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.

Investment highlights

• Staging production Increase: The Company is aggressively drilling to increase and replace resources. It is also ramping up the exploration and infrastructure projects, which were on hold due to COVID-19. From FY2021 – FY2023, the Company expects to achieve a Tonnages Per Day capacity of 9,800 TPD, on the back of healthy performance from all three mines. Recently, it announced regarding receipt of permit allowing for a 20% increase of throughput to 3,600 Tonnes Per Day at its Yauricocha mine in Peru, is a key positive.

Source: Company Presentation 

• Robust Cash Flow Generation: The company recorded robust cash flow from operations at USD 62.2 million in 9MFY21, up from USD 47.1 million in the previous corresponding period. An improvement was mainly due to higher revenues clocked by the company. We believe an increase in cash from operations would further improve the working capital.

• Minimizing debt: The company reported a decrease in total borrowings at the end of 9MFY21, which is a significant positive and signals greater financial flexibility. Notably, the company's debts are decreasing on a sequential basis, with a total debt of USD 86.9 million reported.

Source: Company Presentation 

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. 

Financial overview of Q3 2021 (In 000 of USD)

Source: Company Filing

• In Q3 2021, the company’s revenue decreased by 17% to USD 60.7 million, compared to USD 73.2 million in pcp. The decline was primarily due to the lower grades at the Yauricocha and Bolivar mines and operational challenges at the Cusi Mine. Additionally, the realization price of gold and silver declined by 7% and 3% respectively, partially offset by higher average realization of copper, lead and zinc.
• On the back of lower sales, coupled with higher mining costs (USD 37.2 million v/s USD 29.2 million in pcp), the gross profit squeezed to USD 11.0 million, against USD 33.0 million in pcp.
• The period was marked by an increase in general and administrative expenses (USD 6.8 million v/s USD 4.5 million in pcp). In contrast, slightly lower selling expenses (USD 2.2 million v/s USD 2.6 million in Q3FY20) supported the operating profitability.
• The group reported a net loss of USD 3.7 million, compared to a net profit of USD 19.4 million in Q3FY20.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock recommendation

The Company had a tough third quarter due to sequencing challenges at its Mexican facilities. Over the previous year, the Bolivar Mine has faced challenges with mine development, infill drilling, and equipment availability, all of which have had a significant impact on throughput, head grades, and recoveries. For the quarter ended September 30, 2021, the firm reported revenue of USD 60.7 million and adjusted EBITDA of USD 17.4 million, based on throughput of 750,208 tonnes and metal output of 21.9 million copper equivalent pounds.

Despite the challenges it has experienced this year, the Company has a strong balance sheet and is focused on improving operations. It is continuing to strive for production growth while optimizing operations at all three mines, with cost reductions a top emphasis. Inflation has been high and is increasing, which might push gold demand and price considerably higher, which would be a significant plus for the company. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 1.71 as on March 16, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 16, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.