Thursday, June 9, 2016

Impact Silver - Progress, Progress

Impact Silver is a strange company. The way it reports its revenue is unique. 
Generally, mining companies disclose the average metal prices received during the reporting period. Most often this price is expressed in US dollars per ounce of gold / silver etc.

Impact Silver is different - it discloses its sale price per ton of ore. I have contacted the company to explain why they use such an usual way of reporting. 

They answered:

"While we would love to report various other non-silver elements, the simple fact is IMPACT sells metals concentrates to smelters such as ...(names of smelters removed by Simple Digressions) and any other metal traders on a month to month basis. Pricing changes daily and it’s also not as reliant on spot as most would think – due to distance, smelting costs, and the metallurgy factor (see below.)
It’s simply much more efficient for us to report figures on a ton-by-ton basis. For interested investor it’s always possible to work backwards and arrive at a dollar/revenue figure and/or revenue %.

Further, our silver mix and metallurgy is much “cleaner” and has less deleterious elements so smelters often will price ours more to mix in with their lower quality ore. This makes our concentrate command a premium on a certain month to these clients"

Well, I think it is not that easy to arrive at a dollar figure but O.K. Let it be.

The most important thing is the fact that Impact is making steady progress. They cut their production costs:

                                    source: Simple Digressions

Note: accounting costs are defined as: operating expenses + depreciation, amortization and depletion + all administrative expenses + share based payments + management fees

As the chart shows, since 2013 the company managed to cut these costs from C$105.9 to C$89.8 per ton of ore (in 1Q 2016) - a decrease of 15.2%. 

Impact uses a little bit different metrics - it reports its direct costs of production. Here the company also made progress - in the same period these costs went down from C$70.2 to C$68.36 per ton of ore (a decrease of 2.6%). Well, it looks like cutting direct costs of production is much harder than other costs (mainly overhead). I think the message is clear: "Do not expect substantially lower mining costs when the company is mining at higher grade zones" 

The indirect confirmation of this thesis is below. Let me cite the company (2015 Annual Report, page 2):

"Despite persistently low silver prices throughout 2015 , our focus on profitability and mining higher grade zones of silver (especially at San Ramon Deeps and Mirasol) resulted in revenue per tonne of $91.68 in Q4 2015 compared to $68.75 in Q4 2014."

Lower costs and higher revenue per ton of ore translate into stronger cash flows from operations:

                           source: Simple Digressions

Note: working capital issues and taxes paid are excluded from operating cash flow 

It looks like the above described positives were at last spotted by investors and most recently the deeply oversold shares of Impact Silver went strongly up:


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