FVI: Undervalued and Overlooked

JOHN KIERNAN, PI Financial Corp. (07/06/2009)
"We believe Fortuna Silver offers investors a very timely investment opportunity in a junior silver producer with substantial growth prospects. They have many of the key elements we look for in an attractive junior mining company—experienced management, quality assets, low operating costs, a solid balance sheet, low capex, low jurisdictional risk and a significant number of material catalysts in the next one to two years.

Fortuna Silver is trading at a discount to its NAV. Using a 6% discounted cash flow (DCF) model on Caylloma and an 8% DCF on San Jose, and following corporate adjustments we derived a total net asset value (NAV) of $179M or $1.80 per share; Fortuna is currently trading at 0.45x NAV. We believe Fortuna shares are trading at an excessive discount to its NAV primarily because the market is not attributing much value to the San Jose project and is underestimating the cash flow potential of Caylloma. We expect this gap to narrowing in 2009-2010 when the San Jose feasibility study is released in November 2009.

On a relative cash flow basis Fortuna also trades at a sharp discount. Fortuna is trading at 3.2x 2010 cash flow and 1.6x 2010 EV/EBITDA, while peers trade at 10.7x 2010 cash flow and 8.4x EV/EBITDA. We expect this gap to narrow as the company reports successive improvement in quarterly results.

We are initiating coverage on Fortuna Silver (V-FVI) with a BUY rating and a 12-month target price of $1.80 per share, representing a 117% premium to the current price. Fortuna Silver has a SPECULATIVE risk rating and is suitable for risk tolerant investors."

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