CRUX visited the London 121 Mining Conference and spoke to Sierra Metal’s CEO Igor Gonzales. Hear what he had to say about his South American based Poly-Metallic mines – the Yauricocha Mine in Peru, and the Bolivar and Cusi Mines in Mexico.
Click here to watch the interview.
Matthew Gordon: Hello Igor, how are you?
Igor Gonzales: Hello Matthew, how are you today?
Matthew Gordon: Fantastic. Lovely to have you in London.
Igor Gonzales: Yes it is.
Matthew Gordon: Now, I always start off and I get people to do just a two three minute helicopter view of the business.
Igor Gonzales: Okay. Sierra Metals is a poly-metallic producer that has operations in two very well established mining jurisdictions which are Mexico and Peru. We have one… our largest mine in Peru which produces three types of concentrates. Lead, Copper and Zinc concentrates. It’s the Yauricocha mine located at 4,700m above sea level. Then we have two other mines in Mexico. One is the Bolivar mine in the state of Chihuahua. Bolivar is currently at around 3,600t per day in throughput and then we have the smaller mine which is the Cusi mine which is a silver mine essentially and now running around 1,200t per day.
Matthew Gordon: Okay and give us a sort of sense of the size, of the scale of the business
Igor Gonzales: Well we will generate an EBITDA this year in the order of $90M to $100M. Our revenue is in excess of $250M. And our debt is about, our total debt around $65M. And so we generate positive cash flow and we finance all of our capital requirements and with our own cash flow.
Matthew Gordon: Thank you very much for that. You’re obviously here in London. At the 121 Conference. Why are you here?
Igor Gonzales: Well we want to promote our company. we think that we are a growth story. We’re a success story in terms of exploration results. Growing our reserves and resources, and putting those resources and reserves into operation. We’ve been growing our throughput steadily in the last three years. And so we will want to continue to do that. This year is the largest investment for us in terms of capital requirements. We will invest in the neighbourhood of $83M just to grow our operations in both in Mexico and Peru.
Matthew Gordon: That’s self-funded?
Igor Gonzales: It self-funded, all funded from our cash flow. We think that’s a very attractive story for any investor because or where we have a solid base from which we’re growing our business which is where we’re growing our resources and reserves and then we’re growing our production plants. And therefore our unit costs will drop as a result of that. And our investors will benefit from that lower cost production.
Matthew Gordon: Okay. You’re listed on the TSX obviously
Igor Gonzales: We are listed in the TSX and then the New York Stock.
Matthew Gordon: New York Stock Exchange. Okay, so those markets at the moment seem quite illiquid. And a lot of companies are coming to London to other parts of Hong Kong other parts of the world looking for new access to new investors. What are you trying to do? Are you trying to get better liquidity because you’re unhappy with perhaps the market cap now. I mean what’s the goal for you?
Igor Gonzales: Yes we would like to have better liquidity. Our liquidity hasn’t been all that great. As we moved from Toronto to New York we improved our liquidity. However we were also looking for other areas where London could be one of them. But one of the issues we will face is that we have a major shareholder that holds 52% of the company. And he has that 52% divided into two soft fund.
Matthew Gordon: This New York fund?
Igor Gonzales: Yeah. Our fund. But one of the funds is due now. And so he will have to deal with that fund eventually and that will bring a lot of liquidity to our stock
Matthew Gordon: New shares into the market. Not new… Shares into the market. And so who are the other major shareholders at the moment?
Igor Gonzales: BlackRock and Ingalls And Snyder.
Matthew Gordon: That’s right. So are you… There’s quite a bit of your shares are taken up with major institutional money. Are you looking to drive interest from the retail market, High Net Worth family office type?
Igor Gonzales: Yes. That’s our target because we think there is a lot to gain from our story and our ability to generate cash and revenue and earnings per share.
Matthew Gordon: Again I think like a lot people you’d say you’re undervalued. And if you didn’t, you wouldn’t be doing your job. So let’s take that as read. What is the growth… What’s the growth actually going to be delivered by for these shareholders? You know your share price is what it is today. You are funding yourselves, self-funding. You’re growing, it’s a big growth story. People look at your presentation which I encourage them to do on your website. There’s a big growth story there. You’ve got three quite good assets. Where’s the upside going to come for new investors?
Igor Gonzales: I think the upside for new investors is based on our growth. our growth is quite steady and the other area where we bring a lot of value to our investors is the way we spend our capital. our capital spent it’s quite with very high ROI’s. And the reason we do that is because we do small increments in capacity to our plants. and we use local talent local engineering firms construction and labour. And therefore we’re very efficient in the use of capital because we’re in two well-known mining jurisdictions. We don’t need to go outside of Mexico or Peru to find the skill we need to grow and that makes the capital we use… it’s quite profitable in the sense that we get a great return on our investment and the for the expansion we’re doing in both Mexico and Peru.
Matthew Gordon: Okay. So in that case your AISC is what it is. How are you going to drive that down if you’re already very efficient? Is that something that you’re trying to do?
Igor Gonzales: As we increase our throughput. Ours are fixed costs which are our operating costs will start dropping round and our net cash flow will increase and that will drive the earnings per share.
Matthew Gordon: So it’s going to be coming from grades?
Igor Gonzales: Grades, higher throughput
Matthew Gordon: So if we look back at 2018, what would you have done differently?
Igor Gonzales: I think we would have done a similar story but faster if we could have.
Matthew Gordon: Yeah. Interesting. Okay. That’s your big learning from last year?
Igor Gonzales: Yes probably. So yeah. And we’ve been slowed down by permits for example. we would have probably applied to permits much earlier than we have and that’s a learning lesson from us where we could have done this faster. Had we applied for permits especially in Peru. Peru it a jurisdiction where there’s a lot of bureaucracy in the permits. And had we applied earlier and moved on those permits faster, we would be…
Matthew Gordon: You’d be there today. OK, so if I look at 2019. People always talk about catalysts and catalysts for growth. How do you balance running a company and all the risks associated with that and driving shareholder value, share price appreciation?
Igor Gonzales: I think we try to balance that by trying to meet our targets in being responsible in our spend. We try to apply the capital where we need it. We try to be very disciplined in our production and our results. and we show that quarter over quarter. and and by doing so then we will represent to any potential investor a solid story a responsible company that will look after the interests of their shareholders by respecting our budget in numbers by meeting our metal production by meeting our costs by meeting our capital requirements by respecting the all the framework that it’s required to operate in the two countries we operate. I think that’s how we show to our shareholders that we’re a responsible investor and someone you can trust and someone you can you can go there and and rely on what we’re saying. We deliver on what we say.
Matthew Gordon: Yeah I think it’s a very interesting story. It’s kind of slow steady growth as opposed to telling people they’re going to get multiple baggers.
Igor Gonzales: That’s right. And with that we have a track record that it’s very clearly proven. We’ve been delivering on our commitments to the market in a very steady pace.
Matthew Gordon: Okay. And how are you going to manage these new investors coming in, how are you going to manage the stories to them that you’re telling?
Igor Gonzales: I think we’re going to manage them by and continue our path. Of delivering results continue our growth in a more dramatic way. If I could use that word because we were looking at larger expansions in the future. And once we’re in that position and then we can then look into M&A’s and the like. In other words a growth story altogether.
Matthew Gordon: Right well that’s what I want to come onto. But first let’s talk about the markets. You’re poly-metallic, which basically means you’re into lots of things: you’re gold silver copper lead zinc. I think that’s right. You kinda spread the risk but you’re also quite exposed to the commodity market generally at the moment because it’s pretty flat.
Igor Gonzales: Yes it is. It is but at the same time we’re exposed to precious metals and we’re exposed to base metals. And when one does better than the other then we have a natural hedge there. By proves in five different metals. unfortunately we don’t choose whether we could not be a poly-metallic producer because that’s the nature of our resources. But what we can do is we can gauge our production according to the needs of the market depending on the metal. I’ll give you a good example for that. Two of our mines the Yauricocha mine and the Bolivar mine are copper producers that we produce copper concentrate. And if, had the market, had the price of copper would go up we would have the flexibility to increase our throughput in terms of copper for example. And likewise in zinc or in lead, we have some flexibility in our production to try to meet the needs of the current metal market or the metal price for example there is a trend that zinc and silver will… might go up in the rest of the year then we can move into those directions if we need to.
Matthew Gordon: Right. But again you’ve got to be able to produce those efficiently. So how does a poly metallic company operate?
Igor Gonzales: The poly-metallic… What happens in our Yauricocha mine, the truly metallic, poly-metallic is that we have three mines in one. We have one mine that’s truly metallic has all the metal in it. The other some mine of Yauricocha has essentially copper. And then we have lead and zinc on the other one. So we can in our mine plan we can then gauge that according to our needs and put more emphasis in one versus the other. Without of course stepping out of the boundaries of our efficient cost structure.
Matthew Gordon: Right. So you’re spending a lot of time working on efficiency. And therefore margins.
Igor Gonzales: We are. For example putting a lot of emphasis in our planning team we have incorporated in our team very senior planners. Now we have a senior planning team in our corporate office that provides services to all three mines so that the mines do the short term plan and the senior team does the long range planning trying to obtain value from the different attributes that each mine has.
Matthew Gordon: You mentioned the word strategy a few minutes ago and part of that strategy is M&A or M&A potential. So you’re running three assets at the moment you’re optimising those continually, you’ve got a planning team working on that. How do you go about identifying new assets, a lot of competition and not a lot of good assets.
Igor Gonzales: Yes we usually get assets and this… We have this planning team that will go and evaluate these assets and compare to our assets. And of course estimate the potential of growth operating costs location geography infrastructure et cetera. And based on that we’ll say yes or no to any potential possibility of M&A. We would like to stay in a jurisdiction that we know where we’re comfortable and how are we… We don’t discard other jurisdictions just because of their geography. But we are quite comfortable where we’re operating.
Matthew Gordon: Yeah well I think that’s smart. Yeah very very smart. So running a company is about managing risk every day. There’s always something that can go wrong.
Igor Gonzales: Yes.
Matthew Gordon: Okay. Are you frustrated by the market? Because that’s another layer of risk which you’re having to deal with.
Igor Gonzales: I am, we can not manage the market. We cannot manage the prices. We don’t have control of the prices but we do have control in our own cost structure our operating costs our capital efficiency our ability to deliver our production into the market so that’s what we have the control and that’s where we have to work in. We don’t have to worry so much about copper price because we don’t dictate the copper price. But we have to be as efficient as possible in our copper output per unit cost.
Matthew Gordon: And you think compared to your peers, you’re achieving that
Igor Gonzales: Yes we are. We’re competitive.
Matthew Gordon: Okay. So big question to finish with. Is mining still a relevant investment class?
Igor Gonzales: The world is going to continue to grow and there is many countries that still have not fully developed. and those countries will demand metals. For the long run.
Matthew Gordon: And you’ve got the right metals.
Igor Gonzales: And we have the right metals. We have the industrial metals and we have the precious metals. So as far as the grow the world grows we have I think in mining a reliable industry that can sustain that growth for both the industry and the humanity.
Matthew Gordon: What do you think the mining industry or even your company needs to do better to explain to new investors coming into this space with some spare cash. What do they need to do?
Igor Gonzales: Mining has been seen as an industry that is not friendly to the environment. What I can say to new investors is that mining can coexist with environment as a matter of fact we do that. There are farming areas right beside our mining operations today with the available technology. You can work hand-in-hand with the farming hand-in-hand with animal raising at hand-in-hand with other industries. Give you a prime example. All of the water that leaves our properties in Peru for example are all treated to water quality standards so the farms or the users down the road cannot complain and then we’re monitored by third parties by the authorities we get audited and everything else. So I think the technology has made mining a much more friendlier industry than it was in the past. Yes we do move earth from one place to the other but underground mines are friendlier than open pit mines for example in that sense. But nevertheless all the waste rock facilities now are monitored they have drainage they have water contention they have water and they have canals that divert water from entering into those facilities et cetera. So the technology is there. We have continuous monitoring of all of our effluent including the camp effluents and everything they all have to be treated.
Matthew Gordon: I think that’s a great point. Igor Gonzales thank you very much for coming and seeing us.
Company page: https://www.sierrametals.com/Home/default.aspx
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