Toronto-based Sierra Metals
Over the past few quarters, Sierra Metals has been working through a production growth period, increasing throughput at all three of their mines. They are now rounding the corner and are entering a cash harvesting period.
Sierra Metals is a growth story, and they continue to progress on a solid track. Production ramp-ups are progressing well, with record consolidated quarterly metal production achieved during Q3.
This quarter saw the best performance for the year in terms of both revenues and adjusted EBITDA. The fourth quarter and 2020 are setting up to be just as big.
Revenues ($, 000s)
|9 Months End Sept. 30||113,752||40,713||9,939||164,404|
|3 Months End Sept. 30||44,427||14,675||5,449||64,551|
|Percent of Revenue||39%||36%||55%||39%|
Adjusted EBITDA ($, 000s)
|9 Months End Sept. 30||45,215||3,495||1,001||46,153|
|3 Months End Sept. 30||20,284||863||1,463||21,554|
|Percent of Revenue||45%||25%||146%||47%|
Specifically, their flagship Yauricocha mine in Peru and their expanding Bolivar mine in Mexico have shown strong performances. The cash costs per equivalent pound have both decreased — a good sign they are operating well.
AISC costs have remained flat or increased slightly in the case of Bolivar due to mine development costs associated with the 46% throughput increase over the last year.
The main challenge facing the company is the ramp-up of their Cusi mine. This quarter was better than expected due to concentrate build-up from Q2 (sold in Q3). Cash costs and AISC costs have increased from a year ago as they work to stabilize operations after the ramp up.
Sierra Metals brought new contractors on-site as of October and invested in processing equipment to increase throughput while maintaining solid recoveries. Overall, the company is taking the right steps to improve performance.
The management team has also decided to reduce planned CapEx from $70 million to $50 million in 2019, with deferrals into 2020 for all three mines. The company has confirmed that none of these deferrals will result in unnecessary expenses.
In our opinion, the biggest checkmark for Sierra Metals is their ability to achieve positive results despite numerous headwinds.
Copper and Zinc prices have decreased over the last year, metals that represent 35% and 23% of revenues respectively, and treatment charges are also higher. They’ve also managed to overcome illegal strike action at Yauricocha and subsidence issues at Cusi.
Despite these challenges, Sierra Metals generated positive cash flow with substantial CapEx and drilling still being completed. This is the key component to a sustainable mining operation. As headwinds decrease, the company is positioned to outperform based on its current operations alone.
On a 2020 price-to-earnings basis, Sierra Metals is the cheapest polymetallic miner among its peers. Notably, analysts project over half the group will not even generate positive net income for 2020.
2020 Price to Earnings for North American Polymetallic Miners
Finally, the company has entered a cash flow positive period with over $40 million of cash on the balance sheet. When analysts asked about management’s allocation plans, they responded saying all options, including dividends, M&A and further share buybacks were on the table.
While they are taking options to the board before announcing any plans, we like the optionality for the company. While it’s nothing concrete, it suggests more catalysts are on the horizon beyond the increasing cash flows and updated 43-101’s that we’re already expecting.
Quarterly Financial Review
Starting with their topline, revenues increased 27% quarter over quarter, and 22% year over year to $64.5 million. Gross profit was $18.3 million, representing gross margins of 28%. This was a 25% increase quarter over quarter and closer to last year’s 30.5%.
This trend is a positive sign for investors, signaling they are moving back toward stable operations after a substantial ramping period. Investors should continue to monitor margins to ensure the ramp-up is proceeding as expected.
Operating expenses were steady at $7.5 million. This resulted in an operating income of 10.8 million, a 165% increase quarter over quarter and a 13% increase year over year. These increases are derived from substantial revenue and gross margin improvements as operations stabilize.
Net income increased to $3.2 million, up substantially from last quarter.
Overall, net cash flow from operations was $1.9 million, compared to an outflow of $11.5 million last quarter. Cash balance remained steady quarter over quarter.
Sierra Metals is a market awareness client of Capital 10X.
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