Everyone understands PE, and a lot of investors use PE.So what...

Everyone understands PE, and a lot of investors use PE.

So what is AYN's prospective PE based upon the current silver price of US$32.28 which is A$31.20?

AYN's cash costs estimate of A$15 were based on a 1.5 million ounces to 2 million ounces production profile.

However, in the 29/3/2012 resource update released to the ASX, AYN told us that "The reserves and mine plan will now be reviewed with a likely increase in both reserves and mine life based on a forecast production rate of 1.2-1.5M oz per annum."

So assuming a production profile of 1.2 million ounces to 1.5 million ounces, a conservative approach until steady state production has been reached and so AYN is in a position to release cash costs based on steady state production, is to assume cash costs will be higher than the cash costs for a 1.5 million ounces to 2 million ounces production profile, so I'll assume about A$20 cash costs. This may be too high. It also may be too low. Hopefully for current investors in AYN it turns out to be too high.

With 1.2 million ounces of silver production annual revenue is approximately $37.4 million. Cash costs are about $24 million.

However, cash costs are not total production costs. Nor is any exploration expenditure taken into account. Allowing for only a few million dollars on exploration, we can now add about $6 million for additional costs not included as part of cash costs.

Result - about $7.4 million profit (free cash flow after all expenses.)

AYN's current market cap is over $100 million. That means AYN is on a PE above 14 for a small, one mine operation.

The world's resource giant, BHP, is on a PE of 8.71. That's right. A PE of 8.71. (PE at http://www.tradingroom.com.au/apps/qt/quote.ac?code=bhp§ion=summary&submit=Go%21)

Of course a massive surge in the silver price and/or serious exploration success and it's a whole new ball game.

From a personal point of view, with equities I have myself covered for a potential massive surge in the silver price via holdings in a number of other companies that I rate as better investment propositions for my risk profile than AYN.

Why have I posted this? As I have followed AYN closely it's a good intellectual exercise for me to put into writing the sort of analysis I have made on AYN.

How others view it is up to them. I don't really expect any thumbs up. Holders don't like being presented with analysis that is not glowing in its assessment of the company they have parked their money in.