With no recovery in sight, lithium prices force miners to reevaluate output
The price of the material that’s vital to the energy transition has plunged by around 80% since late 2022.
Construction is accelerating at Fortuna Silver Mines’ (TSX: FVI; NYSE: FSM) Lindero project in Argentina and commercial production will start as planned at the end of the third quarter next year, the company says.
“The project has gained significant momentum,” Jorge Ganoza, Fortuna’s president and CEO, told analysts and investors on a conference call on its third quarter results.
Fortuna decided to build the open-pit, heap leach mine in Salta province after completing a feasibility study in September 2017.
In August, the company increased its capex forecast for the greenfield gold project by 10-17%.
This week the company estimated that project expenditures in 2018 are likely to total between $110 million and $130 million.
Initial capex estimates of $239 million have been revised. In August, the company increased its capex forecast for the greenfield gold project by 10-17%.
Fortuna now estimates $180 million in direct capital costs and a further $170 million in indirect capital costs for a total of $350 million. 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.
“I can say that up to the third quarter we have captured gains due to exchange rates against our original budget of close to $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 we’re benefiting right now from that. We are forecasting 0-14% higher costs at Lindero but that will be offset by exchange rate gains.”
Lindero is designed as an 18,750 tonne per day, owner-operated mine with a pit life of 13 years based on existing reserves.
The feasibility study outlined an after-tax net present value of $130 million at a 5% discount rate and a post-tax internal rate of return of 18% at a base case of $1,250 per oz. gold.
Average annual gold recovered to dore is forecast to come in at 96,000 ounces at all-in sustaining costs of $802 per oz. A head grade of 0.62 gram gold is expected with recoveries of 75%.
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 net income of $6.9 million, earnings per share of $0.04 based on revenues of $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,” Ganoza said.
Net cash provided by operations came in at $21.5 million and adjusted earnings before interest, taxes, depreciation and amortization (EBIDTA) of $24.2 million.
Excluding Lindero capex, Fortuna generated $13.6 million in free cash flow during the quarter.
Production totaled 2.23 million ounces of silver and 12,542 ounces of gold, compared with 2.01 million ounces of silver and 13,412 ounces of gold in the year-earlier quarter.
San Jose produced 1.99 million ounces of silver and 12,387 ounces of gold while Caylloma produced 239,253 ounces of silver, 7.6 million pounds of lead and 11.5 million pounds of zinc.
AISCs for the quarter were $10.8 per silver-equivalent ounce. At the end of September, Fortuna had $177 million in cash and equivalents.
Ganoza added that management is excited about the exploration potential at Lindero and elsewhere in Salta, where it 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 presstime in Toronto, Fortuna’s shares were trading at $4.70 per share within a 52-week trading range of $4.60 and $7.78.
Ryan Thompson of BMO Capital Markets has a price target of $8.00 per share.
(By Trish Saywell)
