Cormark Research: Sierra Metals upgrade to 2.50 CAD target price

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Investment Thesis:

Sierra Metals stands out for its: (1) historically high margin polymetallic production, (2) low overall debt leverage, and (3) high organic growth potential. After the changes in Management in 2015, we suggest investors revisit the name and are comfortable Yauricocha and the company have now turned the corner operationally.

Highlights:
• Esperanza – The Value Proposition From Brownfield Exploration

Yesterday, SMT provided an update and hosted a conference call to discuss development plans at all three of its producing mines. For us, the highlights from the call were: (1) Esperanza’s maiden resource/reserve is likely to grow and is increasingly important to Yauricocha’s mine plan, (2) each mine still offers high brownfield exploration potential (as demonstrated by the Esperanza discovery), and (3) Management has a much better handle on operations after a challenging transitional period late last year.

Expect Performance To Continue To Improve Into 2017

For Q2, we saw a continuation of the improvement seen in Q1 as Yauricocha’s throughput remained at design and EBITDA recovered. However, these improvements were outdone by the updates at the Esperanza zone which is already beginning to feed the Yauricocha mill. With the higher grade (4% CuEq) ore from Esperanza and better metals prices (ex-copper), we now expect to see a much stronger back half to 2016. 

Upgrade To Buy Rating, Increase Target To C$2.50 From C$1.95
To Management’s credit, the company has done a good job at both improving operations and outlining a clear exploration strategy to add value at each mine. With the shares still trading at a discount (5.5x EV/EBITDA) and much higher confidence in operations and the balance sheet, we are upgrading Sierra Metals to a Buy from Buy  


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