Sierra Mineral

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Sierra Minerals Inc. is ‘a profitable gold producer focused on acquiring and developing advanced stage gold deposits that have the likelihood of realizing near-term production.’

And the things they have accomplished lately prove them to be so much more.

There were a lot of questions to be asked when the IRJ caught up with CEO and President Michael Farrant. The most pressing perhaps, being “How on earth does a company nigh on erase their entire working capital deficiency in such a short time?”

Here’s how...

Farrant’s Financial Edge
To say Farrant’s blend of financial and gold mining experience is helpful would be an understatement.

“I’ve been in the gold industry for about 13 years now. I have a BCOM (Bachelor of Commerce degree) from Queens University and I am also a chartered accountant” he says.

“In 1996 I joined Barrick Gold Corporation and spent six years with them, five as Corporate Controller. At the beginning of 2003 I left to join Kinross Gold Corporation. I spent three years with them; a year as Operations Controller and two years as Vice President and Treasurer. In 2006 I left them and did a bit of consulting for Centerra Gold. Then I joined Origin Resources as CFO so I spent some time with junior producers and then in the middle of last year I took over the role of Presidency here at Sierra Minerals.”

Farrant joined Sierra Minerals in June 2008, a time which he openly admits had been difficult for the company of late. But what has happened since his arrival is really extraordinary.

Cerro Colorado, Mexico
Cerro Colorado is Sierra Minerals 100% owned property in Senora, Mexico. The acquisition of this site dates back to 2006 when an interesting agreement was made with their now Chairman Keith Piggott.

“He (Piggott) privately owned a mine in Mexico” Farrant says.

“A deal was struck to vend through a reverse takeover to bring the Cerro Colorado mine into Sierra Minerals and that’s how our chairman and our debt holder ended up being the two largest shareholders of the company.”

Their announcement of the 43-101 results on Cerro Colorado in late April this year featured heavily in industry news publications and rightly so.

“To put it in perspective, historically we had been thinking along the lines of 150,000 ounces. The estimate they came up with was actually 250,000 ounces so we were very pleased with the resource” Farrant says.

“It certainly gives us the chance to perhaps extend the mine life for about five years.”

This brings us to Sierra Minerals goal of increasing their Cerro Colorado production from almost 20,000 ounces per year to 30,000 ounces per year. Of course Farrant’s financial and mining industry expertise proves a strong suit to play in making these plans.

“The production rates have grown year after year to the point where last year we produced almost 20,000 ounces of gold but our goal is to grow to 30,000 annually. To do that we needed to accomplish two things” Farrant explains.

We needed to buy more trucks simply to have the capacity to move more ore. In April this year we did that. We bought three more CAT 773B’s to expand our trucks to eight. That now gives us six of the CAT 773B’s and two smaller CAT trucks. Now the second thing we had to do was expand the capacity of our processing plant. Along the lines of doing that we began adding more carbon columns. We were running at 18 carbon columns and we’ve added six more. We have 24 right now and we’re going to add six more to take it up to 30. We’re also in the process of finalising a few upgrades including installation of a new boiler at the plant which will ultimately give us the capacity to collect gold from carbon and strip it at a rate of 30,000 ounces a year.”

Cutting Costs and Raising Value

Putting the facts and figures into practise and remaining realistic about the positive and negative impacts of their cost structure, Farrant explains Sierra’s current and future market placement. 

Our first quarter cash cost was $572 dollars per ounce and the reason it’s so high is predominantly because a lot of our costs are fixed. If we were to take that production rate from 20,000 ounces to 30,000 ounces we see those costs dropping to somewhere in the order of $425 to $450 dollars per ounce. At current gold prices that would give us a significant margin” Farrant explains.

He also cites the dwindling value of the Mexican Peso as a positive result for their finances.

“70% of our costs are denominated in pesos so right now with the peso in excess of 13 to one compared to last year where it was about ten to one, we’re experiencing savings of over $100,000 dollars a month simply because of the currency devaluation.”

These factors of the Cerro Colorado cost structure are not all. Farrant explains that the achievement he is most proud of lately is the overhaul and great success of the company finances.

"We’ve practically erased the entire working capital deficiency. One of the contributors to that is in March this year we did a private placement of units at 20 cents Canadian per unit. That comprised a common share and a half purchase warrant at 30 cents. We were successful there in raising $1.73 million Canadian. The funds for that allowed us to get our debt agreements renegotiated. We made some payments against those debts. It also gave us the funds to purchase the trucks” he says.

“One of the most exciting things which I think will provide value to shareholders is executing our operating plans to get the production from 20,000 ounces to 30,000 ounces. Now for perspective, in the first quarter we had operating earnings of about $611/$612,000 U.S dollars and we had a free operating cash flow that I believe was about $8/900,000before changes of working capital.”

“If you were to extrapolate that over four quarters you’d be looking at maybe $3 million dollars of free cash flow and obviously bottom earnings. That’s at a 20,000 ounce rate” he says.

“If you were to take that to 30,000 ounces, because of our large fixed cost if we could get that down to say $450 dollars per ounce and gold was at $900 dollars an ounce. A $450 dollar margin on 30,000 ounces makes $13.5 million dollars of free cash flow. So the free cash flow expands significantly with the increase in ounces.”

Future Goals

Farrant has some fantastic goals for Sierra Minerals, starting with the 30,000 annual production rate target.

“That is the biggest thing that is going to make a difference to the bottom line and the cash flow of the company and open up the greatest number of opportunities going forward from a financial point of view” he says.

He also mentions operational goals of expanding the Cerro Colorado Mine.

“We do have 34,000 Hectares of exploration property relatively close to the mine – approximately 25 kilometres - and we are doing some work on that right now. We do see it as a potential source of ore going forward if certain things prove themselves out” he says.

Farrant has other plans with a more corporate focus too.

“Two-thirds of the company stock is held by four individuals. Our chairman owns 29% of the company. Our second largest shareholder owns 20% and then there are two public companies. One of them owns 7.5 million shares and one owns 6.5 million shares. In combination they own two-thirds of the stock. So what happens is the stock doesn’t trade very much in the market” he explains.

“One of the things I’d like to do is some sort of corporate transaction with another entity which will really accomplish two things. One, bring in a second operation into the mix or an advanced stage development property which we can build and then run as a second operation and also someone whose stock is fairly liquid in the marketplace so that we can broaden out our shareholder base and improve the liquidity of the stock.”

Things are changing fast at Sierra Minerals and they’re doing so for the better.  It is in no small part down to their incredibly rapid debt reduction and financial understanding too. Like many junior companies, they appear to be under-valued. But this could be set to change with their plans to increase stock trading, retain low cost operations, expand and develop where appropriate and plough on through the tougher times. Sierra Minerals have some fantastic future plans.

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