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

Good day, ladies and gentlemen. Welcome to IMPACT Silver Corp.'s Year-end Q4, 2020 Full Year Audited Financials Report and Production Call. Before we begin, we would like to go over our disclosure statements, followed by CEO and President of IMPACT, Fred Davidson's comment on the quarterly results and annual results, followed by a Q&A period. Certain statements in the following conference call regarding IMPACT Silver's Corp. business operations may constitute forward-looking statements. Such statements are not historical facts but are predictions about future, which inherently involve risk, uncertainty and could cause actual results to differ materially from those in the forward-looking statements. I would like now to turn it over to President and CEO of IMPACT Silver, Mr. Fred Davidson.

Thanks, Jerry. Well, IMPACT announced its results today about the [ full ] year 2020 with net income at $2.3 million or $15.6 million in revenue. The year was really a year of 2 halves, if you will. In the first half of the year, we struggled with extremely low silver prices. We struggled with the fact that the Mexican Government has shut down mining for approximately 2 months. So we had virtually no production, but we had costs for the 2 months. And overall, it was really tough first half. We made up most of that in the second half. And that is the tonnage was almost identical to the tonnage in the prior year, even though it was well down in the first half. And the grades we're approximating almost identical to the grades that we had in the prior year as well. So overall, it was a rather good performance on behalf of our team down in Mexico. They put the ore through the mill in record time. They worked very hard on ensuring that the grade was there. And at the same time, they really maintained control of the costs. And I think the second half was a very productive and very successful period, resulting in a profit for the year in spite of the first half of the year. Overall, our practice of cutting back on the number of ounces and tons we're putting through, that we started 2018, resulted in control of costs that were starting to rise with inflation in Mexico. So I think, in fact, the -- we're really quite satisfied with what happened in 2020. 2021 is going to be -- probably have its own difficulties. COVID hasn't gone away yet. And although it's not a major impact upon us, it is a constraint. And that will continue to encumber our level of activity, or at least just add a percentage of costs by everything that we try and do, because of extra time involved in doing those things. The mine itself at Zacualpan, the mill itself is especially running well. The mine at Zacualpan, the Guadalupe Mine, is well on its way to the development of the [ Machaqueno ] part of the deposit. We're running a underground track, and there'll be a train. It's very low-cost mining or transport once you get one installed, and we've had to update and fix up the shaft because of some technical difficulties there. And we should have most of that completed in this quarter going forward. Jerry, I think we should probably go over to some of the questions now, don't you?

Okay. Excellent overview, Fred. Thank you for that. Here are some of the questions we've compiled from investors over the last few weeks. And today, of course, on the cusp of the quarterly announcement and yearly numbers. Please feel free in the future to send questions to [email protected]. Call us directly on the direct line, (778) 887-6489, or certainly follow us on Twitter and social media at IMPACT Silver, underscore -- sorry, IMPACT_silver. Question one. Great quarter guys, and the full year. Net income has gone up finally to positive. Can we expect earnings per share to go higher than this, or is this it without further capacity increase?

Well, actually, the largest -- the impact or the largest effect upon our earnings per share is not necessarily production, but in fact is the price of silver and the FX attached to it, the -- between Mexico, U.S. dollars. We're looking forward to a fairly strong pricing this year but we don't expect to see it in the first quarter. Only because, as you can see from the volatility in the price of silver, it's very susceptible to influence. And I think we all agree there is an influence there. The overall operation for the year will probably be better than 2020. We are, however, doing a considerable amount of underground development at the moment. And when you're working on epithermal veins like these, and they're not particularly wide, you either do development or you do stoping, i.e., mining. One interferes with the other, and we're making a fairly hefty investment right now in the development so that we will have extra ore towards the end of the year. And that's the objective: you have to make the investment in order to get the results. You can't have them both at the same time. So earnings per share, I would hope that we'll be looking at earnings per share that'd be, sort of, at least the -- what we had for this year and perhaps even greater, if -- barring any unforeseen situation vis-à-vis silver prices or some issues with the underground development. The other thing we're doing here is the development we are doing is written off as we do it underground. And that's adding to extra cost for this quarter, and very likely into next quarter as well. Jerry?

Excellent. Question 2: Fred and Jerry, a great job on the team and on the results this quarter and the full year, looking forward to more. When will mine construction -- sorry, production capacity return back to normal at full capacity, over 535 at Guadalupe? It seems like you're still running at the 400s range?

That's a valid question. As I said before, what we're trying to do is focus on less mines where we can keep the margins better. And the advantage of something like the Guadalupe, is the transport costs are exceptionally low compared to transporting it in from 5 and 10, 15 kilometers away, which adds quite a bit to the price or the cost per ounce. So we're working on that and the end result is that development work is now. And until it's completed, I can't see a significant increase from Guadalupe. For some of the others, it's a phase situation, and we don't want to reopen a small 1 if we can avoid it because the infrastructure you set up on it, yes, it is time-consuming. But I would say that we're looking towards the second half of the year, where we'll be starting to raise the capacity of the mill.

Excellent. So question 3: Fred, was the [ $20 ] million cash on hand end of last quarter, I can't honestly remember when the last time the company had this much cash. Are you guys looking to buy something with it or simply add-on and build on Capire, as you -- as the company did last time?

Ouch. I suspect that someplace, somebody would probably [ tell ] us to [ put Capire in ] production and increase our total throughput. The fact is Capire was tested out, it's been stripped. We have a pilot plan on site. And when the price of silver was over $30, Capire was quite attractive. Unfortunately, the timing was -- by the time Capire was ready to go on a test basis the price had already dropped to $20 and was well on its way down. So yes, we mistimed it. If I had a crystal ball, I probably would've predicted that silver was going to drop to the [ floor ], and we shouldn't work on a higher cost project like Capire. The nice part of it is Capire has -- we've done the, all the infrastructure. We've done all the work we need to do to work Capire. Are we going to put it back into production? Well, we're doing three things with Capire that should give us a higher degree of confidence with the intention of improving the margins in Capire, and give us more resilience towards the price fluctuations. One is we are redoing the reserve report, and we have a more detailed report than we had previously, courtesy of the test mining we did. 2, we're looking at [ building ] ore sorting and the whole process of ore sorting, you take a material and you remove at least what you can call gangue, or the waste material, before it actually enters a mill process and now you can bulk mine. You don't need to do selective mining, which reduces your mining cost and it also reduces your milling cost. So we're going to be determining what is the breakeven for the Capire even with the current [ plan ]. If we put something like this on the front end of the [ plan ], it results in a higher throughput by, maybe you're getting 400 tons a day. You're eliminating 200 tonnes a day as waste and only 200 tonnes goes through the mill. If we do that, we've already substantially enhanced the capacity of Capire at very little cost and studies are being conducted right now on doing that. So a result, we don't intend to dump money on Capire. We do, however, intend to look at Capire as a potential source of additional profitable ore.

Excellent. Thanks, Fred, it's always good to have pointed questions, and we address positive and constructive questions all throughout, regardless. So feel free to send the questions in. Question 4 is about the grade on Q4. It seems to have dropped through Q4. Is that a one time thing, or can we expect on seeing it into Q1 and Q2?

Yes. That's a valid question. And it's part of the issue we're having right now at the Guadalupe Mine. A, we're doing development and that development is what they call development muck. We take some of it as ore level grade, but low because you're taking waste with it and we don't want to give that away. We're going to probably put it through the mill, it's just not as attractive. 2, the other thing we're doing is that because we're doing that, it drops the average grade of what was mill. We could throw it out. I don't think anybody wants us to throw it out. So we've been processing and the good side of that processing is it means we're developing stopes so that they can be mined in hopefully, this latter part of the second quarter. And that way, towards the end of the second quarter or the -- maybe into the second half, we'll be able to improve capacity -- or start filling that capacity in the mill. And at the same time, we will be coincidental with stoping, which tends to be a higher grade. So we'll be looking at both of those. The other side is we are a small mine. So you do get fluctuations in where you're mining. We've seen this before. We'll see it again. But the average last year actually resulted in [ 1 gram over ] the year before. So you can see that [ these things ] do fluctuate and they'll continue to fluctuate in the future.

Okay. Excellent. On question 5, about 10,000 meter drilling. The investor asks that why is Impact committing so little meters when there's nearly $20 million in the bank, and there's specific big, large area on these projects we've talked about for years?

That's a really valid question. First of all, there's resources involved here and the resources are more than just cash. The resources are access to equipment, resources are access to trained geologists and being able to develop a number of these targets till they're what they call drill-ready. We're saying 10,000 meters, the fact is that's the very basic meters we hope to drill this year. With a -- as a test of one of the targets we have, we would probably assign a separate range at that target and keep on drilling. So the number of meters can go up. On the other side, we also recognized that the startup was going to take a couple of months. So it wasn't going to be a 12-month drilling season, it was to be more like a 9 or 10 month drilling season. So we've got to push those rates pretty hard in order to get that. And finally, that 10,000 meters doesn't include the underground drilling. And underground drilling, I know I mentioned this earlier, is written off as part of the operating cost at the mine. And so we'll see, that's the pressure on the operating cost. Because that's making ore we normally define that as an operating cost. And so the good, there will be additional meters drilled this year. But there will be the surface meters of the 10,000 meters we're talking about.

Okay. Excellent. Question 6 about the JV with Nuevo Taxco and Southwest portion of the IMPACT. Pantera does Red Oak [ shell ] be finally listed. Do you now have any visibility on when they'll be drilling or working on Nuevo Taxco? It seems like these are the same guys from Oroco resource, which should mean that they can raise money. Can you give us any color on this joint venture?

Yes. They did raise money, at least far as I've seen. The project is, I would say, drill-ready for a short-term program. But I think we're taking a little longer-term perspective. This is a valuable property. I'm not going to tell them what they're going to do, but my feeling is they're going to do some geotechnical work here as well. Because although it's 1,000 hectares, some of it, in fact, all of it, [ had not had ] geotechnical work on there. So they could identify other zones that don't come to service, which is very practical thing to do. Certainly, they are looking at a drill program. And again, it's up to them to decide on the drill program and the size. But when you drill -- and this is 1 of the things that slows us down in drilling for ourselves as well -- you don't want to do 2,000 meters before you get a single assay back from the lab, because you may not be on the structure you think you want to be. So generally, what you like to do is shorter programs, get the results back then readjust what you're doing for, say, the next 500 meters. And although that slows you down, it improves the accuracy of what you're doing. And I suspect they're looking at this the same way: while they do the geotechnical, they may run a program which might be 500 meters at a time. In fact, I think that would be very practical way of doing it. They could get their results back, and lab results are taking a good time. But then when they go to drill again, they'll have a updated knowledge of what's happening underground, as opposed to drilling blind. And maybe drilling in the wrong spot, or not getting the results they think, and wasting another 1000 meters of drilling.

Okay. Very cool. Last question we have, Fred, specifically on Capire. In the past, company management [ assessed ] Capire at $20, plus it makes money. Last I checked, silver prices are above $25 an ounce even with the recent pullback. What's next year? And why are the DMS various studies taking so long?

That's a good question as well. The DMS studies, at least the first pass on the serious DMS studies, have come in. And what we've concluded is that the payback on the capital investment didn't really warrant going DMS and part of that's the cost of the access to water. Although there's adequate water for a mill, DMS uses a lot of water, and this is a fairly dry area of the property. So it's going to put pressure on water takedown, and we have to be very considerate of the other people in the area, such as the farmers, so they don't want us to drain the river just so we can do DMS. Secondly, [ I'd say ] the DMS installation costs were probably higher than we anticipated and the savings were probably lower than we anticipated. Now that's not the only ore-sorting system. And right now we've gone to another system called XRT, and that's a dry sorting system, where the material is actually -- it comes over the belt and the lower grade material is ejected. What [ we sees ] this type of methodology so valuable, is that rather than mining and the DMS we have in that area is a series of lenses. So when you're mining it, you have to be very precise mining it or you're putting a lot of, basically, earth in the mill or alternatively you develop a system like the XRT or DMS, where you're mitigating that material through some technical system. And XRT, it appears at this point in time, at least the initial pass, is fairly attractive. And by doing so, you're only processing a percentage of what you're mining. So we might have a 200 tonne a day client, but you might have an XRT system that handles maybe 400 tonnes a day, rejects 200, and only puts 200 through the mill. That substantially can reduce mining costs and reduce milling costs. And right now, we have a couple of tonnes of material at the laboratory being tested. And if it goes as we hope it goes, we would like to -- before we put it in Capire into production and install that sort of system, what it does is it improves the margin and makes us a little more resistant to fluctuations in the price of silver. You'll recall that Capire, we got it up running when it was $30 per ounce. And before we got more than 10,000 or 20,000 tonnes in the mill on a test basis, it was under $20 an ounce. We want to make ourselves a little more resilient to that. And that's why we're using the XRT -- or hopefully the XRT.

That's all for the questions this quarter, Fred. Obviously, anybody who has additional inquiries for [ plants ] or any questions for our management, they pass over for the next quarterly call. Please feel free to email us at [email protected] or call us directly at (778) 887-6489. This has been a quick wrap-up of our annual 2020 audited financials and production statement call. We welcome you for any further questions and suggestions. So we look forward to seeing everyone in a month or so for our Q1 2021, for the period ending March 21, 2021. When you have a chance, please give us a like on social media, follow us at impact underscore silver on Twitter. Any further suggestions, we would appreciate your following. Talk to you soon.