first majestic silver

The Goldbug's Weekly Comment

May 7, 1997

Small is beautiful -

If your are looking for a highly leveraged silver stock, don't look further. This small company may be what you just need. International Avino Mines is listed on the VSE with the symbol IVV. It is a thin trader with only 3.5 million shares outstanding, and subsequently very illiquid. Therefore, it is highly volatile - and the spreads between the bid and ask prices are often very wide. Still, these features will foster extremely explosive rallies when certain conditions are met in the not too distant future. The company is also listed on the NASDAQ BB as IVVRF. However, its NASDAQ trading volume is even less than that on the VSE - and often there is no bid nor ask. Currently, the technicals of this stock are the best we have seen in 3 years.

International Avino is obviously a very small company with a total market capitalization of only C$12 million. This provides a very unique opportunity to profit, thanks to the very high leverage that can be obtained when a small company starts doing big things. IVV's main asset is a 49% interest in Cia. Minera Mexicana de Avino, a Mexican company, whose Chairman is Don Pedro Sanchez Mejorada, a mining engineer and metallurgist with years of experience in the industry. Mr. Mejorada was for over 20 years president of Industrias Peñoles SA, one of Mexico's largest mining companies. He was responsible for 20 operating mines, plus smelters and support operations. So, we are in competent hands here.

Cia. Minera de Avino owns 100% of the 6,488 acres Avino Silver Mine. This mine has been in production since the late 1960's - and still is processing more than 320,000 tons per year. Proven and probable underground reserves are approximately 4,000,000 tons grading 125 grams of silver per ton, 1.3 grams of gold per ton and 0.9% copper per ton. Annual production in 1997 should total more than one million ounces of silver, 6,000 ounces of gold and three millions pounds of copper. And these figures are probably conservative. At current production rates these reserves will last for at least another 10 years.

The operating results for January 97 are within budget, and recoveries have been higher. The numbers are in-line with the target production of more than 2 million ounces of silver equivalents. In other words, International Avino is heading for another year of $0.30-$0.35 net profit per share, based on the Avino Mine production only.

It may small, but big things could happen...

There is more to the real picture than meets the eye. As you well know, the silver market is approaching the day when above ground reserves will be completely depleted. When that day comes, much higher silver prices will be required to help bring above ground all the lower grade silver reserves that are currently held by the Pan American Silver and Silver Standard companies of this world. Interestingly, the Avino mine has a considerable amount of these low grades reserves as well.

A very detailed study of the Avino Mine was done in the late 1960's. Subsequently, a year of exploration work by a major international mining company was performed in the early 1980's (when silver prices exploded). The exploration drill work concluded that it was reasonably sure of indicated reserves, averaging about 100 grams per ton, and totaling more than 25 million tons of ore with a probable silver content of 75,000,000 ounces - with gold and copper credits. The study also concluded that a deeper geological resource of more than 25 million tons of ore with unknown grades could also be inferred. In other words, folks, International Avino and its Mexican partner are ready for higher silver prices. In addition to these reserves, some open pit and tailings reserves totaling some 3 million tons, averaging 100 grams per ton also exist on the properties. These reserves could be mined by a separate cyanide plant that would cost some US$2 million to build. Once higher silver prices come, this expansion investment will be justified.

Although the reserves that can currently be mined at a profit are only 4 million tons with a content of approximately 20,000,000 ounces of silver equivalents, the long term probable and possible reserves are in excess of 100 million ounces of silver with gold and copper credits. To help you appreciate the high leverage that International Avino offers during the coming silver price explosion, a comparison with Pan American Silver, which is considered to be the best and purest silver play available today, will reveal a lot. Needless to say my comparison of the two companies doesn't mean that I feel they are in the same class, and can be equitably compared. No, PAA is in a class by itself with 300 million ounces of silver in reserves, and an annual production in the neighborhood of 3 million ounces per year - with a cash war chest of more than US$40 million.

Look at these numbers:

Market Cap in $M (net of Cash)
Annual production (Moz equ.)
Reserves in Moz (all categories)

Market Cap/Production ratio
Market Cap/Reserves ratio



As you can see, the leverage in IVV is greater than that of PAA - assuming silver prices will indeed explode in the years ahead. Most of PAA reserves require higher silver prices in order to be mined at a profit. The same is true for IVV. However, it is important to mention IVV presently doesn't have the cash that would be needed to bring its low grades reserves into production. Nevertheless, it probably would not be too difficult for the company to find the necessary cash when silver prices are again at US$7 to US$8 per ounce. Well, this provides a lot of food for thought when you consider that, at the present time, IVV looks undervalued by a factor of at last 3 when compared to PAA. Add to this the fact that most experts are forecasting silver prices to go above US$10, and you get the picture. So, based on the current production and net profit figures, I can only conclude that International Avino is a very good deal in the $3-$4 range. But, when considering the possible silver squeeze, the low grade reserves of IVV - and therefore very high relative leverage, this stock is one of my favorite silver plays.

In fact, it reminds me of a small company that I followed in the early 1980's, when silver prices surged to US$50. The company was United Keno Hill (UKH.T). UKH had only 3 million shares outstanding, and a small silver production of a few million ounces with reserves of 20 or 30 million ounces or so. I can't recall the exact numbers, but what I do remember is that its price exploded during that period. The stock went from below $5 in the late 1970's to $70 in 1980. Net profits soared from pennies to $8.00+ per share in the same period. That is what I call leverage, and it could happen again with International Avino, if silver prices explode.

The picture gets a lot better! The Coneto Mine -

You will be glad to hear that Mr. Mejorada and Mr. Louis Wolfin, president of IVV (and also current president of Coral Gold and Bralorne-Pioneer) also believe that something big is about to happen in the silver market. So they bought another mine. After several years of negotiations with the miners' union, Cia. Minera Mexicana de Avino successfully acquired the 1,500 hectares Coneto Silver Mine in Durango State, Mexico.

The Coneto property was first mined in 1552, when prospectors exploited the rich surface. Near surface material grading was high at 300 grams of gold/ton and 3 kilograms of silver/ton. Recent surveys have suggested that less than 10% of the district's potential has been identified, but already more than 20 kilometers of vein systems have been uncovered. The southeast region of the property also contains a network of veins rich in fluorospar, a mineral with increasing demand in North America due to its environmentally friendly fluorite.

But that’s not all! The Bralorne-Pioneer Mines -

You may have heard of this mining complex that produced more than 4 million ounces of gold from 8 million tons of ore, grading 0.53 ounces per ton. This mine was the richest and most profitable gold producer of Western Canada from 1928 to 1971. International Avino (50%) and partner Bralorne-Pioneer Mines (BPN.V) acquired the properties in the early 1990's. After several delays and a lot of work including exploration, permitting, and mill construction, production start-up is now expected in May 1997.

Minable reserves are now at 150,000 ounces of gold coming from material garding of 0.31 ounces per ton. These are the immediate reserves that will be mined following a 4,000 tons of ore already stockpiled for initial production. The mine is expected to operate at an initial rate of 150 tons per day, gradually increasing to 450 tons per day. Based on a $US350 per ounce price of gold, the mine is projected to generate net income $US2.7 million in its first full year. In subsequent years annual net income should reach $US5.0 million. The mine will initially produce some 12,000-20,000 ounces of gold, and should reach eventually 50,000 ounces. The long-term goal of Louis Wolfin is to increase production to 100,000 ounces per year. But for that they will need additional reserves to become available. According to highly qualified consultants, more than 1.7 million tons of proven and probable reserves grading 0.25 ounces of gold per ton also exist at deeper levels. These will need the mine-shaft to be de-watered before they can be considered as minable. Once the mine starts to generate some cash flow, this will become a high priority.

Recent exploration of some high grade veins have demonstrated some interesting interceptions that prove without a doubt that more reserves will be found on the Bralorne-Pionneer mining complex, which is coming back to life in 1997 - after 25 years of inactivity. International Avino's share of production will approximate 10,000 ounces of gold in the first year of operation, and will grow substantially in the following period to reach 25,000 ounces of gold annually, and eventually enjoy the definite potential to obtain 50,000 ounces of gold per annum. However, let's be very conservative and use the figure of 10,000 ounces of gold per year.

On this basis, International Avino will earn another $US1 million per year of net profit with gold prices at current levels. That should be good for at least $0.30 per share of net profit in their first full year of operation. Add to this the profit from their Mexican operations and you possibly have a double digits stock price. Of course, many things can happen and the world of mining is full of surprises. But if you consider all the assets of IVV, and keep in perspective that the company is currently valued at only $C12 million, one is forced to conclude that it is an excellent deal. Add to this the very real possibility of much higher gold and silver prices in the years ahead, and you have here a very highly leveraged speculation.

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