Sierra Madre Gold and Silver Ltd. (SM:TSX.V; SMDRF:OTCQX) secured a US$5 million (US$5M) loan from major, 44.9%, shareholder First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), with which it should be able to advance its La Guitarra gold-silver project in Mexico to a production restart, reported VSA Capital analyst Oliver O'Donnell in a May 13 research note.
"With the new funding there is a clearer pathway to the successful execution of the restart strategy that should justify a premium to peers, notwithstanding rising sector multiples as the timing benefits from rising metal prices," O'Donnell wrote.
133% possible return
Currently, Sierra Madre is trading at about CA$0.43 per share, at a discount to its peers on a Measured and Indicated basis, the analyst noted. VSA Capital's CA$1 per share target price on the Canadian explorer-developer implies a 133% return for investors.
Sierra Madre remains a Buy.
"We again highlight management's past operational experience of the asset as well as the significant exploration upside and long-term scalability making the risk-reward aspect [with] Sierra Madre highly favorable," O'Donnell wrote.
Timeline of restart
The plan, reported O'Donnell, is for Sierra Madre to use the funding to prepare to restart the La Guitarra mine, initially at 350 tons per day. This advance work is to include finalizing the plant rehabilitation and building out the underground mining fleet. Capital should cover equipment, staffing and mill repairs and upgrades.
Upon restart, management intends to mine in the La Guitarra zone given it accounts for about 40% of the project's existing Indicated resource: 3,800,000 tons (3.8 Mt) of 220 grams per ton silver equivalent (220 g/t Ag eq). The Inferred resource is 4.1 Mt of 153 g/t Ag eq.
A mine restart plan is slated for publication in Q2/24 followed by test production in H2/24 and a commercial restart next year.
Financing offers flexibility
The term of the US$5M loan from First Majestic is two years, during which there is a six-month, interest-free period. The associated 15% coupon compounds monthly over the two years. Sierra Madre must repay the coupon after six months, but may repay the interest at any time without penalty.
"The simple structure avoids dilution, and the forward sale of future gold and silver production benefits equity holders," O'Donnell commented.
Favorable price environment
The analyst pointed out that rising prices of gold and silver and a likely "major" sector rerating as a result will benefit Sierra Madre. The precious metals prices have broken out of their long-term technical barriers and have been climbing since. Since the start of this year, the gold price has increased 14% and the silver price, 20.4%.
The rally of both is expected to continue but with silver outperforming gold in the short and medium terms, added O'Donnell, due to growing demand and a smaller market.
| Want to be the first to know about interesting Gold and Silver investment ideas? Sign up to receive the FREE Streetwise Reports' newsletter. | Subscribe |
