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Is This Junior Miner the Best Play on a Rebound in Silver?

Silver continues to languish, despite gold remaining firm and trading at over US$1,300 per ounce. While the global economic outlook is upbeat, which is not a positive for precious metals, rising geopolitical tensions in the Middle East bode well for gold and silver.

Another factor that will give silver a boost is rising industrial demand for the white metal. Because of its conductive properties, silver is an important component used in the manufacturer of a range of electronic and electrical products, including the photovoltaic cells that make up solar panels. That coupled with the likelihood of another supply deficit in 2018 should give silver a boost. This makes Fortuna Silver Mines Inc. (TSX:FVI)(NYSE:FSM) an attractive investment. It is ready to soar when silver bounces back. 

Now what?

Fortuna owns two operational mines, the Caylloma mine located in Peru, and the San Jose mine in Mexico. Those mines and its Lindero gold project give it reserves of 44.8 million ounces of silver and two million ounces of gold.

Fortuna recently delivered its first-quarter 2018 results, reporting strong financial and operational results. Silver production for the quarter shot up by an impressive 18% year over year to 2.4 million ounces, while gold output rose by a healthy 14% to 15,000 ounces. That strong growth in production can be attributed to increased efficiencies and productivity at Fortuna’s two operational mines, including a notable increase in the head grades for the silver and gold ore mined at the San Jose Mine.

An important improvement was a sharp decrease in all-in sustaining costs (AISCs) for the quarter. First-quarter AISCs were US$2.11 per ounce produced, or almost a third of what they had been a year earlier. That solid outcome can be primarily attributed to higher by-product credits from Fortuna’s lead and zinc production.

Production from the Caylloma and San Jose mines should continue to grow over the remainder of 2018, as further efficiencies are implemented and the inventory of stopes available for mining are increased. That in conjunction with the solid first-quarter results bodes well for Fortuna to meet its 2018 guidance, where it has forecast annual silver production of 8.3 million ounces and gold output to be 48,300 ounces.

What makes Fortuna even more appealing, aside from its quality silver mining assets, is its fully owned Lindero gold project located in Argentina, which has been assessed to have reserves of 1.7 million ounces of gold. The mine is projected to produce first gold in mid-2019 and, when fully operational, will boost Fortuna’s annual gold output to 190,000 ounces and silver to nine million ounces. Lindero has a payback period of fewer than four years at an assumed gold price of US$1,250 an ounce, which is below the current market price. 

So what?

Even after soaring by 23% over the last year, despite the lacklustre performance of silver, Fortuna remains attractively valued. This — along with its high-quality producing mines and an optimistic outlook for silver — makes it one of the best ways for investors to gain exposure to the white metal and its impending rally.

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Fool contributor Matt Smith has no position in any stocks mentioned.

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