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.

Key Highlights:

• Increased tonnages per day (TPD) capacity: The company reported an increase in the tonnages per day (TPD) capacity continuously from 2015 till the current reported period (Q1FY22) and the estimated till FY27, on a rising trend. The increase in the TPD will help the company to generate more revenues from the production of the metal, which is a key positive. Below is the pictorial representation of the contributions from the various mines of the company to the TPD.

Source: Company presentation

• Production Guidance: The company came out with the strong production guidance for FY22 where the copper (M lb) is estimated to be between 34.5 million lb (pound) to 41 million lb, and gold is expected to be between 15,500 oz to 17,500 oz. The total copper equivalent production is estimated in the range from 79.5 million lb to 89.7 million lb. The higher production guidance and the rising prices of the commodities can be a key positive for the company in terms of revenues in the coming quarters.

Source: Company presentation

• Strong outlook: For FY22, the management is committed to achieving the strategic growth plan and for that, the company estimated a total of USD 69 million consolidated CAPEX guidance, and the total EBITDA is expected to be between USD 90 million to USD 105 million in FY22. 

• Improved profitability margins in Sequential quarter: During Q1FY22, the company reported improved profitability metrics as compared to Q4FY21, which is stated below.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is exposed to the changes in the commodities prices and any substantial downwards movement, can impact the company’s revenue drastically. Also, the group is facing headwinds as rising interest rates, economic slowdown, COVID-19 restrictions, etc can also hamper the business.    

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing

• For Q1FY22, the group reported a decline in revenues at USD 57.24 million as compared to the revenue of USD 69.62 million in Q1FY21. On account of lower commodity production in the reported period (Q1FY22) the company posted a decline in the revenue numbers.

• The gross profit of the company saw a dip to USD 10.64 million in Q1FY22 against USD 21.25 million in Q1FY21.

• The group reported lower net earnings for Q1FY22 at USD 2.13 million against the net earnings of USD 3.76 million in Q1FY21.

Valuation Methodology (Illustrative): Price/ Cash flow-based

Analysis by Kalkine Group

Stock Recommendation:

The group came out with strong production guidance of copper equivalent production for FY22 in the range from 79.5 million lb to 89.7 million LB, and the EBITDA is estimated to be between USD 90 million to USD 105 million in FY22.  The company also increased its tonnage per day (TPD) since 2015 and it is forecasted to reach 15,500 TPD by FY27. On the valuation front, the stock is measured on the Price/ Cash flow-based multiple, and the stock is currently offered at 2.1x as compared to the industry (basic materials) median of 4.1x, suggesting the stock is still undervalued. We have considered Sherritt International Corp., Foraco International SA., etc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock of SMT at the last closing price of CAD 1.18 on June 02, 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 of June 02, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

  Technical Analysis Summary

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.