Sierra Metals – Inflation Protection at a Deep Discount

The Safe Haven of Hard Assets

Globally central banks have significantly increased money supply as a result of the COVID-19 pandemic, which has lead investors to seek the safe-haven of hard assets to protect against inflation.

We have seen gold, silver and copper all rally year-to-date, up 28%, 52% and 8% respectively.

Sierra Metals – Attractive Commodity Exposure, Production Growth and Margin Expansion

Sierra Metals (TSX:SMT, NYSE:SMTS) released solid Q2-2020 results on August 14th despite a challenging operational environment related to COVID-19.  As Capital 10X highlighted in July, the company’s production was down only -10% on a copper equivalent basis to 22.7 million pounds produced.

In the face of the operational challenges the company was remarkably able to keep EBITDA (earnings before interest, tax, depreciation & amortization) flat relative to 2019 at $12.6 million.

The company’s revenue mix in the latest quarter is very attractive from an inflation protection perspective, with 72% of overall revenue coming from copper (42%), Silver (20%) and gold (10%)

Sierra Metals provided revised full year 2020 production guidance, anticipating copper equivalent production that will be in the range of 110.1 to 122.3 million pounds. An impressive outlook that could potentially see the company grow overall production by 9% at the top-end during a volatile operational year.

Importantly the company was able to insulate EBITDA this quarter because of strong cost containment, cash costs in Q2-2020 fell -25% year-over-year, an impressive achievement.

Sierra versus its Commodity Peers

On a valuation basis, Sierra Metals trades at a very attractive multiple versus its commodity peers (copper, silver and gold) at 1.0x forward price-to-sales (analyst consensus).

Sierra trades at a 75% discount to Copper peers, an 80% discount to Silver peers and deep 96% discount to the Gold miner peer group.

The top 10 holdings of the Global X Copper Miners ETF (NYSE:COPX) trade at 4.0x forward price-to-sales, the top 10 holdings of the Global X Silver Miners ETF (NYSE:SIL) trade at 6.6x forward price-to-sales and the top 10 holdings of the VanEck Vectors Gold Miners ETF (NYSE:GDX) trade at 9.6x forward price-to-sales.

Catalysts

Key catalysts for the company for the remainder of 2020 include:

1. The ramp back up to full mining capacity at all their operations.
2. Delineation of the new high-grade silver zone at Cusi, a new 43-101 is expected in 2H 2020.

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