Fortuna(FSM) - 2024 Q1 - Quarterly Report

Management's Responsibility and Independent Auditor's Report Management's Responsibility for the Financial Statements Management confirms responsibility for IFRS financial statements and maintains internal controls for reliable financial reporting - Management is responsible for preparing financial statements in accordance with IFRS and for the accompanying MD&A content[2] - The Company maintains Internal Control over Financial Reporting and Disclosure Controls for asset safeguarding and reliable financial information[3] - Financial statements were audited by KPMG LLP in accordance with PCAOB standards[5] Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on financial statements and internal controls, identifying Lindero CGU impairment as a critical audit matter - KPMG LLP issued an unqualified opinion on the fair presentation of financial statements for 2023 and 2022 in accordance with IFRS[8] - An unqualified opinion was also issued on the effectiveness of internal control over financial reporting as of December 31, 2023[9][17] - A critical audit matter involved the Lindero CGU impairment assessment due to increased costs, requiring significant judgment on assumptions, though no impairment was ultimately required[13][14] Consolidated Financial Statements Consolidated Statements of Income (Loss) Net loss improved to $43.6 million in 2023 from $135.9 million in 2022, primarily due to lower impairment charges and increased sales Consolidated Income (Loss) Statement Highlights (in thousands of US$) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Sales | $842,428 | $681,491 | | Mine operating income | $190,025 | $146,796 | | Impairment of mineral properties | $90,615 | $182,842 | | Operating loss | $(407) | $(113,552) | | Net loss for the year | $(43,630) | $(135,906) | | Basic and Diluted Loss per share | $(0.17) | $(0.44) | Consolidated Statements of Comprehensive Income (Loss) Comprehensive loss for 2023 was $45.5 million, a significant reduction from $136.2 million in 2022, including currency translation adjustments Consolidated Comprehensive Income (Loss) (in thousands of US$) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net loss for the year | $(43,630) | $(135,906) | | Total other comprehensive income (loss) | $(1,881) | $(271) | | Comprehensive loss for the year | $(45,511) | $(136,177) | Consolidated Statements of Financial Position Total assets increased to $1.97 billion in 2023, while total liabilities rose to $679.7 million, with total equity remaining stable at $1.29 billion Consolidated Financial Position Highlights (in thousands of US$) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $333,325 | $252,712 | | Cash and cash equivalents | $128,148 | $80,493 | | Total Assets | $1,967,863 | $1,876,224 | | Total Current Liabilities | $243,770 | $135,080 | | Total Liabilities | $679,742 | $587,528 | | Total Equity | $1,288,121 | $1,288,696 | Consolidated Statements of Cash Flows Operating cash flow increased to $296.9 million in 2023, leading to a $47.7 million increase in cash and equivalents, totaling $128.1 million Consolidated Cash Flow Highlights (in thousands of US$) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $296,909 | $194,249 | | Net cash used in investing activities | $(216,884) | $(255,333) | | Net cash (used in) provided by financing activities | $(32,716) | $38,466 | | Increase (decrease) in cash and cash equivalents | $47,655 | $(26,604) | | Cash and cash equivalents, end of year | $128,148 | $80,493 | Consolidated Statements of Changes in Equity Total equity remained stable at $1.288 billion in 2023, with net loss offset by share issuances for the Chesser acquisition Changes in Equity (in thousands of US$) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Balance at January 1 | $1,288,696 | $1,429,570 | | Total comprehensive loss for the year | $(45,511) | $(136,177) | | Transactions with owners (net) | $44,936 | $(4,697) | | Balance at December 31 | $1,288,121 | $1,288,696 | Notes to Consolidated Financial Statements 1. Nature of Operations The company is a Canadian public company operating five precious and base metal mines across Argentina, Burkina Faso, Côte d'Ivoire, Mexico, and Peru - The Company operates five mines across Argentina, Burkina Faso, Côte d'Ivoire, Mexico, and Peru, focusing on precious and base metals[36] - The Company's common shares are listed on the NYSE (FSM) and TSX (FVI)[37] 8. Acquisition of Chesser Resources The company acquired Chesser Resources for $59.3 million in September 2023, gaining exploration projects in Senegal, accounted for as an asset acquisition - The company acquired Chesser Resources on September 20, 2023, for its exploration projects in Senegal, treated as an asset acquisition[155][156] Acquisition Cost and Asset Allocation (in thousands of US$) | Item | Amount | | :--- | :--- | | Consideration Transferred | | | Shares issued | $45,548 | | Acquisition costs & other fees | $13,765 | | Total Cost of Acquisition | $59,313 | | Assets Acquired (Net) | | | Exploration and evaluation assets | $58,862 | | Cash and other net assets | $451 | | Total Assets Acquired | $59,313 | 9. Mineral Properties and Property, Plant and Equipment Net book value of mineral properties and PPE was $1.57 billion in 2023, with the Séguéla mine achieving commercial production and a $90.6 million impairment charge recorded - The Séguéla mine achieved commercial production in mid-2023, initiating depreciation and ceasing interest capitalization for related assets[160] Mineral Properties and PPE Movement (in thousands of US$) | Description | Dec 31, 2022 | Additions/Acquisitions | Impairment | Depletion/Depreciation | Other | Dec 31, 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Book Value | $1,567,622 | $334,965 | $(90,615) | $(241,071) | $3,211 | $1,574,212 | 14. Debt Total debt decreased to $206.8 million in 2023, comprising a $162.9 million credit facility and $43.9 million in convertible debentures maturing in October 2024 Debt Summary (in thousands of US$) | Debt Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Credit facility | $162,946 | $177,020 | | Convertible debentures | $43,901 | $42,155 | | Total Debt | $206,847 | $219,175 | | Current portion | $43,901 | - | | Non-current portion | $162,946 | $219,175 | - The $250 million Amended Credit Facility matures in November 2025, secured by pledges from the Company and its operating subsidiaries[171][172][173] - The $46.0 million convertible debentures mature on October 31, 2024, convertible at C$5.00 per share[176][177][178] 20. Sales Total sales increased by 23.6% to $842.4 million in 2023, driven by the new Séguéla mine and significant customer concentration Sales by Geography (in thousands of US$) | Location | 2023 | 2022 | | :--- | :--- | :--- | | Argentina (Lindero) | $207,509 | $212,092 | | Burkina Faso (Yaramoko) | $228,846 | $193,541 | | Côte d'Ivoire (Séguéla) | $154,165 | - | | Mexico (San Jose) | $149,706 | $173,527 | | Peru (Caylloma) | $102,202 | $102,331 | | Total Sales | $842,428 | $681,491 | - The company exhibits significant customer concentration, with the top customer accounting for 27% of sales and the top three for 70% in 2023[193] 23. Other (Income) Expenses Other expenses sharply increased to $18.9 million in 2023, primarily due to one-time costs including severance provisions and work stoppage-related expenses - Other expenses for 2023 included several significant one-off items[197] - $6.4 million in severance provisions for the anticipated San Jose mine closure at the end of 2024 - $2.8 million for a new union agreement at San Jose - $1.5 million for standby costs during a work stoppage at San Jose - $3.7 million in administrative penalties at Yaramoko - $2.0 million for standby costs during a work stoppage at Yaramoko 25. Income Tax Total income tax expense was $32.6 million in 2023 on a pre-tax loss, with the effective tax rate significantly impacted by foreign exchange and inflation adjustments Income Tax Expense (in thousands of US$) | Description | 2023 | 2022 | | :--- | :--- | :--- | | Current income tax expense | $42,636 | $35,783 | | Deferred tax expense (recovery) | $(10,057) | $(24,986) | | Total income tax expense | $32,579 | $10,797 | - As of December 31, 2023, the company had $347.8 million in unrecognized deductible temporary differences and unused tax losses, with no deferred tax asset recognized[201] 26. Segmented Information In 2023, the Sango (Séguéla) segment reported the highest pre-tax income, while Cuzcatlan (San Jose) incurred the largest loss due to an impairment charge Segment Income (Loss) Before Taxes for 2023 (in thousands of US$) | Segment (Mine) | Revenues | Segment Income (Loss) Before Taxes | | :--- | :--- | :--- | | Sango (Séguéla) | $154,165 | $65,588 | | Sanu (Yaramoko) | $228,846 | $35,127 | | Bateas (Caylloma) | $102,202 | $28,039 | | Mansfield (Lindero) | $207,509 | $20,200 | | Cuzcatlan (San Jose) | $149,706 | $(106,416) | | Corporate | - | $(53,589) | | Total | $842,428 | $(11,051) | 28. Management of Financial Risk The company faces credit, liquidity, currency, metal price, and interest rate risks, with a significant liquidity risk tied to the San Jose mine legal proceedings - The company had $213.1 million in liquidity as of December 31, 2023, from cash and undrawn credit facilities[214] - A significant liquidity risk stems from legal proceedings regarding the San Jose mine's EIA, potentially triggering a credit facility default if unresolved by December 31, 2024[215][217] - The company is exposed to significant currency risk, particularly with the West African CFA Franc, Canadian Dollar, Mexican Peso, and Peruvian Sol[219] - Capital controls in Argentina require conversion of gold doré export proceeds into Argentine Pesos, impacting capital management[225] 31. Contingencies and Capital Commitments The company faces various contingencies, including mine closure guarantees, a potential $16.7 million service contract termination payment, and ongoing tax disputes in Peru and Argentina - The company provided a $12.9 million bank letter of guarantee to the Peruvian government for the Caylloma mine closure plan[234] - A service agreement at the Séguéla mine has a potential $16.7 million early termination payment if terminated as of December 31, 2023[237] - The company is appealing $1.9 million in Peruvian tax assessments related to disallowed deductions for 2010 and 2011[239][241] - In Argentina, the company challenged a 'windfall income tax prepayment' and secured a preliminary injunction during litigation over its constitutionality[246][247] 32. Impairment A $90.6 million impairment charge was recorded for the San Jose mine due to a shortened mine life and rising costs, while the Lindero CGU required no impairment - An impairment charge of $90.6 million was recorded for the San Jose mine, reducing its carrying value to a recoverable amount of $10.0 million[252] - The San Jose impairment resulted from a shortened mine life to end-2024, driven by significant cost increases from Mexican Peso appreciation, higher labor costs, and inflation[251][255] - The Lindero mine showed impairment indicators from increased costs, but no impairment charge was required as of December 31, 2023, after testing[253] Key Assumptions for Impairment Testing | Assumption | Lindero | San Jose | | :--- | :--- | :--- | | Discount Rate (after-tax) | 7.7% | 6.6% | | Long-Term Gold Price | $1,800/oz | $1,800/oz | | Long-Term Silver Price | $23.00/oz | $23.00/oz | 33. Subsequent Events The reinstatement of the San Jose mine's environmental permit was appealed in January 2024, with a final decision expected within 6-12 months, critical for avoiding credit facility default - A favorable court ruling reinstating the San Jose mine's 12-year environmental permit has been appealed, with the mine operating under a permanent injunction[260] - A final Appeals Court decision is expected within 6-12 months; failure to secure a positive, unappealable ruling by December 31, 2024, will trigger a credit facility default[260]