Avino Reports Third Quarter 2019 Production; Dropping Research Coverage

Entering the Second Half with Improved Liquidity and Leverage to Stronger Commodity Prices

What is the Expected Impact of Phasing Out San Gonzalo?

Resilience In A Challenging Operating Environment

Mark Reichman

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Basic Materials

Metals & Mining

Avino Silver & Gold Mines Ltd. (Canada)

Investment Thesis
Our investment rating is Market Perform.&nbsp; While the company&#8217;s near-term growth outlook is supported by the commissioning of circuit 4 at the Avino mill, growth beyond 2019 is less clear with still much work to be done to advance the oxide tailings and Bralorne gold mine projects, both of which face some economic uncertainty due to commodity price and execution risk.&nbsp; At the earliest, we think it is likely that Bralorne and oxide tailings could go into service in 2021 and 2022, respectively.&nbsp;&nbsp;
The company recently filed a shelf registration to raise up to $25 million through the sale of securities, which may consist of common shares, warrants or debt securities.&nbsp; Of the $25 million, up to $8 million of common shares are expected to be sold under an &#8220;At-the-Market&#8221;? (ATM) sales distribution agreement.&nbsp; Because the proceeds will be used to fund organic growth programs, including the oxide tailings and Bralorne projects, issuances could be dilutive until the organic growth projects that are being funded begin generating cash flow.&nbsp; We expect a paste backfill plant which will help facilitate the development of the oxide tailings project and modernize the mine infrastructure, to cost in the range of $6.5 million to $8.5 million.&nbsp; We expect 80% to 90% of the cost to be funded with debt.
As a result, we believe that some of the benefits of having circuit 4 in service at the Avino mill will be partially offset with expenses and financing costs associated with advancing organic growth initiatives and the impact of lower grades from San Gonzalo.&nbsp; While we think the share price will respond to higher commodity prices, we think other names in our universe offer similar leverage but more defined growth outlooks. 
Update on Longer-Term Growth Initiatives
Bralorne.&nbsp; The Bralorne gold mine, located in southwestern British Columbia, is in the exploration, evaluation and planning stages.&nbsp; Avino is implementing a multi-stage, multi-year plan to increase gold resources and&nbsp; expand the mine&#8217;s operating capacity.&nbsp; Most of the existing processing equipment is configured to process 100 tonnes per day and will be upgraded to process at 400 tonnes per day.&nbsp; Management seeks to increase the resource estimate before investing to expand and commission the project.&nbsp; Consequently, Avino has commenced a drill program to better define and expand current resources and make new discoveries around the mine.&nbsp; A 28,000-meter surface drilling program began in January 2018.&nbsp; While the company anticipates commissioning an updated resource study, the drilling program will not be completed this year and will take about 18 months.&nbsp; Consequently, an updated resource study will likely not be available until the end of next year.&nbsp; At 400 tonnes per day of production, current resources imply a mine life of about four to five years and management would like to see enough resources to double the implied mine life.&nbsp; We note the project is not currently supported by a preliminary economic assessment, preliminary feasibility study or feasibility study.&nbsp;&nbsp;
Oxide Tailings.&nbsp; In April 2017, the company announced an updated preliminary economic assessment for the re-treatment of Avino mine tailings.&nbsp; Tailings are historic ore waste built up during an earlier period of open pit mining.&nbsp; With the application of better processes, gold and silver is expected to be extracted from the tailings.&nbsp;
The preliminary economic assessment for the oxide tailing project forecasts a post-tax net present value of $40.5 million using an 8% discount rate and 32% internal rate of return based on a base case price deck of $18.50 per ounce for silver and $1,250 per ounce for gold.&nbsp; Total capital expenditures are expected to be $28.5 million, including initial capital expenditures of $24.4 million.&nbsp; We note that a tailings facility will need to be decommissioned as part of this project.&nbsp;&nbsp;
Exploration Activities
Brownfield exploration activities are an important source of growth and management is confident in the exploration potential around both the Avino and San Gonzalo mines and continues to invest in expanding its resource base.&nbsp; The company recently announced encouraging drill results from the El Chirumbo and Guadalupe areas at the main Avino mine located on the Avino property.&nbsp; Based on drilling results, the Guadalupe vein is thought to extend 800 meters to a depth of 250 meters from the surface.
The company is also in the planning stages of a new drill program targeting the Aguila Mexicana vein located ~400 meters northeast of the San Gonzalo mine.
We anticipate higher costs associated with exploration activities in 2019.&nbsp;
Capital Structure and Expenditures
As of June 30, the company reported cash of $4.8 million and debt amounting to $12.5 million.&nbsp; Working capital amounted to $10.0 million.&nbsp; Capital expenditures during second quarter and first half of 2018 amounted to $3.8 million and $7.4 million, respectively, compared to $2.5 million and $4.5 million during the same respective periods last year.&nbsp; Second half 2018 capital expenditures are expected to be ~$4.0 million.

Avino Silver & Gold Mines Ltd. (Canada) (ASM)

Losing Some of Its Luster: Rating Lowered to Market Perform

Fundamental Analysis:

Rating: Log in to view

Avino Reports Third Quarter 2019 Production; Dropping Research Coverage (ASM)

Entering the Second Half with Improved Liquidity and Leverage to Stronger Commodity Prices (ASM)

What is the Expected Impact of Phasing Out San Gonzalo? (ASM)

Resilience In A Challenging Operating Environment (ASM)

Inbox Intel from Channelchek.