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, 2016 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 146,978,173 common shares with no par value outstanding as of December 31, 2016.
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.
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.
Based on management’s evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were not effective as of December 31, 2016 as a result of the material weaknesses in the Company’s
internal control over financial reporting. See “Evaluation of Disclosure Controls and Procedures”, “Management’s Report on Internal
Control Over Financial Reporting” and “Material Weaknesses Relating to Insufficient Qualified Resources, the Effectiveness of Risk
Assessment, Design and Implementation of Control Activities and Monitoring Activities as of December 31, 2016” in the Management’s
Discussion and Analysis for the fiscal years ended December 31, 2016 and 2015, included as Exhibit 99.3 to this annual report on Form
40-F.
Notwithstanding these material weaknesses, management has concluded that the Company’s audited consolidated financial statements as
at and for the fiscal years ended December 31, 2016 and 2015, filed as part of this annual report on Form 40-F in Exhibit 99.2, fairly
present in all material respects the Company’s financial position, results of operations, capital position, and cash flows for the periods
presented, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
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 of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer,
conducted as evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, using
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated
Framework (2013). Based on evaluation performed, management concluded that material weaknesses existed as of December 31, 2016.
As a result, the Company’s internal control over financial reporting was not effective. See “Management’s Report on Internal Control
Over Financial Reporting” and “Material Weaknesses Relating to Insufficient Qualified Resources, the Effectiveness of Risk Assessment,
Design and Implementation of Control Activities and Monitoring Activities as of December 31, 2016” in the Management’s Discussion
and Analysis for the fiscal years ended December 31, 2016 and 2015, included as Exhibit 99.3 to this annual report on Form 40-F. The
Company’s auditors have issued an attestation report on management’s assessment of the Company’s internal control over financial
reporting. See “Attestation Report of the Registered Public Accounting Firm” below.
1
Attestation Report of the Registered Public Accounting Firm. The required disclosure is included in the “Report of Independent
Registered Public Accounting Firm” that accompanies the Company’s audited consolidated financial statements as at and for the fiscal
years ended December 31, 2016 and 2015, filed as part of this annual report on Form 40-F in Exhibit 99.2.
Changes in Internal Control Over Financial Reporting. During the fiscal year ended December 31, 2016, other than as described in
“Management’s Annual Report on Internal Controls over Financial Reporting” above, 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.
None.
NOTICES PURSUANT TO REGULATION BTR
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, David Farrell and Alfredo Sillau. The board of directors has
determined that each of Messrs. Robert Gilmore, David Farrell and Alfredo Sillau 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, 2016 and
2015. Aggregate fees (in Canadian dollars) billed to the Company for professional services rendered by Deloitte LLP during the fiscal
years ended December 31, 2016 and 2015 are as follows:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
2016
$915,813
$126,742
$142,746
Nil
$1,185,301
2015
$661,970
$72,774
$129,988
Nil
$864,732
“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.
“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”. These fees include services for securities and
prospectus engagements.
“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.
2
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, 2016, $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.
OFF-BALANCE SHEET ARRANGEMENTS
The required disclosure is included under the heading “Off-Balance Sheet Arrangements” in the Company’s Management’s Discussion
and Analysis for the fiscal years ended December 31, 2016 and 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 years ended December 31, 2016 and 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.
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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.
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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: May 15, 2017
FORTUNA SILVER MINES INC.
By: “Jorge Ganoza Durant”
Name: Jorge Ganoza Durant
Title:
President, Chief Executive Officer & Director
5
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, 2016
Audited Consolidated Financial Statements as at and for the years ended December 31, 2016 and 2015, including the
Report of Independent Registered Public Accounting Firm with respect thereto
Management’s Discussion and Analysis for the years ended December 31, 2016 and 2015
Consent of Deloitte LLP
Consent of Eric Chapman
Consent of Edwin Gutierrez
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.10
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, 2016
DATED: May 12, 2017
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 United States 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
3
4
4
4
4
4
4
5
5
12
12
14
24
24
36
50
50
50
51
51
51
53
54
54
54
56
56
56
56
56
56
57
Audit Committee Charter
Schedule “A”
PRELIMINARY NOTES
Cautionary Statement – Forward-Looking Statements
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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
(the “Exchange Act”), 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:
• Production guidance for 2017 at the San Jose Mine and the Caylloma Mine;
•
cash cost estimates and all-in sustaining cash cost estimates for 2017 at the Caylloma Mine and San Jose
Mine;
•
•
•
•
• Mineral Reserves and Mineral Resources, as they involve implied assessment, based on estimates and
assumptions that the Mineral Reserves and Mineral Resources described exist in the quantities predicted or
estimated and can be profitably produced in the future;
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 capital investments for mine development and
brownfields exploration at the San Jose Mine;
the Company’s planned processing and estimated capital investments for mine development, plant
optimization and brownfields exploration at the Caylloma Mine;
the Company’s plans for development of the Lindero Project;
the maturities of the Company’s financial liabilities, finance leases and other contractual commitments;
the expiry dates of bank letters of guarantee;
estimated mine closure costs; and
•
•
•
•
• 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:
•
•
•
•
•
•
•
•
•
•
•
operational risks associated with mining and mineral processing;
uncertainty relating to Mineral Resource and Mineral Reserve estimates;
uncertainty relating to capital and operating costs, production schedules and economic returns;
risks associated with the Company’s mineral exploration, project development and infrastructure;
risks associated with environmental matters, including the Company’s compliance with environmental laws
and regulations and potential liability claims against the Company;
uncertainty relating to nature and climate conditions;
risks associated with 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;
risks associated with political instability and changes to the regulations governing the Company’s business
operations;
risks relating to the termination of the Company’s mining concessions in certain circumstances;
risks related to opposition of the Company’s exploration, development and operational activities;
risks related to the Company’s ability to obtain adequate financing for planned exploration and
development activities;
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
risks associated with the Company’s substantial reliance on the Caylloma Mine and the San Jose Mine for
revenues;
risks associated with property title matters;
risks related to the integration of businesses and assets acquired by the Company;
risks associated with the Company’s reliance on key personnel;
risks associated with the Company’s reliance on local counsel and advisors and its management and board
of directors in foreign jurisdictions;
uncertainty relating to potential conflicts of interest involving the Company’s directors and officers;
risks associated with the adequacy of the Company’s insurance coverage;
risks related to the Company’s conclusion that it did not have effective internal control over financial
reporting as of December 31, 2016 in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and
applicable Canadian securities laws;
risks related to the foreign corrupt practices regulations and anti-bribery laws;
uncertainty related to potential legal proceedings involving the Company;
uncertainty relating to general economic conditions;
risks associated with competition in the mining industry;
uncertainty relating to fluctuations in metal prices and the marketability of metals acquired by the
Company;
risks associated with entering into commodity forward and option contracts for base metals production;
uncertainty relating to fluctuations in currency exchange rates and the Company’s operating expenses;
uncertainty relating to concentrate treatment charges and transportation costs;
uncertainty relating to the sufficiency of monies allotted by the Company for land reclamation;
risks related to the volatility of the trading price of the Company’s common shares (“Common Shares”);
risks related to shareholder dilution as a result of future equity financings;
risks related to future insufficient liquidity resulting from a decline in the price of the Common Shares;
uncertainty relating to the Company’s ability to pay dividends in the future; 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 Mineral 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.
NOTICE REGARDING NON-IFRS MEASURES
This AIF includes certain terms or performance measures that are not defined under International Financial
Reporting Standards, as issued by the International Accounting Standards Board (“IFRS”), including but not limited
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to cash costs and all-in sustaining costs. The Company believes that, in addition to conventional measures prepared
in accordance with IFRS, certain investors use this information to evaluate the Company’s performance. The data
presented is intended to provide additional information and should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with IFRS. These non-IFRS measures should be read in
conjunction with the Company’s financial statements and management’s discussion and analysis incorporated by
reference herein. See “Non-GAAP Financial Measures” in the Company’s management’s discussion and analysis
for the fiscal year ended December 31, 2016 regarding the Company’s use of non-IFRS measures.
CAUTIONARY NOTE TO UNITED STATES INVESTORS
The Company is a Canadian “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act, and 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.
Canadian standards, including National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-
101”), differ significantly from the requirements of the Exchange Act, and Mineral Reserve and Mineral Resource
information contained or incorporated by reference in this AIF may not be comparable to similar information
disclosed by United States companies. In particular, and without limiting the generality of the foregoing, the term
Mineral Resource does not equate to the term “reserve”. Under United States 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. Among other things, all necessary
permits would need to be in hand or issuance imminent in order to classify mineralized material as reserves under
standards of the United States Securities and Exchange Commission (the “SEC”). The SEC’s current 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 United States standards in documents filed with the SEC.
United States investors are cautioned not to assume that all or any part of Measured Mineral Resources or Indicated
Mineral Resources will ever be converted into reserves. United States investors should also understand that Inferred
Mineral Resources have an even greater amount of uncertainty as to their existence and 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
category having a higher degree of certainty. 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 mineable.
Disclosure of “contained tonnes” in a Mineral Resource estimate is permitted disclosure under NI 43-101 provided
that the grade or quality and the quantity of each category is stated; 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 Mineral Reserves are also not the
same as those of the SEC, and Mineral Reserves reported in compliance with NI 43-101 may not qualify as
“reserves” under SEC standards. Accordingly, information contained in this AIF and the documents incorporated by
reference herein containing descriptions of mineral deposits may not be comparable to similar information made
public by U.S. companies subject to the reporting and disclosure requirements under the U.S. federal securities laws
and the rules and regulations thereunder.
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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
April 27, 2016
May 9, 2016
August 31, 2016
February 1, 2017
Management Proxy /
Information Circular - English
Technical Report(s)
August 20, 2016
February 1, 2017
Technical Report(s)
Technical Report, Caylloma
Property, Peru
Technical Report, San Jose
Property, Mexico
Date of Information
This AIF is dated May 12, 2017. Except as otherwise indicated, the information contained herein is as at
December 31, 2016, 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:
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GENERAL DEVELOPMENT OF THE BUSINESS
Fortuna is engaged in precious and base metals mining and related activities, including exploration, extraction, and
processing. Fortuna operates the Caylloma zinc, lead and silver mine (the “Caylloma Mine”) in southern Peru and
the San Jose silver and gold mine (the “San Jose Mine”) in southern Mexico. The Company is also developing its
recently acquired Lindero gold project (the “Lindero Project”) in Argentina.
Three-Year History and Recent Developments
San Jose Mine, Mexico
Located in the state of Oaxaca in southern Mexico, the 100% owned San Jose Mine covers a high-grade silver-gold
bearing epithermal vein system.
In 2014, the Company produced at the San Jose Mine 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 the San Jose Mine 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 the San Jose Mine 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 the San Jose Mine 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 the San Jose Mine 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.
In 2016, the Company produced at the San Jose Mine 6.1 million ounces of silver and 46,018 ounces of gold, an
increase over 2015 of 24% and 19%, respectively. The increases were the result of higher throughput of 26% and
higher recoveries of 1 percentage point for both silver and gold offset by lower head grades of 3% for silver and 6%
for gold. Silver and gold annual production were 4% and 10% above 2016 guidance. Annual average head grades
for silver and gold were 228 g/t and 1.72 g/t or 1% below plan and 3% above plan respectively. Increased silver and
gold production was the result of higher contributions in ore tonnage and grade from Level 1,100 relative to the
mine plan.
The expansion of the mill capacity to 3,000 tpd from 2,000 tpd was completed successfully on time and under
budget. As of July 1, 2016, the processing plant and mine were fully operational at 3,000 tpd, allowing for an
anticipated annual production rate of 7-8 million ounces of silver and 50-53 thousand ounces of gold. The capital
expenditure of the plant expansion was $27.5 million, 16% below budget.
Cash cost per tonne of processed ore for 2016 was $56.90, or 3% below the cost in 2015. Cash cost in the second
half of 2016 was $55.0 compared to $59.8 in the first half of the year reflecting the positive impact on unit costs of
the expanded plant capacity commissioned in July. The cash cost per tonne for 2016 was in line with guidance for
the year as a result of an average exchange rate of the Mexican peso to United States dollars being 19% above our
assumption for cost guidance, offset by higher costs related to the filtration plant. Excluding this effect, the cash
cost would have been 7% above guidance. All-in sustaining cash cost per payable ounce of silver, net of by-product
credits, was $7.6 for 2016, and below the annual guidance of $9.10 as a result of higher by-product credits.
During 2017, the Company plans to process at the San Jose Mine 1,050,000 tonnes of ore averaging 230 g/t Ag and
1.67 g/t Au. Capital investments for 2017 are estimated to be $23.2 million. Of this amount, the major investments
are anticipated to include $6.5 million for tailings filtration plant expansion), $6.5 million for mine development;
$2.2 for mine development, and $7.0 million for brownfields exploration.
Caylloma Mine, Peru
The Company owns a 100% interest in the Caylloma Mine and related mining concessions located in southern Peru.
In 2014, the Company produced at the Caylloma Mine 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. The Caylloma Mine exceeded its annual production
guidance of 2.0 million ounces of silver.
Cash cost per tonne at the Caylloma Mine for 2014 was $90.57/t 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 the Caylloma Mine for 2014 was $14.13/oz, 17% below the annual guidance of $17.01/oz.
-7-
Capital expenditures at the Caylloma Mine 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 the Caylloma Mine 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. The
Caylloma Mine’s silver production was 11% below the revised guidance of 1.9 million ounces.
Cash cost per tonne of processed ore at the Caylloma Mine 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/oz, above the
annual guidance of $12.78/oz.
In 2016, the Company produced at the Caylloma Mine 1.3 million ounces of silver and 533 ounces of gold. Silver
production was 26% 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 Bateas high-grade silver vein stopped at the beginning of 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. Lead and zinc production increased 37% and 21%, respectively, year-
over-year.
Cash cost per tonne of processed ore at Caylloma for 2016 was $71.89, a decrease of 16% from 2015 resulting from
lower mining costs due to the cessation of mining in the narrow high grade silver veins, lower indirect costs related
to headcount, and the plant optimization. The cash cost per tonne for 2016 was 9% below our guidance, as a result
of lower mining costs and lower distribution costs related to lower lead concentrate production. All-in sustaining
cash cost per payable ounce of silver, net of by-product credits, was $4.3 for 2016, and below the annual guidance of
$12.50 as a result of higher by-product credits and lower unit cash cost.
During 2017, the Company plans to process at the Caylloma Mine 535,000 tonnes averaging 71 g/t silver, 2.73% Pb
and 3.86% Zn. Capital expenditures for 2017 are estimated to be $14.1 million. Of this amount, the major
investments are anticipated to include $6.9 million for mine development, $3.3 million for equipment and
infrastructure; and $3.9 million for brownfields exploration.
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.
Acquisition of Goldrock and the Lindero Project
On July 28, 2016, the Company completed the acquisition of all of the issued and outstanding shares of Goldrock
Mines Corp. (“Goldrock”) by way of plan of arrangement (the “Arrangement”). Goldrock is now a wholly-owned
-8-
subsidiary of Fortuna. Pursuant to the Arrangement, Goldrock shareholders received 0.1331 of a Common Share for
each common share of Goldrock held. Outstanding warrants to purchase Goldrock common shares became
exercisable for Common Shares based on the same exchange ratio. The Company has filed a Form 51-102F4,
Business Acquisition Report, on www.sedar.com.
As a result of the Arrangement, the Company acquired a 100% interest in the Lindero Project. The Lindero Project
is a porphyry gold deposit located in northwestern Argentina 260 km due west of Salta City. Mineral tenements to
the Lindero Project cover 3,500 hectares comprising 35 legally surveyed pertenecias, each 100 hectares in size. A
3% provincial royalty is payable on revenue after deduction of direct processing, commercial and general and
administrative costs. There are no royalties payable to any other third party in respect of the Lindero Project.
Mineralization was initially discovered in September 1999. To date, exploration work at the Lindero Project has
included geologic mapping, soil geochemistry, metallurgy testing, trenching and diamond drilling which has
identified two known porphyry gold-copper deposits. Initially an independent resource estimate was calculated in
2003, followed by a Prefeasibility Study completed in 2010 and a Feasibility Study completed in 2013.
Goldrock commissioned the preparation of the Technical Report Update on the Lindero Heap Leach Project, Salta
Province, Argentina, dated February 23, 2016 (the “Lindero Report”) in order to update the 2013 Feasibility Study.
The Lindero Report was filed on SEDAR on March 2, 2016 by Goldrock. The Lindero Report indicated that the
Lindero Project represents a robust twelve year open pit mining and heap leach project. The Lindero Project has all
required surface rights and has been granted all environmental and other major permits necessary for development.
See “Updated Mineral Reserve and Mineral Resource Estimates” below.
Changes in Board and Management
In mid-2016, Michael Iverson and Thomas Kelly retired from the board of directors of the Company (the “Board”).
On September 26, 2016, David Laing was appointed as an independent member of the Board and the audit
committee. Alfredo Sillau was appointed as an independent member of the Board on November 29, 2016. On
December 21, 2016, Mr. Sillau was appointed to the audit committee in the place of Mr. Laing, and Mr. Laing was
appointed to the Company’s compensation committee.
David Volkert was appointed as Vice-President, Exploration as of August 8, 2016 to replace Thomas Vehrs
following Mr. Vehrs’ retirement in July 2016. Effective January 1, 2017, Eric Chapman, Corporate Head of
Technical Services of Fortuna, was promoted to the new position of Vice President of Technical Services. Effective
April 5, 2017, Gordon Jang was appointed to the new position of Vice-President of Finance and Accounting.
Financing
On February 9, 2017, the Company completed a bought-deal public financing with a syndicate of underwriters co-
led by Raymond James Ltd., BMO Nesbitt Burns Inc. and Scotia Capital Inc., and including CIBC World Markets
Inc. and National Bank Financial Inc., pursuant to which the Company issued 11,873,750 Common Shares at a price
of $6.30 per Common Share, for gross proceeds of $74.8 million. Net proceeds were $70.9 million after deduction
of underwriting fees and expenses. The Company intends to use the net proceeds from the financing for general
working capital purposes.
Updated Mineral Reserve and Mineral Resource Estimates
The Company released Mineral Reserve and Mineral Resource estimates for Caylloma in March 2013 and for San
Jose in October 2013. 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.
Updated Mineral Reserve and Mineral Resource estimates for Caylloma and San Jose as at December 31, 2016,
combined with Mineral Reserve and Mineral Resource estimates for the Lindero Project, were released on February
27, 2017. A summary of the December 31, 2016 estimates is as follows:
Highlights of Reserve and Resource Update
-9-
• Combined Proven and Probable Reserves are reported at 89.2 Mt containing 45.8 Moz silver and 2.0 Moz
gold, representing year-over-year increases of 28 percent in contained silver ounces and 762 percent in
contained gold ounces
• Combined Inferred Resources are reported at 52.6 Mt containing 37.4 Moz silver and 0.8 Moz gold,
representing a year-over-year decrease of 46 percent in contained silver ounces and an increase of 108
percent in contained gold ounces
• Combined Proven and Probable Reserves for the Caylloma and San Jose Mines are reported at 6.6 Mt
containing 45.8 Moz silver and 293 koz gold, representing year-over-year increases of 28 percent in
contained silver and gold ounces
• Combined Inferred Resources for the Caylloma and San Jose Mines are reported at 6.1 Mt containing an
estimated 37.4 Moz silver and 232 koz gold, reflecting year-over-year decreases of 46 percent in contained
silver ounces and 43 percent in contained gold ounces
Mineral Reserves - Proven and Probable
Property
Mines
Caylloma, Peru
San Jose, Mexico
Total
Projects
Lindero, Argentina
Total
Classification
Proven
Probable
Proven + Probable
Proven
Probable
Proven + Probable
Proven + Probable
Proven
Probable
Proven + Probable
Proven + Probable
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
152
1,445
1,596
64
4,957
5,021
6,617
26,349
56,184
120
108
109
186
250
249
215
N/A
N/A
82,533
N/A
0.41
0.26
0.28
1.51
1.73
1.72
1.38
0.78
0.57
0.63
Pb
(%)
1.70
Zn
(%)
2.68
2.46
3.30
2.39
3.24
N/A
N/A
N/A
N/A
N/A
N/A
N/A N/A
N/A
N/A
N/A
N/A
N/A N/A
Contained
Metal
Ag
(Moz)
Au
(koz)
0.6
5.0
5.6
0.4
39.8
40.2
45.8
0.0
0.0
0.0
2
12
14
3
275
278
293
661
1,022
1,684
45.8
1,977
-10-
Mineral Resources - Measured and Indicated
Contained
Metal
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Ag
(Moz)
Au
(koz)
Mines
Caylloma, Peru
San Jose, Mexico
Total
Projects
Lindero, Argentina
Measured
Indicated
Measured +
Indicated
Measured
Indicated
Measured +
Indicated
Measured +
Indicated
Measured
Indicated
Measured +
Indicated
Total
Measured + Indicated
565
1,449
2,014
112
734
846
82
89
87
83
77
78
0.35
0.34
1.16
2.42
1.23
2.26
0.34
1.21
2.31
0.65
0.61
N/A
N/A
N/A
N/A
0.61
N/A
N/A
2,860
84
0.42
N/A N/A
2,051
32,716
N/A
N/A
0.59
0.40
N/A
N/A
N/A
N/A
34,767
N/A
0.41
N/A N/A
1.5
4.2
5.6
0.3
1.8
2.1
7.8
0.0
0.0
0.0
7.8
6
16
22
2
14
17
39
39
418
456
495
Contained
Metal
Mineral Resources – Inferred
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Ag
(Moz)
Au
(koz)
Mines
Caylloma, Peru
Inferred
San Jose, Mexico
Inferred
Total
Inferred
3,003
3,101
6,104
128
252
191
Projects
Total
Lindero, Argentina
Inferred
46,500
N/A
Inferred
0.69
1.66
1.18
0.41
1.67
2.96
N/A
N/A
N/A N/A
N/A N/A
12.3
25.1
37.4
0.0
37.4
66
165
232
610
842
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, San Jose or Lindero
5. Mineral Resources and Mineral Reserves for Caylloma and San Jose are estimated as of June 30, 2016 and reported as of
December 31, 2016 taking into account production-related depletion for the period through December 31, 2016. Mineral
Resources and Mineral Reserves for Lindero are reported as of October 23, 2015
6. Mineral Reserves for San Jose are estimated using a break-even cut-off grade of 127 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 90.5% for Ag and 90.5% for Au and
projected operating costs. 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) * (90.5/90.5))
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 85% for Ag,
22% for Au, 94% for Pb and 90% for Zn; and projected operating costs. 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)
-11-
8. Mineral Reserves for Lindero are reported based on open pit mining within designed pit shells based on variable gold cut-off
grades and gold recoveries by metallurgical type. Met type 1 cut-off 0.25 g/t Au, recovery 67.9%; Met type 2 cut-off 0.23 g/t
Au, recovery 73.6%; Met type 3 cut-off 0.24 g/t Au, recovery 69.3%; and Met type 4 cut-off 0.27 g/t Au, recovery 61.7%. The
cut-off grades and pit designs are considered appropriate for long term gold prices of US$1,200/oz. Lindero Mineral Resources
are reported within a conceptual pit shell above a 0.2 g/t Au cut-off grade with internal dilution appropriate for a 10 x 10 x 8 m
selective mining unit and no external dilution. Mineral Resources are reported using a long-term gold price of US$1,350/oz,
mining costs at US$1.80 per tonne of material, with total processing and process G&A costs of US$5.72 per tonne of ore and
an average process recovery of 70%. The refinery costs net of pay factor were estimated to be US$10.21 per ounce gold
9. Total may not add due to rounding procedures
10. N/A = Not Applicable
San Jose Mine, Mexico
As of December 31, 2016, the San Jose Mine has Proven and Probable Mineral Reserves of 5.0 Mt containing 40.2
Moz of silver and 278 koz of gold, in addition to Inferred Resources of 3.1 Mt containing a further 25.1 Moz of
silver and 165 koz of gold.
Year-over-year, Mineral Reserves increased 33% in tonnes, 43% in contained silver and 33% in contained gold after
net changes resulting from production-related depletion and the upgrading and conversion of Inferred Resources to
Mineral Reserves due to a successful infill drill program focused on the Trinidad North Discovery adding 2.4 Mt of
new reserves averaging 305 g/t Ag and 1.91 g/t Au. Silver grades increased 7% at 249 g/t and gold grades remained
at 1.72 g/t.
Measured and Indicated Resources exclusive of Mineral Reserves remained year-over-year at 0.8 Mt.
Year-over-year, Inferred Resources decreased 54% and 51% in contained silver and gold ounces, respectively.
Silver grade decreased by 3% and gold grade increased by 3%. The net variation is due to reductions resulting from
the upgrading of Inferred Resources by infill drilling in the Trinidad North and Stockwork zones, as well as the
geological reinterpretation of previously modeled veins.
Brownfields exploration program budget for 2017 at the San Jose Mine is $7.0 million, which includes 31,000
meters of diamond drilling and 600 meters of underground development for drilling to define future resources.
Exploration drilling is in progress at the Trinidad Central zone and on the sub-parallel Ocotlan vein.
An infill drilling program of 10,200 meters for the upgrading of Inferred Resources into Measured or Indicated
Resources is underway at the San Jose Mine. The budget of the infill drill program for 2017 is $1.5 million.
Caylloma Mine, Peru
As of December 31, 2016, the Caylloma Mine has Proven and Probable Mineral Reserves of 1.6 Mt containing 5.6
Moz of silver and 14 koz of gold, in addition to Inferred Resources of 3.0 Mt containing 12.3 Moz of silver and 66
koz of gold.
Year-over-year, Mineral Reserve tonnes and contained silver ounces decreased 19 percent and 28 percent,
respectively. Silver grade decreased 10 percent to 109 g/t, lead grade decreased 16% to 2.39%, and zinc grade
decreased 9% to 3.24%. Decreases are primarily due to mining related depletion and geological reinterpretation of
the Animas NE vein.
Measured and Indicated Resources, exclusive of Mineral Reserves, increased by 9% year-over-year to 2.0 Mt as a
consequence of the updated geological interpretation of the Animas and Animas NE veins.
Inferred Resources decreased by 0.4 Mt or 11% year-over-year to 3.0 Mt. Silver, lead and zinc grades decreased by
3%, 24% and 10%, respectively. The decrease in Inferred Resources is primarily due to upgrading of resources to
reserves as a result of infill drilling, production related depletion and adjustments to the estimation methodology for
lead grades in the Animas NE vein.
-12-
Brownfields exploration program budget for 2017 at the Caylloma Mine is $3.9 million, which includes 22,000
meters of diamond drilling. Drilling will focus on testing extensions of the principal Animas vein both northeast and
southwest from current underground operations. Exploration drilling is in progress on extensions of ore-shoots
immediately beneath current operations.
An infill drilling program of 12,600 meters for the upgrading of Inferred Resources into Measured or Indicated
Resources is being presently conducted at the Caylloma Mine. The budget of the infill drill program for 2017 is
$1.2 million.
Lindero Project, Argentina
The Lindero Project has Proven and Probable Mineral Reserves of 82.5 Mt containing 1.7 Moz of gold, in addition
to Inferred Resources of 46.5 Mt containing 0.6 Moz of gold as detailed in the Lindero Report.
Fortuna continues to conduct tradeoff metallurgical tests and detailed engineering revisions to optimize the 2016
Feasibility Study to assist a construction decision in the third quarter of 2017. Preliminary results from this work
announced by Fortuna in March 2017 include:
• Preliminary tall-column leach tests are consistently above 76% gold extraction for the four metallurgical
types of ore.
• Cyanide cure during agglomeration allows over 70% gold extraction in the first 30 days of leaching for the
four metallurgical types of ore.
• Copper concentration in solution is amenable to treatment with sulfidization, acidification, recycling and
thickening (“SART”) plant technology.
• Agglomeration with modest cement addition is expected to achieve heap heights of approximately 80
meters for 9 millimeter high pressure grinding rolls (“HPGR”) crushed ore.
The 2017 Brownfields exploration budget at Lindero is $450,000 which includes investigating the economic
potential of the Arizaro gold-copper porphyry target that lies within the concession block. The work program
includes surface mapping, re-logging of approximately 8,000 meters of core and preliminary metallurgical tests.
Qualified Persons
The Mineral Resource estimates for the San Jose Mine and the Caylloma Mine have been prepared under the
supervision of Eric Chapman, Vice President of Technical Services of the Company. The Mineral Reserve estimate
and the Mineral Resource estimate exclusive of Mineral Reserves for the San Jose Mine and the Caylloma Mine
were prepared under the supervision of Edwin Gutierrez, Technical Services Corporate Manager of the Company.
E. Chapman and E. Gutierrez are Qualified Persons as defined by the National Instrument 43-101. Mr. Chapman is
a Professional Geoscientist of the Association of Professional Engineers and Geoscientists of the Province of British
Columbia (Registration Number 36328) and is responsible for ensuring that the information contained in this AIF is
an accurate summary of the original reports and data provided to or developed by the Company.
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,
and is developing the Lindero Project in Argentina.
The lead-silver, zinc, and gold-silver concentrates produced by the Company at its Caylloma Mine and its San Jose
Mine are sold to international metals traders who in turn deliver the products to different clients around the world.
The material sources of revenue for 2016 and 2015 are as follows:
By type of concentrate:
• Lead-silver concentrate
• Zinc concentrate
• Gold-silver concentrate
By metal contained in concentrate:
• Silver
• Lead
• Zinc
• Gold
-13-
2016
2015
19%
13%
68%
55%
10%
13%
22%
24%
11%
65%
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, 2016 were not material. The Company has recorded in its
financial statements for the year 2016 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 780 direct employees and 1042 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.
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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 Relating to the Company’s Business Operations
The Company’s operations are subject to operating hazards and risks incidental to mining operations.
Mining operations generally involve a high degree of risk. Operations in which the Company has a direct or indirect
interest, including the Caylloma Mine, the San Jose Mine and the Lindero Project, will be subject to all of the
hazards and risks normally incidental to exploration, development and operational activities, including fire,
explosions, floods, structural collapses, industrial accidents, unusual or unexpected geological conditions, ground
control problems, power outages, pollution, industrial water shortages, inclement weather, cave-ins and mechanical
equipment failure. Any such hazards 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 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.
Mineral Resources, Mineral Reserves and precious metal recoveries are estimated.
There is a degree of uncertainty attributable to the estimation of Mineral Resources, Mineral Reserves and expected
mineral grades. The Mineral Resource and Mineral Reserve estimates included or incorporated by reference in this
AIF have been determined and valued based on assumed future prices, cut-off grades and operating costs. However,
until mineral deposits are actually mined and processed, Mineral Resources and Mineral Reserves must be
considered as estimates only. Any such estimates are expressions of judgment based on knowledge, mining
experience, analysis of drilling results and industry practices.
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
Mineral Reserves. Short-term operating factors relating to the Mineral Resources and Mineral Reserves, such as the
need for sequential development of ore bodies, may adversely affect the Company’s profitability in any accounting
period. Estimates of operating costs are based on assumptions including those relating to inflation and currency
exchange, which may prove incorrect. Estimates of mineralization can be imprecise and depend upon geological
interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be
unreliable. In addition, the grade and/or quantity of precious metals ultimately recovered may differ from that
indicated by drilling results. There can be no assurance that precious metals recovered in small scale tests will be
duplicated in large scale tests under onsite conditions or in production scale. Amendments to mine plans and
production profiles may be required as the amount of Mineral Resources changes or upon receipt of further
information during the implementation phase of the project. Extended declines in market prices for gold, silver and
other metals may render portions of the Company’s mineralization uneconomic and result in reduced reported
mineralization. Any material reduction in estimates of mineralization, or in the Company’s ability to develop its
properties and extract and sell such minerals, could have a material adverse effect on the Company's results of
operations or financial condition.
The Company’s capital and operating costs, production schedules and economic returns are based on certain
assumptions which may prove to be inaccurate.
The Company’s expected capital and operating costs, production estimates, anticipated economic returns and other
projections, estimates and forecasts for its mineral properties that are included or incorporated by reference in this
AIF or included 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, metallurgical recoveries, environmental considerations, labour volumes, permitting and other factors, any of
which may prove to be inaccurate. As a result, technical reports, scoping studies, pre-feasibility studies and
feasibility studies prepared for or by the Company may prove to be unreliable.
The Company’s capital and operating costs are affected by the cost of commodities and goods such as steel, cement,
explosives, fuel, electrical power and supplies, including reagents. Significant declines in market prices for gold,
silver and other metals could have an adverse effect on the Company’s economic projections. Management assumes
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that the materials and supplies required for operations will be available for purchase and that the Company will have
access to the required amount of sufficiently skilled labour. As the Company relies on certain third-party suppliers
and contractors, these factors can be outside its control and an increase in the costs of, or a lack of availability of,
commodities, goods and labour may have an adverse impact on the Company’s financial condition. The Company
may experience difficulty in obtaining the necessary permits for its exploration, development or operational
activities, if such permits are obtained at all, and may face penalties as a result of violations of permits or other
environmental laws, which may cause delays and increases to projected budgets. Any of these discrepancies from
the Company’s expected capital and operating costs, production schedules and economic returns could cause a
material adverse effect on the Company's business, financial condition and results of operations.
The development of the Company’s properties requires substantial exploration, expenditure and the development
of infrastructure.
Development of the Company’s non-producing properties, including the Lindero Project, will only follow upon
obtaining satisfactory exploration and engineering results that confirm economically recoverable and saleable
volumes of minerals and metal as well as the legality of such development. The business of mineral exploration and
development is speculative in nature and involves 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 Mineral Reserves. 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.
Development of the Company’s non-producing projects will require the construction and operation of mines,
processing plants and related infrastructure. As a result, the Company is and will continue to be subject to all of the
risks associated with establishing new mining operations, including:
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the timing and cost, which can be considerable, of the construction of mining and processing facilities;
the availability and cost of skilled labour, mining equipment and principal supplies needed for operations;
the availability and cost of appropriate smelting and refining arrangements;
the need to maintain necessary environmental and other governmental approvals and permits;
the availability of funds to finance construction and development activities;
potential opposition from non-governmental organizations, environmental groups, local groups or other
stakeholders which may delay or prevent development activities; and
potential increases in construction and operating costs due to changes in the cost of labour, fuel, power,
materials and supplies.
Substantial expenditures are required to establish Mineral Resources and Mineral Reserves through drilling and
development and for mining and processing facilities and infrastructure. 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.
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 the 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.
The Company’s operations are subject to extensive environmental regulation.
All phases of the Company’s operations are subject to environmental regulation in the various jurisdictions in which
it operates. These laws address emissions into the air, discharges into water, management of waste, management of
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hazardous substances, protection of natural resources, antiquities and endangered species and reclamation of lands
disturbed by mining operations. The Company’s operations generate chemical and metals depositions in the form of
tailings. The Company’s ability to obtain, maintain and renew permits and approvals and to successfully develop
and operate mines may be adversely affected by real or perceived impacts associated with the Company’s activities
or of other mining companies that affect the environment, human health and safety. Environmental hazards may
exist on the Company’s properties which are unknown to the Company at present and were caused by previous or
existing owners or operators of the properties, for which the Company could be held liable.
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. Compliance with
environmental laws and regulations may require significant capital outlays on behalf of the Company and may cause
material changes or delays in the Company's intended activities. Failure to comply with applicable environmental
laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued
by regulatory or judicial authorities, causing operations to cease or be curtailed. Such enforcement actions may
include the imposition of corrective measures requiring capital expenditure, installation of new equipment or
remedial action. There is no assurance that future changes in environmental regulation, if any, will not adversely
affect the Company’s operations.
The Company’s business is sensitive to nature and climate conditions.
The Company and the mining industry are facing continued geotechnical challenges, which could adversely impact
the Company’s production and profitability. Unanticipated adverse geotechnical and hydrological conditions, such
as landslides, floods, seismic activity, droughts and pit wall failures, may occur in the future and such events may
not be detected in advance. Geotechnical instabilities and adverse climatic conditions can be difficult to predict and
are often affected by risks and hazards outside of the Company’s control, such as severe weather and considerable
rainfall. Geotechnical failures could result in limited or restricted access to mine sites, suspension of operations,
government investigations, increased monitoring costs, remediation costs, loss of ore and other impacts, which could
cause one or more of the Company’s projects to be less profitable than currently anticipated and could result in a
material adverse effect on the Company’s business results of operations and financial position.
The Company’s operations are subject to political and other risks in the countries in which it operates.
The Company currently conducts, or plans to conduct, exploration, development and production activity in a number
of countries, including Peru, Mexico and Argentina. There are uncertainties in these regions regarding future
changes in applicable laws related to exploration, development and mining operations. For instance, in January
2014, amendments to the Mexican federal corporate income tax law required titleholders of mining concessions to
pay annually a 7.5% duty on their mining related profits and a 0.5% duty on revenues obtained from the sale of gold,
silver and platinum, effective March 2015. Additionally, 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. On December 7, 2016, the House of Representatives in Argentina approved a
package of bills to introduce a series of amendments to the income tax law. Among the new taxes imposed, the
House of Representatives restored export duties to minerals which had been abrogated by the recently elected
government of President Mauricio Macri. The Senate approved certain amendments to the package of bills but in
particular did not approve the restoration of export duties to minerals. There is no guarantee that future attempts to
restore such export duties will not be made. The Company is not able to determine the impact of other potential
political and country risks on its future financial position, which include:
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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
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•
other risks arising out of foreign sovereignty over the areas in which the Company’s operations are
conducted.
Such risks could potentially arise in any country in which the Company operates. The Company may also evaluate
business opportunities in other jurisdictions where such risks may exist. 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.
The Company is subject to extensive government regulations and permit requirements.
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. Failure to comply with applicable laws and regulations may result in fines or
administrative penalties or enforcement actions, including orders issued by regulatory or judicial authorities
enjoining or curtailing operations or requiring corrective measures, installation of additional equipment or remedial
actions, any of which could result in the Company incurring significant expenditures.
The activities of the Company require licences and permits from various governmental authorities. The Company
currently has been granted the requisite licences and permits to enable it to carry on its existing business and
operations. The Company has also been granted the principal licenses and permits necessary for exploration and
construction of the Lindero Project. Pending licences for the Lindero Project are standard municipal permits to
initiate earthworks and construction activities. There can be no assurance that the Company will be able to obtain all
the necessary licences and permits which may be required to carry out exploration, development and mining
operations for its projects in the future. 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.
The Company’s mining concessions may be terminated in certain circumstances.
Under the laws of the jurisdictions where the Company’s operations, exploration and development projects and
prospects are located, Mineral Resources belong to the state and governmental concessions are required to explore
for, and exploit, Mineral Reserves. The Company holds mining, exploration and other related concessions in each of
the jurisdictions where it is operating and where it is carrying on development projects and prospects. The
concessions held by the Company in respect of its operations, exploration and development projects and prospects
may be terminated under certain circumstances, including where minimum production levels are not achieved by the
Company (or a corresponding penalty is not paid), if certain fees are not paid or if environmental and safety
standards are not met. Termination of any of the Company’s concessions could have a material adverse effect on the
Company’s business, financial condition or results of operations.
Opposition of the Company’s exploration, development and operational activities may adversely affect the
Company’s reputation, its ability to receive mining rights or permits and its current or future activities.
Maintaining a positive relationship with the communities in which the Company operates, including with respect to
the Caylloma Mine, the San Jose Mine and the Lindero Project, is critical to continuing successful exploration and
development. Community support for operations is a key component of a successful exploration or development
project. Various international and national laws, codes, resolutions, conventions, guidelines and other materials
relating to corporate social responsibility (including rights with respect to health and safety and the environment)
may also require government consultation with communities on a variety of issues affecting local stakeholders,
including the approval of mining rights or permits.
The Company may come under pressure in the jurisdictions in which it explores or develops to demonstrate that
other stakeholders benefit and will continue to benefit from its commercial activities. Local stakeholders and other
groups may oppose the Company’s current and future exploration, development and operational activities through
legal or administrative proceedings, protests, roadblocks or other forms of public expression against the Company’s
activities. Opposition by such groups may have a negative impact on the Company’s reputation and its ability to
receive necessary mining rights or permits. Opposition may also require the Company to modify its exploration,
development or operational plans or enter into agreements with local stakeholders or governments with respect to its
projects, in some cases causing considerable project delays. Any of these outcomes could have a material adverse
effect on the Company’s business, financial condition, results of operations and Common Share price.
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The Company is faced with uncertainty of funding for exploration and development.
The Company’s operating cash flow from the Caylloma Mine and the San Jose Mine may not be sufficient to cover
the current and future costs of exploration and development of the Company’s other, non-producing properties,
including the Lindero Project. Exploration and development activities may be dependent upon the Company’s
ability to obtain financing through joint ventures, equity or debt financing or other means. 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.
The Company is substantially reliant on the Caylloma Mine and the San Jose Mine.
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 2017, the Company anticipates that all of its revenue will come
from the Caylloma Mine and the San Jose Mine. Unless the Company develops the Lindero Project or acquires or
develops additional properties or projects, the Company will remain largely dependent upon the operation of the
Caylloma Mine and the San Jose Mine 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.
The title to the Company’s properties could be challenged or impugned.
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. Title insurance is generally not
available for mineral properties and the Company's ability to ensure that it has obtained secure claims to individual
mineral properties or mining concessions may be constrained. A successful challenge to the Company’s title to a
property or to the precise area and location of a property could cause delays or stoppages to the Company’s
exploration, development or operating activities without reimbursement to the Company. Any such delays or
stoppages could have a material adverse effect on the Company’s business, financial condition and results of
operations.
Additional businesses and assets that the Company acquires may not be successfully integrated.
The Company undertakes evaluations from time to time of opportunities to acquire additional mining assets and
businesses. In particular, the Company completed its acquisition of Goldrock in July 2016. Any such 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:
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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
cause the Company’s business, results of operations and financial condition to suffer.
The Company may need additional capital to finance future acquisitions. There can be no assurance that such
financing would be available, on favourable terms or at all. If the Company obtains further debt financing, it will be
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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.
The Company is dependent 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 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. Incentive provisions for the Company’s
key executives include the granting of stock options and various share units that vest over time, which are designed
to encourage such individuals to stay with the Company. However, a low Common Share price, whether as a result
of disappointing progress in the Company's exploration, development, construction or operating activities or as a
result of market conditions generally, could render such agreements of little value to the Company’s key executives.
In such event, the Company’s key executives could be susceptible to being hired away by the Company's
competitors who could offer a better compensation package. If the Company is unable to attract and retain key
personnel, its business, financial conditions and results of operations may be adversely affected.
The Company relies on local counsel and advisors and the experience of its management and board of directors
in foreign jurisdictions.
The Company holds interests in mining or exploration properties in Peru, Mexico, Argentina, Serbia and the United
States. The legal and regulatory requirements in certain of these countries with respect to mineral exploration and
mining activities, as well as local business customs and practices, are different from those in Canada and the United
States. The officers and directors of the Company must rely, to a great extent, on the Company’s local legal counsel
and local consultants retained by the Company in order to keep abreast of material legal, regulatory and
governmental developments as they pertain to and affect the Company’s business operations, and to assist the
Company with its governmental relations. The Company must rely, to some extent, on those members of
management and the Company’s board of directors who have previous experience working and conducting business
in these countries in order to enhance its understanding of and appreciation for the local business customs and
practices. The Company also relies on the advice of local experts and professionals in connection with current and
new regulations that develop in respect of banking, financing, labour, litigation and tax matters in these countries.
There can be no guarantee that reliance on such local counsel and advisors and the Company’s management and
board of directors will result in compliance at all times with such legal and regulatory requirements and business
customs and practices. Any such violations could result in a material adverse effect on the Company’s business,
financial condition and results of operations.
Certain of the Company’s directors and officers may have 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. To the extent that such other companies may participate in
ventures that the Company may also participate in, or in ventures that the Company may seek to participate in, the
Company’s directors and officers may have a conflict of interest in negotiating and concluding terms respecting the
extent of such participation. As a result of these potential conflicts of interests, the Company may miss the
opportunity to participate in certain transactions. In all cases where the Company’s directors and officers have an
interest in other companies, such other companies may also compete with the Company for the acquisition of
mineral property investments. Such conflicts of the Company's directors and officers may result in a material and
adverse effect on its business, financial condition and results of operations.
The insurance coverage on the Company’s operations may be inadequate.
Insurance against certain environmental risks, including potential liability for pollution and other hazards as a result
of the disposal of waste products occurring from production, is not generally available to companies within the
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mining industry. As well, the Company does not currently have any insurance that specifically covers its activities
involving the Lindero Project. 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 business and financial condition.
In connection with the preparation and audit of our financial statements for the year ended December 31, 2016,
material weaknesses in our internal control over financial reporting were identified, which means that a
reasonable possibility exists that material misstatements in the Company’s financial statements will not be
prevented or detected on a timely basis.
The Sarbanes-Oxley Act of 2002 (“SOX”) and applicable Canadian securities laws require an annual assessment by
management of the effectiveness of the Company’s internal control over financial reporting. Beginning with the
Company’s 2016 fiscal year, its independent auditors are also required to attest to the effectiveness of the
Company’s internal control over financial reporting. The Company’s management, under the supervision and with
the participation of its President and Chief Executive Officer and Chief Financial Officer, conducted an evaluation
of the effectiveness of the Company’s internal control over financial reporting. As a result of this evaluation,
management concluded that it did not have sufficient resources with the relevant expertise to perform an effective
risk assessment process, to design and implement controls supported by documentation and to provide evidence that
such controls were designed and operating effectively, which contributed to the following material weaknesses: (1)
the Company did not complete a documented fraud risk assessment; (2) the Company did not identify all risks and
design relevant controls related to significant unusual transactions and complex accounting matters; (3) the
Company’s controls related to revenue recognition did not address all risks and relevant assertions; (4) the
Company’s controls related to tax provisions were not sufficiently precise; and (5) the Company did not implement
effective general information technology controls related to user access privileges, unauthorized access and
segregation of duties. A material weakness, as defined in National Instrument 52-109 of the Canadian Securities
Administrators and Rule 12b-2 under the U.S. Exchange Act, is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a timely basis.
In light of the identified material weaknesses, the Company was unable to conclude that it had effective internal
control over financial reporting as of December 31, 2016 in accordance with Section 404 of SOX and applicable
Canadian securities laws, and the Company’s independent auditors have issued an adverse opinion on the
effectiveness of the Company’s internal control over financial reporting. While the Company has concluded that its
financial statements for the year ended December 31, 2016 fairly present in all material respects its financial
position, results of operations and cash flows for the periods presented in accordance with IFRS, the Company’s
inability to maintain effective internal control over financial reporting could result in the loss of investor confidence
in the reliability of the Company’s financial statements, which in turn could harm its business and negatively impact
the trading price or the market value of its securities. The Company has commenced taking measures, and plans to
continue to take measures, to remediate these material weaknesses. However, the implementation of these measures
may not fully address these material weaknesses in its internal control over financial reporting, and, if so, it would
not be able to conclude that they have been fully remedied. In addition, the material weaknesses cannot be
considered remediated until the applicable remedial controls operate for a sufficient period of time and management
has concluded, through testing, that these controls are operating effectively. If the Company is unable to correct
these material weaknesses on a timely basis or to discover and address any other control deficiencies, this could
result in inaccuracies in its financial statements and could also impair its ability to comply with applicable financial
reporting requirements and make related regulatory filings on a timely basis. No evaluation can provide complete
assurance that the Company’s internal control over financial reporting will detect or uncover all failures of persons
within the Company to disclose material information otherwise required to be reported. The effectiveness of the
Company’s processes, procedures and controls could also be limited by simple errors or faulty judgments. As the
Company continues to expand, the challenges involved in implementing appropriate internal control over financial
reporting will increase and will require that the Company continue to monitor its internal control over financial
reporting. Although the Company intends to expend substantial time and incur substantial costs, as necessary, to
remediate the material weaknesses and ensure ongoing compliance, it cannot be certain that it will be successful in
complying with Section 404 of SOX and similar Canadian securities law requirements.
The Company may be responsible for corruption and anti-bribery law violations.
The Company’s business is subject to the Foreign Corrupt Practices Act (the “FCPA”) and the Corrupt Foreign
Public Officials Act (the “CFPOA”), which generally prohibit companies and company employees from engaging
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in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. The
FCPA also requires companies to maintain accurate books and records and internal controls, including at foreign-
controlled subsidiaries. Since all of the Company’s presently held interests are located in Peru, Mexico and
Argentina, there is a risk of potential FCPA violations. In addition, the Company is subject to the anti-bribery laws
of Peru, Mexico, and Argentina and of any other countries in which it conducts business in the future. The
Company's employees or other agents may, without its knowledge and despite its efforts, engage in prohibited
conduct under the Company’s policies and procedures and the FCPA, the CFPOA or other anti-bribery laws for
which the Company may be held responsible. If the Company’s employees or other agents are found to have
engaged in such practices, the Company could suffer severe penalties and other consequences that may have a
material adverse effect on its business, financial condition and results of operations.
The Company may be subject to legal proceedings that arise in the ordinary course of business.
Due to the nature of its business, the Company may be subject to regulatory investigations, claims, lawsuits and
other proceedings in the ordinary course of its business. The Company’s operations are subject to the risk of legal
claims by employees, unions, contractors, lenders, suppliers, joint venture partners, shareholders, governmental
agencies or others through private actions, class actions, administrative proceedings, regulatory actions or other
litigation. Plaintiffs may seek recovery of very large or indeterminate amounts, and the magnitude of the potential
loss relating to such lawsuits may remain unknown for substantial periods of time. Defense and settlement costs can
be substantial, even with respect to claims that have no merit. 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. The litigation process could, as a result, take away from the
time and effort of the Company’s management and could force the Company to pay substantial legal fees or
penalties. There can be no assurances that the resolutions of any such matters will not have a material adverse effect
on the Company’s business, financial condition and results of operations.
General economic conditions could impact the Company’s business.
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:
•
•
•
•
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 or projected economic returns; and
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.
The Company faces intense competition.
The mining industry is intensely competitive in all of its phases. Much of the Company’s competition is from larger
mining companies with greater liquidity, greater access to credit and other financial resources, and that may have
newer or more efficient equipment, lower cost structures, more effective risk management policies and procedures
and/or greater ability than the Company to withstand losses. The Company’s competitors may be able to respond
more quickly to new laws, regulations or emerging technologies, or devote greater resources to the expansion of
their operations, than the Company can. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with third parties. Competition could
adversely affect the Company's ability to acquire suitable new producing properties or properties for exploration and
development in the future. Competition could also affect the Company’s ability to raise financing to fund the
exploration and development of its properties or to hire qualified personnel. The Company may not be able to
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compete successfully against current and future competitors, and any failure to do so could have a material adverse
effect on the Company's business, financial condition or results of operations.
Metal prices and the marketability of metals acquired or discovered by the Company may be affected by factors
beyond the Company’s control.
The marketability of metals acquired or discovered by the Company 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 government regulations, including regulations relating to royalties, allowable
production, importing and exporting metals and environmental protection.
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.
The price of the Common Shares and 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.
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. The continued exploration and development of or commercial production from the
Company’s properties may no longer be economically viable if serious price declines in the market value of silver,
gold or other metals occur. Even if exploration, development or production 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. Depending on the price of silver, gold and other metals, cash
flow from mining operations may not be sufficient and the Company’s financial condition and results of operations
may be adversely affected. The Company may lose its interest in, or may be forced to sell, some of its properties as
a result. If any such circumstances occur, the price of the Common Shares may be significantly adversely affected.
The Company may suffer adverse effects arising from fixed price 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 and could suffer adverse effects to its
business, financial position and results of operations as a result.
The Company may be adversely affected by operating expense exchange rate fluctuations.
The Company’s activities and operations in Mexico, Peru and Argentina make it subject to foreign currency
fluctuations. Although the Company uses U.S. dollars as the currency for the presentation of its financial statements,
the Company’s operating expenses are incurred in Mexican and Argentine Pesos and Peruvian Sol in proportions
that will typically range between 40% and 60% of total expenses, depending on the country. The fluctuation of these
currencies in relation to the U.S. dollar will consequently have an impact upon the profitability of the Company’s
mineral properties and therefore its ability to continue to finance its exploration, development and operations. Such
fluctuations may also affect the value of the Company’s assets and shareholders’ equity. Future exploration,
development and operational plans may need to be altered or abandoned if actual exchange rates for these currencies
are less than or more than the rates estimated in any such future plans. To date, the Company has not entered into
any agreements or purchased any instruments to hedge possible currency risks. The Company cannot be sure that
any hedging techniques it may implement in the future will be successful or that its business, financial condition,
and results of operations will not be materially adversely affected by exchange rate fluctuations.
The Company is subject to fluctuating concentrate treatment charges and transportation costs.
The Company has entered into agreements to sell its concentrate production from the Caylloma Mine and the San
Jose Mine for 2017. Smelting and refining rates are similar to contract rates established for 2016. There is no
assurance that the Company will be able to enter into smelting and refining contracts at similar competitive terms
beyond 2017. 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
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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.
The Company may not have reserved sufficient monies to cover the costs associated with reclamation.
Land reclamation requirements are generally imposed on companies with mineral exploration, development and
operations activity in order to minimize long-term effects of land disturbance. Reclamation may include
requirements to treat ground and surface water to drinking water standards, control dispersion of potentially
deleterious effluent and reasonably re-establish pre-disturbance land forms and vegetation. In order to carry out
reclamation obligations imposed on the Company in connection with exploration, development and production
activities, the Company must allocate financial resources that might otherwise be spent on further exploration and
development programs. The actual costs of reclamation and mine closure are uncertain and planned expenditures
may differ from the actual expenditures required. 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 any of the Company's projects to cover potential risks. These additional costs
may have material adverse impact on the Company's business, financial condition and results of operations.
Risks Relating to the Common Shares
The market price of the Company’s Common Shares is volatile.
In recent years, the securities markets in the United States and Canada have experienced a high level of price and
volume volatility, and the market prices of securities of many mining companies have experienced wide fluctuations
in price which have not necessarily been related to the operating performance, underlying asset values or prospects
of such companies. In particular, the price of the Common Shares on the TSX and NYSE fluctuated significantly
during the past year. There can be no assurance that continual fluctuations in price will not occur.
There are many factors that may influence such volatility. Macroeconomic conditions in North America, Peru,
Mexico or Argentina and changes in the laws and regulations of these regions may have a negative effect on the
development prospects, timelines or relationships for the Company's properties. Negative changes in the public's
perception of the Company's prospects or of mining companies in general could cause the price of the Company’s
securities, including the price of the Common Shares, to decrease dramatically. The price of the Common Shares is
also likely to be affected by short-term changes in precious metal prices or other mineral prices, currency exchange
fluctuations, the Company’s financial condition or results of operations and the extent of research analyst coverage
of its securities.
Securities class action litigation often has been brought against companies following periods of volatility in the
market price of their securities. The Company may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and damages and divert management's attention and resources.
Shareholders may suffer dilution as a result of future offerings of the Common Shares or securities convertible
into Common Shares.
The Company may sell equity securities in future offerings (including through the sale of securities convertible into
equity securities) and may issue additional equity securities to finance operations, exploration, development,
acquisitions or other projects. The Company may also issue Common Shares as a result of exercises of the
Company’s outstanding stock options or Common Share purchase warrants, or the vesting of the Company's
outstanding share units. The Company cannot predict the size of future issuances of equity securities or the size and
terms of future issuances of debt instruments or other securities convertible into equity securities. The board of
directors of the Company has the authority to authorize certain offers and sales of additional securities without the
vote of, or prior notice to, shareholders. It is likely that the Company will issue additional securities to provide
capital to fund expected expenditures and growth. Any transaction involving the issuance of previously authorized
but unissued Common Shares, or securities convertible into Common Shares, would result in potentially substantial
dilution to shareholders.
The market price of the Common Shares could decline as a result of future issuances or sales of the Company’s
securities, which could result in insufficient liquidity.
The market price of the Common Shares could decline as a result of issuances of securities by the Company or sales
by its existing shareholders of Common Shares in the market, or the perception that these sales could occur. The
issuance of Common Shares upon the exercise of the Company's outstanding stock options and Common Share
purchase warrants or the vesting of the Company’s outstanding share units may also reduce the market price of the
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Common Shares. Additional Common Shares, stock options, Common Share purchase warrants and share units may
be issued in the future. A decrease in the market price of the Common Shares could adversely affect the liquidity of
the Common Shares on the TSX and the NYSE. The Company’s shareholders may be unable, as a result, to sell
significant quantities of the Common Shares into the public trading markets. The Company may not, as a result,
have sufficient liquidity to meet the continued listing requirements of the TSX and the NYSE. Sales of the Common
Shares by shareholders might also make it more difficult for the Company to sell equity securities at a time and price
that it deems appropriate, which may have a material adverse effect on the Company's business, financial conditions
and results of operations.
The Company has never paid, and does not currently anticipate paying, dividends.
The Company has paid no dividends on the Common Shares since incorporation and does not anticipate paying
dividends in the immediate future. The payment of future dividends, if any, will be reviewed periodically by the
Company's board of directors and will depend upon, among other things, conditions then existing including
earnings, financial conditions, cash on hand, financial requirements to fund its commercial activities, development
and growth, and other factors that the Company's board of directors may consider appropriate in the circumstances.
U.S. investors may find it difficult to enforce 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 residents of the United States. Because all or a substantial portion of the Company's
assets and the assets of these persons are located outside of the United States, 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 100% owned material mineral projects, described below. On February 1, 2017, the Company
filed an updated technical report on the Caylloma Mine and an updated technical report on the San Jose Mine, both
of which are summarized below.
For a complete description of the Caylloma Mine, see the technical report entitled Fortuna Silver Mines Inc.:
Caylloma Property, Caylloma District, Peru, dated effective August 31, 2016, as amended January 30, 2017 (the
“Caylloma Technical Report”), and for further information on the San Jose Mine, see the technical report entitled
Fortuna Silver Mines Inc.: San Jose Property, Oaxaca, Mexico, dated effective August 20, 2016, as amended
January 30, 2017 (the “San Jose Technical Report”), each prepared by Eric Chapman, P.Geo, and Edwin
Gutierrez, SME Registered Member. The Caylloma Technical Report and the San Jose Technical Report (together,
the “Technical Reports”) have each been filed with Canadian securities regulatory authorities on SEDAR
(available at www.sedar.com) and with the SEC on EDGAR (available at www.sec.gov).
Defined terms and abbreviations used in this section and not otherwise defined shall have the meanings ascribed to
such terms in the Technical Reports. The information contained in this section regarding the Caylloma Mine and the
San Jose Mine has been derived from the Technical Reports, is subject to certain assumptions, qualifications and
procedures described in the Technical Reports and is qualified in its entirety by the full text of the Technical
Reports. Reference should be made to the full text of the Technical Reports.
Caylloma Mine, Peru
Property Description, Location and Access
The Caylloma Mine is an operating underground mine located in the Caylloma mining district, 14 kilometers
northwest of the town of Caylloma at the Universal Transverse Mercator (“UTM”) grid location of 8192263E,
8321387N, (WGS84, UTM Zone 19S). The Caylloma Mine consists of mineral rights for 75 mining concessions
covering a total of 35,022.24 hectares, of which six concessions, that contain no known Mineral Resources or
Mineral Reserves, are subject to an earn-in agreement with Buenaventura. Sixty concessions are subject to a US$60
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million lien in favour of Scotiabank Peru S.A.A. In addition to these mineral rights, the Huayllacho mill-site
(processing plant) is a granted concession covering 91.12 hectares.
In Peru, a mining concession does not have an expiration date but an annual fee must be paid to maintain the
concession in good standing. All of the Caylloma Mine concessions are in good standing. Pursuant to the General
Mining Law approved by Supreme Decree N° 014-92-EM, Minera Bateas S.A.C. (“Minera Bateas”) has six years
from the date of grant of the mining concessions title to reach the minimum annual production (US$100 per hectare,
per year). If Minera Bateas does not reach the minimum annual production within the six-year period, Minera Bateas
is required to make a payment of US$6 per hectare, per year, in addition to the fees required to keep the mineral
concessions in good standing in each additional year where the minimum annual production requirement is not met.
Minera Bateas hold surface rights to the Caylloma Mine via agreements with various landowners. Access to the
Caylloma Mine is an approximate 5 hour drive from Arequipa, Peru over a combination of sealed and gravel roads
covering a driving distance of 225 road kilometers.
The Caylloma Mine is subject to the following royalty rights:
(a)
(b)
Pursuant to a royalty contract signed in May 2005, Minera Bateas granted to Compania Minera Arcata,
S.A. (“CMA”), a wholly owned subsidiary of Hochschild Mining plc, a 2.0% NSR royalty which will apply
after not less than a total of 21 million ounces of silver have been recovered from the Huayllacho beneficio
(mill site) concession right. In June 2016, CMA assigned its NSR royalty to Lemuria Royalties Corp. As
of June 30, 2016, Minera Bateas has produced a total of 15.6 million troy ounces of silver; therefore, this
royalty condition has not yet been met.
Government royalty payments are set at a base rate of 1% up to US$60 million, 2% on the excess of US$60
million and up to US$120 million and 3% on the excess of US$120 million. Fortuna is on the scales of 1%
and 2% and is current on payment of royalties. Additionally, and in accordance with Mining Special
Royalty Act approved by Peruvian Law No. 29790 (the “Mining Special Royalty Act”) in 2011, royalties are
determined by applying quarterly rates ranging from 4% to 12% (scales provided by the regulations of the
Mining Royalty Act approved by Peruvian Law No. 28258 (the “Mining Royalty Act”) on operating income.
Any royalties due resulting from the application of the Mining Special Royalty Act are only paid in excess
of royalties already paid under the original Mining Royalty Act.
Minera Bateas is in compliance with environmental regulations and standards set in Peruvian law and has complied
with all material laws, regulations, norms and standards at every stage of operation of the mine. To the extent
known, all permits that are required by Peruvian law for the mining operation have been obtained.
History
The earliest documented mining activity in the Caylloma district dates back to that of Spanish miners in 1620.
English miners carried out activities in the late 1800s and early 1900s. Numerous companies have been involved in
mining the district of Caylloma but limited records are available to detail these activities. The Caylloma Mine was
acquired by CMA in 1981. Fortuna acquired the property from CMA in 2005.
CMA focused its exploration activities at the Caylloma Mine on identifying high-grade silver vein structures.
Exploration was concentrated in the northern portion of the district and focused on investigating the potential of
numerous veins including Bateas, El Toro, Parallel, San Pedro, San Cristobal, San Carlos, Don Luis, La Plata,
Apostles and Trinidad.
Extensive exploration and development were conducted on the Bateas vein due to its high silver content; however,
exploration did not extend to the northeast due to the identification of a fault structure that was thought to truncate
the mineralized vein. Animas was one of the first vein structures identified by CMA, however the mineralization
style was identified as polymetallic in nature, rather than the high-grade silver veins CMA were hoping to exploit.
Subsequently, no further exploration or development was undertaken of this vein until Fortuna took ownership in
2005.
The most recent Mineral Reserve and Mineral Resource estimate prior to Fortuna’s purchase of the property was
conducted in June 2004. Since Minera Bateas took ownership of the property, three independent NI 43-101 technical
reports have been published reporting Mineral Resources and Mineral Reserves in 2005, 2006 and 2009.
Production at the Caylloma Mine prior to 2005 came primarily from the San Cristobal vein, as well as from the
Minera Bateas, Santa Catalina and the northern silver veins (including Paralela, San Pedro and San Carlos) with
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production focused on silver ores and no payable credits for base metals. During CMA management production
parameters fluctuated during the late 1990’s as reserves were depleted. Owing to low metal prices, funds were not
available to develop the Mineral Resources at depth or extend along the strike of the veins. Ultimately, this resulted
in production being halted in 2002.
The Caylloma Mine was reopened in October 2006 and production under Minera Bateas management focused on
the development of polymetallic veins producing lead and zinc concentrates with silver and gold credits. Production
rates increased in 2011 from 1,000 tpd to 1,300 tpd, and again in May 2016 to approximately 1,430 tpd.
Geology
The Caylloma district is located in the Neogene volcanic arc that forms part of the Cordillera Occidental of southern
Peru. The volcanic belt in the Caylloma district contains large, locally superimposed calderas of early Miocene to
Pliocene age comprised of calc-alkaline andesitic to rhyolitic flows, ignimbrites, laharic deposits, and volcanic
domes that unconformably overlie a folded marine sequence of quartzite, shale, and limestone of the Jurassic Yura
Group.
The mining district of Caylloma is located northwest of the Caylloma caldera complex. The host rock of the
mineralized veins is volcanic in nature, belonging to the Tacaza Group. The volcanics of the Tacaza Group lie
unconformably over a sedimentary sequence of orthoquartzites and lutites of the Jurassic Yura Group. Portions of
the property are covered by variable thicknesses of post-mineral Pliocene-Pleistocene volcanics of the Barroso
Group and recent glacial and alluvial sediments.
The Caylloma Mine 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 Mine 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 Mine 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.
Mineralization
There are two different types of mineralization at the Caylloma Mine; 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 Cristobal,
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.
Mineralization in these vein systems occurs in steeply dipping ore shoots ranging up to several hundred meters
(“m”) long with vertical extents of over 400 m. Veins range in thickness from a few centimeters (“cm”) to 20 m,
averaging approximately 1.5 m for silver veins and 2.5 m for polymetallic veins.
Deposit Types
The Caylloma Mine polymetallic and silver-gold rich veins are characteristic of a typical low sulfidation epithermal
deposit having formed in a relatively low temperature, shallow crustal environment.
The characteristics described above have resulted in the Caylloma Mine veins being classified as belonging to the
low sulfidation epithermal group of precious metals in quartzadularia veins similar to those at Creede, Colorado;
Casapalca, Peru; Pachuca, Mexico and other volcanic districts of the late Tertiary period. They are characterized by
Ag sulfosalts and base metal sulfides in a banded gangue of colloform quartz, adularia with carbonates, rhodonite
and rhodochrosite. Host rock alteration adjacent to the veins is characterized by illite and widespread propylitic
alteration.
Exploration
In 2007, induced polarization (“IP”) and resistivity studies were conducted over the Nancy and Animas NE veins
covering an area of seven square kilometers. The survey was performed using an IRIS ELREC Pro receptor with a
symmetrical configuration poly pole array with spacing of 50 m between electrodes. Results of the geophysical
studies identified three coincident zones of low IP potential associated with high chargeability and resistivity. The
three geophysical anomalies were investigated through a targeted drilling campaign.
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In 2012, magnetometry, IP and resistivity studies were carried out over Cerro Vilafro and Vilafro South, covering an
area of 17 square kilometers in IP/resistivity studies with a pole-dipole array configuration with spacing of 50 m
between electrodes and 31.6 line kilometers in magnetometry studies. The surveys successfully identified coincident
chargeability and resistivity anomalies in the Cerro Vilafro area.
In 2015, Controlled-source Audio-frequency Magnetotellurics (“CSAMT”) geophysical surveys were completed
covering the northeastern projection of the San Pedro and Paralela veins. Similar CSAMT geophysical surveys were
completed in 2016 covering the Pisacca exploration target area. In both areas, the CSAMT surveys were successful
in identifying resistivity anomalies spatially associated with the projections of mapped vein structures.
Extensive surface channel samples have been taken along all principal mineralized structures identified in the
Caylloma district. Exploration has focused on the delineation of major vein structures such as the Animas, Bateas,
Santa Catalina, Soledad and Silvia veins. Additional exploration has also been conducted to define the mineral
potential of other veins on the property such as the Carolina, Don Luis and Nancy veins. Surface channel samples
are not used for Mineral Resource estimation but as a guide for exploration drilling and to identify the vein structure
on surface.
Extensive mapping activities have been conducted by Fortuna since 2006 focusing on mapping the surface structures
associated with the Animas, Antimonio, Bateas, Silvia, Soledad, San Cristobal, Nancy, La Plata, Vilafro, Cerro
Vilafro, Vilafro Sur and Cailloma 6 veins.
Drilling
Exploration and definition drilling has been conducted at the Caylloma Mine by both CMA and Minera Bateas.
Diamond drilling has been the preferred methodology.
Minera Bateas was able to recover and validate information on 43 diamond drill holes totaling 7,159.32 m drilled by
CMA between 1981 and 2003. As of June 30, 2015, Minera Bateas completed 879 drill holes on the Caylloma Mine
totaling 141,100.65 m since Fortuna took ownership in 2005. All holes are diamond drill holes and include 424 from
the surface totaling 101,608.55 m, and 455 from underground totaling 39,492.10 m. The extent of drilling varies for
each vein with those having the greatest coverage having drill holes extending over 4,000 m of the vein’s strike
length (Animas), to the least having only a couple of drill holes extending over 50 m (Antimonio).
As of the effective date of the Caylloma Technical Report an additional 67 infill drill holes totaling 9,792.95 m have
been completed after the June 30, 2015 cut-off date. All of the drill holes were designed for purposes of upgrading
of Inferred Mineral Resources of the Animas and Animas NE veins.
Sample Preparation and Analysis
All samples at the Caylloma Mine are collected by geological staff of Minera Bateas with sample preparation and
analysis being conducted either at the onsite Minera Bateas laboratory (channel samples and underground
development drill core) or the ALS Chemex laboratory in Lima (exploration drill core). The Minera Bateas on-site
laboratory is not a certified laboratory. Therefore, pulp splits and preparation duplicates, along with reference
standards and blanks are routinely sent to the International Organization for Standardization (“ISO”) certified ALS
Chemex laboratory in Lima to monitor the performance of the Minera Bateas laboratory.
Channel Chip Sampling
Since February 2011 the location of each channel has been surveyed using Total Station equipment. Surveyors use
an underground survey reference point to locate the starting coordinates of each channel.
Sampling is carried out at 2 m intervals within the drifts of all veins and 3 m intervals in stopes (except for Bateas
and Soledad, where due to the thickness of the vein sampling is carried out every 2 m in stopes).
Sample collection is normally performed by two samplers, one using the hammer and pick while the other holds the
receptacle (cradle) to collect rock and ore fragments. A sample mass of between 3 kilograms (“kg”) and 6 kg is
generally collected.
Since August 2012, the entire sample is placed in a plastic sample bag with a sampling card and assigned sample ID
and taken to the laboratory for homogenization and splitting.
Core Sampling
A geologist is responsible for determining and marking the intervals to be sampled, selecting them based on
geological and structural logging. The sample length must not exceed 1 m or be less than 10 cm.
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Splitting of the core is performed by diamond saw. Once the core has been split, half the sample is placed in a
sample bag. A sampling card with the appropriate information is inserted with the core.
Bulk Density Determination
Samples for density analysis are collected underground using a hammer and chisel to obtain a single large sample of
approximately 6 kg. The sample is always taken of mineralized material in the same locality as a channel sample.
The coordinates of the closest channel sample are assigned to the density sample. The sample is brought to the
surface and delivered to the core cutting shed where each side of the sample is cut using a diamond saw to produce a
smooth sided cube. The sample is labeled and bagged prior to being stored in the storage facilities to await
transportation with other samples to the ALS Chemex laboratory in Arequipa.
Density tests are performed at the ALS Chemex laboratory in Lima.
Sample Dispatch
Once samples have been collected they are assigned a batch number and either submitted to the Minera Bateas
onsite laboratory, or sent to the mine warehouse to await transportation (three times a week) to the ALS Chemex
facility in Arequipa, and then on to the ALS Chemex laboratory in Lima for analysis.
Sample Preparation
Upon receipt of a sample batch, the laboratory staff immediately verifies that sample bags are sealed and
undamaged. Sample numbers and identifications are checked to ensure they match that as detailed in the submittal
form provided by the geology department. If any damaged, missing or extra samples are detected the sample batch is
rejected and the geology department is contacted to investigate the discrepancy. If the sample batch is accepted, the
samples are sequentially coded and registered as received.
Accepted samples are then transferred to individual stainless steel trays with their corresponding sample
identifications for drying.
Once samples have been dried, they are transferred to a separate ventilated room for crushing using a two stage
process. Firstly, the sample is fed into a terminator crusher to reduce the original particle size so that approximately
90% passes ½ inch mesh sieve size. The entire sample is then fed to the secondary Rhino crusher so that the particle
size is reduced to approximately 85% passing a 10 mesh sieve size. The percent passing is monitored daily to ensure
these specifications are maintained. The crushing equipment is cleaned using compressed air and a barren quartz
flush after each sample.
Once the sampling has been crushed it is reduced in size to 150 grams (“g”) ± 20 g using a single tier Jones riffle
splitter. The reduced sample is returned to the sampling tray for pulverizing whereas the coarse reject material is
returned to a labeled sample bag and temporarily placed in a separate storage room for transferal to the long term
storage facilities located adjacent to the core logging facilities.
Crushed samples are pulverized using a Rocklab standard ring mill so that 90% of particles pass a 200 mesh sieve
size. The pulp sample is carefully placed in an envelope along with the sample identification label. Envelopes are
taken to the balance room where they are checked to ensure the samples registered as having being received and
processed match those provided in the envelopes.
Assaying of Gold, Silver, Lead, Copper and Zinc
Upon receipt of samples in the analytical laboratory, all pulps are re-checked to ensure they match the list in the
submittal form.
The elements of gold, silver, copper, lead and zinc are assayed using atomic absorption techniques. An initial and
duplicate reading is taken and an internal standard is inserted every ten samples to monitor and calibrate the
equipment.
Sample Security
Core boxes are sealed and carefully transported to the core logging facility constructed in 2012 where there is
sufficient room to layout and examine several holes at a time. The core logging facility is located at the mine site
and is locked when not in use. Once logging and sampling have been performed, the remaining core is transferred to
the core storage facilities located adjacent to the logging facilities. The storage facility is managed by the
Brownfields Exploration Manager and the Superintendent of Geology and any removal of material must receive
their approval.
-29-
Quality Control Measures
Minera Bateas routinely inserts certified standards, blanks and field duplicates to the Minera Bateas laboratory and
regularly sends preparation (coarse reject) and pulp duplicates along with standards and blanks to the umpire ALS
Chemex laboratory.
Standard Reference Material
Standard reference material (“SRM”) are samples that are used to measure the accuracy of analytical processes and
are composed of material that has been thoroughly analyzed to accurately determine its grade within known error
limits. SRMs are inserted by the geologist into the sample stream, and the expected value is concealed from the
laboratory, even though the laboratory will inevitably know that the sample is a SRM of some sort. By comparing
the results of a laboratory’s analysis of a SRM to its certified value, the accuracy of the result is monitored.
Minera Bateas Laboratory
This analysis focuses on the submission of 8,093 standards submitted with 183,694 channel samples as of June 30,
2015 to the Minera Bateas laboratory which represents a submission rate of 1 in 23 samples. As described above, the
Minera Bateas laboratory employs a four acid digestion methodology with atomic absorption (“AA”) for assaying
silver, lead and zinc, unless the grade is greater than 1,500 grams per metric tonne (“g/t”) for silver, or 13% for lead
or 13% for zinc. If the silver grade was found to be greater than 1,500 g/t, it was re-assayed by fire assay using a
gravimetric finish (“FA-GRAV”). If the lead or zinc grades were found to be higher than their upper limits, they
were re-assayed by volumetric methods. For gold, the sample is assayed using fire assay with atomic absorption
finish (“FA-AA”) unless the gold grade is greater than 5 g/t Au, in which case the sample is re-assayed with a FA-
GRAV.
Submitted certified standards indicate the Minera Bateas laboratory has acceptable levels of accuracy for silver,
lead, zinc, and gold with all elements reporting greater than 99% pass rates. The assay results for most standards
demonstrate little or no bias.
ALS Chemex Laboratory
Drill core (exploration and infill) is sent to ALS Chemex for assaying. Silver, zinc and lead are assayed by
inductively coupled plasma atomic emission spectroscopy (“ICP-AES”), unless the grade is greater than 100 g/t for
silver, or 1% for lead or zinc, in which case the sample is re-assayed by aqua regia digestion with an ICP-AES or
atomic absorption finish up to a maximum of 1,500 g/t silver, 30% lead or 60% zinc. If the silver grade was found to
be greater than 1,500 g/t it was re-assayed by fire assay using a gravimetric finish. If the lead or zinc grades were
found to be higher than their upper limits, they were re-assayed by titration. A total of 1,560 standards have been
submitted by Minera Bateas with drill core as of June 30, 2015 to the ALS Chemex facilities representing a
submission rate of 1 in 19 samples.
Results for SRMs submitted to the ALS Chemex laboratory indicate a reasonable level of accuracy is maintained by
the laboratory for the four elements of interest with all reporting a pass rate of greater than 93%.
Blanks
Field blank samples are composed of material that is known to contain grades that are less than the detection limit of
the analytical method in use (or, in the case of Pb and Zn, that are known to be very low) and are inserted by the
geologist in the field. Blank sample analysis is a method of determining sample switching and cross-contamination
of samples during the sample preparation or analysis processes. Minera Bateas uses coarse quartz sourced from
outside the area and provided by an external supplier as their blank sample material. The blank is tested to ensure the
material does not contain elevated values for the elements of interest.
Minera Bateas Laboratory
The analysis focuses on the submission of 7,045 blanks with channel samples as of June 30, 2015 representing a
submission rate of 1 in 26 samples.
The results of the blanks submitted indicate that cross contamination and mislabeling are not material issues at the
Minera Bateas laboratory.
ALS Chemex Laboratory
A total of 1,521 blanks were submitted with drill core as of June 30, 2015 to the ALS Chemex facilities representing
a submission rate of 1 in 19 samples.
-30-
The results of blanks used to monitor the ALS Chemex preparation and analytical facilities are regarded as
acceptable and indicate that contamination and sample switching is not a significant issue at the laboratory.
Duplicates
The precision of sampling and analytical results can be measured by re-analyzing the same sample using the same
methodology. The variance between the measured results is a measure of their precision. Precision is affected by
mineralogical factors such as grain size and distribution and inconsistencies in the sample preparation and analysis
processes. There are a number of different duplicate sample types which can be used to determine the precision for
the entire sampling process.
Numerous plots and graphs, such as absolute relative difference (“ARD”) are used on a monthly basis to monitor
precision and bias levels as part of an extensive quality assurance program with results regarded as demonstrating
acceptable levels of precision.
Minera Bateas Laboratory
Minera Bateas inserts field, preparation and laboratory duplicates as part of a comprehensive quality
assurance/quality control (“QAQC”) program. Reject assays and check assays are sent to the certified laboratory of
ALS Chemex to provide an external monitor to the precision of the Minera Bateas laboratory. Standards and blanks
are also submitted with the reject and check assays to monitor the accuracy of the ALS Chemex results.
In general, precision levels are reasonable with the majority of ARD values being greater than 90%. Field duplicate
results are generally slightly lower than the accepted 90% threshold level but have improved over time through
closer supervision of the sampling process, increasing the sampling mass and estimation of the fundamental
sampling error. With the implementation of these measures, the ARD values of field duplicates have generally been
greater than 90% over the last few years.
It should also be noted that precision levels for gold assays are lower than for the other elements, particularly for the
duplicate assays. This is because gold concentrations are much lower and variability is higher. Gold is not an
economic driver in the operation and therefore the cost associated with increasing sample mass to ensure higher
precision levels is not justified.
Duplicates sent to the umpire laboratory showed reasonable levels of precision between the two laboratories. Quality
control samples included with the duplicates sent to the umpire laboratory showed acceptable levels of accuracy and
no issues with sample switching or contamination.
ALS Chemex Laboratory
Prior to 2013, Minera Bateas relied only on the insertion of preparation and laboratory duplicates by ALS Chemex
to monitor precision levels of drill core samples submitted to the ALS Chemex facilities. The QAQC policy was
revised in late 2012 and brownfields exploration have since submitted the full array of blind duplicates with drill
core since January 2013. The high levels of accuracy, precision and lack of contamination indicate that grades
reported from the Minera Bateas and ALS Chemex laboratories are suitable for Mineral Resource estimation.
Results for duplicates submitted with drill core to the ALS Chemex laboratory that show acceptable levels of
precision are maintained at the laboratory, with the exception of the field duplicates, which are slightly below the
acceptance levels and tend to be related to the insertion of low grade or low mass samples.
Data Verification
Data used for Mineral Resource estimation are stored in three databases. Minera Bateas information is stored in two
of these databases, one storing data relating to the mine (including channel samples) and the other for storing drilling
results.
The databases are fully validated annually by Fortuna as part of the Mineral Resource estimation process. The
database storing CMA information was not validated in 2015 based on the fact that no new information has been
acquired since the previous validation in 2010.
Both databases were then reviewed and validated by Mr. Eric Chapman, P. Geo. The data verification procedure
involved the following:
•
•
Inspection of selected drill core to assess the nature of the mineralization and to confirm geological
descriptions;
Inspection of geology and mineralization in underground workings of the Animas and Bateas veins;
-31-
• Verification that collar coordinates coincide with underground workings or the topographic surface;
• Verification that downhole survey bearing and inclination values display consistency;
• Evaluation of minimum and maximum grade values;
•
• Randomly selecting assay data from the databases and comparing the stored grades to the original assay
Investigation of minimum and maximum sample lengths;
certificates;
• Assessing for inconsistencies in spelling or coding (typographic and case sensitivity errors);
• Ensuring full data entry and that a specific data type (collar, survey, lithology, and assay) is not missing;
and
• Assessing for sample gaps or overlaps.
After correcting all inconsistencies, the databases were accepted as validated on June 30, 2015. Based on the data
verification detailed above, Fortuna’s Corporate Head of Technical Services Mr. Eric Chapman, P. Geo., considers
the Minera Bateas and CMA data to be suitable for the estimation of classified Mineral Resources and Mineral
Reserves.
Mineral Processing and Metallurgical Testing
Metallurgical recoveries for 2015 were 83.03%, 93.98% and 90.79% for silver, lead and zinc respectively, an
important improvement compared to those achieved in 2012 (77.33%, 88.12% and 85.77%, respectively). Minera
Bateas continues to work on optimizing the mineral processing operation focusing on metallurgical recoveries and
processing capacity. The studies or tests developed to achieve these goals include:
1.
Plant test work for oxides
Until 2012 ore identified as containing high lead oxide and zinc oxide (“ZnOx”) content was classified as
oxides not amenable for flotation processing.
Different plant and laboratory tests were carried out during 2012. The maximum metallurgical recoveries
achieved during the plant test work were 63.98% for silver, 46.45% for lead and 32.35% for zinc.
More laboratory and plant tests were conducted in 2013 including the metallurgical testing of the different
levels of the Animas vein. The main conclusion was that ZnOx contents greater than 0.20% within the ore
were related to the lower metallurgical recoveries. In order to include this type of ore without affecting the
metallurgical recoveries, blending has to be performed to limit the high ZnOx ore content.
2.
Mineralogical balancing of products for the lead circuit
Based on the studies and testing developed between 2013 and 2015 for the different stages of the process
some changes or adjustments have been implemented in the processing plant aimed at improving the
metallurgical performance including:
• Adjustments to the grinding medium and size selection were made in order to achieve 60% passing 75
microns as the final grinding product;
• The Z-11 and Z-6 collectors in the lead flotation circuit, which were previously added as a mixed
solution, are now added independently ensuring a superior effect and avoiding alteration in their
properties;
• The Sodium cyanide consumption, which is used as a Fe and Zn depressor in the Ag-Pb flotation
circuit, is reduced from 20 to 10 g/t aiming to promote the Ag and Au flotation;
• The Denver mill critical speed was increased from 69% to 76% increasing the reduction ratio, resulting
in an increase in the treatment capacity of 10 tpd;
• The Magensa (6 foot by 6 foot) mill steel shell liners were changed to rubber increasing the reduction
ratio from 1.20 to 1.60; and
• Automatic pH control was installed to stabilize the process, particularly in the Zn circuit, reducing lime
consumption by 200 g/t.
-32-
3.
Processing plant optimization
Aiming to reduce the recirculating load within the grinding circuit by improving the size selection, pilot
tests to replace cyclones with high frequency vibrating wet screens were run in November 2014.
Results indicated a circulating load reduction from 250 to 170% thanks to a more efficient size
classification thereby allowing improved grinding, and ultimately, an increase in the plant processing
capacity.
To achieve that goal and based on laboratory testing, the flotation time was increased from 14 to 38
minutes by increasing the Ag-Pb flotation circuit capacity. In March 2015, the processing plant
optimization project was initiated. The optimization project was aimed at increasing the processing
capacity from 1,300 to a potential maximum of 1,500 tpd by improvements in the grinding and flotation
circuits. The total investment in the project was US$4.6 million with project completion in March 2016.
Mineral Resources and Mineral Reserve Estimates
Mineral Resource and Mineral Reserve estimates for the Caylloma Mine are reported as of December 31, 2015 in
the following tables:
Caylloma Mineral Reserves as of December 31, 2015
Category
Tonnes (000)
Ag (g/t)
Au (g/t)
Pb (%)
Zn (%)
Contained Metal
Ag (Moz)
1.1
6.6
7.7
Au (koz)
3.8
15.4
19.3
Proven
Probable
Proven + Probable
Notes:
• There are no known legal, political, environmental or other risks that could materially affect the potential development of the Mineral Reserves.
• Mineral Reserves are estimated as of June 30, 2015 and reported as of December 31, 2015, taking into account production-related depletion for the period of July 1,
254
1,724
1,979
2.34
3.73
3.55
0.47
0.28
0.30
2.05
2.95
2.83
138
119
121
2015 through December 31, 2015.
• Mineral Reserves are reported above a Net Smelter Return (“NSR”) breakeven cut-off value of US$82.73/t for Animas, US$82.53/t for Animas NE, US$97.07/t San
Cristóbal and US$173.74/t for Bateas, Cimoide La Plata, La Plata, and Soledad.
• Metal prices used in the NSR evaluation are US$19/oz for silver, US$1,140/oz for gold, US$2,150/t for lead and US$2,300/t for zinc.
• Metallurgical recovery values used in the NSR evaluation are 84.5% for silver, 39.5% for gold, 92.6% for lead, and 89.9% for zinc with the exception of the Ramal
Piso Carolina vein that uses metallurgical recovery rates of 84% for Ag and 75% for Au.
• Operating costs were estimated based on actual operating costs incurred from July 2014 through June 2015.
• Tonnes are rounded to the nearest thousand.
• Totals may not add due to rounding.
Category
Measured
Indicated
Caylloma Mineral Resources as of December 31, 2015
Tonnes
(000)
582
1,269
Ag (g/t)
Au (g/t)
Pb (%)
Zn (%)
82
84
0.36
0.31
1.11
1.14
2.16
2.10
Contained Metal
Ag (Moz)
1.5
3.4
Ag (Moz)
6.7
12.7
1,851
3,392
Measured + Indicated
Inferred
Notes:
• 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.
• Mineral Resources are estimated as of June 30, 2015 and reported as of December 31, 2015, taking into account production-related depletion for the period of July 1,
5.0
14.3
19.3
64.7
2.12
3.30
1.13
2.20
0.32
0.59
84
132
2015 through December 31, 2015.
• Mineral Resources are reported based on a NSR cut-off grade of US$50/t for wide veins and US$100/t for narrow veins.
• Metal prices used in the NSR evaluation are US$19/oz for silver, US$1,140/oz for gold, US$2,150/t for lead and US$2,300/t for zinc.
• Metallurgical recovery values used in the NSR evaluation are 84.5% for silver, 39.5% for gold, 92.6% for lead, and 89.9% for zinc with the exception of the Ramal
Piso Carolina vein that uses metallurgical recovery rates of 84% for Ag and 75% for Au.
• Operating costs were estimated based on actual operating costs incurred from July 2014 through June 2015.
• Tonnes are rounded to the nearest thousand.
• Totals may not add due to rounding.
-33-
Mining Operations
The mining method applied in the exploitation of the two main veins (Animas and Bateas) at the Caylloma Mine is
overhand cut-and-fill using either mechanized, semi-mechanized or conventional extraction methods. The cut-and-
fill method is used in mining steeply dipping orebodies in stable rock masses. Cut-and-fill is a bottom up mining
method that consists of removing ore in horizontal slices, starting from a bottom undercut and advancing upwards.
Breakeven cut-off values were determined for each vein based on actual operating costs incurred in the period July
2014 to June 2015. These include exploitation and treatment costs, general expenses and administrative and
commercialization costs (including concentrate transportation). As operations are not centralized, each vein has a
different operating cost, mainly due to the mining method employed, transportation (mine to plant), support and
power consumption. Breakeven cut-off values used for Mineral Reserve estimation are detailed in the following
table.
Breakeven Cut-off Values Applied to each Vein
Mining Method
Vein
Mechanized
Conventional
Semi-mechanized
Animas
Animas NE
Bateas, Bateas Piso, Bateas Techo
Soledad
La Plata, Cimoide La Plata
Silvia
Santa Catalina
Animas
Animas NE
San Cristóbal
Breakeven cut-off
value(US$/t)
82.40
82.40
173.74
173.74
173.74
173.74
173.74
95.63
97.63
97.07
NSR values depend on various parameters including metal prices, metallurgical recovery, price deductions, refining
charges and penalties. NSR values used for Mineral Reserve estimation are detailed in the following table.
Metal
Silver (US$/g)
Gold (US$/g)
Lead (US$/%)
Zinc (US$/%)
NSR Values
NSR Value
0.45
13.53
14.85
12.68
Blocks whose NSR values are higher than the operating cost (breakeven cut-off value) after the application of
appropriate dilution and recovery factors are reported as Mineral Reserves and are regarded as being amenable to the
proposed method of mining. Measured Mineral Resources are converted to Proven Mineral Reserves and Indicated
Mineral Resources to Probable Mineral Reserves.
Processing and Recovery Operations
The Caylloma Mine processing plant is a typical flotation operation and consists of five stages: crushing; milling;
flotation; thickening and filtering and tailings disposal. Each of the main stages is comprised of multiple sub-stages.
The Caylloma Mine concentrator plant resumed operations in September 2006, treating 600 tpd of polymetallic
mineral. Capacity increased progressively, with the installation of a 1.8 m by 2.4 m ball mill in 2009 the plant
reached a treatment capacity of 1,300 tpd, and with the installation of two Derrick Stack Sizer vibrating wet screens
the plant achieved a treatment capacity of 1,500 tpd at the end of March 2016, although this has since been reduced
to 1,430 tpd for the rest of 2016. The treatment process is differential flotation. Initially, two concentrates were
obtained: lead-silver and zinc. From late 2009 to January of 2011, a copper-silver concentrate was also produced,
but due to unfavorable commercial terms the production of copper concentrate was suspended and the copper circuit
put on standby.
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Infrastructure, Permitting and Compliance Activities
The Caylloma Mine has a well-established infrastructure used to sustain the operation. The infrastructure includes a
main access road from the city of Arequipa, property access roads, tailing storage facilities, mine waste storage
facilities, mine ore stockpiles, camp facilities, concentrate transportation, power generation and communications
systems.
Minera Bateas is in compliance with environmental regulations and standards set in Peruvian law and has complied
with all laws, regulations, norms and standards at every stage of operation of the mine. Minera Bateas obtained its
ISO 14001 Environmental Management Certification in 2008 and continues to maintain this designation. The mine
works continually to improve its operational standards.
The Company has a very strong commitment to the development of neighboring communities of the Caylloma
Mine. In this respect, the Company is committed to sustainable projects, direct support and partnerships that build
company engagement in local communities while respecting local values, customs and traditions. The Company
aims to develop projects or programs based on respect for ethno-cultural diversity, open communication and
effective interaction with local stakeholders that improve education, health and infrastructure.
Capital and Operating Costs
Minera Bateas capital and operating cost estimates for the Caylloma Mine (summarized in the following tables) are
based on 2015 costs. The analysis includes forward estimates for sustaining capital. Inflation is not included in the
cost projections and exchange rates were estimated at S/3.30 (Peruvian Soles) to US$1. Capital costs include all
investments in mine development, equipment and infrastructure necessary to upgrade the mine facilities and sustain
the continuity of the operation.
As disclosed in the Caylloma Technical Report, a total of US$9.39 million was budgeted for 2016 to sustain the
operation. Capital costs are split into two areas, 1) mine development and 2) equipment and infrastructure, as set out
in the following table:
Caylloma Summary of Projected Major Capital Budget for 2016
Capital Item
Mine Development
Development & Infrastructure
Total Mine Development
Equipment and Infrastructure
Mine
Plant
Maintenance & Energy
IT
Logistics, Camp, Geology, Exploration, Planning
Laboratory
Environment
Total Equipment and Infrastructure
Total Capital Expenditure
Cost (US$ in millions)
6.39
6.39
0.64
0.98
0.85
0.04
0.11
0.17
0.47
3.00
9.39
As disclosed in the Caylloma Technical Report, projected operating costs for 2016 included the cash costs
(US$67.47/t) and mine operating expenses (US$12.16/t) for the operation, as set out in the following table:
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Caylloma Summary of Projected Major Operating Costs for 2016
Operating Item
Cost US$/t
Cash Cost
Mine (calculated using extracted ore)
Plant
General Services
Administration
Total Cash Cost
Mine Operating Expenses
Distribution
Management Fees
Community Support Activities
Total Mine Operating Expenses
Total Cash Cost and Mine Operating Expenses
40.17
12.48
9.07
5.75
67.47
11.54
0.21
0.41
12.16
79.63
Exploration, Development, and Production
Minera Bateas continues to successfully manage the Caylloma Mine operation, mining 466,286 tonnes of ore from
underground to produce 1.7 Moz of silver, 1.2 koz of gold, 23.8 million pounds (“Mlbs”) of lead and 35.8 Mlbs of
zinc in 2015 while continuing to improve the mine infrastructure.
Fortuna believes there is good potential for a significant increase of the Mineral Resources at the Caylloma Mine
particularly from the continuity of the current veins in operation as well as from the discovery of new veins. Minera
Bateas continues to investigate cost effective ways to improve productivity and reduce costs. As disclosed in the
Caylloma Technical Report, work programs conducted in 2016 to improve the operation included the following:
1.
2.
3.
4.
5.
Brownfields exploration. Fortuna assigned US$2.9 million in 2016 for Brownfields exploration of the
Caylloma district. This was planned to include 17,000 m of diamond drilling focused on testing new
exploration targets in the northern portion of Pisacca prospect area located a short distance to the southwest
of the mine plant as well as further exploring the northeastern extension of the Animas vein.
Underground development. The most important recommended project for the Caylloma Mine was the
integration of the different levels of the Animas vein with underground ramps. An important effort in 2012
was made to improve ventilation which has allowed the operation to introduce the use of ammonium
nitrate/fuel oil for stoping and drifting. The mine plan for 2016 proposed 1,053 m of raise boring in order to
comply with the ventilation requirements, 1,904 m horizontal and 5,158 m decline drift associated with the
development of the mine especially in the case of the Animas vein. The budgeted cost of this work program
in 2016 was US$9.29 million.
Metallurgical studies to improve silver recovery. Important efforts were made in 2015 in order to
optimize the metallurgical performance and throughput capacity of the plant, especially to increase silver
recovery. It was recommended that an expansion to the lead flotation capacity be considered with the
objective of increasing silver recovery by 2% to 4%. The budgeted cost for these metallurgical studies in
2016 was US$1 million.
Metallurgical studies to improve oxide recovery. The response of “oxide” material to the flotation
process required additional testwork. The plant test conducted in 2012 demonstrated this material could be
processed through flotation albeit at reduced recoveries. Results could help to adjust plant operating
parameters to improve metallurgical response.
Metallurgical studies in gold recovery. Mineral Bateas applies a higher gold metallurgical recovery for
the calculation of the NSR values for the estimate of blocks in the Ramal Piso Carolina vein based on
metallurgical testwork conducted in the plant. There are, however, other veins that have elevated gold
grades that could benefit from the application of a higher metallurgical gold recovery including the San
Carlos, San Pedro, Don Luis II, La Plata and Cimoide La Plata veins. It was recommended that Minera
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Bateas conduct metallurgical testwork on mineralized samples from these veins to ascertain if the gold
recoveries could be improved.
San Jose Mine, Mexico
Property Description, Location and Access
41’39.10” N,
The San Jose Mine is located in the central portion of the state of Oaxaca, Mexico (latitude 16
42’06.32” W; UTM coordinates NAD27, UTM Zone 14N: 745100E, 1846925N). The San Jose Mine
longitude 96
is 47 km by road from the city of Oaxaca and 12 km from Ocotlan de Morelos, a town of approximately 10,000
people and the nearest commercial center.
⁰
⁰
The San Jose Mine consists of mineral rights for mining concessions held by Compania Minera Cuzcatlan S.A. de
C.V. (“Minera Cuzcatlan”), covering a total surface area of approximately 51,300 hectares with an additional
13,128 hectares under options. The concessions have expiry dates ranging from 2023 to 2061. Minera Cuzcatlan has
signed 39 usufruct contracts with land owners to cover the surface area needed for the operation of the San Jose
Mine, with some of these contracts pending registration with the local authority. Minera Cuzcatlan has also applied
for additional concessions in the region of the San Jose Mine and has the right to acquire additional concessions in
the region of the San Jose Mine under option agreements with third parties.
The San Jose Mine is subject to the following royalty rights:
(a)
(b)
(c)
Royalty agreement between Minera Cuzcatlan and Beremundo Tomas de Aquino Antonio
granting a 1% NSR royalty to a maximum of US$800,000 in regard to the mining concession “El
Pochotle”. To date, no mineralized material has been extracted from the El Pochotle concession
and no Mineral Resources or Mineral Reserves have been identified on the El Pochotle
concession. Minera Cuzcatlan has a buyout provision where it can purchase this royalty right for
US$200,000.
Royalty agreement between Minera Cuzcatlan and Underwood y Calvo Compania, S.N.C granting
a 1% NSR royalty to a maximum of US$2,000,000 in regard to the mining concessions “La
Voluntad”, “Bonita Fraccion I” and “Bonita Fraccion II”. To date, no mineralized material has
been extracted from these concessions and no Mineral Resources or Mineral Reserves have been
identified on these concessions. Minera Cuzcatlan has a buyout provision where it can purchase
this royalty right for US$400,000.
Royalty agreement between Minera Cuzcatlan and Pan American Silver Corp., which was
transferred from Pan American Silver Corp. to Maverix Minerals Inc. on July 12, 2016, whereby
Maverix Minerals Inc. holds a 1.5% NSR royalty; and Mexican Geological Service holds a 1%
royalty as a discovery royalty in regard to the mining concession “Reduccion Taviche Oeste”.
Minera Cuzcatlan is in compliance with environmental regulations and standards as set out in Mexican law and has
complied with all material laws, regulations, norms and standards at every stage of operation of the mine.
History
The earliest recorded activity in the San Jose del Progreso area dates to the 1850’s when the mines were exploited
on a small scale by the local hacienda. By the early 1900’s, a large number of silver and gold-bearing deposits were
being exploited in the San Jeronimo Taviche and San Pedro Taviche areas, aided by a new mining law enacted in
1892 and with support from foreign investment capital. Mining activity in the district diminished drastically with the
onset of the Mexican Revolution in 1910, only to resume sporadically in the 1920’s. Mining in the San Jose area
was re-activated on a small scale in the 1960’s and again in 1980 when the San Jose Mine was acquired by Ing.
Ricardo Ibarra. The mine was worked intermittingly by Ibarra through his company, Minerales de Oaxaca S.A.
(“MIOXSA”), through the end of 2006 when the property was purchased by Minera Cuzcatlan.
In 1999, the San Jose Mine was optioned by Pan American Silver Corp., who completed surface and underground
mapping and sampling and drilled five diamond drill holes totaling 1,093.5 m in the San Jose Mine vein system. In
March 2004, Continuum Resource Ltd (“Continuum”) signed an option agreement with MIOXSA covering 19
concessions in the San Jose and San Jeronimo Taviche areas. Continuum completed detailed mapping of the surface,
extensive chip-channel sampling in the underground workings of the Trinidad deposit as well as 15 surface diamond
-37-
drill holes totaling 4,877 m. In November 2005, Fortuna reached an agreement with Continuum to earn a 70%
interest in Continuum’s interests in the properties optioned from MIOXSA, and assumed management of the project.
During 2006, Fortuna completed the drilling of 38 diamond drill holes totaling 12,182 m in the San Jose Mine area,
with 25 of the drill holes being located in the Trinidad zone and 13 of the drill holes being located in the San Ignacio
area. The drilling in the Trinidad area confirmed the results of the prior drilling and expanded the mineralization
along strike and to depth. Drilling in the San Ignacio area by Fortuna identified significant zones of silver-gold
mineralization over generally narrow vein widths. In November of 2006, Fortuna and Continuum purchased a 100%
interest in the properties from MIOXSA and simultaneously restructured their joint operating agreement to a 76%
interest for Fortuna and a 24% interest for Continuum.
During 2007, Fortuna (operating via Minera Cuzcatlan) drilled 67 diamond drill holes totaling 26,605 m. Drilling in
the Trinidad area continued to confirm the potential of the deposit and further expanded the mineralization along
strike to the south and to depth. Drilling continued throughout 2008 and 2009, and in March 2009, Fortuna
completed the acquisition of all issued and outstanding shares of Continuum, thereby acquiring a 100% ownership in
the San Jose Mine.
From 1980 through 2004, production by MIOXSA was intermittent and came primarily from existing stopes and
from development of the fourth and fifth levels of the San Jose Mine. In 2005 and 2006, the sixth level was
developed and mined with grades reported to range between 350 to 500 g/t Ag and 1.8 to 3.5 g/t Au. The ore was
mined primarily from the Bonanza and Trinidad veins, and extracted at rates of approximately 100 tpd through the
Trinidad shaft. Reliable estimates of the total production during MIOXSA’s tenure are not available.
In March 2006, a technical report prepared in accordance with NI 43-101 was filed summarizing the results of the
exploration completed by Continuum and reporting an initial Mineral Resource estimate. At a 5 g/t gold equivalent
cut-off, Inferred Mineral Resources were estimated at 527,283 tonnes with an average grade of 3.50 g/t Au and 396
g/t Ag. In March 2007, an updated Mineral Resource estimate prepared in accordance with NI 43-101 was filed. At
a 150 g/t Ag Eq cut-off, Indicated Mineral Resources were estimated at 1.47 million metric tonnes (“Mt”) averaging
263 g/t Ag and 2.19 g/t Au and Inferred Mineral Resources were estimated at 3.9 Mt averaging 261 g/t Ag and 2.57
g/t Au.
Following extensive exploration drilling in 2007, 2008 and 2009, Fortuna filed, in December, 2009, an updated
technical report prepared in accordance with NI 43-101. In June 2010, a Pre-Feasibility Study was prepared, and
updated Mineral Resources and Mineral Reserves were reported. Subsequently, Fortuna has conducted annual
updated Mineral Resource and Mineral Reserve estimations. Commercial production commenced under the
management of Minera Cuzcatlan on September 1, 2011. Underground mining has focused on the Bonanza,
Trinidad and Stockwork primary veins.
Geological Setting, Mineralization and Deposit Types
The San Jose Mine is hosted by an andesitic to dacitic effusive volcanic sequence of presumed Paleogene age.
Further to the east, these andesites and dacites are overlain by silicic crystalline and lithic tuffs and ignimbrites
corresponding to the Mitla Tuff Formation of Miocene age. The San Jose Mine area is underlain by a thick sequence
of presumed Paleogene-age andesitic to dacitic volcanic and volcaniclastic rocks, which in turn discordantly overlie
units ranging from orthogneisses and paragneisses of Mesoproterozoic age, limestones and calcareous sedimentary
rocks of Cretaceous age and continental conglomerates of the Early Tertiary Tamazulapan Formation. 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 stockwork-like
zones of quartz/carbonate veins emplaced within zones of high paleo permeability associated with the extensional
structures.
In general, the upper 650 to 700 m of the volcanic sequence is characterized by a series of distinct effusive andesitic
to dacitic lava flow units intercalated with thin but laterally extensive horizons of reddish-brown to grayish-brown
volcaniclastic rocks. The lower 250 to 300 m of the volcanic sequence is characterized by a sequence of intercalated
pyroclastic deposits, stratified volcaniclastic sedimentary rocks and local coherent facies lava flows.
Precious metal mineralization at the San Jose Mine is hosted by hydrothermal breccias, crackle breccias, quartz-
carbonate veins and zones of sheeted and stockwork-like quartz-carbonate veins emplaced along steeply dipping
north and north-northwest trending fault structures. The mineralized structural corridor extends for greater than 3 km
in a north-south direction and has been divided into two parts: the Trinidad deposit area and the San Ignacio area.
The major mineralized structures or vein systems recognized in the Trinidad deposit area are the Trinidad and
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Bonanza structures and the Stockwork system. To date, drilling has defined the Trinidad and Bonanza mineralized
structures over a strike length of approximately 1,300 m and to depths exceeding 600 m from the surface.
Acanthite and silver-rich electrum are the primary silver and gold-bearing minerals in the Trinidad deposit. These
minerals, along with pyrite, are discontinuously interlayered with distinctively banded crustiform and colloform
textured quartz, calcite and locally adularia. Principal gangue minerals are quartz and calcite, locally accompanied
by iron or iron/magnesium-bearing carbonates. Amethyst and chalcedonic quartz are commonly present as late
infillings of the veins and hydrothermal breccias. Pale greenish-colored fluorite is present locally as vein and breccia
fillings. Hydrothermal alteration at the Trinidad deposit is characterized by a well-developed alteration zonation
with well crystallized kaolinite being present in the mineralized zones grading outwards to kaolinite-illite, illite, and
illite-smectite-chlorite assemblages. Locally Fe-carbonates and Fe/Mg-carbonates are also present as a halo to the
mineralized zones. Regionally, the andesitic volcanics and volcanoclastic units are weakly to moderately
propylitically altered to epidote-chlorite-smectite assemblages.
The Trinidad vein system is emplaced in the footwall fault zone of the extensional system hosting the mineralized
vein systems at the San Jose Mine. The Trinidad vein system strikes 355˚ and dips 70˚ to 80˚ to the east-northeast.
The vein system ranges from less than 1 m to locally over 15 m in true width, with higher grade mineralization
generally being present in zones with greater widths. Significant portions of the Trinidad structure are characterized
by late black matrix silicified fault breccias with only trace to weak mineralization. Higher grade precious metal
zones in the Trinidad vein system range up to approximately 1,300 g/t Ag Eq across the width of the vein. The
Trinidad hanging wall splays and the Trinidad footwall veins are considered to be part of the Trinidad mineralized
structure.
The Bonanza vein system is emplaced in the hanging wall zone of the structural corridor hosting the mineralized
vein systems in the Trinidad deposit. The Bonanza vein system generally strikes 350˚ and dips steeply to the east to
sub-vertical. Mineralization within the Bonanza vein system is present in the form of shoots plunging shallowly to
moderately to the north-northwest, reflecting the dominant dip-slip movement of the controlling fault structures.
Combined copper, lead and zinc values for the Bonanza vein range from negligible in the upper portions of the vein
system to approximately 0.1% to 0.5% at depth.
The main Stockwork Zone is located between 1846550N to 1847200N and 1,000 meters above sea level (“masl”) to
1,300 masl (the “Stockwork Zone”) and located in an extensional environment between the principal Bonanza and
Trinidad structures. The main Stockwork Zone is present over 650 horizontal m and 300 vertical m, being elliptical
in shape, with a variable thickness ranging to greater than 50 m. The primary silver bearing mineral in the
Stockwork Zone is acanthite, usually in association with traces of pyrite. Secondary minerals accompanying the
acanthite are silver-rich electrum, fine grained galena, sphalerite, chalcopyrite and gangue minerals including
hyaline quartz, white quartz and calcite along with minor concentrations of adularia and fluorite.
The mineralization at the San Jose Mine is hosted by structurally controlled hydrothermal breccias, crackle breccias
and quartz-carbonate veins. Epithermal-style alteration and mineralization are widespread within the Middle to Late
Tertiary volcanic package exposed throughout the central portion of the state of Oaxaca. Host structures to the
mineralization are normal faults and subsidiary structural features common to extension-related pull-apart basins.
Exploration
For exploration work completed prior to 2007, see “Technical Information – San Jose Mine – History”.
Subsequent to 2007, the principal exploration conducted by Fortuna at the San Jose Mine has been surface and
underground drilling, both to extend the deposit to the north and to depth, and for infill purposes to increase the
confidence level of the Mineral Resources. The results of a Pre-Feasibility Study of the San Jose Mine were filed in
June of 2010 and included an estimate of Probable Mineral Reserves of 3.5 Mt averaging 205 g/t Ag and 1.5 g/t. As
of December 31, 2012, Proven Mineral Reserves were estimated at 0.05 Mt averaging 246 g/t Ag and 2.31 g/t Au
and Probable Mineral Reserves were estimated at 3.3 Mt averaging 189 g/t Ag and 1.57 g/t Au at a 96 g/t Ag Eq cut-
off and Inferred Mineral Resources were estimated at 4.3 Mt averaging 185 g/t Ag and 1.58 g/t Au at a 70 g/t Ag Eq
cut-off.
Subsequent to the cut-off date for the Fortuna Silver Mines Inc.: San Jose Property, Oaxaca, Mexico technical
report dated November 22, 2013, Fortuna acquired the Taviche Oeste concession from Pan American Silver Corp.
The acquisition of the 6,254 hectare Taviche Oeste concession allowed for the continued brownfields exploration of
the northern extension of the Trinidad deposit and the discovery of the Trinidad North zone. As of the date of the
San Jose Technical Report, Fortuna’s current brownfields exploration continues to explore the northern projections
of the Trinidad mineralized system.
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Drilling
For drilling completed prior to 2007, see “Technical Information – San Jose Mine - History”.
As of June 30, 2015, a total of 510 drill holes totaling 182,294.75 m have been completed in the San Jose Mine area
(see Table 16 below) with the drilling being concentrated in the Trinidad deposit area and extensions to the south of
the mineralized structural system. Wide-spaced exploration drilling has also been completed in the San Ignacio area
along the southern extension of the structurally controlled mineralized corridor and the Trinidad North discovery
located north of 1847200N. All of the drilling was conducted by diamond core drilling methods with the exception
of 1,476 m of reverse circulation pre-collars in six of the 510 diamond drill holes.
Company
Period
Trinidad Area
Drill Holes
Meters
San Ignacio Area
Drill Holes
Meters
Drilling of the Trinidad Deposit
Pan American
Silver Corp.
Continuum
Fortuna
Minera Cuzcatlan
Minera Cuzcatlan
Minera Cuzcatlan
Minera Cuzcatlan
Minera Cuzcatlan
Minera Cuzcatlan
Minera Cuzcatlan
2001
2004/05
2006
2007
2008/09
2011
2012
2013
2014
2015*
Totals
2001-2015*
*as of June 30, 2015
3
13
25
44
113
0
15
69
96
66
444
851.50
4,370.00
8,392.10
17,694.35
32,925.50
0.00
8,574.30
27,552.65
36,650.65
19,556.50
156,567.55
2
2
13
23
0
17
9
0
0
0
66
242.00
506.85
3,790.30
8,910.20
0.00
8,307.25
3,970.60
0.00
0.00
0.00
25,727.20
The majority of the diamond core holes drilled in the Trinidad deposit area were drilled from the east to the west to
cross-cut the steeply east-dipping mineralized zone at high angles. Of the 444 holes, 250 have been drilled from the
surface while 194 drill holes were drilled from underground. The diamond drilling typically commences with HQ-
diameter core and continues to the maximum depth allowable based on the mechanical capabilities of the drill
equipment. Once this point is reached, or poor ground conditions are encountered, the hole is cased and further
drilling is undertaken with a smaller diameter drilling tools with the core diameter being reduced to NQ2 or NQ-size
to completion of the hole. In five of the drill holes, a further reduction to BQ-size drill core was required in order to
complete the drill holes to the target depths.
Based on the combined results of the drilling completed in the Trinidad deposit area through 2007 and on the results
of preliminary Mineral Resource classification studies, an infill drill program was designed and carried out to permit
conversion of a majority of the Inferred Mineral Resources above the 1,300 m elevation to Indicated Mineral
Resources. The majority of the drilling from the 2008/2009 campaign was directed towards the upper portions of the
Trinidad deposit. The results of the infill drilling confirmed the presence of high-grade silver-gold mineralization in
the Trinidad deposit area, and led to the development of a detailed geologic and mineralization model of the deposit.
While some of the 2011 drill holes located in the San Ignacio area encountered significant mineralized intervals,
additional drilling is required in this area in order to demonstrate the continuity of mineralization. 2012 drilling
completed in the Trinidad North discovery area was successful in demonstrating the extension of significant silver
and gold mineralization to the north and to depth, and resulted in the continuation of the drill program into 2013.
Underground drilling commenced at the end of 2012 with the completion of a single drill hole intersecting the
Stockwork Zone.
From January 1, 2013 to the data cut-off date of June 30, 2015, Minera Cuzcatlan completed 231 drill holes totaling
83,759.80 m in the Trinidad deposit area. Surface and underground exploration drilling, focused on expanding the
Trinidad North discovery, comprised 117 drill holes totaling 54,310.55 m. Underground infill drilling focused on
upgrading Inferred Mineral Resources and refining geologic interpretations in the Central Stockwork Zone and in
the Trinidad North area comprised 114 drill holes totaling 29,449.25 m. As of the effective date of the San Jose
Technical Report, an additional 22 exploration drill holes totaling 14,411.25 m have been completed after the June
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30, 2015 cut-off date with two additional drill holes being in-progress. All drilling was carried out from underground
drill stations. Twelve of the exploration drill holes are located in the Trinidad North Extension area and ten are
located in the Trinidad Central Deep area. All twenty-two of the drill holes are located beyond the influence of the
resource and reserve estimates.
Sampling, Analysis and Data Verification
Sample Preparation Methods Prior to Dispatch
Channel chip samples are generally collected from the face of newly exposed underground workings. Samples,
comprised of fragments, chips and mineral dust, are extracted using a chisel and hammer along the channel’s length
on a representative basis. Sample collection is normally performed by two samplers, one using the hammer and
chisel, and the other holding the receptacle (cradle) to collect rock and ore fragments. Fragments greater than 6 cm
in diameter are not accepted. The obtained sample is deposited into a plastic sample bag with a sampling card and
the assigned sample ID. Once all the samples in the channel have been collected, the sample bags are transported to
the surface and sorted with quality control samples being inserted at industry standard insertion rates prior to
delivery to the Minera Cuzcatlan laboratory.
A geologist is responsible for determining and marking the drill core intervals to be sampled. The sample length
must not exceed 2 m or be less than 20 cm. Splitting of the core is performed by diamond saw. The core cutting
process is performed in a separate building adjacent to the core logging facilities. Once the core has been split, half
the sample is placed in a sample bag. A sampling card with the appropriate information is inserted with the core.
Bulk density samples have been primarily sourced from drill core, with a limited number being sampled from
underground workings. Density tests are performed at the ALS Chemex laboratory in Vancouver.
Following sample collection, samples were placed in polyethylene sample bags with a sample tag detailing a unique
sample identifier. The same sample identifier is marked on the outside of the bag and it is sealed with a cable tie.
Secured sample bags are then placed in rice sacks and stored in a secure, dry, clean location. If the samples are from
the underground channels they are delivered each day to the onsite Minera Cuzcatlan laboratory for preparation and
analyses. If the samples are drill core, the rice sacks are subsequently transported by authorized company personnel
to commercial freight shipment offices in Oaxaca for air transport to the independent ALS Chemex sample
preparation facility in Guadalajara, Jalisco, Mexico.
Analytical Procedures Used at the Laboratories
Upon receipt of a sample batch at the Minera Cuzcatlan laboratory, the laboratory staff immediately verifies that the
sample bags are sealed and undamaged. If any damaged, missing or extra samples are detected, the sample batch is
rejected and the geology department is contacted immediately to investigate and resolve the discrepancy. Accepted
samples are then transferred to individual stainless steel trays for drying.
Once samples have been dried, they are transferred to a separate ventilated room for crushing. Each sample is fed
into a terminator crusher, in turn, to reduce the original particle size so that 75% passes a 10 mesh sieve size (2
millimeters (“mm”)). Once the sample has been crushed, it is homogenized and reduced in size to approximately
1,000 g using a single tier Jones riffle splitter. The reduced sample is returned to the sampling tray for pulverizing,
whereas the coarse reject material is returned to a labeled sample bag. Crushed samples are pulverized so that 85%
of particles pass a 200 mesh sieve size. The pulp sample is carefully placed in envelopes, which are taken to the
balance room where they are checked to ensure the samples registered as having being received and processed
match those provided in the envelopes.
Upon receipt of samples in the analytical laboratory, two samples from the pulp envelope are taken. One sample is
analyzed using atomic absorption spectroscopy and the other by fire assay with gravimetric finish. Atomic
absorption results are recorded when silver grades are less than 500 g/t or when gold grades are less than 6.5 g/t,
otherwise the gravimetric results are recorded.
All exploration core samples are sent to the ALS Chemex sample preparation facility in Guadalajara, Mexico.
Following drying, the samples are weighed and the entire sample is crushed to a minimum of 70%, passing a 10
mesh sieve size. The crushed sample is then reduced in size by passing the entire sample through a riffle splitter
until a 250 g split is obtained. The 250 g split is then pulverized to a minimum of 85%, passing a 200 mesh sieve
size. The pulverized samples are subsequently grouped by sample lot and shipped by commercial air freight to ALS
Chemex’s analytical facility in Vancouver, British Columbia for analysis.
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Analysis at ALS Chemex’s analytical facility in Vancouver, British Columbia includes analysis for silver by ALS-
Chemex Methods with Aqua regia digestion and ICP-AES finish; fire assay for gold with gravimetric finish and
absorption spectroscopy in some cases.
Sample Security
Sample collection and transportation of drill core and channel samples is the responsibility of brownfields
exploration and the Minera Cuzcatlan mine geology departments. Exploration core boxes are sealed and carefully
transported to the core logging facilities located adjacent to the mine offices where there is sufficient room to layout
and examine several holes at a time. Once logging and sampling have been performed, the core is transferred to the
permanent storage facility at the mine site. The drill core from the infill drilling program is stored in the same
warehouse as the exploration core. Any removal of material must receive the approval of the Minera Cuzcatlan
geology department.
Coarse reject material from exploration and infill drill core is presently being stored securely in a separate
warehouse. Pulps from the exploration and infill drill programs are stored in a secure and dry pulp storage facility.
Coarse reject material from channel samples are collected from the Minera Cuzcatlan laboratory every day and
stored in a storage facility located in a secure building 0.5 km from the main operation. Pulps of channel samples
analyzed by ALS Chemex are also stored in the same storage facility as the coarse reject material. Pulps of channel
samples analyzed by the Minera Cuzcatlan laboratory are stored in a secure storage facility at the operation.
All drill core, coarse rejects and pulps from the drill core are stored for the LOM. Disposal of coarse rejects from
surface samples is performed after 90 days and is controlled by the exploration department. Disposal of coarse
rejects from underground channel samples is performed after 90 days and is the responsibility of the Geology
Superintendent.
Quality Control Measures
Standard Reference Material
SRMs are samples that are used to measure the accuracy of analytical processes and are composed of material that
has been thoroughly analyzed to accurately determine its grade within known error limits. SRMs are inserted by the
geologist into the sample stream, and the expected value is concealed from the laboratory, even though the
laboratory will inevitably know that the sample is a SRM of some sort. By comparing the results of a laboratory’s
analysis of a SRM to its certified value, the accuracy of the result is monitored. SRMs have been used to assess the
accuracy of the assay results from both the Minera Cuzcatlan and the independent ALS Chemex laboratories, having
been placed into the sample stream by Minera Cuzcatlan geologists to monitor the accuracy of the analytical
process.
The analysis at the Minera Cuzcatlan laboratory involved the submission of 2,231 standards with 34,640 channel
samples (submission rate of 1 in 16 samples) between February, 2012 and June 30, 2015 to the Minera Cuzcatlan
laboratory, corresponding to the majority of channel samples taken at the operation. Nine of the twelve different
SRMs used since February 2012 have been generated from in-house coarse reject material. In addition to statistical
analysis, graphical analysis of the results was also conducted to assess for trends and bias in the data.
Pass rates reported for standards submitted with channel samples since mining commenced to the data cut-off date
for silver and gold values are 97% and 94% respectively. The accuracy levels for silver and gold can be regarded as
acceptable.
A total of 2,306 standards to monitor the accuracy of silver assays were submitted to the ALS Chemex laboratories
with 52,966 drill core samples, representing a submission rate of 1 in 23 samples between 2006 and June 30, 2015,
of which 1,163 were submitted for assaying by ICP-AES. Of the 2,306 standards, 1,143 were submitted for assaying
by FA-GRAV.
SRMs inserted to assess silver grades using ICP-AES returned a pass rate of 89%, whereas SRMs assessing silver
grades using FA-GRAV had a pass rate of 95%. It should be noted that many of the failures (83 of the 126) observed
in the ICP-AES can be attributed to standard CDN-HC-2, which was thought to be compromised and insertion
ceased. If this standard is ignored the silver accuracy levels can be regarded as reasonable.
Gold is assayed by fire assay with atomic absorption finish unless the gold is greater than 10 g/t Au, in which case
the sample is re-assayed with a FA-GRAV. A total of 2,861 standards to monitor the accuracy of gold assays were
submitted with 52,966 drill core samples, representing a submission rate of 1 in 19 samples between 2006 and June
30, 2015, of which 2,784 were submitted for assaying by FA-AA. Of the 2,861 standards, 77 were submitted for
assaying by FA-GRAV.
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SRMs inserted to assess gold grades using FA-AA returned a pass rate of 93%, whereas SRMs assessing gold grades
using FA-GRAV had a pass rate of 92%. It should be noted that the standards that tended to fail at a higher rate were
those inserted at the beginning of the monitoring program, with results improving as time has progressed. The gold
accuracy levels can be regarded as reasonable for estimation purposes.
Blanks
Field blank samples are composed of material that is known to contain grades that are less than the detection limit of
the analytical method in use and are inserted by the geologist in the field. Blank sample analysis is a method of
determining sample switching and cross-contamination of samples during the sample preparation or analysis
processes. Minera Cuzcatlan uses coarse marble sourced from a local quarry and provided by an external supplier as
their blank sample material.
At the Minera Cuzcatlan laboratory, 2,222 blanks have been submitted since February 2012, representing a
submission rate of 1 in 16 samples. Results of the blanks submitted indicate that cross contamination and
mislabeling are not material issues at the Minera Cuzcatlan laboratory. Of the 2,222 blank samples submitted, six
exceeded the fail line (set at two times the lower detection limit) for silver assays and fourteen for gold assays
indicating an excellent result with pass rates greater than 99%.
A total of 2,755 blanks were submitted with core samples to the ALS Chemex laboratory by Fortuna and Minera
Cuzcatlan covering all core submitted since 2006, representing a submission rate of 1 in 18 samples. Of the 2,755
blank samples submitted, 31 exceeded the fail line (set at two times the lower detection limit) for silver and 10
exceeded the fail line for gold assays. This represents a pass rate of greater than 99% for both silver and gold blank
submissions. If two blanks failed in succession, all assay results for the batch were automatically reviewed and re-
analyzed if deemed necessary. Blank results from ALS Chemex are regarded as acceptable indicating no significant
sample switching or contamination.
Duplicates
Duplicates were submitted to both the Minera Cuzcatlan laboratory (with channel samples) and the ALS Chemex
laboratory (with drill core). The ALS Chemex laboratory also acts as the umpire laboratory, analyzing reject assays
and check assays (pulps) from the Minera Cuzcatlan laboratory.
Minera Cuzcatlan inserts field duplicates with channel samples as part of its QAQC program. Preparation and
laboratory duplicates are inserted by the laboratory, whereas reject assays and duplicate assays are inserted blind by
the geology department. Check assays (both coarse rejects and pulps) from the Minera Cuzcatlan laboratory are sent
to the certified laboratory of ALS Chemex to provide an external monitor of precision. Standards and blanks are also
submitted with the check assays to ensure the accuracy of the ALS Chemex results.
In general, precision levels are reasonable with the majority of ARD values being greater than 80%. However, field
duplicate results are poor for both silver and gold. The operation has tested numerous practices to improve the
sampling procedure, such as including closer supervision of the sampling process, increasing the sampling mass and
trying alternative sampling methods, with limited success. In addition, several adjustments have been made by the
laboratory to improve the gold analytical techniques, with improvements seen over the years. Results from the
umpire laboratory also indicate reasonable precision levels suggesting the issue with the field duplicates is not a
Minera Cuzcatalan laboratory issue. The poor precision levels for the field duplicates have been attributed to the
heterogeneous nature of the mineralization with the presence of a moderate to high nugget effect. It is worth noting
that the results observed for the precision levels for the channel samples is similar to that of the drill core, suggesting
that sampling error is not the problem.
Minera Cuzcatlan has primarily relied on the insertion of field duplicates, reject assays (coarse rejects) and duplicate
assays (pulps) to assess the precision of drill core results from the ALS Chemex laboratory. The operation also
monitors the results of the in-house preparation and laboratory duplicates inserted by ALS Chemex. Minera
Cuzcutlan also regularly sends check assays (both coarse rejects and pulps) to the umpire laboratory of SGS Mineral
Services in Oaxaca to provide an external monitor of precision. Standards and blanks are also submitted with the
check assays to ensure the accuracy of the SGS laboratory.
Precision results for exploration core samples evaluated by ALS Chemex demonstrate the highly variable nature of
the mineralization, with poor precision results for the field duplicates, reject assays and duplicate assays. However,
it was discovered during an audit of the results that the exploration team had been tending to insert low grade
samples (<60 g/t Ag) and that this has had a detrimental effect on the results. When higher grade values were
-43-
assessed, the precision levels improved and were seen to be acceptable, which is reflected in the superior results
observed for the samples assayed with a gravimetric finish.
Precision levels of field duplicates for infill and exploration drill core samples submitted to ALS Chemex are poor.
The results are indicative of the highly variable, ‘nuggety’ nature of the mineralization that reduces precision levels.
The operation is attempting to assess and remove the nugget effect by crushing and splitting the core to obtain a
‘field split’ prior to submission to ALS Chemex rather than using the other half of the core. Minera Cuzcatlan
continues to monitor and attempt to improve the precision of the sampled drill core, however the results indicate the
difficulty the variable grades present for grade estimation, particularly for gold.
Data Verification
Minera Cuzcatlan staff follow a stringent set of procedures for data storage and validation, performing verification
of data on a monthly basis. The operation employs a database manager who is responsible for overseeing data entry,
verification and database maintenance.
Both databases were reviewed and validated by Mr. Eric Chapman, P. Geo. The data verification procedure involved
the following:
•
•
Inspection of selected drill core to assess the nature of the mineralization and to confirm geological
descriptions;
Inspection of geology and mineralization in the underground workings of the Trinidad and Bonanza veins;
• Verification that collar coordinates coincide with underground workings or the topographic surface;
• Verification that downhole survey bearing and inclination values display consistency;
• Evaluation of minimum and maximum grade values;
•
Investigation of minimum and maximum sample lengths;
• Randomly selecting assay data from the databases and comparing the stored grades to the original assay
certificates;
• Assessing for inconsistencies in spelling or coding (typographic and case sensitivity errors);
• Ensuring full data entry and that a specific data type (collar, survey, lithology, and assay) is not missing;
and
• Assessing for sample gaps or overlaps.
Based on the data verification detailed above, Fortuna’s Vice President of Technical Services, Mr. Eric Chapman, P.
Geo., considers the Minera Cuzcatlan data to be suitable for the estimation of classified Mineral Resources and
Mineral Reserves.
Mineral Processing and Metallurgical Testing
Initial metallurgical test work to assess the optimum processing methodology for treating ore from the Trinidad
deposit was conducted in 2009 and reported in the Pre-Feasibility Study. The metallurgical study was conducted on
ten composite samples representing a variety of potential ore types. The following provides a summary of the
metallurgical work conducted and includes comments regarding the most recent studies and findings from the
processing plant. The test work included the following:
• Whole rock analysis – demonstrated that (SiO2) quartz is the main gangue mineral and that the samples are
amenable to gold and silver recoveries by the flotation process;
• Bond ball mill work index – indicates that the average bond work index (“BWI”) is lower than the plant
design and should result in less power being required than was predicted, and that there are some cases
-44-
where BWI is equal to the design so that the plant is prepared to treat all material without any losses in the
process;
• Grind calibration;
• Rougher flotation test work with three stages of cleaning;
• Locked cycle flotation test work – produced average recovery results of 90.6% gold and 91.9% silver,
allowing the technical department to predict estimated recoveries of 89% for both elements of the LOM
plan; and
• Rougher kinetics flotation.
A further difference between the plant design and functionality has been in the amount of flocculent required for the
thickening and filtering process of the tailings and concentrate. The Pre-Feasibility Study had recommended the
usage of 40 g/t to 60 g/t of the reagent HychemAF304 for thickening of tailings to achieve solid content of 47% to
51%. Minera Cuzcatlan has performed the thickening of tailings using the reagent Magnafloc 336 at the lower
concentrations of 15 g/t to 25 g/t and producing tailings with approximately 55% solid content.
The reagent HychemAF304 (recommended at 25 g/t to 40 g/t concentrations) was also replaced with Magnafloc 336
(5 g/t to 10 g/t concentrations) for thickening the concentrate with no detrimental effect to the solid content
percentage. In this way, the plant has made significant cost savings by reducing the quantity of flocculants used in
the plant.
For additional information, see “Technical Information – San Jose Mine – Processing and Recovery Methods”.
Mineral Resources and Mineral Reserves
Mineral Resource and Mineral Reserve estimates for the San Jose Mine are reported as of December 31, 2015 in the
following tables:
San Jose Mineral Reserves as of December 31, 2015
Classification
Tonnes (000)
Ag (g/t)
Au (g/t)
Proven
Probable
Proven + Probable
Notes:
282
3,498
3,780
237
232
232
1.84
1.72
1.73
Contained Metal
Ag (Moz)
2.1
26.0
28.2
Au (koz)
16.7
193.3
209.9
• There are no known legal, political, environmental or other risks that could materially affect the estimate of the Mineral Reserves at the San Jose Mine.
• Mineral Reserves are 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.
• Mineral Reserves are estimated using break-even cut-off grades based on assumed metal prices of US$19.00/oz Ag and US$1,140.00/oz Au, estimated
metallurgical recovery rates of 89% for Ag and 89% for Au and projected operating costs.
• Mining, processing and administrative costs were estimated based on first half of 2015 actual costs.
• Totals may not add due to rounding.
-45-
San Jose Mineral Resources as of December 31, 2015
Classification
Tonnes (000)
Ag (g/t)
Au (g/t)
Measured
Indicated
64
780
89
84
0.71
0.72
Contained Metal
Ag (Moz)
Au (koz)
0.2
2.1
1.5
18.1
Measured + Indicated
Inferred
Notes:
• 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.
• Mineral Resources are estimated as of June 30, 2015 and reported as of December 31, 2015, taking into account production related depletion for the period
844
6,561
19.6
339.9
0.72
1.61
2.3
55.0
84
261
through December 31, 2015.
• Mineral Resources are estimated at a silver equivalent (“Ag Eq”) cut-off grade of 100 g/t, with Ag Eq in g/t = Ag (g/t) + Au (g/t) x ((US$1,140/US$19) x (89/89)).
• Mining, processing and administrative costs were estimated based on first half of 2015 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 were 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 consisting of 4 m x 4 m x 4 m selective mining units
(“SMUs”) 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, visually and through production reconciliation prior to tabulation
of the Mineral Resources.
The Mineral Reserve estimation procedure for the San Jose Mine is defined as follows:
• Review of Mineral Resources in longitudinal sections and grade tonnage curves;
• Evaluate location and dimensions of potential bridges and pillars based on mining methodology;
•
Identification of accessible Mineral Resources using current mining practices and based on the mine
architecture;
• Removal of inaccessible areas and material identified as pillars or bridges;
• Removal of Inferred Mineral Resources;
• Dilution of tonnes and grades based on factors estimated by the San Jose Mine planning department and
determined from the six to twelve months of production preceding the Mineral Reserve estimation;
• After obtaining the resources with diluted tonnages and grades, the value per tonne of each SMU is
determined based on metal prices and metallurgical recoveries for each metal;
• A breakeven cut-off grade is determined based on operational costs of production, processing,
administration, commercial and general administrative costs (total operating cost in US$/t) and converted
into a silver equivalent grade. If the silver equivalent grade of a SMU is higher than the breakeven cut-off
grade, the SMU is considered as part of the Mineral Reserve; otherwise, the SMU is regarded as part of the
Mineral Resource;
• Depletion of Mineral Reserves and Mineral Resources exclusive of reserves relating to operational
extraction between July 1 and December 31, 2015; and
• Reconciliation of the reserve block model against mine production between July 1 and December 31, 2015
to confirm estimation parameters.
-46-
Mining Operations
The method chosen for underground mining at the San Jose Mine is overhand cut-and-fill which removes ore in
horizontal slices starting from the bottom undercut and advancing upwards. When ore widths are greater than 8 m, a
combination of overhand cut-and-fill and room-and-pillars has been selected as the best method for the conditions
encountered. Mechanized mining is regarded as the only methodology suitable in all veins based on the geological
structure and geotechnical studies, and utilizes a jumbo drill rig to drill blast holes, scoop trams for loading and
trucks for ore haulage. Rock support is provided through rock bolts and shotcrete.
A break-even cut-off grade for the deposit was determined as 137 g/t Ag Eq based on existing operating costs
(including exploitation and treatment costs, general expenses and administrative and commercialization costs),
projected metal prices (gold at US$1,140/oz and silver at US$19/oz) and metallurgical recoveries (gold and silver
recovery at 89%) and expected commercial terms. For the Taviche Oeste concession, an extra royalty was applied
resulting in a cut-off grade of 140 g/t Ag Eq.
Applying the above cut-off grades, Datamine’s Minable Shape Optimizer (“MSO”) was used to develop indicative
mineable envelopes to identify economically viable areas amenable to the proposed mining method. MSO utilizes
key inputs to generate stope shape whereby the mined metal in relation to tonnage is optimized. The optimization is
driven by the cut-off grade, mining extents, minimum and maximum stope widths, level spacing and minimum and
maximum dip angles.
The stope design is optimized through the generation of minable areas, based on the following inputs:
(a)
(b)
(c)
(d)
(e)
Height of the operational slice; 6 m high has been considered for the optimization;
Width of the operational slice; a minimal operational width of 4 m was applied;
A breakeven cut-off equivalent to US$67.10/t;
Dip and strike of the vein; and
The resource block model.
MSO outputs were imported into Datamine’s 5D planner to evaluate and remove extraneous satellite stopes that are
not conducive to practical and/or economic extraction. A mineable tonnage at a specific cut-off grade and three-
dimensional wireframe are obtained which represent the mineable Mineral Reserves to be extracted. The result is
used as an input for production and related development infrastructure planning and sequencing.
Processing and Recovery Operations
Expansion of the concentrate plant was successfully completed in June of 2016, taking the ore throughput capacity
from 2,000 dry tpd to 3,000 dry tpd. The principal stages are as follows:
i
ii
iii
iv
Crushing - Ore extracted from the mine is reduced in size to be fed to the mill. The ore is fed from
the bottom of the hopper via a plate feeder into a jaw crusher that crushes the ore prior to it being
transported via conveyors to the primary screen deck. Ore is continually crushed until it is fine ore
capable of passing through 12.7 mm mesh, and is then sent to fine ore storage where it is
stockpiled before being fed into the milling circuit.
Milling – The fine ore is sent to ball mills used to further reduce the ore size. The ore is then
classified using hydro-cyclones, generating fine ore and course ore. Coarse ore is recycled back
into the mills for further grinding until it is finely ground.
Flotation – Fine ore is put through two floatation stages which generate primary concentrate.
Primary concentrate is cleaned in several stages to remove impurities before passing to the
thickening stage.
Thickening, filtering and shipping – Cleaned concentrate is sent to a thickening tank where
particles are agglomerated and sediment is generated. The thickened solid is then pumped into a
two-press type pressure filter where part of the water is eliminated and re-circulated into the
process. The remaining concentrate cake is discharged into the concentrate storage for
-47-
transportation. The underflow of the final bank of the second flotation (exhaustion) is sent to a
thickening tank where a solid-liquid separation is performed through the application of a
flocculating reagent that agglomerates fine particles into sediment. The pulp is pumped to a three
press-type pressure filter where most of the water is eliminated and re-circulated back into the
process. The remaining tailings cake is discharged to the tailings stock for transportation to the dry
stack disposal area.
Project Infrastructure
The operation has a relatively small surface infrastructure consisting primarily of the concentration plant, electrical
power station, water storage facilities, filtered dry stack tailings facility, stockpiles and workshop facilities, all
connected by unsealed roads. Additional structures located at the property include offices, a dining hall, a laboratory
and core logging and core storage warehouses. The tailings storage facility is located approximately 1,500 m to the
southwest of the concentration plant.
Experienced underground miners live in the nearby towns of Ocotlan and Oaxaca, in addition to other local towns in
the district, and are transported to the property by bus. Water for the process plant and mining operations is sourced
from the tailings storage facility and, since 2010, from a waste water treatment plant operated by Minera Cuzcatlan,
located in the town of Ocotlan de Morelos.
Minera Cuzcatlan is in compliance with environmental regulations and standards set in Mexican law, and has
complied with all laws, regulations, norms and standards at every stage of operation of the mine. Minera Cuzcatlan
has an environmental commitment related to the remediation of the current mining facilities located on the Progreso
and Reduccion Taviche Oeste concessions. Minera Cuzcatlan is obligated to set aside US$6.7 million over a 10-year
period to cover remediation and closure requirements. These programs are ongoing with funds assigned to various
projects on an annual basis. To the extent known, all permits that are required by Mexican law for the mining
operation have been obtained.
Minera Cuzcatlan’s Community Relations department promotes the sustainable development of the San Jose Mine’s
neighboring communities. From 2011 to 2015, Minera Cuzcatlan has signed an economic agreement with the
community of San Jose del Progreso in which US$3.8 million has been invested in sustainable development, health
and nutrition, education, culture, communication and dialogue.
Capital and Operating Costs
Minera Cuzcatlan capital and operating cost estimates for 2016 for the San Jose Mine were based on predictions of
costs for 2016 and the long term. Capital costs include all investments in mine development, equipment and
infrastructure necessary to upgrade the mine facilities and sustain the continuity of the operation. Projected capital
costs for 2016, as set out in the San Jose Technical Report, are summarized in the table below.
As disclosed in the San Jose Technical Report, a total of US$37.40 million was estimated for 2016 in order to
improve the mine facilities and sustain the operation. The capital costs beyond 2016 are expected to decrease
significantly to ranges between US$5 million and US$10 million annually. The capital costs are split into three
areas: 1) mine development, 2) equipment and infrastructure, and (3) principal projects, as set out in the following
table:
-48-
San Jose Summary of Projected Major Capital Costs for 2016
Cost (MUS$)*
Capital Item
Development
Mine Geology
Mine Development
Mine
Plant
Maintenance & Energy
Safety
Planning and Geology
Laboratory
Other Investment
Equipment and Infrastructure
Plant Expansion
Tailing Filtration Plant
Paste Fill Plant
Dry Tailing Deposit
Principal Projects
Total Capital Expenditure
*Numbers may not total due to rounding
5.30
2.30
7.60
2.33
0.49
0.01
0.01
0.16
0.18
0.28
3.45
21.86
0.30
0.70
3.50
26.36
37.40
Operating costs include the site costs and other operating expenses for the operation. The site costs relate to
activities that are performed on the property including mine, plant, general services and administrative service costs.
The other operating expenses include costs associated with distribution, general and administrative services and
community support activities. As disclosed in the San Jose Technical Report, projected operating costs for 2016 are
set out in the following table:
San Jose Summary of Projected Major Operating Costs for 2016
Operating Item
Mine
Plant
General Services
Administration Mine
Site Costs
Concentrate Transportation
Sales and Administration Expenses
Community Support Activities
Other Operating Expenses
Total Site Cost & Operating Expenses
Cost US$/t
31.14
14.38
4.85
1.84
52.22
4.24
5.74
0.97
10.94
63.16
-49-
Based on a mineable Proven and Probable Mineral Reserve of 3.78 million tonnes, a project life of over four years is
projected. The estimates of metal production, capital costs and operating costs are combined into the discounted
cash flow evaluation. The economic evaluation is treated on a project basis using a silver price of US$19 per troy
ounce and a gold price of US$1,140 per troy ounce. Income taxes have been accounted for in the cash flow analysis.
The start date for the economic analysis was January 1, 2016. The financial results are presented based on future
metal production, operating expenses and capital expenditure to completion basis from this date. This represents the
total project costs without the production and expenditures to that date. The economic analysis is based on an annual
production plan for the life of mine (“LOM”) and associated operating and capital costs. The results of the cash
flow evaluation are summarized in the following table:
San Jose Economic Evaluation Summary
Item
Value
Payable Silver
Payable Gold
Undiscounted Free Cash Flow (After-tax)
Pre-tax Net Present Value at 5%
After-tax Net Present Value at 5%
Pre-tax Internal Rate of Return*
After-tax Internal Rate of Return*
* Internal Rate of Return cannot be estimated since all cash flows from the evaluation day onwards are positive
24.0 Moz
181.0 koz
US$181 M
US$291 M
US$180 M
N/A
N/A
It should be noted that the economic analysis is performed utilizing only Measured and Indicated Mineral
Resources, which have been converted to Proven and Probable Mineral Reserves; however, Inferred Mineral
Resources which are not included in the cash flow estimate, can potentially have a positive impact on the project
economics and the LOM.
Exploration, Development, and Production
Since September 2011, Minera Cuzcatlan has successfully managed the operation of the San Jose Mine, processing
over 2.7 Mt of ore from its underground mining operation and producing 16.8 Moz of silver and 132 koz of gold.
During this period considerable investment was made to expand the processing plant and increase the capacity of the
tailings dam.
Minera Cuzcatlan continues developing sustainable annual programs for the benefit of local communities, including
educational, nutritional and economic programs. The above mentioned social and environmental responsibilities
support a good relationship between the company and local communities. This will aid the development and
continuity of the mining operation and improve the standard of living and economies of local communities.
Short-term mine plans must be developed in accordance with long-term plans to ensure the mine’s production
results are consistent with its budget. As disclosed in the San Jose Technical Report, recommended work programs
for 2016 included:
1)
2)
3)
Plant expansion. This project involved the expansion of the production plant, consisting of
equipment and construction to increase production to 3,000 tpd. The estimated cost of this project
was US$21.86 million.
Mine Development Program. This activity was designed to prepare the high-grade mineralized
Stockwork Zone at the 1,100 level in order to sustain production in 2016. Additionally, the
development will aim to reach the 1,100 and 1,000 level to complete the access and to commence
the required infrastructure in the Trinidad North discovery area at the 1,100 level.
Tailings handling facility. This project was divided into three areas: (i) the paste fill plant, (ii) the
tailing filtration plant and (iii) the dry tailing deposit. The purpose of the paste fill plant is to re-
utilize part of the tailings (comprising 30% of the fill) in order to backfill the mine. The tailing
filtration plant will mainly serve two purposes: (i) to help recover approximately 86% of the water
from the tailings to be re-used in the plants flotation cycle and (ii) to create a better quality of dry
tailings which will have a lesser impact on the environment. The dry tailings deposit will consist
-50-
4)
5)
of platforms at different levels, for the stacking, laying and compaction of dry tailings. The project
was budgeted to cost US$4.5 million.
Delineation (infill) drilling. In 2016, Minera Cuzcatlan planned to continue the delineation
drilling from underground mainly in the Trinidad North area. The goal of the program was to
convert a total of 1.6 Mt of Inferred Mineral Resource to the category of Indicated Mineral
Resource, representing an estimated 21 Moz Ag Eq. To achieve this, 64 drill holes totaling 11,000
m were planned at a budgeted cost of US$1.7 million.
Brownfields exploration. Fortuna assigned US$8.2 million in 2016 for brownfields exploration
of the San Jose district. This was planned to include 22,000 m of diamond drilling and the
development of a 1,500 m underground exploration drift that will allow better access to explore
the northern extension of the Trinidad North vein system.
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.
-51-
Trading Prices and Volume
The following table sets forth the high and low sale prices and trading volumes of the Common Shares on the TSX
and the NYSE during the fiscal year ended December 31, 2016:
Toronto Stock Exchange
Month
December 2016
November 2016
October 2016
September 2016
August 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
Month
December 2016
November 2016
October 2016
September 2016
August 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
High (C$)
8.74
9.88
9.34
11.67
12.28
11.62
9.03
8.56
8.03
5.50
4.96
3.58
New York Stock Exchange
High (US$)
6.73
7.73
7.37
9.09
9.75
9.03
7.03
6.69
6.49
4.30
3.65
2.55
Low (C$)
6.78
8.01
8.10
9.38
9.79
10.00
7.07
7.13
5.03
4.52
3.60
2.96
Low (US$)
5.00
5.70
6.02
6.90
7.25
7.19
5.35
5.38
3.70
3.32
2.51
2.03
Volume
19,792,151
16,917,970
11,987,253
15,699,582
17,113,776
13,339,685
24,271,625
11,884,277
8,713,709
12,467,281
9,874,224
8,433,826
Volume
33,602,306
35,311,314
24,211,369
36,276,630
37,238,182
27,595,252
37,338,963
18,787,309
14,761,824
17,024,208
9,174,715
6,245,432
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
MARIO SZOTLENDER (3) (4)
Director
Caracas, Venezuela
ROBERT GILMORE (2) (4)
Director
Colorado, USA
DAVID FARRELL (2) (3) (4)
Director
British Columbia, Canada
DAVID LAING (3)
Director
British Columbia, Canada
ALFREDO SILLAU (2)
Director
Lima, Peru
LUIS GANOZA DURANT
Chief Financial Officer
Lima, Peru
MANUEL RUIZ-CONEJO
Vice-President of Operations
Lima, Peru
JOSE PACORA
Vice-President of Project Development
Lima, Peru
DAVID VOLKERT
Vice-President, Exploration
British Columbia, Canada
-52-
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
June 16, 2008 to present
June 23, 2010 to present
July 15, 2013 to present
September 26, 2016 to
present
November 29, 2016 to
present
N/A
N/A
N/A
N/A
Chairman of the Company; President
& CEO of Radius Gold Inc. (mineral
exploration).
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).
President of Davisa Consulting (a
private consulting company).
Mining Engineer; Chief Operating
Officer of Trek Mining Inc. and
predecessor, Luna Gold Corp.
(mining), August 2016 to present;
Chief Operating Officer of True Gold
Mining Inc. (mining), June 2015 to
April 2016; Chief Operating Officer of
Quintana Resources Inc. (resource
industry management) from 2014 to
2015; Executive at Endeavour Mining
Corporation (mining), October 2010 to
February 2014.
Managing Partner, CEO and Director
of Faro Capital (investment
management).
Chief Financial Officer of the
Company.
Vice-President of Operations of the
Company.
Vice-President of Project
Development of the Company,
November 2014 to present; Corporate
Project Manager of the Company,
February 2012 to November 2014.
Vice-President, Operations of the
Company, August 2016 to present;
President / Chief Executive Officer of
Paget Minerals Corp. (mineral
exploration), January 2010 to August
2016.
ERIC CHAPMAN
Vice-President of Technical Services
British Columbia, Canada
GORDON JANG
Vice-President of Finance and
Accounting
British Columbia, Canada
-53-
Vice-President of Technical Services
of the Company, January 2017 to
present; Corporate Head of Technical
Services of the Company, July 2016 to
December 2016; Mineral Resource
Manager of the Company, April 2011
to July 2016.
Vice-President of Finance and
Accounting of the Company, April
2017 to present; Consultant, Hudbay
Minerals Inc. (mining), July 2014 to
March 2017; Vice-President,
Corporate Controller of Augusta
Resource Corporation (mining),
February 2009 to July 2014.
N/A
N/A
Notes:
(1) The information as to country of residence, principal occupation, and Common 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 304,260 Common Shares, representing approximately 0.2% of
the issued Common 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:
(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.
-54-
On April 3, 2017, a management cease trade order (“MCTO”) was issued by the British Columbia Securities
Commission and other Canadian provincial securities regulatory authorities pursuant to National Policy 12-203
Management Cease Trade Orders in connection with the late filing of the Company’s annual audited financial
statements and related MD&A for the years ended December 31, 2016 and 2015 and this AIF for the year ended
December 31, 2016 (the “Annual Documents”). The MCTO prohibits the Chief Executive Officer and the Chief
Financial Officer of the Company from trading in securities of the Company until the Company completes the
required filing of the Annual Documents as well as its interim financial documents for the first quarter of 2017, and
the regulator revokes the MCTO.
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)
(b)
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; or
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, David Farrell and Alfredo Sillau. 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
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.
David Farrell
Alfredo Sillau
-55-
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.
Mr. Sillau is Managing Partner, CEO and Director of Faro Capital, an
investment management firm that manages private equity and real estate funds.
Previously, Alfredo headed the business development in Peru for Compass
Group, a regional investment management firm, until late 2011. As CEO of
Compass, Mr. Sillau actively took part in the structuring, promoting and
management of investment funds with approximately US$500 million in assets
under management. Mr. Sillau is a Harvard graduate and board member of
Cosapi S.A., the second largest engineering and construction firm in Peru, and
of Pecsa S.A., a company that operates gas stations in Peru. 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 pre-approves 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
2016
$915,813
$126,742
$142,746
Nil
$1,185,301
2015
$661,970
$72,774
$129,988
Nil
$864,732
“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.
“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”.
These fees include services for securities and prospectus engagements.
“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.
-56-
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. The Company’s co-transfer agent and registrar in the United States is Computershare Trust Company,
N.A. at its office in Golden, Colorado.
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, 2016 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
The updated Mineral Resource estimates for the Caylloma Mine and the San Jose Mine as at December 31, 2016
described in this AIF under the heading “General Development of the Business – Three-Year History and Recent
Developments” have been prepared under the supervision of Eric Chapman, Vice President of Technical Services of
the Company. The Mineral Reserve estimate and the Mineral Resource estimate exclusive of Mineral Reserves for
the Caylloma Mine and the San Jose Mine were prepared under the supervision of Edwin Gutierrez, Technical
Services Corporate Manager of the Company.
Eric Chapman and Edwin Gutierrez, each a Qualified Person as defined by NI 43-101, are the authors of the
Caylloma Report and the San Jose Report.
Eric Chapman, 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.
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.
-57-
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 16, 2016. Additional
financial information is provided in the Company’s audited financial statements for the fiscal year ended
December 31, 2016 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 CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 2016 AND 2015
(Presented in thousands of United States dollars, unless otherwise stated)
MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management of Fortuna Silver Mines Inc. (the "Company") ("we", "us" or "our") have prepared the
consolidated financial statements and the accompanying Management’s Discussion and Analysis
("MD&A"), and are responsible for their content. The financial information presented in the MD&A
is consistent with the information that is contained in the consolidated financial statements. The
consolidated financial statements include, where necessary, amounts based on our estimates and
judgement.
In order to discharge our responsibility for the integrity of the financial statements, the Company
maintains a system of internal accounting controls. These controls are designed to provide
reasonable assurance that the Company’s assets are safeguarded, transactions are executed and
recorded in accordance with our authorization, proper records are maintained and relevant and
reliable financial information is produced. These controls include maintaining quality standards in
the hiring and training of employees, policies and procedures manuals, a corporate code of conduct
and ensuring that there is proper accountability for performance within appropriate and well
defined areas of responsibility.
The Board of Directors is responsible for overseeing the performance of our responsibilities for
financial reporting and internal control. The Audit Committee, which is composed of non executive
directors, meets with us as well as the external auditors to ensure that we are properly fulfilling our
financial reporting responsibilities to the Directors who approve the consolidated financial
statements. The external auditors have full and unrestricted access to the Audit Committee to
discuss the scope of their audits, and the adequacy of the system of internal controls, and to review
financial reporting issues.
The consolidated financial statements have been audited by Deloitte LLP, the Company’s
independent registered public accounting firm, in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight Board (United
States).
/s/ Jorge Ganoza Durant
/s/ Luis Ganoza Durant
Jorge Ganoza Durant
President and Chief Executive Officer
Luis Ganoza Durant
Chief Financial Officer
Vancouver, Canada
, 2017
May 1
2
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. and
subsidiaries (the “Company”), which comprise the consolidated statements of financial position as at
December 31, 2016 and December 31, 2015, and the consolidated income statements, consolidated
statements of comprehensive 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.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Fortuna Silver Mines Inc. and subsidiaries as at December 31, 2016 and December 31, 2015,
and their financial performance and their cash flows for the years then ended, in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board.
page 2
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of December 31, 2016,
based on the criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 12, 2017
expressed an adverse opinion on the effectiveness of the Company’s internal control over financial
reporting because of material weaknesses.
/s/ Deloitte LLP
Chartered Professional Accountants
May 12, 2017
Vancouver, Canada
page 3
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareholders of Fortuna Silver Mines Inc.
We have audited the internal control over financial reporting of Fortuna Silver Mines Inc. and subsidiaries
(the “Company”) as December 31, 2016, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions,
and effected by the company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of
the 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 or
procedures may deteriorate.
page 4
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual
or interim financial statements will not be prevented or detected on a timely basis. The following material
weaknesses have been identified and included in management’s assessment: material weaknesses related
to insufficient qualified resources, the risk assessment process, design and implementation of control
activities and monitoring activities. These material weaknesses were considered in determining the nature,
timing and extent of audit tests applied in our audits of the consolidated statements of financial position of
Fortuna Silver Mines Inc. and subsidiaries as at December 31, 2016 and 2015, and the consolidated
income statements, consolidated statements of comprehensive income, consolidated statements of
changes in equity and consolidated statements of cash flows for the years then ended of the Company and
this report does not affect our report on such consolidated financial statements dated May 12, 2017.
In our opinion, because of the effect of material weaknesses identified above on the achievement of the
objectives of the control criteria, the Company has not maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2016, based on the criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements as at and for the years ended December 31, 2016 and December 31, 2015 of the Company
and our report dated May 12, 2017 expressed an unmodified/unqualified opinion on those financial
statements.
/s/ Deloitte LLP
Chartered Professional Accountants
May 12, 2017
Vancouver, Canada
page 5
Fortuna Silver Mines Inc.
Consolidated Income Statements
For the years ended December 31 (Presented in thousands of US dollars)
Sales (note 23)
Cost of sales (note 24)
Mine operating earnings
Other expenses
Selling, general and administrative (note 25)
Exploration and evaluation
Foreign exchange (gain) loss
Impairment of mineral properties and plant and equipment
Impairment of inventories
Write off of mineral properties (note 12)
Other (income) expenses
Operating income (loss)
Finance items
Interest income
Interest expense
Accretion of provisions
Gain on financial assets and liabilities carried at fair value
Income (loss) before income taxes
Income tax expense (note 29)
Current
Deferred
Year ended December 31
2016
2015
$
210,255
129,649
80,606
$
154,729
111,081
43,648
31,117
177
(649)
–
280
1,143
(3)
32,065
17,863
320
1,564
25,000
–
–
741
45,488
48,541
(1,840)
(328)
2,147
665
(1,053)
1,431
(381)
1,758
–
–
1,377
47,110
(3,217)
29,063
189
29,252
11,606
(4,215)
7,391
Net income (loss) for the year
$
17,858
$
(10,608)
Earnings (loss) per share (note 22)
Basic
Diluted
Weighted average number of common shares outstanding during the year (000's)
Basic
Diluted
$
$
0.13
0.13
$
$
(0.08)
(0.08)
136,888
138,053
129,001
129,001
The accompanying notes are an integral part of these financial statements.
page 6 Fortuna Silver Mines Inc.
Consolidated Statements of Comprehensive Income
For the years ended December 31 (Presented in thousands of US dollars)
Net income (loss) for the year
Items that may in future be reclassified to profit or loss:
Change in fair value of hedging instruments, net of nil tax
Change in fair value of available for sale securities, net of nil taxes
Unrealized loss on translation of net investment, net of nil tax
Translation of foreign operations to presentation currency
Total other comprehensive income (loss)
Year ended December 31
2016
2015
$
17,858
$
(10,608)
85
334
–
–
419
(307)
–
(2,324)
1,430
(1,201)
Total Comprehensive income (loss) for the year
$
18,277
$
(11,809)
The accompanying notes are an integral part of these financial statements.
page 7 Fortuna Silver Mines Inc.
Consolidated Statements of Financial Position
As at December 31 (Presented in thousands of US dollars)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Short term investments (note 6)
Marketable securities (note 7)
Derivative assets (note 10)
Accounts receivable and other assets (note 8)
Income taxes receivable
Prepaid expenses
Inventories (note 9)
NON-CURRENT ASSETS
Deposits on long term assets (note 11)
Other long term receivables
Deferred income tax assets (note 29)
Mineral properties (note 12)
Plant and equipment (note 13)
Total assets
LIABILITIES
CURRENT LIABILITIES
Trade and other payables (note 14)
Derivative liabilities (note 10)
Current portion of obligations under finance lease (note 17)
Closure and rehabilitation provisions (note 19)
Income taxes payable
NON-CURRENT LIABILITIES
Bank loan (note 16)
Finance lease obligations (note 17)
Other liabilities (note 18)
Closure and rehabilitation provisions (note 19)
Deferred income taxes (note 29)
Total liabilities
EQUITY
Share capital
Reserves
Retained earnings
Total equity
December 31
2016
December 31
2015
$
82,484
41,100
1,579
973
24,987
72
2,145
13,572
166,912
$
72,218
36,031
–
–
7,068
780
1,512
10,434
128,043
572
562
471
263,535
130,863
396,003
8,716
–
492
128,720
113,683
251,611
$
562,915
$
379,654
$
40,160
254
2,128
1,121
14,447
58,110
$
28,970
351
772
453
3,605
34,151
39,768
906
3,544
12,091
25,345
81,654
39,486
1,112
3,508
12,052
25,177
81,335
139,764
115,486
343,963
16,092
63,096
423,151
203,953
14,977
45,238
264,168
Total liabilities and equity
$
562,915
$
379,654
Events after the reporting period (note 31)
/s/ Jorge Ganoza Durant
Jorge Ganoza Durant
Director
/s/ Robert R. Gilmore
Robert R. Gilmore
Director
The accompanying notes are an integral part of these financial statements.
page 8
Fortuna Silver Mines Inc.
Consolidated Statements of Cash Flows
For the years ended December 31 (Presented in thousands of US dollars)
OPERATING ACTIVITIES
Income (loss) for the year
Adjustments for:
Depletion, depreciation, and amortization
Accretion
Income taxes
Share based payments
Impairment of mineral properties, and plant and equipment
Impairment of inventories
Write-off of mineral properties
Gain on financial assets carried at fair value
Accrued interest on long term loans
Other
Cash generated from operations before working capital changes
Accounts receivable and other assets
Prepaid expenses
Inventories
Trade and other payables
Share units payable
Provisions
Cash generated from operations
Income taxes paid
Interest paid
Interest received
Cash provided by operating activities
INVESTING ACTIVITIES
Purchase of Lindero Project (note 12(a))
Purchase of short term investments
Disposition of short term investments
Purchase of marketable securities
Purchase of mineral properties and plant and equipment
Deposits to contractors and suppliers, net
Disposition of mineral properties and plant and equipment
Cash used for investing activities
FINANCING ACTIVITIES
Proceeds from issuance of common shares, net of costs
Proceeds from drawdown of bank loan, net of costs
Repayments of finance lease obligation
Cash provided by financing activities
Increase in cash and cash equivalents
Effect of exchange rate changes
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash and cash equivalents consists of:
Cash
Cash equivalents
Cash and cash equivalents, end of year
Year ended December 31
2016
2015
$
17,858
$
(10,608)
33,024
665
29,252
468
–
280
1,143
(1,053)
(10)
(76)
81,551
(18,521)
(630)
(2,922)
4,861
7,962
(349)
71,952
(17,513)
(2,028)
289
52,700
(4,876)
(46,914)
41,845
(1,165)
(40,229)
–
10
(51,329)
10,025
(6)
(1,213)
8,806
25,739
310
7,391
761
25,000
585
46
–
39
(75)
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)
2,026
39,316
–
41,342
10,177
89
10,266
72,218
82,484
$
29,721
(370)
29,351
42,867
72,218
$
$
$
78,029
4,455
82,484
$
$
70,268
1,950
72,218
The accompanying notes are an integral part of these financial statements.
page 9 Fortuna Silver Mines Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31 (Presented in thousands of US dollars, except for number of common shares)
Share capital
Number
of common
shares
Amount
Reserves
Equity
reserve
Hedging
reserve
Fair
value
reserve
Foreign
currency
reserve
Retained
earnings
Total equity
Balance at January 1, 2015
128,537,742
$
201,057
$
13,800
$
–
$
–
$
2,010
$
55,846
$
272,713
Total comprehensive loss
Net loss for the year
Other comprehensive loss
Total comprehensive loss
Transactions with owners of the Company
Cancellation of treasury shares
Exercise of stock options
Transfer upon exercise of stock options
Share-based payments (note 20)
–
–
–
(38,035)
740,860
–
–
702,825
–
–
–
–
2,026
870
–
2,896
–
–
–
–
(307)
(307)
–
–
(870)
1,239
369
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(895)
(895)
(10,608)
–
(10,608)
(10,608)
(1,202)
(11,810)
–
–
–
–
–
–
–
–
–
–
–
2,026
–
1,239
3,265
Balance at December 31, 2015
129,240,567
$
203,953
$
14,169
$
(307)
$
–
$
1,115
$
45,238
$
264,168
Total comprehensive income
Net income for the year
Other comprehensive income
Total comprehensive income
Transactions with owners of the Company
Issuance of common shares (note 12)
Issuance of warrants (note 12)
Exercise of stock options
Exercise of warrants
Transfer upon exercise of stock options
Share-based payments (note 20)
–
–
–
–
–
–
14,569,045
2,236,861
931,700
–
–
17,737,606
122,813
–
5,843
8,733
2,621
–
140,010
–
–
–
–
7,401
–
(4,552)
(2,621)
468
696
–
85
85
–
–
–
–
–
–
–
–
334
334
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
17,858
–
17,858
17,858
419
18,277
–
–
–
–
–
–
–
122,813
7,401
5,843
4,181
–
468
140,706
Balance at December 31, 2016
146,978,173
$
343,963
$
14,865
$
(222)
$
334
$
1,115
$
63,096
$
423,151
The accompanying notes are an integral part of these financial statements.
page 10 Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
1.
Reporting Entity
Fortuna Silver Mines Inc. and its subsidiaries (the "Company") is a publicly traded company
incorporated and domiciled in British Columbia, Canada.
The Company is engaged in precious and base metal 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, and is developing the Lindero Gold Project in northern Argentina.
Its common shares are listed on the New York Stock Exchange under the trading symbol FSM, and
on the Toronto Stock Exchange under the trading symbol FVI.
The Company’s registered office is located at Suite 650, 200 Burrard Street, Vancouver, Canada,
V6C 3L6.
2.
Basis of Accounting
These consolidated financial statements have been prepared by management of the Company in
accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board (“IFRS”). On May 11, 2017, the Company's Board of Directors
approved these financial statements for issuance.
3.
Functional and Presentation Currency
The presentation currency of the Company is the United States Dollar (“$” or "US$").
Effective April 1, 2015, the functional currency of the parent entity and all its subsidiaries was
determined to be the United States Dollar.
Prior to April 1, 2015, the functional currency of each of the entities in the group was the US$, with
the exception of the parent entity and certain holding companies which had a Canadian dollar
("C$") functional currency.
All amounts in these financial statements have been rounded to the nearest thousand US dollars,
unless otherwise stated.
4.
Significant Accounting Policies
The Company has consistently applied the following accounting policies to all periods presented in
these consolidated financial statements.
(a) Basis of Consolidation
These financial statements include the accounts of the Company. All significant inter-company
transactions, balances, revenues, and expenses have been eliminated upon consolidation.
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. Control is
achieved when the Company has power over the investee, is exposed to or has rights to variable
page 11
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
returns from its involvement with an investee, and has the ability to affect those returns through its
power over the investee.
Fortuna Silver Mines Inc. is the ultimate parent entity of the group. At December 31, 2016, the
principal subsidiaries of the Company, their geographic locations, and the ownership interests held
by the Company, were as follows:
Location
Peru
Peru
Name
Fortuna Silver Mines Peru S.A.C.
Minera Bateas S.A.C.
Compania Minera Cuzcatlan S.A. de C.V. Mexico
Mexico
Fortuna Silver Mexico S.A. de C.V.
Barbados
Fortuna Silver (Barbados) Inc.
Canada
Continuum Resources Ltd.
Canada
Goldrock Mines Corp.
Bermuda
Mansfield Bermuda Ltd.
Barbados
Argex Mining Barbados Ltd.
Argentina
Mansfield Minera S.A.
Ownership
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Principal Activity
Services company
Caylloma Mine
San Jose Mine
Exploration company
Holding company
Holding company
Holding company
Holding company
Holding company
Lindero Project
In these financial statements,
Minera Bateas S.A.C. is referred to as "Bateas"
Compania Minera Cuzcatlan S.A. de C.V. is referred to as "Cuzcatlan"
Continuum Resources Ltd. is referred to as "Continuum"
Fortuna Silver (Barbados) Inc. is referred to as "Barbados"
Goldrock Mines Corp. is referred to as "Goldrock"
Mansfield Minera S.A. is referred to as "Mansfield"
(b) Foreign Currency Translation
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 profit or loss. 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.
(c) Financial Instruments
i.
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.
page 12
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
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 profit or loss in the period in which they arise. Transaction costs related to financial
assets classified as FVTPL are recognized immediately in profit or loss.
Held-to-Maturity (“HTM”)
HTM investments are recognized on a trade-date basis and are initially measured at fair value,
including transaction costs. The Company does not have any assets classified as HTM investments.
Loans and Receivables
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.
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 profit or loss 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 profit or loss.
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 profit or loss.
page 13
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
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 profit or loss. On the
date of impairment reversal, the carrying amount of the financial asset cannot exceed its amortized
cost had an impairment not been recognized.
Derecognition of Financial Assets
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
profit or loss over the period to maturity using the effective interest method.
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 profit or loss with exception of
derivatives designated as effective cash flow hedges.
Derivatives not being accounted for as hedges 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 profit or loss.
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 profit or loss.
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 14
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Derivatives are carried as financial assets when the fair value is positive and as financial liabilities
when the fair value is negative.
iv.
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.
(d) Cash and Cash Equivalents
Cash and cash equivalents are designated as loans and receivables. 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.
(e) 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.
(f) 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 a 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. The Company uses the following criteria in its assessment:
the property has mineral reserves as referred to in Canadian National Instrument 43-101, and
page 15
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
when legal, permitting and social matters have been resolved sufficiently to allow mining of the
body.
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.
(g) Mineral Properties, and 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
Not depreciated
Mineral properties
Units of production Declining balance
Buildings, located at the mine
Units of production Declining balance
Buildings, others
Leasehold improvements
6 - 20 years
4 - 8 years
Straight line
Straight line
Plant and equipment
Machinery and equipment
3 - 15 years
Furniture and other equipment
2 - 13 years
Transport units
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 over the shorter of the lease term or useful
life. Spare parts and components included in machinery and equipment, depending on the
replacement period of the initial component, are depreciated over 8 to 18 months.
Borrowing costs attributed to the construction of qualifying assets are capitalized to mineral
properties, plant and equipment and 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.
page 16
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
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.
i.
Operational Mining Properties and Mine Development
For operating mines, all mineral property expenditures are capitalized and amortized based on the
unit-of-production method considering the expected production to be obtained over the life of the
mineral property. The expected production includes proven and probable reserves and the portion
of inferred 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 inferred resources where it is considered highly probable that
those resources are expected to be extracted economically.
The expected production to be obtained over the life of the mineral property is based on our life-of-
mine production plans which typically include a portion of inferred resources, and therefore differ
from the life-of-mine plans we publish as part of our 43-101 compliant technical reports which are
based on reserves only. The decision to use inferred resources, and the portion of inferred
resources to be included varies for each operation and is based on the geological characteristics of
the ore body, the quality and predictability of inferred resources, and the conversion of inferred
resources into measured and indicated ("M&I") that we have historically achieved in the past.
Many factors are taken into account during resource classification including; the quality of drilling
and sampling, drill/sample spacing, sample preparation and analysis, geological logging and
modelling, database construction, geological interpretation and modelling, statistical/geostatistical
analysis, interpolation method, local estimation, engineering studies, economic parameters, and
reconciliation with actual results.
Once the integrity of the data has been established, two important considerations around
classification of resources are geologic continuity and possible variation of thickness and grade
between samples. For our inferred resources at San Jose and Caylloma we are able to achieve a
significant level of confidence on the existence of mineable material as geological continuity has
been established by consistent drill hole intercepts both along strike and down-dip which provides
us with reasonable confidence in the location of the structures. The vast majority of the inferred
resources are interpolated, estimated between existing drill hole intercepts, as opposed to
extrapolated where the grades are estimated beyond the furthest sample point, adding to our
confidence in the geologic continuity of the veins. Furthermore, San Jose and Caylloma are not
structurally complex deposits where faulting has disrupted geologic continuity.
With regards to the variation of thickness and grade between samples, we use statistical means to
calculate the probability that tonnage and grade content falls within a certain accuracy over a given
timeframe. If the potential variation is estimated to be within ± 25 % at 90 percent confidence
globally, we classify it as an inferred resource. This is equivalent to stating that we have 95 percent
confidence that greater than 75 % of the inferred tonnes, grade, and metal content will ultimately
be recovered by the mine and hence that the same percentage or higher will be converted from an
inferred resource to an indicated resource through infill drilling as per our policy of upgrading
prior to production.
As part of our process to include inferred resources into our life-of-mine production plans we apply
an economic cut-off to identify only the material that can be considered profitable to mine within
page 17
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
our mine designs and at this time we apply a conversion or “risk” factor to the mining blocks
comprised of inferred resources we include in such mine production plans. This conversion factor
is based on the predictability of conversion derived from statistical estimates of confidence as
described above and the support from historic conversion rates of inferred resources into M&I at
each of our mines. The conversion factors used in our 2016 and 2015 life-of-mine plans were 90%
at San Jose and between 79% and 87% at Caylloma, depending on the veins being mined.
The percentage of inferred resources included as a component of the total mineable inventory
(reserve + resource) considered in the 2016 life-of-mine evaluation for each operation as of
December 31, 2015 was: San Jose 53% (2014: 55%); Caylloma 33% (2014: 18%).
The Company reviews the conversion factors including past experience in assessing the future
expected conversion of inferred resources to be used in the life-of-mine plans for inclusion of
inferred resources once a year in light of new geologic information and conversion data and when
events or circumstances indicate that a review should be made. The Company continually monitors
expected conversion and any changes in estimates that arise from this review are accounted for
prospectively.
Significant estimation is involved in determining resources and in determining the percentage of
resources ultimately expected to be converted to reserves, which we determine based on careful
consideration of both internal and external technical and economic data. Estimation of future
conversion of resources is inherently uncertain and involves significant judgment and actual
outcomes may vary from these judgments and estimates and such outcomes may have a material
impact on the results. Some of the key judgements in the estimation process include; geological
continuity; stationarity in the grades within defined domains; reasonable geotechnical and
metallurgical conditions; treatment of outlier (extreme) values; cut-off grade determination, and
the establishment of geostatistical and search parameters. Revisions to these estimates are
accounted for in the period in which the change in estimate arises.
Costs of abandoned properties are written-off.
ii.
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.
page 18
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(h)
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.
When the recoverable amount is assessed using pre-tax discounted cash flow techniques, the
resulting estimates are based on detailed mine and/or production plans. For value in use, recent
cost levels are considered, together with expected changes in costs that are compatible with the
current condition of the business. The cash flow forecasts are based on best estimates of expected
future revenues and costs, including the future cash costs of production, sustaining capital
expenditure and reclamation and closures costs.
Where a 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.
(i)
Borrowing Costs
Interest and other financing costs incurred that are attributable to acquiring and developing
exploration and development stage mining properties and constructing new facilities (“qualifying
assets”) are capitalized and included in the carrying amounts of qualifying assets until those
qualifying assets are ready for their intended use.
Capitalization of borrowing costs incurred commences on the date the following three conditions
are met:
expenditures for the qualifying asset are being incurred;
borrowing costs are being incurred; and,
activities that are necessary to prepare the qualifying asset for its intended use are being
undertaken.
Borrowing costs incurred after the qualifying assets are ready for their intended use are expensed
in the period in which they are incurred.
Transaction costs, comprised of legal fees and upfront commitment fee, associated with the credit
facility for general working capital and future expansion are recorded as a debit to the bank loan
and are amortized over the term of the credit facility.
page 19
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
All other borrowing costs are expensed in the period in which they are incurred.
(j)
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:
o
the appropriate level of management must be committed to a plan to sell the asset;
o an active program to locate a buyer and complete the plan must have been initiated;
o
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,
o
o 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. Any gain or loss from initial measurement and subsequent
measurement are recorded in income but not in excess of cumulative impairment losses.
(k)
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 profit or loss using the straight line method over their estimated useful
lives.
(l)
Income Taxes
Income tax expense consists of current and deferred tax expense.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates
enacted or substantively 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 substantively 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 profit or loss
in the period that substantive enactment occurs.
page 20
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
A deferred tax asset is recognized to the extent that it is probable that future taxable income will be
available against which the asset can be utilized. To the extent that the Company does not consider
it probable that deferred tax asset will be recovered, the deferred tax asset is reduced.
The following temporary differences do not result in deferred tax assets or liabilities:
the initial recognition of assets or liabilities, not arising in a business combination, that does
not affect accounting or taxable income;
goodwill; and,
investments in subsidiaries, associates and jointly controlled entities where the timing of
reversal of the temporary differences can be controlled and reversal in the foreseeable
future is not probable.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to 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.
(m)
Provisions
i.
Closure and Rehabilitation 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 closure and reclamation provision (“CRP”) is adjusted at each reporting period for changes to
factors including the expected amount of cash flows required to discharge the liability, the timing of
such cash flows and the risk-free discount rate.
The liability is accreted to full value over time through periodic charges to profit or loss.
The amount of the CRP initially recognized is capitalized as part of the related asset’s carrying value
and amortized to profit or loss. The method of amortization follows that of the underlying asset.
The costs related to a CRP 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 CRP 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 CRP with an offsetting adjustment to the capitalized closure and
rehabilitation cost.
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.
page 21
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
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 of the time value of money is material, the
provision is discounted using an appropriate current market-based pre-tax discount rate.
(n) Share Capital
Common shares are classified as equity. Costs directly attributable to the issuance of common
shares are shown in equity as a deduction from the proceeds.
(o) Revenue Recognition
Revenue arising from the sale of metal concentrates is recognized when all significant risks and
rewards of ownership of the concentrates have been transferred to the buyer. This usually occurs
when title passes to the customer and all insurance risk has been transferred. 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 income statement. 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.
(p) 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.
page 22
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Equity settled share based payment transactions with parties other than employees are measured
at the fair value of the goods or services received, except where that fair value cannot be estimated
reliably, in which case they are measured at the fair value of the equity instruments granted,
measured at the date the Company obtains the goods or the counter party renders the services.
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 profit or loss.
iii.
Share Unit Plans
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.
Restricted Share Units ("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 profit or loss in the period of change.
Performance Share Units ("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 payments
expense within selling, general and administrative expenses in the consolidated income statement
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 payments 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.
page 23
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(q) Related Party Transactions
Parties are considered to be related if one party has the ability directly, or indirectly, to control the
other party or exercise significant influence over the other party in making financial and operating
decisions. Parties are also considered to be related if they are subject to common control, related
parties may be individuals or corporate entities. A transaction is considered to be a related party
transaction when there is a transfer of resources or obligations between related parties.
(r) 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.
(s) 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, as chief operating
decision maker, 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.
(t) Adoption of New Accounting Standards
The following standards or amendments were adopted effective January 1, 2016. They had no
significant impact on the financial position, results of operations, or cash flows of the Company
previously reported.
IAS 1 «Presentation of Financial Statements» (Amendment)
IFRS 11 «Joint Arrangements» (Amendment)
IAS 16 «Property, Plant and Equipment» (Amendment)
IAS 38 «Intangible Assets» (Amendment)
Annual Improvements 2012-2014 Cycle
page 24
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
The following are new or revised standards which we expect may be applicable to the Company. We
are currently assessing the impact on the financial position, results of operations, and cash flows of
the Company resulting from these new or revised standards.
Amendments to IAS 12
Recognition of Deferred Tax
Assets for Unrealized Losses
Applicable to the Company
commencing in the 2017 fiscal
year.
Amendments to IAS 7
Disclosure Initiative
Applicable to the Company
commencing in the 2017 fiscal
year.
IFRS 9 «Financial Instruments»
Applicable to the Company
commencing in the 2018 fiscal
year.
Amends IAS 12 «Income Taxes» to clarify the following
aspects:
Unrealized losses on debt instruments measured at fair
value and measured at cost for tax purposes give rise to
a deductible temporary difference regardless of whether
the debt instrument's holder expects to recover the
carrying amount of the debt instrument by sale or by
use.
The carrying amount of an asset does not limit the
estimation of probable future taxable profits.
Estimates for future taxable profits exclude tax
deductions resulting from the reversal of deductible
temporary differences.
An entity assesses a deferred tax asset in combination
with other deferred tax assets. Where tax law restricts
the utilization of tax losses, an entity would assess a
deferred tax asset in combination with other deferred
tax assets of the same type.
Amends IAS 7 «Statement of Cash Flows» to clarify that
entities shall provide disclosures that enable users of
financial statements to evaluate changes in liabilities arising
from financing activities.
Contains accounting requirements for financial instruments,
and replaces IAS 39 «Financial Instruments: Recognition and
Measurement». The new standard contains requirements in
the following areas:
Classification and measurement. Financial assets are
classified by reference to the business model within
which they are held and their contractual cash flow
characteristics. The new standard introduces a 'fair value
through other comprehensive income' category for
certain debt instruments. Financial liabilities are
classified in a similar manner to under IAS 39, however
there are differences in the requirements applying to the
measurement of an entity's own credit risk.
Impairment. The new standard introduces an 'expected
credit loss' model for the measurement of the
page 25
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
impairment of financial assets, so it is no longer
necessary for a credit event to have occurred before a
credit loss is recognized
Hedge accounting. Introduces a new hedge accounting
model that is designed to be more closely aligned with
how entities undertake risk management activities when
hedging financial and non-financial risk exposures
Derecognition. The requirements for the derecognition
of financial assets and liabilities are carried forward
from IAS 39.
IFRS 15 «Revenue from Contracts
with Customers»
Applicable to the Company
commencing in the 2018 fiscal
year.
IFRS 15 provides a single, principles based five-step model
to be applied to all contracts with customers.
The new standard provides guidance on topics such as the
point in which revenue is recognized, accounting for variable
consideration, costs of fulfilling and obtaining a contract and
various related matters. New disclosures about revenue and
contract costs are also introduced.
Amendments to IFRS 2
Classification and Measurement
of Share-based Payment
Transactions
Applicable to the Company
commencing in the 2018 fiscal
year.
Amends IFRS 2 «Share-based Payment» to clarify the
standard in relation to the accounting for cash-settled share-
based payment transactions that include a performance
condition, the classification of share-based payment
transactions with net settlement features, and the
accounting for modifications of share-based payment
transactions from cash-settled to equity-settled.
IFRS 16 «Leases»
Applicable to the Company
commencing in the 2019 fiscal
year.
IFRS 16 specifies how the Company should recognize,
measure, present and disclose leases. The new standard
provides a single lessee accounting model, requiring lessees
to recognize assets and liabilities for all leases unless the
lease term is 12 months or less or the underlying asset has a
low value.
IFRIC 22 «Foreign Currency
Transactions and Advance
Consideration»
Applicable to the Company
commencing in the 2018 fiscal
year.
Addresses foreign currency transactions or parts of
transactions where:
there is consideration that is denominated or priced in a
foreign currency;
the entity recognizes a prepayment asset or a deferred
income liability in respect of that consideration, in
advance of the recognition of the related asset, expense
or income; and
the prepayment asset or deferred income liability is non-
monetary.
page 26
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(u) Comparative Figures
Certain comparative figures have been reclassified to conform to the presentation adopted for the
years ended December 31, 2016 and 2015. To provide more relevant or detailed information to
users of the financial statements, mineral properties and plant and equipment are now presented
separately.
Consolidated statement of financial position
Mineral properties, plant and equipment, as previously reported
Reallocated to mineral properties
Reallocated to plant and equipment
Mineral properties, plant and equipment
Mineral properties, as previously reported
Reallocated from mineral properties, plant and equipment
Mineral properties
Plant and equipment, as previously reported
Reallocated from mineral properties, plant and equipment
Plant and equipment
December 31
2015
$ 242,403
(128,720)
(113,683)
$ –
$ –
128,720
$ 128,720
$ –
113,683
$ 113,683
There has been no effect on profit or loss, earnings per share, cash flows, total assets, or total
liabilities, for any of the periods presented as a result of these changes.
5.
Use of Judgements and Estimates
(a)
Critical Accounting Estimates and Assumptions
Many of the amounts included in the consolidated financial statements require management to
make judgments and/or estimates. These judgments and estimates are continuously evaluated and
are based on management’s experience and knowledge of the relevant facts and circumstances.
Areas where critical accounting estimates and assumptions have the most significant effect on the
amounts recognized in the consolidated financial statements include:
Mineral Reserves and Resources and the Life of Mine Plan
We estimate our mineral reserves and mineral resources in accordance with the Canadian
Securities Administrators’ National Instrument 43-101 Standards of Disclosure for Mineral Projects
requirements. Estimates of the quantities of mineral reserves and mineral resources form the basis
for our life of mine plans, which are used for the calculation of depletion expense under the units of
production method, impairment tests, and forecasting the timing of the payments related to the
environmental rehabilitation provision.
page 27
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Significant estimation is involved in determining the reserves and resources included within our
life of mine plans. Changes in forecast prices of commodities, exchange rates, production costs or
recovery rates may result in our life of mine plan being revised and such changes could impact
depletion rates, asset carrying values and our environmental rehabilitation provision. As at
December 31, 2016 we have used the following long term prices for our reserve and resource
estimations and life of mine plans: Gold $1,150/oz, Silver $19/oz.
In addition to the estimates above, estimation is involved in determining the percentage of
resources ultimately expected to be converted to reserves and hence included in our life of mine
plans. Our life of mine plans include a portion of inferred resources as we believe this provides a
better estimate of the expected life of mine for certain type of deposits, in particular for vein type
structures. The percentage of inferred resources out of the total tonnage included in the life of mine
plans is based on site specific geological, technical, and economic considerations. Estimation of
future conversion of resources is inherently uncertain and involves judgement and actual outcomes
may vary from these judgments and estimates and such changes could have a material impact on
the financial results. Some of the key judgements in the estimation process include; geological
continuity; stationarity in the grades within defined domains; reasonable geotechnical and
metallurgical conditions; treatment of outlier (extreme) values; cut-off grade determination, and
the establishment of geostatistical and search parameters. Revisions to these estimates are
accounted for prospectively in the period in which the change in estimate arises.
See note 4(g)(i).
Valuation of Mineral Properties and Exploration Properties
The Company carries its mineral properties at cost less accumulated depletion and any
accumulated provision for impairment. The costs of each property and related capitalized
expenditures are depleted over the economic life of the property on a units‐of‐production basis.
Costs are charged to the consolidated statement of income (loss) when a property is abandoned or
when there is a recognized impairment in value.
The Company undertakes a review of the carrying values of mining properties and related
expenditures whenever events or changes in circumstances indicate that their carrying values may
exceed their estimated net recoverable amounts determined by reference to estimated future
operating results and discounted net cash flows. Where previous impairment has been recorded,
the Company analyzes any impairment reversal indicators. An impairment loss is recognized when
the carrying value of those assets is not recoverable. In undertaking this review, management of the
Company is required to make significant estimates of, amongst other things, future production and
sale volumes, metal prices, foreign exchange rates, Mineral Resource and Reserve quantities, future
operating and capital costs and reclamation costs to the end of the mine’s life. These estimates are
subject to various risks and uncertainties which may ultimately have an effect on the expected
recoverability of the carrying values of the mining properties and related expenditures.
The Company, from time to time, acquires exploration and development properties. When
properties are acquired, the Company must determine the fair value attributable to each of the
properties. When the Company conducts exploration on a mineral property and the results from
the exploration do not support the carrying value, the property is written down to its new fair value
which could have a material effect on the consolidated statement of financial position and the
consolidated statement of income (loss).
page 28
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Reclamation and Other Closure Provisions
The Company has obligations for reclamation and other closure activities related to its mining
properties. The future obligations for mine closure activities are estimated by the Company using
mine closure plans or other similar studies which outline the requirements that will be carried out
to meet the obligations. Because the obligations are dependent on the laws and regulations of the
countries in which the mines operate, the requirements could change as a result of amendments in
the laws and regulations relating to environmental protection and other legislation affecting
resource companies. As the estimate of the obligations is based on future expectations, a number of
estimates and assumptions are made by management in the determination of closure provisions.
Revenue Recognition
Revenue from the sale of concentrate to independent smelters is recorded at the time the risks and
rewards of ownership pass to the buyer using forward market prices on the expected date that final
sales prices will be fixed. Variations between the prices set under the smelting contracts may be
caused by changes in market prices and result in an embedded derivative in the accounts
receivable. The embedded derivative is recorded at fair value each period until final settlement
occurs, with changes in the fair value classified in revenue. For changes in metal quantities upon
receipt of new information and assay, the provisional sales quantities are adjusted.
Contingencies
Contingencies can be either possible assets or possible liabilities arising from past events which, by
their nature, will only be resolved when one or more future events not within our control occur or
fail to occur. The assessment of such contingencies inherently involves the exercise of significant
judgment and estimates of the outcome of future events. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that may result in
such proceedings or regulatory or government actions that may negatively impact our business or
operations, the Company with assistance from its legal counsel evaluates the perceived merits of
any legal proceedings or unasserted claims or actions.
A liability is recognized in the consolidated financial statements when the outcome of the legal
proceedings is probable and the estimated settlement amount can be estimated reliably.
Contingent assets are not recognized in the consolidated financial statements until virtually certain.
(b)
Critical accounting judgments in applying the entity’s accounting policies
Judgements that have the most significant effect on the amounts recognized in the Company’s
consolidated financial statements are as follows:
Income taxes
Deferred tax assets and liabilities are determined based on differences between the financial
statement carrying values of assets and liabilities and their respective income tax bases
(“temporary differences”) and losses carried forward. The determination of the ability of the
Company to utilize tax loss carry‐forwards to offset deferred tax liabilities requires management to
exercise judgment and make certain assumptions about the future performance of the Company.
page 29
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Management is required to assess whether it is “probable” that the Company will benefit from these
prior losses and other deferred tax assets. Changes in economic conditions, metal prices and other
factors could result in revisions to the estimates of the benefits to be realized or the timing of
utilization of the losses.
Assessment of impairment and reverse impairment indicators
Management applies significant judgement in assessing whether indicators of impairment or
reverse impairment exist for an asset or a group of assets which could result in a testing for
impairment. Internal and external factors such as significant changes in the use of the asset,
commodity prices, tax laws or regulations in the countries that our mines operate in and interest
rates are used by management in determining whether there are any indicators of impairment or
reversal of a previous impairment.
Functional currency
The functional currency for the Company and its subsidiaries is the currency of the primary
economic environment in which each operates. The Company has determined that its functional
currency and that of its subsidiaries is the U.S. dollar. The determination of functional currency may
require certain judgements to determine the primary economic environment. The Company
reconsiders the functional currency used when there is a change in events and conditions which
determined the primary economic environment.
6.
Short Term Investments
Term deposits and similar instruments
December 31 December 31
2015
$ 36,031
2016
$ 41,100
7. Marketable Securities
Common shares of Medgold Resources Corp.
Warrants of Medgold Resources Corp.
December 31 December 31
2015
$ –
–
$ –
2016
$ 1,266
313
$ 1,579
page 30
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
As part of the acquisition by the Company of 10 million common shares and 10 million warrants of
Medgold (note 15), the warrants were each exercisable for one common share of Medgold at C$0.15
until June 17, 2017. These warrants are a derivative asset, and are categorized as fair value through
profit or loss. Accordingly, changes in the fair value of these warrants during the period are
recorded to profit or loss.
Subsequent to the reporting period, the Company exercised all the Medgold warrants it held. Upon
exercise, the Company held 24.0% of the common shares of Medgold (20.4% on a fully diluted
basis).
8.
Accounts Receivable and Other Assets
Trade receivables from concentrate sales
Advances and other receivables
Value added taxes recoverable
Accounts receivable and other assets
The aging of trade receivables from concentrate sales is as follows
0-30 days
31-60 days
61-90 days
over 90 days
9.
Inventories
Concentrate stockpiles
Ore stockpiles
Materials and supplies
Inventories
December 31 December 31
2015
$ 5,172
1,350
546
$ 7,068
2016
$ 23,185
1,095
707
$ 24,987
December 31 December 31
2015
$ 5,172
–
–
–
$ 5,172
2016
$ 22,312
101
772
–
$ 23,185
December 31 December 31
2015
$ 1,457
1,912
7,065
$ 10,434
2016
$ 1,285
2,659
9,628
$ 13,572
page 31
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
During the year ended December 31, 2016, $127,984 (2015 – $109,685) of inventories was
expensed to cost of sales.
During the year ended December 31, 2016, certain materials and supplies were written down to net
realizable value and a charge of $280 (2015 – $585) was recorded as an impairment and charged to
profit or loss.
10. Derivative Assets and Derivative Liabilities
Zinc swaps (note 10(b))
Derivative assets
Interest rate swap (note 10(a))
Derivative liabilities
Derivative assets
December 31
2016
$ 973
$ 973
December 31
2015
$ –
$ –
Derivative liabilities
$ 254
$ 254
$ 351
$ 351
(a) Interest rate swap
Effective April 1, 2015, the Company entered into an interest rate swap ("swap") of $40,000, which
expires on March 25, 2019 and matches the maturity of the bank loan (note 16). The swap was
entered into to hedge the variable interest rate risk on the bank loan. The swap is designated as a
cash flow hedge for forecasted variable interest rate payments. 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. The ineffective portion is recorded to profit or loss. Interest expense on the bank loan is
recorded to profit or loss.
The fixed rate on the swap is 1.52% and the floating amount is based on the one month LIBOR rate.
The swap is settled on a monthly basis, with settlement being the net difference between the fixed
and floating interest.
(b) Zinc swaps
In December 2016, the Company entered into two sets of zinc swaps with Scotiabank, to mitigate its
commodity price risks. The zinc swaps consist of a total of 3900 tonnes of zinc at $2,650 per tonne
and 3900 tonnes of zinc at $2,750 per tonne (average of 650 tonnes per month).
page 32
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
These contracts are not accounted for as designated hedges under IAS 39. Such derivative financial
instruments were initially recognized at fair value on the date on which the related derivative
contracts were entered into and are subsequently re-measured at estimated fair value. A gain of
$973 arising from changes in the fair value of the zinc swaps was credited to profit or loss.
11. Deposits on Long Term Assets
Deposits on equipment
Deposits paid to contractors
Deposits on long term assets
12. Mineral Properties
Year ended
December 31, 2016
COST
December 31 December 31
2015
$ 8,183
533
$ 8,716
2016
$ 119
453
$ 572
Depletable
Caylloma
San Jose
Not depleted
Lindero
Other
Total
Balance, January 1, 2016
Acquisition of subsidiary (note 12(a))
Additions
Change in rehabilitation provision
Write-offs
Reclassifications
Balance, December 31, 2016
$ 92,973 $ 136,666
–
14,643
(414)
(512)
876
$ 100,630 $ 151,259
–
7,060
597
–
–
$ –
128,687
1,795
108
–
–
$ 130,590
$ 1,533
–
942
–
(631)
–
$ 1,844
$ 231,172
128,687
24,440
291
(1,143)
876
$ 384,323
ACCUMULATED IMPAIRMENT
Balance, January 1, 2016
Balance, December 31, 2016
ACCUMULATED DEPLETION
Balance, January 1, 2016
Depletion
Balance, December 31, 2016
$ 31,900
$ 31,900
$ –
$ –
$ –
$ –
$ –
$ –
$ 31,900
$ 31,900
$ 37,552
4,507
$ 42,059
$ 33,000
13,829
$ 46,829
$ –
–
$ –
$ –
–
$ –
$ 70,552
18,336
$ 88,888
BOOK VALUE, December 31, 2016
$ 26,671 $ 104,430
$ 130,590
$ 1,844
$ 263,535
page 33
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Year ended December 31, 2015
COST
Cost, January 1, 2015
Additions
Currency translation
Balance, December 31, 2015
ACCUMULATED IMPAIRMENT
Balance, January 1, 2015
Impairment
Balance, December 31, 2015
ACCUMULATED DEPLETION
Balance, January 1, 2015
Currency translation
Depletion
Balance, December 31, 2015
Depletable
Not depleted
Caylloma
San Jose
Lindero
Other
Total
$ 87,953 $ 125,007
11,781
(122)
$ 92,973 $ 136,666
5,347
(327)
$ –
–
–
$ –
$ 1,348
185
–
$ 1,533
$ 214,308
17,313
(449)
$ 231,172
$ 16,868
15,032
$ 31,900
$ –
–
$ –
$ –
–
$ –
$ –
–
$ –
$ 16,868
15,032
$ 31,900
$ 32,913
(252)
4,891
$ 37,552
$ 23,988
(31)
9,043
$ 33,000
$ –
–
–
$ –
$ –
–
–
$ –
$ 56,901
(283)
13,934
$ 70,552
BOOK VALUE, December 31, 2015
$ 23,521 $ 103,666
$ –
$ 1,533
$ 128,720
(a) Lindero Project
On July 28, 2016, Fortuna Silver Mines Inc. acquired all the issued and outstanding common shares
of Goldrock Mines Corp. ("Goldrock"), a public company listed on the TSX Venture Exchange, by
issuing 14,569,045 common shares and 1,514,677 warrants, exercisable at C$6.01 per common
share and expiring on October 31, 2018. Goldrock's principal asset is the 100% owned Lindero
Gold Project located in Salta Province, Argentina.
This acquisition has been accounted for as an asset purchase, as Goldrock Mines Corp. and its
subsidiaries did not meet the definition of a business as defined in IFRS 3 «Business Combinations».
page 34
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
The following summarizes the consideration paid and estimates of fair value of assets acquired and
liabilities assumed:
Consideration:
14,569,045 common shares of the Company
1,514,677 warrants
Costs of the transaction
Cash of Goldrock received
Costs of the transaction paid by Goldrock prior to closing
8,226
(528)
(2,822)
Assets acquired and liabilities assumed:
Accounts receivable
Machinery and Equipment
Accounts payable
Closure and rehabilitation provisions
Lindero Gold Project
The cash used for the purchase of the Lindero Project was as follows:
Total consideration
less: Non-cash issuance of common shares
less: Non-cash issuance of warrants
Comprising:
Cash transaction costs
less: Cash of Goldrock received
$ 122,813
7,401
4,876
$ 135,090
$ 249
6,954
(700)
(100)
128,687
$ 135,090
$ 135,090
(122,813)
(7,401)
$ 4,876
$ 5,404
(528)
$ 4,876
The consideration was determined based on the fair value of the Goldrock shares at the date of the
acquisition, plus the estimated fair value of warrants issued and transaction costs incurred. The
warrants were accounted for under IFRS 2 «Share-based Payment», and are treated as equity
settled share-based payments. The corresponding credit has been recorded in equity. The purchase
price was allocated to the assets acquired and liabilities assumed on a relative fair value basis.
The Company has corrected an immaterial allocation error previously reported in the financial
statements for the three and nine months ended September 30, 2016. This reclassification resulted
in an increase of $3,141 in machinery and equipment and a corresponding decrease in Lindero Gold
Project.
page 35
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Upon achievement of commercial production of a mine at Lindero, the Company has agreed to
payments totaling C$480 to certain private companies controlled by former executives of Goldrock
Mines Corp.
(b) Exploration and Evaluation Assets
There are several properties at which the Company is conducting exploration and evaluation
activities. These are included as "non-depleted – other" within "mineral properties". Details of
these properties are described below.
i.
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 company with certain directors in common with the Company).
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), making staged payments totaling $300 in cash, and providing $250 in
common shares of the Company to Radius according to an agreed schedule.
$20 in cash and $20 cash equivalent in shares upon stock exchange approval (completed),
$30 in cash and $30 cash equivalent in shares by January 15, 2011 (completed),
$50 in cash and $50 cash equivalent in shares by January 15, 2012 (completed),
$50 in cash and $50 cash equivalent in shares by January 15, 2013 (completed),
$50 in cash by January 19, 2015 (completed), 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.
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 the
issuance date of these financial statements, the Company is in negotiations with Radius to purchase
the Tlacolula Property, and accordingly, Radius has agreed not to terminate the option agreement.
To December 31, 2016, the Company had issued an aggregate of 34,589 (December 31, 2015 –
34,589) common shares of the Company to Radius, with a fair market value of $150 (December 31,
2015 – $150), and paid $200 (to December 31, 2015– $200) in cash according to the terms of the
option agreement.
ii.
Tabaconas Property
In June 2016, the Company entered into a Usufruct and Option Agreement pursuant to which it
acquired an option to acquire 100% the issued and outstanding common shares of two private
page 36
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Peruvian companies which hold the mining rights to the 2983 hectare Tabaconas Property in
northern Peru, by making staged cash payments totaling $3,000 over a period of up to
approximately six years. The vendors retain a 1% net smelter return royalty on mineral products
from these mining rights.
During the year ended December 31, 2016, the Company incurred $445 (2015 – $nil) in
expenditures on the Tabaconas Property. In December 2016, the Company concluded no further
work was warranted, and wrote off $445 (2015 – $nil).
iii.
Northwest Nevada Initiative
In December 6, 2016, the Company entered into an option agreement with an unrelated party to
acquire 6,756 mineral claims in north west Nevada, USA, totaling 239,128 acres (96,773 hectares).
To maintain this agreement, the Company is required to make the following payments and
expenditures:
Cash or
shares
Exploration
expenditures
Timing
Upon signing of the agreement
The later of receipt of drill permit,
or June 6, 2017
The later of six months after receipt
of drill permit, or December 6, 2017
Cash
$ 200
$ 250
–
–
$ 165
$ 335
December 6, 2018
$ 330
$ 670
Within 24 months after receipt of
drill permit
–
–
$ 1,000
December 6, 2019
December 6, 2020
Before December 6, 2020
TOTALS
$ 495
$ 900
–
$ 1,005
$ 2,100
–
$ 2,340
$ 4,110
–
–
$ 1,000
$ 2,000
–
–
–
–
Status
paid
–
–
–
–
–
–
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
A further success payment is required if the Company completes an economic study on a potential
mine if certain minimum technical parameters based on resource size and rate of return are met.
(c) Impairment
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
page 37
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
($25,000, before tax) 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.
13. Plant and Equipment
Year ended December 31, 2016
COST
Balance, January 1, 2016
Acquisition of subsidiary (note 12(a))
Additions
Disposals
Write-offs
Reclassifications
Balance, December 31, 2016
ACCUM. IMPAIRMENT
Balance, January 1, 2016
Disposals
Balance, December 31, 2016
ACCUM. DEPRECIATION
Balance, January 1, 2016
Disposals
Reclassifications
Depreciation
Balance, December 31, 2016
Machinery
and
equipment
Land,
buildings and
leasehold
improvements
Furniture
and other
equipment
Transport
units
Equipment
under
finance
lease
Capital
work in
progress
Total
$ 28,462
6,954
1,627
(211)
–
20,853
$ 57,685
$ 94,872 $ 15,476
–
368
(106)
–
110
$ 132,067 $ 15,848
–
258
–
–
36,937
$ 711
–
181
(64)
–
267
$ 1,095
–
$ 5,215 $ 38,792 $ 183,528
6,954
–
2,013 21,849
26,296
(456)
–
(75)
–
–
–
(876)
657 (59,700)
$ 941 $ 215,446
$ 7,810
$ 3,784
(8)
$ 3,776
$ 16,154
–
$ 16,154
$ 2,405
(40)
$ 2,365
$ –
–
$ –
$ 483
(8)
$ 475
$ –
–
$ –
$ 22,826
(56)
$ 22,770
$ 14,816
(199)
12
3,235
$ 17,864
$ 24,466
–
2
9,011
$ 33,479
$ 4,387
(64)
(14)
2,439
$ 6,748
$ 505
(60)
–
131
$ 576
$ 2,845
(67)
–
368
$ 3,146
$ –
–
–
–
$ –
$ 47,019
(390)
–
15,184
$ 61,813
BOOK VALUE, December 31, 2016
$ 36,045
$ 82,434
$ 6,735
$ 519
$ 4,189
$ 941 $ 130,863
page 38
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Year ended December 31, 2015
COST
Cost, January 1, 2015
Additions
Disposals
Reclassifications
Currency translation
Cost, December 31, 2015
ACCUM. IMPAIRMENT
Balance, January 1, 2015
Disposals
Impairment
Balance, December 31, 2015
ACCUM. DEPRECIATION
Balance, January 1, 2015
Disposals
Currency translation
Depreciation
Balance, December 31, 2015
Machinery
and
equipment
Buildings and
leasehold
improvements
Furniture
and other
equipment
Transport
units
Equipment
under
finance
lease
Capital
work in
progress
Total
$ 27,976
1,011
(525)
–
–
$ 28,462
$ 94,122 $ 13,537
1,924
(134)
155
(6)
$ 94,872 $ 15,476
128
(14)
647
(11)
$ 628
179
(96)
–
–
$ 711
$ 4,308 $ 3,251 $ 143,822
41,162
(1,439)
–
(17)
$ 5,215 $ 38,792 $ 183,528
1,577 36,343
(670)
–
(802)
–
–
–
$ 2,208
(54)
1,630
$ 3,784
$ 8,175
(4)
7,983
$ 16,154
$ 2,317
(78)
166
$ 2,405
$ 1
(1)
–
$ –
$ 318
(24)
189
$ 483
$ –
–
–
$ –
$ 13,019
(161)
9,968
$ 22,826
$ 12,422
(433)
–
2,827
$ 14,816
$ 18,269
(4)
(4)
6,205
$ 24,466
$ 3,211
(52)
(5)
1,233
$ 4,387
$ 476
(93)
–
122
$ 505
$ 3,115
(637)
–
367
$ 2,845
$ –
–
–
–
$ –
$ 37,493
(1,219)
(9)
10,754
$ 47,019
BOOK VALUE, December 31, 2015
$ 9,862
$ 54,252
$ 8,684
$ 206
$ 1,887 $ 38,792 $ 113,683
page 39
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
14.
Trade and Other Payables
Trade accounts payable
Refundable deposits to contractors
Payroll payable
Mining royalty
Value added taxes payable
Interest payable
Due to related parties (note 15(d))
Other payables
Deferred share units payable
Restricted share units payable
Performance share units payable
December 31 December 31
2015
$ 18,177
1,370
6,607
471
–
104
8
654
27,391
2016
$ 15,251
1,514
10,755
755
1,866
114
10
354
30,619
4,992
2,870
1,679
9,541
–
1,117
462
1,579
Total trade and other payables
$ 40,160
$ 28,970
Refer to note 20 for details on the Company's share units plans.
15. Related Party Transactions
The Company's related parties include:
Related party
Nature of the relationship
Key management personnel
Officers and directors of the Company.
Gold Group Management Inc. ("GGMI") A private company owned by a director of the Company.
The Company shares office space with GGMI, and
reimburses GGMI for shared office and administrative
costs and other related expenses. All charges from GGMI
to the Company are at cost, plus a monthly administration
fee to cover incidentals. Charges for salaries and benefits
are based on estimates of the percentage of time worked
by GGMI employees on the activities of the Company.
Mill Street Services Ltd. ("Mill Street") A private company owned by a director of the Company,
through which consulting fees of the director are paid.
page 40
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Radius Gold Inc. ("Radius")
A Canadian public company which has certain directors
in common with the Company. Radius shares office space
with the Company, and reimburses the Company at cost
for general overhead costs as they arise.
Medgold Resources Corp. ("Medgold") A Canadian public company which has a director in
common with the Company.
During the years ended December 31, 2016 and 2015, the Company entered into the following
related party transactions:
(a) Purchase of Goods and Services
The following transactions are with GGMI. There were no purchases of goods or services from
other related parties.
Salaries and wages
General and administrative expenses
Mineral property option payments
Shared computer equipment
(b) Key Management Personnel
Salaries and short term employee benefits
Directors fees
Consulting fees
Share-based payments
December 31 December 31
2015
$ 88
$ 104
$ 50
$ 6
$ 248
2016
$ 121
103
–
–
$ 224
December 31 December 31
2015
$ 3,947
373
141
1,381
$ 5,842
2016
$ 3,987
357
127
13,527
$ 17,998
Share-based payments consist primarily of DSUs, RSUs and PSUs (note 20).
page 41
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(c) Private Placement
On June 17, 2016, the Company acquired 10 million units of Medgold Resources Corp. (the
"Medgold Units") for $1,165. Each unit consisted of one common share of Medgold and one
warrant entitling Fortuna to purchase one additional common share of Medgold at C$0.15 until
June 17, 2017.
Upon acquisition, the Medgold common shares and the Medgold warrants were accounted for as
separate financial assets, and are presented on the statement of financial position within
marketable securities (note 7). Fair value changes on the Medgold common shares are charged to
other comprehensive income, and fair value changes on the Medgold warrants are charged to profit
or loss.
(d) Outstanding Balances at the Reporting Date
Balances payable to:
Gold Group Management Inc.
December 31
2016
$ 10
$ 10
December 31
2015
$ 8
$ 8
Amounts due to related parties are due on demand, and are unsecured.
16. Bank Loan
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 “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 the assets of Bateas, Cuzcatlan,
and their holding companies. If the utilization of 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.
In April 2015, the $40 million term credit facility was drawn down. Interest on the term credit
facility is calculated using the one, two, three, or six month US$ LIBOR rates plus a graduated
margin based on the Company’s leverage ratio. Interest is payable one month in arrears. The term
credit facility bears a 4 year term and is repayable with a balloon payment on the maturity date of
April 1, 2019.
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, (b) 50% of positive quarterly net income earned after June 30,
2014, and (c) 50% of the value of any equity interests issued by the Company after June 30,
2014.
page 42
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
As at December 31, 2016, the Company was in compliance with all covenants required by the credit
facility.
Unamortized transaction costs are comprised of legal fees and an upfront commitment fee arising
upon inception of the loan in March 2015.
Term credit facility, drawn
Unamortized transaction costs
less: current portion
Other than interest, no payments are required until April 2019.
17.
Finance Lease Obligations
December 31 December 31
2015
$ 40,000
(514)
39,486
–
$ 39,486
2016
$ 40,000
(232)
39,768
–
$ 39,768
Less than one year
Between one and five years
More than five years
Less: future finance charges
Present value of minimum lease payments
Presented as:
Current portion
Non-current portion
Minimum lease
payments
Dec 31
2016
$ 2,189
912
–
3,101
(67)
$ 3,034
Dec 31
2015
$ 809
1,132
–
1,941
(57)
$ 1,884
Present value of
minimum lease
payments
Dec 31
2016
$ 2,128
906
–
3,034
–
$ 3,034
Dec 31
2015
$ 772
1,112
–
1,884
–
$ 1,884
$ 2,128
906
$ 3,034
$ 772
1,112
$ 1,884
page 43
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
18. Other Liabilities
Deferred share units
Restricted share units
Performance share units
Non-current liabilities
Details of the share units plans are provided in note 20.
19. Closure and Rehabilitation Provisions
December 31 December 31
2015
$ 2,279
453
732
44
$ 3,508
2016
$ –
1,619
1,866
59
$ 3,544
Caylloma Mine
San Jose Mine
Lindero Project
December 31, 2016
December 31, 2015
Total
$ 8,182
4,822
208
$ 13,212
Current Non-current
$ 7,360
4,523
208
$ 12,091
$ 822
299
–
$ 1,121
Total
$ 7,508
4,997
–
$ 12,505
Current Non-current
$ 7,173
4,879
–
$ 12,052
$ 335
118
–
$ 453
At January 1, 2016
Acquisition of a subsidiary
Increase to existing provisions
Incurred and charged against the provision
Accretion of provisions
Foreign exchange differences
At December 31, 2016
Presented as:
Current portion
Non-current portion
Closure and rehabilitation provisions
Caylloma
Mine
$ 7,508
–
641
(302)
331
4
$ 8,182
San Jose
Mine
$ 4,997
–
444
(94)
334
(859)
$ 4,822
Lindero
Project
$ –
100
108
–
–
–
$ 208
Total
$ 12,505
100
1,193
(396)
665
(855)
$ 13,212
$ 822
7,360
$ 8,182
$ 299
4,523
$ 4,822
$ –
208
$ 208
$ 1,121
12,091
$ 13,212
page 44
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
At January 1, 2015
Increase to existing provisions
Incurred and charged against the provision
Accretion of provisions
Foreign exchange differences
At December 31, 2015
Presented as:
Current portion
Non-current portion
Closure and rehabilitation provisions
Caylloma
Mine
$ 7,187
1,165
(127)
344
(1,061)
$ 7,508
San Jose
Mine
$ 5,511
471
(145)
(34)
(806)
$ 4,997
Lindero
Project
$ –
–
–
–
–
$ –
Total
$ 12,698
1,636
(272)
310
(1,867)
$ 12,505
$ 335
7,173
$ 7,508
$ 118
4,879
$ 4,997
$ –
–
$ –
$ 453
12,052
$ 12,505
Closure and reclamation provisions represent the present value of rehabilitation costs relating to
mine sites.
The major estimates and assumptions used in estimating these closure and reclamation provisions
are:
Closure and rehabilitation provisions
Caylloma
Mine
2021
$ 8,580
5
4.1%
2.0%
San Jose
Mine
2030
$ 5,190
8
7.5%
4.1%
Lindero
Project
2028
$ 458
10
10.0%
3.0%
Total
$ 14,228
Anticipated settlement date
Undiscounted estimated cash flow
Estimated life (years)
Discount rate
Inflation rate
20.
Share Based Payments
(a) Deferred Share Units ("DSUs")
Deferred share units are typically granted to non-executive directors of the Company. They are
payable in cash, upon resignation, retirement, removal, failure to achieve re-election, or upon a
change of control of the Company.
During the year ended December 31, 2016, the Company granted 201,319 (year ended December
31, 2015 – 187,890) DSUs with an aggregate market value of CAD$1,025 (year ended December 31,
2015 - CAD$900), at the dates of grant.
As at December 31, 2016, there were 883,071 (December 31, 2015 – 1,016,419) DSUs outstanding
with an estimated fair value of $4,992 (December 31, 2015 – $2,279).
page 45
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(b) Restricted Share Units ("RSUs")
Restricted share units are from time to time be granted to officers and employees of the Company.
They are payable in cash and typically vest over three years, in tranches of 20%, 30%, and 50%.
RSUs are payable in cash at each vesting date, or upon a change of control or termination without
cause. The amount payable is calculated based on a five-day trailing average price.
During the year ended December 31, 2016, the Company granted 789,946 (year ended December
31, 2015 – 385,740) RSU with a market value of CAD$3,926 (2015 – CAD$1,848), at the date of
grant, to an executive director and officer (317,276), officers (389,991), and employees (82,679),
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, 2016, the Company paid $1,846 (year ended December 31,
2015 – $739) upon the vesting of 377,654 (year ended December 31, 2015 – 192,519) RSUs to an
executive director and officer, officers, and employees. Also during the year ended December 31,
2016, the Company cancelled 49,043 RSUs (year ended December 31, 2015 – nil) and paid $257
(year ended December 31, 2015 - $nil) on 41,365 (year ended December 3, 2015 – nil) RSUs to a
former officer and employee of the Company.
As at December 31, 2016, there were 1,337,720 (December 31, 2015 – 1,015,846) RSUs outstanding
with a fair value of $4,489 (December 31, 2015 – $1,570).
(c) Performance Share Units ("PSUs")
Performance Share Units ("PSUs") are performance-based awards for the achievement of specified
performance metrics by specified deadlines, which vest over a three year period. PSUs for which
the performance metrics have not been achieved are forfeited and cancelled. The PSUs for which
the performance metrics have been achieved vest and are paid in cash based on a five-day trailing
average price.
During the year ended December 31, 2016, the Company granted nil (year ended December 31,
2015 – 1,236,620) PSU with a market value of $nil (year ended December 31, 2015 – CAD$5,923),
at the date of grant, to an executive director and officer (nil) and officers (nil), 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 of CAD$4.79 per unit.
During the year ended December 31, 2016, the Company paid $961 (year ended December 31, 2015
– $nil) upon the vesting of 247,324 (year ended December 31, 2015 – nil) PSUs to an executive
director and officer, and officers and cancelled 103,761 (year ended December 31, 2015 - nil) PSUs
of a former officer.
As at December 31, 2016, a total of 885,535 (2015 – 1,236,620) PSUs were outstanding with a fair
value of $3,545 (2015– $1,194).
page 46
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
21.
Share Capital
(a) Authorized share capital
The Company has an unlimited number of common shares without par value authorized for issue.
(b) Stock Options
The Company’s Stock Option Plan, as amended and approved from time to time, permits the
Company to issue up to 12,200,000 stock options. As at December 31, 2016, a total of 2,840,599
common shares were available for issuance under the plan.
Outstanding, January 1, 2015
Granted
Exercised
Outstanding, December 31, 2015
Exercised
Forfeited
Outstanding, December 31, 2016
Number of stock
options
Weighted
average
exercise price
Canadian
dollars
$ 3.25
$ 4.79
$ 3.40
$ 3.66
$ 3.45
$ 4.79
$ 4.19
2,944,246
901,969
(740,860)
3,105,355
(2,236,861)
(23,501)
844,993
Vested and exercisable, December 31, 2015
Vested and exercisable, December 31, 2016
1,873,695
459,578
$ 3.01
$ 3.68
During the year ended December 31, 2016, a total of $468 (2015 – $761) in share-based payments
related to stock options was expensed.
No options were granted during 2016. The assumptions used to estimate the fair value of the stock
options granted during the year ended December 31, 2015 were a risk free interest rate of 0.45%,
expected volatility of 61%, expected term of 3 years, expected forfeiture rate of 5.25%, and an
expected dividend yield of nil.
page 47
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
22.
Earnings per Share
Income attributable to equity owners
Weighted average number of shares (000's)
Earnings per share - basic
Year ended
December 31
2016
$ 17,858
136,888
$ 0.13
2015
$ (10,608)
129,001
$ (0.08)
Basic EPS from continuing operations
$ 0.13
$ (0.08)
Year ended
December 31
2016
2015
Adjusted income attributable to equity owners
$ 17,858
$ (10,608)
Weighted average number of shares ('000's)
Incremental shares from options
Incremental shares from warrants
Weighted average diluted number of shares (000's)
136,888
236
929
138,053
129,001
–
–
129,001
Diluted earnings per share
$ 0.13
$ (0.08)
Diluted EPS from continuing operations
$ 0.13
$ (0.08)
There were no anti-dilutive options or warrants excluded from the above calculation in respect of
2016. For the year ended December 31, 2015, excluded from the calculation were 1,417,685 anti-
dilutive options with exercise prices ranging from CAD$4.79 to CAD$6.67.
page 48
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
23.
Sales
(a) By product and geographical area
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Sales to external customers
(b) By major customer
Customer 1
Customer 2
Customer 3
Customer 4
Other Customers
Canada
$ –
–
–
Year ended December 31, 2016
Mexico
Peru
$ 143,151
$ –
–
40,442
–
26,662
$ 143,151
$ – $ 67,104
Argentina
$ –
–
–
$ –
Year ended December 31, 2015
Mexico
Peru
$ 100,926
$ –
–
36,962
–
16,841
$ 100,926
$ – $ 53,803
Argentina
$ –
–
–
$ –
Canada
$ –
–
–
Total
$ 143,151
40,442
26,662
$ 210,255
Total
$ 100,926
36,962
16,841
$ 154,729
Year ended December 31
2016
$ 71,967
71,184
40,646
18,238
8,220
$ 210,255
2015
$ 100,831
–
20,230
24,384
9,284
$ 154,729
For the year ended December 31, 2016, five (2015: nine) customers represented 100% of total
sales to external customers. In 2016 and 2015, revenues from Customers 1 and 2 were realized by
Cuzcatlan, and revenues from Customers 3 and 4 were realized from Bateas.
page 49
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
24. Cost of Sales
Direct mining costs
Salaries and benefits
Workers' participation
Depletion and depreciation
Royalties
Direct mining costs
Salaries and benefits
Workers' participation
Depletion and depreciation
Royalties
Year ended
December 31, 2016
Caylloma
$ 32,047
5,399
973
7,958
873
$ 47,250
San Jose
$ 46,574
4,697
4,742
24,759
1,627
$ 82,399
Year ended
December 31, 2015
Caylloma
$ 33,520
6,161
385
9,366
681
$ 50,113
San Jose
$ 38,010
4,492
2,269
15,528
669
$ 60,968
Total
$ 78,621
10,096
5,715
32,717
2,500
$ 129,649
Total
$ 71,530
10,653
2,654
24,894
1,350
$ 111,081
25.
Selling, General, and Administrative Costs
Selling, general and administrative costs for the years ended December 31, 2016 and 2015 are
comprised of the following.
General and administrative
Workers' participation
Share-based payments
Year ended
December 31
2016
$ 15,616
1,363
16,979
14,138
$ 31,117
2015
$ 15,700
664
16,364
1,499
$ 17,863
page 50
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
26.
Fair Value Measurements
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.
The following sets up the methods and assumptions used to estimate the fair value of Level 2 and
Level 3 financial instruments.
Financial asset or liability
Methods and assumptions used to estimate fair value
Trade receivables
Trade receivables arising from the sales of metal concentrates are
subject to provisional pricing, and the final selling price is adjusted
at the end of quotational period. We mark these to market at each
reporting date based on a quoted spot price.
The Company’s trade receivables are valued using quoted market
prices based on the spot price on the London Metal Exchange
(“LME”).
Medgold warrants (note 7) Fair value is estimated using an option pricing model which uses a
combination of quoted prices and market-derived inputs, such as
volatility and interest rate estimates.
Interest rate swaps, and
zinc swaps
Fair value is calculated as the present value of the estimated
contractual cash flows. Estimates of future cash flows are based on
quoted swap rates, futures prices and interbank borrowing rates.
These are discounted using a yield curve, and adjusted for credit
risk of the Company and the counterparty.
During the years ended December 31, 2016, and 2015, there were no transfers of amounts between
Level 1, Level 2, and Level 3 of the fair value hierarchy. The following tables show the carrying
amounts and fair values of financial assets and financial liabilities, including their levels in the fair
value hierarchy. Fair value information for financial assets and financial liabilities not measured at
fair value is not presented if the carrying amount is a reasonable approximation of fair value.
page 51
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
December 31, 2016
Financial assets measured at FV
Marketable securities - shares
Marketable securities - warrants
Trade receivables concentrate sales
Zinc swaps
Financial assets not measured at FV
Cash and cash equivalents
Term deposits
Other receivables
Value added taxes recoverable
Financial liabilities measured at FV
Interest rate swap liability
Financial liabilities not measured at FV
Trade payables
Payroll payable
Share units payable
Finance lease obligations
Bank loan payable
Other payables
Carrying value
Fair value
Fair value
through
profit or
loss
Available
for sale
FV
(hedging)
Loans and
receivables
Other
liabilities
Total
Level 1
Level 2
Level 3
Carrying
value
approximates
FV
$ 1,266
–
–
–
$ –
313
23,185
973
$ –
–
–
–
$ –
–
–
–
$ –
–
–
–
$ 1,266
313
23,185
973
$ 1,266
–
–
–
$ –
313
23,185
973
$ –
–
–
–
$ 1,266
$ 24,471
$ –
$ –
$ –
$ 25,737
$ 1,266
$ 24,471
$ –
$ –
–
–
–
$ –
$ –
–
–
–
$ –
–
–
–
$ –
–
–
–
$ 82,484
41,100
72
707
$ –
–
–
–
$ 82,484
41,100
72
707
$ –
–
–
–
$ –
–
–
–
$ –
–
–
–
$ 82,484
41,100
72
707
$ –
$ –
$ – $ 124,363
$ – $ 124,363
$ –
$ –
$ –
$ 124,363
$ –
$ –
$ –
$ –
$ (254)
$ (254)
$ –
$ –
$ –
$ –
$ (254)
$ (254)
$ –
$ –
$ (254)
$ (254)
$ –
$ –
$ –
$ –
$ –
–
–
–
–
–
$ –
–
–
–
–
–
$ –
–
–
–
–
–
$ – $ (15,251) $ (15,251)
(10,755)
(10,755)
(13,026)
(13,026)
(3,034)
(3,034)
(39,768)
(39,768)
(17,605)
(17,605)
–
–
–
–
–
$ –
$ –
$ –
$ – $ (99,439) $ (99,439)
$ –
–
(13,026)
–
–
–
$ (13,026)
$ –
–
–
–
–
–
$ –
–
–
–
–
–
$ (15,251)
(10,755)
–
(3,034)
(39,768)
(17,605)
$ –
$ –
$ (86,413)
page 52
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
December 31, 2015
Financial assets measured at FV
Trade receivables concentrate sales
Financial assets not measured at FV
Cash and cash equivalents
Term deposits
Other receivables
Value added taxes recoverable
Financial liabilities measured at FV
Interest rate swap liability
Financial liabilities not measured at FV
Trade payables
Payroll payable
Share units payable
Finance lease obligations
Bank loan payable
Other payables
Carrying value
Fair value
Fair value
through
profit or
loss
Available
for sale
FV
(hedging)
Loans and
receivables
Other
liabilities
Total
Level 1
Level 2
Level 3
Carrying
value
approximates
FV
$ –
$ –
$ 5,172
$ 5,172
$ –
$ –
$ –
$ –
$ –
$ –
$ 5,172
$ 5,172
$ –
$ –
$ 5,172
$ 5,172
$ –
$ –
$ –
$ –
$ –
–
–
–
$ –
–
–
–
$ –
–
–
–
$ 72,218
36,031
2,130
546
$ –
–
–
–
$ 72,218
36,031
2,130
546
$ –
–
–
–
$ –
–
–
–
$ –
–
–
–
$ 72,218
36,031
2,130
546
$ –
$ –
$ – $ 110,925
$ – $ 110,925
$ –
$ –
$ –
$ 110,925
$ –
$ –
$ –
$ –
$ (351)
$ (351)
$ –
$ –
$ –
$ –
$ (351)
$ (351)
$ –
$ –
$ (351)
$ (351)
$ –
$ –
$ –
$ –
$ –
–
–
–
–
–
$ –
–
–
–
–
–
$ –
–
–
–
–
–
$ – $ (18,177) $ (18,177)
(6,607)
(6,607)
(5,043)
(5,043)
(1,884)
(1,884)
(39,486)
(39,486)
(4,886)
(4,886)
–
–
–
–
–
$ –
–
(5,043)
–
–
–
$ –
–
–
–
–
–
$ –
–
–
–
–
–
$ (18,177)
(6,607)
–
(1,884)
(39,486)
(4,886)
$ –
$ –
$ –
$ – $ (76,083) $ (76,083)
$ (5,043)
$ –
$ –
$ (71,040)
page 53
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
27. Management of Financial 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.
The Company is exposed to certain financial risks, including credit risk, liquidity risk, currency risk,
metal price risk, and interest rate risk.
(a) 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. All of our trade accounts receivables from concentrate
sales are held with large international metals trading companies.
The Company’s cash and cash equivalents and short term investments are held through large
financial institutions. These investments mature at various dates within one year.
The Company’s maximum exposure to credit risk as at December 31, 2016 and 2015 is as follows.
Cash and cash equivalents
Short term investments
Marketable securities
Derivative assets
Accounts receivable and other assets
Income tax receivable
Other non-current receivables
December 31 December 31
2015
$ 72,218
36,031
–
–
7,068
780
–
$ 116,097
2016
$ 82,484
41,100
1,579
973
24,987
72
562
$ 151,757
The carrying amount of financial assets recorded in the financial statements represents the
Company’s maximum exposure to credit risk. We limit our exposure to counterparty credit risk on
cash and term deposits by only dealing with financial institutions with high credit ratings and
through our investment policy of purchasing only instruments with high credit ratings. Almost all
of our concentrate is sold to large well-known concentrate buyers.
(b) Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they come due.
We manage our liquidity risk by continually monitoring forecasted and actual cash flows. We have
in place a planning and budgeting process to help determine the funds required to support our
normal operating requirements and our development plans. We aim to maintain sufficient liquidity
to meet our short term business requirements, taking into account our anticipated cash flows from
operations, our holdings of cash and cash equivalents, and our committed and anticipated liabilities.
page 54
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
The following are the remaining contractual maturities of financial liabilities at the reporting date.
The tables include both interest and principal cash flows.
Trade and other payables
Bank loan
Derivative liabilities
Income tax payable
Finance lease obligations
Other liabilities
Operating leases
Provisions
Expected payments due by period as at December 31, 2016
Less than
1 year
$ 40,160
–
254
14,447
2,189
–
431
1,154
$ 58,635
1 - 3 years
$ –
40,000
–
–
912
3,544
360
2,728
$ 47,544
4 - 5 years
$ –
–
–
–
–
–
82
5,172
After
5 years
$ –
–
–
–
–
–
–
5,174
$ 5,254 $ 5,174
Total
$ 40,160
40,000
254
14,447
3,101
3,544
873
14,228
$ 116,607
Trade and other payables
Bank loan
Derivative liabilities
Income tax payable
Other liabilities
Operating leases
Provisions
Expected payments due by period as at December 31, 2015
Less than
1 year
$ 28,970
–
351
3,605
809
539
447
$ 34,721
1 - 3 years
$ –
–
–
–
4,640
585
1,134
$ 6,359
4 - 5 years
$ –
40,000
–
–
–
–
1,239
$ 41,239
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.
(c) Currency risk
The functional and reporting currency for all of entities is the US dollar and we report our results
US dollars. The majority of our operating and capital expenditures are denominated and settled in
US dollars. We are exposed to fluctuations in foreign exchange rates as a portion of our expenses
are incurred in Canadian dollars, Peruvian soles, Argentinean pesos 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 profit or loss, financial position, or
cash flows. We have not hedged our exposure to currency fluctuations.
page 55
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
As at December 31, 2016, the Company was exposed to currency risk through the following assets
and liabilities denominated in foreign currencies.
(thousands)
Cash and cash equivalents
Marketable securities
Accounts receivable and other assets
Income tax receivable
Deposits on non-current assets
Trade and other payables
Due to related parties
Provisions, current
Income tax payable
Other liabilities
Provisions
Total foreign currency exposure
US$ equivalent of foreign currency exposure
(thousands)
Cash and cash equivalents
Accounts receivable and other assets
Income tax receivable
Deposits on non-current assets
Trade and other payables
Provisions, current
Income tax payable
Other liabilities
Provisions
Total foreign currency exposure
US$ equivalent of foreign currency exposure
December 31, 2016
Mexico
Canada
Pesos
Dollars Peru Soles
7,788
4,098
–
–
3,369
3,810
–
243
4,325
–
(208,364)
(13,666)
–
–
(6,169)
(2,765)
(202,804)
(7,564)
(1,220)
–
(93,520)
(24,719)
(496,595)
(40,563)
$ (5,359) $ (12,072) $ (24,032)
9,436
2,300
343
–
–
(14,581)
(14)
–
–
(4,679)
–
(7,195)
Argentina
Pesos
16,502
–
115
–
8,419
(3,891)
–
–
509
–
(7,283)
14,371
$ 904
December 31, 2015
Mexico
Canada
Pesos
Dollars Peru Soles
46,405
983
10,023
6,805
4,035
83
–
2,663
–
31,899
–
–
(163,699)
(10,931)
(2,921)
(2,028)
(1,143)
–
(61,960)
(15)
–
(754)
(4,805)
–
(83,978)
(24,475)
–
(227,310)
(28,883)
2,380
$ (8,463) $ (13,211)
$ 1,716
Argentina
Pesos
–
–
–
–
–
–
–
–
–
–
$ –
Based on the above net exposure as at December 31, 2016, 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 (2015– $nil), and
impact to net income before tax with a 10% appreciation of the US dollar of $3,687 (2015-
$1,814) and with a 10% depreciation of the US dollar of $4,506 (2015– $2,217).
page 56
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(d) Metal Price Risk
We are exposed to metal price risk with respect to our sales of silver, gold, zinc, and lead
concentrates. As a matter of policy, we do not hedge our silver production.
A 10% change in silver prices would cause a $8,005 change in net earnings on an annualized basis.
A 10% change in gold prices would cause a $3,309 change in net earnings on an annualized basis.
A 10% change in zinc prices would cause a $1,456 change in net earnings on an annualized basis.
A 10% change in lead prices would cause a $1,232 change in net earnings on an annualized basis.
We mitigate the price risk of our base metal production from time to time by committing a portion
of such production under forward sales or swap contracts. In December 2016, we entered into a
series of zinc swaps representing approximately 50% of our expected zinc production in 2017
(note 10(b)).
(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. Currently, our interest rate exposure mainly
relates to interest earned on our cash balances, and the mark-to-market value of derivative
instruments which depend on interest rates. We have entered into an interest rate swap to
mitigate the interest rate risk on our bank loan.
28.
Segmented Information
All of our operations are within the mining sector, conducted through operations in four countries.
Due to geographic and political diversity, our mining operations are decentralized whereby local
management is responsible for achieving specified business results within a framework of overall
corporate policies and standards. Local corporate offices provide support infrastructure to the mine
in addressing local issues including financial, human resources, and exploration support.
The following summary describes the operations of each reportable segment
Bateas – operates the Caylloma silver-zinc mine
Cuzcatlan – operates the San Jose silver-gold mine
Lindero – development of the Lindero Gold Project
Corporate – corporate stewardship
Prior to the acquisition of Goldrock (note 12(a)), the Company had three reportable segments,
namely Cuzcatlan, Bateas, and Corporate. Upon the acquisition of Goldrock and its Lindero project,
effective July 28, 2016, another segment "Lindero" was added.
page 57
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
Revenues from external customers
Cost of sales
Selling, general, and administration
Other expenses (income)
Finance items
Segment profit (loss) before taxes
Income taxes
Segment profit (loss) after taxes
Year ended December 31, 2016
Corporate
$ –
–
(23,684)
195
(1,847)
(25,338)
32
(25,306)
Bateas
Cuzcatlan
$ 67,104 $ 143,151
(82,399)
(47,250)
(4,817)
(2,616)
(375)
(768)
(302)
718
55,260
17,188
(24,695)
(4,411)
30,565
12,777
Total
Lindero
$ – $ 210,255
– (129,649)
(31,117)
–
(948)
–
(1,431)
–
47,110
–
(29,252)
(178)
17,858
(178)
Intersegment revenues
Intersegment interest
Interest revenue
Interest expense
Depletion, depreciation, and amortization
7,390
(5,186)
120
2,046
155
–
–
176
101
7,978
–
5,049
32
–
24,891
–
137
–
–
–
7,390
–
328
2,147
33,024
Revenues from external customers
Cost of sales
Selling, general, and administration
Impairment of mineral properties
Other expenses (income)
Finance items
Segment profit (loss) before taxes
Income taxes
Segment profit (loss) after taxes
Year ended December 31, 2015
Corporate
$ –
–
(10,818)
–
(488)
(1,268)
(12,573)
(24)
(12,597)
Bateas
Cuzcatlan
$ 53,803 $ 100,926
(60,968)
(50,113)
(4,484)
(2,561)
(25,000)
–
(1,232)
(905)
117
(226)
34,358
(25,002)
(11,288)
3,921
23,070
(21,081)
Lindero
Total
$ – $ 154,729
– (111,081)
(17,863)
–
(25,000)
–
(2,625)
–
(1,377)
–
(3,217)
–
(7,391)
–
(10,608)
–
Intersegment revenues
Intersegment interest
Interest revenue
Interest expense
Depletion, depreciation, and amortization
4,170
(5,049)
(160)
1,738
643
–
–
(138)
20
9,400
–
5,049
(83)
–
15,696
–
–
–
–
–
4,170
–
(381)
1,758
25,739
December 31, 2016
Total assets
Total liabilities
Total assets
Total liabilities
Corporate
Bateas
Total
Cuzcatlan
$ 40,351 $ 105,001 $ 279,316 $ 138,247 $ 562,915
139,764
57,962
Lindero
23,622
57,132
1,048
December 31, 2015
Corporate
$ 51,061
47,681
Bateas
Cuzcatlan
$ 86,159 $ 242,434
50,790
17,015
Lindero
Total
$ – $ 379,654
115,486
–
page 58
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
29.
Income Taxes
(a)
Reconciliation of effective tax rate
Income tax expense differs from the amount that would be computed by applying the applicable
Canadian statutory income tax rate to income before income taxes. The significant reasons for the
differences are as follows:
Income (loss) before tax
Statutory income tax rate
Expected income tax
Items not deductible for tax purposes
Differences between Canadian and foreign tax rates
Change in estimate
Effect of change in tax rates
Inflation adjustment
Impact of foreign exchange on local currencies
Change in deferred tax assets not recognized
Mining taxes
Withholding taxes
Other
Total income taxes
December 31 December 31,
2015
(3,216)
26.0%
(836)
774
(354)
(2,009)
860
(613)
7,749
(812)
1,831
–
801
7,391
2016
47,110
26.0%
12,249
514
2,995
(511)
(622)
(933)
5,328
4,839
2,738
2,760
(105)
29,252
Effective tax rate
62%
–230%
In 2015, Peru underwent a tax reform that included an announced decrease in tax rates over a four
year period. In December of 2016 the future decreases were halted and the tax rate was increased.
The Company’s Peruvian operating subsidiary, Minera Bateas, has an agreement with the Peruvian
government that stabilizes its tax rate.
The above mentioned rate changes do not impact the Company's tax provision in 2016.
page 59
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(b)
Tax amounts recognized in profit or loss
Current tax expense
Current year
Changes in estimates related to prior years
Deferred tax expense
Origination and reversal of temporary differences
Changes in tax rates and imposition of new taxes
Changes in estimates related to prior years
2016
2015
$ 29,791
(728)
$ 29,063
$ 11,606
–
$ 11,606
$ 594
(622)
217
$ 189
$ (3,066)
860
(2,009)
$ (4,215)
Tax expense
$ 29,252
$ 7,391
page 60
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(c)
Deferred tax balances
The significant components of deferred tax assets and liabilities are:
Deferred tax assets:
Provisions and other
Deferred mining taxes
Other
Total deferred tax assets
Deferred tax liabilities:
Mineral properties
Special mining taxes
Equipment and buildings
Other
Total deferred tax liabilities
December 31
2016
December 31
2015
$ 3,940
–
2,898
$ 6,838
$ 1,546
2,877
2,154
$ 6,577
December 31
2016
December 31
2015
$ 14,858
3,336
5,363
8,155
$ 31,712
$ 18,000
7,211
5,643
408
$ 31,262
Net deferred tax liabilities
(24,874)
(24,685)
The classification of the net deferred tax liability is:
Non-current assets
Non-current liabilities
Net deferred tax liabilities
2016
$ 471
(25,345)
$ 24,874
2015
$ 492
(25,177)
$ 24,685
The Company's movement of net deferred tax liabilities is described below:
At January 1
Deferred income tax recovery through income statement
At December 31
2016
$ 24,685
189
$ 24,874
2015
$ 28,900
(4,215)
$ 24,685
page 61
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(d)
Unrecognized deferred tax assets and liabilities
We recognize 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 costs
Mineral properties, plant and equipment
Derivative liabilities
Capital losses
Unrecognized deductible temporary differences
December 31
2016
$ 55,500
13,074
624
1,801
254
846
$ 72,099
December 31
2015
$ 43,916
5,042
868
1,450
351
839
$ 52,466
The Company has unremitted intercompany interest on which no withholding tax has been accrued
as we do not intend to repatriate the funds in the foreseeable future. Additionally, the Company has
not recognized taxable temporary differences related to unremitted earnings associated with
investments in subsidiaries as the Company can control the timing of the reversal of the temporary
differences and the Company is permanently reinvested in its foreign subsidiaries. Our intent is to
continue focusing on developing mineral properties, with a current focus on Argentina.
Unremitted intercompany interest - Mexico
Unremitted intercompany interest - Argentina
Unremitted retained earnings – Peru
Unremitted retained earnings – Mexico
Unremitted retained earnings – Argentina
(e)
Tax loss carryforwards
Our tax losses have the following expiry dates.
December 31
2016
$ –
17
86,416
107,727
–
2015
$ 22,553
–
45,687
41,101
–
Canada
Mexico
Barbados
Tax losses
expire in years
2025 – 2036
2021 – 2025
2022 – 2024
December 31
2016
$ 55,500
–
–
2015
$ 43,281
450
185
page 62
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
30. Contingencies and Capital Commitments
(a) Bank Letter of Guarantee
The Caylloma Mine closure plan was updated in August 2015, with total closure costs of $7,770,
consisting of progressive closure activities of $3,604, final closure activities of $3,594, and post-
closure activities of $573. Pursuant to the closure regulations, the Company is required to lodge the
following guarantees with the government:
2017 – $3,179
2018 – $3,908
2019 – $4,705
2020 – $5,641
Scotiabank Peru, a third party, has established a bank letter of guarantee in the amount of $3,179
(2015 – $2,495), on behalf of Bateas, in favor of the Peruvian mining regulatory agency in
compliance with local regulation and to collateralize Bateas’ mine closure plan. This bank letter of
guarantee expires on December 31, 2017.
On November 21, 2016, we submitted to the Peruvian mining regulatory agency an update of the
mine closure plan related to the San Cristobal mining unit and the Huayllacho processing plant, in
order to incorporate new mining components. This update is currently pending approval.
(b) Capital Commitments
As at December 31, 2016, the Company had the following capital commitments, expected to be
expended within one year:
$2,172 for the tailing filtration plant expansion at the San Jose property,
$175 for the plant at the Caylloma property,
$532 for drilling at the Lindero property,
$530 for testing, software, and consulting at the Lindero 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 which 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.
The Company has a contract to guarantee the cement supply at its San Jose Mine up to $76 for a 6
month period, renewable for another equal period, prior written consent.
Operating leases includes leases for office premises, computer and other equipment used in the
normal course of business (note 27(c)).
page 63
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
The expected payments due by period, as at December 31, 2016 are as follows:
Expected payments due by period as at December 31, 2016
Less than
1 year
$ 65
141
84
$ 290
72
69
$ 141
–
$ –
$ 431
1 - 3 years
$ 141
–
129
$ 270
27
45
$ 72
18
$ 18
$ 360
4 - 5 years
$ –
–
82
$ 82
–
–
$ –
–
$ –
$ 82
Total
$ 206
141
295
$ 642
99
114
$ 213
18
$ 18
$ 873
Office premises - Canada
Office premises - Peru
Office premises - Argentina
Total office premises
Computer equipment - Peru
Computer equipment - Mexico
Total computer equipment
Machinery - Mexico
Total machinery
Total operating leases
(d) Tax Contingencies
Peru
The Company has been assessed taxes by the Peruvian tax authority, SUNAT, for tax years 2010 and
2011. Including related interest and penalties, these amount to $1,033 and $657, respectively, for a
total of $1,690.
The Company is appealing these assessments.
The Company has provided a guarantee by way of a letter bond in the amount of $793.
Mexico
During 2015, the Company’s foreign trade operations for tax years 2011 to 2014 were reviewed by
the Mexican Tax Administration Service ("SAT") and faced an administrative customs procedure
("PAMA") for specific temporary import documents (pediments). On October 27, 2015, the SAT
issued an assessment regarding the Company’s foreign trade operations for tax years 2011 to 2014,
and denied certain claims, which resulted in the following assessments totaling $198 (the "tax
credit"):
$30 in general import tax, $90 in VAT, and $5 custom management tax, and
associated fines of $73
On December 11, 2015, the Company established a security bond in the amount of $211 in favor of
PAMA to collateralize this tax credit of $198. This security bond was renewable annually, and has
been renewed until February 2018. On January 21, 2016, the Company presented its arguments
before the Mexican Federal Court for the nullification and voidance of the tax credit (the “Company
claim”). On August 18, 2016, the Mexican Federal Court issued a first instance resolution declaring
the nullity and voidance of the tax assessment. The tax authority has the right to appeal the first
instance resolution, which appeal is still pending.
page 64
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Presented in thousands of US dollars)
(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 our opinion, none of these matters is expected to have a
material effect on the results of operations or financial conditions of the Company.
31.
Events after the Reporting Period
(a) Financing
Subsequent to December 31, 2016, the Company issued 11,873,750 common shares for gross
proceeds of $74,804,625 pursuant to a public offering.
(b) Exercise of Warrants
Subsequent to December 31, 2016, a total of 238,515 warrants with an exercise price of CAD$6.01,
were exercised.
(c) Exercise of Stock Options
Subsequent to December 31, 2016, a total of 133,060 options were exercised with exercise prices
ranging from CAD$4.30 to CAD$6.67.
(d) Exercise of Medgold Warrants
Subsequent to December 31, 2016, the Company exercised all the Medgold warrants it held, for
$1,139. This resulted in the Company owning 24.0% of the then-outstanding common shares of
Medgold.
(e) Prospero shares
Subsequent to December 31, 2016, the Company acquired by way of a private placement 5,357,142
units of Prospero Silver Corp. ("Prospero") at a price of C$0.28 per unit for cash consideration of
C$1.5 million. Each unit is comprised of one common share and one common share purchase
warrant exercisable at C$0.35 per share for three years. Immediately following the transaction, the
Company will own 14.91% of the issued and outstanding common shares of Prospero and 25.95%,
if all of the warrants were exercised.
page 65
EXHIBIT 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
YEAR ENDED DECEMBER 31, 2016
As of May 12, 2017
(Monetary amounts expressed in US dollars, unless otherwise indicated)
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Contents
Page
Business of the Company ................................................................................................................................................................... 2
2016 Highlights ..................................................................................................................................................................................... 3
2017 Guidance and Outlook ............................................................................................................................................................. 7
Changes in Management and Board ........................................................................................................................................... 10
Financial Results ................................................................................................................................................................................ 11
Fourth Quarter 2016 Financial Results .................................................................................................................................... 14
Results of Operations ....................................................................................................................................................................... 16
Acquisition of Goldrock ................................................................................................................................................................... 21
The Lindero Project .......................................................................................................................................................................... 21
Quarterly Information ..................................................................................................................................................................... 22
Non-GAAP Financial Measures ..................................................................................................................................................... 22
Liquidity and Capital Resources .................................................................................................................................................. 33
Off-Balance Sheet Arrangements ................................................................................................................................................ 38
Adoption of New Accounting Standards .................................................................................................................................. 39
Critical Accounting Estimates and Assumptions .................................................................................................................. 41
Critical Accounting Judgements in Applying the Entity’s Accounting Policies ........................................................ 43
Share Position and Outstanding Warrants and Options .................................................................................................... 44
Other Risks and Uncertainties ...................................................................................................................................................... 44
Controls and Procedures ................................................................................................................................................................ 44
Qualified Persons ............................................................................................................................................................................... 47
Cautionary Statement on Forward-Looking Statements ................................................................................................... 47
Cautionary Note to United States Investors Concerning Estimates of Reserves and Resources ...................... 49
Management's Discussion and Analysis, page 1
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Business of the Company
Fortuna Silver Mines Inc. (“Fortuna” or the “Company”) is engaged in precious and base metal 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,
operates the San Jose silver and gold mine (“San Jose”) in southern Mexico, and
is developing the Lindero Gold Project (“Lindero”) in northern Argentina.
Fortuna is a publicly traded company incorporated and domiciled in British Columbia, 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.
Name
The Company's material subsidiaries include –
Principal Activity
Ownership
Location
Fortuna Silver Mines Peru S.A.C.
Minera Bateas S.A.C.
Compania Minera Cuzcatlan S.A. de C.V.
Goldrock Mines Corp.
Mansfield Minera S.A.
Peru
Peru
Mexico
Canada
Argentina
100%
100%
100%
100%
100%
Services company
Caylloma Mine
San Jose Mine
Holding company
Lindero Project
In this MD&A,
Minera Bateas S.A.C. is referred to as "Bateas"
Compania Minera Cuzcatlan S.A. de C.V. is referred to as "Cuzcatlan"
Goldrock Mines Corp. is referred to as "Goldrock"
Mansfield Minera S.A. is referred to as "Mansfield"
•
•
•
•
•
•
•
This Management’s Discussion and Analysis (“MD&A”) is intended to help readers understand the
significant factors that have affected the performance of Fortuna and its subsidiaries, and those that may
affect future performance. This MD&A has been prepared as of May 12, 2017 and should be read in
conjunction with the Company’s audited consolidated financial statements for the years ended December
31, 2016, and 2015.
We report our annual financial statements in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board (“IFRS").
In this MD&A, we refer to various non-GAAP financial measures. These measures are used by us to
manage and evaluate operating performance and the ability to generate cash, and are widely reported in
the silver mining industry as benchmarks for performance.
More information about the Company, including our Annual Information Form, is available at SEDAR at
www.sedar.com
Management's Discussion and Analysis, page 2
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
This document contains Forward-Looking Statements. Refer to the cautionary language under the heading
“Cautionary Statement on Forward-Looking Statements.”
2016 Highlights
Operating highlights
Financial and Operating Highlights
Consolidated Metrics
2016
2015
%
Change
2014
Q4 2016
Q4 2015
%
Change
Key Indicators
Silver
Metal produced (oz)
Metal sold (oz)
Realized price ($/oz)
7,380,217
7,377,509
17.2
6,624,635
6,618,784
15.6
Gold
Metal produced (oz)
Metal sold (oz)
Realized price ($/oz)
Lead
Metal produced (000's lbs)
Metal sold (000's lbs)
Zinc
46,551
45,958
1,253
32,673
33,187
Metal produced (000's lbs)
Metal sold (000's lbs)
All-in sustaining cash cost
(US$/oz Ag)*
(net of by-product credits from gold, lead, and zinc)
*(refer to non-GAAP financial measures)
43,204
43,041
8.38
39,689
39,209
1,156
23,835
23,361
35,829
35,934
11%
11%
10%
17%
17%
8%
37%
42%
21%
20%
6,599,300
6,694,552
18.9
2,120,098
2,126,723
17.1
1,585,315
1,614,908
13.1
35,316
35,758.00
1,260
16,152
16,244
27,361
27,471
13,812
13,803
1,217
7,290
7,361
11,006
10,537
34%
32%
30%
39%
40%
10%
9,955
9,865
1,106
8,361
8,156
-13%
-10%
9,599
9,665
15%
9%
14.48
-42%
14.48
7.33
18.02
-59%
During the year ended December 31, 2016, the Company increased silver production by 11% over the
year ended December 31, 2015 to 7.4 million ounces, and gold production by 17% to 46,551 ounces. The
increase was a result of the 50% plant expansion at our San Jose mine which was finalized at the end of
the second quarter of 2016. Production of lead and zinc increased 37% and 21%, respectively, as a result
of higher zinc and lead head grades and higher throughput ore at our Caylloma mine. Silver and gold
production were 5% and 9% above our guidance for the year.
During the three months ended December 31, 2016, the Company increased silver production by 34%
over the three months ended December 31, 2015, to 2.1 million ounces, and gold production by 39% to
13,812 ounces. The increase was also the result of the 50% plant expansion at our San Jose mine which
was finalized at the end of the second quarter of 2016. Production of zinc increased 15% and lead
Management's Discussion and Analysis, page 3
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
decreased 13%, respectively, as a result of higher zinc and lower lead head grades and higher throughput
at our Caylloma mine.
Consolidated all-in sustaining cash cost per payable ounce of silver, net of by-product credits, was $8.38,
42% below the prior year, and below our annual guidance of $11.10 for 2016 (refer to non-GAAP financial
measures). The lower cost compared to guidance is mainly explained by higher by-product credits and
lower sustaining capital expenditures compared to our budget for 2016.
Management's Discussion and Analysis, page 4
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Financial highlights
Consolidated Metrics
2016
2015 % Change 2014 Q4 2016 Q4 2015 % Change
Financial (Expressed in $ millions except per share information)
Sales
Mine operating earnings
Operating income
Net income (loss)
$ 210.3 $ 154.7
43.6
(1.7)
(10.6)
80.6
48.5
17.9
36%
85%
-
-
$ 174.0
60.3
33.8
15.6
$ 57.9
20.7
17.6
6.5
$ 37.0
56%
10.3 101%
(20.6)
(17.3)
Earnings (loss) per share (basic)
Earnings (loss) per share (diluted)
0.13
0.13
(0.08)
(0.08)
-
-
0.12
0.12
0.04
0.05
(0.13)
(0.13)
-
-
-
-
Adj net income (loss)*
Adjusted EBITDA*
Cash provided by operating activities
Cash provided by operating activities
(before changes in working capital)*
Capex (sustaining)
Capex (non-sustaining)
Capex (Brownfields)
Cash and cash equivalents, end of period
18.2
83.0
52.7
6.7 172%
67%
-4%
49.6
54.8
62.3
30.6 104%
19.9
22.9
7.9
82.5
43.0
11.7
4.0
72.2
-54%
96%
98%
14%
15.7
64.1
60.2
59.8
30.4
1.7
6.8
42.9
8.8
29.4
25.8
22.7
5.3
2.0
2.2
82.5
(0.1)
11.0 167%
11%
23.2
9.6 136%
-71%
18.0
-77%
8.7
0.6 267%
14%
72.2
Total assets
Non-current bank loan
Other liabilities
562.9
39.8
3.5
379.7
39.5
3.5
48%
1%
0%
350.3
–
4.7
562.9
39.8
3.5
379.7
39.5
3.5
48%
1%
0%
* refer to non-GAAP financial measures
Net income for 2016 amounted to $17.9 million (2015 – $10.6 million loss), resulting in a basic earnings
per share of $0.13 (2015 – $0.08 loss per share). Adjusted net income for 2016 amounted to $18.2 million
compared to $6.7 million in 2015. The higher net income was driven mostly by higher metal sales across
all our products and higher metal prices in the period. Silver and gold metal sales increased 11% and
17% while realized metal prices increased 10% for silver to $17.20 per ounce and 8% for gold to $1,253
per ounce. This increase in net income was partially offset by $13.4 million higher selling, general, and
administrative expenses over 2015. This increase resulted from fluctuations in the recorded value of
share-based compensation instruments which are marked-to-market based on the performance of our
share price. The share-based compensation charge in 2016 was $14.1 million compared to $1.5 million in
2015.
Management's Discussion and Analysis, page 5
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Cash provided by operating activities was $52.7 million, slightly below the $54.8 million recorded in
2015. This reduction is explained by certain timing differences in the collection of accounts receivable
from one year to the next offset by higher Adjusted EBITDA in 2016.
Net income for Q4 2016 amounted to $6.5 million (Q4 2015 – $17.3 million loss), resulting in a basic
earnings per share of $0.04 (Q4 2015 – $0.13 loss per share). Adjusted net income for Q4 2016 amounted
to $8.8 million compared to $0.1 million loss in Q4 2015. The higher income was driven by higher silver
and gold metal sold of 32% and 40% as well as higher realized prices for silver, gold, zinc, and lead. Net
income in the period was also positively impacted by $2.5 million lower selling, general and
administrative expenses over 2015 related to lower stock based compensation charges.
Cash provided by operating activities was $25.8 million compared to $23.2 million in Q4 of 2015.
At December 31, 2016, the Company had cash and short-term investments totaling $123.6 million
(December 31, 2015 – $108.2 million).
NET INCOME FOR THE PERIOD
Adjustments, net of tax:
Unrealized gain on financial instruments
Write-off of mineral properties
Impairment of mineral properties, plant and equipment
Impairment of inventories
Other operating income - other
Adjusted Net Income (a non-GAAP measure)
Expressed in $ millions
Three months
ended
December 31
2016
2015
$ 6.5 $ (17.3)
Year ended
December 31
2016
$ 17.9
2015
$ (10.6)
1.3
0.8
–
0.2
–
–
–
17.0
0.3
(0.1)
$ 8.8 $ (0.1)
(0.7)
0.8
–
0.2
–
$ 18.2
–
–
17.0
0.4
(0.1)
$ 6.7
Management's Discussion and Analysis, page 6
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Corporate highlights
•
During the year ended December 31, 2016,
the Company acquired the Lindero Gold Project by acquiring all the outstanding common shares
of TSX-Venture listed Goldrock Mines Corp. Goldrock is now a wholly owned subsidiary of
Fortuna.
the mill expansion project of 50% at San Jose mine achieved commercial production in July 2016.
•
•
the Company issued updated Technical Reports on the Caylloma and San Jose mines.
2017 Guidance and Outlook
2017 Production and Cash Cost Guidance
Gold
-
For 2017, the production and cash cost guidance is noted in the table below:
(koz)
51.9
0.5
Lead
(Mlbs)
NA
30.0
Zinc
(Mlbs)
NA
41.0
Mine
San Jose, Mexico
Caylloma, Peru
Silver
(Moz)
7.1
1.0
Cash Cost
($/t)
56.7
75.5
AISCC **
($/ oz Ag)
8.4
10.8
Total
8.1
52.4
30.0
41.0
--
--
-
-
Note:
1.
2.
3.
2017 silver equivalent production guidance of 11.2 million ounces
2017 consolidated AISC of $9.8/oz Ag
Silver equivalent production does not include lead or zinc and is calculated using a silver to gold
ratio of 60 to 1
All-in sustaining cash cost ("AISC") per ounce of silver is net of by-products gold, lead, and zinc
Total figures may not add due to rounding
Management's Discussion and Analysis, page 7
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
San Jose Mine, AISCC guidance:
Item
Cash cost net of by-product credits
Commercial and government royalties and mining tax
Workers' participation
Selling, general and administrative expenses (operations)
Sustaining capital expenditures
All-in sustaining cash cost per payable ounce of silver
Brownfields exploration expenditures
(*) Total figures may not add up due to rounding
Caylloma Mine, AISCC guidance:
Item
Cash cost net of by-product credits
Commercial and government royalties and mining tax
Workers' participation
Selling, general and administrative expenses (operations)
Sustaining capital expenditures
All-in sustaining cash cost per payable ounce of silver
Brownfields exploration expenditures
(*) Total figures may not add up due to rounding
Consolidated AISCC guidance:
Item
Cash cost net of by-product credits
Commercial and government royalties and mining tax
Workers' participation
Selling, general and administrative expenses (operations)
Selling, general and administrative expenses (corporate)
Sustaining capital expenditures
All-in sustaining cash cost per payable ounce of silver
Brownfields exploration expenditures
(*) Total figures may not add up due to rounding
Management's Discussion and Analysis, page 8
2017 Guidance
($/oz Ag)
2.4
1.2
0.8
0.7
2.3
8.4
1.0
2017 Guidance
($/oz Ag)
(8.9)
0.9
0.2
3.4
11.0
4.2
10.8
2017 Guidance
($/oz Ag)
1.1
1.1
0.7
1.0
1.1
3.4
9.8
1.4
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
San Jose Mine, Mexico
2017 Outlook
San Jose plans to process 1,050,000 tonnes of ore averaging 230 g/t Ag and 1.67 g/t Au. Capital
investment is estimated at $23.2 million.
Major capital investments include:
•
•
•
•
Mine development: $6.5 million
Equipment and infrastructure: $2.2 million
Tailings filtration plant expansion: $6.5 million
Caylloma Mine, Peru
Brownfields exploration: $7.0 million
Caylloma plans to process 535,000 tonnes of ore averaging 71 g/t Ag, 2.73% Pb and 3.86% Zn. Capital
investment is estimated at $14.1 million.
Major capital investments include:
•
•
•
Mine development: $6.9 million
Equipment and infrastructure: $3.3 million
Lindero Gold Project, Argentina
Brownfields exploration: $3.9 million
The Company continues advancing with the optimization of the 2016 Feasibility Study, including tradeoff
metallurgical tests and detailed engineering revisions. In September 2016, the Company started a pre-
construction review of the project with the objective of optimizing certain components of the Feasibility
Study. This review includes the validation of the geological model and resource/reserve estimates,
optimization of the mine design, review of the metallurgical process including key metallurgy laboratory
tests, and an update of the infrastructure basic engineering. Mineral processing optimization highlights
included:
-
-
-
-
Preliminary tall-column leach tests consistently above 76% gold extraction for the four
metallurgical types of ore
Cyanide cure during agglomeration allows over 70% gold extraction in the first 30 days of
leaching for the four metallurgical types of ore
Copper concentration in solution amenable to treatment with sulfidization, acidification,
recycling, and thickening (“SART”) plant technology
Agglomeration with modest cement addition to achieve heap heights of approximately 80 meters
for 9 millimeter high pressure grinding rolls (“HPGR”) crushed ore.
See Fortuna news release dated March 22, 2017.
Management's Discussion and Analysis, page 9
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
San Jose Mine, Mexico
Brownfields Exploration Highlights
Brownfields exploration program budget for 2017 at the San Jose Mines is $7.0 million, which includes
31,000 meters of diamond drilling and 600 meters of underground development for drilling to define
future resources. Exploration drilling is in progress at the Trinidad Central Zone and on the sub-parallel
Ocotlan vein in the San Jose Mine.
Caylloma Mine, Peru
Brownfields exploration program budget for 2017 at the Caylloma Mine is $3.9 million, which includes
22,000 meters of diamond drilling. Drilling will focus on testing extensions of the principal Animas vein
both northeast and southwest from current underground operations. Exploration drilling is in progress
on extensions of ore-shoots immediately beneath current operations.
Lindero Gold Project, Argentina
The Arizaro gold-copper porphyry target lies within the Lindero Project concession block and contains a
Mineral Resource as detailed in the 2016 Feasibility Study. We plan to investigate the economic potential
of including the Arizaro target into the existing Lindero resource through surface mapping, re-logging of
approximately 8,000 meters of core and initial metallurgical tests with a budget of $0.5 million
Serbia
Greenfields Exploration Highlights
Through two C$1.5 million equity investments in Medgold Resources Corp. (see Medgold's news release
dated January 9, 2017), Fortuna is funding a Strategic Alliance with Medgold and has the option to
nominate two Selected Properties over the course of 2017 to form joint ventures with Medgold.
Exploration will center on high and low-sulfidation epithermal gold-silver mineralization in the western
portion of the Tethyan orogenic system. Each joint venture, if formed, will allow Fortuna the right to earn
a 51% interest by spending $3.0 million over three years, with a first-year commitment of $1.0 million,
and gain an additional 19% interest by spending a further $5.0 million and completing a Preliminary
Economic Assessment.
Changes in Management and Board
Thomas I. Vehrs voluntarily retired June 30, 2016 as Vice President of Exploration of the Company.
David Volkert was appointed as the new Vice President of Exploration effective August 8, 2016 (see
Fortuna news release dated July 11, 2016).
Michael Iverson retired from the Board of Directors of the Company (see Fortuna news release dated July
27, 2016). Thomas Kelly resigned from the Board of Directors of the Company (see Fortuna news release
dated October 3, 2016).
David Laing was appointed to the Board of Directors of the Company effective September 26, 2016 (see
Fortuna news release dated October 3, 2016).
Management's Discussion and Analysis, page 10
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Alfredo Sillau was appointed to the Board of Directors of the Company effective November 29, 2016 (see
Fortuna news release dated December 8, 2016).
Eric Chapman was promoted to Vice President of Technical Services of the Company effective January 1,
2017 (see Fortuna news release dated December 8, 2016).
Financial Results
Revenue
Provisional sales ($ million)
Caylloma
San Jose
Adjustments ($ million) *
Sales ($ million)
Silver
Provisional sales ($ million)
Metal produced (oz)
Provisional Sales (oz)
Realized Price ($/oz)**
Net Realized Price ($/oz)***
Gold
Provisional sales ($ million)
Metal produced (oz)
Provisional Sales (oz)
Realized Price ($/oz)**
Net Realized Price ($/oz)***
Lead
Provisional sales ($ million)
Metal produced (000's lbs)
Provisional Sales (000's lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
Zinc
Provisional sales ($ million)
Metal produced (000's lbs)
Provisional Sales (000's lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
YEAR TO DATE RESULTS
Year ended December 31
2015
2016
209.1
65.8
143.3
1.2
210.3
114.4
7,380,217
7,377,509
17.23
15.51
47.6
46,551
45,958
1,253
1,035
21.4
32,673
33,187
0.84
0.64
25.8
43,204
43,041
0.95
0.60
158.1
54.8
103.2
(3.4)
154.7
92.0
6,624,635
6,618,784
15.65
13.90
35.1
39,689
39,209
1,156
896
13.5
23,835
23,361
0.80
0.58
17.4
35,829
35,934
0.87
0.48
% Change
32%
20%
39%
135%
36%
24%
11%
11%
10%
12%
36%
17%
17%
8%
16%
59%
37%
42%
5%
10%
48%
21%
20%
9%
25%
Management's Discussion and Analysis, page 11
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
* 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 year ended December 31, 2016 were $210.3 million, 36% above 2015 sales of $154.7 million.
Silver ounces sold increased 11%, and gold ounces sold increased 17% while realized prices on
provisional sales for silver increased 10% to $17.23 per ounce and for gold increased 8% to $1,253 per
ounce.
Provisional sales at San Jose increased 39% to $143.3 million (2015 – $103.2 million) as a result of a 24%
increase in silver ounces sold compared with the same period in the prior year. Provisional sales at
Caylloma increased 20% to $65.8 million (2015 – $54.8 million) as a result of higher lead and zinc pounds
sold of 42% and 20%, respectively. Silver ounces sold decreased 26%.
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.
Operating income (loss) and Adjusted EBITDA
(Expressed in $ millions)
Operating income (loss)
Caylloma
San Jose
Corporate
Total
Adjusted EBITDA*
Caylloma
San Jose
Corporate
Total
Note: figures may not add due to rounding
YEAR TO DATE RESULTS
Year ended
December 31
2016
2015
as a % of Sales
as a % of Sales
as a % of Sales
as a % of Sales
as a % of Sales
as a % of Sales
$ 16.5
25%
55.6
39%
(23.5)
$ 48.5
23%
$ 25.2
38%
81.2
57%
(23.3)
$ 83.0
39%
$ (24.8)
-46%
34.2
34%
(11.1)
$ (1.7)
-1%
$ 10.0
19%
50.1
50%
(10.5)
$ 49.6
32%
% Change
167%
63%
-112%
2953%
152%
62%
122%
67%
Management's Discussion and Analysis, page 12
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
*refer to Non-GAAP financial measures
During 2016, operating income was $48.5 million compared to a $1.7 million loss in 2015 related to an
impairment charge of $25.0 million at the Caylloma mine. At San Jose, operating income increased 63% to
$55.6 million mainly as a result of 42% higher sales. Operating margin increased five percentage points
from 34% to 39% as a result of higher leverage from increased volume of sales and improved prices. At
Caylloma, operating income was $16.5 million compared to an operating loss $24.8 million related to the
impairment described above. Caylloma´s operating income was positively impacted by 25% higher sales
and improved gross margin. Improved operating margin of 25% at Caylloma was the result of lower cash
costs per tonne of 16% and higher metal prices.
During the fourth quarter ended December 31, 2016, the Company revised its Adjusted EBITDA
calculation methodology to exclude share-based payments charge (refer to Non-GAAP financial measures
section). Adjusted EBITDA in 2016 increased 67% over 2015 to $83.0 million, driven by a 62% increase
of $31. million at San Jose and a 152% increase of $15.2 million at Caylloma.
Selling, General, and Administration
$ millions
Operating mines SG&A
Corporate SG&A
Share-based payments
Workers' participation
Total
Year ended December 31
2016
2015
$ 6.1
9.5
14.1
1.4
$ 31.1
$ 6.4
9.2
1.5
0.7
$ 17.8
% Change
-5%
3%
840%
100%
75%
Selling, general and administrative expenses
for the year ended December 31, 2016 increased 75%, to
$31.1 million (2015 – $17.8 million). The driver for the increase compared with the same period in the
prior year was the increase in share-based payments to $14.1 million from $1.5 million. Most of this
increase is related to mark-to-market effects on grants of restricted share units and deferred share units.
Excluding this effect the charge for share-based payment in 2016 would have been $6.4 million (2015 –
$5.0 million). Corporate SG&A increased 4% to $9.5 million.
Management's Discussion and Analysis, page 13
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Fourth Quarter 2016 Financial Results
Revenue
The following table summarizes the details of sales by region and component:
Provisional sales ($ million)
Caylloma
San Jose
Adjustments ($ million) *
Sales ($ million)
Silver
Provisional sales ($ million)
Metal produced (oz)
Provisional Sales (oz)
Realized Price ($/oz)**
Net Realized Price ($/oz)***
Gold
Provisional sales ($ million)
Metal produced (oz)
Provisional Sales (oz)
Realized Price ($/oz)**
Net Realized Price ($/oz)***
Lead
Provisional sales ($ million)
Metal produced (000's lbs)
Provisional Sales (000's lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
Zinc
Provisional sales ($ million)
Metal produced (000's lbs)
Provisional Sales (000's lb)
Realized Price ($/lb)**
Net Realized Price ($/lb)***
QUARTERLY RESULTS
Three months ended December 31
2016
2015
60.5
18.2
42.3
(2.6)
57.9
32.8
2,120,098
2,126,723
17.10
15.42
13.9
13,812
13,803
1,217
1,004
5.7
7,290
7,361
0.97
0.77
8.1
11,006
10,537
1.15
0.77
37.8
12.0
25.8
(0.8)
37.0
21.2
1,585,315
1,614,908
14.80
13.13
8.6
9,955
9,865
1,106
876
4.4
8,361
8,156
0.77
0.54
3.6
9,599
9,665
0.73
0.37
% Change
60%
52%
64%
-225%
56%
55%
34%
32%
16%
17%
62%
39%
40%
10%
15%
30%
-13%
-10%
26%
43%
125%
15%
9%
58%
108%
* 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
Management's Discussion and Analysis, page 14
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Sales for Q4 2016 were $57.9 million, 56% above Q4 2015 sales of $37.0 million. Silver ounces sold
increased 32%, and gold ounces sold increased 40%, while realized prices on provisional sales for silver
increased 16% to $17.10 per ounce and gold increased 10% to $1,217 per ounce.
Provisional sales at San Jose increased 64% to $42.3 million (Q4 2015 – $25.8 million) as a result of
increased silver and gold ounces sold of 42% and 40% respectively, compared with the same period in
the prior year. Provisional sales at Caylloma increased 52% to $18.2 million (Q4 2015 – $12.0 million) as
a result of higher realized prices, despite lower volumes of metal sold. For the Company, realized prices
for silver, gold, lead, and zinc increased 16%, 10%, 26%, and 9% respectively.
The Company has not hedged its exposure to metal price risks, although it has entered into zinc swap
contracts into 2017 for about half of its budgeted 2017 zinc production.
Operating income (loss) and Adjusted EBITDA
(Expressed in $ millions)
Operating income (loss)
Caylloma
San Jose
Corporate
Total
Adjusted EBITDA*
Caylloma
San Jose
Corporate
as a % of Sales
as a % of Sales
as a % of Sales
as a % of Sales
as a % of Sales
Total
Note: figures may not add due to rounding
*refer to Non-GAAP financial measures
as a % of Sales
QUARTERLY RESULTS
Three months ended
December 31
2016
2015
% Change
$ 4.5
25%
13.7
34%
(0.5)
$ 17.6
30%
$ 7.4
41%
22.5
57%
(0.5)
$ 29.4
51%
$ (26.7)
-224%
9.5
38%
(3.4)
$ (20.6)
-56%
$ 1.4
12%
12.8
51%
(3.3)
$ 11.0
30%
117%
44%
85%
185%
429%
76%
-85%
167%
During Q4 2016, operating income was $17.6 million compared to a $20.6 million loss in Q4 2015 related
to an impairment charge of $25.0 million at the Caylloma mine. At San Jose, operating income increased
44% to $13.7 million mainly as a result of 59% higher sales. Operating margin decreased four percentage
Management's Discussion and Analysis, page 15
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
points from 38% to 34% as a result of higher depreciation and depletion charges. At Caylloma, operating
income was $4.5 million compared to an operating loss of $26.7 million related to the impairment
mentioned above. Operating income was positively impacted by 50% higher sales of $6.0 million and
improved gross margin. Improved operating margin of 25% at Caylloma was the result of lower cash
costs per tonne and higher metal prices.
Adjusted EBITDA in Q4 2016 increased 167% over Q4 2015 to $29.4 million, driven by a 76% increase of
$9.7 million at San Jose and a 429% increase of $6.0 million at Caylloma. Adjusted EBITDA margin
increased significantly from 30% to 51% as a result of higher margins at both Caylloma and San Jose.
Results of Operations
San Jose Mine Review
San Jose is an underground silver-gold mine located in the state of Oaxaca in southern Mexico. The
following table shows the main variables used to measure the operating performance of the mine –
throughput, grade, recovery, gold and silver production, and unit costs.
San Jose
Mine Production
Tonnes milled
Average tonnes milled per day
Silver
Grade (g/t)
Recovery (%)
Production (oz)
Metal sold (oz)
Realized price ($/oz)
Gold
Grade (g/t)
Recovery (%)
Production (oz)
Metal sold (oz)
Realized price ($/oz)
Unit Costs
Production cash cost (US$/oz Ag)*
Production cash cost (US$/tonne)
Unit Net Smelter Return (US$/tonne)
QUARTERLY RESULTS
Three months ended
December 31
2016
273,036
3,103
2015
172,789
2,071
YEAR TO DATE RESULTS
Year ended
December 31
2016
905,467
2,596
2015
717,505
2,072
225
92
1,828,110
1,832,298
17.10
245
93
1,261,495
1,292,443
14.81
228
92
6,124,235
6,102,667
17.29
234
91
4,928,893
4,903,658
15.60
1.69
92
13,660
13,746
1,216.47
1.90
93
9,762
9,792
1,106.91
1.72
92
46,018
45,901
1,252.89
1.83
91
38,526
38,140
1,155.23
1.85
55.09
154.21
1.81
55.45
146.65
1.77
56.90
158.76
2.57
58.83
144.77
Management's Discussion and Analysis, page 16
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
All-in sustaining cash cost (US$/oz Ag)*
6.73
16.80
7.58
12.86
* Net of by-product credits from gold
Financial Information
Sales
Operating income
Adjusted EBTIDA
Sustaining capital expenditures
Non-sustaining capital expenditures
Brownfields exploration expenditures
Annual results
QUARTERLY RESULTS
Three months ended
December 31
2016
$ 39,843
13,685
22,525
2,522
206
1,625
2015
$ 24,968
9,516
12,885
15,719
6,506
461
YEAR TO DATE RESULTS
Year ended
December 31
2016
$ 143,151
55,561
81,146
12,260
17,808
6,705
2015
$ 100,926
34,242
50,088
35,840
9,397
3,513
Silver and gold annual production for 2016 increased 24% and 19% respectively to 6,124,235 and 46,018
ounces of silver and gold respectively above the prior year’s production. The increases were the result of
higher throughput of 26% and higher recoveries of 1 percentage point for both silver and gold offset by
lower head grades of 3% for gold and 6% for silver. Silver and gold annual production were 4% and 10%
above 2016 guidance.
Cash cost per tonne of processed ore for 2016 was $56.90 (refer to non-GAAP financial measures), or 3%
below the cost in the prior year. Cash cost in the second half of 2016 was $55.0 compared to $59.8 in the
first half of the year reflecting the positive impact on unit costs of the expanded plant capacity
commissioned in July. Cash cost per tonne for 2016 of $56.90 was in line with guidance for the year as a
result of an average exchange rate 19% above our assumption for cost guidance, offset by higher costs
related to the filtration plant. Excluding this effect, the cash cost would have been 7% above guidance.
All-in sustaining cash cost per payable ounce of silver, net of by-product credits, was $7.58 for 2016 (refer
to non-GAAP financial measures), and below the annual guidance of $9.10 as a result of by-product
credits and lower execution of sustaining capital expenditures.
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).
Quarterly results
Silver production increased 45% to 1,828,110 ounces, and gold production increased 40% to 13,660
ounces in Q4 2016 compared with the same period in the prior year. Throughput increased 58%, and
head grades were 8% and 11% lower for silver and gold, respectively. See sales information for details on
metal sold. Silver and gold production in Q4 2016 were 4% and 8% above budget, respectively.
Management's Discussion and Analysis, page 17
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Cash cost per tonne of processed ore for 4Q 2016 was $55.09 (refer to non-GAAP financial measures), in
Processing plant expansion to 3,000 tonnes per day ("tpd")
line with the cost in the same period in the prior year.
The expansion of the mill capacity to 3,000 tpd from 2,000 tpd has concluded successfully on time and
under budget. As of the first of July 2016, the processing plant and mine were fully operational at 3,000
tpd; allowing for an annual production rate of 7-8 million ounces of silver and 50-53 thousand ounces of
gold. The capital expenditure of the plant expansion was $27.5 million, 16% below budget. (see Fortuna
news releases dated December 17, 2014, August 12, 2015, October 15, 2015, December 16, 2015, April
13, 2016, and July 6, 2016).
Management's Discussion and Analysis, page 18
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Caylloma Mine Review
Caylloma is an underground silver, lead, and zinc mine located in the Arequipa Department in southern
Peru. Its commercial products are silver-lead and zinc concentrates. The table below shows the main
variables used to measure the operating performance of the mine.
Caylloma
Mine Production
Tonnes milled
Average tonnes milled per day
Silver
Grade (g/t)
Recovery (%)
Production (oz)
Metal sold (oz)
Realized price ($/oz)
Gold
Grade (g/t)
Recovery (%)
Production (oz)
Metal sold (oz)
Realized price ($/oz)
Lead
Grade (%)
Recovery (%)
Production (000's lbs)
Metal sold (000's lbs)
Realized price ($/lb)
Zinc
Grade (%)
Recovery (%)
Production (000's lbs)
Metal sold (000's lbs)
Realized price ($/lb)
QUARTERLY RESULTS
Three months ended
December 31
2016
135,121
1,501
2015
117,776
1,309
YEAR TO DATE RESULTS
Year ended
December 31
2016
514,828
1,438
2015
466,286
1,306
82
82
291,988
294,425
17.11
103
83
323,820
322,465
14.75
90
84
1,255,981
1,274,842
16.96
136
83
1,695,742
1,715,126
15.80
0.21
17
152
57
1,277
2.60
94
7,290
7,361
0.97
4.06
91
11,006
10,537
1.15
0.22
23
193
73
1,031
3.38
95
8,361
8,156
0.77
4.09
90
9,599
9,665
0.73
0.20
16
533
57
1,277
3.06
94
32,673
33,187
0.84
4.25
90
43,204
43,041
0.95
(6.78)
71.89
126.91
0.26
30
1,163
1,070
1,192
2.47
94
23,835
23,361
0.80
3.84
91
35,829
35,934
0.87
6.60
85.76
117.58
Unit Costs
Production cash cost (US$/oz Ag)*
Production cash cost (US$/tonne)
Unit Net Smelter Return (US$/tonne)
(14.59)
71.15
136.92
6.57
81.77
103.17
Management's Discussion and Analysis, page 19
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
All-in sustaining cash cost (US$/oz Ag)*
1.72
16.47
4.34
13.56
* Net of by-product credits from gold, lead and zinc
Financial Information
Sales
Operating income (loss)
Adjusted EBTIDA
Sustaining capital expenditures
Non-sustaining capital expenditures
Brownfields exploration expenditures
Annual results
QUARTERLY RESULTS
Three months ended
December 31
2016
$ 18,023
4,458
7,408
2,807
247
605
2015
$ 12,045
(26,718)
1,335
2,209
2,198
100
YEAR TO DATE RESULTS
Year ended
December 31
2016
$ 67,104
16,470
25,174
7,589
2,860
1,216
2015
$ 53,803
(24,776)
10,005
7,137
2,339
452
Lead and zinc annual production for 2016 increased 37% and 21% to 32.7 million and 43.2 million lbs
respectively, offset by silver and gold annual production which decreased 26% and 54% respectively to
1.3 million and 533 ounces of silver and gold respectively below the prior year’s production. The changes
were the result of higher head grades of 24% for lead and 11% for zinc offset by lower head grades of
23% for gold and 34% for silver. Compared to 2016 guidance, silver was 5% above, while gold, lead, and
zinc were 41%, 23%, and 1% below.
Cash cost per tonne of processed ore for 2016 was $71.89 (refer to non-GAAP financial measures), a
decrease of 16% from the same period in the prior year mainly related to lower mining costs as result of
the cessation of mining in the narrow high grade silver veins, lower indirect costs related to headcount,
and the plant optimization.
Cash cost per tonne for 2016 of $71.89 was 9% below our guidance, as a result of lower mining costs and
lower distribution costs related to lower lead concentrate production.
All-in sustaining cash cost per payable ounce of silver, net of by-product credits, was $4.34 for 2016 (refer
to non-GAAP financial measures), and below the annual guidance of $12.50 as a result of by-product
credits and lower unit cash cost.
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).
Quarterly results
Silver production in Q4 2016 was 0.29 million ounces compared with 0.32 million ounces in the same
period of the prior year. Zinc production was 15% higher as a result of 14% higher throughput and lead
production was 13% lower as a result of lower head grade. Silver production in Q4 2016 was 5% above
Management's Discussion and Analysis, page 20
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
forecast. Lead production was 26% below forecast due to lower head grade, and zinc production met our
2016 forecast.
Increase in throughput in Q4 2016 to 1,501 tpd compared to 1,309 tpd in Q4 2015, is a result of the plant
optimization achieved at the end of March 2016.
Cash cost per tonne of processed ore at Caylloma for Q4 2016 was $71.15 (refer to non-GAAP financial
measures), a decrease of 13% from the same period in the prior year mainly due to lower mining,
processing, and distribution costs.
Acquisition of Goldrock
On July 28, 2016, Fortuna Silver Mines Inc. acquired all the issued and outstanding common shares of
Goldrock Mines Corp. ("Goldrock"), a public company listed on the TSX Venture Exchange, by issuing
14,569,045 common shares, and 1,514,677 warrants exercisable at C$6.01 per common share and
expiring on October 31, 2018.
Goldrock ceased to be a reporting issuer effective August 12, 2016.
The Lindero Project
Lindero is an open pit, heap leach gold project with a completed 2016 feasibility study that has been
granted all environmental and other major permits necessary for development.
The Lindero Project is located in the Argentinian puna at an elevation of approximately 3,500 to 4,000
meters, 260 kilometers due west of Salta City. Drive time from Salta City to Lindero is approximately 7 to
7.5 hours over a road distance of 420 kilometers.
The Lindero deposit is a gold-rich porphyry system with minor content of copper. Based on the 2016
feasibility study Lindero is projected to be an 18,500 tpd open pit mine, with the following parameters for
life-of-mine; head grade of 0.63 g/t, strip ratio of 1.22, and gold production of 1.15 million oz Au.
Fortuna is currently conducting additional metallurgical testing and process design review with the aim
of optimizing the project and mitigating certain sources of potential design and operational risk. We are
working to advance the project to a construction decision by the third quarter of 2017.
Management's Discussion and Analysis, page 21
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Quarterly Information
The following table provides information for eight fiscal quarters up to December 31, 2016:
Q4 2016
Dec 31,
2016
57,866
20,721
17,607
6,513
Q3 2016
Sep 30,
2016
(restated)
65,212
28,414
21,160
10,157
Expressed in $000's, except per share data
Quarters ended
Q2 2016
Jun 30,
2016
Q1 2016
Mar 31,
2016
Q4 2015
Dec 31,
2015
Q3 2015
Sep 30,
2015
Q2 2015
Jun 30,
2015
Q1 2015
Mar 31,
2015
44,485
15,917
3,641
(1,390)
42,692
15,554
6,134
2,578
37,013
10,332
(20,572)
(17,290)
39,041
10,333
6,138
2,592
38,871
10,402
4,803
236
39,804
12,581
7,961
3,854
Sales
Mine operating earnings
Operating income (loss)
Net income (loss)
Basic EPS
Diluted EPS
0.04
0.05
0.08
0.07
(0.01)
(0.01)
0.02
0.02
(0.13)
(0.13)
0.02
0.02
0.00
0.00
0.03
0.03
Total assets
Long term bank loan
Other liabilities
562,914
39,768
543,356
39,633
387,713
39,568
392,165
39,531
379,654
39,486
398,648
39,487
392,488
39,470
351,260
–
3,544
5,241
4,798
2,889
4,620
4,353
5,701
4,578
The Company's total assets increased substantially the third quarter of 2016 as a result of our acquisition
of the Lindero Project.
During the fourth quarter 2016, the Company had determined that the warrants issued as part of the
consideration for the Goldrock acquisition was in classified as a liability in error when the warrants
should have been classified as a Reserve, a component of shareholders' equity. As a result, the Company
reclassified the initial fair value of the warrants of $7.4 million from liability to reserve and reduced its
third quarter 2016 earnings by $1.7 million relating to the reversal of unrealized gain on financial assets
carried at fair value. Basic earnings per share decreased $0.02 to $0.07 and there was no change to
diluted earnings per share. There was no impact on the condensed consolidated interim statements of
cash flows.
Non-GAAP Financial Measures
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; and adjusted EBITDA.
Management's Discussion and Analysis, page 22
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
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 under IFRS 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 International Financial Reporting Standards as issued by the IASB (“GAAP” or “IFRS”).
To facilitate a better understanding of these measures as calculated by the Company, descriptions and
reconciliations are provided here.
Cash Cost per Payable Ounce of Silver and Cash Cost per Tonne of Processed Ore (Non-GAAP
Financial Measures)
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
and year ended December 31, 2016 and 2015 (“Q4 2016” and “2016”, and “Q4 2015” and “2015”,
respectively):
Management's Discussion and Analysis, page 23
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
US$ 000's
Cost of sales
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
Cash cost
Add (subtract):
By-product credits from gold, lead and zinc
Refining charges
Cash cost applicable per payable ounce
Payable ounces of silver production
A
A
B
C
CONSOLIDATED MINE CASH COST
Q4 2016
YTD
Q4 2016
Q4 2015
YTD
Q4 2015
37,145
129,649
26,681
111,081
245
(92)
(172)
(9)
(262)
64
57
(38)
(708)
(1,637)
(10,297)
24,656
(2,500)
(5,715)
(32,717)
88,536
(464)
(719)
(6,089)
19,211
(1,350)
(2,654)
(24,893)
82,203
24,656
88,536
19,211
82,203
(27,812)
2,374
(782)
(94,577)
8,434
2,393
(16,676)
1,672
4,207
(66,600)
7,169
22,772
2,044,674 7,108,170
1,518,664 6,342,693
Cash cost per ounce of payable silver ($/oz)
=B/C
$ (0.38)
$ 0.34
$ 2.77
$ 3.59
Management's Discussion and Analysis, page 24
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
US$ 000's
Cost of sales
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
Total processed ore (tonnes)
A
B
SAN JOSE MINE CASH COST
Q4 2016
YTD
Q4 2016
Q4 2015
YTD
Q4 2015
24,883
82,399
14,175
60,968
134
(55)
425
(172)
(292)
85
(396)
105
(435)
(1,407)
(8,078)
15,042
(1,627)
(4,742)
(24,759)
51,524
(318)
(670)
(3,399)
9,581
(669)
(2,269)
(15,527)
42,212
273,036
905,468
172,789
717,505
Cash cost per tonne of processed ore ($/t)
=A/B
$ 55.09
$ 56.90
$ 55.45
$ 58.83
Cash cost
Add (subtract):
By-product credits from gold, lead and zinc
Refining charges
Cash cost applicable per payable ounce
Payable ounces of silver production
A
B
C
15,042
51,524
9,581
42,212
(13,763)
1,986
3,265
(47,670)
6,623
10,477
(8,605)
1,211
2,187
(34,803)
4,732
12,141
1,767,286 5,914,989
1,211,035 4,731,738
Cash cost per ounce of payable silver ($/oz)
=B/C
$ 1.85
$ 1.77
$ 1.81
$ 2.57
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
29.81
15.81
6.15
0.39
2.93
55.09
30.41
15.42
6.67
1.08
3.32
56.90
33.20
8.34
8.21
1.33
4.37
55.45
32.37
13.02
7.92
1.15
4.37
58.83
Management's Discussion and Analysis, page 25
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
US$ 000's
Cost of sales
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
Total processed ore (tonnes)
Cash cost per tonne of processed ore ($/t)
Cash cost
Add (subtract):
By-product credits from gold, lead and zinc
Refining charges
Cash cost applicable per payable ounce
Payable ounces of silver production
Cash cost per ounce of payable silver ($/oz)
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
A
B
=A/B
A
B
C
=B/C
CAYLLOMA MINE CASH COST
Q4 2016
12,262
YTD
Q4 2016
47,250
Q4 2015
12,506
YTD
Q4 2015
50,113
111
(37)
(597)
163
30
(21)
453
(143)
(273)
(230)
(2,219)
9,614
135,121
$ 71.15
9,614
(873)
(973)
(7,958)
37,012
514,829
$ 71.89
37,012
(146)
(49)
(2,690)
9,630
117,776
$ 81.77
9,630
(681)
(385)
(9,366)
39,991
466,286
$ 85.76
39,991
(46,907)
(14,049)
1,811
388
(4,047)
(8,084)
277,388 1,193,181
$ (6.78)
$ (14.59)
35.34
34.76
12.51
12.64
15.27
16.18
0.20
0.23
8.57
7.34
71.89
71.15
(8,071)
461
2,020
(31,797)
2,437
10,631
307,629 1,610,955
$ 6.60
43.83
14.66
18.80
0.36
8.11
85.76
$ 6.57
38.68
15.40
17.23
0.50
9.96
81.77
All-in Sustaining Cash Cost and All-in Cash Cost per Payable Ounce of Silver (Non-GAAP
Financial Measure)
We believe that “all-in sustaining cash cost” and “all-in cash cost” 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. The Company conforms its all-in sustaining definition to that set out in the guidance issued by
the World Gold Council (“WGC,” a non-regulatory market development organization for the gold industry
whose members comprise global senior gold mining companies).
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
Management's Discussion and Analysis, page 26
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
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 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. We believe 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. We
report 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 year ended December 31, 2016 and 2015 –
Management's Discussion and Analysis, page 27
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
US$ 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
Brownfields exploration expenditures
All-in sustaining cash cost
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
1
1
1
US$ 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 expenditures
Brownfields exploration expenditures
All-in sustaining cash cost
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
1
1
1
CONSOLIDATED MINE ALL-IN CASH COST
Q4 2016
(782)
2,383
2,036
YTD
Q4 2016
2,393
6,718
7,085
Q4 2015
4,207
483
904
YTD
Q4 2015
22,772
3,294
3,318
1,073
4,710
6,079
22,275
1,339
6,933
6,408
35,792
2,725
5,329
2,230
14,994
1,997
16,991
9,538
19,849
7,921
59,583
22,959
82,542
2,044,674 7,108,170
8.38
11.61
7.33
8.31
1,947
17,928
561
27,369
8,704
36,073
9,122
42,977
3,965
91,856
11,736
103,592
1,518,664 6,342,693
14.48
16.33
18.02
23.75
SAN JOSE MINE ALL-IN CASH COST
Q4 2016
3,265
2,110
1,765
YTD
Q4 2016
10,477
5,845
5,934
Q4 2015
2,187
337
837
YTD
Q4 2015
12,141
2,613
2,836
600
7,740
2,522
1,625
11,887
206
12,093
3,632
25,888
12,260
6,705
44,853
17,808
62,661
3,917
21,507
35,840
3,513
60,860
9,397
70,257
1,767,286 5,914,989 1,211,035 4,731,738
12.86
14.85
803
4,164
15,719
461
20,344
6,506
26,850
7.58
10.59
16.80
22.17
6.73
6.84
presented on a cash basis
Management's Discussion and Analysis, page 28
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
US$ 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 expenditures
Brownfields exploration expenditures
All-in sustaining cash cost
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
1
1
1
CAYLLOMA MINE ALL-IN CASH COST
Q4 2016
(4,047)
273
268
572
(2,934)
2,807
605
478
247
725
277,388
1.72
2.61
YTD
Q4 2016
(8,084)
873
1,142
2,447
(3,622)
7,589
1,216
5,183
2,860
8,043
1,193,181
4.34
6.74
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
presented on a cash basis
Management's Discussion and Analysis, page 29
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Adjusted Net Income (Non-GAAP Financial Measures)
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 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 IFRS, and
therefore the Company’s definitions are unlikely to be comparable to similar measures presented by
other companies.
Expressed in $'000's
NET INCOME FOR THE PERIOD
Items of note, net of tax:
Unrealized gain on financial instruments
Write-off of mineral properties
Impairment of mineral properties, plant and
equipment
Impairment of inventories
Other operating income - other
Adjusted Net Income (a non-GAAP measure)
ADJUSTED NET INCOME
Three months ended
December 31
2016
$ 6,513
2015
$ (17,290)
Year ended
December 31
2016
$ 17,858
2015
$ (10,608)
1,264
791
–
190
–
$ 8,758
–
–
(742)
791
–
–
17,000
398
(57)
$ 51
–
190
–
$ 18,097
17,000
398
(57)
$ 6,733
The Company uses other financial measures whose presentation is not meant to be a substitute for other
subtotals or totals presented in accordance with 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 measures presented by other companies. The Company believes
that its presentation provides useful information for investors.
Management's Discussion and Analysis, page 30
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Operating Cash Flow per Share Before Changes in Working Capital (Non-GAAP Financial
Measures)
OPERATING CASH FLOW PER SHARE BEFORE
CHANGES IN WORKING CAPITAL
$ 000's
Net income for the period
Items not involving cash
Income taxes paid
Interest expense paid
Interest income received
Cash generated by operating activities before changes
in working capital
Divided by
Weighted average number of shares ('000's)
Operating cash flow per share before changes in
working capital
Three months ended
December 31
2016
2015
$ 6,513 $ (17,290)
22,264
28,777
(5,372)
(720)
49
27,634
10,344
(367)
(417)
86
Year ended
December 31
2016
2015
$ 17,858 $ (10,608)
59,796
49,188
(17,846)
(1,110)
354
63,693
81,551
(17,513)
(2,028)
289
$ 22,734
$ 9,646
$ 62,299
$ 30,586
146,454
129,133
136,888
129,001
$ 0.16
$ 0.07
$ 0.46
$ 0.24
Management's Discussion and Analysis, page 31
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Adjusted EBITDA (Non-GAAP Financial Measure)
(a non-GAAP financial measure)
$ 000's
Net Income
Add back:
ADJUSTED EBITDA
Three months ended
December 31
2016
Year ended
December 31
2015
2016
2015
$ 6,513
$ (17,290)
$ 17,858 $ (10,608)
Net finance items
Depreciation, depletion, and amortization
Income taxes
Impairment of mineral properties
Other operating expenses
69
10,414
11,025
–
1,424
667
6,263
(3,949)
25,000
321
1,431
33,024
29,252
–
1,420
1,547
25,739
7,391
25,000
550
Adjusted EBITDA
$ 29,445
$ 11,012
$ 82,985
$ 49,619
During the fourth quarter ended December 31, 2016, the Company revised its EBITDA calculation
methodology to exclude share-based payments charges. For the three and twelve months ended
December 31, 2015 the adjustments were $1.5 million, and $1.0 million, respectively; and for the three
and twelve months ended December 31, 2016, the adjustments were $(2.2) million, and $14.1 million,
respectively. The change in the calculation methodology will improve the comparability of our reported
adjusted EBITDA with that of other mining companies.
Management's Discussion and Analysis, page 32
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
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, but manage the
Company's capital structure and adjust 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, 2016, totaled $82.5 million (December 31,
2015 – $72.2 million), and its short term investments totaled $41.1 million (December 31, 2015 – $36.0
million).
Fourth Quarter 2016 Liquidity and Capital Resources
During the three months ended December 31, 2016, cash and cash equivalents increased by $17.8 million
(Q4 2015 – an increase of $5.0 million), and comprised the following:
(Expressed in $ millions)
Net cash provided by operating activities
Net cash used in by investing activities
Net cash provided by financing activities
Note: Figures may not add due to rounding
Increase in cash and cash equivalents
Three months ended December 31
2016
2015
$ 25.8 $ 23.2
(18.3)
(12.0)
0.1
4.0
$ 5.0
$ 17.8
Change
$ 2.6
6.3
3.9
$ 12.8
Change %
11%
-34%
3900%
256%
During the quarter ended December 31, 2016, the cash provided by our operating activities reflects the
positive impact of our second full quarter at the expanded capacity of 3,000 tonnes per day at San Jose
mine, higher silver and gold prices, and good cost execution at both our mines.
During the three months ended December 31, 2016 and 2015, net cash provided by or used in investing
activities comprised the following:
(Expressed in $ millions)
Purchase of short term investments
Redemptions of short term investments
Expenditures on mineral properties, plant and equipment
Deposits on non-current assets, net
Note: Figures may not add due to rounding
Net cash used in by investing activities
INVESTING ACTIVITIES
Three months ended December 31
2015 Change
2016
$ 9.2
$ (4.5)
(18.3)
2.0
16.1
(9.5)
(0.8)
–
$ 6.3
$ (12.0)
$ (13.7)
20.3
(25.6)
0.8
$ (18.3)
Change %
67%
-90%
63%
-100%
34%
Management's Discussion and Analysis, page 33
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Expenditures on mineral properties, and plant and equipment during the quarter amounted to $9.5
million as follows:
(Expressed in $ millions)
EXPENDITURES ON PROPERTY, PLANT AND EQUIPMENT
Three months ended December 31, 2016
Plant and equipment
Dry stack tailings deposit project and
disposal
Equipment and infrastructure
Plant expansion
Infill drilling
Mine development
Brownfields exploration
Greenfields exploration
Transfer from deposits on non-current
assets
Note: Figures may not add due to rounding
Corporate Caylloma
$ 0.8
$ 0.2
–
$ 0.2
–
–
–
–
–
–
$ 0.2
–
$ 0.8
–
–
2.1
0.6
0.2
–
$ 3.7
San Jose Lindero Consolidated
$ 0.9 $ –
0.2
–
$ 1.1 $ –
–
–
–
1.3
–
0.1
0.2
1.2
1.6
0.1
0.1
$ 4.4
–
$ 1.3
$ 1.9
0.2
$ 2.1
0.1
0.2
3.3
3.5
0.3
0.1
$ 9.5
The main financing activity during the quarter was $4.5 million related to the exercise of stock options
and warrants, an increase of $4.3 million from Q3 2015.
2016 Liquidity and Capital Resources
Working capital during the year ended December 31, 2016 increased $18.7 million, to $112.6 million from
$93.9 million at December 31, 2015.
For the year ended December 31, 2016 and 2015, cash and cash equivalents increased $10.2 million
(2015 – increased $29.7 million) and comprised the following:
(Expressed in $ millions)
Net cash provided by operating activities
Net cash used in by investing activities
Net cash provided by financing activities
Note: Figures may not add due to rounding
Increase in cash and cash equivalents
Year ended December 31
2015
2016
$ 52.7 $ 54.8
(66.4)
(51.3)
41.3
8.8
$ 10.2 $ 29.7
Change
$ (2.1)
15.1
(32.5)
$ (19.5)
Change %
-4%
-23%
-79%
-66%
Management's Discussion and Analysis, page 34
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
During the year ended December 31, 2016 and 2015, net cash provided by or used in investing activities
comprised the following:
(Expressed in $ millions)
Purchase of Lindero project
Purchase of short term investments
Redemptions of short term investments
Purchase of marketable securities
Expenditures on mineral properties, plant and equipment
Deposits on non-current assets, net
Note: Figures may not add due to rounding
Net cash used in by investing activities
INVESTING ACTIVITIES
Year ended December 31
2015 Change
$ (4.9)
48.6
(51.1)
(1.2)
16.9
6.7
$ 15.1
$ –
(95.5)
92.9
–
(57.1)
(6.7)
$ (66.4)
Change %
--
-51%
-55%
--
-30%
-100%
-23%
2016
$ (4.9)
(46.9)
41.8
(1.2)
(40.2)
–
$ (51.3)
Cash expenditures directly related to the purchase of the Lindero project during the year amounted to
$4.9 million.
Expenditures on mineral properties, and plant and equipment during the year amounted to $40.2 million
as follows:
(Expressed in $ millions)
Plant and equipment
Dry stack tailings deposit project and
disposal
Equipment and infrastructure
Plant expansion
Infill drilling
Mine development
Brownfields exploration
Greenfields exploration
Transfer from deposits on non-current
assets
Note: Figures may not add due to rounding
EXPENDITURES ON PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 2016
San Jose
$ 2.9
Corporate Caylloma
$ 1.5
Lindero Consolidated
$ 4.7
$ –
$ 0.3
–
$ 0.3
–
–
–
–
–
–
$ 0.3
–
$ 1.5
–
–
5.9
1.2
0.4
2.2
$ 5.1
17.6
1.7
5.4
6.7
0.2
–
$ –
–
–
–
2.0
–
2.2
$ 6.8
17.6
1.7
11.3
9.9
0.6
–
$ 9.0
(7.8)
$ 28.9
–
$ 2.0
(7.8)
$ 40.2
Management's Discussion and Analysis, page 35
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Contractual Obligations
The Company expects the following maturities of its financial liabilities (including interest), finance
leases, and other contractual commitments:
Trade and other payables
Bank loan
Derivative liabilities
Income tax payable
Finance lease obligations
Other liabilities
Operating leases
Provisions
Expected payments due by period as at December 31, 2016
Less than
1 year
$ 40,160
–
254
14,447
2,189
–
431
1,154
$ 58,635
1 - 3 years
$ –
40,000
–
–
912
3,544
360
2,728
$ 47,544
4 - 5 years
$ –
–
–
–
–
–
82
5,172
$ 5,254
After
5 years
$ –
–
–
–
–
–
–
5,174
$ 5,174
Total
$ 40,160
40,000
254
14,447
3,101
3,544
873
14,228
$ 116,607
Operating leases includes leases for office premises and for computer and other equipment used in the
normal course of business.
Bank Letter of Guarantee
The Caylloma Mine closure plan was updated in August 2015, with total closure costs of $7,770,
consisting of progressive closure activities of $3,604, final closure activities of $3,594, and post-closure
activities of $573. Pursuant to the closure regulations, the Company is required to lodge the following
guarantees with the government:
•
•
•
•
2017 – $3,179
2018 – $3,908
2019 – $4,705
2020 – $5,641
Scotiabank Peru, a third party, has established a bank letter of guarantee in the amount of $3,179 (2015–
$2,495), on behalf of Bateas in favor of the Peruvian mining regulatory agency, in compliance with local
regulation and to collateralize Bateas’ mine closure plan. This bank letter of guarantee expires on
December 31, 2017.
On November 21, 2016, we submitted to the Peruvian mining regulatory agency an update of the mine
closure plant related to the San Cristobal mining unit and the Huayllacho processing plan, in order to
incorporate new mining components. This update is currently pending approval.
Management's Discussion and Analysis, page 36
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Capital Commitments
As at December 31, 2016, the Company had the following capital commitments, expected to be expended
within one year:
•
•
•
•
$2,172 for the dry stack tailing dam at the San Jose property,
$175 for the plant at the Caylloma property,
$532 for drilling at the Lindero property,
$530 for testing, and consulting at the Lindero property.
Other Commitments
As at December 31, 2016, the expected payments due by period are as follows –
Expressed in $'000's
Expected payments due by period as at December 31, 2016
Less than
1 year
$ 65
141
84
$ 290
72
69
$ 141
–
$ –
$ 431
1 - 3 years
$ 141
–
129
$ 270
27
45
$ 72
18
$ 18
$ 360
4 - 5 years
$ –
–
82
$ 82
–
–
$ –
–
$ –
$ 82
Total
$ 206
141
295
$ 642
99
114
$ 213
18
$ 18
$ 873
Office premises - Canada
Office premises - Peru
Office premises - Argentina
Total office premises
Computer equipment - Peru
Computer equipment - Mexico
Total computer equipment
Machinery - Mexico
Total machinery
Total operating leases
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 which 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.
Management's Discussion and Analysis, page 37
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Peru
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 $1,033 and $657, respectively, for a total of $1,690.
The Company is appealing these assessments.
The Company has provided a guarantee by way of a letter bond in the amount of $793.
Mexico
During 2015, the Company’s foreign trade operations for tax years 2011 to 2014 were reviewed by the
Mexican Tax Administration Service ("SAT") and faced an administrative customs procedure ("PAMA")
for specific temporary import documents (pediments). On October 27, 2015, the SAT issued an
assessment regarding the Company’s foreign trade operations for tax years 2011 to 2014, and denied
certain claims, which resulted in the following assessments totaling $198 (the "tax credit"):
$30 in general import tax, $90 in VAT, and $5 custom management tax, and
associated fines of $73
On December 11, 2015, the Company established a security bond in the amount of $211 in favor of PAMA
to collateralize this tax credit of $198. This security bond has to be updated on December 10, 2016. On
January 21, 2016, the Company presented its arguments before the Mexican Federal Court for the
nullification and voidance of the tax credit (the “Company claim”). On August 18, 2016, the Mexican
Federal Court issued a first instance resolution declaring the nullity and voidance of the tax assessment.
The Tax authority has the right to appeal the first instance resolution, which appeal is still pending.
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 is expected to have a material effect
on the results of operations or financial conditions of the Company.
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.
Management's Discussion and Analysis, page 38
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Adoption of New Accounting Standards
The following standards or amendments were adopted effective January 1, 2016. They had no significant
impact on the financial position, results of operations, or cash flows of the Company previously reported.
•
•
•
•
•
IAS 1 «Presentation of Financial Statements» (Amendment)
IFRS 11 «Joint Arrangements» (Amendment)
IAS 16 «Property, Plant and Equipment» (Amendment)
IAS 38 «Intangible Assets» (Amendment)
Annual Improvements 2012-2014 Cycle
The following are new or revised standards which we expect may be applicable to the Company. We are
currently assessing the impact on the financial position, results of operations, and cash flows of the
Company resulting from these new or revised standards.
Amendments to IAS 12
Recognition of Deferred Tax Assets
for Unrealized Losses
Applicable to the Company
commencing in the 2017 fiscal year.
Amendments to IAS 7
Disclosure Initiative
Applicable to the Company
commencing in the 2017 fiscal year.
IFRS 9 «Financial Instruments»
Applicable to the Company
commencing in the 2018 fiscal year.
•
Amends IAS 12 «Income Taxes» to clarify the following aspects:
•
•
•
Unrealized losses on debt instruments measured at fair value
and measured at cost for tax purposes give rise to a deductible
temporary difference regardless of whether the debt
instrument's holder expects to recover the carrying amount of
the debt instrument by sale or by use.
The carrying amount of an asset does not limit the estimation
of probable future taxable profits.
Estimates for future taxable profits exclude tax deductions
resulting from the reversal of deductible temporary
differences.
An entity assesses a deferred tax asset in combination with
other deferred tax assets. Where tax law restricts the
utilization of tax losses, an entity would assess a deferred tax
asset in combination with other deferred tax assets of the
same type.
Amends IAS 7 «Statement of Cash Flows» to clarify that entities
shall provide disclosures that enable users of financial statements
to evaluate changes in liabilities arising from financing activities.
Contains accounting requirements for financial instruments, and
replaces IAS 39 «Financial Instruments: Recognition and
Measurement». The new standard contains requirements in the
•
following areas:
Classification and measurement. Financial assets are classified
Management's Discussion and Analysis, page 39
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
by reference to the business model within which they are held
and their contractual cash flow characteristics. The new
standard introduces a 'fair value through other
comprehensive income' category for certain debt instruments.
Financial liabilities are classified in a similar manner to under
IAS 39, however there are differences in the requirements
applying to the measurement of an entity's own credit risk.
Impairment. The new standard introduces an 'expected credit
loss' model for the measurement of the impairment of
financial assets, so it is no longer necessary for a credit event
to have occurred before a credit loss is recognized
Hedge accounting. Introduces a new hedge accounting model
that is designed to be more closely aligned with how entities
undertake risk management activities when hedging financial
and non-financial risk exposures
Derecognition. The requirements for the derecognition of
financial assets and liabilities are carried forward from IAS 39.
•
•
•
IFRS 15 provides a single, principles based five-step model to be
applied to all contracts with customers.
The new standard provides guidance on topics such as the point
in which revenue is recognized, accounting for variable
consideration, costs of fulfilling and obtaining a contract and
various related matters. New disclosures about revenue and
contract costs are also introduced.
IFRS 15 «Revenue from Contracts
with Customers»
Applicable to the Company
commencing in the 2018 fiscal year.
Amendments to IFRS 2
Classification and Measurement of
Share-based Payment Transactions
Applicable to the Company
commencing in the 2018 fiscal year.
IFRS 16 «Leases»
Applicable to the Company
commencing in the 2019 fiscal year.
Amends IFRS 2 «Share-based Payment» to clarify the standard in
relation to the accounting for cash-settled share-based payment
transactions that include a performance condition, the
classification of share-based payment transactions with net
settlement features, and the accounting for modifications of
share-based payment transactions from cash-settled to equity-
settled.
IFRS 16 specifies how the Company should recognize, measure,
present and disclose leases. The new standard provides a single
lessee accounting model, requiring lessees to recognize assets and
liabilities for all leases unless the lease term is 12 months or less
or the underlying asset has a low value.
IFRIC 22 «Foreign Currency
Transactions and Advance
Consideration»
Addresses foreign currency transactions or parts of transactions
•
where:
there is consideration that is denominated or priced in a
Management's Discussion and Analysis, page 40
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Applicable to the Company
commencing in the 2018 fiscal year.
•
•
foreign currency;
the entity recognizes a prepayment asset or a deferred income
liability in respect of that consideration, in advance of the
recognition of the related asset, expense or income; and
the prepayment asset or deferred income liability is non-
monetary.
Critical Accounting Estimates and Assumptions
Many of the amounts included in the consolidated financial statements require management to make
judgments and/or estimates. These judgments and estimates are continuously evaluated and are based
on management’s experience and knowledge of the relevant facts and circumstances. Areas where critical
accounting estimates and assumptions have the most significant effect on the amounts recognized in the
consolidated financial statements include:
Mineral Reserves and Resources and the Life of Mine Plan
We estimate our mineral reserves and mineral resources in accordance with the Canadian Securities
Administrators’ National Instrument 43-101 Standards of Disclosure for Mineral Projects requirements.
Estimates of the quantities of mineral reserves and mineral resources form the basis for our life of mine
plans, which are used for the calculation of depletion expense under the units of production method,
impairment tests, and forecasting the timing of the payments related to the environmental rehabilitation
provision.
Significant estimation is involved in determining the reserves and resources included within our life of
mine plans. Changes in forecast prices of commodities, exchange rates, production costs or recovery rates
may result in our life of mine plan being revised and such changes could impact depletion rates, asset
carrying values and our environmental rehabilitation provision. As at December 31, 2016 we have used
the following long term prices for our reserve and resource estimations and life of mine plans: Gold
$1,150/oz, Silver $19/oz.
In addition to the estimates above, estimation is involved in determining the percentage of resources
ultimately expected to be converted to reserves and hence included in our life of mine plans. Our life of
mine plans include a portion of inferred resources as we believe this provides a better estimate of the
expected life of mine for certain type of deposits, in particular for vein type structures. The percentage of
inferred resources out of the total tonnage included in the life of mine plans is based on site specific
geological, technical, and economic considerations. Estimation of future conversion of resources is
inherently uncertain and involves judgement and actual outcomes may vary from these judgments and
estimates and such changes could have a material impact on the financial results. Some of the key
judgements in the estimation process include; geological continuity; stationarity in the grades within
defined domains; reasonable geotechnical and metallurgical conditions; treatment of outlier (extreme)
values; cut-off grade determination, and the establishment of geostatistical and search parameters.
Revisions to these estimates are accounted for prospectively in the period in which the change in estimate
arises.
Management's Discussion and Analysis, page 41
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
See note 4 (g)(i) of the consolidated financial statements.
Valuation of mineral properties and exploration properties
The Company carries its mineral properties at cost less accumulated depletion and any accumulated
provision for impairment. The Company expenses exploration costs which are related to specific projects
until commercial feasibility of the project is determinable. The costs of each property and related
capitalized development expenditures are depleted over the economic life of the property on a units-of-
production basis. Costs are charged to the consolidated statement of income (loss) when a property is
abandoned or when there is a recognized impairment in value.
The Company undertakes a review of the carrying values of mining properties and related expenditures
whenever events or changes in circumstances indicate that their carrying values may exceed their
estimated net recoverable amounts determined by reference to estimated future operating results and
discounted net cash flows. Where previous impairment has been recorded, the Company analyzes any
impairment reversal indicators. An impairment loss is recognized when the carrying value of those assets
is not recoverable. In undertaking this review, management of the Company is required to make
significant estimates of, amongst other things, future production and sale volumes, metal prices, foreign
exchange rates, Mineral Resource and Reserve quantities, future operating and capital costs and
reclamation costs to the end of the mine’s life. These estimates are subject to various risks and
uncertainties which may ultimately have an effect on the expected recoverability of the carrying values of
the mining properties and related expenditures.
The Company, from time to time, acquires exploration and development properties. When properties are
acquired, the Company must determine the fair value attributable to each of the properties. When the
Company conducts exploration on a mineral property and the results from the exploration do not support
the carrying value, the property is written down to its new fair value which could have a material effect
on the consolidated balance sheet and the consolidated statement of income (loss).
Reclamation and other closure provisions
The Company has obligations for reclamation and other closure activities related to its mining properties.
The future obligations for mine closure activities are estimated by the Company using mine closure plans
or other similar studies which outline the requirements that will be carried out to meet the obligations.
Because the obligations are dependent on the laws and regulations of the countries in which the mines
operate, the requirements could change as a result of amendments in the laws and regulations relating to
environmental protection and other legislation affecting resource companies. As the estimate of the
obligations is based on future expectations, a number of estimates and assumptions are made by
management in the determination of closure provisions.
Revenue recognition
Revenue from the sale of concentrate to independent smelters is recorded at the time the risks and
rewards of ownership pass to the buyer using forward market prices on the expected date that final sales
prices will be fixed. Variations between the prices set under the smelting contracts may be caused by
changes in market prices and result in an embedded derivative in the accounts receivable. The embedded
derivative is recorded at fair value each period until final settlement occurs, with changes in the fair value
Management's Discussion and Analysis, page 42
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
classified in revenue. For changes in metal quantities upon receipt of new information and assay, the
provisional sales quantities are adjusted.
Contingencies
Contingencies can be either possible assets or possible liabilities arising from past events which, by their
nature, will only be resolved when one or more future events not within our control occur or fail to occur.
The assessment of such contingencies inherently involves the exercise of significant judgment and
estimates of the outcome of future events. In assessing loss contingencies related to legal proceedings that
are pending against the Company or unasserted claims that may result in such proceedings or regulatory
or government actions that may negatively impact our business or operations, the Company with
assistance from its legal counsel evaluates the perceived merits of any legal proceedings or unasserted
claims or actions.
A liability is recognized in the consolidated financial statements when the outcome of the legal
proceedings is highly probable and the estimated settlement amount can be estimated reliably.
Contingent assets are not recognized in the consolidated financial statements until the future events are
settled.
Critical Accounting Judgements in Applying the Entity’s Accounting Policies
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial statement
carrying values of assets and liabilities and their respective income tax bases (“temporary differences”)
and losses carried forward. The determination of the ability of the Company to utilize tax loss carry-
forwards to offset deferred tax liabilities requires management to exercise judgment and make certain
assumptions about the future performance of the Company. Management is required to assess whether it
is “probable” that the Company will benefit from these prior losses and other deferred tax assets. Changes
in economic conditions, metal prices and other factors could result in revisions to the estimates of the
benefits to be realized or the timing of utilization of the losses.
Assessment of impairment and reverse impairment indicators
Management applies significant judgement in assessing whether indicators of impairment or reverse
impairment exist for an asset or a group of assets which could result in a testing for impairment. Internal
and external factors such as significant changes in the use of the asset, commodity prices, tax laws or
regulations in the countries that our mines operate in and interest rates are used by management in
determining whether there are any indicators of impairment or reversal of a previous impairment.
Functional currency
The functional currency for the Company and its subsidiaries is the currency of the primary economic
environment in which each operates. The Company has determined that its functional currency and that
of its subsidiaries is the U.S. dollar. The determination of functional currency may require certain
judgements to determine the primary economic environment. The Company reconsiders the functional
Management's Discussion and Analysis, page 43
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
currency used when there is a change in events and conditions which determined the primary economic
environment.
Share Position and Outstanding Warrants and Options
The Company’s outstanding share position as at May 12, 2017 is 159,223,498 common shares. In
addition, 1,056,395 incentive stock options and warrants are currently outstanding as follows:
Exercise
Price
Type of Security
No. of Shares
(CAD$) Expiry Date
Warrants
344,462
$6.01 October 31, 2018
Incentive Stock Options:
Total outstanding
$0.85 October 5, 2018
$0.85 November 5, 2018
$4.79 March 18, 2020
122,000
20,000
569,933
711,933
1,056,395
Other Risks and Uncertainties
For further information regarding the Company’s operational risks, please refer to the section entitled
“Description of the Business - Risk Factors” in the Annual Information Form for the year ended December
31, 2016 available at www.sedar.com and www.sec.gov/edgar.shtml.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures have been designed to provide reasonable assurance that all material
information related to the Company is identified and communicated to management on a timely basis.
Management of the Company, under the supervision of the President and Chief Executive Officer and the
Chief Financial Officer, is responsible for the design and operation of disclosure controls and procedures
in accordance with the requirements of National Instrument 52-109 of the Canadian Securities
Administrators (“National Instrument 52-109”) and as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “U.S. Exchange Act”).
Management's Discussion and Analysis, page 44
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Based on management’s evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were not effective as of December 31,
2016 as a result of the material weaknesses in the Company’s internal control over financial reporting, as
further described below.
Notwithstanding these material weaknesses, the Company has concluded that the financial statements
included in this report fairly present in all material respects its financial position, results of operations,
capital position, and cash flows for the periods presented, in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board (“IFRS”).
Management’s Report on Internal Control over Financial Reporting
U.S. Exchange Act
Management is responsible for establishing and maintaining adequate internal control over financial
reporting in accordance with the requirements of National Instrument 52-109 and as defined in Rule 13a-
. internal control over financial reporting is a process
15(f) or 15d – 15(f) under the
designed by, or under the supervision of, the President and Chief Executive Officer and Chief Financial
Officer and effected by the board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with IFRS. Internal control over financial reporting
includes those policies and procedures that:
1.
2.
3.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflects the
transactions and dispositions of the Company’s assets and consolidated entities;
provide reasonable assurance that transactions are recorded as necessary to permit the
preparation of consolidated financial statements in accordance with IFRS and that receipts and
expenditures by the Company and its subsidiaries are being made in accordance with
authorization of management and our directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control
over financial reporting can only provide reasonable assurance of achieving their control objectives.
A material weakness, as defined in National Instrument 52-109 of the Canadian Securities Administrators
and Rule 12b-2 under the Exchange Act, is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is reasonable possibility that a material misstatement of
the annual or interim financial statements will not be prevented or detected on a timely basis.
The Company’s management, under the supervision and with the participation of its President and Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control –
Company´s internal control over financial reporting as of December 31, 2016, using the criteria set forth
by the
Management's Discussion and Analysis, page 45
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Integrated Framework (2013 (the “COSO 2013 Framework”).
management concluded that material weaknesses existed as of December 31, 2016, as described below.
Based on the evaluation performed,
Material Weaknesses Relating to Insufficient Qualified Resources, the Effectiveness of Risk
Assessment, Design and Implementation of Control Activities and Monitoring Activities as of
December 31, 2016
The Company did not have sufficient resources with the relevant expertise to perform an effective risk
assessment process, design and implement controls supported by documentation and provide evidence
that such controls were designed and operating effectively.
The material weaknesses in risk assessment, control activities and monitoring activities contributed to
the following material weaknesses:
1.
2.
3.
4.
5.
The Company did not complete a documented fraud risk assessment;
The Company did not identify all risks and design relevant controls related to significant unusual
transactions and complex accounting matters;
The Company´s controls related to revenue recognition did not address all risks and relevant
assertions;
The Company´s controls related to tax provisions were not sufficiently precise; and
The Company did not implement effective general information technology controls related to user
access privileges, unauthorized access and segregation of duties.
Accordingly, a reasonable possibility exists that material misstatements in the Company’s financial
statements will not be prevented or detected on a timely basis.
Because of the above described material weaknesses in internal control over financial reporting,
management concluded that the Company’s internal control over financial reporting was not effective as
of December 31, 2016.
Deloitte LLP, the Company’s independent registered public accounting firm, that audited the Company’s
consolidated financial statements as at and for the year ended December 31, 2016 has issued an audit
report on the effectiveness of the Company’s internal control over financial reporting.
Remediation Plan and Activities
Management has commenced remediation of these material weaknesses in 2017, and its remediation plan
•
includes the following actions:
•
•
Hiring of additional resources to enhance the accounting and tax controls, including a Vice-President
of Finance and Accounting, an Internal Controls Manager and a Tax Manager;
Engaging third party resources to assist the Company in its risk assessment process and in completing
the design and implementation of certain internal controls over financial reporting pursuant to the
COSO 2013 Framework; and
Engaging specialists to assist us in the evaluation and redesign of our general information technology
controls over user access privileges, unauthorized access and segregation of duties.
Management's Discussion and Analysis, page 46
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
Senior management has discussed the aforementioned material weaknesses with the Audit Committee,
and the Board will continue to review progress on these remediation activities on a regular and ongoing
basis.
The material weaknesses cannot be considered remediated until the applicable remedial controls operate
for a sufficient period of time and management has concluded, through testing, that these controls are
operating effectively.
No assurance can be provided at this time that the actions and remediation efforts will effectively
remediate the material weaknesses described above or prevent the incidence of other material
weaknesses in the Company’s internal control over financial reporting in the future. Management,
including the Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls
and procedures or internal control over financial reporting will prevent all errors, even as the
remediation measures are implemented and further improved to address the material weaknesses. The
design of any system of controls is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving the stated goals under all
potential future conditions.
Changes in Internal Control over Financial Reporting
Other than those described above, there have been no changes in the Company’s internal control over
financial reporting (as defined in Rule 13a – 15(f) and 15d- 15(d) under the U.S. Exchange Act) during the
year ended December 31, 2016, that have materially affected, or that are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Qualified Persons
Eric N. Chapman, M.Sc., Vice President of Technical Services, is a Qualified Person for Fortuna Silver Mines
Inc. as defined by National Instrument 43-101. Mr. Chapman is a Professional Geoscientist of the
Association of Professional Engineers and Geoscientists of the Province of British Columbia (Registration
Number 36328) 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-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
Management's Discussion and Analysis, page 47
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
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;
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 and brownfields exploration at
the San Jose Mine during 2017;
the Company’s planned processing and
estimated major investments for mine
development, plant optimization and
brownfields exploration at the Caylloma
Mine during 2017;
the Company’s plans for development of the
Lindero Project;
maturities of the Company’s financial
liabilities, finance leases and other
contractual commitments;
expiry dates of bank letters of guarantee;
estimated mine closure costs; and
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;
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;
Management's Discussion and Analysis, page 48
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
•
•
•
•
•
•
•
•
•
•
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 our 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.
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
Management's Discussion and Analysis, page 49
Fortuna Silver Mines Inc.
Management's Discussion and Analysis
For the year ended December 31, 2016
(Presented in US dollars)
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 50
EXHIBIT 99.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use of our reports dated May 12, 2017 relating to the consolidated financial statements of Fortuna
Silver Mines Inc. and subsidiaries (the “Company”) and the Company’s internal control over financial reporting
(which report expresses an adverse opinion on the effectiveness of the Company’s internal control over financial
reporting because of material weaknesses) appearing in this Annual Report on Form 40-F of Fortuna Silver Mines
Inc. for the year ended December 31, 2016.
/s/ Deloitte LLP
Chartered Professional Accountants
Vancouver, Canada
May 15, 2017
EXHIBIT 99.5
CONSENT OF ERIC CHAPMAN
CONSENT OF AUTHOR / EXPERT
I hereby consent to:
1.
the use of my name, Eric Chapman, and reference to my name, the technical report entitled “Fortuna Silver Mines Inc.: Caylloma
Property, Caylloma District, Peru” dated effective August 31, 2016, as amended January 30, 2017 (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 effective August 20, 2016, as amended January 30, 2017, 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,
2016 filed with the United States Securities and Exchange Commission;
2.
the use of my name, Eric Chapman, and reference to my name, and the technical information relating to the updated Mineral
Resource 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 the Company for the year ended
December 31, 2016 included in the Company’s Annual Report on Form 40-F for the year ended December 31, 2016 filed with
the United States Securities and Exchange Commission; and
3.
the use of my name, Eric Chapman, and reference to my name, and the technical information contained in the Annual
Information Form of the Company for the year ended December 31, 2016 included in the Company’s Annual Report on Form
40-F for the year ended December 31, 2016 filed with the United States Securities and Exchange Commission.
Dated: May 15, 2017
“Eric N. Chapman”
Eric N. Chapman, P.Geo., C. Geol. (FGS)
EXHIBIT 99.6
CONSENT OF EDWIN GUTIERREZ
CONSENT OF AUTHOR / EXPERT
I hereby consent to:
1.
the use of my name, Edwin Gutierrez, and reference to my name, the technical report entitled “Fortuna Silver Mines Inc.:
Caylloma Property, Caylloma District, Peru” dated effective August 31, 2016, as amended January 30, 2017 (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 effective August 20, 2016, as amended January 30, 2017,
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, 2016 filed with the United States Securities and Exchange Commission; and
2.
the use of my name, Edwin Gutierrez, and reference to my name, and the technical information relating to the updated Mineral
Reserve estimate and the Mineral Resource estimate exclusive of Mineral Reserves 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 the Company for the year ended December 31, 2016 included in the Company’s Annual Report
on Form 40-F for the year ended December 31, 2016 filed with the United States Securities and Exchange Commission.
Dated: May 15, 2017
“Edwin Gutierrez”
Edwin Gutierrez,
Registered Member of the Society for Mining, Metallurgy and Exploration, Inc. (SME Registered Member Number 4119110RM)
EXHIBIT 99.7
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: May 15, 2017
“Jorge Ganoza Durant”
Name: Jorge Ganoza Durant
Title: President, Chief Executive Officer & Director
(principal executive officer)
EXHIBIT 99.8
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: May 15, 2017
“Luis Ganoza Durant”
Name: Luis Ganoza Durant
Title: Chief Financial Officer
(principal financial officer)
EXHIBIT 99.9
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,
2016, 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: May 15, 2017
“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 99.10
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,
2016, 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: May 15, 2017
“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.