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

Good morning. Dear, ladies and gentlemen, welcome to IMPACT Silver's Year-end Period Ending December 31, 2022, Financial and Production Results Conference Call. Before we begin, we would like to go over our disclosure statements, followed by Mr. Fred Davidson's comments on the quarter results and the 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 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 it over to the President and CEO of IMPACT Silver, Mr. Frederick Davidson.

Thank you, Jerry. It's been an interesting time in the last little week or 2. Let me, first of all, summarize the year-to-date because I think that's probably as relevant as anything. We reported an income of about $16.3 million for the year, and that was down from $17.7 million last year, primarily because of the drop in the price of silver of roughly 13.6%. On the good side and the positive side, we maintained positive mine earnings of about $1.2 million, again, granted, it was $4.7 million from the prior year, and those earnings, of course, were before depreciation and amortization. But it demonstrated that we were able to address the substantially reduced price of silver and the inflation we're seeing in costs across the board. And we're going to continue working on those costs with the objective of improving the operating margin at the Zacualpan mine. And in spite of the fact that the prices were working against us in 2022, we conducted a fairly extensive exploration program of about over 20,000 meters of drilling, extending some of where we're going to be potentially mining for the next 4 or 5 years and, at the same time, I think, generating some enthusiasm on -- even on the greenfields onto [ my ] crew for a potential down the road -- in near future actually. So very simply, we did about 632,000 ounces, actually 633,000 rounded number. That was up from last year, about a 2% increase. What we're hoping to do, though, is to work on grade and tonnage to improve overall revenues and, at the same time, keep that pressure on our operating costs. Our average grade for the year, interestingly enough, was exactly the same as the prior year, 159. Going forward in 2023, we expect to see that grade vary, depending on where we are and which mine. But at the same time, we're hoping to bring some addition and in terms of overall average grade equivalent, if you will, I hate using that word, as we introduce more gold into the street. Final amount of gold per tonne, what have you, still outstanding because we're doing exploration in that very area. But yes, where our objective is to increase the average grade up to the almost 178 level and push on cost. And I think going forward, we can do that. We will reduce our exploration budget at Guadalupe this year, primarily because we identified a number of targets that we wanted to pursue, and we'll be trying to develop some of those from underground rather than just growing. Overall, I think we're still seeing production coming from the main mine of Guadalupe. But you have to appreciate, Guadalupe was first mined in 1529. So it's a real producer. We're starting to also open up the Alacran, which is one that was even earlier than Guadalupe in 1527. And that one has been giving us some indications of gold and as well as good grade silver. And I think over the year, our underground development and exploration will expand that and provide additional feed for us going forward. The San Ramon mine is an interesting one. As you know, traditionally, we've mined the San Ramon and then we mined San Ramon Deeps. And now we're into area called San Juan South, and it's open in a couple of directions. It's quite deep and quite isolated. So development costs will be incurred over the next while as we open that area up. But it remains open. And San Ramon has always given us good grades, and we expect to see that continue over the next little while. Okay. The real question is going to come up, and has come up, and I think we identified it, is we have made a contract for the acquisition of Plomosas, which is a zinc-lead-silver target up in the state of Chihuahua. First of all, the question comes up, why we're chasing that? We're chasing CRDs, now carbon replacement deposits. Carbon replacement deposits are the second largest source of silver in Mexico. And this is probably the only one that would even be available. All of the rest in the area are majors. And these deposits tend to be deposits for majors. So our interest in this project going forward is that it's not only potential production with very high-grade tonnages, 13% zinc translates to a very high number per tonne. But it also offers the opportunity for extensive exploration and size. So we're going to pursue that. Now the terms of the agreement were basically at USD 6 million, half of which is in cash and half of which is in shares. There is a 12% NPI, which is a net profit interest, and that is after all of our expenses incurred on site. So it's fairly kind to us. And the other side is there's an NSR of 1%. That's the only things that are hanging off of this, it's a very high-grade deposit. It remains open. Historically, there's about a 900,000 tonnes already identified. We're obviously going to drill that off to take it to a resource under 43-101, but we're also going to be very aggressively drilling over the -- over 7 kilometers strike length of this deposit. And I think that's going to provide some very exciting information for us going forward. Going forward then, what we're going to offer the shareholder is this -- if you will, a hedge or an option on price of silver. And that is we'll maintain our production 600,000 to 700,000 ounces. But with the capability of an uptick in the price of silver, we can expand production readily there to up to close to 1 million, as we have done in the past. And if the price of silver extends further, we would look at opening up the Capire deposit, which we have a mill sitting on already. It's a lower value deposit, and it needs a higher price of silver, but it could add probably in the area of another 0.25 million ounces. So we've got that on one side. And on the other side, we have -- and exploration, by the way, still remains at the Zacualpan mine -- mining district. But on the other hand, we have Plomosas, which has almost immediate production and at the same time, extreme exploration potential. So yes, it's going to be a very busy year for us. I think there will be lots of news coming out, a lot of information, and we'll be rolling up our sleeves to make this happen. Jerry?

Great. Thank you for the overview, Fred. Here are some of the questions we compiled over the quarter from investors and stakeholders. Please feel free in the future to send questions to [email protected] or call us directly at +1 (778) 887-6489.

Question 1, Fred. Reasonable quarter, guys, despite the silver prices dropping over 2022 and global turmoil. The IMPACT team, what's expected in the Guadalupe production and operations in 2023, considering the size and cost inflation?

Yes, actually a really good question. We're looking at trying to keep sort of a production level, which brings us sort of cash neutral or cash positive at Zacualpan. And right now, we're in the sort of 650,000 ounces, plus whatever we bring out in the way of gold, which will obviously may not even look more attractive if we talk gold equivalents. We're fighting costs. And there's no question about it. Throughout the industry, it doesn't matter what country you're in, costs are rising in the mining industry fairly dramatically. And at the same time, we're fighting another awkward situation, and that is the Mexican peso was strong, which means our cost, relative to the U.S. dollar, are going up. So it's going to be a fight for the year. I think we can manage it. And we've certainly demonstrated, I think, last year, with the fact that we were able to produce positive cash flow from the mine. But at the same time, it won't be easy. The upside is we have the speculative advantage of silver. We see a dramatic move in silver. We can relatively quickly expand overall production.

Great. That's excellent, Fred. Question 2, when will Plomosas acquisition close? And what -- why did the operators -- previous operators not operated well? And obviously, what will IMPACT and the team do differently?

That's -- well, the first part is easy. We're anticipating and closing in the beginning of April. So that's that. It's hard to criticize somebody when you're sort of sitting in a distance. But they basically ran into some bad luck, and I think they were undercapitalized. The bad luck was they were trying to manage it. That's an Australian group. And they got hit by COVID. And of course, they couldn't attend the site. So you're managing it by 16 hours away in terms of time. And that's tough to do. And I think the team they had at the mine site were okay, but none of them were really the real leaders you need to operate a mine. So there was those 2 things in terms of management. The other side of this was capital. This is a small mine, yes. But the value in this thing is not as a small mine. The value in this thing is as a potentially very large mine. And they didn't have the capital to push it through. So they were trying to do, let's call it, a boot scrapping. And you can do that in an epithermal vein situation. But when you're talking a CRD, you need to spend some serious money. And I think they were undercapitalized. And the end result is the very things they needed to improve performance, the very things they needed to expand, what have you, they didn't have the money even if they could. So it was a combination of money, circumstances, COVID-19 and the local management team that worked against them. Now we have an excellent management team. COVID-19 is not an issue because we're in Mexico, so there's not as if we can be held from traveling like they were in Australia. We believe that we're in a position that we are capable of financing, not the acquisition. I mean, we can do that out of working capital, but rather the -- develop the potential of this mine, and that is size, size with continued grade, probably one of the highest grade zinc mines certainly in Mexico. And it's one of those that offers us the opportunity to also, in the process of exploring for zinc, we get the silver free. And as we go North in this structure, Northwest, we're running into a change in mineralization, which hasn't been tested yet. And that change in mineralization could lead to higher percentage of silver, higher percentage of golds in the ore. So again, they've explored 7% of the strike points of this deposit. We see it as an ideal opportunity, especially with our low-cost drilling that we do in-house. So yes, I think people will be very pleased when they can see this. Now it's not going to be quick. It's not going to be easy because a lot of things have suffered from the capitalization. And we're going to have to spend some serious time and some serious money, basically restructuring how things are operated, bringing things up to proper operating capability and serious drilling on the property.

Okay. An excellent question and a reply from the shareholders of Plomosas, lots of question on that, obviously, Fred. Question 3, obviously, heading into bit of a global slowdown here, why zinc-silver mine now? And will this drain cash and resources from IMPACT in the near term?

Quite frankly, when you think of 13% zinc on -- per tonne, that's some of the highest grade ore we see at either mine. We're talking over $400 rock. So why zinc? It makes us a lot of money. Two, it comes with silver. So the silver is effectively free. So yes, we're going to continue working at Zacualpan. We're going to -- we've identified targets there. We're going to be opening up things like San Ramon South. So we're not losing a degree of activity there. We're gaining, if you will, a second deposit, again, CRDs, which do have precious metals in them and are generally large. And a case in point, in the immediate vicinity -- well, not immediate in relative terms, we have Cinco De Mayo. We've got Peñoles. We've got GoGold. We've got Grupo México. We've got Newmont, Goldcorp. All of these that are mining CRDs in the Chihuahua district. So this is one of those Chihuahua districts. It's got size. It's got an indication of grade, and it happens to provide silver as well as very high-grade rock, if you will.

Okay. Excellent. Question 4, Fred. Will grade at Guadalupe stabilize at this 160 grams per tonne or even improve with some of the recent exploration results and high grade we've been seeing?

Yes. I think the grade at Zacualpan is going to be -- for the silver grade will be in the area of about 160. We're expecting to enhance that grade with the addition of some of the gold that we're now starting to see coming through. And as you know, there is this underlying gold-copper district, appears to be at least. And we're certainly seeing it in places like actually Alacran. So we're going to be exploiting that because at a ratio of 80 plus to 1, that really adds to the overall sort of grade equivalent. And that's going to be the objective for the next while is to mine at silver at about 160 grams a tonne. And hopefully, to boost that up at least another 10 to 15 grams per tonne with the gold equivalents -- the silver equivalents.

Okay. Question 5. There are news and some hearsay or even some confirmed news that mining or some majors are now leaving Mexico with some of the recent changes, while IMPACT is adding a second operation at Plomosas. What would be the rationale beyond the profitability and the grade?

Well, that's a good question. I think people have to recognize that mining in general worldwide is under additional burdens from various, let's call them, stakeholders. And that doesn't exclude places like Canada or United States either, where permitting can easily take 10, 15 years. One thing about permitting in Mexico, it is faster. Two, it has a history of mining. So there's a cultural reference that certain other countries don't recognize. It has a talent pool of people that we can engage at reasonable prices. So all of those are working in favor of why we're there. Yes, the government, like a lot of other governments elsewhere, are trying to sort of get blood from the stone, if you excuse the expression, blood from mine. But it hasn't reached the point where it's impressive. It's just frustrating. And by hanging in there, and in fact, this particular acquisition was done at bargain prices. And the reason is we have the talent, et cetera. We understand how to work in Mexico. I don't think our predecessors on the project did. And it will probably provide additional opportunity down the road. As some companies abandon Mexico and go somewhere else, there will be excellent opportunities to go and make further acquisitions right time and right place. So yes, tough place to work. There's a lot tougher places in the world. And you can't turn downgraded. That's one of these things that something like Plomosas offers.

Okay. Excellent. More questions on Plomosas. Tell me if you're sick of these already. Fred, question 6. The exploration update on Plomosas, are there any additional drilling and exploration plans here in 2023?

Oh, yes, yes. We've got a sort of historical resource there of about 900,000 ounces -- or tonnes rather. It should be out. What's interesting is we're going to do a twofold program. We're going to enhance that resource. It doesn't stop, which is this -- it's just that they didn't drill any further, so they couldn't attach additional values. So we're going to enhance that resource as one of our primary functions. And we're going to take it to a level that qualifies under 43-101. So that's number one. Number two is, as I mentioned earlier, we're talking a district that's sort of 7 kilometers long or a zone that's 7 kilometers long. They worked and explored probably 600 meters of it. So there's a huge opportunity. We have the capability. We have the talent pool and we're going to be chasing it. No question. And I expect that we'll be having some really interesting results coming out in the next 7 to 9 months. Understanding, though -- and this is probably one of the issues, yes, understanding that we have to understand the deposit more, earn better. And in that process, we're going to have a 43-101, and we're going to have a better indication for the shareholders of the potential going forward.

Great. Last question on Plomosas. What kind of range of production size in either zinc or silver equivalent spread will we see from Plomosas in 2023, 2024? And obviously, will any sort of updates come out specifically on Plomosas on a technical basis as well?

Yes, it's going to be a technical report initially. The situation at this mine, because it wasn't the capital, because it wasn't the management team on site, the infrastructure, et cetera, has deteriorated significantly. So -- and we have some issues with the mining methods, et cetera. So we're going to be rolling up our sleeves and looking at a two-stage program that we're anticipating going forward. The next -- oh, it's going to be at least 7 months. We're going to be doing things that are necessary to get the production. It's currently running around 70, 75 tonnes a day when it runs, to get the production up to about 150 tonnes a day running at 13-plus percent zinc. And then the next phase, and it will take another year to do it, will be to get up to about 300 tonnes a day. Now that's a lot of zinc coming out because if you think of a conventional zinc mine that runs at, say, 4%, we're running at 3x to 4x that grade. So even though we're only doing 300 tonnes a day, it's almost as if you're doing 900 tonnes a day in a situation, given we maintain that grade. So it will be kind of interesting going forward. I think we'll have a lot to talk about, but I don't think there should be any expectations that it's going to impact revenues in 2023 very significantly, because this thing has to get cleaned up. So we will be generating something, but you won't really see the earnings power of this thing until 2024. And going forward from there, potentially, 2025 will be at a sort of almost 4x the level of production they're doing today.

Excellent. And lastly, to close off, with silver prices looking more positive along with gold in recent weeks, are there any more plans for Capire, given that Plomosas is obviously front and center?

Yes. As you know, we've been working on Capire. We've got the XRT studies, which showed us how to enhance the grade going into the mill. Last year, we just completed additional drilling, a couple of the deposits in the area. And we're hoping to have a better idea once the studies are completed of the additional tonnage that we may have been acquired in the process. And that's going to determine ultimately the size and basically our mining methods. Capire will be sitting on the sidelines, I think, only because Plomosas is that much bigger and that much better. Capire is a [ Gernomens ] type mine and at the right price. And it's now depending on inflationary costs, et cetera. I don't think we're there yet that we'd see a sufficient margin to open up the effort on Capire. It is a higher cost mine. And it's the one that is sort of an option on the price of silver in the future. Because the price of silver goes up significantly like it did last couple of years where we've seen it go up to, say, $30. If we're confident it's going to stay in that range, we'd open up Capire and add that 0.25 million ounces of silver thereabouts of sort of on blinks, I guess, of what the production level would be. And then sort of equivalent again, things like lead, zinc, copper and gold. So Capire is a bit of a teaser. But right now, our priority will be the Guadalupe, which would be the one that we'd expand the most in terms of uptick in the price of silver. And the other one is in the current situation, Plomosas, which has got a mineral product that appears to be profitable even now.

Excellent. That's all the questions we have for today, and this has been a wrap-up on the 2022 full year financial and production results for our investors. If you have any questions or would like to submit questions or call us directly, please do so at +1 area code (778) 887-6489 or send us an e-mail to [email protected]. Our website has a full range of information for our acquisition on Plomosas, our current operation at Guadalupe. And certainly, follow us on Twitter and various social media at impactsilver_ -- sorry, impact_silver. Again, this is Jerry and Fred signing off. And we'll be speaking to you pretty soon for our Q1 2023 production and financial results. Thank you for listening.