building on our strengths
2013 Annual Report
Table of Contents
Page 3
Building on Our
Strengths
The mines are forecast to produce a total
of 6 million ounces of silver and 32,300
ounces of gold in 2014
3
Page 4
2013 Highlights
Cash cost per silver ounce of $7.03, net
of by-products
4
Page 7
CEO’s Letter
Our exploration success was underpinned
by yet another year of solid operational and
financial performance
Page 10
Chairman’s Letter
We continue to optimize and expand our
operations to ensure that we remain one of
the lowest-cost silver producers in the industry
Page 12
Board of Directors
Page 14
Senior Management
Page 16
Our Growth Strategy
Operating low-cost, long-life mines is the best
strategy for delivering sustainable value
Page 26
Mineral Reserves &
Resources
Inferred Resources increased by 26% for
silver and 36% for gold year-over-year
16
Page 18
Guidance for 2014
Silver production is forecast to increase
by 30% to 6 million ounces and gold
production by 52% to 32,300 ounces
Page 19
Milestones
Delivering steady growth and creating value
since 2005
Page 21
Sustainability
Our aim is to collaborate and form strategic
partnerships with neighboring communities
to enhance their capabilities and improve
their quality of life
21
26
Page 28
Core Asset Review
Step-out drilling confirms continuation
of high-grade Trinidad North zone at San
Jose Mine
28
Page 36
Proud to be Miners
Page 39
Management’s
Discussion and Analysis
Page 73
Consolidated Financial
Statements
Inside Back Cover
Corporate Information
All figures are in US dollars unless otherwise noted.
This annual report contains forward-looking statements. Please refer to the cautionary language under “Cautionary
Statement on Forward-Looking Statements” on page 70 of the Management’s Discussion & Analysis.
COVER PHOTO: San Jose Mine, Mexico
CorPorAte ProFile
Corporate Office
Corporate Office
Vancouver, Canada
Vancouver, Canada
Vancouver, Canada
Vancouver, Canada
SAN JOSE MINE
SAN JOSE MINE
Silver, Gold
Silver, Gold
Oaxaca, Mexico
Oaxaca, Mexico
Management
Head Office
Lima, Peru
Lima, Peru
CAYLLOMA MINE
CAYLLOMA MINE
Silver, Lead, Zinc
Arequipa, Peru
Fortuna Silver Mines Inc. owns and operates two low-cost silver mines
in Latin America, the San Jose Mine in Mexico and the Caylloma Mine
in Peru. The mines are forecast to produce a total of 6 million ounces
of silver and 32,300 ounces of gold in 2014, at a consolidated all-in
sustaining cash cost of $17.14 per ounce of silver, net of by-products
gold, lead and zinc.
Our extensive land package of more than 97,000 hectares offers
significant potential to support organic growth, from the expansion of
existing reserves and resources and the discovery of high-grade silver-
gold mineralization.
Trading Symbols
NEw YORk
STOCk ExCHANGE
FsM
TORONTO
BOLSA DE VALORES
FRANkFuRT
STOCk ExCHANGE
FVi
DE LIMA
FVi
STOCk ExCHANGE
F4s.F
BUILDING ON OUR STRENGTHS
1
Fortuna is one of the fastest growing silver
producers in Latin America.
2
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Caylloma Mine, Peru
building on our strengths
By focusing on sustainable, long-term growth
and low-cost production, we are building on
our strengths to become a leading silver
mining company in Latin America.
Experienced management team
Management has followed a disciplined growth strategy since 2006,
earning a reputation as efficient mine builders and solid operators.
• San Jose Mine commissioned in 2011 at 1,000 tpd, expanded in 2013
to 1,800 tpd and in April 2014 to 2,000 tpd, on time and on budget
Low-cost, efficient silver producer
By containing costs, expanding capacity and maximizing efficiency, we
have become one the lowest cost silver producers in the industry.
• Estimated consolidated all-in sustaining cash cost for 2014 is $17.14
per ounce of silver, net of by-products gold, lead and zinc
Organic growth opportunities
We forecast continued silver-gold production growth by exploring and
developing our 97,900-hectare land package.
• Trinidad North discovery adds Inferred Resource containing an estimated
16.3 million ounces of silver and 100,800 ounces of gold
• Annual silver equivalent* production expected to rise by 47% from 5.9,
in 2013, to 8.7 million ounces by 2016
Stable balance sheet + financial flexibility
We have a strong balance sheet, no debt and no hedging.
• Cash position as at March 31, 2014 of $62.1 million and an untapped
credit facility of $40 million
* Ag Eq estimated using Au = $1,200/oz and Ag = $20/oz; exclusive of by-product lead and zinc
BUILDING ON OUR STRENGTHS
3
2013 highlights
Silver production increases for the seventh consecutive year, reaching a record 4.6
million ounces, while gold production rises by 3% to 21,200 ounces. Balance sheet
and treasury remain strong at year-end.
Financial
• Sales of $137.4 million, compared with $161.0
Production and reserves
• Silver production increases by 16% to 4.6 million
million in 2012
ounces
• Cash cost per silver ounce of $7.03, net of by-
products, compared with guidance of $6.55
• Consolidated all-in sustaining cash cost per ounce
of silver of $20.45, net of by-products, compared
with guidance of $20.45
• Net loss of $19.1 million after a non-cash
impairment charge of $20.4 million, net of tax,
compared with net income of $31.5 million in 2012
• Cash generated by operating activities of $40.9
million, compared with $62.2 million in 2012
• Adjusted net income of $9.4 million or earnings
per share of $0.08 compared with earnings of
$0.25 in 2012
• Gold production rises by 3% to 21,242 ounces
• Combined Inferrred Resources for Caylloma and
San Jose increased to 11.6 Mt containing an
estimated 59.1 Moz silver averaging 159 g/t and
370.9 koz gold averaging 1.0 g/t; year-over-year
increases of 26% and 36%, respectively
• San Jose mill capacity expanded from 1,150 to
1,800 tpd
Community and environment
• Approximately $3 million invested in social
programs in Peru and Mexico, with an emphasis
on education, health and nutrition, and
sustainable development
Capital share structure*
Issued and Outstanding 126,335,370
Stock options
Warrants
Fully Diluted
* May 9, 2014
6,866,027
0
133,201,397
Brownfields team at Caylloma Mine
San Jose Mine crushing circuit
4
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Financial Snapshot
Revenue
($ million)
Cash Flow
from Operations
($ million)
Cash Flow
per Share
($)
Adjusted Earnings
per Share*
($)
* Net of income tax
Sales by Metal
2013 Head Count
BUILDING ON OUR STRENGTHS
5
2013 HIGHLIGHTS
Operating Highlights
2013
2012
2011
Caylloma
Mine
San Jose
Mine
Consolidated
Caylloma
Mine
San Jose
Mine
Consolidated
Caylloma
Mine
San Jose
Mine
Consolidated
458,560
1,284
456,048
1,296
462,222
1,266
369,022
1,055
448,866
1,264
116,410
954
173
82
2,104,061
194
89
2,527,203 4,631,264
177
77
2,038,579
188
88
1,949,178 3,987,757
171
81
2,008,488
150
85
478,167 2,486,655
0.36
42
2,212
1.46
89
19,031
1.92
91
17,780
2.83
88
25,211
23.49
20.97
21,242
1,394.91
1,040.51
17,780
0.97
0.72
25,211
0.87
0.61
0.40
47
2,781
1.74
87
17,918
1.99
88
17,886
2.56
86
22,396
30.91
27.40
20,699
1,648.83
1,295.32
17,886
0.94
0.63
22,396
0.88
0.66
0.36
46
2,393
1.43
85
4,524
2.15
93
19,678
2.68
88
23,425
34.83
31.09
6,917
1,631.39
1,179.90
19,678
1.10
0.86
23,425
1.00
0.66
7.65
6.53
7.03
8.07
3.76
5.96
(0.78)
4.69
0.25
20.83
91.22
161.19
15.89
71.41
160.76
20.45
24.05
87.28
183.29
15.64
74.10
209.70
23.02
–
69.12
221.01
–
50.73
155.56
–
Processed Ore
Tonnes milled
Average tpd milled
Silver
Grade (g/t)
Recovery (%)
Production (oz)
Realized Price ($/oz)*
Net Realized Price ($/oz)**
Gold
Grade (g/t)
Recovery (%)
Production (oz)
Realized Price ($/oz)*
Net Realized Price ($/oz)**
Lead
Grade (%)
Recovery (%)
Production (000 lbs)
Realized Price ($/lb)*
Net Realized Price ($/lb)**
Zinc
Grade (%)
Recovery (%)
Production (000 lbs)
Realized Price ($/lb)*
Net Realized Price ($/lb)**
unit Costs
Cash Cost /oz Ag ($)***
All-in sustaining cash
cost/oz Ag ($) ***
Cash cost /t ($)
Unit Net Smelter Return ($/t)
* 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
*** Net of by-product credits
6
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Ceo’s letter
Dear Shareholders,
Our discovery and ongoing expansion of
the high-grade Trinidad North zone at our
San Jose Mine in Mexico was the highlight
of 2013. Indeed, there is nothing like the
discovery of a robust mineralized system
to energize a mining organization and
capture the attention and imagination of
shareholders and mining analysts.
I am pleased to report that our exploration success
was underpinned by yet another year of solid
operational and financial performance despite
persistent challenging market conditions. Precious
metal prices continued to decline in 2013 after
peaking in mid-2011. Our average realized price per
ounce was $23.49 for silver and $1,394.91 for gold,
24% and 15% lower respectively compared with 2012.
2013 was a trying year for the entire mining industry.
A lower metal-price environment required many
companies to implement significant changes. In the
process, we have seen personnel layoffs, lower
exploration and capital spending, reductions in
reserve estimates and balance sheet adjustments
from asset impairment charges. Fortuna was not
immune to the impact of lower metal prices.
However, I am pleased to report that we have
adjusted to this new environment and we are well
positioned to generate sustainable free cash flow
and continue thriving in the years to come.
Jorge A. Ganoza – President, CEO and Co-founder
Expanding resources at San Jose
Silver reserves increased by 12% and gold by 16%,
after taking into consideration production-related
depletion and an 18% decline in silver prices since
the previous reserve estimate. Reserves now stand
at 23 million ounces of silver and 197,000 ounces
of gold.
In the inferred resource category, estimated
contained silver increased by 39% to 35 million
ounces and gold by 26% to 271,000 ounces.
Importantly, the inferred resource includes only that
portion of Trinidad North explored during the first six
months of drilling. Nevertheless, the higher grades of
Trinidad North added significantly to the resource,
contributing an estimated 16.3 million ounces of
silver (47%) and 101,000 ounces of gold (38%), at a
70 g/t silver equivalent cutoff.
BUILDING ON OUR STRENGTHS
7
CEO’S LETTER
Mineralization in Trinidad North remains wide open
and we continue to pursue it to the north, at depth
and for 300 meters toward surface above level
1200. The importance of the discovery is twofold.
First, it is located adjacent to San Jose’s underground
workings and plant infrastructure, making the resource
low risk in terms of capital cost, permitting and time
to production.
Second, it highlights the tremendous long-term
exploration potential of our contiguous 64,400
hectare mineral concession package at San Jose.
All of our reserves and resources at San Jose lie
within two sub-parallel vein systems, Bonanza and
Trinidad Veins. Based on evidence of additional veins
and gold anomalies throughout our land package, we
have excellent opportunities for more high-grade
silver-gold discoveries.
In 2014, we will continue to explore Trinidad North
starting with a 16,000-meter step-out drilling program.
We expect to update the resource estimate in the
second half of the year.
The pace of discovery at
Trinidad North and the growing
resource and reserve base at
San Jose suggest the potential
for still higher production.
Sustaining organic growth
Our consolidated mine production for 2013 was 4.6
million ounces of silver and 21,242 ounces of gold,
3% above guidance for silver and 10% below for gold.
Silver accounted for 65% of sales and gold for 14%.
Guidance for 2014 is for silver production to rise by
30% to 6 million ounces and gold by 52% to 32,300
ounces. The increases are due to our recent mill
expansion at San Jose. Completed on time and on
budget in September 2013, we increased throughput
capacity by 57%, from 1,150 to 1,800 tonnes per
day (tpd), just two years after starting commercial
operations at 1,000 tpd.
During the 2013 expansion project, we identified
and captured opportunities for additional capacity
that led to a further mill expansion to 2,000 tpd,
which we completed in early April 2014.
The pace of discovery at Trinidad North and the
growing resource and reserve base at San Jose
suggest the potential for still higher production. In
2014, we will therefore assess the technical and
financial viability of an expansion to 3,000 tpd.
At the Caylloma Mine, production in 2014 is
scheduled to remain steady at 2 million ounces of
silver, plus 10,000 tonnes of zinc and 7,500 tonnes
of lead. In 2013, we recorded a year-over-year silver
reserve reduction of 24% to 14 million ounces, after
depletion. The main drivers were lower silver prices
and a 9% increase in the breakeven cutoff cost to
$87 per tonne. The silver grade in reserves
8
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Our goal is to collaboratively improve the quality of life in ways that
are both good for business and for human development in the
countries where we operate.
increased marginally to 137 g/t, the lead grade
increased by 11% to 1.7% and the zinc grade by 16%
to 2.5%. Contained silver in the inferred resource
category decreased to 24 million ounces.
Maintaining low-cost operations
In mid-2013, in the face of lower metal prices, we
implemented cost reduction measures, restricted
capital expenditures and focused exploration
programs on higher reward targets. These measures
enabled us to achieve revised 2013 guidance for
consolidated all-in sustaining cash cost of $20.45
per ounce of silver, net of by-products. Our annual
capital expenditures declined by 9.4% from initial
guidance of $66.9 million to $60.6 million, which
included $10 million to purchase the Taviche Oeste
concession covering the Trinidad North discovery.
Our 2014 consolidated all-in sustaining cash cost
is forecast to be $17.14 per ounce of silver, net of
by-products. This figure includes $40 million in
sustaining capital spending. Our lowest cost
operation will be San Jose at $14.43 per ounce,
compared with Caylloma at $17.01 per ounce.
Realizing our vision
Fortuna continues to establish itself as a positive
force and strategic partner in neighboring
communities in Peru and Mexico. During 2013, we
invested approximately $3 million to execute joint
social programs with an emphasis on education,
health and nutrition and sustainable development.
Our goal is to collaboratively improve the quality of
life in ways that are both good for business and for
human development in the countries where we
operate.
Fortuna is a successful company today only because
of the commitment and dedication of its more than
700 employees and 1,000 contractors working
together in Peru, Mexico and Canada. It has been my
privilege to contribute to the growth of our organization
since it was formed in 2004.
I express my gratitude to our entire team. Because of
your efforts, we have grown and evolved to become a
multinational enterprise that is equipped to thrive in
a challenging operating environment.
All of us at Fortuna are deeply proud of the role we
play in producing metals that are essential to society.
Silver, gold, lead and zinc are all important to the
advancement of humankind. We also take great pride
in using best practices in all aspects of our business
to create shared value for our stakeholders.
In closing, I thank our shareholders for the
confidence you place in our company. I look forward
to reporting our continued growth and success.
Jorge A. Ganoza
President and Chief Executive Officer
BUILDING ON OUR STRENGTHS
9
ChAirMAn’s letter
To our shareholders
and employees,
Like all mining companies, our business
is not isolated from external forces. In
2013, lower metal prices created a
difficult operating environment that
caused our revenues and earnings to
decline. However, these results masked
remarkable growth and achievements by
our management team and employees
during the year. I am pleased and proud
Simon Ridgway – Chairman of the Board
to say that we outperformed our peers in
virtually all aspects of our operations.
Delivering on our promises
The management team delivered record annual silver and gold production and aggressively reduced operating
and capital costs, while expanding production and capacity at San Jose. The team also enjoyed tremendous
success exploring the highly promising Trinidad North discovery.
We continue to optimize and expand our operations to ensure that we remain one of the lowest-cost silver
producers in the industry. Even though we are still at the early stages of developing Trinidad North, this robust
mineralized system is proving to be a great discovery. We have yet to fully attack the potential of our 64,400
hectare property at San Jose, which holds significant potential to generate long-term organic growth for our
company.
10
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
I am confident that we have the resources and the team
to continue to create long term value for our stakeholders.
Creating sustainable value
Fortuna’s continued growth demands that we deliver
on our promises to local communities. To maintain
our social license to operate, we must go beyond
traditional philanthropic activities. More than ever,
we must demonstrate our commitment to providing
employment, to fostering economic development and
to environmental stewardship.
Our aim is to form alliances with community
stakeholders to develop and implement sustainable
development projects. Proving that we’re serious
about creating shared value in local communities
doesn’t happen overnight. Year by year, though, we
have built goodwill in communities neighboring our
operations by resolving issues collaboratively and
demonstrating that Fortuna has the means and the
commitment to be a positive force.
In 2013, we continued to actively engage with local
communities in Peru and Mexico. You can read more
about these programs in the Sustainability chapter
of this report and on our website.
Implementing our growth strategy
The sustainability of our business is central to
everything that we do. Our near-term strategy is to
focus on organic growth opportunities to create
value for our workers, for local communities near
our operations and for society at large. We must,
however, also follow a longer term, integrated
approach that combines organic growth of our
operations with attractive acquisitions in Latin
America.
In only a few years, we have made significant progress
towards building Fortuna into a leading silver miner.
I am confident that we have the resources and the
team to continue to create long term value for our
stakeholders.
I congratulate Fortuna’s management, employees
and contractors for continuing to implement our
growth strategy effectively during a challenging year.
I also thank my fellow shareholders for their trust
and support.
Simon Ridgway
Chairman of the Board
BUILDING ON OUR STRENGTHS
11
boArd oF direCtors
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).
On April 28, 2014, Tomas Guerrero retired from the Board of Directors
12
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Michael Iverson
Thomas kelly
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.
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.
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.
David Farrell
David Farrell is President of
Davisa Consulting, a private
consulting firm working with
global mining companies.
Prior to founding Davisa in
2011, David was Managing
Director, Mergers &
Acquisitions at Endeavour
Financial where he successfully closed over US$25
billion worth of M&A transactions for junior and mid-tier
natural resource companies. Before his 12 years at
Endeavour Financial, David was a lawyer at Stikeman
Elliott, working in Vancouver, Budapest and London. He
graduated from the University of British Columbia with a
B.Comm (Honours, Finance) and an LL.B and is called
to the bar in both British Columbia and England. David
also serves as a director of Northern Vertex Mining
Corp. and is a board and finance committee member of
Yaletown House, a non-profit, critical-care seniors'
residence in downtown Vancouver.
BUILDING ON OUR STRENGTHS
13
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.
we have grown and evolved
to become a multinational
enterprise that is equipped
to thrive in a challenging
operating environment.
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 40 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.
14
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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.
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.
Brownsfields exploration at San Jose Mine
Coreshack at San Jose Mine
Ore transport at Caylloma Mine
BUILDING ON OUR STRENGTHS
15
our growth strAtegy
Peru and Mexico have maintained their standing
as mining-friendly jurisdictions in the Americas.
16
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Animas Vein, Caylloma Mine
we believe that operating low-cost, long-life mines is the best
strategy for delivering sustainable value.
In light of recent lower metal prices, we have reduced costs and increased operating efficiency to ease pressure
on financial margins. We also have maintained an intense focus on capital stewardship, investing wisely in
opportunities that generate immediate growth—such as the recent expansions of our San Jose Mine.
Looking ahead, we expect the large, highly prospective land packages surrounding our mines to keep generating
steady organic growth in our silver and gold production profile. We will, at the same time, continue to evaluate
new sources of long-term growth through selective accretive acquisitions in the region.
Objectives for 2014
Maximize production,
profitability and cash flow
Invest in high return
organic growth
Maintain flexibility
for M&A
• Assess the economics of
expanding the San Jose Mine
from 2,000 to 3,000 tpd
• Continue step-out and delineation
drilling of the Trinidad North
discovery at the San Jose Mine
• Maintain balance sheet strength
by generating sustainable free
cash flow
• Generate and evaluate new high-
grade silver-gold targets at San
Jose and Caylloma
• Focus on high-grade, high-margin
precious metals opportunities
• Seek attractive acquisitions in
mining friendly jurisdictions in
the Americas
Caylloma Mine
BUILDING ON OUR STRENGTHS
17
OuR GROwTH STRATEGY
2014 Guidance
Production Guidance
Cash Cost Guidance
For 2014, we forecast a 30% increase in silver
production to 6 million ounces and a 52% increase in
gold production to 32,300 ounces or 8 million silver
equivalent* ounces.
Mine
Silver
(Moz)
Gold
(koz)
San Jose, Mexico 4.0
2.0
Caylloma, Peru
Total
6.0
30.4
1.9
32.3
Zinc
(Mlb)
--
22.6
22.6
Lead
(Mlb)
--
16.6
16.6
Mine
Per tonne**
All-in sustaining***
Cash Cost
San Jose
Caylloma
Consolidated
$67.10
88.30
$14.43
17.01
$17.14
*
Silver equivalent (Ag Eq) net of by-products lead and zinc and calculated
using Au = $1,200/oz and Ag = $20/oz
** 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
*** All-in sustaining cash cost per ounce of silver is based on the guidelines
of the World Gold Council and is net of by-products gold, lead and zinc
2014 - 2016 Silver and Gold Production Forecast
Silver Production (Moz)
Gold Production (koz)
18
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
historiCAl Milestones
2010
• Silver production of
1.9 million ounces,
up 13% over 2009
• San Jose Mine
construction
commences
• Shares upgraded
to Toronto Stock
Exchange from
Toronto Venture
Exchange
2011
• Silver production of
2.5 million ounces,
up 31% over 2010
• Gold production of
6,917 ounces, up
170% over 2010
• San Jose Mine achieves
commercial production
at 1,000 tpd
• Common shares begin
trading in the New York
Stock Exchange
2012
• Silver production of
3.9 million ounces,
up 60% over 2011
• Gold production of
20,699 ounces, up
199% over 2011
2013
• Record silver production
of 4.6 million ounces,
up 16% over 2012
• Record gold production
of 21,242 ounces;
up 3% over 2012
• San Jose Mine
• High-grade silver-gold
expansion to 1,500
tpd commences
Trinidad North discovery
at the San Jose Mine
• San Jose Mine
expanded from 1,150
to 1,800 tpd
2014
(as of April 30)
• San Jose Mine
expanded from
1,800 to 2,000 tpd
Delivering steady growth and creating value since 2005
2005
• Acquired 100 %
interest in the
Caylloma Mine,
Peru
• Shares begin
trading on the
Toronto Venture
Exchange
• Fortuna is
established in
British Columbia,
Canada
2006
• Caylloma Mine
resumes production
at 500 tpd
• Acquired 76%
interest in the San
Jose Project,
Mexico
2007
• Silver production of
400,000 ounces
• Successful drilling at
the San Jose Project
significantly
increased Ag Eq
resources
2008
• Silver production of
800,000 ounces,
up 100% over
2007
• Shares begin
trading on the
Bolsa de Valores
de Lima, Peru
2009
• Silver production of
1.7 million ounces,
up 109% over 2008
• Environmental Impact
Study approved and
construction permits
received for
San Jose Mine
• Acquired 100%
interest in the San
Jose Project
BUILDING ON OUR STRENGTHS
19
our Vision, Mission & VAlues
Our Vision
Our Values
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.
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 neighbors and other stakeholders
We respect cultural diversity and work as a
strategic partner towards the sustainable
development of neighboring communities
We value the commitment to excellence
We achieve high standards and best practices
We value integrity
We act according to our philosophy
20
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
sustAinAbility
Building stronger and more competitive communities
wherever we operate, our aim is to collaborate and form strategic partnerships with
neighboring communities to enhance their capabilities and improve their quality of life.
Our community relations programs recognize the unique culture, traditions and needs of
local communities.
We implement programs through partnerships,
fellowships, sponsorships and donations to improve
local healthcare, education and economies. We also
work with our host communities to help protect
wildlife and conserve water for agricultural purposes.
By actively engaging with local stakeholders, we
seek opportunities to establish and participate
collaboratively in sustainable community
development projects.
Caylloma Mine, Peru
Fellowships enable students to pursue
professional careers
Education center funding imparts
technical skills
In 2012, we established a five-year fellowship
program, in cooperation with the District Municipality
of Caylloma and government educational institutions,
to help students pay for food, housing and local
transportation. Each year starting in 2013, up to 10
fellowships are available for pupils in the city of
Arequipa who are pursuing university or technical
degree programs. The program aims to train 60
professionals by 2017.
“My desire is to carry out innovation projects in
the livestock arena, working together with the
communities of the District of Caylloma.
I look forward to being a veterinary technician
who works hand in hand with the population and
the communities.”
Yesenia Choquehuanca, fellowship holder pursuing a
career in agriculture and livestock production
We approved funding for the Productive and Technical
Education Center of Caylloma in 2013. Scheduled to
open in 2014, the center will be the first higher
education facility in the District of Caylloma.
We will finance the center’s operations for 2014 and
2015 under an agreement with the Regional
Education Management of Arequipa, the non-profit
fundraising organization Virgen del Chapi Association
and the Municipality of Caylloma.
Our objective is to promote the development of
technical skills and training to adolescents who have
finished high school. In the first year of operation, we
expect about 30 students to enroll in programs for
industrial leather garment-making and steel building
fabrication. In future years, the center will offer
training in fish farming, civil works, electrical
maintenance and heavy machinery maintenance.
BUILDING ON OUR STRENGTHS
21
SuSTAINABILITY – CAYLLOMA MINE
Trout farming boosts local economies
To meet growing demand for freshwater fish in
Arequipa, we worked alongside residents of the
District of Caylloma and local government to build
a commercial trout farm in the Carhualaca lagoon.
Started in 2012, we have contributed two-thirds of
the start-up costs and assisted with technical
aspects of the construction and training for large-
scale production.
To help gain market access, Fortuna approached the
Peruvian government agency responsible for
developing sustainable economic activities in the
Andes. On the strength of a five-year plan to produce
up to 50 tonnes annually of high-quality trout, the
agency agreed to provide the necessary training and
technical assistance. The agency also secured a
distribution agreement with two supermarket chains
that serve regional markets.
About 40,000 fingerlings were stocked in 13 floating
cages in the initial production module in September
2012. In June 2013, the cooperative formed to
manage the trout farm harvested 2,000 kilos of
Rainbow trout. By 2015, the cooperative plans to
sustainably produce 50 tonnes per year, using
staggered production to achieve a constant supply of
fresh fish (to learn more, please see the case study
on our website).
Multipurpose coliseum benefits
entire community
In 2010, we entered into a seven-year agreement
with the Municipality of Caylloma to support local
infrastructure development. Our commitment was to
fund the construction of a multipurpose coliseum on
5,000 square meters of land provided by the
municipality.
In 2013, the coliseum became a reality as a result of
consensus-based agreements among the population
of Caylloma, its authorities and Fortuna. Importantly,
dozens of direct and indirect jobs were generated
during construction.
This major infrastructure project benefits the entire
population, but particularly children and young
people. The coliseum provides an appropriate space
to practice sports and hold cultural and recreational
events, as well as a shelter from the rough weather
conditions common to the Peruvian Andes.
22
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
SuSTAINABILITY
San Jose Mine, Mexico
New roof creates all-weather
multipurpose public space
In coordination with the residents of Cuajilote, a
village within the municipality of San Jose del Progreso,
Fortuna refurbished the local basketball court in late
2010 so it could be used to practice different sports.
In 2013, under a collaboration agreement between
Fortuna and the municipality, the court was roofed to
create an all-weather, multipurpose facility.
Today, local residents have a public space where they
can practice sports and hold cultural and civic events,
health workshops and community meetings, among
other activities.
“Children will not be exposed to the sun during
outdoor activities anymore, and will be able to
enjoy recreational activities for longer. When
community meetings are held, it will not be
necessary to rent canvas marquees or modules.
It’s an important community space.”
Victor Arango, Municipal Agent
Mushroom crops benefit local farmers
In the Ocotlan Valley, the local diet is based on
maize, beans, chili and pumpkin. These crops have
been grown for generations, but farming has become
increasingly difficult due to poor water recovery and
the loss of nutrients in the soil. Moreover, the work is
hard and, in general, expenses are not fully recovered
through the sale of harvested produce.
To offer a dietary and a harvest alternative to the
community, Fortuna worked alongside local farmers
to introduce oyster mushroom crops. Oyster
mushroom cultivation offers a viable solution for
local farmers, as the crops require smaller plots,
less water and the raw materials are more affordable.
“I was not aware that this type of product could
be grown in our region, but with the support of
Fortuna, we are learning how to handle this crop.”
Gerardo Santiago, oyster mushroom producer
from the Porvenir Municipal Agency
BUILDING ON OUR STRENGTHS
23
SuSTAINABILITY – SAN JOSE MINE
Lighting project increases public safety
Emotional care for those in need
The road connecting the federal highway to the town
of San Jose del Progreso is approximately three
kilometers in length. Before road lighting was
installed, many of the 2,800 residents of the town
were concerned for their safety because of poor
visibility.
Finding emotional-care services in San Jose del
Progreso is very difficult, if not impossible. The
community is small and located in Oaxaca, one of
the most economically marginal states in Mexico.
Government-funded care programs are either non-
existent or inadequate.
Working in partnership with municipal authorities, we
funded a street lighting project in 2013. The road is
now safer for the students, workers and others using
the road during the night and early morning hours.
“Our village not only looks better, now it is also
safer,” said a child while exercising at the sports
facility, looking at the newly lit entrance with joy.
As the largest employer in the area, we recognize
that we have a responsibility beyond providing
employment and contributing to the local economy.
We also have an obligation to contribute to the well-
being of local residents, especially children and
single parents.
With the aim of improving the quality of life and unity
within the community, we established an emotional-
care program in 2009. The service is free and
provides ready access to healthcare counsellors and
other professionals.
The services have enabled women to address intra-
family violence and self-destructive behavior, as well
as manage family and working relationships.
Relationships with children have also improved,
which helps to prevent addictions, school dropout,
unwanted pregnancy or early marriage. We have also
seen improved school grades among children and
adolescents with a history of low performance.
“Therapy allowed me to be stronger, stand by my
decisions and do whatever it takes to achieve
happiness. Through this program I was able to
let it all out. The therapies convinced me that I
must not be afraid of anything or anyone. I feel
better and more self-assured. This is working,
because my life is changing and I will become a
better person, which is what my family and I want.”
Manuel, a 16-year-old resident
of San José del Progreso
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FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Dining facility receives national
food-service award
The cafeteria at our San Jose Mine is one of several
benefits we provide to employees. It is staffed by
eleven women from San Jose del Progreso and other
neighboring communities.
For many of these women, food service was a new
career that required learning specialized skills for
sourcing supplies, preparing food, cleaning and
disinfecting equipment, as well as related clerical
duties. Adapting and changing old work habits was
another challenge many had never faced before.
In 2013, the cafeteria staff started a comprehensive
program to improve their skills and knowledge. The
goal was to achieve 90% compliance with a wide
range of food service standards established by the
Ministry of Tourism. After completing the program,
the staff achieved 100% compliance, earning the
ministry’s Distintivo H award for providing high-quality
services and observing strict hygiene practices in
food handling.
The achievement was of great significance for our
cafeteria staff, as it encourages them to excel in
their work by improving personally and professionally.
The community also benefited as local suppliers
improved the quality of their goods and services to
meet new, stricter food-handling standards at our mine.
BUILDING ON OUR STRENGTHS
25
MinerAl reserVes & resourCes
Mineral Reserves – Proven and Probable
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Caylloma Mine, Peru
Silver Veins
Polymetallic Veins
Combined-All Veins
Proven
Probable
Proven + Probable
Proven
Probable
Proven + Probable
Proven
Probable
Proven + Probable
San Jose Mine, Mexico Proven
Total
Probable
Proven + Probable
Proven + Probable
12
199
211
754
2,118
2,872
766
2,317
3,083
196
3,409
3,605
6,688
Mineral Resources – Measured and Indicated
Property
Classification
Caylloma Mine, Peru
Measured
Indicated
Measured + Indicated
San Jose Mine, Mexico Measured
Indicated
Measured + Indicated
Tonnes
(000)
821
1,168
1,989
29
808
837
Total
Measured + Indicated
2,826
Mineral Resources – Inferred
Property
Classification
Caylloma Mine, Peru
San Jose Mine, Mexico
Total
Inferred
Inferred
Inferred
Tonnes
(000)
6,184
5,394
11,578
772
495
511
111
108
109
121
141
137
209
196
197
169
Ag
(g/t)
83
72
76
69
74
74
75
Ag
(g/t)
121
202
159
0.06
1.26
1.20
0.38
0.32
0.34
0.38
0.40
0.40
2.10
1.67
1.70
1.10
Au
(g/t)
0.31
0.30
0.30
0.57
0.64
0.64
0.40
Au
(g/t)
0.50
1.56
1.00
0.36
0.34
0.34
1.75
1.81
1.79
1.72
1.68
1.69
N/A
N/A
N/A
N/A
Pb
(%)
1.37
0.88
1.08
N/A
N/A
N/A
N/A
Pb
(%)
2.11
N/A
N/A
0.56
0.55
0.55
2.54
2.67
2.64
2.51
2.49
2.49
N/A
N/A
N/A
N/A
Zn
(%)
2.37
1.86
2.07
N/A
N/A
N/A
N/A
Zn
(%)
2.97
N/A
N/A
Contained Metal
Ag
(Moz)
Au
(koz)
0.3
3.2
3.5
2.7
7.4
10.1
3.0
10.5
13.5
1.3
21.5
22.8
36.3
0.0
8.1
8.1
9.3
22.0
31.3
9.3
30.1
39.4
13.2
183.3
196.5
235.9
Contained Metal
Ag
(Moz)
2.2
2.7
4.9
0.1
1.9
2.0
6.8
Au
(koz)
8.2
11.2
19.4
0.5
16.8
17.3
36.7
Contained Metal
Ag
(Moz)
24.0
35.1
59.1
Au
(koz)
100.2
270.8
370.9
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 July 4, 2013 for San Jose and as of June 30, 2013 for Caylloma and are reported as of December
31, 2013 taking into account production-related depletion for the period through December 31, 2013
6. Mineral Reserves for San Jose are estimated using break-even cut-off grades based on assumed metal prices of US$24.00/oz Ag and US$1,400.00/oz Au;
estimated metallurgical recovery rates of 89% for Ag and 89% for Au and projected operating costs for year-end 2013. Mineral Resources are estimated at a Ag
Eq 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) * (89/89))
7. Mineral Reserves for Caylloma are estimated using break-even cut-off grades based on estimated NSR values using assumed metal prices of US$24.00/oz Ag,
US$1,400/oz Au, US$2,100/t Pb and US$1,900/t Zn; metallurgical recovery rates of 82% for Ag, 45% for Au, 93% for Pb and 88% for Zn; and projected
operating costs for year-end 2013. Caylloma Mineral Resources are reported based on estimated NSR values using assumed 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 as detailed for Mineral Reserves; and an NSR cut-off grade of US$50/t
8. Totals may not add due to rounding procedures
9. N/A = Not Applicable
26
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Historical Reserve and Resource Base
Coreshack at San Jose Mine
BUILDING ON OUR STRENGTHS
27
Core Asset reView – Peru
CAylloMA Mine
Commodities
Silver, gold, lead and zinc
Reserve life
8 years
Ownership
100%
Land package
33,500 hectares
Operation
1,300 tpd underground mine
Location
Arequipa, Peru
(Latitude: 15° 12’ 15” S,
Longitude: 71° 51’ 40” W)
Deposit type
Intermediate-sulphidation
epithermal deposit
2013 uNIT COSTS
Cash cost per ounce of silver*
$7.65
Cash cost per tonne
$91.22
unit net smelter return
per tonne
$161.19
All-in sustaining cash cost
per ounce of silver*
$20.83
* Net of by-product credits
28
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
2013 operating and financial results
Caylloma exceeded production guidance by 6% in
2013, producing 2.1 million ounces of silver, a 3%
increase over 2012. Improvements to the processing
plant completed in late 2012 resulted in silver
recoveries rising to 82% in 2013 from 77% in the
previous year. The higher recoveries offset a small
decrease in ore production (1%) and in silver head
grades (2%).
Zinc production increased by 13% due to higher head
grades and was in line with plan. Lead production
was stable, declining only 1% compared with 2012,
although 8% below plan.
Caylloma has met or exceeded production forecasts
every year since 2007, when the mine and mill were
upgraded.
Cash cost per ounce of silver, net of by-product
credits, was $7.65, a 5% decrease from 2012. Cash
cost per tonne was $91.22. This was 5% lower than
guidance because of cost-reduction measures
implemented at the beginning of the third quarter,
but 5% higher than 2012. The all-in sustaining cash
cost per ounce of silver, net of by-products, was
$20.83, in line with 2013 guidance, and 13% lower
than 2012.
BUILDING ON OUR STRENGTHS
29
CORE ASSET REVIEw – CAYLLOMA MINE, PERu
Outlook for 2014
We have budgeted $10.7 million in capital
expenditures, primarily for mine development,
maintenance and energy projects, and brownfields
exploration.
Brownfields exploration drilling will focus on testing
high-grade silver mineralization targets within the Don
Luis I and Cailloma 6 vein systems.
Silver Production
Moz
2014 Production
and Cost Guidance
Tonnes milled
464,100
Metal production
Silver (Moz)
Gold (koz)
Zinc (Mlbs)
Lead (Mlbs)
Head grade
Silver (g/t)
Gold (g/t)
Lead (%)
Zinc (%)
2.0
1.9
22.6
16.6
167
0.29
1.76
2.51
Unit costs
Cash cost/t
All-in sustaining cash cost/oz Ag,
$88.30
net of by-product credits
$17.01
Jumbo drilling at Level 12
at Animas Vein
Operations team
New mine camp
30
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Caylloma has met or exceeded production forecasts every
year since 2007, when the mine and mill were upgraded.
1,300 tpd processing plant
BUILDING ON OUR STRENGTHS
31
Core Asset reView – MexiC0
sAn Jose Mine
Commodities
Silver, gold
Ownership
100%
Land package
64,400 hectares
Reserve life
5.2 years
Location
Taviche Mining District,
Oaxaca, Mexico
(Latitude: 16° 41’ 40” N,
Longitude: 96° 42’ 00” W)
Operation
2,000 tpd underground mine
Deposit type
High-grade, low-sulphidation,
epithermal vein deposit
2013 uNIT COSTS
Cash cost per ounce of silver*
$6.53
Cash cost per tonne
$71.41
unit net smelter return
per tonne
$160.76
All-in sustaining cash cost
per ounce of silver*
$15.89
* Net of by-product credits
32
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
2013 operating and financial results
Silver production in 2013 increased by 30% to 2.5
million ounces and gold production by 6% to 19,031
ounces, compared with 2012. Annual silver production
was 3% above guidance, however, gold production
was 8% below guidance because of variations in the
head grade from the mine’s resource model.
An expansion of the processing plant to 1,800 tpd
was completed and commissioned in September
2013 on time and on budget. This additional
capacity, higher throughput during the year of 24%
and a 3% higher silver head grade all contributed to
the increase in silver production in 2013.
Cash cost per ounce of silver, net of by-products, was
$6.53, compared with $3.76 in 2012; difference is
mainly due to lower gold credits. Cash cost per tonne
of processed ore for 2013 was $71.41, in line with
annual guidance, and 4% lower than 2012. The all-in
sustaining cash cost per ounce of silver, net of by-
products, was $15.89, in line with 2013 guidance,
and 1.6% higher than 2012.
Metallurgical recoveries continued to improve during
2013, rising to 89% for both gold and silver.
BUILDING ON OUR STRENGTHS
33
CORE ASSET REVIEw – SAN JOSE MINE, MExICO
Trinidad North Discovery
• Robust high-grade silver-gold mineralization, open
in three directions with potential for further
extension
• Average grade and widths greater than San Jose
Mine reserves and resources
• Estimated true widths up to 18.8 meters, with
silver equivalent values ranging to 4.4 kg/t
• Initial contribution to production blend expected
by first quarter of 2015
In early 2013, our brownfields exploration drilling
extended the Trinidad ore shoot to the north and to
depth. The grades and widths indicated a strong
mineralized system that was open in both directions.
Mineralization is present in two sub-parallel vein
systems (Bonanza and Trinidad Veins) and locally in
the form of stockwork zones between the two
structures.
Drilling continued to July 2013, with results
incorporated in an updated reserve and resource
estimate for San Jose in October 2013. Inferred
Resources totaled 1.9 million tonnes averaging
269 g/t silver and 1.67 g/t gold, at a 70 g/t silver
equivalent cutoff. The contained metal is estimated
at 16.3 million ounces of silver and 100,800 ounces
of gold.
In September 2013, we started a step-out drilling
program to test extensions of the Trinidad North
zone. Eight drill holes were completed from
underground drilling stations at the 1300 meter
level by December 2013. These holes confirmed the
extension of a robust mineralized system over a 200
meter strike extension. The mineralization remains
open to the north, at depth and vertically above the
1200 meter level.
We continue to explore the Trinidad North zone with
two drill rigs operating from underground drill
stations. By the third quarter of 2014, the crosscut
at the 1300 meter level should be advanced to the
point to enable exploration of a further 300 meter
extension of the Trinidad North zone for a total of
550 meters strike length beyond the current northern
limit of the Inferred Resources.
We anticipate incorporating the most recent drilling
results into an updated reserve and resource
estimate in the second half of 2014.
Additionally, in 2013 we consolidated our land
position by acquiring a 100% interest in the Taviche
Oeste concession that covers Trinidad North. The
concession was purchased for $10 million and is
subject to net smelter return royalties totaling 2.5%.
Silver Production
Moz
Gold Production
koz
34
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Outlook for 2014
We have identified and captured unused capacity in
major equipment that enabled a further expansion of
mine and mill production to 2,000 tpd in April 2014.
No additional capital investment was required for this
increase in production. Throughout 2014, we will
conduct engineering studies to evaluate the economic
robustness of expanding production to 3,000 tpd
in 2015.
We have budgeted $29.4 million in capital expenditures
at San Jose, primarily for tailings dam expansion,
mine development, brownfields exploration and a
water evaporation control project. Our brownfields
exploration will focus on testing for extensions of
high-grade silver-gold resources at Trinidad North.
2014 Production
and Cost Guidance
Tonnes milled
683,000
Metal production
Silver (Moz)
Gold (koz)
Head grade
Silver (g/t)
Gold (g/t)
4.0
30.4
203
1.56
Unit Costs
Cash cost/t
All-in sustaining cash cost/oz Ag,
$67.10
net of by-product credits
$14.43
Trinidad North discovery indicates robust high-grade
silver-gold mineralization, open in three directions
with potential for further extension of the system.
2,000 tpd processing plant
Gold assay at laboratory
Tailings dam
BUILDING ON OUR STRENGTHS
35
Proud to be Miners
The metals that we mine – silver, gold, lead and zinc – are vital commodities in our daily
lives. From cell phones to renewable energy and medical equipment, these precious and
base metals form the building blocks of our society.
Demand for most metals continues to climb as the world’s population rises and standards of living improve in
developing countries. We are proud to contribute to this growing global demand by producing metals responsibly
and by making a lasting contribution to local communities where we operate.
Silver: The indispensable element
Silver has countless applications, however, 95% of
the demand for silver is from three areas: industry,
investment and silver jewelry and décor. In recent
years, fabrication demand has greatly outpaced mine
production forcing market participants to use existing
stocks to meet demand. As these available sources
continue to decline, silver’s fundamental value
continues to strengthen.
• Solar energy. 90% of all photovoltaic cells rely on
silver paste. These cells turn the sun’s rays into
solar energy, one of our most valuable sources of
renewable energy.
• Medicine. The medical community has long valued
silver for its healing and anti-disease properties.
Today, it is added to bandages and wound-
dressings, catheters and other medical instruments
and is a key part of the technology behind X-rays.
• Cars. Over 36 million ounces of silver are used
annually in automobiles. Silver-coated electrical
contacts help start the engine, open power windows,
adjust power seats and close a power trunk.
Source: The Silver Institute
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FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Gold: The iconic metal
Gold has been used for jewelry, decorative and monetary purposes for
thousands of years. And it has long been considered a store value.
Today, gold is also increasingly important in the development of new
technologies.
• Electronics. Gold is used in components for mobile phones,
computer systems and a variety of high-performance electronic
systems. Only silver and copper are better conductors of electricity.
• Medicine. Gold is highly resistant to bacteria and can be used for
medical implants where there is a high risk of infection, such as in
the inner ear.
• Diagnostics. Researchers have used gold nanoparticles in
laboratory tests to detect disease, which could lead to tests more
than three-million times more sensitive than currently available.
Source: World Gold Council
Zinc: Critical for life on earth
Zinc is integral to our daily lives. From transportation and medicine, to
energy conservation, pollution control, electronics and space
exploration, about 12 million tons of zinc is produced annually to meet
this demand. About 75% of the zinc consumed worldwide originates
from mined ores and 25% from recycled or secondary zinc.
• Galvanizing. More than half is used for galvanizing to protect steel
from corrosion.
• Die-casting. Approximately 14% goes into the production of zinc-
based alloys, mainly to supply the die-casting industry, and 10% to
produce brass and bronze.
• Housing. Zinc is used for applications such as roofing, gutters and
down-pipes.
Source: International Zinc Association
Lead: A store of energy
Lead is mined on all continents except Antarctica and is one of the
most important metals to industrialized economies. Global demand for
lead has more than doubled since the early 1990s. Today, lead has the
highest recycling and reuse rates compared to other major metals.
• Batteries. 80% of lead usage is in the production of batteries, of
which more than 95% are recycled in developed countries. Lead
batteries are allowing significant vehicle CO2 savings through “start-
stop” technology and hybrid electric vehicles.
• Protection. Lead provides protection from radiation for people
working in hospitals, dental surgeries, laboratories and nuclear
installations. It is also vital for protecting underwater transmission
cables.
Source: International Lead Association
BUILDING ON OUR STRENGTHS
37
FinAnCiAl reView
MANAGEMENT’S DISCuSSION AND ANALYSIS
page 39
40
40
43
47
48
51
51
54
60
63
64
65
68
68
68
69
69
69
70
70
Business of the Company
2013 Highlights
2014 Guidance and Outlook
Results of Operations
Property Option Agreements
Annual 2013 Financial Results
Quarterly Information
Fourth Quarter 2013 Financial Results
Non-GAAP Financial Measures
Liquidity and Capital Resources
Related Party Transactions
Significant Accounting Judgments and Estimates
Financial Instruments and Related Risks
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
Qualified Person
Cautionary Statement on Forward-Looking Statements
CONSOLIDATED FINANCIAL STATEMENTS
72
73
74
75
76
77
78
Report of Independent Registerered Chartered Accountants
Consolidated Statements of Income
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Cash Flows
Consolidated Statements of Financial Position
Consolidated Statements of Changes in Equity
Notes to Consolidated Financial Statements
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FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2013
As at March 17, 2014
(Dollar amounts expressed in US dollars, unless otherwise indicated)
This 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”)’s performance and such
factors that may affect its future performance. This MD&A, which has been prepared as of March 17, 2014, should be
read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31,
2013, and the related notes contained therewith. 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, all-in sustaining cash
cost, all-in cash cost, adjusted net income, operating cash flow per share before changes in working capital, income
taxes, and interest income, used by the Company to manage and evaluate operating performance and ability to generate
cash and widely reported in the silver mining industry as benchmarks for performance but that 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 the 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 southern 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 symbol FSM, on the Toronto Stock Exchange and Lima Stock Exchange, both
under the trading 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”).
BUILDING ON OUR STRENGTHS
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MANAGEMENT’S DISCUSSION AND ANALYSIS
2013 Highlights
FuLL Year FinanCiaL and OPeraTing HigHLigHTS
Net loss for the year ended December 31, 2013 (“2013”), amounted to $19.1 million, compared with $31.5 million net
income for the year ended December 31, 2012 (“2012”). The loss was driven by a non-cash impairment charge of $20.4
million, net of tax (2012: $nil) and by a one-time non-cash income tax provision of $7.7 million resulting from the initial
recognition of the Mexican mining tax reform.
The Company’s adjusted net income was $9.4 million (2012: $34.1 million), after adjusting for the write-off and
impairment of mineral properties, plant and equipment and the impact of the initial recognition of the Mexican mining
tax reform (refer to non-GAAP financial measures). The decrease with respect to 2012 was driven by lower silver and
gold prices of 24% and 15%, respectively. Sales decreased 15% to $137.4 million, while silver ounces sold increased 16%.
Cash flow from operations, before changes in working capital, decreased 34% to $40.9 million (2012: $62.2 million).
The decrease reflects the negative impact of lower metal prices on our sales offset by the lower taxes paid at Caylloma
in 2013.
Basic loss per share for the year was $0.15 (2012: earnings $0.25). Operating cash flow per share, before changes in
working capital items, decreased 34% to $0.33 (2012: $0.50) (refer to non-GAAP financial measures).
In 2013, sales comprised 65% silver and 14% gold, compared with 67% and 17%, respectively, in the prior year.
Silver production increased 16% to 4,631,264 ounces (2012: 3,987,757 ounces), and gold production rose 3% to
21,242 ounces (2012: 20,699 ounces). Silver exceeded annual production guidance by 3%, and gold fell 10% short of
annual guidance.
Consolidated all-in sustaining cash cost per ounce of silver, net of by-product credits, was $20.45 in line with our guidance
for 2013 (refer to non-GAAP financial measures).
Trinidad nOrTH diSCOverY
The Trinidad North discovery was announced in February of 2013 (see Fortuna news release of February 4, 2013) and a
maiden resource for the Trinidad North zone was announced in October of 2013 (see Fortuna news release of October
17, 2013). At a 70 g/t Ag Eq cutoff, inferred resources at Trinidad North are estimated at 1.9 Mt averaging 269 g/t Ag
and 1.67 g/t Au, containing 16.3 Moz Ag and 100.8 koz Au. Step-out drilling of the Trinidad North discovery was initiated
in late September of 2013 and is being carried out from two underground drill stations located at the 1,300 meter level.
Through December 2013, eight step-out drill holes were completed in the Trinidad North Extension, a 200 meter strike
extension beyond the existing resource boundary at Trinidad North (see Fortuna news release of January 21, 2014).
Results from the step-out drilling campaign have confirmed the continuation of the high-grade Trinidad North zone over
the full 200 meter strike extension. The mineralization remains open to the north and to depth as well as vertically above
the 1,200 meter level.
2014 Guidance and Outlook
2014 PrOduCTiOn guidanCe
For 2014, silver production is estimated to grow 30% to 6 million ounces and gold production 52% to 32,300 ounces,
or 7.9 million Ag Eq ounces*, plus base metal by-products, at an estimated all-in sustaining cash cost** of $17.14 per
ounce of silver.
Mine
San Jose, Mexico
Caylloma, Peru
Total
Silver
(Moz)
4.0
2.0
6.0
gold
(koz)
30.4
1.9
32.3
investments
($ millions)
29.4
10.7
40.1
Cash
Cost
($/t)
67.1
88.3
–
all-in
Sustaining
Cash Cost
($/oz ag)
14.43
17.01
–
• Caylloma Mine zinc and lead production forecast of 22.6 million pounds and 16.6 million pounds, respectively.
• Consolidated all-in sustaining cash cost per ounce of silver of $17.14.
(*) Ag Eq estimated based on gold price of $1,260/oz and silver price of $21/oz.
(**) All-in sustaining cash cost per ounce of silver, net of by-product credits. Based on the guidelines from the World Gold Council. All-in
sustaining cash cost calculated using Au = $1,300/oz, Pb = $2,100/t and Zn = $1,900/t.
40
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MANAGEMENT’S DISCUSSION AND ANALYSIS
2014 OuTLOOk
San Jose Mine, Mexico
San Jose plans to process 683,000 tonnes of ore averaging 203 g/t Ag and 1.56 g/t Au. Investments for 2014 are
estimated to be $29.4 million.
The Company has captured opportunities in spare capacity of major equipment, allowing for an additional processing
plant expansion to 2,000 tpd by the beginning of the second quarter of 2014. The mill and mine will increase production
without incurring additional capital investments. The Company will be conducting engineering studies to assess a further
expansion beyond 2,000 tpd.
Major investments include:
• Mine development: $7.0 million
• Tailings dam expansion: $11.7 million
• Water evaporation control project: $2.2 million
• Brownfields exploration: $5.3 million
Caylloma Mine, Peru
Caylloma plans to process 464,100 tonnes of ore averaging 167 g/t Ag. Capital expenditures for 2014 are estimated
to be $10.7 million.
Major investments include:
• Mine development: $4.7 million
• Maintenance and energy: $1.9 million
• Brownfields exploration: $1.1 million
Brownfields exploration
The 2014 brownfields exploration program at the San Jose property is focused on testing the potential for extensions of
the high-grade silver-gold resources identified at Trinidad North (see Fortuna Silver news release dated October 17, 2013).
Step-out and delineation drilling totaling over 16,000 meters will explore the Trinidad North structure over a further 550-
meter strike extension and to depths between 1,300 and 900 meters in elevation. Underground workings will be advanced
a further 300 meters to the north to provide access for drill stations.
At the Caylloma property, brownfields exploration drilling will focus on testing the Don Luis I and Cailloma 6 vein systems,
where exploration completed to date has identified potential for high-grade silver mineralization.
2014 aLL-in SuSTaining CaSH COST Per OunCe OF ag, neT OF BY-PrOduCT CrediTS
Refer to All-in cash cost per payable ounce of silver (non-GAAP financial measures).
San Jose Mine all-in cash cost per oz ounce of Ag, net of by-product credits
item
Cash cost net of by-producing credits
Government royalty and mining tax
Workers’ participation
Selling, general and administrative expenses (operations)
Adjusted operating cash cost
Selling, general and administrative expenses (corporate)
Sustaining capital expenditures
Brownsfields exploration
all-in sustaining cash cost/oz ag
Non-sustaining capital expenditures
all-in cash cost/oz ag
2014 guidance
($/oz ag)
4.97
0.14
1.03
0.84
6.98
–
6.06
1.39
14.43
0.26
14.69
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Caylloma Mine all-in cash cost per ounce of Ag, net of by-product credits
item
Cash cost net of by-product credits
Government royalty and mining tax
Workers’ participation
Selling, general and administrative expenses (operations)
Adjusted operating cash cost
Selling, general and administrative expenses (corporate)
Sustaining capital expenditures
Brownsfields exploration
all-in sustaining cash cost/oz ag
Non-sustaining capital expenditures
all-in cash cost/oz ag
Consolidated all-in cash cost per ounce of Ag, net of by-product credits
item
Cash cost net of by-product credits
Government royalty and mining tax
Workers’ participation
Selling, general and administrative expenses (operations)
Adjusted operating cash cost
Selling, general and administrative expenses (corporate)
Sustaining capital expenditures
Brownsfields exploration
all-in sustaining cash cost/oz ag
Non-sustaining capital expenditures
all-in cash cost/oz ag
MexiCO Mining Tax
2014 guidance
($/oz ag)
9.36
0.34
0.33
1.65
11.68
–
4.76
0.57
17.01
0.21
17.22
2014 guidance
($/oz ag)
6.44
0.21
0.80
1.11
8.56
1.85
5.62
1.11
17.14
0.24
17.38
On October 31, 2013, the 2014 Mexico Tax Reform package (“reform”) was approved by the Mexican Congress and was
published in the official gazette in November and December 2013. The new laws have an effective date of January 1,
2014.
Under the reform, three new articles were included relating to federal royalties and taxes, among other tax law changes:
• Special Mining Royalty. This is a 7.5% royalty on earnings before interest, taxes, depreciation, and amortization
(“EDITDA”) based on tax rules (taxable income minus producing costs, but some costs will no longer be
deductible, such as depreciation) and is deductible from income tax.
• Extraordinary Mining Royalty. This consists of a 0.5% royalty rate for companies producing gold, silver and
platinum. This royalty is based on the gross revenues derived from the sales of these metals and is deductible
from income tax but not deductible for the special mining royalty.
• Additional Mining Tax. This corresponds to a tax of 50% of $124.74 per hectare for each concessioned hectare
for companies that have not performed exploration or exploration activities for a consecutive two-year period
during the first 11 years of the concession grant. The tax is increased to 100% of $124.74 per hectare in the
12th year of the concession grant.
• Non-deductible Payments to Employees. Payments to employees that, in turn, are not included as taxable income
to the employee will result in the employer absorbing the non-deductible portion of up to 53%.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
In addition, the option that allows the deduction of exploration expenses in mineral deposits in the same period they
were incurred is limited to the general rule of applying 10% amortization per year. As well, a 10% dividend withholding tax
will be applied to distributions, from after-tax earnings generated in 2014 and subsequent years, to non-resident
shareholders. Furthermore, the tax stimulus that allowed for immediate deduction of fixed assets is eliminated.
Results of Operations
COnSOLidaTed MeTaL PrOduCTiOn
QuarTerLY reSuLTS
Three months ended december 31,
2013
2012
Consolidated Metal Production
Caylloma
San Jose
Consolidated
Caylloma
San Jose
Consolidated
Silver (oz)
Gold (oz)
Lead (000’s lb)
Zinc (000’s lb)
Production cash cost (US$/oz Ag)*
All-in sustaining cash cost (US$/oz Ag)*
542,457
632
3,770
6,676
8.29
18.55
917,668
6,420
–
–
5.55
10.78
1,460,125
7,052
3,770
6,676
6.56
15.49
519,549
514
4,936
6,135
9.30
24.75
491,181
3,854
–
–
8.38
29.09
1,010,730
4,368
4,936
6,135
8.85
30.17
* Net of by-product credits
Year TO daTe reSuLTS
Years ended december 31,
2013
2012
Consolidated Metal Production
Caylloma
San Jose
Consolidated
Caylloma
San Jose
Consolidated
Silver (oz)
Gold (oz)
Lead (000’s lb)
Zinc (000’s lb)
Copper (000’s lbs)
Production cash cost (US$/oz Ag)*
All-in sustaining cash cost (US$/oz Ag)*
2,104,061
2,212
17,780
25,211
–
7.65
20.83
2,527,203
19,031
–
–
–
6.53
15.89
4,631,264
21,242
17,780
25,211
–
7.03
20.45
2,038,579
2,781
17,886
22,396
48
8.07
24.05
1,949,178
17,918
–
–
–
3.76
15.64
3,987,757
20,699
17,886
22,396
48
5.96
23.02
* Net of by-product credits
Silver and gold production for the year ended December 31, 2013, totaled 4,631,264 ounces and 21,242 ounces,
respectively, exceeding by 3% and under by 10%, respectively, the Company’s production guidance for 2013. Compared
with the previous year, silver and gold production increased 16% and 3%, respectively, explained largely by the
commissioning of the San Jose plant expansion to 1,800 tpd, on September 23, 2013.
COnSOLidaTed CaSH COST Per OunCe OF PaYaBLe SiLver
All-in sustaining cash cost per ounce of payable silver for 2013, net of by-product credits, decreased to $20.45 (2012:
$23.02) as a result of lower operating and capital costs per ounce in spite of lower gold by-product credits (refer to non-
GAAP financial measures). All-in sustaining cash cost per ounce of payable silver for 2013 was in line with guidance.
BUILDING ON OUR STRENGTHS
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MANAGEMENT’S DISCUSSION AND ANALYSIS
San JOSe Mine review
San Jose is an underground silver-gold mine located in southern Mexico in the State of Oaxaca. The table below shows
the main variables used by management to measure operating performance of the mine: throughput, grade, recovery,
gold and silver production, and unit costs.
Mine Production
Tonnes milled
average tonnes milled per day
Silver
Grade (g/t)
Recovery (%)
Production (oz)
gold
Grade (g/t)
Recovery (%)
Production (oz)
unit Costs
Production cash cost (US$/oz Ag)*
Production cash cost (US$/tonne)
Unit Net Smelter Return (US$/tonne)
ll-in sustaining cash cost (US$oz/Ag)*
* Net of by-product credits.
QuarTerLY reSuLTS
Three Months ended december 31
Year TO daTe reSuLTS
Years ended december 31
2013
San Jose
158,218
1,741
202
89
917,668
1.42
89
6,420
5.55
63.38
147.76
10.78
2012
San Jose
98,348
1,107
177
88
491,181
1.39
88
3,854
8.38
82.82
198.53
29.09
2013
San Jose
456,048
1,296
2012
San Jose
369,022
1,055
194
89
2,527,203
188
88
1,949,178
1.46
89
19,031
6.53
71.41
160.76
15.89
1.74
87
17,918
3.76
74.10
209.70
15.64
Silver annual production for 2013 was 3% above guidance. Gold annual production was 8% below guidance due to
variations in the head grade relative to the resource model. The Company is analyzing the reasons for these variations
and is taking measures to improve the accuracy of gold grade estimates predicted by the resource model and the mining
schedule production plans. The expansion of the San Jose Mine’s processing plant capacity to 1,800 tpd was successfully
completed and commissioned in September 2013 on time and on budget.
Silver and gold production for 2013 was 30% and 6% above the previous year respectively. Silver production increased
on the back of higher processed ore of 24% and 3% higher head grade. Gold production saw a more modest increase
due to a reduction in head grades of 16%, where our mine plan contemplated an 8% reduction.
A total of 6,552 m of preparation and development were completed in 2013 compared with 6,015 m in 2012. The
increase is related to the ramp-up in mine production throughout the year as the extraction rate went from 1,200 tpd to
1,800 tpd.
Cash cost per tonne of processed ore for 2013 was 4% below 2012 and in line with guidance for the year. All-in sustaining
cash cost per ounce, net of by-product credits, at San Jose was $15.89 in 2013 (refer to non-GAAP financial measures),
in line with guidance for the year.
Investments in property plant and equipment and brownfields exploration, on a cash basis, were $28.3 million for the
year ended December 31, 2013, and include $4.3 million for mine development, $6.2 million for brownfields exploration,
$16.1 million of equipment and infrastructure, and $1.7 million of infill drilling.
Cash cost per ounce of payable silver and cash cost per tonne of processed ore are non-GAAP financial measures (refer
to non-GAAP financial measures for reconciliation of cash cost to the cost of sales).
Exploration drilling at Trinidad North continues with two drill rigs from existing underground drilling stations with the
objectives of extending the mineralization in open directions and the delineation of new mineral resources for incorporation
into the resource update scheduled for the second half of 2014. An extension of the crosscut at the 1300 meter level
is planned for completion by June of 2014 to facilitate the exploration of a further 300 meter extension of the mineralized
system for a total of 500 meters from the northern limit of existing inferred resources.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
CaYLLOMa Mine review
Caylloma is an underground silver-lead-zinc mine located in southern Peru, in the Arequipa Department. Its commercial
products are silver-lead and zinc concentrates. The table below shows the main variables used by management to
measure the operating performance of the mine.
QuarTerLY reSuLTS
Three Months ended december 31
Year TO daTe reSuLTS
Years ended december 31
Mine Production
Tonnes milled
average tonnes milled per day
Silver
Grade (g/t)
Recovery (%)
Production (oz)
gold
Grade (g/t)
Recovery (%)
Production (oz)
Lead
Grade (%)
Recovery (%)
Production (000’s lbs)
Zinc
Grade (%)
Recovery (%)
Production (000’s lbs)
Copper
Production (000’s lbs)
unit Costs
Production cash cost (US$/oz Ag)*
Production cash cost (US$/tonne)
Unit Net Smelter Return (US$/tonne)
All-in sustaining cash cost (US$oz/Ag)*
* Net of by-product credits.
2013
Caylloma
116,127
1,290
174
83
542,457
0.38
44
632
1.59
93
3,770
2.88
91
6,676
0
8.29
90.49
145.51
18.55
2012
Caylloma
115,522
1,256
176
79
519,549
0.34
40
514
2.16
90
4,936
2.78
87
6,135
0
9.30
96.80
196.29
24.75
2013
Caylloma
458,560
1,284
2012
Caylloma
462,222
1,266
173
82
2,104,061
177
77
2,038,579
0.36
42
2,212
1.92
91
17,780
2.83
88
25,211
0.40
47
2,781
1.99
88
17,886
2.56
86
22,396
0
48
7.65
91.22
161.19
20.83
8.07
87.28
183.29
24.05
Silver annual production was 6% over guidance mainly due to an improvement in silver metallurgical recovery from 77%
to 82%. 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 82%, throughout 2013.
When compared with the prior year, silver production for 2013 increased 3% due to the increase in metallurgical recoveries
of 6% and despite slightly lower head grades (down 2%). Zinc production increased 13% year over year as a result of
higher head grade and was in line with the plan. Lead production was stable when compared with the previous year,
albeit 8% below plan.
A total of 7,100 m of mine development and preparation were completed in 2013, compared with 9,643 m in 2012. The
reduction is part of the optimization initiatives undertaken in the second half of 2013 to bring down operating costs.
Cash cost per tonne at Caylloma for 2013 was $91.22 per tonne of processed ore, an increase of 5% from 2012, but
5% lower than guidance. This decrease is the result of cost-reducing measures undertaken at the beginning of the third
quarter. These consist mainly of an optimization of mine preparation activities and reductions in related personnel
expenses and technical services. All-in sustaining cash cost per ounce, net of by-product credits, at Caylloma in 2013
was $20.83 (refer to non-GAAP financial measures) in line with guidance for the year.
Investments, on a cash basis, were $21.8 million for the year ended December 31, 2013, and include $5.3 million for
mine development, $4.0 million for brownfields exploration, and $12.5 million of equipment and infrastructure.
BUILDING ON OUR STRENGTHS
45
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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
Three months ended decmber 31,
Year TO daTe reSuLTS
Years ended december 31,
2013
2012
2013
2012
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
433
4,580
4,282
-114
617
0
0
0
0
0
424
2,723
2,682
2
466
0
0
0
0
0
466
13,152
12,888
-114
617
0
0
0
0
0
730
9,647
9,915
3
466
355
5,966
5,843
7
485
198
3,386
3,406
29
208
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
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
521
22,333
22,384
16
485
443
15,762
16,094
97
208
0
0
0
0
0
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
* Copper concentrate sold as lead concentrate
iMPairMenT OF CaYLLOMa Mine
Assets are reviewed and tested for impairment when events or changes in circumstances suggest that the carrying
amount exceeds the recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value
in use. Assets are grouped at the lowest level for which there are separately identifiable cash flows or cash generating
units.
Impairment indicators were identified for Caylloma in the second quarter of 2013. The impairment was driven by the
reduction in gold and silver prices during the aforementioned quarter, and reflected a reduction in expected future cash
flows at the Caylloma operations. The Company has determined that the Caylloma property represents a cash generating
unit within the Peru geographic region. Fair value models were used to determine the recoverable amount of the cash
generating unit using a weighted average cost of capital of 7.65%. The carrying value of net assets of $87.6 million was
determined to be impaired by $15.0 million, before tax. In the second quarter ended June 30, 2013, the Company
recorded an impairment charge of $10.2 million, net of tax ($15.0 million, before tax) (Q2 2012: $nil) for non-current
assets related to Caylloma. The impairment charge was allocated on a pro rata basis against the net book value of the
mineral properties, plant and equipment of $90.1 million.
The recoverable amounts of the Company’s cash generating units (“CGUs”), which include mineral properties, plant and
equipment are determined on an annual basis, or where facts and circumstances provide impairment indicators. The
recoverable amounts are based on each CGUs future after-tax cash flows expected to be derived from the Company’s
mineral properties and represent each CGUs FVLCTS. The after-tax cash flows are determined based on life-of-mine
(“LOM”) after-tax cash flow projections which incorporate management’s best estimates of future metal prices, production
based on current estimates of recoverable reserves and resources, exploration potential, future operating costs and
non-expansionary capital expenditures. Projected cash flow are discounted using a weighted average cost of capital of
7.42%. Management’s estimate of the FVLCTS of its CGUs is classified as level 3 in the fair value hierarchy.
46
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MANAGEMENT’S DISCUSSION AND ANALYSIS
As at December 31, 2013, the Company performed an annual review of the recoverable amounts of its CGUs and
recognized a $10.2 million, net of tax ($15.0 million, before tax) (Q4 2012: $nil) impairment charge, on the carrying
value of net assets of $78.1 million, in respect to the Company’s investment in Caylloma. The impairment charge was
allocated on a pro rata basis against the net book value of the mineral properties, plant and equipment of $79.4 million.
For December 31, 2013 and 2012, the key assumptions used for fair value less cost to sell calculations are as follows:
Metal Price assumptions
2014
2015
2016
2017
2018
2019-2026
Gold price $ per ounce
Silver price $ per ounce
Lead price $ per tonne
Zinc price $ per tonne
1,361.50
21.35
2,212.49
2,028.25
1,362.50
22.66
2,290.89
2,204.62
1,392.50
23.00
2,340.63
2.385.50
1,336.50
22.40
2,355.65
2,129.00
1,336.50
22.40
2,373.00
2,149.00
1,336.50
22.40
2,068.21
2,149.00
Weighted average cost of capital
7.42%
7.42%
7.42%
7.42%
7.42%
7.42%
december 31, 2013
Metal Price assumptions
2013
2014
2015
2016
2017
2018-2020
Gold price $ per ounce
Silver price $ per ounce
Lead price $ per tonne
Zinc price $ per tonne
1,700.00
34.49
2,100.00
2,000.00
1,700.00
34.25
2,100.00
2,000.00
1,700.00
32.38
2,100.00
2,000.00
1,700.00
29.50
2,100.00
2,000.00
1,700.00
26.94
2,100.00
2,000.00
1,700.00
26.31-26.06
2,100.00
2,000.00
Weighted average cost of capital
7.65%
7.65%
7.65%
7.65%
7.65%
7.65%
december 31, 2012
Expected future cash flows to determine the FVLCTS in the impairment testing of non-current assets are inherently
uncertain and could materially change over time. The cash flows are significantly affected by a number of factors including
estimates of production levels, operating costs, and capital expenditures reflected in the Company’s life of mine plans,
as well as economic factors beyond management’s control, such as silver and gold prices, discount rates, and observable
net asset valuation multiples. Should management’s estimate of the future not reflect actual events, further impairments
or reversals of impairments may be identified.
Property Option Agreements
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”).
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 by 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 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 to have 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, 2013, the Company had issued 34,589 common shares of the Company, with a fair market value
of $0.15 million, and paid $0.15 million cash according to the terms of the option agreement.
BUILDING ON OUR STRENGTHS
47
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MANAGEMENT’S DISCUSSION AND ANALYSIS
TaviCHe OeSTe COnCeSSiOn
On February 4, 2013, the Company, through its wholly owned subsidiary, Cuzcatlan, acquired, through an option agreement
with Plata Pan American S.A. de C.V. (“Plata,” a wholly owned subsidiary of Pan American Silver Corp.), a 55% undivided
interest in the 6,254-hectare Taviche Oeste Concession (“concession”) immediately surrounding the San Jose Mine in
Oaxaca, Mexico. The Company made a cash payment of $4.0 million. On June 19, 2013, the Company made the final
$6.0 million cash payment to purchase the remaining 45% undivided interest in the concession.
The concession is subject to a 2.5% net smelter royalty on ore production from this property.
San LuiSiTO COnCeSSiOnS
On February 26, 2013, the Company, through its wholly owned subsidiary, Cuzcatlan, was granted an option with a third
party on concessions in the San Luisito Project, Sonora, Mexico, and made a cash payment of $0.05 million. During the
second quarter of 2013, upon completion of the exploration program and given the current economic environment, the
Company abandoned its interest in the option agreement, resulting in a write-off of $0.4 million. Additional costs of $0.1
million and $0.1 million were written off in Q3 2013 and Q4 2013, respectively, for a total write-off of $0.6 million.
Annual 2013 Financial Results
expressed in $000's, except per share data
2013
2012
2011
Years ended december 31,
Sales
Mine operating earnings
Operating (loss) income
Net (loss) income
(Loss) earnings per share, basic
(Loss) earnings per share, diluted
Total assets
Leases and long term liabilities
137,394
41,775
(9,629)
(19,100)
(0.15)
(0.15)
302,215
2,343
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
Net loss for the year ended December 31, 2013 (“2013”), amounted to $19.1 million, compared with $31.5 million of
net income for the year ended December 31, 2012 (“2012”). The loss was driven by a non-cash impairment charge of
$20.4 million, net of tax (2012: $nil) and by a one-time non-cash income tax provision of $7.7 million resulting from the
initial recognition of the Mexican mining tax reform.
The Company’s adjusted net income was $9.4 million (2012: $34.1 million) (refer to non-GAAP financial measures). The
decrease with respect to 2012 was driven by lower sales of 15%, related mainly to lower silver and gold prices of 24%
and 15%, respectively. The impact of lower metal prices on our sales was partially offset by higher ounces of silver sold,
of 16%, reflecting mostly the expansion at the San Jose mine. Mine operating earnings decreased 41% to $41.8 million
(2012: $70.7 million), and gross margins (mine operating earnings over sales) fell from 44% to 30%, reflecting the effect
of lower metal prices.
Cash flow from operations, before changes in working capital, decreased 34% to $40.9 million (2012: $62.2 million).
The decrease reflects the negative impact of lower metal prices on our sales, offset by the lower taxes paid at Caylloma
in 2013.
Basic loss per share for the year decreased to $0.15 (2012: earnings $0.25). Operating cash flow per share, before
changes in working capital items, decreased 34% to $0.33 (2012: $0.50) (refer to non-GAAP financial measures).
Sales for 2013 decreased 15% from a year ago to $137.4 million (2012: $161.0 million). Sales from Caylloma decreased
14% to $72.3 million (2012: $83.7 million) and from San Jose, 16% to $65.1 million (2012: $77.3 million), as realized
prices for silver and gold declined 24% and 15%, respectively.
Provisional sales during the period decreased 9% to $146.9 million (2012: $161.4 million), while negative price and
assay adjustments amounted to $9.5 million (2012: $0.4 million).
Net realized prices are calculated from provisional sales, based on contained metals in concentrate sold, before
government royalties and after deductions, treatment, and refining charges. Treatment charges are allocated to the base
metals in Caylloma and to gold in San Jose. Final pricing for all concentrates takes place one month after the month of
sale. The Company has not hedged its exposure to metal price risks.
48
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Year TO daTe reSuLTS
Years ended december 31,
2013
2012
Sales and realized Prices
Caylloma
San Jose
Consolidated
Caylloma
San Jose
Consolidated
Provisional Sales
Adjustments*
Sales
Silver
Provisional Sales (oz)
Realized Price ($/oz)**
Net Realized Price ($/oz)***
gold
Provisional Sales (oz)
Realized Price ($/oz)**
Net Realized Price ($/oz)***
Lead
Provisional Sales (000’s lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
Zinc
Provisional Sales (000’s lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
75,434,322
(3,128,808)
72,305,514
71,421,250 146,855,572
(6,332,971)
(9,461,779)
65,088,279 137,393,279
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
2,160,783
23.69
20.71
2,451,608
23.31
21.19
4,612,391
23.49
20.97
1,975,984
30.98
26.96
1,984,902
30.84
27.83
3,960,886
30.91
27.40
2,247
1,399.42
1,052.19
18,750
1,394.37
1,039.11
20,997
1,394.91
1,040.51
2,452
1,667.47
1,321.92
18,524
1,657.14
1,291.80
20,976
1,648.83
1,295.32
18,170
0.97
0.72
25,259
0.87
0.61
–
–
–
–
–
–
18,170
0.97
0.72
25,259
0.87
0.61
17,662
0.94
0.63
22,049
0.88
0.66
–
–
–
–
–
–
17,662
0.94
0.63
22,049
0.88
0.66
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 2013 increased 6% to $95.6 million (2012: $90.4 million), as direct mining costs increased $7.6 million
to $74.8 million, offset by a decrease in depletion and depreciation of $1.4 million. In Q4 2012, the Company made a
change in estimate, on a prospective basis, to the amortization on a unit-of-production basis over the portion of inferred
resources, in addition to the proven and probable reserves, expected to be extracted economically. The change was not
applied to periods prior to Q4 2012.
(Refer to non-GAAP financial measures for reconciliation of cash cost to the cost of sales.)
Workers’ participation for San Jose remained at $0.1 million (2012: $0.1 million).
Direct mining costs 1
Workers’ participation
Depletion and depreciation
Royalty expenses
expressed in $ millions
Years ended december 31,
2013
2012
Caylloma
San Jose
Total
Caylloma
San Jose
Total
$ 42.4
1.0
9.6
0.7
$ 53.7
$ 32.4
0.1
9.5
–
$ 42.0
$ 74.8
1.1
19.1
0.7
$ 95.7
$ 39.8
1.1
8.9
1.5
$ 51.3
$ 27.4
0.1
11.6
–
$ 39.1
$ 67.2
1.2
20.5
1.5
$ 90.4
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 2013 decreased 3% to $19.8 million (2012: $20.5 million). The decrease
was largely because general and administrative expenses for 2013 decreased 8% to $16.7 million (2012 $18.2 million),
as the Company has undertaken cost-cutting measures since Q2 2013, but was offset by higher share-based payments
of $3.2 million (2012: $2.2 million) following the granting of restricted share units and deferred share units during the
year and to vesting of granted options.
BUILDING ON OUR STRENGTHS
49
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Selling, general and administrative expenses consist primarily of corporate office and subsidiary expenses, such as
salaries and payroll-related costs for executive and management. These expenses also include administrative, legal,
financial, information technology, human and organizational development, procurement functions, and professional service
fees.
expressed in $ millions
Years ended december 31,
2013
2012
Corporate
Bateas
Cuzcatlan
Total
Corporate
Bateas
Cuzcatlan
Total
General and administrative expenses $ 10.3
(0.7)
Foreign exchange
3.2
Share-based payments
–
Workers' participation
$ 12.8
$ 3.0
0.3
–
0.2
$ 3.5
$ 3.4
0.1
–
–
$ 16.7
(0.3)
3.2
0.2
$ 11.7
(0.3)
2.2
–
$ 3.5
$ 19.8
$ 13.6
$ 3.2
(0.1)
–
0.2
$ 3.3
$ 3.3
0.3
–
–
$ 18.2
(0.1)
2.2
0.2
$ 3.6
$ 20.5
exploration and evaluation costs for 2013 decreased 50% to $0.4 million (2012: $0.8 million) as a result of the
Company’s reduction in its greenfields exploration program.
Share-based payments
Salaries, wages, and benefits
Direct costs
expressed in $ millions
Years ended december 31,
2013
–
0.3
0.1
0.4
$
$
2012
0.1
0.5
0.2
0.8
$
$
net loss on commodity contracts for 2013 was $nil compared with a loss of $0.3 million in 2012 that was related to
short-term contracts used to fix the final settlement price on metal contained in concentrate delivered throughout the
period.
restructuring costs for 2013 amounted to $0.5 million (2012: $nil) and were related to the Company’s cost-reduction
program and included all post-employment costs.
expressed in $ millions
Years ended december 31,
2013
2012
Salaries and post-employment benefits
$
0.5
$
–
write-off of mineral properties, plant and equipment for 2013 was $0.6 million and pertained to the San Luisito
concessions. This was a decrease of 85% compared with $3.9 million in 2012, which pertained to the Mario project.
impairment of mineral properties, plant and equipment for 2013 of $30.0 million (2012: $nil) related to the impairment
of Caylloma as a result of declining silver prices during the year.
impairment of inventories for 2013 of $0.1 million (2012:$nil) related to the write-down of materials in inventory to its
net realizable value.
interest income for 2013 amounted to $0.6 million (2012: $0.6 million).
interest expense for 2013 amounted to $0.9 million (2012: $0.6 million).
income taxes for 2013 decreased to $9.1 million (2012: $13.8 million) because of the $9.6 million (2012: $nil) tax
impact of the impairment charge for Caylloma, the deferred income tax provision of $7.7 million (2012: $nil) resulting
from the Mexico special mining royalty, and a reduction of the tax base.
The income tax provision comprises $4.9 million (2012: $5.5 million) of current expense arising mainly from Peruvian
operations and $4.2 million of deferred income tax (2012: $8.3 million) arising from Peruvian and Mexican operations.
50
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Quarterly Information
The following table provides information for the eight fiscal quarters ended December 31, 2013:
Quarters ended
expressed in $000's, except per share data 31-dec-13
30-Sep-13
30-Jun-13 31-Mar-13
31-dec-12 30-Sep-12
30-Jun-12 31-Mar-12
Sales
Mine operating earnings
Operating (loss) income
Net (loss) income
(Loss) earnings per share, basic
(Loss) earnings per share, diluted
36,377
10,373
(8,312)
(14,930)
(0.12)
(0.12)
30,203
8,140
2,346
(264)
0.00
0.00
30,101
6,478
(14,669)
(10,571)
(0.08)
(0.08)
40,713
16,784
11,006
6,665
0.05
0.05
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
Total assets
Leases and long term liabilities
302,215
2,343
311,170
2,850
310,291
2,282
327,346 316,983 304,612 288,686 280,825
2,237
2,250
2,766
1,658
2,238
During Q4 2013, sales increased 20% from Q3 2013 as a result of an increase in silver and gold sold of 32% and 66%,
respectively, offset by lower lead sold of 23% and lower realized silver and gold metal prices both of 3%. Mine operating
earnings increased 27% from Q3 2013 as a result of increased sales and the Company’s continuing efforts to contain
costs. Operating income decreased due to the impairment charge of $15.0 million, before tax (Q3 2013: $nil). Net loss
increased due to the non-cash impairment charge of $10.2 million, net of tax (Q3 2013: $nil) and the non-cash income
tax provision of $7.7 million resulting from the Mexico special mining royalty.
During Q3 2013, sales increased marginally from Q2 2013 as a result of a reduction of $4.7 million in sales adjustments,
which offset a reduction of provisional sales of $4.6 million. The reduction in our provisional sales was driven by lower
silver and gold production, and an accumulation of inventory in Q3 2013 that resulted in lower silver and gold sold of 5%
and 25%, respectively. Realized price on the sale of silver and gold decreased 7% and 6% to $21.30 and $1,318.93 per
ounce, respectively. Mine operating earnings increased from Q2 2013 in part as a result of the Company’s implementation
of efforts to contain costs. In addition, as part of the Company’s cost-reduction program, the Company recorded a $0.5
million restructuring charge in Q3 2013 covering 65 positions, while in Q2 2013 the Company recorded a non-cash
impairment charge of $15.0 million, before tax impacting operating income.
During Q2 2013, declining silver prices, along with rising costs, resulted in a significant decline in mine operating earnings
compared with prior quarters. Lower silver prices also contributed to the non-cash impairment charge related to the
carrying value of Caylloma, resulting in a net loss for the period. The impairment charge also reduced the total assets of
the Company.
The operating loss in Q3 2013, compared with the operating income in Q3 2012, is due to a decrease in sales; an
increase in restructuring costs; the write-off of mineral properties, plant and equipment; and a decrease in the cost of
sales because of lower cash costs per tonne of processed ore (refer to non-GAAP financial measures).
Fourth Quarter 2013 Financial Results
The fourth-quarter net loss was $14.9 million (Q4 2012: income $8.5 million), resulting in a loss per share of $0.12 (Q4
2012 earnings per share: $0.07). The loss was driven by a non-cash impairment charge of $10.2 million, net of tax (Q4
2012: $nil) and by a one-time non-cash income tax provision of $7.7 million (Q4 2012: $nil) resulting from the initial
recognition of the Mexican mining tax reform.
The Company’s fourth-quarter adjusted net income was $3.0 million (Q4 2012: income $8.5 million) (refer to non-GAAP
financial measures). The corresponding adjusted income before taxes was $6.5 million, compared with $8.0 million in
the prior-year period. The decrease with respect to Q4 2012 was driven mainly by lower silver and gold prices, of 37%
and 26%, respectively, partially offset by higher silver and gold sales resulting from the expansion at the San Jose mine,
of 49% and 64%, respectively. Mine operating earnings decreased 22% to $10.4 million (Q4 2012: $13.3 million), and
gross margins fell from 35% to 29%, reflecting the impact of lower metal prices, which was partially offset by lower unit
cash costs at both our mines. Also contributing to offset the negative impact of metal prices were lower selling, general
and administrative expenses which were reduced by $1.5 million.
Cash generated by operating activities, before changes in working capital, was $11.2 million, a decrease of 6% from the
prior-year period, mainly because of lower sales, of 4%. Operating cash flow per share, before changes in working capital,
decreased 10% to $0.09 (Q4 2012: $0.10) (refer to non-GAAP financial measures).
The basic loss per share for Q4 2013 was $0.12 (Q4 2012: earnings per share $0.07). Operating cash flow per share,
before changes in working capital, was $0.09 (Q4 2012: $0.10) (refer to non-GAAP financial measures).
BUILDING ON OUR STRENGTHS
51
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Sales for Q4 2013 were $36.4 million (Q4 2012: $37.9 million). Sales from Caylloma decreased 23% to $16.3 million
(Q4 2012: $21.2 million), while sales at San Jose increased 20% to $20.0 million (Q4 2012: $16.7 million). The
decreases was driven by lower realized prices for silver and gold, which declined 37% and 26%, respectively, and by
higher negative price adjustments.
In Q4 2013, provisional sales decreased 2% to $38.7 million (Q4 2012: $39.7 million), while negative price and assay
adjustments amounted to $2.4 million (Q4 2012: $1.8 million).
Net realized prices are calculated from provisional sales, based on contained metals in concentrate sold, before
government royalties and after deductions, treatment, and refining charges. Treatment charges are allocated to the base
metals in Caylloma and to gold in San Jose. Final pricing for all concentrates takes place one month after the month of
sale. The Company has not hedged its exposure to metal price risks.
QuarTerLY reSuLTS
Three months ended december 31,
2013
2012
Sales and realized Prices
Caylloma
San Jose
Consolidated
Caylloma
San Jose
Consolidated
Provisional Sales
Adjustments *
Sales
Silver
Provisional Sales (oz)
Realized Price ($/oz)**
Net Realized Price ($/oz)***
gold
Provisional Sales (oz)
Realized Price ($/oz)**
Net Realized Price ($/oz)***
Lead
Provisional Sales (000's lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
Zinc
Provisional Sales (000's lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
16,914,394
(572,594)
16,341,801
21,817,857
(1,782,823)
20,035,034
38,732,251
(2,355,416)
36,376,835
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
546,633
20.70
17.96
642
1,266.41
1,013.68
3,789
0.96
0.71
6,532
0.86
0.57
848,156
20.74
18.95
1,394,789
20.72
18.56
6,158
1.274.33
933.06
6,801
1,273.58
940.67
–
–
–
–
–
–
3,789
0.96
0.71
6,532
0.86
0.57
466,492
32.56
28.30
440
1,714.36
1,206.60
4,698
1.00
0.68
6,223
0.89
0.65
469,858
32.73
29.71
3,710
1,707.87
1,279.55
–
–
–
–
–
–
936,350
32.64
29.01
4,150
1,718.91
1,271.81
4,698
1.00
0.68
6,223
0.89
0.65
* 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 Q4 2013 increased 6% to $26.0 million (Q4 2012: $24.6 million), as direct mining costs increased
$1.1 million to $20.1 million (Q4 2012: $19.0 million). Depletion and depreciation increased $0.5 million to $5.3 million
(Q4 2012: $4.8 million). The Company has made a change in estimate, and commencing in the fourth-quarter of 2012
the amortization of depletable properties on a unit-of-production basis will be over the portion of inferred resources, in
addition to the proven and probable reserves, expected to be extracted economically. The change was not applied to
periods prior to Q4 2012.
Workers’ participation for San Jose remained at $0.1 million (Q4 2012: $0.1 million).
(Refer to non-GAAP financial measures for reconciliation of cash cost to the cost of sales.)
52
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Direct mining costs 1
Workers’ participation
Depletion and depreciation
Royalty expenses
expressed in $ millions
Three months ended december 31,
2013
2012
Caylloma
San Jose
Total
Caylloma
San Jose
Total
$ 10.4
0.3
2.0
0.2
$ 12.9
$ 9.7
0.1
3.3
–
$ 13.1
$ 20.1
0.4
5.3
0.2
$ 26.0
$ 11.0
0.3
2.8
0.4
$ 14.5
$ 8.0
0.1
2.0
–
$ 10.1
$ 19.0
0.4
4.8
0.4
$ 24.6
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 2013 decreased 31% to $3.6 million (Q4 2012: $5.1 million), due
to lower general and administrative expenses of $4.1 million (Q4 2012: $4.6 million), foreign exchange of negative $0.6
million (Q4 2012: positive $0.1 million), and lower share-based payments of $0.1 million (Q4 2012: $0.3 million).
Selling, general and administrative expenses consist primarily of corporate office and subsidiary expenses, such as
salaries and payroll-related costs for executive and management. These expenses also include administrative, legal,
financial, information technology, human and organizational development, procurement, and professional service fees.
General and administrative expenses for Q4 2013 decreased 11% to $4.1 million (Q4 2012: $4.6 million), as the
Company has undertaken cost-cutting measures since Q2 2013.
expressed in $ millions
Years ended december 31,
General and administrative expenses
Foreign exchange
Share-based payments
Workers' participation
2013
2012
Corporate
Bateas
Cuzcatlan
Total
Corporate
Bateas
Cuzcatlan
$ 2.6
(0.6)
0.1
–
$ 2.1
$ 0.7
–
–
–
$ 0.7
$ 0.8
–
–
–
$ 0.8
$ 4.1
(0.6)
0.1
–
$ 3.6
$ 3.1
–
0.3
–
$ 3.4
$ 0.7
(0.1)
–
0.1
$ 0.7
$ 0.8
0.2
–
–
$ 1.0
Total
$ 4.6
0.1
0.3
0.1
$ 5.1
exploration and evaluation costs for Q4 2013 decreased to $nil (Q4 2012: $0.2 million) as a result of the Company’s
reduction in its greenfields exploration program.
Salaries, wages, and benefits
Direct costs
expressed in $ millions
Three months ended december 31,
2013
–
–
–
$
$
2012
0.1
0.1
0.2
$
$
write-off of mineral properties, plant and equipment for Q4 2013 was $0.1 million and pertained to the San Luisito
concessions (Q4 2012: $nil).
impairment of mineral properties, plant and equipment for Q4 2013 of $15.0 million (Q4 2012: $nil) related to the
impairment of Caylloma as a result of declining silver prices recorded in Q4 2013.
impairment of inventories for Q4 2013 of $0.1 million (2012:$nil) related to the write-down of materials in inventory to
its net realizable value.
interest income for Q4 2013 amounted to $0.1 million (Q4 2012: $0.2 million).
interest expense for Q4 2013 amounted to $0.2 million (Q4 2012: $0.1 million).
income taxes for Q4 2013 increased to $6.4 million (Q4 2012: recovery $0.5 million) because of the $4.8 million (Q4
2012: $nil) tax impact of the impairment charge for Caylloma, the deferred income tax provision of $7.7 million (Q4
2012: $nil) resulting from the Mexico special mining royalty, and a reduction of the tax base.
The income tax provision comprises $1.6 million (Q4 2012: $1.7 million) of current expense arising mainly from Peruvian
operations and $4.8 million of deferred income tax (Q4 2012: recovery $2.2 million) arising from Peruvian and Mexican
operations.
BUILDING ON OUR STRENGTHS
53
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-GAAP Financial Measures
adJuSTed neT inCOMe (nOn-gaaP FinanCiaL MeaSure)
Three months ended december 31,
Years ended december 31,
expressed in $ millions
neT (LOSS) inCOMe FOr THe Year
Items of note, net of tax:
Write-off of mineral properties
Impairment of mineral properties,
plant and equipment
Initial recognition impact of Mexican
mining tax reform
adJuSTed neT inCOMe FOr THe PeriOd 1
$
1
A non-GAAP financial measure
2013
2012
2013
$
(14.9)
$
8.5
(19.1)
$
–
10.2
7.7
3.0
–
–
–
$
8.5
$
0.4
20.4
7.7
9.4
2012
31.5
2.6
–
–
$
34.1
OPeraTing CaSH FLOw Per SHare BeFOre CHangeS in wOrking CaPiTaL (nOn-gaaP FinanCiaL MeaSure)
Net (loss) 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
expressed in $’000’s (except per share measures)
Three months ended december 31,
2013
2012
Years ended december 31,
2013
2012
$
$
$
$
(14,930)
27,456
12,526
(1,408)
(3)
69
8,472
4,392
12,864
(1,141)
(8)
150
$
$
$
$
(19,100)
63,851
44,751
(4,430)
(20)
608
31,463
40,885
72,348
(10,703)
(31)
611
$
11,184
$
11,865
$
40,909
$
62,225
125,974
124,412
125,553
123,585
before changes in working capital 1
$
0.09
$
0.10
$
0.33
$
0.50
1
A non-GAAP financial measure
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. Management believes that certain investors also use these non-GAAP
financial measures to evaluate the Company’s performance. Cash costs are an industry standard method of comparing
certain costs on a per unit basis, however, they do not have a standardized meaning or method of calculation, even
though the descriptions of such measures may be similar. 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.
54
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The following tables present a reconciliation of cash costs per tonne of processed ore and cash costs per ounce of
payable silver to the cost of sales in the consolidated financial statements for the three months and the years ended
December 31, 2013 and 2012.
Consolidated Mine Cash Cost
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)
Cash cost (A)
Add / (Subtract)
By-product credits
Refining charges
Cash cost applicable per payable ounce (B)
expressed in $’000’s
Q4 2013
26,004
YTd
Q4 2013
95,619
Q4 2012
24,631
YTd
Q4 2012
90,358
562
(472)
394
430
(132)
(218)
(353)
(5,327)
20,536
20,536
(13,181)
1,809
9,164
194
(749)
(1,078)
(19,114)
74,400
74,400
(50,105)
6,794
31,089
(41)
(399)
(379)
(4,879)
19,327
19,327
(12,878)
2,051
8,500
23
(1,491)
(1,153)
(20,477)
67,690
67,690
(52,899)
7,790
22,581
Payable ounces of silver production (C)
1,396,295
4,420,241
960,194
3,788,369
Cash cost per ounce of payable silver
($/oz) (B/C)
6.56
7.03
8.85
5.96
1
Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation
BUILDING ON OUR STRENGTHS
55
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MANAGEMENT’S DISCUSSION AND ANALYSIS
San Jose Mine Cash Cost
Cost of sales 1
Add / (Subtract)
Change in concentrate inventory
Depletion and depreciation in concentrate
inventory
Workers’ participation
Depletion and depreciation
Cash cost (A)
expressed in $’000’s
YTd
Q4 2013
41,947
Q4 2012
10,090
YTd
Q4 2012
39,126
Q4 2013
13,080
462
105
115
(269)
(113)
(81)
(3,320)
10,028
117
(81)
(9,520)
32,568
16
(41)
(2,035)
8,145
146
(41)
(11,616)
27,346
Total processed ore (tonnes) (B)
158,218
456,048
98,348
369,022
Cash cost per tonne of processed ore
($/t) (A/B)
Cash cost (A)
Add / (Subtract):
By-product credits
Refining charges
Cash cost applicable per payable ounce (C)
63.38
10,028
(6,017)
881
4,892
71.41
32,568
(19,775)
3,007
15,800
82.82
8,145
(4,916)
679
3,908
74.10
27,346
(23,146)
2,757
6,957
Payable ounces of silver production (D)
880,961
2,421,383
466,622
1,851,718
Cash cost per ounce of payable silver
($/oz) (B/C)
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
5.55
34.21
14.27
9.44
1.08
4.38
63.38
6.53
34.50
16.95
13.19
1.88
4.89
71.41
8.38
40.36
17.84
15.99
3.52
5.11
82.82
3.76
33.43
17.96
15.53
2.09
5.09
74.10
1
Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation
56
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Caylloma Mine Cash Cost
Cost of sales 1
Add / (Subtract)
Change in concentrate inventory
Depletion and depreciation in concentrate
inventory
Government royalties and taxes
Workers’ participation
Depletion and depreciation
Cash cost (A)
expressed in $’000’s
YTd
Q4 2013
53,672
Q4 2012
14,541
YTd
Q4 2012
51,232
Q4 2013
12,924
100
(577)
279
699
(19)
(218)
(272)
(2,007)
10,508
77
(749)
(997)
(9,594)
41,832
(57)
(399)
(338)
(2,844)
11,182
(123)
(1,491)
(1,112)
(8,861)
40,344
Total processed ore (tonnes) (B)
116,127
458,560
115,522
462,222
Cash cost per tonne of processed ore
($/t) (A/B)
Cash cost (A)
Add / (Subtract):
By-product credits
Refining charges
Cash cost applicable per payable ounce (C)
90.49
91.22
96.80
87.28
10,508
41,832
11,182
40,344
(7,164)
928
4,272
(30,330)
3,787
15,289
(7,962)
1,372
4,592
(29,753)
5,033
15,624
Payable ounces of silver production (D)
515,334
1,998,858
493,572
1,936,651
Cash cost per ounce of payable silver
($/oz) (B/C)
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
8.29
40.10
15.31
24.95
2.00
8.13
90.49
7.65
39.38
15.02
23.55
4.56
8.71
91.22
9.30
40.04
15.69
27.82
4.61
8.64
96.80
8.07
39.78
14.05
24.83
1.46
7.16
87.28
1
Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation
aLL-in CaSH COST Per PaYaBLe OunCe OF SiLver (nOn-gaaP FinanCiaL MeaSure)
The Company believes that “all-in sustaining costs” and “all-in costs” will better meet the needs of analysts, investors
and other stakeholders of the Company in understanding the costs associated with producing silver, understanding the
economics of silver mining, assessing our operating performance and also our ability to generate free cash flow from
current operations and to generate free cash flow on an overall Company basis.
The Company, in conjunction with an initiative undertaken within the gold mining industry, has adopted an all-in sustaining
cost performance measure; however, this performance measure has no standardized meaning. Effective June 30, 2013,
the Company conformed its all-in sustaining definition to the measure as set out in the guidance note released by the
World Gold Council (“WGC”) (a non-regulatory market development organization for the gold industry whose members
comprise global senior gold mining companies) on June 27, 2013 and which is expected to be effective from January 1,
2014. The comparative periods have been restated accordingly.
“All-in sustaining costs” and “all-in costs” are intended to provide additional information only and do not have standardized
definitions under IFRS and should not be considered in isolation or as a substitute for measures of performance prepared
in accordance with IFRS. These measures are not necessarily indicative of operating profit or cash flow from operations
as determined under IFRS. Although the WGC has published a standardized definition, companies may calculate these
measures differently.
BUILDING ON OUR STRENGTHS
57
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MANAGEMENT’S DISCUSSION AND ANALYSIS
“All-in sustaining costs” include total production cash costs incurred at the Company’s mining operations, which forms
the basis of the Company’s by-product cash costs. Additionally, the Company includes sustaining capital expenditures,
corporate selling, general and administrative expenses, and brownfields exploration expenditures. The Company believes
that this measure represents the total costs of producing silver from current operations, and provides the Company and
other stakeholders of the Company with additional information of the Company’s operational performance and ability to
generate cash flows. As the measure seeks to reflect the full cost of silver production from current operations, new
project capital is not included. Certain other cash expenditures, including tax payments, dividends and financing costs
are also not included. The Company reports this measure on a silver ounces sold basis.
The following tables provide a reconciliation of all-in sustaining costs per ounce to the consolidated financial statements
for each of the three months and year ended December 31, 2013:
Consolidated Mine all-in Cash Cost
Cash cost applicable per payable ounce
Government royalty and mining tax
Workers' participation
Selling, general and administrative
expenses (operations)
adjusted operating cash cost
Selling, general and administrative
expenses (corporate)
Sustaining capital expenditures 1
Brownfields exploration expenditures 1
all-in sustaining cash cost
Non-sustaining capital expenditures 1
expressed in $’000’s
Q4 2013
9,164
218
463
1,336
11,181
2,537
6,754
1,162
21,634
1,196
YTd
Q4 2013
31,089
749
1,306
6,084
39,228
10,253
30,728
10,198
90,407
8,910
Q4 2012
8,500
399
471
1,595
10,965
3,154
11,350
3,501
28,970
697
YTd
Q4 2012
22,581
1,491
1,404
6,575
32,051
11,615
31,402
12,138
87,206
772
all-in cash cost
Payable ounces of silver operations
22,830
1,396,295
99,317
4,420,241
29,667
960,194
87,978
3,788,369
all-in sustaining cash cost per
payable ounce of silver
all-in cash cost per payable ounce of silver
1 presented on a cash basis
15.49
16.35
20.45
22.47
30.17
30.90
23.02
23.22
58
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MANAGEMENT’S DISCUSSION AND ANALYSIS
San Jose Mine all-in Cash Cost
Cash cost applicable per payable ounce
Workers' participation
Selling, general and administrative
expenses (operations)
adjusted operating cash cost
Sustaining capital expenditures 1
Brownfields exploration expenditures 1
all-in sustaining cash cost
Non-sustaining capital expenditures 1
all-in cash cost
Payable ounces of silver operations
all-in sustaining cash cost per
payable ounce of silver
all-in cash cost per payable ounce of silver
1 presented on a cash basis
Caylloma Mine all-in Cash Cost
Cash cost applicable per payable ounce
Government royalty and mining tax
Workers' participation
Selling, general and administrative
expenses (operations)
adjusted operating cash cost
Sustaining capital expenditures 1
Brownfields exploration expenditures 1
expressed in $’000’s
Q4 2013
4,892
101
743
5,736
2,751
1,006
9,493
1,196
YTd
Q4 2013
15,800
101
3,347
19,248
13,045
6,180
38,473
8,910
10,689
880,961
47,383
2,421,383
10.78
12.13
15.89
19.57
Q4 2012
3,908
51
835
4,794
7,184
1,594
13,572
697
14,269
466,622
29.09
30.58
expressed in $’000’s
Q4 2013
4,272
218
315
593
5,398
4,003
156
YTd
Q4 2013
15,289
749
1,158
2,737
19,933
17,683
4,018
Q4 2012
4,592
399
393
760
6,144
4,166
1,907
YTd
Q4 2012
6,957
51
3,333
10,341
13,857
4,760
28,958
772
29,730
1,851,718
15.64
16.06
YTd
Q4 2012
15,624
1,491
1,305
3,242
21,662
17,545
7,378
all-in cash cost
Payable ounces of silver operations
9,557
515,334
41,634
1,998,858
12,217
493,572
46,585
1,936,651
all-in sustaining cash cost per
payable ounce of silver
all-in cash cost per payable ounce of silver
1 presented on a cash basis
18.55
18.55
20.83
20.83
24.75
24.75
24.05
24.05
BUILDING ON OUR STRENGTHS
59
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
FuLL Year 2013 LiQuidiTY and CaPiTaL reSOurCeS
The Company’s cash and cash equivalents as at December 31, 2013, totalled $31.7 million (December 31, 2012: $58.7
million) and short term investments totalled $17.4 million (December 31, 2012: $6.0 million).
The $26.4 million decrease (2012: $19.9 million increase) in cash and cash equivalents at December 31, 2013, is due
to cash provided by operating activities of $45.0 million, net cash used in investing activities of $71.7 million, and net
cash provided by financing activities of $0.3 million. Exchange rate changes had a negative $0.6 million impact on cash
and cash equivalents. Compared with 2012, the Company’s expenditures on mineral properties, plant and equipment
increased $15.7 million, net redemptions of short term investments declined $23.1 million, and cash provided by
operating activities decreased $8.9 million.
Working capital for the year ended December 31, 2013, decreased $21.0 million to $66.4 million. This reflects decreases
in cash and cash equivalents of $27.0 million, accounts receivable and other assets of $10.0 million, assets held for
sale of $0.1 million, and increases in provisions of $0.2 million. These decreases in working capital were offset by
increases in short term investments of $11.4 million, in prepaid expenses of $0.3 million and in inventories of $2.6
million, and by decreases in trade and other payables of $1.7 million, in income tax payable of $0.1 million, and in the
current portion of leases and long term liabilities of $0.2 million.
During the year ended December 31, 2013, cash generated by operating activities before changes in non-cash working
capital items, income taxes paid, and interest income paid and received totalled $40.9 million (2012: $62.2 million).
Net cash provided by operating activities was $45.0 million (2012: $53.9 million). This included income taxes paid and
interest income paid and received of $3.8 million (2012: $10.1 million) and changes in non-cash working capital items
of $4.0 million (2012: $8.4 million).
Cash used by the Company in investing activities for the year ended December 31, 2013, totalled $71.7 million (2012:
$33.0 million) and comprised the following:
• $12.1 million (2012: $11.0 million net redemptions) in net purchases of short term investments,
• $0.9 million (2012: $0.7 million) in net receipts on deposits on long term assets,
• $nil (2012: $0.1 million) in proceeds on disposal of mineral properties, plant and equipment, and,
• $60.5 million (2012: $44.8 million) in expenditures on mineral properties, plant and equipment.
Investing activities included $60.5 million of expenditures on mineral properties, plant and equipment that comprised
$39.7 million of plant and equipment and mine development, $10.2 million of brownfields exploration, $10.0 million for
the acquisition of the Taviche Oeste concession, and $0.6 million of greenfields exploration for the San Luisito
concessions.
During the year ended December 31, 2013, cash provided by financing activities totalled $0.3 million (2012: used in
$0.9 million) and comprised net proceeds on issuance of common shares of $0.7 million (2012: $0.7 million), the
repayment of finance lease obligations of $0.4 million (2012: $0.8 million), and the repayment of long term debt of $nil
(2012: $0.8 million).
On April 23, 2013, the Company entered into an amended and restated credit agreement with the Bank of Nova Scotia
for a $40 million senior secured revolving credit facility (“credit facility”) to be refinanced or repaid on or within three
years or before April 22, 2016. The credit facility is secured by a first ranking lien on Bateas, Cuzcatlan, Continuum, and
Barbados, and their 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 1.0% per annum is payable quarterly on the unutilized portion
of the available credit facility. No funds were drawn from this credit facility.
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, management believes
the Company will be able to do so at prevailing market rates.
FOurTH-QuarTer 2013 LiQuidiTY and CaPiTaL reSOurCeS
The capital of the Company consists of equity and an 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
During the three months ended December 31, 2013, cash and cash equivalents increased $0.7 million (Q4 2012:
decreased $1.8 million) to $31.7 million. The increase was due to cash provided by operating activities of $16.8 million,
net cash used in investing activities of $16.0 million, net cash used in financing activities of $0.1 million, and the negative
effect of exchange rate changes on cash and cash equivalents of $0.3 million. Compared with 2012, the Company’s
expenditures on mineral properties, plant and equipment decreased $6.6 million, net purchases of short term
investments increased $3.4 million, and cash provided by operating activities decreased $0.8 million.
During the three months ended December 31, 2013, cash generated by operating activities before changes in non-cash
working capital items, income taxes paid, and interest income paid and received was $11.2 million (Q4 2012: $11.9
million). Net cash provided by operating activities amounted to $16.8 million (Q4 2012: $17.6 million). This includes
income taxes paid and interest income paid and received of $1.3 million (Q4 2012: $1.0 million) and changes in non-
cash working capital items of $5.6 million (Q4 2012: $5.7 million).
Cash used by the Company in investing activities for the three months ended December 31, 2013, totalled $16.0 million
(Q4 2012: $19.2 million) and comprised the following:
• $7.4 million (Q4 2012: $4.0 million) in net purchases of short term investments,
• $9.2 million (Q4 2012: $15.8 million) in expenditures on mineral properties, plant and equipment, and
• $0.6 million (Q4 2012: $0.6 million) in net receipts on deposits on long term assets.
Investing activities included $9.2 million of expenditures on mineral properties, plant and equipment that comprised
$7.9 million of plant and equipment and mine development, $1.2 million of brownfields exploration, and $0.1 million of
greenfields exploration for the San Luisito concessions.
During the three months ended December 31, 2013, cash used in financing activities totalled $0.1 million (Q4 2012:
$0.1 million) and comprised the repayment of finance lease obligations of $0.1 million (Q4 2012: $0.1 million).
COnTraCTuaL OBLigaTiOnS
The Company expects the following maturities of its financial liabilities (including interest), finance leases, and other
contractual commitements:
Trade and other payables
Income tax payable
Long term liabilities
Operating leases
Provisions
expressed in $ millions
expected payments due by period as at december 31, 2013
Less than
1 year
$ 15.9
0.1
0.2
0.6
0.7
$ 17.5
1–3 years
4–5 years
$ –
–
2.4
1.1
0.7
$ 4.2
$ –
–
–
0.3
1.2
$ 1.5
after
5 years
$ –
–
–
–
10.7
$ 10.7
Total
$ 15.9
0.1
2.6
2.0
13.3
$ 33.9
Operating leases includes leases for office premises, computer and other equipment used in the normal course of
business.
CaPiTaL COMMiTMenTS (exPreSSed in $’000’S)
As at December 31, 2013, $361 of capital commitments not disclosed elsewhere in the Financial Statements, and
forecasted to be expended within one year, includes the following: $nil mine and tailing dam development at the San
Jose property; and $361 for the tailing dam 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
commitment is $180 per month.
Operating leases includes leases for office premises, computer and other equipment used in the normal course of
business.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The expected payments due by period as at December 31, 2013 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, 2013
Less than
1 year
$ 79
385
10
$ 474
81
17
$ 98
$ 572
1–3 years
4–5 years
$ 261
805
–
$ 1,066
30
7
$ 37
$ 1,103
$ 177
172
–
$ 349
–
–
$ –
$ 349
after
5 years
$ –
–
–
$ –
–
–
$ –
$ –
Total
$ 517
1,362
10
$ 1.889
111
24
$ 135
$ 2,024
OTHer COnTingenCieS
The Company is subject to various investigations, claims, legal, labor 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. As at December 31, 2013, the Company has completed its evaluation of
the mining concessions which are currently included on the list and has estimated the net cost of the mine closure
liability of $350. This estimate is included as part of the provisions.
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. In March 2013 the closure plan was updated with total closure costs of
$7,996 of which $4,167 is subject to annual collateral in the form of a letter of guarantee.
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 and to collateralize Bateas’ mine closure plan, in the amount
of $1,204 (2012: $585). This bank letter of guarantee expires on December 31, 2014.
In August 2013, Bateas obtained two bank letters of guarantee of a combined amount of $1,182 from Banco Continental
in favor of the Peruvian Tax Authority SUNAT associated to a claim made by Bateas.
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 the 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.
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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
MANAGEMENT’S DISCUSSION AND ANALYSIS
expressed in $‘000’s
Years ended december 31,
2013
86
130
–
216
$
$
2012
135
308
23
466
$
$
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 2013, the Company issued 11,415 (2012: 8,605) common shares of the Company, at a fair market value of
$4.38 (2012: $5.81) per share and paid $50 (2012: $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,
$
2013
2,849
409
175
2,683
$
2012
2,789
388
180
1,629
$
6,116
$
4,986
Consulting fees includes fees paid to two non-executive directors in both 2013 and 2012.
C) PeriOd end BaLanCeS ariSing FrOM PurCHaSeS OF gOOdS/ServiCeS
amounts due from related parties
Owing from a company with common director 3
expressed in $‘000’s
december 31,
2013
december 31,
2012
$
–
$
5
3 Owing from a company controlled by a director of the Company at December 31, 2012.
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.
BUILDING ON OUR STRENGTHS
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Subsequent to December 31, 2013, the Company entered into a sales transaction with a Company related by directors
and officers in common for the sale of materials with a book value of $36 and a selling price of $37 resulted in a gain
on sale of $1. Terms of payment are 180 days guaranteed by a bill of exchange.
amounts due to related parties
expressed in $‘000’s
december 31,
2013
december 31,
2012
Owing to company(ies) with common directors 4
$
20
$
54
4 2013 owing to Radius and Gold Group who has a director in common with the Company. 2012 owing to Radius and Gold Group
whom have directors in common with the Company
Significant Accounting Judgments and Estimates
The preparation of the unaudited condensed interim consolidated financial statements (“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 Financial Statements include judgments and estimates which, by their nature,
are uncertain. The impacts of such judgments and estimates are pervasive throughout the 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 carrying value or fair value
less cost to sell 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 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 and the portion of mineral resources expected to be extracted economically,
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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;
• the 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 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;
• the determination of the fair value of financial instruments and derivatives included in the consolidated statements
of financial position;
• the fair value estimation of share-based awards included in the consolidated statements of financial position and
the inputs used in accounting for share-based compensation expense in the consolidated statements of income;
• the provision for income taxes which is included in the consolidated statements of income and composition of
deferred income tax asset and liabilities included in the consolidated statement of financial position;
• the recognition of deferred income tax assets, amounts recorded for uncertain tax positions, the measurement of
income tax expense and indirect taxes included in the consolidated statement of financial position;
• the inputs used in determining the net present value of the liability for provisions related to decommissioning and
restoration included in the consolidated statements of financial position; and,
• the inputs used in determining the various commitments and contingencies accrued in the consolidated statements
of financial position.
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
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the
principal (or most advantageous) market at the measurement date under current market conditions (an exit price)
regardless of whether that price is directly observable or estimated using another valuation technique. The fair value
hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices
in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted
prices that are observable for the asset or liability (interest rate, yield curves), or inputs that are derived principally from
or corroborated observable market data or other means. Level 3 inputs are unobservable (supported by little or no market
activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
During the year ended December 31, 2013 there have been no transfers of amounts between Level 1, Level 2, and Level
3 of the fair value hierarchy.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
i. assets and Liabilities Measured at Fair value on a recurring Basis
Fair value Measurements
expressed in $’000’s
Quoted Prices in
active Markets for
identical assets
Significant and
Other Observable
inputs
Significant
unobservable
inputs
at december 31, 2013
Level 1
Level 2
Level 3
Cash and cash equivalents
Short term investments
Trade receivable from concentrate sales 1
$
31,704
17,411
–
$
$
49,115
$
–
–
9,797
9,797
$
$
–
–
–
–
$
aggregate
Fair value
31,704
17,411
9,797
$
58,912
1
Trade receivable from concentrate sales includes provisional pricing, and final price and assay adjustments. The fair value of trade
receivable from concentrate sales resulting from provisional pricing reflect observable market commodity prices and thereby
classified within Level 2 of the fair value hierarchy.
ii. Fair value of Financial assets and Liabilities
Fair value of Financial assets and Liabilities
Financial assets
Cash and cash equivalents 1
Short term investments 1
Trade receivable from concentrate sales 2
Advances and other receivables
Due from related parties 1
Financial liabilities
Trade and other payables 1
Due to related parties 1
Leases and long term liabilities 3
expressed in $’000’s
december 31, 2013
Carrying
amount
estimated
Fair value
december 31, 2012
Carrying
amount
estimated
Fair value
$
31,704
17,411
9,797
3,883
–
$
31,704
17,411
9,797
3,883
–
$
62,795
$
62,795
$
15,272
20
540
$
15,272
20
544
$
$
$
58,720
6,019
15,158
3,637
5
85,539
16,700
54
695
$
$
$
58,720
6,019
15,158
3,637
5
85,539
16,700
54
719
$
15,832
$
15,836
$
17,449
$
17,473
1
2
Fair value approximates the carrying amount due to the short term nature and historically negible credit losses.
Trade receivable from concentrate sales includes provisional pricing, and final price and assay adjustments. The fair value of trade
receivable from concentrate sales resulting from provisional pricing reflect observable market commodity prices and thereby
classified within Level 2 of the fair value hierarchy.
3 Borrowing costs and deposits on long term assets includes the amortized value of long term receivables which approximates their
4
fair value.
Leases and long term liabilities are recorded at amortized costs. The fair value of leases and long term liabilities are primarily
determined using quoted market prices. Balance includes current portion of leases and long term liabilities.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
As at December 31 2013, 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, 2013
december 31, 2012
expressed in $’000’s
Canadian
dollars
$ 2,699
3,286
306
nuevo
Soles
Mexican
Pesos
S/. 619
–
7,917
$ 10,994
–
33,818
Canadian
dollars
$ 4,231
6,000
77
nuevo
Soles
S/. 1,389
–
3,097
355
(1,181)
(22)
–
–
(2,477)
–
–
(12,659)
–
(349)
(2,213)
–
(18,544)
–
(49,618)
–
(6,499)
–
(350)
(45,499)
–
(1,225)
(54)
–
–
(1,998)
–
–
(12,300)
–
(284)
(326)
–
(19,560)
Mexican
Pesos
$ 6,136
–
98,147
–
(49,779)
–
(4,502)
–
(245)
(39,323)
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Deposits on long term assets and long
term borrowing costs
Trade and other payables
Due to related parties
Provisions, current
Income tax payable
Leases and long term liabilities
Provisions
Total
$ 2,966
S/. (25,229)
$ (57,154)
$ 7,031
S/. (27,984)
$ 10,434
Total US$ equivalent
$ 2,773
$ (9,023)
$ (4,371)
$ 7,053
$ (10,970)
$ 802
Based on the above net exposure as at December 31, 2013, 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 $308 (2012: $784) and a net loss of $1,489 (2012: net loss
$1,130).
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’s maximum exposure to credit risk as at December 31, 2013 is as follows:
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Due from related parties
expressed in $‘000’s
december 31,
2013
december 31,
2012
$
31,704
17,411
17,040
–
$ 58,720
6,019
27,032
5
$
66,155
$ 91,776
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, 2013.)
BUILDING ON OUR STRENGTHS
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Significant Changes in Accounting Policies including Initial Adoption
The Company has adopted the following accounting standards along with any consequential amendments, effective
January 1, 2013:
IAS 1 Presentation of Financial Statements (Amendment); IAS 16 Property, Plant, and Equipment (Amendment); IAS 32
Financial Instruments: Presentation (Amendment); IAS 34 Interim Financial Reporting (Amendment); IAS 34 (Amendment);
IFRS 7 Financial Instruments: Disclosures in Respect of Offsetting (Amendment); IFRS 10 Consolidated Financial
Statements; IFRS 11 Joint Arrangements; IFRS 12 Disclosure of Interests in Other Entities; IAS 19 Employee Benefits; IAS
27 Separate Financial Statements; and, IAS 28 Investments in Associates and Joint Ventures.
The Company has adopted the above amendments which do not have a significant impact on the Company’s Financial
Statements.
IFRS 13 Fair Value Measurement
The Company has adopted IFRS 13 and as a result has made updates to the disclosure of its financial instruments.
New Accounting Standards
The Company is currently assessing the impact of adopting the following new accounting standards, noted below, on the
Company’s Financial Statements.
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.
IFRIC 21 - Levies
IFRIC 21 is an interpretation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”), on the accounting
for levies imposed by governments. IAS 37 sets out criteria for the recognition of a liability, one which is the requirement
for the entity to have a present obligation as a result of a past event (“obligating event”). IFRIC 21 clarifies that the
obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers
the payment of the levy. IFRIC 21 is effective for annual periods commencing on or after January 1, 2014.
IAS 36 - Impairment of Assets - Amendments for Recoverable Amount Disclosures for Non-Financial Assets
The amendment to IAS 36 Impairment of Assets to reduce the circumstances in which the recoverable amount of assets
or cash-generating units is required to be disclosed, clarify the disclosures required, and to introduce an explicit
requirement to disclose the discount rate used in determining impairment (or reversals) where recoverable amount (based
on fair value less costs of disposal) is determined using a present value technique. The amendment is effective for
annual periods commencing on or after January 1, 2014.
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.
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (Amendment)
The amendment to IFRS 9 Financial Instruments which includes the new hedge accounting requirements and some related
amendments to IAS 39 Financial Instruments; Recognition and Measurement and IFRS 7 Financial Instruments;
Disclosures.
IFRS 9 (2013) also replicates the amendments in IAS 39 in respect of novations. The amendments allow
for early adoption of the requirement to present fair value changes due to own credit on liabilities designated as at fair
value through profit or loss to be presented in other comprehensive income; and removes the January 1, 2015 effective
date.
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.
68
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Share Position and Outstanding Warrants and Options
The Company’s outstanding share position as at March 17, 2014 is 126,038,832 common shares. In addition,
6,371,823 incentive stock options are currently outstanding as follows:
Type of Security
Incentive Stock Options:
TOTaL OuTSTanding OPTiOnS
exercise
Price
(Cad$)
$4.46
$4.03
$1.35
$1.75
$3.38
$1.55
$1.66
$2.22
$6.67
$3.79
$0.85
$0.85
no. of Shares
1,651,244
195,866
160,000
10,000
1,134,885
153,800
127,900
350,000
147,349
380,779
250,000
20,000
6,371,823
expiry date
June 8, 2014
May 29, 2015
February 5, 2016
May 8, 2016
May 29, 2016
July 5, 2016
July 10, 2016
January 11, 2017
February 20, 2017
July 31, 2017
October 5, 2018
November 5, 2018
Other Risks and Uncertainties
For further information regarding the Company’s operational risks, please refer to the section entitled “Description of the
Business – Risk Factors” in the Annual Information form for the year ended December 31, 2012, available at
www.sedar.com and the Company’s Annual Information Form for the year ended December 31, 2013 to be filed on
SEDAR.
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, 2013, and have concluded that such disclosure
controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 and Canadian securities laws is (i) recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms and Canadian securities laws and (ii)
accumulated and communicated to them Company’s management, including its principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosure.
inTernaL COnTrOL Over FinanCiaL rePOrTing
The Company’s management, with the participation of its CEO and CFO, are responsible for establishing a system of
internal control over financial reporting to provide reasonable assurance regarding the reliability and integrity of the
Company’s financial information and the preparation of its financial statements in accordance with IFRS as issued by the
IASB.
The Company’s management, including its CEO and CFO, believe that due to its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements on a timely basis. Also, projection of any evaluation of the
effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures
may deteriorate.
There has been no change in the Company’s internal control over financial reporting that occurred during the year that
has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Management concludes that, as of December 31, 2013, the Company’s internal control over financial reporting was
effective and no material weaknesses were identified.
BUILDING ON OUR STRENGTHS
69
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Qualified Person
Thomas I. Vehrs, Ph.D., Vice President of Exploration, is a 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 Management’s Discussion and Analysis is an accurate summary of the original reports and
data provided to or developed by Fortuna Silver Mines Inc.
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;
• the sufficiency of the Company’s cash position and its ability to raise equity capital or access debt facilities;
• the Company’s planned processing, and estimated major investments for mine development, tailings dam
expansion, the water evaporation control project and brownfields exploration, at the San Jose property in 2014;
• the Company’s expectation for an additional processing plant expansion to 2,000 tpd by the beginning of the
second quarter of 2014 resulting in an increase in production without incurring additional capital investments
at the San Jose property;
• the Company’s intention to conduct engineering studies to assess a further expansion beyond 2,000 tpd at the
San Jose property;
• the Company’s planned processing, estimated capital expenditures, and anticipated major investments for mine
development, maintenance and energy, and brownfields exploration, at the Caylloma property during 2014;
• the Company’s plans for the 2014 brownfields exploration program at the Caylloma property;
• management’s belief 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;
• management’s belief that if the Company needs to access the capital markets for additional financial resources,
the Company will be able to do so at prevailing market rates;
• the expected maturities of the Company’s financial liabilities, finance leases and other contractual commitments;
and
• management’s expectation that none of the investigations, claims, and legal, labor and tax proceedings arising
in the ordinary course of business will have a material effect on the results of operations or financial conditions
of the Company.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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,
gold, 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.
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 mineral exploration and project
development; the need for additional financing; operational risks associated with mining and mineral processing;
uncertainty relating to concentrate treatment charges and transportation costs; uncertainty relating to capital and
operating costs, production schedules, and economic returns; uncertainties relating to general economic conditions; the
Company’s substantial reliance on the Caylloma and San Jose mines for revenues; risks related to the integration of
businesses and assets acquired by the Company; risks associated with entering into commodity forward and option
contracts for base metals production; potential conflicts of interest involving the Company’s directors and officers; the
risk that monies allotted for land reclamation may not be sufficient; risks associated with potential legal proceedings;
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, 2012 filed with the Canadian
Securities Administrators and the U.S. Securities and Exchange Commission and available at www.sedar.com and
www.sec.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.
BUILDING ON OUR STRENGTHS
71
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CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
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, 2013 and 2012 and the consolidated statements of
net (loss) income, comprehensive (loss) income, cash flows, and of changes in equity, for each of the years in the two
years ended December 31, 2013 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, 2013 and 2012 and its financial performance and its cash flows for the
years ended December 31, 2013 and 2012 in accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board.
Deloitte LLP
Chartered Accountants
March 17, 2014
Vancouver, Canada
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CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Net (Loss) 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 earnings
Other expenses
notes
2013
2012
18
19
$ 137,394
95,619
$ 161,020
90,358
41,775
70,662
Selling, general and administrative expenses
Exploration and evaluation costs
Net loss on commodity contracts
Loss (gain) on disposal of mineral properties,
plant and equipment
10 a), 10 b), 20
21
Restructuring costs
Write-off of mineral properties, plant and equipment
Impairment of mineral properties, plant and equipment
Impairment of inventories
22
8 a), 8 b), 8e)
8f
6
Operating (loss) income
Finance items
Interest income
Interest expense
net finance (expense) income
(Loss) income before tax
Income taxes
net (loss) income for the year
(Loss) earnings per share – Basic
(Loss) earnings per share – diluted
weighted average number of shares outstanding – Basic
weighted average number of shares outstanding – diluted
23
13
14 e)i
14 e)ii
14 e)i
14 e)ii
19,783
418
_
78
493
570
30,000
62
(9,629)
591
(932)
(341)
(9,970)
9,130
20,541
777
339
(50)
3,887
–
–
45,168
620
(562)
58
45,226
13,763
$
(19,100)
$ 31,463
$
$
(0.15)
(0.15)
$
$
0.25
0.25
125,552,597
123,584,611
126,547,754
125,232,663
The accompanying notes are an integral part of these consolidated financial statements.
BUILDING ON OUR STRENGTHS
73
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CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Comprehensive (Loss) Income
FOr THe YearS ended deCeMBer 31,
(expressed in thousands of uS dollars)
net (loss) income for the year
$
(19,100)
$ 31,463
notes
2013
2012
Other comprehensive (loss) income
items that may be classified subsequently to net income
Transfer of unrealized loss to realized loss
upon reduction of net investment
Unrealized loss on translation of net investment
Unrealized gain on translation to presentation
currency on foreign operations
–
(1,454)
230
(1,224)
(895)
(376)
2,224
953
Total comprehensive (loss) income for the year
$
(20,324)
$ 32,416
The accompanying notes are an integral part of these consolidated financial statements.
74
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Consolidated Statements of Cash Flows
FOr THe YearS ended deCeMBer 31,
(expressed in thousands of uS dollars)
OPeraTing aCTiviTieS
Net (loss) 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
Impairment of inventories
Loss (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 of 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
18
net cash used in investing activities
FinanCing aCTiviTieS
Repayment of long term debt
Net proceeds on issuance of common shares
Repayment of finance lease obligations
net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
(deCreaSe) inCreaSe in CaSH and CaSH eQuivaLenTS
Cash and cash equivalents - beginning of year
CaSH and CaSH eQuivaLenTS - end OF Year
Supplemental cash flow information
15
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED FINANCIAL STATEMENTS
notes
Years ended december 31,
2013
2012
$
(19,100)
$ 31,463
20,304
539
9,130
3,221
–
570
30,000
62
78
(61)
8
44,751
8,538
(340)
4
(2,648)
(1,339)
(31)
(139)
48,796
(4,430)
(20)
608
44,954
(27,241)
15,178
(60,507)
(7,984)
8,846
49
(71,659)
–
707
(449)
258
(569)
(26,447)
58,720
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
$ 31,704
$ 58,720
BUILDING ON OUR STRENGTHS
75
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CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Position
aS aT deCeMBer 31,
(expressed in thousands of uS dollars)
aSSeTS
CurrenT aSSeTS
Cash and cash equivalents
Short term investments
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
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
Total liabilities
eQuiTY
Share capital
Share option and warrant reserve
Retained earnings
Accumulated other comprehensive income
Total equity
Total liabilities and equity
notes
2013
2012
as at december 31,
3
4
5
10 c)
6
7, 18
5
13
8
9
10 c)
12
13
11
11
12
13
$ 31,704
17,411
17,040
1,578
–
15,488
–
$ 58,720
6,019
27,032
1,268
5
12,858
51
83,221
105,953
1,882
151
216,961
2,694
113
207,503
$ 302,215
$ 316,263
$ 15,897
20
622
50
227
$ 17,348
54
457
200
449
16,816
18,508
2,343
10,112
25,284
54,555
189,092
15,200
40,244
3,124
247,660
2,250
9,970
21,042
51,770
187,807
12,994
59,344
4,348
264,493
$ 302,215
$ 316,263
Contingencies and capital commitments
24
aPPrOved BY THe direCTOrS:
“Jorge Ganoza Durant” , Director
“Robert R. Gilmore” , Director
Jorge Ganoza Durant
Robert R. Gilmore
The accompanying notes are an integral part of these consolidated financial statements.
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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
14 a)
number of
Shares
amount
125,268,751
693,800
11,415
$ 187,807
707
49
Share
Option and
warrant
reserve
$ 12,944
–
–
–
–
–
–
–
529
–
(529)
2,734
–
–
–
–
–
–
accumulated
Other
Compre-
hensive
income
(“aOCi”)
Total
equity
$ 4,348 $ 264,493
707
49
–
–
–
–
–
0
2,734
(19,100)
(1,454)
(1,454)
230
230
retained
earnings
$ 59,344
–
–
–
–
(19,100)
–
–
(19,100)
(1,224)
(20,324)
Balance – December 31, 2012
Exercise of options
Issuance of shares for property
Transfer of share option and warrant
reserve on exercise of options
Share-based payments expense
Net loss for the year
Unrealized loss on translation of
net investment
Unrealized gain on translation to
presentation currency on foreign
operations
Total comprehensive loss for the year
Balance – december 31, 2013
125,973,966
$ 189,092
$ 15,200
$ 40,244
$ 3,124 $ 247,660
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
Unrealized loss on translation of
net investment
Unrealized gain on translation to
presentation currency on foreign
operations
Total comprehensive income for the year
124,945,921
314,225
8,605
$ 186,540
738
51
$ 10,495
–
–
$ 27,881
–
–
$ 3,395 $ 228,311
738
51
–
–
14 a)
–
–
–
–
–
478
–
(478)
2,977
–
–
–
–
–
–
–
–
31,463
–
–
–
–
2,977
31,463
–
(895)
(895)
(376)
(376)
–
2,224
2,224
31,463
953
32,416
Balance – December 31, 2012
125,268,751
$ 187,807
$ 12,994
$ 59,344
$ 4,348 $ 264,493
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(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 (“Caylloma”)
in southern Peru and the San Jose silver/gold mine (“San Jose”) in southern 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 symbol FSM, on the Toronto Stock Exchange and Lima Stock Exchange, both
under the trading 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, 2013. The Board of
Directors approved these financial statements for issue on March 17, 2014.
b) Basis of Consolidation
These Financial Statements include the accounts of the Company and its subsidiaries. All significant inter-company
transactions, balances, revenues, and expenses have been eliminated upon consolidation.
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the
financial and operating policies of an entity so as to obtain benefits from the entity’s activities. Control is normally
achieved through ownership, directly or indirectly, of more than 50% of the voting power. Control can also be achieved
through power over more than half the voting rights by virtue of an agreement with other investors or through the exercise
of de facto control.
For non-wholly owned subsidiaries, the net assets attributable to outside equity shareholders are presented as “non-
controlling interests” in the equity section of the consolidated statements of financial position. Net income for the period
that is attributable to non-controlling interests is calculated based on the ownership of the minority shareholders in the
subsidiary.
Subsidiaries are included in the consolidated financial results of the Company from the effective date of acquisition up
to the effective date of disposition or loss of control. The principal subsidiaries of the Company and their geographic
locations at December 31, 2013 were as follows:
name
entity Type at
december 31,
2013
Subsidiary
Minera Bateas S.A.C. (“Bateas”)
Subsidiary
Fortuna Silver Mines Peru S.A.C. (“FSM Peru”)
Compania Minera Cuzcatlan SA (“Cuzcatlan”)
Subsidiary
Fortuna Silver Mexico, S.A. de CV. (“FS Mexico”) Subsidiary
Subsidiary
Fortuna Silver (Barbados) Inc. (“Barbados”)
Subsidiary
Continuum Resources Ltd. (“Continuum”)
economic
interest at
december 31,
2013
100%
100%
100%
100%
100%
100%
Location
Peru
Peru
Mexico
Mexico
Barbados
Canada
Principal activity
Method
Caylloma Mine
Service company
San Jose Mine
Exploration company
Holding company
Holding company
Consolidation
Consolidation
Consolidation
Consolidation
Consolidation
Consolidation
As at December 31, 2013, the Company has no joint arrangement or associates.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
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.
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, located at the mine
Buildings, others
Leasehold improvements
Plant and equipment
Machinery and equipment
Furniture and other equipment
Transport units
Not depreciated
Units of production
Life of mine
6 – 20 years
7 – 8 years
3 – 15 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 are 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
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.
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
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 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
(“FVLCTS”) 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.
Fair value models are used to determine the recoverable amount of cash generating units. 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, sustaining 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) Borrowing Costs
Interest and other financing costs incurred that are attributable to acquiring and developing exploration and development
stage mining properties and constructing new facilities (“qualifying assets”) are capitalized and included in the carrying
amounts of qualifying assets until those qualifying assets are ready for their intended use.
Capitalization of borrowing costs incurred commences on the date the following three conditions are met:
• expenditures for the qualifying asset are being incurred;
• borrowing costs are being incurred; and,
• activities that are necessary to prepare the qualifying asset for its intended use are being undertaken.
Borrowing costs incurred after the qualifying assets are ready for their intended use are expenses in the period in which
they are incurred.
Borrowing costs, comprised of legal fees and upfront commitment fee, associated with the credit facility for general
working capital and future expansion are recorded as Accounts Receivable and Other Assets and amortized over the
term of the credit facility.
All other borrowing costs are expensed in the period in which they are incurred.
h) 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.
The amount of the DRP initially recognized is capitalized as part of the related asset’s carrying value and amortized to
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
income (loss). The method of amortization follows that of the underlying asset. The costs related to a DRP are only
capitalized to the extent that the amount meets the definition of an asset and can bring about future economic benefit.
For a closed site or where the asset which generated a DRP no longer exists, there is no longer future benefit related to
the costs and as such, the amounts are expensed. For operating sites, a revision in estimates or a new disturbance will
result in an adjustment to the liability with an offsetting adjustment to the capitalized retirement cost. For closed sites,
adjustments to the DRP that are required as a result of changes in estimates are charged to income in the period in
which the adjustment is identified.
Environmental disturbance restoration provisions
ii.
During the operating life of an asset, events such as infractions of environmental laws or regulations may occur. These
events are not related to the normal operation of the asset and are referred to as environmental disturbance restoration
provisions (“EDRP”). The costs associated with an EDRP are accrued and charged to earnings in the period in which the
event giving rise to the liability occurs. Any subsequent adjustments to an EDRP due to changes in estimates are also
charged to earnings in the period of adjustment. These costs are not capitalized as part of the long-lived asset’s carrying
value.
iii. Other provisions
Provisions are recognized when a present legal or constructive obligation exists, as a result of past events, and it is
probable that an outflow of resources that can be reliably estimated will be required to settle the obligation. Where the
effect is material, the provision is discounted using an appropriate current market-based pre-tax discount rate.
inventories
i)
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
j)
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
k)
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(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.
Share-Based Payments
l)
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.
m) earnings per Share
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
The diluted earnings per share calculation is based on the weighted average number of common shares outstanding
during the year, plus the effects of dilutive common share equivalents. This method requires that the dilutive effect of
outstanding options issued should be calculated using the treasury stock method. This method assumes that all common
share equivalents have been exercised at the beginning of the year (or at the time of issuance, if later), and that the
funds obtained thereby were used to purchase common shares of the Company at the average trading price of the
common shares during the year, but only if dilutive.
n) Foreign Currency Translation
The presentation currency of the Company is the United States Dollar (“US$”).
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.
o) 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 each reporting period. Interest income is
recognized by applying the effective interest rate, except for short term receivables when the recognition of interest would
not be significant.
d) Available-For-Sale (“AFS”) Assets
AFS financial assets are non-derivatives that are either designated in this category or not classified in any of the other
categories.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
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 reporting period. 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.
Derecognition of Financial Assets
f)
A financial asset is derecognized when:
• the contractual right of the asset’s cash flows expire; or
• if the Company transfers the financial asset and substantially all risks and reward of ownership to another entity.
Financial Liabilities
ii.
Derivatives are categorized as held-for-trading. Derivatives are initially recognized at fair value on the date a derivative
contract is entered into and are subsequently remeasured at their fair value. Fair value of the Company’s recognized
commodity-based derivatives are based on the forward prices of the associated market index. Gains or losses are
recorded in the 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(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
Lease and 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.
p) Fair value Measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the
principal (or most advantageous) market at the measurement date under current market conditions (an exit price)
regardless of whether that price is directly observable or estimated using another valuation technique. The fair value
hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Refer to
Note 17. a).
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.
Leases
r)
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.
s) 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. l).
86
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
t) 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.
u) Significant accounting Judgments and estimates
The preparation of these 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 Financial Statements
include judgments and estimates which, by their nature, are uncertain. The impacts of such judgments and estimates
are pervasive throughout the 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 carrying value or fair value
less cost to sell 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 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 and the portion of mineral resources expected to be extracted economically,
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;
BUILDING ON OUR STRENGTHS
87
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
• the 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 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;
• the determination of the fair value of financial instruments and derivatives included in the consolidated statements
of financial position;
• the fair value estimation of share-based awards included in the consolidated statements of financial position and
the inputs used in accounting for share-based compensation expense in the consolidated statements of income;
• the provision for income taxes which is included in the consolidated statements of income and composition of
deferred income tax asset and liabilities included in the consolidated statement of financial position;
• the recognition of deferred income tax assets, amounts recorded for uncertain tax positions, the measurement of
income tax expense and indirect taxes included in the consolidated statement of financial position;
• the inputs used in determining the net present value of the liability for provisions related to decommissioning and
restoration included in the consolidated statements of financial position; and,
• the inputs used in determining the various commitments and contingencies accrued in the consolidated statements
of financial position.
v) Significant Changes in accounting Policies including initial adoption
The Company has adopted the following accounting standards along with any consequential amendments, effective
January 1, 2013:
IAS 1 Presentation of Financial Statements (Amendment); IAS 16 Property, Plant, and Equipment (Amendment); IAS 32
Financial Instruments: Presentation (Amendment); IAS 34 Interim Financial Reporting (Amendment); IAS 34 (Amendment);
IFRS 7 Financial Instruments: Disclosures in Respect of Offsetting (Amendment); IFRS 10 Consolidated Financial
Statements; IFRS 11 Joint Arrangements; IFRS 12 Disclosure of Interests in Other Entities; IAS 19 Employee Benefits; IAS
27 Separate Financial Statements; and, IAS 28 Investments in Associates and Joint Ventures.
The Company has adopted the above amendments which do not have a significant impact on the Company’s Financial
Statements.
IFRS 13 Fair Value Measurement
The Company has adopted IFRS 13 and as a result has made updates to the disclosure of its financial instruments in
Note 17 a).
w) new accounting Standards
The Company is currently assessing the impact of adopting the following new accounting standards, noted below, on the
Company’s Financial Statements.
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.
IFRIC 21 - Levies
IFRIC 21 is an interpretation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”), on the accounting
for levies imposed by governments. IAS 37 sets out criteria for the recognition of a liability, one which is the requirement
for the entity to have a present obligation as a result of a past event (“obligating event”). IFRIC 21 clarifies that the
obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers
the payment of the levy. IFRIC 21 is effective for annual periods commencing on or after January 1, 2014.
88
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
IAS 36 - Impairment of Assets - Amendments for Recoverable Amount Disclosures for Non-Financial Assets
The amendment to IAS 36 Impairment of Assets to reduce the circumstances in which the recoverable amount of assets
or cash-generating units is required to be disclosed, clarify the disclosures required, and to introduce an explicit
requirement to disclose the discount rate used in determining impairment (or reversals) where recoverable amount (based
on fair value less costs of disposal) is determined using a present value technique. The amendment is effective for
annual periods commencing on or after January 1, 2014.
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.
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (Amendment)
The amendment to IFRS 9 Financial Instruments which includes the new hedge accounting requirements and some related
amendments to IAS 39 Financial Instruments; Recognition and Measurement and IFRS 7 Financial Instruments;
IFRS 9 (2013) also replicates the amendments in IAS 39 in respect of novations. The amendments allow
Disclosures.
for early adoption of the requirement to present fair value changes due to own credit on liabilities designated as at fair
value through profit or loss to be presented in other comprehensive income; and removes the January 1, 2015 effective
date.
x) Change in estimate
The Company has made a change in estimate and commencing in the fourth quarter of 2012, the amortization of
depletable properties 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. The impact on the change in estimate for 2013
is a decrease in depletion of $10,283 (2012: $1,938).
y) Comparative Figures
Certain comparative figures have been reclassified to conform to the presentation adopted for the current year. Capital
expenditures in segmented information is now presented on a cash basis.
Capital expenditures, accrual basis
Corporate
Bateas
Cuzcatlan
Total capital expenditures, accrual basis
add (deduct) non-cash items:
Bateas
Cuzcatlan
Total non-cash items
Capital expenditures, cash basis
Corporate
Bateas
Cuzcatlan
Years ended december 31,
2013
2012
$
101
21,202
39,160
$
525
29,566
20,868
$
60,463
$
50,959
$
499
(455)
44
101
21,701
38,705
(4,642)
(1,478)
$
(6,120)
525
24,924
19,390
Total capital expenditures, cash basis
$
60,507
$
44,839
Total capital expenditures, cash basis is presented in the consolidated statements of cash flows as expenditures on
mineral properties, plant and equipment.
BUILDING ON OUR STRENGTHS
89
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
3. Cash and Cash Equivalents
Cash
Cash equivalents
4. Short Term Investments
Held for trading short term investments
december 31,
2013
december 31,
2012
$ 11,066
20,638
$ 18,038
40,682
$ 31,704
$ 58,720
december 31,
2013
december 31,
2012
$
17,411
$
6,019
5. Accounts Receivable and Other Assets and Deposits
on Long Term Assets
The current accounts receivables and other assets are comprised of the following:
Trade receivables from concentrate sales
Current portion of long term receivables
Current portion of borrowing costs
Advances and other receivables
GST/HST and value added tax receivable
Accounts receivable and other assets
december 31,
2013
december 31,
2012
$
9,797
488
265
3,883
2,607
$ 15,158
832
–
3,637
7,405
$
17,040
$ 27,032
Deposits on long term assets include non-current accounts receivable and other assets are comprised of the following:
Long term receivables and borrowing costs
Less: current portion of long term receivables
Less: current portion of long term borrowing costs
Non-current portion of long term receivables
Non-current portion of borrowing costs
Deposits on equipment
Deposits paid to contractors
Other
Deposits on long term assets
december 31,
2013
december 31,
2012
$
1,322
$
(488)
(265)
237
332
700
411
202
1,557
(832)
–
725
–
1,086
744
139
$
1,882
$
2,694
As at December 31, 2013, the Company had $245 trade receivables (2012: $1,178) which were past due with no
impairment. The Company’s allowance for doubtful accounts is $nil for all reporting periods.
As at December 31, 2013, the Company has capitalized $796 (2012: $nil) of borrowing costs comprised of legal fees
and upfront commitment fee in connection with the amended and restated credit agreement with the Bank of Nova
Scotia. The borrowing costs are amortized over a period of 36 months. Refer to Note 17.d).
90
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
The aging analysis of these trade receivables from concentrate sales is as follows:
0-30 days
31-60 days
61-90 days
over 90 days
6.
Inventories
Concentrate stock piles
Ore stock piles
Materials and supplies
Total inventories
december 31,
2013
december 31,
2012
$
9,552
–
–
245
$ 13,725
255
–
1,178
$
9,797
$ 15,158
december 31,
2013
december 31,
2012
$
2,475
4,756
8,257
$
2,918
3,391
6,549
$ 15,488
$ 12,858
For the years ended December 31, 2013, $64,284 (2012: $59,077) of inventory was expensed, respectively, in cost of
sales and $62 of materials was written down to its net realizable value and recorded as an impairment in inventories
(2012: $nil).
7. Assets Held for Sale
Total assets held for sale – December 31, 2011
Additions
Disposals
Total assets held for sale – December 31, 2012
Disposal proceeds
Loss on disposal
Total assets held for sale – december 31, 2013
$
$
$
–
63
(12)
51
(28)
(23)
–
As at December 31, 2013, the Company has $nil (2012: $51) of equipment held for sale. In 2012, included in assets
held for sale were a scoop and a front loader as the machinery were not being used in the mine operations and were
expected to be sold within one year.
BUILDING ON OUR STRENGTHS
91
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
9. Mineral Properties, Plant and Equipment
Mineral
Properties
depletable
(Caylloma,
San Jose,
Taviche,
San Luisito) Taviche Oeste)
Mineral
Properties
non-
depletable
(Tlacolula,
Land,
Buildings
and
Leasehold
improvements
Machinery
and
equipment
Furniture
and Other
equipment
Transport
units
equipment
under
Finance
Lease
$ 960
887
–
(570)
–
–
–
$ 124,173
31,430
–
–
(11,158)
(16,868)
(217)
$ 19,047
(242)
(20)
–
(2,825)
(2,264)
605
$ 35,796
1,236
(2)
–
(4,454)
(8,180)
31,186
$ 3,984
1,192
(53)
–
(871)
(2,358)
3,323
$ 186
102
–
–
(90)
(1)
–
$ 2,468
–
–
–
(733)
(329)
–
Capital
work in
Progress
$ 20,889
25,858
(50)
–
–
–
(34,897)
Total
$ 207,503
60,463
(75)
(570)
(20,131)
(30,000)
–
–
(219)
–
(8)
(2)
–
–
–
(229)
Year ended december 31, 2013
Opening carrying amount
Additions
Disposals
Write–off of mineral properties
Depletion and depreciation
Impairment charge
Reclassification
Adjustment on
currency translation
Closing carrying amount
$ 1,277
$ 127,141
$ 14,301
$ 55,574
$ 5,215
$ 197
$ 1,406
$ 11,850
$ 216,961
as at december 31, 2013
Cost
Accumulated depletion
and depreciation
$ 1,277
$ 170,934
$ 25,167
$ 68,234
$ 7,685
$ 574
$ 4,795
$ 11,850
$ 290,516
Closing carrying amount
$ 1,277
$ 127,141
$ 14,301
$ 55,574
–
(43,793)
(10,866)
(12,660)
(2,470)
$ 5,215
(377)
(3,389)
–
(73,555)
$ 197
$ 1,406
$ 11,850
$ 216,961
As at December 31, 2013, the non-depletable mineral property includes the Tlacolula property (2012: Tlacolula property)
as the San Luisito property (2012: Mario and Don Mario properties) were abandoned and written off during the year.
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)
–
–
953
–
2
–
–
–
955
Year ended december 31, 2012
Opening carrying amount
Additions
Disposals
Write–off of mineral properties
Depletion and depreciation
Reclassification
Adjustment on
currency translation
Closing carrying amount
$ 960
$ 124,173
$ 19,047
$ 35,796
$ 3,984
$ 186
$ 2,468
$ 20,889
$ 207,503
as at december 31, 2012
Cost
Accumulated depletion
and depreciation
$ 960
$ 157,054
$ 27,092
$ 44,004
$ 5,694
$ 539
$ 5,124
$ 20,889
$ 261,356
–
(32,881)
(8,045)
(8,208)
(1,710)
(353)
(2,656)
–
(53,853)
Closing carrying amount
$ 960
$ 124,173
$ 19,047
$ 35,796
$ 3,984
$ 186
$ 2,468
$ 20,889
$ 207,503
92
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
a) Mario Property
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
As 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 in the
second quarter of 2012.
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 10. a)).
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 by 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 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 to have 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 $100 and paid $100 cash according to the terms of the option agreement.
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.
As at December 31, 2013, the Company had issued 34,589 common shares of the Company, with a fair market value
of $150, and paid $150 cash according to the terms of the option agreement.
d) Taviche Oeste Concessions
On February 4, 2013, the Company, through its wholly owned subsidiary, Cuzcatlan, acquired, through an option agreement
with Plata Pan American S.A. de C.V. (“Plata”, a wholly owned subsidiary of Pan American Silver Corp.), a 55% undivided
interest in the 6,254-hectare Taviche Oeste Concession (“concession”) immediately surrounding the San Jose Mine in
Oaxaca, Mexico. The Company made a cash payment of $4.0 million. On June 19, 2013, the Company made the final
$6.0 million cash payment to purchase the remaining 45% undivided interest in the concession.
The concession is subject to a 2.5% net smelter royalty on ore production from this property.
e) San Luisito Concessions
On February 26, 2013, the Company through its wholly owned subsidiary, Cuzcatlan, was granted an option with a third
party on concessions in the San Luisito Project, Sonora, Mexico and made a cash payment of $50. During the second
quarter of 2013, upon completion of the exploration program and given the current economic environment, the Company
abandoned its interest in the option agreement resulting in a write-off of $376. Additional costs of $125 and $69 were
written off in Q3 2013 and Q4 2013, respectively for a total write-off of $570.
BUILDING ON OUR STRENGTHS
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
Caylloma Property
f)
Assets are reviewed and tested for impairment when events or changes in circumstances suggest that the carrying
amount exceeds the recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value
in use. Assets are grouped at the lowest level for which there are separately identifiable cash flows or cash generating
units.
Impairment indicators were identified for Caylloma in the second quarter of 2013. The impairment was driven by the
reduction in gold and silver prices during the aforementioned quarter, and reflected a reduction in expected future cash
flows at the Caylloma operations. The Company has determined that the Caylloma property represents a cash generating
unit within the Peru geographic region. Fair value models were used to determine the recoverable amount of the cash
generating unit using a weighted average cost of capital of 7.65%. The carrying value of net assets of $87,562 was
determined to be impaired by $15,000, before tax. In the second quarter ended June 30, 2013, the Company recorded
an impairment charge of $10,200, net of tax ($15,000, before tax) (Q2 2012: $nil) for non-current assets related to
Caylloma. The impairment charge was allocated on a pro rata basis against the net book value of the mineral properties,
plant and equipment of $90,129.
The recoverable amounts of the Company’s cash generating units (“CGUs”), which include mineral properties, plant and
equipment are determined on an annual basis, or where facts and circumstances provide impairment indicators. The
recoverable amounts are based on each CGUs future after-tax cash flows expected to be derived from the Company’s
mineral properties and represent each CGUs FVLCTS. The after-tax cash flows are determined based on life-of-mine
(“LOM”) after-tax cash flow projections which incorporate management’s best estimates of future metal prices, production
based on current estimates of recoverable reserves and resources, exploration potential, future operating costs and
non-expansionary capital expenditures. Projected cash flow are discounted using a weighted average cost of capital of
7.42%. Management’s estimate of the FVLCTS of its CGUs is classified as level 3 in the fair value hierarchy.
As at December 31, 2013, the Company performed an annual review of the recoverable amounts of its CGUs and
recognized a $10,200, net of tax ($15,000, before tax) (Q4 2012: $nil) impairment charge, on the carrying value of net
assets of $78,064, in respect to the Company’s investment in Caylloma. The impairment charge was allocated on a pro
rata basis against the net book value of the mineral properties, plant and equipment of $79,413.
For December 31, 2013 and 2012, the key assumptions used for fair value less cost to sell calculations are as follows:
Metal Price assumptions
2014
2015
2016
2017
2018
2019-2026
Gold price $ per ounce
Silver price $ per ounce
Lead price $ per tonne
Zinc price $ per tonne
1,361.50
21.35
2,212.49
2,028.25
1,362.50
22.66
2,290.89
2,204.62
1,392.50
23.00
2,340.63
2,385.50
1,336.50
22.40
2,355.65
2,129.00
1,336.50
22.40
2,373.00
2,149.00
1,336.50
22.40
2,068.21
2,149.00
Weighted average cost of capital
7.42%
7.42%
7.42%
7.42%
7.42%
7.42%
december 31, 2013
Metal Price assumptions
2013
2014
2015
2016
2017
2018-2020
Gold price $ per ounce
Silver price $ per ounce
Lead price $ per tonne
Zinc price $ per tonne
1,700.00
34.49
2,100.00
2,000.00
1,700.00
34.25
2,100.00
2,000.00
1,700.00
32.38
2,100.00
2,000.00
1,700.00
29.50
2,100.00
2,000.00
1,700.00
26.94
2,100.00
2,000.00
1,700.00
26.31-26.06
2,100.00
2,000.00
Weighted average cost of capital
7.65%
7.65%
7.65%
7.65%
7.65%
7.65%
december 31, 2012
Expected future cash flows to determine the FVLCTS in the impairment testing of non-current assets are inherently
uncertain and could materially change over time. The cash flows are significantly affected by a number of factors including
estimates of production levels, operating costs, and capital expenditures reflected in the Company’s life of mine plans,
as well as economic factors beyond management’s control, such as silver and gold prices, discount rates, and observable
net asset valuation multiples. Should management’s estimate of the future not reflect actual events, further impairments
or reversals of impairments may be identified.
94
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
9. Trade and Other Payables
Trade accounts payable
Payroll payable
Restricted share unit payable
Other payables
10. 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,
2013
december 31,
2012
$
9,928
4,216
625
1,128
$ 11,114
4,238
648
1,348
$ 15,897
$ 17,348
Years ended december 31,
2013
86
130
–
216
$
$
2012
135
308
23
466
$
$
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 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, 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 2013, the Company issued 11,415 (2012: 8,605) common shares of the Company, at a fair market value of
$4.38 (2012: $5.81) per share and paid $50 (2012: $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,
$
2013
2,849
409
175
2,683
$
6,116
$
2012
2,789
388
180
1,629
4,986
Consulting fees includes fees paid to two non-executive directors in both 2013 and 2012.
BUILDING ON OUR STRENGTHS
95
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
c) Period end Balances arising From Purchases of goods/Services
amounts due from related parties
Owing from a company with common director 3
december 31,
2013
december 31,
2012
$
–
$
–-
3 Owing from a company controlled by a director of the Company at December 31, 2012.
Subsequent to December 31, 2013, the Company entered into a sales transaction with a Company related by directors
and officers in common for the sale of materials with a book value of $36 and a selling price of $37 resulted in a gain
on sale of $1. Terms of payment are 180 days guaranteed by a bill of exchange.
amounts due to related parties
december 31,
2013
december 31,
2012
Owing to company(ies) with common directors 4
$
20
$
54
4 2013 owing to Gold Group who has a director in common with the Company. 2012 owing to Radius and Gold Group whom have
directors in common with the Company.
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.
11. Leases and Long Term Liabilities
Leases and long term liabilities are comprised of the following:
Obligations under finance lease (a)
Long term liabilities (b)
Deferred share units (Note 14 c))
Restricted share units (Note 14, d))
Less: current portion
Obligations under finance lease (a)
december 31,
2013
december 31,
2012
$
227
27
2,030
286
2,570
227
$
676
19
2,004
–
2,699
449
Leases and long term liabilities, non-current
$
2,343
$
2,250
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
december 31,
2013
december 31,
2012
$
$
231
(4)
227
–
–
–
469
(20)
449
231
(4)
227
676
Present value of finance lease payments
$
227
$
96
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
b) Long Term Liabilities
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%, wage 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 end December 31, 2013, $16 (2012:
$20) has been recognized as an expense, respectively.
12. Provisions
A summary of the Company’s provisions for other liabilities and charges is presented below:
as at december 31, 2013
Anticipated settlement date to
Undiscounted value of estimated cash flow
Estimated mine life (years)
Discount rate
Inflation rate
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
Total provisions – December 31, 2012
Increase to existing provisions
Accretion of provisions
Foreign exchange differences
Cash payments
Total provisions – december 31, 2013
Less: current portion
non current – december 31, 2013
decommissioning and restoration Liabilities
Caylloma Mine
San Jose Mine
Total
2028
7,718
10
6.20%
3.88%
3,496
3,954
124
(129)
(386)
7,059
(111)
6,948
7,059
103
291
(600)
(95)
6,758
(125)
6,633
$
$
$
$
$
$
$
2026
5,587
10
6.45%
3.35%
1,478
1,680
108
102
–
3,368
(346)
3,022
3,368
424
247
(19)
(44)
3,976
(497)
3,479
$
$
$
$
$
$
$
$
13,305
4,974
5,634
232
(27)
(386)
10,427
(457)
9,970
10,427
527
538
(619)
(139)
10,734
(622)
10,112
$
$
$
$
$
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. Adjustments to the carrying
amounts of the related mineral properties, plant and equipment balance can result in a change to the future depletion
expense.
BUILDING ON OUR STRENGTHS
97
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
Income Tax
13.
a) Income tax expense differs from the amount that would be computed by applying the Canadian statutory income tax
rate of 25.75% (2012: 25.00%) 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
Special Mining Royalty
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,
2013
december 31,
2012
$
$
(9,970)
25.75%
$ 45,226
25.00%
(2,567)
1,458
407
306
1,244
7,677
(766)
1,371
$ 11,307
962
2,354
(796)
(1,580)
–
(70)
1,586
$
9,130
$
13,763
$
4,926
4,204
$
5,508
8,255
$
9,130
$ 13,763
The Canadian Federal corporate tax rate remained unchanged at 15% throughout 2013, and the British Columbia
provincial tax rate increased from 10% to 11% effective April 1, 2013. The overall increase in tax rates has resulted in
an increase in the Company’s statutory tax rate from 25.00% to 25.75%.
In December 2013, the Mexican President signed a bill approving significant tax reforms which have an effective date of
January 1, 2014. These tax reforms include a tax-deductible special mining royalty of 7.5% on EBITDA and an extraordinary
mining royalty of 0.5% on precious metals revenue. In addition, the Mexican corporate tax rate is to remain at 30%, while
previously expected to decrease to 28% in 2015.
The special mining royalty is an annual tax with the first payment due in March 2015 for 2014 activities. For 2013, the
Company recognized an initial deferred tax liability of $7,677 related to the special mining royalty of 7.5%. This deferred
tax liability will be drawn down to $nil as a reduction to tax expense over the life of mine as the mine and its related
assets are depleted or depreciated.
Income taxes payable of $50 (December 31, 2012: $200) relates to current taxes.
98
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’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, 2013 and 2012 are presented below:
Deferred income tax assets:
Non-capital losses
Provisions and other
Other
Net deferred income tax assets
Deferred income tax liabilities:
Mineral properties – Peru
Mineral properties – Mexico
Special Mining Royalty
Equipment
Total deferred income tax liabilities
Net deferred income tax liabilities
Classification
Non-current assets
Non-current liabilities
december 31,
2013
december 31,
2012
$
$
6,148
3,301
898
10,347
(10,393)
(8,241)
(7,677)
(9,169)
$ (35,480)
$
(25,133)
$
151
(25,284)
$
$
$
$
$
2,431
4,059
78
6,568
(14,314)
(3,452)
–
(9,731)
(27,497)
(20,929)
113
(21,042)
Net deferred income tax liabilities
$
(25,133)
$
(20,929)
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,
2013
december 31,
2012
$ 44,961
2,941
1,119
–
1,593
$ 47,124
2,652
1,947
1,283
1,467
Unrecognized deductible temporary differences
$
50,614
$ 54,473
BUILDING ON OUR STRENGTHS
99
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
The Company’s unrecognized taxable temporary difference consists of the following amounts:
Investment in subsidiaries
Unrecognized taxable temporary differences
The Company’s tax losses have the following expiry dates:
Non-capital losses, expiring as follows:
Canada
Mexico
14. Share Capital
december 31,
2013
december 31,
2012
$
$
13,599
13,599
$
$
6,620
6,620
expiry date
2014 - 2033
2021 - 2023
$
44,524
20,928
$ 65,452
a) unlimited Common Shares without Par value
During the year ended December 31, 2013, the Company issued 11,415 (2012: 8,605) common shares of the Company,
at a fair market value of $4.38 (2012: $5.81) per share and paid $50 (2012: $50) cash to Radius, under the option to
acquire a 60% interest in the Tlacolula silver project located in the State of Oaxaca, Mexico. (Refer to Note 8. c)).
b) Share Options
Shareholder approval of the Company’s Stock Option Plan (the “Plan”), dated April 11, 2011, was obtained at the
Company’s annual general meeting held on May 26, 2011. The Plan provides that the number of common shares of the
Company issuable under the Plan, together with all of the Company’s other previously established or proposed share
compensation arrangements, may not exceed 12,200,000 shares, which equals 9.92% of the current total number of
issued and outstanding common shares of the Company, as at April 11, 2011.
Option pricing models require the input of highly subjective assumptions including the estimate of the share price volatility,
risk-free interest rate and expected life of the options. Changes in the subjective input assumptions can materially affect
the fair value estimate. The following is a summary of share option transactions:
Outstanding at beginning of the year
Granted
Exercised
Forfeited
Expired
Outstanding at end of the year
Vested and exercisable at end of the year
december 31, 2013
december 31, 2012
Shares
(in ‘000’s)
6,117
1,153
(694)
(84)
(55)
6,437
3,949
weighted
average
exercise price
(Cad$)
$ 3.42
3.38
1.01
4.69
2.27
$ 3.65
$ 3.55
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
During the year ended December 31, 2013, 1,152,669 share purchase options with a term of three years were granted
with an exercise price of CAD$3.38, vesting 50% after one year and 100% after two years from the grant date.
100
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
During the year ended December 31, 2013, 67,939 share purchase options were accelerated to expire as follows:
Shares
25,000
8,271
2,500
10,000
9,905
12,263
67,939 Total
exercise price (Cad$)
Original expiry date
accelerated expiry date
$0.85
4.46
0.85
0.85
4.03
6.67
January 11, 2017
June 8, 2014
July 5, 2016
January 11, 2017
May 29, 2015
February 20, 2017
April 17, 2013
June 29, 2013
September 5, 2013
September 5, 2013
October 16, 2013
December 29, 2013
During the year ended December 31, 2013, 83,351 share purchase options with exercise prices ranging from CAD$3.38
and CAD$6.67 per share were forfeited and 55,439 share purchase options with exercise prices ranging from CAD$0.85
and CAD$6.67 expired unexercised.
During the year ended December 31, 2013, 693,800 share purchase options with exercise prices ranging from CAD$0.83
and CAD$1.66 per share were exercised.
Subsequent to December 31, 2013 to March 17, 2014, 64,866 share purchase options were exercised at prices ranging
from CAD$2.29 to CAD$4.03 resulting in issued and outstanding shares of 126,038,832.
During the year ended December 31, 2013, the Company recorded share-based payment charge of $2,734 (2012:
$2,977). The assumptions used to estimate the fair value of the share purchase options granted during the years ended
December 31, 2013 and 2012 were:
Risk-free interest rate
Expected stock price volatility
Expected term in years
Expected dividend yield
Expected forfeiture rate
2013
1.18%
57.81%
3
0%
4.15%
Years ended december 31,
2012
1.00% to 1.62%
55.93% to 58.36%%
3
0%
4.15%
The expected volatility assumption is based on the historical volatility of the Company’s Canadian dollar common share
price on the Toronto Stock Exchange. The weighted average fair value per share purchase option was CAD$3.68 (2012:
CAD$4.25).
The following table summarizes information related to stock options outstanding and exercisable at December 31, 2013.
number of
outstanding
share purchase
options (in ‘000’s)
weighted average
remaining
contractual life
of outstanding
share purchase
options (years)
weighted average
exercise price on
outstanding share
purchase options
Cad$
exercisable
share purchase
options
(in ‘000’s)
weighted average
exercise price on
exercisable share
purchase options
Cad$
270
452
5,715
6,437
4.8
2.4
1.6
1.8
$ 0.85
1.51
3.95
$ 3.65
270
452
3,227
3,949
$ 0.85
1.51
4.06
$ 3.55
exercise price
in Cad$
$0.80 to $0.99
$1.00 to $1.99
$2.00 to $6.67
$0.80 to $6.67
The weighted average remaining life of vested share purchase options at December 31, 2013 was 1.6 years (December
31, 2012: 3.3 years).
BUILDING ON OUR STRENGTHS
101
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
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, 2013, the Company granted 230,479 (2012: nil) DSU with a market value of
CAD$782, at the date of grants, to non-executive directors. During the year ended December 31, 2013 and 2012, there
were no DSU settlements in cash.
As at December 31, 2013, there are 711,944 (2012: 481,465) DSU outstanding with a fair value of $2,030 (2012:
$2,004). Refer to Note 11.
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 three 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, 2013, the Company granted 582,846 (2012: nil) RSU with a market value of
CAD$1,970, at the date of grant, to an executive director and officer (131,953), officers (259,770), and employees
(191,123), payable 20% after one year, 30% after two years, and the remaining 50% after three years from the date of
grant.
During the year ended December 31, 2013, the Company cancelled 39,201 (2012: nil) RSU and there were no (2012:
nil) RSU settlements.
As at December 31, 2013, there are 699,319 (2012: 155,674) RSU outstanding with a fair value of $911 (2012: $648).
Refer to Note 9 and Note 11.
e)
(Loss) earnings per Share
Basic
i.
Basic (loss) earnings per share is calculated by dividing the net income for the year by the weighted average number of
shares outstanding during the year.
The following table sets forth the computation of basic (loss) earnings per share:
(Loss) income available to equity owners
Weighted average number of shares (in '000's)
(Loss) earnings per share – basic
Years ended december 31,
2013
2012
$
(19,100)
$ 31,463
125,553
123,585
$
(0.15)
$
0.25
ii. Diluted
Diluted (loss) 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 (loss) earnings per
share:
(Loss) income available to equity owners
Weighted average number of shares ('000's)
Incremental shares from share options
Weighted average diluted shares outstanding ('000's)
(Loss) earnings per share – diluted
Years ended december 31,
2013
2012
$
(19,100)
$ 31,463
125,553
996
126,549
123,585
1,648
125,233
$
(0.15)
$
0.25
For the year ended December 31, 2013, excluded from the calculation were 4,180,104 (2012: 184,138) anti-dilutive
options, respectively with exercise prices ranging from CAD$3.79 to CAD$6.67 (2012: CAD$6.67).
102
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
15. Supplemental Cash Flow Information
non-cash investing and Financing activities:
Issuance of shares on purchase
of mineral properties, plant and equipment
note
Years ended december 31,
2013
2012
8 c)
$
50
$
50
16. Capital Disclosure
The Company’s objectives when managing capital are to provide shareholder returns through maximization of the profitable
growth of the business and to maintain a degree of financial flexibility relevant to the underlying operating and metal
price risks while safeguarding the Company’s ability to continue as a going concern.
The capital of the Company consists of equity and available credit facility, net of cash. The Board of Directors does not
establish a quantitative return on capital criteria for management. The Company manages the capital structure and
makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets.
The management of the Company believes that the capital resources of the Company as at December 31, 2013, are
sufficient for its present needs for at least the next 12 months. The Company is not subject to externally imposed capital
requirements.
The Company’s overall strategy with respect to capital risk management remained unchanged during the year.
17. Management of Financial Risk
The Company 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
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the
principal (or most advantageous) market at the measurement date under current market conditions (an exit price)
regardless of whether that price is directly observable or estimated using another valuation technique. The fair value
hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices
in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted
prices that are observable for the asset or liability (interest rate, yield curves), or inputs that are derived principally from
or corroborated observable market data or other means. Level 3 inputs are unobservable (supported by little or no market
activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
During the year ended December 31, 2013, there have been no transfers of amounts between Level 1, Level 2, and
Level 3 of the fair value hierarchy.
BUILDING ON OUR STRENGTHS
103
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
i.
Assets and Liabilities Measured At Fair Value on a Recurring Basis
Quoted Prices in
active Markets for
identical assets
Significant and
other Observable
inputs
Significant
unobservable
inputs
at december 31, 2013
Level 1
Level 2
Level 3
Cash and cash equivalents
Short term investments
Trade receivable from concentrate sales 1
$
31,704
17,411
–
$
$
49,115
$
–
–
9,797
9,797
$
$
–
–
–
–
aggregate Fair
value Total
$
31,704
17,411
9,797
$
58,912
1
Trade receivable from concentrate sales includes provisional pricing, and final price and assay adjustments. The fair value of trade
receivable from concentrate sales resulting from provisional pricing reflect observable market commodity prices and thereby
classified within Level 2 of the fair value hierarchy.
ii.
Fair Value of Financial Assets and Liabilities
Fair Values of Financial Assets and Liabilities
Financial assets
Cash and cash equivalents 1
Short term investments 1
Trade receivable from concentrate sales 2
Advances and other receivables
Due from related parties 1
Financial liabilities
Trade and other payables 1
Due to related parties 1
Leases and long term liabilities 3
december 31, 2013
december 31, 2012
Carrying
amount
estimated
Fair value
Carrying
amount
estimated
Fair value
$
$
$
$
31,704
17,411
9,797
3,883
–
62,795
15,272
20
540
15,832
$
$
$
$
31,704
17,411
9,797
3,883
–
62,795
15,272
20
544
15,836
$
$
$
$
58,720
6,019
15,158
3,637
5
83,539
16,700
54
695
17,449
$
$
$
$
58,720
6,019
15,158
3,637
5
83,539
16,700
54
719
17,473
1
2
Fair value approximates the carrying amount due to the short term nature and historically negible credit losses.
Trade receivable from concentrate sales includes provisional pricing, and final price and assay adjustments. The fair value of trade
receivable from concentrate sales resulting from provisional pricing reflect observable market commodity prices and thereby
classified within Level 2 of the fair value hierarchy.
3 Borrowing costs and deposits on long term assets includes the amortized value of long term receivables which approximates their
4
fair value.
Leases and long term liabilities are recorded at amortized costs. The fair value of leases and long term liabilities are primarily
determined using quoted market prices. Balance includes current portion of leases and long term liabilities.
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.
104
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
As at December 31, 2013, 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
Deposits on long term assets and
long term borrowing costs
Trade and other payables
Due to related parties
Provisions, current
Income tax payable
Leases and long term liabilities
Provisions
Canadian
dollars
$ 2,699
3,286
306
355
(1,181)
(22)
–
–
(2,477)
–
december 31, 2013
nuevo
Soles
Mexican
Pesos
S/. 619
–
7,917
$ 10,994
–
33,818
–
(12,659)
–
(349)
(2,213)
–
(18,544)
–
(49,618)
–
(6,499)
–
(350)
(45,499)
december 31, 2012
Canadian
dollars
$ 4,231
6,000
77
nuevo
Soles
S/. 1,389
–
3,097
–
(1,225)
(54)
–
–
(1,998)
–
–
(12,300)
–
(284)
(326)
–
(19,560)
Mexican
Pesos
$ 6,136
98,147
–
(49,779)
–
(4,502)
–
(245)
(39,323)
Total
$ 2,966
S/. (25,229)
$ (57,154)
$ 7,031
S/. (27,984)
$ 10,434
Total US$ equivalent
$ 2,773
$ (9,023)
$ (4,371)
$ 7,053
$ (10,970)
$ 802
Based on the above net exposure as at December 31, 2013, 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 $308 (2012: $784) and a net loss of $1,489 (2012: net loss
$1,130).
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’s maximum exposure to credit risk as at December 31, 2013 is as follows:
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Due from related parties
december 31,
2013
december 31,
2012
$
31,704
17,411
17,040
–
$ 58,720
6,019
27,032
5
$
66,155
$ 91,776
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.
BUILDING ON OUR STRENGTHS
105
Fortuna-AR13-mda&fin-toMay14_Layout 1 14-05-20 9:33 AM Page 106
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
d) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company
manages liquidity risk by continuing to monitor forecasted and actual cash flows. The Company has in place a planning
and budgeting process to help determine the funds required to support the Company’s normal operating requirements
on an ongoing basis and its development plans. The Company strives to maintain sufficient liquidity to meet its short
term business requirements, taking into account its anticipated cash flows from operations, its holdings of cash, short
term investments, and its committed liabilities.
The Company expects the following maturities of its financial liabilities (including interest), finance leases, and other
contractual commitments:
expected payments due by period as at december 31, 2013
Trade and other payables
Due to related parties
Income tax payable
Long term liabilities
Operating leases
Provisions
Less than
1 year
$ 15,897
20
50
231
572
700
1–3 years
4–5 years
$ –
–
–
2,343
1,103
762
$ –
–
–
–
349
1,170
$ 1,519
after
5 years
$ –
–
–
–
–
10,673
Total
$ 15,897
20
50
2,574
2,024
13,305
$ 10,673
$ 33,870
$ 17,470
$ 4,208
Operating leases includes leases for office premises, computer and other equipment used in the normal course of
business. Refer to Note 24. c).
On April 23, 2013, the Company entered into an amended and restated credit agreement with the Bank of Nova Scotia
for a $40 million senior secured revolving credit facility (“credit facility”) to be refinanced or repaid on or within three
years or before April 22, 2016. The credit facility is secured by a first ranking lien on Bateas, Cuzcatlan, Continuum, and
Barbados, and their 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 1.0% per annum is payable quarterly on the unutilized portion
of the available credit facility. No funds were drawn from this credit facility.
interest rate risk
e)
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market interest rates. The risk that the Company will realize a loss as a result of a decline in the fair value
is limited because the balances are generally held with major financial institutions in demand deposit accounts.
A 10% change in interest rates would cause a $2 change in income on an annualized basis.
f) Metal Price risk
The Company is exposed to metals price risk with respect to silver, gold, zinc, and lead sold through its mineral
concentrate products. As a matter of policy, the Company does not hedge its silver production.
18. Segmented Information
All of the Company’s operations are within the mining sector, conducted through operations in three countries. Due to
geographic and political diversity, the Company’s mining operations are decentralized whereby management are
responsible for achieving specified business results within a framework of global policies and standards. Country
corporate offices provide support infrastructure to the mine in addressing local and country issues including financial,
human resources, and exploration support.
Products are silver, gold, lead, zinc and copper produced from mines in Peru and Mexico, as operated by Bateas and
Cuzcatlan, respectively. Segments have been aggregated where operations in specific regions have similar products,
production processes, types of customers and economic environment.
106
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
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, 2013 and 2012 are as follows:
reportable Segments
Corporate
Bateas
Cuzcatlan
Total
Year ended December 31, 2013
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Cost of sales*
Depletion and depreciation**
Selling, general and
administrative expenses*
Exploration and evaluation costs
Restructuring costs
Write-off of mineral properties
Other material non-cash items
Impairment of mineral properties, plant
and equipment
Impairment of inventories
Interest income
Interest expense
(Loss) income before tax
Income taxes
(Loss) income for the year
Capital expenditures***
$
$
–
–
–
–
–
662
12,820
376
305
–
–
–
–
101
374
(13,774)
231
(14,005)
101
72,306
–
57,013
15,293
53,672
9,676
3,513
–
57
–
7
30,000
62
402
311
(14,914)
(2,816)
(12,098)
21,701
$
65,088
65,088
–
–
41,947
9,966
3,450
42
131
570
71
–
–
88
247
18,718
11,715
7,003
38,705
$
137,394
65,088
57,293
15,013
95,619
20,304
19,783
418
493
570
78
30,000
62
591
932
(9,970)
9,130
(19,100)
60,507
* cost of sales and selling, general and administrative expenses includes depletion and depreciation
** included in cost of sales or selling, general and administrative expenses
*** segmented capital expenditures are presented on a cash basis
reportable Segments
Corporate
Bateas
Cuzcatlan
Total
Year ended December 31, 2012
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
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
(Loss) income before tax
Income taxes
(Loss) income for the year
Capital expenditures***
$
$
–
–
–
–
–
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
24,924
$
77,323
77,323
–
–
39,127
12,127
3,610
–
–
(51)
70
108
34,344
6,970
27,374
19,390
$
161,020
77,323
68,616
15,081
90,358
21,372
20,541
777
3,887
(50)
620
562
45,226
13,763
31,463
44,839
* cost of sales and selling, general and administrative expenses includes depletion and depreciation
** included in cost of sales or selling, general and administrative expenses
*** segmented capital expenditures are presented on a cash basis
BUILDING ON OUR STRENGTHS
107
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
reportable Segments
Corporate
Bateas
Cuzcatlan
Total
As at December 31, 2013
Mineral properties, plant and equipment
Total assets
Total liabilities
$
As at December 31, 2012
Assets held for sale
Mineral properties, plant and equipment
Total assets
Total liabilities
670
25,191
4,715
–
1,034
19,412
5,466
$
64,197
104,398
19,091
51
82,940
127,778
27,710
$
152,094
172,626
30,749
–
123,529
169,073
18,594
$
216,961
302,215
54,555
51
207,503
316,263
51,770
The segment information by geographical region for the years ended December 31, 2013 and 2012 are as follows:
reportable Segments
Canada
Peru
Mexico
Total
Year ended December 31, 2013
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Year ended December 31, 2012
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
$
$
–
–
–
–
–
–
–
–
72,306
–
57,013
15,293
83,697
–
68,616
15,081
reportable Segments
Canada
Peru
$
65,088
65,088
–
–
77,323
77,323
–
–
Mexico
$
137,394
65,088
57,013
15,293
161,020
77,323
68,616
15,081
Total
As at December 31, 2013
Non current assets
As at December 31, 2012
Non current assets
$
3,038
$
64,938
$
151,018
$
218,994
3,132
84,531
122,647
210,310
For the year ended December 31, 2013, there were six (2012: six) 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,
$
2013
29,341
42,968
9
(12)
41%
59%
0%
0%
$
2012
1,391
75,136
6,675
495
2%
89%
8%
1%
$
72,306
100%
$
83,697
100%
$
53%
63,955
1,133
$
65,088
47%
98%
2%
100%
$
52%
2,333
74,990
3%
97%
$
77,323
100%
48%
$
137,394
100%
$
161,020
100%
100%
100%
108
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
Fortuna-AR13-mda&fin-toMay14_Layout 1 14-05-20 9:33 AM Page 109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
19. Cost of Sales
The cost of sales for the years ended December 31, 2013 and 2012 are as follows:
Years ended december 31,
2013
2012
Caylloma
San Jose
Total
Caylloma
San Jose
Total
Direct mining costs 1
Workers’ participation
Depletion and depreciation
Royalty expenses
$ 42,331
998
9,594
749
$ 32,345
81
9,521
–
$ 74,676
1,079
19,115
749
$ 39,767
1,112
8,861
1,491
$ 27,470
41
11,616
–
$ 67,237
1,153
20,477
1,491
$ 53,672
$ 41,947
$ 95,619
$ 51,231
$ 39,127
$ 90,358
1 Direct mining costs includes salaries and other short term benefits, contractor charges, energy, consumables and production related
costs.
20. Selling, General and Administrative Expenses
The selling, general and administrative expenses for the years ended December 31, 2012 and 2011 are as follows:
Salaries and benefits
Corporate administration
Audit, legal and professional fees
Filing and listing fees
Director's fees
Depreciation
Years ended december 31,
2013
2012
$ 14,275
112
3,795
40
578
983
$ 12,213
2,172
4,461
236
564
895
$
19,783
$ 20,541
21. Exploration and Evaluation Costs
The exploration and evaluation costs for the years ended December 31, 2013 and 2012 are as follows:
Share-based payments
Salaries, wages, and benefits
Direct costs
Years ended december 31,
2013
22
312
84
418
$
$
2012
52
506
219
777
$
$
22. Restructuring Costs
The restructuring costs for the years ended December 31, 2013 and 2012 are as follows:
Salaries and post-employment benefits
Years ended december 31,
2013
493
493
$
$
2012
–
–
$
$
BUILDING ON OUR STRENGTHS
109
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
23. Net Finance (Expense) Income
The net finance (expense) income for the years ended December 31, 2013 and 2012 are as follows:
Years ended december 31,
Finance income
Interest income on FVTPL financial assets
$
Total finance income
Finance expenses
Interest expense
Standby and commitment fees
Accretion of provisions (Note 12)
Total finance expense
net finance (expense) income
$
2013
591
591
21
373
538
932
2012
620
620
30
300
232
562
58
$
(341)
$
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. In March 2013 the closure plan was updated with total closure costs of
$7,996 of which $4,167 is subject to annual collateral in the form of a letter of guarantee.
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 and to collateralize Bateas’ mine closure plan, in the amount
of $1,204 (2012: $585). This bank letter of guarantee expires on December 31, 2014.
In August 2013, Bateas obtained two bank letters of guarantee of a combined amount of $1,182 from Banco Continental
in favor of the Peruvian Tax Authority SUNAT associated to a claim made by Bateas.
b) Capital Commitments
As at December 31, 2013, $361 of capital commitments not disclosed elsewhere in the Financial Statements, and
forecasted to be expended within one year, includes the following: $nil mine and tailing dam development at the San
Jose property; and $361 for the tailing dam 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
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
commitment is $180 per month.
Operating leases includes leases for office premises, computer and other equipment used in the normal course of
business. Refer to Note 17. d).
110
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOr THe YearS ended deCeMBer 31, 2013 and 2012
(all amounts in uS$’000’s unless otherwise stated)
The expected payments due by period as at December 31, 2013 are as follows:
expected payments due by period as at december 31, 2013
1–3 years
4–5 years
Office premises – Canada
Office premises – Peru
Office premises – Mexico
Less than
1 year
$ 79
385
10
$ 261
805
–
Total office premises
$ 474
$ 1,066
Computer equipment – Peru
Computer equipment – Mexico
Total computer equipment
Total operating leases
81
17
$ 98
$ 572
30
7
$ 37
$ 1,103
$ 177
172
–
$ 349
–
–
$ –
$ 349
after
5 years
$ –
–
–
$ –
–
–
$ –
$ –
Total
$ 517
1,362
10
$ 1,889
111
24
$ 135
$ 2,024
d) Other Contingencies
The Company is subject to various investigations, claims, legal, labor 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. As at December 31, 2013, the Company has completed its evaluation of
the mining concessions which are currently included on the list and has estimated the net cost of the mine closure
liability of $350. This estimate is included as part of the provisions in Note 12.
BUILDING ON OUR STRENGTHS
111
Fortuna-AR13-mda&fin-toMay14_Layout 1 14-05-20 9:33 AM Page 112
NOTES
112
FORTUNA SILVER MINES INC. | 2013 ANNUAL REPORT
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 18 – Peru
T: +51.1.616.6060
Investor Relations
Carlos Baca
Investor Relations Manager
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
Suite 2800
1055 Dunsmuir Street
Vancouver, BC Canada V7X 1P4
Share Transfer Agent
Olympia Trust Company
Suite 1003
750 West Pender Street
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.
silver
Abbreviations
Ag
Ag Eq silver equivalent
Au
g/t
m
gold
grams per metric tonne
meters
koz
M
Moz
oz
Pb
1,000 ounces
million
1,000,000 ounces
troy ounce. One troy ounce is
equal to 31.1035 grams
lead
metric tonne
t
tpd metric tonnes per day.
One metric tonne equals
2,204.62 pounds
zinc
Zn
BUILDING ON OUR STRENGTHS
www.fortunasilver.com
Caylloma Mine, Peru
DESIGN BY XY3 DESIGN | PRINTED IN CANADA