Avino Silver & Gold Mines Ltd. (ASM) Q3 2016 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Avino Silver & Gold Mines Third Quarter 2016 Earnings Call taking place November 9th, 2016 at 8:00 AM 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 third quarter 2016 financial results conference call. On the call today, we have the company's President and CEO, David Wolfin; 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 2016 and future years including revenue and cost forecasts, 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 will now turn the call over to Avino’s President and CEO, Mr. David Wolfin.

Thanks, Charles. Good morning everyone, and welcome to Avino's third quarter 2016 conference call. Thank you all for joining us here today. Before we begin, please note that the full financial statements and MD&A are now available on our website. During this call, I’ll cover the highlights of our Q3 2016 financial and operating performance and then we will open it up for questions. In summary, it was a positive and very productive quarter for the company. Together with consistent production from our operations, we began construction of a new tailings storage facility in Mexico, established new resource estimates for Avino in Bralorne properties and also commenced a new exploration program at the Avino Mine. Revenue from mining operations for the quarter were $13.2 million compared to $5 million in Q3 last year. The increase was a result of the Avino Mine now being in commercial production, which during the comparative quarter last year, the Avino Mine was in development phase and proceeds from the sale of concentrates were classified as recovery of exploration and evaluation expenses. Higher metal prices for silver and gold were also contributing factor. Mine operating income was $6 million compared to $2.2 million in the third quarter last year. The increase was also due to new revenue from the sale of Avino Mine concentrate and higher metal prices. Our realized silver price increased by 24% from $15.75 to $19.49 per ounce sold. Our realized gold price increased by 15% from $11.58 to $13.28 per ounce sold compared to the third quarter last year. Earnings for the quarter before income taxes were $3.4 million compared to $44,000 in Q3 last year. Net income for the quarter after taxes was $1.2 million compared to net loss of $625,000 in the same quarter last year, resulting in earnings of $0.03 a share, up from $0.02 a share loss last year. The increase was a result of the factors discussed earlier, which also had a positive effect on earnings. Additionally, just to highlight our earnings are up compared to the second quarter of 2016, as operations at Avino Mine are continuing to transition from development mining to production mining. Our consolidated all-in sustaining cash cost for the quarter was CAD13.83 or $10.60 compared to CAD11.99 or $9.16 in the comparable quarter last year. The increase was a result of us no longer being able to capitalize expenses related to ongoing development of the Avino Mine. We expect cost to continue to go down as we complete the transition from development mining to production mining at the Avino Mine. Our cash and cash equivalents compared to the third quarter in 2015 increased by 63% from $9.1 million to $15 million. Our cash position has improved due to positive earnings. The strategic use of our ATM through Cantor Fitzgerald where we sold 6.1 million shares over the last nine months at an average price of $1.85 and an additional finance and [Indiscernible] capital group of $800,000. We continue to maintain a strong balance sheet, which will keep us well-positioned for expansion and new opportunities. Now on to operations. This quarter our silver equivalent production decreased by 16% to 650,000 ounces. However, we're encouraged that the decrease was mainly due to lower recoveries at the Avino Mine or mining activities took place in a new low grade zone. Moving forward, we expect recoveries to improve as we optimize the plant for material from this new zone. Advancing our underground operations into new areas is fundamental to our goal of expanding both mining and processing operations. In summary, our silver production was up 3% to 411,000 ounces, gold production was up 10% to 1,800 ounces and our copper production was down 22% to just over a 1 million pounds. At Bralorne, we continue to develop a strategic operating plan for profitable production. Our new mine plan includes changing the mining method to long-haul mining, which is considered safer and less labor-intensive than previous trial mining methods, which would generate positive results starting at 300 tonnes per day. New mining equipment is being acquired to replace older equipment and further mechanized for long-haul mining. Engineering is in progress to expand the mill from 100 to 300 tonnes per day and to upgrade the surface infrastructure for a 300 tonne per day operations. Construction on the mill is expected to begin by the end of this year and is already underway on surface infrastructure. We also added a buttress to the tailing storage facility, ensuring its long-term viability and build a facility to house our new microfiltration water treatment plant. Additionally, based on the success of the underground mining training program, which we put on for members of the St'at'imc First Nation earlier this year, we had our funding application approved by the provincial government to hold the program again this fall. This year we also gained additional funding to bring in state-of-the-art simulator from Sandvik to enhance the student experience. Student interviews were conducted last week and the program will commence during the third week of November. Avino is committed to education and training which is imperative to our success as an operator as well as to build a strong mutually beneficial partnership with the communities in which we operate. Now, let's move on to the outlook for the rest of 2016. Management remains focused on the following key objectives: Maintain and improve profitable mining operations, while managing operating costs and achieving efficiencies; advance the Bralorne project towards profitable production; explore regional targets on the Avino property, followed by other properties in our portfolio; assess the potential for processing the oxide tailings resource from previous milling operations; and identify and evaluate potential projects for acquisition. We would now like to move the call to question-and-answer portion. Operator?

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Heiko Ihle with Rodman & Renshaw. Please go ahead.

It's Ihle, good morning.

Hey Heiko, how are you doing?

Excellent. Excellent. Sure, it's an interesting day in the market and worldwide geopolitically, that's for sure.

Well, you get to guess a few changes in your neck [ph] of the woods.

Few changes puts it very politely. Walk me through the delta in the fish [ph], you're right, walk me through the delta in the copper production that you guys saw in the quarter. I mean it's somewhat bigger change when we had modeled. Was this below expectations? Was is mix issues? And sort of -- if you could sort of walk us through a path forward for -- in Q4 and beyond?

No problem Heiko, its Jasman here. Yes, Heiko what has happened is this is a new zone that we sort of discovered. We basically -- it was on the other side of a hanging wall fault. So, we drove towards it and what we found was there was another mineralized zone, what it graded was it was lower in copper, but the positive side was -- there was a lot more gold in it. And what we have noticed is when we were processing this material, the gold recovery was not as good as what we had originally anticipated similar to what the recoveries were from the main -- the main Avino vein at the deeper levels with a higher copper grade. So, this is sort of like in transition-only period. We'll be going back to deeper zone later on once we're able to access the deeper levels.

Okay. In other words trend-lining the first half of the year is probably a decent way to go.

Yes, I would say so.

Okay. Fair enough. Moving over to Bralorne, I mean you state in the release that the new equipment is being acquired to replace the older equipment and further mechanized for long-haul mining, just sort of walk me through the capital spend both in Q3 and Q4 for Bralorne. And just sort of walk me through what kind of equipment you're buying?

Okay. Well, Jas, maybe you want to comment on what we've done in the mill.

Yes, up at Bralorne, what we're looking at is a larger operation like 300 tonnes per day. We have sort of started procuring some of the major pieces -- the big piece, like we basically put a deposit down on the larger ball mill. We'll probably have to upgrade the crushing circuit as well and this is sort of to improve on the existing layout which really isn’t very cost-effective. So, we'll be looking at a new crushing layout for the larger operation. On the mining underground side, we'll probably be looking at more of the jumbos--

Jumbo, connectivity scoops on the [Indiscernible] on the loader. So, yes, we're acquiring more--

Yes, we have more equipment.

We haven't acquired anything significant in Q3. In Q4, we'll acquire a new excavator. We just put an order in, it should actually arrive tomorrow or today actually. But as far as any other additional spend, I don't think we've got anything significant--

The excavator is going to be next year for trenching because we wanted to do some exploration in gap zones.

As the risk you're saying no, can you quantify it in dollar terms?

The amount of the equipment?

Yes.

$330,000, but we have acquired that under finance leases with Caterpillar.

Okay. Cool. Excellent. Well, thank you guys so much. I'll jump back in queue.

Great. Thank you.

Thanks Heiko.

Thanks Heiko.

The next question comes from Bhakti Pavani with Euro Pacific Capital. Please go ahead.

Good morning guys.

Hi Bhakti.

Good morning.

This is sort of just a follow-up on Heiko's question, you guys mentioned in the press release that the recoveries are expected to improve at Avino Mine, just kind of wondering is that -- I mean are you guys undertaking some new initiatives in order to improve the recovery or it's just that you know once you get pass through the wall and get into the deeper zone and that's why you expect the recoveries to improve?

Yes, we -- you want to go ahead David?

No, I was going say as we mine and we sub-level cave and we're retreating back to the main part of the ore zone, its higher grade.

Yes, its higher copper grade and the gold recovery is higher as well.

Its new zone, it's in the perimeter of the deposits where it's lower grade.

Yes, lower in copper.

So, is that going to be in Q4 or some expected in Q1 2017?

Well, I would think that we would be -- we'll have a blend of this material in Q4.

Okay.

It will be blend.

Yes, I'm trying to spilt that up.

Yes, we're trying to smooth the grades out.

Okay. All right. On the exploration side, you guys are planning an exploration drilling project at the Avino Mine, could you maybe provide some additional color on how big the program is going to be, how many holes, CapEx, et cetera?

Well, we've already started. I think we're on hole number eight.

Yes.

In between Avino and St. Louis, which is all part of the Avino structure, but there was a gap zone that was never explored or mined for whatever reason. So, we're filling in that gap. And we're working on our budgets for next year. We plan to increase them. So, it's hard to say right now, but it's going to be in the millions of dollars put it that way. So, we're back on track exploring. We want to explore to the east and west of the strike zone and adapt. So, we're going to down at level 17, we're going to drift away from the vein, put in a drilling station and then drill below it. So, we want to see how far the mineralization goes down so we can look at modifying our mining plan or extending it for cost.

Yes, I think once we completed our budgets over the next few weeks, we'll be able to give a bit more fraction of what our budget will look like and exactly what that will entail.

But as of--

Go ahead.

I'm sorry go ahead. No, I was going to ask do you have any kind of set budget of -- set number of holes that you plan to drill or is it still wide open there?

18 right now.

18.

About 3,000 meters.

And Bhakti, sorry, did you have a question on CapEx?

Yes. I was going to ask about that, yes.

Yes. With respect to Bralorne, it's the same thing we commented on Heiko. We've just acquired or ordered a new piece of equipment from [Indiscernible] which will arrive today or tomorrow. On the Avino side, we have mostly the equipment we need. The team does have a few items that they would like purchase, but primarily it will be amount spent on the tailings facility, which we've started and we'll continue expenditures into 2017.

So, between Q4 and Q1, how is the spend going to look like on the tailings facility?

I would probably say a few million. It really depends on how quickly--

It's been slow because of weather has gotten wet. So, the dozers have been slipping and sliding. But we expect it improve when it dries.

Yes, the rainy season is over, so hopefully, we'll continue to move ahead quickly.

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

Thanks Bhakti.

Thanks Bhakti.

Thank you.

The next question comes from Rob Chang with Cantor Fitzgerald. Please go ahead.

Good morning gentlemen and congratulations on a solid quarter.

Thank you.

Thanks Rob.

A few questions. First off to clarify with respect to the new zone at Avino, it was mentioned recoveries, but it sounds like it’s a grade issue. Is it -- does the production from there effected mostly by grade or is actually recovery because of mineralization and whatnot?

Basically, the -- what we've noticed in the monthly reports is the gold recovery has dropped and what we've done is we're being looking at the mineralogy of the gold in this particular zone. This work is currently taking place right now with one of our consultants down in Mexico. So, based on those results, we'll be looking at what would be the next step we would take in trying to improve the recovery. What has happened is the gold grade in this particular zone is much higher than what the budgeted grade for the year. And this is something that's sort of new to us and we're sort of trying to work towards finding solutions as to how to overcome this problem.

I see. So, the solution to it is still ongoing though. The [Indiscernible] solution--

That is correct.

Okay. Moving along then in terms of your outlook, is there any way we can get some quantification on at least the 2016 numbers in terms of potential production costs in CapEx?

Well, it's same sort of question we don't really give guidance. But on the capital side, I made a few comments here, I mean we're not anticipating anything significant for 2017 other than the completion of the tailings facility. Our cost structures in general will stay the same. I don't anticipate any significant changes in G&A. San Gonzalo has been very stable. Our profit margin there is being averaging between 42% and 46%. Avino as we expected was a little bit lower when we first declared production. And we've seen gross margin come up from about 25% to 38% in the current quarter which is what we expected. Once we back off on the development of mining, we'll continue to see our cost come down and our profit margin go up. So, that's what we're anticipating for 2017 on the cost side of the CapEx.

One of the things I want to add is we're also looking at online analyzer for the mill to improve recoveries, do you want to explain what that is Jasman?

Yes. Basically what we're looking at is more automation in the plat. Currently, what we've been -- what we're using to control the plant metallurgy is basically doing assays and the turnaround time is basically about a day and with an on-stream analyzer, we'll be able to respond much more quickly because we'll have assays for the operators to make the adjustments to the circuit and hopefully, we could optimize our recoveries in the plant by having a faster turnaround time. But the capital cost for an instrument like this is fairly, fairly high and this is an item that is more than likely -- will probably end up in 2017 budget.

Yes.

Which begs the question what would the cost be?

Our initial budget is--

Well, hang on, it really depends because we have three independent circuits. So, if we want to get three units, the price goes up. We may start testing one, right.

Yes, the right now.

But it depends on what--

Yes, and there's different manufacturers too. So, the price could vary quite a bit depending on which supplier you get and kinds of bells and whistles that goes with it.

Okay.

And hopefully we can finance those in the similar way we finance some of other significant capital items.

I see. So, your assay turnaround time currently is one day and this will make even faster, just to be clear?

Correct. Yes.

Okay.

It's immediate.

Interesting, okay. Well, great. Well, thanks a lot. That's it from me.

Thanks Rob.

Thanks Rob.

The next question comes from Joseph Reagor with Roth Capital Partners. Please go ahead.

Good morning guys and congrats on a good quarter here.

Thanks Joseph.

So, a lot of the important topics are already been touched on, but two other things here I was curious on. First one, being production numbers versus sales, is this just given -- I'm new on the analyst side here, is it a reflection of inventory build, the 40,000 roughly difference between produced and sold or is that a payable discrepancy or is a combination thereof?

Let's have a look here. Are you talking all with -- not compared to the comparable quarter, you're talking about for the current quarter?

Current quarter production was about -- little shy of 650,000 of equivalent and then sold was 608,000. And I was just wondering is that inventory build, is that you're reporting from inventory build or is that a reflection of -- like a payable percentage, are you getting -- you're only paid on a certain number of the ounces.

It’s a bit of both. I mean we get -- we do get paid a certain amount on the ounces, but also it is an inventory adjustment. We sold some additional material during the quarter that was produced in a prior quarter. But yes, that is correct.

Okay. And so on ignoring payable percentage, are you saying you had a slight inventory decrease during the quarter on an ounces -- true ounces basis ignoring the impact to payability?

Correct.

Okay. And then on the tailings project that you guys discussed a little bit of the timing, early next year, so the new tailings facility, on your actual tailings projects -- the old tailings, when would we expect construction decision or potential mine plant update there next year, like when will those catalysts most likely occur?

It's David here. So, when the new tailings storage facilities completed, we're hoping by the middle of the year, we then have to make it safe to put a drill rig on top. So, we're planning to drill some holes and put some pumps down at the bottom and such the moisture out. Then we're going to drill the rest of the tailings from top to bottom through the sulfides. Then based on the PA recommendations, we need to metallurgically test the upper sulfides to see if they leach. Jas can comment on how long that takes. And once that's done, maybe by the end of next year, we could be a in position to move that project forward. I mean -- how successful those leach test take. If they have to do multiple tests, I mean they take what 90 days each order and column leach test?

Exactly. It's really the column leach test that will really dictate the amount of time that's required. So, some of these column leach test would last here as long as three months or four months.

Okay. All right. So, it’s a bit forward right now.

Early 2018, we could be in a position to really move that project forward.

Okay. And given that backdrop, there's some uncertainty as far as timing, would you say that it's still ahead of Bralorne or just they are kind of on equal track as far as timing of potential construction or do you think maybe Bralorne could possibly move ahead of it?

Well, we're looking at bringing Bralorne back online before the end of next year.

Okay. All right. So, it sounds like that one might be ahead then. That's good to hear.

It's well ahead. Once we decided to move the oxide tailings project forward, then it's another year to build it out and permit it and build -- and also could be 2019 by the time we are producing from there.

Okay. All right. Well, thanks for the update guys. I'll turn it over.

Thanks Joe.

Thank you.

Thanks Joe.

[Operator Instructions] There are no more questions at this time. I would now like to hand the call over to David Wolfin for closing remarks.

I just want to thank you all and appreciate you calling in today on such a busy day in the political world. We're thrilled about our results. We're proud of our teams here in Canada and in Mexico and ask you to please continue to follow our developments and hang in there with us as we grow the company. Thanks again and have a great day.

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