Avino Silver & Gold Mines Ltd. (ASM) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the Avino Silver & Gold Mines’ Second Quarter 2015 Earnings Call taking place August 19, 2015 at 8AM Pacific Time. 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’ second 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 our financial and operating performance during the second quarter of 2015 compared to 2014. I will then open up for a Q&A session to address any questions you may have. I’m pleased to report that Q2 2015 was another profitable quarter despite increasingly challenging market conditions. Revenue for the quarter was $5.9 million compared to $5.1 million in the year prior. The increase was mainly due to an increase in silver equivalent ounces sold which increased to 345,300, a 22% increase over the same period last year. The increase in revenue was offset by a higher cost of sales of $3.5 million this quarter compared to $2.8 million in the same quarter last year. The increase was a result of the cost associated with higher volume of broken tons during the current quarter, the higher depreciation and depletion as a result of the company’s continued investment in mining equipment and infrastructure. Mine operating income was consistent with last year, totaling $2.4 million. Our earnings for the quarter before income taxes was $1.2 million compared to $440,000 in the same quarter last year. Net income for the quarter after taxes was $362,000 compared to a loss of $87,000 in the corresponding quarter last year, resulting in earnings of a penny a share, up from zero in Q2 2014. Current income taxes during the quarter totaled $1.9 million compared to $655,000 in the same quarter of the previous year. The increase reflects our continued profitable operations in Mexico. During six months ended June 30, 2015, our realized silver price decreased by 20% from $19.59 US to $16.20 and our realized gold decreased by 7% from $1,283 to $1,287 US ounces sold compared to the same period last year. Our consolidated cash cost per silver equivalent payable was consistent with the same period last year at $8.67 and our consolidated all-in sustaining cash cost was $11.72 compared to $12.02 in the same quarter of the prior year, a decrease of 2%. Cash costs at San Gonzalo were $8.67 per silver equivalent ounce payable compared to $8.42 in Q2 last year. Consolidated costs are expected to maintain at present levels. Our cash and cash equivalents decreased by 23% December 31, 2014 to $3.3 million. The figure does not include the US $10 million received on August 17 from Samsung concentrate prepay agreement. Now on to operations. I am pleased to report that we delivered another record quarter of production thanks to the hard work of our teams in Mexico and Canada. Silver production increased by 102% to 451,000 ounces. Gold production was up 63% to 1891 ounces and we produced 1.2 million pounds of copper. As a result, silver equivalent production was up 167% to 819,000 ounces. Based on consideration of feed grades, recovery rates and smelter returns during the second quarter, Mill Circuit 2 was primarily used to process accumulated mill feed sourced from San Gonzalo mine stockpile and was also briefly used to process historic above ground stockpile material left from past mining of Avino vein. The material from San Gonzalo was processed during April and June and the historic stockpiles were processed in May. Combined output from Mill Circuit 2 for the quarter was 95,630 ounces of silver, 463 ounces of gold or 128,905 ounces of silver equivalent. During the third quarter of 2015, the company plans to use Mill Circuit 2 to process mill feed from the main Avino mine. Comparative increase in overall production was due to the Avino mine and associated Mill Circuit 3 coming online January 1 of this year. During the quarter at Mill Circuit 3, we witnessed a 23% increase in silver equivalent production compared to Q1 2015 as a result of increased mill throughput. Since reopening the Avino mine in the second half of 2014, the company has been continuing its efforts to develop the mine, including the extension of the haulage ramp to access and extract the mineralized material included in the resource estimate prepared by Tetra Tech. During this development investment period, the company has arranged for sales of the Avino material to Samsung. The material is processed into concentrate at Mill Circuit 3. During the six months ended June 30, 2015 the company recorded proceeds of $4.2 million in the statement of financial position for concentrate sales during the development. The proceeds generated from the sales of Avino concentrate will be treated as a recovery of exploration and evaluation expenditures and not reported as revenue until after management has made a production decision. The mine plan calls for 20 to 24 months of development. However during this period, this development will take place primarily within mineralized areas. During this period, the company plans to extend the haulage decline and put in five new levels within the area included in the existing resource estimate. A drawing of the plan can be found on our website. Subsequent to the end of the quarter, the company signed a 24-month agreement with Samsung and received 10 million US prepayment under the agreement. The low-cost money ensures Avino will have sufficient capital to further advance operations and continue its growth strategy without major dilution. At Bralorne, construction of our tailings embankment will commence early next week and we're working on a plan to restart the operation. Now let's move on to objectives for the remainder of 2015. Management remains focused on the following objectives: maintain profitable mining operation while managing operating costs and improving efficiencies; integrate Bralorne’s mine operation into Avino’s corporate structure and implement strategies to make the operation more efficient and profitable; continue to explore regional targets on the Avino property and conduct exploration drilling at Bralorne to expand the resource base on both properties; work on securing permits to construct a new tailing storage facility on the Avino properties so we can decommission the current facility, then 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-answer portion. Operator?

[Operator Instructions] The first question is from Heiko Ihle of H.C. Wainwright.

Hey, can you break down the 1.97 million that you spent in capital expenditures for the quarter and just sort of walk me through we should expect for them to come in going forward? I get it that it was down a little bit but just sort of break down the $2 million please if you could.

Sure, thanks, Heiko. During the quarter, we acquired a new jumbo through Sandvik through capital lease. That was about $1 million, Jasman?

Yes, about $1 million.

And we’ve also continued to make this into camp costs and other infrastructure for the Avino mine.

Deposit on an cone crusher.

Yes, which will be coming into – I think will be delivered and in production later –

Yes, Q3.

And then just go through the MD&A that you guys said, just looking over increases in silver production versus gold production, silver was up 102%, gold was up 63%, both obviously very impressive, and related to the sources of your production. But should we continue modeling it with the slightly change silver to gold ratio in the future?

I will be fairly cautious based on the information that we’ve got so far from the ET mine. The feed grade seems to be fairly variable and we expect that it will continue for the next little while. So trying to model a grade at this time might be -- I would caution you going ahead until we get more information as we develop the mine further. I don't know if –

In other words, don’t trend the mine the way it is.

What was the question again, I am sorry?

I said, in other words, do not trend the mine the way it is right now?

Yes, I would say so. I think we basically budgeted the figures going forward, and based on the information that we’ve got so far, it’s fairly consistent based on the quarterly results. So the variation in silver and gold could fluctuate but if you average it over the quarter, I think it will be fairly close to what we’re seeing in the second quarter results going ahead.

And after the 24 month development period we expect the greatest improvements for strictly mining.

As we get deeper in the mine, the copper grades will increase. But the silver grade will decrease slightly.

Last question, gold through Bralorne, again just in the MD&A you guys go through your drilling program and all the other stuff. Walk me through how much money you expect to spend at Bralorne for the remainder of the year? I mean you guys sound like a school trends [ph], all that stuff, and there is place for some more drilling, just quantify the dollar expenditures for that site please?

Well David mentioned, we are starting the tailings lift next week, that has a capital budget of between 600,000 and 700,000. We are currently working on a budget to look at what the costs will be to have the operator restarted in the coming months. We hope that will be perhaps later in September or October and we are just finalizing those numbers now.

There was a couple of other items you could add on there, the new scoops that arrived and some of the other new equipment, and we’ve completed upgrading the mill.

Yes, in the Bralorne mill, we’ve basically upgraded some of the problems that were associated when it was in operation like in the crushing circuit that there were issues with some of the conveyors, that’s being addressed, the cone crusher, the jaw crusher and there have been improvements made to that section of the circuit and we’re basically looking at ensuring that we're able to do 120 tons per day when we start up. I think this is sort of like the key objective.

Yes, and we’ve got essentially – looking at flow testing to see if we could ramp it up to 150, 160 without too many expensive items. So we’re looking at growing the operation in the near future.

Yes, for the remainder of 2015, other than the tailings lift, and a few other smaller items, we don’t have a large CapEx budget for Bralorne.

The next question is from Bhakti Pavani of Euro Pacific Capital.

Just a follow-up question on the grades, I believe the explanation on the grades, Jasman, you just mentioned was regarding to Avino mine, or was it regarding to San Gonzalo as well, because San Gonzalo had a good uptick in the silver grades for second quarter, so I mean do you think that grades – I mean can be told [ph] or do you think it’s going to go back to Q1?

Yes, I was just discussing the Avino mine grades in the earlier question, and as far as San Gonzalo the grades going forward I think it will probably be relatively the same as what we had provided to you previously. But as we are doing exploration towards the eastern part, what we have noticed is there is a lot more lead and zinc in it but the grades for silver and gold, they are relatively the same. We will have a better idea as we do more exploration work there with regards to the grade in the eastern part of San Gonzalo.

With regards to the Avino mine, I know you guys are still not recognizing any revenues. Any kind of color you can provide as to when do you plan on doing that, or do you think there is still more time and it would be early 2016, any kind of thought process?

It’s a good question, Bhakti. We are continuing to look at making the production decisions. Jasman mentioned we still see some variability in the feed grade, and we’d like to see that stabilize a little bit just so we can internally model the financials little bit better but I am optimistic that it’s sooner than later but I wouldn’t want to give a hard data when that’s going to be.

Also with regards to the new contract with Samsung, that was certainly a very good news for you guys. Was just wondering and trying to understand, how did the deal work out and would you guys be open to this kind of arrangement in the future? Any color on that please.

How did the deal work out, what do you mean?

I mean did you guys approach Samsung or Samsung came to you guys, how did this happen and would you be open to – I believe the contract with Samsung is for 24 months. So is there any scope for expansion or would you be open to doing with any other customers?

Well, last year I gave a presentation at the European Gold Forum in Zurich and there was a representative in the audience and he liked what he heard. So he sat down with me after and that’s how this all started. And they sent a team of people down to the mine. They hired SRT engineering, they spent a lot of time doing their due diligence and they liked the prognosis and they liked that we are young impressive team and looking to grow the operations, so this was sort of a test case for them and they wanted to showcase that they are not predatorial, that they give good terms. And we’re quite pleased with the way things turned out with them and absolutely we will look to grow with them.

It’s Jasman here. I just want to add to what – add to my answers on the grade on the Avino mine. It’s important to note that Samsung did the due diligence on Avino and the fact that we sort of agreed that we’re going to do a 24 months contract with them for the shipments of approximately 800 tons of concentrate a month. So they basically have done the due diligence on the deposit itself. They determined that the possibility of us not being able to deliver is definitely in our favour, that it looks good.

The last question is on Bralorne, you just mentioned in your prepared remarks that the tailings – the work on the tailings embankment is going to start next week and you guys are waiting for the new appointment for the new tailings. Was just trying to understand with regards to the production of 120 tons per day, what kind of timeline should we be expecting?

Timeline to start up.

Yes.

We are planning to start up once the tailings embankment is complete, so probably within next four to six weeks.

So that’s when you guys would – that’s when the production would start at Bralorne?

Correct.

So what about the permits for the new tailings, would there be – I mean is it important to get that permits before starting production or that would be okay if you guys start production and later you receive the permits?

The permit for the new tailings is Mexico. We applied for a permit to build the new tailings facility in Mexico, so we’re just waiting to hear back from the authorities on that and we’ve still got a few years left in the current capacity but we want to get ahead and start on that.

The next question is from Donald Steenkamp who was retired.

My question was answered, so thank you very much.

[Operator Instructions] The next question is from Mike Heim of Noble Financial. It seems like he’s gone. We’ll go on to next person. The next question is from Bob Smith who is a private investor.

Just a question on the Avino mine, what is your – can you give some color on the cash cost per ounce there or what is the expected cost, or when you guys start recognizing the revenue on there?

Sure. Good question, Bob. Currently we are still advancing the project and we are still – we haven’t declared production yet. During this period, we did see some fluctuations in cash costs but we’re finding them – fine-tuning them, we expect them to be consistent with San Gonzalo but until we spend some more time and have more time to analyze the results, it’s hard to give a firm number.

Okay, but can you give kind of a ballpark there so we can just model your costs, I understand you can’t give an exact number but I just think a ballpark would help out there.

Again until we make the production decisions I can’t sort of provide that information with a lot of confidence, I could have a discussion with you subsequently to have a general discussion about it but until we make the production decision, it’s a number that I have to be cautious with.

And you said that it would probably be similar to San Gonzalo?

Yes.

The next question is from Mike Heim of Noble Financial.

Yes, sorry about that. I was actually going to ask about some of the costs of the restart and declaring the production I think that was kind of addressed in the last question. But let me just move on to Bralorne, should we expect a similar type of time period for declaring production in Bralorne, that could start up?

Declaring commercial production?

Yes, same type of – sort of declaring technical feasibility and commercial viability and maybe I thought I heard you say 20 to 24 months of production before they might get declared?

That’s at the Avino mine. Yes, there is – we can’t give a timeline on that. There is no feasibility study, so I mean it’s basically pilot operation at this stage and we’re planning quite a bit of exploration drilling for the future. What we wanted to do is to throw out some cash to help pay for that, so that’s what we are working towards right now.

And then maybe back to the Avino mine, maybe I can address it from a different direction and kind of say any general thoughts on what level of decline in silver, gold and copper pricing you might have to see that would really start to challenge commercial viability?

That’s a good question. It’s something that’s on all of our minds. We worked very hard to achieve a very low cash cost, and we are looking at additional ways to improve our cash costs and improve efficiencies. And I think we are all very comfortable at this point that we have a lot of – we still have room to move and continue our profitability. In 2001, when the mine closed, silver was below $4 and gold was below $300. So we’ve still got some room. End of Q&A

There are no more questions at this time. I will now hand the call back over to David Wolfin for closing remarks.

I just want to thank everybody for calling in here and taking the time to listen to our story. We are planning to continue to grow operations, and hopefully build a good profit margin and we really appreciate all of you following us and watching the developments, and we’re really excited about this new partnership with Samsung. They really want to help us grow. So keep an eye on us and let’s hope that metal prices improve in the not too distant future. Thanks again everybody. Take care.

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