Grizzle kicked off their inaugural CommoditiesCON, featuring speakers from the copper, silver, gold, and oil universe. The conference also had strong participation from analysts – including a social media chicken that provided some key insights (@doomberg1 on twitter). This was a great series, so we’ll cover some of the highlights.
Let’s start with Sierra Metals (NYSE:SMTS, TSX:SMT), as they illustrate the experiences of many a mid-tier miner over the past 2 years (you can watch their presentation here). Christiana Papadopoulos, Manager of Investor Relations gave a solid overview of the company, which mines a good mix of the strategic metals we like to see – located in the jurisdictions of Mexico and Peru. Their Yauricocha mine (in Peru) has been producing for over 70 years, and the districts of Cusi and Bolivar (in Mexico) have a 300 year history.
It’s Easy Being Green
Sierra Metals has a strong angle on green metals. They’ve produced 10.5 million lbs. of zinc this year, which brings them about 24% of their 12-month trailing revenue.
A quick note on zinc – it’s a highly-used metal that’s considered to be very green. Its main use is the galvanizing process, which rust-proofs iron and steel. It extends the life infrastructure (bridges etc.) and is very versatile; it’s used in electric vehicles and can be alloyed with other metals like copper to make brass and bronze. Die-casting into shapes like door handles, and other practical every-day uses are a main component of the mix-use of this metal. Unbeknownst to many, zinc is also 100% recyclable – making it essential for the green economy/energy transition.
Sierra Metals is focused on copper. It takes the lead representing 37% of their 12-month trailing revenue; the company has mined 6.3 million lbs. in Q1 this year. They expect that number to rise as production at their sites increases. One of the burning issues with copper is that grades are decreasing globally, and demand is increasing for electric vehicles and other products that require the red metal for their manufacture. We’ve been banging the table about copper for a long time, and its long-term outlook remains bright.
Moving on from COVID
2020 was an obstacle for mid-tiers miners, hit with the gut punch of COVID-19. For Sierra staffing became an issue due to a lack of personnel; drilling became backlogged, and the quality of mining was impacted at their Bolivar site. Despite these COVID-related issues, Sierra maintained a strong balance sheet in Q1 with cash and equivalents at $19.5 million and total debt at $81.1 million.
Sierra plans to meet guidance measures this year as production increases moving into Q2, to an annual of 79.5 to 89.7 million tons.
Dividends to Chew On
There was a pre-COVID discussion in 2020 about returning capital to shareholders. Sierra expected to return a significant portion of their excess free cash flow to shareholders on annual basis. They had initiated a plan to repurchase $15 million in common shares for cancellation and another $15 million was to be allocated in some form of return of capital by the end of the quarter.
Unfortunately, in March the plan hit the COVID-19 wall – along with the rest of world. In January 2021 Sierra entered a strategic review which got delayed, because – you guessed it – COVID restrictions. Investors were frustrated with this process, and the company couldn’t provide an update until October 2021.
They then announced a dividend policy of $5 million, or 3 cents per share. Not a significant amount (wouldn’t affect their cash position), but they wanted to give back to shareholders. As the company turns the corner, they expect to continue to spread the love with an annual dividend as their cash position strengthens.
Stonegate Capital Partners recently performed a DCF analysis of Sierra’s mines and came up with a valuation range of $3.25 to $5.00 with a mid-point of $4.25. As of this writing the company is trading on the TSX at $1.17, and on the NYSE at $0.91. We’ve previously identified Sierra Metals as trading at a deep discount vs its copper peers; on a forward price to cashflow basis they trade at 1.6x vs small & mid cap copper peers at 4.4x. Coupled with an attractive dividend yield, we’ll continue to cover these guys as a solid long-term copper/inflation protection play.
Sierra Metals is a market awareness client of Capital 10X.
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.