Sierra Metals keeps faith in exploration

There are two ways to look at the current rough conditions in the mining equity markets: investors can believe in the “sky is falling” scenario and stay clear for an indeterminate period of time, or they can see present conditions as an opportunity to go value hunting.

For those in the latter camp, the art of picking a great value stock often comes down to finding low-cost producers — companies that are directly leveraged to metal prices, and that have assets resilient enough to survive the lean years so that they can shine when prices rebound.

One such candidate is Sierra Metals (TSXV: SMT; US-OTC: DBEXF).

Formerly known as Dia Bras Exploration, the company changed its name and switched out the “exploration” for “metals” to reflect its status as a three-mine producer in Mexico and Peru.

The transition from an explorer to producer began a year before the name change, when management sniffed out an opportunity to acquire a mature mining company. It raised $300 million in debt and equity to make the $286-million acquisition in 2011 of 81.8% of Sociedad Minera Corona and its high-margin Yauricocha polymetallic mine in west-central Peru’s Yauyos province.

“Yauricocha has been in operation for the last forty years. It’s been producing consistent cash flows even during the low commodity cycle,” says Daniel Tellechea, Sierra’s president and CEO. “Why? Because it’s an excellent mine with good volume, and its cash flows have been competitive.”

This competitiveness has to do with the orebody’s polymetallic nature and the cash costs for silver production being driven down below zero, thanks to strong copper, zinc and lead credits.

For the first half of the year the mine produced silver at a cash cost of negative US$18.14 per oz. The same period last year was even more impressive, with negative cash costs of US$27.63 per oz.

The rise in costs has to do with lower prices for the credit metals combined with lower silver and copper production. The effect on the bottom line was that net income from the mine for the first half of the year fell to US$11 million compared to US$37.4 million for the same period last year.

Production for the second quarter alone came in at 481,058 oz. silver and 1.7 million lb. copper, compared to 544,707 oz. silver and 2.2 million lb. copper year-over-year.

And while margins at the mine are being squeezed by softer prices, Tellechea estimates that it would take a combination of a US$9 per oz. silver price, a US$1.50 per lb. copper price and a US50¢ per lb. lead price to erase the negative cash costs at the mine.

With that kind of cushion, Sierra is in little danger of losing the ability to continue with its strategy of using Yauricocha cash to fund development of its Cusi mine project in Mexico’s Chihuahua state.

And it’s talk of Cusi that gets Sierra’s vice-president of exploration, Tom Robyn, most excited.

 The enthusiasm is tied to the fact that recent drilling at the historic site (Cusi has seen production since the time of Spanish colonialism) has discovered virgin mineralization that widens and increases in grade at depth at its Promontorio deposit.

Recent highlights from the deeper zone include 4 metres true width grading 709 grams silver and 2.12% lead, and 1 metre true width grading 459 grams silver, 4.04 grams gold and 1.81% lead.

Results like that have strengthened Tellechea’s resolve to maintain Sierra’s exploration budget at the project, despite efforts to reduce costs company-wide. Cuts will instead have to come from negotiating better terms with suppliers and on the administration side.

Not only is Cusi’s exploration budget being maintained, Tellechea says hiring new workers has become a necessity, as the project evolves into an exciting exploration play alongside its current production status.

Ore at Cusi is mainly being mined from Promontorio, where Sierra rehabilitated a shaft and is adding a ramp. The mineralized rock is then trucked 35 km northwest of the project for milling. Transportation costs are US$3 per tonne of rock.

The mill processes 500 tonnes per day, and, by year-end, Tellechea estimates that 200 of those tonnes will be coming from Promontorio and 200 from Santa Eduwiges, with the rest coming from other deposits on the property.

Beyond Promontorio and Santa Eduwiges the other key mineralized zones are San Juan, Minerva and La India. All three are seeing underground mining of silver-rich veins.

The mineral wealth of the property is connected to its position between two faults named Cusi and Border. Santa Eduwiges, Promontorio, San Juan and Minerva stretch out along the Cusi fault, while La India is closer to the Border fault to the southwest.

The area yielded between 100 and 200 million oz. silver between 1680 and 1940, and reached commercial production under Sierra’s stewardship in January of this year.

The fact that so much ore and so much potential for new discoveries can be found on well-trodden ground comes down to two factors, according to Tellechea.

“First off, while it was always considered an important district, revolution, independence and Indian raids, you name it, meant it was difficult to develop,” he says. “Point number two is that the district was always owned by six or seven different companies. This is the first time in many years that one company owns most of the district.”

That strong ownership positions has Sierra pushing aggressively at Cusi, and it plans to have an updated resource estimate and prefeasibility study in hand by year-end.

The project has indicated resources of 1.4 million tonnes grading 166 grams silver, 0.3% lead and 0.29% zinc. Inferred resources add 1.65 million tonnes grading 273 grams silver, 0.14% lead and 0.09% zinc.

Mineralization at the site is associated with silver and base-metal veins that occur as hydrothermal fissures filling faults and fractures. The veins are generally narrow, vuggy and chalcedonic, and fill major structures. The length of these structures varies between 500 to 2,000 metres, with high-grade zones as well as barren sections.

Sierra’s third key asset is the Bolivar mine also in Chihuahua state, southwest of Cusi. It went into production in November 2011, with the completion of the Piedras Verdes mill 6 km away. The mill processes 1,000 tonnes per day, but that should move up to 2,000 tonnes by year-end, and the company plans to increase daily capacity again to 3,000 tonnes by the end of next year.

Those expansions have been  funded by the cash flows generated at the mine.

Bolivar hosts proven and probable reserves of 7.5 million tonnes grading 1.04% copper equivalent. Those reserves come out of measured and indicated ­resources of 15.4 million tonnes grading 1.26% copper equivalent. The site also hosts inferred resource of 6.2 million tonnes grading 1.71% copper equivalent.

But Tellechea and Robyn believe this is the tip of the iceberg. Robyn says reserves account for less than 5% of the known mineralized rock at the property and recent exploration efforts support his bullishness.

At the end of July, the company announced that 31 surface samples returned an average of 0.988 gram gold per tonne, 42 grams silver and 0.91% copper, and a drill hole at the Bolivar NW zone intercepted several zones of mineralization, including 2.4 metres true width averaging 1.05 grams gold, 176 grams silver and
2.03% copper.

Bolstering resources at Bolivar would only continue the company’s track record of delivering both resource and production growth to investors over the last four years.

Sierra has grown its global measured and indicated resource from 1.4 million tonnes of metal in 2010, to its current level of 21 million tonnes.

Increased metal in the ground has been accompanied by growing production. While it only produced 230,000 oz. silver and 2.9 million lb. copper in 2010, this year it expects to produce 2.92 million oz. silver and 23.1 million lb. copper.