Monday, August 22, 2016

Fortuna Silver - Why Are You So Greedy, Boys?

Fortuna Silver is one of my five picks for this bull market in gold / silver.

However, the first thing each independent analyst has to do is to look for and report any strange behavior of a company covered by this analyst.

Unfortunately, Fortuna did such a thing in 2Q 2016. Due to higher silver prices, in 2Q 2016 the company delivered quite decent financial results. And what did the management do? It granted itself very high share-based payments.

Look at an excerpt from the last financial statement:

source: Fortuna Silver 2Q 2016 Financial Report

Firstly, look at the first line in red. Higher revenue resulted in much higher "Mine operating earnings". They went up from $10,402 thousand in 2Q 2015 to $15,917 thousand in 2Q 2016 (an increase of 53%). Quite a nice increase, indeed.

Now, look at the red circles. These are "Selling, general and administrative expenses". At this point the company's management made a very sad thing - it increased these costs from $5,471 thousand in 2Q 2015 to as much as $12,341 thousand in 2Q 2016 - an increase of 126%! On a per half-year basis there is a similar relationship - an increase of 101%.

Well, I do not like it at all. To show the scale of this misbehavior, look at the average "Selling, general and administrative expenses", on a per quarter basis, starting from 2009:

source: Simple Digressions

It looks that the management's greed is at its highest level since 2009.

Another excerpt shows a breakdown of "Selling, general and administrative expenses":

Look at the line "Share-based payments" and note that these costs went up from $1,195 thousand in 2Q 2015 to $8,031 thousand in 2Q 2016, nearly eightfold!

Well, the management may defend itself saying that these costs are non-cash expenses. No way. They are absolutely cash expenses but paid by other company's shareholders in the form of dilution (me included). 

Summarizing - I am changing my positive opinion on the company. While I still own these shares I no longer recommend them as a buying opportunity.


  1. Enjoy all your articles/analysis in describing the financial's of an assortment of miners honestly, and not avoiding any of the unpleasant details.
    Would be most interested in an up-to-date analysis of Timmins Gold, a company that seems to have turned the corner due to a large part of management's cutting costs, and reducing debt. Thanks

  2. Good point. Timmins was once one of my favorite miners. Then problems started. Now, with a new CEO and the last decision to keep mining from the San Francisco deposit the company looks interesting. It is definitely worth a post...