Sierra Metals Inc (TSX: SMT) is a precious and base metals producer in Latin America which is engaged in the acquisition, exploration, extraction, and production of mineral concentrates consisting of silver, copper, lead, zinc and gold.

Q2FY20 Financial Highlights: SMT declared its quarterly results, wherein the Company posted revenue of USD 41.901 million, as compared to USD 50.673 million in the previous corresponding period (pcp). The decline was majorly attributable to lower mining and production activities due to the COVID-19 pandemic and a decline in the metal price. Average realized for copper, zinc and led declined 13%, 26% and 11% respectively on y-o-y basis. However, realized price of silver and gold soared 11% and 30%, respectively on y-o-y basis, partially supported the top-line. The Company posted its net income at USD 154 million as compared to a net loss of USD 158 million in pcp. The Group reported a Cash flow generated from operations before movements in working capital of USD 13.2 million as compared to USD 12.8 million in Q2FY19. The improvement was majorly driven by lower general and administrative costs on account of COVID 19 pandemic. The quarter was marked by mine development activities across the Cusi property which totaled at 146.0 meters to stope preparation in various zones within the mine.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The Company’s business is exposed to commodity prices and a correction in the international commodity prices is likely to hinder the top-line of the Company.

Valuation Methodology: EV to EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock soared ~98% in the last three months and currently trading above the 200-days simple moving average (SMA) of CAD 1.68, indicating a bullish trend. The Company has shown improved operational performance, aided by improved realization from gold and silver prices. The Company posted a positive bottom-line, as compared to a net loss in the previous corresponding quarter. The Company expects FY20 production of copper equivalent within the range between 110.1 million pounds to 122.3 million pounds while silver equivalent production is expected between 17.4 million ounces to 19.4 million ounces. The Company expects its zinc equivalent production in between 286.8 million pounds to 318.7 million pounds. The range remains lower than the original guidance stated earlier due to a production shutdown on account of COVID 19 pandemic. Sierra remains confident on the longer-term outlook for its major commodities, however global economic uncertainty and COVID-19 have had a significant negative effect on the metal prices (Copper and Lead), which poses a challenge in the near term. Going forward, the demand for copper is likely to increase as the governments across the geographies are easing the restrictions and allowing the industrial activities to resume. Further, China (one of the largest consumers of copper) has opened its economy, which would support the demand. A recovery in demand is likely to support copper prices. The group is likely to benefit from the elevated gold prices as it derives a certain portion of its revenue from gold sales. We have valued the stock using EV to EBITDA value-based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like Trevali Mining Corp, K92 Mining Inc. etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 2.18 on August 21, 2020.

SMT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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