver/copper/gold prices with no expiration date. In comparison, larger diversified silver-focused mining companies with U.S. and Canadian assets that produce ore at breakeven to net income for owners [for example, Hecla (NYSE:HL) and Coeur Mining (NYSE:CDE) are priced in the $0.30 to $1 per silver-equivalent ounce in the ground range on equity value].

Mining Activities

Avino will be marginally profitable in 2022-23 by extracting the three metals from the ground, with current projections putting a 30- to 40-year mine lifespan on its resource base surrounding the flagship property. Trading at a 1.5x sales valuation and EPS less than 10x represent discounts of more than 50% compared to the world’s mining heavyweights with comparable resource configurations.

In early 2022, Avino purchased from Coeur Mining a land package next door with accretive resources that can easily be accommodated into Avino’s existing plant and equipment flow – La Preciosa. In my opinion, these assets, when combined with only $2 million in net corporate long-term liabilities at the end of March ($18 million current assets vs. $20 million total liabilities for ASM), indicate significant equity value upfront ($78 million in equity capitalization at $0.66 per share).

Cash expenses and AISC have been declining as output has achieved new highs in the last year. While certain special cost overruns occurred in Q1, general production growth is continuing.

Silver and copper currently contribute 80% of total revenue, approximately evenly weighted. However, over the next five years, the breakdown is expected to shift more significantly in favor of silver. With its increasing use in solar panels and other green-energy advancements, I believe silver is one of the most undervalued and underappreciated commodities in the market right now. I have long-term upside estimates for silver of $50+ per ounce, which I have discussed in previous writings since last summer.

Avino’s chart pattern is relatively appealing, with the price increasing by +30% in the last year. Remember that over the same time period, the US equities market has increased from +4% for the smaller Russell 2000 businesses to +13% for the S&P 500 index and +25% for the NASDAQ 100 Big Tech names. However, a significant drop from $1 has occurred since April. The two-month price drop has thrown off my momentum indicators for underlying strength. If you buy shares, you are essentially betting that the long-term metals leverage narrative is one not to be missed.

On a 10-year graph of weekly price movements, shares have not increased in value at all. Three swings above $2 per share have occurred in 2014, 2016, and early 2021, on silver asset sentiment runs higher and/or short-term firm accomplishments. I’ve calculated 1-year and 2-year moving averages. The most significant up moves have occurred after breaking above the 2-year MA. From a technical trading standpoint, this technique makes sense if you want to wait until the price is back over $0.78 before buying.

The intriguing aspect of the ASM investment proposal is that underlying metals prices have been rising over the last year. Further rises in silver and copper, in particular, should take the stock quote back above $1 in 2024, bolstering the existing valuation, earnings and cash flow generation, and a healthy growth profile for production. Silver and copper have been testing their 200-day moving averages over the last week, so keep an eye on them. A rally in July would be good news for Avino Silver stockholders.

Last Thoughts

My motivation for owning Avino Silver is its exposure to rising silver and copper prices, particularly in 2024-25. I believe that an economic recovery phase will demonstrate to everyone that there is a lack of mined supply for the two metals.

Do you want proof of a looming silver supply-demand imbalance? Already, silver coins and small bullion bars have sold for the highest premiums to “spot” prices (of 20% or more) in the last year, since the depths of the 2008 Great Recession banking and financial crisis. Following the incident, silver soared from a low of US$9 per ounce to $49 in 2011.

Furthermore, the futures trading market has the biggest inversion spread in forward contract pricing favoring short-term deliveries. While 1-year rates remain only slightly higher than spot, individuals asking for delivery in two months pay significant premiums. 

Copper inventories are also extremely low today. The London Metal Exchange, the principal international market for copper trading, saw inventory levels (particularly in relation to global sales and usage) reach all-time lows in April. Today’s stocks are HALF of what they were just before the epidemic began in early 2020, and ONE-THIRD of what they were in August 2019.

In a nutshell, here’s my case for owning Avino Silver. Rising silver and copper output, along with flat to declining operating costs to extract each from the ground, should allow profitability and cash flow to skyrocket over the next five years. With metals prices remaining stable, management expects EBITDA to nearly TRIPLE, for a compounded annual rate of +25%.

If silver/copper/gold prices grow by 50% over the following five years, EBITDA could increase from $17 million in 2022 to over $100 million yearly, indicating a +45% compounded rate per year. Where else can you find a forecasted growth rate of this magnitude from a corporation with minimal net liabilities today? What if precious metals prices double rather than double in the next five years?

Avino ranks towards the middle of the pack in terms of current “enterprise value” (equity + debt) to forward 2023 EBITDA projections when compared to other miners in the United States, Mexico, Canada, and worldwide. ASM, on the other hand, stands out as a top precious metals mining pick to me due to its enormous long-life resource base and ultra-conservative balance sheet.

Is Avino risk-free? No, there are significant hazards associated with operating a single little mine in Mexico. One risk is local politics and labor demands. Mexico is constantly experimenting with new taxes and regulations for miners. Furthermore, concerns with ore quality for metals found in the ore might cause unanticipated drops in output from time to time.

Then, my prediction of increasing metals pricing is not a foregone conclusion. A big concern is that lower silver/copper/gold prices will have a long-term detrimental impact on operating results and investor valuations.

However, many of these adverse risks appear to be discounted by the lower value of on-ground resources, a P/E multiple of less than 10x, and EV readings of 5x EBITDA. Larger, more diverse peers in the United States and Canada are essentially selling for double the earnings ratios assigned to Avino Silver.

In my opinion, competent property management might bring tremendous shareholder value. The newly acquired nearby resources should raise production levels and maybe cut the overall per unit cost of extraction. What’s the advantage? If EBITDA increases by 5x and net reported income increases by a similar amount, forecasts of $3 to $5 per share over time are not out of the question. This equates to “potential” returns of +350% to +650% over the next 3-5 years. For the dreamers, an immediate double in precious metals pricing may result in a P/E ratio nearing one.

Just keep in mind that the higher-risk profile of this investment necessitates a lower-than-normal proportion for the amount of a stake in your portfolio. In the minor mining sector, share prices can always fall to zero if there are hitches in expansion and/or expensive capital raises to enhance production. To me, the upside of Avino Silver is worth the risk. I grade the stock as a Buy.

Featured Image: Pexels © Tom Fisk

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