Form 6-K FORTUNA SILVER MINES For: Mar 12

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR

15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of March 2020

 

Commission File Number 001-35297

 

Fortuna Silver Mines Inc.

(Translation of registrant’s name into English)

 

200 Burrard Street, Suite 650, Vancouver, British Columbia, Canada V6C 3L6

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

FORM 20-F   ¨                         FORM 40-F  þ

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Fortuna Silver Mines Inc.
	(Registrant)
Date:  March 12, 2020	By:	/s/ "Jorge Ganoza Durant"
		Jorge Ganoza Durant
		President and CEO

 

Exhibits:

 

99.1

Annual Consolidated Financial Statements for the year ended December 31, 2019.

99.2

Management’s Discussion and Analysis for the year ended December 31, 2019.

99.3

News release dated March 11, 2020

 

Exhibit 99.1

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

YEARS ENDED

DECEMBER 31, 2019 AND 2018

 

(Presented in thousands of United States dollars, unless otherwise stated)

 

 

MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

 

Management of Fortuna Silver Mines Inc. (the “Company”) (“we”, “us” or “our”) have prepared the consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) and the accompanying Management’s Discussion and Analysis (“MD&A”) and are responsible for their content. The financial information presented in the MD&A is consistent with the information that is contained in the consolidated financial statements. The consolidated financial statements include, where necessary, amounts based on our estimates and judgement.

 

In order to discharge our responsibility for the integrity of the financial statements, the Company maintains a system of Internal Control over Financial Reporting and Disclosure Controls and Procedures. These controls are designed to provide reasonable assurance that the Company’s assets are safeguarded, transactions are executed and recorded in accordance with our authorization, proper records are maintained and relevant and reliable financial information is produced. These controls include maintaining quality standards in the hiring and training of employees, policies and procedures manuals, a corporate code of conduct and ensuring that there is proper accountability for performance within appropriate and well defined areas of responsibility.

 

The Board of Directors is responsible for overseeing the performance of our responsibilities for financial reporting and internal control over Financial Reporting and Disclosure Controls and Procedures. The Audit Committee, which is composed of non-executive directors, meets with us as well as the external auditors to ensure that we are properly fulfilling our financial reporting responsibilities to the Directors who approve the consolidated financial statements. The external auditors have full and unrestricted access to the Audit Committee to discuss the scope of their audits, and the adequacy of the system of internal controls, and to review financial reporting issues.

 

The consolidated financial statements have been audited by KPMG LLP, the Company’s independent registered public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States).

 

/s/ Jorge Ganoza Durant	/s /Luis Ganoza Durant
President and Chief Executive Officer	Chief Financial Officer

 

Vancouver, Canada

March 10, 2020

 

 

 

 

	KPMG LLP	Telephone	(604) 691-3000
	Chartered Professional Accountants	Fax	(604) 691-3031
	PO Box 10426 777 Dunsmuir Street	Internet	www.kpmg.ca
	Vancouver BC V7Y 1K3
	Canada

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors
Fortuna Silver Mines Inc.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated statements of financial position of Fortuna Silver Mines Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Change in Accounting Principle

 

As discussed in Note 3 to the consolidated financial statements, the Company has changed its accounting policy for leases as of January 1, 2019 due to the adoption of IFRS 16, Leases.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

 

 

 

Fortuna Silver Mines Inc.
Page 2

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ KPMG LLP

 

 

Chartered Professional Accountants

 

We have served as the Company’s auditor since 2017.

 

Vancouver, Canada
March 10, 2020

 

 

 

 

	KPMG LLP	Telephone	(604) 691-3000
	Chartered Professional Accountants	Fax	(604) 691-3031
	PO Box 10426 777 Dunsmuir Street	Internet	www.kpmg.ca
	Vancouver BC V7Y 1K3
	Canada

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors
Fortuna Silver Mines Inc.

 

Opinion on Internal Control Over Financial Reporting

 

We have audited Fortuna Silver Mines Inc.’s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the years then ended, and the related notes (collectively, the consolidated financial statements), and our report dated March 10, 2020 expressed an unqualified opinion on those consolidated financial statements.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, under the heading Controls and Procedures – Management’s Report on Internal Control Over Financial Reporting in the accompanying Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

 

 

 

Fortuna Silver Mines Inc.
Page 2

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ KPMG LLP

Chartered Professional Accountants

Vancouver, Canada
March 10, 2020

 

 

Fortuna Silver Mines Inc.

Consolidated Income Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars, except per share amounts) 

		Years ended December 31,
		2019				2018
Sales (note 23)		$	257,187			$	263,296
Cost of sales (note 24)			172,606				166,725
Mine operating income			84,581				96,571
General and administration (note 25)			29,805				26,189
Exploration and evaluation			2,411				723
Share of loss from associates (note 11)			225				21
Foreign exchange loss (note 12)			13,335				6,091
Other expenses (note 26)			4,611				1,961
			50,387				34,985
Operating income			34,194				61,586
Investment gains (note 12)			11,024				-
Interest and finance (costs) income, net (note 27)			(24	)			384
Gain (loss) on derivatives			(1,223	)			5,370
			9,777				5,754
Income before income taxes			43,971				67,340
Income taxes (note 28)
Current income tax expense			32,631				30,563
Deferred income tax (recovery) expense			(12,456	)			2,787
			20,175				33,350
Net income for the year		$	23,796			$	33,990
Earnings per share (note 22)
Basic		$	0.15			$	0.21
Diluted		$	0.14			$	0.21
Weighted average number of common shares outstanding (000's)
Basic			160,193				159,785
Diluted			164,525				161,636

 

The accompanying notes are an integral part of these financial statements.

 

 

Fortuna Silver Mines Inc.

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars)

 

		Years ended December 31,
		2019				2018
Net income for the year		$	23,796			$	33,990
Items that will remain permanently in other comprehensive income:
Changes in fair value of marketable securities, net of $nil tax			-				(69	)
Items that may in the future be reclassified to profit or loss:
Changes in fair value of hedging instruments, net of $nil tax			(665	)			(156	)
Total other comprehensive loss for the year			(665	)			(225	)
Comprehensive income for the year		$	23,131			$	33,765

 

The accompanying notes are an integral part of these financial statements.

 

 

Fortuna Silver Mines Inc.

Consolidated Statements of Financial Position 

As of December 31, 2019 and 2018

(Presented in thousands of US dollars)

 

		December 31,				December 31,
		2019				2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	83,404			$	90,503
Short term investments			-				72,824
Trade and other receivables (note 5)			47,707				32,769
Inventories (note 6)			14,471				14,386
Other current assets (note 7)			5,495				7,341
Assets held for sale (note 8)			1,069				1,097
			152,146				218,920
NON-CURRENT ASSETS
Mineral properties and exploration and evaluation assets (note 9)			353,519				312,800
Plant and equipment (note 10)			378,509				192,200
Investment in associates (note 11)			1,331				4,277
Long-term receivables and other (note 12)			38,389				15,241
Deposits and advances to contractors (note 13)			12,171				43,079
Total assets		$	936,065			$	786,517
LIABILITIES
CURRENT LIABILITIES
Trade and other payables (note 14)		$	65,286			$	48,734
Income taxes payable			12,400				8,358
Current portion of lease obligations (note 3(u) and 16)			8,831				3,395
Current portion of closure and reclamation provisions (note 19)			3,257				841
			89,774				61,328
NON-CURRENT LIABILITIES
Debt (note 17)			146,535				69,302
Deferred tax liabilities (note 28 (c))			20,915				31,444
Closure and reclamation provisions (note 19)			27,868				15,102
Lease obligations (notes 3(u) and 16)			15,048				5,371
Other liabilities (note 18)			499				1,166
Total liabilities			300,639				183,713
SHAREHOLDERS' EQUITY
Share capital (note 21)			422,145				420,467
Reserves			26,094				18,946
Retained earnings			187,187				163,391
Total shareholders' equity			635,426				602,804
Total liabilities and shareholders' equity		$	936,065			$	786,517

 

 

/s/ Jorge Ganoza Durant	/s/ Kylie Dickson
Jorge Ganoza Durant	Kylie Dickson
Director	Director

 

The accompanying notes are an integral part of these financial statements.

 

 

Fortuna Silver Mines Inc. 

Consolidated Statements of Cashflows 

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars)

 

		Years ended December 31,
		2019				2018
OPERATING ACTIVITIES
Net income for the year		$	23,796			$	33,990
Items not involving cash
Depletion and depreciation			46,003				44,774
Accretion expense			939				830
Income taxes			20,175				33,350
Interest expense			857				1,562
Interest income			(1,838	)			-
Share based payments expense, net of cash settlements			4,567				(2,051	)
Share of loss from associates			225				21
Unrealized foreign exchange loss			509				453
Unrealized foreign exchange loss, Lindero construction (note 12)			11,465				3,854
Investment gains, Lindero construction			(11,024	)			-
Unrealized (gain) loss on derivatives			2,646				(4,974	)
Write-downs and other			5,592				2,806
			103,912				114,615
Trade and other receivables			(14,309	)			4,257
Prepaid expenses			1,621				(496	)
Inventories			(1,036	)			1,792
Trade and other payables			3,021				(1,588	)
Closure and reclamation payments			(352	)			(682	)
Cash provided by operating activities			92,857				117,898
Income taxes paid			(31,521	)			(35,698	)
Interest paid			(824	)			(1,576	)
Interest received			2,493				2,831
Net cash provided by operating activities			63,005				83,455
INVESTING ACTIVITIES
Purchases of short-term investments			(45,145	)			(237,787	)
Redemptions of short-term investments			128,320				191,632
Investments in associates			-				(1,148	)
Expenditures on Lindero construction			(189,653	)			(59,535	)
Capitalized interest on Lindero construction			(6,005	)			(1,573	)
Additions to mineral properties, plant and equipment			(28,473	)			(36,788	)
Contractor advances on Lindero construction and other expenditures			(19,743	)			(48,191	)
Advances applied to Lindero construction and other expenditures			50,650				5,112
Proceeds from sale of assets			229				13
Additions to long-term receivables			(35,394	)			(16,788	)
Cash used in investing activities			(145,214	)			(205,053	)
FINANCING ACTIVITIES
Transaction costs on debt modification			-				(1,338	)
Transaction costs on convertible debenture (note 17(b))			(2,490	)			-
Proceeds from credit facility (note 17(a))			40,000				30,000
Proceeds from convertible debenture (note 17(b))			46,000				-
Proceeds from issuance of common shares			-				959
Payments of lease obligations			(8,385	)			(907	)
Cash provided by financing activities			75,125				28,714
Effect of exchange rate changes on cash and cash equivalents			(15	)			313
Decrease in cash and cash equivalents during the year			(7,099	)			(92,571	)
Cash and cash equivalents, beginning of the year			90,503				183,074
Cash and cash equivalents, end of the year		$	83,404			$	90,503
Cash and cash equivalents consist of:
Cash		$	30,984			$	24,535
Cash equivalents			52,420				65,968
Cash and cash equivalents, end of the year		$	83,404			$	90,503

 

The accompanying notes are an integral part of these financial statements.

 

 

Fortuna Silver Mines Inc.

Consolidated Statements of Changes in Equity

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars, except for number of shares)

 

		Share capital								Reserves
		Number of common shares				Amount				Equity reserve				Hedging reserve				Fair value reserve				Equity component of convertible debenture				Foreign Currency reserve				Retained earnings				Total equity
Balance at January 1, 2018			159,636,983			$	418,168			$	14,726			$	147			$	27			$	-			$	1,115			$	129,401			$	563,584
Total comprehensive income
Net income for the year			-				-				-				-				-				-				-				33,990				33,990
Other comprehensive loss			-				-				-				(156	)			(69	)			-				-				-				(225	)
Total comprehensive income			-				-				-				(156	)			(69	)			-				-				33,990				33,765
Transactions with owners of the Company
Shares issued on vesting of share units			78,150				388				(388	)			-				-				-				-				-				-
Exercise of stock options			20,000				21				(8	)			-				-				-				-				-				13
Exercise of warrants			204,462				1,890				(944	)			-				-				-				-				-				946
Share-based payments (note 20)			-				-				4,496				-				-				-				-				-				4,496
			302,612				2,299				3,156				-				-				-				-				-				5,455
Balance at December 31, 2018			159,939,595			$	420,467			$	17,882			$	(9	)		$	(42	)		$	-			$	1,115			$	163,391			$	602,804
Balance at January 1, 2019			159,939,595			$	420,467			$	17,882			$	(9	)		$	(42	)		$	-			$	1,115			$	163,391			$	602,804
Total comprehensive income
Net income for the year			-				-				-				-				-				-				-				23,796				23,796
Other comprehensive loss			-				-				-				(665	)			-				-				-				-				(665	)
Total comprehensive income			-				-				-				(665	)			-				-				-				23,796				23,131
Transactions with owners of the Company
Shares issued on vesting of share units			351,958				1,678				(1,678	)			-				-				-				-				-				-
Share-based payments (note 20)			-				-				4,666				-				-				-				-				-				4,666
Equity portion of convertible debenture, net of tax (note 17 (b))			-				-				-				-				-				4,825				-				-				4,825
			351,958				1,678				2,988				-				-				4,825				-				-				9,491
Balance at December 31, 2019			160,291,553			$	422,145			$	20,870			$	(674	)		$	(42	)		$	4,825			$	1,115			$	187,187			$	635,426

 

The accompanying notes are an integral part of these financial statements.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

1.	Nature of Operations

 

Fortuna Silver Mines Inc. and its subsidiaries (the “Company”) is a publicly traded company incorporated and domiciled in British Columbia, Canada.

 

The Company is engaged in precious and base metal mining and related activities in Latin America, including exploration, extraction, and processing. The Company operates the Caylloma silver, lead, and zinc mine (“Caylloma”) in southern Peru, the San Jose silver and gold mine (“San Jose”) in southern Mexico, and the Lindero Gold Project (“Lindero Mine”), which is under construction, in northern Argentina.

 

Its common shares are listed on the New York Stock Exchange under the trading symbol FSM, on the Toronto Stock Exchange under the trading symbol FVI, and on the Frankfurt Stock Exchange under the trading symbol F4S.F.

 

The Company’s registered office is located at Suite 650 - 200 Burrard Street, Vancouver, Canada, V6C 3L6.

 

2.	Basis of Presentation

 

Statement of Compliance

 

These consolidated financial statements (“financial statements”) have been prepared by management of the Company in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) effective as of December 31, 2019.

 

On March 10, 2020, the Company's Board of Directors approved these financial statements for issuance.

 

Presentation and Functional Currency

 

These financial statements are presented in United States Dollars (“$” or “US$” or “US dollars”), which is the functional currency of the Company. Reference to C$ are to Canadian dollars. All amounts in these financial statements have been rounded to the nearest thousand US dollars, unless otherwise stated.

 

Basis of Measurement

 

These financial statements have been prepared on a historical cost basis, except for those assets and liabilities that are measured at fair value (Note 30) at the end of each reporting period.

 

3.	Significant Accounting Policies

 

The Company has consistently applied the following accounting policies to all periods presented in these financial statements.

 

(a)

Basis of Consolidation

 

These financial statements include the accounts of the Company. All significant intercompany transactions, balances, revenues, and expenses have been eliminated upon consolidation.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

Subsidiaries are included in the consolidated financial results of the Company from the effective date of acquisition or control and up to the effective date of disposition or loss of control. Control is achieved when the Company has power over the investee, is exposed to or has rights to variable returns from its involvement with an investee, and had the ability to affect those returns through its power over the investee.

 

Fortuna Silver Mines Inc. is the ultimate parent entity of the group. At December 31, 2019, the principal subsidiaries of the Company, their geographic locations, and the ownership interests held by the Company, were as follows:

 

Name		Location				Ownership				Principal Activity
Minera Bateas S.A.C. ("Bateas")			Peru				100%			Caylloma Mine
Compania Minera Cuzcatlan S.A. de C.V. ("Cuzcatlan")			Mexico				100%			San Jose Mine
Mansfield Minera S.A. ("Mansfield")			Argentina				100%			Lindero Mine

 

(b)

Foreign Currency Translation

 

Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange at each financial position date. Foreign exchange gains or losses on translation to the functional currency of an entity are recorded in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction.

 

(c)

Cash, Cash Equivalents and Short-Term Investments

 

Cash and cash equivalents include cash on hand, demand deposits, and money market instruments with maturities from the date of acquisition of 90 days or less, which are readily convertible to known amounts of cash and are subject to insignificant changes in value. Short-term investments consist of term deposits with original maturities in excess of three months but less than twelve months. Cash, cash equivalents and short-term investments are designated as amortized cost.

 

(d)

Inventories

 

Inventories include mineral concentrates, stockpiled ore, materials and supplies. Costs allocated to metal inventories are based on average costs, which include direct mining costs, direct labor and material costs, mine site overhead, depletion and amortization. Costs allocated to materials and supplies are based on weighted average costs and include all costs of purchase and other costs in bringing these inventories to their existing location and condition. If carrying value exceeds net realizable amount, a write down is recognized. The write down may be reversed in a subsequent period if the circumstances which caused the write down no longer exist, to the extent that the related inventory has not been sold. Net realizable value is calculated as the estimated price at the time of sale based on prevailing metal prices less estimated future costs to convert the inventories into saleable form and estimated costs to sell.

 

(e)

Investment in Associates

 

Associates are those entities in which the Company has significant influence, but not control or joint control, over the entity’s financial and operating policies. Interests in associates are accounted for using the equity method. They are initially recognized at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income of equity-accounted investees, until the date on which significant influence ceases.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

An impairment test is performed when there is objective evidence of impairment, such as significant adverse changes in the environment in which the associate operates or there is a significant or prolonged decline in the fair value of the investment below its carrying amount. When there is objective evidence that an investment is impaired, a quantitative impairment test is performed and a loss is recorded if the recoverable amount is lower than the carrying amount. Impairment losses are reversed if the recoverable amount subsequently exceeds the carrying amount.

 

(f)

Exploration and Evaluation Assets

 

Exploration expenditures on properties for which the Company does not have title or rights to are expensed when incurred. Significant payments related to the acquisition of land and mineral rights and the costs to conduct a preliminary evaluation to determine that the property has potential to develop an economic ore body are capitalized as incurred. The time between initial acquisition and a full evaluation of a property’s potential is dependent on many factors including, but not limited to, location relative to existing infrastructure, the property’s stage of development, geological controls and metal prices.

 

The Company capitalizes the cost of acquiring, maintaining its interest and exploring mineral properties as exploration and evaluation assets until such time as the properties are placed into development, abandoned, sold, or considered to be impaired in value.

 

If a mineable ore body is discovered, exploration and evaluation costs are reclassified to mining properties. The Company uses the following criteria in its assessment:

 

•

the property has mineral reserves as referred to in Canadian National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”), and

 

•

when legal, permitting and social matters have been resolved sufficiently to allow mining of the ore body.

 

Exploration and evaluation assets are tested for impairment when an indicator of impairment is identified and upon reclassification to mining properties.

 

If no mineable ore body is discovered, all previously capitalized costs are expensed in the period in which it is determined the property has no economic value.

 

Proceeds received from the sale of interests in exploration and evaluation assets are credited to the carrying value of the mineral properties, plant and equipment. Exploration costs that do not relate to any specific property are expensed as incurred.

 

(g)

Mineral Properties, Plant and Equipment

 

i.

Operational Mining Properties and Mine Development

 

For operating mines, all mineral property expenditures are capitalized and amortized based on a unit-of-production method considering the expected production to be obtained over the life of the mineral property. The expected production includes proven and probable reserves and the portion of inferred resources expected to be extracted economically as part of the production cost.

 

Capitalized costs of producing properties are amortized on a unit-of-production basis over proven and probable reserves and the portion of inferred resources where it is considered highly probable that those resources are expected to be extracted economically.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

The expected production to be obtained over the life of the mineral property is based on our life-of-mine production plans which typically include a portion of inferred resources, and therefore differ from the life-of-mine plans we publish as part of our NI 43-101 compliant technical reports which are based on reserves only. The decision to use inferred resources, and the portion of inferred resources to be included varies for each operation and is based on the geological characteristics of the ore body, the quality and predictability of inferred resources, and the conversion of inferred resources into measured and indicated (“M&I”) that we have historically achieved in the past.

 

Many factors are taken into account during resource classification including; the quality of drilling and sampling, drill/sample spacing, sample preparation and analysis, geological logging and modelling, database construction, geological interpretation and modelling, statistical/geostatistical analysis, interpolation method, local estimation, engineering studies, economic parameters, and reconciliation with actual results.

 

Once the integrity of the data has been established, two important considerations around classification of resources are geologic continuity and possible variation of thickness and grade between samples. For our inferred resources at San Jose and Caylloma we are able to achieve a significant level of confidence on the existence of mineable material as geological continuity has been established by consistent drill hole intercepts both along strike and down-dip which provides us with reasonable confidence in the location of the structures. The vast majority of the inferred resources are interpolated, estimated between existing drill hole intercepts, as opposed to extrapolated where the grades are estimated beyond the furthest sample point, adding to our confidence in the geologic continuity of the veins. Furthermore, San Jose and Caylloma are not structurally complex deposits where faulting has disrupted geologic continuity.

 

With regards to the variation of thickness and grade between samples, we use statistical means to calculate the probability that tonnage and grade content falls within a certain accuracy over a given timeframe. If the potential variation is estimated to be within ± 25% at 90 percent confidence globally, we classify it as an inferred resource. This is equivalent to stating that we have 95 percent confidence that greater than 75% of the inferred tonnes, grade,and metal content will ultimately be recovered by the mine and hence that the same percentage or higher will be converted from an inferred resource to an indicated resource through infill drilling as per our policy of upgrading prior to production.

 

As part of our process to include inferred resources into our life-of-mine production plans, we apply an economic cut-off to identify only the material that can be considered profitable to mine within our mine designs, and at this time we apply a conversion or “risk” factor to the mining blocks comprised of inferred resources that we include in such mine production plans. This conversion factor is based on the predictability of conversion derived from statistical estimates of confidence as described above and the support from historic conversion rates of inferred resources into M&I at each of our mines. The conversion factors used in our 2019 and 2018 life-of-mine plans were 90% at San Jose and 80% at Caylloma.

 

The percentage of inferred resources included as a component of the total mineable inventory (reserve + resource) considered in the 2019 life-of-mine evaluation for each operation as of December 31, 2019, was San Jose 29% (2018 and 2017: 21% and 23%); Caylloma 45% (2018 and 2017: 48% and 60%).

 

The Company reviews the conversion factors including past experience in assessing the future expected conversion of inferred resources to be used in the life-of-mine plans for inclusion of inferred resources once a year in light of new geologic information and conversion data and when events or circumstances indicate that a review should be made. The Company continually monitors expected conversion and any changes in estimates that arise from this review are accounted for prospectively.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

Significant estimation is involved in determining resources and in determining the percentage of resources ultimately expected to be converted to reserves, which we determine based on careful consideration of both internal and external technical and economic data. Estimation of future conversion of resources is inherently uncertain and involves significant judgment and actual outcomes may vary from these judgments and estimates and such outcomes may have a material impact on the results. Revisions to these estimates are accounted for in the period in which the change in the estimate arises.

 

Costs of abandoned properties are written-off.

 

-

Commercial Production

 

Capital work in progress consists of expenditures for development of a mine and construction of related processing facilities, and includes costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling metals produced while bringing the asset to the condition necessary for it to be capable of operating in the manner intended by management (“commercial production”). Commercial production is a convention for determining the point in time in which a mine and plant has completed the operational commissioning and has operational results that are expected to remain at a sustainable commercial level over a period of time, after which production costs are no longer capitalized and are reported as operating costs. The determination of when commercial production commences is based on several qualitative factors including but not limited to the following:

 

•

all major capital expenditures to bring the mine to the condition necessary for it to be capable of operating in the manner intended by management have been completed; and

 

•

the ability to sustain ongoing production of ore at a steady or increasing level.

 

On the commencement of commercial production, depletion of each mining property will commence on a unit-of-production basis. Any costs incurred after the commencement of commercial production are capitalized to the extent they give rise to a future economic benefit.

 

ii.

Plant and Equipment

 

Property, plant and equipment are recorded at cost, net of accumulated depreciation and impairments. Costs directly related to construction projects are capitalized to work in progress until the asset is available for use in the manner intended by management. Assets, other than capital works in progress, are depreciated to their residual values over their estimated useful lives as follows:

 

Land and buildings
Land		Not depreciated
Mineral properties		Units of production		Declining balance
Buildings, located at the mine		Units of production		Declining balance
Buildings, others (1)		6-10 years		Straight line
Leasehold improvements (1)		4-8 years		Straight line
Plant and equipment
Machinery and equipment (1)		3-12 years		Straight line
Furniture and other equipment (1)		2-12 years		Straight line
Transport units		4-5 years		Straight line
Capital work in progress		Not depreciated

 

⁽¹⁾ The lesser of useful life or life of mine.

 

Equipment under finance lease is initially recorded at the present value of minimum lease payments at the inception of the lease and depreciated over the shorter of the lease term or useful life.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

Spare parts and components included in machinery and equipment are depreciated over the shorter of the useful life of the component or the related machinery and equipment.

 

Borrowing costs attributed to the construction of qualifying assets are capitalized to mineral properties, plant and equipment, and are included in the carrying amounts of related assets until the asset is available for use in the manner intended by management.

 

Costs associated with commissioning activities on constructed plants are deferred from the date of mechanical completion of the facilities until the date the assets are capable of operating in the manner intended by management. Any revenues generated prior to commencement of commercial production are credited against the carrying value of the qualifying asset.

 

On an annual basis, the depreciation method, useful economic life, and residual value of each component asset is reviewed with any changes recognized prospectively over its remaining useful economic life.

 

(h)

Asset Impairment

 

At the end of each reporting period, the Company assesses for impairment indicators and if there are such indicators, then the Company performs a test of impairment.

 

For the purpose of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash inflows or cash generating units. These are typically individual mines or development projects. Brownfields exploration projects, located close to existing mine infrastructure, are assessed for impairment as part of the associated mine cash generating unit.

 

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost of disposal (“FVLCD”) and value in use.

 

When the recoverable amount is assessed using pre-tax discounted cash flow techniques, the resulting estimates are based on detailed mine and/or production plans. For value in use, recent cost levels are considered, together with expected changes in costs compatible with the current condition of the business. The cash flow forecasts are based on best estimates of the expected future revenues and costs, including the future cash costs of production, sustaining capital expenditures, and reclamation and closure costs.

 

Where a FVLCD model is used, the cash flow forecast includes net cash flows expected to be realized from extraction, processing, and sale of mineral resources that do not currently qualify for inclusion in proven or probable reserves and the portion of resources expected to be extracted economically.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of recoverable amount but not beyond the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized into earnings immediately.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

(i)

Borrowing Costs

 

Interest and other financing costs incurred that are attributable to acquiring and developing exploration and development stage mining properties and constructing new facilities (“qualifying assets”), are capitalized and included in the carrying amounts of qualifying assets until those qualifying assets are capable of operating in the manner intended by management.

 

Capitalization of borrowing costs incurred commences on the date the following three conditions are met:

 

•

expenditures for the qualifying asset are being incurred;

 

•

borrowing costs are being incurred; and,

 

•

activities that are necessary to prepare the qualifying asset for its intended use are being undertaken.

 

Borrowing costs incurred after the qualifying assets are capable of operating in the manner intended by management are expensed.

 

Transaction costs, including legal, upfront commitment fees and other costs of issuance, associated with debt are recorded against the debt and are amortized over the term of the credit facility using the effective interest rate method.

 

All other borrowing costs are expensed in the period in which they are incurred.

 

(j)

Assets Held for Sale

 

A non-current asset is classified as held for sale when it meets the following criteria:

 

•

The non-current asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; and,

 

•

the sale of the non-current asset is highly probable. For the sale to be highly probable:

 

o

the appropriate level of management must be committed to a plan to sell the asset;

 

o

an active program to locate a buyer and complete the plan must have been initiated;

 

o

the non-current asset or disposal group must be actively marketed for sale at a price that is reasonable in relation to its current fair value;

 

o

the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification as held for sale (with certain exceptions); and

 

o

actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

 

Assets held for sale are not depreciated and are recorded at the lower of their carrying amount and fair value less costs to sell.

 

(k)

Income Taxes

 

Income tax expense consists of current and deferred tax expense.

 

Current tax expense is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at period end adjusted for amendments to tax payable with regards to previous years.

 

Deferred tax assets and liabilities are recognized for deferred tax consequences attributable to unused tax loss carry forwards, unused tax credits, and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis (“temporary differences”). Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability is settled.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in profit or loss in the period that substantive enactment occurs.

 

A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered, the deferred tax asset is reduced.

 

The following temporary differences do not result in deferred tax assets or liabilities:

 

•

the initial recognition of assets or liabilities, not arising in a business combination, that does not affect accounting or taxable income;

 

•

goodwill; and

 

•

investments in subsidiaries, associates and jointly controlled entities where the timing of reversal of the temporary differences can be controlled and reversal in the foreseeable future is not probable.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities, and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

 

(l)

Provisions

 

i.

Closure and Reclamation Provisions

 

Future obligations to retire an asset, including dismantling, remediation and ongoing treatment and monitoring of the site related to normal operation are initially recognized and recorded as a liability based on estimated future cash flows discounted at the risk-free rate.

 

The closure and reclamation provision (“CRP”) is adjusted at each reporting period for changes to the expected amount of cash flows required to discharge the liability, the timing of such cash flows and the risk-free discount rate.

 

The liability is accreted to full value over time through periodic charges to profit or loss.

 

The amount of the CRP initially recognized is capitalized as part of the related asset’s carrying value and amortized to profit or loss. The method of amortization follows that of the underlying asset. The costs related to a CRP are only capitalized to the extent that the amount meets the definition of an asset and can bring about future economic benefit. For a closed site or where the asset which generated a CRP no longer exists, there is no longer a future benefit related to the costs and as such, the amounts are expensed. Revisions in estimates or new disturbances result in an adjustment to the CRP with an offsetting adjustment to the asset, unless there is no future benefit, in which case they are expensed.

 

ii.

Environmental Disturbance Restoration Provisions

 

During the operating life of an asset, events such as infractions of environmental laws or regulations may occur. These events are not related to the normal operation of the asset and are referred to as environmental disturbance restoration provisions (“EDRP”). The costs associated with an EDRP are accrued and charged to earnings in the period in which the event giving rise to the liability occurs. Any subsequent adjustments to an EDRP due to changes in estimates are also charged to earnings in the period of adjustment. These costs are not capitalized as part of the long-lived asset’s carrying value.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

iii.

Other Provisions

 

Provisions are recognized when a present legal or constructive obligation exists as a result of past events, and it is probable that an outflow of resources that can be reliably estimated will be required to settle the obligation. Where the effect of the time value of money is material the provision is discounted using an appropriate current market based pre-tax discount rate.

 

(m)

Share Capital

 

Common shares are classified as equity. Costs directly attributable to the issuance of common shares are shown in equity as a deduction from the proceeds.

 

(n)

Share-Based Payments

 

The fair value method of accounting is used for share-based payment transactions. Under this method, the cost of stock options and other equity-settled share-based payment arrangements are recorded based on the estimated fair value at the grant date and charged to earnings over the vesting period. Where awards are forfeited because non-market based vesting conditions were not satisfied, the expense previously recognized is reversed in the period the forfeiture occurs.

 

Share-based payment expenses relating to cash-settled awards, including deferred and restricted share units are accrued and expensed over the vesting period based on the quoted market value of the Company’s common shares. As these awards will be settled in cash, the expense and liability are adjusted at each reporting period for any changes in the underlying share price.

 

Equity settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the Company obtains the goods or the counter party renders the services.

 

i.

Stock Option Plan

 

The Company applies the fair value method of accounting for all stock option awards. Under this method, the Company recognizes a compensation expense for all stock options awarded to employees, based on the fair value of the options on the date of grant which is determined by using the Black-Scholes option pricing model. The fair value of the options is expensed over the graded vesting period of the options.

 

ii.

Deferred Share Unit Plan

 

Deferred share units (“DSU”) are typically granted to non-executive directors of the Company. They are payable in cash upon resignation, retirement, removal, failure to achieve re-election, or upon a change of control of the Company. The DSU compensation liability is accounted for based on the number of DSUs outstanding and the quoted market value of the Company’s common shares at the financial position date. The year-over-year change in the DSU compensation liability is recognized in profit or loss.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

iii.

Share Unit Plans

 

The Company’s amended and restated share unit plan (the “SU Plan”) covers all restricted share units (“RSUs”) and performance share units (“PSUs”) granted by the Company on and after March 1, 2015. All RSUs granted prior to March 1, 2015 were governed by the restricted share unit plan dated November 12, 2010.

 

-

Restricted Share Units

 

The Company’s RSUs are settled in either cash or equity, as determined by the Company’s Board of Directors at the grant date and typically vest over three years.

 

For cash settled RSUs, the share-based payment expense is adjusted at each reporting period to reflect any change in the quoted market price of the Company’s common shares and the vesting of each RSU grant, with a corresponding amount recorded in other liabilities.

 

For equity-settled RSUs, the fair value is determined based on the quoted market price of the Company’s common shares at the date of grant, and the fair value is recognized as a share-based payment expense over the vesting period with a corresponding amount recorded in equity reserves.

 

-

Performance Share Units

 

The Company’s PSUs are performance-based awards for the achievement of specified performance metrics by specified deadlines and are settled in either cash or equity, as determined by the Company’s Board of Directors at the grant date and typically vest over three years.

 

For cash settled PSUs, the share-based payment expense is adjusted at each reporting period to reflect any change in the quoted market price of the Company’s common shares, the vesting of each PSU grant and the expected performance factors with a corresponding amount recorded in other liabilities.

 

For equity-settled PSUs, the fair value is determined based on the quoted market price of the Company’s common shares at the date of grant and the number of PSUs expected to vest based on the performance factors. The fair value is recognized as a share-based payment expense over the vesting period with a corresponding amount recorded in equity reserves.

 

(o)

Related Party Transactions

 

Parties are related if one party has the ability directly, or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities, and include key management personnel of the Company. A transaction is a related party transaction when there is a transfer of resources or obligations between related parties.

 

(p)

Earnings per Share

 

Basic earnings per share (“EPS”) is computed by dividing the net income for the year by the weighted average number of common shares outstanding during the year.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

The diluted earnings per share calculation is based on the weighted average number of common shares outstanding during the year, adjusted for the effects of dilutive common share equivalents. This method requires that the dilutive effect of outstanding options and equity settled units issued should be calculated using the treasury stock method. This method assumes that all common share equivalents have been exercised at the beginning of the year (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of the common shares during the year, but only if dilutive. Dilution from convertible debentures is calculated using the if-converted method, based on the number of shares to be issued upon conversion of the convertible debentures, with a corresponding adjustment to net income for the after-tax interest expense related to the convertible debentures.

  

(q)

Financial Instruments

 

i

Classification and measurement of financial assets and financial liabilities

 

Financial assets are measured as either: amortized cost; fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). All non-derivative financial liabilities are measured at amortized cost. The classification of financial assets is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated, and instead the hybrid financial instrument is assessed for classification.

 

A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:

 

·

it is held within a business model whose objective is to hold assets to collect contractual cash flows; and

 

·

its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:

 

·

it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

 

·

its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

On initial recognition of an equity investment that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income (OCI). This election is made on an investment-by-investment basis. All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL.

 

Components of compound financial instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. The financial liability is initially recognized at fair value, net of an allocation of issuance costs, and is subsequently measured at amortized cost. The equity component is initially measured based on the residual amount, net of an allocation of issuance costs, and is not subsequently remeasured.

 

Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs. Repurchase of the Company’s own equity instruments is recognized and deducted directly in equity. No gain or loss is recognized in profit or loss on the purchase, sale, or cancellation of our own equity instruments. No gain or loss is recognized on the issue of our own equity instruments, unless the equity is issued to settle a liability.

 

Financial Liabilities at Amortized Cost – Financial liabilities are measured at amortized cost using the effective interest method, unless they are required to be measured at fair value through profit or loss (“FVTPL”), or the Company has opted to measure them at FVTPL. Debt and accounts payable and accrued liabilities are recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method.

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars – unless otherwise noted)

 

The following accounting policies apply to the subsequent measurement of financial assets:

 

·

Financial assets at FVTPL - These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in profit or loss.

 

·

Financial assets at amortized cost - These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.

 

·

Equity investments at FVOCI - These assets are subsequently measured at fair value. Dividends are recognized as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Gains or losses recognized on the sale of the equity investment are recognized in OCI and are never reclassified to profit or loss.

 

ii  Impairment of Financial Assets

 

An entity is required to recognize expected credit losses when financial instruments are initially recognized and to update the amount of expected credit losses recognized at each reporting date to reflect changes in the credit risk of the financial instruments.

 

For the Company’s trade receivables, it determines the lifetime expected losses for all of its trade receivables. The expected lifetime credit loss provision for the Company’s trade receivables is based on historical counterparty default rates and adjusted for relevant forward-looking information, when required.

 

iii  Hedge Accounting

 

The Company has established a strategy, in accordance with its current risk management policies, to use interest rate swaps to hedge against the variability in cash flows arising from changes in USD LIBOR based floating interest rate borrowing relating to its credit facility.

 

Management qualitatively assess that the changes in value of the hedging instrument and the hedged item will move in opposite directions and will be perfectly offset. As both counterparties to the derivative are investment grade, the effect of credit risk is considered as neither material nor dominant in the economic relationship. The portion of the gain or loss on the hedging instrument that is determined to be effective will be recognized directly in other comprehensive income while the amount that is determined to be ineffective, if any, will be recorded in the profit or loss during the life of the hedging relationship.

 

(r)    Revenue Recognition

 

The Company earns revenue from contracts with customers related to its concentrate sales. Revenue from contracts with customers is recognized when a customer obtains control of the concentrate and the Company satisfies its performance obligation. The Company considers the terms of the contract in determining the transaction price, which is the amount the entity expects to be entitled to in exchange for the transferring of the concentrates. The transaction price of a contract is allocated to each performance obligation based on its stand-alone selling price.

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars – unless otherwise noted) 

 

The Company satisfies its performance obligations for its concentrate sales based upon specified contract terms which are generally upon delivery to the customer at a specified warehouse or upon loading of the concentrate onto a vessel. The Company typically receives payment within one to four weeks of delivery.

 

Revenue from concentrate sales is recorded based upon forward market price of the expected final sales price date. IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) does not consider provisional price adjustments associated with concentrate sales to be revenue from contracts with customers as they arise from changes in market pricing for silver, gold, lead and zinc between the delivery date and settlement date. As such, the provisional price adjustments are accounted for as derivatives and presented separately in Note 23 of these financial statements.

 

(s)    Segment Reporting

 

The Company’s operating segments are based on the reports reviewed by the senior management group that are used to make strategic decisions. The Chief Executive Officer, as chief operating decision maker, considers the business from a geographic perspective considering the performance of the Company’s business units.

 

A geographical segment is a distinguishable component of the entity that is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different than those of segments operating in other economic environments.

 

The business operations comprise the mining and processing of silver-lead, zinc, and silver-gold and the sale of these products.

 

(t)    Significant Accounting Estimates and Judgements

 

The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities at the period end date and reported amounts of expenses during the reporting period. Such judgements and estimates are, by their nature, uncertain. Actual outcomes could differ from these estimates.

 

The impact of such judgements and estimates are pervasive throughout the financial statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and are accounted for prospectively.

 

In preparing these consolidated financial statements for the year ended December 31, 2019, the Company applied the critical estimates, assumptions and judgements as disclosed in note 4.

 

(u)    Adoption of New Accounting Standards

 

i.    IFRS 16 Leases

 

Prior to the adoption of IFRS 16 on January 1, 2019, a lease was classified as a finance lease when substantially all of the risks and rewards incidental to ownership of the leased asset were transferred from the lessor to the lessee by the agreement. At the commencement of the lease term, finance leases were recognized as assets and liabilities at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The assets were depreciated over the shorter of the asset’s useful lives and the term of the lease. Interest on the lease instalments was recognized as interest expense over the lease term using the effective interest method. Leases for land and buildings were recorded separately if the lease payments could be allocated accordingly.

 

Leases that do not transfer all the risks and rewards of ownership are classified as operating leases. Payments are recorded in profit or loss using the straight line method over their estimated useful lives.

 

The following is the new accounting policy for leases under IFRS 16, effective January 1, 2019:

 

At inception, the Company assesses whether a contract contains an embedded lease. A contract contains a lease when the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars – unless otherwise noted)

 

The Company, as lessee, is required to recognize a right-of-use asset (“ROU asset”), representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments. The Company may elect to not apply IFRS 16 to leases with a term of less than 12 months or to low value assets, which is made on an asset by asset basis.

 

The Company recognizes a ROU asset and a lease liability at the commencement of the lease. The ROU asset is initially measured based on the present value of lease payments, plus initial direct cost, less any incentives received. It is subsequently measured at cost less accumulated depreciation, impairment losses and adjusted for certain remeasurements of the lease liability. The ROU asset is depreciated from the commencement date over the shorter of the lease term or the useful life of the underlying asset. The ROU asset is subject to testing for impairment if there is an indicator of impairment.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by the interest rate implicit in the lease, or if that rate cannot be readily determined, the incremental borrowing rate. The incremental borrowing rate is the rate which the operation would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the ROU asset in a similar economic environment.

 

Lease payments included in the measurement of the lease liability are comprised of:

 

·

fixed payments, including in-substance fixed payments;

·

variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

·

amounts expected to be payable under a residual value guarantee;

·

the exercise price under a purchase option that the Company is reasonably certain to exercise;

·

lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option; and

·

penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.

 

The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or a rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.

 

Variable lease payments that do not depend on an index or a rate not included in the initial measurement of the ROU asset and lease liability are recognized as an expense in the consolidated statement of income in the period in which they are incurred.

 

The ROU assets are presented within “Plant and equipment” and the lease liabilities are presented in “Lease obligations” on the balance sheet.

 

ii.   Adoption of IFRS 16 Leases

 

Effective January 1, 2019, the Company adopted IFRS 16 using the modified retrospective approach. The comparative figures for the 2018 reporting period have not been restated and are accounted for under IAS 17, Leases, and IFRIC 4, Determining Whether an Arrangement Contains a Lease, as permitted under the specific transitional provisions in the standard.

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars – unless otherwise noted)

 

The Company used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:

 

·

applied the exemption not to recognize right of use asset and liabilities for leases with less than 12 months of lease term;

·

excluded initial direct cost from measuring the right of use asset at the date of initial application; and

·

used hindsight when determining the lease term if the contract contains an option to extend or terminate the lease.

 

At transition to IFRS 16, for those leases classified as operating leases under IAS 17, the lease liabilities were measured at the present value of the remaining lease payments and discounted using each operation’s applicable incremental borrowing rate as of January 1, 2019. As a result, the Company, as a lessee, has recognized $7,316 within Lease Obligations representing its obligation to make lease payments. ROU assets of the same amount were recognized within Plant and Equipment, representing its right to use the underlying assets. The weighted average incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 5.32%.

 

The Company leases various pieces of equipment that had previously been classified as finance leases under IAS 17. For these finance leases, the carrying amount of the ROU asset and the lease liability at January 1, 2019 were determined at the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date.

 

The following table summarizes the difference between operating lease commitments disclosed immediately preceding the date of initial application and lease liabilities recognized on the balance sheet at the date of initial application:

 

Operating lease obligations as at December 31, 2018		$	2,553
Leases with lease term of 12 months or less and low value assets			(825	)
Embedded leases identified in existing service contracts			6,162
Effect of discounting at incremental borrowing rate			(574	)
Lease liabilities recognized as at January 1, 2019			7,316
Lease liabilities from finance leases previously recorded in lease obligations			8,767
Total lease liabilities as at January 1, 2019			16,083
Less current portion			(6,120	)
Non-current portion		$	9,963

 

iii.  Adoption of IFRIC 23 Uncertainty over Income Tax Treatments

 

This interpretation sets out how to determine the accounting for a tax position when there is uncertainty over income tax treatments. At January 1, 2019, the Company adopted this standard and there was no impact on its financial statements.

 

(v)    New Accounting Standards Issued but not yet Effective

 

A number of new standards are effective for annual periods beginning after January 1, 2019 and earlier application is permitted; however, the Company has not early adopted the new or amended standards in preparing these financial statements.

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars – unless otherwise noted)

 

The following amended standards and interpretations are not expected to have a significant impact on the Company’s consolidated financial statements:

 

·

Amendments to References to Conceptual Framework in IFRS Standards.

·

Definition of a Business (Amendments to IFRS 3).

·

Definition of Material (Amendments to IAS 1 and IAS 8).

 

4.   Use of Estimates, Assumptions and Judgements

 

(a)    Critical Accounting Estimates and Assumptions

 

Many of the amounts included in the consolidated financial statements require management to make judgements and/or estimates. These judgements and estimates are continuously evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. Areas where critical accounting estimates and assumptions have the most significant effect on the amounts recognized in the consolidated financial statements include:

 

i.    Mineral Reserves and Resources and the Life of Mine Plan

 

We estimate our mineral reserves and mineral resources in accordance with the requirements of NI 43-101. Estimates of the quantities of the mineral reserves and mineral resources form the basis for our life of mine plans, which are used for the calculation of depletion expense under the units of production method, impairment tests, and forecasting the timing of the payments related to the environmental reclamation provision.

 

Significant estimation is involved in determining the reserves and resources included within our life of mine plans. Changes in forecast prices of commodities, exchange rates, production costs or recovery rates may result in our life of mine plan being revised and such changes could impact depletion rates, asset carrying values and our environmental reclamation provision. As at December 31, 2019 we have used the following long-term prices for our reserve and resource estimations: gold $1,380/oz, silver $17/oz, lead $2,170/t and zinc $2,590/t.

 

In addition to the estimates above, estimation is involved in determining the percentage of resources ultimately expected to be converted to reserves and hence included in our life of mine plans. Our life of mine plans include a portion of inferred resources as we believe this provides a better estimate of the expected life of mine for certain types of deposits, in particular for vein type structures. The percentage of inferred resources out of the total tonnage included in the life of mine plans is based on site specific geological, technical, and economic considerations. Estimation of future conversion of resources is inherently uncertain and involves judgement, and actual outcomes may vary from these judgements and estimates and such changes could have a material impact on the financial results. Some of the key judgements of the estimation process include geological continuity, stationarity in the grades within defined domains, reasonable geotechnical and metallurgical conditions, treatment of outlier (extreme) values, cut-off grade determination and the establishment of geostatistical and search parameters. Revisions to these estimates are accounted for prospectively in the period in which the change in estimate arises. See note 3(g)(i) of these financial statements.

 

ii.   Valuation of Mineral Properties and Exploration Properties

 

The Company carries its mineral properties at cost less accumulated depletion and any accumulated provision for impairment. The costs of each property and related capitalized expenditures are depleted over the economic life of the property on a units-of-production basis. Costs are charged to the consolidated income statement when a property is abandoned or when there is an impairment.

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars – unless otherwise noted) 

 

The Company undertakes a review of the carrying values of mining properties and related expenditures whenever events or changes in circumstances indicate that their carrying values may exceed their estimated net recoverable amounts determined by reference to estimated future operating results and discounted net cash flows. Where previous impairment has been recorded, the Company analyzes any impairment reversal indicators. An impairment loss is recognized when the carrying value of those assets is not recoverable.

 

In undertaking this review, management of the Company is required to make significant estimates of, amongst other things, future production and sales volumes, metal prices, foreign exchange rates, mineral resource and reserve quantities, future operating and capital costs to the end of the mine’s life, and reclamation costs. These estimates are subject to various risks and uncertainties which may ultimately have an effect on the expected recoverability of the carrying values of the mining properties and related expenditures.

 

The Company, from time to time, acquires exploration and development properties. When properties are acquired, the Company must determine the fair value attributable to each of the properties. When the Company conducts exploration on a mineral property and the results from the exploration do not support the carrying value, the property is written down to its new fair value which could have a material effect on the consolidated statement of financial position and the consolidated income statement.

 

iii.  Reclamation and Other Closure Provisions

 

The Company has obligations for reclamation and other closure activities related to its mining properties. The future obligations for mine closure activities are estimated by the Company using mine closure plans or other similar studies which outline the requirements that will be carried out to meet the obligations.

 

Because the obligations are dependent on the laws and regulations of the countries in which the mines operate, the requirements could change as a result of amendments in the laws and regulations relating to environmental protection and other legislation affecting resource companies. As the estimate of the obligations is based on future expectations, a number of estimates and assumptions are made by management in the determination of closure provisions.

 

iv.   Revenue Recognition

 

The Company’s sales of metal in concentrates allow for price adjustments based on the market price at the end of the relevant quotational period (“QP”) stipulated in the contract. These are referred to as provisional pricing arrangements and are such that the selling price for metal in concentrate is based on the prevailing spot price on a specified future date. At each balance sheet date, the Company estimates the value of the trade receivable using forward metal prices.

 

Adjustments to the sale price occurs based on movements in quoted market prices up to the end of the QP. The period between provisional invoicing and the end of the QP is generally between one and three months. Any future changes over the QP are embedded within the provisionally priced trade receivables and are, therefore, within the scope of IFRS 9 and not within the scope of IFRS 15. As such, the provisional price adjustments are accounted for as derivatives and presented separately in Note 23 of these financial statements.

 

v.    Contingencies

 

Contingencies can be either possible assets or possible liabilities arising from past events which, by their nature, will only be resolved when one or more future events not within our control occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgement and estimates of the outcome of future events. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings or regulatory or government actions that may negatively impact our business or operations, the Company with assistance from its legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims or actions.

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars – unless otherwise noted)

 

A liability is recognized in the consolidated financial statements when the outcome of the legal proceedings is probable and the estimated settlement amount can be estimated reliably. Contingent assets are not recognized in the consolidated financial statements until virtually certain.

 

(b)    Critical Accounting Judgements in Applying the Entity’s Accounting Policies

 

Judgements that have the most significant effect on the amounts recognized in the Company’s consolidated financial statements are as follows:

 

i.    Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between the financial statement carrying values of assets and liabilities and their respective income tax bases and losses carried forward. The determination of the ability of the Company to utilize tax loss carryforwards to offset deferred tax liabilities requires management to exercise judgement and make certain assumptions about the future performance of the Company.

 

Management is required to assess whether it is “probable” that the Company will benefit from these prior losses and other deferred tax assets. Changes in economic conditions, metal prices and other factors could result in revisions to the estimates of the benefits to be realized or the timing of utilization of the losses.

 

ii.   Assessment of Impairment and Reversal of Impairment Indicators

 

Management applies significant judgement in assessing whether indicators of impairment or reversal of impairment exist for an asset or a group of assets which could result in a testing for impairment. Internal and external factors such as significant changes in the use of the asset, commodity prices, life of mines, tax laws or regulations in the countries that our mines operate in and interest rates are used by management in determining whether there are any indicators of impairment or reversal of previous impairments.

 

iii.  Functional Currency

 

The functional currency for the Company and its subsidiaries is the currency of the primary economic environment in which each operates. The Company has determined that its functional currency and that of its subsidiaries is the U.S. dollar. The determination of functional currency may require certain judgements to determine the primary economic environment. The Company reconsiders the functional currency used when there is a change in the events and conditions which determined the primary economic environment.

 

iv.   Leases

 

Significant estimates, assumptions and judgments made by management on the adoption of IFRS 16 Leases primarily included judgement about whether the lease conveys the right to use a specific asset, whether the Company obtains substantially all of the economic benefits from the use of the asset, whether the Company has the right to direct the use of the asset, evaluating the appropriate discount rate to use to discount the lease liability for each lease or groups of assets, and to determine the lease term where a contract includes renewal options. Significant estimates, assumptions and judgments over these factors would affect the present value of the lease liabilities, as well as the associated amount of the ROU asset.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

5.

Trade and Other Receivables

 

		December 31,				December 31,
		2019				2018
Trade receivables from concentrate sales		$	33,642			$	28,132
Advances and other receivables			2,419				3,179
Value added taxes recoverable			11,646				1,458
Accounts and other receivables		$	47,707			$	32,769

 

The Company’s trade receivables from concentrate sales are expected to be collected in accordance with the terms of the existing concentrate sales contracts with its customers. No amounts were past due as at December 31, 2019 and 2018.

 

6.

Inventories

 

		December 31,				December 31,
		2019				2018
Concentrate stockpiles		$	2,640			$	1,671
Ore stockpiles			3,730				3,166
Materials and supplies			8,101				9,549
Inventories		$	14,471			$	14,386

 

During the year ended December 31, 2019, the Company expensed $169,711 (December 31, 2018 –$162,751) of inventories to cost of sales and wrote down $1,328 (December 31, 2018 - $206) of materials and supplies to their net realizable value, with such write downs included in cost of sales.

 

7.

Other Current Assets

 

		December 31,				December 31,
		2019				2018
Derivative assets		$	-			$	2,646
Income tax recoverable			2,553				136
Prepaid expenses			2,942				4,559
Other current assets		$	5,495			$	7,341

 

8.

Assets Held for Sale

 

Changes to assets held for sale during the years ended December 31, 2019 and 2018 are as follow:

 

Balance at December 31, 2017		$	1,701
Transfer from property, plant and equipment			194
Disposals			(107	)
Write-downs			(691	)
Balance at December 31, 2018			1,097
Disposals			(28	)
Balance at December 31, 2019		$	1,069

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

9.

Mineral Properties and Exploration and Evaluation Assets

 

		Depletable								Not depletable
		Caylloma				San Jose				Lindero				Other				Total
COST
Balance at December 31, 2018		$	121,625			$	175,609			$	155,854			$	7,797			$	460,885
Additions			6,396				7,838				34,485				2,652				51,371
Changes in closure and reclamation provision			223				886				13,527				-				14,636
Write-downs			-				-				-				(2,516	)			(2,516	)
Balance at December 31, 2019		$	128,244			$	184,333			$	203,866			$	7,933			$	524,376
ACCUMULATED DEPLETION
Balance at December 31, 2018		$	68,207			$	79,878			$	-			$	-			$	148,085
Depletion			6,228				16,544				-				-				22,772
Balance at December 31, 2019		$	74,435			$	96,422			$	-			$	-			$	170,857
Net Book Value at December 31, 2019		$	53,809			$	87,911			$	203,866			$	7,933			$	353,519

 

		Depletable								Not depletable
		Caylloma				San Jose				Lindero				Other				Total
COST
Balance at December 31, 2017		$	112,669			$	164,198			$	140,154			$	4,150			$	421,171
Additions			8,240				12,035				14,782				3,647				38,704
Changes in closure and reclamation provision			716				(624	)			918				-				1,010
Balance at December 31, 2018		$	121,625			$	175,609			$	155,854			$	7,797			$	460,885
ACCUMULATED DEPLETION
Balance at December 31, 2017		$	61,053			$	63,506			$	-			$	-			$	124,559
Depletion			7,154				16,372				-				-				23,526
Balance at December 31, 2018		$	68,207			$	79,878			$	-			$	-			$	148,085
Net Book Value at December 31, 2018		$	53,418			$	95,731			$	155,854			$	7,797			$	312,800

 

During the year ended December 31, 2019, the Company capitalized $5,259 (December 31, 2018 - $1,125) of interest related to the construction of the Lindero Mine.

 

The assets of the Caylloma Mine and the San Jose Mine and their holding companies, are pledged as security under the Company’s credit facility.

 

Exploration and Evaluation Assets

 

		Mexico								Argentina												Serbia
		Tlacolula				Pachuca				Arizaro				Esperanza				Incachule				Barje				Others				Total
Balance at December 31, 2017		$	3,128			$	-			$	367			$	82			$	82			$	491			$	-			$	4,150
Additions			170				-				567				706				684				1,447				73				3,647
Balance at December 31, 2018			3,298				-				934				788				766				1,938				73				7,797
Additions			218				962				2				-				-				1,318				152				2,652
Write-off			-				(962	)			-				(788	)			(766	)			-				-				(2,516	)
Balance at December 31, 2019		$	3,516			$	-			$	936			$	-			$	-			$	3,256			$	225			$	7,933

 

During the year ended December 31, 2019, the Company incurred $2,652 (December 31, 2018 - $3,647) of exploration and evaluation expenditures of which $962 were expensed. In addition, the Company wrote down $1,554 relating to two greenfield exploration projects (December 31, 2018 – nil).

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

10.	Plant and Equipment

 

		Machinery and equipment				Land, buildings and leasehold improvements				Furniture, other equipment and Transport units				Assets under lease 1				Capital work in progress - Lindero				Capital work in progress - Other				Total
COST
Balance at December 31, 2018		$	74,188			$	141,318			$	11,066			$	13,411			$	52,964			$	6,140			$	299,087
Initial adoption IFRS 16 (note 3(u))			-				-				-				7,316				-				-				7,316
Balance at January 1, 2019			74,188				141,318				11,066				20,727				52,964				6,140				306,403
Additions			1,185				714				3,464				14,944				177,017				9,718				207,042
Changes in closure and reclamation provision			171				-				-				-				-				-				171
Disposals			(1,038	)			-				(87	)			-				-				-				(1,125	)
Reclassifications			740				17,700				1,640				-				(10,646	)			(9,434	)			-
Balance at December 31, 2019		$	75,246			$	159,732			$	16,083			$	35,671			$	219,335			$	6,424			$	512,491
ACCUMULATED DEPRECIATION
Balance at December 31, 2018		$	35,843			$	65,547			$	5,390			$	107			$	-			$	-			$	106,887
Disposals			(746	)			-				(79	)			-				-				-				(825	)
Depreciation			7,117				12,813				2,091				5,899				-				-				27,920
Balance at December 31, 2019		$	42,214			$	78,360			$	7,402			$	6,006			$	-			$	-			$	133,982
Net Book Value at December 31, 2019		$	33,032			$	81,372			$	8,681			$	29,665			$	219,335			$	6,424			$	378,509

 

(1)

The Company leases equipment that was previously classified as a finance lease under IAS 17. On January 1, 2019, these leases were classified as right-of-use assets under IFRS 16 and the carrying amount of $13,411 and the lease liability of $8,767 were determined based on the carrying amount of these assets and their related lease liability immediately before this date.

 

		Machinery and equipment				Land, buildings and leasehold improvements				Furniture, other equipment and transport units				Equipment under  finance lease				Capital work in progress- Lindero				Capital work in progress - Other				Total
COST
Balance at December 31, 2017		$	62,217			$	131,738			$	7,478			$	7,295			$	4,360			$	8,561			$	221,649
Additions			3,122				390				7,405				-				59,356				8,858				79,131
Changes in closure and reclamation provision			550				-				-				-				-				-				550
Disposals			(1,859	)			-				(358	)			(26	)			-				-				(2,243	)
Reclassifications			10,158				9,190				(3,459	)			6,142				(10,752	)			(11,279	)			-
Balance at December 31, 2018		$	74,188			$	141,318			$	11,066			$	13,411			$	52,964			$	6,140			$	299,087
ACCUMULATED DEPRECIATION
Balance at December 31, 2017		$	27,570			$	52,353			$	4,552			$	3,510			$	-			$	-			$	87,985
Disposals			(1,719	)			-				(295	)			(26	)			-				-				(2,040	)
Reclassifications			3,152				538				18				(3,708	)			-				-				-
Depreciation			6,840				12,656				1,115				331				-				-				20,942
Balance at December 31, 2018		$	35,843			$	65,547			$	5,390			$	107			$	-			$	-			$	106,887
Net Book Value at December 31, 2018		$	38,345			$	75,771			$	5,676			$	13,304			$	52,964			$	6,140			$	192,200

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

11.	Investment in Associates

 

As at December 31, 2019, investments in associates were comprised of:

 

		Proportion of ownership held								Market Value (C$)
		December 31,								December 31,
Name		2019				2018				2019				2018
Medgold Resources Corp. ("Medgold")			22	%			22	%		$	1,265			$	2,740
Prospero Silver Corp. ("Prospero")			27	%			27	%		$	464			$	927

 

Medgold and Prospero are Canadian public companies which both trade on the TSX Venture Exchange under the ticker symbols MED and PSL, respectively, and are quoted in Canadian dollars (“C$”). Medgold’s principal business activity is the acquisition and exploration of resource properties in Serbia, and Prospero’s principal business activity is the acquisition and exploration of resource properties in Mexico.

 

		Medgold				Prospero				Total
Balance at December 31, 2017		$	2,694			$	-			$	2,694
Shares and warrants presented as marketable securities, December 31, 2017			-				556				556
Fair value adjustments prior to May 18, 2018			-				(99	)			(99	)
Exercise of warrants			-				624				624
Purchase of additional shares			249				274				523
Share of net income (loss)			132				(153	)			(21	)
Balance at December 31, 2018			3,075				1,202				4,277
Write down of investment			(1,937	)			(784	)			(2,721	)
Share of net loss			(164	)			(61	)			(225	)
Balance at December 31, 2019		$	974			$	357			$	1,331

 

During the year ended December 31, 2019, the Company wrote-down its investments in Prospero to $357 and in Medgold of $974.

 

12.	Long-Term Receivables and Other

 

		December 31,			December 31,
		2019			2018
Value added tax recoverable - Lindero (1)		$	34,176		$	15,241
Value added tax recoverable - San Jose (2)			2,036			-
Income tax recoverable (note 33 (d))			1,310			-
Other assets			867			-
Long-term receivables and other		$	38,389		$	15,241

(1)	The Company expects to start recovering the value added tax amount after commencement of commercial production at the Lindero Mine.

(2)	The Company expects to start recovering the value added tax amount during the third quarter of 2021.

 

During the year ended December 31, 2019, the Company recognized an unrealized foreign exchange loss of $12,137 (December 31, 2018 - $2,769) related to the value added tax recoverable on the construction at the Lindero Mine.

 

As a result of the devaluation of the Argentine Peso which followed Argentina’s primary election in the third quarter of 2019, the Company implemented an investment strategy to meet its local currency requirements in Argentina and recognized $11,024 of gains from Argentine Peso denominated cross-border securities trades.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

13.	Deposits and Advances to Contractors

 

As at December 31, 2019, the Company has advanced $12,164 (December 31, 2018 – $42,938) to contractors related to the construction of the Lindero Mine. During the year ended December 31, 2019, the Company paid $19,175 (December 31, 2018 - $46,453) as deposits for equipment and advances to contractors, and $49,950 of deposits (December 31, 2018 - $3,932) were applied against equipment delivered or services rendered during the year ended December 31, 2019.

 

14.	Trade and Other Payables

 

		December 31,				December 31,
		2019				2018
Trade accounts payable		$	15,975			$	14,099
Lindero construction payables			24,998				13,549
Refundable deposits to contractors			1,496				1,091
Payroll payable			13,627				12,696
Mining royalty payable			1,237				890
Value added taxes payable			224				-
Interest payable			1,457				189
Due to related parties (note 15)			14				17
Other payables			535				931
Derivative liability			894				224
Deferred share units payable (note 20(a))			3,918				3,116
Restricted share units payable (note 20(b))			911				1,932
Total trade and other payables		$	65,286			$	48,734

 

15.	Related Party Transactions

 

In addition to the related party transactions and balances disclosed elsewhere in these financial statements, the Company entered into the following related party transactions during the years ended December 31, 2019 and 2018:

 

a) Purchase of Goods and Services

 

During the years ended December 31, 2019 and 2018, the Company was charged for general and administrative services pursuant to a shared services agreement with Gold Group Management Inc., a company of which Simon Ridgway, the Company’s Chairman, is a director.

 

		Years ended December 31,
		2019				2018
Personnel costs		$	21			$	118
General and administrative expenses			189				193
		$	210			$	311

 

As at December 31, 2019, the Company had outstanding balances payable to Gold Group Management Inc. of $14 (December 31, 2018 - $17). Amounts due to related parties are due on demand and are unsecured.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

b) Key Management Personnel

 

During the years ended December 31, 2019 and 2018, the Company was charged for consulting services by Mario Szotlender, a director of the Company, and by Mill Street Services Ltd., a company of which Simon Ridgway, the Company’s Chairman, is a director. Such amounts, along with other amounts paid to key management personnel are as follows:

 

		Years ended December 31,
		2019				2018
Salaries and benefits		$	4,716			$	4,471
Directors fees			702				709
Consulting fees			135				139
Share-based payments			5,449				3,545
		$	11,002			$	8,864

 

16.	Lease Obligations

 

		Minimum lease payments
		December 31,				December 31,
		2019				2018
Less than one year		$	9,313			$	3,912
Between one and five years			13,521				5,744
More than five years			14,958				-
			37,792				9,656
Less: future finance charges			(13,913	)			(890	)
Present value of minimum lease payments		$	23,879			$	8,766
Presented as:
Current portion		$	8,831			$	3,395
Non-current portion			15,048				5,371

 

17.

Debt

 

The movement in debt during the years ended December 31, 2019 and 2018, respectively, are comprised of the following:

 

		Credit Facility				Debentures				Total
Balance at December 31, 2017		$	39,871			$	-			$	39,871
Loss on modification			653				-				653
Transaction costs paid			(1,338	)			-				(1,338	)
Amortization of transaction costs			116				-				116
Drawdowns			30,000				-				30,000
Balance at December 31, 2018			69,302				-				69,302
Proceeds from debentures			-				46,000				46,000
Transaction costs paid			-				(2,490	)			(2,490	)
Portion allocated to equity			-				(7,141	)			(7,141	)
Transaction costs allocated to equity			-				389				389
Amortization of discount			128				347				475
Drawdowns			40,000				-				40,000
Balance at December 31, 2019		$	109,430			$	37,105			$	146,535

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

a) Credit Facility

 

On January 26, 2018, the Company entered into an amended and restated four-year term credit facility with the Bank of Nova Scotia (“Amended Credit Facility”) with a maturity date of January 26, 2022. The Amended Credit Facility consists of a $40,000 non-revolving credit facility (the “Non-Revolving Facility”), which has been fully drawn and an $80,000 revolving credit facility (the “Revolving Facility”). An upfront lenders fee and transactions cost of $793 were payable on closing of the Amended Credit Facility.

 

The Amended Credit Facility was further amended on December 13, 2018 (the “Third Amendment and Restated Credit Agreement”) whereby the Revolving Facility was increased by an additional $30,000 to $110,000 for a temporary period from December 13, 2018 to December 31, 2020. At such time, if any part of the additional $30,000 has been advanced it must be repaid by December 31, 2020, and the balance of the Non-Revolving Facility and the Revolving Facility must be repaid on January 26, 2022 as per the terms of the Third Amendment and Restated Credit Agreement. In addition, BNP Paribas was added as a lender. The Company incurred fees of $545 to the lenders which have been charged to transaction costs.

 

The interest rate on the Amended Credit Facility is on a sliding scale at one-month LIBOR plus an applicable margin ranging from 2.5% to 3.5%, based on a Total Debt to EBITDA ratio, as defined in the Amended Credit Facility. The Amended Credit Facility is secured by a first ranking lien on the assets of Minera Bateas S.A.C. and Compania Minera Cuzcatlan S.A. de C.V. and their holding companies. The Company must comply with the terms in the Amended Credit Facility relating to, among other matters, reporting requirements, conduct of business, insurance, notices, and must comply with certain financial covenants, including a maximum debt to EBITDA ratio and a minimum tangible net worth, each as defined in the Amended Credit Facility.

 

As at December 31, 2019, there is $40,000 available for drawdown from the Revolving Facility under the Amended Credit Facility. The Company was in compliance with all of the covenants under the credit facility as at December 31, 2019 and December 31, 2018.

 

b) Convertible Debenture

 

On October 2, 2019, the Company completed a bought deal public offering (the “Offering”) of senior subordinated unsecured convertible debentures with an aggregate principal amount of $40,000. The Offering was subject to an over-allotment option which was exercised in full on October 8, 2019, pursuant to which an additional $6,000 aggregate principal amount of debentures were issued, bringing the aggregate gross proceeds to the Company under the Offering to $46,000. The debentures issued under the Offering, including those issued upon exercise of the Over-Allotment Option, are collectively referred as the “Debentures”.

 

The Debentures mature on October 31, 2024 and bear interest at a rate of 4.65% per annum, payable semi-annually in arrears on the last business day of April and October, commencing on April 30, 2020. The Debentures are convertible at the holder’s option into common shares in the capital of the Company at a conversion price of $5.00 per share, representing a conversion rate of 200 Common Shares per $1 principal amount of Debentures, subject to adjustment in certain circumstances

 

Subject to certain exceptions in connection with a change of control of the Company, the Debentures will not be redeemable by the Company prior to October 31, 2022. On or after October 31, 2022 and prior to October 31, 2023, the Debentures may be redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price of the Common Shares on the NYSE for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the redemption is given is at least 125% of the Conversion Price.

 

On and after October 31, 2023, the Debentures may be redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount plus accrued and unpaid interest regardless of the trading price of the Common Shares.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

Subject to applicable securities laws and regulatory approval and provided that no event of default has occurred and is continuing, the Company may, at its option, elect to satisfy its obligation to pay the principal amount of the Debentures and accrued and unpaid interest on the redemption date and the maturity date, in whole or in part, through the issuance of Common Shares, by issuing and delivering that number of Common Shares, obtained by dividing the principal amount of the Debentures and all accrued and unpaid interest thereon by 95% of the current market price (as defined in the Debenture Indenture) on such redemption date or maturity date, as applicable.

 

The component parts of the convertible debentures, a compound instrument, are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument. A conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Company’s own equity instrument is an equity instrument.

 

At initial recognition, gross proceeds of $46,000 from the Debentures were allocated into its debt and equity components. The fair value of the debt component was estimated at $38,859 using a discounted cash flow model method with an expected life of five years and a discount rate of 8.6%. This amount is recorded as a financial liability on an amortized cost basis net of transaction cost using the effective interest method using an effective interest rate of 9.7% until extinguished upon conversion or at its maturity date.

 

The conversion option of the Debentures is classified as equity and was estimated based on the residual value of $7,141. This amount is not subsequently remeasured and will remain in equity until the conversion option is exercised, in which case, the balance recognized in equity will be transferred to share capital. Where the conversion option remains unexercised at the maturity date of the convertible note, the balance will remain in equity reserves. A deferred tax liability of $1,927 related to the taxable temporary difference arising from the equity portion of the convertible debenture was recognized in equity reserves.

 

Transaction costs of $2,490 that relate to the issuance of the Debentures were allocated to the liability and equity components in proportion to the allocation of the gross proceeds. Transaction costs relating to the equity component are recognized directly in equity. Transaction costs relating to the liability component are included in the carrying amount of the liability component and are amortized over the life of the Debentures using the effective interest method.

 

18.	Other Liabilities

 

		December 31,				December 31,
		2019				2018
Restricted share units (note 20 (b))		$	246			$	125
Other non-current liabilities			253				1,041
		$	499			$	1,166

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

19.	Closure and Rehabilitation Provisions

 

		Closure and Reclamation Provisions
		Caylloma Mine				San Jose Mine				Lindero Project				Total
Balance at December 31, 2018		$	10,800			$	3,716			$	1,427			$	15,943
Changes in estimate			394				886				13,390				14,670
Reclamation expenditures			(201	)			(150	)			-				(351	)
Accretion			331				259				136				726
Effect of changes in foreign exchange rates			-				137				-				137
Balance at December 31, 2019			11,324				4,848				14,953				31,125
Less:  Current portion			3,048				209				-				3,257
Non-current portion		$	8,276			$	4,639			$	14,953			$	27,868

 

		Closure and Reclamation Provisions
		Caylloma Mine				San Jose Mine				Lindero Project				Total
Balance at December 31, 2017		$	9,624			$	4,100			$	509			$	14,233
Changes in estimate			1,266				(624	)			896				1,538
Reclamation expenditures			(559	)			(123	)			-				(682	)
Accretion			469				361				22				852
Effect of changes in foreign exchange rates			-				2				-				2
Balance at December 31, 2018			10,800				3,716				1,427				15,943
Less:  Current portion			682				159				-				841
Non-current portion		$	10,118			$	3,557			$	1,427			$	15,102

 

Closure and reclamation provisions represent the present value of reclamation costs related to mine and development sites. There have been no significant changes in requirements, laws, regulations, operating assumptions, estimated timing and amount of reclamation and closure obligations during the year ended December 31, 2019, except for the Lindero Mine, where the Company estimates reclamation and closure cost based on the progress of the mine construction.

 

		Closure and Reclamation Provisions
		Caylloma Mine				San Jose Mine				Lindero Project				Total
Anticipated settlement date			2022 - 2027				2025 - 2037				2029 - 2042
Undiscounted uninflated estimated cash flow		$	11,095			$	4,850			$	17,420			$	33,365
Estimated life of mine (years)			10				6				14
Discount rate			3.00	%			6.88	%			1.94	%
Inflation rate			2.00	%			3.58	%			2.00	%

 

The Company is expecting to incur annual reclamation expenses throughout the life of its mines.

 

20.	Share Based Payments

 

During the year ended December 31, 2019, the Company recognized $5,471 (year ended December 31, 2018 - $2,343) of share-based payment expenses related to the outstanding deferred, restricted and performance share units.

 

For the year ended December 31, 2019, the Company recognized a share-based payment expense of $542, related to stock options (year ended December 31, 2018 – $1,357).

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

(a) Deferred Share Units

 

		Cash Settled
		Number of Deferred Share Units				Fair Value
Outstanding, December 31, 2017			974,179			$	5,094
Granted			101,612				482
Units paid out in cash			(225,724	)			(1,251	)
Changes in fair value			-				(1,209	)
Outstanding, December 31, 2018			850,067				3,116
Granted			111,804				455
Changes in fair value			-				347
Outstanding, December 31, 2019			961,871			$	3,918

 

(b) Restricted Share Units

 

		Cash Settled								Equity Settled
		Number of Restricted Share Units				Fair Value				Number of Restricted Share Units
Outstanding, December 31, 2017			980,476			$	3,935				390,751
Granted			87,759				414				422,030
Units paid out in cash			(405,821	)			(1,915	)			-
Vested			-				-				(78,150	)
Forfeited or cancelled			(3,029	)			(15	)			-
Changes in fair value and vesting			-				(362	)			-
Outstanding, December 31, 2018			659,385				2,057				734,631
Granted			139,661				506				633,914
Units paid out in cash			(406,611	)			(1,466	)			-
Vested			-				-				(201,633	)
Changes in fair value and vesting			-				60				-
Outstanding, December 31, 2019			392,435			$	1,157				1,166,912
Current portion							911
Non-current portion							246
Outstanding, December 31, 2019						$	1,157

 

During the year ended December 31, 2019, the Company granted 633,914 (year ended December 31, 2018 – 422,030) equity-settled RSUs with a fair value of $3.62 (C$4.83) per share unit (year ended December 31, 2018 – between $4.71 (C$6.20) and $5.54 (C$7.15) per share unit).

 

(c) Performance Share Units

 

		Cash Settled								Equity Settled
		Number of Performance Share Units				Fair Value				Number of Performance Share Units
Outstanding, December 31, 2017			553,459			$	2,691				-
Granted			-				-				1,002,166
Units paid out in cash			(553,459	)			(2,596	)			-
Changes in fair value and vesting			-				(95	)			-
Outstanding, December 31, 2018			-				-				1,002,166
Granted			-				-				422,609
Vested			-				-				(150,325	)
Outstanding, December 31, 2019			-			$	-				1,274,450

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

During the year ended December 31, 2019, the Company granted 422,609 (December 31, 2018 – 1,002,166) equity settled, PSUs with a fair value of $3.62 (C$4.83) (December 31, 2018 – $4.71 (C$6.20)) on the grant date. These share units vest as to 20% on the first anniversary, 30% on the second anniversary and 50% on the third anniversary of the date of grant based on prescribed performance metrics. The PSUs granted during the year ended December 31, 2019 are subject to a multiplier ranging from 50% to 200% depending on the achievement level of certain performance targets.

 

d) Stock Options

 

The Company’s Stock Option Plan, as amended and approved from time to time, permits the Company to issue up to 12,200,000 stock options. As at December 31, 2019, a total of 1,574,403 stock options were available for issuance under the plan.

 

		Number of stock options				Weighted average exercise price
						Canadian dollars
Outstanding, December 31, 2017			1,155,527			$	5.56
Exercised			(20,000	)			0.85
Granted			648,502				6.21
Outstanding, December 31, 2018			1,784,029				5.85
Outstanding, December 31, 2019			1,784,029			$	5.85
Vested and exercisable, December 31, 2018			826,680			$	5.37
Vested and exercisable, December 31, 2019			1,459,779			$	5.77

 

No options were granted during the year ended December 31, 2019. The assumptions used to estimate the fair value of the stock options granted during the year ended December 31, 2018 were a risk-free interest rate of 1.79% - 1.90%, expected volatility of 67.56% - 68.16%, expected life of 3 years, expected forfeiture rate of 5.57%, and an expected dividend yield of nil. The fair value, as determined using the BlackScholes model, was between $2.06 and $2.38 (C$2.69 and C$3.09) per option granted in the period.

 

21.	Share Capital

 

Authorized Share Capital

 

The Company has an unlimited number of common shares without par value authorized for issue.

 

22.	Earnings per Share

 

		Years ended December 31,
Basic		2019				2018
Net income for the year		$	23,796			$	33,990
Weighted average number of shares (000's)			160,193				159,785
Earnings per share - basic		$	0.15			$	0.21

 

		Years ended December 31,
Diluted		2019				2018
Net income for the year		$	23,796			$	33,990
Weighted average number of shares (000's)			160,193				159,785
Incremental shares from share units			2,215				1,851
Incremental shares from convertible debenture			2,117				-
Weighted average diluted number of shares (000's)			164,525				161,636
Earnings per share - diluted		$	0.14			$	0.21

 

For the year ended December 31, 2019, 1,784,029 out of the money options were excluded from the diluted earnings per share calculation as their effect would have been anti-dilutive (year ended December 31, 2018 – 1,266).

 

 

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

23.

Sales

 

The Company’s geographical analysis of revenue from contracts with customers attributed to the location of the products produced, is as follows:

 

By-product and Geographical Area

 

		Year ended December 31, 2019
		Peru				Mexico				Total
Silver-gold concentrates		$	-			$	183,197			$	183,197
Silver-lead concentrates			39,936				-				39,936
Zinc concentrates			33,686				-				33,686
Provisional pricing adjustments			(740	)			1,108				368
Sales to external customers		$	72,882			$	184,305			$	257,187

 

		Year ended December 31, 2018
		Peru				Mexico				Total
Silver-gold concentrates		$	-			$	180,151			$	180,151
Silver-lead concentrates			40,254				-				40,254
Zinc concentrates			48,831				-				48,831
Provisional pricing adjustments			(1,636	)			(4,304	)			(5,940	)
Sales to external customers		$	87,449			$	175,847			$	263,296

 

Sales by Major Costumer

 

		Years ended December 31,
		2019				2018
Customer 1		$	184,304			$	163,425
Customer 2			72,938				66,429
Customer 3			(55	)			33,442
		$	257,187			$	263,296

 

24.	Cost of Sales

 

		Year ended December 31, 2019
		Caylloma				San Jose				Total
Direct mining costs		$	35,712			$	66,022			$	101,734
Salaries and benefits			7,557				7,483				15,040
Workers' participation			717				5,294				6,011
Depletion and depreciation			13,621				30,737				44,358
Royalties			750				3,385				4,135
Write-down of inventories			93				1,235				1,328
		$	58,450			$	114,156			$	172,606

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

		Year ended December 31, 2018
		Caylloma				San Jose				Total
Direct mining costs		$	38,788			$	60,860			$	99,648
Salaries and benefits			7,303				5,889				13,192
Workers' participation			1,726				4,438				6,164
Depletion and depreciation			12,222				32,251				44,473
Royalties			218				3,030				3,248
		$	60,257			$	106,468			$	166,725

 

For the year ended December 31, 2019, depletion and depreciation includes $2,262 (December 31, 2018 - $nil) of right-of-use assets depreciation.

 

25.	General and Administration

 

		Years ended December 31,
		2019				2018
General and administration		$	22,315			$	21,088
Workers' participation			1,477				1,400
			23,792				22,488
Share-based payments			6,013				3,701
		$	29,805			$	26,189

 

26.	Other Expenses

 

		Years ended December 31,
		2019				2018
Write-down of investment in associate		$	2,706			$	-
Write-off of mineral properties			1,554				-
Loss on disposal of assets			67				167
Write-off of spare parts			-				398
Write off of assets held for sale			-				691
Other expenses			284				705
		$	4,611			$	1,961

 

27.	Interest and Finance (Costs) Income, Net

 

		Years ended December 31,
		2019				2018
Interest income		$	1,838			$	3,429
Interest expense			(857	)			(1,092	)
Bank stand-by and commitment fees			(415	)			(470	)
Accretion expense			(590	)			(830	)
Loss on debt restructuring			-				(653	)
		$	(24	)		$	384

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

28.

Income Tax

 

(a)

Reconciliation of Effective Tax Rate

 

Income tax expense differs from the amount that would be computed by applying the applicable Canadian statutory income tax rate to income before income taxes. The significant reasons for the differences are as follows:

 

		Years ended December 31,
		2019				2018
Net income before tax		$	43,971			$	67,340
Statutory tax rate			27.0	%			27.0	%
Anticipated income tax at statutory rates			11,872				18,182
Non-deductible expenditures			2,507				1,935
Differences between Canadian and foreign tax rates			1,353				2,159
Changes in estimate			856				(679	)
Effect of change in tax rates			345				299
Inflation adjustment			(12,158	)			(6,408	)
Impact of foreign exchange			11,773				10,377
Changes in deferred tax assets not recognized			(2,254	)			(287	)
Mining taxes			3,241				4,383
Withholding taxes			2,367				3,180
Other items			273				209
Total income tax expense		$	20,175			$	33,350
Total income tax represented by:
Current income tax expense		$	32,631			$	30,563
Deferred tax expense			(12,456	)			2,787
		$	20,175			$	33,350

 

(b)

Tax Amounts Recognized in Profit or Loss

 

		Years ended December 31,
		2019				2018
Current tax expense
Current taxes on profit for the year		$	32,246			$	30,515
Changes in estimates related to prior years			385				48
		$	32,631			$	30,563
Deferred tax expense
Origination and reversal of temporary differences and foreign exchange rate		$	(13,678	)		$	3,216
Changes in estimates related to prior years			479				(728	)
Effect of differences in tax rates			398				16
Effect of changes in tax rates			345				283
		$	(12,456	)		$	2,787
Total tax expense		$	20,175			$	33,350

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

(c)

Deferred Tax Balances

 

The significant components of the recognized deferred tax assets and liabilities are:

 

		December 31,				December 31,
		2019				2018
Deferred tax assets:
Reclamation and closure cost obligation		$	9,530			$	4,594
Carried forward tax loss			14,020				3,386
Accounts payable and accrued liabilities			7,731				5,642
Deductibility of resource taxes			3,140				3,436
Lease obligations			5,317				-
Other			1				190
Total deferred tax assets		$	39,739			$	17,248
Deferred tax liabilities:
Mineral properties		$	(44,825	)		$	(34,541	)
Mining and foreign withholding taxes			(5,281	)			(8,412	)
Equipment and buildings			(3,621	)			(4,413	)
Convertible debenture			(1,857	)			-
Inflation			(4,939	)			-
Other			(131	)			(1,326	)
Total deferred tax liabilities		$	(60,654	)		$	(48,692	)
Net deferred tax liabilities		$	(20,915	)		$	(31,444	)
			2019				2018
Classification:
Deferred tax assets		$	-			$	-
Deferred tax liabilities			(20,915	)			(31,444	)
Net deferred tax liabilities		$	(20,915	)		$	(31,444	)

 

The Company's movement of net deferred tax liabilities is described below:

 

		2019				2018
At January 1		$	31,444			$	28,657
Deferred income tax (recovery) expense through income statement			(12,456	)			2,787
Deferred income tax expense through equity			1,927				-
At December 31		$	20,915			$	31,444

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

(d)

Unrecognized Deferred Tax Assets and Liabilities

 

The Company recognizes tax benefits on losses or other deductible amounts where it is more likely than not that the deferred tax asset will be realized. The Company’s unrecognized deductible temporary differences and unused tax losses for which no deferred tax asset is recognized consists of the following amounts:

 

		December 31,				December 31,
		2019				2018
Unrecognized deductible temporary differences and unused tax losses:
Non capital losses		$	72,156			$	81,188
Provisions			5,074				5,173
Share issue costs			2,174				3,354
Mineral properties, plant and equipment			-				244
Lease obligation			656				-
Derivative liabilities			894				-
Capital losses			2,496				2,326
Investments in associates			1,397				-
Unrecognized deductible temporary differences		$	84,847			$	92,285

 

As at December 31, 2019, the Company has temporary differences associated with investments in subsidiaries for which an income tax liability has not been recognized as the Company can control the timing of the reversal of the temporary differences and the Company plans to reinvest in its foreign subsidiaries. The temporary difference associated with investments in subsidiaries aggregate as follow:

 

		December 31,				December 31,
		2019				2018
Mexico		$	198,214			$	97,705
Peru			54,618				69,669

 

(e)

Tax Loss Carry Forwards

 

Tax losses have the following expiry dates:

 

						December 31,								December 31,
		Year of expiry				2019				Year of expiry				2018
Canada			2026 - 2039			$	84,200				2026 - 2038			$	81,000
Argentina			2020 - 2024				42,500				2019 - 2023				11,900
Mexico			2021 - 2029				369				2021 - 2028				349
Peru			2021				70				2021				238

 

In addition, as at December 31, 2019, the Company has accumulated Canadian resource-related expenses of $8,188 (2018 - $6,582) for which the deferred tax benefit has not been recognized.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018 

(Presented in thousands of US dollars – unless otherwise noted)

 

29.   Segmented Information

 

The following summary describes the operations of each reportable segment:

 

·

Bateas – operates the Caylloma silver, lead and zinc mine

 

·

Cuzcatlan – operates the San Jose silver-gold mine

 

·

Mansfield – construction of the Lindero Mine

 

·

Corporate – corporate stewardship

 

		Year ended December 31, 2019
		Corporate				Bateas				Cuzcatlan				Mansfield				Total
Revenues from external customers		$	-			$	72,882			$	184,305			$	-			$	257,187
Cost of sales before depreciation and depletion			-				(44,829	)			(83,419	)			-				(128,248	)
Depreciation and depletion in cost of sales			-				(13,621	)			(30,737	)			-				(44,358	)
General, and administration			(17,438	)			(4,569	)			(7,798	)			-				(29,805	)
Other expenses			(4,402	)			(664	)			(1,928	)			(13,588	)			(20,582	)
Finance items			(80	)			(1,552	)			385				11,024				9,777
Segment (loss) profit before taxes			(21,920	)			7,647				60,808				(2,564	)			43,971
Income taxes			(511	)			(2,761	)			(18,032	)			1,129				(20,175	)
Segment (loss) profit after taxes		$	(22,431	)		$	4,886			$	42,776			$	(1,435	)		$	23,796

 

		Year ended December 31, 2018
		Corporate				Bateas				Cuzcatlan				Mansfield				Total
Revenues from external customers		$	-			$	87,449			$	175,847			$	-			$	263,296
Cost of sales before depreciation and depletion			-				(48,035	)			(74,217	)			-				(122,252	)
Depreciation and depletion in cost of sales			-				(12,222	)			(32,251	)			-				(44,473	)
General, and administration			(14,692	)			(3,973	)			(7,524	)			-				(26,189	)
Other income (expenses)			(411	)			(311	)			(3,938	)			(4,136	)			(8,796	)
Finance items			(1,172	)			6,263				1,111				(448	)			5,754
Segment (loss) profit before taxes			(16,275	)			29,171				59,028				(4,584	)			67,340
Income taxes			(3,168	)			(10,628	)			(18,544	)			(1,010	)			(33,350	)
Segment (loss) profit after taxes		$	(19,443	)		$	18,543			$	40,484			$	(5,594	)		$	33,990

 

		December 31, 2019
		Corporate				Bateas				Cuzcatlan				Mansfield				Total
Total assets		$	60,134			$	116,501			$	252,100			$	507,330			$	936,065
Total liabilities		$	162,210			$	36,747			$	42,264			$	59,418			$	300,639
Capital expenditures		$	1,333			$	11,845			$	14,046			$	211,413			$	238,637

 

		December 31, 2018
		Corporate				Bateas				Cuzcatlan				Mansfield				Total
Total assets		$	31,739			$	174,985			$	286,621			$	293,172			$	786,517
Total liabilities		$	84,575			$	35,568			$	38,220			$	25,350			$	183,713
Capital expenditures		$	1,448			$	16,400			$	16,224			$	83,335			$	117,407

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

30.   Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.

 

The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (interest rate, yield curves), or inputs that are derived principally from or corroborated observable market data or other means. Level 3 inputs are unobservable (supported by little or no market activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.

 

The following sets up the methods and assumptions used to estimate the fair value of Level 2 and Level 3 financial instruments.

 

Financial asset or liability	Methods and assumptions used to estimate fair value
Trade receivables	Trade receivables arising from the sales of metal concentrates are subject to provisional pricing, and the final selling price is adjusted at the end of a quotational period. We mark these to market at each reporting date based on the forward price corresponding to the expected settlement date.
Interest rate swaps, and metal contracts	Fair value is calculated as the present value of the estimated contractual cash flows. Estimates of future cash flows are based on quoted swap rates, futures prices and interbank borrowing rates. These are discounted using a yield curve, and adjusted for credit risk of the Company or the counterparty.
Marketable securities – warrants	The Company determines the value of the warrants using a Black-Scholes valuation model which uses a combination of quoted prices and market-derived inputs, such as volatility and interest rate estimates. Fair value changes on the warrants are charged to profit and loss.

 

During the years ended December 31, 2019 and 2018, there were no transfers of amounts between Level 1, Level 2, and Level 3 of the fair value hierarchy. The following tables show the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. Fair value information for financial assets and financial liabilities not measured at fair value is not presented if the carrying amount is a reasonable approximation of fair value.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

		Carrying value																Fair value
December 31, 2019		Fair Value (hedging)				Fair value through profit or loss				Amortized cost				Total				Level 1				Level 2				Level 3				Carrying value approximates Fair Value
Financial assets measured at Fair Value
Trade receivables concentrate sales		$	-			$	33,642			$	-			$	33,642			$	-			$	33,642			$	-			$	-
		$	-			$	33,642			$	-			$	33,642			$	-			$	33,642			$	-			$	-
Financial assets not measured at Fair Value
Cash and cash equivalents		$	-			$	-			$	83,404			$	83,404			$	-			$	-			$	-			$	83,404
Other receivables			-				-				2,419				2,419				-				-				-				2,419
		$	-			$	-			$	85,823			$	85,823			$	-			$	-			$	-			$	85,823
Financial liabilities measured at Fair Value
Interest rate swap liability		$	(894	)		$	-			$	-			$	(894	)		$	-			$	(894	)		$	-			$	-
		$	(894	)		$	-			$	-			$	(894	)		$	-			$	(894	)		$	-			$	-
Financial liabilities not measured at Fair Value
Trade payables		$	-			$	-			$	(37,357	)		$	(37,357	)		$	-			$	-			$	-			$	(37,357	)
Payroll payable			-				-				(15,801	)			(15,801	)			-				-				-				(15,801	)
Share units payable			-				-				(5,075	)			(5,075	)			-				(5,075	)			-				-
Bank loan payable			-				-				(109,430	)			(109,430	)			-				(110,000	)			-				-
Debentures			-				-				(37,105	)			(37,105	)			-				(38,858	)			-				-
Other payables			-				-				(22,403	)			(22,403	)			-				-				-				(22,403	)
		$	-			$	-			$	(227,171	)		$	(227,171	)		$	-			$	(153,933	)		$	-			$	(75,561	)

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

		Carrying value																Fair value
December 31, 2018		Fair Value (hedging)				Fair value through profit or loss				Amortized cost				Total				Level 1				Level 2				Level 3				Carrying value approximates Fair Value
Financial assets measured at Fair Value
Trade receivables concentrate sales		$	-			$	28,132			$	-			$	28,132			$	-			$	28,132			$	-			$	-
Metal forward sales contracts			-				2,646				-				2,646				-				2,646				-				-
		$	-			$	30,778			$	-			$	30,778			$	-			$	30,778			$	-			$	-
Financial assets not measured at Fair Value
Cash and cash equivalents		$	-			$	-			$	90,503			$	90,503			$	-			$	-			$	-			$	90,503
Short term investments			-				-				72,824				72,824				-				-				-				72,824
Other receivables			-				-				3,179				3,179				-				-				-				3,179
		$	-			$	-			$	166,506			$	166,506			$	-			$	-			$	-			$	166,506
Financial liabilities measured at Fair Value
Interest rate swap liability		$	224			$	-			$	-			$	224			$				$	224			$	-			$	-
		$	224			$	-			$	-			$	224			$	-			$	224			$	-			$	-
Financial liabilities not measured at Fair Value
Trade payables		$	-			$	-			$	(24,219	)		$	(24,219	)		$	-			$	-			$	-			$	(24,219	)
Payroll payable			-				-				(14,976	)			(14,976	)			-				-				-				(14,976	)
Share units payable			-				-				(5,173	)			(5,173	)			-				(5,173	)			-				-
Bank loan payable			-				-				(69,302	)			(69,302	)			-				(70,000	)			-				-
Other payables			-				-				(4,030	)			(4,030	)			-				-				-				(4,030	)
		$	-			$	-			$	(117,700	)		$	(117,700	)		$	-			$	(75,173	)		$	-			$	(43,225	)

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

31.

Management of Financial Risk

 

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework and reviews the Company’s policies on an ongoing basis.

 

The Company is exposed to certain financial risks, including credit risk, liquidity risk, currency risk, metal price risk, and interest rate risk.

 

(a)

Credit Risk

 

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. All our trade accounts receivables from concentrate sales are held with large international metals trading companies.

 

The Company’s cash and cash equivalents and short-term investments are held through large financial institutions. These investments mature at various dates within one year.

 

The Company’s maximum exposure to credit risk as at December 31, 2019 and 2018 is as follows:

 

		December 31,				December 31,
		2019				2018
Cash and cash equivalents		$	83,404			$	90,503
Short term investments			-				72,824
Derivative assets			-				2,646
Accounts receivable and other assets			47,707				32,769
Income tax receivable			2,553				136
Non-current receivables			38,389				15,241
		$	172,053			$	214,119

 

The carrying amount of financial assets recorded in the financial statements represents the Company’s maximum exposure to credit risk. We limit our exposure to counterparty credit risk on cash and term deposits by only dealing with financial institutions with high credit ratings and through our investment policy of purchasing only instruments with a high credit rating. Almost all of our concentrate are sold to large well-known concentrate buyers.

 

(b)

Liquidity Risk

 

Liquidity risk is the risk that we will not be able to meet our financial obligations as they come due. We manage our liquidity risk by continually monitoring forecasted and actual cash flows. We have in place a planning and budgeting process to help determine the funds required to support our normal operating requirements and our development plans. We aim to maintain sufficient liquidity to meet our short term business requirements, taking into account our anticipated cash flows from operations, our holdings of cash and cash equivalents, and our committed and anticipated liabilities.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

The following are the remaining contractual maturities of financial liabilities at the reporting date. The tables include cash flows associated with principal payments.

 

		Expected payments due by year as at December 31, 2019
		Less than												After
		1 year				1 - 3 years				4 - 5 years				5 years				Total
Trade and other payables		$	65,286			$	-			$	-			$	-			$	65,286
Debt			-				110,000				46,000				-				156,000
Income taxes payable			12,400				-				-				-				12,400
Lease obligations			9,313				9,424				4,097				14,958				37,792
Other liabilities			-				499				-				-				499
Capital commitments, Lindero 1			24,467				-				-				-				24,467
Closure and reclamation provisions			2,699				7,565				1,846				21,255				33,365
		$	114,165			$	127,488			$	51,943			$	36,213			$	329,809

1) Net of $10.9 million of deposits on equipment and advances to contractors.

 

		Expected payments due by year as at December 31, 2018
		Less than												After
		1 year				1 - 3 years				4 - 5 years				5 years				Total
Trade and other payables		$	48,510			$	-			$	-			$	-			$	48,510
Debt			-				-				70,000				-				70,000
Derivative liabilities			224				-				-				-				224
Income tax payable			8,358				-				-				-				8,358
Equipment loan			4,328				5,371				-				-				9,699
Other liabilities			-				1,166				-				-				1,166
Operating leases			1,055				1,248				250				-				2,553
Capital commitments, Lindero			111,940				-				-				-				111,940
Provisions			878				6,738				4,029				6,262				17,907
		$	175,293			$	14,523			$	74,279			$	6,262			$	270,357

 

Operating leases includes leases for office premises, computer equipment and other equipment used in the normal course of business.

 

(c)

Currency risk

 

The functional and reporting currency for all entities within the consolidated group is the US dollar. We are exposed to fluctuations in foreign exchange rates as a portion of our expenses are incurred in Canadian dollars, Peruvian soles, Argentinean peso and Mexican peso. A significant change in the foreign exchange rates between the United States dollar relative to the other currencies could have a material effect on the Company’s profit or loss, financial position, or cash flows. We have not hedged our exposure to foreign currency fluctuations.

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

As at December 31, 2019 and 2018, the Company was exposed to currency risk through the following assets and liabilities denominated in foreign currencies:

 

		December 31, 2019
		Canadian Dollars				Peruvian Soles				Mexican Pesos				Argentinian Pesos
Cash and cash equivalents			626				2,293				13,103				11,762
Accounts receivable and other assets			310				1,827				3,972				117,539
Income tax receivable			-				8,451				-				-
Investments in associates			1,373				-				-				-
VAT - long term receivable			-				-				10,715				2,039,929
Trade and other payables			(8,549	)			(19,385	)			(214,679	)			(1,454,444	)
Due to related parties			(18	)			-				-				-
Provisions, current			-				-				(3,942	)			-
Income tax payable			-				-				(161,900	)			-
Other liabilities			-				-				(4,217	)			-
Provisions			-				-				(87,459	)			-
Total foreign currency exposure			(6,258	)			(6,814	)			(444,407	)			714,786
US$ equivalent of foreign currency exposure			(4,818	)			(2,054	)			(23,582	)			11,815

 

		December 31, 2018
		Canadian Dollars				Peruvian Soles				Mexican Pesos				Argentinian Pesos
Cash and cash equivalents			376				941				37,039				6,967
Accounts receivable and other assets			279				3,660				11,836				37,129
Income tax receivable			-				459				-				-
Investments in associates			5,244				-				-				-
VAT - long term receivable			-				-				-				560,873
Trade and other payables			(8,478	)			(18,492	)			(218,833	)			(125,159	)
Due to related parties			(23	)			-				-				-
Provisions, current			-				-				(2,991	)			-
Income tax payable			-				(4,591	)			(59,810	)			-
Other liabilities			-				-				(2,296	)			-
Provisions			-				-				(66,977	)			-
Total foreign currency exposure			(2,602	)			(18,023	)			(302,032	)			479,810
US$ equivalent of foreign currency exposure			(2,010	)			(5,458	)			(16,055	)			11,646

 

Sensitivity as to change in foreign currency exchange rates on our foreign currency exposure as at December 31, 2019 is provided below:

 

						Effect on foreign
						denominated
Currency (Expressed in $000's)		Change				items
Mexican Peso			+	/-10%		$	2,144
Peruvian Soles			+	/-10%		$	187
Argentinian Peso			+	/-10%		$	1,029
Canadian Dollar			+	/-10%		$	438

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

Due to the volatility of the exchange rate for Argentine Peso, the Company is applying additional measures in cash management to minimize potential losses arising from the conversion of funds. As discussed in note 31(f), with the capital controls in effect when the Company commences production at the Lindero Mine, the Company will be required to convert the equivalent value into Argentine Peso from the export sale of all gold doré from the Lindero Mine.

 

(d)

Metal Price Risk

 

We are exposed to metal price risk with respect to our sales of silver, gold, zinc, and lead concentrates. A 10% change in metal prices from the prices used at December 31, 2019 would result in the following change to sales and accounts receivable for sales which are still based on provisional prices as at December 31, 2019. As a matter of policy, we do not hedge our silver production.

 

Metal (Expressed in $000,s)		Change			Effect on Sales
Silver			+/-10%		$	3,424
Gold			+/-10%		$	1,767
Lead			+/-10%		$	216
Zinc			+/-10%		$	281

 

(e)

Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Currently, the Company’s interest rate exposure mainly relates to interest earned on its cash, cash equivalent, and short-term investment balances, interest paid on its LIBOR-based debt, and the mark-to-market value of derivative instruments which depend on interest rates. The Company has entered into an interest rate swap for the $40,000 non-revolving credit facility to mitigate the interest rate risk on its debt.

 

(f)

Capital Management

 

The Company’s objective when managing its capital is to maintain its ability to continue as a going concern while at the same time maximizing the growth of its business and providing returns to its shareholders. The Company manages its capital structure and makes adjustments based on changes to its economic environment and the risk characteristics of the Company’s assets.

 

Effective December 23, 2019, changes to Argentina’s tax laws proposed by the new Argentine Government were implemented. The changes ratified and extended legislation which was to expire on December 31, 2019 and allow the Argentine Central Bank to regulate funds coming into and flowing out of Argentina in order to maintain stability and support the economic recovery of the country. These capital controls are in effect until December 31, 2025 and have the effect of: requiring exporters to convert the equivalent value of foreign currency received from the export into Argentine Pesos; requiring the prior consent of the Argentine Central Bank to the payment of cash dividends and distributions of currency out of Argentina; requiring Argentine companies to convert foreign currency loans received from abroad into Argentine Pesos; and restricting the sale of Argentine Pesos for foreign currency.

 

The Company’s capital requirement is effectively managed based on the Company having a thorough reporting, planning and forecasting process to help identify the funds required to ensure the Company is able to meet its operating and growth objectives.

 

The Company’s capital structure consists of equity comprising of share capital, reserves and retained earnings as well as debt facilities, equipment financing obligations less cash, cash equivalents and short-term investments.

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements 

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

		December 31,				December 31,
		2019				2018
Equity		$	635,426			$	602,804
Debt			146,535				69,302
Lease obligations			23,879				8,766
Less:  Cash, cash equivalents and short-term investments			(83,404	)			(163,327	)
		$	722,436			$	517,545

 

As discussed above, the Company operates in Argentina where the new Argentine government had ratified and extended legislation to December 31, 2025 to allow the Argentine Central Bank to regulate funds coming into and flowing out of Argentina. Other than the restrictions related to these capital controls and complying with the debt covenants under the credit facilities, the Company is not subject to any externally imposed capital requirements. As at December 31, 2019 and 2018, the Company was in compliance with its debt covenants..

 

32.   Supplemental Cashflow Information

 

The changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes were as follows:

 

		Bank Loan				Debenture				Lease obligations				Interest rate swaps
As at January 1, 2018		$	39,871			$	-			$	906			$	(140	)
Additions			30,000				-				9,792				-
Transaction costs			(1,338	)			-				-				-
Loss on debt modifications			653				-				-				-
Interest			116				-				-				228
Payments			-				-				(1,932	)			-
Changes in fair value			-				-				-				(312	)
As at December 31, 2018			69,302				-				8,766				(224	)
Initial recognition of IFRS 16			-				-				7,316				-
As at January 1, 2019			69,302				-				16,082				(224	)
Additions			40,000				46,000				14,944				-
Interest			128				347				1,848				-
Payments			-				-				(9,048	)			-
Transaction costs			-				(2,101	)			-				-
Equity component			-				(7,141	)			-				-
Foreign exchange			-				-				53				-
Changes in fair value			-				-				-				(670	)
As at December 31, 2019		$	109,430			$	37,105			$	23,879			$	(894	)

 

 

Fortuna Silver Mines Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

33.   Contingencies and Capital Commitments

 

(a)

Caylloma Letter of Guarantee

 

The Caylloma Mine closure plan was updated in December 2018, with total undiscounted closure costs of $11,431 consisting of progressive closure activities of $3,646, final closure activities of $7,156, and post-closure activities of $790. Pursuant to the closure regulations, the Company is required to provide the following guarantees with the government:

 

·

2019 – $7,237

 

·

2020 – $9,704

 

The Company has established a bank letter of guarantee in the amount of $7,237 on behalf of Bateas in favor of the Peruvian mining regulatory agency, in compliance with local regulation and to collateralize Bateas’ mine closure plan. This bank letter of guarantee expired on December 31, 2019. Subsequent to December 31, 2019, the Company established a security bond in the amount of $1,300 and a bank letter of guarantee in the amount of $8,394. The security bond and the letter of guarantee expire on January 29, 2021.

 

(b)

San Jose Letter of Guarantee

 

The Company has established three letters of guarantee in the aggregate amount of $1,236 to fulfill its environmental obligations under the terms and conditions of the Environmental Impact Statements issued by the Secretaria de Medio Ambiente y Recursos Naturales (“SEMARNAT”) in 2009 in respect of the construction of the San Jose mine, and in 2017 and 2019 with respect to the expansion of the dry stack tailings facility at the San Jose mine. The letters of guarantee expire on December 31, 2023, June 15, 2022 and May 15, 2020 respectively.

 

(c)

Other Commitments

 

As at December 31, 2019, the Company had capital commitments of $36,454, $510, and $124 for civil work, equipment purchases and other services at the Lindero Mine and the Caylloma and San Jose Mines, respectively, expected to be expended within one year.

 

(d)

Tax Contingencies

 

Peru

 

The Company has been assessed $1,310 (4,343 Peruvian Soles), including interest and penalties of $725 (2,405 Peruvian Soles), for the tax year 2010 by SUNAT, the Peruvian tax authority, with respect to the deduction of certain losses arising from derivative instruments. The Company applied to the Peruvian tax court to appeal the assessments.

 

On January 22, 2019, the Peruvian tax court reaffirmed SUNAT’s position and denied the deduction. The Company believes the assessment is inconsistent with Peruvian tax law and that it is probable the Company will succeed on appeal through the Peruvian legal system. The Company has paid the disputed amount in full and has initiated proceedings through the Peruvian legal system to appeal the decision of the Peruvian tax court.

 

The Company has recorded the amount paid of $1,310 (4,343 Peruvian Soles) in long-term receivables and other as at December 31, 2019, as the Company believes it is probable that the appeal will be successful (note 12).

 

 

 

Fortuna Silver Mines Inc. 

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

(Presented in thousands of US dollars – unless otherwise noted)

 

(e)

SGM Royalty

 

In 2017 the Mexican Geological Service (“SGM”) advised the Company that a previous owner of one of the Company’s mineral concessions located at the San Jose Mine in Oaxaca, Mexico had granted the SGM a royalty of 3% of the billing value of minerals obtained from the concession. The Company, supported by legal opinions from three independent law firms, at that time advised the Mexican mining authorities that it was of the view that no royalty is payable, and in 2018 initiated administrative and legal proceedings against the Dirección General de Minas (“DGM”) to remove reference to the royalty on the title register. Those proceedings are ongoing and progressing in accordance with the procedures of the Mexican Administrative Court.

 

In January 2020, the Company received notice from the DGM proposing to cancel the mining concession if the royalty, in the Mexican peso equivalent of US$30 million plus VAT (being the amount of the claimed royalty from 2011 to 2019) is not paid before March 15, 2020.  In early February 2020, the Company initiated legal proceedings against the DGM to contest the cancellation procedure and also to stay the cancellation process.

 

The District Court in Mexico City has accepted the filing of the Company’s legal proceedings and also granted a permanent stay of execution, which protects the Company from the cancellation of the concession until a resolution by the Court is reached on the legality of the cancellation procedure.  The timing of a decision by the Court at first instance in this action against the DGM is uncertain and may take several months.  In the event that the Company is unsuccessful in these proceedings, it may appeal.  If ultimately the Company does not prevail, it may be required to pay the disputed royalty in order to preserve the mining concession.

 

The Company has determined that it is more likely than not that it will succeed in these proceedings; therefore, no provision has been recorded as at December 31, 2019.

 

(f)

Other Contingencies

 

The Company is subject to various investigations, royalties and other claims, legal, labor, and tax proceedings covering matters that arise in the ordinary course of business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably for the Company. Certain conditions may exist as of the date the financial statements are issued that may result in a loss to the Company. None of these matters is expected to have a material effect on the results of operations or financial conditions of the Company.

 

Exhibit 99.2

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

YEAR ENDED DECEMBER 31, 2019

 

As of March 10, 2020

 

(Monetary amounts expressed in US dollars, unless otherwise indicated)

 

 

Table of Contents

 

	Page
Business of the Company	3
Full Year Financial and Operating Highlights	4
Lindero Project	7
2020 Guidance and Outlook	9
Financial Results	10
Results of Operations	14
Quarterly Information	16
Liquidity and Capital Resources	18
Financial Instruments	20
Related Party Transactions	20
Risks and Uncertainties	21
Adoption of New Accounting Standards	27
Critical Accounting Estimates, Assumptions, and Judgements	28
Share Position & Outstanding Options & Equity Based Share Units	31
Controls and Procedures	32
Non-GAAP Financial Measures	33
Cautionary Statement on Forward-Looking Statements	41
Cautionary Note to United States Investors Concerning Estimates of Reserves and Resources	43

 

 

Business of the Company

 

Fortuna Silver Mines Inc. (“Fortuna” or the “Company”) is engaged in precious and base metal mining and related activities in Latin America, including exploration, extraction, and processing. The Company:

 

·

operates the Caylloma silver, lead and zinc mine (“Caylloma”) in southern Peru,

 

·

operates the San Jose silver and gold mine (“San Jose”) in southern Mexico, and

 

·

is currently constructing an 18,750 tpd open pit gold heap leach mine (“Lindero Project”) in northern Argentina.

 

The Company only processes ore extracted from its own mining concessions and does not purchase ore or mineral concentrates from third parties either for processing, refining, or trading.

 

Fortuna is a publicly traded company incorporated and domiciled in British Columbia, Canada. Its common shares are listed on the New York Stock Exchange under the trading symbol FSM, on the Toronto Stock Exchange under the trading symbol FVI, and on the Frankfurt Stock Exchange under the trading symbol F4S.F.

 

The Company’s registered office is located at Suite 650 - 200 Burrard Street, Vancouver, British Columbia, Canada V6C 3L6.

 

The consolidated financial statements include wholly-owned subsidiaries of the Company; the most significant of which at December 31, 2019 are presented in the following table:

 

Name		Location		Ownership		Principal Activity
Minera Bateas S.A.C. ("Bateas")		Peru		100%		Caylloma Mine
Compania Minera Cuzcatlan S.A. de C.V. ("Cuzcatlan")		Mexico		100%		San Jose Mine
Mansfield Minera S.A. ("Mansfield")		Argentina		100%		Lindero Project

 

This Management’s Discussion and Analysis (“MD&A”) is intended to help readers understand the significant factors that affect the performance of Fortuna and its subsidiaries, and those that may affect future performance. This MD&A has been prepared as of March 10, 2020 and should be read in conjunction with the Company’s audited consolidated financial statements for the years ended December 31, 2019 and 2018. The Company’s significant accounting policies are set out in Note 3 of the December 31, 2019 and 2018 audited consolidated financial statements. All amounts in this MD&A are expressed in United States dollars, unless otherwise indicated. Certain amounts shown in tables within this MD&A may not add exactly to the totals due to rounding.

 

The Company prepares its annual financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB").

 

In this MD&A, we refer to various Non-GAAP Financial Measures. These measures are used by us to manage and evaluate the operating performance of our mines and their ability to generate cash flows and these measures are widely reported in the mining industry as benchmarks for performance. Refer to the discussion under the heading “Non-GAAP Financial Measures”.

 

Additional information about the Company, including our Annual Information Form, is available on SEDAR at www.sedar.com.

 

This document contains forward-looking statements. Refer to the cautionary language under the heading “Cautionary Statement on Forward-Looking Statements.”

 

 

Full Year Financial and Operating Highlights

 

Sales for the year ended December 31, 2019 were $257.2 million, a 2% decrease from the $263.3 million reported in the year ended December 31, 2018 (“2018”).

 

Operating income for the year ended December 31, 2019 was $34.2 million compared to $61.6 million reported in 2018.

 

Net income for the year ended December 31, 2019 was $23.8 million or $0.15 per share compared to $34.0 million or $0.21 per share reported in 2018.

 

Adjusted net income (refer to Non-GAAP Financial Measures) was $28.4 million compared to $38.4 million reported in 2018.

 

Adjusted EBITDA (refer to Non-GAAP Financial Measures) for the year ended December 31, 2019 was $95.4 million compared to $113.9 million reported in 2018.

 

Free cash flow from ongoing operations (refer to Non-GAAP Financial Measures) was $34.5 million compared to $55.2 million reported in 2018.

 

Operating Highlights

 

Consolidated Metrics		Three months ended December 31,												Years ended December 31,
		2019				2018				% Change				2019				2018				% Change
Key Indicators
Silver
Metal produced (oz)			2,251,917				1,937,703				16	%			8,809,767				8,890,943				(1%)
Metal sold (oz)			2,221,330				2,032,909				9	%			8,798,054				8,832,993				(0%)
Realized price ($/oz)			17.33				14.60				19	%			16.20				15.74				3%
Gold
Metal produced (oz)			12,279				12,070				2	%			50,525				54,210				(7%)
Metal sold (oz)			12,157				12,555				(3	%)			50,374				53,498				(6%)
Realized price ($/oz)			1,483				1,236				20	%			1,393				1,273				9%
Lead
Metal produced (000's lbs)			7,441				6,453				15	%			28,746				28,255				2%
Metal sold (000's lbs)			7,559				6,377				19	%			28,969				28,349				2%
Zinc
Metal produced (000's lbs)			11,614				11,537				1	%			45,600				45,485				0%
Metal sold (000's lbs)			11,974				11,713				2	%			45,781				45,867				(0%)
All-in sustaining cash cost (US$/oz Ag Eq)1, 2			12.58				12.24				3	%			11.91				10.55				13%

Notes: 

1.

All-in sustaining cash cost (“AISC”) is a Non-GAAP Financial Measure. Refer to Non-GAAP Financial Measures

2.

AISC ($/oz Ag Eq) calculated using the realized metal prices for each period (See Sales table under Financial Results)

 

Silver and gold production for the three months ended December 31, 2019 increased 16% and 2% to 2,251,917 ounces and 12,279 ounces, respectively, over the same period in 2018. At San Jose, silver and gold production increased 17% and 1% to 2,002,633 ounces and 11,993 ounces, respectively, over the same period in 2018 due primarily to a 7% increase in mine production and an 8% increase in silver head grade. At Caylloma, silver production increased 14% to 249,284 ounces over the same period in 2018 due to a 16% higher silver head grade. Lead production at Caylloma increased 15% to 7.4 million pounds due to a 19% higher head grade, while zinc production increased 1% to 11.6 million pounds on 4% higher head grade compared to the same period in 2018.

 

Consolidated all-in sustaining cash cost per ounce of payable silver equivalent (refer to Non-GAAP Financial Measures) for the fourth quarter was $12.58 per ounce or 3% higher than the $12.24 per ounce reported in 2018.

 

 

Silver and gold production for the year ended December 31, 2019 decreased 1% and 7% to 8,809,767 ounces and 50,525 ounces, respectively, over 2018. At San Jose, silver and gold production decreased 1% and 9% to 7,868,478 ounces and 48,880 ounces, respectively. The decrease was due primarily to a planned change in mine sequencing of lower grade stopes in the third quarter, which reduced silver and gold production for the year by 14% and 9%, respectively. At Caylloma, silver and lead production increased 3% and 2% to 941,289 ounces and 28.7 million pounds, respectively, over 2018 due primarily to higher silver and lead head grade of 5% and 4%, respectively. Zinc production was 45.6 million pounds, compared to 45.5 million pounds in 2018.

 

Consolidated all-in sustaining cash cost per ounce of payable silver equivalent (refer to Non-GAAP Financial Measures) for the year ended December 31, 2019 was $11.91 per ounce or 13% higher than the $10.55 per ounce reported in 2018. This increase was due primarily to higher production costs at both San Jose and Caylloma.

 

Selected Financial Information

 

Consolidated Financial Metrics		Three months ended December 31,												Years ended December 31,
		2019				2018				% Change				2019				2018				% Change
(Expressed in $ millions except per share information)
Sales		$	69.0			$	59.6				16	%		$	257.2			$	263.3				(2%)
Mine operating income			23.4				17.3				35	%			84.6				96.6				(12%)
Operating income			9.0				6.3				43	%			34.2				61.6				(44%)
Net income			19.0				2.2				764	%			23.8				34.0				(30%)
Earnings per share (basic)			0.12				0.01				1,100	%			0.15				0.21				(29%)
Adjusted net income1			10.9				4.4				148	%			28.4				38.4				(26%)
Adjusted EBITDA1			25.1				22.7				11	%			95.4				113.9				(16%)
Net cash provided by operating activities			19.2				19.3				(1	%)			63.0				83.5				(25%)
Free cash flow from ongoing operations1			6.4				11.8				(46	%)			34.5				55.2				(37%)
Capex
Sustaining			6.2				9.4				(34	%)			20.4				24.0				(15%)
Non-sustaining			0.9				1.2				(29	%)			2.0				3.3				(39%)
Lindero			26.8				39.4				(32	%)			188.3				80.0				135%
Brownfields			0.9				1.6				(46	%)			4.8				8.6				(44%)
															Dec 31, 2019				Dec 31, 2018				% Change
Cash, cash equivalents, and short-term investments														$	83.4			$	163.3				(49%)
Total assets														$	936.1			$	786.5				19%
Debt														$	146.5			$	69.3				111%
Shareholders' equity														$	635.4			$	602.8				5%

Notes:

1.  Refer to Non-GAAP financial measures.

 

Sales for the three months ended December 31, 2019 were $69.0 million, a 16% increase from the $59.6 million reported in the same period in 2018. The increase in sales was due primarily to higher silver, gold, and lead prices of 19%, 20%, and 4%, respectively, and a 9% and 19% increase in the volume of silver and lead sold.

 

Sales for the year ended December 31, 2019 were $257.2 million, a 2% decrease from the $263.3 million reported in 2018.

 

Net income for the three months ended December 31, 2019 was $19.0 million or $0.12 per share compared to $2.2 million net income or $0.01 per share reported in the same period in 2018. The increase in net income was driven by higher sales, $11.0 million of investment gains from cross-border, Argentine Pesos denominated bond trades, and lower income taxes. These were partially offset by $4.3 million of non-cash write-downs in inventories, Argentine exploration projects and our investment in the shares of Prospero Silver Corp (“Prospero”) and Medgold Resources Corp (“Medgold”).

 

 

Net income for the year ended December 31, 2019 was $23.8 million or $0.15 per share compared to $34.0 million net income or $0.21 per share reported in 2018. The net income was impacted by a 12% decrease in mine operating income, $5.6 million of non-cash write-downs on exploration projects, obsolete inventories, a decrease in the fair value of Prospero and Medgold shares, and a $2.3 million increase in share-based payment expenses due to the impact of a 7% year-over-year increase in the Company’s share price on the cash-settled share-based payments. The $13.3 million of foreign exchange losses primarily from the devaluation of the Argentine Peso were substantially mitigated by $11.0 million of gains from cross-border bond trades.

 

Adjusted net income (refer to Non-GAAP Financial Measures) for the three months ended December 31, 2019 was $10.9 million compared to $4.4 million for the same period in 2018. The increase was due primarily to higher mine operating income from the San Jose Mine and was partially offset by higher share-based payments.

 

Adjusted net income for the year ended December 31, 2019 was $28.4 million compared to $38.4 million for 2018. The adjusted net income for the year was adjusted to remove non-cash impairment charges, foreign exchange losses and investment gains from cross-border securities trades for the Lindero Project, and other non-cash items.

 

Adjusted EBITDA (refer to Non-GAAP Financial Measures) for the three months ended December 31, 2019 was $25.1 million compared to $22.7 million in the same period in 2018, as a result of the same factors that increased the adjusted net income for the period.

 

Adjusted EBITDA for the year ended December 31, 2019 was $95.4 million compared to $113.9 million in 2018, as a result of the same factors that lowered the adjusted net income for the year.

 

Net cash provided by operating activities for the three months ended December 31, 2019 was $19.2 million compared to $19.3 million reported in the same period in 2018.

 

Free cash flow from ongoing operations (refer to Non-GAAP Financial Measures) for the three months ended December 31, 2019 was $6.3 million compared to $11.8 million reported in same period in 2018. The decrease was due primarily to the negative changes in working capital, most notably, an increase in concentrate receivables at the San Jose Mine.

 

Net cash provided by operating activities for the year ended December 31, 2019 was $63.0 million compared to $83.5 million reported in 2018. The decrease was driven by lower operating margins and negative changes in working capital of $11.0 million compared to positive changes of $3.3 million in 2018.

 

Free cash flow from ongoing operations for the year ended December 31, 2019 was $34.5 million compared to $55.2 million reported in 2018. The decrease was driven by lower margins and negative changes in working capital, which was partially offset by lower expenditures on mineral properties, plant and equipment.

 

As at December 31, 2019, the Company had cash, cash equivalents, and short-term investments of $83.4 million (December 31, 2018 – $163.3 million), a decrease of $79.9 million since the beginning of the year, which was due primarily to funding construction of the Lindero Project.

 

 

Lindero Project (“Lindero” or the “project”)

 

Construction of the Lindero open pit heap leach gold mine located in Salta Province, Argentina is 89% complete as of the end of January 2020. Construction spending for the fourth quarter of 2019 was $27.8 million (2019 spending - $157.5 million) of which $21.3 million of construction trade payables was unpaid as of the end of December. Total construction spending as at December 31, 2019 is $280.3 million.

 

The following table summarizes the total construction spending at the Lindero Project:

 

		Cumulative to				Twelve months ended
(Expressed in $ millions)		December 31, 2018				December 31, 2019				Total
Construction capital expenditures		$	79.9			$	188.3			$	268.2
Contractor advances and deposits on equipment, net of transfers			42.9				(30.8	)			12.1
Total Construction Spending		$	122.8			$	157.5			$	280.3

 

Construction highlights and milestones include:

 

·

18,750 tpd crushing and agglomeration plant

Primary and secondary crushing circuits: Pre-commissioning activities of the main equipment has been completed. Crushing circuits are being commissioned and stockpiling of ore has commenced.

 

Tertiary crushing circuit: Vendor technicians are concluding with final mechanical and instrumentation activities on the HPGR. Pre-commissioning of the conveyors and transfer systems were initiated in February.

 

Agglomeration plant: Mechanical work is substantially complete; piping and electrical installation is in its final stages due to the delay caused by shortfalls in contractor manpower during December and January; pre-commissioning activities have been pushed back to March.

 

·

Leach pad and solution ponds area

Construction of the 31-hectare start-up leach pad area and solution ponds has been completed. Assembly and installation of the stacking system from the agglomeration plant to the leach pad is in progress but behind schedule due to a shortfall in contractor manpower during December and January, but is expected to be completed in April; making it on the critical path of the project.

 

Mechanical and piping installations on the solution ponds are in progress. Pumping and solution management systems are planned to be commissioned in April.

 

·

ADR plant

Equipment installation has been completed with piping and electrical work in progress. Pre-commissioning activities are expected to conclude in May.

 

·

8 MW power plant

Commissioning of the 8-megawatt power plant and medium voltage power distribution system has been completed. The plant has been connected to the mine’s grid and is providing power to the mine.

 

·

SART plant

Mechanical and piping installation work is progressing with pre-commissioning activities scheduled to conclude in May. The SART plant is not mission critical for the start of gold production.

 

 

·

Ancillary facilities

Construction and implementation of the on-site assay laboratory has been completed. Sample preparation and analysis for gold using fire assay with an atomic absorption finish has been conducted at this facility since the end of January 2020.

 

Industrial water for the operation will be sourced from a 120 cubic meter per hour well field and pumping station located 13 kilometers from the mine site. Commissioning of the industrial water system was completed in February 2020.

 

Further to the updated construction and commissioning schedule, the Company expects to place ore on the leach pad and first doré pour in the second quarter of 2020 (refer to Fortuna’s news release dated February 13, 2020), and the total construction capital expenditures are now forecast to be in the range of $314 million to $320 million, an increase of 28% over the initial capital cost guidance¹ (see Fortuna news release dated September 21, 2017 and the technical report entitled “Fortuna Silver Mines Inc. Lindero Property, Salta Province, Argentina, dated effective October 31, 2017 which is available on SEDAR at www.sedar.com). In addition, the Company expects to incur approximately $32 million of pre-production costs and buildup of working capital and approximately $12 million of recoverable value added taxes through to the end of construction. Commercial production is expected to commence in the third quarter of 2020.

 

The main drivers for the increased capital costs are $8.6 million of indirect costs, and $6.8 million of EPCM contractor. In addition, the Company expects to incur pre-production costs and buildup of working capital through to the commencement of production of approximately $40 million of which $14 million had been spent as of December 31, 2019. This is an increase of $15 million over the $25 million disclosed in our November 14, 2019 news release and is mainly driven by continued mining operations during the pre-production phase which will result in an inventory of ore stockpile 30% larger than originally planned, and additional related owner’s costs, and an additional $4 million for inventory of spare parts.

 

Note 1: The initial capital cost guidance of $239 million was subsequently adjusted to $245.5 million to reflect the shifting of $6.5 million in a future sustaining capital investment to expand the leach solution flow to the construction phase.

 

 

2020 Guidance and Outlook

 

2020 Production Guidance

 

			Silver				Gold				Lead				Zinc				Cash Cost1			AISC1
Mine			(Moz)				(koz)				(Mlbs)				(Mlbs)				($/t)
Silver																						(US$/oz Ag Eq)
San Jose, Mexico			6.6 - 7.3				41 - 45				-				-				65.6 - 72.5			9.6 - 11.7
Caylloma, Peru			0.9 - 1.0				-				27.2 - 30.1				44.0 - 48.6				81.4 - 89.9			14.8 - 18.1
Gold																						(US$/oz Au)
Lindero2,3, Argentina			-				60 - 80				-				-				10.2 - 11.4			520 - 620
Consolidated Total			7.5 - 8.3				101 - 125				27.2 - 30.1				44.0 - 48.6				-			-

 

Notes:

1.

All-In Sustaining Cost (AISC) is a non-GAAP financial measure (Refer to Non-GAAP Financial Measures). AISC includes production cash cost, commercial and government royalties, mining tax, export duties (as applicable), worker's participation (as applicable), subsidiary G&A, sustaining capital expenditures, and Brownfields exploration and is estimated at metal prices of US$1,450/oz Au, US$17/oz Ag, US$2,100/t Pb, and US$2,500/t Zn.

2.

Lindero's production and cost guidance is based on the updated construction and commissioning schedule, as detailed in Fortuna's news release dated February 13, 2020, with ore to be placed on the leach pad and first doré pour scheduled in the second quarter of 2020. Any material changes to the construction and commissioning schedule may have a material impact on Lindero's production and cost guidance.

3.

Lindero's all-in sustaining cost is based on commercial production and includes an export duty of 5% of revenue.

4.

Totals may not add due to rounding.

 

2020 All-In-Sustaining Cash Cost Per Silver and Gold Ounce Guidance

 

$/oz Ag			San Jose				Caylloma
Cash cost, net of by-product credits		$	6.7 - 8.2			$	11.7 - 14.3
Adjustments:
Commercial and government royalties and mining tax			0.3 - 0.4				0.2 - 0.2
Worker's participation			0.5 - 0.6				0 - 0
General and administrative expenses			0.5 - 0.7				0.7 - 0.8
Sustaining capital expenditures			1.1 - 1.3				1.9 - 2.3
Brownfield exploration expenditures			0.4 - 0.5				0.4 - 0.5
All-in-sustaining cash cost per payable ounce of silver		$	9.6 - 11.7			$	14.8 - 18.1

$/oz Au			Lindero
Cash cost, net of by-product credits		$	324 - 399
Adjustments:
Commercial and government royalties and mining tax			106 - 123
General and administrative expenses			32 - 36
Sustaining capital expenditures			53 - 56
Brownfield exploration expenditures			4 - 5
All-in-sustaining cash cost per payable ounce of gold		$	520 - 620

 

 

2020 Capital Expenditure and Exploration Guidance

 

(Expressed in $ millions)		San Jose				Caylloma				Lindero				Total
Equipment and infrastructure		$	2.0			$	5.7			$	3.3			$	11.0
Dry stack expansion			2.4				-				-				2.4
Mine development			4.8				5.0				-				9.8
Brownfield exploration			4.9				2.1				-				7.0
Other sustaining capex			3.0				0.1				-				3.1
Total		$	17.1			$	12.9			$	3.3			$	33.3

 

Financial Results

 

Sales

 

		QUARTERLY RESULTS												YEAR TO DATE RESULTS
		Three months ended December 31,												Years ended December 31,
		2019				2018				% Change				2019				2018				% Change
Provisional sales ($ million)
Caylloma			18.8				19.2				(2	%)			73.6				89.1				(17	%)
San Jose			48.9				39.2				25	%			183.2				180.2				2	%
Adjustments ($ million)1			1.3				1.2				(8	%)			0.4				(6.0	)			107	%
Sales ($ million)			69.0				59.6				16	%			257.2				263.3				(2	%)
Silver
Metal produced (oz)			2,251,917				1,937,703				16	%			8,809,767				8,890,943				(1	%)
Provisional sales (oz)			2,221,330				2,032,909				9	%			8,798,054				8,832,993				(0	%)
Provisional sales ($ million)			35.7				27.4				30	%			131.9				128.6				3	%
Realized price ($/oz)2			17.33				14.60				19	%			16.20				15.74				3	%
Net realized price ($/oz)3			16.07				13.47				19	%			14.99				14.56				3	%
Gold
Metal produced (oz)			12,279				12,070				2	%			50,525				54,210				(7	%)
Provisional sales (oz)			12,157				12,555				(3	%)			50,374				53,498				(6	%)
Provisional sales ($ million)			17.4				14.8				18	%			66.6				64.7				3	%
Realized price ($/oz)2			1,483				1,236				20	%			1,393				1,273				9	%
Net realized price ($/oz)3			1,429				1,177				21	%			1,323				1,209				9	%
Lead
Metal produced (000's lbs)			7,441				6,453				15	%			28,746				28,255				2	%
Provisional sales (000's lbs)			7,559				6,377				19	%			28,969				28,349				2	%
Provisional sales ($ million)			6.4				5.4				19	%			24.6				27.6				(11	%)
Realized price ($/lb)2			0.92				0.89				4	%			0.91				1.02				(11	%)
Net realized price ($/lb)3			0.85				0.85				(0	%)			0.85				0.97				(13	%)
Zinc
Metal produced (000's lbs)			11,614				11,537				1	%			45,600				45,485				0	%
Provisional sales (000's lbs)			11,974				11,713				(2	%)			45,781				45,867				(0	%)
Provisional sales ($ million)			8.3				10.8				(23	%)			33.7				48.3				(30	%)
Realized price ($/lb)2			1.08				1.19				(10	%)			1.15				1.32				(13	%)
Net realized price ($/lb)3			0.69				0.92				(25	%)			0.74				1.05				(30	%)

 

Notes:

1

Adjustments consists of mark to market, final price adjustments and final assay adjustments

2

Based on provisional sales before final price adjustments. Net after payable metal deductions, treatment, and refining charges

3

Treatment charges are allocated to base metals at Caylloma and to gold at San Jose

 

 

Sales for the three months ended December 31, 2019 were $69.0 million or $9.4 million higher than the $59.6 million reported in the same period in 2018. The higher sales were due mainly to higher prices of silver, gold, and lead of 19%, 20%, and 4%, respectively, and higher volumes of silver and lead sold of 9% and 19%, respectively.

 

Sales at San Jose were $50.4 million, or 24% higher than the $40.5 million reported in the same period in 2018. The higher sales were due to higher silver and gold prices of 19% and 20%, respectively, and higher volume of silver sold of 8% which was partially offset by a 4% decrease in the volume of gold sold. Sales at Caylloma were $18.6 million, or 3% lower than the $19.2 million reported in the same period in 2018 as higher lead and zinc production and higher silver prices helped compensate for a 10% year-over-year decline in the price of zinc and a $2.0 million increase in treatment charges.

 

Sales for the year ended December 31, 2019 were $257.2 million, or 2% lower than the $263.3 million reported in 2018.

 

Sales at San Jose increased $8.5 million to $184.3 million as a result of increases in the prices of gold and silver of 9% and 3%, respectively, despite lower sales volume. Sales at Caylloma declined $14.5 million to $72.9 million as a result of an 11% and a 13% decline in lead and zinc prices, respectively, and an $8.6 million increase in treatment charges.

 

Operating Income (Loss) and Adjusted EBITDA

 

		Three months ended December 31,																Years ended December 31,
(Expressed in $ millions)			2019				%1				2018				%1				2019				%1				2018				%1
Operating income (loss)
San Jose		$	17.4				34	%		$	10.5				26	%		$	60.4				33	%		$	57.9				33	%
Caylloma			1.4				8	%			2.9				15	%			9.2				13	%			22.9				26	%
Lindero			(1.9	)			0	%			(3.9	)			0	%			(13.6	)			0	%			(4.1	)			0	%
Corporate			(7.9	)							(3.2	)							(21.8	)							(15.1	)
Total		$	9.0				13	%		$	6.3				10	%		$	34.2				13	%		$	61.6				23	%
Adjusted EBITDA2
San Jose		$	26.2				52	%		$	19.6				49	%		$	92.5				50	%		$	92.2				52	%
Caylloma			4.6				25	%			6.3				33	%			22.3				31	%			37.0				42	%
Lindero			(0.2	)			0	%			(0.1	)			0	%			(0.7	)			0	%			(0.3	)			0	%
Corporate			(5.5	)							(3.1	)							(18.7	)							(15.0	)
Total		$	25.1				36	%		$	22.7				38	%		$	95.4				37	%		$	113.9				43	%

 

Notes:

1

As a Percentage of Sales

2

Refer to Non-GAAP Financial Measures

3

Figures may not add due to rounding

 

Operating income for the three months ended December 31, 2019 was $9.0 million or $2.7 million higher than the $6.3 million reported in the same period in 2018. The increase in operating income was due to higher sales at our San Jose mine as a result of higher gold and silver prices of 19% and 20% respectively. Other items that impacted operating income were a $1.9 million increase in share-based payments and $4.2 million of non-cash impairment charges.

 

At San Jose, operating income was $17.4 million or $6.9 million higher than the $10.5 million reported in the same period in 2018. The increase was due to higher gold and silver prices and higher volume of silver ounces sold, and was partially offset by higher production cash costs of 6% and a $0.5 million foreign exchange loss in 2019 compared to a $0.4 million foreign exchange gain in 2018. At Caylloma, operating income was $1.4 million or $1.5 million lower than the $2.9 million reported in the same period in 2018. The decrease was driven by lower sales, and higher depreciation and general and administrative expenses.

 

Operating income for the year ended December 31, 2019 was $34.2 million, or $27.4 million lower than the $61.6 million reported in 2018. The decrease was driven by a $13.7 million decrease in operating income at the Caylloma Mine, a $7.2 million increase in foreign exchange loss due primarily to the impact a 60% year-over-year decline in the Argentine Peso had on recoverable value added taxes accumulated during the construction of the Lindero Project, and $5.6 million of non-cash impairment charges on two exploration projects in Mexico and Argentina, investment in associates, and obsolete inventories.

 

 

Exploration and Evaluation Costs

 

Exploration and evaluations costs for the three months ended December 31, 2019 totaled $0.4 million on an Argentine exploration project compared to $0.2 million reported in the same period in 2018.

 

Exploration and evaluation costs for the year ended December 31, 2019 were $2.4 million compared to $0.7 million reported in 2018. The increase was due to spending on the Company’s Argentine and Mexican greenfield exploration projects.

 

General and Administrative (“G&A”) Expenses

 

		Three months ended December 31,												Years ended December 31,
(Expressed in $ millions)		2019				2018				% Change				2019				2018				% Change
Mine G&A		$	3.5			$	3.0				17	%		$	10.9			$	10.1				8	%
Corporate G&A			3.0				2.6				15	%			11.4				11.0				4	%
Share-based payments			2.4				0.5				380	%			6.0				3.7				62	%
Workers' participation			0.5				0.2				150	%			1.5				1.4				7	%
Total		$	9.4			$	6.3				49	%		$	29.8			$	26.2				14	%

 

General and administrative expenses for the three months ended December 31, 2019 increased 49% to $9.4 million compared to $6.3 million in the same period in 2018 on higher share-based payments reflecting the impact of a 29% increase in the Company’s share price on the Company’s cash-settled share units and higher personnel costs at the Mexico administration office.

 

General and administrative expenses for the year ended December 31, 2019 increased 14% to $29.8 million compared to $26.2 million reported in 2018 on higher share-based payments and increased headcount to support the mining operations.

 

Foreign Exchange Loss

 

Foreign exchange loss for the three months ended December 31, 2019 was $1.4 million compared to $3.6 million reported in the same period in 2018. The decrease was due primarily to the Argentine Peso declining 6% against the U.S. dollar, which contributed a $1.0 million foreign exchange loss for the current period compared to a $3.9 million foreign exchange loss for the same period in 2018.

 

Foreign exchange loss for the year ended December 31, 2019 was $13.3 million compared to a $6.1 million foreign exchange loss for 2018. The increase was due primarily to a $11.5 million foreign exchange loss from the Argentine Peso declining 60.5% against the U.S. dollar during 2019.

 

As a result of the devaluation of the Argentine Peso which followed Argentina’s primary election in the third quarter of 2019, the Company implemented a bond investment strategy to meet our local currency requirements in Argentina and recognized $11.0 million of gains from cross-border securities trades.

 

 

Other Expenses

 

Other expenses for the three months ended December 31, 2019 were $3.2 million compared to $0.9 million reported in the same period in 2018. Other expenses include $2.2 million in non-cash impairment charges on the Company’s investments in Prospero and Medgold and a $0.7 million write-off of an Argentine greenfield exploration project.

 

Other expenses for the year ended December 31, 2019 were $4.6 million compared to $2.0 million reported in 2018. Other expenses include $4.3 million of non-cash impairment charges on the Company’s investments in Prospero and Medgold and the write-off of exploration projects.

 

Income Tax Expense

 

Income tax expense for the three months ended December 31, 2019 was $1.1 million or $3.8 million lower than the $4.9 million reported in the same period in 2018. Current income tax expense increased $4.3 million to $8.2 million compared to $3.9 million reported in 2018 due primarily to higher mine operating profits from the San Jose Mine. Included in the 2018 comparative figure was a $1.3 million tax recovery in the fourth quarter of 2018 relating to the reclassification of withholding taxes from current to deferred due to the timing of payments.

 

Deferred income tax recovery increased $8.2 million to $7.2 million compared to a $1.0 million deferred tax expense reported in the same period in 2018. The main drivers for the tax recovery were the positive impact of a strong Mexican Peso and high inflation on the tax base of mining assets in Mexico as well as recognition of $2.0 million of tax assets that had previously been not recognized.

 

Effective tax rate (“ETR”) for the three months ended December 31, 2019 was 5.3% as a result of a favorable impact on deferred taxes from a strong Mexican Peso and high inflation in Mexico and Argentina, and recognizing tax assets that were previously not recognized against $11.0 million in investment gains from cross-border bond trades. Excluding these items, the ETR would have been 45.6% compared to 68.7% reported in the same period in 2018. The higher ETR in 2018 included the recognition of additional withholding taxes that increased the ETR by 19%.

 

Income tax expense for the year ended December 31, 2019 was $20.2 million, or $13.2 million lower than the $33.4 million reported in 2018. Current income tax expense was $32.6 million, or $2.0 million higher than the $30.6 million reported in 2018 due primarily to a $3.2 million increase in interest and dividend withholding tax.

 

Deferred income tax recovery for the year ended December 31, 2019 was $12.5 million, compared to a $2.8 million deferred income tax expense reported in 2018. The swing to a tax recovery was due primarily to a favorable impact from a strong Mexican Peso, high inflation in both Mexico and Argentina, as well as recognizing tax assets that were previously not recognized.

 

The ETR for the year ended December 31, 2019 was 45.9% compared to 49.5% reported in 2018. The lower ETR was primarily attributed to the net favorable impact of foreign exchange and inflation in Mexico and Argentina.

 

 

Results of Operations

 

San Jose Mine Operating Results

 

The San Jose Mine is an underground silver-gold mine located in the state of Oaxaca in southern Mexico. The following table shows the key metrics used to measure the operating performance of the mine: throughput, head grade, recovery, gold and silver production and unit costs:

 

		Three months ended December 31,								Years ended December 31,
		2019				2018				2019				2018
Mine Production
Tonnes milled			273,066				256,181				1,068,722				1,040,478
Average tonnes milled per day			3,034				2,846				3,028				2,956
Silver
Grade (g/t)			249				230				252				260
Recovery (%)			91				91				91				92
Production (oz)			2,002,633				1,718,496				7,868,478				7,979,634
Metal sold (oz)			1,968,550				1,818,026				7,849,438				7,921,345
Realized price ($/oz)			17.34				14.61				16.20				15.74
Gold
Grade (g/t)			1.50				1.58				1.57				1.75
Recovery (%)			91				91				91				92
Production (oz)			11,993				11,825				48,880				53,517
Metal sold (oz)			11,870				12,312				48,731				53,255
Realized price ($/oz)			1,483				1,236				1,393				1,273
Unit Costs
Production cash cost ($/t)2			70.19				65.94				69.60				63.72
Production cash cost ($/oz Ag Eq)1,2			6.82				6.79				6.74				5.93
Net smelter return ($/t)			181.85				145.49				172.04				138.54
All-in sustaining cash cost ($/oz Ag Eq)1,2			10.54				9.85				9.83				9.02
Capital expenditures ($000's)
Sustaining			3,737				2,723				9,969				9,277
Brownfields			649				1,361				4,077				6,947

Notes:

1.

Production cash cost silver equivalent and all-in sustaining cash cost (“AISC”) silver equivalent are calculated using realized metal prices for each period respectively.

2.

Production cash cost, Production cash cost silver equivalent and AISC silver equivalent are Non-GAAP Financial Measures. Refer to Non-GAAP Financial Measures.

 

Quarterly Results

 

The San Jose Mine produced 2,002,633 ounces of silver and 11,993 ounces of gold in the fourth quarter of 2019, which were 17% and 1%, respectively, above the comparable quarter in 2018. The higher silver production was due primarily to a 7% increase in mine throughput as well as an 8% increase in silver head grade.

 

Cash cost per tonne of processed ore for the fourth quarter increased 6% to $70.19 per tonne (refer to Non-GAAP Financial Measures) compared to $65.94 per tonne for the comparable quarter in 2018. The increased cash cost was due to higher mine costs related to breakup, support and transportation.

 

 

Annual Results

 

The San Jose Mine produced 7,868,478 ounces of silver and 48,880 ounces of gold in 2019, which were 1% and 9%, respectively, below 2018. The lower production was due primarily to the impact of scheduled mine production in lower grade stopes in the third quarter which produced approximately 282,000 less silver ounces on 15% lower head grade.

 

Cash cost per tonne of processed ore for the year ended December 31, 2019 increased 9% to $69.60 per tonne (refer to Non-GAAP Financial Measures) compared to $63.72 per tonne for 2018. The increased cash cost was due to higher mining costs relating to contractor tariffs and indirect costs. The cash cost was within the annual cost guidance.

 

Caylloma Mine Operating Results

 

Caylloma is an underground silver, lead and zinc mine located in the Arequipa Department in southern Peru. Its commercial products are silver-lead and zinc concentrates. The table below shows the key metrics used to measure the operating performance of the mine: throughput, head grade, recovery, silver, lead and zinc production and unit costs:

 

		Three months ended December 31,								Years ended December 31,
		2019				2018				2019				2018
Mine Production
Tonnes milled			133,271				135,034				531,307				534,773
Average tonnes milled per day			1,481				1,500				1,497				1,502
Silver
Grade (g/t)			71				61				66				63
Recovery (%)			82				83				83				84
Production (oz)			249,284				219,207				941,289				911,309
Metal sold (oz)			252,780				214,883				948,616				911,648
Realized price ($/oz)			17.31				14.55				16.23				15.71
Lead
Grade (%)			2.84				2.39				2.72				2.62
Recovery (%)			89				91				90				91
Production (000's lbs)			7,441				6,453				28,746				28,255
Metal sold (000's lbs)			7,559				6,377				28,969				28,349
Realized price ($/lb)			0.92				0.89				0.91				1.02
Zinc
Grade (%)			4.48				4.30				4.36				4.28
Recovery (%)			88				90				89				90
Production (000's lbs)			11,614				11,537				45,600				45,485
Metal sold (000's lbs)			11,974				11,713				45,781				45,867
Realized price ($/lb)			1.08				1.19				1.15				1.32
Unit Costs
Production cash cost ($/t)2			85.86				89.50				86.15				83.47
Production cash cost ($/oz Ag Eq)1,2			11.67				8.67				10.92				7.64
Net smelter return ($/t)			138.07				141.67				137.77				166.05
All-in sustaining cash cost ($/oz Ag Eq)1,2			15.40				14.76				14.30				11.68
Capital expenditures ($000's)
Sustaining			2,487				6,646				10,440				14,709
Brownfields			214				223				700				1,691

Notes:

1.

Production cash cost silver equivalent and all-in sustaining (“AISC”) cash cost silver equivalent are calculated using realized metal prices for each period respectively.

2.

Production cash cost, Production cash cost silver equivalent and AISC silver equivalent are Non-GAAP Financial Measures. Refer to Non-GAAP Financial Measures.

 

 

Quarterly Results

 

The Caylloma Mine produced 7.4 million pounds of lead and 11.6 million pounds of zinc in the fourth quarter of 2019, which were 15% higher and in line with the production for the comparable quarter in 2018. The higher volume of lead production was due primarily to a 19% higher lead head grade despite lower mine throughput. Silver production totaled 249,284 ounces or 14% higher than the comparable quarter in 2018 due to higher silver head grade by 16%.

 

Cash cost per tonne of processed ore was $85.86 (refer to Non-GAAP Financial Measures), which was 4% lower than the $89.50 cash cost per tonne for the comparable quarter in 2018 and was within our annual guidance range. The lower cash cost was due primarily to lower mining costs related to breakup and support.

 

Annual Results

 

The Caylloma Mine produced 28.7 million pounds of lead and 45.6 million pounds of zinc in 2019, which were 2% higher and in line with the production for 2018. The higher volume of lead production was due to a 4% higher lead head grade. Zinc production was in line with production for 2018. Silver production totaled 941,289 ounces or 3% higher than the production for 2018.

 

Cash cost per tonne of processed ore was $86.15 (refer to Non-GAAP Financial Measures), or 3% higher than the $83.47 per tonne for 2018 and within our annual guidance range. The higher cash cost was due to higher indirect costs related mainly to on-site camp maintenance and personnel transportation.

 

Quarterly Information

 

The following table provides information for the last eight fiscal quarters up to December 31, 2019:

 

		Expressed in $000's, except per share data
		Q4 2019				Q3 2019				Q2 2019				Q1 2019				Q4 2018				Q3 2018				Q2 2018				Q1 2018
Sales			68,983				61,305				67,908				58,991				59,592				59,596				73,666				70,442
Mine operating income			23,445				16,671				22,978				21,487				17,345				16,497				31,392				31,337
Operating (loss) income			9,029				(1,459	)			15,711				10,913				6,251				10,535				22,372				22,428
Net (loss) income			18,984				(7,710	)			10,279				2,243				2,232				6,853				11,151				13,754
Basic EPS			0.12				(0.05	)			0.07				0.01				0.01				0.04				0.07				0.09
Diluted EPS			0.12				(0.05	)			0.07				0.01				0.01				0.04				0.07				0.09
Total assets			936,065				871,483				823,310				796,718				786,517				738,305				721,147				707,504
Debt			146,535				109,394				69,363				69,338				69,302				39,639				39,603				39,588

 

Sales increased 13% in the fourth quarter of 2019 to $69.0 million compared to $61.3 million in the third quarter of 2019 due primarily to a 15% and 7% increase in the volume of silver and gold ounces sold. Cash mine operating costs at the San Jose and Caylloma Mines were 6% higher and 4% lower, respectively. Pre-tax income included $11.0 million of investment gains from cross-border securities trades.

 

Sales decreased 10% in the third quarter of 2019 to $61.3 million compared to $67.9 million in the second quarter of 2019 due primarily to lower silver and gold ounces sold from the San Jose Mine as a result of scheduled mining at lower grade stopes. The lower sales and an $8.3 million foreign exchange loss from the devaluation of the Argentine Peso were the primary reasons for the $1.5 million operating loss and $7.7 million net loss in the third quarter of 2019.

 

 

Sales increased 15% in the second quarter of 2019 to $67.9 million compared to $59.0 million in the first quarter of 2019 due primarily to higher silver and gold sales volume from the San Jose Mine. Sales from the Caylloma Mine decreased $2.6 million or 13% quarter-over-quarter due to lower sales volume and a 21% and 11% decrease in the prices for lead and zinc, respectively. Cost of sales increased 20% over the first quarter of 2019 due to higher mining, milling, and labour costs. Foreign exchange swung to a $0.2 million gain from a $3.7 million loss in the first quarter as the Argentine Peso strengthened 2.1% against the U.S. dollar in the quarter and contributed $0.7 million towards the foreign exchange gain.

 

Sales decreased 1% in the first quarter of 2019 to $59.0 million compared to $59.6 million in the fourth quarter of 2018. Lower sales in the first quarter of 2019 were impacted by a $3.7 million buildup in silver-gold concentrate inventory shipped in the second quarter of 2019. Depreciation and depletion were $2.0 million lower due to lower sales volume. Income tax expense increased 49% quarter-over-quarter to $7.3 million compared to $4.9 million from the previous quarter. The increase in income tax expense was due primarily to the impact of a 15% decline in the Argentine Peso and was partially offset by a highly inflationary environment in Argentina, which had a positive impact on the tax base of Lindero’s assets. Other factors contributing to an 18% increase in the ETR include deferred tax assets not recognized, non-deductible expenses, and mining taxes.

 

Precious Metal Prices Trends

 

 

For the year ended December 31, 2019, the sale of silver and gold ounces represents 78% of the Company’s sales revenue while lead and zinc make up the remaining 22% of sales revenue. Therefore, the prices of silver and gold are the most dominant factors in determining the Company’s profitability and cash flow from operations. The financial performance of the Company is expected to continue to be closely linked to the prices of silver and gold.

 

The silver price began the 2019 year at $15.47 per ounce and trended to a low of $14.38 per ounce in late May before closing at $15.28 per ounce at the end of the second quarter. During the third quarter the silver price trended to a high of $19.56 per ounce in early September before retreating to $16.97 per ounce at the end of the quarter. Silver trended to a high of $18.08 per ounce by the end of October before trending to a low $16.54 before closing at $17.78 per ounce at the end of the fourth quarter. Comparatively, the Company had an average realized price of silver of $17.33 per ounce and $16.20 per ounce, respectively, for the three and twelve months ended December 31, 2019.

 

 

The gold price began the 2019 year at $1,274 per ounce and rose to a first quarter high of $1,344 per ounce before closing the first quarter at $1,295 per ounce. Gold traded in a narrow range during April and May before the start of an uptrend, closing at $1,409 per ounce at the end of the second quarter. During the third quarter, the gold price trended to a high of $1,546 per ounce by mid-August before retreating to $1,485 per ounce at the end of the quarter. Gold traded in a narrow range in the fourth quarter and closed at $1,523 per ounce at the end of the fourth quarter. Comparatively, the Company had an average realized price of gold of $1,483 and $1,393 per ounce, respectively, for the three and twelve months ended December 31, 2019.

 

Liquidity and Capital Resources

 

Cash, Cash Equivalents and Short-Term Investments

 

The Company had cash, cash equivalents and short-term investments of $83.4 million at December 31, 2019, which represents a $79.9 million decrease from $163.3 million at December 31, 2018 and is comprised of $31.0 million of cash and $52.4 million of cash equivalents. The decrease in cash, cash equivalents and short-term investments was due primarily to $188.3 million in construction expenditures at Lindero, $34.7 million on construction related VAT payments, $8.4 million in lease payments and $35.0 million on non-construction related expenditures at Lindero and other capital expenditures at San Jose and Caylloma. These expenditures were partially funded from $63.5 million in cash generated from operations, $43.5 million net proceeds from the issuance of convertible debentures and $40.0 million drawn under the Company’s credit facility.

 

The Company’s investment objectives for its cash balances, in order of priority, are to preserve capital, to ensure liquidity and to maximize returns. The Company’s strategy to achieve these objectives is to invest its excess cash balance in a portfolio of primarily fixed income instruments with specified credit rating targets established by the Board of Directors of the Company. The Company does not own any asset-based commercial paper or other similar at-risk investments in its investment portfolios.

 

Working Capital

 

Working capital decreased $95.2 million to $62.4 million at December 31, 2019 compared to $157.6 million at December 31, 2018. The decrease in working capital was due to funding construction at the Lindero Project and other capital expenditures at the San Jose and Caylloma mines.

 

Capital Resources

 

As at December 31, 2019, the Company had fully drawn $40.0 million from its non-revolving credit facility and $70.0 million from its $110.0 million revolving credit facility. The purpose of the credit facility is to fund the construction of the Lindero Project. The interest rate on the revolving credit facility is on a sliding scale at one-month LIBOR plus an applicable margin ranging from 2.5% to 3.5%, based on a defined Total Debt to EBITDA Ratio, and is secured by a first ranking lien on the assets of the San Jose and Caylloma mines as well as their holding companies.

 

Liquidity and capital measures (expressed in $ millions)		December 31, 2019				December 31, 2018				Change
Cash and cash equivalents ("Cash")		$	83.4			$	90.5			$	(7.1	)
Short-term investments ("STI")			-				72.8				(72.8	)
Total Cash and STI			83.4				163.3				(79.9	)
Credit facility			150.0				150.0				-
Amount drawn on credit facility			(110.0	)			(70.0	)			(40.0	)
Net liquidity position		$	123.4			$	243.3			$	(119.9	)

 

 

On October 2, 2019, the Company completed a bought deal public offering (the “Offering”) of senior subordinated unsecured convertible debentures with an aggregate principal amount of $40.0 million. The Offering was subject to an over-allotment option which was exercised in full on October 8, 2019, pursuant to which an additional $6.0 million aggregate principal amount of debentures were issued, bringing the aggregate gross proceeds to the Company under the Offering to $46.0 million. The debentures issued under the Offering including those issued upon exercise of the Over-Allotment Option are collectively referred as the “Debentures”. The Company paid $2.5 million of transaction costs related to this financing.

 

The Debentures mature on October 31, 2024 and bear interest at a rate of 4.65% per annum, payable semi-annually in arrears on the last business day of April and October, commencing on April 30, 2020. The Debentures are convertible at the holder’s option into common shares in the capital of the Company at a conversion price of $5.00 per share, representing a conversion rate of 200 Common Shares per $1,000 principal amount of Debentures, subject to adjustment in certain circumstances.

 

The component parts of the convertible debentures, a compound instrument, are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument. A conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Company’s own equity instrument is an equity instrument.

 

At initial recognition, gross proceeds of $46.0 million from the Debentures were allocated into its debt and equity components. The fair value of the debt component was estimated at $38.9 million using a discounted cash flow model method with an expected life of five years and a discount rate of 8.6%. This amount is recorded as a financial liability on an amortized cost basis net of transaction cost using the effective interest method using an effective interest rate of 9.7% until extinguished upon conversion or at its maturity date.

 

The conversion option of the Debentures is classified as equity and was estimated based on the residual value of $7.1 million. This amount is not subsequently remeasured and will remain in equity until the conversion option is exercised, in which case, the balance recognized in equity will be transferred to share capital. Where the conversion option remains unexercised at the maturity date of the convertible note, the balance will remain in equity reserves. A deferred tax liability of $1.9 million related to the taxable temporary difference arising from the equity portion of the convertible debenture was recognized in equity reserves.

 

Subject to certain exceptions in connection with a change of control of the Company, the Debentures will not be redeemable by the Company prior to October 31, 2022. On or after October 31, 2022 and prior to October 31, 2023, the Debentures may be redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price of the Common Shares on the NYSE for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the redemption is given is at least 125% of the Conversion Price. On and after October 31, 2023, the Debentures may be redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount plus accrued and unpaid interest regardless of the trading price of the Common Shares.

 

Subject to applicable securities laws and regulatory approval and provided that no event of default has occurred and is continuing, the Company may, at its option, elect to satisfy its obligation to pay the principal amount of the Debentures and accrued and unpaid interest on the redemption date and the maturity date, in whole or in part, through the issuance of Common Shares, by issuing and delivering that number of Common Shares, obtained by dividing the principal amount of the Debentures and all accrued and unpaid interest thereon by 95% of the current market price (as defined in the Debenture Indenture) on such redemption date or maturity date, as applicable.

 

The Company does not have unlimited financial resources and there is no assurance that sufficient additional funding or financing will be available when needed by the Company or its direct and indirect subsidiaries on acceptable terms, or at all, to further explore or develop its properties or to fulfill its obligations under any applicable agreements. Fortuna is a multinational company and relies on financial institutions worldwide to fund corporate and project needs. Instability of large financial institutions may impact the ability of the Company to obtain equity or debt financings in the future and, if obtained, on terms that may not be favorable to the Company. Disruptions in the capital and credit markets as a result of uncertainty, geo-political events, changing or increased regulations of financial institutions, reduced alternatives or failures of significant financial institutions could adversely affect the Company’s access to the liquidity needed for the business in the longer term.

 

The Company may incur substantial debt from time to time to finance working capital, capital expenditures, investments or acquisitions or for other purposes. If the Company does so, the risks related to the Company’s indebtedness could intensify, including: (i) increased difficulty in satisfying existing debt obligations (ii) limitations on the ability to obtain additional financings, or imposed requirements to make non-strategic divestures (iii) impose hedging requirements (iv) imposed restrictions on the Company’s cash flows, for debt repayments or capital expenditures (v) increased vulnerability to general adverse economic and industry conditions (vi) interest rate risk exposure as borrowings may be at variable rates of interest (vii) decreased flexibility in planning for and reacting to changes in the mining industry (viii) reduced competitiveness versus less leveraged competitors, and (ix) increased cost of borrowings.

 

 

Subject to the various risks and uncertainties, as explained in the Risks and Uncertainties section, management believes the Company’s mining operations will generate sufficient cash flows and the Company has sufficient available credit lines and cash on hand to fund the construction of the Lindero Project and planned capital and exploration programs.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements or commitments that are expected to have a current or future effect on the financial condition, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

 

Financial Instruments

 

The Company does not utilize complex financial instruments in hedging metal price, foreign exchange or interest exposure. Any hedging activity requires approval of the Company’s Board of Directors. The Company will not hold or issue derivative instruments for speculation or trading purposes.

 

Provisional priced trade receivables of $33.6 million and an interest rate swap liability of $0.9 million are the Company’s only level 2 fair valued financial instruments and no level 3 instruments are held.

 

Provisionally priced trade receivables are valued using forward London Metal Exchange prices until final prices are settled at a future date. The interest rate swap is measured at estimated fair value.

 

Related Party Transactions

 

The Company has entered into the following related party transactions during the years ended December 31, 2019 and 2018:

 

(a)   Purchase of Goods and Services

 

During the years ended December 31, 2019 and 2018, the Company was charged for general and administrative services pursuant to a shared services agreement with Gold Group Management Inc., a company of which Simon Ridgway, the Company’s Chairman, is a director.

 

		Years ended December 31,
(Expressed in $000's)		2019				2018
Personnel costs		$	21			$	118
General and administrative expenses			189				193
		$	210			$	311

 

As at December 31, 2019, the Company has outstanding balances payable to Gold Group Management Inc. of $0.01 million (December 31, 2018 - $0.02 million). Amounts due to related parties are due on demand and are unsecured.

 

(b)   Key Management Personnel

 

During the years ended December 31, 2019 and 2018, the Company was charged for consulting services by Mario Szotlender, a director of the Company, and by Mill Street Services Ltd., a company of which Simon Ridgway, the Company’s Chairman, is a director. Such amounts, along with other amounts paid to key management personnel are as follows:

 

 

 

 

		Years ended December 31,
(Expressed in $000's)		2019				2018
Salaries and benefits		$	4,716			$	4,471
Directors fees			702				709
Consulting fees			135				139
Share-based payments			5,449				3,545
		$	11,002			$	8,864

 

Risks and Uncertainties

 

The Company is exposed to many risks in conducting its business, including but not limited to metal price risk as the Company derives its revenue from the sale of silver, gold, lead and zinc; credit risk in the normal course of business; foreign exchange risk as the Company reports its financial statements in U.S. dollars whereas the Company operates in jurisdictions that conducts its business in other currencies; the inherent risks of uncertainties in estimating mineral reserves and mineral resources; the risk in relation to the construction, the timing of commissioning and commencement of commercial production at the Lindero Project; political risks, environmental risks; and risks related to its relations with employees. These and other risks are described below and in the Company’s audited consolidated financial statements for 2019, its Annual Information Form which is available on SEDAR at www.sedar.com, and its Form 40-F filed with the SEC. Readers are encouraged to refer to these documents for a more detailed description of some of the risks and uncertainties inherent to the Company’s business.

 

Foreign Jurisdiction Risk

 

The Company currently conducts its operations in Peru, Mexico and Argentina. All these jurisdictions are potentially subject to a number of political and economic risks, including those described in the following section. The Company is unable to determine the impact of these risks or its future financial position or results of operations and the Company’s exploration, development and production activities may be substantially affected by factors outside of the Company’s control. These potential factors include but are not limited to royalty and tax increases or claims by governmental bodies, expropriation or nationalization, lack of an independent judiciary, foreign exchange controls, import and export regulations, cancellation or renegotiation of contracts and environmental and permitting regulations. The Company has no political risk insurance coverage against these risks.

 

All of the Company’s current production and revenue is derived from its operations in Peru and Mexico. As the Company’s business is carried on in a number of developing countries, it is exposed to a number of risks and uncertainties, including the following: expropriation or nationalization without adequate compensation especially in Argentina which has a history of expropriation where the Company is currently in the process of construction at the Lindero Project; changing political and fiscal regimes, and economic and regulatory instability; unanticipated changes to royalty and tax regulations; unreliable and undeveloped infrastructure, labor unrest and labor scarcity; difficulty procuring key equipment and components for equipment; import and export regulation and restrictions; the imposition of capital controls which may affect the repatriation of funds; high rates of inflation; extreme fluctuations in foreign exchange rates and the imposition of currency controls; inability to obtain fair dispute resolution or judicial determination because of bias, corruption or abuse of power; difficulties enforcing judgments; difficulties understanding and complying with regulatory and legal framework with respect to ownership and maintenance of mineral properties, mines and mining operations, local opposition to mine development projects, which include the potential for violence, property damage and frivolous or vexatious claims; terrorism and hostage taking; military repression and increased likelihood of international conflicts or aggression; increased public health concerns. Certain of these risks and uncertainties are prevalent in the jurisdictions where the Company operates.

 

 

Estimating Mineral Resources and Mineral Reserves

 

There is a degree of uncertainty attributable to the estimation of Mineral Resources, Mineral Reserves and expected mineral grades. Until mineral deposits are actually mined and processed, Mineral Resources, Mineral Reserves must be considered as estimates only. Any such estimates are expressions of judgment based on knowledge, mining experience, analysis of drilling results and industry practices.

 

Mineral Resources and Mineral Reserves may require revision based on actual production experience. Market fluctuations in the price of metals, as well as increased production costs and reduced recovery rates, may render certain Mineral Reserves uneconomic and may ultimately result in a restatement of Mineral Resources and/or Mineral Reserves. Short-term operating factors relating to the Mineral Resources and Mineral Reserves, such as the need for sequential development of ore bodies, may adversely affect the Company’s profitability in any accounting period. Estimates of operating costs are based on assumptions including those relating to inflation and currency exchange, which may prove incorrect. Estimates of mineralization can be imprecise and depend upon geological interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be unreliable. In addition, the grade and/or quantity of precious metals ultimately recovered may differ from that indicated by drilling results. There can be no assurance that precious metals recovered in small scale tests will be duplicated in large scale tests under onsite conditions or in production scale. Amendments to mine plans and production profiles may be required as the amount of Mineral Resources changes or upon receipt of further information during the implementation phase of the project. Extended declines in market prices for gold, silver and other metals may render portions of the Company’s mineralization uneconomic and result in reduced reported mineralization. Any material reduction in estimates of mineralization, or in the Company’s ability to develop its properties and extract and sell such minerals, could have a material adverse effect on the Company's results of operations or financial condition.

 

Mining Operations

 

The capital costs required by the Company’s projects may be significantly higher than anticipated. Capital and operating costs, production and economic returns, and other estimates contained in the Company’s current technical reports, may differ significantly from those provided for in future studies and estimates and from management guidance, and there can be no assurance that the Company’s actual capital and operating costs will not be higher than currently anticipated. In addition, delays to construction and exploration schedules may negatively impact the net present value and internal rates of return of the Company’s mineral properties as set forth in the applicable technical report. Similarly, there can be no assurance that historical rates of production, grades of ore processed, rates of recoveries or mining cash costs will not experience fluctuations or differ significantly from current levels over the course of the mining operations. In addition, there can be no assurance that the Company will be able to continue to extend the production from its current operations through exploration and drilling programs.

 

Uncertainties and risks related to the Construction of the Lindero Project

 

The Company is subject to inherent uncertainties and risks related to the construction and start-up of the Lindero Project, the principal of which include: delays in pre-commissioning, and ramp-up to commercial production; delays associated with contractors; budget overruns due to changes in costs of fuel, labour, power, materials and supplies, inflation and exchange rate risks and potential opposition from non-governmental organizations, environmental groups or local groups which may delay or prevent activities.

 

The Company’s ability to meet construction, development, and production schedules and cost estimates for the Lindero Project cannot be assured. The Company has prepared estimates of capital costs and/or operating costs for the Lindero Project, but no assurance can be given that such estimates will be achieved. Delays in the commencement of commercial production, failure to achieve cost estimates or material increases in costs due to increases in foreign exchange rates; continuation of capital controls imposed in Argentina; imposition of exchange control restrictions; and delays in obtaining the value added tax refunds, could have an adverse impact in future cash flows, profitability, results of operations and financial condition of the Company.

 

 

 

Environmental Uncertainties

 

All phases of the Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These laws address emissions into the air, discharges into water, management of waste, management of hazardous substances, protection of natural resources, antiquities and endangered species and reclamation of lands disturbed by mining operations. The Company’s operations generate chemical and metals depositions in the form of tailings. The Company’s ability to obtain, maintain and renew permits and approvals and to successfully develop and operate mines may be adversely affected by real or perceived impacts associated with the Company’s activities or of other mining companies that affect the environment, human health and safety. Environmental hazards may exist on the Company’s properties which are unknown to the Company at present and were caused by previous or existing owners or operators of the properties, for which the Company could be held liable.

 

Environmental legislation is evolving in a manner requiring stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. Compliance with environmental laws and regulations may require significant capital outlays on behalf of the Company and may cause material changes or delays in the Company's intended activities. Failure to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities, causing operations to cease or be curtailed. Such enforcement actions may include the imposition of corrective measures requiring capital expenditure, installation of new equipment or remedial action. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

 

Credit Risk

 

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. All of our trade accounts receivables from concentrate sales are held with large international metals trading companies.

 

The Company’s cash and cash equivalents and short term investments are held through large financial institutions. These investments mature at various dates within one year.

 

The Company’s maximum exposure to credit risk as at December 31, 2019 and 2018 is as follows:

 

		December 31,				December 31,
Credit (Expressed in $000’s)		2019				2018
Cash and cash equivalents		$	83,404			$	90,503
Short-term investments			-				72,824
Derivative assets			-				2,646
Accounts receivable and other assets			47,707				32,769
Income tax receivable			2,553				136
Other non-current receivables			38,389				15,241
		$	172,053			$	214,119

 

The carrying amount of financial assets recorded in the financial statements represents the Company’s maximum exposure to credit risk. We limit our exposure to counterparty credit risk on cash and term deposits by only dealing with financial institutions with high credit ratings and through our investment policy of purchasing only instruments with a high credit rating. Almost all of our concentrate is sold to large well-known concentrate buyers.

 

 

Metal Price Risk

 

The Company derives its revenue from the sale of silver, gold, lead and zinc. The Company’s sales are directly dependent on metal prices, and metal prices have historically shown significant volatility that is beyond the Company’s control.

 

The following table illustrates the sensitivity to a +/-10% change in metal prices on the Company’s outstanding trade receivables as at December 31, 2019:

 

Metal (Expressed in $ millions)		Change		Effect on Sales
Silver		+/- 10%		$	3.4
Gold		+/- 10%		$	1.8
Lead		+/- 10%		$	0.3
Zinc		+/- 10%		$	0.2

 

The Company mitigates the price risk associated with its base metal production by entering into forward sale and collar contracts for some of its forecasted base metal production. The Board of Directors continually assesses the Company’s strategy towards its base metal exposure, depending on market conditions. As at December 31, 2019, the Company had no outstanding forward sales and zero cost collars contracts.

 

Currency Risk

 

The functional and reporting currency for all entities within the consolidated group is the US dollar. We are exposed to fluctuations in foreign exchange rates as a portion of our expenses are incurred in Canadian dollars, Peruvian soles, Argentine Peso and Mexican Peso. A significant change in the foreign exchange rates between the United States dollar relative to the other currencies could have a material effect on the Company’s profit or loss, financial position, or cash flows. We have not hedged our exposure to foreign currency fluctuations.

 

The following table illustrates the sensitivity to a +/-10% change in foreign currency exchange rates on the Company’s foreign currency exposure as at December 31, 2019:

 

				Effect on foreign
				denominated
Currency (Expressed in $ millions)		Change		items
Mexican Peso		+/- 10%		$	2.1
Peruvian Soles		+/- 10%		$	0.2
Argentinian Peso		+/- 10%		$	1.0
Canadian Dollar		+/- 10%		$	0.4

 

Due to the volatility of the exchange rate for Argentine Peso, the Company is applying additional measures in cash management to minimize potential losses arising from the conversion of funds. As discussed below in the capital management section, the capital controls in effect when the Company commences production at the Lindero Project, the Company will be required to convert the equivalent value into Argentine Peso from the export sale of all gold doré from the Lindero Project. In addition, the Company would be required to obtain the prior consent of the Argentine Central Bank for the payment of cash dividends and distributions of profits out of Argentina.

 

 

The following tables summarize the Company’s exposure to currency risk through the following assets and liabilities denominated in foreign currencies:

 

		December 31, 2019
(Expressed in millions)			Canadian Dollars				Peruvian Soles				Mexican Pesos				Argentinian Pesos
Cash and cash equivalents			0.6				2.3				13.1				11.8
Accounts receivable and other assets			0.3				1.8				4.0				87.5
Income tax receivable			-				8.5				-				-
Investments in associates			1.4				-				-				-
VAT - long term receivable			-				-				10.7				2,039.9
Trade and other payables			(8.5	)			(19.4	)			(214.7	)			(1,454.4	)
Due to related parties			(0.0	)			-				-				-
Provisions, current			-				-				(3.9	)			-
Income tax payable			-				-				(161.9	)			-
Other liabilities			-				-				(4.2	)			-
Provisions			-				-				(87.5	)			-
Total foreign currency exposure			(6.3	)			(6.8	)			(444.4	)			684.8
US$ equivalent of foreign currency exposure		$	(4.8	)		$	(2.1	)		$	(23.6	)		$	11.3

 

		December 31, 2018
(Expressed in millions)		Canadian Dollars				Peruvian Soles				Mexican Pesos				Argentinian Pesos
Cash and cash equivalents			0.4				0.9				37.0				7.0
Accounts receivable and other assets			0.3				3.7				11.8				37.1
Income tax receivable			-				0.5				-				-
Investments in associates			5.2				-				-				-
VAT - long term receivable			-				-				-				560.9
Trade and other payables			(8.5	)			(18.5	)			(218.8	)			(125.2	)
Due to related parties			(0.0	)			-				-				-
Provisions, current			-				-				(3.0	)			-
Income tax payable			-				(4.6	)			(59.8	)			-
Other liabilities			-				-				(2.3	)			-
Provisions			-				-				(67.0	)			-
Total foreign currency exposure			(2.6	)			(18.0	)			(302.0	)			479.8
US$ equivalent of foreign currency exposure		$	(2.0	)		$	(5.5	)		$	(16.1	)		$	11.6

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligation as they become due. The volatility of the metals market can impact the Company’s ability to forecast cash flow from operations.

 

The Company maintains sufficient liquidity to meet its short-term business requirements, taking into account anticipated cashflows from operations, holdings of cash, cash equivalents and short-term investments and committed loan facilities.

 

The Company manages its liquidity risk by continuously monitoring forecasted and actual cashflows. A rigorous reporting, planning and budgeting process are in place to help facilitate forecasting funding requirements, to support operations on an ongoing basis and expansion plans, if any. The Company expects the following maturities of its financial liabilities, lease obligations, and other contractual commitments, excluding payments relating to interest:

 

 

		Expected payments due by year as at December 31, 2019
		Less than												After
(Expressed in $ millions)		1 year				1 - 3 years				4 - 5 years				5 years				Total
Trade and other payables		$	65.3			$	-			$	-			$	-			$	65.3
Debt			-				110.0				46.0				-				156.0
Income taxes payable			12.4				-				-				-				12.4
Lease obligations			9.3				9.4				4.1				15.0				37.8
Other liabilities			-				0.5				-				-				0.5
Capital commitments, Lindero 1			24.5				-				-				-				24.5
Closure and reclamation provisions			2.7				7.6				1.8				21.3				33.4
		$	114.2			$	127.5			$	51.9			$	36.3			$	329.9

 

Note:

1 Net of $10.9 million of deposits on equipment and advances to contractors

 

Capital Management

 

The Company’s objective when managing its capital is to maintain its ability to continue as a going concern while at the same time maximizing the growth of its business and providing returns to its shareholders. The Company manages its capital structure and makes adjustments based on changes to its economic environment and the risk characteristics of the Company’s assets.

 

Effective December 23, 2019, changes to Argentina’s tax laws proposed by the new Argentine Government were implemented. The changes ratified and extended legislation which was to expire on December 31, 2019 and allow the Argentine Central Bank to regulate funds coming into and flowing out of Argentina in order to maintain stability and support the economic recovery of the country. These capital controls are in effect until December 31, 2025 and have the effect of: requiring exporters to convert the equivalent value of foreign currency received from the export into Argentine Pesos; requiring the prior consent of the Argentine Central Bank to the payment of cash dividends and distributions of currency out of Argentina; requiring Argentine companies to convert foreign currency loans received from abroad into Argentine Pesos; and restricting the sale of Argentine Pesos for foreign currency.

 

The Company’s capital requirement is effectively managed based on the Company having a thorough reporting, planning and forecasting process to help identify the funds required to ensure the Company is able to meet its operating and growth objectives.

 

The Company’s capital structure consists of equity comprising of share capital, reserves and retained earnings as well as debt consisting of credit facilities and convertible debentures, lease obligations less cash, cash equivalents and short-term investments.

 

		December 31,				December 31,
(Expressed in $ millions)		2019				2018
Equity		$	635.4			$	602.8
Debt			146.5				69.3
Lease obligations			23.9				8.8
Less:  Cash, cash equivalents and short-term investments			(83.4	)			(163.3	)
		$	722.4			$	517.5

 

Figures may not add due to rounding

 

As discussed above, the Company operates in Argentina where the new Argentine government has ratified and extended legislation to December 31, 2025 to allow the Argentine Central Bank to regulate funds coming into and flowing out of Argentina. Other than the restrictions related to these capital controls and complying with the debt covenants under the credit facilities, the Company is not subject to any externally imposed capital requirements. As at December 31, 2019 and 2018, the Company was in compliance with its debt covenants.

 

 

Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Currently, our interest rate exposure mainly relates to interest earned on our cash, cash equivalent, and short-term investment balances, interest paid on its LIBOR-based debt, and the mark-to-market value of derivative instruments which depend on interest rates. We have entered into an interest rate swap for the $40.0 million non-revolving credit facility to mitigate the interest rate risk on our debt.

 

Key Personnel

 

The Company is dependent on a number of key management and employee personnel.  The Company’s ability to manage its exploration, development, construction and operating activities, and hence its success, will depend in large part on the ability to retain current personnel and attract and retain new personnel, including management, technical and unskilled employees.  The loss of the services of one or more key management personnel, as well as a prolonged labor disruption, could have a material adverse effect on the Company’s ability to successfully manage and expand its affairs.

 

Claims and Legal Proceedings

 

The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the normal course of business. The Company may be subject to claims by local communities, indigenous groups or private land owners relating to land and mineral rights and such claimants may seek sizable monetary damages or seek the return of surface or mineral rights that may be valuable to the Company which may significantly impact operations and profitability, if lost. These matters are subject to various uncertainties and it is possible that some of these matters may be resolved with an unfavorable outcome to the Company. The Company does carry liability insurance coverage, but such coverage does not cover all risks to which the Company may be exposed to.

 

Adoption of New Accounting Standards

 

IFRS 16, Leases

 

Effective January 1, 2019, the Company adopted IFRS 16 using the modified retrospective approach. The comparative figures for the 2018 reporting period have not been restated and are accounted for under IAS 17, Leases, and IFRIC 4, Determining Whether an Arrangement Contains a Lease, as permitted under the specific transitional provisions in the standard.

 

The Company used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:

 

·

Applied the exemption not to recognize right of use asset and liabilities for leases with less than 12 months of lease term;

 

·

Excluded initial direct cost from measuring the right of use asset at the date of initial application; and

 

·

Used hindsight when determining the lease term if the contract contains an option to extend or terminate the lease.

 

At transition to IFRS 16, for leases classified as operating leases under IAS 17, the lease liabilities were measured at the present value of the remaining lease payments and discounted using each operation’s applicable incremental borrowing rate as of January 1, 2019. As a result, the Company, as a lessee, has recognized $7,316 within Lease Obligations representing its obligation to make lease payments. ROU assets of the same amount were recognized within Plant and Equipment, representing the Company’s right to use the underlying assets. The weighted average incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 5.32%.

 

 

The Company leases various equipment that had previously been classified as finance leases under IAS 17. For these finance leases, the carrying amount of the ROU asset and the lease liability at January 1, 2019 were determined at the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date.

 

The following table (expressed in $000’s) summarizes the difference between operating lease commitments disclosed immediately preceding the date of initial application and lease liabilities recognized on the balance sheet at the date of initial application:

Operating lease obligations as at December 31, 2018		$	2,553
Leases with lease term of 12 months or less and low value assets			(825	)
Embedded leases identified in existing service contracts			6,162
Effect of discounting at incremental borrowing rate			(574	)
Lease liabilities recognized as at January 1, 2019			7,316
Lease liabilities from finance leases previously recorded in lease obligations			8,767
Total lease liabilities as at January 1, 2019			16,083
Less current portion			(6,120	)
Non-current portion		$	9,963

 

IFRIC 23 Uncertainty over Income Tax Treatments

 

This interpretation sets out how to determine the accounting tax position when there is uncertainty over income tax treatments. At January 1, 2019, the Company adopted this standard and there was no impact on its financial statements.

 

Critical Accounting Estimates, Assumptions and Judgements

 

Many of the amounts included in the consolidated financial statements require management to make estimates, assumptions and judgements. These estimates, assumptions and judgements are continuously evaluated and are based on management’s experience and knowledge of the relevant facts and circumstances. Areas where critical accounting estimates and assumptions have the most significant effect on the amounts recognized in the consolidated financial statements include:

 

Mineral Reserves and Resources and the Life of Mine Plan

 

We estimate our mineral reserves and mineral resources in accordance with the requirements of National Instrument 43-101 Standards of Disclosure for Mineral Projects published by the Canadian Securities Administrators. Estimates of the quantities of the mineral reserves and mineral resources form the basis for our life of mine plans, which are used for the calculation of depletion expense under the units of production method, impairment tests, and forecasting the timing of the payments related to the environmental rehabilitation provision.

 

Significant estimation is involved in determining the reserves and resources included within our life of mine plans. Changes in forecast prices of commodities, exchange rates, production costs or recovery rates may result in our life of mine plan being revised and such changes could impact depletion rates, asset carrying values and our environmental rehabilitation provision. As at December 31, 2019 we have used the following long-term prices for our mineral reserve and mineral resource estimations: gold $1,380/oz, silver $17.00/oz, lead $2,170/t and zinc $2,590/t.

 

In addition to the estimates above, estimation is involved in determining the percentage of mineral resources ultimately expected to be converted to mineral reserves and hence included in our life of mine plans. Our life of mine plans include a portion of inferred mineral resources as we believe this provides a better estimate of the expected life of mine for certain types of deposits, in particular for vein type structures. The percentage of inferred resources of the total tonnage included in the life of mine plans is based on site specific geological, technical, and economic considerations. Estimation of future conversion of resources is inherently uncertain and involves judgment and actual outcomes may vary from these judgments and estimates and such changes could have a material impact on the financial results. Some of the key judgments of the estimation process include geological continuity, stationarity in the grades within defined domains, reasonable geotechnical and metallurgical conditions, treatment of outlier (extreme) values, cut-off grade determination and the establishment of geostatistical and search parameters. Revisions to these estimates are accounted for prospectively in the period in which the change in estimate arises. See note 3(g)(i) to the audited consolidated financial statements for 2019.

 

 

Valuation of Mineral Properties and Exploration Properties

 

The Company carries its mineral properties at cost less accumulated depletion and any accumulated provision for impairment. The costs of each property and related capitalized expenditures are depleted over the economic life of the property on a units-of-production basis. Costs are charged to the consolidated statement of income (loss) when a property is abandoned or when there is an impairment.

 

The Company undertakes a review of the carrying values of mining properties and related expenditures whenever events or changes in circumstances indicate that their carrying values may exceed their estimated net recoverable amounts determined by reference to estimated future operating results and discounted net cash flows. Where previous impairment has been recorded the Company analyzes any impairment reversal indicators. An impairment loss is recognized when the carrying value of those assets is not recoverable. In undertaking this review, management of the Company is required to make significant estimates of, amongst other things, future production and sales volumes, metal prices, foreign exchange rates, mineral resource and reserve quantities, future operating and capital costs to the end of the mine’s life, and reclamation costs. These estimates are subject to various risks and uncertainties which may ultimately have an effect on the expected recoverability of the carrying values of the mining properties and related expenditures.

 

The Company, from time to time, acquires exploration and development properties. When properties are acquired, the Company must determine the fair value attributable to each of the properties. When the Company conducts exploration on a mineral property and the results from the exploration do not support the carrying value, the property is written down to its new fair value which could have a material effect on the consolidated statement of financial position and the consolidated income statement.

 

Reclamation and Other Closure Provisions

 

The Company has obligations for reclamation and other closure activities related to its mining properties. The future obligations for mine closure activities are estimated by the Company using mine closure plans or other similar studies which outline the requirements that will be carried out to meet the obligations. Because the obligations are dependent on the laws and regulations of the countries in which the mines operate, the requirements could change as a result of amendments in the laws and regulations relating to environmental protection and other legislation affecting resource companies. As the estimate of the obligations is based on future expectations, a number of estimates and assumptions are made by management in the determination of closure provisions.

 

Revenue Recognition

 

Revenue from the sale of concentrate to customer is recognized when the customer obtains control of the concentrate. A provisional invoice is issued to the customer based on the monthly average metal prices on the expected date of final settlement at which time the final sale prices will be fixed. Variations between the prices at initial recognition and final settlement may occur due to changes in the market metal prices and result in an embedded derivative in the accounts receivable. The embedded derivative is recorded at fair value each period until final settlement occurs with changes in the fair value classified as revenue. For changes in metal quantities upon receipt of new information and assays, the provisional sale quantities are adjusted.

 

 

Contingencies

 

Contingencies can be either possible assets or possible liabilities arising from past events which, by their nature, will only be resolved when one or more future events not within our control occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings or regulatory or government actions that may negatively impact our business or operations, the Company

with assistance from its legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims or actions.

 

A liability is recognized in the consolidated financial statements when the outcome of the legal proceedings is probable, and the estimated settlement amount can be estimated reliably. Contingent assets are not recognized in the consolidated financial statements until virtually certain.

 

In 2017 the Mexican Geological Service (“SGM”) advised the Company that a previous owner of one of the Company’s mineral concessions located at the San Jose Mine in Oaxaca, Mexico had granted the SGM a royalty of 3% of the billing value of minerals obtained from the concession. The Company supported by legal opinions from three independent law firms, has previously advised the Mexican mining authorities that it is of the view that no royalty is payable, and in 2018 initiated administrative and legal proceedings against the Direccion General de Minas (“DGM”) to remove reference to the royalty on the title register. The proceedings are progressing in accordance with the procedures of the Mexican administrative court.

 

In January 2020, the Company received notice from the DGM proposing to cancel the mining concession if the royalty, in the Mexican peso equivalent of US$30 million plus VAT (being the amount of the claimed royalty from 2011 to 2019) is not paid before March 15, 2020.  In early February 2020, the Company initiated legal proceedings against the DGM to contest the cancellation procedure and also to stay the cancellation process.

 

The District Court in Mexico City has accepted the filing of the Company’s legal proceedings and also granted a permanent stay of execution, which protects the Company from the cancellation of the concession until a resolution by the Court is reached on the legality of the cancellation procedure.  The timing of a decision by the Court at first instance in this action against the DGM is uncertain and may take several months.  In the event that the Company is unsuccessful in these proceedings, it may appeal.  If ultimately the Company does not prevail, it may be required to pay the disputed royalty in order to preserve the mining concession.  If the Company is required to pay the royalty, it will do so from available capital resources. If the Company is required to pay the royalty, it will do so from available capital resources.

 

The Company has determined that it is more likely than not that it will succeed in these proceedings; therefore, no provision has been recorded as at December 31, 2019.

 

Critical Accounting Judgements in Applying the Entity’s Accounting Policies

 

Judgements that have the most significant effect on the amounts recognized in the Company’s consolidated financial statements are as follows:

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between the financial statement carrying values of assets and liabilities and their respective income tax bases (“temporary differences”) and losses carried forward. The determination of the ability of the Company to utilize tax loss carry-forwards to offset deferred tax liabilities requires management to exercise judgment and make certain assumptions about the future performance of the Company.

 

 

Management is required to assess whether it is “probable” that the Company will benefit from these prior losses and other deferred tax assets. Changes in economic conditions, metal prices and other factors could result in revisions to the estimates of the benefits to be realized or the timing of utilization of the losses.

 

Assessment of Impairment and Reversal of Impairment Indicators

 

Management applies significant judgment in assessing whether indicators of impairment or reversal of impairment exist for an asset or a group of assets which could result in a testing for impairment. Internal and external factors such as significant changes in the use of the asset, commodity prices, life of mines, tax laws or regulations in the countries that our mines operate in and interest rates are used by management in determining whether there are any indicators of impairment or reversal of previous impairments.

 

Functional Currency

 

The functional currency for the Company and its subsidiaries is the currency of the primary economic environment in which each operates. The Company has determined that its functional currency and that of its subsidiaries is the U.S. dollar. The determination of functional currency may require certain judgments to determine the primary economic environment. The Company reconsiders the functional currency used when there is a change in the events and conditions which determined the primary economic environment.

 

IFRS 16 Leases

 

Significant estimates, assumptions and judgments made by management on adoption of IFRS 16 Leases primarily included judgement about whether the lease conveys the right to use  a specific asset, whether the Company obtains substantially all of the economic benefits from the use of the asset, whether the Company has the right to direct the use of the asset, evaluating the appropriate discount rate to use to discount the lease liability for each lease or groups of assets, and to determine the lease term where a contract includes renewal options. Significant estimates, assumptions and judgements over these factors would affect the present value of the lease liabilities, as well as the associated amount of the ROU asset.

 

Share Position and Outstanding Options and Equity Based Share Units

 

The Company has 160,291,553 common shares outstanding as at March 10, 2020. In addition, 4,225,391 incentive stock options and equity-settled restricted share units are currently outstanding as follows:

 

						Exercise
						Price
Type of Security		No. of Shares				(CAD$)				Expiry Date
Incentive Stock Options:			517,833			$	4.79			March 18, 2020
			617,694			$	6.35			May 28, 2022
			640,951			$	6.20			March 18, 2023
			7,551			$	7.15			June 4, 2023
			1,784,029							Vesting Date
Equity-Settled Share Units:			195,375				n/a			May 29, 2020
			1,185,548				n/a			March 19, 2021
			3,916				n/a			June 5, 2021
			1,056,523				n/a			March 15, 2022
			2,441,362
Total outstanding			4,225,391

 

  

During the year ended December 31, 2019, the Company granted 422,609 (2018 – 1,002,166) equity-settled performance share units which vest as follows: 20% on the first anniversary, 30% on the second anniversary and 50% on the third anniversary of the date of grant based on prescribed performance metrics. The share units granted in the current period are subject to a multiplier ranging from 50% to 200% depending on the achievement level of certain performance targets. The fair value of the share units on the grant date was $3.62 (C$4.83) (year ended December 31, 2018 –$4.71 (C$6.20).

 

During the year ended December 31, 2019 the Company granted 633,914 (2018 – 422,030) equity-settled restricted share units at a price of $3.62 (C$4.83) per share unit (2018 – between $4.71 (C$6.20) and $5.54 (C$7.15) per share unit).

 

As at December 31, 2019, the Company has $46.0 million of Debentures that are convertible at the holder’s option into common shares in the capital of the Company at a conversion price of $5.00 per share, representing a conversion rate of 200 Common Shares per $1,000 principal amount of Debentures, subject to adjustment in certain circumstances. Subject to certain exceptions in connection with a change of control of the Company, the Debentures will not be redeemable by the Company prior to October 31, 2022. On or after October 31, 2022 and prior to October 31, 2023, the Debentures may be redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price of the Common Shares on the NYSE for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the redemption is given is at least 125% of the Conversion Price. On and after October 31, 2023, the Debentures may be redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount plus accrued and unpaid interest regardless of the trading price of the Common Shares.

 

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures have been designed to provide reasonable assurance that all material information related to the Company is identified and communicated to management on a timely basis. Management of the Company, under the supervision of the President and Chief Executive Officer and the Chief Financial Officer, is responsible for the design and operation of disclosure controls and procedures in accordance with the requirements of National Instrument 52-109 of the Canadian Securities Administrators (“National Instrument 52-109”) and as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the U.S. Exchange Act).

 

Based on management’s evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as at December 31, 2019.

 

Management’s Report on Internal Control over Financial Reporting

 

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external reporting purposes in accordance with IFRS as issued by the International Accounting Standards Board. However, due to its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements and fraud.

 

Management assesses the effectiveness of the Company’s internal control over financial reporting using the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the Treadway Commission. Management conducted an evaluation of the effectiveness of internal control over financial reporting and concluded that it was effective as at December 31, 2019.

 

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting for the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Non-GAAP Financial Measures

 

This MD&A refers to various Non-GAAP Financial Measures, including cash cost per payable ounce of silver equivalent; cash cost per tonne of processed ore; total production cash cost per tonne; all-in sustaining cash cost per payable ounce of silver equivalent production; all-in sustaining cash cost per payable ounce of silver equivalent production; free cash flow and free cashflow from ongoing operations; adjusted net income; and adjusted EBITDA.

 

These measures are used by the Company to manage and evaluate operating performance and ability to generate cash flow and are widely reported in the mining industry as benchmarks for performance. The Company believes that certain investors use these Non-GAAP Financial Measures to evaluate the Company’s performance. However, the measures do not have a standardized meaning and may differ from measures used by other companies with similar descriptions. Accordingly, Non-GAAP Financial Measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The Company has calculated these measures consistently for all periods presented.

 

To facilitate a better understanding of these measures as calculated by the Company, descriptions and reconciliations are provided here.

 

Cash Cost per Payable Ounce of Silver Equivalent Production and Cash Cost per Tonne of Processed Ore

 

Cash cost per payable ounce of silver equivalent production and total production cash cost per tonne of processed ore are key performance measures that management uses to monitor performance. Management believes that certain investors also use these Non-GAAP Financial Measures to evaluate the Company’s performance. Cash cost is an industry-standard method of comparing certain costs on a per unit basis; however, they do not have a standardized meaning or method of calculation, even though the descriptions of such measures may be similar. These performance measures have no meaning under IFRS, and, therefore, amounts presented may not be comparable with similar data presented by other mining companies.

 

 

The following tables present a reconciliation of cash cost per tonne of processed ore and cash cost per payable ounce of silver equivalent production to the cost of sales in the consolidated financial statements for the three and twelve months ended December 31, 2019 and 2018.

 

				Three Months Ended								Years Ended
CONSOLIDATED MINE CASH COST SILVER EQUIVALENT				December 31,								December 31,
(Expressed in $'000's, except unit costs)				2019				2018				2019				2018
Cost of sales				$	45,539			$	42,247			$	172,607			$	166,725
Change in concentrate inventory					443				(1,795	)			969				(922	)
Depletion and depreciation in concentrate inventory					(178	)			648				(280	)			384
Inventory adjustment					(1,257	)			(206	)			(1,327	)			(206	)
IFRS 16 embedded lease adjustment					626				-				2,409				-
Commercial and government royalties and mining taxes					(1,462	)			(669	)			(4,134	)			(3,248	)
Provision for community support					128				231				282				(1,165	)
Workers participation					(1,922	)			(779	)			(6,012	)			(6,164	)
Depletion and depreciation					(11,309	)			(10,700	)			(44,357	)			(44,473	)
Cash cost		A		$	30,608			$	28,977			$	120,157			$	110,931
Cash cost		A		$	30,608			$	28,977			$	120,157			$	110,931
Treatment charges					2,275				-				10,060				-
Refining charges					1,274				950				5,011				4,434
Cash cost applicable per payable ounce		B			34,157				29,927				135,228				115,365
Payable ounces of silver equivalent production1		C			4,132,079				4,018,731				16,806,749				17,693,738
Cash cost per ounce of payable silver equivalent2 ($/oz)		=B/C		$	8.27			$	7.45			$	8.05			$	6.52

Notes:

1

Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.5:1 (Q4 2018:  84.6:1), silver to lead of 1:18.7 pounds (Q4 2018:  1:16.3), and silver to zinc of 1:16.0 pounds (Q4 2018:  1:12.2), and YTD 2019: silver to gold ratio of 86.0:1 (YTD 2018:  81.0:1), silver to lead of 1:17.9 pounds (YTD 2018:  1:15.4), and silver to zinc of 1:14.1 pounds (YTD 2018:  1:11.9)

2	Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc.  Refer to Financial Results - Sales - Sales and Realized Prices

 

 

				Three Months Ended								Years Ended
SAN JOSE MINE CASH COST SILVER EQUIVALENT				December 31,								December 31,
(Expressed in $'000's, except unit costs)				2019				2018				2019				2018
Cost of sales				$	30,024			$	27,407			$	114,156			$	106,468
Change in concentrate inventory					741				(1,755	)			1,111				(717	)
Depletion and depreciation in concentrate inventory					(231	)			628				(325	)			264
Inventory adjustment					(1,235	)			-				(1,235	)			-
IFRS 16 embedded lease adjustment					31				-				93				-
Commercial and government royalties and mining taxes					(844	)			(621	)			(3,385	)			(3,030	)
Workers participation					(1,779	)			(488	)			(5,293	)			(4,438	)
Depletion and depreciation					(7,541	)			(8,279	)			(30,736	)			(32,251	)
Cash cost		A			19,166				16,892				74,386				66,296
Total processed ore (tonnes)		B			273,066				256,181				1,068,722				1,040,478
Cash cost per tonne of processed ore ($/t)		=A/B		$	70.19			$	65.94			$	69.60			$	63.72
Cash cost		A		$	19,166			$	16,892			$	74,386			$	66,296
Treatment charges					(542	)			-				(990	)			-
Refining charges					1,131				825				4,468				3,871
Cash cost applicable per payable ounce		B			19,755				17,717				77,864				70,167
Payable ounces of silver equivalent production1		C			2,898,204				2,610,093				11,554,107				11,823,139
Cash cost per ounce of payable silver equivalent2 ($/oz)		=B/C		$	6.82			$	6.79			$	6.74			$	5.93
Mining cost per tonne				$	36.25			$	33.36			$	36.27			$	30.90
Milling cost per tonne					16.59				17.17				17.17				18.71
Indirect cost per tonne					9.43				8.82				8.80				7.50
Community relations cost per tonne					1.70				1.28				1.56				1.23
Distribution cost per tonne					6.22				5.31				5.80				5.38
Total production cost per tonne				$	70.19			$	65.94			$	69.60			$	63.72

Notes:

1	Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.5:1 (Q4 2018:  84.6:1) and for YTD 2019, silver to gold ratio of 86.0:1 (YTD 2018:  80.9:1)

2	Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc.  Refer to Financial Results - Sales - Sales and Realized Prices

 

 

				Three Months Ended								Years Ended
CAYLLOMA MINE CASH COST SILVER EQUIVALENT				December 31,								December 31,
(Expressed in $'000's, except unit costs)				2019				2018				2019				2018
Cost of sales				$	15,515			$	14,840			$	58,451			$	60,257
Change in concentrate inventory					(298	)			(40	)			(142	)			(205	)
Depletion and depreciation in concentrate inventory					53				20				45				120
Inventory adjustment					(22	)			(206	)			(92	)			(206	)
IFRS 16 embedded lease adjustment					595				-				2,316				-
Commercial and government royalties and mining taxes					(618	)			(48	)			(749	)			(218	)
Provision for community support					128				231				282				(1,165	)
Workers participation					(143	)			(291	)			(719	)			(1,726	)
Depletion and depreciation					(3,768	)			(2,421	)			(13,621	)			(12,222	)
Cash cost		A			11,442				12,085				45,771				44,635
Total processed ore (tonnes)		B			133,270				135,034				531,307				534,773
Cash cost per tonne of processed ore ($/t)		=A/B		$	85.86			$	89.50			$	86.15			$	83.47
Cash cost		A		$	11,442			$	12,085			$	45,771			$	44,635
Treatment charges					2,817				-				11,050				-
Refining charges					143				125				543				564
Cash cost applicable per payable ounce		B			14,402				12,210				57,364				45,199
Payable ounces of silver equivalent production1		C			1,233,875				1,408,638				5,252,643				5,916,133
Cash cost per ounce of payable silver equivalent2 ($/oz)		=B/C		$	11.67			$	8.67			$	10.92			$	7.64
Mining cost per tonne				$	41.60			$	44.94			$	41.26			$	41.35
Milling cost per tonne					14.15				13.92				14.17				14.41
Indirect cost per tonne					20.23				21.11				22.35				19.61
Community relations cost per tonne					2.26				2.42				1.19				1.06
Distribution cost per tonne					7.62				7.11				7.18				7.04
Total production cost per tonne				$	85.86			$	89.50			$	86.15			$	83.47

Notes:

1

Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.6:1 (Q4 2018: 85.3:1) , silver to lead of 1:18.7 pounds (Q4 2018:  1:16.3), and silver to zinc of 1:16.0 pounds (Q4 2018:  1:12.2),  and YTD 2019: silver gold ratio of 85.8:1 (YTD 2018: 85.3:1), silver to lead of 1:17.9 pounds (YTD 2018: 1:15.4), and silver to zinc of 1:14.1 pounds (YTD 2018: 1:11.9)

2	Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc.  Refer to Financial Results - Sales - Sales and Realized Prices

 

All-in Sustaining Cash Cost and All-in Cash Cost per Payable Ounce of Silver Equivalent Production

 

The Company believes that “all-in-sustaining cash cost silver equivalent” and “all-in cash cost silver equivalent” meet the needs of management, analysts, investors, and other stakeholders of the Company in understanding the costs associated with producing silver, the economics of silver mining, the Company’s operating performance and the Company’s ability to generate cash flow from current operations, and on an overall company basis.

 

The Company, in conjunction with an initiative undertaken within the gold mining industry, has adopted an all-in-sustaining cost performance measure; however, this performance measure has no standardized meaning. The Company conforms its all-in-sustaining cost definition to that set out in the guidance issued by the World Gold Council (“WGC”).

 

 

All-in-sustaining cash cost silver equivalent and all-in cash cost silver equivalent are intended to provide additional information only and do not have standardized definitions under IFRS and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. These measures are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Although the WGC has published a standardized definition, companies may calculate these measures differently.

 

All-in sustaining cash cost includes total production cash costs incurred at the Company’s mining operations. Sustaining capital expenditures, corporate selling, general and administrative expenses, and brownfield exploration expenditures are added to the cash cost to calculate the all-in-sustaining cost. The Company believes that this measure represents the total costs of producing silver from operations and provides the Company and its stakeholders with additional information on the Company’s operational performance and the ability to generate cash flows. Certain cash expenditures such as new project spending, tax payments, dividends, and financing costs are not included. We report this measure on a payable silver equivalent ounce produced basis. Silver equivalent production is calculated taking the total metal payable production of gold, lead and zinc multiplied by the realized prices of gold, lead, and zinc and divided by the realized silver price to calculate the silver equivalent production.

 

The following tables show a breakdown of the all-in sustaining cash cost per silver equivalent ounce for the three and twelve months ended December 31, 2019 and 2018.

 

		Three Months Ended								Years Ended
CONSOLIDATED MINE ALL-IN CASH COST SILVER EQUIVALENT		December 31,								December 31,
(Expressed in $'000's, except unit costs)		2019				2018				2019				2018
Cash cost applicable		$	34,157			$	29,927			$	135,228			$	115,365
Commercial and government royalties and mining tax			2,389				1,718				9,948				10,081
Workers' participation			2,405				945				7,489				7,564
General and administrative expenses (operations)			3,499				2,970				10,899				10,097
Adjusted operating cash cost			42,450				35,560				163,564				143,107
General and administrative expenses (corporate)			2,439				2,696				11,416				10,991
Sustaining capital expenditures3			6,224				9,369				20,409				23,986
Brownfield exploration expenditures3			863				1,584				4,777				8,638
All-in sustaining cash cost			51,976				49,209				200,166				186,722
Exploration and evaluation expenses			402				180				2,411				726
Non-sustaining capital expenditures3			27,664				40,556				190,294				83,335
All-in cash cost			80,042				89,945				392,871				270,783
Payable ounces of silver equivalent production1			4,132,079				4,018,731				16,806,749				17,693,738
All-in sustaining cash cost per ounce of payable silver equivalent2		$	12.58			$	12.24			$	11.91			$	10.55
All-in cash cost per ounce of payable silver equivalent2		$	19.37			$	22.38			$	23.38			$	15.30

Notes:

1

Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.5:1 (Q4 2018:  84.6:1), silver to lead of 1:18.7 pounds (Q4 2018:  1:16.3), and silver to zinc of 1:16.0 pounds (Q4 2018:  1:12.2), and YTD 2019: silver to gold ratio of 86.0:1 (YTD 2018:  81.0:1), silver to lead of 1:17.9 pounds (YTD 2018:  1:15.4), and silver to zinc of 1:14.1 pounds (YTD 2018:  1:11.9)

2	Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc.  Refer to Financial Results - Sales - Sales and Realized Prices

3	Presented on a cash basis

 

 

		Three Months Ended								Years Ended
SAN JOSE MINE ALL-IN CASH COST SILVER EQUIVALENT		December 31,								December 31,
(Expressed in $'000's, except unit costs)		2019				2018				2019				2018
Cash cost applicable		$	19,755			$	17,717			$	77,864			$	70,167
Commercial and government royalties and mining tax			2,252				1,398				8,605				8,293
Workers' participation			2,223				610				6,616				5,548
General and administrative expenses (operations)			1,919				1,911				6,475				6,414
Adjusted operating cash cost			26,149				21,636				99,560				90,422
Sustaining capital expenditures3			3,737				2,723				9,969				9,277
Brownfield exploration expenditures3			649				1,361				4,077				6,947
All-in sustaining cash cost			30,535				25,720				113,606				106,646
Exploration and evaluation expenses			-				63				-				156
All-in cash cost			30,535				25,783				113,606				106,802
Payable ounces of silver equivalent production1			2,898,204				2,610,093				11,554,107				11,823,139
All-in sustaining cash cost per ounce of payable silver equivalent2		$	10.54			$	9.85			$	9.83			$	9.02
All-in cash cost per ounce of payable silver equivalent2		$	10.54			$	9.88			$	9.83			$	9.03

Notes:

1	Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.5:1 (Q4 2018:  84.6:1) and for YTD 2019, silver to gold ratio of 86.0:1 (YTD 2018:  80.9:1)

2	Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc.  Refer to Financial Results - Sales - Sales and Realized Prices

3	Presented on a cash basis

 

 

		Three Months Ended								Years Ended
CAYLLOMA MINE ALL-IN CASH COST SILVER EQUIVALENT		December 31,								December 31,
(Expressed in $'000's, except unit costs)		2019				2018				2019				2018
Cash cost applicable		$	14,402			$	12,210			$	57,364			$	45,199
Commercial and government royalties and mining tax			137				320				1,343				1,788
Workers' participation			179				335				864				2,016
General and administrative expenses (operations)			1,580				1,059				4,424				3,683
Adjusted operating cash cost			16,298				13,924				63,995				52,686
Sustaining capital expenditures3			2,487				6,646				10,440				14,709
Brownfield exploration expenditures3			214				223				700				1,691
All-in sustaining cash cost			18,999				20,793				75,135				69,086
Non-sustaining capital expenditures1			259				-				705				-
All-in cash cost			19,258				20,793				75,840				69,086
Payable ounces of silver equivalent production1			1,233,875				1,408,638				5,252,643				5,916,133
All-in sustaining cash cost per ounce of payable silver equivalent2		$	15.40			$	14.76			$	14.30			$	11.68
All-in cash cost per ounce of payable silver equivalent2		$	15.61			$	14.76			$	14.44			$	11.68

Notes:

1

Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.6:1 (Q4 2018: 85.3:1) , silver to lead of 1:18.7 pounds (Q4 2018:  1:16.3), and silver to zinc of 1:16.0 pounds (Q4 2018:  1:12.2),  and YTD 2019: silver gold ratio of 85.8:1 (YTD 2018: 85.3:1), silver to lead of 1:17.9 pounds (YTD 2018: 1:15.4), and silver to zinc of 1:14.1 pounds (YTD 2018: 1:11.9)

2	Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc.  Refer to Financial Results - Sales - Sales and Realized Prices

3	Presented on a cash basis

 

Free Cash Flow and Free Cash Flow From Ongoing Operations

 

The Company uses the financial measure of “free cash flow” and “free cash flow from ongoing operations” to supplement information in its consolidated financial statements. Free cash flow is defined as cash provided from operating activities less purchases of mineral properties, plant and equipment, less net deposits on long term assets, less current income tax, and add back income taxes paid. This measure is used by the Company and investors to measure the cash flow available to fund the Company’s growth through investments and capital expenditures. These performance measures are intended to provide additional information only and do not have standardized definitions under IFRS and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. These measures are not necessarily indicative of operating profits or cash flow from operations as determined under IFRS.

 

The following table presents a reconciliation of free cash flow from ongoing operations for the three and twelve months ended December 31, 2019 and 2018:

 

		Three months ended								Years ended
		December 31,								December 31,
(Expressed in $ millions)		2019				2018				2019				2018
Net cash provided by operating activities		$	19.2			$	19.3			$	63.0			$	83.5
Less:  Accrued interest			(1.5	)			-				-				-
Less:  Change in long term receivables			-				-				(1.5	)			-
Less:  Additions to mineral properties, plant and equipment			(7.6	)			(10.5	)			(26.0	)			(33.3	)
Less:  Contractor advances for plant and equipment			-				-				(0.6	)			(1.3	)
Add:  Advances applied to plant and equipment			-				0.1				0.7				1.2
Less:  Current income tax expense			(8.2	)			(3.9	)			(32.6	)			(30.6	)
Add:  Income taxes paid			4.5				6.8				31.5				35.7
Free cash flow from ongoing operations1		$	6.4			$	11.8			$	34.5			$	55.2

Note:

1.	From ongoing operations including San Jose and Caylloma and excludes Greenfields exploration

 

 

Adjusted Net Income

 

The Company uses the financial measure of “adjusted net income” to supplement information in its consolidated financial statements. The Company believes that in addition to conventional measures prepared in accordance with IFRS, the Company and certain investors and analysts use this information and information obtained from conventional IFRS measures to evaluate the Company’s performance. The term “adjusted net income” does not have a standardized meaning prescribed by IFRS, and therefore the Company’s definitions are unlikely to be comparable to similar measures presented by other companies.

 

		Three months ended								Years ended
		December 31,								December 31,
(Expressed in $ millions)			2019				2018				2019				2018
Net  income		$	19.0			$	2.2			$	23.8			$	34.0
Adjustments, net of tax:
Community support provision			(0.1	)			(0.2	)			(0.2	)			0.8
Foreign exchange loss, Lindero project			1.0				3.9				11.5				3.9
Income tax, Lindero project			-				(2.8	)			(1.1	)			1.0
Income tax, convertible debentures			(1.9	)			-				(1.9	)			-
Share of loss from associates			0.1				0.1				0.2				-
Investment income			(11.0	)			-				(11.0	)			-
Other non-cash items			3.8				1.2				7.1				(1.3	)
Adjusted Net Income		$	10.9			$	4.4			$	28.4			$	38.4

 

Adjusted EBITDA

 

The Company uses other financial measures whose presentation is not meant to be a substitute for other subtotals or totals presented in accordance with IFRS measures, but that rather should be evaluated in conjunction with IFRS measures. The item described and presented below does not have a standardized meaning prescribed by IFRS, and therefore the Company’s definitions are unlikely to be comparable to similar measures presented by other companies. The Company believes that its presentation provides useful information for investors.

 

		Three months ended								Years ended
		December 31,								December 31,
(Expressed in $ millions)			2019				2018				2019				2018
Net income		$	19.0			$	2.2			$	23.8			$	34.0
Adjustments:
Community support provision			(0.1	)			(0.3	)			(0.3	)			1.1
Inventory adjustment			1.3				0.2				1.3				0.2
Foreign exchange loss, Lindero project			1.0				3.9				11.5				3.9
Net finance items			(0.1	)			(0.4	)			(0.3	)			(0.4	)
Depreciation, depletion, and amortization			11.6				10.8				46.0				44.8
Income taxes			1.1				4.9				20.2				33.4
Share of loss from associates			0.1				0.1				0.2				-
Investment income			(11.0	)			-				(11.0	)			-
Other non-cash items			2.2				1.3				4.0				(3.0	)
Adjusted EBITDA		$	25.1			$	22.7			$	95.4			$	113.9

 

 

Qualified Person

 

Eric Chapman, P.Geo (APEGBC #36328) is the Vice-President of Technical Services for the Company and is the Company’s Qualified Person (as defined by National Instrument 43-101).  Mr. Chapman has reviewed and approved the scientific and technical information contained in this MD&A.

 

Other Information, Risks and Uncertainties

 

For further information regarding the Company’s operational risks, please refer to the section entitled “Description of the Business - Risk Factors” in the Company’s most recent Annual Information Form that is available at www.sedar.com and www.sec.gov/edgar.shtml.

 

Cautionary Statement on Forward-Looking Statements

 

This MD&A and any documents incorporated by reference into this MD&A contain forward-looking statements which constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and Section 21E of the United States Securities Exchange Act of 1934, as amended, and forward-looking information within the meaning of applicable Canadian securities legislation (collectively, “Forward-looking Statements”). All statements included herein, other than statements of historical fact, are Forward-looking Statements and are subject to a variety of known and unknown risks and uncertainties which could cause actual events or results to differ materially from those reflected in the Forward-Looking Statements. The Forward-looking Statements in this MD&A include, without limitation, statements relating to:

 

·

mineral “reserves” and “resources” as they involve the implied assessment, based on estimates and assumptions that the reserves and resources described exist in the quantities predicted or estimated and can be profitably produced in the future;

 

·

production rates at the Company’s properties;

 

·

cash cost estimates;

 

·

timing for delivery of materials and equipment for the Company’s properties;

 

·

the sufficiency of the Company’s cash position and its ability to raise equity capital or access debt facilities;

 

·

the Company’s planned greenfield exploration programs;

 

·

the Company’s planned capital expenditures and brownfields exploration at the San Jose Mine;

 

·

the Company’s planned capital expenditures and brownfields exploration at the Caylloma Mine;

 

·

the Company’s planned capital expenditures and brownfields exploration at the Lindero Project;

 

·

the Company’s construction of the open pit gold heap leach mine at the Lindero Project and the anticipated timing of commissioning and commencement of commercial production of the mine;

 

·

maturities of the Company’s financial liabilities, finance leases and other contractual commitments;

 

·

expiry dates of bank letters of guarantee;

 

·

litigation matters;

 

·

estimated mine closure costs; and

 

·

management’s expectation that any investigations, claims, and legal, labour and tax proceedings arising in the ordinary course of business will not have a material effect on the results of operations or financial condition of the Company.

 

Often, but not always, these Forward-looking Statements can be identified by the use of words such as “anticipates”, “believes”, “plans”, “estimates”, “expects”, “forecasts”, “scheduled”, “targets”, “possible”, “strategy”, “potential”, “intends”, “advance”, “goal”, “objective”, “projects”, “budget”, “calculates” or statements that events, “will”, “may”, “could” or “should” occur or be achieved and similar expressions, including negative variations.

 

 

Forward-looking Statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any results, performance or achievements expressed or implied by the Forward-looking Statements. Such uncertainties and factors include, among others:

 

·

operational risks relating to mining and mineral processing;

 

·

uncertainty relating to Mineral Resource and Mineral Reserve estimates;

 

·

uncertainty relating to capital and operating costs, production schedules and economic returns;

 

·

uncertainty and risks related to the start-up of the Lindero Project;

 

·

uncertainty relating to capital and operating costs and economic returns of development projects such as the Lindero Project;

 

·

risks related to the construction, commissioning and commencement of commercial production at the Lindero Project;

 

·

risks associated with mineral exploration and project development;

 

·

uncertainty relating to the repatriation of funds as a result of currency controls;

 

·

environmental matters including potential liability claims;

 

·

uncertainty relating to nature and climate conditions;

 

·

risks associated with political instability and changes to the regulations governing the Company’s business operations;

 

·

changes in national and local government legislation, taxation, controls, regulations and political or economic developments in countries in which the Company does or may carry on business;

 

·

risks relating to the termination of the Company’s mining concessions in certain circumstances;

 

·

risks related to International Labour Organization (“ILO”) Convention 169 compliance;

 

·

developing and maintaining relationships with local communities and stakeholders;

 

·

risks associated with losing control of public perception as a result of social media and other web-based applications;

 

·

potential opposition of the Company’s exploration, development and operational activities;

 

·

risks related to the Company’s ability to obtain adequate financing for planned exploration and development activities;

 

·

substantial reliance on the Caylloma Mine and San Jose Mine for revenues;

 

·

property title matters;

 

·

risks relating to the integration of businesses and assets acquired by the Company;

 

·

impairments;

 

·

risks associated with climate change legislation;

 

·

reliance on key personnel;

 

·

uncertainty relating to potential conflicts of interest involving the Company’s directors and officers;

 

·

risks associated with the Company’s reliance on local counsel and advisors and the experience of its management and board of directors in foreign jurisdictions;

 

·

adequacy of insurance coverage;

 

·

risks related to the Company’s compliance with the United States Sarbanes-Oxley Act;

 

 

·

risks related to the foreign corrupt practices regulations and anti-bribery laws;

 

·

potential legal proceedings; to which it is a party;

 

·

the Company is subject to any adverse ruling in any of the litigation

 

	·	uncertainties relating to general economic conditions;
	·	risks relating to a global pandemic, which unless contained could cause a slowdown in global economic growth and impact the Company’s business, operations, financial condition and share price;

 

·

competition;

 

·

fluctuations in metal prices;

 

·

risks associated with entering into commodity forward and option contracts for base metals production;

 

·

fluctuations in currency exchange rates;

 

·

tax audits and reassessments;

 

·

uncertainty relating to concentrate treatment charges and transportation costs;

 

·

sufficiency of monies allotted by the Company for land reclamation;

 

·

dilution from equity or convertible debenture financings; and

 

·

risks associated with dependence upon information technology systems, which are subject to disruption, damage, failure and risks with implementation and integration.

 

as well as those factors referred to in the “Risks and Uncertainties” section in this MD&A and in the “Risk Factors” section in our Annual Information Form filed with the Canadian Securities Administrators and available at www.sedar.com and filed with the U.S. Securities and Exchange Commission as part of the Company’s Form 40-F and available at www.sec.gov/edgar.shtml.  Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in Forward-looking Statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended.

 

Forward-looking Statements contained in this MD&A are based on the assumptions, beliefs, expectations and opinions of management, including but not limited to:

 

·

all required third party contractual, regulatory and governmental approvals will be obtained for the exploration, development, construction and production of its properties;

 

·

there being no significant disruptions affecting operations, whether relating to labour, supply, power, damage to equipment or other matter;

 

·

permitting, construction, development, expansion, and production continuing on a basis consistent with the Company’s current expectations;

 

·

expected trends and specific assumptions regarding metal prices and currency exchange rates;

 

·

prices for and availability of fuel, electricity, parts and equipment and other key supplies remaining consistent with current levels;

 

·

production forecasts meeting expectations; and

 

·

the accuracy of the Company’s current mineral resource and reserve estimates.

 

These Forward-looking Statements are made as of the date of this MD&A. There can be no assurance that Forward-looking Statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers are cautioned not to place undue reliance on Forward-looking Statements. Except as required by law, the Company does not assume the obligation to revise or update these forward looking-statements after the date of this document or to revise them to reflect the occurrence of future unanticipated events.

 

Cautionary Note to United States Investors Concerning Estimates of Reserves and Resources

 

The Company is a Canadian “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act, and is permitted to prepare the technical information contained herein in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of the securities laws currently in effect in the United States.

 

 

Canadian standards, including National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”), differ significantly from the disclosure requirements of U.S securities laws currently in effect, and Mineral Reserve and Mineral Resource information contained or incorporated by reference in this MD&A may not be comparable to similar information disclosed by United States companies. Equivalent U.S. disclosure requirements are currently governed by the United States Securities and Exchange Commission (“SEC”) Industry Guide 7 (“Industry Guide 7”) under the U.S. Securities Act of 1933, as amended. In particular, and without limiting the generality of the foregoing, the term Mineral Resource does not equate to the term “reserve”. Under the SEC’s disclosure standards currently in effect under Industry Guide 7, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. Among other things, all necessary permits would need to be in hand or issuance imminent in order to classify mineralized material as reserves under such U.S. standards currently in effect. The SEC has not recognised the reporting of mineral deposits which do not meet the Industry Guide 7 definition of “reserve” prior to the adoption of the Modernization of Property Disclosures for Mining Registrants, which rules will be required to be complied with in the first fiscal year beginning on or after January 1, 2021. As a result, the SEC’s disclosure standards currently in effect normally do not permit the inclusion of information concerning Measured Mineral Resources, Indicated Mineral Resources or Inferred Mineral Resources or other descriptions of the amount of mineralization in mineral deposits that do not constitute “reserves” by United States standards in documents filed with the SEC.

 

United States investors are cautioned not to assume that all or any part of Measured Mineral Resources or Indicated Mineral Resources will ever be converted into reserves. United States investors should also understand that Inferred Mineral Resources have an even greater amount of uncertainty as to their existence and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a category having a higher degree of certainty. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of Feasibility or Pre-Feasibility Studies except in rare cases. Investors are cautioned not to assume that all or any part of an Inferred Mineral Resource exists or is economically or legally mineable.

 

Disclosure of “contained tonnes” in a Mineral Resource estimate is permitted disclosure under NI 43-101 provided that the grade or quality and the quantity of each category is stated; however, the SEC’s disclosure standards currently in effect under Industry Guide 7 normally only permit issuers to report mineralization that does not constitute “reserves” by SEC standards as in place tonnage and grade without reference to unit measures. The requirements of NI 43-101 for identification of Mineral Reserves are also not the same as those of the SEC’s disclosure standards currently in effect under Industry Guide 7, and Mineral Reserves reported in compliance with NI 43-101 may not qualify as “reserves” under such SEC standards. Accordingly, information contained in this MD&A or any documents incorporated by reference herein containing descriptions of mineral deposits may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the U.S. federal securities laws and the rules and regulations thereunder.

 

 

Exhibit 99.3

 

 

Fortuna reports consolidated financial results for full year 2019

(All amounts expressed in US dollars, unless otherwise stated)

 

Vancouver, March 11, 2020: Fortuna Silver Mines Inc. (NYSE: FSM) (TSX: FVI) today reported full year 2019 net income of $23.8 million, adjusted net income of $28.4 million, and adjusted EBITDA of $95.4 million.

 

Jorge A. Ganoza, President and CEO, commented, “Our production results and cost execution were in-line with our guidance for 2019 generating a strong EBITDA margin of 37% and free cash flow from ongoing operations of $35 million.” Mr. Ganoza added, “Construction and pre-commissioning activities at Lindero continue to advance according to our updated schedule. We expect to place ore on the leach pad and first doré pour in the second quarter of this year.”

 

Full year 2019 highlights

 

• Sales of $257.2 million, compared to $263.3 million in 2018
• Net income of $23.8 million, compared to $34.0 million in 2018
• Adjusted net income of $28.4 million, compared to $38.4 million in 2018
• Adjusted EBITDA¹ of $95.4 million, compared to $113.9 million in 2018
• Free cash flow from ongoing operations¹ of $34.5 million
• Cash and cash equivalents as at December 31, 2019 was $83.4 million
• Credit facility of $150.0 million with $40.0 million undrawn
• Silver and gold production of 8,809,767 ounces and 50,525 ounces, respectively
• AISC^1,2 per silver equivalent ounce of payable silver was $11.9

 

Fourth quarter 2019 highlights

 

• Sales of $69.0 million, compared to $59.6 million in 2018
• Net income of $19.0 million, compared to $2.2 million in 2018
• Adjusted net income of $10.9 million, compared to $4.4 million in 2018
• Adjusted EBITDA¹ of $25.1 million, compared to $22.7 million in 2018
• Free cash flow¹ from ongoing operations of $6.4 million
• Silver and gold production of 2,251,917 ounces and 12,279 ounces, respectively
• AISC^1,3 per silver equivalent ounce of payable silver was $12.5

 

Notes:

1.

Refer to Non-GAAP financial measures and Forward-Looking Statements at the end of this news release

2.

AISC/oz Ag Eq calculated at realized metal prices of $1,393/oz Au, $16.2/oz Ag, $0.9/lb Pb, and $1.2/lb Zn

3.

AISC/oz Ag Eq calculated at realized metal prices of $1,483/oz Au, $17.3/oz Ag, $0.9/lb Pb, and $1.1/lb Zn

 

Capital resources and liquidity

 

Total liquidity available to the Company as of December 31, 2019 was $123 million, which includes $40 million of available credit under our $150 million credit facility. At the end of the year the Company had cash, cash equivalents, and short-term investments of $83.4 million.

 

In October 2019, the Company closed a bought deal public offering of senior subordinated, unsecured convertible debentures which raised aggregate gross proceeds of $46 million.

 

 

Fourth quarter and Full year 2019 consolidated results

 

Consolidated Financial Metrics		Three months ended December 31,								Years ended December 31,
		2019			2018			% Change		2019			2018			% Change
(Expressed in $ millions except per share information)
Sales		$	69.0		$	59.6		16%		$	257.2		$	263.3		(2%)
Mine operating income			23.4			17.3		35%			84.6			96.6		(12%)
Operating income			9.0			6.3		43%			34.2			61.6		(44%)
Net income			19.0			2.2		764%			23.8			34.0		(30%)
Earnings per share (basic)			0.12			0.01		1,100%			0.15			0.21		(29%)
Adjusted net income1			10.9			4.4		148%			28.4			38.4		(26%)
Adjusted EBITDA1			25.1			22.7		11%			95.4			113.9		(16%)
Net cash provided by operating activities			19.2			19.3		(1%)			63.0			83.5		(25%)
Free cash flow1 from ongoing operations			6.4			11.8		(46%)			34.5			55.2		(38%)
Capex
Sustaining			6.2			9.4		(34%)			20.4			24.0		(15%)
Non-sustaining			0.9			1.2		(29%)			2.0			3.3		(39%)
Lindero			26.8			39.4		(32%)			188.3			80.0		135%
Brownfields			0.9			1.6		(46%)			4.8			8.6		(44%)
											Dec 31, 2019			Dec 31, 2018		% Change
Cash, cash equivalents, and short-term investments										$	83.4		$	163.3		(49%)
Total assets										$	936.1		$	786.5		19%
Debt										$	146.5		$	69.3		111%
Shareholders' equity										$	635.4		$	602.8		5%

Note:

1.

Refer to Non-GAAP financial measures and Forward-Looking Statements at the end of this news release

 

Fourth Quarter 2019 Results

 

Sales for the quarter were $69.0 million, a 16% increase from the $59.6 million reported in the same period in 2018. The increase in sales was due primarily to higher silver, gold, and lead prices of 19%, 20%, and 4%, respectively, and a 9% and 19% increase in the volume of silver and lead sold.

 

Net income for the quarter was $19.0 million or $0.12 per share compared to $2.2 million net income or $0.01 per share reported in the fourth quarter of 2018. The increase in net income was driven by higher sales, $11.0 million of investment gains denominated in Argentine pesos from cross border trades, and lower income taxes. These were partially offset by $4.3 million of non-cash write-downs in inventories, exploration projects, and exploration related equity investments.

 

Adjusted net income for the period was $10.9 million compared to $4.4 million for the same period in 2018. The increase was driven by higher sales and lower income taxes and was partially offset by general and administrative expenses of $3.1 milion including higher share-based payment expenses of $2.0 million.

 

Adjusted EBITDA for the quarter was $25.1 million compared to $22.7 million in the fourth quarter of 2018.

 

Cash provided by operating activities for the period was $19.2 million compared to $19.3 million reported in the same period in 2018. Free cash flow from ongoing operations was $6.4 million compared to $11.8 million reported in the fourth quarter of 2018. The decrease was due primarily to negative changes in working capital of $8.0 million in the fourth quarter of 2019 compared to positive changes of $3.0 million in the fourth quarter of 2018. The changes in free cashflow in the fourth quarter of 2019 were mostly related to timing in the collection of accounts receivable and an increase of our VAT receivable at the San Jose Mine in Mexico.

 

 

Annual Results

 

Sales for the full year were $257.2 million, a 2% decrease from the $263.3 million reported in 2018.

 

Net income for the full year was $23.8 million or $0.15 per share compared to net income of $34.0 million or $0.21 per share reported in 2018. The decrease in net income was due to a combination of slightly lower sales ($6 million), higher cash costs, and higher general and administrative expenses of $3.7 million, including $2.3 million of share-based payment expenses. In addition, results in 2019 were impacted by $5.6 million of non-cash write-downs on exploration projects, obsolete inventories, and a decrease in the fair value of exploration related equity investments, compared to $2.0 million of write-downs in 2018. The $13.2 million of foreign exchange losses in the year, primarily from the devaluation of the Argentine Peso were substantially mitigated by $11.0 million of investment gains.

 

Adjusted net income for the full year was $28.4 million compared to $38.4 million for 2018. The net loss for the year was adjusted to reflect non-cash impairment charges, foreign exchange losses related to the Lindero Project, and the aforementioned investment gains.

 

Adjusted EBITDA for the full year was $95.4 million compared to $113.9 million in 2018.

 

Cash provided by operating activities for the full year was $63.0 million compared to $83.5 million reported in 2018. The decrease was driven by lower operating margins and negative changes in working capital of $11.0 million compared to positive changes of $3.3 million in 2018. Free cash flow from ongoing operations for the year ended December 31, 2019 was $34.5 million compared to $55.2 million reported in 2018.

 

Lindero Project, Argentina

 

Construction of the Lindero open pit heap leach gold mine located in Salta Province, Argentina is 89% complete as of the end of January 2020. Construction spending for the fourth quarter of 2019 was $27.8 million (FY 2019 spending: $157.5 million) of which $21.3 million was unpaid as of the end of December 2019. Total construction capital expenditures as at December 31, 2019 was $280.3 million. Management expects total construction capital expenditures of between $314.0 million and $320.0 million as per the the updated construction and commissioning schedule (refer to Fortuna’s news release dated February 13, 2020). This represents an increase of 28% from the September 2017 feasibility estimate.

 

The main drivers for the increased capital costs are $8.6 million of indirect costs, and $6.8 million of EPCM contractor. In addition, the Company expects to incur pre-production costs and buildup of working capital through to the commencement of production of approximately $40 million of which $14 million had been spent as of December 31, 2019. This is an increase of $15 million over the $25 million disclosed in our November 14, 2019 news release and is mainly driven by continued mining operations during the pre-production phase which will result in an inventory of ore stockpile 30% larger than originally planned, additional related owner’s costs, and an additional $4 million for inventory spare parts.

 

The Company expects to place ore on the leach pad and first doré pour in the second quarter of 2020, and commercial production is expected to commence in the third quarter of 2020.

 

Lindero construction capital expenditures and total spending

 

		Cumulative to				Twelve months ended
(Expressed in $ millions)		December 31, 2018				December 31, 2019				Total
Construction capital expenditures¹		$	79.9			$	188.3			$	268.2
Contractor advances and deposits on equipment, net of transfers			42.9				(30.8	)			12.1
Total spending			122.8				157.5				280.3

Note 1: Includes $21.3 million of invoices that were unpaid as of the end of December 2019

 

Refer to the following link  to  access  Lindero’s  photo gallery: https://fortunasilver.com/mines-and-projects/development/lindero-project-argentina/construction-gallery/lindero-deposit/

 

 

San Jose Mine, Mexico

		Three months ended December 31,								Years ended December 31,
		2019				2018				2019				2018
Mine Production
Tonnes milled			273,066				256,181				1,068,722				1,040,478
Average tonnes milled per day			3,034				2,846				3,028				2,956
Silver
Grade (g/t)			249				230				252				260
Recovery (%)			91				91				91				92
Production (oz)			2,002,633				1,718,496				7,868,478				7,979,634
Metal sold (oz)			1,968,550				1,818,026				7,849,438				7,921,345
Realized price ($/oz)			17.34				14.61				16.20				15.74
Gold
Grade (g/t)			1.50				1.58				1.57				1.75
Recovery (%)			91				91				91				92
Production (oz)			11,993				11,825				48,880				53,517
Metal sold (oz)			11,870				12,312				48,731				53,255
Realized price ($/oz)			1,483				1,236				1,393				1,273
Unit Costs
Production cash cost ($/t)			70.2				65.9				69.6				63.7
Production cash cost ($/oz Ag Eq)1,2			6.8				6.8				6.7				5.9
Unit net smelter return ($/t)			181.8				145.5				172.0				138.5
AISC ($/oz Ag Eq)1,2			10.5				9.9				9.8				9.0

Notes:

1.

Production cash cost silver equivalent and all-in sustaining cash cost silver equivalent (AISC) are calculated using realized metal prices for each period respectively

2.

Production cash cost, production cash cost silver equivalent, and all-in sustaining cash cost silver equivalent (AISC) are Non-GAAP financial measures. Refer to Non-GAAP financial measures in the associated MD&A for a description and calculation of these measures

 

Quarterly Results

 

The San Jose Mine produced 2,002,633 ounces of silver and 11,993 ounces of gold in the fourth quarter of 2019, which were 17% and 1%, respectively, above the comparable quarter in 2018. The higher silver production was due primarily to a 7% increase in mine throughput as well as an 8% increase in silver head grade.

 

Cash cost per tonne of processed ore for the fourth quarter increased 6% to $70.19 per tonne compared to $65.94 per tonne for the comparable quarter in 2018. The increased cash cost was due to higher mine costs related to breakup, support, and transportation.

Annual Results

 

The San Jose Mine produced 7,868,478 ounces of silver and 48,880 ounces of gold in 2019, which were 1% and 9%, respectively, below 2018. The lower production was due primarily to the impact of scheduled mine production in lower grade stopes in the third quarter which produced approximately 282,000 less silver ounces on 15% lower head grade.

 

Cash cost per tonne of processed ore for the year ended December 31, 2019 increased 9% to $69.60 per tonne compared to $63.72 per tonne for 2018. The increased cash cost was due to higher mining costs relating to contractor tariffs and indirect costs. The cash cost was within the annual cost guidance.

 

 

Caylloma Mine, Peru

		Three months ended December 31,								Years ended December 31,
		2019				2018				2019				2018
Mine Production
Tonnes milled			133,271				135,034				531,307				534,773
Average tonnes milled per day			1,481				1,500				1,497				1,502
Silver
Grade (g/t)			71				61				66				63
Recovery (%)			82				83				83				84
Production (oz)			249,284				219,207				941,289				911,309
Metal sold (oz)			252,780				214,883				948,616				911,648
Realized price ($/oz)			17.31				14.55				16.23				15.71
Lead
Grade (%)			2.84				2.39				2.72				2.62
Recovery (%)			89				91				90				91
Production (000's lbs)			7,441				6,453				28,746				28,255
Metal sold (000's lbs)			7,559				6,377				28,969				28,349
Realized price ($/lb)			0.92				0.89				0.91				1.02
Zinc
Grade (%)			4.48				4.30				4.36				4.28
Recovery (%)			88				90				89				90
Production (000's lbs)			11,614				11,537				45,600				45,485
Metal sold (000's lbs)			11,974				11,713				45,781				45,867
Realized price ($/lb)			1.08				1.19				1.15				1.32
Unit Costs
Production cash cost ($/t)			85.9				89.5				86.2				83.5
Production cash cost ($/oz Ag Eq)1,2			11.7				8.7				10.9				7.6
Unit net smelter return ($/t)			138.1				141.7				137.8				166.1
AISC ($/oz Ag Eq)1,2			15.4				14.8				14.3				11.7

Notes:

1.

Production cash cost silver equivalent and all-in sustaining cash cost silver equivalent (AISC) are calculated using realized metal prices for each period respectively

2.

Production cash cost, production cash cost silver equivalent, and all-in sustaining cash cost silver equivalent (AISC) are Non-GAAP financial measures. Refer to Non-GAAP financial measures in the associated MD&A for a description and calculation of these measures

 

Quarterly Results

 

The Caylloma Mine produced 7.4 million pounds of lead and 11.6 million pounds of zinc in the fourth quarter of 2019, which were 15% higher and in line with the production for the comparable quarter in 2018. The higher volume of lead production was due primarily to a 19% higher lead head grade despite lower mine throughput. Silver production totaled 249,284 ounces or 14% higher than the comparable quarter in 2018 due to higher silver head grade by 16%.

 

Cash cost per tonne of processed ore was $85.86, which was 4% lower than the $89.50 cash cost per tonne for the comparable quarter in 2018 and was within our annual guidance range. The lower cash cost was due primarily to lower mining costs related to breakup and support.

 

 

Annual Results

 

The Caylloma Mine produced 28.7 million pounds of lead and 45.6 million pounds of zinc in 2019, which were 2% higher and in line with production for 2018. The higher volume of lead production was due to a 4% higher lead head grade. Silver production totaled 941,289 ounces or 3% higher than the production for 2018.

 

Cash cost per tonne of processed ore was $86.15 (refer to Non-GAAP Financial Measures), or 3% higher than the $83.47 per tonne for 2018 and within our annual guidance range. The higher cash cost was due to higher indirect costs related mainly to on-site camp maintenance and personnel transportation. The cash cost was within the annual cost guidance.

 

Non-GAAP financial measures

 

The following tables represent the calculation of certain Non-GAAP financial measures as referenced in this news release.

 

Income Statement reconciliation to Adjusted Net Income for the three and twelve months ended December 31, 2019 and 2018

 

(Expressed in $ millions, except per share information)		Q4 2019			Adjust.			Q4 2019 Adjusted			Q4 2018			Adjust.			Q4 2018 Adjusted
Sales	$	69.0		$	-		$	69.0		$	59.6		$	-		$	59.6
Cost of sales		45.5			(1.1)			44.5			42.2			0.1			42.3
Mine operating income		23.4			1.1			24.5			17.4			(0.1)			17.3
General and administration		9.4			0.0			9.4			6.3			-			6.3
Exploration and evaluation		0.4			-			0.4			0.2			-			0.2
Share of loss from associates		0.1			(0.1)			-			0.1			(0.1)			-
Foreign exchange loss (gain)		1.4			(1.1)			0.4			3.6			(3.9)			(0.2)
Other expenses, net		3.2			(3.0)			0.1			0.9			(0.9)			0.1
Operating Income		9.0			5.2			14.2			6.3			4.7			11.0
Investment income		11.0			(11.0)			-			-			-			-
Interest and finance costs		-			0.1			0.1			0.4			0.2			0.6
Gain on derivatives		-			-			-			0.4			0.4			0.8
Income before taxes		20.1			(5.8)			14.3			7.1			5.3			12.5
Income tax expense		1.1			2.3			3.4			4.9			3.1			8.0
Net (loss) income and adjusted net income	$	19.0		$	(8.0)		$	10.9		$	2.2		$	2.2		$	4.4
Earnings per share - basic	$	0.11		$	(0.04)		$	0.07		$	0.01		$	0.01		$	0.02

 

(Expressed in $ millions, except per share information)		YTD 2019			Adjust.			YTD 2019 Adjusted			YTD 2018			Adjust.			YTD 2018 Adjusted
Sales	$	257.2		$	-		$	257.2		$	263.3		$	-		$	263.3
Cost of sales		172.6			(0.9)			171.7			166.7			(1.3)			165.4
Mine operating income		84.6			0.9			85.5			96.6			1.3			97.9
General and administration		29.8			0.1			29.9			26.2			-			26.2
Exploration and evaluation		2.4			-			2.4			0.7			-			0.7
Share of loss from associates		0.2			(0.2)			-			0.0			(0.0)			-
Foreign exchange loss		13.3			(11.5)			1.8			6.1			(3.9)			2.2
Other expenses, net		4.6			(4.3)			0.3			2.0			(1.8)			0.2
Operating Income		34.2			16.9			51.1			61.6			7.0			68.6
Investment income		11.0			(11.0)			-			-			-			-
Interest and finance costs		(0.0)			0.4			0.3			0.4			0.7			1.0
Gain (loss) on derivatives		(1.2)			2.6			1.4			5.4			(5.0)			0.4
Income before taxes		44.0			8.9			52.8			67.3			2.7			70.0
Income tax expense		20.2			4.2			24.4			33.4			-			31.7
Net income and adjusted net income	$	23.8		$	4.6		$	28.4		$	34.0		$	4.3		$	38.3
Earnings per share - basic	$	0.14		$	0.04		$	0.18		$	0.21		$	0.03		$	0.24

 

 

Adjusted EBITDA

 

Reconciliation to Adjusted EBITDA for the three and twelve months ended December 31, 2019 and 2018

 

(Expressed in $ millions)		Q4 2019			Q4 2018			YTD 2019			YTD 2018
Net (loss) income for the period	$	19.0		$	2.2		$	23.8		$	34.0
Adjustments:
Community support provision		(0.1)			(0.3)			(0.3)			1.1
Inventory adjustment		1.3			0.2			1.3			0.2
Foreign exchange loss, Lindero project		1.0			3.9			11.5			3.9
Net finance items		(0.1)			(0.4)			(0.3)			(0.4)
Depreciation, depletion, and amortization		11.6			10.8			46.0			44.8
Income taxes		1.1			4.9			20.2			33.4
Share of loss from associates		0.1			0.1			0.2			-
Investment income		(11.0)			-			(11.0)			-
Other non-cash items		2.2			1.3			4.0			(3.0)
Adjusted EBITDA	$	25.1		$	22.7		$	95.4		$	113.9

 

Reconciliation to Free cash flow from ongoing operations for the three and twelve months ended December 31, 2019 and 2018

 

(Expressed in $ millions)		Q4 2019			Q4 2018			YTD 2019			YTD 2018
Net cash provided by operating activities	$	19.2		$	19.3		$	63.0		$	83.5
Less:  Accrued interest		(1.5)			-			-			-
Less:  Change in long term receivables		-			-			(1.5)			-
Less:  Additions to mineral properties, plant and equipment		(7.6)			(10.5)			(26.0)			(33.3)
Less:  Contractor advances for plant and equipment		-			-			(0.6)			(1.3)
Add:  Advances applied to plant and equipment		-			0.1			0.7			1.2
Less:  Current income tax expense		(8.2)			(3.9)			(32.6)			(30.6)
Add:  Income taxes paid		4.5			6.8			31.5			35.7
Free cash flow from ongoing operations1	$	6.4		$	11.8		$	34.5		$	55.2
Note:
1.  From ongoing operations, including San Jose and Caylloma and excludes Greenfield exploration

 

The financial statements and MD&A are available on SEDAR and on the Company's website at https://www.fortunasilver.com/investors/financials/2019/.

 

Conference call to review 2019 year end financial and operational results

 

A conference call to discuss the financial and operational results will be held on Thursday, March 12, 2020 at 9:00 a.m. Pacific time | 12:00 p.m. Eastern time. Hosting the call will be Jorge A. Ganoza, President and CEO, and Luis D. Ganoza, Chief Financial Officer.

 

Shareholders, analysts, media and interested investors are invited to listen to the live conference call by logging onto the webcast at: https://www.webcaster4.com/Webcast/Page/1696/33369 or over the phone by dialing just prior to the starting time.

 

Conference call details:

 

Date: Thursday, March 12, 2020

Time: 9:00 a.m. Pacific time | 12:00 p.m. Eastern time

 

Dial in number (Toll Free): +1.844.369.8770

Dial in number (International): +1.862.298.0840

 

Replay number (Toll Free): +1.877.481.4010

Replay number (International): +1.919.882.2331

Replay Passcode: 33369

 

 

Playback of the conference call will be available until March 26, 2020 at 12:00 a.m. Eastern time. Playback of the webcast will be available until March 12, 2021. In addition, a transcript of the call will be archived on the company’s website: https://www.fortunasilver.com/investors/financials/2019/.

 

About Fortuna Silver Mines Inc.

 

Fortuna is a growth oriented, precious metal producer with its primary assets being the Caylloma silver mine in southern Peru, the San Jose silver-gold mine in Mexico and the Lindero gold project, currently under construction, in Argentina.  The Company is selectively pursuing acquisition opportunities throughout the Americas and in select other areas.  For more information, please visit its website at www.fortunasilver.com.

 

ON BEHALF OF THE BOARD

 

Jorge A. Ganoza

President, CEO, and Director

Fortuna Silver Mines Inc.

 

Trading symbols: NYSE: FSM | TSX: FVI

 

Investor Relations:

Carlos Baca

T (Peru): +51.1.616.6060, ext. 0

E: [email protected]

Forward-looking Statements

 

This news release contains forward-looking statements which constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (collectively, "Forward-looking Statements"). All statements included herein, other than statements of historical fact, are Forward-looking Statements and are subject to a variety of known and unknown risks and uncertainties which could cause actual events or results to differ materially from those reflected in the Forward-looking Statements. The Forward-looking Statements in this news release include, without limitation, statements about the Company's plans for its mines and mineral properties; the Company’s exploration activities, including related capital expenditures; the timing of the completion of construction at Lindero; the timing of the placing of the ore on the leach pad and the first dore pour; the costs related to the construction of the Lindero Project; the timing of commissioning, and timing of commencement of commercial production of the Lindero Project; the Company's business strategy, plans and outlook; the merit of the Company's mines and mineral properties; the future financial or operating performance of the Company; 2020 production and cost guidance; and proposed expenditures. Often, but not always, these Forward-looking Statements can be identified by the use of words such as "estimated", “expected”, “anticipated”, "potential", "open", "future", "assumed", "projected", "used", "detailed", "has been", "gain", "planned", "reflecting", "will", "containing", "remaining", "to be", or statements that events, "could" or "should" occur or be achieved and similar expressions, including negative variations.

 

Forward-looking Statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any results, performance or achievements expressed or implied by the Forward-looking Statements. Such uncertainties and factors include, among others, changes in general economic conditions and financial markets; changes in prices for silver and other metals; fluctuation in foreign exchange rates; inflation; any extension of the currency controls in Argentina; technological and operational hazards in Fortuna's mining and mine development activities; delays in the completion of the construction and commissioning at Lindero may cause delays in the commencement of commercial production; delays in the commissioning and start up of Lindero may increase the costs at Lindero; risks inherent in mineral exploration; uncertainties inherent in the estimation of mineral reserves, mineral resources, and metal recoveries; governmental and other approvals; political unrest or instability in countries where Fortuna is active; risks relating to a global pandemic; labor relations issues; as well as those factors discussed under "Risk Factors" in the Company's Annual Information Form. Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in Forward-looking Statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended.

 

Forward-looking Statements contained herein are based on the assumptions, beliefs, expectations and opinions of management, including but not limited to expectations regarding the Company's plans for its mines and mineral properties; mine production costs; expected trends in mineral prices and currency exchange rates; the accuracy of the Company's current mineral resource and reserve estimates; that the Company's activities will be in accordance with the Company's public statements and stated goals; that there will be no material adverse change affecting the Company or its properties; that all required approvals will be obtained; that there will be no significant disruptions affecting operations and such other assumptions as set out herein. Forward-looking Statements are made as of the date hereof and the Company disclaims any obligation to update any Forward-looking Statements, whether as a result of new information, future events or results or otherwise, except as required by law. There can be no assurance that Forward-looking Statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, investors should not place undue reliance on Forward-looking Statements.

 

This news release also refers to non-GAAP financial measures, such as cash cost per tonne of processed ore; cash cost per payable ounce of silver; total production cost per tonne; all-in sustaining cash cost; all-in cash cost; adjusted net (loss) income; operating cash flow per share before changes in working capital, income taxes, and interest income; and adjusted EBITDA. These measures do not have a standardized meaning or method of calculation, even though the descriptions of such measures may be similar. These performance measures have no meaning under International Financial Reporting Standards (IFRS) and therefore, amounts presented may not be comparable to similar data presented by other mining companies.