Avino: Betting on a Silver Lining

Central Mexico, which held the largest concentration of silver found by the conquistadors, has been the center of Mexico’s billion-ounce silver production history. Having given up as much as a third of the total amount of silver ever mined globally, the Latin American country is today is the world’s second largest producer (after Peru)—and the largest producer of silver from mines.

The white metal may have a lower profile that its yellow counterpart, but while the price of gold rose 31% in the past 12 months, silver quietly leaped 37% over the same period, definitive proof that all that glitters is not the yellow metal. Even so, and despite economists and analysts expressing bullish sentiments on silver, it remains heavily undervalued when compared with gold, energy commodities and stocks.

One company banking on silver’s rise is Avino Silver & Gold Mines Ltd. (TSX: ASM), a family-owned small-cap mining play based in Vancouver, Canada. Founded by Louis Wolfin in 1968, the company is primarily engaged in the exploration and acquisition of precious and base metals in British Columbia and the Yukon Territory, Canada and Durango State, Mexico.

The company operated their Onvia mine in Mexico, about 50 miles northeast of the town of Durango, on a small scale (300 to 400 tons a day) from 1974 until 2001, before shutting down because of low metal prices. During the nearly 30 years that the mine was in production, it gave up some 16 million ounces of silver, 96,000 ounces of gold and 24 million pounds of copper.

After raising $15 million in capital and bringing a geologist onboard, the company resumed exploration in 2006. It drilled again until last year, when the economic slowdown forced the tiny operation to once again put a hold on business. The past January, Avino once again started operations. Construction of the mine office, mechanical shop, fuel storage depot and containment structure were completed in the spring. A mining engineer was hired to oversee the development efforts and to manage contractor operations, and a plant manager was also hired. Diversified Mineral Group, Inc., the mining contractor, set up the ramp and decline to intersect the mine’s San Gonzalo vein. A new 250 tonne-per-day circuit was added and the mill, which grinds and pulverizes rock to extract ore, was upgraded.

Company president and director David Wolfin believes that not operating and promoting the mine for several years has created opportunity by leaving large areas of the mine undeveloped. With the help of Luismin, S.A. de C.V., a Mexican subsidiary of Goldcorp Inc. (NYSE: GG), they are probing at least a dozen other targets. Through satellite imaging, geological testing and aggressive drilling, Avino has also uncovered zones of silver, gold, zinc and lead on the property. And 3D modeling has indicated potential in largely untapped areas of the mine, leaving the company confident about future prospects.

Drill holes in the mine’s San Gonzalez zone have tested positive for near surface high-grade silver. Avino is prepping for a 10,000 tonne bulk sampling program, which it expects to complete later this year. Once fully up and running, the company expects an annual commercial production of 890,000 ounces silver and 4,500 ounces gold. According to a Wardrop Engineering Study, conducted in 2006, there is at least $40 million worth of silver left in the mine with an estimated recoverable net value of $31 million (based on silver selling at just $8 an ounce).

In the meantime, Avino isn’t sitting on its hands. On August 23, it announced a deal to sell private Swiss commodity company MRI Trading AG all the copper concentrates produced from stockpiled material remaining on the site from past mining. Avino has agreed to deliver 400 to 600 tonnes of concentrate containing roughly 50 to 70 tonnes of copper, 20,000 to 30,000 ounces of silver and 150 to 200 ounces of gold. While the financial terms of the contract were not disclosed, the deal will allow Avino to raise much-needed capital as it moves toward production.

Avino’s strong management team has significant experience in both the financial and operations side of the business. While the family patriarch brings more than four decades of industry know-how to the table, his son bears down on all the details of business planning and forging relationships.

The younger Wolfin, who studied business and geology at Colorado State University, got his start in the late 1980s on the floor of Vancouver Stock Exchange and at several brokerage firms. Before arriving at the helm of Avino, he held various positions of management responsibility with The Resource Group, which is made up of several mining concerns.

While silver has a thinner market and is subject to more volatile price swings than gold, it also has different leverage. Not only does it trade as a safe haven asset, but its use in industry—appliances like washing machines, computers and consumer-grade electronics—provides exposure to growth and recovery sectors.

Silver’s still relatively low price is primarily due to a weak economy, which has caused consumer spending to grind to a virtual crawl, effecting the sale of big-ticket items that rely on silver for their manufacture. As the world emerges from the grips of the downturn, silver’s price should rise with consumer spending and an increase in industrial silver demand.

However, the most compelling case for investing in silver lies not on the demand side, but due to supply. Compared to other metals, silver is rare. There are less than two dozen pure silver mines operating around the world today (most silver drawn from the earth is a by-product from mining operations targeting copper, zinc and lead). The amount of silver mined annually has been insufficient to meet global demand for each of the past 20 years, according to the CPM Group, a New York commodity research firm.

Going forward, silver has not only strong supply and demand fundamentals driving growth in consumption, but also in investment, as increasing numbers of individual investors turn to the shiny metal.

For its part, Avino is well positioned to benefit from a silver market that, in spite of concerns about the short-term, is poised to ascend over the long haul.

Don’t let this company’s small size fool you. The Onvia mine’s unexplored depths, as well as Avino’s industry expertise, existing relationships with industry players and debt-free status make it an outfit brimming with potential.

Wall Street Elite recommends buying Avino , which trades on the Toronto Exchange (TSX: ASM) at $0.80.

Shannon Roxborough, Analyst, Oakshire Financial