VANCOUVER — It is becoming exceedingly difficult to be a successful precious metals producer, but for juniors like Impact Silver (TSXV: IPT) these tough markets are an opportunity to show why fiscal restraint and measured growth are keys to long term success.
The business model is not necessarily a new one. Canadian explorers saw an opportunity in historic Mexican mining regions where high grade gold and silver operations were long run by private local families and wealthy landowners.
These operators were rarely concerned with longevity or exploration success, but instead focused on high grade vein systems accessible via artisanal adits, with ore processed through basic milling infrastructure. Add a dash of Canadian exploration ingenuity, however, and these often prolific epithermal vein systems can turn into district plays.
And according to president Frederick Davidson that's pretty much the story for Impact. Back in 2006 the company struck a US$1.8-million deal for the ailing Guadalupe production centre in the Royal Mines of Zacualpan silver district around 300 km southwest of Mexico City.
The acquisition included a 500 t/d mill, which was operating at around 130 t/d when Impact made its acquisition due to a lack of ore and private ownerships' refusal to spend capital on additional exploration.
"I had been involved with Wheaton River and when we walked through the thing the smell was right. It was great ground and the conditions were fantastic. The guy who was walking us through the old workings was literally wearing sandals and a baseball cap, though he did have a flashlight," Davidson explains during an interview.
"That was the first one, and then they showed me two others. I thought 'if there are three here there has got to be more', and it was apparent that this is one of those mines that was going to require very little ventilation with good ground and a positive local community," he adds, pointing out that Impact is the first company to consolidate the Zacualpan district over its 500-year mining history. The company now holds nearly 100% in a 623 km2 piece of the region.
What Impact found was a site with strong production potential. Water and power were readily available, the tailings infrastructure was well designed, and the bulk of the operating permits were grandfathered.
Since 2006 Impact has invested around US$40 million in the district, and seen its production centre running near nameplate capacity with three silver mines currently providing ore. And with the company's total equity financing during that period totalling US$28 million, much of its growth has been organic.
"We're looking at a series of epithermal veins that are running northwest-southeast. When we looked at the opportunity we knew there were three key aspects: firstly, we had to get feed for that mill going; secondly, we needed to nail down where we were going to get feed for the next five years; and lastly, we wanted to unearth the real potential of the region," Davidson continues.
Impact produced 620,500 oz of silver in 2012 from four mines — namely San Ramon, Noche Buena, Chivo, and Gallega — and generated US$3.3 million in cash flows before finishing the year with a capital balance of US$21.4 million.
Guadalupe hummed along at roughly 465 t/d, with the company's revenue per tonne sold clocking in at US$94.32. Chivo and Gallega were put on care and maintenance earlier this year, but the company commenced silver production at its newly minted Chuchara-Oscar mine in February, which is expected to fill any void left by the closures.
And Impact shows no signs of slowing down with a 30,000 metre drill program ongoing in the region aimed at unearthing more potential mines amongst over 3,000 historic workings the company has mapped.
"Our rig is mostly focused on the Zacualpan district because honestly we keep finding more veins," Davidson explains, adding that the company tends to drill on 50 metre spacing when it identifies potential mine-worthy targets. "We continue to make these new discoveries. With our epithermals we haven't even tried to put a tonnage figure to it because by the time we reached compliant resource standards we could have already mined it. And that's how it works. You drill on those spacings and drive for the vein as soon as we hit a target out there."
For example Impact's production decision at the Cuchara-Oscar vein corridor — located 2.5 km east of Guadalupe — was predicated on a 35,000 metre drill program the company ran through 2012. Highlights at the Oscar silver area include: 6.6 metres grading 223 g/t Ag and 0.23 g/t Au from 36 metres depth in hole Z11-64; 2.7 metres of 408 g/t Ag and 0.62 gram gold from surface in hole Z11-69; and 23.4 metres of 115 g/t Ag from 22 metres depth in hole Z12-08.
Similar results emerged at Cuchara's Condesa zone, where the company cut 1.45 metres grading 1,773 g/t Ag from 61 metres in hole Z12-32; 1.1 metres averaging 1,655 g/t Ag from 178 metres depth in hole Z12-45; and 2.85 metres of 255 g/t Ag and 0.11 gram gold from 151 metres in hole Z12-46.
Impact's newest discovery is its Mirasol zone, which was uncovered during a 2012 drill initiative. Sitting around 5.5 km southeast of Guadalupe, Mirasol features some wider intervals for the company, including: 12.3 metres grading 112 g/t Ag and 0.13 gram gold from 99 metres in hole Z12-69; 7.15 metres averaging 216 g/t Ag from 75 metres in hole Z12-71; and 4.75 metres of 118 g/t Ag from 247 metres depth in hole Z12-77.
"We're in the mining business, and I don't think we should be producing an ounce of anything unless we make a profit out of it. I think that can be somewhat contrary to the promotional aspect of something like this, but it means out of the past six years we've made a profit in five of them, and we always generate a positive cash flow," Davidson continues, pointing out Impact's enviable balance sheet with no debt and a deep working capital position.
"It is not one of those deposits that are so rich everyone will jump all over you, but we have basically been printing money through our operations, and we use that money to expand our regional knowledge and production capabilities," he adds.
And cash flow allowed Impact to branch into a second production region in early 2013. The company initially acquired the 200-km2 Mamatla mining district through an invitation-only auction held by the Mexican Geological Survey in 2007. Located immediately southwest of Zacualpan in Guerrero State, Mamatla cost the company US$200,000 plus a 1% net smelter royalty return.
The company also acquired around US$12 million worth of exploration data from the 1990s that targeted volcanogenic massive sulphide (VMS) deposits. Impact was therefore able to fast track development at its Capire production centre, which lies around 16 km southwest of its Guadalupe plant.
Capire is a different beast for Impact, as it involves a lower grade, open pit operation that takes aim at 4.9 million measured and indicated tonnes grading 45.74 g/t Ag, 0.88% Zn and 0.34% Pb."
I'd tend not to call [Capire] a pure VMS since it has quite a bit of the lead-zinc-silver in it. It is also in very tight pods so you have to be very specific on your mining control," Davidson says. "Meanwhile we wanted to continue to explore the [seven other targets] in the vicinity, so we came up with the strategy to put in this pilot plant."
Capire will initially host a 200 t/d circuit plant, with Impact intending to iron out future production costs and cut-off grades for a 500 t/d upgrade, while generating operating cash flow. Davidson points out that the power supply and tailings facilities were built with the larger facility in mind, so the ramp-up should carry a relatively low cost.
Though the initial resource does not account for gold and copper mineralization, Impact did hit some interesting polymetallic grades during its 2012 drill campaign at the site. The company's prog ram at Capire was highlighted by hole C12-06, which cut 2 metres of 507 g/t Ag, 1.81 g/t Au, 2.2% Pb, 4.02% Zn, and 0.41% Cu from 78 metres. Similarly hole C12-21 cut 4.6 metres of 435 g/t Ag, 0.71 g/t Au, 3.13% Pb, 5.99% Zn, and 0.48% Cu from a depth of 92 metres.
Davidson explains that he expects to have around US$10 million in cash at the end of June, and points out that the majority of Impact's development and exploration programs are currently capitalized.
Growing through cash flow has allowed the company to maintain a relatively tight equity structure with 68 million shares outstanding. Impact has jumped around 28%, or 15¢, since early June en route to a 71¢ close at the time of writing for a $48.4 million market capitalization. International supplier Energold Drilling — which Davidson also helms — currently holds roughly 10% of Impact's outstanding shares.
"I don't regret for a moment the approach we've taken," he concludes. "We're going to be here, and we've increased our production consistently. It has been completely organic growth; I mean we haven't made a single acquisition. I will say, however, that our cash position has us actively looking for that acquisition in these market conditions."
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