Fortuna Silver Mines Inc (TSX: FVI) is a Canada-based precious metals producer. Its business operations comprised of mining and related activities in Latin America, including exploration, extraction, and processing of silver- lead, zinc, and silver-gold and the sale of these products. 

Investment Rationales

• Healthy production numbers: The corporation recently released its fourth-quarter production statistics from its four active mines in the Americas and West Africa, revealing that it produced 76,162 ounces of gold, up 200% from the previous corresponding period. The silver production was also on the higher side, which increased by 4% to 1.9 million ounces. Although, it witnessed a slight decline in zinc, while the lead was at the same level.

Source: Company Presentation

• Robust financial performance: In Q3 2021, the company's revenue climbed by USD 79.2 million to USD 162.6 million. On a year-over-year basis, sales climbed principally owing to gold sales of USD 49.0 million and USD 41.8 million from the Yaramoko and Lindero mines, while adjusted EBITDA increased by 78 percent to USD 75.3 million and adjusted net income increased to USD 22.5 million. Higher output was the driving force behind the improved results.

Source: Company Presentation

• Higher production guidance for FY 2022: The company's management is optimistic about commodity prices and has projected a good production profile. The firm forecasts consolidated silver and gold production of 6.2 to 6.9 million ounces and 244 to 280 thousand ounces, or 326 to 371 thousand gold equivalent ounces, in FY 2022, representing a 7% to 21% growth year over year. The business merger with Roxgold Inc. is projected to result in increased production figures.

Source: Company Presentation 

• Elevated free cash flow: The firm generated significant cash flow from operations during the report period, which climbed by USD 7 million to USD 39.4 million, thanks to solid operational performance. In addition, free cash flow improved to USD 33.8 million in Q3 2020, up from USD 30.1 million in Q3 2020. Higher EBITDA was primarily responsible for the increase, which was powered by increased output as well as contributions from Lindero and Yaramoko.
  

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 3.6x compared to the industry (Basic Material) median of 4.6x, while on NTM Price/Cash Flow multiple the stock is trading at 4.0x compared to 4.2x. This implies that the shares are trading at discount against the industry. The table below reflects the picture.

Source: REFINITIV, Analysis by Kalkine Group 

• Elevated commodity prices to support future earnings: The recent surge in commodity prices is benefiting the company, as we can observe a considerable influence on the precious and industrial metal mining company's balance sheet as a result of this trend. As prices rise, average realization prices for miners rise, resulting in a stronger margin profile, higher free cash flow generation, and balance sheet deleveraging. The company is well positioned to profit from rising underlying commodity prices and end FY2021 in good financial shape.
  

Risks associated with investment: The performance of the company is directly correlated with the gold and other metal prices. Thus, volatility in the commodity price would dampen the company’s income and would take a toll on the overall performance. 

Financial overview of Q3 2021 (In 000 of USD)

Source: Company Filing 

• Robust sales: In Q3 2021, the company reported record sales of USD 162.6 million, increased 95% from the USD 83.4 million reported in the previous corresponding period. An increase in the revenue was mainly due to higher production.

• Higher cost of sales: Cost of sales stood at USD 115.2 million against USD 41.3 million in the previous corresponding period. The company’s cost of sales stood at 70.8% as a % to sales in Q3 2021, compared to 49.5% as a % to sales in Q3 2020.

• Mines operating income increased to USD 47.3 million against USD 42.0 million in the previous corresponding period.

• Smaller operating income: Operating income in Q3 2021 stood at USD 21.7 million, decreased by USD 6.7 million compared to Q3 2020, primarily due to higher expenses, mainly due to acquisition of Roxgold Inc.

• Net profit in the reported period stood much lower at USD 0.2 million compared to USD 13.0 million in pcp. The dented net income was primarily due to lower operating income and USD 10.5 million in transaction costs related to the acquisition of Roxgold Inc.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 20.42% of the total shareholding. Van Eck Associates Corporation and Mirae Asset Global Investments (USA) LLC hold the company's maximum interests at 9.85% and 2.14%, respectively. The company's institutional ownership stood at 35.81%. 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Stock recommendation

The company's strength is demonstrated by its excellent adjusted EBITDA of USD 75.3 million in the third quarter, with margins of 46%, and free cash flow from operations of USD 33.8 million. The Lindero mine in Argentina has continued to increase production, while the Yaramoko mine in Burkina Faso has made its first quarterly contribution, resulting in FVI's record financial results. We anticipate that when the company ramps up its construction work at the Seguela project in Côte d'Ivoire, it will be able to provide a more stable cash flow, which is a critical positive.

Furthermore, the company is expected to achieve healthy revenue growth over the medium term on the back of higher commodity prices, higher production and higher realization prices. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 4.28 as on February 10, 2022. In addition, we have considered Dundee Precious Metals Inc, Endeavour Silver Corp, Silvercorp Metals Inc, etc., as a peer group for the comparison.

One-Year Technical Price Chart (as on February 10, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

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