Avino Silver & Gold Mines Ltd. (ASM) Q2 2018 Earnings Report, Transcript and Summary

Welcome to the Avino Silver & Gold Mines' Q2 2018 Conference Call and Webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Jennifer North, Manager of Investor Relations. Please go ahead.

Thank you, Operator. Good morning everyone, and welcome to the Avino Silver & Gold Mines Limited Second Quarter 2018 Financial Results Conference Call and Webcast. There will also be a live stream on our new Facebook page. The link is available on our press release. On the call today we have the company's President and CEO, David Wolfin, and our Chief Financial Officer, Malcolm Davidson. We will also have on the line our Chief Operating Officer Carlos Rodriguez, and one of our directors, Mr. Jasman Yee. Before we get started, please note that certain statements made today on this call by the management team may include forward-looking information within the meaning of applicable securities laws. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different than those expressed by or implied by such forward-looking statements. 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. For more information, we refer you to our detailed cautionary note in the presentation accompanying this call or on our press release of yesterday's date. I would like to remind everyone that this conference call is being recorded and will be available for replay later today. Replay information and the presentation slides accompanying this conference call and webcast will be available on the website. Thank you.

Thanks, Jen. Good morning everyone, and welcome to Avino's Q2 2018 financial results conference call and webcast. Thank you all for joining us today. Before we begin, please note that the full financial statements and MD&A are now available on our website. Today we will cover the highlights of our second quarter 2018 financial and operating performance, and then we will open it up for questions. Please note that all figures are stated in U.S. dollars unless otherwise noted. The second quarter of this year saw an increase in overall production compared to the same period in 2017. Silver equivalent production was up 6% to 739,000 ounces compared to 698,000 ounces in the same quarter of 2017. Our copper production was up 31% to just under 1.5 million pounds from just over 1.1 million pounds in Q2 2017. Our silver production was down 16% to 323,000 ounces, and our gold production was down 11% to just over 1,700 ounces. During the quarter, the company produced 2,743 tonnes of bulk copper, silver, and gold concentrate from its Avino Mine, 679 tonnes of bulk silver, gold concentrate from its San Gonzalo mine, and 363 tonnes of bulk copper, silver, gold concentrate from the newly completed Mill Circuit 4, which was used to process historic aboveground Avino stockpiles. We also continued the testing program for the recovery of the zinc from the San Gonzalo tailings throughout the quarter. The company produced 199 dry tonnes of low-grade zinc concentrate, with a content grading 1,094 grams per tonne silver, 6.31 grams gold, and 7.65% zinc for an additional 13,032 silver equivalent ounces. We're extremely pleased with the new state of the art Mill Circuit 4 in Mexico, which came online full-time in May, and has added an additional 70% throughput capacity to our processing plant. During the startup, testing, and commissioning phase, which is expected to last through the end of 2018, feed to Mill Circuit 4 will come from historic aboveground Avino Mine stockpiles. Once underground development is complete, Mill Circuit 4 will transition to processing newly mined mill feed from the San Luis area of the Avino Mine. Work at San Luis is currently focused on restoration of the main haulage ramp, which was near completion at the end of the second quarter. When the haulage ramp is complete, plans are to begin development and drifting in areas that were partially developed during the 1980s and '90s prior to the mine closure. Subsequent to the quarter end, we announced the final drill results the planned drill programs on the El Chirumbo and Guadalupe areas at the main Avino Mine located on the Avino property. The objective of the drill program was to explore the targets outside the active mining areas to assess their potential. Overall, we were pleased with these drill results, as they provided further confidence to continue exploration. In addition, we are in the planning stages of a new drill program targeting the Aguila Mexicana vein located approximately 400 meters to the northeast of the San Gonzalo mine. The Avino and Aguila Mexicana veins are considered to be the two strongest and widest structures on the property. The main purpose of this drill program will be to explore the potential continuity and mineralization along the vein, which was subject to 2007 and 2008 drilling. With respect to alternative tailings disposal, management has retained the services of SRK Consulting Canada Inc. and MPL Mine Paste Ltd. to review the mine operating plan and alternatives for tailings disposal. Additionally, an optimization review of our internal operating plan was carried out, resulting in discussions on alternatives to conventional tailings storage and a recommendation to use tailings as backfill. The recommendation is contingent on a revised internal operating plan, which is underway. I will now ask Malcolm Davidson, Avino's CFO, to present the financial results.

Thanks, David, and welcome to all who are on the call and viewing our presentation today. Avino is pleased to delivery another positive and consistent quarter of financial performance. Although we did experience some increases in energy costs and experience lower silver and gold production, our results were within our expectations. Revenue from mining operations during the quarter were $9.2 million compared to $7.9 million for the same quarter in 2017. Mine operating income was $2.4 million compared to $2.5 million in Q2 2017. The slight decrease is due to slightly lower silver and gold production rates and an increase in labor costs as well as the depletion expense at San Gonzalo. Our average realized silver price decreased by 3% from $17.09 to $16.54 per ounce sold, and our average realized gold price is virtually unchanged from $1,259 to $1,265 per ounce sold compared to Q2 2017. Our average realized copper price increased by 23% to $6,939 per tonne from $5,643 per tonne. After taxes, net income for the second quarter of 2018 was $0.8 million, or $0.02 basic EPS, compared to $1.2 million or $0.02 in the second quarter of 2017. Our revenue of $9.2 million was derived of 49% from silver, 19% from gold, and the remaining 32% from copper. Our consolidated all-in sustaining cash cost for silver equivalent ounce for Q2 2018 was $10.54 compared to $10.42 in Q2 2017, an increase of 2% due to higher operating costs. Working capital for the quarter was $10 million compared to $17.7 million in the same period of 2017. The decrease is due to our continued investment in capital projects at the Avino property in Mexico, as well as at the Bralorne mine in British Columbia. Cash of $4.8 million was on hand at the end of the quarter. During the second quarter, the company announced and closed a private placement for gross proceeds of CAD 6 million comprising 3 million in flow-through common shares. The company is using the gross proceeds raised from the offering to incur qualifying Canadian exploration expenses and flow-through mining expenditures at its Bralorne Mine. These expenditures will be renounced through the purchases of the flow-through shares for 2018 taxation year. Also during the quarter, the company signed a sales agreement to sell San Gonzalo concentrate for a 12-month period. As per the agreement, the company received a prepayment of $2 million, which will be repaid in equal monthly installments for a 12 month period ending March 2019. The prepayment was used to fund the remaining expenditures related to Mill Circuit 4 in Mexico. Capital expenditures during the first six months of 2018 were $7.4 million compared to $4.5 million in first half of 2017. Capital expenditures for the quarter were attributed to the completion of construction of Mill Circuit 4 as well as production equipment to meet the increasing capacity. At this point, I will hand it back over to David for a discussion on Bralorne. Thank you.

Thank you, Malcolm. During the quarter, plans to spend the CAD 6 million raised for exploration at the Bralorne were finalized. The funds have been allocated to search for new discoveries. Our new exploration plan, which is the most comprehensive in the mine's 100 year history, includes the following steps. Number one, comprehensive structural modeling and geophysical mapping; two, extensive airborne and ground geophysics; three, focus on geochemical sampling; four, significant drilling campaign. Work this summer has been focused on the geophysical and geochemical elements of the program, and we expect drilling to begin before the summer is out. Also in the quarter, environmental work continued with regards to requirements under the operating permit M207, in particular studies and reclamation regarding legacy issues, plus work to improve the short and long term water treatment and overall water management. Overall, our financial results and progress in the second quarter of 2018 are within our internal projections. The Mill Circuit 4 expansion was completed on time, under budget, and is now operating above 98% efficiency. I'd like to say thank you to the teams in both Canada and Mexico. Avino's steady results and growth are due to their dedicated efforts. Moving on to our outlook for 2018, management remains focused on the following key objectives; one, maintain and improve profitable mining operations while managing operating costs and achieving efficiencies; two, complete Mill Circuit 4 expansion to increase Avino Mine production; three, complete a successful drill program to increase and improve confidence in our resource base out of Bralorne and look at new exploration targets on the property; four, continue mine expansion drilling and explore regional targets on the Avino property in Mexico; five, follow the recommendations made in the 2017 PEA on the oxide tailings resource at the Avino Mine and assess the potential for processing the oxide tailings resource; six, complete paste backfill engineering and commence construction on the paste backfill plant. We would now like to move the call to the question and answer portion. Operator?

[Operator Instructions]. Our first question comes from Heiko Ihle with H.C. Wainwright.

Can you just talk a bit about the exploration drilling, especially the one at Bralorne? I mean, I just reread that release you guys put out on June 20 with the significant drilling and the campaign and the structural modeling and all that stuff, geological mapping, etc., etc. But just walk us through what else you expect to see for the remainder of the year, please. I mean, you've got the CAD 6 million to spend through the flow, plus whatever else you decide to drill there and elsewhere, please.

Yes, we're planning 28,000 meters of drilling, which will commence in about a month. So other geophysical work and geochemical work is going to help hone down the targets, but we have a general idea of where we're going to be drilling. So that's the plan.

But, I mean, just sort of breaking it out I guess quarter by quarter or even just -- obviously this all gets spent at Bralorne, correct?

Correct. Yes, over 18 months since we closed it. So that'll go into next year.

Malcolm, you talked about higher labor expenses at San Gonzalo on this call earlier. Can you just do me a favor quickly? Can you quantify that higher labor expenses and sort of provide some color on where that's coming from?

Yes, that's with -- so with our mining team in Mexico. The increases haven't been that significant, but just to keep up with general labor costs in Mexico. And to be competitive we have seen some slight increases.

Deal?

He's asking about labor.

Thank you, guys.

Thanks, Heiko. Happy birthday.

Thank you.

Our next question comes from Joseph Reagor with Roth Capital Partners.

On the exploration side, do you have an idea of what over the last couple years your cost of discovery has been on like a silver equivalent basis?

Good question. I'd probably have to give that a little bit of thought and get back to you offline.

Okay, fair enough. And continuing on with exploration, are there opportunities in the neighboring areas to the Avino Mine for let's call it under explored project areas that you guys could look to pick up if the drilling on the project doesn't lead to the results you'd like?

A lot of the ground is covered by other companies in the general area. But we have extensive targets on our property. We do have one property to the north called La Podicina, and we're waiting on permit and agreements so we can go in and drill that one. So that one is a -- there's old workings there. There's been a few drill holes and it looks very, very good. So we have a lot of targets that we can drill on our own property. So before we go out and look elsewhere, that's what we're going to focus on.

Okay, fair enough, and it's good to hear you've still got a lot of potential there. Shifting gears a bit, you guys mentioned again that you're looking at reengineering to do paste backfill. Given the production rate increase, the wind down of San Gonzalo, and having to do paste backfill, are you guys concerned at all about bottlenecking in the mine itself, or have you guys already gotten to that point of engineering that that's not a concern?

No, we're not concerned about that because the Avino strike length and the width is so robust there's plenty of room to feed the entire plant. And so that shouldn't be an issue.

[Operator Instructions]. Our next question comes from Bhakti Pavani with Alliance Global Partners.

Just wanted to build up on Joe's question with regards to the paste backfill plant. I know you guys have been completing the engineering work there. Just wanted to understand what are the next steps once the engineering is done.

Once the engineering is done, then financing the project will be underway.

Well, we are looking at various ways to finance the project. The capital expenditure is between $6.5 million and $8.5 million, but we do have a few options that we're working on that are relatively low cost. And once we finalize the financing, we'll be making some disclosures.

And what about the permitting? Do you guys need to obtain or modify or amendment of permitting?

No, we don't.

With regards to Mill Circuit 4, I know you guys have that online. Just kind of wondering, is it processing 2,500 tonnes per day like you guys had planned as of now?

Absolutely.

With regards to zinc circuit, you guys have been consistently producing zinc concentrate. Just wanted to understand, is there any update on the testing program? Do you guys anticipate or expect to continue producing that? How should we think about it?

Yes, we're going to continue producing until the end of the life of mine, because we're into an area where there's more zinc. So we'll continue.

With regards to drill program at El Chirumbo and Guadalupe, what are the next steps? I mean, do you guys continue -- plan to continue drilling there, or is there going to be an update on the mineral resource?

We do plan, yes. Basically we do it in phases. We drill it and then we get the results and evaluate it. So we're just finishing our evaluation and planning the next phases of drilling. So they both look very good, very robust, and we'll come out with an update once those plans are finalized.

And lastly, with regards to the grades for copper and gold, second quarter saw quite a bit of shift in the grades. Is that sort of the silver and copper grade we should be modeling going forward?

I would say so. I mean, we feel that the grades will improve, but to be conservative I would stick with these grades for now.

[Operator Instructions]. Our next question comes from Chris Temple with National Investor Publishing.

First is with especially the beating that the copper price has taken of late, is there consideration or even any room, like with your obligations to Samsung, to delay any concentrate sales? Is that considered at all?

No. It's a good question, but we have a commitment under all of our sales agreements, whether it's to Samsung or anybody else, and we deliver the monthly quantities as required.

Okay. I wasn't sure if there was any--

We don't do any internal hedging and sit on inventory. It's just not something we have in our risk profile.

Okay. I didn't think so, but I just wanted to ask.

Oh, no, good question.

And secondly, and this may be premature also. But have you heard anything at all as far as any intentions to tweak or change the tax or royalty structures once new President Lopez Obrador is in?

I haven't heard anything. My ears are certainly open for a decline in tax rates, but we're not aware of anything at this time.

This concludes the question and answer session. I would now like to turn the conference back over to David Wolfin for any closing remarks.

Thank you, Operator. And thank you again to everyone who joined the call today. Once again, we continue to work diligently on expanding our operations and making improvements to grow the company and ultimately increase shareholder value. Thanks and have a great day, you guys.

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