H.C. Wainwright Research: Sierra Metals bleibt Kauf

Continuing Optimization of Operations in Mexico Should Start to Bear Fruit; Maintain Buy

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Continuing coverage under the name H.C. Wainwright & Co. with a Buy rating. Effective September 8, 2017, research in the above titled name will now be published under H.C. Wainwright & Co. and no longer distributed in conjunction with 'Rodman & Renshaw, a unit of H.C. Wainwright'. Yesterday's update on the Mexican asset operational improvement program. The program has concentrated on strengthening the corporate team by adding expertise, while raising production by improving recoveries and throughput. We highlight the similarities between the current program in Mexico with a prior program that was successful at Yauricocha in late 2015. Progress to date includes improvements in recoveries at Bolívar and Cusi, the commissioning of additional equipment at Bolivar, and further development of the Santa Rosa de Lima zone at Cusi. We believe that incremental improvements from these efforts should begin to take hold as early as 4Q17. We expect higher throughput and recoveries for Bolívar.

Copper recoveries at Bolívar have improved from around 73% in July to about 82% at present. This was largely achieved by reducing the grind size of processed ore to a particle size distribution level of P80. Management expects recoveries to be maintained at current levels through 2018. Throughput at the mine should be supported by the commissioning of 13 new pieces of equipment, concurrent with maximization of the existing infrastructure. This should allow for processed tonnage to reach about 3,000 tpd in 1Q18. We highlight the potential for higher grades at the mine, in part due to further definition of higher grade ore from Bolívar West and Bolívar Northwest. That said, positive impacts from these areas may not be seen until 2H19.

Santa Rosa de Lima zone should impact production profile at Cusi. Drift development at the Santa Rosa de Lima structure continues to progress on four sub-levels located within the planned pilot sub level longhole stoping area. We note that initial development ore from the structure has already contributed to improved head grades at the mill. Tonnage from the Santa Rosa de Lima zone is expected to trend higher until the mill reaches 650 tpd solely from the high-grade zone. We expect a majority of Cusi throughput to be sourced from Santa Rosa de Lima by the beginning of 2Q18. We also note that recoveries at Cusi have increased from 60% in July to 83% at present through individualized treatment of each ore type, coupled with the addition of lime.

We maintain our Buy rating and $3.50 per share PT.

We have not yet adjusted our model for potential impacts from the operational improvements program, but plan to do so once additional information is available regarding progress at both assets. Our valuation remains based on an equally weighted composite NAV and CFPS methodology. We apply a 12x multiple to our 2017E CFPS estimate, while our NAV analysis utilizes 9.0% discount rates at Yauricocha and Bolívar and 10.0% at Cusi. We highlight continued success and resource growth at Yauricocha, and expect 2H17 improvements at Bolívar and Cusi.

Risks. 1) Gold and silver price risk; 2) operating and technical risk; 3) political risk; and 4) financing risk.

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