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

Good day, ladies and gentlemen. Welcome to IMPACT Silver Corp.'s Q1 2020 period ending March 30, 2020, Financial Production Results Conference Call. Before we begin, we would like to go over our disclosure statement, followed by Mr. Fred Davidson's comments on the quarter results and a Q&A period. Certain statements in the following conference call regarding IMPACT Silver's business operations may constitute forward-looking statements. Such statements are not historical facts but are predictions about the future, which involves inherently risk, uncertainty and could cause actual results to differ materially from those in the forward-looking statements. I would like to now turn it over to President and CEO of IMPACT Silver Corp., Mr. Fred Davidson.

Thanks, Jerry. The first quarter for 2020 is basically a summation of our plans and reorganization over 2019. We had a -- reported a $3.4 million revenue in the first quarter, a 15% comparison over $3 million in 2019. But the interesting thing is the EBITDA itself turned around by almost 900 -- well, over $900,000 compared to that period. And the loss was almost $800,000 reduced from that period. So it's a dramatic change in operations when you go from a loss of about $900,000 in Q1 2019 and less than $100,000 in 2020. It was part of the reorganizations we've talked about where we're focusing more on the higher-margin mines. We're backing off from some of the still attractive, but lower-margin mines. And you'll see that in terms of the principal mines that we're mining now. Silver production increased to 179,000 ounces in 2020 compared to 163,000 ounces in 2019. The source of that production, as I say, which came more from the Guadalupe Mill, which is turning out to be very successful for us. It's an old mine -- I said the Guadalupe Mill, but I meant the Guadalupe Mine. It's an old mine. It's been mined for over 50, 60 years. We've identified new areas in the mine that are quite attractive and very low cost, relatively speaking, for mining. But better yet, it's probably within about 100 meters of the mill. So our transfer costs are virtually 0. We're mining the San Ramon as well. That's been a traditional support for us over the last number of years. We're getting into a new area, and that's -- but we'll probably see less and less production from San Ramon as we develop that area. Where we're at, you either mine or you develop but you can't do both. So we're going to take pressure off of San Ramon as we're now moving into adding additional feed from Veta Negra. And Cuchara is sitting there, and it's always been 1 of those producers that chugs along at 10% to 20% of our feed and it's going forward and probably going to be there for us in the future. But the exciting one, the new one is Veta Negra where we -- 17% of the feed came from. It's high-grade material, relatively speaking, at about 200 grams a tonne. The mining is the dramatic part of the whole thing. At the current moment, it's an open bid, and we're mining with a backhoe. We're not blasting, we're not drilling. It's simply breaking a rock with a backhoe and mining. It means our mining costs there are exceptionally low. Haulage is a little higher, but it means it's also one of the higher market lines that we're currently operating on. Our feed grade for the mill for the quarter was 170 grams per tonne. It's a slight increase over the previous year but it's a little down from where we're going to be as we go forward. And it's a function of where we're mining at an instant in time. The throughput of the mill was about 40,000 tonnes compared to 36,000 tonnes in the comparative period as well. Income before taxes and the financial statements. I think, I'd better explain a little bit about them. We're showing that the income before taxes was just positive at about $59,000, I think it was, which is quite a bit up from a loss of about $850,000 in the prior year. The earnings before interest taxes and depreciation, et cetera, even for Q1 was about $900,000, up from the comparative period in 2018, fairly a dramatic change in what we're doing. And the mine operating earnings improved about $0.3 million from Q1 in 2019. Direct cost per tonne decreased to $75 a tonne and that was a 9% decrease from the prior year. Working capital was $3.9 million. And of course, the -- rather, the cash was $3.9 million, and working capital is $3.4 million. Subsequently, at the end of the quarter, we raised an additional $2 million in a private placement. So we had positive cash flows. We had positive EBITDAs. We were very close to hitting what could have been a very profitable quarter. And of course, the world changed with COVID-19. And that's probably impacted us more dramatically than anything else, both in the marketplace where the general market became very apprehensive. And in that process, it became very apprehensive about the price of silver. And prices actually dropped down to as low as $12 before rebounding towards $15, but still a far cry below the $17 that we were achieving earlier in the year. So when you take that $3 to $4 differential x 178,000 ounces, you can imagine what the quarter would have looked like if we had, had that pricing. Overall, we're being very low-key in what we do. We shut down in compliance with the government's requirements. We have filed the necessary documentation to restart activities and we expect that in June, we should be back up to very close to what we were doing in the first 2 months of the year. Pressure still remains in areas of foreign currencies, the U.S. dollar, the price of silver, the potential impact of COVID-19 in Mexico itself. Although in our area, there's virtually -- there is no cases that we know of, of COVID-19 in the Zacualpan mining district. So we are allowed to restart production and we're controlling the whole area with courtesy of the Army to ensure that anybody entering the Zacualpan district is a resident of Zacualpan. So very tightly controlled. We started this actually in late February, early March. So what we're filing with the government is almost identical to what we're doing in any event. So we're looking forward to, subject to, obviously, world events beyond our control, a much stronger second half of the year. Jerry, over to you.

Great. Thank you, Fred. And now we'll move on to some of the production Q&A that has been submitted by investors this quarter. Going forward, please, again, a reminder, feel free to send questions to [email protected], or call us directly during this remote working-from-home session at +(236) 863-2067.

Question 1 comes from an investor, Tom. Great quarter, Fred D. Huge recovery on EBITDA year-over-year. It's almost $1 million above the 2019 metrics. Obviously, you can't say entirely, but what will Q2 look like with COVID-19?

Okay. Good question. It's a little bit up in the air. Given we get back to production in June, we'll obviously be -- not have the quarter that we would have liked to have because there's been at least 1.5 months of production where we were held up. During that time, the government insisted that we pay -- continue to pay to our employees. However, the union did agree to a discount. And although they've been very responsible at this point in time, but it still means we're carrying the full load of people for the 3 months and we're producing for maybe a little over a month. So second quarter will not be impressive. And I don't think anybody else is. In fact, I looked at many of our peer group and our loss this year -- or for the first quarter looks like minuscule compared to what everybody else was hit with. So yes, I don't think it's going to be a -- it certainly won't be a great quarter. It will probably be a loss, but I think it's going to be mitigated by the fact that our operating costs are so low. And if the price of silver stays in the sort of $17 range, that's going to help quite a bit.

Okay. Great. Question 2, has -- with the recent financing, if you can walk through us the timing and the discount. The investor group, obviously, Palisades, has grown quite a bit. They certainly have a wide reach, but they've also had a reputation in the past where they sold aggressively. Will they be able to impact management decisions or will IMPACT carry on as usual?

Valid question. First of all, let's deal with why we did it. We're in the crisis of COVID-19. We saw the price of silver drop. We saw the Mexican government already making noises about shutting down the mining industry. And as prudent individuals and as Board members, we looked at that and we said we had to protect ourselves, but we didn't want an excessive dilution. So although we could have raised actually quite a bit more, we restrained that. But we've got enough to say, okay, if we're shut down for a couple of months, how can we keep a clean balance sheet, absorb the costs and go forward after that. And that was the -- basically, the decision behind -- or the reasons behind the decision. Palisades is there. They do have a reputation. But I think, in fact, that reputation reflects that they've had some tough luck with some of the projects they've worked with. We're giving them some really good luck. We're professional. We know our business. We don't intend to defer to them in terms of our operating style and what we do. We're certainly willing to see their participation in supporting this in the marketplace. And I suspect if they have a win like us, they want to make sure that win continues on. And you don't run to first base on something because you try for a home run. So I think they're going to be very supportive actually rather than just flogging the shares and disappearing out the door.

Great. That's good to hear. Question 3. The forex gain was very substantial this quarter, over $0.5 million. Obviously, this is likely a onetime thing? Or should shareholders prepare for this on an ongoing basis? Or was there a change in the forex brokers?

No, no. It's -- there's a lot of confusion about this. And I have to, once again, apologize for accountants and IFRS. What principally was in the forex gain was that when we actually ship our concentrate shipment, we do an initial pricing, and we do it -- and that includes the foreign exchange that would be in that price. As you know, the Mexican peso got hit rather badly. And the end result is on realization, we were getting a much higher price in U.S. dollars than we would have only a few months earlier, having recorded it in Mexican pesos. So what you're seeing is actually a gain on the receivables or which could probably attribute it to the sales price. So it's actually revenue. And the problem that we're going to run into, and you're going to see perhaps more of this depending on what happens with the Mexican peso, et cetera, is you're going to see significant fluctuations here but it is -- normally, we probably would throw it up into revenue. IFRS is -- we have to show it as a forex gain or loss. So that's why it's down there not at the top line.

Okay. Next question is also question 4, somewhat accounting related. How did IMPACT end up with such a large comprehensive loss this quarter of $4.3 million?

Well, a total loss of $4.3 million. Yes. It's actually -- is a very similar situation. What happens is, let's say, we have CAD 1 million in assets in Mexico. And on the balance sheet, Mexico, it shows up as $10 million because -- on a 10:1 ratio, for instance. When we convert that -- and we have to convert those assets every time we do a quarterly statement. And of course, the Mexican peso has gone down. So the pricing is those assets down in Mexico are now worth significantly less in Canadian dollars when you translate. Are the assets really worth significantly less than in Canadian dollars? No. But the translation issue from Mexican pesos and Mexican pesos gone down by that amount, means those assets get written down by that amount. So what you're seeing is on a $40 million -- I think, it's about $38 million of hard assets and exploration assets there. You've seen a significant crunch as the Mexican peso has gone down, translated into Canadian dollars. That's roughly 10% or even less than that, it's 1%. So yes. No, no, it's -- actually I did lie, it's 10%. So it's -- again, thanks to the accountants, and I apologize for that profession, and IFRS because it's not meaningful for the average reader but it's something they've come up with. And unfortunately, we literally have to explain it every time we run a quarter.

Yes. Got it. Question 5 more on the greenfield exploration side, Fred, drilling targets for IMPACT on the gold and silver front after COVID-19, which investors presume will resume after June 2020. What are some of the specific programs?

Well, right now, we've got 2 really exciting targets that we want to chase, a number of others for that matter. Veta Negra is an open pit. We're not sure how far it extends as a potential open pit. But obviously, because the costs of mining there are so low, that's one of the first ones we're going to drill. We wanted to tell the extension of it, the depth of it before we have to go underground. We probably would have been trying to move that forward over the last 1.5 months, 2 months. But we're only going to be reintroducing the exploration team in the next few days. So we're a couple of months behind on that one, but that's going to be a very obvious drilling target for us going forward. The other problem we have is in Mexico, and actually in Guadalupe as well, in the town, there's a real problem bringing in either ex-pats or even geologists from other parts of Mexico. So we're going to be a little slow until we get them in. And of course, if you're a gringo or Canadian geologist, going down there means you're going to get stuck for a 14-day sort of quarantine. And then coming back, you're going to get stuck for a 14-day quarantine. And that assumes that when you get to Zacualpan, the Army will let you in. So it's going to be a little slow start. But yes, those -- the Veta Negra will be target #1 for us because it's good grade -- appears to be good grade and it appears to extend quite a distance. So we want to chase that one. The other one is Chapanial. Chapanial has got gold and has got some great gold numbers. Most of this is -- we've done in sort of the sediments and some rock chip sampling. And as we follow up a couple of the creeks, there's some really impressive grades there. It's, if you will, a distance from, say, Carlos Pacheco, which is another gold target we have, but it's sort of in line with Carlos Pacheco. And it rises up on the sort of north side of the valley we call, Valle De Oro, valley of gold. And we didn't come up with that name. That's a very historic name. So it's an interesting area. It's certainly attractive. Once we finish off with the work there, and again, it's going to be a little slower because we can't bring all the crew in we'd like. It's going to be the second target we're going to get. I think that is -- the grades are very impressive. And it looks like a fairly big system at this point in time, or at least it covers a fairly large area. So those are 2. I've got probably 6 other specs we'd want to chase right now. But those 2 will be probably our first ones.

Okay. Great. And just a reminder for the readers, Chapanial was won recently in our March press release, which had over 90-gram per tonne gold samples, which is very exciting in any market. Question 6 has to do with the operational size. What price of silver need to be to get Guadalupe running at full capacity again? It seems like at 433 tonnes per day this quarter, that's about 80% of capacity.

Yes. We're obviously -- I mean, the price of silver in the $17 range is getting to be attractive. The fact is if anybody looking at the charts right now, the volatility is still extreme. And to set up and start mining is an expensive process on a -- in mine, even if it's already been established, to get back in there and mining on it. So I think at this point in time, we're going to do as we planned before COVID-19 hit us. We're going to do incremental increases, and that will probably mean in June, we will probably do what we were doing in sort of February, beginning of March area. And we'll probably try and add sort of in the order of 50 to 75 tonnes a day in the following months. And as we develop and work some of the targets we're working on, we'll do it incrementally. So yes, it's going to be late summer before we end with a consistent price to -- before we open up and say, let's go for it. What we've always said, and I'll repeat it, is we don't want to mine something unless we're mining it at a profit. And a lot of the industry will mine it for the status of being a big producer even if they lose money on everything else they produce. We don't like to do that. We're only here to make money for our shareholders and to generate the cash that's necessary to go explore this property.

Great. Last 2 questions. Revenue in Q4 was over $100 a tonne. Why was Q1 2020 only $84 a tonne?

Unfortunately, that's what we got down -- we get down to is the pricing. We price the smelter prices 2 months after delivery. So January and February, which we produced when we're running at $17 an ounce, was priced in the $15 range. So the end result is we were getting much less per tonne because of the lower price of silver at the end of the month of March. So as the price moves up, obviously, and that grade continues and the grades continues upwards, we're going to see that revenue rise. But the important part we did there, it was tied into the margin and the margin actually improved because of the mining costs. And that, I think, was the critical part where we actually generated positive margin in every tonne we produced. That's certainly the name of our game. And we will -- once again, as I mentioned before, we will be expanding our production as long as we can keep a positive margin on every tonne we produce.

Okay. Great to hear. It sounds like for simplicity, Fred, if silver stays positive in the $17-plus or even $19 like March for more than 1.5 months, 2 months, we'll be able to see the higher revenue then.

We're going to start cranking out more tonnage at that point in time. Absolutely.

Okay. Okay. The last question. Silver market is clearly heating up with a number of juniors or even peripheral projects raising capital. With Capire and some of the higher prospect joint venture potential that IMPACT has mentioned in the past, how will company realize additional value from this still very large 200-kilometer package?

Yes. And that is a problem. We've certainly got our hand in the cookie jar, and the problem is how many cookies can we pull out at a time. And we've had a very patient shareholder base that's sort of waiting for us to pull those cookies out. And I think what we're looking at, and we are in discussions with a couple of groups as to possibly joint ventures or option arrangements on some of the lower priority targets that we have. And some of them aren't necessarily lower priority but would require more capital, and that would be dilutive. So if we can retain an interest and have somebody do the work on the property under our guidance, I think that's the best for all worlds. And going forward, that's one of the things we are going to push as we go forward. It's hard to necessarily get confident in people to joint venture that [indiscernible] types or promote -- promise the world and can't deliver. So we have to be selective.

For sure.

Yes. I think it was disrupted badly. We had a few that were very serious in February, March. And of course, with the COVID-19 and the market sort of collapse, if you will, they pulled in their horns a bit. And I suspect we'll be talking to them again to -- as things get stronger going forward.

Okay. It sounds like a lot of good news and catalysts potentially after June when things reopen in Mexico. That's all the questions we have for this quarter, Fred. Thank you for -- everyone, for tuning in to IMPACT Silver Corp's Q1 2020 Financial and Production Results Conference Call. If you have any further questions for management, please feel free to submit the questions to [email protected], or call us directly at +(236) 863-2067. This is the IMPACT Silver's management team signing off. We look forward to speaking with everyone on Q2 2020 in a few months.