Sierra Madre Gold and Silver Ltd. (SM:TSX.V; SMDRF:OTCQX) achieved full commercial and record production in January at its La Guitarra silver-gold project in Mexico, reported VSA Capital Markets Analyst Oliver O'Donnell in a Feb. 24 research note.
"With the company now consistently achieving throughput at commercial run rates and accessing higher grade material, this provides the platform to deliver profitability over the coming quarters," O'Donnell wrote. "This will provide the necessary catalysts, in our view, for a rerating and outperformance against the sector."
120% Return Potential
Sierra Madre's share price is now about CA$0.59, having increased 37.2% since early December 2024, and noted O'Donnell, VSA Capital expects it to move higher.
Its price target on the Canadian producer is CA$1.30 per share, which implies further upside of 120%.
"We expect that positive operating and financial results over the coming months will provide the catalysts to break out [of the recent trading range] to the upside while the backdrop for gold and silver remain positive," the analyst wrote.
Sierra Madre remains a Buy.
Past Production Milestones
O'Donnell recapped Sierra Madre's production achievements to date. The company started commercial production at La Guitarra on July 1, 2024 and reached industrial production in December. All told last year, Sierra Madre delivered 1,292.5 dry metric tons (dmt) of concentrate, equal to about 108,000 ounces (108 Koz) of silver and 1.452 Koz of gold based on reported grades of 2,594.2 grams per ton (2,594.2 g/t) silver and 34.93 g/t gold.
In January the company reached full commercial production and set a production record. It shipped 349.48 dmt of concentrate and had 45.81 dmt left in inventory.
"The latest monthly production record demonstrates the results of the successful debottlenecking of the plant and development improvements underground," wrote O'Donnell. "The newly opened underground operating faces, some of which are outside the current compliant resources limits, should provide higher grade material to the mill more consistently."
With these grade improvements, purported O'Donnell, the miner should be able to reach its production target of 350 dmt per month and simultaneously enhance margins.
Financial Expectations
Accordingly, VSA expects Sierra Madre's upcoming production and earnings updates to show operational consistency, and increased revenue and profit, noted O'Donnell. VSA anticipates Sierra Madre's full-year 2024 revenue to be US$7 million (US$7M). In Q3/24, the period ended Sept. 30, 2024, the company generated US$2.5M and achieved an operating profit of US$0.25M.
As for this year, VSA revised its expectations for Sierra Madre to reflect its recent "better-than-expected performance in terms of optimizing recoveries" and the rapid ascent of the silver and gold prices to US$30 and US$3,000 per ounce, respectively.
"Our current 2025F indication is for about 400 Koz silver and 4.7 Koz gold, indicating revenue of US$25M and EBITDA of US$10M based on consistent operations at around 500 tons per day (500 tpd) throughput," O'Donnell wrote.
Sierra Madre should generate enough cash flow to cover the cost of doubling throughput to 1,000 tpd as it would require additional equipment. Previously, management indicated that by 24 months from the start of production at La Guitarra, they would have enough information for an expansion decision.
Ownership and Share Structure
O'Donnell pointed out that Sierra Madre's major shareholders are First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) with 44.9%, Commodity Capital AG with 4.4% and Sierra Madre President and Chief Executive Officer Alex Langer with 2.7%.
The precious metals producer has 153.9 million shares in issue and a market cap of CA$91.2M.
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