Just a few days ago, I revisited my bullish call on Avino Gold and Silver Mines (NYSEMKT:ASM) and recommended that investors consider taking some profits, as the shares had soared more than 60 percent since I recommended the stock in January.
Over the past couple of days, this anticipated correction has begun, with shares falling from a multiyear high of $2.84 per share down to Friday’s close of $2.40per share. The primary trigger of this was that the company announced a secondary offering. Management is selling $5 million worth of stock at $2.42 per share. This amounts to roughly 2,066,115 shares. Furthermore, with each share issued, the company is issuing half a warrant. Each warrant entitles the holder to purchase a share of Avino at $2.87 per share on or before February 15, 2017.
The secondary offering will likely spawn continued short-term weakness in the stock. Not only are gold and silver prices due for a correction in the next few weeks, but Avino shares have performed particularly well due to the company’s strong production figures from the San Gonzalo vein at its Avino mine in Mexico.
Nevertheless, I think that this weakness should be bought. The company is still relatively inexpensive compared to its peers. Furthermore, there is hardly anything arbitrary about the terms of this secondary offering. The $5 million in proceeds, coupled with the $5.7 million raised just prior to this, will be going toward restarting production at the main vein at the company’s Avino mine. This mine was a long-term producer up until 2000, when the company decided that metals prices were too low to continue producing.
Recently management decided to restart production, and the current plan is to begin later this year. While the company has yet to provide investors with specific details, given the size of the resource at the Avino vein (18 million ounces of silver), investors should expect the company’s production to at least double to two million ounces of silver annually by 2015.
The warrants have significance in the company’s development, as well. Management dated the warrants to expire around the time that it plans on constructing the Oxide Tailings mine adjacent to the Avino vein. This project is a longer-term project with an estimated construction cost of $29 million. Once in production, it is going to be a very low-cost producer of a million ounces of silver with all-in production costs of around $13 per ounce, meaning that it should generate $8 million in cash flow at $21 per ounce silver once in production. The warrants are going to provide Avino with $3 million of the $29 million needed to build the mine.
While the secondary offering is creating short-term weakness in the share price, long-term investors should be pleased that management is taking advantage of the fact that the shares rose too far too fast. While there is still a lot of value in Avino shares at $2.40 per share, I think the correction is set to continue. Meanwhile, the company will have more of the capital it needs in order to expand its already robust production both in the near term and in the long term. This makes the secondary offering an outstanding move from the perspective of long term shareholders, and it gives investors who missed the first leg up in the share price an opportunity to take a position.