Research
Report: Impact Minerals International Inc. - written by
Mike Kachanovsky
Impact Minerals International Inc. is a Canadian-based
junior mining company active in Mexico and the Dominican Republic.
They recently negotiated a purchase option to assume ownership of a small
mining operation, along with a large property package hosting dozens of historic
mine workings. The vendors of this property have failed to provide adequate
capital investment to allow for optimum production, and lack expertise to
oversee a modern mining operation, and hence the property is in distress,
allowing the negotiation for the acquisition to be concluded on favourable terms
for Impact Minerals shareholders. The
management team of Impact Minerals believes that funding an intensive
exploration effort will uncover large new deposits of high-grade silver-gold
ore. They also expect that a thorough operations audit of the processing plant
on site will enable increased capacity and more efficient production.
As a result they are confident that the project can become a low-cost,
profitable operation. Commodity
pricing for silver has been rising and it can be argued that a new bull market
cycle for silver has begun. If
Impact Minerals is successful on their development objectives for this
acquisition, the company will offer shareholders excellent leverage to
participate in a rising market for precious metals.
I own shares of Impact Minerals International Inc.
- Mike Kachanovsky
The odds of any junior mining exploration company advancing to the stage where they operate a producing mine should at best be considered a long shot. Mineral exploration is a risky, capital-intensive venture, where failure is considered the norm. Funding issues usually stand in the way of attempts to gain control of producing assets through the acquisition shortcut. Impact Minerals International may be one company that is able to beat those odds. Though the company has been actively exploring property interests for several years, with unspectacular results to date, it appears they have positioned themselves to exploit an exceptional opportunity by negotiating an option to purchase an large property package comprising the Royal Mines Project, complete with two operating mines and a processing plant, in the prolific Zacualpan Silver District of Mexico.
The terms of the deal state that Impact must pay a monthly “lease fee” to maintain their option while they complete due diligence and explore the potential resources of the property. Any time within a three-year period they can exercise the option to purchase the entire project for a fee of $1.5 million USD and the issuance of 300,000 shares. Given the strong share capital position of the company, and low purchase price, it is well within the capability of management to raise the funds to complete the purchase and deliver tremendous value for shareholders.
Office Address: 900 – 543 Granville Street, Vancouver, BC, Canada, V6C 1X8
Telephone: (604) 681-9501
Exchange Listing Symbol (TSX-V): IPT
Website: http://www.impactmin.com
Share Structure: Issued and Outstanding: 17,165,022
Options: 1,605,000
Warrants: 5,921,166
Fully Diluted: 24,691,188
Market Capitalization: $5.7 Million CDN
The flagship property package for Impact Minerals is the Royal Mines of Zacualpan project, secured through option to purchase agreements that were closed on June 17, 2004, for the acquisition of two operating mines, a fully permitted 500 tons-per-day processing plant, and the rights to the surrounding property. The company followed this up with a comprehensive staking program to assume control of most of the district surrounding the mines, comprising a total area of 125 square kilometers. A thorough reconnaissance of this district has since revealed over 100 silver prospects, and remnants of historic mine workings from 500 years of mining activity documented in the area, a testament to the degree of widespread mineralization across the property.
There are two mines currently in operation on the property. The terms of the option agreement allow the vendors to continue production from these mines until the net purchase price of $1,500,000 USD is paid, and monthly lease payments of $3,000 USD, plus an annual payment of 100,000 shares of Impact are required to maintain the agreement in good standing. Primarily due to the inexperience of the vendor’s management team, and the failure to invest sufficient operating capital to fund efficient operations, the mines are running below capacity and generating marginal revenues. Underground development at the mines proceeds without the planning and exploration activity necessary to identify and develop new zones, and ensure efficient operations. As a result, the Royal Mines property has seen production levels fall well below the potential for the area, and Impact was able to negotiate the purchase option at very favourable terms.
The mineralization of the district is characterized by a series of northwest trending structurally controlled vein systems that extend for several kilometers in length. Formed through the processes of hydrothermal deposition, the veins typically contain a high-grade near-surface oxide horizon where silver grades can run to 5,000 g/t. Below is a sulphide zone that extends to depths of at least 300m, with silver grades commonly averaging 300-500 g/t. The ore also contains lead and zinc, becoming more enriched at depth, in addition to low grade gold values averaging 0.5 g/t. Observations from current processing at the mine are encouraging, and suggest the ore recovery percentage will be above average.
The company has initiated a program of mapping, and rock and soil sampling to identify targets for a 2000m diamond-drilling program commencing at the end of January 2005. Additional drilling will take place later in the year to follow up on the first program. To date most of the property holdings have not seen any exploration efforts utilizing modern technology. Given the prolific nature of the mineralization across the property, it is expected that several promising zones will be uncovered in this preliminary effort. If they are successful in that objective, management plans to exercise the purchase option before the end of this year. A full-scale exploration effort will follow to develop multiple mine access points to provide feedstock for the processing plant and bring production up to capacity. Once sufficient tonnage has been brought into production, efforts will focus on upgrading the capacity of the processing plant.
The company also owns the El Brujo property in the Dominican Republic that has several showings of high grade gold and silver values uncovered during a sampling program. The property has seen only limited testing by drilling, even though the it shares the same geologic formation as the 5 million ounce Pueblo Viejo Mine currently operated by Placer Dome Gold some 100 kms to the west. GoldQuest Mining Corp. is working to earn a 51% interest in the property as a JV partner.
The decision to proceed with the purchase of the Royal Mines of Zacualpan Project will depend on the results of due diligence efforts currently underway by Impact Minerals. Along with the exploration activity, designed to identify and outline new resources to feed the mill in the years ahead, a study is underway to consider all the parameters and cost structure associated with the operations. Based on data from past activity, and certain assumptions to account for potential improvements to increase the efficiency of operations, it is estimated that the operating costs for the project amount to $45 USD per tonne. The objective of operating at near capacity of 500 tons per day is realistic and achievable. With an estimated average silver content of 300-350 g/t, the Royal Mines Project can be expected to produce about 2,000,000 ounces Ag per year. Recoveries of zinc and lead in the ore grading up to 5% will enhance the economics of the operation, which could ultimately generate cash flow in excess of $7 million USD per annum.
The variables to consider from an investment point of
view depend on the strength of commodity pricing, and the ability of management
to prove up new resources and maintain efficient operations to ensure that the
plant operates close to capacity.
Increasing commodity consumption in Asia has been the driving force behind a rising price trend for base and precious metals. Silver pricing in particular has demonstrated a disconnect between supply and demand fundamentals over the last 10 years, and it appears that silver is now beginning to break out from a narrow trading range near historic lows. It is very difficult to predict the possible price targets for silver due to unreliable reporting of above ground supply of the metal available for delivery, but substantial evidence exists that current production is not sufficient to meet demands and the draw down of silver stockpiles is not sustainable. This should support higher prices for silver in the years ahead and improve the economic outlook for primary silver producers. Also the weakness in the US dollar will continue to be reflected in higher prices for all commodities, while at the same time placing an impediment on the development of new deposits due to higher capital expenditures. This serves as a further competitive advantage for silver producers with existing infrastructure in place. As silver prices continue to rise, the large tonnage of lower grade ore in place after past mining activity will become economic to mine and add to the reserves of the property.
The potential going forward for shareholders of Impact
Minerals is based on leverage to regular news flow of possibly impressive
exploration results as they progress through their resource definition program.
Once they have announced their intentions to exercise their option to
purchase the project, thus completing the transition from an exploration company
to a junior precious metals producer, the stock should trade at a multiple to
the cash flow, and this could be substantial.
The management skills necessary to run a successful
exploration venture are quite different from the those required to operate a
producing mine and build a business that can attract capital, grow assets, and
generate a return for investors. Several
directors of the company including the president, Mr. Fred Davidson, have
demonstrated past experience in developing a mineral deposit to full production,
and operating a mine. Management
will probably have to gain the confidence of investors through several quarters
of effective operation at Royal Mines before Impact trades at a cash flow
multiple on par with the peer group of junior silver producers.
Without question, a number of significant hurdles lie
in the path of Impact Minerals, and their ability to fully seize the opportunity
within the company’s grasp. Raising
the capital to fund their purchase option, successfully exploring the property
to uncover ore to feed the mill, increasing the efficiency of operations, and
growing earnings and revenues quarter-over-quarter in a climate of fluctuating
commodity pricing, all constitute formidable challenges for a junior mining
company. Although none of the
potential obstacles above are insurmountable, failure to achieve any of those
considerations will have an adverse effect on the performance of the company.
The company is also exposed to the market risk factors that affects all
junior mining companies. An
investment in Impact Minerals should thus be considered extremely speculative.
The essence of successfully speculating in junior resource stocks lies in
the ability to uncover companies that can generate potential gains that outweigh
the risk exposure. Taking into
account the extremely low market valuation that the company currently trades at,
and the potential upside target that is attainable if they are successful in
their objectives, Impact Minerals appears to fit that profile.
Disclaimer: I have made my research and opinions available to the public as a resource to provide investors and the public with basic information. My comments and opinions should not be interpreted as a recommendation or investment advice, which I am not qualified to provide. While I have made every effort to maintain accuracy in the information I provide, it is possible that there are some errors or omissions in my coverage and the accuracy cannot be guaranteed. It remains the responsibility of each individual investor to confirm if the subject of my analysis is appropriate for their investment objectives, and to conduct their own research and due diligence, and retain the services of a qualified advisor on to provide this service on their behalf. I accept no responsibility for the performance of the companies that I feature in my coverage. Junior mining and exploration companies are a risky market sector and investment in these companies can result in loss of capital. Past performance is no guarantee of future success. From time to time I may purchase stocks in the companies I feature in my reports, and I may sell some or all of my holdings. I will disclose personal ownership in those companies that I refer to at the time of my first coverage, or after follow up reports. I do not accept compensation from companies as payment to provide positive coverage or opinions.