The following is a Q&A interview with Sierra Metals Inc.
, Stock Forum
) Chairman Alberto Arias.
Sierra Metals is a dividend-paying Canadian mining company focused on precious and base metals production from its Yauricocha Mine in Peru, and in Mexico its Bolivar and Cusi mines.
Sierra Metals has been called an “under-appreciated polymetallic producer” by RBC Capital Markets, which has upgraded the stock to “outperform” and put a target of $3 on the stock.
Trading at $1.71 on June 5, 2014, Sierra has a market cap of $272.2 million, based on 159.2 million shares outstanding. The 52-week range is $2.59 and $1.41.
What is keeping you busy right now?
We are focusing on pre-feasibility study that will give us the economics for an expansion of production capacity at the Cusi Mine. Silver resources at Cusi have increased significantly to a level that justifies an expansion from the current level of 400-500 tonnes per day.
Results of the prefeasibility study are expected to be ready by September this year.
The second most important issue that the company is going through is deep drilling at the Yauricocha mine in west central Peru. It has been in operation for more than 60 years and produces silver, lead, zinc, copper and gold in concentrate. We bought that mine in May 2011. We have increased reserves and resources significantly since we bought it. By December 2013, aggressive drilling had increased proven and probable reserves from 1.1 million tonnes to 6.4 million tonnes.
We are drilling the deepest drill holes ever completed on this property and we are finding some very good extensions of high grade mineralization for copper silver and zinc.
We have a copper-zinc-silver-gold mine in northern Mexico called the Bolivar Mine. This silver, copper, gold and zinc mine covers 6,800 hectares and is located 400 kilometres south of the city of Chihuahua. We are currently expanding that mine from 2,000 to 2,500 tonnes per day.
What is the budget for all that work?
The budget for the expansion of the Cusi Mine has yet to be defined and will be part of the economic study. We are investing about $62 million over the next couple of years on all of these projects.
How will you financing that?
We have strong cash flow. Our EBITDA generation last year was about $55 million. We are a profitable cash flow generating company. We have a cash position of $40 million and a $60 million credit line facility in Peru. Our balance sheet is in very good shape and we will be able to accomplish all of these objectives.
Even if Sierra’s fortunes only dealt with silver, if silver stays where it is, is the company able to grow and profit in that space?
Yes. Because of the nature of our operations, we are a very competitive silver producer. The advantage is the fact that we have this base metals cushion that allows us to be profitable, even in a depressed silver price environment. In the case of the Cusi mine, we are finding some very high grade areas that will allow us to be a low cost producer because of the high quality of our resource there.
What is your breakeven price for silver?
“When you look at the cash costs on a by-product basis, it is actually negative because we get more profits from our base metals operations due to the cost of producing silver. So we are very competitive. If you look at the Cusi mine as a standalone operation, I think we could be competitive in the range of $10 to $15 per ounce.
If silver makes a comeback, I imagine the company is now diversified enough to be ready to rocket?
We are preparing the company to have more leverage to the price of silver. A lot of people call themselves leveraged producers because they are high cost. We like to think of ourselves as leveraged producers because we have a lot of growth potential. If we can deliver more ounces by the time the silver price rallies, it would be a very pleasant gift to our investors.
Can you break down the percentages in terms of how much revenue comes from silver versus the other metals in your arsenal?
Silver and gold account for 36% of our total revenue. Copper accounts for 28%, zinc is 19% and lead 17%. That is the beauty of diversification. Depending on the expansion of the Cusi Mine, we think that the percentage of silver will increase [relative to the other metals].
Is Sierra a potential acquisition target?
I think there are some companies out there that are interested in us. We are quite open to any possibility that would create shareholder value, including M&A activity. If it can be accretive in value to our shareholders we are open to consider anything.
Who are the key players on the management team and what do they bring to the table?
I am originally from Peru. I come from a mining family. I run Arias Resource Capital Management LP, which has a majority stake in Sierra Metals.
Daniel Tellechea, the Chief Executive Officer has over 40 years of experience in the mining and metals industry. He was President and CEO of Asarco LLT from 1999 until 2003. He was also a Vice-President, Finance for Southern Peru Copper Corp.
Fernando Piccini, Chief Financial Officer, was a former CFO and Head of Corporate Development with Volcan Compania S.A.A. in Peru We think we have a pretty good team on board to continue to deliver the growth and value that we have been demonstrating over the past few years.
Who are the company’s biggest shareholders?
Arias Resource Capital Management has 51%. We have other shareholders like Black Rock, as well as other institutions.
You have a large stake in the company – it has been said previously perhaps too large, in terms of liquidity of the stock – any thoughts to simply take it private and keep those dividends and profits?
We are not thinking of taking the company private. We like the public markets, which provide investors with the impulse to participate in the returns of this great asset. I believe there will be good returns when market sentiment improves for silver and for base metals.
How frustrating is it for a company like this to continue to be associated with the dozens of microcaps in the space that are far from production let alone dividends? Does the company get ‘sucked down’ by the sector as a whole?
We are a very different player from a junior. We are a production company. The major problems that affect junior companies, such as lack of funding, do not apply to us. For people who want to do their homework and see the major transformation that this company has had in the past few years, I think they will be pleasantly surprised. They will find that this is anything but a junior exploration company.
FULL DISCLOSURE: Sierra Metals is a Stockhouse client.