To The Moon

Summary

• This analysis suggests a buy recommendation on Avino Silver & Gold Mines Ltd.
• The outlook is positive for the company's production and precious metal prices.
• Under current conditions, Avino sees its long-term growth potential increasing.
• The shares are not trading low, but a dip in the share price is expected.

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A Buy Rating for Avino Silver & Gold Mines Ltd.

This analysis suggests a Buy recommendation on shares of Avino Silver & Gold Mines Ltd. (NYSE:ASM), a Vancouver, Canada-based silver equivalent producer exploiting its 100% owned silver/copper/gold production at the Avino Mine, 65 km northeast of Durango, Durango, Mexico, and the adjacent La Preciosa Mine, which was added to the portfolio following its strategic acquisition in Q1 2022.

The valuation is supported by a positive outlook for the company's production and precious metal prices. However, this analysis also suggests that implementation should not occur soon, but only when the share price falls significantly from current levels. Now, the stock price is somewhere in the upper part of the stock price cycle, but the waters of the economy are mixing in a way that portends eddies in the near term, and with a leaner shape, the stock price will have more floor to rebuild the rally.

Avino Silver & Gold Mines Ltd. (hereinafter “Avino”) is a producer with a long-term horizon as annual production is on track to reach 2.5 to 2.8 million silver equivalent ounces (Ag Eq oz) for full year 2024, as operations improve from nearly 1.25 million Ag Eq oz of production in the first half of 2024, while the company has the strong opportunity within its district-scale land package to draw from an Ag Eq oz pool of total 371 million Ag Eq oz.

The Outlook for The Silver Price

The company’s production outlook is supported by a very promising silver price forecast, which is primarily due to a continued structural deficit between silver supply and demand. The Silver Institute reports that silver demand is expected to once again exceed silver supply in 2024 after three consecutive years of outperformance starting in 2021. For full-year 2024, The Silver Institute forecasts silver supply at 1,003.8 million ounces (down 1% from last year), while “led by strong industrial consumption” silver demand is estimated at 1,219.1 million ounces (up 2% from last year).

“The global market for the metal is expected to mark a fourth straight year of structural deficit, according to the Silver Institute's annual World Silver Survey.” reported on April 17, Carl Surran, Seeking Alpha News Editor.

But we must say that demand is destined to remain robust for many years to come, as silver is increasingly used in the electrification of human activities to reduce CO2 emissions into the atmosphere, as well as the development of technologies that support green transition strategies such as solar panels and also in AI data centres where silver is used in the powerful semiconductor chips needed for artificial intelligence. Instead, supply will tend to have more trouble expanding, limited by mining becoming increasingly difficult due to resource depletion, expensive operations, and geopolitical tensions. From this point of view, the production of Avino does not run many risks, because being located in Mexico implies a moderate risk according to the Sprott Mining Risk Heat Map 2024. In addition, Mexico is the country of silver production, as its mines produced 6,400 tons in 2023, an increase of 205 tons from 2022, ranking first in the world, according to Melissa Pistilli, reported by Investing News Network. The location of the activities should not cause concern for the shareholders. Under such supply and demand pledges, we are likely to see the price per ounce of silver affected by structural deficit as a very important factor for a continued upward trend going forward. But as we work to become more environmentally sustainable, the world is fraught with greater risks and economies are less healthy than before. Geopolitical tensions that are destabilizing globalization pose risks to growth and compromise the ability of monetary and fiscal policies to contain inflation and other flare-ups. These macroeconomic issues are raising concerns for portfolios, and investors are looking for safe haven remedies to mitigate potential negative winds. In this regard, silver may not shine as well as gold, as the yellow metal is the safe haven par excellence. However, silver, also known as the “poor man's gold”, is also bought by investors around the world to protect the value of their investments.

For example, while technical buying dominated among demand drivers in a recent round of price support, investors' use of the metal's safe haven amid Middle East tensions was evident not only in gold but also in silver markets, as noted by Kitco Metals analyst Jim Wycoff in an interview for Reuters.

Supported by structural demand-supply deficits as well as safe-haven purposes to protect portfolios from geopolitical tensions and economic uncertainty, Silver Spot Price (XAGUSD:CUR) has rallied significantly YTD: they are up 23.8% as of this writing, and the party may not be over yet.

Michale DiRienzo, president and CEO of The Silver Institute, said in June that there is further room for silver prices to uptrend, adding that:

“The future is bright for silver in terms of its use in green energy transition.”

Avino Is Exposed to Silver Changes: Silver in the Grip of the Gold Bull Market

Avino also produces gold and copper but share price movements are more exposed to changes in the price of silver, as production is reported by the company in terms of silver equivalent ounces. Gold had an impressive year-to-date rally as foreign investors sought safe haven with the Chinese at the top of most active buyers looking for ways to protect themselves from several threats of a geopolitical and macroeconomic nature. From time to time, renewed hopes for a Fed rate cut led to short-term jumps in precious metal prices, but according to analysts at Goldman Sachs Group, Inc. (GS), who were among the first to point this out in early February 2024, “resilient safe-haven purchases by central banks,” especially China, as analysts at SP Angel identified a little later, had been observed for several months as a trend responsible for strengthening the long-term uptrend. Fearing devaluation due to galloping inflation in the US and the risk of insolvency for the US economy, which the Fed's hawkish monetary policy still signals, Chinese investors sold their U.S. Treasuries and used the proceeds to buy physical safe-haven metals, gold and silver, as these investors “worked to reduce US dollar foreign exchange reserves”, according to Robert Crayfourd and Keith Watson, co-managers of the CQS Natural Resources Growth & Income fund on May 20. In the wake of this investment trend in China, Robert Crayfourd and Keith Watson noted that negative Western sentiment towards the metal began to improve as “financial players returned to the precious metal, with the West using ETFs as a proxy, providing prices with and further upward momentum”, also reported Carl Surran, Seeking Alpha News Editor.

Gold Spot Price (XAUUSD:CUR) is up 21.72% YTD. As reported by Kitco.com last week, according to Scott Bauer, CEO of Prosper Trading Company, the prospect of lower interest rates and continued geopolitical risks are now responsible for gold in its current new run above $2,500/oz, as it is now $2,510,80/oz at the time of writing. Bauer also believes that demand for gold and silver under current conditions has skyrocketed and supported by historical data on the gold/silver ratio, silver is poised for a rally. Thus, he said:

“Historically, when the ratio has topped 80, it has signaled that silver is inexpensive relative to gold,” Also, he said: “The last three times this happened, silver rallied 40%, 300% and 400%. When the ratio has fallen below 20, it has signaled that gold is inexpensive relative to silver.”

The spot price of silver (XAGUSD:CUR) was $29.50/ounce at the time of writing. Given the current prices displayed in the respective markets, the gold/silver ratio is 85.11 and the Bauer statistics suggest that the silver price will have a robust rally in the coming period.

This favorable combination of metal prices and production ounces, reflected for Avino in increased sales, cash flow and earnings, which the stock market craves as signs of the company's improvements, has driven Avino's share price up nearly 93% year-to-date. The share price has fared significantly better than the US stock market, but also the small and medium-sized gold/silver mining and exploration industry represented by VanEck The Junior Gold Miners ETF (GDXJ) had to give way to Avino at some point.

As a benchmark for the US stock market, the S&P 500 Index (SPX) is up 18% and the GDXJ is up 28.37% YTD, and the returns are at the time of writing.

Source: TradingView

How Avino Performs: Silver Pulls Up Income and Cash Flow

Year-to-date, Avino delivered record revenues of $27.18 million, reflecting a 43% YoY jump as a result of higher silver metal spot prices in markets averaging $26.253/oz in H1-2024, up almost 12% YoY, and steady production of silver equivalent ounces of 1,246,053 led to 1,147,914 silver equivalent payable ounces sold in H1-2024, up 20% y/y.

Driven by

“A combination of geopolitical risks related to the Middle East and the war in Ukraine, strong retail demand in China, central bank demand, rising debt-to-GDP among major economies and a potential resurgence of inflation.” indicated Saxo Bank's Ole Hansen in April,

the gold price ultimately also acted as a driving force for the price of silver, whose gains at a certain point shortly after mid-April “were even hotter than gold”. While “the traditional view is that silver will outperform gold in a bull market,” according to Metals Focus CEO Philip Newman as reported by Carl Surran, Seeking Alpha News Editor on April 17 -- this is because investors realized that they can achieve their safe haven strategies with silver too and cheaper than gold -- front-month Comex silver (XAGUSD:CUR) was up 14.3% in April 2024 and 18.8% since early 2024; while front-month Comex gold (XAUUSD:CUR) rose 6.9% in April 2024 and 15% in the period from the beginning of 2024 up to and including 17 April 2024.

Subsequently, the upward trend in silver prices continued, with the gray metal, along with gold and copper, “scoring a place on the podium,” Yoel Minkoff, Seeking Alpha News Editor reported on May 21 amid an “Olympics of metals” amid the wild world of commodities. The validity of “the traditional view” was supported by the fact that after reaching its all-time high on April 19 and 20, silver continued to outperform gold, posting a total year-to-date gain of 32%, while gold posted an 18% YTD return on May 21.

These were the positive demand factors, as Yoel Minkoff pointed out:

“It also benefits from all the safe haven attributes of its shiny cousin, such as a popular hedge against inflation, along with some distinctive practical qualities of its own. Silver is used for industrial purposes, like solar panel cells, and is relatively cheap in ounces when compared to pricey gold.”

On the production side: continued better-than-expected recovery from processing tonnes of ore at the La Preciosa surface deposit, combined with production from the adjacent Avino Mine, is also benefiting the company's steady level of silver equivalent ounces reflected in higher silver grades. These improvements also translate into a lower All-in Sustaining Cash Cost (“AISC”) per Silver Equivalent Payable Ounce of $21.40 for the first half of 2024, one per cent lower than last year.

Avino production is likely not in the class of cheap silver production as the industry average for AISC as estimated by The Silver Institute is $17/oz for 2023 with some additional data actually suggesting the attributable cost of producing silver as a by-product of copper, zinc and lead production may be even lower.

Avino saw higher sales, thanks in particular to a robust recovery in silver prices and better costs, leading to a huge 261% year-on-year jump in cash flow from operations to $3.425 million for H1-2024, while earnings before interest, tax and amortization (“EBITDA”) increased by 651% YoY to $5.122 million for H1-2024. The EBITDA margin was 18.84% of total revenue in the first half of 2024 against a margin of 3.58% for the first half of 2023. The adjusted earnings per share was up 400% YoY to $0.05 for H1-2024 from $0.01 in H1-2023.

This means that profitability is being significantly boosted by the bull market of the precious metals. Since the current conditions suggest that the price per ounce will continue to develop positively in the future, it is quite conceivable that the market price of Avino shares will be in a sustainable upward trend as long as silver continues its upward trend, albeit not steadily, but in cycles that correspond to the cyclicality of the commodity markets.

The Financial Condition Strengthened

Of the total capital budgeted at $7.3 - $9 million for 2024, capital expenditures are trending downwards with $3.3 million spent in H1-2024. They were also significantly below $5.6 million spent in H1-2023 as the company nears receipt of the environmental permit required to mine the Gloria and Abundancia veins, which will bring the La Preciosa mine in production and complete the Oxide Tailings Project, which will add significant mineral resources for a total of 370 million silver equivalent ounces across the two property mines.

In H1-2024, Avino reported free cash flow of $125 million, which the company is using to strengthen its financial position, including $5.3 million in cash on hand and short-term investments, up 98% year-over-year and working capital of $13.57 million, up 40% year-on-year.

Liquidity is more than enough to continue to fund the development of the La Preciosa mine with most of the growth capital in the form of mining and development equipment already in place as well as the drilling program at the Elena Tolosa mine, which along with the Guadalupe and the La Potosina deposits are part of the Avino property. Drilling is successful and progressing rapidly to explore the mineralisation potential beneath the Elena Tolosa mine.

Avino Shares Are Familiar with Long-Term Growth: But a Higher Margin Is Possible with Cyclicality

Buoyed by expected increases in precious metals prices and continued operational improvements, Avino stock is well positioned to outperform most of its small- and mid-cap peers over the long term, but also to add positive momentum to the effort to reduce the gap with the stock market.

Source: TradingView

Past performance is no guarantee of future returns, but it is useful to design the next strategy so that it will have a greater chance of success: In the past 5 years, Avino rose by 52.35%, while the US stock market represented by its benchmark, the SPX index, was up 97.27% and the industry of small and mid-tier miners and explorers represented by the benchmark of the GDXJ was up 15.21%. When investors take advantage of dips in the stock price, they increase their chance to outperform the industry and perhaps even beat the stock market. The following section highlights some factors that could cause Avino's share prices to dip in the short term.

The Stock Price: Another Dip Is Likely, and You Don’t Have to Wait Too Long Either

At the time of writing, shares under the symbol of ASM traded on the NYSE at $1.01 per share, giving it a market cap of $135.75 million. Shares are still trading above the MA ribbon despite recently being lower due to commodity consolidation ahead of the expected new rally. Also, shares are currently well above the midpoint of the 52-week range of $0.40 to $1.13.

Source: TradingView

The 14-day Relative Strength Indicator of 54 means that there is plenty of room for the downside for shares to achieve a dip in the stock price cycle, so until then investors are suggested to wait before implementing a Buy rating.

Around June 17, 2024, Avino shares on the NYSE formed a dip in the wake of cooling silver prices, which fell to “the lowest since May 14” on June 7 as US economic data with surprising strength in the labour market led by higher-than-expected non-farm payrolls in May dampened hopes for a late summer interest rate cut by the Fed. Higher interest rates tend to negatively impact the prices of silver and gold, as these metals do not provide any income. Therefore, in a high-interest rate environment, US Treasury bonds, which instead provide income based on a fixed interest rate, are preferred over silver and gold.

Another dip happened in early July 2024: Silver prices cooled somewhat as the Fed was expected to keep interest rates high at its July 31 meeting and ING Groep N.V. (ING) signalled optimism about a rate cut being postponed to the September meeting.

A third dip in Avino's share price occurred in early August 2024 as silver prices fell and eventually stagnated as markets were chaotic with large sell-offs worldwide. The pessimistic sentiment was suddenly triggered by fears of a recession in the US after the unemployment rate had earlier risen from 4.1% to 4.3%.

The factors that could lead to another dip are primarily 2: changes in Fed rate cut expectations and the likelihood of a US recession.

As for the first factor, given easing inflation and deteriorating labour market conditions, the Fed will most likely cut interest rates by 25 basis points at its September 18 meeting. Between late July and early August, driven by recession fears, market participants began to believe in a 50- bps rate cut. This broader 50bps cut is unlikely to happen as Fed rate traders' chance fell to 32.5% at the time of writing “compared to 50% before the release of the latest CPI data according to CME FedWatch Tools.”. The release of the latest CPI data was made on August 13.

Next Friday, August 23, 2024, Federal Reserve Chairman Jerome Powell is expected to outline the course for the coming months at the Fed's usual symposium in Jackson Hole. If the chairman disappoints traders and “makes a 25-bps rate cut likely but does not hint at the possibility of a deeper 50-bps cut,” as David Meger of High Ridge Futures believes, according to Reuters, then this could create negative winds for silver prices and also set the bar for falling stock prices for Avino.

As for fears of a recession in the US: Fears of a recession 2 weeks ago dragged stock markets down as traders and investors panicked. If there is a sharp deterioration in the US cycle, based on a 24-market beta of 1.66 for Avino shares on the NYSE, shares will also fall significantly.

We must say that the recession with its headwinds for investors' portfolios bodes well for silver and gold as these are sought as safe-haven strategies. But initially, the panicked market participants, blinded by the frenzy to get their funds back, won't be able to distinguish silver-equivalent producer Avino shares from the rest of the US-listed stocks.

The following two indicators point to a looming recession in the US.

• Economist Claudia Sahm, the designer of the Sahm Rule, believes that the US recession is likely to be three to six months from now. The Sahm Rule is an indicator that, performed on the last nine US recessions since 1970, has convinced most in the market about its intent to predict a subsequent one.
• The inverted yield curve indicator (three-month US Treasury yields are currently higher than ten-year US Treasury yields: 5.155% versus 3.797%), developed by Duke University professor and Canadian economist Campbell Harvey, also signals a looming recession for the US economy. Since World War II, this index has reliably predicted a recession 8 out of 8 times.

The same considerations apply to shares of Avino Silver & Gold Mines Ltd. traded on the Toronto Stock Exchange under the ASM:CA symbol, with a price of CA$1.38 per share and a market cap of CA$184.93 million, as of this article. The 52-week range was at CA$0.57 to CA$1.54/share, shares were trading completely above the MA Ribbon, and a 14-day RSI of 53.65 indicated shares could still move downwards.

Source: TradingView

The stock has the following daily trading volumes on both markets, which are not very high volumes in the US or low volumes in Canada: Over the past 3 months, an average of 1.14 million shares changed hands on the NYSE market (scroll down this Seeking Alpha page to the “Trading Data” section), while on the TSX, an average of 88,116 shares changed hands (scroll down on this Seeking Alpha page to the “Trading Data” section).

Stocks with low liquidity mean you may have trouble adjusting your holdings quickly if new circumstances require it.

The stock of Avino Silver & Gold Mines Ltd. has 134.98 million shares outstanding. A total of 129.3 million shares are making up the float, which is freely tradable on the stock exchanges' open market, and institutions own 7.68% of the float.

Conclusion

Avino Silver & Gold Mines Ltd. is a good alternative to investing directly in physical metals, which are typically out of reach for individual investors. Avino is a silver equivalent producer, so its primary source of income comes from silver production and the price of silver. The company's production is expected to improve over time, as are its costs, although these are not cheap compared to the industry average in 2023.

But rising silver prices, expected to generate significant profits, will offset the higher-than-industry average production costs, putting Avino in a solid position to deliver increasing sales, cash flow and robust margins.

The financial position was strengthened thanks to the silver rally. The company now has sufficient resources to continue its exploration and development activities. The company has many years of production to mine based on its current annual levels and what can be extracted from its mineral resources.

Shares aren't trading low relative to recent trends and could fall amid some headwinds expected to blow soon. So, investors would be wise to wait for a dip to arise before implementing the Buy rating.