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Stockhouse Short Report: Fortuna off 19%, analysts revise targets

Peter Kennedy Peter Kennedy, Stockhouse
0 Comments| March 29, 2012

Shares of Fortuna Silver Mines Inc. (TSX: T.FVI, Stock Forum) (NYSE: FSM, Stock Forum) have been crushed in the wake of rising costs and media reports about the recent shooting deaths of two protesters in a community near the company’s Mexico mine site.

After losing another 19% of its value on Wednesday, the stock is trading at $4.40, down from $7.58 in late February, leaving the company with a market cap of $675.5 million, based on 125.1 million shares outstanding.

Wednesday’s selloff came after analysts at CIBC World Markets, Haywood Securities Inc., Cormark Securities Inc. lowered their stock price targets. CIBC has a new target of $6.50, down from $9. Haywood is down to $6.60 from $7.25, while Cormark has revised to $7.25 from $8.25.

During a conference call with analysts to discuss its 2011 financial results on Tuesday, company officials said Fortuna has yet to secure a permit for a new tailings facility at a mine in southern Peru. If the permit isn’t granted, production at the Caylloma mine may be temporarily suspended, putting about two million ounces of annual silver production at risk, company officials warned.

(Combined production from Caylloma and Fortuna’s $55 million San Jose mine in Mexico this year is expected to be 3.7 million ounces silver, 17,400 ounces gold, or 4.6 million silver equivalent ounces).

This is more bad news for a Vancouver company that is already in the spotlight as a result of fatal shooting incidents near the San Joes mine.

In early January, protestor Bernardo Mendez was shot dead in the town of San Jose del Progreso, a community where the mine is the biggest employer.

As reported by The Financial Post on January 25, the town and the mine in the southwestern state of Oaxaca have been the venues for past conflicts involving groups who say the mine poses a threat to the region’s water supply.

A CTV News investigative team followed that up last week with report about the death of protestor, Bernardo Vasquez, 32, who was shot dead in his car on March 15.

According to MiningWatch Canada, the victim’s brother Alvaro Andres Vasquez Sanchez and local activist Rosalinda Vasquez were also wounded in the ambush and remain in hospital.

“No-one wants to read these sorts of things,’’ said Chris Thompson, a research analyst with Haywood in Vancouver.

Speaking to Stockhouse, he said it allows bloggers to label Fortuna as a “bad Canadian company.’’

“I don’t believe it,” he said.

Analysts who have visited the San Jose site say planning for water use is a lightning rod for conflict in the region, involving local residents and the government. This is partly because Fortuna is mining in an agricultural community, they say. Thompson said the company isn’t getting much credit for building new sewage treatment facilities that will be available to the community near the San Jose mine.

During Tuesday’s conference, one of the callers wondered if investors should be concerned about what they have been reading in newspaper reports and heard on television.

Fortuna President and chief executive officer Jorge Ganoza Durant responded by denying that the company was in any way associated with the deaths. “Fortuna nor any of its subsidiaries is in no way linked or condones acts of violence,” he said.

But Andrew Kaip, an analyst with BMO Nesbitt Burns, told Stockhouse that the recent stock price fall has had more to do with disappointment over Fortuna’s fourth quarter financial results than reports about the deaths of mine protestors.

During the quarter ended December 31, 2011, the company reported a net loss of $1.76 million or $0.01 per share, on sales of $31.05 million. That compared to a year earlier profit of $4.33 million or $0.04on sales of $23.91 million.

The decline in income was partly due to a drop in the price of silver and lower base metal revenue from the company’s Caylloma mine.

Before the financial results were released on March 23, there was little consensus among the eight analysts who follow the stock about what they would turn out to be, Kaip said.

In the fourth quarter of 2011, Fortuna reported silver production of 913,803 ounces, an increase of 90% from the year ago period. The increase has been attributed to higher production from Caylloma as well as contributions from the San Jose mine, where production began in September 2011.

However, Haywood’s Chris Thompson said rising costs at both mines prompted him to lower its stock price target. Thompson’s forecasts are based on multiples of cash flow that will inevitably be reduced as a result of rising costs.  The company is seeking to expand production at San Jose to 1,500 tonnes per day from the current rate of 1,000 tonnes by installing a new ball mill.

It also wants install an off-site leaching circuit, giving Fortuna the option to produce dore bars at San Jose, where metal is currently shipped in concentrates to a refinery.

Fortuna has warned that if doesn’t secure the final permits to install a new tailings facility at Caylloma, operations may be suspended unless the company can come up with another way of dealing with mine waste.

The new tailings facility has the capacity for 17 years of production and was due to be commissioned in June, 2012.


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