Mexico Silver-Gold Producer Lifts Throughput 34% as Mill Expansion Slips to End-Q3
Research Report

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Disclosures for VSA Capital, Sierra Madre Gold & Silver Ltd., September 2, 2026

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In any case, ratings (or research) should n t d d p n a nv t nt adv n nv t ’ decision to buy or sell a stock or investment fund should depend on individual circumstances and other considerations. ap ta t d’ ndat n a d f n d a f w : BUY: The stock is expected to increase by in excess of 10% in absolute terms over the next twelve months. HOLD: The price of the stock is expected to move in a range between -10% and +10% in absolute terms over the next twelve months. SELL: The stock is expected to decrease by in excess of 10% in absolute terms over the next twelve months. In addition, on occasion, if the stock has the potential to increase by in excess of 10%, but on qualitative grounds rather t han quantitative, a SPECULATIVE BUY may be used.

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On September 2, 2026, VSA Capital analyst Oliver O'Donnell, CFA reiterated a BUY recommendation and a CA$2.70 per share price target on Sierra Madre Gold and Silver Ltd. (SM:TSX.V; SMDRF:OTCQX), implying a 25% return from the September 1, 2026 closing price of CA$2.15, following second quarter 2026 results that showed steady output and broadly flat mine operating costs alongside a delay in accessing higher-grade mineralization.

Q2 2026 Results

Sierra Madre reported net revenue of US$8.2 million in the quarter, down 19% quarter over quarter but up 43% year over year, with pricing the principal driver. Silver production totaled 64,315 ounces and gold production 945 ounces, down 3% and 10% respectively year over year. Silver sales of 66,691 ounces were realized at US$75.65 per ounce and gold sales of 943 ounces at US$4,529 per ounce, against 65,683 ounces of silver at US$33.36 per ounce and 1,096 ounces of gold at US$3,272 per ounce in the second quarter of 2025. Total silver equivalent ounces sold reached 123,483, with gross silver revenues of US$5.0 million and gross gold revenues of US$4.3 million broadly balanced. For the first half, net revenues of US$18.3 million were up 71% year over year on 252,627 silver equivalent ounces sold.

Adjusted EBITDA fell to approximately US$0.7 million from US$2.8 million in the first quarter, taking the first half total to US$3.5 million, against US$2.6 million in the first half of 2025 and US$6 million for full-year 2025. Gross profit declined to US$1.58 million from US$3.6 million. Net income remained positive but close to breakeven at US$37,000, down from US$339,000, after income tax expense of US$566,000 comprising a US$230,000 current charge and a US$335,000 deferred charge. Share-based compensation fell to US$132,000 from US$850,000, the prior quarter having reflected immediately vesting options, while general and administrative expense rose modestly to US$901,000 from US$884,000 on consulting costs tied to the Del Toro acquisition.

Costs, Recoveries, and Balance Sheet

The company processed 41,567 tonnes in the quarter, broadly flat both sequentially and year over year, and consistent with operation around the 500 tonne per day nameplate, with first half throughput of 83,265 tonnes, up 4%. Silver recoveries averaged 73.58% and gold recoveries 67.97%, down 4% and 13% year over year, reflecting the blending of lower-grade development material from the Coloso and Nazareno mines as they ramp up; a metallurgical lab has been built on site to optimize the blending protocol. Mine operating costs were US$6.3 million versus US$6.2 million in the first quarter, while cash costs rose to US$49.28 per silver equivalent ounce produced from US$42.55, reflecting workforce expansion ahead of Phase I completion, contractor mobilization from mid-June, currency movements, inflation, and initial lower grades from development drives. Some cost offset is expected in the second half as leases on now-purchased rental equipment end.

Cash, including short-term investments, stood at US$22.2 million at the end of the first half, up from US$13.2 million at March 31, 2026. Operating activities generated US$1.9 million in the half, investing spend was US$26.2 million, including the US$20 million Del Toro cash consideration that closed in June, and net financing inflows were US$31.8 million as the CA$57.5 million concurrent financing was released from escrow on June 19, 2026. The First Majestic Silver Corp. (TSX: AG) loan has been fully repaid, with a final US$2.5 million principal payment in June following US$2.5 million in February; interest expense fell to US$91,000 from US$132,000. First Majestic remains the largest shareholder at 24.13%, ahead of Jupiter Asset Management at 6.76% and Commodity Capital AG at 2.60%.

La Guitarra Expansion

Capital spending remained focused on the La Guitarra expansion, which continues to target 1,200 to 1,500 tonnes per day in phases. The first milestone of 750 to 800 tonnes per day is now expected before the end of the third quarter of 2026, a slip from the original end of the second quarter target after the company opportunistically purchased a larger used ball mill capable of meeting Phase I and Phase II requirements combined. That mill was refurbished to 900 tonnes per day rather than the 600 to 700 tonnes per day originally planned, lifting total milling capacity to approximately 1,450 tonnes per day and effectively pre-installing the milling portion of Phase II.

Additional foundation and electrical work, together with shipping delays on other components, pushed completion back by several weeks. Throughput reached 672 tonnes per day so far in August, a 34% increase on the prior 500 tonnes per day level, and O'Donnell wrote that management's reported figure "gives us confidence in our throughput forecast." The thickener tank was completed in mid-August, with full functionality expected by the end of September. Phase 2 remains anticipated by the third quarter of 2027 and requires a new dry-stack tailings storage facility, with site clearing due to start in October, plus a filter plant.

Exploration

The US$3.5 million exploration program announced in October 2025 targets the East District of the Guitarra complex and covers multiple known historic mines, structured as an initial phase of drill target definition followed by a phased drilling campaign. Target definition has involved reopening, mapping, and sampling several old mine portals alongside expanded surface work, with particular emphasis on the historic Rincon mine.

After quarter-end, the company received drilling permits and obtained bids for a long-hole sub-horizontal drill program from its Tlacotal land position, a permitted area already designated for mining, with the sub-horizontal approach designed to test numerous veins within each drill hole. Drilling is expected to commence in the second half of 2026, while Del Toro drilling is not expected to begin until mid-2027.

Forecast Revisions

VSA Capital marked its 2026 price assumptions to market, moving silver to US$75 per ounce from US$85 per ounce and gold to US$4,700 per ounce from US$5,000 per ounce, and updated operational assumptions for the delayed access to higher-grade zones. Management also highlighted an unfavorable USD/MXN movement of roughly 15%, partly offset by a model change capitalizing exploration spending at La Guitarra. Revenue estimates fall 36% to US$52.2 million for 2026 and 10% to US$95.0 million for 2027, with EBITDA cut 60% to US$20.9 million and 16% to US$57.6 million, respectively, and net income cut 60% to US$13.1 million and 7% to US$37.3 million. Capital expenditure forecasts rise 33% to US$8.6 million in 2026 and 76% to US$7.9 million in 2027, partly reflecting capex pulled forward for the larger mill purchase. The 2028 revenue forecast is unchanged at US$123.7 million, with EBITDA of US$76.9 million and net income of US$50.2 million.

Valuation and Outlook

The valuation is unchanged despite the near-term earnings reduction, as peer EV per ounce multiples have risen, and the early debt paydown improved the net cash position. Applying a target EV/Resource multiple of US$15 per ounce produces a fair enterprise value of US$534.0 million and, after net debt of negative US$8.3 million across 242,214,887 shares, a per share fair value of CA$3.11. Blended with a DCF-derived target of CA$2.07, this yields the 12-month target of CA$2.70. The shares have risen 29% since July 2026 as silver moved from US$55 per ounce to close to US$70 per ounce, and the stock is up 124.6% over 12 months against a 12-month range of CA$3.09 to CA$0.92.

O'Donnell argued that while trailing earnings may look stretched on a simple multiple, this understates the opportunity ahead, since throughput gains from the expansion are essentially linear, but the earnings impact of moving past lower-grade development drives into higher-grade in-resource zones at Coloso and Nazareno "is multiplicative."

He added a caution against reading the revisions negatively: "We caution against our revised forecasts being viewed as a deterioration of the overall story." On funding, the note stated that "the balance sheet is well placed to fund the remainder of the programme," citing the US$22.2 million cash position and full repayment of the First Majestic Silver Corp. (AG:TSX; AG:NYSE; FMV:FSE) loan. Overlaying production growth is the potential for a renewed silver price surge, while East District exploration offers a new set of catalysts from high-grade drill results.

Risks

Key risks identified include exposure to silver and gold prices; political risk, with Mexico an established mining jurisdiction but globally rising resource nationalism potentially altering taxes and laws; macro and currency risk, given metals are priced in US dollars, the shares trade in Canadian dollars and costs are partly denominated in Mexican pesos, alongside inflation; execution risk covering delays and operating issues; and financing risk, described as a perennial issue for junior natural resource companies. VSA Capital acts as corporate adviser and broker to Sierra Madre and as its research provider, and the note is a marketing communication classed as non-independent research.