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 Updates:

• Reported Strong Q1FY22 production: For Q1FY22, the company posted its gold production of 66,800 ounces, reflecting a growth of 93% on y-o-y basis, driven by added contribution from the Yaramoko Mine, acquired on July 2021. The company also reported higher gold production of 30,068 oz from Lindero mine, increased from 22,332 oz of gold in pcp. On the other hand, Silver production was down by 13% on y-o-y basis to 1,670,128 ounces.

• Growth in Mineral reserves: The group recently reported its Combined Proven and Probable Mineral Reserves, wherein it reported containing 3.3 Moz of gold and 25.9 Moz of silver, representing a y-o-y increase of 81% and y-o-y decrease of 10%, respectively. The combined Inferred Mineral Resources were reported at 1.0 Moz of gold and 26.3 Moz of silver, respectively, reflecting a 82% y-o-y growth and a 8% y-o-y decline, respectively. An increase in gold reserves is likely to support the company’s future operations.

• Improved Margins: In FY21, the company reported its EBITDA and operating margin of 45.7% and 20.4%, respectively, which is higher than the industry median of 39% and 19.5%, respectively. This indicates an improved cost structure on an operational level.

Risk associated with the investment:

The company’s operations are subjected to international commodity prices, and price volatility would ruin the overall performance.

FY21 Income Statement Highlights (Source: Company Report)

• FVI announced its full year results, wherein the company posted USD 599.8 million, as compared to USD 278.9 million in FY20. The growth was driven by solid contribution from both Gold and silver segment due to strong demand dynamics and elevated realization prices.
• Mine operating income surged to USD 205.4 million in FY21, as compared to USD 110.2 million in FY20, thanks to the elevated revenue, partially offset by higher cost of sales.
• The period was marked by higher general & administration cost and an increase in other expenses, partially offset by lower foreign exchange loss. Operating income jumped to USD 136.8 million in FY21 from USD 57.2 million in FY20, supported by a higher gross profit.
• The group reported an increase in net finance costs and an inclusion of Roxgold transaction costs along with a higher income tax expense. Despite rising expenses, the company managed to report a net income of USD 59.3 million, higher than USD 21.5 million in FY20.

 Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group

Stock Recommendation:

The company reported a solid growth in its gold production in Q1FY22, supported by higher production from Lindero mine. The management expects 244 to 280 Koz of gold, while silver production is expected 6.2 to 6.9 million ounces.  We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Silvercorp Metals Inc, Ero Copper Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of FVI at the last closing price of CAD 5.32 on April 20, 2022.

One-Year Technical Price Chart (as on April 20, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.