Fortuna Mining

Let’s take a look at their latest MD&A:

I call bullshit.  If you look at the breakdown above, you can see that management expects a ramp in Tonnes milled and a ramp in Au and Ag grades.  Sane mine engineers do not make plans like this.  First off, it is optimal to mine the highest grade ores first to maximize the net present value (NPV) of the mine.  In some mines lower grade ore has to be mined first to get to the highest grade ore.  But generally speaking, you should pretty much see the highest grade ore get mined first.  Mining the highest grade ore 2 years before mine closure makes absolutely no sense at all.

Secondly, the breakdown above calls for production to ramp up to more than four times over four years.  This is a dopey way of building a mine.  It makes more sense to build to a specific capacity by year 1/2 of commercial production as this would maximize the NPV.

What’s probably happening here is that management is making stuff up.  It is highly, highly likely that grades will go down over time according to the mine engineer’s plans.  And my personal opinion is that this company will likely miss its production targets and that this will be blamed on external factors.

Is it any wonder that commodity futures outperform commodity-producing companies by three times?

3 thoughts on “Fortuna Mining

  1. Hi Glenn. I wonder if, in hindsight, your opinion of the management team has changed in light of Fortuna basically hitting or exceeding the numbers outlined in this production schedule for San Jose. They’ve ended up being one of the more stable stocks to hold on to during the sector downturn.

    • Thanks for the comment- I forgot about this company!

      Hmm so far they are more or less hitting their grades. But I guess we’ll have to wait to see what happens a few years from now. I don’t think the grades will necessarily matter that much. With the drop in gold and silver prices, it looks like the company is cash flow negative (even if you assume that most of the Cuzcatlan/San Jose capex is expansion capex).

  2. Pingback: Fortuna Silver Mines: A negative cash flow miner? | Glenn Chan's Random Notes on Investing

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