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UPDATE: Sierra Metals (T.SMT) rallies as RBC outlines bullish production scenario

Stockhouse Editorial
0 Comments| June 6, 2014

RBC Capital Markets has upgraded its rating on Sierra Metals Inc. (TSX: T.SMT, Stock Forum), calling the company an “under-appreciated polymetallic producer.”

“Sierra Metals has made significant strides in the past two years and is becoming a free cash flow producer,’’ said RBC analyst Patrick Morton in a research report.

RBC has upgraded the stock to “outperform” with a $3 target price. It also said the company has opportunities to increase value that could add $1 per share to RBC’s base valuation, driving it to $4. (more about that later).

Sierra Metals is a Canadian mining company focused on precious and base metals production from its Yauricocha mine in Peru, and in Mexico its Bolivar and Cusi mines.

Led by Yauricocha, RBC said it expects Sierra Metals will be a stable and growing producer of copper, silver, zinc, and lead over at least the next five years at margins that are among the better of the peer group of North American mid-cap base metal companies.

“The company is not planning a major capital project and we expect free cash flow yields to average 8% over the next three years to 2016, one of the best three-year averages amongst the peer group,’’ Morton said in the report.

“We think Sierra Metals provides an alternative to the higher-growth investments in the midcap mining space that have higher execution, capital inflation, and timeline risk,’’ he said.

“The company also has a uniquely even commodity exposure – we forecast revenue to be relatively evenly split among copper, silver, zinc, and lead over the next three years.’’

Sierra Metals shares rose 1.17% to $1.73 on Thursday, leaving a market cap of $275.4 million, based on 159.2 million shares outstanding. The 52-week range is $2.59 and $1.41.

RBC said Sierra Metals has a number of opportunities to add value through expansion/extension of production at its existing mines. “In our view these brownfield opportunities should have lower capex and execution risk as compared to a number of other midcap producers with large-scale, technically challenging new projects,’’ RBC said.

These opportunities include:

Production extension at Yauricocha, expansion at Bolivar, grade and mine life increase at Cusi and a possible new mill (being considered in a pre-feasibility study expected in the fourth quarter of 2014) that would significantly expand Cusi.

"Combined, we think these initiatives could add $1 per share to our base valuation, bringing it to $4, RBC said.

FULL DISCLOSURE: Sierra Metals is a Stockhouse client

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