Sierra Metals Inc (TSX: SMT) is a precious and base metals producer in Latin America. The company acquires, explores, extracts, and produces mineral concentrates consisting of silver, copper, lead, zinc and gold in Mexico and Peru.

Key Updates:

• Positive Macros: The company is a producer of copper, lead, gold, silver, lead, and zinc, which indicates balanced a risk profile due to the lower dependence on one segment. Additionally, all these commodities are likely to play a major role for new generation businesses. Notably, we know coper is expected to play a vital role in the future due to its usage for the next generation of clean tech, while lead would be heavily used for the manufacturing of Electric Vehicle batteries. As per the study, the global demand for copper is likely to remain elevated in the coming days, which is a key positive.

Source: Company PPT

• Bullish Management Commentary: The company reported a lower production of copper equivalent pounds of 15.9 million pounds, a 38% decrease from Q1FY21, primarily attributable to the negative impact from COVID-19 during the first quarter of FY22. However, the management highlighted that lost production is expected to be recovered in the coming quarters by making efficient use of spare capacity at the plant. Moreover, the company would focus on identifying new mineralization within its mining jurisdiction, which is expected to improve the upcoming performances.

   Source: Company Report

• Increase in Cash from Operations: In FY21, the company reported a higher cash flow from operations of USD 72.2 million, which is higher than USD 66.9 million in FY20. This is impressive as it would support the overall liquidity of the company.

• Result Update: The company will disclose its Q1FY22 result on May 12, 2022.
  

Risks Associated with the Investment:

The income of the company is related to international commodity prices, and price volatility could fluctuate the operations in terms of the average released rate which could sway the financials in the near term in any direction.

FY21 Financial Highlights:

   FY21 Income Statement Highlights (Source: Company Report)

• SMT announced its full-year result, wherein the company posted revenue of USD 272.0 million in FY21, as compared to USD 246.8 million in FY20. Higher revenue was primarily due to a result of the increased realized prices for all metals as compared to 2020.
• Cost of sales stood significantly higher at USD 190.7 million in FY21 from USD 165.3 million in FY20. Hence, gross profit stood slightly lower to USD 81.2 million v/s USD 81.5 million in FY20.
• The period was marked by higher general & administrative expense coupled with an inclusion of asset impairment costs amounting USD 35 million, which resulted in a decline in income from operations of USD 12.5 million v/s USD 51.1 million in FY20.
• The company reported its net loss of USD 22.1 million, as compared to a net profit of USD 27.3 million in FY20. This was primarily due to a decline in income from operations coupled with higher other expenses and a rise in income tax expenses.
  

Valuation Methodology (Illustrative): Price to CF-based

Analysis By Kaline Group

Stock Recommendation:

For FY22, the company expects its production in between 79,500 to 89,700 copper equivalent pounds. The group expects its silver production in between 3,202,500 to 3,360,500 ounces (v/s 3,527,438 ounces in FY21), while its gold production is expected in between 15,500 to 17,500 ounces (v/s 9,572 ounces in FY21). Copper production is estimated in between 34,500 to 41,000 Klbs, higher than 31,757 Klbs in FY21. The stock of SMT carries a dividend yield of ~3.336% on an annualized basis, which looks impressive considering the ongoing interest rate scenario. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Foraco International SA, Geodrill Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of SMT at the last closing price of CAD 1.12 on April 26, 2022. 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 April 26, 2022). Analysis by Kalkine Group 

Technical Analysis Summary:

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