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:

• Sequential Improvement: The group reported sequentially improved revenue, gross profit and operating income of USD 73.21 million, USD 33.02 million and USD 25.91 million, respectively in Q3FY20 These numbers were higher than USD 41.90 million, USD 11.70 million and USD 5.13 million, respectively recorded in Q2FY20. The improved performance was driven by higher realized prices and improved operational efficiency.

• Impressive Guidance: For FY21, the company expects copper productions within the range of 44.1 M lb to 48.4 M lb, as compared to 44.3 M lb in FY20. The company’s gold production is expected within the range of 10,691 oz to 11,720 oz. The group’s zinc production is expected within the range of 101 M lb to 109.2 M lb, significantly higher than 81.9 M lb in FY20.

Source: Company Presentation

• Higher Financial Flexibility: The group has reported an improved set of numbers in the past, driven by strong operational growth underpinned by strong capitalization, low net leverage and robust liquidity position. Free cash flow for 9MFY20 stood at USD 24.216 million, significantly higher than the annualized free cash flow of FY17, FY18 and FY19. The company’s cash and cash equivalent stood at USD 63.846 million as on Q3FY20, up from USD 42.980 million in FY19.

Q3FY20 Financial Highlights:

• SMT declared its quarterly results; wherein the group posted revenue of USD 73.211 million, higher than USD 64.551 million in the previous corresponding period (pcp). The increase was driven by higher sales from the Bolivar mine, supported by higher realized metal prices and higher copper equivalent payable pounds, attributable to a 24% increase in throughput.
• Gross profit soared to USD 33.021 million, from USD 18.320 million in Q3FY19, supported by higher sales and lower mining costs (USD 29.247 million versus USD 35.782 million in pcp), partially offset by a higher depletion, depreciation and amortization (USD 10.943 million versus USD 10.449 million in pcp)
• The quarter was marked by a slightly lower general and administrative expense (USD 4.516 million versus USD 4.858 million in pcp), a lower selling expenses (USD 2.600 million versus USD 2.689 million in pcp) and a lower interest expense and other finance costs (USD 1.025 million versus USD 1.417 million in pcp).
• The group reported a surge in net income of USD 19.490 million, from USD 3.232 million in pcp.
• Cash and cash equivalents were recorded at USD 63.846 million, while total assets were recorded at USD 430.938 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): Price to CF based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The group reported a robust result and outperformed the industry median on various financial parameters. For FY21, the corporation expects capital expenditure of USD 78 million, while consolidated EBITDA is expected between USD 155 million to USD 185 million. The company has a Diversified Asset Base with a multi-asset production platform while its operations based in first-class, well-established mining jurisdictions, indicates a stable production profile. Further, we expect the higher copper and gold price continue to benefit the group’s revenue and cash flow. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms) potential. For the said purposes, we have considered peers like Trevali Mining Corp, Major Drilling Group International Inc and Forage Orbit Garant Inc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 4.09 on January 28, 2021.

SMT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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