While the price of gold (GLD) has been pummeled over the past month, it’s the silver price (SLV) that has taken the real beating.
This is evidenced by the industrial metal finding itself more than 18% off its recent highs, more than double the ~7% correction of gold in the same period.
The violent decline has pushed the price of silver back near $20.00/oz, which is only marginally above the average all-in cost to produce silver for primary producers, with this cost being all-in-sustaining costs plus growth capital and corporate G&A.
This is not ideal for the silver miners group, and especially not high-cost miners with $25.00/oz plus all-in costs that are now seeing negative margins for every ounce pulled out of the ground and processed on site.
The silver lining, though, is that if the silver price has declined to a point where growth is no longer incentivized, suggesting a steady decline in silver production if prices remain at or near these levels.
This obviously isn’t great for high-cost producers, but it is positive for those producers that will survive the short-term margin compression and are being thrown out with the bathwater.
In this update, we’ll look at two names that are trading at deep discounts to their historical multiples, and dig into their respective low-risk buy zones.
Avino Silver & Gold Mines (ASM)
Avino Silver & Gold Mines (ASM) is a ~$90 million silver producer that operates the Avino Mine in Durango, Mexico, which has more than a dozen named veins on the property and sits on the edge of a caldera.
The mine is unique given that it has silver, gold, and copper instead of just silver and gold like many primary silver mines, and it’s also unique in the sense that it is profitable despite a very small footprint, operating at a rate of barely 700,000 tonnes per annum, translating to production of 3.0 million ounces of silver per year dependent on grades.
Although Avino Silver & Gold Mines is a relatively small producer from a production and market cap standpoint and is a single-asset producer which I typically shy away from (single-asset producers can be higher-risk), the company has acquired a second project near its Avino Mine, La Preciosa, which has potential synergies with the ability to process material at the Avino Plant.
In addition, Avino has an Oxide Tailings Project just southwest of its Avino Mill facility. These two projects have the potential to increase the company’s annual production from 3.0 million ounces in 2023 to 7.0+ million ounces by 2028, giving Avino one of the best growth profiles sector-wide.
Obviously, one must be very careful when it comes to a micro-cap producer like Avino even if it is profitable at current silver prices with estimated operating costs of ~$16.50/oz.
However, with the stock now down sharply from its highs and getting closer to key support at $0.59 with a valuation of less than $0.30 per ounce of silver, we’re starting to see a margin of safety built into the stock.
So, if I were looking for a very speculative name to get exposure to silver, I would strongly consider buying ASM on any pullback below $0.59 where it has support, with the potential for a trade back towards the $0.90 - $1.00 level in the next 12 months.
Pan American Silver (PAAS)
Pan American Silver (PAAS) is one of the largest silver producers globally, with a market cap of ~$5.5 billion at a share price of $15.00 once its acquisition of Yamana Gold’s assets closes at quarter-end (an acquisition that’s been approved but has yet to close).
This recent deal is a game-changer for Pan American Silver gives that it gives the company added diversification (it adds 4 mines in South America, with one mine in a jurisdiction it already operates in: Argentina), and it lowers the company’s cost profile.
This is because Yamana is one of the lowest-cost producers globally, with all-in sustaining costs coming in at ~$1,000/oz in FY2022, below the industry average of $1,300/oz.
These two purely gold mines (Jacobina, Minera Florida) and two gold/silver mines (Cerro Moro, El Penon) owned by Yamana that will move into Pan American’s portfolio will complement the company’s Pan American’s mix of gold and silver mines in Mexico, Peru, Argentina, Canada, and Bolivia, with the combined company having no more than 25% of revenue exposure to any single country, a drastic improvement from much heavier concentration without Yamana Gold.
In addition, the combined company will benefit from more scale, with this often leading to a slight premium from a multiple standpoint given that producers with 1.0+ million ounce gold-equivalent profiles often trade at premiums to their smaller peers.
While we haven’t seen what the combined company will look like yet, we have a pretty good idea, with Pan American set to see a 50% increase in silver production per year and a ~100% increase in gold production, resulting in a production profile of ~1.1 million ounces of gold and 30 million ounces of silver, or the equivalent of more than 110 million silver-equivalent ounces per annum.
Importantly, this company will have higher margins this production profile excludes multiple development assets, including two world-class assets: Escobal and La Colorada Skarn.
These assets would provide a significant lift to output and without them in production, PAAS is receiving little value for them today.
So, what’s the opportunity?
Even without Yamana’s stronger assets, PAAS has historically traded at a cash flow multiple of 12.5, and I would argue that it could easily trade at 13.0x cash flow given the upgrade to its portfolio and the premium valuation that silver producers receive.
Based on conservative FY2023 cash flow per share estimates of $2.02, this translates to a fair value of $26.20, pointing to more than 70% upside from current levels.
This makes it one of the most undervalued silver producers and these assumptions are based on a conservative silver price of $21.00/oz for FY2023.
So, with the stock trading at a steep discount to fair value, I see this pullback to the $15.00 level (vs. a previous high above $32.00) as a gift, especially given the significant portfolio upgrade.
While most investors likely have little interest in buying silver miners when we’ve just seen a nasty rout in the silver price, this is often exactly the time to start nibbling on these names given that the best time to buy is when blood is in the streets.
At the current juncture, I don’t see most silver miners as cheap and I think we could still see lower levels.
That said, PAAS has underperformed materially and is one name that is cheap, and ASM would start to become more interesting below $0.59 given its large resource base and industry-leading growth profile.
So, if I were looking to diversify my portfolio with some materials exposure, I would view pullbacks below $15.00 in PAAS and $0.59 in ASM as opportunities to start new positions.
Disclosure: I am long PAAS
Taylor Dart
INO.com Contributor
Disclaimer: This article is the opinion of the contributor themselves. 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 in 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.
