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IMPACT Silver – Growing Company Severely Undervalued

June 13, 2011 | About:
If you know anything about investing in silver, you have probably heard Eric Sprott making bold statements that silver is going to be the investment of this decade, similar to the way that gold was the investment of the last decade. As of the date of this report, silver is trading for about $36 per ounce, and the bulls are predicting that silver will reach $50 per ounce and even $100 per ounce in the near future. About a month ago, the price of silver almost reached $50 per ounce but then experienced a significant correction back to the current levels. While I happen to believe that the price of silver is going higher from here, I prefer to stay away from owning silver in its physical form. I would much rather own a silver mining company. This is why I like IMPACT Silver Corporation (ISVLF)(IPT.V), which is a silver producer with an extensive portfolio of advanced silver projects in Mexico.

IMPACT Silver is not some exploration company that just raised capital in order to drill holes in the ground and wildly promote the stock to make insiders rich. IMPACT Silver is already a silver producer that was profitable from the day it opened its doors in 2006. The management increased the company’s silver production from 348,949 ounces in 2006 to 823,571 ounces in 2009, which represents an increase of 136 percent. All of this was achieved by using internally generated cash flows. Currently, the company is on track to produce 1 million ounces in 2011 and 1.5 million ounces in 2012.

Assuming that the price of silver is at $30 per ounce and the company produces 1.5 million ounces per year, then IMPACT Silver is a $3.50 per-share stock. Currently, it trades for $1.70 per share. However, if Eric Sprott is right about silver and it reaches $50 per ounce, IMPACT Silver should be a $7.70 per-share stock. And, if silver reaches $100 per ounce, then it will be even higher.

Business Description

IMPACT Silver is a profitable silver producer with an aggressive growth strategy whose main two assets are Royal Mines of Zacualpan Silver District and Mamatla Mineral District.

Zacualpan is one of the oldest mining districts in North America with mining activity dating back to at least 1527. Currently, the production that feeds a central processing plant comes from three operating mines: Chivo, San Ramon and Noche Buena. The company acquired this district in 2006 from a private businessman who did not know much about mining. He barely invested any money into it and the lack of investment turned out to be detrimental not only to the mill but also to the morale of the workforce. When he was ready to sell, the price of silver was below $5 per ounce, and IMPACT Silver got an incredible deal.

A mining company can only operate at its full capacity if it is fed enough ore. In 2009, the plant only operated at around 313 tpd (tonnes per day) as it was only fed ore from the Chivo and San Ramon mines. In April 2010, the Noche Buena mine was put into full production and provided enough feed to get the plant to operate at 360 tpd by the end of 2010. Currently, it is operating at 419 tpd and is on schedule to produce 1 million ounces of silver in 2011. The management plans to increase the plant’s operation to 500 tpd, which will yield 1.5 million ounces of silver in 2012.

The second district, Mamatla Mining District, is located immediately southwest of and adjacent to Royal Mines of Zacualpan Silver District. The district was acquired in February 2007 in a government auction. Mamatla was previously explored by Valerie Gold, which spent over $10 million to do so. However, the company was unsuccessful in turning resources into production as it ran out of money and was unable to raise additional capital. The capital markets for mining companies froze after the Bre-X scandal that spooked investors. For more information about this fraud, you can view the following videos:

http://www.youtube.com/watch?v=pNvixeqlKdQ&feature=related

http://www.youtube.com/watch?v=0YNnjitbcaE&feature=related

http://www.youtube.com/watch?v=-2hTKWZZz74&feature=related

In the Mamatla Mining District, IMPACT Silver is in the process of bringing Capire Project into production by the end of 2011. Currently, the company has a semi-portable 200 tpd processing plant, which will be used for the first couple of years before a new plant is constructed in 2013/2014. Capire will be the fourth mine taken from discovery to production. In 2011, it will not add much into production but in 2012 and 2013, it will produce an additional 300,000 ounces of silver per year. The management’s goal for this district is to construct a plant with a capacity of 1,000 to 1,500 tpd and bring additional mines into feeding it. Based on my guess, Mamatla Mining District could produce over 4.5 million ounces of silver per annum. Add this to 1.5 million from the Zacualpan Silver District, and by 2015 you have a silver producer with a production level of about 6 million ounces of silver. None of this is included in my valuation calculation.

Valuation

IMPACT Silver increased silver production from 348,949 ounces in 2007 to 823,571 ounces in 2009 which represents a 136 percent growth. All this growth was financed by internal cash flow, which is absolutely amazing. Also, let’s not forget that the price of silver was nowhere near where it is today. In 2010, production dipped to 750,259 because the company revised cut-off grades and mined more medium grade ore as it took advantage of high silver prices. In 2011, silver production is on track to reach 1 million ounces. During the first quarter of 2011, the company already produced 260,970 ounces. By 2012, the company projects a production level of 1.5 million ounces of silver. Considering that so far the management is executing flawlessly, I have no doubt that they will be able to execute again.

Let’s first look at how much money IMPACT Silver can make with the production of 1 million ounces of silver. I will use a silver price of $30 per ounce even though it is $36 per ounce as of the date of this report.

Revenues = 1 million production x $30 per ounce = $30 million

Expenses = 1 million production x $13 per ounce = $13 million

Profit before Taxes = $17 million or $0.24 per share

Using a multiple of 10 on this number gives us a value of $2.40 per share.

Now let’s take a look at how much IMPACT Silver can make with the production of 1.5 million ounces of silver which is scheduled to occur in 2012.

Revenues = 1.5 million production x $30 per ounce = $45 million

Expenses = 1.5 million production x $13 per ounce = $19.5 million

Profit before Taxes = $25.5 million or $0.35 per share

Using a multiple of 10 on this number gives us a value of $3.50 per share.

What if Eric Sprott is right and silver reaches $50 per ounce?

Revenues = 1.5 million production x $50 per ounce = $75 million

Expenses = 1.5 million production x $13 per ounce = $19.5 million

Profit before Taxes = $55.5 million or $0.77 per share

Using a multiple of 10 on this number gives us a value of $7.70 per share.

What if Eric Sprott is even more right and silver reaches $100 per ounce?

Revenues = 1.5 million production x $100 per ounce = $150 million

Expenses = 1.5 million production x $13 per ounce = $19.5 million

Profit before Taxes = $130.5 million or $1.81 per share

Using a multiple of 10 on this number gives us a value of $18.10 per share.

As you can see, the value of IMPACT Silver will depend on the price of silver and its underlying production. Consequently, if we assume silver production levels of 1.5 million ounces of silver, then we arrive at values between $3.50 and $18.10 per share. While I have no idea where it will fall, buying it for $1.70 per share does not seem like a bad idea.

But the story does not end here. The above production calculations are only from the Zacualpan Silver District. They do not include Mamatla Mining District, which as I mentioned before could add over 4.5 million ounces to the company’s silver production levels. Running the same number using 6 million ounces of production can get you a stock price that is significantly higher than any of my conservative estimates. Because the company is cheap based on the current production, I won’t bother calculating it, and I will treat it as a free option that might have some value in the future.

Catalysts

On March 24, 2011, the stock of IMPACT Silver reached $3.14 per share and then kept going down. There are several reasons for this decline: 1) the price of silver declined after the margin requirements were increased on the exchange, and 2) warrant holders sold the stock after exercising the warrants.

The CME Group raised margin requirements on trading silver futures several times this year, and consequently, this drove the price of silver down from almost $50 to $36 per ounce today. IMPACT Silver sold off heavily as the price of silver experienced this correction.

On Dec. 15, 2010, the company closed a $15.0 million private placement consisting of 12 million units at a price of $1.25 per unit. Each unit consists of one common share of the company and one half of a non-transferable common share purchase warrant. Each warrant was exercisable at $1.75 to purchase one common share of the company until Dec. 14, 2012. Under the private placement, the company was entitled to accelerate the expiry date of the warrants in the event that the common shares of the company trade at a price of $2.50 per share or more for a period of at least 10 consecutive trading days.

Because the stock traded at a price above $2.50 per share for 10 consecutive trading days, the company gave such notice to the warrant holders. Some of the investors that exercised their warrants immediately turned around and sold the stock in the open market, sending the price below the exercise price of $1.75 per share. While there might still be more selling happening in the near future, all the warrants had been exercised as of last Friday, June 10, 2011, which was the date that these warrants would have expired if not exercised.

What is interesting is that Eric Sprott was part of the $15 million private placement and his company received the majority of the warrants. He did not exercise his warrants until the last few days last week. This means that even though the price of IMPACT Silver was below $1.75 per share and the warrants were technically worthless, he still went ahead and exercised them paying a higher price that what he could have gotten in the open market. I believe that this is a strong indicator that he believes that IMPACT Silver is severely undervalued.

Because the warrants have all been exercised, this could provide a nice catalyst in the near future. More catalysts are likely to come from quarterly earnings and increases in production in 2011 and 2012. The increase in the price of silver should also have a positive effect on the stock of IMPACT Silver.

About Silver

Investment in IMPACT Silver makes the most sense if you happen to be bullish on silver. If you are not, you should probably look elsewhere. The following videos reflect a bullish view on silver.

Eric Sprott – Casey Research Gold & Resource Summit, October 3, 2010

http://www.youtube.com/watch?v=T2w7wGwUZ9Y

Eric Sprott – Vancouver Resource Investment Conference, Jan. 24, 2011

http://www.sprott.com/Main1.aspx?id=297

IMPACT Silver Corporate Investor Presentation – May 2011

http://www.impactsilver.com/i/pdf/CorporatePresentation.pdf

Articles about IMPACT Silver

Wolverton Resource Review by Jim Dartnell – Nov. 28, 2006

http://www.silverstrategies.com/publications/Wolverton_ResourceReview112806.pdf

A Small Silver Miner with Big Potential by Sean Brodrick – May 7, 2010

http://www.torontostockexchanges.com/read_email.php?email_id=1318

IMPACT Silver Mine Tour by Cansano Capital Management – March 29-31, 2008

http://www.cansanocapital.com/Temp/Impact-Silver.htm

YouTube Video about IMPACT Silver

Sean Brodrick sits down in Zacualpan, Mexico, with George Gorzynski, Vice President of Exploration of IMPACT Silver. They talk about what the company is doing and a new mine that IMPACT Silver will soon bring. Very few investors are even aware that this company even exists. When I watched this video, it was only viewed 28 times.

http://www.youtube.com/watch?v=q5rxNL2Qg_0&feature=related

Conclusion

IMPACT Silver is a company run by excellent managers. From its first days of existence, the management has been able to increase silver production at a phenomenal rate using internally generated cash flows. Only recently, it raised $15 million to accelerate the increase in production even further. Because the management executed on its plans flawlessly, I have no doubt that they will be able to bring the company to a production level of 1.5 million ounces of silver in 2012 and even more thereafter. If the price of silver continues to increase, IMPACT Silver is going to be a huge winner. If the price of silver stays at current levels, IMPACT Silver will still be a winner. The price of silver would have to fall significantly below $23 per ounce in order for IMPACT Silver to be not such a good deal. Considering that the governments around the world are destroying their currencies, I doubt that silver will fall below $23 per ounce.

Disclosure: I, or persons whose accounts, manage or own shares of IMPACT Silver. This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors LLC, is responsible for any losses resulting from purchasing or disposing shares of IMPACT Silver. You are advised to consult your financial adviser or conduct the due diligence yourself.

About the author:

Mariusz Skonieczny
Mariusz Skonieczny is the founder and president of Classic Value Investors, an investment management firm. He is also the editor of Ultimate Value Finder, a monthly newsletter that features three underfollowed, unknown, and undervalued companies ignored by Wall Street.

Visit Mariusz Skonieczny's Website


Rating: 2.8/5 (15 votes)

Comments

blish1234
Blish1234 - 3 years ago
Very able management team and a terrific amount of yet to be drilled reserves potential on their large acreage.

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