Record Margins And Strong Balance Sheet Will Support Future Precious Metals Upside

Catalysts

About Andean Precious Metals

Andean Precious Metals operates silver and gold producing assets, including the San Bartolome operation in Bolivia and the Golden Queen mine, with a focus on efficient production and exploration driven growth.

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

• High metal prices combined with record quarterly revenue of $90.4 million, record net income of $43.7 million and record earnings per share of $0.29 are giving the company a strong earnings base that can amplify future moves in precious metal prices, supporting potential upside in revenue and earnings leverage.
• San Bartolome is running near the upper end of margin guidance with a cash gross operating margin of $16.13 per silver equivalent ounce and a gross margin ratio of 43.8%, while exploration drilling on multiple oxide targets and third party ore sourcing agreements aim to extend mine life and keep the mill near its planned 5,000 tonnes per day capacity, supporting future revenue and margin resilience.
• Golden Queen is seeing production normalize after leach cycle issues. The team is reconditioning the affected cell, improving blending, adding a new agglomeration drum and planning a fine bypass, while also advancing an 8,100 meter Phase 3 drill program and a new heap leach pad, which together target longer mine life, steadier output and more stable all in sustaining costs.
• Planned process improvements at Golden Queen, including increasing Merrill Crowe solution treatment from 3,000 to 4,000 gallons per minute with relatively modest spending, are designed to capture more gold bearing solution instead of diverting it to low grade ponds. These improvements could lift recoveries, improve production levels and support higher operating cash flow and EBITDA.
• A very strong balance sheet with $121 million in liquid assets, negative net debt and a $200 million base shelf prospectus provides ample flexibility to pursue growth projects and potential acquisitions in a supportive precious metals pricing backdrop, which can influence future production scale, revenue and earnings per share.

Assumptions

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

• The bullish analysts are assuming Andean Precious Metals's revenue will grow by 2.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 25.9% today to 16.0% in 3 years time.
• The bullish analysts expect earnings to reach $52.1 million (and earnings per share of $0.39) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 47.3x on those 2029 earnings, up from 14.9x today. This future PE is greater than the current PE for the CA Metals and Mining industry at 23.0x.
• The bullish analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current earnings profile leans heavily on strong realized prices of about $3,448 per ounce of gold and $40.09 per ounce of silver, so a sustained period of weaker precious metal prices would likely feed directly through to revenue, compress gross operating income and reduce net income and earnings per share.
• Golden Queen’s heap leach operation has already been affected by leach cycle timing and clay related percolation issues, and if similar operational problems recur despite process tweaks and new equipment, production could remain lumpy, raising cash costs and all in sustaining costs and putting pressure on consolidated margins and free cash flow.
• Both San Bartolome and Golden Queen depend on ongoing drilling and permitting to extend mine life, so if exploration results do not convert into economic reserves or if social and permitting progress slows, the company could face shorter production horizons that weigh on long term revenue visibility and earnings durability.
• San Bartolome’s ore sourcing relies on third party agreements and community relationships in Bolivia, and any deterioration in these arrangements, or changes in the political and tax regime following the recent election, could affect access to ore and operating terms, which would likely impact mill utilization, cash gross operating margins and overall profitability.

Valuation

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

• The assumed bullish price target for Andean Precious Metals is CA$17.94, which represents up to two standard deviations above the consensus price target of CA$15.25. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$17.94, and the most bearish reporting a price target of just CA$12.76.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $324.9 million, earnings will come to $52.1 million, and it would be trading on a PE ratio of 47.3x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of CA$10.5, the analyst price target of CA$17.94 is 41.5% 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.