BUILDING
THE FOUNDATIONS
OF A LEADING
SILVER MINER
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FORTUNA SILVER MINES INC. 2009 ANNUAL REPORT >>
Since opening the Caylloma silver-lead-
zinc-copper mine in Peru less than four
years ago, Fortuna Silver Mines has
become one of Latin America’s fastest-
growing silver producers. Our second and
largest asset, the San Jose silver-gold
mine in Mexico, will triple the company’s
silver-equivalent output when it opens
in the third quarter of 2011. We remain
focused on our primary goal of building
the foundations of a leading silver miner
in Latin America, a region where
management holds particular expertise
and experience and where we are pursuing
additional accretive mining opportunities.
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Cover Photo: San Jose Project
main access decline
Photo (this page): Caylloma
Mine- Animas Vein, level 12
All figures expressed in US
dollars unless otherwise stated.
pg.03
pg.04
pg.07
pg.10
Vision &
Strategy
Operating
Highlights
President’s
Letter
Chairman’s
Letter
pg.11
Social
Commitment
pg.13
Core
Assets
pg.24
Financial
Reports
MEXICO
San Jose Project
Ag, Au : Construction
PERU
Caylloma Mine
Ag, Pb, Zn, Cu : Production
Forward-Looking Statements
Certain statements in this report constitute forward-looking statements and as such are based on an assumed set of economic conditions and courses
of action. These include estimates of future production levels, expectations regarding mine production costs, expected trends in mineral prices and
statements that describe Fortuna’s future plans, objectives or goals. There is a significant risk that actual results will vary, perhaps materially, from
results projected depending on such factors as changes in general economic conditions and financial markets, changes in prices for silver and other
metals, technological and operational hazards in Fortuna’s mining and mine development activities, risks inherent in mineral exploration, uncertain-
ties inherent in the calculation of mineral reserves, mineral resources, and metal recoveries, the timing and availability of financing, governmental
and other approvals, political unrest or instability in countries where Fortuna is active, including labour relations and other risk factors.
HIGHLIGHTS:
Caylloma Mine produced
1,682,546 ounces of
silver (**), an increase
of 109% over 2008
(805,057 ounces *)
Production of zinc
(28.4M pounds) and
lead (25.1M pounds)
increased by 22% and
52% respectively over
2008
High-grade silver-
gold mineralization
discovered in upper
portion of Animas Vein
at the Caylloma Mine;
development underway
for incorporation into
mine plan by mid-2010
Copper circuit completed
at Caylloma with
commercial production
of copper concentrates
commencing in
December 2009
Vision & Strategy: We are committed to
building Fortuna into a leading silver mining
company centered on developing mineral
resources in Latin America. We will operate
with a commitment to profitability, sustainable
growth, high standards and the well-being of
our workers, neighboring communities and
the environment.
01
02
03
04
05
06
01 SIMON RIDGWAY, Chairman of the Board / 02 JORGE A. GANOZA DURANT, President, CEO and Director
03 THOMAS I. VEHRS, Vice President, Exploration / 04 JORGE R. GANOZA AICARDI, Vice President, Operations
05 MANUEL RUIZ-CONEJO CARLOS, Vice President, Project Development
06 LUIS DARIO GANOZA DURANT, Chief Financial Officer
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All permits for the
construction and operation
of a 1,500 tonnes per day
(tpd) mine at San Jose
received in Q4 2009
Pre-feasibility study
completed at San Jose
mine, construction decision
announced Q2 2010
Commitment letter signed
for a US$20M senior
secured debt facility with
The Bank of Nova Scotia
Cash position of US$70 million +
bank debt facility leaves Fortuna
well funded for San Jose construction
(estimated pre-operational capital
expenditure of US$55.7 M), conduct
exploration activities and seize
accretive business opportunities
within Latin America
Fortuna´s shares listed on the
Toronto Stock Exchange as of
January 18, 2010
(*)
Silver production contained in lead
concentrate
(**) Silver production contained in lead
and copper concentrates
OUR GROWTH
1. Focusing on Peru and Mexico, the world’s two largest silver producing
STRATEGY
INCLUDES:
countries, where we can harness management’s extensive skills and experience
in all facets of Latin American exploration and mining
2. Using knowledge and skills gained through development, mechanization and
optimization of the Caylloma mine to more efficiently build the San Jose mine
3. Growing organically through brown-fields exploration and through acquisitions
Expressed in US dollars
2009
2008
FINANCIAL
HIGHLIGHTS
(000’s)
Sales
Operating Income (loss)
Net Income (loss)
Earnings (loss) per share, basic and diluted
Net cash provided by operating activities
Cash end of the year
$ 51,428
14,383
623
0.01
13,686
30,763
$ 24,867
(5,593)
(910)
(0.01)
8,356
29,454
RESULTS OF
OPERATIONS
Caylloma Mine,
Peru
Tonnes milled
Average tonnes milled per day (tpd)
Production (metal contained)
Silver (oz) (*), (**)
Lead (lbs)
Zinc (lbs)
Copper (lbs) (***)
Unit cash cost and Net smelter return
Unit cash cost (US$/oz Ag)
Unit cash cost (US$/tonne)
Unit NSR (US$/tonne)
Average Selling Price
Silver (US$/oz)
Lead (US$ /lb)
Zinc (US$/lb)
Copper (US$/lb)
2009
2008
395,560
1,121
331,381
936
1,682,546
25,137,107
28,441,836
88,185
805,057
16,501,600
23,283,019
na
(4.93)
46.00
124.00
14.65
0.78
0.75
3.17
(3.78)
46.41
87.00
15.02
0.95
0.85
na
(*) 2009 Ag production contained in Pb and Cu concentrates
(**) 2008 Ag production contained in Pb
(***) 2009 Cu production for the month of December
SILVER PRODUCTION
1
3
2
1. Caylloma Mine
2. Caylloma Mine: Crushing
and stockpile
3. Caylloma Mine: Camp
located at 4,500 m.a.s.l.
Caylloma Mine (Ag) + San Jose Mine (Ag Eq)
Caylloma* San Jose**
(2009 – 2018e)
M oz
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2
1
0
2009
2010e
2011e
2012e
2013e
2014e
2015e
2016e
2017e
2018e
e - estimate / * Ag / ** Ag, Au
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TO OUR SHAREHOLDERS
STRONG LONG-TERM
In October of
current mining rate. Total silver production
POTENTIAL
2009, Fortuna
for 2009 was 1.7 million ounces, which ac-
celebrated its
counted for 44% of revenue. Due to the con-
third year anniversary as a producing mining
tribution of lead, zinc and copper, we achieved
company. During this time we invested over
a cash cost per silver ounce, net of by-product
US$70 million to build and expand the Cayl-
credits, of negative US$4.93 per ounce. This
loma Mine and advance our San Jose project
figure ranks Fortuna among the lowest cost
to the construction phase. Today, with the
emerging silver producers. The financial
San Jose Mine under construction, we are on
benefits of our solid production expansions
a direct path to increase our annual output
and operating results were reflected in the
to 7 million ounces of silver equivalent. We
improved earnings and cash flow in the final
stand in a solid financial position to execute
quarter of 2009 and first quarter of 2010.
the construction of San Jose and have been
able to strengthen our Company by attract-
Our objective at Caylloma over the next 24
ing and retaining talented employees. As
months is to focus on improving operational
we embark on this new phase of expansion,
efficiencies before planning further capacity
we look forward with enthusiasm to the new
expansion. Our operations team is confident
challenges that lie ahead. We are building the
we can derive moderate growth from these
foundations for a new leading silver miner in
efficiency gains. Perhaps most exciting is the
Latin America.
recent exploration success reported on the up-
per levels of the Animas vein. This new discov-
OPERATING PERFORMANCE AT
ery will advance Caylloma’s silver production
CAYLLOMA—SUSTAINED PRODUCTION
to the 2 million ounce per year benchmark.
AND LOW COSTS
Through sound execution of our vision and
SAN JOSE, MEXICO—OUR SECOND
investment plans for Caylloma, we have built
MINE IN THE MAKING
a very profitable operation. Mine throughput
In late 2009 we concluded the permitting
has now consolidated at 35,000 tonnes per
process for construction and operation of a
month or 1,200 tpd. Production is supported
1,500 tpd underground mine and processing
by over 3 million tonnes of reserves, enough
facility at our San Jose project in Mexico. In
to ensure a mine life of over eight years at our
April of 2010, we released the results of a
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positive pre-feasibility study and subsequently
ery, especially as we see how a historic mining
our Board of Directors approved the start of
district, with a production history spanning
construction. Within the next 16 months, we
almost 500 years, can still surprise us with a
plan to deliver production at San Jose at an
near surface, high-grade discovery.
initial rate of 750 tpd and 2 million ounces of
silver equivalent per year with subsequent ex-
For 2010 we are expanding our exploration
pansions to reach the design capacity of 1,500
programs and budgets. On the brown-fields
tpd and 5 million ounces of silver equivalent
area we hold approximately 68,000 hectares
per year. Based on current reserves, the mine
of exploration ground around our mines in
life stands at nine years. By the time of this
Peru and Mexico where we are expanding our
writing, detail engineering was advanced and
target generation and evaluation activities. In
construction activities on the water project
Peru, exploration drilling is currently being
and tailings had begun.
carried out and is also programmed at a num-
ber of targets within the Caylloma District. In
San Jose has several areas of opportunity we
Mexico, we are evaluating exploration targets
will work to capitalize on once the mine is
in the Taviche district and are planning the
in operation. The primary opportunity is to
evaluation and follow-up of gold-in-soils and
convert Inferred Resources to Measured and
gold-in-stream sediment anomalies outlined
Indicated Resources, and subsequently to
by generative exploration activities in 2008. At
Mineable Reserves, as we advance with the
the San Jose property, drilling is planned for
development of the upper levels of the mine.
the southern extension of the Bonanza vein
The potential gains of reserves from the
system, where previous drilling intersected
conversion of Inferred resources will allow for
significant silver and gold mineralization inter-
a faster and lower cost expansion to the design
sections that merited follow up.
capacity.
Our new project generation team evaluated
COMMITMENT TO EXPLORATION
numerous opportunities in Peru, Mexico,
Our exploration work in 2009 returned a new
Argentina, Chile and Ecuador during 2009.
high-grade silver and gold discovery in the up-
For 2010, we are prioritizing project genera-
per levels of the Animas Vein at the Caylloma
tion work in Peru and Mexico where we can
mine. This has emerged as an exciting discov-
maximize the benefit of existing corporate in-
TO OUR SHAREHOLDERS
1
1. Caylloma Mine:
Bateas Vein end of shift
frastructure. We look forward to reporting on
of high safety standards. Our environmental
the success of our project generation efforts.
management programs in Peru and Mexico
are designed to achieve zero effluent discharg-
BUILDING THE FOUNDATIONS OF
es into the environment. At San Jose, we
A LEADING SILVER MINER
are using an innovative and environmentally
Fortuna begins 2010 with a strong balance
friendly approach to source industrial water to
sheet that includes US$70 million in cash.
the project by using treated waste water from
We have a solid production base of 2 million
a neighboring community. And finally, we
ounces of silver per year and a growth profile
devote significant resources to ensure Fortuna
that will take the Company to 7 million ounc-
operates as a responsible neighbor. We work
es of annual silver equivalent production as
to be a strategic partner of our host communi-
San Jose is commissioned and achieves design
ties by assisting them in achieving their plans
capacity. And we will accomplish this while
and objectives for improved quality of life.
maintaining one of the lowest production cost
structures in the silver producer sector.
I cannot finish without acknowledging and
Key to achieving our plans and objectives is
port of all of the Fortuna directors, officers,
our commitment to operational and financial
employees, contractors and collaborators who
results, the health and safety of our workers,
make Fortuna a great Company.
thanking the resolute commitment and sup-
to protecting the environment and to being a
responsible neighbor within our host com-
munities. We have a record of zero fatalities
at our operations and we continue to invest in
Jorge A. Ganoza Durant
process imporovements and the maintenance
President, CEO and Director
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TO OUR SHAREHOLDERS
BECOMING A LEADING
Following three
San Jose’s fast-track development represents a
SILVER MINER
years of steady
remarkable achievement for any mining com-
growth at the
pany, junior or senior. As the mine comes on
Caylloma Mine, your company has begun a
stream in 2011, Fortuna will begin to double
new and important chapter. As production at
its silver equivalent output. At that point, we
Caylloma stabilizes, and as we look forward
will become a very different company from
to a long and profitable mine life there, we
what we are now—larger, significantly more
are taking the next steps towards our goal of
profitable and on the radar of much larger
becoming a leading silver mining company.
investors.
This is a crucial phase for Fortuna. While we
Looking beyond San Jose—which is a key part
have certainly proven ourselves capable of
of our goal of becoming a leading silver pro-
finding, developing and operating a successful
ducer—we plan to make another acquisition
mine, the market waits to see if we can do the
that will continue our rapid growth in silver
same with a much larger asset at San Jose. We
resources and production. Nearly all market
of course believe we can.
factors point to long-term high prices for
silver as well as other metals. With what we’ve
We have learned a great deal from our experi-
learned at Caylloma, and what we will surely
ence at Caylloma. And there is no substitute
learn from building and operating San Jose,
for experience. So with the groundwork com-
we believe we can locate, explore, develop and
pleted—not the least of which was developing
operate other projects profitably. In short,
an economic high-grade silver-gold resource—
we’re confident in our ability to deliver long-
we move into the construction phase at San
term growth and shareholder value.
Jose with confidence. Funding is in place,
permits, power and water have been secured,
My heartfelt thanks go to everyone in the For-
and planning is complete.
tuna family including directors, management,
staff and consultants. We have accomplished
It’s important to remember that we are just
so much in such a short period of time, which
beginning to understand San Jose’s long-term
has been possible only because of the team-
potential. We took our first samples there in
work and dedication everyone has shown day
2006. A mere four years later, we are prepar-
after day in Peru, Mexico and Canada. I look
ing to mine a deposit that to date contains
forward to new achievements in 2010 and the
more than 37 million ounces of silver equiva-
very exciting years beyond.
lent in the Indicated category and over 30
million ounces Inferred. Unexplored targets
across the property’s 68,000 hectares, how-
ever, could add considerably to this total and
Simon Ridgway
add many years to the mine’s life.
Chairman of the Board
OUR SOCIAL AND
ENVIRONMENTAL COMMITMENT
1
2
3
4
1. Caylloma Mine viewing north
2. Caylloma Mine: Caylloma
community site visit
3. San Jose Project: San Jose
artisans
4. San Jose Project: Ocotlan
community students site visit
RESPECT AND
Fortuna’s philosophy is to build and maintain collaborative
ETHNOCULTURAL
relationships wherever we have operations. We know that
DIVERSITY
mining and exploration affects people, communities and the
environment. What those impacts are, and the legacies they
leave, are up to us. That is why we strive to improve living conditions in the neighborhoods we
operate and leave as small of a footprint as possible.
In Peru and Mexico, the Company coordinates closely with government environment
agencies and works diligently to comply with all regulations to ensure minimal impact on
the environment. Our community relations programs are based on respect for ethnocultural
diversity, open communication and effective interaction with all stakeholders. The Company
also works with communities towards self-development of economically sustainable activities to
improve their quality of life.
In the Caylloma region of Peru, the Company conducts technical and environmental awareness
workshops, assists in improving educational programs, alpaca breeding and feeding practices
amongst various other activities. At the San Jose Project in Mexico, we conduct regular project
briefings with the community along with local, state and federal authorities. The Company is
also conducting health and environmental workshops, assisting in the development of local
schools´ infrastructures and participating in a collaborative manner in the sustainability of
community social programs.
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CAYLLOMA MINE:
LOW COST PRODUCER, CONSISTENT
CASH GENERATION
1
2
3
1. Caylloma Mine:
Animas Vein
2. Caylloma Mine
3. Caylloma Mine: 1,200 tpd
milling circuit
PROFITABLE
SINCE OPENING
Fortuna’s 100%-owned Caylloma Mine is a low-cost, under-
ground vein mine producing zinc, lead-silver-gold and copper-
silver-gold concentrates. The mine and related concessions cover
more than 10,000 hectares in Arequipa, located in the southern highlands of Peru. Fortuna
acquired the former producer in 2005 and returned it to production a year later. The mine has
operated profitably since opening. Exploration and development are ongoing and an updated
reserve and resource estimation will be produced in 2010.
Caylloma Reserve and Resource Table
CATEGORY
Proven & Probable
Measured & Indicated*
Inferred*
Tonnes
(M)
4.0
0.3
1.3
Ag
(g/t)
156
64
187
Au
(g/t)
0.6
0.3
0.3
Zn
(%)
2.6
2.2
3.3
Pb
(%)
1.7
1.2
1.9
Ag
(M oz)
20.3
0.6
7.7
* Based on a cutoff of US$ 37.15/t. Reserves estimate is based on a cutoff of US$ 47.80/t. Mineral Resources do not include Reserves.
SIGNIFICANT INCREASE IN PRODUCTION AND REVENUES IN 2009
Gross revenues from Caylloma, at US$51.43 million, increased 107% over 2008 revenues of
US$24.87 million. This increase in revenue is explained by higher metal prices, processing plant
expansion, improvements in metal recoveries and higher average grades. 2009 silver output
increased 109% from 805,057* ounces in 2008 to 1,682,546** ounces. The mine achieved
its planned expansion to 1,200 tpd, and production is expected to stabilize for all metals
except copper. A new copper circuit, commissioned in the fourth quarter of 2009, will add 1
million pounds of copper to the production mix in 2010. Silver production is forecast to reach
1,700,000 ounces in 2010 accounting for approximately 45% of revenue. Silver production
is currently forecast to reach 1,700,000 ounces in 2010, although mining of high grade ore
from the new discovery on the upper levels of the Animas Vein may advance Caylloma´s silver
production to the 2 million ounce per year benchmark, approximately 45 to 50% of revenue.
(*) Silver production contained in lead concentrate
(**) Silver production contained in lead and copper concentrates
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Commodities: Silver, Zinc, Lead, Gold, Copper
Location: Arequipa, Peru
(Latitude: 15° 13” S, Longitude: 71° 49” W)
Ownership: 100%
Deposit Type: Intermediate-sulfidation epithermal deposit
Status: - Mine and Processing Plant operating at 1,200 tpd
- Conducting exploration activities for high-grade
silver veins
CAYLLOMA MINE: LOW COST PRODUCER, CONSISTENT CASH GENERATION
2010 Production Guidance
MEDAL PRODUCTION
2010 (FORECAST)
Silver (oz)
Zinc (lb)
Lead (lb)
Copper (lb)
1,700,000
28,400,000
25,200,000
1,000,000
SILVER GRADES IMPROVING
Silver grades continued to improve in 2009, due to the addition of high-grade ores from the
Bateas and Soledad veins. The head grade for silver averaged 155 g/t in 2009, a 63% increase
over the 2008 average of 95 g/t.
LOWER COSTS, HIGHER MARGINS
Caylloma’s cash costs per ounce of silver, net of by-products, continued a downward trend,
reaching negative US$4.93/oz compared with negative US$3.78/oz in 2008.
The mine’s operating margin for 2009 was US$78.00 per tonne of ore compared to US$40.59
for 2008, an increase of US$37 per tonne of processed ore. The Net Smelter Return per
tonne of processed ore was US$124 in 2009 compared to US$87 in 2008. Unit cash costs per
tonne of processed ore were US$46.00 in 2009 compared to US$46.41 in 2008. Process plant
improvements, higher grades and higher mill throughput all contributed to the improved mine
performance.
EXPLORATION AND DEVELOPMENT
FOR FUTURE PRODUCTION
Following the economic downturn in 2008, management modified its short-term focus to
mine development and expansion while de-emphazing exploration activities. This strategy was
designed to increase revenues and operating efficiencies. As market conditions improved in
2009, along with dramatically higher throughput and revenues at Caylloma, Fortuna is investing
more in exploration and resource expansion.
Exploration raises and cross-cuts along the upper portion of the Animas Vein (see Animas Vein
longitudinal section below) late in the year cut high grade silver-gold mineralization above level
6. All production to date from the Animas Vein, source of 85% of Caylloma’s mill feed, has
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1
2
1. Caylloma Mine: High-grade silver ore, Soledad Vein
2. Caylloma Mine: Animas Vein
been derived from beneath the 6th level. Grades from Raise CH 418N returned an average of
1,890 g/t Ag and 5.4 g/t Au over an average sample width of 1.35 meters, while Cross-Cut 418N
averaged 2,110 g/t Ag and 13.27 g/t Au over a true width of 4.36 meters.
Animas Vein - Longitudinal Section (Looking NW)
TJ 388E
TJ 400E
TJ 415W
TJ 415E
Other targets at Caylloma provide additional potential for resource and reserve expansion.
Exploration drilling of the Don Luis II Vein prospect, located in the western portion of the
Caylloma District, was initiated in May of 2010 where surface sampling and mapping have
identified mineralized structures with silver and gold mineralization.
SAN JOSE PROJECT:
FORTUNA´S NEXT MINE
1
2
3
1-3. San Jose Project:
Main access decline
construction activities
POSITIVE PRE-FEASIBILITY,
Subsequent to year end, on April 26, 2010,
CONSTRUCTION BEGINS
Fortuna released the results of a positive Pre-Feasibility
Study (PFS) for the San Jose Project. This study sets
the basis for construction of the Company’s second mine with the goal of commencing
production in the third quarter of 2011.
ANNUAL PRODUCTION: 4.9M OUNCES SILVER EQUIVALENT
The PFS study considers 4.5 years to reach the design capacity of 1,500 tpd and a 9 year mine
life. At the 1,500 tpd production rate, San Jose will produce 4.9 million silver equivalent ounces
annually at a cash cost of US$6.20 per silver equivalent ounce, generating annual revenues of
US$60 million and EBITDAs of US$40 million at projected metal prices of US$15/oz for silver
and US$900/oz for gold.
Mineral Reserve Summary
Reserve
Category
Probable
Diluted
Tonnes
(000)
3,516
Ag Eq Dil
(g/t)
303
Ag Dil
(g/t)
205
Au Dil
(g/t)
1.6
Ag Eq (oz)
(000)
34,202
Ag (oz)
(000)
23,213
Au (oz)
(000)
181
Contained Metal
Mineral Resource Summary*
Reserve
Category
Indicated
Inferred
Tonnes
(000)
3,478
3,074
Ag Eq
(g/t)
364
334
Ag
(g/t)
246
222
Au
(g/t)
1.9
1.8
Ag Eq (oz)
(000)
40,725
32,963
Ag (oz)
(000)
27,486
21,988
Au (oz)
(000)
215
178
Contained Metal
(*) 100 g/t Ag Eq Cutoff, inclusive of Mineral Reserves
CHALLENGES OF RESOURCE CONVERSION IN A VEIN DEPOSIT
The PFS presented challenges due to the limitations a vein deposit imposes on resource
conversion. Although extensive in-fill drilling on 30-meter spacing was completed in the upper
half of the deposit, only 53% of the total estimated resources or 3.5Mt at a 100 g/t Ag Eq
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Commodities: Silver, Gold
Location: Taviche Mining District, Oaxaca, Mexico
(Latitude: 16° 41” N, Longitude: 96° 42” W)
Ownership: 100%
Deposit Type: High-grade, low-sulfidation Ag-Au epithermal deposit
Status: - Pre-feasibility study completed
- Construction of a 1,500 tpd mine initiated Q2 2010
- Exploration of property holdings in-progress
SAN JOSE PROJECT: FORTUNA´S NEXT MINE
cutoff are in the indicated classification with 3.1Mt remaining in the inferred classification.
Approximately 2.8Mt of inferred resources above the break-even cutoff grade are located
within the immediate area of the mineable reserves and will be developed in conjunction
with the modeled mineable reserves. Approximately 800,000 tonnes grading 314 g/t Ag Eq
and containing 8M ounces of equivalent silver are located above the 1,300m level within the
reserve area planned for production in the initial four years of operation. These resources will
be accessed through the same mine development already anticipated for the stated mineable
reserves and their inclusion into the mine plan will allow for a quicker ramp-up to the
design capacity of 1,500 tpd at lower capital expenditure rates than permitted within the
constraints of the PFS.
CONSERVATIVE APPROACH EXCLUDES 5M SILVER EQUIVALENT OUNCES
Approximately 400,000 tonnes of mineralized material containing an estimated 5 million silver
equivalent ounces are located in the upper 100 meters of the deposit where historic mining has
taken place. Due to uncertainty in the exact location and volume of existing workings above the
1450m elevation, these materials have not been included in the reported resource and reserve
inventories for the deposit. As the mine is developed, it is management’s expectation that a
significant portion of these mineralized materials will be converted to mineable reserves.
KEY GOAL: FAST TRACK TO DESIGN CAPACITY AT LOWER CAPITAL INVESTMENT RATE
Based on the opportunities presented through incorporation of the inferred resources
and other mineralized materials into the mine plan, the Company believes that the design
capacity of 1,500 tpd can be achieved within a shorter time period than considered in the
PFS. Inclusion of these materials into the mine plan will result in a significant extension
to the life of the mine and will directly reduce the rate of capital investment required for
underground development on an annualized basis.
FAVORABLE RETURNS PROJECTED
The PFS for the San Jose Project indicates an after-tax internal rate of return of 18% and an
NPV of US$36 million at a discount rate of 8%. The Company believes that there is substantial
opportunity for improvement of the project economic metrics that will be realized as the project
is developed and enters into production
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1
1. San Jose Project: Plant and top soil removal at tailings site
2. San Jose Project: Ocotlan grey water treatment facility
3. San Jose Project: Main access decline construction activities
2
3
SILVER ANALYSIS AND OUTLOOK
TOTAL FABRICATION DEMAND FOR SILVER IN 2009:
608.8 MILLION OUNCES
EXCHANGE TRADED FUNDS’
PHYSICAL SILVER HOLDINGS
18%
Photography
112.3
40%
Jewelry &
Silverware
242.1
ZKB
ETF
SLV
CEF
SIV
ETF Australia
MM Ozs
500
450
400
350
300
250
200
150
100
50
0
Source: CPM Group
Source: CPM Group
2002
2006
2007
2008
2009
2010
OPPOSING MARKET FORCES PUSH
Silver’s average price of US$14.67/oz in 2009
SILVER LOWER IN 2009
was 2% lower than the 2008 average of US$14.97.
reached US$17.50/oz. Silver’s performance in 2009 was in some respects a repeat of 2008,
meaning that its dual identity as both a precious and industrial metal exerted opposing forces
By the end of Q1 2010, however, the price had
on the demand and price trajectory.
NEAR RECORD INVESTMENT DEMAND—AGAIN
The predominant influence on silver by far was the second consecutive year of near-record
high investment demand. Despite silver’s primary role as an industrial metal, its appeal as a
safe haven investment continued to grow. Sovereign debt problems, inflation threats and rising
interest rates were a few of the factors that pushed investors to buy unprecedented amounts of
both physical silver (coins and ingots) and shares of silver ETFs. Sales of U.S. Mint Silver Eagle
coins totaled 28.8 million ounces in 2009, a 47.4% increase over the previous year. Worldwide
coin sales were estimated by CPM Group at 35 million ounces. At the end of 2009, silver ETF
holdings stood at an all-time high of 464.8 million ounces, up 48.1% from 2008. As economic
worries continue, particularly related to the sovereign debt situation and threats of inflation,
investment buying of silver will likely remain strong through 2010.
22%
Other Uses
134.9
20%
Electronics &
Batteries
119.5
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SLUGGISH ECONOMIES AND DECLINING INDUSTRIAL DEMAND
Overall silver demand was tempered in 2009 by continued sluggish fabrication demand.
The ongoing decline in photography film use accounted for much of this drop. However, a
world still emerging from a major recession simply was not buying as many silver-related goods.
CPM Group estimates that fabrication demand fell to 616.4 million ounces in 2009, an 11.3%
decline from 2008. An improving economic outlook, however, should translate into higher
fabrication demand in 2010. Certain sectors, including electronics and batteries, solar panels
and chemical catalysts, are already showing higher sales over 2009.
HIGHER PRICES BRING ON NEW SUPPLY
The relatively high prices for silver throughout 2009 and into 2010 generated a supply increase
of 2.4% over 2008, to a record high 826.1 million ounces, sustaining a 15-year upward trend
in both mine and scrap supply. Mine output, at 554 million ounces, accounted for most of the
increase. Mine supply is expected to exceed 580 million ounces in 2010 as high prices bring
new mines on stream and generate more production from existing mines. New supply was
augmented in 2009 from a 7% increase in secondary scrap—mostly jewelry, silverware, photo-
graphic materials, electronics and batteries.
PERU REMAINS NUMBER ONE SILVER PRODUCER IN THE WORLD
Peru remained the world’s key supplier of silver in 2009, producing a record high 123.9 million
ounces in 2009—a 4.6% increase over 2008. Peru’s silver production has risen sharply over the
past decade and it has surpassed Mexico as the world’s number one silver producer. The coun-
try is estimated to hold 13% of the world’s entire silver reserves.
MEXICO OUTPUT TO RISE DRAMATICALLY
Mexico held its number two spot, producing 104.7 million ounces and increasing 0.6% over
2008. Like Peru, Mexico’s silver output has increased steadily over the past several years. How-
ever, silver production in Mexico is expected to rise nearly 15% in 2010—a dramatic increase
generated in part by the planned startup of Goldcorp’s massive Peñasquito Mine.
*Based on information supplied by CPM Group
COPPER, LEAD, ZINC ANAYLSIS AND OUTLOOK
ALL PRICES UP DRAMATICALLY
Copper, lead and zinc were among the strongest
performers in the commodity complex in 2009.
LME three-month official copper prices rose 136%
in 2009 while lead (LME three-month) and zinc (LME three-month) prices gained 134% and
107%, respectively. At the end of 2009 copper stood at US$7,377 per metric tonnes (Mt), just
16% below its record high of US$8,812 set in July 2008. Significant recoveries were also staged
in lead and zinc, which closed the year at US$2,416 and US$2,596 per Mt, respectively.
CHINA AFFECTING ALL BASE METALS MARKETS
China’s growing economy is significantly impacting the price of all base metals. In 2009,
China’s economy achieved an overall rebound and recovery with annual GDP growth of 8.7%.
Not only is China the largest consumer and producer of all unwrought base metals, for most of
2009 it was a net importer of all base metals.** Chinese imports of copper, lead and zinc rose
to record highs on the back of the Chinese government stockpiling program and restocking by
Chinese consumers. Significant arbitrage opportunities and reduced availability of scrap also
amplified import demand of base metals.
Global Market Share of Chinese Demand
CHINA CONSUMPTION TRENDS
Percentage
2000 2009
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
LEAD
ZINC
COPPER
WILL CONTINUE TO SUPPORT METALS
Chinese domestic demand for many final goods
is still at a nascent stage. If the trend in vehicle
ownership per capita in the United States foreshad-
ows expenditure habits in China, Chinese motor
vehicle ownership may be set to increase more than
three and a half fold over the next 10 years. Last
year the number of motor vehicles relative to popu-
lation in China was at similar levels to those seen
in the United States in 1917. Automobiles employ
lead in their lead-acid batteries and zinc in the die
castings for emblems, moldings, door handles and
brackets. Zinc is also a protective alloy coating in
galvanized steel used for automobile body parts.
* Based on information supplied by CPM Group
**China was a net exporter of unwrought aluminum in December 2008.
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Financial Reports
pg.25
pg.55
pg.56
pg.57
MANAGEMENT’S
DISCUSSION
AND ANALYSIS
CONSOLIDATED
BALANCE
SHEETS
CONSOLIDATED
STATEMENTS OF
OPERATIONS
CONSOLIDATED
STATEMENTS OF
COMPREHENSIVE
INCOME (LOSS)
pg.58
pg.59
pg.60
pg.88
CONSOLIDATED
STATEMENTS OF
CASH FLOWS
CONSOLIDATED
STATEMENTS OF
SHAREHOLDERS’
EQUITY
NOTES TO THE
CONSOLIDATED
FINANCIAL
STATEMENTS
CORPORATE
INFORMATION
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the sig-
nificant factors that have affected Fortuna Silver Mines Inc. and its subsidiaries’ (“Fortuna” or the
“Company”) performance and such factors that may affect its future performance. For a comprehensive
understanding of Fortuna’s financial condition and results of operations, this MD&A should be read in
conjunction with the Company’s audited consolidated financial statements for year ended December
31, 2009 and the related notes contained therein. The Company reports its financial position, results
of operations and cash flows in accordance with Canadian generally accepted accounting principles
(“Canadian GAAP”). In addition, the following should be read in conjunction with the Consolidated
Financial Statements of the Company for the year ended December 31, 2008, the related MD&A, and
Fortuna’s Annual Information Form (available on SEDAR at www.sedar.com). This MD&A refers to vari-
ous non-GAAP measures, such as cash cost per tonne of processed ore, cash cost per ounce of payable
silver, adjusted net income (loss), cash generated by operating activities before changes in working
capital, used by the Company to manage and evaluate operating performance and ability to generate
cash and are widely reported in the silver mining industry as benchmarks for performance. Cash costs
are presented as they represent an industry standard method of comparing certain costs on a per unit
basis. The Company believes that certain investors use these non-GAAP measures to evaluate the Com-
pany’s performance. Non-GAAP measures do not have standardized meaning. Accordingly, non-GAAP
measures should not be considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP. To facilitate a better understanding of these measures as calculated by the
Company, we have provided detailed descriptions and reconciliations where applicable.
This MD&A is prepared as of March 11, 2010.
Certain statements contained in this MD&A and elsewhere constitute forward-looking statements.
Such forward-looking statements involve a number of known and unknown risks, uncertainties and
other factors which may cause the actual results, and performance of achievements of the Company to
be materially different from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, changes in project parameters
to deal with unanticipated economic factors, risks related to technological and operational nature of
the Company’s business, the speculative nature of exploration and development, and changes in local
and national government legislation.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date the statements were made, and readers are advised to consider such forward-looking
statements in light of the risks set forth in the section Risks and Uncertainties.
This MD&A also contains references to estimates of mineral reserves and mineral resources. The es-
timation of reserves and resources is inherently uncertain and involves subjective judgments about
many relevant factors. The accuracy of any such estimates is a function of the quantity and quality
of available data, and of the assumptions made and judgments used in engineering and geological
interpretation, which may prove to be unreliable. There can be no assurance that these estimates will
be accurate or that such mineral reserves and mineral resources can be mined or processed profitably.
FORWARD LOOKING
INFORMATION
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Dollar amounts expressed in US dollars, unless otherwise indicated
Mineral resources that are not mineral reserves do not have demonstrated economic viability. 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.
In particular, forward-looking information and statements include:
• “A pre-feasibility study covering all pre-construction engineering projects for the mine, processing
plant and supporting infrastructure is scheduled to be completed in the first quarter of 2010, with
construction activities to commence shortly thereafter.” (page 28);
• “The ore mix in 2010 is expected to be similar.” (page 32);
• “In 2010, 14,800 m of development and preparation have been budgeted as part of ongoing
operations.” (page 32);
• “The first phase of the project will demand $2.5 million and construction is scheduled for the
second quarter of 2011.” (page 32);
• “The Company expects to publish a pre-feasibility and start construction activities during the first
quarter of 2010. The Company looks forward to commissioning San Jose in 2011, which will drive
further growth in Fortuna’s silver production.” (page 34);
• “The new resource estimate will serve as the basis for pre-feasibility level engineering studies
projected for the first quarter of 2010.” (page 34);
• “The Company´s engineering staff is currently conducting an internal review of the various
engineering projects and continues to work towards the delivery of the final feasibility study by the
first quarter of 2010.” (page 36);
• “Management believes the Company’s cash position as well as its ongoing operation in Caylloma is
sufficient to support the Company’s operating and capital requirements on an ongoing basis.”
(page 38);
• “For 2010, the Company expects to sustain silver production at 1,700,000 ounces, with base
metal production also remaining level at current rates.” 2010 Production Guidance table.
(page 53).
BUSINESS OF THE
COMPANY
Fortuna Silver Mines Inc. (the “Company”) is a mining company focused on producing silver and devel-
oping silver projects in Latin America. The Company’s principal assets are the Caylloma Polymetallic
Mine in southern Peru and the San Jose Silver-Gold Project in southern Mexico.
RECENT
DEVELOPMENTS
AND 2009
HIGHLIGHTS
Financial and Operating Results
During the year ended December 31, 2009, the Company generated record sales of $51.43 million
compared to $24.87 million in 2008, representing an increase of 107%.
In 2009, Caylloma produced 1,682,546 ounces of silver, representing an increase of 109% over the
2008 production of 805,057 ounces of silver. This increase is primarily attributable to a 64% increase
in silver head grade.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
RECENT
DEVELOPMENTS
AND 2009
HIGHLIGHTS
(continued)
The income in 2009 of $0.62 million (2008: loss $0.91 million) was due primarily to record sales of
$51.43 million (2008: $24.87 million) resulting in record mine operating income of $27.73 million
(2008: $3.90 million) offset by losses on our commodity hedge book. The Company’s base metal price
protection program generated a loss on commodity contracts of $7.36 million during 2009 compared
to a gain of $4.27 million in 2008.
Adjusting for the mark-to-market effect on the loss on commodity contracts, a non-GAAP measure, the
year of 2009 resulted in adjusted net income of $1.98 million compared to a loss of $1.30 million in
2008.
NET (LOSS) INCOME FOR THE PERIOD
Items of note, net of tax:
Mark to Market effect on derivatives
ADJUSTED NET INCOME (LOSS) FOR THE PERIOD(1)
(1) A non-GAAP measure
Expressed in millions
Years ended December 31,
2009
0.62
$
$
$
1.36
1.98
$
2008
(0.91)
(0.39)
(1.30)
Cash generated by operating activities before changes in working capital, a non-GAAP measure, for the
year was $15.91 million up from $8.65 million in 2008.
During the year ended December 31, 2009, silver production amounted to 1,755,017 ounces with a
negative cash cost per ounce of payable silver of $4.93, net of by-product credits. In 2009, 395,561
tonnes of ore were treated compared to 331,380 tonnes in the prior year and the cash cost per tonne
of treated ore was $46.00 (Cash cost is a non-GAAP measure). See page 37 for reconciliation of cash
cost to the cost of sales in the consolidated statement of operations.
Financing
On January 6, 2010, the Company signed a commitment letter to enter into a $20 million senior se-
cured revolving credit facility with The Bank of Nova Scotia. The facility has a 2.5 year maturity. The
proceeds of the facility may be used for general corporate purposes, including the development of the
San Jose Project in Mexico. The facility is intended to complement Fortuna’s strong cash position and
provide additional financing flexibility during the construction stage at San Jose. No funds have been
drawn under this facility.
On February 3, 2010, the Company entered into a bought deal financing (“Offering”) with a syndicate
of underwriters co-led by CIBC and Canaccord Financial Ltd.
The Offering closed on March 2, 2010 and the Company issued 15,007,500 common shares at a
price of CAD$2.30 per shares (refer to Note 16.a) under the bought deal financing for gross proceeds
of CAD$34.5 million. Net proceeds of CAD$32.8 million after underwriting fees of CAD$1.7 million
were raised from the bought deal financing.
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Dollar amounts expressed in US dollars, unless otherwise indicated
The Company intends to use the net proceeds from the Offering to partially fund the construction of
its 100% owned San Jose project in the state of Oaxaca, Mexico and for general corporate purposes.
Approval of Change of Land Use for San Jose Project, Mexico
On December 14, 2009, the “Secretaria de Medio Ambiente y Recursos Naturales” (Mexican Envi-
ronmental Agency) approved the Company’s application for a change of land use from agricultural to
industrial for the San Jose silver-gold project, located in the southern State of Oaxaca, Mexico.
This is the final permit required to commence construction activities and complements the Environ-
mental Impact Study, which was approved in late October 2009.
A pre-feasibility study covering all pre-construction engineering projects for the mine, processing plant
and supporting infrastructure is scheduled to be completed in the first quarter of 2010, with construc-
tion activities to commence shortly thereafter.
Exchange Listings
The Company’s common shares began trading on the Toronto Stock Exchange (TSX) at the opening of
trading on Monday, January 18, 2010 under the symbol “FVI”.
Discovery of high-grade silver-gold at Caylloma Mine, Peru
On February 2, 2010, the Company announced the discovery of high-grade silver-gold mineralization
in the upper portion of the Animas Vein at the Caylloma Mine in southern Peru. The Animas vein,
traditionally a polymetallic vein, is the source of 85% per cent of production at the Caylloma mine. The
Company is currently investigating the impact of the new discovery and are working to define resources
to be included in the mine plan.
SELECTED
ANNUAL
INFORMATION
Expressed in $000’s, except per share data
Sales
Income before income taxes and non-controlling interest
Net income (loss)
Earnings (loss) per share, basic and diluted
Total assets
Long term liability
2009
51,428
6,312
623
0.01
Years Ended December 31,
2008
24,867
687
(910)
(0.01)
2007
29,796
1,566
(2,437)
(0.04)
139,738
115,368
126,860
1,454
1,382
411
In 2009, the Company generated record sales of $51.43 million compared to $24.87 million in 2008.
This increase was primarily driven by higher silver and lead head grades, in particular silver which
increased by 64%, higher throughput, and reduced treatment charges. Sales in 2008, decreased
from 2007, by 16.5% in spite of higher metal production due to decreased unit values of concentrates
comprised of decreases in metal prices and increases in smelter treatment charges.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
QUARTERLY
INFORMATION
The following table provides information for the eight fiscal quarters ended December 31, 2009:
Expressed in $000’s, except per share data
Quarters Ended
Sales
Mine operating
income (loss)*
Net income (loss)
Earning (loss)
per share - basic
- diluted
31-Dec-09 30-Sep-09 30-Jun-09 31-Mar-09 31-Dec-08 30-Sep-08 30-Jun-08 31-Mar-08
6,808
13,230
12,862
8,980
2,795
7,492
7,772
16,356
10,376
1,037
0.01
0.01
7,074
(556)
(0.01)
(0.01)
6,792
1,196
3,487
(1,054)
(2,986)
(2,468)
0.01
0.01
(0.02)
(0.02)
(0.03)
(0.03)
1,734
(297)
0.00
0.00
2,848
2,493
0.03
0.03
2,303
(638)
(0.01)
(0.01)
* Mine operating income (loss) is a non-GAAP measure used by the company as a measure of operating performance.
Sales have consistently increased quarter over quarter since the fourth quarter of 2008 with the fourth
quarter of 2009 reaching a record high at $16.36 million. This upward trend in sales is mainly at-
tributable to increases in metal prices. Higher sales throughout 2009 compared to the corresponding
quarters of 2008 have been significantly driven by higher silver head grades, higher production, and
lower treatment charges.
FINANCIAL
RESULTS
During the year ended December 31, 2009, the Company generated record sales of $51.43 million
compared to $24.87 million in 2008, representing an increase of 107%.
When broken down by type of concentrate: silver-lead concentrate sales increased in tonnage by 50%,
and the unit value of concentrate increased by 11%. The latter increase is a result of lower smelter
treatment charges of $197 per ton of concentrate and higher silver grade offset by a 18% and 2%
decrease in lead and silver prices, respectively. Zinc concentrate sales increased in tonnage by 23%
and the unit value of concentrate increased by 4%. The latter increase is a result of lower smelter
treatment charges of $140 per ton of concentrate offset by a 12% decrease in the metal price.
During the year ended December 31, 2009, mine operating income was $27.73 million, 6 times above
the $3.90 million achieved in the same period of 2008. This improvement is a reflection of improved
head grades, higher throughput, increased recoveries, and better commercial terms. Contributing
negatively to the income for the year of $0.62 million (2008: loss $0.91 million) is primarily the non-
operating loss in commodity contracts of $7.36 million (2008: gain $4.27 million).
Mark-to-Market effect: Included in the $7.36 million loss recorded on commodity contracts, is a mark-
to-market effect of $1.36 million, net of tax, related to open contracts as at the end of December 2009
expiring between the months of January 2010 and December 2010.
Total cost of sales, including depletion, depreciation and accretion, in 2009 totalled $23.70 million
(2008: $20.97 million) and represents an increase of 13% over 2008. While tonnage of concentrate
sold during 2009 increased 35% compared to 2008, cost of sales increased only by 13%. Lead and
silver head grades increased by 25% and 64%, respectively, over 2008. Other things being equal, an
increase in head grades will deliver higher concentrate production for equal or similar production costs.
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Dollar amounts expressed in US dollars, unless otherwise indicated
Selling and administrative expenses in 2009 increased 22% to $9.56 million (2008: $7.82 million).
The increase is due mainly to higher selling expenses associated with higher tonnage of concentrate
sold. Corporate general and administrative expenses increased by $0.67 million to $4.06 million
(2008: $3.39 million); selling and administrative expenses increased by $0.81 million to $5.01 mil-
lion (2008: $4.20 million); and government royalty paid by Minera Bateas increased by $0.26 million
to $0.49 million (2008: $0.23 million).
Stock-based compensation charge totalled $2.71 million compared to $1.35 million in 2008.
Interest and other income and expenses in 2009 amounted to net income of $0.43 million compared
to net income of $1.36 million in 2008. The decrease is attributable to the Company holding a com-
paratively smaller average cash balance and a reduction in interest rates.
Interest and finance expenses in 2009 were $0.16 million compared to $0.10 million in 2008. Inter-
est expenses relate primarily to capital lease operations at our operating subsidiary.
Net loss on commodity contract in 2009 amounted to $7.36 million compared to a net gain of $4.27
million in 2008. This amount reflects the change in fair value of derivative contracts between the
opening of the reporting period and either the expiry of the contracts or the closing of the period,
whichever happened first. Included in the $7.36 million loss recorded on commodity contracts, is a
mark-to-market effect of $2.17 million ($1.36 million net of tax) related to open contracts as at the
end of December 2009 expiring between the months of January 2010 and December 2010. The Com-
pany has entered into short term commodity forward and option contracts to secure a minimum price
level on part of Caylloma’s zinc and lead metal production, and enters regularly into forward lead and
zinc contracts with banks to fix the final settlement price of metal delivered in concentrates, where the
final settlement price is yet to be set at a future quotational period according to contract terms. The
Company does not use hedge accounting.
The $5.87 million Income tax provision recorded for 2009 (2008: $1.70 million) comprises current
and future income tax expense. Current income tax for the period, including the worker profit sharing
plan regulated by Peruvian law was $5.08 million (2008: $nil). Future income tax expense, amount-
ing to $0.79 million (2008: $1.70 million) is attributed to temporary differences arising on amounts
of mineral properties at Peruvian operations where exploration and development are expensed for tax
purposes.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
RESULTS OF
OPERATIONS
Peru - Caylloma Ag-Pb-Zn Mine
Caylloma Mine
Tonnes milled
Average tons milled per day
Head Grade
Silver (g/t)
Lead (%)
Zinc (%)
Copper (%)*
Recoveries
Silver (%)**
Lead (%)
Zinc (%)
Copper (%) *
Production (metal contained)
Silver (oz)***
Lead (lbs)
Zinc (lbs)
Copper (lbs)*
Average Selling Price
Silver (US$ per oz)
Lead (US$ per lb)
Zinc (US$ per lb)
Copper (US$ per lb)*
Unit cash cost and Net smelter return
Unit cash cost (US$/oz ag)
Unit Net Smelter Return (US$/tonne)
* Copper figures for the month of December 2009
** Silver recovery in lead and copper concentrates
*** Silver production contained in lead and copper concentrates
Years ended December 31,
2008
331,381
936
2009
395,560
1,121
154.76
3.10
3.66
0.24
85.40
93.02
89.07
51.94
94.58
2.48
3.65
na
79.47
90.69
87.39
na
1,682,546
25,137,107
28,441,836
88,185
805,057
16,501,600
23,283,019
na
14.65
0.78
0.75
3.17
(4.93)
124.00
15.02
0.95
0.85
na
(3.78)
87.00
In 2009, the Caylloma mine increased throughput by 19% compared to 2008 by processing 395,560
tonnes of ore, and surpassed its silver production forecast by 5%. Production in 2009, as compared
to 2008, increased as follows:
• silver production increased by 109% to 1,682,546 ounces;
• lead metal production increased by 52% to 25,137,107 pounds;
• zinc metal production increased by 22% to 28,441,836 pounds; and,
• exceeded the Company’s silver production forecast of 1.6 million ounces by 5%.
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Increments against 2008 were achieved through a combination of higher grades, improved metallurgi-
cal recoveries, and a higher throughput which reached an average of 1,121 tonnes per day (“tpd”) in
2009, 20% above the average throughput rate of 936 tpd in 2008.
Mine production throughout the year took place principally on the polymetallic Animas vein which pro-
vided 85% of ore sourced to the mill in 2009. The balance was sourced as follows: 9% from high grade
silver veins Soledad and Bateas, and 6% from existing ore stocks. The ore mix in 2010 is expected to
be similar.
Total underground preparation and development in 2009 amounted to 9,800 m, below the 13,000
m drifted in 2008. The gradual return to normality in metal prices throughout the year allowed the
Company to get back on track with respect to required mine development after the significant budget
cutbacks at the end of 2008 and the beginning of 2009. In 2010, 14,800 m of development and
preparation have been budgeted as part of ongoing operations.
In 2009, the Company successfully commissioned the expansion project that allowed a ramp up in
plant capacity to 1,200 tpd and the addition of a copper circuit. The copper project started commer-
cial production in December of 2010 and is now operating at sustained recoveries of 56%.
In 2009, the Company completed the feasibility study for a new tailings facility. Total estimated capital
for the project is $6.8 million for a capacity equivalent to 15 years of operations. The first phase of
the project will demand $2.5 million and construction is scheduled for the second quarter of 2011.
Cash cost per ounce of payable silver net of by-product credits at Caylloma was negative $4.93 in
2009, a 30% drop compared to 2008 (2008: negative $3.78) attributable to a 45% increase in by-
product credits and a 108% increase in payable silver ounces. Cash cost per tonne of treated ore in
2009 decreased by 1% to $46.00 (2008: $46.41). (See page 37 for reconciliation of cash production
cost to the cost of sales in the consolidated statement of operations).
On July 16, 2009, the Company released an updated NI 43-101 resource estimation for Caylloma.
The NI 43-101 Technical Report was filed on August 27, 2009. Highlights of the resource & reserve
estimation include:
• Proven and Probable Mineral Reserves are estimated at 4.03 million tonnes averaging 156 g/t Ag,
0.55 g/t Au, 1.70% Pb and 2.58% Zn;
• Contained silver is estimated at 20.3 million ounces, representing a 304% increase in silver ounces
in the Proven and Probable reserve categories over the previous resource and reserve estimate (NI
43-101 Technical Report published October 3, 2006);
• Inferred Mineral Resources are estimated at 1.3 million tonnes averaging 187 g/t Ag, 0.29 g/t Au,
1.92% Pb and 3.25% Zn;
• Contained silver in the Inferred Resource category is estimated at 7.7 million ounces.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
RESULTS OF
OPERATIONS
(continued)
Discovery of high-grade silver-gold at Caylloma Mine, Peru
On February 2, 2010, the Company announced the discovery of high-grade silver-gold mineralization
in the upper portion of the Animas Vein at the Caylloma Mine in southern Peru. The Animas vein, tra-
ditionally a polymetallic vein, is the source of 85% per cent of production at the Company’s Caylloma
mine. The Company is currently investigating the impact of the new discovery and are working to define
resources to be included in the Company’s mine plan.
Price protection program
During the year, the Company entered into commodity forward and option contracts to secure a mini-
mum price level on part of its Caylloma’s zinc and lead metal production throughout the period covering
February 2009 to December 2010 with the objective of securing short term capital requirements for
project development.
The counterparties are Standard Bank PLC, Banco Bilbao Vizcaya Argentaria, S.A., Macquarie Bank
Limited, Goldman Sachs, and Scotia Bank.
Forward Sales Contracts - Swap Basis
The contracts are spread evenly over the periods shown below with settlement occurring on a monthly
basis. No initial premium associated with these trades has been paid.
The following forward sale contracts were entered into on a SWAP basis, as defined below:
January 2009 - settlements throughout February 2009 to July 2009:
Lead forward contracts: $1,109/t, for the total of 3,150 tons
Zinc forward contracts: $1,240/t, for the total of 3,850 tons
July 2009 - settlements throughout August 2009 to December 2009:
Lead forward contracts: $1,645/t, for the total of 2,675 tons
Zinc forward contracts: $1,561/t, for the total of 3,000 tons
August 2009 - settlements throughout January 2010 to June 2010:
Lead forward contracts: $1,910/t, for the total of 1,800 tons
Zinc forward contracts: $1,787/t, for the total of 1,050 tons
The SWAP basis contracts are settled against the arithmetic average of zinc and lead spot prices over
the month in which the contract matures.
Put and Call Option Commodity Arrangements
As at December 31, 2009, the Company had entered into a series of put and call option commodity
arrangements. A long put refers to put options that have been bought by the Company, and a short call
refers to call options that have been sold by the Company. Settlement of these options occurs monthly
during the period of January 2010 to December 31, 2010 as follows:
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Period January 2010 - June 2010
The following Zinc Option contracts were entered into:
• 6 Long put options at strike price:
• 6 Short call options at strike price:
$2,000/t, for the total of 2,100 tons
$3,010/t, for the total of 2,100 tons
The following Lead Option contracts were entered into:
• 6 Long put options at strike price:
• 6 Short call options at strike price:
$2,000/t, for the total of 1,200 tons
$2,975/t, for the total of 1,200 tons
Period July 2010 - December 2010
The following Zinc Option contracts were entered into:
• 6 Long put options at strike price:
• 6 Short call options at strike price:
$2,000/t, for the total of 3,150 tons
$3,010/t, for the total of 3,150 tons
The following Lead Option contracts were entered into:
• 6 Long put options at strike price:
• 6 Short call options at strike price:
$2,000/t, for the total of 2,850 tons
$2,974/t, for the total of 2,850 tons
Mexico - San Jose Silver-Gold Project
With the recent granting of the Change of Land Use permit (see Fortuna news release dated December
14, 2009), Fortuna now has all of the key permits necessary to start construction at San Jose. Proj-
ect staffing for the construction phase is being conducted and the Company has initiated selective
searches for long lead equipment.
The Company expects to publish a pre-feasibility and start construction activities during the first quar-
ter of 2010. The Company looks forward to commissioning San Jose in 2011, which will drive further
growth in Fortuna’s silver production.
For financing of this project, refer to Liquidity and Capital Resources (page 38).
Trinidad Resource Estimation
On October 26, 2009, the Company released an updated NI 43-101 resource estimation for San Jose,
with the full NI 43-101 released on December 10, 2009. Highlights are as follows:
Indicated Resources have increased 83% to 2.69 million tonnes with contained silver equivalent ounc-
es increasing 112% to 37.6 million Ag Equivalent1 ounces. Silver and gold grades in the Indicated
Resource category have increased by 12% to 295 g/t and 4% to 2.27 g/t, respectively. The new re-
source estimate will serve as the basis for pre-feasibility level engineering studies projected for the first
quarter of 2010.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
RESULTS OF
OPERATIONS
(continued)
At a cut-off grade of 150 g/t Ag Equivalent, the Indicated and Inferred Mineral Resources for the Trini-
dad Zone at San Jose are estimated at:
Indicated Mineral Resource:
2.69 million tonnes grading 295 g/t Ag and 2.27 g/t Au containing 37.6 million Ag Equivalent1 ounces
Inferred Mineral Resource:
2.41 million tonnes grading 262 g/t Ag and 2.11 g/t Au containing 30.4 million Ag Equivalent1 ounces.
1 Silver equivalency estimates were derived using metal prices of US$13.75/oz for silver and US$856.16/oz for gold (36-month average + 24 month future metal prices as of July
31, 2009). Metallurgical recoveries were estimated at 92.5% for silver and 91.5% for gold based on metallurgical testing completed by Metcon Research of Tucson, Arizona as of
March 2009.
The resource estimate incorporates data from 196 core drill holes totaling 64,204 meters and 908
underground channel samples. Previously reported NI 43-101 compliant resources for San Jose were
estimated at 1.47 million tonnes grading 263 g/t Ag and 2.19 g/t Au in the Indicated category and
3.9 million tonnes grading 261 g/t Ag and 2.57 g/t Au in the Inferred category (see March 31, 2007
Technical Report available on the company website (www.fortunasilver.com) and on SEDAR).
Approval of Environmental Impact Study
On October 23rd, 2009, the “Secretaria de Medio Ambiente y Recursos Naturales” (Mexican Envi-
ronmental Agency) delivered the approval of the Environmental Impact Study for full mine and mill
construction and operation at the San Jose silver-gold project, located in the southern State of Oaxaca,
Mexico.
The October 23rd, 2009 government approval authorizes the construction and future operation of the
San Jose Mine, including the underground workings, processing plant, tailings facility and other sur-
face infrastructure for a 1,500 tonne per day operation within an area of ninety-two hectares.
The permit contemplates a processing plant that will use conventional flotation for production of high
grade silver- and gold- bearing concentrates, without the use of cyanide. The primary source of indus-
trial water for the project will be from a gray-water treatment facility located thirteen kilometers from
the mine site.
Approval of Change of Land Use
On December 14, 2009, the “Secretaria de Medio Ambiente y Recursos Naturales” (Mexican Envi-
ronmental Agency) approved the Company’s application for a change of land use from agricultural to
industrial for the San Jose silver-gold project, located in the southern State of Oaxaca, Mexico.
This is the final permit required to commence construction activities and complements the Environ-
mental Impact Study, which was approved in late October 2009.
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Other permits
On April 28, 2009, the “Comision Federal de Electricidad” (Mexican Federal Energy Commission)
issued the permit to connect to the national power grid for up to five megawatts; sufficient power to
cover the requirements of a 1,500 tonnes per day mine operation. The transformer sub-station site
will be located within five hundred meters of the main high voltage power line which runs through the
Company´s property.
Project Engineering
The Company has received from its consultants all the engineering design that form up the San Jose
Pre-Feasibility Study which include the processing plant, tailings facility, power project, water project,
surface infrastructure, mine design, and other matters. The Company´s engineering staff is currently
conducting an internal review of the various engineering projects and continues to work towards the
delivery of the final feasibility study by the first quarter of 2010.
The Company has engaged North American engineering firm CAM to provide Qualified Person supervi-
sion for the project engineering and to author required Technical Reports.
Mexico - Tlacolula Silver Project
The 12,000 ha Tlacolula property is located 14km E-SE of the city of Oaxaca, 20km north of the
Taviche District, where high-grade silver has been mined since Spanish colonial times, and is 30km
northeast of the Company’s 100% owned San Jose silver-gold development project.
In September 2009, the Company, through its wholly owned subsidiary, Cuzcatlan, was granted an
option (the “Option”) to acquire a 60% interest (the “Interest”) in the Tlacolula silver project (“prop-
erty”) located in the State of Oaxaca, Mexico from Radius Gold Inc.’s wholly owned subsidiary, Radius
(Cayman) Inc. (“Radius”) (a related party by way of directors in common with the Company). The Com-
pany can earn the Interest by spending $2 million, which includes a commitment to drill 1,500 meters
within three years, and making staged annual payments of $0.25 million cash and $0.25 million in
common stock of the Company to Radius according to the following schedule:
• $0.02 million cash and $0.02 million cash equivalent in shares upon stock exchange approval;
• $0.03 million cash and $0.03 million cash equivalent in shares by the first year anniversary;
• $0.05 million cash and $0.05 million cash equivalent in shares by the second year anniversary;
• $0.05 million cash and $0.05 million cash equivalent in shares by the third year anniversary; and,
• $0.10 million cash and $0.10 million cash equivalent in shares by the fourth year anniversary.
Upon completion of the cash payments and share issuances, and incurring the exploration expenditures
as set forth above, the Company will be deemed to have exercised the Option and acquired a 60%
interest in the property, whereupon a joint venture will be formed to further develop the property on the
basis of the Company owning 60% and Radius 40%.
On January 15, 2010, the transaction was approved by the TSX Venture Exchange, The Company has
issued 7,813 common shares of the Company at a fair market value of $2.56 per share and paid $0.02
million cash according to the terms of the option agreement.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
CASH COST
PER SILVER OUNCE
AND CASH COST
PER TONNE
(NON-GAAP
MEASURES)
Cash cost per ounce and cash cost per tonne are key performance measures that management uses
to monitor performance. In addition, cash costs are presented as they represent an industry standard
method of comparing certain costs on a per unit basis and management believes that certain investors
use these non-GAAP measures to evaluate the Company’s performance. These performance measures
have no meaning within Canadian Generally Accepted Accounting Principles (“Canadian GAAP”), and,
therefore, amounts presented may not be comparable to similar data presented by other mining com-
panies.
The following table presents a reconciliation of cash costs per tonne of processed ore and cash cost per
ounce of payable silver to the cost of sales in the consolidated statement of operations for the years
ended December 31, 2009 and 2008.
Cost of sales
Add / (Subtract)
Change in inventory (ore and concentrate stock piles)
Depletion, depreciation, and accretion
Cash cost
$’000’s
Years ended December 31,
2008
20,968
2009
23,699
442
(5,944)
18,197
(225)
(5,363)
15,380
Total processed ore (tonnes)
395,561
331,380
Cash cost per tonne of processed ore ($/t)
Cash cost
Add / (Subtract)
By-product credits 1
Refining charges
Cash cost applicable per payable ounce
46.00
18,197
(27,318)
1,416
(7,705)
46.41
15,380
(18,879)
659
(2,840)
Payable silver ounces
1,563,775
750,822
Cash cost per ounce of payable silver ($/oz)
(4.93)
(3.78)
1 By-product credits are included in the provisional liquidation
LIQUIDITY AND
CAPITAL
RESOURCES
The Company’s cash as at December 31, 2009 was $30.76 million (2008: $29.45 million) and $6.03
million (2008: $nil) in short term investments.
During 2009, cash generated by operating activities before changes in working capital was $15.91
million. Further liquidity consumed by changes in working capital amounted to $2.22 million, for total
cash generated by operating activities of $13.69 million.
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Dollar amounts expressed in US dollars, unless otherwise indicated
During 2009, the Company invested a total amount of $11.02 million in mineral properties, $3.10 mil-
lion in plant and equipment, and $5.99 million in short term investments. Additionally, the Company
collected a net amount of value added tax refundable credit from the Mexican Government of $2.90
million. This is net of value added tax disbursements on local expenses during the period.
As at December 31, 2009, the Company’s working capital amounted to $36.14 million compared to
working capital of $34.06 million at December 31, 2008.
On January 6, 2010, the Company signed a commitment letter to enter into a $20 million senior se-
cured revolving credit facility with The Bank of Nova Scotia. The facility has a 2.5 year maturity. The
proceeds of the facility may be used for general corporate purposes, including the development of the
San Jose Project in Mexico. The facility is intended to complement Fortuna’s strong cash position and
provide additional financing flexibility during the construction stage at San Jose. No funds have been
drawn under this facility.
On March 2, 2010 and the Company issued 15,007,500 common shares at a price of CAD$2.30
per shares, under the bought deal financing for gross proceeds of CAD$34.5 million. Net proceeds of
CAD$32.8 million after underwriting fees of CAD$1.7 million were raised from the bought deal financing.
Management believes the Company’s cash position as well as its ongoing operation in Caylloma is suf-
ficient to support the Company’s operating and capital requirements on an ongoing basis. Actual fund-
ing requirements may vary from those planned due to further acquisition opportunities. Management
believes it will be able to raise equity capital or access debt facilities as required in both the short and
long term, but recognizes the uncertainty attached thereto.
GUARANTEES AND
INDEMNIFICATIONS
The Company may provide guarantees and indemnifications in conjunction with transactions in the
normal course of operations. These are recorded as liabilities when reasonable estimates of the obliga-
tions can be made. Indemnifications that the Company has provided include obligation to indemnify:
•
•
directors and officers of the Company and its subsidiaries for potential liability while acting as a
director or officer of the Company, together with various expenses associated with defending and
settling such suits or actions due to association with the Company;
certain vendors of acquired company for obligations that may or may not have been known at the
date of the transaction.
The Company acts as a guarantor to capital lease obligations held by two of its mining contractors.
These capital lease contracts are related to the acquisition of mining equipment deployed at the Cayl-
loma mine.
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 our financial condition, results of operations, liquidity, capital expen-
ditures, or capital resources that is material to investors, other than those disclosed in this MD&A and
the consolidated financial statements and the related notes.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
RELATED PARTY
TRANSACTIONS
(EXPRESSED
IN $’000’S)
The Company incurred charges from directors, officers, and companies having a common director or
officer as follows:
Expressed in $’000’s
Years ended December 31,
Transactions with related parties
Consulting fees1
Salaries and wages2,3
other general and administrative expenses3
$
$
2009
145
122
159
426
$
$
2008
62
104
74
240
1
2
2,3
Consulting fees includes fees paid to two directors, Simon Ridgway and Mario Szotlender.
Salaries and wages includes employees’ salaries and benefits charged to the Company based on an estimated percentage of the actual hours worked for the Company
Radius Gold Inc. (“Radius”) has directors in common with the Company and shares office space, and is reimbursed for various general and administrative costs incurred on
behalf of the Company.
In September 2009, the Company was granted an option to acquire a 60% interest in the Tlacolula
silver project located in the State of Oaxaca, Mexico from Radius. Refer to Notes to the Consolidated
Financial Statements Note 10. c).
Amounts due to/(from) related parties
Owing (from)/to a director and officer4
Owing to a company with common directors3
Expressed in $’000’s
December 31, 2009
(1)
50
49
$
$
$
December 31, 2008
-
38
38
$
$
$
4
Owing from a director includes a non-interest bearing loan to Jorge A. Ganoza Durant with no specific terms of repayments.
The transactions with related parties are measured at the agreed upon exchange amount, which is the
amount of consideration established and agreed upon by the parties. The balances with related parties
are unsecured, non-interest bearing, and payable in the normal course of business.
CRITICAL
ACCOUNTING
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated finan-
cial statements and the reported amounts of revenue and expenses during the reporting periods. These
estimates and assumptions are based on established industry standards, historical experience, and are
reviewed on an ongoing basis to confirm their continued applicability.
Depletion and Mineral Properties Cost
Mineral property costs are comprised of acquisition costs and capitalized exploration, construction and
development costs. Upon initiating production, the asset is depleted over its estimated useful life on
a units-of-production basis. The Company estimates reserves and resources and the economic life of
its mines and utilizes this information to calculate depletion expense. Depletion charges are adjusted
prospectively based on periodic re-assessments of the Company’s mineral reserves.
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Dollar amounts expressed in US dollars, unless otherwise indicated
The estimate of mineral reserves is prepared by Qualified Persons in accordance with industry stan-
dards defined under NI 43-101 of the Canadian Securities regulatory authorities. Mineral reserve
estimates can change over time as a result of numerous factors, including changes in metal prices,
production costs, or the re-evaluation of geological, engineering and economic data of a deposit. A
significant reduction in mineral reserves would have a negative impact on the calculation of the deple-
tion of this asset.
Asset Retirement Obligations
Fortuna’s determination for asset retirement obligations involves estimation of timing and amounts of
future costs relating to ongoing environmental and mine closure activities required under applicable
law or the Company’s own remediation plans. These estimates are subject to significant uncertainties
because many of these costs will not be incurred for a number of years, the nature of the reclamation
activities might change and the assumptions regarding the rate of inflation and credit risk-adjusted
interest rate used in the calculation may vary over time. Therefore, actual costs and their timing might
differ from current estimates.
Impairment of Long-lived Assets
Management reviews and evaluates its long-lived assets for impairment when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable. Examples of such
events or circumstances are changes in metal prices, sudden physical deterioration of the asset, legal
circumstances or political risks in the countries Fortuna operates, or other external factors which could
have a significant impact on the operations of the Company. Impairment is considered to exist if total
estimated future cash flows or probability-weighted cash flows on an undiscounted basis are less than
the carrying amount of the assets, including mineral property, plant and equipment and non-producing
property. An impairment loss is measured and recorded based on discounted estimated future cash
flows or the application of an expected present value technique to estimate fair value in the absence
of a market price. Future cash flows include recoverable proven and probable reserves and a portion
of recoverable resources, silver, zinc, copper, lead and gold prices (considering current and historical
prices, price trends and related factors), production levels, capital and reclamation costs, all based on
detailed engineering life-of-mine plans. Assumptions underlying future cash flow estimates are subject
to risks and uncertainties. Any differences between significant assumptions and market conditions
and/or the Company’s performance could have a material effect on any impairment provision, and on
the Company’s financial position and results of operations.
Income Taxes
The estimation of the Company’s future tax liabilities and assets involves significant judgment around
a number of assumptions. Judgement must be used to determine the Company’s future earning poten-
tial, and the expected timing of the reversal of future tax assets and liabilities. Further uncertainties
are the result of interpretation of tax legislation in a number of jurisdictions which might differ from
the ultimate assessment of the tax authorities. These differences may affect the final amount or the
timing of the payment of taxes.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
CRITICAL
ACCOUNTING
ESTIMATES
(continued)
Stock-based Compensation
The determination of the value of stock-based compensation is estimated using the Black-Scholes
option pricing model. Option pricing models require the input of highly subjective assumptions, par-
ticularly as to the expected price volatility of the stock. Other assumptions include the expected life of
the options and the risk-free interest rate at the time of the grant. Changes in these assumptions can
materially affect the fair value estimated.
FINANCIAL
INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and accrued liabilities, due to re-
lated parties, net approximate their fair value due to the relatively short periods to maturity and the
terms of these financial instruments.
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates are subjective in nature and involve un-
certainties and matters of significant judgement and, therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
The Company enters into derivative contracts to manage its exposure to fluctuations in base metal
prices. These contracts are marked-to-market at the end of each period, and the changes in estimated
fair value are recorded as an unrealized gain (loss) on commodity contracts in the statement of opera-
tions. As at December 31, 2009 the Company estimated the fair value of the outstanding contracts to
constitute a liability of $3.06 million, and recorded a loss in the consolidated statements of operations
for the year of $7.36 million. The estimated fair value was determined based on using applicable valu-
ation techniques for commodity options with reference to the published market prices for underlying
commodities quoted at the London Metal Exchange.
The long term investments in marketable securities are classified as available-for-sale and are mea-
sured at fair value at the end of each period. Fair value of these investments is determined based on
published market prices of underlying securities. Change in fair values of available-for-sale marketable
securities is recognized in other comprehensive income. At December 31, 2008 the Company had an
investment in 3,706,250 shares of Continuum. These shares were de-recognized upon the Company’s
acquisition of Continuum on March 6, 2009 and a loss of $0.46 million was recorded in the statement
of operations to reflect the realization of the loss.
The Company’s financial instruments are exposed to certain financial risks, including currency risk,
credit risk, liquidity risk, interest risk, and metal price risk.
(a) Fair value of financial instruments
The Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3862 “Financial Instru-
ments - Disclosure” requires disclosure of a three-level-hierarchy for fair value measurements based
upon transparency of inputs to the valuation of financial instrument carried on the balance sheet at fair
value. The three levels are defined as follows:
• Level 1 - inputs to the valuation methodology are quoted (unadjusted) for identical assets or li-
abilities in active markets.
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Dollar amounts expressed in US dollars, unless otherwise indicated
• Level 2 - inputs to valuation methodology include quoted market prices for similar assets and li
abilities in active markets, and inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument.
• Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value of
measurement.
The carrying value of cash, short term investments, accounts receivable, accounts payable and accrued
liabilities, due to related parties, net, approximate their fair value due to the relatively short periods to
maturity and the terms of these financial instruments.
Fair value estimates are made a specific point in time, based on relevant market information and infor-
mation about the financial instrument. These estimates are subjective in nature and involve uncertain-
ties and matters of significant judgement and, therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
The Company has classified the determination of fair value of accounts receivable, and derivatives as
level 2, as the valuation method used by the Company includes an assessment of assets in quoted
markets with significant observable inputs.
Short term investments
Accounts receivable
Derivatives
Expressed in ‘000’s
Financial assets (liabilities) at fair value as at December 31, 2009
Level 1
6,034
-
-
6,034
$
$
Level 2
-
8,322
(3,055)
5,267
$
$
$
$
Level 3
-
-
-
-
$
$
Total
6,034
8,322
(3,055)
11,301
1
Comparative information has not been presented in the table because this information is not required in the year of adoption. For periods subsequent to the year of adoption
comparative information would be necessary.
Accounts receivable includes accounts receivable from provisional sales. The fair value of accounts
receivable resulting from provisional pricing reflect observable market commodity prices. Resulting fair
value changes accounts receivable are through sales. Transactions involving accounts receivable are
with counterparties the Company believes are creditworthy.
Derivatives are carried at their fair value, which is determined based on internal valuation models that
reflect observable forward market commodity prices. Resulting fair value changes to derivatives are
through net gain(loss) on commodity contracts. Transactions involving derivatives are with counterpar-
ties the Company believes to be creditworthy.
(b) Currency risk
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. The
Company operates in Canada, Peru, Mexico, and Barbados and a portion of its expenses are incurred
in Canadian dollars, Nuevo Soles, and Mexican Pesos. A significant change in the currency exchange
rates between the United States dollar relative to the other currencies could have a material effect on
the Company’s results of operations, financial position or cash flows. The Company has not hedged its
exposure to currency fluctuations.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
FINANCIAL
INSTRUMENTS
(continued)
At December 31, 2009, the Company is exposed to currency risk through the following assets and li-
abilities denominated in Canadian dollars, Nuevo Soles and Mexican Pesos (all amounts are expressed
in thousands of Canadian dollars, thousands of Nuevo Soles or thousands of Mexican Pesos):
Expressed in ‘000’s
Cash
Short term investments
Accounts receivable
Accounts payable and accrued
liabilities
Canadian
Dollars
21,283 S/.
560
5
$
December 31, 2009
Nuevo
Soles
Mexican
Pesos
1,283
-
6,565
302 $
-
880
December 31, 2008
Canadian
Dollars
$ 29,748
-
13
S/.
Nuevo
Soles
629 $
-
10,400
Mexican
Pesos
3,864
-
46,460
(194)
(17,150)
(623)
(172)
(5,281)
(10,259)
Based on the above net exposure as at December 31, 2009, and assuming that all other variables remain constant, a 10%
depreciation or appreciation of the US dollar against the above currencies would result in an increase or decrease expressed in
US dollars, as follows:
Impact to other comprehensive
income (loss)
Impact to net income (loss)
(614) $
2,293
$
65
$
(c) 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. The Company’s cash equivalents and short term investments are held
through large Canadian, international and foreign national financial institutions. These investments
mature at various dates within one year. All of the Company’s trade accounts receivables are held with
large international metals trading companies.
The Company holds derivative contracts with financial institutions and in this regard is exposed to
counterparty risk. The Company mitigates this risk by transacting only with reputable financial institu-
tions to minimize credit risk.
As at December 31, 2009, the Company has a Mexican value added tax of $0.42 million and Peruvian
value added tax of $0.18 million. The Company expects to recover the full amounts from the Mexican
and Peruvian Governments.
(d) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall
due. The Company manages liquidity risk by continuing to monitor forecasted and actual cash flows.
The Company has in place a planning and budgeting process to help determine the funds required to
support the Company’s normal operating requirements on an ongoing basis and its development plans.
The Company strives to maintain sufficient liquidity to meet its short term business requirements,
taking into account its anticipated cash flows from operations, its holdings of cash, short term invest-
ments, and its committed liabilities.
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Dollar amounts expressed in US dollars, unless otherwise indicated
The Company expects the following maturities of its financial liabilities (including interest), operating
lease and other contractual commitments:
Accounts payable and accrued liabilities
Due to related parties, net
Derivatives
Long term liability
Total1
Expressed in ‘000’s
Expected payments due by period as at December 31, 2009
Less than
1 year
8,083 $
49
3,055
1,038
12,225 $
1-3 years
-
-
-
1,454
1,454
$
$
4-5 years
-
$
-
-
-
-
$
$
$
After
5 years
- $
-
-
-
- $
Total
8,083
49
3,055
2,492
13,679
1
Amounts above do not include payments related to the following: (i) the Company’s anticipated asset retirement obligation of $2,529 associated with mine closure, land reclamation,
and other environmental matters.
(e) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. The risk that the Company will realize a loss as a result
of a decline in the fair value is limited because the balances are generally held with major financial
institutions in demand deposit accounts.
(f) Metal price risk
The Company is exposed to metals price risk with respect to silver, gold, zinc, and lead sold through
its mineral concentrate products. The Company mitigates this risk by implementing price protection
programs for some of its zinc and lead production through the use of derivative instruments. As a mat-
ter of policy, the Company does not hedge its silver production.
OTHER DATA
Additional information related to the Company is available for viewing at www.sedar.com and the Com-
pany’s website at www.fortunasilver.com.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
SHARE POSITION
AND OUTSTANDING
WARRANTS
AND OPTIONS
The Company’s outstanding share position at March 11, 2010 is 110,062,465 common shares. In ad-
dition, a total of 8,150,500 incentive stock options, with 2,665,000 subject to shareholder approval,
are currently outstanding as follows:
Type of Security
No. of Shares
Incentive Stock Options:
TOTAL OUTSTANDING OPTIONS:
30,000
270,000
250,000
60,000
200,000
7,500
225,000
860,000
225,000
95,000
700,000
50,000
15,000
5,000
38,000
30,000
25,000
250,000
150,000
1,100,000
650,000
250,000
2,150,000
490,000
25,000
8,150,500
Exercise
Price
CAD$
$0.80
$1.35
$2.29
$1.75
$1.75
$0.85
$1.55
$1.66
$1.61
$0.85
$2.22
$2.75
$0.85
$0.85
$0.85
$0.85
$0.85
$2.52
$1.25
$0.85
$0.85
$0.83
$1.60
$1.70
$2.23
Expiry Date
July 24, 2010
February 5, 2016
March 30, 2016
May 8, 2016
May 22, 2016
July 5, 2016
July 5, 2016
July 10, 2016
September 13, 2016
January 11, 2017
January 11, 2017
February 6, 2017
April 22, 2017
May 31, 2017
June 27, 2017
July 2, 2017
October 24, 2017
February 5, 2018
August 25, 2018
October 5, 2018
November 5, 2018
July 6, 2019
October 27, 2019
November 8, 2019
November 23, 2019
CHANGE IN
ACCOUNTING
POLICY
Change in Reporting Currency
Effective January 1, 2009, the Company changed its reporting currency to the US dollar. The change
in reporting currency is to better reflect the Company’s business activities and to improve investors’
ability to compare the Company’s financial results with other publicly traded businesses in the mining
industry. Prior to January 1, 2009, the Company reported its annual and quarterly consolidated bal-
ance sheets and the related consolidated statements of operations and cash flows in Canadian dollar
(CAD).
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In making this change in reporting currency, the Company followed the recommendations of the Emerg-
ing Issues Committee (EIC) of the Canadian Institute of Chartered Accountants (“CICA”), set out in
EIC-130, “Translation Method when the Reporting Currency Differs from the Measurement Currency or
there is a Change in the Reporting Currency”. In accordance with EIC-130, the financial statements
for all years and periods presented have been translated in to the new reporting currency using the cur-
rent rate method. Under this method, the statements of operations and cash flows statements items
for each year and period have been translated into the reporting currency using the average exchange
rates prevailing during each reporting period. All assets and liabilities have been translated using the
exchange rate prevailing at the consolidated balance sheets dates. All resulting exchange differences
arising from the translation are included as a separate component of other comprehensive income. All
comparative financial information has been restated to reflect the Company’s results as if they had been
historically reported in US dollars.
Adoption of New Accounting Standards
Goodwill and Intangible Assets (Section 3064)
In February 2008, the CICA issued the following Handbook Sections : Section 3064, “Goodwill and In-
tangible Assets”, which replaces Section 3062, “Goodwill and Intangible Assets”, and Section 3450,
“Research and Development Costs”, and amended Section 1000, “Financial Statement Concepts”.
The standard intends to reduce the differences with International Financial Reporting Standards
(“IFRS”) in the accounting for intangible assets and results in closer alignment with U.S. GAAP. Un-
der previous Canadian standards, more items are recognized as assets than under IFRS or U.S. GAAP.
The objectives of Section 3064 are to reinforce the principle-based approach to the recognition of as-
sets only in accordance with the definition of an asset and the criteria for asset recognition; and clarify
the application of the concept of matching revenues and expenses such that the current practice of
recognizing assets that do not meet the definition and recognition criteria are eliminated. The standard
also provides guidance for the recognition of internally developed intangible assets (including research
and development activities), ensuring consistent treatment of all intangible assets, whether separately
acquired or internally developed. This standard is effective for fiscal years beginning on or after Oc-
tober 1, 2008. The Company has evaluated the new section and determined that adoption of these
new requirements did not have a material impact on the Company’s consolidated financial statements.
Credit risk and fair value of financial assets and financial liabilities
In January 2009, the Emerging Issues Committee of the CICA issued EIC-173 “Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities”. This guidance clarified that an entity’s own
credit risk and the credit risk of the counterparty should be taken into account in determining the fair
value of financial assets and financial liabilities including derivative instruments, for presentation and
disclosure purposes.
The guidance is to be applied retrospectively without restatement of prior periods to all financial assets
and liabilities measured at fair value in interim and annual financial statements for periods ending on or
after the date of issuance of this Abstract. Retrospective application with restatement of prior periods
is permitted but not required.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
The Company has evaluated the new section and determined that adoption of these new requirements
did not have a material impact on the Company’s consolidated financial statements.
Mining Exploration Costs
On March 27, 2009, the Emerging Issues Committee of the CICA issued EIC-174 “Mining Exploration
Costs” which applies to interim and annual financial statements for periods ending on or after January
20, 2009. This guidance clarified that an entity that has initially capitalized exploration costs has
an obligation in the current and subsequent accounting periods to test such costs for recoverability
whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
The Company has adopted this new standard in its December 31, 2009 annual financial statements
with no impact on the Company’s consolidated financial statements.
Foreign currency translation
Fortuna Silver Mines Inc.’s functional currency is the Canadian dollar. Effective January 1, 2009, the
Company changed its reporting currency to the US dollar.
All subsidiaries, except its wholly owned subsidiary, Minera Bateas S.A.C. (“Bateas”), are considered
to be self sustaining operations. Bateas’s integrated foreign operations and their financial statements
are translated to US dollars under the temporal method. Monetary assets and liabilities denominated
in foreign currencies are translated at the exchange rate in effect at the balance sheet date and non-
monetary assets and liabilities at historical exchange rates. Revenues and expenses are translated at
the average exchange rate in effect during the period. Realized and unrealized foreign exchange gains
and losses are included in earnings.
Commencing January 1, 2009, Bateas is an integrated foreign operation because Bateas translates its
financial statements denominated in Peruvian Soles to US dollars using the temporal method.
All other subsidiaries’ financial statements are translated using the current rate method. Assets and
are translated into US dollars using the current rate method at period-end exchange rates and resulting
translation adjustments are reflected in comprehensive income. Revenues and expenses are translated
at average exchange rates for the period.
The Company has assessed new and revised accounting pronouncements that have been issued and
determined that the following may have an impact on the Company:
Convergence with International Financial Reporting Standards (“IFRS”)
In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will
significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan
outlines the convergence of Canadian GAAP with International Financial Reporting Standards (“IFRS”)
over an expected five year transitional period. In February 2008, the AcSB announced that 2011 is
the changeover date for publicly-listed companies to use IFRS, replacing Canadian GAAP. This date
is for interim and annual financial statements relating to fiscal years beginning on or after January 1,
2011. The Company will begin reporting its financial statements in accordance with IFRS on January
1, 2011, with comparative figures for 2010.
CHANGE IN
ACCOUNTING
POLICY
(continued)
RECENT
RELEASED
CANADIAN
ACCOUNTING
STANDARDS
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The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of
amounts reported by the Company for its year ended December 31, 2010, and of the opening balance
sheet as at January 1, 2010.
During 2009, the Company began planning its transition to IFRS. The process will consist of three
phases: Scoping and Diagnostics, Analysis and Development, and Implementation and Review.
During the third quarter of 2009, the Company, with the assistance of external advisors, completed an
initial scoping and diagnostic assessment. This assessment identified, at a high level, the key areas for
more detailed consideration and that may give rise to potential difference upon conversion. As part of
this phase, preliminary recommendations were made in respect of transitional elections available under
IFRS 1, “First-Time Adoption of International Reporting Standards”. At the present time the Company
is planning to apply two of the 17 exemptions which include:
• IFRS 3 “Business Combinations” which allows an entity that has conducted prior business
combinations to apply IFRS 3 on a prospective basis only from the date of transition. This avoids
the requirement to restate prior business combinations, although some adjustments may still be
necessary. Currently, the Company has three prior business transactions that meet the criteria of a
business combination under IFRS.
• IFRS 2 “Share-Based Payment Transactions” which allows full retrospective application to be
avoided for certain share-based instruments depending on the grant date, vesting terms and
settlement of any related liabilities. The Company has not disclosed the value of the share options
historically and therefore cannot apply IFRS 2 retrospectively.
Following the completion of the scoping and diagnostic assessment, the Company engaged external
advisors to assist with detailed technical reviews of the identified potential high impact areas. These
reviews include the identification of IFRS - Canadian GAAP differences, accounting policy consider-
ations, and preliminary implementation plans. The high impact areas relating to conversion include
foreign currency; property, plant and equipment; income taxes; and provisions (including asset retire-
ment obligations). The technical review aspects of these assessments have been completed for foreign
currency; property, plant and equipment; and income taxes. A summary of the potential impacts in
these areas are as follows:
a) Foreign Currency
Under International Accounting Standard (“IAS”) 21, it is necessary to assess the functional currency
of all the Company’s entities based on the primary economic environment in which the entity operates.
In addition, secondary factors may also provide evidence of an entity’s functional currency. Once the
functional currency is determined, it does not change unless there is a change in the underlying nature
of the transactions and relevant conditions and events.
All entities that have a Canadian GAAP measurement currency that is different than the functional cur-
rency under IFRS will need to translate their balance sheets to the functional currency at the transition
date. The Company will need to update its consolidation model for foreign currency translation.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
RECENT
RELEASED
CANADIAN
ACCOUNTING
STANDARDS
(continued)
The Company’s preliminary analysis is the functional currency of all the group’s entities is U.S. dollars,
the same as the presentation currency. As a result, the Company is planning to take the IFRS 1 exemp-
tion that resets the cumulative translation adjustment balance to zero, to reduce the conversion effort.
b) Property, Plant and Equipment
Under IAS 16, each part of an item of property, plant and equipment with a cost that is significant in
relation to the total costs of an item is depreciated separately. This is commonly referred to as com-
ponent depreciation. Each separate part is depreciated over its useful economic life to the residual
value. Under IFRS, the assessment of the useful economic life and the residual value of each part of
the asset are determined on an annual basis. The Company is currently completing a detailed review
of fixed assets to determine if additional component depreciation will be necessary.
Canadian GAAP does not specifically state how to treat borrowing costs related to the construction of
an asset, whereas IFRS states that borrowing costs that are directly attributable to the acquisition or
construction of a qualifying asset shall be capitalized as part of the cost of that asset on a net basis.
Under IFRS, there is an option to use either the cost method or the revaluation model for subsequent
measurement of classes of assets. The Company plans to continue to use the cost method.
For impairment, Canadian GAAP generally uses a two-step approach to testing: first comparing asset
carrying values with undiscounted future cash flows to determine whether impairment exists, and then
measuring any impairment by comparing asset carrying values with fair values. IAS 36, “Impairment
of Assets”, uses a one-step approach for both testing for and measurement of impairment, with carrying
values compared directly with the higher of fair value less costs to sell and value in use (which uses
discounted future cash flows). This may potentially result in more write downs when carrying values
of assets are supported under Canadian GAAP on an undiscounted cash flow basis, but could not be
supported on a discounted cash flow basis.
However, the extent of any new writedowns may be partially offset by the requirement under IAS 36 to
reverse any previous impairment losses where circumstances have changed such that the impairments
have been reduced. Canadian GAAP prohibits reversal of impairment losses.
c) Income Taxes
The analysis completed to date has identified two significant relevant differences in the area of ac-
counting for income taxes.
Canadian GAAP has a specific exemption for future income taxes related to non-monetary assets or
liabilities of integrated foreign operations. Future income taxes cannot be recognized for a temporary
difference arising from the difference between the historical exchange rate and the current exchange
rate translation of the cost of non-monetary assets or liabilities of integrated foreign operations. Under
IFRS, deferred tax is recognized on the difference between: the accounting basis of all items, which is
accounted for as specified under IFRS. For foreign currency non-monetary assets or liabilities, this is
the local or tax basis currency translated into the functional currency at the historical rate; and the tax
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basis, which is the local or tax basis currency amount translated to the functional currency at the spot
exchange rate at the balance sheet date. The result of this calculation difference will be added volatil-
ity in the tax expense as foreign exchange swings will have an impact on the tax expense.
IFRS 12 does not permit recognition of a temporary difference on initial recognition, except if the
transaction is a business combination or if the transaction affects accounting or taxable profit or loss.
Under Canadian GAAP, assets acquired in other than in a business combination, may have a tax basis
different than the carrying amount on acquisition. The associated FIT assets (subject to the more likely
than not test) or liability is recognized at the time of acquisition and added to the cost of the asset.
The amount of the FIT is calculated using a simultaneous equation; this method of tax calculation is
referred to as the ‘gross up’ method. Under IAS 12, any temporary differences arising on subsequent
asset acquisitions, other than in a business combination, would be ignored. On adoption of IFRS, the
temporary differences arising from the ‘gross up’ method under Canadian GAAP will be reversed.
Following the completion of the 2009 year-end filings, the Company will commence quantification of
the identified technical differences.
Concurrent with the technical analysis, we have prepared draft pro forma consolidated annual IFRS
financial statements to help understand the disclosure impact of the change to IFRS. These will be
presented to the Audit Committee at the end of the first quarter of 2010.
The Company will continue to monitor changes in IFRS leading up to the changeover date, and will
update the conversion plan as required.
Business Combinations
In January 2009, the CICA issued the following Handbook Sections: Section 1582, “Business Com-
binations”, Section 1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling
Interests”. These new standards are harmonized with International Financial Reporting Standards
(IFRS). Section 1582 specifies a number of changes, including: an expanded definition of a busi-
ness, a requirement to measure all business acquisitions at fair value, a requirement to measure non-
controlling interests at fair value, and a requirement to recognize acquisition-related costs as expenses.
Section 1601 establishes the standards for preparing consolidated financial statements. Section 1602
specifies that non-controlling interests be treated as a separate component of equity, not as a liability
or other item outside of equity. The new standards will become effective in 2011 but early adoption is
permitted. The Company is evaluating the attributes of early adoption of this standard and its potential
effects if events or transactions occurred that this standard applies to.
Comprehensive revaluation of Assets and Liabilities and Equity
In August 2009, the CICA amended Section 1625, “Comprehensive revaluation of assets and liabili-
ties” as a result of issuing “Business Combinations, Section 1582, “Consolidated Financial State-
ments”, Section 1601, and Non-Controlling Interests”, Section 1602, in January 2009.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
RECENT
RELEASED
CANADIAN
ACCOUNTING
STANDARDS
(continued)
In August 2009, the CICA amended Section 3251, “Equity” as a result of issuing Section 1602, “Non-
controlling Interests”. These amendments only apply to entities that have adopted Section 1602.
These amendments apply prospectively to comprehensive revaluations of assets and liabilities occur-
ring in fiscal years beginning on or after January 1, 2011, but early adoption is permitted. The Com-
pany is evaluating the attributes of early adoption of this standard and its potential effects if events or
transactions occurred that this standard applies to.
Financial Instruments and Impaired Loans
In August 2009, the CICA issued amendments to Section 3855, “Financial Instruments: Recognition
and Measurement”. These amendments will permit (or require in certain circumstances) entities to
reclassify certain investments in debt instruments, will amend the guidance regarding impairment
measurement for Held-to- Maturity debt instruments and will require reversals of impairment losses
for Available for Sale debt instruments when conditions have changed. These amendments apply only
to investments in debt instruments and do not apply to investments in equity investments or to debt
instruments that have been designated at orgination as Held-for-Trading.
In August 2009, the CICA amended Section 3025, “Impaired loans” to conform with the definition of
a loan to that in amended Section 3855 and to include held-to-maturity investments within the scope
of this Section.
These amendments are effective for annual financial statements relating to fiscal years beginning on
or after November 1, 2008 with early adoption permitted for interim financial statements issued on or
after August 20, 2009. The Company has evaluated the new section and determined that adoption of
these new requirements, for fiscal year end December 31, 2009, did not have a material impact on the
Company’s consolidated financial statements.
Metal price risk
One of the most significant risks affecting the profitability and viability of the Company’s mining opera-
tions is the fluctuation of metal prices. Volatility of metal prices is high by historic measures and strong
downturns on these prices can have significant adverse effects on the continuity of the Company’s op-
erations. In order to mitigate this risk in the medium term, the Company put in place price protection
strategies for approximately 59% and 60% of its zinc and lead metal production, respectively, for the
six month period between January 2010 and June 2010. For the six month period between July 2010
and December 31, 2010, the Company put in place price protection strategies for 59% and 57% of
its zinc and lead metal production, respectively.
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. The Company’s cash equivalents and short term investments are held
through large Canadian and international financial institutions. These investments mature at various
dates within one year.
RISKS AND
UNCERTAINTIES
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Dollar amounts expressed in US dollars, unless otherwise indicated
The Company is subject to credit risk through its trade receivables. The Company enters into one year
contracts to sell its concentrate products at Caylloma and transacts only with credit worthy costumers
to minimize credit risk. The Company awarded its full production of 2009 to large international metals
trading companies, including Glencore International.
The Company holds derivative contracts with financial institutions and in this regard is exposed to
counterparty risk. The Company mitigates this risk by transacting only with reputable financial institu-
tions to minimize credit risk. During 2009, the Company has transacted with Standard Bank PLC,
Banco Bilbao Vizcaya Argentaria, S.A., Macquarie Bank Limited, Goldman Sachs, and Scotia Bank.
The Company currently holds derivatives contracts with Macquarie Bank Limited and Scotia Bank.
Environmental risk
The Company has recorded an asset retirement obligation of $2.53 million as of December 31, 2009
in relation to the cost of reclamation associated with the Caylloma property. This amount has been
estimated by a third party in compliance of local regulations and has been approved by the relevant
authorities in November 2009.
In view of the uncertainties concerning environmental reclamation, the ultimate cost of reclamation
activities could differ materially from the estimated amount recorded. The estimate of the Company’s
asset retirement obligation relating to the Caylloma mine is subject to change based on amendments
to laws and regulations and as new information regarding the Company’s operations becomes available.
Currency risk
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. The
Company operates in Canada, Peru, Mexico, and Barbados and a portion of its expenses are incurred
in Canadian dollars, Nuevo Soles, and Mexican Pesos. A significant change in the currency exchange
rates between the United States dollar relative to the other currencies could have a material effect on
the Company’s results of operations, financial position or cash flows. The Company has not hedged its
exposure to currency fluctuations.
Exploration and development
The business of mineral exploration and extraction involves a high degree of risk. Few properties that
are in the exploration stage ultimately become producing mines. Major expenses may be required to
establish reserves by drilling and to construct mining and processing facilities at a site. It is impossible
to ensure that exploration and development programs carried out by the Company will result in profit-
able commercial mining operations.
Resources and reserves
There is a degree of uncertainty attributable to the estimation of resources and reserves and to expected
mineral grades. Mineral Resources and Mineral Reserves may require revision based on actual produc-
tion 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 resources and/or reserves. Short term operating factors relating to the mineral resources
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
Dollar amounts expressed in US dollars, unless otherwise indicated
RISKS AND
UNCERTAINTIES
(continued)
and reserves, such as the need for sequential development of ore bodies may adversely affect the Com-
pany’s profitability in any accounting period.
Political and country risk
The Company’s mineral properties are located in emerging nations and consequently may be subject
to a higher level of risk compared to developed countries. Operations, the status of mineral property
rights, title to the properties and the recoverability of amounts shown for mineral properties in emerging
nations can be affected by changing economic, regulatory, and political situations.
The State of Oaxaca has a history of social conflicts and political agitation which can lead to public
demonstrations and blockades that can from time to time affect the Company’s operations.
CONTROLS AND
PROCEDURES
Disclosure Controls and Procedures
The Company evaluated the effectiveness of the design and operation of the disclosure controls and
procedures, as of December 31, 2009, under the supervision of the Chief Executive Officer (“CEO”)
and the Chief Financial Officer (“CFO”). Based on the results of this evaluation the CEO and the CFO
have concluded that such disclosure controls are sufficiently effective to provide reasonable assurance
that material information relating to the Company is made known to management and disclosed in ac-
cordance with the applicable securities laws.
Internal Control Over Financial Reporting
The Company’s management, with the participation of its CEO and CFO, are responsible for establish-
ing a system of internal control over financial reporting to provide reasonable assurance regarding the
reliability and integrity of the Company’s financial information and the preparation of its financial state-
ments in accordance with Canadian generally accepted accounting principles. Management of the
Company, with the participation of the CEO and CFO, has evaluated the effectiveness of internal control
over financial reporting as of December 31, 2009 and has concluded there are no material weaknesses.
Management continues to review and refine its internal controls and procedures.
MANAGEMENT
CHANGES
There were no management changes during the year ended December 31, 2009.
OUTLOOK
For 2010, the Company expects to sustain silver production at 1,700,000 ounces, with base metal
production also remaining level at current rates.
2010 Production Guidance (rounded to whole thousands)
Metal production
Silver (oz)
Zinc (lbs)
Lead (lbs)
Copper (lbs)
2010
(Forecast)
1,700,000
28,400,000
25,200,000
1,000,000
2009
(Actual)
1,683,000
28,442,000
25,137,000
88,000
2008
(Actual)
805,000
23,283,000
16,502,000
-
2007
(Actual)
480,000
13,900,000
8,300,000
-
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Deloitte & Touche LLP
2800 - 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada
Tel: 604-669-4466
Fax: 604-685-0395
www.deloitte.ca
AUDITORS’ REPORT TO THE SHAREHOLDERS OF FORTUNA SILVER MINES INC.
To the Shareholders of Fortuna Silver Mines Inc.
We have audited the consolidated balance sheets of Fortuna Silver Mines Inc. as at December 31,
2009 and 2008 and the consolidated statements of operations, comprehensive income (loss), cash
flows, and shareholders’ equity for the years then ended. These financial statements are the respon-
sibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2009 and 2008 and the results of its opera-
tions and its cash flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
Chartered Accountants
March 18, 2010
CONSOLIDATED
BALANCE SHEETS
FORTUNA SILVER MINES INC.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31,
Expressed in thousands of US Dollars
ASSETS
CURRENT
Cash
Short term investments
Derivatives
Accounts receivable and prepaid expenses
GST and value added tax
Inventories
LONG TERM INVESTMENT AND RECEIVABLE
PROPERTY, PLANT AND EQUIPMENT
MINERAL PROPERTIES
LIABILITIES
CURRENT
Accounts payable and accrued liabilities
Due to related parties, net
Derivatives
Current portion of long term liability
LONG TERM LIABILITY
ASSET RETIREMENT OBLIGATION
FUTURE INCOME TAX LIABILITY
NON-CONTROLLING INTEREST
SHAREHOLDERS’ EQUITY
SHARE CAPITAL
CONTRIBUTED SURPLUS
DEFICIT
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Notes
2009
4
5
6
7
8
9
10
11
12
5
13 a), 13 b)
13 a), 13 b)
14
15
3
$
$
$
30,763
6,034
-
8,635
601
2,329
48,362
16
17,233
74,127
139,738
8,083
49
3,055
1,038
12,225
1,454
2,529
10,973
-
27,181
$
$
$
2008
29,454
-
1,418
1,865
5,127
1,727
39,591
3,207
13,285
59,285
115,368
4,735
38
-
762
5,535
1,382
1,066
9,410
9,007
26,400
104,701
14,315
(9,357)
2,898
(6,459)
112,557
$ 139,738
98,206
11,854
(9,980)
(11,112)
(21,092)
88,968
$ 115,368
Commitments and contingencies
Subsequent events
18
10, 22
APPROVED BY THE DIRECTORS: Jorge Ganoza Durant Simon Ridgway
Director
Director
The accompanying notes are an integral part of these audited consolidated financial statements.
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CONSOLIDATED
STATEMENTS OF
OPERATIONS
FORTUNA SILVER MINES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
Expressed in thousands of US Dollars, except for share and per share amounts
Sales
Cost of sales
Depletion, depreciation and accretion
MINE OPERATING INCOME
Selling, general and administrative expenses
(includes depreciation of $64 (2008: $49))
Stock-based compensation
Write-off of deferred exploration costs
OPERATING INCOME (LOSS)
Interest and other income and expenses
Interest and finance expenses
Net (loss) gain on commodity contracts
(Loss) on disposal of property, plant and equipment
(Loss) on disposal of investment
Foreign exchange (loss) gain
INCOME BEFORE INCOME TAXES AND
NON-CONTROLLING INTEREST
Income tax provision
Non-controlling interest
NET INCOME (LOSS) FOR THE YEAR
Earnings (Loss) per Share - Basic and Diluted
Weighted average number of shares outstanding -
Basic and Diluted
Notes
$
12
16 d)
$
$
2009
51,428
17,755
5,944
27,729
9,558
2,707
1,081
13,346
14,383
433
(160)
(7,356)
(101)
(236)
(651)
(8,071)
6,312
5,869
(180)
623
0.01
2008
$ 24,867
15,605
5,363
3,899
7,815
1,348
329
9,492
(5,593)
1,361
(98)
4,269
(45)
-
793
6,280
687
1,699
(102)
$ (910)
$ (0.01)
91,802,881
84,400,969
The accompanying notes are an integral part of these audited consolidated financial statements.
FORTUNA SILVER MINES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
Expressed in thousands of US Dollars
CONSOLIDATED
STATEMENTS OF
COMPREHENSIVE
INCOME (LOSS)
Net income (loss) for the year
Other comprehensive income (loss)
Unrealized gain (loss) on available for sale long term investments,
net of taxes
Transfer of unrealized loss to realized loss upon derecognition of
available for sale long term investment, net of taxes
Unrealized gain on translation of functional currency to reporting
currency
Other comprehensive income (loss)
Comprehensive income (loss)
148
462
13,400
14,010
14,633
$
$
2009
623
$
2008
(910)
(745)
-
(21,754)
(22,499)
(23,409)
$
The accompanying notes are an integral part of these audited consolidated financial statements.
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CONSOLIDATED
STATEMENTS OF
CASH FLOWS
FORTUNA SILVER MINES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
Expressed in thousands of US Dollars
OPERATING ACTIVITIES
Net income (loss) for the year
Items not involving cash
Depletion and depreciation
Accretion expense
Future income tax
Stock-based compensation
Unrealized loss on commodity contracts
Non-controlling interest
Write-off of deferred exploration costs
Loss on disposal of equipment
Loss on disposal of investments
Unrealized foreign exchange loss
Changes in non-cash working capital items
Accounts receivable and prepaid expenses
Inventories
Accounts payable
Due to related parties
Net cash provided by operating activities
3
INVESTING ACTIVITIES
Costs relating to the acquisition of Continuum
Acquisition of short term investments
Mineral property expenditures
Value added taxes on purchase of property, plant and equipment
Property, plant & equipment
Long term receivable
Proceeds on disposal of equipment
Acquisition of long term investments
Proceeds on disposal of long term investments
Net cash (used in) investing activities
FINANCING ACTIVITIES
Net proceeds on issuance of common shares
Capital lease obligations
Net cash provided by financing activities
Effect of exchange rate changes on cash
(DECREASE) IN CASH
Cash - beginning of year
Notes
2009
2008
$
623
$ (910)
5,858
150
794
2,707
4,473
(180)
1,081
101
236
67
15,910
(5,073)
(313)
3,158
4
13,686
(162)
(5,990)
(11,023)
2,897
(3,098)
96
47
(235)
489
(16,979)
1,025
(976)
49
4,553
(3,244)
29,454
5,350
102
1,698
1,348
8
(102)
329
45
-
785
8,653
255
(411)
(172)
31
8,356
-
-
(21,200)
(1,473)
(3,535)
(16)
37
-
-
(26,187)
7,586
(351)
7,235
(8,106)
(10,596)
48,156
CASH - END OF YEAR
Supplemental cash flow information
21
$
30,763
$ 29,454
The accompanying notes are an integral part of these audited consolidated financial statements.
FORTUNA SILVER MINES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Expressed in thousands of US Dollars, except for share amounts
Share Capital
Shares
80,977,663 $
Amount
90,176 $
Contributed
Surplus
(Deficit)
10,533 $ (9,070)
Accumulated
Other
Comprehensive
(Loss)Income
135
$
Total
Shareholders’
Equity
91,774
$
Balance -December 31, 2007
Effect of change in reporting
currency
Exercise of options
Exercise of warrants
Transfer of contributed surplus on
exercise of options
Stock-based compensation
(Loss) for the year
Unrealized loss of available for sale
long term investments
Unrealized (loss) on translation of
functional currency to reporting
currency
Balance - December 31, 2008
Exercise of options
Exercise of warrants
Issuance of shares for property
Cancellation of fractional shares
Transfer of contributed surplus on
exercise of options
Stock-based compensation
Income for the year
Unrealized gain on available for sale
long term investments
Transfer of unrealized loss to realized
loss upon derecognition of available
for sale long-term investment
Unrealized gain on translation of
functional currency to reporting
currency
Balance - December 31, 2009
-
31,400
4,322,596
85,331,659 $
389,000
2,475,355
6,786,674
(36)
-
-
-
-
-
-
-
-
-
-
-
-
37
7,966
-
-
-
27
-
-
-
(27)
1,348
-
-
-
-
-
-
-
(910)
11,252
-
-
-
-
-
-
(745)
11,252
37
7,966
-
1,348
(910)
(745)
-
98,206 $
281
776
5,192
-
-
-
11,854 $ (9,980)
-
-
-
-
-
-
-
-
$
$
(21,754)
(11,112)
-
-
-
-
(21,754)
88,968
281
776
5,192
-
246
-
-
(246)
2,707
-
-
-
623
-
-
-
-
-
148
462
-
2,707
623
148
462
-
-
-
-
-
94,982,652 $ 104,701 $
-
-
14,315 $ (9,357)
$
13,400
2,898
$
13,400
112,557
The accompanying notes are an integral part of these audited consolidated financial statements.
CONSOLIDATED
STATEMENTS OF
SHAREHOLDERS’
EQUITY
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FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
01. NATURE OF
OPERATIONS
Fortuna Silver Mines Inc. (the “Company”) is engaged in silver mining and related activities, including
exploration, extraction, and processing. The Company operates the Caylloma zinc/lead/silver mine in
southern Peru and is currently developing the San Jose silver/gold project in Mexico.
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
a) Basis of presentation and principles of consolidation
These consolidated financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (“GAAP”), and presented in US dollars. The consolidated financial
statements include the accounts of the Company and wholly owned subsidiaries: Minera Bateas S.A.C.
(“Bateas”); Fortuna Silver (Barbados) Inc.; Compania Minera Cuzcatlan SA (“Cuzcatlan”); Continuum
Resources Ltd. (“Continuum”); and Fortuna Silver Mines Peru S.A.C.
All significant inter-company transactions and accounts have been eliminated upon consolidation.
b) Change in Reporting Currency
Effective January 1, 2009, the Company changed its reporting currency to the US dollar. The change
in reporting currency better reflects the Company’s business activities and improves investors’ ability to
compare the Company’s financial results with other publicly traded businesses in the mining industry.
Prior to January 1, 2009, the Company reported its annual and quarterly consolidated balance sheets
and the related consolidated statements of operations and cash flows in Canadian dollars (CAD).
In making this change in reporting currency, the Company followed the recommendations of the
Emerging Issues Committee (EIC) of the Canadian Institute of Chartered Accountants (“CICA”), set out
in EIC-130, “Translation Method when the Reporting Currency Differs from the Measurement Currency
or there is a Change in the Reporting Currency”.
In accordance with EIC-130, the financial statements for all years and periods presented have been
translated into the new reporting currency using the current rate method. Under this method, the
statements of operations and cash flows statements items for each year and period have been translated
into the reporting currency using the average exchange rates prevailing during each reporting period.
All assets and liabilities have been translated using the exchange rate prevailing at the consolidated
balance sheets dates. All resulting exchange differences arising from the translation are included as a
separate component of other comprehensive income. All comparative financial information has been
restated to reflect the Company’s results as if they had been historically reported in US dollars.
$
Current Assets
Total Assets
Current Liabilities
Total Liabilities
Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
expressed in
CAD 000’S
48,413
141,072
6,769
32,282
108,790
141,072
Condensed Consolidated Balance Sheet As at December 31, 2008
expressed in
USD 000’S
39,591
115,368
5,535
26,400
88,968
115,368
foreign currency translation at
1.22267
(8,822)
(25,704)
(1,234)
(5,882)
(19,822)
(25,704)
$
$
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
$
Sales
Mine operating income
Operating (loss)
Income before income taxes and
non-controlling interest
Net (loss) for the year
Condensed Consolidated Statement of Operations As at December 31, 2008
expressed in
expressed in
USD 000’S
CAD 000’S
26,339
24,867
4,130
3,899
(5,925)
(5,593)
foreign currency translation at
1.05921
(1,472)
(231)
332
$
$
727
(964)
(40)
54
687
(910)
c) Adoption of New Accounting Standards
i. Goodwill and Intangible Assets (Section 3064)
In February 2008, the CICA issued the following Handbook Sections : Section 3064, “Goodwill and In-
tangible Assets”, which replaces Section 3062, “Goodwill and Intangible Assets”, and Section 3450,
“Research and Development Costs”, and amended Section 1000, “Financial Statement Concepts”.
The standard intends to reduce the differences with International Financial Reporting Standards
(“IFRS”) in the accounting for intangible assets and results in closer alignment with U.S. GAAP. Un-
der previous Canadian standards, more items are recognized as assets than under IFRS or U.S. GAAP.
The objectives of Section 3064 are to reinforce the principle-based approach to the recognition of as-
sets only in accordance with the definition of an asset and the criteria for asset recognition; and clarify
the application of the concept of matching revenues and expenses such that the current practice of
recognizing assets that do not meet the definition and recognition criteria are eliminated. The standard
also provides guidance for the recognition of internally developed intangible assets (including research
and development activities), ensuring consistent treatment of all intangible assets, whether separately
acquired or internally developed. This standard is effective for fiscal years beginning on or after Oc-
tober 1, 2008. The Company has evaluated the new section and determined that adoption of these
new requirements did not have a material impact on the Company’s consolidated financial statements.
ii. Credit risk and fair value of financial assets and financial liabilities
In January 2009, the Emerging Issues Committee of the CICA issued EIC-173 “Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities”. This guidance clarified that an entity’s own
credit risk and the credit risk of the counterparty should be taken into account in determining the fair
value of financial assets and financial liabilities including derivative instruments, for presentation and
disclosure purposes.
The guidance is to be applied retrospectively without restatement of prior periods to all financial assets
and liabilities measured at fair value in interim and annual financial statements for periods ending
on or after the date of issuance of this Abstract. Retrospective application with restatement of prior
periods is permitted but not required.
The Company has evaluated the new section and determined that adoption of these new requirements
did not have a material impact on the Company’s consolidated financial statements.
iii. Mining Exploration Costs
On March 27, 2009, the Emerging Issues Committee of the CICA issued EIC-174 “Mining Exploration
Costs” which applies to interim and annual financial statements for periods ending on or after January
1
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
20, 2009. This guidance clarified that an entity that has initially capitalized exploration costs has
an obligation in the current and subsequent accounting periods to test such costs for recoverability
whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
The Company has adopted this new standard in its December 31, 2009 annual financial statements
with no impact on the Company’s consolidated financial statements.
iv. Financial Instruments - Disclosure
In 2009, the Accounting Standards Board (“AcSB”) amended CICA Handbook Section 3862, Financial
Instruments - Disclosures (“Section 3862”), to require enhanced disclosures about liquidity and about
the relative reliability of the data, or “inputs”, that an entity uses in measuring the fair values of its
financial instruments. The new requirements are effective for annual financial statements for fiscal
years ending after September 30, 2009. The Company has adopted this new standard in its December
31, 2009 annual financial statements.
d) Use of estimates
The preparation of financial statements in conformity with Canadian GAAP requires the Company’s
management to make estimates and assumptions that affect the reported amounts of assets and liabili-
ties, the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. The most significant estimates are: quantities of proven and probable silver reserves;
the value of mineralized material beyond proven and probable reserves; future costs and expenses to
produce proven and probable reserves; future commodity prices and foreign currency exchange rates;
the future cost of asset retirement obligations; amounts of contingencies; and the fair value of acquired
assets and liabilities including pre-acquisition contingencies. Significant items that require estimates
as the basis for determining the stated amounts include inventories, trade accounts receivable, mineral
properties, property, plant and equipment, investments in non-producing properties, revenue recogni-
tion, stock-based compensation, unrealized gains and losses on commodity contracts, fair value of
assets and liabilities acquired in a business combination, and taxes.
e) Revenue Recognition
Revenue arising from the sale of metal concentrates is recognized when title and the significant risks
and rewards of ownership of the concentrates have been transferred to the buyer. The passing of title
to the customer is based on the terms of the sales contract and final commodity prices are set on a
specified quotational period, either one or three months after delivery at the option of the customer.
The Company’s metal concentrates are provisionally priced at the time of sale based on the prevailing
market price. Variations recorded between the price recorded at the time of provisional settlement and
the actual final price are caused by changes in metal prices.
f) Cash
Cash which is designated as held-for-trading financial assets and measured at fair value, include cash
on hand and demand deposits.
g) Short term investments
Short term investments, which are designated as held-for-trading financial assets and measured at
fair value, include bank notes, guaranteed investment certificates, term deposits, and money market
instruments with maturities greater than 90 days, but less than one year, from the date of acquisition.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
h) Long term investments
Long term investments are those investments which the Company will be retaining for a period longer
than one year. These investments are classified as available-for-sale and are recorded at fair value.
i) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated over the estimated economic
life of the asset on a straight line basis as follows:
Buildings, mine site
Buildings, other
Machinery and equipment
Furniture and other equipment
Transport units
Life of mine
6 - 20 years
3 - 8 years or Life of mine
3 - 13 years
4 - 5 years
The expected remaining life of Caylloma mine as at December 31, 2009 is 8.3 years.
Land is not depreciated. Equipment under capital lease is initially recorded at the present value of
minimum lease payments at the inception of the lease. Spare parts and components included in ma-
chinery and equipment, depending on the replacement period of the initial component, is depreciated
over 8 to 18 months.
j) Depletion and Mineral Properties Cost
The Company defers the cost of acquiring, maintaining its interest, exploring, and developing mineral
properties until such time as the properties are placed into production, abandoned, sold or considered
to be impaired in value. General exploration costs that do not relate to a property where the Company
has a vested interest are expensed as incurred. Costs of producing properties are depleted on a unit-of-
production basis over proven and probable reserves and costs of abandoned properties are written-off.
Proceeds received from the sale of interests in mineral properties are credited to the carrying value
of the mineral properties, with any excess included in operations. Write-downs due to impairment in
value are charged to operations.
Significant payments related to the acquisition of land and mineral rights are capitalized as incurred.
Prior to acquiring such land or mineral rights, the Company makes a preliminary evaluation to deter-
mine that the property has significant potential to develop an economic ore body. The time between
initial acquisition and full evaluation of a property’s potential is dependent on many factors including
location relative to existing infrastructure, the property’s stage of development, geological controls,
and metal prices. If a mineable ore body is discovered, such costs are amortized when production
commences. If no mineable ore body is discovered, such costs are expensed in the period in which it
is determined the property has no future economic value. In countries where the Company paid Value
Added Tax (“VAT”) and where there is uncertainty of its recoverability, the VAT payments are capitalized
with mineral property costs relating to the property or expensed if the exploration costs have been ex-
pensed according to our accounting policy. If the Company recovers amounts that have been deferred,
the amount received will be applied to reduce mineral property costs or taken as a credit against cur-
rent expenses depending on the prior treatment.
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
k) Operational Mining Properties and Mine Development
For operating mines all exploration within the mineral deposit is capitalized and depleted on a unit-of-
production basis over proven and probable reserves as part of the production cost.
Costs associated with commissioning activities on constructed plants are deferred from the date of
mechanical completion of the facilities until the date the Company is ready to commence commercial
production. Any revenues earned during this period are recorded as a reduction in deferred commis-
sioning costs. These costs are depleted using the units-of-production method over the life of the mine,
commencing on the date of commercial service.
l) Asset Impairment
Management reviews and evaluates its long-lived assets for impairment when events or changes in cir-
cumstances indicate that the related carrying amounts may not be recoverable. Impairment is consid-
ered to exist if total estimated future cash flows or probability-weighted cash flows on an undiscounted
basis are less than the carrying amount of the assets, including mineral property, plant and equipment
and producing and non-producing properties. An impairment loss is measured and recorded based on
discounted estimated future cash flows or the application of an expected present value technique to
estimate fair value in the absence of a market price. Future cash flows are based on recoverable proven
and probable reserves and a portion of recoverable resources, silver, zinc, copper, lead and gold prices
(considering current and historical prices, price trends and related factors), production levels, capital
and reclamation costs, all based on detailed engineering life-of-mine plans. Assumptions underlying
future cash flow estimates are subject to risks and uncertainties.
Any differences between significant assumptions and market conditions and/or the Company’s per-
formance could have a material effect on any impairment provision, and on the Company’s financial
position and results of operations. In estimating future cash flows, assets are grouped at the lowest
levels for which there are identifiable cash flows that are largely independent of cash flows from other
groups. Generally, in estimating future cash flows, all assets are grouped at a particular mine for which
there is identifiable cash flow.
m) Asset Retirement Obligation
The fair value of an obligation associated with the retirement of a tangible long-lived asset is recorded
in the period in which it is incurred and a reasonable estimate of the fair value can be made, with a cor-
responding increase to the carrying amount of the related asset. The liability is accreted over time for
changes in the fair value of the liability through charges, which are included in depletion, depreciation,
and accretion expense. The costs capitalized to the related assets are amortized in a manner consistent
with the depletion and depreciation of the related assets.
n) Inventories
Inventories include metals contained in concentrates, stockpile ores, and operating materials and
supplies. The classification of metals inventory is determined by the stage at which the ore is in the
production process. Inventories of ore are sampled for metal content and are valued based on the
lower of actual production costs incurred or estimated net realizable value based upon the period end-
ing prices of contained metal. Mined material that does not contain a minimum quantity of metal to
cover estimated processing expense to recover the contained metal is not classified as inventory and
is assigned no value.
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
Ore stockpile and finished goods inventories are valued at the lower of production cost and net realiz-
able value. Materials and supplies are valued at the lower of average cost and net realizable value.
Production costs include all mine site costs.
o) Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance to the
CICA Handbook Section 3465 “Income Taxes”. Under the asset and liability method, future tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income
in the year that includes the date of substantive enactment. Future tax assets are recognized to the
extent that they are considered more likely than not to be realized.
p) Stock-based Compensation
The Company has a share option plan which is described in Note 16. d). The Company records all
stock-based compensation relating to options granted using the fair value method such that stock-
based payments are measured at fair value and expensed over their vesting period with a corresponding
increase to contributed surplus. Upon exercise of share purchase options, the consideration paid by
the option holder, together with the amount previously recognized in contributed surplus, is recorded
as an increase to share capital.
q) Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period.
The diluted earnings (loss) per share calculation is based on the weighted average number of common
shares outstanding during the period, plus the effects of dilutive common share equivalents. This
method requires that the dilutive effect of outstanding options and warrants issued should be calcu-
lated using the treasury stock method. This method assumes that all common share equivalents have
been exercised at the beginning of the period (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 period, but only if dilutive.
r) Foreign Currency Translation
Fortuna Silver Mines Inc.’s functional currency is the Canadian dollar. Effective January 1, 2009, the
Company changed its reporting currency to the US dollar.
All subsidiaries, except its wholly owned subsidiary, Bateas, are considered to be self sustaining op-
erations. Bateas’s integrated foreign operations and their financial statements are translated to US
dollars under the temporal method. Monetary assets and liabilities denominated in foreign currencies
are translated at the exchange rate in effect at the balance sheet date and non-monetary assets and
liabilities at historical exchange rates. Revenues and expenses are translated at the average exchange
rate in effect during the period. Realized and unrealized foreign exchange gains and losses are in-
cluded in earnings.
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
Commencing January 1, 2009, Bateas is an integrated foreign operation because Bateas translates its
financial statements denominated in Peruvian Soles to US dollars using the temporal method.
All other subsidiaries’ financial statements are translated using the current rate method. Assets and
liabilities are translated into US dollars using the current rate method at period-end exchange rates and
resulting translation adjustments are reflected in comprehensive income. Revenues and expenses are
translated at average exchange rates for the period.
s) Financial Instruments
The Company applies as prescribed Section 3855, “Financial Instruments - Recognition and Measure-
ment”. CICA Standard 3855 establishes standards for recognizing and measuring financial assets,
financial liabilities, and non-financial derivatives. Under CICA 3855, all financial assets must be classi-
fied as either held-for-trading, available-for-sale, held-to-maturity investments or loans and receivables.
All financial liabilities must be classified as held-for-trading or other financial liabilities. All financial
instruments, including derivatives, are included on the Consolidated Balance Sheets and are measured
at fair value, except for held-to-maturity investments, loans and receivables, and other financial li-
abilities, and these are all measured at amortized cost. The carrying value of receivables, and accounts
payable and accrued liabilities approximate their fair value because of the short-term maturity of those
instruments. Subsequent measurements and recognition of changes in fair value depend on the instru-
ment’s initial classification. Held-for-trading financial instruments are measured at fair value, and all
gains and losses are included in net income (loss) in the period in which they arise. Available- for-sale
financial instruments are measured at fair value, determined by published market prices in an active
market, except for investments in equity instruments that do not have quoted market prices in an active
market which are measured at cost. Changes in fair value are recorded in other comprehensive income
(loss) until the assets are removed from the balance sheet. Investments classified as available-for-sale
are written down to fair value through income whenever it is necessary to reflect other than-temporary
impairment. Realized gains and losses on the disposal of available-for-sale securities are recognized in
investment and other income. Also, transaction costs related to all financial assets and liabilities are
recorded in the acquisition or issue cost, unless the financial instrument is classified as held-for-trading
or other liabilities, in which case the transaction costs are recognized immediately in net income (loss).
CICA Handbook Section 3855 also requires financial and non-financial derivative instruments to be
measured at fair value and recorded as either assets or liabilities. Certain derivatives embedded in non-
derivative contracts must also be measured at fair value. Any changes in the fair value of recognized
derivatives are included in net income (loss) for the period in which they arise, unless specific hedge
accounting criteria are met, as defined in CICA Section 3865. The same accounting treatment applied
to these non-financial derivative contracts prior to the adoption of CICA Section 3855. Fair values for
the Company’s recognized commodity-based derivatives are based on the forward prices of the associ-
ated market index.
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
The Company has designated each of its significant categories of financial instruments as follows:
Financial Instrument
Cash
Short term investments
Accounts receivable
Long term receivables
Long term investments and receivables
Derivatives
Accounts payable and accrued liabilities
Due to related parties, net
Long term liability
Classification
Held-for-trading
Held-for-trading
Loans and receivables
Loans and receivables
Available for sale
Held-for-trading
Other liabilities
Other liabilities
Other liabilities
Measurement
Fair value
Fair value
Amortized cost
Amortized cost
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
t) Derivatives and Trading Activities
The Company employs metals contracts, including forward contracts to manage exposure to fluctua-
tions in metal prices. For metals production, these contracts are intended to reduce the risk of falling
prices on the Company’s future sales.
All derivative instruments are recorded on the balance sheet at fair value. Unrealized gains and losses
on derivative instruments are marked to market at the end of each accounting period with the results
included in gain or loss on commodity and foreign currency contracts in the Consolidated Statement
of Operations.
u) Comparative figures
Certain comparative figures have been reclassified to conform with the presentation adopted for the
current year. In particular, certain balance sheet items were condensed.
v) Recently released Canadian Accounting Standards
The Company has assessed new and revised accounting pronouncements that have been issued and
determined that the following may have an impact on the Company:
i. Convergence with International Financial Reporting Standards (“IFRS”)
In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will
significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan
outlines the convergence of Canadian GAAP with International Financial Reporting Standards (“IFRS”)
over an expected five year transitional period. In February 2008, the AcSB announced that 2011 is
the changeover date for publicly-listed companies to use IFRS, replacing Canadian GAAP. This date
is for interim and annual financial statements relating to fiscal years beginning on or after January 1,
2011. The Company will begin reporting its financial statements in accordance with IFRS on January
1, 2011, with comparative figures for 2010.
The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of
amounts reported by the Company for its year ended December 31, 2010, and of the opening balance
sheet as at January 1, 2010.
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
ii. Business Combinations
In January 2009, the CICA issued the following Handbook Sections: Section 1582, “Business Combi-
nations”, Section 1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling In-
terests”. These new standards are harmonized with International Financial Reporting Standards (IFRS).
Section 1582 specifies a number of changes, including: an expanded definition of a business, a re-
quirement to measure all business acquisitions at fair value, a requirement to measure non-controlling
interests at fair value, and a requirement to recognize acquisition-related costs as expenses. Section
1601 establishes the standards for preparing consolidated financial statements. Section 1602 speci-
fies that non-controlling interests be treated as a separate component of equity, not as a liability or
other item outside of equity. The new standards will become effective in 2011 but early adoption is
permitted. The Company is evaluating the attributes of early adoption of this standard and its potential
effects if events or transactions occurred that this standard applies to.
iii. Comprehensive revaluation of assets and liabilities and Equity
In August 2009, the CICA amended Handbook Section 1625, “Comprehensive revaluation of assets
and liabilities” as a result of issuing “Business Combinations, Section 1582, “Consolidated Financial
Statements”, Section 1601, and Non-Controlling Interests”, Section 1602, in January 2009.
In August 2009, the CICA amended Handbook Section 3251, “Equity” as a result of issuing Section
1602, “Non-controlling Interests”. These amendments only apply to entities that have adopted Sec-
tion 1602.
These amendments apply prospectively to comprehensive revaluations of assets and liabilities occur-
ring in fiscal years beginning on or after January 1, 2011, but early adoption is permitted. The Com-
pany is evaluating the attributes of early adoption of this standard and its potential effects if events or
transactions occurred that this standard applies to.
iv. Financial Instruments and Impaired Loans
In August 2009, the CICA issued amendments to Section 3855, “Financial Instruments: Recognition
and Measurement”. These amendments will permit (or require in certain circumstances) entities to
reclassify certain investments in debt instruments, will amend the guidance regarding impairment
measurement for Held-to-Maturity debt instruments and will require reversals of impairment losses
for Available for Sale debt instruments when conditions have changed. These amendments apply only
to investments in debt instruments and do not apply to investments in equity investments or to debt
instruments that have been designated at origination as Held-for-Trading.
In August 2009, the CICA amended Section 3025, “Impaired loans” to conform with the definition of
a loan to that in amended Section 3855 and to include held-to-maturity investments within the scope
of this Section.
These amendments are effective for annual financial statements relating to fiscal years beginning on
or after November 1, 2008 with early adoption permitted for interim financial statements issued on or
after August 20, 2009. The Company has evaluated the new section and determined that adoption of
these new requirements, for fiscal year end December 31, 2009, did not have a material impact on the
Company’s consolidated financial statements.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
03. ACQUISITION
OF MINING
INTEREST
On March 6, 2009, the Company closed the acquisition of all the issued and outstanding shares of
Continuum which had 124,037,920 shares outstanding as of March 6, 2009. The Company agreed
to issue to the Continuum shareholders a total of 6,995,738 shares, which is an exchange ratio of ap-
proximately 0.0564 of a share of the Company for every one Continuum share held.
As Fortuna held 3,706,250 common shares of the issued and outstanding share capital of Continuum
as at March 6, 2009, those shares were cancelled and Fortuna issued a total of 6,786,674 shares to
the Continuum shareholders other than Fortuna. As a result of the acquisition of Continuum, Fortuna
now owns 100% of the San Jose Project in Oaxaca, Mexico.
The acquisition is being accounted for as a purchase of assets. The following calculations include the
fair value of Fortuna shares issued, based on the issuance of 6,786,674 Fortuna shares at CAD$0.98
per share for consideration of $5,194 (CAD$6,651). A valuation date of March 6, 2009 was deter-
mined for the share value.
The difference between the purchase consideration and the fair values of Continuum’s other assets
and liabilities has been allocated to “Mineral properties”. The fair value of all identifiable assets and
liabilities acquired was determined by a valuation effective March 6, 2009. No future tax asset has
been recorded. The resulting “negative” purchase price discrepancy would have resulted in a future
tax asset as it is more likely than not that this will not be recovered.
The purchase price allocation is as follows
Purchase Price
6,786,674 common shares of Fortuna
Acquisition costs
Loan to Continuum
Cost of shares previously acquired
Total purchase price
Purchase Price allocation
Net assets acquired
Cash received
Property, plant & equipment
Mineral property interests
Accounts payable and accrued liabilities
Net identifiable assets of Continuum
$
$
$
$
5,194
113
3,184
130
8,621
5
6
8,749
(139)
8,621
Included as part of the mineral property interests purchased was the Predilecta project in Mexico
with a value of $87 at acquisition date.
As a result of the acquisition of Continuum, the non-controlling interest previously in Cuzcatlan was
eliminated.
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04. SHORT TERM
INVESTMENTS
All amounts expressed in thousands of US Dollars, except for share and per share amounts
December 31, 2009
December 31, 2008
Held-for-Trading
Short term investments
Fair Value
6,034
6,034
$
$
Cost
6,034
6,034
$
$
Accumulated
unrealized
holding gains
(losses)
Fair Value
Cost
$
$
- $
- $
- $
- $
Accumulated
unrealized
holding gains
(losses)
-
-
- $
- $
05. DERIVATIVES
During the year, the Company entered into commodity forward and option contracts to secure a mini-
mum price level on part of its Caylloma’s zinc and lead metal production throughout the period covering
February 2009 to December 2010 with the objective of securing short term capital requirements for
project development.
The counterparties are Standard Bank PLC, Banco Bilbao Vizcaya Argentaria, S.A., Macquarie Bank
Limited, Goldman Sachs, and Scotia Bank.
Forward Sales Contracts - Swap Basis
The contracts are spread evenly over the periods shown below with settlement occurring on a monthly
basis. No initial premium associated with these trades has been paid.
The following forward sale contracts were entered into on a SWAP basis, as defined below:
January 2009 - settlements throughout February 2009 to July 2009:
• Lead forward contracts: $1,109/t, for the total of 3,150 tons
• Zinc forward contracts: $1,240/t, for the total of 3,850 tons
July 2009 - settlements throughout August 2009 to December 2009:
• Lead forward contracts: $1,645/t, for the total of 2,675 tons
• Zinc forward contracts: $1,561/t, for the total of 3,000 tons
August 2009 - settlements throughout January 2010 to June 2010:
• Lead forward contracts: $1,910/t, for the total of 1,800 tons
• Zinc forward contracts: $1,787/t, for the total of 1,050 tons
The SWAP basis contracts are settled against the arithmetic average of zinc and lead spot prices over
the month in which the contract matures.
Put and Call Option Commodity Arrangements
As at December 31, 2009, the Company had entered into a series of put and call option commodity
arrangements. A long put refers to put options that have been bought by the Company, and a short call
refers to call options that have been sold by the Company. Settlement of these options occurs monthly
during the period of January 2010 to December 31, 2010 as follows:
05. DERIVATIVES
(continued)
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
Period January 2010 - June 2010
The following Zinc Option contracts were entered into:
•
•
6 Long put options at strike price:
6 Short call options at strike price:
$2,000/t, for the total of 2,100 tons
$3,010/t, for the total of 2,100 tons
The following Lead Option contracts were entered into:
•
•
6 Long put options at strike price:
6 Short call options at strike price:
$2,000/t, for the total of 1,200 tons
$2,975/t, for the total of 1,200 tons
Period July 2010 - December 2010
The following Zinc Option contracts were entered into:
•
•
6 Long put options at strike price:
6 Short call options at strike price:
$2,000/t, for the total of 3,150 tons
$3,010/t, for the total of 3,150 tons
The following Lead Option contracts were entered into:
•
•
6 Long put options at strike price:
6 Short call options at strike price:
$2,000/t, for the total of 2,850 tons
$2,974/t, for the total of 2,850 tons
The estimated fair value of the outstanding derivative contracts of ($3,055) (2008: $1,418) was
determined with reference to the published market prices for underlying commodities quoted at the
London Metal Exchange.
06. ACCOUNTS
RECEIVABLE AND
PREPAID
EXPENSES
Trade accounts receivable
Advances and other receivables
Prepaid expenses and deposits
December 31, 2009
7,154
$
1,168
313
$ 8,635
December 31, 2008
-
$
1,701
164
1,865
$
Accounts receivable and prepaid expenses include prepaid income tax of $9 (2008: $605), $121
(2008: $102) short term portion of the long term receivable, $34 (2008: $33) in guaranteed deposits.
Trade accounts receivable includes receivables from the sale of concentrates of $7,154 (2008: $nil)
and are aged less than 30 days.
07. INVENTORIES
Inventories consist of the following:
Stockpile ore
Concentrate inventory
Materials and supplies
December 31, 2009
204
$
651
1,474
$ 2,329
December 31, 2008
322
$
90
1,315
1,727
$
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
08. LONG TERM
INVESTMENT AND
RECEIVABLE
As at December 31, 2008, the Company had an investment in 3,706,250 shares of Continuum Re-
sources Ltd. (“Continuum”). The Company measures these investments at fair value and this was
determined based on published share prices of underlying securities on the active market. In addition,
the Company had granted a loan to Continuum under the terms of the agreement by which Fortuna
acquired all of the issued and outstanding shares of Continuum. This amount was used by Continuum
to meet its share of the San Jose project capital contributions as well as general corporate expenditures.
As at March 6, 2009, the Company closed the acquisition of Continuum as discussed in Note 3.
Investment in shares in Continuum
Loan to Continuum
Receivables
December 31, 2009
-
$
-
16
16
$
December 31, 2008
91
$
3,002
114
3,207
$
09. PROPERTY, PLANT
AND EQUIPMENT
Property, plant and equipment are comprised of the following:
$
Land
Buildings
Machinery & equipment
Equipment under capital lease
Furniture & other equipment
Transport units
Work in progress
$
$
December 31, 2009
Accumulated
Depreciation
-
$
1,040
3,023
568
438
239
-
$
5,308
$
Cost
316
4,740
10,152
3,249
1,627
430
2,027
22,541
December 31, 2008
Accumulated
Depreciation
Net Book
Value
316 $
Cost
231 $
3,700
7,129
2,681
1,189
191
2,027
17,233
3,410
7,867
1,615
1,193
526
1,354
$ 16,196 $
Net Book
Value
231
2,808
6,163
1,399
975
355
1,354
13,285
- $
602
1,704
216
218
171
-
2,911
$
Machinery & equipment includes costs of $526 (2008: $nil) and accumulated depreciation of $131
(2008: $nil) resulting from the estimate for the asset retirement obligation.
Mineral properties are located in Peru and Mexico and are comprised of the following:
December 31, 2009
December 31, 2008
10. MINERAL
PROPERTIES
Caylloma, Peru
San Jose, Mexico
Predilecta, Mexico
Net Book
Value
Cost Depletion
$ 42,209 $ 11,685
44,745
109
-
-
Write-off
$
Cost Depletion
160 $ 30,364 $ 32,915 $ 7,154 $
-
-
43,654 33,809
-
109
-
1,091
$ 87,063 $ 11,685 $
1,251 $ 74,127 $ 66,724 $ 7,154 $
Write-off
Net Book
Value
- $ 25,761
33,524
-
285 $ 59,285
285
-
a) Caylloma Project, Peru
For the year ended December 31, 2009, additions to the Caylloma mineral property includes
development and exploration costs of $5,178, an increase of $944 resulting from a revision to the
estimate for the asset retirement obligation, and $160 write off of exploration costs.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
10. MINERAL
PROPERTIES
(continued)
b) San Jose Project, Mexico
For the year ended December 31, 2009, additions to the San Jose mineral property consist of
development and exploration costs capitalized of $5,742. Included in the additions for the San
Jose property is $66 relating to the accretion of the payable for the Monte Alban II concession. This
property was acquired for a total of $1,900 and consists of a payment of $1,100 made in May 2008
and a future payment of $800 is to be made in May 2012 (Note 13. b)). The present value of the
$800 was $589 and this is being accreted monthly with the accretion amount being capitalized to the
mineral property.
Also included in additions to the San Jose mineral property is depreciation of equipment involved in
construction work of $220 (2008: $181), and general and administrative costs to develop the mine
of $1,425 (2008: $1,087), and $141 received as interest on VAT recovered. The San Jose Project is
owned and operated by Cuzcatlan, a wholly owned subsidiary of the Company.
In February 2009, the Company made effective a reduction of 8,344 ha out of the approximately
49,000 ha surrounding the San Jose project for which it holds exploration and mining rights. This
resulted in a write-down of $1,091. This decision was based on existing geological information and is
part of an effort to prioritize capital expenditures.
c) Tlacolula Project, Mexico
In September 2009, the Company, through its wholly owned subsidiary, Cuzcatlan, was granted an
option to acquire a 60% interest in the Tlacolula silver project (“property”) located in the State of
Oaxaca, Mexico from Radius Gold Inc.’s wholly owned subsidiary, Radius (Cayman) Inc. (“Radius”) (a
related party by way of directors in common with the Company).
The Company can earn the interest by spending $2,000, which includes a commitment to drill 1,500
meters within three years, and making staged annual payments of $250 cash and $250 in common
stock of the Company to Radius according to the following schedule:
•
•
•
•
•
$20 cash and $20 cash equivalent in shares upon stock exchange approval;
$30 cash and $30 cash equivalent in shares by the first year anniversary;
$50 cash and $50 cash equivalent in shares by the second year anniversary;
$50 cash and $50 cash equivalent in shares by the third year anniversary; and,
$100 cash and $100 cash equivalent in shares by the fourth year anniversary.
Upon completion of the cash payments and share issuances, and the incurring of the exploration
expenditures as set forth above, the Company, will be deemed to have exercised the option and acquired
a 60% interest in the property, whereupon a joint venture will be formed to further develop the property
on the basis of the Company 60% and Radius 40%.
As at December 31, 2009, the transaction is pending stock exchange approval and no payments have
been made.
On January 15, 2010, the transaction was approved by the TSX Venture Exchange, The Company has
issued 7,813 common shares of the Company, at a fair market value of $2.56 per share and paid $20
cash according to the option agreement.
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
11. ACCOUNTS
PAYABLE
AND ACCRUED
LIABILITIES
Trade accounts payable
Income taxes payable
Payroll and other payables
December 31, 2009
2,577
$
2,949
2,557
$ 8,083
December 31, 2008
$ 3,877
-
858
4,735
$
Payroll and other payables includes $1,084 (2008: $ nil) attributable to workers’ participation under
Peruvian law.
12. RELATED PARTY
TRANSACTIONS
The Company incurred charges from directors, officers, and companies having a common director or
officer as follows:
Transactions with related parties
Consulting fees 1
Salaries and wages 2,3
Other general and administrative expenses 3
Years ended December 31,
$
2009
145
122
159
$ 426
$
$
2008
62
104
74
240
1 Consulting fees includes fees paid to two directors, Simon Ridgway and Mario Szotlender.
2 Salaries and wages includes employees’ salaries and benefits charged to the Company based on an estimated percentage of the actual hours worked for the Company.
2, 3 Radius Gold Inc. (“Radius”) has directors in common with the Company and shares office space, and is reimbursed for various general and administrative costs incurred on
behalf of the Company.
In September 14, 2009, the Company was granted an option to acquire a 60% interest in the Tlacolula
silver project located in the State of Oaxaca, Mexico from Radius. Refer to Notes to the Consolidated
Financial Statements Note 10. c).
Amounts due to/(from) related parties
Owing (from)/to a director and officer 4
Owing to a company with common directors 3
December 31, 2009
(1)
$
50
49
$
December 31, 2008
-
$
38
38
$
4 Owing from a director includes a non-interest bearing loan to Jorge A. Ganoza Durant with no specific terms of repayments.
The transactions with related parties are measured at the agreed upon exchange amount, which is the
amount of consideration established and agreed upon by the parties. The balances with related parties
are unsecured, non-interest bearing, and payable in the normal course of business.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
13. LEASES AND
LONG TERM
LIABILITIES
a) Obligations under capital lease
The following is a schedule of the Company’s capital lease obligations. These are related to the
acquisition of mining equipment, vehicles, and buildings.
Scotia Bank
Banco Interamericano de Finanzas
Scotia Bank
Scotia Bank
Scotia Bank
Scotia Bank
Scotia Bank
Scotia Bank
Scotia Bank
Scotia Bank
Interbank
Interbank
Interbank
Interbank
Lease payments
Less current amount
Interest Rate
9.29%
8.50%
8.20%
8.66%
8.20%
8.49%
8.34%
8.49%
6.75%
6.75%
4.00%
9.12%
9.75%
9.75%
Maturity Date
2009
2009
2009
2010
2010
2010
2010
2011
2011
2011
2011
2011
2012
2012
$
December 31, 2009
-
-
-
101
252
57
14
100
16
20
198
170
91
829
1,848
(1,038)
810
$
$
December 31, 2008
14
$
38
134
226
26
534
110
248
-
-
-
69
-
-
1,399
(682)
717
$
$
b) Long term liability
In November 2007, Bateas acquired the Minera Condor II and the Minera Condor III concessions for
$250. A payment of $50 was made upon the signing of the contract, payments of $30 are required to
be made every six months for a total of five payments, and $50 is required to be made November 2010.
This contract was cancelled in March 2009 and the obligation of $156 recorded has been reversed.
In May 2008, Cuzcatlan acquired the Monte Alban II concession (Note 10. b)) for which a payment of
$800 is due May 2012. This payment is non-interest bearing and all debt relating to the acquisition
of the mineral resource property has been recognized as at December 31, 2009.
Face value of long term liability
Less: adjustment to amortized cost
Opening fair value of liability measured
at amortized cost
Cancellation of contract
Add: accretion to period end
Less: payments
Liability at period end
Less: current portion of long term liability
December 31, 2009
970
(225)
$
December 31, 2008
$ 1,000
(271)
745
(156)
55
-
644
-
644
$
$
729
-
46
(30)
745
(80)
665
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14. ASSET
RETIREMENT
OBLIGATION
All amounts expressed in thousands of US Dollars, except for share and per share amounts
Principal minimum repayment terms will be:
2009
2010
2011
2012
$
$
-
-
-
800
800
c) Contingent liability
The Caylloma mine closure plan was approved in November 2009 with the total closure costs of
$3,346 of which $1,756 is subject to annual collateral in the form of a letter of guarantee, to be
awarded each year in increments of $146 over 12 years, and is based on the life of the mine.
Banco Bilbao Vizcaya Argentaria, S.A., a third party, has established a bank letter of guarantee on
behalf of Bateas in favor of the Peruvian mining regulatory agency in compliance with local regulation
associated with the approved Bateas’ mine closure plan, for the sum of $146. This bank letter of
guarantee expires 360 days from December 2009.
A summary of the Company’s provision for asset retirement obligation is presented below.
Asset retirement obligation - beginning of year
Revisions in estimates
Accretion expense, included in depreciation, depletion and accretion
Foreign exchange impact
Asset retirement obligation - end of year
December 31, 2009
1,066
$
1,286
150
27
2,529
$
$
December 31, 2008
1,953
(589)
88
(386)
1,066
$
The accretion expense was calculated over the year using a risk free interest rate of 7.46%. The
Company has reviewed its reclamation obligations at the property in light of changing regulations and
on the basis of further data in respect of the mine life and has made an increase to the estimated
amount of the asset retirement obligation of $1,286.
In view of the uncertainties concerning environmental reclamation, the ultimate cost of reclamation
activities could differ materially from the estimated amount recorded. The estimate of the Company’s
asset retirement obligation relating to the Caylloma mine is subject to change based on amendments
to laws and regulations and as new information regarding the Company’s operations becomes available.
Future changes, if any, to the estimated liability as a result of amended requirements, laws, regulations,
operating assumptions, estimated timing and amount of obligations may be significant and would be
recognized prospectively as a change in accounting estimate. Any such change would result in an
increase or decrease to the liability and a corresponding increase or decrease to the mineral property,
plant and equipment balance.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
15. INCOME TAX
a) Income tax expense differs from the amount that would be computed by applying the Canadian
statutory income tax rate of 30% (2008 - 31%) to loss before income taxes and non-controlling
interest. The reasons for the differences are as follows:
Income before income taxes and non-controlling interest
Statutory income tax rate
Expected income tax
Items non-deductible (deductible) for income tax purposes
Difference between Canadian and foreign tax rates
Change in income tax rates
Change in exchange rates
Change in valuation allowance
Total income taxes
Represented by:
Current income tax
Future income tax
$
December 31, 2009
6,312
$
30%
1,894
948
1,130
346
818
733
5,869
$
$
December 31, 2008
686
$
31%
212
715
191
206
143
232
1,699
$
$
$
4,922
947
5,869
$
$
-
1,699
1,699
Current income taxes payable of $2,949 (2008: $nil) is included within accounts payable and accrued
liabilities in Note 11.
b) The tax effects items that give rise to significant portions of the future tax assets and future tax
liabilities at December 31, 2009 and 2008 are presented below:
Future income tax assets:
Non-capital losses
Share issue costs
Unrealized foreign exchange losses and other
Financial derivatives
Mineral properties and property, plant and equipment
Total future income tax assets
Valuation allowance
Net future income tax assets
Future income tax liabilities:
Mineral properties – Peru
Mineral properties – Mexico
Unrealized foreign exchange gains and other
Net future income tax liabilities
Net future income tax liabilities
December 31, 2009
December 31, 2008
$
5,416
275
207
1,125
927
7,950
(6,599)
1,351
$ 2,204
352
272
-
1,261
4,089
(2,142)
1,947
$
$
$
(10,366)
(1,958)
-
(12,324)
(10,973)
$
$
$
(8,498)
(1,743)
(1,116)
(11,357)
(9,410)
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
The Company has non-capital loss carry-forwards that will expire if unused of $20,931 that may be
available for tax purposes. The loss carry-forwards expire as follows:
Non-capital losses, expiring as follows:
2013
2014
2016
2017
2025
2026
2027
2028
2029
No expiry
Canada
362
1,076
960
-
2,039
2,233
3,669
1,364
4,508
-
16,211
$
$
Peru
$
- $
-
-
-
-
-
-
-
$
870
870
$
Mexico
-
-
15
2,848
-
-
-
-
987
-
3,850
A full valuation allowance has been recorded against the potential future income tax assets associated
with the Canadian loss carry-forwards as their utilization is not considered more likely than not at this
time.
16. SHARE CAPITAL
a) Authorized: Unlimited common shares without par value
On June 17, 2009, an aggregate of 36 common shares resulting from rounding of previous capital
consolidations were returned to treasury to reduce the accumulated fractional shares held in the
Company’s trustee account.
Subsequent to December 31, 2009, the Company issued 7,813 common shares, at a fair market value
of CAD$2.63 per share, to Radius (refer to Note 10.c)) and issued 15,007,500 common shares at a
price of CAD$2.30 per shares, under the bought deal financing (refer to Note 22.c)), and 64,500 share
purchase options were exercised at CAD$0.85 per share, resulting in issued and outstanding shares of
110,062,465.
b) Stock Options
The following is a summary of option transactions:
Balance, December 31, 2007
Granted
Exercised
Expired
Forfeited
Balance, December 31, 2008
Granted
Exercised
Expired
Forfeited
Balance, December 31, 2009
Number of Shares
6,686,400
2,655,000
(31,400)
-
(1,576,000)
7,734,000
2,915,000
(389,000)
(970,000)
(1,075,000)
8,215,000
$
Weighted Average Exercise
Price Per Share in CAD$
2.24
1.03
1.22
-
2.77
1.87
1.56
0.81
2.35
3.22
1.50
$
$
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
16. SHARE CAPITAL
(continued)
During the period, 970,000 share purchase options with exercise prices ranging from CAD$0.85 to
CAD$3.22 per share expired unexercised, 389,000 share purchase options were exercised at exercise
prices ranging from CAD$0.37 to CAD$0.85 per share. During the period, the Company granted
to officers and employees an aggregate of 2,915,000 share purchase options with exercise prices
ranging from CAD$0.83 to CAD$2.23 per share, exercisable for ten years, vesting from 4 months or
immediately. As at December 31, 2009, 2,665,000 share purchase options are subject to shareholder
approval.
The following share purchase options were outstanding at December 31, 2009:
Number of Shares
30,000
270,000
250,000
60,000
200,000
20,000
225,000
860,000
225,000
110,000
700,000
50,000
15,000
5,000
50,000
30,000
25,000
250,000
150,000
1,125,000
650,000
250,000
2,150,000
490,000
25,000
8,215,000
Exercise Price
CAD$
$ 0.80
$ 1.35
$ 2.29
$ 1.75
$ 1.75
$ 0.85
$ 1.55
$ 1.66
$ 1.61
$ 0.85
$ 2.22
$ 2.75
$ 0.85
$ 0.85
$ 0.85
$ 0.85
$ 0.85
$ 2.52
$ 1.25
$ 0.85
$ 0.85
$ 0.83
$ 1.60
$ 1.70
$ 2.23
Expiry Date
July 24, 2010
February 5, 2016
March 30, 2016
May 8, 2016
May 22, 2016
July 5, 2016
July 5, 2016
July 10, 2016
September 13, 2016
January 11, 2017
January 11, 2017
February 6, 2017
April 22, 2017
May 31, 2017
June 27, 2017
July 2, 2017
October 24, 2017
February 5, 2018
August 25, 2018
October 5, 2018
November 5, 2018
July 6, 2019
October 27, 2019
November 8, 2019
November 23, 2019
Weighted
Average Remaining
Contractual Life -Years
0.6
6.1
6.2
6.4
6.4
6.5
6.5
6.5
6.7
7.0
7.0
7.1
7.3
7.4
7.5
7.5
7.8
8.1
8.7
8.8
8.9
9.5
9.8
9.9
9.9
8.29
As at December 31, 2009, 8,215,000 share purchase options have vested with 2,665,000 share
purchase options subject to shareholder approval.
Subsequent to December 31, 2009 to March 11, 2010, 64,500 share purchase options were exercised
at CAD$0.85 per share.
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
c) Warrants
The following is a summary of share purchase warrant transactions:
Balance, December 31, 2007
Issued
Exercised
Expired
Balance, December 31, 2008
Issued
Exercised
Expired
Balance, December 31, 2009
Number of Share
Purchase Warrants
16,479,375
-
(4,322,596)
(1,093,424)
11,063,355
-
(2,475,355)
(8,588,000)
-
Weighted Average
Exercise Price Per
Share Purchase
Warrant in CAD$
1.89
$
-
1.85
2.30
1.86
-
0.35
2.30
-
$
$
d) Stock-based Compensation
The Company has established a formal stock option plan in accordance with the policies of the TSX
Venture Exchange under which it is authorized to grant options up to 10% of its outstanding shares to
officers, directors, employees, and consultants, and is subject to shareholder approval. The exercise
price of each option must not be less than the closing market price of the Company’s shares on the
trading day immediately prior to the date of grant. The options are for a maximum term of ten years.
The Company uses the fair value based method of accounting for share options granted to consultants,
directors, officers, and employees. The non-cash compensation charge of $2,707 recognized for
the year ended December 31, 2009 (2008: $1,348) is associated with the granting of options to a
consultant, directors and employees. These compensation charges have been determined under the
fair value method using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate
Expected stock price volatility
Expected term in years
Expected dividend yield
Years ended December 31,
2009
2.42% - 3.45%
70% - 78%
5 & 10
0%
2009
2.57% - 3.97%
62% - 78%
2, 3, 5 & 10
0%
The weighted average grant date fair value of options granted during the year ended December 31,
2009 was CAD$0.91 (2008 - CAD$0.57).
Option pricing models require the input of highly subjective assumptions including the estimate of the
share price volatility, risk-free interest rate and expected life of the options. Changes in the subjective
input assumptions can materially affect the fair value estimate, and therefore the existing models do
not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
16. SHARE CAPITAL
(continued)
e) Reserves
During the year, the Board of Directors of Bateas has appropriated reserves of $1,130 (2008: $nil)
from its retained earnings representing ten percent of the net income earned in the calendar years
2006, 2007, and 2008. The reserve is required under the Republic of Peru’s General Corporate Law
(Ley General de Sociedades) article 229, whereas a legal reserve equivalent to a minimum of ten
percent of the distributable value of each financial year, net of income taxes until the reserve reaches
an amount equal to one fifth of its capital (capital defined as share capital and retained earnings) must
be established. The excess over this limit is not a legal reserve. Dividends can only be paid on profits
free of reserves.
17. SEGMENTED
INFORMATION
a) Industry Information
The Company operates in one reportable operating segment, being the acquisition, exploration,
development, and operation of mineral properties.
b) Geographic Information
The following is the summary of operations and summary of certain assets on a geographical basis.
Canada
Peru
Mexico
Other
Total
$
$
$
$
Year ended December 31, 2009
Sales
Operating income (loss)
Year ended December 31, 2008
Sales
Operating (loss) income
As at December 31, 2009
$
Mineral Properties
Property, plant and equipment $
Total assets
As at December 31, 2008
Mineral Properties
Property, plant and equipment $
Total assets
$
$
$
-
(5,612)
-
(4,294)
-
11
25,120
-
4
25,071
$
$
51,428
20,992
$
$
- $
(921) $
- $
(76) $
51,428
14,383
$
$
24,867
(947)
- $
$
$ (329) $
- $
(23) $
24,867
(5,593)
$
$
$
$
$
$
30,364
12,298
67,978
$
$
$
43,763 $
4,922 $
46,614 $
- $
2 $
26 $
74,127
17,233
139,738
25,761
9,105
46,124
$ 33,524 $
$ 4,174 $
$ 41,348 $
- $
2 $
2,825 $
59,285
13,285
115,368
c) Major Customers
For the year ended December 31, 2009 and 2008, there was one customer accounting for 94% and
100% of total sales of the Company, respectively.
18. COMMITMENTS
AND
CONTINGENCIES
The Company has a contract to guarantee power supply at its Caylloma mine. Under the contract,
the seller is obligated to deliver a “maximum committed demand” (for the present term this stands
at 2,800 Kw) and Bateas is obligated to purchase subject to exemptions under provisions of “Force
Majeure”. The contract is automatically renewed every two years for a period of 10 years. Renewal
can be avoided without penalties by notifying 10 months in advance of renewal date. Tariffs are
established yearly by the energy market regulator in accordance with applicable regulations in Peru.
The Company acts as guarantor to capital lease obligations held by two of its mining contractors. These
capital lease contracts are related to the acquisition of mining equipment deployed at the Caylloma
mine. As at December 31, 2009, these obligations amounted to $1,075 and mature in 2010.
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
a) Environmental Matters
The Company’s mining and exploration activities are subject to various laws and regulations governing
the protection of the environment. These laws and regulations are continually changing and are generally
becoming more restrictive. The Company conducts its operations so as to protect the public health and
environment and believes its operations are in compliance with applicable laws and regulations in all
material respects. The Company has made, and expects to make in the future, expenditures to comply
with such laws and regulations, but cannot predict the full amount of such future expenditures.
Estimated future reclamation costs are based principally on legal and regulatory requirements. As of
December 31, 2009 and 2008, $2,529 and $1,066, respectively, were accrued for reclamation costs
relating to mineral properties in accordance with Section 3110, “Asset Retirement Obligations”. See
Note 13. c) and 14.
b) Income Taxes
The Company operates in numerous countries around the world and accordingly it is subject to, and
pays annual income taxes under the various income tax regimes in the countries in which it operates.
Some of these tax regimes are defined by contractual agreements with the local government, and others
are defined by the general corporate income tax laws of the country. The Company has historically filed,
and continues to file, all required income tax returns and to pay the taxes reasonably determined to be
due. The tax rules and regulations in many countries are highly complex and subject to interpretation.
From time to time, the Company is subject to a review of its historic income tax filings and in connection
with such reviews, disputes can arise with the taxing authorities over the interpretation or application of
certain rules to the Company’s business conducted within the country involved.
c) Title Risk
Although the Company has taken steps to verify title to properties in which it has an interest, these
procedures do not guarantee the Company’s title. Property title may be subject to, among other things,
unregistered prior agreements or transfers and may be affected by undetected defects.
19. CAPITAL
DISCLOSURE
The Company’s objectives when managing capital are to provide shareholder returns through
maximization of the profitable growth of the business and to maintain a degree of financial flexibility
relevant to the underlying operating and metal price risks while safeguarding the Company’s ability to
continue as a going concern.
The capital of the Company consists of shareholders’ equity and the line of credit, net of cash. The
Board of Directors does not establish a quantitative return on capital criteria for management. The
Company manages the capital structure and make adjustments to it in light of changes in economic
conditions and the risk characteristics of the underlying assets.
The management of the Company believes that the capital resources of the Company as at December
31, 2009, are sufficient for its present needs for the next 12 months.
The Company’s overall strategy with respect to capital risk management remained unchanged during
the year. The Company is not subject to externally imposed capital requirements.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
20. MANAGEMENT
OF FINANCIAL
RISK
The Company’s financial instruments are exposed to certain financial risks, including currency risk,
credit risk, liquidity risk, interest risk, and price risk. The Company’s 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.
a) Fair value of financial instruments
The Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3862 “Financial
Instruments - Disclosure” requires disclosure of a three-level-hierarchy for fair value measurements
based upon transparency of inputs to the valuation of financial instrument carried on the balance sheet
at fair value. The three levels are defined as follows:
•
•
•
Level 1 - inputs to the valuation methodology are quoted (unadjusted) for identical assets or
liabilities in active markets.
Level 2 - inputs to valuation methodology include quoted market prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the financial instrument.
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value of
measurement.
The carrying value of cash, short term investments, accounts receivable, accounts payable and accrued
liabilities, due to related parties, net, approximate their fair value due to the relatively short periods to
maturity and the terms of these financial instruments.
Fair value estimates are made a specific point in time, based on relevant market information and
information about the financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement and, therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
The Company has classified the determination of fair value of accounts receivable, and derivatives as
level 2, as the valuation method used by the Company includes an assessment of assets in quoted
markets with significant observable inputs.
Short term investments
Accounts receivable
Derivatives
Financial assets (liabilities) at fair value as at December 31, 2009
Total
6,034
8,322
(3,055)
11,301
Level 3
-
-
-
-
Level 2
-
8,322
(3,055)
5,267
Level 1
6,034
-
-
6,034
$
$
$
$
$
$
$
$
1
Comparative information has not been presented in the table because this information is not required in the year of adoption. For periods subsequent to the year of adoption
comparative information would be necessary.
Accounts receivable includes accounts receivable from provisional sales. The fair value of accounts
receivable resulting from provisional pricing reflect observable market commodity prices. Resulting fair
value changes accounts receivable are through sales. Transactions involving accounts receivable are
with counterparties the Company believes are creditworthy.
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All amounts expressed in thousands of US Dollars, except for share and per share amounts
Derivatives are carried at their fair value, which is determined based on internal valuation models that
reflect observable forward market commodity prices. Resulting fair value changes to derivatives are
through net gain(loss) on commodity contracts. Transactions involving derivatives are with counterparties
the Company believes to be creditworthy.
b) Currency risk
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. The
Company operates in Canada, Peru, Mexico and Barbados and a portion of its expenses are incurred
in Canadian dollars, Nuevo Soles, and Mexican Pesos. A significant change in the currency exchange
rates between the United States dollar relative to the other currencies could have a material effect on
the Company’s results of operations, financial position or cash flows. The Company has not hedged its
exposure to currency fluctuations.
As at December 31, 2009, the Company is exposed to currency risk through the following assets and
liabilities denominated in Canadian dollars, Nuevo Soles and Mexican Pesos (all amounts are expressed
in thousands of Canadian dollars, thousands of Nuevo Soles or thousands of Mexican Pesos):
Cash
Short term investments
Accounts receivable
Accounts payable and accrued
liabilities
Canadian
Dollars
21,283 S/.
560
5
$
December 31, 2009
Nuevo
Soles
Mexican
Pesos
1,283
-
6,565
302 $
-
880
December 31, 2008
Canadian
Dollars
$ 29,748
-
13
S/.
Nuevo
Soles
629 $
-
10,400
Mexican
Pesos
3,864
-
46,460
(194)
(17,150)
(623)
(172)
(5,281)
(10,259)
Based on the above net exposure as at December 31, 2009, and assuming that all other variables remain constant, a 10%
depreciation or appreciation of the US dollar against the above currencies would result in an increase or decrease expressed in
US dollars, as follows:
Impact to other comprehensive
income (loss)
Impact to net income (loss)
(614) $
2,293
$
65
$
c) 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. The Company’s cash equivalents and short term investments are held
through large Canadian, international and foreign national financial institutions. These investments
mature at various dates within one year. All of the Company’s trade accounts receivables are held with
large international metals trading companies.
The Company holds derivative contracts with financial institutions and in this regard is exposed
to counterparty risk. The Company mitigates this risk by transacting only with reputable financial
institutions to minimize credit risk.
As at December 31, 2009, the Company has a Mexican value added tax of $421 and Peruvian value
added tax of $176. The Company expects to recover the full amounts from the Mexican and Peruvian
Governments.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
All amounts expressed in thousands of US Dollars, except for share and per share amounts
20. MANAGEMENT
OF FINANCIAL
RISK (continued)
d) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall
due. The Company manages liquidity risk by continuing to monitor forecasted and actual cash flows.
The Company has in place a planning and budgeting process to help determine the funds required to
support the Company’s normal operating requirements on an ongoing basis and its development plans.
The Company strives to maintain sufficient liquidity to meet its short term business requirements, taking
into account its anticipated cash flows from operations, its holdings of cash, short term investments,
and its committed liabilities.
The Company expects the following maturities of its financial liabilities (including interest), operating
lease and other contractual commitments:
Accounts payable and accrued liabilities
Due to related parties, net
Derivatives
Long term liability
Total1
Expected payments due by period as at December 31, 2009
Less than
1 year
8,083 $
49
3,055
1,038
12,225 $
1-3 years
-
-
-
1,454
1,454
$
$
4-5 years
-
$
-
-
-
-
$
$
$
After
5 years
- $
-
-
-
- $
Total
8,083
49
3,055
2,492
13,679
1
Amounts above do not include payments related to the following: (i) the Company’s anticipated asset retirement obligation of $2,529 associated with mine closure, land reclamation,
and other environmental matters.
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. The risk that the Company will realize a loss
as a result of a decline in the fair value is limited because the balances are generally held with major
financial institutions in demand deposit accounts.
f) Metal price risk
The Company is exposed to metals price risk with respect to silver, gold, zinc, and lead sold through
its mineral concentrate products. The Company mitigates this risk by implementing price protection
programs for some of its zinc and lead production through the use of derivative instruments. As a
matter of policy, the Company does not hedge its silver production.
A 10% change in zinc, lead, silver, gold, and copper prices would cause an $811, $848, $1,528,
$149, and $27 change in net earnings, respectively.
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21. SUPPLEMENTAL
CASH FLOW
INFORMATION
All amounts expressed in thousands of US Dollars, except for share and per share amounts
Supplementary disclosure of cash flow information:
Cash received or paid for interest and income taxes:
Cash received for interest
Cash paid for income taxes
Non-cash Transactions
Issue of share on purchase of resource property
Reassessment of asset retirement obligation
Cancellation of Minera Condor liability
Equipment purchase through capital lease
Purchase of resource property on a deferred payment plan
Sale of equipment for a long-term receivable
Fair value of options exercised
Notes
10
10,14
13 b)
Years ended December 31,
2009
210
596
5,194
1,286
156
1,425
-
-
246
$
$
$
$
$
$
$
$
$
2008
$ (1,417)
479
$
$
$
$
$
$
$
$
-
-
-
-
860
143
25
22. SUBSEQUENT
EVENTS UP TO
MARCH 11, 2010
a) Credit Facility
On January 6, 2010, the Company has signed a commitment letter to enter into a $20 million senior
secured revolving credit facility with The Bank of Nova Scotia. The facility will have a 2.5 year maturity.
The proceeds of the facility may be used for general corporate purposes, including the development of
the San Jose Project in Mexico.
The facility is intended to complement Fortuna’s strong cash position and provide additional financing
flexibility during the construction stage at San Jose. The San Jose pre-feasibility study is scheduled to
be concluded the first quarter of 2010.
b) Exchange listing
The Company’s common shares were listed and begun trading on the Toronto Stock Exchange (TSX)
at the opening of trading on Monday, January 18, 2010 under its current symbol “FVI”. Fortuna’s
common shares were delisted from the TSX Venture Exchange upon commencement of trading on the
TSX.
c) Other
On February 3, 2010, the Company (“Fortuna”) entered into a bought deal financing (“Offering”) with
a syndicate of underwriters co-led by CIBC and Canaccord Financial Ltd.
The Offering closed on March 2, 2010 and the Company issued 15,007,500 common shares at a
price of CAD$2.30 per shares (refer to Note 16.a) under the bought deal financing for gross proceeds
of CAD$34.5 million. Net proceeds of CAD$32.8 million after underwriting fees of CAD$1.7 million
were raised from the bought deal financing.
The Company intends to use the net proceeds from the Offering to partially fund the construction of
its 100% owned San Jose project in the state of Oaxaca, Mexico and for general corporate purposes.
BUILDING
THE FOUNDATIONS
OF A LEADING
SILVER MINER
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1
2
1. Caylloma Mine: Animas Vein
2. Vancouver, Canada
CORPORATE INFORMATION
Corporate Office:
355 Burrard Street, Suite 840
Vancouver, BC
Canada, V6C 2G8
Tel: +1.604.484.4085
Management Head Office:
Piso 17. Av. Pardo y Aliaga # 640
San Isidro, Lima - Peru
Tel: +51.1.616.6060, ext. 2
Investor Relations
Corporate Office
Erin Ostrom / Ralph Rushton
Management Head Office
Carlos Baca
info@fortunasilver.com
Stock Exchanges:
TSX: FVI
Lima Stock Exchange: FVI
Frankfurt: F4S.F
OTC:BB: FVIT.F
Auditors:
Deloitte & Touche LLP
Chartered Accountants
2800 – 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver, BC
Canada V7X 1P4
Share Transfer Agent:
Olympia Trust Company
925 West Georgia Street, Suite 1900
Vancouver, BC
Canada V6C 3L2
Qualified Person
Mr. Miroslav Kalinaj, P. Geo., is
the Company’s Qualified Person
as defined by the NI 43 - 101
and is responsible for the accuracy
of the technical information in this
annual report.
www.fortunasilver.com
TSX: FVI
Lima Stock Exchange: FVI
Frankfurt: F4S.F
OTC:BB: FVIT.F
Photo: Caylloma Mine: Animas Vein