Sierra Metals (TSX: SMT) is a premier Latin American precious and base metals producer with significant resource growth potential. The Company commercially owns and operates in three mines also produces mineral concentrates consisting of silver, copper, lead, zinc and gold.

Key highlights

• On Going Exploration Opportunities: As a result of Company’s continued exploration in wider zones of Yauricocha Mine (Size=18000 hectares), significant higher metal grades have been discovered, which will provide the greater potential of metals produced. Yauricocha Mine processed 324,196 tonnes in Q3 2021, up by 2% compared to Q3 2020. Another one is Bolivar mine where 4274 TPD has produced in nine months and have capacity of 5000 TPD having size of 15217 hectares. In this way company has well established mining jurisdiction. A production chart of all three mine areas is given below.

Source: Company PPT

• Operational & Production Guidance: Company’s production of copper equivalent pounds decreased 38% to 21.9 million pounds. The Company earned Revenue of USD 60.7 million vs USD 73.21 million in Q3 2021 and Q3 2020 respectively. Despite higher base metal prices compared to Q3 2020, Revenue of the company has decreased due to decrease in throughput and head grades at its Bolivar Mine.
• Company’s Management Update: The Company despite facing several challenges this year still has a strong balance sheet. Also, company has focused on improving operations and continuous push to production growth while optimizing operations at all three mines, with cost reductions being a priority. These efforts are expected to benefit all stakeholders in the long run.

Risks associated with investment           

Since, the company competes in a highly competitive market, it must adapt to and compete with rapid changes in global metal prices, volatility of commodity prices, exchange rates and governmental actions, and interruption of production. This could result in significant exploration costs, which might increase losses of the company. 

Financial Overview of for the Period Ended September 2021 (In thousands of USD, except share and per share amounts)

Source: Company’s Filing

• The Company’s Revenue is USD 60.7 million in Q3 2021, decreased by 17% from USD 73.2 million in Q3 2020, largely due to the lower grades at the Yauricocha and Bolivar mines combined with operational challenges at the Cusi mine.
• The Company has posted net loss of USD 3.73 million in sept 2021 compared to profit of USD 19.49 million, this substantial decrease in profits is due to increase in mining cost, general and administrative expenses and decrease in revenue.
• Company has USD 58.3 million of cash and cash equivalents and working capital of USD 38.1 million as on sept 2021.

 Valuation Methodology (Illustrative) EV to EBITDA Based

**% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock recommendation

The company has done expansion by preliminary economic assessments for all three mines which includes NPV expansion of Yauricocha Mine to USD 28.4 million, 78.2 million to Bolivar Mine and USD 28.1 million to Cusi mine. Company has also calculated inferred mineral resource of 11.6 million tonne (+79%), 21.4 million tonne (+168%) and 4.9 million tonnes (+200%) respectively.

Company is focusing on successfully mine site and greenfield exploration programme and value enhancing of the business by taking development initiatives.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 1.61 on 06^th January 2022 

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

Technical Summary Analysis

One-Year Price Chart (as on January 6, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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