Inflation remains elevated, sparking fears that central banks may raise interest rates. A tighter monetary policy could slow down the economic recovery while households and businesses are still in need of support. However, keeping interest rates low is also proving to be harmful.
China, the second-largest economy in the world, saw its third-quarter gross domestic product grow by less than 5% year over year, down nearly 300 basis points from the previous quarter, creating tension among investors as they see this as a warning sign of stagflation. The situation is similar in the U.S., with GDP growth now expected to be lower than inflation.
Due to the spread of the delta variant, there is still a lot of uncertainty on the horizon, boosting expectations for higher volatility.
When prices of securities fluctuate too much compared to the norm, investors do not have many options to shelter the value of their assets other than jumping into precious metals as these commodities are considered safe-haven assets during tough periods.
Silver is a good candidate for this purpose. Silver futures with expirations in December were at $23.762 per troy ounce during trading hours on Tuesday. With an increase of 5.2% last week and 6.6% jump last month, the metal is back in rally mode following the year-to-date drop of 10%.
Silver prices are expected to go up even further. Analysts' expectations are now for a level of $25.65 per troy ounce to reach in 12 months' time, reflecting 7.5% upside.
As such, investors may want to consider gaining exposure to publicly traded silver mining companies as their shares usually move up faster than the metal when the commodity market is bullish.
The Canadian miner with mineral assets in West Africa, Central and South America, holds catalysts that could make the share price increase like crazy on the market, eventually beating the sell-side analysts' average target price of $5.60, which is already implying a hefty upside of 25% from current levels.
Silver operations are performing as expected with the first nine months' output of nearly 5.52 million ounces, which was abundantly within the company's guidance range for consolidated production.
For the entire year, Fortuna Silver Mines targets to mine between 6.8 million and 7.6 million ounces of silver. There is a strong chance production will hit the upper limit. In fact, mining activities at the Caylloma mine in Peru are moving to an area called the Animas Northeast vein, where silver reserves are characterized by higher mineralization than adjacent deposits. Animas is on track to become the new center of the company's silver production in Peru.
Fortuna Silver Mines also produces gold, lead and zinc. Its gold mining activities are poised to boost the company's financials further over the next several quarters.
In the worst-case scenario, gold operations at the Lindero mine in Argentina will continue to perform in line with guidance, but following the third-quarter output record, there are now expectations for higher-than-expected production. Also, the government of Argentina should start easing travel restrictions in November, which will improve delivery times and will make it easier for foreign vendors to provide technical assistance.
Additionally, starting in the final quarter of 2021, the Yaramoko gold mine in Burkina Faso is also expected to increase its contribution as a mechanical issue with the grinding mill has finally been fixed and the resequencing of the production stopes has been completed.
In the first nine months of 2021, the company mined slightly over 131,000 ounces of gold, which was in line with the company's plan. For the entire year, the miner is guiding for between 194,000 ounces and 223,000 ounces.
The assets of Fortuna Silver Mines yield high rates of return, outpacing most of the competitors as indicated by a trailing Ebitda margin rate of 45.6% versus the industry median of 25.3%.
Fortuna Silver Mines also holds a metallic development project in the Ivory Coast. In addition to cash flows from operations, the company can use approximately $123 million available in cash on hand to fund this project, maintain current activities and try to hit the upper limit of its guidance range on consolidated production.
The company trades on the New York Stock Exchange with a market valuation of $4.7 per share. The market cap is $1.38 billion and the 52-week range is $3.74 to $9.85.
Shares can also be purchased on the Toronto stock exchange, where they are changing hands at 5.57 Canadian dollars ($4.51) each for a market cap of CA$162 billion and a 52-week range of CA$4.71 to CA$12.61.
The share price is about 10% above the 50-day moving average, but still more than 16% below the 200-day moving average.
I believe that Fortuna Silver Mines’ shares are undervalued given the upside potential that the market has not appreciated yet.