BUSINESS
Fortuna Silver Mines Inc. engages in the acquisition, exploration, and mining of precious and base metal deposits in Argentina, Burkina Faso, Mexico, Peru, and Cote d’Ivoire. It holds interest in the Caylloma silver, lead, and zinc mine located in southern Peru; the San Jose silver and gold mine situated in southern Mexico; the Lindero gold project located in Argentina; Yaramoko gold mine situated in south western Burkina Faso; and Seguela gold mine located in south western Cote d’Ivoire. The company was formerly known as Fortuna Ventures Inc. and changed its name to Fortuna Silver Mines Inc. in June 2005. Fortuna Silver Mines Inc. was incorporated in 1990 and is based in Vancouver, Canada.
INVESTMENT RATING
FSM’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to be a modest Value Builder.
Fortuna Silver Mines has a current Value Trend Rating of B (Positive).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Fortuna Silver Mines has a neutral Power Rating of 60 but a good Appreciation Score of 77, resulting in the Positive Value Trend Rating.
Fortuna Silver Mines’ stock is selling well below targeted value. The current stock price of $3.13 compares to targeted value 12 months forward of $9.
Fortuna Silver Mines’ high appreciation potential results in an appreciation score of 77 (only 23% of the universe has greater appreciation potential.)
Fortuna Silver Mines has a Power Rating of 60. (This neutral Power Rating indicates that FSM’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: the recent trend in FSM’s earnings estimates has been favorable; and recent price action has been slightly favorable. An offsetting factor is the Gold and Silver Ores comparison group is currently in an unfavorable position.
INVESTMENT PROFILE
FSM’s financial strength is average. Financial strength rating is 51.
Relative to the S&P 500 Composite, Fortuna Silver Mines Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that FSM is higher risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, and high earnings variability. FSM’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. FSM has unusually low market capitalization.
CURRENT SIGNALS
Fortuna Silver Mines’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.
Fortuna Silver Mines’ current technical position is mixed. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.
ALERTS
Fortuna Silver Mines Inc (NYSE: FSM) has recently experienced significant negative changes in investment behavior: the stock fell on very heavy volume.
In light of this we are reviewing our current Overall Rating of B. This review will be completed in the next several days.
Fortuna Silver Mines Inc (NYSE: FSM) stock suffered a major decline of -11.6% on 1/18/24. The shares closed at $3.13. Moreover, exceptionally high trading volume at 252% of normal accompanied the decline. The stock has declined -12.3% during the last week but has been strong relative to the market over the last nine months.
CASH FLOW
In 2022, Fortuna Silver Mines experienced a very significant reduction in cash of -$26.94 million (-25%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$86.94 million. Non-operating sources contributed +$4.47 million (+5% of EBITDA). Cash taxes consumed -$34.85 million (-40% of EBITDA). Re-investment in the business amounted to -$120.03 million (-138% of EBITDA). On a net basis, debt investors contributed +$38.78 million (+45% of EBITDA) while equity investors withdrew -$2.26 million (-3% of EBITDA).
FSM’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Fortuna Silver Mines Peer Group as well. In most years, Fortuna Silver Mines was in the third quartile and second quartile. Currently, Fortuna Silver Mines is at the upper quartile at +5% of EBITDA (+$4.47 million).
FSM’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Fortuna Silver Mines Peer Group. In most years, Fortuna Silver Mines was in the lower quartile and top quartile. Currently, Fortuna Silver Mines is lower quartile at -40% of EBITDA (-$34.85 million).
FSM’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Fortuna Silver Mines Peer Group. In most years, Fortuna Silver Mines was in the third quartile and second quartile. Currently, Fortuna Silver Mines is below median at -138% of EBITDA (-$120.03 million).
FSM’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Fortuna Silver Mines Peer Group. (Since 2020 Debt Investors, %EBITDA has experienced very sharp improvement.) In most years, Fortuna Silver Mines was in the third quartile and top quartile. Currently, Fortuna Silver Mines is below median at +45% of EBITDA (+$38.78 million).
FSM’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Fortuna Silver Mines Peer Group. In most years, Fortuna Silver Mines was in the top quartile and second quartile. Currently, Fortuna Silver Mines is slightly above median at -3% of EBITDA (-$2.26 million).
FSM’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Fortuna Silver Mines Peer Group. (Since 2020 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Fortuna Silver Mines was in the top quartile and lower quartile. Currently, Fortuna Silver Mines is lower quartile at -31% of EBITDA (-$26.94 million).
FSM’s Cash, %Revenue has suffered a strong overall downtrend over the period. This downtrend was accompanied by stability for the Fortuna Silver Mines Peer Group. (Since 2020 Cash, %Revenue has accelerated very sharply.) In most years, Fortuna Silver Mines was in the second quartile and lower quartile. Currently, Fortuna Silver Mines is at the lower quartile at +12%.
PROFITABILITY
FSM’s return on equity has eroded very significantly since 2014. The current level is -10.3% versus the high of 5.7% and the low of -10.3%.
This very significant erosion was due to very strong negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of FSM’s assets declined over the full period 2013-2023: asset turnover has suffered a strong overall downtrend even as it experienced a very sharp recovery after the 2020 low.
Reinforcing this trend, pretax margin experienced a strong overall downtrend that decelerated very sharply from the 2022 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
FSM’s return on equity is lower quartile (-8.3%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is lower quartile (-5.6%) reflecting asset turnover that is above median (0.36X) and lower quartile pretax margin (-15.4%).
Tax “keep” rate (income tax management) is at the upper quartile (97.6%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at median (1.53X).
GROWTH RATES
Overall, Fortuna Silver Mines’ growth rate has slowed very considerably in recent years.
Fortuna Silver Mines’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 7.4% per year. (More recently it has been 16.6%.)
Total asset growth has been 11.8% per year. (More recently it has been 4.0%.)
Annual E.P.S. growth has been 4.1% per year.
Equity growth has been 9.6% per year. (More recently it has been 3.9%.)
No consensus growth rate forecast is available for Fortuna Silver Mines.
Relative to the Fortuna Silver Mines Peer Group, Fortuna Silver Mines’ historical growth measures are consistently third quartile. E.P.S. growth (4.1%) has been substantially below median. Total asset growth (11.8%) has been below median. Revenue growth (7.4%) has been at the lower quartile. Equity growth (9.6%) has been at the lower quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Fortuna Silver Mines’ stock price performance has been volatile and significantly below market. Between March, 2013 and January, 2024, Fortuna Silver Mines’ stock price fell -27%; relative to the market, this was a -76% loss. Significant price moves during the period: 1) October, 2021 – August, 2022: -53%; 2) December, 2020 – September, 2021: -52%; 3) March, 2020 – December, 2020: +257%; 4) July, 2016 – November, 2017: -52%; 5) September, 2015 – July, 2016: +300%; and 6) January, 2015 – September, 2015: -55%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 2.9% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through December, 2023 of 2.9% is below median relative to Fortuna Silver Mines Inc Peer Group.
Current 5-year total return performance of 1.2% is lower quartile relative to the S&P 500 Composite.
Through December, 2023, with lower quartile current 5-year total return of 1.2% relative to S&P 500 Composite, Fortuna Silver Mines’ total return performance is at the lower quartile relative to Fortuna Silver Mines Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, FSM’s overall valuation is exceptionally low. Ratio of enterprise value/revenue is lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Relative to Fortuna Silver Mines Peer Group, FSM’s overall valuation is quite low. Ratio of enterprise value/assets is at the lower quartile. Price/equity ratio is at the lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Fortuna Silver Mines has a major value gap compared to the median. For FSM to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.70X to 3.21X. If FSM’s ratio of enterprise value/revenue were to rise to 3.21X, its stock price would be higher by $4 to $7.
For FSM to achieve upper quartile valuation relative to the Fortuna Silver Mines Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.70X to 8.99X. If FSM’s ratio of enterprise value/revenue were to rise to 8.99X, its stock price would increase by $18 from the current level of $3.13.
VALUE TARGETS
FSM’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to be a modest Value Builder.
Fortuna Silver Mines’ current Price Target of $9 represents a +184% change from the current price of $3.13.
This high appreciation potential results in an appreciation score of 77 (only 23% of the universe has greater appreciation potential.)
With this high Appreciation Score of 77, the neutral Power Rating of 60 results in an Value Trend Rating of B.
Fortuna Silver Mines’ current Price Target is $9 (+135% from the 2022 Target of $4 and +184% from the 01/18/24 price of $3.13). This dramatic rise in the Target is the result of a +13% increase in the equity base and a +108% increase in the price/equity multiple. The forecasted increase in return on equity has a huge positive impact on the price/equity multiple and the forecasted decline in growth has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
PTR’s return on equity forecast is 8.2% — slightly above our recent forecasts. Forecasted return on equity exhibited a modest, erratic increase between 2014 and 2022. The current forecast is above the 2020 low of 4%.
PTR’s growth forecast is 18.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is well above the 2020 low of 9%.
PTR’s cost of equity forecast is 6.9% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2014 and 2022. The current forecast is above the 2015 low of 4.0%.
At Fortuna Silver Mines’ current price of $3.13, investors are placing a negative value of $-1 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 22.0% per year, and a return on equity of 5.7% versus a cost of equity of 5.9%.
PTR’s 2024 Price Target of $9 is based on these forecasts and reflects an estimated value of existing assets of $4 and a value of future investments of $5.
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