BUILDING SUSTAINABLE VALUE
2011 ANNUAL REPORT
Cover photo:
San Jose Mine, Mexico
Symbols
Ag
silver
Ag Eq silver equivalent
Au
Cu
g/t
m
koz
M
gold
copper
grams per metric tonne
meters
1,000 ounces
million
Moz
1,000,000 ounces
oz
Pb
t
troy ounce. One troy ounce is equal
to 31.1035 grams
lead
metric tonne
tpd metric tonnes per day. One metric
tonne equals 2,204.62 pounds
Zn
zinc
Caylloma Mine, Peru
Our Vision
To be valued by our workers, the community and our shareholders as a leading silver
mining company in Latin America.
Our Mission
To create value through the growth of silver reserves, metal production and the efficient
operation of our assets with a commitment to safety, social and environmental responsibility.
Our Values
We value the health and safety of our workers: We do not tolerate unsafe acts or conditions.
We value the environment: We subscribe to the highest environmental standards.
We value our neighbours and other stakeholders: We respect cultural diversity and work as
a strategic partner towards the sustainable development of neighbouring communities.
We value the commitment to excellence: We achieve high standards and best practices.
We value integrity: We act according to our philosophy.
Table of Contents
2011 Performance
2
4
5
Outlook for 2012
Historical Milestones
6 Mineral Reserves & Resources
Fueling Growth
CEO’s Letter
Chairman’s Letter
Senior Management & Directors
8
9
11
12
14
16
16
18
20
22
24
25
57
Operational Highlights
Caylloma Mine
San Jose Mine
Mario Property
Silver Analysis
Financial Review
Management’s Discussion & Analysis
Consolidated Financial Statements
Social Responsibility
101
Corporate Data
This annual report contains forward-looking statements. Please refer to the cautionary
language under the heading “Cautionary Statement on Forward-Looking Statements”
on page 55 of the Management’s Discussion & Analysis.
FORTUNA SILVER MINES INC.
Fortuna Silver Mines Inc. is a profitable silver producer with two 100%-owned, low-cost mines in Peru and
Mexico. One of Latin America’s fastest growing silver miners, Fortuna has increased annual production
steadily to approximately 2.8 million silver equivalent ounces since its establishment in 2005. Fortuna’s
growth strategy is to focus on exploration and development of opportunities within its 73,000 hectare land
holdings in Peru and Mexico while also pursuing select advanced stage silver projects in Latin America.
Fortuna is headquartered in Vancouver, Canada and maintains management offices in Lima, Peru. Its
common shares are listed on the New York Stock Exchange (FSM), Toronto Stock Exchange (FVI), Bolsa de
Valores de Lima (FVI) and Frankfurt Stock Exchange (F4S.F).
PRODUCING MINES
San Jose Mine, Mexico
San Jose achieved commercial production in September 2011 at 1,000 tpd and is expected to produce
1.7 million ounces of silver and 15,000 ounces of gold in 2012. Fortuna plans to initiate an expansion
program in 2012 to increase mine and mill production capacity to 1,500 tpd. When operating at design
capacity, San Jose is projected to produce approximately 3.2 million ounces of silver and 25,000 ounces
of gold annually. During 2012, the company’s brownfields exploration program will focus on the testing and
evaluation of opportunities developed in its 58,000 hectare land package.
Caylloma Mine, Peru
Over the past four years, the company has increased silver production at Caylloma by more than 200%.
In 2011, the mine produced 2 million ounces of silver and 2,400 ounces of gold, plus base metal by-
products. Caylloma’s Mine life is projected at eight years. In 2012, Fortuna will conduct brownfields
exploration to evaluate a number of high-grade silver targets on its 11,000 hectare land package.
Concentrate shipment at the San Jose Mine, Mexico
1
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
1
PERFORMANCE
San Jose Mine, Mexico
2011 PERFORMANCE
Milestones
• Silver production increases by 31% to 2.5 million ounces
• Sales increase by 49% to a record US$110 million
• Earnings per share increase by 7% to US$0.16
• San Jose Mine achieves commercial production on time and on budget at 1,000 tpd in September
• Fortuna acquires option to purchase 100% interest in the Mario project in central Peru
• Exploration continues to increase mineral resources and reserves
• Common shares begin trading on the New York Stock Exchange
Financial Highlights
(Expressed in thousands of US dollars)
Sales
Operating income
Net income
Earnings per share
Cash flow from operations
2011*
110,004
38,065
19,533
0.16
35,508
2010*
74,056
27,728
16,003
0.15
21,713
2009**
51,428
14,383
623
0.01
13,686
* Figures expressed under IFRS
** Figures expressed under Canadian Generally Accepted Accounting Principles
Capital Share Structure
(As of April 13, 2012)
Shares outstanding
Stock options
Warrants
125,268,751
3,688,289
0
2
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
PERFORMANCE
Operating Highlights
Processed Ore
Tonnes milled
Average tpd milled
Cash Cost (US$/oz Ag) (1)
Silver (2)
Grade (g/t)
Recovery (%)
Production (oz)
Realized Price (US$/oz) (3)
Gold
Grade (g/t)
Recovery (%)
Production (oz)
Realized Price (US$/oz) (3)
Lead
Grade (%)
Recovery (%)
Production (000 lbs)
Realized Price (US$/lb) (3)
Zinc
Grade (%)
Recovery (%)
Production (000 lbs)
Realized Price (US$/lb) (3)
Copper
Grade (%)
Recovery (%) (4)
Production (000 lbs)
Realized Price (US$/lb) (3)
No. of Employees
2011
2010
2009
Caylloma Mine
Peru
San Jose Mine (5)
Mexico
Consolidated
Peru
Peru
Caylloma Mine Caylloma Mine
125,301
949
4.51
144
84.60
490,555
1.36
84.40
4,622
–
–
–
–
–
–
448,866
1,272
(0.59)
171
81.43
2,008,488
0.36
45.71
2,393
2.15
92.68
19,677
2.68
88.46
23,424
0.18
2.03
36
434,656
1,231
(5.99)
395,560
1,121
(4.86)
0.37
159.24
85.67
1,906,423
18.18
154.76
85.40
1,682,546
13.09
2,499,043
31.11
0.40
46.28
2,556
921
2.44
91.28
21,373
0.79
3.10
87.99
26,137
0.60
0.21
51
1,026
2.60
1,630
0.47
46.45
2,780
707
3.10
93.02
25,137
0.56
3.66
89.07
28,442
0.39
0.25
–
190
1.53
885
7,015
1,183
19,677
0.86
23,424
0.66
80.275
2.65
1,502
1 Net of by-product credits
2 2011 Caylloma Mine silver recovery in lead concentrates. 2009 and 2010 Caylloma Mine silver recovery in lead and copper concentrates
3 Calculated based on contained metals and after deductions, treatment, and refining charges. Treatment charges are allocated to the
base metals in Caylloma and to gold in San Jose. Net realized prices are based on provisional sales and are calculated before
government royalties
4 Copper recovery in 2009 was not reported as circuit was fully commissioned in December 2009
5 Total production for 2011, includes pre-commissioning production. Commercial production as of September 1st, 2011: Tonnes milled:
116,410, average tpd milled: 954, silver grade (g/t): 150, silver recovery (%): 84.95, silver production (oz): 478,167, gold grade (g/t):
1.43, gold recovery (%): 84.62 and gold production (oz): 4,524
Sales by Metal
Gold
7%
Copper
4%
Gold
3%
Copper
1%
Gold
4%
Silver
64%
Zinc
14%
Lead
15%
Silver
49%
Zinc
21%
Silver
43%
Zinc
23%
2011
2010
2009
Lead
23%
Lead
29%
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
3
CAYLLOMA MINE
OUTLOOK FOR 2012
Opening Bell Ceremony at the
New York Stock Exchange
January 17, 2012
OUTLOOK FOR 2012
Production Guidance
Mine
Caylloma, Peru
San Jose, Mexico
Total
Silver (Moz)
Gold (koz)
Zinc (Mlbs)
Lead (Mlbs)
2.0
1.7
3.7
2.4
15.0
17.4
21.0
--
21.0
18.0
--
18.0
2012 – 2015 Production Forecast
2014E production:
6.4M Ag Eq oz + base metals
z
o
n
o
i
l
l
i
M
q
E
g
A
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Caylloma Mine base metal Ag Eq
San Jose Mine Ag Eq (Ag + Au)
Caylloma Mine Ag Eq (Ag + Au)
2007
2008
2009
2010
2011
2012
2013
2014
2015
Ag Eq calculated using Ag = US$30/oz, Au = US$1,660/oz, Pb = US$2,300/t and Zn = US$2,000/t
4
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
I
HISTORICAL MILESTONES
Core shack at Caylloma Mine, Peru
HISTORICAL MILESTONES
2005
• Fortuna Silver Mines Inc. is established
• Shares begin trading on the Toronto Venture Exchange under the ticker “FVI”
• Fortuna acquires 100% interest in the Caylloma Mine
2006
• Caylloma Mine resumes production at approximately 500 tpd
• Fortuna purchases 76% interest in the San Jose project
2007
• Silver and gold resources increase significantly at San Jose project
2008
• Annual silver production increases by 85%
• Shares begin trading on the Bolsa de Valores de Lima under the ticker “FVI”
2009
• Annual silver production reaches a record 1.7 million ounces
• Fortuna completes acquisition of 100% interest in the San Jose project
• Environmental Impact Study approved for San Jose project
2010
• Fortuna raises more than C$80 million in two bought-deal financings
• Common shares upgraded to Toronto Stock Exchange from Toronto Venture Exchange
• San Jose Mine construction commences
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
5
MINERAL RESERVES & RESOURCES
MINERAL RESERVES & RESOURCES
Mineral Reserves – Proven & Probable
Contained Metal
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Ag
(Moz)
Au
(koz)
Caylloma, Peru
Silver Veins
Polymetallic Veins
Proven
Probable
Proven + Probable
Proven
Probable
Proven + Probable
Combined – All Veins Proven
Probable
Proven + Probable
San Jose, Mexico
Probable
Total
Proven + Probable
26
755
781
1,318
2,543
3,861
1,344
3,297
4,642
3,600
8,241
687
365
376
87
86
86
98
150
135
204
165
0.28
0.42
0.42
0.32
0.31
0.31
0.32
0.34
0.33
1.59
0.88
0.32
0.06
0.07
1.59
1.58
1.59
1.57
1.23
1.33
N/A
N/A
0.32
0.06
0.07
2.39
2.27
2.31
2.35
1.76
1.93
0.6
8.9
9.4
3.7
7.1
10.7
4.2
15.9
20.2
0.2
10.3
10.5
13.5
25.5
39.0
13.7
35.8
49.5
N/A
23.6 183.7
N/A
43.8 233.2
Mineral Resources – Measured and Indicated
Contained Metal
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Ag
(Moz)
Au
(koz)
Caylloma, Peru
Measured
Indicated
Measured + Indicated
574
1,684
2,258
100
131
123
0.31
0.30
0.30
1.17
0.74
0.85
1.75
1.11
1.28
1.8
7.1
8.9
5.8
16.0
21.8
San Jose, Mexico
Indicated
376
243
2.12
N/A
N/A
2.9
25.6
Total
Measured + Indicated
2,634
140
0.56
N/A
N/A
11.9
47.4
Mineral Resources – Inferred
Contained Metal
Property
Classification
Caylloma, Peru
San Jose, Mexico
Total
Inferred
Inferred
Inferred
Tonnes
(000)
3,258
3,072
6,330
Ag
(g/t)
112
223
166
Au
(g/t)
Pb
(%)
Zn
(%)
Ag
(Moz)
Au
(koz)
0.36
0.99
1.50
11.8
37.9
1.80
N/A
N/A
22.0 178.1
1.06
N/A
N/A
33.8 216.0
1. Mineral Reserves and Mineral Resources are as defined by CIM Definition Standards on Mineral Resources and Mineral 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 Resources and Mineral Reserves are estimated as of June 30, 2011 and reported as of December 31,
2011 taking into account production-related depletion for the period of July 1, 2011 through December 31, 2011
5. Caylloma Mineral Reserves are estimated using break-even cut-off grades based on estimated NSR values using assumed
metal prices of US$26.59/oz Ag, US$1,279.31/oz Au, US$2,116/t Pb and US$2,028/t Zn; historical metallurgical recovery
rates of 82% for Ag, 45% for Au, 93% for Pb and 88% for Zn; and historic operating costs adjusted for inflation. Caylloma
Mineral Resources are reported based on estimated NSR values using the aforementioned assumed metal prices and
metallurgical recovery rates and a cut-off value of US$30/t
6. 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 1,077,000 tonnes averaging 197 g/t Ag, 0.39 g/t Au, 1.00%
Pb and 1.28% Zn. Inferred Oxide Resources are estimated at 544,000 tonnes averaging 143 g/t Ag, 0.27 g/t Au, 0.55%
Pb and 0.94% Zn
7. San Jose Mineral Resources are estimated as of December 10, 2009 with Mineral Reserves estimated as of December
31, 2010 and actualized as of December 31, 2011 taking into account production-related depletion from start-up in
August 2011 through December 31, 2011
8. San Jose Mineral Reserves are estimated using break-even cut-off grades based on assumed metal prices of US$15.12/oz Ag
and US$897.51/oz Au, estimated metallurgical recovery rates of 88% for Ag and 90% for Au and projected operating
costs. San Jose Mineral Resources are estimated and reported at a Ag Equivalent cutoff 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))
9. Totals may not add due to rounding procedures
10. N/A = Not Applicable
6
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
2
2
MINERAL RESERVES & RESOURCES
Sustainable Mineral Reserve and Resource Growth
z
o
n
o
i
l
l
i
M
q
E
g
A
140
120
100
80
60
40
20
0
2005
2006
2007
2008
2009
2010
2011
Ag Eq calculated using Ag = US$25.14/oz and Au = US$1,391.63/oz
Inferred Resources
Measured + Indicated Resources
Proven + Probable Reserves
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
7
Grade control sampling at Caylloma Mine, Peru
FUELING GROWTH
Caylloma Mine, Peru
FUELING GROWTH
Fortuna’s growth strategy is to focus on expanding its resource base by exploring for high-grade silver
mineralization within its core land holdings in Peru and Mexico. To further leverage this growth, the
company is selectively pursuing the acquisition of advanced-stage, silver-rich projects in Latin America
with potential for low-cost operations.
The objective is to achieve annual production of 14 million silver equivalent ounces by 2016: 7 million
ounces from current reserves and mine plans and 7 million from new reserves. To achieve this objective,
management has implemented the following strategic initiatives in 2012:
Maximize production, profitability and cash flow
• Initiate expansion of San Jose’s mill and mine production capacity to 1,500 tpd
• Focus on operational efficiencies to reduce cash costs
• Convert silver/gold concentrate to dore production at San Jose
Capitalize on brownfields exploration opportunities at San Jose and Caylloma
• Conduct 44,000 meters of exploration drilling
• Generate high-priority silver-gold targets through exploration of extensive land holdings
Pursue M&A opportunities in Latin America
• Evaluate advanced-stage projects with potential for at least 50% of revenue from silver
• Pursue projects with potential for low-cost operations
The objective is to achieve annual production of 14 million silver
equivalent ounces by 2016: 7 million ounces from current
reserves and mine plans and 7 million from new reserves.
8
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
CHIEF EXECUTIVE OFFICER’S LETTER
Our consolidated production
budget for 2012 is 3.7 million
ounces of silver and 17,000 ounces
of gold, a 48% increase in silver
production and more than double
the gold output of 2011.
CHIEF EXECUTIVE OFFICER’S LETTER
To our shareholders, employees and stakeholders,
2011 was a year of transformation marked by several important milestones. In September, we started
commercial production on time and on budget at our San Jose Mine in Mexico. San Jose is our second
operating mine and fundamental to the continued growth of silver and gold production in the next two
years. Also in September, our shares began trading on the New York Stock Exchange, the world’s premier
securities market. Additionally, Fortuna achieved record sales and silver production.
Creating sustainable value
At the start of 2012, we had capital and exploration budgets of US$70 million for sustaining our
aggressive long-term growth strategy. By mid-2013, I expect Fortuna to achieve an annual production rate
of approximately 5.2 million ounces of silver and 27,000 ounces of gold from existing reserves and mine
expansion plans. In the meantime, I am optimistic that our search for attractive silver projects in Latin
America will enable us to further expand our property portfolio.
The listing of Fortuna´s common shares on the New York Stock Exchange on September 19, 2011 and
the opening bell ceremony on January 17, 2012 gave us many reasons to celebrate. Those highlights also
caused us to pause and reflect on our achievements. As a group — management, directors and
employees — we reminisced about the beginnings of Fortuna in 2004, when we came together with the
vision of building a leading silver mining company in Latin America. We took this opportunity to renew our
commitment to that vision and to our values.
Entering 2012 with ambitious yet realistic plans
Our consolidated production budget for 2012 is 3.7 million ounces of silver and 17,000 ounces of gold,
a 48% increase in silver production and more than double the gold output of 2011. The San Jose Mine is
scheduled to produce 1.7 million ounces of silver and 15,000 ounces of gold. Caylloma is expected to
produce 2 million ounces of silver and 2,000 ounces of gold, plus base metals. Our estimated
consolidated cash production cost is approximately US$6 per ounce of silver, net of by-product credits.
This is below the median production cost among silver producers.
The silver mining industry benefited from continued strong silver prices in 2011. Driven by growth in
investment and industrial demand, silver prices averaged US$35 per ounce, a 74% increase over the
average price in 2010. At the same time, the industry faced challenges from rising operating costs. Our
cash cost at Caylloma increased significantly over the year driven by industry related inflation mainly in
wages and mining services which accentuated in Q4 2011. We do not expect significant cost increase in
2012 from our cost reported for Q4 2011. In response to these cost pressures, Fortuna has implemented
several initiatives aimed at improving productivity, maintaining strong financial margins and increasing
production.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
9
CHIEF EXECUTIVE OFFICER’S LETTER
Fortuna has implemented several initiatives aimed at
improving productivity, maintaining strong financial
margins and increasing production.
At the San Jose Mine, we will increase production capacity from 1,000 tpd to 1,500 tpd and build a silver-
gold dore production facility, which will significantly reduce treatment charges related to the sale of gold
and silver concentrates. The 2012 capital budget for these projects is US$25 million. At the Caylloma
Mine, we plan to invest US$30 million in 2012 to improve underground mining efficiency and upgrade
energy, plant and camp infrastructure. The projects at both mines will be pivotal in supporting our cost
competitiveness and growth.
Generating new growth opportunities
The highlight of our exploration and project-generation activities in 2011 was the signing of an option
agreement to acquire a 100% interest in the Mario Property. Located in central Peru, Mario is a post-
discovery stage project with good potential for bulk-minable, epithermal gold-and-silver mineralization, as
well as high-grade replacement style silver-and-base metal mineralization. Our first-phase drilling program
at Mario started in November 2011 and continued into the first quarter of 2012.
At the Caylloma Mine, our exploration programs replaced 670,000 tonnes of reserves consumed through
production. More importantly, this work increased reserves of the high-grade silver-rich veins in the central
portion of our holdings. We now have a proven and probable reserve base of approximately 20 million
ounces of silver, supporting an eight-year mine life.
Our exploration budget overall for 2012 is US$15 million. This includes plans for drilling approximately
44,000 meters in brownfields and greenfields exploration programs at our projects in Peru and Mexico.
Maintaining our commitment to sustainability
As an organization, we remain committed to the three cornerstones of our values: maintaining the health
and safety of our personnel, subscribing to the highest environmental standards and respecting our host
communities.
Despite our best efforts to uphold safe work practices, a fatal accident at the Caylloma Mine in February
2012 claimed the life of Mr. Sixto Chambilla Apaza, a driller working for one of our mine contractors. This
is the first fatal accident at Fortuna in six years of operations. Following a thorough analysis of the
accident, we have adopted all recommendations of the investigation team. We are implementing company-
wide measures to ensure that additional safeguards are in place to prevent violations of the safety
regulations and procedures that led to this tragic accident.
Our company actively works as a strategic partner in the communities that host our operations. We
collaborate with local stakeholders to identify opportunities where we can establish and participate in
sustainable community development projects and social responsibility initiatives. During 2011, Fortuna
funded US$1.3 million in various projects. These ranged from genetic improvement of local Alpaca herds
near our Caylloma Mine, to road construction and school scholarships in Mexico.
In closing, I commend the extraordinary group of people that make up our team. More than 1,500
employees and contractors located in three countries are working together every day to realize our vision.
I also extend my thanks to our Board of Directors for their continued leadership and support.
10
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
Jorge A. Ganoza
President and Chief Executive Officer
CHAIRMAN’S LETTER
Our goal is to become an industry
leader in the Americas.
CHAIRMAN’S LETTER
To our shareholders and employees,
In 2004, we set out to build a company that would capitalize on the favourable long-term outlook for
silver and on Latin America’s growing dominance in silver production. Then, as now, our objectives are to
create a leading silver producer, to generate rapid growth and to recruit and retain top talent to manage
our growth.
I am delighted with how the Fortuna team continues to embrace our objectives and work tirelessly to
meet them. We have made tremendous progress from our small beginnings as a junior resource
company. Today, our growth potential is the strongest it has ever been, given the steadily increasing
value and potential of our core assets. Since the formation of our company, we have always emphasized
building sustainable value. Our goal is to become an industry leader in the Americas by maintaining a
commitment to growth and to the well-being of our workers, neighbouring communities and the
environment. Our success, however, won’t be determined solely by the volume and value of the metals
that we mine. Rather, it will also be measured by the economic, social and environmental sustainability
of our operations. And in that respect, we have much to be proud of.
I believe that our approach to creating sustainable value was key to the fast-track development of our
San Jose Mine. The Fortuna team quickly and efficiently advanced San Jose from acquisition and initial
sampling to commercial production in just five years. This remarkable achievement adds considerable
value to the reputation of our company. Similarly, the recent listing of our common shares on the New
York Stock Exchange benefits both our company and our shareholders, providing additional liquidity to
investors and access to capital to support Fortuna’s growth plans.
Fortuna has evolved and grown rapidly in recent years, yet its strategy of focussing on silver projects in
Latin America remains relevant. We believe that Latin America offers a rich hunting ground for new
projects. The region hosts the top two silver producing countries in the world, Mexico and Peru, and
boasts a safe, mining-friendly culture in most countries. Additionally, the outlook for silver demand
remains bright. Industrial demand is forecast to grow by 36% from 2010 through 2015, according to the
Silver Institute. Demand is expected to remain positive primarily because of the lack of substitution and
the wide range of established and ever-growing new uses of silver that are vital to industry.
As always, it is my pleasure to thank the entire Fortuna family for their exceptional dedication,
enthusiasm and teamwork. Like every mining company, we face challenges and opportunities day in and
day out. Fortuna, however, has the credibility, industry expertise and solid financial growth to remain on
track to achieving its long-term objectives. On behalf of my fellow directors, I also thank our shareholders
for your continued loyalty and support.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
11
Simon Ridgway
Chairman of the Board
SENIOR MANAGEMENT & DIRECTORS
SENIOR MANAGEMENT
Jorge A. Ganoza,
Geological Engineer
President, CEO and
Director
Thomas I. Vehrs, Ph.D.
Vice President of
Exploration
Luis Dario Ganoza,
B. Sc. Engineering,
MBA, M. Sc.
Chief Financial
Officer
Manuel Ruiz-Conejo,
B. Sc. Engineering
Vice President of
Operations
Cesar Pera
Vice President of
Human and
Organizational
Development
Jorge A. Ganoza is a geological engineer with over 16 years of experience in
exploration, mining and business development throughout Latin America.
A graduate of the New Mexico Institute of Mining in 1994, Jorge is a fourth
generation miner from a Peruvian family that has owned and operated
underground mines in Peru and Panama. Jorge also serves as a Chairman
of the Board of Atico Mining Corporation, a TSX.V listed company.
Over the past 35 years, Dr. Thomas Vehrs has enjoyed a successful career in
mineral exploration and mine development. During this time, he consulted to
and held senior positions with several major mining companies and was a
founder and acted as President and COO of Aquest Minerals Corp. Tom has
worked extensively in Latin America developing and managing exploration
programs with an emphasis on epithermal and porphyry-related mineralized
systems. Tom also serves as an independent director of AQM Copper Inc.
Luis D. Ganoza has 12 years of experience in the operation and financial
management of mining companies. He has served as CFO of Fortuna Silver
since 2006 and previously held the positions of Controller and Treasurer for
a public mining company in Peru. Luis has a B.Sc. in mining engineering
from the Universidad Nacional de Ingenieria in Peru, and an M.Sc. in
accounting and finance from the London School of Economics. Luis also
serves as a director of Atico Mining Corporation, a TSX.V listed company.
A mining engineer with more than 25 years of experience, Manuel Ruiz-Conejo
has worked for the most prolific polymetallic mines and mine contractors in
Peru. As an engineer, he has participated in the execution of critical
projects. As an executive, he has developed and supervised the
implementation of several multimillion-dollar mining projects and numerous
community relations initiatives. Manuel graduated from the Universidad
Nacional de Ingenieria and from the Executive Management Program at the
Universidad de Piura in Peru.
Cesar Pera is an organizational psychologist with a master’s degree in
organizational psychology from the University of Madrid. Cesar has over
25 years of experience in organizational development and change with Latin
American companies. He served as President of the Peruvian Association of
Human Resources and as Vice President of the Interamerican Federation of
Human Management for the Andean region. Cesar serves as director of the
Master’s Degree Program in Organizational Development and People
Management at the Universidad del Pacifico in Peru.
12
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
SENIOR MANAGEMENT & DIRECTORS
DIRECTORS
Simon Ridgway
Chairman
of the Board
Robert R. Gilmore,
CPA
Tomas Guerrero,
Geological Engineer
Michael Iverson
Mario Szotlender
Thomas Kelly
Simon Ridgway is a prospector, a mining financier and a Casey Research
Explorers’ League inductee. Grassroots exploration is Simon’s first love,
and he has had a successful career as an explorationist since starting out
in the Yukon Territory in the late 70s. Simon and the exploration teams
under his guidance have discovered gold deposits in Honduras, Guatemala
and Nicaragua. On the financial side, Mr. Ridgway has raised more than
CAD$350 million for exploration and development projects since 2003.
Robert Gilmore graduated from the University of Denver with a bachelor of
science degree in business administration, accounting. Robert is a Certified
Public Accountant and a member of the Colorado Society of Certified Public
Accountants and the American Institute of CPAs. He has more than 30
years of experience working with resource companies and currently serves
as Chairman of the Board for Eldorado Gold Corporation and as a director
for Layne Christensen Company, a NASDAQ-listed US company with nearly
US$1 billion in revenues.
Tomas Guerrero is a geological engineer with over 30 years of mine geology
and mineral exploration experience in Latin America. Until 2001, Tomas
served for ten years as Director of Explorations for the Hochschild Group,
a leading public Peruvian mining company. Under his leadership, Hochschild
discovered and put in production three mid-size gold-silver mines. He is
currently the principle of BO Consulting, an engineering consulting firm
serving the mining sector.
Michael Iverson has served as President and a director of Triple K Ventures
Ltd. since 1975 and as President and a director of R.P. F. Custom Wood
Fibre Ltd. since 1985. In 1997, Michael joined Sasha Ventures Ltd., a
public company, as President and a director. In addition, Michael was Chief
Executive Officer of Fortuna from 1998 to 2005, and has served as
Secretary and a director of Niogold Mining Corp. since 1998.
Mario Szotlender holds a degree in international relations and is fluent in
several languages. He has directed Latin American affairs for numerous
companies over the past 20 years, specializing in developing business
opportunities and establishing relations within the investment community.
He has been involved in various mineral exploration and development joint
ventures and operations in Central and South America. Mario has served as
President of Mena Resources Inc. and Rusoro Mining Ltd., and is currently
a director of Radius Gold Inc. and Endeavour Silver Corp.
Thomas Kelly has bachelor and masters degrees in mining engineering from
the Colorado School of Mines and is a Fellow of the Australasian Institute of
Mining and Metallurgy and a member of the Society for Mining, Metallurgy &
Exploration. Tom has over 35 years of worldwide experience with mineral
industry leaders such as Freeport- McMoRan Copper & Gold, AMEC
Americas and Inca Pacific Resources. He is a recognized expert in project
management and development and is fluent in Spanish. Tom is currently
CEO of Apurimac Ferrum.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
13
SOCIAL RESPONSIBILITY
Scholarship program for San Jose del Progreso community
SOCIAL RESPONSIBILITY
At Fortuna, we have implemented a series of projects aimed at improving health, education and infrastructure
in the communities near our operations.
At San Jose, we signed an agreement in 2011 with the Municipality of San Jose del Progreso to implement
several projects for improving the well-being of residents and the local infrastructure. The main projects
include construction of a health post, sports court and daycare centre.
We also developed several programs in collaboration with the community aimed at improving education,
health and culture. These include providing scholarships for primary and secondary school and college
students, and home improvements such as upgrades to kitchens and construction of ecological bathrooms.
At Caylloma, an agreement signed in 2010 with the Municipality of Caylloma opened the door to local
development projects that train community members to work in our mine and provide educational support.
Other initiatives include genetic enhancements of local alpaca herds to improve the quality of their wool and
overall health, and support of the community’s activities to develop a self-sustaining local economy. We are
also helping local artisanal weavers improve weaving techniques, granting scholarships, funding summer-
school programs and working to improve nutrition and health in the communities.
Program to improve kitchens at San Jose del Progreso community
San Jose del Progreso medical post
14
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
SOCIAL RESPONSIBILITY
Alpaca herd genetic improvement program at Caylloma
Forging Strategic Partnerships
• Programs are based on respect for ethno-cultural
diversity, open communication and effective interaction
with all stakeholders.
• We work with communities towards self-development
of economically sustainable activities to improve their
quality of life.
Teaching children about caring for the environment at Caylloma
Pasture improvement program at Caylloma
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
15
CAYLLOMA MINE, PERU
COMMODITIES: Silver, gold, lead and zinc
OWNERSHIP: 100%
LAND PACKAGE: 11,000 hectares
LOCATION: Arequipa, Peru
DEPOSIT TYPE:
(Latitude 15° 13” S, Longitude 71° 49” W)
Intermediate-sulphidation epithermal deposit
STATUS: Mill and underground mine operating at over
1,250 tpd
Exploration underway for veins with potential
for high-grade silver mineralization
CAYLLOMA MINE
16
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
4,500 meters above sea level
CAYLLOMA MINE, PERU
1,300 tpd processing plant
2011 Results
Silver production reached 2 million ounces in 2011 and has exceeded forecasts every year since the mine
and mill were upgraded in 2006.
In 2011, the cash cost per ounce of silver, net of by-product credits, was negative US$0.59, compared to
negative US$5.99 in 2010. Cash costs were driven higher by inflationary pressure on labour costs and a
decrease in by-product credits during the second half of the year. The decrease in by-product credits was
due primarily to lower base metal prices (lead down 24%, zinc down 21%) and lower lead production, which
declined by 13% from the previous year.
Exploration
Our exploration in 2011 led to the discovery of high-grade silver ore shoots in the Bateas vein and
confirmed the exploration and discovery potential of this prolific mining district, which has been in semi-
continuous production since the arrival of the Spaniards in the early 16th century.
Outlook
For 2012, the mine is scheduled to produce 2 million ounces of silver and 2,400 ounces of gold plus lead
and zinc by-products. Our capital spending budget for the year is US$25 million and includes a new
tailings facility with total holding capacity for 17 years and improvements to the power grid, plant
equipment, camp and other infrastructure.
Fortuna will also continue to scope production expansion of the mine in 2012. In 2011, the company
received approval for an Environmental Impact Study to increase production capacity up to 2,250 tpd. An
updated reserve and resource estimate has been completed and will be used to evaluate the next phase
of mine expansion.
The company’s exploration plans for 2012 include 24,000 meters of diamond drilling and 3,500 meters of
underground drifting. This work will focus on high-grade silver targets, including extensions of bonanza-
style mineralization in the following areas:
• Bateas vein: Drilling will test the projected intersection with the San Cristobal vein that, along with the
Bateas vein, has been a prominent producer throughout the mine’s history.
• Animas vein: Drilling will target ore-grade intersections from earlier exploration programs of the Nancy
structure, a subsidiary structure to the Animas vein.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
17
SAN JOSE MINE, MEXICO
COMMODITIES: Silver and gold
OWNERSHIP: 100%
LAND PACKAGE: 58,000 hectares
LOCATION: Taviche Mining District, Oaxaca, Mexico
(Latitude 16° 41” N, Longitude 96° 42” W)
DEPOSIT TYPE: High-grade, low-sulphidation, epithermal vein deposit
STATUS: Mill and underground mine operating at 1,000 tpd
Expansion to 1,500 tpd design capacity initiated in 2012
Exploration for high-grade silver veins underway
SAN JOSE MINE
18
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
1,600 meters above sea level
SAN JOSE MINE, MEXICO
Ocotlan Grey Water Treatment Plant –
source of 20% of San Jose’s water balance
2011 Results
In July 2011, the company completed construction and commissioning of the San Jose Mine on time and
on budget. Commercial production commenced on September 1, 2011 at a rate of 1,000 tpd. San Jose’s
total metal production for 2011 was 490,555 ounces of silver and 4,622 ounces of gold at a cash cost of
US$4.51 per silver equivalent ounce, net of by-product credits.(1)
Exploration
The San Jose land package holds potential for discovery of new gold-and-silver-bearing deposits within the
58,000 hectare concession area located in the general vicinity of the existing mill at San Jose.
In 2012, the company’s program will focus on the continued exploration and evaluation of the southern
extension of the Bonanza and Trinidad veins at the San Jose Mine as well as exploration of other targets
within the district. Targets in evaluation and under consideration for drill testing include vein systems
outcropping in the Tlacolula concession and the La Altona vein system in the Taviche District area. Early
stage exploration activities will also be carried out in a number of locations within the concession area
where previous work has identified significant gold and silver geochemical anomalies.
Outlook
For 2012, Fortuna expects the San Jose Mine to produce 1.7 million ounces of silver and 15,000 ounces
of gold. The company has initiated construction activities to expand mine and mill capacity to 1,500 tpd.
Once completed, San Jose is expected to produce at a rate of approximately 3.2 million ounces of silver,
25,000 ounces of gold, or 4.6 million silver equivalent ounces per year. The capital budget for the
expansion project is US$30.7 million.
1 Total production for 2011, includes pre-commissioning production. Commercial production as of September 1st, 2011:
Tonnes milled: 116,410, average tpd milled: 954, silver grade (g/t): 150, silver recovery (%): 84.95, silver production (oz):
478,167, gold grade (g/t): 1.43, gold recovery (%): 84.62 and gold production (oz): 4,524.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
19
MARIO PROPERTY, PERU
COMMODITIES: Silver, gold, lead and zinc
OWNERSHIP: Option to earn 100% interest
LAND PACKAGE: 4,900 hectares
LOCATION:
Junin, central Peru
MINERALIZATION: Massive sulphide replacement bodies,
veins, mantos, hydrothermal breccias,
disseminations and skarn-type bodies
STATUS: Exploration stage
MARIO PROPERTY
20
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MARIO PROPERTY, PERU
Uchucchacua
c
cua
Atachocha
ha
AtAtat ch
Milpo
o
Iscaycruz
ayc
uz
ca
Ce
Cerro de Pasco
d
d
Quicay
Qui
Invicta
Inv
Met
Metallogenic Belt
etallogenic
Silver – Lead – Zinc
Silv
ilver – Lead –
M
Maria Teresa
Colquijirca
ca
lq
Shalipayco
Huaron
uaro
r
Chungar
n
Puy Puy
y
Pu Puy
San Vincente
ro
Morococha
ocha
Toromocho
ho
Toro
m
mm
Casapalca
al
sa
as
s
c
San Cristobal
tobal
bal
o
to
Cristobal
st
n
Sa
Juauja
a
Silveria-Germania
Pachancoto
Pa
ococ
Lima
Palma
cha
Azulcocha
yo
Huancayo
LEGEND
LEGEND
LEGEND
Ag-Pb-Zn mine
Ag-Pb-Zn mine
Au-Ag mine
Au-Ag mine
Cu-Porphyry mine
Cu-Porphyry mine
Cu-Pb-Zn mine
Cu-Pb-Zn mine
City
City
Jumasha Limestone
Jumasha Limestone
Pucara Limestone
Pucara Limestone
0
0
0
50 km
50 km
50 km
MARIO PROPERTY
Yauricocha
ha
co
Yauuricocha
Tucumachay
achay
Tucumachay
Cercapuquio
eCeCC caapu uioquio
quio
Overview
Located in the Central Peru silver-lead-zinc metallogenic belt, the Mario Project represents a potential
growth opportunity for the company. Through option agreements signed with Crocodile Gold Corp. in May
of 2011 and with Consorcio Empresarial Agmin S.A.C. in July of 2011, Fortuna acquired an option to earn
a 100% interest in combined 4,900 hectare property.
Prior exploration of the property by Teck-Cominco Peru SA (1998-2000), Sulliden Exploration Inc. (2000-
2003) and Franc-Or Resources Corporation (2006-2008), identified significant ore-grade intercepts of
silver-gold-lead-zinc mineralization associated with a late Tertiary diatreme breccia and intrusive dome
complex. The combined program of Teck-Cominco, Sulliden and Franc-Or included project-scale mapping
and sampling, geophysical surveys and approximately 14,000 meters of diamond drilling.
Exploration and outlook
In 2011, Fortuna completed detailed geologic mapping, geochemical sampling and detailed geophysical
surveys in the Mario Project area. A 7,000 meter first phase drill program was initiated in November of
2011 and is projected for completion in April of 2012. The drill program will focus on the exploration and
evaluation of disseminated gold-silver mineralization in the diatreme breccia as well as the testing of high-
grade silver-lead-zinc replacement style deposits in limestone units in contact with the diatreme breccia.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
21
Drilling at Mario Property
SILVER ANALYSIS
Silver Price
Monthly Average Comex Through April 16, 2012
2011 Silver Production by Country
774.9 million ounces
z
o
/
$
S
U
45
40
35
30
25
20
15
10
5
0
Mexico
19.7%
Peru
14.2%
Other
37.7%
United States
4.6%
75
79
83
87
91
95
99
03
07
11
Australia
7.2%
China
16.6%
E
Source: CPM Group
Source: CPM Group
SILVER ANALYSIS
Average price hits new high
Silver prices averaged US$35.29 in 2011, up 73.8% from 2010 and a record nominal high, surpassing the
annual average price of US$20.65 in 1980. In 2011 dollar terms, the average price of silver in 1980 was
US$65.14.
Silver prices continued to surge in the first few months of 2011, driven by momentum buying throughout
the period. Prices dropped after peaking in April and trended lower for the remainder of the year.
Silver demand, primarily from fabrication of consumer electronics and solar panels, helped boost demand
overall as the global economy continued to expand.
Higher mine output boosts supply
Total silver supply rose to 995.1 million ounces, up 2.3% from 2010. Mine production accounted for the
majority of the increase, rising 27.8 million ounces from 2010 levels.
Mexico was the world’s largest producer silver in 2011. Mine output was a record 152.8 million ounces,
up 18.8% from 128.6 million ounces in 2010.
Peruvian silver output fell to 109.8 million ounces in 2011, from 116.9 million ounces in 2010. Much of
the decline can be attributed to lower silver production at the largest silver producing mines in the country.
Secondary supply of silver fell 1.2% year-over-year, totalling 277.1 million ounces in 2011. Secondary
supply growth was curbed by a sharp drop in Indian scrap supplies, which fell to 4.8 million ounces, down
two-thirds from 2010 levels.
22
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
0
SILVER ANALYSIS
2011 Total Fabrication Demand for Silver
861.9 million ounces
Other Uses
21%
Solar Panels
7%
Electronics
and Batteries
26%
Photography
12%
Jewelry and
Silverware
34%
Source: CPM Group
Mobile devices containing silver boosted demand
Economic expansion drives fabrication demand
Fabrication demand for silver rose to 861.9 million ounces in 2011, a 2.2% increase from 843.5 million
ounces in 2010. Fabrication demand increased as the global economy continued to expand, while demand
from the photography sector again declined, as digital cameras commanded an ever larger market share.
Silver used in consumer electronics rose, as healthy demand for mobile devices containing silver helped
boost demand for the metal. Demand from the solar panel industry rose at a slower pace in 2011, up
23.1% to an estimated 59.8 million ounces, compared with nearly 100% growth in 2010.
Higher prices slow investment demand
Silver investment demand waned in 2011, which weighed heavily on prices after April. Some investors
began exiting the silver market at this time, booking profits. Weaker economic growth in the second half of
the year further contributed to investor disinterest in silver.
Combined silver exchange traded product (ETP) holdings stood at 565.4 million ounces at the end of
2011. This was down 4.5% from 591.8 million ounces at the end of 2010, and the first annual decrease
in holdings since the silver ETP was introduced in 2000. However, sales of US Mint Silver Eagle coins
reached a record 39.9 million ounces in 2011, up 15.0% from a year ago.
Outlook
In 2012, fabrication demand for silver is forecast to rise further, but at a slower pace than in recent years.
Healthy consumer and industrial demand is expected to continue, boosting industrial silver consumption,
including that used in solar panels. Silver coin sales, however, may decline in 2012 from 2011 levels.
Source: CPM Group
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
23
FINANCIAL REVIEW
FINANCIAL REVIEW
MANAGEMENT’S DISCUSSION & ANALYSIS
Flotation at Caylloma Mine, Peru
Business of the Company
Recent Developments and 2011 Highlights
Results of Operations
Property Option Agreements
Annual Financial Results
page 25
26
27
32
33
35 Quarterly Information
Fourth Quarter Financial Results
35
Cash Cost Per Silver Ounce and Cash Cost Per Tonne (non-GAAP financial measures)
37
Liquidity and Capital Resources
39
43 Off-Balance Sheet Arrangements
43 Derivatives
43
45
46
48
51 Other Data
54
54 Other Risks and Uncertainties
54
Controls and Procedures
54 Outlook
55
Related Party Transactions
Significant Accounting Judgments and Estimates
Financial Instruments and Related Risks
Changes in Accounting Policies including Initial Adoption
Cautionary Statement on Forward-Looking Statements
International Financial Reporting Standards (“IFRS”)
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Chartered Accountants
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Financial Position
Consolidated Statements of Changes in Equity
57
58
59
60
61
62
63 Notes to Consolidated Financial Statements
24
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2011
As at March 23, 2012
(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 financial
performance, this MD&A should be read in conjunction with the Company’s audited consolidated financial statements
for year ended December 31, 2011 and the related notes contained therein. The Company reports its financial position,
financial performance and cash flows in accordance with the International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”). This MD&A refers to various non-GAAP financial
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, income taxes, and interest income, 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, but do not have a standardized meaning and may differ from
methods used by other companies with similar descriptions. The Company believes that certain investors use these non-
GAAP financial measures to evaluate the Company’s performance. Accordingly, non-GAAP financial measures should not
be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. To facilitate
a better understanding of these measures as calculated by the Company, we have provided detailed descriptions and
reconciliations as required.
This document contains forward-looking statements. Please refer to the cautionary language under the heading
“Cautionary Statement on Forward-Looking Statements”.
BUSINESS OF THE COMPANY
Fortuna is engaged in silver mining and related activities, in Latin America, including exploration, extraction, and
processing. The Company operates the Caylloma zinc/lead/silver mine in southern Peru and the San Jose silver/gold
mine in Mexico.
Fortuna is a publicly traded company incorporated and domiciled in Canada and is listed on the New York Stock Exchange
under the trading ticker symbol “FSM”, and on the Toronto Stock Exchange and Lima Stock Exchange under the trading
ticker symbol “FVI”.
The Company’s registered office is at Suite 650, 200 Burrard Street, Vancouver, British Columbia, Canada, V6C 3L6.
The financial results 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”); Fortuna Silver Mines Peru S.A.C. (“FSM Peru”); and Fortuna Silver Mexico, S.A. de CV. (“FS Mexico”).
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
25
MANAGEMENT’S DISCUSSION AND ANALYSIS
RECENT DEVELOPMENTS AND 2011 HIGHLIGHTS
FaTaL aCCidenT RePoRT
It is with great sorrow the Company informs that on February 26, 2012 a fatal accident claimed the life of a driller and
injured a supervisor, both working for the Company’s mine contractor operating the Animas vein on Level 12 of the
Caylloma mine. All mine operations were stopped immediately. The supervisor is in stable condition and recovering in a
hospital in Arequipa. Mine operations resumed on February 28, 2012. Fortuna’s senior operations management team
traveled to the mine site the same day of the accident and a corporate investigation of this tragic accident was launched.
Findings indicate the crew of contractors suffered a premature detonation on a round of rib and ditch blast. Levels of
responsibility and breaches of safety regulations and procedures that led to the accident were identified as a result of
the investigation. Under the recommendations of the investigation report, Fortuna is implementing companywide
measures to ensure additional safeguards are in place against violations of safety regulations and procedures.
This is the first tragic accident in the history of Fortuna’s operations. The Company has a culture of zero tolerance for
insecure acts and conditions and is acting accordingly.
FinanCiaL and oPeRaTing ReSuLTS
During the quarter ended December 31, 2011, the Company generated a net loss of $1.76 million (Q4 2010: income
$4.33 million) on operating income of $4.44 million (Q4 2010: $8.03 million) and sales of $31.05 million (Q4 2010:
$23.91 million).
During the year ended December 31, 2011, the Company generated a net income of $19.53 million (2010: income
$16.00 million) on operating income of $38.07 million (2010: $27.73 million) and sales of $110.00 million (2010:
$74.06 million).
Silver ounces produced during the quarter ended December 31, 2011 were 913,803 (Q4 2010: 481,802) ounces, 90%
above the prior year. Gold ounces produced during the quarter ended December 31, 2011 were 4,153 (Q4 2010: 1,822)
ounces, 128% above the prior year.
Silver ounces produced during the year ended December 31, 2011 were 2,486,655 (2010: 1,906,423) ounces, 30%
above the prior year. Gold ounces produced during the year ended December 31, 2011 were 6,843 (2010: 2,556) ounces,
168% above the prior year.
During the quarter ended December 31, 2011 silver comprised 68% (Q4 2010: 55%) of revenue and the realized silver
price was $27.64 (Q4 2010: $23.73) per ounce. San Jose contributed to our consolidated revenue stream for the full
quarter after commencing operations in September 2011. As at the end of 2011, San Jose had accumulated
approximately $4.4 million worth of silver-gold concentrate inventory based on average prices for the quarter. Consolidated
cash cost per ounce, for the quarter, net of by-product credits, was $5.11 (Q4 2010: negative $6.31). Refer to cash cost
per silver ounce and cash cost per tonne (non-GAAP financial measures) for reconciliation of cash cost to the cost of
sales.
During the year ended December 31, 2011 silver comprised 65% (2010: 49%) of revenue and the realized silver price
was $31.11 (2010: $18.18) per ounce. Consolidated cash cost per ounce, for the year, net of by-product credits, was
$0.37 (2010: negative $5.99). Refer to cash cost per silver ounce and cash cost per tonne (non-GAAP financial measures)
for reconciliation of cash cost to the cost of sales.
Cash generated by operating activities before changes in working capital, income taxes, and interest income for the year
ended December 31, 2011 totalled $53.35 million, up from $31.34 million in 2010.
Commercial production at the San Jose silver and gold mine was delivered on September 1, 2011 on-time and on-budget
after fifteen months of construction and commissioning. The mine and mill are operating within design parameters at a
rate of 1,000 tpd with a planned investment in infrastructure, in 2012 and 2013, to expand to 1,500 tpd by Q3 2013.
Cash cost per Ag oz, net of by-product credits, for 2011 was $4.51.
CoRPoRaTe HigHLigHTS
On April 19, 2011 the Company announced changes to the Board of Directors with the appointment of Mr. Thomas Kelly
and the resignation of Mr. Jeffrey Franzen.
On May 26, 2011 Mr. Jorge Ganoza Aicardi resigned as Vice-President, Operations. Effective August 1, 2011 Mr. Manuel
Ruiz-Conejo, previously Vice-President, Project Development was appointed to the position.
The Company’s common shares began trading on the New York Stock Exchange (“NYSE”) at the opening of trading on
Monday, September 19, 2011 (refer to Sedar.com for releases dated August 29, 2011 and September 15, 2011).
Effective at the market open on December 19, 2011, the Company was added to the S&P/TSX Composite.
26
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
ConSoLidaTed MeTaL PRoduCTion
Consolidated Metal Production
Silver (Oz)*
Gold (Oz)*
Lead (000’s lb)
Zinc (000’s lb)
Copper (000’s lb)
QuaRTeRLy ReSuLTS
Three months ended december 31,
2011
2010
yeaR To daTe ReSuLTS
years ended december 31,
2011
2010
913,803
4,153
4,396
5,688
0
481,802
1,822
5,338
6,158
987
2,486,655
6,843
19,678
23,425
36
1,906,423
2,556
21,373
26,137
4,596
* Caylloma: Silver in lead and copper concentrates; San Jose: Silver in silver and gold concentrates.
The Company’s silver production in Q4 of 2011 was 90% higher than Q4 2010 as a result of higher silver production
from Caylloma of 11% and the contribution from San Jose for its first full quarter under commercial operations.
The Company’s silver production in 2011 was 30% higher than in 2010 as a result of higher silver production from
Caylloma of 5% and the contribution from San Jose for the second half of the year.
ConSoLidaTed PRoduCTion HigHLigHTS FoR Q4 2011:
• Silver production of 913,803 ounces; 90% increase over Q4 2010;
• Gold production of 4,153 ounces; 128% increase over Q4 2010;
• Lead production of 4,396 (000’s) pounds; 18% decrease over Q4 2010, and,
• Zinc production of 5,688 (000’s) pounds; 8% decrease over Q4 2010.
ConSoLidaTed PRoduCTion HigHLigHTS FoR 2011:
• Silver production of 2.49 million ounces; 30% increase over 2010;
• Gold production of 6,843 ounces; 168% increase over 2010;
• Lead production of 19,678 (000’s) pounds; 8% decrease over 2010, and,
• Zinc production of 23,425 (000’s) pounds; 10% decrease over 2010.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
27
MANAGEMENT’S DISCUSSION AND ANALYSIS
CayLLoMa Mine PRoduCTion
Mine Production
Silver*
Grade (g/t)
Recovery %*
Production (Oz)*
gold
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
QuaRTeRLy ReSuLTS
Three months ended december 31,
2011
2010
yeaR To daTe ReSuLTS
years ended december 31,
2011
2010
177.42
80.82
536,426
159.51
83.69
481,802
170.91
81.43
2,008,488
159.24
85.67
1,906,423
0.35
44.97
591
1.85
92.39
4,396
2.47
89.73
5,688
0.40
51.00
734
2.37
90.93
5,338
2.87
86.77
6,158
0.36
45.71
2,393
2.15
92.68
19,678
2.68
88.46
23,425
0.40
46.28
2,556
2.44
91.28
21,373
3.10
87.99
26,137
0
987
36
4,596
Production cash cost (US$/oz ag)**
Production cash cost (US$/tonne)
Unit Net Smelter Return (US$/tonne)
6.67
79.68
188.42
(6.31)
64.55
185.96
(0.59)
68.98
217.70
(5.99)
58.43
163.59
* Caylloma: Silver in lead and copper concentrates.
** Net of by-product credits.
SuMMaRy oF Q4 2011 CayLLoMa Mine PRoduCTion ReSuLTS:
• Silver production of 536,426 ounces; 11% increase over Q4 2010;
• Gold production of 591 ounces; 68% decrease over Q4 2010;
• Lead production of 4,396 (‘000’s) pounds; 18% decrease over Q4 2010;
• Zinc production of 5,688 (‘000’s) pounds, 8% decrease over Q4 2010; and,
• Cash cost per silver ounce, net of by-product credits, $6.67 (refer to cash cost per silver ounce and cash cost
per tonne (non-GAAP financial measures) for reconciliation of cash cost to the cost of sales).
SuMMaRy oF 2011 CayLLoMa Mine PRoduCTion ReSuLTS:
• Silver production of 2,008,488 ounces; 5% increase over 2010;
• Gold production of 2,319 ounces; 9% decrease over 2010;
• Lead production of 19,678 (‘000’s) pounds; 8% decrease over 2010;
• Zinc production of 23,425 (‘000’s) pounds; 10% decrease over 2010; and,
• Cash cost per silver ounce, net of by-product credits, negative $0.59 (refer to cash cost per silver ounce and
cash cost per tonne (non-GAAP financial measures) for reconciliation of cash cost to the cost of sales).
28
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
diSCuSSion on CayLLoMa Mine oPeRaTionS
Silver production at Caylloma for the year was 2,008,488 ounces with mill feed being sourced mainly from the Animas
(88%), Bateas (6%), and Soledad (5%) veins. The increase in silver production for the year compared to the same period
last year was achieved through higher throughput and head grades in spite of a decrease in metallurgical recovery rates
of 5%. Higher grades are a result of an increase in mill feed contribution from the high silver grade ore shoot on level 6
in Animas vein and bonanza ore from Bateas vein. The reduction in metallurgical recoveries is a result of mixed sulfide-
oxide material on level 6 of the Animas vein.
In January 2011, production of copper-silver concentrate was discontinued at Caylloma due to a material deterioration
in treatment and refining smelter charges with respect to 2010. The Company is monitoring market conditions to evaluate
restarting the circuit. Copper accounted for 0.18% of sales in 2011 (2010: 3.68%).
The new high-grade silver ore shoots that were discovered through the extension of exploration and development drifts
from current production areas on the 10th and 12th levels of the Bateas Vein (refer to press release dated April 14,
2011) entered into production in late June. Exploration drifting towards the northeast area of the Bateas Vein was stopped
by the end of September 2011 in order to improve ventilation and infrastructure for auxiliary services in levels 10 and
12. By mid December 2011, a ventilation shaft from surface to level 12 was completed, and two more shafts between
levels 10 and 12 should be completed by the end of March 2012 to resume exploration drifting.
In June 2011, the Company received the approval of the environmental impact study for the construction of a plant
expansion to 1,500 tpd encompassing a new tailings facility. The construction of the tailings dam for the first two years
of operation concluded in late 2011. The tailings pipeline and pumping system is scheduled for completion in June 2012.
Total design capacity of the tailings facility including future expansions is for 9 years of operation at the current mill
throughput rate.
In May 2011, the Company submitted to the Ministry of Energy and Mines (“MEM”), in Peru, the application for
construction permit of the tailings facility. Approval of this permit has not been received as of March 23, 2012. All
technical and surface rights observations made by MEM in November 2011 have been addressed and the Company is
awaiting final resolution. Although the Company is working closely with MEM and expects to receive the permits on time,
the delay in obtaining this permit represents a risk for the commissioning of the new tailings facility in June 2012 which
could lead to a subsequent temporary stoppage of operations.
Cash cost per payable ounce of silver, for the year ended December 31, 2011, was negative $0.59 net of by-product
credits compared to negative $5.99 in 2010. This increment was driven by a cash cost increase and lower base metal
credits in the second half of 2011, with special emphasis in the fourth quarter. Cash cost per oz throughout 2011 went
from negative $5.82 in Q1 2011 to $6.67 in Q4 2011. The sharp increment throughout the year is explained by a
decrease in by-product credits of $9.40/oz and a 29% unit cash cost per tonne increase. The decrease in by-product
credits was primarily due to lower base metal prices (lead 24%, zinc 21%) and lower lead production (13%). The unit cost
increments reflect cost increases in qualified labor and industry related services that have been mounting in the Peruvian
underground mining industry since late 2010. For 2012, the Company anticipates cost pressures to continue; several
productivity and cost control initiatives are included in the 2012 operational and capital budgets.
Capital expenditures for the year ended December 31, 2011 amounted to $17.1 million. The main components were
the first phase of the new tailings facility ($7.8 million), mine development ($3.7 million), and camp infrastructure and
ancillary facilities ($1.7 million).
Capital expenditures budgeted for the year 2012 amount to $25.1 million which includes the second phase of the new
tailings facility ($4.8 million), upgrading of the processing plant ($8.2 million), mine camp improvements ($4.8 million),
and mine development ($4.5 million).
A total of 10,551 meters were drilled in Caylloma in 2011 with close to 50% of the program allocated to Animas vein
and the other 50% distributed among high grade silver targets at La Plata, San Cristobal, and Bateas veins. A total of
3,642 meters of exploration drifting were done with 50% allocated to Bateas and San Cristobal veins, and 40% allocated
to Animas vein.
The brownfields exploration budget for 2012, amounts to $7.2 million including 3,552 meters of drifting and 16,000
meters of drilling.
Cash cost is a non-GAAP financial measure, refer to cash cost per silver ounce and cash cost per tonne (non-GAAP
financial measures) for reconciliation of cash cost to the cost of sales.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
29
MANAGEMENT’S DISCUSSION AND ANALYSIS
San joSe Mine PRoduCTion***
QuaRTeRLy ReSuLTS
Three months ended december 31,
Mine Production
Tonnes milled
average tons milled per day
Silver*
Grade (g/t)
Recovery %*
Production (Oz)*
gold
Grade (g/t)
Recovery %*
Production (Oz)*
unit Costs
Production cash cost (US$/oz ag)**
Production cash cost (US$/tonne)
Unit Net Smelter Return (US$/tonne)
2011
87,884
955
159.00
84.00
377,377
1.48
84.90
3,562
2.85
47.16
147.31
* San Jose: Silver in silver gold concentrates.
** Net of by-product credits.
*** From commercial production, which commenced on September 1, 2011.
SuMMaRy oF Q4 2011 San joSe Mine PRoduCTion ReSuLTS:
• Silver production of 377,377 ounces;
• Gold production of 3,562 ounces; and,
2010
0
0
0.00
0.00
0
0.00
0.00
0
na
na
0.00
yeaR To daTe ReSuLTS
years ended december 31,
2011
2010
116,410
954
150.40
84.95
478,167
1.43
84.62
4,524
4.51
50.73
147.33
0
0
0.00
0.00
0
0.00
0.00
0
na
na
0.00
• Cash cost per silver ounce, net of by-product credits, $2.85 (refer to cash cost per silver ounce and cash cost
per tonne (non-GAAP financial measures) for reconciliation of cash cost to the cost of sales).
SuMMaRy oF 2011 San joSe Mine PRoduCTion ReSuLTS:
• Silver production of 478,167 ounces;
• Gold production of 4,524 ounces; and,
• Cash cost per silver ounce, net of by-product credits, $4.51 (refer to cash cost per silver ounce and cash cost
per tonne (non-GAAP financial measures) for reconciliation of cash cost to the cost of sales).
diSCuSSion on San joSe Mine oPeRaTionS
Production at the San Jose silver and gold mine commenced on September 1, 2011 on-time and on-budget after fifteen
months of construction and commissioning. The mine and mill are operating within design parameters at a rate of 1,000
tpd with a planned investment in infrastructure, in 2012 and 2013, to expand to 1,500 tpd by Q3 2013. Cash cost per
tonne of processed ore was $50.73.
Mine production is currently taking place above level 1,400 on blocks K, L, and M with production targets being met
according to plan. Production in level 1,300 is scheduled to commence during the second quarter of 2012, 3 months
ahead of the original mine plan. As of the end of the second week of March 2012, the main ramp reached the 1,300
meter elevation where production blocks C and D will be developed by year end as the mine moves towards the planned
expansion of 1,500 tpd.
The plant is processing ore at an average throughput rate of 1,000 tpd. Metallurgical recovery is still undergoing an
adjustment process and remains within 95% of design parameters. Concentrate grade is already at planned levels for
the current head grades.
Capital expenditures budgeted for the year 2012, amounts to $30.7 million which includes a new concentrate leaching
facility to produce dore bars ($12 million), ramp and mine development ($9.2 million), tailings dam expansion to support
1,500 tpd ($4.5 million), processing plant expansion ($1.6 million), a hydraulic fill plant and the underground power grid
($2.6 million).
30
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
A total of 13,527 meters were drilled in San Jose and our surrounding properties in 2011 with 60% of the program
directed to test the southern extension of the San Jose deposit (“San Ignacio”) and the balance allocated to new target
zones Taviche and El Rancho. A follow up program for San Ignacio in 2012 will continue testing for extensions of
mineralization open to the south of existing reserves.
The 2012 brownfields program amounts to $5.8 million including over 15,000 meters of drilling.
Violent acts have claimed the life of two members of the San Jose del Progreso community on January 18 and March
15, 2012. These murders are being investigated by local authorities and mourned by the entire community. Continuous
violence in Mexico and in the state of Oaxaca is a concern for the Company. Security measures are being taken to ensure
the safeguard of our personnel.
Cash cost, cash cost per silver ounce, and cash cost per tonne are non-GAAP financial measures, refer to cash cost per
silver ounce and cash cost per tonne (non-GAAP financial measures) for reconciliation of cash cost to the cost of sales.
CayLLoMa Mine and San joSe Mine* ConCenTRaTeS
Mine Concentrates
Caylloma
San jose
Caylloma
San jose
Caylloma
San jose
Caylloma
San jose
QuaRTeRLy ReSuLTS
Three months ended december 31,
yeaR To daTe ReSuLTS
years ended december 31,
2011
2010
2011
2010
Silver gold
Opening Inventory (t)
Production (t)
Sales (t)
Adjustment (t)
Closing Inventory (t)
Ag in concentrate (g/t)**
Au in concentrate (g/t)**
Zinc
Opening Inventory (t)
Production (t)
Sales (t)
Adjustment (t)
Closing Inventory (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 (%)**
0
0
0
0
0
0
0
538
2,276
2,084
0
730
5,155
49
273
4,964
4,920
-12
305
51.98
232
3,599
3,590
14
255
4,636
55.41
4
0
0
0
4
0
0.00
0
0
0
0
0
0.00
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0
540
5,467
5,749
5
263
51.09
404
3,829
4,053
8
188
1,685
63.23
44
448
464
1
29
19,056
21.62
0
0
0
0
0
0
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0
0
2,958
2,227
0
730
5,028
48
263
20,569
20,490
-37
305
51.66
188
15,767
15,760
60
255
3,881
56.61
29
80
104
-1
4
15,876
20.23
0
0
0
0
0
0.00
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0
369
22,291
22,419
22
263
53.86
408
15,015
15,250
14
188
1,499
64.56
46
2,085
2,117
15
29
17,644
22.31
0
0
0
0
0
0
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0.00
0
0
0
0
0
0
0.00
* Commercial production commenced on September 1, 2011.
** Grades from commercial production.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
31
MANAGEMENT’S DISCUSSION AND ANALYSIS
PROPERTY OPTION AGREEMENTS
MaRio PRoPeRTy
In May 2011, the Company entered into an agreement to acquire a 100% interest in the Mario Property, located in the
Department of Junin in central Peru. Under the terms of the agreement, the Company is granted the exclusive right and
option to purchase an undivided 100% interest in the Mario Property subject to the following payments:
1. $0.50 million on signing of agreement;
2. $0.50 million on or before six months from the signing of the agreement;
3. $0.50 million on or before 12 months from the signing of the agreement; and,
4. $2.50 million on or before 24 months from the signing of the agreement.
The transfer of the property to the Company is subject to a 1% net smelter return (“NSR”) royalty on production from the
property payable to Crocodile Gold (“Crocodile”). The Company shall have the right to purchase the NSR royalty from
Crocodile at any time during the five-year period following the final option payment for the sum of $3.0 million. The
property is also subject to a 2% NSR royalty on production payable to Teck Cominco and a 0.5% NSR royalty on production
payable to Socrate Capital Inc., with each royalty in turn subject to certain buy-back provisions.
As at December 31, 2011, $1.0 million has been paid under the agreement.
don MaRio PRoPeRTy
The Company entered into an option agreement, effective July 20, 2011, to acquire 100% interest in the Don Mario
property, with Consorcio Empresarial Agmin S.A.C.(“AGMIN”). Under the terms of the mining assignment and option to
purchase mineral rights agreement (“agreement”), the Company is required to make the following payments:
1. $0.20 million on signing the agreement;
2. $0.30 million after 12 months from signing the agreement;
3. $0.50 million after 24 months from signing the agreement; and,
4. $2.00 million after 36 months from signing the agreement.
Under the terms of the agreement, once the option is exercised and technical report is prepared under National
Instrument 43-101 and published, if the pre-feasibility study indicates that the property contains more than five million
silver equivalent ounces, the Company would further pay AGMIN, one dollar for each additional resource and reserves
indicated in the pre-feasibility report. The Company has the option to buy-out the additional pay-out for a further $3.0
million, subject to certain conditions.
As at December 31, 2011, $0.20 million has been paid under the agreement.
32
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
ANNUAL FINANCIAL RESULTS
expressed in $000's, except per share data*/**
Sales
Operating income
Income
Earnings per share, basic
Earnings per share, diluted
Total assets
Leases and long term liabilities
2011*
110,004
38,065
19,533
0.16
0.16
271,606
2,764
years ended december 31,
2010*
74,056
27,728
16,003
0.15
0.14
233,870
3,166
2009**
51,428
14,383
623
0.01
0.01
139,738
1,454
* Figures for 2011 and 2010 expressed under IFRS.
** Figures for 2009 expressed under Canadian Generally Accepted Accounting Principles ("CAD GAAP").
The comparative financial information for 2009 is presented in accordance with Canadian Generally Accepted Accounting
Principles (“CAD GAAP”) and was not required to be restated to IFRS in this MD&A.
During the year ended December 31, 2011 the Company generated net income of $19.53 million (2010: $16.00 million)
on operating income of $38.07 million (2010: $27.73 million). The increase in net income is mainly attributable to higher
mine operating income of $60.97 million (2010: $39.21 million) driven by higher sales at Caylloma and the contribution
of the San Jose mine, offset by higher selling, general and administrative expenses of $19.84 million (2010: $10.98
million), income taxes of $18.80 million (2010: $11.51 million), impairment of mineral properties, property, plant and
equipment of $1.89 million (2010: $nil), exploration and evaluation costs of $1.72 million (2010: $0.55 million), and
lower gain on commodity contracts of $0.48 million (2010: $0.74 million).
Sales, for the year end December 31, 2011, increased by 49% to $110.00 million (2010: $74.06 million), compared to
the prior year. The sales increase is mainly a result of higher realized prices for silver, gold, lead and zinc of 71%, 29%,
9% and 9%, respectively, and higher metals sold for silver and gold of 23% and 124%, respectively, offset by lower metal
sold for lead and zinc of 8% and 11%, respectively.
Mine MeTaL SoLd and PRiCeS
2011
yeaR To daTe ReSuLTS
years ended december 31,
2010
Mine Metal Sold and Prices
Caylloma
San jose
Consolidated
Caylloma
San jose
Consolidated
Silver
Sales (Oz)*
Net Realized Price (US$/Oz)**
2,004,457
31.91
320,599 2,325,056
31.11
26.42
1,894,703
18.18
gold
Sales (Oz)*
Net Realized Price (US$/Oz)**
2,438
1,116.09
2,952
1,230.34
5,391
1,183.39
Lead
Sales (000’s lb)*
Net Realized Price (US$/lb)**
Zinc
Sales (000’s lb)*
Net Realized Price (US$/lb)**
Copper
Sales (000’s lb)*
Net Realized Price (US$/lb)**
19,685
0.86
23,323
0.66
52
2.65
–
–
–
–
–
–
19,685
0.86
23,323
0.66
52
2.65
2 ,411
920.85
21,461
0.79
26,306
0.60
1,021
2.60
–
–
–
–
–
–
–
–
–
–
1,894,703
18.18
2,411
920.85
21,461
0.79
26,306
0.60
1,021
2.60
* Contained metal in concentrate. The current and subsequent period may include final settlement quantity adjustments from prior
periods.
** Calculated based on contained metals and after deductions, treatment, and refining charges.
Treatment charges are allocated to the base metals in Caylloma and to gold in San Jose.
Net realized prices are based on provisional sales and are calculated before governmental royalties.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
33
MANAGEMENT’S DISCUSSION AND ANALYSIS
Cost of sales, for the year ended December 31, 2011, increased by 41% to $49.03 million (2010: $34.84 million)
compared to the prior year. The increase is primarily attributable to 18% higher unit production cash costs per tonne of
processed ore in Caylloma and an overall throughput increase of 30%. The higher unit production cash cost per tonne of
processed ore reflect cost increases in qualified labor and industry related services that have been mounting in the
Peruvian underground mining industry since late 2010. (Refer to cash cost per silver ounce and cash cost per tonne
(non-GAAP financial measures), discussion on Caylloma mine operations, and discussion on San Jose mine operations).
Selling, general and administrative expenses, for the year ended December 31, 2011, increased by 81% to $19.84 million
(2010: $10.98 million). The increase is primarily attributable to share-based payments of $4.79 million in 2011 compared
to a net recovery of $0.42 million in 2010, a $2.61 million increase in corporate general and administrative expenses
mainly as a result of higher salaries and professional fees related to the growth of the company, the New York Stock
Exchange (“NYSE”) listing, and $0.87 million from Cuzcatlan as a result of the commencement of commercial production
in the second half of 2011.
Corporate general and administrative expenses
Bateas general and administrative expenses
Cuzcatlan general and administrative expenses
Foreign exchange
Share-based payments
Peruvian workers’ participation
$
expressed in $ millions
year ended december 31,
$
2011
9.97
3.36
0.87
0.22
4.79
0.63
2010
7.36
3.83
–
0.21
(0.42)
–
$
19.84
$
10.98
exploration and evaluation costs, for the year ended December 31, 2011, increased to $1.72 million (2010: $0.55 million)
as the Company pursues its exploration program.
impairment of mineral properties, property, plant and equipment, for year ended December 31, 2011, amounted to $1.89
million (2010: $nil) as the Company has taken an impairment charge related to the Taviche property comprised of: $1.08
million on the tailing dam, $0.14 million on the mine infrastructure, and $0.67 million on equipment, machinery, and
buildings.
In 2010, the Company included the idle plant in Taviche as part of the San Jose mine plant as it was more likely than
not that the idle plant could be used to treat excess ore from San Jose or from surrounding areas where the company
was conducting exploration. On September 1, 2011, the San Jose mine plant commenced commercial production and in
the fourth quarter of 2011, achieved an average of 955 tonnes milled per day with the San Jose plant having sufficient
capacity for the production. In the fourth quarter, management reassessed the usability of the idle plant and in
conjunction, obtained an independent third party appraisal of various assets acquired under an asset purchase agreement
dated 2007 related to the Taviche property.
Management used the fair value less cost to sell method to determine the recoverable amount of the idle plant. Based
upon an independent appraisal of the assets, which is in accordance with fair value less cost to sell, the Company has
taken an impairment charge of $1.89 million that comprised of the following impairments: $1.08 million on the tailing
dam, $0.14 million on the mine infrastructure, and $0.67 million on equipment, machinery, and buildings. As at December
31, 2011, the net book value of assets related to the Taviche property for machinery, and equipment amount to $0.36
million.
net gain on commodity contract, for the year ended December 31, 2011, was $0.48 million (2010: $0.74 million). The
gain is related to short term contracts used to fix the final settlement price on metal contained in concentrate delivered
throughout the period.
interest income, for the year ended December 31, 2011, increased by 68% to $0.83 million (2010: $0.49 million). The
increase in interest income is primarily attributable to interest earned on long term receivables through the sale of assets
and higher invested cash balances at the first half of the year.
interest expense, for the year ended December 31, 2011, decreased by 21% to $0.56 million (2010: $0.71 million) as
a result of a reduction in standby and commitment fees, compared to the prior year.
income taxes, for the year ended December 31, 2011, increased by 63% to $18.80 million (2010: $11.51 million) due
to higher income recorded at Bateas and deferred tax arising from Cuzcatlan.
Income tax provision is comprised of $14.61 million of current income tax expense and $4.19 million of deferred income
tax expense mainly related to our Peruvian and Mexican operations.
34
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
QUARTERLY INFORMATION
The following table provides information for the eight fiscal quarters ended December 31, 2011:
expressed in $000's, except per share data* 31-dec-11
30-Sep-11
30-jun-11 31-Mar-11
31-dec-10 30-Sep-10
30-jun-10 31-Mar-10
Quarters ended
Sales
Operating income
Income before taxes
Income (loss)
Earnings per share, basic
Earnings per share, diluted
Total assets
Leases and long term liabilities
31,047
4,437
4,443
(1,755)
(0.01)
(0.01)
32,543
14,886
14,948
10,309
0.08
0.08
24,528
10,665
10,754
6,197
0.05
0.05
21,886
8,077
8,190
4,782
0.04
0.04
23,909
8,031
8,033
4,333
0.04
0.04
18,039
1,030
780
(773)
(0.01)
(0.01)
14,565
9,629
9,666
6,719
0.06
0.06
17,543
9,038
9,034
5,724
0.06
0.05
271,606 270,259 253,287 242,564 233,870 180,473 175,445 170,198
1,306
2,764
2,988
3,384
3,166
2,653
1,384
2,873
* Figures for 2011 and 2010 expressed under IFRS.
The past eight quarters show a consistent trend of sales growth with a marginal decline in Q4 2011 from Q3 2011. This
trend reflects the surge in silver price since the beginning of 2010 and the commencement of commercial production at
the San Jose mine starting in September 2011.
FOURTH QUARTER FINANCIAL RESULTS
expressed in $’000’s
Sales
Cost of sales
Mine operating income
other expenses
Selling, general and administrative expenses
Exploration and evaluation costs
Net gain on commodity contracts
Loss on disposal of mineral properties, property, plant and equipment
Loss on disposal of investment
Write-off of deferred exploration costs
Impairment of mineral properties, property, plant and equipment
operating income
Finance items
Interest income
Interest expense
net finance income
income before tax
Income taxes
Three months ended december 31,
$
2011
31,047
17,782
13,265
$
2010
23,909
9,804
14,105
5,871
605
442
16
–
–
1,894
4,437
155
(149)
6
4,443
6,198
4,583
202
725
2
119
443
–
8,031
159
(157)
2
8,033
3,700
(Loss) income for the period
$
(1,755)
$
4,333
During the fourth quarter ended December 31, 2011 the Company generated net loss of $1.76 million (Q4 2010: $4.33
million) on operating income of $4.44 million (Q4 2010: $8.03 million). The decrease in net income compared to the
same period in 2010 is mainly attributable to lower mine operating income of $13.27 million (Q4 2010: $14.11 million),
higher selling, general and administrative expenses of $5.87 million (Q4 2010: $4.58 million), impairment of mineral
properties, property, plant and equipment of $1.89 million (Q4 2010: $nil), exploration and evaluation costs of $0.61
million (Q4 2010: $0.20 million), and income taxes of $6.20 million (Q4 2010: $3.70 million). The decrease in mine
operating income in spite of the contribution from the San Jose mine in 2011 and a higher silver price is explained by
lower revenue from base metals of $4 million, negative price adjustments in Caylloma associated with the sharp fall in
silver price in the fourth quarter, and higher unit costs of 23% at Caylloma.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
35
MANAGEMENT’S DISCUSSION AND ANALYSIS
Sales, for the fourth quarter ended December 31, 2011 increased by 30% to $31.05 million (Q4 2010: $23.91 million)
compared to the same quarter a year ago with San Jose contributing $11.39 million (Q4 2010: $nil). Sales at Caylloma
decreased by 18% to $19.66 (Q4 2010: $23.91), in spite of higher silver prices (20%) and higher silver sold (11%),
mainly due to lower lead and zinc sold (22% and 13% respectively) with lower lead and zinc prices (23% and 15%,
respectively) representing $4.25 million of decreased revenue, and a negative final sales adjustments of $2.33 million
(Q4 2010: positive $1.85 million) associated with the sharp fall in silver price in the quarter.
Mine MeTaL SoLd and PRiCeS
QuaRTeRLy ReSuLTS
Three months ended december 31,
2011
2010
Mine Metal Sold and Prices
Caylloma
San jose
Consolidated
Caylloma
San jose
Consolidated
Silver
Sales (Oz)*
Net Realized Price (US$/Oz)**
547,542
28.58
300,411
26.08
847,952
27.64
494,451
23.73
gold
Sales (Oz)*
Net Realized Price (US$/Oz)**
Lead
Sales (000's lb)*
Net Realized Price (US$/lb)**
Zinc
Sales (000's lb)*
Net Realized Price (US$/lb)**
Copper
Sales (000's lb)*
Net Realized Price (US$/lb)**
597
1,245.14
2,770
1,227.19
3,367
1,229.99
696
1,031.09
4,385
0.67
5,613
0.54
–
–
–
–
–
–
–
–
4,385
0.67
5,613
0.54
–
–
5,605
0.87
6,487
0.64
221
3.07
–
–
–
–
–
–
–
–
–
–
494,451
23.73
696
1,031.09
5,605
0.87
6,487
0.64
221
3.07
* Contained metal in concentrate. The current and subsequent period may include final settlement quantity adjustments from
prior periods.
** Calculated based on contained metals and after deductions, treatment, and refining charges.
Treatment charges are allocated to the base metals in Caylloma and to gold in San Jose.
Net realized prices are based on provisional sales and are calculated before governmental royalties.
Cost of sales, for the fourth quarter ended December 31, 2011 increased by 81% to $17.78 million (Q4 2010: $9.80
million) compared to the prior year. The increase is primarily attributable to the contribution of the San Jose mine which
was in production for the full quarter resulting in an overall throughput increase of 82%, and to 23% higher unit production
cash costs per tonne of processed ore at Caylloma (Refer to cash cost per silver ounce and cash cost per tonne (non-
GAAP financial measures)).
Selling, general and administrative expenses, for the fourth quarter ended December 31, 2011 increased by 28% to
$5.87 million (Q4 2010: $4.58 million). The increase is primarily attributable to share-based payments of $1.20 million
(Q4 2010: $0.76 million), a $0.75 million increase in corporate general and administrative expenses, mainly as a result
of higher salaries and professional fees related to the growth of the Company, and $0.67 million from Cuzcatlan (Q4
2010: $nil).
Corporate general and administrative expenses
Bateas general and administrative expenses
Cuzcatlan general and administrative expenses
Foreign exchange
Share-based payments
Peruvian workers’ participation
expressed in $ millions
Three months ended december 31,
2011
2.90
0.82
0.67
0.19
1.20
0.09
5.87
$
$
2010
2.15
1.50
–
0.17
0.76
–
4.58
$
$
exploration and evaluation costs, for the fourth quarter ended December 31, 2011 increased to $0.61 million (Q4 2010:
$0.20 million) as the Company pursues its exploration program.
36
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
impairment of mineral properties, property, plant and equipment, for the fourth quarter ended December 31, 2011,
amounted to $1.89 million (Q4 2010: $nil) as the Company has taken an impairment charge related to the Taviche
property comprised of: $1.08 million on the tailing dam, $0.14 million on the mine infrastructure, and $0.67 million on
equipment, machinery, and buildings.
net loss on commodity contract, for the fourth quarter ended December 31, 2011, was $0.44 million (Q4 2010: $0.73
million). The loss is related to short term contracts used to fix the final settlement price on metal contained in concentrate
delivered throughout the period.
interest income, for the fourth quarter ended December 31, 2011 decreased by 3% to $0.16 million (Q4 2010: $0.16
million) as a result of a reduction in cash balances.
interest expense, for the fourth quarter ended December 31, 2011 decreased by 5% to $0.15 million (Q4 2010: $0.16
million) as a result of a reduction in the balance of finance leases.
income taxes, for the fourth quarter ended December 31, 2011 increased by 68% to $6.20 million (Q4 2010: $3.70
million) due to higher recorded income at Bateas and deferred tax arising from Cuzcatlan.
CASH COST PER SILVER OUNCE AND CASH COST PER TONNE
(NON-GAAP FINANCIAL 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 but do not have a standardized meaning and may differ from methods used by other companies
with similar descriptions. Management believes that certain investors use these non-GAAP financial measures to evaluate the
Company’s performance. These performance measures have no meaning under International Financial Reporting Standards
(“IFRS”) 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 financial statements for the three months and years ended December 31,
2011 and 2010.
ConSoLidaTed Mine CaSH CoST
Consolidated Mine Cash Cost
Cost of sales 2, 3
Add/(Subtract)
Change in concentrate inventory
Depletion and depreciation in
concentrate inventory
Inventory adjustment
Government royalties and mining taxes
Workers participation
Depletion and depreciation 2
Cash cost
Total processed ore (tonnes)
expressed in $000’s
expressed in $000’s
Q4 2011
17,782
yTd
Q4 2011
49,030
Q4 2010
9,804
yTd
Q4 2010
34,844
415
2,142
(295)
(305)
(207)
–
(385)
(436)
(3,752)
13,417
204,248
(781)
–
(1,322)
(3,141)
(9,060)
36,868
565,276
65.22
124
525
(320)
(881)
(1,711)
7,246
112,257
64.55
7,246
(10,544)
410
(2,888)
5
290
(788)
(2,320)
(6,327)
25,399
434,656
58.43
25,399
(37,825)
1,576
(10,850)
Cash cost per tonne of processed ore ($/t)
65.69
Cash cost
Add/(Subtract)
By-product credits 1
Refining charges
Cash cost applicable per payable ounce
13,417
36,868
(11,252)
2,234
4,399
(40,267)
4,280
881
Payable silver ounces
860,565
2,352,759
457,712
1,811,102
Cash cost per ounce of payable silver ($/oz)
5.11
0.37
(6.31)
(5.99)
1 By-product credits as included in the provisional sales.
2 2010 and 2011 figures in accordance with IFRS.
3
Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
37
MANAGEMENT’S DISCUSSION AND ANALYSIS
CayLLoMa Mine CaSH CoST
Caylloma Mine Cash Cost
Cost of sales 2, 3
Add/(Subtract)
Change in concentrate inventory
Depletion and depreciation in
concentrate inventory
Government royalties and mining taxes
Workers participation
Depletion and depreciation 2
Cash cost
Total processed ore (tonnes)
Cash cost per tonne of processed ore ($/t)
Cash cost
Add/(Subtract)
By-product credits 1
Refining charges
Cash cost applicable per payable ounce
expressed in $000’s
expressed in $000’s
Q4 2011
11,777
yTd
Q4 2011
42,236
Q4 2010
9,804
yTd
Q4 2010
34,844
92
206
(295)
(305)
(12)
(385)
(436)
(1,764)
9,272
116,363
79.68
9,272
(6,773)
900
3,399
(97)
(1,322)
(3,141)
(6,919)
30,963
448,866
68.98
30,963
(34,676)
2,590
(1,123)
124
(320)
(881)
(1,711)
7,246
112,257
64.55
7,246
(10,544)
410
(2,888)
5
(788)
(2,320)
(6,327)
25,399
434,656
58.43
25,399
(37,825)
1,576
(10,850)
Payable silver ounces
509,605
1,908,064
457,712
1,811,102
Cash cost per ounce of payable silver ($/oz)
6.67
(0.59)
(6.31)
(5.99)
1 By-product credits as included in the provisional sales.
2 2010 and 2011 figures in accordance with IFRS.
3
Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation.
San joSe Mine CaSH CoST
San jose Mine Cash Cost
Cost of sales 2, 3
Add/(Subtract)
Change in concentrate inventory
Depletion and depreciation in
concentrate inventory
Depletion and depreciation 2
Cash cost
Total processed ore (tonnes)
Cash cost per tonne of processed ore ($/t)
Cash cost
Add/(Subtract)
By-product credits 1
Refining charges
Cash cost applicable per payable ounce
expressed in $000’s
Q4 2011
6,005
323
(195)
(1,988)
4,145
87,884
47.16
4,145
(4,479)
1,334
1,000
yTd
Q4 2011
6,794
1,936
(684)
(2,141)
5,905
116,410
50.73
5,905
(5,591)
1,690
2,004
Payable silver ounces
350,961
444,695
Cash cost per ounce of payable silver ($/oz)
2.85
4.51
Commercial production commenced on September 1, 2011.
1 By-product credits as included in the provisional sales.
2 2010 and 2011 figures in accordance with IFRS.
3
Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation.
38
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
The capital of the Company consists of equity and available credit facility, 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 Company’s cash and cash equivalents as at December 31, 2011 totalled $38.73 million, and short term investments
totalled $17.00 million. The $31.87 million decrease (2010: $37.38 million increase) in cash and cash equivalents at
December 31, 2011 compared to the end of the prior year is largely due to the use of $45.48 million on the construction
of the San Jose mine. In 2010, the $37.38 million increase in cash is primarily a result of the $74.92 million net proceeds
on the issuance of shares. As at December 31, 2011, working capital amounted to $63.90 million (2010: $97.07
million). The 2011 decrease in working capital reflects: decreases in cash and cash equivalents and short term
investments; increases in trade and other payables due to related parties, derivative liabilities, provisions, and current
portion of long term liabilities; offset by increases in derivative assets, accounts receivable and other assets, GST/HST
and value added tax receivable, inventories.
During the fourth quarter ended December 31, 2011, cash generated by operating activities before changes in non-cash
working capital items, income taxes paid, and interest income paid and received was $10.45 million (Q4 2010: $7.60 million).
During the year ended December 31, 2011, cash generated by operating activities before changes in non-cash working
capital items, income taxes paid, and interest income paid and received was $49.76 million (2010: $28.68 million).
Changes in non-cash working capital items amounted to $3.60 million (2010: $2.66 million), and income taxes paid
and interest income paid and received amounted to $14.25 million (2010: $6.97 million), resulting in net cash provided
by operating activities of $35.51 million (2010: $21.71 million).
Cash generated by operating activities before changes in working capital, income taxes, and interest income is calculated
as follows:
oPeRaTing aCTiViTieS
Net income
$ (1,755)
$ 4,333
$ 19,533
$ 16,003
Three months ended december 31
2011
2010
years ended december 31,
2011
2010
Items not involving cash
Depletion and depreciation
Accretion of provisions
Income tax expense
Share-based payments (recovery)
Unrealized (gain) on commodity contracts
Write-off of deferred exploration costs
Impairment of mineral properties, property,
plant and equipment
(Gain) loss on disposal of mineral properties,
property, plant and equipment
Accrued interest on long term loans
receivable and payable
3,943
57
6,199
475
1,089
–
1,894
16
7
1,782
42
3,700
676
(325)
443
–
6
14
9,421
173
18,802
3,682
(116)
–
1,894
(59)
24
6,462
163
11,510
(501)
(2,922)
443
–
127
50
Changes in non-cash working capital items
Accounts receivable and other assets
Inventories
Trade and other payables
Due to/from related parties
Provisions
Cash provided by operating activities before
11,925
10,671
53,354
31,335
1,693
2,189)
(963)
183
(201)
(3,091)
(144)
165
(2)
–
(3,085)
(7,273)
6,829
134
(201)
(4,788)
(1,536)
3,677
(9)
–
interest and income taxes
$ 10,448
$ 7,599
$ 49,758
$ 28,679
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
39
MANAGEMENT’S DISCUSSION AND ANALYSIS
Cash consumed by the Company for the fourth quarter ended December 31, 2011, in investing activities totalled $31.64
million (Q4 2010: $24.77 million) with $16.24 million (Q4 2010: $14.37 million) for mineral properties, property, plant
and equipment, $0.63 million (Q4 2010: receipts $0.14 million) net advances on deposits on long term assets, $15.05
million (Q4 2010: $9.48 million) net purchases of short term investments, offset by receipts of VAT $0.28 million (Q4
2010: payments $1.13 million), and proceeds on disposal of mineral properties, property, plant and equipment $nil (Q4
2010: $0.07 million).
Cash consumed by the Company, for the year ended December 31, 2011, in investing activities totalled $69.86 million
(2010: $58.06 million) with $76.68 million (2010: $36.71 million) for mineral properties, property, plant and equipment,
$3.57 million (2010: advances $4.66 million) for net receipts on deposits on long term assets, $3.73 million net
redemptions (2010: purchases $13.85 million) of short term investments, payments of VAT of $0.52 million (2010:
$2.92 million), and offset by proceeds on disposal of mineral properties, property, plant, and equipment of $0.04 million
(2010: $0.08 million). The total investment in San Jose amounted to $45.48 million.
During the fourth quarter ended December 31, 2011, cash provided by financing activities totalled $1.95 million (Q4
2010: $42.73 million) with repayment of finance lease obligations of $0.30 million (Q4 2010: $0.26 million), offset by
cash provided by net proceeds on the issuance of common shares of $2.25 million (Q4 2010: $42.99 million).
During the year ended December 31, 2011, cash provided by financing activities totalled $2.48 million (2010: $73.74
million) with repayment of finance lease obligations of $1.18 million (2010: $1.18 million), offset by cash provided by
net proceeds on the issuance of common shares of $3.66 million (2010: $74.92 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. In the event that utilization under the credit facility is less than $10 million, a commitment fee
of 1.50% per annum is payable quarterly on the unutilized portion of the available credit facility. No funds were drawn
from this credit facility during the year.
The Company has raised funds from two prospectus financings in 2010. 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
expected use
of proceeds*
actual use
of proceeds**
$ 6.7
16.6
1.9
3.0
–
–
$ 28.2
$ 11.2
30.4
4.4
3.5
2.5
2.5
$ 54.5
Variance
$ (4.5)
(13.8)
(2.5)
(0.5)
(2.5)
(2.5)
$ (26.3)
expressed in Cad $ millions
expected use
of proceeds*
actual use
of proceeds**
$ 14.5
5.5
17.7
$ 37.7
$ –
10.7
26.3
$ 37.0
Variance
$ 14.5
(5.2)
(8.6)
$ 0.7
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**
Planned expansion
Exploration programs
Working capital
Total
* Excludes over-allotment.
** Funds to be utilized post development.
40
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management believes the Company’s cash position, along with its ongoing operations, in Caylloma and San Jose, and
the available 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.
ConTRaCTuaL obLigaTionS
The Company expects the following maturities of its financial liabilities (including interest), finance leases, and other
contractual commitments:
Trade and other payables
Due to related parties
Derivative liabilities
Income tax payable
Long term liabilities
Operating leases
Provisions
expected payments due by period as at december 31, 2011
expressed in $ millions
1–3 years
4–5 years
$ –
–
–
–
2.77
1.41
0.85
$ –
–
–
–
–
1.18
0.77
after
5 years
$ –
–
–
–
–
0.53
3.73
$ 5.03
$ 1.95
$ 4.26
Total
$ 17.16
0.21
0.09
3.92
4.30
3.82
6.08
$ 35.58
Less than
1 year
$ 17.16
0.21
0.09
3.92
1.53
0.70
0.73
$ 24.34
CaPiTaL CoMMiTMenTS (exPReSSed in $’000’S)
As at December 31, 2011, $8.12 million of capital commitments not disclosed elsewhere in the consolidated financial
statements, and forecasted to be expended within one year, includes the following: $5.80 million for the ramp
development at the San Jose property located in Mexico; $2.25 million for the tailing dam, concentrator plant and
electrical infrastructure renewal, and mine camp development at the Caylloma Property; and $0.08 million for software
development.
oTHeR CoMMiTMenTS (exPReSSed in $’000’S)
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 3,500 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 and expiring in 2017. 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, jointly with Radius Gold Inc., a related party by way of common directors, has entered into an office premise
lease located in Canada, effective on November 28, 2011, the date the Company commenced carrying on business in
the premises. The shared office with Radius has been finalized with the Company obligated to pay 50% of the total rent
payable. The lease term is eight years with the Company’s annual net rent payable, on 3,195 rentable square feet, as
follows:
• years one to two $111;
• years three to five $115; and,
• years six to eight $118.
In addition, estimated operating costs, utilities, and realty taxes is $71 in the first year of occupancy. During 2011, the
Company has advanced 50% of the three month security deposit in the amount of $47.
On May 24, 2010, the Company entered into a seven year office premise lease located Peru. The annual rent payable
on 1,717 rentable square meters for office space, is as follows:
• year one $289;
• year two $297;
• year three $306; and,
• years four through seven the lease is subject a minimum annual increase of 3% or the Consumer Price Index
published by Bureau of Labor Statistics of the United States Department of Labor, whichever is higher.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
41
MANAGEMENT’S DISCUSSION AND ANALYSIS
The lease also includes the use of additional space for mini-warehouse and parking spots, the obligation for which is
$58 per annum for the first year and is subject to an annual increase of 3% as stated above until the end of the lease.
As at December 31, 2011, the Company has advanced rent $159 (2010: $426) and provided a security deposit of $44.
On March 15, 2011, the Company entered into a one year office premise lease located in Mexico with an annual lease
obligation of $37.
Office premises – Canada
Office premises – Peru
Office premises – Mexico
Total office premises
Computer equipment – Peru
Computer equipment – Mexico
Total computer equipment
Total operating leases
expected payments due by period as at december 31, 2011
Less than
1 year
$ 181
363
8
$ 552
128
16
$ 144
$ 696
1–3 years
4–5 years
$ 549
758
–
$ 1,307
75
28
$ 103
$ 1,410
$ 372
805
–
$ 1,177
–
–
–
$
$ 1,177
after
5 years
$ 359
172
–
$ 531
–
–
$ –
$ 531
Total
$ 1,461
2,098
8
$ 3,567
203
44
$ 247
$ 3,814
On February 17, 2012, the Company entered into a one year office premise lease, effective March 1, 2012, located in
Mexico with an annual lease obligation of $18.
oTHeR ConTingenCieS (exPReSSed in $’000’S)
In February 2009, the Environmental Assessment and Oversight Agency (“OEFA”) in Peru, alleged the Company had five
violations: two were for breaches of recommendations; two for excess of total suspended solids in water over the
maximum allowable; and an alleged unauthorized discharge of effluent. The Ministry of Energy and Mines in Peru
(“OSINERGMIN”) decided to close the two alleged violations for failure to adopt recommendations and punish the
Company for the three alleged violations and imposed a fine of $200 in 2010. The Company appealed on June 23, 2010.
Subsequent to December 31, 2011 and on February 22, 2012, the alleged unauthorized discharge of effluent was
dismissed and confirmed a fine of $133 for the two alleged violations of excess of total suspended solids in water over
the maximum allowable. The Company is proceeding with an administrative appeal to the Ministry of Energy and Mines
in Peru (“OSINERGMIN”) for the remaining two alleged offenses. The Company believes it is more likely than not that it
will defend itself successfully in the claims and therefore has not recorded a provision for the potential exposure relating
to these alleged violations.
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; and,
• the dollar value cannot be reasonably estimated.
The Caylloma mine closure plan was approved in November 2009 with total closure costs of $3,587 of which $1,756 is
subject to annual collateral in the form of a letter of guarantee, to be awarded each year in increments of $146 over 12
years 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 $439. This bank letter of guarantee expires 360 days from December 2011.
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 were renewed in
June 2011 with expiry 360 days to June 2012.
42
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Company acts as guarantor to finance lease obligations held by two of its mining contractors. These finance lease
contracts are related to the acquisition of mining equipment deployed at the Caylloma mine. As at December 31, 2011,
these obligations amounted to $231 with $74 maturing in 2012 and $157 maturing in 2013.
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 are
material to investors, other than those disclosed in this MD&A and the consolidated financial statements and the related
notes.
DERIVATIVES
Lead forward contracts
Zinc forward contracts
Silver forward contracts
Total
december 31, 2011
expressed in $ millions
december 31, 2010
assets
Liabilities
assets
Liabilities
–
0.07
–
0.05
–
0.04
–
–
–
0.01
0.01
0.11
$ 0.07
$ 0.09
$ –
$ 0.13
The Company occasionally 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. As at the end of the period
no such contracts are outstanding.
Additionally, the Company enters regularly into short term forward and 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 forward sale and option contracts are settled against the arithmetic average of metal spot prices
over the month in which the contract matures. No initial premium associated with these trades has been paid.
RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability directly, or indirectly, to control the other party or exercise
significant influence over the other party in making financial and operating decisions. Parties are also considered to be
related if they are subject to common control, related parties may be individuals or corporate entities. A transaction is
considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
The consolidated financial statements include the financial statements of Fortuna Silver Mines Inc. and its subsidiaries
listed in the following table:
name
Country of incorporation
Minera Bateas S.A.C.
Fortuna Silver Mines Peru S.A.C.
Compania Minera Cuzcatlan SA
Fortuna Silver Mexico, S.A. de CV
Fortuna Silver (Barbados) Inc.
Continuum Resources Ltd.
Peru
Peru
Mexico
Mexico
Barbados
Canada
Fortuna Silver Mexico, S.A. de CV was incorporated in 2011.
equity interest as at december 31,
2011
100%
100%
100%
100%
100%
100%
2010
100%
100%
100%
n/a
100%
100%
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
43
MANAGEMENT’S DISCUSSION AND ANALYSIS
a) PuRCHaSe oF goodS and SeRViCeS
The Company entered into the following related party transactions:
Transactions with related parties
Salaries and wages 1,2
Other general and administrative expenses 2
Leasehold improvements 2
expressed in $‘000’s
years ended december 31,
2011
173
292
93
558
$
$
2010
174
185
–
359
$
$
1 Salaries and wages includes employees' salaries and benefits charged to the Company based on a percentage of the estimated
hours worked for the Company.
2 Radius Gold Inc. (“Radius”) has directors in common with the Company and shares office space, and is reimbursed for salaries and
wages, general and administrative costs, and leasehold improvements incurred on behalf of the Company.
During the year ended December 31, 2011, the Company transferred two mining concessions to Focus Ventures Ltd., a
Company with directors in common, in exchange for a 1% net smelter return royalty.
During the year ended December 31, 2011, the Company issued 6,756 (2010: 7,813) common shares, at a fair market
value of $4.44 (2010: $2.56) per share and paid $0.03 million cash (2010: $0.02 million) to Radius, under the option
to acquire a 60% interest in Tlacolula silver project located in the State of Oaxaca, Mexico.
Subsequent to the year ended December 31, 2011 to March 23, 2012, the Company issued 8,605 common shares, at
a fair market value of $5.81 per share and paid $0.05 million cash to Radius, under the option to acquire a 60% interest
in Tlacolula silver project located in the State of Oaxaca, Mexico.
b) Key ManageMenT CoMPenSaTion
Key management includes all persons named or performing the duties of Vice-President, Chief Financial Officer, President,
Chief Executive Officer, and non-executive Directors of the Company. The compensation paid or payable to key
management for services is shown below:
Salaries and other short term employee benefits
Directors fees
Consulting fees
Share-based payments
expressed in $‘000’s
years ended december 31,
$
2011
3,492
333
416
4,398
$
2010
2,633
300
174
188
$
8,639
$
3,295
The share-based payments includes the change in the deferred share unit (“DSU”) and restricted share unit (“RSU”) fair
value over each reporting period and payments made under the DSU and RSU plans and the non-cancellation of share
options.
Consulting fees includes fees paid to two non-executive directors in both 2011 and 2010.
C) yeaR end baLanCeS aRiSing FRoM PuRCHaSeS oF goodS/SeRViCeS
Amounts due to/(from) related parties
amounts due to/(from) related parties
Owing from a director and officer 3
Owing to a company with common directors 2
expressed in $‘000’s
december 31,
2011
december 31,
2010
$
$
(36)
205
169
$
$
(1)
41
40
3 Owing from a director includes non-interest bearing advances to a director and officers at December 31, 2011 and one officer and
director at December 31, 2010.
44
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The preparation of these consolidated financial statements requires management to make judgments and estimates
that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts
of expenses during the reporting period. Actual outcomes could differ from these judgments and estimates. The
consolidated financial statements include judgments and estimates which, by their nature, are uncertain. The impacts
of such judgments and estimates are pervasive throughout the consolidated financial statements, and may require
accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in
which the estimate is revised and the revision affects both current and future periods. Significant assumptions about
the future and other sources of judgments and estimates that management has made at the statement of financial
position date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event
that actual results differ from assumptions made, relate to, but are not limited to, the following:
i. Critical judgments
• The analysis of the functional currency for each entity of the Company. In concluding that the United States dollar
(“US$”) functional currency for its Peruvian and Mexican entities and the Canadian and Barbados entities have a
Canadian dollar (“CAD$”) functional currency, management considered the currency that mainly influences the cost
of providing goods and services in each jurisdiction in which the Company operates. As no single currency was
clearly dominant the Company also considered secondary indicators including the currency in which funds from
financing activities are denominated and the currency in which funds are retained.
• In concluding when commercial production has been achieved, the Company considered the following factors:
• all major capital expenditures to bring the mine to the condition necessary for it to be capable of operating
in the manner intended by management have been completed;
• the mine or mill is operating within eighty percent of design capacity;
• metallurgical recoveries are achieved within eighty percent of projections; and,
• the ability to sustain ongoing production of ore at a steady or increasing level.
• The identification of reportable segments, basis for measurement and disclosure of the segmented information.
• The determination of estimated useful lives and residual values of tangible and long-lived assets and the
measurement of depreciation expense.
• The identification of impairment indicators, cash generating units and determination of value in use and the write
down of tangible and long lived assets.
• Measurement of financial instruments involve significant judgments related to interpretation of the terms of the
instrument, identification, classification, impairment and the overall measurement to approximate fair values.
ii. estimates
• the recoverability of amounts receivable which are included in the consolidated statements of financial position;
• the estimation of assay grades of metal concentrates sold in the determination of the carrying value of accounts
receivable which are included in the consolidated statements of financial position and included as sales in the
consolidated statements of income;
• the carrying value of the short term investments and the recoverability of the carrying value which are included in
the consolidated statements of financial position;
• the determination of net realizable value of inventories on the consolidated statements of financial position;
• the estimated useful lives of property, plant and equipment which are included in the consolidated statements of
financial position and the related depreciation included in the consolidated statements of income;
• the determination of mineral reserves, carrying amount of mineral properties, and depletion of mineral properties
included in the consolidated statements of financial position and the related depletion included in the consolidated
statements of income;
• review of tangible and intangible assets carrying value, the determination of whether these assets are impaired
and the measurement of impairment charges or reversals which are included in the consolidated statements of
income;
• the determination of the fair value of financial instruments and derivatives included in the consolidated statements
of financial position;
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
45
MANAGEMENT’S DISCUSSION AND ANALYSIS
• the fair value estimation of share-based awards included in the consolidated statements of financial position and
the inputs used in accounting for share-based compensation expense in the consolidated statements of income;
• the provision for income taxes which is included in the consolidated statements of income and composition of
deferred income tax asset and liabilities included in the consolidated statement of financial position;
• the recognition of deferred income tax assets, amounts recorded for uncertain tax positions, the measurement of
income tax expense and indirect taxes included in the consolidated statement of financial position;
• the inputs used in determining the net present value of the liability for provisions related to decommissioning and
restoration included in the consolidated statements of financial position;
• the inputs used in determining the various commitments and contingencies accrued in the consolidated statements
of financial position; and,
• the assessment of indications of impairment of each mineral properties and related determination of the net
realizable value and write-down of those properties where applicable.
FINANCIAL INSTRUMENTS AND RELATED RISKS (EXPRESSED IN 000’S)
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, derivative assets, trade receivable from
concentrate sales, other accounts receivables, trade and other payables, due to related parties, and derivative liabilities
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.
The amortized value of long term receivables approximates their fair value as these are measured at the amortized cost
using the effective interest method. The fair value of the lease and long term liabilities is $5,531 as at December 31,
2011.
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 trade receivable concentrate sales, 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
Trade receivable from concentrate sales
Derivatives
Level 1
Level 2
Level 3
Total
expressed in $’000’s
$
$
38,730
17,000
–
–
–
–
11,287
(17)
$
55,730
$
11,270
$
$
–
–
–
–
–
$
38,730
17,000
11,287
(17)
$
67,000
There were no changes in the levels during the year ended December 31, 2011.
46
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Cash and cash equivalents
Short term investments
Trade receivable from concentrate sales
Derivatives
Level 1
Level 2
Level 3
Total
expressed in $’000’s
$
$
70,298
20,509
–
–
–
–
12,551
(133)
$
90,807
$
12,418
$
$
–
–
–
–
–
$
70,298
20,509
12,551
(133)
$
103,225
There were no changes in the levels during the year ended December 31, 2010.
Accounts receivable includes trade receivable from concentrate sales, provisional price adjustments, and final price
adjustments. 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. As such, these accounts receivable are classified within
level 2 of the fair value hierarchy.
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, 2011, there have been no changes in the classification of financial assets and
liabilities in levels 1, 2, and 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 and Mexico 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 income, financial position, or cash flows. The Company has
not hedged its exposure to currency fluctuations.
As at December 31, 2011, 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
Accounts receivable and other assets
Deposits on long term assets
Trade and other payables
Provisions, current
Income tax payable
Leases and long term liabilities
Provisions
december 31, 2011
Canadian
dollars
nuevo
Soles
Mexican
Pesos
Canadian
dollars
expressed in $’000’s
december 31, 2010
nuevo
Soles
Mexican
Pesos
$ 18,457
42
–
(1,580)
–
–
(2,691)
–
S/. 1,396
5,657
–
(17,993)
(1,351)
(10,581)
–
(8,079)
$ 1,758
58,939
–
(24,310)
(3,163)
–
–
(17,494)
$ 54,782
71
–
(625)
–
–
(1,999)
–
S/. 741
1,304
–
(15,493)
–
(11,775)
–
(9,169)
$ 2,201
42,452
24,209
(6,390)
–
–
–
(19,959)
Total
14,228
(30,951)
15,730
52,229
(34,392)
42,513
Total US$ equivalent
13,950
(11,476)
1,125
52,219
(12,244)
3,440
Based on the above net exposure as at December 31, 2011, 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,
as follows: impact to other comprehensive income of $1,550 (2010: $5,802) and a net loss of $1,150 (2010: $978).
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.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
47
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
The Company’s maximum exposure to credit risk at December 31, 2011 is as follows:
Cash and cash equivalents
Short term investments
Accounts receivable
Derivative assets
Due from related parties
GST/HST and value added tax receivable
expressed in '000's
december 31,
2011
december 31,
2010
$ 38,730
17,000
14,391
70
36
4,777
$ 70,298
20,509
12,551
–
–
3,542
$ 75,004
$ 106,900
The carrying amount of financial assets recorded in the financial statements represents the Company’s maximum
exposure to credit risk. The Company believes it is not exposed to significant credit risk and overall, the Company’s credit
risk has not declined significantly from the prior year.
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.
Refer to Contractual Obligations for the expected payments due as at December 31, 2011.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
The Company is currently assessing the impact of adopting the new accounting standards, noted below, on our
consolidated financial statements.
The following standards and amendments to existing standards have been published and are mandatory for the
Company’s annual accounting periods beginning January 1, 2012, or later:
i) new accounting Standards impacting on or after january 1, 2012
iFRS 7 Financial Instruments: Disclosures (Amendment)
The amendment, effective for annual periods beginning on or after July 1, 2011, with early application permitted, requires
additional quantitative and qualitative disclosures relating to transfers of financial assets, where: financial assets are
derecognized in their entirety, but where the entity has a continuing involvement in them; financial assets that are not
derecognized in their entirety.
iaS 12 Income Taxes (Amendment)
IAS 12 Income Taxes, amendments regarding Deferred Tax: Recovery of Underlying Assets introduces an exception to the
existing principle for the measurement of deferred tax assets and liabilities arising on investment property measured at
fair value, and the requirement that deferred tax on non-depreciable assets measured using the revaluation model in IAS
16 should always be measured on a sale basis. The amendment is effective for annual periods beginning on or after
January 1, 2012.
ii) new accounting Standards impacting on or after july 1, 2012
iaS 1 Presentation of Financial Statements (Amendment)
The amendments to IAS 1 Presentation of Financial Statements require companies preparing financial statements in
accordance with IFRSs to group together items within OCI that may be reclassified to the profit or loss section of the
income statement. The amendments retain the 'one or two statement' approach at the option of the entity and only
revise the way other comprehensive income is presented: requiring separate subtotals for those elements which may be
'recycled' (e.g. cash-flow hedging, foreign currency translation), and those elements that will not (e.g. fair value through
48
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
OCI items under IFRS 9). In addition, the tax associated with items presented before tax to be shown separately for each
of the two groups of OCI items (without changing the option to present items of OCI either before tax or net of tax).
The amendment is effective for annual periods beginning on or after July 1, 2012.
iii) new accounting Standards impacting on or after january 1, 2013
iFRS 7 Financial Instruments: Disclosures in Respect of Offsetting (Amendment)
At its meeting on December 13-15, 2011, the IASB approved amendments to IFRS 7, Financial Instruments: Disclosures,
with respect to offsetting financial assets and financial liabilities. The common disclosure requirements issued by the
IASB and the FASB in December 2011 are intended to help investors and other users to better assess the effect or
potential effect of offsetting arrangements on a company's financial position. Companies and other entities are required
to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within
those annual periods. The required disclosures should be provided retrospectively.
iFRS 10 Consolidated Financial Statements
IFRS 10 Consolidated Financial Statements replaces the portion of IAS 27 Consolidated and Separate Financial Statements
that addresses the accounting for consolidated financial statements, and SIC12 Consolidation - Special Purpose Entities.
IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity
controls one or more entities. This standard (i) requires a parent entity (an entity that controls one or more other entities)
to present consolidated financial statements; (ii) defines the principle of control, and establishes control as a basis for
consolidation; (iii) sets out how to apply the principle of control whether an investor controls an investee and therefore
must consolidate the investee; and (iv) sets out the accounting requirements for the preparation of consolidated financial
statements.
IFRS 10 is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. IFRS 10
may be adopted to an earlier accounting period, but in doing so, an entity must disclose the fact that it has early adopted
the standard and apply IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Separate
Financial Statements (as amended in 2011), IAS 28 Investments in Associates and Joint Ventures (as amended in 2011).
iFRS 11 Joint Arrangements
IFRS 11 replaces IAS 31 Interest in Joint Ventures and SIC-13 Jointly-Controlled Entities-Non-Monetary Contributions by
Venturers. This standard establishes the core principle that a party to a joint arrangement determines the type of joint
arrangement in which it is involved by assessing its rights and obligations and accounts for those rights and obligations
in accordance with that type of joint arrangement (joint operations or joint ventures). This standard is effective for annual
periods on or after January 1, 2013, with early adoption permitted.
iFRS 12 Disclosure of Interests in Other Entities
IFRS 12 combines the disclosure requirements for an entity’s interest in subsidiaries, joint arrangements, associates
and structured entities into one comprehensive disclosure standard. This standard requires the disclosure of information
that enable users of financial statements to evaluate the nature of, and risks associated with, its interest in other entities
and the effects of those interests on its financial position, financial performance and cash flows. This standard is effective
for annual periods beginning on or after January 1, 2013, with early adoption permitted, and entities are permitted to
incorporate any of the new disclosures into their financial statements before that date.
iFRS 13 Fair Value Measurement
IFRS 13 Fair Value Measurement provides guidance on how to measure fair value, but does not change when fair value
is required or permitted under IFRS. IFRS 13 defines fair value, sets out a single IFRS framework for measuring fair value
and requires disclosures about fair value measurements. IFRS 13 applies when another IFRS requires or permits fair
value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs
to sell, based on fair value or disclosures about those measurements), except for: share-based payment transactions
within the scope of IFRS 2 Share-based Payment; leasing transactions with the scope of IAS 17 Leases; measurements
that have some similarities to fair value that are not fair value, such as net realizable value in IAS 2 Inventories; or value
in use IAS 36 Impairment of Assets. This standard is effective for annual periods beginning on or after January 1, 2013,
with early adoption permitted.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
49
MANAGEMENT’S DISCUSSION AND ANALYSIS
iaS 19 Post-employment Benefits
On June 16, 2011 the IASB issued amendments to IAS 19, Employee Benefit, in order to improve the accounting for
pensions and other post-employment benefits.
The amendments make important improvements by:
• eliminating the option to defer the recognition of gains and losses, known as the ‘corridor method’ or the “deferral
and amortization approach”;
• streamlining the presentation of changes in assets and liabilities arising from defined benefit plans, including
requiring re-measurements to be presented in OCI, thereby separating those changes from changes that many
perceive to be the result of an entity’s day-to-day operations;
• enhancing the disclosure requirements for defined benefit plans, providing better information about the
characteristics of defined benefit plans and the risks that entities are exposed to through participation in those
plans.
The amendments are effective for financial years beginning on or after January 1, 2013. Earlier application is permitted.
iaS 27 Separate Financial Statements
IAS 27 has the objective of setting standards to be applied in accounting for investments in subsidiaries, jointly controlled
entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated)
financial statements. This standard is effective for annual periods beginning on or after January 1, 2013, with early
adoption permitted. This standard will not have an impact on the consolidated financial statements.
iaS 28 Investments in Associates and Joint Ventures
IAS 28 prescribes the accounting for investments in associates and to set the requirements for the application of the
equity method when accounting for investments in associates and joint ventures. This standard is effective for annual
periods beginning on or after January 1, 2013, with early adoption permitted.
iv) new accounting Standards impacting on or after january 1, 2014
iaS 32 Financial Instruments - Presentation in Respect of Offsetting (Amendment)
At its meeting on December 13-15, 2011, the IASB approved amendments to IFRS 7, Financial Instruments: Disclosures,
with respect to offsetting financial assets and financial liabilities. As part of this project the IASB also clarified aspects
of IAS 32, Financial Instruments: Presentation. The amendments to IAS 32 address inconsistencies in current practice
when applying the requirements. The amendments are effective for annual periods beginning on or after January 1, 2014
and are required to be applied retrospectively.
v) new accounting Standards impacting on or after january 1, 2015
iFRS 9 Financial Instruments - Classification and Measurement
IFRS 9, Financial Instruments: IFRS 9 introduces the new requirements for the classification, measurement and de-
recognition of financial assets and financial liabilities. Specifically, IFRS 9 requires all recognized financial assets that
are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at
amortized cost or fair value, and all financial liabilities classified as subsequently measured at amortized cost except for
financial liabilities as at FVTPL. The amendments are effective for annual periods beginning on or after January 1, 2015,
with earlier application permitted.
50
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
As at March 23, 2012, there are 481,465 DSU outstanding with a fair value of $2.98 million and 265,231 RSU
outstanding with a fair value of $1.45 million.
SHaRe PoSiTion and ouTSTanding WaRRanTS and oPTionS
The Company’s outstanding share position as at March 23, 2012 is 125,268,751 common shares. In addition, a total
of 3,696,560 incentive stock options are currently outstanding as follows:
Type of Security
Incentive Stock Options:
Total outstanding options
exercise
Price
(Cad$)
$4.46
$4.46
$1.35
$2.29
$1.75
$0.85
$1.55
$1.66
$0.85
$2.22
$6.67
$0.85
$0.85
$0.85
$0.85
$0.83
no. of Shares
8,271
1,663,651
200,000
50,000
10,000
2,500
225,000
225,000
35,000
350,000
184,138
38,000
25,000
250,000
230,000
200,000
3,696,560
expiry date
March 30, 2012
June 8, 2014
February 5, 2016
March 30, 2016
May 8, 2016
July 5, 2016
July 5, 2016
July 10, 2016
January 11, 2017
January 11, 2017
February 20, 2017
June 27, 2017
October 24, 2017
October 5, 2018
November 5, 2018
July 6, 2019
INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)
Effective January 1, 2011, Canadian publicly listed entities were required to prepare their financial statements in
accordance with IFRS. Due to the requirement to present comparative financial information, the effective transition date
is January 1, 2010. Refer to Note 23 of the consolidated financial statements for the year ended December 31, 2011.
Our IFRS conversion team identified three phases to our conversion: Scoping and Diagnostics, Analysis and Development,
and Implementation and Review.
We have now completed our IFRS conversion project through implementation. Review and post-implementation will
continue in future periods, as outlined below.
The following outlines our transition project, IFRS transitional impacts and the on-going impact of IFRS on our financial
results.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
51
MANAGEMENT’S DISCUSSION AND ANALYSIS
TRanSiTionaL FinanCiaL iMPaCT
equity impact
As a result of the policy choices we have selected and the changes we were required to make under IFRS, we have
recorded a reduction in our equity of approximately $1.20 million and $3.42 million as at January 1, 2010 and December
31, 2010, respectively. The table below outlines adjustments to our equity on adoption of IFRS on January 1, 2010 and
December 31, 2010.
expressed in $ millions
Equity, CAD GAAP
Adjustments:
Effect of foreign exchange on inventory, deposits on long term
assets, and mineral properties, property, plant and equipment
Deferred income tax adjustments
Transfer of accumulated other comprehensive income to retained earnings
Reset accumulated other comprehensive income to zero
Adjustment to revise provisions
Adjustment for depletion on mineral properties related to provisons
Total iFRS adjustments to equity
equity, iFRS
Note: There may be differences due to rounding of decimal places.
january 1,
2010
december 31,
2010
$
112.56
$
206.01
(2.54)
1.48
2.90
(2.90)
(0.32)
0.18
(1.20)
(5.34)
1.94
2.90
(2.90)
(0.25)
0.23
(3.42)
$
111.36
$
202.59
A reconciliation of our comprehensive income under CAD GAAP and IFRS for the year ended December 31, 2010 and a
discussion of the impact of IFRS on our cash flows are provided below.
Comprehensive income impact
As a result of the policy choices we have selected and the changes we were required to make under IFRS, we have also
recorded an increase in our net income of approximately $3.0 million for the year ended December 31, 2010. We have
recorded a decrease in our total comprehensive income of approximately $2.2 million for the year ended December 31,
2010.
The following is a summary of the adjustments to comprehensive income for year ended December 31, 2010 under IFRS
(all of which are outlined in the notes to our consolidated financial statements):
year ended december 31, 2010
expressed in $ millions
Cad gaaP
effect of
Transition
to iFRS
Income (loss) for the year
Other comprehensive income (loss)
Transfer of unrealized loss to realized loss upon reduction of
net investment, net of taxes
Unrealized (loss) gain on translation to presentation currency
on foreign operations
Other comprehensive income
$ 13.0
$ 3.0
2.1
5.9
8.0
(2.1)
(3.2)
(5.3)
iFRS
$ 16.0
–
2.7
2.7
Total comprehensive income for the year
$ 20.9
$ (2.2)
$ 18.7
Note: There may be differences due to rounding of decimal places.
Cash Flow impact
The adoption of IFRS has had no material impact on the net cash flows of the Company. The changes made to the
Consolidated Statements of Financial Position and Consolidated Statements of Comprehensive Income have resulted in
reclassifications of various amounts on the Consolidated Statements of Cash Flows, however there is no net impact on
cash and cash equivalents.
52
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Statement Presentation Changes
The transition to IFRS has resulted in financial statement presentation changes in our financial statements, most
significantly on the consolidated statement of income. The changes to the balance sheet relate mainly to the combining
of mineral properties, property, plant and equipment and renaming of asset retirement obligations to provisions; future
income tax liability to deferred income tax liabilities; and contributed surplus to share option and warrant reserve.
The following is a summary of the significant changes to our consolidated statement of income:
• expenses by function and nature – our statement of income presents expenses by function. Accordingly,
depreciation, depletion, and accretion are no longer presented as a separate line item on the statement of
income but depreciation and depletion are included in cost of sales. Accretion of provisions is included in
interest expense;
• government royalties to cost of sales from selling, general and administrative expenses;
• distribution costs to cost of sales from selling, general and administrative expenses;
• community relation costs to cost of sales from selling, general and administrative expenses;
• other income and expenses from interest and other income and expenses to selling, general and administrative
expenses;
• interest expense includes interest on debt financing and accretion of provisions; and,
• current workers participation from income tax to cost of sales and selling, general and administrative expenses.
In addition, exploration and evaluation costs moved from selling, general and administrative expenses.
The above changes are reclassifications within our statement of income so there is no net impact to our income as a
result of these changes.
Control activities
For all changes to policies and procedures that have been identified, the effectiveness of internal controls over financial
reporting and disclosure controls and procedures has been assessed and any changes have been implemented. In
addition, controls over the IFRS changeover process have been implemented, as necessary. We have identified and
implemented the required accounting process changes that resulted from the application of IFRS accounting policies
and these changes were not material. We have completed the design, implementation and documentation of the internal
controls over accounting process changes resulting from the application of IFRS accounting policies and these changes
were not material. We applied our existing control framework to the IFRS changeover process. All accounting policy
changes and transitional financial position impacts were subject to review by senior management and the Audit Committee
of the Board of Directors.
business activities and Key Performance Measures
We have assessed the impact of the IFRS transition project on our financial covenants and key ratios. The transition did
not significantly impact our covenants and key ratios that have an equity component.
We have also reviewed the impact of the IFRS transition project on our compensation arrangements. We have identified
compensation arrangements that are calculated based on indicators in our financial statements. We are continuing to
work with our Human Resources department to ensure that all compensation arrangements incorporate indicators from
our financial statements prepared under IFRS in accordance with our compensation policies.
information Technology and Systems
The IFRS transition project did not have a significant impact on our information systems for the convergence periods. We
also do not expect significant changes in the post-convergence periods.
Review
The post-implementation phase will involve continuous monitoring of changes in IFRS in future periods. We note that the
standard-setting bodies that determine IFRS have significant ongoing projects that could impact the IFRS accounting
policies that we have selected. In particular, there may be additional new or revised IFRSs or IFRICs in relation to financial
instruments, hedge accounting, discontinued operations, leases and revenue recognition. We also note that the
International Accounting Standards Board is currently working on an extractive industries project, which could significantly
impact our financial statements primarily in the areas of capitalization of exploration costs and disclosures. We have
processes in place to ensure that potential changes are monitored and evaluated. The impact of any new IFRSs and
IFRIC Interpretations will be evaluated as they are drafted and published.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
53
MANAGEMENT’S DISCUSSION AND ANALYSIS
OTHER RISKS AND UNCERTAINTIES
There have been no major changes from the reported risks factors outlined in the Annual Information Form for the financial
year ended December 31, 2011.
CONTROLS AND PROCEDURES
diSCLoSuRe ConTRoLS and PRoCeduReS
The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, have
evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the rules of the SEC
and the Canadian Securities Administrators (“CSA”) as of December 31, 2011, and have concluded that such disclosure
controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 and Canadian securities laws is (i) recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms and Canadian securities laws and (ii)
accumulated and communicated to them Company’s management, including its principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosure.
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 IFRS as issued by the IASB.
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 year that
has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Management concludes that, as of December 31, 2011, the Company’s internal control over financial reporting was
effective and no material weaknesses were identified.
OUTLOOK
San joSe Mine, MexiCo
Exploration at San Jose in 2012 will continue to focus on the evaluation and advancement of multiple mineral occurrences
outlined through mapping and stream and soil sampling on the 58,000 hectare land package the Company controls in
the area surrounding the San Jose Mine. A 15,000 meter drill program has been budgeted for the year to drill test new
targets and follow-up on the results of the 2011 program.
CayLLoMa Mine, PeRu
For 2012, the mine is scheduled to produce 2 million ounces of silver with additional by-product gold, lead and zinc.
Capital projects budgeted for the year total $25 million and include a new tailings facility with total holding capacity for
seventeen years, camp improvements, upgrading of the power grid and plant equipment and infrastructure optimizations.
54
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
2012 PRoduCTion guidanCe
For 2012, the Company is scheduled to produce 3.7 million ounces of silver and 17,400 ounces of gold production or
4.6 million Ag Eq ounces plus base metal credits.
Mine
Caylloma, Peru
San Jose, Mexico
Total
Silver (M oz)
gold (k oz)
Zinc (M lbs)
Lead (M lbs)
2.0
1.7
3.7
2.4
15.0
17.4
21.0
--
21.0
18.0
--
18.0
• 2012 forecast silver production of 3.7 million ounces and gold production of 17,400 ounces or 4.6 million Ag Eq ounces plus base
metal credits (Ag = US$30/oz, Au = US$1,660/oz; metallurgical recoveries of 88% and 90% for Ag and Au respectively)
• Ag Eq = Silver Equivalent
Mining Tax in PeRu
Effective October 1, 2011, the Peruvian Government approved a change in the tax law for the mining sector which consists
of a progressive royalty scheme based on operating margins. Management expects that the impact on taxes paid by its
Peruvian subsidiary under the current metal price environment will be between 2 and 3 added percentage points on the
total royalty and mining tax.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements contained in this MD&A and any documents incorporated by reference into this MD&A constitute
forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and Section
21E of the United States Securities Exchange Act of 1934, as amended, and forward-looking information within the
meaning of applicable Canadian securities legislation (collectively, “forward-looking statements”). Forward-looking
statements express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives,
assumptions or future events or performance (often, but not always, identified 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) and are not statements of historical fact. Forward-looking statements relate to,
among other things:
• mineral “reserves” and “resources” as they involve the implied assessment, based on estimates and
assumptions that the reserves and resources described exist in the quantities predicted or estimated and can
be profitably produced in the future;
• 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 required third party contractual, regulatory and governmental approvals will be obtained for the
development, construction and production of its properties, (2) there being no significant disruptions affecting operations,
whether due to labor 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) labor 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.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
55
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2011 filed with the Canadian Securities Administrators and the U.S.
Securities and Exchange Commission and available at www.sedar.com and www.edgar.gov.
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 are
cautioned not to 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.
56
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To THe boaRd oF diReCToRS and SHaReHoLdeRS oF FoRTuna SiLVeR MineS inC.
We have audited the accompanying consolidated financial statements of Fortuna Silver Mines Inc. and subsidiaries,
which comprise the consolidated statements of financial position as at December 31, 2011, December 31, 2010 and
January 1, 2010, and the consolidated statements of income, statements of comprehensive income, statements of
changes in equity, and statements of cash flows for the years ended December 31, 2011 and December 31, 2010, 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 International Financial Reporting Standards as issued by the International Accounting Standards Board,
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 and the standards of the Public Company
Accounting Oversight Board (United States). 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 purpose 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. and subsidiaries as at December 31, 2011, December 31, 2010 and January 1, 2010 and
their financial performance and cash flows for the years ended December 31, 2011 and December 31, 2010 in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
(Signed) Deloitte & Touche LLP
Independent Registered Chartered Accountants
March 23, 2012
Vancouver, Canada
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
57
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
FoR THe yeaRS ended deCeMbeR 31,
(expressed in thousands of uS dollars, except for share and per share amounts)
Sales
Cost of sales
Mine operating income
other expenses
notes
18
21
2011
2010
23 h)
$ 110,004
49,030
$ 74,056
34,844
60,974
39,212
Selling, general and administrative expenses
Exploration and evaluation costs
Net gain on commodity contracts
(Gain) loss on disposal of mineral properties,
10 a) b), 21
21
property, plant and equipment
Loss on disposal of investment
Write-off of deferred exploration costs
Impairment of mineral properties, property, plant and equipment
operating income
Finance items
Interest income
Interest expense
net finance income (expense)
income before tax
Income taxes
income for the year
Earnings per Share – Basic
Earnings per Share – Diluted
Weighted average number of shares outstanding – basic
Weighted average number of shares outstanding – diluted
Expenses by Nature
8
20
13
14 e) i
14 e) ii
14 e) i
14 e) ii
21
The accompanying notes are an integral part of these consolidated financial statements.
19,840
1,715
(481)
(59)
–
–
1,894
10,984
547
(736)
127
119
443
–
38,065
27,728
830
(560)
270
38,335
18,802
493
(708)
(215)
27,513
11,510
$ 19,533
$ 16,003
$
$
0.16
0.16
$
$
0.15
0.14
123,295,063
108,120,452
124,711,984
110,564,767
58
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FoR THe yeaRS ended deCeMbeR 31,
(expressed in thousands of uS dollars)
income for the year
other comprehensive income
Unrealized gain on translation of net investment
Unrealized (loss) gain on translation to presentation
currency on foreign operations
other comprehensive income
Total comprehensive income for the year
notes
2011
2010
23 i)
$ 19,533
$ 16,003
751
(79)
672
–
2,723
2,723
$ 20,205
$ 18,726
The accompanying notes are an integral part of these consolidated financial statements.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
59
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FoR THe yeaRS ended deCeMbeR 31,
(expressed in thousands of uS dollars)
oPeRaTing aCTiViTieS
Net income
Items not involving cash
Depletion and depreciation
Accretion of provisions
Income tax expense
Share-based payments (recovery)
Unrealized (gain) on commodity contracts
Write-off of deferred exploration costs
Impairment of mineral properties, property, plant and equipment
(Gain) loss on disposal of mineral properties, property,
plant and equipment
Accrued interest on long term loans receivable and payable
Changes in non-cash working capital items
Accounts receivable and other assets
Inventories
Trade and other payables
Due to/from related parties
Provisions
Cash provided by operating activities before interest and income taxes
Income taxes paid
Interest income paid
Interest income received
net cash provided by operating activities
inVeSTing aCTiViTieS
Purchase of short term investments
Redemptions in short term investments
Expenditures on mineral properties, property, plant and equipment
Payments of value added taxes on purchase of property,
plant and equipment
Advances of deposits on long term assets
Receipts of deposits on long term assets
Proceeds on disposal of mineral properties, property, plant and equipment
net cash used in investing activities
FinanCing aCTiViTieS
Proceeds from long term debt
Repayment of long term debt
Net proceeds on issuance of common shares
Repayment of finance lease obligations
net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
(deCReaSe) inCReaSe in CaSH and CaSH eQuiVaLenTS
Cash and cash equivalents – beginning of year
CaSH and CaSH eQuiVaLenTS – end oF yeaR
Supplemental cash flow information
3
3
15
The accompanying notes are an integral part of these consolidated financial statements.
60
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
notes
years ended december 31,
2011
2010
23 i)
$ 19,533
$ 16,003
9,421
173
18,802
3,682
(116)
–
1,894
(59)
24
6,462
163
11,510
(501)
(2,922)
443
–
127
50
53,354
31,335
(3,085)
(7,273)
6,829
134
(201)
49,758
(15,007)
(80)
837
35,508
(49,671)
53,406
(76,676)
(522)
(31,859)
35,424
41
(69,857)
18
(18)
3,656
(1,178)
2,478
303
(31,871)
70,298
(4,788)
(1,536)
3,677
(9)
–
28,679
(7,301)
(127)
462
21,713
(47,675)
33,817
(36,711)
(2,915)
(4,661)
–
81
(58,064)
–
–
74,922
(1,187)
73,735
2,151
37,384
30,763
$ 38,730
$ 70,298
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(expressed in thousands of uS dollars)
aSSeTS
CuRRenT aSSeTS
Cash and cash equivalents
Short term investments
Derivative assets
Accounts receivable and other assets
GST/HST and value added tax receivable
Inventories
notes
december 31,
2011
december 31,
2010
23 g)
january 1
2010
23 g)
3
4
5
6
6
7
$ 38,730
17,000
70
15,609
4,777
11,291
$ 70,298
20,509
–
13,454
3,542
4,018
$ 30,763
6,034
37
8,635
601
2,328
87,477
111,821
48,398
non-CuRRenT aSSeTS
Deposits on long term assets
Deferred income tax assets
Mineral properties, property, plant and equipment
6
13 b)
8
Total assets
LiabiLiTieS and eQuiTy
CuRRenT LiabiLiTieS
Trade and other payables
Due to related parties
Derivative liabilities
Provisions
Income tax payable
Current portion of long term liability
non-CuRRenT LiabiLiTieS
Leases and long term liabilities
Provisions
Deferred income tax liabilities
eQuiTy
Share capital
Share option and warrant reserve
Retained earnings (deficit)
Accumulated other comprehensive income
9
10 c)
5
12
13 a)
11
11
12
13 b)
2,260
36
181,833
4,686
–
117,363
16
–
85,175
$ 271,606
$ 233,870
$ 133,589
$ 17,156
169
87
727
3,923
1,512
$
9,303
40
133
–
4,192
1,083
$
5,136
49
3,092
–
2,949
1,038
23,574
14,751
12,264
2,764
4,247
12,710
43,295
186,540
10,495
27,881
3,395
31,276
228,311
3,166
4,881
8,482
31,280
180,403
11,116
8,348
2,723
11,071
202,590
1,454
2,917
5,593
22,228
104,701
14,315
(7,655)
–
(7,655)
111,361
$ 271,606
$ 233,870
$ 133,589
Contingencies and capital commitments
Subsequent events
19
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 consolidated financial statements.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
61
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FoR THe yeaRS ended deCeMbeR 31,
(expressed in thousands of uS dollars, except for share amounts)
Share Capital
attributable to equity Holders of the Company
notes
Shares
amount
Share
option and
Warrant
Reserve
Retained
earnings
(deficit)
accumulated
other
Compre-
hensive
income
(aoCi”)
Total
Retained
earnings
(deficit)
and aoCi
Total
equity
122,497,465 $ 180,403 $ 11,116
$ 8,348
$ 2,723 $ 11,071 $ 202,590
Balance – December 31, 2010
Issuance of shares under
bought deal financing,
net of issuance costs
Exercise of options
Issuance of shares for property 14 a)
Transfer of contributed surplus
on exercise of options
Share–based payments on
option grants
Income for the year
Unrealized gain on translation
of net investment
Unrealized (loss) on translation to
presentation currency on foreign
operations
Total comprehensive income
for the year
Balance – December 31, 2009
Issuance of shares under
bought deal financing,
net of issuance costs
Exercise of options
Issuance of shares for property 14 a)
Transfer of contributed surplus
on exercise of options
Share-based payments (recoveries)
on option grants
Income for the year
Unrealized gain on translation to
presentation currency on foreign
operations
Total comprehensive income
for the year
–
–
–
–
–
–
–
–
–
–
2,441,700
6,756
(95)
3,751
30
–
–
–
2,451
(2,451)
–
–
–
–
–
–
–
–
–
–
(95)
3,751
30
–
–
19,533
1,830
19,533
751
751
751
(79)
(79)
(79)
–
–
–
–
1,830
–
–
19,533
–
–
–
–
26,507,500
999,500
7,813
73,919
1,004
20
–
–
–
759
(759)
(2,440)
–
–
16,003
–
–
–
–
–
–
–
–
–
–
–
–
–
73,919
1,004
20
–
–
16,003
(2,440)
16,003
–
–
2,723
2,723
2,723
16,003
2,723
18,726
18,726
balance – december 31, 2011
124,945,921 $ 186,540
$ 10,495
$ 27,881
$ 3,395
$ 31,276
$ 228,311
19,533
672
20,205
20,205
94,982,652 $ 104,701 $ 14,315 $ (7,655) $ – $ (7,655) $ 111,361
–
–
–
–
–
–
–
Balance – December 31, 2010
23 f)
122,497,465 $ 180,403 $ 11,116
$ 8,348
$ 2,723 $ 11,071 $ 202,590
The accompanying notes are an integral part of these consolidated financial statements.
62
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
1. CORPORATE INFORMATION
Fortuna Silver Mines Inc. (“Fortuna” or the “Company”) is engaged in silver mining and related activities, in Latin America,
including exploration, extraction, and processing. The Company operates the Caylloma zinc/lead/silver mine in southern
Peru and the San Jose silver/gold mine in Mexico.
Fortuna is a publicly traded company incorporated and domiciled in Canada and is listed on the New York Stock Exchange
under the trading ticker symbol “FSM”, and on the Toronto Stock Exchange and Lima Stock Exchange under the trading
ticker symbol “FVI”.
The Company’s registered office is at Suite 650, 200 Burrard Street, Vancouver, British Columbia, Canada, V6C 3L6.
2. BASIS OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
a) Statement of Compliance
These consolidated financial statements have been prepared in accordance with the International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The policies applied in these
consolidated financial statements are based on IFRS issued and effective as at December 31, 2011. The Board of
Directors approved these financial statements for issue on March 23, 2012.
b) basis of Consolidation
These 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”); Fortuna Silver Mines Peru S.A.C. (“FSM Peru”); and Fortuna Silver Mexico, S.A. de CV.
(“FS Mexico”).
All significant inter-company transactions, balances, revenues, and expenses have been eliminated upon consolidation.
c) 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. Final commodity prices are set in a period subsequent to the date of sale based on a
specified quotational period, either one or three months after delivery at the option of the customer or one month after
delivery. The Company’s metal concentrates are provisionally priced at the time of sale based on the prevailing market
price.
Variations between the price recorded at the shipment date and the actual final price set under the sales contracts are
caused by changes in market prices, and result in an embedded derivative in accounts receivable. The embedded
derivative is recorded at fair value each period until final settlement occurs, with changes in fair value classified as
provisional price adjustments and included in sales in the consolidated statement of income. Sales of metal concentrates
are net of refining and treatment charges.
d) Cash and Cash equivalents
Cash and cash equivalents are designated as fair value through profit or loss (“FVTPL”). Cash and cash equivalents
include cash on hand, demand deposits, and money market instruments, with maturities from the date of acquisition of
90 days or less, which are readily convertible to known amounts of cash and are subject to insignificant changes in
value. Transaction costs are expensed when incurred through profit or loss.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
e) Mineral Properties, Property, Plant and equipment
Costs directly related to construction projects are capitalized to work-in-progress until the asset is available for use in
the manner intended by management. Completed property, plant and equipment are recorded at cost, net of accumulated
depreciation and accumulated impairments. Assets, other than capital work in progress, will be depreciated to their
residual values over their estimated useful lives as follows:
Land and buildings
Land
Mineral properties
Buildings
Leasehold improvements
Plant and equipment
Machinery and equipment
Furniture and other equipment
Transport units
Not depreciated
Units of production
6 – 20 years
7 – 8 years
3 – 8 years
3 – 13 years
4 – 5 years
Straight line
Straight line
Straight line
Straight line
Straight line
Capital work in progress
Not depreciated
Equipment under finance lease is initially recorded at the present value of minimum lease payments at the inception of
the lease and depreciated as above. Spare parts and components included in machinery and equipment, depending on
the replacement period of the initial component, are depreciated over 8 to 18 months.
Borrowing costs allocable to the costs of construction projects are capitalized to mineral properties, property, plant and
equipment and included in the carrying amounts of related assets until the asset is available for use in the manner
intended by management.
Costs associated with commissioning activities on constructed plants are deferred from the date of mechanical
completion of the facilities until the date the assets are ready for use in the manner intended by management.
On an annual basis, the depreciation method, useful economic life and the residual value of each component asset is
reviewed, with any changes recognized prospectively over its remaining useful economic life.
Evaluation and Exploration Assets
i.
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.
The Company defers the cost of acquiring, maintaining its interest, exploring and developing mineral properties as
exploration and evaluation assets when future inflow of economic benefits from the properties is probable and until such
time as the properties are placed into development, abandoned, sold or considered to be impaired in value.
If a mineable ore body is discovered, exploration and evaluation costs are reclassified to mining properties. 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.
Proceeds received from the sale of interests in exploration and evaluation assets are credited to the carrying value of
the mineral properties, with any excess included in income.
Write-downs due to impairment in value are charged to income. The cash-generating unit for assessing impairment is a
geographic region and shall be no larger than the operating segment.
Exploration costs that do not relate to any specific property are expensed as incurred.
Operational Mining Properties and Mine Development
ii.
For operating mines, all exploration within the mineral deposit is capitalized and amortized on a unit-of-production basis
over proven and probable reserves as part of the production cost.
Costs of producing properties are amortized on a unit-of-production basis over proven and probable reserves, and costs
of abandoned properties are written-off.
64
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
iii. Commercial Production
Capital work in progress consists of expenditures for the construction of future mines and include pre-production revenues
and expenses prior to achieving commercial production. Commercial production is a convention for determining the point
in time in which a mine and plant has completed the operational commissioning and has operational results that are
expected to remain at a sustainable commercial level over a period of time, after which production costs are no longer
capitalized and are reported as operating costs. The determination of when commercial production commences is based
on several qualitative and quantitative factors including but not limited to the following:
• all major capital expenditures to bring the mine to the condition necessary for it to be capable of operating in the
manner intended by management have been completed;
• the mine or mill is operating within eighty percent of design capacity;
• metallurgical recoveries are achieved within eighty percent of projections; and,
• the ability to sustain ongoing production of ore at a steady or increasing level.
On the commencement of commercial production, depletion of each mining property will be provided on a unit-of-
production basis. Any costs incurred after the commencement of production are capitalized to the extent they give rise
to a future economic benefit.
f) asset impairment
Assets are assessed for impairment at each reporting date when changes in events or circumstances occur that indicate
the assets may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount
exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value
in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately
identifiable cash inflows or cash generating units. These are typically individual mines or development projects.
Brownfields exploration projects, located close to existing mine infrastructure, are assessed for impairment as part of
the associated mine cash generating unit.
When the recoverable amount is assessed using pre-tax discounted cash flow techniques, the resulting estimates are
based on detailed mine and/or production plans. For value in use, recent cost levels are considered, together with
expected changes in costs that are compatible with the current condition of the business.
The cash flow forecasts are based on best estimates of expected future revenues and costs, including the future cash
costs of production, capital expenditure and reclamation and closures costs.
Where a fair value less cost to sell model is used the cash flow forecast includes net cash flows expected to be realized
from extraction, processing and sale of mineral resources that do not currently qualify for inclusion in proven or probable
reserves.
Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased
to the revised estimate of recoverable amount, but not beyond the carrying amount that would have been determined
had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment
loss is recognized into earnings immediately.
g) Provisions
Decommissioning and restoration provisions
i.
Future obligations to retire an asset, including dismantling, remediation and ongoing treatment and monitoring of the
site related to normal operations are initially recognized and recorded as a liability based on estimated future cash flows
discounted at a credit adjusted risk-free rate. The decommissioning and restoration provision (“DRP”) is adjusted at
each reporting period for changes to factors including the expected amount of cash flows required to discharge the
liability, the timing of such cash flows and the credit adjusted risk-free discount rate.
The liability is accreted to full value over time through periodic charges to income. This accretion of provisions is charged
to finance costs in the consolidated statements of income.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
The amount of the DRP initially recognized is capitalized as part of the related asset’s carrying value and amortized to
income. The method of amortization follows that of the underlying asset. The costs related to a DRP are only capitalized
to the extent that the amount meets the definition of an asset and can bring about future economic benefit. For a closed
site or where the asset which generated a DRP no longer exists, there is no longer future benefit related to the costs and
as such, the amounts are expensed. For operating sites, a revision in estimates or a new disturbance will result in an
adjustment to the liability with an offsetting adjustment to the capitalized retirement cost. For closed sites, adjustments
to the DRP that are required as a result of changes in estimates are charged to income in the period in which the
adjustment is identified.
Environmental disturbance restoration provisions
ii.
During the operating life of an asset, events such as infractions of environmental laws or regulations may occur. These
events are not related to the normal operation of the asset and are referred to as environmental disturbance restoration
provisions (“EDRP”). The costs associated with an EDRP are accrued and charged to earnings in the period in which the
event giving rise to the liability occurs. Any subsequent adjustments to an EDRP due to changes in estimates are also
charged to earnings in the period of adjustment. These costs are not capitalized as part of the long-lived asset’s carrying
value.
iii. Other provisions
Provisions are recognized when a present legal or constructive obligation exists, as a result of past events, and it is
probable that an outflow of resources that can be reliably estimated will be required to settle the obligation. Where the
effect is material, the provision is discounted using an appropriate current market-based pre-tax discount rate.
inventories
h)
Inventories include metals contained in concentrates, stockpiled ore, materials, and supplies. The classification of metals
inventory is determined by the stage in the production process. Product inventories 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.
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.
income taxes
i)
Income tax expense consists of current and deferred tax expense. Income tax is recognized in the income or loss.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or
substantially enacted at period end, adjusted for amendments to tax payable with regards to previous years.
Deferred tax assets and liabilities are recognized for deferred tax consequences attributable to unused tax loss carry
forwards, unused tax credits and differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted or
substantially enacted tax rates expected to apply when the asset is realized or the liability settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or loss in the period that
substantive enactment occurs.
A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against
which the asset can be utilized. To the extent that the Company does not consider it probable that deferred tax asset
will be recovered, the deferred tax asset is reduced.
The following temporary differences do not result in deferred tax assets or liabilities:
• the initial recognition of assets or liabilities, not arising in a business combination, that does not affect accounting
or taxable income;
• goodwill; and,
• investments in subsidiaries, associates and jointly controlled entities where the timing of reversal of the temporary
differences can be controlled and reversal in the foreseeable future is not probable.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to the set off current tax assets
against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net basis.
66
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
Share-based Payments
j)
The fair value method of accounting is used for share-based payment transactions. Under this method, the cost of share
options and other equity-settled share-based payment arrangements are recorded based on the estimated fair value at
the grant date and charged to earnings over the vesting period. Where awards are forfeited because non-market based
vesting conditions are not satisfied, the expense previously recognized is proportionately reversed in the period the
forfeiture occurs.
Share-based payment expense relating to cash-settled awards, including deferred and restricted share units is accrued
over the vesting period of the units based on the quoted market value of Company’s common shares. As these awards
will be settled in cash, the expense and liability are adjusted each reporting period for changes in the underlying share
price.
Stock Option Plan
i.
The Company applies the fair value method of accounting for all stock option awards. Under this method, the Company
recognizes a compensation expense for all stock options awarded to employees, based on the fair value of the options
on the date of grant which is determined by using the Black-Scholes option pricing model. The fair value of the options
is expensed over the graded vesting period of the options.
ii. Deferred Share Unit (“DSU”) Plan
The Company’s DSU compensation liability is accounted for based on the number of units outstanding and the quoted
market value of the Company’s common shares at the financial position date. The year-over-year change in the deferred
share unit compensation liability is recognized in income.
iii. Restricted Share Unit (“RSU”) Plan
The Company’s RSU compensation liability is accounted for based on the number of units outstanding and the quoted
market value of the Company’s common shares at the financial position date. The Company recognizes a compensation
cost in operating income on a graded vesting basis for each RSU granted equal to the quoted 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 fair value until the end of the performance date. The cumulative effect of the
change in fair value is recognized in income in the period of change.
k) earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing income for the year by the weighted average number of common
shares outstanding during the period.
The diluted earnings (loss) per share calculation is based on the weighted average number of common shares outstanding
during the period, plus the effects of dilutive common share equivalents. This method requires that the dilutive effect of
outstanding options 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.
Foreign Currency Translation
l)
The presentation currency of the Company is the United States Dollar (“US$”).
The functional currency of each of the entities in the group is the US$, with the exception of the parent entity and certain
holding companies which have a Canadian dollar functional currency.
Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange
at each financial position date. Foreign exchange gains or losses on translation to the functional currency of an entity
are recorded in income. Non-monetary items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rate as at the date of the initial transaction.
For entities with a functional currency different from the presentation currency, translation to the presentation currency
is required. Assets and liabilities are translated at the rate of exchange at the financial position date. Revenue and
expenses are translated at the average rate for the period. All resulting exchange differences are recognized in other
comprehensive income.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
m) Financial instruments
Financial Assets
i.
The Company classifies all financial assets as either fair value through profit or loss (“FVTPL”), held-to-maturity (“HTM”),
loans and receivables, or available-for-sale “(AFS”). The classification is determined at initial recognition and depends
on the nature and purpose of the financial asset.
Financial Assets at Fair Value Through Profit or Loss
a)
Financial assets are classified as FVTPL when the financial asset is held-for-trading or it is a designated FVTPL on initial
recognition. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-
term.
Financial assets classified as FVTPL are stated at fair value with any resulting gain or loss recognized in income or loss
in the period in which they arise. Transaction costs related to financial assets classified as FVTPL are recognized
immediately in net income (loss).
Derivatives are categorized as held-for-trading. Derivatives are initially recognized at fair value on the date a derivative
contract is entered into and are subsequently remeasured at their fair value. Fair value of the Company’s recognized
commodity-based derivatives are based on the forward prices of the associated market index. Gains or losses are
recorded in the statement of income.
b) Held-to-Maturity Investments (“HTM”)
HTM investments are recognized on a trade-date basis and are initially measured at fair value, including transaction
costs. The Company does not have any assets classified as HTM investments.
Loans and Receivables
c)
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. They are stated at fair value, net of transaction costs and are classified as current or non-current assets
based on their maturity date. They are carried at amortized cost less any impairment. The impairment loss of receivables
is based on a review of all outstanding amounts at period end. Interest income is recognized by applying the effective
interest rate, except for short term receivables when the recognition of interest would not be material.
d) Available-For-Sale (“AFS”) Assets
AFS financial assets are non-derivatives that are either designated in this category or not classified in any of the other
categories.
AFS financial assets are subsequently 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 statement of financial position. Investments classified as available-for-sale are written down to fair value through
income whenever it is necessary to reflect prolonged or significant decline in the value of the assets. Realized gains and
losses on the disposal of available-for-sale securities are recognized in investment and other income.
The Company does not have any assets classified as AFS.
Impairment of Financial Assets
e)
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each period end. Financial
assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the
initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.
Objective evidence of impairment could include the following:
• significant financial difficulty of the issuer or counterparty;
• default or delinquency in interest or principal payments; or
• it has become probable that the borrower will enter bankruptcy or financial reorganization.
For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying
amount and the present value of the estimated future cash flows, discounted at the financial asset’s original effective
interest rate.
68
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
The carrying amount of all financial assets at amortized cost, excluding trade receivables, is directly reduced by the
impairment loss. The carrying amount of trade receivables is reduced through the use of an allowance account. When a
trade receivable is considered uncollectable, it is written off against the allowance account. Subsequent recoveries of
amounts previously written off are credited against the allowance account. Changes in the carrying amount of the
allowance account are recognized in income or loss.
With the exception of AFS equity instruments, if a subsequent period, the amount of the impairment loss decreases and
the decrease relates to an event occurring after the impairment was recognized, the previously recognized impairment
loss is reversed through income or loss. On the date of impairment reversal, the carrying amount of the financial asset
cannot exceed its amortized cost had impairment not been recognized.
Derecognition of Financial Assets
f)
A financial asset is derecognized when:
• the contractual right of the asset’s cash flows expire; or
• if the Company transfers the financial asset and substantially all risks and reward of ownership to another entity.
Financial Liabilities
ii.
Derivatives are categorized as held-for-trading. Derivatives are initially recognized at fair value on the date a derivative
contract is entered into and are subsequently remeasured at their fair value. Fair value of the Company’s recognized
commodity-based derivatives are based on the forward prices of the associated market index. Gains or losses are
recorded in the statement of income.
Long term debt and other financial liabilities are recognized initially at the fair value, net of transaction costs incurred,
and are subsequently stated at amortized cost. Any difference between the amounts originally received (net of transaction
costs) and the redemption value is recognized in the income statement of income over the period to maturity using the
effective interest method.
iii. Classification and Subsequent Measurements
The Company has designated each of its significant categories of financial instruments as follows:
Financial instrument
Classification
Cash and Cash Equivalents
Short Term Investments
Derivative Assets
Trade Receivable from Concentrate Sales
Other Accounts Receivables
Due from Related Parties
Long Term Receivables
Trade and Other Payables
Due to Related Parties
Derivative Liabilities
Income Tax Payable
Long Term Liabilities
FVTPL
FVTPL
FVTPL
FVTPL
Loans and receivables
Loans and receivables
Loans and receivables
Other liabilities
Other liabilities
FVTPL
Other liabilities
Other liabilities
Measurement
Fair value
Fair value
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
Effective Interest Method
iv.
The effective interest method calculates the amortized cost of a financial instrument and allocates interest income or
expense over the corresponding period. The effective interest rate is the rate that discounts estimated future cash
receipts or payments over the expected life of the financial instrument, or where appropriate, a shorter period, to the net
carrying amount on initial recognition. Income or expense is recognized on an effective interest basis for instruments
other than those financial instruments classified as FVTPL.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
n) Segment Reporting
A geographical segment is a distinguishable component of the entity that is engaged in providing products or services
within a particular economic environment and is subject to risks and returns that are different than those of segments
operating in other economic environments.
The business operations comprise the mining and processing of silver-lead, zinc, and silver-gold and the sale of these
products.
o) Leases
A lease is a finance lease when substantially all of the risks and rewards incidental to ownership of the leased asset are
transferred from the lessor to the lessee by the agreement. The leased assets are initially recorded at the lower of the
fair value and the present value of the minimum lease payments and are depreciated over the shorter of the asset’s
useful lives and the term of the lease. Interest on the lease instalments is recognized as interest expense over the lease
term using the effective interest method. Leases for land and buildings are recorded separately if the lease payments
can be allocated accordingly.
Leases that do not transfer all the risks and rewards of ownership are classified as operating leases. Payments are
recorded in the income statement using the straight line method over their estimated useful lives.
p) Share Capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of shares are shown in
equity as a deduction from the proceeds. Share-based payments including stock option plan, deferred share unit plan,
and restricted share unit plan are discussed in Note 2. j).
q) Related Party Transactions
Parties are considered to be related if one party has the ability directly, or indirectly, to control the other party or exercise
significant influence over the other party in making financial and operating decisions. Parties are also considered to be
related if they are subject to common control, related parties may be individuals or corporate entities. A transaction is
considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
Significant accounting judgments and estimates
r)
The preparation of consolidated financial statements requires management to make judgments and estimates that affect
the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses
during the reporting period. Actual outcomes could differ from these judgments and estimates. The consolidated financial
statements include judgments and estimates which, by their nature, are uncertain. The impacts of such judgments and
estimates are pervasive throughout the consolidated financial statements, and may require accounting adjustments
based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is
revised and the revision affects both current and future periods.
Significant assumptions about the future and other sources of judgments and estimates that management has made at
the statement of financial position date, that could result in a material adjustment to the carrying amounts of assets
and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to, the following:
i.
Critical Judgments
• The analysis of the functional currency for each entity of the Company. In concluding that the United States dollar
(“US$”) functional currency for its Peruvian and Mexican entities and the Canadian and Barbados entities have a
Canadian dollar (“CAD$”) functional currency, management considered the currency that mainly influences the cost
of providing goods and services in each jurisdiction in which the Company operates. As no single currency was
clearly dominant the Company also considered secondary indicators including the currency in which funds from
financing activities are denominated and the currency in which funds are retained.
• In concluding when commercial production has been achieved, the Company considered the following factors:
• all major capital expenditures to bring the mine to the condition necessary for it to be capable of operating in
the manner intended by management have been completed;
• the mine or mill is operating as per design capacity and metallurgical recoveries were achieved; and,
• the ability to sustain ongoing production of ore at a steady or increasing level.
• The identification of reportable segments, basis for measurement and disclosure of the segmented information.
70
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
• The determination of estimated useful lives and residual values of tangible and long-lived assets and the
measurement of depreciation expense.
• The identification of impairment indicators, cash generating units and determination of value in use and the write
down of tangible and long lived assets.
• Measurement of financial instruments involve significant judgments related to interpretation of the terms of the
instrument, identification, classification, impairment and the overall measurement to approximate fair values.
ii.
Estimates
• the recoverability of amounts receivable which are included in the consolidated statements of financial position;
• the estimation of assay grades of metal concentrates sold in the determination of the carrying value of accounts
receivable which are included in the consolidated statements of financial position and included as sales in the
consolidated statements of income;
• the carrying value of the short term investments and the recoverability of the carrying value which are included in
the consolidated statements of financial position;
• the determination of net realizable value of inventories on the consolidated statements of financial position;
• the estimated useful lives of property, plant and equipment which are included in the consolidated statements of
financial position and the related depreciation included in the consolidated statements of income;
• the determination of mineral reserves, carrying amount of mineral properties, and depletion of mineral properties
included in the consolidated statements of financial position and the related depletion included in the consolidated
statements of income;
• review of tangible and intangible assets carrying value, the determination of whether these assets are impaired
and the measurement of impairment charges or reversals which are included in the consolidated statements of
income;
• the determination of the fair value of financial instruments and derivatives included in the consolidated statements
of financial position;
• the fair value estimation of share-based awards included in the consolidated statements of financial position and
the inputs used in accounting for share-based compensation expense in the consolidated statements of income;
• the provision for income taxes which is included in the consolidated statements of income and composition of
deferred income tax asset and liabilities included in the consolidated statement of financial position;
• the recognition of deferred income tax assets, amounts recorded for uncertain tax positions, the measurement of
income tax expense and indirect taxes included in the consolidated statement of financial position;
• the inputs used in determining the net present value of the liability for provisions related to decommissioning and
restoration included in the consolidated statements of financial position;
• the inputs used in determining the various commitments and contingencies accrued in the consolidated statements
of financial position; and,
• the assessment of indications of impairment of each mineral properties and related determination of the net
realizable value and write-down of those properties where applicable.
s) new accounting Standards
The Company is currently assessing the impact of adopting the new accounting standards, noted below, on our
consolidated financial statements.
i)
New Accounting Standards Impacting on or after January 1, 2012
iFRS 7 Financial Instruments: Disclosures (Amendment)
The amendment, effective for annual periods beginning on or after July 1, 2011, with early application permitted, requires
additional quantitative and qualitative disclosures relating to transfers of financial assets, where: financial assets are
derecognized in their entirety, but where the entity has a continuing involvement in them; financial assets that are not
derecognized in their entirety.
iaS 12 Income Taxes (Amendment)
IAS 12 Income Taxes, amendments regarding Deferred Tax: Recovery of Underlying Assets introduces an exception to the
existing principle for the measurement of deferred tax assets and liabilities arising on investment property measured at
fair value, and the requirement that deferred tax on non-depreciable assets measured using the revaluation model in IAS
16 should always be measured on a sale basis. The amendment is effective for annual periods beginning on or after
January 1, 2012.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
ii) New Accounting Standards Impacting on or after July 1, 2012
iaS 1 Presentation of Financial Statements (Amendment)
The amendments to IAS 1 Presentation of Financial Statements require companies preparing financial statements in
accordance with IFRSs to group together items within OCI that may be reclassified to the profit or loss section of the
income statement. The amendments retain the 'one or two statement' approach at the option of the entity and only
revise the way other comprehensive income is presented: requiring separate subtotals for those elements which may be
'recycled' (e.g. cash-flow hedging, foreign currency translation), and those elements that will not (e.g. fair value through
OCI items under IFRS 9). In addition, the tax associated with items presented before tax to be shown separately for each
of the two groups of OCI items (without changing the option to present items of OCI either before tax or net of tax).
The amendment is effective for annual periods beginning on or after July 1, 2012.
iii) New Accounting Standards Impacting on or after January 1, 2013
iFRS 7 Financial Instruments: Disclosures in Respect of Offsetting (Amendment)
At its meeting on December 13-15, 2011, the IASB approved amendments to IFRS 7, Financial Instruments: Disclosures,
with respect to offsetting financial assets and financial liabilities. The common disclosure requirements issued by the
IASB and the FASB in December 2011 are intended to help investors and other users to better assess the effect or
potential effect of offsetting arrangements on a company's financial position. Companies and other entities are required
to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within
those annual periods. The required disclosures should be provided retrospectively.
iFRS 10 Consolidated Financial Statements
IFRS 10 Consolidated Financial Statements replaces the portion of IAS 27 Consolidated and Separate Financial
Statements that addresses the accounting for consolidated financial statements, and SIC12 Consolidation - Special
Purpose Entities. IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements
when an entity controls one or more entities. This standard (i) requires a parent entity (an entity that controls one or
more other entities) to present consolidated financial statements; (ii) defines the principle of control, and establishes
control as a basis for consolidation; (iii) sets out how to apply the principle of control whether an investor controls an
investee and therefore must consolidate the investee; and (iv) sets out the accounting requirements for the preparation
of consolidated financial statements.
IFRS 10 is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. IFRS 10
may be adopted to an earlier accounting period, but in doing so, an entity must disclose the fact that it has early adopted
the standard and apply IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Separate
Financial Statements (as amended in 2011), IAS 28 Investments in Associates and Joint Ventures (as amended in 2011).
iFRS 11 Joint Arrangements
IFRS 11 replaces IAS 31 Interest in Joint Ventures and SIC-13 Jointly-Controlled Entities-Non-Monetary Contributions by
Venturers. This standard establishes the core principle that a party to a joint arrangement determines the type of joint
arrangement in which it is involved by assessing its rights and obligations and accounts for those rights and obligations
in accordance with that type of joint arrangement (joint operations or joint ventures). This standard is effective for annual
periods on or after January 1, 2013, with early adoption permitted.
iFRS 12 Disclosure of Interests in Other Entities
IFRS 12 combines the disclosure requirements for an entity’s interest in subsidiaries, joint arrangements, associates
and structured entities into one comprehensive disclosure standard. This standard requires the disclosure of information
that enable users of financial statements to evaluate the nature of, and risks associated with, its interest in other entities
and the effects of those interests on its financial position, financial performance and cash flows. This standard is effective
for annual periods beginning on or after January 1, 2013, with early adoption permitted, and entities are permitted to
incorporate any of the new disclosures into their financial statements before that date.
72
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
iFRS 13 Fair Value Measurement
IFRS 13 Fair Value Measurement provides guidance on how to measure fair value, but does not change when fair value
is required or permitted under IFRS. IFRS 13 defines fair value, sets out a single IFRS framework for measuring fair value
and requires disclosures about fair value measurements. IFRS 13 applies when another IFRS requires or permits fair
value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs
to sell, based on fair value or disclosures about those measurements), except for: share-based payment transactions
within the scope of IFRS 2 Share-based Payment; leasing transactions with the scope of IAS 17 Leases; measurements
that have some similarities to fair value that are not fair value, such as net realizable value in IAS 2 Inventories; or value
in use IAS 36 Impairment of Assets. This standard is effective for annual periods beginning on or after January 1, 2013,
with early adoption permitted.
iaS 19 Post-employment Benefits
On June 16, 2011 the IASB issued amendments to IAS 19, Employee Benefit, in order to improve the accounting for
pensions and other post-employment benefits.
The amendments make important improvements by:
• eliminating the option to defer the recognition of gains and losses, known as the ‘corridor method’ or the “deferral
and amortization approach”;
• streamlining the presentation of changes in assets and liabilities arising from defined benefit plans, including
requiring re-measurements to be presented in OCI, thereby separating those changes from changes that many
perceive to be the result of an entity’s day-to-day operations;
• enhancing the disclosure requirements for defined benefit plans, providing better information about the
characteristics of defined benefit plans and the risks that entities are exposed to through participation in those
plans.
The amendments are effective for financial years beginning on or after January 1, 2013. Earlier application is permitted.
iaS 27 Separate Financial Statements
IAS 27 has the objective of setting standards to be applied in accounting for investments in subsidiaries, jointly controlled
entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated)
financial statements. This standard is effective for annual periods beginning on or after January 1, 2013, with early
adoption permitted. This standard will not have an impact on the consolidated financial statements.
iaS 28 Investments in Associates and Joint Ventures
IAS 28 prescribes the accounting for investments in associates and to set the requirements for the application of the
equity method when accounting for investments in associates and joint ventures. This standard is effective for annual
periods beginning on or after January 1, 2013, with early adoption permitted.
iv) New Accounting Standards Impacting on or after January 1, 2014
iaS 32 Financial Instruments - Presentation in Respect of Offsetting (Amendment)
At its meeting on December 13-15, 2011, the IASB approved amendments to IFRS 7, Financial Instruments: Disclosures,
with respect to offsetting financial assets and financial liabilities. As part of this project the IASB also clarified aspects
of IAS 32, Financial Instruments: Presentation. The amendments to IAS 32 address inconsistencies in current practice
when applying the requirements. The amendments are effective for annual periods beginning on or after January 1, 2014
and are required to be applied retrospectively.
v) New Accounting Standards Impacting on or after January 1, 2015
iFRS 9 Financial Instruments - Classification and Measurement
IFRS 9, Financial Instruments: IFRS 9 introduces the new requirements for the classification, measurement and de-
recognition of financial assets and financial liabilities. Specifically, IFRS 9 requires all recognized financial assets that
are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at
amortized cost or fair value, and all financial liabilities classified as subsequently measured at amortized cost except for
financial liabilities as at FVTPL. The amendments are effective for annual periods beginning on or after January 1, 2015,
with earlier application permitted.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
3. CASH AND CASH EQUIVALENTS
Cash
Cash equivalents
december 31,
2011
december 31,
2010
january 1,
2010
$ 25,652
13,078
$ 61,118
9,180
$ 21,863
8,900
$
38,730
$ 70,298
$ 30,763
Cash and cash equivalents include cash on hand, demand deposits, and money market instruments, with maturities
from the date of acquisition of 90 days or less.
4. SHORT TERM INVESTMENTS
Held for trading short term investments
$ 17,000
$
20,509
$
6,034
Short term investments include deposits with maturities from the date of acquisition of more than 90 days.
december 31,
2011
december 31,
2010
january 1,
2010
5. DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES
Lead Asian options
Zinc Asian options
Lead forward contracts
Zinc forward contracts
Silver forward contracts
Total
december 31, 2011
december 31, 2010
january 1, 2010
assets
Liabilities
assets
Liabilities
assets
Liabilities
$ –
–
–
70
–
$ 70
$ –
–
53
–
34
$ 87
$ –
–
–
–
–
$ –
$ –
–
14
6
113
$ 133
$ 2
–
–
–
35
$ –
263
1,356
1,473
–
$ 37
$ 3,092
The Company occasionally 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. As at the end of the year
no such contracts are outstanding.
Additionally, the Company enters regularly into short term forward and 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 forward sale and option contracts are settled against the arithmetic average of metal spot prices
over the month in which the contract matures. No initial premium associated with these trades has been paid.
74
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
6. ACCOUNTS RECEIVABLE AND OTHER ASSETS AND DEPOSITS
ON LONG TERM ASSETS
The current accounts receivables and other assets are comprised of the following:
Current
Trade receivables from concentrate sales
Current portion of long term receivables - net
Prepaid expenses
Deposits
Advances and other receivables
Accounts receivable and other assets
GST/HST and value added tax receivable
december 31,
2011
december 31,
2010
january 1,
2010
$ 11,287
891
1,171
47
2,213
$ 11,224
39
903
–
1,288
$ 15,609
$ 13,454
$
4,777
$
3,542
$
$
$
7,154
121
313
24
1,023
8,635
601
Deposits on long term assets includes the non-current accounts receivable and other assets comprised of the following:
december 31,
2011
december 31,
2010
january 1,
2010
non-current
Long term receivables
Less: current portion of long term receivables
Non-current portion of long term receivables – net
Deposits on equipment
Deposits paid to contractors
Other
$
1,415
$
(891)
524
1,167
448
121
47
(39)
8
3,097
1,581
–
$
2,260
$
4,686
$
$
137
(121)
16
–
–
–
16
As at December 31, 2011, the Company had $100 trade receivables (2010: $nil) (January 1, 2010: $nil) which were
past due with no impairment. The Company’s allowance for doubtful accounts is $nil for all reporting periods.
The aging analysis of these trade receivables is as follows:
0-30 days
31-60 days
61-90 days
over 90 days
december 31,
2011
december 31,
2010
january 1,
2010
$
9,518
911
758
100
$
9,754
1,057
413
–
$
7,154
–
–
–
$ 11,287
$ 11,224
$
7,154
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
7.
INVENTORIES
For the years ended December 31, 2011, $31,655 (2010: $22,270) of inventory was expensed in cost of sales and
there has been no impairment during 2011 (2010: $nil).
Concentrate stock piles
Ore stock piles
Materials and supplies
Total inventories
december 31,
2011
december 31,
2010
january 1,
2010
$
2,488
4,008
4,795
$
346
1,274
2,398
$
651
203
1,474
$ 11,291
$
4,018
$
2,328
8. MINERAL PROPERTIES, PROPERTY, PLANT AND EQUIPMENT
Mineral
Properties
non-
depletable
Mineral
Properties
depletable
(Caylloma,
San jose*)
Land
Machinery buildings, and
Leasehold
improvements
and
equipment
Furniture
and other
equipment
Transport
units
equipment
under
Finance
Lease
Capital
Work in
Progress
Total
year ended december 31, 2011
Opening carrying amount
Additions
Disposals
Depreciation charge
Impairment charge
Reclassification
$ 49,129
6,258
–
–
–
(48,076)
$ 33,608
30,091
–
(6,107)
–
48,076
$ 6,897
5,429
(1,532)
(1,847)
(1,688)
10,057
$ 7,013
729
–
(1,820)
(195)
31,725
$ 3,177
2,032
(33)
(334)
–
(1,657)
$ 112
131
–
(97)
(11)
–
$ 2,893
500
–
(873)
–
–
$ 14,534
33,837
–
–
–
(40,125)
$ 117,363
79,007
(1,565)
(11,078)
(1,894)
–
Closing carrying amount
$ 7,311
$ 105,668
$ 17,316
$ 37,452
$ 3,185
$ 135
$ 2,520
$ 8,246
$ 181,833
as at december 31, 2011
Cost
Accumulated depreciation
and impairment
7,311
125,667
$ 22,870
$ 41,212
$ 4,296
$ 520
$ 4,674
$ 8,246
$ 214,796
–
(19,999)
(5,554)
(3,760)
(1,111)
(385)
(2,154)
–
(32,963)
Closing carrying amount
$ 7,311
$ 105,668
$ 17,316
$ 37,452
$ 3,185
$ 135
$ 2,520
$ 8,246
$ 181,833
* Commercial production began on September 1, 2011 for San Jose and included in mineral properties non-depletable as at
December 31, 2010 and January 1, 2010.
In 2011, non-depletable mineral properties include the following properties: Mario, Don Mario, Tlacolula, and Taviche.
Mineral
Properties
non-
depletable
Mineral
Properties
depletable
(Caylloma)
Land
Machinery buildings, and
Leasehold
improvements
and
equipment
Furniture
and other
equipment
Transport
units
equipment
under
Finance
Lease
Capital
Work in
Progress
Total
Year ended December 31, 2010
Opening carrying amount
Additions
Disposals
Depreciation charge
Reclassification
$ 39,907
9,334
(112)
–
–
$ 28,370
8,499
(443)
(3,604)
786
$ 6,916
1,729
(20)
(1,509)
(219)
$ 4,033
155
(1)
(768)
3,594
$ 1,117
2,542
(10)
(273)
(199)
Closing carrying amount
$ 49,129
$ 33,608
$ 6,897
$ 7,013
$ 3,177
$ 197
88
(67)
(106)
–
$ 112
$ 2,682
928
–
(664)
(53)
$ 1,953
16,490
–
–
(3,909)
$ 85,175
39,765
(653)
(6,924)
–-
$ 2,893
$ 14,534
$ 117,363
As at December 31, 2010
Cost
Accumulated depreciation
and impairment
49,129
47,500
$ 11,060
$ 9,076
$ 3,985
$ 436
$ 4,174
$ 14,534
$ 139,894
–
(13,892)
(4,163)
(2,063)
(808)
(324)
(1,281)
–
(22,531)
Closing carrying amount
$ 49,129
$ 33,608
$ 6,897
$ 7,013
$ 3,177
$ 112
$ 2,893
$ 14,534
$ 117,363
76
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
Mineral
Properties
non-
depletable
Mineral
Properties
depletable
(Caylloma)
Machinery
and
equipment
Land
and
buildings
Furniture
and other
equipment
Transport
units
equipment
under
Finance
Lease
Capital
Work in
Progress
Total
As at January 1, 2010
Opening carrying amount
Additions
Disposals
Depreciation charge
Reclassification
$ 35,755
5,402
(1,250)
–
–
$ 25,947
5,019
–
(2,596)
–
$ 6,661
418
(77)
(1,250)
1,164
$ 3,365
138
(1)
(392)
923
$ 1,025
229
(26)
(216)
105
Closing carrying amount
$ 39,907
$ 28,370
$ 6,916
$ 4,033
$ 1,117
$ 392
–
(80)
(115)
–
$ 197
$ 1,629
1,425
(23)
(349)
–
$ 1,493
2,652
–
–
(2,192)
$ 76,267
15,283
(1,457)
(4,918)
–
$ 2,682
$ 1,953
$ 85,175
As at January 1, 2010
Cost
Accumulated depreciation
and impairment
39,907
38,658
$ 9,933
$ 5,071
$ 1,548
$ 437
$ 3,249
$ 1,953 $ 100,756
–
(10,288)
(3,017)
(1,038)
(431)
(240)
(567)
–
(15,581)
Closing carrying amount
$ 39,907
$ 28,370
$ 6,916
$ 4,033
$ 1,117
$ 197
$ 2,682
$ 1,953
$ 85,175
Mineral properties includes bonuses paid of $1,350 (2010: $nil) (January 1, 2010: $nil) which were paid upon
commissioning of the San Jose mine to a director, a director and officer, and an officer. The bonus comprises of $1,113
paid to key management and $237 paid to a company controlled by a director. Refer to Note 10 Related Party
Transactions.
a) Mario Property
In May 2011, the Company entered into an agreement to acquire a 100% interest in the Mario Property, located in the
Department of Junin in central Peru. Under the terms of the agreement, the Company is granted the exclusive right and
option to purchase an undivided 100% interest in the Mario Property subject to the following payments:
1. $500 on signing of agreement;
2. $500 on or before six months from the signing of the agreement;
3. $500 on or before 12 months from the signing of the agreement; and,
4. $2,500 on or before 24 months from the signing of the agreement.
The transfer of the property to the Company is subject to a 1% net smelter return (“NSR”) royalty on production from the
property payable to Crocodile Gold (“Crocodile”). The Company shall have the right to purchase the NSR royalty from
Crocodile at any time during the five-year period following the final option payment for the sum of $3,000. The property
is also subject to a 2% NSR royalty on production payable to Teck Cominco and a 0.5% NSR royalty on production payable
to Socrate Capital Inc., with each royalty in turn subject to certain buy-back provisions. As at December 31, 2011, $1,000
has been paid under the agreement.
b) don Mario Property
The Company entered into an option agreement, effective July 20, 2011, to acquire 100% interest in the Don Mario
property, with Consorcio Empresarial Agmin S.A.C.(“AGMIN”). Under the terms of the mining assignment and option to
purchase mineral rights agreement (“agreement”), the Company is required to make the following payments:
1. $200 on signing the agreement;
2. $300 after 12 months from signing the agreement;
3. $500 after 24 months from signing the agreement; and,
4. $2,000 after 36 months from signing the agreement.
Under the terms of the agreement, once the option is exercised and technical report is prepared under National
Instrument 43-101 and published, if the pre-feasibility study indicates that the property contains more than five million
silver equivalent ounces, the Company would further pay AGMIN, one dollar for each additional resource and reserves
indicated in the pre-feasibility report. The Company has the option to buy-out the additional pay-out for a further $3,000,
subject to certain conditions.
As at December 31, 2011, $200 has been paid under the agreement.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
Tlacolula Property
c)
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 described further in Note 10).
The Company can earn the Interest by spending $2,000, which includes a commitment to drill 1,500 meters within three
years, and making staged annual payments of $250 cash and $250 in common stock of the Company to Radius according
to the following schedule:
• $20 cash and $20 cash equivalent in shares upon stock exchange approval;
• $30 cash and $30 cash equivalent in shares by the first year anniversary;
• $50 cash and $50 cash equivalent in shares by the second year anniversary;
• $50 cash and $50 cash equivalent in shares by the third year anniversary; and,
• $100 cash and $100 cash equivalent in shares by the fourth year anniversary.
Upon completion of the cash payments and share issuances, and 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 at a fair market value of $2.56 per share and paid $20 cash according to the terms of the option
agreement.
On January 14, 2011, the Company issued 6,756 common shares of the Company, at a fair market value of $4.44 per
share and paid $30 cash according to the terms of the option agreement.
Subsequent to December 31, 2011, on January 13, 2012, the Company issued 8,605 common shares of the Company,
at a fair market value of $5.81 per share and paid $50 cash according to the terms of the option agreement.
d) Taviche Property
In 2010, the Company included the idle plant in Taviche as part of the San Jose mine plant as it was more likely than
not that the idle plant could be used to treat excess ore from San Jose or from surrounding areas where the Company
was conducting exploration. On September 1, 2011, the San Jose mine plant commenced commercial production and in
the fourth quarter of 2011, achieved an average of 955 tonnes milled per day with the San Jose plant having sufficient
capacity for the production. In the fourth quarter, management reassessed the usability of the idle plant and in
conjunction, obtained an independent third party appraisal of various assets acquired under an asset purchase agreement
dated 2007 related to the Taviche property.
Management used the fair value less cost to sell method to determine the recoverable amount of the idle plant. Based
upon an independent appraisal of the assets, which is in accordance with fair value less cost to sell, the Company has
taken an impairment charge of $1.89 million that comprised of the following impairments: $1.08 million on the tailing
dam, $0.14 million on the mine infrastructure, and $0.67 million on equipment, machinery, and buildings. As at December
31, 2011, the net book value of assets related to the Taviche property for machinery, and equipment amount to $0.36
million.
9. TRADE AND OTHER PAYABLES
Trade accounts payable
Payroll and other payables
Restricted share unit payable
december 31,
2011
december 31,
2010
january 1,
2010
$
8,800
7,152
1,204
$
3,967
5,249
87
$
2,580
2,556
–
$ 17,156
$
9,303
$
5,136
78
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
10. RELATED PARTY TRANSACTIONS
The consolidated financial statements include the financial statements of Fortuna Silver Mines Inc. and it subsidiaries
listed in the following table:
name
Country of incorporation
Minera Bateas S.A.C.
Fortuna Silver Mines Peru S.A.C.
Compania Minera Cuzcatlan SA
Fortuna Silver Mexico, S.A. de CV
Fortuna Silver (Barbados) Inc.
Continuum Resources Ltd.
Peru
Peru
Mexico
Mexico
Barbados
Canada
Fortuna Silver Mexico, S.A. de CV was incorporated in 2011.
a) Purchase of goods and Services
The Company entered into the following related party transactions:
Transaction with related parties
Salaries and wages 1, 2
Other general and administrative expenses 2
Leasehold improvements 2
equity interest as at december 31,
2011
100%
100%
100%
100%
100%
100%
2010
100%
100%
100%
n/a
100%
100%
year ended december 31
2011
173
292
93
558
$
$
2010
174
185
–
359
$
$
1
Salaries and wages includes employees' salaries and benefits charged to the Company based on a percentage of the estimated
hours worked for the Company.
2 Radius Gold Inc. (“Radius”) has directors in common with the Company and shares office space, and is reimbursed for salaries and
wages, general and administrative costs, and leasehold improvements incurred on behalf of the Company.
During the year ended December 31, 2011, the Company transferred two mining concessions to Focus Ventures Ltd., a
Company with directors in common, in exchange for a 1% net smelter return royalty.
During the year ended December 31, 2011, the Company issued 6,756 (2010: 7,813) common shares, at a fair market
value of $4.44 (2010: $2.56) per share and paid $30 cash (2010: $20) to Radius, under the option to acquire a 60%
interest in Tlacolula silver project located in the State of Oaxaca, Mexico.
Subsequent to the year ended December 31, 2011 to March 23, 2012, the Company issued 8,605 common shares, at
a fair market value of $5.81 per share and paid $50 cash to Radius, under the option to acquire a 60% interest in
Tlacolula silver project located in the State of Oaxaca, Mexico.
b) Key Management Compensation
Key management includes all persons named or performing the duties of Vice-President, Chief Financial Officer, President,
Chief Executive Officer, and non-executive Directors of the Company. The compensation paid and payable to key
management for services is shown below:
Salaries and other short term employee benefits
Directors fees
Consulting fees
Share-based payments
year ended december 31
2011
3,492
333
416
4,398
8,639
$
$
$
2010
2,633
300
174
188
3,295
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
The share-based payments includes the change in the DSU and RSU fair value over each reporting period and payments
made under the DSU and RSU plans and the non-cancellation of share options.
Consulting fees includes fees paid to two non-executive directors in both 2011 and 2010.
c) year-end balances arising from Purchases of goods/Services
amounts due to/(from) related parties
Owing from a director and officer 3
Owing to a company with common directors 2
december 31,
2011
december 31,
2010
january 1,
2010
$
$
(36)
205
169
$
$
(1)
41
40
$
$
(1)
50
49
3 Owing from a director includes non-interest bearing advances to a director and officers at December 31, 2011 and one officer and
director at December 31, 2010 and January 1, 2010.
11. LEASES AND LONG TERM LIABILITIES
Leases and long term liabilities are comprised of the following:
Obligations under finance lease (a)
Long term liability (b)
Deferred share units (Note 14 c))
Restricted share units (Note 14 d))
Less: current portion
Obligations under finance lease
Long term liability
Current portion of long term liability
Restricted share unit payable, current (Note 9)
december 31,
2011
december 31,
2010
january 1,
2010
$
866
771
2,639
1,204
5,480
741
771
1,512
1,204
$
1,545
705
1,955
131
4,336
1,083
–
1,083
87
$
1,848
644
–
–
2,492
1,038
–
1,038
–
Leases and long term liability, non-current
$
2,764
$
3,166
$
1,454
a) obligations under Finance Lease
The following is a schedule of the Company’s future minimum lease payments. These are related to the acquisition of
mining equipment, vehicles, and buildings.
obligations under Finance Lease
Not later than 1 year
Less: future finance charges on finance lease
Later than 1 year but less than 5 years
Less: future finance charges on finance lease
Present value of finance lease payments
december 31,
2011
december 31,
2010
january 1,
2010
$
$
763
(22)
741
126
(1)
125
866
$
1,150
$
(67)
1,083
472
(10)
462
1,151
(113)
1,038
862
(52)
810
$
1,545
$
1,848
b) Long Term Liabilities
In May 2008, the Company acquired the Monte Alban II concession for which a payment of $800 is due May 2012. This
payment is non-interest bearing.
80
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
12. PROVISIONS
A summary of the Company’s provisions for other liabilities and charges is presented below:
Balance – January 1, 2010
New provisions
Increase to existing provisions
Accretion of provisions (Note 20)
Foreign exchange differences
Balance – December 31, 2010
Increase to existing provisions
Accretion of provisions (Note 20)
Foreign exchange differences
Cash payments
Total provisions – december 31, 2011
Less: current portion
non current – december 31, 2011
decommissioning
and Restoration
Liability
$
$
$
$
2,917
1,583
125
163
93
4,881
126
173
(5)
(201)
4,974
(727)
4,247
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 decommissioning and restoration liability
relating to the Caylloma and San Jose 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 properties, property, plant and equipment balance.
13. INCOME TAX
a) Income tax expense differs from the amount that would be computed by applying the Canadian statutory income tax
rate of 26.50% (2010: 28.50%) to income before income taxes. The reasons for the differences are as follows:
Income before tax
Statutory income tax rate
Expected income tax
Items non-deductible for income tax purposes
Difference between Canadian and foreign tax rates
Effect of change in tax rates
Impact of foreign exchange on tax assets and liabilities
Impact of Mexican inflation on tax values
Under (over) provided in prior periods
Unused tax losses and tax offsets not recognized in tax asset
Total income taxes
Represented by:
Current income tax
Deferred income tax
december 31
2011
december 31
2010
$ 38,335
26.50%
$ 10,159
1,401
1,376
620
3,271
(16)
704
1,287
$ 27,513
28.50%
$
7,841
292
874
431
(133)
(130)
(1,495)
3,830
$ 18,802
$ 11,510
$ 14,607
4,195
$
8,620
2,890
$ 18,802
$ 11,510
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
The effective tax rate for the years ended December 31, 2011 and 2010 was 49.05% and 41.8%, respectively. The
change in the effective tax rate was primarily attributable to the geographical mix of income, fluctuations in exchange
rates for foreign currency, the impact of foreign exchange on the tax basis on non-monetary assets, and the non-
recognition of tax benefits.
Effective January 1, 2011, the Canadian Federal corporate tax rate decreased from 18% to 16.5% and the British
Columbia provincial tax decreased from 10.5% to 10%. The overall reduction in tax rates has resulted in a decrease in
the Company’s statutory tax rate from 28.50% to 26.50%.
In 2009, the Mexican government approved tax reform that includes a 2% increase in the income tax rate in Mexico from
28% to 30% for a three-year period starting in 2010.
Income taxes payable of $3,923 (December 31, 2010: $4,192, January 1, 2010 $2,949) relates to current taxes.
b) The tax effected items that give rise to significant portions of the deferred income tax assets and deferred income
tax liabilities at December 31, 2011 and 2010 are presented below:
Deferred income tax assets:
Non-capital losses
Provisions and other
Financial derivatives
Mineral properties, property, plant and equipment
Net deferred income tax assets
Deferred income tax liabilities:
Mineral properties – Peru
Mineral properties – Mexico
Equipment
Total deferred income tax liabilities
Net deferred income tax liabilities
Classification
Non-current assets
Non-current liabilities
december 31
2011
december 31
2010
$ 12,544
2,059
5
296
14,904
$
$
$
$
(11,790)
(5,640)
(10,148)
(27,578)
(12,674)
36
(12,710)
$
$
$
$
$
2,939
1,095
42
186
4,262
(9,912)
(2,832)
–
(12,744)
(8,482)
–
(8,482)
Net deferred income tax liabilities
$
(12,674)
$
(8,482)
c) The Company recognizes tax benefits on losses or other deductible amounts generated in countries where the probable
criteria for the recognition of deferred tax assets has been met. The Company’s unrecognized deductible temporary
differences and unused tax losses for which no deferred tax asset is recognized consist of the following amounts:
Non-capital losses
Provisions and other
Share issue cost
Mineral properties, property, plant and equipment
Unrecognized deductible temporary differences
december 31
2011
december 31
2010
$ 38,503
3,841
2,913
1,532
$ 29,689
3,563
4,146
3,966
$
46,789
$
41,364
82
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
The Company’s unrecognized deferred tax assets related to unused tax losses have the following expiry dates:
Non-capital losses, expiring as follows:
Canada
Mexico
Barbados
14. SHARE CAPITAL
expiry date
2013 - 2031
2016 - 2031
2017 - 2020
$
35,346
2,850
172
$
38,368
a) unlimited Common Shares Without Par Value
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: 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.
During the year ended December 31, 2011, the Company issued 6,756 (2010: 7,813) common shares, at a fair market
value of $4.44 (2010: $2.56) per share to Radius Gold, under the option to acquire a 60% interest in Tlacolula silver
project located in the State of Oaxaca, Mexico.
Subsequent to the year ended December 31, 2011 to March 23, 2012, the Company issued 8,605 common shares, at
a fair market value of $5.81 per share to Radius Gold, under the option to acquire a 60% interest in Tlacolula silver
project located in the State of Oaxaca, Mexico.
b) Share options
The Company’s stock option plan, approved by the shareholders on August 30, 2006 and accepted by the TSX Venture
Exchange on October 16, 2006 provides a rolling maximum of the issuance of common treasury shares equal to up to
ten percent of the issued and outstanding common shares with no vesting provisions. The exercise price of the optioned
shares are no less than the market price, with a maximum term of ten years from grant. Shareholder approval of the
Company’s stock option plan was not obtained at the Company’s annual general meeting held on June 23, 2010.
Shareholder approval of the Company’s new Stock Option Plan (the “New Plan”), dated April 11, 2011, was obtained at
the Company’s annual general meeting held on May 26, 2011. The New Plan provides that the number of common shares
of the Company issuable under the Plan, together with all of the Company’s other previously established or proposed
share compensation arrangements, may not exceed 12,200,000 shares, which equals 9.92% of the current total number
of issued and outstanding common shares of the Company, as at April 11, 2011.
Option pricing models require the input of highly subjective assumptions including the estimate of the share price volatility,
risk-free interest rate and expected life of the options. Changes in the subjective input assumptions can materially affect
the fair value estimate.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
The following is a summary of option transactions:
Outstanding at beginning of the year
Granted
Exercised
Cancelled
Forfeited
Outstanding at end of the year
Vested and exercisable at end of the year
december 31, 2011
december 31, 2010
Shares
(in 000’s)
4,551
1,792
(2,442)
–
(25)
3,876
2,557
Weighted
average
exercise price
(Cad$)
$ 1.51
4.46
1.55
–
4.46
$ 2.83
$ 1.99
Shares
(in 000’s)
8,215
–
(999)
(2,665)
–
4,551
4,551
Weighted
average
exercise Price
(Cad$)
$ 1.50
–
1.03
1.62
–
$ 1.51
$ 1.51
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.
During the year ended December 31, 2011, 1,792,289 share purchase options were granted with an exercise price of
CAD$4.46 per share with a term of three years and vesting 25% within six months of grant date, 50% within 12 months
of grant date, 75% within 18 months of grant date, and fully vested after 24 months of grant date. As at December 31,
2011, 24,814 share purchase options were forfeited and 8,271 share purchase options were accelerated to expire
March 8, 2012. The share based compensation charge of $1,830 covering option grants, forfeitures, and accelerated
vesting, was recognized for the year ended December 31, 2011 has been determined under the fair value method using
the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate
Expected stock price volatility
Expected term in years
Expected dividend yield
Expected forfeiture rate
year ended december 31
2011
1.91%
56.48%
3
0%
1.38%
2010
n/a
n/a
n/a
n/a
n/a
The expected volatility assumption is based on the historical volatility of the Company’s Canadian dollar common share
price on the Toronto Stock Exchange.
The following table summarizes information related to stock options outstanding and exercisable at December 31, 2011:
exercise price
in Cad$
$0.80 to $0.99
$1.00 to $1.99
$2.00 to $4.46
$0.80 to $4.46
number of
outstanding
share purchase
options (in 000’s)
816
693
2,367
3,876
Weighted average
remaining
contractual life
of outstanding
share purchase
options (years)
Weighted average
exercise price on
outstanding share
purchase options
Cad$
exercisable
share purchase
options
(in 000’s)
Weighted average
exercise price on
exercisable share
purchase options
Cad$
6.8
4.4
3.0
4.1
$ 0.85
1.53
3.90
$ 2.83
816
693
1,048
2,557
$ 0.85
1.53
3.19
$ 1.99
Subsequent to December 31, 2011 to March 23, 2012, 184,138 share purchase options were granted with an exercise
price of CAD$6.67 per share with a term of five years and vesting 33.33% within twelve months of grant date, 33.33%
within 24 months of grant date, and 33.34% within thirty six months of grant date.
84
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
Subsequent to December 31, 2011, 49,628 share purchase options were forfeited and 41,542 share purchase options
were accelerated to expire March 30, 2012.
Subsequent to December 31, 2011 to March 23, 2012, 314,225 share purchase options were exercised at prices
ranging from CAD$0.85 to CAD$4.46 per share, resulting in issued and outstanding shares of 125,268,751.
c) deferred Share units (“dSu”) Cost
During 2010, the Company implemented a DSU 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.
During the year ended December 31, 2011, 70,000 DSU were settled in cash for $5.36 per unit for a total payment
of $375.
During the year ended December 31, 2011, the Company granted 48,824 DSU with a market value of CAD$232, at the
date of grant, to a director, and 93,544 DSU with a market value of CAD$473, at the date of grant, to a director, with
vesting subject to the commissioning of the San Jose mine, which occurred on September 1, 2011.
During the year ended December 31, 2010, the Company granted 409,097 DSU with a market value of CAD$1,358, at
the date of grant, to directors.
As at December 31, 2011, there are 481,465 (2010: 409,097) DSU outstanding with a fair value of $2,639 (2010:
$1,955).
d) Restricted Share units (“RSu”) Cost
During 2010, the Company implemented a RSU plan for certain employees or officers. The RSU entitle employees or
officers to a cash payment after the end of a performance period of 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 RSU held by the employee.
During the year ended December 31, 2011, the Company granted 155,674 RSU with a market value of CAD$788, at the
date of grant, to a director, with vesting subject to the commissioning of the San Jose mine, which occurred on September
1, 2011.
During the year ended December 31, 2011, the Company paid $736 (2010: $nil) on 109,557 (2010: nil) RSU to directors,
a former director, and officers of the Company.
As at December 31, 2011, there are 265,231 (2010: 219,114) RSU outstanding with a fair value of $1,204 (2010:
$131).
e) earnings per Share
Basic
i.
Basic earnings per share is calculated by dividing the income for the year by the weighted average number of shares
outstanding during the year.
The following table sets forth the computation of basic earnings per share:
Income available to equity owners
Weighted average number of shares (in '000's)
Earnings per share – basic
year ended december 31
2011
2010
$ 19,533
$ 16,003
123,295
108,120
$
0.16
$
0.15
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
ii. Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to assume
conversion of all potentially dilutive shares. The following table sets forth the computation of diluted earnings per share:
Income available to equity owners
Weighted average number of shares ('000's)
Incremental shares from share options
Weighted average diluted shares outstanding
Earnings per share – diluted
year ended december 31
2011
2010
$ 19,533
$ 16,003
123,295
1,417
124,712
108,120
2,445
110,565
$
0.16
$
0.14
15. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash Investing and Financing Activities:
Issuance of shares on purchase of mineral properties, property,
plant and equipment
8
$
30
$
20
note
years ended december 31
2011
2010
16. 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 equity and available credit facility, 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, 2011, are
sufficient for its present needs for at least 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.
17. MANAGEMENT OF FINANCIAL RISK
The Company’s financial instruments are exposed to certain financial risks, including currency risk, credit risk, liquidity
risk, interest risk, and price risk. The Company’s Board of Directors has overall responsibility for the establishment and
oversight of the Company’s risk management framework and reviews the Company’s policies on an ongoing basis.
a) Fair Value of Financial instruments
The carrying value of cash and cash equivalents, short term investments, derivative assets, trade receivable from
concentrate sales, other accounts receivables, trade and other payables, due to related parties, and derivative liabilities
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.
The amortized value of long term receivables approximates their fair value as these are measured at the amortized cost
using the effective interest method. The fair value of the lease and long term liabilities is $5,531 as at December 31, 2011.
86
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
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 trade receivable from concentrate sales, 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.
Financial assets (liabilities) at fair value as at december 31, 2011
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
Short term investments
Trade receivable from concentrate sales
Derivatives
$
$
38,730
17,000
–
–
–
–
11,287
(17)
$
$
55,730
$
11,270
$
–
–
–
–
–
$
38,730
17,000
11,287
(17)
$
67,000
There were no changes in the levels during the year ended December 31, 2011.
Financial assets (liabilities) at fair value as at december 31, 2010
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
Short term investments
Trade receivable from concentrate sales
Derivatives
$
$
70,298
20,509
–
–
–
–
12,551
(133)
$
$
90,807
$
12,418
$
–
–
–
–
–
$
70,298
20,509
12,551
(133)
$
103,225
There were no changes in the levels during the year ended December 31, 2010.
Accounts receivable includes trade receivable from concentrate sales, provisional price adjustments, and final price
adjustments. 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. As such, these accounts receivable are classified within
level 2 of the fair value hierarchy.
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, 2011, there have been no changes in the classification of financial assets and
liabilities in levels 1, 2, and 3 of the hierarchy.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
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 and Mexico 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 income, financial position, or cash flows. The Company has
not hedged its exposure to currency fluctuations.
As at December 31, 2011, 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
Accounts receivable and other assets
Deposits on long term assets
Trade and other payables
Provisions, current
Income tax payable
Leases and long term liabilities
Provisions
december 31, 2011
Canadian
dollars
nuevo
Soles
Mexican
Pesos
Canadian
dollars
december 31, 2010
nuevo
Soles
Mexican
Pesos
$ 18,457
42
–
(1,580)
–
–
(2,691)
–
S/. 1,396
5,657
–
(17,993)
(1,351)
(10,581)
–
(8,079)
$ 1,758
58,939
–
(24,310)
(3,163)
–
–
(17,494)
$ 54,782
71
–
(625)
–
–
(1,999)
–
S/. 741
1,304
–
(15,493)
–
(11,775)
–
(9,169)
$ 2,201
42,452
24,209
(6,390)
–
–
–
(19,959)
Total
14,228
(30,951)
15,730
52,229
(34,392)
42,513
Total US$ equivalent
13,950
(11,476)
1,125
52,219
(12,244)
3,440
Based on the above net exposure as at December 31, 2011, 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,
as follows: impact to other comprehensive income of $1,550 (2010: $5,802) and a net loss of $1,150 (2010: $978).
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.
The Company’s maximum exposure to credit risk at December 31, 2011 is as follows:
Cash and cash equivalents
Short term investments
Accounts receivable
Derivative assets
Due from related parties
GST/HST and value added tax receivable
december 31
2011
december 31
2010
$ 38,730
17,000
14,391
70
36
4,777
$ 70,298
20,509
12,551
–
–
3,542
$ 75,004
$ 106,900
The carrying amount of financial assets recorded in the financial statements represents the Company’s maximum
exposure to credit risk. The Company believes it is not exposed to significant credit risk and overall, the Company’s credit
risk has not declined significantly from the prior year.
88
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
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), finance leases, and other
contractual commitments:
Trade and other payables
Due to related parties
Derivative liabilities
Income tax payable
Long term liabilities
Operating leases
Provisions
expected payments due by period as at december 31, 2011
Less than
1 year
$ 17,156
205
87
3,923
1,534
696
734
$ 24,335
1–3 years
4–5 years
$ –
–
–
–
2,765
1,410
849
$ 5,024
$ –
–
–
–
–
1,177
774
$ 1,951
after
5 years
$ –
–
–
–
–
531
3,725
$ 4,256
Total
$ 17,156
205
87
3,923
4,299
3,814
6,082
$ 35,566
Operating leases includes leases for office premises, computer and other equipment used in the normal course of
business. Refer to Note 19 c) for details of operating leases.
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. In the event that utilization under the credit facility is less than $10 million, a commitment fee
of 1.50% per annum is payable quarterly on the unutilized portion of the available credit facility. No funds were drawn
from this credit facility during the year.
interest Rate Risk
e)
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.
A 10% change in interest rates would cause a $12 change in income on an annualized basis.
f) Metal Price Risk
The Company is exposed to metals price risk with respect to silver, gold, zinc, lead, and copper sold through its mineral
concentrate products. The Company mitigates this risk by implementing price protection programs for some of its zinc
and lead production through the use of derivative instruments. As a matter of policy, the Company does not hedge its
silver production.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
18.
SEGMENTED INFORMATION
All of the Company’s operations are within the mining sector, conducted through operations in three countries. Due to
geographic and political diversity, the Company’s mining operations are decentralized whereby management are
responsible for achieving specified business results within a framework of global policies and standards. Country
corporate offices provide support infrastructure to the mine in addressing local and country issues including financial,
human resources, and exploration support.
Products are silver, gold, lead, zinc and copper produced from mines in Peru and Mexico. Segments have been aggregated
where operations in specific regions have similar products, production processes, types of customers and economic
environment.
The Company’s operating segments are based on the reports reviewed by the senior management group that are used
to make strategic decisions. The Chief Executive Officer considers the business from a geographic perspective considering
the performance of the Company’s business units.
The segment information provided to the Board of Directors for the reportable segments for the year ended December
31, 2011 and 2010 are as follows:
Reportable Segments
Corporate
bateas
Cuzcatlan
Total
Year ended December 31, 2011
Sales to external customers
$
Silver concentrates
Gold concentrates
Lead concentrates
Zinc concentrates
Copper concentrates
Sales to internal customers
Cost of sales
Depreciation, depletion, and amortization
Selling, general and administrative expenses
Exploration and evaluation costs
Impairment of mineral properties, property,
plant and equipment
Interest income
Interest expense
Income (loss) before tax
Income taxes
Income (loss) for the year
Capital expenditures
$
–
–
–
–
–
–
5,961
–
100
14,352
1,715
–
494
306
(15,881)
183
(16,064)
814
97,740
–
–
80,689
15,290
1,761
–
42,236
7,053
3,920
–
–
297
219
52,133
15,804
36,329
25,066
$
12,264
7,586
4,678
–
–
–
–
6,794
2,268
1,568
–
1,894
39
35
2,083
2,815
(732)
53,127
$
110,004
7,586
4,678
80,689
15,290
1,761
5,961
49,030
9,421
19,840
1,715
1,894
830
560
38,335
18,802
19,533
79,007
90
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
Reportable Segments
Corporate
bateas
Cuzcatlan
Total
Year ended December 31, 2010
Sales to external customers
$
Lead concentrates
Zinc concentrates
Copper concentrates
Sales to internal customers
Cost of sales
Depreciation, depletion, and amortization
Selling, general and administrative expenses
Exploration and evaluation costs
Interest income
Interest expense
Income (loss) before tax
Income taxes
Income (loss) for the year
Capital expenditures
$
–
–
–
–
2,464
–
202
6,941
547
44
417
(6,491)
(47)
(6,444)
1,190
74,056
31,180
15,883
26,993
–
34,844
6,347
4,043
–
449
291
34,004
11,557
22,447
14,614
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23,961
74,056
31,180
15,883
26,993
2,464
34,844
6,549
10,984
547
493
708
27,513
11,510
16,003
39,765
Reportable Segments
Corporate
bateas
Cuzcatlan
Total
as at december 31, 2011
Total assets
Total liabilities
As at December 31, 2010
Total assets
Total liabilities
As at January 1, 2010
Total assets
Total liabilities
$
$
$
$
$
$
27,843
5,694
81,900
3,404
25,330
321
$
$
$
$
$
$
112,746
29,793
74,950
24,794
65,439
21,037
$
$
$
$
$
$
131,017
7,808
77,020
3,082
42,820
870
$
$
$
$
$
$
271,606
43,295
233,870
31,280
133,589
22,228
For the years ended December 31, 2011 three (2010: two) customers, respectively, represented 100% of total sales to
external customers.
external Sales by
Customer and Region
Customer 1
Customer 2
Bateas/Peru
% of total sales
Customer 1
Cuzcatlan/Mexico
% of total sales
Consolidated
% of total sales
$
$
$
$
$
2011
95,978
1,762
97,740
89%
12,264
12,264
11%
110,004
100%
98%
2%
100%
100%
100%
100%
years ended december 31,
$
$
$
$
$
2010
47,062
26,994
74,056
100%
–
–
0%
74,056
100%
64%
36%
100%
0%
0%
100%
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
19. CONTINGENCIES AND CAPITAL COMMITMENTS
a) bank Letter of guarantee
The Caylloma mine closure plan was approved in November 2009 with total closure costs of $3,587 of which $1,756 is
subject to annual collateral in the form of a letter of guarantee, to be awarded each year in increments of $146 over 12
years 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 $439. This bank letter of guarantee expires 360 days from December 2011.
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 were renewed in
June 2011 with expiry 360 days to June 2012.
b) Capital Commitments
As at December 31, 2011, $8,122 of capital commitments not disclosed elsewhere in the consolidated financial
statements, and forecasted to be expended within one year, includes the following: $5,800 for the ramp development at
the San Jose property located in Mexico; $2,247 for the tailing dam, concentrator plant and electrical infrastructure
renewal, and mine camp development at the Caylloma Property; and $75 for software development.
c) other Commitments
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 3,500 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 and expiring in 2017. 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 finance lease obligations held by two of its mining contractors. These finance lease
contracts are related to the acquisition of mining equipment deployed at the Caylloma mine. As at December 31, 2011,
these obligations amounted to $231 with $74 maturing in 2012 and $157 maturing in 2013.
The Company, jointly with Radius Gold Inc., has entered into an office premise lease located in Canada, effective on
November 28, 2011, the date the Company commenced carrying on business in the premises. The shared office with
Radius has been finalized with the Company obligated to pay 50% of the total rent payable. The lease term is eight years
with the Company’s annual net rent payable, on 3,195 rentable square feet, as follows:
• years one to two $111;
• years three to five $115; and,
• years six to eight $118.
In addition, estimated operating costs, utilities, and realty taxes is $71 in the first year of occupancy. During 2011, the
Company has advanced 50% of the three month security deposit in the amount of $47.
On May 24, 2010, the Company entered into a seven year office premise lease located Peru. The annual rent payable
on 1,717 rentable square meters for office space, is as follows:
• year one $289;
• year two $297;
• year three $306; and,
• years four through seven the lease is subject a minimum annual increase of 3% or the Consumer Price Index
published by Bureau of Labor Statistics of the United States Department of Labor, whichever is higher.
The lease also includes the use of additional space for mini-warehouse and parking spots, the obligation for which is
$58 per annum for the first year and is subject to an annual increase of 3% as stated above until the end of the lease.
As at December 31, 2011, the Company has advanced rent $159 (2010:$426) and provided a security deposit of $44.
On March 15, 2011, the Company entered into a one year office premise lease located in Mexico with an annual lease
obligation of $37. The office premise leases are included as operating leases in Note 17 d).
92
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
Office premises – Canada
Office premises – Peru
Office premises – Mexico
Total office premises
Computer equipment – Peru
Computer equipment – Mexico
Total computer equipment
Total operating leases
Less than
1 year
$ 181
363
8
$ 552
128
16
$ 144
$ 696
expected payments due by period as at december 31, 2011
1–3 years
4–5 years
$ 549
758
–
$ 1,307
75
28
$ 103
$ 1,410
$ 372
805
–
$ 1,177
–
–
–
$
$ 1,177
$ 531
after
5 years
$ 359
172
–
$ 531
–
–
–
$
Total
$ 1,461
2,098
8
$ 3,567
203
44
$ 247
$ 3,814
d) other Contingencies
In February 2009, the Environmental Assessment and Oversight Agency (“OEFA”) in Peru, alleged the Company had five
violations: two were for breaches of recommendations; two for excess of total suspended solids in water over the
maximum allowable; and an alleged unauthorized discharge of effluent. The Ministry of Energy and Mines in Peru
(“OSINERGMIN”) decided to close the two alleged violations for failure to adopt recommendations and punish the
Company for the three alleged violations and imposed a fine of $200 in 2010. The Company appealed on June 23, 2010.
Subsequent to December 31, 2011 and on February 22, 2012, the alleged unauthorized discharge of effluent was
dismissed and confirmed a fine of $133 for the two alleged violations of excess of total suspended solids in water over
the maximum allowable. The Company is proceeding with an administrative appeal to the Ministry of Energy and Mines
in Peru (“OSINERGMIN”) for the remaining two alleged offenses. The Company believes it is more likely than not that it
will defend itself successfully in the claims and therefore has not recorded a provision for the potential exposure relating
to these alleged violations.
20. NET FINANCE INCOME (EXPENSE)
Finance income
Interest income on FVTPL financial assets
Total finance income
Finance expenses
Interest expense
Standby and commitment fees
Accretion of provisions (Note 12)
Total finance expense
net finance income (expense)
years ended december 31
2011
2010
$
$
830
830
81
306
173
560
270
$
493
493
128
417
163
708
$
(215)
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
21. EXPENSES BY NATURE
Cost of Sales
Direct mining costs 1
Depreciation and depletion
Royalty expenses
Total cost of sales
years ended december 31
2011
2010
$ 38,649
9,059
1,322
$ 27,729
6,327
788
$ 49,030
$ 34,844
1 Direct mining costs includes salaries and other short term benefits, contractor charges, energy, consumables and production
related costs.
Selling, general and administrative expenses
Salaries and benefits
Corporate administration
Audit, legal and professional fees
Filing and listing fees
Director's fees
Depreciation
years ended december 31
$
2011
12,168
3,409
2,915
467
519
362
$
2010
5,312
2,253
2,414
311
472
222
Total selling, general and administrative expenses
$ 19,840
$ 10,984
exploration and evaluation costs
Brownfields exploration
Greenfields exploration
Evaluation costs
$
2011
206
344
550
1,165
$
Total exploration and evaluation costs
$
1,715
$
2010
160
253
413
134
547
years ended december 31
22. SUBSEQUENT EVENTS UP TO MARCH 23, 2012
Subsequent to December 31, 2011 and at March 23, 2012 the value of the DSU and RSU liabilities have increased by
$278 and $211, respectively.
On February 17, 2012, the Company entered into a one year office premise lease, effective March 1, 2012, located in
Mexico with an annual lease obligation of $18.
94
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
23. FIRST-TIME ADOPTION OF IFRS
IFRS 1 First-time Adoption of International Financial Reporting Standards, which governs the first time adoption of IFRS,
in general requires accounting policies to be applied retrospectively to determine the opening financial position at the
Company’s transition date of January 1, 2010, and allows certain exemptions on the transition to IFRS. The elections
the Company has decided to apply and that are considered significant to the Company include:
• business Combinations exemption
– IFRS 1 allows a first-time adopter to not apply of IFRS 3 retrospectively to business combinations that occur
before either the date of transition to IFRS or an alternative pre-transition date.
– The Company elected the business combinations exemption in IFRS 1 to not apply IFRS 3 retrospectively to
past business combinations. Accordingly, the Company has not restated business combinations that took place
prior to the transition date.
• Share-based Payment exemption
– IFRS 1 gives a first-time adopter the option to not apply IFRS 2 Share-Based Payment to (i) equity instruments
that were granted for the periods on or before November 7, 2002 or after November 7, 2002 but that vested
before the date of transition to IFRS and (ii) liabilities arising from cash-settled share-based payment
transactions if those liabilities were settled before January 1, 2005 or before the date of transition to IFRS.
– The Company elected to apply this exemption at the transition date.
• Cumulative Translation differences
– IFRS 1 gives a first-time adopter through 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.
– The Company elected to set the previously accumulated cumulative translation amount, which was included in
accumulated other comprehensive income (“AOCI”), to zero as at the date of transition with the balance being
reclassified to retained earnings.
• borrowing Costs exemption
– This exemption in IFRS 1 allows a first-time adopter to apply the transitional provisions set out in IAS 23
Borrowing Costs at January 1, 2009 or the date of transition to IFRS, whichever is later. IAS 23 requires the
capitalization of borrowing costs related to all qualifying assets.
– The Company elected to apply IAS 23 to borrowing costs relating to all qualifying assets for which the
commencement date for capitalization is on or after the transition date.
• decommissioning Liability exemption
– IFRS 1 indicates that a first-time adopter may elect not to apply IFRIC 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities retrospectively.
– The Company elected to take a simplified approach to calculate and record the asset related to the
decommissioning and restoration liability on our opening IFRS consolidated statement of financial position. The
decommissioning and restoration liability calculated on the transition date in accordance with IFRS 37 Provisions,
Contingent Liabilities and Contingent Assets was discounted back to the date when the provision first arose on
the mineral property, at which date the corresponding asset and liability was set up and then depreciated to its
carrying amount at the transition date.
The IFRS 1 mandatory exceptions applied by the Company in the conversion from Canadian Generally Accepted Accounting
Principles (“CAD GAAP”) to IFRS included estimates. In accordance with IFRS 1, an entity’s estimates under IFRS at the
date of transition to IFRS must be consistent with estimates made for the same date under previous GAAP unless those
estimates were in error. The Company’s IFRS estimates as at the Transition Date are consistent with its CAD GAAP
estimates as at that date.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
Adjustments on transition to IFRS
Adoption of IFRS resulted in changes to the Company’s Statements of Financial Position, Statements of Income,
Statements of Comprehensive Income (Loss), Statements of Cash Flows, and Statements of Changes in Equity as set
out below:
a) Foreign exchange
Under IAS 21, each entity in a group must be analyzed, through application of primary and secondary factors, to determine
its functional currency. Based on this assessment, the functional currency of each of the entities in the group is the
US$, with the exception of the parent entity and certain holding companies which have a Canadian dollar functional
currency. Under CAD GAAP, the parent entity had a Canadian dollar presentation currency and all subsidiaries were
integrated with the exception of Bateas which was self-sustaining. The presentation currency will continue to be US$.
The parent entity and the holding companies which have a CAD$ functional currency will be translated to US$ using the
closing rate method with the differences to the cumulative translation adjustment account, on consolidation. Those
entities with a US$ functional currency do not require translation on consolidation. Under CAD GAAP, the Company used
the indirect consolidation method whereby all entities were first translated to CAD$ and then the entire consolidation
translated to US$ for presentation purposes.
b) deferred income Tax
Under IFRS, income taxes include all domestic and foreign taxes based on taxable profits. The Company accounted for
Peruvian statutory workers participation under CAD GAAP as an income tax. Under IFRS the statutory workers participation
is accounted for as an employee benefit under IAS 19. Accordingly, future Peruvian Workers Participation balances have
been derecognized and current Peruvian Workers Participation expense has been reclassified from income tax expense
to operating expenses.
Under IFRS, deferred tax is recognized on the difference between the accounting basis and tax basis of all items. Under
CAD GAAP income tax assets or liabilities were not recognized for differences arising between the historical exchange
rate and the current exchange rate translation of the cost of non-monetary assets or liabilities of integrated foreign
operations.
For foreign currency non-monetary assets or liabilities where the tax basis currency differs from the functional currency
of the entity, foreign exchange differences will result in tax assets or liabilities which were not previously recognized
under CAD GAAP. This difference will result in added volatility in the tax expense as foreign exchange rate changes will
have an impact on the tax expense.
IAS 12 does not permit recognition of temporary differences on the initial acquisition of assets that do not constitute a
business combination. There is no similar prohibition under CAD GAAP. Deferred tax arising from temporary differences
on initial recognition have been reversed against mineral properties, property, plant and equipment and retained earnings.
c) Reset accumulated other Comprehensive income to Zero
The Company has taken the exemption under IFRS 1 which allows for the cumulative translation differences that existed
at the date of transition to IFRS to be reset to zero.
d) Provisions
Where a provision is recognized, IFRS requires the estimate to be discounted at a risk-free pre-tax rate, typically that of
a government bond that is matched to the expected risk adjusted cash flows. On transition, the Company used a risk
free rate to discount their decommissioning liabilities and this results in an increased decommissioning liability being
recognized under IFRS as compared to CAD GAAP.
96
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
e) Reclassification of items in the Consolidated Statements of income
The Company has reclassified the following income and expense items in the consolidated statements of income:
• government royalties to cost of sales from selling, general and administrative expenses;
• distribution costs to cost of sales from selling, general and administrative expenses;
• community relation costs to cost of sales from selling, general and administrative expenses;
• other income and expenses from interest and other income and expenses to selling, general and administrative
expenses;
• interest expense includes interest on debt financing and accretion of provisions;
• current workers participation from income tax to cost of sales and selling, general and administrative expenses;
and,
• depletion and depreciation combined with cost of sales.
In addition, exploration and evaluation costs moved from selling, general and administrative expenses.
The above changes are reclassifications within our statement of income so there is no net impact to our income as a
result of these changes.
f) Reconciliation of Consolidated Statements of Changes in equity
The reconciliations between the CAD GAAP and IFRS consolidated Equity, for January 1, 2010 and December 31, 2010
are provided below:
expressed in $’000’s
Equity, CAD GAAP
Adjustments:
Effect of foreign exchange on inventory, deposits on
long term assets, and mineral properties, property,
plant and equipment
Deferred income tax adjustments
Transfer of accumulated other comprehensive income
to retained earnings
Reset accumulated other comprehensive income to zero
Adjustment to revise provisions
Adjustment for depletion on mineral properties related
to provisons
Total iFRS adjustments to equity
equity, iFRS
notes
january 1,
2010
december 31,
2010
$ 112,557
$ 206,008
23 a)
23 b)
23 c)
23 c)
23 d)
23 d)
(2,538)
1,475
2,898
(2,898)
(311)
178
(1,196)
(5,339)
1,944
2,898
(2,898)
(254)
231
(3,418)
$ 111,361
$ 202,590
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
g) Reconciliation of Consolidated Statement of Financial Position
The reconciliations between the CAD GAAP and IFRS consolidated statement of financial position at December 31, 2010
(date of transition to IFRS) are provided below.
notes
Canadian
gaaP
december 31, 2010
effect of
Transition
to iFRS
iFRS
$ 70,298
20,509
13,454
3,542
4,034
111,837
$
–
–
–
–
(16)
(16)
$ 70,298
20,509
13,454
3,542
4,018
111,821
23 a)
23 a)
4,533
153
4,686
23 a) b) d)
126,813
(9,450)
117,363
$ 243,183
$
(9,313)
$ 233,870
$
9,303
40
133
4,192
1,083
14,751
3,166
4,924
14,334
37,175
180,403
11,116
3,597
10,892
14,489
206,008
$
–
–
–
–
–
–
–
(43)
(5,852)
(5,895)
–
–
4,751
(8,169)
(3,418)
(3,418)
$
9,303
40
133
4,192
1,083
14,751
3,166
4,881
8,482
31,280
180,403
11,116
8,348
2,723
11,071
202,590
$ 243,183
$
(9,313)
$ 233,870
aSSeTS
CuRRenT aSSeTS
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
GST/HST and value added tax receivable
Inventories
non-CuRRenT aSSeTS
Deposits on long term assets
Mineral properties, property, plant
and equipment
Total assets
LiabiLiTieS and eQuiTy
CuRRenT LiabiLiTieS
Trade and other payables
Due to related parties
Derivative liabilities
Income tax payable
Current portion of long term liability
non-CuRRenT LiabiLiTieS
Leases and long term liabilities
Provisions
Deferred income tax liabilities
23 d)
23 b) d)
eQuiTy
Share capital
Share option and warrant reserve
Retained earnings (deficit)
Accumulated other comprehensive income
23 a) b) c) d)
23 c)
98
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
h) Reconciliations of Consolidated Statement of income
The reconciliation between the CAD GAAP and IFRS consolidated statement of income for the year ended December 31,
2010 are provided below:
Sales
Cost of sales
Mine operating income (loss)
other expenses
notes
23 e)
23 d) e)
Canadian
gaaP
$ 74,056
29,129
44,927
$
Selling, general and administrative expenses
Exploration and evaluation costs
Net (gain) on commodity contracts
Loss on disposal of mineral properties, property,
23 a) e)
23 e)
plant and equipment
Loss on disposal of investment
Write-off of deferred exploration costs
16,529
547
(736)
127
119
443
year ended december 31, 2010
effect of
Transition
to iFRS
–
5,715
(5,715)
(5,545)
–
–
–
–
–
iFRS
$ 74,056
34,844
39,212
10,984
547
(736)
127
119
443
operating income (loss)
Finance items
Interest income
Interest expense
net finance income (expense)
income before tax
Income taxes
income for the year
27,898
(170)
27,728
23 d) e)
23 e)
23 b) d) e)
(379)
(544)
(923)
26,975
14,020
872
(164)
708
538
(2,510)
493
(708)
(215)
27,513
11,510
$ 12,955
$
3,048
$ 16,003
i) Reconciliation of Consolidated Statement of Comprehensive income
The reconciliation between the CAD GAAP and IFRS consolidated statement of comprehensive income for the year ended
December 31, 2010 are provided below:
notes
Canadian
gaaP
year ended december 31, 2010
effect of
Transition
to iFRS
iFRS
Income for the year
Other comprehensive income (loss)
Transfer of unrealized loss to realized loss
upon reduction of net investment,
net of taxes
Unrealized (loss) gain on translation to
23 c)
presentation currency on foreign operations
23 a)
Other comprehensive (loss) income
$ 12,955
$
3,048
$ 16,003
2,100
5,895
7,994
(2,100)
(3,172)
(5,271)
–
2,723
2,723
Total comprehensive (loss) income for the year
$ 20,949
$
(2,223)
$ 18,726
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FoR THe yeaRS ended deCeMbeR 31, 2011 and 2010
(all amounts in uS$’000’s unless otherwise stated)
j) Reconciliation of Consolidated Statement of Cash Flows
The adoption of IFRS has had no material impact on the net cash flows of the Company. The changes made to the
Consolidated Statement of Financial Position and Consolidated Statement of Comprehensive Income has resulted in
reclassifications of various amounts on the Consolidated Statement of Cash Flows, however as there have been no
material changes to the net cash flows, summarized reconciliation has been presented below.
Effect of exchange rate changes on cash
and cash equivalents
(deCReaSe) inCReaSe in CaSH and
CaSH eQuiVaLenTS
Cash and cash equivalents
– beginning of year
notes
23 a)
23 a)
Canadian
gaaP
2,128
37,407
30,763
CaSH and CaSH eQuiVaLenTS – end oF yeaR
$ 70,298
$
year ended december 31, 2010
effect of
Transition
to iFRS
23
(23)
–
–
iFRS
2,151
37,384
30,763
$ 70,298
100
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
CAYLLOMA MINE
Trading on the NYSE as of September 19, 2011
CORPORATE DATA
Corporate Office
Suite 650 – 200 Burrard Street
Vancouver, BC Canada V6C 3L6
Tel: +1.604.484.4085
Management Head Office
Piso 5. Av. Jorge Chávez #154
Miraflores, Lima – Perú
Tel: +51.1.616.6060, ext. 0
Investor Relations
Management Head Office
Carlos Baca,
Investor Relations Manager
Corporate Office
Holly Hendershot,
Investor Relations
info@fortunasilver.com
Stock Exchanges
NYSE: FSM
TSX: FVI
BVL: FVI
Frankfurt: F4S.F
Legal Counsel
Blake Cassels & Graydon LP
Suite 2600 – 595 Burrard Street
Vancouver, BC Canada V7X 1L3
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 2T8
Qualified Person
Thomas I. Vehrs, Ph.D., Vice President
of Exploration, is the Qualified Person
for Fortuna Silver Mines Inc. as defined
by National Instrument 43-101.
Dr. Vehrs is a Founding Registered
Member of The Society for Mining,
Metallurgy, and Exploration, Inc.
(SME Registered Member Number
3323430RM) and is responsible for
ensuring that the information contained
in this annual report is an accurate
summary of the original reports and
data provided to or developed by
Fortuna Silver Mines.
FORTUNA SILVER MINES INC. 2011 ANNUAL REPORT
www.fortunasilver.com
Caylloma Mine, Peru
Frankfurt: F4S.F
www.fortunasilver.com
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