Avino Silver & Gold Mines' (ASM) CEO David Wolfin on Q4 2017 Results - Earnings Call Transcript

Avino Silver & Gold Mines Ltd (NYSE:ASM) Q4 2017 Results Conference Call April 3, 2018 11:00 AM ET

Executives

Jennifer North - Manager, IR

David Wolfin - President and CEO

Malcolm Davidson - CFO

Carlos Rodriguez - COO

Jasman Yee - Director

Analysts

Mark Reichman - Noble Capital Markets

Matt Barry - H.C. Wainwright and Co

Joseph Reagor - ROTH Capital Partners

Bhakti Pavani - Euro Pacific Capital

Operator

Thank you for standing by. This is the conference operator. Welcome to the Avino Silver & Gold Mines Fourth Quarter and Year End 2017 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.

Jennifer North

Thank you, operator. Good morning everyone and welcome to the Avino Silver & Gold Mines Ltd, fourth quarter and year end 2017 financial results conference call. On the call today, we have the Company's President and CEO, David Wolfin, and our Chief Financial Officer, Malcolm Davidson. We also have on the line our COO, 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 result to be materially different than those expressed by or implied by such forward looking statements. The Company’s 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 or the applicable press release.

Thank you. I will now turn the call over to Avino's President and CEO, Mr. David Wolfin. David?

David Wolfin

Thanks, Jen. Good morning everyone and welcome to Avino's year end 2017 financial results conference call. Thank you all for joining us here today. Please note that we’re also doing a webcast presentation for this conference call and it will be accessed on our website. 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 year end 2017 financial and operating performance and then we will open it up for questions.

Before I begin, I would like to note that all the figures are stated in U.S. dollars unless otherwise noted. 2017 was another productive year for the Company where we continued to deliver solid financial and operating results. We maintained consistent silver equivalent production and strong performance from our Avino and San Gonzalo mines our key assets from which to grow the Company.

In Mexico, construction continued on Mill Circuit 4, which will be used to process mill feed from the Avino mine and will increase the throughput capacity of our processing plant by approximately 70%. Construction is on schedule and is expected to be commissioned shortly. In addition, we released an updated preliminary economic assessment on the Oxide Tailings resource project which demonstrated a pre-tax NPV of 40.5 million and an IRR of 48% over anticipated mine life of seven years.

For tailings management, we are looking at a flexible backfill system that will allow us to make cemented backfill for our underground or thicken tailings for disposal in the open pit depending on the needs. We also completed a 22-hole drill program which was successful in evaluating a new area of the Avino's vein system between the historic San Luis workings and the Elena Tolosa, which is the current area of production.

The results support the continuation of the extensive Avino Vein system and provide further confidence that should allow us to go underground to develop this area for mining. The results of the drill programs were included in the new NI 43-101 mineral resource estimate that was announced in mid February of this year. And the updated technical report will be filed on our profile on CEDAR and filed on Form-6K with the SEC within 45 days required from the date of release. 19 holes were also drilled at the Chirumbo, Guadalupe, and San Juventino areas, all of which are outside the existing mining area and have the potential to extend resources.

Additionally, the Company continued its testing program for recovery of zinc from the San Gonzalo Tailings throughout the fourth quarter. The results are currently being evaluated. The product is marketable with zinc grades between 20% and 25%, silver grades of approximately 1,200 grams per ton silver and gold grades between 4 grams and 6 grams per ton gold. On a monthly basis about 50 to 70 tons of zinc concentrate are produced. In 2017, the Company produced and sold 73,460 silver equivalent ounces of low-grade zinc concentrate. As well early in January of this year, Avino graduated to the TSX from the TSX venture, which is a key milestone for the Company.

And before I hand it over to Malcolm, I’d like to say thank you to the teams in both Canada and Mexico. Avinos steady results are due to their dedicated efforts. I will now ask Malcolm Davidson, Avino's CFO to present the financial results.

Malcolm Davidson

Thank you, David, and welcome to all who are on the call and viewing our presentation today. Overall, our financial health in 2017 remains fairly consistent to 2016 with expected marginal increases. Revenue from mining operations during the year was 33.4 million compared to 30 million in 2016. The 11% increase is mainly a result of the Avino Mine entering production as of April 1, 2016.

Mine operating income was 11.4 million compared to 10.9 million last year. The slight increase is due to the commencement of production at the Avino Mine on April 1, 2016 and although we experienced an increase in operating costs, this was offset by the increased sales as a result of the commencement of production.

Our average realized silver price decreased by 4% from 17.71 to 17.01 per ounce sold and our average realized gold price increased by 1% from 1,258 to 1,268 per ounce sold compared to last year. Our average realized copper price increased by 29% to $6,251 per ton from $4,850 per ton. After taxes net income for 2017 increased by 76% over 2016 to 2.7 million or $0.05 basic EPS and $0.05 diluted per share compared to net income of 1.5 million and $0.04 basic and $0.03 diluted earnings per share for 2016.

Working capital as of December 31, 2017 was 16.5 million compared to 23 million in the same period of 2016. The decrease is due to our continued investment in capital projects at both Avino and San Gonzalo in Mexico as well as the Bralorne Mine in British Columbia. Cash of 3.4 million and short-term investments consisting of cash of 1 million was on hand at the end of the quarter.

Capital expenditures during 2017 were 12.4 million compared to 10.7 million in 2016. Capital expenditures for 2017 attributed to the Avino Mine advancement, including the construction of Mill Circuit 4 and mining and production equipment to maintain operations at the San Gonzalo, Avino and Bralorne mines.

At this point, I will hand it back over to David for discussion on operations.

David Wolfin

Thank you, Malcolm. Operationally, we had a consistent and steady year in line with our internal projections. In 2017, our silver equivalent production remained consistent at 2.7 million. Our silver production was down 14% to 1.4 million ounces. Our gold production was up 11% to 7,935 ounces as well as our copper production, which increased by 4% to 4.4 million pounds.

52% of revenue comes from silver, 21% comes from gold and 27% comes from copper. Our consolidated all in sustaining cash cost per silver equivalent ounce for 2017 was $10.11 compared to $10.34 last year, a decrease of 2%. All in sustaining cash cost at San Gonzalo mine during 2017 were $9.50 per silver equivalent ounce compared to $9.40 during 2016. All in sustaining cash costs at the Avino Mine during 2017 were $10.34 compared to $10.99 in 2016, a decrease of 6%.

At Bralorne, we completed our review of potential scenarios for developing and operating plan. Our new plan involves opening the mine at a higher throughput rather than scaling up operations to reach our desired level. Bralorne potential and the cost to increase mining and processing operations, we've concluded that the expanded operations should be supported by an increase in geological resources. As a result in January 2018, the Company commenced an 8,000 metered surface drilled program to better define and expand current resources and explore for new zones near the proposed new mine development.

In November 2017, we received an approved permit amendment from the Ministry of Energy and Mines and Petroleum Resources. The permit amendment is an important step in the Company's strategic plan to reopen the Bralorne gold mine. With the receipt of this modern mining permit, the Company anticipates an easier and quicker transition to amended permit that will allow for future expansion.

In addition, we wrapped up our third underground mining training program with North Island College in February of this year. This program was held in Pemberton to benefit members of N'Quatqu and the Lower St'at'imc and communities. Overall, we're pleased with the financial results and progress in 2017. We achieved our internal production targets and are now very close to the completion of Mill Circuit 4 at the Avino Mine. The year yielded a consistent and solid balance sheet and good production results. We are confident that we will increase our production profile in 2018 with the completion of Mill Circuit 4.

Moving on to our outlook for 2018, management remains focused on the following key objectives. Maintaining approved profitable mining operations while managing operating cost and achieving efficiencies complete Mill Circuit 4 expansion to increase Avino Mine production, complete a successful drill program to increase and improve confidence in our resource base at continue mine expansion drilling and explore regional targets on the Avino property, follow the recommendations in the 2017 PEA on the oxide tailings resource at the Avino Mine, and assess the potential for processing the oxide tailings resource.

Finally, before we move to the question-and-answer portion. I would like to mention that Avino is celebrating its 50th year in the industry. And many of you have already noticed that the new presence, new brand and logo. Our 50-year history has inspired a resilience initiative and enterprise across the team and we hope to continue working hard and rely on our core values of growth, quality and relationships.

We would now like to move the call to question-and-answer portion. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our next question comes from the line of Mark Reichman of Noble Capital Markets.

Mark Reichman

Just a quick question on your cost -- I'll get back in queue.

David Wolfin

Mark, are you still there?

Jennifer North

No, he has got back into queue.

Operator

Our next question comes from Heiko Ihle of H.C. Wainwright and Co.

Matt Barry

This is Matt Barry on behalf of Heiko. Unfortunately, he was unable to join the call.

David Wolfin

Hi, there Matt.

Matt Barry

So, just a few questions from Heiko. First, you guys ended 2017 with 3.4 million in cash down from 11.8 million the end of 2016 and while an additional 16.5 million in working capital, that’s also declined by that 30%, some of that is from account receivable and maybe 3 million factors recoverable. Also you guys have made meaningful investments in all your assets over the year and it seems like [indiscernible] the year is over. Can you walk us through your cash and working capital plans for 2018? And on that note, Q1 is almost over. What did you guys see there?

Malcolm Davidson

Hi, Matt. It's Malcolm here. Thanks for the question. As you know as we mentioned a lot of heavy lifting has been done. 2017 was certainly a busy year, primarily focusing on the construction of Mill Circuit 4, which is more or less complete or in the sense we’ve spent the majority of the required capital. Looking ahead to 2018, we do have a couple of projects in the pipeline relating to our tailing. We’ve got a few different sources to finance that, but overall it will be relatively lighter on CapEx.

Matt Barry

And so you guys also have some low-grade zinc concentrate that provide you with about 72,000 ounces of silver fettling. Can you walk us through this figure in 2018? Is there a way for incremental revenues that we may be able to overlooking? And also, do you expect to eventually break that production for zinc the same way you breakout copper? And if so, what’s the production amount for doing so?

David Wolfin

Jasman, do you want to comment on zinc.

Jasman Yee

Yes, this is Jasman. As for our projection for the zinc production for 2018, a lot of this would be based on the amount of zinc we have in the fee grade. That needs to be determined how much --how many tons of this particular product was going to produce from our perspective. Currently, we’re producing around about 70 tons every month based on the current zinc grade which is running approximately under 1%.

Hopefully in one of the zones that we've been looking at in 2018, potentially the zinc grade could come up. This would be the feed material from the [indiscernible] vein. We’re hoping to put that type of martial into the circuit sometime in 2018 or thereafter.

And hopefully, the zinc grade in this product will be a lot better than what we are currently producing. We’re also looking at adding a cleaning circuit for the zinc to upgrade it from what it currently is to maybe a more acceptable figure that will provide us with better payables. Those are the things we’re looking at for the lower grade zinc for 2018.

Operator

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

Joseph Reagor

I guess my first question. Maybe you guys could elaborate a little further on, how you kept cost down in the quarter despite the lower grades? What you guys did at the mine site in order to effectively lower the cost per ton mine?

David Wolfin

Jazz, you're on site. Do you want to comment on that one with the call us in the team?

Jasman Yee

Yes, basically, I could comment on the low cost at site. I think these are some of the things that we start to put in motion in the past with regards to trying to lower our operating cost. And one of the first things that we did when we looked at this, we were looking at buying now consumables in bulk. And this is something that we are continuing to do, and hopefully, it's been started up resulting in reducing operating cost also automation where surprising which is helping efficiencies. Is there something you would like to add Carlos?

Carlos Rodriguez

No, I am going with the response, yes.

Joseph Reagor

Okay, fair enough.

Carlos Rodriguez

We're targeting the consumables.

Joseph Reagor

And then given that the first quarter is basically where you guys haven’t released your production numbers yet, but are we expecting to see a recovery in silver grade at Avino? I know Q4 was abnormally low at about 50 grams. You are usually more in the 65 grams to 75 gram range. I know it fluctuates quarter to quarter, but should we see a rebound there in Q1?

Malcolm Davidson

It's more of a technical question to Jazz.

Jasman Yee

I think based on our budget for 2018 I think we are expecting silver grades to be more or less remained about the same, round up between 60 and 70 grams per ton. It all depends on the location that we are mining material. There are -- as we get deeper, the silver grade tends to drop but the copper grade increases. And there an area -- that are in upper sections where the gold grade is high typically the silver grad is high, but the copper is low. So, it's somewhere like the balancing act and our projection basic calls for a steady silver grade for the balance of 2018 between 60 and 70 grams. Carlos, might want to add more color to this probably.

Carlos Rodriguez

Yes, Joe, this is Carlos. Yes, basically the grade that we are mining right now has to be considered as the metal team is staged, right. We haven't started any mining activity there, but once we'll start mining the all the growth is leveled. Yes, we are planning to increase the range just to 70 to 75 grams silver. But now we are developing the stage, we don’t have too much concern on that, but yes, hopefully in the next few months or year, yes, the grades, silver grade will increase, definitely.

Joseph Reagor

Okay then one final one, if I could. That’s the mine grade. There will be a bit of a blend down as you guys process some low-grade stockpile as you start up Mill Circuit 4, correct?

Malcolm Davidson

You are correct Joe. Yes, we are down here now and within weeks of completing Circuit 4. I recommend you come down, so in May or June, you want to take a trip to come see us. It looks like its first class the circuit.

Joseph Reagor

Yes, I could come with David and we’re down here. And Joe, the Mill for Circuit Number 4 is currently in operation, it’s been running for about a month. The only outstanding item on Circuit Number 4 is the completion of the float cells and the pressure filter. So, currently we’re running the new mill on Circuit Number 4 and using the floatation cells and the filter press from Circuit Number 3.

David Wolfin

And when we are in there, it was running for August. We couldn’t believe how fire it was. They have really optimized this.

Operator

Our next question comes from Bhakti Pavani of Euro Pacific Capital.

Bhakti Pavani

Just a quick question on the Mill Circuit 4, I know Jasman just mentioned that it’s been in operation for a month. How should we see the production progressing for the Mill Circuit 4? I mean when should we see to be completely in 100% operational?

Jasman Yee

Based on the schedule that we saw yesterday by the contractor, we should be -- that whole project should be completed before the end of this month.

David Wolfin

Yes and when that was going to run stockpiles for several months.

Carlos Rodriguez

Six months.

David Wolfin

While we continue developing San Luis and in San Luis we’re already in there, we’re cleaning it out, it’s an old decline that fortunately now put in place. We’re just cleaning it out.

Bhakti Pavani

With regards to capital expenditure I know you guys provided guidance on the expected capital expend of 14.5 million. Just curious does that also take into consideration or include the underground equipment that you plan to buy for -- in the future for Avino Mine?

Malcolm Davidson

Bhakti, it's Malcolm here. So, the capital number that we did put out is accurate, but I just want to clarify the timing on that isn’t necessarily going to be albeit in 2018. We will be ordering some underground equipment for new and ongoing operations. I don’t expect that’s going to be significant. The majority of the costs for 2018 is for a new tailing processing facility which the team is still evaluating and working on. It will most likely be tailings facility that will be built out over a 12 to 14 month period and that’s double sort of approximate when the capital expenditures will be made as well.

Bhakti Pavani

So just a follow-up on that, would it be more weighted towards the second half of this year? Or is that the case? Or how should we model out the capital expend throughout the quarters?

Malcolm Davidson

Well, it will be that once we do some deposits to get the tailings facility moving forward, the equipment will arrive -- underground equipment will arrive over the next few months. I would say it’s probably fairly evenly distributed. Probably a little bit in the next few months, maybe perhaps a bit of a low during the middle of the year June, July, August and then during the end of the year we’ll look to wrap up any ongoing projects. But the tailings facility will likely go into 2019 as well.

Bhakti Pavani

Just last one. Could you maybe provide additional color on your plans and capital expenditure with regards to Bralorne?

Malcolm Davidson

Sure. During 2017, we continued to look at a number of mine plants and what we've ultimately concluded with we've got a very interesting and very good project but we want to really focused on continuing to drill and explore the property and from up resources. The majority of the CapEx it will be exploration type activity in drilling.

Bhakti Pavani

Okay is there kind of a budget or expectation on how much do you plan on exploration and prolong this year?

Malcolm Davidson

I won't say it's going to be it will be significant but not always significant and obviously the neighborhood of 2 million to 4 million.

Operator

Our next question comes from Barry Morlan, a private investor.

Unidentified Analyst

I have a couple of quick questions on Mill Circuit 4, pretty much done. Do you ever foresee enough products from Avino properties? Do you have another Mill Circuit added to that? Or does that pretty much stand of it?

David Wolfin

No, we've vary the looking at another circuit. We've sent the equipment down from Bralorne in the last year. The [indiscernible] flip locations, so we're already designing a new circuit, not that we are going put it timeline on is yet, but we're thinking about it.

Unidentified Analyst

And on your tailings, there you are planning to put those back into the backfill, correct?

David Wolfin

Yes, that's what we study yet.

Unidentified Analyst

Okay and we already have a water problem in Avino. I guess this is going into Avino, correct?

David Wolfin

What water problem?

Carlos Rodriguez

Yes, I don't know.

Unidentified Analyst

Well, you have condensation of ground water that builds up down there. You keep pumped out and you are going to put this in a flurry. Will that add to the water problem or not?

David Wolfin

No because we'll probably filter out water and cement will be added to it.

Unidentified Analyst

Okay, I see.

David Wolfin

If you see the mine is dry it's being watered on a regular basis.

Unidentified Analyst

I understand that but I just wanted to personally add to the problem or add to dewater.

David Wolfin

No, we won't. Water issue was a problem in the past where we didn’t have enough pumping capacity, but with rates going down is a problem.

Unidentified Analyst

And you were -- last year, you were talking about caving and mining and being a lower cost. I'm not a mining guy but in my mind it sounds like the end of mine life so I guess it's…

David Wolfin

So, it's also located and using gravity, so you drill that compliance and it's followed down to the next development level rather than scaling up on mine. So it's a cheaper form of mining which we haven't even started yet. We're just developing the different levels.

Unidentified Analyst

And once you start to cave in mining, is that pretty much as the end of that area?

David Wolfin

No just work in that area and then it will be at backfill, but there is still potential below the current workings. So this is the huge system if you go there point of distance, and so we haven't even drilled the below that level 17 yet, so we're just -- we've got targets to continually expand. So, we’re not caving it in the sense where we’re not going to be able to go back. It's just a terminology for the style of mining.

Unidentified Analyst

All right and the long-haul mining you’re talking about for Bralorne. I am trying to see a vision report that is?

David Wolfin

It's using mechanized equipment rather than still mining. So, it's can drill up instead of using jack lay for using mechanize equipment. So it can produce more material factors those we're looking at the larger operations.

Unidentified Analyst

And one more question, in the 2016 you thought 2017 without be a breakout year. Do you have any more predictions?

David Wolfin

Well, this year when we start feeding mill circuit floor with fresh water from the underground, the grades are going to improve. So our outputs are going to improve. Once the pace backfill plant commissioned by next year then we will decommission the current tailing and then will then proceed with the recommendations in the PEA on the offside tailings, which is a completely new project over the seven year mine life. And we'll add a million or half ounces of silver equivalent annually. We’re also drilling other areas of the property. There is tremendous potential on our properties Guadalupe, Chirumbo, [indiscernible] Mexico. There is a lot of potential on the properties to continue to find more resources.

Operator

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to David Wolfin for any closing remarks.

David Wolfin

Thank you, operator, and thank you again to everyone who joined the call today. Once again, we’re pleased with their overall performance in 2017, and we look forward to another solid year in 2018. Thank you to all team in Canada, Mexico and around the world. Thanks again and have a great day.

Operator

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