Fortuna Silver Mines Inc

Fortuna Silver Mines Inc (TSX: FVI) is a growth-focused Canadian precious metals mining company engaged in THE production of silver, gold, zinc, and lead.

Investment Rationale

Available at a Discounted Valuation vs Peers: From the TTM valuation standpoint, FVI shares are available at a discount to its peers, with the TTM P/E multiple of FVI standing at 11.36x whereas the peer median was 19.05x, indicating a discount of 40%. FVI's TTM P/CF stood at 8.12x, compared to the industry median of 12.58x (a discounted valuation of 35%). Hence, the stock looks attractive from a valuation standpoint.

Source: REFINITIV, Analysis by Kalkine Group

Strong Production Growth in Q3FY21: During the third quarter under consideration, the company reported that its consolidated gold production surged by 411% against the comparable period of the previous financial year. Zinc and lead production improved by 21% and 23%, respectively, on a YoY basis. However, silver production was down 20% against the same period of the previous financial year.

Source: Company Presentation

Attractive Near-Term Free Cash Flow: Given the increased production, firm underlying commodities prices and strengthened company balance sheet, we believe this will bolster FVI's cash flows in the upcoming quarter.

Risks Associated with Investment

The company is exposed to various risks, including adverse movement in the underlying commodity prices, the resurgence of COVID-19 cases that can hamper production in the short-run, supply chain-related disruptions, and others.

Financial Highlights: Q3FY21

Source: Company report

• During the quarter under consideration, the company recorded sales of USD 162.6 million, an increase of 95% from USD 83.4 million reported in the comparable quarter of the previous financial year, primarily because of additional gold sales from the Yaramoko mine of USD 49.0 million and Lindero mine of USD 41.8 million.
• Free cash flow also improved during the quarter under consideration, from USD 30.1 million in Q3FY20 to USD 33.8 million in Q3FY21.
• In Q3FY21, its mine operating income amounted to USD 47.3 million, an increase of USD 5.2 million from USD 42.1 million reported in Q3FY20.
• As of September 30, 2021, the company had cash and cash equivalents of USD 135.8 million.

Valuation Methodology (illustrative): Price to Cash Flow-based valuation

Note: Premium (discount) is based on our assessment of the company's growth drivers, economic moat, competitive advantage, stock's current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

The company boasts of solid fundamentals, with a robust balance sheet and reliable risk protection metrics. In addition, elevated underlying commodities prices will further bolster its balance sheet in the upcoming quarters. Moreover, at the current price, FVI shares are available at a significant discount to its peers. Hence, based on the above rationale and valuation done, we recommend a "Buy" rating on FVI stock at the closing price of CAD 4.62 (as on November 25, 2021).

1-Year Price Chart (as on November 25, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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