More information pertaining to one of our top holdings…
“Fortuna Silver Mines (NYSE: FSM)
Fortuna Silver Mines is an intermediate gold, silver, and base-metal producer focused on assets in Latin America.
Fortuna has a current market cap of a little more than $1 billion. In 2015, the company generated $157 million in revenue. As of March 31, it holds $96 million in cash and has only $42 million in total debt. In 2015, gold and silver production totaled 6.6 million ounces and 40,000 ounces, respectively.
The company currently has two operating mines: the Caylloma silver mine in Peru and the San Jose silver and gold mine in Mexico. The Caylloma mine is the smaller of the two and provided about 25% of the company’s 2015 silver production and only 3% of its gold production. Current reserves and resources give the mine a lifespan of about six years, with only modest increases in silver production expected.
The San Jose Mine offers significant growth potential for Fortuna. The company expects the mine to produce 8 million ounces of silver in 2019 – up from 4.9 million ounces in 2015. Gold production forecasts grow to 53,000 ounces in 2019 – up from 38,000 in 2015.
The company forecasts 2016 production for the combined mines at 7 million ounces of silver and 42,000 ounces of gold.
And Fortuna is growing… It recently acquired a junior miner and is pursuing other opportunities throughout the Americas.
Last month, the company completed its acquisition of Goldrock Mines. Goldrock’s principal asset is the 100%-owned open-pit Lindero Project in Argentina. Goldrock recently completed a feasibility study and received the necessary environmental permit to begin development of the mine. The acquisition increases Fortuna’s reserve base by more than 200%.
And it appears that Fortuna got a good deal with Goldrock. Under the terms of the agreement, Fortuna will offer 0.1331 shares of its stock to for each share of Goldrock. The total equity value of the deal is approximately $100 million. Goldrock’s recent feasibility study on Lindero indicated a net present value (NPV) of $152 million at a gold price of $1,200 per ounce. Gold trades for more than $1,350 an ounce today.
Goldrock shareholders fared well, too. The offer represents a 58% premium to the close of trading on previous day and an 85% premium over the previous 20-day average.
Terms of the deal will enable Fortuna to maintain a strong balance sheet with zero net debt. The company expects to use the increased cash flow from its San Jose mine to fund the majority of the construction costs for Lindero.
Fortuna expects production to begin at Lindero in 2018. The mine has a projected lifespan of 12 years, with an average annual production rate near 100,000 ounces of gold per year. However, Fortuna expects to produce about 128,000 ounces annually for the first three years. All-in sustaining cash costs (AISC) – what it costs per ounce to produce the precious metal – are projected to be less than $750 per ounce for the life of the mine.
The political landscape in Argentina has recently shifted. Since being elected last fall, President Mauricio Macri has implemented several policy changes to make the country a more business-friendly environment. Fortuna looked at the Lindero project back in 2010, but passed because of its political uncertainty. The Salta Province (where Lindero is located) has a young, energetic governor who will be in control until 2019. He is a big promoter of investments in the region’s natural resources.
The acquisition also offers additional exploration opportunities with the Alisaro site near Lindero. Exploration to date has been limited, but Fortuna sees it as an attractive target.
Fortuna recently released its production highlights for the second quarter 2016. The results were better than expected. Silver and gold production for the first half of the year totaled 3.2 million ounces and 18,629 ounces, respectively – increases of 7% and 10%, respectively, from the company’s midyear forecast.
We are comfortable with Fortuna’s management team. Jorge Ganoza, the company’s president and chief executive officer, is a fourth-generation miner from a Peruvian family that has owned and operated several mines in Peru and Panama. Ganoza co-founded Fortuna in 2004 after working for several Canadian junior miners with assets in Central and South America.”
Since putting Fortuna in our trading account Friday, April 8, just over 4 months ago, we’ve a 113% gain in it so far!
Here’s to your accumulation of real wealth!
Harold F Crowell