Seeking Alpha: Should Investors Press Their Luck With Fortuna Silver?

Eight months ago I thought Fortuna Silver (NYSE:FSM) was one of the best plays on silver out there in the market, and the performance of the shares has backed up on that idea. Even with a recent pullback of more than 10%, these shares are up almost 90% from late December of 2013 and the comparisons with the likes of Silver Wheaton (NYSE:SLW), Pan American Silver (NASDAQ:PAAS), First Majestic (NYSE:AG), and Fresnillo (OTCPK:FNLPF) aren't even all that close.

So what now? I do like the significant improvements that the company has made in reducing costs - where I thought 20% reductions in cash operating costs were possible, management has delivered 30%. Better still, the company's drilling program at Trinidad North continues to suggest significant reserve expansion and mining potential here. I openly acknowledge that I underestimated management's cost-cutting abilities and may be doing so again, but I think valuation is less compelling today. If you believe that mining stocks can still support historical NAV premiums of 1.5x or more, the shares still offer upside (and on EV/EBITDA as well), but I take a more conservative approach and don't see nearly as much value remaining in these shares today.

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Should Investors Press Their Luck With Fortuna Silver?

Seeking Alpha: Solid Costs And Expansion Potential For Fortuna Silver

The closest thing to a safe hiding place that investors in precious metal miners can find today is a company with a clean balance sheet and a competitive cost structure. Fortuna Silver (FSM) seems to fit the bill, as the company's cash production costs are on the correct side of industry-wide averages and the company has a net cash position with no particularly demanding capital requirements in the near term.

Even though Fortuna Silver has a better cost position than Pan American Silver (PAAS) and Coeur Mining (CDE), the all-in sustaining cost of more than $20/oz is a little higher than the current spot price of silver. What that suggests to me is that cash flow is likely to get tight if silver prices don't recover, as I am not convinced that the company has the scope to significantly curtail costs from here. I do believe that the stock is trading at an attractive price relative to its NAV, but investors should note that Fortuna's current price would seem to be forecasting silver prices at least 10% lower than today's level.

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Solid Costs And Expansion Potential For Fortuna Silver