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:

• Update on Séguéla Project, Côte d'Ivoire: Recently the group released an update on its Sunbird exploration program at the Séguéla gold Project located in Côte d’Ivoire, stating the results of the exploration are 28.2 g/t (grams/ tonne) over 3.5 meters from one of the drill hole and another drilling resulted in 12.6 g/t over 7.7 meters from another drill hole. The results at this stage are very encouraging and the company is moving in the right direction in terms of further exploration of the various other pre-identified prospects.

• Improved financials: For Q1FY22, the company reported an increase in revenue to USD 182.3 million as compared to the revenue of USD 117.8 million in Q1FY21. The sales from gold dore rose to USD 109.85 during the reported period (Q1FY22) vs the sales of USD 36.93 million in the pcp, on account of higher total gold volumes sold which was further assisted by higher realized sales price inQ1FY22. Below is the graphical representation of the overall financial performance of the group across revenue, adjusted EBITDA, and adjusted net income in Q1FY22 as compared to Q1FY21.

Source: Company presentation

• Sequential improvement in the margins: In Q1FY22, the group reported increased revenues, which were on account of the higher quantity of gold sold at a higher realized sales price, which helped the group to improve across the various key profitability margins when compared sequentially.

Source: Refinitiv, Analysis by Kalkine Group

• Strong liquidity: The company stated an increase in its cash flows from operations to USD 33.24 million during Q1FY22 as compared to the cash from the operating activities of USD 21.13 million in pcp. Also, the company’s quick ratio improved to 1.44x during Q1FY22 against the 1.11x in pcp, and the current ratio was at an elevated level of 2.0x in the same period (Q1FY22) against the current ratio of 1.36x in Q1FY21. The strong liquidity helps the company to meet its day-to-day operational expenses along with carrying out the expansionary plans as well.

Risks associated with investment

The group’s major revenue portion is driven by the commodities (silver, gold, etc) and any sustained price decline can impact the revenues severely. Further, the risk of changing laws, decline in demand for commodities, rising interest rates which could slow down the mining operations, and inflationary cost pressure, can also dampen the company’s financials.

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing 

• For Q1FY22, the company witnessed increased revenues to USD 182.3 million versus the revenue of USD 117.8 million in Q1FY21. The total quantity of gold sold in Q1FY22 was 66,426 ounces at an average realized price of USD 1,884 per oz (ounce) when measured against the 33,257 ounces of gold sold at an average realized price of USD 1,764/ oz, in the pcp, which helped the group to attain the higher sales in the reported period.

• The income from the mining operations increased to USD 63.50 million for Q1FY22 as compared to USD 51.31 million in Q1FY21.

• The group reported a marginal increase in net income for Q1FY22 at USD 26.97 million against USD 26.40 million in Q1FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company gave the annual production guidance for FY22 on a strong note, stating the annual production of silver to be between 6.2 million oz to 6.9 million oz, for the gold the annual production is estimated in the range from 244,000 oz to 280,000 oz. The AISC (all-in sustaining cash cost) for the company declined to  USD 17.83/ oz silver equivalent (ag eq) during Q1FY22 when measured against USD 18.50 / oz ag eq in the pcp, which is a key positive. The liquidity of the company stood at elevated levels across cash flows from operating activities, which will help the company to meet operational expenses for the smooth running of the business. The adjusted EBITDA of the company rose to USD 80.3 million in the reported period (Q1FY22) against the adjusted EBITDA of USD 60.8 million in the pcp.  On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is offered at 1.9x as compared to the industry (basic materials) median of 2.0x, stating the stock is undervalued. We have considered Endeavour Silver Corp., Silvercorp Metals Inc., etc. as the peer group for the comparison. 

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock of FVI at the last closing price of CAD 4.30 on June 09, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-conomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 09, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Disclaimer

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