One Small-Cap Mining stock to Bet on- Sierra Metals Inc

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 Highlights:

• Strong performance from Mine: The group reported a strong operational performance from its Cusi Mine and posted an annual production of 295,771 tonnes in 2021, which was 28% higher than 2020. Daily throughput reported at 845 tonnes/day in FY21, which is 28% higher over FY20. Higher throughput and grades resulted in higher silver equivalent production. Notably Silver equivalent ounces stood at 465 koz and 1,382 koz, respectively in Q4FY21 and FY21, respectively, up 21% and 38%, respectively, on y-o-y basis.

              Source: Company Report

• Lower Cash conversion period: The company reported a higher cash conversion period of 59.1 days in FY21, as compared to the industry median of 64 days. This indicates that the company lakes lower time to convert its investments to cash flows, which is a key positive.

• Bullish Long-term outlook: 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. All these factors would likely to have a positive impact on the company’s upcoming performance.

Risks Associated with the business:

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 Income Statement Highlights (Source: Company Report)

FY21 Income Financial Highlights:

• 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 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. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Foraco International SA, Magna Gold Corp etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of SMT at the closing price of CAD 1.60 on March 29, 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 March 29, 2022). Analysis by Kalkine Group

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.