Silver, Gold Producer Delivers 2nd Quarter of Profitability
Research Report

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Disclosures for VSA Capital, Sierra Madre Gold and Silver, August 27, 2025:

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Sierra Madre Gold and Silver Ltd. (SM:TSX.V; SMDRF:OTCQX) has achieved profitability for two consecutive quarters since commencing commercial production, noted VSA Capital Analyst Oliver O'Donnell in an updated research note on August 27.

In the second quarter of 2025, silver production decreased by 6% while gold production increased by 5% quarter-over-quarter, reaching 66,000 ounces of silver and 1,048 ounces of gold, O'Donnell wrote.

With rising prices, revenue climbed 11% quarter-over-quarter to CA$5.4 million, totaling CA$10.4 million for the first half of 2025, the analyst said. The cost of goods sold rose to CA$4.1 million for the quarter and CA$7.7 million for the first half, marking a 13% increase quarter-over-quarter. Consequently, gross profit saw a slight increase to CA$1.29 million for the quarter, amounting to CA$2.5 million for the first half of the year.

The rise in costs was attributed to the ongoing ramp-up, team expansion, and a weaker U.S. dollar. After accounting for corporate expenses, the company ended the period with a net income of CA$0.28 million, slightly lower than the previous quarter. Management noted that production could have been higher if not for heavy rains at the start of the wet season, which caused power outages.

VSA Capital's 2025 projections remain unchanged for production (356,000 ounces of silver, 4,000 ounces of gold) and EBITDA (CA$5.9 million), although the firm reduced the net income forecast for 2025 by 12% to CA$2.7 million due to higher depreciation and amortization charges. Capital expenditures for 2025 and earnings beyond this period have been updated to reflect the expansion plans.

Fundraising and Accelerated Growth

Following modest capital expenditures of CA$0.9 million in the second quarter, the company's cash position increased by CA$0.3 million. However, this has been surpassed by a well-supported CA$19.5 million fundraising at CA$0.70 per share, providing the resources to accelerate the planned expansion.

The expansion will first increase capacity to 640 tonnes per day and then to 1,000 tonnes per day over the next 24 months, enabling annual production of 1.1 million ounces silver (Moz Ag) and 10,000 ounces of gold (Au), with free cash flow exceeding CA$22 million per annum based on VSA's latest forecasts. Additionally, the funding will support an exploration program, including 20,000 meters of drilling in the highly promising Eastern District, unlocking new potential catalysts for share price growth.

Recommendation and Target Price

The second quarter of 2025 marks the beginning of a profitability track record for Sierra Madre, with further gains anticipated in the second half of 2025 as the higher-grade Coloso is ramped up, O'Donnell wrote. Since the fundraising, the share price has risen 7.5% to CA$0.86 per share. The additional funding alleviates working capital risks, enabling the acceleration of the growth strategy and opening up exploration opportunities in the Eastern District. The value proposition now shifts to a growth narrative from one of restart execution, and our forecasts have been adjusted to reflect the deal and its positive impact.

Sierra Madre has completed its second profitable quarter since achieving commercial production and has secured funding for an accelerated expansion strategy, the analyst noted. This has led to significant increases in VSA's earnings forecasts and brought forward spending assumptions for growth. EBITDA forecasts for 2026 and 2027 have been raised by 21% and 44%, respectively, to CA$23.2 million and CA$32.7 million. The 2025 forecast remains unchanged except for a reduction in net income due to higher depreciation and amortization. The firm's model has been adjusted for the additional shares issued in the deal, while the 60/40 weighting (EV/oz: DCF) remains unchanged.

Since the deal at CA$0.70 per share, the share price has performed strongly, up 7.5%, reflecting confidence in the strategy, reduced time to stronger cash flows, and the removal of working capital pressure risks, the analyst wrote. The funding of an exploration program introduces new catalysts for the stock price, alongside a further re-rating as the expansion strategy is executed. The Eastern District will finally receive the exploration focus needed to prove its potential, supporting the company's growth strategy and valuation. Drilling, likely in 2026, could uncover new high-grade mineralization zones, offering the potential to expand and extend the operation's life.

The narrative shifts from restart execution, which delivered an expected re-rating, to a broader and well-funded growth strategy with further value to be realized, O'Donnell said.  Since VSA's last update, sector multiples have increased, but there has been little change in relative valuation. Sierra Madre continues to trade in the middle of the range at a CA$3.95 per ounce rating, above peers trading under a dollar per ounce, which are mostly earlier-stage companies not yet rated as producers or large-scale projects.

"Given SM has achieved profitability, has an expansion strategy and new growth catalysts, we believe that a fair target is now towards the top end of the range to capture the growth upside potential and the fair rating of a company beginning to build a track record of profitability," O'Donnell wrote. "We reiterate our BUY rating and target price of CA$1.40/sh," a 63% return at the time the note was written.