Avino Silver & Gold Mines Ltd. (ASM) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the Avino Silver & Gold Mines First Quarter 2015 Earnings Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. At this time, I would like to turn the conference over to Charles Daley, Corporate Communications. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Avino Silver & Gold Mines First Quarter 2015 financial results conference call. On the call today, we have the company’s President and CEO, David Wolfin; as well as our Chief Financial Officer, Malcolm Davidson; and one of our Directors, Mr. Jasman Yee. Before we get started, I’m required to remind you that certain statements on this call will include forward-looking information within the meaning of applicable securities laws. These may include statements regarding Avino’s anticipated performance in 2015 and future years, including revenue and cost forecast, silver and gold production, grades and recoveries, and the timing of expenditures required to develop new mines in mineralized zones. The company does not intend to, and does not assume any obligation to update such forward-looking statements or information other than as required by applicable law. Thank you. With that, I’ll now turn the call over to Avino’s President and CEO, Mr. David Wolfin.

Thanks, Charles, and welcome everybody. I’d like to thank you all for joining us here today. During this call, I will cover the highlights of this morning's news release and our financial and operating performance during the first quarter of 2015 compared to 2014. I’ll then open up the call for Q&A session to address any questions you may have. I’m pleased to report that Q1 2015 was another profitable quarter despite challenging market conditions. Revenue for the quarter was $4.3 million compared to $5.7 million the year prior. The decrease was due to lower metal prices as well as lower silver and gold grades at the San Gonzalo operation. Mine operating income decreased by $752,000 totalling $2.1 million in Q1 2015. Our earnings for the quarter before income taxes were $1.2 million, compared to $2.2 million in 2014. Net income for the quarter after taxes was $376,000 compared to $1.3 million in the corresponding quarter last year, resulting in earnings of $0.01 per share, down from $0.05 in 2014. Current income tax expenses during the year totalled $251,000, compared to $153,000 in the previous quarter. The increase was a result of a profitable operation. Our realized silver price decreased by 20%, from $20.15 to $16.22 per ounce sold; our realized gold price decreased by 9%, from $1299 to $1188 per ounce sold, compared to the year prior. Our consolidated cash cost remained constant year-on-year at $8.60 per ounce of silver equivalent payable. And our consolidated all-in sustaining costs were $12.36, compared to $12.85 the prior year, a decrease of 4%. Cash costs at San Gonzalo were $8.60 per silver equivalent ounce payable, compared to $8.62 in Q1 2014. Consolidated costs are expected to decrease, thanks to the availability of cheaper grid power, as well as due to the economies of scale that will be created by the 1000 ton per day Mill Circuit number 3 once cash generated from the sale of concentrates is classified as revenue after production is declared. Circuit 3 began processing new material from the Avino mine on January 1 of this year. Our cash and cash equivalents increased by 15%, from March 31, 2014 to $4.9 million. Now, onto operations. I'm pleased to report that we delivered another record quarter production, thanks to the hard work of our teams in Mexico and Canada. Silver production increased by 56% to 363,210 ounces, gold production was up 37% to 1750 ounces, and we produced 872,884 pounds of copper. As a result, silver equivalent production was up 101% to 653,000 ounces. The increase in production was due to the Avino mine and associated Mill Circuit 3 coming online January 1 of this year. At Mill Circuit 3 during the quarter, we witnessed mill tonnage throughput increase on a monthly basis as the circuit was being fine-tuned. During the first quarter Mill Circuit number 2 was used to process development material from the San Gonzalo mine. In previous quarters, Mill Circuit 2 have been used to process historic of Avino stockpiles left behind from open pit mining of the Avino vein and initial material extracted from the underground during the commissioning phase. During the first quarter of 2015, Mill Circuit number 2 recovered a total of 66,087 ounces of silver, 329 ounces of gold or 890,740 ounces of silver equivalent. The San Gonzalo mine development material was depleted during the second quarter of 2015 and the company will continue to assess optimal feed material for Circuit number 2. Now, let's look at the outlook for the remainder of 2015. Management remains focused on following key objectives: maintain profitable mining operation while managing operating costs and improving efficiencies; integrate the Bralorne operation into Avino's corporate structure and implement strategies to make the operation more efficient and profitable; continue to explore targets on the Avino property and conduct exploration drilling at Bralorne to expand our resource base on both properties; also, construct a new tailings storage facility on the Avino property so we can decommission the existing facility and proceed with the recommendations made in the preliminary economic assessment covering the oxide tailings resource. We would like to now move the call to question and answers portion. Operator?

[Operator Instructions]. The first question today comes from Rob Chang of Cantor Fitzgerald. Please go ahead.

Good morning, guys. And congratulations on yet another profitable quarter. Question for you, for the quarter though is, would be able to get a sense of the sales from the gold and silver specifically, because we have it as a consolidated silver number, but is there any detail on the actual breakout?

We don't provide statement details on the breakout, but I can certainly provide that to you afterwards, Rob.

Okay. Perfect. That sounds good then. And would there be any type of guidance for the year in terms of sales?

At this point, we're not providing guidance.

Fair enough. All right. Thanks then guys.

Thanks, Rob. Operator The next question comes from Mike Heim of Noble Financial. Please go ahead.

Thank you. Good morning. Maybe a couple counting questions if Malcolm is there.

Sure.

First one would be on depreciation. Looking at the cash flow statement, there was a pretty shape reduction in depreciation expense and I see the footnote comments about DDA on mill equipment. I wonder if you can kind of give a layman's explanation of the decline in depreciation.

Thanks, Mike, for question. That's due to an inventory adjustment. A lot of our depreciation was inventory that ended the quarter.

Okay. So depreciation is based on inventory and you had a lower inventory level that's what you're saying?

No, inventory is higher. Actually, due to having additional San Gonzalo concentrate on hand at March 31.

Okay. Also, in looking at some of the statements, I see there is $5 million in a concentrate prepayment, which I haven't seen use of that facility before. Can you kind of talk about the background thought behind that?

Sure, yes. All I can really say is, we did do a prepayment for the sale of some Avino concentrate, which was subsequently sell, was settled in April 2015. But it's a very consistent with our other sales other than it was not form of a prepayment at the end of the quarter.

Okay. You've said in the past kind of expected capital expenditures of about $10 million, is that still your thought process for this year?

For Avino, that's about right.

Okay. For Avino. Does that imply that if there is some expenditures with restarting Bralorne or some other areas that could be higher number?

It could be slightly higher at the moment. We're just looking at options to do some modifications on the tailings facility, but the management team is continuing to look at various plans for advancing the project. But we haven't decided exactly how we'll proceed. So I don't have a hard number for anyone at this time.

Okay. Fair enough. Speaking of Bralorne, there is nothing in -- there is no wording like you've some time said in the past about restarting this summer, is that still something you're committed to you're kind of waiting to see how the report comes out?

Yes. We recently received the permit to raise the dam, so we're just waiting for weather to permit and we've tendered it out for with construction companies to raise the dame. So once we have handle on when that will be completed then we can give a timeline on a restart. So it will be sometime later this year.

Okay.

Hopefully, in the summer.

Okay. All right. Can you talk just kind in general, how you -- with all these expansion opportunities, the Bralorne, tailing, maybe even other stuff in Mexico, how you kind of prioritize these opportunities?

Well, in Mexico, the operation of priority number one, and Bralorne is number two. Bralorne is more of an exploration with a pilot mill; so that's the priority number one. And the expansion is behind us now. There is just a few items remaining and that's our priority number one.

Okay. Let me jump back for just a couple more accounting questions. You've talked in the past about strategies to lower your tax rate. It seems like you dropped pretty well from 40% to 30%. Is that the results of actions you've taken or, if not, this is kind of pushback some of those comments you're making in previous earnings calls?

It's a bit of both. And we continue to work with outside Gonzalo and so on on looking at different strategies to minimize taxes; we have implemented some of those. But – yes, that's our goal going forward to continue to look at clearly non-aggressive tax planning strategies.

Okay. And then maybe finally, looking at the G&A expense. Good reduction there, kind of looking at the breakout it seems like there were lot of consulting fees and those types of stuff. I guess the question is, is what we're seeing this quarter probably a better indication of what we should model going forward?

Yes. I would say that's fairly accurate.

Okay.

Thank you. The next question comes from Bhakti Pavani of Euro Pacific Capital. Please go ahead.

Just a quick question. I realized the silver equivalent produced for this quarter was about 625,000 ounces. And going through the MD&A it look like the silver equivalent sold was 253,000 ounces. Could you maybe provide some more color? It looks like you just forwarded the San Gonzalo mine production. So what the Avino production then, if you can provide some more color?

What did so Avino production but that actually occurred after the quarter but at this time we are capitalizing the proceeds from any sale of the Avino mine product. So we don’t show that as part of our revenues and we sort of excluded in our performance discussion.

So how long that process is going to be continuing? I mean, when I say how long, I mean are you going to be capitalizing those revenues for the remaining of 2015?

We will continue to capitalize them until we have made a production decision about Avino, which we currently haven’t done but we are reviewing that at the moment.

Also there is no kind of time line as of yet?

There is a checklist we have to go through.

Well there is a process and there is a lot of judgments but I'm very optimistic it will be sooner than later but that's really all I can comment on at this time.

Okay. Also going to the grades at San Gonzalo it looks like the grades were down, is that something because as to the location where you are drilling and is that going to be continuing for the remaining of 2015?

Yes, Bhakti, exactly that is what has happened here for the first quarter of 2015. The grades that where we were extracting material for mill feed was slightly lower, but in anyway those grades are more or less to the average from the resource estimate. So we expect that these grades were sort of be in line going forward.

Okay.

Yes, the first quarter of 2014 was exceptional.

Okay. Also, could you maybe provide some more color as of today how much of stock pile do you have left from San Gonzalo and Avino vein?

Can you repeat the question again, Bhakti?

I said the stockpiles, how much of the stockpile you have left from San Gonzalo and Avino, because it looks like for the quarter you processed the stockpile from San Gonzalo and historically you have done it from the Avino vein. So just kind of curious to know as to where you stand today.

Okay. Currently we have approximately little over 30,000 tons of Avino on stockpile right now. It represents roughly about months of mill feed. For San Gonzalo the amount of stockpile that we have would be the marginal material that we have been stockpiling during the development work that we are doing going on drips at 3, 4, 5 and 6. The margin material basically had been set aside and we will process this material as it builds up, but for the normal Sam Gonzalo material basically what we are mining we are processing.

Okay. Also I was just curious to know as to your thought process on how is the decision made on resisting the stockpile. I mean, how do you guys decide on if the stockpile from San Gonzalo is going to be processed for the quarter or from Avino?

We normally start to review this for Circuit number 2. Circuit number 2 is really the circuit that does the excess material that's available to us. So it could be the old Avino stockpiles or it could be the low grade marginal stockpiles from San Gonzalo. And if the production from the Avino mine is capable of producing 1,250 or 1,500 tons a day then we will be using Circuit number 2 to process this material.

Yes, we feel that sometime in the summer when the final equipment rides are waiting for another jumbo then we will be able to feed both Circuit number 2 and Circuit number 3 entirely from fresh ore from underground at Avino.

Okay. Fair enough. That's it from my side. Thank you very much.

The next question comes from Frederick Maslange[ph] of Health and Financial Services. Please go ahead. Q –Unidentified Analyst: Good morning guys, just a quick question on the electric grid. How close are we to hooking up to the electrical grid?

We are about 70% to 80% complete on the new power line from Guadeloupe to the mine site. It's almost complete, but when you are talking about hooking up to the power grid we have sufficient power to run everything at Avino with the current system. Does that answer your question? Q –Unidentified Analyst: Is that current system is that based upon electrical grid or is that the diesel generation?

This is on the electrical grid. Q –Unidentified Analyst: On the electrical grid, okay.

Yes, all the power right now is coming from the grid.

Okay. Very good thank you.

Yes, the mill has been operating at the efficiency rate.

Yes, the mill availability has been in the mid-90s to 98% availability.

And we have been upgrading the mill with Circuit number 3 brand new Italian made filter press and we have been modernizing that. So we are not far off from declining commercial production on Circuit 3.

The next question comes from Anthony Kluk of Loeb Aron & Co. Please go ahead.

Hi guys, I think you were very unlucky not to have met some of that Avino production in this quarter so you could have recognized the revenue from that, but just a quick question on doing some basic sums here. If you have produced 356,000 ounces of silver equivalent at Avino and that got your prepayment of just over $5 million, it's roughly $14.20 per silver equivalent ounce. It seems a little low. Is that with significant penalties in there or how does that cost price received compared to the San Gonzalo concentrate that we shipped?

Yes, the $5 million was basically a rough estimate based on the tonnage and the grade to concentrate, Anthony. I think this was something that was sort of prepay. So we used sort of estimated numbers or the numbers we have sort of in our books to --

Because that prepayment is still subject to adjustment based on the actual assays that came out --

Yes.

Correct.

Yes, it will be settled in June.

Yes, correct.

Okay.

Sorry, Anthony. I also want to add that prepayment is also based on metal prices that we use for the prepayment. So the metal prices could fluctuate and it could impact on the final value.

Moving forward, is this kind of prepayment structure likely to carry on to the foreseeable future? I know you eluded to these incomes are going to be capitalized for the foreseeable future. Are you going to forward presell concentrate going forward?

No, I mean this is how we started up before with San Gonzalo, we did it on a lot basis and our goal is eventually is to do longer term agreements. And so once we get comfortable and declare commercial production, it will probably enter a longer term agreement.

Okay. One more just on the income statement. There were some benefits of currency translation differences just under $1.9 million comparing to something significantly less from same quarter last year. What goes into the calculation of that and how does that look going forward?

It really depends on foreign exchange rate, what's driving that number, Anthony, that translating our assets and liabilities is the balance sheet date. Our functional currency in Mexico is the U.S. dollar. So we translate everything from Mexico from peso to U.S. dollars, U.S. dollars to Canadian. So again it really depends on what's happening the movements between the peso and the U.S. dollar and the U.S. dollar and the Canadian dollar. So, to answer your question, going forward, it’ll all be just a non-cash items but it will fluctuate with -- with fluctuations in exchange rate.

Just one more question on capital expenditure, you said that there was about $10 million earmarked for Avino. What is included in that and can we see the likelihood of Circuit 4 coming online any time soon?

Circuit 4; I haven’t heard circuit four before, it’s in the plan. It’s down the road. New tailings facility is going to be between $3 million and $4 million, power line is $1 million, that’s about 75% complete. So underground equivalent Jumbo, scoop trams, some drilling yeah, drilling around San Gonzalo and Avino. What else is there? Upgrades to some of the surface structures and buildings we just recently completed -- well, we’re almost completed an 80 men camp building. So there is still some items that are needed for that, but those are the main things.

That’s the most significant items.

[Operator Instructions]. Our next question comes Heiko Ihle of H.C. Wainwright. Please go ahead.

Hey, can you walk me through current smelting refining charges that you guys are seeing on Mexico? I’ve read some reports about changes in the industry; just want to see what you guys are seeing first hand please.

Smelting and treatment charges you’re referring to, Heiko?

Yes, correct.

Those are the terms that we get from the different trading firms and they -- they vary from time to time. So if we are able to get long-term agreement typically the charges a lot more favorable.

Okay. And what have they done over the past, call it, three months?

What was that again?

What have they -- what changes have you seen over the past three months or so?

What we have seen would be -- there’s usually changes in the treatment and refining charges and I get these are sort of dictated by the smelters that receive the concentrate and normally what they would do is they would sort of coke that to us.

Yes, yes, I know exactly but sorry to interrupt, Jasmine, but it’s sort of depends. I mean, each company is obviously very different and Avino has obviously got some very specific arrangements with the companies that we’re working with. So I don’t really want to say that sort of too much because that might be quite a bit different than what you’re seeing with the other companies, Heiko.

Fair enough, fair enough. Walk me through current investment in Bralorne. How much money have you guys spent in Q1 combined between everything and what do you think it’s going to be in Q2?

Good question. In the notes of the financial statement, I’ll walk you through real quick but on Page 10, which is note number four, in the second column you’ll see British Columbia, that’s always to Bralorne, we spent about $1.2 million on mine and camp costs, another $0.5 million on drilling and exploration, and about another $70,000 on permitting, geology expenses. So going forward, again we haven’t really made a firm commitment to exactly how we’ll ramp the project. We do have some short-term obligations to do tailings lift and few other things at the mines, but how that will look in Q2, I would say at this point it probably will be about the same maybe higher depending on if we are able to get the tailings lift done. With respect to the -- how it impacts the P&L, there is very little impact on the P&L from Bralorne is almost all the costs are capitalized.

Fair enough. Okay. And finally can you walk me just through some of the cash cost decrease that you guys had in the quarter? Your decreased cash costs at $0.49 from $12.85 to $12.36, again just walk me through the changes the -- the quantifiable ones that you made to get where you are?

Are you looking at the 12, yes, the $12.36?

Yes. The $12.85 to $12.36, that’s -- that’s 4% right?

Correct. Mostly that’s foreign exchange. I mean, overall our cash costs all-in cash costs have been very consistent but yes, it’s foreign exchange. I mean we’re --

Okay. That’s it. Sorry.

No, no, that’s it.

Excellent. Thank you very much.

There are no more questions at this time. I’ll now hand the call back for any closing comments.

Well, thank you, everybody. We appreciate you being on the call today. Look forward to getting more questions as the year rolls on and we look forward to declaring commercial production very soon. So, keep an eye on us. Thanks a lot.

Thank you.

Thank you everybody.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.