Sierra Metals Inc

Sierra Metals Inc (TSX: SMT) is a precious and base metals producer in Peru and Mexico. The company acquires, explores, extracts, and produces mineral concentrates consisting of silver, copper, lead, zinc and gold. Sierra has interests in the Yauricocha Mine in Peru, and the Bolivar and Cusi Mines, Mexico. The majority of the revenue comes from selling the mineral concentrates to its customers in Peru.

Key highlights 

• Staging production Increase: The Company is aggressively drilling to increase and replace resources. It is also ramping up the exploration and infrastructure projects, which were on hold due to COVID-19. From FY2021 – FY2023, the Company expects to achieve a Tonnages Per Day capacity of 9,800 TPD, on the back of healthy performance from all three mines.

Source: Company

• The bullish stance of management: The management is optimistic on the operations of the company where they increased production levels. The improved efficiencies have helped them in lower costs on a per-unit basis, which is expected to continue with further production increases. With a consolidated capex of USD 106 million for FY2021, the company expects to achieve total EBITDA in a range of USD 170-185 million based on spot prices.

Source: Company

• Diversified portfolio: The company enjoys a healthy revenue mix driven by many commodities. This diversification continues to be led by copper, followed by silver, which has taken an increasing role with the ramp-up of Cusi. Gold has seen a continued increase as a percentage of the mix, aided by improved production and recovery at Bolivar and supported by higher gold prices. In Q1 2021 the group saw an improvement in realized metal prices for copper, silver, gold and zinc. 

Source: Company

• Strong Balance Sheet: The Company continues to have a strong balance sheet, working capital and cash position to support its capital expenditures and growth initiatives. Metals prices have strengthened in 2020, especially for copper and precious metals and are expected to remain strong through 2021. The group reported cash and cash equivalents of USD 74.3 million as on March 31, 2021.

Source: Company 

Financial overview of Q1 2021 (In thousands of United States dollars)

Source: Company 

• The Company posted total revenue of USD 69.6 million in Q1 2021, increased by 25% from USD 55.5 million in Q1 2020. The rise was largely due to increase in realized metal prices, which more than compensated for the decrease in metal payable, except zinc and lead.
• Adjusted EBITDA reported by the Company stood at USD 25.3 million in the reported period, increased by 57.1% compared to USD 16.1 million in pcp. The increase in adjusted EBITDA was mainly due to higher revenues and higher gross margins at all sites.
• The company transformed from net loss to net income in the reported period. Net income stood at USD 3.7 million compared to loss of USD 1.7 million in the previous corresponding period, partially offset by higher income tax. 

Risks associated with investment

The group’s revenue is directly correlated with the prices of commodities in international market. Any volatility in commodity (Copper, Gold, Zinc, etc) prices would affect the group’s financial performance.

Valuation Methodology (Illustrative): Price to Cash Flow 

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

Stock recommendation

During 2020, the metal prices started experiencing declines in the second half of March due to weaker demand outlooks resulting from the economic uncertainty at that time. However, with the reopening of the economies later in 2020, industrial demand picked up pushing these prices higher. The trend continued in Q1 2021 and metal prices averages during the quarter were much higher than their respective averages during Q1 2020.

Furthermore, we are optimistic that with improved operating efficiencies, increasing production and continued metal price strength, the company would witness a strong FY2021. Therefore, based on the above rationale and valuation done, we recommend a “Hold” rating at the closing price of CAD 3.93 on May 13, 2021. We have considered Sherritt International Corp, Foraco International SA, Geodrill Ltd, etc. as the peer group for the comparison.

One-Year Price Chart (as on May 13, 2021). Source: Refinitiv (Thomson Reuters)

Quipt Home Medical Corp (Protech Home Medical Corp)

Quipt Home Medical Corp (TSXV: QIPT), (earlier known as Protech Home Medical Corp) (TSXV: PTQ) is a healthcare service company based out of United States. The company provides in-home monitoring and disease management services, which includes end-to-end respiratory solutions for patients in the United States.

Key Highlights:

• Change of Company name and share consolidation: On May 11, 2021, the company reported that it would change its name to Quipt Home Medical Corpfrom Protech Home Medical Corp and would trade under the symbol of ‘QIPT’ from May 13, 2021 onwards. The Company announced that the Common Shares would be consolidated on the basis of one post-consolidation Common Share for each four pre-consolidation Common Shares. The Share Consolidation represents another step towards the proposed listing of the Common Shares on The Nasdaq Capital Market by meeting the minimum share price requirement set by Nasdaq for an initial listing of shares.

• Strong Recurring Revenue: The company derives its majority income from recurring revenue, which indicates operational resiliency due to higher repetitive income. Notably, the company derives almost 75% from recurring revenues, driven by better service offered as compared to the peers.                                                                  

Source: Company Presentation

• Diverse Product base reduces Risk profile: The company’s revenue is not dependent on a single revenue stream, while the Oxygen Therapy segment is the highest contributor to the group’s total revenue (22.9%). We believe, with the recent acquisitions, the company is bestowed with an impressive product mix, which is a key positive.                                                         

Source: Company Presentation

• Favorable Industry Demography: The corporation’s revenue is directly correlated with the increasing demand for durable medical equipment (DME) are increasing aged population (above 65 years) coupled with higher Sleep disorders patients. The industry estimates that 22 million Americans suffer from sleep apnea disease, with ~80% of them have moderate and severe obstructive sleep apnea undiagnosed. Moreover, almost 10,000 people are turning sixty-five every day and the trend is expected to continue for the next 15 years. Hence, we believe DME expenditure is expected to rise in the next decade, which would provide ample scope of expansion for the company.              

Expected DME Expenditure (Source: Company Presentation)

Q1FY 21 Financial Highlights:

• PTQ announced its second quarter result, wherein the company posted revenue of USD 22.755 million, stood 32% higher over Q1FY20. The increase was driven by a higher number of equipment set-ups or deliveries (76,691 v/s 62,999 in pcp).
• Adjusted EBITDA stood at USD 5.126 million, higher than USD 3.343 million in pcp. Adjusted EBITDA margin was reported at 22.5%, higher than 19.4% in pcp.
• The company reported its net profit at USD 0.229 million, as compared to a net loss of USD 1.328 million in pcp.
• The company posted a cash balance of USD 23.593 million, while total assets were recorded at USD 78.562 million.

Q1FY21 Selective Data (Source: Company Report)

Risks: The company is planning to expand its footprints across new geographies and new products. Thus, any delay in project execution would affect the business prospects.

Valuation Methodology (Illustrative): EV to Sales

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

At the end of Q1FY21, the group reported a cash balance of USD 23.593 and an available line of credit of USD 13.77 million. We believe the above is sufficient to cater for the working capital needs of the firm. The management has guided for positive net profit and Adjusted EBITDA in FY21, which is a key positive. We have valued the stock using EV to Sales-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered Cipher Pharmaceuticals Inc, Medexus Pharmaceuticals Inc etc. Considering the aforesaid facts, price movements, we recommend a ‘Hold’ rating on the stock at the last trading price of CAD 8.15 on May 13, 2021.

One-year Price Chart (as on May 12, 2021). Source: Refinitiv (Thomson Reuters)

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.