Shares of Fortuna Silver Mines (NYSE:FSM) sank 20.1% in the month of June, according to data provided by S&P Global Market Intelligence. With that drop, the silver mining stock gave up all of its gains from May and then some, and the stock isn’t done just yet: It’s already down about another 7% so far in July. The company’s recent acquisition, even as silver prices got whacked, didn’t go down well with the market.
Earlier in April, Fortuna Silver announced its plan to acquire Canada-based gold mining company Roxgold in a stock-and-cash deal valued at nearly 1.1 billion Canadian dollars. That represented a steep 42% premium to Roxgold’s last closing price on the Toronto Stock Exchange. The higher premium didn’t sit well with investors, and they dumped Fortuna Silver shares soon thereafter.
Fortuna Silver, however, managed to win back investor confidence when it reported its highest-ever quarterly net income in May. With silver prices also rising meanwhile, investors hoped the Roxgold acquisition would unlock greater value. Between April and May alone, silver prices rallied nearly 20%, which partly explains why Fortuna Silver shares rallied double-digits in May.
The price of silver, however, hit the brakes in June as encouraging macro data started to pour in. Strong jobs data and the Federal Reserve hinting at two potential interest-rate increases by the end of 2023 were enough to send silver and gold prices, and prices of precious metal stocks, over the cliff. While several factors influence the price of precious metals, they become less alluring in a rising interest rate environment as investors sell precious metals and park their money in interest-bearing investments instead.
Moreover, unlike gold which is primarily used in jewelry, silver is more of an industrials metal. The price of silver, therefore, is also influenced by the move in prices of base metals. With prices of metals like copper tumbling in June, silver also felt the heat.
Since Fortuna Silver is a pure-play silver company, declining silver prices would directly hit the company’s top line. Even though its proposed acquisition of Roxgold won shareholder approval on June 28, the market became increasingly wary about the company’s prospects, especially as silver prices declined.
It appears the market may have turned a bit too pessimistic about Fortuna Silver. Thanks to the company’s acquisition of Roxgold on July 2, Fortuna has now expanded its reach to West Africa with two mines — one operational and another under development.
Also, Roxgold was a low-debt company, and the acquisition has bumped up Fortuna’s estimated 2021 silver equivalent ounces (SEO) production by nearly 39% while lowering its all-in-sustaining cost (AISC). In fact, Fortuna Silver estimates its 2021 AISC to be the lowest among leading silver miners at $951 per SEO. Long-term investors might, therefore, want to pay attention to this silver stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.