Zgounder Expansion And Open-Pit Operations Will Redefine Silver Production

Key Takeaways

• The Zgounder expansion and transition to open-pit mining are expected to boost production and reduce costs, enhancing revenue and net margins.
  
• Enhanced mill recoveries and focus on silver ingot production could improve earnings and overall profitability.
  
• Lower production and rising costs may strain revenue and profits, despite expansion efforts, while significant exploration spending and mining changes inject volatility.

Catalysts

Engages in the exploration, evaluation, and development of precious metals projects in Morocco.

• The ramp-up of the Zgounder expansion is expected to significantly increase silver production from approximately 1.6 million ounces to between 5 and 5.3 million ounces in 2025, which should substantially impact revenue growth.
  
• The transition to primarily open-pit mining at Zgounder is likely to reduce costs due to the lower expense of open-pit operations compared to underground mining, potentially improving net margins.
  
• The expected increase in mill recoveries, targeting between 88% and 90% as the new plant reaches steady-state capacity, is anticipated to enhance overall earnings by maximizing the value extracted from processed ore.
  
• Exploration activities, particularly at Boumadine with an expanded footprint and substantial drilling, could lead to significant resource expansion, potentially impacting future revenue and market valuation positively.
  
• The shift from producing silver concentrate to primarily silver ingot is expected to improve the average realized price, positively influencing net margins and earnings.

Aya Gold & Silver Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aya Gold & Silver's revenue will grow by 85.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -55.3% today to 49.4% in 3 years time.
• Analysts expect earnings to reach $122.3 million (and earnings per share of $0.98) by about April 2028, up from $-21.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, up from -39.0x today. This future PE is greater than the current PE for the CA Metals and Mining industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

Aya Gold & Silver Future Earnings Per Share Growth

Risks

• The silver production in 2024 was lower by 16% compared to 2023, and the average grade of ore processed was also lower. This could negatively impact revenue as lower production and grades typically reduce sales volumes and revenue.
  
• The company reported a significant reduction in profits from $15 million in 2023 to $382,000 in 2024, partly due to processing lower-grade ore and the impact of a $27 million write-off related to the Tijirit project. This indicates potential volatility in earnings.
  
• Despite the completion of the Zgounder expansion on budget, the average cash cost per silver ounce increased significantly from $12 to $19. Rising costs could erode profit margins unless offset by higher silver prices or increased production efficiency.
  
• The company has plans to invest $25 million to $30 million in exploration in 2025, which may not yield immediate returns and could strain cash flow initially if additional revenue is not generated promptly from exploration outcomes.
  
• The transition to more open-pit mining, while reducing costs compared to underground mining, could present operational challenges and uncertain long-term impacts on recovery rates, potentially affecting revenue if not managed effectively.

Valuation

• The analysts have a consensus price target of CA$19.417 for Aya Gold & Silver based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$23.05, and the most bearish reporting a price target of just CA$9.97.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $247.7 million, earnings will come to $122.3 million, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 7.1%.
• Given the current share price of CA$9.19, the analyst price target of CA$19.42 is 52.7% higher.
• 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.