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Sierra Metals Stock (TSX:SMT) – Investment Analysis

Common Stock: Sierra Metals (TSX:SMT)

Current Market Price: $2.98 USD

Market Capitalization: $489.3 Million USD

**Note: All values in this article are expressed United States Dollars (USD) unless otherwise noted.

Sierra Metals (TSX:SMT) - Stock Chart
Sierra Metals (TSX:SMT) – Stock Chart

Sierra Metals Stock – Summary of the Company

Sierra Metals is a mining company focused on the acquisition, exploration, development and operation of mineral properties. The company is mainly focused on Peru and Mexico, where they own a total of 3 operating mines as well as a portfolio of exploration stage assets. Their production is well diversified, with their main products being copper, zinc, silver, lead, and gold. Sierra Metals was founded in 1996 and is headquartered in Toronto, Canada.

Sierra Metals - Property and Production Map
Sierra Metals – Property and Production Map

Revenue and Cost Analysis

Sierra Metals had revenue of $229 million in 2019, a slight decrease from $232 million in 2019. Their COGS was $171 million, representing a gross margin of 25%, a significant decrease compared to 37% in the previous year.

The company was profitable in each of the past two years. In 2019 Sierra Metals had net income of $9.4 million, representing a profit margin of 4.1%, a significant decrease compared to 11.1% in 2018. This decrease in profitability is due mostly to the deteriorating gross margins discussed above. General and administrative expenses remained relatively constant year over year.

Sierra Metals - Revenue by Product
Sierra Metals – Revenue by Product

Sierra Metals – Royalty and Streaming Agreements

The company’s most recent audited financial report does not mention any royalty or streaming agreements.

Sierra Metals – Mineral Resources

The company has measured and indicated resources totaling 742 million pounds of copper, 63.1 million ounces of silver, and 419.5 thousand ounces of gold.

Sierra Metals - Mineral Resource Estimate
Sierra Metals – Mineral Resource Estimate

Balance Sheet Analysis

Sierra Metals has a decent balance sheet. They have a solid base of long term assets and sufficient liquidity in the short term. Liability levels are reasonable, but they do have long term debt outstanding.

Sierra Metals – Debt Analysis

As of year-end 2019 the company has $99.8 million in total debt outstanding, all of which is classified as long term.

Sierra Metals - Debt Table
Sierra Metals – Debt Table

Sierra Metals Stock – Share Dynamics and Capital Structure

As of September 2020 the company has 162.8 million common shares outstanding. In addition they have a small number of dilutive instruments outstanding. Fully diluted shares outstanding is around 164.2 million shares.

Sierra Metals Stock – Dividends

The company did not pay a dividend in 2019.

Management – Skin in the game

Insiders at Sierra Metals have been net sellers of the company’s stock in the recent past. This is generally viewed as a bearish signal by investors.

Sierra Metals Stock (TSX:SMT) - Insider Activity
Sierra Metals Stock (TSX:SMT) – Insider Activity

Sierra Metals Stock – 3 Metrics to Consider

Debt to Equity Ratio

Total Liabilities/Total Share Holder Equity

$199 million/ $212 million = .94

A debt to equity ratio of .94 indicates that Sierra Metals uses a mix of debt and equity in its capital structure, relying slightly more on equity financing to fund itself.

Working Capital Ratio

Current Assets/Current Liabilities

$104 million / $54 million = 1.9

A working capital ratio of 1.9 indicates a sufficient but not strong liquidity position. Sierra Metals should not have problems meeting its near term obligations.

Price to Book Ratio

Current Share Price/Book Value per Share.

$2.98 / $1.29 = 2.3

Based on fully diluted shares outstanding Sierra Metals has a book value per share of $1.29. At the current market price this implies a price to book ratio of 2.3, meaning Sierra Metals stock currently trades at a premium to the book value of the company.

Gold Market – Economic Factors and Competitive Landscape

Gold mining is a highly competitive, capital intensive business. The company will need to compete fiercely for both new projects and capital. However, given the current economic environment of global money printing and zero or negative interest rates, it would appear gold companies are poised to benefit from a strong economic tailwind.

Sierra Metals Stock – Summary and Conclusions

Sierra Metals is a solid mining company. They have a well-diversified production portfolio and are not overly exposed to any single commodity. Their flagship Yauracacha mine in Peru has been in continuous operation since 1948. All their properties still have relevant exploration potential.

The company is in decent financial health. Their liquidity is sufficient and they are not over leveraged. Although gross margins, and thus profitability, deteriorated significantly year over year.

I am impressed by Sierra Metals. I find the diversity of their revenue streams appealing within a mining portfolio. I will wait to see the company’s full year 2020 financials, and if the company is still in sound financial health, I will seriously consider taking a position. Investors can compare Sierra Metals stock to other diversified mining companies, such as McEwen Mining (MUX).

Disclaimer

This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.

This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.

Patrick Flood, CFA

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