Polymetallic Miner Sierra Metals Reports Record Production in Q3

Sierra Metals is a polymetallic miner headquartered in Toronto with three mines operating in Peru (1) and Mexico (2).

Their Q3 production numbers demonstrate to investors that their mine expansions are on track. With record quarterly consolidated processed ore and metal production, the Sierra Metals story becomes more intriguing with each passing quarter.

We believe the company is turning the corner on their cash spend and will begin seeing the benefits of their work in the form of free cash flow.

The company has been in a period of cash investment at all three mines. Between expanding production to the extensive definition, brownfield, and greenfield drilling, there are a lot of catalysts on the horizon.

We believe the company is turning the corner on their cash spend and will begin seeing the benefits of their work in the form of free cash flow. This will pique the interest of investors and bode well for Sierra Metals’ stock price, a miner that already trades at a significant discount to peers.

With new 43-101’s on the way and metals pricing stabilizing, we believe 2020 could be an excellent year for the stock.

Late last week we sat down the Sierra Metals’ CFO and Vice President of Investor Relations to talk about their recent performance and upcoming catalysts. Stay tuned for the full video. Below is our review of their latest production numbers.

For a refresher on Sierra Metals’ operations and catalysts, see the infographic at the end of the article.

Production Overview

On a consolidated basis, processed ore has increased substantially over the last two quarters, along with metal production.

Tonnes Processed

Source: Company Filings.

Notably, on both a year-over-year and quarter-over-quarter basis, the metal production increases have outpaced tonnes processed for virtually all metals. While this doesn’t speak to the economics, it’s certainly the first step to a successful expansion.

Production %Change on a Year-over-Year Basis

Source: Company Filings.

Production %Change on a Quarter-over-Quarter Basis

Source: Company Filings.

Looking on a mine-by-mine basis, Sierra’s three mines, Yauricocha (Peru), Bolivar (Mexico), and Cusi (Mexico) each increased ore processing by 8%, 46% and 28% year over year. On a quarter-over-quarter basis, the mines saw changes of 21%, 2%, and -14%.

While seemingly mixed, their performance fits in line with their planned ramp-ups over the last year.

Yauricocha was expected to hold steady for 2019 at 3,150 tpd and increase to 3,600 tpd by mid-2020. Due to lost time from the now resolved strike action at Yauricocha, the mine has been operating at 3,500 tpd to ensure production guidance is still met. Sierra can operate at an average of 3,150 tpd for the year with its current permit.

This lost time explains the processing increases even though Yauricocha is supposed to hold steady for 2019. Given the solid grades and recoveries at this higher throughput, Sierra Metals is demonstrating they will have no issues with the planned ramp-up in mid-2020.

Bolivar was expected to increase from 3,000 tpd in 2018 to 4,000 tpd by end of 2019 and up to 5000 tpd by early-2020. As confirmed by the 46% increase, Sierra Metals is on track with its Bolivar expansion, averaging 3,800 tpd for Q3 before ramping to over 4,000 tpd in Q4.

Cusi was expected to increase from 650 tpd to 1,200 tpd by the end of 2019. Management has confirmed they are still on track to meet their 1,200 tpd goal by the end of 2019.

Due to some of the growing pains that come with mine expansions, management is making the prudent choice to stabilize operations before pushing to their year-end goal. Further, management has confirmed that new contractors arrived on site in October, with the goal of increasing development rates and improving mine access.

What to Expect from Financials

After speaking with management, they confirmed that the financials for H2 2019 would be much stronger than H1. This is largely on the back of improved operational efficiencies as they stabilize their mine expansions.

Across all three mines, the company largely saw solid increases or only modest decreases as they stabilized operations.

Additionally, there was an issue with processing at Cusi that led to substantially higher unit costs ($4-5 per oz). With operations now stabilizing, we expect to see a better performance from that mine specifically.

The grades and recoveries also look favourable for Sierra’s financial performance. Across all three mines, the company largely saw solid increases or only modest decreases as they stabilized operations.

This demonstrates Sierra Metals is executing well on their mine expansions and moving past the growing pains that come with it.

Grade %Change (QoQ)

YauricochaBolivarCusi 
Silver5.1%13.5%-2.7%
Copper7.7%0.0%
Lead7.6%27.3%
Zinc12.8%77.8%
Gold-1.7%29.2%0.0%

Recoveries %Change (QoQ)

YauricochaBolivarCusi 
Silver4.36%-1.30%14.80%
Copper1.69%-2.67%
Lead0.61%4.46%
Zinc-0.68%0.00%
Gold34.37%-2.79%5.89%

 

We will be looking at Q3 financials closely. As they achieve stabilization before further ramping in 2020, it will be important to see Sierra Metals have their costs under control.

As we highlighted above, the company is about to enter a cash harvesting period. If they can demonstrate that they have strong operational footing before another big step-change expansion, the market will likely react favourably.

The Sierra Metals Story

 

Sierra Metals is a Market Awareness client of Capital 10X.

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.

Evan Veryard
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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