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My 5 cents-worth

Bob Moriarty
Dec 6, 2006

It's pretty obvious to an American who can count that with a copper price of $3.15 and a zinc price of $2.03 that our humble cent is doomed. It costs over two cents to make a pre-1983 copper cent and over a cent to make a post-1983 zinc cent. In its finite wisdom, the Congress of the United States has actually come up with a formula to determine if you should average a bill up or down to the nearest five cents. Say bye-bye to the cent.

I think that of all the metals-related web sites, we are the only site who actually aim to make their readers money. And I take a lot of pride in the fact that our readers have consistently been given good investment advice for years. If you read the site on a regular basis, you have made money in your investments if you are willing to listen.

So I have a guaranteed 35% return investment only for the benefit of my readers. And the Chinese. Because they can add and subtract and are already aware of this investment. The investment is a measure of how close our economy and the financial system of the world is to total chaos.

I just got back from a couple of days at the San Francisco Gold Show. (By the way, I will be holding an hour long workshop at the Cambridge House Investment Conf. in Vancouver in January, if you are interested.) Everyone in the mining business is wildly optimistic about mining. But most of the speakers and those attending the show fail to realize how close we are to total chaos. With $370 trillion dollars in derivatives, four US carrier groups off Iran and an $8 million dollar an hour tar baby in Iraq, "Houston, we have a problem."

Wanna make 35% on an investment? Go to your US bank and buy a bag of nickels. Each nickel weighs 5 grams. 1.25 grams is nickel ($15.15 per pound) and 3.75 grams is copper ($3.16 per pound.) It costs the US government $.067 per nickel to make them just for the metals. I don't have figures for the Canadian five cent piece but it has to be pretty close to the same.

So while your attention is being focused by the media on the humble cent, the nickel is going to go the way of the dodo bird. Since the price of all commodities is set today by Chinese demand and their foreign exchange surplus is now over $1 trillion, you can count on them dumping US denominated investments (Bonds and Treasury Bills) and loading up on real assets. Like pennies and nickels. All it would take is a mention on David Letterman and you will have seen your last nickel until they start making them of paper.

The world, your world and mine, is going to start changing at a faster and faster pace. If Bush and the Gang of Fools in Washington have their way we will start a nuclear war with Iran which we clearly will lose in the first 48 hours. That will destroy both Israel and the US, which seems fair, we are only considering attacking non-nuclear Iran because they don't have nukes. There is no one who can fix things, our financial system is way beyond fixing, with the US government some $80 trillion in debt. But you can protect yourself and your family.

I've been traveling most of the last month and I want to share with you some of my adventures. One of the most interesting was my two-day visit to one of the oldest silver mining districts in Mexico. Mexico is, of course, the largest silver producer in the world with silver production of about 94 million ounces a year. One mine, the Fresnillo Silver mine produces 32 million ounces all by itself.

Cortez conquered the Aztecs in 1521. Soon after the Spanish discovered silver at Taxco, near Acapulco, in 1524. The 2nd silver district in Mexico was called the Royal Mines of Zacualpan, discovered and put into production in 1527, located only 25km from Taxco. By the 18th Century, Mexican silver mines were producing 9 million ounces of silver a year. Mexico has produced a third of the silver in the entire world.

Regular readers will remember I am a big fan of the bootstrap model of mining where a company begins to produce minerals at a profit and uses the funds to further explore. The only alternatives are either to dilute existing shareholders on a constant basis, which is the favored business model, or to finance internally. I favor internal financing even if it is not favored in the industry.

The President and CEO of Impact Silver, Fred Davidson, scored the most incredible coup two years ago in Mexico. He did a deal for the entire Zacualpan district encompassing a total of 125 square kilometers for about $1.84 million dollars US and 300,000 shares of IPT. It would be easy to get lost in the details and to fail to see the real story. He negotiated the deal in June of 2004 with silver under $6 an ounce.

Fred's guys (who happen to be the best and most professional group I have seen at any mine in Mexico) have discovered almost 200 surface workings. In other words, mines, and it's clear there are twice as many around. This is a district, an entire district with 400 mines which have been on and off in production for 478 years and they have barely scratched the surface.

Every silver lining has its cloud. I've been to Fresnillo and seen it and seen Mag Silver's property next to the Fresnillo Silver mine. It's in a relatively flat area with lots of room and good roads. The only limit I could see at Zacualpan was the geography. It's up and down and the roads are tiny. There could well be billions of ounces of silver in the hundreds of silver veins they already know about but moving around is physically hard to do.

Impact is not going to try to maximize silver production. That's very important to mention. Fred Davidson is a bean counter in every good sense of the word. He understands finance and money and profit, that's his background.

Impact is going to maximize profit at Zacualpan. That's the bad news and the good news. Fred is going to maximize profit but someone is going to be mining silver and lead and zinc there two hundred years from now. Hopefully at a profit. And Fred Davidson is going to use that cash flow to expand Impact into other Mexican silver districts which do have greater production potential.

Impact spent between June of 2004 and January of 2006 conducting exploration. The district had never been properly mapped and explored on a district scale. One of the giant dangers to a project of this size is that you can go broke before you fully understand the potential. Fred and his mostly Mexican crew, understand that the first goal is profit and the second is a good plan for profitable management of the hundreds of millions of ounces of silver we can see are there.

There are no good historical records but a reasonable estimate would be production of a million ounces of silver a year for the last 478 years except for the frequent civil wars and disturbances. Bear in mind that the Spanish didn't value zinc and if they came across a high grade zinc vein, they left it. With 1% zinc now being worth $40 a ton, Impact is in the enviable position of being able to focus on the highest value ore which at present is going to be the high-grade and previously-ignored zinc.

I have been to a dozen or more Mexican silver/lead/zinc properties. In my view, Mexico is a far more favorable place to mine than either the US or Canada. The tree huggers and bureaucrats have taken over mining in the US like a cancer and as mining minded Canada is today, not many years ago, that wasn't true. The giant Mexican family fortunes were financed on Mexican silver/lead/zinc mines and the Mexican miners are among the best in the world if managed properly. Fred is letting Mexican born and trained geologists and mining engineers run the show and they are brilliant. I believe Mexican mines should trade at a premium in Vancouver and Toronto even if they don't today. And while some in the industry are talking $5 copper, there is a far greater shortage of zinc than copper and I believe zinc will sell at a higher price than copper. It may not be as sexy as copper but it's going to be a whole lot more profitable.

Impact used the period between signing the deal in 2004, and closing in January of 2006, wisely. Once Fred had the reins in his hands, he started mining in a serious way. His deal gave him a slightly dated mill capable of production of 500 tons per day. (getting your hands on a 500 TPD mill for under $2 million is considered stealing in some places) Upon assuming control of the district and mill, Fred began producing about 180 tons a day. It costs him about $50 a ton to mine and mill and his cost of production of silver is about $4.25 an ounce. With $6 silver as in 2004, the mill was barely profitable. With $13 silver and $2 a pound zinc, it's a license to steal.

Impact produces just under 400,000 ounces of silver today and about 1 million silver ounce equivalent. Their goal is to ramp production up to 500 tons a day and be producing in the area of 2 million to 2.5 million ounces of silver equivalent. By optimizing the mill and increasing the grade after careful exploration, Davidson believes they can produce in the nature of 5 million ounces of silver equivalent. It won't be the biggest silver producer by far but it will rank as one of the most profitable.

In San Francisco at the latest gold show, one of the leading analysts in the industry took me aside and told me that the biggest problems with the small silver/lead/zinc producers in Mexico was the lack of 43-101 resources. My response is that while that is perfectly valid, it's also perfectly meaningless. The Spanish mined 9 million ounces a year with primitive methods and equipment for centuries without any resources. They simply mined until they ran out of ore and then found another vein and mined it. All at a profit. That's a lot more valid a business model than drilling until a project looks like a giant Swiss cheese, losing money and diluting your shares all along the way.

Fred has already begun his expansion program. In July of 2006 he announced the purchase of the Veta Grande silver project in Zacatecas. For just about $2 million US and 500,000 shares, he gets a bunch of silver projects and a 200 TPD mill. His real goal in Zacatecas is to control the mill and to do deals with the owners of the prime silver/lead/zinc areas. He's in the drivers seat because the locals bring their ore to him for processing and he gets to see who has the highest grade ore and gets paid for processing it. In a land where mills are rare, it's better to control the mill than the mine.

I have to mention another company if only because the two companies are intertwined. Fred Davidson started a drilling company he called Energold Drilling so he could control access to drills when mining. The company has been profitable for the last 6 years. How many people can say that in mining? They have set a new record this year for meters drilled and gross profit with 25 drills working. Davidson plans to expand to 30 drills over the next year or so.

If you want to be in the mining business, it's nice to have your own pet drilling company. I can't tell you how many tales of woe I have heard in the last year about ability to get your hands on a drill. I was at projects in the Yukon with the shortest of seasons where they had drills, but the drills didn't happen to come with crews. They were forced to operate on a single shift a day, which gets very expensive.

The drilling company throws off cash with $2.4 million in gross profit in 2006. But EGD with only 22.2 million shares owns 6.6 million shares of IPT. So about three shares of EGD is the same as one share of IPT. EGD has a total market cap of $29.5 million Canadian but their IPT shares are worth $10.5 million Canadian all by themselves. EGD also has $15.3 million in working capital. So if you like the Impact story, you can either invest directly via IPT directly or through EGD indirectly.

Impact contacted me at the San Francisco show and wanted to advertise on 321gold. I had to turn them down because we are simply running out of space. And we are not willing to totally garbage up the site visually.

Impact Silver Corp
IPT-V $1.60 Canadian (December 5, 2006)
38 million shares
Impact Silver
Energold Drilling Corp
EGD-V $1.33 Canadian (December 5, 2006)
22.2 million shares

Bob Moriarty
President: 321gold