Igor Gonzales has been President and CEO of Sierra Metals (T.SMT) since May 1 of this year. With three mines, one in his native Peru and two in Mexico, to oversee he has his hands full. Especially as production at two of the three mines was down in Q2 2017.
I spoke to Gonzales in Peru and he was anything but disappointed in these results. “Our main mine in Peru, the Yauricocha Mine, had good results. But the two mines in Mexico did not meet their targets,” said Gonzales.
At the company’s Bolivar mine in Mexico a cycle of equipment replacement and upgrading is running into anticipated challenges. “This is underground mining,” said Gonzales. “We have to deploy the equipment into our operations. We have to train operators. But this is not immediate because the equipment is arriving slowly. Plus, we are doing upgrades to our concentrator.”
All of which slows production in the short term. However, it will make the Bolivar mine more efficient and productive in the medium to long term
At the Cusi mine in Mexico, the production slowdown reflects a change in mining strategy. “Cusi is 5- percent of our total revenue,” said Gonzales. In the Company’s August 17 press release Gonzales is quotes as saying, “At Cusi, weaker production was the result of a new plan which refocuses efforts away from narrow veins and emphasizes the access, development and production from the Santa Rosa de Lima zone, which has wider structures as well as higher silver grades. An initial 15,000 meter drill program recently completed saw average silver equivalent grades of 371 grams per tonne and average widths of 4.1 meters. The Company has almost completed an additional 15,000 meters of infill drilling and is working to complete a ramp designed to allow us to include material from the Santa Rosa de Lima zone, which has improved head grades as part of our mill feed in the latter part of the year. Additionally, structural development will be completed using a long hole mining method which is a change from our existing cut and fill methodology.”
This shift in mining strategy will have a number of consequences for Cusi. First, Gonzales anticipates putting out a new resource report for the property in Q4 2017. Second, the ore which the company is targeting is higher grade and in the deeper, sulfide areas which Gonzales said, “will lead to better recoveries once we get to this structure. We can get higher grade, better quality ore once we reach the Santa Rosa de Lima zone”.
For Gonzales re-equiping and shifting mining strategies, while they depress production as they are implemented, are necessary to bring the existing mines to their full potential. However, in many ways, the mining story at Sierra is balanced by the exploration story. At each of the three mines extensive brownfield drilling programs are in progress.
“At Cusi we are doing 30,000 meters of drilling primarily focused on the Santa Rosa de Lima zone. This zone currently has a defined one kilometer strike length from the current program but is part of a larger regional 64 kilometer trend of which 12 kilometers runs on our property. Some of that recent drilling is to step out and confirm the continuation of the structures beyond that initial one kilometer strike length. And part of that drilling is to test our theories as to how the structures actually work,” said Gonzales.
At the Bolivar mine Sierra initially had 40 targets identified from a Titian 24 Geophysical Survey. “We narrowed those down to 8 for drilling. We are looking for extensions to the current mine, and increased copper grades said Gonzales. “We will report those results in Q4 of 2017 as part of a updated technical report.”
At Yauricocha exploration drilling is ongoing on several targets and there is also a full Titan 24 Geophysical survey in progress over the entire property which has never been completed in the past. “We have finished about 50% of the lines,” said Gonzales. “We expect to be finished the program at the end of August and we expect results from the program to be available at the end of Q3.”
“This is all brownfield drilling,” said Gonzales. “We’re extending ore zones close by existing mines and mills. We’re staying away from greenfield drilling. By drilling in brown fields we enjoy a real competitive advantage. We’re getting good extensions at depth.”
Looking at the metals markets overall, Gonzales is optimistic. “Base metals will stay strong. Copper, lead and zinc will stay strong. In fact, copper is trending upwards,” said Gonzales. “We’re well positioned to take advantage of higher metal prices as we sell all our concentrate offtake at spot prices. Approximately 25% of our revenue comes from silver, 4% from gold and the rest comes from base metals.”
“Right now, we are busy expanding our mineral resource base. It is the first phase in Sierra’s development and growth strategy,” said Gonzales. “We’re expanding the resource and we are also bringing on new people. We’re building a larger team to allow us to expand our mines and our mills. Sierra is a growth story in general and we are ready for that growth.”
For investors Sierra represents an option on base metal prices as well as a solid look at silver. If Gonzales is right about copper prices firming, Sierra is ready to take full advantage. So far copper is well up from its $2.00 a pound level just over a year ago trading around $2.80. If the much discussed supply gap in copper continues, $3.00 copper may be just around the corner. Sierra will be ready.
At time of writing Sierra was trading at $3.01 with 162,679,430 shares outstanding for a market cap of 490 million dollars.