Avino Silver & Gold Mines Ltd. (ASM) Q2 2019 Earnings Report, Transcript and Summary

Good morning and welcome to Avino Silver & Gold Mines Second Quarter 2019 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 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; our Chief Operating Officer, Carlos Rodriguez; and our Technical Services Manager, Peter Latta.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. 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 Q2 2019 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 2019 financial and operating performance and our plans for the remainder of 2019 and then open it up for questions. Please note that all figures are stated in U.S. dollars unless otherwise noted.During the second quarter of this year, several factors negatively impacted our performance on a year-over-year basis. The San Gonzalo mine is near the end of its economic mine life and as a result both grades and recoveries were impacted.Additionally all four circuits of the mill were offline for five days due to labor negotiations relating to the closure of the San Gonzalo mine. In addition depressed metal markets during the second quarter also negatively affected our financial performance.Silver equivalent was down 19% to 600,000 ounces compared to 739,000 ounces in the same quarter of 2018. During the quarter and compared to Q2, 2018 our silver production was down 24% to 246,000 ounces from 323,000 ounces. Gold production was down 7% to 1,609 ounces from 1,734 ounces. And copper production was down 23% to 1.1 million pounds from 1.5 million pounds in Q2, 2018.With the difficulties experienced during the second quarter now behind us, we are optimistic about the rest of the year and the future. Metal markets have improved. The labor situation has been resolved. We are excited about the Hanging-wall Breccia area of the Avino vein stockwork system located on the Avino property. And as we are beginning to assess this as a replacement for San Gonzalo, we feel it has the potential to add minable tonnage and increase our overall head grade.Additionally the installation of a tailing's thickener was completed during the quarter. This thickener has reduced the water content sent to the tailings facility, which has both decreased the volume of tailings as well as increased the stability of the tailings in the impoundment.As a result more water can be recycled from the process, which reduces the requirement from fresh -- from the freshwater well. This then allows for increased water availability for farmers in the towns adjacent to the Avino property.Finally, engineering work is ongoing for a new tailing storage facility in the historic open pit, which is already permitted.The mill circuit configuration in the second quarter 2019 was the same as the first quarter of 2019 where Mill Circuit 1 processed material from the San Gonzalo Mine, Mill Circuit 2 processed material from the San Luis area of the Avino Mine, Mill Circuit 3 processed material from Elena Tolosa and Mill Circuit 4 processed materials from Avino's Historic Aboveground Stockpiles.At the Avino Mine, mill throughput was down 19% on a quarterly basis primarily due to the shutdown of all Mill Circuits for a period of five days during the previously mentioned labor negotiations. Gold grades in Q2 2019 increased by 6% compared to Q2 2018 and silver and copper grades decreased by 23% and 8% respectively. The change in grades is due to the variability of -- in the deposit.Recovery rates for Q2 2019 also decreased compared to Q2 2018 with decreases of 6% in gold and copper and 5% for silver. At the San Gonzalo Mine, silver equivalent ounces produced during Q2 2019 totaled 61,905 representing a decrease of 57%, compared to 143,124 ounces in Q2 2018. During Q2 2019 silver and gold feed grades declined by 45% and 54% respectively compared to Q2 2018. Recoveries for silver and gold also dropped 8% and 14% respectively.As we've been messaging over the last year, San Gonzalo is approaching its end of life and the grades, recoveries and productions have begun to decline. This is in line with our internal expectations. In Q2 2019, the new Mill Circuit 4 processed 86,596 tonnes of AHAG Stockpiles, which represent a 10% increased throughput compared to Q1 2019 and no comparative figures for Q2 2018.Accordingly, our consolidated cash cost for the quarter was US$10.89 and all-in sustaining was $13.10 compared to $9.07 and $10.54 respectively during Q2 2018. At Bralorne, Avino continues its exploration and drilling campaign in Q2 2019 using flow-through funds that were raised in April of 2018. These funds are available to be used by December 31, 2019. The budget for the program was CAD 6.4 million and an estimated CAD 4.5 million has been spent to target new discoveries in unexplored portions of the property.Phase One of the drilling proceeded from Q4 2018 to Q1 2019 targeting unexplored portions of known veins. Phase Two of the drilling continued from Q1 and will go through to the end of Q4 2019 and will be targeting new discoveries in unexplored portions of the property. Phase Two drilling has confirmed a new targeting model in the Northeast block and highlights potential for another large Bralorne-style gold vein system.I will now ask Nathan Harte, Avino's interim CFO 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 has mentioned, the second quarter of 2019 was a challenging one. And our financial results were impacted by lower metal prices in addition to the five-day labor disruption and winding down of the San Gonzalo Mine.Revenues from mining operations during the second quarter were $7.8 million compared to $9.2 million during the second quarter of 2018. Mine operating income was $0.3 million compared to $2.4 million in Q2 2018. The decrease is reflective of lower realized metal prices, lower consolidated feed grade as San Gonzalo reaches the latter stages of mine life as well as the aforementioned five-day labor negotiation in which all the mill circuits were offline.After taxes, there was a net loss for the second quarter of 2019 of $0.2 million or 0 loss per share compared to earnings of $0.8 million or $0.02 earnings per share in the second quarter of 2018. Earnings before interest, taxes, depreciation and amortization or EBITDA was $0.6 million in Q2, 2019 compared to $2.8 million for Q2 2018. Adjusted EBITDA was $0.4 million in Q2, 2019 compared to $2.4 million in Q2 of 2018.Working capital at the end of the quarter was $8.7 million compared to $10 million at the end of the same quarter of 2018 with the decline coming from our continued reinvestment in capital projects at the Avino property in Mexico. Cash of $3.4 million was on hand at the end of the quarter compared to $3.3 million at the end of 2018 and $4.8 million at the end of Q2, 2018.Our consolidated cash cost per silver equivalent ounce increased by 20%, up to $10.89 in Q2, 2019 from $9.07 in Q2, 2018. And our all-in sustaining cash cost increased by 26%, up to $13.10 in Q2, 2019 from $10.54 in Q2, 2018. Our revenues of $7.8 million were derived 38% from silver 34% from copper and 28% from gold.Capital expenditures during the first six months of 2019 were $4.9 million compared to $7.4 million in the first six months of 2018. Capital expenditures at the Avino property mainly relate to the upgrades to the existing tailings facility equipment purchased to improve metallurgical results and the completion of the tailing's thickener. At Bralorne all expenditure's related to the exploration program.During the quarter while we continue to experience challenges in the mining sector management has remained focused on its previously announced cost-reduction initiatives which have resulted in a cost savings of 24% in our G&A expenditures when compared to Q2, 2018 and an overall 32% reduction in the first six months of 2019 compared to the first six months of 2018. Along with others in the mining space, we look forward to continued improvement in the metal sector throughout 2019 and beyond.At this point I will hand it back over to David for a discussion on our plans for the remainder of the 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 despite the recent uptick in the markets. Looking ahead to Q2, 2019 we have outlined our expectations as follows.At the Avino Mine in Mexico our plans are as follows: further underground development at the Elena Tolosa and commencing the development at the Hanging-wall Breccia area of the Avino Mine; continue engineering work on the new TSF and in the historic open pit which is already permitted; continue to explore options to add minable tonnage; and increase overall head grade.At Bralorne, we plan to continue the Phase 2 drill program targeting new discoveries in the unexplored areas of the property, further drill results on the Northeast block to be finalized. The drilling campaign calls for 24,000 to 28,000 meters in total. To date 23,000 meters have been drilled at an average rate of 73 meters per day. So this number has been improving and averaged 84.9 meters so far in 2019. The drilling will continue until the end of Q4, 2019.We remain 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 in both Mexico and Canada for their perseverance and dedicated efforts during what has been a challenging quarter.We would now like to move the call to the question-and-answer portion. Operator?

Thank you. [Operator Instructions] Our first question is from Mark Reichman with Noble Capital Markets. Please go ahead.

Beginning in 2020, management expects that enough ore will be available from the Avino Mine to provide Mill feed for all four circuits at 2500 a day. I was just wondering if you could just maybe talk a little bit about that transition from the San Gonzalo and the aboveground stockpiles and any work that still needs to be done at Avino to ensure kind of a successful transition? And then also just kind of your exploration efforts around that to make sure that you have that ore available going forward. And then the second question is just around Bralorne. You've had some success there with the exploration. And you recently raised some funds through the flow-through equity issuance. And so I was just wondering if that's going to be used to fund the exploration through the end of the year or whether that takes you into 2020 and just kind of overall how you're thinking about Bralorne at this point. Thank you.

Thanks, Mark. Peter do you want to talk about the Mexican?

Yeah. Mark I can answer the first part of your question there. You are correct there that we will have enough feed from the one ET mine of Avino to feed 2500 tonnes per day starting in 2020. And that's really due to the nature of the mining method that we have. It's a bulk mining method, so we're not limited by trucks. We have the equipment so it's actually not too difficult to pull 2,500 tonnes per day from ET. That's currently in the mine plan and the guys are comfortable with that. The transition is coming up and that's something that we're working towards as far as making sure everything is coordinated appropriately. But we're confident we can do that, because we're pulling from two different stopes. So it's really – it's not too far of a stretch from what we're doing currently at ET.

Yeah. Thank you, Peter. And with regards to Bralorne, we have about I think about $1.5 million left to spend for the drilling program for this year. We raised a couple of million Canadian to continue drilling into next year. And until the drill targets are fully developed we're just holding off on raising any more money for that. We want to see the results. And we're expecting some news here in the next couple of weeks on the – from the northeast block. The results are coming in and we'll put that out. The drill has been moved between Bralorne and Pioneer and we're targeting a new theory. We think that past drilling may have drilled in parallel to certain targets so they may completely miss them. So we're excited about what that's going to bring to the company. And hopefully, we hit something interesting there.

Thank you very much.

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

Good morning, guys. Thanks for taking my question.

Hey, Bhakti.

Just a quick question. With regards to second quarter cost performance the cost of sales was high and that was because of the unplanned downtime. Just was wondering would you may be able to quantify as to how much production and revenue was lost in that process? And how much of a cost impact that created for – in the quarter?

Thanks Bhakti. Nathan do you want to take this one?

Sure. Thanks, David. So the additional cost – cost per ounce and cost of sales overall is not just a function of the downtime, but also a function of the accounting costs related to San Gonzalo as we get to the end of its life. As I think we mentioned on roughly in the first quarter earnings call as well the accounting costs for San Gonzalo are going to look quite high until we're done mining there. But essentially the real – not real but – well actual cost spent at San Gonzalo is quite low as we've already done the mining underground. And right now we're just hauling the surface. So the cash cost you're seeing at this time per ounce is basically as a function of cost was already spent. And actual spend has been actually quite low at San Gonzalo as there's no underground mining cost anymore. It's just processing costs. Does that kind of answer your question?

Yes. So – I just wanted to understand the cost impact that you had and San Gonzalo is at the end of the mine life, but there's not going to be any increase in cost due to the labor negotiations is that correct?

We're not anticipating any additional costs. There's some small onetime costs that occurred in the quarter, but nothing significant.

We reduced the labor force.

Yeah, exactly as David mentioned there. And as well – you mentioned quantifying the actual impact of the lost production. And we quantify that at around 50,000 to 60,000 ounces lost which puts us on track for kind of our internal expectations of around 650 a quarter. But yes, that's kind of what we expect was the lost silver equivalent production from the -- San Gonzalo time.

Just one housekeeping question. With regards to CapEx -- what's kind of the CapEx spend over the next two quarters? And now that you have cash in hand, have you guys prepared a budget of the exploration or CapEx spend for 2020 at this time?

Great question, Bhakti. So we're currently evaluating a number of capital projects just to see what is the best deployment of our -- of the raised capital. Obviously, the floating portion is allocated to Bralorne, but the remaining is available for either exploration and development or other capital projects in Mexico.At this time, I would say it's hard to say if there will be an increase in CapEx for the rest of the year based on what we previously released, but we are looking at exploration and development targets as well as some ongoing capital projects to generate more value.

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

Thank you, Bhakti.

Thank you.

[Operator Instructions] The next question is from Matthew O'Keefe with Cantor Fitzgerald. Please go ahead.

Thanks, operator. Good morning. Just going back to the Avino Mine and development plans there. So production from the mine has been coming down a little bit in the last few quarters. When will we -- what's the timing to see it start to ramp -- or increasing again? And that will be primarily Tolosa? Or where else is it going to be coming from the ore?

Peter, you want this one?

Yes. Thanks, Matthew. Yes -- I mean primarily it's going to be coming from ET in the mine plan there. And we should see production pick-up, I would say in the next couple of quarters here, certainly towards the end of Q4. And that's as a result of San Gonzalo production decreasing as well as the stockpiles decreasing.

Yes. And the stockpile so there -- that is just filling the mill I guess between during this transition. Can you remind me what the size of the stockpile is?

Yes. I mean...

It's growing.

It's growing the stockpile. Keep in mind that the stockpiles were more than a stop-gap. Because the cost of mine were so low, we had that flexibility when prices were decreased to really look at maximizing our margin instead of producing maximum ounces. As we see prices increase a little bit we can switch back there. So we actually have that flexibility which is really key. So we're not running the stockpiles out so to speak. We're just trying to optimize margin and production there based on market prices.

And the amount of stockpiles we keep finding more so there's vegetation that's grown over them because they're decades old some of them. And so the internal estimate is relatively unchanged after several years.

Nice. That’s really nice, if I…

We have for sure – to some down. Thanks.

Okay. That’s great. Just wanted to get a little better sense of that. I appreciate that. Thank you.

Thank you.

Thanks, Matty.

There are no further questions registered this time. This concludes the question-and-answer session and I would like to turn the conference back over to David Wolfin for any closing remarks.

Thank you, operator. Thank you again to everyone who joined the call today. We are encouraged by the recent moves in the metal prices and we continue to work diligently on expanding our operations, making improvements to grow the company and ultimately increase shareholder value. Thank you 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.