Why this $ 5 silver stock sank 20% in June and is falling


What happened

Actions of Fortuna Silver Mines (NYSE: FSM) fell 20.1% in June, according to data provided by S&P Global Market Intelligence. With this drop, the silver mining stock has given up all of its May gains, then some, and the stock is not over yet: it’s already down around 7% so far in July. . The recent acquisition of the company, even as silver prices were hit, did not follow the market well.

So what

Earlier in April, Fortuna Silver announced plans to acquire Canada-based gold mining company Roxgold in a stock and cash transaction valued at nearly C $ 1.1 billion. This represented a steep premium of 42% over Roxgold’s last closing price on the Toronto Stock Exchange. Investors did not like the higher premium, and they ditched Fortuna Silver shares shortly thereafter.

Fortuna Silver, however, managed to regain investor confidence when it reported its highest quarterly net profit on record in May. With silver prices also rising at the same time, investors were hopeful that the acquisition of Roxgold would unlock more value. Between April and May alone, silver prices rose almost 20%, which is part of the reason why Fortuna Silver shares posted a double-digit rise in May.

Image source: Getty Images.

The price of silver, however, slowed in June as encouraging macroeconomic data began to flow. and the prices of stocks of precious metals, above the cliff. Although several factors influence the price of precious metals, they become less attractive in a rising interest rate environment as investors sell precious metals and place their money in interest-bearing investments.

In addition, unlike gold which is mainly used in jewelry, silver is more of an industrial metal. The price of silver is therefore also influenced by the evolution of the prices of base metals. With the price of metals like copper falling in June, silver also felt the heat.

Since Fortuna Silver is a pure silver company, falling silver prices would directly affect the company’s revenue. Even though its proposed acquisition of Roxgold gained shareholder approval on June 28, the market has become increasingly suspicious of the company’s prospects, especially as silver prices have fallen.

Now what

It looks like the market has gotten a bit too pessimistic about Fortuna Silver. Thanks to the company’s acquisition of Roxgold on July 2, Fortuna has now extended its reach to West Africa with two mines, one operational and the other in development.

Additionally, Roxgold was a low-leverage company, and the acquisition increased Fortuna’s estimated Silver Equivalent (SEO) production by almost 39% in 2021 while reducing its cost of all-in-one maintenance. a (AISC). In fact, Fortuna Silver estimates its 2021 AISC to be the lowest among major silver miners at $ 951 per referral. Long-term investors might therefore want to pay attention to this silver stock.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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