DELIVERING
GROWTH
CREATING
VALUE
2012 AnnuAl RepoRt
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
Page 2
2012 Performance Review
production, cash flow and earnings
increase for the sixth consecutive year
2
Page 4
CEO’s Letter
We are better positioned than at any
time in the company’s history to create
sustainable value for our stakeholders
Page 7
Chairman’s Letter
I believe Fortuna has put in place the
right ingredients necessary to build a
great mining company
Page 10
Growth Strategy
Fortuna has consistently delivered strong
year-over-year growth in production and
earnings by following a disciplined
corporate strategy
10
Page 13
Guidance for 2013
We forecast a 10 % increase in silver
production to 4.4 million ounces and a
13 % increase in gold production to
23,300 ounces
Page 14
Milestones
Delivering steady growth and creating
value since 2005
14
Page 15
Sustainability
We strive to create sustainable value for
our employees and their families, for
communities near our operations and
for society at large
15
Page 20
Mineral Reserves &
Resources
Inferred resources increased by 38 % in
contained silver and 26 % in contained gold
Page 22
Core Asset Review
Silver and gold production exceed guidance
by 8 % and 19 % respectively in 2012
22
Page 26
Silver Market Review
& Outlook
Healthy demand from several sectors is
expected to resume in 2013, boosting silver
consumption from most industrial sources
26
Page 29
Management’s Discussion
& Analysis
Page 63
Consolidated Financial
Statements
Inside Back Cover
Corporate Information
This annual report contains forward-looking statements. Please refer to the cautionary
language under “Cautionary Statement on Forward-Looking Statements” on page 61
of the Management’s Discussion & Analysis.
Fortuna Silver Mines Inc., one of latin America’s fastest growing silver producers, aims to become one of the
leading silver miners in the Americas. established in 2005, we are poised for sustainable growth with two, 100 % owned
underground operating silver mines and extensive property holdings in peru and Mexico.
our annual production rate is forecast to reach approximately five million ounces of silver and 26,000 ounces of gold,
plus base metals, by third quarter of 2013. ongoing brownfields exploration programs on our 95,000 hectare land
package offer attractive opportunities for driving organic growth.
the company employs over 2,000 people in Canada, Mexico and peru. our common shares trade on the new York Stock
exchange (FSM), toronto Stock exchange (FVI), Bolsa de Valores de lima (FVI) and Frankfurt Stock exchange (F4S.F).
San Jose Mine, Mexico
DELIVERING GROWTH
CREATING VALUE
In 2012, Fortuna delivered its sixth consecutive year of record silver and gold production,
exceeding its guidance by 8 % and 19 %, respectively. Revenue, net income and cash
generated by operating activities also reached record levels. With efficient, low-cost
operations and a strong balance sheet to support its disciplined growth strategy, the
company is better positioned than at any other time in its history to create long-term
value for our shareholders.
Sustainability is central to our operations. We are committed to ensuring the health and
safety of our personnel, subscribing to the highest environmental standards and
respecting our host communities.
We believe responsible corporate citizenship results in greater operational effectiveness –
minimizing risks and contributing to the creation of sustainable value for all stakeholders.
1
FORTUNA SILVER MINES INC. | 2012 ANNUAL REPORT
Sales
(US$ million)
181.8
181.8
161.0
161.0
110.0
110.0
110.0
74.1
74.1
51.4
51.4
Performance Growth
Production, cash flow and earnings increase for the
sixth consecutive year
2012 Highlights
Annual financial and operational performance
• Sales increase US$51.0 million or 46 % to US$161.0 million
· Cash cost per silver ounce of US$5.96 per ounce, net of by-product credits for gold,
lead and zinc
· Net income grows US$12.0 million or 62 % to US$31.5 million
· Cash generated by operating activities rises US$23.1 million or 59 % to US$62.2 million
· Basic earnings per share increases US$0.09 or 56 % to US$0.25
· Silver production increases 1.5 million ounces or 60 % to 4.0 million ounces
· Gold production increases 13,684 ounces or 195 % to 20,699 ounces
·
Inferred resources increased by 38 % in contained silver and 26 % in contained gold
Community and environment
• Implemented various economic development programs in San Jose del Progreso,
Mexico, to support local artisans, mine contractors and suppliers
• Started construction of sport and community arena in Caylloma, Peru, that will
benefit over 5,000 residents when completed in July 2013
Capital Share Structure
As of April 16, 2013
Issued and Outstanding
Options
Fully Diluted
125,305,166
L
6,067,474
131,372,640
‘09
‘11
‘13E
‘09 ‘10 ‘11 ‘12 ‘13E
‘10
‘12
Cash Flow from Operations
(US$ million)
73.7
73.7
62.2
62.2
39.1
39.1
39.1
24.4
24.4
‘10
‘13E
‘10 ‘11 ‘12 ‘13E
‘11
‘12
Cash Flow per Share
(US$)
0.50
0.50
0.32
0.32
0.23
0.23
‘10 ‘11 ‘12
‘12
‘10
‘11
Earnings per Share
(US$)
0.25
0.25
0.15 0.16
0.16
0.15
‘10 ‘11 ‘12
‘12
‘10
‘11
Sales by Metal
Lead
7 %
Zinc
9 %
Gold
17 %
Lead
15 %
Zinc
14 %
Gold
6 %
Silver
67 %
Silver
65 %
Copper
4 %
Lead
23 %
Zinc
21 %
Gold
3 %
Silver
49 %
2010
2012
2011
2
<< Table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
2012 Performance Chart
2012
2011
Processed Ore
Caylloma
Mine
San Jose
Mine
Consolidated
Caylloma
Mine
San Jose
Mine
Consolidated
tonnes milled
Average tpd milled
Cash cost (uS$/oz Ag) 1
462,222
1,266
8.07
369,022
1,055
3.76
448,866
1,272
(0.78)
125,301
949
4.69
5.96
0.25
Silver
Grade (g/t)
Recovery (%)
production (oz)
Realized price (uS$/oz) 2
net realized price (uS$/oz) 3
Gold
Grade (g/t)
Recovery (%)
production (oz)
Realized price (uS$/oz) 2
net realized price (uS$/oz) 3
Lead
Grade (%)
Recovery (%)
production (000 lbs)
Realized price (uS$/lb) 2
net realized price (uS$/lb) 3
Zinc
Grade (%)
Recovery (%)
production (000 lbs)
Realized price (uS$/lb) 2
net realized price (uS$/lb) 3
177
77
2,038,579
188
88
1,949,178
0.40
47
2,781
1.74
87
17,918
1.99
88
17,886
2.56
85.77
22,396
3,987,757
30.91
27.40
20,699
1,648.83
1,295.32
17,886
0.94
0.63
22,396
0.88
0.66
171
81
2,008,488
144
85
490,555
0.36
46
2,393
1.36
85
4,622
2.15
93
19,677
2.68
88
23,424
–
–
–
–
–
–
–
–
2,499,043
34.83
31.09
7,015
1,631.39
1,179.90
19,677
1.10
0.86
23,424
1.00
0.66
–
–
–
–
–
–
–
Copper
production (000 lbs)
–
2010
Caylloma
Mine
434,656
1,231
(5.99)
159
86
1,906,423
20.09
18.18
0.40
46
2,556
1,227.52
921.00
2.44
91.28
21,373
0.98
0.79
3.10
88
26,137
0.98
0.60
1,026
1 Net of by-product credits
2 Based on provisional sales before final price adjustments
3 Net after payable metal deductions, treatment, and refining charges. Treatment charges are allocated to the base metals in Caylloma
and to gold in San Jose
2012 Head Count
Fortuna Silver Mines
7 %
Caylloma Mine
52 %
Employees
Contractor Employees
Caylloma Mine
56 %
San Jose Mine
41 %
San Jose Mine
44 %
Total: 780
Total: 1,110
<< table of Contents
3
3
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Jorge A. Ganoza
President, CEO and
Co-founder
Chief executive officer’s letter
Dear shareholders,
I am pleased to report that Fortuna’s production, cash flow and earnings increased for the
sixth consecutive year in 2012—keeping us well on track to achieving our vision of building a
leading silver mining company in the Americas. to this end, we continue to focus our energy
and resources on operational excellence, brownfields exploration and implementing a
disciplined long-term growth strategy.
our current financial resources and talented management team ensure that we can face the
challenges of growing our business and creating sustainable value for our stakeholders.
For that reason, I remain confident in our ability to achieve our strategic objective of producing
at an annual rate of 14 million silver equivalent ounces by 2016, while maintaining cash
operating costs below the industry average.
Operational excellence
Consistent operational excellence at our mines over the past five years has positioned
Fortuna among the industry’s lowest-cost silver producers.
In 2012, our consolidated cash cost per ounce of silver was uS$5.96, net of by-product
credits, or 41 % below the industry average of approximately uS$10.04. throughout the year,
we continued to capitalize on opportunities to increase production at the San Jose Mine,
resulting in silver and gold production exceeding annual guidance by 8 % and 19 % respectively.
For 2013, we expect silver and gold production to continue to grow, as throughput capacity at
San Jose increases 50 % to 1,500 tpd upon completion of our mill expansion project. We
expect this project, which is scheduled for commissioning in the third quarter of 2013, to also
lower operating costs.
Recognizing that our stakeholders have a keen interest in our operational performance for the
coming year, we are, for the first time, providing cost and capital expenditure guidance for 2013.
Many of the cost pressures we face are the result of external forces. In peru and Mexico,
shortages of experienced technical staff and contract services have persisted for the past
four years, creating operating challenges throughout the entire industry. Recently however, we
have witnessed an easing of cost pressures associated with these shortages, and expect this
trend to continue in 2013. Within Fortuna, we have implemented our own initiatives to
We are better
positioned than at
any time in the
company’s history to
face the challenges
of growing our
business and
creating sustainable
value for our
stakeholders.
4
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
mitigate industry cost pressures. We are offering competitive retention plans for key positions,
we’ve reduced the number of mine contractors we employ and we’ve begun using lower-cost
ammonium nitrate explosives.
For 2013, we forecast that cash costs per tonne at San Jose will decrease by about 5 %
following the mill expansion. At Caylloma, we expect cash costs per tonne to increase by
approximately 10 %. Capital expenditures, meanwhile, are expected to begin to decline, as
Fortuna emerges from a period of intense capital expenditure activity that began with the
construction of the San Jose Mine in 2010. Capital expenditures in 2012 at both mines were
uS$31.1 million. For 2013, our capital budget is uS$52 million, which includes the San Jose
expansion and three one-time infrastructure projects at Caylloma.
Starting in 2014, we expect annual capital requirements at Caylloma and San Jose to drop
closer to sustainable levels of approximately uS$20 million to uS$25 million. Fortuna is
positioned to self-fund all foreseeable capital expenditures.
Brownfields exploration
In addition to the ever-increasing production at both of our mines, since 2005, we have been
steadily building Fortuna’s reserve and resource base. today, we project a mine life beyond
eight years at both operations, based on reserves of approximately 50 million silver
equivalent ounces.
In 2012, we continued to capitalize on brownfields exploration opportunities, completing more
than 40,000 meters of diamond drilling in an exploration program totaling uS$13 million. the
highlight of this program was the discovery at San Jose of a wide, high-grade extension of the
trinidad-Bonanza ore shoot, trinidad north. this mineralization is open to the north and at
depth, offering the opportunity to add high-grade resources in the immediate area of the mine.
For 2013, our uS$14 million budget for brownfields exploration includes over 50,000 meters
of diamond drilling. At San Jose and Caylloma our exploration teams will pursue new zones
with aggressive drill programs throughout the year.
Project pipeline
In August 2012, Robert Brown joined Fortuna, assuming the newly created position of Vice
president of Corporate Development. With more than 20 years of industry experience, he will
play a key role in implementing our growth strategy. our goal is to acquire attractive pre-
development stage silver-gold projects in the Americas that will add low-cost production,
enabling us to reach our objective of producing at an annual rate of 14 million silver
equivalent ounces in 2016. We will, as always, follow a disciplined approach, favoring peru
and Mexico, countries where we have well-established presence and infrastructure.
With annual production forecast to grow 9 % to 5.7 million silver equivalent ounces in 2013,
a commanding land position of more than 95,000 hectares and re-energized merger and
acquisition efforts, we are well equipped to reach our goal through organic growth and
acquisitions.
We continue to work
collaboratively with
communities in
Mexico and peru to
establish programs
that will benefit the
local population and
protect and preserve
the environment.
“Fortuna supported us in the building of water reservoirs, which has improved the
quality and quantity of our harvest. Both of our sons are employed by the mine.”
Epifanio Gonzalez Ramirez and Carlos Gonzalez Ramirez
San Jose del Progreso farmers, Oaxaca, Mexico
5
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
I pay tribute to our
most valuable asset –
our employees – the
more than 2,000
women and men who
work together every
day in peru, Mexico
and Canada to fulfill
our vision and
mission.
Sustainability
Since Fortuna’s establishment, our Board and management have maintained that our bottom
line results are second to our core values of ensuring the health and safety of our workers,
complying with the highest environmental standards and conducting ourselves responsibly in
our host communities.
It was, therefore, with great regret that we reported the death of a contract driller at San Jose
in January 2013. our entire organization mourned this tragic loss. As part of our standard
procedures, a thorough independent accident investigation was conducted. We have further
strengthened safety procedures companywide, as recommended by the investigation. I am
confident that these improvements, together with our long-standing efforts to encourage a
safety-first culture, will ensure this accident is an isolated event.
With respect to our community development activities, we continue to collaborate with
communities in Mexico and peru to establish programs that will benefit the local population
and protect and preserve the environment. Working with local stakeholders, our community
relations and environmental departments completed two important projects in 2012:
• In ocotlan de Morelos, Mexico, we completed a water pipeline project connecting the
town’s grey water treatment plant with the San Jose Mine. the project, which included
renovating a sewage treatment facility, now provides 20 % of the mine’s industrial water.
Most importantly, the upgraded treatment plant has eliminated the discharge of raw
sewage into a nearby creek and improved living standards in the community.
• In Caylloma, peru, we are working with the community to build a town hall. the meeting
facility will allow community gatherings, sport and cultural events to take place indoors in
a town exposed regularly to extreme weather at over 4,500 meters above sea level.
In closing, I pay tribute to our most valuable asset – our employees – the more than 2,000
women and men who work together every day in peru, Mexico and Canada to fulfill our vision
and mission. I thank everyone for their great work and commitment. It is gratifying to note that
the investment community continues to recognize the strength and performance of our
operating teams as among the best in the industry.
I also thank you, our shareholders, for the confidence you place in our company. I look forward
to reporting on our continued growth.
Jorge A. Ganoza
president and Chief executive officer
“Being from Caylloma, the mine gives me the opportunity to work. like my fellow
townspeople, we work hard to bring progress to our town, especially our families.”
Marleny Infa Mercado
Caylloma community member, Arequipa, Peru
6
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Simon Ridgway
Chairman of the Board
and Co-founder
I believe Fortuna has put in
place the right ingredients
necessary to build a great
mining company: an
experienced and talented
leadership team, an effective
growth strategy and attractive
mineral properties.
Chairman’s letter
To our valued shareholders,
We continue to make gratifying progress toward our goal of building Fortuna into one of the leading silver mining
companies in the Americas. Since placing our first mine, Caylloma, back into production in 2006, we have grown silver
production every year and have been profitable since 2009. last year, in 2012, Fortuna recorded the best operating
performance in its eight-year history, achieving record annual production, revenue and cash flow.
I believe Fortuna has put in place the right ingredients necessary to build a great mining company: an experienced and
talented leadership team, an effective growth strategy and attractive mineral properties with the potential to support
low-cost, long-life mines. Importantly, we also have the financial resources to execute our strategy and build on our
successful track record of growth and profitability. At year-end, Fortuna had cash and short-term investments of uS$65
million, no long-term debt and an un-tapped uS$40 million credit facility.
unpredictability and uncertainty are everyday factors in our business. As mine operators, we have no control over
metal prices. We can, however, manage our operations to maintain high levels of efficiency and productivity, as we did
during 2012 in the face of weaker precious and base metal prices.
As I pointed out in the 2011 annual report, our success will not 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. We continue to demonstrate our commitment to stakeholders in our host communities. Completion of the
ocotlan grey water treatment plant project near our San Jose Mine is but one of many examples that you can read
about in this report.
the San Jose and Caylloma mines are the rock solid foundation of our future. By continuing to execute our three-
pronged growth strategy – maximize production, profitability and cash flow, capitalize on brownfields exploration
opportunities and selectively pursue M&A opportunities – our silver and gold production should again reach record
levels in 2013 and 2014.
I thank all employees for their contributions in 2012. I couldn’t be more proud of their efforts. I also thank my fellow
shareholders for their trust and support. I am confident that together we can continue to deliver growth and create
value as a responsible mining company.
Simon Ridgway
Chairman of the Board
<< table of Contents
7
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Senior Management
Jorge A. Ganoza, Geological engineer
President, CEO and Director
Jorge A. Ganoza is a geological engineer with over 18 years of experience in mineral exploration, mining and
business development throughout latin America. He is a graduate from the new Mexico Institute of Mining and
technology. Jorge is a fourth generation miner from a peruvian family that has owned and operated underground
gold, silver and polymetallic mines in peru and panama. Before co-founding Fortuna in 2004 he was involved in
business development at senior levels for several private and public Canadian junior mining companies working in
Central and South America. Jorge also serves as Chairman of the Board of Atico Mining Corporation.
Luis D. Ganoza, B. Sc. engineering, MBA, M. Sc.
Chief Financial Officer
luis D. Ganoza has 12 years of experience in the operation and financial management of mining companies.
He has held the position of CFo at Fortuna since 2006 and previously held the positions of Controller and
treasurer for one of peru’s largest public mining companies. 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.
Dr. Thomas I. Vehrs, ph.D.
Vice President of Exploration
over the past 38 years, Dr. thomas I. Vehrs has built a successful career in mineral exploration and mine
development. During this time, he has consulted for and/or held senior positions with Gold Fields, Cyprus-
Amax, Western States Minerals and Anaconda Minerals, as well as being a founder, president and Coo of
Aquest Minerals Corp. Since 1980, tom has worked extensively in latin America, developing and managing
exploration programs in Chile, peru, Bolivia, Colombia, Argentina, Mexico and Central America with emphasis
on epithermal and porphyry-related mineralized systems. Dr. Vehrs is a Founding Registered Member of the
Society for Mining, Metallurgy, and exploration, Inc. (SMe Member number 3323430RM), a Fellow of the
Society of economic Geologists and a Member of the Geological Society of America. tom has been Vice
president of exploration since 2006. He also serves as an independent director for AQM Copper Inc.
Manuel Ruiz-Conejo, B. Sc. engineering
Vice President of Operations
Manuel Ruiz-Conejo is a mining engineer graduated from the universidad nacional de Ingenieria in lima, peru.
He has more than 25 years in the mining industry and has worked for the most prolific polymetallic mines and
mine contractors in peru. As an engineer, he participated in the implementation and execution of critical
projects. As an executive, he devised and supervised the execution of several multimillion dollar mining
projects. In 2005, he became Chief operating Manager of Minera Atacocha S.A.A. Manuel also holds an
executive Management program from the universidad de piura in peru. Amongst his different areas of
expertise, he has vast experience in community relations.
Cesar Pera, Bachelor in psychology, Masters in organizational psychology
Vice President of Human and Organizational Development
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 in latin
American companies. He has served as president of the peruvian Association of Human Resources (ApeRHu)
and also as Vice president of the Interamerican Federation of Human Management (FIDAGH) for the Andean
region. Cesar is currently director of the master’s degree program in organizational Development and people
Management at the universidad del pacifico in peru.
Robert Brown, B. Sc. (Honors Geology), MBA
Vice President of Corporate Development
Robert Brown has 20 years of international experience in exploration, project development, finance and
corporate development. throughout his career he has identified exploration and development opportunities
through the detailed analysis of economic, geologic and corporate criteria. prior to joining Fortuna, Robert was
president and Ceo of Calibre Mining Corp. where he was responsible for the acquisition, exploration and
development of the company's projects in Australia, north America and Central America. He also spent nine
years with Barrick Gold in various senior management roles in exploration and business development and was
involved with numerous exploration, valuation, and merger and acquisition transactions. Robert is a graduate of
the university of Alberta with a Bachelor of Science degree in Geology (Honors), and an MBA from the Rotman
School of Management at the university of toronto.
8
<< table of Contents
Board of Directors
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Simon Ridgway
Chairman of the Board
Simon Ridgway is a co-founder of Fortuna Silver Mines Inc., a prospector, a mining financier and a Casey
Research explorer’s league inductee. Grass roots exploration is his first love and he has had a successful
career as an explorationist since starting out as a prospector 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, companies operating under the Gold Group banner have raised over CAD$350
million for exploration and development projects since 2003. Simon is the Chairman of Fortuna Silver Mines
Inc., Ceo of Focus Ventures ltd., president and Ceo of Radius Gold Inc.
Jorge A. Ganoza
Jorge A. Ganoza is a geological engineer with over 18 years of experience in mineral exploration, mining and
business development throughout latin America. He is a graduate from the new Mexico Institute of Mining and
technology. Jorge is a fourth generation miner from a peruvian family that has owned and operated underground
gold, silver and polymetallic mines in peru and panama. Before co-founding Fortuna back in 2004 he was
involved in business development at senior levels for several private and public Canadian junior mining companies
working in Central and South America. Jorge also serves as Chairman of the Board of Atico Mining Corporation.
Robert R. Gilmore
Robert Gilmore is a graduate of 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. Robert has more than 30 years of experience
working with resource companies and currently serves as Chairman of the Board for eldorado Gold Corp., a tSX
and nYSe listed Canadian gold mining company, and as a Director of layne Christensen Company, a nASDAQ
listed uS company with nearly uS$1 billion in revenues.
Tomas Guerrero
tomas Guerrero is a geological engineer with over 30 years of mine geology and mineral exploration experience
in peru, Mexico, Bolivia, Venezuela, Chile, Argentina and ecuador. until 2001, tomas held a ten year tenure as
Director of explorations for the Hochschild Group, a leading private peruvian mining company with multiple mine
operations. 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 specializing in servicing the mining
sector. tomas is a Member of the SMe (Society Mining engineers – uSA) and Fellow Member of the SeG
(Society economic Geologist – uSA).
Michael Iverson
An entrepreneur for the past 30 years, Michael is the president and Ceo of several publicly-listed tSX
companies, including niogold Mining Corporation, Volcanic Metals, and past president and Ceo of Fortuna
Silver Mines Inc. Michael brings a wealth of experience in public and private equity markets and important
management disciplines in strategic planning, sales and marketing. He has also been responsible for other
private interests for many years, including 30 years as head of triple K Ventures, a private merchant capital
investment company.
Mario Szotlender
Mario Szotlender holds a degree in international relations and is fluent in several languages. He has successfully
directed latin American affairs for numerous private and public companies over the past 20 years, specializing
in developing new business opportunities and establishing relations within the investment community. He has
been involved in various mineral exploration and development joint ventures (precious metals and diamonds) in
Central and South America, including heading several mineral operations in Venezuela, such as las Cristinas in
the 1980s. He was president of Mena Resources Inc. until it was purchased by Rusoro Mining ltd., of which he
was also president. In addition to being a Director and co-founder of Fortuna Silver Mines, Mario is also a
Director of Radius Gold Inc. and endeavour Silver Corp.
Thomas Kelly
thomas Kelly has bachelor and masters degrees in mining engineering from the Colorado School of Mines, is a
Fellow of the Australasian Institute of Mining and Metallurgy and a registered 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 Coo of Atico Mining Corporation.
<< table of Contents
9
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
San Jose Mine, Mexico
Strategy and outlook
Fortuna has consistently delivered strong year-over-
year growth in production and earnings by following
a disciplined corporate strategy. Since commercial
operations began in 2006, the company has
emerged as one of the lowest-cost silver producers
in the industry. today, with a growing resource base
and active brownfields exploration programs
underway, the company is poised to continue
delivering value to its stakeholders.
10
10
<< table of Contents
San Jose Mine
10
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Investment Highlights
Proven mine developers and operators
• Caylloma Mine returned to full operation in 2006 after extended shutdown by previous owner
• San Jose Mine placed into commercial production on time and on budget in 2011, just six years after
its acquisition as an exploration-stage project
• Annual silver production increased from 486,000 ounces in 2007 to 4.0 million ounces in 2012
• Annual gold production increased from 3,300 ounces in 2007 to 20,700 ounces in 2012
• Annual silver and gold production have exceeded forecasts for the past three years
Strong cash flow
• uS$62.2 million in cash generated by operations in 2012, before changes in working capital
• uS$64.7 million in cash and short-term investments at year-end, with no long-term debt or hedging
• uS$40 million untapped credit facility provides financial flexibility
Demonstrated brownfields exploration upside
• exploration increases inferred resources of silver by 38 % and gold by 26 %, as of December 2012
• uS$14.2 million exploration budget for 2013
Disciplined growth strategy
• Acquisition strategy focused on opportunities that will add low-cost production in the short term
• Focus on projects with potential for high-margin operations, with silver/gold comprising 50 % of mine revenue
• evaluating post-discovery, pre-development opportunities in the Americas
Caylloma Mine, Peru
“I thank God for initiating my work career at the Caylloma Mine where I was given the opportunity
to expand and reinforce my knowledge. this has enabled me to contribute with ideas and work
in the implementation of projects to achieve the environment Department’s goals. every day we
work and put effort into conducting environmentally responsible mining.”
Lourdes Esperanza Yanque Huamani
Environmental Engineer, Caylloma Mine, Peru
11
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Growth Strategy
our strategy is to grow organically and sustainably by capitalizing on the exploration
potential of our 95,000 hectare land package in peru and Mexico. We plan to
supplement this growth by acquiring silver-rich projects in the Americas. We are
evaluating post-discovery, pre-development stage projects in peru, Mexico, northern
Chile, Colombia and select countries in Central America.
Fortuna’s objective is to reach an annual production rate of 14 million silver equivalent
ounces by 2016; 7 million ounces from current reserves and mine plans and 7 million
ounces from new reserves, plus lead and zinc by-products.
Maximize production,
profitability and cash
flow of operating mines
Capitalize on
brownfields exploration
opportunities
Pursue M&A
opportunities
• Increase San Jose Mine
capacity to 1,500 tpd, with
commissioning planned for
third quarter of 2013
• Focus on operational
efficiencies to reduce cash
costs at San Jose and
Caylloma
• Conduct a 51,000 meter
exploration program in 2013
• Generate and evaluate
multiple silver-gold targets at
San Jose and Caylloma
• evaluate projects with
silver/gold contribution
of at least 50 % of
revenue
• Focus on projects with
cash costs below the
industry average
San Jose Mine, Mexico
“When we started the association back in 2009 we had no training, capital or resources. We
are very happy with what we have been able to accomplish working collaboratively with Fortuna.
the company even assisted us in sourcing better suppliers to help bring costs down.”
San Jose del Progreso artisanal women’s association, Oaxaca, Mexico
Irene Zoila Vasquez
12
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
2013 Guidance
We forecast a 10 % increase in silver production to 4.4 million ounces and a 13 % increase
in gold production to 23,300 ounces.
Production Guidance
Mine
San Jose Mine, Mexico
Caylloma Mine, peru
Total
Cash Cost Guidance
Silver
(Moz)
2.4
2.0
4.4
Gold
(koz)
20.6
2.7
23.3
Zinc
(Mlb)
–
25.1
25.1
Lead
(Mlb)
–
19.4
19.4
Mine
Q1
(US$/t*)
Q2
(US$/t*)
Q3
(US$/t*)
Q4
(US$/t*)
2013 Cash Cost
(US$/t*)
(US$/oz**)
San Jose Mine, Mexico
Caylloma Mine, peru
76
96
78
97
67
95
65
95
70.4
96.0
Consolidated
2.9
7.7
5.0
* Cash cost per tonne includes all on-site direct and indirect production costs, community relations
expenses, concentrate transportation and corporate management fees. It excludes government royalties
and workers participation
** Cash cost per ounce is calculated using the following metal prices assumptions: Ag = US$30, Au = US$1,700,
Pb = US$2,100/t and Zn = US$2,000/t
2013-2014 Silver and Gold Production Forecast
Silver (Moz)
0.4
0.4
0.8
0.8
4.4
4.4
4.9
4.9
4.0
4.0
1.7
1.7
1.9
1.9
2.5
2.5
2.5
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2011
2012
2012
2013E
2013E
2014E
2014E
2014E
Gold (oz)
20,700
20,700
23,300
23,300
26,000
26,000
26,000
3,300
3,300
2,200
2,200
2,400
2,400
2,600
2,600
6,900
6,900
6,900
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2011
2012
2012
2013E
2013E
2014E
2014E
2014E
“We are thankful for the assistance that the Caylloma Mine has given us. Before our alpacas had
spots and were underweight. now the quality of the wool has improved with artificial
insemination. the donation of breeding males with high genetic value means we now have better
quality alpacas which we sell for higher prices. We thank the Caylloma Mine for the support and
hope it continues to the neighbors in the area.”
Exaltacion Sapacayo Chipa
Caylloma community alpaca shepherd, Arequipa, Peru
13
<< table of Contents
0
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Historical Milestones
2012
• Annual silver production increases by 60 % to 4.0 million ounces
• Annual gold production increases by 195 % to 20,700 ounces
• San Jose Mine mill expansion to 1,500 tpd commences
2011
2010
2009
2008
2007
2006
2005
• San Jose Mine achieves commercial production on time and on budget at 1,000 tpd
• Annual silver production increases by 31 % to 2.5 million ounces
• Common shares begin trading on the new York Stock exchange
• Fortuna raises more than CAD$80 million in two bought-deal financings
• Shares upgraded to toronto Stock exchange from toronto Venture exchange
• San Jose Mine construction commences
• 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 and construction permits received for San Jose Mine
• Caylloma Mine annual silver production increases by 85 %
• Shares begin trading on the Bolsa de Valores de lima
• Successful drilling at the San Jose Mine significantly increased Ag eq resources
• Caylloma Mine resumes production at approximately 500 tpd
• Fortuna purchases 76 % interest in the San Jose project
• Fortuna Silver Mines Inc. is established in British Columbia, Canada
• Shares begin trading on the toronto Venture exchange
• Fortuna acquires 100 % interest in the Caylloma Mine
“I am proud of working at the Caylloma Mine, contributing to the growth of the operation as well
as being able to grow personally and bring progress to my family.”
Elias Emiliano Delgado Llacho
Environmental Supervisor, Caylloma Mine, Peru
14
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
T Y
E
C
O
EN
G
M
A
M
G
U
E
N
M
I
RESPONSIBLE
MINING
T
Y
E
N
T
H & S A F
T
L
A
E
H
E
NVIRON M E
N T
Sustainability
At Fortuna, we strive to create sustainable
value for our employees and their families, for
communities near our operations and for
society at large. to succeed in today’s
challenging operating environment, we
recognize that we must communicate openly
with stakeholders about all aspects of our
business. our goal is to build strong
relationships by collaborating with local
communities in ways that are both good for
business and human development in the
countries where we operate.
Caylloma Mine, Peru
<< table of Contents
15
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Caylloma Mine, Peru
Employee health, safety and wellbeing
We believe that a safe and healthy work environment benefits our employees and our business. For us, this is at the
core of our responsibility to employees and their families. We do not tolerate unsafe acts or conditions. As an
organization, we are committed to reducing injuries and occupational illnesses and to employing the best safety and
health practices.
our commitment means that we work continuously to ensure a safe workplace and to provide training and safe
equipment for employees and contractors. We also encourage and promote a strong safety culture that helps
employees understand personal health risks and empowers them to report and address safety issues.
San Jose Mine safety team
Mine rescue training at Caylloma Mine, Peru
16
<< table of Contents
16
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
San Jose del Progreso farmers, Oaxaca, Mexico
The environment
Managing our environmental impact is a key aspect of being a good corporate citizen. It is not only part of our overall
corporate responsibility, but it also makes good business sense.
throughout our organization, we interact proactively with authorities and communicate transparently about our
activities. Starting at the earliest stages of exploration through to project development, we work directly and
collaboratively with local communities to safeguard the environment for future generations.
Community engagement
Wherever we operate, our goal is to contribute to neighboring communities through partnerships, sponsorships and
donations that improve health, education and economic development.
our community relations programs recognize the unique culture, traditions and needs of local communities. By actively
engaging with local stakeholders, we seek opportunities where we can establish and participate collaboratively in
sustainable community development projects.
Improving health and nutrition
We direct financial and human resources to help build healthier and stronger communities. our work recognizes the
importance of health care and nutrition services for the local population, particularly women and children.
Supporting education
We focus on developing a broad range of work-related skills and on building infrastructure, channeling our efforts into
supporting the education of both children and adults. our activities include providing scholarships for primary and
secondary school and college students.
Encouraging economic development
We have implemented several projects aimed at encouraging local economic development. Working alongside local
stakeholders, we aim to establish or increase self-sustaining economic activities that improve the quality of life for
residents. our activities include starting and supporting programs such as genetic enhancement of local alpaca herds,
trout breeding and prioritizing employment for local residents in our operations.
<< table of Contents
17
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
“the investment made by Fortuna was important to build an ideal, modern daycare facility
which contributes to building strong values and foundations for our kids.”
Diana Ivet Suarez Vasquez
Director at Estancia Infantil Rivera
San Jose del Progreso Child Daycare Centre, Oaxaca, Mexico
18
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Case Study
Improving communities and the environment
When Fortuna started to plan construction of the San Jose Mine in oaxaca, Mexico,
sourcing water for the 1,500 tonne per day underground operation presented a
significant challenge. the mine is located in a semi-arid region that suffers from a long
history of water scarcity.
The challenge
the company recognized that sourcing water from traditional water wells or the nearby Atoyac River were not
sustainable options. In 2008, Fortuna identified a potential alternative water source: an abandoned grey water
treatment plant located in the community of ocotlan de Morelos about 15 kilometers from the mine site.
the plant had become largely non-functioning because of a lack of investment and maintenance, causing serious
environmental and public health problems in the community and surrounding area. these included:
• pollution of the local aquifer from raw sewage discharges
• farmers using overflow from the plant to irrigate crops, causing stomach infections in community residents
• local roads flooded with sewage during the rainy season, polluting neighboring towns and interrupting transit,
school attendance and sports activities at the nearby athletics field
the plant also emitted unbearable odors and excessive noise and served as the source for flies, rodents and disease-
causing bacteria.
The solution
In January 2010, Fortuna signed a 15-year renewable agreement with the Municipality of ocotlan to refurbish and
operate the plant in exchange for residual grey water to use at the San Jose Mine. Fortuna made the necessary
investments to transform the plant into a modern grey water treatment facility and, in october 2010, the upgraded
plant became fully operational.
the renovated plant provides approximately 20 % of the make-up water currently required for the San Jose operation.
the balance comes from rainwater collected at the tailings dam during the rainy season and from water recycled at the
zero-discharge mine site.
The benefits
Community support for the San Jose Mine has been strengthened thanks to the significant environmental, health and
social benefits generated by Fortuna’s refurbishment of the grey water treatment plant. today, the facility serves as a
new source of employment, hosts community site visits and contributes to improving the surrounding landscape.
Sewage is fully contained and treated according to international standards and flooding has been eliminated. the
plant no longer pollutes the environment and health hazards caused from sewage contamination no longer exist. the
residents of ocotlan can now use the athletic facility, attend school and enjoy public gardens surrounding the plant in
an eco-friendly environment.
<< table of Contents
19
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Mineral Reserves & Resources
Mineral Reserves – Proven and Probable
Property
Classification
Caylloma Mine, Peru
Silver Veins
polymetallic Veins
Combined-All Veins
San Jose Mine, Mexico
Total
proven
probable
proven + probable
proven
probable
proven + probable
proven
probable
proven + probable
proven
probable
proven + probable
proven + probable
Mineral Resources – Measured and Indicated
Property
Classification
Caylloma Mine, Peru
Measured
Indicated
Measured + Indicated
San Jose Mine, Mexico Measured
Indicated
Measured + Indicated
Total
Measured + Indicated
1,656
Mineral Resources – Inferred
Property
Classification
Caylloma Mine, Peru
San Jose Mine, Mexico
total
Inferred
Inferred
Inferred
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Ag
(Moz)
Au
(koz)
Contained Metal
11
246
257
1,242
2,809
4,052
1,253
3,055
4,308
51
3,283
3,335
7,643
872
386
407
92
121
112
99
142
130
246
189
190
156
0.06
0.96
0.93
0.33
0.33
0.33
0.33
0.38
0.37
2.31
1.57
1.58
0.90
0.43
0.31
0.31
1.48
1.66
1.60
1.47
1.55
1.52
n/A
n/A
n/A
n/A
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
431
1,170
1,601
3
53
56
72
82
79
71
74
74
79
0.30
0.34
0.33
0.66
0.60
0.61
0.34
0.88
0.75
0.79
n/A
n/A
n/A
n/A
0.64
0.51
0.51
2.20
2.27
2.25
2.19
2.13
2.15
n/A
n/A
n/A
n/A
Zn
(%)
1.53
1.40
1.43
n/A
n/A
n/A
n/A
0.3
3.1
3.4
3.7
10.9
14.6
4.0
14.0
17.9
0.0
7.6
7.7
13.2
30.2
43.4
13.2
37.8
51.1
0.4
3.8
20.0 165.7
20.4 169.5
38.3 220.6
Contained Metal
Ag
(Moz)
Au
(koz)
1.0
3.1
4.1
0.0
0.1
0.1
4.2
4.2
12.8
17.0
0.1
1.0
1.1
18.1
Contained Metal
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Ag
(Moz)
Au
(koz)
6,633
4,257
10,890
101
185
134
0.27
1.57
0.78
1.84
n/A
n/A
2.58
n/A
58.5
21.5
25.3 214.9
n/A
46.8 273.4
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. There are no known legal, political, environmental, or other risks that could materially affect the potential development of the Mineral
Resources or Mineral Reserves at Caylloma or San Jose
5. Mineral Resources and Mineral Reserves are estimated as of June 30, 2012 and reported as of December 31, 2012 taking into
account production-related depletion for the period of July 1, 2012 through December 31, 2012 with the exception of the Animas and
Animas NE veins at Caylloma which were re-estimated using all exploration drilling information as of December 31, 2012
6. Metallurgical recovery rates used at Caylloma for estimation of NSR values for sulfide material are 82 % for Ag, 45 % for Au, 93 % for
Pb and 88 % for Zn; and for oxide material are 64 % for Ag, 45 % for Au, 46 % for Pb and 30 % for Zn
7. Caylloma Mineral Reserves are estimated using break-even cut-off grades based on estimated NSR values using assumed metal prices
of US$29.36/oz Ag, US$1,544/oz Au, US$2,245/t Pb and US$2,139/t Zn; metallurgical recovery rates detailed in footnote 6; and
historical operating costs adjusted for inflation. Caylloma Mineral Resources are reported based on estimated NSR values using metal
prices of US$25.14/oz Ag, US$1,391.63/oz Au, US$2,116/t Pb and US$2,028/t Zn; metallurgical recovery rates detailed in footnote 6;
and an NSR cut-off of US$30/t
8. San Jose Reserves are estimated using break-even cut-off grades based on assumed metal prices of US$29.36/oz Ag and
US$1,544/oz Au, estimated metallurgical recovery rates of 88 % for Ag and 89 % for Au and projected operating costs. San Jose
Resources are estimated and reported at a Ag Equivalent cut-off grade of 70 g/t, with Ag Eq in g/t = Ag (g/t) + Au (g/t) *
((US$1,391.63/US$25.14) * (90/88)) = Ag (g/t) + Au (g/t)*56.61
20
<< table of Contents
9. Totals may not add due to rounding procedures
10. N/A = Not Applicable
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
San Jose Mine, Mexico
Proven &
Probable
Reserves
Measured &
Indicated
Resources
Inferred
Resources
Sustainable Mineral Reserve and Resource Growth
* 70
)
z
o
M
(
q
E
g
A
-
l
a
t
e
M
d
e
n
a
t
n
o
C
i
60
50
40
30
20
10
0
2005
2006
2007
2008
2009
2010
2011
2012
* Ag Eq for Resources calculated using Ag = US$25.14/oz and Au = US$1,391.63/oz
Ag Eq for Reserves calculated using Ag = US$29.36/oz and Au = US$1,544.00/oz
“It brings great satisfaction to share my knowledge on trout breeding with the Caylloma trout
Breeders Association. this project will give the opportunity to generate capabilities and establish
businesses in the town of Caylloma.”
Julio Iglesia Monzon
Sierra Exportadora, Caylloma Mine, Peru
21
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
CAYLLOMA MINE AT-A-GLANCE
PERU
Lima
Lima
OWNERSHIP
100 % interest
LAND PACKAGE
31,200 hectares
DEPOSIT TYPE
Intermediate-sulphidation
epithermal deposit
Caylloma Mine, peru
STATUS
• Mill and underground mine operating at
over 1,250 tpd
• Brownfields exploration underway for
high-grade silver veins
Caylloma is an underground silver-lead-zinc mine located in southern
peru in the department of Arequipa. Its two commercial products are
silver-lead and zinc concentrates.
2012 results
Caylloma produced 2.0 million ounces of silver in 2012, achieving its production forecast for
the year. the mine has met or exceeded our production forecasts every year since 2007,
when the mine and mill were upgraded.
In 2012, cash cost per ounce of silver, net of by-product credits, was uS$8.07, compared to
negative uS$0.78 in 2011. Cash cost per tonne was uS$87.28, a 26 % increase over 2011.
Cash costs increased in 2012 primarily because of higher contractor tariffs and labour costs.
While ore production increased 3 % and silver head grades rose 4 %, silver production
increased 1 % year-over-year because of a 5 % decrease in metallurgical recoveries. Following
extensive testing, we implemented recommendations to improve metallurgical recoveries,
improving silver recovery to 80 % in november and December 2012, with further improvement
to 82 % expected in 2013.
Additionally, a new tailings facility was commissioned in January 2013, providing sufficient
capacity for approximately 17 years of operation.
Caylloma Mine Management Team:
(L-R) Alexander Carbajal, Information
technology Chief; Fernando Rivera,
Budget and Costs Chief; Olga Barco,
logistics Chief; Rodolfo Robles,
Administration and Finance Manager;
Wilber Zamora, Core Business
Manager; Alejandro Reategui,
Human and organizational
Development Manager; Kattya
Villanueva, legal Chief; Cesar
Fiestas, Chief Accountant
22
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Outlook for 2013
the mine is scheduled to produce 2 million ounces of silver and 2,700 ounces of gold plus lead and zinc by-products,
with ore grading 170 g/t silver and 0.40 g/t gold. Cash cost per ounce of silver is forecast to be uS$7.70, net of by-
product credits, a decrease of approximately 5 % over 2012.
We have budgeted uS$30.7 million in capital expenditures, primarily for camp infrastructure, mine development,
tailings dam expansion and an ongoing energy generation project.
“I feel good…as a Caylloma Mine employee, my goal is to achieve personal growth, progress
for me and my family as well as to contribute to our country [peru].”
Bernardo Cayllahue Sapacayo
Warehouse Assistant, Caylloma Mine, Peru
23
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
SAN JOSE MINE AT-A-GLANCE
MEXICO
Mexico
City
OWNERSHIP
100 % interest
LAND PACKAGE
64,400 hectares
DEPOSIT TYPE
High-grade, low-sulphidation
epithermal vein deposit
STATUS
• Mill and mine operating at over 1,000 tpd
• Mill expansion to 1,500 tpd underway with
commissioning planned for third quarter
• exploration for high-grade silver veins
underway
San Jose Mine, Mexico
San Jose is an underground silver-gold mine located in southern
Mexico in the state of oaxaca. Its commercial product is a high-grade
silver-gold concentrate. Commercial production commenced on
September 1, 2011.
2012 results
Following its commissioning in September 2011, San Jose operated at a rate of 1,055 tpd, on
average, in 2012. the mine produced 1.95 million ounces of silver and 17,918 ounces of
gold, 15 % and 19 %, respectively, above our 2012 production guidance.
Cash cost per ounce of silver was uS$3.76, net of by-product credits, compared to uS$4.69
in 2011. Cash cost per tonne of processed ore for 2012 was uS$74.10, or 6 % above forecast
as a result of accelerated mine preparation in the fourth quarter and certain non-recurring items.
We produced more silver and gold than planned in 2012, as higher grade ore was mined
ahead of schedule on level 1350, contributing approximately 47 % of mine production during
the year.
During 2012, San Jose’s first full year of operation, the processing plant performed within
design parameters, with silver and gold recoveries averaging 88 % and 87 %, respectively.
As part of our ongoing capital program and community development activities, we completed
the final two kilometers of a thirteen kilometer water pipeline in october, connecting the
ocotlan grey water treatment plant with the San Jose Mine site. the pipeline, planned and
constructed in collaboration with state and community authorities, is delivering approximately
20 % of the make-up water currently required for the San Jose mill.
San Jose Mine Management Team:
(L-R) Alberto Gonzalez Ruiz, Cost
Assistant; Alberto Olmos Carrillo,
Cost Superintendent; Nestor Ramirez
Chavez, Cost Supervisor; Alejandro
Chavez Hernandez, exploration
Manager; Carlos Manrique Bellido,
operation Manager; Patricia Gonzalez
Pineda, Chief Metallurgist; Juan
Carlos Gomez Muñoz, Financial and
Administrative Manager; Eduardo
Abad Flores, Human and organizational
Development Manager; Javier
Castañeda Pedraza, Community
Relations Manager
24
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Outlook for 2013
We expect San Jose to produce 2.4 million ounces of silver and 20,600 ounces of gold, with ore grading 186 g/t silver
and 1.60 g/t gold. Cash cost per ounce of silver is forecast to be uS$2.90, net of by-product credits, or approximately
23 % lower than in 2012.
the mill expansion to design capacity of 1,500 tpd from 1,000 tpd is on track to be commissioned at the beginning of
the third quarter. When completed, San Jose is expected to annually produce approximately 2.9 million ounces of silver
and 23,000 ounces of gold, or 4.4 million silver equivalent ounces.
We have budgeted uS$22.0 million in capital expenditures at San Jose, primarily for plant expansion, mine development
and tailings dam expansion.
“the San Jose Mine is a good place to work because we have the opportunity to develop
ourselves. I am happy because I learn something new every day.”
Judith Cecilia Padilla Luis
Dining room, San Jose Mine, Mexico
25
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Silver Market Review and outlook*
Silver price slips as fabrication demand slows
Silver prices averaged uS$31.17 per ounce in 2012, down 11.7 % from 2011, when prices averaged a nominal record
high of uS$35.29. this was the first annual average decline since 2009, when prices fell 2.0 % from the previous year,
and the largest percentage decline since 2001, when prices came off 12.4 %.
total silver supply rose to 981.6 million ounces in 2012, a 1.5 % year-over-year increase after declining 0.7 % in 2011.
Secondary supply was nearly flat compared with 2011, while mine supply rose by 12.4 million ounces.
Silver Price Performance*
52
52
48
48
44
44
40
40
36
36
32
32
28
28
24
24
20
20
16
16
12
12
8
8
4
4
0
0
z
z
z
o
o
o
/
/
/
$
$
$
S
S
S
U
U
U
F
Feb-05
eb-05
F
Feb-06
eb-06
eb-07
Feb-07
F
eb-07
F
Feb-08
eb-08
F
Feb-09
eb-09
eb-10
Feb-10
F
eb-10
F
Feb-11
eb-11
F
Feb-12
eb-12
eb-13
Feb-13
F
eb-13
*Daily average Comex through April 3, 2013
Silver production in Mexico continues to grow
Mexico was the largest producer of silver in the world in 2012, with mine output of 136.6 million ounces, up 2.4 %
from the record output of 133.4 million ounces in 2011. Chinese mine production rose to 122.2 million ounces last
year, up 2.7 % from the previous year. China is now the second largest silver producer in the world. peruvian silver
output increased, for the first time since 2009, to 111.9 million ounces in 2012, compared to 109.8 million ounces
in 2011.
3
Cash costs at primary silver mines continued to increase rapidly in 2012. on a production-weighted basis, annual
average cash costs are estimated to have increased 19.0 % to uS$10.04 per ounce in 2012. Much of the increase in
cash costs is due to external factors being faced by the entire mining industry, such as higher input costs.
Secondary supply of silver, meanwhile, was nearly flat at 283.3 million ounces, compared to 281.5 million ounces in
2011. lower silver prices in 2012 reduced the level of jewelry and silverware scrap entering the recycling circuit.
However, secondary supply was boosted by a three-fold year-over-year increase in Indian scrap flows, which rose to
15.3 million ounces.
Demand slips on lower industrial use
Fabrication demand for silver fell to an estimated 858.9 million ounces in 2012, a decrease of 1.8 % over 2011
levels. Fabrication demand decreased due to declines in demand from the photovoltaics industry, the photography
industry and the jewelry and silverware sector.
the slowdown in industrial activity throughout 2012 weighed on demand, slowing demand growth from electronics
manufacturers. Silver use in the photography sector continued to decline, as digital cameras commanded a larger
share of the market. Silver demand for fabrication of electronics and electrical components rose at a substantially
slower pace in 2012 relative to the past two years due to lower computer and mobile phone sales. Demand from the
solar panel industry in 2012 declined for the first time in over a decade after multiple years of double-digit growth.
26
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
Lower prices boost investment demand
Silver investment demand rose 32.1 % to 122.7 million ounces in 2012. Silver exchange traded product (etp)
holdings rose 51.4 million ounces, a major contributor to higher demand. Despite a downward trend in silver prices,
investors aggressively bought silver during price dips. Combined silver etp holdings stood at 619.1 million ounces at
the end of 2012, up 9.1 % from 567.4 million ounces at the end of 2011.
Coin demand is estimated to have declined by about 18 % relative to 2011 levels, with sales of u.S. Mint Silver eagle
coins in 2012 down 15.4 % from a year ago.
Outlook: Demand growth to resume
In 2013, fabrication demand for silver is forecast to rise 2.1 % due to the resumption of growth in jewelry and
photovoltaic demand for the metal. Silver demand from the solar panel manufacturers is expected to improve as the
industry’s supply overhang declines. electronics demand growth may continue to slow as the tablet market continues
to expand, reducing demand for more conventional computers.
2012 Silver Production by Country
770.9 million ounces
2012 Total Fabrication Demand for Silver
876.3 million ounces
Mexico
Mexico
Mexico
21.3 %
21.3 %
21.3 %
Photograph
Photography
Photograph
y
11 %
11 %
Other
Other
Other
34.8 %
34.8 %
34.8 %
United States
United States
United States
4.1 %4.1 %
4.1 %
Australia
Australia
7.6 %
7.6 %
China
China
China
17.8 %
17.8 %
17.8 %
Other Uses
Other Uses
Other Uses
24 %
24 %
24 %
urPe
Peru
14.4 %
14.4 %
Solar Panels
Solar P
anels
5 %
5 %
Electronics
Electronics
Electronics
and Batteries
and Batteries
and Batteries
26 %
26 %
Jewelry and
elrwJe
y and
Silverware
Silverw
are
34 %
34 %
* Source: CPM Group
“I like working at the San Jose Mine because it employs many women. With that we can
develop ourselves and keep our families going. the mine is also concerned about our
health, our safety and the environment.”
Elia Vasquez Hernandez
Cleaning service, San Jose Mine, Mexico
27
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
FInAnCIAl ReVIeW
MANAGEMENT’S DISCUSSION AND ANALYSIS
page 29
30
31
32
35
37
40
42
44
44
44
44
48
51
51
53
54
56
57
57
57
59
60
60
60
61
Business of the Company
2012 Highlights
2013 outlook and Guidance
Results of operations
property option Agreements
Annual Financial Results
Quarterly Information
Fourth Quarter 2012 Financial Results
non-GAAp Financial Measures
Adjusted net Income (non-GAAp financial measure)
operating cash flow per share before change in working capital items (non-GAAp financial measure)
Cash cost per ounce of payable silver and cash cost per tonne of processed ore (non-GAAp financial measure)
liquidity and Capital Resources
off-Balance Sheet Arrangements
Related party transactions (expressed in $‘000’s)
Significant Accounting Judgments and estimates
Financial Instruments and Related Risks (expressed in ‘000’s)
Derivatives
Significant Accounting policy
Significant Changes in Accounting policies including Initial Adoption
new Accounting Standards
other Data
Share position and outstanding Warrants and options
other Risks and uncertainties
Controls and procedures
Cautionary Statement on Forward-looking Statements
CONSOLIDATED FINANCIAL STATEMENTS
63
64
65
66
67
68
69
Report of Independent Registerered 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
notes to Consolidated Financial Statements
Caylloma Mine, Peru
28
<< table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
FoR tHe YeAR enDeD DeCeMBeR 31, 2012
As at March 19, 2013
(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. this MD&A, which has been prepared as of March 19, 2013, should be read in
conjunction with the Company’s audited consolidated financial statements for year ended December 31, 2012 and the
related notes contained therein. the Company reports its financial position, financial performance and cash flows in
accordance with 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, total production cost per tonne, adjusted net income, operating cash flow per
share before change in working capital items, 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 silver/lead/zinc mine (“Caylloma”) in southern peru and the San Jose
silver/gold mine (“San Jose”) in Mexico.
Fortuna is a publicly traded company incorporated and domiciled in Canada. Its common shares are listed on the new
York Stock exchange under the trading ticker symbol FSM, on the toronto Stock exchange and lima Stock exchange,
both under the trading ticker symbol FVI, and on the Frankfurt Stock exchange under the trading symbol F4S.F.
the Company’s registered office is located at Suite 650, 200 Burrard Street, Vancouver, British Columbia, Canada, V6C 3l6.
the financial results include the accounts of the Company and its wholly owned subsidiaries: Minera Bateas S.A.C.
(“Bateas”); Fortuna Silver (Barbados) Inc. (“Barbados”); 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”).
<< Financial Review table of Contents
29
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
2012 Highlights
FULL YEAR FINANCIAL AND OPERATING HIGHLIGHTS
net income for the year ended December 31, 2012 (“2012”) increased by 62% to $31.5 million, compared to $19.5
million for the year ended December 31, 2011 (“2011”). the increase, in spite of an 11% lower silver price, reflects the
contribution of San Jose in its first full year of production, and a lower effective income tax rate.
Cash generated by operating activities, before changes in working capital, increased by 59% to $62.2 million attributed
to San Jose’s strong cash margins and a lower cash tax rate.
Basic earnings per share for the year rose by 56% to $0.25 (2011: $0.16). operating cash flow per share, before changes
in working capital items, increased by 56% to $0.50 (2011: $0.32) (Refer to non-GAAp financial measures).
In 2012, sales were comprised of silver and gold, 67% and 17%, respectively, compared to the prior year of 65% and 6%,
respectively.
Silver production increased by 60% to 3,987,757 ounces (2011: 2,486,655 ounces) and gold production rose by 199%
to 20,699 ounces (2011: 6,917 ounces), exceeding annual guidance by 8% for silver and 19% for gold.
Consolidated cash cost per ounce of payable silver, net of by-product credits, was $5.96, compared to $0.25 in 2011.
the higher cost was primarily at Caylloma, due to higher unit cash costs, higher refining charges, and lower by-product
credits. (Refer to non-GAAp financial measures).
FOURTH QUARTER HIGHLIGHTS AND RECENT DEVELOPMENTS
Fourth quarter net income was $8.5 million, compared to a net loss of $1.8 million a year ago. Cash generated by
operating activities, before changes in working capital, increased by 35% over the prior period to $11.9 million. the
increase in net income and cash generation was driven by higher sales at San Jose, lower effective income tax rate, and
lower cash tax rate.
Basic earnings per share for Q4 2012 improved to $0.07, compared to a $0.01 loss per share in Q4 2011. operating
cash flow per share, before change in working capital items, increased by 43% to $0.10, compared to $0.07 in Q4 2011
(Refer to non-GAAp financial measures).
Compared to the third quarter of 2012, cash generated by operating activities, before changes in working capital,
decreased by $8.1 million to $11.9 million primarily due to lower sales of $5.9 million driven by lower final sales
adjustments of $3.5 million, changes in concentrate inventory, and lower head grades at San Jose, and to higher unit
cash cost at Caylloma with an impact of $1.3 million.
Silver production increased by 11% to 1,010,730 ounces (Q4 2011: 913,803 ounces), while gold production rose by 5%
to 4,368 ounces (Q4 2011: 4,153 ounces).
Consolidated cash cost per ounce of payable silver, net of by-product credits, was $8.85, compared to $5.20 in Q4 2011,
due to higher cash cost per ounce at both Caylloma and San Jose. the main increase comes from San Jose, where unit
costs were much lower in Q4 2011 as low cost development ore were consumed by the plant during the first quarter of
commercial production. Compared to Q3 2012, consolidated cash cost per ounce of payable silver, net of by-product
credits increased by 44% in Q4 2012 due to lower silver and gold head grades at San Jose.
MANAGEMENT CHANGE
the Company appointed Robert Brown as Vice-president, Corporate Development effective August 1, 2012.
MINE ACCIDENT
It is with great sorrow the Company informs that on January 2, 2013, an electrical accident claimed the life of a contractor
at the San Jose mine.
30
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
2013 outlook and Guidance
PRODUCTION GUIDANCE
For 2013, the Company forecasts production of 4.4 million ounces of silver and 23,300 ounces of gold, an increase of
10% and 13%, respectively over 2012, or 5.7 million silver equivalent ounces (using $30/oz silver and $1,700/oz gold).
Mine
San Jose, Mexico
Caylloma, peru
Total
(CAPEX refers to capital expenditure)
Silver
(M oz)
2.4
2.0
4.4
Gold
(k oz)
20.6
2.7
23.3
CAPEX
($ millions)
Cash Cost (*)
($/t)
22.0
30.7
52.7
70.4
96.0
--
For 2013, the Company projects zinc and lead production of 25.1 million pounds and 19.4 million pounds, respectively,
an increase over 2012 of 9% and 12%, respectively.
CASH COST QUARTERLY GUIDANCE
Mine
San Jose
Caylloma
Consolidated
Q1
($/t)
76
96
Q2
($/t)
78
97
Q3
($/t)
67
95
Q4
($/t)
65
95
2013
($/t) ($/oz)
70 2.90
96 7.70
5.00
* Note: Cash cost per tonne (“$/t”) includes all on-site direct and indirect production costs, community relations expenses, concentrate
transportation and corporate management fees. It excludes government royalties and workers participation. Cash cost per ounce
(“$/oz”) is net of by-product credits.
Cash cost at San Jose for 2013 is expected to decrease by 5% over the 2012 cost of $74.10 per tonne, as mine
throughput rises on completion of development activities. Cash cost at Caylloma for 2013 is expected to increase by
10% over the 2012 cost of $87.28 per tonne, due to higher wages, contractor tariffs, and operational items such as
higher ground support in level 6 of the Animas and Bateas veins, and increased diesel energy generation. the forecast
for 2013 incorporates certain cost containment measures taken by the Company, such as investments required to
eliminate energy restrictions from the power grid.
SAN JOSE MINE
In 2013, San Jose is expected to process 451,000 tonnes of ore grading 186 g/t silver and 1.60 g/t gold. Capital
expenditures for the year are estimated to be $22.0 million. the mill expansion to 1,500 tonnes per day (“tpd”) from
1,000 tpd is on track to be commissioned at the beginning of third quarter. Major capital expenditures include:
• Mine development: $5.7 million
• plant expansion: $9.1 million
• tailings dam expansion: $4.4 million
CAYLLOMA MINE
Caylloma is expected to process 464,100 tonnes of ore grading 170 g/t silver and 0.40 g/t gold in 2013. Capital
expenditures are estimated to be $30.7 million, including the following major items:
• Mine development: $7.6 million
• Camp infrastructure: $8.6 million
• tailings dam expansion: $3.6 million
• power grid: $4.8 million
BROWNFIELDS EXPLORATION
the Company´s brownfields exploration budget for 2013 is estimated at $14.2 million: $7.5 million will be spent at San
Jose and $6.7 million at Caylloma.
<< Financial Review table of Contents
31
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Results of operations
CONSOLIDATED METAL PRODUCTION
QUARTERLY RESULTS
Three months ended December 31,
YEAR TO DATE RESULTS
Years ended December 31,
2012
2011
2012
2011
Caylloma
San Jose Consolidated
Caylloma
San Jose Consolidated
Caylloma
San Jose Consolidated
Caylloma
San Jose
Consolidated
519,549 491,181
3,854
–
–
514
4,936
6,135
1,010,730
4,368
4,936
6,135
536,426 377,377
3,562
–
–
591
4,396
5,688
913,803 2,038,579 1,949,178 3,987,757 2,008,488 478,167
4,524
–
17,918
–
–
20,699
17,886
22,396
2,393
19,678
23,425
4,153
4,396
5,688
2,781
17,886
22,396
2,486,655
6,917
19,678
23,425
–
–
–
–
–
–
48
–
48
36
–
36
9.30
8.38
8.85
6.48
3.34
5.20
8.07
3.76
5.96
(0.78)
4.69
0.25
Consolidated
Metal Production
Silver (oz)
Gold (oz)
lead (000’s lb)
Zinc (000’s lb)
Copper
(000’s lb)
production
cash cost
(uS$/oz Ag)*
* Net of by-product credits
Silver and gold production for the year ended December 31, 2012, totaled 3,987,757 ounces and 20,699 ounces,
respectively, exceeding by 8% and 19%, respectively, the Company’s production guidance for 2012. When compared to
the previous year, silver and gold production increased by 60% and 199%, respectively, as San Jose contributed its first
full year of production after commissioning in September 2011.
CONSOLIDATED CASH COST PER OUNCE OF PAYABLE SILVER
Consolidated cash cost per ounce of payable silver for 2012, net of by-product credits, was $5.96 (2011: $0.25) (Refer
to non-GAAp financial measures for reconciliation of cash cost to the cost of sales). the higher cost was primarily at
Caylloma, which increased from negative $0.78 per ounce in 2011 to $8.07 per ounce in 2012, due to higher unit cash
costs (up $4.57), higher refining charges (up $1.24), and lower by-product credits (down $3.04) for an overall increase
of $8.85 per ounce. this increase is in line with our forecast for 2012 (See Caylloma Mine Review and San Jose Mine
Review for more detail).
Consolidated cash cost per ounce of payable silver in Q4 2012, net of by-product credits, was $8.85, compared to $5.20
in Q4 2011, due to higher cash cost per ounce at both Caylloma and San Jose. the main increase comes from San
Jose, where unit costs were much lower in Q4 2011, as the mine completed its commissioning phase and started its
first full quarter of commercial production. Cash cost per ounce at Caylloma was higher due to higher unit costs and
refining charges. Compared to Q3 2012, consolidated cash cost per ounce increased 44% due mainly to lower silver
and gold head grades at San Jose of 7% and 20%, respectively.
During the fourth quarter of 2012, the Company identified through its internal control procedures an inconsistency in
San Jose’s reported cash cost per ounce of payable silver. the adjusted San Jose cash cost per ounce of payable silver
is as follows: Q1 2012 $0.83, Q2 2012 $0.82, and Q3 2012 $4.81. the adjusted consolidated cash cost per ounce of
payable silver is as follows: Q1 2012 $3.96, Q2 2012 $4.75, and Q3 2012 $6.15. the Company deems the adjustments
not to be material. (Refer to non-GAAp financial measures).
32
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
SAN JOSE MINE REVIEW
San Jose is an underground silver-gold mine located in southern Mexico in the State of oaxaca. Its commercial product
is silver-gold concentrate. Commercial production commenced on September 1, 2011. the table below shows the main
variables used by management to measure the operating performance of the mine: throughput, grade, recovery, metal
production, and unit costs.
Mine Production
YTD
Q4
Q3
Q2
Q1
YTD
San Jose Mine
2012
2011
Q4
Q3
Tonnes milled
Average tonnes milled per day
369,022
1,055
98,348
1,107
91,607
1,048
92,011
1,034
87,056 116,410
954
989
87,884
955
28,526
951
Silver
Grade (g/t)
Recovery %
production (oz)
Gold
Grade (g/t)
Recovery %
production (oz)
Unit Costs
production cash cost (uS$/oz Ag)*
production cash cost (uS$/tonne)
unit net Smelter Return (uS$/tonne)
* Net of by-product credits.
188
88
124
89
1,949,178 491,181 502,835 486,297 468,865 478,167 377,377 100,790
177
88
191
89
198
85
150
85
187
88
159
84
1.74
87
17,918
1.39
88
3,854
1.73
89
4,501
1.96
88
5,065
1.92
84
4,498
1.43
85
4,524
1.48
85
3,562
1.25
84
962
3.76
74.10
209.70
8.38
82.82
198.53
4.81
80.59
213.44
0.82
66.50
207.45
0.83
65.46
223.07
4.69
50.73
155.56
3.34
47.16
160.93
9.72
61.70
154.58
During 2012, silver and gold production at San Jose was 15% and 19%, respectively, above annual production guidance.
the increased production resulted from mining higher grade ore ahead of schedule on level 1350, which contributed
approximately 47% of mined ore in the period, or 160% above plan. By accelerating completion of the main access ramp
and preparing levels 1350 and 1300 ahead of plan, we added operational flexibility to the mine that will help to sustain
production in the face of potential ore variability and to secure the ramp-up of production to 1,500 tpd by the third quarter
of 2013. Mine preparation peaked in Q4 2012 at 1,127 meters of underground development, compared to 614 meters,
on average, during the first three quarters of the year. In Q4 2012, silver and gold head grades decreased compared to
the first nine months of 2012 because of higher production of lower grade development ore from level 1300.
In its first full year of operation, the San Jose processing plant performed within design parameters, with silver and gold
recoveries of 88% and 87%, respectively, and average ore throughput of 1,055 tpd.
Cash cost per tonne of processed ore for 2012 was $74.10, or 6% above forecast as a result of accelerated mine
preparation in the fourth quarter and certain non-recurring items. Cash cost per payable ounce of silver for 2012 was
$3.76, net of by-product credits.
Cash cost per tonne for Q4 2012 was $82.82, or 76% above Q4 2011. the increase is mainly because of the high
volume of lower cost development ore treated during Q4 2011, as the mine completed its commissioning phase and
started its first full quarter of operations. Cash cost per tonne in Q4 2012 was 12% above the full year due, in part, to
the acceleration of mine preparation in Q4 2012. Cash cost per payable ounce of silver in Q4 2012 was 151% above
the same period a year ago because of lower unit costs in Q4 2011, as explained above. Cash cost per payable ounce
of silver in Q4 2012 was $8.38, or 74% above Q3 2012, due to lower head grades in Q4 2012 (Refer to 2013 outlook
and Guidance for cost estimates for 2013).
Cash cost per ounce of payable silver and cash cost per tonne of processed ore are non-GAAp financial measures (Refer
to non-GAAp financial measures for reconciliation of cash cost to the cost of sales).
on october 2012, the Company, working in collaboration with state and community authorities, completed the final two
kilometers of a thirteen kilometer, eight inch diameter water pipeline connecting the ocotlan water treatment plant with
the San Jose mine site. the pipeline is delivering approximately 20% of the make-up water currently required for the San
Jose mill.
Capital expenditures at San Jose in 2012 were $14.3 million, which is lower than the $30.8 million budgeted mainly due
to the postponement of the dore plant project.
<< Financial Review table of Contents
33
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
CAYLLOMA MINE REVIEW
Caylloma is an underground silver-lead-zinc mine located in southern peru, in the Arequipa department. Its commercial
products are a silver-lead and zinc concentrates. the table below shows the main variables used by management to
measure the operating performance of the mine.
Mine Production
YTD
Q4
2012
Q3
Q2
Q1
YTD
Q4
2011
Q3
Q2
Q1
Caylloma Mine
Tonnes milled
Average tonnes
milled per day
Silver
Grade (g/t)
Recovery %
production (oz)
Gold
Grade (g/t)
Recovery %
production (oz)
Lead
Grade (%)
Recovery %
production (000’s lb)
Zinc
Grade (%)
Recovery %
production (000’s lb)
Copper
462,222
115,522 117,386
115,870
113,444
448,866
116,363
115,574
111,992 104,937
1,266
1,256
1,306
1,295
1,260
1,264
1,307
1,270
1,273
1,206
177
77
2,038,579
176
79
181
77
519,549 524,906
181
76
509,897
171
78
484,227
171
81
2,008,488
177
81
536,426
186
81
559,959
162
82
158
82
474,979 437,124
0.40
47
2,781
1.99
88
17,886
2.56
86
22,396
0.34
40
514
2.17
90
4,936
2.78
87
6,135
0.44
51
847
1.97
87
4,452
2.55
85
5,615
0.42
50
780
1.85
86
4,055
2.49
84
5,325
0.39
45
640
1.98
90
4,443
2.43
88
5,321
0.36
46
2,393
2.15
93
19,678
2.68
88
23,425
0.35
45
591
1.85
92
4,396
2.47
90
5,688
0.35
43
563
2.11
92
4,960
2.58
88
5,815
0.38
47
638
2.28
94
5,276
2.80
89
6,177
0.37
48
601
2.36
92
5,046
2.87
87
5,745
production (000’s lb)
48
–
–
48
–
36
–
–
–
36
Unit Costs
production cash cost
(uS$/oz Ag)*
production cash cost
(uS$/tonne)
unit net Smelter
Return (uS$/tonne)
* Net of by-product credits.
8.07
9.30
7.43
8.49
6.99
(0.78)
6.48
(0.48)
(4.59)
(5.93)
87.28
96.80
85.14
85.55
81.58
69.12
79.68
69.96
63.49
62.50
183.29
196.29
180.94
172.95
183.63
221.01
190.95
248.63
234.61
208.58
Silver production for 2012 at Caylloma increased just 1% year over year because of a decrease in metallurgical recoveries
of 5%, despite higher ore production (up 3%) and silver head grades (up 4%). Metallurgical recoveries were affected in
2012 by the high oxide content of ore mined in level 6 of the Animas vein, which contributed 30% of ore production
during the year. In Q4 2012, the Company implemented recommendations to improve metallurgical recoveries following
extensive testing conducted over several months. positive results were achieved in november and December 2012, with
silver recoveries improving to 80%, which are expected to reach 82% in 2013. lower lead and zinc head grades and
recoveries resulted in a year-over-year reduction in lead and zinc production of 9% and 4%, respectively.
Cash cost per tonne at Caylloma for 2012 was $87.28 per tonne of processed ore, an increase of 26% from 2011, but
only 1% higher than forecast. the increase resulted mainly from higher contractor tariffs and labor costs. Cash cost per
payable ounce of silver for 2012 was $8.07, net of by-product credits, compared to negative $0.78 in the prior year.
Cash cost per tonne for Q4 2012 was $96.80, or 21% above Q4 2011. throughout the first three quarters of 2012, cost
per tonne remained steady and below projections, however, higher costs for some items originally budgeted for 2013
were incurred in Q4 2012, resulting in costs rising 13% compared to forecast. these increases, which are reflected in
the 2013 outlook and Guidance, relate to milder inflation in contractor and transport tariffs and wages, operational items
such as higher ground support in level 6 of the Animas and Bateas veins, and increased diesel energy generation as a
result of constraints in the power grid. Cash cost per payable ounce of silver in Q4 2012 was $9.30, net of by-product
credits, compared to $6.48 in Q4 2011.
34
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Several cost containment initiatives were or are being implemented to help offset cost pressures. these mainly relate
to changes in mining methods of high-grade narrow veins that will result in less mine preparation, the concentration of
operations under one single contractor, ceasing production at minor peripheral veins, and the ongoing energy project to
increase access to energy from the power grid.
Capital expenditures at Caylloma were $16.8 million in 2012, compared to $25.0 million budgeted for the year. the
lower expenditures were due mainly to reducing the scope and postponing refurbishment of the processing plant,
postponing until 2013 the energy project, and delaying moderately the mine camp project. the new tailings facility was
successfully commissioned in January 2013.
CAYLLOMA MINE AND SAN JOSE MINE CONCENTRATES
the table below shows the production and balance of commercial end-products at each of our operating mines.
Mine Concentrates
Caylloma
San Jose
Caylloma
San Jose
Caylloma
San Jose
Caylloma
San Jose
Quarterly Results
Year to Date Results
Three months ended Decmber 31,
Years ended December 31,
2012
2011
2012
2011
Silver Gold
opening Inventory (t)
production (t)
Sales (t)
Adjustment (t)
Closing Inventory (t)
Zinc
opening Inventory (t)
production (t)
Sales (t)
Adjustment (t)
Closing Inventory (t)
Lead
opening Inventory (t)
production (t)
Sales (t)
Adjustment (t)
Closing Inventory (t)
Copper
opening Inventory (t)
production (t)
Sales (t)*
Adjustment (t)
Closing Inventory (t)
0
0
0
0
0
424
2,723
2,682
2
466
0
0
0
0
0
538
2,277
2,084
0
730
0
0
0
0
0
730
9,647
9,915
3
466
0
0
0
0
0
0
2,958
2,228
0
730
589
5,351
5,435
15
521
261
4,155
4,011
37
443
9
0
0
-9
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
273
4,964
4,920
-12
305
232
3,599
3,590
14
255
4
0
0
0
4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
305
19,588
19,394
23
521
255
14,803
14,820
204
443
4
97
0
-101
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
258
20,569
20,490
-32
305
191
15,767
15,760
58
255
29
80
104
-1
4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
* Copper concentrate sold as lead concentrate
property option Agreements
MARIO AND DON MARIO PROPERTIES (“MARIO PROJECT”)
During the second quarter of 2012, upon completion of a 7,000 meter phase I drill program at the Mario and Don Mario
properties (“Mario project”), the Company determined the program was not successful in demonstrating the potential to
meet the minimum target size established for the project and the Company abandoned its interest in the Mario property
resulting in a write-off of $3.9 million.
TLACOLULA PROPERTY
pursuant to an agreement dated September 14, 2009, as amended December 18, 2012, 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”).
<< Financial Review table of Contents
35
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
the Company can earn the Interest by spending $2.0 million, which includes a commitment to drill 1,500 meters within
12 months after Cuzcatlan has received a permit to drill the property and making staged annual payments totalling $0.25
million cash and providing $0.25 million in common shares of the Company to Radius according to the following schedule:
• $0.02 million cash and $0.02 million cash equivalent in shares upon stock exchange approval;
• $0.03 million cash and $0.03 million cash equivalent in shares by January 15, 2011;
• $0.05 million cash and $0.05 million cash equivalent in shares by January 15, 2012;
• $0.05 million cash and $0.05 million cash equivalent in shares by the January 15, 2013; and,
• $0.10 million cash and $0.10 million cash equivalent in shares within 90 days after Cuzcatlan has completed
the first 1,500 meters of drilling on the property.
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%.
As at December 31, 2012, the Company had issued 23,174 common shares of the Company, with a fair market value
of $0.10 million and paid $0.10 million cash according to the terms of the option agreement.
Subsequent to December 31, 2012, on January 15, 2013, the Company issued 11,415 common shares of the Company,
at a fair market value of $4.38 per share and on January 14, 2013 paid $0.05 million cash according to the terms of
the option agreement.
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 are as 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 of 2011, 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 took
an impairment charge, in 2011, 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 amounted to $0.36
million.
TAVICHE OESTE CONCESSIONS
Subsequent to December 31, 2012, on February 4, 2013, the Company, through its wholly owned subsidiary, Cuzcatlan,
acquired, through an option agreement (the “option”) with plata pan American S.A. de C.V. (“plata”) (a wholly owned
subsidiary of pan American Silver Corp.), a 55% undivided interest in 6,254 hectare taviche oeste Concessions
(“concessions”) immediately surrounding the San Jose Mine in oaxaca, Mexico. the Company made a cash payment of
$4.0 million. once a production decision is made to develop ore from the concessions, the Company, through its wholly
owned subsidiary, Cuzcatlan, will purchase the remaining 45% undivided interest in the property for $6.0 million. plata
will retain a 2.5% net smelter royalty on ore production from this property.
SAN LUISITO CONCESSIONS
Subsequent to December 31, 2012, in February 2013, the Company, through its wholly owned subsidiary, Cuzcatlan,
was granted an option (the “option”) with a third party on concessions in the San luisito project, Sonora, Mexico and
made a cash payment of $0.05 million. Further payments due are as follows: August 26, 2013 $0.15 million, February
24, 2014 $0.40 million, February 24, 2015 $1.0 million, February 26, 2016 $1.4 million, and February 26, 2017 $12
million. the third party will retain a 2% net smelter royalty on ore produced from this property.
36
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Annual Financial Results
Expressed in $000's, except per share data
2012
2011
Years ended December 31,
Sales
Mine operating earnings
operating income
net income
earnings per share, basic
earnings per share, diluted
total assets
leases and long term liabilities
161,020
70,662
45,168
31,463
0.25
0.25
316,983
2,250
110,004
60,974
38,065
19,533
0.16
0.16
271,642
2,764
2010
74,506
39,212
27,728
16,003
0.15
0.14
233,871
3,166
For the year ended December 31, 2012, net income increased by 62% to $31.5 million, compared to $19.5 million in
2011. Mine operating earnings increased by 16% to $70.7 million (2011: $61.0 million) and cash flow from operations,
before changes in working capital, rose by 59% to $62.2 million (2011: $39.1 million).
the increase in net income reflects the contribution of San Jose, which commenced commercial operations in September
2011, and a lower effective tax rate, which reduced income taxes by $5.0 million. the full benefit of San Jose was
tempered by lower sales and operating margins at Caylloma than in 2011. Caylloma was affected by higher treatment
and refining charges and lower base metals sold (down $5.5 million), by lower prices for and, in turn, sales of silver and
base metals (down $12.5 million), and an increase in unit cash cost year over year of 26%. However, cash flow from
operations before changes in working capital, increased, as did cash flow margins (cash flow from operations, before
changes in working capital, over sales), which increased to 39% in 2012 from 36% in 2011 as a result of strong margins
at San Jose and a lower cash tax rate. the latter effect relates mainly to San Jose, which incurred no taxes during the
year ended December 31, 2012.
Basic earnings per share increased by 56% to $0.25 in 2012, compared to $0.16 in 2011. operating cash flow per
share, before change in working capital items, increased by 56% to $0.50 (2011: $0.32) (Refer to non-GAAp financial
measures).
Sales for 2012 increased by 46% to $161.0 million (2011: $110.0 million) primarily because of the contribution from
San Jose of $77.3 million (2011: $12.3 million). In respect to metals, higher sales of silver and gold (up 71% and 303%,
respectively) were partially offset by lower prices for silver, lead, and zinc (down 11%, 15%, and 12%, respectively), higher
consolidated refining charges ($2.06/oz compared to $1.83/oz) and lower lead and zinc sales (down 9% and 5%,
respectively).
net realized prices are calculated from provisional sales, based on contained metals in concentrate sold, before
government royalties and after deductions, treatment, and refining charges. treatment charges are allocated to the base
metals in Caylloma and to gold in San Jose. Final pricing for all concentrates takes place one month after the month of
sale.
<< Financial Review table of Contents
37
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
YEAR TO DATE RESULTS
Years ended December 31,
2012
2011
Sales and Realized Prices
Caylloma
San Jose
Consolidated
Caylloma
San Jose
Consolidated
provisional Sales (uS$)
Adjustments (uS$)*
Sales (uS$)
82,226,303
1,470,935
83,697,237
79,161,972 161,388,274
(1,839,272)
(368,338)
77,322,699 161,019,936
97,518,505
221,116
97,739,620
12,665,147 110,183,652
(179,495)
12,264,536 110,004,157
(400,610)
Silver
provisional Sales (oz)
Realized price (uS$/oz)**
net Realized price (uS$/oz)***
Gold
provisional Sales (oz)
Realized price (uS$/oz)**
net Realized price (uS$/oz)***
Lead
provisional Sales (000’s lb)
Realized price (uS$/lb)**
net Realized price (uS$/lb)***
Zinc
provisional Sales (000’s lb)
Realized price (uS$/lb)**
net Realized price (uS$/lb)***
Copper
provisional Sales (000’s lb)
Realized price (uS$/lb)**
net Realized price (uS$/lb)***
1,975,984
30.98
26.96
1,984,902
30.84
27.83
3,960,886
30.91
27.40
1,976,301
35.00
31.91
338,852
31.95
26.29
2,315,153
34.83
31.09
2,452
1,667.47
1,321.92
18,524
1,657.14
1,291.80
20,976
1,648.83
1,295.32
2,130
1,560.59
1,116.09
3,069
1,680.93
1,224.19
5,199
1,631.39
1,179.90
17,662
0.94
0.63
22,049
0.88
0.66
–
–
–
–
–
–
–
–
–
–
–
–
17,662
0.94
0.63
22,049
0.88
0.66
–
–
–
19,460
1.10
0.86
23,107
1.00
0.66
47
4.25
2.65
–
–
–
–
–
–
–
–
–
19,460
1.10
0.86
23,107
1.00
0.66
47
4.25
2.65
Adjustments consists of mark to market and final price adjustments, and final assay adjustments
*
** Based on provisional sales before final price adjustments
*** Net after payable metal deductions, treatment, and refining charges
Treatment charges are allocated to the base metals in Caylloma and to gold in San Jose
Cost of sales for 2012 increased by 84% to $90.4 million (2011: $49.0 million). the increase is primarily attributable to
the contribution by San Jose of $39.1 million (2011: $6.8 million) as results for San Jose in 2012 reflect a full year
versus four months in 2011, and to a 26% higher unit production cash costs per tonne of processed ore at Caylloma
(Refer to non-GAAp financial measures for reconciliation of cash cost to the cost of sales).
Direct mining costs 1
Depletion and depreciation
Royalty expenses
Expressed in $ millions
Years ended December 31,
2012
2011
Caylloma
San Jose
Total
Caylloma
San Jose
Total
$ 40.9
8.9
1.5
$ 51.3
$ 27.5
11.6
–
$ 39.1
$ 68.4
20.5
1.5
$ 90.4
$ 34.0
6.9
1.3
$ 42.2
$ 4.7
2.1
–
$ 6.8
$ 38.6
9.1
1.3
$ 49.0
1 Direct mining costs includes salaries and other short term benefits, contractor charges, energy, consumables and production related
costs.
Selling, general and administrative expenses for 2012 increased by 4% to $20.5 million (2011: $19.8 million). the
increase is primarily attributable to an increase of $2.4 million in Cuzcatlan general and administrative expenses as
commercial production at San Jose commenced September 1, 2011, to a $1.6 million increase in corporate general and
administrative expenses as a result of higher salaries and professional fees related to the growth of the Company, and
offset by a $2.6 million decrease in share-based payments. the decrease in share-based payments is attributed to the
decline in the fair value of restricted share units and deferred share units. Shared-based payments related to vesting of
granted instruments, excluding the mark-to-market effect, amounted to $3.2 million during the year.
38
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Selling, general and administrative expenses consist primarily of corporate office and subsidiary expenses such as
salaries and other payroll related costs for executive, administrative, legal, financial, information technology, human and
organizational development, and procurement functions, as well as professional service fees.
Corporate general and administrative expenses
Bateas general and adminstrative expenses
Cuzcatlan general and adminstrative expenses
Foreign exchange
Share-based payments
Workers' participation
Expressed in $ millions
Years ended December 31,
2012
11.6
3.2
3.3
(0.1)
2.2
0.3
20.5
$
2011
10.0
3.4
0.9
0.1
4.8
0.6
$ 19.8
$
$
Exploration and evaluation costs for 2012 decreased to $0.8 million (2011: $1.7 million).
Share-based payments
Salaries, wages, and benefits
Direct costs
Expressed in $ millions
Years ended December 31,
2012
0.1
0.5
0.2
0.8
$
$
2011
–
0.9
0.8
1.7
$
$
Net loss (gain) on commodity contract for 2012 was $0.3 million loss compared to a $0.5 million gain in 2011. the loss
is related to short term contracts used to fix the final settlement price on metal contained in concentrate delivered
throughout the period.
Write-off of mineral properties costs for 2012 was $3.9 million (2011: nil) and relates to the write-off of exploration costs
for the Mario project.
Impairment of mineral properties, plant and equipment for 2012 was nil. this compares to an impairment charge in
2011 of $1.9 million related to the taviche property comprised of: $1.1 million on the tailings dam, $0.1 million on mine
infrastructure, and $0.7 million on equipment, machinery, and buildings.
Interest income for 2012 decreased by 25% to $0.6 million (2011: $0.8 million) primarily due to a reduction in cash
balances.
Interest expense for 2012 remained unchanged at $0.6 million (2011: $0.6 million). expenses for 2012 result from the
accretion of the decommissioning and restoration of the San Jose property, offset by a reduction in interest on leases.
Income taxes for the year decreased by 27% to $13.8 million (2011: $18.8 million). the effective tax rate for the years
ended December 31, 2012 and 2011 was 30.43% and 49.05%, respectively. the change in the effective tax rate was
primarily attributable to the geographical mix of income and the impact of foreign exchange on the tax basis on non-
monetary assets.
the income tax provision comprised $5.5 million (2011: $14.6 million) of current income tax expense arising mainly
from our peruvian operations and $8.3 million (2011: $4.2 million) of deferred income tax expense arising from our
peruvian and Mexican operations.
<< Financial Review table of Contents
39
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Quarterly Information
the following table provides information for the eight fiscal quarters ended December 31, 2012:
Expressed in $000's, except per share data 31-Dec-12
30-Sep-12
30-Jun-12 31-Mar-12
31-Dec-11 30-Sep-11
30-Jun-11 31-Mar-11
Quarters ended
Sales
Mine operating earnings
operating income
net income (loss)
earnings per share, basic
earnings per share, diluted
total assets
leases and long term liabilities
37,895
13,264
7,976
8,472
0.07
0.07
43,835
19,239
12,262
8,026
0.06
0.06
38,689
17,078
8,397
3,854
0.03
0.03
40,601
21,081
16,533
11,111
0.09
0.09
31,047
13,265
4,436
(1,756)
(0.01)
(0.01)
32,543
19,811
14,886
10,309
0.08
0.08
24,528
14,847
10,667
6,199
0.05
0.05
21,886
13,052
8,076
4,781
0.04
0.04
316,983 304,612 288,686 280,825 271,641 270,289 253,350 242,566
3,384
2,250
2,766
1,658
2,988
2,764
2,873
2,237
Sales growth from Q1 2011 to Q4 2012 reflects the surge in silver price since the beginning of 2010 and the
commencement of commercial production at San Jose starting in September 2011.
40
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
the following table provides the realized prices from sales for the past eight quarters and the years ended December
31, 2012 and 2011:
Realized Prices from Sales
YTD
Q4
2012
Q3
Q2
Q1
YTD
Q4
30.98
30.84
30.91
32.56
32.73
32.64
29.96
30.29
30.11
29.40
28.89
29.12
26.96
7.83
27.40
28.30
29.71
29.01
26.06
27.35
26.67
25.66
26.02
25.86
32.19
31.90
32.05
27.99
28.63
28.30
35.00
31.95
34.83
31.91
26.29
31.09
32.09
31.57
31.98
28.58
25.95
27.59
2011
Q3
38.33
37.96
38.70
35.28
31.59
35.15
Q2
Q1
37.88
–
37.88
30.94
–
30.94
34.86
–
34.86
28.26
–
28.26
Silver
Realized Prices
Silver (US$/oz)**
Caylloma
San Jose
Consolidated
Net Realized Prices
Silver (US$/oz)***
Caylloma
San Jose
Consolidated
Gold
Realized Prices
Gold (US$/oz)**
Caylloma
San Jose
1,667.47
1,657.14
1,714.36
1,707.87
1,660.62
1,667.93
1,603.01
1,598.37
1,680.97
1,663.73
1,560.59
1,680.93
1,694.98
1,675.70
1,682.50
1,763.44
1,487.72 1,380.01
–
–
Consolidated
1,648.83
1,718.91
1,661.73
1,598.54
1,656.09
1,631.39
1,673.38
1,703.29
1,487.72 1,380.01
Net Realized Prices
Gold (US$/oz)***
Caylloma
San Jose
1,321.92
1,291.80
1,206.60
1,279.55
1,382.27
1,288.74
1,318.12
1,269.71
1,332.77
1,333.49
1,116.08
1,224.19
1,245.13
1,221.05
1,153.99
1,273.67
1,063.98 1,000.52
–
–
Consolidated
1,295.32
1,271.81
1,302.14
1,274.62
1,333.40
1,179.90
1,224.79
1,185.07
1,063.98 1,000.52
Lead
Realized Prices
Lead (US$/lb)**
Caylloma
Consolidated
Net Realized Prices
Lead (US$/lb)***
Caylloma
Consolidated
Zinc
Realized Prices
Zinc (US$/lb)**
Caylloma
Consolidated
Net Realized Prices
Zinc (US$/lb)***
Caylloma
Consolidated
0.94
0.94
0.63
0.63
0.88
0.88
0.66
0.66
1.00
1.00
0.68
0.68
0.89
0.89
0.65
0.65
0.90
0.90
0.62
0.62
0.86
0.86
0.65
0.65
0.90
0.90
0.58
0.58
0.88
0.88
0.67
0.67
0.95
0.95
0.63
0.63
0.92
0.92
0.68
0.68
1.10
1.10
0.86
0.86
1 .00
1 .00
0.66
0.66
0.91
0.91
0.67
0.67
0.86
0.86
0.57
0.57
1.13
1.13
0.89
0.89
1.01
1.01
0.67
0.67
1.17
1.17
0.92
0.92
1.03
1.03
0.68
0.68
1.18
1.18
0.94
0.94
1.09
1.09
0.71
0.71
** Based on provisional sales before final price adjustments
***Net after payable metal deductions, treatment, and refining charges
Treatment charges are allocated to the base metals in Caylloma and to gold in San Jose
<< Financial Review table of Contents
41
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Fourth Quarter 2012 Financial Results
During Q4 2012, the Company generated net income of $8.5 million, compared to a net loss in the prior year of $1.8
million. Mine operating earnings remained at $13.3 million (Q4 2011: $13.3 million) while cash flow from operations,
before changes in working capital, increased by 35% to $11.9 million (Q4 2011: $8.8 million).
the higher net income resulted mainly from higher sales at San Jose, lower income taxes in the quarter comprising a
$6.4 million reduction of deferred tax provision, and a one-time $1.9 million write-off of the taviche idle plant that was
recorded in the prior year. the full contribution of San Jose was curtailed by a $1.3 million negative final assay adjustment
to sales and by higher costs related to accelerated mine preparation prior to the mine’s expansion. Mine operating
earnings remained flat due to lower results from Caylloma, which were affected by higher depletion and depreciation
charges, an inventory build-up, and a rise in unit cash cost, reflecting the trend of our cost guidance for 2013.
the increase in cash flow from operations, before changes in working capital, reflects the positive contribution of San
Jose to cash margins as well as lower cash tax rate in the period.
Basic earnings per share for Q4 2012 was $0.07 (Q4 2011: $0.01 loss). operating cash flow per share, before change
in working capital items, was $0.10 (Q4 2011: $0.07) (Refer to non-GAAp financial measures).
Sales for Q4 2012 increased by 22% to $37.9 million (Q4 2011: $31.0 million). the increase is due primarily to the
contribution from San Jose of $16.7 million (Q4 2011: $11.4 million). In respect to metals, the sales increase was
driven by higher provisional sales of silver, gold, and zinc, up 11%, 21%, and 12%, respectively, and partially offset by
$1.3 million of negative assay adjustments at San Jose.
net realized prices are calculated from provisional sales, based on contained metals in concentrate sold, before
government royalties and after deductions, treatment, and refining charges. treatment charges are allocated to the base
metals in Caylloma and to gold in San Jose. Final pricing for all concentrates takes place one month after the month of
sale.
QUARTERLY RESULTS
Three months ended December 31,
2012
2011
Sales and Realized Prices
Caylloma
San Jose
Consolidated
Caylloma
San Jose
Consolidated
provisional Sales (uS$)
Adjustments (uS$)*
Sales (uS$)
20,980,783
223,218
21,204,001
18,707,113
(2,016,662)
16,690,451
39,687,896
(1,793,444)
37,894,452
21,742,179
(2,086,580)
19,655,599
11,792,088
(400,610)
11,391,478
33,534,267
(2,487,190)
31,047,077
Silver
provisional Sales (oz)
Realized price (uS$/oz)**
net Realized price (uS$/oz)***
Gold
provisional Sales (oz)
Realized price (uS$/oz)**
net Realized price (uS$/oz)***
Lead
provisional Sales (000's lb)
Realized price (uS$/lb)**
net Realized price (uS$/lb)***
Zinc
provisional Sales (000's lb)
Realized price (uS$/lb)**
net Realized price (uS$/lb)***
466,492
32.56
28.30
469,858
32.73
29.71
936,350
32.64
29.01
526,096
32.09
28.58
318,593
31.57
25.95
40
1,714.36
1,206.60
3,710
1,707.87
1,279.55
4,150
1,718.91
1,271.81
5 30
1,694.98
1,245.13
2,886
1,675.70
1,221.05
4,698
1.00
0.68
6,223
0.89
0.65
–
–
–
–
–
–
4,698
1.00
0.68
6,223
0.89
0.65
4,340
0 .91
0 .67
5,565
0.86
0.57
–
–
–
–
–
–
844,689
31.98
27.59
3,416
1,673.38
1,224.79
4,340
0.91
0.67
5,565
0.86
0.57
* Adjustments consists of mark to market and final price adjustments, and final assay adjustments
** Based on provisional sales before final price adjustments
***Net after payable metal deductions, treatment, and refining charges
Treatment charges are allocated to the base metals in Caylloma and to gold in San Jose
Cost of sales for Q4 2012 increased by 39% to $24.6 million, compared to $17.8 million in Q4 2011. the increase is
primarily attributable to higher concentrate sales and unit cash costs at both San Jose and Caylloma. Refer to non-GAAp
financial measures for reconciliation of cash cost to the cost of sales.
42
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Direct mining costs 1
Depletion and depreciation
Royalty expenses
Expressed in $ millions
Three months ended December 31,
2012
2011
Caylloma
San Jose
Total
Caylloma
San Jose
Total
$ 11.3
2.8
0.4
$ 14.5
$ 8.1
2.0
–
$ 10.1
$ 19.4
4.8
0.4
$ 24.6
$ 9.6
1.8
0.4
$ 11.8
$ 4.0
2.0
–
$ 6.0
$ 13.6
3.8
0.4
$ 17.8
1 Direct mining costs includes salaries and other short term benefits, contractor charges, energy, consumables and production related
costs.
Selling, general and administrative expenses for Q4 2012 decreased by 12% to $5.1 million (Q4 2011: $5.9 million).
the decrease is primarily attributable to lower share-based payments of $0.9 million and foreign exchange of $0.3 million,
offset by higher general and administrative expenses in Cuzcatlan ($0.1 million) and corporate general and administrative
expenses ($0.3 million), mainly as a result of higher salaries and professional fees related to growth of the Company.
the decrease in share-based payments is attributed to the decrease in the fair value of restricted share units and deferred
share units. Shared-based payments related to vesting of granted instruments, excluding the mark-to-market effect,
amounted to $1.0 million during the quarter.
Selling, general and administrative expenses consist primarily of corporate office and subsidiary expenses such as
salaries and other payroll related costs for executive, administrative, legal, financial, information technology, human and
organizational development, and procurement functions, as well as professional service fees.
Corporate general and administrative expenses
Bateas general and adminstrative expenses
Cuzcatlan general and adminstrative expenses
Foreign exchange
Share-based payments
Workers' participation
Expressed in $ millions
Three months ended December 31,
2012
2011
$
$
3.2
0.8
0.8
(0.1)
0.3
0.1
5.1
$
$
2.9
0.8
0.7
0.2
1.2
0.1
5.9
Exploration and evaluation costs for Q4 2012 decreased by 75% to $0.2 million (Q4 2011: $0.6 million).
Salaries, wages, and benefits
Direct costs
Expressed in $ millions
Three months ended December 31,
2012
0.1
0.1
0.2
$
$
2011
0.3
0.3
0.6
$
$
Net loss on commodity contract for Q4 2012 was nil compared to a loss of $0.4 million in Q4 2011, which 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 Q4 2012 remained flat at $0.2 million (Q4 2011: $0.2 million), as cash balances were reduced.
Interest expense for Q4 2012 remained unchanged at $0.1 million (Q4 2011: $0.1 million).
Income taxes for Q4 2012 decreased by 108% to a recovery of $0.5 million (Q4 2011: $6.2 million expense). the change
was primarily attributable to the impact of foreign exchange on the tax basis on non-monetary assets.
Income tax provision is comprised of $1.7 million (Q4 2011: $1.9 million) of current income tax expense, arising mainly
from our peruvian operations, and a $2.2 million recovery (Q4 2011: $4.3 million expense) of deferred income tax arising
from our peruvian and Mexican operations.
<< Financial Review table of Contents
43
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
non-GAAp Financial Measures
ADJUSTED NET INCOME (NON-GAAP FINANCIAL MEASURE)
NET INCOME FOR THE YEAR
Items of note, net of tax:
Mark-to-Market effect on derivatives
Write-off of mineral properties
Impairment of mineral properties, plant and equipment
ADJUSTED NET INCOME FOR THE YEAR 1
1
A non-GAAP financial measure
Expressed in $ millions
Years ended December 31,
2012
2011
$
31.5
$
19.5
–
2.6
–
(0.1)
–
1.3
$
34.1
$
20.7
OPERATING CASH FLOW PER SHARE BEFORE CHANGE IN WORKING CAPITAL ITEMS (NON-GAAP FINANCIAL MEASURE)
net income for the period
Items not involving cash
Income taxes paid
Interest expense paid
Interest income received
Cash generated by operating activities
before changes in working capital
Divided by
Weighted average number of shares (‘000’s)
Operating cash flow per share
before change in
working capital items 1
1
A non-GAAP financial measure
Expressed in $’000’s (except per share measures)
Three months ended December 31,
$
$
2012
8,472
4,392
12,864
(1,141)
(8)
150
$
$
2011
(1,755)
13,680
11,925
(3,274)
(21)
155
Years ended December 31,
2012
2011
$
$
$
$
31,463
40,885
72,348
(10,703)
(31)
611
19,533
33,821
53,354
(15,007)
(80)
837
$
11,865
$
8,785
$
62,225
$
39,104
124,412
124,090
123,585
123,295
$
0.10
$
0.07
$
0.50
$
0.32
CASH COST PER OUNCE OF PAYABLE SILVER AND CASH COST PER TONNE OF PROCESSED ORE
(NON-GAAP FINANCIAL MEASURE)
Cash cost per ounce of payable silver and cash cost per tonne of processed ore 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 tables present 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 past eight quarters and the years ended
December 31, 2012 and 2011.
44
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Consolidated Mine Cash Cost
YTD
Q4
2012
Q3
Q2
Q1
YTD
Q4
2011
Q3
Q2
Q1
Expressed in $’000’s
90,358
24,631
24,596
21,611
19,520
49,030
17,782
12,732
9,682
8,834
430
394
(872)
(320)
1,228
2,142
415
1,168
(4)
563
23
(41)
227
233
(396)
(717)
(1,491)
(1,153)
(399)
(379)
(320)
(428)
(170)
52
(602)
(398)
(1,322)
(3,141)
(207)
(385)
(436)
(403)
22
(129)
(463)
(1,132)
(260)
(852)
(214)
(721)
(20,477)
(4,879)
(5,826)
(5,374)
(4,398)
(9,060)
(3,752)
(2,056)
(1,478)
(1,774)
Cost of sales 1
Add / (Subtract)
Change in concentrate
inventory
Depletion and
depreciation in
concentrate inventory
Government royalties
and mining taxes
Workers participation
Depletion and
depreciation
Cash cost (A)
67,690
19,327
17,377
16,032
14,954
36,932
13,417
9,846
7,110
6,559
Cash cost (A)
Add / (Subtract)
By-product credits
Refining charges
Cash cost applicable
per payable ounce (B)
payable ounces of
silver production (C)
Cash cost per ounce
of payable silver
($/oz) (B/C)
67,690
19,327
17,377
16,032
14,954
36,932
13,417
9,846
7,110
6,559
(52,899)
7,790
(12,878)
2,051
(13,359)
1,986
(13,388)
1,849
(13,274)
1,904
(40,644)
4,308
(11,184)
2,242
(10,207)
1,015
(9,720)
541
(9,533)
510
22,581
8,500
6,004
4,493
3,584
596
4,475
654
(2,069)
(2,464)
3,788,369
960,194
976,355
946,384
905,436
2,352,759
860,566
625,696
451,230
415,267
5.96
8.85
6.15
4.75
3.96
0.25
5.20
1.05
(4.59)
(5.93)
1
Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation
<< Financial Review table of Contents
45
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
San Jose Mine Cash Cost
Mine Production
YTD
Q4
Q3
Q2
Q1
YTD
Expressed in $000’s
2012
2011
Q4
Cost of sales 1
Add / (Subtract)
Change in concentrate inventory
Depletion and depreciation
in concentrate inventory
Workers participation
Depletion and depreciation
Cash cost (A)
total processed ore (tonnes) (B)
Cash cost per tonne of
processed ore ($/t) (A/B)
Cash cost (A)
Add / (Subtract)
By-product credits
Refining charges
Cash cost applicable
per payable ounce ( C)
payable ounces of silver
production (D)
Cash cost per ounce of
payable silver ($/oz) (C/D)
Mining cost per tonne
Milling cost per tonne
Indirect cost per tonne
Community relations cost per tonne
Distribution cost per tonne
total production cost per tonne
Q3
789
39,126
10,090
11,184
10,147
7,705
6,794
6,005
(269)
115
(384)
(957)
957
1,936
323
1,613
146
(41)
(11,616)
27,346
369,022
16
(41)
(2,035)
8,145
98,348
150
–
(3,567)
7,383
91,607
338
–
(3,409)
6,119
(358)
–
(2,605)
5,699
(684)
–
(2,141)
5,905
(195)
–
(1,988)
4,145
(489)
–
(153)
1,760
92,011
87,056
116,410
87,885
28,525
74.10
27,346
82.82
8,145
80.59
66.50
65.46
50.73
47.16
61.70
7,383
6,119
5,699
5,905
4,145
1,760
(23,146)
2,757
(4,916)
679
(5,800)
717
(6,432)
693
(5,998)
668
(5,539)
1,718
(4,313)
1,341
(1,226)
377
6,957
3,908
2,300
380
369
2,084
1,173
911
1,851,718
466,622
477,694
461,981
445,421
444,695
350,960
93,735
3.76
8.38
4.81
0.82
0.83
4.69
3.34
9.72
33.43
17.96
15.53
2.09
5.09
74.10
40.36
17.84
15.99
3.52
5.11
82.82
35.51
20.10
17.47
2.33
5.18
80.59
28.84
15.76
14.24
2.29
5.37
66.50
28.26
18.15
14.37
0.02
4.66
65.46
17.37
14.64
11.54
4.47
2.71
50.73
15.03
15.16
11.33
2.27
3.37
47.16
24.57
13.07
12.12
11.24
0.70
61.70
1
Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation
46
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Caylloma Mine Cash Cost
YTD
Q4
2012
Q3
Q2
Q1
YTD
Q4
2011
Q3
Q2
Q1
Expressed in $000’s
51,232
14,541
13,412
11,464
11,815
42,236
11,777
11,943
9,682
8,834
699
279
(488)
637
271
206
92
(445)
(4)
563
(123)
(57)
77
(1,491)
(1,112)
(399)
(338)
(320)
(428)
(105)
(170)
52
(38)
(602)
(398)
(33)
(1,322)
(3,141)
(12)
(385)
(436)
86
22
(129)
(463)
(1,132)
(260)
(852)
(214)
(721)
(8,861)
(2,844)
(2,259)
(1,965)
(1,793)
(6,919)
(1,764)
(1,903)
(1,478)
(1,774)
Cost of sales 1
Add / (Subtract)
Change in concentrate
inventory
Depletion and
depreciation in
concentrate inventory
Government royalties
and mining taxes
Workers participation
Depletion and
depreciation
Cash cost (A)
40,344
11,182
9,994
9,913
9,255
31,027
9,272
8,086
7,110
6,559
total processed ore
(tonnes) (B)
Cash cost per tonne
of processed ore
($/t) (A/B)
Cash cost (A)
Add / (Subtract)
By-product credits
Refining charges
Cash cost applicable
per payable ounce (C)
payable ounces of
silver production (D)
Cash cost per ounce
of payable silver
($/oz) (C/D)
Mining cost per tonne
Milling cost per tonne
Indirect cost per tonne
Community relations
cost per tonne
Distribution cost
per tonne
total production
cost per tonne
462,222
115,522
117,386
115,870
113,444
448,866
116,363
115,574
111,992
104,937
87.28
96.80
85.14
85.55
81.58
69.12
40,344
11,182
9,994
9,913
9,255
31,027
79.68
9,272
69.96
63.49
62.50
8,086
7,110
6,559
(29,753)
5,033
(7,962)
1,372
(7,559)
1,269
(6,956)
1,156
(7,276)
1,236
(35,105)
2,590
(6,871)
901
(8,981)
638
(9,720)
541
(9,533)
510
15,624
4,592
3,704
4,113
3,215
(1,488)
3,302
(257)
(2,069)
(2,464)
1,936,651
493,572
498,661
484,403
460,015
1,908,064
509,606
531,961
451,230
415,267
8.07
9.30
7.43
8.49
6.99
(0.78)
6.48
(0.48)
(4.59)
(5.93)
39.78
14.05
24.83
40.04
15.69
27.82
39.76
14.13
24.29
40.64
12.66
25.13
38.67
13.73
22.00
1.46
4.61
0.43
0.48
0.32
7.16
8.64
6.53
6.64
6.86
32.05
11.54
18.80
0.67
6.06
38.02
12.49
21.92
1.01
6.24
31.84
11.64
19.80
28.71
10.86
17.44
29.23
11.12
15.70
0.59
0.28
0.78
6.09
6.20
5.67
87.28
96.80
85.14
85.55
81.58
69.12
79.68
69.96
63.49
62.50
<< Financial Review table of Contents
47
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
liquidity and Capital Resources
FULL YEAR 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, 2012 totalled $58.7 million (2011: $38.7 million), and
short term investments totalled $6.0 million (2011: $17.0 million).
the $20.0 million increase (2011: $31.9 million decrease) in cash and cash equivalents at December 31, 2012 is due
to the cash provided by operating activities of $53.9 million, net cash used in investing activities of $33.0 million and
net cash used in financing activities of $0.9 million, and the effect of exchange rate changes on cash and cash equivalents
of $0.1 million. Compared to 2011, the Company’s expenditures on mineral properties, plant and equipment declined
by $31.8 million and redemptions of short term investments declined by $36.4 million and cash provided by operating
activities increased by $18.9 million attributable to the commissioning of San Jose mine on September 1, 2011.
Working capital for the year increased $23.5 million to $87.4 million reflecting increases in accounts receivable and
other assets of $7.9 million, prepaid expenses of $0.1 million, inventories of $1.6 million, assets held for sale of $0.1
million, and decreases in due to related parties of $0.2 million, derivative liabilities of $0.1 million, provisions of $0.3
million, income tax payable of $3.7 million, current portion of long term liabilities of $1.1 million; offset by decreases in
short term investments of $11.0 miilion, derivative assets of $0.1 million, due from related parties and increases in
trade and other payables of 0.2 million.
During the year ended December 31, 2012, cash generated by operating activities before changes in non-cash working
capital items, income taxes paid, and interest income paid and received was $62.2 million (2011: $39.1 million). Changes
in non-cash working capital items amounted to $8.4 million (2011: $4.1 million), and income taxes paid and interest
income paid and received amounted to $10.1 million (2011: $14.3 million), resulting in net cash provided by operating
activities of $53.9 million (2011: $35.0 million).
Cash used by the Company for the year ended December 31, 2012, in investing activities totalled $33.0 million (2011:
$69.3 million) comprised of $11.0 million (2011: $3.7 million) net redemptions of short term investments, $0.7 million
(2011: $3.6 million) net receipts on deposits on long term assets, $0.1 million (2011: nil) proceeds on disposal of
mineral properties, plant and equipment, and offset by $44.8 million (2011: $76.7 million) expenditures on mineral
properties, plant and equipment.
During the year ended December 31, 2012, cash used by financing activities totalled $0.9 million (2011: provided $2.5
million) with net repayment of long term debt of $0.8 million (2011: nil), repayment of finance lease obligations of $0.8
million (2011: $1.2 million), and offset by net proceeds on the issuance of common shares of $0.7 million (2011: $3.7
million).
FOURTH QUARTER LIQUIDITY AND CAPITAL RESOURCES
During Q4 2012, cash generated by operating activities before changes in non-cash working capital items, income taxes
paid, and interest income paid and received was $11.9 million (Q4 2011: $8.8 million). Changes in non-cash working
capital items amounted to $5.7 million (Q4 2011: $1.2 million), and income taxes paid and interest income paid and
received amounted to $1.0 million (Q4 2011: $3.1 million), resulting in net cash provided by operating activities of $17.6
million (Q4 2011: $7.6 million).
Cash used by the Company in Q4 2012 for investing activities totalled $19.2 million (Q4 2011: $31.9 million), with
$15.8 million (Q4 2011: $16.2 million) for expenditures on mineral properties, plant and equipment, $0.6 million (Q4
2011: $0.6 million net advances) in net receipts on deposits on long term assets, and $4.0 million (Q4 2011: $15.0
million) for net purchases of short term investments.
During Q4 2012, cash used by financing activities was $0.1 million, compared to $2.0 million provided by such activities
in Q4 2011, and included repayment of finance lease obligations of $0.1 million (Q4 2011: $0.2 million), offset by net
proceeds on the issuance of common shares of nil (Q4 2011: $2.2 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 February
6, 2013. 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 have been
drawn from this credit facility.
48
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
In February 2013, the Bank of nova Scotia extended the credit facility maturity date to February 6, 2013 and then to
February 27, 2013. on March 15, 2013, the Bank of nova Scotia extended the credit facility maturity date to March 28,
2013. no funds were drawn from this credit facility.
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
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
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
$ –
11.4
26.3
$ 37.7
Variance
$ 14.5
(5.9)
(8.6)
$ –
Management believes that the Company’s current operational requirements and capital projects can be funded from
existing cash and cash equivalents, cash generated from operations, and the available credit facility. If future
circumstances dictate an increased cash requirement and we elect not to delay, limit, or eliminate some of our plans, we
may raise additional funds through debt financing, the issuance of hybrid debt-equity securities, or additional equity
securities. If the Company needs to access the capital markets for additional financial resources, managements believes
the Company will be able to do so at prevailing market rates.
CONTRACTUAL OBLIGATIONS
trade and other payables
Due to related parties
Income tax payable
long term liabilities
operating leases
provisions
Expected payments due by period as at December 31, 2012
Expressed in $ millions
Less than
1 year
$ 17.3
0.1
0.2
0.5
0.7
0.5
$ 19.3
1–3 years
4–5 years
$ –
–
–
2.3
1.3
0.5
$ 4.1
$ –
–
–
–
0.9
0.5
$ 1.4
After
5 years
$ –
–
–
–
0.1
11.3
$ 11.4
Total
$ 17.3
0.1
0.2
2.8
3.0
12.8
$ 36.2
<< Financial Review table of Contents
49
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
CAPITAL COMMITMENTS (EXPRESSED IN $’000’S)
As at December 31, 2012, $5,613 of capital commitments not disclosed elsewhere in the consolidated financial
statements, and forecasted to be expended within one year, includes the following: $4,280 mine and tailing dam
development at the San Jose property; and, $1,333 for the tailings dam transport system, concentrator plant, electrical
infrastructure renewal, and camp infrastructure at Caylloma.
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 notification 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, 2012,
these obligations amounted to $13 and mature in 2013.
on May 24, 2010, the Company entered into a seven year office premise lease located in 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.
During 2011, the Company provided a security deposit of $44.
on September 30, 2012, the Company entered into a one year office premise lease in Mexico effective September 30,
2012, with an annual lease obligation of $16.
the expected payments due by period as at December 31, 2012 are as follows:
office premises – Canada
office premises – peru
office premises – Mexico
Total office premises
Computer equipment – peru
Computer equipment – Mexico
Total computer equipment
Total operating leases
Expressed in $’000’s
Expected payments due by period as at December 31, 2012
Less than
1 year
$ 148
373
14
$ 535
149
18
$ 167
$ 702
1–3 years
4–5 years
$ 443
781
–
$ 1,224
64
17
$ 81
$ 1,305
$ 306
580
–
$ 886
–
–
$ –
$ 886
After
5 years
$ 147
–
–
$ 147
–
–
$ –
$ 147
Total
$ 1,044
1,734
14
$ 2,792
213
35
$ 248
$ 3,040
OTHER CONTINGENCIES
the Company is subject to various investigations, claims and legal and tax proceedings covering matters that arise in
the ordinary course of business activities. each of these matters is subject to various uncertainties and it is possible
that some of these matters may be resolved unfavorably to the Company. Certain conditions may exist as of the date
the financial statements are issued, which may result in a loss to the Company. In the opinion of management none of
these matters are expected to have a material effect on the results of operations or financial conditions of the Company.
50
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
During the year ended December 31, 2012, the Ministry of Mining and energy (MeM) in peru made an update to the
approved Mining environmental liabilities list. the Company is currently in the process of evaluating its mining
concessions which are currently included on the list and as at the date of the issuance of the financial statements an
estimate of liability cannot be determined.
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.
Scotiabank peru, 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 $585. this bank letter of guarantee expires 360 days from December 2012.
Banco Bilbao Vizcaya Argentaria, S.A. had 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. this guarantee expired in June 2012.
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.
Related party transactions
(expressed in $’000’s)
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,
2012
135
308
23
466
$
$
2011
173
292
93
558
$
$
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,
wages, general administration costs, and leasehold improvements incurred on behalf of the Company to June 30, 2012. Gold Group
Management Inc. ("Gold Group"), which is owned by a director in common with the Company, provides various administrative,
management, and other related services effective July 1, 2012.
In January 2012, the Company issued 8,605 (2011: 6,756) common shares, at a fair market value of $5.81 (2011:
$4.44) per share and paid $50 (2011: $30) cash to Radius, under the option to acquire a 60% interest in tlacolula
silver project located in the State of oaxaca, Mexico.
<< Financial Review table of Contents
51
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
In october 2012, the Company entered into a services agreement, effective July 1, 2012, with Gold Group Management
Inc. (“Gold Group”), which is owned by a director in common with the Company. the services agreement provides that
Gold Group provides various administrative, management and other related services.
Subsequent to December 31, 2012, on January 14, 2013 the Company issued 11,415 common shares of the Company,
at a fair market value of $4.38 per share and paid $50 cash to Radius, under the option to acquire a 60% interest in the
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,
$
2012
2,789
388
180
1,629
$
2011
3,492
333
416
4,398
$
4,986
$
8,639
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 2012 and 2011.
C) YEAR END BALANCES ARISING FROM PURCHASES OF GOODS/SERVICES
Amounts due from related parties
owing from a director and officer 3
owing from a company with common director 3
Expressed in $‘000’s
December 31,
2012
December 31,
2011
$
$
–
5
5
$
$
36
–
36
3 Owing from a director includes non-interest bearing advances to a company controlled by a director of the company at December 31,
2012 and to director and officers at December 31, 2011.
Amounts due to related parties
Expressed in $‘000’s
December 31,
2012
December 31,
2011
owing to company(ies) with common directors 4
$
54
$
205
4 2012 Owing to Radius Gold Inc. (“Radius”) and Gold Group Management Inc. ("Gold Group") whom have directors in common with
the Company and 2011 to Radius.
on october 10, 2012, the Company paid Gold Group Management Inc., which is owned by a director in common with the
Company, a retainer of $61 representing three months deposit under a services agreement effective July 1, 2012.
52
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 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
functional currency for its peruvian and Mexican entities and the Canadian and Barbados entities have a Canadian
dollar 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;
<< Financial Review table of Contents
53
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
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 is exposed to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk, and price
risk. the 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, due from related parties, 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 $2,723 as at December 31,
2012.
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 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.
Financial assets (liabilities) at fair value as at December 31, 2012
Expressed in $’000’s
Level 1
Level 2
Level 3
Cash and cash equivalents
Short term investments
trade receivable from concentrate sales
$
58,720
6,019
–
$
–
–
15,158
$
$
64,739
$
15,158
$
–
–
–
–
there were no changes in the levels during the year ended December 31, 2012.
$
Total
58,720
6,019
15,158
$
79,897
54
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Financial assets (liabilities) at fair value as at December 31, 2011
Level 1
Level 2
Level 3
Total
Expressed in $’000’s
Cash and cash equivalents
Short term investments
trade receivable from concentrate sales
Derivatives assets
Derivatives liabilities
$
38,730
17,000
–
–
–
$
–
–
11,287
70
(87)
$
$
55,730
$
11,270
$
–
–
–
–
–
–
$
38,730
17,000
11,287
70
(87)
$
67,000
there were no changes in the levels during the year ended December 31, 2011.
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, 2012, 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, 2012, 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):
December 31, 2012
Expressed in $’000’s
December 31, 2011
Canadian
Dollars
$ 4,231
6,000
77
–
(1,225)
(54)
–
–
(1,998)
–
Nuevo
Soles
Mexican
Pesos
Canadian
Dollars
Nuevo
Soles
S/. 1,389
–
3,097
–
(12,300)
–
(284)
(326)
–
(19,560)
$ 6,136
–
98,147
–
(49,779)
–
(4,502)
–
(245)
(39,323)
$ 18,457
–
42
–
(1,580)
(209)
–
–
(2,691)
–
S/. 1,396
–
5,657
4,434
(17,993)
–
(1,351)
(10,581)
–
(8,079)
Mexican
Pesos
$ 1,758
–
58,939
–
(24,310)
–
(3,163)
–
–
(17,494)
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Due from related parties
trade and other payables
Due to related parties
provisions, current
Income tax payable
leases and long term liabilities
provisions
total
$ 7,031
S/. (27,984)
$ 10,434
$ 14,019
S/. (26,517)
$ 15,730
total uS$ equivalent
$ 7,053
$ (10,970)
$ 802
$ 13,745
$ ( 9,832)
$ 1,125
Based on the above net exposure as at December 31, 2012, 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 $784 (2011: $1,527) and a net loss of $1,130 (2011: $967).
<< Financial Review table of Contents
55
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
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, 2012 is as follows:
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Derivative assets
Due from related parties
Expressed in $‘000’s
December 31,
2012
December 31,
2011
$
58,720
6,019
27,032
–
5
$ 38,730
17,000
19,167
70
36
$
91,776
$ 75,003
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, 2012.)
Derivatives
lead forward contracts
Zinc forward contracts
Silver forward contracts
total
December 31, 2012
Expressed in $ millions
December 31, 2011
Assets
$ –
–
–
$ –
Liabilities
Assets
Liabilities
$ –
–
–
$ –
–
$ 0.1
–
$ 0.1
$ 0.1
–
–
$ 0.1
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.
In 2011, the Company entered 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 were settled against the arithmetic average of metal spot prices
over the month in which the contract matures. no initial premium associated with these trades had been paid.
56
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Significant Accounting policy
OPERATIONAL MINING PROPERTIES AND MINE DEVELOPMENT
For operating mines, all exploration within the mineral deposit is capitalized and amortized on a unit-of-production basis
over proven and probable reserves and the portion of resources expected to be extracted economically as part of the
production cost.
Costs of producing properties are amortized on a unit-of-production basis over proven and probable reserves and the
portion of resources expected to be extracted economically, and costs of abandoned properties are written-off.
the company has made a change in estimate and commencing in the fourth quarter of 2012, the amortization on a unit-
of-production basis will be over the portion of resources, in addition to the proven and probable reserves, expected to be
extracted economically. the change in estimate is applied prospectively and impacts the depletion of the mineral deposit
for the current and future periods.
Significant Changes in Accounting policies including Initial Adoption
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. the Company has adopted the amendment to IFRS 7 and the amendment did not have a
material impact on the Company’s consolidated financial statements.
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. the Company has adopted the amendment to IAS 12 and the amendment did not have a material
impact on the Company’s consolidated financial statements.
new Accounting Standards
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 on or after July 1, 2012 or later:
i) 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 retain the 'one or two statement' approach at the option
of the entity and only revise the way other comprehensive income (“oCI”) 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) to the statement of income. 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).
ii) New Accounting Standards Impacting on or after January 1, 2013
on May 17, 2012, the IASB issued Annual Improvements to IFRSs: 2009-2011 Cycle, incorporating amendments to five
IFRSs; IFRS 1 First-time Adoption of International Reporting Standards, IAS 1 Presentation of Financial Statements, IAS
16 Property, Plant and Equipment, IAS 32 Financial Statements: Presentation, IAS 34 Interim Financial Reporting. the
amendments are effective for annual periods beginning on or after January 1, 2013, with early application permitted,
and must be applied retrospectively.
IFRS 1 First-time Adoption of International Financial Reporting Standards (Amendment)
IFRS 1 is amended to clarify the repeated application of IFRS 1 and the treatment of borrowing costs incurred on
or after the date of transition to IFRSs. this is not applicable as the company has already transitioned to IFRS.
IAS 1 Presentation of Financial Statements (Amendment)
IAS 1 is amended to clarify that only one comparative period – which is the preceding period – is required for a
complete set of financial statements.
<< Financial Review table of Contents
57
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
IAS 16 Property, Plant, and Equipment (Amendment)
IAS 16 is amended to clarify the classification of servicing equipment. Spare parts, stand-by equipment and
servicing equipment should be classified as property, plant, and equipment when they meet the definition of
property, plant, and equipment in IAS 16 and otherwise as inventory using IAS 2 Inventories.
IAS 32 Financial Instruments: Presentation (Amendment)
IAS 32 is amended to clarify that IAS 12 Income Taxes applies to the account for income taxes relating to
distributions to holders of equity instruments and transaction costs of equity transactions.
IAS 34 Interim Financial Reporting (Amendment)
IAS 34 is amended to clarify that the total assets and total liabilities for a particular reportable segment would be
separately disclosed in interim financial reporting only when the amounts are regularly provided to the chief
operating decision maker and there has been a material change from the amounts disclosed in the last annual
financial statements for the reportable segment.
the Company does not anticipate these amendments to have a significant impact on its consolidated financial
statements.
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. the Company does not anticipate
this amendment to have a significant impact on its consolidated financial statements.
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. the Company does not
anticipate the application of IFRS 10 to have a significant impact on its consolidated financial statements.
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.
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.
the Company does not anticipate these amendments to have a significant impact on its consolidated financial
statements.
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
58
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
in use IAS 36 Impairment of Assets. this standard is effective for annual periods beginning on or after January 1, 2013.
the Company does not anticipate the application of IFRS 13 to have a significant impact on its consolidated financial
statements.
IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, and IFRS 12 Disclosure of Interests in Other
Entities: Transition Guidance
the amendments provide additional transition relief, limiting the requirement to provide adjusted comparative information
to only the preceding comparative period. For disclosures related to unconsolidated structured entities, the amendments
will remove the requirement to present comparative information for periods before IFRS 12 is first applied. the effective
date of the amendments is annual periods beginning on or after January 1, 2013, which is aligned with the effective
date of IFRS 10, IFRS 11, and IFRS 12. the Company does not anticipate these amendments to have a significant impact
on its consolidated financial statements.
IAS 19 Employee Benefits
on June 16, 2011, the IASB issued amendments to IAS 19, Employee Benefits, in order to improve the accounting for
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. the Company does not anticipate
the application of IFRS 13 to have a significant impact on its consolidated financial statements
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. 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. this standard will not have an impact on the consolidated financial
statements.
iii) New Accounting Standards Impacting on or after January 1, 2014
IAS 32 Financial Instruments - Presentation in Respect of Offsetting (Amendment)
the amendments to IAS 32 address inconsistencies in current practice when applying the requirements with regards to
the offsetting of financial assets and financial liabilities. the amendments are effective for annual periods beginning on
or after January 1, 2014 and are required to be applied retrospectively.
iv) 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. the amendments are effective for annual periods beginning on or
after January 1, 2015, with earlier application permitted.
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.
<< Financial Review table of Contents
59
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
Share position and outstanding Warrants and options
the Company’s outstanding share position as at March 19, 2013 is 125,305,166 common shares. In addition,
6,091,610 incentive stock options are currently outstanding as follows:
Type of Security
No. of Shares
Incentive Stock options:
TOTAL OUTSTANDING OPTIONS
1,663,651
2,047,542
200,000
50,000
10,000
2,500
225,000
225,000
10,000
350,000
184,138
38,000
380,779
25,000
250,000
230,000
200,000
6,091,610
Exercise
Price
(CAD$)
$4.46
$4.03
$1.35
$2.29
$1.75
$0.85
$1.55
$1.66
$0.85
$2.22
$6.67
$0.85
$3.79
$0.85
$0.85
$0.85
$0.83
Expiry Date
June 8, 2014
May 29, 2015
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
July 31, 2017
october 24, 2017
october 5, 2018
november 5, 2018
July 6, 2019
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, 2012.
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, 2012, 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.
60
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
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, 2012, the Company’s internal control over financial reporting was
effective and no material weaknesses were identified.
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.
<< Financial Review table of Contents
61
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
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.
62
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 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., which comprise the
consolidated statements of financial position as at December 31, 2012 and 2011 and the consolidated statements of
income, statements of changes in equity, comprehensive income and cash flows for the years then ended and a summary
of significant accounting policies and other explanatory information.
MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with 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.as at December 31, 2012 and 2011 and its financial performance and its cash flows for the
years ended December 31, 2012 and 2011 in accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board.
Deloitte LLP
Independent Registered Chartered Accountants
March 19, 2013
Vancouver, Canada
<< Financial Review table of Contents
63
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
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
2012
2011
19
20
$ 161,020
90,358
$ 110,004
49,030
70,662
60,974
Selling, general and administrative expenses
exploration and evaluation costs
net loss (gain) on commodity contracts
Gain on disposal of mineral properties,
property, plant and equipment
11 a), 11 b), 21
22
Write-off of mineral properties, plant and equipment 9 a), 9 b)
Impairment of mineral properties, property, plant and equipment
9 a), 9 b)
9 d)
Operating income
Finance items
Interest income
Interest expense
Net finance income (expense)
Income before tax
Income taxes
Net 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
23
14
15 e) i
15 e) ii
15 e) i
15 e) ii
20,541
777
339
(50)
3,887
–
45,168
620
(562)
58
45,226
13,763
19,840
1,715
(481)
(59)
–
1,894
38,065
830
(560)
270
38,335
18,802
$ 31,463
$ 19,533
$
$
0.25
0.25
$
$
0.16
0.16
123,584,611
123,295,063
125,232,663
124,711,984
The accompanying notes are an integral part of these consolidated financial statements.
64
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
ConSolIDAteD FInAnCIAl StAteMentS
Consolidated Statements of Comprehensive Income
FOR THE YEARS ENDED DECEMBER 31,
(Expressed in thousands of US Dollars)
Net Income for the year
Other comprehensive income (loss)
transfer of unrealized loss to realized (loss)
upon reduction of net investment, net of nil taxes
unrealized (loss) gain on translation of
net investment, net of nil taxes
unrealized gain (loss) on translation to presentation
currency on foreign operations
Other comprehensive income
Notes
2012
2011
$ 31,463
$ 19,533
(895)
(376)
2,224
953
–
751
(79)
672
Total comprehensive income for the year
$ 32,416
$ 20,025
The accompanying notes are an integral part of these consolidated financial statements.
<< Financial Review table of Contents
65
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
ConSolIDAteD FInAnCIAl StAteMentS
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31,
(Expressed in thousands of US Dollars)
OPERATING ACTIVITIES
net income for the year
Items not involving cash
Depletion and depreciation
Accretion of provisions
Income taxes
Share-based payments
unrealized gain on commodity contracts
Write-off of mineral properties
Impairment of mineral properties, plant and equipment
Gain on disposal of mineral properties, plant and equipment
Accrued interest on long term loans receivable and payable
other
Changes in non-cash working capital items
Accounts receivable and other assets
prepaid expenses
Due from related parties
Inventories
trade and other payables
Due to related parties
provisions
Cash provided by operating activities before interest and income taxes
Income taxes paid
Interest expense 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, plant and equipment
Advances of deposits on long term assets
Receipts of deposits on long term assets
proceeds on disposal of mineral properties, 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 (used in) provided by financing activities
effect of exchange rate changes on cash and cash equivalents
INCREASE (DECREASE) 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
16
The accompanying notes are an integral part of these consolidated financial statements.
66
<< Financial Review table of Contents
Notes
Years ended December 31,
2012
2011
$ 31,463
$ 19,533
21,372
232
13,763
1,703
(17)
3,887
–
(50)
(25)
20
72,348
(6,971)
(45)
31
(1,567)
718
(155)
(386)
63,973
(10,703)
(31)
611
53,850
(6,000)
17,000
(44,839)
(9,752)
10,429
116
(33,046)
-
(800)
738
(844)
(906)
92
19,898
38,730
9,421
173
18,802
3,682
(116)
–
1,894
(59)
24
–
53,354
(3,292)
(315)
(35)
(7,273)
6,829
169
(201)
49,236
(15,007)
(80)
837
34,986
(49,671)
53,406
(76,676)
(31,859)
35,424
41
(69,335)
18
(18)
3,656
(1,178)
2,478
303
(31,871)
70,298
$ 58,720
$ 38,730
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
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
prepaid expenses
Due from related parties
Inventories
Assets held for sale
total current assets
NON-CURRENT ASSETS
Deposits on long term assets
Deferred income tax assets
Mineral properties, plant and equipment
Total assets
LIABILITIES AND EQUITY
CURRENT LIABILITIES
trade and other payables
Due to related parties
Derivative liabilities
provisions
Income tax payable
Current portion of leases and long term liabilities
total current liabilities
NON-CURRENT LIABILITIES
leases and long term liabilities
provisions
Deferred income tax liabilities
non-controlling interest
total liabilities
EQUITY
Share capital
Share option and warrant reserve
Retained earnings
Accumulated other comprehensive income
total equity
Total liabilities and equity
Contingencies and capital commitments
Subsequent events
APPROVED BY THE DIRECTORS:
Years ended December 31,
2012
2011
$ 58,720
6,019
–
27,032
1,268
5
12,858
51
105,953
2,694
113
207,503
$ 38,730
17,000
70
19,167
1,218
36
11,291
–
87,512
2,260
36
181,833
$ 316,263
$ 271,641
$ 17,348
54
–
457
200
449
$ 17,155
205
87
727
3,923
1,512
18,508
23,609
2,250
9,970
21,042
–
51,770
187,807
12,994
59,344
4,348
264,493
2,764
4,247
12,710
–
43,330
186,540
10,495
27,881
3,395
228,311
$ 316,263
$ 271,641
Notes
3
4
5
6
11 c)
7
8, 19
6
14
9
10
11 c)
5
13
14
12
12
13
14
24
25
“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.
<< Financial Review table of Contents
67
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
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)
Attributable to Equity Holders of the Company
Share Capital
Notes
Shares
Amount
124,945,921
314,225
8,605
$ 186,540
738
51
15 a)
Share
Option and
Warrant
Reserve
$ 10,495
–
–
Retained
Earnings
$ 27,881
–
–
Accumulated
Other
Compre-
hensive
Income
(“AOCI”)
Total
Equity
$ 3,395 $ 228,311
738
51
–
–
–
–
–
–
–
–
478
–
–
(478)
2,977
–
–
–
31,463
–
–
–
–
2,977
31,463
–
–
–
–
–
–
–
–
–
(895)
(895)
(376)
(376)
2,224
2,224
Balance - December 31, 2011
exercise of options
Issuance of shares for property
transfer of share option and warrant
reserve on exercise of options
Share-based payments expense
net income for the year
transfer of unrealized loss to realized
loss upon reduction of net
investment, net of taxes
unrealized loss on translation of
net investment
unrealized gain on translation to
presentation currency on foreign
operations
total comprehensive income for the year
31,463
953
32,416
Balance – December 31, 2012
125,268,751
$ 187,807
$ 12,994
$ 59,344
$ 4,348 $ 264,493
Balance – December 31, 2010
Issuance of shares under bought
deal financing, net of issuance costs
exercise of options
Issuance of shares for property
transfer of share option and warrant
reserve on exercise of options
Share-based payments expense
net income for the year
unrealized gain on translation of
net investment
unrealized loss on translation to
presentation currency on foreign
operations
122,497,465
$ 180,403
$ 11,116
$ 8,348
$ 2,723 $ 202,590
–
2,441,700
6,756
15 a)
–
–
–
–
–
(95)
3,751
30
2,451
–
–
–
–
–
–
–
–
–
–
(2,451)
1,830
–
–
–
19,533
–
–
–
–
–
–
(95)
3,751
30
–
1,830
19,533
–
–
–
–
751
751
(79)
(79)
total comprehensive income for the year
19,533
672
20,205
Balance - December 31, 2011
124,945,921
$ 186,540
$ 10,495
$ 27,881
$ 3,395 $ 228,311
68
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to tHe ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(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 silver/lead/zinc mine in southern
peru and the San Jose silver/gold mine in Mexico.
Fortuna is a publicly traded company incorporated and domiciled in Canada. Its common shares are listed on the new
York Stock exchange under the trading ticker symbol FSM, on the toronto Stock exchange and lima Stock exchange,
both under the trading ticker symbol FVI, and on the Frankfurt Stock exchange under the trading symbol F4S.F.
the Company’s registered office is located 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, 2012. the Board of
Directors approved these financial statements for issue on March 19, 2013.
b) Basis of Consolidation
these consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Minera
Bateas S.A.C. (“Bateas”); Fortuna Silver (Barbados) Inc. (“Barbados”); 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 or 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, two, or three months 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 delivery date and the 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.
Revenues from metal concentrate sales are subject to adjustment upon final settlement of metals prices, weights, and
assays as of a date that is typically one, two, or three months after the delivery date. typically, the adjustment is based
on an inspection of the concentrate by the customer and in certain cases an inspection by a third party. the Company
records adjustments to revenues monthly based on quoted spot prices for the expected settlement period. Adjustments
for weights and assays are recorded when results are determinable or on final settlement.
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.
<< Financial Review table of Contents
69
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
e) Mineral Properties, 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 attributed to the construction of qualifying assets are capitalized to mineral properties, 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.
Exploration and Evaluation 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 evaluation and exploration assets are credited to the carrying value of
the mineral properties, with any excess included in income as gain or loss on disposal of mineral properties, plant and
equipment.
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 and the portion of resources expected to be extracted economically as part of the
production cost.
Costs of producing properties are amortized on a unit-of-production basis over proven and probable reserves and the
portion of resources expected to be extracted economically, and costs of abandoned properties are written-off.
70
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
the company has made a change in estimate and commencing in the fourth quarter of 2012, the amortization on a unit-
of-production basis will be over the portion of resources, in addition to the proven and probable reserves, expected to be
extracted economically. the change in estimate is applied prospectively and impacts the depletion of the mineral deposit
for the current and future periods.
iii. Commercial Production
Capital work in progress consists of expenditures for the construction of future mines and includes 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 reviewed and tested for impairment when an indicator of impairment is considered to exist. An assessment
of impairment indicators is performed at each reporting period or whenever indicators arise. even with no indicators
present, the Company will test an intangible asset with an indefinite useful life or an intangible asset not yet available
for use for impairment at least once annually. 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 and the portion of resources expected to be extracted economically.
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 the 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
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.
<< Financial Review table of Contents
71
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(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.
Other provisions
iii.
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.
Assets Held for Sale
i)
A non-current asset is classified as held for sale when it meets the following criteria:
• the non-current asset is available for immediate sale in its present condition subject only to terms that are usual
and customary for sales of such assets; and,
• the sale of the non-current asset is highly probable. For the sale to be highly probable:
• the appropriate level of management must be committed to a plan to sell the asset;
• an active program to locate a buyer and complete the plan must have been initiated;
• the non-current asset or disposal group must be actively marketed for sale at a price that is reasonable in
relation to its current fair value;
• the sale should be expected to qualify for recognition as a completed sale within one year from the date of
classification as held for sale (with certain exceptions); and,
• actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will
be made or that the plan will be withdrawn.
Assets held for sale are not depreciated. When the sale of assets held for sale is expect to occur beyond one year, the
assets are measured at the lower of its carrying amount and fair value less costs to sell. Any gain or loss from initial
measurement and subsequent measurement are recorded in other comprehensive income but not in excess of cumulative
impairment losses.
Income Taxes
j)
Income tax expense consists of current and deferred tax expense. Income tax is recognized in the consolidated statement
of income.
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.
72
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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 offset 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.
k) Share-Based Payments
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.
<< Financial Review table of Contents
73
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
Earnings per Share
l)
Basic earnings per share is computed by dividing net income for the year by the weighted average number of common
shares outstanding during the year.
the diluted earnings per share calculation is based on the weighted average number of common shares outstanding
during the year, 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 year (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 year, but only if dilutive.
m) Foreign Currency Translation
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 translated 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 of the Company, 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.
n) 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 not being accounted for as hedges and 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 consolidated statement of income.
b) Held-to-Maturity (“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 initially measured 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
significant.
74
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
Available-For-Sale (“AFS”) Assets
d)
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 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 realized through disposal or
impairment. 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 the consolidated statement of 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.
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 in 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 an impairment not been recognized.
g) Derecognition of Financial Assets
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 consolidated 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 consolidated statement of income over the period to maturity using
the effective interest method.
<< Financial Review table of Contents
75
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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.
o) 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.
p) 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.
q) 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).
r) 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.
76
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
s) Significant Accounting Judgments and Estimates
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
functional currency for its peruvian and Mexican entities and the Canadian and Barbados entities have a Canadian
dollar 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.
• 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;
<< Financial Review table of Contents
77
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
• 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.
t)
Significant Changes in Accounting Policies including Initial Adoption
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. the Company has adopted the amendment to IFRS 7 and the amendment did not have a
material impact on the Company’s consolidated financial statements.
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. the Company has adopted the amendment to IAS 12 and the amendment did not have a material
impact on the Company’s consolidated financial statements.
u) New Accounting Standards
i)
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 retain the 'one or two statement' approach at the option
of the entity and only revise the way other comprehensive income (“oCI”) 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) to the statement of income. 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).
ii) New Accounting Standards Impacting on or after January 1, 2013
on May 17, 2012, the IASB issued Annual Improvements to IFRSs: 2009-2011 Cycle, incorporating amendments to five
IFRSs; IFRS 1 First-time Adoption of International Reporting Standards, IAS 1 Presentation of Financial Statements, IAS
16 Property, Plant and Equipment, IAS 32 Financial Statements: Presentation, IAS 34 Interim Financial Reporting. the
amendments are effective for annual periods beginning on or after January 1, 2013, with early application permitted,
and must be applied retrospectively.
IFRS 1 First-time Adoption of International Financial Reporting Standards (Amendment)
IFRS 1 is amended to clarify the repeated application of IFRS 1 and the treatment of borrowing costs incurred on
or after the date of transition to IFRSs. this is not applicable as the company has already transitioned to IFRS.
IAS 1 Presentation of Financial Statements (Amendment)
IAS 1 is amended to clarify that only one comparative period - which is the preceding period - is required for a
complete set of financial statements.
78
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
IAS 16 Property, Plant, and Equipment (Amendment)
IAS 16 is amended to clarify the classification of servicing equipment. Spare parts, stand-by equipment and
servicing equipment should be classified as property, plant, and equipment when they meet the definition of
property, plant, and equipment in IAS 16 and otherwise as inventory using IAS 2 Inventories.
IAS 32 Financial Instruments: Presentation (Amendment)
IAS 32 is amended to clarify that IAS 12 Income Taxes applies to the account for income taxes relating to
distributions to holders of equity instruments and transaction costs of equity transactions.
IAS 34 Interim Financial Reporting (Amendment)
IAS 34 is amended to clarify that the total assets and total liabilities for a particular reportable segment would be
separately disclosed in interim financial reporting only when the amounts are regularly provided to the chief
operating decision maker and there has been a material change from the amounts disclosed in the last annual
financial statements for the reportable segment.
the Company does not anticipate these amendments to have a significant impact on its consolidated financial
statements.
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. the Company does not anticipate
this amendment to have a significant impact on its consolidated financial statements.
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. the Company does not
anticipate the application of IFRS 10 to have a significant impact on its consolidated financial statements.
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.
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.
the Company does not anticipate these amendments to have a significant impact on its consolidated financial
statements.
<< Financial Review table of Contents
79
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(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.
the Company does not anticipate the application of IFRS 13 to have a significant impact on its consolidated financial
statements.
IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, and IFRS 12 Disclosure of Interests in Other
Entities: Transition Guidance
the amendments provide additional transition relief, limiting the requirement to provide adjusted comparative information
to only the preceding comparative period. For disclosures related to unconsolidated structured entities, the amendments
will remove the requirement to present comparative information for periods before IFRS 12 is first applied. the effective
date of the amendments is annual periods beginning on or after January 1, 2013, which is aligned with the effective
date of IFRS 10, IFRS 11, and IFRS 12. the Company does not anticipate these amendments to have a significant impact
on its consolidated financial statements.
IAS 19 Employee Benefits
on June 16, 2011, the IASB issued amendments to IAS 19, Employee Benefits, in order to improve the accounting for
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. the Company does not anticipate
the application of IFRS 13 to have a significant impact on its consolidated financial statements
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. 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. this standard will not have an impact on the consolidated financial
statements.
iii) New Accounting Standards Impacting on or after January 1, 2014
IAS 32 Financial Instruments - Presentation in Respect of Offsetting (Amendment)
the amendments to IAS 32 address inconsistencies in current practice when applying the requirements with regards to
the offsetting of financial assets and financial liabilities. the amendments are effective for annual periods beginning on
or after January 1, 2014 and are required to be applied retrospectively.
80
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
iv) 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. the amendments are effective for annual periods beginning on or
after January 1, 2015, with earlier application permitted.
Comparative figures
t)
Certain comparative figures have been reclassified to conform to the presentation adopted for the current period. In
particular: prepaid expenses are now reported separate from accounts receivable and other assets as prepaid expenses
are not a financial instrument under IFRS 7; due from related parties are included separate from due to related parties
as offsetting is not permitted under IAS 1; and, GSt/HSt and value added tax receivable are included with accounts
receivable and other assets as permitted under IAS 1.
December 31, 2011
Reclassifications
Accounts
receivable
and other
assets
$ 15,608
3,559
GST/HST
and value
added tax
receivable
$ 4,777
(4,777)
Adjusted December 31, 2011
$ 19,167
$ –
3. Cash and Cash equivalents
Prepaid
expenses
$ –
1,218
$ 1,218
Due from
related
parties
$ –
36
$ 36
Due to
related
parties
$ 169
36
$ 205
Cash
Cash equivalents
December 31,
2012
December 31,
2011
$ 18,038
40,682
$ 25,652
13,078
$ 58,720
$ 38,730
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
December 31,
2012
December 31,
2011
$
6,019
$
17,000
Short term investments include deposits with maturities from the date of acquisition of more than 90 days.
5. Derivative Assets and Derivative liabilities
lead forward contracts
Zinc forward contracts
Silver forward contracts
total
December 31, 2012
December 31, 2011
Assets
Liabilities
Assets
Liabilities
$ –
–
–
$ –
$ –
–
–
$ –
–
$ 70
–
$ 70
$ 53
–
34
$ 87
<< Financial Review table of Contents
81
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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 December 31, 2012,
no such contracts are outstanding.
In 2011, the Company entered 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 were settled against the arithmetic average of metal spot prices
over the month in which the contract matures. no initial premium associated with these trades had been paid.
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
Advances and other receivables
GSt/HSt and value added tax receivable
Accounts receivable and other assets
December 31,
2012
December 31,
2011
$ 15,158
832
3,637
7,405
$ 11,287
891
2,213
4,776
$
27,032
$ 19,167
Deposits on long term assets include the non-current accounts receivable and other assets are comprised of the following:
Non-current
long term receivables
less: current portion of long term receivables
non-current portion of long term receivables
Deposits on equipment
Deposits paid to contractors
other
Deposits on long term assets
December 31,
2012
December 31,
2011
$
1,557
$
(832)
725
1,086
744
139
1,415
(891)
524
1,167
448
121
$
2,694
$
2,260
As at December 31, 2012, the Company had $1,178 trade receivables (2011: $100) 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 from concentrate sales is as follows:
December 31,
2012
December 31,
2011
$ 13,725
255
–
1,178
$
9,518
911
758
100
$ 15,158
$ 11,287
0-30 days
31-60 days
61-90 days
over 90 days
82
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
7.
Inventories
Concentrate stock piles
ore stock piles
Materials and supplies
total inventories
December 31,
2012
December 31,
2011
$
2,918
3,391
6,549
$
2,488
4,008
4,795
$ 12,858
$ 11,291
For the years ended December 31, 2012, $59,077 (2011: $31,655) of inventory was expensed in cost of sales and
there has been no impairment during 2012 (2011: $nil).
8. Assets Held for Sale
Balance, December 31, 2011
Additions
Disposals
total assets held for sale – December 31, 2012
Less current portion
Non current assets held for sale – December 31, 2012
$
$
$
–
63
(12)
51
(51)
–
As at December 31, 2012, the Company has $51 (2011: $nil) of equipment held for sale. Included in assets held for
sale are a scoop and a front loader as the machinery is not being used in the mine operations and are expected to be
sold within one year.
9. Mineral properties, plant and equipment
Mineral
Properties
Non-
Depletable
(Mario, Don Mario,
Tlacolula)
Mineral
Properties
Depletable
(Caylloma,
San Jose,
Taviche)
Land
Buildings,
and
Leasehold
Improvements
Machinery
and
Equipment
Furniture
and Other
Equipment
Transport
Units
Equipment
under
Finance
Lease
$ 7,311
2,566
–
(3,887)
–
(5,030)
$ 105,668
24,849
–
–
(12,327)
5,030
$ 17,316
5,384
(1,097)
–
(3,000)
444
$ 37,452
138
–
–
(4,449)
2,653
$ 3,185
1,462
(22)
––
(629)
(12)
$ 135
129
(5)
(73)
–
$ 2,520
653
–
–
(705)
–
Capital
Work in
Progress
$ 8,246
15,778
(50)
–
–
(3,085)
Total
$ 181,833
50,959
(1,174)
(3,887)
(21,183)
–
Closing carrying amount
$ 960
$ 124,173
$ 19,047
$ 35,796
$ 3,984
$ 186
$ 2,468
$ 20,889
$ 207,503
–
953
–
2
–
–
–
955
$ 960
$ 157,054
$ 27,092
$ 44,004
$ 5,694
$ 539
$ 5,124
$ 20,889
$ 261,356
Closing carrying amount
$ 960
$ 124,173
$ 19,047
$ 35,796
–
(32,881)
(8,045)
(8,208)
(1,710)
$ 3,984
(353)
(2,656)
–
(53,853)
$ 186
$ 2,468
$ 20,889
$ 207,503
Year ended December 31, 2012
opening carrying amount
Additions
Disposals
Write–off of mineral properties
Depletion and depreciation
Reclassification
Adjustment on
currency translation
As at December 31, 2012
Cost
Accumulated depletion
and depreciation
<< Financial Review table of Contents
83
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
Mineral
Properties
Non-
Depletable
(Mario, Don Mario,
Taviche,Tlacolula)
Mineral
Properties
Depletable
(Caylloma,
San Jose*)
Land
Buildings,
and
Leasehold
Improvements
Machinery
and
Equipment
Furniture
and Other
Equipment
Transport
Units
Equipment
under
Finance
Lease
Year ended December 31, 2011
opening carrying amount
Additions
Disposals
Depletion and depreciation
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)
Closing carrying amount
$ 7,311
$ 105,668
$ 17,316
$ 37,452
$ 3,185
$ 112
131
–
(97)
(11)
–
$ 135
$ 2,893
500
–
(873)
–
–
Capital
Work in
Progress
$ 14,534
33,837
–
–
–
(40,125)
Total
$ 117,363
79,007
(1,565)
(11,078)
( 1,894)
–
$ 2,520
$ 8,246
$ 181,833
As at December 31, 2011
Cost
Accumulated depletion
and depreciation
$ 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.
As at December 31, 2012, the non-depletable mineral properties includes the tlacolula property (2011: Mario, Don
Mario, tlacolula, and taviche) as the Mario and Don Mario properties were abandoned and written off in 2012.
Mineral properties includes bonuses paid of $nil (2011: $1,350) which were paid upon commissioning of the San Jose
mine. the bonus paid in 2011 comprises of $1,113 paid to key management and $237 paid to a company controlled by
a director.
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 May 14, 2012, $1,000 had
been paid under the agreement.
During the second quarter of 2012, upon completion of a 7,000 meter phase I drill program at the Mario and Don Mario
properties (“Mario project”), the Company determined the program was not successful in demonstrating the potential to
meet the minimum target size established for the project and the Company abandoned its interest in the Mario property
resulting in a write-off of $3,627.
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. $2,000 after 36 months from signing the agreement.
84
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
under the terms of the agreement, once the option is exercised and the 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 May 14, 2012, $200 had been paid under the agreement. the Don Mario property is part of the overall Mario
project and as the phase 1 drill program at the Mario property was not successful, the Company abandoned its interest
in the Don Mario property resulting in a write-off of $260.
Tlacolula Property
c)
pursuant to an agreement dated September 14, 2009, as amended December 18, 2012, 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 11).
the Company can earn the Interest by spending $2,000, which includes a commitment to drill 1,500 meters within 12
months after Cuzcatlan has received a permit to drill the property and making staged annual payments totalling $250
cash and providing $250 in common shares 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 January 15, 2011;
• $50 cash and $50 cash equivalent in shares by January 15, 2012;
• $50 cash and $50 cash equivalent in shares by the January 15, 2013; and,
• $100 cash and $100 cash equivalent in shares within 90 days after Cuzcatlan has completed the first 1,500
meters of drilling on the property.
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.
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.
As at December 31, 2012, the Company had issued a total of 23,174 common shares of the Company, with a fair market
value of $100 and paid $100 cash according to the terms of the option agreement.
Subsequent to December 31, 2012, on January 15, 2013, the Company issued 11,415 common shares of the Company,
at a fair market value of $4.38 per share and on January 14, 2013 paid $50 cash according to the terms of the option
agreement.
d) Taviche Property
In 2010, the Company included the idle plant in taviche as part of the San Jose mine plant as it was more likely than
not that the idle plant could be used to treat excess ore from San Jose or from surrounding areas where the company
was conducting exploration. on September 1, 2011, the San Jose mine plant commenced commercial production and in
the fourth quarter of 2011, achieved an average of 955 tonnes milled per day with the San Jose plant having sufficient
capacity for the production. In the fourth quarter of 2011, management reassessed the usability of the idle plant and in
conjunction, obtained an independent third party appraisal of various assets acquired under an asset purchase agreement
dated 2007 related to the taviche property.
<< Financial Review table of Contents
85
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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 took
an impairment charge, in 2011, 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 amounted to $0.36
million.
Taviche Oeste Concessions
e)
Subsequent to December 31, 2012, on February 4, 2013, the Company, through its wholly owned subsidiary, Cuzcatlan,
acquired, through an option agreement (the “option”) with plata pan American S.A. de C.V. (“plata”) (a wholly owned
subsidiary of pan American Silver Corp.), a 55% undivided interest in 6,254 hectare taviche oeste Concessions
(“concessions”) immediately surrounding the San Jose Mine in oaxaca, Mexico. the Company made a cash payment of
$4.0 million. once a production decision is made to develop ore from the concessions, the Company, through its wholly
owned subsidiary, Cuzcatlan, will purchase the remaining 45% undivided interest in the property for $6.0 million. plata
will retain a 2.5% net smelter royalty on ore production from this property.
San Luisito Concessions
f)
Subsequent to December 31, 2012, in February 2013, the Company through its wholly owned subsidiary, Cuzcatlan,
acquired, was granted an option (the “option”), with a third party, on concessions in the San luisito project, Sonora,
Mexico and made a cash payment of $50. Further payments due are as follows : August 26, 2013 $150, February 24,
2014 $400, February 24, 2015 $1,000, February 26, 2016 $1,400, and February 26, 2017 $12,000. the third party
will retain a 2% net smelter royalty on ore produced from this property.
10. trade and other payables
trade accounts payable
payroll payable
Restricted share unit payable
other payables
11. Related party transactions
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
December 31,
2012
December 31,
2011
$ 11,114
4,238
648
1,348
$
8,799
5,809
1,204
1,343
$ 17,348
$ 17,155
Years ended December 31,
2012
135
308
23
466
$
$
2011
173
292
93
558
$
$
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,
wages, general administration costs, and leasehold improvements incurred on behalf of the Company to June 30, 2012. Gold Group
Management Inc. ("Gold Group"), which is owned by a director in common with the Company, provides various administrative,
management, and other related services effective July 1, 2012.
In January 2012, the Company issued 8,605 (2011: 6,756) common shares, at a fair market value of $5.81 (2011:
$4.44) per share and paid $50 (2011: $30) cash to Radius, under the option to acquire a 60% interest in tlacolula
silver project located in the State of oaxaca, Mexico.
86
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
In october 2012, the Company entered into a services agreement, effective July 1, 2012, with Gold Group Management
Inc. (“Gold Group”), which is owned by a director in common with the Company. the services agreement provides that
Gold Group provides various administrative, management and other related services.
Subsequent to December 31, 2012 to March 19, 2013 the Company issued 11,415 common shares of the Company,
at a fair market value of $4.38 per share and paid $50 cash to Radius, under the option to acquire a 60% interest in the
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
Years ended December 31,
$
2012
2,789
388
180
1,629
$
4,986
$
2011
3,492
333
416
4,398
8,639
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 2012 and 2011.
c) Year end Balances arising from Purchases of Goods/Services
Amounts due from related parties
owing from a director and officer 3
owing from a company with common director 3
December 31,
2012
December 31,
2011
$
$
–
5
5
$
$
36
–-
36
3 Owing from a director includes non-interest bearing advances to a company controlled by a director of the Company at December 31,
2012 and to director and officers at December 31, 2011.
Amounts due to related parties
December 31,
2012
December 31,
2011
owing to company(ies) with common directors 4
$
54
$
205
4 2012 Owing to Radius Gold Inc. (“Radius”) and Gold Group Management Inc. ("Gold Group") whom have directors in common with
the Company and 2011 to Radius.
on october 10, 2012, the Company paid Gold Group Management Inc., which is owned by a director in common with the
Company, a retainer of $61 representing three months deposit under a services agreement effective July 1, 2012.
<< Financial Review table of Contents
87
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
12. 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 15 c))
less: current portion
obligations under finance lease
long term liability
Current portion of leases and long term liabilities
leases and long term liabilities, non-current
December 31,
2012
December 31,
2011
$
676
19
2,004
2,699
449
–
449
$
866
771
2,639
4,276
741
771
1,512
$
2,250
$
2,764
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, and 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,
2012
December 31,
2011
$
$
469
(20)
449
231
(4)
227
676
$
$
763
(22)
741
126
(1)
125
866
b) Long Term Liabilities
In May 2008, the Company acquired the Monte Alban II concession for which a payment of $800 was due May 2012.
this liability is non-interest bearing and the principal was paid during the second quarter of 2012.
the Company’s Mexican operation is required to provide a seniority premium to all employees as required under Mexican
labor law. this liability is calculated using actuarial techniques and discounting the benefit using the projected unit Credit
Method with the following assumptions: a discount rate of 7.50%, wages increases ranging from 4.5% to 5.0%, minimum
wage increase of 4.0%, and a long term inflation rate of 4.0%. During the year ended December 31, 2012, $20 (2011:
$nil) has been recognized as an expense, respectively.
88
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
13. provisions
A summary of the Company’s provisions for other liabilities and charges is presented below:
total provisions - December 31, 2010
Increase to existing provisions
Accretion of provisions
Foreign exchange differences
Cash payments
total provisions - December 31, 2011
less: current portion
non current - December 31, 2011
total provisions – December 31, 2011
Increase to existing provisions
Accretion of provisions
Foreign exchange differences
Cash payments
Total provisions - December 31, 2012
Less: current portion
Non current - December 31, 2012
Decommissioning and Restoration Liability
Caylloma Mine
San Jose Mine
$
$
$
$
3,298
119
138
142
(201)
3,496
(501)
2,995
3,496
3,954
124
(129)
(386)
$
1,583
7
35
(147)
–
$
1,478
(226)
$
$
1,252
1,478
1,680
108
102
–
$
$
$
$
Total
4,881
126
173
(5)
(201)
4,974
(727)
4,247
4,974
5,634
232
(27)
(386)
$
7,059
$
3,368
(111)
(346)
$
6,948
$
3,022
$ 10,427
(457)
$
9,970
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, plant and equipment balance.
<< Financial Review table of Contents
89
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
Income tax
14.
a) Income tax expense differs from the amount that would be computed by applying the Canadian statutory income tax
rate of 25.00% (2011: 26.50%) 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
other items
unused tax losses and tax offsets not recognized in tax asset
total income taxes
Represented by:
Current income tax
Deferred income tax
December 31,
2012
December 31,
2011
$ 45,226
$ 38,335
25.00%
26.50%
$ 11,307
1,155
2,354
(796)
(1,580)
(193)
(70)
1,586
$ 10,159
1,401
1,376
620
3,271
(16)
704
1,287
$ 13,763
$
18,802
$
5,508
8,255
$ 14,607
4,195
$
13,763
$ 18,802
the effective tax rate for the years ended December 31, 2012 and 2011 was 30.43% and 49.05%, 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, 2012, the Canadian Federal corporate tax rate decreased from 16.5% to 15.0% and the British
Columbia provincial tax remained the same at 10%. the overall reduction in tax rates has resulted in a decrease in the
Company’s statutory tax rate from 26.50% to 25.00%.
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.
the Mexican corporate tax rate was scheduled to be reduced from 30% to 29% on January 1, 2013 and then to 28% on
January 1, 2014. However, newly enacted legislation maintains the 2012 rate of 30% through the end of 2013, with a
reduction to 29% on January 1, 2014 and an additional reduction to 28% on January 1, 2015.
Income taxes payable of $200 (December 31, 2011: $3,923) relates to current taxes.
90
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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, 2012 and 2011 are presented below:
Deferred income tax assets:
non-capital losses
provisions and other
other
Mineral properties, 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,
2012
December 31,
2011
$
2,431
4,059
78
–
6,568
$
(14,314)
(3,452)
(9,731)
$ (27,497)
$
(20,929)
$
113
(21,042)
$ 12,544
2,059
5
296
14,904
$
$
$
$
(11,790)
(5,640)
(10,148)
(27,578)
(12,674)
36
(12,710)
net deferred income tax liabilities
$
(20,929)
$
(12,674)
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
Investments in subsidiaries
Mineral properties, plant and equipment
December 31,
2012
December 31,
2011
$ 47,124
2,652
1,947
1,283
1,467
$ 38,503
3,841
2,913
56
1,532
unrecognized deductible temporary differences
$
54,473
$ 46,845
the Company’s unrecognized taxable temporary difference consists of the following amounts:
Withholding tax
unrecognized taxable temporary difference
the Company’s tax losses have the following expiry dates:
non-capital losses, expiring as follows:
Canada
Mexico
December 31,
2012
December 31,
2011
$
$
505
505
$
$
147
147
Expiry Date
2013 - 2032
2016 - 2032
$
43,906
11,321
$ 55,227
<< Financial Review table of Contents
91
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
15. Share Capital
a) Unlimited Common Shares Without Par Value
During the year ended December 31, 2012, the Company issued 8,605 (2011: 6,756) common shares, at a fair market
value of $5.81 (2011: $4.44) per share to Radius Gold, under the option to acquire a 60% interest in tlacolula silver
project located in the State of oaxaca, Mexico. (Refer to note 9. c)).
Subsequent to December 31, 2012 to March 19, 2013, the Company issued 11,415 common shares of the Company,
at a fair market value of $4.38 per share and paid $50 cash to Radius, under the option to acquire a 60% interest in the
tlacolula silver project located in the State of oaxaca, Mexico. (Refer to note 9. c)).
b) Share Options
Shareholder approval of the Company’s Stock option plan (the “plan”), dated April 11, 2011, was obtained at the
Company’s annual general meeting held on May 26, 2011. the plan provides that the number of common shares of the
Company issuable under the plan, together with all of the Company’s other previously established or proposed share
compensation arrangements, may not exceed 12,200,000 shares, which equals 9.92% of the current total number of
issued and outstanding common shares of the Company, as at April 11, 2011.
option pricing models require the input of highly subjective assumptions including the estimate of the share price volatility,
risk-free interest rate and expected life of the options. Changes in the subjective input assumptions can materially affect
the fair value estimate.
the following is a summary of share option transactions:
outstanding at beginning of the year
Granted
exercised
Forfeited
expired
outstanding at end of the year
Vested and exercisable at end of the year
December 31, 2012
December 31, 2011
Shares
(in ‘000’s)
3,876
2,613
(314)
(50)
(8)
6,117
3,081
Weighted
average
exercise price
(CAD$)
$ 2.83
4.18
2.35
4.46
4.46
$ 3.42
$ 2.63
Shares
(in ‘000’s)
4,551
1,792
(2,442)
(25)
–
3,876
3,557
Weighted
average
exercise Price
(CAD$)
$ 1.51
4.46
1.55
4.46
–
$ 2.83
$ 1.99
During the year ended December 31, 2012, 2,612,459 share purchase options were granted with exercise prices ranging
from CAD$3.79 to CAD$6.67 with terms ranging from three and five years, respectively. the vesting of 2,047,542 share
purchase options are as follows: 50% after twelve months of grant date and a further 50% after twenty four months of
grant date. the vesting of 184,138 share purchase options are as follows: 33.33% after twelve months of grant date, a
further 33.33% after twenty four months of grant date, and a further 33.34% after thirty six months of grant date. the
vesting of 380,779 share purchase options are as follows: 33.33% after twelve months of grant date, a further 33.33%
after twenty-four months of grant date, and a further 33.34% after thirty-six months of grant date.
During the year ended December 31, 2012, 49,628 share purchase options were forfeited, 41,542 share purchase
options were accelerated to expire March 30, 2012, and 8,271 share purchase options expired unexercised.
Subsequent to December 31, 2012, 25,000 share purchase options were accelerated to expire March 31, 2013 from
January 11, 2017.
Subsequent to December 31, 2012 to March 19, 2013, 25,000 share purchase options were exercised at CAD$0.85
resulting in issued and outstanding shares of 125,305,166.
92
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
the share-based payment charge of $2,977 (2011: $1,830) covering option grants, forfeitures, and accelerated vesting
recognized for the year ended December 31, 2012 has been determined under the fair value method using the Black-
Scholes option pricing model with the following assumptions:
Risk-free interest rate
expected stock price volatility
expected term in years
expected dividend yield
expected forfeiture rate
Years ended December 31,
2012
1.00% to 1.62%
55.93% to 58.36%
3
0%
4.15%
2011
1.91%
56.48%
3
0%
1.38%
the expected volatility assumption is based on the historical volatility of the Company’s Canadian dollar common share
price on the toronto Stock exchange.
Number of
outstanding
share purchase
options (in ‘000’s)
Weighted average
remaining
contractual life
of outstanding
share purchase
options (years)
Weighted average
exercise price on
outstanding share
purchase options
CAD$
Exercisable
share purchase
options
(in ‘000’s)
Weighted average
exercise price on
exercisable share
purchase options
CAD$
781
660
4,676
6,117
5.8
4.4
2.4
3.0
$ 0.84
1.53
4.11
$ 3.42
781
660
1,640
3,081
$ 0.84
1.53
3.92
$ 2.63
Exercise price
in CAD$
$0.80 to $0.99
$1.00 to $1.99
$2.00 to $6.67
$0.80 to $6.67
the weighted average remaining life of vested share purchase options at December 31, 2012 was 3.3 years (2011: 4.9
years).
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, 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, 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, 2012, there were no DSu grants or settlements in cash. As at December 31, 2012,
there are 481,465 (2011: 481,465) DSu outstanding with a fair value of $2,004 (2011: $2,639).
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, 2012, there were no RSu grants and the Company paid $583 (2011: $736) on
109,557 (2011: 109,557) RSu to directors and officers of the Company. As at December 31, 2012, there are 155,674
(2011: 265,231) RSu outstanding with a fair value of $648 (2011: $1,204). Refer to note 10.
<< Financial Review table of Contents
93
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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
Years ended December 31,
2012
2011
$ 31,463
$ 19,533
123,585
123,295
$
0.25
$
0.16
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 ('000's)
earnings per share - diluted
Years ended December 31,
2012
2011
$ 31,463
$ 19,533
123,585
1,648
125,233
123,295
1,417
124,712
$
0.25
$
0.16
For the year ended December 31, 2012, excluded from the calculation were 184,138 (2011: $nil) anti-dilutive options
with an exercise price of CAD$6.67 (2011: $nil).
16. Supplemental Cash Flow Information
Note
Years ended December 31,
2012
2011
Non-cash Investing and Financing Activities:
Issuance of shares on purchase
of mineral properties, property, plant and equipment
9 c)
$
50
$
30
17. 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, 2012, 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.
94
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
18. Management of Financial Risk
the Company is exposed to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk, and price
risk. the 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, due from related parties, 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 $2,723 as at December 31,
2012.
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 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, 2012
Level 1
Level 2
Level 3
Cash and cash equivalents
Short term investments
trade receivable from concentrate sales
$
58,720
6,019
–
$
–
–
15,158
$
$
64,739
$
15,158
$
–
–
–
–
there were no changes in the levels during the year ended December 31, 2012.
$
Total
58,720
6,019
15,158
$
79,897
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 assets
Derivatives liabilities
$
38,730
17,000
–
–
–
$
–
–
11,287
70
(87)
$
$
55,730
$
11,270
$
–
–
–
–
–
–
$
38,730
17,000
11,287
70
(87)
$
67,000
there were no changes in the levels during the year ended December 31, 2011.
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.
<< Financial Review table of Contents
95
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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, 2012, 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, 2012, the Company is exposed to currency risk through the following assets and liabilities
denominated in Canadian dollars, nuevo soles and Mexican pesos (all amounts are expressed in thousands of Canadian
dollars, thousands of nuevo soles or thousands of Mexican pesos):
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Due from related parties
trade and other payables
Due to related parties
provisions, current
Income tax payable
leases and long term liabilities
provisions
December 31, 2012
December 31, 2011
Canadian
Dollars
$ 4,231
6,000
77
–
(1,225)
(54)
–
–
(1,998)
–
Nuevo
Soles
Mexican
Pesos
Canadian
Dollars
Nuevo
Soles
S/. 1,389
–
3,097
–
(12,300)
–
(284)
(326)
–
(19,560)
$ 6,136
–
98,147
–
(49,779)
–
(4,502)
–
(245)
(39,323)
$ 18,457
–
42
–
(1,580)
(209)
–
–
(2,691)
–
S/. 1,396
–
5,657
4,434
(17,993)
–
(1,351)
(10,581)
–
(8,079)
Mexican
Pesos
$ 1,758
–
58,939
–
(24,310)
–
(3,163)
–
–
(17,494)
total
$ 7,031
S/. (27,984)
$ 10,434
$ 14,019
S/. (26,517)
$ 15,730
total uS$ equivalent
$ 7,053
$ (10,970)
$ 802
$ 13,745
$ ( 9,832)
$ 1,125
Based on the above net exposure as at December 31, 2012, 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 $784 (2011: $1,527) and a net loss of $1,130 (2011: net loss
$967).
c) Credit Risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its
contractual obligations. the Company’s cash and cash equivalents and short term investments are held through large
Canadian, international and foreign national financial institutions. these investments mature at various dates within one
year. All of the Company’s trade accounts receivables from concentrate sales are held with large international metals
trading companies.
the Company holds derivative contracts with financial institutions and in this regard is exposed to counterparty risk. the
Company mitigates this risk by transacting only with reputable financial institutions to minimize credit risk.
96
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
the Company’s maximum exposure to credit risk as at December 31, 2012 is as follows:
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Derivative assets
Due from related parties
December 31,
2012
December 31,
2011
$
58,720
6,019
27,032
–
5
$ 38,730
17,000
19,167
70
36
$
91,776
$ 75,003
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.
the Company expects the following maturities of its financial liabilities (including interest), finance leases, and other
contractual commitments:
Expected payments due by period as at December 31, 2012
trade and other payables
Due to related parties
Income tax payable
long term liabilities
operating leases
provisions
Less than
1 year
$ 17,348
54
200
469
702
528
1–3 years
4–5 years
$ –
–
–
2,254
1,305
519
$ –
–
–
–
886
459
$ 1,345
After
5 years
$ –
–
–
–
147
11,333
Total
$ 17,348
54
200
2,723
3,040
12,839
$ 11,480
$ 36,204
$ 19,301
$ 4,078
operating leases includes leases for office premises, computer and other equipment used in the normal course of
business. Refer to note 24 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 February
6, 2013. 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 have been
drawn from this credit facility.
Subsequent to December 31, 2012, in February 2013 the Bank of nova Scotia extended the credit facility maturity date
to February 6, 2013 and then to February 27, 2013. on March 15, 2013, the Bank of nova Scotia extended the credit
facility maturity date to March 28, 2013. no funds were drawn from this credit facility.
e)
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market interest rates. the risk that the Company will realize a loss as a result of a decline in the fair value
is limited because the balances are generally held with major financial institutions in demand deposit accounts.
A 10% change in interest rates would cause a $nil change in income on an annualized basis.
<< Financial Review table of Contents
97
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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.
19. 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, as operated by Bateas and
Cuzcatlan, respectively. 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 for the reportable segments for the years
ended December 31, 2012 and 2011 are as follows:
Reportable Segments
Corporate
Bateas
Cuzcatlan
Total
Year ended December 31, 2012
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Sales to internal customers
Cost of sales*
Depletion and depreciation**
Selling, general and
administrative expenses*
exploration and evaluation costs
Write-off of mineral properties
other material non-cash items
Interest income
Interest expense
Income (loss) before tax
Income taxes
Income (loss) for the year
Capital expenditures
$
$
–
–
–
–
8,379
–
284
13,594
777
–
2
156
300
(14,514)
272
(14,786)
525
83,697
–
68,616
15,081
–
51,231
8,961
3,337
–
3,887
(1)
394
154
25,396
6,521
18,875
29,566
$
77,323
77,323
–
–
–
39,127
12,127
3,610
–
–
(51)
70
108
34,344
6,970
27,374
20,868
$
161,020
77,323
68,616
15,081
8,379
90,358
21,372
20,541
777
3,887
(50)
620
562
45,226
13,763
31,463
50,959
* cost of sales and selling, general and administrative expenses includes depletion and depreciation
** included in cost of sales or selling, general and administrative expenses
98
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
Reportable Segments
Corporate
Bateas
Cuzcatlan
Total
Year ended December 31, 2011
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Copper concentrates
$
Sales to internal customers
Cost of sales*
Depletion and depreciation**
Selling, general and administrative expenses*
exploration and evaluation costs
other material non-cash items
Impairment of mineral properties,
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
1
–
494
306
(15,881)
183
(16,064)
814
97,740
–
80,689
15,290
1,761
–
42,236
7,053
3,920
–
10
–
297
219
52,133
15,804
36,329
25,066
$
$
12,264
12,264
–
–
–
–
6,794
2,268
1,568
–
(70)
1,894
39
35
2,083
2,815
(732)
53,127
110,004
12,264
80,689
15,290
1,761
5,961
49,030
9,421
19,840
1,715
(59)
1,894
830
560
38,335
18,802
19,533
79,007
* cost of sales and selling, general and administrative expenses includes depletion and depreciation
** included in cost of sales or selling, general and administrative expenses
Reportable Segments
Corporate
Bateas
Cuzcatlan
Total
As at December 31, 2012
Assets held for sale
total assets
total liabilities
As at December 31, 2011
total assets
total liabilities
$
–
19,412
5,466
27,878
5,729
$
51
127,778
27,710
112,746
29,793
$
–
169,073
18,594
131,017
7,808
$
51
316,263
51,770
271,641
43,330
the segment information by geographical region for the years ended December 31, 2012 and 2011 are as follows:
Reportable Segments
Canada
Peru
Mexico
Other
Total
Year ended December 31, 2012
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Year ended December 31, 2011
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Copper concentrates
$ –
–
–
–
$ 83,697
–
68,616
15,081
$ 77,323
77,323
–
–
$ –
–
–
–
$ 161,020
77,323
68,616
15,081
–
–
–
–
–
97,740
–
80,689
15,290
1,761
12,264
12,264
–
–
–
–
–
–
–
–
110,004
12,264
80,689
15,290
1,761
Reportable Segments
Canada
Peru
Mexico
Other
Total
As at December 31, 2012
non current assets
As at December 31, 2011
non current assets
$ 3,132
$ 84,531
$ 122,647
$ –
$ 210,310
3,004
68,105
113,020
-
184,129
<< Financial Review table of Contents
99
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
For the years ended December 31, 2012, six (2011: three) customers, respectively, represented 100% of total sales to
external customers as follows:
External Sales by
Customer and Region
Customer 1
Customer 2
Customer 3
Customer 4
Bateas/peru
% of total sales
Customer 1
Customer 2
Cuzcatlan/Mexico
% of total sales
Consolidated
% of total sales
Years ended December 31,
$
2012
1,391
75,136
6,675
495
2%
89%
8%
1%
$
2011
95,978
1,762
–
–
98%
2%
0%
0%
$
83,697
100%
$
97,740
100%
$
52%
2,333
74,990
$
77,323
48%
3%
97%
100%
$
$
$
89%
12,264
–
12,264
11%
100%
0%
100%
$
161,020
100%
$
110,004
100%
100%
100%
20. Cost of Sales
the cost of sales for the years ended December 31, 2012 and 2011 are as follows:
Years ended December 31,
2012
2011
Caylloma
San Jose
Total
Caylloma
San Jose
Total
Direct mining costs 1
Depletion and depreciation
Royalty expenses
$ 40,879
8,861
1,491
$ 27,511
11,616
–
$ 68,390
20,477
1,491
$ 33,995
6,919
1,322
$ 4,654
2,140
–
$ 38,649
9,059
1,322
$ 51,231
$ 39,127
$ 90,358
$ 42,236
$ 6,794
$ 49,030
1 Direct mining costs includes salaries and other short term benefits, contractor charges, energy, consumables and production related
costs.
21. Selling, General and Administrative expenses
the selling, general and administrative expenses for the years ended December 31, 2012 and 2011 are as follows:
Years ended December 31,
2012
2011
$ 12,213
2,172
4,461
236
564
895
$ 12,168
3,409
2,915
467
519
362
$
20,541
$ 19,840
Salaries and benefits
Corporate administration
Audit, legal and professional fees
Filing and listing fees
Director's fees
Depreciation
100
<< Financial Review table of Contents
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
22. exploration and evaluation Costs
the exploration and evaluation costs for the years ended December 31, 2012 and 2011 are as follows:
Share-based payments
Salaries, wages, and benefits
Direct costs
Years ended December 31,
2012
52
506
219
777
$
$
$
2011
–
931
784
$
1,715
23. net Finance Income
the net finance income for the years ended December 31, 2012 and 2011 are as follows:
Finance income
Interest income on FVtpl financial assets
Total finance income
Finance expenses
Interest expense
Standby and commitment fees
Accretion of provisions (note 13)
Total finance expense
Net finance income
Years ended December 31,
2012
2011
$
$
620
620
30
300
232
562
58
$
$
830
830
81
306
173
560
270
24. 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.
Scotiabank peru, 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 $585. this bank letter of guarantee expires 360 days from December 2012.
Banco Bilbao Vizcaya Argentaria, S.A. had 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. this guarantee expired in June 2012.
b) Capital Commitments
As at December 31, 2012, $5,613 of capital commitments not disclosed elsewhere in the consolidated financial
statements, and forecasted to be expended within one year, includes the following: $4,280 mine and tailing dam
development at the San Jose property; and, $1,333 for the tailings dam transport system, concentrator plant, electrical
infrastructure renewal, and camp infrastructure at Caylloma.
c) Other Commitments
the Company has a contract to guarantee power supply at its Caylloma mine. under the contract, the seller is obligated
to deliver a "maximum committed demand" (for the present term this stands at 3,500 Kw) and the Company is obligated
<< Financial Review table of Contents
101
FoRtunA SIlVeR MIneS InC. | 2012 AnnuAl RepoRt
noteS to ConSolIDAteD FInAnCIAl StAteMentS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
(All amounts in US$’000’s unless otherwise stated)
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 notification 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, 2012,
these obligations amounted to $13 and mature in 2013.
on May 24, 2010, the Company entered into a seven year office premise lease located in 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.
During 2011, the Company provided a security deposit of $44.
on September 30, 2012, the Company entered into an one year office premise lease in Mexico effective September 30,
2012, with an annual lease obligation of $16.
the expected payments due by period as at December 31, 2012 are as follows:
Expected payments due by period as at December 31, 2012
1–3 years
4–5 years
office premises – Canada
office premises – peru
office premises – Mexico
Less than
1 year
$ 148
373
14
$ 443
781
–
Total office premises
$ 535
$ 1,224
Computer equipment – peru
Computer equipment – Mexico
Total computer equipment
Total operating leases
149
18
$ 167
$ 702
64
17
$ 81
$ 1,305
$ 306
580
–
$ 886
–
–
$ –
$ 886
After
5 years
$ 147
–
–
$ 147
–
–
$ –
$ 147
Total
$ 1,044
1,734
14
$ 2,792
213
35
$ 248
$ 3,040
d) Other Contingencies
the Company is subject to various investigations, claims and legal and tax proceedings covering matters that arise in
the ordinary course of business activities. each of these matters is subject to various uncertainties and it is possible
that some of these matters may be resolved unfavorably to the Company. Certain conditions may exist as of the date
the financial statements are issued, which may result in a loss to the Company. In the opinion of management none of
these matters are expected to have a material effect on the results of operations or financial conditions of the Company.
During the year ended December 31, 2012, the Ministry of Mining and energy (MeM) in peru made an update to the
approved Mining environmental liabilities list. the Company is currently in the process of evaluating its mining
concessions which are currently included on the list and as at the date of the issuance of the financial statements an
estimate of liability cannot be determined.
25. Subsequent events up to March 19, 2013
Subsequent to December 31, 2012, in February 2013 the Bank of nova Scotia extended the credit facility maturity date
to February 6, 2013 and then to February 27, 2013. on March 15, 2013, the Bank of nova Scotia extended the credit
facility maturity date to March 28, 2013. no funds were drawn from this credit facility.
102
<< Financial Review table of Contents
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 Chavez #154
Miraflores, lima – peru
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 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
Dr. 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 technical
information contained in this annual report is an
accurate summary of the original reports and data
provided to or developed by Fortuna Silver Mines Inc.
Symbols
Ag
silver
Ag Eq silver equivalent
Au
Cu
g/t
gold
copper
grams per metric tonne
m
koz
M
Moz
oz
meters
1,000 ounces
million
1,000,000 ounces
troy ounce. one troy ounce is
equal to 31.1035 grams
lead
metric tonne
Pb
t
tpd metric tonnes per day.
one metric tonne equals
2,204.62 pounds
zinc
Zn
<< table of Contents
nYSe: FSM | tSX: FVI | BVl: FVI
| Frankfurt: F4S.F
www.fortunasilver.com
DeSIGn BY XY3 DeSIGn | pRInteD In CAnADA