Fortuna Silver Mines Will Take Off With Rising Commodity Prices
- By Alberto Abaterusso
Gold is down 5.2% so far this year to $1,243.3 per troy ounce as of Friday and declined 0.93% over the last 52 weeks through Dec. 7.
The precious metal last traded over $1,300 in the first quarter. I don't think gold will be boosted enough before the end of the year that it pushes the cumulative average of $1,269.32 an ounce much higher.
Warning! GuruFocus has detected 2 Warning Signs with FSM. Click here to check it out.
The intrinsic value of FSM
Silver is also down 15.1% to $14.485 per troy ounce as of Friday. It fell 9% over the last 52 weeks through Dec. 7.
Several investors who invest in gold and silver are repositioning their portfolios because they believe the Federal Reserve's next interest rate hike, which is expected to occur before the end of the year, should put enough pressure on commodity prices that it causes a reversal in the share price movement of mining stocks.
Investors should start repositioning their portfolios to include Fortuna Silver Mines Inc. (FSM). This miner has attracted my attention because its operations can generate a high return. The company has already beaten the industry over the trailing 12 months of operations, when gold averaged $1,280 an ounce and silver traded for an average of $16.25 per troy ounce.
Fortuna also delivered an earnings before interest, taxes, depreciation and amortization margin of 54%, compared to an industry median of just 23%. GuruFocus has assigned a high profitability and growth rating of 8 out of 10.
I like to use the EBITDA margin when comparing the profitability of one specific company with its industry, because the ratio excludes the impact of management decisions that are influenced by the company's size. These decisions regarding financing and accounting matters usually alter the results of the assessment, so the analysis loses reliability.
Fortuna Silver Mines is a Canadian producer of silver, gold and base metals. The company has mineral deposits in Latin American. It operates the Caylloma mine, which is located in southern Peru, and the San Jose mine, which is situated in the state of Oaxaca in southern Mexico.
The Caylloma mine is an intermediate sulfidation epithermal deposit, which is storing 12,000 ounces of gold and 4.7 million ounces of silver in proven and probable reserves. The company is running underground operations at a rate of 1,430 tons of ore processed per day. For full-year 2018, the mine is guiding production of 800,000 ounces of silver, 25.8 million pounds of lead and 44.8 million pounds of zinc. The production will be made at a total cash cost of $81.3 per ton and an all-in sustaining cost of $5.2 per ounce of silver. The AISC per ounce of silver is net of gold, lead and zinc, which are byproducts. The miner is planning to invest $2.2 million in brownfield explorations at Caylloma in 2018.
The San Jose mine is a high-grade, underground, low sulfidation epithermal vein mineral deposit, where the miner is processing approximately 3,000 tons of mineral per day. For the year, the mine is on track to produce 48,300 ounces of gold and 7.5 million ounces of silver at a cash cost of $61.2 per ton and an AISC of $6.6 per ounce of silver. The San Jose mineral deposit has 40.1 million ounces of silver and 261,000 ounces of gold in proven and probable reserves. Fortuna Silver plans to invest $8.4 million in brownfield explorations at San Jose for the year.
Fortuna Silver Mines is also developing the Lindero gold project in northern Argentina. It is an open-pit, heap leach gold project. The project has a completed feasibility study and already received all environmental and other major permits necessary for development. Lindero has a projected mine life of 13 years, processing 18,750 tons of ore per day. The yellow metal will be produced through heap leaching and poured into dore bars.
Fortuna Silver Mines hopes to produce an average of 96,000 ounces of gold over the entire life of the mine. The production will reach a peak of 138,000 ounces of gold in dore bars in the second year of operations. The Canadian miner will produce the precious metal at an AISC of $802 per ounce. The company will initially invest $239 million for the construction of the mine and then will spend about $105 million for care and maintenance expenses. The internal rate return for the development project is 18%, the payback period is forecasted in 3.6 years and the after-tax net present value is estimated to be $130 million.
Financially speaking, Fortuna Silver Mines' business is based on a solid balance sheet that GuruFocus gave a financial strength rating of 8 out of 10.
The stock is cheap. The closing price of $3.31 on Friday was only 4.7% off the 52-week low of $3.16 and 90% below from the 52-week high of $6.08.
The price-book ratio is 0.90 versus an industry median of 1.74 and the EV-to-EBITDA ratio is 2.64 versus an industry median of 9.3.
The share price declined 27% for the 52 weeks through Dec. 7 and is now below the 200-, 100- and 50-day simple moving average lines.
The 14-day Relative Strength Indicator is 41.19, suggesting the stock has yet reached oversold levels. As a result, additional dips are still possible.
The Peter Lynch chart is also indicating a compelling valuation for Fortuna Silver.
Analysts are predicting the share price will reach $7.75 within the next 52 weeks, mirroring a 135% appreciation from the share price at close on Friday.
In regard to short-term catalysts, the company is experiencing higher silver ore grades at the San Jose Mine and an increase in production at the Caylloma Mine. These operating improvements, along with rising commodity prices, could help to trigger stock appreciation.
The long-term catalyst is represented by the beginning of commercial production at Lindero, which is expected to occur before the end of the third quarter of 2019.
Fortuna Silver Mines has a market capitalization of approximately $524.15 million on the New York Stock Exchange as of Dec. 7.
Disclosure: I have no positions in any securities mentioned in this article.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Signs with FSM. Click here to check it out.
The intrinsic value of FSM
