Exceptional
exploration potential makes this
Mining
veterans will tell you that the best place to look for a new deposit is right
alongside an old mine, and there are good reasons for this view. Favorable conditions
that contribute to the emplacement of one deposit will often extend across a
wide area, well beyond the limits of the original mine workings. Also, as the
information on geological structure is better understood from working an ore
body, this could assist the interpretation of exploration data, and improve the
discovery odds in the surrounding district. One should also note that mining
technology today is far more advanced than the practices that were common even
fifty years ago, and since many past producing mines date back centuries, it
should come as no surprise that a modern exploration and development program
can often transform an old district into a productive operation with strong
economic potential. So the risks are much lower for companies to acquire under
explored property assets where historic mines were once in operation.
None of
this comes as a surprise to the management team of Impact Silver Corp, who have taken on an entire mining district with a history
spanning hundreds of years of mining. The company came out of nowhere in June
2004, with the announcement of a purchase option to acquire the Royal Mines of Zacualpan project in
If there is
an issue with securing a drill contractor in
As an
illustration of just how prospective the past mine workings are for new
discovery, consider that in 2005 the company launched its first limited
exploration program, and was successful to hit silver mineralization in every
drill core. This included one intercept that graded an eye-popping 27,793 g/t
silver and 3.4 g/t gold, along with high-grade zinc and lead values. Additional
drilling completed in subsequent programs has returned further encouraging
results.
While the
exploration targets are impressive, development of the currently producing
mines is the priority at the present time. Impact was able to buy the project
on very favorable terms because the former operator of the mines had basically
run them into the ground, if you will excuse the pun. Limited capital resources
and poor management are not the precursors for success in the mining game. So a
great deal of time and money has gone into underground infrastructure
improvements, and refurbishing the equipment at the recovery plant. This kind
of work is less impressive than spectacular exploration results, so the share
price for the company has languished.
The mill is
capable of processing about 500 tonnes of ore per
day, yet only about 200 tonnes of throughput is
currently running on a daily basis. The operational makeover is nearing completion
however, and the production level is expected to begin ramping up into 2007.
Impact
management decided to run lower grade ore during the first quarters of
production after they gained control of the project. The former operator had
been mining only the highest grading ore from the deposit and a large volume of
marginal mineralization had been bypassed as a result. Before advancing
development work to open new zones of rich silver ore, the company went back to
clean up the remnant lower grade material. However, even with the limited
production of low-grade material, Impact was still able to surprise the market
in the most recent quarter by reporting a modest net profit.
So the
future looks very bright indeed for this little company. Development work has
now opened a large tonnage of higher-grade ore to feed the mill. And the mill
itself has been upgraded to generate improved efficiency from operations, while
the overall tonnage of production is increasing. Add in the strong market price
for silver and base metals, and there is ample reason to be very optimistic
that Impact is capable of reeling off several strong quarters of growth and
profits.
But the
company is not going to just ride the success of one project. It recently
announced the acquisition of the Veta Grande Silver
Project in the prolific Zacatecas mining district. This acquisition includes
four property claims with an application for a fifth property. However, the key
to the deal is a modern mill and recovery plant that is currently generating
revenues from operations. The terms for the acquisition allow the current owner
to retain control of the mill until a period of 18 months has passed, and
Impact is entitled to 25 percent of the revenues from the mill during that
period. Custom milling is currently underway, generating revenues and the
company plans to invest its share of this cash flow back into capital
improvements for the mill.
Shortly
thereafter, Impact announced the several more attractive acquisitions in the
Zacatecas district to bring its holdings to a total of 7 properties, and then a
joint venture partnership was signed with junior explorer Yale Resources
allowing it to earn an interest in three of those projects in exchange for cash
and exploration work commitments.
Impact
plans to complete the earn-requirements for the Veta
Grande Mill, and will own an undivided interest through which any new ore body
discovered on these projects is likely to be processed, so there are back end
advantages to the deals as well. It is a prototypical example of the low risk
approach that Fred Davidson has employed to build value for shareholders. There
are also additional attractive opportunities to pursue in this area as the
company builds relationships with the smaller independent mine operators who
will be using the mill on a contract basis. This could contribute to future
growth potential for the company.
One
appealing aspect of Impact is the tight share structure, with only slightly
more than 38 million shares currently outstanding, and less than 49 million
fully diluted. That ensures shareholders will have strong leverage as the
company grows earnings, and it should support a much higher share price in the
future. With the revenues flowing in from operations, the company will not have
to issue a great deal of share capital in the future in order to raise the funding to meet their objectives.
Throughout
this rapid growth curve, Impact management has stuck with their core values to operate
the company with a bias to conservative targets and financial stability. The
company has a clean balance sheet, with a well-funded treasury and no long-term
debt. This platform will enable the company to move forward with its objectives
to conduct systematic exploration in order to develop new resources at Zacualpan, and increase total production to take full
advantage of the bull market conditions.
Impact Silver is exactly the kind of company that the Mexico Mike Portfolio was created to exploit. There is tremendous asset value to be developed, and the company is fully leveraged to the upside ahead in a resource bull market, yet the overall risk going forward is much lower than the sector as a whole. So few junior mining stocks are able to post a net quarterly profit at this point in the cycle, and to find one like Impact that is so cheap in terms of market capitalization relative to its peers, represents a compelling investment opportunity. I buy a $10,000 allocation for the portfolio.