Fortuna Silver keeps the faith with future growth

While some analysts remain bullish on Fortuna Silver Mines (TSX: FVI; NYSE: FSM), the overall market doesn’t seem to agree.

The silver producer with mines in Mexico and Peru lost 23% of its market cap in just three days since releasing its financial results on March 17. Its stock had traded for $5.27 before the results but settled at $4.07 on March 19, on 700,000 shares traded.

The results showed a $14.9-million net loss for the fourth quarter, largely due to a $10.2-million non-cash impairment charge. On an adjusted basis Fortuna showed a $3-million net income, or 2¢ per share. These numbers came on the back of 1.46 million oz. silver, 7,100 oz. gold, 3.8 million lb. lead and 6.7 million lb. zinc, at operating costs of US$75 per tonne and cash costs of US$6.57 per oz., net of by-product credits.

Canaccord Genuity mining analyst John Kratochwil is bullish on the stock despite conceding that earnings came in slightly below estimates. He says the company’s production growth profile remains strong.

While some of the increased production is expected to come from higher throughput at the San Jose mine in Mexico next quarter, and mining higher grades thereafter, Kratochwil says a resource update at the Trinidad North zone, due in the third quarter, could double the current resource.

San Jose has proven and probable reserves of 3.6 million tonnes grading 197 grams silver and 1.7 grams gold, for 22.8 million oz. silver and 196,500 oz. gold.

The mine is located in Oaxaca state, 47 km south of the city of Oaxaca. It went into commercial production in September 2011, with a milling rate of 1,000 tonnes per day.

The deposit is described as a low-sulphidation epithermal vein system characterized by mineralized multi-phase quartz–carbonate–sulphide veins, hydrothermal breccias and stockwork veining. The mineralized system is hosted within a sequence of Tertiary andesitic volcanic and volcaniclastic rocks.

Fortuna is planning to ramp up to 2,000 tonnes per day at San Jose by the second quarter, which will move the production needle to 3.9 million oz. this year compared to 2.5 million last year. After that, high-grade ore from Trinidad North will come on stream and help push production up to 4.6 million oz. silver in 2015.

Haywood Securities analyst Benjamin Asuncion agrees that San Jose remains the growth driver, but points to the company’s balance sheet as another reason for investor confidence.

“The company has . . . cash and short-term investments of US$49 million, plus an undrawn credit facility of US$40 million,” he said in a research note. “That gives it more operating freedom and flexibility to pursue growth opportunities, as they may arise.”

Asuncion rates the stock as a “buy,” with a $5 price target.

As for the company’s Caylloma  mine in Peru, Fortuna has been reducing costs. The company expects costs at the mine to fall to US$88 per tonne this year from US$91 per tonne last year, and it is cutting capital spending to just US$10.7 million this year from $21.7 million last year.