Long before Hollywood directors made it a favored setting for westerns. .
.before Pancho Villa rose from the poverty of a hacienda there to become an
important Revolutionary general. . .the Mexican state of Durango was a major
center for global silver production.
Understanding silver's role in Mexico—formerly part of "New
Spain"—requires stepping back about 500 years. The precious metal has
been mined in Durango since the time of the Spanish conquest, more or less
continuously. Silver enriched the Spanish king and bolstered the treasury,
helping fund wars against European rivals. It also funded a magnificent
cathedral that still stands in the state capital, also named Durango. And
coins minted from Mexican silver soon became a global currency.
One of the sources of that mineral wealth was Avino, the "mountain of
silver" on the eastern flank of the Sierra Madre mountains outside of
the city of Durango. It's an ore body now being mined by Vancouver-based Avino Silver
& Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.MKT). Avino produces silver,
as well as gold and copper, from two underground mines: the main Avino deposit
and San Gonzalo, a small higher-grade deposit about two kilometers away.
The metal remains a major export for Mexico, and Avino's silver still
makes its way around the world. But these days, it's purchased by a division
of Samsung. Samsung C&T purchases all of Avino's production at spot
prices and ships it to smelters in Asia.
Avino founder Lou Wolfin
Avino was founded by current CEO David Wolfin's father Lou Wolfin (above),
who in 1968 bought a 49% stake in the mothballed Mexican mine—which had
closed in 1912 due to the Mexican Revolution. The joint venture put the mine
back into production, and Avino later purchased the remaining stake from the
Mexican family that owned it. Avino's 50-year history is one of the features
that sets the company apart in a junior mining sector where longevity is
typically measured in years, not decades.
CEO David Wolfin's roots at Avino run deep, too—as a teenager, he worked
in the underground mine. Lou Wolfin, who died on March 3, 2017, at age 85,
was an entrepreneur and inventor who showed a willingness to invest where
others feared to tread. And although the company founder's path to silver
mining in Durango started on Howe Street, it began with a detour through
Beverly Hills.
That's where the elder Wolfin met Mexican entrepreneur Fernando Ysita at a
party in the late 1960s. The chance Hollywood encounter led to forays into
Mexico and, eventually, a major investment. Avino purchased a 49-per-cent
stake (the maximum allowed) in 1968 when Mexico re-opened to foreign
investment. The company later bought the rest of the mine from the Ysita
family.
Lou Wolfin was a contemporary of Murray Pezim and a bit of a legend in
Vancouver business circles. A former stockbroker, Wolfin bought a seat on the
Vancouver Stock Exchange in 1960 and later opened a Vancouver brokerage
house. His entrepreneurial instincts extended far beyond mining—he owned the
patent on holograms and developed a keyless door-lock entry system decades
before those became common.
But it's in mining that the elder Wolfin's legacy is felt most acutely. He
wasn't there to see it, but Avino celebrated its 50-year milestone at the
Vancouver Resource and Investment Conference in January. Among those at the
party were employees who had been there from the beginning, as well as a
contingent from Samsung headquarters in Seoul, South Korea.
The Avino mine on the "mountain of silver."
I toured the Avino mines—which also produce gold and copper concentrates—on
a site visit to Durango late last year. After flying into the state capital
of Durango via Mexico City, we shuttled to the Hotel Gobernador, a hacienda
that was formerly a state prison (complete with bullet holes on one of the
outer walls). Our group, mostly German investors and analysts, was hosted by
Avino CEO David Wolfin, COO Carlos Rodrigues and investor relations manager
Jennifer North.
The mine is about an hour-and-a-half drive through towns and a countryside
that looks familiar thanks to westerns such as "How The West Was
Won" and "Butch Cassidy and the Sundance Kid." The city of
Durango has its own walk of fame featuring Hollywood stars on the sidewalk
and several bronze statues including John Wayne—The Duke totes a rifle missing
its barrel. (John Candy died of a heart attack in the city in 1994 during a
break from filming "Wagons East.")
At the mine, silver, gold and copper concentrates are processed using a
flotation circuit from ore mined at Avino and San Gonzalo. For the last three
years, production has held steady at or above the 2.7 million ounces
silver-equivalent produced in 2017 (2.68 million AgEq oz in 2016, 3 million
AgEq oz in 2015).
But a project under construction when I visited and now largely complete
should hike that total significantly: the fourth mill circuit. That
circuit—with a ball mill purchased from a Quebec mine—is now complete and set
to process ore in the first quarter of 2019. The circuit is projected to
boost capacity by about 70%, to 2,500 tonnes per day. Once the fourth circuit
is commissioned, it will process ore from the San Luis (expansion) area of
the Avino mine.
The fourth circuit at Avino's mill, under construction when I visited, is
now complete.
Avino announced Q3 2018 production on Oct. 15 and the company's
silver-equivalent production dropped by 7% year-over-year, to 704,429 ounces
AgEq. Avino produced 342,151 ounces of silver (down 7% YOY), 2,204 ounces of
gold (down 18% YOY) and 992,271 pounds of copper (down 10% YOY). The lower
production and declining grades are partly because San Gonzalo is reaching
the end of its mine life as Avino transitions to San Luis ore.
About 90% of Avino's workers live in villages a short drive away from the
mine. The local workers have been a constant for the last five centuries—the
jobs pay well and are highly coveted. It's quite a contrast to the fly-in,
fly-out contract mining methods at many modern mines. That helps on the
community relations front, in addition to Avino's decades-long presence
there.
The Sinaloa cartel operates in Durango but our group travelled without
guards or security, and neither is there a visible security presence at the
mine. There are signs of a cartel presence if you pay attention, however, in
and around Durango. The police station outside the city is built high on a
hill and resembles a fortress. A prison we passed also looked seriously
secure.
At the mine site, our group of analysts, investors and newsletter writers
donned waterproof protective and safety gear and descended into both mines,
the temperature rising with each lower level. It was vaguely reminiscent of
the silver price, which has fallen more or less consistently and is now stuck
under US$15 after running to almost $50 an ounce in April 2011.
That's made it tough for silver producers to make money, and Avino is no
exception. The company is also in expansion mode; there are exploration
drilling projects at both the Avino mine and at the company's Bralorne
project in British Columbia. Avino is also investigating the economics of
processing oxide tailings at Avino. It all costs money, and Avino recently
raised US$4.6 million through the sale of 65-cent (US) units.
Each unit consisted of one 65-cent share and a full five-year warrant
exercisable at 80 cents. But the financing was announced with the stock at 79
cents US, and the below-market pricing prompted a selloff in the stock. In
conjunction with Q3 production numbers, released October 15, Avino announced
cost-reduction initiatives (capital, operating and administrative) at its
operations in Mexico and British Columbia.
There are other examples in Avino's neighbourhood of how silver's
struggles have hit other producers. Nearby is Coeur Mining's mothballed
Preciosa silver deposit, purchased for $382 million from Orko Silver in 2013.
That deal was done with silver at about US$30 an ounce.
Growing production from the fourth circuit gives Avino good leverage to
rising silver prices. When and if that occurs is anybody's guess, but the
silver price has a track record of bouncing hard when it reverses. One
measure suggestive of a silver bull market is the gold-silver ratio, which is
above 80 and near a historical record. Silver has made outsized returns each
time it has reached these levels.
Avino also has leverage to gold at Bralorne, its under-the-radar Canadian
project. Bralorne is nestled amid rugged mountains in British Columbia's
South Chilcotin range. It was the epicenter of a major gold mining camp that
produced 4.2 million ounces of gold between 1928 and 1971. The three adjacent
mines—Bralorne, Pioneer and King—produced extremely high-grade ore. Average
head grades were above 0.5 ounces per tonne, or 14 g/t gold—multiples of
global mined grades that are now below 1 g/t Au.
Avino's Bralorne project site: July 2018.
Bralorne, where Avino is in the middle of a fully funded 28,000-meter
drill program, has the potential to become the flagship and a company maker,
if things work out. The project already hosts a state-of-the-art water
treatment system and dozens of kilometers of underground workings as well as
brand-new mining equipment. The latter equipment—including two scoop trams
and a jumbo drill—was purchased as part of a prior plan to start small and
ramp up production. The company now plans to focus on expanding the
historical resource before starting up a larger mine.
As with Avino, Lou Wolfin played a key role in securing the property,
including the historical mine workings. Wolfin bought the Bralorne-Pioneer
Mines from Homestake and brought it into Avino in 1990. He got Bralorne
running at 100 tonnes per day (in a separate company) but the mine shut down
due to low silver prices. Bralorne was brought back into Avino in 2014.
Avino funded the drill program through a $6-million flow-through financing
priced at $2.00 (Cdn) per share. The drill program is the most extensive in
the project's history, and includes both exploration and resource drilling.
The company is using two drill rigs; assay results should start landing in
the first quarter of 2019.
The existing Bralorne resource, announced on Oct. 21, 2016, is 91,528
ounces Measured and Indicated at average grades of 0.33 oz/t gold (9.36 g/t)
and 83,900 ounces Inferred at 0.22 oz/t gold (6.2 g/t).
Independent geoscientist Garth Kirkham of Kirkham Geosystems completed the
NI 43-101 resource model and also played a major role in designing the
current drill program. Kirkham is an award-winning geoscientist known for his
resource estimation and 3D modelling work. He has worked extensively with
John Robins' Discovery Group companies, including Kaminak Gold (acquired by
Goldcorp) and Bluestone Resources (BSR-V). The drilling follows structural
modelling and geological mapping as well as airborne and ground geophysics.
Avino's investment proposition is that of a stable silver producer with
growing, lower-grade deposits and a call option on high-grade gold at
Bralorne, where drill assays could provide catalysts for the share price.
Avino Silver and Gold Mines (ASM-T)
Price: CA$0.85
Shares outstanding: 63.3 million (75.5 million fully diluted)
Market cap: CA$53.8 million
James Kwantes is the editor of Resource
Opportunities, a subscriber supported junior mining investment
publication. Kwantes has two decades of journalism experience and was the mining
reporter at Vancouver Sun, the city's paper of record.
Disclosure: James Kwantes has been compensated by Avino
Silver & Gold Mines to produce this article and Avino paid for costs of
the site visit to Mexico. Avino Silver & Gold Mines is not a Resource
Opportunities portfolio company. This article is for informational purposes
and does not constitute investment advice. All investors need to do their own
due diligence.
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