Operational Setbacks And Policy Risks Will Define Mine Life Yet Leave Upside Potential

Catalysts

About Andean Precious Metals

Andean Precious Metals operates precious metals mines, with producing assets focused on silver and gold in Bolivia and the United States.

What are the underlying business or industry changes driving this perspective?

• Although San Bartolome is running efficiently with high recovery rates and targets to utilize its 5,000 tonnes per day capacity without major new spending, future ore sourcing still depends on maintaining and expanding community agreements. These agreements could restrict throughput and weigh on revenue if negotiations stall or if grades are below expectations.
• Although the company is advancing a heap leach expansion, new agglomeration equipment and potential Merrill Crowe capacity increases at Golden Queen, all of which are intended to smooth recoveries and support higher volumes, execution risk around these process changes could lead to lower realized recoveries and pressure on net margins if technical issues persist or recur.
• While exploration drilling at Golden Queen and San Bartolome is aimed at extending mine life and defining additional resources, the economic viability of these targets is not guaranteed. If drilling results do not convert into mineable reserves, the expected long run production base and associated earnings could fall short of current plans.
• Although the new Bolivian government is currently signaling a more investment friendly tone with potential for legal or tax reforms, any shift back to less supportive policies or delays in implementing reforms could add uncertainty to San Bartolome and increase the long term cost burden. This could affect future operating margins and free cash flow.
• While the company holds record liquid assets of $121 million and has a base shelf prospectus for up to $200 million of securities that can support growth projects or acquisitions, deploying this capital into assets that fail to deliver expected returns could dilute earnings and weigh on future returns on invested capital.

Assumptions

This narrative explores a more pessimistic perspective on Andean Precious Metals compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Andean Precious Metals's revenue will grow by 2.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 25.9% today to 16.1% in 3 years time.
• The bearish analysts expect earnings to reach $52.3 million (and earnings per share of $0.4) by about February 2029, down from $77.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 27.7x on those 2029 earnings, up from 12.2x today. This future PE is greater than the current PE for the CA Metals and Mining industry at 24.9x.
• The bearish analysts expect the number of shares outstanding to decline by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Golden Queen relies on heap leach performance, and the recent percolation issue in Cell 11 shows how operational disruptions and slower solution application can push recoveries into later periods. This can create extended working capital tie ups in inventory and put pressure on short term revenue and earnings.
• San Bartolome depends on long running ore sourcing agreements with local communities and third parties. While management highlights ongoing progress, any breakdown in social licenses or slower access to the planned 7 million tonnes could limit throughput toward the 5,000 tonnes per day target and weigh on revenue and gross margins over time.
• The company is increasing its exposure to longer term exploration and mine life extension at both San Bartolome and Golden Queen. If current drilling programs at Hilltop, Starlight Vein or Bolivian oxide targets do not convert into economic reserves, future production profiles could fall short of expectations, which would affect long run revenue and free cash flow generation.
• The new, more investment friendly government rhetoric in Bolivia is still described as cautiously optimistic and subject to potential legal or tax reform outcomes that are not yet clear. Any shift to less favorable policies or slower than expected reforms could increase operating costs and tax burdens and compress net margins at San Bartolome.
• The company now has record liquid assets of $121 million and a base shelf prospectus for up to $200 million of securities. If that financial flexibility leads to acquisitions or growth projects that do not earn attractive returns on capital, shareholders could face dilution and lower long term earnings per share and returns on invested capital.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Andean Precious Metals is CA$10.85, which represents up to two standard deviations below the consensus price target of CA$12.85. This valuation is based on what can be assumed as the expectations of Andean Precious Metals's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$14.98, and the most bearish reporting a price target of just CA$10.85.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $324.6 million, earnings will come to $52.3 million, and it would be trading on a PE ratio of 27.7x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of CA$8.62, the analyst price target of CA$10.85 is 20.6% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.