The recent dip in silver has created a buying opportunity for investors, especially because of several indicators that silver will appreciate over the short to medium term. One of the best means of taking advantage of the increasingly positive outlook for silver is by investing in Sierra Metals Inc. (TSX:SMT).
Now what?
Sierra Metals is a junior miner focused on Latin America. What makes it stand out relative to its peers is the considerable promise held by its core assets, the Bolivar and Cusi mines in Mexico as well as the Yauricocha mine in Peru.
While Latin America is considered a high-risk jurisdiction in which to operate, both Mexico and Peru have shown themselves to be favourably disposed to mining. The slump in commodity prices, particularly oil and base metals, has placed considerable pressure on the commodity-dependent economies in the region.
This has caused Mexico and Peru seek alternative forms of government revenues and much-needed export income. The mining of precious metals is now being targeted by both governments as a means of filling the fiscal gap.
Sierra’s silver production has grown at a rapid clip, more than doubling between 2011, when it commenced operations, and 2016. Further growth is forecast for 2017. That leaves it well positioned to take full advantage of the impending rally in silver.
Sierra is also focused on reducing costs reporting some impressive all-in sustaining costs (AISCs) for its individual mines. The Yauricocha mine, which is responsible for half of its silver output, reported AISCs of US$10.60 per ounce for the first quarter 2017 — well below the average spot price for silver.
Meanwhile, the Bolivar mine, which primarily produces copper, had AISCs of US$1.89 per pound — 45% lower than the market price for copper.
The miner also possesses considerable exploration upside because of the Cusi mine, where a major high-grade silver discovery was made. It has been estimated that Cusi has over 31 million ounces of silver resources, and Sierra has embarked on considerable drilling at the mine to develop that asset. Those activities are why Cusi has reported high AISCs for the first quarter of US$22.72 per ounce, which will fall once exploration and development activities wind down.
So what?
Junior silver miners, while higher-risk means of playing the recovery in silver, offer far greater potential upside for investors than established, well-known miners. In the case of Sierra, much of that risk is mitigated by its high-quality assets and solid balance sheet. Sierra ended the first quarter 2017 with net debt of US$37 million, which was less than triple free cash flow for the quarter, indicating that Sierra can easily manage that level of debt while funding its ongoing exploration efforts.
As silver appreciates, Sierra’s costs fall, and production grows, it is easy to see the miner appreciating significantly in value.
