One Small Cap Basic Material Stock to Hold – FVI

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 matrix: Despite the turmoil, the Company maintained its momentum and generated strong revenue, operating income, and net income. Consolidated sales for the twelve months ended December 31, 2021, increased 115% to USD 599.9 million compared to USD 279.0 million for the same period in 2020. Higher output was the driving force behind the improved results, which is remarkable.

Source: Company Filing

• Healthy production numbers: In Q4 2021, the corporation’s production statistics from its four active mines in the Americas and West Africa, revealed 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 

• 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.

Source: Company Presentation

• Elevated cash from operations and free cash flow: In FY 2021, the company achieved higher cash from operations at USD 147.1 million, increased by 57% compared to USD 93.4 million in the pcp, while the free cash flows increased by 23% to USD 97.0 million, compared to USD 78.9 million in the same period. This cash generation is due to strong operational performance and effective cost control measures.

 Financial overview of FY 2021 (In 000 of USD)

Source: Company Filing

• In FY 2021, the company reported record sales of USD 599.8 million, increased 115% from the USD 278.9 million reported in the previous corresponding period. The increase was driven by the contribution of Yaramoko and Lindero as well as higher silver prices in 2021 compared to 2020.

• Cost of sales increased to USD 394.3 million against USD 168.7 million in the previous corresponding period. The company’s cost of sales stood at 65.7% as a % of sales in FY 2021, compared to 60.4% as a % of sales in FY 2020.

• Mines operating income increased to USD 205.4 million against USD 110.2 million in the previous corresponding period.

• Operating income in the reported period of FY 2021, increased to USD 136.8 million, against USD 57.2 million in pcp, primarily due to higher other expenses, mainly due to acquisition of Roxgold Inc.

• Net profit in FY 2021 stood much higher at USD 59.3 million compared to USD 21.5 million in pcp.

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

Analysis by Kalkine Group

Stock recommendation 

The company's strength is demonstrated by its excellent revenue of USD 599.8 million and robust jump in its net income at USD 59.3 in FY 2021, with free cash flow from operations of USD 97.0 million, which increased 23% against pcp. Moreover, the group clocked higher production numbers in Q4 regarding Gold and silver.

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 "Hold" rating on the stock at the last closing price of CAD 4.80 as on March 25, 2022. Additionally, 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 March 25, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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