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Bullish Silver Market Fundamentals Are Positive For This High Leverage Company

Silver Physical Surplus Deficit Historical

Silver Physical Surplus Deficit Historical

Impact Silver (OTCPK:ISVLF) is a highly leveraged stock play on the price of silver, with 90% of revenues coming from the shiny metal. If you are willing to take some market risk on the price of silver in return for the potential leveraged returns on the silver market price that many expect to move higher in coming years, then Impact may be your company.

Impact Silver Production

Image Source: Impact Silver

I last wrote about Impact a year ago after interviewing the CFO and CEO of the company. I first met them early in 2018 at a Canadian investment conference as I was searching for some investment candidates of my own in the silver space. My initial impression from the original interview was that the management of this company believed in their project, and stood by the potential of it both from internal production and third party joint venture possibilities.

Silver Price Leverage

After reviewing this project myself, I share the same belief in the potential of Impact as an outstanding leverage play on the price of silver. Let us look at what happens to the share price when silver prices rise and fall. First we print the price of silver itself, YTD.

Silver Price YTD 2019

Silver Price YTD 2019

And now the price of Impact Silver compared with the iShares Silver Trust (SLV), the popular silver ETF.

ISVLF Price Compare SLV

Image Source: Seeking Alpha

Notice how much more leverage that Impact Silver has to the price of silver when compared with the SLV ETF, depicted in purple. Prices of Impact almost doubled (from 21 to 37.5 cents) per share on a $3.20 move (20%) in the price of the commodity. That is pure silver price leveraging which tends to work in both directions.

Impact Silver is a volatile stock due to its leverage to the price of silver, but I believe recent price declines to $0.23, as of today, are a nice entry point for speculative investors who have some space in their portfolios for high beta positions.

Operational Performance

Over the past year, Impact management have been streamlining operations by shrinking the land package and thereby tax exposure, reducing tonnage through the mill, and increasing operational efficiencies to reduce OPEX. The results are shown in the Q3 2019 numbers.

ISVLF Production Summary

ISVLF Production Summary

I recently spoke with the CFO, Jerry Huang, by email and phone, and we discussed the operational changes that the company has made over the last year.

Direct costs per tonne produced have fallen from YE 2018 results, while revenue has ticked up. The company has increased mill head grade by focusing on areas of high silver concentration. They are mining their best rock to take advantages in recent increases in the price of silver.

The company wants to reduce costs for now and has reduced their overall land package. Tax costs increase over time in Mexico and therefore the tax exposure tends to rise on held land. The positioning of the land means; however, that other companies would likely have to partner with Impact to take silver out of any of the release land.

Royal Zacualpan Mining District

Royal Zacualpan Mining District

The company is also looking for experienced and well-financed partners to help explore and develop some of the un-mined areas. The company knows that there is a lot of silver untouched, but the nature of the thin-vein mining will require some hefty capital to produce it in larger quantities. There has been plenty of investment interest with recent non-brokered financing this summer, as well as the investment interest from Sprott.

Silver Price Outlook – Investment Demand

The question for Impact Silver really comes down to future demand, as we see that as both the primary driver of the stock price, and also the primary component required to entice a larger metals company to invest in expansion of Impact’s mine production. There is plenty of money to be made from Impact’s silver holdings as the mine has proven recently profitable even at today’s relatively weak silver prices; what is needed is sustained higher silver demand leading to a new baseline in the silver price.

What are some factors that support a bull market in silver prices? As Forbes analysts note, silver prices are largely inversely related to world GDP. Even though silver is primarily used as an industrial component today, the major volatility in silver prices over history have come during economic recessions due to the highly positive effects that increased investment demand have on the metal’s relative value, and therefore price.

According to the World Bank, GDP growth has never fully recovered from the financial crisis, and is now ticking downward again in 2018.

GDP Growth Annual World Bank

GDP Growth Annual World Bank

Image Source: World Bank

The IMF has recently recognized in its October 2019 World Economic Outlook report that a slowdown in overall global growth is quite possible.

Global growth is forecast at 3.0 percent for 2019, its lowest level since 2008–09 and a 0.3 percentage point downgrade from the April 2019 World Economic Outlook. Growth is projected to pick up to 3.4 percent in 2020 (a 0.2 percentage point downward revision compared with April), reflecting primarily a projected improvement in economic performance in a number of emerging markets in Latin America, the Middle East, and emerging and developing Europe that are under macroeconomic strain. Yet, with uncertainty about prospects for several of these countries, a projected slowdown in China and the United States, and prominent downside risks, a much more subdued pace of global activity could well materialize.

The IMF’s outlook for global GDP is conservative, with major risks being seen in the Group of Four that includes China, Euro area, Japan, and the US. The IMF projects an uptick in emerging market GDP, but time will tell whether that is realistic given that the major consumers of the world are struggling to expand.

IMF GDP Outlook 2019

IMF GDP Outlook 2019

Image Source: IMF

Specific to investment demand, The Silver Institute’s World Silver Survey report indicated a significant increase for investment demand in coin and bar forms of silver in 2018. The most significant increases in silver investment demand came from India, which is no surprise considering their monetary and economic challenges of recent years.

World Silver Coin Bar Demand 2018

World Silver Coin Bar Demand 2018

Source: The Silver Institute

Silver Price Outlook – Industrial Demand

It is almost obligatory in any article related to the silver market to discuss the recent supply deficits for which the Silver Institute has a ready chart. Fading silver prices in the face of prolonged supply deficits cannot last for long.

Silver Physical Surplus Deficit Historical

Silver Physical Surplus Deficit Historical

While many industry analysts think China has substantial supplies of silver in mines, any prolonged deficit in mine supply is expected to increase price pressure on the metal because China needs its silver for industrial production.

The Silver Institute reports that while China produces 110 million ounces of silver annually, it is currently using about 150 million ounces in its industries. Much of the increase in silver goes into photovoltaic cell production for solar panels as it ramps up dependence on solar energy for its electricity needs.

Chinese Solar Electric Generation

Chinese Solar Electric Generation

Image Source: The Silver Institute

Risk Assessment – Impact Silver

Investing in any precious metals miner comes with substantial risks that must be understood. The mining sector is very cyclical, and specifically precious metals are correlated with world economies.

Given we are in a ten year bull stock market that came with rising debt issuance and world GDP, investors should begin thinking about the next down leg of the business cycle and increased chances for a recession which would support higher prices in both metals.

Impact silver is the most highly silver correlated junior minor, besting even  First Majestic (AG). However, as a junior minor with a thin vein mining strategy, the company is strongly affected by any increases in cost inflation and the prolonged sideways movements in silver price that do not support rising annual OPEX and CAPEX mining costs.

Essentially, you invest in this company with discretionary income that you can afford to lose due to its price volatility. However, you may seek to increase your holdings substantially if you believe the silver market is about to enter a new bull phase, because you will not get leverage to the silver price like this anywhere else.

Perhaps the best strategy is to blend investment into silver stocks with ownership of both gold and silver metals to reduce overall volatility, while maintaining exposure to price increases that both will experience during the next business cycle downturn. This is my strategy, but each investor should make his own decision based upon his risk appetite and long term investment goals.