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 Growth in Cash flows: For FY20, the group reported an impressive performance, which has been reflected in its cash flows (USD 66.981 million v/s USD 39.587 million in FY19). The increase was primarily attributable to robust net profit growth. A higher cash flows is an indication of improved financial flexibility. Notably, free cash flow increased to USD 32.732 million, as compared to an outflow of USD 15.034 million in FY19.

• Impressive Guidance amidst tepid economic scenario: For FY21, the company expects its copper production within 130 million lbs to 141 million lbs, higher than 118.2 million lbs in FY20. Meanwhile, silver production is expected within 16.1 million ozs to 17.5 million ozs, higher than 16.1 million ozs in FY20. Consolidated EBITDA is expected in between USD 155.0 million and USD 170.0 million, while capital expenditure is anticipated at USD 78 million.

FY21 Guidance (Source: Company Report)

FY20 Financial Highlights:

• SMT declared its full-year result, wherein the group posted revenue of USD 246.888 million, higher than USD 229.038 million in the previous corresponding period (pcp). Higher revenue was primarily driven by higher copper sales from the Bolivar mine attributable to increased throughput, and higher average realized prices for copper, gold and silver as compared to FY19.
• Gross profit stood at USD 81.585 million, higher from USD 57.762 million in FY19. The growth was supported by higher sales and lower mining costs (USD 123.649 million v/s USD 135.192 million in pcp), while a slightly higher depletion, depreciation and amortization (USD 41.654 million v/s USD 36.084 million in FY19) remained a drag.
• The period was marked by a slightly higher general and administrative expense (USD 20.270 million v/s USD 19.515 million in pcp), and marginally higher selling expenses (USD 10.195 million v/s USD 9.741 million in FY19), while a lower interest expense and other finance costs (USD 4.293 million v/s USD 4.875 million in FY19) supported the profitability.
• The group reported its net income of USD 27.391 million, significantly higher than USD 9.417 million in FY19.
• Cash and cash equivalents stood at USD 71.473 million, while total assets were recorded at USD 439.592 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: The income of the company is correlated to commodity prices such as copper and silver. Volatility in price would lead to a slide in the overall performance of the company.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

During FY17 to FY20, the company reported consistent improvement in its financials and showcased elevated revenue, adjusted EBITDA and growth in cash and cash equivalents while controlled its debt profile, which is a key positive.

Source: Company Report

Going forward, we expect the demand for copper to remain stable, which would support the copper prices.  This would help in sustaining revenue and cash flows. 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). For the said purposes, we have considered peers like Trevali Mining Corp, Largo Resources Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 3.87 on April 09, 2021.

One-Year Price Chart (as on April 09, 2021). Source: Refinitiv (Thomson Reuters)

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