Sierra Metals Inc (SMT.TO) Intrinsic Value Analysis

Executive Summary

As of June 12, 2025, Sierra Metals Inc's estimated intrinsic value ranges from $1.20 to $1.95 per share, depending on the valuation methodology applied.

Valuation Method	Fair Value (USD)	Implied Upside/Downside
Discounted Cash Flow (10Y)	$1.82	+60.7%
Discounted Cash Flow (5Y)	$1.20	+6.1%
Dividend Discount Model (Stable)	$1.95	+72.7%

Is Sierra Metals Inc (SMT.TO) undervalued or overvalued?

With the current market price at $1.13, the stock appears to be significantly undervalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate Sierra Metals Inc's intrinsic value, including:

1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component	Low	High
Long-term bond rate	3.2%	3.7%
Equity market risk premium	5.1%	6.1%
Adjusted beta	0.85	1.2
Cost of equity	7.5%	11.5%
Cost of debt	6.3%	7.9%
Tax rate	25.9%	26.5%
Debt/Equity ratio	0.59	0.59
After-tax WACC	6.4%	9.4%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

• Forecast Period: 5-year DCF and 10-year DCF
• Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
• Discount Rate: 7.9% (range: 0.0% - 9.3%)

Key Projections:

• Revenue growth from $273 (FY12-2024) to $604 (FY12-2034)
• Net profit margin expansion from 6% to 0%
• Capital expenditures maintained at approximately 20% of revenue

DCF Model	Fair Value	Enterprise Value	% from Terminal Value
5-Year Growth	$1	$259M	78.1%
10-Year Growth	$1	$355M	63.7%
5-Year EBITDA	$1	$275M	79.4%
10-Year EBITDA	$1	$348M	63.0%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

• Current payout ratio: 0.0%
• Stable payout ratio: 90.0%
• Growth transition: 5 years
• Cost of equity: 9.5%
• Long-term growth rate: 2.0%
• Fair value: $-0.07 (-106.3% from current price)

Stable DDM:

• Stable payout ratio: 70% (Low) to 90% (High)
• Cost of equity: 11.5% (Low) to 7.5% (High)
• Long-term growth rate: 1.0% (Low) to 3.0% (High)
• Fair value range: $1 to $2
• Selected fair value: $1.95 (72.7% from current price)

Key Financial Metrics

Metric	Value
Market Capitalization	$240M
Enterprise Value	$340M
Trailing P/E	7.76
Forward P/E	7.76
Trailing EV/EBITDA	3.25
Current Dividend Yield	0.00%
Dividend Growth Rate (5Y)	0.00%
Debt-to-Equity Ratio	0.59

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method	Weight	Weighted Value
Discounted Cash Flow (10Y)	43%	$0.54
Discounted Cash Flow (5Y)	36%	$0.30
Dividend Discount Model (Stable)	21%	$0.29
Weighted Average	100%	$1.62

Investment Conclusion

Based on our comprehensive valuation analysis, Sierra Metals Inc's weighted average intrinsic value is $1.62, which is approximately 43.8% above the current market price of $1.13.

Key investment considerations:

• Strong projected earnings growth (6% to 0% margin)
• Consistent cash flow generation

Given these factors, we believe Sierra Metals Inc is currently significantly undervalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.