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Sierra Metals (T.SMT): Growth, revenue, yield and value make 2014 a big year

Stockhouse Editorial
0 Comments| March 17, 2014

Q&A with Sierra Metals Inc. (TSX: T.SMT, Stock Forum) President and CEO, Daniel Tellechea
Daniel, Sierra Metals is a company that experienced industry watchers like to say is doing everything right: What were the 2013 highlights for you?
2013 was a year of consolidation for the Company after acquiring the Yauricocha mine in 2011;
At the Yauricocha Mine, the mine operators worked very hard to bring down the operating costs from $56 to $50 per tonne and the underground development and construction to deepen the mine was initiated.
At the Bolivar Mine in Mexico, the throughput capacity at the Piedras Verde processing plant was doubled from 1,000 tpd to 2,000 tpd in November 2013. Therefore, in 2014, operating costs per tonne are expected to be much lower.

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At the Cusi Mine in Mexico, silver production has increased to 420,000 ounces, a 44% increase year to year and over 24,000 meters of exploration drilling was carried out. A revised NI 43-101 compliant resources calculation is expected to be released by the end of the first quarter of 2014.
For the uninitiated, what is the Sierra Metals opportunity?
It is the opportunity to be part of a real metal production growth story. Sierra has a world class asset base to grow from; the Yauricocha Mine which has been in operation for over 60 years is a steady source of cash flow for years to come. At Bolivar we will increase the mill throughput to 3,000 tonnes per day in 2015 and at Cusi we expect the mine to become a multi-million ounces of silver per year producer in the coming years.
Sierra has one of the best operating teams in the mining industry in both Mexico and Peru and we offers geographic and metals diversity and a strong balance sheet. On top of all that Sierra paid a dividend in 2013.
At  the current share price we feel that Sierra is very much undervalued compared to our peer group of companies.
Sierra has got a lot of wheels turning at high speed right now. Production is up, mill capacity is up, reserves are up, costs are going down, you’re paying a significant dividend, and you have more exploration to come – the company seems to be a rare mix of growth, revenue and yield, yet also seems undervalued. Do you think 2014 is the year the market realizes what you’ve built here?
Yes we believe that 2014 is the year that the market will finally realize how great the fundamentals and the organic growth of Sierra are. We have all the ingredients investors are looking for in a Mining company.
What do you see as your focus in 2014?
In 2014, The Company has major capital expenditures and exploration programs at all 3 mines and will focus on keeping costs low and maintain high operating margins. 2014 will be a pivotal year for the Cusi Mine, following the revised 43-101 resource report expected in March, a prefeasibility report will be filed in the third quarter. This report will contain the first proven and probable resources of silver for the Cusi Mine.

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How do you view the silver sector, and Sierra’s place in it, going forward?

We cannot predict the price of silver. The price has come down significantly over the past year and a half from $35 per ounce in Oct. 2012 to a recent low of $19 per ounce in late January of this year and it looks like it is recovering. I believe that there is a shortage of physical silver and the price per ounce should appreciate in the future. There are not a lot of pure silver producers and their average cost per ounce of silver is relatively high. We not only produce silver but a significant amount of copper, lead, zinc and gold so we are less vulnerable to a drop in the price of one metal.
What we can control is our costs per tonne, which compares favorably with other silver low cost producing companies. Our margins remain very healthy even in this lower silver price environment.
The Cusi Mine is where we see the future of the Company. We have barely scratched the potential of this district wide property. Cusi could eventually produce 3 to 4 million ounces of silver per year and when it does our exposure to silver will be doubled.
Sierra has the ARC fund as the major shareholder, they own over 51% of the shares, how do you see this relationship going forward?
It is important to mention that the ARC fund portfolio manager, M. Alberto Arias, is the chairman of Sierra Metals meaning that the fund’s interest is aligned with the interest of the smaller shareholders which is to maximize the value of its shares. The ARC fund has been very supportive of the company throughout their years of involvement and I anticipate that to continue.

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Sierra has chosen to pay shareholders a dividend, when so much of the industry is desperate for financing. What was the strategy behind that decision?
In 2013, when the decision was made to pay a dividend, the Company was coming off a record year of production and cash flows. Prices of all metals were high and the decision was made to reward the shareholders.
Will you continue your dividend plan for 2014?
That decision is made by the board of directors on a quarterly basis. 
What’s more likely to happen in 2014: Sierra gets acquired, or Sierra does some acquiring?
The company has a $60M line of credit for among other things, acquisitions. A number of opportunities have been presented to us and we are always reviewing potential opportunities. The focus is on precious metals in Latin America.
Disclosure: Sierra Metals is a Stockhouse client.  


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