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:

• Operational update from Yauricocha mine:

1. For FY21, the company reported a 12% y-o-y growth on total production within the Yauricocha mine at 1,256.8 k tonnes v/s 1,117.8 k tonnes in FY20. Daily throughput stood higher at 3,591 tonnes in FY21, increasing from 3,194 tonnes in FY20.
2. Copper production from the Yauricocha mine stood at 14.8 million pounds in FY21, as compared to 19.7 million pounds in FY20, down 25% on y-o-y basis.
3. Zinc and lead production from the Yauricocha mine stood at 79.2 million pounds and 29.1 million pounds in FY21, as compared to 81.8 million and 31.6 million in FY20, down 3% and 8%, respectively on y-o-y basis.
4. The company reported its gold production from the Yauricocha mine at 4,059 oz in FY21, as compared to 4,292 oz in FY20, down 5% on y-o-y basis.

• Management Update: On February 24, 2022, the company reported the appointment of Ms. Dawn Whittaker to its Board of Directors with immediate effect.
  

• Higher cash from Operations: In 9MFY21, the company reported its cash from operations of USD 62.2 million in FY21, higher than USD 47.1 million in pcp, supported by efficient working capital management. This indicates an improved liquidity profile, which is a key positive.
  

• Result Update: The management informed that it would disclose its Q4FY21 result on March 16, 2022.
  

• Improvement in the precious metal prices: Due to the ongoing volatility in the global capital market along with persisting tension between Ukraine and Russia, we have seen higher investors’ interest shifting towards the Safe heaven asset classes, such as Gold. In the recent past, we have seen a tremendous rally in precious metals, especially gold and silver, and while the continuation of the above trend might lead to elevated metal prices and would support the company’s top-line due to higher realization prices.

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.

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• SMT declared its quarterly result for Q3FY21, wherein the group posted revenue of USD 60.7 million, a slide from USD 73.2 million in the previous corresponding period (pcp). The decrease was primarily due to the lower grades at the Yauricocha and Bolivar mines coupled with operational challenges at the Cusi Mine. Additionally, a slide in the realization price of gold and silver also contributed to the fall.
• Gross profit from mining operations stood at USD 11.0 million for Q3FY21, declined from USD 33.0 million in Q3FY20, due to lower sales, coupled with higher mining costs (USD 37.2 million v/s USD 29.2 million in pcp), and higher depletion, depreciation, and amortization expense.
• The period was marked by an increase in general and administrative expenses of USD 6.8 million in Q3FY21 v/s USD 4.5 million in pcp while lower selling expenses (USD 2.2 million v/s USD 2.6 million in Q3FY20) partially supported the profitability. Income from operations stood at USD 2.0 million v/s USD 25.9 million in pcp.
• The group reported a net loss of USD 3.7 million, as compared to a net profit of USD 19.4 million in Q3FY20. This was primarily due to the above-mentioned reasons coupled with an increase in other losses (USD 1.4 million v.s USD 0.02 million in pcp).

Valuation Methodology (Illustrative): Price to CF-based

 Analysis By Kaline Group

Stock Recommendation:

Moreover, the stock of SMT closed above its 20-days and 50-days simple moving averages which indicate a bullish pattern.The stock has been valued the stock using the price to cash flow-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Trevali Mining Corp, Sherritt International Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of SMT at the closing price of CAD 1.77 on February 25, 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 February 25, 2022). Analysis by Kalkine Group

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

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