Markets & Metals Navigator: Crypto & Copper Miners

Crypto in the Drivers Seat vs. Precious Metals

Gold and silver have struggled in year-to-date versus the two largest crypto currencies: Bitcoin and Ethereum.

The precious metals are negative YTD (gold -6% and silver -10%) while Bitcoin has rallied +56% YTD and Ethereum elevates over all commodity assets rising +312% YTD.

What’s driving Ethereum? NFT (digital collectables) trading volume has skyrocketed, these assets are run primarily on the Ethereum network.

Trade volumes on NFT marketplace OpenSea have soared in the last month as the craze for non-fungible tokens continues; OpenSea has done $1.22 billion in volume in the past 30 days, a 950% increase from last month.

In the shadow of Ethereum’s moonshot Bitcoin has rallied strongly as well off its YTD low of $30K, Bitcoin is up over 50% in the last month.

Performance of Commodity Mining ETFs

Over the last year the performance of commodity mining ETFs has directionally followed their underlying commodities.

Gold and silver mining ETFs have underperformed gold and silver bullion; we believe this disconnect presents an opportunity for investors – however it would likely require return of capital from the large cap gold miners (buybacks or dividends) or a wave of M&A.

Coppers miners have consistently outperformed the underlying copper metal over 1, 3 and 5 years – this is a much more constructive backdrop for copper miners relative to gold and silver miners. In the section below we examine valuations within the copper mining universe.

The Value Case for Copper Miners

We believe we’re at the early stages of a commodity bull market and copper will be front and center, there’s significant upside ahead.

Commodities have historically provided investors a safe haven to protect against inflation. Investors are in an advantageous position as commodities are the cheapest they have been in the last 50 years relative to US equities.

Commodities Relative to US Equities

Hunting for Value – Small & Mid Cap Copper Stocks

Small & mid cap copper producers are trading at steep discounts relative to large cap producers on every valuation metric. Small & mid trade at a 55% discount on forward price-to-cashflow, 42% discount on forward EV/EBITDA and 48% discount on forward price-to-sales.

Given that large cap valuations are nearly double that of small/mid producers, M&A is one of the most tangible ways for large caps to grow production and enhance shareholder value.

Sierra Metals: Valuation, Q2 Results & PEA Update

Sierra Metals Trades at a Deep Discount to Peers

Looking at updated valuation metrics (Bloomberg consensus), Sierra Metals trades at a deeply discounted valuation multiple relative to its copper peers across all metrics.

• 75% discount on forward price-to-cashflow
• 72% discount on forward EV-to-EBITDA
• 65% discount on forward price-to-sales

 

Q2-2021 Results: Solid Production & EBITDA Growth, Guidance Revised Lower Due to COVID-19

Sierra Metals delivered solid production and profitability results in Q2 in the face of COVID-19 headwinds.

• Revenue for the quarter came in at $79.4 million, an increase of 90% from the previous year and 14% from Q1 2021.
• EBITDA rose 173% from the previous year to $37.7 million, and increased 47% from Q1 2021.

In the first half of 2021 Sierra Metals was impacted by operational challenges in relation to  COVID-19, which resulted in lower workforce availability and additional costs.  Management believes these issues are transitory and will not impact the company’s results in the medium and longer term.

2021 EBITDA guidance was lowered to $130 – $140 million from the previous guidance of $155 – $170 million. The mid-point of the new range represents a 2021 EBITDA increase of +39% from 2020.

The company anticipates strong 2nd half results versus the 1st half of the year. The Yauricocha Mine received its final permit required for the construction and operation of the expansion of throughput to 3,600 tonnes per day. At the Bolivar Mine the company will be implementing on a 500,000 tonne per year magentite concentrate plant which will be operational next year.

Updated PEA for Bolivar

Sierra Metals has provided the market a very constructive update of its Preliminary Economic Assessment for the Bolivar Mine (copper-gold-silver) in Mexico.

The updated PEA now includes iron ore concentrate production, which has provided a meaningful increase to the Net Present Value (NPV) of the mine from $283 Million to $361 Million.

The PEA indicated the incremental benefit of doubling production (5,000 TPD to 10,000 TPD) would have an NPV of $78.2 million with a 69.0% associated IRR; prior to the update the incremental NPV of the expansion was $57.4 million and an IRR of 27.9%.

Sierra Metals is a market awareness client of Capital 10X.