UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 40-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2015 Commission File Number: 001-35297
FORTUNA SILVER MINES INC.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English (if applicable))
British Columbia, Canada
(Province or other jurisdiction of incorporation or organization)
1040
(Primary Standard Industrial
Classification Code Number (if applicable))
N/A
(I.R.S. Employer
Identification Number (if applicable))
200 Burrard Street, Suite 650
Vancouver, British Columbia, Canada V6C 3L6
604-484-4085
(Address and telephone number of Registrant’s principal executive offices)
National Corporate Research, Ltd.
10 East 40th Street, 10th Floor
New York, New York 10016
(212) 947-7200
(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Common Shares
Name of each exchange on which registered
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
For annual reports indicate by check mark the information filed with this Form:
Annual information form Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered
by the annual report:
There were 128,240,567 common shares with no par value outstanding as of December 31, 2015.
Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the Registrant was required to submit and post such files).
Yes No
Disclosure Controls and Procedures.
DISCLOSURE REGARDING CONTROLS AND PROCEDURES
Disclosure controls and procedures are defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) as those controls and procedures designed to ensure that information required to be disclosed in the annual filings
and interim filings and other reports filed or submitted by Fortuna Silver Mines Inc. (the “Company”) under the Exchange Act is duly
recorded, processed, summarized and reported, within the time periods specified in rules and forms of the United States Securities and
Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the Company’s reports and filings is accumulated and communicated to management,
including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding
required disclosure.
The Company evaluated, with the participation of its CEO and CFO, the effectiveness of its disclosure controls and procedures as of
December 31, 2015. Based on that evaluation, the CEO and the CFO have concluded that, as of the end of the period covered by this
annual report on Form 40-F, the disclosure controls and procedures were effective to provide reasonable assurance that information
required to be disclosed in the Company’s annual filings and interim filings and other reports filed or submitted under the Exchange Act,
is recorded, processed, summarized and reported within time periods specified in SEC rules and forms and is accumulated and
communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Notwithstanding the foregoing, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons
within the Company and its subsidiaries to disclose material information otherwise required to be set forth in the Company’s periodic
reports. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objective of
ensuring that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is
communicated to management to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Controls Over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in
Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) and has designed such internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
In designing and evaluating the Company’s internal control over financial reporting, the Company’s management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its reasonable judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control - Integrated Framework (1992). Based on this assessment, management believes that, as of December 31, 2015, the
Company’s internal control over financial reporting was effective based on those criteria. See “Internal Control Over Financial
Reporting” in the Management’s Discussion and Analysis for the fiscal year ended December 31, 2015, included as Exhibit 99.3 to this
annual report on Form 40-F.
Attestation Report of the Registered Public Accounting Firm. This annual report on Form 40-F does not include an attestation report of
the Company’s registered public accounting firm because the Company is exempt from such requirement due to its status as an “emerging
growth company” under the Jumpstart Our Business Startups Act.
Changes in Internal Control Over Financial Reporting. During the fiscal year ended December 31, 2015, there were no changes in the
Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
NOTICES PURSUANT TO REGULATION BTR
None.
1
IDENTIFICATION OF THE AUDIT COMMITTEE
The Company has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act. The members of the audit committee are: Messrs. Robert Gilmore, Thomas Kelly and David Farrell. The board of directors has
determined that each of Messrs. Robert Gilmore, Thomas Kelly and David Farrell is independent, as that term is defined in Rule 10A-3
under the Exchange Act and the Listed Company Manual of the New York Stock Exchange.
AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors of the Company has determined that Robert Gilmore, a member of the Company’s audit committee, qualifies as an
audit committee financial expert for purposes of paragraph (8) of General Instruction B to Form 40-F. The SEC has indicated that the
designation of Robert Gilmore as an audit committee financial expert does not make him an “expert” for any purpose, impose any duties,
obligations or liabilities on him that are greater than those imposed on members of the audit committee and the board of directors who do
not carry this designation or affect the duties, obligations or liabilities of any other member of the audit committee or the board of
directors.
CODE OF ETHICS
The Company has adopted a “code of ethics” (as that term is defined in Form 40-F), entitled the “Code of Business Conduct and Ethics
and Whistle-Blower Policy”, that applies to all of its directors, officers, employees, and consultants including its principal executive
officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions.
The Code of Business Conduct and Ethics and Whistle-Blower Policy is available for viewing on the Company’s website at
www.fortunasilver.com under “About Fortuna / Corporate Governance”.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte LLP served as the Company’s Independent Registered Public Accounting Firm for the fiscal years ended December 31, 2015 and
2014. Aggregate fees (in Canadian dollars) billed to the Company for professional services rendered by Deloitte LLP during the fiscal
years ended December 31, 2015 and 2014 are as follows:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
2015
$661,970
$72,774
$129,988
Nil
$864,732
2014
$507,462
Nil
$150,805
Nil
$658,267
“Audit Fees” are the aggregate fees billed for the audit of the Company’s consolidated annual financial statements, review of the interim
financial statements and management’s discussion and analysis, or services that are normally provided in connection with statutory and
regulatory filings or engagements.
“Audit-Related Fees” are fees charged for assurance and related services that are reasonably related to the performance of the audit or
review of the Company’s financial statements and are not reported under “Audit Fees”.
“Tax Fees” are fees for professional services rendered for tax compliance, tax advice on actual or contemplated transactions, and tax
planning.
“All Other Fees” are for amounts not included in the categories above.
PRE-APPROVAL POLICIES AND PROCEDURES
The auditors of the Company obtain, as necessary, the pre-approval of the Audit Committee for any anticipated additional services
required of the auditors for the coming fiscal year. If other service requirements arise during the year, the Audit Committee will pre-
approve such services at that time, prior to the commencement of such services. Of the total aggregate fees paid by the Company to its
auditors during the fiscal year ended December 31, 2015, $nil or 0% of the fees were approved by the Audit Committee pursuant to the de
minimus exception provided by Section (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
2
OFF-BALANCE SHEET ARRANGEMENTS
The required disclosure is included in Notes 17(d) and 24 of the Company’s audited consolidated financial statements for the fiscal years
ended December 31, 2015 and 2014, filed as part of this annual report on Form 40-F in Exhibit 99.2, and under the headings “Financial
Instruments and Related Risks – Liquidity Risk” and “Off-Balance Sheet Arrangements” in the Company’s Management’s Discussion and
Analysis for the fiscal year ended December 31, 2015, filed as part of this annual report on Form 40-F in Exhibit 99.3.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The required disclosure is included under the heading “Contractual Obligations” of the Company’s Management’s Discussion and
Analysis for the fiscal year ended December 31, 2015, filed as part of this annual report on Form 40-F in Exhibit 99.3.
MINE SAFETY DISCLOSURE
The Company is not required to disclose the information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE
The Company is a “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act and Rule 405 under the United States
Securities Act of 1933, as amended, and the Company’s common shares are listed on the New York Stock Exchange (the “NYSE”).
Sections 103.00, 303A.00 and 303A.11 of the NYSE Listed Company Manual permit foreign private issuers to follow home country
practices in lieu of certain provisions of the NYSE Listed Company Manual. A foreign private issuer that follows home country practices
in lieu of certain provisions of the NYSE Listed Company Manual must disclose any significant ways in which its corporate governance
practices differ from those followed by domestic companies either on its website or in the annual report that it distributes to shareholders
in the United States. A description of the significant ways in which the Company’s governance practices differ from those followed by
domestic companies pursuant to NYSE standards is disclosed on the Company’s website at www.fortunasilver.com under “About
Fortuna/Corporate Governance / NYSE”.
The Company’s corporate governance practices, as described on its website, are consistent with the laws, customs and practices in
Canada.
The Company is not currently required to submit to the SEC, or post to its corporate website, an Interactive Data File.
INTERACTIVE DATA FILE
UNDERTAKING
The Company undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the SEC staff, and
to furnish promptly, when requested to do so by the SEC staff, information relating to: the securities registered pursuant to Form 40-F; the
securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
CONSENT TO SERVICE OF PROCESS
A Form F-X signed by the Company and its agent for service of process has been previously filed with the SEC together with the
Company’s Registration Statement on Form 40-F (File No. 001-35297) in connection with its securities registered on such form.
Any changes to the name or address of the agent for service of process of the Company shall be communicated promptly to the SEC by an
amendment to the Form F-X referencing the file number of the Company.
3
SIGNATURE
Pursuant to the requirements of the Exchange Act, the Company certifies that it meets all of the requirements for filing on Form 40-F and
has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2016
FORTUNA SILVER MINES INC.
By: “Jorge Ganoza Durant”
Name: Jorge Ganoza Durant
Title:
President, Chief Executive Officer & Director
4
EXHIBIT INDEX
Exhibit
Description
99.1
99.2
99.3
99.4
99.5
99.6
99.7
99.8
99.9
Annual Information Form for the year ended December 31, 2015
Audited Consolidated Financial Statements for the years ended December 31, 2015 and 2014, including the auditor’s
report with respect thereto
Management’s Discussion and Analysis for the year ended December 31, 2015
Consent of Deloitte LLP
Consent of Eric N. Chapman
Consent of Thomas Kelly
Consent of Edwin Gutierrez
Consent of Thomas Vehrs
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.10
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.11
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.12
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.1
ANNUAL INFORMATION FORM
ANNUAL INFORMATION FORM
For the Fiscal Year Ended December 31, 2015
DATED: March 24, 2016
CORPORATE OFFICE:
Suite 650, 200 Burrard Street
Vancouver, BC V6C 3L6, Canada
Tel: 604.484.4085
Fax: 604.484.4029
MANAGEMENT HEAD OFFICE:
Piso 5, Av. Jorge Chávez #154
Miraflores, Lima, Peru
Tel: 511.616.6060, ext. 2
TABLE OF CONTENTS
PRELIMINARY NOTES
Cautionary Statement – Forward Looking Statements
Cautionary Note to U.S. Investors
Documents Incorporated by Reference
Date of Information
Currency
CORPORATE STRUCTURE
Name, Address and Incorporation
Intercorporate Relationships
GENERAL DEVELOPMENT OF THE BUSINESS
Three-Year History and Recent Developments
DESCRIPTION OF THE BUSINESS
General
Risk Factors
Material Mineral Properties
Caylloma Mine, Peru
San Jose Mine, Mexico
DIVIDENDS
DESCRIPTION OF CAPITAL STRUCTURE
MARKET FOR SECURITIES
Trading Price and Volume
DIRECTORS AND EXECUTIVE OFFICERS
Name, Occupation and Shareholding
Cease Trade Orders or Bankruptcies
Penalties or Sanctions
Conflicts of Interest
AUDIT COMMITTEE
LEGAL PROCEEDINGS
TRANSFER AGENT AND REGISTRAR
MATERIAL CONTRACTS
INTERESTS OF EXPERTS
Names of Experts
Interests of Experts
ADDITIONAL INFORMATION
1
1
2
4
4
4
4
4
4
5
5
10
10
11
17
17
19
23
23
23
23
24
24
25
26
26
26
28
28
28
28
28
28
29
Audit Committee Charter
Schedule “A”
PRELIMINARY NOTES
Cautionary Statement – Forward-Looking Statements
-1-
Certain statements contained in this Annual Information Form (“AIF”) and any documents incorporated by
reference into this AIF 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”). All statements included herein, other than statements of historical fact, are forward-
looking statements and are subject to a variety of known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those reflected in the forward-looking statements. The forward-
looking statements in this AIF include, without limitation, statements relating to:
•
•
•
•
•
•
• 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 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, plant expansion,
filter facility and dry-stack tailings deposit project, and brownfields exploration at the San Jose property during
2016;
the Company’s planned processing and estimated major investments for mine development, plant optimization
and brownfields exploration at the Caylloma property during 2016;
•
expiry dates of bank letters of guarantee;
estimated mine closure costs; and
• maturities of the Company’s financial liabilities, finance leases and other contractual commitments;
•
•
• management’s expectation that any investigations, claims, and legal, labor and tax proceedings arising in the
ordinary course of business will not have a material effect on the results of operations or financial condition of
the Company.
Often, but not always, these forward-looking statements can be identified by the use of words such as “anticipates”,
“believes”, “plans”, “estimates”, “expects”, “forecasts”, “scheduled”, “targets”, “possible”, “strategy”, “potential”,
“intends”, “advance”, “goal”, “objective”, “projects”, “budget”, “calculates” or statements that events, “will”,
“may”, “could” or “should” occur or be achieved and similar expressions, including negative variations.
Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially different from any results, performance
or achievements expressed or implied by the forward-looking statements. Such uncertainties and factors include,
among others:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
uncertainty of mineral resource and reserve estimates;
risks associated with mineral exploration and project development;
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;
competition;
substantial reliance on the Caylloma and San Jose mines for revenues;
risks related to the integration of businesses and assets acquired by the Company;
potential legal proceedings;
changes in national and local government legislation, taxation, controls, regulations and political or
economic developments in countries in which the Company does or may carry on business;
fluctuations in metal prices;
risks associated with entering into commodity forward and option contracts for base metals production;
environmental matters including potential liability claims;
-2-
•
•
•
•
•
•
•
•
•
reliance on key personnel;
potential conflicts of interest involving the Company’s directors and officers;
property title matters;
dilution from further equity financing;
uncertainty of future dividends;
currency exchange rate fluctuations;
adequacy of insurance coverage;
sufficiency of monies allotted for land reclamation; and
uncertainty relating to the enforcement of U.S. judgments against the Company;
as well as those factors referred to in the “Risk Factors” section in this AIF.
Forward-looking Statements contained in this AIF are based on the assumptions, beliefs, expectations and opinions
of management, including but not limited to:
•
•
•
•
•
•
•
all required third party contractual, regulatory and governmental approvals will be obtained for the
exploration, development, construction and production of its properties;
there being no significant disruptions affecting operations, whether relating to labor, supply, power,
damage to equipment or other matter;
permitting, construction, development and expansion proceeding on a basis consistent with the Company’s
current expectations;
expected trends and specific assumptions regarding metal prices and currency exchange rates;
prices for and availability of fuel, electricity, parts and equipment and other key supplies remaining
consistent with current levels;
production forecasts meeting expectations; and
the accuracy of the Company’s current mineral resource and reserve estimates.
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 AIF. 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.
CAUTIONARY NOTE TO U.S. INVESTORS
The Company is a Canadian “foreign private issuer” as defined in Rule 3b-4 under the U.S. Securities Exchange Act
of 1934, as amended (the “U.S. Exchange Act”), which is permitted to prepare the technical information contained
herein in accordance with the requirements of the securities laws in effect in Canada, which differ from the
requirements of U.S. securities laws. The terms “mineral resource,” “measured resource,” “indicated resource” and
“inferred resource” used in the Company’s disclosure are Canadian mining terms that are defined in accordance with
National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) under the guidelines set
out in the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) Best Practice Guidelines for the
Estimation of Mineral Resources and Mineral Reserves (the “CIM Standards”), adopted by the CIM Council on
November 23, 2003. These terms, however, are not recognized by SEC Industry Guide 7 and are normally not
permitted to be used in reports and registration statements filed with the United States Securities and Exchange
Commission (the “SEC”). In particular, the term “resource” does not equate to the term “reserve”. Under U.S.
standards, mineralization may not be classified as a “reserve” unless the determination has been made that the
mineralization could be economically and legally produced or extracted at the time the reserve determination is
made.
Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be
converted into reserves. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and
great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred
mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral
resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases. Investors are
cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally
-3-
mineable. Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian regulations;
however, the SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC
Industry Guide 7 standards as in place tonnage and grade without reference to unit measures. The requirements of
NI 43-101 for identification of “reserves” are also not the same as those of the SEC.
Accordingly, information contained in this AIF containing descriptions of the Company’s mineral deposits may not
be comparable to similar information made public by U.S. companies subject to the reporting and disclosure
requirements under the United States federal securities laws and the rules and regulations thereunder.
-4-
Documents Incorporated by Reference
The information provided in this AIF is supplemented by disclosure contained in the documents listed below which
are incorporated by reference into this AIF. These documents must be read together with the AIF in order to provide
full, true and plain disclosure of all material facts relating to Fortuna Silver Mines Inc. (referred to herein as the
“Company” or “Fortuna”). The documents listed below are not contained within or attached to this document. The
documents may be accessed on SEDAR at www.sedar.com under the Company’s profile, Fortuna Silver Mines Inc.:
Document
Effective Date /
Period Ended
Date Filed on
SEDAR website
Document Category on the
SEDAR website
Management Information Circular
May 4, 2015
May 12, 2015
Technical Report, Caylloma
Property, Peru
Technical Report, San Jose
Property, Mexico
March 22, 2013
November 22,
2013
March 26, and
April 15, 2013
November 29,
2013
Management Proxy /
Information Circular - English
Technical Report(s)
Technical Report(s)
Date of Information
This AIF is dated March 24, 2016. Except as otherwise indicated, the information contained herein is as at
December 31, 2015, being the date of the Company’s most recently completed financial year end.
Currency
Unless otherwise noted, all references to “$” in this AIF refer to United States dollars.
CORPORATE STRUCTURE
Name, Address and Incorporation
The Company was incorporated on September 4, 1990 pursuant to the Company Act (British Columbia) under the
name Jopec Resources Ltd. and subsequently transitioned under the Business Corporations Act (British Columbia).
On February 3, 1999, the Company changed its name to Fortuna Ventures Inc. and on June 28, 2005 to Fortuna
Silver Mines Inc.
The management head office of the Company is located at Piso 5, Av. Jorge Chávez #154, Miraflores, Lima, Peru.
The corporate head and registered office of the Company is located at 200 Burrard Street, Suite 650, Vancouver, BC
V6C 3L6.
Intercorporate Relationships
The Company carries on a significant portion of its business through a number of 100%-owned subsidiaries, held
either directly or indirectly, as follows:
-5-
Fortuna Silver
Mines Inc.
[British Columbia]
Minera Bateas
S.A.C.
[Peru]
Caylloma Mine
Fortuna Silver
Mines Perú S.A.C.
[Peru]
99.998%
Fortuna Silver
Barbados Inc.
[Barbados]
76%
Continuum
Resources Ltd.
[British Columbia]
24%
Compania Minera
Cuzcatlan S.A. de C.V.
[Mexico]
San Jose Mine
0.002%
Fortuna Silver Mexico,
S.A. de C.V.
[Mexico]
GENERAL DEVELOPMENT OF THE BUSINESS
Three-Year History and Recent Developments
San Jose Mine, Mexico
Located in the state of Oaxaca in southern Mexico, the 100% owned San Jose property covers a high-grade silver-
gold bearing epithermal vein system.
Commercial production of the San Jose mine commenced on September 1, 2011 at an initial rate of 1,000 tpd. In
2012, San Jose completed its first full year of operation, producing 1,949,178 ounces of silver and 17,918 ounces of
gold. In 2013, the Company produced at San Jose 2.5 million ounces of silver and 19,031 ounces of gold, an
increase over 2012 of 30% and 6%, respectively. The increased production resulted from the ramp-up to 1,800 tpd
in the fourth quarter of 2013.
Cash cost per tonne of processed ore at San Jose for 2013 was $71.41, a decrease of 4% from 2012 and 3% higher
than forecast. The decrease resulted mainly from the ramp-up of production to 1,800 tpd in the fourth quarter of
2013. Cash cost per payable ounce of silver for 2013 was $6.53, net of by-product credits, compared to $3.76 in the
prior year, mainly due to lower gold credits related to lower gold prices.
In 2014, the Company produced at San Jose 4.4 million ounces of silver and 33,496 ounces of gold, an increase over
2013 of 74% and 76%, respectively. The increases are the result of higher throughput of 48% and of higher head
grade for silver and gold of 16% and 18%, respectively. The San Jose mine and processing plant were expanded to
2,000 tpd in April 2014. Compared to guidance for the year, silver and gold production were 10% and 9% higher,
respectively.
Cash cost per tonne of processed ore at San Jose for 2014 was $62.99/t, or 12% below the cost in the prior year due
mainly to higher throughput, a 4% devaluation of the peso, and lower mining cost related to support and preparation,
and below the annual guidance of $67.10/t. All-in sustaining cash cost per payable ounce of silver, net of by-
product credits, was $12.07 for 2014, below the annual guidance of $14.43.
-6-
Capital expenditures at San Jose were $29.0 million in 2014, in line with forecast. Main capital projects for 2014
included $12.3 million for tailings dam expansion and evaporation control, $6.0 million for brownfields exploration,
and $4.8 million for mine development.
In 2015, the Company produced at San Jose 4.9 million ounces of silver and 38,526 ounces of gold, an increase over
2014 of 12% and 15%, respectively. The increase in metal production is the result of 6% higher throughput; 4% and
6% higher head grades for silver and gold, respectively; and 2% higher metallurgical recovery for both silver and
gold. Annual average head grades for silver and gold were 234 g/t and 1.83 g/t or 9 percent and 10 percent above
plan.
Cash cost per tonne of processed ore at San Jose for 2015 was $58.83/t, or 7% below the cost in the prior year and
6% below the annual guidance of $62.70/t. The devaluation of the Mexican peso throughout the year had a positive
effect of $4.43/t on costs. Excluding this effect, cash cost was 1% above 2014. All-in sustaining cash cost per
payable ounce of silver, net of by-product credits for 2015, was $12.86 or 21% below the annual guidance of
$16.27/oz, as a result of lower unit costs and lower sustaining capital expenditures.
During 2016, the Company plans to process at San Jose 875,000 tonnes of ore averaging 230 g/t Ag and 1.65 g/t Au.
Capital investments for 2016 are estimated to be $46 million. Of this amount, the major investments are anticipated
to include $21.9 million for 3,000 tpd mill expansion; $4.5 million for dry stack tailings deposit (of which $1.0
million is related to the mill expansion), $7.0 million for mine development; and $8.2 million for brownfields
exploration.
The budget for the 2016 brownfields exploration program at the San Jose mine includes 22,000 meters of diamond
drilling and the development of a 1,500 meter underground exploration drift that will allow better access to test the
northern extension of the Trinidad North vein system. Exploration drilling is in progress at the Trinidad Central
zone in the San Jose Mine and at La Noria/San Antonio vein system, a parallel vein system located two kilometers
to the west of the San Jose Mine area.
Caylloma Mine, Peru
The Company owns a 100% interest in the Caylloma mine and related mining concessions located in southern Peru.
In 2013, the Company produced at Caylloma 2.1 million ounces of silver and 2,212 ounces of gold. Silver
production was 3% higher year over year in spite of 2% lower head grades, mainly due to improved metallurgical
recoveries of 82% versus 77% the previous year. Higher zinc head grades and recovery resulted in a 13% year over
year increase in zinc production, while 4% lower lead head grade, offset by 4% higher recovery resulted in a 1%
year over year reduction in lead production.
Cash cost per tonne of processed ore at Caylloma for 2013 was $91.23, an increase of 5% from 2012 and 1% higher
than forecast. The increase resulted mainly from higher community relations expense related to the completion of
Caylloma’s Mini Colliseum and higher distribution costs related to lower base metal concentrate grades. Cash cost
per payable ounce of silver for 2013 was $7.65, net of by-product credits, compared to $8.07 in the prior year.
Capital expenditures at Caylloma were $22.1 million in 2013, in line with forecast. Main capital projects for 2013
included $4.0 million for brownfields exploration, $5.4 million for mine camp, and $4.1 million for tailings dam
expansion. The new tailings facility was commissioned in January 2013.
In 2014, the Company produced at Caylloma 2.2 million ounces of silver and 1,820 ounces of gold. Silver
production was 5% above production in the prior year due to higher metallurgical recovery and slightly higher head
grade. Zinc production increased 9% as a result of higher head grade and higher metallurgical recoveries. Lead
production decreased 9% because of reduced head grade. Caylloma exceeded its annual production guidance of 2.0
million ounces of silver.
Cash cost per tonne at Caylloma for 2014 was $90.57 per tonne of processed ore, a decrease of 1% from the prior
year and 3% above annual guidance. All-in sustaining cash cost per payable ounce of silver, net of by-product
credits, at Caylloma for 2014 was $14.13, 17% below the annual guidance of $17.01.
-7-
Capital expenditures at Caylloma were $9.9 million in 2014, in line with forecast. Main capital projects for 2014
included $5.1 million for mine development, $4.0 million for equipment and infrastructure, and $0.8 million for
brownfields exploration.
In 2015, the Company produced at Caylloma 1.7 million ounces of silver and 1,163 ounces of gold. Silver
production was 23% below production in the prior year due to the decision to shift mining to base metal-rich zones
in the polymetallic Animas Vein. Mining at the high-grade Bateas Vein stopped in the fourth quarter of 2015.
Decrease in silver production was the result of lower production from the Bateas high-grade silver vein and from
Level 6 of the Animas Vein. Zinc and lead production increased 31% and 48%, respectively, year-over-year.
Caylloma’s silver production was 11% below the revised guidance of 1.9 million ounces.
Cash cost per tonne of processed ore at Caylloma for 2015 was $85.76/t, or 5% below the cost in the prior year and
5% below the annual guidance of $90.30/t, due to lower indirect costs related to headcount, lower distribution costs
related to zinc concentrate transport tariffs, and a 14% devaluation of the Peruvian Nuevo Sol. All-in sustaining
cash cost per payable ounce of silver, net of by-product credits, for 2015 was $13.56, above the annual guidance of
$12.78/oz.
During 2016, the Company plans to process at Caylloma 503,100 tonnes averaging 89 g/t silver, 4.08% Pb and
4.37% Zn. A 10% increase in mill throughput from 1,300 tpd to 1,430 tpd took effect in March. Capital
expenditures for 2016 are estimated to be $12.9 million. Of this amount, the major investments are anticipated to
include $6.4 million for mine development; $1.0 million for processing plant optimization; and $2.9 million for
brownfields exploration.
The budget for the 2016 brownfields exploration program at Caylloma includes 17,000 meters of diamond drilling.
Drilling will be focused on testing new exploration targets in the northern portion of the Caylloma District and in the
Pisacca prospect area located a short distance to the southwest of the processing plant, as well as further exploring
the northeastern extension of the Animas Vein.
Updated Reserve and Resource Estimates – Caylloma and San Jose Mines
The Company released Mineral Reserve and Mineral Resource estimates for Caylloma in March 2013 and for San
Jose in October 2013, as set forth in the Caylloma Report and the San Jose Report described below under
“Description of the Business - Material Mineral Properties”. Updated Mineral Reserve and Mineral Resource
estimates for San Jose as at June 30, 2014 were released on September 30, 2014; for both Caylloma and San Jose as
at December 31, 2014 were released in March 2015; and for both Caylloma and San Jose as at December 31, 2015
were released on March 24, 2016. A summary of the December 31, 2015 estimates is as follows:
Highlights of Reserve and Resource Update
• Combined Proven and Probable Reserves for Caylloma and San Jose are reported at 5.8 Mt containing 35.9
Moz silver and 229.2 koz gold, representing year-over-year decreases of 13 percent in contained silver
ounces and 9 percent in contained gold ounces
• Combined Inferred Resources for Caylloma and San Jose are reported at 10.0 Mt containing an estimated
69.3 Moz silver and 404.6 koz gold, reflecting year-over-year decreases of 10 percent in contained silver
ounces and 16 percent in contained gold ounces
• Proven and Probable Reserves for San Jose are reported at 3.8 Mt containing 28.2 Moz silver and 210 koz
gold. There is no variation for silver and a 4 percent decrease in contained gold ounces with respect to
2014.
• Proven and Probable Reserves for Caylloma are reported at 2 Mt containing 7.7 Moz silver. This represents
a year-over-year decrease of 41 percent in contained silver ounces.
-8-
Mineral Reserves - Proven and Probable
Property
Classification
Caylloma Mine,
Peru
San Jose Mine,
Mexico
Total
Proven
Probable
Proven + Probable
Proven
Probable
Proven + Probable
Proven + Probable
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
254
138
0.47
2.05
2.34
1,724
1,979
119
121
0.28
0.30
2.95
2.83
3.73
3.55
282
237
1.84
N/A
N/A
3,498
3,780
5,759
232
232
194
1.72
1.73
1.24
N/A
N/A
N/A
N/A
N/A
N/A
Mineral Resources - Measured and Indicated
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Caylloma Mine,
Peru
San Jose Mine,
Mexico
Measured
Indicated
Measured + Indicated
Measured
Indicated
Measured + Indicated
582
1,269
1,851
64
780
844
Total
Measured + Indicated
2,695
82
84
84
89
84
84
84
0.36
1.11
2.16
0.31
0.32
1.14
1.13
2.10
2.12
0.71
N/A
N/A
0.72
0.72
0.45
N/A
N/A
N/A
N/A
N/A
N/A
Contained Metal
Au
(koz)
Ag
(Moz)
1.1
6.6
7.7
2.1
26.0
28.2
35.9
3.8
15.4
19.3
16.7
193.3
209.9
229.2
Contained Metal
Au
(koz)
Ag
(Moz)
1.5
3.4
5.0
0.2
2.1
2.3
7.3
6.7
12.7
19.3
1.5
18.1
19.6
38.9
Mineral Resources – Inferred
Contained Metal
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Ag
(Moz)
Au
(koz)
Caylloma Mine,
Peru
San Jose Mine,
Mexico
Total
Inferred
Inferred
Inferred
3,392
132
0.59
2.20
3.30
6,561
9,953
261
217
1.61
N/A
N/A
1.26
N/A
N/A
14.3
55.0
69.3
64.7
339.9
404.6
Notes:
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 potential development of the
Mineral Resources or Mineral Reserves at Caylloma or San Jose.
5. Mineral Resources and Mineral Reserves estimated as of June 30, 2015 and reported as of December 31, 2015 taking into
account production-related depletion for the period through December 31, 2015
6. Mineral Reserves for San Jose are estimated using a break-even cut-off grade of 137 Ag Eq g/t based on assumed metal prices
of US$ 19/oz Ag and US$ 1,140/oz Au; estimated metallurgical recovery rates of 89% for Ag and 89% for Au and actual
operating costs incurred in period June 2014 through May 2015. Mineral Resources are estimated at a Ag Eq cut-off grade of
100 g/t, with Ag Eq in g/t = Ag (g/t) + Au (g/t)* ((US$1,140/US$19) * (89/89))
-9-
7. Mineral Reserves for Caylloma are estimated using break-even cut-off grades based on estimated NSR values using assumed
metal prices of US$19/oz Ag, US$1,140/oz Au, US$2,150/t Pb and US$2300/t Zn; metallurgical recovery rates of 84.5% for
Ag, 39.5% for Au, 92.6% for Pb and 89.9% for Zn; and actual operating costs incurred in period July 2014 through June 2015.
Caylloma Mineral Resource are reported based on NSR values using the same metal prices and metallurgical recovery rates as
detailed for Mineral Reserves; and an NSR cut-off grade of US$50/t for veins classified as wide (Animas, Animas NE, Nancy,
San Cristobal) and US$100/t for veins classified as narrow (all other veins)
8. Total may not add due to rounding procedures
9. N/A = Not Applicable
San Jose Mine, Mexico
As of December 31, 2015, the San Jose Mine has Proven and Probable Mineral Reserves of 3.8 Mt containing 28.2
Moz of silver and 210 koz of gold, in addition to Inferred Resources of 6.6 Mt containing a further 55 Moz of silver
and 340 koz of gold.
Year-over-year, Mineral Reserves remained constant in tonnes and in contained silver and decreased 4 percent in
contained gold after net changes resulting from production-related depletion and upgrades of new reserves through
infill drilling . Silver grades remained essentially flat at 232 g/t and gold grades decreased 5 percent to 1.73 g/t.
Infill drilling was successful in upgrading from Inferred Resources to new Mineral Reserves approximately 1.2 Mt
averaging 277 g/t Ag and 1.93 g/t Au reported for the Stockwork, Bonanza, and Trinidad veins.
Measured and Indicated Resources exclusive of Mineral Reserves decreased 15 percent year-over-year to
approximately 0.8 Mt due to improved conversion of resources to reserves.
Year-over-year, Inferred Resources decreased 7 percent and 15 percent in contained silver and gold ounces,
respectively. Silver grade remained flat and gold grade decreased by 8 percent. The net variation is primarily
explained by additions through exploration offset by reductions from upgrading of Inferred Resources by infill
drilling in the Trinidad North and Central Stockwork zones and geological reinterpretation of previously modeled
veins.
Brownfields exploration budget for 2016 at San Jose is $8.2 million, which includes 22,000 meters of diamond
drilling and the development of a 1,500 meter underground exploration drift that will allow better access to test the
northern extension of the Trinidad North vein system. Exploration drilling is in progress at the Trinidad Central zone
in the San Jose Mine and at the La Noria/San Antonio vein system, a parallel vein system located two kilometers to
the west of the San Jose Mine area. The company disclosed further details of San Jose’s brownfields exploration
program on December 16, 2015 (refer to “Fortuna provides year-end update for the San Jose Mine, Mexico”).
Caylloma Mine, Peru
As of December 31, 2015, the Caylloma Mine has Proven and Probable Mineral Reserves of 2.0 Mt containing 7.7
Moz of silver and 19.3 koz of gold, in addition to Inferred Resources of 3.4 Mt containing 14.3 Moz of silver and
64.7 koz of gold.
Mineral Reserves decreased 41 percent in contained silver ounces compared to 2014. The loss of ounces is
explained primarily by the update of geological models from June 2014, the net loss to mining related depletion,
higher cutoff and dilution applied to narrow veins, and changes to commercial terms. The loss in reserve tonnage is
lower than the silver loss, at 35 percent due to the gain in base metal credits from additions to reserves from base
metal rich zones. Silver grade decreased 9 percent to 121 g/t, lead grade increased 26 percent to 2.83 %, and zinc
grade increased 13 percent to 3.55 %.
Year-over-year, Measured and Indicated Resources, exclusive of Mineral Reserves, increased by 9 percent to 1.9 Mt
due to the negative impact on reserves of commercial terms and the geological reinterpretation of the ore deposit.
Inferred Resources decreased by 0.96 Mt or 22 percent to 3.4 Mt, silver grades remained flat, and lead and zinc
grades increased by 11 percent and 4 percent, respectively. The decrease in Inferred Resources is primarily due to
the upgrading of resources through infill drilling, and changes in the geological interpretation of the mineralized
zones.
-10-
Brownfields exploration budget for 2016 at the Caylloma Mine is $2.9 million, which includes 17,000 meters of
diamond drilling. Drilling will be focused on testing new exploration targets in the northern portion of the Caylloma
District and in the Pisacca prospect area located a short distance to the southwest of the plant as well as further
exploring the northeastern extension of the Animas Vein.
Qualified Persons
The Mineral Resource estimates have been prepared under the supervision of Eric Chapman, Mineral Resource
Manager of Fortuna Silver Mines Inc. The Mineral Reserve estimate and the Mineral Resource estimate exclusive
of Mineral Reserves were prepared under the supervision of Edwin Gutierrez, Technical Services Corporate
Manager for Fortuna Silver Mines Inc.
E. Chapman and E. Gutierrez are Qualified Persons as defined by the National Instrument 43-101. Mr. Gutierrez is
a Registered Member of the Society for Mining, Metallurgy and Exploration, Inc. (SME Registered Member
Number 4119110RM) and is responsible for ensuring that the information contained in this AIF relating to the
updated Mineral Resources and Mineral Reserves is an accurate summary of the original reports and data provided
to or developed by the Company.
Credit Facility
In April 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 (the “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 the Company’s
material subsidiaries 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 have been drawn from the Credit
Facility.
In March 2015, the Company entered into an amended and restated credit agreement with the Bank of Nova Scotia
for a $60 million senior secured financing (the “2015 Credit Facility”) consisting of a $40 million credit facility with
a 4 year term and a $20 million revolving credit facility for a two year period. The 2015 Credit Facility is secured
by a first ranking lien on the Company’s material subsidiaries and their assets, and bears interest and fees at
prevailing market rates. The Company drew down the $40 million credit facility on April 1, 2015.
The proceeds of the credit facility may be used for working capital requirements and general corporate purposes.
The facility is intended to complement Fortuna’s strong cash position and provide additional financing flexibility
during the expansion to 3,000 tpd of the San Jose mine.
Along with the $40 million term loan, the Company entered into an interest rate swap of $40 million and notional
amount of $40 million which expires at the same time as the maturity of the bank loan. The interest rate swap was
entered into to hedge the variable interest rate risk on the bank loan, and is designated as a cash flow hedge for
forecasted variable interest rate payments.
DESCRIPTION OF THE BUSINESS
General
Summary. The Company is engaged in silver and gold mining and related activities, including exploration,
extraction, and processing. The Company operates the Caylloma mine in Peru and the San Jose mine in Mexico.
The lead-silver, zinc, and gold-silver concentrates produced by the Company at its Caylloma mine in Peru and its
San Jose mine in Mexico are sold to international metals traders who in turn deliver the products to different clients
around the world. The material sources of revenue for 2015 and 2014 are as follows:
By type of concentrate:
• Lead-silver concentrate
• Zinc concentrate
• Gold-silver concentrate
By metal contained in concentrate:
• Silver
• Lead
• Zinc
• Gold
-11-
2014
28%
10%
62%
2014
64%
7%
10%
19%
2015
24%
11%
65%
2015
58%
9%
11%
22%
Production Methods. The method of production both at Caylloma and San Jose consists of underground mining
principally through cut and fill mechanized operations. Extracted ore is trucked to a conventional crushing, milling
and flotation processing plant which consists of zinc, and lead-silver flotation circuits for Caylloma, and a gold-
silver circuit for San Jose.
Specialized Skill and Knowledge. All aspects of the Company’s business require specialized skills and knowledge.
Such skills and knowledge include the areas of geology, mining, metallurgy, engineering, environment issues,
permitting, social issues, and accounting. While competition in the resource mining industry can make it difficult to
locate and retain competent employees in such fields, the Company has been successful in finding and retaining
personnel for the majority of its key processes. Management considers training and re-training of its staff to be a
priority.
Competitive Conditions. The Company competes with other mining companies, some of which have greater
financial resources and technical facilities, for the acquisition of mineral property interests, as well as for the
recruitment and retention of qualified employees.
Environmental Protection. The Company is currently in compliance with all material environmental regulations
applicable to its exploration, development, construction and operating activities. The financial and operational
effects of environmental protection requirements on the Company’s capital expenditures, earnings, and competitive
position during the fiscal year ended December 31, 2015 were not material. The Company has recorded in its
financial statements for the year 2015 a provision for decommissioning and restoration liabilities which reflects
future environmental obligations associated with the Caylloma and San Jose mine closure plans.
Employees. The Company and its subsidiaries have 686 direct employees and 1,182 indirect employees through
contractors.
Foreign Operations. The Company’s material mineral resource properties are located in Peru and Mexico, each of
which has a stable government, and a mature mining industry and regulatory environment.
Health and Safety, Social and Environmental Policies. The Company is committed to maintaining the health and
safety of its personnel by minimizing hazards and providing training and safe equipment. A strong safety culture is
encouraged so that all employees are empowered to report and address safety issues.
The Company has built strong relationships with the communities in which it operates, and is dedicated to
innovative, sustainable projects and partnerships that build company engagement in local communities while
respecting their values, customs and traditions.
The Company is committed to complying in all material respects with all environmental laws and regulations
applicable to its activities. It interacts proactively with authorities and communicates openly about its activities.
The Company works directly and collaboratively with local communities to protect and preserve the environment.
-12-
Risk Factors
The Company’s ability to generate revenues and profits from its natural resource properties is subject to a number of
risks and uncertainties including, without limitation, the following:
Risks Related to the Caylloma and San Jose Mines
Operating hazards and risks. Mining operations generally involve a high degree of risk, which even a combination
of experience, knowledge and careful evaluation may not be able to overcome. Hazards such as unusual or
unexpected formations and other conditions can occur. Operations in which the Company has a direct or indirect
interest will be subject to all the hazards and risks normally incidental to exploration, development and production
of precious and base metals, any of which could result in work stoppages, damage to or destruction of mines and
other producing facilities, damage to life and property, environmental damage and possible legal liability for any or
all damages. The Company may become subject to liability for pollution, cave-ins or hazards against which it
cannot insure or against which it may elect not to insure. Any compensation for such liabilities may have a material,
adverse effect on the Company’s financial position.
Concentrate treatment charges and transportation costs. The Company has entered into agreements to sell its
concentrate production from the Caylloma and San Jose mines for 2016. Smelting and refining rates are similar to
contract rates established for 2015. There is no assurance that the Company will be able to enter into smelting and
refining contracts at similar competitive terms beyond 2016. The cost of transporting concentrate from the Mines to
the smelters is dependent on, among other things, the concentrate destination. Transportation related costs have
been volatile over the last several years and could continue to be volatile due to a number of factors, including
changes in the price of oil, or a shortage in the number of vessels available to ship concentrate to smelters. Increases
in these rates would have an adverse impact on the Company’s results of operations and financial condition.
Risks Relating to the Company
Capital and operating costs, production schedules, and economic returns. The Company’s expected operating
costs and expenditures, production schedules, economic returns and other projections from a mining project which
are contained in this document and in any technical reports, scoping studies, pre-feasibility studies and feasibility
studies prepared for or by the Company are based on assumed or estimated future metals prices, cut-off grades,
operating costs, capital costs, and expenditures and other factors any of which may prove to be inaccurate.
Therefore, feasibility studies and other studies and reports may prove to be unreliable.
The Company’s operating costs are affected by the cost of commodities and goods such as steel, cement, explosives,
fuel, electrical power and supplies, including reagents. Management prepares its cost and production guidance and
other forecasts based on its review of current and estimated future costs, and assumes that the materials and supplies
required for operations will be available for purchase. As the Company relies on certain third-party suppliers and
contractors, these factors can be outside our control and an increase in the costs of, or a lack of availability of,
commodities and goods may have an adverse impact on the Company’s financial condition.
General economic conditions. Turmoil in global financial markets in recent years has had a profound impact on the
global economy. Many industries, including the precious and base metals mining industry, have been impacted by
these market conditions. Some of the key impacts have included contraction in credit markets resulting in a
widening of credit risk, devaluations and high volatility in global equity, commodity, foreign exchange and precious
metal markets, and a lack of market liquidity. The sovereign debt crisis in Europe and the recent economic
slowdown in China have been some of the most visible risks to world financial stability. A continued or worsened
slowdown in economic conditions, including but not limited to, consumer spending, employment rates, business
conditions, inflation, fuel and energy costs, consumer debt levels, lack of available credit, the state of the financial
markets, interest rates, and tax rates may adversely affect the Company’s growth and profitability. Specifically:
• Under a worst case scenario a new global credit/liquidity crisis could impact the cost and availability of
•
•
financing and the Company’s overall market liquidity;
the volatility of metal prices could impact the Company’s revenues, profits, losses and cash flow;
volatile energy prices, commodity and consumables prices and currency exchange rates could impact the
Company’s production costs; and
-13-
•
the devaluation and volatility of global stock markets, which are not related to the Company’s operations or
assets, could impact the valuation of the Company’s equity and other securities.
These factors could have a material adverse effect on the Company’s financial condition and results of operations.
Competition. The mining industry is intensely competitive in all of its phases, and such competition could adversely
affect the Company’s ability to acquire suitable resource properties in the future.
Substantial reliance on the Caylloma and San Jose Mines. All of the Company’s revenues were generated by the
Caylloma mine until September 2011 when commercial production commenced at the San Jose mine. For 2016, the
Company anticipates that all of its revenue will come from the Caylloma and San Jose mines. Unless the Company
develops or acquires additional properties or projects, the Company will remain largely dependent upon the
operation of the Caylloma and San Jose mines for its future revenue and profits, if any. If for any reason production
at either mine was reduced or stopped, the Company’s revenues and profits would decrease significantly.
Additional businesses and assets may not be successfully integrated. The Company undertakes evaluations of
opportunities to acquire additional mining assets and businesses. Any acquisitions may be significant in size, may
change the scale of the Company’s business, may require additional capital, and/or may expose the Company to new
geographic, political, operating, financial and geological risks. The Company’s success in its acquisition activities
depends on its ability to identify suitable acquisition candidates, acquire them on acceptable terms, and integrate
their operations successfully. Any acquisitions would be accompanied by risks such as a significant decline in the
relevant metal price after the Company commits to complete an acquisition on certain terms; the quality of the
mineral deposit acquired proving to be lower than expected; the difficulty of assimilating the operations and
personnel of any acquired companies; the potential disruption of the Company’s ongoing business; the inability of
management to realize anticipated synergies and maximize the financial and strategic position of the Company; the
failure to maintain uniform standards, controls, procedures and policies; the impairment of relationships with
employees, customers and contractors as a result of any integration of new management personnel, and the potential
unknown liabilities associated with acquired assets and businesses. There can be no assurance that any assets or
business acquired will prove to be profitable or that the Company will be able to integrate the required businesses
successfully, which could slow the Company’s rate of expansion and the Company’s business, results of operations
and financial condition could suffer.
Fortuna may need additional capital to finance other acquisitions. If the Company obtains further debt financing, it
will be exposed to the risk of leverage and its operations could become subject to restrictive loan and lease
covenants and undertakings. If the Company obtains equity financing, existing shareholders may suffer dilution.
There can be no assurance that the Company would be successful in overcoming these risks or any other problems
encountered in connection with such financings.
Political and country risk. The Company conducts, or will conduct, exploration, development and production
activity in a number of countries, namely Peru and Mexico and potentially others. The State of Oaxaca in Mexico
has a history of social conflicts and political agitation which can lead to public demonstrations and blockades that
can from time to time affect the Company’s operations. The Company is not able to determine the impact of
potential political, social, economic or other risks on its future financial position, which include:
• Cancellation or renegotiation of contracts;
• Changes in foreign laws or regulations;
• Changes in tax laws;
• Royalty and tax increases or claims by governmental entities;
• Retroactive tax or royalty claims;
• Expropriation or nationalization of property;
•
Inflation of costs that is not compensated by a currency devaluation;
• Restrictions on the remittance of dividend and interest payments offshore;
• Environmental controls and permitting;
• Opposition from local community members or non-governmental organizations;
• Civil strife, acts of war, guerrilla activities, insurrection and terrorism, and
• Other risks arising out of foreign sovereignty over the areas in which the Company’s operations are
conducted.
-14-
Such risks could potentially arise in any country in which the Company operates. Furthermore, in the event of a
dispute arising from such activities, the Company may be subject to the exclusive jurisdiction of courts outside
North America or may not be successful in subjecting persons to the jurisdiction of the courts in North America,
which could adversely affect the outcome of a dispute.
Metal prices and marketability. The marketability of any metals acquired or discovered may be affected by
numerous factors which are beyond the Company’s control and which cannot be accurately foreseen or predicted,
such as market fluctuations, the global marketing conditions for precious and base metals, the proximity and
capacity of milling facilities, metal markets and processing equipment, and such other factors as government
regulations, including regulations relating to royalties, allowable production, importing and exporting metals and
environmental protection.
The price of the common shares of the Company, the Company’s financial results and exploration, development and
mining activities may in the future be significantly adversely affected by declines in the price of silver, gold or other
metals. The price of silver, gold or other metals fluctuates widely and is affected by numerous factors beyond the
Company’s control such as the sale or purchase of metals by various central banks and financial institutions, interest
rates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign
currencies, global and regional supply and demand, the political and economic conditions of major metal-producing
countries throughout the world, and the cost of substitutes, inventory levels and carrying charges. Future serious
price declines in the market value of silver, gold or other metals could cause continued development of and
commercial production from the Company’s properties to be impracticable. Depending on the price of silver, gold
and other metals, cash flow from mining operations may not be sufficient and the Company could be forced to
discontinue production and may lose its interest in, or may be forced to sell, some of its properties. Future
production from the Company’s mining properties is dependent upon the prices of silver, gold and other metals
being adequate to make these properties economic.
In addition to adversely affecting the Company’s reserve estimates and its financial condition, declining metal prices
can impact operations by requiring a reassessment of the feasibility of a particular project. Such a reassessment may
be the result of a management decision or may be required under financing arrangements related to a particular
project. Even if the project is ultimately determined to be economically viable, the need to conduct such a
reassessment may cause substantial delays or may interrupt operations until the reassessment can be completed.
Commodity forward and option contracts for base metals production. From time to time the Company may enter
into agreements to receive fixed prices on any metal production to offset the risk of revenue losses if commodity
prices decline; however, if commodity prices increase beyond the levels set in such agreements, the Company will
not benefit from such increases.
Government regulation. Operations, development and exploration on the Company’s properties are affected to
varying degrees by political stability and government regulations relating to such matters as environmental
protection, health, safety and labour, mining law reform, restrictions on production, price controls, tax increases,
maintenance of claims, tenure, and expropriation of property. There is no assurance that future changes in such
regulations, if any, will not adversely affect the Company’s operations.
The activities of the Company require licenses and permits from various governmental authorities. While the
Company currently has been granted the requisite licenses and permits to enable it to carry on its existing business
and operations, there can be no assurance that the Company will be able to obtain all the necessary licenses and
permits which may be required to carry out exploration, development and mining operations for its projects. In rare
circumstances, the Company might find itself in situations where the state of compliance with regulation and permits
can be subject to interpretation and challenge from authorities that could carry risk of fines or temporary stoppage.
Environmental matters. All phases of the Company’s operations are subject to environmental regulation in the
various jurisdictions in which it operates. Environmental legislation is evolving in a manner which will require
stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental
assessments of proposed projects and a heightened degree of responsibility for companies and their officers,
directors and employees. There is no assurance that future changes in environmental regulation, if any, will not
adversely affect the Company’s operations. Environmental hazards may exist on the Company’s properties which
-15-
are unknown to the Company at present which have been caused by previous or existing owners or operators of the
properties.
Dependence on key personnel. The Company is dependent on a number of key management and employee
personnel. The Company’s ability to manage its exploration, development, construction and operating activities,
and hence its success, will depend in large part on the ability to retain current personnel and attract and retain new
personnel, including management, technical and unskilled employees. The loss of the services of one or more key
management personnel, as well as a prolonged labor disruption, could have a material adverse effect on the
Company’s ability to successfully manage and expand its affairs.
The Company’s ability to recruit and assimilate new personnel will be critical to its performance. The Company
will be required to recruit additional personnel and to train, motivate and manage its employees. The international
mining industry is very active and the Company is facing increased competition for personnel in all disciplines and
areas of operation, including geology and project management, and there can be no assurance that it will be able to
retain current personnel and attract and retain new personnel.
Director and officer conflicts of interest. Certain of the directors and officers of the Company also serve as
directors and/or officers of other companies involved in natural resource exploration and development and
consequently there exists the possibility for such directors and officers to be in a position of conflict. In such case,
the Company’s directors and officers comply with conflict of interest provisions in Canadian corporate law,
including relevant securities regulatory instruments, in order to ensure that they exercise independent judgment in
considering transactions and agreements in respect of which a director or officer has a material interest.
Title to properties. Although the Company has or will receive title opinions for any properties in which it has a
material interest, there is no guarantee that title to such properties will not be challenged or impugned. The
Company has not conducted surveys of the claims in which it holds direct or indirect interests and, therefore the
precise area and location of the properties may be in doubt. The Company’s properties may be subject to prior
unregistered agreements or transfers or native land claims and title may be affected by unidentified or unknown
defects. The Company has conducted as thorough investigation as possible on the title of properties that it has
acquired or will be acquiring to be certain that there are no other claims or agreements that could affect its title to the
properties.
Dilution from further equity financing. If the Company raises additional funding by issuing equity securities, such
financing may substantially dilute the interests of existing shareholders of the Company and reduce the value of their
investment.
Foreign currency. The Company’s activities and operations in Mexico and Peru make it subject to foreign currency
fluctuations. The Company’s operating expenses are primarily incurred in Mexican pesos and Peruvian Sol, and the
fluctuation of the US dollar in relation to these currencies will consequently have an impact upon the profitability of
the Company and may also affect the value of the Company’s assets and the amount of shareholders’ equity. The
Company has not entered into any agreements or purchased any instruments to hedge possible currency risks.
Exploration and development, and infrastructure. Development of the Company’s non-producing properties will
only follow upon obtaining satisfactory exploration results that confirm economically recoverable and saleable
volumes of minerals and metal. The business of mineral exploration and development is speculative in nature and
involve a high degree of risk, as few properties which are explored are ultimately developed into producing mines.
There is no assurance that the Company’s mineral exploration and development activities will result in any
discoveries of reserves of commercial ore. The long-term profitability of the Company’s operations will be in part
directly related to the cost and success of its exploration programs, which may be affected by a number of factors.
Substantial expenditures are required to establish resources and reserves through drilling and development and for
mining and processing facilities and infrastructure. Although substantial benefits may be derived from the discovery
of a major mineralized deposit, no assurance can be given that minerals will be discovered in sufficient quantities to
justify commercial operations or that the funds required for development can be obtained on a timely basis.
Economic feasibility of a project is based on several other factors including anticipated metallurgical recoveries,
environmental considerations and permitting, future metal prices, and timely completion of the development plan.
-16-
Completion of the development of the Company’s advanced projects is subject to various requirements, including
the availability and timing of acceptable arrangements for power, water, transportation, access and facilities. The
lack of, or delay in, availability of any one or more of these items could prevent or delay development of the
Company’s advanced projects. There can be no assurance that adequate infrastructure, including road access, will
be built, that it will be built in a timely manner or that the cost of such infrastructure will be reasonable or that it will
sufficiently satisfy the requirements of the advanced projects. As well, accidents or sabotage could affect the
provision or maintenance of adequate infrastructure.
The Company’s operations require water, and its San Jose mine is located in a region where water is scarce. While
the Company believes it holds sufficient water rights to support its current operations, future developments could
limit the amount of water available to the Company. New water development projects, or climatic conditions such
as extended drought, could adversely affect the Company. There can be no guarantee that the Company will be
successful in maintaining adequate supplies of water for its operations.
Insurance. Where practical, a reasonable amount of insurance is maintained against risks in the Company’s
operations, but coverage has exclusions and limitations. There is no assurance that the Company’s insurance will be
adequate to cover all liabilities or that it will continue to be available and at terms that are economically acceptable.
Losses from un-insured or under-insured events may cause the Company to incur significant costs that could have a
material adverse effect on its financial performance.
Estimation of mineral resources and reserves and precious metal recoveries. There is a degree of uncertainty
attributable to the estimation of resources and reserves and to expected mineral grades. Mineral resources and
mineral reserves may require revision based on actual production experience. Market fluctuations in the price of
metals, as well as increased production costs and reduced recovery rates, may render certain mineral reserves
uneconomic and may ultimately result in a restatement of mineral resources and/or reserves. Short term operating
factors relating to the mineral resources and reserves, such as the need for sequential development of ore bodies may
adversely affect the Company’s profitability in any accounting period.
Reclamation. There is a risk that monies allotted for land reclamation may not be sufficient to cover all risks, due to
changes in the nature of the waste rock or tailings and/or revisions to government regulations. Therefore, additional
funds, or reclamation bonds or other forms of financial assurance may be required over the tenure of the project to
cover potential risks. These additional costs may have material adverse impact on the financial condition and results
of the Company.
Uncertainty of funding. The Company’s operating cash flow from the Caylloma and San Jose mines may not be
sufficient to cover the current costs of exploration and development of the Company’s other, non-producing
properties. Exploration and development activities may be dependent upon the Company’s ability to obtain
financing through joint venturing, equity or debt financing or other means, and although the Company has been
successful in the past in obtaining financing through the sale of equity securities, there can be no assurance that the
Company will be able to obtain additional financing or that the terms of such financing will be favorable. Failure to
obtain such additional financing could result in delay or indefinite postponement of further exploration and
development of some of its projects.
Uncertainty of dividends on its common shares. The Company has paid no dividends on its common shares since
incorporation and does not anticipate paying dividends in the immediate future. Payment of any future dividends
will be at the discretion of the Company’s Board of Directors (the “Board”) after taking into account many factors,
including the Company’s operating results, financial condition and current and anticipated cash needs.
Legal Proceedings. Due to the nature of its business, the Company may be subject to numerous regulatory
investigations, claims, lawsuits and other proceedings in the ordinary course of its business. The results of these
legal proceedings cannot be predicted with certainty due to the uncertainty inherent in litigation, including the
effects of discovery of new evidence or advancement of new legal theories, the difficulty of predicting decisions of
judges and juries and the possibility that decisions may be reversed on appeal. There can be no assurances that these
matters will not have a material adverse effect on the Company’s business.
U.S. investors may have difficulty enforcing U.S. judgments against the Company. The Company is incorporated
under the laws of British Columbia, Canada and the majority of the Company’s directors and officers are not
-17-
residents of the U.S. Consequently, it may be difficult for U.S. investors to effect service of process within the
United States upon the Company or upon such persons who are not residents of the United States, or to realize in the
United States upon judgments of U.S. courts predicated upon civil liabilities under U.S. securities laws. A judgment
of a U.S. court predicated solely upon such civil liabilities may be enforceable in Canada by a Canadian court if the
U.S. court in which the judgment was obtained had jurisdiction, as determined by the Canadian court, in the matter.
There is substantial doubt whether an original action could be brought successfully in Canada against any of such
persons or the Company predicated solely upon such civil liabilities.
Material Mineral Properties
The Company has two material mineral projects, described below.
Caylloma Mine, Peru
The Company owns a 100% interest in the Caylloma mine, Peru.
The following is the Summary from the technical report (the “Caylloma Report”) entitled “Fortuna Silver Mines
Inc.: Caylloma Property, Caylloma District, Peru” dated as of March 22, 2013, as amended April 15, 2013,
prepared by Eric N. Chapman and Thomas Kelly. The full text of the Caylloma Report is available for viewing on
SEDAR at www.sedar.com and is incorporated by reference in this AIF. Defined terms and abbreviations used
herein and not otherwise defined shall have the meanings ascribed to such terms in the Caylloma Report.
Summary
This Technical Report refers to the Caylloma property, an operating underground mine located in the Caylloma
Province, Peru. Since June 2005, the Caylloma property has been 100 % owned by Minera Bateas S.A.C. (Minera
Bateas), a Peruvian subsidiary of Fortuna Silver Mines Inc. (Fortuna).
The Caylloma property is located in the Caylloma Mining District, 225 kilometers north-northwest of Arequipa,
Peru. The property is within the historical mining district of Caylloma, northwest of the Caylloma caldera complex
and southwest of the Chonta caldera complex. Host rocks at the Caylloma property are volcanic in nature, belonging
to the Tacaza Group. Mineralization is in the form of low to intermediate sulfidation epithermal vein systems.
Epithermal veins at the Caylloma property are characterized by minerals such as pyrite, sphalerite, galena,
chalcopyrite, marcasite, native gold, stibnite, argentopyrite, and silver-bearing sulfosalts (tetrahedrite, polybasite,
pyrargyrite, stephanite, stromeyerite, jalpite, miargyrite and bournonite). These are accompanied by gangue
minerals, such as quartz, rhodonite, rhodochrosite, johannsenite (manganese-pyroxene) and calcite.
There are two different types of mineralization at Caylloma; the first is comprised of silver-rich veins with low
concentrations of base metals and includes the Bateas, Bateas Techo, La Plata, Cimoide La Plata, San Cristóbal, San
Pedro, San Carlos, Paralela, and Ramal Paralela veins. The second type of vein is polymetallic in nature with
elevated lead, zinc, copper, silver and gold grades and includes the Animas, Animas NE, Santa Catalina, Soledad,
Silvia, Pilar, Patricia, and Nancy veins.
Underground operations are presently focused on mining the Animas and Bateas veins. Exploration in 2012 focused
on the expansion and delineation of the Animas and Animas NE veins as well as the exploration of the recently
discovered Nancy vein.
The 2012 Mineral Resource update has relied on channel and drill hole sample information obtained by Minera
Bateas since 2005. Mineralized domains identifying potentially economically extractable material were modeled for
each vein and used to code drill holes and channel samples for geostatistical analysis, block modeling and grade
interpolation by ordinary kriging or inverse distance weighting.
Mineral Resource and Mineral Reserve estimates for the Caylloma property are reported as of December 31, 2012
and detailed in Table 1.1 and Table 1.2.
-18-
Economic values (NSR) for each mining block take into account the commercial terms of 2012, the average
metallurgical recovery, the average grade in concentrate and long term projected metal prices. Mineral Reserves
have been reported above a break-even cut-off value calculated for each vein, based on NSR values and operating
costs. Mineral Resources have been reported above a US$30/t cut-off value based on NSR values.
Mineral Resources are categorized as Measured, Indicated and Inferred. The criteria used for classification includes,
the number of samples, spatial distribution, distance to block centroid, kriging efficiency (KE) and slope of
regression (ZZ).
Mineral Reserve estimates have considered only Measured and Indicated Mineral Resources as only these categories
have sufficient geological confidence to be considered Mineral Reserves (CIM, 2010). Subject to the application of
certain economic and mining-related qualifying factors, Measured Resources may become Proven Reserves and
Indicated Resources may become Probable Reserves.
Table 1.1 Mineral Reserves as of December 31, 2012
Vein type
Category
Silver Veins
Polymetallic
Veins
Combined-All
Veins
Proven
Probable
Proven +Probable
Proven
Probable
Proven +Probable
Proven
Probable
Proven +Probable
Tonnes
(000)
11
246
257
1,242
2,809
4,052
1,253
3,055
4,308
Ag (g/t) Au (g/t) Pb (%) Zn (%)
872
386
407
92
121
112
99
142
130
0.06
0.96
0.93
0.33
0.33
0.33
0.33
0.38
0.37
0.43
0.31
0.31
1.48
1.66
1.60
1.47
1.55
1.52
0.64
0.51
0.51
2.20
2.27
2.25
2.19
2.13
2.15
Contained Metal
Au
(koz)
Ag
(Moz)
0.3
3.1
3.4
3.7
10.9
14.6
4.0
14.0
17.9
0.0
7.6
7.7
13.2
30.2
43.4
13.2
37.8
51.1
Table 1.2 Mineral Resources as of December 31, 2012
Category
Measured
Indicated
Measured + Indicated
Inferred
Notes
Tonnes
(000)
431
1,170
1,601
6,633
Ag (g/t) Au (g/t) Pb (%) Zn (%)
Contained Metal
Ag
(Moz)
Ag (Moz)
72
82
79
101
0.30
0.34
0.33
0.27
0.88
0.75
0.79
1.84
1.53
1.40
1.43
2.58
1.0
3.1
4.1
21.5
4.2
12.8
17.0
58.5
• Mineral Reserves and Mineral Resources are as defined by CIM Definition Standards on Mineral
Resources and Mineral Reserves
• Mineral Resources are exclusive of Mineral Reserves
• Mineral Resources which are not Mineral Reserves do not have demonstrated economic viability
• 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.
• Mineral Resources and Mineral Reserves are estimated as of June 30, 2012 and reported as of December
31, 2012 taking into account production-related depletion for the period of July 1, 2012 through December
31, 2012 with the exception of the Animas and Animas NE veins which were re-estimated using all
exploration drilling information as of December 31, 2012
• Mineral Reserves are reported above a NSR breakeven cut-off of US$74.69/t for Animas, Animas NE, and
San Cristóbal; US$226.77/t for Bateas, Cimoide La Plata, and La Plata; US$138.34/t for Soledad, Silvia,
and Santa Catalina
-19-
• Mineral Resources are reported above a NSR cut-off of US$30/t
• Metal prices used in the NSR evaluation for Mineral Reserves are US$29.36/oz for silver, US$1,544/oz for
gold, US$2,245/t for lead and US$2,139/t for zinc
• Metal prices used in the NSR evaluation for Mineral Resources are US$25.14/oz for silver,
US$1,391.63/oz for gold, US$2,116/t for lead and US$2,006/t for zinc
• Metallurgical recovery values used in the NSR evaluation of sulfides are 82 % for silver, 45 % for gold, 93
% for lead, and 88 % for zinc; and of oxides are 64 % for silver, 45 % for gold, 46 % for lead, and 30 % for
zinc
• Operating costs were estimated based on 2012 actual costs
• Tonnes are rounded to the nearest thousand
• The quantity and grade of the Inferred Resources reported in this estimation are conceptual in nature, and it
is uncertain if further exploration will result in upgrading of Inferred Resources to Indicated or Measured
Resource categories
• Totals may not add due to rounding
Minera Bateas continues to successfully manage the operation, mining 462,000 t of ore from underground to
produce 2.0 Moz of silver, 2.8 koz of gold, 17.9 Mlbs of lead, and 22.4 Mlbs of zinc in 2012 while continuing to
improve the mine infrastructure.
Fortuna believes there is good potential for a significant increase of the Mineral Resources at the Caylloma property
particularly from the continuity of the current veins in operation as well as from the discovery of new veins. During
2012 important exploration projects were developed and new exploration targets were identified. Fortuna is
committed in continuing its intensive exploration program, budgeting US$ 6.7 million to continue developing
ongoing exploration projects over identified structures as well as the discovery of new targets. In addition to this
US$ 4 million has been budgeted for work designed to upgrade Inferred Resources.
The construction of the first stage of the new tailings facility (N° 3) with 15 years life at a 1,300 tpd design capacity,
as well as the granting of the operation permit by the Ministry of Energy and Mines in December 2012, has been a
major milestone for Minera Bateas in order to assure available tailings disposal capacity for the coming years.
The mining operation has been developed under strict compliance of norms and permits required by public
institutions associated with the mining sector. Furthermore, all work follows quality and safety international norms
as set out in ISO 14001 and OHSAS 18000.
Minera Bateas continues developing sustainable programs to benefit the local communities including educational,
nutritional and economical programs. The socio–environmental responsibilities of these programs contribute toward
establishing a good relationship between the company and local communities.
This Technical Report represents the most accurate interpretation of the Mineral Reserve and Mineral Resource
available at the effective date of this report. The conversion of Mineral Resources to Mineral Reserve was made
using industry-recognized methods, actual operational costs, capital costs, and plant performance data. Thus, it is
considered to be representative of actual and future operational conditions.
San Jose Mine, Mexico
The Company owns a 100% interest in the San Jose mine, Mexico.
The following is the Summary from the technical report (the “San Jose Report”) entitled “Fortuna Silver Mines
Inc.: San Jose Property, Oaxaca, México” dated as of November 22, 2013 prepared by Eric N. Chapman and
Thomas Kelly. The full text of the San Jose Report is available for viewing on SEDAR at www.sedar.com and is
incorporated by reference in this AIF. Defined terms and abbreviations used herein and not otherwise defined shall
have the meanings ascribed to such terms in the San Jose Report.
-20-
Summary
This Technical Report has been prepared by Fortuna Silver Mines Inc. (Fortuna) in accordance with the disclosure
requirements of Canadian National Instrument 43-101 (NI 43-101) to disclose recent information about the San Jose
operation.
The San Jose mine is located in the central portion of the state of Oaxaca, Mexico. The project site is 47 km by road
south of the city of Oaxaca and 0.8 km east of federal highway 175, the major highway between Oaxaca and Puerto
Angel on the Pacific coast. The village of San José del Progreso is located 2 km to the southeast of the project site.
The San Jose mine is operated by Compania Minera Cuzcatlan S.A. de C.V., a Mexican subsidiary 100 percent
owned by Fortuna.
The San Jose Mine area is underlain by a thick sequence of sub-horizontal andesitic to dacitic volcanic and
volcaniclastic rocks of presumed Paleogene age. These units have been significantly displaced along major north-
and northwest-trending extensional fault systems with the precious metal mineralization being hosted in
hydrothermal breccias, crackle breccias, and sheeted and stockwork-like zones of quartz/carbonate veins emplaced
within zones of high paleopermeability associated with the extensional structures.
The mineralized structural corridor extends for more than 3 km in a north-south direction and has been subdivided
into the Trinidad deposit area and the San Ignacio area. The Mineral Resource and Mineral Reserve estimates
discussed in this Technical Report are located in the Trinidad deposit area.
The major mineralized structures or vein systems recognized in the Trinidad deposit area are the Trinidad and
Bonanza vein systems. In addition to the major veins, secondary veins and zones of sheeted and stockworked quartz-
carbonate veins are present between the Trinidad and Bonanza systems and locally in the hanging wall adjacent to
the Bonanza vein system.
In the second half of 2012 and first half of 2013 an aggressive program of infill (delineation) drilling and exploration
drilling was executed to define and expand the resources and reserves of the Trinidad Deposit.
Infill drilling targeted a Stockwork domain located between the Trinidad and Bonanza veins below the 1300 level.
The new drilling results provided closer spaced intercepts enabling the geological interpretation to be refined and
resulted in the upgrading of 1.3 Mt from an Inferred to an Indicated category with respect to the previous estimate
reported as of December 31, 2012 (Fortuna, 2013b). The stockwork mineralization is characterized by moderate to
high-grade material present over significant widths (averaging 27 m).
Exploration drilling targeted the Trinidad North discovery of the Trinidad Deposit with the majority of drilling being
north of 1847200N and below 1200 m elevation. The drilling identified the continuation of the Bonanza and
Trinidad veins, encountering numerous high-grade intercepts over significant intervals (Fortuna, 2013c; Fortuna,
2013d; Fortuna, 2013e; Fortuna, 2013g). The exploration drilling discovered 1.9 Mt of Inferred Resources averaging
269 g/t Ag and 1.67 g/t Au at a 70 g/t Ag Eq cut-off grade contributing 21.8 million silver equivalent ounces to the
resource inventory.
To-date, drilling has defined the Trinidad and Bonanza vein systems over a strike length of approximately 1,000
meters and to depths exceeding 600 meters from the surface. The deposit remains open to the north and at depth.
Mineral Reserves and Mineral Resources as of July 4, 2013 are reported in Table 1.1 and Table 1.2 respectively.
-21-
Table 1.1 Mineral Reserves as of July 4, 2013
Classification
Proven
Probable
Proven + Probable
Tonnes
(000)
314
3,618
3,933
Ag (g/t)
Au (g/t)
Contained Metal
Ag (Moz) Au (koz)
203
196
196
2.03
1.67
1.70
2.0
22.8
24.8
20.5
194.6
215.1
Table 1.2 Mineral Resources as of July 4, 2013
Classification
Measured
Indicated
Measured
Indicated
Inferred
Notes:
Tonnes
(000)
Ag (g/t)
Au (g/t)
Contained Metal
Ag (Moz) Au (koz)
44
844
888
+
67
74
73
5,422
202
0.55
0.64
0.64
1.56
0.1
2.0
2.1
0.8
17.4
18.2
35.3
272.3
• Mineral Reserves and Mineral Resources are as defined by CIM Definition Standards on Mineral
Resources and Mineral Reserves.
• Mineral Resources are exclusive of Mineral Reserves.
• Mineral Resources which are not Mineral Reserves do not have demonstrated economic viability.
• 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 San Jose.
• Mineral Resources and Mineral Reserves are estimated and reported as of July 4, 2013.
• Mineral Reserves 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. Mineral Resources are estimated at a Ag Equivalent cut-off grade of
70 g/t, with Ag Eq in g/t = Ag (g/t) + Au (g/t)* ((US$1,391.63/US$25.14)*(89/89)).
• Mining, processing and administrative costs were estimated based on first half of 2013 actual costs.
• Totals may not add due to rounding.
Mineral Resource estimation involved the usage of drill hole and channel samples in conjunction with underground
mapping to construct three dimensional wireframes to define individual vein structures. Samples were selected
inside these wireframes, coded, composited and top cuts applied if applicable. Boundaries were treated as hard with
statistical and geostatistical analysis conducted on composites identified in individual veins. Silver and gold grades
were estimated into a geological block model representing each vein. Primary veins including Bonanza, Trinidad,
Fortuna and the Stockwork Zone were estimated by Sequential Gaussian Simulation. Secondary veins were
estimated by inverse power of distance. Estimated grades were validated globally, locally, and visually prior to
tabulation of the Mineral Resources.
Mineral Reserve estimates have considered only Measured and Indicated Mineral Resources as only these categories
have sufficient geological confidence to be considered Mineral Reserves (CIM, 2010). Subject to the application of
certain economic and mining-related qualifying factors, Measured Resources may become Proven Reserves and
Indicated Resources may become Probable Reserves.
Mineral Reserves are estimated at 3.9 million tonnes as of July 4, 2013, which is sufficient for a 6.3 year life of mine
considering 350 days in the year for production and a capacity rate of 1,800 tpd. Expectation is for an average
annual production of approximately 3.5 million troy ounces of silver and 30 thousand troy ounces of gold based on
an average 195 g/t Ag and 1.68 g/t Au head grade. Proven and Probable Reserves are estimated to contain 24.8 Moz
silver and 215.1 koz gold, reflecting increases of 22 percent in contained silver ounces and 27 percent in contained
gold ounces relative to the December 31, 2012 Mineral Reserves estimate. Variations from previously announced
reserves and resources are the result of successful conversion of previously existing Inferred Resources to Indicated
or Measured Resource categories through infill drilling partially offset by depletion through the extraction of ore
during the period of Jan. 1st through June 30th of 2013. Alterations in the reserve estimation process have also led to
improved spatial identification of reserves in three dimensions. Future increases in the mine life are anticipated
-22-
through the upgrading of Inferred Resources in the Trinidad North discovery (planned for 2014) and their
subsequent conversion to Mineral Reserves.
Minera Cuzcatlan commenced production at the San Jose mine in September 2011 and as of June 30, 2013 had
produced 3.5 Moz of silver and 31 koz of gold. The mining method applied in the exploitation of the veins is
overhand cut and fill using a mechanized extraction methodology. Production capacity at the mine has been
increased to 1,800 tonnes per day through a plant expansion completed in September 2013. From January 1 to June
30, 2013 the operation had processed close to 200,000 tonnes of ore from its underground mining operation and
produced approximately 1.07 Moz of silver and 8.6 koz of gold. Additionally, the tailings dam capacity has been
increased with the successful completion of stage 2 of the construction project raising the storage capacity to
1,427,000 m3.
Operating costs are estimated at US$68.14 per tonne of processed ore. This is a significant improvement from
previous years where this value was over US$75.00 per milled tonne. The operating costs reduction is mainly
explained by the expanded ore processing throughput to 1,800 tpd which allows for the decrease of the operating
fixed costs component.
Recommended projects for 2014 include:
1) Mine Development Program. This activity is designed to prepare the high-grade mineralized Stockwork zone
at 1,200 masl, which will sustain production in 2014. Additionally, the development will aim to reach the 1,100
level so as to complete the access and allow construction of the required infrastructure for the Trinidad North
discovery area.
2) Completion of Tailing Dam Stage 3a. This is a core project that requires an investment of US$11.6 million
during 2014 and is designed to raise the height of the tailings dam, increasing storage capacity in order to
sustain the operation for the next two and a half years. Fortuna is also exploring alternative solutions for future
tailings storage, including using the material as back fill underground, in an attempt to reduce future capital and
operating expenditures.
3) Delineation drilling. Minera Cuzcatlan is planning to continue the delineation drilling from underground in
2014 including in the Trinidad North discovery area. The goal of the program is to convert a total of 641,000 t
of Inferred Resource to the category of Indicated Resource representing an estimated 6.6 Moz Ag Eq. To
achieve this 23 drill holes totaling 6,315 m have been planned at a budgeted cost of US$1.4 million.
4) Brownfields exploration. The Trinidad North exploration drilling campaign is planned to continue in the last
quarter of 2013 and throughout 2014. To ensure the drill holes intercept the mineralized structures at a
reasonable intersection angle, the drilling will be conducted from underground. An exploration crosscut and two
drilling stations have been completed on the 1300 m level and drilling from the underground drill stations was
initiated in late September of 2013 to further explore the extensions of this important mineralized shoot to depth
and to the north. Fifteen drill holes are planned totaling 6,310 m of drilling at a budget cost of US$1 million
with additional drilling being considered to further test the northern extensions of the mineralized structures.
5) Water evaporation control system. This has been identified as a key strategic project to increase the water
available for the operations through reduction of evaporation losses of the tailings pond by seventy percent.
This will reduce the amount of water required external to the operation and lead to a further decrease in
operating costs. Additionally, extra water could also be used to facilitate future increases in production. Capital
expenditure budgeted for this project in 2014 is US$1.89 million.
This Technical Report represents the most accurate interpretation of the Mineral Reserve and Mineral Resource
available at the effective date of this report. The conversion of Mineral Resources to Mineral Reserves was made
using industry-recognized methods, actual operational costs, capital costs, and plant performance data. Thus, it is
considered to be representative of actual and future operational conditions. This report has been prepared with the
latest information regarding environmental and closure cost requirements.
Fortuna believes there is excellent potential to further increase the Mineral Resource at the San José property with
recent drilling demonstrating the continuation of high-grade mineralization in the Trinidad North discovery with the
mineralization remaining open to the north and at depth.
-23-
DIVIDENDS
The Company has not to date paid any dividends on its common shares nor does it intend to pay any dividends on its
shares in the immediate future as management anticipates that all available funds will be invested to finance further
acquisition, exploration and development of its mineral properties.
DESCRIPTION OF CAPITAL STRUCTURE
The Company’s authorized share capital is an unlimited number of common shares without par value. All common
shares of the Company rank equally as to dividends, voting powers and participation in assets and in all other
respects.
Voting. The holders of common shares are entitled to receive notice of, attend and vote at any meeting of the
shareholders of the Company. Each common share carries one vote per share.
Dividends. The holders of common shares are entitled to receive on a pro-rata basis such dividends as the Board
from time to time may declare, out of funds legally available therefor.
Rights on Dissolution. In the event of a liquidation, winding-up or dissolution of the Company, whether voluntary
or involuntary or for the purpose of a reorganization or otherwise or upon any distribution of capital, the holders of
the common shares have the right to receive on a pro-rata basis all of the assets of the Company remaining after
payment of all of the Company’s liabilities.
Pre-emptive, Conversion and Other Rights. No pre-emptive, redemption, retraction, exchange, sinking fund or
conversion rights are attached to the common shares, and the common shares, when fully paid, will not be liable to
further call or assessment. No other class of shares may be created without the approval of the holders of the
common shares.
MARKET FOR SECURITIES
The Company’s common shares were listed and posted for trading on the TSX Venture Exchange (“TSXV”) until
January 18, 2010 when the Company graduated to the Toronto Stock Exchange (“TSX”). On September 19, 2011,
the Company’s common shares were listed and posted for trading on the New York Stock Exchange (“NYSE”).
The Company’s shares currently trade on the NYSE under the symbol “FSM”, on the TSX under the symbol “FVI”,
and on the Frankfurt Open Market, the unofficial market organized by Deutsche Börse in Germany, under the
symbol “F4S”. On May 14, 2015, the Company voluntarily delisted its common shares from the Lima Stock
Exchange as a very limited amount of trading of the Company’s common shares occurred on such Exchange.
Trading Prices and Volume
The following table provides the high and low prices (in Canadian dollars) and volume for the Company’s shares as
traded on the TSX during the fiscal year ended December 31, 2015:
-24-
High
(CDN$)
3.56
3.52
3.95
3.28
4.09
4.68
5.00
4.87
5.05
5.65
6.30
6.28
Low
(CDN$)
3.05
3.03
2.84
2.65
2.96
3.12
4.43
4.35
4.17
4.45
5.23
5.07
Volume
5,650,785
4,911,703
11,188,051
14,780,006
7,288,379
7,415,823
4,714,784
5,047,570
7,582,526
9,900,340
7,359,618
16,067,632
Period
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
DIRECTORS AND EXECUTIVE OFFICERS
Name, Occupation and Shareholding
The Board presently consists of seven directors. Each director will hold office until the next annual general meeting
of the Company or until his successor is elected or appointed, unless his office is earlier vacated in accordance with
the Articles of the Company, or with the provisions of the British Columbia Business Corporations Act.
The following are the full name, place of residence, position with the Company, and principal occupation within the
preceding five years of each of the directors and executive officers of the Company:
Name, Position and Residency (1)
JORGE GANOZA DURANT
President, Chief Executive Officer &
Director
Lima, Peru
SIMON RIDGWAY
Chairman and Director
British Columbia, Canada
MICHAEL IVERSON (3) (4)
Director
British Columbia, Canada
MARIO SZOTLENDER (3) (4)
Director
Caracas, Venezuela
ROBERT GILMORE (2) (4)
Director
Colorado, USA
Principal Occupation or
Employment (1)
President & CEO of the Company.
Period as a Director of the
Company
December 2, 2004 to present
January 25, 2005 to present
March 30, 1998 to present
June 16, 2008 to present
June 23, 2010 to present
Chairman of the Company; President
& CEO of Radius Gold Inc. (mineral
exploration).
Executive Vice-President (and
formerly Chairman & CEO) of
Niogold Mining Corporation (mineral
exploration), over five years; President
of Triple K Ventures Inc. (private
management).
Independent Consultant and Director
of several public mineral exploration
companies.
Independent Certified Public
Accountant; Independent Financial
Consultant; Director of Eldorado Gold
Corporation (mining); Director of
Layne Christensen Company
(diversified water and mineral
services).
Name, Position and Residency (1)
THOMAS KELLY (2)
Director
Lima, Peru
DAVID FARRELL (2) (3) (4)
Director
British Columbia, Canada
LUIS GANOZA DURANT
Chief Financial Officer
Lima, Peru
MANUEL RUIZ-CONEJO
Vice-President, Operations
Lima, Peru
THOMAS VEHRS
Vice-President, Exploration
Colorado, USA
JOSE PACORA
Vice-President, Project Development
Lima, Peru
-25-
Principal Occupation or
Employment (1)
Mining Engineer; Chief Operating
Officer of Atico Mining Corp. (copper
exploration & mining), March 2013 to
present; CEO of Apurimac Ferrum
(mineral exploration), 2011 to 2013;
COO of Inca Pacific Resources, Inc.
(mineral exploration), 2008 to 2010.
President of Davisa Consulting (a
private consulting company), 2011 to
present; Managing Director of Mergers
& Acquisitions at Endeavour Financial
until October 2011.
Chief Financial Officer of the
Company.
Vice-President, Operations of the
Company, August 2011 to present;
formerly Vice-President, Project
Development, July 2009 to August
2011.
Vice-President, Exploration of the
Company.
Vice-President, Project Development
of the Company, November 2014 to
present; Corporate Project Manager of
the Company, February 2012 to
November 2014; Project Manager of
Pan American Silver Peru SAC
(mining company), 2000 to January
2012.
Period as a Director of the
Company
April 11, 2011 to present
July 15, 2013 to present
N/A
N/A
N/A
N/A
Notes:
(1) The information as to country of residence, principal occupation, and shares held is not within the
knowledge of the management of the Company and has been furnished by the respective individuals.
(2) Member of the Audit Committee of the Company.
(3) Member of the Compensation Committee of the Company.
(4) Member of the Corporate Governance and Nominating Committee of the Company.
As at the date hereof, the directors and executive officers of the Company beneficially own or have control or
direction over, directly or indirectly, an aggregate of 941,260 common shares of the Company, representing
approximately 0.7% of the issued shares of the Company.
Cease Trade Orders or Bankruptcies
As at the date of the AIF and during the 10 years prior to the date of the AIF, none of the directors or executive
officers of the Company or a shareholder holding a sufficient number of securities of the Company to affect
materially the control of the Company:
(a)
is or has been a director or executive officer of any company (including the Company), that while that
person was acting in that capacity:
-26-
(i)
(ii)
(iii)
was the subject of a cease trade order or similar order or an order that denied the relevant company
access to any exemption under securities legislation, for a period of more than 30 consecutive
days;
was subject to an event that resulted, after the director or executive officer ceased to be a director
or executive officer, in the company being the subject of a cease trade or similar order or an order
that denied the relevant company access to any exemption under securities legislation, for a period
of more than 30 consecutive days; or
within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal
under any legislation relating to bankruptcy or insolvency or was subject to or instituted any
proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold its assets; or
(b)
has become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or
become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a
receiver, receiver manager or trustee appointed to hold the assets of the director, officer and shareholder.
Penalties or Sanctions
As at the date of the AIF and during the 10 years prior to the date of the AIF, none of the directors or officers of the
Company or a shareholder holding a sufficient number of securities of the Company to affect materially the control
of the Company has been subject to:
(a)
any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory
authority or has entered into a settlement agreement with a securities regulatory authority other than Simon
Ridgway and Mario Szotlender, who are directors of a corporation that, in the past 10 years, had its
registration under Section 12(g) of the U.S. Exchange Act revoked by the SEC for failure to keep its filings
with the SEC up-to-date. Upon receipt of the SEC’s notice of proposed revocation, the corporation filed a
settlement agreement with the SEC consenting to the revocation as the corporation was dormant at the time.
This corporation filed a registration statement with the SEC in January 2015 to re-register its common
shares under Section 12(g) of the U.S. Exchange Act, which became effective in March 2015. The
effectiveness of such registration statement removes the prior restrictions on market participants trading the
corporation’s shares in United States markets; or
(b)
any other penalties or sanctions imposed by a court or regulatory body that would likely be considered
important to a reasonable investor making an investment decision.
Conflicts of Interest
There are no existing or potential material conflicts of interest between the Company or any of its subsidiaries and a
director or officer of the Company or any subsidiary.
AUDIT COMMITTEE
Pursuant to the provisions of National Instrument 52-110 (the “Instrument”), the Company’s Audit Committee has
adopted a written charter (the “Charter”) that sets out its mandate and responsibilities. The Charter is attached
hereto as Schedule “A”.
The Audit Committee is presently comprised of Robert Gilmore, Thomas Kelly and David Farrell. All members of
the Committee are “independent” and “financially literate”, within the meanings given to those terms in the
Instrument.
The education and experience of each Audit Committee member that is relevant to the performance of his
responsibilities as an audit committee member is as follows:
Audit Committee Member
Robert Gilmore
Thomas Kelly
David Farrell
-27-
Education and Experience
Mr. Gilmore is a Certified Public Accountant and independent financial
consultant with more than 35 years’ experience working with resource
companies. He is a graduate of the University of Denver with a Bachelor of
Science degree in Business Administration, Accounting. He is Chairman of the
Board and a member of the Audit and Compensation Committees of Eldorado
Gold Corporation, and is a director and Audit Committee Chairman of Layne
Christensen Company. Mr. Gilmore has also served as Chairman of the Audit
Committees of Global Med Technologies, MK Resources, Inc., Frontera
Copper Corporation and Ram Power Corporation.
Mr. Kelly has Bachelor and Masters Degrees in Mining Engineering from the
Colorado School of Mines and is a Fellow of Aus.IMM and a Registered
Member of SME. He has over 35 years of world-wide mineral industry
experience including underground and open pit mining, project development,
project management, corporate management and consulting services. Mr. Kelly
has held senior positions with Freeport-McMoRan Copper & Gold Inc., AMEC
Americas, Inca Pacific Resources Inc. and other recognized industry-leading
companies. He is a recognized expert in project management/development and
is fluent in Spanish.
David Farrell is President of Davisa Consulting, a private consulting firm
working with junior to mid-tier global mining companies. He formerly was
Managing Director, Mergers & Acquisitions at Endeavour Financial where he
successfully closed over US$25 billion worth of mergers and acquisitions
transactions for junior and mid-tier natural resource companies. Before his 12
years at Endeavour Financial, Mr. Farrell 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 was called to the bar in both British Columbia and England. Mr.
Farrell is currently a director and member of the audit committee for two other
junior public companies. His background has given him the required
experience to understand and assess the general application of the accounting
principles used by the Company and to understand internal controls and
procedures for financial reporting.
The auditors of the Company, Deloitte LLP, obtain, as necessary, the pre-approval of the Audit Committee for any
anticipated additional services required of the auditors for the coming fiscal year. If other service requirements arise
during the year, the Audit Committee will pre-approve such services at that time, prior to the commencement of
such services. No services were performed by the auditors pursuant to the De-Minimus Non-audit Services
exemption contained in the Instrument.
During the Company’s most recently completed fiscal year, the Company’s auditors performed certain non-audit
services. Fees charged (in Canadian dollars) by the auditors during the last two fiscal years are as follows:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
2015
$661,970
$72,774
$129,988
Nil
$864,732
2014
$507,462
Nil
$150,805
Nil
$658,267
“Audit Fees” are the aggregate fees billed for the audit of the Company’s consolidated annual financial statements,
and review of the interim financial statements and management discussion and analysis.
-28-
“Audit-Related Fees” are fees charged for assurance and related services that are reasonably related to the
performance of the audit or review of the Company’s financial statements and are not reported under “Audit Fees”.
“Tax Fees” are fees for professional services rendered for tax compliance and tax advice on actual or contemplated
transactions.
“All Other Fees” are amounts not included in the categories above.
LEGAL PROCEEDINGS
There are no known legal proceedings involving an amount exceeding 10% of the current assets of the Company to
which the Company is a party or which any of its properties is the subject during the most recently completed
financial year, or any such proceedings known to the Company to be contemplated.
TRANSFER AGENT AND REGISTRAR
The Company’s transfer agent and registrar is Computershare Trust Company, at its offices in Vancouver, BC and
Toronto, ON.
MATERIAL CONTRACTS
There are no contracts, other than those herein disclosed in this AIF and other than those entered into in the ordinary
course of the Company’s business, that are material to the Company and that were entered into during the most
recently completed fiscal year ended December 31, 2015 or before the most recently completed financial year, but
are still in effect as of the date of this AIF.
INTERESTS OF EXPERTS
Names of Experts
Eric N. Chapman and Thomas Kelly, each a Qualified Person as defined by NI 43-101, are the authors of the
Caylloma Report and the San Jose Report. In these Reports, the Mineral Resource estimates were prepared under
the supervision of Mr. Chapman, and the Mineral Reserve estimate and the Mineral Resource estimate exclusive of
Mineral Reserves were prepared under the supervision of Mr. Kelly.
Eric N. Chapman and Edwin A. Gutierrez, each a Qualified Person, supervised the preparation of the updated
Mineral Resource and Mineral Reserve estimates for the Caylloma Mine and the San Jose Mine as at December 31,
2015 described in this AIF under the heading “General Development of the Business – Three-Year History and
Recent Developments”.
Thomas Vehrs, a Qualified Person, is responsible for ensuring that the technical information contained in this AIF is
an accurate summary of the original reports and data provided to or developed by the Company.
Interests of Experts
To the knowledge of the Company, the experts named above did not have any registered or beneficial interest, direct
or indirect, in any securities or other property of the Company when the experts prepared their reports, other than
Thomas Vehrs who currently holds 695,000 shares and 327,092 stock options in the Company.
-29-
Deloitte LLP is the independent registered public accounting firm of the Company and is independent within the
meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of British Columbia.
ADDITIONAL INFORMATION
Additional information relating to the Company is available for viewing on SEDAR at www.sedar.com.
Information regarding directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s
securities and securities authorized for issuance under equity compensation plans, if applicable, is contained in the
Company’s Information Circular pertaining to its Annual General Meeting held on June 18, 2015. Additional
financial information is provided in the Company’s audited financial statements for the fiscal year ended
December 31, 2015 and the management’s discussion and analysis thereon.
SCHEDULE “A”
FORTUNA SILVER MINES INC.
(the “Company”)
AUDIT COMMITTEE CHARTER
PURPOSE
The primary function of the Audit Committee is to assist the Board of Directors of the Company (the ‘Board”) in
fulfilling its oversight responsibilities by reviewing the financial information to be provided to the shareholders and
others, the systems of internal controls and management information systems established by the senior officers of
the Company (“Management”) and the Company’s internal and external audit process and monitoring compliance
with the Company's legal and regulatory requirements with respect to its financial statements.
The Audit Committee is accountable to the Board. In the course of fulfilling its specific responsibilities hereunder,
the Audit Committee is expected to maintain an open communication between the Company’s external auditors and
the Board.
The Audit Committee does not plan or perform audits or warrant the accuracy or completeness of the Company's
financial statements or financial disclosure or compliance with generally accepted accounting procedures as these
are the responsibility of Management.
RESPONSIBILITIES
Subject to the powers and duties of the Board, the Board hereby delegates to the Audit Committee the following
powers and duties to be performed by the Audit Committee on behalf of and for the Board. Nothing in this Charter
is intended to or does confer on any member a higher standard of care or diligence than that which applies to the
directors as a whole.
External Auditors
The Audit Committee has primary responsibility for the selection, appointment, dismissal, compensation and
oversight of the external auditors, subject to the overall approval of the Board. For this purpose, the Audit
Committee may consult with Management.
The external auditors shall report directly to the Audit Committee.
Also, the Audit Committee:
a.
recommends to the Board:
i. whether the current external auditors should be nominated for reappointment for the ensuing year and
if applicable, select and recommend a suitable alternative for nomination; and
ii.
the amount of compensation payable to the external auditors;
b.
resolves disagreements, if any, between Management and the external auditors regarding financial
reporting;
c. provides the Board with such recommendations and reports with respect to the financial statements of the
Company as it deems advisable;
d.
takes reasonable steps to confirm the independence of the external auditors, including but not limited to
pre-approving any non-audit related services provided by the external auditors to the Company or the
Company's subsidiaries, if any;
e. confirms that the external auditors are a 'participating audit' firm for the purpose of National Instrument 52-
108 Auditor Oversight and are in compliance with governing regulations;
-ii-
f.
reviews the plan and scope of the audit to be conducted by the external auditors of the Company;
g.
reviews and evaluates the performance of the external auditors; and
h.
reviews and approves the Company’s hiring policy regarding partners, employees and former partners and
employees of the Company’s present and former external auditors.
Audit and Review Process and Results
The Audit Committee has a duty to receive, review and make any inquiry regarding the completeness, accuracy and
presentation of the Company’s financial statements to ensure that the financial statements fairly present the financial
position and risks of the organization and that they are prepared in accordance with generally accepted accounting
principles. To accomplish this, the Audit Committee:
a. considers the scope and general extent of the external auditors' review, including their engagement letter
and major changes to the Company’s auditing and accounting principles and practices;
b. consults with management regarding the sufficiency of the Company's internal system of audit and
financial controls, internal audit procedures and results of such audits;
c. ensures the external auditors have full, unrestricted access to required information and have the cooperation
of management;
d.
e.
reviews with the external auditors the audit process and standards, as well as regulatory or Company-
initiated changes in accounting practices and policies and the financial impact thereof, and selection or
application of appropriate accounting principles;
reviews with the external auditors and, if necessary, legal counsel, any litigation, claim or contingency,
including tax assessments, that could have a material effect upon the financial position of the Company and
the manner in which these matters are being disclosed in the financial statements;
f.
reviews the appropriateness and disclosure of any off-balance sheet matters;
g.
reviews disclosure of related-party transactions;
h.
receives and reviews with the external auditors, the external auditors' audit report and the audited financial
statements;
i. makes recommendations to the Board respecting approval of the audited financial statements;
j. meets with the external auditors separately from management to review the integrity of the Company’s
financial reporting, including the clarity of financial disclosure and the degree of conservatism or
aggressiveness of the accounting policies and estimates, any significant disagreements or difficulties in
obtaining information, adequacy of internal controls over financial reporting, adequacy of disclosure
controls and procedures, and the degree of compliance by the Company with prior recommendations of the
external auditors;
k. directs management to implement such changes as the Audit Committee considers appropriate, subject to
any required approvals of the Board arising out of the review; and
l. meets at least annually with the external auditors, independent of management, and reports to the Board on
such meetings.
Interim Financial Statements
The Audit Committee:
-iii-
a.
reviews and determines the Company's practice with respect to review of interim financial statements by
the external auditors;
b. conducts all such reviews and discussions with the external auditors and Management as it deems
appropriate; and
c. makes recommendations to the Board respecting approval of the interim financial statements.
Involvement with Management
The Audit Committee has primary responsibility for overseeing the actions of management in all aspects of financial
management and reporting. The Audit Committee:
a.
b.
reviews the Company’s annual and interim financial statements, Management’s Discussion and Analysis
and earnings press releases, if any, before the Company publicly discloses this information;
reviews all of the Company’s public disclosure of financial information extracted from the Company's
financial statements, if such financial statements have not previously been reviewed by the Committee,
prior to such information being made public by the Company and for such purpose, the CFO assumes
responsibility for providing the information to the Audit Committee for its review;
c.
reviews material financial risks with Management, the plan that Management has implemented to monitor
and deal with such risks and the success of Management in following the plan;
d. consults annually and otherwise as required with the Company's CEO and CFO respecting the adequacy of
the internal controls over financial reporting and disclosure controls and procedures and reviews any
breaches or deficiencies;
e. obtains such certifications of annual and interim filings by the CEO and CFO attesting to internal controls
over financial reporting and disclosure controls and procedures as deemed advisable;
f.
g.
h.
reviews Management's response to significant written reports and recommendations issued by the external
auditors and the extent to which such recommendations have been implemented by Management;
reviews with Management the Company's compliance with applicable laws and regulations respecting
financial reporting matters, and any proposed regulatory changes and their impact on the Company; and
reviews as required with Management and approves disclosure of the Audit Committee Charter, and Audit
Committee disclosure required in the Company's Annual Information Form, Information Circular and on
the Company's website.
PROCEDURAL MATTERS
The Audit Committee:
a.
b.
invites the Company's external auditors, the CFO, and such other persons as deemed appropriate by the
Audit Committee to attend meetings of the Audit Committee;
reports material decisions and actions of the Audit Committee to the Board, together with such
recommendations as the Committee may deem appropriate;
c. has the power to conduct or authorize investigations into any matter within the scope of its responsibilities;
d. has the right to engage independent counsel and other advisors as it determines necessary to carry out its
duties and the right to set the compensation for any advisors employed by the Audit Committee;
-iv-
e. has the right to communicate directly with the CFO and other members of Management who have
responsibility for the internal and external audit process, as well as to communicate directly with the
internal and external auditors; and
f. pre-approves non-audit services to be performed by the external auditors.
COMPOSITION
The Audit Committee is composed of a minimum of three directors, all of whom are independent and have relevant
skills and/or experience in the Audit Committee's areas of responsibility as may be required by the securities laws
applicable to the Company, including those of any stock exchange on which the Company’s securities are traded.
Appointment of Committee Members and Vacancies
Members of the Audit Committee are appointed or confirmed by the Board annually and hold office at the pleasure
of the Board. The Board fills any vacancy on, or any additional members to, the Audit Committee.
Committee Chair
The Board appoints a Chair for the Audit Committee.
STRUCTURE AND OPERATIONS
Meetings
The Chair of the Audit Committee or the Chair of the Board or any two of its members may call a meeting of the
Audit Committee. The Audit Committee meets at least four times each fiscal year, and at such other times during
each year as it deems appropriate.
Quorum
A majority of the members appointed to the Audit Committee constitutes a quorum.
Notice of Meetings
The Chair of the Audit Committee arranges to provide notice of the time and place of every meeting in writing
(including by facsimile) to each member of the Audit Committee at least two (2) business days prior to the time
fixed for such meeting, provided, however, that a member may in any manner waive a notice of a meeting.
Attendance of a member at a meeting constitutes a waiver of notice of the meeting, except where a member attends a
meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not
lawfully called. The Chair also ensures that an agenda for the meeting and all required materials for review by the
members of the Audit Committee are delivered to the members with sufficient time for their review, or that such
requirement is waived.
Absence of Committee Chair
If the Chair of the Audit Committee is not present at any meeting of the Audit Committee, the other members of the
Audit Committee will be chose a Chair to preside at the meeting.
Secretary of Committee
At each meeting the Audit Committee appoints a secretary who need not be a director of the Company.
Attendance of the Company's Officers at Meetings
The Chair of the Audit Committee or any two members of the Audit Committee may invite one or more officers of
the Company to attend any meeting of the Audit Committee.
Delegation
-v-
The Audit Committee may, in its discretion and where permitted by National Instrument 52-110 – Audit
Committees, delegate all or a portion of its duties and responsibilities to a subcommittee, management or, to the
extent otherwise permitted by applicable plans, laws or regulations, to any other body or individual.
Procedure and Records
Subject to any statute or constating documents of the Company, the Audit Committee determines its own procedures
at meetings and may conduct meetings by telephone and keeps records of its proceedings.
COMPLAINTS
The Audit Committee has established a Whistle Blower Policy which sets out the procedures for:
a.
b.
the receipt, retention and treatment of complaints received by the Company regarding accounting, internal
accounting controls, or auditing matters; and
the confidential, anonymous submission to the Company of concerns regarding questionable accounting or
auditing matters.
The Audit Committee reviews the Whistle Blower Policy annually.
REPORTING AND ASSESSMENT
The Audit Committee reports to the Board of Directors, and on an annual basis, presents to the Board a Committee
Annual Report consisting of the Audit Committee’s review of its charter, the Committee’s and its Chair’s
performance over the past year, and any recommendations the Audit Committee makes in respect thereto.
EXHIBIT 99.2
AUDITED FINANCIAL STATEMENTS
Fortuna Silver Mines Inc.
Years ended December 31, 2015 and 2014
Consolidated Financial Statements
March 14, 2016
(All amounts in US$’000’s unless otherwise stated)
________________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial statements
Page 1
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. (the
“Company”), which comprise the consolidated statements of financial position as at December 31, 2015
and December 31, 2014, and the consolidated statements of net (loss) income, consolidated statements of
comprehensive (loss) income, consolidated statements of changes in equity, and consolidated statements
of cash flows for the years then ended and a summary of significant accounting policies and other
explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board, and for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement. We were not
engaged to perform an audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion.
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. 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, 2015 and December 31, 2014, and its financial
performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.
/s/ Deloitte LLP
Chartered Professional Accountants
Vancouver, Canada
March 14, 2016
FORTUNA SILVER MINES INC.
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
Selling, general and administrative expenses
Exploration and evaluation costs
Foreign exchange loss (gain)
Impairment of mineral properties
Other operating expense
Operating (loss) income
Finance items
Interest income
Interest expense
Net finance expense
(Loss) income before tax
Income taxes
Current income tax
Deferred income tax
Net (loss) income for the year
Notes
18
19
$
2015
154,729
111,081
43,648
$
2014
174,006
113,753
60,253
10 a), 10 b), 20
21
8 b)
22
23
14
14
17,863
320
1,564
25,000
741
(1,840)
381
(1,758)
(1,377)
(3,217)
25,426
-
(201)
-
1,278
33,750
281
(1,152)
(871)
32,879
11,606
(4,215)
7,391
(10,608)
$
13,511
3,766
17,277
15,602
$
(Loss) earnings per share - Basic
(Loss) earnings per share - Diluted
Weighted average number of shares outstanding - Basic
Weighted average number of shares outstanding - Diluted
15 f) i
15 f) ii
15 f) i
15 f) ii
$
$
(0.08)
(0.08)
129,001,047
129,001,047
$
$
0.12
0.12
126,786,921
128,142,977
________________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial statements
Page 3
FORTUNA SILVER MINES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31,
(Expressed in thousands of US Dollars)
Net (loss) income for the year
Other comprehensive loss
Items that may be classified subsequently to net (loss) income
Net change in fair value of hedging instruments, net of nil
taxes
5
Notes
Unrealized loss on translation of net investment, net of nil
taxes
Unrealized gain on translation to presentation currency on
foreign operations, net of nil taxes
Total comprehensive (loss) income for the year
2015
(10,608)
$
$
2014
15,602
(307)
-
(2,324)
(2,001)
1,430
(1,201)
(11,809)
$
$
887
(1,114)
14,488
$
________________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial statements
Page 4
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
Notes
2015
2014
$
(10,608)
$
15,602
Depletion, depreciation, and amortization
Accretion of provisions
Income taxes
Share-based payments
Impairment of mineral properties, plant and equipment
Impairment of inventories
Other operating expense - other
Loss on disposal of mineral properties, plant and equipment
Accrued interest on long term loans receivable and payable
Other
8, 8 b)
22
Changes in non-cash working capital items
Accounts receivable and other assets
Prepaid expenses
Inventories
Trade and other payables
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
Deposits on long term assets, net
Proceeds on disposal of mineral properties, plant and equipment
Net cash used in investing activities
18
FINANCING ACTIVITIES
Proceeds from bank loan
Net proceeds on issuance of common shares
Repayment of finance lease obligations
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
INCREASE IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents - beginning of year
25,739
310
7,391
761
25,000
585
(81)
46
39
6
49,188
13,233
(208)
3,324
8,106
(273)
73,370
(17,846)
(1,110)
354
54,768
(95,453)
92,927
(57,130)
(6,746)
13
(66,389)
39,316
2,026
-
41,342
(370)
29,721
42,867
23,517
744
17,277
5,586
-
121
-
66
(27)
11
62,897
(4,521)
(49)
282
4,900
(171)
63,338
(3,417)
(4)
275
60,192
(65,657)
47,641
(38,943)
(68)
67
(56,960)
-
8,458
(227)
8,231
(300)
11,463
31,704
CASH AND CASH EQUIVALENTS - END OF YEAR
________________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial statements
$
$
72,218
42,867
Page 5
FORTUNA SILVER MINES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS AT DECEMBER 31,
(Expre sse d in thousands of US Dollars)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Income tax receivable
Prepaid expenses
Inventories
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
Derivative liabilities
Provisions
Income tax payable
Current portion of other liabilities
Total current liabilities
NON-CURRENT LIABILITIES
Bank loan
Other liabilities
Provisions
Deferred income tax liabilities
Total liabilities
EQUITY
Share capital
Equity reserve
Accumulated other comprehensive income
Retained earnings
Total equity
Total liabilities and e quity
Continge ncie s and capital commitments
Subse quent eve nts
Note s
2015
2014
3
4
6
14
7
6
14
8
$
72,218
36,031
7,068
780
1,512
10,434
128,043
$
42,867
34,391
19,905
680
1,592
14,937
114,372
8,716
492
242,403
379,654
$
1,963
126
233,849
350,310
$
9, 10 c)
5
13
14
12
$
28,970
351
453
3,605
772
34,151
$
21,467
-
809
9,745
-
32,021
39,486
4,620
12,052
25,177
115,486
-
4,661
11,889
29,026
77,597
203,953
14,169
808
45,238
264,168
379,654
$
201,057
13,800
2,010
55,846
272,713
350,310
$
11
12
13
14
24
25
APPROVED BY THE DIRECTORS:
"Jorge Ganoza Durant" , Director
Jorge Ganoza Durant
"Robert R. Gilmore" , Director
Robert R. Gilmore
________________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial statements
Page 6
FORTUNA SILVER MINES INC.
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
Accumulated Other Comprehensive
(Loss) Income ("AOCI")
Share Capital
Balance - December 31, 2014
Exercise of stock options
Cancellation of treasury shares
Transfer of stock option and warrant reserve on exercise of stock options
Share-based payments expense
Net loss for the period
Net change in fair value of hedging instruments
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, 2015
Number of
Shares
128,537,742
740,860
(38,035)
-
-
-
-
-
-
$
Amount
201,057
2,026
-
870
-
-
-
-
-
Equity
Reserve
13,800
$
-
-
(870)
1,239
-
-
-
-
129,240,567
$
203,953
$
14,169
Balance - December 31, 2013
Exercise of stock options
Transfer of stock option and warrant reserve on exercise of stock options
125,973,966
2,563,776
-
$
189,092
8,458
3,507
$
15,200
-
(3,507)
Share-based payments expense
Net income for the period
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, 2014
-
-
-
-
128,537,742
-
-
-
2,108
-
-
-
-
$
201,057
$
13,800
Total
Accumulated
Other
Comprehensive
(Loss) Income
2,010
$
-
-
-
-
-
(307)
(2,324)
1,430
(1,201)
808
$
$
3,124
-
-
-
-
(2,001)
887
(1,114)
2,010
$
Foreign
Currency
Reserve
2,010
$
-
-
-
-
-
-
(2,324)
1,430
(895)
1,115
$
$
3,124
-
-
-
-
(2,001)
887
(1,114)
2,010
$
Hedging
Reserve
-
$
-
-
-
-
-
(307)
-
-
(307)
(307)
$
$
-
-
-
-
-
-
-
-
$
-
Retained
Earnings Total Equity
272,713
$
$
2,026
-
-
1,239
(10,608)
(307)
(2,324)
1,430
(11,809)
264,168
55,846
-
-
-
-
(10,608)
-
-
-
(10,608)
$
45,238
$
$
40,244
-
-
-
15,602
-
-
15,602
$
55,846
$
247,660
8,458
-
2,108
15,602
(2,001)
887
14,488
$
272,713
________________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial statements
Page 7
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(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, and zinc mine (“Caylloma”) in southern Peru and the San Jose silver and 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 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.
a)
Basis of Consolidation and Summary of Significant Accounting Policies
Statement of Compliance
These consolidated financial statements (“Financial Statements”) have been prepared in accordance with
the International Financial Reporting Standard (“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, 2015. The Board of Directors approved these financial
statements for issue on March 14, 2016.
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 or control and up to the effective date of disposition or loss of control. The principal subsidiaries
of the Company and their geographic locations at December 31, 2015 were as follows:
________________________________________________________________________________
Page 8
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
b)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Basis of Consolidation (continued)
Entity Type at
December 31,
2015
Name
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,
2015
100%
100%
100%
100%
100%
100%
Location
Peru
Peru
Mexico
Mexico
Barbados
Canada
Principal Activity
Method
Consolidation
Caylloma Mine
Consolidation
Service company
San Jose Mine
Consolidation
Exploration company Consolidation
Consolidation
Holding company
Consolidation
Holding company
As at December 31, 2015, the Company has no joint arrangements or associates.
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.
________________________________________________________________________________
Page 9
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
e)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
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 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
Units of production
6 - 20 years
4 - 8 years
Declining balance
Declining balance
Straight line
Straight line
3 - 15 years
2 - 13 years
4 - 5 years
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.
________________________________________________________________________________
Page 10
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
e)
i.
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Mineral Properties, Plant and Equipment (continued)
Exploration and Evaluation Assets
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.
Exploration costs that do not relate to any specific property are expensed as incurred.
ii.
Operational Mining Properties and Mine Development
For operating mines, all exploration within the mineral deposit is capitalized and amortized on a unit-of-
production basis over proven and probable reserves and the portion of resources expected to be extracted
economically as part of the production cost.
Costs of producing properties are amortized on a unit-of-production basis over proven and probable
reserves and the portion of resources expected to be extracted economically. Costs of abandoned properties
are written-off.
________________________________________________________________________________
Page 11
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
e)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Mineral Properties, Plant and Equipment (continued)
iii.
Commercial Production
Capital work in progress consists of expenditures for the construction of future mines and includes pre-
production revenues and expenses prior to achieving commercial production. Commercial production is a
convention for determining the point in time in which a mine and plant has completed the operational
commissioning and has operational results that are expected to remain at a sustainable commercial level
over a period of time, after which production costs are no longer capitalized and are reported as operating
costs. The determination of when commercial production commences is based on several qualitative and
quantitative factors including but not limited to the following:
all major capital expenditures to bring the mine to the condition necessary for it to be capable of
operating in the manner intended by management have been completed;
the mine or mill is operating within eighty percent of design capacity;
metallurgical recoveries are achieved within eighty percent of projections; and,
the ability to sustain ongoing production of ore at a steady or increasing level.
On the commencement of commercial production, depletion of each mining property will be provided on
a unit-of-production basis. Any costs incurred after the commencement of production are capitalized to
the extent they give rise to a future economic benefit.
f)
Asset Impairment
At the end of each reporting period, the Company makes an assessment of impairment indicators and if
there are such indicators, then the Company performs a test of impairment.
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.
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.
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.
________________________________________________________________________________
Page 12
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
f)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Asset Impairment (continued)
Where a FVLCTS 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.
expenditures for the qualifying asset are being incurred;
Capitalization of borrowing costs incurred commences on the date the following three conditions are met:
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 expensed 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)
i.
Provisions
Decommissioning and restoration provisions
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.
________________________________________________________________________________
Page 13
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
h)
i.
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Provisions (continued)
Decommissioning and restoration provisions (continued)
The liability is accreted to full value over time through periodic charges to income. This accretion of
provisions is charged to interest expense 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 income. The method of amortization follows that of the underlying asset. The costs related to
a DRP are only capitalized to the extent that the amount meets the definition of an asset and can bring about
future economic benefit. For a closed site or where the asset which generated a DRP no longer exists, there
is no longer future benefit related to the costs and as such, the amounts are expensed. For operating sites, a
revision in estimates or a new disturbance will result in an adjustment to the liability with an offsetting
adjustment to the capitalized retirement cost. For closed sites, adjustments to the DRP that are required as
a result of changes in estimates are charged to income in the period in which the adjustment is identified.
ii.
Environmental disturbance restoration provisions
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.
i)
Inventories
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.
________________________________________________________________________________
Page 14
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
j)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Assets Held for Sale
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 income but not in excess of
cumulative impairment losses.
k)
Income Taxes
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.
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.
________________________________________________________________________________
Page 15
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
k)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Income Taxes (continued)
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 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.
l)
Share-Based Payments
The fair value method of accounting is used for share-based payment transactions. Under this method, the
cost of stock 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.
i.
Stock Option Plan
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 DSUs are cash settled. The DSU compensation liability is accounted for based on the
number of DSUs outstanding and the quoted market value of the Company’s common shares at the financial
position date. The year-over-year change in the DSU compensation liability is recognized in income.
________________________________________________________________________________
Page 16
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
l)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Share-Based Payments (continued)
iii.
Share Unit Plan
The Company’s amended and restated share unit plan (the “SU Plan”) covers all restricted share units
(“RSUs”) and performance share units (“PSUs”) granted by the Company on and after March 1, 2015. All
RSUs granted prior to March 1, 2015, are governed under the restricted share unit plan dated November
12, 2010.
a)
RSUs
The Company’s RSUs are settled in cash. The RSUs compensation liability is accounted for based on the
number of RSUs 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 RSUs 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 a specified period of time and adjusts for changes
in the fair value until the end of the term of the RSUs. The cumulative effect of the change in fair value is
recognized in income in the period of change.
b)
PSUs
The Company’s PSUs are settled in cash. The fair value of the estimated number of PSUs awarded that
will eventually vest, determined as of the date of grant, is recognized as share-based compensation expense
within selling, general and administrative expenses in the consolidated statement of income over the vesting
period, with a corresponding amount recorded as a liability. Until the liability is settled, the fair value of
the PSUs is re-measured at the end of each reporting period and at the date of settlement, with changes in
fair value recognized as share-based compensation expense or recovery over the vesting period. The fair
value of PSUs are estimated on a graded vesting basis for each PSUs granted equal to the quoted market
value, up to a maximum of two times the grant price, of the Company’s common shares.
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.
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.
________________________________________________________________________________
Page 17
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
n)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Foreign Currency Translation
The presentation currency of the Company is the United States Dollar (“US$”).
Prior to April 1, 2015, the functional currency of each of the entities in the group was the US$, with the
exception of the parent entity and certain holding companies which had a Canadian dollar functional
currency.
On April 1, 2015, the functional currency of the parent entity and certain holding companies which had a
Canadian dollar functional currency were determined to have a US$ functional currency. The change was
primarily a result of the currency in which funds from financing activities are generated and in particular,
a loan denominated and drawn down in US$. This change has been prospectively applied from the date of
change, April 1, 2015.
As at April 1, 2015, the parent entity and certain holding companies have translated all monetary assets and
liabilities into the US$ functional currency using the exchange rate at the date of the change. Non-monetary
assets and liabilities were translated into the US$ functional currency using the historical exchange rates at
the date of the initial transaction. Revenues and expenses were translated at the average rate of exchange
for the period. Foreign exchange differences arising from the translation of a foreign operation previously
recognized in other comprehensive income are not reclassified from equity to profit or loss until disposal
of the operation.
Prior to April 1, 2015, 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. These
previously recognized foreign exchange differences are not reclassified from equity to profit or loss until
disposal of the operations.
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.
________________________________________________________________________________
Page 18
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
o)
i.
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Financial Instruments
Financial Assets
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.
a)
Financial Assets at Fair Value Through Profit or Loss (“FVTPL”)
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).
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.
c)
Loans and Receivables
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, and subsequently measured at
amortized cost, using the effective interest method, 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.
d)
Available-For-Sale (“AFS”) Assets
AFS financial assets are non-derivatives that are either designated in this category or not classified in any
of the other categories.
AFS financial assets are 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 AFS 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 AFS securities are recognized in the consolidated statement of
income. The Company does not have any assets classified as AFS.
________________________________________________________________________________
Page 19
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
o)
i.
e)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Financial Instruments (continued)
Financial Assets (continued)
Impairment of Financial Assets
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.
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.
f)
Derecognition of Financial Assets
A financial asset is derecognized when:
the contractual right of the asset’s cash flows expire; or
if the Company transfers the financial asset and substantially all risks and reward of ownership to
another entity.
ii.
Financial Liabilities
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.
________________________________________________________________________________
Page 20
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
o)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Financial Instruments (continued)
iii.
Derivative Instruments
Derivatives instruments are recorded at fair value, including those derivatives that are embedded in financial
or non-financial contracts that are not closely related to the host contracts. Changes in the fair values of
derivative instruments are recognized in the consolidated statement of income with exception of derivatives
designated as effective cash flow hedges.
Derivatives 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.
For cash flow hedges that qualify under the hedging requirements of IAS 39 Financial Instruments:
Recognition and Measurement (“IAS 39”), the effective portion of any gain or loss on the hedging
instrument is recognized in other comprehensive income (“OCI”) and the ineffective portion is reported as
a gain (loss) on derivatives in the consolidated statement of income.
Hedge accounting is discontinued prospectively when:
the hedge instrument expires or is sold, terminated, or exercised;
the hedge no longer meets the criteria for hedge accounting; and,
the Company revokes the designation.
The Company considers derecognition of a cash flow hedge when the related forecast transaction is no
longer expected to occur. If the Company revokes the designation, the cumulative gain or loss on the
hedging instrument that has been recognized in OCI from the period when the hedge was effective remains
separately in equity until the forecast transaction occurs or is no longer expected to occur. Otherwise, the
cumulative gain or loss on the hedge instrument that has been recognized in OCI from the period when the
hedge was effective is reclassified from equity to profit or loss.
________________________________________________________________________________
Page 21
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
o)
iv.
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Financial Instruments (continued)
Classification and Subsequent Measurements
The Company has designated each of its significant categories of financial instruments as follows:
Financial Instrument
Classification
Measurement
Cash and Cash Equivalents
Short Term Investments
Derivative Assets
Trade Receivable from Concentrate Sales
Income Tax Receivable
Other Accounts Receivables
Long Term Receivables
FVTPL
FVTPL
FVTPL
FVTPL
Loans and receivables
Loans and receivables
Loans and receivables
Trade and Other Payables
Bank Loan
Derivative Liabilities
Income Tax Payable
Lease and Long Term Liabilities
Other liabilities
Other Liabilities
FVTPL
Other liabilities
Other liabilities
Fair value
Fair value
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
v.
Effective Interest Method
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).
________________________________________________________________________________
Page 22
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
q)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Segment Reporting
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.
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. Refer to Note 18.
r)
Leases
A lease is a finance lease when substantially all of the risks and rewards incidental to ownership of the
leased asset are transferred from the lessor to the lessee by the agreement. The leased assets are initially
recorded at the lower of the fair value and the present value of the minimum lease payments and are
depreciated over the shorter of the asset’s useful lives and the term of the lease. Interest on the lease
instalments is recognized as interest expense over the lease term using the effective interest method. Leases
for land and buildings are recorded separately if the lease payments can be allocated accordingly.
Leases that do not transfer all the risks and rewards of ownership are classified as operating leases.
Payments are recorded in the income statement using the straight line method over their estimated useful
lives.
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,
DSUs, RSUs, and PSUs are discussed in Note 2. l).
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.
________________________________________________________________________________
Page 23
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
u)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
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 Canadian, Peruvian, Mexican, and Barbados entities,
management considered the currency that mainly influences the sales and costs 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.
________________________________________________________________________________
Page 24
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
u)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Significant Accounting Judgments and Estimates (continued)
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;
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 property 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.
________________________________________________________________________________
Page 25
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
v)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
New Accounting Standards
There were no significant accounting standards or interpretations along with any consequential amendments
required for the Company to adopt for the year ended December 31, 2015.
The Company is currently assessing the impact of adopting the following new accounting standards, noted
below, on the Company’s Financial Statements.
IFRS 11 Joint Arrangements (Amendment)
The amendment to IFRS 11 Joint Arrangements adds new guidance on how to account for the acquisition
of an interest in a joint operation that constitutes a business. The amendments specify the appropriate
accounting treatment for such acquisitions. The amendments are effective for annual periods beginning on
or after January 1, 2016, with earlier application permitted. Transactions before the adoption date are
grandfathered.
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets (Amendment)
The amendment to IAS 16 Property, plant and equipment and IAS 38 Intangible assets on depreciation and
amortisation clarifies that the use of revenue-based methods to calculate the depreciation of an asset is not
appropriate because revenue generated by an activity that includes the use of an asset generally reflects
factors other than the consumption of the economic benefits embodied in the asset. The amendment also
clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of
the economic benefits embodied in an intangible asset. The amendment is effective for annual period
starting on or after January 1, 2016, with earlier application permitted.
IFRS 15 Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers specifies how and when revenue should be recognized
as well as requiring more informative and relevant disclosures. The standard supersedes IAS 18 Revenue,
IAS 11 Construction Contracts and a number of revenue-related interpretations. Application of the standard
is mandatory and it applies to nearly all contracts with customers: the main exceptions are leases, financial
instruments and insurance contracts. IFRS 15 is effective for annual periods starting on or after January 1,
2018, with earlier application permitted.
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, 2018, with earlier application permitted.
________________________________________________________________________________
Page 26
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
w)
New Accounting Standards (continued)
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. The amendments are effective for annual periods beginning on or after January 1,
2018, with earlier application permitted.
IFRS 9 Financial Instruments - Expected Credit Losses
On July 24, 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9
Financial Instruments, bringing together the classification and measurement, impairment and hedge
accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and
Measurement and all previous versions of IFRS 9. The amendments are effective for annual periods
beginning on or after January 1, 2018. Entities will also have the option to early apply the accounting for
own credit risk-related fair value gains and losses arising on financial liabilities designated at fair value
through profit or loss without applying the other requirements of IFRS 9.
IFRS 16 Leases
On January 13, 2016, the IASB issued IFRS 16 Leases of which requires lessees to recognise assets and
liabilities for most leases. For lessors, there is little change to the existing accounting in IAS 17 Leases. The
new standard will be effective for annual periods beginning on or after January 1, 2019. Early application
is permitted, provided the new revenue standard, IFRS 15 Revenue from Contracts with Customers, has
been applied, or is applied at the same date as IFRS 16.
________________________________________________________________________________
Page 27
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
2.
w)
Basis of Consolidation and Summary of Significant Accounting Policies (continued)
Comparative Figures
Certain comparative figures have been reclassified to conform to the presentation adopted for the years
ended December 31, 2015 and 2014. Foreign exchange loss (gain) is now reported separate from selling,
general and administrative expenses with no effect on the net (loss) income for the years ended December
31, 2015 and 2014.
Selling, general and administrative expenses , as previously reported
less: foreign exchange loss (gain)
Selling, general and administrative expenses
3.
Cash and Cash Equivalents
Years ended December 31,
2014
25,225
(201)
25,426
2015
19,427
1,564
17,863
$
$
$
$
Cash
Cash equivalents
4.
Short Term Investments
Held for trading short term investments
December 31, 2015 December 31, 2014
$
15,234
27,633
42,867
70,268
1,950
72,218
$
$
$
December 31, 2015 December 31, 2014
$
34,391
$
36,031
5.
Derivative Assets and Derivative Liabilities
December 31, 2015
Liabilities
Assets
Interest rate swap
$
-
$
351
Assets
$
-
December 31, 2014
Liabilities
$
-
Under interest rate swaps contracts, the Company agrees to exchange the difference between fixed and
floating rate interest amounts calculated on agreed notional principal amounts. The interest rate swap
contract enables the Company to mitigate the risk of changing interest rates on the drawn variable rate debt.
The fair value of interest rate swaps at the end of the reporting period is determined by discounting future
cash flows using the curves at the end of the reporting period and credit risk inherent in the contract, and is
disclosed below.
The interest rate swap is carried on the statement of financial position at fair value, with periodic changes
in the fair value being recorded in other comprehensive income, to the extent that it is determined to be an
effective hedge with the gain or loss being recorded to income for the ineffective portion. Interest expense
on the bank loan will be recorded to income.
________________________________________________________________________________
Page 28
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
5.
Derivative Assets and Derivatives Liabilities (continued)
On March 26, 2015, the Company entered into an interest rate swap of $40 million, effective date of April
1, 2015, and expires on March 25, 2019 matching the maturity of the bank loan (refer to Note 11). The
interest rate swap was entered into to hedge the variable interest rate risk on the bank loan. The interest
rate swap is designated as a cash flow hedge for forecasted variable interest rate payments.
The fixed rate on the interest rate swap is 1.52% and the floating amount is based on the one month LIBOR
rate. The interest rate swap is settled on a monthly basis and the settlement is the difference between the
fixed and floating interest rate on a net basis.
As at December 31, 2015, the mark-to-market fair value of the interest rate swap was $351. This includes
$44 of accrued interest on the bank loan and as the hedge was effective, the remaining $307 mark-to-market
fair value loss was recognized in other comprehensive income.
6.
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 and value added tax receivable
Accounts receivable and other assets
$
$
December 31, 2015 December 31, 2014
16,573
209
244
2,226
653
19,905
5,172
-
-
1,350
546
7,068
$
$
Deposits on long term 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
Deposits on long term assets
$
$
December 31, 2015 December 31, 2014
542
(209)
(244)
28
61
516
1,358
1,963
28
-
-
28
-
8,183
505
8,716
$
$
As at December 31, 2015, the Company had $nil trade receivables (2014: $nil) which were over 90 days
and with no impairment. The Company’s allowance for doubtful accounts is $nil for all reporting periods.
________________________________________________________________________________
Page 29
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
6.
Accounts Receivable and Other Assets and Deposits on Long Term Assets (continued)
As at December 31, 2015, the unamortized borrowing costs of $305, associated with the April 23, 2013
amended and restated credit agreement with the Bank of Nova Scotia, has been written off to selling, general
and administrative expenses as the Company has entered into an amended and restated credit agreement
effective March 25, 2015.
The aging analysis of these trade receivables from concentrate sales is as follows:
0-30 days
31-60 days
7.
Inventories
Concentrate stock piles
Ore stock piles
Materials and supplies
Total inventories
$
December 31, 2015 December 31, 2014
16,157
416
16,573
5,172
-
5,172
$
$
$
December 31, 2015 December 31, 2014
$ 1,457 $ 1,575
4,992
8,370
14,937
1,912
7,065
10,434
$
$
For the year ended December 31, 2015, $74,060 (2014: $76,230) of inventory was expensed in cost of sales
and $175 (2014: $nil) of concentrate stock pile and $410 (2014: $121) of materials were written down to
net realizable value and recorded as an impairment of inventories.
________________________________________________________________________________
Page 30
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
8.
Mineral Properties, Plant and Equipment
Mineral
Properties
Non-
Depletable
(Tlacolula)
Mineral
Properties
Depletable
(Caylloma and San
Jose)
Land, Buildings,
and Leasehold
Improvements
Furniture
and Other
Equipment
Transport
Units
Machinery and
Equipment
Equipment
under
Finance
Lease
Capital
Work in
Progress
Total
$
1,348
185
-
-
-
-
-
$
139,191
17,128
-
(13,934)
(15,032)
-
(166)
$
13,345
1,011
(37)
(2,827)
(1,630)
-
-
$
67,678
128
(6)
(6,205)
(7,983)
647
(7)
$
8,009
1,924
(4)
(1,233)
(166)
155
(1)
$
151
179
(2)
(122)
-
-
-
$
876
1,577
(10)
(367)
(189)
-
-
3,251
$
36,343
-
-
-
(802)
-
$
233,849
58,475
(59)
(24,688)
(25,000)
-
(174)
Year ended December 31, 2015
Opening carrying amount, January 1, 2015
Additions
Disposals
Depreciation
Impairment charge
Reclassification
Adjustment on currency translation
Closing carrying amount, December 31, 2015
$
1,533
$
127,187
$
9,862
$
54,252
$
8,684
$
206
$
1,887
$
38,792
$
242,403
As at December 31, 2015
Cost
Accumulated depreciation
Closing carrying amount, December 31, 2015
$
$
$
$
$
$
$
1,533
-
1,533
197,739
(70,552)
127,187
24,678
(14,816)
9,862
78,718
(24,466)
54,252
13,071
(4,387)
8,684
711
(505)
206
4,732
(2,845)
1,887
38,792
$
-
$
38,792
359,974
$
(117,571)
$
242,403
$
$
$
$
$
$
$
________________________________________________________________________________
Page 31
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
8.
Mineral Properties, Plant and Equipment (continued)
Mineral
Properties Non-
Depletable
(Tlacolula)
Mineral Properties
Depletable
(Caylloma and San
Jose)
Land, Buildings, and
Leasehold
Improvements
Furniture and
Other
Equipment
Equipment
under Finance
Lease
Capital
Work in
Progress
Transport
Units
Machinery and
Equipment
Total
$
1,277
71
-
-
-
-
$
127,141
21,016
-
(13,395)
4,633
(204)
$
14,301
1,297
(69)
(2,602)
418
-
$
55,574
228
(28)
(5,619)
17,531
(8)
$
5,215
1,147
(1)
(883)
2,533
(2)
$
197
60
(7)
(99)
-
-
$
1,406
-
(28)
(502)
-
-
11,850
$
16,516
-
-
(25,115)
-
$
216,961
40,335
(133)
(23,100)
-
(214)
Year ended December 31, 2014
Opening carrying amount, January 1, 2014
Additions
Disposals
Depreciation
Reclassification
Adjustment on currency translation
Closing carrying amount, December 31, 2014
$
1,348
$
139,191
$
13,345
$
67,678
$
8,009
$
151
$
876
$
3,251
$
233,849
As at December 31, 2014
Cost
Accumulated depreciation
Closing carrying amount, December 31, 2014
$
$
$
$
$
$
$
1,348
-
1,348
196,093
(56,902)
139,191
25,768
(12,423)
13,345
85,947
(18,269)
67,678
11,220
(3,211)
8,009
627
(476)
151
3,991
(3,115)
876
$
3,251
-
$
3,251
$
328,245
(94,396)
$
233,849
$
$
$
$
$
$
$
a)
Tlacolula Property
Pursuant to an agreement dated September 14, 2009, as amended December 18, 2012 and November 10,
2014, the Company, through its wholly owned subsidiary, Cuzcatlan, holds 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 on exploration of the property, which includes a
commitment to drill 1,500 meters within 12 months after Cuzcatlan has received a permit to drill the
property, by making staged payments totalling $300 in cash, and by providing $250 in common shares of
the Company to Radius according to the following schedule:
$20 in cash and $20 cash equivalent in shares upon stock exchange approval;
$30 in cash and $30 cash equivalent in shares by January 15, 2011;
$50 in cash and $50 cash equivalent in shares by January 15, 2012;
$50 in cash and $50 cash equivalent in shares by January 15, 2013;
$50 in cash by January 19, 2015; and,
$100 in cash and $100 cash equivalent in shares within 90 days after Cuzcatlan has completed the
first 1,500 meters of drilling on the property of which has not occurred.
________________________________________________________________________________
Page 32
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
8.
a)
Mineral Properties, Plant and Equipment (continued)
Tlacolula Property (continued)
Upon completion of the cash payments and share issuances and incurring the exploration expenditures as
set forth above, the Company will be deemed to have exercised the Option and 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%. Radius has the right to terminate the agreement if the
option is not exercised by January 31, 2017.
As at December 31, 2015, the Company had issued an aggregate of 34,589 (2014: 34,589) common shares
of the Company to Radius, with a fair market value of $150 (2014: $150), and paid $200 (2014: $150) in
cash according to the terms of the option agreement. Refer to Note 10. a). Joint venture has not been
formed as of yet.
b)
Impairment of Mineral Properties, Plant and Equipment
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 inflows or cash generating units. The Company’s cash generating units (“CGU”) have
been identified as follows:
i.
Cuzcatlan CGU includes the assets at the San Jose property, which includes Taviche and Taviche
Oeste, and the Tlacolula property in the Mexico geographical region.
ii.
Bateas CGU includes the assets at the Caylloma property in the Peru geographical region.
The recoverable amounts of the Company’s CGUs, which include mineral properties, plant and equipment
are determined 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. Management’s estimate of the FVLCTS of its CGUs
is classified as level 3 in the fair value hierarchy.
At December 31, 2015, the Company determined there were several indicators of potential impairment on
its non current assets, including the decline in the Company’s market capitalization, reduction in the market
consensus on long term silver price forecasts during the year and the consequential impact on the
Company’s reserves and resources. Based on the Company’s assessment of the recoverable amounts of its
CGUs, the Company concluded that the Caylloma Mine had an estimated recoverable value, based on its
FVLCTS, below its carrying value and an impairment charge was required. As a result, the Company
recognized a $17,000, net of tax ($25,000, before tax) (2014: $nil) impairment charge, on the carrying value
of net assets of $65,187, in respect to the Company’s investment in Caylloma. The impairment charge was
allocated on a pro rata basis against the net book value of the mineral properties, plant and equipment.
________________________________________________________________________________
Page 33
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
8.
b)
Mineral Properties, Plant and Equipment (continued)
Impairment of Mineral Properties, Plant and Equipment (continued)
For December 31, 2015 and 2014, the key assumptions used for FVLCTS calculations were as follows:
Metal Price Assumptions
Gold price $ per ounce
Silver price $ per ounce
Lead price $ per tonne
Zinc price $ per tonne
2016
$
1,150.00
$
15.00
1,750.00
$
$
1,750.00
December 31, 2015
2019
1,215.71
$
$
2020
1,200.56
2018
1,191.54
$
2017
1,173.85
$
2021
1,200.56
$
2022
1,200.56
$
$
16.00
$
16.00
$
16.00
$
16.00
$
16.00
$
16.00
$
1,936.98
$
1,921.58
$
2,014.90
$
2,016.62
$
2,016.62
$
2,016.62
$
2,216.41
$
2,350.62
$
2,525.38
$
2,218.65
$
2,218.65
$
2,218.65
Weighted average cost of capital
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
December 31, 2014
Metal Price Assumptions
Gold price $ per ounce
Silver price $ per ounce
Lead price $ per tonne
Zinc price $ per tonne
2015
1,248.00
$
17.98
$
$
2,206.00
$
2,374.00
2016
1,261.00
$
$
18.27
$
2,294.00
$
2,533.00
2017
1,263.00
19.39
2,320.00
2,599.00
$
$
$
$
2018
1,270.00
19.60
2,062.00
2,200.00
$
$
$
$
2019
1,270.00
19.60
2,062.00
2,200.00
$
$
$
$
2020-2021
1,270.00
19.60
2,062.00
2,200.00
$
$
$
$
Weighted average cost of capital
7.20%
7.20%
7.20%
7.20%
7.20%
7.20%
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 LOM 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.
________________________________________________________________________________
Page 34
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
9.
Trade and Other Payables
Trade accounts payable
Payroll payable
Mining royalty
VAT payable
Due to related party (Note 10. c))
Restricted share unit payable
Performance share unit payable
Refundable deposits to contractors
Other payables
$
December 31, 2015 December 31, 2014
$
10,105
8,005
487
70
9
1,386
-
780
625
21,467
18,177
6,607
471
-
8
1,117
462
1,370
758
28,970
$
$
10.
a)
Related Party Transactions
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
Computer equipment 2
Years ended December 31,
2014
2015
$
88
$
83
104
6
198
108
$
-
191
$
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
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. In 2014, Radius Gold Inc. (“Radius”), which has directors in common with
the Company and shares office space, reimbursed the Company for general overhead costs incurred in prior periods.
In 2015, the Company paid $50 in cash to Radius under the option to acquire a 60% interest in the Tlacolula
silver project located in the State of Oaxaca, Mexico. Refer to Note 8. a).
________________________________________________________________________________
Page 35
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
10.
Related Party Transactions (continued)
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,
2014
4,828
390
163
6,178
11,559
2015
3,947
373
141
1,381
5,842
$
$
$
Consulting fees includes fees paid to two non-executive directors in both 2015 and 2014.
c)
Period End Balances Arising From Purchases of Goods/Services
Amounts due to related party
Owing to a company with a common director 3
3 Owing to Gold Group Management Inc. ("Gold Group") who has a director in common with the Company.
December 31, 2015 December 31, 2014
$
9
$
8
11.
Bank Loan
Bank loan
Unamortized transaction costs
Par Value
40,000
$
Maturity
April 1, 2019
December 31, December 31,
2015
40,000
(514)
39,486
2014
-
$
-
$
-
$
$
Non-Current
$
39,486
$
-
On March 25, 2015, the Company entered into an amended and restated credit agreement with the Bank of
Nova Scotia for a $60 million senior secured financing (“credit facility”) consisting of a $40 million term
credit facility with a 4 year term and a $20 million revolving credit facility for a two year period. 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 $10 million, a commitment fee of 1.0% per annum is payable quarterly on the unutilized portion
of the available credit facility.
________________________________________________________________________________
Page 36
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
11.
Bank Loan (continued)
On April 1, 2015, the $40 million term credit facility was drawn down. Interest on the term credit facility
is calculated from the one, two, three, or six month LIBOR plus a graduated margin based on the Company’s
leverage ratio and interest is payable one month in arrears. The term credit facility bears a 4 year term and
is repayable with a balloon payment on maturity date of April 1, 2019. Refer to Note 16.
While the term credit facility remains unpaid, the Company is required to maintain the following financial
covenants:
Total debt to EBITDA of not greater than 3:1 calculated on a rolling four fiscal quarter basis and
measured at the end of each fiscal quarter of the Company; and,
Minimum tangible net worth in an amount equal to the sum of (a) 85% of the tangible net worth as
at June 30, 2014, plus (b) 50% of positive quarterly net income earned after June 30, 2014, plus (c)
50% of the value of any equity interests issued by the Company after June 30, 2014.
Unamortized transaction costs are comprised of legal fees and upfront commitment fee in connection with
the amended and restated credit agreement with the Bank of Nova Scotia on March 25, 2015.
The following is a schedule of long-term bank loan principal repayments, during each of the four years
ending December 31:
2016
2017
2018
2019
$
-
-
-
40,000
40,000
$
12.
Other Liabilities
Other liabilities are comprised of the following:
Obligations under finance lease (a)
Long term liabilities (b)
Deferred share units (Note 15. c))
Restricted share units (Note 15. d))
Performance share units (Note 15. e))
Less: current portion
Obligations under finance lease (a)
Restricted share units
Performance share units
Less: current portion of other liabilities
Other liabilities, non-current
$
December 31,
2015
1,884
44
2,279
1,570
1,194
6,971
December 31,
2014
-
$
38
3,762
861
-
4,661
772
1,117
462
2,351
4,620
$
-
-
-
-
4,661
$
________________________________________________________________________________
Page 37
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
12.
a)
Other Liabilities (continued)
Obligations under Finance Lease
Obligations under Finance Lease
Not later than 1 year
Less: future finance charges on finance lease
Later than 1 year but less than 5 years
Less: future finance charges on finance lease
Present value of finance lease payments
b)
Long Term Liabilities
$
December 31,
2015
809
(37)
772
1,132
(20)
1,112
1,884
$
$
December 31,
2014
-
$
-
-
-
$
-
-
$
-
The Company’s Mexican operation is required to provide a seniority premium to all employees as required
under Mexican labor law. The seniority premium, equal to 12 days of salary for each year of services
rendered and is subject to a salary limitation of up to twice the minimum wage, is payable to employees
who: (i) voluntarily leave their employment after completing 15 years of service; (ii) leave their
employment for just cause; (iii) are dismissed by the Company with or without just cause; or (iv) die during
the labor relationship, in such event their beneficiaries must receive such premium. In addition, an employee
dismissed without cause has the option to be reinstated to his or her former job instead of receiving the
seniority payment, provided the employee does not work in a white-collar position.
A summary of the Company’s long term liabilities for seniority premium are presented below:
At December 31, 2015
Discount rate
General wage increase - Regular employees
General wage increase - Unionized employees
Increase in minimum wage
Long term inflation rate
Total seniority premium - December 31, 2013
Seniority premium expense
Foreign exchange differences
Cash payments
Total seniority premium - December 31, 2014
Seniority premium expense
Foreign exchange differences
Cash payments
Total seniority premium - December 31, 2015
7.5%
5.0%
4.5%
4.0%
4.0%
27
18
(5)
(2)
38
15
(6)
(3)
44
$
$
$
________________________________________________________________________________
Page 38
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
13.
Provisions
A summary of the Company’s provisions for decommissioning and restoration are presented below:
Decommissioning and Restoration Provisions
Caylloma Mine
Total
San Jose Mine
At December 31, 2015
Anticipated settlement date to
Undiscounted value of estimated cash flow
Estimated mine life (years)
Discount rate
Inflation rate
Total provisions - December 31, 2013
Increase to existing provisions
Accretion of provisions
Foreign exchange differences
Cash payments
Total provisions - December 31, 2014
Less: current portion
Non current - December 31, 2014
Total provisions - December 31, 2014
Increase to existing provisions
Accretion of provisions
Foreign exchange differences
Cash payments
Total provisions - December 31, 2015
Less: current portion
Non current - December 31, 2015
2027
8,299
2030
5,573
$
13,872
$
$
7 8
6.25%
3.32%
4.63%
2.00%
$
$
$
3,976
1,863
345
(613)
(60)
5,511
(553)
4,958
5,511
471
(34)
(806)
(145)
4,997
(118)
4,879
10,734
2,558
743
(1,166)
(171)
12,698
(809)
11,889
12,698
1,636
310
(1,867)
(272)
12,505
(453)
12,052
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6,758
695
398
(553)
(111)
7,187
(256)
6,931
7,187
1,165
344
(1,061)
(127)
7,508
(335)
7,173
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 mines are 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.
________________________________________________________________________________
Page 39
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
14.
Income Tax
a)
Income tax expense differs from the amount that would be computed by applying the Canadian
statutory income tax rate of 26% (2014: 26%) to income before income taxes. The reasons for the
differences are as follows:
(Loss) income before tax
Statutory income tax rate
Expected income tax
Items not deductible for tax purposes
Differences between Canadian and foreign tax rates
Other
Effect of change in tax rates
Inflation adjustment
Impact of foreign exchange
Impact of foreign exchange on tax assets and liabilities
Under(over) provided in prior years
Unused tax losses and tax offsets not recognized
Minimum royalty tax
Total income taxes
Effective tax rate
Total income taxes represented by:
Current income tax
Deferred income tax
December 31,
2015
(3,216)
26.00%
$
$
$
$
December 31,
2014
32,879
26.00%
8,549
1,665
2,046
128
(41)
-
-
790
-
2,425
1,715
17,277
52.55%
(836)
774
(354)
801
860
(613)
(402)
8,151
(2,009)
(812)
1,831
7,391
-229.82%
11,606
(4,215)
7,391
$
$
$
$
$
$
13,510
3,767
17,277
The Canadian Federal corporate tax and the British Columbia provincial tax rates remained
unchanged at 15% and 11%, respectively, for 2015 and 2014, resulting in a statutory tax rate of
26% throughout 2015 and 2014.
In the fourth quarter 2014, a tax rate change was enacted in Peru, reducing corporate income tax
rates. The Company has a legal stability agreement with the Peruvian government and it is valid
until 2017. The reduction in tax rate would impact the temporary difference that will reverse
subsequent to 2017. This resulted in a deferred tax expense of $860 in 2015 (2014: recovery of
$34) due to impairment and the deferred tax recovery in 2014 was due recording the deferred tax
liability in Peru at the lower rates. The Company will be subject to a Peruvian income tax rate of
27% in 2018 and 26% thereafter.
In December 2013, the Mexican President signed a bill approving significant tax reforms which
have an effective date of January 1, 2014. These tax reforms include a tax-deductible special mining
royalty of 7.5% on EBITDA and an extraordinary mining royalty of 0.5% on precious metals
revenue. The Mexican corporate tax rate remained unchanged at 30% for 2015 and 2014.
________________________________________________________________________________
Page 40
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
14.
Income Tax (continued)
a)
(continued)
The special mining royalty is an annual tax with the first payment of $9,745 due and paid in March
2015 for 2014 activities. The special mining royalty balance for 2015 is $3,105 (December 31,
2014: $5,870) resulting in a deferred tax expense of $1,486 (2014: $1,807) which offsets the current
tax special mining royalty expense of $1,934 (2014: $3,522). The 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 receivable of $780 (December 31, 2014: $680) of which $622 relates to current taxes
(December 31, 2014: $500) and $158 (December 31, 2014: $180) relates to mining tax in Peru.
Income taxes payable of $3,605 (December 31, 2014: $9,745) of which $500 relates to current
taxes (December 31, 2014: $6,223) and $3,105 (December 31, 2014: $3,522) relates to special
mining royalty in Mexico.
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, 2015 and December 31, 2014 are presented below:
December 31,
2015
December 31,
2014
Deferred income tax assets:
Provisions and other
Deferred mining tax
Other
Net deferred income tax assets
Deferred income tax liabilities:
Mineral properties - Peru
Mineral properties - Mexico
Special mining royalty
Equipment
Other
Total deferred income tax liabilities
Net deferred income tax liabilities
Classification
Non-current assets
Non-current liabilities
Net deferred income tax liabilities
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,546
2,877
2,154
6,577
(5,255)
(12,745)
(7,211)
(5,643)
(408)
(31,262)
(24,685)
492
(25,177)
(24,685)
3,889
-
2,515
6,404
(11,280)
(10,302)
(5,870)
(7,541)
(311)
(35,304)
(28,900)
126
(29,026)
(28,900)
________________________________________________________________________________
Page 41
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
14.
c)
Income Tax (continued)
The Company recognizes tax benefits on losses or other deductible amounts generated in countries
where the probable criteria for the recognition of deferred tax assets has been met. The Company’s
unrecognized deductible temporary differences and unused tax losses for which no deferred tax
asset is recognized consist of the following amounts:
Non-capital losses
Provisions and other
Share issue cost
Mineral properties, plant and equipment
Derivative Liability
Capital Losses
Unrecognized deductible temporary differences
$
$
December 31,
2015
43,916
5,042
868
1,450
351
839
52,466
December 31,
2014
46,166
6,009
639
1,704
-
1,004
55,522
$
$
The Company has unremitted intercompany interest of $22,553 (2014 - $22,775) from Mexico that
is subject to an interest withholding tax rate of 10% and unremitted retained earnings of $45,687
(2014 - $67,173) in Peru and $58,248 (2014 - $41,101) in Mexico that is subject to withholding
taxes of 10% and 5% respectively. No withholding taxes have been accrued with respect to the
unremitted intercompany interest and unremitted retained earnings as the company is permanently
reinvested in its foreign subsidiaries.
The Company’s tax losses have the following expiry dates:
Non-capital losses, expiring as follows:
Canada
Mexico
Barbados
$
43,281
450
185
43,916
$
Expiry date
2025 - 2035
2021 - 2025
2022 - 2024
________________________________________________________________________________
Page 42
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
15.
Share Capital
a)
Unlimited Common Shares Without Par Value
Pursuant to the Combination Agreement (the “Combination Agreement”) dated October 29, 2008 between
the Company and Continuum Resources Ltd. (“Continuum”), the Company acquired all of the issued and
outstanding common shares of Continuum pursuant to a plan of arrangement under section 288 of the
Business Corporations Act (British Columbia) (the “Arrangement”). The Combination Agreement
provided that any certificate formerly representing Continuum common shares not duly surrendered on or
prior to the sixth anniversary of the effective date of the Arrangement shall cease to represent a claim or
interest of any kind or nature against the Company or Continuum by a former holder, and that on such
anniversary date, all common shares in the capital of the Company to which the former holders of such
certificates were entitled (the “Surrendered Shares”) shall be deemed to have been surrendered to the
Company. On June 18, 2015, the Company cancelled and returned to treasury 38,035 common shares of
the Company registered in the name of Computershare in trust for Continuum holders pursuant to a
Depositary Agreement between among the Company and Computershare Investor Services dated February
22, 2009.
b)
Stock Options
The Company’s Stock Option Plan (the “Plan”) dated April 11, 2011 was approved by the shareholders at
the Company’s annual general meeting held on May 26, 2011. On April 21, 2015 the Board approved
amendments to the Plan which do not require shareholder approval. The Plan provides that from May 9,
2011, 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 equaled 9.92% of the total number of issued and outstanding common shares of
the Company as at April 11, 2011. As at December 31, 2015, the number of common shares available for
issuance under the Plan is 2,817,098.
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:
________________________________________________________________________________
Page 43
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
15.
Share Capital (continued)
b)
Stock Options (continued)
December 31, 2015
December 31, 2014
Outstanding at beginning of the period
Granted
Exercised
Forfeited
Expired
Outstanding at end of the period
Vested and exercisable at end of the period
2,944
902
(741)
-
-
3,105
1,874
Weighted
average
exercise
price (CAD$)
Shares
(in 000's)
$
Weighted
average
exercise price
(CAD$)
$
3.42
4.30
3.68
5.26
4.55
3.25
2.80
Shares
(in 000's)
6,437
828
(2,564)
(70)
(1,687)
2,944
1,776
3.25
4.79
3.40
-
-
3.66
3.01
$
$
$
$
During the year ended December 31, 2015, 901,969 stock options with a term of five years were granted
with an exercise price of CAD$4.79, vesting 50% after one year and 100% after two years from the grant
date.
During the year ended December 31, 2015, 740,860 stock options with an exercise prices ranging from
CAD$0.85 to CAD$4.03 per share were exercised.
During the year ended December 31, 2015, the expiry date for 75,000 stock options with an exercise price
of CAD$4.03 was extended from May 29, 2015 to June 12, 2015.
During the year ended December 31, 2015, the Company recorded a share-based payment charge of $1,239
(2014: $2,108) in respect to options granted and vested.
The assumptions used to estimate the fair value of the stock options granted during the years ended
December 31, 2015 and 2014 were as follows:
Risk-free interest rate
Expected stock price volatility
Expected term in years
Expected dividend yield
Expected forfeiture rate
2015
Years ended December 31,
2014
1.19%
59.29%
3
0%
4.15%
0.45%
61.22%
3
0%
5.25%
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 stock option was
CAD$4.86 (2014: CAD$4.30).
________________________________________________________________________________
Page 44
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
15.
Share Capital (continued)
b)
Stock options (continued)
The following table summarizes information related to stock options outstanding and exercisable at
December 31, 2015:
Number of
outstanding
stock options
(in 000's)
Weighted
average
remaining
contractual life
of outstanding
stock options
(years)
262 2.8
114 0.5
250 1.0
869 0.4
1,561 3.0
1.1
2.0
49
3,105
Exercise price
in CAD$
$0.85 to $0.99
$1.00 to $1.99
$2.00 to $2.99
$3.00 to $3.99
$4.00 to $4.99
$6.00 to $6.67
$0.85 to $6.67
$
Weighted average
exercise price on
outstanding stock
options CAD$
0.85
1.57
2.22
3.38
4.58
6.67
3.66
$
Exercisable
stock options
(in 000's)
262
114
250
869
330
49
1,874
$
Weighted average
exercise price on
exercisable stock
options CAD$
0.85
1.57
2.22
3.38
4.30
6.67
3.01
$
The weighted average remaining life of vested stock options at December 31, 2015 was 1.0 years
(December 31, 2014: 1.5 years).
c)
DSUs
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, 2015, the Company granted 187,890 (2014: 244,188) DSU with a
market value of CAD$900 (2014: CAD$1,050), at the date of grants, to non-executive directors.
During the year ended December 31, 2015, the Company paid $nil (2014: $514) on nil (2014: 127,063)
DSU to a former director of the Company.
As at December 31, 2015, there are 1,016,419 (2014: 828,529) DSU outstanding with a fair value of $2,279
(2014: $3,762). Refer to Note 12.
d)
RSUs
The Company’s SU Plan covers all RSUs and PSUs granted by the Company on and after March 1,
2015. All RSUs granted prior to March 1, 2015, are governed under the restricted share unit plan dated
November 12, 2010.
________________________________________________________________________________
Page 45
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
15.
Share Capital (continued)
d)
RSUs (continued)
The RSUs entitle employees or officers to cash payments which vest and are payable in installments over
a period of up to three years following the date of the award. The RSUs 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
vesting date multiplied by the number of RSUs held.
During the year ended December 31, 2015, the Company granted 385,740 (2014: 424,425) RSU with a
market value of CAD$1,848 (2014: CAD$1,825), at the date of grant, to an executive director and officer
(151,651), officers (205,185), and employees (28,904), vesting and 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, 2015, the Company cancelled nil (2014: 52,528) RSU and paid $nil
(2014: $601) on nil (2014: 137,305) RSU to former officers of the Company, and $739 (2014: $435) on
192,519 (2014: 111,286) RSU to an executive director and officer, officers, employees, and a former
employee.
As at December 31, 2015, there were 1,015,846 (2014: 822,625) RSUs outstanding with a fair value of
$1,570 (2014: $2,247). Refer to Note 9 and Note 12.
e)
PSUs
The cash settled PSUs are performance-based awards for the achievement of specified performance metrics
by specified deadlines, which vest in installments over a three year period. Any PSUs for which the
performance metrics have not been achieved shall automatically be forfeited and cancelled. The PSUs for
which the performance metrics have been achieved will vest and the PSU 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
vesting date multiplied by the number of PSUs held.
During the year ended December 31, 2015, the Company granted 1,236,620 (2014: nil) PSU with a market
value of CAD$5,923 (2014: $nil), at the date of grant, to an executive director and officer (758,255) and
officers (478,365), vesting and payable 20% after one year, 30% after two years, and the remaining 50%
after three years from the date of grant if certain performance metrics are achieved. For PSUs that vest
under this grant, the payout will be paid up to a maximum of two times the grant price.
As at December 31, 2015, a total of 1,236,620 (2014: nil) PSUs are outstanding with a fair value of $1,194
(2014: $nil).
f)
i.
Earnings per Share
Basic
Basic earnings per share is calculated by dividing the net income for the period by the weighted average
number of shares outstanding during the period.
The following table sets forth the computation of basic earnings per share:
________________________________________________________________________________
Page 46
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
15.
Share Capital (continued)
f)
i.
Earnings per Share (continued)
Basic (continued)
(Loss) income available to equity owners
Weighted average number of shares (in '000's)
(Loss) earnings per share - basic
ii.
Diluted
Years ended December 31,
2014
15,602
126,787
0.12
2015
(10,608)
129,001
(0.08)
$
$
$
$
Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to
assume conversion of all potentially dilutive shares. The following table sets forth the computation of
diluted earnings per share:
(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
$
2015
(10,608)
129,001
Years ended December 31,
2014
15,602
126,787
1,356
128,143
0.12
129,001
(0.08)
$
-
$
$
For the year ended December 31, 2015, excluded from the calculation were 1,417,685 (2014: 49,084) anti-
dilutive options with exercise prices ranging from CAD$4.79 to CAD$6.67 (2014: CAD$6.67).
16.
Capital Disclosure
The Company’s objectives when managing capital are to provide shareholder returns through maximization
of the profitable growth of the business and to maintain a degree of financial flexibility relevant to the
underlying operating and metal price risks while safeguarding the Company’s ability to continue as a going
concern.
The capital of the Company consists of equity and available credit facility, net of cash. The Board of
Directors has not established a quantitative return on capital criteria for management. The Company
manages the capital structure and makes adjustments to it in light of changes in economic conditions and
the risk characteristics of the underlying assets.
The management of the Company believes that the capital resources of the Company as at December 31,
2015, are sufficient for its present needs for at least the next 12 months.
________________________________________________________________________________
Page 47
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
16.
Capital Disclosure (continued)
The Company, under the credit facility, shall maintain at all times, on a consolidated basis, a tangible net
worth in an amount equal to the sum of (a) 85% of the tangible net worth as at June 30, 2014, plus (b) 50%
of positive quarterly net income earned after June 30, 2014 plus (c) 50% of the value of any equity interests
issued by the Company after June 30, 2014. Tangible net worth is defined as shareholders’ equity less all
amounts that would be included on a consolidated statement of financial position of the Company as
amounts owed by the Company or as intangibles. Intangibles includes, without limitation, such personal
property as goodwill, copyrights, patents and trademarks, franchises, licences of intellectual property rights,
research and development costs, but, for greater certainty, excludes accounts receivable, prepaids, future
tax assets and deferred development costs. As at December 31, 2015, the Company is in compliance with
the credit facility covenants.
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 Measurements 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, 2015, there have been no transfers of amounts between Level 1, Level
2, and Level 3 of the fair value hierarchy.
________________________________________________________________________________
Page 48
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
17. Management of Financial Risk (continued)
a)
i.
Fair Value Measurements of Financial Instruments (continued)
Assets and Liabilities Measured At Fair Value on a Recurring Basis
Fair Value Measurements
Quoted Prices in
Active Markets for
Identical Assets
Significant and
Other Observable
Inputs
Significant
Unobservable
Inputs
$
Level 1
72,218
36,031
-
Level 2
$
-
-
5,172
Level 3
$
-
-
-
1
$
Aggregate Fair
Value
72,218
36,031
5,172
At December 31, 2015
Cash and cash equivalents
Short term investments
Trade receivable from concentrate sales
2
$
$
(351)
4,821
Derivative liabilities
-
108,249
-
$
-
(351)
113,070
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.
1
The Company's trade receivables arose from provisional concentrate sales and are valued using quoted market prices based
on the forward London Metal Exchange ("LME") for zinc and lead, the average London Bullion Market Association A.M. and
P.M. fix ("London A.M. fix" and "London P.M. fix") for gold and silver, and the London Bullion Market Association P.M. fix
("London P.M. fix") for gold and silver.
2 Derivative liabilities includes interest rate swaps. The fair value of the derivative liabilities reflect observable LIBOR and
hereby classified within Level 2 of the fair value hierarchy.
$
At December 31, 2014
Cash and cash equivalents
Short term investments
Trade receivable from concentrate sales 1
Quoted Prices in
Active Markets for
Identical Assets
Significant and
Other Observable
Inputs
Significant
Unobservable
Inputs
$
Level 1
42,867
34,391
Level 2
-
$
-
Level 3
-
$
-
Aggregate Fair
Value
42,867
34,391
$
-
16,573
-
16,573
$
77,258
$
16,573
$
-
$
93,831
________________________________________________________________________________
Page 49
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
17. Management of Financial Risk (continued)
a)
ii.
Fair Value Measurements of Financial Instruments (continued)
Fair Value of Financial Assets and Liabilities
Financial assets
Trade receivable from concentrate sales 2
Advances and other receivables3
Financial liabilities
Derivative liabilities 1
Other liabilities
3
December 31, 2015
December 31, 2014
Carrying amount Estimated fair value Carrying amount Estimated fair value
$
5,172
$
5,172
$
16,573
$
16,573
$
1,350
6,522
$
1,350
6,522
2,226
18,799
$
$
2,226
18,799
$
351
$
351
$
-
$
-
1,985
2,336
1,928
2,279
$
$
38
38
1 Derivative derivative liabilities includes interest rate swaps. The fair value of the derivative liabilities reflect observable
LIBOR and hereby classified within Level 2 of the fair value hierarchy.
2
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 Advances and other receivables and other liabilities are recorded at amortized costs. The fair value of other assets and other
liabilities are primarily determined using quoted market prices, and the balances include the current portion of other assets and
other liabilities, respectively.
$
$
38
38
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.
________________________________________________________________________________
Page 50
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
17. Management of Financial Risk (continued)
b)
Currency Risk (continued)
As at December 31, 2015, the Company is exposed to currency risk through the following assets and
liabilities denominated in Canadian dollars, Peruvian nuevo soles and Mexican pesos (all amounts are
expressed in thousands of Canadian dollars, thousands of Peruvian nuevo soles or thousands of Mexican
pesos):
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Income tax receivable
Deposits on long term assets and long
term borrowing costs
Trade and other payables
Provisions, current
Income tax payable
Other liabilities
Provisions
Total
Total US$ equivalent
December 31, 2015
December 31, 2014
Canadian
Dollars
$
10,023
-
83
-
-
(2,921)
-
-
(4,805)
-
2,380
1,716
$
$
S/.
Nuevo
Soles
Mexican
Pesos
983
-
4,035
2,663
$
46,405
-
6,805
-
Canadian
Dollars
$
2,695
7,696
897
-
S/.
Nuevo
Soles
Mexican
Pesos
8,633
-
3,742
448
$
56,739
-
15,692
-
-
(10,931)
(1,143)
(15)
-
(24,475)
(28,883)
(8,463)
31,899
(163,699)
(2,028)
(61,960)
(754)
(83,978)
(227,310)
(13,211)
$
$
71
(2,231)
-
-
(5,376)
-
3,752
3,226
$
$
S/.
$
-
(12,387)
(767)
(37)
-
(20,710)
(21,078)
(7,052)
19,096
(117,848)
(8,138)
(143,426)
(563)
(73,001)
$
(251,449)
$
(17,084)
S/.
$
Based on the above net exposure as at December 31, 2015, 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 $nil (2014: $358) and an
impact to net income before tax of $2,217 (2014: $2,682).
The sensitivity analyses in the above table should be used with caution as the results are theoretical, based
on management’s best assumptions using material and practicable data which may generate results that are
not necessarily indicative of future performance. In addition, in deriving this analysis, the Company has
made assumptions based on the structure and relationship of variables as at the balance sheet date which
may differ due to fluctuations throughout the year with all other variables assumed to remain constant.
Actual changes in one variable may contribute to changes in another variable, which may amplify or offset
the effect on earnings.
________________________________________________________________________________
Page 51
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
17. Management of Financial Risk (continued)
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, 2015 is as follows:
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Income tax receivable
$
December 31, 2015 December 31, 2014
$
42,867
34,391
19,905
680
97,843
72,218
36,031
7,068
780
116,097
$
$
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.
________________________________________________________________________________
Page 52
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
17. Management of Financial Risk (continued)
d)
Liquidity Risk (continued)
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, 2015
Trade and other payables
Bank loan
Derivative liabilities
Income tax payable
Other liabilities
Operating leases
Provisions
Less than
$
1 year 1 - 3 years 4 - 5 years
$
28,970
-
40,000
-
-
351
-
3,605
-
809
539
-
1,239
447
41,239
34,721
-
$
-
-
-
4,640
585
1,134
6,359
$
$
After
5 years
-
$
-
-
-
-
-
11,052
11,052
$
$
Total
28,970
40,000
351
3,605
5,449
1,124
13,872
93,371
$
$
Operating leases includes leases for office premises, computer and other equipment used in the normal
course of business. Refer to Note 24. c).
On March 25, 2015, the Company entered into an amended and restated credit agreement with the Bank of
Nova Scotia for a $60 million senior secured financing (“credit facility”) consisting of a $40 million term
credit facility with a 4 year term and a $20 million revolving credit facility for a two year period. 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.
On April 1, 2015, the $40 million term credit facility was drawn down. Refer to Note 5 and Note 11.
e)
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. The risk that the Company will realize a loss as a result of a
decline in the fair value is limited because the balances are generally held with major financial institutions
in demand deposit accounts.
A 10% change in interest rates would cause a $1 change in income on an annualized basis.
On March 25, 2015, the Company entered into a $40 million interest rate swap, effective for April 1, 2015
as a cash flow hedge to the credit facility (refer to Note 11 and Note 17. d)).
________________________________________________________________________________
Page 53
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
17. Management of Financial Risk (continued)
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.
A 10% change in zinc, lead, silver, and gold prices would cause a $1,738, $1,168, $6,425, $2,392,
respectively, change in net earnings on an annualized basis.
The Company also enters into provisional concentrate contracts to sell the silver-gold, zinc, lead-silver
concentrates produced by the San Jose and Caylloma mines. For the year ended December 31, 2015, the
impact of price adjustments was an expense of $2,329 (2014: expense $539).
18.
Segmented Information
All of the Company’s operations are within the mining sector, conducted through operations in three
countries. Due to geographic and political diversity, the Company’s mining operations are decentralized
whereby management are responsible for achieving specified business results within a framework of global
policies and standards. Country corporate offices provide support infrastructure to the mine in addressing
local and country issues including financial, human resources, and exploration support.
Products are silver, gold, lead, zinc and copper produced from mines in Peru and Mexico, as operated by
Bateas and Cuzcatlan, respectively. Segments have been aggregated where operations in specific regions
have similar products, production processes, types of customers and economic environment.
The Company’s operating segments are based on the reports reviewed by the senior management group
that are used to make strategic decisions. The Chief Executive Officer considers the business from a
geographic perspective considering the performance of the Company’s business units. The segment
information for the reportable segments for the years ended December 31, 2015 and 2014 are as follows:
________________________________________________________________________________
Page 54
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
18.
Segmented Information (continued)
Reportable Segments
Year ended December 31, 2015
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Cost of sales*
Depletion, depreciation, and amortization**
Selling, general and administrative expenses*
Exploration and evaluation costs
Foreign exchange loss
Impairment of mineral properties
Other operating expense
Interest income
Interest expense
(Loss) income before tax
Current income tax
Deferred income tax
Income taxes
(Loss) income for the year
Capital expenditures***
Corporate
Bateas
Cuzcatlan
Total
$
-
$
-
$
-
$
-
$
-
$
643
$
10,818
$
253
216
$
$
-
$
19
$
160
$
1,428
$
(12,573)
$
114
$
(90)
$
24
$
(12,597)
$
29
$
53,803
$
-
$
36,962
$
16,841
$
50,113
$
9,400
$
2,561
$
-
$
333
$
25,000
$
572
$
138
$
364
$
(25,002)
$
1,690
$
(5,611)
$
(3,921)
$
(21,081)
$
8,351
$
100,926
$
100,926
$
-
$
-
$
60,968
$
15,696
$
4,484
$
67
1,015
$
$
-
$
150
$
83
$
(34)
$
34,358
$
9,802
$
1,486
$
11,288
$
23,070
$
48,750
$
$
$
$
$
154,729
100,926
36,962
16,841
111,081
$
$
$
$
$
$
$
$
$
$
$
$
$
$
25,739
17,863
320
1,564
25,000
741
381
1,758
(3,217)
11,606
(4,215)
7,391
(10,608)
57,130
Reportable Segments
Year ended December 31, 2014
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Cost of sales*
Depletion, depreciation, and amortization**
Selling, general and administrative expenses*
Foreign exchange (gain) loss
Other operating expense
Corporate
Bateas
Cuzcatlan
Total
$
-
$
-
-
$
$
-
$
-
$
465
$
66,054
$
-
$
47,978
$
18,076
$
51,131
$
7,521
$
107,952
107,952
$
-
$
$
-
$
62,622
$
15,531
$
$
$
$
$
$
174,006
107,952
47,978
18,076
113,753
23,517
$
17,536
$
3,535
$
4,355
$
25,426
$
(747)
$
368
$
178
$
(201)
Interest income
Interest expense
(Loss) income before tax
Current income tax
Deferred income tax
Income taxes
(Loss) income for the year
Capital expenditures***
* cost of sales and selling, general and administrative expenses includes depletion, depreciation, and amortization
** included in cost of sales or selling, general and administrative expenses
*** segmented capital expenditures are presented on a cash basis
$
$
$
$
$
$
$
$
$
16
88
345
40,524
9,922
2,188
12,110
28,414
29,006
$
$
$
$
$
$
$
$
$
1,021
93
404
(18,120)
289
26
315
(18,435)
87
$
$
$
$
$
$
$
$
$
241
100
403
10,475
3,300
1,552
4,852
5,623
9,850
$
$
$
$
$
$
$
$
$
1,278
281
1,152
32,879
13,511
3,766
17,277
15,602
38,943
________________________________________________________________________________
Page 55
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
18.
Segmented Information (continued)
Reportable Segments
As at December 31, 2015
Corporate
Bateas
Cuzcatlan
Total
Mineral properties, plant and equipment
Total assets
Total liabilities
$
$
$
371
51,061
47,681
$
$
$
42,072
86,159
17,015
$
$
$
199,960
242,434
50,790
$
$
$
242,403
379,654
115,486
As at December 31, 2014
Mineral properties, plant and equipment
Total assets
Total liabilities
$
$
$
539
20,804
8,153
$
$
$
66,570
110,499
19,813
$
$
$
166,740
219,007
49,631
$
$
$
233,849
350,310
77,597
The segment information by geographical region for the years ended December 31, 2015 and 2014 are as
follows:
Reportable Segments
Year ended December 31, 2015
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Year ended December 31, 2014
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Reportable Segments
As at December 31, 2015
Non current assets
As at December 31, 2014
Non current assets
Canada
Peru
Mexico
Total
$
-
$
-
$
-
$
-
$
53,803
$
-
$
36,962
$
16,841
$
100,926
100,926
$
$
-
$
-
$
$
$
$
154,729
100,926
36,962
16,841
$
-
$
-
$
-
$
-
66,054
$
$
-
$
47,978
$
18,076
$
107,952
107,952
$
$
-
$
-
$
$
$
$
174,006
107,952
47,978
18,076
Canada
Peru
Mexico
Total
$
1,897
$
43,053
$
206,661
$
251,611
$
2,323
$
67,196
$
166,419
$
235,938
________________________________________________________________________________
Page 56
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
18.
Segmented Information (continued)
For the year ended December 31, 2015, there were nine (2014: 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
Customer 5
Customer 6
Customer 7
Customer 8
Bateas/Peru
% of total sales
Customer 1
Customer 2
Cuzcatlan/Mexico
% of total sales
Consolidated
% of total sales
$
$
37%
0%
0%
0%
16%
1%
1%
45%
100%
Years ended December 31,
2014
35,624
12,324
16,869
1,237
-
-
-
-
66,054
38%
50,278
57,674
100% 107,952
$
62%
100% 174,006
$
100%
2015
20,230
-
(11)
(18)
8,389
461
368
24,384
53,803
35%
100,831
95
100,926
65%
154,729
100%
100%
0%
$
$
53%
19%
26%
2%
0%
0%
0%
0%
100%
47%
53%
100%
100%
$
$
$
$
19.
Cost of Sales
The cost of sales for the years ended December 31, 2015 and 2014 are as follows:
2015
Caylloma San Jose
2014
Total Caylloma San Jose
Total
$
$
$
Direct mining costs 1
Workers' participation
Depletion and depreciation
Royalty expenses
42,503
2,269
15,527
669
60,968
$
1 Direct mining costs includes salaries and other short term benefits, contractor charges, energy,
consumables and production related costs.
82,184
2,654
24,893
1,350
111,081
39,681
385
9,366
681
50,113
42,013
735
7,482
901
51,131
43,418
3,556
15,161
487
62,622
$
$
$
$
$
$
$
$
85,431
4,291
22,643
1,388
113,753
________________________________________________________________________________
Page 57
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
20.
Selling, General and Administrative expenses
The selling, general and administrative expenses for the years ended December 31, 2015 and 2014 are as
follows:
Years ended December 31,
Salaries and benefits
Corporate administration
Audit, legal and professional fees
Filing and listing fees
Director's fees
Depreciation and amortization
$
$
2015
11,198
1,321
4,221
188
506
429
17,863
2014
18,599
(8)
5,269
223
546
797
25,426
$
$
21.
Exploration and Evaluation Costs
The exploration and evaluation costs for the years ended December 31, 2015 and 2014 are as follows:
Years ended December 31,
Salaries, wages, and benefits
Direct costs
2015
Corporate
133
$
120
253
$
Bateas Cuzcatlan
-
$
-
$
-
-
$
67
67
$
22.
Other Operating Expense
Total Corporate
133
187
320
-
$
-
$
-
$
$
2014
Bateas Cuzcatlan
-
$
-
$
-
-
$
-
$
-
Total
-
$
-
$
-
The other operating expense for the years ended December 31, 2015 and 2014 are comprised of the
following:
Loss on disposal of mineral properties, plant and equipment
Restructuring and severance costs
Impairment of inventories
Other operating (income) - other
$
$
Years ended December 31,
2014
66
1,091
121
-
1,278
2015
46
191
585
(81)
741
$
$
Restructuring and severance costs include the Company’s cost-reduction program, and include all salaries
and post-employment costs.
________________________________________________________________________________
Page 58
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
23.
Net Finance Expense
The net finance expense income for the years ended December 31, 2015 and 2014 are as follows:
Years ended December 31,
2014
2015
$
381
381
$
281
281
1,258
190
310
1,758
(1,377)
$
5
404
743
1,152
(871)
$
Finance income
Interest income on FVTPL financial assets
Total finance income
Finance expenses
Interest expense
Standby and commitment fees
Accretion of provisions (Note 13)
Total finance expense
Net finance expense
24.
a)
Contingencies and Capital Commitments
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 was 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 was subject to annual collateral in the
form of a letter of guarantee. In August 2015, the closure plan was again updated with total closure costs
of $7,770, consisting of progressive closure activities of $3,604, final closure of $3,594, and post closure
of $573. Under the rules of closure, for purposes of determining the annual financial collateral in the form
of a letter of guarantee, the final closure and post-closure activities constitute one amount of $4,166, the
same to be allocated annually constituting the following guarantees by year: 2016 $2,495, 2017 $3,179,
2018 $3,908, 2019 $4,705 and 2020 $5,641, according to the approved life in the study of mine closure.
Scotiabank Peru, a third party, has established a bank letter of guarantee in the amount of $2,495 (2014:
$1,842) ,on behalf of Bateas, in favor of the Peruvian mining regulatory agency in compliance with local
regulation and to collateralize Bateas’s mine closure plan. This bank letter of guarantee expires on
December 31, 2016.
Scotiabank Peru, a third party, has established a bank letter of guarantee in the amount of $3 (2014: $3), on
behalf of Bateas, in favor of the Peruvian Energy and Mining Ministry to collateralize Bateas’s regulatory
compliance with an electric transmission line project. This bank letter of guarantee expires on November
30, 2016.
Scotiabank Peru, a third party, has established a bank letter of guarantee in the amount of $55 (2014: $58),
for office rental, on behalf of Bateas, in favor of Centro Empresarial Nuevo Mundo S.A.C. This bank letter
of guarantee expires on July 15, 2016.
________________________________________________________________________________
Page 59
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
24.
Contingencies and Capital Commitments (continued)
b)
Capital Commitments
As at December 31, 2015, $8,346 of capital commitments not disclosed elsewhere in the Financial
Statements, and forecasted to be expended within one year, included $1,938 for the dry stack tailing dam
and $4,649 for the plant expansion at the San Jose property, and $213 for an energy improvement project
and $1,546 for the plant expansion at the Caylloma property.
c)
Other Commitments
The Company has a contract to guarantee the 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 5,200
kW) and the Company is obligated to purchase subject to exemptions under provisions of "Force Majeure".
The contract period is 15 years and expires in 2022, after that it is automatically renewed for periods of two
years. Renewal can be avoided without penalties by notification 10 months in advance of the renewal date.
Tariffs are established annually by the energy market regulator in accordance with applicable regulations
in Peru. The minimum committed demand is $30 per month, and the average monthly charge for 2016 is
$300.
Operating leases includes leases for office premises, computer and other equipment used in the normal
course of business. Refer to Note 17. d).
The expected payments due by period, as at December 31, 2015, are as follows:
Expected payments due by period as at December 31, 2015
Office premises - Canada
Office premises - Peru
Office premises - Mexico
Total office premises
Computer equipment - Peru
Computer equipment - Mexico
Total computer equipment
Machinery - Mexico
Total machinery
Total operating leases
$
$
Less than
1 year
66
335
8
409
126
4
130
-
$
-
$
539
$
$
$
$
$
1 - 3 years
199
141
-
340
47
139
186
59
59
585
4 - 5 years
-
$
-
-
-
$
-
-
$
-
-
$
-
$
-
$
$
$
$
$
$
Total
265
476
8
749
173
143
316
59
59
1,124
________________________________________________________________________________
Page 60
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts in US$’000’s unless otherwise stated)
_______________________________________________________________________________
24.
d)
Contingencies and Capital Commitments (continued)
Tax Contingencies
The Company has been assessed taxes and related interest and penalties by the Peruvian tax authority,
SUNAT, for tax years 2010 and 2011 in the amounts of $957, $564, respectively, for a total of $1,521. The
Company is currently appealing the assessments and believes the appeals will be ruled in favor of the
Company. The Company has provided a guarantee by way of a letter bond in the amount of $772. This
bank letter of guarantee expires on September 8, 2016.
During 2015, the Company’s foreign trade operations for tax years 2011 to 2014 were under review by the
Mexican Tax Administration Service (SAT) and facing an administrative customs procedure (PAMA) for
specific temporary import documents (pediments). On October 27, 2015, the Mexican Tax Administration
Service (SAT) issued a final resolution regarding the Company’s foreign trade operations for tax years 2011
to 2014, concluding that certain claims are denied resulting in an assessment of $25 customs excise tax,
$63 in VAT, and $93 in penalties and interest for a total of $181 (the “Tax Credit”). On December 11,
2015, the Company, through Afianzadora Sofimex S.A., has established a security bond in the amount of
$215, in favor of the PAMA to collateralize the Tax Credit of $181. This security bond expires on December
10, 2017. Subsequent to December, 31, 2015, on January 21, 2016, the Company presented its arguments
before the Federal Court for the nullity and voidance of the Tax Credit.
e)
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 for the Company.
Certain conditions may exist as of the date the financial statements are issued that 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.
25.
Subsequent event up to March 14, 2016
Subsequent to December 31, 2015, 4,940 share purchase options with an exercise price of CAD$3.38 were
exercised resulting in issued and outstanding shares of 129,245,507.
________________________________________________________________________________
Page 61
EXHIBIT 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE
YEAR ENDED DECEMBER 31, 2015
As of March 14, 2016
(Dollar amounts expressed in US dollars, unless otherwise indicated)
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Management’s discussion and analysis (“MD&A”) is intended to help the reader understand the significant factors
that have affected Fortuna Silver Mines Inc.’s and its subsidiaries’ (“Fortuna’s” or the “Company’s”) performance
and that may affect its future performance. This MD&A was prepared as of March 14, 2016 and should be read
in conjunction with the Company’s audited consolidated financial statements for the year ended December 31,
2015, and the related notes contained therein. The Company reports its financial position, financial performance
and cash flows in accordance with International Financial Reporting Standards (“GAAP” or “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 payable ounce of silver; total production
cost per tonne; all-in sustaining cash cost; all-in cash cost; adjusted net (loss) income; operating cash flow per
share before changes in working capital, income taxes, and interest income; mine operating earnings (loss); and
adjusted EBITDA. These measures are used by the Company to manage and evaluate operating performance and
ability to generate cash and are widely reported in the silver mining industry as benchmarks for performance.
However, the measures do not have a standardized meaning and may differ from methods used by other companies
with similar descriptions. The Company believes that certain investors use these non-GAAP financial measures
to evaluate the Company’s performance. Accordingly, non-GAAP financial measures should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with IFRS. To facilitate a better
understanding of these measures as calculated by the Company, we have provided detailed descriptions and
reconciliations as required.
This document contains forward-looking statements. Please refer to the cautionary language under the
heading “Cautionary Statement on Forward-Looking Statements.”
Contents
Page
Business of the Company ........................................................................................................................................ 2
2015 Highlights ....................................................................................................................................................... 2
2016 Guidance and Outlook .................................................................................................................................... 3
Property Option Agreements ................................................................................................................................. 13
Annual 2015 Financial Results ............................................................................................................................. 14
Quarterly Information ........................................................................................................................................... 21
Fourth Quarter 2015 Financial Results ................................................................................................................. 22
Non-GAAP Financial Measures............................................................................................................................ 28
Liquidity and Capital Resources ........................................................................................................................... 36
Off-Balance Sheet Arrangements .......................................................................................................................... 43
Related Party Transactions (expressed in $’000’s) ............................................................................................... 43
Significant Accounting Judgments and Estimates ................................................................................................ 43
Financial Instruments and Related Risks (expressed in $’000’s) .......................................................................... 45
Significant Changes, Including Initial Adoption of Accounting Standards .......................................................... 49
New Accounting Standards ................................................................................................................................... 50
Other Data ............................................................................................................................................................. 51
Share Position and Outstanding Warrants and Options ........................................................................................ 51
Other Risks and Uncertainties ............................................................................................................................... 51
Controls and Procedures ....................................................................................................................................... 52
Qualified Persons .................................................................................................................................................. 52
Cautionary Statement on Forward-Looking Statements ....................................................................................... 52
Cautionary Note to United States Investors Concerning Estimates of Reserves and Resources .......................... 55
Management’s Discussion and Analysis Page - 1
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Business of the Company
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, and
zinc mine (“Caylloma”) in southern Peru and the San Jose silver and 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 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”).
2015 Highlights
Full Year Financial and Operating Highlights
Net loss for the year ended December 31, 2015 (“2015”), amounted to $10.6 million compared with $15.6 million
net income for the year ended December 31, 2014 (“2014”), resulting in a basic loss per share of $0.08 (2014:
earnings of $0.12).
For the year ended December 31, 2015, the Company recorded an impairment on its Caylloma Mine for $25.0
million, before tax. Refer to the below discussion on the Impairment of Caylloma Mine.
The Company’s adjusted net income was $6.7 million (2014: $15.7 million), after adjusting for the non-cash
impairment of Caylloma Mine, net of tax, of $17.0 million ($25.0 million before tax) and other minor items. Refer
to non-GAAP financial measures.
Silver sold decreased 1% to 6,618,784 ounces from the prior year, while the realized silver price decreased 17%
to $15.65 per ounce. Gold sold increased 10% to 39,209 ounces, while the realized gold price decreased 8% to
$1,156.24 per ounce. Sales comprised 58% silver and 22% gold, compared with 64% and 19%, respectively, in
the prior year.
Cash flow from operations, before changes in working capital, refer to non-GAAP measures, decreased 49% to
$30.6 million (2014: $59.8 million) from the prior year, reflecting an increase of $14.4 million in income taxes
paid related mostly to timing issues in the payment of income taxes. Operating cash flow per share, before changes
in working capital items, decreased to $0.24 (2014: $0.47) (refer to non-GAAP financial measures). Cash and
cash equivalent and short term investments increased $31.0 million (40%) to $108.2 million (2014: $77.3 million).
Silver production marginally increased to 6,624,635 ounces (2014: 6,599,300 ounces), and gold production
increased 12% to 39,689 ounces (2014: 35,316 ounces).
Management’s Discussion and Analysis Page - 2
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Consolidated all-in sustaining cash cost per payable ounce of silver, net of by-product credits, was $14.51, below
our annual guidance of $16.61 for 2015 (refer to non-GAAP financial measures).
San Jose’s all-in sustaining cash cost per payable ounce of silver, net of by-product credits, was $12.86 and below
the annual guidance of $16.27 for 2015 (refer to non-GAAP financial measures).
Caylloma’s all-in sustaining cash cost per payable ounce of silver, net of by-product credits, was $13.56 and above
our annual guidance of $12.78 for 2015 (refer to non-GAAP financial measures).
Fourth Quarter 2015 Financial Highlights
For the fourth quarter ended December 31, 2015 (“Q4 2015”), net loss amounted to $17.3 million (Q4 2014:
income of $0.1 million), resulting in basic loss per share of $0.13 (Q4 2014: $nil). Loss before income tax for Q4
2015 was $21.2 million, compared with income of $3.4 million in Q4 2014.
The Company’s Q4 2015 adjusted net loss was $0.1 million (Q4 2014: income of $0.2 million), after adjusting
for the non-cash impairment of Caylloma Mine, net of tax, of $17.0 million ($25.0 million before tax) and other
minor items. Refer to non-GAAP financial measures.
Silver sold remained flat, at 1,614,908 (Q4 2015: 1,611,313) ounces, while the realized silver price decreased 9%
to $14.80 per ounce from the same period in the prior year. Gold sold increased 12% to 9,865 ounces, while the
realized gold price decreased 7% to $1,106.34 per ounce.
2016 Guidance and Outlook
2016 Production and Cash Cost Guidance
For 2016, the production and cash cost guidance is noted in the table below.
Mine
San Jose, Mexico
Caylloma, Peru
Total
** All-in sustaining cash cost (“AISCC”) per ounce of silver is net of by-products gold, lead and zinc
All-in sustaining cash cost is a non-GAAP financial measure
Cash
Gold Investments
Cost
($/t)
($ million)
(koz)
57.4
46.0
42.0
12.9
0.9
79.4
58.9 --
42.8
Silver
(Moz)
5.9
1.2
7.0
($/ oz Ag)
9.1
12.5
AISCC **
--
Total figures may not add up due to rounding.
The 2016 San Jose Mine AISCC of $9.1/oz Ag includes $2.5/oz Ag, or $13.9 million in sustaining capital
investments mainly related to mine development and the expansion of the dry stack tailings deposit.
The consolidated AISCC is estimated to be $11.1/ oz Ag.
Caylloma Mine zinc and lead production is forecast at 43.7 million pounds and 42.5 million pounds,
respectively.
Management’s Discussion and Analysis Page - 3
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
San Jose Mine AISCC guidance
Item
Cash cost net of by-product credits
Commercial and government royalties and mining tax
Workers' participation
Selling, general and administrative expenses (operations)
Adjusted operating cash cost
Sustaining capital expenditures
Brownfields exploration expenditures
All-in sustaining cash cost per payable ounce of silver
Total figures may not add up due to rounding.
2016
Guidance
($/oz Ag)
3.4
0.6
0.5
0.7
5.2
2.5
1.5
9.1
Caylloma Mine AISCC guidance
Item
2016
Guidance
($/oz Ag)
(1.0)
Cash cost net of by-product credits
0.6
Commercial and government royalties and mining tax
Workers' participation
0.1
Selling, general and administrative expenses (operations)
2.5
Adjusted operating cash cost
2.3
Sustaining capital expenditures
7.6
Brownfields exploration expenditures
2.6
All-in sustaining cash cost per payable ounce of silver 12.5
Total figures may not add up due to rounding.
Consolidated AISCC guidance
Item
Cash cost net of by-product credits
Commercial and government royalties and mining tax
Workers' participation
Selling, general and administrative expenses (operations)
Adjusted operating cash cost
Selling, general and administrative expenses (corporate)
Sustaining capital expenditures
Brownfields exploration expenditures
All-in sustaining cash cost per payable ounce of silver
Total figures may not add up due to rounding.
2016
Guidance
($/oz Ag)
2.7
0.6
0.4
1.0
4.7
1.4
3.3
1.7
11.1
Management’s Discussion and Analysis Page - 4
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
2016 Outlook
San Jose Mine, Mexico
San Jose plans to process 875,000 tonnes of ore averaging 230 g/t Ag and 1.65 g/t Au. An increase of mill
throughput from 2,000 tpd to 3,000 tpd is planned for July 2016. Capital investment is estimated at $46 million.
Major capital investments include:
3,000 tpd mill expansion:
$21.9 million
Mine development:
$ 7.0 million
Dry stack tailings deposit expansion: $ 4.5 million
Brownfields exploration:
$ 8.2 million
Caylloma Mine, Peru
Caylloma plans to process 503,100 tonnes of ore averaging 89 g/t Ag, 4.08 % Pb and 4.37 % Zn. A 10% increase
in mill throughput from 1,300 tpd to 1,430 tpd is planned for March. Capital investment is estimated at $12.9
million.
Major capital investments include:
Mine development:
Processing plant optimization:
Brownfields exploration:
$ 6.4 million
$ 1.0 million
$ 2.9 million
Brownfields Exploration Highlights
San Jose Mine, Mexico
Brownfields exploration program budget for 2016 at the San Jose Mine is $8.2 million, which includes 22,000
meters of diamond drilling and the development of a 1,500 meter underground exploration drift that will allow
better access to test the northern extension of the Trinidad North vein system. Exploration drilling is in progress
at the Trinidad Central zone in the San Jose Mine and at La Noria/San Antonio vein system, a parallel vein system
located two kilometers to the west of the San Jose Mine area. The Company disclosed further details of San Jose’s
brownfields exploration program on December 16, 2015 (refer to “Fortuna provides year-end update for the
San Jose Mine, Mexico”).
Caylloma Mine, Peru
Brownfields exploration program budget for 2016 at the Caylloma Mine is $2.9 million, which includes 17,000
meters of diamond drilling. Drilling will be focused on testing new exploration targets in the northern portion of
the Caylloma District and in the Pisacca prospect area located a short distance to the southwest of the plant as well
as further exploring the northeastern extension of the Animas Vein.
Management’s Discussion and Analysis Page - 5
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Results of Operations
Consolidated Metal Production
Three months ended December 31,
2015
2014
Consolidated Metal Production
Caylloma
San Jose Consolidated Caylloma
San Jose Consolidated
Silver (oz)
Gold (oz)
Lead (000's lbs)
Zinc (000's lbs)
Production cash cost (US$/oz Ag)*
All-in sustaining cash cost (US$/oz Ag)*
* Net of by-product credits from gold, lead and zinc
323,820
193
8,361
9,599
6.57
16.47
1,261,495
9,762
-
-
1.81
16.80
1,585,315
9,955
8,361
9,599
2.77
18.13
544,977
335
4,084
6,986
7.70
14.64
1,083,215
8,561
-
-
4.13
9.42
1,628,191
8,896
4,084
6,986
5.32
12.51
Consolidated Metal Production
Caylloma
Silver (oz)
Gold (oz)
Lead (000's lbs)
Zinc (000's lbs)
Production cash cost (US$/oz Ag)*
All-in sustaining cash cost (US$/oz Ag)*
* Net of by-product credits from gold, lead and zinc
1,695,742
1,163
23,835
35,829
6.60
13.56
Years ended December 31,
2015
San Jose Consolidated
Caylloma
2014
San Jose Consolidated
4,928,893
38,526
-
-
2.57
12.86
6,624,635
39,689
23,835
35,829
3.59
14.51
2,202,540
1,820
16,152
27,361
7.02
14.13
4,396,760
33,496
-
-
3.52
12.07
6,599,300
35,316
16,152
27,361
4.69
14.48
Consolidated production highlights for 2015 are as follows:
Silver production of 6,624,635 ounces; 0.4% increase over 2014
Silver and gold production were 2% and 13%, respectively, above 2015 production guidance
Gold production of 39,689 ounces; 12% increase over 2014
Zinc production of 35,828,558 pounds; 31% increase over 2014
Lead production of 23,834,964 pounds; 48% increase over 2014
Cash cost for San Jose of $58.83/t; 7% under 2014, and 6% under annual guidance of $62.7/t
Cash cost for Caylloma of $85.76/t; 5% under both 2014 and annual guidance of $90.3/t
*Ag Eq calculated using silver to gold ratio of 60 to 1
Management’s Discussion and Analysis Page - 6
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Compared with the prior year, silver production remained flat and gold production increased 12%, explained
largely by the commissioning of the San Jose plant expansion from 1,800 tpd to 2,000 tpd in April 2014 as well
as higher head grades. Silver and gold production for 2015 totaled 6.6 million ounces and 39,689 ounces,
respectively, reflecting 102% and 113%, respectively, of the Company’s annual guidance (see Fortuna news
release dated January 14, 2016).
Consolidated Cash Cost per Payable Ounce of Silver
All-in sustaining cash cost per ounce of payable silver for 2015, net of by-product credits, was $14.51, in line with
the prior year (2014: $14.48) and below our 2015 guidance of $16.61 as a result of lower unit costs, higher by-
product credits, and lower sustaining capital expenditures. Refer to non-GAAP financial measures.
San Jose Mine Review
San Jose is an underground silver-gold mine located in the State of Oaxaca in southern Mexico. The following
table shows the main variables used by management to measure the operating performance of the mine:
throughput, grade, recovery, gold and silver production, and unit costs.
Mine Production
Tonnes milled
Average tonnes milled per day
Silver
Grade (g/t)
Recovery (%)
Production (oz)
Gold
Grade (g/t)
Recovery (%)
Production (oz)
Unit Costs
Production cash cost (US$/oz Ag)*
Production cash cost (US$/tonne)
Unit Net Smelter Return (US$/tonne)
All-in sustaining cash cost (US$/oz Ag)*
* Net of by-product credits from gold
QUARTERLY RESULTS
Three months ended December 31,
YEAR TO DATE RESULTS
Years ended December 31,
2015
San Jose
172,789
2,071
245
93
1,261,495
1.90
93
9,762
1.81
55.45
146.65
16.80
2014
San Jose
181,702
2,019
208
89
1,083,215
1.65
89
8,561
4.13
60.41
129.12
9.42
2015
San Jose
717,505
2,072
234
91
4,928,893
1.83
91
38,526
2.57
58.83
144.77
12.86
2014
San Jose
676,959
1,928
226
89
4,396,760
1.72
90
33,496
3.52
62.99
157.55
12.07
Silver and gold annual production for 2015 increased 12% and 15% to 4,928,893 and 38,526 ounces of silver and
gold, respectively, above the prior year’s production. The increases were the result of higher throughput of 6%;
higher head grades of 3% and 6% for silver and gold, respectively; and higher metallurgical recovery of 2
percentage points for both silver and gold. See sales for information on metal sold.
Silver and gold annual production was 15% and 16%, respectively, above 2015 guidance. Annual average head
grades for silver and gold were 234 g/t and 1.83 g/t, or 9% and 10%, above plan. Increased silver and gold
Management’s Discussion and Analysis Page - 7
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
production was the result of higher contributions in ore tonnage and grade from Level 1,100 relative to the mine
plan and of 3% higher metallurgical recoveries and mill throughput.
Silver production in Q4 2015 was 1.3 million ounces compared to 1.1 million ounces in the same period of the
prior year. Silver and gold production was 16% and 14%, respectively, above Q4 2014.
Cash cost per tonne of processed ore for 2015 was $58.83, or 7% below the cost in the prior year, and 6% below
the annual guidance of $62.7/t. The devaluation of the Mexican peso throughout the year had a positive effect on
our costs, of $4.43/t. Excluding this effect, cash cost for 2015 was 1% above the prior year. All-in sustaining cash
cost per payable ounce of silver, net of by-product credits, was $12.86 for 2015 (refer to non-GAAP financial
measures), below the annual guidance of $16.27 as a result of lower unit costs and lower sustaining capital
expenditures.
Cash cost per tonne of processed ore for Q4 2015 was $55.45, or 8% below Q4 2014. The devaluation of the
Mexican peso throughout the year had a positive effect on our costs, of $3.88/t. Excluding this effect, cash cost
for Q4 2015 was 2% below cost in Q4 2014.
Cash cost per payable ounce of silver and cash cost per tonne of processed ore are non-GAAP financial measures
(refer to non-GAAP financial measures for the reconciliation of cash cost to the cost of sales).
Investments in property, plant and equipment and brownfields exploration, on a cash basis, comprised the
following expenditures:
Year ended December 31, 2015
(Expressed in $ millions)
Plant and equipment
Dry stack tailings deposit project
Equipment and infrastructure
Plant expansion
Infill drilling
Mine development
Brownfields exploration
Processing plant expansion to 3,000 tpd
$
Cuzcatlan
3.3
25.0
28.3
9.4
1.6
5.9
3.5
48.7
$
The expansion of the mill capacity to 3,000 tpd from the current 2,000 tpd is currently under way, with a planned
commissioning for mid-2016 (see Fortuna news releases dated December 17, 2014, October 15, 2015, and
December 16, 2015). Also, see Fortuna news release dated August 12, 2015.
Work on the third expansion of the San Jose Mine to 3,000 tpd is advancing on schedule and within budget, with
64% progress as of the end of December 2015.
Management’s Discussion and Analysis Page - 8
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Dry stack tailings deposit and filter facility project
Construction of the dry stack tailings deposit and the tailings filter facility have progressed according to schedule
in spite of a delay in the delivery of the filters from the supplier. The project is in the final stages of dry
commissioning and is 8% below the approved budget of $29.2 million. The first stage of the dry stack deposit was
built to provide storage capacity until year-end 2016. The deposit will be expanded in 2016 to provide storage
capacity through April 2017 at an estimated capital expenditure (CAPEX) of $3.5 million and will continue to be
expanded as required throughout the life of mine (see Fortuna news release dated December 16, 2015). The dry
stack tailings deposit and filter facility project is advancing on schedule and within budget, with 97% progress as
of the end of December 2015.
Caylloma Mine Review
Caylloma is an underground silver, lead, and zinc mine located in the Arequipa Department in southern Peru. Its
commercial products are silver-lead and zinc concentrates. The table below shows the main variables used by
management to measure the operating performance of the mine.
Management’s Discussion and Analysis Page - 9
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Mine Production
Tonnes milled
Average tonnes milled per day
QUARTERLY RESULTS
Three months ended December 31,
2014
Caylloma
117,060
1,301
2015
Caylloma
117,776
1,309
YEAR TO DATE RESULTS
Years ended December 31,
2015
Caylloma
466,286
1,306
Silver
Grade (g/t)
Recovery (%)
Production (oz)
Gold
Grade (g/t)
Recovery (%)
Production (oz)
Lead
Grade (%)
Recovery (%)
Production (000's lbs)
Zinc
Grade (%)
Recovery (%)
Production (000's lbs)
Unit Costs
Production cash cost (US$/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 from gold, lead and zinc
103
83
323,820
0.22
23
193
3.38
95
8,361
4.09
90
9,599
6.57
81.77
103.17
16.47
173
84
544,977
136
83
1,695,742
0.27
33
335
1.70
93
4,084
3.03
89
6,986
7.70
91.60
130.13
14.64
0.26
30
1,163
2.47
94
23,835
3.84
91
35,829
6.60
85.76
117.58
13.56
2014
Caylloma
464,823
1,302
174
85
2,202,540
0.31
40
1,820
1.70
93
16,152
2.97
90
27,361
7.02
90.57
144.57
14.13
Silver production in 2015 was 1.7 million ounces, 23% below 2014, due to a 22% lower head grade. The decrease
in silver production was the result of lower production from the Bateas high-grade silver vein and Level 6 of the
Animas Vein. Zinc and lead production in 2015 increased 31% and 48% over 2014.
Silver annual production was 1.7 million ounces, or 11% below the revised guidance of 1.9 million ounces
resulting from a management decision to focus on base metal-rich zones of the polymetallic Animas Vein. Mining
at the high-grade Bateas Vein stopped in the fourth quarter of 2015.
Zinc and lead annual production was 12% and 22%, respectively, above the revised 2015 guidance of 32.1 million
pounds and 19.5 million pounds, respectively.
Silver production in Q4 2015 was 0.32 million ounces compared to 0.54 million ounces in the same period of the
prior year. Zinc and lead production was 37% and 105%, respectively, above Q4 2014.
Management’s Discussion and Analysis Page - 10
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Cash cost per tonne of processed ore at Caylloma for 2015 was $85.76 , a decrease of 5% from the prior year due
to lower indirect costs related to headcount, lower distribution costs related to zinc concentrate transport tariffs,
and a 14% devaluation of the Peruvian nuevo sol and was 5% below the annual guidance of $90.3/t. Caylloma’s
all-in sustaining cash cost per payable ounce of silver, net of by-product credits, was $13.56 for 2015, compared
with the annual guidance of $12.78 (refer to non-GAAP financial measures).
Cash cost per tonne at Caylloma for Q4 2015 was $81.77, 11% below Q4 2014, as a result of lower mining costs
related to decreased sourcing of ore from the high-grade silver-bearing Bateas Vein (where conventional mining
takes place), the devaluation of the Peruvian nuevo sol, and restructuring efforts impacting mining and indirect
costs.
Investments in property, plant and equipment and brownfields exploration, on a cash basis, comprised the
following expenditures:
Year ended December 31, 2015
(Expressed in $ millions)
Equipment and infrastructure
Plant expansion
Mine development
Brownfields exploration
Bateas
3.2
1.6
4.7
0.5
10.0
$
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 inflows or cash
generating units (“CGUs”).
The recoverable amounts of the Company’s CGUs, which include mineral properties, plant and equipment are
determined 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.
Management’s estimate of the FVLCTS of its CGUs is classified as level 3 in the fair value hierarchy.
At December 31, 2015, the Company determined there were several indicators of potential impairment on its non
current assets, including the decline in the Company’s market capitalization, reduction in the market consensus
on long term silver price forecasts during the year and the consequential impact on the Company’s reserves and
resources. Based on the Company’s assessment of the recoverable amounts of its CGUs, the Company concluded
that the Caylloma Mine had an estimated recoverable value, based on its FVLCTS, below its carrying value and
an impairment charge was required. As a result, the Company recognized a $17.0 million, net of tax ($25.0 million
before tax) (2014: $nil) impairment charge, on the carrying value of net assets of $65.2 million, in respect to the
Management’s Discussion and Analysis Page - 11
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
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.
For December 31, 2015, the key assumptions used for FVLCTS calculations were as follows:
Metal Price Assumptions
Gold price $ per ounce
Silver price $ per ounce
Lead price $ per tonne
Zinc price $ per tonne
2016
$
1,150.00
$
15.00
1,750.00
$
$
1,750.00
2017
1,173.85
$
December 31, 2015
2019
1,215.71
$
$
2020
1,200.56
2018
1,191.54
$
2021
1,200.56
$
2022
1,200.56
$
$
16.00
$
16.00
$
16.00
$
16.00
$
16.00
$
16.00
$
1,936.98
$
1,921.58
$
2,014.90
$
2,016.62
$
2,016.62
$
2,016.62
$
2,216.41
$
2,350.62
$
2,525.38
$
2,218.65
$
2,218.65
$
2,218.65
Weighted average cost of capital
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
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 LOM 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.
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.
Management’s Discussion and Analysis Page - 12
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
QUARTERLY RESULTS
Three months ended December 31,
2015
2014
YEAR TO DATE RESULTS
Years ended December 31,
2015
2014
Caylloma
San Jose
Caylloma
San Jose
Caylloma
San Jose
Caylloma
San Jose
-
-
-
-
-
488
8,625
8,680
8
442
500
6,836
6,712
(14)
610
283
4,663
4,779
(2)
165
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
408
6,288
6,256
24
464
287
3,600
3,689
21
220
198
5,081
4,952
-
327
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
302
21,321
21,394
(63)
165
464
31,967
32,063
74
442
220
19,818
19,474
45
610
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
485
24,410
24,501
70
464
208
14,318
14,411
105
220
617
20,014
20,303
(1)
327
-
-
-
-
-
-
-
-
-
-
Mine Concentrates
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-Silver
Opening Inventory (t)
Production (t)
Sales (t)
Adjustment (t)
Closing Inventory (t)
Property Option Agreements
Tlacolula Property
Pursuant to an agreement dated September 14, 2009, as amended December 18, 2012 and November 10, 2014,
the Company, through its wholly owned subsidiary Cuzcatlan, holds an option (the “option”) to acquire a 60%
interest (the “interest”) in the Tlacolula silver project (the “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, by making staged payments totaling
$0.30 million in cash, and by providing $0.25 million in common shares of the Company to Radius according to
the following schedule:
$0.02 million in cash and $0.02 million cash equivalent in shares upon stock exchange approval;
$0.03 million in cash and $0.03 million cash equivalent in shares by January 15, 2011;
$0.05 million in cash and $0.05 million cash equivalent in shares by January 15, 2012;
$0.05 million in cash and $0.05 million cash equivalent in shares by January 15, 2013;
$0.05 million in cash by January 19, 2015; and,
$0.10 million in 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 of which has not occurred.
Management’s Discussion and Analysis Page - 13
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
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%. Radius has the right to terminate the agreement if the option is not exercised by
January 31, 2017.
As of December 31, 2015, the Company had issued an aggregate of 34,589 common shares of the Company to
Radius, with a fair market value of $0.15 million, and paid $0.20 million in cash according to the terms of the
option agreement. Joint venture has not been formed as of yet.
Annual 2015 Financial Results
Expressed in $000's, except per share data
Sales
Mine operating earnings
Operating (loss) income
Net (loss) income
(Loss) earnings per share, basic
(Loss) earnings per share, diluted
Total assets
Long term bank loan
Other liabilities
Years ended December 31,
2015
154,729
43,648
(1,840)
(10,608)
(0.08)
(0.08)
379,654
39,486
4,620
2014
174,006
60,253
33,750
15,602
0.12
0.12
350,310
-
4,661
2013
137,394
41,775
(9,629)
(19,100)
(0.15)
(0.15)
302,215
-
2,343
Net loss for the year ended December 31, 2015 (“2015”), amounted to $10.6 million compared with $15.6 million
net income for the year ended December 31, 2014 (“2014”), resulting in a basic loss per share of $0.08 (2014:
earnings of $0.12).
The Company’s adjusted net income was $6.7 million (2014: $15.7 million), after adjusting for the non-cash
impairment of inventories, net of tax, of $0.4 million ($0.6 million before tax) (2014: $0.1 million); non-cash
impairment of Caylloma Mine, net of tax, of $17.0 million ($25.0 million before tax) (2014: $nil); and non-cash
other operating income-other, net of tax, of $0.1 million (2014: $nil). Refer to non-GAAP financial measures.
As at December 31, 2015, total assets increased to $379.7 million, as the $40.0 million term credit facility was
drawn down, with a net of unamortized transaction costs of $0.5 million; property, plant and equipment increased
$8.6 million; accounts receivable and other assets decreased $12.8 million; and inventories decreased $4.5 million.
For other liabilities as of December 31, 2015, refer to financial statement note 12.
Management’s Discussion and Analysis Page - 14
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Summary of Financial Results
(Expressed in $ millions)
Sales
Cost of Sales
Mine operating earnings*
as a % of Sales
Selling, general and administrative expenses
Foreign exchange (gain) loss
Impairment of mineral properties
Operating (loss) income
(Loss) income before tax
Net (loss) income
as a % of Sales
as a % of Sales
Adjustments to net (loss) income, net of taxes**
Adjusted net income */**
Operating cash flow before changes in working capital *
Note: Figures may not add due to rounding
$
% Chg
$
$
$
Years ended December 31,
2014
174.0
(11%)
(2%)
113.7
60.3
(28%)
35% (19%)
(30%)
25.4
(900%)
(0.2)
0%
-
33.7
(105%)
19% (106%)
(110%)
32.9
15.6
(168%)
9%
0.1
15.7
59.8
2015
154.7
111.1
43.6
28%
17.9
1.6
25.0
(1.8)
-1%
(3.2)
(10.6)
-7%
17.3
6.7
30.6
$
$
$
$
$
$
17200%
(57%)
(49%)
Note: * Mine operating earnings, Adjusted net income, and Operating cash flow per share before changes in working capital are non-GAAP financial measures
Note: ** Refer to non-GAAP Financial Measures
2015 net loss amounted to $10.6 million (2014: income $15.6 million) as a result of a $25.0 million (before tax)
impairment charge on the Caylloma mine. Adjusted net income in 2015 decreased 57% to $6.7 million compared
to $15.7 million in 2014. This was due mainly to lower metal prices partially offset by higher gold and base metal
production, and lower unit costs at both operations. General and administrative expenses were $7.5 million lower
compared to 2014. This was mostly due to a stock based compensation charge of $1.5 million in 2015, compared
to $6.7 million in 2014 (a $5.2 million decrease), and $1.5 million less corporate expenses.
Sales
The following table summarizes the details of sales by region and component:
Management’s Discussion and Analysis Page - 15
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Sales and Realized Prices
(Expressed in $ millions, unless otherwise noted)
Caylloma
YEAR TO DATE RESULTS
Years ended December 31,
2015
San Jose Consolidated
2014
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)***
54.8
(1.0)
53.8
103.2
(2.3)
100.9
158.1
(3.4)
154.7
67.5
(1.5)
66.0
108.6
(0.6)
108.0
176.0
(2.0)
174.0
1,715,126
15.80
13.58
4,903,658
15.60
14.01
1,070
1,192.12
623.27
38,140
1,155.23
903.37
23,361
0.80
0.58
35,934
0.87
0.48
-
-
-
-
-
-
6,618,784
15.65
13.90
39,209
1,156.24
895.73
23,361
0.80
0.58
35,934
0.87
0.48
2,209,690
19.01
16.46
1,828
1,275.25
907.40
16,244
0.95
0.71
27,471
0.98
0.65
4,484,861
18.85
16.92
33,930
1,259.65
962.61
-
-
-
-
-
-
6,694,552
18.90
16.77
35,758
1,260.44
959.79
16,244
0.95
0.71
27,471
0.98
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
Sales for 2015 were $154.7 million, 11% below the prior year (2014: $174.0 million). Silver ounces sold decreased
1%, and gold ounces sold increased 10%, while realized prices on provisional sales for silver and gold decreased
17% and 8%, respectively. Sales at San Jose decreased 7% to $100.9 million (2014: $108.0 million) as a result of
lower realized prices for silver and gold. Sales at Caylloma decreased 18% to $53.8 million (2014: $66.0 million)
as a result of lower realized prices for silver, lead, and zinc, and lower silver and gold ounces sold.
Sales in 2015 comprised 58% silver and 22% gold, compared with 64% and 19%, respectively, in the prior year.
The Company’s metal concentrates are provisionally priced at the time of sale based on the prevailing commodity
market price. Final 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. Under current sales contracts, final pricing for all concentrates
takes place one month after the month of sale. During 2015, the recorded sales consisted of provisional sales of
$158.1 million (2014: $176.0 million); negative price and mark-to-market adjustments of $2.3 million (2014: $0.5
million); and negative assay adjustments of $1.0 million (2014: negative $1.5 million).
Management’s Discussion and Analysis Page - 16
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
The net realized prices shown above are calculated based on provisional sales pricing and on contained metals in
concentrate sold and after accounting for payable metal deductions, treatment, and refining charges before
government royalties. To establish the net realized price for silver, treatment charges on our mineral concentrates
are allocated to the base metals at Caylloma and to gold at San Jose. The Company has not hedged its exposure
to metal price risks.
Mine Operating Earnings, Operating (Loss) Income, and Adjusted EBITDA
The following table summarizes the details of mine operating earnings, operating (loss) income, and adjusted
EBITDA by region and component:
Years ended December 31,
2015
2014
(Expressed in $ millions)
Mine operating earnings*
Other expenses
Selling, general and administrative expenses
Operating (loss) income
Net (loss) income
Adjustments to net (loss) income, net of taxes
Adjusted net (loss) income*
as a % of Sales
as a % of Sales
as a % of Sales
Operating (loss) income
Add back: Depreciation, depletion, and amortization**
Add back: Share-based payments**
Add back: Impairment of mineral properties
Add back: Other operating expense (income)
Adjusted EBITDA*
Note : Figures may not add due to rounding
Corporate Bateas Cuzcatlan
40.0
$
$
-
40%
0%
3.7
7%
$
$
Total Corporate
43.6
$
-
28%
0%
$
Bateas
14.9
23%
$
Cuzcatlan
45.3
42%
$
Total
60.3
35%
10.8
0%
(11.3)
2.6
5%
(24.8)
0% -46%
(21.1)
17.2
(3.9)
$
(12.6)
-
(12.6)
$
4.5
4%
34.2
34%
23.1
0.1
23.2
$
17.9
12%
(1.8)
-1%
(10.6)
17.3
6.7
$
17.5
0%
(17.8)
0%
(18.3)
-
(18.3)
$
3.5
5%
10.9
16%
5.6
0.1
5.7
$
4.4
4%
40.8
38%
28.4
-
28.4
$
25.4
15%
33.8
19%
15.6
0.1
15.7
$
$
$
$
$
$
$
$
(11.3)
0.6
1.5
-
-
(9.2)
(24.8)
$
9.4
-
25.0
0.6
10.0
$
34.2
15.7
-
-
0.2
50.1
(1.8)
25.7
1.5
25.0
0.6
50.9
(17.8)
0.5
6.7
-
-
(10.6)
10.9
7.5
-
-
0.1
18.4
40.8
15.5
-
-
-
56.3
33.8
23.5
6.7
-
0.2
64.1
$
$
$
$
$
$
$
% Change
(28%)
(19%)
(30%)
(21%)
(105%)
(106%)
(168%)
17200%
(57%)
(105%)
9%
(78%)
0%
200%
(21%)
Note: * Mine operating earnings, Adjusted net (loss) income, and adjusted EBITDA are non-GAAP financial measures
Note: ** included in cost of sales or selling, general and administrative expenses
For 2015, mine operating earnings decreased 28% due to lower sales and higher depletion. Margin (mine operating
earnings over sales) decreased from 35% to 28%, impacted mostly by deteriorated results at Caylloma, where
mine operating earnings fell 75% and margin fell from 23% to 7%. Caylloma was affected by lower silver, lead,
and zinc, prices of 17%, 16%, and 11%, respectively, higher depletion compared to 2014, and a drop in silver sold
of 22%. This was partially offset by higher lead and zinc sales of 44% and 31% and lower unit costs of 5%. Mine
Management’s Discussion and Analysis Page - 17
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
operating earnings at San Jose fell 12% and margin dropped slightly from 42% to 40% as the impact of lower
metal prices and higher depletion was partially offset by higher silver and gold sold, and lower unit costs of 7%.
Adjusted EBITDA in 2015 decreased $13.2 million, or 21% over 2014 to $50.9 million reflecting the negative
effect of metal prices with the largest impact felt at the Caylloma mine. Adjusted EBITDA at Caylloma was down
$8.4 million or 46%, while at the San Jose mine adjusted EBITDA was down $6.2 million, or 11%, as improved
operating results helped compensate the negative impact of metal prices.
Selling, General and Administrative Expenses
The following table summarizes the details of selling, general and administrative expenses by region and
component:
Expressed in $ millions
Years ended December 31,
2015
2014
General and administrative expenses
Share-based payments
Workers' participation
Corporate Bateas Cuzcatlan
3.9
2.5
$
$
$
-
-
0.6
0.1
4.5
2.6
9.3
1.5
-
10.8
$
$
$
Total Corporate
15.7
10.8
$
1.5
6.7
0.7
-
17.9
17.5
$
Bateas Cuzcatlan
3.5
$
-
0.9
4.4
3.4
$
-
0.1
3.5
$
$
Total
17.7
6.7
1.0
25.4
$
$
$
$
Selling, general and administrative expenses for 2015 decreased 30%, or $7.5 million, to $17.9 million (2014:
$25.4 million). The main driver for the decrease was the decline in share-based payments to $1.5 million, a $5.2
million reduction compared with the prior year period that was mostly related to mark-to-market effects stemming
from the performance of our share price. Without the mark-to-market effect of $3.5 million the charge for share-
based payments would have been $5.0 million. Also contributing to the decrease were lower general and
administrative expenses of $2.0 million to $15.7 million and lower workers’ participation of $0.3 million to $0.7
million.
Foreign Exchange Loss (Gain)
For 2015, foreign exchange loss (gain) by reportable segments was as follows:
Expressed in $ millions
Years ended December 31,
2015
Corporate
$
0.2
Bateas
0.3
$
Cuzcatlan
1.1
$
Total Corporate
1.6
(0.7)
$
$
2014
Bateas
0.3
$
Cuzcatlan
0.2
$
Total
(0.2)
$
The increase in the foreign exchange loss by $1.8 million to $1.6 million is a result of the devaluation of the
Peruvian nuevo sol and Mexican peso against the United States dollar. Refer below to “Currency Risk” or to
financial statement note 17 b).
Management’s Discussion and Analysis Page - 18
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Impairment of Mineral Properties
For 2015, the $25.0 million (2014: $nil) impairment of mineral properties relates to the impairment of Caylloma
as a result of declining metal prices. Refer above to the disclosure on the “Impairment of Caylloma Mine.”
Other Operating Expenses
The following table summarizes the details of other operating expenses:
Loss on disposal of mineral properties, plant and equipment
Restructuring and severance costs
Impairment of inventories
Other operating (income) - other
Expressed in $ millions
Years ended December 31,
2014
0.1
1.1
0.1
-
$
1.3
2015
$
-
0.2
0.6
(0.1)
0.7
$
$
Restructuring and severance costs include the Company’s cost-reduction program which includes salaries and
post-employment costs. For 2015, these costs were related solely to Caylloma, compared with the prior year, when
the costs were throughout the organization.
For 2015, the impairment of inventories included the write-down of concentrate stock piles of $0.2 million, and
$0.4 million of materials were written down to net realizable value.
Expressed in $ millions
Years ended December 31,
2015
Bateas Cuzcatlan
$
0.2
0.1
0.3
-
$
0.3
0.3
$
$
Concentrate stock piles
Materials and supplies
Finance items
Total
0.2
0.4
0.6
$
$
2014
Bateas Cuzcatlan
-
$
0.1
0.1
$
-
$
-
$
-
Total
-
$
0.1
0.1
$
The following table summarizes the details of finance items:
Management’s Discussion and Analysis Page - 19
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Finance income
Interest income on FVTPL financial assets
Total finance income
Finance expenses
Interest expense
Standby and commitment fees
Accretion of provisions (Note 13)
Total finance expense
Net finance expense
Expressed in $ millions
Years ended December 31,
2014
2015
$
$
0.4
0.4
$
$
0.3
0.3
1.3
0.2
0.3
1.8
(1.4)
$
$
-
0.4
0.8
1.2
(0.9)
$
$
Interest expense of $1.3 million (2014: $nil) includes $0.8 million interest on the bank loan, $0.4 million interest
on the interest rate swap, and $0.1 million on leases. Refer below to the discussion on “Liquidity and Capital
Resources.”
Income Taxes
The following table summarizes the details of income taxes by region and component:
Expressed in $ millions
Years ended December 31,
Income taxes
Current income tax
Deferred income tax
2015
Peru Mexico
9.8
1.8
1.5
(5.7)
11.3
(3.9)
$
$
$
$
$
Total
11.6
(4.2)
7.4
$
2014
$
Peru Mexico
9.9
3.6
2.2
1.6
12.1
5.2
$
Total
13.5
3.8
17.3
$
$
$
$
Income taxes for 2015 decreased to $7.4 million (2014: $17.3 million) as current income tax decreased $1.9
million and deferred income tax decreased $8.0 million because of the $8.0 million (2014: $nil) tax impact of the
impairment charge for Caylloma Mine.
For 2015, the Company paid $17.8 million in income tax, comprising $8.8 million in income tax related to the
2014 fiscal period and $9.0 million in tax installments related to the 2015 fiscal period. The current income tax
incurred in 2015 was $11.6 million (2014: $13.5 million).
Management’s Discussion and Analysis Page - 20
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Quarterly Information
The following table provides information for eight fiscal quarters up to December 31, 2015:
Quarters ended
Expressed in $000's, except per share data
Sales
Mine operating earnings
Operating (loss) income
Net (loss) income
(Loss) earnings per share, basic
(Loss) earnings per share, diluted
Q4 2015
31-Dec-15
37,013
10,332
(20,675)
(17,290)
(0.13)
(0.13)
Q3 2015
30-Sep-15
39,041
10,333
6,099
2,592
0.02
0.02
Q2 2015 Q1 2015
Q4 2014 Q3 2014 Q2 2014 Q1 2014
30-Jun-15 31-Mar-15 31-Dec-14 30-Sep-14 30-Jun-14 31-Mar-14
45,480
17,204
9,273
4,853
0.04
0.04
46,384
16,720
13,201
7,824
0.06
0.06
39,804
12,581
7,961
3,854
0.03
0.03
44,319
16,277
7,623
2,868
0.02
0.02
38,871
10,402
4,775
236
-
-
37,823
10,052
3,653
57
-
-
Total assets
Long term bank loan
Other liabilities
379,654
39,486
4,620
398,648
39,487
4,353
392,488
39,470
5,701
351,260
-
4,578
350,310
-
4,661
342,413
-
4,076
330,791
-
5,269
318,349
-
4,076
During Q4 2015, sales decreased 5% from Q3 2015 as a result of a decrease in silver and gold ounces sold of 7%
and 10%, respectively, and of lower head grades for silver and gold of 7% and 6%, respectively. Mine operating
earnings was flat at $10.3 million as a result of both the decrease in sales and cost of sales of $2.0 million.
Operating loss increased because of the non-cash impairment charge on Caylloma Mine of $25.0 million ($17.0
million, net of tax) (Q3 2015: $nil) related to the reduction of Caylloma Mine’s carrying value as a result of
declining metal prices. Current assets decreased $14.3 million, and non-current assets decreased $4.7 million,
resulting in the reduction in total assets of $19.0 million to $379.7 million compared with Q3 2015.
During Q3 2015, sales and mine operating earnings remained relatively unchanged from Q2 2015, while operating
income increased 28% to $6.1 million. This reflects a recovery of share-based payments of $1.5 million in Q3
2015 compared with a $1.2 million charge in Q2 2015 as a result of the decline in the Company’s share price in
Q3 2015.
During Q2 2015, sales decreased 2%, or $0.9 million, from Q1 2015, due mostly to negative mark-to-market
adjustment increases of $1.0 million. Operating income decreased 40%, or $3.2 million, from Q1 2015 as a result
of $2.2 million in lower mine operating earnings, $0.4 million in higher share-based payment costs, $0.9 million
in higher foreign exchange costs, $0.4 million in lower corporate costs, and $0.7 million in higher interest expense
related to a bank loan. The Company’s long term bank loan includes a $40.0 million bank loan, net of unamortized
transaction costs of $0.5 million, for working capital requirements and general corporate purposes.
During Q1 2015, sales increased 5%, or $2.0 million, from Q4 2014, due mostly to higher gold and base metal
sold. The Company’s realized prices for silver and gold increased 2% to $16.65 and $1,215.57 per ounce,
respectively. Operating income increased twofold from Q4 2014 as mine operating earnings increased $2.5 million
and as restructuring and severance costs declined from $1.1 million to $nil in Q1 2015.
Management’s Discussion and Analysis Page - 21
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
During Q4 2014, sales decreased 18%, or $8.6 million, from Q3 2014 as metal prices decreased. The Company’s
realized prices for silver and gold declined 15% and 6%, respectively, to $16.33 and $1,192.86 per ounce,
respectively. During the fourth quarter of 2014, the Company’s operating income was negatively affected by the
mark-to-market effects on share-based compensation expense of $1.4 million, compared with a recovery of $0.8
million in Q3 2014. In addition, as a result of declining metal prices the Company restructured its operations and
incurred restructuring and severance costs of $1.1 million during the fourth quarter of 2014 that negatively affected
its operating income in that quarter.
During Q3 2014, sales increased 5%, or $2.1 million, from Q2 2014 as a result of Caylloma’s and San Jose’s
provisional sales increasing $1.9 million and $3.8 million, respectively, and being offset by negative price and
mark-to-market adjustments that increased $1.0 million and $2.1 million, respectively. During Q3 2014, operating
income increased 73% to $13.2 million from Q2 2014 as selling, general and administrative expenses decreased
$5.1 million, or 60%, to $3.5 million. The decrease in selling, general and administrative expenses was mainly
attributed to the positive effect of mark-to-market effects on share-based compensation of $4.1 million over Q2
2014.
During Q2 2014, sales decreased 3%, or $1.2 million, from Q1 2014 as a result of San Jose’s provisional sales
declining $1.9 million, offset by positive adjustments of $0.7 million. San Jose’s provisional sales of silver and
gold declined 2% and 5%, respectively, from Q1 2014, along with lower realized silver and gold prices of 3% and
1%, respectively.
Fourth Quarter 2015 Financial Results
Summary of Financial Results
(Expressed in $ millions)
Sales
Cost of Sales
Mine operating earnings*
as a % of Sales
Selling, general and administrative expenses
Foreign exchange (gain) loss
Impairment of mineral properties
Operating (loss) income
(Loss) income before tax
Net (loss) income
as a % of Sales
as a % of Sales
Adjustments to net (loss) income, net of taxes**
Adjusted net (loss) income */**
Operating cash flow before changes in working capital *
Note: Figures may not add due to rounding
Three months ended December 31,
$
$
$
$
2015
37.0
26.7
10.3
28%
4.6
0.8
25.0
(20.7)
-56%
(21.2)
(17.3)
(47%)
17.2
(0.1)
10.8
2014 % Chg
37.8
(2%)
(4%)
27.8
2%
10.1
4%
27%
(12%)
5.2
700%
0.1
0%
-
(691%)
3.5
9% (704%)
3.4
(724%)
0.1
(17400%)
0%
0.1
0.2
10.0
17100%
(150%)
8%
$
$
$
$
$
$
Note: * Mine operating earnings, Adjusted net (loss) income, and Operating cash flow per share before changes in working capital are non-GAAP financial measures
Note: ** Refer to non-GAAP Financial Measures
Management’s Discussion and Analysis Page - 22
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Q4 2015 net loss amounted to $17.3 million (Q4 2014: $0.1 million), resulting in a basic loss per share of $0.13
(Q4 2014: $nil) driven by a $25.0 million impairment charge at the Caylloma mine. The Company’s Q4 2015
adjusted net loss was $0.1 million (Q4 2014: income of $0.2 million). The adjusted net loss was driven by an
operating loss at Caylloma resulting from 19% lower sales, and a high deferred tax charge from the impact of the
devaluation of the Peruvian nuevo sol. Compared to the prior year San Jose increased sales by 9% and operating
income by 28%. Refer to non-GAAP financial measures.
Cash flow from operations, before changes in working capital and after income taxes paid, increased 9% to $10.8
million (Q4 2014: $10.0 million).
Operating cash flow per share, before changes in working capital items, increased to $0.08 (Q4 2014: $0.08) (refer
to non-GAAP financial measures).
Sales
The following table summarizes the details of sales by region and component:
Sales and Realized Prices
(Expressed in $ millions, unless otherwise noted)
Caylloma
QUARTERLY RESULTS
Three months ended December 31,
2015
San Jose Consolidated
2014
Caylloma
San Jose Consolidated
12.0
-
12.0
25.8
(0.8)
25.0
37.8
(0.8)
37.0
15.3
(0.5)
14.8
23.1
(0.1)
23.0
38.4
(0.6)
37.8
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
322,465
14.75
12.59
73
1,030.87
91.07
8,156
0.77
0.54
1,292,443
14.81
13.26
9,792
1,106.91
881.86
-
-
-
1,614,908
14.80
13.13
9,865
1,106.34
876.01
8,156
0.77
0.54
544,603
16.41
14.07
318
1,204.32
701.67
4,181
0.90
0.68
1,066,710
16.28
14.48
8,452
1,192.43
908.15
1,611,313
16.33
14.34
8,770
1,192.86
900.66
-
-
-
-
-
-
4,181
0.90
0.68
6,954
1.01
0.65
Provisional Sales (000's lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
9,665
0.73
0.37
* 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
9,665
0.73
0.37
6,954
1.01
0.65
-
-
-
Management’s Discussion and Analysis Page - 23
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Sales for Q4 2015 were $37.0 million, 2% below Q4 2014’s $37.8 million. Silver ounces sold were flat, and gold
ounces sold increased 12%, while realized prices on provisional sales for silver and gold decreased 9% to $14.80
per ounce and 7% to $1,106.34 per ounce, respectively. Sales at San Jose increased 9% to $25.0 million (Q4 2014:
$23.0 million) as a result of increased silver and gold ounces sold of 21% and 16%, respectively, compared with
the same period in the prior year. Sales at Caylloma decreased 19% to $12.0 million (Q4 2014: $14.8 million) as
a result of lower silver and gold ounces sold and lower realized prices for silver.
The Company’s metal concentrates are provisionally priced at the time of sale based on the prevailing commodity
market price. Final 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. Under current sales contracts, final pricing for all concentrates
takes place one month after the month of sale. During the fourth quarter of 2015, recorded sales consisted of
provisional sales of $37.8 million (Q4 2014: $38.4 million); negative price and mark-to-market adjustments of
$0.6 million (Q4 2014: negative $0.5 million); and negative assay adjustments of $0.2 million (Q4 2014: negative
$0.1 million).
The net realized prices shown above were calculated based on provisional sales pricing and on contained metals
in concentrate sold and after accounting for payable metal deductions, treatment, and refining charges before
government royalties. To establish the net realized price for silver, treatment charges on our mineral concentrates
are allocated to the base metals at Caylloma and to gold at San Jose. The Company has not hedged its exposure
to metal price risks.
Mine Operating (Loss) Earnings, Operating (Loss) Income, and Adjusted EBITDA
The following table summarizes the details of mine operating earnings, operating (loss) income, and adjusted
EBITDA by region and component:
Management’s Discussion and Analysis Page - 24
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Three months ended December 31,
(Expressed in $ millions)
Mine operating (loss) earnings*
Other expenses
Selling, general and administrative expenses
Operating (loss) income
Net (loss) income
Adjustments to net (loss) income, net of taxes
Adjusted net (loss) income*
as a % of Sales
as a % of Sales
as a % of Sales
Operating (loss) income
Add back: Depreciation, depletion, and amortization**
Add back: Share-based payments**
Add back: Impairment of mineral properties
Add back: Other operating expense (income)
Adjusted EBITDA*
Note : Figures may not add due to rounding
2015
Corporate
-
$
0%
$
Bateas Cuzcatlan
10.8
$
43%
(0.5)
-4%
$
Total Corporate
10.3
-
$
28%
0%
2014
Bateas Cuzcatlan
8.3
$
36%
1.8
12%
$
%
Change
2%
5%
$
Total
10.1
27%
0.5
3.1
4%
0%
(3.4)
(26.7)
0% (223%)
(20.3)
(3.9)
17.2
-
(3.1)
(3.9)
$
$
4.6
1.0
12%
4%
9.5
(20.7)
38% -56%
(17.3)
6.9
17.2
-
(0.1)
$
6.9
$
3.5
0%
(4.2)
0%
(4.2)
-
(4.2)
$
0.9
6%
0.4
3%
(0.6)
0.1
(0.5)
$
0.7
3%
7.4
32%
5.0
-
$
5.0
(12%)
5.2
(10%)
14%
3.7
(659%)
10% (672%)
(17400%)
0.1
17100%
0.1
(150%)
0.2
$
$
$
$
$
$
$
$
$
(3.4)
0.1
1.0
-
-
(2.4)
(26.7)
2.7
-
25.0
0.5
1.3
9.5
3.4
-
-
(0.1)
12.9
(20.7)
6.3
1.0
25.0
0.3
11.9
(4.2)
0.1
1.4
-
-
(2.8)
0.4
2.0
-
-
0.1
2.6
7.4
3.5
-
-
-
11.0
3.7
5.6
1.4
-
0.1
10.8
(659%)
13%
(29%)
0%
200%
10%
$
$
$
$
$
$
$
$
Note: * Mine operating (loss) earnings, Adjusted net (loss) income, and adjusted EBITDA are non-GAAP financial measures
Note: ** included in cost of sales or selling, general and administrative expenses
During Q4 2015, mine operating earnings remained flat at $10.3 million as compared to Q4 2014 of $10.1 million,
while gross margin (mine operating earnings over sales) was 28% (Q4 2014: 27%). A mine operating loss at
Caylloma was offset by an increase of mine operating income of 30% at San Jose. Caylloma´s results were
impacted by lower silver sold of 41% and lower metal prices, in particular lead and zinc which fell 14% and 28%
quarter over quarter. Higher lead and zinc sold and lower unit costs of 11% partially compensated the negative
effect from metal prices. At San Jose, higher head grades and metallurgical recoveries, and lower unit costs of
8% more than compensated lower silver and gold prices, resulting in higher gross margin of 43% compared to
36% in Q4 2014.
Adjusted EBITDA in Q4 2015 increased 10% over Q4 2014 to $11.9 million driven by an increase at San Jose of
$1.9 million, or 17%, to $12.9 million. This was partially offset by a decrease at Caylloma of $1.3 million or 50%,
to $1.3 million.
Selling, General and Administrative Expenses
The following table summarizes the details of selling, general and administrative expenses by region and
component:
Management’s Discussion and Analysis Page - 25
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Expressed in $ millions
Three months ended December 31,
2015
General and administrative expenses
Share-based payments
Workers' participation
Corporate
2.1
$
1.0
-
$
3.1
Bateas Cuzcatlan
0.8
$
-
0.3
1.1
0.5
$
-
-
$
0.5
$
$
Total Corporate
2.1
1.4
-
$
3.5
3.4
1.0
0.3
4.7
$
$
2014
Bateas Cuzcatlan
0.6
$
-
0.1
0.7
0.9
$
-
-
$
0.9
$
Total
3.6
1.4
0.1
5.2
$
$
Selling, general and administrative expenses for Q4 2015 decreased 10%, or $0.5 million, to $4.7 million (Q4
2014: $5.2 million). The main driver for the decrease compared with the same period in the prior year was the
decline in share-based payments of $0.4 million to $1.0 million that was mostly related to higher charges in Q4
2014 from the mark-to-market effect. Also contributing to the decrease were lower general and administrative
expenses of $0.2 million to $3.4 million, offset by higher workers’ participation of $0.2 million to $0.3 million.
Foreign Exchange Loss (Gain)
For the three months ended December 31, 2015 and 2014, the foreign exchange loss (gain) by reportable segments
was as follows:
Expressed in $ millions
Three months ended December 31,
2015
2014
Corporate
$
0.2
Bateas
0.2
$
Cuzcatlan
0.4
$
Total Corporate
0.8
(0.3)
$
$
Bateas Cuzcatlan
0.2
$
0.2
$
Total
0.1
$
The increase in the foreign exchange loss by $0.7 million to $0.8 million is a result of the devaluation of the
Peruvian nuevo sol and Mexican peso against the United States dollar.
Impairment of Mineral Properties
For Q4 2015, the $25.0 million (Q4 2014: $nil) impairment of mineral properties relates to the impairment of
Caylloma as a result of declining metal prices. Refer above to the disclosure on the “Impairment of Caylloma
Mine.”
Other Operating Expenses
The following table summarizes the details of other operating expenses:
Management’s Discussion and Analysis Page - 26
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Restructuring and severance costs
Impairment of inventories
Other operating (income) - other
$
Expressed in $ millions
Three months ended December 31,
2014
1.1
0.1
-
$
1.2
2015
0.2
0.4
(0.1)
0.5
$
$
Restructuring and severance costs include the Company’s cost-reduction program which includes salaries and
post-employment costs. For Q4 2015, these costs were related solely to the Caylloma, compared with the same
period in the prior year, when the costs were throughout the organization.
For Q4 2015, the impairment of inventories included the write-down of concentrate stock piles of $0.2 million,
and $0.2 million of materials were written down to net realizable value.
Expressed in $ millions
Three months ended December 31,
2015
2014
Concentrate stock piles
Materials and supplies
Finance items
$
$
Bateas
0.2
0.2
0.4
Bateas
-
$
0.1
0.1
$
Finance income
Interest income on FVTPL financial assets
Total finance income
Finance expenses
Interest expense
Standby and commitment fees
Accretion of provisions (Note 13)
Total finance expense
Net finance expense
Expressed in $ millions
Three months ended December
2014
2015
$
$
0.1
0.1
$
$
0.1
0.1
0.4
-
0.2
0.6
(0.5)
$
$
-
0.1
0.2
0.3
(0.2)
$
$
Interest expense of $0.4 million (Q4 2014: $nil) included $0.3 million interest on the bank loan and $0.1 million
interest on the interest rate swap. Refer below to the discussion on “Liquidity and Capital Resources.”
Management’s Discussion and Analysis Page - 27
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Income Taxes
The following table summarizes the details of income taxes by region and component:
Expressed in $ millions
Three months ended December 31,
2015
2014
Income taxes
Current income tax
Deferred income tax
Peru Mexico
2.7
$
(0.1)
2.6
0.2
(6.7)
(6.5)
$
$
$
$
Total
2.9
(6.8)
(3.9)
$
$
Peru Mexico Total
2.1$
0.2
1.3
0.8
3.4$
1.0
1.9
0.5
2.4
$
$
$
Income taxes for Q4 2015 decreased to a recovery of $3.9 million (Q4 2014: expense of $3.4 million), as current
income tax increased $0.8 million and deferred income tax decreased $8.1 million because of the $8.0 million (Q4
2014: $nil) tax impact of the impairment charge for Caylloma Mine.
In Q4 2015, the Company paid $0.4 million in income tax related to the 2015 fiscal period. The current income
tax incurred in Q4 2015 was $2.9 million (Q4 2014: $2.1 million).
Non-GAAP Financial Measures
Cash Cost per Payable Ounce of Silver and Cash Cost per Tonne of Processed Ore (Non-GAAP Financial
Measure)
Cash cost per payable ounce of 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 cost is 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 with similar data presented by other mining companies.
The following tables present a reconciliation of cash cost per tonne of processed ore and cash cost per payable
ounce of silver to the cost of sales in the consolidated financial statements for the three months (“Q4”) and the
years (“YTD Q4”) ended December 31, 2015 and 2014:
Management’s Discussion and Analysis Page - 28
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Consolidated Mine Cash Cost
Expressed in $'000's
Expressed in $'000's
Q4 2015
YTD
Q4 2015
YTD
Q4 2014 Q4 2014
Cost of sales 1
Add / (Subtract):
Change in concentrate inventory
Depletion and depreciation in concentrate inventory
Commercial and government royalties and mining taxes
Workers participation
Depletion and depreciation
Cash cost (A)
26,681
111,081
27,771
113,753
(262)
64
(464)
(719)
(6,089)
19,211
57
(38)
(1,350)
(2,654)
(24,893)
82,203
235
(70)
(298)
(519)
(5,419)
21,700
(901)
211
(1,388)
(4,291)
(22,643)
84,741
Cash cost (A)
Add / (Subtract):
By-product credits from gold, lead and zinc
Refining charges
Cash cost applicable per payable ounce (B)
19,211
82,203
21,700
84,741
(16,676)
1,672
4,207
(66,600)
7,169
22,772
(15,356)
1,899
8,243
(63,198)
7,920
29,463
Payable ounces of silver production (C)
1,518,664
6,342,693
1,549,464
6,287,593
Cash cost per ounce of payable silver ($/oz) (B/C)
2.77
3.59
5.32
4.69
1 Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation
Management’s Discussion and Analysis Page - 29
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
San Jose Mine Cash Cost
Expressed in $'000's
Expressed in $'000's
Q4 2015
YTD
Q4 2015
Q4 2014
YTD
Q4 2014
Cost of sales 1
Add / (Subtract):
Change in concentrate inventory
Depletion and depreciation in concentrate inventory
Commercial and government royalties and mining taxes
Workers participation
Depletion and depreciation
Cash cost (A)
14,175
60,968
14,661
62,622
(292)
85
(318)
(670)
(3,399)
9,581
(396)
105
(669)
(2,269)
(15,527)
42,212
366
(98)
(71)
(456)
(3,425)
10,977
(1,006)
232
(487)
(3,556)
(15,161)
42,644
Total processed ore (tonnes) (B)
172,789
717,505
181,702
676,959
Cash cost per tonne of processed ore ($/t) (A/B)
55.45
58.83
60.41
62.99
Cash cost (A)
Add / (Subtract):
By-product credits from gold
Refining charges
Cash cost applicable per payable ounce ( C)
9,581
42,212
10,977
42,644
(8,605)
1,211
2,187
(34,803)
4,732
12,141
(7,791)
1,071
4,257
(32,244)
4,369
14,769
Payable ounces of silver production (D)
1,211,035
4,731,738
1,031,736
4,195,180
Cash cost per ounce of payable silver ($/oz) (C/D)
1.81
2.57
4.13
3.52
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
33.20
8.34
8.21
1.33
4.37
55.45
32.37
13.02
7.92
1.15
4.37
58.83
32.73
14.11
7.94
1.53
4.10
60.41
31.51
16.08
9.18
1.25
4.97
62.99
1 Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation
Management’s Discussion and Analysis Page - 30
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Caylloma Mine Cash Cost
Expressed in $'000's
Expressed in $'000's
Q4 2015
YTD
Q4 2015
Q4 2014
YTD
Q4 2014
Cost of sales 1
Add / (Subtract):
Change in concentrate inventory
Depletion and depreciation in concentrate inventory
Commercial and government royalties and mining taxes
Workers participation
Depletion and depreciation
Cash cost (A)
12,506
50,113
13,110
51,131
30
(21)
(146)
(49)
(2,690)
9,630
453
(143)
(681)
(385)
(9,366)
39,991
(131)
28
(227)
(63)
(1,994)
10,723
105
(21)
(901)
(735)
(7,482)
42,097
Total processed ore (tonnes) (B)
117,776
466,286
117,060
464,823
Cash cost per tonne of processed ore ($/t) (A/B)
81.77
85.76
91.60
90.57
Cash cost (A)
Add / (Subtract):
By-product credits from gold, lead and zinc
Refining charges
Cash cost applicable per payable ounce ( C)
9,630
39,991
10,723
42,097
(8,071)
461
2,020
(31,797)
2,437
10,631
(7,565)
828
3,986
(30,954)
3,551
14,694
Payable ounces of silver production (D)
307,629
1,610,955
517,728
2,092,413
Cash cost per ounce of payable silver ($/oz) (C/D)
Mining cost per tonne
Milling cost per tonne
Indirect cost per tonne
Community relations cost per tonne
Distribution cost per tonne
Total production cost per tonne
6.57
38.68
15.40
17.23
0.50
9.96
81.77
6.60
7.70
7.02
43.83
14.66
18.80
0.36
8.11
85.76
44.16
15.41
22.61
0.94
8.48
91.60
43.58
15.32
22.67
0.65
8.35
90.57
1 Includes depletion, depreciation, distribution, community relations, government royalties and mining taxes, and workers participation
Management’s Discussion and Analysis Page - 31
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
All-in Sustaining Cash Cost and All-in Cash Cost per Payable Ounce of Silver (Non-GAAP Financial Measure)
The Company believes that “all-in sustaining cash cost” and “all-in cash cost” better meet the needs of analysts,
investors, and other stakeholders of the Company in understanding the cost associated with producing silver, the
economics of silver mining, the Company’s operating performance, and the Company’s ability to generate free
cash flow from current operations and 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 that 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 that came into effect
January 1, 2014.
All-in sustaining cash cost and all-in cash cost are intended to provide additional information only and do not have
standardized definitions under the IFRS and should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with the IFRS. These measures are not necessarily indicative of operating
profit or cash flow from operations as determined under the IFRS. Although the WGC has published a
standardized definition, companies may calculate these measures differently.
All-in sustaining cost include total production cash costs incurred at the Company’s mining operations, which
form 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 operations and provides
the Company and stakeholders of the Company with additional information on the Company’s operational
performance and ability to generate cash flows. As the measure seeks to reflect the full cost of silver production
from 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 ounce sold
basis.
The following tables provide a reconciliation of all-in sustaining cash cost per ounce in the consolidated financial
statements for the three months and years ended December 31, 2015 and 2014:
Management’s Discussion and Analysis Page - 32
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Consolidated Mine All-in Cash Cost
Expressed in $'000's
Expressed in $'000's
Cash cost applicable per payable ounce
Commercial and government royalties 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
1
Brownfields exploration expenditures
All-in sustaining cash cost
Non-sustaining capital expenditures1
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
Q4 2015
4,207
483
904
1,339
6,933
2,117
17,928
561
27,539
YTD
Q4 2015
22,772
3,294
3,318
6,408
35,792
9,292
42,977
3,965
92,026
Q4 2014
8,243
298
629
1,495
10,665
2,107
5,383
1,232
19,387
YTD
Q4 2014
29,463
1,388
5,321
6,877
43,049
10,825
30,395
6,757
91,026
8,704
36,243
1,518,664
18.13
23.87
11,736
103,762
6,342,693
14.51
16.36
846
20,233
1,549,464
12.51
13.06
1,704
92,730
6,287,593
14.48
14.75
San Jose Mine All-in Cash Cost
Expressed in $'000's
Expressed in $'000's
Cash cost applicable per payable ounce
Commercial and government royalties and mining tax
Workers' participation
Selling, general and administrative expenses (operations)
Adjusted operating cash cost
Sustaining capital expenditures1
Brownfields exploration expenditures1
All-in sustaining cash cost
1
Non-sustaining capital expenditures
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
Q4 2015
2,187
337
837
803
4,164
15,719
461
20,344
YTD
Q4 2015
12,141
2,613
2,836
3,917
21,507
35,840
3,513
60,860
6,506
26,850
1,211,035
16.80
22.17
9,397
70,257
4,731,738
12.86
14.85
Q4 2014
4,257
71
570
634
5,532
3,037
1,146
9,715
680
10,395
1,031,736
9.42
10.08
YTD
Q4 2014
14,769
487
4,445
3,466
23,167
21,477
5,978
50,622
1,551
52,173
4,195,180
12.07
12.44
Management’s Discussion and Analysis Page - 33
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Caylloma Mine All-in Cash Cost
Expressed in $'000's
Expressed in $'000's
Cash cost applicable per payable ounce
Commercial and government royalties and mining tax
Workers' participation
Selling, general and administrative expenses (operations)
Adjusted operating cash cost
Sustaining capital expenditures1
Brownfields exploration expenditures
All-in sustaining cash cost
1
1
Non-sustaining capital expenditures
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
Adjusted Net (Loss) Income (Non-GAAP Financial Measure)
Q4 2015
2,020
146
57
536
2,759
2,209
100
5,068
2,198
7,266
307,629
16.47
23.62
YTD
Q4 2015
10,631
681
455
2,491
14,258
7,137
452
21,847
2,339
24,186
1,610,955
13.56
15.01
Q4 2014
3,986
227
73
861
5,147
2,346
86
7,579
166
7,745
517,728
14.64
14.96
YTD
Q4 2014
14,694
901
859
3,411
19,865
8,918
779
29,562
153
29,715
2,092,413
14.13
14.20
The Company uses the financial measure of “adjusted net (loss) income” to supplement information in its
consolidated financial statements. The Company believes that in addition to conventional measures prepared in
accordance with the IFRS, the Company and certain investors and analysts use this information and information
obtained from conventional IFRS measures to evaluate the Company’s performance. The term “adjusted net (loss)
income” does not have a standardized meaning prescribed by the IFRS, and therefore the Company’s definitions
are unlikely to be comparable to similar measures presented by other companies.
Expressed in $ millions
NET (LOSS) INCOME FOR THE YEAR
Items of note, net of tax:
Impairment of mineral properties, plant and equipment
Impairment of inventories
Other operating income - other
ADJUSTED NET (LOSS) INCOME FOR THE YEAR
(1)
A non-GAAP financial measure
(1)
Three months ended December 31,
2014
0.1
$
2015
(17.3)
$
Years ended December 31,
2014
15.6
2015
(10.6)
$
$
17.0
0.3
(0.1)
(0.1)
-
0.1
-
0.2
17.0
0.4
(0.1)
6.7
-
0.1
-
15.7
The Company uses other financial measures whose presentation is not meant to be a substitute for other subtotals
or totals presented in accordance with the IFRS measures but that rather should be evaluated in conjunction with
IFRS measures. The following other financial measures are used: operating cash flow per share before changes in
working capital, and adjusted EBITDA. These terms described and presented below do not have standardized
meanings prescribed by IFRS, and therefore the Company’s definitions are unlikely to be comparable to similar
Management’s Discussion and Analysis Page - 34
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
measures presented by other companies. The Company’s management believes that its presentation provides
useful information for investors.
Operating cash flow per share before changes in working capital (non-GAAP financial measure)
Expressed in $'000's (except per share measures)
Net (loss) income for the year
Items not involving cash
Income taxes paid
Interest expense paid
Interest income received
$
$
Three months ended December
2014
57
10,712
10,769
(890)
-
87
2015
(17,290)
28,809
11,519
(367)
(417)
86
$
$
$
$
$
Years ended December 31,
2015
(10,608)
59,796
49,188
(17,846)
(1,110)
354
$
2014
15,602
47,295
62,897
(3,417)
(4)
275
Cash generated by operating activities before changes in working capital
Divided by
Weighted average number of shares ('000's)
$
10,821
$
9,966
$
30,586
$
59,751
129,133
127,700
129,001
126,787
Operating cash flow per share before changes in working capital (1)
$
0.08
$
0.08
$
0.24
$
0.47
(1)
A non-GAAP financial measure
Mine operating earnings (non-GAAP financial measure)
Expressed in $'000's
Sales
Cost of sales
Mine operating earnings (1)
Three months ended December 31,
2014
37,823
27,771
2015
37,013
26,681
$
$
Years ended December 31,
2015
2014
154,729
174,006
111,081
113,753
$
$
$
10,332
$
10,052
$
43,648
$
60,253
Management’s Discussion and Analysis Page - 35
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Adjusted EBITDA (non-GAAP financial measure)
Expressed in $'000's
Net (Loss) Income
Add back: Net finance expense
Add back: Depreciation, depletion, and amortization
Add back: Income taxes
Add back: Share-based payments
Add back: Impairment of mineral properties
Add back: Other operating expenses
Adjusted EBITDA (1)(2)
(1)
A non-GAAP financial measure
$
$
Three months ended December 31,
2014
57
225
5,579
3,371
1,447
-
99
2015
(17,290)
564
6,263
(3,949)
985
25,000
321
$
$
Years ended December 31,
2015
2014
(10,608)
15,602
1,377
871
25,739
23,517
7,391
17,277
1,499
6,695
25,000
-
550
187
$
11,894
$
10,778
$
50,948
$
64,149
(2)
Adjusted EBITDA is net income before interest, taxes, depreciation, depletion, and amortization, unrealized gains and losses on hedge contracts,
share based payments, and other non-cash expenses
Liquidity and Capital Resources
Full-Year 2015 Liquidity and Capital Resources
The capital of the Company consists of equity and an available credit facility, net of cash. The Board of Directors
has not established a quantitative return on capital criteria for management. The Company manages the capital
structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the
underlying assets.
The Company’s cash and cash equivalents at December 31, 2015, totaled $72.2 million (December 31, 2014:
$42.9 million), and its short term investments totaled $36.0 million (December 31, 2014: $34.4 million).
On April 1, 2015, the Company drew down a $40.0 million term credit facility from the Bank of Nova Scotia.
(Refer to “Liquidity Risk,” discussed below.)
On March 26, 2015, the Company entered into an interest rate swap of $40.0 million, effective date of April 1,
2015, and expires on March 25, 2019 matching the maturity of the bank loan (refer to financial statement note
11). The interest rate swap was entered into to hedge the variable interest rate risk on the bank loan. The interest
rate swap is designated as a cash flow hedge for forecasted variable interest rate payments.
The fixed rate on the interest rate swap is 1.52% and the floating amount is based on the one month LIBOR rate.
The interest rate swap is settled on a monthly basis and the settlement is the difference between the fixed and
floating interest rate on a net basis. Refer to financial statement note 5.
Working capital for the year ended December 31, 2015, increased $11.5 million, to $93.9 million (December 31,
2014: $82.4 million). This reflects the proceeds from a bank loan of $39.3 million, net of transaction costs.
Management’s Discussion and Analysis Page - 36
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
The increase in working capital resulted from increases in the following: cash and cash equivalents of $29.4
million, short term investments of $1.6 million, income tax receivable of $0.1 million, and from decreases in the
following: provisions of $0.4 million, and income tax payable of $6.1 million.
The increase in working capital was offset by decreases in the following: accounts receivable and other assets of
$12.8 million, prepaid expenses of $0.1 million, inventories of $4.5 million, and from increases in the following:
accounts payable of $7.5 million, derivative liabilities of $0.4 million, and current portion of other liabilities of
$0.8 million.
During the year ended December 31, 2015, cash and cash equivalents increased $29.7 million (2014: increased
$11.5 million) and comprised the following:
Years ended December 31,
(Expressed in $ millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
INCREASE IN CASH AND CASH EQUIVALENTS
Note: Figures may not add due to rounding
$
$
$
2014
60.2
(57.0)
8.2
(0.3)
11.5
Change
(5.4)
(9.4)
33.1
(0.1)
18.2
$
$
$
During the years ended December 31, 2015 and 2014, net cash provided by operating activities included income
taxes paid, interest expense paid, and income received as follows:
Years ended December 31,
(Expressed in $ millions)
Cash provided by operating activities before interest and income
Income taxes paid
Interest expense paid
Interest income received
Net cash provided by operating activities
Note: Figures may not add due to rounding
$
$
$
2014
63.3
(3.4)
-
0.3
60.2
Change
10.1
(14.4)
(1.1)
0.1
(5.4)
$
$
$
For the years ended December 31, 2015 and 2014, net cash provided by operating activities included the following
non-cash working capital items:
Management’s Discussion and Analysis Page - 37
2015
54.8
(66.4)
41.3
(0.4)
29.7
2015
73.4
(17.8)
(1.1)
0.4
54.8
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
(Expressed in $ millions)
Cash generated by operating activities before changes in working capital
Changes in non-cash working capital items
Accounts receivable and other assets
Prepaid expenses
Inventories
Trade and other payables
Provisions
Changes in non-cash working capital
Net cash provided by operating activities
Note: Figures may not add due to rounding
Years ended December 31,
2014
59.8
$
$
Change Change %
-49%
(29.2)
2015
30.6
$
$
$
$
13.2
(0.2)
3.3
8.1
(0.3)
24.1
54.8
(4.5)
-
0.3
4.9
(0.2)
0.5
60.2
$
$
$
$
$
$
17.7
(0.2)
3.0
3.2
(0.1)
23.6
(5.4)
-393%
0%
1000%
65%
50%
4720%
-9%
Cash used by the Company in investing activities for the year ended December 31, 2015, totaled $66.4 million
(2014: $57.0 million) and comprised the following:
$2.6 million (2014: net purchases of $18.0 million) in net purchases of short term investments;
$6.8 million in net advances (2014: net advances of $0.1 million) on deposits on long term assets; and,
$57.1 million (2014: $38.9 million) in expenditures on mineral properties, plant and equipment,
representing an increase of $18.2 million over the prior year period and comprising the following
expenditures:
Year ended December 31, 2015
(Expressed in $ millions)
Plant and equipment
Dry stack tailings deposit project
Equipment and infrastructure
Plant Expansion
Infill drilling
Mine development
Brownfields exploration
$
$
$
Bateas Cuzcatlan Consolidated
6.5
3.3
25.0
25.0
31.5
28.3
9.4
9.4
1.6
1.6
10.6
5.9
3.5
4.0
57.1
48.7
3.2
-
3.2
-
-
4.7
0.5
8.4
$
$
$
During the year ended December 31, 2015, cash provided by financing activities totaled $41.3 million (2014: $8.2
million) and comprised the proceeds from a bank loan of $39.3 million (2014: $nil); net proceeds on the issuance
of common shares of $2.0 million (2014: $8.5 million); and repayments of finance lease obligations of $nil (2014:
$0.2 million).
Fourth Quarter 2015 Liquidity and Capital Resources
During Q4 2015, cash and cash equivalents increased $5.0 million (Q4 2014: increased $2.4 million) and
comprised the following:
Management’s Discussion and Analysis Page - 38
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
(Expressed in $ millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
INCREASE IN CASH AND CASH EQUIVALENTS
Note: Figures may not add due to rounding
$
Three months ended December 31,
2014 Change
13.9
$
9.3
(6.6)
(11.7)
(4.7)
4.8
2.6
2.4
2015
23.2
(18.3)
0.1
5.0
$
$
$
$
During the three months ended December 31, 2015 and 2014, net cash provided by operating activities included
income taxes paid, interest expense paid, and income received as follows:
(Expressed in $ millions)
Cash provided by operating activities before interest and income
Income taxes paid
Interest expense paid
Interest income received
Net cash provided by operating activities
Note: Figures may not add due to rounding
$
$
Three months ended December 31,
2014 Change
13.8
$
10.1
0.5
(0.9)
(0.4)
-
-
0.1
13.9
9.3
2015
23.9
(0.4)
(0.4)
0.1
23.2
$
$
$
During the three months ended December 31, 2015 and 2014, net cash provided by operating activities included
the following non-cash working capital items:
(Expressed in $ millions)
Cash generated by operating activities before changes in working capital
Changes in non-cash working capital items
Accounts receivable and other assets
Prepaid expenses
Inventories
Trade and other payables
Provisions
Changes in non-cash working capital
Net cash provided by operating activities
Note: Figures may not add due to rounding
Three months ended December 31,
2014 Change
0.8
10.0
2015
10.8
$
$
$
$
8.6
(0.8)
1.8
2.9
(0.2)
12.3
23.2
1.2
(0.8)
(0.1)
(0.9)
-
(0.6)
9.3
7.4
$
-
1.9
3.8
(0.2)
12.9
13.9
$
$
$
$
$
Cash used by the Company in investing activities for Q4 2015 totaled $18.3 million (Q4 2014: $11.7 million) and
comprised the following:
$6.6 million (Q4 2014: net purchases of $3.2 million) in net redemption of short term investments;
$0.8 million in net receipts (Q4 2014: net advances of $1.1 million) on deposits on long term assets; and,
$25.6 million (Q4 2014: $7.5 million) in expenditures on mineral properties, plant and equipment
comprising the following expenditures:
Management’s Discussion and Analysis Page - 39
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Three months ended December 31, 2015
(Expressed in $ millions)
Plant and equipment
Dry stack tailings deposit project
Equipment and infrastructure
Plant Expansion
Infill drilling
Mine development
Brownfields exploration
$
$
$
Bateas Cuzcatlan Consolidated
2.9
1.2
12.2
12.2
15.1
13.4
6.5
6.5
0.1
0.1
3.4
2.3
0.4
0.5
25.6
22.7
1.7
-
1.7
-
-
1.1
0.1
2.9
$
$
$
Cash provided by financing activities was $0.1 million (Q 2014: $4.8 million) and included the net proceeds on
the issuance of common shares of $0.2 million (Q4 2014: $4.8 million), less the use of a bank loan of $0.1 million
(2014: $nil).
Contractual Obligations
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, 2015
Expressed in $ millions
Trade and other payables
Bank loan
Derivative liabilities
Income tax payable
Other liabilities
Operating leases
Provisions
Less than
$
1 year 1 - 3 years 4 - 5 years
$
29.0
-
40.0
-
-
0.4
-
3.6
-
0.8
-
0.5
0.4
1.2
41.2
34.7
-
$
-
-
-
4.6
0.6
1.2
6.4
$
$
After
5 years
-
$
-
-
-
-
-
11.1
11.1
$
$
$
$
Total
29.0
40.0
0.4
3.6
5.4
1.1
13.9
93.4
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, 2015, $8,346 of capital commitments not disclosed elsewhere in the Financial Statements,
and forecasted to be expended within one year, included $1,938 for the dry stack tailing dam and $4,649 for the
plant expansion at the San Jose property, and $213 for an energy improvement project and $1,546 for the plant
expansion at the Caylloma property.
Management’s Discussion and Analysis Page - 40
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Other Commitments (expressed in $’000’s)
The Company has a contract to guarantee the 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 5,200 kW) and the
Company is obligated to purchase subject to exemptions under provisions of "Force Majeure". The contract period
is 15 years and expires in 2022, after that it is automatically renewed for periods of two years. Renewal can be
avoided without penalties by notification 10 months in advance of the renewal date.
Tariffs are established annually by the energy market regulator in accordance with applicable regulations in Peru.
The minimum committed demand is $30 per month, and the average monthly charge for 2016 is $300.
Operating leases includes leases for office premises, computer and other equipment used in the normal course of
business. The expected payments due by period, as at December 31, 2015, are as follows:
Expressed in $'000's
Expected payments due by period as at December 31, 2015
Office premises - Canada
Office premises - Peru
Office premises - Mexico
Total office premises
Computer equipment - Peru
Computer equipment - Mexico
Total computer equipment
Machinery - Mexico
Total machinery
Total operating leases
$
$
Less than
1 year
66
335
8
409
126
4
130
-
$
-
$
539
$
$
$
$
$
1 - 3 years
199
141
-
340
47
139
186
59
59
585
4 - 5 years
-
$
-
-
-
$
-
-
-
$
-
$
-
$
-
$
$
$
$
$
$
Total
265
476
8
749
173
143
316
59
59
1,124
Tax Contingencies (expressed in $’000’s)
The Company has been assessed taxes and related interest and penalties by the Peruvian tax authority, SUNAT,
for tax years 2010 and 2011 in the amounts of $957, $564, respectively, for a total of $1,521. The Company is
currently appealing the assessments and believes the appeals will be ruled in favor of the Company. The Company
has provided a guarantee by way of a letter bond in the amount of $772. This bank letter of guarantee expires on
September 8, 2016.
During 2015, the Company’s foreign trade operations for tax years 2011 to 2014 were under review by the
Mexican Tax Administration Service (SAT) and facing an administrative customs procedure (PAMA) for specific
temporary import documents (pediments). On October 27, 2015, the Mexican Tax Administration Service (SAT)
issued a final resolution regarding the Company’s foreign trade operations for tax years 2011 to 2014, concluding
that certain claims are denied resulting in an assessment of $25 customs excise tax, $63 in VAT, and $93 in
penalties and interest for a total of $181 (the “Tax Credit”). On December 11, 2015, the Company, through
Afianzadora Sofimex S.A., has established a security bond in the amount of $215, in favor of the PAMA to
Management’s Discussion and Analysis Page - 41
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
collateralize the Tax Credit of $181. This security bond expires on December 10, 2017. Subsequent to December,
31, 2015, on January 21, 2016, the Company presented its arguments before the Federal Court for the nullity and
voidance of the Tax Credit.
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 for the Company. Certain conditions may
exist as of the date the financial statements are issued that 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.
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 the obligation to indemnify the following:
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; and,
certain vendors of an acquired company for obligations that may or may not have been known at the date of
the transaction.
The dollar value of guarantees and indemnifications 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 was 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 was subject to annual collateral in the form of a letter of guarantee.
In August 2015, the closure plan was again updated with total closure costs of $7,770, consisting of progressive
closure activities of $3,604, final closure of $3,594, and post closure of $573. Under the rules of closure, for
purposes of determining the annual financial collateral in the form of a letter of guarantee, the final closure and
post-closure activities constitute one amount of $4,166, the same to be allocated annually constituting the
following guarantees by year: 2016 $2,495, 2017 $3,179, 2018 $3,908, 2019 $4,705 and 2020 $5,641, according
to the approved life in the study of mine closure.
Scotiabank Peru, a third party, has established a bank letter of guarantee in the amount of $2,495 (2014: $1,842),on
behalf of Bateas, in favor of the Peruvian mining regulatory agency in compliance with local regulation and to
collateralize Bateas’s mine closure plan. This bank letter of guarantee expires on December 31, 2016.
Scotiabank Peru, a third party, has established a bank letter of guarantee in the amount of $3 (2014: $3), on behalf
of Bateas, in favor of the Peruvian Energy and Mining Ministry to collateralize Bateas’s regulatory compliance
with an electric transmission line project. This bank letter of guarantee expires on November 30, 2016.
Management’s Discussion and Analysis Page - 42
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Scotiabank Peru, a third party, has established a bank letter of guarantee in the amount of $55 (2014: $58), for
office rental, on behalf of Bateas, in favor of Centro Empresarial Nuevo Mundo S.A.C. This bank letter of
guarantee expires on July 15, 2016.
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.
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
Computer equipment 2
Expressed in $'000's
Years ended December 31,
2014
2015
$
88
$
83
104
6
198
108
-
191
$
$
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
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. In 2014, Radius Gold Inc. (“Radius”), which has directors in common with
the Company and shares office space, reimbursed the Company for general overhead costs incurred in prior periods.
In 2015, the Company paid $50 in 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. a).
b)
Period End Balances Arising From Purchases of Goods/Services
Expressed in $'000's
December 31, 2015 December 31, 2014
Amounts due to related party
Owing to a company with a common director 3
$
9
3 Owing to Gold Group Management Inc. ("Gold Group") who has a director in common with the Company.
$
8
Significant Accounting Judgments and Estimates
The preparation of the 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
Management’s Discussion and Analysis Page - 43
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
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 Canadian, Peruvian and Mexican, and Barbados entities, management
considered the currency that mainly influences the sales and costs 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
Management’s Discussion and Analysis Page - 44
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
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 property 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 Measurements 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, 2015, there have been no transfers of amounts between Level 1, Level 2,
and Level 3 of the fair value hierarchy.
Management’s Discussion and Analysis Page - 45
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
i.
Assets and Liabilities Measured At Fair Value on a Recurring Basis
Expressed in $'000's
Quoted Prices in
Active Markets for
Identical Assets
Significant and
Other Observable
Inputs
Significant
Unobservable
Inputs
$
Level 1
72,218
36,031
-
Level 2
-
$
-
5,172
Level 3
-
$
-
-
$
Aggregate Fair
Value
72,218
36,031
5,172
At December 31, 2015
Cash and cash equivalents
Short term investments
Trade receivable from concentrate sales 1
Derivative liabilities 2
$
$
(351)
4,821
-
108,249
-
$
-
(351)
113,070
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.
1 The Company's trade receivables arose from provisional concentrate sales and are valued using quoted market prices based
on the forward London Metal Exchange ("LME") for zinc and lead, the average London Bullion Market Association A.M. and
P.M. fix ("London A.M. fix" and "London P.M. fix") for gold and silver, and the London Bullion Market Association P.M. fix
("London P.M. fix") for gold and silver.
2 Derivative liabilities includes interest rate swaps. The fair value of the derivative liabilities reflect observable LIBOR and
hereby classified within Level 2 of the fair value hierarchy.
$
At December 31, 2014
Cash and cash equivalents
Short term investments
Quoted Prices in
Active Markets for
Identical Assets
Significant and
Other Observable
Inputs
Significant
Unobservable
Inputs
$
Level 1
42,867
34,391
Level 2
-
$
-
Level 3
-
$
-
Aggregate Fair
Value
42,867
34,391
$
Trade receivable from concentrate sales
1
-
16,573
-
16,573
$
77,258
$
16,573
$
-
$
93,831
Management’s Discussion and Analysis Page - 46
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
ii.
Fair Value of Financial Assets and Liabilities
Fair Values of Financial Assets and Liabilities
Financial assets
Trade receivable from concentrate sales
2
Advances and other receivables
3
Financial liabilities
1
Derivative liabilities
Other liabilities
3
Expressed in $'000's
December 31, 2015
December 31, 2014
Carrying amount Estimated fair value Carrying amount Estimated fair value
$
5,172
$
5,172
$
16,573
$
16,573
$
1,350
6,522
$
1,350
6,522
2,226
18,799
$
$
2,226
18,799
$
351
$
351
$
-
$
-
$
1,928
2,279
$
1,985
2,336
$
38
38
$
38
38
1
Derivative derivative liabilities includes interest rate swaps. The fair value of the derivative liabilities reflect observable
LIBOR and hereby classified within Level 2 of the fair value hierarchy.
2
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
Advances and other receivables and other liabilities are recorded at amortized costs. The fair value of other assets and other
liabilities are primarily determined using quoted market prices, and the balances include the current portion of other assets and
other liabilities, respectively.
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, Peruvian
nuevo soles, and Mexican pesos. A significant change in the currency exchange rates between the United States
dollar relative to the other currencies could have a material effect on the Company’s income, financial position,
or cash flows. The Company has not hedged its exposure to currency fluctuations.
As at December 31, 2015, the Company is exposed to currency risk through the following assets and liabilities
denominated in Canadian dollars, Peruvian nuevo soles and Mexican pesos (all amounts are expressed in
thousands of Canadian dollars, thousands of Peruvian nuevo soles or thousands of Mexican pesos):
Management’s Discussion and Analysis Page - 47
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
December 31, 2015
December 31, 2014
Expressed in '000's
Canadian
Dollars
$
10,023
-
83
-
-
(2,921)
-
-
(4,805)
-
2,380
1,716
$
$
S/.
Nuevo
Soles
Mexican
Pesos
983
-
4,035
2,663
$
46,405
-
6,805
-
Canadian
Dollars
$
2,695
7,696
897
-
S/.
Nuevo
Soles
Mexican
Pesos
8,633
-
3,742
448
$
56,739
-
15,692
-
-
(10,931)
(1,143)
(15)
-
(24,475)
(28,883)
(8,463)
31,899
(163,699)
(2,028)
(61,960)
(754)
(83,978)
(227,310)
(13,211)
$
$
71
(2,231)
-
-
(5,376)
-
3,752
3,226
$
$
S/.
$
-
(12,387)
(767)
(37)
-
(20,710)
(21,078)
(7,052)
19,096
(117,848)
(8,138)
(143,426)
(563)
(73,001)
$
(251,449)
$
(17,084)
S/.
$
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Income tax receivable
Deposits on long term assets and long
term borrowing costs
Trade and other payables
Provisions, current
Income tax payable
Other liabilities
Provisions
Total
Total US$ equivalent
Based on the above net exposure as at December 31, 2015, 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 $nil (2014: $358) and an impact to net income
before tax of $2,217 (2014: $2,682).
The sensitivity analyses included in the table above should be used with caution as the results are theoretical,
based on management’s best assumptions using material and practicable data which may generate results that are
not necessarily indicative of future performance. In addition, in deriving this analysis, the Company has made
assumptions based on the structure and relationship of variables as at the balance sheet date which may differ due
to fluctuations throughout the year with all other variables assumed to remain constant. Actual changes in one
variable may contribute to changes in another variable, which may amplify or offset the effect on earnings.
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, 2015 is as follows:
Management’s Discussion and Analysis Page - 48
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Cash and cash equivalents
Short term investments
Accounts receivable and other assets
Income tax receivable
Expressed in '000's
December 31, 2015 December 31, 2014
$
42,867
34,391
19,905
680
97,843
72,218
36,031
7,068
780
116,097
$
$
$
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 same period in 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.
On March 25, 2015, the Company entered into an amended and restated credit agreement with the Bank of Nova
Scotia for a $60.0 million senior secured financing (“credit facility”) consisting of a $40.0 million term credit
facility with a 4 year term and a $20.0 million revolving credit facility for a two year period. 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 $10.0
million, a commitment fee of 1.0% per annum is payable quarterly on the unutilized portion of the available credit
facility.
On April 1, 2015, the $40.0 million term credit facility was drawn down.
While the term credit facility remains unpaid, the Company is required to maintain the following financial
covenants:
Total debt to EBITDA of not greater than 3:1 calculated on a rolling four fiscal quarter basis and
measured at the end of each fiscal quarter of the Company; and,
Minimum tangible net worth in an amount equal to the sum of (a) 85% of the tangible net worth as at
June 30, 2014, plus (b) 50% of positive quarterly net income earned after June 30, 2014 plus (c) 50% of
the value of any equity interests issued by the Company after June 30, 2014.
(Refer to Contractual Obligations for the expected payments due as at December 31, 2015.)
Significant Changes, Including Initial Adoption of Accounting Standards
There were no significant accounting standards or interpretations along with any consequential amendments
required for the Company to adopt for the year ended December 31, 2015.
Management’s Discussion and Analysis Page - 49
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
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.
IFRS 11 Joint Arrangements (Amendment)
The amendment to IFRS 11 Joint Arrangements adds new guidance on how to account for the acquisition of an
interest in a joint operation that constitutes a business. The amendments specify the appropriate accounting
treatment for such acquisitions. The amendments are effective for annual periods beginning on or after January
1, 2016, with earlier application permitted. Transactions before the adoption date are grandfathered.
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets (Amendment)
The amendment to IAS 16 Property, plant and equipment and IAS 38 Intangible assets on depreciation and
amortisation clarifies that the use of revenue-based methods to calculate the depreciation of an asset is not
appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors
other than the consumption of the economic benefits embodied in the asset. The amendment also clarified that
revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic
benefits embodied in an intangible asset. The amendment is effective for annual period starting on or after January
1, 2016, with earlier application permitted.
IFRS 15 Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers specifies how and when revenue should be recognized as well
as requiring more informative and relevant disclosures. The standard supersedes IAS 18 Revenue, IAS 11
Construction Contracts and a number of revenue-related interpretations. Application of the standard is mandatory
and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and
insurance contracts. IFRS 15 is effective for annual periods starting on or after January 1, 2018, with earlier
application permitted.
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, 2018, 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. The
amendments are effective for annual periods beginning on or after January 1, 2018, with earlier application
permitted.
IFRS 9 Financial Instruments - Expected Credit Losses
On July 24, 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9
Financial Instruments, bringing together the classification and measurement, impairment and hedge accounting
Management’s Discussion and Analysis Page - 50
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement and all
previous versions of IFRS 9. The amendments are effective for annual periods beginning on or after January 1,
2018. Entities will also have the option to early apply the accounting for own credit risk-related fair value gains
and losses arising on financial liabilities designated at fair value through profit or loss without applying the other
requirements of IFRS 9.
IFRS 16 Leases
On January 13, 2016, the IASB issued IFRS 16 Leases of which requires lessees to recognise assets and liabilities
for most leases. For lessors, there is little change to the existing accounting in IAS 17 Leases. The new standard
will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided
the new revenue standard, IFRS 15 Revenue from Contracts with Customers, has been applied, or is applied at
the same date as IFRS 16.
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.
Share Position and Outstanding Warrants and Options
The Company’s outstanding share position as at March 14, 2016 is 129,245,507 common shares. In addition,
3,100,415 incentive stock options are currently outstanding as follows:
Type of Security
No. of Shares
Incentive Stock Options:
TOTAL OUTSTANDING OPTIONS:
Other Risks and Uncertainties
10,000
864,180
103,800
250,000
49,084
659,382
242,000
20,000
901,969
3,100,415
Exercise
Price
(CAD$)
$1.75
$3.38
$1.55
$2.22
$6.67
$4.30
$0.85
$0.85
$4.79
Expiry Date
May 8, 2016
May 29, 2016
July 5, 2016
January 11, 2017
February 20, 2017
March 23, 2017
October 5, 2018
November 5, 2018
March 18, 2020
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, 2014 available
at www.sedar.com and www.sec.gov/edgar.shtml.
Management’s Discussion and Analysis Page - 51
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
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, 2015, 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, 2015, the Company’s internal control over financial reporting
was effective and no material weaknesses were identified.
Qualified Persons
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
This MD&A and any documents incorporated by reference into this MD&A contain forward-looking statements
which 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-
Management’s Discussion and Analysis Page - 52
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
looking Statements”). All statements included herein, other than statements of historical fact, are Forward-looking
Statements and are subject to a variety of known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those reflected in the Forward-looking Statements. The Forward-looking
Statements in this MD&A include, without limitation, statements relating to:
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 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, plant expansion,
filter facility and dry stack tailings deposit project, and brownfields exploration at the San Jose property during
2016;
the Company’s planned processing and estimated major investments for mine development, plant
optimization and brownfields exploration at the Caylloma property during 2016;
expiry dates of bank letters of guarantee;
estimated mine closure costs; and
maturities of the Company’s financial liabilities, finance leases and other contractual commitments;
management’s expectation that any investigations, claims, and legal, labor and tax proceedings arising in the
ordinary course of business will not have a material effect on the results of operations or financial condition
of the Company.
Often, but not always, these Forward-looking Statements can be identified by the use of words such as
“anticipates”, “believes”, “plans”, “estimates”, “expects”, “forecasts”, “scheduled”, “targets”, “possible”,
“strategy”, “potential”, “intends”, “advance”, “goal”, “objective”, “projects”, “budget”, “calculates” or statements
that events, “will”, “may”, “could” or “should” occur or be achieved and similar expressions, including negative
variations.
Forward-looking Statements involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially different from any results,
performance or achievements expressed or implied by the Forward-looking Statements. Such uncertainties and
factors include, among others:
risks associated with mineral exploration and project development;
uncertainty of mineral resource and reserve estimates;
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;
competition;
substantial reliance on the Caylloma and San Jose mines for revenues;
risks related to the integration of businesses and assets acquired by the Company;
Management’s Discussion and Analysis Page - 53
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
risks associated with potential legal proceedings;
changes in national and local government legislation, taxation, controls, regulations and political or
economic developments in countries in which the Company does or may carry on business;
fluctuations in metal prices;
risks associated with entering into commodity forward and option contracts for base metals production;
environmental matters including potential liability claims;
reliance on key personnel;
potential conflicts of interest involving the Company’s directors and officers;
property title matters;
dilution from further equity financing;
currency exchange rate fluctuations;
adequacy of insurance coverage;
sufficiency of monies allotted for land reclamation; and
potential legal proceedings;
as well as those factors referred to in the “Risks and Uncertainties” section in this MD&A and in the “Risk Factors”
section in the Company’s Annual Information Form filed with the Canadian Securities Administrators and
available at www.sedar.com and filed with the U.S. Securities and Exchange Commission as part of the
Company’s Form 40-F and available at www.sec.gov/edgar.shtml. 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.
Forward-looking Statements contained in this MD&A are based on the assumptions, beliefs, expectations and
opinions of management, including but not limited to:
all required third party contractual, regulatory and governmental approvals will be obtained for the
exploration, development, construction and production of its properties;
there being no significant disruptions affecting operations, whether relating to labor, supply, power, damage
to equipment or other matter;
permitting, construction, development and expansion proceeding on a basis consistent with the Company’s
current expectations;
expected trends and specific assumptions regarding metal prices and currency exchange rates;
prices for and availability of fuel, electricity, parts and equipment and other key supplies remaining consistent
with current levels;
production forecasts meeting expectations; and
the accuracy of the Company’s current mineral resource and reserve estimates.
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.
Management’s Discussion and Analysis Page - 54
FORTUNA SILVER MINES INC.
Management’s Discussion and Analysis
For the year ended December 31, 2015
(Dollar amounts expressed in US dollars, unless otherwise indicated)
Cautionary Note to United States Investors Concerning Estimates of Reserves and Resources
Reserve and resource estimates included in this MD&A have been prepared in accordance with National
Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of
Mining, Metallurgy, and Petroleum Definition Standards on Mineral Resources and Mineral Reserves. NI 43-101
is a rule developed by the Canadian Securities Administrators that establishes standards for public disclosure by
a Canadian company of scientific and technical information concerning mineral projects. Canadian standards,
including NI 43-101, differ significantly from the requirements of the United States Securities and Exchange
Commission (“SEC”), and reserve and resource information contained in this news release may not be comparable
to similar information disclosed by U.S. companies. In particular, the term “resource” does not equate to the term
“reserves”. Under U.S. standards, mineralization may not be classified as a “reserve” unless the determination
has been made that the mineralization could be economically and legally produced or extracted at the time the
reserve determination is made.
The SEC’s disclosure standards normally do not permit the inclusion of information concerning “measured
mineral resources”, “indicated mineral resources” or “inferred mineral resources” or other descriptions of the
amount of mineralization in mineral deposits that do not constitute “reserves” by U.S. standards in documents
filed with the SEC. Readers are cautioned not to assume that resources will ever be converted into reserves.
Readers should also understand that “inferred mineral resources” have a great amount of uncertainty as to their
existence and great uncertainty as to their economic and legal feasibility. Readers should also not assume that all
or any part of an “inferred mineral resource” will ever be upgraded to a higher category. Under Canadian rules,
estimated “inferred mineral resources” may not form the basis of feasibility or pre-feasibility studies except in
rare cases. Readers are cautioned not to assume that all or any part of an “inferred mineral resource” exists or is
economically or legally mineable. Disclosure of “contained ounces” in a resource is permitted disclosure under
Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not
constitute “reserves” by SEC standards as in-place tonnage and grade without reference to unit measures. The
requirements of NI 43-101 for identification of “reserves” are also not the same as those of the SEC, and reserves
reported in compliance with NI 43-101 may not qualify as “reserves” under SEC standards. Accordingly,
information concerning mineral deposits set forth in this news release may not be comparable with information
made public by companies that report in accordance with U.S. standards.
Management’s Discussion and Analysis Page - 55
EXHIBIT 99.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use of our report dated March 14, 2016 relating to the consolidated financial statements of
Fortuna Silver Mines Inc. appearing in this Annual Report on Form 40-F of Fortuna Silver Mines Inc. for the year
ended December 31, 2015.
/s/ Deloitte LLP
Chartered Professional Accountants
Vancouver, Canada
March 29, 2016
EXHIBIT 99.5
CONSENT OF ERIC N. CHAPMAN
CONSENT OF AUTHOR / EXPERT
I hereby consent to:
1.
the use of my name, Eric N. Chapman, and reference to my name, the technical report entitled “Fortuna
Silver Mines Inc.: Caylloma Property, Caylloma District, Peru” dated as of March 22, 2013, as amended
April 15, 2013 (the “Caylloma Report”) evaluating the Caylloma Property of Fortuna Silver Mines Inc. (the
“Company”), the technical report entitled “Fortuna Silver Mines Inc.: San Jose Property, Oaxaca, Mexico”
dated as of November 22, 2013 evaluating the San Jose Property of the Company (together with the
Caylloma Report, the “Reports”), and the information contained in the Reports described or incorporated
by reference in the Company’s Annual Report on Form 40-F for the year ended December 31, 2015 filed
with the United States Securities and Exchange Commission; and
2.
the use of my name, Eric N. Chapman, and reference to my name, and the technical information relating to
the Updated Mineral Resource and Mineral Reserve estimates for the Caylloma Mine and the San Jose
Mine contained under the heading “General Development of the Business – Three-Year History and Recent
Developments” in the Annual Information Form of Fortuna Silver Mines Inc. (the “Company”) for the year
ended December 31, 2015 included in the Company’s Annual Report on Form 40-F for the year ended
December 31, 2015 filed with the United States Securities and Exchange Commission.
Dated: March 29, 2016
“Eric N. Chapman”
Eric N. Chapman, P.Geo., C. Geol. (FGS)
EXHIBIT 99.6
CONSENT OF THOMAS KELLY
CONSENT OF AUTHOR
I hereby consent to the use of my name, Thomas Kelly, and reference to my name, the technical report entitled
“Fortuna Silver Mines Inc.: Caylloma Property, Caylloma District, Peru” dated as of March 22, 2013, as amended
April 15, 2013 (the “Caylloma Report”) evaluating the Caylloma Property of Fortuna Silver Mines Inc. (the
“Company”), the technical report entitled “Fortuna Silver Mines Inc.: San Jose Property, Oaxaca, Mexico” dated as
of November 22, 2013 evaluating the San Jose Property of the Company (together with the Caylloma Report, the
“Reports”), and the information contained in the Reports described or incorporated by reference in the Company’s
Annual Report on Form 40-F for the year ended December 31, 2015 filed with the United States Securities and
Exchange Commission.
Dated: March 29, 2016
“Thomas Kelly”
Thomas Kelly, E.M. Fellow AusIMM, Registered Member SME
EXHIBIT 99.7
CONSENT OF EDWIN GUTIERREZ
CONSENT OF EXPERT
I hereby consent to the use of my name, Edwin Gutierrez, and reference to my name, and the technical information
relating to the Updated Mineral Resource and Mineral Reserve estimates for the Caylloma Mine and the San Jose
Mine contained under the heading “General Development of the Business – Three-Year History and Recent
Developments” in the Annual Information Form of Fortuna Silver Mines Inc. (the “Company”) for the year ended
December 31, 2015 included in the Company’s Annual Report on Form 40-F for the year ended December 31, 2015
filed with the United States Securities and Exchange Commission.
Dated: March 29, 2016
“Edwin Gutierrez”
Edwin Gutierrez,
Registered Member of the Society for Mining, Metallurgy and Exploration, Inc. (SME Registered Member Number
4119110RM)
EXHIBIT 99.8
CONSENT OF THOMAS VEHRS
CONSENT OF EXPERT
I hereby consent to the use of my name, Thomas Vehrs, and reference to my name, and the technical information
contained in the Annual Information Form of Fortuna Silver Mines Inc. (the “Company”) for the year ended
December 31, 2015 included in the Company’s Annual Report on Form 40-F for the year ended December 31, 2015
filed with the United States Securities and Exchange Commission.
Dated: March 29, 2016
“Thomas Vehrs”
Thomas Vehrs, Ph.D., Registered Member SME
EXHIBIT 99.9
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jorge Ganoza Durant, certify that:
1. I have reviewed this annual report on Form 40-F of Fortuna Silver Mines Inc. (the “issuer”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period
covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control
over financial reporting; and
5. The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent
functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s
internal control over financial reporting.
Dated: March 29, 2016
“Jorge Ganoza Durant”
Name: Jorge Ganoza Durant
Title: President, Chief Executive Officer & Director
(principal executive officer)
EXHIBIT 99.10
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Luis Ganoza Durant, certify that:
1. I have reviewed this annual report on Form 40-F of Fortuna Silver Mines Inc. (the “issuer”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period
covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control
over financial reporting; and
5. The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent
functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s
internal control over financial reporting.
Dated: March 29, 2016
“Luis Ganoza Durant”
Name: Luis Ganoza Durant
Title: Chief Financial Officer
(principal financial officer)
EXHIBIT 99.11
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Fortuna Silver Mines Inc. (the “Company”) on Form 40-F for the fiscal year ended December 31,
2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jorge Ganoza Durant, President, Chief
Executive Officer & Director of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: March 29, 2016
“Jorge Ganoza Durant”
Name: Jorge Ganoza Durant
Title: President, Chief Executive Officer & Director
(principal executive officer)
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended.
EXHIBIT 99.12
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Fortuna Silver Mines Inc. (the “Company”) on Form 40-F for the fiscal year ended December 31,
2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Luis Ganoza Durant, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: March 29, 2016
“Luis Ganoza Durant”
Name: Luis Ganoza Durant
Title: Chief Financial Officer
(principal financial officer)
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended.