Fortuna Silver Mines Inc.
Losing A Bit Of Its LusterFVI surprised to the downside with Q4/11 earnings. Adjusted EPS were $0.00 compared to us and consensus at $0.08. The miss was particularly shocking given production and cash costs were pre-released. As of 3/28, we reduce FVI's rating from SO to SP as our PT goes from C$9 to C$6.50.Over the past three years, operating costs per tonne have almost doubled. During the conference call, management guided to cost inflation of 20% in 2012. We have raised our long-term operating costs across the board for Fortuna, with a somewhat disastrous effect on our NAV.Smelter agreements, particularly for "pure" precious metals concentrates have become progressively more onerous recently. San Jose produces this type of concentrate, and given the difficulties that we have observed, we have materially boosted our smelter costs at this operation for 2012.The new mining taxes in Peru are based on operating profit, not on revenue, and they are assessed on a sliding scale. The rates slide from 3% for mines with no operating profit to 20% for operating profit above 85%. These are now incorporated in our Caylloma model.
PS you can download your copy of the CIBC report by clicking here
UPDATE: I've been asked to share the March 25th IKN151 analysis on FVI.to here on the blog. I'm not so sure about the whole thing (it's 9 pages long for one thing, hardly blogpost stuff) but to give the general idea, here's how the conclusion section of the report started.
Before any further thoughts, after last week’s diatribe I again want to stress my full personal satisfaction with the way FVI has disclosed and approached the news dissemination of the recent accidental death of a worker at Caylloma. The company had already said it would be raised at the ConfCall and in the MD&A, but it was above and beyond its call to have featured the circumstances in its NR so prominently (and given it a large space at the top of the MD&A too, instead of tucking it somewhere further down where many eyes don’t travel) as well as making sincere pledges to help those directly affected by the accident when it most likely has little legal obligation to do so (if we read between the lines about the causes of the accident). My decision to sell FVI is not in any way related to this now closed issue.
I’m selling FVI because the way in which 2012 is shaping up doesn’t seem to give the company much more share price growth to the upside, it’s that simple. The combination of reduced revenues and creeping costs, particularly those at Caylloma, mean that cash flow that affects the price the market is willing to pay for a piece of this company is being squeezed on either side. Added to the straight math-crunching, the $57m budgeted for cap-ex at Caylloma and San José combined suggest that FVI will be a better and more profitable company once those improvements are done, but 2012 is shaping up to be a transition year for the company, at least in respect to its results (and yes, bottom line results because they do count round here).