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

Good day, ladies and gentlemen. Welcome to IMPACT Silver's Q3 2024 period ending September 30, 2024, 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 about the quarter's results and a Q&A period. Certain statements in the following conference call regarding IMPACT Silver's core business operations may constitute forward-looking statements. Such statements are not historical facts but are predictions about the future, which inherently 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. It was a very interesting quarter. I think we had numerous positive events occurring. And amongst those would be the obvious, we saw some good metal prices. We saw that the Plomosas is now at about 70% of its rated capacity, which is normally where we would have said, okay, we're now in production and from here on in, everything gets expensed. Under IFRS, everything was expensed from day 1. So that's why the quarters have been carrying a pretty heavy burden that normally they wouldn't have. In any event, we're there. It's getting up. It's continuing to grow, and we're forecasting sort of the fourth quarter should be at least around 175 tonnes a day either. So it's overall been a really positive quarter for Plomosas. We've got control of a lot of what's happening there. Exploration is continuing fairly aggressively, and we should have results out on it very shortly. With regard to Zacualpan. A little bit of a tough quarter, primarily not that the metal prices weren't bad, and it's not an issue with grade. In fact, we had 176 ounces of gold production finally starting to come on stream from Alacran. It was in the last month, September, we got caught up in the storms that hit Central and lower Mexico, as you probably all know. And we had several days where there was no power to the mill as the lines were down. And also the haul roads for 2 of our 4 mines were washed out, and we had to rehabilitate those. So that hit us in the last sort of half of the September, unfortunate, but that's the nature of mining. You run into these things, you work through them and you continue on. Overall, let's get to some of the statistics here. Revenue from the Zacualpan district was $6.1 million, and that's up from $4.8 million in the comparable period last year. For Plomosas, even more impressive because the revenue was $2.5 million. There was no revenue from Plomosas last year because it was in start-up mode. And the net loss was $1.2 million, and that's down from $2.6 million in the previous quarter and $3.1 million in the first quarter as we started working through the issues at the Plomosas mine, and we found that the tonnage millput went from 3,594 tonnes in Q1 to 12,686 tonnes in Q3. So you can see there's been a dramatic improvement. Interestingly enough, operating costs haven't changed significantly. So you can see a lot of those costs were related to development. We're now starting to see that development producing more for us. And going forward, we're seeing some strength. And both silver and zinc are pretty strong in the market today. Interestingly enough, based on some of the forecasts, we may be producing about 50,000 ounces of zinc from Plomosas as well. Those are virtually free because as far as we're concerned, it's a zinc provider. So revenue per ton was also interesting. And that was for the operations at Zacualpan, we were running up to $180 a ton, whereas the direct cost for mining and production was $146. So we're starting to see a healthy margin. And that's, in fact, lower by about $7 than it was in the previous quarter. So we're starting to control those quarters. At the same time, we're starting to see some results from the higher metal prices and grades that we're putting through. Overall, the outlook for what we're doing is we're continuing to see production growing at Plomosas. We are going to be spending a lot of money and time there on the development and exploration because that's why people really are interested. Yes, we can produce and we can be a small producer, but that exploration can make us a big producer, and that's the interest we have there. As for Zacualpan, we've been pretty consistent in our operations. We've had some successes, some failures. And the grades we're getting on the exploration are potentially quite interesting. So we've had a couple of releases on those, and we'll have some more coming towards year-end as well. So the exploration side of us, because we are both a producer and a major explorer, is going fairly well. And hopefully, we can have some really good results coming out in the new year as we go into new areas. Overall, the balance sheet is still strong. We've got $8.9 million in cash and our working capital is about $8 million, a little more than that, $8.5 million. At the same time, our earnings demonstratively are -- when you talk gross revenue of $4.7 million, for the first time in a while, we've had sort of net of amortization, we've had a positive income from mining operations, and that should grow as our production from the Plomosas grows. Our overall G&As are pretty well consistent. The issue we run into is more and more the regulatory requirements, both in Mexico and Canada are getting quite onerous for a small company. And these have to be brought under control, not by us because we can do nothing about it. But the governments are going to have to look at how prudent they are in their statutory regulations. Overall, what also distorts the financials a little bit is FX. When the U.S. dollar is strong and the Mexican peso is weaker, it's really a translation from the Mexican peso to the Canadian dollar and when we translate to what we disclosed in our financial statements. Because the operating currency is Mexican peso, we have a triple conversion, if you will. You go from peso to U.S. dollar and Canadian dollar. And FX distorts the balance sheet more than anything, which causes some confusion with the average reader. Looking at, for instance, the expenditures. You look at it, some are capitalized and raised in value because the currency has gone up or gone down. So it's a hard read for the average person. I think the most prudent thing we have to look at is working capital and what we're doing on operations. And on operations, we're finally turning the corner on Plomosas. We're starting to rebuild what we're doing at Zacualpan. I should add, Zacualpan is also down because we're replacing the track system underground on the 195 level and on the shaft. So that's also slowed production coming out of there. But going forward, it's looking very positive for the new year. Jerry?

Okay. Excellent. Thank you for the overview, Fred. Here are some of the questions we compiled from investors this quarter. [Operator Instructions] Question one. Fred and team, that's a great boost in revenue year-over-year of 81% from $4.7 million to $8.6 million for the quarter. Can investors expect this to ramp up even further as Plomosas tonnage going higher?

I think we're going to see a ramp-up in both Plomosas, which is, as I say, has gone from 3,500 tonnes to 12,600 tonnes in a matter of 2 quarters or 3 quarters. We're going to see that go up. As I say, our forecast is roughly 175 tonnes a day average and that third quarter was only 138. So yes, we should see some strength there. And interestingly enough, zinc is maintaining itself very well, probably #2 to copper. And we expect it to stay the same in terms of strength going forward. The other side of it is Zacualpan. And Zacualpan is -- tends to be because these are epithermal veins, you're mining, you develop, you finally get to production. And we did do a release on it with one of the discoveries we've had last year. And we're expecting to see that one come on basically, I would say, second quarter, and it's decidedly higher grade, at least based on the studies we've done to date. We're hoping that will start to impact our production in the second quarter, combined with the fact that Alacran hopefully -- well, it should. But again, this is mining. We're looking at the Alacran producing more gold than it produced in this quarter, back up to maybe the 400-plus level or more. And that would be rather nice because it certainly reflects the fact that gold is still really leveraged compared to silver. So yes, we expect revenues to boost. 81% might be pushing it a bit because, really, what it is, it was the start-up at Plomosas. But I think we're going to see some strength in our revenues going forward next year.

Okay. Excellent. Question two. Positive operating cost for Q3 2024 before amortization and improving $1 million from Q3 of 2023 is great to see, but the operational loss is a concern. Will this still be a trend even at these higher silver prices, right?

Well, the actual operating costs pretty well are, I won't say are static because you have to deal with inflation, what have you. But the operating costs, we seem to have a pretty good handle on. And I don't think they're going to move on a per tonne basis so much. And quite frankly, the revenue per tonne is really a difficult one to judge primarily because of prices. But I would suggest that if the operating costs are fairly static, and that we get things like the Plomosas up to 175 on average tonnes per day. And we see Zacualpan getting its production up again after that third quarter, I think we're going to see sort of continuing positive operating income. Depletion and amortization is always a bug bear because it's a noncash and it represents expenses that have occurred in the past, including some exploration expenses. So what I'd suggest is the way to monitor us, and I think virtually, that's how most other silver producers are being monitored, is what's happening on that line that's the sort of operating income net of the amortization and depreciation. Is there other things happening next year? It would be nice to know. But at this point in time, I think we're going to see the point where on an operating basis, we're looking as the way we're doing it net of things like amortization and that, we're looking at a pretty positive approach for next year. The only other thing that's going to impact that, of course, is as we continue to accelerate exploration and how that is treated under IFRS because there's all sorts of rulings of what you have to do with it. But ignoring the exploration side because that really is a different part of our valuation, the operating income, I think, will continue to grow.

Okay. Excellent. Question three. Will more expenditures be needed at Plomosas to get to that additional 30% of capacity?

You're probably thinking CapEx. And there are always 1 or 2 things that will be needed, but nothing material at this point in time. I think the vast majority, let's hope, have been spent. We will always be doing development, and that's one that you always have to incur before you can actually get production. And the way to describe Plomosas for somebody who's not familiar with this type of deposit, it's very much like what they call a chimney and mantle. And if you take your hand and put it out in the air and spread your fingers, the fingers are the chimneys and mantles are the palm of your hand. And with these type of deposits at any one time, you might be in a chimney or you might be in a mantle. If you're in a chimney, that's great. but there's not a lot of tonnage. And -- but you follow it and you get to the mantle. So part of what we do is we drill, but part of it is we have to develop because to drill that thing off entirely, you'd go bankrupt. So in fact, what you have to do, you get into a chimney, you follow it. And if it sort of is only a couple of meters wide, but then you've got an idea you're definitely into one of those chimneys. But if you get enough of them, you can start to plot where the mantles are. And the mantles are where you make some serious money. So at any point in time with Plomosas, it's going to be, are we into a mantle or are we into a chimney and the subsequent development that would take place. But on average, it's looking pretty solid. And I think that, as we go forward, we're going to see some success there. With Zacualpan, it's a different animal. These are epithermal veins. You don't need to drill them intensively. What we do, do is because we've got a history of, let's face it, 500 years, you can drill, say, 50 meters apart. And if both of them offer you grade, you know you're on to what we call a hot vein. And we then go in and develop because the development costs aren't much more than the cost of drilling a hole that's 300 meters deep. So that's what we'll be doing over the next year. So the development then, the exploration related to that development are probably the biggest outlays we do. And depending on the success or the deposition, they'll be larger or less. As for physical assets, people look at, we might buy an underground truck. We might buy something or else no large capital expenditures. We've finished the tailings pond for the most part, the extension. We've rehabilitated most of the underground. We put in new infrastructure. We rebuilt the mill. No serious dollars we really anticipate spending at this point in time.

Excellent. Question four follows the line of the questions from earlier. Receivables and cash equivalents are piling up to over $5 million with cash a bit lower than last quarter. Will liquidity be an issue or concern in the next year?

Yes. We're -- like any ongoing business, you do run up receivables. The nice thing about these receivables is they're with a major and they're reliable. It's just they take up to 90 days to get paid on. So that's actually a positive sign. It means we're actually generating revenues. We're generating production, which is generating receivables, which ultimately will be recovering in terms of cash as we go forward. So yes, that one, I'm quite comfortable with. We haven't had too much of a problem with things like value-added taxes because we get that back in terms of our receivables. So it's sort of one versus the other. It's not an issue and our trade and other receivables are all good quality.

Excellent. Question five follows Plomosas again. Can we expect to see more drilling results from the high-grade and the carbon replacement deposit project at Plomosas in 2024 still?

I'm hoping you can get results from both it and Zacualpan. A lot of our drilling is sort of into the actual existing deposits that we're working on. And traditionally, we don't release those because it's sort of a mining decision. You drill ahead of where you're mining, you go to it. But for the exploration type drilling, we certainly want that out, and we're trying to resolve how to -- in case of Plomosas, how to interpret it because again, as I say, if you're with the fingers and the mantle situation, if you happen to conveniently drill down one of those fingers, you can have a very large drill hole, but it's misstating what's really there. So we have to be very careful in interpreting what we drill before we do those releases. And that means we have to understand the deposit that we're actually drilling on. So yes, there will be some coming out. We -- I think one is expected shortly, if not a second from Plomosas. And there will be sort of a summary as well ultimately of the exploration on year-end as we summarize the work both at Plomosas and at Zacualpan.

Excellent. Question six goes into the nitty gritty details. Direct cost per tonne has dropped to $146 a tonne. That's a great sign of the efficiency improvements mentioned in the MD&A, Fred and team. Will this continue to drop? Or is this a one-off?

I don't think it's a one-off. The real issue we're going to have here is inflation and FX. People say, okay, the Mexican peso is down, so your cost should be cheaper. But a significant portion of our costs are quoted in U.S. dollars. So we don't get any extra brownie points for the fact that we're in Mexico and Mexican peso with that respect. And the other respect is inflation is still fairly high in Mexico, which means we're going to be continually pressed by labor for that. So yes, it's -- I think we can continue. I think what we'll see is with the increased production coming through at Zacualpan, we're not going to see that much in the way of increases in costs. So as a -- if you will, the whole idea is there's a fixed component to our expenditures and there's a variable component. And the fixed component is fairly high. So as we add additional ore, it doesn't really impact on that fixed component. So yes, I think we'll probably see, at least under control, the direct costs and hopefully, a little bit of a break in terms of throughput and hence, lower cost per tonne.

Excellent. Last question. The Capire with the silver over at $1.34 an ounce in the last quarter, zinc at very good reasonable levels. What are the plans for this now that Plomosas is up and running?

Well, Capire is a teaser. We did mine it, as you know, almost a decade ago. And what we found in mining it that the mill worked well, the tailings were all set up. Everything was done. But the mining itself, we found mining the deposit, the grade and structure was very, very irregular. The end result is when we mined it, the selective mining was prohibitively expensive. Then as we've talked about it in the past, we looked at a way of perhaps ore sorting, and that is we mine the whole thing and let some system sort the ore before it actually gets to the mill. There's 2 methods of doing that. One is dense media separation, but that requires a lot of water, and this is a fairly dry area. So that wasn't on the cards. The other one is XRT, and that's X-ray sorting. And really what happens is you break the rock into a certain size, it runs over a belt and that belt has an X-ray that measures atomic density of each rock and the machine sorts those rocks based on atomic density. And we've already done a bulk sample. It worked very effectively. It took the average grade up almost double. And the mining cost would drop dramatically because all you're doing is bulk mining. It's very, very cheap to do. So the end result is it's a model that works, we believe, at the right price and the prices are about there, it's one that we'd probably look at doing. It's going to require CapEx and probably the XRT unit, the bigger crushing unit that we need because you're putting through more tonnes and what have you, it's probably in the $5 million to $6 million range. And right now, we're busy trying to get Plomosas under our belt. And Capire has got to wait. Plomosas is what we're working on right now. Would I like to put it in production? Yes. Would it take -- how fast could I do it? The XRT unit has a delay of delivery of almost a year. So even if we laid out the money now, it would be a year before we saw it coming on. So it's one of those things that we just have to wait on from our perspective or look for somebody who wants to do it with us.

Definitely. Okay. Great. That's all the questions we have for this quarter. Thank you for all the investors that fielded in questions and interest in IMPACT Silver. Please submit your questions to us or to [email protected]. We look forward to hearing from you at the end of our next call. For more questions or information, please visit www.impactsilver.com or follow us on Twitter or various social media at impact_silver.