Fortuna Silver Mines Inc.

Fortuna Silver Mines Inc. (TSX: FVI) is a Canada-based precious metals producer, while 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:

• Encouraging Q2 Production Numbers: The group reported strong production in its second quarter of FY21. Silver production jumped to 1,892,822 oz, from 1,273,922 oz in Q2FY20. The growth was supported by higher production from its San Jose mine, located in Mexico. On the other hand, the company reported four-fold growth on y-o-y basis in its gold production to 31,048 oz. Lead and zinc production stood at 8,143,876 oz and 11,763,866 oz, respectively, higher than 6,777,010 oz and 10,976,816 oz in Q2FY20.

• Updated FY21 Guidance: The company updated its FY21 production outlook, wherein the company expects consolidated silver and gold production of 6.8 to 7.6 moz and 194 to 223 moz, respectively, or 283 to 323 thousand gold equivalent ounces. Gold production includes a full contribution from Yaramoko Mine in Burkina Faso during H2FY21.

FY21 Production Guidance (Source: Company Report)

• Completed Rox Gold Acquisition: On July 02, 2021, the company completed the acquisition of Roxgold Inc., which is expected to support the company’s operation with a robust exploration pipeline and expanded presence in the Americas and West Africa. Moreover, the group would be benefitted from a low-cost structure, and this would support the overall margins and profitability.

Q1FY21 Financial Highlights

• FVI announced its quarterly result, wherein the company posted a tremendous surge in its topline at USD 117.822 million, as compared to USD 47.541 million in the previous corresponding period (pcp). The growth was aided by a tremendous surge in income from all its segments.
• Mine operating income jumped to USD 51.311 million, from USD 7.464 million in pcp, while the cost of sales increased to USD 66.511 million, as compared to USD 40.077 million in pcp.
• Operating income stood at USD 40.372 million, significantly higher than USD 1.839 million in Q1FY20. The quarter was marked by higher general and administration, coupled with an increase in the foreign exchange loss.
• The group reported a net profit of USD 26.402 million, as compared to a net loss of USD 4.498 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company

Risk: The company’s topline is correlated to the prices of underlying commodity prices, and price volatility would affect the overall performance.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendation:

The company reported a solid Q1FY21 performance, and its Q2FY21 production are encouraging. The recent merger with Roxgold Inc. would bring improved business prospects for the company in the coming quarters. Moreover, the addition of Yaramoko’s production would support the company’s overall production in FY21, while it represents almost 30% of the total production. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Dundee Precious Metals Inc, SSR Mining Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 5.57 on July 22, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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