Avino (ASM) Q2 2023: Silver Output Down 10% as Mill Bottleneck Emerges, Growth Hinges on Oxide Tailings and La Preciosa

August 10, 2023 | By EarningsIQ Research

Avino’s second quarter showed operational stability but rising costs and a new mill bottleneck shifted the growth narrative to project execution and cost discipline. The company’s five-year plan is anchored on scaling silver-equivalent production and unlocking value from the oxide tailings and La Preciosa, but near-term cost inflation and currency headwinds demand close investor attention. Execution on pre-feasibility studies and permitting will define the next leg of Avino’s transformation story.

Summary

• Mill Bottleneck Now Limits Output: Haulage improvements shift operational focus to mill optimization for volume gains.
• Cost Pressures Intensify: Peso appreciation and lower grades drive all-in sustaining costs higher, squeezing margins.
• Growth Hinges on Project Delivery: Progress at oxide tailings and La Preciosa is critical for scaling and cost reset.

Business Overview

Avino Silver & Gold Mines (ASM) is a precious metals producer focused on silver, gold, and copper, operating primarily in Durango, Mexico. The company’s revenue comes from mining and selling silver equivalent ounces from the Avino mine, its core asset, with growth prospects tied to the oxide tailings project and La Preciosa, both within a 20-kilometer radius of its mill complex. Key business segments include mine operations, project development, and exploration, with silver, gold, and copper sales as primary revenue streams.

Performance Analysis

Q2 results reflected a production dip and margin compression as Avino navigated operational transitions and macro headwinds. Silver equivalent production fell 10% year-over-year, largely due to lower grades and equipment delivery delays, though these logistics issues have reportedly been resolved. While silver and gold output ticked up, copper production lagged, and overall throughput rose 33%, highlighting the company’s ability to move more ore but at lower average grades.

Financial results were mixed: revenue and mine operating income both declined versus the prior year, with cash costs per silver equivalent ounce and all-in sustaining costs rising to $16.33 and $23.06, respectively. The strengthening Mexican peso—up over 15% in the quarter—exacerbated cost inflation, as most expenses are peso-denominated. Despite these pressures, the Avino mine generated positive operating cash flow and net income, demonstrating ongoing resilience even as margins narrowed.

• Operational Bottleneck Shift: Upgrades to the haulage ramp removed underground constraints, but the mill now limits throughput, requiring further optimization.
• Currency Headwind: Peso appreciation increased local costs, impacting profitability more than expected and prompting management to evaluate hedging strategies.
• CapEx Moderation: Capital expenditures are expected to ease in the second half, with major spending already completed for the year.

Production is expected to catch up in the second half as operational improvements take hold and the company targets internal guidance of 2.8 to 3 million silver equivalent ounces for 2023.

Executive Commentary

Strategic Positioning

1. Mill Optimization as Growth Lever

With the haulage ramp upgrade completed, operational focus has shifted to the mill, now the primary constraint on output. Management is working to optimize mill throughput, targeting 2,500 tons per day with all circuits running. This unlocks higher production potential as ore supply from the mine is no longer the limiting factor.

2. Oxide Tailings Project Progress

The oxide tailings project, currently in pre-feasibility with Tetra Tech, is a key pillar of Avino’s five-year growth plan. Metallurgical testing yielded recovery rates up to 90% for gold and silver in ancient oxides, with measured and indicated resources up over 400% since initial drilling. The pre-feasibility study is on track for early December, with potential to fast-track or slip into January, and will set the stage for a construction decision.

3. La Preciosa Permitting and Community Engagement

La Preciosa remains a strategic growth asset, but progress is gated by environmental permitting and final community agreements. Management reports positive engagement with local groups, with only one remaining ejido’s approval needed before permit submission. The project’s low footprint and community alignment are emphasized to mitigate regulatory risk.

4. Exploration Upside at Depth

Recent drilling below level 17 at Avino delivered the best intercept in company history, with 57 meters of high-grade mineralization. This expands the known vein system, supports the thesis of a more complex and larger ore body, and opens further exploration potential both along strike and at depth.

Key Considerations

Avino’s Q2 marks a transition from mine-limited to mill-limited operations, with strategic focus on unlocking new sources of low-cost production and managing cost inflation. The company’s ability to execute on pre-feasibility, permitting, and mill optimization will determine the pace and sustainability of its growth trajectory.

Key Considerations:

• Mill Throughput Is Now the Bottleneck: Operational gains from haulage ramp upgrades must be matched by mill circuit optimization to realize volume targets.
• Cost Inflation Remains a Material Risk: Peso appreciation and lower grades have driven up unit costs, pressuring margins and requiring active mitigation strategies.
• Project Execution Is Critical: Timely delivery of the oxide tailings pre-feasibility study and environmental permitting for La Preciosa are essential for scaling production and reducing average costs.
• Exploration Success Underpins Long-Term Value: High-grade intercepts at depth could extend mine life and support resource growth, but require sustained investment and technical expertise.

Risks

Currency volatility, persistent inflation, and permitting delays remain the most significant risks to Avino’s near-term outlook. The company’s exposure to the Mexican peso, which appreciated sharply in Q2, directly impacts cost structure and operating margins. Regulatory and community engagement processes at La Preciosa carry inherent uncertainties, while execution slippage on project timelines could delay critical growth milestones. Lower ore grades and mill recovery challenges may persist if operational bottlenecks are not resolved.

Forward Outlook

For Q3 2023, Avino guided to:

• Production recovery toward internal guidance of 2.8 to 3 million silver equivalent ounces for the year
• Completion of oxide tailings pre-feasibility study, with results targeted for early December

For full-year 2023, management maintained its growth focus:

• Advancing La Preciosa permitting and early development work
• Ongoing mill optimization and cost control initiatives

Management highlighted several factors that will shape the next quarters:

• Mill throughput optimization is now the key operational priority
• Project milestones at oxide tailings and La Preciosa will be decisive for growth and cost reset

Takeaways

Avino’s path to transformation depends on operational discipline and project execution amid rising costs and shifting bottlenecks.

• Cost Discipline Is Essential: Margin pressure from currency and grade mix requires aggressive cost management and potential hedging to protect profitability.
• Growth Narrative Hinges on Project Delivery: The oxide tailings and La Preciosa projects are the catalysts for scaling production and lowering unit costs, but are dependent on timely execution and permitting.
• Watch for Mill Performance and Project Milestones: Investors should track mill throughput rates, cost trends, and the delivery of key project studies and permits in the coming quarters.

Conclusion

Avino’s Q2 underscores the delicate balance between operational resilience and cost headwinds as the company shifts from mine-limited to mill-limited production. The next phase of growth will be defined by project execution, cost control, and the ability to convert exploration success into scalable, low-cost output.

Industry Read-Through

Avino’s results reflect broad challenges facing Mexican precious metals producers: currency-driven cost inflation, regulatory scrutiny, and the growing importance of community engagement for project approvals. The shift from mine to mill bottlenecks is a recurring theme across the sector as legacy operations seek to optimize existing infrastructure. Exploration-driven resource growth and brownfield project advancement are increasingly critical for intermediate producers aiming to offset grade declines and rising costs. The experience at Avino signals that margin protection and disciplined capital allocation will be key differentiators as the industry navigates volatile metals prices and regulatory complexity.

ASM Materials Mining Silver Cost inflation Project pipeline Permitting Exploration