Sierra Metals [stock_market_widget type="inline" template="generic" color="default" assets="SMT.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] [stock_market_widget type="inline" template="generic" color="default" assets="SMTS" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] announced the intention to return up to US$30 million to shareholders in 2020. The first $15 million will be through a share buyback via a modified Dutch auction.
If you invested in Sierra Metals when we highlighted the opportunity in a November management interview, you’d be up almost 30%.
We then followed this up by an interview with their CFO discussing their plans for the US$ 30 million of cash on their balance sheet.
The story hasn’t changed, Sierra Metals is a diversified miner now entering a cash generation phase. They’ve been under-appreciated by the market to date, trading at a deep discount to NAV, and now the company is putting their money where their mouth is with a substantial buyback plan.
After releasing initial resource and reserve updates, the market reacted favorably. Given the recent strength in metals pricing, the upside has only improved.
Below we detail their plans for the US$30 million and how it stands to impact the share price.
Details of The Dutch Auction
First, let’s start with the definition of a modified Dutch auction according to Sierra.
The specific number of purchased shares may vary based on the desires of the shareholders, providing ample flexibility for shareholders.
In total, the first issuer big (offering) will result in the repurchase and cancellation of up to US$15 million worth of shares. The terms of this offering are expected to be announced in 2020 Q2.
The Board will continue to review market conditions before determining the best method by which to distribute the remaining US$15 million.
President and CEO, Igor Gonzales, commented on the impetus behind the decision,
With major shareholders like Arias Resource Capital and BlackRock each owning 52% and 10% of the company respectively, they are providing them with the opportunity to lock in gains without adversely affecting the stock price.
Potential Effect on Share Price
If Sierra Metals determines the best course of action is to buyback and cancel all US$30 million of shares, at the current stock price, that would represent approximately 10% of the outstanding shares.
Effectively, this would mean each share of the company would be entitled to 11% more of the earnings generated by Sierra Metals. In a perfect market, the stock price should see a corresponding 10% increase.
Based on management’s previous actions, we know they like the share buyback option. At this time it seems likely all US$30 million will be returned to shareholders through buybacks.
Given the company has indicated they will return a significant portion of its excess free cash flow from operations to shareholders annually, this share buyback becomes much more meaningful.
Looking forward we believe a number of catalysts, including full 43-101s updates, increasing cash generation, and strong metals pricing will bode well for Sierra Metals in the coming quarters.
With management showing they are actively looking to improve Sierra Metals’ share price, now would be a good time to invest before the remainder of the market catches up to this story.
Sierra Metals is a market awareness client of Capital 10X.
