In spite of falling commodity prices, Fortuna Silver (FSM, Financial) reported solid results in the fourth quarter with year-over-year growth in both revenue and profits. Its shares, however, continued its downward momentum led by weak silver prices, and the stock is currently trading near its 52-week low. But the company has a sound financial standing and looks poised for future growth even as silver prices are expected to increase in the days ahead. Let’s see in detail what to expect from the company and subsequently our take on it.
Positive moves
The cost reduction drivers were mainly led by increased metal output coupled with higher grade ores. Not only this, the company has been resizing its staff for the past two years reducing around 53% of its staff over this span. All these efforts led to combined growth reductions amounting to $6 million in the past two years. The company will continue such initiatives that will enhance its bottom line in the days ahead.
During the quarter its revenue rose 4% from a year ago period to $37.8 million, while profits declined to $0.2 million compared to $3 million last year.
Going forward, mixed cues are coming in from the market with regard to gold and silver prices. The main demand are expected to come from India with commentators proposing that it may once again become world’s number one gold consumer. In 2014, the country had imported approximately 1,000 tonnes of gold, while the global gold output was around 3,000 tonnes. This shows that India has a significant contribution in the global consumption of the yellow metal. But it is not the only one that consumes gold. In fact, most of the Asian and Middle Eastern countries have significant consumption.
In spite of this pegged up demand analysts are bearish on these metals. Analyst Suki Cooper at Barclays Bank said:
“We believe silver's lows for the year could test levels not reached since 2009" at $12 per ounce. Another report stated “The average analyst forecast for silver's average 2015 price is $16.76 per ounce, some 12.2% below the 2014 outcome. Gold prices on the other hand will average 4.4% less from last year at $1211 per ounce.”
Conclusion
The company currently has a trailing P/E of 30.75, but its forward P/E looks impressive at 17.57, reflecting that its earnings will improve in the days to come. Its aggressive cost reduction efforts also point to the same. Albeit, the numbers are good and point towards improving fundamentals but for the stock to turn around, improvement in metal prices is also mandatory. From the above estimates we cannot expect an immediate boost in commodity prices, but we could hope that a turnaround is on the way. Investors must be cautiously optimistic on this stock and keep a close eye on the precious metals.
