Ignore Weak Silver and Buy This Silver Miner

Fortuna Silver Mines Inc. (TSX:FVI)(NYSE:FSM) latest sell-off has created an opportunity for risk tolerant contrarian investors.

The year 2018 has been a bad one for silver investors and miners. The precious metal, which is renowned for its conductive qualities, has plunged by around 16% since the start of 2018 to be trading at US$14.50 per ounce. This has hit primary silver miners hard, with the Global X Silver Miner’s ETF crashing by 27% for that period.

One miner that’s been heavily marked down by the market is Fortuna Silver Mines Inc. (TSX: FVI)(NYSE: FSM). It has lost a whopping 31%, creating an opportunity for contrarian investors despite the stagnant silver outlook.

Now what?

Fortuna, which owns and operates the San Jose mine in Mexico and the Caylloma mine in Peru, is also developing the Lindero gold project located in Argentina. That asset is expected to commence commercial production during the third quarter 2019, which will reduce Fortuna’s considerable dependence on mining silver to generate revenue.

This will be a positive development because gold, which is less volatile than silver, has remained firm, whereas the white metal’s price remains under considerable pressure. The divergence of silver and gold has occurred because while both are precious metals that are perceived to be stores of value, silver is also an industrial metal because of its conductive properties.

As a result, during 2017, manufacturing applications accounted for 59% of all silver consumed, which makes the metal particularly vulnerable to any negative changes in the global economic outlook. The declining industrial demand in recent years combined with fears of lower than expected global growth in 2019 has been weighing on the price of silver.

However, this should ease somewhat in the coming months because President Trump and Chinese President Xi have recently reached a temporary truce on trade. That could avert the looming trade war between the world’s two largest economies, thereby reducing the risk of further declines in industrial activity.

The impact of sharply weaker silver can be seen in Fortuna’s third quarter results. Despite silver production rising by 11% year over year to 2.2 million ounces and AISCs falling by 3% to US$10.80 per silver ounce sold, Fortuna reported a 33% decline in net income to US$6.9 million.

In the third quarter, it only realized an average price of US$14.80 for each silver ounce sold, which was 12% lower than the same period in 2017, emphasizing the considerable benefits that Fortuna will derive from Lindero once it’s operational.

You see, unlike silver, gold has remained firm to trade at around US$1,233 per ounce because of a range of economic and geopolitical fissures, which means that Fortuna’s earnings should receive a healthy bump when Lindero begins commercial operations.

In its first year of production, the mine is expected to produce 137,000 gold ounces with all-in sustaining costs (AISCs) of US$528 per ounce produced. Those AISCs are some of the lowest in the industry and underscore the considerable potential profitability of Lindero, especially amid an operating environment where gold is trading at over US$1,200 an ounce.

It should be noted that over the 13-year life of the mine, AISCs will average US$802 per gold ounce produced, which, while significantly greater than for the first year of operation, still underscores the mine’s profitability.

According to Fortuna’s third quarter 2018 report, Lindero is on schedule to be commissioned during the second quarter 2019 and for commercial production to begin during the third quarter.

So what?

While the outlook for precious metals and especially silver is uncertain, the sharp sell-off of Fortuna has created an opportunity for contrarian investors seeking to boost their exposure to gold and silver.

The commissioning of the Lindero mine will give the miner’s earnings a healthy lift and reduce its dependence on silver, thereby offsetting much of the risk associated with the white metals’ weak outlook. Once Fortuna consistently reports that Lindero has met forecasts, its market value should receive a healthy boost.

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

More on Metals and Mining Stocks

Stacked gold bars
Metals and Mining Stocks

2 Mining Stocks I’d Buy as Carney Courts Global Investors

As Carney courts global investors to strengthen Canada’s trade and economy, these two Canadian mining stocks offer solid financials and…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

Cameco Stock Has Fallen 10%: But the Business Isn’t Broken, so Here’s Why I’d Buy

Down 10% on temporary maintenance, Cameco’s nuclear thesis is far from broken. Here's why this pullback is a prime buy…

Read more »

gold prices rise and fall
Stocks for Beginners

Gold May Be Pulling Back From Record Highs, but I’d Still Buy This Royalty Stock

Franco-Nevada offers precious-metal exposure without taking on every expense of running a mine.

Read more »

nugget gold
Stocks for Beginners

Gold is Back Above US$4,000: This Streamer Down 15% in a Month Could be a Steal

Wheaton's falling share price offers a fresh look at a business that earns from precious metals without operating the mines.

Read more »

Investor reading the newspaper
Stocks for Beginners

Steel is Back in the Headlines: This Iron Ore Royalty Pays You to Watch

Labrador Iron Ore Royalty offers a variable dividend, with mine recovery carrying more weight than steel-policy headlines.

Read more »

financial chart graphs and oil pumps on a field
Dividend Stocks

This TSX Royalty Stock Pays Its Monthly Dividend Today: The Payout Math Behind It

Freehold pays eligible shareholders today, with a $10,000 investment offering about $52 monthly at the current dividend.

Read more »

panning for gold uncovers nuggets and flakes
Stocks for Beginners

Gold Pulled Back From Its Record: This Royalty Stock Raised Its Dividend 18%

OR Royalties offers a different way to own gold exposure, with strong dividend coverage and a modest starting yield.

Read more »

gold prices rise and fall
Stocks for Beginners

Gold is Near $4,200: This Miner Pays You to Wait

Agnico's cash position supports its dividend, but gold-price sensitivity and a modest starting yield define what investors actually receive.

Read more »