The fourth quarter and fiscal year 2021 earnings season for the Silver Miners Index (SIL) is finally over, and one of the most recent companies to report results was Avino Silver & Gold (New York Stock Exchange: ASM). Since operations have been closed for most of the year due to a temporary shutdown, we have had another year of limited production and sales, but 2022 should be a much better year with operations approaching pre-mining rates -COVID-19. After a 25% rally from its lows, I don’t see Avino near a low-risk buy point, but I continue to see the stock as a speculative buy at $0.75 as a trading vehicle.

Avino reported fourth quarter and full year 2021 results last month, reporting quarterly production of approximately 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 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 over fiscal 2020 levels when operations were temporarily suspended. Let’s take a closer look below:

As shown in the graph above, Avino reported a significant increase in tonnes crushed during the fourth quarter, with the Avino operation reporting mill throughput of approximately 103,500 tonnes, compared to just under 60 000 tons in the third quarter. This led to a 90% increase in SEO production from Q3 2021 levels (~285,500 SEOs), with Avino reporting ~541,400 SEO production in Q4. Clearly, this was a welcome development after limited sales for a year through Q3 2021, but as the graph below shows, production was still more than 60% below levels. before COVID-19 (2019: ~2.4M SEOs).

Unfortunately, due to the significant decline in metal 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-inclusive sustaining costs [AISC] $25.60/oz in Q3 and $17.24/oz in Q4, comparing unfavorably to costs below $17.00/oz in fiscal 2019 and even less favorably to costs below 11, 00 $/oz in fiscal year 2018 ($10.67/oz). However, this is largely due to declining sales as the mine continues to ramp up, which can take several months, especially with Avino needing to complete hiring and training.

The good news is that we continue to see progress accelerating towards its goal of just over 2,000 tonnes per day. Based on this, the company provided a production estimate of approximately 2.4 million SEOs for fiscal year 2021, which translates to a slight increase from fiscal year 2019 levels (~2.397 million SEO products). The increase in sales should help reduce costs slightly due to the high fixed costs of mining, although I imagine there will be some offset due to inflationary pressures that were not there pre-COVID- 19.

Financial results

Given the increase in sales in the most recent period, revenues have finally started to increase and the mine was able to generate positive revenues in the fourth quarter. This was demonstrated by quarterly revenues of $9.3 million and mine operating profit of $4.4 million, a significant improvement over the same period last year. Increased revenue helped maintain Avino’s strong balance, with Avino ending the year with just over $30 million in working capital.

Assuming the price of silver continues to maintain or increase its trend, Avino should be able to generate meaningful revenue in fiscal 2021 and see decent margins from pre-COVID levels. -19. Indeed, while Avino may have had slightly lower costs in fiscal 2019 ($17.19/oz), it was operating with much lower metal prices than today (average price silver for fiscal year 2019: $17.40/oz). Therefore, even if we see some cost increase due to inflationary pressures, the Avino operation should be quite profitable at $24.50/oz.

Notably, Avino’s improved balance sheet, thanks to its timely sale of shares during last year’s silver price surge in Q1 2021 above $1.80 per share, helped the company improve its Avino operations. This includes significant investments in the construction of a dry-stack ISR, 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 bring it to near-term pre-feasibility level. Let’s take a look at Avino’s valuation below:

Evaluation and technical image

Based on an updated stock count of approximately 130 million fully diluted shares (post-La Preciosa transaction), Avino’s market capitalization is approximately $122 million at a price of the share of 0.94 USD. This is a very reasonable valuation for a small-scale silver producer, even though the company is a relatively high-cost producer, with costs likely to reach close to $17.00/oz over the course of fiscal year 2022. In fact, based on Avino’s ~116 million silver equivalent ounces at its mainline operation, the company has a valuation of approximately $1.05 per listing. This assessment assigns zero value to the cash or the neighboring and newly acquired La Preciosa project until there is a high degree of confidence that this resource can be mined profitably.

That said, I generally prefer to avoid single-asset producers, and this is especially true when it comes to those located in less favorable jurisdictions. Over the past 18 months I would say Mexico is a tough jurisdiction to operate in, with a permit dispute 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 he certainly offers great money leverage. Still, if I’m going to buy single-asset producers, I want a major differentiator like very high margins or a world-class orebody from a grade perspective, which Avino doesn’t have.

Since Avino doesn’t have a clear differentiation from its peers, I don’t consider the stock to be investable, but the stock is a decent trading vehicle for those looking for silver exposure due its liquidity relative to its peers (more than 2.0 million shares traded per week). However, after the recent rally, the stock 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 right now, and 20% above where I noted the stock would be a speculative buy at $0.78.

While I’m not thrilled with the 19% stock dilution that accompanied the acquisition of La Preciosa, Avino has a clean balance sheet, a decent operation, and an edge from La Preciosa if it can find a way to extract those 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 that would require a drop to US$0.75 or lower. Therefore, while I am currently neutral on Avino after its strong rally, I would consider the stock a speculative buy at $0.75 or lower.