Aya Gold & Silver: Bright Prospects, But First A Dip (OTCMKTS:AYASF)

A Hold Rating for shares of Aya Gold & Silver Inc.

Canadian mining and exploration company Aya Gold & Silver Inc. (OTCQX:AYASF) (TSX:AYA:CA) has a very positive outlook. Driven by robust silver pricing coupled with strong operations, the cash flow generation enables growth projects to focus on resource exploration and processing capacity development. The business is well projected into the future. The silver price outlook is also rosy. However, in the short term, there is a chance of a dip in the stock price.

In the previous article, shares of Aya Gold & Silver Inc. rated also “Hold”: This Canadian silver producer and explorer in Morocco was seen as able to take advantage of the very good outlook for the energy transition key element silver as, according to plans, operations were improving. Although this represents an attractive investment opportunity, retail investors are also asked not to rush into buying but rather wait for a significant decline in the stock price, which will initially be due to the Fed’s restrictive policies to calm inflation in the economy. Despite the attractive investment opportunity, investors were also asked to watch for a significant fall in the share price that could take place due to the market impact from the economic consequences of the Fed’s restrictive anti-inflation policy. Although the stock market has yet to face recession headwinds, additional recessionary signals from the Fed, which is now focused on delaying the first rate cut later this year amid persistent inflation, resulted in two significant declines in the price of Aya Gold & Silver Inc. shares compared to the previous article: The first in late February 2024, and the subsequent one in late March/early April 2024. By buying these dips, the strategy has maximized the potential for a good return as the stock price uptrend continues.

Until the economic recession sets in, there will likely be more opportunities to buy the dips as long as the Fed wants to keep interest rates higher.

The Silver Outlook, Aya Gold & Silver Inc.’s Primary Commodity

The company produces silver, whose production has great prospects as industrial demand will benefit from the energy transition program and the electrification of human activities, while investment demand will benefit from investors resorting to a hedging portfolio strategy amid an increasingly uncertain global outlook. Not only for economic sustainability and environmental protection, as silver is a key component in many clean energy technologies such as solar panels, but silver also finds massive use in the following products due to its excellent electrical and thermal conductivity and storage capacity. Therefore, it is widely used in various devices such as electric batteries, electronic devices, mobile phones, tablets, and computers, the consumption of which will be stimulated by software such as AI. The Silver Institute reports that after a record use of silver in industrial applications in 2022, the green economy and other green-related applications significantly increased global demand for electrical & electronics to the extent that 654.4 million ounces of silver were used in industrial applications in 2023, a new record. In addition to key drivers in 2022 and 2023, the Silver Institute survey also sees new opportunities for robust industrial demand for silver in the future, as the gray metal is expected to be integrated into more AI technologies and the new era of AI is now upon us. As such, industrial demand for silver is on track to reach new record highs in the future, which will boost global demand. The latest forecast is for a 2 percent increase in total demand to 1.219 million ounces in 2024, compared to 1.195 million ounces in 2023.

When it comes to portfolio hedging purposes, silver is considered the poor man’s gold, as the yellow metal is the safe-haven asset of choice against the headwinds of increased risk and uncertainty. In this context, gold may have attracted more attention from silver in 2023, with net hedging demand for silver falling year-on-year to 12.2 million ounces in 2023 from 17.9 million ounces in 2022. Silver was likely sought more as an industrial commodity rather than for investment purposes. However, the gray metal is also suitable for this as it is now used by investors as a hedge against the risk of recession due to the Federal Reserve’s restrictive interest rate policy to contain inflation and against the headwinds of geopolitical tensions, particularly from the Ukrainian war and geopolitical crisis in the Middle East. Analysts at Trading Economics believe that silver prices are supported not only by industrial demand but also by a safe-haven demand:

“the metal remains set for an over 6% monthly gain thanks to safe-haven and industrial demand.” source: Trading Economics

Global silver mine production fell 1 percent year-over-year to 830.5 million ounces in 2023 as increased supply from Chile and Bolivia combined with higher recycling of ethylene oxide (or “EO”) catalysts was not enough to offset declines due to labor strike at Newmont Corporation (NEM) Peñasquito mine in Mexico, and due to lower grades, and some mine closures in Argentina, Australia, and Russia. Going forward, the depletion of silver ore resources, combined with environmental concerns and costly underground mining technology, will continue to weigh on silver supplies, and this year’s projected second-biggest deficit in the silver market in 20 years is unlikely to be the last.

Global silver supply is expected to be more limited relative to the demand for the gray metal, and the expected balance shortfall is likely to further drive the price per ounce higher.

At the time of writing, an ounce of silver is trading at $26.5, and after gaining 11.4% so far this year, it is expected to reach $29.2 an ounce before the end of this quarter and then continue to rise reaching $30.97/ounce in a year time.

Aya Gold & Silver Inc. Operations Amid Rising Silver Prices

The rising silver price per ounce bodes well for Aya Gold & Silver Inc.’s cash flow, as does the improvement in the company’s cost levels that the Canadian miner continues to report from its production in Morocco.

Operations are progressing as the company mined 493,340 tonnes of ore in 2023, representing 79% year-on-year growth driven by underground activities and the commencement of open pit mining operations in the third quarter of 2023. Although the average grade of ore entering the mill was slightly lower than the previous year, recovery rates were confirmed to be on the upside, so combined with a 10% increase in total ore processed to 281,634 tonnes, Aya Gold & Silver increased production to 1,970 646 ounces in 2023, up 5% year over year.

Continuous improvements in operations result in lower cash costs per ounce of silver sold ($12.50/oz in 2023 vs $12.63/oz in 2022), and with silver prices resilient due to industrial demand, Aya’s margins benefit.

A 12% increase in revenue to $42.85 million in 2023, driven by higher sales volumes and silver prices, easily translated into strong cash flow generation of $21.2 million in 2023, up 120% year over year.

The Financial Position Remains Solid, while the Development of the Zgounder Processing Plant Is Just a Step Away

As of December 30, 2023, Aya Gold & Silver Inc.’s balance sheet showed total cash and ST investments of $49.8 million and the potential to unlock $16.8 million from total silver inventory. The balance sheet was burdened by a total debt of $58.8 million, 98% of which was long-term debt. However, Aya Gold & Silver is expected to have more cash upon completion of the offering of 7,573,900 common shares at $10.25 per share earlier in 2024. As a result, the company raised approximately $77.6 million plus $10,125 million. The latter proceeds came from the underwriters fully exercising their over-allotment option and purchasing an additional 987,900 shares.

An Altman Z-score of 4.29 indicates that the company’s financial condition is good, as values above 3.0 indicate safe zones and a very low or no risk of bankruptcy within a few years.

The company will use the above monetary resources to fund exploration efforts at Zgounder as this asset offers potential to the south, east, at depth, and nearby, where some results from previous drilling confirmed the potential for satellite deposits. This mineral deposit is the Zgounder mine, located 98 km south of Marrakesh, where the mineral team is also conducting a milling and processing facility expansion project in addition to mineral resource exploration activities. The expansion project, which aims to increase the capacity of the Zgounder silver mine up to 2,700 tonnes per day (or “tpd”) from 700 tpd as of the February 2022 feasibility study, was 83% complete at the end of February 2024, advancing from 60% at the end of Q3 2023. The project is on track for completion within the estimated capital cost of $159 million and will be delivered in the second quarter of 2024.

Looking forward to 2024, the company is targeting production of 2.6 million to 3.2 million ounces of silver (an increase of 32% to 62.3% over 2023 due to expanded processing capacity) at a cash cost of between $13 and $14.50 per ounce (up 4.5% to 16% from 2023 due to higher production).

Further Upside Potential from Additional Exploration in Morocco

The company is also using the funds to establish polymetallic production and, in the future, will also supply ounces of gold equivalent from Morocco but from the Boumadine project 75 km southwest of Errachidia, where the mineral team is involved in resource exploration activities. But first, the company needs to increase resources and move them from the “inferred resources” category to “indicated” to “measured” and then up to the “reserves” category. The last category is the only one that contains proven mineral resources from an economic point of view, which allows a forecast of how much precious metals can be produced, for how long, and at what cost. At the same time, metallurgical testing continues to examine whether it is possible to profitably extract the precious metal from the mineral using processing techniques that include a flotation stage followed by an oxidation and leaching stage.

Aya Gold & Silver Inc. recently announced a Mineral Resource Estimate (or “MRE”) for its Boumadine: 7.4 million ounces (or “Moz”) of silver and 165,000 ounces of gold in the Indicated Mineral Resources grading 113 grams of silver per tonne of ore (or “g/t”) and 2.51 g/t gold. This is not the highest Mineral Resource category achieved to date, meaning the category will continue to be raised through exploration, evaluation, and testing to meet the requirements for profitable deposit exploitation. The site offers significant growth potential for future MRE determination, as currently permitted activities are conducted on a very small portion of the potentially mineralized area. However, Aya Gold & Silver Inc. will continue to use its financial strength to further expand the area package on which the team is permitted to conduct exploration activities. It is clear that this growth potential, which is gradually emerging through the above activities, offers positive upside potential for the share price.

The Reason for Holding Shares of Aya Gold & Silver

In my opinion, there are no adverse reasons why a position in Aya Gold & Silver Inc. cannot continue to benefit from bullish sentiment, supported by increased capacity at the Zgounder processing plant and exploration at the Zgounder and Boumadine mines, helped by a rosy silver price outlook. This analysis suggests holding shares of Aya Gold & Silver Inc. for the time being: Stock prices undoubtedly have a positive long-term trend, but because they move across cycles, they are not currently at the bottom of the cycle. Assuming they continue to rise, driven by corporate catalysts and silver prices, investors may want to take advantage of a lower price across cycles to allow the position to appreciate as much as possible going forward.

Share Price Target: A Dip Is Possible Based on Recent Past

Under the AYASF symbol, shares of Aya Gold & Silver Inc. traded at $9.65/share for a market cap of $1.32 billion as of this writing. The shares are trading significantly above the past year’s trends, as evidenced by their higher levels relative to the MA Ribbon. Shares are also closer to the upper limit than the lower limit of the 52-week range of $4.80 to $10.77. The shares of Aya Gold & Silver Inc. significantly outperformed the 71.86% jump in the US stock market over the past 5 years.

The 14-day RSI of 62.58 suggests there is plenty of room for shares to reach lower levels under downward pressure on correlated silver prices from the Fed’s “higher-for-longer” stance at least until September, as the Personal Consumer Price Index – Fed’s preferred measure of underlying inflation — is stubbornly likely to stay.

In fact, the US dollar Silver Spot Price (XAGUSD:CUR) lost 5.2% in the last (calendar) week from $28.65/oz on April 19th to $27.1650/oz on April 26th, as hopes of an imminent US interest rate cut this year faded with the Fed expected to hold its benchmark rate at 5.25% to 5.5% at the end of its two-day policy meeting on Wednesday, May 1, 2024. This shows that a less likely rate cut scenario is typically priced into a lower silver price by the market.

The postponement of the rate cut may impact industrial and investment demand for the precious metal, and with market participants expecting weaker silver prices in response, the scenario does not bode well for sentiment towards Aya Gold & Silver shares as cash flow (a key driver of share prices) would be considered more subdued. Higher financing costs slow the development of green projects and others that require silver as a key component, and also increase the opportunity cost of owning no-income yielding silver instead of fixed-income assets like U.S. bonds, causing overall silver demand to lose momentum and silver prices to suffer.

Aya Gold & Silver’s shares also experienced a significant but temporary downtrend, which provided opportunities to buy the dips: This happened in the second half of February 2024, in the wake of a generally unfavorable month for the silver spot price, as hopes for an early interest rate cut from the Federal Reserve gradually moderated as economic data came in, notably higher-than-expected US inflation figures.

At approximately the end of February 2024, AYASF stock was at $7.10/share, 26.5% lower compared to the current stock price, while at CA$9.6/share AYA:CA stock was 27.5% lower compared to the current share price.

Since it appears that silver prices tend to trade higher when interest rates fall based on historical data, fading expectations of a U.S. rate cut are likely to slow the metal’s progression. In the wake of silver’s five-day losing streak through March 22, Aya Gold & Silver shares saw another significant drop in early April 2024 as investors lowered their expectations for a US rate cut following a slightly larger-than-expected rise in consumer prices in February. Indeed, before Aya Gold & Silver’s second stock price dip, the odds of a June rate cut among traders fell to 59% after February CPI data released on March 12, from a previous 72%, according to the CME FedWatch tool.

On April 1, 2024, AYASF stock was around $8.10/share, 16.5% lower compared to the current share price, while at around $11/share AYA:CA stock price was 17% lower compared to the current price level.

Investors may see another dip buying opportunity in Aya Gold & Silver shares over the next few weeks as the first quarterly increase in a year in the Fed’s preferred inflation gauge, the “core” index of personal consumption expenditures (or “PCE”) now underscores concerns that the central bank may not cut interest rates as quickly as it has predicted.

The same considerations apply to shares in Aya Gold & Silver Inc. under the symbol AYA:CA: They were trading at CA$13.23/share at the time of writing, for a market capitalization of CA$ 1.80 billion. The shares are trading well above last year’s trends, as evidenced by their higher prices compared to the MA Ribbon. Shares are also closer to the upper limit than the lower limit of the 52-week range of CA$ 6.58 to CA$ 14.81. The shares of Aya Gold & Silver Inc. significantly outperformed the 71.87% rise in the US stock market over the past 5 years.

The 14-day RSI of 63.91 suggests there is plenty of room for shares to reach lower levels under downward pressure from the Fed’s “higher for longer” stance on silver prices in the short term.

Conclusion

Aya Gold & Silver Inc. is a Canadian silver mining, exploration, and development company in Morocco and an explorer of the potential of polymetallic, including gold, to be produced from another site in Morocco.

The company is making significant progress as its business on enhanced operations, which will benefit from a processing capacity expansion planned for the second quarter of 2024, supported by elevated silver prices, is generating robust cash flow.

The company has also raised capital through the issuance of additional common shares; so overall there is a solid financial foundation to continue all its mineral activities in Morocco and project the business well into the future.

The rosy outlook for silver will create a very stimulating environment for Aya Gold & Silver Inc.

Silver is a key element in green projects and electrification of operations, serves as a portfolio hedge against geopolitical headwinds and increased inflation, and has upside potential from interest rate cuts.

The shares of Aya Gold & Silver Inc. are poised to rise further after rising more than 500% in the past five years, significantly outperforming the US stock market.

Investors are advised to maintain their position in this stock in both markets and look to increase their position whenever the market experiences a dip in the stock price.

Based on recent associations, stubborn inflation is convincing the Fed to delay rate cuts later this year, which doesn’t bode well for silver prices in the short term. Because sentiment toward Aya Gold & Silver Inc. stocks is influenced by silver price trends, investors may have a short-term opportunity to buy shares by taking advantage of a sharp decline in the share price. Therefore, hold shares in Aya Gold & Silver Inc. for the time being.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.