FVI: Growing to 5+ Million Ag Oz/Yr.

NICHOLAS CAMPBELL, Canaccord Genuity (11/30/2009)
"We are initiating coverage on Fortuna Silver with a SPECULATIVE BUY recommendation for the following reasons:
  • Organic growth profile: By advancing the San Jose mine through to production by mid-2011, we forecast the company's production will grow to 5.5 million ounces of silver in 2012.

  • Solid balance sheet and consistent cash flows: Fortuna has US$33.7 million in cash and equivalents and only US$1.5 million in long-term obligations. We forecast operating cash flow of US$26.6 million in 2010, growing to US$43.2 million in 2011. With the company likely to establish a revolving credit facility, the company should have sufficient funds to finance the development of the San Jose project.

  • Attractive valuation: Fortuna is trading at 4.5x 20011E CFPS, a discount to the average for other junior precious metal producers and it is trading at 0.56x our estimate of NAV (5%, spot), compared with an average of 1.00x NAV (5%, spot) for junior precious metal producers.
Given the growth profile and balance sheet, we expect this company to gain broader investor attention, which should lead to a revaluation in line with other junior precious metal producers. We estimate a peak silver and gold NAVPS (5%, US$21.50/oz Ag and US$1,300/oz Au) of C$4.72. Based on a 1.0x multiple to our peak silver and gold NAVPS (5%, US$21.50/oz Ag and US$1,300/oz Au), we initiate coverage Fortuna Silver with a SPECULATIVE BUY recommendation 12-month target price of C$4.75 per share (rounded)."

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