I have recently covered both Energold Drilling Corp. (OTCPK:EGDFF) and IMPACT Silver (OTCPK:ISVLF) in articles at Seeking Alpha this year. I originally met with Fred Davidson and Jerry Huang in person at the Vancouver Resource Investment Conference in January of this year.
Energold Investment Thesis Improves During 2018
The prospects for both companies are bright for different reasons. Energold has already seen two years of consecutive YoY increases in revenues as mineral drilling begins to pick up. In addition, the company has added additional new business lines to their drilling services line up to broaden their customer base. Let’s get into some specifics for this company.
Energold has sought to expand outside the mineral drilling sector which is what most investors are familiar with when discussing drilling. The company added horizontal and hydrovac business lines, and does quite a bit in geothermal and water drilling as well. As a result, the company’s revenues stabilized and have seen YoY growth since 2016 despite the down cycle performance of the mineral drilling sector. Further, the company now has positive EBITDA growth for the first time in several years.
When I wrote about Energold earlier this year, I profiled how the cyclical nature of drilling was due for a reversal to the upside. I think we now have more data to support that earlier prognostication.
I am also providing coverage on Energold because I think the value proposition has materially changed for this company. Not only is the oil drilling sector showing signs of a rebound, but mineral exploration is turning around. For instance, mineral exploration in Australia just reached a 5-year high. Exploration budgets have been rising since 2016.
As we can see, pipeline activity has increased since 2015 during the same time frame that Energold has been making their turnaround. The mining industry market cap is rising which indicates more money for exploration to continue, particularly in the base metals index prices which are also rising. The exploration index is now at its highest since 2013.
Junior gold and base metal companies have seen significant increases in financing since 2015 as well.
In a nutshell, the metals and mineral mining activity is increasing which will raise overall revenues and profits for Energold, while the company has also expanded into other segments which will reduce volatility in off-peak cycles of the minerals markets. I expect, therefore, that revenues for the company will be less volatile moving forward and therefore stock prices should also be less cyclical than they have in the past. In the near-term future, the stock looks really cheap heading into another bull cycle market.
Lastly, Energold has recently brought the manufacturing division, Dando, into positive margins over 2018. The CEO stated his intent to sell the division to reduce capital expenditures and focus on the drilling services. This move will help the company focus on using available cash to expand operations without financing drill manufacturing CAPEX over 180-220 days waiting for a return, as it has done in the past.
Source: Seeking Alpha
As you can see from the chart above, Energold does very, very well when hitting cycle peaks. I expect, given the improvements to business operations made during the recent lean times, that the company has every reason to see the same upside as in the past during mineral cycle booms at the same time building more price resiliency when those booms end. Investors should consider this a great value investment at a time when the broad stock market is experiencing high P/E ratios historically and value investing may come back into vogue in 2019.
IMPACT Silver Investment Potential a 10-bagger
When looking at precious metals miners specifically, investors often want to see multiple price appreciation potential. That is largely because gold and silver tend to move in substantial trend cycles. While gold is in a multi-decade bull run which may or may not continue into the next decade, silver is sitting at historic lows and is considered very cheap.
I also believe that silver is cheap, with a recent article pointing out that it may be an inflation adjusted low dating back to 1970.
The recent declines in silver price during 2018, and since 2016, have only made it more attractive, especially when considering the demand in industrial applications such as green energy and medicine. But why IMPACT Silver as an investment target?
Well for one, IMPACT Silver and Energold are closely tied at the hip with much of the same management team and Energold holding a position in IMPACT. As one company goes so tends the other. Energold’s positive position in the drilling market, particularly with a recovering mineral drilling sector, indicates the demand for silver deposits is up which will drive up the stock price of IMPACT in the future. This is confirmed by the fact that despite its low price, silver exploration activities have stayed strong and have slightly increased YoY.
As you will find out in the interview I have with Fred Davidson, CEO of IMPACT Silver, posted below, IMPACT Silver has spent millions of dollars on exploring one of the oldest, largest, and historically prolific silver producing regions in all of Mexico.
The Capire mine, which is currently on maintenance, has quite a large resource reserve in silver, zinc, and lead coming available for mining at each step of the silver price increase over $15.
Add in the fact that IMPACT is one of the primary silver producers most highly levered to the price of silver, and you get an potentially explosive increase in the stock price should the market value of silver rise into the future. Given demand for silver remains very strong industrially, really the main catalyst to silver price growth remains in the investment sector.
As the above chart indicates, IMPACT Silver has seen both reduced revenues and higher costs. Much of the cost has come from exploration activities to find the next tranche of mineable silver. The approach is to use existing mine workings on this historic property to find big deposits for future production. As you will note in my interview with CFO Jerry Huang posted below, IMPACT has made some very exciting discoveries that are more resource rich than previous exploration activity and provide a very nice upside potential for this company’s production and cost numbers from what it has observed in the past.
As you can see from the above price chart, IMPACT Silver tends to trade much higher than the current price when silver prices are higher, most recently spiking to 4 times its current valuation when silver was around $20 in 2016. It does not take much of a price rise in silver to send the company’s stock soaring, as CFO Jerry Huang points out in our interview below. In fact, IMPACT’s stock price has soared 3 times since inception, due to this dynamic, when the market price of silver has risen.
What may be most interesting for this company is the recent discovery of a gold and copper porphyry deposit on site. The potential for this discovery to change the price dynamic of this stock is potentially staggering, as Fred and I discuss during our interview. Both copper and gold have more stable price characteristics typically than silver, which, once the discovery is put into production, should provide more price stability for IMPACT investors moving forward while still offering that same very strong price appreciation opportunity during times of strong silver market prices.
As Fernando Pertini points out in his recent article, Will Forgotten Silver Ever Shine Again?, now is the time to be long silver.
Bonus Interviews With Company Management
Because I have a relationship with management of both companies, I conducted interviews recently to discuss management’s thoughts on their companies and where the markets for their services may be headed.
Because the companies share management and are both engaged in markets with significant uptrend signals, I believe both Energold and IMPACT Silver are attractive targets for investors looking for values in a market filled with overinflated stock P/E ratios.
I believe that both companies have been managed very well during a down market cycle. IMPACT Silver has almost no debt and very good fundamentals working in favor of the company.
Energold has already turned around operations and is looking to divest off its most capital intensive business unit to increase expansion opportunities. Both present investors with strategic opportunities to invest in companies with solid fundamentals, management, and a lot of upside potential in a market awash with high corporate debt.
Fred Davidson is CEO of both companies, and took a moment to answer some questions on both of the company’s operations for the year for investors.
In addition, I spoke with IMPACT Silver CFO Jerry Huang on how the company is doing financially this year, as well as discussed an open private placement opportunity for investors open through November 14th. The company is raising $1.5 million for exploration and drilling operations in anticipation of increased production.