Sierra Eyes Growth to Meet Demands of Green Revolution

Sierra Metals is thinking big. The Latin America-based mid-tier precious and base metals producer is in a growth phase that will enable it to take full advantage of the bourgeoning green revolution. While the company derives value from a diversified asset base that includes zinc, lead, gold, and silver, they’re placing their bets on copper, a metal that offers them the greatest growth potential. Copper is currently Sierra’s biggest resource and is expected to make up more than half of the company’s consolidated production longer-term.

This “green metal” is an essential component in electric vehicles, solar panels and other green energy solutions. Producers like Sierra (TSX: SMT), Copper Mountain Mining (TSX: CMMC), and Hudbay Minerals (TSX: HBM) are lining up to capitalize on the opportunities at hand - opportunities that are enhanced by a global copper deficit that is expected to grow as green energy solutions continue to take hold.

“Multiple studies indicate that we'll be in a small copper deficit this year,” Mike McAllister, V.P. of Investor Relations at Sierra explains. “There will be a small surplus next year, but then after that, it's expected we’ll see continued deficits that will ease slightly in the late 2020’s when new copper projects are expected to come online. Even then, the demand is expected to outstrip the supply. We see significant value growth for copper going forward in terms of increased demand, limited supply, and a rising price for the commodity.”

Sierra’s plan to expand the production of copper along with other assets is already unfolding. In 2020 the company added roughly 30 million tons of mineral resources to the mix and increased production capacity from 9,350 to 9,800 tons per day between the company’s three operations - the Yauricocha Mine in Peru, and the Bolivar and Cusi mines in Mexico.

Production at the Yauricocha Mine, which consists of mostly copper and zinc along with some silver, is expected to increase from 3,600 to 5,500 tons per day. Bolivar, primarily a copper mine, will double its throughput from 5,000 to 10,000 tons per day. And Cusi, the company’s smallest operation, is aiming to double the production of silver from 1,200 to 2,400 tons per day.

“The Cusi Silver Mine is a non-core asset for us due to it’s smaller nature,” McAllister said. “It's not getting the multiples it would get if it was sitting in the hands of a silver producer. We’re reviewing the asset to decide if it would make more sense to put it into a silver producers hands where it would attract a silver multiple.”

McAllister anticipates production increases at the Bolivar and Cusi mines in Mexico will be completed as early as 2024, while increases at the Yauricocha Mine in Peru should be wrapped up by 2025 due to the country’s slower permitting timeframe.

At the same time, Sierra is also ramping up efforts on the exploration side of the equation, targeting several near-term assets that are close to their existing mines. “We continue to spend a healthy amount on our exploration program even as we expand production,” McAllister said. “We have 110,000 hectares with multiple brownfield and greenfield targets, so we have no shortage of opportunities. We'll continue to drill, not only to replace mined resources, but to increase our resource base as well.”

Sierra is confident they have the financial resources to see these plans through. The company is profitable and expects to finance the majority if not all the expansions through cash flow. It also has access to some debt if any merger or acquisition opportunities present themselves. Just as importantly, “we’ve been able to initiate a base dividend of $5 million a year,” McAllister declared. “That works out to about three cents a share. It’s a small dividend, but it illustrates the strength of the balance sheet and expected cash flow going forward. The bigger part of the growth story is going to come from the production expansions that we’ve undertaken and a rise in share price as we start producing more metal.”

To that end, there is no shortage of catalysts for the company going forward. Feasibility studies are expected for Bolivar before the end of 2021, and for the Yauricocha and Cusi projects by mid-2022. And, as the company grows and reaches the next level of market capitalization, Sierra would be well-positioned to acquire smaller projects or miners, or perhaps, be acquired themselves. Either way, McAllister thinks there’s a lot to look forward to for investors. “You get exposure to both copper and a flourishing green energy sector, and you earn a small dividend now ahead of a potential rerating of the share price expected with the expansion completions in the next 3 to 4 years. I think that’s an enticing prospect for most investors.”

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