IMPACT Silver Corp. (IPT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to IMPACT Silver Corp.'s Quarter and Full Year-End 2019 Period Ending December 31, 2019, Financial Production Results Conference Call. Before we begin, we would like to go over our disclosure policies and comments, followed by Mr. Fred Davidson's comment on the quarter, year-end results and then following, a Q&A period. Certain statements in the following conference call regarding IMPACT Silver's operations may constitute forward-looking statements. Such statements are not historical facts, but are predictions about the future, which inherently involves risk, uncertainty and could cause actual results to differ materially from those in the forward-looking statements. I would like to now turn over to President and CEO of IMPACT Silver Corp., Mr. Fred Davidson.

Thanks, Jerry. Needless to say, it's a fairly interesting time that we live in. And it's funny enough, there's actually an expression -- Chinese curse, "May he live in interesting times." And considering where this COVID-19 came from, I guess, that's sort of very appropriate. In any event, we had a basically -- a significant turnaround in 2019. Revenues and gross revenues were $13.3 million compared to $13.1 million. But more importantly, revenue in the fourth quarter was $4 million compared to $3 million in 2018. Mine operating earnings for the year were turned around, before amortization, depreciation that is, turned around by almost $3 million. So we've made a dramatic change in our operating, basically a strategy that was implemented at the very end of 2018, where we focused on our higher-grade mines, shut down some of the less productive or lower-margin mines, went on a major cost control effort. And even though we produced less ounces, those ounces were produced at a substantially less cost. That, combined with an improvement in the, obviously, grade and the price of silver, led to the fact that our revenue per tonne in the fourth quarter was $105.47 compared to $79.55 1 year earlier. Our mining costs were the same sort of thing. We had a mining cost of $82.60 in 2019 fourth quarter compared to $91.50 in 2018, a 10% improvement, combined with a 33% improvement in revenue, and the effect is rather obvious on our financial situation. Full year's production then was 664,000 ounces, obviously, about 100,000 -- about 80,000 ounces less than last year. But with higher grades and fewer tonnes, the margin improved substantially. Grades were also substantially improved. We've averaged 182 grams a tonne in the fourth quarter compared to 170 in the prior comparative quarter and 173 grams for the year compared to 159 grams for the year, 9% improvement. So a combination of price and grade substantially was reflected in our fourth quarter results, and in fact, our third quarter results were -- both of them were cash positive. The overall financial situation for the company is in -- strong. We have $3.8 million with working capital of $3.6 million compared to cash of $1.2 million in the comparative period in 2018 and working capital of $1.3 million. The company continues to have no debt. Overall, we've recognized that our strategy is working. We've got all our team on-site completing this effort. And I think the general impression is we are on the right course of action. And obviously, the thing that we did represent in the news release, a very, very recent event, was the COVID-19. The -- basically, the Mexican Ministry of Health issued a decree, in order to mitigate the spread and transmission of COVID-19, that they were shutting down most operations. They would -- said nonessential businesses, and that appears to include mining -- to temporarily suspend activities until April 30. We're, of course, going to comply, although we believe that the strategy is the incorrect strategy as Mexico's mining industry is a substantial part of the overall economy, a major employer and a major source of export revenues. So the business -- the decree by the Ministry of Health will probably be reconsidered in the future. At the moment, at this point in time, they're looking for the net effect of what's going to happen in Mexico itself. Reporting on the COVID-19 is not particularly strong in Mexico, and nobody is exactly sure of what the overall status is. We do, however, have no evidence of it in the local community. We've gone through a considerable effort with the local authorities to ensure that everybody is made aware of COVID-19, the symptoms, and every person coming on to our site is checked every day to ensure that we're not a transmission site for COVID-19. In any event, we are where we are. We see that the first quarter was looking fairly strong up until the -- this whole issue. And hopefully, as we go on in the year, we're going to be able to demonstrate our success going forward. We had some major exploration and development successes during the year. That includes Chapanial, which is -- looks like the high-grade silver target. We were pursuing that right up to a week ago. We are currently -- or we were at Guadalupe, accessing a major target called PatrocÃnio. It's an area that we've made a considerable effort on, and I think that we're going to see some exciting results coming out of there. Certainly, initially, the grades have been considerably higher than our average grade. And we're also working on a site called Veta Negra, which is an open pit, and that open pit has produced extremely high grades considering that's an open pit. With nominal mining costs, most of it is done by ripping and hammer, virtually no drilling and no -- certainly no explosives. And all 3 of those bode well for the future. Jerry?

Great. Thank you, Fred, for the overview on financials and operations for full year 2019. We will proceed to some of the questions and answers from investors that we compiled this quarter. Please certainly feel free to e-mail, [email protected], or give us a call directly at (236) 863-2067 during this COVID-19 remote working situation if you have any further questions for next quarter.

Question one, Fred. Great quarter for M team. Will, obviously, Q1 and onwards be negatively impacted? Because we briefly saw $12 silver down from almost $19.

Well, I guess the answer is yes. The effect is not quite as dramatic as it looks because FX, that foreign exchange relationship with U.S. dollar and the Mexican peso certainly helps to mitigate a substantial part of that. We don't anticipate silver to remain at these levels. In fact, I think we're even currently seeing some upward movement since that $12 number. People have to recognize that if, in fact, the mines are not producing silver in Mexico, 23% of the world's supply of silver is just suddenly off the table. So I think we're going to see strengthening in silver. Where it ends up, goodness knows. But at this point in time, it is strengthening, and we still see that. As I say, the foreign exchange differential certainly helps us going forward.

Got it. Question two, IMPACT has certainly been able to navigate through several downturns in the last 13 years. Plus, how has the team changed operations, streamlined further from beyond the 2019 cost-cutting initiatives to navigate this possible prolonged downturn?

Well, as you know, we did do a financing in -- last year -- over the last year, deliberately, to give us a bit of a buffer in this situation. The world is a pretty scary place right now. And we want to make sure that the cash situation of the company is always comfortable. We are obviously working at reducing costs wherever we can. We're trying to target the -- again, the higher-grade material and keep our exploration program moving forward in order to do that. Quite frankly, I don't think anybody anticipated the crash that we've seen from COVID-19. I think our market and, I think, the market in general for the juniors especially has actually responded relatively well compared to when you think of the S&P in New York. Yes, we're going to hang on. We're going to run this prudently, and we're going to make sure at all times that we have adequate reserves on hand to allow us to sustain ourselves through the downturns.

Great. Question three, specific with this 30-day decree from Mexican government of suspension or temporary halt of operations across the board for the sector, what would the IMPACT Silver's hard cost be in terms of overhead and ongoing salary?

Well, to be honest, I can't tell you at this moment. We're working on that right now. We're negotiating with some of the employees for a sort of a percentage payout while we retain them. Obviously, contractors, et cetera, are excluded. And overall, we would see a substantial reduction in costs for the quarter. The issue would be if it's more sustained. At the moment, we have to keep the mine operating in terms of pumps. We have to monitor our explosives or magazines. We have to keep safety on hand. So the net effect is we are going to incur a labor cost which is very similar to our monthly cost. What we aren't going to incur, as I say, is the contracting costs and obviously, supplies, what have you. So I would anticipate, and again, we don't have the final numbers yet, we're going to be looking at a cost that is probably half of what our normal monthly cost is.

Okay. Got it. Sounds good. Next question, about specific on the net loss for the year. IMPACT showed almost a similar net loss versus 2018 albeit silver grades improved. The net loss was nearly $4.8 million, $4.9 million, but of which $2.9 million was property write-down. So does that mean really the adjusted net loss was $2 million? And does that also mean if we see higher or better silver prices in 2019, we would actually see net profit for 2020 for IMPACT and not just positive mining earnings and EBITDA?

Well, until COVID-19 came along, we were anticipating that we'd be very close to or actually achieving a profit in the first quarter of this year. We still don't know the net impact of that. That's going to be a function of -- depending on the pricing for shipments that we made as price of silver collapsed. But we were anticipating, with the grades we were getting and the prices we were looking at, that the company would be profitable. It's certainly positive EBITDA for the year and with profits on -- as the mining plan was going forward. Don't know what the impact's going to be. Obviously, we're all waiting with bated breaths to see what happens to the price of silver, to government performance and the total impact of COVID-19 on the labor costs and the overall operations on a go-forward basis. We'll try and keep the shareholders informed as we go forward, to be made aware of things as they happen. And this is going to be a moving target as we all know. I think we have to be realistic about it. We are in a good position. We are purely a silver player in Mexico, and silver will respond certainly before any of the base metals do. I think that we're well positioned. It's just a matter of macro events which are beyond our control. And to that, we're going to protect ourself by making sure we have the reserves on hand to sustain in any possible downturn.

Okay. So question five, Fred, has to do with the marketing budget for 2019. The cost and expenses, obviously, went up quite a bit year-over-year. I think fair to say from investors' comments, volume and the reach -- outreach has been certainly felt and seen in the market. Will this continue in 2020? Was this a onetime event? Or can you delve into some of the costs? What it entailed?

Yes. Marketing cost is twofold. One, there's no sense in -- we choose the expression, "spitting into the wind." We certainly -- when the price of silver was consistently $14, it was hard to get anybody's attention and generally not very successful. I think the market is starting to recognize that precious metals once again has value and is of interest. And at that point in time, we identified that and we pursued that. And I think it was very successful. And Jerry, I have to compliment you on it. We were able to attract a lot of attention in the skinny market. We're getting a lot of the support. We have good trading. And somebody might say, well, somebody sold 1 million shares in a month. The fact is we had people buying 1 million shares in a month, and we saw strength in that market, and they were buying on a rising price. So I think overall, we got very good value for the dollars we spent in 2019. 2020 is going to be a little more interesting because at this point in time, we're going to be selective in our marketing. But I think at the right time and with the right information, we can be prudent with those dollars and yet generate some very positive results from the effort.

Great. Going on more to the production numbers, Fred. Revenue per tonne rose over to $105 per tonne, Q4, that's a substantial increase of almost 34% from the same period of $80 per tonne, revenue in 2019 year-end versus 2018. And obviously, grade almost -- it hit 183 grams per tonne. Will this continue to go higher? And obviously, can you ramp down the cost per tonne as a result of the open pit operation in Veta Negra and also the shaft at Guadalupe?

Well, that's certainly our objective. We are shutting down the more marginal mines. Interestingly enough, margin is a critical number, not necessarily great. Veta Negra may have a -- it's actually got very good grade. But even if it was a lower grade, its margin would be very significant mainly because it's a very low-cost mine. And we sometimes run into the situation where we have a high-grade mine but a high-cost mine at the same time. So we look at margins. We look at the differential between what -- the revenue you can get per tonne versus the cost per tonne at that mine. Will it drop further? I'm inclined to think so, only because Veta Negra is an open pit and it's a very unique open pit. It's very much like a quarry on the side of the hill. So the strip ratio is very, very limited. And the rock type, at least where we're mining right now, is such that it can be mined, as I mentioned, by ripping and with a hammer. That's very low-cost mining. It has higher haul costs, but certainly, the low cost of mining makes up for the difference. The other one, Guadalupe, is also pretty exciting. The PatrocÃnio, at least the initial grade seems substantially higher than our average. And with the track system we've set up at 195 -- on the 195 level and the shaft, it's very low cost of mining, rather, transportation. And the end result is, I think both of those are going to be significant contributors to the margin. At this point in time, it's going to be a real question when you talk about revenues as to the price of silver itself. And that's an unknown at this point in time, the price of silver and foreign exchange. But I would say that we certainly anticipate 2020 to look more like 2019 last quarter than elsewhere -- than in the past couple of years.

Got it. Question eight, obviously, has to do with ongoing COVID-19 shutdowns in Mexico. I mean what are we seeing out there? Are production suspended? How about greenfield operations? And would that delay or defer IMPACT's plan on greenfield drilling this year and exploration efforts?

Okay. Two things. COVID-19 is going to delay everything, and it's a matter of how long we're shut down. At this point in time, the government says it's until the end of the month. So that's not unreasonable time to live with it. Are we still going to do drill? Yes, absolutely. That will be restarted as soon as we're allowed to put people back on our property. Interestingly enough, the drilling work is being deferred a little bit only because the 2 biggest targets we've got right at the moment -- well, 2 of the exploration targets we've got. One is part of an ongoing mining situation, Veta Negra. And right now, we're doing what we call trenching and that we're mapping this thing out at sort of 50-meter intervals out from where we're mining. It's exposed its surface, and that surface definition is critical before we start drilling. So we'll complete that trenching. And at this point in time, it's still open in at least 2 directions before we start drilling. So I'd anticipate drilling probably now third quarter as opposed to second quarter on the Veta Negra just because we are being delayed and be -- the surface expression is getting bigger as we go. So the target is getting bigger. And obviously, the drilling program would be bigger. The underground work we're doing at PatrocÃnio is -- will be ongoing drilling with that. We generally don't release the underground drilling unless we think it's significant to the interpretation of what's going to happen going forward. That will always go. And Chapanial is the gold target we're working on. And right now, that's being converted from a prospecting situation to trenching, again being deferred with this recent announcement. But we'll go back in and continue on that and trench. And we anticipate we'll be drilling it after we drill Veta Negra. So the last half of the year, we're anticipating at least 2 programs, one at Veta Negra, one at Chapanial. One is obviously an open pit -- potentially open pit with underground potential as well in Veta Negra, fairly high-grade gold or silver, rather, running at 200 grams, at least historically. And Chapanial, which is the gold target, that will be the sort of last drilling we do, obviously, unless something else comes up, that we'll be working on in the fourth quarter. And it's a very attractive gold target. We just want to make sure that our odds on drilling it are up at the 80 percentile before we actually put the drills on the ground.

Got it. The last question has to do with the property package. So the write-down, obviously, was noncash for M team. But 200 kilometers package is still obviously a very sizable land package for exploration and production. This is down from a long-term investor who has known IMPACT since the 400-kilometer package days. Can IMPACT reacquire those properties? Would there be any loopholes on lowering the property-claimed taxes if a new company acquires it?

Well, there's 2 things. One, part of the package was reduced when our first [indiscernible] work indicated that part of the property was covered by tertiary volcanics which are effectively dead. There's no apparent grades, and there's no serious pain that's come up through the tertiary volcanics that made it attractive. So that was one of the packages that we released. The second package is again lower priority. And part of this, obviously, is property taxes in Mexico are extremely high and grow fairly dramatically year-over-year. So we had to decide on which ones we'd focus on. And those are the ones that we've kept -- we're still focusing on. The other ones, we could probably make application. My understanding is the Mexican government hasn't granted any new concessions in the last 1.5 years. So it's going to be in that situation where if we do want to go back and look at it, we would probably get into an auction situation. However, seeing how we're the only ones who know what's there, I think it gives us much better leverage in the auction situation if we did go and acquire those properties again.

Okay. Excellent. Those are all the questions we have from investors and stakeholders this quarter, Fred. So again, just to reiterate to investors listening, if you have any questions or would like to put forward for future inquiries for next quarter's call, which should be coming up in about 1.5 months or so for Q1 2020 IMPACT Silver, give us a call at +1 (236) 863-2135 or e-mail us at [email protected]. This has been a quarterly and annual wrap up for 2019 financial and production results. We thank you for your investment and your time and attention. And if you have any questions, please visit our website at www.impactsilver.com. We trade on the TSXV under IPT or on the U.S. Exchange, ISVLF. Thank you.