Fortuna Silver Mines in the Precious Metal Market | Company Overview & CEO Profile
Fortuna Silver Mines Inc. (NYSE:FSM, FVI.TO, F4S.F, F4S.DU, F4S.SG) is a Canadian company that specializes in the exploration, mining, and processing of precious metals, silver and gold, as well as zinc and lead. The company conducts its operations primarily in Latin America, with assets located in Peru, Mexico, and Argentina. Fortuna Silver Mines was established in 2005 and is headquartered in the Canadian city of Vancouver. The company launched mining operations 16 years ago, after the acquisition of the Caylloma Mine. By 2009, Fortuna Silver Mines acquired a 100% share in the silver-gold San Jose Project in Mexico and two years laters, the mine started commercial production at 1,000 tonnes per day.
In 2011, Fortuna Silver Mines stock began trading on the New York Stock Exchange, a year after it was listed on the Toronto Stock Exchange. In 2016, the company acquired the Lindero Gold Project in Argentina as well as increasing production at Jose Mine and Caylloma Mine to 3,000 and 1,430 tonnes per day, respectively. Last year, Fortuna Silver Mines expanded its footprint into West Africa by purchasing assets in Burkina Faso and Côte d'Ivoire.
At present, Fortuna Silver Mines has four operating mines and one under construction. All these mines are operated by local subsidiaries of Fortuna Silver Mines. In March 2022, the company published updated mineral reserves estimates, according to which combined proven and probable mineral reserves of its mines were 3.3 million ounces of gold and 25.9 million ounces of silver. This represents a year-over-year increase of 81% in gold reserves and a 10-percent decrease in silver reserves.
Assets Owned by Fortuna Silver Mines
The company operates Caylloma Mine in the Peruvian city of Arequipa, Lindero Mine in Salta, Argentina, San Jose Mine located in the Mexican state of Oaxaca, and the Yaramoko Mine in Burkina Faso, a country in West Africa. The fifth mine, the Séguéla Gold Project situated in Côte d'Ivoire, is currently under construction and is expected to be operational in the middle of 2023.
The largest asset owned by Fortuna Silver Mines is the underground cut-and-fill San Jose Mine in Mexico. The mine occupies an area of 48,000 hectares and accounts for the majority of the company’s silver production. As of 2021, the San Jose Mine produced 6.4 million ounces of silver and 39,400 ounces of gold. However, it has a short mine life of 3 years, as of December 2021. The commercial mining activities at San Jose Mine started in September 2011. The company invested heavily in the asset and managed to significantly increase its production capacity.
The Caylloma Mine, which is operated by Fortuna Silver Mines’ subsidiary in Peru, produces silver, gold, lead, and zinc. This is an underground mine with an area of 36,000 hectares and a mine life of 6 years, based on 2021 reserves. The Caylloma District, which is located in southwestern Peru, has been the site of silver production for more than 500 years. In 2005, Fortuna Silver Mines purchased the Caylloma Mine, modernized the processing facility, and launched operations there in 2006. Ten years later, the company increased the production capacity of the plant 1,430 tonnes per day. As of 2021, over a million ounces of silver and six thousand ounces of gold were produced by the mine. The production of lead and zinc amounted to 33 million pounds and 47 million pounds, respectively.
In Argentina, the company owns the Lindero Mine with an area of 3,500 hectares. Located in Salta, a province in the northwest of the country, Lindero is the largest gold-producing mine of the company. This open-pit mine has an annual production of over 104 thousand ounces of gold and the pit life of 13 years, based on the 2021 data. The also has the largest proven and probable mineral reserves compared to other assets owned by Fortuna Silver Mines. The operator of the mine is Mansfield Minera S.A., a subsidiary of Fortuna Silver Mines. After acquiring the mine in 2016, Fortuna Silver Mines started the first gold pour in 2020.
The Yaramoko Mine with an area of 23,000 hectares is situated in Burkina Faso, a country in West Africa. This gold-producing asset includes two underground mines with high-grade gold deposits. Yaramoko began to contribute to the company’s gold production in the summer of 2021. Over the last six months of 2021, the mines produced more than 57 thousand ounces of gold — nearly half the amount produced by Lindero Mine. Unlike the other three assets, the Yaramoko mine is not fully owned by Fortuna Silver Mines. The government of Burkina Faso holds a 10-percent stake in the mine.
The fifth mine, the Séguéla Gold Project in Côte d'Ivoire, is uncer construction and is scheduled to be put in operation in 2023. This open-pit mine with an area of 62,000 hectares contains 1 million ounces of gold reserves. With the mine life of 9 years, the Séguéla Gold Project will produce 130,000 ounces of gold annually during the initial 6 years. Up to date, the company has invested over $173 million in the asset.
Speaking about the company’s mineral reserves and its prospects, Senior Vice President of Fortuna Silver Mines Eric Chapman has said that adding the Séguéla Gold Project and Yaramoko Mine to the company’s portfolio has considerably increased its resources. Moreover, the exploration and drilling activities conducted by Fortuna Silver Mines helped to identify new inferred resources and expand reserves at Séguéla and Caylloma mines. Mr. Chapman has also noted that this year, the exploration programs will continue at Yaramoko, Lindero, and San Jose projects.
Fortuna Silver Mines & the Global Precious Metals Market
Following the growth period from 2017 to 2019, the global precious metals market experienced a decline in 2020 due to the negative demand caused by the COVID-19 pandemic. In 2021, the market was estimated at nearly $193 billion and is expected to grow at a rate of 5.3% within the next five years. According to analysts’ estimates, the global market for precious metals will reach $254.3 billion by 2027. The major growth driver is the increase in disposable incomes of individuals. The important role of jewelry in wedding ceremonies in Asian countries contributes to the market growth as well. Besides, electronics and automotive industries increase their demand for precious metals. For example, solar panel manufacturing accounts for more than 10% of total demand for silver.
The global precious metals market has three main segments: platinum, gold, and silver. Gold is the dominant segment in the market as this metal is widely used not only in jewelry but also as an investment. The largest consumers of gold are India and China, which is related to the rising spending capacity of individuals in these countries. The silver segment is forecast to demonstrate considerable growth in the coming years, primarily because of an increase in demand from the electronics industry. Another advantage of silver is that it is viewed as a lower-cost alternative to gold in the jewelry market.
Fortuna Silver Mines is a diversified company that produces both gold and silver. However, it is not among the largest miners in either of the segments.
Competitors
As of 2021, the world's largest silver mining company is the Mexican miner Fresnillo plc (FRES.L) that produced 50 million ounces of silver.
The second-largest is KGHM Polska Miedz S.A. (KGH.WA) with an output of 43.9 million ounces if silver, followed by Glencore plc (GLNCY, 31.5 million ounces), Newmont Corporation (NEM, 31.4 million), Hindustan Zinc Limited (HINDZINC.NS, 22 million ounces), Polymetal International plc (POLY.L, 20 million ounces), Pan American Silver Corp. (PAAS, 19.2 million ounces), and Southern Copper Corporation (SCCO, 19 million ounces).
Fortuna Silver Mines, which reported an output of 7.5 million ounces of silver in 2021, is not on the list of the 20 top silver producers in the world.
In the gold-mining industry, the largest producer is Newmont (NEM) with an output of 5.9 million ounces, followed by Barrick Gold Corporation (GOLD, 4.4 million ounces), Polyus (PLZL.ME, 2.7 million ounces), AngloGold Ashanti (AU, 2.4 million ounces), Gold Fields Limited (GFI, 2,3 million ounces), Agnico Eagle Mines (AEM, 2 million ounces), Kinross Gold (KGC, 2 million ounces), Newcrest Mining (NCM.AX 1.8 million ounces), Harmony Gold Mining Company (HMY, 1.5 million ounces), and Endeavour Mining plc (EDV.TO).
Fortuna Silver Mines is not on this list of the 10 largest gold mining companies as it produced 207,192 ounces of gold in 2021.
What distinguishes Fortuna from other giants
However, what favorably distinguishes Fortuna Silver Mines from these gold-mining giants is the pace of production growth. Last year, Fortuna Silver Mines reported a 274-percent increase in gold output over 2020. For comparison, the U.S.-based Newmont’s gold production increased only 1% as the company had to reduce some operations. Canada’s Barrick Gold, Russia’s Polyus, and South Africa’s AngloGold Ashanti even reported a decline in gold output of 7%, 2%, and 12%, respectively.
Four other companies saw an increase in gold production, with the highest growth of 69% reported by Endeavour Mining. Furthermore, Fortuna Silver Mines saw growth in all of its four segments. In addition to an impressive increase in gold production, the company reported a five-percent growth in silver output as compared to 2020. Lead production was up by 11% to 32.9 million pounds, while zinc output rose by 4% to 47.5 million pounds.
For 2021, the sales of silver and gold represented around 88% of the company’s revenue while zinc and lead accounted for the remaining 12%. As the company noted in its 2021 Annual Report, gold and silver prices are, therefore, have the greatest impact on the profitability of Fortuna Silver Mines.
Since the beginning of 2022, gold prices surged by 18% to $2,050 per ounce in March. Although the prices dropped to $1,845 by the end of May, they are still expected to increase, partly due to existing political uncertainties. In particular, Goldman Sachs’ analysts believe that gold prices will increase another 25% to $2,500 an ounce by the end of this year. Moreover, since the dollar index started to decline in the middle of May, bullion is becoming less expensive for investors holding other currencies.
Silver prices have been generally volatile over the past year. That said, 2021 experienced a deficit in silver as a metal used in the electronic industry and green technologies. Demand was outpacing supply, and this situation will continue into 2022. Nevertheless, analysts predict that silver prices will fall despite the record-high demand. They note that the deficit is relatively small compared to the total demand while silver supply is growing at the highest rate since 2013. “As such, the silver price is expected to ease back, although robust demand should lend strong price support, which will limit the downside,” added the analysts.
Fortuna Silver Mines’ Financial Performance
Revenues of Fortuna Silver Mines have been generally rising from $50 million in 2009 to $260 million in 2017. The next two years, the company reported a slight decline in sales and in 2020, revenue growth resumed and continued into 2021-2022. Last year, Fortuna Silver Mines delivered impressive financial results. Sales were up by 115% year-over-year to $599.9 million, operating income increased by 139% to $136.9 million, net income rose by 100% to $59.4 million or $0.24 per share, adjusted net income increased 216% year-over-year to $100.6 million, while adjusted EBITDA was up by 149% to $280.7 million. Free cash flow from ongoing operations rose by 23% to $97 million. The company highlighted that strong EBITDA and cash flow were largely due to contributions by Yaramoko and Lindero mines.
By type of concentrate, gold has become the largest material source of the company’s revenue. Its contribution to the total revenue has increased from 25% in 2020 to 59% in 2021. The percentage of silver, on the contrary, decreased from 52% in 2020 to 29% in 2021. Lead and zinc accounted for 5% and 7% in 2021 as compared to 7% and 9% a year earlier. Currently, the company largely depends on the operation of its San Jose Mine, Yaramoko Mine, and the Lindero Mine as its primary source of future revenues.
In its annual guidance for 2022, the company expects its gold production to increase by 15%-26% to 244-280 thousand ounces, while silver output will decrease by 8%-17% to 6.2-6.9 million ounces. The production of lead will remain approximately at the same level, while zinc output will slightly decrease to 41-45 million ounces.
“At the end of the year, our liquidity position remained strong at $187 million, while keeping our debt to EBITDA ratio at a low 0.2. The company remains well-funded to meet all its capital projects for the year”, the company's CEO Jorge Ganoza said during an earnings call in March. “On the exploration front, we continue to exhibit the resource growth potential of the Séguéla camp with the recent announcement of the 350,000 ounces inferred maiden resource at Sunbird. Sunbird is a recent discovery located only 2 kilometers from the Séguéla mill site. We have high expectations with respect to the opportunities to continue expanding the resources at Séguéla where exploration drilling remains a big area focus for this year”.
In the first quarter of 2022, gold production increased by 93% to 66,800 ounces, of which 30,000 ounces were produced at the Lindero Mine and 28,200 at the Yaramoko Mine. Silver production fell by 13% to nearly 1.7 million ounces. Sales increased by 50% year-over-year to $182.3 million, with precious metals making the largest contribution to the revenue. Gold accounted for 71% of the total revenue, followed by silver (19%), zinc (6%), and lead (4%).
Adjusted net income increased by 21% to $33.4 million, while adjusted EBITDA grew by 32% to $80.3 million. Additionally, Fortuna Silver Mines The company announced a program for the repurchase of up to 5% of shares. On the other hand, EPS and free cash flow from ongoing operations declined by 36% and 19%, respectively. The company notes that free cash flow was affected by taxes paid and negative changes in working capital. The decrease in margins was due to high administration spendings and lower margins at the San Jose mine. A significant factor is the rise in prices for fuel, steel, and explosives. In particular, the consumption of diesel at the Lindero mine accounted for up to 18% of costs.
Fortuna Silver Mines stock has underperformed the market, falling 42% on a one-year basis. One of the reasons is issues with obtaining an environmental permit for the San Jose mine. The company filed a petition to extend the permit for another 10 years, but Mexico’s Environment Ministry said it would first carry out consultations with local communities. The problem was that local activists protested against construction activities, which they believed to be unauthorized. If the permit had not been extended, the mine would have faced the threat of closure. Fortuna Silver Mines appealed the decision of the Mexican authorities and in December, obtained a 12-year extension of the environmental impact authorization at the San Jose Mine.
Apart from the issues with the San Jose Mine, which have been successfully resolved, the company’s stock price is heavily dependent on the prices for gold and silver. Seeking Alpha’s analysts say that if prices for these precious metals rise, the FSM stock may reach $4.50 per share on its way to $5.50. Also, the company’s shift to gold production may positively affect the stock price. “Fortuna Silver Mining should change its business name to Fortuna Gold Mining because its primary metal is gold, not silver,” writes an analyst with Seeking Alpha. “It may play a role in the market perception. Thus, the focus should be on the gold price, not the silver price, which has tended to underperform since July last year”.
Fortuna Silver Mines’ market capitalization has been in a decline over the past two years and is now estimated at around $1 billion. The stock currently trades at around $3.3, below the lowest price target of $3.8 given by analysts. The average rating for the stock is to “hold”, with a median price target of $4.6, which is 35% higher than the current price of the company’s shares.
On May 13th, BMO Capital Markets, an investment banking subsidiary of Canadian Bank of Montreal, dropped their price target for the stock from C$7.00 (USD 5.5) to C$6.75 (USD 5.3). A month earlier, National Bank Financial increased their target price from C$5.50 (USD 4.3) to C$6.50 (USD 5.1). On May 12th, Scotiabank set a price target of US$5.00, adding that Fortuna Silver Mines’s first-quarter adjusted EPS slightly missed the consensus estimate of $0.10, which was associated with the higher-than-expected costs.
Leadership & Shareholders of Fortuna Silver Mines
The largest shareholder in Fortuna Silver Mines is the investment company Van Eck Associates Corporation with headquarters in New York that holds a 10-percent stake. The second-largest institutional shareholder is another New York-based company, Global X Management Co. LLC, which owns 2.2% of shares. Jorge Ganoza (52 years old), a c-founder founder, President, and CEO of Fortuna Silver Mines, is the largest insider shareholder who owns around 2 million or less than 1% of the company’s shares. He is followed by Luis Dario Ganoza with over 688,000 shares. Luis Dario, who holds the position of Chief Financial Officer, is Jorge’s brother.
Their father, Jorge Ganoza Acairdi, is a fourth-generation Peruvian miner. In the past, he served as Mine Chief Operating Officer at Fortuna Silver Mines. “The company has often touted its family-run roots and its native insight for navigating the Latin American mining world,” says the article published by Vancouver Sun. The other co-founder of Fortuna Silver Mines, Simon Ridgway, stepped down as director and Chair of the Board in 2021. According to Ganoza, Ridgway will continue to work with the company in a special advisory role.
The company’s CEO Jorge Ganoza is a geological engineer with rich experience. A graduate of the New Mexico Institute of Mining and Technology, he has been engaged in Latin America’s exploration and mining projects for more than 25 years. Before founding Fortuna Silver Mines, Jorge Ganoza worked at various Canada-based mining companies that carried out operations in Latin America. From 2017 to 2020, he was Director of Ferreycorp, a Peruvian conglomerate that imports and sells construction and mining equipment.
His brother Luis Dario Ganoza also has extensive experience in the mining industry. Before his appointment as Chief Financial Officer at Fortuna Silver Mines in 2006, he served as Treasurer for Minera Atacocha, which was among the largest public miners in Peru. Luis Dario Ganoza holds a Bachelor of Science degree in Mining Engineering from the Peruvian National University of Engineering and obtained his Master of Science in Finance from the London School of Economics. In addition to his executive position at Fortuna Silver Mines, Luis Dario Ganoza is also Chairman of the Board at Atico Mining, a Canadian company that operates copper-gold projects in Latin America, and is on the board of the Silver Corp. Ltd., another Canada-based mining company that develops silver mines in China.
Speaking with Bloomberg about the company’s strategy to reduce its weight in silver, Jorge Ganoza has highlighted that Fortuna Silver Mines still considers silver an important part of its business.
“We love silver. Silver has been part of our story. And we are still committed to silver, we have active aggressive exploration initiatives in the Americas for silver. But more than focused on silver, we are focused on a good, solid business. We want to bring into our portfolio the assets of precious metals, gold and silver, that can perform throughout the precious metal price cycle. We are more focused on putting together a portfolio of low-cost, high-margin quality assets. But we are still committed to silver… You know good silver has a possibility, good silver is not something you can go and purchase somewhere around”.
