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. 

Key highlights

• Robust financial performance: In Q1 2022, the company's revenue climbed by USD 65.4 million to USD 182.3 million. On a year-over-year basis, sales climbed principally owing to gold sales of 66.4 Koz at higher average realization price, which increased by 7%. Adjusted EBITDA increased by 32% to USD 80.3 million and adjusted net income increased to USD 33.4 million. Higher output was the driving force behind the improved results.

• Mix bag of production numbers: The corporation recently released its first-quarter 2022, production statistics from its four active mines in the Americas and West Africa, revealing that it produced 66,800 ounces of gold, up 93% from the previous corresponding period. The silver production fell marginally to 1.7 million ounces, while zinc production declined by 10% to 10.8 Mlbs. However, the company witnessed an upside of 12% in the production of lead.

• 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 369 to 420 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.

• Strong cash flows: The firm generated significant cash flow from operations during the report period, which climbed by USD 12.1 million to USD 33.2 million, thanks to solid operational performance. The free cash flow stood at USD 9.6 million in Q1 2022, which declined from USD 11.8 million in Q1 2021. The decline in free cash flows was driven by negative changes in working capital.

• 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 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 FY2022 in good financial shape.

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 3.0x compared to the industry (Basic Material) median of 4.2x, while on NTM Price/Cash Flow multiple the stock is trading at 3.6x compared to 3.9x. This implies that the shares are trading at discount against the industry. The table below reflects the picture.

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 Q1 2022 (In 000 of USD)

Source: Company Filing 

• Robust sales: In Q1 2022, the company reported record sales of USD 182.3 million, increased 55% from the USD 117.8 million reported in the previous corresponding period. An increase in the revenue was mainly due to higher production and sales of gold at higher average realization price.

• Higher cost of sales: Cost of sales stood at USD 118.8 million in Q1 2022, against USD 66.5 million in the previous corresponding period. The company’s cost of sales increased to 65.2% as a % to sales in Q1 2022, compared to 56.5% as a % to sales in Q1 2021.

• Mines operating income increased to USD 63.5 million in Q1 2022, against USD 51.3 million in the previous corresponding period.

• Steady operating income: Operating income in Q1 2022 stood at USD 40.7 million, nominally increased compared to USD 40.3 million in Q1 2021. This result was primarily due to an increase in general and administrative expenses, and due to an acquisition of Roxgold Inc.

• Net profit in the reported period stood stagnant at USD 26.9 million compared to USD 26.4 million in pcp.  Net income was impacted by a loss on financial derivatives of USD 4.1 million in the reported period compared to a USD 1.7 million gain in the same period of 2021. 
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 22.11% of the total shareholding. Van Eck Associates Corporation and Mirae Asset Global Investments (USA) LLC hold the company's maximum interests at 10.50% and 2.23%, respectively. The company's institutional ownership stood at 36.10%.

Valuation Methodology (Illustrative): EV to Sales based

Stock recommendation

The company's net income of USD 27.0 million in the quarter and adjusted EBITDA of USD 80.3 million with margins of 44% testified to the mines' good operational performance. Furthermore, the company is running a flourishing business in a gold price environment of USD 1,800 per ounce and is confident in the resilience of its assets across the precious metal cycle.

The firm anticipates increased production levels for FY 2022, along this it is maintaining a robust balance sheet with low debt leverage and a good liquidity position of USD 150.4 million, which is a key advantage. Furthermore, the business intends to deliver strong revenue growth in the medium term as a result of increased commodity prices, higher production, and better 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 4.35 as on May 19, 2022. In addition, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 19, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on May 20, 2022, price as well.

Technical Analysis Summary

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