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

• Healthy production numbers: The company recently announced FY21 production figures from its four operating mines in the Americas and West Africa, revealing that 207,192 ounces of gold was produced, up 274 percent from the previous similar period. Silver saw a minor increase in volume, rising 5% against the pcp to 7,498,701 ounces. The momentum was higher for Zinc and lead also which were up by 4% and 11% respectively.

• Robust financial performance: Revenue increased by USD 79.2 to USD 162.6 million in Q3 2021. An increase in sales was primarily due to gold sales from the Yaramoko mine of USD 49.0 million and Lindero mine of USD 41.8 million, while adjusted EBITDA increased by 78% to USD 75.3 million and adjusted net income increased to USD 22.5 million, all on a year-over-year basis. The improved outcomes were fueled by higher output.

Source: Company Filing 

• Updated 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 healthy growth year over year. The business merger with Roxgold Inc. is projected to result in increased production figures.

• Elevated free cash flow: Due to strong operational performance, the company produced considerable cash flow from operating operations during the report period, which increased by USD 7 million to USD 39.4 million. While the free cash flow also increased to USD 33.8 million against USD 30.1 million in Q3 2020. The gain was mostly attributable to higher EBITDA, which was fueled by a higher output and Lindero and Yaramoko contributions.
  

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 Q3 2021 (In 000 of USD)

Source: Company Filing

• In Q3 2021, the company reported record sales of USD 162.6 million, increased 95% from the USD 83.4 million reported in the previous corresponding period. An increase in the revenue was mainly due to higher production.
• Cost of sales stood at USD 115.2 million against USD 41.3 million in the previous corresponding period. The company’s cost of sales stood at 70.8% as a % to sales in Q3 2021, compared to 49.5% as a % to sales in Q3 2020.
• Mines operating income increased to USD 47.3 million against USD 42.0 million in the previous corresponding period.
• Operating income in Q3 2021 stood at USD 21.7 million, decreased by USD 6.7 million compared to Q3 2020, primarily due to higher expenses, mainly due to acquisition of Roxgold Inc.
• Net profit in the reported period stood much lower at USD 0.2 million compared to USD 13.0 million in pcp. The dented net income was primarily due to lower operating income and USD 10.5 million in transaction costs related to the acquisition of Roxgold Inc.
  

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group 

Stock recommendation

The company's excellent adjusted EBITDA of USD 75.3 million in the third quarter, with margins of 46%, and free cash flow from operations of USD 33.8 million testifies to the business's strength. FVI's record financial results reflect the Lindero mine in Argentina's continued increasing production trend and the Yaramoko mine in Burkina Faso's first quarterly contribution. We believe, as the group ramp up its building activity at the Seguela project in Côte d'Ivoire, would help them in clocking more healthy cash flow, which is a key positive. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 4.36 as on January 26, 2022.

One-Year Technical Price Chart (as on January 26, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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