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

Good day, ladies and gentlemen. Welcome to IMPACT Silver Corp.'s Q2 2024 ending June 30, 2024, Financial and 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 the Q&A period. Certain statements in the following conference call regarding IMPACT Silver's Corp.'s business operations may constitute forward-looking statements. Such statements are not historical facts but are predictions about the future, which involves risks, uncertainties 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, Mr. Fred Davidson.

Thanks, Jerry. This has really been quite an exciting quarter for us. It's very definitely transitional. And first of all, let me sort of summarize it, and then we can get into more detail on it. Revenue was obviously up significantly, $7.7 million from $5.5 million in the comparable period last year. We had money loss, but it was down to $0.22 million, ignoring the amortization and [ depletion ], which is a fairly dramatic improvement over the prior quarter as well, although the comparative year was $0.9 million in 2023. The net loss was $2.6 million, but that has to be taken in context, and -- one of which is the deferred income taxes and foreign exchange expense, was almost $0.6 million on the [ self ]. And more than that, because the mine at Plomosas is not up to the economic level of production, it was only running at 100 tonnes for the quarter, the costs or losses that we develop as we developed the mine as we make those expenditures that are necessary to get it up to the 200 tonnes a day have to be expensed rather than capitalized under the new accounting system. So a little frustrating. But overall, it was a very positive quarter for where we're going in terms of the transition. During the quarter, we raised a net $8.8 million -- $8.6 million, and that was used for good stead. It refurbished the cash on hand. It also allowed us to be very aggressive on our drilling. And to date, we've drilled for the first 6 months at both mines over a total of over 20,000 meters of drilling. So it's a serious dedication to exploring the potential of these 2 rather exciting, if you will, mining ranges or districts. And that's going to continue aggressively because the reason we're here is not just to produce but to also develop something that has the real potential to get everybody's attention. The production at the mine at Zacualpan was a little lighter, only a few hundred tonnes lighter. What we found there is that we're working on the shaft. It hasn't been worked on, say, for about 40 years. We've had to rebuild some of the steel in there. That slows down. We have to close down for half [ of ] 1 day during the week going. And that will continue for the next few months. But at the same time, we're going to be drawing more ore from other mines where we don't need to [ shaft ]. So looking forward to the second half of the year, we expect to see the production maintained or increased. And also, we're going to be seeing more gold coming back into the system as the mine Alacran is brought back into operation. You may recall last year, towards the end of the year, we're not happy with the recoveries we're getting from the gold production. We hated to put too much of it out in the tailings. So we stopped mining at Alacran. We did some extremely good metallurgical work and -- where we started with much higher recovery. So we're going to start seeing more gold coming through in the second half of the year at Zacualpan. Overall, we saw an uptick in the cost per tonne, and that was somewhat of a unique situation for the quarter. We were in union negotiations starting in the first quarter. And when they were concluded in the second quarter, there was a retroactive payment to the union leaders through the union itself for severance in certain cases, for bonus in certain other cases and overall increase. And that retroactive aspect of it bumped up the wages for the period. The other thing we're seeing here, too, is that the Mexican peso has been extremely strong compared to the Canadian dollar. And on translation down, we're getting hurt or hit on nose the by that. So we're seeing some FX impact in what we're doing. But overall, Zacualpan is [indiscernible] ore, it's looking fairly solid. And going forward, we've got a growth program on a couple of very interesting targets, including the possible extension to some of our bigger mines. And at the same time, we're developing one called the Kena, which is a new discovery underground, and it's very high grade, very high graded at least compared to some of the other mines, and represents a unique opportunity to both increase throughput and increase the average grade going through the mill. Plomosas is a different issue. It's been a bit of a bear. We're running about 6 to 8 months behind in our development there only because of the conditions underground, et cetera, which made it very difficult to increase production without solving these problems. It's a bit of a [ whack-a-mole ]. You solve one problem and another one pops up. But we did do a significant increase in production in tonnage. The first quarter, we mined about 3,600 tonnes there. Second quarter, we mined 9,200 tonnes. And third quarter, we're seeing -- we'll see an uptick on that again. In the fourth quarter, we're hoping to reach design capacity of about 200 tonnes a day. That makes a heck of a difference, needless to say. The other side is the average grade, it as good or better than we anticipated. Up to the end of the second quarter, our average zinc rate was running 14%, led was 8.7%, and silver was 43.7%. That's amongst the highest of the zinc mines that are kicking around. So good production, good tonnage. We're increasing the tonnage throughput. Our costs are probably going to fall more as we get more efficient. And as you increase your tonnage, certain costs are fixed. So we're looking to improve the overall cost of that operation. Meanwhile, revenues should be increasing fairly substantially going forward for the balance of the year. So it is, it's a really transitional period. In fact, our operating costs between first quarter and second quarter were actually lowered by $0.2 million. So we're running at scooping [indiscernible], we're running it tight. Going forward, we're going to continue to be aggressive in terms of our exploration. We have 2 very exciting exploration districts that are only partially explored. And as the case in Plomosas, literally only 10% of the 6-kilometer straight length of this deposit has been looked at. I shouldn't call it officially a deposit, but the mineralization extends over 6 kilometer distance. At the same time, at Zacualpan, we still have a dozen or so excellent mineral targets to drill. We still have to deal with the copper-gold district that appears to be underlying the silver-lead-zinc district. And as we go, we're going to see -- depending on the price of silver, of course, increased throughput. And the idea would be if the price of silver goes up, we're bringing in our more marginal mines and increase our throughput. As the price of silver draws down, we tend to pull back and only deal with those that have got a decent margins. So you'll see that fluctuation on an ongoing basis year-over-year. Both of the mines are well equipped, the crews that are well and truly experienced. And we're seeing the -- going forward, we're seeing a fairly exciting exploration plus production coming towards the end of this year. So overall, our target is the end of the year, where we hope to, as I say, be at economic levels for both mines and [indiscernible] a little bit in the bank, meanwhile conducting a very aggressive exploration program across the board. We remain to have excellent working capital. And at the same time, we still have no long-term debt. So we're running a very prudent balance sheet. And I think going forward, we're going to see some improvement both in the market for the silver, but also in zinc. And as recent surveys have indicated that both are critical minerals, silver, everybody knows what it is and why. It certainly in with solar panels, et cetera, very attractive. [ Very few people ] will recognize that zinc is a strategic metal. And in it or with it, we look at something like a wind farm. And virtually every tower that goes up requires a couple of tonnes of zinc. And the other one probably even more dramatic and more important, the zinc oxide batteries, excellent source and much safer than a lithium battery in terms of storage facilities. So there is a demand for both. And we see that ultimately as Plomosas, for instance, is up and running, the zinc-lead sales will literally subsidize the silver, which is running about 1.5 ounces per tonne. We subsidize it, we'll be literally producing the silver for free. And we anticipate that year-over-year, the silver production will be, at least next year, about 100,000 ounces additional to our silver production at Guadalupe, which is going to ramp us up even more in terms of our overall silver production. Jerry?

Excellent. Fred. Thank you for that overview. Here are some of the questions we compiled from investors this quarter and in recent days. Please feel free in the future to send questions to [email protected] or call us directly at +1-778887-6489. Question one, Fred and team, great to see the revenue increase finally, 40% plus at Plomosas and overall revenue jump to CAD 13 million for the 2 quarters. What's the realistic run rate of the new mill on top of the Guadalupe?

The top of the Guadalupe or Plomosas?

I guess Plomosas adding on to the...

Yes, yes, that's actually, sorry. Yes, we're looking at -- right now, we're only -- the quarter was only at 100 tonnes a day, and that was about $1.5 million, $2 million in revenue. We're looking at getting up to 200 tonnes a day, but we see the -- it will probably be more like $2.5 million a quarter. So on the year-to-year, it should be about $10 million, depending on price, et cetera, an additional $10 million through our traditional sort of $15 million that we're getting from the silver sales.

Excellent. Question two, while the revenue has gone up, cost has gone up as well to $3.8 million, $6.5 million for the 2 quarters on production costs. This is according to Note 11. Why is that? Wages also has gone up quite a bit from 3 to 6 in the same 6 months 2024. Are a lot of these onetime start-up cost?

Well, some of them are start-up costs, as I mentioned the other issues such as the settlement that we had to do with the union. The other side is, Plomosas right now is running sort of as an equivalent to what Zacualpan is, but about 50% of that isn't actually producing ore, it's doing underground development, its rehabilitation of the site. So you're right, it's very much the start-up costs. The rate will be increased. In fact, I don't think we're going to see a substantial increase in costs at all as we go from 100 tonnes a day to 200 tonnes a day. And that's where the real leverage is. Once we get back that past this stage of dealing with the various go-throughs as they pop out of the hole and we have to whack-a-mole of it, we're seeing that the increase in production, for instance, for the quarter didn't result -- sorry, I didn't -- wasn't a result of -- there was no increase in the operating cost. So we doubled production, and yet our operating costs didn't go up at all. So we're going to see that leverage coming as we get up to the more efficient levels for Plomosas. For Zacualpan, as I say, it was the union agreement. We're going to obviously pay the increase in union fees and everything else that we do anyhow. But that one-off settlement impacted the second quarter.

Okay. Sounds good. Question 3, it sounds like the investment has gone well on the exploration side and mining asset during the quarter, according to the MD&A. Similar to the last question, is that more or less it for the Plomosas?

Well, we're doing a lot at Plomosas because of the real potential there. We've drilled over [ 28,000 ] meters of drilling between Plomosas and Zacualpan in the first half of the year. That makes us a pretty big and active exploration company on our own right. And we're there for production, yes, but we're also there for that, if you will, home run by getting a discovery that's something bigger than what we have right now. And I think people would be a little upset if we didn't do exploration because sustaining exploration is one thing, and the other thing is discovery exploration, and we're definitely focused on that. There will be CapEx as well, and the CapEx is designed to keep or even reduce our operating costs at the mine, at both mines for that matter. Remember, and I did mention that we're redoing the shaft on the Guadalupe mine, that will be finished probably over this quarter. Meanwhile, at Plomosas, there are certain efficiencies in this whack-a-mole problem of issues coming up that the previous operators have left unattended to and have to be dealt with. So I'd say that there's going to be CapEx. It's going down obviously as we get more and more things resolved. But at the same time, there will be aggressive drilling. And the intention is there is to hit the big one.

Okay. Excellent. Question 4 specifically addresses the gold and lead production this quarter. Why did the numbers drop much this quarter for [indiscernible] down 34% on the lead, 70% on gold?

Yes. Well, the gold is -- it's probably the one that everybody is more interested in, but let me sort of get into that. What it was, we were mining at Alacran last year, and it was a good gold producer. The problem we're running into was the recoveries were low and the end result is we were sacrificing a significant amount of the goal to tailings pond. So we stopped that in the fall. And what we did as we did some extensive metallurgical studies and had to change the facilities slightly. And we've just recently restarted the Alacran. And the idea is of the gold that we mine, we want a lot more of it to actually get into our hands as opposed to get into the tailings pond. And we're seeing that right now. We're seeing an uptick in recoveries. I think that's critical. Nobody is really upset when we make -- we produce gold, there are a lot more upset when we don't produce gold or lose it. So that's what we've done. And I think the gold is working quite well for us or will be working quite well for us for the balance of the year. The other side is the lead. And lead is it's -- we're higher up in the system at the moment where we're mining. And I think we've talked about it before. The system was composed of high-grade silver near surface. As you go to depth, the grade of the lead and zinc picks up, and the silver grades fall off. And you get down to 300 meters, you're primarily mining base metals with some silver. What we're doing right now and where we're mining right now simply doesn't have a lot of lead, i.e., there's more silver in it. And that's going to fluctuate as we go forward. The new structure area that we'll be mining in, Kena, looks like it could be fairly attractive and it's got definitely higher-grade silver, and it does not have as much lead, but I won't apologize for that when we're getting the higher-grade silver. It's really where we are in each individual mine. And [ lead ] will fluctuate. We aim primarily for the silver and gold. And whatever we get in the lead is a bonus.

Okay. Great. Question 5 addresses the top line and margins [Audio Gap] but the [ 17% ] plus increase to direct cost per tonne to over 153 this quarter versus 130 last year at the same time really offset that optimism, even with higher solar prices. Can we expect this trend to continue? Or has inflation start to come off a bit?

Well, as I mentioned before, that direct costs included a fairly large union settlement in the second quarter. And we're seeing the issues of the Mexican peso, quite frankly. Fortunately, our revenue tends to go up with it. And when the revenue goes up, there's still that margin in between the 2. And you'll see that the costs were 153, but the revenue was 168. So we were getting the spread in there, not as much as I'd like to see, $15 a tonne. But in the prior year, it was $25 a tonne. And most of that is probably the union settlement with the issues of FX in the quarter.

Got it. [Audio Gap] price of the too many commodities. We would think that at $29, $30 silver or at $2,700 a tonne zinc, we can do okay. What do we need these prices to be at?

I think those prices are bad prices they aim for. It's obviously a function of grade in any one time. And going forward that we're focusing on something a little less than that in terms of silver and a little less than that in terms of zinc, in terms of where we want to be at a breakeven plus. So if we got $30 with our current grades, if we got $2,700 per tonne for zinc, we'd be quite happy at this point in time. Is it going to be a home run? No, of course not. But if silver goes to like it has in the past, up to $35 or something, all of that was [ great ] to the bottom line. So our objective is, what do we have to live with now, what grades do we need. And when we mine, we reflect on that, and that is we try not to mine something that at, say, $28 doesn't generate positive cash flow. So it's cash flow as our focus. And if we're into a structure, which [ is ] $32, we obviously just don't need it. We put it aside, we leave it, and that's a virtue of having 4 mines supply plus an open pit supply in the Guadalupe mine, for instance, or a mill. And we've certainly done this before, where the margin that you're operating on is a negative, I mean we defer it. We'll go back in there when the margin improves. And we've done that several times over the life of the mine.

Okay. Got it. Question 7, big picture. Fred, what's the expectation for 2024, 2025 looks like with Plomosas at full capacity?

Well, our ambition says that -- let's look at 2025 because we're just building up to the full capacity in 2024. We've actually tested the mill. It can run that even higher capacity, about 250 tonnes a day. We're not sure how much of that is sustainable, but it did run very successfully there. It's, again, a matter of developing underground to feed the mill. We're comfortable that by the fourth quarter, we're going to be capable of feeding 200 tonnes a day to the mill. We still have to make development expenditures because, again, the predecessors didn't do any development. So there might have been a resource available or I guess, we'll officially have to call it potential mineral feed or mining feed available. But it hasn't been developed. So to develop it, you have to spend some serious money and time to underneath expose it and just get it ready for mining. So that's going to be the big constraint. How fast can we access that and develop it while at the same time, mining for production as well. And that, we run into in any smaller mine. When you're producing, you tend to interfere with your development. When you're developing, you tend to interfere with your production. So it's a bit of a cycle. And at this point in time, we're looking at sort of the 200 tonne a day as our target. But with the intention of -- if our development is quick enough to be able to get [indiscernible] higher during 2025.

Okay. Got it. And I believe you mentioned earlier that we were doing about 1.5 million to 2 million a quarter. We're anticipating maybe getting that to maybe closer to adding 10 million a year, roughly, Fred?

Yes. We're looking at 10 million plus a year. Obviously, it's a function of pricing. But that's sort of the minimal target we're aiming for.

Great. Okay. Last question we have here, again, just comes back to Capire. With silver essentially at $30 now and zinc at pretty reasonable levels, what's the plan now for Capire?

No, that's one that's -- it's a little more complex than always has been. When we first mined Capire, we found that there was the ore had no continuity whatsoever and that it was so faulted and twisted, you could mine a tonne of ore directly beside another tonne there was no ore, that wasn't mineralized at all. And that resulted in very high cost of mining because you'd have to drill it, then mine, and you're drilling literally meter by meter. So that was expensive. And as you know, we've done a fairly extensive amount of work on it, and we're looking at the idea of putting an XRT unit in the front end of the mill. That would allow us to aim mine more, but not have to be selective in our mining. And that one is of interest, needless to say. The mine itself, the Capire mine is very price sensitive. And to do that, we would have to commit to an XRT unit, which is about $2 million in total and hope that the price of metal stays up there while we're doing it. So it's one of those that we're really comfortable that we're seeing a strong price in metal, it's one that we'd have to take a very serious look at reinitiating. The second part is there is an underground part of this as well that we haven't put a number to. And as well we drilled off Aurora [ 1 ] -- Aurora [ 2 ] rather, which looks like it has some tonnage available as well. So we're going to be redoing those numbers because I think the tonnage is probably larger. Part of it will be from underground, part of it will be from surface. We'll have an XRT unit in front of it, and we'll love to do a CapEx of about $5 million or so for surface equipment and what have you. So all of that's got to get together, and we are working on that. But quite frankly, our job is to get the Plomosas up and running and to get Zacualpan to the point where it's getting closer to the mill capacity of over 500 tonnes a day rather than 450 tonnes a day. Once we've built those 2, Capire is certainly on the list.

Okay. Great. That's all the questions we have for -- from investors this quarter. Thank you, everyone, for your questions and interest in IMPACT Silver. Please submit questions to us or to [email protected]. We look forward to hearing from you from our next call. For more information, please visit www.impactsilver.com. Follow us on TSXV IPT or on Twitter @IMPACT_Silver. We look forward to hosting you on our next call.