SMTS - Sierra Metals (SMTS)(SMT:CA) - Better-Than-Expected Second Quarter; Increasing Estimates
Better-than-expected second quarter earnings. Sierra Metals reported adjusted earnings per share of $0.01 compared with $0.01 during the prior year period and our estimate of $(0.02). The variance to our estimate was largely due to lower-than-expected operating costs. Adjusted EBITDA amounted to $12.6 million which was even with the prior year period despite lower production due to COVID-19 related work restrictions. Due in part to low capital expenditures amounting to $3.2 million, Sierra generated free cash flow of $4.9 million. Despite a challenging operating environment due to COVID-19, the company proved its resilience and performed well operationally and financially.Updating estimates. We are increasing our 2020 EPS and EBITDA estimates to $0.13 and $82.0 million from $0.07 and $71.6 million, respectively. Additionally, we have increased our 2021 EPS and EBITDA estimates to $0.28 and $132.1 million from $0.24 and $123.8 million. Our 2020 estimates reflect second quarter results and a stronger-than-previously-anticipated second half. Our 2021 estimates reflect higher commodity prices, notably for silver and gold, and margin improvement due to an improving cost profile. Significant growth potential. The company has successfully increased resources through brownfield exploration to support planned capacity expansions. While production is expected to increase in 2021 versus 2020 due higher full year production capacity at all three mines, management is evaluating the next round of significant expansions that could begin in 2024. By year-end 2020, SMTS could process 9,350 tonnes per day, increasing to 9,800 tonnes per day by year-end 2021. Longer-term expansions could increase capacity to nearly 13,000 tonnes per day by year-end 2024.Increasingly Attractive Outlook. Our Outperform rating is based on Sierra Metals’ attractive valuation and favorable long-term growth outlook driven by a favorable metals price outlook and the company’s increasing production profile. We anticipate margin expansion as the company’s unit costs decline because of the higher production level. While sensitive to future capital expenditures, we have increased our price target to $3.25 from $2.75 based on an improving free cash flow profile.Read More >>