Scotiabank: Positive Operational Updates in Mexico from Sierra Metals
OUR TAKE: SMT released a positive update for its two Mexican assets, with operational improvements tracking slightly ahead of our expectations. We rate SMT SO based on solid organic growth potential, its strong financial position, and our robust FCF outlook. Our revised 12-month target of C$4.25 per share (from C$4.00) is based on a 50/50 mix of 4.5x our average 2018E/19E EV/EBITDA and 1.0x our NAVPS estimate.
High grade ore to fill Cusi mill by Q2/18. SMT expects high-grade ore from the Santa Rosa de Lima zone to largely fill the 650 tpd mill by Q2/18, one quarter faster than our previous estimates, which we view as positive. We anticipate an updated NI 43-101 technical report in Q4/17 to provide additional colour on the nature of this production growth (particularly with respect to head grades), and should serve as a meaningful catalyst for SMT. In addition, SMT announced that Cusi's Ag recoveries have improved from the ~65% level in H1/17 to an average level of 83% from August to October 2017. While our previous estimates had assumed a LT recovery improvement to the ~80% level, the pace of recovery has been faster than we had expected. Bolivar Cu recoveries, throughput ahead of expectations.
Cu recoveries have improved to an average level of 82% from Q2/17 levels of 76% due to refinements in the grind size of milled ore. Similar to Cusi, the recovery improvement is in line with our previous LT estimates of 81% but the pace of improvement has exceeded our expectations. SMT also announced that Bolivar mill throughput is expected to reach 3ktpd in Q1/18, slightly ahead of our prior estimates which assumed 2018 average throughput of 2.8ktpd. Higher-grade Bolivar W and NW ore is expected to contribute by H2/19, in line with our estimates.
Expansion plans increasingly in focus. At Cusi, SMT continues to study a mill expansion and the results of a prefeasibilty study are expected by Q3/18. Our estimates currently assume SMT expands Cusi's milling capacity to 2ktpd in 2022 at a capital cost of $85M. SMT also plans to release an expansion study for Bolivar by Q3/18; our estimates do not currently assume a Bolivar expansion. Positive estimate revisions. Our 2018E and 2019E EBITDA forecasts of $135M and $157M increased an average of 4% due to higher throughput and recovery assumptions at both assets. Our NAVPS increased 3% to C$3.88.