When you talk to Mark Brennan, CEO of Sierra Metals (T.SMT), you get a keen sense of his having a plan for the company and sticking to it, you get a keen sense of his having a plan for the company and sticking to it.

“When I joined the company in Q1 2015 it was reporting record production and record profitability. But it was running flat out and it wasn’t sustainable.” said Brennan. “The first thing we did was a full re-evaluation of the three mines Sierra had. It took three or four months and at the end of it we developed a plan.”

The company owns three mines. In Peru it owns 82% of the Yauricocha Mine in Yauyos Province, Peru producing copper, lead and zinc concentrates, with high silver and gold components. In Mexico, Sierra owns 100% of the Bolivar and Cusi mines located in southwest and central Chihuahua State, respectively. The Bolivar mine is a growing, low cost copper-zinc-silver producing asset that achieved commercial production in November 2011. The Cusi Mine is a silver-lead producing asset that achieved commercial production in January 2013.

“We knew that fixing the Yauricocha mine would take four quarters.” said Brennan, “There was a lot to fix and we reduced production due to water issues, engineering and safety concerns. Everything went pretty much according to plan and we were able to finish the restructuring and operational improvements at the mine in Q2 2016. We were able to ramp up production at the mine and had record throughput of 2,850 tons per day in late 2016 despite  a planned shut down in November at Yauricocha to  transition to a new, higher capacity hoist in the mine.”

Similar modernization and refurbishment work is planned at the Bolivar and Cusi mines in Mexico for 2017 and has so far proceeded according to plan. While these programs initially resulted in reduced production Brennan is anticipating a real payoff in 2017 with the program completed at Yauricocha, and sequentially in 2018 as the operational improvements program is completed in Mexico.

“We are expecting to beat our best records in 2017,” said Brennan. “We should surpass 2012 which was our highest production year. But we are mining much more efficiently and safely. Our costs are remaining flat and our contribution margins are higher than in the past. We’ll see strong improvement from 2016 in 2017 and real growth in 2018.”

Modernizing the Sierra mines is one side of the equation, the other side is exploration. “For example,” said Brennan, “The Yauricocha mine was run as a private family owned mine. They followed the drill bit but did not look around at the hosting environment. We have been looking at the geological host and we’ve found some excellent brownfield, near mine exploration targets.”

“In the central mine zone we see 10 to 12 ounces per ton. 400 meters to the North we are in the Esperanza zone. We announced the Esperanza discovery in January 2016. The Esperanza zone returned the thickest sulfide intercepts in the 60 year mining history at Yauricocha.” said Brennan. “Because it is so close to the main zone infrastructure we were able to put the Esperanza zone into production in June 2016 and we announced that we were processing the Esperanza material in August 2016. At Esperanza we are dealing with 30 meter widths and averaging 15 to 20 ounces per ton. And we’ve barely scratched the surface.”

Similar “brownfields” exploration is taking place at Sierra’s mines in Mexico and the prospect of adding significant, low cost, reserves is the real blue sky for the company. More efficient mining and serious, close to mine, exploration, opens up significant possibilities for the company.

In its January 18, 2016 press release, Sierra announced 2016 production levels and gave guidance for 2017 production and costs. In that release Brennan is quoted as saying, “The groundwork has been set for a seminal year at Sierra in 2017. The lengthy process of modernizing and implementing best operational practices has opened the door to the possibility that we will surpass the highest levels of EBITDA previously attained by the Company. Our ongoing brownfield exploration programs at all of our mines should lead to a significant improvement to our net asset value in the year ahead as well.”  

Brennan went a little further in our interview saying, “We are looking at potentially transformational exploration at all three of Sierra’s mines. And we are expecting to be making announcements in the second quarter of 2017.”

By exploring very near its existing mines, indeed drilling underground from the  drifts of the mine itself, Sierra is able to put new discoveries into production quickly and inexpensively. The infrastructure is already in place. That keeps costs down and margins up.

The market seems to like the combination of well executed mine refurbishment and brownfields exploration potential. Sierra opened 2016 trading as low as $0.93, at time of writing the company was trading at $2.95 with 161.94 million shares outstanding and a market cap of 502.01 million dollars.