Avino Silver & Gold Mines Ltd. (ASM) Q1 2019 Earnings Report, Transcript and Summary

Welcome to the Avino Silver & Gold Mines First Quarter 2019 Earnings 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 Ltd. First Quarter 2019 Financial Results Conference Call and Webcast. On the call today, we have the company's President and CEO, David Wolfin; our Interim Chief Financial Officer, Nathan Harte; and we will also have on the line one of Avino's 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 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. The replay information and the presentation slides accompanying this conference call and webcast will be available on the website. Thank you. I will now 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 2019 financial results and 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 the website. Today, we will cover the highlights of our first quarter 2019 financial and operating performance and our plans for the second quarter of 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 the first quarter of this year, we experienced significant challenges due to substantially lower metal prices. The results this quarter are reflective of the lower grades achieved together with 7 days of loss production while upgrades to the crusher were being completed at the mill. The upgrades were significant to the overall operation that they will enable us to realize more consistent throughput from the crushers during the rainy season in Mexico. Silver equivalent production was down 6% to 615,000 ounces compared to 657,000 ounces in the same quarter of 2018. During the quarter and compared to Q1 2018, our silver production was down 13% to 268,000 ounces and 310,000 ounces. Gold production was down 12% to 1,813 ounces from 2,065 ounces. And copper was up 10% to 1.1 million pounds from 970,000 pounds in Q1 2018. As a result of the ongoing depressed metal market environment, together with the planned 7-day upgrades to the crushing circuit in which all mills were offline, earnings during the first quarter of 2019 was effected. On a positive note, the installation of the tailings thickener commenced during the quarter, which should be completed on schedule and ready for startup in May 2019. This thickener will reduce the water content sent to the tailings facility, which will both decrease the volume of tailings as well as increase the stability of the tailings in the impoundment. In addition, engineering work is ongoing for a new tailings storage facility in the historic open pit, which is already permitted. Furthermore, we are confident that our decision to pursue the mill expansion in 2018 was the right move to position ourselves for the future. The Mill Circuit configuration in the first quarter 2019 was the same as the fourth quarter of 2018, where Mill Circuit 1 processed materials from the San Gonzalo mine, Mill Circuit 2 processed materials from the San Luis area of the Avino mine, Mill Circuit 3 processed materials from Elena Tolosa and Mill Circuit 4 processed materials from Avino's historic aboveground stockpiles. Mill throughput from the Avino mine material was down 16% on the quarterly basis primarily due to the shutdown of all Mill Circuits for the period of 7 days during the previously mentioned planned upgrades to the crushing circuit. The downtime was offset by increased efficiencies gained on Mill Circuit 3, and the company continues to further refine its production process. The copper feed grade increased by 14%, while silver and gold feed grades decreased by 27% and 17%, respectively. The change in grades was mainly due to the mining sequence at the ET and San Luis areas. Recovery rates for Q1 2019 show improvement compared with Q1 2018, with increases of 4% in silver, gold and copper recovery rates. At the San Gonzalo mine, silver equivalent ounces during Q1 2019 totaled 86,406, representing a decrease of 51% compared to 176,384 in Q1 2018. During Q1 2019, silver and gold feed grades declined by 29% and 50%, respectively, compared to Q1 2018. This, along with the decrease in both silver and gold recovery, resulted in a 51% decrease in silver equivalent ounces produced compared to Q1 2018. San Gonzalo is approaching its end of life, and the grades, recoveries and production have begun to decline. This is in line with our internal expectations, and the results are indicative of both the decline and the previously mentioned planning upgrades to the crushing circuit. Upon closure, the company will plan to transition some workers from San Gonzalo to the San Luis area. In Q1 2019, Mill Circuit 4 processed 78,864 tonnes of AHAG Stockpiles, which represents a 14% increase in throughput compared to Q4 2018, with no comparative figures for Q1 2018 as the company commenced processing AHAG Stockpiles in May 2018. During Q1 2019, silver and copper feed grades increased by 2% and 17%, respectively, compared to Q4 2018. Gold feed grade compared to Q4 2018 declined by 7%. Accordingly, our consolidated cash costs for the quarter were $11.44, and our all-in sustaining were $13.81 compared to $9.63 and $11.74, respectively, during Q1 2018. At Bralorne, Avino continued its exploration and drilling campaign in Q1 during 2019, using flow-through funds that were raised in April of 2018. These funds are available to be used by December 31, 2019. An estimated CAD 4.4 million will be spent on diamond drilling to target new discoveries in unexplored portions of the property. Phase 1 of the drilling proceeded from Q4 2018 to Q1 2019, targeting unexplored portions of known veins. Phase 2 of the drilling will continue from Q1 to Q4 2019 and will be targeting new discoveries in unexplored portions of the property. Phase 2 drilling in the Northeast block confirms a new targeting model and highlights potential for another large Bralorne-style Merrill vein gold system. 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 is viewing our presentation today. As David mentioned, the first quarter of 2019 was a tough one, and our financial results have been impacted by low metal prices and the planned 7 down days as a result of planned upgrades to the crushing circuit. Revenues from mining operations during the first quarter were $6.7 million compared to $8.2 million during the first quarter of 2018. Mine operating income was $56,000 compared to $1.9 million in Q1 2018. The decrease is reflective of lower realized metals prices, lower consolidated feed grades as San Gonzalo reaches the latter stages of mine life as well as the planned 7-day upgrade to the crushing circuit, in which all Mill Circuits were offline. After taxes, there was a net loss for the first quarter of 2019 at $610,000 or a loss of $0.01 earnings per share when compared to earnings of $818,000 or $0.02 in Q1 2018. Earnings before interest, taxes, depreciation and amortization or EBITDA was $49,000 in Q1 2019 compared to $1.7 million in Q1 2018. Adjusted EBITDA was 0 in Q1 2019 when compared to $1.5 million in Q1 2018. Working capital at the end of the quarter was $10.5 million compared to $11.6 million at the end of the same quarter in 2018, the decline coming from our continued reinvestment in capital projects at the Avino property in Mexico. Cash of $2.6 million was on hand at the end of the quarter compared to $2.3 million at the end of Q1 2018. Our consolidated cash cost per silver equivalent ounce increased 19% to $11.44 in Q1 2019, up from $9.63, and our all-in sustaining cash cost increased 18% to $13.81 in Q1 2019, up from $11.74 in Q1 2018. Our revenues of $6.7 million were derived of 36% from silver, 27% from gold and 37% from copper. Capital expenditures during the first 3 months of 2019 were $2.5 million compared to $3.6 million in the first 3 months of 2018. These capital expenditures mainly related to the upgrades to the crushing circuit, which includes all 4 Mill Circuits as well the installation of the thickener. While we continue to experience challenges in the mining sector, management remains focused on its previously announced cost reduction initiatives, which have resulted in a cost saving of 38% in our G&A expenditures when compared to Q1 2018. Along with others in the mining space, we look forward to an 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 the second quarter of this year.

Thank you, Nathan. We certainly hope for continued improvement in metal prices. We will also maintain a pragmatic approach and an emphasis on controlling our capital, operating and administrative costs during these challenging markets. Looking ahead to Q2 2019, we have outlined our expectations as follows. At the Avino mine property in Mexico, our plans are as follows. Further underground development at the Elena Tolosa and San Luis areas of the Avino mine will remove remaining inventory from underground at San Gonzalo. The construction of a tailings thickener is almost complete. It should be operating sometime this quarter. The engineering work is ongoing on the new TSF in the historic open pit, which is already permitted. Onto Bralorne, continue the Phase 2 drill program targeting new discoveries in unexplored areas of the property. The drilling campaign calls for 24,000 to 28,000 meters in total. To date, 60,201 meters have been drilled at an average rate of 70.1 meters per day. Though this number has been improving and averaged 90.4 meters so far in 2019, drilling has only just begun to test the mineralized potential in the Northeast block. Avino will continue to explore the newly defined veins network in the Northeast block, targeting a potential high-grade gold system. The digitalization of historic data is nearing completion. We remain focused on approaches 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 in both Mexico and Canada. 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?

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

So you had a temporary shutdown during the quarter, but in your MD&A, you state that, and this is a quote, "The downtime was offset by increased efficiencies gained on Mill Circuit 3, as the Company continues to further refine its production process." Can you confirm that those efficiencies were meant for good and potentially also quantify them towards future production, feed and cost savings or recovery rates, given that we saw the 4% increase in silver, gold and copper recovery rates, please?

Yes, sure, Heiko. This is Peter Latta here. That's mainly due to that onstream analyzer. I know we talked a little bit about that the last time we had a call together. And that's something that we're kind of continually refining going forward, whether that continues. I mean recovery rate improvement is a continuous improvement exercise, so we're constantly working at improving those rates.

Rates from the trends that are learned from the machinery.

Sure. Exactly. And recovery though is also a function of head grade as well though. So it can be a bit misleading to just look at recovery rates, but that's something that we're certainly pushing hard towards. We have a couple other things that we're trying to implement from a technology standpoint there, so we hope to continue pushing those recovery rates.

Okay. Now for San Gonzalo, what do you guys anticipate to be a continued cost, with the mine life approaching the end of its life obviously? I mean if you could just estimate it for this year and next. And also, is there any excess equipment you can use elsewhere in order to reduce the CapEx requirements?

Hey, Heiko, Nathan here. To talk to your first point, I think the ongoing cost is San Gonzalo. They -- you should see a decline mainly due to the fact that we will shut down the underground mining, and we will simply be taking broken ore to surface for processing. So our mine costs should go down overall. But again, there is some cost and inventory that will continue to be moved over. So I'm not sure if you'll see a bold realization for accounting cost than actual expenditures. It should look fairly lean. And that will continue until the estimated end of life, which I think, right now, is set for later this year, luckily in Q3, Q4, when we finish processing this underground material. And to the second question, I mean, Peter, I don't know if you want to try that one.

Yes, Heiko, it's a different style of mining. It's kind of narrow vein versus the bulk style of Avino. So some of the equipment and manpower, certainly things like trucks and that sort of thing, but some of the equipment is too small. That being said, there's other areas that we are looking at developing, and certainly, David can talk a little bit about -- more about that, where that equipment will be more applicable.

Yes. We've got 2 areas of the property, Guadalupe, [Portacina], that we think could be the next San Gonzalo. There's been limited -- there's been some drilling on both, but more work needs to be done to put them in the resource categories. So Guadalupe could potentially be under Avino, a larger style, but [Portacina's] more narrow, so potentially, the smaller equipment could go there.

Okay. As I was preparing for this call and I was on SEDAR, I realized that you filed an amended interim financial statement a few hours after the original document on SEDAR last night. What changed in the 2 different documents and what happened?

Yes. No, that's all right. And Heiko, I'll take that one. Nathan here. So we were just missing a line in Page 5 in our cashless payment. It was just a typo, accidental deletion. There was $50,000 relating to mining at a discount in the term facility on Page 5, the cashless payment, and that's the only change.

Got it. Okay. So it's nothing.

I was just wanting to make sure that everything added up and put in there, and that was just an error on my part.

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

So Heiko went after the operational side of things, so I'll tackle the cash loan balance sheet side. I guess, first thing, working capital was a source of cash, $1.1 million in the quarter. Do you think they will be a source for use of cash over the rest of the year?

We're hoping it will be -- we're definitely hoping will be a source. Our interim model suggests that operating cash flow has little increase for Q2. I wouldn't say, significantly, but we are expecting probably from full year will be close to cash flow neutral. Other than that, I mean, we are -- again, Peter mentioned some of the efficiencies we're still looking at as far our Mill Circuit. And as well, we think that the shutdown that we did do in Q1 for the 7 days, we think that will be able to provide some increased cash flow throughout the year and going forward. I don't know if that fully answered your question, but that's kind of how we see things...

So there's further in the rainy season.

Yes. I think that will go to the rainy season.

Okay. Fair enough. On the capital expenditures side, you had a $1.6 million exploration, $0.9 million additions to PP&E. What should we expect total for those 2 over the remainder of the year?

We think similar to how we budgeted for the full year, I think we expected both just somewhere in the range of $5 million to $6 million at Avino overall, and that's mainly the PP&E expenditures, and then Bralorne about the same. So -- and I think, for Bralorne, we're on track to spend just around $6 million for the year, Avino, just somewhere, I think -- we expect Q2, Q3 maybe to be a little higher on the capital side, but not much higher, and we should still be close to that $5 million number.

Okay. And then I saw you guys use your ATM for another $250,000 or so in the quarter. What's left on that you guys can draw down? And how much do you have left to spend as far as requirements still on your flow-through shares at Bralorne?

So we can draw about -- there's just under $7 million left on the ATM available. Whether we use that, I mean, that's a different story. We spent on the requirements of Bralorne, I think, around -- we spent the majority of it already as of today, essentially. So we have probably another $1.5 million, I would say, USD 1 million to USD 1.5 million required to spend.

Okay. So it's fair to say if you needed to, you could dial back some exploration spending up there. If cash bounces, it got tight, that's another corner you could cut if necessary.

Yes. Yes, definitely. I mean we're constantly monitoring our cash flows as well as how it relates to the exploration program. I'm going to make sure we make the smart decisions.

Our next question comes from Bhakti Pavani of Alliance Global Partners.

Just a quick one. Q1 was light from the production standpoint. So considering the guidance for 2019 at this point, how comfortable you guys are towards meeting the guidance?

Yes. Thanks, Bhakti. This is Peter here. It really depends on what metal price is doing. And one of the things that we've talked about before is our flexibility on what we can input to the circuits, that product flexibility, whether we're looking at targeting ounces or margin. So that's really what it comes down to is we have to make that decision based on what the market conditions are and what our price expectations are. And you know what, if prices decrease, then there's more of a focus on margin than there is on ounces.

Yes. And there is potential for more historic aboveground stockpiles to found, and we'll find out if we've been successful in finding them. And Carlos is pretty confident that we may be on this for more high-grade material.

Yes, and to that point, that's some of our highest-margin material because that's the stockpile material that's kind of just hanging around from previous mining operations. And that material, although it doesn't produce a lot of ounces, it's very good margin. So it's really striking the right balance between that ounces and margin, which is very market-dependent.

Okay. Fair enough. Just one more. Following up on Heiko's question with regards to the San Gonzalo, you mentioned that most of the mining costs are going to be coming down. And because you would be posting the broken material, I'm just kind of wondering, at San Gonzalo, how much of the material you have left that maybe you can convert into some production. Is it going to be like second quarter, or do you see extending in the third and fourth quarter at a loss?

Yes, Bhakti, Peter here again. I can answer that question for you. We planned essentially 6 months from April. Now that's preliminary. That's looking at our stockpiles and looking at what broken ore is available. And I was thinking that's a flexible thing based on market prices and cutoff grade. But that's kind of where we're estimating internally. What that ends up playing out with, once again, like I said, is going to be market-dependent.

Okay. And just last one on the tailings thickener. How much money was spent on the installation and do we expect to see for the spending there?

Hi, Bhakti. Nathan here. So I think in Q1, I think it was just a couple $100,000 close -- yes, I think in the total cost, is going to be around, I believe, just over $600,000, around $500,000 to $600,000. So we used to have that in Q1, and the remainder will get spent in Q2.

[Operator Instructions]. Our next question comes from [Jay Strong], a Private Investor.

So I have a couple questions here. First of all, regarding revenues, the silver production is all consumed by Samsung, is that correct?

No, that's not entirely accurate. It's Nathan here. We sell these concentrates, which is a copper, silver and gold concentrate, to -- from the Avino Mine to Samsung. And our other material, which comes from the San Gonzalo mine, does not actually go to Samsung.

And historic stockpiles.

And yes. Yes, I'm sorry, and the jobs from the historic stockpiles as well goes to Samsung.

Okay. And so these prices that you sell these metals at, is it like a floating price based on the market, or is it sort of contract-negotiated price?

No, it's fall pricing. We -- it's fall pricing based on its -- the trickling average as well as these -- when the final contract sells and plus 1.

And plus 1.

Yes. So the falling month's offering is actually quite a large pull in market.

So it's based on a monthly price, is that right?

Correct. Yes.

The month has pulled every price for the next month's average.

Yes. All prices are not hedged.

No, definitely not.

And so in terms of looking in the crystal ball, what do you see for projection for prices this year?

Well, I think that next year's an election year in the U.S., and if you look at 2016, metal prices had a good run. So we're very optimistic that they're going to be higher. I don't have a crystal ball so I can't tell you by how much, but we're very confident that we're going to see higher metal prices by the end of the year.

Okay. Yes. And I'm just looking at the prices that you used to calculate your figures for this quarter, and roughly, I think it's lower than that right now. But I'm just wondering if you expected working share recovery there? Or is it going to continue at a slide.

No, I think -- I mean I think we're expecting that to continue to rise. Yes, I guess that's how we see things.

Okay. Another question. In terms of compensation, I'm looking at the figures for executive compensation, and I'm seeing like, in 2016, '17, we saw increases of 24%, 25% and 30%, respectively, for the CIO, CFO and CEO. And during that time, I've seen my share value buoyed by about 60%. And so I'm wondering, based on that, what you're administrative plan is and operational plan to recover those share prices and get back to a profitable situation.

Well, we haven't raised executive salaries in some time. Our G&A has dropped 38%. So we've proven that we have been able to cut costs. We're continuing to look for other ways of cutting costs and improving returns. And when our Compensation Committee evaluates pay, they do a thorough investigation. And I think that we're average or below average on pay, so for our peer group. And so we're very efficient, and we're going to continue to look to be as efficient as possible.

So the 38% reduction in cost, is that just administratively, or is that overall, like in the whole operation?

That was administrative cost pain at the corporate level as well as at the operational level. But a lot, yes. I mean that does relate to management salaries as well.

Okay. Alright. So with respect to the Bralorne property, now BC got to have very stringent environmental requirements, and so I mean, I understand that this is in -- still in an evaluation phase. So we're not at the point of permitting right now at that site, but I'm just wondering, that supposing that we receive grades significant enough to warrant, there's all kinds of mining there, what the projected time line would be to get the permitting and get it up and operational.

We already have production permits. So this was an operating mine when we acquired it in 2014. And we upgraded the permits. We have the modern mining permit, an M207, it's called, for the rate of 100 tonnes per day. But because of depressed metal prices, we ran our numbers and figured we need a larger operation. We're looking at a 400 tonne per day operation. Just we need a larger resource to justify the capital expenditures. And so that's what prompted this exploration program. All the environmental mechanical machinery, like a water treatment plant, is in place. We put it in there, so we're being compliant in that regard and -- but if we were to say, today, let's go ahead and put it in production, we think it could be -- and left in 2 years, maybe 12 to 16 months to put it into production, so because we already have the permit.

Yes, it's Jasman here. Basically, what I want to add to this is we do have a permit in place. All we need to do is to amend it for a larger operation. We have both the mining operational permit and also the Minister of Environment discharge permits. They're all in place.

And the infrastructure's there and the towns draw labor from them. We've been training potential workers for the future.

So it is projected that this will be an underground operation or an open pit?

Underground.

Underground. Okay.

That's what it was in the past.

Yes. Okay. Just backtracking a little bit here, going back to the revenue side, your Mexico operations, so you mentioned that the grades are declining, already declined over the first quarter, so do you see that improving over the balance of the year? And what do the declines offset in production loss of the Gonzalo's mine when it closes?

The decline was on San Gonzalo. Avino's fairly steady, but it's a stop-work system. And there's areas that are higher, and there's areas that are lower.

Yes. I just want to maybe touch on the mine plan a little bit. And that's something that we're constantly evaluating, is that mine planning sequence. And that depends on a variety of factors that play into that. So yes, I guess I would say that's something that's very -- that's quite variable. What that ends up playing, I would guess, it depends on what happens in the market.

[Operator Instructions]. We currently have no questioners in the queue. This concludes the question-and-answer-session. I would like to turn the conference back over to David Wolfin for any closing remarks.

Thank you, operator. Thanks, again, everyone, who joined us on the call today. Once again, during these times of significantly lower metal prices, we are continuing to work diligently at controlling our costs, cutting G&A where possible. But we're also looking at the future. We're also looking at ways of finding another San Gonzalo, which is a high-grade mine, and there's tremendous opportunity on this property that's been untapped and we're preparing at prioritizing that for when the funds become available. So thanks again, everybody, and have a good day.