start here

start here

The Daily IKN email digest, get all daily posts sent to you next day (& no ads)

I say things on Twitter

11/26/13

Unfairly picking on IMPACT Silver (IPT.v) in order to make the point about the problem in the small silver producer space

IMPACT Silver (IPT.v) reported its quarter yesterday and apart from that annoying all-caps corporate name, I really don't have a beef with the company. It's small, mines its deposit reasonably well, has a decent reputation with the local community and treats its workforce correctly. It's also survived over the medium-term without diluting its share count much (January 2007 was 40.3m, today it's 68.2m, the difference was raising for capex purposes and was non-dilutive at the time) so it shows the right signs of trying to take care of its stakeholders, wherever they may be.

But the slump in silver means that its financials are starting to get a little sticky. Here are three charts (of many we could show) that outline the issue and surprise surprise, it's all about the money. It starts here.


You'll note that when silver zoomed, so did the margins operated by IPT but tellingly, even with the higher average silver prices (2009/2010 period,versus 2012/2013 period) IPT isn't grossing much more per tonne of rock moved (it's a grade thing). Meanwhile, cost creep has been slow but sure and it's going to be very difficult to cut the price of tonne moved in a meaningful manner. In short, margins are getting squeezed.

Which means the mine's revenues are dropping and as costs are stubborn the company's ops, once cash flow positive, (before the corporate and financial expenses are added on top) are now losing money.


And this means that its cash treasury, once rock solid, is looking a bit on the thin side these days and unless the price of silver picks up, that trend (which is no friend) is unlikely to turn around. As working cap at IPT shows the underlying cash position well, here's that chart:


From here IPT can either 1) bite the bullet and raise, thus diluting and putting the stock price under more pressure or 2) go into preservation mode, start high grading its deposits and cut back on site (and corp) expenses in order to get to breakeven*. Even then I doubt they'll be able to report any meaningful profits until silver moves; with the best will in the world we're looking at a company that will tread water as an optimum situation (and may keep leaking cash, no matter what they do).

As stated at the top, it's a bit unfair to pick on IPT alone for all this because there are a lot of small PM players in the same boat. The bottom line is that until silver moves higher, there seems little reason to own any of this type of company. Small, unprofitable, running to stand still. And that, ladies and gentlemen, is the real problem. These companies are unattractive as investment options, period.


*IPT indicated they'd do this in the MD&A yesterday. We'll see.