Fortuna’s Lindero on track for production in Q3 2019

Construction is accelerating at Fortuna Silver Mines’ (TSX: FVI; NYSE: FSM) Lindero project in northern Argentina, and commercial production is planned to start by September 2019, the company says.

“The project has gained significant momentum,” Jorge Ganoza, Fortuna’s president and CEO, told analysts and investors on a conference call for its third-quarter results. Fortuna decided to build the open-pit, heap-leach gold mine in Salta province after completing a feasibility study in September 2017.

The company recently estimated that project expenses in 2018 would total between US$110 million and US$130 million.

Initial capital expense (capex) estimates of US$239 million have been revised. In August, the company increased its capex forecast for the development gold project by 10 to 17%.

Some of the increase will be offset by the devaluation of the Argentine peso against the dollar, which has not been included in cost forecasts.

“Up to the third quarter, we have captured gains due to exchange rates against our original budget of close to US$7 million, and we expect to continue to see gains against our budget,” Ganoza said. “Contractors were awarded with pesos in the range of 17 pesos to the dollar, so yes, we’re benefitting right now from that. We are forecasting zero to 14% higher capital costs for Lindero, but that will be offset by exchange rate gains.”

Lindero is designed as an 18,750-tonne-per-day, owner-operated open-pit mine, with a 13-year pit life based on existing reserves.

Trucks at the Lindero project. Credit: Fortuna Silver Mines.

The feasibility study outlined an after-tax net present value of US$130 million at a 5% discount rate, and an 18% post-tax internal rate of return at a base case of US$1,250 per oz. gold.

All-in sustaining costs (AISCs) are an expected US$802 per oz. gold. A life-of-mine, 0.62-gram-gold-per-tonne head grade could come with a 75% life-of-mine recovery.

In addition to the Lindero project, Fortuna Silver’s primary assets include the Caylloma silver mine in southern Peru and the San Jose silver-gold mine in Mexico.

For the third quarter, the company reported a US$6.9-million net income and 4¢ earnings per share, based on revenues of US$59.6 million, despite a 12% and 5% decrease in silver and gold prices.

“In spite of having the lowest average quarterly silver price for three years, our business results show robust margins of 41%,” Ganoza said.

Net cash provided by operations came in at US$21.5 million, and adjusted earnings before interest, taxes, depreciation and amortization were US$24.2 million. Excluding Lindero capex, Fortuna generated US$13.6 million in free cash flow during the quarter and US$42.2 million for the first nine months.

Production totalled 2.23 million oz. silver and 12,542 oz. gold, compared with 2.01 million oz. silver and 13,412 oz. gold in the comparable quarter in 2017.

San Jose produced 1.99 million oz. silver and 12,387 oz. gold, while Caylloma produced 239,253 oz. silver, 7.6 million lb. lead and 11.5 million lb. zinc.

AISCs for the quarter were US$10.8 per equivalent oz. silver.

At the end of September, Fortuna had US$177 million in cash and equivalents.

Ganoza says management is excited about the exploration potential at Lindero and elsewhere in Salta, where the company has assembled a portfolio of early-stage projects.

“We are exploring the porphyry system within 3 km of Lindero, and we have expectations of coming up with a satellite deposit,” Ganoza said.

At press time, Fortuna’s shares were trading at $4.70 per share in a 52-week trading range of $4.60 to $7.78.

Ryan Thompson of BMO Capital Markets has an $8-per-share price target.