Sierra Metals Inc (TSX: SMT) is a Canada-based mining company. The company is focused on the production, exploration and development of precious and base metals in Peru and Mexico. The Company owns interest in the polymetallic Yauricocha Mine in Peru and the Bolivar and Cusi Mines in Mexico.

Investment Rationale

• Firm Underlying Commodity Prices: The company engaged into exploration of silver, copper, lead, zinc and gold. All these metals are up and roaring on the commodity exchange, which will bolster the group’s financial health in the coming quarters. Also, we believe that in Q4FY21, the company’s average realization prices for each metal will increase given the current run-up in the underlying commodity prices.

• Undervalued against Peers: SMT shares are trading at a steep discount to its peers. The TTM P/E multiple of the company stood at 18.16x, whereas average peer’s TTM P/E multiple stood at 97x, implies a discounted valuation of 35%. It looks that the recent poor performance of the company in Q3FY21 has already priced-in, and expected a decent performance of the company in the upcoming quarters on the back of firm underlying commodity prices, which will help SMT shares in PE expansion. 

    Source: REFINITIV, Analysis by Kalkine Group

• Hovering near crucial support zone: On weekly price chart, SMT shares are hovering near strong support level, as last time also we noticed a strong buying interest emerged near CAD 2.0. A  potential upside is possible from the current trading levels.

Weekly price chart (as on November 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

Risk Associated

The company is exposed to variety of risks including adverse move in the underlying commodity prices, resurgence in COVID-19 cases, forex risk, interest rate risk, and other macroeconomic risks.

Financial Highlights: Q3FY21

Source: Company

• During the Q3FY21, company’s reported revenue stood at USD 60.7 million decreased by 17% from USD 73.2 million in Q3FY20, largely due to the lower grades at the Yauricocha and Bolivar mines combined with operational challenges at the Cusi mine.
• In Q3FY21, the company reported adjusted EBITDA of USD 17.4 million decreased by 53% compared to USD 37.2 million in Q3FY20 due to the decrease in revenues realized.
• In Q3FY21, operating cash flows before movements in working capital stood at USD 16.5 million in Q3FY21 decreased from USD 37.9 million in Q3FY20.
• Cash and cash equivalents as of September 30, 2021, stood at USD 58.3 million vs. USD 63.84 million as of September 30, 2020.

Valuation Methodology (illustrative): Price to Cash Flow -based valuation

Stock Recommendation

The  group’s performance in Q3FY21 was relatively poor. However, it has already priced-in in the current stock price. Given the solid underlying commodity prices, we believe company will report improvement in the upcoming quarters on the back of higher commodity realization prices.

Though, company is exposed to an adverse move in the underlying commodity prices.

Hence, based on the above rationale and valuation done, we recommend a “Speculative Buy” rating on SMT stock at the closing price of CAD 2.06 (on November 15, 2021).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary

1-year price chart (as on November 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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