Sierra Metals Inc (TSX: SMT) is a precious and base metals producer in Peru and Mexico. The company acquires, explores, extracts, and produces mineral concentrates consisting of silver, copper, lead, zinc and gold. Sierra has interests in the Yauricocha Mine in Peru, and the Bolivar and Cusi Mines, Mexico.

Key highlights 

• Improving macros: Due to lower demand outlook stemming from the economic uncertainties at the time, metal prices began to fall in the second part of March in 2020. However, as the economies reopened later in 2020, industrial demand increased, pushing prices upward. During the first half of 2021, the rising trend persisted, fueled by excitement about the manufacturing and distribution of the COVID-19 vaccine. Furthermore, we anticipate that the current high commodity prices will continue to be robust.

Source: Company 

• Revival in operations: During the first half of FY21, the company reported higher production of silver, zinc and lead, which has supported the company’s overall operations. Moreover, daily throughput stood 25% higher at 8,925 for H1FY21. Revenue in H1FY21 came at USD 149.0 million, compared to USD 97.4 million in pcp.
  

• Elevated adjusted EBITDA: In the second quarter of 2021, the company's adjusted EBITDA rose 173% to USD 37.7 million, compared to USD 12.6 million in the same quarter of 2020. While adjusted EBITDA in H1 2021 was USD 63.0 million, up 120 % from USD 28.7 million in pcp. Higher revenue because of increased metal prices and higher metal sales resulted in an improvement in adjusted EBITDA.
  

• Robust Cash flow generation: The company reported a strong cash flow of USD 46.527 million in H1FY21, which was significantly higher than USD 14.680 million in pcp. The increase was driven by a net profit of USD 14.8 million in H1FY21, as compared to a loss of USD 1.4 million in pcp mainly due to higher average realization cost of different metals.
  

Financial overview of Q2 2021

Source: Company

• SMT declared its quarterly result, wherein it posted revenue of USD 79.4 million, jumped from USD 41.9 million in the previous corresponding period (pcp). Higher revenue was primarily driven by a strong performance from silver and zinc segments. The company reported a 62% and 25% increase in throughput from its Yauricocha and Bolivar mines, respectively.
• Gross profit stood at USD 33.1 million, soared from USD 11.6 million in Q2FY20. The growth was supported by higher sales, partially offset by higher mining costs (USD 35.5 million v/s USD 21.6 million in pcp), and higher depletion, depreciation and amortization (USD 10.7 million v/s USD 8.5 million in Q2FY20).
• The period was marked by an increase in general and administrative expense (USD 5.1 million v/s USD 4.5 million in pcp) and selling expenses (USD 2.8 million v/s USD 1.9 million in Q2FY20), while a lower interest expense and other finance costs (USD 0.8 million v/s USD 0.9 million in Q2FY20) supported the profitability.
• The group reported its net income of USD 11.0 million, significantly higher than USD 0.3 million in Q2FY20.
  

Risks associated with investment

The group’s revenue is directly correlated with the prices of commodities in international market. Any volatility in commodity (Copper, Gold, Zinc, etc) prices could affect the group’s financial performance. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation 

The company’s Copper equivalent output is expected to be between 110 - 115 million pounds in FY21, while silver production is expected to be between 13 - 14 million equivalent ounces. Due to strong output, the firm anticipates EBITDA to be in the region of USD 130-140 million, which would be a significant positive. Furthermore, the firm is continuously expanding its mines in order to increase output and improve cash flow. Therefore, based on the above rationale and valuation done, we recommend a “Hold” rating at the closing price of CAD 3.02 on October 15, 2021. We have considered Trevali Mining Corp, Foraco International SA, Capstone Mining Corp, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on October 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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