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, 2019 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 V6C 3L6, Canada
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
Trading Symbol(s)
FSM
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 160,291,553 common shares with no par value outstanding as of December 31, 2019.
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 every Interactive Data File required to be submitted
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 such files).
Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
Emerging growth company
Yes No
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the
Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards†
provided pursuant Section 13(a) of the Exchange Act.
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its
Accounting Standards Codification after April 5, 2012.
Disclosure Controls and Procedures.
DISCLOSURE REGARDING CONTROLS AND PROCEDURES
Disclosure controls and procedures are defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”) as those controls and procedures designed to ensure that information
required to be disclosed in the annual filings and interim filings and other reports filed or submitted by Fortuna Silver
Mines Inc. (the “Company”) under the Exchange Act is duly recorded, processed, summarized and reported, within
the time periods specified in rules and forms of the United States Securities and Exchange Commission (the “SEC”).
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the Company’s reports and filings is accumulated and communicated to
management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as appropriate, to
allow timely decisions regarding required disclosure.
The Company evaluated, with the participation of its CEO and CFO, the effectiveness of its disclosure controls and
procedures as of December 31, 2019. Based on that evaluation, the CEO and the CFO have concluded that, as of the
end of the period covered by this annual report on Form 40-F, the disclosure controls and procedures were effective
to provide reasonable assurance that information required to be disclosed in the Company’s annual filings and
interim filings and other reports filed or submitted under the Exchange Act, is recorded, processed, summarized and
reported within time periods specified in SEC rules and forms and is accumulated and communicated to
management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Notwithstanding the foregoing, because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every
situation involving the failure of persons within the Company and its subsidiaries to disclose material information
otherwise required to be set forth in the Company’s periodic reports. The Company’s disclosure controls and
procedures are designed to provide reasonable assurance of achieving their objective of ensuring that information
required to be disclosed in the reports that the Company files or submits under the Exchange Act is communicated
to management to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as
such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) and has designed such internal
controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and
preparation of financial statements for external purposes in accordance with International Financial Reporting
Standards, as issued by the International Accounting Standards Board.
In designing and evaluating the Company’s internal control over financial reporting, the Company’s management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily applies its reasonable judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Because of its inherent limitations,
internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December
31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on this
assessment, management concluded that, as of December 31, 2019, the Company’s internal control over financial
reporting was effective based on those criteria.
1
See “Management’s Report on Internal Control Over Financial Reporting” in the Management’s Discussion and
Analysis for the fiscal years ended December 31, 2019 and 2018, 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.
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, 2019 and 2018, 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, 2019, 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 Kylie Dickson, Alfredo Sillau and David
Farrell. The board of directors has determined that each of Kylie Dickson, Alfredo Sillau and David Farrell is
independent, as that term is defined in Rule 10A-3 under the Exchange Act and the Listed Company Manual of the
New York Stock Exchange.
AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors of the Company has determined that Kylie Dickson, 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 Kylie Dickson as an audit committee financial expert
does not: (i) make her an “expert” for any purpose, (ii) impose any duties, obligations or liabilities on her that are
greater than those imposed on members of the audit committee and the board of directors who do not carry this
designation, and (iii) 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 / Our Governance”.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The required disclosure is included under the heading “Audit Committee” in the Company’s Annual Information
Form for the fiscal year ended December 31, 2019, filed as part of this annual report on Form 40-F in Exhibit 99.1.
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.
No fees paid by the Company to its auditors during the fiscal year ended December 31, 2019, 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, 2019 and 2018, 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 subheading “Liquidity Risk” within the heading “Risks and
Uncertainties” of the Company’s Management’s Discussion and Analysis for the fiscal years ended December 31,
2019 and 2018, filed as part of this annual report on Form 40-F in Exhibit 99.3.
MINE SAFETY DISCLOSURE
The Company is currently 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 / Our Governance / NYSE”.
The Company’s corporate governance practices, as described on its website, are consistent with the laws, customs
and practices in Canada.
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.
3
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.
4
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, thereto
duly authorized.
Date: March 30, 2020
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
Annual Information Form for the year ended December 31, 2019
99.2
Audited Consolidated Financial Statements as at and for the years ended December 31, 2019 and
2018, including the Reports of Independent Registered Public Accounting Firms with respect
thereto
99.3
Management’s Discussion and Analysis for the years ended December 31, 2019 and 2018
99.4
Consent of KPMG LLP
99.5
Consent of Eric Chapman
99.6
99.7
99.8
99.9
Consent of Amri Sinuhaji
Consent of Edwin Gutierrez
Consent of Geoff Allard
Consent of Denys Parra Murrugarra
99.10
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.11
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.12
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.13
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
EXHIBIT 99.1
ANNUAL INFORMATION FORM
ANNUAL INFORMATION FORM
For the Fiscal Year Ended December 31, 2019
DATED: March 26, 2020
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
Note about the information contained herein and the Novel Coronavirus
Notice Regarding Non-IFRS Measures
Cautionary Note to United States Investors Concerning Estimates of Reserves and Resources
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
Lindero Project, Argentina
DIVIDENDS
DESCRIPTION OF CAPITAL STRUCTURE
MARKET FOR SECURITIES
Common Shares
Debentures
Prior Sales
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
Audit Committee Charter
1
1
3
4
4
5
5
5
5
5
5
6
6
16
16
20
38
39
48
59
73
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75
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76
76
76
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78
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Schedule “A”
-1-
PRELIMINARY NOTES
Cautionary Statement – Forward-Looking Statements
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:
•
•
•
•
•
•
• 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;
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 greenfields exploration programs;
the Company’s planned capital expenditures and brownfields exploration at the San Jose Mine (as defined
herein);
the Company’s planned capital expenditures and brownfields exploration at the Caylloma Mine (as defined
herein);
the Company’s planned capital expenditures and brownfields exploration at the Lindero Project (as defined
herein);
the Company’s construction of the open pit gold heap leach mine at its Lindero property in Salta Province,
Argentina (the “Lindero Property”) and the anticipated timing of commissioning and commercial
production at the Lindero Project;
•
•
•
the expiry dates of bank letters of guarantee;
litigation matters;
estimated mine closure costs; and
• maturities of the Company’s financial liabilities, finance leases and other contractual commitments;
•
•
•
• management’s expectation that any investigations, claims, and legal, labor and tax proceedings arising in
the ordinary course of business will not have a material effect on the results of operations or financial
condition of the Company.
Often, but not always, these forward-looking statements can be identified by the use of words such as “anticipates”,
“believes”, “plans”, “estimates”, “expects”, “forecasts”, “scheduled”, “targets”, “possible”, “strategy”, “potential”,
“intends”, “advance”, “goal”, “objective”, “projects”, “budget”, “calculates” or statements that events, “will”,
“may”, “could” or “should” occur or be achieved and similar expressions, including negative variations.
Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially different from any results,
performance or achievements expressed or implied by the forward-looking statements. Such uncertainties and
factors include, among others:
•
•
•
•
•
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;
uncertainty and risks related to the start-up of the Lindero Project;
uncertainty relating to capital and operating costs and economic returns of development projects such as
the Lindero Project;
-2-
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
risks related to the construction, commissioning and commencement of commercial production at the
Lindero Project;
risks associated with mineral exploration and project development;
uncertainty relating to the repatriation of funds as a result of currency controls;
risks relating to the Company’s ability to replace its Mineral Reserves;
environmental matters including potential liability claims;
uncertainty relating to nature and climate conditions;
risks associated with political instability and changes to the regulations governing the Company’s business
operations;
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 relating to the termination of the Company’s mining concessions in certain circumstances;
risks related to International Labour Organization (“ILO”) Convention 169 compliance;
developing and maintaining relationships with local communities and stakeholders;
risks associated with losing control of public perception as a result of social media and other web-based
applications;
potential 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;
substantial reliance on the Caylloma Mine and the San Jose Mine for revenues;
property title matters;
risks relating to the integration of businesses and assets acquired by the Company;
impairments;
reliance on key personnel;
uncertainty relating to potential conflicts of interest involving the Company’s directors and officers;
risks associated with the Company’s reliance on local counsel and advisors and its management and Board
(as defined herein) in foreign jurisdictions;
adequacy of insurance coverage;
risks related to the Company’s compliance with the Sarbanes-Oxley Act;
risks related to the foreign corrupt practices regulations and anti-bribery laws;
legal proceedings and potential legal proceedings;
uncertainties relating to general economic conditions;
risks relating to a global pandemic, including COVID-19, which unless contained could cause a slowdown in
global economic growth and impact the Company’s business, operations, financial condition and share
price;
competition;
fluctuations in metal prices;
risks associated with entering into commodity forward and option contracts for base metals production;
fluctuations in currency exchange rates;
failure to meet covenants under the 2018 Credit Facility (as defined herein);
tax audits and reassessments;
uncertainty relating to concentrate treatment charges and transportation costs;
sufficiency of monies allotted by the Company for land reclamation;
risks associated with dependence upon information technology systems, which are subject to disruption,
damage, failure and risks with implementation and integration;
risks associated with climate change legislation;
risks related to the volatility of the trading price of the Company’s common shares (“Common Shares”) and
the Company’s Debentures (as defined herein);
dilution from future equity or convertible debt financings;
risks related to future insufficient liquidity resulting from a decline in the price of the Common Shares or
Debentures;
uncertainty relating to the Company’s ability to pay dividends in the future;
risks relating to the market for the Company’s securities;
-3-
•
•
risks relating to the Debentures of the Company; 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.
Note about the information contained herein and the Novel Coronavirus
At the date of this AIF, the Company was operational at the Caylloma Mine in Peru with essential personnel due to
a declaration of a period of mandatory national “social isolation” mandated by the government of Peru, and
operations at the Lindero Project were temporarily suspended due to the “social isolation” mandated by the
government of Argentina in response to the COVID-19 pandemic. The Company’s operations and financial
performance are dependent on it being able to operate at each of its mines and projects. Given the fast-changing
situation with respect to the COVID-19 pandemic, including the areas suffering from the pandemic and the response
of governments in implementing protective policies including travel bans, it is difficult to predict the exact nature
and extent of the impact the pandemic may have on the Company and its business. The Company could be restricted
from operating at its mines and projects for a material period of time, and its ability to transport and sell its
concentrates could likewise be restricted. Any changes in the current situation relating to the COVID-19 pandemic
and an increase in the current restrictions applicable to its operations could significantly impact the Company and
its performance and thus would impact the accuracy of any forward-looking statements contained in this AIF,
particularly with respect to the 2020 production guidance for each of its mines (Refer to “Three Year History and
Recent Developments – San Jose Mine Mexico”; “Three Year History and Recent Developments – Caylloma Mine,
Peru”) and the Lindero Project (Refer to “Three Year History and Recent Developments – Lindero Project – Production
Plan for 2020”), and construction timelines, cost budget and timing for commencement of production at the Lindero
Project (“Three Year History and Recent Developments – Lindero Project”). At this time, management does not have
sufficient information to update its 2020 production guidance for each of its mines and the Lindero Project,
construction timelines, cost budget and timing for commencement of production at the Lindero Project to take into
account the impact of COVID-19, but it is continuing to closely monitor the situation and plans to update such
information when there is a reasonable basis to do so.
Notice Regarding Non-IFRS Measures
-4-
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
to cash cost per payable ounce of silver, cash costs per tonne of processed ore, all-in sustaining cash cost and all-in
sustaining cash cost per payable ounce, free cash flow and free cash flow from ongoing operations, adjusted net
income and adjusted EBITDA. 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. See “Non-GAAP
Financial Measures” in the Company’s management’s discussion and analysis (“MD&A”) for the fiscal year ended
December 31, 2019 regarding the Company’s use of non-IFRS measures which may be accessed on SEDAR at
www.sedar.com under the Company’s profile, Fortuna Silver Mines Inc.
Cautionary Note to United States Investors Concerning Estimates of Reserves and Resources
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 the securities laws currently in effect in the United States.
Canadian standards, including National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-
101”), differ significantly from the disclosure requirements of U.S securities laws currently in effect, 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. Equivalent U.S. disclosure requirements
are currently governed by the United States Securities and Exchange Commission (“SEC”) Industry Guide 7 (“Industry
Guide 7”) under the U.S. Securities Act of 1933, as amended. In particular, and without limiting the generality of the
foregoing, the term Mineral Resource does not equate to the term “reserve”. Under the SEC’s disclosure standards
currently in effect under Industry Guide 7, 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 such U.S. standards currently in
effect. While the SEC recognizes the reporting of mineral deposits which do not meet the Industry Standard Guide
7 definition of “reserve” as of February 25, 2019, the effective adoption of the Modernization of Property Disclosures
for Mining Registrants, such rules are not required to be complied with until the first fiscal year beginning on or after
January 1, 2021. As a result, the SEC’s disclosure standards currently in effect for U.S. companies still reporting under
Industry Standard Guide 7 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’s disclosure standards
currently in effect under Industry Guide 7 normally only permit 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’s
disclosure standards currently in effect under Industry Guide 7, and Mineral Reserves reported in compliance with
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NI 43-101 may not qualify as “reserves” under such 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.
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
Date Filed on
SEDAR website
Document
Category on the
SEDAR website
Technical Report, Caylloma Mine, Peru
March 8, 2019
March 28, 2019
Technical Report(s)
Technical Report, San Jose Mine, Mexico
February 22, 2019 March 28, 2019
Technical Report(s)
Technical Report, Lindero Property, Argentina October 31, 2017 November 2, 2017
Technical Report(s)
Date of Information
This AIF is dated March 26, 2020. Except as otherwise indicated, the information contained herein is as at
December 31, 2019, 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 in Latin America, including exploration,
extraction, and processing. Fortuna:
•
•
•
operates the Caylloma silver, lead and zinc mine (the “Caylloma Mine”) in southern Peru,
operates the San Jose silver and gold mine (the “San Jose Mine”) in southern Mexico, and
is constructing an open pit gold heap leach mine at its Lindero Property (the “Lindero Project”) in northern
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 2017, the Company produced, at the San Jose Mine, 7,526,556 ounces of silver and 55,950 ounces of gold, an
increase over 2016 of 23% and 22%, respectively. The increases were the result of 18% higher throughput as well
as 4% and 3% higher head grades of gold and silver over the comparative 2016 year. Silver and gold annual
production were 6% and 8% above 2017 guidance, respectively. The processing plant treated 1,070,790 tonnes
during 2017.
Cash cost per tonne of processed ore for 2017 was $59.70, or 5% above the cost in the prior year. Cash cost per
tonne for 2017 was 5% above guidance due to higher mine support costs and local inflation on the cost of energy
and materials. All-in sustaining cash cost per payable ounce of silver, net of by-product credits, was $7.11 for 2017,
and below the annual guidance of $8.40 as a result of higher gold prices.
Continuum Resources Ltd. [British Columbia] Minera Bateas S.A.C. [Peru] Caylloma Mine Compania Minera Cuzcatlan S.A. de C.V. [Mexico] San Jose Mine Fortuna Silver Mexico, S.A. de C.V. [Mexico] Fortuna Silver Mines Inc. [British Columbia] Fortuna Silver Holdings (Mexico) Inc. [British Columbia] 24% 76% Fortuna Silver Mines Perú S.A.C. [Peru] 99.998% 0.002% Goldrock Mines Corp. [British Columbia] Mansfield Minera S.A. [Argentina] Lindero Project Argex Mining (Barbados) Ltd. [Barbados] Mansfield (Bermuda) Ltd. [Bermuda] 4.704% 95.296%
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In 2018, the Company produced, at the San Jose Mine, 7,979,634 ounces of silver, an increase over 2017 of 6%, and
53,517 ounces of gold, a decrease over 2017 of 4%. 2018 silver and gold production was 7% and 11% above the San
Jose Mine’s annual guidance. Annual average head grades for silver and gold were 260 g/t and 1.75 g/t, being 8%
above and 12% above annual guidance, respectively.
Cash cost per tonne of processed ore for 2018 was $63.72 or 7% higher than in 2017, due to higher energy tariffs in
Mexico, higher distribution costs related to the direct export of concentrates and higher milling costs related to the
dry stack re-handling in the first half of the year.
In 2019, the Company produced at the San Jose Mine 7,868,478 ounces of silver, a decrease over 2018 of 1 %, and
48,880 ounces of gold, a decrease over 2018 of 9%, being within the San Jose Mine’s guidance for silver and slightly
below the lower end of guidance for gold. Average head grades for silver and gold were 252 g/t and 1.57 g/t, 2%
above and 5% below the mine’s annual guidance of 247 g/t silver and 1.66 g/t gold.
Cash cost per tonne of processed ore for 2019 was $69.60 or 9% higher than in 2018, and within 2019 annual cost
guidance of between US$63.5 to US$70.1.
During 2020, the Company plans to process from the San Jose Mine 1,062,000 tonnes of ore averaging 223 g/t silver
and 1.39 g/t gold. Capital investment is estimated at $17.1 million, including $12.2 million for sustaining capital
expenditures and $4.9 million for brownfields exploration programs. Major sustaining capital investment projects
include $2.4 million for expansion of the dry stack, $4.8 million for mine development and $2.0 million for equipment
and infrastructure. On March 17, 2020, the Company announced that it had postponed all non-critical projects and
had temporarily suspended all greenfields and brownfields exploration activities as one of its business continuity
measures to mitigate the potential impacts of COVID-19 on the Company’s operations. Refer to “Company’s
Response to Spread of COVID-19”. The Company continues to assess the situation as the pandemic evolves. There
can be no assurance as to how long these measures will remain in place, or that more restrictive measures will not
be implemented. Further, as the situation is dynamic, the potential impact on production guidance for 2020 is
uncertain at this time. Refer to “Preliminary Notes - Note about the information contained herein and the Novel
Coronavirus”.
Caylloma Mine, Peru
The Company owns a 100% interest in the Caylloma Mine and related mining concessions located in southern Peru.
In 2017, the Company produced at the Caylloma Mine 29.9 million pounds of lead and 44.3 million pounds of zinc, a
decrease of 8% and an increase of 3%, respectively, over 2016. Silver production decreased 25% to 943,038 ounces
compared to 2016 production of 1,255,981 ounces. Head grades for lead, zinc, and silver were 8%, 1%, and 27%
lower than in 2016, respectively; however, this decline in head grades was partially offset by a 3% increase in ore
processed. Silver, zinc, and lead annual production were 6% below, 8% above, and in line with 2017 guidance. The
processing plant treated 1,488 tpd during 2017.
Cash cost per tonne of processed ore for 2017 was $79.11 or 10% higher than in 2016 and 5% above guidance. The
increase in cash costs was due mainly to higher mining, energy, and labour costs. All-in sustaining cash cost per
payable ounce of silver, net of by-product credits, was $(13.04) per ounce for 2017, and below the annual guidance
of $10.80 per ounce.
In 2018, the Company produced at the Caylloma Mine 911,309 ounces of silver, being a 3% decrease over 2017
production. Silver production for 2018 was 11% above the Caylloma Mine’s annual guidance. Annual average head
grade for silver was 63 g/t, being 10% above guidance. Base metal production at the Caylloma Mine in 2018 totaled
28.2 million pounds of lead and 45.4 million pounds of zinc, 10% and 2% above the Caylloma Mine’s annual guidance,
respectively. Average head grades for lead and zinc were 2.62% and 4.28%, being 9% and 2% above annual guidance,
respectively.
Cash cost per tonne of processed ore for 2018 was $83.47 or 6% higher than in 2017. The increase in cash costs was
due mainly to higher indirect costs related to off-site labour and general services and mine support costs.
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In 2019, the Company produced at the Caylloma Mine 941,289 ounces of silver, an increase over 2018 of 3%, and in
line with the mine’s annual guidance. Annual average head grade for silver was 66 g/t, being 3% above the mine’s
annual guidance of 64 g/t Ag. Base metal production at the Caylloma Mine in 2019 totaled 28.7 million pounds of
lead, an increase of 2% over 2018, and 45.6 million pounds of zinc, consistent with 2018. 2019 production of lead
and zinc was in-line with and slightly above the mine’s annual guidance, respectively. Average head grades for lead
and zinc were 2.72% and 4.36%, being 8% and 13% above annual guidance of 2.53% lead and 3.87% zinc.
Cash cost per tonne of processed ore for 2019 was $86.15 or 3% higher than in 2018, and within annual cost guidance
of between US$80.0 to US$88.4.
During 2020, the Company plans to process from the Caylloma Mine 534,000 tonnes of ore averaging 67 g/t silver,
2.81% lead and 4.46% zinc. Capital investments are estimated at $12.9 million, including $10.8 million for sustaining
capital expenditures, and $2.1 million for brownfields exploration programs. Major sustaining capital investment
projects include $5.0 million for mine development and $5.7 million for equipment and infrastructure. On March 17,
2020, the Company announced that it had postponed all non-critical projects and had temporarily suspended all
greenfields and brownfields exploration activities as one of its business continuity measures to mitigate the potential
impacts of COVID-19 on the Company’s operations. In addition, as a result of a period of mandatory national “social
isolation”, imposed by the Government of Peru, operations at the mine have been restricted to continuing with
essential personnel. Refer to “Company’s Response to Spread of COVID-19”. The Company continues to assess the
situation as the pandemic evolves. There can be no assurance as to how long these measures will remain in place,
or that more restrictive measures will not be implemented. Further, as the situation is dynamic, the potential impact
on production guidance for 2020 is uncertain at this time. Refer to “Preliminary Notes - Note about the information
contained herein and the Novel Coronavirus”.
Lindero Project, Argentina
In September 2017, the board of directors of the Company (the “Board”) approved the construction of an open pit
gold heap leach mine at its Lindero Property in Salta Province, Argentina. In November 2017, the Company filed on
SEDAR an updated feasibility study technical report on the Lindero Project.
Construction at the Lindero Property progressed during 2019 to the position where the Lindero Project was 92%
complete as at the end of February, 2020. Construction spending for the fiscal year ended December 31, 2019
totaled $157.5 million of which $21.3 million of construction trade payables was unpaid as of the end of December
2019. Total construction spending as at December 31, 2019 was $280.3 million.
In February 2020, the Company announced that it had encountered challenges during December 2019 and January
2020 due to a shortfall of manpower in the Company’s main electro-mechanical and piping contractor; however
additional manpower has been brought in to address this issue. As a result, the Lindero Project is scheduled to
transition from construction and commissioning to operations in the second quarter of 2020.
In March 2020, the Company announced that the total construction capital expenditures for the Lindero Project are
forecast to be in the range of $314 million to $320 million, an increase of 28% over the initial capital cost guidance.
The initial capital cost guidance of $239 million provided in September 2017 was subsequently adjusted to
$245.5 million to reflect the reallocation of $6.5 million from the construction phase of the project to a future
sustaining capital investment in order to expand the ADR and solution handling system (Refer to “Lindero Technical
Report”). The main drivers for the increased capital costs are $8.6 million of indirect costs and $6.8 million for EPCM
contractor costs. In addition, the Company expects to incur pre-production costs and buildup of working capital
through to the commencement of production of approximately $40 million of which $14 million had been spent as
of December 31, 2019. This is an increase of $15 million over the $25 million announced in November 2019, and is
mainly driven by continued mining operations during the pre-production phase which have resulted in an inventory
of ore stockpile 30% larger than originally planned, additional related owner’s costs, and an additional $4 million for
inventory of spare parts.
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On March 15, 2020, the Government of Argentina introduced a series of measures to contain the rapid spread of
COVID-19 which included the closure of its international borders for 15 days. The Lindero Project team took
necessary actions to mitigate the impact of this measure on the rotation schedule of international staff and vendor
representatives. During the evening of March 19, 2020, the Government of Argentina declared a period of
mandatory national “social isolation” in relation to COVID-19, effective until March 31, 2020. The Company
proceeded to orderly and safely demobilize its workforce at the Lindero Project, in accordance with the Executive
Order and the processes implemented for this purpose by the Provincial Government of Salta. Refer to “General
Development of the Business – Company’s Response to Spread of COVID-19”.
As a result, the Company temporarily suspended construction activities at the Lindero Project (the “Lindero
Temporary Suspension”) for the mandated “social isolation” period. A task force remained on site to maintain critical
activities and to undertake safety and environmental monitoring during the isolation period.
As the Lindero Temporary Suspension was recently imposed, management does not at this time have sufficient
information to update its construction timelines and budget for the Lindero Project to take into account the impact
of COVID-19, but it is continuing to closely monitor the situation and plans to update such information when there
is a reasonable basis to do so.. Refer to “Preliminary Notes - Note about the information contained herein and the
Novel Coronavirus”.
Construction highlights and milestones include:
● 18,750 tpd crushing agglomeration plant
Pre-commissioning activities have been concluded; crushing circuits are being commissioned with ore.
Tertiary crushing circuit: Vendor technicians are concluding with final mechanical and instrumentation
activities on the HPGR. Pre-commissioning of the conveyors and transfer systems were initiated in February.
Agglomeration plant: Mechanical work is substantially complete; piping and electrical installation in its final
stages due to the delay caused by shortfalls in contractor manpower during December and January; pre-
commissioning activities had been pushed back to March, and will now be rescheduled as a result of the
Lindero Temporary Suspension.
•
Leach pad and solution ponds area
Construction of the 31-hectare start-up leach pad area and solution ponds has been completed. Assembly
and installation of the stacking system from the agglomeration plant to the leach pad is in progress but
behind schedule due to a shortfall in contractor manpower during December and January, but is expected
to be completed in April; making it on the critical path of the project. This is subject to rescheduling as a
result of the Lindero Temporary Suspension.
• Mechanical and piping installations on the solution ponds have progressed. Pumping and solution
management systems planned to be commissioned in April are subject to rescheduling as a result of the
Lindero Temporary Suspension.
• ADR plant
Equipment installation has been completed with piping and electrical work well under way. Pre-
commissioning activities expected to be concluded in May are subject to rescheduling as a result of the
Lindero Temporary Suspension.
•
8 MW power plant
Commissioning of the 8-megawatt power plant and medium voltage power distribution system has been
completed. The plant has been connected to the mine’s grid and is providing power to the mine.
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•
SART plant
Mechanical and piping installation work has progressed to a stage where pre-commissioning activities were
scheduled to be concluded in May. This is subject to rescheduling as a result of the Lindero Temporary
Suspension. The SART plant is not mission critical for the start of gold production.
• Ancillary facilities
Construction and implementation of the on-site assay laboratory has been completed. Sample preparation
and analysis for gold using fire assay with an atomic absorption finish has been conducted at this facility
since the end of January 2020.
Industrial water for the operation will be sourced from a 120 cubic meter per hour well field and pumping
station located 13 kilometers from the mine site. Commissioning of the industrial water system was
completed in February 2020.
The following milestones for the Lindero Project were announced prior to the Lindero Temporary Suspension. There
can be no assurance that the Lindero Temporary Suspension will be resolved expediently, and as a result it may be
necessary to adjust certain milestones. As the Lindero Temporary Suspension was recently imposed, management
does not at this time have sufficient information to update its construction timelines, cost budget and timing for
commencement of production at the Lindero Project to take into account the impact of COVID-19, but it is continuing
to closely monitor the situation and plans to update such information when there is a reasonable basis to do so.
Second quarter of 2020:
•
•
•
Commissioning of HPGR crushing and agglomeration plant
Placing ore on leach pad and ore stacking
First doré pour
Third Quarter of 2020:
•
Commencement of commercial production
Refer to “Preliminary Notes - Note about the information contained herein and the Novel Coronavirus”.
Production Plan for 2020
The following production guidance for 2020 for the Lindero Project was announced prior to the Lindero Temporary
Suspension. There can be no assurance that the Lindero Temporary Suspension will be resolved expediently, and as
a result it may be necessary to adjust the production guidance.
During 2020, the Company plans to place between 3.1 and 3.7 million tonnes averaging 1.02 g/t Au on the leach pad
at the Lindero Project, containing between 100,000 to 125,000 ounces of gold, of which 60,000 to 80,000 ounces of
gold are expected to be produced as gold doré in the year. Estimated gold doré production for 2020 is consistent
with the first twelve month commercial production plan of 145,000 to 160,000 ounces as previously projected for
Lindero and assumes the placement of ore on the leach pad and first doré pour in the second quarter of 2020 and is
based on the factors set out in the Lindero Technical Report. As the Lindero Temporary Suspension was recently
imposed, management does not at this time have sufficient information to update its production guidance for the
Lindero Project to take into account the impact of COVID-19, but it is continuing to closely monitor the situation and
plans to update such information when there is a reasonable basis to do so. Refer to “Preliminary Notes - Note about
the information contained herein and the Novel Coronavirus”.
Health and Safety
In the past year, both of our operating mines achieved significant reductions in total recordable incidents and lost
time incident rates. The following statistics are for employees and contractors at the mine sites on a consolidated
basis. The terms set out below have the following meanings:
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“TRIR” means total recordable incident rate = (lost time + medical treatment injuries) x 1,000,000/ man hours
“LTIR” means lost time incident rate = (lost time injuries x 1,000,000) / man hours
“Severity Rate” means (days lost because of lost time injuries x 1,000,000 / man hours)
In 2019, the TRIR at the Caylloma Mine was 4.12 as compared to 7.22 in 2018, and the LTIR was 1.03 compared to
1.44 in 2018. The Severity Rate at the Caylloma Mine was 27.09 compared to 98.85 in 2018.
In 2019, the TRIR at the San Jose Mine was 5.08 as compared to 5.98 in 2018, and the LTIR was 1.17 compared to
2.24 in 2018. The Severity Rate at the San Jose Mine was 2,539.67 compared to 132.41 in 2018, due to a fatality at
the mine as described below.
At the Lindero Project during the construction phase, in 2019 the TRIR was 5.98 compared to 15.9 in 2018 and the
LTIR was 2.39 compared to 7.09 in 2018. The Severity Rate was 110.60 compared to 230.03 in 2018.
However, these achievements in improving workplace safety were overshadowed at the San Jose Mine in August
2019 by a workplace fatality in the underground area of the mine. After the accident, management conducted an
in-depth analysis of the accident and has taken targeted actions to mitigate risks identified in the associated report.
During the year, the Company undertook initiatives to improve safety throughout its operations. This includes:
improving the quality of the supervision of our operations; improving the training of our employees and contractors
to recognize, understand and mitigate hazards of the workplace to prevent incidents and injuries; undertaking a
safety evaluation of all moving equipment at each of our sites; and expanding our internal policies to increase the
accountability of our contractors pertaining to safety and environmental issues. Refer to “Description of the Business
– General – Social and Environmental Policies”.
Company’s Response to Spread of COVID-19
On March 17, 2020, the Company announced that in response to the spread of the coronavirus respiratory disease
(“COVID-19”), particularly in the jurisdictions that host its mining operations, it had activated its Emergency
Response Plan and had placed its Health Safety Security and Environmental Committee in permanent session to
continually assess the related health and safety risks to the Company’s personnel and contractors at its operations
and offices. The Company also announced that preventative measures had been implemented at its offices and
mines to curb the spread of COVID-19.
The Company implemented and continues to implement business continuity measures to mitigate the potential
impacts of COVID-19 on the Company’s operations. This includes the postponement of all non-critical capital
projects and the temporary suspension of all greenfields and brownfields exploration activities.
The following is a summary of the status of operations at its mines and projects as at the date of the AIF:
Caylloma Mine, Peru
On March 15, 2020, the Government of Peru introduced a series of measures to contain the rapid spread of COVID-19
which included: the closing of international borders and a declaration of a 15 day period of mandatory national
“social isolation”. In response to these measures, the Company worked under the regulatory framework issued by
the Ministerio de Energía y Minas (MINEM) and the Ministerio del Interior (MININTER), which allowed mines to
continue to operate during the aforementioned period with essential personnel. Management demobilized non-
critical personnel and continued to operate drawing ore from its 30 day coarse ore stockpile. The transportation of
concentrates and essential supplies is permitted during this period, and the Caylloma mine had at such time a
sufficient supply of critical stock, consumables and camp provisions for over a month.
On March 26, 2020, the Government of Peru extended the 15 day period of mandatory national “social isolation” to
April 12, 2020. As at the date of the AIF, the Caylloma Mine continued to operate as set out above.
San Jose Mine, Mexico
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As at the date of the AIF, there are no COVID-19 related restrictive measures in place in Mexico that might have a
material effect on the daily activities at the San Jose Mine. The Company’s business and operations continue to be
conducted under the Company’s business risk mitigation and preventative health and safety procedures.
Lindero Project, Argentina
On March 15, 2020, the Government of Argentina closed its international borders for 15 days. The Lindero Project
team took necessary actions to mitigate the impact of this measure on the rotation schedule of international staff
and vendor representatives. During the evening of March 19, 2020, the Government of Argentina declared a period
of mandatory national “social isolation” in relation to COVID-19, effective until March 31, 2020. The Company
proceeded to orderly and safely demobilize its workforce at the Lindero Project, in accordance with the Executive
Order and the processes implemented for this purpose by the Provincial Government of Salta.
As a result, the Company temporarily suspended construction activities at the Lindero Project for the mandated
“social isolation” period. A task force remained on site to maintain critical activities and to undertake safety and
environmental monitoring during the isolation period.
As the Lindero Temporary Suspension was recently imposed, management does not at this time have sufficient
information to update its construction timelines, cost budget and timing for commencement of production at the
Lindero Project to take into account the impact of COVID-19, but it is continuing to closely monitor the situation and
plans to update such information when there is a reasonable basis to do so. Refer to “Preliminary Notes - Note about
the information contained herein and the Novel Coronavirus”.
Financings
On February 9, 2017, the Company completed a bought-deal public financing (the “2017 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 proceeds from the 2017 Financing were added to the
Company’s existing cash position, to be used for general working capital purposes.
On October 2, 2019, the Company completed a bought-deal public financing (the “2019 Financing”) with a syndicate
of underwriters co-led by CIBC Capital Markets, Scotiabank, and including BMO Capital Markets, (collectively the
“Underwriters”), pursuant to which the Company issued senior subordinated unsecured convertible debentures
(the “Debentures”) in the aggregate principal amount of US$40 million Debentures at a price of US$1,000 per
Debenture. Effective October 8, 2019, an over-allotment option granted to the Underwriters was exercised in full
and the Company issued additional Debentures in the aggregate principal amount of US$6 million, bringing the total
aggregate gross proceeds to the Company under the 2019 Financing to US$46 million.
The Debentures mature on October 31, 2024 and bear interest at a rate of 4.65% per annum, payable semi-annually
in arrears on the last business day of April and October in each year, commencing on April 30, 2020. The Debentures
are convertible at the holder’s option into Common Shares at a conversion price of US$5.00 per share, representing
a conversion rate of 200 Common Shares per US$1,000 principal amount of Debentures, subject to adjustment in
certain circumstances. Refer to “Description of Capital Structure – Debentures” in this AIF.
Net proceeds from the 2019 Financing were $43.5 million after deduction of underwriting fees and expenses. The
net proceeds from the 2019 Financing were used to pay expenses related to the start-up at the Lindero Project and
for general working capital purposes.
Changes in Board and Management
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On August 16, 2017, Kylie Dickson was appointed as an independent member of the Board, and she was appointed
to the audit committee (the “Audit Committee”) in the place of David Farrell. As well, Mr. Farrell was appointed
Chair of the corporate governance & nominating committee in the place of Mario Szotlender.
On May 1, 2018, David Farrell was appointed as the independent Lead Director of the Company, Alfredo Sillau was
appointed to the compensation committee in the place of Mario Szotlender, and David Laing was appointed to the
corporate governance & nominating committee. Robert Gilmore did not stand for re-election as a director at the
Company’s annual general meeting held on June 14, 2018. Immediately following the annual general meeting, Kylie
Dickson was appointed to the corporate governance & nominating committee and as chair of the Audit Committee,
and David Farrell was appointed to the Audit Committee.
On March 12, 2019, the Board approved the establishment of a sustainability committee (the “Sustainability
Committee”) comprised of David Laing (Chair), Alfredo Sillau and Mario Szotlender. Refer to “Description of the
Business – General – Sustainability” herein for more information regarding the Sustainability Committee”.
Credit Facilities
In January 2018, the Company entered into a third amended and restated credit agreement with the Bank of Nova
Scotia (the “2018 Credit Facility”). The 2018 Credit Facility consists of a $40 million non-revolving credit facility and
an $80 million revolving credit facility, both having a four year term from closing of the 2018 Credit Facility. The
2018 Credit Facility is secured by a first ranking lien on the Company’s material subsidiaries and their assets. The
Company must comply with the terms in the amended agreement related to reporting requirements, conduct of
business, insurance, notices, and must maintain certain covenants. The proceeds of the 2018 Credit Facility were
intended to be used primarily to finance the mine construction at the Lindero Project.
In conjunction with the closing of the 2018 Credit Facility, the 2015 hedging of interest rates on the $40 million term
loan set to expire in 2019 was unwound, and a new hedging arrangement through an interest rate swap contract
was entered into for a four year term coinciding with the 2018 $40 million term loan.
Effective December 13, 2018, the Company further amended the 2018 Credit Facility. Pursuant to the joinder and
amendment to the 2018 Credit Facility, BNP Paribas was added as an additional lender under the 2018 Credit Facility
and the revolving portion of the facility was increased from $80 million to $110 million for a temporary period until
December 31, 2020. The original $80 million revolving portion of the facility retains its original four year term. As
at the date of the AIF, the Company had fully drawn $40.0 million from its non-revolving credit facility and fully
drawn $110.0 million from its revolving credit facility.
Updated Mineral Reserve and Mineral Resource Estimates
During the past three years, the Company has released updated Mineral Reserve and Mineral Resource estimates
for its properties as follows:
•
•
•
•
•
•
for the Caylloma Mine and the San Jose Mine as at December 31, 2016, combined with Mineral Reserve
and Mineral Resource estimates for the Lindero Project- released in February 2017;
for the Lindero Project as at September 9, 2017 - released in September 2017;
for the Caylloma Mine, the San Jose Mine and the Lindero Project as at December 31, 2017 - released in
February 2018;
for the Caylloma Mine and the San Jose Mine as at December 31, 2018 – released in March 2019;
for the Lindero Project as at March 31, 2019 – released in April 2019; and
for the Caylloma Mine and the San Jose Mine as at December 31, 2019 – released in March 2020.
A summary of the Mineral Reserve and Mineral Resource estimates for the Caylloma Mine and the San Jose Mine as
at December 31, 2019 and for the Lindero Project as at March 31, 2019 are as follows:
Highlights of Reserve and Resource Update
-14-
•
•
•
Combined Proven and Probable Mineral Reserves for the Caylloma and San Jose mines are reported at
6.4 Mt containing 37.2 Moz silver and 220 koz gold, representing year-over-year decreases of 18 percent
and 19 percent in contained silver and gold ounces, respectively.
Combined Inferred Mineral Resources for the Caylloma and San Jose mines are reported at 7.9 Mt
containing an estimated 30.9 Moz silver and 168 koz gold, reflecting a year-over-year decrease of 6 percent
in contained silver ounces and no change in reported gold ounces.
Lindero Proven and Probable Mineral Reserves are reported at 84.2 Mt containing 1.7 Moz of gold. Inferred
Resources are reported at 8.6 Mt containing 106 koz of gold.
Mineral Reserves - Proven and Probable
Silver
Mines
Property
Caylloma,
Peru
San Jose,
Mexico
Classification
Proven
Probable
Proven + Probable
Proven
Probable
Proven + Probable
Gold
Mine
Total
Total
Proven + Probable
Lindero,
Argentina
Proven
Probable
Proven + Probable
Proven + Probable
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
99
2,361
2,460
232
3,704
3,936
6,396
25,352
58,875
84,226
101
80
81
311
239
243
181
N/A
N/A
N/A
0.34
0.20
0.21
2.12
1.58
1.61
1.07
0.76
0.58
0.63
2.19
2.41
2.41
N/A
N/A
N/A
N/A
N/A
N/A
N/A
3.09
3.86
3.83
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Mineral Resources - Measured and Indicated
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Silver
Mines
Caylloma,
Peru
San Jose,
Mexico
Total
Lindero,
Argentina
Gold
Mine
Total
Measured
Indicated
Measured +
Indicated
Measured
Indicated
Measured +
Indicated
Measured +
Indicated
Measured
Indicated
Measured +
Indicated
Measured + Indicated
681
1,671
2,352
17
538
555
2,907
2,092
16,774
18,866
110
104
106
104
105
105
106
N/A
N/A
N/A
0.37
0.31
0.33
0.80
0.70
0.70
0.40
0.55
0.49
0.50
1.96
1.56
1.67
N/A
N/A
N/A
N/A
N/A
N/A
N/A
3.28
2.96
3.06
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Contained Metal
Au
Ag
(koz)
(Moz)
0.3
6.1
6.4
2.3
28.5
30.8
37.2
0.0
0.0
0.0
37.2
1
15
16
16
188
204
220
618
1,096
1,714
1,934
Contained Metal
Au
(koz)
Ag (Moz)
2.4
5.6
8.0
0.1
1.8
1.9
9.9
0.0
0.0
0.0
9.9
8
17
25
0
12
13
37
37
265
302
339
-15-
Mineral Resources – Inferred
Property
Classification
Tonnes
(000)
Ag
(g/t)
Au
(g/t)
Pb
(%)
Zn
(%)
Contained Metal
Au
(koz)
Ag (Moz)
Silver
Mines
Gold
Mine
Total
Caylloma,
Peru
San Jose,
Mexico
Total
Lindero,
Argentina
Inferred
Inferred
Inferred
Inferred
Inferred
4,056
3,889
7,945
8,600
112
131
121
N/A
0.37
2.58
4.00
14.6
0.96
0.66
0.38
N/A
N/A
N/A
N/A
N/A
N/A
16.3
30.9
0.0
48
120
168
106
30.9
274
1. Mineral Reserves and Mineral Resources are as defined by the 2014 CIM Definition Standards for 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.
Factors that could materially affect the reported Mineral Resources or Mineral Reserves include; changes in metal price
and exchange rate assumptions; changes in local interpretations of mineralization; changes to assumed metallurgical
recoveries, mining dilution and recovery; and assumptions as to the continued ability to access the site, retain mineral and
surface rights titles, maintain environmental and other regulatory permits, and maintain the social license to operate
5. Mineral Resources and Mineral Reserves are estimated as of September 25, 2019 for the San Jose Mine and as of June 30,
2019 for the Caylloma Mine and reported for both mines as of December 31, 2019 taking into account production-related
depletion for the period through December 31, 2019. Mineral Resources and Mineral Reserves for Lindero are estimated
and reported as of March 31, 2019
6. Mineral Reserves for the San Jose Mine are based on underground mining within optimized stope designs using an
estimated NSR break-even cut-off grade of US$64.54/t, equivalent to 138 g/t Ag Eq based on assumed metal prices of
US$17/oz Ag and US$1,380/oz Au; estimated metallurgical recovery rates of 91 % for Ag and 90 % for Au and mining costs
of US$33.24/t; processing costs of US$17.12/t; and other costs including distribution, management, community support
and general service costs of US$15.18/t based on actual operating costs. Mining recovery is estimated to average 91% and
mining dilution 11%. Mineral Resources are reported at a 110 g/t Ag Eq cut-off grade based on the same parameters used
for Mineral Reserves and a 15% upside in metal prices. Proven and Probable Mineral Reserves include 2.36 Mt containing
20.4 Moz of silver and 124 koz of gold reported at a 142 g/t Ag Eq cut-off grade, in addition to Inferred Resources totaling
2.71 Mt containing 10.9 Moz of silver and 78 koz of gold reported at a 110 g/t Ag Eq cut-off grade, located in the Taviche
Oeste concession and subject to a 2.5 % royalty
7. Mineral Reserves for the Caylloma Mine are reported above NSR breakeven cut-off values based on the proposed mining
method for extraction including; mechanized (breasting) at US$ 85.26/t; mechanized (enhanced) at US$ 78.90/t; and semi-
mechanized at US$ 86.03/t using assumed metal prices of US$17/oz Ag, US$1,380/oz Au, US$2,170/t Pb and US$2,590/t
Zn; metallurgical recovery rates of 84 % for Ag, 25 % for Au, 91 % for Pb and 90 % for Zn with the exception of the Ramal
Piso Carolina vein that uses a metallurgical recovery rate of 75 % for Au. Mining, processing and administrative costs used
to determine NSR cut-off values were estimated based on actual operating costs incurred from July 2018 through June
2019. Mining recovery is estimated to average 93 % with mining dilution ranging from 10 % to 22 % depending on the
mining methodology. Mineral Resources are reported at an NSR cut-off grade of US$65/t for veins classified as wide
(Animas, Animas NE, Nancy, San Cristobal) based on the same parameters used for reserves, and a 15% upside in metal
prices and US$135/t for veins classified as narrow (all other veins) based on narrow vein mining methods
8. Mineral Reserves for Lindero are reported based on open pit mining within a designed pit shell for variable gold cut-off
grades and gold recoveries by metallurgical type. Met type 1 cut-off 0.27 g/t Au, recovery 75.4 %; Met type 2 cut-off 0.26
g/t Au, recovery 78.2 %; Met type 3 cut-off 0.26 g/t Au, recovery 78.5 %; and Met type 4 cut-off 0.30 g/t Au, recovery
68.5%. Mining recovery is estimated to average 100% and mining dilution 0%. The cut-off grades and pit design are
considered appropriate based on long term gold prices of US$1,320/oz, estimated mining costs of US$1.28 per tonne of
material, total processing and process G&A costs of US$8.29 per tonne of ore, and refinery costs net of pay factor of US$6.90
per ounce gold. Lindero Mineral Resources are reported within the same conceptual pit shell above a 0.2 g/t Au cut-off
grade based on the same parameters used for reserves and a 15% upside in metal prices
Eric Chapman, P. Geo. (APEGBC #36328) is the Qualified Person for Mineral Resources and Amri Sinuhaji (APEGBC #48305)
is the Qualified Person for Mineral Reserves, both being employees of Fortuna Silver Mines Inc.
9.
10. Totals may not add due to rounding procedures
11. N/A = Not Applicable
-16-
San Jose Mine, Mexico
As of December 31, 2019, the San Jose Mine has Proven and Probable Mineral Reserves of 3.9 Mt containing
30.8 Moz of silver and 204 koz of gold, in addition to Inferred Resources of 3.9 Mt containing a further 16.3 Moz of
silver and 120 koz of gold.
Year-over-year, Mineral Reserves decreased 24 percent in terms of tonnes and 21 percent in contained silver and
gold ounces after net changes resulting from production-related depletion and the upgrading and conversion of
Inferred Resources to Mineral Reserves due to a limited infill drill program focused primarily on the Stockwork zones.
Silver grade increased 3 percent and gold grade increased 4 percent to 243 g/t and 1.61 g/t, respectively due to an
increase in the break-even cut-off grade from 134 g/t to 138 g/t Ag Eq.
Measured and Indicated Resources tonnes exclusive of Mineral Reserves increased slightly year-over-year from
0.3 Mt to 0.5 Mt due primarily to the change in the breakeven cut-off grade for reserves.
Year-over-year, Inferred Resources increased 61 percent in terms of tonnes and 7 percent in contained silver and
gold ounces. Silver and gold grades decreased by 33 percent. The net variation is due to reductions resulting from
the upgrading of high-grade Inferred Resources related to infill drilling in the Stockwork zones counteracted by
exploration drilling discovering new resources in the Victoria mineralized zone.
Caylloma Mine, Peru
As of December 31, 2019, the Caylloma Mine has Proven and Probable Mineral Reserves of 2.5 Mt containing
6.4 Moz of silver and 16 koz of gold, in addition to Inferred Resources of 4.1 Mt containing 14.6 Moz of silver and 48
koz of gold.
Year-over-year, Mineral Reserve tonnes decreased by 6 percent, while silver grade increased 5 percent to 81 g/t,
lead grade increased 14 percent to 2.41%, and zinc grade increased 4 percent to 3.83%. Changes are primarily due
to mining related depletion and the upgrading and conversion of Inferred Resources to Mineral Reserves due to a
successful infill drill program focused primarily on the Animas NE vein.
Measured and Indicated Resource tonnes, exclusive of Mineral Reserves, increased by 9 percent year-over-year to
2.4 Mt.
Inferred Resources tonnes decreased by 1.3 Mt or 24 percent year-over-year. Silver, lead, and zinc grades increased
10 percent, 8 percent, and 4 percent, respectively. The decrease in Inferred Mineral Resources is primarily due to a
successful infill drill program of the Animas NE vein resulting in the upgrading of Inferred Mineral Resources to
Mineral Reserves coupled with an increase in cut-off value from US$50/t to US$65/t for the reporting of resources
in wide veins.
Lindero Project, Argentina
The Lindero Project has Proven and Probable Mineral Reserves of 84.2 Mt containing 1.7 Moz of gold, in addition to
Inferred Resources of 8.6 Mt containing 106 koz of gold.
DESCRIPTION OF THE BUSINESS
General
Summary. The Company is engaged in silver and gold mining and related activities in Latin America, including
exploration, extraction, and processing. The Company operates the Caylloma Mine in southern Peru and the San
Jose Mine in southern Mexico, and is constructing an open pit gold heap leach mine at its Lindero Property in
northern Argentina.
-17-
The silver-lead, zinc, and silver-gold 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 2019 and 2018 are as follows:
By type of concentrate:
Silver-lead concentrate
Zinc concentrate
Silver-gold concentrate
By metal contained in concentrate:
Silver
Lead
Zinc
Gold
2019
2018
15%
13%
72%
52%
9%
13%
26%
15%
18%
67%
48%
10%
18%
24%
Production Methods. The method of production both at the Caylloma Mine and the San Jose Mine 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 exploration and mining of precious metals and base metals is competitive.
Competition relates to: the acquisition of mineral property interests that can be explored, developed and operated;
technical experts that can find, develop and mine such mineral properties and interests; workers to operate the
mineral properties; and capital to finance, exploration, development and operations.
The Company competes with other mining companies, some of which have greater financial resources and technical
facilities, for the acquisition of mineral property interests, the recruitment and retention of qualified employees;
and for investment capital with which to fund its projects.
Environmental Protection. All phases of the Company’s operations are subject to environmental laws and
regulations in the jurisdictions in which it operates. These environmental regulations provide restrictions and
prohibitions against spills, releases and emission of various substances related to industrial mining operations that
could result in environmental contamination. To the best of management’s knowledge, the Company is in
compliance in all material respects with all environmental laws and regulations applicable to its exploration,
development, construction and operating activities.
On October 11, 2018, the Company reported that on October 8, 2018, abnormally high rainfall caused a contingency
pond to overflow at the dry stack tailings facility at the San Jose mine. The contingency pond collects water from a
ditch system at the dry stack tailing facility designed to capture and manage rainwater. No industrial process water
was discharged in this incident. The San Jose Mine uses a cyanide-free process to produce concentrate. Officials at
the Procuraduria Federal de Protección al Ambiente (“PROFEPA”) were notified of the overflow on the day of the
incident. The Company, along with federal, state and local authorities conducted inspections of the facilities at San
Jose and the Coyote Creek. The Company received PROFEPA’s report on the incident which confirms that the
overflow did not contaminate soil, and therefore, no remediation was necessary. In 2019, the Company received a
final resolution from the Mexican National Water Commission (“CONAGUA”) which confirms that no remediation of
-18-
the nearby Coyote Creek was required. However, the Company received a fine of approximately US$42,000 related
to the incident. The Company has since installed additional pumping equipment, increased its monitoring system
and reinforced the pipes and drainage channels from the dry stack facility to the contingency pond in order to
mitigate the risk of an overflow in the event of abnormally high rainfall at the San Jose Mine in the future.
For further details of the incident, refer to Fortuna’s news releases dated October 11, 2018 “Fortuna reports heavy
seasonal rains caused an overflow in a contingency pond of the dry stack tailings facility at the San Jose Mine,
Mexico”; February 14, 2019 “PROFEPA report confirms no contamination of soil from overflow of contingency pond
at the San Jose Mine, Mexico in October 2018” and March 28, 2019 “CONAGUA resolution confirms no remediation
required as a result of the overflow of contingency pond at the San Jose Mine, Mexico in October 2018” on the
Company’s website or under the Company’s profile on SEDAR.
Reclamation. The environmental permits under which the Company operates require it to reclaim certain lands that
it disturbs during mining operations. Reclamation and closure activities can be significant and include land
rehabilitation, decommissioning of mine facilities, ongoing care and maintenance and other costs. Costs of mine
closures and reclamation of mine sites vary considerably due to factors such as location, climate, rainfall,
environmental vulnerability, age of the mine, mining method, minerals being mined, waste characteristics, and labor
costs. Closure cost estimates are reviewed regularly to reflect changing circumstances and adjusted according to
inflation and work requirements.
There have been no significant changes in requirements, laws, regulations, operating assumptions, estimated timing
and amount of closure and reclamation obligations in respect of the operations of the Company during the financial
year ended December 31, 2019, other than to increase the reclamation obligation for the Lindero Project given the
advance of construction at the mine site. Although the ultimate amount of the closure and reclamation costs to be
incurred cannot be predicted with certainty, the Company currently estimates the undiscounted uninflated amount
of cash flows required to settle the Company’s estimated rehabilitation costs to be approximately $33.3 million
which will be incurred between 2022 and 2047 for the Caylloma Mine, the San Jose Mine and the Lindero Project,
depending on the life of each respective mine, as more particularly described in note 19 to the audited financial
statements of the Company for the fiscal year ended December 31, 2019.
Employees. The Company and its subsidiaries had 1,232 direct employees and 2,508 indirect employees through
contractors as at December 31, 2019.
Foreign Operations. The Company’s material mineral resource properties are located in Peru, Mexico and
Argentina. Any changes in governments or shifts in political attitudes in the jurisdictions in which we operate may
lead to unanticipated or drastic changes in laws and regulations which are beyond our control and which could have
a material adverse effect on the Company’s business, financial condition or results of operations.
Future development and operations may be affected in varying degrees by certain economic, political and other risks
and uncertainties including, but not limited to: royalties, tax increases or claims by governmental bodies; restrictions
on production; expropriation or nationalization; foreign exchange controls; restrictions on repatriation of profits;
import and export regulations; changing fiscal regimes and uncertain regulatory environments; fluctuations in
currency exchange rates; high rates of inflation; changes in royalty and tax regimes; the elimination of tax
exemptions; unenforceability of contractual rights and judgments; changes to environmental legislation; land claims
of local people and mine safety. The Company is not able to accurately predict the effect of the above factors.
Sustainability. The Company’s business and operations involve the exploration, development, extraction and
production of precious and base metals predominantly in Latin America and in other areas in which the Company
has an interest, and are subject to laws and regulations governing health and safety, protection and remediation of
the environment, site reclamation, management of hazardous substances, permit approvals and other related
matters.
The Company’s objective is to generate sustainable prosperity through its business operations which means,
protecting the environment, providing a safe workplace for our employees and contractors, supporting the local
communities in the areas in which the Company operates through investment, education, employment,
-19-
infrastructure, maintaining high ethical standards in its operations and achieving operating excellence in the
Company’s business.
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.
In March 2019, the Board approved the establishment of our Sustainability Committee. The purpose of the
committee is to assist the Board in fulfilling its oversight responsibilities by reviewing and guiding the sustainability,
social responsibility, environmental, and health and safety policies of the Company established by the senior officers
of the Company. Refer to “General Development of the Business – Three-Year History and Recent Developments –
Changes in Board and Management”. The Sustainability Committee has adopted a written charter that sets out its
mandate and responsibilities and is available for review on the Company’s website. The Sustainability Committee
meets and reports to the Board at least once in each fiscal year, and at such other times during each year as it deems
appropriate. In 2019, the Sustainability Committee met three times.
In 2019, the Company produced its first sustainability report which was developed using the Global Reporting
Initiative Standards – Core Option. The report discloses: material sustainable topics applicable to the Company and
its operations; summarizes the actions that the Company is taking in terms of economic, social and environmental
sustainability in the Company’s mining operations in Peru and Mexico; and provides detailed information on the
Company’s environmental, social, socio-economic and health and safety performance. The report is available on the
Company’s website.
Social and Environmental Policies
The Company has adopted several social and environmental policies and codes of conduct that are essential to its
operations. The Company’s operating practices are governed by the principles set out in its Code of Business
Conduct and Ethics and Whistle-Blower Policy and its Supplier Code of Business Conduct and Ethics.
Health and Safety Policy
The health and safety of our employees and contractors is our priority. 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.
In 2020, the Company adopted a safety policy which reflects the Company’s commitment to providing safe and
healthy working conditions for our employees, contractors and visitors at our mining operations, exploration sites
and offices. By adopting a strong risk management approach, the Company trains its employees and contractors to
recognize, understand and mitigate hazards of the workplace to prevent injuries and accidents. The Company is
committed to full compliance with all applicable health and safety legislation and regulations in the countries in
which we operate as well as industry standards and practices which in some cases exceed the legislation and
regulations.
Safety statistics are collected from each of our operations on a monthly basis. Targets for health and safety key
performance indicators are now set each year and were one factor used in determining management compensation
for 2019.
Human Rights Policy
The Company recognizes that its activities have the potential to impact the human rights of individuals affected by
its business operations, including employees, contractors, the communities in which it operates and other external
stakeholders. The Company abides by human rights laws established internationally and in the countries in which it
operates. The Company expects its suppliers and business partners to share this commitment and to implement
policies and procedures that support respect for human rights. The Company’s human rights principles are
embedded in its human rights policy which was adopted in 2019 and in a number of its internal procedures, business
-20-
systems and processes, including those related to employment practices, environmental practices, security, anti-
corruption practices, and community and social relations guidelines.
Environmental Policy
The Company is committed to complying in all material respects with all environmental laws and regulations
applicable to its activities, including in its exploration, mining, processing and closure 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.
The Company strives for continual improvement of its environmental performance. In 2019, the Company adopted
an environmental policy which reflects its above commitment and is guided by international standards, and with
respect to tailings management is guided by the Company’s tailings and heap leach management standard. The
Company’s environmental principles are embedded in a number of its internal procedures, business systems and
processes.
Environmental statistics are collected from each of our operations on a monthly basis. Targets for environmental
management plan key performance indicators are now set each year and were one factor used in determining
management compensation for 2019.
Climate Change
Climate change may have an adverse effect on the Company’s operations, infrastructure and availability of mineral
resources. Climate change may, among other things cause or result in changes in rainfall levels, higher temperatures,
reduced water availability, increase sea levels, increase extreme weather events and resource shortages. Extreme
weather events such as flooding or inadequate water supplies could disrupt operations at the Company’s mines and
impact mining and transport operations, reclamation efforts, create resource shortages, damage property and
equipment and increase health and safety risks on site. Abnormally high rainfall at the San Jose Mine in October
2018 and at the Lindero Project in February 2019 disrupted operations at these locations. Records of precipitation
are being maintained at all operations to track weather conditions. Such events or conditions could have other
adverse effects on the Company’s workforce and the communities around the Company’s mines, such as an
increased risk of food insecurity, water scarcity and prevalence of disease. Climate change may also result in
shortages in certain consumables and other products required to sustain the Company’s operations.
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.
-21-
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
geometallurgical assumptions, 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, that the actual ore mined is amenable to mining or treatment, 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
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 Company has in the past, and may in the future, provide estimates and projections of its future production, costs
and financial results. Any such information is forward looking. Neither the Company’s auditors nor any other
independent expert or outside party compiles or examines these forward looking statements. Accordingly, no such
person expresses any opinion or any other form of assurance with respect thereto. Such estimates are made by the
Company’s management and technical personnel and are qualified by, and subject to the assumptions, contained or
referred to in the filing, release or presentation in which they are made, including assumptions about the availability,
-22-
accessibility, sufficiency and quality of mineralized material, the Company’s costs of production, the market prices
of silver, gold and other metals, the Company’s ability to sustain and increase production levels, the ability to
produce and sell marketable concentrates, the sufficiency of its infrastructure, the performance of its personnel and
equipment, its ability to maintain and obtain mining interests and permits, the state of the government and
community relations, and its compliance with existing and future laws and regulations. Actual results and experience
may differ materially from these assumptions. Failure to achieve estimates or material increases costs could have a
material adverse impact on the Company’s future cashflows, profitability, results of operations and financial
condition. Any such production, cost, or financial results estimates speak only as of the date on which they are made,
and the Company disclaims any intent or obligation to update such estimates, whether as a result of new
information, future events or otherwise. Accordingly, these forward-looking statements should be considered in
the context in which they are made and undue reliance should not be placed on them.
Uncertainties and risks related to the start-up of the Lindero Project
The Company is subject to inherent uncertainties and risks related to the construction and commissioning and start-
up of the Lindero Project, the principal of which include:
•
•
•
•
problems with the start-up of the processing plant which causes a delay in the timeline;
delays associated with contractors;
budget overruns due to changes in costs of fuel, power, labour, materials and supplies; and
potential opposition from non-governmental organizations, environmental groups or local groups which
may delay or prevent activities.
The Company’s ability to meet construction, development, commissioning and production schedules and cost
estimates for the Lindero Project cannot be assured. The Company has prepared estimates of capital costs and/or
operating costs for the Lindero Project, but no assurance can be given that such estimates will be achieved. Failure
to achieve cost estimates or material increases in costs could have an adverse impact in future cash flows,
profitability, results of operations and financial condition.
It is common in new mining operations to experience such unexpected costs, problems and delays during
construction, development and mine start-up. In addition, delays in the commencement of mineral production often
occur. Accordingly, the Company cannot provide assurance that its activities will result in profitable mining
operations at the Lindero Project.
Development projects such as the Lindero Project are uncertain and it is possible that actual capital and operating
costs and economic returns will differ significantly from those estimated for a project prior to production.
The development of the mine at the Lindero Project requires significant expenditures during the development phase
before production is possible. The economic feasibility of development projects is based on many factors such as:
estimation of mineral reserves, anticipated metallurgical recoveries, environmental considerations and permitting,
future gold prices, and anticipated capital and operating costs of such projects. The Lindero Project has no operating
history upon which to base estimates of future production and cash operating costs. Particularly for development
projects, estimates of proven and probable mineral reserves and cash operating costs are, to a large extent, based
upon the interpretation of geologic data obtained from drill holes and other sampling techniques, and feasibility
studies that derive estimates of cash operating costs based upon anticipated tonnage and grades of ore to be mined
and processed, the configuration of the ore body, expected recovery rates of gold from the ore, estimated operating
costs, anticipated climactic conditions and other factors. As a result, it is possible that actual capital and operating
costs and economic returns will significantly differ from those currently estimated for the Lindero Project prior to
production.
Any of the following events, among others, could affect the profitability or economic feasibility of the Lindero
Project: unanticipated changes in grades and tonnes or ore to be mined and processed, unanticipated adverse
geologic conditions, unanticipated metallurgical recovery problems, incorrect data on which engineering
assumptions are made, availability of labor, costs of processing and refining facilities, availability of economic
sources of power, adequacy of water supply, adequate access to the site, unanticipated transportation costs,
government regulations (including regulations with respect to the environment, prices, royalties, duties, taxes,
-23-
permitting, restrictions on production, quotas on exportation of minerals, environmental), fluctuations in gold
prices, and accidents labour actions and force majeure events.
The development of the Company’s properties requires substantial exploration, expenditure and the development
of infrastructure.
Development of the Company’s non-producing properties 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:
•
•
•
•
•
•
•
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 may be unable to replace its Mineral Reserves
The Company must continually replace its Mineral Reserves depleted by production to maintain production levels
over the long term. Mineral Reserves can be replaced by expanding known ore bodies, locating new deposits or
making acquisitions. Exploration is highly speculative in nature and involves many risks and is frequently
unsuccessful. Substantial expenditures are required to complete drilling programs which may take several years to
complete in order to establish Mineral Reserves. As a result, there is no assurance that current or future exploration
programs will be successful. There is a risk that depletion of the Company’s Mineral Reserves will not be offset by
discoveries or acquisitions. The Company’s mineral base may decline if Mineral Reserves are mined without
adequate replacement and the Company may not be able to sustain production beyond the current mine lives, based
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on current production rates. If the Company’s Mineral Reserves are not replaced either by the development of
additional Mineral Reserves and/or additions to Mineral Reserves, there may be an adverse impact on the
Company’s future cash flows, earnings, results of operations and financial condition, and this may be compounded
by requirements to expend funds for reclamation and decommissioning.
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 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.
The Company operates four tailings storage facilities, which includes two heap leach pads at the Caylloma Mine, and
one heap leach pad and one dry stack tailings facility at the San Jose Mine. In addition, the Company has one closed
heap leach pad at the Caylloma Mine. All tailings storage facilities operated by the Company are subject to the
Company’s Tailings and Heap Leach Management Standard. As part of the Company’s risk management protocols,
the Company continually assesses its tailings dam management systems. Since 2019, the Company has planned and
executed an annual comprehensive review of all of its tailings facilities. Following the review in 2019, the Company:
completed an independent audit plan of all of its tailings storage facilities (“TSF”) and its heap leach facility (“HLF”)
currently being constructed at the Lindero Project; assigned an external Engineer of Record for each TSF and HLF;
increased pond and pumping capacity on selected TSFs as a redundant emergency control measure; reviewed and
updated stormwater management plans; reviewed and updated Operation, Maintenance and Surveillance manuals
in accordance with best practices; updated and increased geotechnical monitoring equipment an control points at
selected TSFs and reviewed and tested emergency response plans at each site. While the Company believes that
appropriate steps have been taken to prevent safety incidents, there are inherent risks involved with tailings
facilities, including among other things, seismic activity, particularly in seismically active regions such as Peru, and
the ability of field investigations completed prior to construction to detect weak foundation materials. There can be
no assurance that a dam or other tailings facility safety incident will not occur and such an incident could have a
material adverse effect on the Company’s business, operations and financial condition.
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 intends to, and attempts to, fully comply with all applicable environmental regulations. While the
health and safety of its people and responsible environmental stewardship are top priorities for the Company, there
can be no assurance that the Company has been or will be at all times in complete compliance with such laws,
regulations and permits, or that the costs of complying with current and future environmental and health and safety
laws and permits will not materially and adversely affect the Company’s business, results of operations or financial
condition.
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
-25-
as landslides, floods, seismic activity, droughts and pit wall failures, may occur in the future and such events may not
be detected in advance. Such geotechnical risks could impact the structural integrity of our mines, stockpiles, leach
pads and tailings storage facilities. 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,
droughts and considerable rainfall. The Company’s operations require water, and the San Jose Mine is located in a
region where water is scarce. There can be no assurance that extreme weather events such as a prolonged drought
will not affect the operations at this mine.
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 San Jose Mine and the Lindero Project have in the past experienced abnormally high rainfall which has disrupted
operations at these locations. Increased precipitation, either due to normal variances in weather or due to global
climate change, could result in flooding that may adversely impact operations and could damage the Company’s
facilities, plant and operating equipment.
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 capital
controls and future changes in applicable laws related to exploration, development and mining operations.
Argentina
Effective December 23, 2019, changes to Argentina’s tax laws proposed by the new Argentine Government were
implemented. The changes ratified and extended legislation which was to expire on December 31, 2019 and also
allows the Argentine Central Bank to regulate funds coming into and flowing out of Argentina in order to maintain
stability and support the economic recovery of the country. These capital controls are in effect until December 31,
2025 and have the effect of: requiring exporters to convert the equivalent value of foreign currency received from
the export into Argentine Pesos; requiring the prior consent of the Argentine Central Bank to the payment of cash
dividends and distributions of currency out of Argentina; requiring Argentine companies to convert foreign currency
loans received from abroad into Argentine Pesos; and restricting the sale of Argentine Pesos for foreign currency.
Under the terms of the Argentine Central Bank regulation, any funds in foreign currency which are advanced by the
Company as a loan to its Argentine subsidiary in connection with the payment of construction costs and expenses at
the Lindero Project, are to the extent that the funds are advanced in foreign currency, required to be converted into
Argentine Pesos at a conversion rate negotiated at the Foreign Exchange Market within five business days from the
date of the receipt of the funds in Argentina. When the loan is to be repaid, the Regulation requires proof that the
loan was advanced in foreign currency and converted into local currency in order to repay the loan in foreign
currency. Due to the volatility of the exchange rate for Argentine Pesos, the Company will apply additional measures
in cash management to minimize potential gains or losses arising from the conversion of funds. Accordingly, once
production commences at the Lindero Project, with the capital controls in effect, the Company will be required to
convert the equivalent value into Argentine Pesos of the export of all gold doré from the Lindero Project. In addition,
the Company would be required to obtain the prior consent of the Argentine Central Bank to the payment of cash
dividends and distributions of profits out of Argentina.
Argentina also changed its export tax rates as part of the changes to its tax laws. Effective December 23, 2019,
exports of products related to the oil and mining industries are subject to a maximum 8% export tax with no cap. The
Argentine Government is yet to determine the exact rates for the mining industry. Accordingly, exports of bullion,
doré and unrefined gold are subject to a maximum 8% export tax with no cap until such time as the Argentine
Government determines otherwise.
Mexico
The Company’s operations at the San Jose Mine are subject to the payment of government taxes, fees and duties.
Under Mexican federal corporate income tax law, titleholders of mining concessions are required to pay annually a
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7.5% duty on their mining related profits and a 0.5% duty on revenues obtained from the sale of gold, silver and
platinum.
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.
In 2015, the Mexican Government introduced a Mining Fund which was funded from taxes paid by mining companies
operating in Mexico. The Mining Fund distributed monies to local communities where the activities of mining
companies take place to promote infrastructure and social development and to mitigate environmental impacts.
Effective January 1, 2020, 85% of the funds of the Mining Fund were reallocated to the Public Education Ministry,
and 5% are to be distributed among the municipalities where the mining activities take place. The local communities
where the Company operates may be affected by the cut-back in these funds. It is not yet known if this may have
an impact on the business and operations of the Company.
In January 2020, the Oaxacan Congress approved a Previous, Free and Informed Consultation Law for the Indigenous
and Afromexican Communities in the State of Oaxaca. This law is not yet in effect, and the current timing for its
implementation is not yet known. As a result, the Company is unable to predict how this new legislation may affect
the business and operations of the Company.
Peru
The Company’s operations at the Caylloma Mine are subject to the payment of government taxes, fees and duties.
Holders of mineral concessions are obliged to pay to the Peruvian Government, a mining royalty, as a consideration
for the exploitation of metallic and non-metallic natural resources, which is calculated based on the quarterly sales
revenues from metallic and non-metallic mineral resources at a minimum rate of 1% and up to 12%.
In addition, an additional tax called the “Special Mining Tax” is payable to the Peruvian Government which imposes
a tax on the operating profit of metallic resources at a tax rate that ranges from between 2% to 8.4%.
In some areas of Peru, the development of infrastructure projects and extractive industries have met with strong
rejection from the local population. Such social conflict may lead to public demonstrations and blockades which
could affect the Company’s operations.
The Company is not able to determine the impact of other potential political and country risks on its future financial
position nor its ability to meet future interest or principal payments, which include:
•
•
•
•
•
•
•
•
•
•
cancellation or renegotiation of contracts;
changes in foreign laws or regulations;
changes in tax laws;
royalty and tax increases or claims by governmental entities;
retroactive tax or royalty claims;
expropriation or nationalization of property;
inflation of costs that is not compensated by a currency devaluation;
high rates of inflation;
restrictions on the ability of local operating companies to sell gold, copper or other minerals offshore for
U.S. dollars, and on the ability of companies to hold U.S. dollars or other foreign currencies;
restrictions on the purchase of foreign currencies and on the remittance of dividend and interest payments
offshore;
limitations on the repatriations of earnings;
import and export regulations;
environmental controls and permitting;
•
•
•
• opposition from local community members or non-governmental organizations;
•
•
• other risks arising out of foreign sovereignty over the areas in which the Company’s operations are
civil strife, acts of war, guerrilla activities, insurrection and terrorism;
unenforceability of contractual rights and judgements; and
conducted.
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Such risks could potentially arise in any country in which the Company operates. These risks may limit or disrupt
operating mines or projects, restrict the movement of funds, cause the Company to have to expend more funds than
previously expected or required, and may materially adversely affect the Company’s financial position or results of
operations. 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.
Furthermore, the introduction of new tax laws, regulations or rules, or changes to, or differing interpretation of, or
application of, existing tax laws, regulations or rules in any of the countries in which the Company operates, could
result in an increase in the Company’s taxes, or other governmental charges, duties or impositions. No assurance
can be given that new tax laws, rules or regulations will not be enacted or that existing tax laws will not be changed,
interpreted or applied in a manner that could result in the Company’s profits being subject to additional taxation or
that could otherwise have an adverse material effect on the Company.
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. 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 and/or royalties 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.
Risks related to ILO Convention 169 Compliance
The Company may, or may in the future, operate in areas presently or previously inhabited or used by indigenous
peoples. As a result, the Company’s operations are subject to national and international laws, codes, resolutions,
conventions, guidelines and other similar rules respecting the rights of indigenous peoples, including the provisions
of ILO Convention 169. ILO Convention 169 mandates, among other things, that governments consult with
indigenous peoples who may be impacted by mining projects prior to granting rights, permits or approvals in respect
of such projects.
ILO Convention 169 has been ratified by most Latin American countries including Argentina, Peru and Mexico. It is
possible however that these governments may not (i) have implemented procedures to ensure their compliance
with ILO Convention 169 or (ii) have complied with the requirements of ILO Convention 169 despite implementing
such procedures.
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Government compliance with ILO Convention 169 can result in delays and significant additional expenses to the
Company arising from the consultation process with indigenous peoples in relation to the Company’s exploration,
mining or development projects. Moreover, any actual or perceived past contraventions, or potential future actual
or perceived contraventions, of ILO Convention 169 by ratifying governments in the countries in which the Company
operates create a risk that the permits, rights, approvals, and other governmental authorizations that the Company
has relied upon, or may in the future rely upon, to carry out its operations or plans in such countries could be
challenged by or on behalf of indigenous peoples in such countries.
Such challenges may result in, without limitation, additional expenses with respect to the Company’s operations,
the suspension, revocation or amendment of the Company’s rights or mining, environmental or export permits, a
delay or stoppage of the Company’s development, exploration or mining operations, the refusal by governmental
authorities to grant new permits or approvals required for the Company’s continuing operations until the settlement
of such challenges, or the requirement for the responsible government to undertake the requisite consultation
process in accordance with ILO Convention 169.
As a result of the inherent uncertainty in respect of such proceedings, the Company is unable to predict what the
results of any such challenges would be; however, any ILO Convention 169 proceedings relating to the Company’s
mining and exploration operations in Mexico or Peru, or its development of the Lindero Project and exploration of
other properties in Argentina, may have a material adverse effect on the business, operations, and financial
condition of the Company.
The Company’s success depends on developing and maintaining relationships with local communities and
stakeholders.
The Company’s ongoing and future success depends on developing and maintaining productive relationships with
the communities surrounding its operations, including indigenous peoples who may have rights or may assert rights
to certain of the Company’s properties, and other stakeholders in its operating locations. The Company believes its
operations can provide valuable benefits to surrounding communities, in terms of direct employment, training and
skills development and other benefits associated with ongoing payment of taxes. In addition, the Company seeks to
maintain its partnerships and relationships with local communities, including indigenous peoples, and stakeholders
in a variety of ways, including in-kind contributions, volunteer time, sponsorships and donations. Notwithstanding
the Company’s ongoing efforts, local communities and stakeholders can become dissatisfied with its activities or the
level of benefits provided, which may result in civil unrest, protests, direct action or campaigns against it. Any such
occurrence could materially and adversely affect the Company’s business, financial condition or results of
operations.
As a result of social media and other web-based applications, companies today are at much greater risk of losing
control over how they are perceived.
Damage to the Company’s reputation can be the result of the actual or perceived occurrence of any number of
events, and could include any negative publicity, whether true or not. Although the Company places a great emphasis
on protecting its image and reputation, it does not ultimately have direct control over how it is perceived by others.
Reputation loss may lead to increased challenges in developing and maintaining community relations, decreased
investor confidence and act as an impediment to the Company’s overall ability to advance its projects, thereby
having a material adverse impact 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.
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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.
The Company is faced with uncertainty of funding for exploration and development.
The Company’s ability to continue production, development and exploration activities, if any, will depend on its
ability to generate sufficient operating cash flows from the Caylloma Mine and the San Jose Mine, and from the
Lindero Project when in production, and to obtain additional external financing where necessary. Any unexpected
costs, problems or delays at the Caylloma Mine and the San Jose Mine, or delay in commencement of commercial
production at the Lindero Project, could severely impact the Company’s ability to generate sufficient cash flows and
require greater reliance on alternative sources of financing, including but not limited to: project or bank financing,
or public or private offerings of equity and debt, joint ventures, or utilize one or a combination of all of these
alternatives. 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. Until commencement of commercial production at the Lindero Project
or until the Company 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 indigenous 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:
•
•
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;
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•
•
•
•
•
•
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
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.
Impairments.
Mining and mineral interests are the most significant assets of the Company and represent capitalized expenditures
related to the development of mining properties and related plant and equipment.
The Company reviews and evaluates its mining interests for impairment at each reporting period or when events or
changes in circumstances indicates that the related carrying amounts may not be recoverable which evidences
greater risk levels. It is possible that material changes could occur that may adversely affect management’s estimate
of the carrying value of non-current assets which may have a material adverse effect on the Company. Impairment
estimates are based on management’s assumptions, and sensitivity analyses and actual future outcomes may differ
from these estimates.
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 in foreign
jurisdictions.
The Company’s material mining or exploration property interests are located in Peru, Mexico and Argentina. 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.
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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 Board
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 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.
The mining industry is subject to significant risks that could result in damage to, or destruction of, mineral properties
or producing facilities, personal injury or death, environmental damage, delays in mining, monetary losses and
possible legal liability. The Company’s policies of insurance may not provide sufficient coverage for losses related to
these or other risks. The Company’s insurance does not cover all risks that may result in loss or damages and may
not be adequate to reimburse the Company for all losses sustained. The occurrence of losses or damage not covered
by insurance could have a material and adverse effect on the Company’s business, operations and financial
condition.
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
mining industry. 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.
The Company must comply with the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act (“SOX”) requires 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 auditor is
also required to attest to the effectiveness of the Company’s internal control over financial reporting. The Company
may fail to maintain the adequacy of its internal control over financial reporting as such standards are modified,
supplemented or amended from time to time. If this occurs, the Company may not be able to conclude, on an
ongoing basis, that it has effective internal control over financial reporting in accordance with Section 404 of SOX
and the Company’s auditor may issue an adverse opinion on the effectiveness of its internal control over financial
reporting. The Company’s failure to satisfy the requirements of Section 404 of SOX on an ongoing, timely basis 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. In addition, any failure
to implement required new or improved controls, or difficulties encountered in their implementation, could harm
the Company’s operating results or cause it to fail to meet its reporting obligations. Future acquisitions of
companies, if any, may provide the Company with challenges in implementing the required processes, procedures
and controls in its acquired operations. No evaluation can provide complete assurance that the Company’s internal
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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 ensure ongoing compliance, it cannot
be certain that it will be successful in complying with Section 404 of SOX.
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 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’s Anti-Corruption Policy and other corporate policies
mandate compliance with these anti-bribery laws; however there can be no assurance that the Company’s internal
control policies and procedures always will protect it from fraudulent behavior or dishonesty and other
inappropriate acts committed by the Company’s employees and agents. As such, the Company’s corporate policies
and processes may not prevent all potential breaches of law or other governance practices.
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 is at the date of this AIF subject to litigation and claims in Mexico
and Peru and may, from time to time, 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.
In 2017 the Mexican Geological Service (“SGM”) advised the Company that a previous owner of one of the
Company’s mineral concessions located at the San Jose Mine in Oaxaca, Mexico had granted the SGM a royalty of
3% of the billing value of minerals obtained from the concession. The Company supported by legal opinions from
three independent law firms, has previously advised the Mexican mining authorities that it is of the view that no
royalty is payable, and in 2018 initiated administrative and legal proceedings (the “Administrative Proceedings”) in
the Mexican Federal Administrative Court (“FAC”) against the Direccion General de Minas (“DGM”) to remove
reference to the royalty on the title register. The proceedings are progressing in accordance with the procedures of
the FAC.
In January 2020, the Company received notice from DGM seeking to cancel the mining concession if the royalty, in
the Mexican peso equivalent of US$30 million plus VAT (being the amount of the claimed royalty from 2011 to 2019)
is not paid before March 15, 2020. In February 2020, the Company initiated legal proceedings (the “Amparo
Proceedings”) against the DGM in the Juzgado Séptimo de Distrito en Materia Administrativa en la Ciudad de México
(“District Court”) to contest the cancellation procedure and also to stay the cancellation process. The District Court
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in Mexico City admitted the Company’s legal proceedings on March 2, 2020 and granted a permanent stay of
execution, which protects the Company from the cancellation of the concession until a resolution by the District
Court is reached on the legality of the cancellation procedure. The timing of a decision by the court at first instance
in this action against the DGM is uncertain and may take several months. In the event that the Company is
unsuccessful in these proceedings, it may appeal. If ultimately the Company does not prevail, it may be required to
pay the disputed royalty in order to preserve the mining concession.
General economic conditions could impact the Company’s business.
Turmoil in global financial markets have at times caused a loss of confidence in global financial and credit
markets. 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 recent economic slowdown in China is an example of a visible risk 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:
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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;
until contained, a global pandemic could cause a slowdown in global economic growth and impact the
Company’s share price and financial condition; 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 are beyond the control of the Company and could have a material adverse effect on the Company’s
financial condition and results of operations.
Until contained a global pandemic, including COVID-19, could cause a slowdown in global economic growth and
impact the Company’s business, operations, financial condition and share price.
Epidemics, including the outbreak of COVID-19, which was declared a global pandemic by the World Health
Organization in March 2020, unless contained could cause a slowdown in global economic growth and have a
material adverse effect on the business, operations, financial condition and share price of the Company. As at the
date of this AIF, COVID-19 has spread from China where the virus was originally reported, to other countries including
Peru, Mexico, Argentina and Canada, the countries in which the Company operates.
The international response to the spread of COVID-19 has led to significant restrictions on travel, temporary business
closures, quarantines, global stock market volatility and a general reduction in consumer activity. Such public health
crises can result in operating and supply chain delays and disruptions, global stock market and financial market
volatility, declining trade and market sentiment, reduced movement of people and labour shortages, and travel and
shipping disruption and shutdowns, including as a result of government regulation and prevention measures, or a
fear of any of the foregoing, all of which could affect commodity prices, interest rates, credit ratings, credit risk and
inflation.
As at the date of this AIF, the Governments of Peru and Argentina have implemented measures to curb the spread
of the virus, including among others, the closure of international borders, and the declaration of a mandatory
quarantine period, which in Peru is subject to certain limited exceptions. In Peru, the quarantine period, which was
implemented until March 31, 2020 has been extended to April 12, 2020. In Argentina, as at the date of this AIF, the
quarantine period is in effect until March 31, 2020. There can be no assurance that these measures will not be
extended or that more restrictive measures will be put in place in the countries in which the Company operates,
which may result in the suspension of operations at the Company’s mines and at the Lindero Project on a short or
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long-term basis. As at the date of this AIF, there have been no confirmed cases of COVID-19 associated with the
Company’s workforce.
Even though the Company is implementing business continuity measures to mitigate and reduce any potential
impacts of COVID-19 on its business, operations, supply chain and financial condition, the spread of COVID-19 in the
countries in which it operates could have a material adverse impact on the Company’s workforce; the production at
the Caylloma Mine and the San Jose Mine; the continued operation at those mines and the completion of
construction and the commencement of production at the Lindero Project and the Company’s financial condition.
Refer to “Preliminary Notes - Note about the information contained herein and the Novel Coronavirus”.
The full extent and impact of COVID-19 on the Company’s operations cannot currently be ascertained, as it depends
upon future developments which cannot be predicted, and includes among other matters: the duration of the
outbreak, the severity of the virus and the ability to treat it, the ability to collect sufficient data to track the virus and
the collective actions taken to curb the spread of the virus.
The continued spread of the virus could have a material adverse effect on the economies of the countries in which
the Company operates, including the local communities close to the Company’s operations. In addition, COVID-19
has caused: volatility in commodity prices (including gold, silver, lead and zinc); volatility in the stock markets on
which the Company’s Common Shares and Debentures are listed, and in the price of the Company’s securities. The
continued adverse effects of the spread of COVID-19 if not contained, could have a material adverse effect on the
business, operations and financial condition of Company.
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
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
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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.
Due to the volatility of the exchange rate for Argentine Peso, the Company is applying additional measures in cash
management to minimize potential losses arising from the conversion of funds. There can be no assurance that the
Company will be successful in its cash management measures. With the capital controls in effect when the Company
commences production at the Lindero Project, the Company will be required to convert the equivalent value into
Argentine Peso from the export sale of all gold doré from the Lindero Project. In addition, the Company would be
required to obtain the prior consent of the Argentine Central Bank for the payment of cash dividends and
distributions of profits out of Argentina. These capital controls are in effect until 2025. There can be no assurance
that these capital controls will not have an adverse effect on the financial condition of the Company.
Tax Audits and Reassessments.
In the normal course of business, the Company is subject to assessment by taxation authorities in various
jurisdictions. Any reassessment by applicable tax authorities of the Company’s tax filings and the continuation or
timing of any such process is outside of the Company’s control. There is a risk that applicable tax authorities may
audit the Company or its subsidiaries and issue a notice of reassessment for material amounts. In the event that
applicable tax authorities issue one or more additional notices of reassessment for material amounts of tax, interest
and penalties, the Company is prepared to vigorously defend its position. If the Company is unable to resolve any
of these matters favourably, or if applicable tax authorities issue one or more additional notices of reassessment for
material amounts of tax, interest and penalties, this could have a material and adverse effect on the Company’s
business and its financial condition.
The Company is subject to credit risk through its VAT receivables
The Company is subject to credit risk through its VAT receivables in Mexico and Argentina that are collectible from
the Mexican and Argentine governments, respectively. The balances are expected to be recoverable in full; however
due to legislative rules and the complex collection processes, a significant portion of the asset is classified as non-
current until government approvals of the respective recoveries are approved.
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The 2018 Credit Facility contains financial covenants which the Company could fail to meet
Under the terms of the 2018 Credit Facility, the Company is required to satisfy various affirmative and negative
covenants and to meet certain financial ratios and tests. There is no assurance that in the future the Company will
continue to satisfy these covenants. Furthermore, a breach of these covenants, including a failure to meet the
financial tests or ratios, would likely result in an event of default under the 2018 Credit Facility unless the Company
is able to obtain a waiver or consent in respect of any such breach. The Company cannot provide an assurance that
a waiver or consent would be granted. A breach of any of these covenants or the inability to comply with the required
financial tests or ratios could result in a default under the 2018 Credit Facility. In the event of any default under the
2018 Credit Facility, the lenders could elect to declare all outstanding borrowings, together with accrued interest,
fees and other amounts due thereunder, to be immediately due and payable, which may have a material adverse
impact on the Company’s business, profitability or financial condition.
In addition, an aggregate of $30 million of the revolving portion of the 2018 Credit Facility is due to be repaid on
December 31, 2020. In the event of an unexpectedly prolonged duration of COVID-19, or in the event that more
rigorous capital controls are implemented in Argentina, the Company may be required to restructure the 2018 Credit
Facility. There can be no assurance that the lenders will agree to such a request.
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 2019. Smelting and refining rates are similar to contract rates established for 2018. There is no
assurance that the Company will be able to enter into smelting and refining contracts at similar competitive terms
beyond 2019. The cost of transporting concentrate from the mines to the smelters is dependent on, among other
things, the concentrate destination. Transportation-related costs have been volatile over the last several years and
could continue to be volatile due to a number of factors, including changes in the price of oil or a shortage in the
number of vessels available to ship concentrate to smelters. Increases in these rates would have an adverse impact
on the Company’s results of operations and financial condition.
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.
The Company is dependent upon information technology systems, which are subject to disruption, damage,
failure and risks with implementation and integration.
The Company’s information technology systems used in its operations are subject to disruption, damage or failure
from a variety of sources including without limitation, computer viruses, security breaches, cyberattacks, natural
disasters and defects in design. Cybersecurity incidents, in particular, are evolving and include, but are not limited
to, malicious software, attempts to gain unauthorize access to data or machines and equipment, and other electronic
security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise
protected information, the corruption of data or the disabling, misuse or malfunction or machines and equipment.
Various measures have been implemented to manage the Company’s risks related to information technology
systems and network disruptions. However, given the unpredictability of the timing, nature and scope of
information or operational technology disruptions, the Company could potentially be subject to production
downtimes, operational delays, operating accidents, the compromising of confidential or otherwise protected
information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems
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and networks or financial losses from remedial actions, any of which would have a material and adverse effect on
the Company’s business, financial condition or results of operations.
The Company could also be adversely affected by system or network disruptions if new or upgraded information
technology systems are defective, not installed properly or not properly integrated into operations. Various
measures have been implemented to manage the risks related to the system implementation and modification, but
system modification failures could have a material and adverse effect on the Company’s business, financial condition
or results of operations.
Climate Change Legislation.
Governments are introducing climate change legislation and treaties at the international, national, and local levels.
Regulation relating to emission levels and energy efficiency is becoming more stringent. Some of the costs associated
with reducing emissions can be offset by increased energy efficiency and technological innovation. If the current
regulatory trend continues, this may result in increased costs at some of our operations. The physical risks of climate
change may also adversely impact the Company’s operations. These risks may include extreme weather events,
resource shortages, changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and
changing temperatures.
Risks Relating to the Common Shares
The market price of the Company’s Common Shares and Debentures 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 Toronto Stock Exchange (the “TSX”) and
New York Stock Exchange (the “NYSE”) fluctuated significantly during the past year. Additionally, the price of the
Debentures on the TSX has fluctuated significantly since being listed for trading in October 2019. 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 and Debentures, to decrease dramatically. The price of the
Common Shares and Debentures 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 the vesting of the Company's outstanding share units or as a result of the conversion
of the Company’s Debentures. Any such convertible securities are more likely to be exercised when the market price
of the Company’s Common Shares exceeds the exercise price of such instruments. 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 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.
-38-
The market price of the Common Shares and Debentures 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 and Debentures could decline as a result of issuances of securities by the
Company or sales by its existing shareholders of Common Shares or Debentures 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 Common Shares. Additional Common Shares, Debentures, 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. Additionally, a decrease
in the market price of the Debentures could adversely affect the liquidity of the Common Shares on the TSX. The
Company’s shareholders may be unable, as a result, to sell significant quantities of the Common Shares or
Debentures 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 or Debentures by shareholders
might also make it more difficult for the Company to sell equity or debt 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
Board 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 Board may consider appropriate in the circumstances.
Risks related to the Debentures of the Company.
The terms of the Debentures are governed by the terms and conditions set out in the Debenture indenture between
the Company and Computershare Trust Company of Canada entered into on October 2, 2019 (the “Indenture”). The
Indenture provides, among other things, for the repurchase, conversion and redemption of the Debentures in certain
circumstances and the Company agrees to certain restrictive and affirmative covenants which are set out in the
Indenture. Under the terms of the Indenture, there is a risk that the Company may choose to redeem the outstanding
Debentures for Common Shares or to repay outstanding principal amounts thereunder at maturity of the Debentures
by issuing additional Common Shares. Additionally, the Debentures are subordinate to all senior indebtedness of the
Company. If the Company becomes bankrupt, liquidates its assets, reorganizes or enters into certain other
transactions, the Company will be able to pay its obligations with respect to the Debentures only after it has paid
senior indebtedness and any other secured indebtedness in full. There may be insufficient assets remaining following
such payments to pay amounts due on any or all of the Debentures then outstanding. The Indenture does not restrict
the Company from incurring additional indebtedness for borrowed money or otherwise from mortgaging, pledging
or charging its real or personal property or properties to secure any indebtedness or other financing. A holder of a
Debenture will be subject to such terms and conditions, as further described in the Indenture. A full copy of the
Indenture is available under the Company’s issuer profile at www.sedar.com.
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
-39-
The Company has three 100% owned material mineral projects, described below. The Company filed an updated
technical report on the Lindero Project in 2017 and on each of the San Jose Mine and the Caylloma Mine in 2019,
each of which is summarized below.
Caylloma Mine, Peru
The following is the Summary from the technical report (the “Caylloma Technical Report”) entitled “Fortuna Silver
Mines Inc.: Caylloma Mine, Caylloma District, Peru” with an effective date of March 8, 2019 prepared by Eric
Chapman, P.Geo. and Amri Sinuhaji, P.Eng. This summary is subject to certain assumptions, qualifications and
procedures described in the Caylloma Technical Report and is qualified in its entirety by the full text of the Caylloma
Technical Report which is available for viewing on SEDAR at www.sedar.com and is incorporated by reference in this
AIF, and is also filed with the SEC on EDGAR (available at www.sec.gov). Defined terms and abbreviations used
herein and not otherwise defined shall have the meanings ascribed to such terms in the Caylloma Technical Report.
1. Introduction
This Technical Report (the Report) on the Caylloma Mine in the Caylloma District, Peru, has been prepared by Mr
Eric Chapman, P.Geo, and Mr Amri Sinuhaji, P.Eng. for Fortuna Silver Mines Inc. (Fortuna) in accordance with the
disclosure requirements of Canadian National Instrument 43-101 (NI 43-101). The Report discloses updated Mineral
Resource and Mineral Reserve estimates for the mine.
2. Property description, location and ownership
The Caylloma Mine is located in the Puna region of Peru at an altitude of between 4,300 and 5,000 meters above
sea level (masl). Surface topography is generally steep with vegetation being primarily comprised of grasses and
small shrubs common at high altitudes. The mine facilities are located at approximately 4,300 masl.
Access to the Caylloma Mine is by a combination of sealed and gravel road. The mine is located 225 road kilometers
from Arequipa, a city of approximately a million people that includes an international airport, and requires a trip of
approximately 5 hours by vehicle. Access is available to all concessions via a network of unsealed roads.
The Caylloma Mine is an operating underground mine located in the Caylloma Mining District 14 km northwest of
the town of Caylloma at the UTM grid location of 8192263E, 8321387N, (WGS84, UTM Zone 19S).
The underground mine is operated by Compania Minera Bateas S.A.C. (Bateas), a Peruvian subsidiary 100 % owned
by Fortuna. The operation has infrastructure consisting primarily of the concentration plant, electrical power station,
water storage facilities, tailings facilities, stockpiles, and workshop facilities, all connected by unsealed roads.
Additional structures located at the mine include offices, dining hall, laboratory, core logging and core storage
warehouses.
The property comprises mining concessions; surface rights; a permitted 1,500 tonnes per day (tpd) flotation plant;
connection to the national electric power grid; as well as permits for the infrastructure necessary to sustain mining
operations.
The Caylloma Mine consists of mineral rights for 66 mining concessions for a total surface area of 34,472 hectares
(ha).
Bateas has signed 21 surface rights or easement contracts covering a total of 3,529.89 ha with land owners to cover
the surface area needed for the operation and tailings facilities.
3. 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 Compania Minera Arcata S.A. (CMA), a wholly owned subsidiary of Hochschild
Mining plc in 1981. Fortuna acquired the mine from CMA in 2005.
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CMA focused exploration on identifying high-grade silver vein structures. Exploration was concentrated in the
northern portion of the district and focused on veins including Bateas, El Toro, Paralela, San Pedro, San Cristobal,
San Carlos, Don Luis, La Plata, and Apostles.
Production prior to 2005 came primarily from the San Cristobal vein, as well as from the Bateas, Santa Catalina and
the northern silver veins (including Paralela, San Pedro, and San Carlos) with production focused on silver ores and
no payable credits for base metals. While under CMA management production parameters fluctuated during the
late 1990s, 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.
Production under Bateas management focused on the development of polymetallic veins producing lead and zinc
concentrates with silver and gold credits. Total production since October 2006 through December 31, 2018 is
estimated as 18.1 Moz of silver, 23 koz of gold, 117 kt of lead, and 163 kt of zinc.
4. Geology and mineralization
The 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.
There are two different types of mineralization at Caylloma; the first is comprised of silver-rich veins with low
concentrations of base metals and includes the Bateas, Bateas Techo, La Plata, Cimoide La Plata, San 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.
Underground operations are presently focused on mining the Animas and Animas NE veins.
5. Exploration, drilling, and sampling
CMA implemented a series of exploration programs to complement their mining activities prior to the closure of the
operation in 2002. There is no reliable information available to detail the exploration conducted by CMA at the
Caylloma Mine. Bateas were able to recover and validate information on 47 diamond drill holes totaling 8,177.67 m
drilled by CMA between 1981 and 2003 at the Caylloma Mine.
Since Fortuna took ownership of the property in 2005 the principal exploration conducted at the deposit has been
surface and underground drilling, to explore the numerous vein structures identified through surface mapping or
geophysical surveys conducted by Bateas, or for infill purposes to increase the confidence level of the Mineral
Resource estimates.
As of August 31, 2018, Bateas had completed 1,296 drill holes on the Caylloma Mine totaling 225,361.80 m since the
company took ownership in 2005 and represents all data compiled as of the data cut-off date used for Mineral
Resource estimation. All holes are diamond drill holes and include 544 from the surface totaling 151,774.55 m, and
752 from underground totaling 73,587.25 m. It is important to note that not all the holes presented encountered
mineralization and only drill holes in areas where reasonable geological continuity of mineralized structures could
be established were used in defining and ultimately estimating Mineral Resources.
Bateas has used a number of different drilling contractors to carry out exploration and definition drilling since it took
ownership of the mine in 2005. Both HQ (63.5 mm) and NQ (47.6 mm) diameter core were obtained, depending on
the depth of the hole. Ground conditions are generally good with core recovery averaging 94 %.
Proposed surface drill hole collar coordinates, azimuths and inclinations were designed based on the known
orientation of the veins and the planned depth of vein intersection using geological plan maps and sections as a
guide. Once the coordinates have been determined, the location of the collar is located in the field using differential
global positioning system (GPS) instruments. The drill pad is then prepared at this marked location. Upon completion
-41-
of the drill hole, a survey of the collar is performed using Total Station equipment, with results reported in the collar
coordinates using reference Datum WGS84, UTM Zone 19S.
The geologist in charge of drilling is responsible for orienting the azimuth and inclination of the hole at the collar
using a compass clinometer. Downhole surveys are completed by the drilling contractor using survey equipment
such as a Flexit or Reflex tool at approximately 50 m intervals for all surface drill holes and for underground drill
holes greater than 100 m in length. Bateas assesses the downhole survey measurements as a component of the data
validation.
Drill holes are typically drilled on sections spaced 40 to 60 m apart along the strike of the vein with surface drilling
focusing on exploring the extents of the Animas, Bateas and Nancy veins and underground drilling used for a mix of
exploration and Mineral Resource and Mineral Reserve definition. 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
exploration prospects having only a few drill holes extending over 50 m (Antimonio).
The relationship between the sample intercept lengths and the true width of the mineralization varies in relation to
the intersect angle between the steeply-dipping zone of mineralized veins and the inclined nature of the diamond
core holes. Calculated estimated true widths (ETWs) are always reported together with actual sample lengths by
taking into account the angle of intersection between drill hole and the mineralized structure.
In 2018 all logging became digital, being incorporated daily into the Maxwell DataShed database system. Data were
recorded initially with Excel templates, and later with the Maxwell LogChief application using essentially the same
structure. Both input methods used pick-lists and data validation rules to ensure consistency between loggers.
Separate pages were designed to capture, lithology, alteration, veins, sulfide-oxide zones, minerals, structure
(contacts, fractures, veins, and faults with attitudes to core axis), magnetic susceptibility, and special data (samples
collected for geochemistry, thin section examinations, the core library, density, etc.). Intensity of alteration phases
was recorded using a numeric 1 to 4 scale (weak, moderate, strong, very strong); abundance of veins and most other
minerals were estimated in volume percent.
Geotechnical logging is conducted prior to cutting of the core and involves the collection of drill core recovery and
rock-quality designation (RQD) data. Information is recorded in the field using the Maxwell LogChief application.
The sampling methodology, preparation, and analyses differ depending on whether it is drill core or a channel
sample. All samples are collected by geological staff of Bateas with sample preparation and analysis being conducted
either at the onsite Bateas Laboratory or transported to the ALS Global preparation facility in Arequipa prior to being
sent on for analysis at their laboratory in Lima.
The Bateas laboratory operated by Bateas is not independent and does not hold an international recognized
accreditation.
ALS Global is an independent, privately-owned analytical laboratory group. The preparation laboratory in Arequipa
and the analytical laboratory in Lima are supported by a Quality Management System (QMS) framework which is
designed to highlight data inconsistencies sufficiently early in the process to enable corrective action to be taken in
time to meet reporting deadlines. The QMS framework follows the most appropriate ISO Standard for the service at
hand i.e. ISO 9001:2015 for survey/inspection activity and ISO 17025:2005 UKAS ref 4028 for laboratory analysis.
Channel samples are collected from the backs of underground workings. The entire process is carried out under the
geology department’s supervision. 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). The channel lengths and orientations are identified using paint in the underground working
and by painting the channel number on the footwall. The channel is between 20 cm to 30 cm wide and approximately
2 cm deep, with each individual sample being no longer than 1.5 m.
Drill core is laid out for sampling and logging at the core logging facility at the camp. Sample intervals are marked on
the core and depths recorded on the appropriate box. A geologist is responsible for determining and marking the
drill core intervals to be sampled, selecting them based on geological and structural logging. The sample length must
not exceed 1.2 m or be less than 30 cm.
The elements of silver, copper, lead and zinc are assayed using either; atomic absorption (AA); inductively coupled
plasma atomic emission spectroscopy (ICP-AES); or for high lead and zinc grades volumetric/titration techniques
-42-
(VOL); or for high silver grades gravimetric techniques (GRAV) depending on the laboratory and assay value. Assay
results and certificates are reported electronically by e-mail.
Bulk density samples have been primarily sourced from drill core with a limited number being sampled from
underground workings. Bulk density measurements are performed at the ALS Global Laboratory in Lima using the
OA-GRA09A methodology.
Sample collection and transportation of drill core and channel samples is the responsibility of Brownfields
exploration and the Bateas mine geology departments and must follow strict security and chain of custody
requirements established by Fortuna. Samples are retained in accordance with the Fortuna corporate sample
retention policy.
Implementation of a quality assurance/quality control (QAQC) program is current industry best practice and involves
establishing appropriate procedures and the routine insertion of certified reference material (CRMs), blanks, and
duplicates to monitor the sampling, sample preparation and analytical process. Fortuna implemented a full QAQC
program to monitor the sampling, sample preparation and analytical process for all drilling campaigns in accordance
with its companywide procedures. The program involved the routine insertion of CRMs, blanks, and duplicates.
Evaluation of the QAQC data indicate that the data are sufficiently accurate and precise to support Mineral Resource
estimation.
6. Data verification
Bateas 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 Administrator who is responsible for overseeing data entry,
verification and database maintenance. A separate Database Auditor is responsible for performing a detailed
independent review of the database on a quarterly basis and submitting a report to Fortuna management detailing
the findings. Any issues identified are immediately resolved by the administrator.
Data used for Mineral Resource estimation are stored in Maxwell GeoService’s commercial SQL database system
(DataShed), storing both mine related data (including channel samples) and drilling related results (exploration and
infill drilling).
Data was transferred from an inhouse SQL database system to DataShed by early 2018 with the support of Maxwell
personnel. Both databases were run in tandem until a full verification process had been completed to prove parity
between the systems, at which point the original database was archived.
As a component of the 2018 Mineral Resource estimate, a preliminary validation of the Bateas database was
performed by the Database Administrator in June 2018. The database has a series of automated import, export, and
validation tools to minimize potential errors. Any inconsistencies identified were corrected during the analysis with
the database then being handed over for final QP review on August 31, 2018 in Microsoft Access format.
In addition, data verification by the QP was also conducted through the inspection of selected drill core to assess the
nature of the mineralization and to confirm geological descriptions as well as the inspection of geology and
mineralization in underground workings of the Bateas, Animas/Animas NE, and Nancy veins.
A series of plan and cross sections were generated displaying the lithologic and mineralization interpretation by the
Bateas geology and exploration departments and reviewed by the QP’s of Fortuna.
The QP is of the opinion that the data verification programs performed on the data collected by Bateas are adequate
to support the geological interpretations, the analytical and database quality, and Mineral Resource estimation at
the Caylloma Mine.
7. Mineral processing and metallurgical testing
The Caylloma Mine has an extensive body of metallurgical investigation focused primarily on testwork conducted
while treating ore at the operation since 2006. In the opinion of the QP, the Caylloma metallurgical samples tested
and the ore that is presently treated in the plant is representative of the orebody as a whole in respect to grade and
metallurgical response. Differences between vein systems are minimal with regard to recovery.
Metallurgical recovery values forecast in the LOM for sulfide material average 84 % for silver, 17 % for gold, 91 % for
lead, and 90 % for zinc with the exception of the Ramal Piso Carolina vein that forecasts a metallurgical recovery rate
-43-
of 75 % for Au. Metallurgical recovery is forecast for zinc oxide material to average 57 % for silver, 17 % for gold,
57 % for lead, and 35 % for zinc.
Until 2012 ore identified as containing high zinc oxide content was classified as not amenable for flotation.
Laboratory and plant tests conducted since 2013 include metallurgical testing of material from the different levels
of the Animas vein. The main conclusion was that zinc oxide contents greater than 0.20 % within the ore were related
to 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 zinc oxide ore content to no more than 5 % of the feed to the plant.
Beyond the loss in metallurgical recovery related to elevated zinc oxide material, as described above, there are no
additional deleterious elements that require special treatment in the plant as of the effective date of this Report.
8. Mineral Resources
The 2018 Mineral Resource update has relied on channel and drill hole sample information obtained by Bateas since
2005. Mineralized domains identifying potentially economically extractable material were modeled for each vein
and used to code drill holes and channel samples for geostatistical analysis, block modeling and grade interpolation
by ordinary kriging or inverse distance weighting.
Net smelter return (NSR) values for each mining block take into account expected commercial terms, the average
metallurgical recovery, the average grade in concentrate and long term projected metal prices. Mineral Resources
take into account operational costs and have been reported above a US$ 50/t NSR cut-off value for veins wider than
two meters and amenable to extraction by semi-mechanized mining methods (Animas, Animas NE, Nancy, and San
Cristobal veins); or above a US$ 135/t NSR cut-off value for veins narrower than two meters regarded as amenable
to conventional mining methods (all other veins).
Resource confidence classification considers a number of aspects affecting confidence in the resource estimation
including; geological continuity and complexity; data density and orientation; data accuracy and precision; and grade
continuity. Mineral Resources are categorized as Measured, Indicated or Inferred. The criteria used for classification
includes the number of samples, spatial distribution, distance to block centroid, kriging efficiency (KE) and slope of
regression (ZZ).
Mineral Resources exclusive of Mineral Reserves for the Caylloma Mine are reported as of December 31, 2018 and
detailed in Table 1.1.
Table 1.1 Mineral Resources as of December 31, 2018
Category
Measured
Indicated
Measured + Indicated
Inferred
Notes on Mineral Resources
Tonnes
(000)
524
1,633
2,157
5,354
Ag (g/t)
Au (g/t)
Pb (%)
Zn (%)
73
77
76
102
0.32
0.29
0.30
0.32
1.16
1.23
1.22
2.40
2.23
2.25
2.24
3.83
Contained Metal
Ag (Moz) Au (koz) Pb (kt)
6
20
1.2
5
4.1
15
5.3
17.6
21
56
26
129
Zn (kt)
12
37
48
205
• Mineral Resources are as defined by the 2014 CIM Definition Standards for Mineral Resources and Mineral Reserves
• Mineral Resources are exclusive of Mineral Reserves
• Mineral Resources which are not Mineral Reserves do not have demonstrated economic viability
• Mineral Resources are estimated as of August 31, 2018 and reported as of December 31, 2018 taking into account
production related depletion for the period through December 31, 2018
• Mineral Resources are reported above an NSR cut-off grade of US$ 50/t for wide veins and US$ 135/t for narrow veins
based on actual operational costs
• Metal prices used in the NSR evaluation are US$ 18.25/oz for silver, US$ 1,320/oz for gold, US$ 2,270/t for lead and
US$ 2,750/t for zinc
• Metallurgical recovery values used in the NSR evaluation of sulfide material are 84 % for silver, 17 % for gold, 91 % for
lead, and 90 % for zinc with the exception of the Ramal Piso Carolina vein that uses metallurgical recovery rates of 75
% for Au
• Metallurgical recovery values used in the NSR evaluation of zinc oxide material are 57 % for silver, 17 % for gold, 57 %
for lead, and 35 % for zinc
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• Mining, processing and administrative costs used to determine NSR cut-off values were estimated based on first half of
2018 actual operating costs
Eric Chapman, P.Geo. (APEGBC #36328) is the Qualified Person for resources being an employee of Fortuna Silver Mines
Inc.
Tonnes are rounded to the nearest thousand
Totals may not add due to rounding
•
•
•
Factors that may affect the estimates include metal price and exchange rate assumptions; changes to the
assumptions used to generate the cut-off grade; changes in local interpretations of mineralization geometry and
continuity of mineralized zones; changes to geological and mineralization shape and geological and grade continuity
assumptions; variations in density and domain assignments; geometallurgical assumptions; changes to geotechnical,
mining, dilution, and metallurgical recovery assumptions; change to the input and design parameter assumptions
that pertain to the conceptual stope designs constraining the estimates; and assumptions as to the continued ability
to access the site, retain mineral and surface rights titles, maintain environment and other regulatory permits, and
maintain the social license to operate.
There are no other known environmental, legal, title, taxation, socioeconomic, marketing, political or other relevant
factors that would materially affect the estimation of Mineral Resources or Mineral Reserves that are not discussed
in this Report.
9. Mineral Reserves
Mineral Reserve estimates follow standard industry practices, considering only Measured and Indicated Mineral
Resources as only these categories have sufficient geological confidence to be considered Mineral Reserves (CIM,
2014). Subject to the application of modifying factors, Measured Resources may become Proven Reserves and
Indicated Resources may become Probable Reserves. Mineral Reserves are reconciled quarterly against production
to validate dilution and recovery factors.
Mineral Reserve estimates for the Caylloma Mine are reported as of December 31, 2018 and detailed in Table 1.2.
Table 1.2 Mineral Reserves as of December 31, 2018
Category
Proven
Probable
Proven +Probable
Notes on Mineral Reserves
Tonnes
(000)
149
2,477
2,626
Ag (g/t)
Au (g/t)
Pb (%)
Zn (%)
Contained Metal
Ag (Moz) Au (koz)
85
77
77
0.26
0.18
0.18
2.09
2.12
2.11
3.23
3.71
3.69
0.4
6.1
6.5
1
14
15
Pb (kt)
3
52
Zn (kt)
5
92
56
97
• Mineral Reserves are as defined by the 2014 CIM Definition Standards for Mineral Resources and Mineral Reserves
• Mineral Reserves are estimated as of August 31, 2018 and reported as of December 31, 2018 taking into account
production related depletion for the period through December 31, 2018
• Mineral Reserves are reported above NSR breakeven cut-off values based on the proposed mining method for
extraction including; mechanized (breasting) at US$ 82.90/t; mechanized (enhanced) at US$ 70.30/t; semi-mechanized
at US$ 93.10/t; and conventional at US$ 173.70/t
• Metal prices used in the NSR evaluation are US$ 18.25/oz for silver, US$ 1,320/oz for gold, US$ 2,270/t for lead, and
US$ 2,750/t for zinc
• Metallurgical recovery values used in the NSR evaluation of sulfide material are 84 % for silver, 17 % for gold, 91 % for
lead, and 90 % for zinc with the exception of the Ramal Piso Carolina vein that uses metallurgical recovery rates of 75
% for Au
• Metallurgical recovery values used in the NSR evaluation of zinc oxide material are 57 % for silver, 17 % for gold, 57 %
for lead, and 35 % for zinc
• Mining, processing and administrative costs used to determine NSR cut-off values were estimated based on first half of
2018 actual operating costs
• Mining recovery is estimated to average 92 % with mining dilution ranging from 10 % to 40 % depending on the mining
methodology
Amri Sinuhaji, P.Eng (APEGBC #48305) is the Qualified Person for reserves being an employee of Fortuna Silver Mines
Inc.
Tonnes are rounded to the nearest thousand
Totals may not add due to rounding
•
•
•
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10. Mining methods
The mining method employed at the Caylloma Mine is cut-and-fill which is commonly used in the mining of 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. The operation bases its mining plan on a
mix of mechanized, semi-mechanized, and conventional extraction methods based on vein width and rock quality.
The mining production period extends from 2019 to 2023, almost 5 years. At full production the planned mining rate
is 1,500 tpd (535,500 tonnes per annum). Planned LOM ore production is 2.63 Mt at an average silver grade of 77 g/t,
gold grade of 0.18 g/t, lead grade of 2.11 %, and zinc grade of 3.69 %.
The QP is of the opinion that:
•
•
•
•
The mining method being used is appropriate for the deposit being mined. The underground mine design,
stockpiles, tailings facilities, and equipment fleet selection are appropriate for the operation
The mobile equipment fleet presented is based on the actual mining operations, which is known to achieve
the production targets set out in the LOM
The mine plan method is based on standard industry practices and has been employed at the operation for
the previous seven years, and presents low risk
Inferred Resources are not included in the mine plan
• All mine infrastructure and supporting facilities meet the needs of the current mine plan and production
rate
11. Recovery methods
The current process plant design is split into four principal stages including; crushing; milling; flotation; and
thickening, filtering and shipping.
The QP considers process requirements to be well understood, and consistent based on the actual observed
conditions in the operating plant. There is no indication that the characteristics of the material being mined will
change and therefore the recovery assumptions applied for future mining are considered as reasonable for the LOM.
12. Project infrastructure
All mine and process infrastructure and supporting facilities are in place at the operation with an increase in tailings
storage facility and designation of underground waste disposal area only required to meet the needs of the mine
plan and production rate. The QPs note that:
•
•
The Caylloma Mine is located 225 km, or 5 hours by road from the city of Arequipa, the main service center
for the operation, with good year-round access
The mine site infrastructure has a footprint of 91.12 ha associated with the Huayllacho beneficiation
concession
• An expansion to the tailings facility was completed in January 2019, with a second phase planned for
construction in 2021, providing sufficient capacity for the LOM
•
Power demand on the mine site is 5.5 MW provided mainly (96 %) through the national power grid and two
diesel generators on site to cover the shortfall and provide backup
• Water demand at the Caylloma Mine is 60 l/s, including 10 l/s for the camp. Approximately 70 % of the
processing plant total water consumption is recovered from tailings facility N° 3 with the other 30 % from
fresh water provided by the Santiago River
• All process buildings, offices, and camp facilities for operating the mine have been constructed
13. Market studies and contracts
Since the operation commenced production in October 2006 a corporate decision was made to sell the concentrate
on the open market. In order to get the best commercial terms for the concentrates, it is Fortuna’s policy to sign
-46-
contracts for periods no longer than one year. All commercial terms entered between the buyer and Bateas are
regarded as confidential, but are considered to be within standard industry norms.
The QP has reviewed the information provided by Fortuna on marketing, contracts, metal price projections and
exchange rate forecasts and notes that the information provided support the assumptions used in this Report and
are consistent with the source documents, and that the information is consistent with what is publicly available
within industry norms.
14. Environmental studies and permitting
The mining operation has been developed under strict compliance of norms and permits required by public
institutions associated with the mining sector. Furthermore, all work follows quality and safety international norms
as set out in ISO 14001 and OHSAS 18000.
In addition to these norms and permits obtained from the environmental department, the operation also ensures
all environmental activities are regularly monitored and recorded as part of the quality control measures that are
presented to the Ministry of Energy and Mining (MEM) and other legal regulatory organizations.
Of particular importance is monitoring of the quality of river water in the area. This activity involves monitoring the
Santiago River, being the main river that passes through the property, employing people from the local communities
to verify the results.
Bateas has a very strong commitment to the development of neighboring communities of the Caylloma Mine. In this
respect, Bateas 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.
Mine closure is also included in the environmental program. For 2019 a total of US$ 655,000 has been budgeted for
the ongoing closure plan and environmental liabilities. The closure plan is performed to ensure compliance with the
programs and plans submitted to the MEM. Budgeted mine closure costs for the LOM total US$ 11.3 million.
15. Capital and operating costs
Capital and operating cost estimates are based on established cost experience gained from current operations,
projected budget data and quotes from manufacturers and suppliers.
The capital and operating cost provisions for the LOM plan that supports Mineral Reserves have been reviewed. The
basis for the estimates is appropriate for the known mineralization; mining and production schedules; marketing
plans; and equipment replacement and maintenance requirements.
The QP considers the capital and operating costs estimated for the Caylloma Mine as reasonable based on industry-
standard practices and actual costs observed for 2018.
16. Economic analysis
Fortuna is using the provision for producing issuers, whereby producing issuers may exclude the information
required under Item 22 for technical reports on properties currently in production and where no material production
expansion is planned.
Mineral Reserve declaration is supported by a positive cashflow for the period set out in the LOM based on the
assumptions detailed in this Report.
17. Conclusions, risks, and opportunities
This Report represents the most accurate interpretation of the Mineral Reserve and Mineral Resource available as
of the effective date of this report. The conversion of Mineral Resources to Mineral Reserves was undertaken using
industry-recognized methods, and estimated operational costs, capital costs, and plant performance data. Thus, it is
considered to be representative of future operational conditions. This Report has been prepared with the latest
information regarding environmental and closure cost requirements.
A number of opportunities and risks were identified by the QPs during the evaluation of the Caylloma Mine.
Opportunities include:
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• Reduction in backfill costs through the optimization of the backfilling methodology in order to improve
mining productivity by reducing work cycle times
• Reduction in mining costs via improvements in the underground communication system which would allow
for faster and more efficient decision making, improve logistical coordination, and reduce downtime, hence
improve overall mining productivity
• Reduction in overall pumping costs through improvements to the mine dewatering system resulting in
reduced power consumption and maintenance requirements
•
Potential to expand current resources through exploration of the Animas NE vein with mineralization
remaining open to the northeast and at depth
Risks include:
• Bateas management occasionally receives requests from local authorities and/or civil organizations
regarding unrealistic social expectations. Bateas are mitigating the risk of conflict regarding these demands
by working with local authorities, land owners, and communities to address expectation levels and to take
requests into account in preparing its annual community relations work program and budget
18. Recommendations
Recommendations for the next phase of work have been broken into those related to ongoing exploration activities
and those related to additional technical and operational studies. Recommended work programs are independent
of each other and can be conducted concurrently. The exploration phase is estimated to cost US$ 521,000 with
additional technical studies estimated to cost US$ 280,000.
i)
Exploration
•
Exploration. It is recommended that Bateas continue surface mapping and TerraSpec analysis of key areas
of interest including Animas, Antacollo, and Antimonio to identify potential future drill targets. The
budgeted cost of the surface mapping activities for 2019 is US$ 36,000 (excluding personnel costs).
• Delineation (infill) drilling. Bateas is planning to continue the delineation drilling from underground in 2019
focusing on the junction between the Animas and Animas NE vein at depth. A total of 3,830 m of drilling
and 55 m of development drift is planned at a budgeted total cost of US$ 480,000.
• Bulk density determination. It is recommended that the number of bulk density measurements by
increased in veins that lack sufficient values for meaningful statistical analysis. In addition to this it is also
recommended that a study be performed to improve the understanding of bulk density in the deposit. If a
correlation between density and mineralogy could be established it may provide a superior alternative than
the presently used density assignment methodology. This program cost is estimated at US$ 5,000.
ii)
Technical and operational studies
• Underground communication system. In 2019 it is recommended that the first phase of an improved
underground communication system be installed to connect key areas of the mine at a budgeted cost of
US$ 40,000. Based on positive results from the first phase the system could be extended throughout the
mine to reach other production and production related areas.
• Backfill system optimization. It is recommended that an evaluation of the backfilling system is conducted
at the operation. A trade off analysis should be conducted to benchmark the current hydraulic backfill
system against alternative methods. The study should investigate the potential impacts on OPEX and CAPEX.
The budgeted cost of the study is US$ 70,000.
• Review of mining methodology. The width of mineralization and rock quality varies greatly throughout the
deposit. It is recommended that an evaluation of mining method be conducted to assess if smaller
equipment could be used to extract mineralized material from narrow veins with poor rock quality, and if
more massive mining methods such as long-hole stoping could be employed in wide veins with good rock
quality. Any such study would need to account for the variable equipment that would be required to deal
-48-
•
•
with multiple mining methods. The study could be conducted inhouse or externally, with an external cost
estimated at US$ 50,000.
Plant expansion conceptual study. A conceptual cost-benefit analysis is recommended to assess if the
production rate at the Caylloma plant could be increased to reduce costs. The study could be conducted
inhouse or externally, with an external cost estimated at US$ 120,000.
Zinc oxide study. The response of zinc oxide material to the flotation process requires additional testwork.
Initial plant testwork indicates that this material can be blended with low zinc oxide material and processed
through flotation without a significant loss in recovery, although the percentage blend at which the zinc
oxide becomes detrimental has not been established. It is recommended that inhouse analysis be
conducted to assess the impact of varying levels of zinc oxide on plant recovery to determine a blending
threshold at which recovery is not affected.
[End of Extract of Summary from Caylloma Technical Report]
See “Three Year History and Recent Developments - Updated Mineral Reserve and Mineral Resource Estimates”
herein for further information regarding the Caylloma Mine.
San Jose Mine, Mexico
The following is the Summary from the technical report (the “San Jose Technical Report”) entitled “Fortuna Silver
Mines Inc.: San Jose Mine, Oaxaca, Mexico” with an effective date of February 22, 2019 prepared by Eric Chapman,
P.Geo. and Amri Sinuhaji, P.Eng. This summary is subject to certain assumptions, qualifications and procedures
described in the San Jose Technical Report and is qualified in its entirety by the full text of the San Jose Technical
Report which is available for viewing on SEDAR at www.sedar.com and is incorporated by reference in this AIF, and
is also filed with the SEC on EDGAR (available at www.sec.gov). Defined terms and abbreviations used herein and
not otherwise defined shall have the meanings ascribed to such terms in the San Jose Technical Report.
1. Introduction
This Technical Report (the Report) on the San Jose Mine in Oaxaca, Mexico (the San Jose Mine or the Project), has
been prepared by Mr Eric Chapman, P.Geo, and Mr Amri Sinuhaji, P.Eng. for Fortuna Silver Mines Inc. (Fortuna) in
accordance with the disclosure requirements of Canadian National Instrument 43-101 (NI 43-101). The Report
discloses updated Mineral Resource and Mineral Reserve estimates for the mine.
2. Property description, location and ownership
The San Jose Mine area is characterized by gently-sloping hills and adjoining colluvial-covered plains. Elevations
above mean sea level range from approximately 1,540 m to 1,675 m. The vegetation is grasslands and thorn-bush
that are typical of dry savannah climates being temperate in nature with an average annual temperature of 19.5 0C.
Mining operations are conducted on a year-round basis.
The mine is located in the central portion of the state of Oaxaca, Mexico. The mine site is 47 km by road south of the
city of Oaxaca, which provides access to an international airport, and 0.8 km east of federal highway 175, the major
highway between Oaxaca and Puerto Angel on the Pacific coast. The village of San Jose del Progreso is located 2 km
to the southeast of the project site.
The underground mine is operated by Compania Minera Cuzcatlan S.A. de C.V. (Cuzcatlan), a Mexican subsidiary
100% owned by Fortuna. 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, dining hall, laboratory, core logging and core storage warehouses. The tailings facility is located
approximately 1,500 m to the southwest of the concentration plant.
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The property comprises mining concessions; surface rights; a permitted 3,000 tonnes per day (tpd) flotation plant;
connection to the national electric power grid; as well as permits for the infrastructure necessary to sustain mining
operations.
The San Jose Property consists of mineral rights for 31 mining concessions all located in the state of Oaxaca for a
total surface area of approximately 64,422 hectares (ha). Tenure is held in the name of Cuzcatlan with all mining
concessions having an expiry date beyond the expected mine life.
As of December 31, 2018, the only concession that contains Mineral Resources or Mineral Reserves subject to back-
in rights, liens, payments or encumbrances is Reduccion Taviche Oeste, which is subject to a 1.5 % NSR royalty to
Maverix Minerals Inc., and a 1 % NSR royalty to SGM.
Cuzcatlan has signed 44 usufruct contracts, which have been registered before the National Agrarian Registry, with
land owners to cover the surface area needed for the operation and tailings facilities.
Cuzcatlan has an environmental commitment related to the remediation of the current mining facilities located on
the Progreso and Reduccion Taviche Oeste concessions. Cuzcatlan is to set aside US$ 5.3 million to cover
remediation and closure requirements. These programs are ongoing with funds assigned to various projects on an
annual basis.
3. History
The earliest recorded activity in the San Jose del Progreso area dates to the 1850s when the mines were exploited
on a small scale by the local hacienda. By the early 1900s, a large number of silver-and gold-bearing deposits were
being exploited in the San Jeronimo Taviche and San Pedro Taviche areas. Mining activity in the district diminished
drastically with the onset of the Mexican Revolution in 1910, only to resume sporadically in the 1920s.
Mining in the San Jose area was re-activated on a small scale in the 1960s and again in 1980 when the San Jose Mine
was acquired by Minerales de Oaxaca S.A. (MIOXSA). The mine was worked intermittingly by MIOXSA through to the
end of 2006 when the property was purchased by Cuzcatlán a Mexican registered company then owned jointly by
Fortuna and Continuum Resources Ltd. (Continuum) with sole ownership transferring to Fortuna in March 2009.
From 1980 through 2006, production by MIOXSA was intermittent and came primarily from existing stopes and from
development of the fourth, fifth, and sixth levels of the San Jose Mine. Ore was mined primarily from the Bonanza
and Trinidad veins and extracted at rates of approximately 100 tpd. The principal mining method used by MIOXSA
was shrinkage stoping. The ore was processed at a small crushing and flotation plant in San Jeronimo de Taviche,
located approximately 19 km from the San Jose Mine. Reliable estimates of the total production during MIOXSA’s
tenure are not available.
Commercial production commenced under the management of Cuzcatlan on September 1, 2011. Since then,
underground mining has focused on the Bonanza, Trinidad and Stockwork veins. Total production since September
2011 through December 31, 2018 is estimated as 35.9 Moz of silver and 269 koz of gold.
4. Geology and mineralization
The San Jose Mine area is underlain by a thick sequence of sub-horizontal andesitic to dacitic volcanic and
volcaniclastic rocks of presumed Paleogene age. These units have been significantly displaced along major north and
northwest-trending extensional fault systems with the precious metal mineralization being hosted in hydrothermal
breccias, crackle breccias, and sheeted stockwork-like zones of quartz/carbonate veins emplaced within zones of
high paleo permeability associated with the extensional structures.
The mineralized structural corridor extends for more than 3 km in a north-south direction and has been subdivided
into the Trinidad Deposit area and the San Ignacio area. The Mineral Resource and Mineral Reserve estimates
discussed in this Technical Report are located in the Trinidad Deposit area.
The major mineralized structure in the Trinidad Deposit area consists of a sheeted and stockworked quartz–
carbonate vein system referred to as the main Stockwork Zone located between the primary Trinidad and Bonanza
structures. In addition, several secondary vein systems are present locally in the hanging wall and footwall of the
Trinidad and Bonanza structures.
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The Victoria mineralized zone is located approximately 350 m east of the Trinidad vein and north of the current
underground operations of the San Jose Mine. It is structurally related to the same extensional behavior that
dominates the Trinidad Deposit with a similar style of mineralization, corresponding to a low sulfidation epithermal
deposit formed in a shallow crustal environment with a relatively low temperature resulting in the precipitation of
silver and gold mineralization.
5. Exploration, drilling and sampling
The San Jose Mine has been subjected to a number of documented exploration programs since 1999 including:
•
•
•
•
In 1999 Pan American Silver (Pan American) optioned the property from MIOXSA and conducted surface
and underground mapping and sampling including the drilling of five diamond drill holes totaling 1,093.5 m
In 2004, Continuum completed an option agreement with MIOXSA and completed detailed mapping and
chip-channel sampling of the surface and of the existing underground workings in the Trinidad area
followed by the completion of 15 surface diamond drill holes totaling 4,876.55 m
From 2006 to 2015 the principal exploration conducted by Fortuna at the deposit has been surface and
underground drilling, both to explore the deposit to the north and to depth and for infill purposes to
increase the confidence level of the Mineral Resource estimates
Since 2015, exploration has continued to explore the continuity of the mineralized system to the north,
south and at depth of the Trinidad Deposit. During this period the Victoria mineralized zone was discovered
approximately 350 m east of the Trinidad Deposit and has been explored with the drilling of 51 holes from
underground totaling 27,671.60 m as of June 30, 2018
As of June 30, 2018, the data cut-off date for estimation of Mineral Resources, a total of 845 drill holes totaling
299,319.45 m have been completed on the San Jose Mine area 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 to the far north of the Trinidad Deposit, as well as in the newly discovered Victoria mineralized zone.
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 845 diamond drill holes.
A total of 662 diamond core holes totaling 221,400.75 m have been drilled in the Trinidad Deposit area and 51 holes
totaling 27,671.60 m in the Victoria mineralized zone. In Trinidad, the majority of the holes have been drilled from
east to west to cross-cut the steeply east-dipping mineralized zone at high angles, whereas in the Victoria
mineralized zone, the holes have been drilled from west to east from underground to intersect the subvertical
Victoria main structure. Of the 723 holes, 250 have been drilled from the surface and the remainder from
underground.
The diamond drilling typically commences with HQ-diameter core (63.5 mm) 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 undertaken with smaller diameter drilling tools with
the core diameter being reduced to NQ2 (50.6 mm) or NQ-size (47.6 mm) to completion of the hole. In the Trinidad
Deposit, five of the drill holes were further reduced to BQ-size (36.5 mm) diameter in order to complete the drill
holes to the target depths. All of the drilling completed in the project area has been carried out by contract drilling
service companies. Ground conditions are generally good with core recovery averaging 99 %.
Surface drill hole collars were surveyed using differential global positioning system (GPS) and total station survey
methods. Concrete monuments are constructed at each collar location recording the drill hole name, azimuth,
inclination and total depth. At locations where the drill hole collar is located in a cultivated field, the collar monument
is constructed approximately 50 cm below the actual surface.
Underground drill hole collars were surveyed using total station survey methods. Concrete monuments similar to
those used for surface collars are constructed to mark the location with the drill hole name, azimuth, inclination and
total depth recorded.
Down-hole surveys have been completed for 827 of the 845 drill holes completed as of the data cut-off date. For the
18 holes where downhole surveys are not recorded, 17 were drilled prior to 2007 with only three being drilled in the
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Trinidad Deposit. The azimuth and dip orientation of these holes was recorded at the collar to account for drilling
direction. The absence of downhole surveys in three of the 662 holes drilled at Trinidad is not regarded as material
to the resource estimate.
Downhole surveys are typically completed at 50 m intervals although recent drill holes include downhole surveys at
10 m intervals until reaching 50 m depth and then at 50 m intervals thereafter. All downhole surveys have been
carried out by the drilling contractor using Reflex electronic downhole survey tools.
To-date, drilling has been conducted at the Trinidad Deposit over a strike length of approximately 2,500 m and to
depths exceeding 800 m from surface. Exploration drilling has generally increased in depth to the north.
Drilling of the Victoria mineralized zone has been conducted over a strike length of approximately 1,300 m and
covers a vertical extent of approximately 500 m, with upper holes intersecting the structure at least 250 m below
the surface.
The extent of drilling of the San Ignacio area continues directly to the south of the Trinidad Deposit and has been
conducted over a strike length of approximately 1,000 m and to depths of up to 500 m from surface.
The relationship between the sample intercept lengths and the true width of the mineralization varies in relation to
the intersect angle between the steeply dipping zone of mineralized veins and the inclined nature of the diamond
core holes. Calculated estimated true widths (ETWs) are always reported together with actual sample lengths by
taking into account the angle of intersection between drill hole and the mineralized structure.
In 2018 all logging became digital, being incorporated daily into the Maxwell DataShed database system. Data were
recorded initially with Excel templates, and later with the Maxwell LogChief application using essentially the same
structure. Both input methods used pick-lists and data validation rules to ensure consistency between loggers.
Separate pages were designed to capture metadata, lithology, alteration, minerals (sulfides, oxides, and limonite),
structure (contacts, fractures, veins, and faults with attitudes to core axis). Intensity of alteration phases was
recorded using a numeric 1 to 4 scale (weak, moderate, strong, complete).
Geotechnical logging consists of the collection of specified data fields including; recovery percentage and rock quality
designation (RQD) length. Joint filling and joint weathering are described during the geologic logging. A tablet-based
data entry program was developed by Cuzcatlan using the Maxwell LogChief software. Data checks are implemented
into this program to prevent entry of erroneous data.
The sampling methodology, preparation, and analyses differ depending on whether it is drill core or a channel
sample. All samples are collected by Cuzcatlan geological staff with sample preparation and analysis being conducted
either at the onsite Cuzcatlan Laboratory or transported to the ALS Global preparation facility in Guadalajara prior
to being sent on for analysis at their laboratory in Vancouver.
The Cuzcatlan Laboratory used by Fortuna/Cuzcatlan since 2012 for assaying channel samples was accredited as a
testing laboratory with the requirements of ISO/IEC 17025:2005 for sample preparation and assaying of silver and
gold on March 2, 2018, prior to this the laboratory was not certified. The Cuzcatlan Laboratory is not independent
of Fortuna/Cuzcatlan.
The ALS Global Laboratory is an independent, privately-owned analytical laboratory group. The Vancouver
laboratory holds ISO 17025 accreditation. The Mexican laboratory holds ISO 9001:2000 certification.
The SGS Laboratory used by Cuzcatlan as an umpire laboratory is an independent privately-owned analytical
laboratory located in Durango, Mexico and holds ISO/IEC 17025:2005 accreditation for sample preparation and
assaying.
Channel chip samples are generally collected from the face of newly exposed underground workings. The entire
process is carried out under the mine geology department’s supervision. Sampling is carried out at 3 m intervals
within the drifts and stopes of all veins. The channel’s length and orientation are identified using paint in the
underground working and by painting the channel number on the footwall. The channel is typically approximately
20 cm wide and approximately 1 to 2 cm deep, with each individual sample preferably being no smaller than 0.4 m
and no longer than 1.5 m.
Drill core is laid out for sampling and logging at the core logging facility at the camp. Sample intervals are marked on
the core and depths recorded on the appropriate box. A geologist is responsible for determining and marking the
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drill core intervals to be sampled, selecting them based on geological and structural logging. The sample length must
not exceed 2 m or be less than 20 cm.
All samples collected by Cuzcatlan are assayed by atomic absorption (AA) spectroscopy and by fire assay (FA) with
gravimetric finish. For drill samples only, a full suite of trace elements is analyzed using an aqua regia digestion
followed by inductively-coupled plasma (ICP) analysis. Assay results and certificates are reported electronically by e-
mail. Since mid-2018 the onsite laboratory has also assayed channel samples and selected composites for fluorine
using a selective ion electrode (ISE) technique.
Bulk density samples have been primarily sourced from drill core with a limited number being sampled from
underground workings. Bulk density measurements are performed at the ALS Global Laboratory in Vancouver using
the OA-GRA08 methodology.
Sample collection and transportation of drill core and channel samples is the responsibility of Brownfields
exploration and the Cuzcatlan mine geology departments and must follow strict security and chain of custody
requirements established by Fortuna. Samples are retained in accordance with the Fortuna corporate sample
retention policy.
Implementation of a quality assurance/quality control (QAQC) program is current industry best practice and involves
establishing appropriate procedures and the routine insertion of certified reference material (CRMs), blanks, and
duplicates to monitor the sampling, sample preparation and analytical process. Fortuna implemented a full QAQC
program to monitor the sampling, sample preparation and analytical process for all drilling campaigns in accordance
with its companywide procedures. The program involved the routine insertion of CRMs, blanks, and duplicates.
Evaluation of the QAQC data indicate that the data are sufficiently accurate and precise to support Mineral Resource
estimation.
6. Data verification
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 Administrator who is responsible for overseeing data entry,
verification and database maintenance. A separate Database Auditor is responsible for performing a detailed
independent review of the database on a quarterly basis and submitting a report to Fortuna management detailing
the findings. Any issues identified are immediately resolved by the administrator.
Data used for Mineral Resource estimation are stored in Maxwell GeoService’s commercial SQL database system
(DataShed), storing both mine related data (including channel samples) and drilling related results (exploration and
infill drilling).
Data was transferred from an inhouse SQL database system to DataShed in 2017 with the support of Maxwell
personnel. Both databases were run in tandem until a full verification process had been completed to prove parity
between the systems, at which point the original database was archived.
As a component of the 2018 Mineral Resource estimate, a preliminary validation of the Cuzcatlan database was
performed by the Database Administrator in June 2018. The database has a series of automated import, export, and
validation tools to minimize potential errors. Any inconsistencies identified were corrected during the analysis with
the database then being handed over to the QP for the resource estimate for final review on June 30, 2018 in
Microsoft Access format.
In addition, data verification by the QP was also conducted through the inspection of selected drill core to assess the
nature of the mineralization and to confirm geological descriptions as well as the inspection of geology and
mineralization in underground workings of the Trinidad, Bonanza, and Stockwork veins.
A series of plan and cross sections were generated displaying the lithologic and mineralization interpretation by the
Cuzcatlan geology and exploration departments and reviewed by the QP.
The QP is of the opinion that the data verification programs performed on the data collected by Cuzcatlan are
adequate to support the geological interpretations, the analytical and database quality, and Mineral Resource
estimation at the San Jose Mine.
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7. Mineral processing and metallurgical testing
Initial metallurgical test work to assess the optimum processing methodology for treating ore from the Trinidad
Deposit was conducted by METCON in 2009 and reported in the prefeasibility study written by CAM (2010), with
Cuzcatlan continuing to build on this original work with additional tests to support operational requirements.
Metallurgical tests have not been conducted as of the effective date of this Report for material from the Victoria
mineralized zone but are planned for the second half of 2019. Petrographic studies conducted by Albinson (2018)
indicate that mineralogically the material is similar to that from the Trinidad Deposit.
It is the opinion of the QP that the San Jose Mine has an extensive body of metallurgical investigation comprising
several phases of testwork as well as an extensive history of treating ore at the operation since 2011. In the opinion
of the QP, the San Jose metallurgical samples tested and the ore that is presently treated in the plant is
representative of the material included in the life-of-mine plan (LOMP) in respect to grade and metallurgical
response. Metallurgical recovery is estimated to be constant for the LOMP at 92 % for silver and 91 % for gold.
Differences between vein systems are minimal with regard to recovery.
Deleterious elements detected in ore located in certain parts of the deposit have the potential to affect economics
due to penalties that could be applied during smelting. This includes elevated levels of fluorine (>1,000 ppm), which
has been accounted for as part of the financial analysis.
8. Mineral Resources
Mineral Resource estimation involved the usage of drill hole and channel samples in conjunction with underground
mapping to construct three-dimensional wireframes to define individual vein structures. Samples were selected
inside these wireframes, coded, composited and top cuts applied if applicable. Boundaries were treated as hard with
statistical and geostatistical analysis conducted on composites identified in individual veins. Silver and gold grades
were estimated into a geological block model consisting of 4 m x 4 m x 4 m selective mining units (SMUs) representing
each vein. All veins in the Trinidad Deposit were estimated by sequential Gaussian simulation (SGS). The Victoria
main structure located in the Victoria mineralized zone was estimated by inverse distance weighting employing a
power of two (IDW). Estimated grades were validated globally, locally, visually, and (where possible) through
production reconciliation prior to tabulation of the Mineral Resources.
By the application of a silver equivalent value taking into consideration the average metallurgical recovery and long
term metal prices for each metal, and the determination of a reasonable cut-off grade using actual operating costs,
as well as the exclusion of Mineral Resources identified as being isolated or economically unviable using a floating
stope optimizer, the Mineral Resources have ‘reasonable prospects for eventual economic extraction’.
Resource confidence classification considers a number of aspects affecting confidence in the resource estimation
including; geological continuity and complexity; data density and orientation; data accuracy and precision; grade
continuity; and simulated grade variability.
Mineral Resources exclusive of Mineral Reserves as of December 31, 2018 are reported in Table 1.1.
Table 1.1 Mineral Resources as of December 31, 2018
Classification
Tonnes (000)
Ag (g/t)
Au (g/t)
Contained Metal
Ag (Moz)
Au (koz)
Measured
Indicated
Measured + Indicated
Inferred
Notes:
49
272
321
2,415
77
84
83
196
0.56
0.59
0.59
1.44
0.1
0.7
0.9
15.2
1
5
6
112
• Mineral Resources are as defined by the 2014 CIM Definition Standards for Mineral Resources and Mineral Reserves
• Mineral Resources are exclusive of Mineral Reserves
• Mineral Resources which are not Mineral Reserves do not have demonstrated economic viability
• Mineral Resources are estimated as of June 30, 2018 and reported as of December 31, 2018 taking into account
•
production related depletion for the period through December 31, 2018
Eric Chapman, P.Geo. (APEGBC #36328) is the Qualified Person for resources being an employee of Fortuna Silver Mines
Inc.
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• Mineral Resources are reported based on underground mining within optimized stope designs using a cut-off grade of
100 g/t Ag Eq based on assumed metal prices of US$ 18.25/oz Ag and US$ 1,320/oz Au, estimated metallurgical recovery
rates of 92 % for Ag and 91 % for Au (Ag Eq (g/t) = Ag (g/t) + (Au (g/t)*((1,320/18.25)*(92/91)), and an operating cost
of US$ 52.50/t
• Mineral Resource tonnes are rounded to the nearest thousand
•
Totals may not add due to rounding
Factors that may affect the estimates include metal price and exchange rate assumptions; changes to the
assumptions used to generate the cut-off grade; changes in local interpretations of mineralization geometry and
continuity of mineralized zones; changes to geological and mineralization shape and geological and grade continuity
assumptions; variations in density and domain assignments; geometallurgical assumptions; changes to geotechnical,
mining, dilution, and metallurgical recovery assumptions; change to the input and design parameter assumptions
that pertain to the conceptual stope designs constraining the estimates; and assumptions as to the continued ability
to access the site, retain mineral and surface rights titles, maintain environment and other regulatory permits, and
maintain the social license to operate.
There are no other known environmental, legal, title, taxation, socioeconomic, marketing, political or other relevant
factors that would materially affect the estimation of Mineral Resources or Mineral Reserves that are not discussed
in this Report.
9. Mineral Reserves
Mineral Reserve estimates follow standard industry practices, considering only Measured and Indicated Mineral
Resources as only these categories have sufficient geological confidence to be considered Mineral Reserves (CIM,
2014). Subject to the application of modifying factors, Measured Resources may become Proven Reserves and
Indicated Resources may become Probable Reserves. Mineral Reserves are reconciled quarterly against production
to validate dilution and recovery factors.
Metal prices used for Mineral Reserve estimation were determined as of May 2018 by the corporate financial
department of Fortuna from market consensus.
Metallurgical recoveries were based on metallurgical test work and operational results at the plant from July 2017
to June 2018.
NSR values were dependent on various parameters including metal prices, metallurgical recovery, price deductions,
refining charges and penalties.
A breakeven cut-off grade was determined based on all variable and fixed costs applicable to the operation. These
include exploitation and treatment costs, general expenses and administrative and commercialization costs
(including concentrate transportation).
Mineral Reserves as of December 31, 2018 are reported in Table 1.2.
Table 1.2 Mineral Reserves as of December 31, 2018
Classification
Tonnes (000)
Ag (g/t)
Au (g/t)
Contained Metal
Ag (Moz)
Au (koz)
Proven
Probable
Proven + Probable
Notes:
393
4,779
5,172
237
235
235
1.97
1.51
1.55
3.0
36.0
39.0
25
232
257
• Mineral Reserves are as defined by the 2014 CIM Definition Standards for Mineral Resources and Mineral Reserves
• Mineral Reserves are estimated as of June 30, 2018 and reported as of December 31, 2018 taking into account
production-related depletion for the period through December 31, 2018
• Mineral Reserves are reported based on underground mining within optimized stope designs using an NSR breakeven
cut-off of US$ 65.90/t, equivalent to 131 g/t Ag Eq and 134 g/t Ag Eq for the Taviche Oeste concession due to an
additional 2.5 % royalty
• Metal prices used in the NSR evaluation are US$ 18.25/oz for silver and US$ 1,320/oz for gold
• Metallurgical recovery values used in the NSR evaluation are 92 % for silver and 91 % for gold based on actual plant
recoveries
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• NSR values taking into account refining charges used in the estimation are US$ 15.67/oz for silver and US$ 1,129/oz for
gold with the exception of material located in the Taviche Oeste concession where NSR values are US$ 15.27/oz for
silver and US$ 1,100/oz for gold
Costs used in NSR breakeven cut-off determination are US$ 31.48/t for mining; US$ 16.55/t for processing; and US$
17.91/t for other costs including distribution, management, community support, general service and administration
•
• Mining recovery is estimated to average 89 % and mining dilution 12 %
•
Amri Sinuhaji, P.Eng (APEGBC #48305) is the Qualified Person for reserves, being an employee of Fortuna Silver Mines
Inc.
• Mineral Reserve tonnes are rounded to the nearest thousand
•
Totals may not add due to rounding
10. Mining methods
Cuzcatlan commenced production at the San Jose Mine in September 2011 and as of December 31, 2018 had
produced 35.9 Moz of silver and 269 koz of gold. The mining method applied in the exploitation of the veins is
overhand cut-and-fill using a mechanized extraction methodology.
Production capacity at the mine has been increased on two occasions; in September 2013 it was increased to 1,800
tonnes per day and most recently, in June 2016 the production capacity was increased to 3,000 tpd, through a further
plant expansion.
In May of 2018, a third-stage filtered dry stack tailings facility was commissioned on time and on budget with an
increased capacity of filtered tailings to handle 1.5 years of production with further expansions planned for 2019
and 2020 that would be sufficient to store all tailings for the presently defined life-of-mine plan (LOMP). Cuzcatlan
is in the process of obtaining the permit to allow the construction of the 2019 tailings expansion.
Mineral Reserves are estimated at 5.2 million tonnes as of December 31 2018, which is sufficient for almost a five-
year life-of-mine (LOM) consisting of 350 days in the year at a mill throughput rate of 3,000 tpd. The LOM annual
average production will be approximately 7 Moz of silver and 46 koz of gold based on an average head grade of 232
g/t Ag and 1.52 g/t Au.
The QP is of the opinion that:
•
•
•
•
The mining method being used is appropriate for the deposit being mined. The underground mine design,
stockpiles, tailings facilities, and equipment fleet selection are appropriate for the operation
The mine plan is based on historical mining and planning methods practiced at the operation for the
previous seven years, and presents low risk
Inferred Mineral Resources are not included in the mine plan, and were set to waste
The mobile equipment fleet presented is based on the actual present-day mining operations, which is
known to achieve the production targets set out in the LOM
• All mine infrastructure and supporting facilities meet the needs of the current mine plan and production
rate
11. Recovery methods
The current process plant design is split into four principal stages including; crushing; milling; flotation; and
thickening, filtering and shipping.
The QP considers process requirements to be well understood, and consistent based on the actual observed
conditions in the operating plant. There is no indication that the characteristics of the material planned for mining
will change and therefore the recovery assumptions applied for future mining are considered as reasonable for the
LOM.
12. Project infrastructure
The QP is confident that all mine and process infrastructure and supporting facilities are included in the present
general layout to ensure that they meet the needs of the mine plan and production rate and notes that:
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•
•
The San Jose Mine is located 47 km, or one hour by road from the city of Oaxaca, the main service center
for the operation, with good year-round access
The mine site infrastructure has a compact layout footprint of 50.15 ha, with an additional 69.69 ha for the
tailings storage facilities
• An expansion to the dry stack tailings facility will commence in 2019, with a second phase planned for 2020,
increasing total capacity to 4,039,000 m3, sufficient for the LOM
•
Power is provided to the mine from the main grid via a 115,000 volt circuit, as well as a secondary reserve
power supply line, all managed by CFE
• Water requirements are 2.7 m3 of water to process one tonne of ore being primarily sourced from water
pumped to the surface from the underground dewatering system
• All process buildings and offices for operating the mine have been constructed, with camp facilities not
required due to the proximity of the site to urban
13. Market studies and contracts
Since the operation commenced commercial production in September 2011 a corporate decision was made to sell
the concentrate on the open market. In order to get the best commercial terms for the concentrates, it is Fortuna’s
policy to sign contracts for periods no longer than one year. All commercial terms entered between the buyer and
Cuzcatlan are regarded as confidential, but are considered to be within standard industry norms.
The QP has reviewed the information provided by Fortuna on marketing, contracts, metal price projections and
exchange rate forecasts and notes that the information provided support the assumptions used in this Report and
are consistent with the source documents, and that the information is consistent with what is publicly available
within industry norms.
14. Environmental studies and permitting
The mining operation has been developed in strict compliance with the regulations and permits required by the
government agencies involved in the mining sector. In addition, all work follows the international quality and safety
standards set forth under standards ISO 14001 and OHSAS 18000.
Despite the above, on October 8, 2018 abnormally high rainfall caused a contingency pond to overflow at the dry
stack tailings facility. The contingency pond collects water from a ditch system at the dry stack facility designed to
capture and manage rain water.
Cuzcatlan took steps to mitigate the risk of future overflows by immediately increasing its pumping capacity at the
contingency pond. No damage occurred to the tailings dam or to the dry stack infrastructure. San Jose tailings are
monitored and sampled continuously, are free of heavy metals or other contaminants, and are characterized as
sterile.
Cuzcatlan notified the relevant environmental authorities, PROFEPA and CONAGUA on the day of the incident.
Cuzcatlan worked with federal, state and local authorities as they conducted inspections of the facilities at San Jose
and sampling of the Coyote Creek. Results of the sampling indicated no contamination or pollution occurred due to
the overflow.
On February 14, 2019, PROFEPA released their final report on the incident confirming that the overflow did not
contaminate soil, and therefore no remediation was required. As of the effective date of this Report, Cuzcatlan is
awaiting issuance of the final report from CONAGUA.
To the extent known, all permits that are required by Mexican law for the mining operation have been obtained,
with the exception of the permit to construct the stage 4 expansion of the dry stack tailings facility. Cuzcatlan is in
the process of obtaining the permit from the Secretary of the Environment and Natural Resources (SEMARNAT) and
expect to obtain this in the second quarter of 2019.
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
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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.
The mine closure plan has been designed to ensure the rehabilitation of the area where the mine is located. The
projected total cost required to close present and future infrastructure at the mine is US$ 5.3 million.
15. Capital and operating costs
Capital and operating cost estimates are based on established cost experience gained from current operations,
projected budget data and quotes from manufacturers and suppliers.
The capital and operating cost provisions for the LOMP that supports Mineral Reserves have been reviewed. The
basis for the estimates is appropriate for the known mineralization; mining and production schedules; marketing
plans; and equipment replacement and maintenance requirements.
The QP considers the capital and operating costs estimated for the San Jose Mine as reasonable based on industry-
standard practices and actual costs observed for 2018.
16. Economic analysis
Fortuna is using the provision for producing issuers, whereby producing issuers may exclude the information
required under Item 22 for technical reports on properties currently in production and where no material production
expansion is planned.
Mineral Reserve declaration is supported by a positive cashflow for the period set out in the LOMP based on the
assumptions detailed in this Report.
17. Other relevant data and information
Fortuna considers that this Report contains all the relevant information necessary to ensure the report is
understandable and not misleading.
18. Conclusions, risks and opportunities
This Report represents the most accurate interpretation of the Mineral Reserve and Mineral Resource available as
of the effective date of this report. The conversion of Mineral Resources to Mineral Reserves was undertaken using
industry-recognized methods, and estimated operational costs, capital costs, and plant performance data. Thus, it is
considered to be representative of future operational conditions. This Report has been prepared with the latest
information regarding environmental and closure cost requirements.
A number of opportunities and risks were identified by the QPs during the evaluation of the San Jose Mine.
Opportunities include:
•
•
The wide nature of mineralization of the Stockwork zone in combination with the medium to good rock
quality provides an opportunity to implement a more productive (bulk) mining methodology such as long
hole stoping to extract this material. Implementation of this method could potentially reduce mining costs
and increase mine productivity.
Improvements in mining productivity through optimizing the mining cycle. As shotcreting comprises a
significant component of the mining cycle, a better accelerator agent could shorten the curing and overall
cycle times. Additionally, cycle times could be further reduced by implementing a trim or controlled blasting
system so that less ground support is required due to over-blasting or over scaling.
• Operational delays could be reduced by implementing a better underground communication system.
•
•
The ventilation system could be improved in specific areas of the mine where elevated temperature are
encountered improving productivity in these areas.
Significant exploration potential exists for the Victoria mineralized zone as mineralization remains open in
all directions.
Risks include:
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•
•
•
The recently discovered presence of elevated fluorine in the concentrate resulting in unexpected penalties
to sales. Limited information is currently available to understand the orogenesis, dynamics, and distribution
of fluorine within the deposit, although preliminary sampling suggests it is focused in the Trinidad vein with
a limited spatial extent. However, a risk exists that fluorine levels may be elevated in other veins and areas
of the deposit.
Environmental liability from the pond over-flow in October 2018, mitigated by the rapid response to the
incident and independent testing of the affected area that indicates no heavy metals or other contaminants
are present.
Potential litigation regarding the disputed royalty on the Progresso concession, which has been mitigated
by Cuzcatlan obtaining multiple legal opinions that state the royalty is invalid and taking steps to remove
the royalty from the register.
19. Recommendations
Recommendations for the next phase of work have been broken into those related to ongoing exploration activities
and those related to additional technical and operational studies. Recommended work programs are independent
of each other and can be conducted concurrently unless otherwise stated. The exploration-related programs are
estimated at a total cost of US$ 4.22 million. The operational improvement studies are recommended to be
conducted inhouse and therefore do not involve a direct cost.
•
•
i)
Exploration activities
Exploration of the Trinidad Deposit. The Fortuna vein is known to extend south of the presently-estimated
Mineral Resource by the presence of historical workings and previous drilling demarking where the Fortuna
vein was located in the San Ignacio area. It is recommended that Cuzcatlan explore the mineralized
continuity of this vein as it extends from the Trinidad Deposit into the San Ignacio area with a first phase
drill program involving the drilling of 3,500 m diamond holes at an estimated cost of US$ 492,000. In
addition to testing the extents of the Fortuna vein, the Paloma vein remains open at higher elevations and
it is recommended that upon the issuance of appropriate permits the near-surface potential of the Paloma
vein be explored with the drilling of 1,500 m of diamond holes from surface at an estimated cost of
US$ 203,000.
Exploration of the Victoria mineralized zone. It is recommended that Cuzcatlan continue to explore the
extent of the Victoria mineralized zone above and to the north of the presently-estimated Mineral
Resource. The higher elevations of the vein system can be drilled from surface, with the issuance of the
appropriate permits, and would involve the drilling of 2,000 m diamond holes at an estimated cost of
US$ 257,000. To gain access for exploration of the vein to the north and at depth it is recommended that
a 200 m exploration drift be mined at a cost of US$ 520,000. The drive will allow the drilling of 4,500 m of
underground diamond drill holes to explore the vein continuity at an estimated cost of US$ 509,000.
• Metallurgical testwork. It is recommended that metallurgical testwork be conducted on samples obtained
likely metallurgical recoveries and processing
from the Victoria mineralized zone to establish
characteristics. Testwork should include mineralogical evaluations, along with bond work index, grinding,
flotation and granulometry tests. The estimated cost of the testwork is US$ 32,000.
• Other exploration programs. The Guilla concession of the San Jose Mine has been identified as an area that
has high potential for the discovery of epithermal veins based on surface mapping. It is recommended that
permits be obtained to allow targets to be drilled on this concession. If permits are obtained a drill program
consisting of 9,000 m of diamond holes at an estimated cost of US$ 1,305,000 is recommended. In addition,
it is recommended that a 250 m underground exploration drift be mined in 2019 to the north of the Trinidad
Deposit to facilitate future underground drilling programs to explore the convergence of the Trinidad
Deposit and the Victoria mineralized zone where obtaining surface drill permits has proved problematic.
The estimated cost of this drift is US$ 500,000.
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• Delineation (infill) drilling. Cuzcatlan is planning to continue the delineation drilling from underground in
2019 of the Trinidad Deposit. A total of 2,780 m of drilling is planned at a budgeted cost of US$ 400,000.
ii)
Technical and operational studies
•
Fluorine. It is recommended that the operation continues to assay representative pulps for fluorine and
uses these to improve short term and long-term estimates of fluorine behavior in the deposit as well as
conducting metallurgical tests at the plant to determine methods to reduce fluorine levels in the
concentrate.
• Mine plan optimization and risk analysis. The conditional simulation methodology used in the estimation
of the primary veins results in the generation of 50 equi-probable realizations. By assessing these multiple
potential scenarios, the mine plan can be optimized with the identification of low- and high-risk regions of
the deposit.
• Bulk density measurements. It is recommended that the number of bulk density measurements be
increased in secondary veins. If sufficient measurements are obtained, bulk density can be estimated rather
than the presently-used density assignment methodology.
• Mining method. As part of continuous improvement initiatives to reduce mining cost and to increase mine
productivity, it is recommended that a study be conducted to evaluate the feasibility of a bulk mining
method. Part of the considerations for the mining method selection is to investigate mining method and
mining sequence that eliminate the necessity to leave mineralized material as pillars. Additionally, the study
should investigate mine productivity, equipment and manpower requirements, as well as infrastructure
and cost evaluations.
• Mining recovery. A review on pillar design is recommended, particularly for narrow veins with more
competent country rock where mining recovery could be increased. Cell mapping and geotechnical logging
should be performed on a more frequent basis and detailed pillar analysis conducted based on the specific
local rock conditions.
• Mining dilution. It is recommended that the mine implements an improved survey practice by increasing
the number of points taken per survey or to implement the usage of a scanner. It is further recommended
that the mine reconciles the dilution estimate on a more frequent basis and stores the information into a
database so that statistical analysis such as trends, variations and local dilution analysis can be performed.
This information will assist the Cuzcatlan mine planning department in making timely decisions to
remediate dilution issues and improve Mineral Reserve estimates.
[End of Extract of Summary from San Jose Technical Report]
See “Three Year History and Recent Developments - Updated Mineral Reserve and Mineral Resource Estimates”
herein for further information regarding the San Jose Mine.
Lindero Project, Argentina
The following is the Summary from the technical report (the “Lindero Technical Report”) entitled “Fortuna Silver
Mines Inc.: Lindero Property, Salta Province, Argentina”, with an effective date of October 31, 2017 prepared by
Eric Chapman, P.Geo, Edwin Gutierrez, SME Registered Member, Geoff Allard, PE, and Denys Parra Murrugarra,
SME Registered Member. This summary is subject to certain assumptions, qualifications and procedures described
in the Lindero Technical Report and is qualified in its entirety by the full text of the Lindero Technical Report which
is available for viewing on SEDAR at www.sedar.com and is incorporated by reference in this AIF, and is also filed
with the SEC on EDGAR (available at www.sec.gov). Defined terms and abbreviations used herein and not otherwise
defined shall have the meanings ascribed to such terms in the Lindero Technical Report.
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Property Description, Location and Access
The Lindero Project is in the Argentine puna, a cool, arid zone with a minimum elevation of approximately 3,500 to
4,000 m. The climate is generally dry and windy; it can be cold and snowy during storms.
The Lindero Project is located 260 km due west of Salta, Argentina, the main service center of the region, at latitude
25° 05’ south and longitude 67° 47’ west. Drive time from Salta to the Project is approximately 7 to 7.5 hours, over
a road distance of 420 km. The nearest town to the Lindero Project is Tolar Grande (population 250) located 75 km
to the northeast.
Access to the Lindero Project is via National Route 51, which passes through the towns of San Antonio de Los Cobres
and Olacapato; and Provincial Route 27, via Pocitos and Tolar Grande.
The Lindero Project contains two known porphyry gold-copper deposits. The Lindero Deposit is the focus of the
Feasibility Study and the Lindero Technical Report; whereas the Arizaro Deposit, located 3.2 km southeast of the
Lindero Deposit, is described only in terms of exploration conducted to date.
The mineral tenement holdings cover 3,500 ha, and comprise 35 pertenencias, each of 100 ha, which are constrained
by Gauss Kruger Posgar co-ordinates generated by survey. Tenure is held in the name of Mansfield Minera S.A.
(“Mansfield”), an indirectly wholly-owned subsidiary of the Company. There is no expiry date on the pertenencias,
providing Mansfield meets expenditure and environmental requirements, and pays the appropriate annual mining
fees.
A 3 % provincial royalty “boca mina” is payable on revenue after deduction of direct processing, commercial, general
and administrative costs. There are no royalties payable to any other third party.
Surface rights are owned by the provincial state (Propiedad Fiscal) of Salta. There are no reservations, restrictions,
rights-of-way or easements on the Lindero Project to any third-party. Mansfield holds a registered camp concession,
and a granted and surveyed access right-of-way. Water permits and rights of access to the Lindero Project are
guaranteed through water and access licenses granted by the Mining Court of Salta.
Surface rights for construction of a mining operation and plant have not been granted from the Provincial authorities.
Development of such infrastructure will require additional negotiation and potentially, supporting studies. Mansfield
does not foresee any issues with obtaining the necessary permits for construction.
History
Gold–copper mineralization associated with potassic alteration was first discovered at the Lindero Project by
Goldrock geologists in November 1999, and led to claim staking.
The area was explored using reconnaissance and detailed geological mapping, soil geochemistry (talus fines), trench
sampling and mapping during 2000 and early 2001. As a result of this work, mineralization at what is now the Lindero
Deposit was identified in September 2000.
From April 2002 to March 2003, Rio Tinto had an option on the property with Goldrock, during which time additional
exploration including drilling and metallurgical testwork was conducted. An inhouse preliminary Mineral Resource
estimate for the Lindero Deposit was performed. As the tonnage and grade estimate did not meet Rio Tinto’s
corporate targets, the option was not exercised.
Goldrock resumed as project operator, and between 2005 and 2013 completed additional exploration and drilling.
Based on this, a Pre-Feasibility Study for the Lindero Deposit was completed by AMEC in 2010, assuming a production
throughput of 30,000 tonnes of ore per day (AMEC Americas Ltd., 2010a; 2010b). In 2012, Goldrock commissioned
Kappes, Cassiday & Associates (KCA) to complete a Feasibility Study using a reduced throughput of 18,750 tpd.
In 2015, Goldrock commissioned KCA to work with local engineering firms in advancing the engineering design for
the Project to a basic engineering level, and update the 2013 Feasibility Study. A new Feasibility Study incorporating
these design changes, additional metallurgical testwork, and updated costs and gold price assumptions was filed by
KCA in 2016 (KCA, 2016a).
In July 2016, the Company completed the acquisition of all issued and outstanding shares of Goldrock, making
Mansfield a wholly-owned subsidiary of Fortuna. Upon completion of the transaction, Fortuna continued to advance
the optimization of the 2016 Feasibility Study through additional drilling as well as conducting tradeoff metallurgical
-61-
tests and detailed engineering revisions with the objective of reaching a construction decision for the Lindero
Project.
Geology and Mineralization
In the Central Andes, the altiplano or puna is a high plateau of more subdued relief between the Eastern Cordillera,
a rugged region usually rising to between 3 km and 4.5 km, and the Western Cordillera, which is a high spine of
mountains that may reach as much as 5 km in height. The Arizaro Volcanic Complex consists of two superimposed
concentric volcanic centers, the Arizaro and the Lindero cones, located in the Archibarca volcanic arc at the southern
margin of the Salar de Arizaro basin. Basement rocks crop out to the north of the Lindero Deposit, and consist of
coarse-grained Ordovician granites uncomformably overlain by Early Tertiary red bed sandstones. The Lindero–
Arizaro complex, a series of diorite to monzonite porphyritic stocks, intrudes these units.
Mineralized zones at the Lindero Deposit form a semi-circular shape about 600 m in diameter which extends to a
depth of 600 m, consisting of four different zones at the surface. The distribution of gold–copper mineralization at
Lindero shows a strong relationship to lithology, stockwork veinlets, and alteration assemblages. Gold values average
0.70 g/t Au and copper values are typically about 0.11 % Cu. Higher grades of gold–copper (approximately 1 g/t Au
and 0.1 % Cu) are commonly associated with sigmoidal quartz, quartz–magnetite–sulfide, biotite-magnetite–
chalcopyrite, magnetite–chalcopyrite and quartz–limonite–hematite stockworks that are strongly associated with K-
feldspar alteration. This association is very common in the east zone of the deposit, where the highest gold grades
occur. At other locations where one or more stockwork types are missing or the intensity of fracturing is lower,
mineralization tends to be weaker and the grades of gold tends to be lower (approximately 0.4 g/t Au).
Gold mineralization at the Lindero Project is characterized by native, free-milling gold associated with chalcopyrite
and/or magnetite grains with rare interstitial quartz.
The weathered oxidation zone at the Lindero Project is generally poorly developed and averages 44 m in thickness.
The Arizaro volcanic center is characterized by fine- to medium-grained hornblende diorite to monzonite porphyritic
stocks. The Arizaro Deposit is dominated by a main, moderately to strongly mineralized intrusive unit that crops out
in the central part of the prospect area. It consists of fine hornblende porphyritic diorite intruded by several stocks,
dikes, igneous-cemented breccias and hydrothermal breccias. Smaller stocks are exposed in a few areas. Dikes of
andesitic and dacitic composition are generally distributed radially to the main intrusive unit.
Several alteration assemblages are noted in the Arizaro Deposit area. Alteration patterns are semi-concentric and
asymmetric, with a core of moderate to strong potassic alteration including zones of K-feldspar-rich magnetite–silica
alteration. An incomplete rim of chloritic alteration is developed outboard of the potassic alteration. In the southeast
part of the deposit, intermediate argillic alteration has formed and overprints potassic alteration. Sericitic and very
weak argillic alteration (hydrolytic alteration) has developed in the volcanic tuffs. To the south and west of the
deposit, chloritic alteration passes directly to propylitic alteration. An actinolite–magnetite alteration assemblage
forms in the eastern part of the deposit area.
Arizaro gold–copper mineralization is hosted in one body which has a semi-oval shape at the surface. In the center
there is a high-grade body with a semi-ellipsoidal form, extending north-south for 480 m and about 50 m wide. The
Arizaro Deposit has mineralization styles with copper–gold grades that are strongly correlated with different
alteration assemblages. Mineralization is mainly associated with potassic alteration. This occurs generally in multi-
directional veins, vein stockworks and disseminations. In some areas, the vein density is high, forming vein
stockworks in the intrusive rocks. These vein stockworks are limited to magnetite–biotite veinlets, quartz–
magnetite–chalcopyrite veinlets, late magnetite breccias and in late-stage mineralization events, anhydrite–sulfide
veinlets. Chalcopyrite and bornite are the main copper minerals. Coarse gold was observed and confirmed with X-
ray diffraction analysis in the University of Neuquen, Argentina, laboratory.
Lindero and Arizaro are examples of gold-rich porphyry copper deposits as described by Sillitoe (2000). More
specifically, they show affinities with the porphyry gold deposit model (Rytuba and Cox, 1991; also termed dioritic
porphyry gold deposits by Seedorff et al., 2005). These are exemplified by the Refugio, Cerro Casale, Marte, and
Lobo gold deposits of the Miocene-age Maricunga belt, Chile, approximately 200 km south of Lindero. Vila and
Sillitoe (1991) and Muntean and Einaudi (2000, 2001) described those deposits in detail.
The deposits of the Project area are considered to be examples of porphyry-style deposits, in particular gold-rich
porphyries based on the following:
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• High level (epizonal) stock emplacement levels in magmatic arc
• High-level stocks and related dikes intrude their coeval and cogenetic volcanic piles. Intrusions range from
fine through coarse-grained, equigranular to coarsely porphyritic
• Mineralization in or adjoining porphyritic intrusions of quartz diorite/monzonite composition
• Mineralization is spatially, temporally, and genetically associated with hydrothermal alteration of the
intrusive bodies and host rocks
• Gold–copper mineralization formed during intrusion of multiple phases of similar composition intrusive
rocks
•
•
Large zones of quartz veining, stockwork mineralization, and disseminated pyrite
Tenor of gold and copper grades, i.e., large tonnage but low grade
At the Lindero Deposit, native gold and electrum are finely disseminated in subparallel to stockwork quartz + sulfide
± magnetite ± anhydrite veins and in some cases in matrices of hydrothermal breccias. Magnetite is common to
abundant in mineralized zones. These mineralized stockworks and potassic alteration are interpreted to have formed
as the result of degassing of the early intrusive bodies. Fluid pressures during degassing triggered fracturing of the
intrusions and wall rock, allowing gold-rich fluids to circulate and precipitate, forming a gold–copper orebody. Later
intrusions resulted in weak to moderate gold–copper mineralization forming mostly along and immediately fringing
these intrusive contacts. Finally, post mineralized intrusives were overprinted onto the north and west of the
deposit.
Understanding of the geological setting and model concept of the Lindero and Arizaro is adequate to provide
guidance for exploration and development of the deposits.
Exploration, Drilling and Sampling
The Lindero Deposit was discovered in late 2000. Several exploration programs have been conducted by Rio Tinto,
Goldrock and the Company on the Lindero Project:
• Goldrock campaign: August 2000 to October 2001, which included geologic mapping, soil sampling, and
trench sampling
• Rio Tinto Campaign: May 2002 to February 2003, which included road sampling, geophysics (43 km of
ground magnetics and 11 km of induced polarization (IP)), and drilling (10 holes for a total of 3,279 m)
• Goldrock campaign: October 2005 to January 2008, which included geologic mapping and modeling,
trenching, and a significant drilling program (106 holes for a total of 30,024 m)
• Goldrock campaign: September 2008 and August 2010 to November 2010, which consisted of additional
drilling (23 holes) for the Pre-Feasibility Study
•
The Company’s campaign: September 2016 to December 2016 consisting of 8 holes for metallurgical
samples, 2 holes for geologic interpretation and 2 twin holes
Drilling completed at the Lindero Project comprises 151 diamond drill holes totaling 42,598 m at the Lindero Deposit,
as well as 29 diamond drill holes totaling 8,855 m at the Arizaro Deposit. Mineral Resources are only estimated at
the Lindero Deposit. Ground conditions were good, and core recovery was generally above 90 %. Drill hole collars
were marked with PVC pipes introduced in the hole at surface and then cemented. All holes drilled since 2005 as
well as the 10 holes drilled during the 2002 campaign were surveyed by Servicios Topograficos with a differential
GPS. Coordinates are projected on the WGS 84 Datum ellipsoid and calibrated according to the position of Geodetic
point IGM N° PR-02-015, located a few kilometers from the Project. The results are available in geographic co-
ordinates and in metric co-ordinates (UTM and Gauss Kruger), using the WGS 84 datum.
During Rio Tinto’s exploration drilling campaign in 2002, undertaken by Connors Drilling, no downhole surveys were
completed despite the fact that many of the holes extended beyond 300 m in depth. Holes drilled during the first
Goldrock campaign were not originally downhole surveyed either. In June 2006 GEC-Geophysical Exploration &
Consulting S.A. (GEC) was contracted by Goldrock to perform borehole surveying services with a Reflex Maxibor II
System 3™ Probe (Maxibor™), which is not affected by magnetism. In 2008, Goldrock detected that the Maxibor™
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surveys showed an unacceptably large deviation in the drill holes and a decision was made to re-survey all holes that
showed a deviation of more than 5 %. Comprobe Chile Ltd. (Comprobe) was contracted to re-survey the holes
considered by Goldrock as having incorrect downhole deviations. A surface-recording gyroscopic instrument was
used, and orientation and dip parameters were recorded every 10 m. For the 2016 drilling campaign, Fortuna
retained the services of Construccion & Mineria S.A., based out of Mendoza, Argentina, to complete downhole
surveys for each hole upon completion. Downhole surveys were conducted using Reflex™ gyroscopic equipment
with readings taken at 5-m intervals.
All core was logged for geology and geotechnical characteristics. All logging was digital, and was incorporated daily
into the Maxwell DataShed™ database system. Data were recorded initially with Excel™ templates, and later with
Maxwell LogChief™ application using essentially the same structure. Separate pages were designed to capture
metadata, lithology, alteration, veins, sulfide–oxide zones, sulfide–oxide surfaces, minerals (sulfides, oxides, and
limonite), sulfates, structures (contacts, fractures, veins, and faults with attitudes to core axis), magnetic
susceptibility, and special data (samples collected for geochemistry, thin section examinations, the core library,
skeleton core, etc.). Intensity of alteration phases was recorded using a numeric 1 to 4 scale (weak, moderate, strong,
complete); abundance of veins and most other minerals were estimated in volume percent.
The Lindero Deposit is a gold-rich porphyry with low-grade mineralization permeating throughout the deposit,
making the calculation of true thickness impossible as no definitive across strike direction exists. The mineralization
appears to be annular in shape at surface due to the intrusion of barren to low-grade intrusive rocks into the core of
the system, but this circular shape is not representative of true thickness.
Core samples are marked and collected on 2 m intervals that honor lithological boundaries. Samples weigh between
4 and 8 kg depending on core diameter and recovery. Channel samples were collected using a rock saw to cut a 2 x
3 cm channel in exposed bedrock in trenches and road cuts. The material was removed from the channel with a
chisel. Sample preparation for most samples consisted of crushing to 70 % passing 10 mesh and pulverization to 95%
passing 150 mesh. Density samples are routinely collected by Mansfield from drill core on approximate 10-m
intervals. Samples consist of pieces of core approximately 7 cm in length and weighing between 93 g and 408 g.
All samples collected by Mansfield were assayed for gold using a 30 g fire assay–atomic absorption (FA-AA) finish
and a second aliquot was selected for copper analysis using aqua regia digestion and AA analyses. For the drill
samples only, a full suite of trace elements was analyzed using an aqua regia digestion followed by inductively-
coupled plasma (ICP) analysis. Assay results and certificates were reported electronically by e-mail.
Fortuna samples were sent to the ALS Global sample preparation facility in Mendoza, Argentina. Following drying at
55°C, the samples were weighed and the entire sample crushed using a two-stage method, first with a jaw crusher
to 1 cm, and then by cone crusher to 70 % passing 10 mesh. The entire crushed sample was then pulverized to a
minimum of 95 % passing 80 mesh. Pulverized samples were then split using a riffle splitter to generate a 300 g
subsample that was pulverized to 95 % passing 150 mesh. This subsample was then split again using a riffle splitter
to generate three 100 g samples.
All samples were sent to accredited laboratories independent of Mansfield, Rio Tinto, and Fortuna.
Implementation of a quality assurance/quality control (“QAQC”) program is current industry best practice and
involves establishing appropriate procedures and the routine insertion of standard reference material (SRMs),
blanks, and duplicates to monitor the sampling, sample preparation and analytical process. The Company
implemented a full QAQC program to monitor the sampling, sample preparation and analytical process for the 2016
drilling campaign in accordance with its companywide procedures. The program involved the routine insertion of
SRMs, blanks, and duplicates. Evaluation of the QAQC data indicate that the data are sufficiently accurate and precise
to support Mineral Resource estimation.
Data Verification
In 2009 an independent audit of the information used for the estimation of Mineral Resources and Mineral Reserves
at the time was conducted by AMEC, and summarized in the KCA (2016a) Technical Report. The work included
independent audits of the database, collar and downhole surveys, drill logs, assays, bulk density measurements, core
recovery, and QAQC results.
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The 2009 audit concluded that the data verification programs undertaken on the data collected from the Lindero
Deposit up to 2009 supported the geologic interpretations, and the analytical and database quality, and therefore
the data could support Mineral Resource and Mineral Reserve estimation.
Fortuna reviewed the work performed by AMEC and concurs with their opinion. Fortuna has conducted additional
audits and verification of historical information used in prior Mineral Resource and Mineral Reserve estimates as
well as verifying new data generated during the 2016 drilling campaign to support assumptions for a construction
decision and the Mineral Resource and Mineral Reserve estimates reported in Section 14 and Section 15 of the
Lindero Technical Report. The verification process focused on the database; collars and downhole surveys; lithologic
logs; assays; metallurgical results; and geotechnical parameters. The Company checked all collar and downhole
survey information for each campaign against source documentation and completed a hand-held GPS survey of
randomly selected drill hole collars. The results showed a good agreement with locations in the database. In August
2016, the Company initiated a comprehensive program of relogging to verify the original lithologic descriptions.
The Company contracted Call & Nicholas Inc. (CNI) to validate all geotechnical data, data collection methods, slope
stability analysis methods, and slope angle recommendations presented previously by other consultants to
determine feasibility-level slope angle recommendations for design of the planned Lindero final pit.
The Lindero Technical Report author is of the opinion that the data verification programs performed on the data
collected from the Project are adequate to support the geological interpretations, the analytical and database
quality, and Mineral Resource estimation at the Lindero Project.
Mineral Processing and Metallurgical Testing
The Lindero Project has an extensive body of metallurgical investigation comprising several phases of testwork as
indicated in the KCA (2016a) Technical Report, and summarized in Section 13 of the Lindero Technical Report. In
general, the testwork was done to industry standards. However, some leach conditions set for the testwork made
interpretation difficult. Reinterpretation of the raw test data provided the basis for advancing the metallurgical
knowledge base for Fortuna.
Since September 2016, the Company has performed complementary metallurgical testwork in the areas of
comminution, heap permeability and cement agglomeration, gold extraction in column tests, and copper removal
with sulfidization-acidification-recycle-thickening (SART) technology with the purpose of confirming and optimizing
process design criteria.
Table 1.1 shows key gold extraction results for 10-m columns from laboratory testwork, carried out in the first
semester of 2017, on material cured in a cyanide solution and agglomerated. A 4 % deduction (absolute) has been
used in the design to allow for the differences between laboratory and expected operational results.
Table 1.1
Key gold extraction results for 10-m columns
Met Type
1
2
3
4
Met Type
Description
Fresh Intrusive
Oxide Porphyry
Fresh porphyry
Sediments
Met Type as
Percentage of
Reserve
63
20
9
8
Weighted average
Gold Extraction
Laboratory
(%)
Field
(%)
79.4
82.2
82.5
72.5
79.7
75.4
78.2
78.5
68.5
75.7
Optimization of the process design has confirmed the benefit of the use of a high-pressure-grinding-roll (HPGR), the
inclusion of cyanide cure of ore, and copper removal/cyanide recovery with a SART plant. Results indicate that these
components allow for improved gold leaching kinetics and effective extraction of copper from the pregnant solution.
Ore will be crushed at a nominal rate of 18,750 tpd using a three-stage crushing system including a HPGR in the
tertiary stage. A final crush size of P80 6.0 mm is projected. The crushed product will be agglomerated and cured with
a cyanide solution and then conveyed to the leach pad. A mobile conveying and stacking system will be used to stack
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ore in 10-m-high lifts. The life-of-mine (LOM) leach pad area is projected at 105 ha with a maximum height of 110
m. Leaching will be carried out in two stages with a first stage of 30 days and a second stage of 60 days.
The gold pregnant solution will be pumped at a rate of 400 m3/hr to a SART plant, where copper in solution will be
precipitated to maintain copper levels below 400 ppm in the solution. The Project contemplates an expansion of the
pregnant solution flow rate from 400 m3/hr to 600 m3/hr in year four with the objective of reducing gold ounce
inventory in the heap at the end of mining.
Following the SART plant, the pregnant solution will go to an adsorption, desorption, recovery (ADR) plant and then
to electrowinning and refining where gold will be poured in doré bars. LOM recovery is estimated at 75 %.
It is the opinion of the Lindero Technical Report author that the Lindero samples tested represent the orebody with
respect to grade and metallurgical response. The differences between metallurgical lithologies are minimal with
regard to extraction. Cyanide consumptions are higher with the more oxidized Met 2 samples as would be expected.
Minimal metallurgical differences were expected after review of the historical work.
Physical differences appear to have greater impact on the processing of the Lindero met types. Of significant
importance is the ability of the agglomerated ore to support the planned heap height.
No significant deleterious materials such as mercury or clays were noted in the samples tested.
A high level of metallurgical and process risk mitigation is incorporated in the process design with HPGR crushing,
agglomeration and the SART plant. With these installations any expected short-term variation in ore composition
(i.e. elevated soluble copper content) or physical properties (i.e. elevated gypsum levels or increased ore hardness
at depth) can be accommodated in the normal course of operations.
Mineral Resources and Mineral Reserves
Mineral Resources have only been estimated for the Lindero Deposit.
Mineral Resource estimation of the Lindero Deposit involved the use of drill hole and channel sample data in
conjunction with surface mapping to construct three-dimensional (3-D) wireframes to define individual lithologic
structures and oxide–mixed–sulfide horizons. Drill hole samples were selected inside these wireframes, coded,
composited and grade top cuts applied if applicable. Boundaries were treated as either soft, firm or hard with
statistical and geostatistical analysis conducted on composites identified in individual lithologic units. Gold and
copper grades were estimated into a geological block model consisting of 10 m x 10 m x 4 m selective mining units
(SMUs). Grades were estimated using dynamic anisotropy by ordinary kriging (OK) and constrained within an
ultimate pit shell based on estimated metal prices, costs, geotechnical constraints, and metallurgical recoveries to
fulfill the expectation of reasonable prospects of eventual economic extraction. Estimated grades were validated
globally, locally, and visually prior to tabulation of the Mineral Resources.
Mineral Reserves are exclusive of Mineral Resources and Mineral Reserve estimates have considered only Measured
and Indicated Mineral Resources as only these categories can be considered Mineral Reserves (CIM, 2014). Subject
to the application of modifying factors, Measured Resources may become Proven Reserves and Indicated Resources
may become Probable Reserves.
Mineral Reserves and Mineral Resources exclusive of Mineral Reserves as of September 9, 2017 are reported in Table
1.2 and Table 1.3 respectively:
Table 1.2
Mineral Reserves as of September 9, 2017
Classification
Tonnes (000)
Au (g/t)
Cu (%)
Contained Metal
Au (koz)
Proven
Probable
Proven + Probable
26,009
62,263
88,272
0.74
0.57
0.62
0.11
0.11
0.11
618
1,131
1,749
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Table 1.3
Mineral Resources as of September 9, 2017
Classification
Tonnes (000)
Au (g/t)
Cu (%)
Measured
Indicated
Measured + Indicated
Inferred
610
11,897
12,507
5,700
0.24
0.24
0.24
0.36
0.06
0.07
0.07
0.10
Contained Metal
Au (koz)
5
92
97
65
Notes:
• Mineral Reserves and Mineral Resources are as defined by CIM Definition Standards on Mineral Resources and Mineral
Reserves
• Mineral Resources are exclusive of Mineral Reserves
• Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability
•
There are no known legal, political, environmental, or other risks that could materially affect the potential development
of the Mineral Resources or Mineral Reserves at Lindero
• Mineral Resources and Mineral Reserves are estimated and reported as of September 9, 2017
•
Eric Chapman, P.Geo. (APEGBC #36328) is the Qualified Person for resources and Edwin Gutierrez (SME Registered
Member #4119110RM) is the Qualified Person for reserves, both being current or former employees of Fortuna Silver
Mines Inc.
•
• 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 0.27 g/t Au, recovery 75.4 %; Met type 2
cut-off 0.26 g/t Au, recovery 78.2 %; Met type 3 cut-off 0.26 g/t Au, recovery 78.5 %; and Met type 4 cut-off 0.30 g/t
Au, recovery 68.5 %. The cut-off grades and pit designs are considered appropriate for long-term gold prices of US$
1,250/oz. Assumptions used in the pit design are the same as those for the resources
Lindero Mineral Resources are reported within a conceptual pit shell above a 0.2 g/t Au cut-off grade using a long-term
gold price of US$ 1,250/oz, mining costs at US$ 1.67 per tonne of material, with total processing and process G&A costs
of $7.84 per tonne of mineralized material and an average process recovery of 75 %. The refinery costs net of pay factor
were estimated to be US$ 6.90 per ounce gold. Slope angles are based on 3 sectors (39°, 42°, and 47°) consistent with
geotechnical consultant recommendations
Totals may not add due to rounding
•
Mineral Reserves are estimated at 88.3 Mt as of September 9, 2017 which is sufficient for a thirteen-year LOM
considering 350 days in the year for production and a capacity rate of 18,750 tpd. Expectation based on an optimized
production schedule is for an annual average production of 129,000 troy ounces of gold.
Proven and Probable Mineral Reserves are estimated to contain 1.75 Moz gold, reflecting a 12 % decrease in
contained gold ounces relative to the October, 2015 Mineral Reserve estimate. Variations are the result of:
• A smaller ultimate pit shell based on updated metal prices, mining costs, and metallurgical recoveries
resulting in a decrease in the Measured and Indicated Mineral Resources
•
2016 drilling which upgraded 12 Mt to Indicated Mineral Resources with a loss of that amount of Inferred
Mineral Resources
• Adjustments to the geological interpretation and estimation methodology
Mining methods
The Lindero Project will be an owner-operated conventional open pit mining operation with a nominal rate of
18,750 tpd of ore and a life of pit operations of 13 years using existing reserves. The ratio of waste to ore over the
LOM is 1.2 to 1. The key mining fleet equipment will be initially composed of six 91 tonne (100-ton) trucks and two
17 cubic yard wheel loaders.
In the initial two years, the operation will benefit from mining the higher-grade, outcropping portion of the deposit,
with an average head grade of 0.90 g/t Au, and a low strip ratio of 0.77 to 1. For the initial four years, the average
head grade is projected at 0.77 g/t Au, and a strip ratio of 1 to 1.
Mining costs benefit from short haul distances from the pit to the primary crusher and waste dumps. Maximum
distances are in the range of 2 km. The LOM direct mining cost is estimated at US$ 1.1 per tonne moved.
The Lindero Technical Report author is of the opinion that:
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•
•
•
•
•
The mining method being used is appropriate for the deposit being mined
The open pit, heap leach pad, stockpiles, waste dump designs, and equipment fleet selection are
appropriate to reach production targets
The mine plan is based on successful mining philosophy and planning, and presents low risk
Inferred Mineral Resources are not included in the mine plan and are considered as waste
The mobile equipment fleet presented is based on simulations and bench marks to similar operations
achieving similar production targets
• All mine infrastructure and supporting facilities meet the needs of the current mine plan and production
rate
• Major planned maintenance of the main equipment, such as loaders and trucks, have been covered in
sustaining capital by purchasing additional equipment that can replace any possible lost production hours
and not impact production targets
•
The ancillary equipment appears to be undersized, especially dozers, but this would be covered by renting
additional equipment as necessary
Recovery methods
Most of the major process concepts presented in the 2016 Technical Report such as: high pressure grind roll (HPGR)-
crushing, cyanide heap leaching and carbon adsorption recovery, remain unchanged for the updated 2017 Lindero
Technical Report. Additional physical and metallurgical understanding, developed by the testwork conducted by the
Company in 2016 and 2017, resulted in modifications in the approach to these major process concepts for the
Lindero Project as follows.
• A concentrated cyanide cure was added to shorten the leach cycle and increase extraction
• Agglomeration with cement was added to support a 110-m-high heap with the HPGR-crushed ore
• Conveyor stacking was included from startup
• Two-stage leaching was included to increase preg grades and reduce overall flowrate to the ADR plant
• A SART plant was included to control the copper in solution
• Leach solution flow will be increased 150 % in Year 4 to reduce in-heap gold inventory
Unit operations for the Lindero process were selected based on the physical and metallurgical needs of the Lindero
ore to achieve maximum extraction of gold. No novel or untried technology will be employed in the process.
Project infrastructure
The Lindero Technical Report author is confident that all mine and process infrastructure and supporting facilities
have been included in the general layout to ensure that they meet the needs of the mine plan and production rate
and notes that:
•
•
•
•
•
The Project will have good year-round access with significant road improvements planned for stretches of
road between Tolar Grande and the Fortuna camp
The Project site infrastructure has a compact layout footprint of approximately 60 ha
Power will be generated on-site by a contractor through an 8 MW capacity diesel oil plant
Electrical power will be generated on site under a contract power supply arrangement with a local company
who specializes in such services
Total water requirements are 97.7 m3/hr and will be primarily sourced from two existing wells located
13km southeast of the Project site, along with an additional well to be drilled as part of construction
activities
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• Most of the process buildings for the Lindero Project have been primarily designed as steel frame buildings
with modular thermo-acoustic panels; in general, these are pre-engineered and pre-fabricated steel
buildings which include all structural members, exterior doors and windows, roofs, insulation, interior and
exterior wall panels and all connectors required to erect and assemble the buildings on-site
• A permanent accommodation camp for 320 beds will be built for the LOM operation. For the construction
period, temporary accommodations will be implemented to accommodate the peak of construction
manpower estimated at 600 people
Market studies and contracts
No market studies are currently relevant as the Lindero Project will produce a readily-saleable commodity in the
form of doré.
As of the effective date of the Lindero Technical Report, the Company has not entered into any material contracts
required for the development of the Lindero Project including mining, concentrating, smelting, refining,
transportation, handling, sales and hedging, and forward sales contracts or arrangements.
The gold price used for the base case cash flow analysis is $1,250/oz. Sensitivities with variable price projections
have also been considered. The Lindero Project, like most gold projects, is highly sensitive to changes in the gold
price.
The Lindero mine product will be doré bars containing an estimated gold content averaging 84 % for the Project life.
Overall gold extraction in respect to ore placed on the heap leach is estimated to be approximately 75 %.
The Lindero Technical Report author has reviewed the information provided by Fortuna on marketing, contracts,
metal price projections and exchange rate forecasts and notes that the information provided is consistent with the
source documents used, and that the information is consistent with what is publicly available regarding industry
norms. The information can be used in mine planning and economic analyses for the Lindero Project in the context
of the Lindero Technical Report.
Environmental studies and permitting
In November 2010, Mansfield submitted an Environmental Impact Assessment (EIA) for the Lindero Project, and in
November 2011 received approval through the issue of the Declaración de Impacto Ambiental (DIA). Approval of the
EIA represents formal approval for mine construction, allowing excavation to proceed. Environmental law requires
that the EIA be updated biannually with the current report submitted in December 2015 and an updated report
planned for submission in March 2018.
Mansfield received a mine permit to build a heap-leach gold mine at up to 30,000 tpd as detailed in the Pre-Feasibility
Study (AMEC, 2010b).
The Salta Provincial authorities have approved the building and electrical permits that Mansfield requires to
commence construction at Lindero. Electrical, structural, building and seismic plans have been reviewed and
approved by COPAIPA (Dec 2013), the professional engineering institution that overlooks all construction in Salta
Province. Mansfield is planning to submit additional information to COPAIPA in 2017 to obtain the permits for
construction of the agglomeration and SART plants that have been added to the process design. Mansfield does not
foresee any issues in obtaining the necessary permits to complete construction and commence operation at the
Lindero Project.
In addition, a formal public declaration of support for the Lindero development has been issued by the provincial
government, recognizing the Lindero Project as the priority development project for the Salta Province.
Environmental risks during the closure stage will be reduced by remediation and monitoring work. At the closure
stage, soil will be contoured by heavy machinery to minimize the long-term impact of mining activity, and return the
topology of the land to resemble prior conditions. However, the movement of soil, and thus the risk, will be
significantly less than in the mining operations stage.
One social-environmental risk will be the completion of contracts of employment directly, or indirectly, through
contractors, and the surrounding communities. It will be imperative to implement measures to mitigate this impact
during the whole period of mine operation.
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A significant environmental risk will also be present during the closure of facilities, which will cause significant
production of non-hazardous industrial waste and hazardous products from the movement of heavy machinery. It
will be essential to establish clear environmental policies with the contractors during this process.
It is the opinion of the Lindero Technical Report authors that the appropriate environmental, social and community
impact studies have been conducted to date at the Lindero Project. Mansfield has maintained all necessary
environmental permits that are the prerequisites for the granting of construction permits that will need to be
obtained upon completion of detailed engineering designs for the Project infrastructure.
Capital and operating costs
Capital and operating costs for the Lindero Project were estimated by the Company with the assistance of Elbow
Creek, Allard Engineering Services, and Saxum Engineered Solutions (Saxum), a local engineering firm. These costs
are based on the design outlined in the Lindero Technical Report, and are considered to have an accuracy of +/-15
%. All costs are in second and third quarter 2017 US dollars (US$). No escalation factors have been applied to any
costs, present or future capital. The total mine capital cost is estimated to be US$ 282 million.
Expansion (future) capital for the Project includes the Phase 2 leach pad construction in Year 3, and expansion of the
ADR plant and solutions handling in the leach pad area in Year 3. The total future capital is estimated at US$ 113
million.
Closure and reclamation costs are estimated at US$ 35 million, incurred in Year 13 through Year 17.
The total LOM operating cost for the Lindero Project is US$ 10.32 per tonne of ore processed.
Costs were estimated primarily by the Company for mine pre-production and mine equipment costs. Saxum provided
cost estimates for major and secondary equipment, buildings, infrastructure and major contracts. All equipment and
material requirements are based on the design information described in the Lindero Technical Report. Capital cost
estimates have been made primarily using budgetary supplier quotes for all major and most minor equipment items,
and major construction contract unit rates. Where supplier quotes were not available for minor items, a reasonable
cost estimate was made based on supplier quotes in Saxum’s project files. All capital cost estimates are based on
the purchase of equipment quoted new from the manufacturer, or estimated to be fabricated new.
Economic analysis
The results of the economic analysis discussed in the Lindero Technical Report represent forward-looking
information as defined under Canadian securities law. The results depend on inputs that are subject to a number of
known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from
those presented here. Such uncertainties and factors include, among others, changes in general economic conditions
and financial markets; changes in prices for gold and other metals; technological and operational hazards during the
development of the project; risks inherent in mineral exploration; uncertainties inherent in the estimation of mineral
reserves, mineral resources, and metal recoveries; the timing and availability of financing; governmental and other
approvals; political unrest or instability; labor relations issues; as well as those factors discussed under “Risk Factors”
in the Company’s Annual Information Form for fiscal 2016. Although the Company has attempted to identify
important factors that could cause actual actions, events or results to differ materially from those described in the
Lindero Technical Report, there may be other factors that cause actions, events or results to differ from those
anticipated, estimated or intended.
The Lindero Project economics were evaluated using a discounted cash flow (DCF) method, which estimates the net
present value (NPV) of future cash flow streams. The final economic model was developed by Fortuna using the
following assumptions:
•
Period of analysis of 16 years (includes one year of pre production and investment), 13 years of production,
and two years for closure and reclamation
• Gold price of US$ 1,250/oz
•
Processing rate of 18,750 tpd ore
• Metallurgical recovery of 75 %
-70-
•
•
Initial capital and operating costs as developed in Section 16.5 and 21 of the Lindero Technical Report
Closure capital costs as outlined in Section 20 of the Lindero Technical Report
The Lindero Project shows an NPV of US$ 130 million after tax using a discount rate of 5 %, with an internal rate of
return (IRR) of 18 %, and a payback period of 3.6 years, based on the LOM production plan, assumed metal prices,
and integrated leaching treatment of gold and copper.
NPV and IRR display the greatest sensitivity to gold metal prices and metallurgical recoveries according to the
sensitivity analysis.
The Lindero Technical Report author considers the financial model to be a reasonable estimate of the economic
situation at Lindero and based on the assumptions in the Lindero Technical Report, the Lindero Project shows a
positive DCF over the LOM and supports the Mineral Reserve estimate. The mine plan is achievable under the set of
assumptions and parameters presented.
Other Relevant Data and Information
Goldrock commissioned Vector Argentina SA (Ausenco; 2009a, b) and Conhidro (2013) to conduct a hydrologic study
of the Project area, during the detailing of the environment base line map and EIA study. As part of the study, the
Rio Grande hydrologic basin was defined through the evaluation of various field parameters and review of satellite
images. The basin was determined to be 1,687 km2 in size. Exploration for groundwater resources was undertaken,
and successfully identified possible sources.
A number of geotechnical studies were performed at the Lindero Project and reviewed by CNI. Those studies form
the basis for the pit slope estimates used in the mining model. Included in the studies were geotechnical surveys for
heap leach and waste dumps. These studies are considered by the Lindero Technical Report to be consistent with
industry practices and adequate to support mine design.
Conclusions, Risks, and Opportunities
The Lindero Technical Report represents the most accurate interpretation of the Mineral Reserve and Mineral
Resource available as of the effective date of the Lindero Technical Report. The conversion of Mineral Resources to
Mineral Reserves was undertaken using industry-recognized methods, and estimated operational costs, capital
costs, and plant performance data. Thus, it is considered to be representative of future operational conditions. The
Lindero Technical Report has been prepared with the latest information regarding environmental and closure cost
requirements.
A number of opportunities and risks were identified by the Linder Technical Report authors during the evaluation of
the Lindero Project.
Opportunities include:
• Once mining commences there is an opportunity to collect additional geotechnical data from the open pit
that could support an increase in final pit slope angles, potentially decreasing stripping ratios and/or
increasing Mineral Reserves.
•
•
•
•
The Arizaro porphyry system is not included in the current mine plan. However, it represents upside
opportunity for the Project if a satellite operation can be developed on the deposit.
Infill drilling could support the conversion of Inferred Resources to Measured or Indicated Resources and,
with the appropriate studies, to Mineral Reserves. This represents additional upside potential for the
planned operation.
The Lindero porphyry gold system remains open at depth below the pit shell constrained reported reserves
and resources. An area of interest has been identified by Fortuna during the drilling campaign carried out
in 2016 with drill hole LDH-126 encountering 0.97 g/t Au over a 38 m interval (refer to discussion in Section
10). This is supported by historical drilling from 2007 including drill hole LDH-86 averaging 1.06 g/t Au over
a 52 m interval which bottomed in mineralization. These intercepts warrant follow-up drill testing.
There are a number of local exploration targets within the concession boundary, that with further work,
represent upside opportunity to identify mineralization that can potentially add to the resource base.
-71-
•
•
If historical samples are assayed for cyanide-soluble copper, there is an opportunity to construct a
metallurgical model and incorporate this into the scheduling and process design. This would support
optimization of blending strategies and better understanding of recoverable copper as a by-product from
the SART plant. Improved copper recoveries could have a minor positive impact on the mine economics.
Performance of the equipment can be tracked with the implementation of a fleet management system to
record the main key performance indicators (KPI’s) which will provide an opportunity to improve utilization
and time loss productivity.
• Once mining commences there is an opportunity to conduct additional blasting fragmentation analysis so
as to improve mining productivity and optimize mining costs.
Risks include:
•
Local behavior of cyanide-soluble copper is not fully understood, and cannot be modeled due to a lack of
assays from historical core. Levels of soluble copper could be higher than anticipated in certain areas of the
deposit requiring adjustments to mine plans and schedules to reduce the impact in the plant. The
introduction of a SART plant has greatly reduced the potential impact of soluble copper at the Project.
• Delaying the acquisition of fleet equipment could cause delays in the execution of certain activities. It is
therefore imperative that a clear schedule of lead times is established, and equipment purchased in a timely
manner to ensure on time delivery.
•
•
•
Fortuna calculates that two loaders are needed from Year 3 onwards, but simulations indicate that three
may be required in Year 2. Once mining commences and data on loader productivity is collected, a new
fleet simulation should be performed to confirm if a third loader is required in Year 2 and if so how this will
affect sustaining capital expenditure.
There is a risk that two dozing machines in the original capital estimate are insufficient. Fortuna plans to
mitigate this risk by renting additional ancillary equipment as required.
There is a risk that haul truck tire life of 8,500 hours is higher than can be achieved at the operation, which
could lead to marginally higher operating costs than anticipated.
Recommendations
Recommendations for the next phase of work have been broken into those related to ongoing exploration activities
and those related to additional technical studies. Recommended work programs are independent of each other and
can be conducted concurrently unless otherwise stated and include:
•
Continued work at Arizaro that focuses on the controls of lithology, structure, and alteration on
mineralization so as to determine the suitability of material as a potential feed for the Lindero plant and to
support the estimation of Mineral Resources. It is recommended that a 2,000-m reverse circulation (RC)
drill program (approximately 100 holes at a 75 m spacing) is conducted at a cost of approximately
US$ 500,000.
• An infill drill program involving the drilling of approximately 3,000-m of RC drill holes is recommended to
improve the geological understanding of material planned for extraction in Years 1 and 2 of the mine. The
cost of such a program is estimated at approximately US$ 750,000.
•
•
Exploration work to date on the Lindero concession has been focused on outcropping porphyry
mineralization. It is recommended that the Company evaluate the property for mineralization beyond the
two known porphyry systems at Lindero and Arizaro. For example, alteration zones and silica structures
located within the concession, 2.5 km due south of the Lindero Project site, remain open for evaluation.
Exploration work would primarily involve mapping and carry no additional cost to the Lindero Project.
It is recommended that a drill hole spacing study be conducted to establish the density of sampling that is
required to reduce the grade variability to acceptable levels for specified extraction time frames in respect
to infill and blast control drilling. This will be used to support the estimated meters of infill drilling. The
study can be conducted either inhouse (at no cost) or by external consultants, at an estimated cost of
US$ 25,000.
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• Additional analysis is recommended into the mine operating and ore control process, in particular, the
usage of optimum dig lines for open pit grade control, with the objective of minimizing ore loss and
maximizing profit. The cost of licenses and implementing such software is estimated at US$ 276,000.
• A fleet management system should be considered for KPI purposes, which will provide an opportunity to
improve utilization and time loss productivity. The cost of licenses and implementing such software is
estimated at US$ 1.5 million.
•
•
The cement in each lift on the heap will cure for several months before another lift is placed. It may be
several years before any block of agglomerated ore receives 110 m of loading. It is recommended that a
long-term stacking test be conducted to see if ageing will improve the ability of the ore to support the 110 m
height with less cement. The estimated cost of the testwork is US$ 20,000.
The high static holdup (adsorbed moisture) in the heap makes the secondary leach at 6 l/hr/m2 inefficient
when the heap height increases. There is a possibility that a surface tension modifier may reduce the
amount of adsorbed moisture in the heap reducing the inventory. The estimated cost of the testwork is
US$ 20,000.
[End of Extract of Summary from Lindero Technical Report]
Exploration Work Subsequent to the Lindero Technical Report
Lindero Infill Drill Program
In accordance with the recommendations of the authors of the Lindero Technical Report, the Company completed
an infill drilling program in 2018, consisting of 61 diamond drill holes totaling 1,952 meters, focused on the areas
planned for mining at the Lindero Project in year one of production with holes ranging from 12 meters to 68 meters
in length. The program was designed with three objectives: to improve the estimation of grades in mineralized areas
with lower density of drilling; to better define the contact between mineralized and non-mineralized material at the
periphery of the deposit and at the boundaries between lithologic units; and to source fresh samples for
complementary metallurgical column tests on Mineral Reserves scheduled for year one production. These infill
drilling results together with results from 144 diamond drill holes totaling 42,359 meters were incorporated into the
updated estimate of Mineral Resources and Reserves which were announced on April 4, 2019, with an effective date
of March 31, 2019. Please refer to “Three Year History and Recent Developments - Updated Mineral Reserve and
Mineral Resource Estimates” herein for further information on the updated Mineral Reserve and Mineral Resource
estimates. Such updated technical information did not materially change the Mineral Resources estimates contained
in the Lindero Technical Report.
The Mineral Reserves and Mineral Resources reported as of March 31, 2019 are based on 205 diamond drill holes
totaling 44,311 meters. The estimates incorporate an updated geological interpretation based on the infill drilling
conducted in 2018 (see Fortuna news release dated September 6, 2018), updated metal prices and estimated
operating costs. The updated technical information does not materially change the information presented in the
Lindero Technical Report. Mineral Resource estimation involved the usage of drill hole samples in conjunction with
surface mapping to construct three-dimensional wireframes defining lithologic, alteration, and grade domains.
Samples were selected inside these wireframes, coded, composited and top cut. Boundaries were treated as hard,
firm or soft based on statistical and geostatistical analysis. Gold and copper grades were estimated by ordinary
kriging into a geological block model consisting of 10 meter x 10 meter x 4 meter selective mining units representing
each domain. Estimated grades were validated globally, locally, and visually prior to classification and are reported
above a 0.20 g/t Au cut-off grade within a conceptual pit shell.
The updated Mineral Resource and Mineral Reserve estimates use the same methodology (key assumptions,
parameters and methods) as the Lindero Technical Report. However, Mineral Reserve estimates have been
conducted taking into account the new updated resource block model, revised cost estimates, metal prices,
projected exchange rates, and the updated detailed design capacity of the leach pad. Mineralized material inside
the ultimate pit shell that cannot be accommodated by the updated leach pad design has been classified as a Mineral
Resource.
As a result of the updated Mineral Reserves and Mineral Resources, the mine plan at the Lindero Project has been
optimized for the first year of commercial production so that the operation will benefit from mining the higher grade
mineralization outcropping which was identified through the infill drilling completed in 2018.
-73-
Arizaro Surface Core Drill Program
In accordance with the recommendations of the authors of the Lindero Technical Report, during 2018 the Company
completed a surface core drill program of 2,178 meters in 12 holes to vertical depths of less than 200 meters aimed
at identifying near surface porphyry-style gold mineralization hosted in magnetite and biotite-rich breccia zones and
in associated stockwork veins. Drill highlights include:
ARD32 - 0.61 g/t Au and 0.14 % Cu over 78 meters
ARD38 - 0.67 g/t Au and 0.16 % Cu over 52 meters
ARD41 - 0.70 g/t Au and 0.29 % Cu over 82 meters
Drill hole ARD41 is located approximately 350 meters west of previous drilling and represents a new zone that
requires additional exploration. Please refer to the Company’s news release dated February 14, 2019 entitled
“Fortuna provides review of Brownfields exploration programs” for full details of the drill program.
Update on Construction at the Lindero Project
Please refer to “General Development of the Business” for an update on the development of the construction at the
Lindero Project.
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
Common Shares
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
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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.
Debentures
In October 2019, the Company issued $46 million aggregate principal amount of Debentures by way of a public
offering at a price of $1,000 per Debenture. The Debentures are senior subordinated unsecured convertible
securities of the Company. Refer to “Three- Year History- Recent Developments and Financings”.
The Debentures mature on October 31, 2024 and bear interest at a rate of 4.65% per annum, payable semi-annually
in arrears on the last business day of April and October in each year, commencing on April 30, 2020. The Debentures
are convertible at the holder’s option into Common Shares at a conversion price of US$5.00 per share, representing
a conversion rate of 200 Common Shares per US$1,000 principal amount of Debentures, subject to adjustment in
certain circumstances. The Debentures are governed by way of a debenture indenture (the “Indenture”) between
the Company and Computershare Trust Company of Canada dated October 2, 2019. The Debentures are
transferable and are listed for trading on the TSX.
Adjustment of Conversion Price
The Indenture provides for the adjustment of the conversion price upon certain events including: (i) the subdivision
or consolidation of the outstanding Common Shares; (ii) the issue of Common Shares or securities convertible into
Common Shares by way of stock dividend or other distribution to all or substantially all holders of Common Shares;
(iii) the issue of rights, options or warrants to all or substantially all of the holders of Common Shares entitling them
to acquire Common Shares or other securities convertible into Common Shares in certain circumstances and (iv) the
distribution to all or substantially all holders of Common Shares of any other class of shares, rights, options or
warrants, evidences of indebtedness or assets, at less than 95% of the then Current Market Price (as defined below)
of the Common Shares.
Redemption
The Debentures may not be redeemed (a “Redemption”) by the Company prior to October 31, 2022, except if certain
conditions are satisfied following a Change of Control (as defined below). On or after October 31, 2022 and prior to
October 31, 2023, the Debentures may be redeemed by the Company, in whole or in part from time to time, on not
more than 60 days and not less than 30 days prior notice (a “Redemption Notice”), at a redemption price equal to
the principal amount thereof plus accrued and unpaid interest, if any, up to but excluding the date set for
Redemption, provided that the arithmetic average of the volume weighted average trading price of the Common
Shares (as defined herein) on the New York Stock Exchange (the “NYSE”) for the 20 consecutive trading days ending
five trading days prior to the date on which the Redemption Notice is provided (the “Current Market Price”) is at
least 125% of the conversion price, subject to regulatory approval. On or after October 31, 2023 and prior to the
maturity date, the Debentures may be redeemed in whole or in part at the option of the Company on not more than
60 days and not less than 30 days prior notice, at a price equal to their principal amount plus accrued and unpaid
interest, if any, up to but excluding the date set for Redemption.
Change of Control
Within 30 days of the Company giving notice of the occurrence of: (i) the acquisition by any person or group of
persons acting jointly or in concert (within the meaning of National Instrument 62-104 - Take-Over Bids and Issuer
Bids as at the date of the Indenture) of ownership of, or voting control or direction over, fifty percent (50%) or more
of the then outstanding Common Shares; or (ii) the sale or other transfer of all or substantially all of the consolidated
assets of the Company (each, a “Change of Control”), the holders of the Debentures (the “Debentureholders”) may
require the Company to repurchase their Debentures then outstanding at a price equal to 100% of the principal
amount of the Debentures plus accrued and unpaid interest thereon, from and including the last Interest Payment
-75-
Date (as defined in the Indenture) to, but not including the purchase date. If holders of 90% of the aggregate then
outstanding principal amount of Debentures tender to the Change of Control offer, the Company will have the option
to call the remaining Debentures. A Change of Control will not include a sale, merger, reorganization, arrangement
or similar transaction if the previous holders of the Common Shares hold at least fifty percent (50%) of the voting
control or direction in such merged, reorganized, arranged or other continuing entity.
In the event of an acquisition of the Company where the consideration includes 10% or more in cash or assets or
shares (other than publicly traded shares), then, subject to regulatory approval, Debentureholders will be entitled
to convert their Debentures within a specified timeframe, in whole or in part,and receive, in addition to the number
of Common Shares that such holders are otherwise entitled to receive upon such conversion, an additional number
of Common Shares per $1,000 principal amount of Debentures converted as set forth in the Indenture.
Payment of Principal Upon Redemption of Maturity
Subject to applicable securities laws and regulatory approval and provided that no Event of Default (as defined in
the Indenture) has occurred and is continuing, the Company may, at its option, elect to satisfy its obligation to pay
the principal amount of the Debentures and accrued and unpaid interest on redemption or at maturity, in whole or
in part, through the issuance of freely tradable Common Shares upon at least 30 days and not more than 60 days
prior notice, by issuing and delivering that number of Common Shares, as applicable, obtained by dividing the
principal amount of the Debentures and all accrued and unpaid interest thereon by 95% of the Current Market Price
on the date of redemption or maturity, as applicable.
MARKET FOR SECURITIES
Common Shares
The Company’s Common Shares were listed and posted for trading on the TSX Venture Exchange until January 18,
2010 when the Company graduated to the TSX). On September 19, 2011, the Company’s Common Shares were
listed and posted for trading on the NYSE. The Company’s shares currently trade on the NYSE under the symbol
“FSM”, on the TSX under the symbol “FVI”, and on the Frankfurt Open Market, the unofficial market organized by
Deutsche Börse in Germany, under the symbol “F4S”.
Trading Prices and Volume
The following table sets forth the high and low sale prices and trading volumes of the Common Shares on the TSX
and the NYSE during the fiscal year ended December 31, 2019:
Toronto Stock Exchange
Month
December 2019
November 2019
October 2019
September 2019
August 2019
July 2019
June 2019
May 2019
April 2019
March 2019
February 2019
January 2019
High (C$)
5.47
4.39
4.43
5.85
5.86
5.56
4.02
4.16
4.73
5.19
5.55
5.30
Low (C$)
4.23
3.79
3.92
3.99
4.64
3.50
3.22
3.22
4.04
4.45
4.85
4.41
Volume
9,093,400
8,326,300
8,621,700
15,099,500
18,176,000
20,003,700
37,053,400
7,819,000
6,934,700
12,061,200
6,085,700
7,554,700
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New York Stock Exchange
High (US$)
4.19
3.29
3.34
4.39
4.59
4.24
3.06
3.11
3.56
3.84
4.18
4.04
Low (US$)
3.19
2.86
2.93
3.01
3.49
2.68
2.40
2.39
3.01
3.31
3.67
3.32
Volume
46,249,200
36,966,000
42,577,000
63,631,400
69,192,300
68,168,700
46,721,200
30,652,700
27,582,500
25,215,200
17,013,200
17,278,200
Month
December 2019
November 2019
October 2019
September 2019
August 2019
July 2019
June 2019
May 2019
April 2019
March 2019
February 2019
January 2019
Debentures
The Debentures are listed for trading on the TSX under the trading symbol “FVI:DB.U.”
Trading Prices and Volume
The following table sets forth the high and low sale prices and trading volumes of the Debentures on the TSX during
the fiscal year ended December 31, 2019:
Month
December 2019
November 2019
October 2019(2)
Toronto Stock Exchange
High (C$)
114.00
102.25
102.50
Low (C$)
102.50
99.24
100.08
Volume (C$)(1)
1,339,000
565,000
2,785,000
(1) Principal amount of Debentures traded
(2) The Debentures commenced trading on the TSX on October 2, 2019.
Prior Sales
The following table summarizes the issuances of share-settled restricted share units (“RSUs”) and performance share
units (“PSUs”) by the Company during the financial year ended December 31, 2019, which securities are not listed
or quoted on a market place, and the issuances of Common Shares which were issued upon the vesting of RSUs and
PSUs during the aforementioned year.
Date Issued
March 15, 2019
March 15, 2019
March 19, 2019
May 29, 2019
June 5, 2019
Issue/Exercise
Price (Cdn$)
Number and Type of
Security Issued
Reason for Issuance
$4.83
$4.83
$6.20
$6.35
$7.15
633,914 RSUs
422,609 PSUs
Grant
Grant
233,753 Common Shares
Settlement of PSUs and RSUs
117,226 Common Shares
Settlement of RSUs
979 Common Shares
Settlement of RSUs
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DIRECTORS AND EXECUTIVE OFFICERS
Name, Occupation and Shareholding
The Board presently consists of seven directors. The directors will hold office until the next annual general meeting
of the Company or until their successor is elected or appointed, unless their 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
Principal Occupation or Employment (1)
President & CEO of the Company.
Period as a Director
of the Company
December 2, 2004
to present
SIMON RIDGWAY
Chairman and Director
British Columbia, Canada
MARIO SZOTLENDER (5)
Director
Caracas, Venezuela
DAVID FARRELL (2) (3) (4)
Lead Director
British Columbia, Canada
DAVID LAING (3) (4) (5)
Director
British Columbia, Canada
ALFREDO SILLAU (2) (3) (5)
Director
Lima, Peru
KYLIE DICKSON (2) (4)
Director
British Columbia, Canada
LUIS GANOZA DURANT
Chief Financial Officer
Lima, Peru
Chairman of the Company; President & CEO of
Radius Gold Inc. (mineral exploration).
January 25, 2005
to present
Independent Consultant and Director of several
public mineral exploration companies.
June 16, 2008
to present
President of Davisa Consulting (a private
consulting company).
July 15, 2013
to present
September 26,
2016 to present
Mining Engineer; Independent Mining Executive,
November 2018 to present; Chief Operating
Officer of Equinox Gold Corp. and predecessors
(mining), August 2016 to November 2018; Chief
Operating Officer of True Gold Mining Inc.
(mining), June 2015 to April 2016; Chief Operating
Officer of Quintana Resources Inc. (resource
industry management), 2014 to 2015.
Managing Partner, CEO and Director of Faro
Capital (investment management).
November 29, 2016
to present
Vice-President, Business Development of Equinox
Gold Corp. and predecessors (mining), April 2017
to March 2020; Chief Financial Officer of JDL Gold
Corp. until its acquisition of Luna Gold Corp.
(mining), October 2016 to April 2017; Chief
Financial Officer of Anthem United Inc. (mining),
March 2014 to October 2016.
August 16, 2017
to present
Chief Financial Officer of the Company.
N/A
MANUEL RUIZ-CONEJO
Vice-President of Operations
Lima, Peru
JOSE PACORA
Vice-President of Project
Development
Lima, Peru
DAVID VOLKERT
Vice-President of Exploration
British Columbia, Canada
ERIC CHAPMAN
Vice-President of Technical
Services
British Columbia, Canada
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Vice-President of Operations of the Company.
N/A
Vice-President of Project Development of the
Company.
Vice-President of Exploration of the Company,
August 2016 to present; President / Chief
Executive Officer of Paget Minerals Corp. (mineral
exploration), January 2010 to August 2016.
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.
N/A
N/A
N/A
N/A
GORDON JANG
Vice-President of Finance and
Accounting
British Columbia, Canada
Vice-President of Finance and Accounting of the
Company, April 2017 to present; Consultant,
Hudbay Minerals Inc. (mining), July 2014 to March
2017.
As at December 31, 2019, the directors and executive officers of the Company beneficially owned or had control or
direction over, directly or indirectly, an aggregate of 1,408,307 Common Shares, representing approximately 0.88%
of the issued Common Shares of the Company.
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.
(5) Member of the Sustainability Committee of the Company.
Cease Trade Orders or Bankruptcies
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 the AIF for the year ended
December 31, 2016 (the “Annual Documents”). The MCTO prohibited the Chief Executive Officer and the Chief
Financial Officer of the Company from trading in securities of the Company until the Company completed the
required filing of the Annual Documents as well as its Interim Financial Documents (as defined below) for the first
quarter of 2017, and the regulator revokes the MCTO.
The Annual Documents were filed on May 15, 2017. Due to the delay in finalizing the Annual Financial Documents,
the Company was delayed in filing its interim financial statements and related MD&A for the three months ended
March 31, 2017 and 2016 (together, the “Interim Financial Documents”). The Company filed the Interim Financial
Documents on May 24, 2017, and the MCTO was revoked by the British Columbia Securities Commission on May 25,
2017.
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Other than as set forth above, 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, other than as disclosed above;
was subject to an event that resulted, after the director or executive officer ceased to be a director
or executive officer, in the company being the subject of a cease trade or similar order or an order
that denied the relevant company access to any exemption under securities legislation, for a period
of more than 30 consecutive days; or
within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal
under any legislation relating to bankruptcy or insolvency or was subject to or instituted any
proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold its assets; or
(b)
has become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or
become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a
receiver, receiver manager or trustee appointed to hold the assets of the director, officer and shareholder.
Penalties or Sanctions
As at the date of the AIF and during the 10 years prior to the date of the AIF, none of the directors or officers of the
Company or a shareholder holding a sufficient number of securities of the Company to affect materially the control
of the Company has been subject to:
(a)
(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 Audit Committees (“NI 52-110”), 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 Kylie Dickson, Alfredo Sillau and David Farrell. All members of the
Audit Committee are “independent” and “financially literate”, within the meanings given to those terms in NI 52-
110.
The education and experience of the Audit Committee members that is relevant to the performance of their
responsibilities as Audit Committee members is as follows:
Audit Committee Member
Kylie Dickson
Alfredo Sillau
David Farrell
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Education and Experience
Ms. Dickson is a Canadian Chartered Professional Accountant with more than
13 years’ experience working with publicly traded resource companies. She
received her Bachelor of Business Administration degree in Accounting from
Simon Fraser University. She previously held the positions of Vice-President,
Business Development of Equinox Gold Corp. and Chief Financial Officer of
several mineral exploration and mining companies. Prior to her work with
public companies, Ms. Dickson was an audit manager in the mining group of a
major audit firm.
Mr. Sillau is Managing Partner, CEO and Director of Faro Capital, an
investment management firm that manages private equity and real estate
funds. Previously, he 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 graduate of Harvard Business
School. 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. Farrell is President of Davisa Consulting, a private consulting firm working
with junior to mid-tier global mining companies. He formerly was Managing
Director of Mergers & Acquisitions at Endeavour Financial where he
successfully closed over $25 billion worth of M&A transactions for junior and
mid-tier natural resource companies. Before his 12 years at Endeavour
Financial, David was a lawyer at Stikeman Elliott LLP, working in Vancouver,
Budapest and London. Mr. Farrell 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. In addition, he has completed
the ICD-Rotman Directors Education Program and been awarded the ICD.D
designation. 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 auditor of the Company obtains, as necessary, the pre-approval of the Audit Committee for any anticipated
additional services required of the auditor 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.
Effective July 13, 2017, KPMG LLP, Chartered Professional Accountants, was appointed as auditor of the Company in
the place of Deloitte LLP.
During the Company’s most recently completed fiscal year, no services were performed by the Company’s auditor
pursuant to the De-Minimus Non-audit Services exemption contained in NI 52-110.
During the Company’s most recently completed fiscal year, the Company’s auditor performed certain non-audit
services. Fees charged (in Canadian dollars) by the auditor during the last two fiscal years are as follows:
-81-
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
2018
$1,040,300
Nil
Nil
Nil
$1,040,300
2019
$1,212,300
$27,300
Nil
Nil
$1,239,600
“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”.
The fees charged in 2019 by KPMG LLP include services for attestation 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.
LEGAL PROCEEDINGS
Other than the Administrative Proceedings and the Amparo Proceedings referred to in the “Risk Factors” section of
this AIF, 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 Common Shares are listed for trading on the TSX in Canada and on the NYSE in the United States. The Debentures
are only listed for trading on the TSX. The Company’s transfer agent and registrar for its Common Shares and
Debentures is Computershare Trust Company, at its offices in Vancouver, BC and Toronto, ON. The Company’s co-
transfer agent and registrar for its Common Shares in the United States is Computershare Trust Company, N.A. at its
office in Golden, Colorado.
MATERIAL CONTRACTS
In connection with the 2019 Financing described in this AIF under the heading “General Development of the Business
– Three-Year History and Recent Developments”, the Company entered into:
(a)
an underwriting agreement dated September 16, 2019 with the Underwriters, pursuant to which the
Underwriters agreed to buy Debentures on a bought-deal basis. The Company paid a commission to
the Underwriters of US$40.00 per Debenture issued in the 2019 Financing, and reimbursed certain
expenses of the Underwriters incurred in connection with the 2019 Financing; and
(b)
the Indenture. Refer to “Description of Capital Structure – Debentures”.
Other than as disclosed in this AIF and other than those entered into in the ordinary course of the Company’s
business, there are no contracts that are material to the Company and that were entered into during the most
recently completed fiscal year ended December 31, 2019 or before the most recently completed financial year, but
are still in effect as of the date of this AIF.
-82-
INTERESTS OF EXPERTS
Names of Experts
The following are the names of persons or companies: (a) that are named as having prepared or certified a report,
valuation, statement or opinion included in a filing, or referred to in a filing made under National Instrument 51-102
– Continuous Disclosure Obligations during or relating to the fiscal year ended December 31, 2019; and (b) whose
profession or business give authority to the report, valuation, statement or opinion made by the person or the
Company:
(a)
(b)
KPMG LLP provided an auditors’ report dated March 10, 2020 in respect of the Company’s
consolidated financial statements for the years ended December 31, 2019 and 2018; and
Eric Chapman, P.Geo. and Amri Sinuhaji, P.Eng. prepared the Caylloma Technical Report and the San
Jose Technical Report. See “Description of the Business – Material Mineral Properties”.
Eric Chapman, Vice President of Technical Services of the Company and Amri Sinuhaji, Director of Technical Services,
Mine Planning of the Company are each a Qualified Person as defined by NI 43-101.
Eric Chapman 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 and he has reviewed and approved the
scientific and technical information contained in this AIF.
Interests of Experts
To the knowledge of the Company, as at the dates of the Caylloma Technical Report, the San Jose Technical Report
and as of the date hereof, Eric Chapman and Amri Sinuhaji together own, directly or indirectly, less than one percent
of the outstanding Common Shares. Neither of Eric Chapman or Amri Sinuhaji has received a direct or indirect
interest in any securities or property of the Company in connection with the preparation or certification of such
report.
KPMG LLP is the independent registered public accounting firm of the Company and is independent within the
meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada
and any applicable legislation or regulations and also that they are independent accountants with respect to the
Company under all relevant U.S. professional and regulatory standards.
ADDITIONAL INFORMATION
Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of the
Company’s securities and securities authorized for issuance under equity compensation plans, is contained in the
Company’s Management Information Circular for the most recent annual meeting of shareholders. Additional
financial information is provided in the Company’s audited financial statements for the fiscal year ended
December 31, 2019 and the management’s discussion and analysis thereon. The foregoing disclosure documents,
along with additional information relating to the Company are available for viewing on SEDAR at www.sedar.com.
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;
-ii-
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;
f.
g.
h.
reviews the plan and scope of the audit to be conducted by the external auditors of the Company;
reviews and evaluates the performance of the external auditors; and
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.
f.
g.
h.
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;
reviews the appropriateness and disclosure of any off-balance sheet matters;
reviews disclosure of related-party transactions;
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 Audit 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, in accordance with the
provisions of National Instrument 52-110 – Audit Committees (“NI 52-110”).
COMPOSITION
The Audit Committee is composed of a minimum of three directors, all of whom are independent, subject to any
exemptions or relief that may be granted from such requirements under NI 52-110, 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, and may appoint 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 electronic means) 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
-v-
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 choose 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
The Audit Committee may, in its discretion and where permitted by NI 52-110, 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 as detailed in the Code of Business Conduct and Ethics
and 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.
Approved by the Board: March 27, 2019
EXHIBIT 99.2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 2019 AND 2018
(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
in accordance with International Financial Reporting Standards (“IFRS”) 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 Control over Financial Reporting and Disclosure Controls and Procedures. 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 over Financial Reporting and Disclosure Controls and Procedures. 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 KPMG LLP, the Company’s independent registered public
accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States).
/s/ Jorge Ganoza Durant
President and Chief Executive Officer
/s /Luis Ganoza Durant
Chief Financial Officer
Vancouver, Canada
March 10, 2020
KPMG LLP
Chartered Professional Accountants
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
(604) 691-3031
Fax
www.kpmg.ca
Internet
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Fortuna Silver Mines Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Fortuna Silver Mines Inc.
(the Company) as of December 31, 2019 and 2018, the related consolidated statements of income,
comprehensive income, changes in equity and cash flows for each of the years then ended, and the related
notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31,
2019 and 2018, and the results of its operations and its cash flows for each of the years then ended, in
conformity with International Financial Reporting Standards as issued by the International Accounting
Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2020 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its accounting
policy for leases as of January 1, 2019 due to the adoption of IFRS 16, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We are
a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
Fortuna Silver Mines Inc.
Page 2
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
Chartered Professional Accountants
We have served as the Company’s auditor since 2017.
Vancouver, Canada
March 10, 2020
KPMG LLP
Chartered Professional Accountants
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
(604) 691-3031
Fax
www.kpmg.ca
Internet
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Fortuna Silver Mines Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Fortuna Silver Mines Inc.’s (the Company) internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated statements of financial position of the Company as of
December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash
flows and changes in equity for each of the years then ended, and the related notes (collectively, the
consolidated financial statements), and our report dated March 10, 2020 expressed an unqualified opinion on
those consolidated financial statements.
Basis for Opinion
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, under the heading
Controls and Procedures – Management’s Report on Internal Control Over Financial Reporting in the
accompanying Management’s Discussion and Analysis. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Fortuna Silver Mines Inc.
Page 2
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. 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 generally accepted accounting principles, 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 its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, 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.
/s/ KPMG LLP
Chartered Professional Accountants
Vancouver, Canada
March 10, 2020
Fortuna Silver Mines Inc.
Consolidated Income Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars, except per share amounts)
Sales (note 23)
Cost of sales (note 24)
Mine operating income
General and administration (note 25)
Exploration and evaluation
Share of loss from associates (note 11)
Foreign exchange loss (note 12)
Other expenses (note 26)
Operating income
Investment gains (note 12)
Interest and finance (costs) income, net (note 27)
Gain (loss) on derivatives
Income before income taxes
Income taxes (note 28)
Current income tax expense
Deferred income tax (recovery) expense
Net income for the year
Earnings per share (note 22)
Basic
Diluted
Weighted average number of common shares outstanding (000's)
Basic
Diluted
The accompanying notes are an integral part of these financial statements.
Years ended December 31,
$
2019
257,187 $
172,606
84,581
29,805
2,411
225
13,335
4,611
50,387
2018
263,296
166,725
96,571
26,189
723
21
6,091
1,961
34,985
34,194
61,586
11,024
(24)
(1,223)
9,777
-
384
5,370
5,754
43,971
67,340
32,631
(12,456)
20,175
30,563
2,787
33,350
$
23,796 $
33,990
$
$
0.15 $
0.14 $
0.21
0.21
160,193
164,525
159,785
161,636
Page | 1
Fortuna Silver Mines Inc.
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars)
Net income for the year
Items that will remain permanently in other comprehensive income:
Changes in fair value of marketable securities, net of $nil tax
Items that may in the future be reclassified to profit or loss:
Changes in fair value of hedging instruments, net of $nil tax
Total other comprehensive loss for the year
Comprehensive income for the year
The accompanying notes are an integral part of these financial statements.
Years ended December 31,
2019
23,796 $
2018
33,990
$
-
(69)
(665)
(665)
23,131 $
(156)
(225)
33,765
$
Page | 2
Fortuna Silver Mines Inc.
Consolidated Statements of Financial Position
As of December 31, 2019 and 2018
(Presented in thousands of US dollars)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Short term investments
Trade and other receivables (note 5)
Inventories (note 6)
Other current assets (note 7)
Assets held for sale (note 8)
NON-CURRENT ASSETS
Mineral properties and exploration and evaluation assets (note 9)
Plant and equipment (note 10)
Investment in associates (note 11)
Long-term receivables and other (note 12)
Deposits and advances to contractors (note 13)
Total assets
LIABILITIES
CURRENT LIABILITIES
Trade and other payables (note 14)
Income taxes payable
Current portion of lease obligations (note 3(u) and 16)
Current portion of closure and reclamation provisions (note 19)
NON-CURRENT LIABILITIES
Debt (note 17)
Deferred tax liabilities (note 28 (c))
Closure and reclamation provisions (note 19)
Lease obligations (notes 3(u) and 16)
Other liabilities (note 18)
Total liabilities
SHAREHOLDERS' EQUITY
Share capital (note 21)
Reserves
Retained earnings
Total shareholders' equity
December 31,
2019
December 31,
2018
$
83,404 $
-
47,707
14,471
5,495
1,069
152,146
353,519
378,509
1,331
38,389
12,171
$
936,065 $
$
65,286 $
12,400
8,831
3,257
89,774
146,535
20,915
27,868
15,048
499
300,639
422,145
26,094
187,187
635,426
90,503
72,824
32,769
14,386
7,341
1,097
218,920
312,800
192,200
4,277
15,241
43,079
786,517
48,734
8,358
3,395
841
61,328
69,302
31,444
15,102
5,371
1,166
183,713
420,467
18,946
163,391
602,804
Total liabilities and shareholders' equity
$
936,065 $
786,517
/s/ Jorge Ganoza Durant
Jorge Ganoza Durant
Director
/s/ Kylie Dickson
Kylie Dickson
Director
The accompanying notes are an integral part of these financial statements.
Page | 3
Fortuna Silver Mines Inc.
Consolidated Statements of Cashflows
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars)
OPERATING ACTIVITIES
Net income for the year
Items not involving cash
Depletion and depreciation
Accretion expense
Income taxes
Interest expense
Interest income
Share based payments expense, net of cash settlements
Share of loss from associates
Unrealized foreign exchange loss
Unrealized foreign exchange loss, Lindero construction (note 12)
Investment gains, Lindero construction
Unrealized (gain) loss on derivatives
Write-downs and other
Trade and other receivables
Prepaid expenses
Inventories
Trade and other payables
Closure and reclamation payments
Cash provided by operating activities
Income taxes paid
Interest paid
Interest received
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchases of short-term investments
Redemptions of short-term investments
Investments in associates
Expenditures on Lindero construction
Capitalized interest on Lindero construction
Additions to mineral properties, plant and equipment
Contractor advances on Lindero construction and other expenditures
Advances applied to Lindero construction and other expenditures
Proceeds from sale of assets
Additions to long-term receivables
Cash used in investing activities
FINANCING ACTIVITIES
Transaction costs on debt modification
Transaction costs on convertible debenture (note 17(b))
Proceeds from credit facility (note 17(a))
Proceeds from convertible debenture (note 17(b))
Proceeds from issuance of common shares
Payments of lease obligations
Cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Decrease in cash and cash equivalents during the year
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents consist of:
Cash
Cash equivalents
Cash and cash equivalents, end of the year
The accompanying notes are an integral part of these financial statements.
Years ended December 31,
2019
$
23,796 $
46,003
939
20,175
857
(1,838)
4,567
225
509
11,465
(11,024)
2,646
5,592
103,912
(14,309)
1,621
(1,036)
3,021
(352)
92,857
(31,521)
(824)
2,493
63,005
(45,145)
128,320
-
(189,653)
(6,005)
(28,473)
(19,743)
50,650
229
(35,394)
(145,214)
-
(2,490)
40,000
46,000
-
(8,385)
75,125
(15)
(7,099)
90,503
83,404 $
30,984 $
52,420
83,404 $
$
$
$
2018
33,990
44,774
830
33,350
1,562
-
(2,051)
21
453
3,854
-
(4,974)
2,806
114,615
4,257
(496)
1,792
(1,588)
(682)
117,898
(35,698)
(1,576)
2,831
83,455
(237,787)
191,632
(1,148)
(59,535)
(1,573)
(36,788)
(48,191)
5,112
13
(16,788)
(205,053)
(1,338)
-
30,000
-
959
(907)
28,714
313
(92,571)
183,074
90,503
24,535
65,968
90,503
Page | 4
Fortuna Silver Mines Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars, except for number of shares)
Share capital
Reserves
Number
of common shares Amount
Equity
reserve
Hedging
reserve
Fair value
reserve
Equity
component of
convertible
debenture
Foreign
Currency
reserve
Retained
earnings
159,636,983 $ 418,168 $
14,726 $
147 $
27 $
- $
1,115 $ 129,401 $
Total equity
563,584
Balance at January 1, 2018
Total comprehensive income
Net income for the year
Other comprehensive loss
Total comprehensive income
Transactions with owners of the Company
Shares issued on vesting of share units
Exercise of stock options
Exercise of warrants
Share-based payments (note 20)
-
-
-
-
-
-
-
-
-
-
(156)
(156)
78,150
20,000
204,462
-
302,612
388
21
1,890
-
2,299
(388)
(8)
(944)
4,496
3,156
-
-
-
-
-
-
(69)
(69)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
33,990
-
33,990
33,990
(225)
33,765
-
-
-
-
-
-
13
946
4,496
5,455
Balance at December 31, 2018
159,939,595 $ 420,467 $
17,882 $
(9) $
(42) $
- $
1,115 $ 163,391 $
602,804
Balance at January 1, 2019
Total comprehensive income
Net income for the year
Other comprehensive loss
Total comprehensive income
Transactions with owners of the Company
Shares issued on vesting of share units
Share-based payments (note 20)
Equity portion of convertible debenture, net of tax (note 17 (b))
159,939,595 $ 420,467 $
17,882 $
(9) $
(42) $
- $
1,115 $ 163,391 $
602,804
-
-
-
-
-
-
-
-
-
-
(665)
(665)
351,958
-
-
351,958
1,678
-
-
1,678
(1,678)
4,666
-
2,988
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,825
4,825
-
-
-
-
-
-
-
23,796
-
23,796
23,796
(665)
23,131
-
-
-
-
-
4,666
4,825
9,491
Balance at December 31, 2019
160,291,553 $ 422,145 $
20,870 $
(674) $
(42) $
4,825 $
1,115 $ 187,187 $
635,426
The accompanying notes are an integral part of these financial statements.
Page | 5
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
1. Nature of Operations
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, the San Jose silver and gold mine (“San Jose”) in southern Mexico, and the Lindero Gold Project
(“Lindero Project”), which is under construction, in northern Argentina.
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, Canada, V6C 3L6.
2. Basis of Presentation
Statement of Compliance
These consolidated financial statements (“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”) effective as of December 31, 2019.
On March 10, 2020, the Company's Board of Directors approved these financial statements for issuance.
Presentation and Functional Currency
These financial statements are presented in United States Dollars (“$” or “US$” or “US dollars”), which is the
functional currency of the Company. Reference to C$ are to Canadian dollars. All amounts in these financial
statements have been rounded to the nearest thousand US dollars, unless otherwise stated.
Basis of Measurement
These financial statements have been prepared on a historical cost basis, except for those assets and liabilities that
are measured at fair value (Note 30) at the end of each reporting period.
3. Significant Accounting Policies
The Company has consistently applied the following accounting policies to all periods presented in these financial
statements.
(a) Basis of Consolidation
These financial statements include the accounts of the Company. All significant intercompany transactions, balances,
revenues, and expenses have been eliminated upon consolidation.
Page | 6
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
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 returns from its involvement with an investee, and
had 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, 2019, the principal subsidiaries
of the Company, their geographic locations, and the ownership interests held by the Company, were as follows:
Name
Minera Bateas S.A.C. ("Bateas")
Compania Minera Cuzcatlan S.A. de C.V. ("Cuzcatlan")
Mansfield Minera S.A. ("Mansfield")
(b) Foreign Currency Translation
Location
Peru
Mexico
Argentina
Ownership
100%
100%
100%
Principal Activity
Caylloma Mine
San Jose Mine
Lindero Project
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) Cash, Cash Equivalents and Short-Term Investments
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. Short-term investments consist of term deposits with original maturities in
excess of three months but less than twelve months. Cash, cash equivalents and short-term investments are
designated as amortized cost.
(d) Inventories
Inventories include mineral concentrates, stockpiled ore, materials and supplies. Costs allocated to metal inventories
are based on average costs, which include direct mining costs, direct labor and material costs, mine site overhead,
depletion and amortization. Costs allocated to materials and supplies are based on weighted average costs and
include all costs of purchase and other costs in bringing these inventories to their existing location and condition. If
carrying value exceeds net realizable amount, a write down is recognized. The write down may be reversed in a
subsequent period if the circumstances which caused the write down no longer exist, to the extent that the related
inventory has not been sold. Net realizable value is calculated as the estimated price at the time of sale based on
prevailing metal prices less estimated future costs to convert the inventories into saleable form and estimated costs
to sell.
(e) Investment in Associates
Associates are those entities in which the Company has significant influence, but not control or joint control, over
the entity’s financial and operating policies. Interests in associates are accounted for using the equity method. They
are initially recognized at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated
financial statements include the Company’s share of the profit or loss and other comprehensive income of equity-
accounted investees, until the date on which significant influence ceases.
Page | 7
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
An impairment test is performed when there is objective evidence of impairment, such as significant adverse
changes in the environment in which the associate operates or there is a significant or prolonged decline in the fair
value of the investment below its carrying amount. When there is objective evidence that an investment is impaired,
a quantitative impairment test is performed and a loss is recorded if the recoverable amount is lower than the
carrying amount. Impairment losses are reversed if the recoverable amount subsequently exceeds the carrying
amount.
(f) Exploration and Evaluation Assets
Exploration expenditures on properties for which the Company does not have title or rights to are expensed when
incurred. Significant payments related to the acquisition of land and mineral rights and the costs to conduct a
preliminary evaluation to determine that the property has potential to develop an economic ore body are capitalized
as incurred. The time between initial acquisition and a full evaluation of a property’s potential is dependent on
many factors including, but not limited to, location relative to existing infrastructure, the property’s stage of
development, geological controls and metal prices.
The Company capitalizes the cost of acquiring, maintaining its interest and exploring mineral properties as
exploration and evaluation assets 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 Standards of
Disclosure for Mineral Projects (“NI 43-101”), and
• when legal, permitting and social matters have been resolved sufficiently to allow mining of the ore
body.
Exploration and evaluation assets are tested for impairment when an indicator of impairment is identified and upon
reclassification to mining properties.
If no mineable ore body is discovered, all previously capitalized costs are expensed in the period in which it is
determined the property has no economic value.
Proceeds received from the sale of interests in exploration and evaluation assets are credited to the carrying value
of the mineral properties, plant and equipment. Exploration costs that do not relate to any specific property are
expensed as incurred.
(g) Mineral Properties, Plant and Equipment
i. Operational Mining Properties and Mine Development
For operating mines, all mineral property expenditures are capitalized and amortized based on a 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.
Capitalized 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.
Page | 8
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
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 NI 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 our mine designs, and at this
time we apply a conversion or “risk” factor to the mining blocks comprised of inferred resources that 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 2019 and 2018 life-of-mine plans were
90% at San Jose and 80% at Caylloma.
The percentage of inferred resources included as a component of the total mineable inventory (reserve + resource)
considered in the 2019 life-of-mine evaluation for each operation as of December 31, 2019, was San Jose 29% (2018
and 2017: 21% and 23%); Caylloma 45% (2018 and 2017: 48% and 60%).
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.
Page | 9
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
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. Revisions to these estimates are accounted for in the
period in which the change in the estimate arises.
Costs of abandoned properties are written-off.
- Commercial Production
Capital work in progress consists of expenditures for development of a mine and construction of related processing
facilities, and includes costs of testing whether the asset is functioning properly, after deducting the net proceeds
from selling metals produced while bringing the asset to the condition necessary for it to be capable of operating in
the manner intended by management (“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 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; 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 commence on a unit-of-
production basis. Any costs incurred after the commencement of commercial production are capitalized to the
extent they give rise to a future economic benefit.
ii. Plant and Equipment
Property, plant and equipment are recorded at cost, net of accumulated depreciation and impairments. 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. Assets, other than capital works in progress, are depreciated to their residual
values over their estimated useful lives as follows:
Land and buildings
Land
Mineral properties
Buildings, located at the mine
Buildings, others (1)
Leasehold improvements (1)
Plant and equipment
Machinery and equipment (1)
Furniture and other equipment (1)
Transport units
Capital work in progress
(1) The lesser of useful life or life of mine.
Not depreciated
Units of production
Units of production
6-10 years
4-8 years
3-12 years
2-12 years
4-5 years
Not depreciated
Declining balance
Declining balance
Straight line
Straight line
Straight line
Straight line
Straight line
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.
Page | 10
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
Spare parts and components included in machinery and equipment are depreciated over the shorter of the useful
life of the component or the related machinery and equipment.
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 capable of operating in the manner intended by
management. Any revenues generated prior to commencement of commercial production are credited against the
carrying value of the qualifying asset.
On an annual basis, the depreciation method, useful economic life, and residual value of each component asset is
reviewed with any changes recognized prospectively over its remaining useful economic life.
(h) Asset Impairment
At the end of each reporting period, the Company assesses for impairment indicators and if there are such indicators,
then the Company performs a test of impairment.
For the purpose 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 of disposal (“FVLCD”) 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 compatible with the current condition of the business. The cash flow forecasts are
based on best estimates of the expected future revenues and costs, including the future cash costs of production,
sustaining capital expenditures, and reclamation and closure costs.
Where a FVLCD 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.
Page | 11
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
(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 capable of operating in the
manner intended by management.
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 capable of operating in the manner intended by
management are expensed.
Transaction costs, including legal, upfront commitment fees and other costs of issuance, associated with debt are
recorded against the debt and are amortized over the term of the credit facility using the effective interest rate
method.
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
o
o
o
o
the appropriate level of management must be committed to a plan to sell the asset;
an active program to locate a buyer and complete the plan must have been initiated;
the non-current asset or disposal group must be actively marketed for sale at a price that is
reasonable in relation to its current fair value;
the sale should be expected to qualify for recognition as a completed sale within one year from
the date of classification as held for sale (with certain exceptions); and
actions required to complete the plan should indicate that it is unlikely that significant changes to
the plan will be made or that the plan will be withdrawn.
Assets held for sale are not depreciated and are recorded at the lower of their carrying amount and fair value less
costs to sell.
(k) 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 (“temporary differences”). 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 is settled.
Page | 12
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
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.
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 a 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.
(l) Provisions
i. Closure and Reclamation Provisions
Future obligations to retire an asset, including dismantling, remediation and ongoing treatment and monitoring of
the site related to normal operation 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 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 a future
benefit related to the costs and as such, the amounts are expensed. Revisions in estimates or new disturbances
result in an adjustment to the CRP with an offsetting adjustment to the asset, unless there is no future benefit, in
which case they are expensed.
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 | 13
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
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.
(m) 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.
(n) 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 were not satisfied, the expense previously recognized is reversed in the period
the forfeiture occurs.
Share-based payment expenses relating to cash-settled awards, including deferred and restricted share units are
accrued and expensed over the vesting period based on the quoted market value of the Company’s common shares.
As these awards will be settled in cash, the expense and liability are adjusted at each reporting period for any
changes in the underlying share price.
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 Plan
Deferred share units (“DSU”) 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. 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.
Page | 14
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
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 were governed by the restricted share unit plan dated November 12, 2010.
- Restricted Share Units
The Company’s RSUs are settled in either cash or equity, as determined by the Company’s Board of Directors at the
grant date and typically vest over three years.
For cash settled RSUs, the share-based payment expense is adjusted at each reporting period to reflect any change
in the quoted market price of the Company’s common shares and the vesting of each RSU grant, with a
corresponding amount recorded in other liabilities.
For equity-settled RSUs, the fair value is determined based on the quoted market price of the Company’s common
shares at the date of grant, and the fair value is recognized as a share-based payment expense over the vesting
period with a corresponding amount recorded in equity reserves.
- Performance Share Units
The Company’s PSUs are performance-based awards for the achievement of specified performance metrics by
specified deadlines and are settled in either cash or equity, as determined by the Company’s Board of Directors at
the grant date and typically vest over three years.
For cash settled PSUs, the share-based payment expense is adjusted at each reporting period to reflect any change
in the quoted market price of the Company’s common shares, the vesting of each PSU grant and the expected
performance factors with a corresponding amount recorded in other liabilities.
For equity-settled PSUs, the fair value is determined based on the quoted market price of the Company’s common
shares at the date of grant and the number of PSUs expected to vest based on the performance factors. The fair
value is recognized as a share-based payment expense over the vesting period with a corresponding amount
recorded in equity reserves.
(o) Related Party Transactions
Parties are 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, and include key
management personnel of the Company. A transaction is a related party transaction when there is a transfer of
resources or obligations between related parties.
(p) Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing the net income for the year by the weighted average
number of common shares outstanding during the year.
Page | 15
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
The diluted earnings per share calculation is based on the weighted average number of common shares outstanding
during the year, adjusted for the effects of dilutive common share equivalents. This method requires that the dilutive
effect of outstanding options and equity settled units 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. Dilution from
convertible debentures is calculated using the if-converted method, based on the number of shares to be issued
upon conversion of the convertible debentures, with a corresponding adjustment to net income for the after-tax
interest expense related to the convertible debentures.
(q) Financial Instruments
i Classification and measurement of financial assets and financial liabilities
Financial assets are measured as either: amortized cost; fair value through other comprehensive income (FVOCI) or
fair value through profit or loss (FVTPL). All non-derivative financial liabilities are measured at amortized cost. The
classification of financial assets is generally based on the business model in which a financial asset is managed and
its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the
scope of the standard are never separated, and instead the hybrid financial instrument is assessed for classification.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as
at FVTPL:
•
it is held within a business model whose objective is to hold assets to collect contractual cash flows;
and
its contractual terms give rise on specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
•
A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at
FVTPL:
•
•
it is held within a business model whose objective is achieved by both collecting contractual cash flows
and selling financial assets; and
its contractual terms give rise on specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
On initial recognition of an equity investment that is not held for trading, the Company may irrevocably elect to
present subsequent changes in the investment’s fair value in other comprehensive income (OCI). This election is
made on an investment-by-investment basis. All financial assets not classified as measured at amortized cost or
FVOCI as described above are measured at FVTPL.
Components of compound financial instruments are separately classified as either financial liabilities or as equity in
accordance with the substance of the contractual arrangements and the definitions of a financial liability and an
equity instrument. The financial liability is initially recognized at fair value, net of an allocation of issuance costs, and
is subsequently measured at amortized cost. The equity component is initially measured based on the residual
amount, net of an allocation of issuance costs, and is not subsequently remeasured.
Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs.
Repurchase of the Company’s own equity instruments is recognized and deducted directly in equity. No gain or loss
is recognized in profit or loss on the purchase, sale, or cancellation of our own equity instruments. No gain or loss is
recognized on the issue of our own equity instruments, unless the equity is issued to settle a liability.
Page | 16
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
Financial Liabilities at Amortized Cost – Financial liabilities are measured at amortized cost using the effective
interest method, unless they are required to be measured at fair value through profit or loss (“FVTPL”), or the
Company has opted to measure them at FVTPL. Debt and accounts payable and accrued liabilities are recognized
initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective
interest method.
The following accounting policies apply to the subsequent measurement of financial assets:
•
•
•
Financial assets at FVTPL - These assets are subsequently measured at fair value. Net gains and losses,
including any interest or dividend income, are recognized in profit or loss.
Financial assets at amortized cost - These assets are subsequently measured at amortized cost using
the effective interest method. The amortized cost is reduced by impairment losses. Interest income,
foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on
derecognition is recognized in profit or loss.
Equity investments at FVOCI - These assets are subsequently measured at fair value. Dividends are
recognized as income in profit or loss unless the dividend clearly represents a recovery of part of the
cost of the investment. Gains or losses recognized on the sale of the equity investment are recognized
in OCI and are never reclassified to profit or loss.
ii Impairment of Financial Assets
An entity is required to recognize expected credit losses when financial instruments are initially recognized and to
update the amount of expected credit losses recognized at each reporting date to reflect changes in the credit risk
of the financial instruments.
For the Company’s trade receivables, it determines the lifetime expected losses for all of its trade receivables. The
expected lifetime credit loss provision for the Company’s trade receivables is based on historical counterparty
default rates and adjusted for relevant forward-looking information, when required.
iii Hedge Accounting
The Company has established a strategy, in accordance with its current risk management policies, to use interest
rate swaps to hedge against the variability in cash flows arising from changes in USD LIBOR based floating interest
rate borrowing relating to its credit facility.
Management qualitatively assess that the changes in value of the hedging instrument and the hedged item will move
in opposite directions and will be perfectly offset. As both counterparties to the derivative are investment grade,
the effect of credit risk is considered as neither material nor dominant in the economic relationship. The portion of
the gain or loss on the hedging instrument that is determined to be effective will be recognized directly in other
comprehensive income while the amount that is determined to be ineffective, if any, will be recorded in the profit
or loss during the life of the hedging relationship.
(r) Revenue Recognition
The Company earns revenue from contracts with customers related to its concentrate sales. Revenue from contracts
with customers is recognized when a customer obtains control of the concentrate and the Company satisfies its
performance obligation. The Company considers the terms of the contract in determining the transaction price,
which is the amount the entity expects to be entitled to in exchange for the transferring of the concentrates. The
transaction price of a contract is allocated to each performance obligation based on its stand-alone selling price.
Page | 17
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
The Company satisfies its performance obligations for its concentrate sales based upon specified contract terms
which are generally upon delivery to the customer at a specified warehouse or upon loading of the concentrate onto
a vessel. The Company typically receives payment within one to four weeks of delivery.
Revenue from concentrate sales is recorded based upon forward market price of the expected final sales price date.
IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) does not consider provisional price adjustments
associated with concentrate sales to be revenue from contracts with customers as they arise from changes in market
pricing for silver, gold, lead and zinc between the delivery date and settlement date. As such, the provisional price
adjustments are accounted for as derivatives and presented separately in Note 23 of these financial statements.
(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) Significant Accounting Estimates and Judgements
The preparation of these financial statements requires management to make estimates and judgements that affect
the reported amounts of assets and liabilities at the period end date and reported amounts of expenses during the
reporting period. Such judgements and estimates are, by their nature, uncertain. Actual outcomes could differ from
these estimates.
The impact of such judgements and estimates are pervasive throughout the financial statements, and may require
accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period
in which the estimate is revised and are accounted for prospectively.
In preparing these consolidated financial statements for the year ended December 31, 2019, the Company applied
the critical estimates, assumptions and judgements as disclosed in note 4.
(u) Adoption of New Accounting Standards
i. IFRS 16 Leases
Prior to the adoption of IFRS 16 on January 1, 2019, a lease was classified as a finance lease when substantially all of
the risks and rewards incidental to ownership of the leased asset were transferred from the lessor to the lessee by
the agreement. At the commencement of the lease term, finance leases were recognized as assets and liabilities at
the lower of the fair value of the leased asset and the present value of the minimum lease payments. The assets
were depreciated over the shorter of the asset’s useful lives and the term of the lease. Interest on the lease
instalments was recognized as interest expense over the lease term using the effective interest method. Leases for
land and buildings were recorded separately if the lease payments could be allocated accordingly.
Page | 18
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
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.
The following is the new accounting policy for leases under IFRS 16, effective January 1, 2019:
At inception, the Company assesses whether a contract contains an embedded lease. A contract contains a lease
when the contract conveys a right to control the use of an identified asset for a period of time in exchange for
consideration.
The Company, as lessee, is required to recognize a right-of-use asset (“ROU asset”), representing its right to use the
underlying asset, and a lease liability, representing its obligation to make lease payments. The Company may elect
to not apply IFRS 16 to leases with a term of less than 12 months or to low value assets, which is made on an asset
by asset basis.
The Company recognizes a ROU asset and a lease liability at the commencement of the lease. The ROU asset is
initially measured based on the present value of lease payments, plus initial direct cost, less any incentives received.
It is subsequently measured at cost less accumulated depreciation, impairment losses and adjusted for certain
remeasurements of the lease liability. The ROU asset is depreciated from the commencement date over the shorter
of the lease term or the useful life of the underlying asset. The ROU asset is subject to testing for impairment if there
is an indicator of impairment.
The lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted by the interest rate implicit in the lease, or if that rate cannot be readily
determined, the incremental borrowing rate. The incremental borrowing rate is the rate which the operation would
have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar
value to the ROU asset in a similar economic environment.
Lease payments included in the measurement of the lease liability are comprised of:
•
•
•
•
•
•
fixed payments, including in-substance fixed payments;
variable lease payments that depend on an index or a rate, initially measured using the index or rate as at
the commencement date;
amounts expected to be payable under a residual value guarantee;
the exercise price under a purchase option that the Company is reasonably certain to exercise;
lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension
option; and
penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.
The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease
payments made. It is remeasured when there is a change in future lease payments arising from a change in an index
or a rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as
appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be
exercised or a termination option is reasonably certain not to be exercised.
Variable lease payments that do not depend on an index or a rate not included in the initial measurement of the
ROU asset and lease liability are recognized as an expense in the consolidated statement of income in the period in
which they are incurred.
Page | 19
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
The ROU assets are presented within “Plant and equipment” and the lease liabilities are presented in “Lease
obligations” on the balance sheet.
ii. Adoption of IFRS 16 Leases
Effective January 1, 2019, the Company adopted IFRS 16 using the modified retrospective approach. The
comparative figures for the 2018 reporting period have not been restated and are accounted for under IAS 17,
Leases, and IFRIC 4, Determining Whether an Arrangement Contains a Lease, as permitted under the specific
transitional provisions in the standard.
The Company used the following practical expedients when applying IFRS 16 to leases previously classified as
operating leases under IAS 17:
•
•
•
applied the exemption not to recognize right of use asset and liabilities for leases with less than 12 months
of lease term;
excluded initial direct cost from measuring the right of use asset at the date of initial application; and
used hindsight when determining the lease term if the contract contains an option to extend or terminate
the lease.
At transition to IFRS 16, for those leases classified as operating leases under IAS 17, the lease liabilities were
measured at the present value of the remaining lease payments and discounted using each operation’s applicable
incremental borrowing rate as of January 1, 2019. As a result, the Company, as a lessee, has recognized $7,316 within
Lease Obligations representing its obligation to make lease payments. ROU assets of the same amount were
recognized within Plant and Equipment, representing its right to use the underlying assets. The weighted average
incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 5.32%.
The Company leases various pieces of equipment that had previously been classified as finance leases under IAS 17.
For these finance leases, the carrying amount of the ROU asset and the lease liability at January 1, 2019 were
determined at the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date.
The following table summarizes the difference between operating lease commitments disclosed immediately
preceding the date of initial application and lease liabilities recognized on the balance sheet at the date of initial
application:
Operating lease obligations as at December 31, 2018
Leases with lease term of 12 months or less and low value assets
Embedded leases identified in existing service contracts
Effect of discounting at incremental borrowing rate
Lease liabilities recognized as at January 1, 2019
Lease liabilities from finance leases previously recorded in lease obligations
Total lease liabilities as at January 1, 2019
Less current portion
Non-current portion
iii. Adoption of IFRIC 23 Uncertainty over Income Tax Treatments
$
$
2,553
(825)
6,162
(574)
7,316
8,767
16,083
(6,120)
9,963
This interpretation sets out how to determine the accounting for a tax position when there is uncertainty over
income tax treatments. At January 1, 2019, the Company adopted this standard and there was no impact on its
financial statements.
Page | 20
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
(v) New Accounting Standards Issued but not yet Effective
A number of new standards are effective for annual periods beginning after January 1, 2019 and earlier application is
permitted; however, the Company has not early adopted the new or amended standards in preparing these financial
statements.
The following amended standards and interpretations are not expected to have a significant impact on the Company’s
consolidated financial statements:
• Amendments to References to Conceptual Framework in IFRS Standards.
• Definition of a Business (Amendments to IFRS 3).
• Definition of Material (Amendments to IAS 1 and IAS 8).
4. Use of Estimates, Assumptions and Judgements
(a) Critical Accounting Estimates and Assumptions
Many of the amounts included in the consolidated financial statements require management to make judgements
and/or estimates. These judgements 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:
i. Mineral Reserves and Resources and the Life of Mine Plan
We estimate our mineral reserves and mineral resources in accordance with the requirements of NI 43-101.
Estimates of the quantities of the 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 reclamation 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 reclamation provision. As at December 31, 2019 we have used the following long-term prices for our
reserve and resource estimations: gold $1,380/oz, silver $17/oz, lead $2,170/t and zinc $2,590/t.
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
types 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 judgements and estimates and such changes could have a material impact on the financial
results. Some of the key judgements of 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 3(g)(i) of these financial statements.
Page | 21
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
ii. 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 income statement when a
property is abandoned or when there is an impairment.
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 sales volumes, metal prices, foreign exchange rates, mineral resource and reserve
quantities, future operating and capital costs to the end of the mine’s life, and reclamation costs. 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 income statement.
iii. 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.
iv. Revenue Recognition
The Company’s sales of metal in concentrates allow for price adjustments based on the market price at the end of
the relevant quotational period (“QP”) stipulated in the contract. These are referred to as provisional pricing
arrangements and are such that the selling price for metal in concentrate is based on the prevailing spot price on a
specified future date. At each balance sheet date, the Company estimates the value of the trade receivable using
forward metal prices.
Adjustments to the sale price occurs based on movements in quoted market prices up to the end of the QP. The
period between provisional invoicing and the end of the QP is generally between one and three months. Any future
changes over the QP are embedded within the provisionally priced trade receivables and are, therefore, within the
scope of IFRS 9 and not within the scope of IFRS 15. As such, the provisional price adjustments are accounted for as
derivatives and presented separately in Note 23 of these financial statements.
Page | 22
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
v. 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 judgement 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 Judgements 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:
i. 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 and losses carried forward. The determination
of the ability of the Company to utilize tax loss carryforwards to offset deferred tax liabilities requires management
to exercise judgement 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.
ii. Assessment of Impairment and Reversal of Impairment Indicators
Management applies significant judgement in assessing whether indicators of impairment or reversal of 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, life of mines, 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 previous impairments.
iii. 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 the events
and conditions which determined the primary economic environment.
Page | 23
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
iv. Leases
Significant estimates, assumptions and judgments made by management on the adoption of IFRS 16 Leases primarily
included judgement about whether the lease conveys the right to use a specific asset, whether the Company obtains
substantially all of the economic benefits from the use of the asset, whether the Company has the right to direct the
use of the asset, evaluating the appropriate discount rate to use to discount the lease liability for each lease or
groups of assets, and to determine the lease term where a contract includes renewal options. Significant estimates,
assumptions and judgments over these factors would affect the present value of the lease liabilities, as well as the
associated amount of the ROU asset.
5. Trade and Other Receivables
Trade receivables from concentrate sales
Advances and other receivables
Value added taxes recoverable
Accounts and other receivables
December 31,
$
$
2019
33,642
2,419
11,646
47,707
$
December 31,
2018
28,132
3,179
1,458
32,769
$
The Company’s trade receivables from concentrate sales are expected to be collected in accordance with the terms
of the existing concentrate sales contracts with its customers. No amounts were past due as at December 31, 2019
and 2018.
6. Inventories
Concentrate stockpiles
Ore stockpiles
Materials and supplies
Inventories
December 31,
$
$
2019
2,640
3,730
8,101
14,471
$
December 31,
2018
1,671
3,166
9,549
14,386
$
During the year ended December 31, 2019, the Company expensed $169,711 (December 31, 2018 –$162,751) of
inventories to cost of sales and wrote down $1,328 (December 31, 2018 - $206) of materials and supplies to their
net realizable value, with such write downs included in cost of sales.
7. Other Current Assets
Derivative assets
Income tax recoverable
Prepaid expenses
Other current assets
December 31,
$
$
2019
-
2,553
2,942
5,495
$
December 31,
2018
2,646
136
4,559
7,341
$
Page | 24
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
8. Assets Held for Sale
Changes to assets held for sale during the years ended December 31, 2019 and 2018 are as follow:
Balance at December 31, 2017
Transfer from property, plant and equipment
Disposals
Write-downs
Balance at December 31, 2018
Disposals
Balance at December 31, 2019
9. Mineral Properties and Exploration and Evaluation Assets
$
$
1,701
194
(107)
(691)
1,097
(28)
1,069
Depletable
Not depletable
Caylloma San Jose Lindero
Other
Total
COST
Balance at December 31, 2018
Additions
Changes in closure and reclamation provision
Write-downs
Balance at December 31, 2019
$ 121,625 $ 175,609 $ 155,854 $
6,396
223
-
$ 128,244
7,838
886
-
$ 184,333
34,485
13,527
-
$ 203,866
$
7,797 $ 460,885
51,371
2,652
14,636
-
(2,516)
(2,516)
$ 524,376
7,933
ACCUMULATED DEPLETION
Balance at December 31, 2018
Depletion
Balance at December 31, 2019
$
$
68,207 $
6,228
74,435
$
79,878 $
16,544
96,422
$
- $
-
-
$
- $ 148,085
22,772
-
$ 170,857
-
Net Book Value at December 31, 2019
$
53,809
$
87,911
$ 203,866
$
7,933
$ 353,519
Depletable
Not depletable
Caylloma San Jose Lindero
Other
Total
COST
Balance at December 31, 2017
Additions
Changes in closure and reclamation provision
Balance at December 31, 2018
ACCUMULATED DEPLETION
Balance at December 31, 2017
Depletion
Balance at December 31, 2018
$ 112,669 $ 164,198 $ 140,154 $
12,035
(624)
14,782
918
8,240
716
$ 121,625 $ 175,609 $ 155,854 $
4,150 $ 421,171
38,704
3,647
1,010
-
7,797 $ 460,885
$
$
61,053 $
7,154
68,207 $
63,506 $
16,372
79,878 $
- $
-
- $
- $ 124,559
-
23,526
- $ 148,085
Net Book Value at December 31, 2018
$
53,418 $
95,731 $ 155,854 $
7,797 $ 312,800
Page | 25
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
During the year ended December 31, 2019, the Company capitalized $5,259 (December 31, 2018 - $1,125) of interest
related to the construction of the Lindero Project.
The assets of the Caylloma Mine and the San Jose Mine and their holding companies, are pledged as security under
the Company’s credit facility.
Exploration and Evaluation Assets
Mexico
Balance at December 31, 2017 $
Additions
Balance at December 31, 2018
Additions
Write-off
Balance at December 31, 2019 $
Tlacolula
Pachuca
-
-
-
962
(962)
-
3,128 $
170
3,298
218
-
3,516 $
$
Arizaro
$
Argentina
Esperanza Incachule
Serbia
Barje
Others
367 $
567
934
2
-
936 $
82 $
706
788
-
(788)
- $
$
82
684
766
-
(766)
-
$
491 $
1,447
1,938
1,318
-
3,256 $
- $
73
73
152
-
225 $
Total
4,150
3,647
7,797
2,652
(2,516)
7,933
During the year ended December 31, 2019, the Company incurred $2,652 (December 31, 2018 - $3,647) of
exploration and evaluation expenditures of which $962 were expensed. In addition, the Company wrote down
$1,554 relating to two greenfield exploration projects (December 31, 2018 – nil).
10. Plant and Equipment
Machinery
and
equipment
Land, buildings
and leasehold
improvements
Furniture,
other
equipment
and
Transport
units
Assets
under lease
1
Capital
work in
progress -
Lindero
Capital
work in
progress
- Other Total
COST
Balance at December 31, 2018
Initial adoption IFRS 16 (note 3(u))
Balance at January 1, 2019
Additions
Changes in closure and reclamation provision
Disposals
Reclassifications
Balance at December 31, 2019
ACCUMULATED DEPRECIATION
Balance at December 31, 2018
Disposals
Depreciation
Balance at December 31, 2019
$
$
$
$
74,188
-
74,188
1,185
171
(1,038)
740
75,246
35,843
(746)
7,117
42,214
$
$
$
$
141,318
-
141,318
714
-
-
17,700
159,732
$ $ 11,066
-
11,066
3,464
-
(87)
1,640
16,083
$
65,547
-
12,813
78,360
$
$
5,390
(79)
2,091
7,402
$
$
$
$
13,411
7,316
20,727
14,944
-
-
-
35,671
$
52,964
-
52,964
177,017
-
-
(10,646)
$ 219,335
$ 6,140
-
6,140
9,718
-
-
(9,434)
$ 6,424
$ 299,087
7,316
306,403
207,042
171
(1,125)
-
$ 512,491
107
-
5,899
6,006
$
$
-
-
-
-
$
$
-
-
-
-
$ 106,887
(825)
27,920
$ 133,982
Net Book Value at December 31, 2019
$ 378,509
(1) The Company leases equipment that was previously classified as a finance lease under IAS 17. On January 1, 2019, these leases were
classified as right-of-use assets under IFRS 16 and the carrying amount of $13,411 and the lease liability of $8,767 were determined based
on the carrying amount of these assets and their related lease liability immediately before this date.
$ 219,335
$ 6,424
33,032
81,372
29,665
8,681
$
$
$
$
Page | 26
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
Machinery
and
equipment
Land,
buildings
and leasehold
improvements
Furniture,
other
equipment
and
transport
units
Equipment
under
finance
lease
Capital
work in
progress -
Lindero
Capital
work in
progress -
Other
Total
COST
Balance at December 31, 2017
Additions
Changes in closure and reclamation provision
Disposals
Reclassifications
Balance at December 31, 2018
ACCUMULATED DEPRECIATION
Balance at December 31, 2017
Disposals
Reclassifications
Depreciation
Balance at December 31, 2018
$
$
$
$
62,217
3,122
550
(1,859)
10,158
74,188 $
$
131,738
390
-
-
9,190
$
7,478
7,405
-
(358)
(3,459)
7,295
-
-
(26)
6,142
$
4,360
59,356
-
-
(10,752)
$
141,318 $ 11,066 $ 13,411 $ 52,964 $
8,561 $ 221,649
79,131
8,858
550
-
(2,243)
-
-
(11,279)
6,140 $ 299,087
$
27,570
(1,719)
3,152
6,840
$
35,843 $
$
52,353
-
538
12,656
65,547 $
$
4,552
(295)
18
1,115
5,390 $
$
3,510
(26)
(3,708)
331
107 $
$
-
-
-
-
- $
87,985
- $
(2,040)
-
-
-
-
20,942
- $ 106,887
Net Book Value at December 31, 2018
$
38,345 $
75,771 $
5,676 $ 13,304 $ 52,964 $
6,140 $ 192,200
11. Investment in Associates
As at December 31, 2019, investments in associates were comprised of:
Name
Medgold Resources Corp. ("Medgold")
Prospero Silver Corp. ("Prospero")
Proportion of ownership held
December 31,
2019
2018
Market Value (C$)
December 31,
2019
2018
22%
27%
22% $
27% $
1,265 $
464 $
2,740
927
Medgold and Prospero are Canadian public companies which both trade on the TSX Venture Exchange under the
ticker symbols MED and PSL, respectively, and are quoted in Canadian dollars (“C$”). Medgold’s principal business
activity is the acquisition and exploration of resource properties in Serbia, and Prospero’s principal business activity
is the acquisition and exploration of resource properties in Mexico.
Balance at December 31, 2017
Shares and warrants presented as marketable securities, December 31, 2017
Fair value adjustments prior to May 18, 2018
Exercise of warrants
Purchase of additional shares
Share of net income (loss)
Balance at December 31, 2018
Write down of investment
Share of net loss
Balance at December 31, 2019
Medgold Prospero
$
$
$
2,694
-
-
-
249
132
3,075
(1,937)
(164)
974
-
556
(99)
624
274
(153)
1,202
(784)
(61)
357
$
$
$
Total
2,694
556
(99)
624
523
(21)
4,277
(2,721)
(225)
1,331
During the year ended December 31, 2019, the Company wrote-down its investments in Prospero to $357 and in
Medgold of $974.
Page | 27
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
12. Long-Term Receivables and Other
December 31,
2018
Value added tax recoverable - Lindero (1)
15,241
Value added tax recoverable - San Jose (2)
-
-
Income tax recoverable (note 33 (d))
-
Other assets
15,241
Long-term receivables and other
(1) The Company expects to start recovering the value added tax amount after commencement of commercial production at the Lindero
34,176
2,036
1,310
867
38,389
December 31,
2019
$
$
$
$
Project.
(2) The Company expects to start recovering the value added tax amount during the third quarter of 2021.
During the year ended December 31, 2019, the Company recognized an unrealized foreign exchange loss of $12,137
(December 31, 2018 - $2,769) related to the value added tax recoverable on the construction at the Lindero Project.
As a result of the devaluation of the Argentine Peso which followed Argentina’s primary election in the third quarter
of 2019, the Company implemented an investment strategy to meet its local currency requirements in Argentina
and recognized $11,024 of gains from Argentine Peso denominated cross-border securities trades.
13. Deposits and Advances to Contractors
As at December 31, 2019, the Company has advanced $12,164 (December 31, 2018 – $42,938) to contractors related
to the construction of the Lindero Project. During the year ended December 31, 2019, the Company paid $19,175
(December 31, 2018 - $46,453) as deposits for equipment and advances to contractors, and $49,950 of deposits
(December 31, 2018 - $3,932) were applied against equipment delivered or services rendered during the year ended
December 31, 2019.
14. Trade and Other Payables
Trade accounts payable
Lindero construction payables
Refundable deposits to contractors
Payroll payable
Mining royalty payable
Value added taxes payable
Interest payable
Due to related parties (note 15)
Other payables
Derivative liability
Deferred share units payable (note 20(a))
Restricted share units payable (note 20(b))
Total trade and other payables
December 31,
December 31,
2019
15,975
24,998
1,496
13,627
1,237
224
1,457
14
535
894
3,918
911
65,286
$
$
2018
14,099
13,549
1,091
12,696
890
-
189
17
931
224
3,116
1,932
48,734
$
$
Page | 28
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
15. Related Party Transactions
In addition to the related party transactions and balances disclosed elsewhere in these financial statements, the
Company entered into the following related party transactions during the years ended December 31, 2019 and 2018:
a) Purchase of Goods and Services
During the years ended December 31, 2019 and 2018, the Company was charged for general and administrative
services pursuant to a shared services agreement with Gold Group Management Inc., a company of which Simon
Ridgway, the Company’s Chairman, is a director.
Personnel costs
General and administrative expenses
Years ended December 31,
2019
21 $
189
210 $
2018
118
193
311
$
$
As at December 31, 2019, the Company had outstanding balances payable to Gold Group Management Inc. of $14
(December 31, 2018 - $17). Amounts due to related parties are due on demand and are unsecured.
b) Key Management Personnel
During the years ended December 31, 2019 and 2018, the Company was charged for consulting services by Mario
Szotlender, a director of the Company, and by Mill Street Services Ltd., a company of which Simon Ridgway, the
Company’s Chairman, is a director. Such amounts, along with other amounts paid to key management personnel
are as follows:
Salaries and benefits
Directors fees
Consulting fees
Share-based payments
16. Lease Obligations
11111111111wwwwww www
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
Years ended December 31,
$
2019
4,716 $
702
135
5,449
$
11,002 $
2018
4,471
709
139
3,545
8,864
Minimum lease payments
$
$
$
December 31,
2019
9,313
13,521
14,958
37,792
(13,913)
23,879
$
December 31,
2018
3,912
5,744
-
9,656
(890)
8,766
$
8,831
15,048
$
3,395
5,371
Page | 29
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
17. Debt
The movement in debt during the years ended December 31, 2019 and 2018, respectively, are comprised of the
following:
Balance at December 31, 2017
Loss on modification
Transaction costs paid
Amortization of transaction costs
Drawdowns
Balance at December 31, 2018
Proceeds from debentures
Transaction costs paid
Portion allocated to equity
Transaction costs allocated to equity
Amortization of discount
Drawdowns
Balance at December 31, 2019
a) Credit Facility
$
Credit Facility
39,871
653
(1,338)
116
30,000
69,302
-
-
-
-
128
40,000
109,430
Debentures
-
$
-
-
-
-
-
46,000
(2,490)
(7,141)
389
347
-
37,105
$
$
$
Total
39,871
653
(1,338)
116
30,000
69,302
46,000
(2,490)
(7,141)
389
475
40,000
146,535
$
On January 26, 2018, the Company entered into an amended and restated four-year term credit facility with the
Bank of Nova Scotia (“Amended Credit Facility”) with a maturity date of January 26, 2022. The Amended Credit
Facility consists of a $40,000 non-revolving credit facility, (the “Non-Revolving Facility”) which has been fully drawn
and an $80,000 revolving credit facility (“Revolving Facility”). An upfront lenders fee and transactions cost of $793
were payable on closing of the Amended Credit Facility.
The Amended Credit Facility was further amended on December 13, 2018 (the “Third Amendment and Restated
Credit Agreement”) whereby the Revolving Facility was increased by an additional $30,000 to $110,000 for a
temporary period from December 13, 2018 to December 31, 2020. At such time, if any part of the additional $30,000
has been advanced it must be repaid by December 31, 2020, and the balance of the Non-Revolving Facility and the
Revolving Facility must be repaid on January 26, 2022 as per the terms of the Third Amendment and Restated Credit
Agreement. In addition, BNP Paribas was added as a lender. The Company incurred fees of $545 to the lenders
which have been charged to transaction costs.
The interest rate on the Amended Credit Facility is on a sliding scale at one-month LIBOR plus an applicable margin
ranging from 2.5% to 3.5%, based on a Total Debt to EBITDA ratio, as defined in the Amended Credit Facility. The
Amended Credit Facility is secured by a first ranking lien on the assets of Minera Bateas S.A.C. and Compania Minera
Cuzcatlan S.A. de C.V. and their holding companies. The Company must comply with the terms in the Amended
Credit Facility relating to, among other matters, reporting requirements, conduct of business, insurance, notices,
and must comply with certain financial covenants, including a maximum debt to EBITDA ratio and a minimum
tangible net worth, each as defined in the Amended Credit Facility.
As at December 31, 2019, there is $40,000 available for drawdown from the Revolving Facility under the Amended
Credit Facility. The Company was in compliance with all of the covenants under the credit facility as at December
31, 2019 and December 31, 2018.
Page | 30
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
b) Convertible Debenture
On October 2, 2019, the Company completed a bought deal public offering (the “Offering”) of senior subordinated
unsecured convertible debentures with an aggregate principal amount of $40,000. The Offering was subject to an
over-allotment option which was exercised in full on October 8, 2019, pursuant to which an additional $6,000
aggregate principal amount of debentures were issued, bringing the aggregate gross proceeds to the Company
under the Offering to $46,000. The debentures issued under the Offering, including those issued upon exercise of
the Over-Allotment Option, are collectively referred as the “Debentures”.
The Debentures mature on October 31, 2024 and bear interest at a rate of 4.65% per annum, payable semi-annually
in arrears on the last business day of April and October, commencing on April 30, 2020. The Debentures are
convertible at the holder’s option into common shares in the capital of the Company at a conversion price of $5.00
per share, representing a conversion rate of 200 Common Shares per $1 principal amount of Debentures, subject to
adjustment in certain circumstances
Subject to certain exceptions in connection with a change of control of the Company, the Debentures will not be
redeemable by the Company prior to October 31, 2022. On or after October 31, 2022 and prior to October 31, 2023,
the Debentures may be redeemed in whole or in part from time to time at the Company’s option at a price equal to
their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price
of the Common Shares on the NYSE for the 20 consecutive trading days ending on the fifth trading day preceding
the date on which the notice of the redemption is given is at least 125% of the Conversion Price.
On and after October 31, 2023, the Debentures may be redeemed in whole or in part from time to time at the
Company’s option at a price equal to their principal amount plus accrued and unpaid interest regardless of the
trading price of the Common Shares.
Subject to applicable securities laws and regulatory approval and provided that no event of default has occurred and
is continuing, the Company may, at its option, elect to satisfy its obligation to pay the principal amount of the
Debentures and accrued and unpaid interest on the redemption date and the maturity date, in whole or in part,
through the issuance of Common Shares, by issuing and delivering that number of Common Shares, obtained by
dividing the principal amount of the Debentures and all accrued and unpaid interest thereon by 95% of the current
market price (as defined in the Debenture Indenture) on such redemption date or maturity date, as applicable.
The component parts of the convertible debentures, a compound instrument, are classified separately as financial
liabilities and equity in accordance with the substance of the contractual arrangement and the definitions of a
financial liability and an equity instrument. A conversion option that will be settled by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the Company’s own equity instrument is an equity
instrument.
At initial recognition, gross proceeds of $46,000 from the Debentures were allocated into its debt and equity
components. The fair value of the debt component was estimated at $38,859 using a discounted cash flow model
method with an expected life of five years and a discount rate of 8.6%. This amount is recorded as a financial liability
on an amortized cost basis net of transaction cost using the effective interest method using an effective interest rate
of 9.7% until extinguished upon conversion or at its maturity date.
The conversion option of the Debentures is classified as equity and was estimated based on the residual value of
$7,141. This amount is not subsequently remeasured and will remain in equity until the conversion option is
exercised, in which case, the balance recognized in equity will be transferred to share capital. Where the conversion
option remains unexercised at the maturity date of the convertible note, the balance will remain in equity reserves.
A deferred tax liability of $1,927 related to the taxable temporary difference arising from the equity portion of the
convertible debenture was recognized in equity reserves.
Page | 31
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
Transaction costs of $2,490 that relate to the issuance of the Debentures were allocated to the liability and equity
components in proportion to the allocation of the gross proceeds. Transaction costs relating to the equity
component are recognized directly in equity. Transaction costs relating to the liability component are included in
the carrying amount of the liability component and are amortized over the life of the Debentures using the effective
interest method.
18. Other Liabilities
Restricted share units (note 20 (b))
Other non-current liabilities
19. Closure and Reclamation Provisions
Balance at December 31, 2018
Changes in estimate
Reclamation expenditures
Accretion
Effect of changes in foreign exchange rates
Balance at December 31, 2019
Less: Current portion
Non-current portion
Balance at December 31, 2017
Changes in estimate
Reclamation expenditures
Accretion
Effect of changes in foreign exchange rates
Balance at December 31, 2018
Less: Current portion
Non-current portion
December 31,
2019
246
253
499
$
$
December 31,
2018
125
1,041
1,166
$
$
Closure and Reclamation Provisions
Caylloma
Mine
10,800 $
394
(201)
331
-
11,324
3,048
8,276 $
$
$
San Jose
Mine
Lindero
Project
3,716 $
886
(150)
259
137
4,848
209
4,639 $
1,427 $
13,390
-
136
-
14,953
-
14,953 $
Total
15,943
14,670
(351)
726
137
31,125
3,257
27,868
Closure and Reclamation Provisions
Caylloma
Mine
San Jose
Mine
Lindero
Project
$
9,624
1,266
(559)
469
-
10,800
682
$ $10,118
$
$
4,100
(624)
(123)
361
2
3,716
159
$3,557
$
$
509
896
-
22
-
1,427
-
$1,427
Total
$
14,233
1,538
(682)
852
2
15,943
841
$ $15,102
Closure and reclamation provisions represent the present value of reclamation costs related to mine and
development sites. There have been no significant changes in requirements, laws, regulations, operating
assumptions, estimated timing and amount of reclamation and closure obligations during the year ended December
31, 2019, except for the Lindero Project, where the Company estimates reclamation and closure cost based on the
progress of the mine construction.
Closure and Reclamation Provisions
Caylloma
Mine
San Jose
Mine
Lindero
Project
Anticipated settlement date
Undiscounted uninflated estimated cash flow
Estimated life of mine (years)
Discount rate
Inflation rate
The Company is expecting to incur annual reclamation expenses throughout the life of its mines.
2022 - 2027 2025 - 2037 2029 - 2042
$
10
3.00%
2.00%
6
6.88%
3.58%
14
1.94%
2.00%
11,095 $
4,850 $
17,420 $
Total
33,365
Page | 32
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
20. Share Based Payments
During the year ended December 31, 2019, the Company recognized $5,471 (year ended December 31, 2018 -
$2,343) of share-based payment expenses related to the outstanding deferred, restricted and performance share
units.
For the year ended December 31, 2019, the Company recognized a share-based payment expense of $542, related
to stock options (year ended December 31, 2018 – $1,357).
(a) Deferred Share Units
Outstanding, December 31, 2017
Granted
Units paid out in cash
Changes in fair value
Outstanding, December 31, 2018
Granted
Changes in fair value
Outstanding, December 31, 2019
(b) Restricted Share Units
Outstanding, December 31, 2017
Granted
Units paid out in cash
Vested
Forfeited or cancelled
Changes in fair value and vesting
Outstanding, December 31, 2018
Granted
Units paid out in cash
Vested
Changes in fair value and vesting
Outstanding, December 31, 2019
Current portion
Non-current portion
Outstanding, December 31, 2019
Cash Settled
Number of
Deferred Share
Units
974,179
101,612
(225,724)
-
850,067
111,804
-
961,871
$
$
Fair Value
5,094
482
(1,251)
(1,209)
3,116
455
347
3,918
Cash Settled
Number of
Restricted
Share Units
980,476 $
87,759
(405,821)
-
(3,029)
-
659,385
139,661
(406,611)
-
-
392,435
$
$
Fair Value
3,935
414
(1,915)
-
(15)
(362)
2,057
506
(1,466)
-
60
1,157
911
246
1,157
Equity Settled
Number of
Restricted
Share Units
390,751
422,030
-
(78,150)
-
-
734,631
633,914
-
(201,633)
-
1,166,912
During the year ended December 31, 2019, the Company granted 633,914 (year ended December 31, 2018 –
422,030) equity-settled RSUs with a fair value of $3.62 (C$4.83) per share unit (year ended December 31, 2018 –
between $4.71 (C$6.20) and $5.54 (C$7.15) per share unit).
Page | 33
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
(c) Performance Share Units
Outstanding, December 31, 2017
Granted
Units paid out in cash
Changes in fair value and vesting
Outstanding, December 31, 2018
Granted
Vested
Outstanding, December 31, 2019
Cash Settled
Number of
Performance
Share Units
553,459 $
-
(553,459)
-
-
-
-
- $
Fair Value
2,691
-
(2,596)
(95)
-
-
-
-
Equity Settled
Number of
Performance
Share Units
-
1,002,166
-
-
1,002,166
422,609
(150,325)
1,274,450
During the year ended December 31, 2019, the Company granted 422,609 (December 31, 2018 – 1,002,166) equity
settled, PSUs with a fair value of $3.62 (C$4.83) (December 31, 2018 – $4.71 (C$6.20)) on the grant date. These
share units vest as to 20% on the first anniversary, 30% on the second anniversary and 50% on the third anniversary
of the date of grant based on prescribed performance metrics. The PSUs granted during the year ended December
31, 2019 are subject to a multiplier ranging from 50% to 200% depending on the achievement level of certain
performance targets.
d) 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, 2019, a total of 1,574,403 stock options were available for issuance
under the plan.
Outstanding, December 31, 2017
Exercised
Granted
Outstanding, December 31, 2018
Outstanding, December 31, 2019
Vested and exercisable, December 31, 2018
Vested and exercisable, December 31, 2019
Number of stock options
$
Weighted average
exercise price
Canadian dollars
5.56
0.85
6.21
5.85
5.85
5.37
5.77
$
$
$
1,155,527
(20,000)
648,502
1,784,029
1,784,029
826,680
1,459,779
No options were granted during the year ended December 31, 2019. The assumptions used to estimate the fair
value of the stock options granted during the year ended December 31, 2018 were a risk-free interest rate of 1.79%
- 1.90%, expected volatility of 67.56% - 68.16%, expected life of 3 years, expected forfeiture rate of 5.57%, and an
expected dividend yield of nil. The fair value, as determined using the BlackScholes model, was between $2.06 and
$2.38 (C$2.69 and C$3.09) per option granted in the period.
21. Share Capital
Authorized Share Capital
The Company has an unlimited number of common shares without par value authorized for issue.
Page | 34
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
22. Earnings per Share
Basic
Net income for the year
Weighted average number of shares (000's)
Earnings per share - basic
Diluted
Net income for the year
Years ended December 31,
2019
23,796
160,193
0.15
$
$
2018
33,990
159,785
0.21
Years ended December 31,
2019
23,796
$
2018
33,990
$
$
$
159,785
Weighted average number of shares (000's)
1,851
Incremental shares from share units
-
Incremental shares from convertible debenture
161,636
Weighted average diluted number of shares (000's)
Earnings per share - diluted
0.21
For the year ended December 31, 2019, 1,784,029 out of the money options were excluded from the diluted earnings
per share calculation as their effect would have been anti-dilutive (year ended December 31, 2018 – 1,266).
160,193
2,215
2,117
164,525
0.14
$
$
23. Sales
The Company’s geographical analysis of revenue from contracts with customers attributed to the location of the
products produced, is as follows:
By-product and Geographical Area
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Provisional pricing adjustments
Sales to external customers
Silver-gold concentrates
Silver-lead concentrates
Zinc concentrates
Provisional pricing adjustments
Sales to external customers
Sales by Major Costumer
Customer 1
Customer 2
Customer 3
$
$
$
$
Year ended December 31, 2019
Peru
- $
39,936
33,686
(740)
72,882
$
Mexico
183,197 $
-
-
1,108
184,305
$
Total
183,197
39,936
33,686
368
257,187
Year ended December 31, 2018
Peru
- $
40,254
48,831
(1,636)
87,449
$
Mexico
180,151 $
-
-
(4,304)
175,847
$
Total
180,151
40,254
48,831
(5,940)
263,296
Years ended December 31,
2019
184,304 $
72,938
(55)
257,187
$
2018
163,425
66,429
33,442
263,296
$
$
Page | 35
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
24. Cost of Sales
Direct mining costs
Salaries and benefits
Workers' participation
Depletion and depreciation
Royalties
Write-down of inventories
Direct mining costs
Salaries and benefits
Workers' participation
Depletion and depreciation
Royalties
Year ended December 31, 2019
San Jose
Caylloma
$
35,712
7,557
717
13,621
750
93
58,450
$
$
66,022
7,483
5,294
30,737
3,385
1,235
114,156
$
$
Total
101,734
15,040
6,011
44,358
4,135
1,328
172,606
Caylloma
$
Year ended December 31, 2018
San Jose
Total
38,788
7,303
1,726
12,222
218
60,257
$
$
60,860
5,889
4,438
32,251
3,030
106,468
$
$
99,648
13,192
6,164
44,473
3,248
166,725
$
$
For the year ended December 31, 2019, depletion and depreciation includes $2,262 (December 31, 2018 - $nil) of
right-of-use assets depreciation.
25. General and Administration
General and administration
Workers' participation
Share-based payments
26. Other Expenses
Write-down of investment in associate
Write-off of mineral properties
Loss on disposal of assets
Write-off of spare parts
Write off of assets held for sale
Other expenses
Years ended December 31,
2019
22,315
1,477
23,792
6,013
29,805
$
$
2018
21,088
1,400
22,488
3,701
26,189
Years ended December 31,
2019
2,706
1,554
67
-
-
284
4,611
$
$
2018
-
-
167
398
691
705
1,961
$
$
$
$
Page | 36
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
27. Interest and Finance (Costs) Income, Net
Interest income
Interest expense
Bank stand-by and commitment fees
Accretion expense
Loss on debt restructuring
28. Income Tax
(a) Reconciliation of Effective Tax Rate
Years ended December 31,
2019
1,838
(857)
(415)
(590)
-
(24)
$
$
2018
3,429
(1,092)
(470)
(830)
(653)
384
$
$
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:
Net income before tax
Statutory tax rate
Anticipated income tax at statutory rates
Non-deductible expenditures
Differences between Canadian and foreign tax rates
Changes in estimate
Effect of change in tax rates
Inflation adjustment
Impact of foreign exchange
Changes in deferred tax assets not recognized
Mining taxes
Withholding taxes
Other items
Total income tax expense
Total income tax represented by:
Current income tax expense
Deferred tax expense
Years ended December 31,
2018
2019
$
$
$
$
43,971 $
27.0%
11,872
2,507
1,353
856
345
(12,158)
11,773
(2,254)
3,241
2,367
273
20,175 $
32,631 $
(12,456)
20,175 $
67,340
27.0%
18,182
1,935
2,159
(679)
299
(6,408)
10,377
(287)
4,383
3,180
209
33,350
30,563
2,787
33,350
Page | 37
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
(b) Tax Amounts Recognized in Profit or Loss
Current tax expense
Current taxes on profit for the year
Changes in estimates related to prior years
Deferred tax expense
Origination and reversal of temporary differences and foreign exchange
rate
Changes in estimates related to prior years
Effect of differences in tax rates
Effect of changes in tax rates
Total tax expense
(c) Deferred Tax Balances
Years ended December 31,
2018
2019
32,246 $
385
32,631 $
30,515
48
30,563
$
(13,678)
479
398
345
(12,456) $
3,216
(728)
16
283
2,787
20,175 $
33,350
$
$
$
$
$
The significant components of the recognized deferred tax assets and liabilities are:
Deferred tax assets:
Reclamation and closure cost obligation
Carried forward tax loss
Accounts payable and accrued liabilities
Deductibility of resource taxes
Lease obligations
Other
Total deferred tax assets
Deferred tax liabilities:
Mineral properties
Mining and foreign withholding taxes
Equipment and buildings
Convertible debenture
Inflation
Other
Total deferred tax liabilities
Net deferred tax liabilities
Classification:
Deferred tax assets
Deferred tax liabilities
Net deferred tax liabilities
December 31,
2019
December 31,
2018
$
$
$
$
$
$
$
9,530 $
14,020
7,731
3,140
5,317
1
39,739 $
(44,825) $
(5,281)
(3,621)
(1,857)
(4,939)
(131)
(60,654) $
4,594
3,386
5,642
3,436
-
190
17,248
(34,541)
(8,412)
(4,413)
-
-
(1,326)
(48,692)
(20,915) $
(31,444)
2019
2018
- $
(20,915)
(20,915) $
-
(31,444)
(31,444)
Page | 38
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
The Company's movement of net deferred tax liabilities is described below:
At January 1
Deferred income tax (recovery) expense through income statement
Deferred income tax expense through equity
At December 31
$
$
31,444 $
(12,456)
1,927
20,915 $
28,657
2,787
-
31,444
2019
2018
(d) Unrecognized Deferred Tax Assets and Liabilities
The Company recognizes tax benefits on losses or other deductible amounts where it is more likely than not that
the deferred tax asset will be realized. The Company’s unrecognized deductible temporary differences and unused
tax losses for which no deferred tax asset is recognized consists of the following amounts:
Unrecognized deductible temporary differences and unused tax losses:
December 31,
2019
December 31,
2018
Non capital losses
Provisions
Share issue costs
Mineral properties, plant and equipment
Lease obligation
Derivative liabilities
Capital losses
Investments in associates
$
72,156 $
5,074
2,174
-
656
894
2,496
1,397
Unrecognized deductible temporary differences
$
84,847 $
81,188
5,173
3,354
244
-
-
2,326
-
92,285
As at December 31, 2019, the Company has temporary differences associated with investments in subsidiaries for
which an income tax liability has not been recognized as the Company can control the timing of the reversal of the
temporary differences and the Company plans to reinvest in its foreign subsidiaries. The temporary difference
associated with investments in subsidiaries aggregate as follow:
Mexico
Peru
(e) Tax Loss Carry Forwards
Tax losses have the following expiry dates:
Canada
Argentina
Mexico
Peru
December 31,
2019
198,214 $
54,618
December 31,
2018
97,705
69,669
$
December 31,
Year of expiry
2026 - 2039 $
2020 - 2024
2021 - 2029
2021
2019 Year of expiry
84,200 2026 - 2038
42,500 2019 - 2023
369 2021 - 2028
70
2021
$
December 31,
2018
81,000
11,900
349
238
In addition, as at December 31, 2019, the Company has accumulated Canadian resource-related expenses of $8,188
(2018 - $6,582) for which the deferred tax benefit has not been recognized.
Page | 39
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
29. Segmented Information
The following summary describes the operations of each reportable segment:
• Bateas – operates the Caylloma silver, lead and zinc mine
•
Cuzcatlan – operates the San Jose silver-gold mine
• Mansfield – construction of the Lindero mine
•
Corporate – corporate stewardship
Year ended December 31, 2019
Corporate Bateas
$
$
Cuzcatlan Mansfield
Revenues from external customers
Cost of sales before depreciation and depletion
Depreciation and depletion in cost of sales
General, and administration
Other expenses
Finance items
Segment (loss) profit before taxes
Income taxes
Segment (loss) profit after taxes
-
-
-
(17,438)
(4,402)
(80)
(21,920)
(511)
$ (22,431)
72,882
(44,829)
(13,621)
(4,569)
(664)
(1,552)
7,647
(2,761)
4,886
$ 184,305
(83,419)
(30,737)
(7,798)
(1,928)
385
60,808
(18,032)
42,776
$
$
$
-
-
-
-
(13,588)
11,024
(2,564)
1,129
(1,435)
Total
$ 257,187
(128,248)
(44,358)
(29,805)
(20,582)
9,777
43,971
(20,175)
23,796
$
Revenues from external customers
Cost of sales before depreciation and depletion
Depreciation and depletion in cost of sales
General, and administration
Other income (expenses)
Finance items
Segment (loss) profit before taxes
Income taxes
Segment (loss) profit after taxes
Corporate
$
-
-
-
(14,692)
(411)
(1,172)
(16,275)
(3,168)
$ (19,443)
$
Year ended December 31, 2018
Bateas Cuzcatlan Mansfield
87,449
(48,035)
(12,222)
(3,973)
(311)
6,263
29,171
(10,628)
18,543
$ 175,847
(74,217)
(32,251)
(7,524)
(3,938)
1,111
59,028
(18,544)
40,484
-
-
-
-
(4,136)
(448)
(4,584)
(1,010)
(5,594)
$
$
Total
$ 263,296
(122,252)
(44,473)
(26,189)
(8,796)
5,754
67,340
(33,350)
33,990
$
$
$
$
Total assets
Total liabilities
Capital expenditures
Total assets
Total liabilities
Capital expenditures
December 31, 2019
Bateas Cuzcatlan Mansfield
Corporate
$ 60,134
$ 162,210
$
Total
$ 936,065
$ 300,639
1,333 $ 11,845 $ 14,046 $ 211,413 $ 238,637
$ 116,501
$ 36,747
$ 252,100
$ 42,264
$ 507,330
$ 59,418
December 31, 2018
Bateas Cuzcatlan Mansfield
Corporate
$ 31,739
$ 84,575
$
Total
$ 786,517
$ 183,713
1,448 $ 16,400 $ 16,224 $ 83,335 $ 117,407
$ 286,621
$ 38,220
$ 174,985
$ 35,568
$ 293,172
$ 25,350
Page | 40
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
30. 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
Trade receivables
Interest rate swaps, and metal
contracts
Methods and assumptions used to estimate fair value
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 a
quotational period. We mark these to market at each reporting date based on the
forward price corresponding to the expected settlement date.
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 or the counterparty.
Marketable securities – warrants The Company determines the value of the warrants using a Black-Scholes
valuation model which uses a combination of quoted prices and market-derived
inputs, such as volatility and interest rate estimates. Fair value changes on the
warrants are charged to profit and loss.
During the years ended December 31, 2019 and 2018, 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 | 41
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
Carrying value
Fair value
Fair
Value
(hedging)
Fair value
through
profit or loss
Amortized
cost
Total
Level 1
Level 2
Level 3
Carrying value
approximates
Fair Value
December 31, 2019
Financial assets measured at Fair Value
Trade receivables concentrate sales
Financial assets not measured at Fair Value
Cash and cash equivalents
Other receivables
Financial liabilities measured at Fair Value
Interest rate swap liability
$
$
$
$
-
-
-
-
-
$
$
$
$
33,642 $
33,642 $
- $
- $
33,642 $
33,642 $
- $
-
- $
83,404 $
2,419
85,823 $
83,404 $
2,419
85,823 $
$
$
(894)
(894)
$
$
- $
- $
- $
- $
(894) $
(894) $
Financial liabilities not measured at Fair Value
Trade payables
Payroll payable
Share units payable
Bank loan payable
Debentures
Other payables
$
$
-
-
-
-
-
-
-
$
$
(15,801)
(5,075)
- $ (37,357) $ (37,357) $
(15,801)
-
(5,075)
-
- (109,430) (109,430)
(37,105) (37,105)
-
-
(22,403)
(22,403)
- $ (227,171) $ (227,171) $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
33,642
33,642
$
$
$
$
-
-
-
(894)
(894)
$
-
-
(5,075)
(110,000)
(38,858)
-
$ (153,933)
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
-
-
83,404
2,419
85,823
-
-
(37,357)
(15,801)
-
-
-
(22,403)
(75,561)
Page | 42
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
December 31, 2018
Financial assets measured at Fair Value
Trade receivables concentrate sales
Metal forward sales contracts
Financial assets not measured at Fair Value
Cash and cash equivalents
Short term investments
Other receivables
Financial liabilities measured at Fair Value
Interest rate swap liability
Financial liabilities not measured at Fair
Value
Trade payables
Payroll payable
Share units payable
Bank loan payable
Other payables
Carrying value
Fair value
Fair
Value
(hedging)
Fair value
through
profit or loss
Amortized
cost
Total
Level 1
Level 2 Level 3
$
$
$
$
-
-
-
-
-
-
-
$
$
224
224
$
$
-
-
-
-
-
-
$
$
$
$
$
$
$
$
28,132
2,646
30,778
$
$
-
-
-
$
28,132 $
2,646
$
30,778 $
-
-
-
-
-
-
-
-
-
-
-
-
$
90,503
72,824
3,179
$ 166,506
$
90,503 $
72,824
3,179
$ 166,506 $
$
$
-
-
$
$
224 $
224 $
$ (24,219)
(14,976)
(5,173)
(69,302)
(4,030)
$ (117,700)
$ (24,219) $
(14,976)
(5,173)
(69,302)
(4,030)
$ (117,700) $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 28,132
2,646
$ 30,778
$
$
$
$
-
-
-
-
224
224
$
-
-
(5,173)
(70,000)
-
$ (75,173)
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Carrying value
approximates
Fair Value
$
$
$
$
$
$
$
$
-
-
-
90,503
72,824
3,179
166,506
-
-
(24,219)
(14,976)
-
-
(4,030)
(43,225)
Page | 43
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
31. 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 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, 2019 and 2018 is as follows:
Cash and cash equivalents
Short term investments
Derivative assets
Accounts receivable and other assets
Income tax receivable
Non-current receivables
December 31,
2019
$
$
83,404
-
-
47,707
2,553
38,389
172,053
$
December 31,
2018
90,503
72,824
2,646
32,769
136
15,241
214,119
$
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 a high credit rating. Almost all of our concentrate are 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 | 44
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
The following are the remaining contractual maturities of financial liabilities at the reporting date. The tables include
cash flows associated with principal payments.
Expected payments due by year as at December 31, 2019
Less than
After
1 - 3 years 4 - 5 years 5 years
Trade and other payables
Debt
Income taxes payable
Lease obligations
Other liabilities
Capital commitments, Lindero 1
Closure and reclamation provisions
1 year
$ 65,286
-
12,400
9,313
-
24,467
2,699
$ 114,165
$
-
110,000
-
9,424
499
-
7,565
$ 127,488
$
$
-
46,000
-
4,097
-
-
1,846
51,943
$
$
-
-
-
14,958
-
-
21,255
36,213
$
Total
65,286
156,000
12,400
37,792
499
24,467
33,365
$ 329,809
1) Net of $10.9 million of deposits on equipment and advances to contractors.
Trade and other payables
Debt
Derivative liabilities
Income tax payable
Equipment loan
Other liabilities
Operating leases
Capital commitments, Lindero
Provisions
Expected payments due by year as at December 31, 2018
Less than
1 year
$ 48,510
-
224
8,358
4,328
-
1,055
111,940
878
$ 175,293
After
1 - 3 years 4 - 5 years 5 years
$
$
-
-
-
-
5,371
1,166
1,248
-
6,738
14,523
$
$
-
70,000
-
-
-
-
250
-
4,029
74,279
$
$
-
-
-
-
-
-
-
-
6,262
6,262
$
Total
48,510
70,000
224
8,358
9,699
1,166
2,553
111,940
17,907
$ 270,357
Operating leases includes leases for office premises, computer equipment and other equipment used in the normal
course of business.
(c) Currency risk
The functional and reporting currency for all entities within the consolidated group is the US dollar. We are exposed
to fluctuations in foreign exchange rates as a portion of our expenses are incurred in Canadian dollars, Peruvian
soles, Argentinean peso and Mexican peso. A significant change in the foreign 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 foreign currency fluctuations.
Page | 45
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
As at December 31, 2019 and 2018, the Company was exposed to currency risk through the following assets and
liabilities denominated in foreign currencies:
Cash and cash equivalents
Accounts receivable and other assets
Income tax receivable
Investments in associates
VAT - long term receivable
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
Cash and cash equivalents
Accounts receivable and other assets
Income tax receivable
Investments in associates
VAT - long term receivable
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
December 31, 2019
Canadian
Peruvian
Mexican
Dollars
626
310
-
1,373
-
(8,549)
(18)
-
-
-
-
(6,258)
(4,818)
Soles
2,293
1,827
8,451
-
-
(19,385)
-
-
-
-
-
(6,814)
(2,054)
Pesos
13,103
3,972
-
-
10,715
(214,679)
-
(3,942)
(161,900)
(4,217)
(87,459)
(444,407)
(23,582)
December 31, 2018
Canadian
Peruvian
Mexican
Dollars
376
279
-
5,244
-
(8,478)
(23)
-
-
-
-
(2,602)
(2,010)
Soles
941
3,660
459
-
-
(18,492)
-
-
(4,591)
-
-
(18,023)
(5,458)
Pesos
37,039
11,836
-
-
-
(218,833)
-
(2,991)
(59,810)
(2,296)
(66,977)
(302,032)
(16,055)
Argentinian
Pesos
11,762
117,539
-
-
2,039,929
(1,454,444)
-
-
-
-
-
714,786
11,815
Argentinian
Pesos
6,967
37,129
-
-
560,873
(125,159)
-
-
-
-
-
479,810
11,646
Sensitivity as to change in foreign currency exchange rates on our foreign currency exposure as at December 31,
2019 is provided below:
Currency (Expressed in $000's)
Mexican Peso
Peruvian Soles
Argentinian Peso
Canadian Dollar
Effect on foreign
denominated
items
$
$
$
$
2,144
187
1,029
438
Change
+/- 10%
+/- 10%
+/- 10%
+/- 10%
Page | 46
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
Due to the volatility of the exchange rate for Argentine Peso, the Company is applying additional measures in cash
management to minimize potential losses arising from the conversion of funds. As discussed in note 31 (f), with the
capital controls in effect when the Company commences production at the Lindero Project, the Company will be
required to convert the equivalent value into Argentine Peso from the export sale of all gold doré from the Lindero
Project.
(d) Metal Price Risk
We are exposed to metal price risk with respect to our sales of silver, gold, zinc, and lead concentrates. A 10% change
in metal prices from the prices used at December 31, 2019 would result in the following change to sales and accounts
receivable for sales which are still based on provisional prices as at December 31, 2019. As a matter of policy, we do
not hedge our silver production.
Metal (Expressed in $000,s)
Silver
Gold
Lead
Zinc
(e) Interest Rate Risk
Change
+/- 10%
+/- 10%
+/- 10%
+/- 10%
Effect on Sales
$
$
$
$
3,424
1,767
216
281
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, the Company’s interest rate exposure mainly relates to interest earned
on its cash, cash equivalent, and short-term investment balances, interest paid on its LIBOR-based debt, and the
mark-to-market value of derivative instruments which depend on interest rates. The Company has entered into an
interest rate swap for the $40,000 non-revolving credit facility to mitigate the interest rate risk on its debt.
(f) Capital Management
The Company’s objective when managing its capital is to maintain its ability to continue as a going concern while at
the same time maximizing the growth of its business and providing returns to its shareholders. The Company
manages its capital structure and makes adjustments based on changes to its economic environment and the risk
characteristics of the Company’s assets.
Effective December 23, 2019, changes to Argentina’s tax laws proposed by the new Argentine Government were
implemented. The changes ratified and extended legislation which was to expire on December 31, 2019 and allow
the Argentine Central Bank to regulate funds coming into and flowing out of Argentina in order to maintain stability
and support the economic recovery of the country. These capital controls are in effect until December 31, 2025 and
have the effect of: requiring exporters to convert the equivalent value of foreign currency received from the export
into Argentine Pesos; requiring the prior consent of the Argentine Central Bank to the payment of cash dividends
and distributions of currency out of Argentina; requiring Argentine companies to convert foreign currency loans
received from abroad into Argentine Pesos; and restricting the sale of Argentine Pesos for foreign currency.
The Company’s capital requirement is effectively managed based on the Company having a thorough reporting,
planning and forecasting process to help identify the funds required to ensure the Company is able to meet its
operating and growth objectives.
Page | 47
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
The Company’s capital structure consists of equity comprising of share capital, reserves and retained earnings as
well as debt facilities, equipment financing obligations less cash, cash equivalents and short-term investments.
Equity
Debt
Lease obligations
Less: Cash, cash equivalents and short-term investments
December 31,
2019
635,426 $
146,535
23,879
(83,404)
722,436
$
December 31,
2018
602,804
69,302
8,766
(163,327)
517,545
$
$
As discussed above, the Company operates in Argentina where the new Argentine government has ratified and
extended legislation to December 31, 2025 to allow the Argentine Central Bank to regulate funds coming into and
flowing out of Argentina. Other than the restrictions related to these capital controls and complying with the debt
covenants under the credit facilities, the Company is not subject to any externally imposed capital requirements. As
at December 31, 2019 and 2018, the Company was in compliance with its debt covenants.
32. Supplemental Cashflow Information
The changes in liabilities arising from financing activities, including both changes arising from cash flows and non-
cash changes were as follows:
As at January 1, 2018
Additions
Transaction costs
Loss on debt modifications
Interest
Payments
Changes in fair value
As at December 31, 2018
Initial recognition of IFRS 16
As at January 1, 2019
Additions
Interest
Payments
Transaction costs
Equity component
Foreign exchange
Changes in fair value
As at December 31, 2019
$
Bank Loan
39,871
30,000
(1,338)
653
116
-
-
69,302
-
69,302
40,000
128
-
-
-
-
-
109,430
$
$
Debenture
-
$
-
-
-
-
-
-
-
-
-
46,000
347
-
(2,101)
(7,141)
-
-
37,105
$
$
Lease
obligations
906
9,792
-
-
-
(1,932)
-
8,766
7,316
16,082
14,944
1,848
(9,048)
-
-
53
-
23,879
Interest rate
swaps
$
$
(140)
-
-
-
228
-
(312)
(224)
-
(224)
-
-
-
-
-
-
(670)
(894)
Page | 48
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
33. Contingencies and Capital Commitments
(a) Caylloma Letter of Guarantee
The Caylloma Mine closure plan was updated in December 2018, with total undiscounted closure costs of $11,431
consisting of progressive closure activities of $3,646, final closure activities of $7,156, and post-closure activities of
$790. Pursuant to the closure regulations, the Company is required to provide the following guarantees with the
government:
•
•
2019 – $7,237
2020 – $9,704
The Company has established a bank letter of guarantee in the amount of $7,237 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 expired on December 31, 2019. Subsequent to December 31, 2019, the Company
established a security bond in the amount of $1,300 and a bank letter of guarantee in the amount of $8,394. The
security bond and the letter of guarantee expire on January 29, 2021.
(b) San Jose Letter of Guarantee
The Company has established three letters of guarantee in the aggregate amount of $1,236 to fulfill its
environmental obligations under the terms and conditions of the Environmental Impact Statements issued by the
Secretaria de Medio Ambiente y Recursos Naturales (“SEMARNAT”) in 2009 in respect of the construction of the San
Jose mine, and in 2017 and 2019 with respect to the expansion of the dry stack tailings facility at the San Jose mine.
The letters of guarantee expire on December 31, 2023, June 15, 2022 and May 15, 2020 respectively.
(c) Other Commitments
As at December 31, 2019, the Company had capital commitments of $36,454, $510, and $124 for civil work,
equipment purchases and other services at the Lindero Project and the Caylloma and San Jose Mines, respectively,
expected to be expended within one year.
(d) Tax Contingencies
Peru
The Company has been assessed $1,310 (4,343 Peruvian Soles), including interest and penalties of $725 (2,405
Peruvian Soles), for the tax year 2010 by SUNAT, the Peruvian tax authority, with respect to the deduction
of certain losses arising from derivative instruments. The Company applied to the Peruvian tax court to appeal the
assessments.
On January 22, 2019, the Peruvian tax court reaffirmed SUNAT’s position and denied the deduction. The Company
believes the assessment is inconsistent with Peruvian tax law and that it is probable the Company will succeed on
appeal through the Peruvian legal system. The Company has paid the disputed amount in full and has initiated
proceedings through the Peruvian legal system to appeal the decision of the Peruvian tax court.
The Company has recorded the amount paid of $1,310 (4,343 Peruvian Soles) in long-term receivables and other as
at December 31, 2019, as the Company believes it is probable that the appeal will be successful (note 12).
Page | 49
Fortuna Silver Mines Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Presented in thousands of US dollars – unless otherwise noted)
(e) SGM Royalty
In 2017 the Mexican Geological Service (“SGM”) advised the Company that a previous owner of one of the
Company’s mineral concessions located at the San Jose Mine in Oaxaca, Mexico had granted the SGM a royalty of
3% of the billing value of minerals obtained from the concession. The Company, supported by legal opinions from
three independent law firms, at that time advised the Mexican mining authorities that it was of the view that no
royalty is payable, and in 2018 initiated administrative and legal proceedings against the Dirección General de Minas
(“DGM”) to remove reference to the royalty on the title register. Those proceedings are ongoing and progressing in
accordance with the procedures of the Mexican Administrative Court.
In January 2020, the Company received notice from the DGM proposing to cancel the mining concession if the
royalty, in the Mexican peso equivalent of US$30 million plus VAT (being the amount of the claimed royalty from
2011 to 2019) is not paid before March 15, 2020. In early February 2020, the Company initiated legal proceedings
against the DGM to contest the cancellation procedure and also to stay the cancellation process.
The District Court in Mexico City has accepted the filing of the Company’s legal proceedings and also granted a
permanent stay of execution, which protects the Company from the cancellation of the concession until a resolution
by the Court is reached on the legality of the cancellation procedure. The timing of a decision by the Court at first
instance in this action against the DGM is uncertain and may take several months. In the event that the Company is
unsuccessful in these proceedings, it may appeal. If ultimately the Company does not prevail, it may be required to
pay the disputed royalty in order to preserve the mining concession. If the Company is required to pay the royalty,
it will do so from available capital resources.
The Company has determined that it is more likely than not that it will succeed in these proceedings; therefore, no
provision has been recorded as at December 31, 2019.
(f) Other Contingencies
The Company is subject to various investigations, royalties and other 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.
None of these matters is expected to have a material effect on the results of operations or financial conditions of
the Company.
Page | 50
EXHIBIT 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
YEAR ENDED DECEMBER 31, 2019
As of March 10, 2020
(Monetary amounts expressed in US dollars, unless otherwise indicated)
Table of Contents
Business of the Company
Full Year Financial and Operating Highlights
Lindero Project
2020 Guidance and Outlook
Financial Results
Results of Operations
Quarterly Information
Liquidity and Capital Resources
Financial Instruments
Related Party Transactions
Risks and Uncertainties
Adoption of New Accounting Standards
Critical Accounting Estimates, Assumptions, and Judgements
Share Position & Outstanding Options & Equity Based Share Units
Controls and Procedures
Non-GAAP Financial Measures
Cautionary Statement on Forward-Looking Statements
Cautionary Note to United States Investors Concerning Estimates of Reserves and Resources
Page
3
4
7
9
10
14
16
18
20
20
21
28
29
32
32
33
40
43
Fortuna Silver Mines Inc.
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 currently constructing an 18,750 tpd open pit gold heap leach mine (“Lindero Project”) in northern Argentina.
The Company only processes ore extracted from its own mining concessions and does not purchase ore or mineral
concentrates from third parties either for processing, refining, or trading.
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.
The consolidated financial statements include wholly-owned subsidiaries of the Company; the most significant of which at
December 31, 2019 are presented in the following table:
Name
Minera Bateas S.A.C. ("Bateas")
Compania Minera Cuzcatlan S.A. de C.V. ("Cuzcatlan")
Mansfield Minera S.A. ("Mansfield")
Location
Peru
Mexico
Argentina
Ownership
100%
100%
100%
Principal Activity
Caylloma Mine
San Jose Mine
Lindero Project
This Management’s Discussion and Analysis (“MD&A”) is intended to help readers understand the significant factors that
affect the performance of Fortuna and its subsidiaries, and those that may affect future performance. This MD&A has been
prepared as of March 10, 2020 and should be read in conjunction with the Company’s audited consolidated financial
statements for the years ended December 31, 2019 and 2018. The Company’s significant accounting policies are set out in
Note 3 of the December 31, 2019 and 2018 audited consolidated financial statements. All amounts in this MD&A are
expressed in United States dollars, unless otherwise indicated. Certain amounts shown in tables within this MD&A may not
add exactly to the totals due to rounding.
The Company prepares its annual financial statements in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB").
In this MD&A, we refer to various Non-GAAP Financial Measures. These measures are used by us to manage and evaluate
the operating performance of our mines and their ability to generate cash flows and these measures are widely reported in
the mining industry as benchmarks for performance. Refer to the discussion under the heading “Non-GAAP Financial
Measures”.
Additional information about the Company, including our Annual Information Form, is available on SEDAR at
www.sedar.com.
This document contains forward-looking statements. Refer to the cautionary language under the heading “Cautionary
Statement on Forward-Looking Statements.”
Management's Discussion and Analysis, page 3
Fortuna Silver Mines Inc.
Full Year Financial and Operating Highlights
Sales for the year ended December 31, 2019 were $257.2 million, a 2% decrease from the $263.3 million reported in the
year ended December 31, 2018 (“2018”).
Operating income for the year ended December 31, 2019 was $34.2 million compared to $61.6 million reported in 2018.
Net income for the year ended December 31, 2019 was $23.8 million or $0.15 per share compared to $34.0 million or $0.21
per share reported in 2018.
Adjusted net income (refer to Non-GAAP Financial Measures) was $28.4 million compared to $38.4 million reported in 2018.
Adjusted EBITDA (refer to Non-GAAP Financial Measures) for the year ended December 31, 2019 was $95.4 million
compared to $113.9 million reported in 2018.
Free cash flow from ongoing operations (refer to Non-GAAP Financial Measures) was $34.5 million compared to $55.2
million reported in 2018.
Operating Highlights
Consolidated Metrics
Key Indicators
Silver
Metal produced (oz)
Metal sold (oz)
Realized price ($/oz)
Gold
Metal produced (oz)
Metal sold (oz)
Realized price ($/oz)
Lead
Metal produced (000's lbs)
Metal sold (000's lbs)
Zinc
Metal produced (000's lbs)
Metal sold (000's lbs)
Three months ended December 31,
% Change
2018
2019
Years ended December 31,
2018
% Change
2019
2,251,917
2,221,330
17.33
1,937,703
2,032,909
14.60
12,279
12,157
1,483
12,070
12,555
1,236
7,441
7,559
6,453
6,377
11,614
11,974
12.58
11,537
11,713
12.24
16%
9%
19%
2%
(3%)
20%
15%
19%
1%
2%
3%
8,809,767
8,798,054
16.20
8,890,943
8,832,993
15.74
50,525
50,374
1,393
54,210
53,498
1,273
28,746
28,969
28,255
28,349
45,600
45,781
11.91
45,485
45,867
10.55
(1%)
(0%)
3%
(7%)
(6%)
9%
2%
2%
0%
(0%)
13%
All-in sustaining cash cost (US$/oz Ag Eq)1, 2
Notes:
1.
2.
All-in sustaining cash cost (“AISC”) is a Non-GAAP Financial Measure. Refer to Non-GAAP Financial Measures
AISC ($/oz Ag Eq) calculated using the realized metal prices for each period (See Sales table under Financial Results)
Silver and gold production for the three months ended December 31, 2019 increased 16% and 2% to 2,251,917 ounces and
12,279 ounces, respectively, over the same period in 2018. At San Jose, silver and gold production increased 17% and 1%
to 2,002,633 ounces and 11,993 ounces, respectively, over the same period in 2018 due primarily to a 7% increase in mine
production and an 8% increase in silver head grade. At Caylloma, silver production increased 14% to 249,284 ounces over
the same period in 2018 due to a 16% higher silver head grade. Lead production at Caylloma increased 15% to 7.4 million
pounds due to a 19% higher head grade, while zinc production increased 1% to 11.6 million pounds on 4% higher head grade
compared to the same period in 2018.
Consolidated all-in sustaining cash cost per ounce of payable silver equivalent (refer to Non-GAAP Financial Measures) for
the fourth quarter was $12.58 per ounce or 3% higher than the $12.24 per ounce reported in 2018.
Management's Discussion and Analysis, page 4
Fortuna Silver Mines Inc.
Silver and gold production for the year ended December 31, 2019 decreased 1% and 7% to 8,809,767 ounces and 50,525
ounces, respectively, over 2018. At San Jose, silver and gold production decreased 1% and 9% to 7,868,478 ounces and
48,880 ounces, respectively. The decrease was due primarily to a planned change in mine sequencing of lower grade stopes
in the third quarter, which reduced silver and gold production for the year by 14% and 9%, respectively. At Caylloma, silver
and lead production increased 3% and 2% to 941,289 ounces and 28.7 million pounds, respectively, over 2018 due primarily
to higher silver and lead head grade of 5% and 4%, respectively. Zinc production was 45.6 million pounds, compared to 45.5
million pounds in 2018.
Consolidated all-in sustaining cash cost per ounce of payable silver equivalent (refer to Non-GAAP Financial Measures) for
the year ended December 31, 2019 was $11.91 per ounce or 13% higher than the $10.55 per ounce reported in 2018. This
increase was due primarily to higher production costs at both San Jose and Caylloma.
Selected Financial Information
Consolidated Financial Metrics
Three months ended December 31,
2018
% Change
2019
(Expressed in $ millions except per share information)
Sales
Mine operating income
Operating income
Net income
Earnings per share (basic)
$
69.0
23.4
9.0
19.0
0.12
$
$
59.6
17.3
6.3
2.2
0.01
16%
35%
43%
764%
1,100%
Adjusted net income1
Adjusted EBITDA1
Net cash provided by operating activities
Free cash flow from ongoing operations1
Capex
Sustaining
Non-sustaining
Lindero
Brownfields
10.9
25.1
19.2
6.4
6.2
0.9
26.8
0.9
4.4
22.7
19.3
11.8
148%
11%
(1%)
(46%)
9.4
1.2
39.4
1.6
(34%)
(29%)
(32%)
(46%)
Years ended December 31,
2018
2019
% Change
$
257.2
84.6
34.2
23.8
0.15
28.4
95.4
63.0
34.5
20.4
2.0
188.3
4.8
263.3
96.6
61.6
34.0
0.21
38.4
113.9
83.5
55.2
(2%)
(12%)
(44%)
(30%)
(29%)
(26%)
(16%)
(25%)
(37%)
24.0
3.3
80.0
8.6
(15%)
(39%)
135%
(44%)
Cash, cash equivalents, and short-term investments
Total assets
Debt
Shareholders' equity
Notes:
1. Refer to Non-GAAP financial measures.
Dec 31,
2019
$
83.4
$
Dec 31,
2018
163.3
% Change
(49%)
$
$
$
936.1
146.5
635.4
$
$
$
786.5
69.3
602.8
19%
111%
5%
Sales for the three months ended December 31, 2019 were $69.0 million, a 16% increase from the $59.6 million reported in
the same period in 2018. The increase in sales was due primarily to higher silver, gold, and lead prices of 19%, 20%, and 4%,
respectively, and a 9% and 19% increase in the volume of silver and lead sold.
Sales for the year ended December 31, 2019 were $257.2 million, a 2% decrease from the $263.3 million reported in 2018.
Net income for the three months ended December 31, 2019 was $19.0 million or $0.12 per share compared to $2.2 million
net income or $0.01 per share reported in the same period in 2018. The increase in net income was driven by higher sales,
Management's Discussion and Analysis, page 5
Fortuna Silver Mines Inc.
$11.0 million of investment gains from cross-border Argentine Pesos denominated securities trades, and lower income
taxes. These were partially offset by $4.3 million of non-cash write-downs in inventories, Argentine exploration projects
and our investment in the shares of Prospero Silver Corp (“Prospero”) and Medgold Resources Corp (“Medgold”).
Net income for the year ended December 31, 2019 was $23.8 million or $0.15 per share compared to $34.0 million net
income or $0.21 per share reported in 2018. The net income was impacted by a 12% decrease in mine operating income,
$5.6 million of non-cash write-downs on exploration projects, obsolete inventories, a decrease in the fair value of Prospero
and Medgold shares, and a $2.3 million increase in share-based payment expenses due to the impact of a 7% year-over-
year increase in the Company’s share price on the cash-settled share-based payments. The $13.3 million of foreign exchange
losses primarily from the devaluation of the Argentine Peso were substantially mitigated by $11.0 million of gains from
cross-border securities trades.
Adjusted net income (refer to Non-GAAP Financial Measures) for the three months ended December 31, 2019 was $10.9
million compared to $4.4 million for the same period in 2018. The increase was due primarily to higher mine operating
income from the San Jose Mine and was partially offset by higher share-based payments.
Adjusted net income for the year ended December 31, 2019 was $28.4 million compared to $38.4 million for 2018. The
adjusted net income was adjusted to remove non-cash impairment charges, foreign exchange losses and investment gains
from cross-border securities trades for the Lindero Project, and other non-cash items.
Adjusted EBITDA (refer to Non-GAAP Financial Measures) for the three months ended December 31, 2019 was $25.1 million
compared to $22.7 million in the same period in 2018, as a result of the same factors that increased the adjusted net income
for the period.
Adjusted EBITDA for the year ended December 31, 2019 was $95.4 million compared to $113.9 million in 2018, as a result
of the same factors that lowered the adjusted net income for the year.
Net cash provided by operating activities for the three months ended December 31, 2019 was $19.2 million compared to
$19.3 million reported in the same period in 2018.
Free cash flow from ongoing operations (refer to Non-GAAP Financial Measures) for the three months ended December 31,
2019 was $6.3 million compared to $11.8 million reported in same period in 2018. The decrease was due primarily to the
negative changes in working capital, most notably, an increase in concentrate receivables at the San Jose Mine.
Net cash provided by operating activities for the year ended December 31, 2019 was $63.0 million compared to $83.5 million
reported in 2018. The decrease was driven by lower operating margins and negative changes in working capital of $11.0
million compared to positive changes of $3.3 million in 2018.
Free cash flow from ongoing operations for the year ended December 31, 2019 was $34.5 million compared to $55.2 million
reported in 2018. The decrease was driven by lower margins and negative changes in working capital, which was partially
offset by lower expenditures on mineral properties, plant and equipment.
As at December 31, 2019, the Company had cash, cash equivalents, and short-term investments of $83.4 million (December
31, 2018 – $163.3 million), a decrease of $79.9 million since the beginning of the year, which was due primarily to funding
construction of the Lindero Project.
Management's Discussion and Analysis, page 6
Fortuna Silver Mines Inc.
Lindero Project (“Lindero” or the “project”)
Construction of the Lindero open pit heap leach gold mine located in Salta Province, Argentina is 89% complete as of the
end of January 2020. Construction spending for the fourth quarter of 2019 was $27.8 million (2019 spending - $157.5
million) of which $21.3 million of construction trade payables was unpaid as of the end of December of 2019. Total
construction spending as at December 31, 2019 is $280.3 million.
The following table summarizes the total construction spending at the Lindero Project:
Cumulative to Twelve months ended
December 31, 2018 December 31, 2019
(Expressed in $ millions)
188.3 $
Construction capital expenditures
$
(30.8)
Contractor advances and deposits on equipment, net of transfers
157.5 $
$
Total Construction Spending
79.9 $
42.9
122.8 $
Total
268.2
12.1
280.3
Construction highlights and milestones include:
•
18,750 tpd crushing and agglomeration plant
Primary and secondary crushing circuits: Pre-commissioning activities of the main equipment has been completed.
Crushing circuits are being commissioned and stockpiling of ore has commenced.
Tertiary crushing circuit: Vendor technicians are concluding with final mechanical and instrumentation activities on
the HPGR. Pre-commissioning of the conveyors and transfer systems were initiated in February.
Agglomeration plant: Mechanical work is substantially complete; piping and electrical installation is in its final
stages due to the delay caused by shortfalls in contractor manpower during December and January; pre-
commissioning activities have been pushed back to March.
•
Leach pad and solution ponds area
Construction of the 31-hectare start-up leach pad area and solution ponds has been completed. Assembly and
installation of the stacking system from the agglomeration plant to the leach pad is in progress but behind schedule
due to a shortfall in contractor manpower during December and January, but is expected to be completed in April;
making it on the critical path of the project.
Mechanical and piping installations on the solution ponds are in progress. Pumping and solution management
systems are planned to be commissioned in April.
• ADR plant
Equipment installation has been completed with piping and electrical work in progress. Pre-commissioning
activities are expected to conclude in May.
•
•
8 MW power plant
Commissioning of the 8-megawatt power plant and medium voltage power distribution system has been
completed. The plant has been connected to the mine’s grid and is providing power to the mine.
SART plant
Mechanical and piping installation work is progressing with pre-commissioning activities scheduled to conclude in
May. The SART plant is not mission critical for the start of gold production.
Management's Discussion and Analysis, page 7
Fortuna Silver Mines Inc.
• Ancillary facilities
Construction and implementation of the on-site assay laboratory has been completed. Sample preparation and
analysis for gold using fire assay with an atomic absorption finish has been conducted at this facility since the end
of January 2020.
Industrial water for the operation will be sourced from a 120 cubic meter per hour well field and pumping station
located 13 kilometers from the mine site. Commissioning of the industrial water system was completed in February
2020.
Further to the updated construction and commissioning schedule, the Company expects to place ore on the leachpad and
first doré pour in the second quarter of 2020 (refer to Fortuna’s news release dated February 13, 2020), and the total
construction capital expenditures are now forecast to be in the range of $314 million to $320 million, an increase of 28%
over the initial capital cost guidance1 (see Fortuna news release dated September 21, 2017 and the technical report entitled
“Fortuna Silver Mines Inc. Lindero Property, Salta Province, Argentina, dated effective October 31, 2017 which is available
on SEDAR at www.sedar.com). In addition, the Company expects to incur approximately $32 million of pre-production costs
and buildup of working capital and approximately $12 million of recoverable value added taxes through to the end of
construction. Commercial production is expected to commence in the third quarter of 2020.
The main drivers for the increased capital costs are $8.6 million of indirect costs, and $6.8 million of EPCM contractor. In
addition, the Company expects to incur pre-production costs and buildup of working capital through to the commencement
of production of approximately $40 million of which $14 million had been spent as of December 31, 2019. This is an increase
of $15 million over the $25 million disclosed in our November 14, 2019 news release and is mainly driven by continued
mining operations during the pre-production phase which have resulted in an inventory of ore stockpile 30% larger than
originally planned, additional related owner’s costs, and an additional $4 million for inventory of spare parts.
Note 1: The initial capital cost guidance of $239 milion was subsequently adjusted to $245.5 million to reflect the shifting of
$6.5 million in a future sustaining capital investment to expand the ADR and solution handling system to the construction
phase.
Management's Discussion and Analysis, page 8
Fortuna Silver Mines Inc.
2020 Guidance and Outlook
2020 Production Guidance
Mine
Silver
San Jose, Mexico
Caylloma, Peru
Gold
Lindero2,3, Argentina
Consolidated Total
Silver
(Moz)
Gold
(koz)
Lead
(Mlbs)
Zinc
(Mlbs)
Cash Cost1
($/t)
AISC1
41 - 45
-
(US$/oz
Ag Eq)
9.6 - 11.7
- 27.2 - 30.1 44.0 - 48.6 81.4 - 89.9 14.8 - 18.1
(US$/oz
Au)
520 - 620
-
- 10.2 - 11.4
-
- 65.6 - 72.5
-
101 - 125 27.2 - 30.1 44.0 - 48.6
60 - 80
6.6 - 7.3
0.9 - 1.0
-
7.5 - 8.3
Notes:
1. All-In Sustaining Cost (AISC) is a non-GAAP financial measure (Refer to Non-GAAP Financial Measures). AISC includes production cash cost, commercial
and government royalties, mining tax, export duties (as applicable), worker's participation (as applicable), subsidiary G&A, sustaining capital
expenditures, and Brownfields exploration and is estimated at metal prices of US$1,450/oz Au, US$17/oz Ag, US$2,100/t Pb, and US$2,500/t Zn.
2. Lindero's production and cost guidance is based on the updated construction and commissioning schedule, as detailed in Fortuna's news release dated
February 13, 2020, with ore to be placed on the leach pad and first doré pour scheduled in the second quarter of 2020. Any material changes to the
construction and commissioning schedule may have a material impact on Lindero's production and cost guidance.
3. Lindero's all-in sustaining cost is based on commercial production and includes an export duty of 5% of revenue.
4. Totals may not add due to rounding.
2020 All-In-Sustaining Cash Cost Per Silver and Gold Ounce Guidance
$/oz Ag
Cash cost, net of by-product credits
Adjustments:
Commercial and government royalties and mining tax
Worker's participation
General and administrative expenses
Sustaining capital expenditures
Brownfield exploration expenditures
All-in-sustaining cash cost per payable ounce of silver
$/oz Au
Cash cost, net of by-product credits
Adjustments:
Commercial and government royalties and mining tax
General and administrative expenses
Sustaining capital expenditures
Brownfield exploration expenditures
All-in-sustaining cash cost per payable ounce of gold
San Jose
6.7 - 8.2
Caylloma
$ 11.7 - 14.3
$
0.3 - 0.4
0.5 - 0.6
0.5 - 0.7
1.1 - 1.3
0.4 - 0.5
9.6 - 11.7
0.2 - 0.2
0 - 0
0.7 - 0.8
1.9 - 2.3
0.4 - 0.5
$ 14.8 - 18.1
$
Lindero
324 - 399
$
106 - 123
32 - 36
53 - 56
4 - 5
520 - 620
$
Management's Discussion and Analysis, page 9
Fortuna Silver Mines Inc.
2020 Capital Expenditure and Exploration Guidance
(Expressed in $ millions)
Equipment and infrastructure
Dry stack expansion
Mine development
Brownfield exploration
Other sustaining capex
Total
Financial Results
Sales
Provisional sales ($ million)
Caylloma
San Jose
Adjustments ($ million)1
Sales ($ million)
Silver
Metal produced (oz)
Provisional sales (oz)
Provisional sales ($ million)
Realized price ($/oz)2
Net realized price ($/oz)3
Gold
Metal produced (oz)
Provisional sales (oz)
Provisional sales ($ million)
Realized price ($/oz)2
Net realized price ($/oz)3
Lead
Metal produced (000's lbs)
Provisional sales (000's lbs)
Provisional sales ($ million)
Realized price ($/lb)2
Net realized price ($/lb)3
Zinc
Metal produced (000's lbs)
Provisional sales (000's lbs)
Provisional sales ($ million)
Realized price ($/lb)2
Net realized price ($/lb)3
San Jose
Caylloma
$
$
2.0
2.4
4.8
4.9
3.0
17.1
$
$
5.7
-
5.0
2.1
0.1
12.9
$
$
Lindero
3.3
-
-
-
-
3.3
$
$
Total
11.0
2.4
9.8
7.0
3.1
33.3
QUARTERLY RESULTS
YEAR TO DATE RESULTS
Three months ended December 31,
2018
% Change
2019
Years ended December 31,
2018
% Change
2019
18.8
48.9
1.3
69.0
19.2
39.2
1.2
59.6
2,251,917
2,221,330
35.7
17.33
16.07
1,937,703
2,032,909
27.4
14.60
13.47
12,279
12,157
17.4
1,483
1,429
7,441
7,559
6.4
0.92
0.85
11,614
11,974
8.3
1.08
0.69
12,070
12,555
14.8
1,236
1,177
6,453
6,377
5.4
0.89
0.85
11,537
11,713
10.8
1.19
0.92
(2%)
25%
(8%)
16%
16%
9%
30%
19%
19%
2%
(3%)
18%
20%
21%
15%
19%
19%
4%
(0%)
1%
(2%)
(23%)
(10%)
(25%)
73.6
183.2
0.4
257.2
89.1
180.2
(6.0)
263.3
(17%)
2%
107%
(2%)
8,809,767
8,798,054
131.9
16.20
14.99
8,890,943
8,832,993
128.6
15.74
14.56
50,525
50,374
66.6
1,393
1,323
28,746
28,969
24.6
0.91
0.85
45,600
45,781
33.7
1.15
0.74
54,210
53,498
64.7
1,273
1,209
28,255
28,349
27.6
1.02
0.97
45,485
45,867
48.3
1.32
1.05
(1%)
(0%)
3%
3%
3%
(7%)
(6%)
3%
9%
9%
2%
2%
(11%)
(11%)
(13%)
0%
(0%)
(30%)
(13%)
(30%)
Notes:
1
2
3
Adjustments consists of mark to market, 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 base metals at Caylloma and to gold at San Jose
Management's Discussion and Analysis, page 10
Fortuna Silver Mines Inc.
Sales for the three months ended December 31, 2019 were $69.0 million or $9.4 million higher than the $59.6 million
reported in the same period in 2018. The higher sales were due mainly to higher prices of silver, gold, and lead of 19%, 20%,
and 4%, respectively, and higher volumes of silver and lead sold of 9% and 19%, respectively.
Sales at San Jose were $50.4 million, or 24% higher than the $40.5 million reported in the same period in 2018. The higher
sales were due to higher silver and gold prices of 19% and 20%, respectively, and higher volume of silver sold of 8% which
was partially offset by a 4% decrease in the volume of gold sold. Sales at Caylloma were $18.6 million, or 3% lower than the
$19.2 million reported in the same period in 2018 as higher lead and zinc production and higher silver prices helped
compensate for a 10% year-over-year decline in the price of zinc and a $2.0 million increase in treatment charges.
Sales for the year ended December 31, 2019 were $257.2 million, or 2% lower than the $263.3 million reported in 2018.
Sales at San Jose increased $8.5 million to $184.3 million as a result of increases in the prices of gold and silver of 9% and
3%, respectively, despite lower sales volume. Sales at Caylloma declined $14.5 million to $72.9 million as a result of an 11%
and a 13% decline in lead and zinc prices, respectively, and an $8.6 million increase in treatment charges.
Operating Income (Loss) and Adjusted EBITDA
(Expressed in $ millions)
Operating income (loss)
San Jose
Caylloma
Lindero
Corporate
Total
Adjusted EBITDA2
San Jose
Caylloma
Lindero
Corporate
Total
Notes:
1
2
3
As a Percentage of Sales
Refer to Non-GAAP Financial Measures
Figures may not add due to rounding
Three months ended December 31,
Years ended December 31,
2019 %1
2018 %1
2019 %1
2018 %1
$ 17.4
1.4
(1.9)
(7.9)
9.0
$
8%
0%
34% $ 10.5
2.9
(3.9)
(3.2)
6.3
13% $
26% $ 60.4
9.2
15%
(13.6)
0%
(21.8)
10% $ 34.2
33% $ 57.9
22.9
13%
(4.1)
0%
(15.1)
13% $ 61.6
$ 26.2
4.6
(0.2)
(5.5)
$ 25.1
52% $ 19.6
6.3
25%
(0.1)
0%
(3.1)
36% $ 22.7
49% $ 92.5
22.3
33%
(0.7)
0%
(18.7)
38% $ 95.4
50% $ 92.2
37.0
31%
(0.3)
0%
(15.0)
37% $ 113.9
33%
26%
0%
23%
52%
42%
0%
43%
Operating income for the three months ended December 31, 2019 was $9.0 million or $2.7 million higher than the $6.3
million reported in the same period in 2018. The increase in operating income was due to higher sales at our San Jose mine
as a result of higher gold and silver prices of 19% and 20% respectively. Other items that impacted operating income were
a $1.9 million increase in share-based payments and $4.2 million of non-cash impairment charges.
At San Jose, operating income was $17.4 million or $6.9 million higher than the $10.5 million reported in the same period
in 2018. The increase was due to higher gold and silver prices and higher volume of silver ounces sold, and was partially
offset by higher production cash costs of 6% and a $0.5 million foreign exchange loss in 2019 compared to a $0.4 million
foreign exchange gain in 2018. At Caylloma, operating income was $1.4 million or $1.5 million lower than the $2.9 million
reported in the same period in 2018. The decrease was driven by lower sales and higher depreciation and general and
administrative expenses.
Operating income for the year ended December 31, 2019 was $34.2 million, or $27.4 million lower than the $61.6 million
reported in 2018. The decrease was driven by a $13.7 million decrease in operating income at the Caylloma Mine, a $7.2
million increase in foreign exchange loss due primarily to the impact a 60% year-over-year decline in the Argentine Peso had
Management's Discussion and Analysis, page 11
Fortuna Silver Mines Inc.
on recoverable value added taxes accumulated during the construction of the Lindero Project, and $5.6 million of non-cash
impairment charges on two exploration projects in Mexico and Argentina, investment in associates, and obsolete
inventories.
Exploration and Evaluation Costs
Exploration and evaluations costs for the three months ended December 31, 2019 totaled $0.4 million on an Argentine
exploration project compared to $0.2 million reported in the same period in 2018.
Exploration and evaluation costs for the year ended December 31, 2019 were $2.4 million compared to $0.7 million
reported in 2018. The increase was due to spending on the Company’s Argentine and Mexican greenfield exploration
projects.
General and Administrative (“G&A”) Expenses
(Expressed in $ millions)
Mine G&A
Corporate G&A
Share-based payments
Workers' participation
Total
Three months ended December 31,
2018
2019
% Change 2019
Years ended December 31,
2018
% Change
$
$
3.5 $
3.0
2.4
0.5
9.4 $
3.0
2.6
0.5
0.2
6.3
17%
15%
380%
150%
49%
$
$
10.9 $
11.4
6.0
1.5
29.8 $
10.1
11.0
3.7
1.4
26.2
8%
4%
62%
7%
14%
General and administrative expenses for the three months ended December 31, 2019 increased 49% to $9.4 million
compared to $6.3 million in the same period in 2018 on higher share-based payments reflecting the impact of a 29% increase
in the Company’s share price on cash-settled share units and higher personnel costs at the Mexico administration office.
General and administrative expenses for the year ended December 31, 2019 increased 14% to $29.8 million compared to
$26.2 million reported in 2018 on higher share-based payments and increased headcount to support the mining operations.
Foreign Exchange Loss
Foreign exchange loss for the three months ended December 31, 2019 was $1.4 million compared to $3.6 million reported
in the same period in 2018. The decrease was due primarily to the Argentine Peso declining 6% against the U.S. dollar,
which contributed a $1.0 million foreign exchange loss for the current period compared to a $3.9 million foreign exchange
loss for the same period in 2018.
Foreign exchange loss for the year ended December 31, 2019 was $13.3 million compared to a $6.1 million foreign exchange
loss for 2018. The increase was due primarily to a $11.5 million foreign exchange loss from the Argentine Peso declining
60.5% against the U.S. dollar during 2019.
As a result of the devaluation of the Argentine Peso which followed Argentina’s primary election in the third quarter of 2019,
the Company implemented an investment strategy to meet our local currency requirements in Argentina and recognized
$11.0 million of gains from cross-border securities trades.
Management's Discussion and Analysis, page 12
Fortuna Silver Mines Inc.
Other Expenses
Other expenses for the three months ended December 31, 2019 were $3.2 million compared to $0.9 million reported in the
same period in 2018. Other expenses include $2.2 million in non-cash impairment charges on the Company’s investments
in Prospero and Medgold and a $0.7 million write-off of an Argentine greenfield exploration project.
Other expenses for the year ended December 31, 2019 were $4.6 million compared to $2.0 million reported in 2018. Other
expenses include $4.3 million of non-cash impairment charges on the Company’s investments in Prospero and Medgold and
the write-off of exploration projects.
Income Tax Expense
Income tax expense for the three months ended December 31, 2019 was $1.1 million or $3.8 million lower than the $4.9
million reported in the same period in 2018. Current income tax expense increased $4.3 million to $8.2 million compared
to $3.9 million reported in 2018 due primarily to higher mine operating profits from the San Jose Mine. Included in the 2018
comparative figure was a $1.3 million tax recovery in the fourth quarter of 2018 relating to the reclassification of withholding
taxes from current to deferred due to the timing of payments.
Deferred income tax recovery increased $8.2 million to $7.2 million compared to a $1.0 million deferred tax expense
reported in the same period in 2018. The main drivers for the tax recovery were the positive impact of a strong Mexican
Peso and high inflation on the tax base of mining assets in Mexico as well as recognition of $2.0 million of tax assets that
had previously been not recognized.
Effective tax rate (“ETR”) for the three months ended December 31, 2019 was 5.3% as a result of a favorable impact on
deferred taxes from a strong Mexican Peso and high inflation in Mexico and Argentina, and recognizing tax assets that were
previously not recognized against $11.0 million in investment gains from cross-border securities trades. Excluding these
items, the ETR would have been 45.6% compared to 68.7% reported in the same period in 2018. The higher ETR in 2018
included the recognition of additional withholding taxes that increased the ETR by 19%.
Income tax expense for the year ended December 31, 2019 was $20.2 million, or $13.2 million lower than the $33.4 million
reported in 2018. Current income tax expense was $32.6 million, or $2.0 million higher than the $30.6 million reported in
2018 due primarily to a $3.2 million increase in interest and dividend withholding tax.
Deferred income tax recovery for the year ended December 31, 2019 was $12.5 million, compared to a $2.8 million deferred
income tax expense reported in 2018. The swing to a tax recovery was due primarily to a favorable impact from a strong
Mexican Peso, high inflation in both Mexico and Argentina, as well as recognizing tax assets that were previously not
recognized.
The ETR for the year ended December 31, 2019 was 45.9% compared to 49.5% reported in 2018. The lower ETR was
primarily attributed to the net favorable impact of foreign exchange and inflation in Mexico and Argentina.
Management's Discussion and Analysis, page 13
Fortuna Silver Mines Inc.
Results of Operations
San Jose Mine Operating Results
The San Jose Mine is an underground silver-gold mine located in the state of Oaxaca in southern Mexico. The following table
shows the key metrics used to measure the operating performance of the mine: throughput, head grade, recovery, gold and
silver production and unit costs:
Mine Production
Tonnes milled
Average tonnes milled per day
Three months ended December 31,
Years ended December 31,
2019
2018
2019
2018
273,066
3,034
256,181
2,846
1,068,722
3,028
1,040,478
2,956
Silver
Grade (g/t)
Recovery (%)
Production (oz)
Metal sold (oz)
Realized price ($/oz)
Gold
Grade (g/t)
Recovery (%)
Production (oz)
Metal sold (oz)
Realized price ($/oz)
Unit Costs
Production cash cost ($/t)2
Production cash cost ($/oz Ag Eq)1,2
Net smelter return ($/t)
All-in sustaining cash cost ($/oz Ag Eq)1,2
Capital expenditures ($000's)
Sustaining
Brownfields
Notes:
1.
249
91
2,002,633
1,968,550
17.34
230
91
1,718,496
1,818,026
14.61
252
91
7,868,478
7,849,438
16.20
260
92
7,979,634
7,921,345
15.74
1.50
91
11,993
11,870
1,483
70.19
6.82
181.85
10.54
3,737
649
1.58
91
11,825
12,312
1,236
65.94
6.79
145.49
9.85
2,723
1,361
1.57
91
48,880
48,731
1,393
69.60
6.74
172.04
9.83
9,969
4,077
1.75
92
53,517
53,255
1,273
63.72
5.93
138.54
9.02
9,277
6,947
Production cash cost silver equivalent and all-in sustaining cash cost (“AISC”) silver equivalent are calculated using realized metal prices for each period
respectively.
Production cash cost, Production cash cost silver equivalent and AISC silver equivalent are Non-GAAP Financial Measures. Refer to Non-GAAP Financial
Measures.
2.
Quarterly Results
The San Jose Mine produced 2,002,633 ounces of silver and 11,993 ounces of gold in the fourth quarter of 2019, which were
17% and 1%, respectively, above the comparable quarter in 2018. The higher silver production was due primarily to a 7%
increase in mine throughput as well as an 8% increase in silver head grade.
Cash cost per tonne of processed ore for the fourth quarter increased 6% to $70.19 per tonne (refer to Non-GAAP Financial
Measures) compared to $65.94 per tonne for the comparable quarter in 2018. The increased cash cost was due to higher
mine costs related to breakup, support and transportation.
Management's Discussion and Analysis, page 14
Fortuna Silver Mines Inc.
Annual Results
The San Jose Mine produced 7,868,478 ounces of silver and 48,880 ounces of gold in 2019, which were 1% and 9%,
respectively, below 2018. The lower production was due primarily to the impact of scheduled mine production in lower
grade stopes in the third quarter which produced approximately 282,000 less silver ounces on 15% lower head grade.
Cash cost per tonne of processed ore for the year ended December 31, 2019 increased 9% to $69.60 per tonne (refer to
Non-GAAP Financial Measures) compared to $63.72 per tonne for 2018. The increased cash cost was due to higher mining
costs relating to contractor tariffs and indirect costs. The cash cost was within the annual cost guidance.
Caylloma Mine Operating Results
Caylloma is an underground silver, lead and zinc mine located in the Arequipa Department in southern Peru. Its commercial
products are silver-lead and zinc concentrates. The table below shows the key metrics used to measure the operating
performance of the mine: throughput, head grade, recovery, silver, lead and zinc production and unit costs:
Three months ended December 31,
2018
Years ended December 31,
2018
2019
Mine Production
Tonnes milled
Average tonnes milled per day
Silver
Grade (g/t)
Recovery (%)
Production (oz)
Metal sold (oz)
Realized price ($/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)
Unit Costs
Production cash cost ($/t)2
Production cash cost ($/oz Ag Eq)1,2
Net smelter return ($/t)
All-in sustaining cash cost ($/oz Ag Eq)1,2
Capital expenditures ($000's)
Sustaining
Brownfields
Notes:
1.
2019
133,271
1,481
71
82
249,284
252,780
17.31
2.84
89
7,441
7,559
0.92
4.48
88
11,614
11,974
1.08
85.86
11.67
138.07
15.40
2,487
214
135,034
1,500
531,307
1,497
534,773
1,502
61
83
219,207
214,883
14.55
66
83
941,289
948,616
16.23
63
84
911,309
911,648
15.71
2.39
91
6,453
6,377
0.89
4.30
90
11,537
11,713
1.19
89.50
8.67
141.67
14.76
2.72
90
28,746
28,969
0.91
4.36
89
45,600
45,781
1.15
86.15
10.92
137.77
14.30
2.62
91
28,255
28,349
1.02
4.28
90
45,485
45,867
1.32
83.47
7.64
166.05
11.68
6,646
223
10,440
700
14,709
1,691
Production cash cost silver equivalent and all-in sustaining (“AISC”) cash cost silver equivalent are calculated using realized metal prices for each period
respectively.
Production cash cost, Production cash cost silver equivalent and AISC silver equivalent are Non-GAAP Financial Measures. Refer to Non-GAAP Financial
Measures.
2.
Management's Discussion and Analysis, page 15
Fortuna Silver Mines Inc.
Quarterly Results
The Caylloma Mine produced 7.4 million pounds of lead and 11.6 million pounds of zinc in the fourth quarter of 2019, which
were 15% higher and in line with the production for the comparable quarter in 2018. The higher volume of lead production
was due primarily to a 19% higher lead head grade despite lower mine throughput. Silver production totaled 249,284 ounces
or 14% higher than the comparable quarter in 2018 due to higher silver head grade by 16%.
Cash cost per tonne of processed ore was $85.86 (refer to Non-GAAP Financial Measures), which was 4% lower than the
$89.50 cash cost per tonne for the comparable quarter in 2018 and was within our annual guidance range. The lower cash
cost was due primarily to lower mining costs related to breakup and support.
Annual Results
The Caylloma Mine produced 28.7 million pounds of lead and 45.6 million pounds of zinc in 2019, which were 2% higher
and in line with the production for 2018. The higher volume of lead production was due to a 4% higher lead head grade.
Zinc production was in line with production for 2018. Silver production totaled 941,289 ounces or 3% higher than the
production for 2018.
Cash cost per tonne of processed ore was $86.15 (refer to Non-GAAP Financial Measures), or 3% higher than the $83.47 per
tonne for 2018 and within our annual guidance range. The higher cash cost was due to higher indirect costs related mainly
to on-site camp maintenance and personnel transportation.
Quarterly Information
The following table provides information for the last eight fiscal quarters up to December 31, 2019:
Expressed in $000's, except per share data
Sales
Mine operating income
Operating (loss) income
Net (loss) income
Basic EPS
Diluted EPS
Total assets
Debt
Q4 2019 Q3 2019 Q2 2019 Q1 2019 Q4 2018 Q3 2018 Q2 2018 Q1 2018
70,442
31,337
22,428
13,754
67,908
22,978
15,711
10,279
73,666
31,392
22,372
11,151
58,991
21,487
10,913
2,243
68,983
23,445
9,029
18,984
59,596
16,497
10,535
6,853
61,305
16,671
(1,459)
(7,710)
59,592
17,345
6,251
2,232
0.12
0.12
(0.05)
(0.05)
0.07
0.07
0.01
0.01
0.01
0.01
0.04
0.04
0.07
0.07
0.09
0.09
936,065
146,535
871,483
109,394
823,310
69,363
796,718
69,338
786,517
69,302
738,305
39,639
721,147
39,603
707,504
39,588
Sales increased 13% in the fourth quarter of 2019 to $69.0 million compared to $61.3 million in the third quarter of 2019
due primarily to a 15% and 7% increase in the volume of silver and gold ounces sold. Cash mine operating costs at the San
Jose and Caylloma Mines were 6% higher and 4% lower, respectively. Pre-tax income included $11.0 million of investment
gains from cross-border securities trades.
Sales decreased 10% in the third quarter of 2019 to $61.3 million compared to $67.9 million in the second quarter of 2019
due primarily to lower silver and gold ounces sold from the San Jose Mine as a result of scheduled mining at lower grade
stopes. The lower sales and an $8.3 million foreign exchange loss from the devaluation of the Argentine Peso were the
primary reasons for the $1.5 million operating loss and $7.7 million net loss in the third quarter of 2019.
Sales increased 15% in the second quarter of 2019 to $67.9 million compared to $59.0 million in the first quarter of 2019
due primarily to higher silver and gold sales volume from the San Jose Mine. Sales from the Caylloma Mine decreased $2.6
Management's Discussion and Analysis, page 16
Fortuna Silver Mines Inc.
million or 13% quarter-over-quarter due to lower sales volume and a 21% and 11% decrease in the prices for lead and zinc,
respectively. Cost of sales increased 20% over the first quarter of 2019 due to higher mining, milling, and labour costs.
Foreign exchange swung to a $0.2 million gain from a $3.7 million loss in the first quarter as the Argentine Peso strengthened
2.1% against the U.S. dollar in the quarter and contributed $0.7 million towards the foreign exchange gain.
Sales decreased 1% in the first quarter of 2019 to $59.0 million compared to $59.6 million in the fourth quarter of 2018.
Lower sales in the first quarter of 2019 were impacted by a $3.7 million buildup in silver-gold concentrate inventory shipped
in the second quarter of 2019. Depreciation and depletion were $2.0 million lower due to lower sales volume. Income tax
expense increased 49% quarter-over-quarter to $7.3 million compared to $4.9 million from the previous quarter. The
increase in income tax expense was due primarily to the impact of a 15% decline in the Argentine Peso and was partially
offset by a highly inflationary environment in Argentina, which had a positive impact on the tax base of Lindero’s assets.
Other factors contributing to an 18% increase in the ETR include deferred tax assets not recognized, non-deductible
expenses, and mining taxes.
Precious Metal Prices Trends
For the year ended December 31, 2019, the sale of silver and gold ounces represents 78% of the Company’s sales revenue
while lead and zinc make up the remaining 22% of sales revenue. Therefore, the prices of silver and gold are the most
dominant factors in determining the Company’s profitability and cash flow from operations. The financial performance of
the Company is expected to continue to be closely linked to the prices of silver and gold.
The silver price began the 2019 year at $15.47 per ounce and trended to a low of $14.38 per ounce in late May before
closing at $15.28 per ounce at the end of the second quarter. During the third quarter the silver price trended to a high of
$19.56 per ounce in early September before retreating to $16.97 per ounce at the end of the quarter. Silver trended to a
high of $18.08 per ounce by the end of October before trending to a low $16.54 before closing at $17.78 per ounce at the
end of the fourth quarter. Comparatively, the Company had an average realized price of silver of $17.33 per ounce and
$16.20 per ounce, respectively, for the three and twelve months ended December 31, 2019.
Management's Discussion and Analysis, page 17
Fortuna Silver Mines Inc.
The gold price began the 2019 year at $1,274 per ounce and rose to a first quarter high of $1,344 per ounce before closing
the first quarter at $1,295 per ounce. Gold traded in a narrow range during April and May before the start of an uptrend,
closing at $1,409 per ounce at the end of the second quarter. During the third quarter, the gold price trended to a high of
$1,546 per ounce by mid-August before retreating to $1,485 per ounce at the end of the quarter. Gold traded in a narrow
range in the fourth quarter and closed at $1,523 per ounce at the end of the fourth quarter. Comparatively, the Company
had an average realized price of gold of $1,483 and $1,393 per ounce, respectively, for the three and twelve months ended
December 31, 2019.
Liquidity and Capital Resources
Cash, Cash Equivalents and Short-Term Investments
The Company had cash, cash equivalents and short-term investments of $83.4 million at December 31, 2019, which
represents a $79.9 million decrease from $163.3 million at December 31, 2018 and is comprised of $31.0 million of cash and
$52.4 million of cash equivalents. The decrease in cash, cash equivalents and short-term investments was due primarily to
$188.3 million in construction expenditures at Lindero, $34.7 million on construction related VAT payments, $8.4 million in
lease payments and $35.0 million on non-construction related expenditures at Lindero and other capital expenditures at
San Jose and Caylloma. These expenditures were partially funded from $63.5 million in cash generated from operations,
$43.5 million net proceeds from the issuance of convertible debentures and $40.0 million drawn under the Company’s credit
facility.
The Company’s investment objectives for its cash balances, in order of priority, are to preserve capital, to ensure liquidity
and to maximize returns. The Company’s strategy to achieve these objectives is to invest its excess cash balance in a
portfolio of primarily fixed income instruments with specified credit rating targets established by the Board of Directors of
the Company. The Company does not own any asset-based commercial paper or other similar at-risk investments in its
investment portfolios.
Working Capital
Working capital decreased $95.2 million to $62.4 million at December 31, 2019 compared to $157.6 million at December
31, 2018. The decrease in working capital was due to funding construction at the Lindero Project and other capital
expenditures at the San Jose and Caylloma mines.
Capital Resources
As at December 31, 2019, the Company had fully drawn $40.0 million from its non-revolving credit facility and $70.0 million
from its $110.0 million revolving credit facility. The purpose of the credit facility is to fund the construction of the Lindero
Project. The interest rate on the revolving credit facility is on a sliding scale at one-month LIBOR plus an applicable margin
ranging from 2.5% to 3.5%, based on a defined Total Debt to EBITDA Ratio, and is secured by a first ranking lien on the assets
of the San Jose and Caylloma mines as well as their holding companies.
Liquidity and capital measures (expressed in $ millions)
Cash and cash equivalents ("Cash")
Short-term investments ("STI")
Total Cash and STI
Credit facility
Amount drawn on credit facility
Net liquidity position
$
83.4
-
83.4
150.0
(110.0)
123.4
$
December 31, 2019 December 31, 2018
$
$
90.5 $
72.8
163.3
150.0
(70.0)
243.3 $
Change
(7.1)
(72.8)
(79.9)
-
(40.0)
(119.9)
Management's Discussion and Analysis, page 18
Fortuna Silver Mines Inc.
On October 2, 2019, the Company completed a bought deal public offering (the “Offering”) of senior subordinated
unsecured convertible debentures with an aggregate principal amount of $40.0 million. The Offering was subject to an over-
allotment option which was exercised in full on October 8, 2019, pursuant to which an additional $6.0 million aggregate
principal amount of debentures were issued, bringing the aggregate gross proceeds to the Company under the Offering to
$46.0 million. The debentures issued under the Offering including those issued upon exercise of the Over-Allotment Option
are collectively referred as the “Debentures”. The Company paid $2.5 million of transaction costs related to this financing.
The Debentures mature on October 31, 2024 and bear interest at a rate of 4.65% per annum, payable semi-annually in
arrears on the last business day of April and October, commencing on April 30, 2020. The Debentures are convertible at the
holder’s option into common shares in the capital of the Company at a conversion price of $5.00 per share, representing a
conversion rate of 200 Common Shares per $1,000 principal amount of Debentures, subject to adjustment in certain
circumstances.
The component parts of the convertible debentures, a compound instrument, are classified separately as financial liabilities
and equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and
an equity instrument. A conversion option that will be settled by the exchange of a fixed amount of cash or another financial
asset for a fixed number of the Company’s own equity instrument is an equity instrument.
At initial recognition, gross proceeds of $46.0 million from the Debentures were allocated into its debt and equity
components. The fair value of the debt component was estimated at $38.9 million using a discounted cash flow model
method with an expected life of five years and a discount rate of 8.6%. This amount is recorded as a financial liability on an
amortized cost basis net of transaction cost using the effective interest method using an effective interest rate of 9.7% until
extinguished upon conversion or at its maturity date.
The conversion option of the Debentures is classified as equity and was estimated based on the residual value of $7.1 million.
This amount is not subsequently remeasured and will remain in equity until the conversion option is exercised, in which
case, the balance recognized in equity will be transferred to share capital. Where the conversion option remains unexercised
at the maturity date of the convertible note, the balance will remain in equity reserves. A deferred tax liability of $1.9 million
related to the taxable temporary difference arising from the equity portion of the convertible debenture was recognized in
equity reserves.
Subject to certain exceptions in connection with a change of control of the Company, the Debentures will not be redeemable
by the Company prior to October 31, 2022. On or after October 31, 2022 and prior to October 31, 2023, the Debentures
may be redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount
plus accrued and unpaid interest, provided that the volume weighted average trading price of the Common Shares on the
NYSE for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the
redemption is given is at least 125% of the Conversion Price. On and after October 31, 2023, the Debentures may be
redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount plus
accrued and unpaid interest regardless of the trading price of the Common Shares.
Subject to applicable securities laws and regulatory approval and provided that no event of default has occurred and is
continuing, the Company may, at its option, elect to satisfy its obligation to pay the principal amount of the Debentures and
accrued and unpaid interest on the redemption date and the maturity date, in whole or in part, through the issuance of
Common Shares, by issuing and delivering that number of Common Shares, obtained by dividing the principal amount of
the Debentures and all accrued and unpaid interest thereon by 95% of the current market price (as defined in the Debenture
Indenture) on such redemption date or maturity date, as applicable.
The Company does not have unlimited financial resources and there is no assurance that sufficient additional funding or
financing will be available when needed by the Company or its direct and indirect subsidiaries on acceptable terms, or at all,
to further explore or develop its properties or to fulfill its obligations under any applicable agreements. Fortuna is a
multinational company and relies on financial institutions worldwide to fund corporate and project needs. Instability of
large financial institutions may impact the ability of the Company to obtain equity or debt financings in the future and, if
Management's Discussion and Analysis, page 19
Fortuna Silver Mines Inc.
obtained, on terms that may not be favorable to the Company. Disruptions in the capital and credit markets as a result of
uncertainty, geo-political events, changing or increased regulations of financial institutions, reduced alternatives or failures
of significant financial institutions could adversely affect the Company’s access to the liquidity needed for the business in
the longer term.
The Company may incur substantial debt from time to time to finance working capital, capital expenditures, investments or
acquisitions or for other purposes. If the Company does so, the risks related to the Company’s indebtedness could intensify,
including: (i) increased difficulty in satisfying existing debt obligations (ii) limitations on the ability to obtain additional
financings, or imposed requirements to make non-strategic divestures (iii) impose hedging requirements (iv) imposed
restrictions on the Company’s cash flows, for debt repayments or capital expenditures (v) increased vulnerability to general
adverse economic and industry conditions (vi) interest rate risk exposure as borrowings may be at variable rates of interest
(vii) decreased flexibility in planning for and reacting to changes in the mining industry (viii) reduced competitiveness versus
less leveraged competitors, and (ix) increased cost of borrowings.
Subject to the various risks and uncertainties, as explained in the Risks and Uncertainties section, management believes the
Company’s mining operations will generate sufficient cash flows and the Company has sufficient available credit lines and
cash on hand to fund the construction of the Lindero Project and planned capital and exploration programs.
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.
Financial Instruments
The Company does not utilize complex financial instruments in hedging metal price, foreign exchange or interest exposure.
Any hedging activity requires approval of the Company’s Board of Directors. The Company will not hold or issue derivative
instruments for speculation or trading purposes.
Provisional priced trade receivables of $33.6 million and an interest rate swap liability of $0.9 million are the Company’s
only level 2 fair valued financial instruments and no level 3 instruments are held.
Provisionally priced trade receivables are valued using forward London Metal Exchange prices until final prices are settled
at a future date. The interest rate swap is measured at estimated fair value.
Related Party Transactions
The Company has entered into the following related party transactions during the years ended December 31, 2019 and
2018:
Management's Discussion and Analysis, page 20
Fortuna Silver Mines Inc.
(a) Purchase of Goods and Services
During the years ended December 31, 2019 and 2018, the Company was charged for general and administrative services
pursuant to a shared services agreement with Gold Group Management Inc., a company of which Simon Ridgway, the
Company’s Chairman, is a director.
(Expressed in $000's)
Personnel costs
General and administrative expenses
Years ended December 31,
2019
21
189
210
$
$
2018
118
193
311
$
$
As at December 31, 2019, the Company has outstanding balances payable to Gold Group Management Inc. of $0.01 million
(December 31, 2018 - $0.02 million). Amounts due to related parties are due on demand and are unsecured.
(b) Key Management Personnel
During the years ended December 31, 2019 and 2018, the Company was charged for consulting services by Mario Szotlender,
a director of the Company, and by Mill Street Services Ltd., a company of which Simon Ridgway, the Company’s Chairman,
is a director. Such amounts, along with other amounts paid to key management personnel are as follows:
(Expressed in $000's)
Salaries and benefits
Directors fees
Consulting fees
Share-based payments
Risks and Uncertainties
Years ended December 31,
$
$
2019
4,716
702
135
5,449
11,002
$
$
2018
4,471
709
139
3,545
8,864
The Company is exposed to many risks in conducting its business, including but not limited to metal price risk as the Company
derives its revenue from the sale of silver, gold, lead and zinc; credit risk in the normal course of business; foreign exchange
risk as the Company reports its financial statements in U.S. dollars whereas the Company operates in jurisdictions that
conducts its business in other currencies; the inherent risks of uncertainties in estimating mineral reserves and mineral
resources; the risk in relation to the construction, the timing of commissioning and commencement of commercial
production at the Lindero Project; political risks, environmental risks; and risks related to its relations with employees. These
and other risks are described below and in the Company’s audited consolidated financial statements for 2019, its Annual
Information Form which is available on SEDAR at www.sedar.com, and its Form 40-F filed with the SEC. Readers are
encouraged to refer to these documents for a more detailed description of some of the risks and uncertainties inherent to
the Company’s business.
Foreign Jurisdiction Risk
The Company currently conducts its operations in Peru, Mexico and Argentina. All these jurisdictions are potentially subject
to a number of political and economic risks, including those described in the following section. The Company is unable to
determine the impact of these risks or its future financial position or results of operations and the Company’s exploration,
development and production activities may be substantially affected by factors outside of the Company’s control. These
potential factors include but are not limited to royalty and tax increases or claims by governmental bodies, expropriation or
nationalization, lack of an independent judiciary, foreign exchange controls, import and export regulations, cancellation or
Management's Discussion and Analysis, page 21
Fortuna Silver Mines Inc.
renegotiation of contracts and environmental and permitting regulations. The Company has no political risk insurance
coverage against these risks.
All of the Company’s current production and revenue is derived from its operations in Peru and Mexico. As the Company’s
business is carried on in a number of developing countries, it is exposed to a number of risks and uncertainties, including
the following: expropriation or nationalization without adequate compensation especially in Argentina which has a history
of expropriation where the Company is currently in the process of construction at the Lindero Project; changing political
and fiscal regimes, and economic and regulatory instability; unanticipated changes to royalty and tax regulations; unreliable
and undeveloped infrastructure, labor unrest and labor scarcity; difficulty procuring key equipment and components for
equipment; import and export regulation and restrictions; the imposition of capital controls which may affect the
repatriation of funds; high rates of inflation; extreme fluctuations in foreign exchange rates and the imposition of currency
controls; inability to obtain fair dispute resolution or judicial determination because of bias, corruption or abuse of power;
difficulties enforcing judgments; difficulties understanding and complying with regulatory and legal framework with respect
to ownership and maintenance of mineral properties, mines and mining operations, local opposition to mine development
projects, which include the potential for violence, property damage and frivolous or vexatious claims; terrorism and hostage
taking; military repression and increased likelihood of international conflicts or aggression; increased public health concerns.
Certain of these risks and uncertainties are prevalent in the jurisdictions where the Company operates.
Estimating Mineral Resources and Mineral Reserves
There is a degree of uncertainty attributable to the estimation of Mineral Resources, Mineral Reserves and expected mineral
grades. Until mineral deposits are actually mined and processed, Mineral Resources, 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.
Mining Operations
The capital costs required by the Company’s projects may be significantly higher than anticipated. Capital and operating
costs, production and economic returns, and other estimates contained in the Company’s current technical reports, may
differ significantly from those provided for in future studies and estimates and from management guidance, and there can
be no assurance that the Company’s actual capital and operating costs will not be higher than currently anticipated. In
addition, delays to construction and exploration schedules may negatively impact the net present value and internal rates
of return of the Company’s mineral properties as set forth in the applicable technical report. Similarly, there can be no
assurance that historical rates of production, grades of ore processed, rates of recoveries or mining cash costs will not
Management's Discussion and Analysis, page 22
Fortuna Silver Mines Inc.
experience fluctuations or differ significantly from current levels over the course of the mining operations. In addition, there
can be no assurance that the Company will be able to continue to extend the production from its current operations through
exploration and drilling programs.
Uncertainties and risks related to the Construction of the Lindero Project
The Company is subject to inherent uncertainties and risks related to the construction and start-up of the Lindero Project,
the principal of which include: delays in pre-commissioning, and ramp-up to commercial production; delays associated with
contractors; budget overruns due to changes in costs of fuel, labour, power, materials and supplies, inflation and exchange
rate risks and potential opposition from non-governmental organizations, environmental groups or local groups which may
delay or prevent activities.
The Company’s ability to meet construction, development, and production schedules and cost estimates for the Lindero
Project cannot be assured. The Company has prepared estimates of capital costs and/or operating costs for the Lindero
Project, but no assurance can be given that such estimates will be achieved. Delays in the commencement of commercial
production, failure to achieve cost estimates or material increases in costs due to increases in foreign exchange rates;
continuation of capital controls imposed in Argentina; imposition of exchange control restrictions; and delays in obtaining
the value added tax refunds, could have an adverse impact in future cash flows, profitability, results of operations and
financial condition of the Company.
Environmental Uncertainties
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
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 requiring 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.
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.
Management's Discussion and Analysis, page 23
Fortuna Silver Mines Inc.
The Company’s maximum exposure to credit risk as at December 31, 2019 and 2018 is as follows:
Credit (Expressed in $000’s)
Cash and cash equivalents
Short-term investments
Derivative assets
Accounts receivable and other assets
Income tax receivable
Other non-current receivables
December 31,
2019
83,404
-
-
47,707
2,553
38,389
172,053
$
$
$
$
December 31,
2018
90,503
72,824
2,646
32,769
136
15,241
214,119
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 a high credit
rating. Almost all of our concentrate is sold to large well-known concentrate buyers.
Metal Price Risk
The Company derives its revenue from the sale of silver, gold, lead and zinc. The Company’s sales are directly dependent
on metal prices, and metal prices have historically shown significant volatility that is beyond the Company’s control.
The following table illustrates the sensitivity to a +/-10% change in metal prices on the Company’s outstanding trade
receivables as at December 31, 2019:
Metal (Expressed in $ millions)
Silver
Gold
Lead
Zinc
Change
+/- 10%
+/- 10%
+/- 10%
+/- 10%
Effect on Sales
3.4
1.8
0.3
0.2
$
$
$
$
The Company mitigates the price risk associated with its base metal production by entering into forward sale and collar
contracts for some of its forecasted base metal production. The Board of Directors continually assesses the Company’s
strategy towards its base metal exposure, depending on market conditions. As at December 31, 2019, the Company had no
outstanding forward sales and zero cost collars contracts.
Currency Risk
The functional and reporting currency for all entities within the consolidated group is the US dollar. We are exposed to
fluctuations in foreign exchange rates as a portion of our expenses are incurred in Canadian dollars, Peruvian soles,
Argentine Peso and Mexican Peso. A significant change in the foreign 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 foreign currency fluctuations.
Management's Discussion and Analysis, page 24
Fortuna Silver Mines Inc.
The following table illustrates the sensitivity to a +/-10% change in foreign currency exchange rates on the Company’s
foreign currency exposure as at December 31, 2019:
Currency (Expressed in $ millions)
Mexican Peso
Peruvian Soles
Argentinian Peso
Canadian Dollar
Effect on foreign
denominated
items
$
$
$
$
2.1
0.2
1.0
0.4
Change
+/- 10%
+/- 10%
+/- 10%
+/- 10%
Due to the volatility of the exchange rate for Argentine Peso, the Company is applying additional measures in cash
management to minimize potential losses arising from the conversion of funds. As discussed below in the capital
management section, the capital controls in effect when the Company commences production at the Lindero Project, the
Company will be required to convert the equivalent value into Argentine Peso from the export sale of all gold doré from the
Lindero Project. In addition, the Company would be required to obtain the prior consent of the Argentine Central Bank for
the payment of cash dividends and distributions of profits out of Argentina.
The following tables summarize the Company’s exposure to currency risk through the following assets and liabilities
denominated in foreign currencies:
(Expressed In millions)
Cash and cash equivalents
Accounts receivable and other assets
Income tax receivable
Investments in associates
VAT - long term receivable
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
(Expressed In millions)
Cash and cash equivalents
Accounts receivable and other assets
Income tax receivable
Investments in associates
VAT - long term receivable
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
Canadian
December 31, 2019
Peruvian
Mexican
Dollars
0.6
0.3
-
1.4
-
(8.5)
(0.0)
-
-
-
-
(6.3)
(4.8) $
Soles
2.3
1.8
8.5
-
-
(19.4)
-
-
-
-
-
(6.8)
(2.1) $
Pesos
13.1
4.0
-
-
10.7
(214.7)
-
(3.9)
(161.9)
(4.2)
(87.5)
(444.4)
(23.6) $
Canadian
Peruvian
Mexican
December 31, 2018
Dollars
0.4
0.3
-
5.2
-
(8.5)
(0.0)
-
-
-
-
(2.6)
(2.0) $
Soles
0.9
3.7
0.5
-
-
(18.5)
-
-
(4.6)
-
-
(18.0)
(5.5) $
Pesos
37.0
11.8
-
-
-
(218.8)
-
(3.0)
(59.8)
(2.3)
(67.0)
(302.0)
(16.1) $
Argentinian
Pesos
11.8
87.5
-
-
2,039.9
(1,454.4)
-
-
-
-
-
684.8
11.3
Argentinian
Pesos
7.0
37.1
-
-
560.9
(125.2)
-
-
-
-
-
479.8
11.6
$
$
Management's Discussion and Analysis, page 25
Fortuna Silver Mines Inc.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligation as they become due. The volatility
of the metals market can impact the Company’s ability to forecast cash flow from operations.
The Company maintains sufficient liquidity to meet its short-term business requirements, taking into account anticipated
cashflows from operations, holdings of cash, cash equivalents and short-term investments and committed loan facilities.
The Company manages its liquidity risk by continuously monitoring forecasted and actual cashflows. A rigorous reporting,
planning and budgeting process are in place to help facilitate forecasting funding requirements, to support operations on
an ongoing basis and expansion plans, if any. The Company expects the following maturities of its financial liabilities, lease
obligations, and other contractual commitments, excluding payments relating to interest:
(Expressed in $ millions)
Trade and other payables
Debt
Income taxes payable
Lease obligations
Other liabilities
Capital commitments, Lindero 1
Closure and reclamation provisions
$
- $
4 - 5 years
1 - 3 years
$
Expected payments due by year as at December 31, 2019
Less than
1 year
65.3
-
12.4
9.3
-
24.5
2.7
114.2 $
After
5 years
-
-
-
15.0
-
-
21.3
36.3 $
110.0
-
9.4
0.5
-
7.6
127.5 $
46.0
-
4.1
-
-
1.8
51.9 $
Total
65.3
156.0
12.4
37.8
0.5
24.5
33.4
329.9
- $
$
$
Note:
1 Net of $10.9 million of deposits on equipment and advances to contractors
Capital Management
The Company’s objective when managing its capital is to maintain its ability to continue as a going concern while at the
same time maximizing the growth of its business and providing returns to its shareholders. The Company manages its capital
structure and makes adjustments based on changes to its economic environment and the risk characteristics of the
Company’s assets.
Effective December 23, 2019, changes to Argentina’s tax laws proposed by the new Argentine Government were
implemented. The changes ratified and extended legislation which was to expire on December 31, 2019 and allow the
Argentine Central Bank to regulate funds coming into and flowing out of Argentina in order to maintain stability and support
the economic recovery of the country. These capital controls are in effect until December 31, 2025 and have the effect of:
requiring exporters to convert the equivalent value of foreign currency received from the export into Argentine Pesos;
requiring the prior consent of the Argentine Central Bank to the payment of cash dividends and distributions of currency
out of Argentina; requiring Argentine companies to convert foreign currency loans received from abroad into Argentine
Pesos; and restricting the sale of Argentine Pesos for foreign currency.
The Company’s capital requirement is effectively managed based on the Company having a thorough reporting, planning
and forecasting process to help identify the funds required to ensure the Company is able to meet its operating and growth
objectives.
Management's Discussion and Analysis, page 26
Fortuna Silver Mines Inc.
The Company’s capital structure consists of equity comprising of share capital, reserves and retained earnings as well as
debt consisting of credit facilities and convertible debentures, lease obligations less cash, cash equivalents and short-term
investments.
(Expressed in $ millions)
Equity
Debt
Lease obligations
Less: Cash, cash equivalents and short-term investments
Figures may not add due to rounding
December 31,
2019
635.4 $
146.5
23.9
(83.4)
722.4
$
December 31,
2018
602.8
69.3
8.8
(163.3)
517.5
$
$
As discussed above, the Company operates in Argentina where the new Argentine government has ratified and extended
legislation to December 31, 2025 to allow the Argentine Central Bank to regulate funds coming into and flowing out of
Argentina. Other than the restrictions related to these capital controls and complying with the debt covenants under the
credit facilities, the Company is not subject to any externally imposed capital requirements. As at December 31, 2019 and
2018, the Company was in compliance with its debt covenants.
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, cash equivalent,
and short-term investment balances, interest paid on its LIBOR-based debt, and the mark-to-market value of derivative
instruments which depend on interest rates. We have entered into an interest rate swap for the $40.0 million non-revolving
credit facility to mitigate the interest rate risk on our debt.
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.
Claims and Legal Proceedings
The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the normal
course of business. The Company may be subject to claims by local communities, indigenous groups or private land owners
relating to land and mineral rights and such claimants may seek sizable monetary damages or seek the return of surface or
mineral rights that may be valuable to the Company which may significantly impact operations and profitability, if lost.
These matters are subject to various uncertainties and it is possible that some of these matters may be resolved with an
unfavorable outcome to the Company. The Company does carry liability insurance coverage, but such coverage does not
cover all risks to which the Company may be exposed to.
Management's Discussion and Analysis, page 27
Fortuna Silver Mines Inc.
Adoption of New Accounting Standards
IFRS 16, Leases
Effective January 1, 2019, the Company adopted IFRS 16 using the modified retrospective approach. The comparative figures
for the 2018 reporting period have not been restated and are accounted for under IAS 17, Leases, and IFRIC 4, Determining
Whether an Arrangement Contains a Lease, as permitted under the specific transitional provisions in the standard.
The Company used the following practical expedients when applying IFRS 16 to leases previously classified as operating
leases under IAS 17:
• Applied the exemption not to recognize right of use asset and liabilities for leases with less than 12 months of
lease term;
Excluded initial direct cost from measuring the right of use asset at the date of initial application; and
•
• Used hindsight when determining the lease term if the contract contains an option to extend or terminate the
lease.
At transition to IFRS 16, for leases classified as operating leases under IAS 17, the lease liabilities were measured at the
present value of the remaining lease payments and discounted using each operation’s applicable incremental borrowing
rate as of January 1, 2019. As a result, the Company, as a lessee, has recognized $7,316 within Lease Obligations representing
its obligation to make lease payments. ROU assets of the same amount were recognized within Plant and Equipment,
representing the Company’s right to use the underlying assets. The weighted average incremental borrowing rate applied
to the lease liabilities on January 1, 2019 was 5.32%.
The Company leases various equipment that had previously been classified as finance leases under IAS 17. For these finance
leases, the carrying amount of the ROU asset and the lease liability at January 1, 2019 were determined at the carrying
amount of the lease asset and lease liability under IAS 17 immediately before that date.
The following table (expressed in $000’s) summarizes the difference between operating lease commitments disclosed
immediately preceding the date of initial application and lease liabilities recognized on the balance sheet at the date of
initial application:
Operating lease obligations as at December 31, 2018
Leases with lease term of 12 months or less and low value assets
Embedded leases identified in existing service contracts
Effect of discounting at incremental borrowing rate
Lease liabilities recognized as at January 1, 2019
Lease liabilities from finance leases previously recorded in lease obligations
Total lease liabilities as at January 1, 2019
Less current portion
Non-current portion
IFRIC 23 Uncertainty over Income Tax Treatments
$
$
2,553
(825)
6,162
(574)
7,316
8,767
16,083
(6,120)
9,963
This interpretation sets out how to determine the accounting tax position when there is uncertainty over income tax
treatments. At January 1, 2019, the Company adopted this standard and there was no impact on its financial statements.
Management's Discussion and Analysis, page 28
Fortuna Silver Mines Inc.
Critical Accounting Estimates, Assumptions and Judgements
Many of the amounts included in the consolidated financial statements require management to make estimates,
assumptions and judgements. These estimates, assumptions and judgements 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 requirements of National Instrument
43-101 Standards of Disclosure for Mineral Projects published by the Canadian Securities Administrators. Estimates of the
quantities of the 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, 2019 we have used the following long-term prices for our mineral reserve and mineral
resource estimations: gold $1,380/oz, silver $17.00/oz, lead $2,170/t and zinc $2,590/t.
In addition to the estimates above, estimation is involved in determining the percentage of mineral resources ultimately
expected to be converted to mineral reserves and hence included in our life of mine plans. Our life of mine plans include a
portion of inferred mineral resources as we believe this provides a better estimate of the expected life of mine for certain
types of deposits, in particular for vein type structures. The percentage of inferred resources 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 judgment 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 judgments of 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 3(g)(i) to the audited consolidated financial statements for 2019.
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 an impairment.
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 sales volumes, metal prices, foreign exchange
rates, mineral resource and reserve quantities, future operating and capital costs to the end of the mine’s life, and
reclamation costs. 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.
Management's Discussion and Analysis, page 29
Fortuna Silver Mines Inc.
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
income statement.
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 customer is recognized when the customer obtains control of the concentrate. A
provisional invoice is issued to the customer based on the monthly average metal prices on the expected date of final
settlement at which time the final sale prices will be fixed. Variations between the prices at initial recognition and final
settlement may occur due to changes in the market metal 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 as revenue. For changes in metal quantities upon receipt of new information and assays, the provisional
sale 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.
In 2017 the Mexican Geological Service (“SGM”) advised the Company that a previous owner of one of the Company’s
mineral concessions located at the San Jose Mine in Oaxaca, Mexico had granted the SGM a royalty of 3% of the billing value
of minerals obtained from the concession. The Company supported by legal opinions from three independent law firms, has
previously advised the Mexican mining authorities that it is of the view that no royalty is payable, and in 2018 initiated
administrative and legal proceedings against the Direccion General de Minas (“DGM”) to remove reference to the royalty
on the title register. The proceedings are progressing in accordance with the procedures of the Mexican administrative
court.
In January 2020, the Company received notice from the DGM proposing to cancel the mining concession if the royalty, in
the Mexican peso equivalent of US$30 million plus VAT (being the amount of the claimed royalty from 2011 to 2019) is not
Management's Discussion and Analysis, page 30
Fortuna Silver Mines Inc.
paid before March 15, 2020. In early February 2020, the Company initiated legal proceedings against the DGM to contest
the cancellation procedure and also to stay the cancellation process.
The District Court in Mexico City has accepted the filing of the Company’s legal proceedings and also granted a permanent
stay of execution, which protects the Company from the cancellation of the concession until a resolution by the Court is
reached on the legality of the cancellation procedure. The timing of a decision by the Court at first instance in this action
against the DGM is uncertain and may take several months. In the event that the Company is unsuccessful in these
proceedings, it may appeal. If ultimately the Company does not prevail, it may be required to pay the disputed royalty in
order to preserve the mining concession. If the Company is required to pay the royalty, it will do so from available capital
resources. If the Company is required to pay the royalty, it will do so from available capital resources.
The Company has determined that it is more likely than not that it will succeed in these proceedings; therefore, no provision
has been recorded as at December 31, 2019.
Critical Accounting Judgements 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.
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 Reversal of Impairment Indicators
Management applies significant judgment in assessing whether indicators of impairment or reversal of 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, life of mines, 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 previous impairments.
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 judgments to determine the primary economic environment. The
Company reconsiders the functional currency used when there is a change in the events and conditions which determined
the primary economic environment.
IFRS 16 Leases
Significant estimates, assumptions and judgments made by management on adoption of IFRS 16 Leases primarily included
judgement about whether the lease conveys the right to use a specific asset, whether the Company obtains substantially
all of the economic benefits from the use of the asset, whether the Company has the right to direct the use of the asset,
evaluating the appropriate discount rate to use to discount the lease liability for each lease or groups of assets, and to
Management's Discussion and Analysis, page 31
Fortuna Silver Mines Inc.
determine the lease term where a contract includes renewal options. Significant estimates, assumptions and judgements
over these factors would affect the present value of the lease liabilities, as well as the associated amount of the ROU asset.
Share Position and Outstanding Options and Equity Based Share Units
The Company has 160,291,553 common shares outstanding as at March 10, 2020. In addition, 4,225,391 incentive stock
options and equity-settled restricted share units are currently outstanding as follows:
Type of Security
Incentive Stock Options:
Equity-Settled Share Units:
Total outstanding
No. of Shares
$
$
$
$
517,833
617,694
640,951
7,551
1,784,029
195,375
1,185,548
3,916
1,056,523
2,441,362
4,225,391
Exercise
Price
(CAD$)
Expiry Date
4.79 March 18, 2020
6.35 May 28, 2022
6.20 March 18, 2023
7.15
June 4, 2023
Vesting Date
n/a May 29, 2020
n/a March 19, 2021
n/a
n/a March 15, 2022
June 5, 2021
During the year ended December 31, 2019, the Company granted 422,609 (2018 – 1,002,166) equity-settled performance
share units which vest as follows: 20% on the first anniversary, 30% on the second anniversary and 50% on the third
anniversary of the date of grant based on prescribed performance metrics. The share units granted in the current period
are subject to a multiplier ranging from 50% to 200% depending on the achievement level of certain performance targets.
The fair value of the share units on the grant date was $3.62 (C$4.83) (year ended December 31, 2018 –$4.71 (C$6.20).
During the year ended December 31, 2019 the Company granted 633,914 (2018 – 422,030) equity-settled restricted share
units at a price of $3.62 (C$4.83) per share unit (2018 – between $4.71 (C$6.20) and $5.54 (C$7.15) per share unit).
As at December 31, 2019, the Company has $46.0 million of Debentures that are convertible at the holder’s option into
common shares in the capital of the Company at a conversion price of $5.00 per share, representing a conversion rate of
200 Common Shares per $1,000 principal amount of Debentures, subject to adjustment in certain circumstances. Subject
to certain exceptions in connection with a change of control of the Company, the Debentures will not be redeemable by the
Company prior to October 31, 2022. On or after October 31, 2022 and prior to October 31, 2023, the Debentures may be
redeemed in whole or in part from time to time at the Company’s option at a price equal to their principal amount plus
accrued and unpaid interest, provided that the volume weighted average trading price of the Common Shares on the NYSE
for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the redemption
is given is at least 125% of the Conversion Price. On and after October 31, 2023, the Debentures may be redeemed in whole
or in part from time to time at the Company’s option at a price equal to their principal amount plus accrued and unpaid
interest regardless of the trading price of the Common Shares.
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,
Management's Discussion and Analysis, page 32
Fortuna Silver Mines Inc.
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).
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 effective as at December 31, 2019.
Management’s Report on Internal Control over Financial Reporting
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and preparation of financial statements for external reporting purposes in accordance with IFRS as
issued by the International Accounting Standards Board. However, due to its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements and fraud.
Management assesses the effectiveness of the Company’s internal control over financial reporting using the Internal Control
– Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the Treadway Commission.
Management conducted an evaluation of the effectiveness of internal control over financial reporting and concluded that
it was effective as at December 31, 2019.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting for the year ended December 31,
2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Non-GAAP Financial Measures
This MD&A refers to various Non-GAAP Financial Measures, including cash cost per payable ounce of silver equivalent; cash
cost per tonne of processed ore; total production cash cost per tonne; all-in sustaining cash cost per payable ounce of silver
equivalent production; all-in sustaining cash cost per payable ounce of silver equivalent production; free cash flow and free
cashflow from ongoing operations; adjusted net income; and adjusted EBITDA.
These measures are used by the Company to manage and evaluate operating performance and ability to generate cash flow
and are widely reported in the mining industry as benchmarks for performance. The Company believes that certain investors
use these Non-GAAP Financial Measures to evaluate the Company’s performance. However, the measures do not have a
standardized meaning and may differ from measures used by other companies with similar descriptions. Accordingly, Non-
GAAP Financial Measures should not be considered in isolation or as a substitute for measures of performance prepared in
accordance with IFRS. The Company has calculated these measures consistently for all periods presented.
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 Equivalent Production and Cash Cost per Tonne of Processed Ore
Cash cost per payable ounce of silver equivalent production and total production 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
Management's Discussion and Analysis, page 33
Fortuna Silver Mines Inc.
under 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 equivalent production to the cost of sales in the consolidated financial statements for the three and twelve months
ended December 31, 2019 and 2018.
CONSOLIDATED MINE CASH COST SILVER EQUIVALENT
(Expressed in $'000's, except unit costs)
Cost of sales
Change in concentrate inventory
Depletion and depreciation in concentrate inventory
Inventory adjustment
IFRS 16 embedded lease adjustment
Commercial and government royalties and mining
taxes
Provision for community support
Workers participation
Depletion and depreciation
Cash cost
Cash cost
Treatment charges
Refining charges
Cash cost applicable per payable ounce
Payable ounces of silver equivalent production1
$
A $
A $
B
C
=B/
C $
Three Months Ended
December 31,
Years Ended
December 31,
2019
45,539 $
443
(178)
(1,257)
626
(1,462)
128
(1,922)
(11,309)
30,608 $
30,608 $
2,275
1,274
34,157
4,132,079
2018
42,247 $
(1,795)
648
(206)
-
2019
172,607 $
969
(280)
(1,327)
2,409
2018
166,725
(922)
384
(206)
-
(669)
231
(779)
(10,700)
28,977 $
28,977 $
-
950
29,927
(3,248)
(1,165)
(6,164)
(44,473)
110,931
110,931
-
4,434
115,365
4,018,731 16,806,749 17,693,738
(4,134)
282
(6,012)
(44,357)
120,157 $
120,157 $
10,060
5,011
135,228
Cash cost per ounce of payable silver equivalent2 ($/oz)
Notes:
1 Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.5:1 (Q4 2018: 84.6:1), silver to
lead of 1:18.7 pounds (Q4 2018: 1:16.3), and silver to zinc of 1:16.0 pounds (Q4 2018: 1:12.2), and YTD 2019: silver to
gold ratio of 86.0:1 (YTD 2018: 81.0:1), silver to lead of 1:17.9 pounds (YTD 2018: 1:15.4), and silver to zinc of 1:14.1
pounds (YTD 2018: 1:11.9)
2 Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc. Refer to Financial Results - Sales -
Sales and Realized Prices
8.27 $
7.45 $
8.05 $
6.52
Management's Discussion and Analysis, page 34
Fortuna Silver Mines Inc.
$
SAN JOSE MINE CASH COST SILVER EQUIVALENT
(Expressed in $'000's, except unit costs)
Cost of sales
Change in concentrate inventory
Depletion and depreciation in concentrate inventory
Inventory adjustment
IFRS 16 embedded lease adjustment
Commercial and government royalties and mining taxes
Workers participation
Depletion and depreciation
Cash cost
Total processed ore (tonnes)
Cash cost per tonne of processed ore ($/t)
Cash cost
Treatment charges
Refining charges
Cash cost applicable per payable ounce
Payable ounces of silver equivalent production1
Cash cost per ounce of payable silver equivalent2 ($/oz) =B/C
Mining cost per tonne
Milling cost per tonne
Indirect cost per tonne
Community relations cost per tonne
Distribution cost per tonne
Total production cost per tonne
Notes:
1 Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.5:1 (Q4 2018: 84.6:1) and for YTD 2019, silver
to gold ratio of 86.0:1 (YTD 2018: 80.9:1)
2 Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc. Refer to Financial Results - Sales - Sales and
Realized Prices
Three Months Ended
December 31,
2019
30,024 $
741
(231)
(1,235)
31
(844)
(1,779)
(7,541)
19,166
273,066
70.19 $
19,166 $
(542)
1,131
19,755
2,898,204
6.82 $
36.25 $
16.59
9.43
1.70
6.22
70.19 $
Years Ended
December 31,
2019
114,156 $
1,111
(325)
(1,235)
93
(3,385)
(5,293)
(30,736)
74,386
1,068,722
69.60 $
74,386 $
(990)
4,468
77,864
11,554,107
6.74 $
36.27 $
17.17
8.80
1.56
5.80
69.60 $
2018
27,407 $
(1,755)
628
-
-
(621)
(488)
(8,279)
16,892
256,181
65.94 $
16,892 $
-
825
17,717
2,610,093
6.79 $
33.36 $
17.17
8.82
1.28
5.31
65.94 $
2018
106,468
(717)
264
-
-
(3,030)
(4,438)
(32,251)
66,296
1,040,478
63.72
66,296
-
3,871
70,167
11,823,139
5.93
30.90
18.71
7.50
1.23
5.38
63.72
A
B
=A/B
A
B
C
$
$
$
$
$
Management's Discussion and Analysis, page 35
Fortuna Silver Mines Inc.
Three Months Ended
December 31,
Years Ended
December 31,
$
2019
2018
2018
2019
CAYLLOMA MINE CASH COST SILVER EQUIVALENT
(Expressed in $'000's, except unit costs)
Cost of sales
Change in concentrate inventory
Depletion and depreciation in concentrate inventory
Inventory adjustment
IFRS 16 embedded lease adjustment
Commercial and government royalties and mining taxes
Provision for community support
Workers participation
Depletion and depreciation
Cash cost
Total processed ore (tonnes)
Cash cost per tonne of processed ore ($/t)
Cash cost
Treatment charges
Refining charges
Cash cost applicable per payable ounce
Payable ounces of silver equivalent production1
Cash cost per ounce of payable silver equivalent2 ($/oz) =B/C
Mining cost per tonne
Milling cost per tonne
Indirect cost per tonne
Community relations cost per tonne
Distribution cost per tonne
Total production cost per tonne
Notes:
1 Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.6:1 (Q4 2018: 85.3:1) , silver to lead of 1:18.7
pounds (Q4 2018: 1:16.3), and silver to zinc of 1:16.0 pounds (Q4 2018: 1:12.2), and YTD 2019: silver gold ratio of 85.8:1 (YTD 2018:
85.3:1), silver to lead of 1:17.9 pounds (YTD 2018: 1:15.4), and silver to zinc of 1:14.1 pounds (YTD 2018: 1:11.9)
2 Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc. Refer to Financial Results - Sales - Sales and
Realized Prices
14,840 $
(40)
20
(206)
-
(48)
231
(291)
(2,421)
12,085
135,034
89.50 $
12,085 $
-
125
12,210
1,408,638
8.67 $
44.94 $
13.92
21.11
2.42
7.11
89.50 $
58,451 $
(142)
45
(92)
2,316
(749)
282
(719)
(13,621)
45,771
531,307
86.15 $
45,771 $
11,050
543
57,364
5,252,643
10.92 $
41.26 $
14.17
22.35
1.19
7.18
86.15 $
15,515 $
(298)
53
(22)
595
(618)
128
(143)
(3,768)
11,442
133,270
85.86 $
11,442 $
2,817
143
14,402
1,233,875
11.67 $
41.60 $
14.15
20.23
2.26
7.62
85.86 $
60,257
(205)
120
(206)
-
(218)
(1,165)
(1,726)
(12,222)
44,635
534,773
83.47
44,635
-
564
45,199
5,916,133
7.64
41.35
14.41
19.61
1.06
7.04
83.47
A
B
=A/B
A
B
C
$
$
$
$
$
All-in Sustaining Cash Cost and All-in Cash Cost per Payable Ounce of Silver Equivalent Production
The Company believes that “all-in-sustaining cash cost silver equivalent” and “all-in cash cost silver equivalent” meet the
needs of management, analysts, investors, and other stakeholders of the Company in understanding the costs associated
with producing silver, the economics of silver mining, the Company’s operating performance and the Company’s ability to
generate 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 cost definition to that set out in the guidance issued by the World Gold Council (“WGC”).
All-in-sustaining cash cost silver equivalent and all-in cash cost silver equivalent are intended to provide additional
information only and do not have standardized definitions under IFRS and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with IFRS. These measures are not necessarily indicative
of operating profit or cash flow from operations as determined under IFRS. Although the WGC has published a standardized
definition, companies may calculate these measures differently.
Management's Discussion and Analysis, page 36
Fortuna Silver Mines Inc.
All-in sustaining cash cost includes total production cash costs incurred at the Company’s mining operations. Sustaining
capital expenditures, corporate selling, general and administrative expenses, and brownfield exploration expenditures are
added to the cash cost to calculate the all-in-sustaining cost. The Company believes that this measure represents the total
costs of producing silver from operations and provides the Company and its stakeholders with additional information on the
Company’s operational performance and the ability to generate cash flows. Certain cash expenditures such as new project
spending, tax payments, dividends, and financing costs are not included. We report this measure on a payable silver
equivalent ounce produced basis. Silver equivalent production is calculated taking the total metal payable production of
gold, lead and zinc multiplied by the realized prices of gold, lead, and zinc and divided by the realized silver price to calculate
the silver equivalent production.
The following tables show a breakdown of the all-in sustaining cash cost per silver equivalent ounce for the three and twelve
months ended December 31, 2019 and 2018.
Three Months Ended
Years Ended
$
December 31,
December 31,
2019
34,157 $
2,389
2,405
3,499
42,450
2,439
6,224
863
51,976
402
27,664
80,042
4,132,079
CONSOLIDATED MINE ALL-IN CASH COST SILVER
EQUIVALENT
(Expressed in $'000's, except unit costs)
Cash cost applicable
Commercial and government royalties and mining tax
Workers' participation
General and administrative expenses (operations)
Adjusted operating cash cost
General and administrative expenses (corporate)
Sustaining capital expenditures3
Brownfield exploration expenditures3
All-in sustaining cash cost
Exploration and evaluation expenses
Non-sustaining capital expenditures3
All-in cash cost
Payable ounces of silver equivalent production1
All-in sustaining cash cost per ounce of payable silver
equivalent2
All-in cash cost per ounce of payable silver equivalent2
Notes:
1 Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.5:1 (Q4 2018: 84.6:1), silver to lead of 1:18.7
pounds (Q4 2018: 1:16.3), and silver to zinc of 1:16.0 pounds (Q4 2018: 1:12.2), and YTD 2019: silver to gold ratio of 86.0:1 (YTD 2018:
81.0:1), silver to lead of 1:17.9 pounds (YTD 2018: 1:15.4), and silver to zinc of 1:14.1 pounds (YTD 2018: 1:11.9)
2 Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc. Refer to Financial Results - Sales - Sales and
Realized Prices
3 Presented on a cash basis
2019
135,228 $
9,948
7,489
10,899
163,564
11,416
20,409
4,777
200,166
2,411
190,294
392,871
4,018,731 16,806,749
2018
115,365
10,081
7,564
10,097
143,107
10,991
23,986
8,638
186,722
726
83,335
270,783
17,693,738
2018
29,927 $
1,718
945
2,970
35,560
2,696
9,369
1,584
49,209
180
40,556
89,945
12.58 $
19.37 $
12.24 $
22.38 $
11.91 $
23.38 $
10.55
15.30
$
$
Management's Discussion and Analysis, page 37
Fortuna Silver Mines Inc.
Three Months Ended
December 31,
Years Ended
December 31,
$
2019
2018
SAN JOSE MINE ALL-IN CASH COST SILVER EQUIVALENT
(Expressed in $'000's, except unit costs)
Cash cost applicable
Commercial and government royalties and mining tax
Workers' participation
General and administrative expenses (operations)
Adjusted operating cash cost
Sustaining capital expenditures3
Brownfield exploration expenditures3
All-in sustaining cash cost
Exploration and evaluation expenses
All-in cash cost
Payable ounces of silver equivalent production1
All-in sustaining cash cost per ounce of payable silver
equivalent2
All-in cash cost per ounce of payable silver equivalent2
Notes:
1. Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.5:1 (Q4 2018: 84.6:1) and for YTD 2019, silver
to gold ratio of 86.0:1 (YTD 2018: 80.9:1)
2. Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc. Refer to Financial Results - Sales - Sales and
Realized Prices
3. Presented on a cash basis
2018
70,167
8,293
5,548
6,414
90,422
9,277
6,947
106,646
156
106,802
2,610,093 11,554,107 11,823,139
19,755 $
2,252
2,223
1,919
26,149
3,737
649
30,535
-
30,535
2,898,204
2019
77,864 $
8,605
6,616
6,475
99,560
9,969
4,077
113,606
-
113,606
17,717 $
1,398
610
1,911
21,636
2,723
1,361
25,720
63
25,783
10.54 $
10.54 $
9.85 $
9.88 $
9.83 $
9.83 $
9.02
9.03
$
$
Three Months Ended
December 31,
Years Ended
December 31,
$
2019
2018
14,402 $
137
179
1,580
16,298
2,487
214
18,999
259
19,258
1,233,875
CAYLLOMA MINE ALL-IN CASH COST SILVER EQUIVALENT
(Expressed in $'000's, except unit costs)
Cash cost applicable
Commercial and government royalties and mining tax
Workers' participation
General and administrative expenses (operations)
Adjusted operating cash cost
Sustaining capital expenditures3
Brownfield exploration expenditures3
All-in sustaining cash cost
Non-sustaining capital expenditures1
All-in cash cost
Payable ounces of silver equivalent production1
All-in sustaining cash cost per ounce of payable silver
equivalent2
All-in cash cost per ounce of payable silver equivalent2
Notes:
1. Silver equivalent production for Q4 2019 is calculated using a silver to gold ratio of 85.6:1 (Q4 2018: 85.3:1) , silver to lead of 1:18.7
pounds (Q4 2018: 1:16.3), and silver to zinc of 1:16.0 pounds (Q4 2018: 1:12.2), and YTD 2019: silver gold ratio of 85.8:1 (YTD 2018:
85.3:1), silver to lead of 1:17.9 pounds (YTD 2018: 1:15.4), and silver to zinc of 1:14.1 pounds (YTD 2018: 1:11.9)
2. Silver equivalent is calculated using the realized prices for gold, silver, lead, and zinc. Refer to Financial Results - Sales - Sales and
Realized Prices
3. Presented on a cash basis
2019
57,364 $
1,343
864
4,424
63,995
10,440
700
75,135
705
75,840
5,252,643
12,210 $
320
335
1,059
13,924
6,646
223
20,793
-
20,793
1,408,638
2018
45,199
1,788
2,016
3,683
52,686
14,709
1,691
69,086
-
69,086
5,916,133
14.76 $
14.76 $
15.40 $
15.61 $
14.30 $
14.44 $
11.68
11.68
$
$
Management's Discussion and Analysis, page 38
Fortuna Silver Mines Inc.
Free Cash Flow and Free Cash Flow From Ongoing Operations
The Company uses the financial measure of “free cash flow” and “free cash flow from ongoing operations” to supplement
information in its consolidated financial statements. Free cash flow is defined as cash provided from operating activities less
purchases of mineral properties, plant and equipment, less net deposits on long term assets, less current income tax, and
add back income taxes paid. This measure is used by the Company and investors to measure the cash flow available to fund
the Company’s growth through investments and capital expenditures. These performance measures are intended to
provide additional information only and do not have standardized definitions under IFRS and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with IFRS. These measures are not
necessarily indicative of operating profits or cash flow from operations as determined under IFRS.
The following table presents a reconciliation of free cash flow from ongoing operations for the three and twelve months
ended December 31, 2019 and 2018:
Three months ended
December 31,
$
$
(Expressed in $ millions)
Net cash provided by operating activities
Less: Accrued interest
Less: Change in long term receivables
Less: Additions to mineral properties, plant and equipment
Less: Contractor advances for plant and equipment
Add: Advances applied to plant and equipment
Less: Current income tax expense
Add: Income taxes paid
Free cash flow from ongoing operations1
Note:
1. From ongoing operations including San Jose and Caylloma and excludes Greenfields exploration
2019
19.2
(1.5)
-
(7.6)
-
-
(8.2)
4.5
6.4
2018
19.3 $
-
-
(10.5)
-
0.1
(3.9)
6.8
11.8 $
$
$
$
Years ended
December 31,
2019
63.0
-
(1.5)
(26.0)
(0.6)
0.7
(32.6)
31.5
34.5
$
2018
83.5
-
-
(33.3)
(1.3)
1.2
(30.6)
35.7
55.2
Adjusted Net Income
The Company uses the financial measure of “adjusted net 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 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 $ millions)
Net income
Adjustments, net of tax:
Community support provision
Foreign exchange loss, Lindero project
Income tax, Lindero project
Income tax, convertible debentures
Share of loss from associates
Investment income
Other non-cash items
Adjusted Net Income
Three months ended
December 31,
2019
19.0 $
2018
2.2 $
Years ended
December 31,
2019
23.8 $
$
(0.1)
1.0
-
(1.9)
0.1
(11.0)
3.8
$
10.9 $
(0.2)
3.9
(2.8)
-
0.1
-
1.2
4.4 $
(0.2)
11.5
(1.1)
(1.9)
0.2
(11.0)
7.1
28.4 $
2018
34.0
0.8
3.9
1.0
-
-
-
(1.3)
38.4
Management's Discussion and Analysis, page 39
Fortuna Silver Mines Inc.
Adjusted EBITDA
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
item described and presented below 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. The Company
believes that its presentation provides useful information for investors.
(Expressed in $ millions)
Net income
Adjustments:
Community support provision
Inventory adjustment
Foreign exchange loss, Lindero project
Net finance items
Depreciation, depletion, and amortization
Income taxes
Share of loss from associates
Investment income
Other non-cash items
Adjusted EBITDA
Qualified Person
Three months ended
December 31,
2019
19.0 $
2018
2.2 $
$
Years ended
December 31,
2019
23.8 $
(0.1)
1.3
1.0
(0.1)
11.6
1.1
0.1
(11.0)
2.2
(0.3)
0.2
3.9
(0.4)
10.8
4.9
0.1
-
1.3
(0.3)
1.3
11.5
(0.3)
46.0
20.2
0.2
(11.0)
4.0
$
25.1 $
22.7 $
95.4 $
2018
34.0
1.1
0.2
3.9
(0.4)
44.8
33.4
-
-
(3.0)
113.9
Eric Chapman, P.Geo (APEGBC #36328) is the Vice-President of Technical Services for the Company and is the Company’s
Qualified Person (as defined by National Instrument 43-101). Mr. Chapman has reviewed and approved the scientific and
technical information contained in this MD&A.
Other Information, 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 Company’s most recent Annual Information Form that is available at www.sedar.com and
www.sec.gov/edgar.shtml.
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 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;
•
Management's Discussion and Analysis, page 40
Fortuna Silver Mines Inc.
•
•
•
•
•
•
•
•
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 greenfield exploration programs;
the Company’s planned capital expenditures and brownfields exploration at the San Jose Mine;
the Company’s planned capital expenditures and brownfields exploration at the Caylloma Mine;
the Company’s planned capital expenditures and brownfields exploration at the Lindero Project;
the Company’s construction of the open pit gold heap leach mine at the Lindero Project and the anticipated timing
of commissioning and commencement of commercial production of the mine;
expiry dates of bank letters of guarantee;
litigation matters;
estimated mine closure costs; and
• maturities of the Company’s financial liabilities, finance leases and other contractual commitments;
•
•
•
• management’s expectation that any investigations, claims, and legal, labour 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 relating to 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;
uncertainty and risks related to the start-up of the Lindero Project;
uncertainty relating to capital and operating costs and economic returns of development projects such as the
Lindero Project;
risks related to the construction, commissioning and commencement of commercial production at the Lindero
Project;
risks associated with mineral exploration and project development;
uncertainty relating to the repatriation of funds as a result of currency controls;
environmental matters including potential liability claims;
uncertainty relating to nature and climate conditions;
risks associated with political instability and changes to the regulations governing the Company’s business
operations;
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 relating to the termination of the Company’s mining concessions in certain circumstances;
risks related to International Labour Organization (“ILO”) Convention 169 compliance;
developing and maintaining relationships with local communities and stakeholders;
risks associated with losing control of public perception as a result of social media and other web-based
applications;
•
•
•
•
•
•
•
•
•
•
•
Management's Discussion and Analysis, page 41
Fortuna Silver Mines Inc.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
potential 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;
substantial reliance on the Caylloma Mine and San Jose Mine for revenues;
property title matters;
risks relating to the integration of businesses and assets acquired by the Company;
impairments;
risks associated with climate change legislation;
reliance on key personnel;
uncertainty relating to potential conflicts of interest involving the Company’s directors and officers;
risks associated with the Company’s reliance on local counsel and advisors and the experience of its management
and board of directors in foreign jurisdictions;
adequacy of insurance coverage;
risks related to the Company’s compliance with the United States Sarbanes-Oxley Act;
risks related to the foreign corrupt practices regulations and anti-bribery laws;
potential legal proceedings; to which it is a party;
the Company is subject to any adverse ruling in any of the litigation
uncertainties relating to general economic conditions;
risks relating to a global pandemic, which unless contained could cause a slowdown in global economic growth and
impact the Company’s business, operations, financial condition and share price;
competition;
fluctuations in metal prices;
risks associated with entering into commodity forward and option contracts for base metals production;
fluctuations in currency exchange rates;
tax audits and reassessments;
uncertainty relating to concentrate treatment charges and transportation costs;
sufficiency of monies allotted by the Company for land reclamation;
dilution from equity or convertible debenture financings; and
risks associated with dependence upon information technology systems, which are subject to disruption, damage,
failure and risks with implementation and integration.
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 labour, supply, power, damage to
equipment or other matter;
• permitting, construction, development, expansion, and production continuing on a basis consistent with the
Company’s current expectations;
• expected trends and specific assumptions regarding metal prices and currency exchange rates;
Management's Discussion and Analysis, page 42
Fortuna Silver Mines Inc.
• 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
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 the securities laws currently in effect in the United States.
Canadian standards, including National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”),
differ significantly from the disclosure requirements of U.S securities laws currently in effect, and Mineral Reserve and
Mineral Resource information contained or incorporated by reference in this MD&A may not be comparable to similar
information disclosed by United States companies. Equivalent U.S. disclosure requirements are currently governed by the
United States Securities and Exchange Commission (“SEC”) Industry Guide 7 (“Industry Guide 7”) under the U.S. Securities
Act of 1933, as amended. In particular, and without limiting the generality of the foregoing, the term Mineral Resource does
not equate to the term “reserve”. Under the SEC’s disclosure standards currently in effect under Industry Guide 7,
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
such U.S. standards currently in effect. The SEC has not recognised the reporting of mineral deposits which do not meet the
Industry Guide 7 definition of “reserve” prior to the adoption of the Modernization of Property Disclosures for Mining
Registrants, which rules will be required to be complied with in the first fiscal year beginning on or after January 1, 2021. As
a result, the SEC’s disclosure standards currently in effect 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’s disclosure standards currently in effect
under Industry Guide 7 normally only permit 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’s disclosure standards currently in effect under
Industry Guide 7, and Mineral Reserves reported in compliance with NI 43-101 may not qualify as “reserves” under such
SEC standards. Accordingly, information contained in this MD&A or any 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.
Management's Discussion and Analysis, page 43
EXHIBIT 99.4
KPMG LLP
Chartered Professional Accountants
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone
Telephone
Fax
Fax
Internet
Internet
(604) 691-3000
(604) 691-3000
(604) 691-3031
(604) 691-3031
www.kpmg.ca
www.kpmg.ca
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Fortuna Silver Mines Inc.
We consent to the use of our reports, each dated March 10, 2020, with respect to the consolidated financial
statements of Fortuna Silver Mines Inc. as at December 31, 2019 and 2018 and for the years then ended and the
effectiveness of internal control over financial reporting as of December 31, 2019, included in this annual report on
Form 40-F.
Our report on the consolidated financial statements refers to changes to accounting policy for leases in 2019 due to
the adoption of IFRS 16, Leases.
/s/ KPMG LLP
Chartered Professional Accountants
March 30, 2020
Vancouver, Canada
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 Mine, Caylloma District, Peru” dated effective March 8, 2019 (the “Caylloma Report”),
evaluating the Caylloma Mine of Fortuna Silver Mines Inc. (the “Company”), the technical report entitled
“Fortuna Silver Mines Inc.: San Jose Mine, Oaxaca, Mexico” dated effective February 22, 2019 (the “San
Jose Report”), evaluating the San Jose Mine of the Company, and the technical report entitled “Fortuna
Silver Mines Inc.: Lindero Property, Salta Province, Argentina” dated effective October 31, 2017, evaluating
the Lindero Property of the Company (together with the Caylloma Report and the San Jose 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, 2019 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 Reserve and Mineral Resource estimates for the Caylloma Mine, the San Jose Mine
and the Lindero Project 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, 2019 included in the Company’s Annual Report on Form 40-F for the year ended December
31, 2019 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, 2019 included in the
Company’s Annual Report on Form 40-F for the year ended December 31, 2019 filed with the United States
Securities and Exchange Commission.
Dated: March 30, 2020
“Eric Chapman”
Eric Chapman, P.Geo.
EXHIBIT 99.6
CONSENT OF AMRI SINUHAJI
CONSENT OF AUTHOR / EXPERT
I hereby consent to:
1.
the use of my name, Amri Sinuhaji, and reference to my name, the technical report entitled “Fortuna Silver
Mines Inc.: Caylloma Mine, Caylloma District, Peru” dated effective March 8, 2019 (the “Caylloma Report”),
evaluating the Caylloma Mine of Fortuna Silver Mines Inc. (the “Company”), and the technical report
entitled “Fortuna Silver Mines Inc.: San Jose Mine, Oaxaca, Mexico” dated effective February 22, 2019,
evaluating the San Jose Mine 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, 2019 filed with the United States Securities and
Exchange Commission; and
2.
the use of my name, Amri Sinuhaji, and reference to my name, and the technical information relating to
the updated Mineral Reserve and Mineral Resource estimates for the Caylloma Mine, the San Jose Mine
and the Lindero Project 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, 2019 included in the Company’s Annual Report on Form 40-F for the year ended December
31, 2019 filed with the United States Securities and Exchange Commission
Dated: March 30, 2020
“Amri Sinuhaji”
Amri Sinuhaji, P.Eng.
EXHIBIT 99.7
CONSENT OF EDWIN GUTIERREZ
CONSENT OF AUTHOR / EXPERT
I hereby consent to the use of my name, Edwin Gutierrez, and reference to my name, the technical report entitled
“Fortuna Silver Mines Inc.: Lindero Property, Salta Province, Argentina” dated effective October 31, 2017, evaluating
the Lindero Property of the Company (the “Lindero Report”), and the information contained in the Lindero Report
described or incorporated by reference in the Company’s Annual Report on Form 40-F for the year ended December
31, 2019 filed with the United States Securities and Exchange Commission.
Dated: March 30, 2020
“Edwin Gutierrez”
Edwin Gutierrez,
Registered Member of the Society for Mining, Metallurgy and Exploration, Inc.
EXHIBIT 99.8
CONSENT OF GEOFF ALLARD
CONSENT OF AUTHOR / EXPERT
I hereby consent to the use of my name, Geoff Allard, and reference to my name and the technical report entitled
“Fortuna Silver Mines Inc.: Lindero Property, Salta Province, Argentina” dated effective October 31, 2017, evaluating
the Lindero Property of the Company (the “Lindero Report”), and the information contained in the Lindero Report
described or incorporated by reference in the Company’s Annual Report on Form 40-F for the year ended December
31, 2019 filed with the United States Securities and Exchange Commission.
Dated: March 30, 2020
“Geoff Allard”
Geoff Allard, PE
EXHIBIT 99.9
CONSENT OF DENYS PARRA MURRUGARRA
CONSENT OF AUTHOR / EXPERT
I hereby consent to the use of my name, Denys Parra Murrugarra, and reference to my name and the technical report
entitled “Fortuna Silver Mines Inc.: Lindero Property, Salta Province, Argentina” dated effective October 31, 2017,
evaluating the Lindero Property of the Company (the “Lindero Report”), and the information contained in the
Lindero Report described or incorporated by reference in the Company’s Annual Report on Form 40-F for the year
ended December 31, 2019 filed with the United States Securities and Exchange Commission.
Dated: March 30, 2020
“Denys Parra Murrugarra”
Denys Parra Murrugarra,
Registered Member of the Society for Mining, Metallurgy and Exploration, Inc.
EXHIBIT 99.10
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Jorge Ganoza Durant, certify that:
1. I have reviewed this annual report on Form 40-F of Fortuna Silver Mines Inc. (the “issuer”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in this report;
4. The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the issuer, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred
during the period covered by the annual report that has materially affected, or is reasonably likely to
materially affect, the issuer’s internal control over financial reporting; and
5. The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the issuer’s internal control over financial reporting.
Dated: March 30, 2020
“Jorge Ganoza Durant”
Name: Jorge Ganoza Durant
Title:
President, Chief Executive Officer & Director
(principal executive officer)
EXHIBIT 99.11
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Luis Ganoza Durant, certify that:
1. I have reviewed this annual report on Form 40-F of Fortuna Silver Mines Inc. (the “issuer”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in this report;
4. The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the issuer, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred
during the period covered by the annual report that has materially affected, or is reasonably likely to
materially affect, the issuer’s internal control over financial reporting; and
5. The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the issuer’s internal control over financial reporting.
Dated: March 30, 2020
“Luis Ganoza Durant”
Luis Ganoza Durant
Name:
Chief Financial Officer
Title:
(principal financial officer)
EXHIBIT 99.12
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Fortuna Silver Mines Inc. (the “Company”) on Form 40-F for the fiscal year
ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, Jorge Ganoza Durant, President, Chief Executive Officer & Director of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: March 30, 2020
“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 99.13
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, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, Luis Ganoza Durant, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: March 30, 2020
“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.