Impact Silver Corp

XTSX:IPT

Earnings Call Transcript

[Jerry Huang, executive]

Good day, ladies and gentlemen. Welcome to IMPACT Silver Corp.'s Q3 2022 Financial and 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 Corp.'s 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 in the forward-looking statements.

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

[Frederick Davidson, executive]

Thanks, Jerry. Well, it was certainly an interesting quarter for us. The total revenue for the quarter was $3.8 million, down from last year's same period of $4.1 million. That, in spite of the fact that we were performing according to plan, and the plan really had a setup where we would do more tonnage and better grade, and that's exactly what we did.

During the quarter, we produced almost 40,000 tonnes as compared to 35,000 tonnes the prior year. We generated 169 -- actually, almost 170,000 ounces as opposed to 147,000 ounces in the prior year, it was an increase of 15%. And yet the quarter went against us in terms of revenues, and that is the average revenue per tonne went down to just under $100 a tonne as opposed to $114 a tonne. And that strictly is price.

We started off the year with plans to work between $22 and $24 an ounce silver. And when you commit to a program, in mining especially, you do development, you do planning that sets you up to access or to access and timing within that overall budget. And the end result was first quarter was right on line. Second quarter, we started to see the effect of the declining price of silver. And third quarter, we were hit in terms of revenues, with an incredible decline in price of silver, down about $5, and that really hits the bottom line.

The other side that we went through was the experience on costs. And that is, we've alluded to this earlier in the year, we're going to be doing extensive development with the intention of bringing on more ore for development towards the end of the year and into 2023. That resulted in costs, and I have to admit the costs were even a little higher than we anticipated, in part because of inflation, in part because of a settlement that was retroactive with the union.

And we're seeing pressure on pricing because of inflation. We're actively out there trying to mitigate that with looking at new bids, putting new things for tender, et cetera. And at the same time, we're looking at where we can perhaps produce at a lower cost. And that's going to be focusing primarily on the Guadalupe Mine which, because of the underground rail system and the shaft, is one of our lower transportation costs. And we'll be isolating the particular veins we're working on.

Overall though, other than the fact that the price of silver was down and our costs were up, we were pretty well where we wanted to be or anticipated want to be sans that issue. If we had seen that price being up, we would have been in a breakeven situation, and that was where we really anticipated being for the third quarter.

Fourth quarter going forward, [indiscernible] what the price of silver is going to do. We're looking at it. We are going to mitigate our costs wherever we can. And that will include things like trying to mechanize wherever possible. Unfortunately, we're an underground mine, and it's very difficult when you're mining narrow veins to mechanize too heavily. We're looking at any sort of areas where we can reduce our human commitment. Unfortunately, labor is always a high cost.

Area such as power, there's very little we can do that we get off of the Mexican power grid. So we have to focus on, if you will, very practical, incremental situations. And started that as soon as we saw beginning of September where we are getting hit with this declining price of silver. We started doing some minor layoffs, and we did a hiring freeze, and that's stage 1. If we see continued pressure on that, we will probably do more.

The one thing we are always afraid of and that is we committed to a fairly large exploration program this year. And we did stop the program basically at the end of the quarter. But exploration the lifeblood of mining. And next year, given the price of silver picks up again, we'll once again be aggressive.

We did almost 22,000 meters of drilling this year, and it was a split between what we would call brownfields, and that is extending where we're mining and looking for potential basically mineralization, I'm not allowed to call it ore, block that we can mine. And earlier stage with this perspective.

And perspective for greenfields is always a higher risk and you tend to have a higher failure rate with your drilling. But with the brownfields, we tend to have a more successful. and our brownfields drilling this year was very successful. And the greenfields are pretty well what we expected, some successes and some disappointments.

So overall, I would say on an operating basis, we've had not a bad quarter other than certain issues. And we're having pretty well online, with the exception of those issues, where we thought we would be at the beginning of the year.

Jerry, over to you.

[Jerry Huang, executive]

Great. Thanks for the overview, Fred. Here are some of the questions we compiled from recent investors and e-mails this quarter. Feel free to send questions to [email protected] or call us directly at [phone].

Fred, question one. Difficult quarter, team. What are specific cost mitigation strategies that IMPACT is implementing? And what's the forecast to breakeven at $20 silver?

[Frederick Davidson, executive]

Right now, fortunately, it's over 20 -- it's about $21 silver, and we're starting to feel a lot more comfortable. That doesn't mean we're not going to try and continue to mitigate operating costs. We are in an inflationary environment. Now unfortunately, to a degree, the peso was actually fairly strong compared to the U.S. dollar, compared to most other. And the end result is we're going to be constantly fighting that.

Inflation in Mexico is not as severe in certain countries. But again, there is an expectation on the community, on our union and on our contractors that we have to deal with that as well. So it's going to be a rough, roll-up-your-sleeves here the balance of the year, doing our best to keep those costs down.

We are putting a hold on exploration, at least surface exploration. That's one that's always optional. We'll continue to do brownfields work because that's the lifeblood of what we do, mining. But there are a few prospects that I think early next year we will be chasing on greenfield side that could prove quite attractive.

We are going to plan, obviously focus on perhaps higher-grade material, but that takes time. It takes time to access and it takes time to develop it. But all of that, plus the effort to freeze personnel and in fact, where possible, some redundancies, will hopefully push some of our costs down.

[Jerry Huang, executive]

Okay. Great. Question two. IMPACT team, $4 million of exploration and 22,000-plus meter drilled is quite significant versus previous years. Any exploration update the investors can expect in the near term?

[Frederick Davidson, executive]

That's one of the things I have to apologize for. The -- interesting enough, we've been so busy drilling that the geological team has had in trouble putting it together -- the results together for purposes of 43-101 reporting.

We started off primarily focusing on brownfields -- excuse me. That was very successful. And I say we hopefully would have those fairly shortly. We drilled a number of greenfields towards the end of the year. And those, we'll be releasing hopefully in the next couple of weeks at the most. They're up and down, and they are what they are.

I think the brownfields is probably the most exciting, and it's the one that's going to take the longest to get out because it has the 43-101. And we have to provide for the readers the implications of that. Where in greenfields, we say we made a discovery or we didn't make a discovery. Brownfields is, we've done something here versus extended one of our major projects or something. So a little different in how we approach it, a little difference on the requirements that we have to do for disclosure purposes.

[Jerry Huang, executive]

Okay. Great. Question three. When can investors expect drilling updates beyond the San Ramon and Veta Negra onto some of the new areas we spoke about on the presentation?

[Frederick Davidson, executive]

Yes. We're going to -- we tested balance of the San Ramon. We had a report out at the beginning of the year on the San Ramon and we had a report out on Veta Negra. What we then did was, on both of them, we tested the extremes of those deposits. And that is where it actually ends to get an idea for development purposes. Those, I would expect would be out shortly.

We also tested Aurora 2, which is over at Capire. And that one was -- again, was designed to expand our knowledge of what potential is in the area over and above what we've got on the 43-101. And I think that one went very well. And again, we're sort of trying to put it together to summarize it.

We tested Manto Rico, I don't think it was as exciting. But Aurora 2 was definitely exciting. And we did some infill drilling at Capire as well to sort of outline and give us a higher degree of comfort on the doors there.

So a bunch of programs that were conducted. Some of them are, say brownfields. Some of them are greenfields. And although we've been a little slow in that, it's a little tight for crew, and I didn't want to hire extra people just to produce the results a month earlier, and especially when they don't understand the mines, the geology. We just have to wait until they get their act organized, and we will be getting that information out over the next month or 2.

[Jerry Huang, executive]

Great. The question four has to do with cost. As you mentioned, the operating cost per tonne rose to $106 a tonne this quarter. Is this a new run rate we can expect with the inflationary environment we're in?

[Frederick Davidson, executive]

Well, as I said, we're fighting that right now. We did have some settlement issues with the union which were retroactive, which got plugged in there. And some of our development costs which is part of the development cycle, and we alluded to that at the beginning of the year, that towards the end of the year we'd be into doing development to increase throughput for late in the year or early 2023. So both of those hit that number.

I would hope over the next little while, and that's the next month or 2 or 3, that, that number is coming down. And we've obviously got to work at it. But inflation and, interesting enough, the Mexican peso does hurt a bit, and we've got to fight that.

[Jerry Huang, executive]

Got it. Question five has to do with Capire, which we briefly mentioned the drilling at Aurora 2. At $20 silver, is Capire still in discussion?

[Frederick Davidson, executive]

Yes. It's not just silver, of course, because Capire has also got lead and zinc and some minor quantities of copper and gold. We've always looked at that as when we first did it back when. We started off and with price of silver at over $30, it looked great. And we did start the process at that point in time to our pilot plant. The price of silver then fell to about $15 almost immediately.

So what we're looking at is the resilience of that deposit. And what we want to be assured is that there's a substantial margin between the operating costs and our revenue.

And interestingly enough, one of the dominant factors this year, when we were looking at it initially at the beginning of the year, was zinc prices were very high. And as a product, zinc, lead and silver, it was fairly attractive. We were actually looking at the XRT unit at that point in time and we were just getting to the final numbers, we started to see the collapse of those metal markets. And of course, the world has changed ever since our friend Mr. Putin has invaded Ukraine.

And I think at this point in time, we're on hold with that until we have a comfort level that there is a good, healthy margin again and it's going to stay there. And at $17 silver, it wasn't. At $22, it looks pretty good. But we also want to look at price of zinc because it's a major contributor to the bottom line as well. So we're on hold.

We were happy with what we saw on Aurora 2. We're happy with the infill, the work that we did at Capire. I think we've got all the information we need. Now we need a comfort level as to price.

[Jerry Huang, executive]

Got it. Okay. The last question comes from an investment who is asking about the overall geopolitical situation. So recent changes in parts of South America, other than Mexico, has made it for some of your peers to work in country. How is IMPACT faring in Mexico?

[Frederick Davidson, executive]

Yes. Mexico has joined the overall impetus that we're seeing, not just in South America. I mean South America, there's title issues and what have you, nationalization, threats, what have you. We're not seeing that in Mexico. What we are seeing is what we're seeing in actually the first-world countries like Canada, where stakeholders feel they are entitled to more of what's being generated, forgetting just their basic economics to dictate decisions.

Interestingly enough, they haven't, in Mexico, raised the tax rates. They haven't increased the NSR that they charge or on the gross and on the EBITDA. So they seem to understand that is an important employer in the community. We are a very important employer in the community. But we are seeing pressure, because in the local community, we are the principal source of income. And it's an educational issue of trying to educate them, make them understand. It's also an issue of dealing with the federal government and things like tax collection, which they have driven on an impetus lately. And actually, we incurred a fairly healthy bill just explaining how our tax returns were filed, et cetera, over the last couple of years, and it's going to be ongoing.

And quite frankly, I think we see that in other places, even in Canada, where it could take permitting, for instance, up to 10 years. Mexico is faster on the permitting. But still it's an aggressive situation. And going forward, I think the mining industry just has to accept this is the new world we're in.

[Jerry Huang, executive]

Excellent. Thank you, Fred, for that. And this is all for the Q&A session for the Q3 2022 IMPACT Silver's earning and financial production results for this year. We wish everyone a great day. And for future reference, please visit our website, www.impactsilver.com or send us an e-mail at [email protected] or you can call us directly [phone]. And we look forward to seeing you on the Q4, year-end call next year. And for our U.S. listeners, happy Thanksgiving.