Fortuna Silver Mines (TSX: FVI) Inc is a Canada-based precious metals producer. The company involves in 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. The company operates the Caylloma silver, lead, and zinc mine in southern Peru and the San Jose silver, gold mine in southern Mexico, and is developing the Lindero gold Project in northern Argentina. Its operating segment includes Bateas, Cuzcatlan and Mansfield. The company generates maximum revenue from the Cuzcatlan segment.

Key highlights: 

Business merger agreement:   On 26 April 2021, Fortuna and Roxgold Inc. (TSX: ROXG) announced their deal to enter into a definitive agreement. According to this deal, Fortuna would acquire all the issued and outstanding securities of Roxgold as per the plan of arrangement.

Transaction details: According to the terms of transaction, Roxgold shareholders would receive 0.283 common shares of Fortuna and CAD 0.001 in cash for each Roxgold common share held. After completion of the transaction, shareholders of Fortuna and Roxgold would own approximately 64.3% and 35.7% of the pro forma company, respectively. Additionally, the agreement holds reciprocal CAD 40 million termination fee payable to Fortuna or Roxgold under certain circumstances, other customary circumstances, reciprocal expense reimbursement of USD 3 million. On 23 April 2021, exchange ratio inferred was CAD 2.73 per Roxgold common share over the Fortuna common shares reported on TSX, showcasing 42.1% premium at the closing price of Roxgold.  The transaction estimated the worth of CAD 1.1 billion in the money equity value.

Key Highlights of the Transaction:

High growth opportunities: From this merger, FVI is optimistic for organic and inorganic growth opportunities. Also, company aims to emerge as a global leader in the gold and silver production. In lieu of this, annual gold equivalent combined production is anticipated~ 450,000 ounces at AISC of approximately USD 950 per gold equivalent ounce.

Skilled Management: The merger brings two highly experienced management teams to work together; hence, targeting higher value creation in Americas and West Africa.

Portfolio Diversification: FVI gained diversified complementary portfolio of four different operating assets and an ongoing project from this merger. Hence, anticipating the annual proforma EBITDA of over USD500 million during 2021E to 2023E

Robust exploration pipeline: The ongoing gold exploration project Boussoura expected to be commissioned in the second half of 2021, in addition company has more than 20 satellites at Seguela and an early-stage exploration asset situated in Côte d’Ivoire and Mexico. This would bring attractive profit and healthy free cash flow in future.

Strong Balance Sheet and higher liquidity: The transaction deal is expecting lower cost of capital and stronger balance sheet to fund Séguéla construction and Boussoura’s development and flexibility to pursue other organic and external growth opportunities.

Benefits of the deal:  Fortuna Shareholders have several benefits from this deal as follows:

• Accretive transaction on financial and production metrics.
• Addition of West African mining team provides Fortuna key expertise in a new jurisdiction.
• Yaramoko and Séguéla are low-cost assets with low technical complexity contributing meaningfully to growth while reducing overall AISC
• Séguéla 36,300-hectare concession has significant near-term exploration potential.
• Extensive portfolio of exploration properties covering over 286,300 hectares in the prolific Birimian gold province provides Fortuna a robust exploration pipeline which includes the high-grade Boussoura gold Project.
• Preserve very strong balance sheet.

Risks associated with investment

The Company is exposed to metal price risk with respect to the sales of silver, gold, lead, and zinc concentrates. Also, the company’s operation is related to a significant amount of risk from global financial markets. Moreover, the company might witness volatility in currency mainly Canadian dollars, Peruvian soles, Argentine peso and Mexican peso which might impact the group’s costs of mining. 

Stock recommendation

Upon completion of the transaction, the combined company would be having a team of experienced mining and business leaders along with diversified high performing assets. Additionally, the outlook of proforma EBITDA is quite promising from the ongoing projects. Moreover, post transaction, management is anticipating strong balance sheet with higher liquidity and enhanced capital market presence. Though, the stock corrected ~18% in the last trading session, we expect the merger to have positive impact for FVI in the long term. Hence, considering the aforementioned facts, we recommend a “Hold” rating on FVI at the closing price of CAD 7.90 on April 26, 2021.

1-Year Price Chart (as on April 26, 2021). Source: Refinitiv (Thomson Reuters)

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