Sierra Metals Announces Stellar 2020 Guidance with US$118m in EBITDA

Sierra Metals (TSX: SMT; NYSE: SMTS) released 2019 Q4 production numbers and provided 2020 production and EBITDA guidance. As we highlighted in an earlier video, 2020 is positioned to be a year of substantial growth for Sierra Metals, and their guidance supports that.

The following infographic outlines the highlights from Sierra Metals’ 2020 guidance.

Source: Company Filings, Capital 10X Estimates.

The Bottom Line

Sierra Metals is a polymetallic miner that trades at a significant discount to its net asset value at 0.43 P/NAV. This is before considering the recent drill programs and updated 43-101s being released in the coming months.

While a discounted P/NAV is the first screen when looking at a miner, the second is understanding what management is doing to initiate a re-rate in the stock price.

In this case, Sierra’s management team has indicated they are serious about changing their valuation by committing to returning US$30 million to shareholders in 2020. They are starting with a US$15 million share buyback expected in 2020 Q2. We outline the potential valuation effects here.

Beyond that, management has indicated they intend on returning substantial free cash flow from operations annually as they move forward. Based on provided guidance, this will likely be substantial.

After a significant period of investment in the ground, Sierra Metals is now entering a cash harvesting period. All three mines have seen substantial metals production increases since 2018.

Yauricocha Zinc Equivalent Production By Year

Source: Company Filings.

Bolivar Copper Equivalent Production By Year

Source: Company Filings.

Cusi Silver Equivalent Production By Year

Source: Company Filings.

On top of that, Sierra Metals’ cost guidance is demonstrating that the mine ramps have been successful and their operations are stabilizing. AISCs are expected to be equal or lower than in previous years for the primary metals across their three operating assets.

Yauricocha Zinc Equivalent AISC By Year

Source: Company Filings.

Bolivar Copper Equivalent AISC By Year

Source: Company Filings.

Cusi Silver Equivalent AISC By Year

Source: Company Filings.

All of this means Sierra Metals expects to generate US$118 million in EBITDA (midpoint) in 2020. This represents is a substantial increase over 2019’s estimated US$70 million in adjusted EBITDA.

After accounting for planned capital expenditures of US$52 million, the guidance suggests there will be US$63 million of free cash flow, using EBITDA as a proxy for cash.

We like seeing the US$30 million of expansion, growth, and exploration within that. It demonstrates Sierra intends to continue on its aggressive growth trajectory. With their substantial land package, the exploration potential is intriguing.

In terms of metals exposure, Sierra continues to increase revenues generated by copper (largest source – 45%) and silver (second largest – 23%) in 2020. Given the price strength in copper and silver expected over the short and medium-term, timing is excellent.

Based on our 2019 estimates, Sierra Metals trades at 4.84x EV/EBITDA. On a 2020 forward basis, that multiple reduces to 2.81x. With a base metals industry average of 4.6, this implies a substantial upside of 100% if they trade at peer averages.

Sierra Metals Forward EV/EBITDA

Source: Company Filings, Capital 10X Estimates.
We believe the upcoming free cash flow and management’s decision to return significant value to shareholders should lead to a re-rating in Sierra’s valuation.

Overall we continue to see Sierra Metals as an underfollowed name – the market hasn’t appreciated the capital investments the company has made over the last two years.

We believe the upcoming free cash flow and management’s decision to return significant value to shareholders should lead to a re-rating in Sierra’s valuation.

While every mining company facings challenges with pricing and operations, we believe management has demonstrated prudence and an ability to prioritize shareholder interests. With substantial investors like Arias (52% ownership) and Blackrock (10% ownership), we believe they will continue making decisions in the best interest of shareholders.

Investors should take advantage of Sierra’ Metals stock price at current levels as we believe there will be a re-valuation that will happen quickly as the year progresses.

Operational Review

Overall, Q4 was a quarter of stabilizing operations, with tonnes processed increasing 3% QoQ. Copper and Zinc both saw small increases, while Silver saw a modest decrease due to an inventory backlog that was cleared in Q3.

On a year over year, the increases were much more substantial for each primary metal. Total consolidated tonnes processed also increased by 15%.

Metal Production 2018 Q4 2019 Q4 YoY Change
Silver (000’s Oz) 701 871 24%
Copper (000’s Lbs) 8,932 11,308 27%
Zinc (000’s Lbs) 17,545 25,590 46%

Sierra Metals also saw slightly stronger realized pricing, suggesting revenues should be equal to up slightly on the quarter.

Sierra’s Bolivar asset continues to be the most impressive growth asset. Production of all metals increased quarter over quarter, while the primary metal, copper, saw increased grades and recovery.

Looking forward, management expects daily throughput to reach 5,000 tpd this year, an average of 4,700 across 2020. This represents another substantial increase from Q4’s 4,000 tpd average.

Yauricocha, the flagship zinc mine in Peru, continues to operate as the steady workhorse for the company. Zinc grades and recoveries increased, while tonnes processed remained largely flat.

In 2020, Sierra expects to receive an EIA permit that will allow them to increase production to 3,600 tpd from 3,425 tpd. Given they have already demonstrated the mine can handle this increased throughput, this should immediately benefit their bottom-line.

Cusi, their Mexican silver mine, continues to work towards their goal of 1,200 tpd, expected to be reached in Q2 of 2020. This would be a substantial increase compared to the 870 tpd across Q4.

It’s clear that operational challenges at Cusi have persisted. While the company made changes to the mine operations team in October, the benefits still have not been realized. Investors should look for more clarity on a path to improved operations during the year-end conference call expected near the end of March.

While these operational challenges have lingered across 2019, strong operations from Yauricocha and Bolivar have negated any negative effects on the financial performance of Sierra Metals.

With stronger silver pricing and a better understanding of the mine (substantial drilling completed in 2019), operations should reach a steady state in 2020.

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

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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