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.

Key highlights 

• 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 

• 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.

• 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.

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): EV to Sales

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, we recommend a “Hold” rating on the stock at the closing price of CAD 4.03 on June 14, 2021. We have considered Trevali Mining Corp, Foraco International SA, Capstone Mining Corp, etc. as the peer group for the comparison.

One-Year Price Chart (as on June 14, 2021). Source: Analysis by Kalkine Group

Medical Facilities Corp

Medical Facilities Corp (TSX: DR) owns a diverse portfolio of surgical facilities in the United States. Through its wholly owned subsidiaries, the company owns controlling interests in four specialty hospitals and six ambulatory surgery centers. The hospitals offer a range of non-emergency surgical, imaging, diagnostic and pain management procedures, and other ancillary services such as urgent care and occupational health.

Key highlights

• Expanding Arkansas Surgical Hospital: Recently, the company’s Arkansas Surgical Hospital has announced that it would expand its post-anesthesia care centre by 4,590 square feet, adding two operating rooms and three new recovery beds. By the end of the year, the project is expected to be completed. Post expansion the Hospital would have 13 operating rooms. We anticipate that after expanding, the firm would be able to serve a larger number of patients, resulting in increased future revenues.
• Consistent dividend distribution: The company reported a consistent dividend distribution in the recent past, backed by stable cash flows, which is a key positive. Recently, the group paid a quarterly dividend of USD 0.07 per common share on April 15, 2021. Moreover, at the last traded price, the stock was offering a dividend yield of 3.96%, which looks impressive considering the persisting interest rate scenario.
• Increase in profitability and Reduction in Debt: In Q1FY21, the firm reduced its overall debt by 10% to USD 53.6 million, which is good given the present economic situation. Lower financing costs would result from a reduction in overall debt. Furthermore, the firm has recently achieved greater profitability, with adjusted EBITDA of USD 25.1 million in Q1FY21, up from USD 18.6 million in the previous corresponding period.
• Industry beating margins: The Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q1 2021, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 

  Financial Overview of Q1FY21

Source: Company

• In Q1 2021, the company posted total revenue and other income of USD 98.1 million, depicting a growth of 5.8% against USD 92.7 million in pcp. The increase was driven by higher income from the Facility service segment.
• The group reported lower operating expense at USD 79.7 million, from USD 81.7 million in pcp. The decline was primarily due to lower general and administrative expenses and lower depreciation and amortization expenses, partially offset by higher salaries and benefits costs.
• Income from operations soared to USD 18.3 million compared to USD 11.0 million in pcp.
• Income before income tax for the reported period stood at USD 12.1 million compared to USD 14.2 million in pcp.
• Net income stood at USD 10.3 million, declined from USD 14.6 million in Q1FY20. The decline was majorly due to a loss from the change in value of exchangeable interest liability amounting to USD 1.948 million, as compared to an income of USD 7.027 million in pcp.

Risks associated with investment

Continuation of the restrictions imposed by the Government, the company might witness a hindrance in its Facilities, which might take a toll on the overall company’s performance.

Stock recommendation 

The firm is enthusiastic about its prognosis for 2021 as vaccines continue to be released. A crucial benefit is that case volumes are continuing to return to pre-COVID-19 levels, as observed by the organization in Q1 2021. Furthermore, the firm is well-positioned to capitalize on the growth prospects because of its robust balance sheet. The firm is also expanding its Arkansas Surgical Hospital, and we expect that after the expansion, the firm would be able to serve more patients, resulting in increased future revenues. On the valuation front, the stock is available at a forward EV to Sales multiple of 0.87x which is lower than the industry (Healthcare Providers & services) median of 2.2x. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 7.06 on June 14, 2021.

One-Year Price Chart (as on June 14, 2021). Source: Analysis by Kalkine Group

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

Disclaimer

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