On January 27 I wrote an article in which I argued that investors should buy shares in Avino Gold and Silver Mines (NYSEMKT:ASM). Since that time, the stock has risen an incredible 61 percent, and it seems to climb higher every day.
In that article I argued that Avino has done an excellent job of bringing the San Golzalo vein on its Avino property back into production. The company stopped producing there in 2000 due to low gold and silver prices, but in 2012 it started again. Despite a falling silver price and despite the fact that most silver miners failed to turn a profit in 2013, Avino was able to turn a profit and to significantly increase production. Despite this, the shares remained highly undervalued given the company’s future production potential and given its successful navigation of a difficult market.
This thesis proved to be correct, and those that bought into it were rewarded handsomely. While it might seem a little soon to revisit the position I feel it is necessary to do so given the enormous gains we have seen in such a short period of time. The risk/reward potential has changed given the massive move in the shares versus a small rise in the price of silver of just 8 percent, and an even smaller rise in the price of gold of just 5 percent.
In part this outperformance can be attributed to more than a revaluation in response to the points I made in my previous article. This is due to the company’s massive production expansion at its San Gonzalo vein in January. On February 4, the company reported that its monthly production of silver equivalent ounces (silver ounces plus gold ounces “translated” into silver at a ratio of 62.5:1) soared 27 percent over December’s already strong production. Production came in at 106,000 silver equivalent ounces versus 83,000 ounces in December.
This means that the company is on track to produce more than 1.25 million ounces in 2014. This doesn’t include the potential production coming from the main Avino vein at its Avino property. Currently the company is preparing to bring this vein back into production for the first time in 14 years, and it can more than double production on an annual basis!
So the situation is clearly better than it was when I last wrote about the company. However, with the shares trading substantially higher, expectations are higher, as well. Should the company come out with weak production figures or if production costs rise, the shares might correct quickly, as large price spikes such as this draw in a lot of speculative capital that is not in the stock for the long haul. Furthermore, I think now Avino shares are more vulnerable should the price of silver correct back to $20 per ounce, as the company’s strong relative performance against its peers seems to be priced in to a large extent.
Consequently I think that prudent investors should take some profits here. Investors who are looking to take a position might want to wait for a pullback. After all, it was only a week ago that the stock traded at $2 per share, and now it trades at nearly $2.70. While I think ultimately we will see $3 per share and even higher, a correction is needed to shake out the hot money.
Avino is a great company, and it is one you want to own longer term if you are bullish on the price of silver. But don’t get caught up in the near-term hype, and always buy low and sell high.