Part 2:
Okay, lets have a closer look at the growth potential for IPT going forward. I have already discussed the fantastic deal the company pulled off to gain control of 100% of the project including the operating mines and the mill. But the market appears to be underwhelmed since the production numbers are relatively low, and the earnings so far are thin. As an investor, I do not worry as much about 'what is' but I do focus very carefull attention on 'what will be'.
By definition a value play is an investment in which one can gain leverage to assets that are trading at a discounted value in the market. It is hard to get hurt when you can buy a dollar of asset value for less than a dollar, in other words. Markets are supposed to be forward looking, and what is the most important is what will be happening in 6 months to a year. If the asset value can be rationaly expected to increase, then my purchase today has even greater leverage and greater value.
To put things in perspective, IPT has not yet even reported a full year of operations. The company has managed to post a profit in each of the first 3 quarters however, and that is significant. Considering the learning curve as the company took over the operations, and the depleted state of the project at that time, plus the loss of efficiency as the company overhauled the entire operation in what was basically a work in progress... It is pretty impressive that IPT could post any net earnings at all.
In just one year, the company has managed to grow production from about 145 tpd to about 240 tpd as of January 2007. That represents a growth rate of nearly 70% year-over-year. And the numbers are still well below the current capacity of 500 tpd for the mill. So further growth potential is basically built in.
Now consider the efficiency of the operation. By instituting a professional mine management plan for the operation, IPT is now running the Guadalupe Mine such that ore is mined from numerous stopes, with several open access points for production. This has eliminated bottlenecks and added additonal operating flexibility. The mine is now able to sustain higher production rates, at lower operating costs. Keep in mind that it takes a lead time of 6 months to a year for underground development to translate into production, so the company has been very active to get to the current level.
Add in the growth that can be generated as additional mines are put back online and contribute to total production numbers. The Salvador Mine is now in production, and several other candidates are on the drawing board to provide further growth.
The mill has also become more efficient, and during my visit the mill manager reported that the recovery plant has now achieved efficiency of 86% silver, 82% lead, and 72% zinc from the feedstock processed. That is extremely effective for a polymetallic deposit.
Lastly, bear in mind that an entirely new core operating area has been created in Zacatecas, where IPT now has the option to buy 100% ownership in another mill, and currently gains 25% of the revenue that is generated by contract milling. There are several exploration properties that the company controls around this mill, which could become candidates for development to producing mines, which would feed the mill. All of this would represent incremental growth entirely independant of the Royal Mines.
So looking a couple of years ahead, IPT will very likely be producing at a total rate of at least 500 tpd, with several operating mines under management. And if the company is already profitable today with less than half of that production rate, while reinvesting capital into expansion projects, how much more profitable will IPT be when operating at full capacity. While other companies will have to pour countless millions into the development of their projects, IPT already controls two projects with extensive infrastructure in place.
The luxury of a strong balance sheet for IPT means that shareholders will not have to endure several more rounds of equity offerrings in order to fund the work in the years ahead, and the resulting share capital dilution. IPT is already tightly held and that provides all shareholders even greater leverage to growth.
As profits grow, more cash will be available to accellerate the exploration, development, and internal growth. And this is perhaps the most important consideration. IPT controls 125 square kilometers, almost the entire district of one of the oldest and most productive silver producing regions in Mexico. There are huge areas of the property that have not even seen any mapping, sampling, or exploration at all. There are dozens of historic workings, each of which could yield the same high level of success that the company is already achieving on the first few exploration and development programs they have commenced.
With a focused strategy in place to grow through steady and sustainable development, gradually hiring and training new personnel, expanding both at Zacualpan and also at Zacatecas, IPT is in the drivers seat to build itself into a mid-tier producer. The property holdings currently controlled by the company could support several more mines and several additional mills and there would still be long term growth potential. And there are additional acquisitions which are still in the works going forward.
I believe the current market cap does not fully value the snapshot of earnings and assets under management today. When I consider the full scope for expansion that is achievable in the years ahead, and the realistic forward multiple that market could assign to such an operation, the case for owning IPT today is just that much more compelling.
And I have not yet even commented on the potential that we may see higher market prices for silver, lead, zinc, gold and copper. Or the leverage that increasing production will have on earnings as the metals prices are also rising. I will leave that up to each investor to factor in to their own expectations.
Tomorrow I will go into detail on the exploration potential for the targets on each of the two projects currently controlled by IPT.
cheers!
COACH247 |
