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Sierra Metals receives merger proposal from Peru-based mining company

Yauricocha copper mine. (Image courtesy of Sierra metals | Twitter.)

Dealing with financial difficulties, Sierra Metals (TSX: SMT) confirmed on Monday that it has received a letter of intent (LOI) from Compañia Minera Kolpa, a polymetallic mining company based in Peru, regarding a proposed business combination and an investment package.

The LOI was submitted by Kolpa with its shareholders, including Arias Resource Capital Fund II. Arias and other members of the Arias Group (and principals) are Sierra’s largest shareholder, holding approximately 27% of its common shares.

Kolpa currently operates the Huachocolpa Uno mine, an 1,800 tonne per day capacity underground polymetallic asset in the Huachocolpa region of Peru, with a history of continuous operations since 1948. As Huachocolpa Uno in close proximity to Sierra’s Yauricocha mine, Kolpa anticipates “significant operating and administrative synergies” between the two operations that will reduce overall costs at each mine.

According to Kolpa, these potential synergies are particularly valuable, given the current operating problems at the Yauricocha mine. In addition, it expects the experience and knowledge of key executives and operators at Kolpa, many of whom previously worked at Sierra, to contribute significantly to the turnaround of the Yauricocha and Bolivar mines.

Concurrently, Kolpa’s financing partner intends to purchase unsecured convertible debentures that would be convertible into common shares of Sierra. The terms of such debentures are to be negotiated. With a financing package in place, Kolpa expects that Sierra’s current financial hardship could be resolved.

Earlier this month, Sierra announced that it has started a strategic review of the base metals mining business, citing financial challenges stemming from the earlier suspension of the Yauricocha mine in Peru as well as underwhelming performances of the Bolivar and Cusi mines in Mexico.

In the third quarter of 2022, Sierra’s Yauricocha mine saw a significant decline in ores processed and copper and gold grades over the previous quarter, leading to an 11% decrease in copper-equivalent production. The operation was suspended for a period of 20 days in September as a result of a mudslide incident and the community blockade that followed.

At the Bolivar mine, throughput also fell during Q3 2022 due to an unforeseen flooding event, which led to a 10% reduction in copper-equivalent production. Production at the Cusi silver mine was elevated thanks to higher grades in all metals.

Shares of Sierra Metals dropped another 5% to C$0.28 on the TSX by 11:35 a.m. ET Monday. The company’s market capitalization is C$46.7 million ($34.2m). Sierra delisted its shares from both the NYSE and BVL last week.