Fortuna Silver Mines Is Now Well Established As A Low Cost Silver Producer, And Has Cash Aplenty To Move Up To The Next Level
By Alastair Ford
minesite.com
“We have shown a strong second quarter of the year”, says Jorge Ganoza, chief executive of Fortuna Silver Mines, when he rings up from Lima to chat Minesite through the latest set of financials from his company. And there’s no doubt that Fortuna did pretty well during the period, as sales of concentrate from its Callyoma silver-lead-zinc mine in southern Peru hit a record US$12.86 million. That result compared more than favourably with the US$7.77 million delivered during the same period of 2008, although at US$1.2 million, net profits actually came in lower because the silver price, while still strong, isn’t quite punching through US$20 an ounce like it was a year ago. But with cash costs at Callyoma coming in at a mouth-watering negative US$2.98 per silver ounce including by-product credits, there’s little likelihood that margins are going to come under any severe pressure any time soon.
And that, says Jorge Ganoza, is the whole point. Fortuna, he says, has a focus on ounces that have “a very heavy margin over cost”. That focus means that even if profits aren’t quite running at boom-time levels, this is a company that’s capable of weathering all sorts of storms, as well as enjoying the good times when they come. At the current silver price of US$14 per ounce, times aren’t all that bad right now, but the company’s plans to keep costs down stretch out far into the distance. Hence the low costs at Callyoma will be complemented by a cash cost of around US$4 per ounce from production from the new San Jose silver-gold mine, currently under development in southern Mexico. And hence too, the strict criteria that Jorge has when appraising possible acquisitions: “We’re always looking for the next asset to be better than the previous one”, he says. He’s flying out to have a look at a few potential acquisitions at the end of this month, but with criteria like that you get the feeling that he’s unlikely to be rushed into anything.
Fortuna can in any event afford to take its time in making sure that the next acquisition is the right one. Together Callyoma and San Jose will produce between four and five million silver equivalent ounces per year for Fortuna from 2011. That production will of course come at some capital cost, but with over US$30 million in the bank at the end of the June quarter, this is not a company that’s starved of cash. Indeed, it’s theoretically possible, given the strong positive cashflow from Callyoma, that the company won’t need to tap the financial markets for any of the funding that it’s likely to need to develop San Jose.
By the end of 2010 Fortuna ought to have added roughly another US$8 million to the balance sheet, taking the cash position up towards the US$40 million mark. However Jorge isn’t planning to bet the farm on just the one operation, so although the cash is in place, it’s not all going on San Jose. “We would not want to spend all of our resources funding the development of a mine”, he says. To develop San Jose, a cash element from Fortuna’s own coffers will be complimented, he explains, “with either debt or equity or some sort of convertible structure”. This is not a company that’s going to put all its eggs in one basket, no matter how healthy the margins. But with costs so low, with a cash pile to fall back on, and with a track record of successful operations to show to potential financiers, the company ought to be able to cut a fairly advantageous funding deal when it comes down to it.
Development work at San Jose is two thirds complete, at least as regards the engineering and feasibility studies, says Jorge. Permitting is well advanced too, and the issues which led to the blockade at the project earlier in the year now seem to have been resolved. All of which means, allowing for the usual de-risking process on San Jose to continue at its own pace, the real variable in valuing Fortuna remains the outlook for the silver price. Unsurprisingly Jorge is bullish. “We subscribe to the idea that the American dollar will continue to be under pressure and that we will see sustained strength in precious metals”, he says. That’s all to the good, given that it’s investment demand for silver that’s driving the current strength in the price, as buyers look for safety away from the dollar. When industrial demand comes back we may see more price volatility, but for a low cost producer like Fortuna, that oughtn’t to cause any major headaches. On the current outlook, then, this is a company that looks fairly well positioned. It will be interesting to see if Jorge comes back from his travels with any interesting projects to add to the mix. |
