FVI:CC - Fortuna Silver Mines: Silver Selloff Is A Drag

Summary

• Fortuna Silver's revenues were $167.87 million in 2Q22, up 39.3% YoY and down 7.9% sequentially.
• For 2Q22, Fortuna Silver Mines produced 1,652,895 ounces of silver and 62,171 ounces of gold.
• The Séguéla project was 66% completed as of June 2022 (70% as of August 11). The company expects the first gold pour in mid-2023, producing around the 3Q23.
• I recommend accumulating FSM between $2.35-$2.30 with possible lower support at $2.23.

Part I - Introduction

Fortuna Silver Mines Inc. ( FSM ) released its second-quarter 2022 results on August 11, 2022.

Note: This article is an update of my article published on July 12, 2022. I have followed NGD on Seeking Alpha since Dec. 2021.

1 - Second-quarter 2022 Highlights.

The 2Q22 results were weak, missing analysts' expectations. Revenues were $167.87 million with a net income of $2.33 million or $0.01 per diluted share. It compares to a net income of $16.18 million or $0.08 per diluted share in the same quarter a year ago. The adjusted income was $2.1 million or $0.01 per share.

Lower sales at San Jose impacted the results due to declining silver prices, corresponding negative concentrate sales adjustments, and lower production. Also, higher G&A expenses affected earnings.

However, Fortuna Silver’s revenues improved 39.3% year-over-year to $167.87 million in 2Q22 from $120.53 million in 2Q21.

In spite of inflationary pressures on key consumables like diesel, steel, cyanide and explosives, and the strain on the supply chain, cost at all our mines are tracking within the range we provided at the beginning of the year for annual guidance.

Reminder: On July 2, 2021, Fortuna Silver Mines acquired all of the issued and outstanding common shares of Roxgold Inc. The company acquired the high-grade Yaramoko Mine and the Séguéla advanced exploration project on Ivory Coast. The Séguéla project was 66% completed as of June 2022 ( 70% as of August 11). The company expects the first gold pour in mid-2023, producing around the 3Q23.

The Silver price selloff is affecting Fortuna Silver Mines even though gold production represents over 60% of the total revenues.

The silver price continues to underperform the gold price significantly and is down 22.4% in one year compared to gold which is down 3.3%.

2 - Stock Performance

Fortuna Silver Mines has significantly underperformed the group, with a loss of 47% on a one-year basis.

Most of the recent loss is due to the drop in gold and silver prices after the FED decided to fight rampant inflation with two consecutive hikes of 75-point and recently signaled that it would continue hiking until inflation is down to a reasonable level.

The market has dropped recently after Jerome Powell's hawkish views, which may push the economy to fall into a severe recession.

Fortuna Silver Mines: Financials and Production in 2Q 2022. The Raw Numbers

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Part 1 - Gold and Silver Production Details

2.1 - Gold and silver production history

For 2Q22, Fortuna Silver Mines produced 1,652,895 ounces of silver and 62,171 ounces of gold. Production was down sequentially, as shown in the graph above.

2.2 - Gold and silver prices history

The gold price was $1,869, and the silver price was $22.62 per ounce.

2.3 - Zinc and Lead production history (Caylloma Mine)

Production for Lead was 7,637 Mlbs and 10,886 Mlbs for Zinc.

2.4 - Details per mine and metal produced

The Lindero Mine had a quarterly gold production of 29,016 Au ounces in Argentina. The AISC per ounce of gold sold was $1,151 for the Lindero mine. FSM indicated a lower contribution of mine operating income from the Yaramoko mine than planned and the impact of an inventory write-down of $4.0 million in low-grade stockpiles.

3 - Guidance for 2022 (unchanged since my preceding article)

The guidance has not changed from the preceding quarter. Fortuna Silver forecasts consolidated silver production in a range of 6.2 Moz to 6.9 Moz and gold production between 244K ounces and 280K ounces in 2022.

Part 2 - Balance Sheet and Commentary

1 - Fortuna Silver Mines' Revenues were $167.87 million in 2Q22

The net income was $2.33 million or $0.01 per share, compared to $16.18 million or $0.08 per share reported in 2Q21.

2 - Fortuna Silver reported a 2Q22 Free Cash loss of $6.55 million

FSM's trailing 12-month free cash flow was a loss of $56.92 million, with a loss of $6.55 million in 2Q22.

Note: On May 2, 2022, the company initiated a share repurchase program to purchase up to 5% of its issued and outstanding common shares, expiring on May 1, 2023.

During the three months ended June 30, 2022, the company repurchased 924,404 shares at $3.25 per share.

3 - Fortuna's total debt was $218.6 million on June 30, 2022

As of June 30, 2022, the company had cash equivalents of $116.37 million and total debt of $218.6 million. Total net debt to EBITDA is 0.3x.

Part 3 - Technical Analysis (Short-Term) and Commentary

I regularly promote the general strategy in my marketplace, "The Gold And Oil Corner," to keep a core long-term position and use about 40% to trade short-term LIFO. It allows you to wait for a higher final price target for your core position between $5 and $6.

I suggest selling partially between $2.80 and $3 and waiting for a retracement between $2.35-$2.30 with possible lower support at $2.23.

The issue for gold and silver is what the FED will do starting in September. According to Reuters, the gold price dropped significantly after the Fed indicated it would hike interest again in September, probably by another 50-points. However, a few analysts are expecting 75-points after a stubbornly strong job market. I forecast gold and the gold miners to be weak until the end of 4Q22. Thus, it is vital to accumulate FSM slowly, expecting lower lows.

Watch the gold and silver prices like a hawk.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States by Generally Accepted Accounting Principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stock, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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