After posting very strong production results in July, Sierra Metals (
Before diving into the quarterly results, we want to provide an overview of the company to help unfamiliar investors understand the opportunity.
From their severely undervalued assets to the pending updates to their resources and reserves, there is a lot to like about Sierra over the coming quarters.
The Bottom Line for Q2
Investors have reacted poorly to Sierra’s Q2 financial numbers with the stock dropping 8% as of this writing. We see this as a prime “blood in the streets” buying opportunity.
The company clearly does too, as they stated they see value in continuing their share buyback program up to a price of $2.50 per share. The stock currently trades at $1.74 on the TSX.
Production numbers were impressive, with substantial throughput increases achieved at their expanding mines. With further plans to expand at all three mines, revenues are expected to increase in the near to medium term (see above infographic for specifics).
Even with the illegal strike action (now-resolved) at their Yauricocha mine to start the quarter, Sierra is still on track to meet or exceed total production guidance for 2019.
Production costs have risen modestly year over year as the production ramping continues. These increases are expected given the substantial unforeseen challenges that come with new mine developments.
While investors will need to keep an eye on these costs, we expect to see them decrease as Sierra settles into their expanded operations.
They are also completing extensive exploratory and definition drill work throughout 2019 at high-value targets for all three mines. This will yield updated 43-101’s that should help the company boost its underlying asset value significantly.
While Sierra Metal’s trading volume is low, we see this improving throughout H2 2019 as the company grabs investors attention with continued production growth and the release of updated reserve and resource estimates.
We will be sitting down next week with CFO Ed Guimaraes to discuss what’s in store for Sierra Metals in the second half of 2019 — stay tuned.
Below is a review of their quarterly operational performance.
Operational Review: Q2 Financials Hindered by Metals Pricing and Strike
To summarize the previous production results review, Sierra Metals is successfully ramping mine throughput at their Bolivar and Cusi Mines while their Yauricocha mine continues to perform well.
Unfortunately, Q2 financial results have been hindered by weak metals pricing and a now-resolved illegal strike at Yauricocha.
Revenues rose slightly quarter over quarter to $50.7 million. But, this was down $12 million (19%) from 2018 Q2 due to illegal strike action that resulted in 12 days of lost production in April.
Management also attributed lower revenues to weak realized metals pricing. Year over year Copper saw a 12% drop to $2.75/lb while Silver saw a 9% drop to $14.88/oz. Today, Copper and Silver prices sit at $2.82/lb and $17.29/oz, with strong medium to long term outlooks. This should bode well for Sierra’s top line in the coming quarters.
Looking at production costs, Yauricocha had consistent to slightly higher costs compared to 2018 Q2. This was driven by higher Zinc production costs from increased treatment charge costs.
At Bolivar, cash costs and all-in sustaining costs (AISC) rose more considerably (45% and 20%) due to the costs associated with the 25% throughput ramp up to 4,000 tpd. Notably, the company stated $6.5 million of CapEx was included in AISC even though these are largely one-time mine improvement costs that enable the ongoing production ramp-up. This would represent a decreased cost of $0.55/lb based on the 11.8 million Copper equivalent pounds produced in 2019 H1.
At Cusi, the mine faced similar cost challenges due to its ramp in throughput to 1,000 tpd. Specifically, Silver production cost costs rose 29% to $16.49/oz, while AISC rose 28% to $25.76/oz on a year over year basis. During the conference call, management explained this increase was largely due to a moisture content issue that delayed silver shipments until after quarter-end. Without this delay, AISC costs would have fallen by $5.50/oz, resulting in similar costs year over year.
Management has also deferred immediate CapEx at Cusi until they have stabilized operations at the 1,200 tpd level. While they still intend to ramp to 2,400 tpd, they are taking a disciplined approach to Cusi’s expansion. This is a prudent approach that should help keep costs under control at Cusi.
Overall, Adjusted EBITDA was largely on par with 2019 Q1 at $12.5 Million. With continued capital expenditures planned for H2, management expects similar EBITDA in Q3 and Q4. Management also guided to a total net income of approximately $5 million for the year as their production ramps reach maturity.
Looking at their balance sheet, the company increased their cash position to $40.2 million, while net debt position increased to $59.2 million as they drew down on their new debt facility. This 6-year debt facility provides them with a two-year grace period and gives them the needed liquidity for capital expenditures.
Sierra Metals is a Market Awareness Client of Capital 10X
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