A "Fortuna" in Silver

04/15/2019 5:00 am EST

Focus: GLOBAL

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Fortuna (FSM) is a quality silver mining company, currently developing a gold mine in Argentina which will almost double its production, asserts resource sector expert Adrian Day, editor of The Global Analyst.

A couple of recent stumbles — though modest by miner’s standards — and market concerns have given us a great opportunity to buy this solid company at a great price. Fortuna currently is currently producing from two mines:

• Caylloma, a 500-year old, silver, zinc, lead underground vein mine in Peru; and
• San Jose, one of the top 12 primary silver mines in the world, in Oaxaca State.

Fortuna has been a solid operator, with “all-in sustaining costs” (AISC) comfortably below $10/ounce. The company is currently developing the Lindero project in Salta Province, Argentina, a gold mine that will almost double its production but maintain the same high-margin profile.

Lindero will have a 15-year mine life, with high grades in the early years for a quick pay back. The first year of commercial production is expected to produce between 145,000 and 160,000 ounces. In addition, Fortuna is exploring, in joint venture, silver properties in Mexico and a gold property in Serbia.

Recently, Fortuna announced an increase in the anticipated capital required to bring on Lindero, and a delay in the production start date by a quarter. The market reacted badly, given many other project have seen repeated cost overruns and delays, and given that this will be the only gold mine in Salta province. Argentina is still being tested as an investment destination.

Then, the company’s fourth quarter results saw lower production and higher costs. Again, the stock, already in the penalty box, fell again. Though these are negative developments, the market concerns resulting from these and other issues have ranged from realistic to exaggerated and plain wrong.

Though one never likes to see cost overruns, especially from a company that has an exemplary record of completing new mines and expansions on time and under budget, this is not a major disaster.

Mine construction is already nearly 50% complete, with most major capital costs already expended. The new estimate of $295 million capex, a 20% increase over the previous, is sufficient to complete the project, and likely conservative. There is unlikely to be further budget increases.

And commercial production is scheduled for the first quarter of 2020, with initial production by the end of this year. With cash of $163 million and another $80 million undrawn on its credit facility, Fortuna is well-equipped to complete construction without having to go to the market.

As for the fourth quarter results, Fortuna has experienced variable results in the past, particularly from Caylloma with its heavy by-product production.

The past quarter, though down on year-ago comparison, was by no means its worst quarter. But it raised, once again, unwarranted concerns about life of reserves at the mine. As an underground vein deposit, total reserves are not drilled out in advance.

Normally, this mine that has been producing for 500 years, has about seven years of mine life ahead of it. Today, after a successful drilling campaign, it has 10 years. So this should not be cause for concern.

Mexico is also under the microscope right now, though most operators report no changes with the new government. Fortuna did experience a tailings overflow following unusually heavy rains last October, and given the complex social conditions in that state, there were concerns that this incident could grow.

But the Mexican National Water Commission, following an investigation, recommended minor changes and said no remediation of the nearby water streams was required.

All in all, market concerns are exaggerated, but have hurt the stock. For the first half of last year, the stock was in the $5.50--$6 range, so the price is down significantly, despite the impending new increased production. The recovery will likely be slow and steady until Lindero successfully starts up.

The stock has bounced off yesterday’s exaggerated low of $3.16, following release of an updated reserve and production report this morning. This provides us with the opportunity to buy a quality mining company, with strong operators and a solid balance sheet. Buy Fortuna Silver with a limit of $3.43.

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