Avino Silver & Gold Mines Ltd. (ASM) Q4 2018 Earnings Report, Transcript and Summary

Welcome to the Avino Silver & Gold Mines Fourth Quarter 2018 and Year-End Results 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 Ltd fourth quarter and year-end 2018 financial results conference all and webcast. On the call today we have the company’s President and CEO, David Wolfin; and our Interim Chief Financial Officer, Nathan Harte. 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. 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 Q1 and year-end 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 available on our website. Today, we will cover the highlights of our fourth quarter and year-end 2018 financial and operating performance and our plans for 2019, and then we will open it up for questions. Please note that all figures are stated in U.S. dollars unless otherwise noted. During 2018, we experienced significant challenges due to substantially lower metal prices, at a time where we were committed to completing our planned expansion in Mexico. Despite the challenges faced, our overall silver equivalent production increased in both fourth quarter as well as for the year. Silver equivalent production for the fourth quarter was up 13% to 720,000 ounces compared to Q4 2017, and our 2018 annual production was up 6% compared to 2017 to 2.9 million. Our silver production was down 10% to 289,000 ounces in the fourth quarter, and our annual production also decreased compared to 2017 by 8% to 1.3 million. Gold production during the fourth quarter was up 34% to 1,973 ounces, and also 2% higher in the year compared to 2017 with 8,092 ounces produced. The copper production during the quarter was up by 24% to 1.4 million pounds and also 10% higher on the year compared to 2017 with 4.8 million pounds produced. Avino is pleased with this decision to pursue its expansion plans during 2018, despite the poor market conditions. At the start of 2019, metals markets look to be improving. With the four circuits now at the processing plant, we have the flexibility to optimize our concentrate products to suit variable market conditions. During 2018, this evolved using Mill Circuit 2, Mill Circuit 4, at different times to process higher-margin historic aboveground stockpiles, which were cost effective to process since there was no associated mining cost. In addition, we feel this ability will prove to be beneficial in 2019 as we continue to experience lower grades at San Gonzalo, as it nears the end of its mine life. Accordingly, our consolidated cash cost per payable silver equivalent ounce for 2018 was $9.32 [ph] and our all-in sustaining with $10.67 compared to $8.65 and $10.11 respectively, during 2017. We also continued the testing program for recovery of zinc from the San Gonzalo tailings throughout the year as well as completing drill programs at Guadalupe, Chirumbo, San Juventino areas as well as the Avino open- pit mine area. At Bralorne, during 2018, we embarked on the most comprehensive exploration plan ever undertaken in the camp’s 100-year history, which was being funded by CAD 6 million flow-through funds announced in April. Since April, we completed structural modeling and geological mapping, airborne and ground geophysics, geochemical sampling in large amount of their historical data entry, which has greatly improved our understanding of the property’s geology to help us identify drill targets. We began the 24,000-meter drill program in August and are pleased with the initial results, which were released just before the holidays. We look forward to receiving further essays as the program continues. I will now ask Nathan Harte, Avino’s Interim Chief Financial Officer, to present the financial results.

Thank you, David. It’s my pleasure to be on the call today and welcome, everyone, who has joined us and viewing our presentation today. As David mentioned, 2018 was a challenging one. And although our financials have been impacted by low metal prices, our results for the year were within our expectations. Revenues from mining operations during the year were $34.1 million compared to $33.4 million in 2017, a slight increase of 2%. Mine operating income was $6.3 million compared to a $11.3 million in 2017. The decrease is primarily due to lower metal prices as well as declining grades at the San Gonzalo mine. Earnings before interest, taxes, depreciation and amortization, or EBITDA, was $6 million compared to $8.3 million for 2017. Adjusted EBITDA was $6.1 million in the year compared to $10.6 million for 2017. Moving on. After income taxes, earnings for 2018 were $1.6 million or $0.03 basic EPS compared to $2.5 million or $0.05 in 2017. Working capital for the year of $13.1 million compared to $16.4 million in 2017, with a decline coming from our continued reinvestment in capital projects at the Avino property in Mexico as well as the Bralorne mine in British Columbia. Cash of $3.3 million was on hand at the end of the year. We had maintained and controlled our cash costs in a difficult middle market environment. And just to recap, our consolidated cash costs for payable silver equivalent ounce for the year were $9.32, and our all-in costs were $10.67 compared to $8.65 and $10.11 respectively, during 2017. Our revenues of $34.1 million was derived of 43% from silver, 25% from gold and 32% from copper. Capital expenditures during the year, totaled $14.8 million compared to $12.2 million in 2017. These capital expenditures are attributed to the completion of construction of Mill Circuit 4 as well as production equipment to meet the increased production capacity and ongoing exploration work at the Bralorne property. Avino has worked to keep production cost and cash cost competitive, and the company is committed to vigorously protecting our cost models. As mentioned in previous quarters, management is continuing with cost-reduction initiatives that span the entire company. These strategic changes will help to reduce cost in all areas of the business as well as conserve cash, increased efficiencies and preserve our profitable operations, which shift with the company in a strong position as we expect to see continued improvement in the metal sector throughout 2019. At this point, I will hand it back over to David for a discussion on our plans for 2019.

Thank you, Nathan. We certainly hope for continued improvement in metal prices, but to be prudent, we will continue with reducing and controlling our costs and capital, operating and administration across the company. Looking ahead to 2019, we have outlined our expectations as follows: at Avino property in Mexico, our plans are as follows: further underground development at the Elena Tolosa and St. Louis area of the Avino mine; construction of the tailings thickener; upgrades to existing mining infrastructure at the Avino mine; upgrades to the existing TSF, including the reinforcement by way of buttressing; and replacement of existing mining equipment. On to Bralorne, in 2018, the focus of the drill program was to increase resources in known veins and structures. In 2019, the objective is to make new discoveries in underexplored areas that show similar geological structural attributes as those along the Bralorne, Pioneer and King Mines. New conceptual insights have opened up the validity of the large block of land Northeast of the Peter Vein, as a host area for veins. The drill will be working in this area until mid-year. The drilling campaign calls for 24,000 meters in total. To date, 10,411 meters have been drilled at an average rate of 63.5 meters per day. Though this number has been improving, an average, 101 meters in January. The digitization of historic data, which includes 13,000 scans is nearing completion. The history data has been cataloged for ease of reference and will be incorporated into our Leap Frog modeling software. Again, we remained focused on our projects and controlling costs 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 of 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 question-and-answer portion. Operator?

Thank you. [Operator Instructions] The first question is from Mark Reichman with Noble Capitals. Please go ahead.

Good morning. I was wondering – I was looking at Page 23 of the financial statements, on the exploration and evaluation assets. And I was just wondering if you could talk a little bit about your expectations for exploration and evaluation expenditures in 2019. And how we associate those expenses with each of the projects?

Hey, Mark, Nathan Harte here. First off, I – actually I would like to represent [ph] everyone on the call for the Q&A period. David had to step out. So I’m here to answer questions as well as Carlos Rodriguez, our COO; and Jasman Yee, our Director; and Peter Latta, our Senior Technical Adviser. Mark, sorry, just get back to your question here. So you’re looking for a breakdown on exploration expenditures between Mexico and Canada?

Well, first, what’s your expectation, first, for exploration and evaluation expenditures in 2019? And then, if you could just break it up by project?

Sure, sounds good. So first, I guess, obviously with the large drill program at Bralorne, I’ll start there. So in Canada, we’re expecting to expand – to finish the flow through expansures of up to $6 million. At the end of the year, we’d completed CAD 2 million and will be spending about for CAD 4.5 million to CAD 5 million. So somewhere in the $3 million to $3.5 million range of exploration. As well as there’ll be some other non-filter-related exploration cost there. So I would expect that number to be somewhere in the range of $5 million to $6 million for the year.

Okay. Well, so – just so I can be clear on it. On February 12, you put out the outlook. And the capital expenditures at Avino were, kind of, $5 million to $6 million And that includes the sustaining CapEx, at least, it looked like it. It includes the sustaining CapEx of $4 million to $5 million. And then, you’ve got, at Bralorne – I think, expenditures of around $5 million to $6 at Bralorne, so is that all inclusive? Or I mean, is that…

No, that is all inclusive. Yes, so the $5 million to $6 million mentioned in Bralorne will be related to exploration and evaluation expenditures. And for Mexico, obviously, we do have some sustaining expenditures for 2019. And then, I think, the remaining will likely be split between some exploration as well as some additional capital expenditures that we see.

While, I have you on the line, I may this figure this out, it’s just maybe me looking at it wrong, but when I look at the – on Page 23, if you have the differences in the exploration, evaluation assets, in total, the difference between 2018 and 2017 is about $3.4 million. So what’s the delta between that and the $5.4 million on the cash flow statement under exploration, evaluation expenditures?

That, I mean, obviously, there’s a large movement in the foreign exchange at Bralorne because everything is in Canadian dollars, and we present in U.S. dollars. So with the – some changes in foreign exchange rates there are that. Most of the delta as well as some depreciation, but that’s – but that’s kind of the difference down there.

Okay, great. Thank you very much.

No problem. Thanks, Mark.

The next question is from Heiko Ihle with H.C. Wainwright. Please go ahead.

Hey guys. Thanks for taking my questions.

Hi, Heiko.

Hey, Heiko.

I got an easy one and a little tougher one. Easy one first. Thank you for the color on Bralorne expiration earlier. Very good to see you guys spend that much time on the asset. Given that we think there’s a lot of potential, I’m sure you guys saw the evaluation we put on the asset result this morning. You mentioned in the release earlier this year that there was still $3 million to $3.5 million of flow funds left, but that’s now a month ago, how much is left at the site today?

We spent – I think, we’ve done two months of drilling since then. I would say that probably went through just around $7.5 million, maybe slightly more but, yes, we’re – we still have probably CAD 3.5 million left to spend, CAD 3 million.

Okay. And that’s just the flow through? So there should be additional amount flow funds as well?

Yes. There will be some additional non-flow funds. We’re expecting, around, just under $2 million for the year.

Okay. And just second question. I was hesitant to even ask this on a public call, but I was going through some of your financials last night on CEDAR. And I saw Nate was signing all the documents, so it made me wonder, are you going to stay the CFO? Or you – if there’s still a – if the search – if even fill a search at all for a new CFO? Or?

I think as a group we’re evaluating the decisions. I might be – why don’t I discuss that one offline maybe with David in the future.

Okay, fair enough. Thank you.

Thanks, Heiko.

Thanks, Heiko.

Thanks, Heiko.

The next question is from Bhakti Pavani with Alliance Global Partners. Please go ahead.

Good morning, guys. Thank you for taking my questions.

Good morning, Bhakti.

Good morning, Bhakti.

Hi, Bhakti.

I know you have mentioned that San Gonzalo is near the end of its mine life. Just from the modeling perspective, how many quarters of production do you think you have from there, from the mines?

Yes. Thanks, Bhakti. We have a bit of flexibility there because we have some, both aboveground and broken ore material in the mine. So there’s a bit of flexibility there. I would say, at least, two quarters worth of production.

Fair enough. Moving to Avino mine. I know you guys are still waiting on develop – underground development work at San Luis, and you had a plan of bringing San Luis material and processing it at Mill Circuit 4 for some time first half this year. Is that – is the pace of development still going? And are you guys still on track of bringing that material and processing it at Mill Circuit 4?

Yes. So, we are currently processing San Luis development ore, we’re able to develop in ore, which is actually a large benefit because it keeps our cost down. And as far as the time line to bring that up to full production that, once again, depends on San Gonzalo a little bit as we have to shift our workforce. So we are still on track to do that this year. And we’re playing with timing, doing – once again dependent on metal prices as – and the product mix that we want to put out.

Got it, got it. Moving to Bralorne. You had some very good drilling results at vein 27 and you have – for this year, you do plan to test some new discoveries. With regards to time line of an updated mineral resources estimate, is it – I mean, what’s kind of the timeline? Is it still the end of this year? Or given that you are moving and moving to discovering new areas, would that be shifted to next year?

Hey, Bhakti, Nathan here. So, I think what we’re going to do is, we’re going to reevaluate the asset result as they come in and continue and very much finished the drill program and evaluate everything we have, which will take us through to probably end of the year, potentially. So I’m going to refer an update at the end of 2018, it might be a bit optimistic. But it’s possible. But, I would say, look for maybe to early 2020, just until we can really get a full handle on the actual resource. Because we’re undertaking a fairly large scale of drill program. And we don’t want to jump to any conclusions before we’ve had to analyze all the data. And as we mentioned there, we’re only 10,000 meters into it, a 24,000-meter program. And we really want to get a full-scale picture of what we’re working with because we do believe in it.

Perfect. Thank you very much, guys. That’s it from my side.

Thank you, Bhakti.

Thanks, Bhakti.

And the next question is from Matthew O’Keefe with Cantor Fitzgerald. Please go ahead. Matthew O’Keefe: Thanks, Operator. Good morning. Just wondering if you could comment a little bit more on your – on some of the cost-containment initiatives that you have going on, like, what you are looking at? Is it – is that part of these new equipment purchases? Or are there other areas that you’re looking at? And also, maybe a little more detail on your tailings facility? What’s involved there? And what was the impetus for that work?

Sure. Carlos, do you want to take that first question?

Yes. Regarding with the tailings?

Or the cost-production measures that you’ve implemented at site?

Okay. Yes, Matthew. Yes. We have reduced it, we just reduced some of the contractors at the mine site. And also just keep just the essential personnel in there. Also, we have talked to the carriers, contractors and other people, who provide batteries to the company. In order to reach a new agreement, in order to reduce cost for repairs and supplies and things like that. So, yes, it’s a large program on that. Also, we have looked at kind of reduction on the mill site, but also at the office in [indiscernible]. There are some of the other measures that we are breaking up.

And just to echo those comments, Carlos, we’ve also made reduction here at the head office. Matthew, just to round that out, so we’re kind of looking at all areas that we can tighten our belt or we have this past year. Matthew O’Keefe: Okay. So, it sounds like it’s largely manpower as opposed to optimization of any of your process or equipment. Is that right?

No. I mean as far as that, that wouldn’t be a cost-reduction initiative as far as the optimization of recovery, and so that’s something that personally I’m working on all the time. So we are looking at a number of different projects on the bench scale that I would be excited about to talk about, hopefully, at some point in time, on the optimization side, but that’s not really part of cost reduction. In my mind, that’s more part of the optimization and trying to maximize revenue. Matthew O’Keefe: Okay, okay, good. And on the tailings?

Yes. And on the tailings, we ended up removing about 3 million tons worth of material to establish three buttresses on the tailings, and we installed some measuring devices to look at, if there’s any movement. And this is really just proactively understanding that this is very a sensitive topic in the industry, and we wanted to be really leaders and make sure that without a shadow of a doubt that we have a safe facility. So that’s something that Carlos took the initiative to do, using an engineering company, based out of Mexico as well as some consulting engineers here, based in Canada. Matthew O’Keefe: Okay, great. Thanks. I appreciate that. Sounds like it’s money we all spent.

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

Good morning, guys. Thanks for taking the questions. Those things I wanted to touch on already, the only things left in my list here is, with the cash balance being $3.2 million at year-end, how much of that was flow through that’s – you mark for Bralorne? And how much of that is available to the company for other uses?

Hi Matthew, Nathan here, so the majority – sorry, Joe, sorry. So the majority of the Bralorne is available for – it’s actually potentially unrestricted. And I don’t know if that helps answer your question and will be used for ongoing operations.

Obviously, we’re looking at the market the way the recent churn is on and exploring our financing alternatives at this point. But for now, I think we’re happy with where we are and we just could use that caters for operations. Someone already touched on a little bit, but I’m just trying to get to kind of a total number from a cash-flow statement standpoint for capital spending plus exploration because it seems like there’s some intermingling of those numbers when – in the different guidances that were put together. So like just net total, how much are you guys planning on spending between CapEx and exploration that’s going to be not expensed, that’s not income statement level?

If I can help you that with that If you’re talking about the cash flow statement, what we disclosed for 2018 and potentially the exploration and evaluation expenditures and the additions to PPNE in the cash flow statement. And so for the year we’re expecting, obviously, as we disclosed in our February 12 news release, we’re expecting around probably $12 million total between – $10 million to $12 million between Bralorne and Mexico for both exploration expenditures and the PPNE expenditures.

Okay, all right. Thank you. I’ll turn it over.

[Operator Instructions] We have a follow-up question from Mark Reichman from NOBLE Capital Markets. Please go ahead.

Thank you. Just two follow-ups. First, with the Mill Circuit 4 and the stockpiles, et cetera, just – when you look at 2019 versus 2018, would you expect much change in the metal’s mix? Or if you do, could you maybe just kind of, identify that where you see the differences? And why?

Yes. I mean as far as – Avino is kind of unique in that, it has this 4 Circuit flexibility. And what that means is that, we can either look at investing more capital or spending more resources advancing the underground, which is higher cost, where you don’t – or it kind of delays that cash, as you have to do development. There is a bit of a cash delay there versus dealing with some of the stockpiles with – while they are may be lower grade and lower recovery, have a quicker turnaround from a cash perspective for that cash cycle. So, it really depends on what the metal’s market is and what kind of the returns are per source of ore.

Okay. That’s fair enough. And then just to follow-up on, I guess, it was Joe’s question, on the cash balance. I think that you did issue, I think, about – a little over 800,000 shares under your ATM program, subsequent to year end. So, how do you think about your ATM program? And when you – where do you – when do you – what quarters do you think would be the heaviest quarters to tap? And are you thinking about any other sources of financing beyond the ATM to, kind of, fund in addition to whatever you can generate on your – on the – in cash flow? Just, kind of, how you’re thinking about the financing?

Hey. Thanks for the follow-up question. Basically, we just wanted to use it, I guess, very strategically in kind of an environment where – a good metal’s environment, I guess and when our share price is not feeling any pressure in the market as well. We don’t want – plan to overload any specific months or quarters with the ATM, and we don’t think of it that way as a kind of source of financing. We kind of see it as kind of a bit of like an additional injection of cash flow. Yes, essentially, we’re going to be opportunistic with that expos. And then as far as other financing alternatives, again, we’re going to basically do what’s best for the shareholders of company and what’s best for operations. So I think we’ll just look at everything and – to see if it makes sense strategically with where we want to be at the end of year.

With the $8 million that you – the way I looked at it, it was more kind of a – as I said, it was there, if you needed it. Didn’t necessarily mean that you’re going to tap it or tap the whole thing. I mean, you do feel like the $8 million, it could be for two years for that matter, depending on what cash flows look like and expenditures look like. But in terms of just the ATM, you think the $8 million gives you plenty of firepower if you need it.

Yes. I would agree with that. Again, we don’t want to put any pressure on the company that way. And it gives us an additional, I guess, yes, likely an additional bit of wiggle room.

Okay, great. Thank you very much. Appreciate that.

Thanks, Mark.

Thanks, Mark.

This concludes the question-and-answer session. I’ll turn the conference back over to Nathan Harte for closing remarks.

Thank you, operator. Thank you everyone who joined the call today. And once again during the 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. Thanks to everyone and have a good day.

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