Business context and reporting period
Avino Silver & Gold Mines Ltd. filed an audited annual report on Form 20-F for the fiscal year ended December 31, 2017. The filing provides full-year results, not standalone fourth-quarter results; Q4-specific financial figures are not clearly provided in the filing text. Financial statements are prepared under IFRS and, beginning in 2017, presented in U.S. dollars.
The company produces silver/gold concentrate at San Gonzalo and copper/silver/gold concentrate at the Avino Mine, both in Durango, Mexico, and is advancing the Bralorne gold project in British Columbia. It reports no SEC-defined proven or probable mineral reserves.
Financial and operating performance
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Revenue | $33.36 million | $30.11 million | Up $3.25 million, or about 11% |
| Cost of sales | $21.98 million | $19.16 million | Up about 15% |
| Mine operating income | $11.38 million | $10.94 million | Gross mine operating margin about 34.1%, versus 36.4% |
| Operating expenses | $5.33 million | $5.01 million | Includes $2.02 million in share-based payments |
| Net income | $2.65 million | $1.50 million | Basic EPS $0.05; diluted EPS $0.05 |
| Cash from operations | $(2.17) million | $3.74 million | Operating cash flow turned negative |
| Cash at year-end | $3.42 million | $11.78 million | Down $8.36 million |
| Working capital | $16.40 million | $23.31 million | Down $6.90 million |
| Total assets | $102.63 million | $93.79 million | Increased year over year |
Cash used in investing was $3.14 million, including $6.61 million of property and equipment purchases and $5.53 million of exploration and evaluation expenditures, partly offset by redemption of $9.0 million in short-term investments. Financing used $3.05 million, mainly for equipment, lease and facility repayments. Year-end short-term investments were $1.0 million, so cash plus short-term investments totaled $4.42 million.
Carrying amounts of the term facility, equipment loans and finance leases were approximately $12.26 million combined at year-end: $8.67 million, $1.25 million and $2.35 million, respectively. Total contractual obligations, including accounts payable, leases and scheduled debt payments, were $17.20 million. The Samsung term facility bears interest at three-month U.S. dollar LIBOR plus 4.75%; repayments were amended to run from July 2018 through July 2019, and Avino Mine concentrate sales to Samsung were extended through December 2021.
Material changes and operating developments
- Revenue rose as Avino contributed a full year of production in 2017, compared with nine months in 2016; management also cited stronger realized copper pricing. Net income increased despite lower cash from operations, with working-capital outflows of $9.08 million a major cash-flow factor.
- Avino Mine mill feed increased to 460,890 dry tonnes from 429,289; recovered silver-equivalent production was reported at 1.91 million ounces versus 1.61 million. San Gonzalo mill feed declined to 81,045 tonnes from 115,047, while silver-equivalent production was reported at 1.07 million ounces in both years.
- Avino’s fourth mill circuit was about 90% complete at year-end and was expected to be completed in the first quarter of 2018. Bralorne received an amended permit allowing restart at 100 tons per day; a permit amendment for expansion was in progress.
- The company’s measured and indicated resources across the Avino, San Gonzalo and oxide-tailings deposits totaled 3.27 million tonnes; inferred resources totaled 8.14 million tonnes. These are resources, not reserves, and do not demonstrate economic viability.
Outlook, risks and unusual items
Management estimated 2018 costs of $45.1 million for the Avino/Mexico operations ($29.6 million operating expenses and $14.5 million capital expenditures) and $4.5 million for Bralorne ($2.8 million operating expenses and $1.7 million capital expenditures). The filing says the company will need to raise capital to meet planned costs and provides no assurance that financing will be available; activities may be curtailed if it is not obtained. Management identified a planned Avino expansion as a potential positive for future cash flow and San Gonzalo’s estimated remaining mine life of 0.8 years as a potential constraint.
The oxide-tailings preliminary economic assessment described a seven-year project and estimated post-tax NPV of $28.01 million at 5%, IRR of 32% and payback of 2.6 years at assumed gold and silver prices of $1,250/oz and $18.50/oz. The assessment is preliminary, includes inferred resources and carries no assurance of realization; it is not a production forecast or reserve determination.
- Mining and exploration carry geological, operating, safety, permitting, environmental, commodity-price, currency and financing risks. The company disclosed two accidental deaths at San Gonzalo in 2016 and one at the Avino complex in 2014, and said it did not carry accident insurance.
- The reclamation provision increased to $11.64 million from $6.96 million, largely reflecting changes in estimates; the undiscounted obligation was $17.53 million.
- Revenue depends on a concentrated customer base: three customers accounted for all 2017 sales. Metal prices on certain receivables are provisional, and the company does not hedge metal-price or foreign-exchange exposure.
- SEC staff comments on the prior-year filing remained unresolved at the filing date, including questions about capitalized development and evaluation costs, mine and camp costs, reclamation accounting and the basis for declaring production at intended levels.
- Management reported disclosure controls and internal control over financial reporting as effective at year-end, and said it had remediated prior weaknesses involving formal risk management and Spanish-language policy translations. The auditor did not attest to internal controls, consistent with the company’s emerging-growth-company status.
Important facts for investors to verify
- Review the audited statements and notes for the working-capital movements, the $4.42 million of cash and short-term investments, debt maturities and the company’s near-term funding plan.
- Confirm progress, final cost and commissioning of Avino’s fourth mill circuit, and whether expansion and San Gonzalo’s short remaining mine life affect expected production and cash generation.
- Assess the assumptions, permitting, additional testing and financing required for the oxide-tailings project; do not treat its preliminary economics as demonstrated viability.
- Examine the unresolved SEC staff comments and the accounting judgments underpinning capitalized exploration/development costs and production-stage determinations.
- Reconcile potentially inconsistent filing figures: the selected-data section reports 2017 liabilities of $33.69 million and equity of $68.94 million, while the audited statements report $33.83 million and $68.79 million; the revenue discussion also describes a 29% copper-price increase while listing the same $4,850-per-tonne figure for 2016 and 2017.