Avino Silver & Gold Mines Ltd. (ASM) Q3 2018 Earnings Report, Transcript and Summary

Welcome to the Avino Silver & Gold Mines Third Quarter 2018 Conference Call and Webcast. As a reminder, all participants are in a listen-only mode, and this 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 third quarter 2018 financial results conference all and webcast. On the call today we have the company's President and CEO, David Wolfin; our Chief Financial Officer, Malcolm Davidson. We will also have on the line our Chief Operating Officer, Carlos Rodriguez, and one of our Directors, 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. I would now like to turn the call over to Avino's President and CEO, Mr. David Wolfin. David?

Thanks, Jen. Good morning everyone and welcome to Avino's Q3 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 the third quarter 2018 financial and operating performance and our plans for the fourth quarter of 2018. And then we will open it up for questions. Please note that all figures are stated in the U.S. unless otherwise noted. During the third quarter of this year we experienced significant challenges due to substantially lower metal prices at a time where we were committed to completing our planned expansion in Mexico. Overall production declined compared to the same period in 2017 despite the additional throughput provided by Mill Circuit 4, which remains in the testing and commissioning phase. Silver equivalent production was down 7% to 704,000 ounces compared to 761,000 ounces in the same quarter of 2017. Our silver production was down 7% to 342,000 ounces compared to 368,000 ounces. Gold production was down 18% to 2,204 ounces compared to 2,673 ounces. And copper was down 10% to 992,000 pounds from 1.1 million in Q3 2017. Even with lower metal prices experienced during the quarter, we feel the company is well positioned for the future. During the quarter our priority shifted from growing our production to preserving our margins. With 4 Circuits at the processing plant, we have the flexibility to optimize our concentrate products, which during the quarter involved using Mill Circuit 2 to process higher margin historic aboveground stockpiles, which are cost effective to process since there are no associated mining costs. Accordingly our consolidated cash costs for the quarter were $9.69 and all-in sustaining costs were $11.15 compared to $9.74 and $11.25 respectively during Q3 2017. We also continued the testing program for recovery of zinc from the San Gonzalo tailings throughout the quarter. [indiscernible] during the quarter, we continued with our comprehensive exploration program, which is being funded by the CAD 6 million follow through funds announced in April. Over this summer we completed structural modeling and geological mapping, airborne and ground geophysics surveys, geochemical sampling and a large amount of historical data entry, which has greatly improved our understanding of the property's geology to help us with identifying drill targets. We began the 28,000 meter drill program in August and we are looking forward to receiving assays. On the corporate side we completed $4.6 million public offering with proceeds to improve general working capital and alleviate cash flow constraints. I will now ask Malcolm Davidson, Avino's Chief Financial Officer to present the financial results and provide additional comments on the financing.

Thank you, David. And welcome to those who are on the call and viewing our presentation today. As David mentioned, the third quarter has been a challenging one and although our financials have been impacted by low metal prices, we have delivered a consistent quarter of financial performance and our results were within our expectations. Revenue from mining operations during the quarter were $8.5 million compared to $8.4 million for the third quarter of 2017. Mine operating income was $657,000 compared to $2.1 million in the Q3 2017. The decrease is due to lower metal prices, decreasing grades at San Gonzalo mine and our decision to use Mill Circuit 2 to process lower grade higher margin historic aboveground stockpiles instead of newly mined material from the Avino mine. Our average realized silver price decreased by 12% from $16.81 to $14.85 per ounce sold and our average realized gold price was down from $1,281 to $1,222 or 5% per ounce sold compared to Q3 2017. Our realized copper price decreased by 4% to $6,028 per ton from $6,292 per tonne. Earnings before interest, taxes, depreciation and amortization or EBITDA was $0.3 million compared to $1.1 million in the third quarter of 2017. Adjusted EBITDA was $0.5 million in the quarter compared to $1.9 million in the third quarter of 2017. Just a note on EBITDA, management believes that EBITDA and adjusted EBITDA provides an indication of continuing capacity to generate operating cash flow to fund capital needs, service debt obligations and fund capital expenditures. These measures are intended to provide additional information to investors and analysts. These are standard definition under IFRS and should not be considered in isolation or as a substitute for measures of operating performance prepared in accordance with IFRS. Moving on, after taxes our net loss for the third quarter 2018 of $1 million or a loss of $0.02 basic EPS compared to net loss of $716,000 or $0.01 in the third quarter of 2017. Working capital for the quarter was $9.1 million compared to $20.1 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 Bralorne Mine in British Columbia. Cash of $7.1 million was on hand at the end of the quarter. We have maintained and controlled our cash cost, and just to recap, our consolidated cash cost for the quarter were US$9.69 and our all in sustaining cash cost of $11.15 compared to $9.74 and US$11.25 respectively during Q3 2017. Our revenue of $8.5 million was derived 40% from silver, 29% from gold and 31% from copper. Capital expenditures during the first nine months of 2018 were $11.9 million compared to $8.7 million in the first nine months of 2017. Capital expenditures are attributed to the completion of the construction of Mill Circuit 4 as well as production equipment to meet the increased capacity. With respect to the equity financing completed in October, these funds were raised to alleviate financial constrains that were caused by a variety of items, including, but not limited to significantly lower metal prices, the cost of the expansion at the Avino mine, which we have funded using cash reserves rather than debt, cash flow postponement due to unforeseen delays in shipping and concentrates and the construction of a buttress for the tailing storage facility in Mexico to extend its life by three years, which was not included in the 2018 budget. Avino has worked to keep production cost and cash cost competitive and the company is committed to vigorously protecting our cash models. Further, while we continue to experience challenges in the mining sector, management has commenced cost reduction initiatives that span the company and call for a reduction in capital, operating and administrative cost in Mexico, British Columbia and the corporate offices in Vancouver. Cost reduction measures include temporarily postponing exploration to Mexico, postponing the paste backfill decision in Mexico, as well as reducing general and administrative cost through investor relation initiatives and marketing. The fully funded exploration program will continue at Bralorne. These strategic changes will help reduce cost in all areas of the business as well as conserve cash, increase efficiencies and preserve our profitable operation. At this point, I will hand it back over to David for a discussion on our plans for the fourth quarter of this year.

Thank you, Malcolm. We certainly hope for improved metal prices. And in the meantime, we will continue with reducing and controlling our costs and capital, operating and administrative costs across all the company. Looking ahead to the fourth quarter, we have outlined our expectations as follows. At the Avino property in Mexico, we anticipate receiving drill results from holes that were drilled in the historic open pit area of the Avino vein system and information regarding the Santiago vein, which is joins San Gonzales mine. At Elena Tolosa ET we planned a temporary slowdown in development to control cost and protect our margins during weak metal prices. Mill production will be stable for the rest of the fourth quarter. At the San Luis area, underground development and rehabilitation including bolting and screening will continue. Work is also underway to develop and drift in areas that were partially developed during the 1980s and 1990s prior to the mine's closure. We will continue to evaluate other areas on the property, including the open pit and to assess the quantity and grades of the remaining historic stockpile. During the fourth quarter, Circuit 1 is processing San Gonzalo material, Circuit 2 is processing San Luis material, Circuit 3 is processing Elena Tolosa material and Circuit 4 is processing old stockpile material. Circuit 4 should transition to San Luis material during the first half of 2019. We continue to test the onstream analyzers at Mill Circuit 4, with the goal of improvement recovery rates. With respective cost cutting measures, we have pared back cruise and are looking to our suppliers and offers to achieve repayment flexibility. At Bralorne, we are looking forward to receiving assays from the initial holes drilled at Bralorne as part of the 28,000 meter drill program. Drilling continues to be focused on testing underexplored portions of known veins. We anticipate 4,200 meters of drilling to be completed for the quarter. Drill targets will include Pioneer Mines, 27 vein expansion and King mine area, Ned/Peter and Shaft veins. Phase 2 of the detailed structural modeling review to be completed, trial 2D seismic reflection survey to be completed, high definition LiDAR survey to be completed. Again we remain focused on our projects and controlling cost across the company. We will continue to optimize operations and evaluate other areas of the vast Avino property. Finally, I would like to say thank you to the teams in both Canada and Mexico, Avino's resilience in these challenging times is due to their dedicated efforts. We would now like to move the call to the question-and-answer portion. Operator?

Thank you. At this time we will be conducting the question-and-answer session. [Operator Instructions] Our first question is coming from the line of Heiko Ihle with H.C. Wainwright. Please proceed with your questions.

Hey, guys. Thanks for taking my questions.

Hi, Heiko.

Hi, Heiko.

Hi, Heiko.

Hi. In the long-term, I am pretty convinced your current expansion in this current depressed metal price environment will bear fruit. So keep doing what you are doing. I went through the MD&A breakup of cash costs between Avino San Gonzalo and [indiscernible]. And while doing that I realized the all-in sustaining costs for the stockpiles are actually the lowest for the three. In fact they are actually quite a bit lower at less than $10 an ounce for all-in sustaining when compared with $11.09 at Avino and above $12 at San Gonzalo. That said grades of production at San Gonzalo are declining so it's not really a surprise that you are seeing with the near-term end of mine life. So at least purely obvious question, any idea how much production from there we will see in Q4? And dare ask any sort of cost projections for the rest of 2018 and the remainder of the mine life?

Heiko, how are you doing, it's Malcolm, here. With respect to how long we will be processing that material, it really depends on how much we have, I have got Carlos on the line as well. We expect to be have approximately six to eight months or more we don't fully known how much material we have, we do have quite a bit of it. And with respect to cash cost going forward, I don't think we are going to see anything difficult changes in our model. I think once we have been running Circuit 4 for a little bit longer, we may appreciate some further economies of scale. But they have been fairly stable and we anticipate this going forward.

Yes. In addition to what Malcolm is saying, Heiko, we don't have actually tonnage, estimated tonnage for the remaining stockpile, but yes, [indiscernible] that we have mentioned sometime it's about 300,000 tonnes of historical stockpiles on surplus.

Carlos, I'd like to add something to this as well, because what is happening is we've been identifying more and more historical stockpile material. And I guess the tonnage is really dependent on the assays that we get back from the sampling of the stockpiles. And in some areas, the grades are lower than in some of the other areas. So this could have an impact on the all-in sustaining costs from the historical stockpile depending on the grades, that we get.

Very helpful. Thank you.

Yes, I hope that answers your question, Heiko.

Yes, yes, it certainly provides more color. And I think that's helpful, not just for me. So at Bralorne I know you have to spend the CAD 6 million as the full financing at the site, but some can be spent in 2019. Any idea how much total will be spent by December 31? I mean, I got to think that all the investments at the site are sooner or later going to bear fruit. So on the same token, how much drilling is going to be done before the end of the year? And how much in 2019 please?

Well, it's certainly underway, is Fred with the team in Mexico at the moment, just to comment on what we anticipate as far as…

Yes, Fred is here with Michal. Yes.

Can Fred, comment on the total number of meters that we have project held between now and the end of the year.

Well, I said it in my script, there's 4,200 meters.

Yes, 4,200 meters. And there's a couple of holes completed on the 27th Vein Extension in the Pioneer area we will be getting assays from the drill holes pretty soon.

Okay. So we should expect some results probably before the end of November. Is that fair to assume?

That all depends on the turnaround time from these assay labs. It's hard for me to comment that this time. I think Fred, would probably have a better idea on this.

Yes, hello its Fred here. Yes, the assay office are pretty stepped up these days. And I think not only in Canada, but elsewhere but we can trying to get assays about every three to four weeks. So we'll - and first holes that we drilled were quite deep. So those holes will be done I would in the next month or so.

In the third quarter Heiko we drilled 1,409 meters in the third quarter at Bralorne in two holes on the Pioneer mine.

Okay, thank you very much.

Thank you. The next question is from the line of with Bhakti Pavani with Alliance Global Partners. Please proceed with your question.

Good morning, guys.

Good morning.

Just wondering, with regards to the term facility with Samsung, I believe you had a quarterly payment of about $2 million this quarter. Is that sort of the ongoing or is that what we should be modeling going forward? Or are you guys planning to negotiate, I mean, that facility further?

Hi Bhakti, its Malcolm here. We're continuously talking with Samsung on ways to restructure our current term facility. Given it has been a challenging year, we may consider making some changes, but we have had some discussions with them and we may have information coming out in the coming weeks, but nothing has been settled or finalizing at this point.

Okay. Perfect. Also, in your prepared remarks, you mentioned that you guys are considering the metal environment, you are considering slowing down the development of the ED mine. Just kind of wondering when you move to next year, do you think the slower development could push you guys to further process the stockpile versus the ED mine in 2019?

No. There's areas of the mines that are prepared for mining. So we're going to look to continue to feed the mill and start mining certain areas that are ready. So potentially could lower our costs, because you won't have the development costs.

In addition to what David just mentioned, we have on surface, we have about 880,000 of broken ore to go, I mean, it's just made of haulage from resources and to circle number three. So is just haulage costs only.

Also we have - we drilled the open pit while it has ore in there. So we're going to have results on that we'll have a probably an updated resource estimate early in the new year. And so that will be another area of source.

Perfect, that's very helpful. And lastly with regards to the paste backfill land just wanted to understand how much have you spent so far and how much needs to be spend more on that?

It's been on plan - mine planning and engineering. So we have not made a construction decision as of yet.

And how much have you spend on that?

We've - Bhakti, its Malcolm here. Yes, we've spent between $150,000 to $200,000 on some preliminary engineering work. And as David noted, we've not made a construction decision on the paste backfill. If and when we do I expect it will be in the neighborhood of about $10 million, which most of that could be financed through various different options, but again we have not made a construction decision on that.

Okay, perfect. Thank you very much, that's it from my side.

Thank you.

Thank you. The next question is from the line of Joseph Reagor with Roth Capital Partners. Please proceed with your question.

Morning, guys and thanks for taking the questions.

Good morning, Joe.

So couple of things first thing on the tailings at Avino, the way I understand is that the current plan is to extend the mine life - the life of the tailings dam so the installation of buttress is right. And how long do the official goal to set for extending that life?

To build the buttress?

Or like how much time does it add on to the life total?

Carlos you want to take that?

Yes, thank you, Joe for the question. Yes, we are in the process of the - doing the engineering starting from DFD [ph] and it will take about something from four to six months to complete it. And capacity that we are planning to have for this expansion will be about three years of capacity for storage.

Okay. And then so from a modeling perspective should we be assuming that your tailings project is four to five years away from being a producer then given that you're going to extend the life of the tailings dam for planning?

You're talking about the oxide tailings resource?

Yes.

Yes, really it depends on metal prices and when we make the construction decision to build the paste backfill. And so if we make that decision next year and build it out then we won't continue depositing on the expanded tailings area. But at the moment it's given us a way to save costs and take our time to make sure we have the right plans for the paste backfill. So yes, at the moment it's going to be pushed out further.

Okay. And then moving over to Bralorne, given that you guys have kind of gone back to the drawing board to drill this project out see how big it can be, from an investor and modeling perspective as well there what should we be thinking about as far as the ultimate timing to see that project reach construction decision?

Jasman here, Joe. I think a lot of that will depend on the exploration results that we're going to get. So I think it's hard for us to sort of put a date on when the development of the mine will take place, contingent on the exploration results.

So in the…

Go ahead sorry.

I was just going to say is it fair to say should we be looking at it more like the value of the existing resources and exploration upside rather than on the planned out mining sites since there is not exactly a specific plan in place right now so you don't know how big it is?

That's fairly accurate. I mean, we do have an internal mine plan at 400 tonnes per day. And Fred can speak to that, but it's not finalized yet. It's not 43-101 complaint it's just internal at this point.

Hello, its Fred here. We spent a couple of years looking at putting mine back into production at about a couple of hundred tons per year. But once we went through our planning, our engineering and looked at what size we needed to make it economic. We ended up at about 400 tonne per day operation and we require and at that time we only had about 180,000 ounces in resources, which is not enough to justify going to construction. So about a year ago, we decided that we got to go back to exploration and our first objective was to add to the resources that we had. However, we realized that that was going to be pretty slow in adding resources. So in January of this year with the raising of the CAD 6 million flow through funds we took a different approach to it and said let's look at the overall appraisal of property vacating the Bralorne and the Pioneer. Plus we added BRX its double the size of the property. So look at it from a purely exploration side and try to make new discoveries on current mill vein and make new discoveries. And to that end, we are using the - we have probably got the most comprehensive exploration program that's ever been done on it. We're using modern geophysics, we're using 2D seismic and we're also providing a couple of kind of rules experts in this sort of a project. So we're going to and as David mentioned kind of the third quarter and the fourth quarter. And so this program we are going to run until June of next year and depends on how successful we are at making a new discovery it could significantly. I also expect that we're probably at least two years away from being able to look towards construction. Thanks.

Yes, but Fred you can comment on the infrastructure, once we do make the decision how fast would that go from that point?

Yes, the thing is that over the last two years, we've been doing all the environmental and because of the age of the property we have had to do a lot of work on legacy issues, we've had water that we've had to look after. And so we've got a permit in place for 100 tonne for new operation. We were working towards permit for 400 tonnes per day, which because we have a modern permit now that would probably take six months to do our infrastructure. We - because we decided we couldn't use 100 tonne per day mill or expand it because it just wasn't - it wasn't laid out properly from the old operation side of it. And it had some - a lot of design issues. So we completely removed the 100 tonne plan from the building. And our plan is to build a new crushing station upside, use the old building and that'll have between the 400 to 500 tonnes per day operation. So once we get the resources that we want, we would go immediately to that 400 tonne per day permit, if that's what we're still like or perhaps would be larger than that. But then the mill itself we have done a lot of engineering on already. So within a year we could have the mill up and running. Depend on where we find the new resources in that development.

Okay, great thank you. Well thank you guys for all the color on those.

Thanks, Joe.

Your next question is coming from the line of Michael Wichterle with Cantor Fitzgerald. Please proceed with your question.

Hi, David. Good morning, everyone. Thanks for taking my questions.

Hey, Mike.

Hi, Mike.

So just one, and this concerns the optimization efforts specifically at Avino. You mentioned there will be a bit of a decrease in the mining rate temporary. How could I - can just you help me….

Development rate.

Yes, and temporary that's maybe this quarter and the next two or?

That's not going to affect the output.

Yes. But just in terms of the development. So it's just pretty much hitting just for Q4.

Say that again.

Just a decrease in development you're just - it's just seen in this final quarter of the year.

It's going to be ongoing until market conditions improve. But we have sufficient areas already developed ready for mining.

Yes.

Yes. And besides we do have a stockpile from the ET mine that we've stockpiled now for some period of time and that's going to - we'll be using the stockpile for mill feed in the fourth quarter.

Yes, understood. Okay, very good. Thanks very much.

Thanks, Mike.

Thank you, Mike.

Thank you.

Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to management for any additional or concluding comments.

Thank you, operator. Thank you again everyone who join the call today. Once again during these times of significantly lower metal prices, we continue to work diligently on expanding our operations and making improvements to grow the company and ultimately increase shareholder value. I want to give a special thank you to our operations team in Mexico for doing a fantastic job during these times. And I want to thank you all again for joining us today and wish you to have a good day. Thank you. Bye, bye.

Thanks, everyone.

Ladies and gentlemen, this does conclude today's teleconference. Again, thank you for your participation. And you may disconnect your lines at this time.