Impact Silver Corp

XTSX:IPT

Earnings Call Transcript

[Jerry Huang, executive]

Good day, ladies and gentlemen. Welcome to IMPACT Silver's Q1 2022 Financial Production Results Conference Call. Before we begin, we would like to go over our disclosure statements, followed by Mr. Fred Davidson's comments on the quarterly results and then a Q&A period.

Certain statements in the following conference call regarding IMPACT Silver's core business operations may constitute forward-looking statements. Such statements are not historical facts but are predictions about the future, which inherently involves risks, uncertainties and could cause actual results to differ materially from those in the forward-looking statements.

I would like to now turn it over to President and CEO of IMPACT Silver, Mr. Fred Davidson.

[Frederick Davidson, executive]

Thanks, Jerry. The first quarter for 2022 was actually quite an interesting quarter for us. It's very definitely one of those transitional quarters. As we've talked about before, we've made considerable effort to sort of prepare for increased production throughout the year, and the quarter certainly reflects that.

But first of all, let's talk about the highlights. We did $4.6 million in revenue for the quarter. We had EBITDA, positive EBITDA of $400,000, and the mine operating earnings before amortization and depletion were $1.1 million. We had a loss of $60,000 compared to $300,000 in Q1 2021.

During the quarter, the company was really focusing on exploration and development of the whole district, and we've actually spent over $1.3 million on those programs. And yet the fact we spent $1.3 million, we ended up with working capital that was almost identical to the year before. The other side we had was -- the cash was slightly down, but that was only down because receivables were up, and that was a timing issue. In fact, it was almost our balance sheet, it was almost identical to the quarter 1 in 2021.

Part of the reason the revenue was down, of course, was not that it was actually down, it's just the quarter in Q1 2021 reflected a sale of inventory from Q4 2020. I know it sounds a little confusing. But what happened was because of COVID at that time, we had troubles getting shipments out. We couldn't get the shipments out in December and the end result is they came walked in and we only got them out in the following quarter, 2021.

So what you're seeing in 2021 numbers is, in fact, partially revenue generated in 2020. Overall, we had a very similar performance for the quarters. Grade was very similar. Throughput was very similar. The only substantial difference was price for silver at the time on a quarter-by-quarter basis was down fairly substantially. And we're seeing some weakness, obviously, right now in the quarter as well going forward.

The nice thing about the IMPACT mines is that it's sustainable. We can happily endure lower prices, although we'd like higher prices. We still generate positive cash flows, and we're going to continue with a very aggressive exploration program going forward. The net loss is say, for $60,000, really reflected the fact that a good, significant portion of that was things like deferred income taxes, noncash items.

Overall, our operating was positive in terms of cash generation. What we're looking for on a going-forward basis is that investment being made, and we'll be continuing to make that investment in capital and operating costs for the next quarter or so, is to be able to build up our capacity to produce at higher levels in the second half.

[Jerry Huang, executive]

We have [indiscernible] at 778-887-6489. Question 1. Great quarter, Fred and team. Quarter-over-quarter growth from Q4 last year. But we noticed the year-over-year drop of about 17% from revenue in Q1 2021 to 2022. What's that attributed to?

[Frederick Davidson, executive]

Yes. As I actually mentioned, there was an inventory bring in from the 2020 year into the first quarter of 2021. And the second thing, of course, was the price. Average price of silver for the each quarter significantly differed. I think it was about 13% difference. The second -- in 2022, it was about 13% lower than it was in 2021.

So our production was similar. Our grades were similar. It was simply a matter of timing for the inventory and unfortunately, a decline in price in silver. And in fact, I think we sustained ourselves better than the actual decline. So overall, I think we've put a good quarter.

[Jerry Huang, executive]

Okay. Great. Question 2. Good job, team. Good to see positive EBITDA essentially breakeven. Small net loss of $60,000, which is immaterial for a company your size. Is this now the expected run rate on revenue until, say, silver goes higher or stabilizes?

[Frederick Davidson, executive]

Yes. In fact, as I think I mentioned in a brief summary, we're actually hoping to up our throughput by the second half of this year from the Guadalupe group of production of mines. We're going to see what happens, obviously, with the price of silver, but that's certainly the planning we have now.

And the investment we're making, and that includes a higher operating cost, is part of that, where a lot of our development underground is written off as an operating cost. And then we had CapEx as well. So it was a combination of efforts. So we are able to produce from a number of working places.

And that's what I think a lot of people have difficulty with an epithermal vein system. You have to do a degree of development to access the ore. And because we have multiple veins in there, we made a fairly hefty commitment for the first half of the year to open up those veins. So in the second half of the year, we can produce from more veins than we're producing from right now.

Overall, yes, I think we had quite a good quarter, and it's funny how people highlight a $60,000 loss when there's a $0.25 million deferred income tax provision in there. It was substantially a positive quarter, and our working capital and our cash demonstrate that. Because after that investment of CapEx, after the higher operating costs, we ended up with almost identical working capital and almost identical sort of cash and receivable situation to 1 year earlier.

[Jerry Huang, executive]

Yes. That's a good highlight, Fred. So for the more accounting-focused investors there, one thing to look at is really the statement of cash flow where you can kind of see, despite a CapEx essentially cash outlay has become neutral, cash balance and working capital essentially same as Q4 2021.

You mentioned that about brief, question 3, in terms of relating to the higher-level CapEx. So we have an investor here asking about the $1.3 million in capital expenditure this quarter. Is this the new norm to expect on a quarterly basis? Or is it a onetime event?

[Frederick Davidson, executive]

It's not a onetime event. It's going to be a fairly aggressive program going forward. We've said it before and we'll say it again. We've got the cash. We've got the talent. We've got our own drills. We're going to be making a very considerable effort to expand production here, and at the same time, we're also conducting this year, like last year, we drilled 17,000 meters.

This year, we're planning on over 20,000 meters of drilling. That's a fairly hefty investment on our part. But the neat thing is it doesn't affect our working capital because we're generating enough positive working capital that our cash flow from operations, that we can sustain it. If, in fact, the price of silver falls too dramatically, we can back off a bit, and it still won't affect our long-term plans.

[Jerry Huang, executive]

Okay. Good. Question 4 addresses the production expansion. You mentioned, obviously, one of the key point there, Fred, will be about the Capire. So any updates on changes within 2022, Q2, Q3, on the production engineering decisions? And how soon can investors expect updates there?

[Frederick Davidson, executive]

Yes, it's a fairly complex situation, and that is -- we all know that the Capire is not a high-grade deposit. It's one that is promising, and we want to make sure that the margins are there that when we operate that we can sustain downturns like we're seeing right now. And that's very much our strategy. Margin is critical. It doesn't necessarily mean great, but margin.

And we're trying to do -- we can't do much about the price of silver or some of the other metals included, but we can do something about keeping our costs as low as possible. We're doing studies on that right now. And we -- hopefully, we'll be in a position within -- who knows. We're dealing with consultants.

But I would say within the next month or so to decide on pushing the button or maybe doing a little more work to make sure we're really comfortable with our operating costs and we sustain ourselves at the perhaps the lower silver prices we're seeing at the current moment.

[Jerry Huang, executive]

Got it. Question 5 relates to, I guess, recent mining law changes and regulation changes in Mexico. So with that said, are joint ventures a good way to continue to increase and divest value from the impact of large property of over 200 kilometers?

[Frederick Davidson, executive]

It's a little more difficult now under the new regulations because you can't transfer title. Titles are all frozen. So -- and new titles are granted. So what we have to do, and yes, we look at the possibility of more joint ventures, we would have to look at an arrangement where, in any joint venture, until the current President retires, that we would have to retain title to the property.

As soon as you transfer it, you lose it. So it makes it a little more awkward. And amongst the other things I think we commented on in our management discussion is we are looking at some corporate reorganizations to try and address some of the issues that have come up by the regulators. Nothing critical, but it's just a pain.

It's going to cost us legal time and accounting time in order to get it all cleaned up, but it's an ongoing issue. It seems to be an ongoing issue almost anywhere you work in the world as governments are looking to fill their coffers somehow, and mines always look very attractive for that purpose.

[Jerry Huang, executive]

Sounds good, If anything, that also sounds advantageous for IMPACT, considering we've held the property for so long. If it's difficult for new projects to be granted, it's probably easier to JV with someone like IMPACT.

Question 6 relates to direct cost this quarter. In terms of direct cost, Fred and team, $90 a tonne, is this the new norm with the pre-COVID supply chain started to loosen up a bit? Are we expecting higher costs going forward?

[Frederick Davidson, executive]

Well, right now, the $90 a tonne is a reflection of a lot of the underground development we're doing. And I would expect that to continue into the second quarter. In fact, I think in the fourth quarter last year, we sort of cautioned people that that's what we'd be doing. We're going to have to see what's going to happen as we all know there's high inflation at the moment.

Supply chain issues haven't really badly affected us, but they are there. And in the future, who knows what's going to happen, but I think we're pretty well structured for that. We are also in the midst of a sort of a -- let's see if we can beat down those costs we can control, and some of those include, such as we're exploring use of solar power to generate some additional auxiliary power for our facilities.

You can't run a plant with solar power, but you can run it for the offices and labs and what have you. We're looking at a use of petroleum products. Both petroleum products are going up in price, and again, that's an environmental issue, and both of these are to see if we can somehow reduce the use of petroleum products in what we do. So there's a number of things.

Some of them were very small in impact, but everything helps to improve that. $90 a tonne, who knows what the inflationary impact is going to be? And remember, our costs are incurred in Mexican pesos for the most part. So that ratio between the Mexican peso, the U.S. dollar and the Canadian dollar is probably going to affect the cost per tonne more than almost anything else.

[Jerry Huang, executive]

Sounds good. Question 7 addresses some of the greenfield exploration program you mentioned this year in 2022, Fred. Which targets are the most exciting for you? And you mentioned about 20,000 meters. So this year, when are we expecting more results?

[Frederick Davidson, executive]

Good question. We're working on what we call brownfields drilling right at the moment, and there is a reason for that. The process of permitting has now been sort of made into more of a bureaucracy in Mexico. It just takes a little longer to get permits to go ahead with the program. So we are drilling in the area of San Ramon. We're now going underground into those new areas, San Ramon South, and we'll be drilling from there underground.

Pachuqueno was an area we're drilling in both surface and underground. We're going to into another project directly adjacent to Pachuqueno and probably accessible from the Pachuqueno workings, which is accessible from the Guadalupe workings, of course, called La Luce, and that will be a program we'll be drilling very shortly. We've been drilling at Veta Negra, and there's certainly some interest there in what we're finding.

The next one is Alacran, which, of course, is the oldest mine that we know of in the district. 1527 was first production. And some historical records in the 1920s were suggesting they were shipping multiple 1,000, 2,000, 5,000 grams of silver directly to the smelters. And then the other one we're going to be working on is we are going to be drilling some Capire, because there's 2 sides of the Capire. There's the current Capire open pit or potential open pit. That's a defined item.

And the other way we could look at getting Capire's cost down per tonne is to see if we can increase the resource there. And we're going to be drilling 2 other targets in the immediate vicinity to see if we can enhance that overall -- actually 3 other targets in that vicinity. You see we can enhance what we have there, increase the throughput, hence the cost per tonne goes down.

So we're going to be very busy. Permitting is slowing down on the greenfield projects. We have a number of greenfield projects, some, which like Chapanial, have gold in them. But it's -- we've got enough work ahead of us immediately on the sort of brownfields or near 2 brownfields programs that it will keep our guys busy for the rest of the year on that alone.

[Jerry Huang, executive]

Okay. Great. Last question, question 8, addresses certainly a subsequent event to the quarter. In recent weeks, we've seen a drastic of sell down with the drop across broad markets, obviously, with IMPACT affected as well. Any comments on immediate activities? The company is planning to address the recent stock drop? Are insiders buying some more opportune opportunities?

[Frederick Davidson, executive]

Let's look at it. You're right. There is a unique buying opportunity. If you're a believer in silver, every cent that the stock goes down makes it even a better deal. And as you know, we're highly leveraged to silver and silver prices, probably the most leveraged in the -- on the TSX as far as I know.

That situation in silver is very volatile. It's a thinly-traded market. There's people that I think are probably manipulating it. There's a lot more paper silver out there than there is actual silver. And a lot of silver is produced as a byproduct from base metals. And we're seeing a decline in production in certain of the base metals, which means there's going to be a decline in supply of silver.

So I'm a silver bug, if you will. Insiders have and are making acquisitions on it. I think as we are usually under the situation of blackouts, we have a policy, as you know, that we don't trade from the time that we get the first draft of the financial statements to about a week after the financial statements have been issued just for the obvious reason that, that way, nobody can look at it and second guess us on, gee, what did you know?

We're all believers in it. It's -- silver is certainly not unique. Everybody across the board is getting hammered. We are very well positioned, however, and that is we don't have to go to the market to raise more money, but we are going to go to the market and help identify, for investors, the opportunity. And as you know, we'll be attending the Vancouver Resource Investment Conference.

We're going to be attending a private institutional conference in Europe in the very near future, and then the PDAC and then, of course, the normal distribution of information. So we're out there telling people the obvious. [indiscernible] is unique and opportunistic position, well-funded company. It's not asking for additional dilution. It's simply suggesting and identifying a unique opportunity for the investor.

[Jerry Huang, executive]

Excellent. Thanks for the overview, Fred. Again, just to reiterate to investors and listeners, if you have any questions for IMPACT Silver regarding current quarter or general operations and financial interest, give us a call at 778-887-6489 or send us an e-mail at [email protected].

We thank you for your support and following of IMPACT Silver. Despite these recent turmoil times, we remain one of the best leverage plays to pure silver with 90% plus silver exposure on revenue and over, now, nearly 12 million ounces pure silver produced, no long-term debt.

Again, tune in for Q2 2022 or our next quarterly calls or send us an e-mail or give us a call any time. Again, this is the IMPACT Silver team signing off on Q1 2022 conference call, earnings and results overview. Thank you.

[Frederick Davidson, executive]

Great.