Earnings Call Transcript - ASM Q3 2023

Operator, Operator

Thank you for your patience. Welcome to the Avino Silver & Gold Mines Q3 2023 Conference Call and Webcast. Please note that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for questions. I will now hand it over to Jennifer North, Head of Investor Relations. Please proceed.

Jennifer North, Head of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to the Avino Silver & Gold Mines Limited third quarter 2023 financial results conference call and webcast. To join this webcast and conference call, there is a link in our news release dated November 1st and in our news release of yesterday’s date, which can be found on our website under News 2023. On the call today, we have the Company’s President and CEO, David Wolfin; our Chief Financial Officer, Nathan Harte; our Chief Operating Officer, Carlos Rodriguez; and our VP Technical Services, 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 related to this call or on our press release of yesterday’s date. Please note that the full financial statements and MD&A are now available on the website under the Investors tab then click on Financial Statements. As well, the full statements are available on Avino’s profile on SEDAR and on EDGAR. 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 on this conference call and webcast will be available on the website. Also note that all figures stated are in U.S. dollars unless otherwise noted. Thank you. I will now hand over the call to Avino’s President and CEO, David Wolfin. David?

David Wolfin, President and CEO

Good morning, everyone, and welcome to Avino’s third quarter 2023 financial results conference call and webcast. The full financial statements and management discussion and analysis are now available on our website. During today’s call, we will discuss the key highlights of our financial and operational performance for the third quarter, along with the ongoing projects, and then we will open the floor for questions. I will start with an overview of our operations for the third quarter, after which Nathan Harte, Avino’s CFO, will share insights on our financial results, followed by Jennifer North, our Head of Investor Relations, who will provide details on our ESG initiatives for the quarter. Our third quarter production results were released in mid-October, indicating that we achieved over 591,000 silver equivalent ounces, bringing the total for the trailing 12 months to 2.63 million ounces. We are pleased with the drilling results from July and September, which included the best intercept in the company's history. In September, we reported four drill holes from below Level 17 at the ET area that showed significant widths and grades exceeding our current cutoff values. In July, the best drill intercept recorded revealed 57 meters of true mineralization width. Drill Hole ET-23-09 displayed exceptionally wide and high silver, gold, and copper grades, which are promising for the ongoing exploration of the Avino vein. I will elaborate on the exploration results later in the call. We have completed our budgeted drilling program for the year, totaling 7,545 meters across 13 holes. The pre-feasibility study on the oxide tailings project is in progress, expected to wrap up early in the first quarter of 2024. The dry stack facility is fully operational with the conveyor system in place, and we are currently transporting tailings to the Avino open pit area. Communication with the Tahito group regarding the La Preciosa property is ongoing, and we are committed to advancing this project as it plays a key role in our five-year growth plan. As for our Q3 production results, we maintained consistency at the Avino mine. We mined in areas with lower copper grades and experienced a drop in recovery rates. The results are as follows: we produced 591,000 ounces of silver equivalent, 237,000 ounces of silver, 1.14 million pounds of copper, and gold production increased by 73% to just under 2,100 ounces, with mill throughput at just under 155,000 tons. Based on year-to-date production and processing timelines for La Preciosa, we have revised our internal production estimate for the year to between 2.4 million and 2.7 million ounces of silver equivalent. Our goal is to escalate production from 2.4 million to 2.7 million ounces of silver equivalent to between 8 million and 10 million ounces by 2028. Regarding exploration results from the third quarter, we had planned for 8,000 meters of drilling for the year and completed 745 meters; the 2023 program is now concluded. We released results on September 14, which included assays from four drill holes from below Level 17, and previous results were published on July 5. September 14's drill results included significant widths and grades above our cutoff in all four holes. Hole ET-23-13 reported 0.7% copper, 31 grams per ton of silver, and 0.21 grams of gold over a true width of 44 meters. Additionally, we have continued to explore the Hanging wall Breccia, related to the Avino main vein, with accessible resources that we are evaluating for inclusion in our medium-term plans. We also discovered a surprising intersection of stockwork vein close to the surface, showcasing the complex nature of the mineralization associated with this vein. The drilling this year followed the continuity of steeply dipping mineralization, aiding us in understanding the deep source of mineralization. We have engaged several renowned consulting geologists to deepen our geological understanding of these characteristics. The known depth extent of at least 750 meters of mineralization is significant, and further details can be found in the news release available on our website. On July 5, we reported the best intercept in the company’s history, which demonstrated significant widths and high grades of minerals. The intercept from drill hole ET-23-09 showed 57 meters of true width mineralization and is located 50 meters west of the most westerly drill hole and 200 meters down dip from Level 17. The assay results included 296 grams of silver equivalent over 57 meters true width, with highlights of 407 grams over 37 meters true width and 2,866 grams over 3.43 meters true width. We have provided images showing drill hole locations and cross-sections in the slides. The results are highly encouraging for our future exploration activities, suggesting a more complex mineralization system. We continue to have potential at depth and along strike. Now, I will turn it over to Nathan Harte, Avino’s CFO, for our Q3 financial results.

Nathan Harte, Chief Financial Officer

Thank you, David. It’s my pleasure to be on the call, and I would like to welcome everyone who has joined us in reviewing our presentation today. Turning to slide 10 for a review of the Q3 2023 financial highlights. Our results from this quarter showed positive increases across the board in almost all key metrics. Q3 was the best performing of 2023 when it comes to revenues, mine operating income, EBITDA, adjusted earnings and operating cash flow generated before working capital movements. Revenues for the quarter came in at $12.3 million, an increase of over $3 million from the previous quarter as well as the comparable quarter in 2022. Mine operating income for this quarter was $2.4 million with $5.3 million generated year-to-date. Cash flows generated from operations before working capital adjustments was $1.8 million, totaling $4.1 million for the full year 2023 so far. Adjusted earnings came in at $1.6 million or $0.01 per share for this quarter with the year-to-date total sitting at $2.6 million or $0.02 per share. At September 30th, we did see an increase in working capital of $2.8 million or 62%, bringing our total up to $7.4 million from the $4.6 million we had at the end of the second quarter. Coming to slide 11, I will walk you through some key additional financial results as well as the ones discussed in the previous slide. As noted already, revenues came in at $12.3 million, well up from the $9.1 million we showed in Q3 2022. As we move on from some plant operational challenges that affected the second quarter and part of the third quarter, we are looking for that trend to continue into the end of the year and on to 2024. We generated mine operating income of $2.4 million for this quarter, which includes noncash depreciation and depletion and is compared to $2.1 million in the third quarter of 2022. The increase is a result of higher revenues, which were offset by a very strong peso to U.S. dollar rate when compared to the third quarter in 2022. On a cash basis, mine operating income was $3.1 million, representing a cash operating margin of 26%. Avino reported a net loss after taxes of $0.8 million or $0.01 per share for the third quarter compared to a loss of $1.1 million or $0.01 per share in 2022. EBITDA was $0.7 million for the quarter and adjusted earnings were $1.6 million, both showing significant increases for the same quarter year-over-year. Cash flow from operations for Q3 was $1.8 million before working capital adjustments, up from $1.6 in Q3 of 2022. Beyond slide 12, you can see our cash costs for silver equivalent payable ounce for the third quarter were similar to last quarter at $16.90 with both quarters elevated over results from 2022. All in sustaining cash costs for silver equivalent payable ounce followed a similar trend, although we did see a decrease from the second quarter as it came in at $22.69. The increases for both metrics are in line with our messaging on our second quarter call and as a result of lower production from mill recovery challenges and lower grades arising from the planned mine sequence in the underground. On top of this, the Mexican peso appreciated, up over 15% in the third quarter compared to the 2022 average. While we’ve seen an improvement on this front in the third quarter when compared to the second quarter, there has been an impact on our costs as the majority of all our expenditures are incurred in Mexico with local suppliers, employees and contractors on-site. We have put a number of measures in place for cost reduction, including lowering haulage rates to match the mill throughput as we have generated the large ore stockpile over the last few months as well as certain administrative and auxiliary personnel reductions. Now coming to slide 13. You can see our cash cost per ton processed for the quarter came in above the recent average as well at $59.46. On an all in basis, we were also up from our first two quarters, but we did come in below the 2022 average. Increases on a per ton milled basis are primarily a result of higher mining and haulage rates as we mined over 200,000 tons this quarter, which is about 30% higher than our milled tons of 154,000. As well, lower ounces produced per ton contributed to the increased cost as a result of the operational items mentioned before. So far in the fourth quarter, we have seen improvements to both grade and recovery, and controlling costs remains a key priority for Avino alongside our growth plans. At this point, I will now turn it over to Jennifer North, Head of Investor Relations, for an overview of our Q3 ESG initiatives.

Jennifer North, Head of Investor Relations

Thanks, Nathan. Now turning to slide 14. We have listed our recent ESG initiatives for the third quarter of the year. These continue to build on Avino’s efforts to incorporate the principles of sustainability and social responsibility. We have added members to the CSR team in Durango, and the department is working to ensure that we continue meaningful conversations with the community that are close to the mine. The activities carried out during the third quarter under the new CSR management team were focused on improving relationships between each of the communities and strengthening the social bond while establishing a new social link between company and community. The activities carried out were as follows. In all of the communities, parents were offered summer courses for children aged 6 to 12. This summer program was developed to encourage and promote healthy ways to manage children’s summer free time. Courses and workshops were offered in a number of different activities, including soccer, arts and crafts, drawing, Taekwondo and others. In total, 220 children from the communities of Panuco de Coronado, Zaragoza and San Jose de Avino participated. In August, Avino’s medical department conducted its annual first aid training for a period of 6 days with 2 sessions a day. There were 119 employees from the mine coming from different departments to learn and improve first aid skills. As a high percentage of our employees come from the nearby communities, this training also benefits everyone in the adjacent areas. The goal is to ensure that all of our employees have the knowledge and skills necessary to be first responders in the event of an emergency. Also, the team put together several educational pieces to show our management of tailings, how we safely manage the tailings, what dry tailings means as well as the testing process. Educational flyers and videos in Spanish and English have been posted to the website and shared in the communities. For environmental compliance and for educational purposes, water samples were taken at the junior high school in September, together with the residents of the Panuco de Coronado community alongside company representatives to show Avino’s sampling process. In addition, the Company continues with its ongoing community road works and delivery of garbage drums in generally supporting beneficial ways. In September, the Company showed its commitment to the mental health of employees by commemorating World Suicide Prevention Day, where talks and support were offered. In addition, we are so pleased with the efforts of the CSR team in Durango as they were recognized for the second year in a row for the ESR distinction as being a socially responsible company. This designation is a reflection of the passion and dedication of the Company and shows that not only do we extract minerals, but we sow knowledge to build a brighter future for generations to come. Every day, every action brings us closer to a brighter and sustainable future. The mine is more than a workplace, it is an example of responsibility and commitment to be in harmony with the environment. One of the top priorities for Avino is to provide jobs to those in the surrounding communities with the goal of fostering generations of enthusiastic and dedicated ambassadors of Avino. We currently have 448 direct jobs, which includes the workers at the mine site and in our Durango offices. This number of jobs will typically translate to 3 times the number of indirect jobs for services, consultants and suppliers in the surrounding communities and the Durango area. In September, I was fortunate to go to Durango and spend time at site in the offices talking about our strategic alignment goals that span across the Company and communicating how we can work towards shared goals and vision. We have an action plan to inform, educate, and support all employees and community members to become ambassadors of Avino, and that we will all benefit when community and company are aligned. The success of Avino is dependent on its people, profitable operations, community support and a strong and sustainable future. I will now turn it back over to David to continue on with the presentation, providing our plans for the coming quarter. David?

David Wolfin, President and CEO

Thanks, Jen. Moving to slide 15, you can see our plans for the remainder of 2023. We are now well into the final quarter and the prefeasibility study on the oxide tailings project is well underway. We expect to present the results to the market in Q1 2024. We are also focused on our plans for the Gloria and Abundancia veins at La Preciosa with community engagement ongoing as we ready ourselves to begin development work. Equipment is being sourced and the environmental permit application has been prepared, and we are finalizing it for submission. As we have mentioned previously, we are in talks for the social blessing with the Tahito group, and this is something that takes time and patience. We will let the market know when this is finalized. And in the meantime, we continue to negotiate in good faith, so we may move forward with our plans. As mentioned earlier, our drilling program for 2023 is complete, and we will be reviewing the results to determine next steps for 2024. Lastly, the main goal is to replenish the treasury from cash flow generation from the Avino mine as we look forward to the future development of La Preciosa and the Oxide Tailings projects. On slide 16, we want to reemphasize the Company’s plans for growth. We have three assets within a 20-kilometer footprint, totaling hundreds of millions of silver equivalent ounces. On the same area, we are operating a mill complex, which is currently producing from the Avino mine. Additional access to water, power and tailing storage, all ingredients to grow organically without the major capital investment required that would be expected if you were starting from scratch. As you can see on this slide, our goal is to scale up by 2028 through the production from these three assets. Lastly, please move to slide 17, where we present our continued initiatives for growth, which are: development, production and optimization of La Preciosa; the tailings project prefeasibility study and eventual construction decisions; developing next steps for exploration and drilling; evaluating recommendations made by renowned structural geologists. We would now like to move the call to the question-and-answer portion. Operator?

Operator, Operator

Our first question is from Heiko Ihle with H.C. Wainwright.

Heiko Ihle, Analyst

Let’s talk about La Preciosa for a bit. I mean, in our view that asset should really help growth for the firm in the intermediate, and also the longer term really. Given commodity prices, Mexican political and just the general market sentiment that we are seeing, has your internal timeline for the assets shifted in any way over the past three months? And just capital wise, how much cash flow do you anticipate using for the site in calendar ‘24?

David Wolfin, President and CEO

Sorry. Heiko, you’re not coming in very clear, I don’t think. Can you repeat the question?

Heiko Ihle, Analyst

What I was saying is let’s talk about La Preciosa for a bit. I mean in our view, the asset should really help growth of the firm in the intermediate and also in the longer term. Given current commodity pricing, the Mexican political climate and just general market sentiment, has your internal timeline for the asset shifted in any way over the past few months? And building on that question, just capital wise, how much cash flow do you anticipate using for the site in calendar ‘24?

David Wolfin, President and CEO

Well, first of all, the grade that we’re going to be mining there is much higher than what we’re mining now, so we’re excited about that. The timeline basically hasn’t started until we get the blessing of the Tahitos, which we think we’re in the 11th inning. We’ve gone back and forth. They’ve been discussing at their assemblies. So we think possibly before the end of the year, we could have an agreement in place. And there are above ground stockpiles that we can start processing right away.

Nathan Harte, Chief Financial Officer

And yes, on the cash flow side of things, obviously, as David mentioned, we expect to generate lot of cash flow from La Preciosa. But as far as the development and paying for that, one of the nice things is we will be developing in ore as we start at La Preciosa, as we follow our mine plan. But as well with Avino, we do project to generate cash flow in Q4 and continue into 2024, so we will have some cash flow to invest in.

David Wolfin, President and CEO

And the initial mine plan is on the Gloria vein, which is really close to the surface. It’s not going to be very expensive. And the above ground stockpiles will pay for a lot of that.

Heiko Ihle, Analyst

On the Oxide Tailings project seems to be moving along quite well. I’m not sure if you can disclose any of this really. But has there been any impact, positives, negatives, anything compared to what you had previously anticipated for the asset? I mean, anything that you’ve seen as the study is getting together?

Carlos Rodriguez, Chief Operating Officer

Yes. Heiko, thank you for the question. A couple of things to note actually. We have a lot of construction experience. That’s something that we’ve done well with the expansion in Circuit 4 with the dry stack tailings. And that experience directly translates to accurate predictions in pricing for this plant. And that’s going to be lower cost than typically what an engineering company would speculate for this. So, we feel that we’ll be accurate with our construction costs based on our experience.

David Wolfin, President and CEO

And the big change is we went from looking at a heap leach to dynamic leaching, which is contained.

Carlos Rodriguez, Chief Operating Officer

Yes. So I mean, if I just want to maybe summarize the changes that we’ve seen, when we did that drilling, we also found a lot more material. We increased our resource significantly and that was updated in the resource. And certainly, we’ll have reserves that come out of this prefeasibility study and that will be forthcoming. I can’t say too much on that. But that would be a big change. As David mentioned, the change in process from heap leach to dynamic leaching and then finally our construction experience to really dial in accurate costs that are lower than industry average.

Heiko Ihle, Analyst

You may have noticed both of my questions related to things in the future. That’s by design and not a coincidence, because I think the future potential is quite large. And with that, I’ll go back in queue. Thank you very much.

Operator, Operator

The next question is from Jake Sekelsky with Alliance Global Partners. Please go ahead.

Jake Sekelsky, Analyst

So just starting from a high level, I mean, the strength of the peso is something that negatively impacted producers across the board, in Mexico this quarter. I was just wondering if you can touch on that impact to cost and maybe on any hedging programs you have or you plan to engage in, going forward.

Nathan Harte, Chief Financial Officer

Yes, Nathan here. You can clearly see the effect this is having on all producers in Mexico, including developers. This situation is not new; we experienced similar challenges in the second quarter, and it was likely more severe then. However, there has been some improvement in the third quarter. We are actively managing our foreign exchange rates because we invest significantly in pesos, working with local contractors and suppliers and employing a completely Mexican labor force on-site. This has a direct effect on us. We are also monitoring our hedging programs and keeping an eye on peso projections. Many believe the peso's strength will decrease. As we plan our budget for next year, we will consider various strategies for managing the peso, including hedging as one option.

Jake Sekelsky, Analyst

And then just more of a housekeeping, CapEx was just under $2 million in Q3. Is that sort of a baseline level we should expect going forward heading into next year, or do you have any larger sustaining capital items that you see popping up over the next year?

Nathan Harte, Chief Financial Officer

So for Q4, probably fairly light, ideally a bit lower. We do have some larger capital maintenance items we have to do, some overhauls of some equipment that will be likely in 2024. But also looking towards La Preciosa, which as you noted, it isn’t exactly sustaining capital. That’s growth capital for us. We have acquired some equipment for that, but we will need more and as well obviously some of the cash flow generated from Avino is earmarked for development.

David Wolfin, President and CEO

We got the most important piece of equipment, the new jumbo, driving the ramp.

Nathan Harte, Chief Financial Officer

Yes. We have gotten equipment ahead of time, stuff that can be used at Avino in the meantime, but can be transferred over to La Preciosa as soon as we get the green light.

Operator, Operator

The next question is from Matthew O’Keefe with Cantor Fitzgerald. Please go ahead.

Matthew O’Keefe, Analyst

I have a couple of operational questions for you. First, you mentioned you moved out 207,000 tons to the surface, which is about 3% more than what you milled. What is the nature of those tons? Are they low grade, heading to a low grade stockpile? Are you in the process of building a stockpile? Does this indicate increased efficiency from the mining side? Could you elaborate on that a bit?

Carlos Rodriguez, Chief Operating Officer

Yes, thank you, Matt. That’s a great question. Last quarter, we improved our ramp conditions, which significantly enhanced our ability to haul from underground. The mine has been outperforming the mill, leading to the building of high-grade stockpiles. However, some of the material poses a challenge because of the large size of some boulders, requiring a rock breaker that is now on-site to handle that material. In Q4, we plan to decrease haulage slightly to reduce those stockpiles, which should help lower our costs. We are currently observing very good grades going through the mill.

Matthew O’Keefe, Analyst

I have another question about the mill itself. I know you’ve made some modifications, but in the last couple of quarters, we’ve observed that recoveries for both silver and copper have been trending down. Can you talk about that a little and can we anticipate those recoveries to move back up?

Carlos Rodriguez, Chief Operating Officer

Yes, I believe the answer is affirmative. We can anticipate those recoveries and grades to improve. The decline in grade was due to not having a rock breaker on-site to handle some of the larger un-oxidized material, which led to a higher percentage of oxidized fine material. This situation has a dual impact: it results in slightly lower grades and reduced recovery rates. When starting with a lower grade, even if the tailings grade remains constant, the recovery is negatively affected. Fortunately, we have now addressed that issue, as we have the rock breaker and are processing those larger boulders containing higher-grade material. We are already observing improvements in recovery and grades in the mill.

David Wolfin, President and CEO

Yes. And the automation has worked well. It’s just a few key pieces of equipment were delayed in arriving that affected certain circuits.

Matthew O’Keefe, Analyst

And is that oversized material common that you’ve had, or is that a function of different ore, or you need to work a bit more on some of your blasting?

Carlos Rodriguez, Chief Operating Officer

No, that’s a fair question. As far as blasting goes, we have engaged many rock mechanics consultants, and we have optimized the blasting process. The nature of the ETR body means that at times we encounter relatively large boulders in various sections. Therefore, we need a rock breaker on the surface to handle some of that material.

David Wolfin, President and CEO

The stockwork systems, when they blast, the shock goes down where the fractures are and it just happens. We’ve had experts on-site, as you said, and we’ve optimized it as best we can.

Carlos Rodriguez, Chief Operating Officer

So we just get some slabs, to David’s point.

Operator, Operator

The next question is from Richard Mangan, a private investor.

Unidentified Analyst, Analyst

I have a quick question in reference to wanting more color on the third Tahito group. And what happens if they choose not to sign? Does it go to arbitration, or what actually happens?

David Wolfin, President and CEO

Well, we’re in the final stages of negotiations with them.

Operator, Operator

Pardon me. Mr. Mangan, could you please mute your phone? We’re getting your feedback.

Unidentified Analyst, Analyst

Is that better?

David Wolfin, President and CEO

Yes. So, we’re in the latter stages of negotiation. They want the agreement in place. So, it’s just fine-tuning it. So, it’s imminent.

Unidentified Analyst, Analyst

But I guess my point is if they choose not to sign, what happens?

David Wolfin, President and CEO

They want to sign, they want the economic benefit. So, it’s happening. It’s moving forward.

Operator, Operator

This concludes the question-and-answer session. I’d like to turn the conference back over to David Wolfin for any closing remarks.

David Wolfin, President and CEO

Thank you everyone for joining us on this call today. We’re looking forward to a better, healthy Q4. So, stay tuned for some news from us. We’ll have the prefeasibility study completed in Q4. So, hopefully, we can get that news out to you before year end. If not, it will be early in January. So, thanks again, and have a great day.

Operator, Operator

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