Sierra Metals Inc. (TSX:SMT) (NYSE MKT: SMTS) CEO Interview

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Sierra Metals Inc.
CEO: Igor Gonzales


About: Sierra Metals Inc. is Canadian based growing polymetallic mining company with production from its Yauricocha Mine in Peru, and its Bolivar and Cusi Minesin Mexico. The Company is focused on increasing production volume and growing mineral resources. Sierra Metals has recently had several new discoveries and still has additional brownfield exploration opportunities at all three mines in Peru and Mexico that are within or close proximity to the existing mines. Additionally, the Company has large land packages at all three mines with several prospective regional targets providing longer term exploration upside and mineral resource growth potential.


WSA:  Good day from Wall Street, this is Juan Costello, Senior Analyst with the Wall Street Analyzer.  Joining us today is Igor Gonzales, the President and CEO for Sierra Metals Incorporated.  The company trades on the Toronto Stock Exchange ticker symbol SMT and now also on the New York Stock Exchange ticker is SMTS.  Thanks for joining us today, Igor.

Igor Gonzales:  Good morning, Juan.  How are you today?

WSA:  So yes, starting off, please give us a history and overview there of the company.

Igor Gonzales:  Yes.  Sierra Metals is a polymetallic mining company and we currently produce silver, copper, lead, zinc and gold.  And one of our main characteristics is that we have a very strong resource potential and a very strong growth profile.  We operate three mines in two countries, Peru and Mexico.  We have our Yauricocha Mine in Peru which is a polymetallic mine and we also have the Bolivar Mine in Mexico and the Cusi Mine, which is a silver mine also in Mexico.  Both the Mexican mines are in the State of Chihuahua.  Our cash flow was about $38 million and we had an EBITDA of $25 million at the end of Q1.  We are a listed company on the Toronto Stock Exchange and we’ve just listed in the New York Stock Exchange.

WSA:  Great.  So bring us up to speed on some of your most recent news, including your Q2 results, which were pretty strong.

Igor Gonzales:  Yes.  Effectively, our Q2 results have included about 2.7 million silver equivalent ounces and 23.1 million of copper equivalent pounds.  We had a very strong production from our flagship Yauricocha Mine which had an increase of 14% in silver equivalent production and 10% increase in throughput, if we compare it to the second quarter of last year.

In our Mexican mines, we have had some issues with tonnage and in order to address these, in the case of Bolivar, we’re putting additional resources available to them like purchasing new equipment for their operations.  And in the case of Bolivar, we are focusing our efforts on the recently discovered Santa Rosa de Lima structure.  In the case of Cusi, the Santa Rosa de Lima structure after 15,000 meters of drilling has demonstrated to us that it has a width of 4.1 meters over 370 grams of silver.  And this is silver equivalent grade.

And, you know, we extended this exploration by doing an additional 15,000 meters of infill drilling that we’re close to completing.  And this has therefore refocused our attention to this section of the mine and now we have arrived to this area with a ramp and we are doing development work in order to exploit this section of the mine because of its grade and the quality of the resources.

And so this has been the effort during Q2.  We also continue with our exploration efforts.  As I stated earlier, given the fact that we are very strong in resources in all three sites, we are continuing our exploration efforts at all three mines both in drilling and also doing geophysical studies.  We are conducting two geophysical studies Titan 24 both at Bolivar and also at Yauricocha.  In the case of Bolivar, this study is complete.  We have identified several targets which we are now in the process of drilling.  And in Yauricocha, we are halfway through this, the geophysical study, and very shortly we’ll start addressing which are the best targets for us to grow.

WSA:  Great.  And what are some of the key trends that you’re focusing on right now in the sector and how are you positioning the company to capitalize?

Igor Gonzales:  Well, we think we are well-positioned as a mining company given the fact that we produce several metals with silver, copper and zinc.  And zinc and copper as you know, inventories are dropping and therefore we are well-positioned to deliver these metals.  We are also seeing some more merger and acquisition activity where the major producers are looking to increase their mineralized resources.  Metal prices in this case, copper and zinc, are remaining strong and we think we are starting to see another strong cycle given the inventories in both metals.

So we are positive on the future outcome for our business.  And a very important element to this is that through the lower cycle, we’ve continued to do drilling and explorations and now we’re prepared for the better cycle.

WSA:  And what are some of the factors that you feel make you and your projects unique from some of the other players in the sector?

Igor Gonzales:  We think that we are truly a polymetallic company.  Just to give you an example, our revenues by metal is 24% silver, 30% zinc, 25% copper, 18% lead and 4% gold.  So by producing polymetals, we have a natural hedge against fluctuation prices and we can sequence our mines to take advantage of one metal versus the other.  So I think we’re in a good position and given the prices today, that even adds to our polymetallic nature.

WSA:  And what are the key goals that you’re hoping to accomplish over the course of the next 6 to 12 months?

Igor Gonzales:  Well, first of all, we have designed a corporate strategy which includes three phases.  The first phase between January and October of this year will focus primarily on brownfield explorations and upgrading of infrastructure and equipment.  We are drilling 83,000 meters in total in this timeframe and have also completed one Titan 24 geophysical survey at Bolivar and we are conducting the second one as we speak at Yauricocha.  We will also release an updated technical report on all three properties in the fourth quarter of this year and we expect to increase our mineral resources at all properties.

And so, this will position us to start looking into now the expansion of our resources or the expansion of our facilities to exploit these additional resources and we’ll start working on feasibility studies and engineering studies to increase the capacity of our mines and minerals.

Now the second phase of this strategy is from November 2017 to October 2018, and we’ll drill another 153,000 meters and continue our feasibility studies.  And finally the third phase of our strategy will be the drilling of 330,000 meters, not only brownfield but also greenfield properties and the construction of our expanded facility.

WSA:  So as far as the way that the company operates within the sector, will you consider any sort of joint venture or strategic alliance?

Igor Gonzales:  Yes.  I think within our strategies, the first thing we discussed and concluded is that we need to reinforce our current operations in the sense that we have to join our operations as economical as possible, optimize them.  And once that initial phase is concluded, then we’ll move into the merging and acquisition phase.  We are undertaking the improving of grade and expanding resources first.  We are optimizing our Mexican mines and our Peruvian mines.  We are for example hiring additional senior executives just to handle our growth.  We have hired for example expertise on projects and metallurgy, on mine planning and also human resources and continuous improvement.  So with these, I think we will be much stronger going forward.

WSA:  And perhaps you could talk a little bit about your background and experience, Igor, and go over who the key management team is.

Igor Gonzales:  Yes.  My background is in – I started my career working in the copper sector for about 18 years with Southern Peru Copper.  And then I moved into the gold industry for about 16 years.  I worked for Barrick Gold Corporation for 16 years.  I started as a Manager of the Pierina Mine and then VP of Peruvian operations in first South American operation.  And my last role with Barrick was as a COO, in charge of all the operations in Barrick.  Then I moved to become the COO for Buenaventura.  So I’ve been doing that role for last two and a half years.  And then in May of this year, I took the position of CEO of Sierra Metals.  So I have over 35 years experience in mining.

And as I mentioned earlier, we’re trying to assemble a strong experienced team.  I have for example our Chief Operating Officer is Gordon Babcock.  He’s got over 34 years of experience in mining, specifically in underground mining.  And then we have our Chief Financial Officer who is Ed Guimaraes who has over 27 years experience.  And the recent incorporations to our team are Augusto Chung who has over 30 years of experience in metallurgy and project management, and Americo Zuzunaga who has extensive experience also in planning and merger and acquisitions.  Finally, our manager for HR and CI (continuous improvement), his name is Dante Vargas, and he has over 30 years of experience as well.  So, as you can see, we are assembling a very experienced team in order to develop our properties and to support Sierra Metals’ growth.

WSA:  Right.  And so as far as investors and the financial community, as you guys recently listed on the New York Stock Exchange, what are some of the key drivers that you want them to better understand about SMT.

Igor Gonzales:  You know, we would like to improve for example, our research coverage for Sierra Metals.  And of course we’re looking at several analysts too, and they are also looking at our company to pick up coverage.  We should convey the message to the market that we are polymetallic but also have a precious metal production base.  And we need to convey the message that we are expanding our resource at all mines, both quantitatively and qualitatively.  We are also doing the studies to expand our operations, both mines and processing facility, and we’re reinforcing our senior workforce.  So I think that’s the areas where we would like to see then the story completely understood by the financial community.

WSA:  Great.  So once again joining us today is Igor Gonzales, President and CEO for Sierra Metals Incorporated.  The company trades on the Toronto Stock Exchange, ticker symbol SMT and now in the New York Stock Exchange SMTS, currently trading at $2.57 per share US and market cap is about 420 million US.  And before we include here, to recap some of your key points, why do you believe investors should consider the company as a good investment opportunity today?

Igor Gonzales:  We believe the company is currently undervalued on an EBITDA basis, and not being given credit for any of the exploration work or the potential at our Cusi Mine.  So I think when we bring our updated mineral resource statement as part of our technical report, I think we will see a reaction of the market, a positive reaction because we believe that by presenting our real capacity in terms of resources, it will impact positively to the market.  Also our success on cash flow production is something that I think will impact the market positively.  And it’s very likely that we are going to be beating the previous high watermark for EBITDA this year.

So at the end, this will be a very good sign to our investors.  So we are also paying our debts and finishing the year with a net that’s closer to zero, and therefore we present a very attractive opportunity of investment for anyone.

WSA:  Well we certainly look forward to continuing to track the company’s growth and report on your upcoming progress.  And we’d like to thank you for taking the time to join us today, Igor, and update on investor audience on Sierra Metals.  It was great having you on.

Igor Gonzales:  Thank you, Juan, and thank you for the opportunity to present Sierra Metals to the Wall Street Analyzer.


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