Sierra Metals (NYSE:SMTS, TSX:SMT) released full year 2020 results on March 18th, delivering strong EBITDA (cash flow), growing production and reduced operating cash costs.
During a period where many mining companies faced significant operational setbacks due to COVID-19, Sierra Metals was able to effectively implement policies and practices to quickly bring back full operations.
In this challenging 2020 operational backdrop Sierra Metals generated full year EBITDA of $97.0 million (49% year-over-year growth) and full year production of 118 million pounds of copper equivalent (6% year-on-year growth).
Sierra Metals: Attractive Commodity Exposure and Best-in-Class Costs
Sierra’s operations consist of 3 mines in 2 attractive mining jurisdictions:
- Mexico: Bolivar Mine (copper) and Cusi Mine (silver)
- Peru: Yauricocha Mine (copper/zinc)
Sierra Metals provides investors with an excellent inflation protection revenue mix, 71% of their 2020 production revenue came from copper, (39%), silver (23%) and gold (9%).
The company’s flagship mines, Yauricocha and Bolivar, have best-in-class production costs versus global copper mining peers. Both mines sit at the 31st percentile of the global copper industry cash cost curve.
Lower production costs equal more potential for cashflow.
Robust 2020 Full Year Results
Sierra Metals delivered strong full year 2020 production and profitability results despite the volatile COVID-19 operational environment.
- EBITDA increased by 49% to $97 million
- Production grew 6% to 118 million pounds of copper equivalent production
- Cash costs fell -19% year-over-year to $1.13/lb (copper eq. pounds)
Favorable Economics for PEAs at All Mines – Profitable Production Growth Runway Ahead
Sierra Metals recently completed preliminary economic assessments for expansions at all 3 of their major mines.
- The incremental benefit of a 45% increase in output at the Yaurichocha mine would deliver a 36% IRR
- The doubling of output at the Bolivar mine would deliver an IRR of 28%.
- And the doubling of output at the Cusi mine would provide a 47% associated IRR.
The company’s long-term production outlook is excellent, they are planning to increase tonnage mined per day capacity to 17,900 by 2025; which represents an impressive 14% compound annual growth rate.
2021 Operational & Profitability Outlook
Management has provided impressive growth guidance for 2021:
- Copper equivalent production is anticipated to grow 15% to 136 million copper equivalent pounds (mid-point of guidance)
- At current metals prices EBITDA is forecast to grow 83% to $177.5 million (mid-point of guidance)
The company has also provided the following operational guidance:
- Consolidated CAPEX of ~$78 million for 2021.
- Yauricocha cash cost (copper eq. lb) will be in the range of $0.96-1.03/lb
- Bolivar cash cost (copper eq. lb) will be in the range of $1.00-1.07/lb
- Cusi cash cost (silver eq. oz) will be in the range of $13.37-14.08/oz
Sierra Versus Commodity Peers
Capital 10X published a comprehensive analysis of the copper market and stocks of copper producers.
Relative to the copper mining producer universe, Sierra Metals trades at a quarter of the valuation multiple relative to its copper peers across all metrics.
- 75% discount on forward price-to-cashflow
- 76% discount on forward EV-to-EBITDA
- 63% discount on forward price-to-sales
Capital 10X believes we are entering a prolific M&A boom in the mining sector as a result of the current commodity super cycle. We believe small & mid cap companies that trade at attractive valuations relative to large cap peers are positioned for the greatest upside.
Sierra Metals not only trades at one of the lowest valuations in the copper universe, it has a unique combination of superior production growth (14% compound annual growth rate over the next 5 years) and below industry average cost structure (32nd percentile on the copper industry cost curve).
Sierra Metals is a market awareness client of Capital 10X.
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