Impact silver is one of the purest, if not the purest, silver producers in the world. 95% of their historic revenues come from the production of silver. As such, they have recently signed an agreement with Samsung to purchase their high quality silver concentrate to use in their manufacturing. Higher purity rates benefit manufacturers by reducing processing and waste costs for their commodity inputs.
The production summary provided above by the company shows marked improvements in recent revenues and grades from previous years. Direct costs have risen steadily in the last 5 years until 2019, where Impact managed to lower production costs per tonne for the first time in half a decade. They have done this by focusing on higher grade, lower cost zones due to a prolonged period of low silver prices in recent years.
An example of this is the site Veta Negra, in which about 200 g/t silver sits in walls that can be mined with a back hoe. There is no drilling or blasting required, the company just has to pull the mineralized rock off the wall and truck it over the the mill at Guadalupe. The deposit at Veta Negra, as currently measured, provides enough rock for 4 months of processing by itself; however the company plans on mixing it with production from its other sites. In total, the deposit could yield 5-8 years of high value, low cost silver production for the company. The effect of this very recent find is to lower the cash cost of mining silver, which should become apparent in coming operational reports.
What won’t be reflected in the following financial performance chart are the effect that rising silver prices since November have had on revenues, which we should find out soon as Q4 numbers are reported by the company.
One thing Impact investors know is they have a huge land package covering 325 square kilometers in an established mining district in Mexico. Impact owns the second-oldest mine in Mexico next to Groupo Mexico’s (GMBXF) Taxco mine. Literally, the Taxco mine is next door and within a stone’s throw from Impact’s property. Impact’s land has been mined for over 500 years, dating back to the Aztecs.
Impact is primarily mining from Area 1 shown on the map above. As you can see, they have three other zones that provide production upside. The property is so big that Impact cannot expand production at current silver prices without taking on debt, which the company refuses to do. Since 2007, 50% of exploration expenses have been financed from internal production amounting to 9.5 million silver ounces. Unlike many precious metals miners, Impact has not taken on debt or excessively diluted shares to finance expansion, raising equity investment only 3 times in the last decade.
Area 4 has a massive collection of existing mine works on epithermal mineral veins with substantial historic production. These veins, along with those in currently producing Area 1, have been mined with legacy mining techniques that previously cut off at about 1 kilogram per tonne silver, leaving Impact with many choice silver deposits to chose from. Given the size of the district, Impact could mine these existing silver veins for decades to come based on current production rates.
Area 3 at Capire comes with a second mill capable of processing 200 tonnes per day, and expandable to 500 tpd. Contrary to Areas 1 and 4, Capire sits on a VMS silver deposit that is economic for the company to mine at $22 silver, per the company’s 43-101 technical report.
This silver economic value does not even take into account the 48 million pounds of zinc and 21 million pounds of lead contained in Capire which could be used to offset the silver mining cost. Further, the company recently announced success in using DMS method to reduce processing waste by up to 50%, which the company estimates may reduce mill running costs by up to 30%. It is quite likely that the company brings Capire online beginning at $20-$21 silver, a short hop away from silver’s current $18.73 market price. If silver hits $30 again, company management told me they will likely expand Capire production capabilities to its limit of 500 tpd.
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That’s all the silver districts Impact holds, now let’s talk about gold and copper in Area 2 known as Carlos Pacheco. The company has sampled 19.6 g/t gold over 2.9 meters. The Carlos Pacheco zone is massive, offering real upside potential for Impact as a sizeable gold/copper operator.
The second promising Area 4 gold deposit is called Santa Teresa, and is likely a felsic intrusion with mineralization. Stream samples indicated up to 114 g/t gold, with 17 samples over 17 g/t gold. The El Canelo vein averaged 6.5 g/t over 1.66 meters along a strike of 50 meters. The potential for this second deposit in Area 4 is also pretty massive.
The size of the existing silver mines, along with the size of potential expansion into gold mining suggests that Impact Silver has many different options for expansion moving forward. Current silver prices and production do not suggest enough capital to expand into gold mining. As the company continues to sample Area 2 and delineate high value gold targets, the possibility remains that this zone is sold to a major gold producer or spun off as its own entity with its own financing options. The potential gold resources this Area has changed the game for Impact and should incentivize investors to look much more closely at Impact’s long term prospects as a growing mining firm.
It is generally accepted among silver stock investors that they are gaining leverage to the price of silver. Booms in commodity prices bring handsome rewards to stock holders.
To understand the benefits of owning Impact stock versus owning the commodity silver, we compare the price of the stock to a common silver index, the iShares Silver Trust (SLV). SLV in an index fund which is designed to closely track the value of silver prices, and buys silver for this purpose. The fund charges 0.5% expenses and occasionally sells silver to pay them. That being said, it is the closest proxy to the silver price which we can use to compare to stock prices of primary silver miners like Impact.
We have charted SLV and Impact from 2009 to present, which provides ample data with which to compare Impact to the commodity price. I have added two indicators, the Trend Intensity Index and the Accumulation / Distribution Indicator. The TII was designed to measure the strength of a price trend in a stock by comparing the veracity of deviations in the closing prices of a stock. The ADI indicator was developed using volume and price information to assess whether a stock is being accumulated or distributed in the market. With those indicators included with standard trade volumes indicated by red/green histogram bars, we can perform the following analysis.
During the run up of silver from 2009 to 2011, following the last financial crisis, the commodity price approached the $50 mark. We can see that increase of Impact Silver’s stock price in percentage terms far exceeded that of the SLV index tracking the price of silver. Volume trading of SLV was high during this period resulting in a positive accumulation index value. The TTI indicator also indicates very strong trends in closing price deviations as the price of silver closed aggressively higher each day during the move. In other words, during strong silver bull markets supported by volume and accumulation of the metal, Impact Silver investors benefit from very strong price leverage to the commodity.
Following the decline in price of silver through 2015, the reverse is true in Impact’s stock price. In percentage terms, the company’s stock will fall more than the commodity price. During 2016 when silver once again moved solidly up to the $20 range, Impact’s stock price responded with much higher gains than the commodity. During this time, the SLV volume, TTI, and ADI indicators strengthened only moderately suggesting that a sustained, aggressive increase in silver prices is not needed to benefit Impact stock holders with price leverage. However, sustained and aggressive silver price moves do amplify the benefits to Impact’s share holders.
The 2016 price increase was once again followed by another lengthy decline in silver’s price through 2019. Starting last year, silver price began to appreciate again, though on relatively weak volume as indicated on the chart. Despite the modest positive trading in silver since last November, Impact’s price has nearly doubled since, moving from $0.23 to $0.43.
We therefore deduce that Impact’s stock price will mirror the commodity price direction, amplified by the strength of volume and length of the direction of the trade. Further, when silver’s price range trades over several years, the company’s stock will slowly drift downward as investors lose interest in the leveraged trading vehicle the stock provides to the commodity. Aggressive silver price moves, in either direction, are not required to influence Impact’s price; the stock’s investors signal their interest in owning the shares quite willingly.
Investors who believe silver is about to enter another sustained bull market, as I do, have every reason to believe that owning Impact will give them a substantial advantage over physical or ETF metal investors. The data proves this out. Of course, the flip side is falling silver prices bring more risk to stock traders than those holding the metal or the ETF. Nevertheless, it is doubtful silver prices drift back much lower as the physical market is in yearly supply deficit and the average cost to mine silver by primary miners is between $16.50 to $17.
It is unlikely the company becomes insolvent as they hold no debt and have plenty of cash available in the treasury. The company, unlike many precious metals miners, leaned up significantly during the recent low silver prices. This enabled them to survive during a bleak time for primary silver producers who saw silver market prices plummet below mining costs despite rising annual shortages in available silver mine supply. Given those circumstances, the chances of default by the company should be considered remote.
The main criticism the market has for Impact is the lack of a formal resource estimate for its current production targets in Area 1. Impact management is aware of the limitations this has for investors in estimating the company’s potential market value. As such, they continue to release news on new drill and sample results to assure investors that there is plenty more silver left in their land package.
Considering that hundreds of previously mined veins exist in this historic Mexican silver district in which Impact has produced almost 10 million ounces in 12 years, I believe the chances of the company running out of economic silver to mine anytime soon is pretty remote. That is one of the advantages of doing boots-on-the-ground due diligence in the form of a site visit, which I have. Nonetheless, it is fair that investors are wary of the company’s lack of an established resource estimate which I expect will continue to weigh on investor sentiment.
In order to address this risk for myself, I spent several hours on my recent mine site tour pouring over Impact’s GIS maps and resource database in an attempt to assess the company’s resource potential. Let me say I came away impressed with the sheer size of the company’s data on silver in its land package, while optimistic about the potential for substantial gold finds of their holding. It is one thing to dismiss the company’s resource potential by reviewing a few company presentations, and quite another to spend hours reviewing its actual exploration data maps. I am not concerned in any way that Impact does not have the resources in the ground that management is confident about and has been able to produce for 12 years running. I see this risk as abundantly low for shareholders.
Impact has the highest leverage to the silver price of any miner. The upside is fantastic returns during silver bull markets, with potential for sizable losses during extended silver bear markets. Recent trends in silver market fundamentals indicate a new silver bull which bodes well for primary silver miners such as Impact. The company also has real potential to expand into gold and copper operations or sell those holdings to an interested bidder.
The company needs sustained higher silver prices to finance continued exploration, allowing it to define both its silver and gold resources. Having more robust resource data likely provides the confidence that many sidelined investors need to move into the stock.
These are reasons I see Impact as being undervalued in this market. Given the chances of sustained higher silver prices along with an expanding mineral resource base, I see Impact Silver as a buy candidate for precious metals investors looking for silver exposure with potential expansion into gold.