Adrian Day of Global Analyst delves into what the denial of the renewal of a mining permit in Mexico means for Fortuna Silver.
(US$3.87) fell sharply at the end of the week, down 26% in two days (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE)
after reporting that a Mexican agency had denied its application for a renewal of its mining permit at San Jose. This took the stock to its lowest level since May of last year.
All mines in Mexico receive permits for a number of years––San Jose’s permit had been for 10 years––at which point they have to reapply for an extension. In the past, this has been more-or-less routine, provided there have been no serious environmental or safety issues, but since the new president came in at the end of 2018, there has been a decidedly anti-mining attitude throughout much of the Mexican government.
Fortuna has experienced several issues recently at San Jose, including a local blockade, and a government dispute over a royalty. The company said it had moved to settle the disputed royalty claim, which covers part of the mine site, for $9.6 million. This settles all past claims (the relevant agency claimed $30 million), and Fortuna agreed to a 3% royalty moving forward. Part of the reason for Fortuna to settle was to show cooperation and goodwill in the country.
Anti-mining agency has another agenda
SEMARNAT, the environmental agency that denied the permit, is the same agency that rejected Almaden’s mine permit and is headed by an anti-mining activist.
However, given everything about the mine’s operations, it was certainly unexpected, and it is unusual for a company that has been operating a mine without any significant environment or safety problem not to have their permit renewed. Fortuna’s CEO Jorge Ganoza called the action “unprecedented.” A Mexican court has granted a temporary injunction for Fortuna to continue to mine. The company preemptively applied for the injunction after the deadline for the mine renewal passed without hearing anything from the agency. Fortuna is now seeking a permanent injunction.
As with the Almaden permit denial, the company is perplexed as to the reasons for the denial. Certainly the stated reasons (including, for example, the company’s failure to supply certain documents) do not appear valid. There is no obvious failing that they have to remedy.
Lack of communication from agency shows bad faith
Other than immediately after filing the renewal application, the company said it had not heard from SEMARNAT at all, until receiving the letter of denial. Local reports indicate that this decision was entirely that of SEMARNAT’s Secretary Albores González, a known anti-mining activist with friends among anti-mining activists in the region, who has repeatedly stated publicly that he is against the presence of Fortuna and wants the mine to close. He has not answered any requests from Fortuna for a meeting for over a year, and continues to be non-responsive.
Fortuna is now working on several fronts to get the decision overturned. This includes answering the agency’s stated reasons for denial, including providing proof that they complied with information requests and seeking a meeting with SEMARNAT (to which there has been no response so far); gaining support from both the state governor and the town mayor, both of whom have been publicly supportive as well as trying to arrange a meeting with the agency; and going to court. In addition, workers at the mine as well as local town people who depend on the mine for business have organized protests. CEO Ganoza said there had been “remarkable support from the local authorities…could not have asked for more support.”
Failure would be important but not a death blow
The court may extend the injunction in coming days, but a permanent solution may take longer. I would think the odds favor Fortuna prevailing but it is by no means a certainty. And operating under a court injunction against a hostile governing agency is not a satisfactory long-term solution. It would certainly be a serious blow if the mine were closed. In the latest quarter it had sales of $43 million out of total company sales of $162 million (and that is down from $65 million a year ago).
On the other hand, the mines it acquired from Roxgold are ramping up, currently accounting for $49 million in sales (more than San Jose), and virtually 50% of the company’s operating income. Certainly one of the reasons the company acquired Roxgold was because of ongoing problems in Mexico and to diversify geographically.
In sum: it is certainly a possibility that the permit is denied and that would be a serious financial blow, but increasingly offset by other income. This issue reflects poorly on Mexico rather than on Fortuna, and if the decision is not overturned and soon, and mining at San Jose were suspended, it would affect all ongoing foreign investment in the sector in the country.
Credit line would be affected as well
Beyond any loss of revenue from the mine, the dispute could affect the company’s line of credit, on which it has currently drawn $120 million. If they do not receive a renewal of the permit or a permanent injunction by January 23rd, there would be a technical default and the line would be reduced to $100 million Fortuna is currently negotiating with the banks to amend or extend this requirement. Fortuna is well capitalized, with $135 million in cash and equivalents. A default would be not be a death blow, but would be serious, however.
Production and earnings up in otherwise strong quarter
Fortuna’s quarterly results were, naturally, completely overshadowed by the permit denial in Mexico. But the results were positive, with record sales. It is operating at a margin of 46%, with adjusted net income of $22.5 million, and strong free cash flow.
Not surprisingly after several quarters of issues, it achieved record gold production at Lindero, in Argentina, which is now performing at 80% of design parameters. The quarter also saw first results from West Africa. Precious metals accounted for 88% of revenue, with silver just over 22% of total revenue.
Fortuna stock lost over $400 million in value in the last two days, but the NAV of San Jose is only $206 million (according to analysts) and with the stock trading at 0.8 x NAV, the stock decline has been vastly exaggerated, even including any additional loss for reputation.
Fortuna definitely should not be sold, given the ramp up in Argentina as well as strong cash flow from West Africa, and the valuation compares very favorably with its peers. (First Majestic trades at 2.6 x NAV; Coeur at 2.3 and so on). The value here is compelling.
Follow the leader
However, a protracted dispute will cause ongoing negative headlines, and would consume time and energy of top management. The San Jose news stopped an incipient stock recovery, and we should not expect a quick bounce back and certainly the road back to $6 and $7 will be a longer one. The stock needs clarity to move ahead. Again, however, the value is strong; this represents a very good level at which to accumulate. CEO Gonzaga said now that the blackout period was over, he would be back in the market. Investors with some patience should follow him.
Originally published on Nov. 14, 2021.
Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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Looking for Leverage? Silver Sands at a Sub $10 Million Valuation Offers the Highest Leverage Drilling Play Around
Nearing the end of a phase III drill program, this high-leverage silver/gold play couples enormous upside with an unusually low risk profile. Eric Sprott is the largest shareholder…
Nearing the end of a phase III drill program, this high-leverage silver/gold play couples enormous upside with an unusually low risk profile. Eric Sprott is the largest shareholder.
Veteran analysts predict gold and silver are on the cusp of another bull run, with some speculating that after a year of consolidation we may see prices rise to $50 per ounce for silver and $2,500 per ounce for gold near term. A further leg up is forecast, and some say precious metals will hit unheard of levels over the next few years as the US dollar staggers. This is big news considering that past silver bull markets have delivered gains ranging from 330% to 900%.
Which brings us to and why its Phase III drill program currently underway makes it the best high leverage silver junior around. ( ), SAND started out with a silver resource of 15 million ounces at its Virginia project in Argentina last year and this is their third round of drilling. Their goal is to have grown that to 50 million ounces by the time Phase III is finished, on their way to 100 million.
But that’s the low-risk part. The leverage comes from drilling the silver/gold Santa Rita vein field in the northern part of the property first explored by Mirasol and Hochschild in 2007. Surface sampling and channel sampling highlights included 340 g/t silver and 5 g/t gold. Mirasol put 7 green field exploratory drill holes into the structure and came up with mineralization in 6 of 7 holes before Hochschild dropped it to focus on their San Jose discovery (now mine).
Silver Sands largest shareholders areand Eric Sprott, who has invested twice – increasing his initial investment by 300%. Commenting on the silver market, Sprott said:
“There’s going to be a shortage of silver. We get information from dealers looking for supply and paying premiums, which is almost unheard of. And when I look at the amount of silver going into ETFs and India, we know a shortage is on its way. The last time silver had a breakout, the price went up 10-fold. Do I think that could happen again? Absolutely.”
Sprott is not the only one with Silver Sands on his radar. In his Gold Newsletter, well-known precious metals expert Brien Lundin firmly put the company into the buy column, reiterating his previous buy recommendation. Speaking to the high leverage nature of Silver Sand’s Virginia project, he described the company as “a great ongoing lever on …… silver.”
SAND is near the end of a Phase III exploration program at its Virginia project located in mining-friendly Santa Cruz, Argentina, in close proximity to four producing precious metal mines. Virginia started out with a silver resource of 15 million ounces, and the goal is to grow that to 50 million ounces by the time Phase III is complete.
The right people, place, and resource
Silver Sands hits the mining trifecta of people, place, and resource. The company is overseen by market veteran Keith Anderson who brings to the mix a successful 20-year history of structuring and financing resource companies. Leading a deeply experienced management team, Keith has brought in a top-class investor, executed operations under budget, and delivered a clear roadmap towards the development of a significant resource.
The company’s flagship Virginia project is located in mining-friendly Santa Cruz, Argentina, in close proximity to four producing precious metal mines. This year, Argentina was rated the 5th most attractive region in the world for investment, and a global top 10 of silver mining jurisdictions. Furthermore, Santa Cruz ranks above Mexico on the investment attractiveness index.
Following up on highly successful Phase I and II exploration programs, Silver Sands is nearing the end of its Phase III program which comprises 2,685 metres of drilling across more than 16 holes. The program is targeting seven silver vein structures along with the high priority Santa Rita silver-gold prospect.
Overall, the Virginia property has the markings of an exceptionally large epithermal vein system yet only a tiny fraction outcrops at or near surface. Silver Sands has just started to scratch the surface of the property’s potential. By the time Phase III is completed, the company believes it will have grown its resource from 15 to 50 million ounces, on the way to 100 million plus.
Phase III will comprise 2,685 metres of drilling across 16 holes and is targeting seven silver vein structures along with the high priority Santa Rita silver-gold prospect. This will all be driven by a low-risk model that involves mostly drilling gaps and extensions between high-grade intercepts along known vein structures.
Adding ounces on the low-risk journey to massive upside potential
The 59,750-hectare Virginia project is a low to intermediate sulphidation epithermal silver deposit nestled in the mineral-rich Deseado massif, roughly 100 kilometres south of Newmont’s Cerro Negro Mine, one of the largest gold mines in the world.
Through initial discovery in 2009 and four follow up drill programs between 2010 – 2012, defined an indicated resource of 11.9 million ounces of silver at 310 g/t and an inferred resource of 3.1 million ounces of silver at 207 g/t, which were documented in an NI 43-101 technical report filed in 2014. Mineral resources are contained within seven conceptual open pits including Naty, Julia North, Julia Central, Julia South, Ely North, Ely South, and Martina.
Phase I and II drilling subsequently identified four new conceptual open pits – Ely Central, Ely North Extension, Julia South Extension, and Martina NW. Drilling confirmed the Ely structure can be traced over 2.3 kilometres in strike length from north to south, open along strike and at depth. The Naty-Julia structure now extends to over 3 kilometres in strike length, open to the north and south, and at depth.
Phase I focused on exploring new high-grade silver zones to expand on the existing NI 43-101 and consisted of 2,831 metres across 18 drill holes along with 80.5-line kilometres of IP surveying. Phase II followed up and yielded some impressive results, testing several new prospective zones through 3,104 metres of drilling across 20 holes. New discoveries were made in areas of lower IP chargeability, showing potential for strike extensions of known veins, as well as new discoveries within previously untested linear trends of lower intensity.
Phase II also led to the discovery of a new high-grade zone at Ely Central, where drilling intersected strong and continuous Ag grades in four drill holes over a 200-metre strike length that lies within a 580-metre untested gap from original drilling in 2012. Furthermore, drilling intercepted high-grade silver mineralization at the Ely North, Martina, and Julia South targets.
Highlights from Phase I and II exploration programs include:
• 639 g/t Ag over 9.60m
• 625 g/t Ag over 10.80m, including 1,110 g/t Ag over 5.70m
• 560 g/t Ag over 9.98m, including 1,578 g/t Ag over 2.87m
• 476 g/t Ag over 4.0m, including 929 g/t Ag over 1.85m
• 198.5 g/t silver over 33.5m
• 123.43 g/t silver over 8.5m, including 168.34 g/t silver over 3.9m
Phase II encountered phenomenal grades at shallow depths. It also led to the discovery of a new high-grade zone at Ely Central, where drilling intersected strong and continuous Ag grades in four drill holes over a 200-metre strike length that lies within a 580-metre untested gap from original drilling in 2012.
A New Vein Field Target That Looks Like Virginia
Adding to the positive results, an IP survey to the northeast of the existing vein field identified 17 targets with a chargeability response similar to known veins in the main field, suggesting that a new vein field akin to Virginia has been discovered. The 37.5-line kilometres of IP surveying has since been worked up for drill targeting.
“In Phase II, we hit some of our best holes ever and encountered phenomenal grades at shallow depths – this is pretty big stuff, indicating tremendous upside potential,” said Keith Anderson. “Our main goal with Phase III is to climb to 50 million ounces, on our way to 100 million plus. Nothing is set in stone, but it’s definitely within the realm of possibility, especially when you consider the size of our property.”
In addition to identifying new mineralized zones and a key target area for expansion, Virginia’s potential is unique in that the property has never been explored to depths greater than 150 metres, while surrounding miners have successfully encountered mineralization to depths as low as 450 metres.
Furthermore, silver veins in the south and east portions of the Virginia property do not outcrop to the surface and require deeper drilling than what’s been endeavored so far. If Silver Sands encounters mineralization at lower depths the resource potential could very well double or triple.