CONTENTS

1 1 Editors Comments Silicom Ltd. Hard-to-Understand Business Too Cheap to Ignore The Marketing Alliance Great Business with a Competitive Advantage IMPACT Silver Getting Absolutely No Love

Dear Valued Readers, In the July issue of the Ultimate Value Finder, I cover three very different companies: Silicom Ltd., which is a hard-to-understand business that is too cheap to ignore; The Marketing Alliance, which is a great business with a competitive advantage; and IMPACT Silver, which is a growing company that is totally unappreciated by the market.

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Mariusz Skonieczny

SILICOM (SILC) - HARD-TO-UNDERSTAND BUSINESS TOO CHEAP TO IGNORE

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INVESTMENT SUMMARY Silicom is an Israeli company whose business would be quite confusing to most people. When I read through the companys annual report, I literally could not tell you what they did. I knew that their business had something to do with computer networking and that was about it. The reason why I kept coming back

to it again and again was the fact that the person who introduced me to this company had approximately 40 percent of his entire net worth tied to this one stock and he had no problem sleeping at night. This just tells you how much conviction he has regarding this position, and his conviction made me curious enough to want to go through the pain of learning about this company. But before I could even comprehend anything from the annual

report, I had to read a book about computer networking to be familiar with some basic computer networking vocabulary. Now, looking back, I am glad I did it because this company is too cheap to ignore. At the end of the day, what matters is whether the company makes money and how much. The stock price will take care of itself. In fact, the complicated nature of the business could even help create an opportunity for investors because many people will not be willing to study such a company and thus, will overlook the value that it offers. COMPANYS BUSINESS The following description has been taken directly from Silicoms website. Silicom has a 20-year history of providing the networking industry with innovative, state-of-the-art connectivity and networking solutions. Silicoms flagship product lines, which include a wide range of high-end multiport networking, bypass, encryption and redirector adapters, are used by over 85 vendors and suppliers of security appliances, load balancing appliances, Internet acceleration systems, WAN optimization appliances, server-based systems and mission-critical gateway applications. Wow. I dont know about you but that would have made just as much sense to me if it were written in Chinese. Warren Buffett has said that you should invest in companies that you can understand. While I agree with this, there is one problem when I started investing I did not understand 2
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anything. Does it mean that I should have never invested? Of course not. I am going to pat myself on the back and coin a new phrase Only invest in companies that you either understand or have the ability to understand after you study them. With that being said, let me try to explain what this company does in terms that both you and I can understand it. Silicom makes connectors that make servers and server-based systems talk to each other. To be clear, it does not make the servers itself, but supplies connectors to the manufacturers that make them. If all you have is one computer with a monitor and a printer, you might not even know what a server is. Lets say you have a small business with four employees and each of them requires a computer. To make your life easier, it would be helpful to set up a computer network such as the one shown below.

For those of you who arent familiar with the concept of a network, it allows you to connect all the computers to one central computer called a server and this server can service all the computers connected to it. You can purchase software needed by your employees and install it on the server. Then, all the computers serviced by the

server are able to use this particular software. It is much more productive and cost effective to install software on one computer/server than to purchase and install it on each of the individual computers. Also, lets say that all four of your employees work on the same project together. Through a network, they can have a place on the server where they save the projects file so that everyone can access it. The problem of having multiple files of the same project saved on different computers is eliminated. In order for computer networks to work properly, they need to be connected, and this is where Silicoms products come in handy because they improve the connectivity for servers. The companys products fall under three categories: Server Adapters External Bypass Switches SETAC SErver To Appliance Converters

can be read by the receiving computer or device. Silicom manufactures high-end server networking cards that are mainly used in WAN optimization and security appliances. The word appliance is a commonly used word in the industry and it simply means a hardware device on the network. What are WAN optimization appliances? Before discussing WAN optimization, we should first learn what WAN is. Computer networks can be categorized into LANs (Local Area Networks) and WANs (Wide Area Networks). The picture of the network that I included before describes a LAN because it connects network devices over a relatively short distance. These kinds of networks work very well for small businesses that are located in one room or property. However, for large businesses with multiple locations, WANs are used. A WAN is a computer network spanning regions, countries, or even the world. The Internet is the largest WAN spanning the entire earth. A WAN can also be thought as a geographically-dispersed collection of LANs. Now that we understand what a WAN is, we can go back to WAN optimization appliances, which are devices that improve data-transfer efficiencies across WANs. With the explosion of the Internet and computer technology, businesses are able to accomplish things that were not possible before. However, computer network technology is far from perfect. Many businesses of all sizes are dealing with increasingly poor network performance and unreliability caused by outdated
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Server Adapters A server adapter is another name for a networking card, which is a piece of computer hardware that allows computers to communicate over a network. A network card converts the data sent by a computer into a form that can be transferred through a network cable or wireless spectrum. Then, another network card, on the other end, receives that data and translates it into information that

equipment and increasingly growing network traffic. Time is money and the faster and more efficiently businesses can transfer data through computer networks, the better. Through WAN optimization devices, businesses can run faster and more efficiently. The following is a WAN optimization device manufactured by Riverbed, one of the main players in the industry.

As you can see from the arrows, this device has a networking card inside because as everything else on the network, it needs to be able to communicate with all the other devices on the network. While it is not possible to tell from looking at the picture whether the networking card was manufactured by Silicom, it probably was because Silicom has a leading market share in WAN optimization networking cards and Riverbed is one of its clients. Approximately one half of Silicoms revenues from networking cards come from WAN optimization devices. Because this market continues to grow, the company expects to continue to benefit from it. According to Gartner, a technology research firm, WAN optimization was a $1 billion business in 2008, and it will grow to $4.4 billion. What are security devices? Security devices are products that protect computer networks from unwanted traffic. Some examples are firewalls and anti-virus scanning devices. If you have a computer, 4
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you have probably had to deal with a virus and you know very well the kind of headache and financial burden it had on you. Now, imagine what kind of damage unwanted traffic can have on a business. It literally can make a company go bankrupt. Consequently, proper protection for computer networks is essential. The following picture is an example of what a security device looks like. It was manufactured by Check Point Software Technologies, Ltd. Notice that the device has six Ethernet ports that indicate that there is a networking card inside, which was either manufactured by Check Point or by a company like Silicom.

Approximately one-third of Silicoms revenues from networking cards come from security devices. As you can probably imagine, due to the explosion of the Internet and computer technology, the demand for security devices is strong and growing. This is very good news for Silicom, which benefits from this trend tremendously. This market is more fragmented than the WAN optimization market, but Silicom also enjoys a large market share. External Bypass Switches Silicoms server adapters or networking cards may come with or without a bypass feature, which was developed in order to meet demands of existing and potential customers. On a network where various devices are connected to one another, a device failure may occur causing the entire network to fail. The bypass feature automatically reroutes

traffic to bypass the faulty components, enabling the network to stay reliable and accessible by other devices. Because some appliance manufacturers do not want networking cards with an internal bypass feature, Silicom developed a stand-alone bypass solution without the networking component in the form of external bypass switches. SETAC SErver Converters To Appliance

servers while maintaining the flexibility that was previously only available through custom-built servers. Currently, SETAC only contributes approximately 10 percent to the companys total revenues. The management believes that the sales from SETAC will be significant in the coming years as the SETAC solution gains more momentum and becomes trusted by current and potential clients. HISTORY AND FINANCIAL RESULTS While you might be a consumer of their products such as various networking appliances, you are probably not aware of Silicoms work, which mainly takes place behind the scenes. Before we get to the valuation of the company, it is useful to learn how Silicom became what it is today, and how it performed financially over the last ten years. Silicom wasnt always making highend server networking cards. In the early 1990s, the company was focusing on designing, manufacturing, marketing, and supporting a range of connectivity solutions for mobile and personal computer users. After gaining expertise and know-how in networking and operating systems, the company leveraged this knowledge to develop and enter the high-end server networking cards business. Because of its successful innovation and ability to solve clients problems, this business became the major growth driver. As a result of the continuous evaluation of clients needs, the company kept innovating and introducing new products such as intelligent and programmable cards, stand-alone bypass cards, and SETAC.

Through SETAC, which converts a standard server into an appliance, Silicom came up with a way for appliance manufacturers to be able to use low-priced and reliable standard

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In 2009, responding to clients problems and needs, Silicom launched SETAC which stands for SErver To Appliance Converter. On June 12, 2012, the company was issued a patent for this product. SETAC allows for a more reliable and flexible approach to building network appliances. Before Silicom invented this product, appliance manufacturers had to make a tradeoff between the use of standard highquality server-grade motherboards and the provision of customized functions, such as field re-configurability, frontconnectivity and others. In other words, if they chose a standard server made by IBM or Dell, they got two things low cost and reliability. However, they did not get flexibility. For example, most of the connections on standard servers are in the back while many customers require them in the front for ease of access. However, if flexibility was more important than low cost and reliability, these manufacturers had to have their servers custom built, which meant higher cost and possibly lower reliability.

As a result of its hard work, Silicoms revenues and profits grew fantastically over the last ten years as shown in the following income statement.

As you can see, shareholders equity increased from $5.6 million, or $1.38 per share, in 2002 to $64.3 million, or $9.19 per share, in 2011.

As you can see, sales grew from $2.7 million in 2002 to $39.6 million in 2011, which is more than a 14-fold increase. Net income grew from negative $2.5 million, or $0.60 per share, in 2002 to positive $8.2 million, or $1.18 per share, in 2011. These results translated into shareholders wealth as shown in the balance sheet on the next page. 6
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VALUATION As of the date of this report, Silicom is trading for a market cap of less than $100 million, or $14 per share. Because the company is debt-free and has more than $51 million in cash, it is really selling for an enterprise value of less than $50 million, or $7 per share. As mentioned before, earnings per share in 2011 were $1.18, which

means that the company is trading for a P/E ratio of less than 6. In my opinion, this is way too cheap. Such a low P/E ratio would be reasonable for a declining company but not for Silicom whose business is growing. Not only is Silicoms business growing, it has the potential to explode in the next few years because of SETAC, as shown in the following graph.

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The companys goal is to achieve revenues of $100 million, which should translate into earnings per share of approximately $3 if the current margins are maintained. However, the margins are likely to be higher because the existing salespeople can handle additional sales and SETAC products carry higher margins. Considering how low the stock price is, even $3 per share of earnings should send the stock price to $45 per share or more in the future, which is significantly more than what it is trading for today. While future projections are nice to know about, they are nothing but projections. They might never materialize. Considering that the companys stock is currently trading for less than 6 times earnings, you are not paying for potential growth, but you will be rewarded with a higher stock price if it does materialize. CONCLUSION When I first looked at Silicom, I was not interested because I could not understand it. However, the more that I learned about the company, the more I realized that the market is seriously mispricing its stock. I believe that Silicoms stock price is so low because of the lack of institutional coverage, the markets inability to understand its business, and the unawareness of its existence. With that being said, as long as the revenues and profits continue to grow, it does not matter whether the company sells networking cards or lemonade. Money is money the stock price will have to adjust to more reasonable levels. Disclosure: I, or persons whose accounts I manage, do not own 8
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shares of Silicom Ltd. 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 Silicom Ltd. You are advised to consult your financial advisor or conduct the due diligence yourself. Why Dont I Own This Stock? I am asked this question on every single company that I dont own but write about so I decided to include the answer here. And, the answer is simple I cannot own everything I write about even though I like it. I only own 8 to 10 positions and when I buy something, I commit to it for several years. I cant be changing my portfolio every week just because I found something better. If I did this I would only be investing in potentials and never riding them. When one of my positions reaches my target, I will sell it, and then, I will go back to the ideas that I wrote about and pick one that will take its place.

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THE MARKETING ALLIANCE (MAAL) GREAT BUSINESS WITH A COMPETITIVE ADVANTAGE

INVESTMENT SUMMARY The Marketing Alliance, or TMA, is a small cap company trading on the pink sheets that possesses a moat stemming from a network effect and economies of scale. The company is run by Timothy Klusas who is a good capital allocator and knows how to create value for shareholders. From Fiscal Year 2005 to Fiscal Year 2011, he grew TMAs operating income from less than $600k to more than $4 million, which represents an increase of more than 600 percent. He accomplished this on revenue growth of only 30 percent. Now that the companys core business is generating more than $4 million of operating income per year and the company has more than $8 million in cash and investments, Klusas has set out to transition TMA from having only one type of business to being a holding company comprising various different businesses. While it is certainly possible that he may not be successful at allocating capital going forward, the market is pricing the company as if it did not have $8 million in cash and investments. In other words, the market is saying that Klusas squandered the $8 million instead of putting it to good use. 10
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COMPANYS BUSINESS The Marketing Alliance (TMA) is a wholesale distributor of life insurance, annuities, and long-term care insurance. As a wholesale distributor, it does not deal directly with the general public but with insurance agencies that sell to the end customers. TMA is the middleman between insurance carriers, such as Prudential, and independent insurance agencies. In order to understand how being the middleman benefits both the insurance companies and insurance agencies, it is helpful to be familiar with some of the basics of the insurance industry. The purpose of insurance is to protect people from unpredictable incidents that could cause them financial hardship. While some customers might think that think that insurance companies exist solely for their own benefit, insurance companies exist for one main reason to make money for their owners. Yes, they benefit society, but they would not operate unless they made money. Their business model relies on the laws of probability meaning that out of all the people or businesses that they insure, only a small handful of them end up using the coverage. Insurance companies collect

premiums in exchange for taking on the risk of the unknown. They must price their policies in such a way that the premium payments exceed claim payouts. Another way that insurance companies make money is by investing the premium payments during the period of time before claims are paid out. While it is possible to buy automobile insurance directly through insurance companies such as GEICO or Allstate, when buying life insurance, annuities, or long-term care insurance, the typical route is through an agent who can shop around for the best deal from various insurance providers and educate the buyer on the specific features of particular insurance products. If you wanted to sell insurance to individuals or businesses, you would need to obtain proper licenses required by individual states, lease office space, and let the world know you are open for business. Most importantly, you would need saleable insurance products, and to do that, you would need to work with insurance companies. However, this is not as simple as it sounds. You cant just say, I am going to sell insurance products from Prudential, MetLife, and Transamerica. To sell their products, you need to get appointed by them by showing them that they will benefit from doing business with you. The more relationships you can form with quality insurance companies, the more product choices you can provide to your clients. If you only worked with one insurance company and your competitor had access to 20, you would be at a competitive disadvantage because you would not be as effective at shopping around and getting the best prices for your clients as your competitor.

If you run a small insurance agency, getting appointed by large insurance companies may be difficult. However, even if you are appointed, you do not have much bargaining power and the insurance companies know it and have no problem taking advantage of you by paying you low commissions. If you are working independently, you will take whatever offer they give you because you need them more than they need you. However, if you operate in a group, you increase your bargaining power and this is where The Marketing Alliance can assist you. By joining TMAs network, you become part of a group of agencies that work together to have bargaining power that allows them to negotiate better commission rates with insurance carriers. Through TMA, you do not have to get appointed with various insurance carriers. You can simply write insurance with the insurance carriers that already work with TMA as shown in the following sampling of carrier partners.

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It is a win-win for everybody. You get a better price, insurance providers increase their sales reach, and TMA gets a cut from the action. In addition to getting a better price from insurance providers, TMA also assists its agencies with back-office operations. Every

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insurance carrier has a different set of forms and procedures that need to be followed before insurance coverage is provided. TMA has an office in Omaha that is staffed with approximately 15 employees who help client agencies with these administrative tasks so that the agencies can focus their efforts on prospecting and getting more clients. This way, agencies do not have to hire their own employees for such administrative tasks and this means one less fixed expense during slow times. Because TMA acts as a middleman between the insurance carriers and insurance agencies, it benefits from a network effect. As more agents are added to its network, more bargaining power is created over the insurance carriers. With more bargaining power, more agents want to join because more bargaining power translates into better pricing. With better pricing, there is more to share and TMA can compensate agencies more to keep them happy and attract even more agencies. Also, as more agents are added to TMAs network, more insurance carriers want to do business with TMA. In addition to the network effect, TMA benefits from economies of scale. The company has built the infrastructure

(Omaha office) for back-office operations and it is being leveraged to operate much more efficiently than individually owned insurance agencies. As mentioned before, TMA has approximately 15 employees who are knowledgeable about procedures required by individual insurance carriers. Individual agencies do not have to hire as many of their own employees but rely on TMAs human capital. TMA also leverages its technology. The companys website serves as a complete resource for forms, compensation information and administrative essentials for contracting and doing business with each of TMAs carriers. It would be very inefficient for each agency to build its own infrastructure. It is much more efficient for hundreds of agencies to use TMAs human capital and technology. RESULTS As you can see, TMA benefits from a network effect and economies of scale. In other words, TMA has a moat as Warren Buffett would describe it. Before getting into valuation, lets examine how TMAs moat helped the company prosper over the years. The following graph is TMAs income statement from Fiscal Year 2005 through 2011.

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Over this time period, revenues increased 29 percent from $16.7 million to $21.5 million. However, operating income and operating income per share increased 601 and 651 percent, respectively. This is almost a ten-fold increase in the bottom line. These fantastic results translated into dramatic increase in shareholders equity as shown in the following balance sheet.

2011, the operating income margin increased significantly from 3.5 percent to 19.1 percent of total revenues. This was driven by individual expense items, which are discussed in the following paragraphs. Bonus & Commissions TMAs biggest expense item is bonus & commissions. When individual agencies write insurance policies, they go through TMA for better pricing. Consequently, total commissions flow through TMAs revenues. From this figure, TMA retains only a portion of the commission and pays out the rest to the individual insurance agencies. Bonus & commissions as a percentage of revenues stayed pretty consistent from Fiscal Year 2005 through Fiscal Year 2011. One might argue that TMA could get away with paying its agents a lower percentage as its network strengthens. However, based on my conversation with the CEO, he is not interested in getting more money from its agents but in compensating them as lucratively as possible. Happy agents stick around and tell other agents to join. Benefits & Processing While the bonus & commissions stayed pretty much flat as a percentage of revenues since Fiscal Year 2005, benefits & processing declined

One interesting thing to point out is that all these results have been accomplished with no debt. Pretty incredible this is what a strong moat can do for a business. Going back to the income statement, how did the company achieve more than 600 percent growth in the operating income while only increasing total revenues by 29 percent? The following graph will help us answer it.

From Fiscal Year 2005 to Fiscal Year

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significantly from 17.5 to 10.5 percent of revenues. The reason for the decline was economies of scale as the existing infrastructure (Omaha office) was leveraged to help insurance agencies with more back-office operations as its network grew. Operating Expenses Operating expenses are other expenses that are not associated with direct processing. They include items such as rent, telephone, postage, compensation, and various administrative items. Operating expenses also declined as a percentage of revenues from 18.2 percent in Fiscal Year 2005 to 15.5 percent in Fiscal Year 2011. This was caused by economies of scale as previously discussed and the managements strict control over costs. For example, in Fiscal Year 2006, the company moved its headquarters to St. Louis, Missouri, to consolidate operations into one centralized location. Because of the companys successful cash generation, shareholders received close to $6 million just in dividends over the last 10 years as shown in the following graph. This is approximately 25 percent of the current market cap.

VALUATION Up to this point, we established that TMA is a great business with a moat. Consequently, past shareholders benefited from dividends and stock price appreciation. With that being said, a great business does not do us any good if it is not being offered at a cheap, or at least, reasonable price. Future returns will be determined by the price that we pay today. In order to value TMA, we need to look at three parts: 1. 2. 3. The Wholesale Distribution Business JDC Construction Cash and Investments Distribution

The Wholesale Business

Up until recently, it was pretty easy to value the Wholesale Distribution Business because it was the only business that the company had and all the operating revenues and expenses came from it. However, in Fiscal Year 2012, TMA acquired JDC Construction, and consequently, the companys income statement includes its revenues and expenses as shown in the following figure.

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The new items that appear on the income statement are the construction revenue and cost of construction. In order to get an idea of how the wholesale distribution business did during the first nine months of Fiscal Year 2012, I will take out everything related to JDC Construction.

Without JDC Construction on the income statement, it is easier to compare the first nine months of Fiscal Year 2012 with the rest of the years. In Fiscal Year 2011, the wholesale distribution business generated $21.5 million in revenues. During the first nine months of Fiscal Year 2012, it generated $17.9

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million and is on track to surpass the revenues from the prior year. However, in Fiscal Year 2011, the company made $4.1 million in operating income, and during the first nine months of Fiscal Year 2012, it made only $1.9 million, which is less than half of $4.1 million. If we annualized the $1.9 million, we would get $2.5 million of operating income. The drop from $4.1 million to $2.5 million, which appears to be caused by margin compression, might be raising some concerns. In order to understand it, we have to look at individual quarters.

By analyzing individual quarters from Fiscal Year 2008 through Fiscal Year 2011, we see a pattern. The fourth quarter is always the most profitable with the highest margins. The reason for this has to do with the way TMA compensates its client agencies. The compensation in general is structured in a way to encourage high production. The more that agencies produce, the more they make. With that being said, the fiscal fourth quarter covers January, February, and March. Because these three months represent the beginning of the year, the agencies are starting at a production level of zero and are beginning to work up the compensation scale. Consequently, the bonus and commissions paid to these agencies is greatly reduced in this quarter. However, as the months progress, the agencies reach higher production levels, which allows them to earn more bonuses and commissions. This is why the margins for TMA continue to decline as the quarters progress and are usually the lowest in the fiscal third quarter, which represents the last three months of the calendar year (October, November, and December). By this time, the agencies are at the highest production level for the year. Now that we understand why the fourth quarter of each fiscal year is the most profitable, we can estimate it for Fiscal Year 2012.

Revenues for the fourth quarter of Fiscal Year 2012 should be around $6 million, which should translate into operating 16
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income of $2.1 million. For the entire Fiscal Year 2012, this should translate into operating income of $4 million, which is almost identical to the operating income in Fiscal Year 2011. The reason why it is identical is because operating expenses are higher during Fiscal Year 2012 versus Fiscal Year 2011. As you remember, I removed all the line items related to JDC Construction. Actually, I only removed the ones that I was able to identify. JDC Construction also has operating expenses which are lumped together with the operating expenses of the wholesale distribution business. Plus, TMA experienced non-recurring expenses related to the acquisition of JDC Construction. Because I was not able to identify exactly how much JDC Construction contributed to higher operating expenses, I just left them unchanged. The bottom line is this the wholesale distribution business generates at least $4 million in operating income per year and if we apply a price-to-operating income multiple of 6, we arrive at a valuation of $24 million or $11.50 per share, which is almost exactly the current price of the companys stock. Anything in addition to the wholesale distribution business we are getting for free. JDC Construction JDC Construction was acquired during the second quarter of Fiscal Year 2012. This company installs drainage systems and erosion control terraces for farm fields. In the simplest terms, some farmland has low-lying areas that become flooded with water, and consequently, cannot be used to produce crops. JDC Construction installs drainage systems so that these low-lying areas can be used for crop

production. During the second and third quarter of Fiscal Year 2012, JDC Construction generated $1.6 million in revenues and incurred $1.3 of expenses to generate a profit of $300k. JDC Construction also incurred general operating expenses, but since I already counted them in the valuation of the wholesale distribution business, I will not double count them here. If we annualize a profit of $300k, we arrive at a profit of $600k for the entire year. Based on my conversation with the CEO, the company is planning to grow this business organically and through acquisitions of similar businesses. Some of the smartest investors in the world are buying farmland because they believe years from now, farmland will be more valuable. JDC Construction is in the business of making farmland more productive and thus more valuable. The company is definitely positioned properly to benefit from this trend. It is not unreasonable to think that this business will generate $1 million in profits several years from now. With that being said, lets just ignore the future potential, and just focus on the $600k per year in profits. Based on this, it is probably worth between $2.5 million and $3.5 million or between $1.20 and $1.70 per share. TMA paid $1.7 million to acquire it, which appears to be a good use of shareholders capital. Cash and Investment Portfolio As of December 31, 2011, TMA had the following balance sheet:

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company, then revenues from the newly acquired company would flow through TMAs total revenues. If the acquisition was accretive, this would increase the bottom line, too. This is exactly what the company is starting to do. As mentioned before, TMA acquired JDC Construction during the second quarter of Fiscal Year 2012, Based on my conversation with the CEO and his interview with Matthew Miller, (https://www.themarketingalliance. com/docs/public---shareholderinformation---presentations/interview--april-2012.pdf), the company is in the early stages of making a transition from just the wholesale insurance distribution business to more of a holding company such as Leucadia or Teledyne. With the $8.2 million in cash and investments, and the $4 million per year in operating income from the wholesale insurance distribution business, the company is definitely ready to make this transition. In his interview with Matthew Miller, the CEO said, what we are trying to do is use one cash machine to develop other cash machines. By cash machines, I mean one that generates cash returns for our shareholders If we do our job correctly, what well have in the future is a few cash machines that throw off returns for shareholders and generate excess cash that we can use to go find others. Valuation Summary Based on what we discussed, TMA is conservatively worth $35 million or $16.73 per share as shown in the following summary.

As you can see, the company has $8.2 million or $4 per share in cash and investments. The money in the investment account is invested in various common and preferred stocks. The investment activities are outsourced to outside investment companies. Over the years, the performance results of the companys investment portfolio were reported on the income statement under the other income and expenses section of the income statement. This is why I did not use net income to value the wholesale distribution business. The income and losses from the investment portfolio were distorting the profitability of the wholesale distribution business. While the companys cash and investments are worth $4 per share, the market is not giving the company any credit for this value. Unless this money is placed into better uses, the market is likely to continue ignoring it. One way, outside of the obvious special dividend, to make the market notice would be to make this money show up in the operating section of the income statement through acquisitions of other companies. If TMA spent a portion of this money to buy another 18
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CONCLUSION TMA is a company that possesses an economic moat, and consequently, is able to grow profitably while earning high returns on capital. At the current price levels, the market is pricing the company as if it did not own JDC Construction or have $8.2 million in cash and investments. While the cash and investments are worth as much as the amounts reported on the companys balance sheet, they can be worth significantly more if allocated properly. Considering that the CEO understands capital allocation, which is not common among the CEOs of small companies, I believe that he will be able to put this cash into value creation ventures. Disclosure: I, or persons whose accounts I manage, do not own shares of The Marketing Alliance. 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 The Marketing Alliance. You are advised to consult your financial advisor or conduct the due diligence yourself.

be investing in potentials and never riding them. When one of my positions reaches my target, I will sell it, and then, I will go back to the ideas that I wrote about and pick one that will take its place.

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I am asked this question on every single company that I dont own but write about so I decided to include the answer here. And, the answer is simple I cannot own everything I write about even though I like it. I only own 8 to 10 positions and when I buy something, I commit to it for several years. I cant be changing my portfolio every week just because I found something better. If I did this I would only

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Why Dont I Own This Stock?

IMPACT SILVER CANADA (IPT), US (ISVLF) GETTING ABSOLUTELY NO LOVE

INVESTMENT SUMMARY In the last 12 months, if you invested in any mining company, whether it was a silver or gold miner, you probably experienced the following dynamics: -Gold and silver prices go up, mining stocks do not -Gold and silver prices go down, mining stocks get crushed -The Dow goes up, mining stocks do not -The Dow goes down, mining stocks get destroyed -A mining company reports fantastic news, the stock price stays the same -A mining company reports no news, the stock price goes down -A mining company reports bad news, the stock price gets killed If you are exhausted by this, you are not alone. I dont know how much longer this insanity will continue but it has to stop somewhere. I continue writing about these mining stocks because they are just so incredibly cheap. IMPACT Silver is a perfect example. This 20
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is a company run by an outstanding management team that has delivered over and over again. The company is profitable and is on track to increase silver production significantly over the next three to four years. The companys stock is trading for a little over $1 per share it is probably going to earn approximately $0.50 per share in 2015. COMPANYS BUSINESS IMPACT Silver is a profitable silver producer with an aggressive growth strategy whose main two assets are the Royal Mines of Zacualpan Silver District and Mamatla Mineral District.

Zacualpan Silver District Zacualpan is one of the oldest mining districts in North America with mining activity dating back to at least 1527. 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. The silver production in this district comes from four mines that are currently active: the Chivo Mine, the San Ramon Mine, the Noche Buena Mine, and the Gallega Mine. They are all underground mines that have been discovered by the IMPACT Silver exploration team. The Chivo Mine was discovered in 2005, and quickly put into initial production in November 2007. The San Ramon Mine recommenced production in 2008. The Noche Buena Mine was opened in the first quarter of 2010. The Gallega Mine was recently restarted in late 2011. Together, all four mines feed the Guadalupe Processing Plant which has a capacity of 500 tonnes per day.

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 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. During the first quarter of 2012, it was operating at 455 tpd. Currently, the Noche Buena Mine is the most significant contributor of feed to the processing plant. In 2008, the Chivo Mine was the main contributor. The following is a chart showing ore contribution from various mines to the processing plant.

Mamatla Mining District The second district, Mamatla Mining District, is located immediately southwest of and adjacent to the Royal Mines of Zacualpan Silver District. The district was acquired in February 2007

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In approximately six months, the Chivo Mine will cease production because high-grade ore will have depleted. This will negatively impact the companys silver production for the first three quarters of 2012. Then, in the fourth quarter of 2012, the Oscar Mine, which is currently being fast-tracked into production as a source of high-grade silver mill feed, will replace it in the fourth quarter of 2012. With the Oscar Mine, the processing plant should be operating very close to its maximum capacity, generating approximately 1 million ounces of silver in 2013.

in a government auction. Mamatla was previously explored by Valerie Gold, which spent over $10 million in its efforts. However, the company was unsuccessful in its attempt to turn resources into production because 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. In the Mamatla Mining District, IMPACT Silver is in the process of bringing the Capire Project into production by the end of 2012. 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 2014/2015. The Capire Mine will be the fourth mine taken from discovery to production. In 2012, it will not add much to production, but in 2013 and 2014, it will produce an additional 250,000 ounces of silver per year. The managements goal for this district is to construct a plant with a capacity of 1,000 to 2,000 tpd and and feed it with ore from additional mines in the Mamatla Mining District. Based on my conversation with the CEO, Mamatla Mining District could produce over 1 million ounces of silver per annum. Add this to 1 million from the Zacualpan Silver District, and by 2015, you could have a silver producer with a production level of more than 2 million ounces of silver. According to the CEO, the cost of building the 1,000 to 2,000 tpd processing facility should be somewhere between $30 and $60 million. Considering the amount of cash that IMPACT Silver has in the bank, plus the cash flow generating Zacualpan Silver District, the company should be in good shape financially to take on this project. 22
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FINANCIAL HISTORY Since the first day of production in 2006, IMPACT Silver generated a fantastic financial performance as shown in the income statement on the next page. Revenues increased from $7 million in 2006 to $24.3 million in 2011. Operating income increased from $1.5 million in 2006 to $10.5 million in 2011. Net earnings increased from $0.5 million in 2006 to $7.6 million in 2011. To visualize how well the company did from year to year, it is helpful to see the following graph.

As with any silver mining company, total revenues are driven by two variables: 1) number of ounces produced and sold, and 2) price of silver per ounce. While the price of silver is out of the managements control, yearly silver production is something that they can control. IMPACT Silver increased silver production almost every single year from 2007 to 2011. In 2010, silver production declined because the price of silver was very high and the management chose to reduce the cutoff grade (see next page).

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Silver production is driven by the number of producing mines and the productivity level of each mine. Since 2006, the management has done a very good job of bringing new mines into production in a relatively short period of time. From the following illustration, you can see that both revenues and earnings were driven by the Chivo Mine, the San Ramon Mine, and the Noche Buena Mine, which were put into production in 2007, 2008, and 2009/2010, respectively. The Oscar and Capire Mines are scheduled to commence production in late 2012.

2011 Production and Financials As shown on the previous pages, in 2011, IMPACT Silver produced 833,607 ounces of silver, 731 tons of lead, and 1,248 tons of zinc. This translated into an operating income of $10.5 million and net income of $7.6 million. Considering that the enterprise value is $48 million, the company is selling for an enterprise value-to-operating income of 4.5, and an enterprise value-to-net income of 6.3. Is this cheap? Considering that IMPACT Silver is aggressively growing, yes, it is cheap. 2013 Production and Financials As mentioned before, the production for 2012 will be negatively impacted by lower grade ore from the Chivo Mine which will be phased out after the Oscar Mine is put into production at the end of 2012. Because of this dynamic, 2012 production will be lower than 2011 production. With that being said, we have to look forward to 2013 because 2012 is a transition year.

VALUATION Based on the stock price of $1.04 per share and 73 million shares, IMPACT Silvers market cap is approximately $76 million. Because the company is debt-free and has $28 million in cash, the enterprise value is $48 million. In other words, $48 million is the price tag. Lets see what we get for it in terms of value. Lets look at the valuation from three different angles: 1) based on 2011 production and financials, 2) based on 2013 production and financials, and 3) based on 2015 production and financials. 24
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By the end of 2013, the Oscar Mine will have completed an entire year of production. Together with the San Ramon Mine, the Noche Buena Mine, and the Gallega Mine, the company should be able to produce approximately 1 million ounces of silver. This does not include the Capire Project from the Mamatla Mining District, which is also scheduled to be put into production in late 2012. With the pilot plant, Capire should only contribute 250,000 ounces to total silver production. Altogether, in 2013, IMPACT Silver should produce approximately 1.3 million ounces of silver. Assuming the price of silver of $27 per ounce and the cash cost of $9 per ounce

net of lead and zinc credits, this should translate into the following financial results: Revenues = 1,300,000 ounces x $27 = $35,100,000 Operating expenses = 1,300,000 x $9 = $11,700,000 Mine operating earnings = $23,400,000 General and administrative expenses = $2,500,000 Operating Income = $20,900,000 Considering that the enterprise value is $48 million, the company is selling for an enterprise value-to-2013 operating income multiple of 2.3. Is this cheap? Yes, it most certainly is cheap. 2015 Production and Financials This is where things get really interesting. In late 2012, the Capire Project is scheduled to be in production, but it will initially produce very little silver (250,000 ounces per year) because the company will be using a semi-portable 200 tpd processing plant to test the metallurgy in the Capire zone and define the operating parameters for the large permanent plant. Then, in 2014/2015, a new plant will be constructed with a capacity of 1,000 to 2,000 tpd, which will allow IMPACT Silver to produce more than 1 million ounces of silver per annum. Add this to 1 million from the Zacualpan Silver District, and by 2015, you could have a silver producer with a production level of about 2 million ounces of silver. Lets run the same numbers that we did before.

Revenues = 2,000,000 ounces x $27 = $54,000,000 Operating expenses = 2,000,000 x $9 = $18,000,000 Mine operating earnings = $36,000,000 General and administrative expenses = $3,000,000 Operating Income = $33,000,000 Considering that IMPACT Silvers market cap is $76 million, the company is selling for a market cap-to-2015 operating income multiple of 2.3. Is this cheap? This is what I call STUPIDLY cheap. (I am using market cap versus enterprise value because all of the cash will be used in the construction of the plant). By looking at the value of IMPACT Silver from three different angles, we get can see how massively undervalued its stock is. Obviously, the biggest unknown variable is the price of silver. I used $27 per ounce, which is the most recent price and this could definitely change. If you are in the camp that believes that silver prices are going to be lower, you can either ignore this investment opportunity or recalculate the numbers based on different prices. However, if you believe that silver prices are going to be the same or higher in future years, IMPACT Silver is definitely something that you should study. CONCLUSION IMPACT Silver is a company run by excellent managers. They have proved themselves by continually bringing new mines into production. The year 2012 is a transitional year during which the management is planning on adding the Oscar and Capire Projects to its production profile. After the

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permanent processing plant is built in the Mamatla Mining District, IMPACT Silver will transform itself into a midtier multi-million ounce silver producer. While waiting until 2015 would be an eternity for most investors and money managers, I will be there harvesting the fruit even though it will be a painful ride, as it always is. Disclosure: I, or persons whose accounts I manage, 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 advisor or conduct the due diligence yourself.

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