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Sierra Metals (SMT) - Peruvian & Mexican Base Metals Targeting Growth

October 6 2020, 07:44 GMT+01:00

Sierra Metals (SMT)

  • TSX: SMT
  • Shares Outstanding: 162.81M
  • Share price C$1.93 (05.10.2020)
  • Market Cap: C$317.481M

Sierra Metals is a is a mid-tier precious and base metals producer that is based in Latin America. Marchese is a good person and only became CEO 3-months ago, so maybe we should have gone easy on him. The Sierra Metals story is comprised of 3 producing base metal assets and numerous exploration tenements in Mexico and Peru. Sierra Metals is also something of a mining turnaround story.

The share price is on its way back up after what has been a difficult decade for the company and an especially difficult recent few years. Marchese is going to have to leverage his 25-years' experience in the mining sector, most of that spent with Anglo American, to get create meaningful value for shareholders. Lots to like, but still lots to do. If Sierra Metals can deliver, it could well be a strong base metals proposition, but there will a lot of questions marks up until that point.

We Discuss:

  1. 3:20 - Company Overview
  2. 5:44 - New CEO: Track Record and Board Expectations
  3. 12:20 - Update on Arias Resources Capital: Has Anything Been Resolved?
  4. 14:05 - Company Financials: Debt, Cash Position, and Reassessment
  5. 17:28 - Potential of Yauricocha: Promises Delivered?
  6. 22:05 - Bolivar: Plans, Growth, and the Future
  7. 28:03 - Cusi: Plans & Options

Matthew Gordon: Give us a one-minute overview of Sierra Metals for people new to this story? And then we can pick it up from there.

Luis Marchese: Sierra has three assets. It's an operating company with three assets, one in Peru, two in Mexico. The two in Mexico, Cusi, which is a silver mine. The other one is Bolivar, which is a Copper mine. Cusi is around 10% of our revenue is around 30% of our revenue. And we have Yauricocha here in Peru, which is a flagship, which is around 60% of our revenue. Yauricocha is a polymetallic mine. It's Copper, Zinc, Lead, Gold and Silver. Overall, our mix is of five metals. Copper is 40% of our revenue, Zinc is 20%. Silver - 20%. Gold -10%, so we are a truly, polymetallic fundamentally diversified company. We are in a good cash position and plenty of resources. It's been a steady growth strategy. Now we're sitting in a quite nice resource base that we are working to put into value for everybody, for the shareholders. It's an exciting company. It's a strong company, it has been delivering over the years and we have good prospects for the future.

One really good thing about where we are is that we are in established jurisdictions, where we are has been mining for many years, so people know what mining is about, and we are very well received by the communities around us. We are in nice, very prospective belts. We are near the Toromocho Copper mine in Peru, in that belt where there are many ore bodies. In Mexico, in Bolivar, where we are near an organic area for Copper, and Cusi has been mining for hundreds of years. So, we have plenty of places to work, to explore and potentially grow.

Matthew Gordon: What's your experience? Where have you come from? What have you done?

Luis Marchese: I am a mining engineer by training. I worked for Anglo American for 23 years, I've been in projects, operations in Chile, Canada, Mexico. Projects in Peru and other parts of the world. I've got this mix of operations and projects, which actually fits really well with Sierra because it's an operating company that has a growth strategy. I feel like at home here where I can do a lot. And also, I like Sierra for the management team as well. I'm fitting in really well. I'm really excited

Matthew Gordon: What was it they have tasked you with? What do they want you to try to do? What was their problem they were trying to fix?

Luis Marchese: Not really, no. Well, there are issues as in any company, but it's a company that has been growing steadily. The previous CEO, Igor, who you know, he was very consistent in the strategy of growing the resources for India, and the production capacity. So, the next stage now is to deliver that production capacity and growth on those resources. And that's where I'm focusing the team and the company. So, as we speak, we're managing the current situation, but other than that, once we get through this we are going to go on with the strategy.

Matthew Gordon: What more does the board want from you that wasn't happening before?

Luis Marchese: As we speak, we are filling the production, we are filling the plants, we have 5,000 tons per day capacity in Bolivar, which now we are reaching. We expect to be consistent in that throughput by the end of the year, same thing with Cusi: 1,000 tonnage per day. Last year, it was only 800tpd. We're going to get there. And same thing with Yauricocha. The first thing we're doing is to make sure that we're running at full capacity. The second thing that we're doing is to build on those resources. As I said, we have plenty of resources due to the Greenfield exploration, brownfield exploration on the properties.  We've just been approved in a number of expansion studies that we are starting as we speak, to make sure that we are in a position to grow the capacity of the plants, bring more value. And the other thing is that we have a very nice land position. So, once we are allowed, we're going to keep exploring and we are very optimistic about exploration. We have this three-legged strategy.

Matthew Gordon: What are they seeing in you that they weren't getting before? What are you going to do to change this company, to ensure that investors are interested in this story going forward?

Luis Marchese: We're ensuring that we are bringing some disciplined processes. We are starting the team. We are working on the relationship with the communities. ESG certainly is one of our focusses. I feel like part of the process, Matt, that's a good thing about Sierra – it is a very good org which has been very supportive. The management is a very nice, very good management team. What I'm doing is strengthening that and making sure that it happens. And I'm bringing this to the next step. And I think that I have the support of the board and everybody in my team.

Matthew Gordon: Are there expectations of you using your track record which may signal to us, as investors, as to what the company is going to try and do moving forward, over and above the plans that it already has in place?

Luis Marchese: The expectation is on delivery. Matt. I want to make sure, I think I'm strong together with my team to make sure that the delivery will be there. So, we're following a disciplined process for projects, making sure that we have the right idea, that we have no surprises and we put full value to our resources. In terms of operations, that we are safely operating, which is obviously very important and that we have the lowest cost that we can aim for. And that is where we are focusing as we speak, since this tragedy of COVID, it has also taught us that there is a number of processes that we can streamline in all of our operations. We're building on that as well. I think that's what the board has expected from me. I'm three months into the job, and I being at home the last few months, so it's really difficult to go beyond that for the time being.

Matthew Gordon: What's happened with Arias? Has that position been resolved?

Luis Marchese: Arias is a main supporter of Sierra, it is 52% or 53% - I don't know what you mean by resolving, but they are a part of our shareholder base and they are supportive.

Matthew Gordon: Did they resolve to hang on to their position or will they be offloading?

Luis Marchese: They have over 50% of all of our shares. I mean, the actions of Arias, you would have to ask Arias. That's what I can say.

Matthew Gordon: Let's talk around the debt position. Can we talk about your finances?

Luis Marchese: We have a strong cash position. We have around USD$40M. We have the standing loan PCP, which we will start paying next year. Our finances are fine, actually over the COVID so far, we've been able to keep our cash position. We have reduced some of the CAPEX in some operations because we wanted to remain strong. So far, we're doing very well. Since June 1st, when I joined, we have started to take our operations to full capacity, together with the exchange rate, which is helping with price of the metals, which are also helping it’s looking very well onwards in terms of our cash generation and production. So, it's going well.

Matthew Gordon: Returning up to $30M to shareholders in 2020. Is that going to happen?

Luis Marchese: That was put on hold, obviously for the right reasons at the beginning of the year. We are reassessing that. If we do any return to the shareholders, which we sometimes try to do, it's going to be in of our excess cashflow, which we still have to assess. Things are very fluid, and we have to make sure that we have the right level of cashflow to run the company on its right path. But after that, we'll discuss with the board on what's the right way to return the cash for shareholders.

Matthew Gordon: At what point are you going to make those sorts of decisions?

Luis Marchese: We haven't discussed that with the board yet. I think we've been very focused on making sure that we are operating and that we are keeping our financial strength, but that is on the horizon. I'd say that in the next 3 to 6-months to discuss, depending on our cost position. As I said, the position in the company is quite strong. We've been able to retain our cash position through COVID, and now we are having lower costs. We're having higher revenues because of the prices so things are going well. We have COVID on top of us and anything can happen. We have to be very conscious about it.

Matthew Gordon: How much more money do you need to be spending at your Yauricocha?

Luis Marchese: We have spent over USD$15M for CAPEX this year. It's less than what the plan was because we've only focused on non-discretionary CAPEX. As you said, ventilation is certainly non-discretionary, development is non-discretionary. The shaft, we've been able to delay it because we've had access to other parts of the mine where we have ore. As we speak, we're looking at when we're going to restart it. Overall, we've been focusing on non-discretionary CAPEX, and the discretionary CAPEX, we are reassessing as we speak, how we're going to move with those. Certainly, our aim is not to hurt production in the future due to any delay.

Matthew Gordon: What is the potential there at Yauricocha? What should you be doing there that you're not able to at the moment?

Luis Marchese: Exploration - we're not doing. We have a nice resource base in Yaurichocha where actually we can grow, but we feel that the potential in the area is very strong, so we have stopped production and we're going to start quite soon. We have high expectations of the area; it is very prospective. So that's maybe the main thing that we've stopped doing for the time being, but we are going to restart, and we hope to bring some surprises to the market for sure.

Matthew Gordon: Like what?

Luis Marchese: I don't know. It's very prospective. We'll have all the metres there. You can find scars; you can find more buys like we have. We are looking at porphyries in the area. There is a porphyrizing environment. A couple of years ago, there were some drills that were released to the market where we found some Copper porphyries. We are relooking at the whole place to see what we're going to do next, but we are very optimistic about it.

Matthew Gordon: How has that affected the revenues at Yauricocha culture and how are you managing that? Where are you spending your time, money and effort?

Luis Marchese: Yauricocha is everything and anything: we have the full mix of metals there so all of them have gone up but Lead. We're really happy with the mix that we have. One of the good things about Sierra Metals is that we have Copper 40%, you know, the metal of the future. We have Silver at 20%, it's been going up by 50% this year. Gold - 10%. Zinc, it is doing very well, actually. And Lead is moving sideways. So, Yauricocha, where you see it, it's a good asset with the right mix. We don't have that much flexibility to change the mix, I should say. We'd like to shift to Copper or shift to Silver a little bit, but the geology, God decided to mix it also.

Matthew Gordon: Are you going to continue to explore there? Are you looking for other acquisitions to bolster the scale of the opportunity here? What does the future look like for Bolivar?

Luis Marchese: Bolivar is very exciting. Maybe because I come from the Copper environment.

Matthew Gordon: What are you going to do? Again, what's your experience going to deliver?

Luis Marchese: We're aiming to find more resources. We already have 40Mt of resources there, it is sizeable. We are looking at expanding Bolivar, so far, we are filling the plant at 5,000tpd. As we speak, we're looking at expanding, to grow it better. Now we are doing some more exploration in the area. Actually, now we are doing production and we are aiming to grow the resource base and see what else we can do.  I'm very excited about Bolivar. It's going to become a larger part of the revenue stream for Sierra, actually part of the profits for Sierra. So, keep an eye on it.

Matthew Gordon: How much of your focus, your money, your time, are we going to start seeing you move towards this?

Luis Marchese: Actually, what is good about Mexico in particular? I mean, it's hard for me to say, because I'm Peruvian, but it is easier to get permitting, it's faster to get the permit. So, in Bolivar we have the resources, we have the people we have the right cost base. If you see the overall equation for costs, it is in the right space. We might not have the lowest cash costs, but we have a very nice low CAPEX base. So, once we do the equation, with the low CAPEX intensity and the right position on the cost curve, Bolivar is an exciting opportunity in terms of return. We've got the resources so we're planning to grow there. I cannot tell you how big we're going to go because we're doing the studies, but certainly we're aiming to do it as quickly as possible.

We are also doing some district exploration. There is a porphyry 15km away from where we are, which was many years ago bought by a Chinese company. So, we are in that environment. We don't send geophysics and we're going to keep exploring. Hopefully we'll find something. This can even change the history of Bolivar, but that's still some ahead. With what we have now, where we are planning to grow.

Matthew Gordon: What's going on in your head? What are you looking at?

Luis Marchese: We are already established there. That's a good thing. If you compare it with some greenfield projects or even brownfield large projects, we are on the right size equation. If we want to grow our capacity intensity is not that high. It's quite low actually. But we have a large resource base, which from my point of view is still underexplored, so we can explore more and eventually grow the resource space there. In terms of resource and CAPEX, we are in the right place. And we established that we have good relationships with the community. On the other hand, our cost base is fairly low because the ore body is, is fairly massive for underground standards. So, our cost base is quite good. You've got the right variables in the equation. Now we have to make it happen. And that's why we're in.

Matthew Gordon: How do you tackle it though? What's the business plan for making this asset go forward at some kind of pace?

Luis Marchese: We are doing the studies here as we speak, but I have only been here for 3-months, but we are doing the studies, we are hiring engineering. We are doing the job, we're bringing consultants. And we are making sure that we are right on that place. So, it's an ongoing thing.

Matthew Gordon: What's happening there? Are you going to increase capacity there?

Luis Marchese: We put it on care and maintenance during the COVID, and actually, we brought it back to production right when the price of Silver was going up at the end of July. So, it was it was the right timing. Now we are working on feeding the plant, which is a 20,000tpd. The exciting story about Cusi has been that we have found a new high-grade area which is right next to where we are mining. So, as we speak, we are drilling, trying to measure the tonnage and actually we are mining as well, because as part of the drilling we are doing development. Part of the ore that we're bringing to the plant, now it's coming from this new, higher-grade area. That's where we are. We have tried, but what we're aiming is to consolidate the production at Cusi. There were some issues with their mine last year and the year before. So, we are making sure that it's consistent in the delivery to the plant and that we have the right cost base. We have a good team. They're doing a great job. I'm optimistic as well to have Cusi as a source of revenue for the company.

Matthew Gordon: Wouldn’t it be better just to sell it.

Luis Marchese: No. I think we have it under control, we are operating it. It's going well. If somebody comes and makes the right offer, I don’t know, like anything else, but certainly we are very confident. The company has been investing in Cusi for many years. I think we are at the right juncture to reap the benefits of it

Matthew Gordon: It's 1,200 tons a day. It's not a big asset really, surely that's a bit of a distraction?

Luis Marchese: No, it's not that big, but at the current Silver prices, it's a very good asset and we have it under control. We've made the right investment over time. And as I said, we're finding better grade. And so, it's a nicer story. You'll see the results in the next few months.

Matthew Gordon: Lovely to meet you. I wanted to talk to you because of your track record. I wanted to see what you'd be bringing to the party here. It is difficult times, but also exciting times in terms of some of the commodity prices.

Luis Marchese: Thank you, Matt.

Company Website: https://www.sierrametals.com/

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Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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