F O R T U N A S I LV E R M I N E S I N C . / 2 0 1 0 A N N U A L R E P O R T
Exceeding Objectives
Exceeding Objectives
pg.04
2011 - 2015
Production Forecast
pg.05
Mid-Term Strategy
pg.09
pg.11
Mineral Reserves and
Mineral Resources
Chief Executive
Officer’s Letter
pg.15
Social
Responsibility
pg.17
Caylloma
Mine, Peru
pg.21
San Jose
Mine, Mexico
pg.27
Silver
Analysis
pg.14
Chairman´s
Letter
pg.29
Financial
Review
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,
uncertainties 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.
Cover Photo: Caylloma Mine- Bateas vein workers / Photo: San Jose Mine- Crushing circuit
FORTUNA SILVER MINES INC. remains one of the industry’s most efficient and lowest
cost silver producers and an outstanding performer amongst its peer companies. As
a result, the Company’s operational team is gaining recognition as one of the best
operators and mine developers in the emerging producer sector. During 2010, Fortuna
capitalized on rising silver and base metal prices and realized its best performance
to date in earnings and operating margins. Annual silver production at Fortuna’s
Caylloma Mine in Peru has continually exceeded forecasts and increased by more
than 250% over the past three years to 1.9 million ounces. With commissioning
of the Company’s San Jose Mine in Mexico, planned for the third quarter of 2011,
Fortuna offers one of the most exciting organic production growth profiles amongst
emerging silver producers, ensuring increasing leverage to rising silver prices. >>
02
Corporate Office
Vancouver, Canada
Management Head Office
Lima, Peru
San Jose Project
Oaxaca, Mexico
(Silver, Gold)
Caylloma Mine
Caylloma, Peru
(Silver, Lead, Zinc, Copper)
2010 highlights
FINANCIAL HIGHLIGHTS (000’s)
Expressed in US dollars
Sales
Operating Income (loss)
Net Income (loss)
Earnings (loss) per share, basic and diluted
Net cash provided by operating activities
Cash position
OPERATING HIGHLIGHTS
Tonnes milled
Average tonnes milled per day (tpd)
Production (metal contained)
Silver (oz) (*)
Gold (oz) (*)
Lead (000 lbs)
Zinc (000 lbs)
Copper (lbs)
Unit Cash Cost and Net Smelter Return
Unit cash cost (US$/oz Ag**)
Unit cash cost (US$/tonne)
Unit NSR (US$/tonne)
Realized Price (**)
Silver (US$/oz)
Lead (US$/lb)
Zinc (US$/lb)
Copper (US$/lb)
Gold (US$/oz)
No. of Employees
2010
$ 74,056
30,111
12,955
0.12
21,109
90,087
2009
$ 51,428
14,383
623
0.01
13,686
36,796
2008
$ 24,867
(5,593)
(910)
(0.01)
8,356
na
2010
434,656
1,231
2009
395,560
1,121
2008
331,381
936
1,906,423
2,556.05
21,373
26,137
1,026
1,682,546
2,780.07
25,137
28,442
190
(7.73)
51.20
163.59
19.05
0.80
0.60
2.67
939.45
(4.86)
46.27
124.07
13.75
0.61
0.42
1.59
812.08
1,630
1,185
805,057
2,196.67
16,502
23,283
na
(3.78)
46.41
87.00
na
na
na
na
na
885
03
CAPITAL STRUCTURE HIGHLIGHTS
Share Structure
(as of April 1, 2011)
Outstanding Options: 4.1 million
Warrants:
0
Issued Capital:
122.9 Million
Fully Diluted:
127.1 Million
Exchanges
TSX: FVI
BVL: FVI
Frankfurt: F4S.F
OTC:BB: FVIT.F
Average Trading Volume
(3 month)
816,000 shares
Market Capitalization
(as of April 14, 2011)
CND$771.8 million
52-week
Price Range
CND$6.81 – $1.85
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
Notes:(*) 2010, 2009 Ag and Au production in Pb and Cu. 2008 Ag and Au production in Pb.(**) Considers deductions, treatment, and refining charges as applicable
2010 Milestones:
Higher Income, Production and Declining Cash Costs
Net income of US$12.96 million, compared with US$0.62 million in 2009 n Sales of
US$74.06 million, compared with US$51.43 million in 2009; 44% increase n Record silver
production at Caylloma: 1.9 million ounces n Production of 26.1 million pounds of zinc,
21.4 million pounds of lead and 1 million pounds of copper as by-products n Caylloma’s
cash cost per silver ounce drop to negative US$7.73, net of by-product credits n San Jose
on track to produce 542,420 ounces of silver and 4,816 ounces of gold or 824,158 silver
equivalent ounces* in 2011 and 2.75 million silver equivalent ounces in 2012
n Two bought-deal financings raised more than CND$80 million n Cash position (including
short-term investments and working capital) at year end: US$90.81 million and US$97.09
million respectively.
2011-2015
Production Forecast
n Caylloma Mine (Ag - Au)
n San Jose Mine (Ag - Au)
n Caylloma Mine Base Metal (Ag Eq)
10
z
o
M
9
8
7
6
5
4
3
2
1
0
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
04
Photo: San Jose Mine- Ocotlan grey water treatment plant
(*) Based on Ag= US$ 23.60/oz, Au= US$ 1,350/oz and metallurgical recoveries of 88% and 90% for Ag and Au respectively1. Ratios for silver equivalency have been derived using the following metal prices: Au: US$1,350/oz, Ag: US$35/oz, Zn: US$2,400/t, Pb: US$2,400/t2. Metal production forecast based on Mineral Reserves published in news release dated April 12th, 2011
OUR VISION: To be valued as a
leading silver mining company
centered on developing natural resources in Latin
America; operating with a commitment to profitability,
growth, high standards and the well being of our work-
ers, neighboring communities and the environment.
Fortuna Silver Mines’ Philosophy
OUR MISSION: To create shareholder value through the rational acquisition,
exploration, development and mining of silver in Latin America with a
commitment to sustainable growth of reserves and annual metal production.
To promote a stimulating work environment of high-standards
and best-practices which fosters respect, team work, social
and environmental responsibility.
OUR
VALUES
(1) We value the environment: We subscribe to the
highest environmental standards (2) We value the
health and safety of our workers: We will not tolerate
insecure acts or conditions (3) We value our neighbors
and other stakeholders: We have respect for cultural di-
versity and will work as a strategic partner towards the
sustainable development of neighboring communities
(4) We value the courage to introduce change: We will
break industry paradigms (5) We value integrity: We do
what we say we will do
OUR MID-TERM STRATEGY n Target 14 million silver equivalent ounces in
production and development by 2015, 7 million silver equivalent ounces
from current reserves and plans plus 7 million silver equivalent from new
ounces n Focus on Latin America n Focus on silver, no less than 40% of
value n Focus on high margin operations below the median for industry cost.
Photo: Processing plant concentrate/tailings thickeners and water tanks
05
JORGE A.
GANOZA DURANT
President, CEO
and Director
CESAR F.
PERA CACERES
Vice President,
Human and Organizational
Development
MANUEL
RUIZ-CONEJO CARLOS
Vice President,
Project Development
JORGE R.
GANOZA AICARDI
Vice President,
Operations
Dr. THOMAS I.
VEHRS
Vice President,
Exploration
LUIS DARIO
GANOZA DURANT
Chief Financial Officer
06
2011 Production Guidance
Mine
Silver (oz) Gold (oz)
Zinc (lbs)
Lead (lbs) Copper (lbs)
Caylloma, Peru
1,900,000
2,950 25,200,000 16,600,000
760,000
San Jose, Mexico
542,420
4,580
--
--
--
Total :
2,442,420
7,530 25,200,000 16,600,000
760,000
Core Assets at a Glance
CAYLLOMA Ag-Pb-Zn-Cu MINE – AREQUIPA, PERU Low-cost, underground vein mine in
operation since late 2006. Produces silver, gold, lead, zinc and copper from 1,250 tonnes
per day operation. Silver production currently optimized at 1.9 million ounces. In 2010,
silver accounted for 48% of revenue and gold 3%, the balance being base metals. Our
Peruvian subsidiary employs approximately 1,050 workers.
SAN JOSE Ag-Au MINE – OAXACA, MEXICO Underground vein mine scheduled to initiate
commercial operations in the third quarter of 2011 at a rate of 1,000 tonnes per day,
increasing to 1,500 tonnes per day in late 2013. 2011 production forecast of 542,420
ounces of silver plus 4,816 ounces of gold or 824,158 silver equivalent ounces. For 2012,
production forecast of 1.79 million ounces of silver plus 16,283 ounces of gold or 2.75
million silver equivalent ounces. Our Mexican subsidiary currently employs approximately
500 workers out of which 40% come from surrounding communities.
EXPLORATION AND RESERVE REPLACEMENT In 2009 and 2010, we successfully replaced
reserves consumed through production at Caylloma and believe that with our improving
understanding of ore controls in the district, we should be able to continue to add to the
reserve and resource base.
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
07
Both Caylloma and
San Jose offer excellent
potential for expansion
of our current reserves
and resources.
Both Caylloma and San Jose offer excellent
potential for expansion of our current reserves
and resources. Fortuna Silver has an aggressive
Brownfields exploration program for 2011 with a
budget of US$12.5 million, including more than
30,000 meters of exploration drilling at Caylloma
and San Jose. If successful, these exploration
programs could have a material impact on expansion plans for the two operations. At the
Caylloma Mine, the Company is targeting the lateral and depth extensions of the principal
veins in the southern portion of the district. Targets have been defined at the northeast
extension of the San Cristobal vein where the projection of the vein is covered by post-
mineral rock units. Similarly, drilling will further test the northeast extension of the Animas
vein where prior drilling in 2007 and 2008 intersected ore-grade mineralization in the
Nancy structure, a subsidiary structure to the Animas Vein.
Exploration drilling will also test the northeast extension of the Bateas Vein near its projected
intersection with the San Cristobal Vein. Both the Bateas and the San Cristobal veins have
been prominent producers of high-grade silver ores throughout the history of the Caylloma
District. Our geologists will also explore the La Plata Vein which is sub-parallel to the
Animas Vein. Limited past drilling of the La Plata Vein has encountered high-grade silver
mineralization over vein widths ranging to 2.65 meters.
At the San Jose Project, drilling targets have been defined along the southern strike
extension of the San Jose deposit and in association with multiple vein targets in the Taviche
Mining District located approximately 12 kilometers to the northeast of San Jose. Drilling is
also planned in the El Rancho area, on-trend from the Taviche District, where geochemical
surface sampling has identified a large Au-in-soil anomaly associated with strongly silicified
and mineralized limestones stratigraphically beneath the volcanic sequence that is host to
the vein-style mineralization present in the area. Additional exploration is planned to further
evaluate previously identified stream sediment and soil anomalies located within Fortuna’s
58,000 hectare concession package.
08
Mineral Reserves and Mineral Resources
MINERAL RESERVES – PROVEN AND PROBABLE
Tonnes
Property
Classification
(000) Ag (g/t) Au (g/t)
Pb (%)
Zn (%)
Cont. Ag
(Moz)
Cont.Au
(koz)
Caylloma, Peru
Silver Veins
Proven
Probable
Proven + Prob.
Polymetallic Veins
Proven
Probable
Proven + Prob.
Combined-All Veins Proven
Probable
Proven + Prob.
San Jose, Mexico
Probable
Total Reserves
Proven + Prob.
403
111
515
1,316
2,305
3,622
1,720
2,417
4,136
3,771
7,908
394
457
407
115
121
119
180
137
155
202
177
0.34
0.90
0.47
0.35
0.34
0.34
0.35
0.36
0.36
1.58
0.94
0.03
0.11
0.05
1.96
1.80
1.86
1.50
1.72
1.63
0.04
0.04
0.04
2.92
2.64
2.74
2.24
2.52
2.40
N/A
N/A
N/A
N/A
5.1
1.6
6.7
4.9
9.0
13.9
10.0
10.6
20.6
24.5
45.1
4.5
3.2
7.7
14.6
25.0
39.6
19.1
28.2
47.3
191.6
238.9
MINERAL RESOURCES – MEASURED AND INDICATED
Property
Classification
(000) Ag (g/t) Au (g/t)
Pb (%)
Zn (%)
Tonnes
Cont. Ag
(Moz)
Cont. Au
(koz)
Caylloma, Peru
Measured
Indicated
463
1,423
Measured + Ind.
1,887
San Jose, Mexico
Indicated
376
Total
Measured + Ind.
2,263
94
131
122
243
142
0.27
0.33
0.31
2.12
0.61
1.00
0.84
0.88
N/A
N/A
1.66
1.37
1.44
N/A
N/A
1.4
6.0
7.4
2.9
10.4
4.1
14.9
18.9
25.6
44.6
MINERAL RESOURCES - INFERRED
Tonnes
Property
Classification
(000) Ag (g/t) Au (g/t)
Pb (%)
Zn (%)
Cont. Ag
(Moz)
Cont. Au
(koz)
Caylloma, Peru
Inferred
San Jose, Mexico
Inferred
3,332
3,074
119
222
0.35
1.80
09
Total
Inferred
6,406
168
1.05
1.05
2.02
N/A
N/A
N/A
N/A
12.8
22.0
34.7
37.9
178.0
215.9
Notes: 1. Mineral Reserves and Mineral Resources are as defined by the CIM Definition Standards on Mineral Resources and Miner-
al Reserves 2. Mineral Resources are exclusive of Mineral Reserves 3. Mineral Resources that are not Mineral Reserves do not have
demonstrated economic viability 4. Caylloma Mineral Reserves are estimated and reported as of June 30, 2010 using break-even
cut-off grades based on estimated NSR values using assumed metal prices of US$16.63/oz Ag, US$1066.68/oz Au, US$1984/t
Pb and US$1962/t Zn; historic metallurgical recovery rates of 87% for Ag, 43% for Au, 91% for Pb and 89% for Zn; and historic
operating costs adjusted for inflation. Caylloma Mineral Resources are reported as of June 30, 2010 based on estimated NSR val-
ues using the aforementioned assumed metal prices and a cut-off grade of US$30/t 5. Caylloma Mineral Resources include oxide
material that is not amenable to processing in the existing flotation plant. Measured and Indicated oxide resources are estimated at
831,100 tonnes averaging 200 g/t Ag, 0.38 g/t Au, 1.10% Pb and 1.30% Zn. Inferred oxide resources are estimated at 677,000
tonnes averaging 176 g/t Ag, 0.30 g/t Au, 0.50% Pb and 0.91% Zn 6. San Jose Reserves are estimated and reported as of Dec. 31,
2010 using break-even cut-off grades based on assumed metal prices of US$15.12/oz Ag and US$897.51/oz Au, estimated metal-
lurgical recovery rates of 88% for Ag and 90% for Au and projected operating costs. San Jose Resources are estimated and reported
at a Ag Equivalent cut-off grade of 100 g/t, with Ag Eq in g/t = Ag (g/t) + Au (g/t) * ((US$856.16/US$13.75) * (91.5/92.5)) = Ag
(g/t) + Au (g/t)*61.6 7. Totals may not add due to rounding procedures 8. N/A = Not Applicable
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
Exceeding Objectives
On Track to Becoming a
Leading Silver Miner in Latin America
10
Photo: San Jose Mine- Mine development
Chief Executive Officer’s Letter
DEAR SHAREHOLDERS 2010 has been
with other structural changes, will assist us in
another year of accomplishment for Fortuna
continuing to mobilize our organization to
as we reported record financial performance,
achieve sustainable long term growth.
driven by increases in production and metal
prices, with net earnings of US$0.12 per
GROWING OUR BUSINESS Over the course of
share. We realized an average silver price
the last four years we have been diligently de-
of US$19 dollars per ounce during the year
ploying capital to build a base of reserves that
and are well positioned to continue benefi-
have taken us to 45.1 million ounces of silver
ting from the surge in silver price. Under the
and 239,000 ounces of gold at both Caylloma
theme of “building a leading silver miner” we
and San Jose. This allows us to project the
have been carrying initiatives in 2010 and
life of each of our mines to over eight years
into 2011, to continue delivering growth in
and support an annual production rate of 6.5
resources, reserves and silver production with
million silver equivalent ounces (from silver
an emphasis on remaining as one of the
and gold) starting in 2013. Our challenge now
lowest cost silver producers. Cash cost per sil-
is to continue fuelling growth organically and
ver ounce in 2010 was negative US$7.73 per
through corporate transactions.
ounce net of by product base metal credits.
Exploration successes
will likely lead to further
11
incremental metal
production growth
For 2011, we have allocated US$12.5 mi-
llion dollars to brownfields exploration around
our mines in Peru and Mexico. Exploration
successes will likely lead to further incre-
mental metal production growth. In addition,
we continue actively searching for new silver
business opportunities in Latin America. Our
business development efforts for a material
In 2010, the Company incorporated a new
acquisition are centered in Mexico and Peru
set of values to meet the challenges of our
and over the past months, we have evaluated
growing business: value for the environment,
opportunities in Argentina, Chile, Ecuador
value for the health and safety of our workers,
and Colombia. Apart from the inherent cha-
value for surrounding communities and stake-
llenge of discovery, we are in a very com-
holders along with the courage to introduce
petitive market. We rely on the skills of our
change and integrity. This, in concurrence
exploration team as well as on our regional
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
expertise to gain a competitive advantage
San Jose into production in the third quarter
in our search for Fortuna´s next asset.
of 2011, execute our planned exploration
programs and meet sustaining capital require-
BUILDING OUR ORGANIZATION As a growth
ments of our Caylloma Mine. Our excess cash
company in a dynamic market, our organiza-
will allow us to aggressively pursue new busi-
tion is faced with a constant state of change.
ness opportunities in Latin America.
In 2010 and early 2011 we incorporated four
key positions to Fortuna´s executive team.
THE SAN JOSE AG-AU MINE: PLANNED
The position of Vice President of Human
COMMERCIAL PRODUCTION FOR THIRD
and Organizational Development will play a
QUARTER 2011 The San Jose Mine
strategic role in supporting our growth stra-
construction continues advancing within
tegy ensuring that we have the ability of not
schedule and budget targeting the start of
only attracting but also retaining talent in an
commercial production for the third quarter
extremely competitive job market. We also in-
of 2011. Our 2011 budget to commission the
corporated the positions of Corporate Manager
mine is US$32 million dollars.
for Financial Planning, reporting to the Chief
Financial Officer; Corporate Resource Mana-
As of March 2011 major processing plant
ger and Brownfields Exploration Manager, both
equipment has been mounted and installed.
reporting to the Vice President of Exploration.
This includes: three stage crushing circuit,
FINANCIAL POSITION Fortuna enters 2011
conveyors, ball mill, flotation cells, thicke-
with a solid balance sheet and a strong
ners and water tanks. Key projects have been
coarse and fine ore storage facilities and belt
treasury. In cash and short term investments,
concluded including the tailings and water
12
we hold approximately US$90 million dollars
storage facilities, 8MW power substation and
with no long term debt. During 2010, we
the Ocotlan gray water treatment plant. Mine
closed two successful bought deal equity
development and preparation is advancing
financings raising CDN$80.5 million; in
according to plan with the aim of building a
addition, we put in place a CDN$20 million
30,000 tonne ore stock pile by June and
revolving credit facility with Scotiabank.
being in a position to source 1,000 tonnes
With cash on hand and cash flow projections
per day starting in July. Our project and
from our mines, we are adequately funded to
construction teams continue delivering an
meet all of our capital requirements to bring
excellent performance at San Jose. >>
Chief Executive Officer’s Letter
Continued
Photo: San Jose Mine- Processing plant ore transport conveyor belt system
13
OPERATING AND SAFETY PERFORMANCE
I want to take the opportunity to commend
We continue to excel as a low cost
our operating and construction teams in
underground silver miner. We produced
Peru and Mexico for their commitment to a
1.9 million ounces of silver, 2,000 ounces
safe work environment. In March 2011, we
of gold, 21.4 million pounds of lead, 26.1
achieved 1,586,000 work time hours without
million pounds of zinc and 1 million pounds
any lost time accidents.
of copper in 2010. Silver accounted for
48% of revenue with a cash cost of negative
The most valuable asset of any company is its
US$7.73 cents net of by product base
people. I want to thank the continued sup-
metals and gold. For 2011, we plan to
port and leadership of the Board of Directors
produce 2.8 million silver equivalent ounces
and all our co-workers and contractors who’s
(from silver and gold) at a negative cash
efforts and dedicated work are contributing to
cost net of by product base metal.
build Fortuna into a leading silver miner.
The most valuable
asset of any company
is its people.
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
Jorge A. Ganoza D.
President, CEO and Director
Chairman’s Letter
EXCEEDING OBJECTIVES was an easy
has brought us to this pivotal year. Fortuna’s
choice for the title of this year’s annual
silver production, revenue and cash flow
report. It is after all management’s operating
are set to grow significantly with the
philosophy and it underpins their actions
commissioning of the San Jose Mine in
and decisions on a day to day basis. Your
Mexico, pushing us ahead of many of our
Company’s President, Jorge Ganoza Durant,
peers in these three important metrics.
made this his battle cry when we founded
Fortuna Silver back in 2005 and he has
Our growth to date has been organic. We
instilled it in the management team he has so
set out to build Fortuna through the drill bit.
ably assembled in the years since then.
We have excellent mineral deposits that I
believe will keep growing even as they are
being mined. And we have excellent people
to explore, develop and mine those deposits
and grow our Company.
As the management and workers of
Fortuna Silver continue to Exceed Objectives,
so the Company will continue to outperform.
I am grateful for how the Fortuna team
has collectively embraced the Company’s
goals and worked tirelessly to meet them.
I believe we can all look forward to very
positive years ahead.
14
Fortuna’s silver
production, revenue
and cash flow are set to
grow significantly with
the commissioning of
the San Jose Mine in
Mexico…
As Fortuna Shareholders we can count
ourselves lucky. It is the reason our Company
is where it is today.
2011: A YEAR OF GROWTH. Exceeding
Simon Ridgway
objectives has served shareholders well and
Chairman of the Board
Social Responsibility
WE ARE COMMITTED to contribute to sustainable economic development — working with
employees, their families, the local community and society at large to improve the quality
of life, in ways that are both good for business and good for human development in the
countries where we operate. We firmly believe that effective and responsible environmental
and social management will result in greater efficiency by minimizing risks, thus contributing
to our long term success.
Our corporate policies
commit us to working under
the following standards:
n To operate in an ethical and legal manner, with transparency and accountability, seeking
to ensure access to new resources and to manage our projects with environmental and social
responsibility. n To develop the full potential of our employees. We respect and value each of
our employees and observe the fundamental tenets of human rights, safety and non-discrim-
ination in the workplace. n To responsibly manage all resources under our control by ensur-
ing the conservation of the environment and the welfare of our workers and our neighboring
communities. n To minimize environmental, health, and safety risks by ensuring that all
government and corporate regulations and standards are satisfied. n To maintain participa-
tory monitoring programs in our operations with local authorities and neighboring communi-
ties to ensure permanent compliance with our policies for social and environmental respon-
sibility and with government laws and regulations. n To periodically review all environmental,
health and safety, and community relations systems, programs and regulations to guarantee
continued improvement in the performance of our activities. n To keep our contractors and
strategic partners informed and aligned with our Social Responsibility policy and programs.
n To maintain open communications with regard to environmental, health, and safety matters
with government authorities, shareholders, employees, communities in our areas of influ-
ence, their authorities and other concerned stakeholders.
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
15
Exceeding Objectives
We Are Committed To Contribute
to Sustainable Economic Development
16
Photo: Caylloma Mine- Tailings dam ichu replanting
17
Exceeding Objectives
Low Cost Silver and Base Metal Producer
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
Photo: Caylloma Mine- 1,250 tpd processing plant
Photo: Caylloma Mine- 4,500 m.a.s.l. mine camp
Corporate Office
Vancouver, Canada
Caylloma Mine, Peru
Corporate Office
Vancouver, Canada
MEXICO
San Jose Project
CONSTRUCTION
Oaxaca, Mexico
(Silver, Gold)
MEXICO
San Jose Project
CONSTRUCTION
Oaxaca, Mexico
(Silver, Gold)
Management Head Office
Lima, Peru
PERU
Caylloma Mine
PRODUCTION
Caylloma, Peru
(Silver, Lead, Zinc, Copper)
Management Head Office
Lima, Peru
PERU
Caylloma Mine
PRODUCTION
Caylloma, Peru
(Silver, Lead, Zinc, Copper)
COMMODITIES: Silver, Gold, Zinc, Lead, Copper
LOCATION:
Arequipa, Peru
(Latitude 15° 13” S, Longitude: 71° 49” W)
OWNERSHIP: 100%
Lima
DEPOSIT TYPE: Intermediate-sulfidation epithermal vein deposit
STATUS:
Mine and processing plant operating at 1,250 tpd
>>
2011 EXPLORATION TARGETS
San Cristobal Vein (NE extension), Bateas Vein
(NE extension), La Plata Vein, Animas Vein (NE extension)
SILVER PRODUCTION of 1,906,423
CAYLLOMA MINE 2010 PRODUCTION
ounces, a 13% increase over the
1,682,546 ounces in 2009, exceeded
2010 guidance by 12%. This increase
is attribu-table to an increase in mill
throughput of 10%, an increase in
silver recoveries of 0.3% and a 3%
increase in silver head grade.
Cash cost per payable ounce silver in
Tonnes Milled
Average tonnes milled per day
Silver
Grade (g/t)
Recovery (%)
Production (oz)*
Lead
Grade (%)
Recovery (%)
2010 was negative US$7.73 net of
Production (000’s lbs)
by-product credits compared to
negative US$4.86 in 2009. The
change was attributable to increased
revenue from by-product credits and
increased payable silver ounces of
38% and 16%, respectively, offset by
an 11% increase in refining charges.
Zinc
Grade (%)
Recovery (%)
Production (000’s lbs)
Copper
Production (000’s lbs)
Unit Costs
Production cash cost(US$/oz Ag)**
Production cash cost(US$/tonne)
Unit Net Smelter Return(US$/tonne)
Years Ended December 31,
2009
2010
434,656
1,231
395,560
1,121
159.24
85.67
1,906,423
154.76
85.40
1,682,546
2.44
91.28
21,373
3.10
87.99
26,137
3.10
93.02
25,137
3.66
89.07
28,442
1,026
190
(7.73)
51.20
163.59
(4.86)
46.27
124.07
18
The mill treated 434,656 tonnes of ore in 2010, compared to 395,560 tonnes in the prior
year. The cash cost per tonne was US$51.20 compared to US$46.27 in 2009. >>
(*) Silver in lead and copper concentrates
(**) Net of by-product credits
Caylloma Mine, Peru
Caylloma had a 13%
increase in Silver
production in 2010.
Zinc and lead production during 2010 decreased
by 8% and 15%, respectively, compared to 2009.
This decrease was related to a shift in the mine
plan designed to replace the polymetallic ore from
the Animas vein with higher grade silver ore from
level 6 in the upper part of the Animas vein. The mine plan shift was made because of
lower than expected grades from the Bateas silver vein which lead to an acceleration of the
incorporation of level 6 into the production plan.
Photo: Caylloma Mine: Animas vein
Cash cost per tonne of treated ore for the year 2010 increased by 11% to US$51.20 com-
pared to 2009. The cost variation reflected a 2010 upward revision of underground mine
contractor tariffs and labor costs directed towards reducing personnel rotation at operations,
higher preparation and breakage costs at the mine, commencement of ore control drilling in
2010, local currency appreciation and preventive equipment maintenance plans that have
been successful in increasing plant availability by 3% to 4%.
19
In 2010, 71% (2009: 85%) ore was sourced from the central and lower levels of Animas
vein, 17% from level 6 in the upper part of Animas vein, and 11% (2009: 15%) from
Bateas, Soledad, and Silvia veins.
Total mine development and preparation in 2010 was 12,110 meters, 56% in the Animas
vein and 44% in the high-grade silver veins. The main focus of development in the Animas
vein was to extend mineralization along strike towards the northeast on levels 10 and 12,
and preparation of resource blocks between level 10 and level 12 with infrastructure as the
mine plan extends below level 10 in 2011. In the upper part of the Animas vein, develop-
ment and preparation was focused on incorporating level 6 into the production plan.
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
In the high grade Soledad and Silvia silver veins mine development and preparation was
aimed mainly below current working levels.
In the high-grade Bateas vein exploration and development drifting focused on extending
mineralization along strike to the east and resulted in the discovery of high-grade silver ore
shoots on levels 10 and 12 as reported in the press release of December 15, 2010.
The main capital projects executed in 2010 were a tailings reclassification plant for
US$0.48 million, and the finalization of the feasibility study for the new tailings dam facility
with an estimated total cost of US$4.2 million. The tailings reclassification plant will allow
an increase in the percentage of tailings available for backfill material and the first stage of
the new tailings dam will provide 7.5 years of life at current production levels.
In January 2011, production of copper-silver concentrate was discontinued at Caylloma
due to a material deterioration in commercial treatment terms with respect to 2010.
The Company is monitoring market conditions to evaluate restarting the circuit. Copper
accounted for 4% of sales in 2010 (2009: 1%).
20
Photo: Caylloma Mine: Caylloma mining district
21
Exceeding Objectives
The San Jose Mine will be a Company Game Changer
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
Photo: San Jose Mine- 13´ x 19.5´ ball mill
San Jose Mine, Mexico
Corporate Office
Vancouver, Canada
Corporate Office
Vancouver, Canada
MEXICO
San Jose Project
CONSTRUCTION
Oaxaca, Mexico
(Silver, Gold)
COMMODITIES: Silver, Gold
LOCATION:
MEXICO
San Jose Project
CONSTRUCTION
Taviche Mining District, Oaxaca, Mexico
Management Head Office
Lima, Peru
PERU
Caylloma Mine
PRODUCTION
Caylloma, Peru
(Silver, Lead, Zinc, Copper)
(Latitude: 16° 41” N, Longitude: 96° 42” W)
Oaxaca, Mexico
(Silver, Gold)
OWNERSHIP: 100%
DEPOSIT TYPE: High-grade, low-sulfidation epithermal vein deposit
Mexico City
STATUS:
- Construction of 1,500 tpd mine underway
PERU
Caylloma Mine
PRODUCTION
- Commissioning in Q3 2011 at 1000 tpd
Management Head Office
Lima, Peru
Caylloma, Peru
(Silver, Lead, Zinc, Copper)
>>
2011 EXPLORATION PROJECTS
San Ignacio, Taviche and El Rancho areas
SAN JOSE MINE 2011 AND 2012 PRODUCTION FORECAST
Year
2011
2012
Silver (oz)
Gold (oz)
Silver Equivalent (oz)*
542,420
1.79M
4,816
16,283
824,158
2.75M
THE SAN JOSE Ag-Au MINE The Company anticipates that the San Jose Mine, currently under
construction in Mexico, will begin to contribute both silver and gold ounces starting in the
third quarter of 2011 allowing the Company to maintain its organic silver production
growth in 2011.
Construction Highlights as of March 23, 2011:
n Processing plant construction is 33% complete. Foundation work for crushers, milling,
flotation, thickening and filtering areas is complete. Mounting and installation of major
22
plant equipment was initiated in January 2011. The 13’ x 19.5’ ball mill has been
mounted where the milling section is 42% advanced. The three stage crushing circuit
is being mounted and installed with a 66% advance. Flotation cells have arrived on site
and thickeners are being mounted and installed.
n Tailings dam construction was concluded in January 2011.
n The 8MW power substation construction and commissioning has been concluded;
connection to the national grid is expected in March 2011.
n The mine access ramp has reached the 1,400 meter elevation, where the first
production level is being developed. >>
(*) Based on Ag= US$ 23.60/oz, Au= US$ 1,350/oz and
metallurgical recoveries of 88% and 90% for Ag and Au respectively
San Jose Mine, Mexico
Photo: San Jose Mine- Mine develoment
n Three stopes are being developed and prepared for the start of production in the third
quarter at the initial rate of 1,000 tpd; Stope K is being developed on the Trinidad,
Fortuna and Bonanza veins on sublevel 1430. Stopes L and M are being developed on
level 1400. Overall advance on stope preparation is 115% against the program.
n To December 31, 2010 the mine had built an ore stock pile of 6,816 tonnes grading
234 g/t Ag and 2.13 g/t Au. The Company anticipates an inventory of approximately
30,000 tonnes before the start of commercial operations in the third quarter of 2011.
n Water pipeline installation to the mine site is 87% advanced.
23
PROCESSING PLANT AND ANCILLARY FACILITIES Construction of the 1,500 tpd processing
plant and ancilliary facilities are on schedule for commissioning at an initial rate of 1,000
tpd in the third quarter of 2011. The processing plant has no long lead equipment on criti-
cal path. Purchase orders for all plant equipment have been placed with equipment arriving
on-site according to schedule. Processing plant construction is 33% complete. Foundation
work for crushers, milling, flotation, thickening and filtering areas is complete. Mounting and
installation of major plant equipment was initiated in January 2011. The 13’ x 19.5’ ball
mill has been mounted where the milling section is 42% advanced. The three stage crushing
circuit is being mounted and installed with a 66% advance. Flotation cells have arrived on
site and thickeners are being mounted and installed.
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
TAILINGS DAM Construction of the tailings dam was concluded in January 2011. The
tailings dam is currently prepared to store water for the commissioning of the processing
plant. Conagua (National Water Commission of Mexico responsible for the management and
preservation of national waters and their inherent goods in order to achieve sustainable use,
with joint responsibility of the three tiers of government - federal, state and municipal- and
society as a whole) technical observations to the design of the tailings facility were addressed
with state and federal Conagua authorities. The Company expects approval of the final
Conagua permit in the coming weeks.
UNDERGROUND MINE DEVELOPMENT In December, the main access ramp reached the 1400
meter elevation -the first production level- allowing for the development of production stopes
K, L and M for start-up of production at an initial mining rate of 1,000 tonnes per day. Vein
widths and grades for the Trinidad, Fortuna and Bonanza veins intersect on level 1400 and
sublevel 1430 are in line with the geologic resource model.
WATER SOURCING The Ocotlan grey water treatment plant is fully operational and the
quality of the water obtained is within design parameters. The pipeline to carry water from
the grey water treatment plant to the San Jose Mine site is 87% complete. Negotiations
with a neighboring community are taking place to install the remaining two kilometers of
the pipeline. Inflow to the process from the grey water treatment facility is required twenty
months after the start of commercial operations.
POWER SUBSTATION Construction of the transformer and switching stations has been
completed. Commissioning has been concluded and connection to the national power grid in
March, 2011.
24
Photo: San Jose Mine- Tailings Dam
San Jose Mine Layout
San Jose Mine will begin to contribute both silver and
gold ounces starting in the third quarter of 2011
01
8 MW POWER
SUBSTATION
SWITCHING STATION /
TRANSFORMER STATION
02
MAIN ACCESS RAMP
25
01
02
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
03
05
PROCESSING PLANT
CRUSHING CIRCUIT
1,500 TPD
PROCESSING PLANT
ANCILLARY FACILITIES
03
04
05
04
26
Silver Analysis
DUAL IDENTITY DRIVES
PRICE DYNAMICS
Silver prices averaged US$20.31 in
2010, a 38.4% increase over 2009
and second only to 1980’s average
of US$20.65. Silver’s dual identity
as both a precious and industrial
metal continued to define its price
performance. Thus the pricing
dynamics remained much the
same as in 2009: high investment
demand and a recovering global
economy.
HIGH PRICES GENERATE
RECORD SUPPLY
Prices rose despite a 9.3%
increase in total silver supply
to a record 1.03 billion ounces
and a continuing decrease in
photography demand. The largest
supply increase in 2010 came from
secondary recovery, as the higher
prices generated unprecedented
levels of scrap and industrial
recovery plus high sales of
jewelry and silverware. New mine
production also increased.
RECOVERING ECONOMY
AND SOLAR PANELS DRIVE
FABRICATION INCREASE
Increasing industrial activity
worldwide and higher demand
for consumer electronics
produced a 9.5% increase in
overall fabrication demand,
from 864.8 million ounces in
2009 to 946.6 million ounces
in 2010. The sharpest demand
increase occurred in solar panel
fabrication—the industry is
estimated to have consumed 64
million ounces of silver in 2010, a
205% increase over 2009.
$/Ounce
45
$/Ounce
45
THE PRICE OF SILVER
(Monthly Average Comex,
Through 13 April 2011)
MM Oz
700
MM Oz
600
700
SILVER DEMAND AND
SUPPLY BALANCE
500
600
400
500
300
400
200
300
100
200
0
100
0
07
07
08
08
09
09
10
10
11
11
MM Oz
700
MM Oz
600
700
500
600
400
500
300
400
200
300
100
200
0
100
0
WITE
GLTR
PSLV
WITE
27
SVR.UN
GLTR
SBT.U
PSLV
JB
SVR.UN
SBT.U
SIVR
MSL
JB
ZKB
SIVR
PHAG
MSL
SLV
ZKB
CEF
PHAG
SLV
CEF
06
06
$/Ounce
40
45
35
40
30
35
25
30
20
25
15
20
10
15
5
10
0
5
0
Million Ounces
1100
Million Ounces
1000
1100
900
1000
800
900
700
800
600
700
500
600
400
500
300
400
200
300
$/Ounce
40
45
35
40
30
35
25
30
20
25
15
20
10
15
5
10
0
5
0
Million Ounces
1100
Million Ounces
1000
1100
900
1000
800
900
700
800
600
700
500
600
400
500
300
400
200
300
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Fabrication Demand
Fabrication Demand
Supply
Supply
60 63 66 68 72 75 78 81 84 87 90 93 96 99 02 05 08 11p
200
200
60 63 66 68 72 75 78 81 84 87 90 93 96 99 02 05 08 11p
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
A NERVOUS WORLD PUSHES
INVESTMENT DEMAND
Investment demand also rose in
2010. Precarious political, debt and
market forces continued to funnel
cash into silver and gold as safe
havens. Inflation and interest rate
concerns, along with sovereign
debt worries, remained key factors
in the flight to safety which was
marked by record purchases of ETF
shares and silver coins. However,
investment demand was also driven
increasingly by speculation that
fabrication demand will continue
its climb.
MEXICO: LARGEST SILVER
PRODUCER IN THE WORLD
Of interest in 2010 was Mexico’s
rise to the world’s top silver
producing country, overtaking Peru.
Part of this surge was attributed to
the opening of Goldcorp’s massive
Penasquito mine and production
increases at other major mines.
2011: MORE OF THE SAME
Looking ahead, silver market
dynamics for 2011 are likely to
mirror those of 2010 and produce
further increases in both demand
and supply. Which force wins out
as the primary market catalyst,
however, is not as easy to predict.
If inflation and interest rates trend
higher, driven by both sovereign
debt worries and recovering
economies, silver may well reach
record prices again in 2011.
64.0
Solar Panels
176.2
Other Uses
FABRICATION
DEMAND
FOR SILVER
Total Fabrication Demand
for Silver in 2010:
844.8 Million Ounces
220.4
Electronics
and Batteries
ETF SILVER
HOLDINGS
Exchange Traded Funds’
Physical Silver Holdings
Silver analysis and graphs provided
MM Oz
700
600
500
MM Oz
700
400
600
300
500
200
400
100
0
300
200
100
0
103.4
Photography
280.8
Jewelry and
Silverware
MM Oz
700
600
500
400
300
200
100
0
MM Oz
700
600
500
400
300
200
100
0
11
$/Ounce
45
40
35
30
25
20
15
10
5
0
Million Ounces
1100
28
1000
900
$/Ounce
45
40
35
30
25
20
15
10
5
0
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Fabrication Demand
800
700
600
500
400
300
200
Million Ounces
1100
1000
900
800
700
600
500
400
300
200
Fabrication Demand
60 63 66 68 72 75 78 81 84 87 90 93 96 99 02 05 08 11p
Supply
60 63 66 68 72 75 78 81 84 87 90 93 96 99 02 05 08 11p
$/Ounce
45
40
35
30
25
20
15
10
5
0
1100
1000
900
800
700
600
500
400
300
200
Million Ounces
$/Ounce
45
40
35
30
25
20
15
10
5
0
900
800
700
600
500
400
300
200
Million Ounces
1100
1000
Supply
WITE
GLTR
PSLV
SVR.UN
SBT.U
JB
SIVR
MSL
ZKB
PHAG
SLV
CEF
WITE
GLTR
PSLV
SVR.UN
SBT.U
JB
SIVR
MSL
ZKB
PHAG
SLV
CEF
06
07
08
09
10
06
07
08
09
10
11
Fortuna Silver Mines Inc.
Financial Review
Fiscal Year Ended December 31, 2010
29
pg.30
Management’s
Discussion and
Analysis
pg.56
Consolidated
Financial
Statements
pg.62
Independent
Auditor’s Report
on Consolidated
Financial Statements
pg.86
Corporate
Information
FORTUNA SILVER MINES INC. 2010 ANNUAL REPORT
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the
significant 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, 2010 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, 2009, the related MD&A,
and Fortuna’s Annual Information Form (available on SEDAR at www.sedar.com). This MD&A refers
to various 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 Company’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 document contains forward-looking statements. Please refer to the cautionary language under the
heading “Cautionary Statement on Forward-Looking Information” below.
BUSINESS OF
THE COMPANY
Fortuna Silver Mines Inc. (the “Company”) is a mining company focused on producing silver and
base metals and developing 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 2010
HIGHLIGHTS
Financial Results
During the year ended December 31, 2010 the Company generated a net income of $12.96 million
(2009: $0.62 million) on operating income of $30.11 million (2009: $14.38 million) and sales of
$74.06 million (2009: $51.43 million). Record results were driven by increased silver production and
higher silver and base metal prices.
30
Silver metal production during the year ended December 31, 2010 was 1,906,423 ounces, 13%
above 2009. The increase was due to a combination of higher throughput (10%) and higher silver head
grades (3%). Silver comprised 48% of revenue and the realized silver price was $19.05 per ounce.
Cash cost per ounce, net of by-product credits, was negative $7.73. See the page 12 for reconciliation
of cash cost to the cost of sales.
Adjusting for the mark-to-market effect on commodity contracts and a foreign exchange loss on the
repatriation of funds from the Company’s Peruvian subsidiary (included in the $2.70 million foreign
exchange loss recorded for the year) 2010 adjusted net income (a non-GAAP measure) totalled $11.29
million (2009: $2.37 million).
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
RECENT
DEVELOPMENTS
AND 2010
HIGHLIGHTS
(continued)
NET INCOME FOR THE YEAR
Items of note, net of tax:
Mark to Market effect on derivatives(1)
Foreign exchange loss on repatriation
of funds from subsidiary(1)
Stock-based compensation(1)
ADJUSTED NET INCOME FOR THE YEAR(1)
(1) A non-GAAP measure
Expressed in $ millions
Years ended December 31,
2010
12.96
$
$
(1.33)
2.10
(2.44)
11.29
$
$
2009
0.62
1.75
-
-
2.37
Cash generated by operating activities before changes in working capital (a non-GAAP measure) for the
year totalled $22.11 million, up from $15.91 million in 2009.
San Jose Mine Construction
Construction activities for the San Jose Project commenced in the second quarter of 2010 and are
on schedule for completion and commissioning of the mine in the third quarter of 2011 at an initial
annual production rate of 1,000 tpd yielding 1.8 million oz silver and 16,000 oz gold. To the end of
January 2011, $29.1 million had been invested in construction or 52% of CAPEX.
Corporate Highlights
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”.
In 2010, the Company entered into a credit agreement with the Bank of Nova Scotia for a $20 million
senior secured revolving credit facility to be refinanced or repaid before December 2012.
On March 3, 2010, the Company closed a bought-deal public offering for total gross proceeds of
CAD$34.5 million. The Company issued 15,007,500 shares at a price of CAD$2.30 per share.
On December 23, 2010, the Company closed a second bought-deal public offering for total gross
proceeds of CAD$46 million. The Company issued 11,500,000 shares at a price of CAD$4.00 per
share.
On June 2010, the Company appointed Mr. Cesar Pera as Vice President of Human Resources.
On July 2010, the Company announced changes to the Board of Directors with the appointment of Mr.
Robert Gilmore and the resignation of Mr. Richard Clark.
On August 2010, the Company announced the appointment of Mr. Jeffrey Franzen to the Board of
Directors.
31
SELECTED ANNUAL
INFORMATION
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
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
Years Ended December 31,
2010
74,056
26,975
12,955
0.12
2009
51,428
6,312
623
0.01
2008
24,867
687
(910)
(0.01)
243,183
139,738
115,368
3,166
1,454
1,382
In 2010, the Company generated record sales of $74.06 million compared to $51.43 million in 2009.
This increase was primarily driven by higher silver prices (38%) and higher silver sales volume (15%).
Total assets increased by 74% to $243.18 million with the proceeds from the $73.9 million bought-
deal financings for the development of the San Jose Project.
In 2009, the Company generated sales of $51.43 million compared to $24.87 million in 2008. This
increase was also primarily driven by higher silver and lead head grades, in particular silver grades
which increased by 64%, higher throughput, and reduced concentrate treatment charges.
QUARTERLY
INFORMATION
The following table provides information for the eight fiscal quarters ended December 31, 2010:
Expressed in $000’s, except per share data
Quarters Ended
Sales
Mine operating
income (loss)
Operating income
Net income (loss)
Earning (loss)
per share - basic
- diluted
31-Dec-10 30-Sep-10 30-Jun-10 31-Mar-10 31-Dec-09 30-Sep-09 30-Jun-09 31-Mar-09
8,980
16,356
18,039
12,862
17,543
14,565
13,230
23,908
16,203
10,570
4,222
0.04
0.04
9,963
4,678
(2,542)
(0.02)
(0.02)
7,996
6,972
5,980
0.05
0.05
10,765
7,891
5,296
10,375
5,563
1,037
0.05
0.05
0.01
0.01
7,074
4,388
(556)
(0.01)
(0.01)
6,792
4,355
1,196
0.01
0.01
3,487
76
(1,054)
(0.02)
(0.02)
The past eight quarters demonstrate a clear trend of sales growth. This trend reflects both the recovery
in metal prices since the beginning of 2009 and increased silver output from the Caylloma mine. Sales
and operating income in the second and third quarters of 2010 reflect a decrease in base metal prices
during the period.
32
Even though the Company achieved higher sales in Q4 and Q3 2010 as compared to Q2 2010 resulted
in lower net income primarily as result of the following: higher production cash cost of 13% for Q3
and 7% for Q4; stock-based compensation expense of $1.22 million and $0.76 million in Q3 and
Q4 2010, respectively, compared to a recovery of $2.40 million in Q2 2010; net losses on commodity
contracts of $3.18 million in Q3 2010 and $0.73 million in Q4 2010 compared to a gain of $2.90
million in Q2 2010; higher foreign exchanges losses in Q3 2010 of $1.4 million, as compared to Q2
2010 of $0.36 million; and, write off of deferred exploration costs in Q3 2010 of $0.44 million.
The fourth quarter of 2010 net income of $4.22 million is primarily attributable to the record sales of
$23.91 million, offset by a commodity contract loss of $0.73 million, a foreign exchange loss of $0.30
million, stock-based compensation expense of $0.76 million and bonus accrual of $0.48 million.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
RESULTS OF
OPERATIONS
San Jose Mine Construction
The Company anticipates that the San Jose Project, currently under construction in Mexico, will begin
to contribute both silver and gold ounces starting in the third quarter of 2011 allowing the Company to
maintain its organic silver production growth in 2011.
Construction Highlights to March 23, 2011
• Processing plant construction is 33% complete. Foundation work for crushers, milling, flotation,
thickening and filtering areas is complete. Mounting and installation of major plant equipment was
initiated in January 2011. The 13’ x 19.5’ ball mill has been mounted where the milling section
is 42% advanced. The three stage crushing circuit is being mounted and installed with a 66%
advance. Flotation cells have arrived on site and thickeners are being mounted and installed.
• Tailings dam construction was concluded in January 2011.
• The 8MW power substation construction and commissioning has been concluded; connection to the
national grid is expected in March 2011.
• The mine access ramp has reached the 1,400 meter elevation, where the first production level is
being developed.
• Three stopes are being developed and prepared for the start of production in the third quarter at the
initial rate of 1,000 tpd; Stope K is being developed on the Trinidad, Fortuna and Bonanza veins
on sub-level 1430. Stopes L and M are being developed on level 1400. Overall advance on stope
preparation is 115% against the program.
• To December 31, 2010 the mine had built an ore stock pile of 6,816 tonnes grading 234 g/t Ag
and 2.13 g/t Au. The Company anticipates an inventory of approximately 30,000 tonnes before the
start of commercial operations in the third quarter of 2011.
• Water pipeline installation to the mine site is 87% advanced.
Processing Plant and Ancillary Facilities
Construction of the 1,500 tpd processing plant and ancilliary facilities are on schedule for commissioning
at an initial rate of 1,000 tpd in the third quarter of 2011.
33
The processing plant has no long lead equipment on critical path. Purchase orders for all plant
equipment have been placed with equipment arriving on-site according to schedule. Processing plant
construction is 33% complete.
Foundation work for crushers, milling, flotation, thickening and filtering areas is complete. Mounting
and installation of major plant equipment was initiated in January 2011. The 13’ x 19.5’ ball mill has
been mounted where the milling section is 42% advanced. The three stage crushing circuit is being
mounted and installed with a 66% advance. Flotation cells have arrived on site and thickeners are
being mounted and installed.
Tailings Dam
Construction of the tailings dam was concluded in January 2011. The tailings dam is currently prepared
to store water for the commissioning of the processing plant. The Conagua (National Water Commission
of Mexico responsible for the management and preservation of national waters and their inherent goods
in order to achieve sustainable use, with joint responsibility of the three tiers of government - federal,
state, and municipal, and society as a whole) technical observations to the design of the tailings facility
were addressed with state and federal Conagua authorities. The Company expects approval of the final
Conagua permit in the coming weeks.
RESULTS OF
OPERATIONS
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
Underground Mine Development
In December, the main access ramp reached the 1400 meter elevation -the first production level-
allowing for the development of production stopes K, L and M for start-up of production at an initial
mining rate of 1,000 tpd.
Vein widths and grades for the Trinidad, Fortuna and Bonanza veins intersect on level 1400 and
sublevel 1430 are in line with the geologic resource model.
Water Sourcing
The Ocotlan grey water treatment plant is fully operational and the quality of the water obtained is
within design parameters.
The pipeline to carry water from the grey water treatment plant to the Project site is 87% complete.
Negotiations with a neighboring community are taking place to install the remaining two kilometers
of the pipeline. Inflow to the process from the grey water treatment facility is required twenty months
after the start of commercial operations.
Power Substation
Construction of the transformer and switching stations has been completed. Commissioning has been
concluded and connection to the national power grid is expected during March, 2011.
Caylloma Ag-Pb-Zn Mine
Caylloma Mine Production
Tonnes milled
Average tons milled per day
Silver*
Grade (g/t)
Recovery %*
Production (Oz)*
Lead
Grade (%)
Recovery %
Production (000’s lb)
Zinc
Grade (%)
Recovery %
Production (000’s lb)
Copper
Production (000’s lb)
Unit Costs
Production cash cost (US$/oz ag)**
Production cash cost (US$/tonne)
Unit Net Smelter Return (US$/tonne)
* Silver in lead and copper concentrates
** Net of by-product credits
Years ended December 31,
2009
395,560
1,121
2010
434,656
1,231
159.24
85.67
1,906,423
154.76
85.40
1,682,546
2.44
91.28
21,373
3.10
87.99
26,137
1,026
(7.73)
51.20
163.59
3.10
93.02
25,137
3.66
89.07
28,442
190
(4.86)
46.27
124.07
34
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
RESULTS OF
OPERATIONS
(continued)
Silver production of 1,906,423 ounces, a 13% increase over the 1,682,546 ounces in 2009, exceeded
2010 guidance by 12%. This increase is attributable to an increase in mill throughput of 10%, an
increase in silver recoveries of 0.3% and a 3% increase in silver head grade.
Cash cost per payable ounce silver in 2010 was negative $7.73 net of by-product credits compared to
negative $4.86 in 2009. The change was attributable to an increased revenue from by-product credits
and increased payable silver ounces of 38% and 16%, respectively, offset by an 11% increase in
refining charges. See page 12 for reconciliation of cash production cost to the cost of sales.
The mill treated 434,656 tonnes of ore in 2010, compared to 395,560 tonnes in the prior year. The
cash cost per tonne was $51.20 compared to $46.27 in 2009. Cash cost is a non-GAAP measure, see
page 12 for reconciliation of cash cost to the cost of sales.
Zinc and lead production during 2010 decreased by 8% and 15%, respectively, compared to 2009.
This decrease was related to a shift in the mine plan designed to replace the polymetallic ore from the
Animas vein with higher grade silver ore from level 6 in the upper part of Animas vein. The mine plan
shift was made because of lower than expected grades from the Bateas silver vein which lead to an
acceleration of the incorporation of level 6 into the production plan.
Cash cost per tonne of treated ore for the year 2010 increased by 11% to $51.20 compared to 2009.
The cost variation reflected a 2010 upward revision of underground mine contractor tariffs and labor
costs directed towards reducing personnel rotation at operations, higher preparation and breakage costs
at the mine, commencement of ore control drilling in 2010, local currency appreciation and preventive
equipment maintenance plans that have been successful in increasing plant availability by 3% to 4%.
In 2010, 71% (2009: 85%) ore was sourced from the central and lower levels of Animas vein, 17% from
level 6 in the upper part of Animas vein, and 11% (2009: 15%) from Bateas, Soledad, and Silvia veins.
Total mine development and preparation in 2010 was 12,110 meters, 56% in the Animas vein and
44% in the high-grade silver veins. The main focus of development in Animas vein was to extend
mineralization along-strike towards the northeast on levels 10 and 12, and preparation of resource
blocks between level 10 and level 12 with infrastructure as the mine plan extends below level 10 in
2011. In the upper part of Animas development and preparation was focused on incorporating level 6
into the production plan.
In the high grade Soledad and Silvia silver veins mine development and preparation was aimed mainly
below current working levels.
In the high-grade Bateas vein exploration and development drifting focused on extending mineralization
along-strike to the east and resulted in the discovery of high-grade silver ore shoots on levels 10 and
12 as reported in the press release of December 15, 2010.
The main capital projects executed in 2010 were a tailings reclassification plant for $0.48 million,
and the finalization of the feasibility study for the new tailings dam facility with an estimated total cost
of $4.2 million. The tailings reclassification plant will allow an increase in the percentage of tailings
available for backfill material and the first stage of the new tailings dam will provide 7.5 years of life
at current production levels.
In January 2011 production of copper-silver concentrate was discontinued at Caylloma due to a material
deterioration in commercial treatment terms with respect to 2010. The Company is monitoring market
conditions to evaluate restarting the circuit. Copper accounted for 4% of sales in 2010 (2009: 1%).
35
RESULTS OF
OPERATIONS
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
Caylloma Mine Concentrates
Years ended December 31,
2009
2010
Zinc
Opening Inventory (t)
Production (t)
Sales (t)
Adjustment (t)
Closing Inventory (t)
Ag in concentrate (g/t)
Zn in concentrate (%)
Lead
Opening Inventory (t)
Production (t)
Sales (t)
Adjustment (t)
Closing Inventory (t)
Ag in concentrate (g/t)
Pb in concentrate (%)
Copper
Opening Inventory (t)
Production (t)
Sales (t)
Adjustment (t)
Closing Inventory (t)
Ag in concentrate (g/t)
Cu in concentrate (%)
Financial Results
369
22,291
22,419
22
263
96
53
408
15,015
15,250
14
188
1,499
65
46
2,085
2,117
15
29
17,644
22
295
23,700
23,563
(63)
369
95
54
17
18,078
17,715
28
408
2,567
63
0
411
366
1
46
14,496
21
During the year ended December 31, 2010 the Company generated net income of $12.96 million
(2009: $0.62 million) on operating income of $30.11 million (2009: $14.38 million).
Sales for the year were $74.06 million (2009: $51.43 million). Increased sales were partially offset in
operating income by a higher cash cost per tonne of $51.20 (2009: $46.27). Operating income also
includes higher corporate selling, general and administrative expenses of $5.23 million compared to
2009. These expenses were associated with the growth of the Company, legal fees related to the credit
facility, development of corporate projects and bonus payments.
36
Net income includes commodity contracts gain of $0.74 million (2009: loss $7.36 million), foreign
exchange loss of $2.70 million (2009: $0.65 million), and stock-based compensation recovery of
$0.42 million (2009: expense $2.71 million).
Sales increased by 44% to $74.06 million (2009: $51.43 million) compared to a year ago. The
increase is primarily attributable to higher silver prices (38%) and higher sales volume (15%). Zinc
and lead metal sold were below last year (7% and 11%, respectively) with zinc and lead prices above
last year (31% and 25%, respectively).
RESULTS OF
OPERATIONS
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
Caylloma Mine Metal Sold and Prices
Years ended December 31,
2010
2009
Silver
Sales (Oz)*
Realized Price (US$/Oz)**
Average Price (US$/Oz)
Lead
Sales (000’s lb)*
Realized Price (US$/lb)**
Average Price (US$/lb)
Zinc
Sales (000’s lb)*
Realized Price (US$/lb)**
Average Price (US$/lb)
Copper
Sales (000’s lb)*
Realized Price (US$/lb)**
Average Price (US$/lb)
Gold
Sales (Oz)*
Realized Price (US$/Oz)**
Average Price (US$/Oz)
1,894,703
19.05
20.16
21,461
0.80
0.97
26,306
0.60
0.98
1,021
2.67
3.42
2,411
939.45
1,225.07
1,645,629
13.75
14.65
24,184
0.61
0.78
28,175
0.42
0.73
163
1.59
2.34
2,397
812.08
972.98
37
* The current and subsequent period may include final settlement quantity adjustments from prior periods.
** Considers deductions, treatment, and refining charges as applicable.
Treatment charges are allocated to the base metals.
Cost of sales increased by 25% to $22.27 million (2009: $17.76 million) compared to last year.
The increase is primarily attributable to an 11% higher unit production cash costs and increased
throughput of 10%. Refer to Page 7 discussion on cash cost per tonne of treated ore.
Operating income increased by 109% to $30.11 million (2009: $14.38 million) compared to 2009.
The increase is primarily attributable to higher sales, a 115% decrease in stock-based compensation, a
59% decrease in write-off of deferred exploration costs and a 15% increase in depletion, depreciation
and accretion. These savings were offset by a 25% increase in cost of sales, and a 55% increase in
selling, general and administrative expenses.
Selling, general and administrative expenses increased by 55%, in 2010, to $14.79 million (2009:
$9.56 million). The increase is primarily attributable to corporate general and administrative expenses
associated with the growth of the Company, legal fees related to the credit facility with the Bank of
Nova Scotia and bonus payments.
Corporate general and administrative expenses
Peruvian subsidiary:
general and administrative expenses
selling expense (including trucking of concentrate)
government royalty
Expressed in $ millions
Years ended December 31,
2010
8.32
$
$
$
$
$
2.99
2.69
0.79
6.47
14.79
$
$
$
2009
4.06
3.08
1.93
0.49
5.50
9.56
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
RESULTS OF
OPERATIONS
(continued)
Stock-based compensation recovery of $0.42 million (2009: expense $2.71 million) is primarily
attributable to the cancellation of 2,665,000 share purchase options as shareholder approval was not
obtained at the Company’s annual general meeting held on June 23, 2010 resulting in a stock-based
compensation recovery of $2.44 million. In addition, stock-based compensation is impacted by the
mark-to-market value of the Company’s deferred and restricted share units of $2.02 million (2009: $nil).
Interest and other (expenses) income decreased by 188% to an expense of $0.38 million (2009:
income $0.43 million) compared to a year ago. The increase in costs is primarily attributable to
the dividend withholding tax paid of $0.27 million (2009: $nil) offset by an increase in interest
income arising from higher interest rates applied to higher cash and cash equivalents and short term
investments balances.
Interest and finance expenses, increased by 240% to $0.54 million (2009: $0.16 million) compared
to a year ago. The increase is primarily attributable to the commitment and standby fees associated
with the Bank of Nova Scotia credit facility and capital lease obligations at our operating subsidiary.
Net gain (loss) on commodity contract increased to a net gain of $0.74 million (2009: loss ($7.36
million)). The gain reflected 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 $0.74 million gain is a mark-to-market effect of $2.12 million ($1.33
million, net of tax), related to open contracts as at December 31, 2010 expiring March 2011. The
Company occasionally enters into commodity forward and option contracts to secure a minimum price
level on part of Caylloma’s zinc and lead metal production. Additionally, for the unhedged balance
of production, the Company enters regularly into short term forward lead and zinc and silver option
contracts 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.
Price protection program - Derivatives
As at December 31, 2010, the Company had the following contracts outstanding:
Type of
contract
Forward sale
Forward sale
Long put
Short call
Long put
Short call
Metal
Lead
Zinc
Silver
Silver
Silver
Silver
Total tonnage (t)
or ounces (oz)
210 t
240 t
90,000 oz
90,000 oz
50,000 oz
50,000 oz
Settlement
period
March 2011
March 2011
January 2011
January 2011
January 2011
January 2011
Price/t or
Price/oz
$2,500/t
$2,415/t
$28.00/oz
$32.10/oz
$29.00/oz
$31.70/oz
38
Foreign exchange loss, increased four-fold to $2.70 million (2009: $0.65 million). The increase is
primarily attributable to the $2.10 million foreign exchange loss realized upon the repatriation of funds
from the Company’s Peruvian subsidiary.
Income tax provision increased by 139% to $14.02 million (2009: $5.87 million). Income tax
provision is comprised of current and future income tax expense. Current income tax for the period,
including the worker profit sharing plan regulated by Peruvian law, totalled $10.94 million (2009:
$5.08 million). Future income tax expense, amounting to $3.08 million (2009: $0.79 million) was
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, 2010
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. 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
companies.
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, 2010 and 2009.
Cost of sales
Add / (Subtract)
Change in concentrate inventory
Inventory adjustment
Depletion, depreciation, and accretion
Cash cost
$’000’s
Years ended December 31,
2009
23,699
2010
29,129
(305)
290
(6,859)
22,255
549
-
(5,944)
18,304
Total processed ore (tonnes)
434,656
395,561
Cash cost per tonne of processed ore ($/t)
Cash cost
Add / (Subtract)
By-product credits1
Refining charges
Cash cost applicable per payable ounce
51.20
22,255
(37,825)
1,576
(13,994)
46.27
18,304
(27,318)
1,416
(7,598)
Payable silver ounces
1,811,102
1,563,775
39
Cash cost per ounce of payable silver ($/oz)
(7.73)
(4.86)
1 By-product credits as included in the provisional liquidation
LIQUIDITY
AND CAPITAL
RESOURCES
The Company’s cash and cash equivalents as at December 31, 2010 totalled $70.30 million, and short
term investments totalled $20.51 million. Working capital amounted to $97.09 million.
During 2010, cash generated by operating activities before changes in working capital was $22.19
million. Changes in working capital amounted to $1.08 million, resulting in cash generated by operating
activities of $21.11 million.
During 2010, cash consumed by the Company in investing activities totalled $57.39 million with
$16.60 million for mineral properties, $19.82 million for property, plant and equipment, $4.29 million
for deposits on long term assets, and short term investments of $13.86 million. The total investment
in San Jose amounted to $27.90 million and included $8.12 million for mineral properties, $15.39
million for property, plant and equipment, and $4.39 million for deposits on long term assets.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
LIQUIDITY
AND CAPITAL
RESOURCES
(continued)
During 2010, cash generated by financing activities totalled $73.69 million comprised of net proceeds
on the issuance of common shares of $74.92 million less the repayment of capital lease obligations
of $1.23 million.
In 2010, the Company entered into a credit agreement with the Bank of Nova Scotia for a $20 million
senior secured revolving credit facility (“credit facility”) to be refinanced or repaid on or within two and
one-half years or before December 2012. The credit facility is secured by a first ranking lien on Bateas
and its assets and bears interest and fees at prevailing market rates. No funds were drawn from this
credit facility during the year.
The Company has raised funds from two prospectus financings. The details of the expected use of
proceeds and actual use of proceeds are discussed below.
Prospectus February 18, 2010 Closed March 2, 2010
San Jose Project Financing
Expressed in CAD $ millions
Actual Use of
Proceeds**
3.3
$
4.8
3.9
2.4
2.2
1.0
17.6
$
Variance
3.4
11.8
(2.0)
0.6
(2.2)
(1.0)
10.6
$
$
$
Expected Use
of Proceeds*
6.7
16.6
1.9
3.0
-
-
28.2
$
Mine development
Processing plant
Tailings dam
Water and Infrastructure
Energy supply
Construction management
Total
*excludes over-allotment
**US CAD FX rate at 1.0
Prospectus December 17, 2010 Closed December 23, 2010
San Jose Project Financing**
Expressed in CAD $ millions
Expected Use
of Proceeds*
14.5
5.5
17.7
$
$
37.7
Planned expansion
Exploration programs
Working capital
Water and Infrastructure
Energy supply
Construction management
Total
*excludes over-allotment
** funds to be utilized post development
$
Actual Use of
Proceeds
-
-
-
-
-
-
-
$
Variance
14.5
5.5
17.7
-
-
-
37.7
$
$
40
Management believes the Company’s cash position, along with its ongoing operation in Caylloma and
the credit facility, is sufficient to support the Company’s operating and capital requirements on an
ongoing basis. Actual funding 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 it recognizes the uncertainty attached thereto.
LIQUIDITY
AND CAPITAL
RESOURCES
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
Guarantees and Indemnifications (expressed in $’000’s)
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 obligations 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 Caylloma mine closure plan was approved in November 2009 with total closure costs of $3,587 of
which $1,756 is subject to an 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 estimated 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 $293. This bank letter of
guarantee expires 360 days from December 2010.
Banco Bilbao Vizcaya Argentaria, S.A., has also established bank letters of guarantee totalling $54 to
provide an annual guarantee associated with an office lease contract and truck rentals. These bank
letters of guarantee expire 360 days from June 2010.
Interbank, a third party, has renewed the bank letter of guarantee in the amount of $2, in favor of
the Peruvian Ministry of Energy and Mines, to allow a temporary concession to study electric power
generation in the hydro electric power plant, to expire April 2011.
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, 2010, these obligations amounted to $711 with $231 and $480 maturing
in 2011 and 2012, respectively.
41
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
expenditures, 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.
RELATED PARTY
TRANSACTIONS
The Company incurred charges from directors, officers, and companies having a common director or
officer as follows:
(Expressed
in $’000’S)
Transactions with related parties
Consulting fees 1
Salaries and wages 2,3
Other general and administrative expenses 3
Expressed in $’000’s
Years ended December 31,
2010
175
174
185
534
$
$
$
$
2009
145
122
159
426
1Consulting 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.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
RELATED PARTY
TRANSACTIONS
(EXPRESSED IN
$’000’S)
(continued)
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.
Amounts due to/(from) related parties are comprised of the following:
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, 2010
$
$
$
(1) $
$
41
$
40
December 31, 2009
(1)
50
49
4Owing from a director includes non-interest bearing advances to Jorge A. Ganoza Durant at December 31, 2010 and 2009.
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
financial 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.
The estimate of mineral reserves is prepared by Qualified Persons in accordance with industry standards
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 depletion of this asset.
42
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.
CRITICAL
ACCOUNTING
ESTIMATES
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
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 potential,
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.
Stock-based Compensation
i. Stock Option Plan
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.
ii. Deferred Share Unit Plan (“DSU”)
The Company’s DSU compensation liability is accounted for based on the number of units outstanding
and the market value of the Company’s common shares at the balance sheet date. The year-over-year
change in the deferred share unit compensation liability is recognized in operating income.
iii. Restricted Share Unit Plan (“RSU”)
The Company recognizes a compensation cost in operating income on a prescribed vesting basis for
each RSU granted equal to the market value of the Company’s common shares at the date of which
RSUs are awarded to each participant prorated over the performance period and adjusts for changes in
the market value until the end of the performance date. The cumulative effect of the change in market
value is recognized in operating income in the period of change.
43
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
FINANCIAL
INSTRUMENTS
AND RELATED
RISKS
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 carrying value of cash and cash equivalents, short term investments, accounts receivable, accounts
payable and accrued liabilities, and due to related parties 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
uncertainties and matters of significant judgement and, therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
The analysis of financial instruments that are measured subsequent to initial recognition at fair value
can be categorized into Levels 1 to 3 based upon the degree to which the fair value is observable.
• 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 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.
Cash and cash equivalents
Short term investments
Accounts receivable
Derivatives
Financial assets (liabilities) at fair value as at December 31, 2010
Level 1
70,298
20,509
-
-
90,807
$
$
Level 2
-
-
12,551
(133)
12,418
$
-
$
$
$
Level 3
-
$
-
-
-
$
There were no changes in the levels during the year ended December 31, 2010.
Cash and cash equivalents
Short term investments
Accounts receivable
Derivatives
Financial assets (liabilities) at fair value as at December 31, 2009
Level 1
30,763
6,034
-
-
36,797
$
$
Level 2
-
-
8,322
(3,055)
5,267
$
$
Level 3
-
-
-
-
-
$
$
$
$
Total
70,298
20,509
12,551
(133)
103,225
Total
30,763
6,034
8,322
(3,055)
42,064
44
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
FINANCIAL
INSTRUMENTS
AND RELATED
RISKS
(continued)
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 to 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
counterparties the Company believes to be creditworthy.
During the year ended December 31, 2010, there have been no changes in the classification of financial
assets and liabilities in level 3 of the hierarchy.
(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, 2010, 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):
Expressed in ‘000’s
December 31, 2010
December 31, 2009
45
Cash and cash equivalents
Short term investments
Accounts receivable
Long term investment and receivable
Accounts payable and accrued liabilities
Long term liability
Asset retirement obligation
$ 54,782 S/.
20,514
71
-
(625)
(1,999)
-
-
1,304
-
(27,268)
-
(9,169)
Canadian
Dollars
Nuevo
Soles
741
$
Mexican
Pesos
Canadian
Dollars
2,201 $ 21,283
560
5
-
(194)
-
-
-
42,452
24,209
(6,390)
-
(19,959)
S/.
Nuevo
Soles
302
-
880
-
(17,150)
-
(8,835)
Mexican
Pesos
$ 1,283
-
6,565
-
(623)
-
-
Based on the above net exposure as at December 31, 2010, 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
Impact to net income (loss)
$ 8,081
$ (1,360)
$
382
FINANCIAL
INSTRUMENTS
AND RELATED
RISKS
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
(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 and 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, 2010, the Company has a Mexican value added tax of $3.34 million and Peruvian
value added tax of $0.14 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 investments,
and its committed liabilities.
The Company expects the following maturities of its financial liabilities (including interest), operating
leases, and other contractual commitments:
Expressed in $‘000’s
Expected payments due by period as at December 31, 2010
Accounts payable and accrued liabilities
Due to related parties, net
Derivatives
Long term liability
Total1
$
$
Less than
1 year
13,496 $
40
133
1,083
14,752
$
1-3 years
4-5 years
After
5 years
- $
-
-
3,243
3,243 $
- $
-
-
-
- $
- $
-
-
-
- $
Total
13,496
40
133
4,326
17,995
46
1 Amounts above do not include payments related to the following: (i) the Company’s anticipated asset retirement obligation of $4,924 associated with mine closure, land reclamation,
and other environmental matters.
(e) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. The risk that the Company will realize a loss as a result
of a decline in the fair value is limited because the balances are generally held with major financial
institutions in demand deposit accounts.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
(f) Metal price risk
The Company is exposed to metals price risk with respect to silver, gold, zinc, lead, and copper sold
through its mineral concentrate products. The Company mitigates this risk by implementing price
protection programs for some of its zinc and lead production through the use of derivative instruments.
As a matter of policy, the Company does not hedge its silver production.
FINANCIAL
INSTRUMENTS
AND RELATED
RISKS
(continued)
OTHER DATA
Additional information related to the Company is available for viewing at www.sedar.com and the
Company’s website at www.fortunasilver.com.
The Company’s outstanding share position as at March 23, 2011 is 122,749,221 common shares. In
addition, a total of 4,305,500 incentive stock options are currently outstanding as follows:
SHARE POSITION
AND OUTSTANDING
WARRANTS
AND OPTIONS
Type of Security
No. of Shares
Incentive Stock Options:
47
TOTAL OUTSTANDING OPTIONS
240,000
200,000
60,000
200,000
7,500
225,000
825,000
225,000
60,000
670,000
20,000
38,000
5,000
25,000
250,000
810,000
240,000
205,000
4,305,500
Exercise
Price
(CAD$)
$1.35
$2.29
$1.75
$1.75
$0.85
$1.55
$1.66
$1.61
$0.85
$2.22
$0.85
$0.85
$0.85
$0.85
$2.52
$0.85
$0.85
$0.83
Expiry Date
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
June 27, 2017
July 2, 2017
October 24, 2017
February 5, 2018
October 5, 2018
November 5, 2018
July 6, 2019
CHANGE IN
ACCOUNTING
POLICY
Adoption of New Accounting Standards
The Company has not adopted any new accounting standards during the year.
RECENTLY
RELEASED
CANADIAN
ACCOUNTING
STANDARDS
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
The Company has assessed new and revised accounting pronouncements that have been issued and
determined that the following will 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.
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.
IFRS Project Overview
The Company continues to advance through its IFRS transition project plan.
During 2009, the Company began planning its transition to IFRS. The process consists of three phases:
Scoping and Diagnostics, Analysis and Development, and Implementation and Review.
Phase One: Scoping and Diagnostics, which involved project planning and identification of differences
between current Canadian GAAP and IFRS, was completed in the third quarter of 2009 with the
assistance of external advisors.
The resulting identified areas of accounting difference of highest potential impact to the Company,
were: IFRS 1 “First-time Adoption of IFRS”; International Accounting Standard (“IAS”) 21 “The
Effects of Changes in Foreign Exchange Rates”; and, IAS 16 “Property, Plant and Equipment”.
Phase Two: Analysis and Development involved detailed diagnostics and evaluation of the financial
impacts of various options and alternative methodologies provided for under IFRS: identification
and design of operational and financial processes; initial staff training; analysis of IFRS 1 optional
exemptions and mandatory exceptions to the general requirement for full retrospective application
upon transition to IFRS; summarization of 2011 IFRS disclosure requirements; and development of
required solutions to address identified issues.
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 included the identification of IFRS - Canadian GAAP differences, accounting policy
considerations, and preliminary implementation plans. The high impact areas relating to conversion
include foreign currency; property, plant and equipment; income taxes; and provisions, contingent
liabilities and contingent assets (including asset retirement obligations). During the second quarter
of 2010, the technical review aspects of these assessments were substantially completed. During
the third and fourth quarters of 2010, the Company substantially completed the preliminary opening
balance sheet quantification of the identified technical differences and quantification of the impacts of
IFRS transition on the first three quarters of 2010.
48
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
RECENTLY
RELEASED
CANADIAN
ACCOUNTING
STANDARDS
(continued)
Phase Three: Implementation and Review, will involve the execution of changes to information systems
and business processes; completion of formal authorization processes to approve recommended
accounting policy changes; integration of appropriate changes to maintain the integrity of internal
controls over financial reporting and disclosure controls and procedures; and further training programs
across the Company’s finance and other affected areas, as necessary. It will culminate in the collection
of financial information necessary to compile IFRS-compliant financial statements and reconciliations;
embedding of IFRS in business processes; and, audit committee approval of IFRS-compliant financial
statements. This phase commenced in the third 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. Changes in circumstances may cause the Company to revise
its IFRS opening balance sheet and policy choices before the changeover date. The opening balance
sheet will be published in the first quarter of 2011.
First Time Adoption Elections and Accounting Policy Changes
At the present time the Company is planning to apply five of the 17 elections within IFRS 1 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.
IFRS 2 “Share-based Payment” 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.
IAS 21 “The Effects of Changes in Foreign Exchange Rates” which allows for the cumulative
translation differences that existed at the date of transition to IFRS to be reset to zero.
IAS 23 “Borrowing Costs” which allows full retrospective application to be avoided by electing an
effective date as the date of transition, January 1, 2010, to IFRS.
IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” which allows a short cut method in
recalculating both the decommissioning liability and asset at the transition date of January 1, 2010.
This avoids the requirement to recalculate the liability retrospectively from the date of recognition
and then re-measure it at each subsequent reporting period up until the date of transition.
49
Below is a preliminary summary of the impacts of the high impact areas relating to conversion to IFRS
and their expected impact on the Company:
a) Foreign Currency
Under 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
currency under IFRS will need to translate their balance sheets to the functional currency at the
transition date. The Company’s preliminary analysis determined that Compania Minera Cuzcatlan S.A.
de C.V., Fortuna Silver Mines Peru S.A.C., and Recursos del Golfo, S.A. change from a Canadian dollar
(“CAD$”) measurement currency under Canadian GAAP to a United States dollar (“US$”) functional
currency under IFRS.
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
RECENTLY
RELEASED
CANADIAN
ACCOUNTING
STANDARDS
(continued)
The Company intends to continue with a US$ presentation currency under IFRS.
The Company is planning to take the IFRS 1 exemption that resets the cumulative translation adjustment
balance (“CTA”) to zero, to reduce the conversion effort. This will result in the reclassification of the
CTA existing balance into deficit on transition to IFRS on January 1, 2010, in the preliminary amount
of $2.90 million.
The preliminary adjustments for the opening balance sheet includes a foreign currency reduction to
property, plant and equipment and mineral properties of $0.33 million and $2.20 million, respectively.
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
component 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 has completed a detailed review of fixed assets
and preliminarily concluded that there will be no transitional adjustments as a result of this issue.
Under IFRS, there is an option to use either the cost method or the revaluation model for subsequent
measurement of classes of property, plant and equipment. The Company plans to continue to use the
cost method.
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.
The Company has elected to apply the borrowing cost requirements effective January 1, 2010.
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.
The Company has preliminarily concluded that there will be no impairment adjustments required at the
transition date to IFRS.
c) Income Taxes
Under Canadian GAAP, current and future income tax assets and liabilities are referred to as “future
income tax” (“FIT”) assets or liabilities whereas under IFRS the terminology is “deferred tax”. There
are no accounting policy choices available upon transition to IAS 12 “Income Taxes”.
50
RECENTLY
RELEASED
CANADIAN
ACCOUNTING
STANDARDS
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
The preliminary analysis completed to date has identified two significant differences in the area of
accounting 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. 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 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 volatility in the tax expense as foreign exchange
changes will have a more pervasive impact on tax expense.
IAS 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, where assets are acquired other than in a business combination and a
temporary difference arises the associated FIT asset (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.
In addition, IFRS requires additional disclosure with respect to “outside basis” differences not
recognized in the tax provision. These “outside basis” differences are essentially any tax liability that
would result on accounts that are eliminated upon consolidation (for example: intercompany loans,
intercompany dividends, or investments). The Company has some outside basis differences arising
from foreign exchange rates on loans denominated in United States dollars.
The preliminary adjustment to the future income tax liability opening balance sheet amounts to a reduction
of $5.38 million comprised of the following: reversal of future income tax of $1.09 million related to
workers’ participation; $3.47 million related to temporary differences on business combinations; $0.15
million related to provision; and, $0.67 million related to foreign currency adjustments.
d) Provisions, Contingent Liabilities and Contingent Assets (including asset retirement obligations)
Under Canadian GAAP, the Company recognizes decommissioning liabilities where there is a legal
obligation as compared to IFRS requiring including both legal and constructive obligations. The
preliminary analysis has determined there are no additional constructive obligations for the Caylloma
mine or the San Jose Project.
Under Canadian GAAP, the Company applies a credit adjusted risk free interest rate to the undiscounted
cash flow estimate at each site. IFRS requires the Company to use a pre-tax discount rate, typically a
long term government bond rate in the jurisdiction the Company intends to raise the financing to meet
the reclamation costs. In addition, under Canadian GAAP, the estimate of cash flows is based on a third
party concept and cannot be based on the Company’s calculated cost of using its own equipment. IFRS
allows a Company to use internal cost estimates if the Company is likely to use its own machinery and
labour to perform the reclamation work.
51
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
RECENTLY
RELEASED
CANADIAN
ACCOUNTING
STANDARDS
(continued)
The Company has elected to take the IFRS 1 exemption to avoid the requirement to recalculate the
liability retrospectively from the date of recognition and then re-measure it at each subsequent reporting
period up until the date of transition.
On a go forward basis, the Company will be required to present accretion as a finance cost under IFRS.
In addition, there will be differences due to the subsequent re-measurement of the decommissioning
liability.
The preliminary adjustment to the asset retirement obligation opening balance sheet amounts to an
increase of $0.39 million.
e) Other
The Company considered both IFRS 2 - “Share-based Payment” and IFRS 6 - “Exploration for and
Evaluation of Mineral Resources” as part of its initial diagnostic assessment. The Company has
concluded that there will be no significant or material transitional adjustments or changes in reported
results arising from the application of these standards upon transition to IFRS.
OUTLOOK ON
FUTURE
EARNINGS
Future net earnings will be impacted by the change in the accounting methodology of recognizing
deferred taxes that arise on foreign non-monetary assets or liabilities. The result of this calculation
difference will be added volatility in the tax expense as foreign exchange swings will have an impact
on the tax expense.
QUANTITATIVE
IMPACT ON
TRANSITION
TO IFRS
Based on the analysis completed to date, the Company expects the following impact on shareholders
equity on transition to IFRS:
Shareholders’ Equity, Canadian GAAP, December 31, 2009
Adjustments:
Effect of foreign exchange on property, plant and equipment
Deferred income tax adjustments
Transfer of accumulated other comprehensive income to deficit
Reset accumulated other comprehensive income to zero
Asset retirement obligation adjustments
Shareholders’ Equity, IFRS, January 1, 2010
Expressed in
$ millions
$
112.56
(2.54)
1.48
2.90
(2.90)
(0.32)
111.18
$
Internal Control over Financial Reporting and Disclosure Controls and Procedures
The Company has considered the short term effects the IFRS transition will have on our internal
controls over financial reporting and disclosure controls and procedures. We will continue to monitor
and assess these controls on an on-going basis.
Business Activities and Key Performance Measures
The Company has considered what effects the IFRS transition will have on our business policies and
activities. The following key areas are likely to be affected:
•
• Dual reporting obligation for the year 2010 because statements are required under both Canadian
Internal controls over financial reporting with respect to the IFRS transition project;
GAAP and IFRS for that year;
• Budgeting and Forecasting activities during the IFRS transition year, 2010. The budgeting process
for 2011 factored in IFRS related impacts that have been identified; and,
• Key performance measures.
52
QUANTITATIVE
IMPACT ON
TRANSITION
TO IFRS
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
Financial Reporting Expertise in IFRS
The Company is maintaining its financial reporting expertise and competencies by addressing training
requirements through IFRS sessions provided by external advisors. The training is targeted to key
finance staff and will continue to be delivered in 2011.
IT Systems
The extent of the impact of the Company’s information systems for transitioning to IFRS has been
determined. The adoption of IFRS will have an impact on the Company’s information systems in
particular the process of consolidating information for reporting of the external financial statements.
The Company has commenced a process of changing its consolidation. During the third quarter,
the Company engaged a third party to assist with implementing modifications to ensure an efficient
conversion to IFRS.
OTHER RISKS AND
UNCERTAINTIES
There have been no major changes from the reported risks factors outlined in the Annual Information
Form dated March 31, 2010.
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, 2010, 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
accordance 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 establishing
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
statements in accordance with Canadian generally accepted accounting principles.
The Company’s management, including its CEO and CFO, believe that due to its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements on a timely basis.
Also, projection of any evaluation of the effectiveness of internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and procedures may deteriorate.
There has been no change in the Company’s internal control over financial reporting that occurred
during the period that has materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.
OUTLOOK
The Company anticipates that the San Jose Project, currently under construction in Mexico, will begin
to contribute both silver and gold ounces starting in the third quarter of 2011 allowing Fortuna to
maintain its organic silver production growth in 2011.
53
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
OUTLOOK
(continued)
Once San Jose is in operation in the third quarter of 2011, Management anticipates that Fortuna’s
operations at Caylloma and San Jose should produce a total of 2.4 million ounces of silver and 7,530
ounces of gold or 2.8 million silver equivalent ounces (*) plus base metal credits in 2011. San Jose’s
contribution will be 500,000 ounces of silver and 4,580 ounces of gold. The Company is executing
plans to reach a production rate of 7 million ounces of silver equivalent annual production from existing
reserves by 2013.
CAUTIONARY
STATEMENT ON
FORWARD-LOOKING
INFORMATION
2011 Production Guidance
Mine
Caylloma, Peru
San Jose, Mexico
Total :
Silver (oz)
1,900,000
500,000
2,400,000
Gold (oz)
2,950
4,580
7,530
Zinc (lbs)
25,200,000
-
25,200,000
Lead (lbs)
16,600,000
-
16,600,000
Copper (lbs)
760,000
-
760,000
(*) Based on Ag = US$ 23.60/oz, Au = US$ 1,350/oz and metallurgical recoveries of 88% and 90% for Ag and Au respectively
In 2012, its first full year of production, the San Jose Mine is scheduled to produce 1.77 million ounces
of silver and 16,120 ounces of gold or 2.75 million silver equivalent ounces. At full design capacity,
planned for late 2013 (24 months from the start of operations), the San Jose Mine’s annual production
forecast is 3.2 million ounces of silver, 24,220 ounces of gold or 4.6 million silver equivalent ounces.
Certain statements contained in this MD&A and any documents incorporated by reference into this
MD&A constitute forward-looking statements and forward-looking information. Any statements or
information that express or involve discussions with respect to predictions, expectations, beliefs, plans,
projections, objectives, assumptions or future events or performance (often, but not always, using
words or phrases such as “expects”, “is expected”, “anticipates”, “believes”, “plans”, “projects”,
“estimates”, “assumes”, “intends”, “strategies”, “targets”, “goals”, “forecasts”, “objectives”,
“budgets”, “schedules”, “potential” or variations thereof or stating that certain actions, events or results
“may”, “could”, “would”, “might” or “will” be taken, occur or be achieved, or the negative of any of
these terms and similar expressions) are not statements of historical fact and may be forward-looking
statements or information. Forward-looking statements or information relate to, among other things:
• estimates of mineral reserves and mineral resources to the extent that they involve estimates of the
•
mineralization that will be encountered if the property is developed;
timing of the completion of construction activities at the Company’s properties and their completion
on budget;
• production rates at the Company’s properties;
• cash cost estimates;
•
•
•
•
timing to achieve full production capacity at the Company’s properties;
timing for completion of infrastructure upgrades related to the Company’s properties;
timing for delivery of materials and equipment for the Company’s properties; and
the sufficiency of the Company’s cash position and its ability to raise equity capital or access debt
facilities.
Forward-looking statements are necessarily based upon a number of estimates and assumptions that,
while considered reasonable by the Company as at the date of such statements, are inherently subject
to significant business, economic, social, political and competitive uncertainties and contingencies and
other factors that could cause actual results or events to differ materially from those projected in the
forward-looking statements. The estimates and assumptions of the Company contained or incorporated
by reference in this MD&A which may prove to be incorrect, include, but are not limited to, (1) that all
54
CAUTIONARY
STATEMENT ON
FORWARD-LOOKING
INFORMATION
(continued)
FORTUNA SILVER MINES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010
Dollar amounts expressed in US dollars, unless otherwise indicated
required third party contractual, regulatory and governmental approvals to the Offer will be obtained for
the development, construction and production of its properties, (2) there being no significant disruptions
affecting operations, whether due to labour disruptions, supply disruptions, power disruptions, damage
to equipment or otherwise; (3) permitting, development, expansion and power supply proceeding
on a basis consistent with the Company’s current expectations; (4) currency exchange rates being
approximately consistent with current levels; (5) certain price assumptions for silver, lead, zinc and
copper; (6) prices for and availability of natural gas, fuel oil, electricity, parts and equipment and other
key supplies remaining consistent with current levels; (7) production forecasts meeting expectations;
(8) the accuracy of the Company’s current mineral resource and reserve estimates; (9) labour and
materials costs increasing on a basis consistent with the Company’s current expectations; and (10)
assumptions made and judgments used in engineering and geological interpretation.
In addition, there are known and unknown risk factors which could cause the Company’s actual results,
performance or achievements to differ materially from any future results, performance or achievements
expressed or implied by the forward-looking statements. Known risk factors include, risks associated
with project development; the need for additional financing; operational risks associated with mining
and mineral processing; changes in national and local government legislation, taxation, controls,
regulations and political or economic developments in Canada, Mexico, the United States, Peru or
other countries in which the Company does or may carry on business; the possibility of cost overruns or
unanticipated expenses; fluctuations in silver, lead, zinc and copper prices; title matters; uncertainties
and risks related to carrying on business in foreign countries; environmental liability claims and
insurance; reliance on key personnel; currency exchange rate fluctuations; competition; and other risks
and uncertainties, including those described in the Risks and Uncertainties section in the MD&A and
in the Risk Factors section in the Company’s Annual Information Form for the financial year ended
December 31, 2009 filed with the Canadian Securities Administrators and available at www.sedar.com.
Although the Company has attempted to identify important factors that could cause actual actions,
events or results to differ materially from those described in forward-looking statements, there may be
other factors that cause actions, events or results not to be as anticipated, estimated or intended. These
forward-looking statements are made as of the date of this MD&A. There can be no assurance that
forward looking statements will prove to be accurate, as actual results and future events could differ
materially from those anticipated in such statements. Accordingly, readers should not place undue
reliance on forward-looking statements. Except as required by law, the Company does not assume the
obligation to revise or update these forward looking statements after the date of this document or to
revise them to reflect the occurrence of future unanticipated events.
55
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
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Fortuna Silver Mines Inc.
We have audited the accompanying consolidated financial statements of Fortuna Silver Mines Inc.,
which comprise the consolidated balance sheets as at December 31, 2010 and 2009, and the
consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows
for the years then ended, and a summary of significant accounting policies and other explanatory
information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Canadian generally accepted accounting principles, and for such
internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on
our audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments,
the auditor considers internal control relevant to the entity’s preparation and fair presentation of
the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purposes of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Fortuna Silver Mines Inc. as at December 31, 2010 and 2009 and the results
of its operations and cash flows for the years then ended in accordance with Canadian generally
accepted accounting principles.
Chartered Accountants
Vancouver, British Columbia
March 23, 2011
56
CONSOLIDATED
BALANCE SHEETS
FORTUNA SILVER MINES INC.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31,
Expressed in thousands of US Dollars
ASSETS
CURRENT
Cash and cash equivalents
Short term investments
Accounts receivable and prepaid expenses
GST/HST and value added tax receivables
Inventories
DEPOSITS ON LONG TERM ASSETS
PROPERTY, PLANT AND EQUIPMENT
MINERAL PROPERTIES
LIABILITIES
CURRENT
Accounts payable and accrued liabilities
Due to related parties
Derivatives
Current portion of long term liability
LONG TERM LIABILITY
ASSET RETIREMENT OBLIGATION
FUTURE INCOME TAX LIABILITY
SHAREHOLDERS’ EQUITY
SHARE CAPITAL
CONTRIBUTED SURPLUS
RETAINED EARNINGS (DEFICIT)
ACCUMULATED OTHER COMPREHENSIVE INCOME
Notes
2010
4
6
7
8
9
10
11
12
5
13 a)
13
14
15
$
$
$
$
70,298
20,509
13,454
3,542
4,034
111,837
4,533
35,763
91,050
243,183
13,496
40
133
1,083
14,752
3,166
4,924
14,333
37,175
180,403
11,116
3,597
10,892
14,489
206,008
243,183
2009
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
104,701
14,315
(9,357)
2,898
(6,459)
112,557
139,738
$
$
$
$
57
COMMITMENTS AND CONTINGENCIES
SUBSEQUENT EVENT
18
22
APPROVED BY THE DIRECTORS:
“Jorge Ganoza Durant”
, Director
“Robert R. Gilmore”
, Director
Jorge Ganoza Durant
Robert R. Gilmore
The accompanying notes are an integral part of these audited consolidated financial statements
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
CONSOLIDATED
STATEMENTS OF
OPERATIONS
Sales
Cost of sales
Depletion, depreciation and accretion
MINE OPERATING INCOME
Notes
$
Selling, general and administrative expenses
Stock-based compensation (recovery) expense
Write-off of deferred exploration costs
12
16 c)
OPERATING INCOME
Interest and other (expenses) income
Interest and finance (expenses)
Net gain (loss) on commodity contracts
(Loss) on disposal of property, plant and equipment
(Loss) on disposal of mineral property
(Loss) on disposal of investment
Foreign exchange (loss)
INCOME BEFORE INCOME TAXES
AND NON-CONTROLLING INTEREST
Income tax provision
Non-controlling interest
NET INCOME FOR THE YEAR
15
$
2010
74,056
22,270
6,859
44,927
14,789
(416)
443
14,816
30,111
(379)
(544)
736
(27)
(100)
(119)
(2,703)
(3,136)
26,975
14,020
-
12,955
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
$
$
Earnings per Share - Basic
Earnings per Share - Diluted
Weighted average number of shares outstanding - Basic
Weighted average number of shares outstanding - Diluted
0.12
$
0.12
$
108,120,452
110,564,767
0.01
$
$
0.01
91,802,881
91,802,881
58
The accompanying notes are an integral part of these audited consolidated financial statements
FORTUNA SILVER MINES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
Expressed in thousands of US Dollars
CONSOLIDATED
STATEMENTS OF
COMPREHENSIVE
INCOME
Net income for the year
Other comprehensive income
Unrealized gain 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
Transfer of unrealized loss to realized loss upon reduction of net investment,
net of taxes
Unrealized gain on translation of functional currency to reporting currency
Other comprehensive income
Comprehensive income for the year
2010
12,955
$
$
-
-
2,100
5,895
7,994
20,949
$
$
2009
623
148
462
-
13,400
14,010
14,633
59
The accompanying notes are an integral part of these audited consolidated financial statements
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 for the year
Items not involving cash
Depletion and depreciation
Accretion expense
Future income tax
Stock-based compensation (recovery) expense
Unrealized (gain) loss on commodity contracts
Non-controlling interest
Write-off of deferred exploration costs
Loss on disposal of equipment
Loss on disposal of investments
Loss on disposal of mineral property
Unrealized foreign exchange loss
Changes in non-cash working capital items
Accounts receivable and prepaid expenses
Inventories
Accounts payable and accrued liabilities
Due to related parties
Net cash provided by operating activities
INVESTING ACTIVITIES
Costs relating to the acquisition of Continuum
Short term investments
Mineral property expenditures
(Payments) receipts of value added taxes on purchase of
property, plant and equipment
Acquisition of property, plant and equipment
Deposits on long term assets
Proceeds on disposal of equipment
Acquisition of long term investments
Proceeds on disposal of long term investments
Proceeds on disposal of mineral property
Net cash used in investing activities
FINANCING ACTIVITIES
Net proceeds on issuance of common shares
Repayment of capital lease obligations
Net cash provided by financing activities
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Effect of exchange rate changes on cash
Cash and cash equivalents - beginning of year
Notes
2010
$
12,955
$
3
6,896
185
3,080
(416)
(2,922)
-
443
27
119
100
1,726
22,193
(4,908)
(1,537)
5,372
(11)
21,109
-
(13,858)
(16,595)
(2,915)
(19,816)
(4,290)
68
-
-
13
(57,393)
74,922
(1,231)
73,691
37,407
2,128
30,763
2009
623
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
(3,244)
4,553
29,454
CASH AND CASH EQUIVALENTS - END OF YEAR
$
70,298
$
30,763
Supplemental cash flow information
21
The accompanying notes are an integral part of these audited consolidated financial statements
60
FORTUNA SILVER MINES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Expressed in thousands of US Dollars, except for share amounts
CONSOLIDATED
STATEMENTS OF
SHAREHOLDERS’
EQUITY
Share Capital
Shares
Amount
Contributed
Surplus
Accumulated
Other
Comprehensive
Income (Loss)
(“AOCI”)
Total Retained
Earnings
(Deficit)
and AOCI
Retained
Earnings
(Deficit)
Total
Shareholders’
Equity
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 ofavailable for sale
long-term investment, net of taxes
Unrealized gain on translation of functional
currency to reporting currency
Balance - December 31, 2009
Issuance of shares under bought deal
financing, net of issuance costs
Exercise of options
Issuance of shares for property
Transfer of contributed surplus on exercise
of options
Stock-based compensation
Income for the period
Transfer of unrealized loss to realized loss
upon reduction of net investment, net of taxes
Unrealized gain o translation of functional
currency to reporting currency
Balance - December 31, 2010
85,331,659
389,000
2,475,355
6,786,674
(36)
$
$ 98,206
281
776
5,192
-
-
-
-
-
-
246
-
-
-
-
11,854
-
-
-
-
(246)
2,707
-
-
-
$
(9,980) $
-
-
-
-
(11,112) $ (21,092) $ 88,968
281
776
5,192
-
-
-
-
-
-
-
-
-
-
-
623
-
-
-
-
-
148
-
-
623
148
-
2,707
623
148
462
462
462
-
94,982,652
-
$ 104,701
-
14,315
$
$
-
(9,357) $
13,400
2,898 $
13,400
(6,459)
13,400
112,557
26,507,500
999,500
7,813
73,919
1,004
20
-
-
-
-
-
-
-
-
-
-
759
-
-
-
(759)
(2,440)
-
-
-
12,955
-
-
-
-
-
-
-
-
-
-
-
12,955
73,919
1,004
20
-
(2,440)
12,955
-
122,497,465
-
$ 180,403
-
11,116
$
$
-
3,597 $
5,895
5,895
10,892 $ 14,489 $ 206,008
5,895
61
-
-
2,100
2,100
2,100
The accompanying notes are an integral part of these audited consolidated financial statements
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
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 silver/zinc/lead/copper
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.
c) Adoption of New Accounting Standards
The Company has not adopted any new accounting standards during the current year. The Company
is adopting International Financial Reporting Standards (“IFRS”) effective January 1, 2011. Refer to
Note 2 v).
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
liabilities, 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
62
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
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 recognition, 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 and Cash Equivalents
Cash and cash equivalents which are 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, of 91 days to one year, from the date of acquisition.
h) Deposits on Long Term Assets
63
Deposits on long term assets consist of advance payments to construction contractors and equipment
providers and other receivables which have a maturity period of greater than one year.
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, 2010 is 9.3 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
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
in machinery 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 determine
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 expensed
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 current
expenses depending on the prior treatment.
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
commissioning costs. These costs are depleted using the units-of-production method over the life of
the mine, commencing on the date of commercial service.
64
l) Asset Impairment
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. 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 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,
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
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. 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 corresponding 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, 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 ending 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.
Ore stockpile and finished goods inventories are valued at the lower of production cost and net
realizable value. Materials and supplies are valued at the lower of average cost and net realizable
value. Production costs include all mine site costs.
65
o) Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset
and liability method, future tax assets and liabilities are recognized for the future tax consequences
attributable to loss carryforwards and to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and loss carryforwards. 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.
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
p) Stock-based Compensation
i. Stock Option Plan
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.
ii. Deferred Share Unit Plan (“DSU”)
The Company’s DSU compensation liability is accounted for based on the number of units outstanding
and the market value of the Company’s common shares at the balance sheet date. The year-over-year
change in the deferred share unit compensation liability is recognized in operating income.
iii. Restricted Share Unit Plan (“RSU”)
The Company recognizes a compensation cost in operating income on a prescribed vesting basis for
each RSU granted equal to the market value of the Company’s common shares at the date of which
RSUs are awarded to each participant prorated over the performance period and adjusts for changes in
the market value until the end of the performance date. The cumulative effect of the change in market
value is recognized in operating income in the period of change.
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. The
dilutive effect of outstanding options and warrants issued should be calculated using the treasury
stock method. This method assumes that all common share equivalents have been exercised at the
beginning of the 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.
66
r) Foreign Currency Translation
The Company’s functional currency is the Canadian dollar. On January 1, 2009, the Company changed
its reporting currency to the US dollar.
Transaction amounts denominated in foreign currencies are translated at exchange rates prevailing at
the transaction dates. Carrying values of foreign currency monetary assets and liabilities are adjusted at
each balance sheet date to reflect the exchange rate prevailing at that date. Gains and losses arising from
translation of foreign currency monetary assets and liabilities at each period end are included in earnings.
The accounts of certain subsidiaries, which are considered to be integrated operations, are translated
into US dollars using the temporal method. Under this method, monetary assets and liabilities of
foreign subsidiaries are translated at exchange rates in effect at the end of each period and non-
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
monetary assets and liabilities are translated using historical exchange rates. Revenues and expenses
are translated at the average exchange rate for the period. Foreign currency transaction gains and losses
are included in the determination of net income or loss.
The accounts of other subsidiaries 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
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
liabilities, 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
instrument’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).
Financial and non-financial derivative instruments are 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 associated market index.
The Company has designated each of its significant categories of financial instruments as follows:
Financial Instrument
Classification
Measurement
Cash and Cash Equivalents
Short Term Investments
Accounts Receivable
Held-for-trading
Held-for-trading
Loans and receivables
Fair value
Fair value
Amortized cost
Long Term Receivables
Loans and receivables
Amortized cost
Derivatives
Held-for-trading
Fair value
Accounts Payable and Accrued Liabilities
Due to Related Parties
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Long Term Liability
Other liabilities
Amortized cost
67
02. SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
(continued)
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
t) Derivatives and Trading Activities
The Company employs metals contracts, including forward contracts to manage exposure to fluctuations
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, Long Term Investments and Receivables are now included in Deposits on
Long Term Assets.
v) Recently released Canadian Accounting Standards
The Company has assessed new and revised accounting pronouncements that have been issued and
determined that the following will 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.
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.
68
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
approximately 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
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
03. ACQUISITION
OF MINING
INTEREST
(continued)
per share for consideration of $5,194 (CAD$6,651). A valuation date of March 6, 2009 was determined
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.
69
04. SHORT TERM
INVESTMENTS
Held-for-Trading
Short term investments
December 31, 2010
December 31, 2009
Fair Value
$ 20,509
$ 20,509
Cost
$ 20,509
$ 20,509
Fair Value
$ 6,034
$ 6,034
Cost
$ 6,034
6,034
$
05. DERIVATIVES
The Company enters into forward commodity contracts as well as put and call option commodity
arrangements to secure a minimum price level on part of its zinc and lead metal production. Additionally,
for the unhedged balance of production, the Company enters regularly into short term forward and
option metal contracts 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 forward sale and option contracts are settled against the arithmetic average of metal spot prices
over the month in which the contract matures.
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.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
05. DERIVATIVES
As at December 31, 2010, the Company had the following contracts outstanding:
(continued)
Type of contract Metal
Lead
Forward sale
Zinc
Forward sale
Silver
Long put
Silver
Short call
Silver
Long put
Silver
Short call
Total tonnage (t)
or ounces (oz)
210 t
240 t
90,000 oz
90,000 oz
50,000 oz
50,000 oz
Settlement period
March 2011
March 2011
January 2011
January 2011
January 2011
January 2011
As at December 31, 2009 the main contracts outstanding were the following:
Type of contract
Forward sale
Forward sale
Long put
Short call
Long put
Short call
Long put
Short call
Long put
Short call
Metal
Lead
Zinc
Zinc
Zinc
Lead
Lead
Zinc
Zinc
Lead
Lead
Total tonnage (t)
1,800
1,050
2,100
2,100
1,200
1,200
3,150
3,150
2,850
2,850
Settlement period
Jan 2010 – Jun 2010
Jan 2010 – Jun 2010
Jan 2010 – Jun 2010
Jan 2010 – Jun 2010
Jan 2010 – Jun 2010
Jan 2010 – Jun 2010
Jul 2010 – Dec 2010
Jul 2010 – Dec 2010
Jul 2010 – Dec 2010
Jul 2010 – Dec 2010
Price/t or
Price/oz
$2,500/t
$2,415/t
$28.00/oz
$32.10/oz
$29.00/oz
$31.70/oz
Price/t
US$1,910/t
US$1,787/t
US$2,000/t
US$3,010/t
US$2,000/t
US$2,975/t
US$2,000/t
US$3,010/t
US$2,000/t
US$2,974/t
The estimated fair value of the outstanding liability in derivative contracts of $133 (2009: liability
$3,055) 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, 2010
11,224
$
1,327
903
13,454
$
December 31, 2009
7,154
$
1,168
313
8,635
$
Accounts receivable and prepaid expenses include prepaid income tax of $nil (2009: $9), $39 (2009:
$121) short term portion of the long term receivable, $57 (2009: $34) in guarantee deposits. Trade
accounts receivable includes receivables from the sale of concentrates of $11,224 (2009: $7,154)
and are aged as follows:
70
0-30 days
31-60 days
61-90 days
over 90 days
December 31, 2010
9,754
$
1,057
413
-
11,224
$
December 31, 2009
7,154
$
-
-
-
7,154
$
The Company has no allowance for doubtful accounts (2009: $nil).
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
07. INVENTORIES
Inventories consist of the following:
Stockpile ore
Concentrate inventory
Materials and supplies
December 31, 2010
1,274
$
347
2,413
4,034
$
December 31, 2009
204
$
651
1,474
2,329
$
The amount of inventory recognized as expenses during 2010 was $22,270 (2009: $17,755) and
there has been no impairment during 2010 (2009: $nil).
08. DEPOSITS ON
LONG TERM ASSETS
Deposits on long term assets consist of advance payments to construction contractors and equipment
providers, and other receivables that are long term in nature and consist of the following:
Deposits on equipment
Deposits to contractors
Other
December 31, 2010
2,996
$
1,529
8
4,533
$
December 31, 2009
-
$
-
16
16
$
Property, plant and equipment are comprised of the following:
09. PROPERTY,
PLANT AND
EQUIPMENT
December 31, 2010
December 31, 2009
$
Land
Buildings
Machinery & equipment
Equipment under capital lease
Furniture & other equipment
Transport units
Work in progress
$
71
Accumulated
Depreciation
Net Book
Value
329 $
Accumulated
Depreciation
Cost
316 $
Cost
329 $
8,760
11,451
4,174
4,174
442
14,977
44,307 $
- $
2,069
4,027
1,281
836
331
-
8,544 $
6,691
7,424
2,893
3,338
111
14,977
35,763 $ 22,541 $
4,740
10,152
3,249
1,627
430
2,027
Net Book
Value
316
3,700
7,129
2,681
1,189
191
2,027
17,233
- $
1,040
3,023
568
438
239
-
5,308 $
Machinery & equipment includes costs of $682 (2009: $526) and accumulated depreciation of $201
(2009: $131) resulting from the estimate for the asset retirement obligation.
Work in progress includes construction costs of $1,029 (2009: $1,202) and $13,948 (2009: $825)
related to the Caylloma, Peru and San Jose, Mexico properties, respectively.
The net carrying amount of $2,503 (2009: $2,503) related to an idle plant in Mexico, is not being
amortized while the San Jose, Mexico property is under construction.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
10. MINERAL
PROPERTIES
Mineral properties are located in Peru and Mexico and are comprised of the following:
December 31, 2010
December 31, 2009
Caylloma, Peru
San Jose, Mexico
Tlacolula, Mexico
Predilecta, Mexico
Cost Depletion
$ 51,971 $ 16,079
55,525
-
-
76
-
118
$ 107,690 $ 16,079
a) Caylloma Project, Peru
Write-off
Net Book
Value
Cost Depletion
443 $ 35,449 $ 42,209 $ 11,685
-
- 55,525 44,745
-
-
76
-
-
109
-
118
561 $ 91,050 $ 87,063 $ 11,685
$
$
Write-off
$
Net Book
Value
160 $ 30,364
43,654
-
-
109
-
$ 1,251 $ 74,127
1,091
For the year ended December 31, 2010, additions to the Caylloma mineral property includes
development and exploration costs of $9,564 (2009: $6,122).
During the year ended December 31, 2010, the Company wrote down exploration costs in the amount
of $443 (2009: $160) as it was determined there are significant exploration risks and does not warrant
drill testing of the property.
b) San Jose Project, Mexico
For the year ended December 31, 2010, additions to the San Jose mineral property consist of
development and exploration costs capitalized of $5,781 (2009: $5,742), general and administrative
costs to develop the mine of $2,308 (2009: $1,425), and asset retirement obligation of $1,626
(2009: $nil).
Included in the additions for the San Jose property is $62 (2009: $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 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 the additions for the San Jose mineral property is depreciation of equipment involved in
construction work of $317 (2009: $220) and $1 (2009: $141) received as interest on VAT recovered.
72
c) Tlacolula Project, Mexico
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
(“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.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
10. MINERAL
PROPERTIES
(continued)
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 $20
cash according to the terms of the option agreement. Refer to Note 22.
d) Predilecta, Mexico
During the first quarter of 2010, the Company sold its interest in the Predilecta mineral property, for
cash consideration of $13 resulting in a loss of $100.
11. ACCOUNTS
PAYABLE
AND ACCRUED
LIABILITIES
Trade accounts payable
Income taxes payable
Payroll and other payables
Restricted share unit payable
December 31, 2010
3,968
$
4,192
5,249
87
13,496
$
December 31, 2009
2,577
$
2,949
2,557
-
8,083
$
Payroll and other payables includes $2,328 (2009: $1,084) attributable to workers’ participation
under Peruvian law and $495 (2009: $nil) attributable to bonus accruals.
12. RELATED PARTY
TRANSACTIONS
The Company incurred charges from directors, officers, and companies having a common director or
officer as follows:
Years ended December 31,
Transactions with related parties
Consulting fees1
Salaries and wages2,3
Other general and administrative expenses3
$
$
2010
175
174
185
534
$
$
2009
145
122
159
426
73
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 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 10. c) and 22.
December 31, 2010
Amounts due to/(from) related parties
Owing (from)/to a director and officer4
(1)
$
Owing to a company with common directors3 $
41
40
$
December 31, 2009
(1)
$
50
$
49
$
4 Owing from a director includes non-interest bearing advances to Jorge A. Ganoza Durant at December 31, 2010 and 2009.
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, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
13. LEASES AND LONG
TERM LIABILITIES
Leases and long term liabilities are comprised of the following:
Obligations under capital Lease
Long term liability
Deferred share unit payable
Restricted share unit payable
a) Obligations under Capital Lease
December 31, 2010
462
$
705
1,955
44
3,166
$
December 31, 2009
810
$
644
-
-
1,454
$
The following is a schedule of the Company’s capital lease obligations. These are related to the
acquisition of mining equipment, vehicles, and buildings.
Interest Rate
Maturity Date
December 31, 2010
December 31, 2009
Gross lease payments:
Scotia Bank Peru S.A.A.
Scotia Bank Peru S.A.A.
Scotia Bank Peru S.A.A.
Scotia Bank Peru S.A.A.
Scotia Bank Peru S.A.A.
Scotia Bank Peru S.A.A.
Scotia Bank Peru S.A.A.
Banco Internacional del Peru S.A.A.
Banco Internacional del Peru S.A.A.
Banco Internacional del Peru S.A.A.
Scotia Bank Peru S.A.A.
Banco Internacional del Peru S.A.A.
Scotia Bank Peru S.A.A.
Scotia Bank Peru S.A.A.
Gross lease payments
Less: interest
Total payment, net of interest
Less: current amount
b) Long Term Liability
8.66%
8.20%
8.49%
8.34%
8.49%
6.75%
6.75%
4.00%
9.12%
9.75%
4.50%
9.75%
4.50%
4.85%
2010
2010
2010
2011
2011
2011
2011
2011
2011
2012
2012
2012
2012
2012
$
$
$
-
-
-
1
31
7
9
93
89
58
341
574
360
58
1,622
(77)
1,545
(1,083)
462
$
$
$
104
261
60
15
107
17
22
205
185
101
-
936
-
-
2,014
(165)
1,848
(1,038)
810
In May 2008, the Company acquired the Monte Alban II concession (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, 2010.
74
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
Liability at period end
Less: current portion of long term liability
December 31, 2010
644
$
-
644
-
61
705
-
705
$
$
December 31, 2009
970
(225)
745
(156)
55
644
-
644
$
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
13. LEASES AND
LONG TERM
LIABILITIES
(continued)
Principal minimum repayment terms will be:
2011
2012
$
$
-
800
800
c) Contingent Liabilities
The Caylloma mine closure plan was approved in November 2009 with total closure costs of $3,587 of
which $1,756 is subject to an 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 estimated 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 $293. This bank letter of
guarantee expires 360 days from December 2010.
Banco Bilbao Vizcaya Argentaria, S.A., has also established bank letters of guarantee totalling $54 to
provide an annual guarantee associated with an office lease contract and truck rentals. These bank
letters of guarantee expire 360 days from June 2010.
Interbank, a third party, has renewed the bank letter of guarantee in the amount of $2, in favor of
the Peruvian Ministry of Energy and Mines, to allow a temporary concession to study electric power
generation in the hydro electric power plant, to expire April 2011.
d) Deferred Share Units Payable
The deferred share units are recorded on the balance sheet at fair value. As at December 31, 2010,
there are 409,097 (2009: nil) deferred share units outstanding with a mark-to-market value of $1,955
(2009: $nil).
e) Restricted Share Units Payable
75
The restricted share units are recorded on the balance sheet at fair value. As at December 31, 2010,
there are 219,114 (2009: nil) restricted share units outstanding with a mark-to-market value of $131
(2009: $nil) of which $87 is current (2009: $nil). Refer to Note 11.
14. ASSET
RETIREMENT
OBLIGATION
A summary of the Company’s provision for asset retirement obligation (“ARO”) is presented below.
Asset retirement obligation - beginning of year
Additions to obligation
Revisions in estimates
Accretion expense, included in depreciation, depletion and accretion
Foreign exchange impact
Asset retirement obligation - end of year
December 31, 2010
2,529
1,626
584
185
-
4,924
$
$
December 31, 2009
1,066
$
-
1,286
150
27
2,529
$
For the Caylloma Mine, the accretion expense of $185 (2009: $150) was calculated over the year
using a risk free interest rate of 4.87% (2009: 7.46%). The Company had 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 had made an increase to the estimated amount of the asset retirement obligation of
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
14. ASSET
RETIREMENT
OBLIGATION
(continued)
$584 (2009: $1,286) with a foreign exchange impact of $ nil (2009: $27). As at December 31, 2010,
the accrued obligation was estimated using an undiscounted cash flow of $3,587 (2009: $3,346), a
risk free rate of 4.87% (2009: 7.46%), mine life of 8.17 years (2009: 9.67 years), and Nuevo Soles
to United States dollars foreign exchange rate of 2.809 (2009: 3.011). The accrued obligation at
December 31, 2010 is $3,298. Refer to Note 13 c).
For the San Jose mine development, the Company estimated the ARO using a undiscounted cash flow
of $2,540 (2009: $nil), a risk free rate interest rate of 4.945% (2009: nil), a mine life of 9 years,
and Mexican Pesos to United States dollars foreign exchange rate of 12.610 (2009: nil). Accretion
expense over the year is $nil (2009: $nil) and the accrued obligation at December 31, 2010 is $1,626
(2009: $nil).
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.
15. INCOME TAX
a) Income tax expense differs from the amount that would be computed by applying the Canadian
statutory income tax rate of 29% (2009 - 30%) to income 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 (deductible) non-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, 2010
26,975
$
December 31, 2009
6,312
$
29%
30%
$
$
$
$
7,688
(488)
2,535
431
24
3,830
14,020
10,940
3,080
14,020
$
$
$
$
1,894
948
1,130
346
818
733
5,869
5,075
794
5,869
Current income taxes payable of $4,192 (2009: $2,949) is included within accounts payable and
accrued liabilities in Note 11.
76
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
15. INCOME TAX
(continued)
b) The tax effects items that give rise to significant portions of the future tax assets and future tax
liabilities at December 31, 2010 and 2009 are presented below:
Future income tax assets:
Non-capital losses
Share issue costs
Asset retirement obligation 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
Equipment
Total future income tax liabilities
Net future income tax liabilities
December 31, 2010
December 31, 2009
$
$
$
$
10,500
1,037
2,185
48
1,012
14,782
(10,553)
4,229
(13,360)
(5,024)
(178)
(18,562)
(14,333)
$
$
$
$
5,416
275
207
1,125
927
7,950
(6,599)
1,351
(10,366)
(1,958)
-
(12,324)
(10,973)
c) The Company has non-capital loss carry-forwards that will expire if unused of $40,248 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
2030
No expiry
Canada
380
1,129
915
-
2,139
2,342
3,850
1,597
4,674
9,876
-
26,902
$
$
$
$
Peru
-
-
-
-
-
-
-
-
-
-
357
357
$
$
Mexico
-
-
41
3,371
1,999
-
-
-
3,702
3,876
-
12,989
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.
During the year ended December 31, 2010, the Company issued an aggregate of 26,507,500 common
shares, under two bought deal financings, for gross proceeds of $78,528. Net proceeds of $73,919
after share issuance costs of $4,609 were raised from the bought deal financings comprised of:
77
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
16. SHARE
CAPITAL
(continued)
15,007,500 common shares at CAD$2.30 per share, for net proceeds of $31,135; and 11,500,000
common shares at CAD$4.00 per share, for net proceeds of $42,784.
Subsequent to December 31, 2010 to March 23, 2011, the Company issued 6,756 common shares, at
a fair market value of CAD$4.41 per share, to Radius (refer to Notes 10.c) and 22) and 245,000 share
purchase options were exercised at prices ranging from CAD$0.83 to CAD$2.22 per share, resulting in
issued and outstanding shares of 122,749,221.
b) Stock Options
The Company’s stock option plan, approved by the shareholders on August 30, 2006 and accepted
by the TSX Venture Exchange on October 16, 2006 provides a rolling maximum of the issuance of
common treasury shares equal to up to ten percent of the issued and outstanding common shares with
no vesting provisions. The exercise price of the optioned shares are no less than the market price, with
the length of the grant expiring up to ten years from grant.
The following is a summary of option transactions:
Balance, December 31, 2008
Granted
Exercised
Expired
Forfeited
Balance, December 31, 2009
Exercised
Cancelled
Balance, December 31, 2010
Number of Shares
7,734,000
2,915,000
(389,000)
(970,000)
(1,075,000)
8,215,000
(999,500)
(2,665,000)
4,550,500
$
Weighted Average Exercise
Price Per Share in CAD$
1.87
1.56
0.81
2.35
3.22
1.50
1.03
1.62
1.51
$
$
During the period, 999,500 share purchase options with exercise prices ranging from CAD$0.80 to
CAD$2.29 per share were exercised.
During the period, 2,665,000 share purchase options with exercise prices ranging from CAD$1.60 to
CAD$2.23 were cancelled as shareholder approval was not obtained at the Company’s annual general
meeting held on June 23, 2010.
78
The following table summarizes information related to stock options outstanding and exercisable at
December 31, 2010:
Number of
outstanding
share purchase
options (in 000’s)
1,621
1,800
1,130
4,551
Exercise price
in CAD$
$0.80 to $0.99
$1.00 to $1.99
$2.00 to $2.75
$0.80 to $2.75
Weighted
average
remaining Weighted average
contractual life
exercise price on
of outstanding outstanding share
purchase options
share purchase
CAD$
options (years)
0.85
1.61
2.30
1.51
7.7 $
5.5
6.1
6.4 $
Vested share
purchase options
(in 000’s)
Weighted average
exercise price on
vested share
purchase options
CAD$
0.85
1.61
2.30
1.51
1,621 $
1,800
1,130
4,551 $
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
16. SHARE
CAPITAL
(continued)
The weighted average remaining life of vested share purchase options at December 31, 2010 was 6.4
years (2009: 8.3 years).
As at December 31, 2010, 4,550,500 share purchase options have vested.
Subsequent to December 31, 2010 to March 23, 2011, 245,000 share purchase options were
exercised at prices ranging from CAD$0.83 to CAD$2.22 per share.
c) Stock-based Compensation
i. Stock Option Plan
The Company uses the fair value based method of accounting for share options granted to consultants,
directors, officers, and employees. The non-cash compensation recovery of $2,440 recognized for the
year ended December 31, 2010 is associated with the 2,665,000 share purchase options granted in
the fourth quarter of 2009 and cancelled as shareholder approval was not obtained at the Company’s
annual general meeting held on June 23, 2010.
The non-cash compensation charge of $2,707 recognized for the year ended December 31, 2009 is
associated with options granted to a directors, officers, and employees. These compensation charges
have been determined under the fair value method using the Black-Scholes option pricing model with
the following assumptions:
Risk-free interest rate
Expected stock price volatility
Expected term in years
Expected dividend yield
Years ended December 31,
2010
n/a
n/a
n/a
n/a
2009
2.42% to 3.45%
70% to 78%
5 to 10 years
0%
The weighted average grant date fair value of options granted during the year ended December 31,
2010 was CAD$nil (2009 - CAD$0.91).
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.
ii. Deferred Share Units Cost
During the year, the Company implemented a deferred share unit plan which allows for up to 1% of the
number of shares outstanding from time to time to be granted to eligible directors. All grants under the
plan are fully vested upon credit to an eligible directors’ account. As at December 31, 2010, there are
409,097 (2009: nil) deferred share units outstanding with a mark-to-market cost of $1,897 (2009:
$nil).
iii. Restricted Share Units Cost
During the year, the Company implemented a restricted share unit plan for certain employees or officers.
The RSUs entitle employees or officers to a cash payment after the end of each performance period, of
79
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
16. SHARE
CAPITAL
(continued)
up to two years, following the date of the award. The RSU payment will be an amount equal to the fair
market value of the Company’s common share on the five trading days immediately prior to the end of
the performance period multiplied by the number of RSUs held by the employee.
As at December 31, 2010, there are 219,114 (2009: nil) restricted share units outstanding with a
mark-to-market cost of $127 (2009: $nil).
d) Reserves
During the year, the Board of Directors of Bateas has appropriated reserves of $975 (2009: $1,130)
from its retained earnings representing ten percent of the net income earned in the calendar years
2009 (2009: 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.
e) Weighted average number of common shares and dilutive common share equivalents
Weighted average number of commons shares
Weighted average number of dilutive stock options
December 31, 2010
108,120
2,445
110,565
December 31, 2009
91,803
-
91,803
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
80
Year ended December 31, 2010
Sales
Operating income (loss)
Year ended December 31, 2009
Sales
Operating income (loss)
$
$
$
$
As at December 31, 2010
$
Mineral Properties
Property, plant and equipment $
Total assets
$
As at December 31, 2009
Mineral Properties
$
Property, plant and equipment $
$
Total assets
-
$
(5,807) $
74,056 $
35,962 $
- $
- $
$
-
(5,612) $
51,428 $
20,992 $
- $
(921) $
-
6
81,439
-
11
25,120
$
$
$
$
$
$
35,449 $
14,953 $
$
77,760
55,601 $
20,804 $
83,973 $
30,364
$
12,298 $
67,978 $
43,763 $
4,922 $
46,614 $
- $
(44) $
- $
(76) $
- $
- $
11 $
- $
2 $
26 $
74,056
30,111
51,428
14,383
91,050
35,763
243,183
4,127
17,233
139,738
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
c) Major Customers
For the year ended December 31, 2010, there were two customers accounting for 64% and 36%,
respectively, of the total sales of the Company.
For the year ended December 31, 2009, there was one customer accounting for 94% of total sales of
the Company.
17. SEGMENTED
INFORMATION
(continued)
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 the Company 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 annually 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, 2010, these obligations amounted to $711 with $231 and $480 maturing
in 2011 and 2012, respectively.
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.
81
Estimated future reclamation costs are based principally on legal and regulatory requirements. As of
December 31, 2010, $4,924 (2009: $2,529) was accrued for reclamation costs relating to mineral
properties in accordance with Section 3110, “Asset Retirement Obligations”. See Note 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.
18. COMMITMENTS
AND
CONTINGENCIES
(continued)
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
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.
d) Credit Facility
In 2010, the Company entered into a credit agreement with the Bank of Nova Scotia for a $20 million
senior secured revolving credit facility (“credit facility”) to be refinanced or repaid on or within two and
one-half years or before December 2012. The credit facility is secured by a first ranking lien on Bateas
and its assets. The interest margin on drawings under the facility ranges from 4% to 4.5% depending
on the leverage ratio. A stand-by fee between 1.25% and 1.5% depending on the leverage ratio is
to be paid on the undrawn amounts under the facility. No funds were drawn from this credit facility
during the year.
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 bank loan, 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 makes 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, 2010, are sufficient for its present needs for the next 12 months. The Company is not subject to
externally imposed capital requirements.
The Company’s overall strategy with respect to capital risk management remained unchanged during
the year.
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.
82
a) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, short term investments, accounts receivable, accounts
payable and accrued liabilities, and due to related parties 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
uncertainties and matters of significant judgement and, therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
20. MANAGEMENT
OF FINANCIAL RISK
(continued)
The analysis of financial instruments that are measured subsequent to initial recognition at fair value
can be categorized into Levels 1 to 3 based upon the degree to which the fair value is observable.
• 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 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.
Cash and cash equivalents
Short term investments
Accounts receivable
Derivatives
$
$
$
Financial assets (liabilities) at fair value as at December 31, 2010
Level 1
Total
70,298
70,298
20,509
20,509
12,551
-
(133)
-
103,225
90,807
Level 2
-
-
12,551
(133)
12,418
Level 3
-
-
-
-
-
$
$
$
$
$
There were no changes in the levels during the year ended December 31, 2010.
Cash and cash equivalents
Short term investments
Accounts receivable
Derivatives
$
$
$
Financial assets (liabilities) at fair value as at December 31, 2009
Level 1
Total
30,763
30,763
6,034
6,034
8,322
-
(3,055)
-
42,064
36,797
Level 2
-
-
8,322
(3,055)
5,267
Level 3
-
-
-
-
-
$
$
$
$
$
83
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 to 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
counterparties the Company believes to be creditworthy.
During the year ended December 31, 2010, there have been no changes in the classification of financial
assets and liabilities in level 3 of the hierarchy.
20. MANAGEMENT
OF FINANCIAL RISK
(continued)
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
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, 2010, 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 and cash equivalents
Short term investments
Accounts receivable
Long term investment and receivable
Accounts payable and accrued liabilities
Long term liability
Asset retirement obligation
December 31, 2009
Nuevo
Soles
December 31, 2010
Canadian
Dollars
$ 54,782 S/.
20,514
71
-
(625)
(1,999)
-
741 $
-
1,304
-
(27,268)
(9,169)
-
Mexican
Pesos
2,201 $ 21,283 S/.
Canadian
Dollars
-
42,452
24,209
(6,390)
-
(19,959)
560
5
-
(194)
-
-
Nuevo
Soles
302 $
-
880
-
(17,150)
-
(8,835)
Mexican
Pesos
1,283
-
6,565
-
(623)
-
-
Based on the above net exposure as at December 31, 2010, 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
Impact to net income (loss)
$
8,081
$
(1,360) $
382
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 and 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.
84
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, 2010, the Company has a Mexican value added tax of $3,336 and Peruvian value
added tax of $136. The Company expects to recover the full amounts from the Mexican and Peruvian
Governments.
20. MANAGEMENT
OF FINANCIAL RISK
(continued)
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
All amounts expressed in thousands of US Dollars, except for share and per share amounts
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.
Expected payments due by period as at December 31, 2010
Accounts payable and accrued liabilities
Due to related parties, net
Derivatives
Long term liability
Total1
$
$
Less than
1 year
13,496
40
133
1,083
14,752 $
1-3 years
$
- $
-
-
3,243
3,243 $
4-5 years
After
5 years
- $
-
-
-
- $
- $
-
-
-
- $
Total
13,496
40
133
4,326
17,995
1 Amounts above do not include payments related to the following: (i) the Company’s anticipated asset retirement obligation of $4,924 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, lead, and copper 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.
Cash received or paid for interest and income taxes:
Cash received for interest
Cash paid for income taxes
Non-cash Transactions:
Issuance of shares on purchase of resource property
Reassessment of asset retirement obligation
Cancellation of Minera Condor liability
Equipment purchased through capital lease
Fair value of options exercised
Disposal of investment in subsidiary
Notes
10 c)
14
13 b)
Years ended December 31,
2010
335
4,346
20
2,210
-
925
759
119
$
$
$
$
$
$
$
$
2009
210
596
5,194
1,286
156
1,425
246
-
$
$
$
$
$
$
$
$
85
21. SUPPLEMENTAL
CASH FLOW
INFORMATION
22. SUBSEQUENT
EVENT UP TO
MARCH 23, 2011
On January 14, 2011, the Company issued 6,756 common shares of the Company to Radius, at a fair
market value of $4.44 per share and paid $30 cash according to the terms of the option agreement
referenced in Note 10.c).
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
Management Head Office
Carlos Baca
Corporate Office
Ralph Rushton / Erin Ostrom
info@fortunasilver.com
.
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:
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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
Vancouver, BC
Canada V7X 1P4
Share Transfer Agent
Olympia Trust Company
750 West Pender Street, Suite 1003
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.
86
Photo: San Jose Mine: Processing plant ore transport conveyor belt underground tunnel
www.fortunasilver.com
TSX: FVI
Lima Stock Exchange: FVI
Frankfurt: F4S.F
OTC:BB: FVIT.F
Photo: San Jose Mine: Processing plant flotation cells and ball mill