Durango Project Back on Track

Q: As a Canadian explorer with an extensive amount of operations in Mexico, what kind of exploration plans does the company have in the country?

A: Avino’s exploration projects include the Avino property which has an extensive system of veins and a variety of targets. We also have other standalone claims that are not being explored significantly at the moment, such as the Anna Maria, El Hueco, and El Laberinto in Durango. Development of the Avino mine and its surrounding exploration targets is being prioritized for the coming months. Exposed veins on the surface show us a window of dozens of targets, as well as old mines that are centuries old that need further exploration and development. Progress in these areas comes down to the amount of capital we have. As we receive more money, we can continue to explore and develop these targets. They are all high priority but progress depends completely on funding. As we accumulate capital we can continue to explore and develop these targets with the goal of expanding the Avino property’s operations. We are also considering using private money and IPOs to finance the projects. Over the past five years, many of our exploration projects have been restrained due to the low market conditions but more favorable metal prices and earnings could help accelerate our near-term exploration plans. Our budget for 2016 is about US$1 million, and we are hoping to double or triple it next year.

Q: To what do you attribute the loss of competitiveness in the exploration sector in Mexico?

A: The price of metals around the world have caused earnings to shrink over the last five years, and in effect, limited the industry’s ability to explore and develop. The new Mexican tax regime is an additional factor. Even though part of its objective is to support surrounding communities we have noticed little change. Our company is disappointed but has continued to play an active role in supporting the communities in lieu of the additional government money that has been allocated for this purpose, which from what we can see has not yet been deployed.

Q: What is behind the remarkable rise in the company’s stock price since November 2015?

A: Several factors have lent a hand, such as our excellent share structure that limits the overhang of stock. Higher metal prices and demand are pushing stocks up throughout the sector. Our stock in particular was able to achieve such substantial gains in part because we do not have hundreds of millions of shares outstanding. Additionally, declaring commercial production at the historic Avino during 2Q16 also helped. The company started to operate the Avino Mine in 1974 but was forced to close it after 27 years in 2001 due to low metal prices. At the time, gold was below US$300/oz, and Industrias Peñoles stopped buying our concentrate. Prior to NAFTA, foreign companies were only allowed to own 49 percent of an operation in Mexico. Following the shut down in 2001 and new NAFTA regulations that allowed full ownership by foreign companies, Avino decided to buy the other half of the Avino mine from its Mexican partners. The negotiations took three years and we eventually agreed in 2006 to give shares of the public company in exchange for a 100 percent interest in the Mexican subsidiary company that owns the mine. After the negotiations were made public, the company’s extensive network of followers rushed to contact us. We were able to raise US$10 million, which was enough capital to rehire a team of approximately 480 people and lay the foundation to bring the project back into operation. In 2008, we started drilling and discovered new exploration targets, so we opted to create a new mine rather than immediately re-open the main Avino Mine. The new mine, which is known as San Gonzalo, is smaller and its ore is higher grade. Revenues from the San Gonzalo mine, where we declared commercial production in 4Q12, were enough to finance the re-opening of the Avino mine.

To resume operations at the Avino Mine, the existing underground workings had to be de-watered. The dewatering process lasted 482 days, was completed in May 2014, and successfully removed over 1 million cubic meters of water. Following the dewatering, we brought in new equipment to increase milling capacity and service the mine, then started processing fresh ore from the Avino Mine underground by the beginning of 2015. The company was able to subsidize the mine’s development in 2015 by running the mill and making a profit through the processing of development material. In April 2016, following the implementation of the efficient long-hole sublevel caving mining method we declared commercial production. Following the declaration of commercial production, the market is anxious to see Avino’s revenue in 2016, as proceeds from the sale of Avino Mine concentrate, which last year totaled US$21 million, were classified as a recovery of exploration and evaluation expenses and were not included in our top line revenue figure of US$19.5 million. Overall, the property is expected to produce between 2.5-3 million ounces of silver equivalent in 2016.

Q: How does the long hole sublevel caving method increase efficiency?

A: Traditional methods require parallel drills and jack hammers that are quite labor intensive and costly. Long hole sublevel caving is cheaper because it uses a spiral ram that enters beside the main system through levels that are 20-30m apart. Jumbos are then used to drift 450m along in opposite directions when the vein is cut, and 50m walls are slashed. Once the underground levels are ready, track drills or mining jumbos drill straight down. Gravity causes the broken rocks to naturally drop to the level underneath, and machines follow by scooping the material out. This form of mining is ultimately more cost-effective than traditional methods.

Q: How does Avino plan on using its tailings storage facility (TSF) to contribute to the production of the mine?

A: A Preliminary Economic Assessment (PEA) by Tetra Tech suggested that our oxide tailings could economically produce over 1 million ounces of silver, and 6,500oz/y of gold over for five years from a heap leach or Merrill Crowe processing operation. The oxide tailings were created during the 1970s from our open pit operation and are currently sitting at the bottom of the pile as they did not recover well under conventional milling methods at the time they were mined. Subsequently, sulphide tailings from our more recent operations have been placed on top. The oxide resource cannot be accessed until the company decommissions the existing tailings, and builds a new facility. We recently received a construction permit, and plans are being discussed with a contractor to commence construction in 2016. Following decommissioning of the existing TSF, wells are going to be drilled to drain the bottom and make it safe. Additionally, there are 3.5 million tons of copper sulphide tailings sitting on top of the oxide tailings that could potentially be capitalized on if it is determined it will leach. If it does, the PEA economics will increase, and if not the top can be stripped off and converted it into a separate operation. The operation will be a combination of heap leach and Merrill-Crowe precipitation, exactly as Goldcorp uses. It can begin operating once the new facilities are completed, the current pile is decommissioned, and the wells are drilled at the bottom, which will take a couple of years.

Q: What strategies are in place to continue to expand and develop Avino Silver and Gold over the next few years, and what are the company’s primary goals going forward?

A: The company plans to expand using our oxide tailings resource. Additionally, the Avino mine, which has a robust stockwork system, is currently processing 1,250t/d at the plant but has the potential to expand considerably. We are currently considering an expansion of the mill, tailings, underground facilities, and the mining fleet. If metal prices go up we will be able to manage more drilling to continue exploration on the property. There is significant potential to find other narrow vein higher grade systems that would become a priority because margin is everything. A few drill holes and installations on exploration targets can increase production rapidly.