IMPACT Silver Corp. (OTC: ISVLF) is a small silver
producer, operating four mines across the two districts located in
South-Central Mexico. In 2006 the company started producing silver and this
year it expects to produce 1 million ounces of silver. Unfortunately, though in
the short-term the production growth is quite impressive, IMPACT is a high-cost
producer. In this article I would like to present a short description of the
company and to prove my thesis on high production costs.
Business description
IMPACT is organized into two the so-called production centers:
Guadalupe Production Center and Capire Production Center. Of these centers, silver
and other metals are extracted only at Guadalupe - the Capire Production Center,
consisting of a 200-ton-per day pilot processing facility and the Capire Mine,
has been suspended until market conditions improve.
Guadalupe Production
Center
Guadalupe, acquired by IMPACT in 2006, consists of a 500-ton-per
day processing facility fed by three underground mines:
- Cuchara-Oscar
– it started its operations in 2013. Now, the mine is a principal producing
operationdelivering a silver-zinc-lead feed.
-
San
Ramon – this mine was opened in 2008. In 2014 the company discovered new high
grade silver zones at San Ramon, located below the current production zone.
-
Mirasol
– it is the newest mine in the company’s mineral portfolio (it started its
operations in the third quarter of 2014). Currently the mine is ramping up its
production.
The company’s strategy
IMPACT, well aware of the current gloomy situation in the
precious metals market, tries to focus itself on extracting metals from high
grade zones, where costs of production should be lower. The last discovery at
San Ramon plus opening the new, high grade Mirasol mine contribute to the
company’s strategy – please, look at the chart below:
As the chart shows, the average silver grades have gone up significantly
since 2013, with the highest increase taking place between 2014 and 1H 2015 (an
increase of 16.4%, from 159 gram per ton to 185 gram per ton).
What is more, since 2012 the IMPACT’s silver production has
been also going up. The chart below supports this thesis:
However, looking at the company’s silver production in the
long term, it is easily spotted that between 2008 and 2014 the annual output
was rather stagnant, within a range of 636 thousand (2008) and 834 thousand
ounces (2011). This year IMPACT expects to produce around 1 million ounces of
silver – if the company succeeds, it would be the highest output in its
history, indeed.
1 million ounces of silver is quite a large amount of this
metal, at least for the small company as IMPACT. However, there is one technical
constraint. In 1H 2015 the company was processing 460 tons of ore per day,
which was close to the full mill capacity (500 tons per day). To produce larger
amounts of silver, IMPACT will have to increase its capacity or implement other
solutions, for example a mill located at Capire (this mill has a capacity of
200 ton per day). I am not sure whether the Capire mill is suitable for
Guadalupe because the Capire mine, in contrast to Guadalupe, is an open pit
mine, where the processing method may be different. Anyway, if IMPACT wants to
increase its output it will surely have to introduce some changes to its
business model. If such is a case, an additional investment could be needed
(for example, constructing a new mill or increasing the capacity of the
existing facility).
Production costs
Now, the most important thing. Despite higher output and
higher ore grade, the company is still unprofitable. What is more, IMPACT has a
different cost reporting philosophy than its peers. A vast majority of mining
companies report their cash costs on a per-ounce basis. IMPACT does not report
its cash costs at all. The only metric the company provides is the direct costs
per ton of ore produced. Therefore it is possible to calculate the accounting
costs of production on a per-ton of ore basis. However, it is not possible to
find in what way these costs refer to the prices of silver. As a result, it is
impossible to find at what silver prices the company’s business is profitable. Additionally,
the company’s final product is a concentrate (zinc - silver and silver – lead).
IMPACT, reporting the amount of ore sold, reports an artificial thing – the
company is selling concentrate, not ore. Let me dig a little bit deeper into
this matter. In two sections below I am using the company’s metric to present
the costs of production and then I am trying to estimate, using my own
methodology, at what silver prices the company could be profitable.
Note: if somebody does
not feel good about basic math, please, go directly to the final section of
this article (Summary).
The company’s metric
Through reporting the direct costs per ton of ore sold, no
matter how artificial this measure is, IMPACT provides the most important
figure – the amount of ore sold. Therefore it is possible to find out whether
the company is making money on its ore or it does not. For example, in 1H 2015
IMPACT sold 85,392 tons of ore, which, having in mind that the company’s half
year revenue was $6,647 thousand, means that the company got $77.84 per ton of
ore sold. Then, to produce these 85,392 tons of ore, the company incurred the accounting
costs of $8,107 thousand (accounting costs are defined as operating costs less impairment
expenses), which is attributable to $94.94 per ton of ore sold. The difference
between revenue and costs per ton is $17.1. This figure should be read as: “In
1H 2015 IMPACT was losing $17.1 on each ton of ore sold”. The chart below shows
revenue and costs per ton of ore sold since 2011. It is easily seen that since
2013 the accounting costs have been higher than revenue – IMPACT has been
losing money since then.
The picture above is telling quite much about the company’s
economics but it does not provide any clue at what price of silver the company
could be profitable. To answer that question I will use my own methodology.
My metric
Each quarter the company reports the amounts of silver, zinc,
lead and gold sold in its concentrates. Therefore it is possible to calculate
the amount of the so-called silver equivalents sold.
First of all, it is the standard in the precious metals
sector that refiners pay the miners for metals extracted from concentrate using
market prices of these metals. Therefore I think it will be correct if I
calculate silver equivalent ounces using the average prices at which silver,
lead, zinc and gold were traded in each analyzed period. Let me calculate this
figure using 1H 2015 data.
In 1H 2015 IMPACT sold 450,370 ounces of silver, 225 tons of
lead, 136 tons of zinc and 288 ounces of gold. The average prices of these
metals were $16.57 per ounce of silver, $1,873 per ton of lead, $2,134 per ton
of zinc and $1,206 per ounce of gold. After multiplying the amount of each metal
sold by its price I am able to find that in 1H 2015 the company’s revenue obtained
for each metal was as follows:
- Silver:
$7,463 thousand
- Lead:
$421 thousand
- Zinc:
$290 thousand
- Gold:
$347 thousand
To find the number of silver equivalents ounces sold in 1H 2015
I have to divide the revenue obtained for each metal (except silver) by the
average price of silver in that period. After doing this math and summing up
all silver equivalent ounces attributable to each metal (plus silver ounces
sold) I find that in 1H 2015 the company sold 514,284 ounces of silver
equivalent. Having that figure I may calculate production costs on a per-ounce
basis.
As I mentioned in the section above, in 1H 2015 the company
incurred accounting costs of production of $8,107 thousand, which means $15.76
per ounce of silver equivalent.
However, there is a catch because this figure does not take
into account the refining charges paid by IMPACT to refiners for treating its
concentrate. Simply put, any mining company producing concentrates, instead of
doré, has to deliver its concentrate to the specialized companies (refiners).
Refiners, carrying out the complex chemical processing, are able to convert a
concentrate into the highest quality precious metals bars. This process costs
money, which is paid by the mining company according to the industry standards.
Basically, the refiner is paid for the previously agreed amounts of metal
contained in the concentrate plus some additional fees paid for excessive
impurities. The vast majority of mining companies report these charges but
IMPACT, unfortunately, is an exception to this rule. The company confirms that
its revenue is reported as net revenue (refer to “Significant accounting
policies” in each annual report):
“Refining
charges are netted against revenue for sales of metal concentrates.”
However it does not go into specifics about these charges. Fortunately,
there is a way to cope with that lack of information. According to its
financial statements, in 1H 2015 IMPACT had revenue of $6,647 thousand, which
is attributable to $12.92 per ounce of silver equivalent (revenue divided by
the number of silver equivalent ounces sold). Since in 1H 2015 the average
price of silver was $16.57 per ounce of silver, the difference between this
price and the price got by the company ($12.92) is the theoretical refining
charge ($3.65 per ounce of silver equivalent). Therefore the overall cost of
production is $19.41 per ounce of silver equivalent (accounting cost of $15.76
plus the refining charge of 3.65 per ounce of silver equivalent). The chart
below evidences gross production costs against silver prices, since 2009:
Summary
As the chart shows, IMPACT is a high cost producer. For
example, in 1H 2015 its production costs were $19.41 per ounce of silver
equivalent, much above the average price of silver in that period. What is
more, despite heavy investment expenditures, the company has made nearly no
progress in its business Let me show it using a few figures.
Since 2009, when the last bull market in the precious metals
had started, IMPACT generated $19.5 million from its operations. This cash flow
was delivered mainly between 2009 and 2011, then, when silver prices started to
fall, cash flow from operations followed them.
Next thing, since 2009 the company had invested in its
business $48.1 million, which was $28.6 million more than the company obtained from
its mining operations. Most of this negative gap had been covered through new
share offerings ($25.5 million obtained mostly in 2010 and 2011).
Summarizing, since 2009 the company has invested a lot of
money in its business. Most of this investment program was financed by the
company’s shareholders. However, the result of this heavy investment and
shareholder’s effort is miserable. IMPACT is still producing silver at very
high cost and, what is more, in the long term the company’s output is not
impressive at all. For example, in 2014 the company produced 725.7 thousand
ounces of silver, much less than in 2009 (823.6 thousand ounces). Although
IMPACT has strong balance (nearly no debt), its business is going to stay
depressed, even at higher silver prices.
Last but not least – the company’s reporting is, in my
opinion, under the industry standards. To find the most vital figures, as, for
example, production costs, one have to dig very deeply, I think too deeply.
