ASM

Business Context and Reporting Period

Company: Avino Silver & Gold Mines Ltd.
Filing Type: Form 20-F (Annual Report)
Period Ended: December 31, 2012
Accounting Basis: International Financial Reporting Standards (IFRS)
Reporting Currency: Canadian Dollars (CDN$)

Avino is a Canadian-based resource firm focused on silver and gold production and exploration. The company operates primarily in Durango, Mexico, where it owns a 99.28% interest in Avino Mexico. A significant milestone occurred on October 1, 2012, when the company commenced commercial production at its San Gonzalo underground mine, transitioning from an exploration-stage to a production-stage company. The company also holds exploration properties in British Columbia and the Yukon, Canada.

Key Financial Metrics

Outstanding Shares: 27,127,416 common shares as of December 31, 2012.

Material Changes vs. Prior Period

• Revenue Recognition: The company recorded revenue of $2.26 million in 2012, compared to zero in 2011 and 2010. This was driven by the sale of silver/gold concentrate from the San Gonzalo mine following the commencement of commercial production on October 1, 2012. Prior to this date, proceeds from concentrate sales were recorded as a reduction of exploration and evaluation costs.
• Net Loss Reduction: The net loss decreased significantly to $1.26 million in 2012 from $4.18 million in 2011. This improvement was primarily due to the recognition of mine operating income ($820,807) and a substantial decrease in share-based payment expenses ($2.51 million reduction).
• Operating Expenses: Operating and administrative expenses dropped by approximately $2.11 million year-over-year, largely attributed to fewer stock options being granted in 2012 compared to 2011.
• Inventory: Inventory increased to $2.23 million in 2012 (from zero in 2011), consisting of concentrate inventory, ore stockpiles, and materials/supplies.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Management Commentary

• Production Growth: Management reported increased feed grades and production volumes in Q1 2013 compared to Q4 2012. Silver equivalent production increased by 26.2% quarter-over-quarter.
• Expansion Plans: The company is refurbishing a second 250 tpd processing circuit to handle historic stockpiles and plans to bring a 1,000 tpd circuit online in 2014 to process material from the main Avino Mine.
• Financing: In January 2013, the company secured a $5 million credit facility with Caterpillar Finance to acquire mining equipment and advance operations.
• Capital Needs: Management explicitly states that additional capital will be required to further develop the San Gonzalo mine and reopen the main Avino Mine. There is no assurance that funds can be raised on commercially reasonable terms.

Risks and Contingencies

• Internal Controls: Management concluded that disclosure controls and internal controls over financial reporting were ineffective as of December 31, 2012. Material weaknesses include inadequate segregation of duties, insufficient written policies, and insufficient disaster recovery plans.
• Regulatory Action: In July 2012, the British Columbia Securities Commission (BCSC) issued a cease trading order due to non-compliant disclosures regarding mineral resources. The order was revoked in late July 2012 after the company addressed the concerns.
• Resource Definitions: The filing includes a cautionary note that mineral resource estimates (measured, indicated, inferred) are based on Canadian NI 43-101 standards and may not be comparable to SEC Industry Guide 7 reserves. U.S. investors are cautioned not to assume these resources will ever be converted to reserves.
• Profitability: The company has incurred net losses since inception and expects losses to continue until operations are fully scaled and profitable.

Investor Verification Checklist

• Production Sustainability: Verify if the increased feed grades and production volumes reported in Q1 2013 are sustainable or if they represent a temporary high-grade pocket.
• Capital Adequacy: Assess the company's ability to raise the additional capital required for the 1,000 tpd circuit expansion and the reopening of the main Avino Mine, given the current cash balance of ~$4 million.
• Internal Control Remediation: Monitor the progress of remediation efforts regarding the material weaknesses in internal controls over financial reporting to ensure future financial reliability.
• Commodity Price Sensitivity: Evaluate the impact of potential declines in silver and gold prices on the company's ability to maintain positive cash flow from operations.
• Regulatory Compliance: Confirm that all future disclosures regarding mineral resources strictly adhere to both Canadian NI 43-101 and SEC Industry Guide 7 standards to avoid further regulatory scrutiny.