Gold and Silver Exploration Co. Well-Positioned for a Major Rerating, Analyst Says

Source: Oliver O’Donnell 11/14/2024

“With the gold price up 26% and silver up 29% YTD (silver was 52% of revenue in this quarter), Sierra Madre Gold and Silver Ltd. (SM:TSX.V; SMDRF:OTCQX) is well-positioned for a major rerating in the precious metals sector,” a VSA Capital research note reported.

VSA Capital analyst Oliver O’Donnell, in a research report published on November 12, 2024, maintained a Buy rating on Sierra Madre Gold and Silver Ltd. (SM:TSX.V; SMDRF:OTCQX) with a target price of CA$1.30. The report follows Sierra Madre’s first quarterly earnings since starting test mining operations.

O’Donnell highlighted the company’s initial production results, stating, “Figures for Q3 2024 indicate production of 49koz silver and 539oz gold or 95koz AgEq. Realized silver prices averaged US$28.9/oz while gold averaged US$2,474/oz. Revenue was US$2.5m with COGS of US$2.3m leading to an operating profit of US$0.25m, an impressive achievement for this the earliest phase of production.”

The analyst emphasized continued operational progress, noting, “The company reported sequential increases in operating availability with the most recent update post period end in October achieving over 425tpd with 39,272t processed up until that point. The company is targeting commercial rates of over 500tpd before year-end.”

Regarding future potential, O’Donnell stated, “Our base case analysis of commercial production rates indicates US$80m in post-tax cash flow over the next five years after funding a ramp up to 1,000tpd, allowing for future expansion and a large-scale drilling program of brown and greenfield targets within the 40,000ha license area.”

The report highlighted the company’s strong positioning in the current market environment, with the analyst noting, “With the gold price up 26% and silver up 29% YTD (silver was 52% of revenue in this quarter), SM is well-positioned for a major rerating in the precious metals sector.”

VSA Capital’s valuation methodology combines DCF and EV/oz multiple approaches. O’Donnell explained, “Our base case over five years yields a post-tax NPV10 of US$66m. However, this does not fully account for the likelihood that a significant portion of free cash flow will be reinvested in the project.” He added, “We, therefore, continue to use our current valuation methodology using a fair EV/oz multiple.”

In conclusion, VSA Capital’s maintenance of their Buy rating and CA$1.30 target price reflects confidence in Sierra Madre’s operational execution and growth potential. The share price at the time of the report of CA$0.47 represents a potential return of approximately 176% to the analyst’s target price.

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Disclosures for VSA Capital, Sierra Madre Gold and Silver Ltd., November 12, 2024

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( Companies Mentioned: SM:TSX.V; SMDRF:OTCQX, )

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