Sierra Metals sees exploration growth at its three underground mines

Sierra Metals (TSX: SMT) shares gained momentum after the company outlined its commitment to increase high-grade tonnage at its Yauricocha polymetallic mine in Peru, and Bolivar and Cusi mines in Mexico through brownfield programs.

“Sierra Metals is on track to see strong exploration growth and exploration success. The past year’s preparation should lead to the rubber hitting the road, which should increase shareholder value for the company and its shareholders,” Mark Brennan, the company’s president and CEO, said on a conference call.

At the underground Yauricocha silver-copper-zinc-lead-gold operation in Yauyos province, Sierra is wrapping up the first phase of an optimization program that has boosted quarterly production and throughput since the fourth quarter of 2015. The program, which began in late 2015, is focused on controlling water inflow, improving mine sequencing and introducing mechanized mining methods. (The company is replacing conventional jackleg mining with mechanized jumbo mining.)

In the second quarter, Yauricocha’s silver-equivalent output grew 24% over the first quarter to 1.85 million oz., despite only a 4% increase in throughput, Brennan says. But compared to the second quarter of 2015, silver-equivalent ounces decreased 14%.

Surface facilities at Sierra Metals’ Yauricocha polymetallic mine in Yauyos province, Peru. Photo by Salma Tarikh.

The 3,000-tonne-per-day operation sits at an average altitude of 4,600 metres and has produced for more than 60 years, with no signs of stopping.

Sierra recently updated the mine’s reserve and resource estimates, including a maiden reserve and resource estimate for the Esperanza zone, which it found 400 metres north of the central mine area in January.

The Esperanza zone contains 1.5 million tonnes in reserves, bringing Yauricocha’s total to 3.8 million tonnes averaging 61.1 grams silver per tonne, 0.8% copper, 1.2% lead, 2.9% zinc and 0.62 gram gold.

Esperanza has 2.5 million measured and indicated tonnes and 1.5 million inferred tonnes, representing 30% of the total measured and indicated resource and 41% of the total inferred resource at Yauricocha.

Sierra is in the early stages of delineation drilling at Esperanza and says the exploration program will grow the mine’s resources in the coming months.

“We like to emphasize that we believe we’re at the bottom of the first inning of a nine-inning ball game at Esperanza,” Brennan says.

Esperanza is just one of the many brownfield targets at Yauricocha that Sierra is assessing. During the June quarter, Sierra drilled 10,800 metres in 72 holes at Yauricocha, with 32 holes going into Esperanza.

At the underground Bolivar copper-zinc in Chihuahua, Sierra is growing throughput. The operation went from 400 tonnes per day in 2011 to 2,500 tonnes per day in 2015. It is now at 3,000 tonnes per day. Second-quarter throughput was up 13% from a year ago. Despite the increase, average head grades and recoveries declined, resulting in a 5% year-over-year decline in 5.36 million equivalent lb. copper production.

Sierra expects grades will improve in the second half of 2016, because it may mine from higher-grade areas on the property. During the June quarter, Sierra extracted ore from the El Gallo zone and drilled over 6,000 metres at the nearby Bolivar West fault area.

Meanwhile, the underground Cusi silver-lead mine, also in Chihuahua, saw second-quarter silver-equivalent ounces climb 23% year-over-year to 307,000 ounces.

Sierra Metals operations manager Bernardo Cabezas (left) eyes a sample during a tour in the Yauricocha polymetallic mine in 2014. Photo by Salma Tarikh.

All-in sustaining costs per silver-equivalent ounces decreased 39% to US$18.49. Sierra notes the mine started zinc production in the first half of 2016, which contributed to the higher silver-equivalent ounces. During the quarter, Cusi saw nearly 1,600 metres of infill drilling.

“This year will be a significant year for Sierra Metals,” Brennan says, noting that production, grade and recoveries should improve throughout the year at Yauricocha, with the optimization program and production from the Esperanza zone in the third quarter. He expects more brownfield exploration success at all three of Sierra’s underground operations.

Net loss during the June quarter totalled US$3.4 million, compared to a US$1.2-million profit a year ago, largely due to lower revenues. Adjusted earnings were US$454,000.

Revenue fell 20% to US$36.9 million, on the back of lower year-over-year production at Yauricocha and Bolivar. All-in sustaining costs at the two operations also increased.

Quarterly silver-equivalent output came in at 3 million oz., compared to 3.2 million equivalent oz. copper production of 19.7 million lb., versus 21.6 million pounds.

Sierra exited the quarter with US$20.6 million in cash and equivalents, and US$4.7 million in restricted cash.

On Aug. 17, the day Sierra released the operational update, its shares gained 11% to close at $2.06.