EXHIBIT 99.15
FORTUNA SILVER MINES INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Second Quarter Ended June 30, 2010
As at August 9, 2010
(Unaudited - Expressed in thousands of United States Dollars, unless otherwise stated)
Notice to Reader of the Unaudited Interim Consolidated Financial Statements
For the three and six months ended June 30, 2010
In accordance with National Instrument 51-102, of the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed the unaudited interim consolidated financial statements.
The unaudited interim consolidated financial statements of Fortuna Silver Mines Inc. (the “Company”) for the three and six month periods ended June 30, 2010 (“Financial Statements”) have been prepared by management. The Financial Statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2009, which are available at the SEDAR website at www.sedar.com. The Financial Statements are stated in terms of thousands of United States dollars, unless otherwise indicated, and are prepared in accordance with Canadian generally accepted accounting principles.
FORTUNA SILVER MINES INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited - Expressed in thousands of US Dollars)
June 30, | December 31, | |||||||||||
Notes | 2010 | 2009 | ||||||||||
ASSETS | ||||||||||||
CURRENT | ||||||||||||
Cash | $ | 48,885 | $ | 30,763 | ||||||||
Short term investments | 3 | 16,052 | 6,034 | |||||||||
Derivatives | 4 | 3,263 | - | |||||||||
Accounts receivable and prepaid expenses | 5 | 8,699 | 8,635 | |||||||||
GST and value added tax | 1,448 | 601 | ||||||||||
Inventories | 6 | 3,221 | 2,329 | |||||||||
81,568 | 48,362 | |||||||||||
LONG TERM INVESTMENT AND RECEIVABLE | 7 | 27 | 16 | |||||||||
PROPERTY, PLANT AND EQUIPMENT | 8 | 21,448 | 17,233 | |||||||||
MINERAL PROPERTIES | 9 | 78,291 | 74,127 | |||||||||
$ | 181,334 | $ | 139,738 | |||||||||
LIABILITIES | ||||||||||||
CURRENT | ||||||||||||
Accounts payable and accrued liabilities | 10 | $ | 8,746 | $ | 8,083 | |||||||
Due to related parties, net | 11 | 17 | 49 | |||||||||
Derivatives | 4 | - | 3,055 | |||||||||
Current portion of long term liability | 12 | 1,079 | 1,038 | |||||||||
9,842 | 12,225 | |||||||||||
LONG TERM LIABILITY | 12 | 1,384 | 1,454 | |||||||||
ASSET RETIREMENT OBLIGATION | 13 | 2,621 | 2,529 | |||||||||
FUTURE INCOME TAX LIABILITY | 14,148 | 10,973 | ||||||||||
27,995 | 27,181 | |||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||
SHARE CAPITAL | 136,526 | 104,701 | ||||||||||
CONTRIBUTED SURPLUS | 11,619 | 14,315 | ||||||||||
RETAINED EARNINGS (DEFICIT) | 1,919 | (9,357 | ) | |||||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME | 3,275 | 2,898 | ||||||||||
5,194 | (6,459 | ) | ||||||||||
153,339 | 112,557 | |||||||||||
$ | 181,334 | $ | 139,738 | |||||||||
Commitments and contingencies | 16 | |||||||||||
Subsequent event | 20 |
APPROVED BY THE DIRECTORS:
”Jorge Ganoza Durant” , Director Jorge Ganoza Durant | “Robert R. Gilmore” , Director Robert R. Gilmore |
The accompanying notes are an integral part of these unaudited interim consolidated financial statements
FORTUNA SILVER MINES INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Expressed in thousands of US Dollars, except for share and per share amounts)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
Notes | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||
Sales | $ | 14,565 | $ | 12,862 | $ | 32,108 | $ | 21,842 | ||||||||||||
Cost of sales | 4,955 | 4,490 | 10,124 | 8,584 | ||||||||||||||||
Depletion, depreciation and accretion | 1,614 | 1,580 | 3,223 | 2,979 | ||||||||||||||||
MINE OPERATING INCOME | 7,996 | 6,792 | 18,761 | 10,279 | ||||||||||||||||
Selling, general and administrative expenses (includes depreciation of $66 (2009: $31)) | 11 | 3,464 | 2,426 | 6,338 | 4,406 | |||||||||||||||
Stock-based compensation | 14 c | ) | (2,440 | ) | 11 | (2,440 | ) | 360 | ||||||||||||
Write-off of deferred exploration costs | - | - | - | 1,081 | ||||||||||||||||
1,024 | 2,437 | 3,898 | 5,847 | |||||||||||||||||
OPERATING INCOME | 6,972 | 4,355 | 14,863 | 4,432 | ||||||||||||||||
Interest and other income and expenses | 17 | 141 | 153 | 399 | ||||||||||||||||
Interest and finance expenses | (31 | ) | (42 | ) | (68 | ) | (72 | ) | ||||||||||||
Net gain (loss) on commodity contracts | 2,895 | (1,356 | ) | 4,642 | (1,772 | ) | ||||||||||||||
(Loss) on disposal of property, plant and equipment | (7 | ) | (6 | ) | (10 | ) | (6 | ) | ||||||||||||
(Loss) on disposal of mineral property | - | - | (100 | ) | - | |||||||||||||||
(Loss) gain on disposal of investment | - | 226 | - | (236 | ) | |||||||||||||||
Foreign exchange (loss) | (357 | ) | (399 | ) | (612 | ) | (372 | ) | ||||||||||||
2,517 | (1,436 | ) | 4,005 | (2,059 | ) | |||||||||||||||
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST | 9,489 | 2,919 | 18,868 | 2,373 | ||||||||||||||||
Income tax provision | 3,509 | 1,723 | 7,592 | 2,411 | ||||||||||||||||
Non-controlling interest | - | - | - | (180 | ) | |||||||||||||||
NET INCOME FOR THE PERIOD | $ | 5,980 | $ | 1,196 | $ | 11,276 | $ | 142 | ||||||||||||
Earnings per Share - Basic | $ | 0.05 | $ | 0.01 | $ | 0.11 | $ | - | ||||||||||||
Earnings per Share - Diluted | $ | 0.05 | $ | 0.01 | $ | 0.10 | $ | - | ||||||||||||
Weighted average number of shares outstanding - Basic | 110,164,718 | 92,253,419 | 105,040,478 | 89,750,592 | ||||||||||||||||
Weighted average number of shares outstanding - Diluted | 113,490,707 | 92,253,419 | 108,241,221 | 89,750,592 |
The accompanying notes are an integral part of these unaudited interim consolidated financial statements
FORTUNA SILVER MINES INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - Expressed in thousands of US Dollars)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income for the period | $ | 5,980 | $ | 1,196 | $ | 11,276 | $ | 142 | ||||||||
Other comprehensive income | ||||||||||||||||
Unrealized gain on available for sale long term investments, net of taxes | - | - | - | 148 | ||||||||||||
Transfer of unrealized loss to realized loss upon derecognition of available for sale long term investment, net of taxes | - | - | - | 462 | ||||||||||||
Transfer of unrealized loss to realized loss upon reduction of net investment, net of taxes | 556 | - | 556 | - | ||||||||||||
Unrealized (loss) gain on translation of functional currency to reporting currency | (2,948 | ) | 5,323 | (179 | ) | 6,708 | ||||||||||
Other comprehensive income | (2,392 | ) | 5,323 | 377 | 7,318 | |||||||||||
Comprehensive income | $ | 3,588 | $ | 6,519 | $ | 11,653 | $ | 7,460 |
The accompanying notes are an integral part of these unaudited interim consolidated financial statements
FORTUNA SILVER MINES INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Expressed in thousands of US Dollars)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||
Notes | 2010 | 2009 | 2010 | 2009 | |||||||||||||
OPERATING ACTIVITIES | |||||||||||||||||
Net income for the period | $ | 5,980 | $ | 1,196 | $ | 11,276 | $ | 142 | |||||||||
Items not involving cash | |||||||||||||||||
Depletion and depreciation | 1,601 | 1,565 | 3,197 | 2,949 | |||||||||||||
Accretion expense | 47 | 31 | 93 | 61 | |||||||||||||
Future income tax | 1,688 | 419 | 3,008 | 684 | |||||||||||||
Stock-based compensation | (2,440 | ) | 11 | (2,440 | ) | 360 | |||||||||||
Unrealized (gain) loss on commodity contracts | (3,306 | ) | 622 | (6,318 | ) | 2,518 | |||||||||||
Non-controlling interest | - | - | - | (180 | ) | ||||||||||||
Write-off of deferred exploration costs | - | - | - | 1,081 | |||||||||||||
Loss on disposal of equipment | 7 | 6 | 10 | 6 | |||||||||||||
Loss (gain) on disposal of investments | - | (226 | ) | - | 236 | ||||||||||||
Loss on disposal of mineral property | - | - | 100 | - | |||||||||||||
Unrealized foreign exchange (gain) loss | 1,006 | 396 | 538 | 393 | |||||||||||||
4,583 | 4,020 | 9,464 | 8,250 | ||||||||||||||
Changes in non-cash working capital items | |||||||||||||||||
Accounts receivable and prepaid expenses | - | (1,223 | ) | (368 | ) | (4,713 | ) | ||||||||||
Inventories | (572 | ) | - | (856 | ) | 372 | |||||||||||
Accounts payable | 1,015 | 894 | 661 | 241 | |||||||||||||
Due to related parties | (35 | ) | 7 | (33 | ) | (16 | ) | ||||||||||
Net cash provided by operating activities | 4,991 | 3,698 | 8,868 | 4,134 | |||||||||||||
INVESTING ACTIVITIES | |||||||||||||||||
Costs relating to the acquisition of Continuum | - | (40 | ) | - | (160 | ) | |||||||||||
Short term investments | (15,165 | ) | - | (10,146 | ) | - | |||||||||||
Mineral property expenditures | (3,270 | ) | (2,762 | ) | (5,932 | ) | (4,934 | ) | |||||||||
Value added taxes on purchase of property, plant and | |||||||||||||||||
equipment | (508 | ) | 878 | (569 | ) | 1,973 | |||||||||||
Property, plant & equipment | (3,543 | ) | (75 | ) | (5,111 | ) | (973 | ) | |||||||||
Long term receivable | 39 | 2 | 22 | 31 | |||||||||||||
Acquisition of long term investments | - | (221 | ) | - | (221 | ) | |||||||||||
Proceeds on disposal of long term investments | - | 461 | - | 461 | |||||||||||||
Proceeds on disposal of mineral property | - | - | 13 | - | |||||||||||||
Net cash (used in) investing activities | (22,447 | ) | (1,757 | ) | (21,723 | ) | (3,823 | ) | |||||||||
FINANCING ACTIVITIES | |||||||||||||||||
Net proceeds on issuance of common shares | 338 | 141 | 31,751 | 141 | |||||||||||||
Repayment of capital lease obligations | (279 | ) | (196 | ) | (552 | ) | (376 | ) | |||||||||
Net cash provided by (used in) financing activities | 59 | (55 | ) | 31,199 | (235 | ) | |||||||||||
Effect of exchange rate changes on cash | (1,933 | ) | 2,257 | (222 | ) | 1,635 | |||||||||||
INCREASE (DECREASE) IN CASH | (17,397 | ) | 1,886 | 18,344 | 76 | ||||||||||||
Cash - beginning of period | 68,215 | 27,022 | 30,763 | 29,454 | |||||||||||||
CASH - END OF PERIOD | $ | 48,885 | $ | 31,165 | $ | 48,885 | $ | 31,165 | |||||||||
Supplemental cash flow information | 19 |
The accompanying notes are an integral part of these unaudited interim consolidated financial statements
FORTUNA SILVER MINES INC.
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited - Expressed in thousands of US Dollars, except for share amounts)
Share Capital | Accumulated | |||||||||||||||||||||||
Retained | Other | Total | ||||||||||||||||||||||
Contributed | Earnings | Comprehensive | Shareholders' | |||||||||||||||||||||
Shares | Amount | Surplus | (Deficit) | Income (Loss) | Equity | |||||||||||||||||||
Balance -December 31,2008 | $ | 85,331,659 | 98,206 | $ | 11,854 | (9,980 | ) $ | (11,112 | ) $ | 88,968 | ||||||||||||||
Exercise of options | 389,000 | 281 | - | - | - | 281 | ||||||||||||||||||
Exercise of warrants | 2,475,355 | 776 | - | - | - | 776 | ||||||||||||||||||
Issuance of shares forp roperty | 6,786,674 | 5,192 | - | - | - | 5,192 | ||||||||||||||||||
Cancellation of fractional shares | (36 | ) | - | - | - | - | - | |||||||||||||||||
Transfer of contributed surplus on exercise of options | - | 246 | (246 | ) | - | - | - | |||||||||||||||||
Stock-based compensation | - | - | 2,707 | - | - | 2,707 | ||||||||||||||||||
Income forthe year | - | - | - | 623 | - | 623 | ||||||||||||||||||
Unrealized gain on available for sale long term investments | - | - | - | - | 148 | 148 | ||||||||||||||||||
Transfer of unrealized loss to realized loss upon derecognition of available for sale long-term investment, net of taxes | - | - | - | - | 462 | 462 | ||||||||||||||||||
Unrealized gain on translation of functional currency to reporting currency | - | - | - | - | 13,400 | 13,400 | ||||||||||||||||||
Balance -December31,2009 | $ | 94,982,652 | 104,701 | $ | 14,315 | (9,357 | ) $ | 2,898 | $ | 112,557 | ||||||||||||||
Issuance of shares under bought deal financing, net of issuance costs | 15,007,500 | 31,214 | - | - | - | 31,214 | ||||||||||||||||||
Exercise of options | 384,500 | 335 | - | - | - | 335 | ||||||||||||||||||
Issuance of shares for property | 7,813 | 20 | - | - | - | 20 | ||||||||||||||||||
Transfer of contributed surplus on exercise of options | - | 256 | (256 | ) | - | - | - | |||||||||||||||||
Stock-based compensation | - | - | (2,440 | ) | - | - | (2,440 | ) | ||||||||||||||||
Income for the period | - | - | - | 11,276 | - | 11,276 | ||||||||||||||||||
Transfer of unrealized loss to realized loss upon reduction of net investment, net of taxes | - | - | - | - | 556 | 556 | ||||||||||||||||||
Unrealized (loss) on translation of functional currency to reporting currency | - | - | - | - | (179 | ) | (179 | ) | ||||||||||||||||
Balance - June 30, 2010 | $ | 110,382,465 | 136,526 | $ | 11,619 | $ | 1,919 | 3,275 | $ | 153,339 |
The accompanying notes are an integral part of these unaudited interim consolidated financial statements
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
1. | Nature of Operations |
Fortuna Silver Mines Inc. (the “Company”) is engaged in silver mining and related activities, including exploration, extraction, and processing. The Company operates the Caylloma zinc/lead/silver mine in southern Peru and is currently developing the San Jose silver/gold project in Mexico.
2. | Summary of Significant Accounting Policies |
a) | Basis of Presentation and Principles of Consolidation |
These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”), and presented in US dollars, but they do not contain all disclosures required by Canadian GAAP for annual financial statements and, accordingly, they should be read in conjunction with the most recently prepared annual financial statements for the year ended December 31, 2009. They include the accounts of the Company and its significantly wholly owned subsidiaries: Minera Bateas S.A.C. (“Bateas”); Fortuna Silver (Barbados) Inc.; Compania Minera Cuzcatlan S.A. de C.V. (“Cuzcatlan”); Continuum Resources Ltd. (“Continuum”); and Fortuna Silver Mines Peru S.A.C.
These unaudited interim consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the consolidated financial position as at June 30, 2010 and the consolidated statement of income and consolidated cash flows for the three and six month periods presented. Operating results of the interim period are not necessarily indicative of the result that may be expected for the full fiscal year ending December 31, 2010.
All significant inter-company transactions and accounts have been eliminated upon consolidation.
b) | Adoption of New Accounting Standards |
The Company has not adopted any new accounting standards during the current period.
c) | Recently released Canadian Accounting Standards |
The Company has assessed new and revised accounting pronouncements that have been issued and determined that the following may have an impact on the Company:
Page 1
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
2. Summary of Significant Accounting Policies (continued)
c) | Recently released Canadian Accounting Standards (continued) |
i. | Convergence with International Financial Reporting Standards (“IFRS”) |
In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with International Financial Reporting Standards (“IFRS”) over an expected five year transitional period. In February 2008, the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canadian GAAP. This date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Company will begin reporting its financial statements in accordance with IFRS on January 1, 2011, with comparative figures for 2010.
The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of amounts reported by the Company for its year ended December 31, 2010, and of the opening balance sheet as at January 1, 2010.
ii. | Business Combinations |
In January 2009, the CICA issued the following Handbook Sections: Section 1582, “Business Combinations”, Section 1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling Interests”. These new standards are harmonized with International Financial Reporting Standards (IFRS). Section 1582 specifies a number of changes, including: an expanded definition of a business, a requirement to measure all business acquisitions at fair value, a requirement to measure non-controlling interests at fair value, and a requirement to recognize acquisition-related costs as expenses. Section 1601 establishes the standards for preparing consolidated financial statements. Section 1602 specifies that non-controlling interests be treated as a separate component of equity, not as a liability or other item outside of equity. The new standards will become effective in 2011 but early adoption is permitted. The Company is evaluating the impact of adopting these standards.
iii. | Comprehensive Revaluation of Assets and Liabilities and Equity |
In August 2009, the CICA amended Handbook Section 1625, “Comprehensive revaluation of assets and liabilities” as a result of issuing “Business Combinations, Section 1582, “Consolidated Financial Statements”, Section 1601, and Non-Controlling Interests”, Section 1602, in January 2009.
In August 2009, the CICA amended Handbook Section 3251, “Equity” as a result of issuing Section 1602, “Non-controlling Interests”. These amendments only apply to entities that have adopted Section 1602.
These amendments apply prospectively to comprehensive revaluations of assets and liabilities occurring in fiscal years beginning on or after January 1, 2011, but early adoption is permitted. The Company is evaluating the impact of adopting these standards.
Page 2
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
3. | Short term investments |
June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Accumulated unrealized | Accumulated unrealized | |||||||||||||||||||||||
holding gains | holding gains | |||||||||||||||||||||||
Held-for-Trading | Fair Value | Cost | (losses) | Fair Value | Cost | (losses) | ||||||||||||||||||
Short term investments | $ | 16,052 | $ | 16,052 | $ | - | $ | 6,034 | $ | 6,034 | $ | - | ||||||||||||
$ | 16,052 | $ | 16,052 | $ | - | $ | 6,034 | $ | 6,034 | $ | - |
4. | Derivatives |
As at December 31, 2009, the Company had entered into commodity forward and option contracts to secure a minimum price level on part of its Caylloma’s zinc and lead metal production throughout the period covering January 2010 to December 31, 2010.
The counterparties are Macquarie Bank Limited and the Bank of Nova Scotia.
Forward Sales Contracts - Swap Basis
The contracts are spread evenly over the periods shown below with settlement occurring on a monthly basis. No initial premium associated with these trades has been paid.
The forward sale contracts, entered into on a SWAP basis, are defined below.
Settlements throughout January 2010 to June 2010:
Lead forward contracts: | $1,910/t, for the total of 1,800 tons |
Zinc forward contracts: | $1,787/t, for the total of 1,050 tons |
The SWAP basis contracts are settled against the arithmetic average of zinc and lead spot prices over the month in which the contract matures.
Put and Call Option Commodity Arrangements
As at December 31, 2009, the Company had entered into a series of put and call option commodity arrangements. A long put refers to put options that have been bought by the Company, and a short call refers to call options that have been sold by the Company. The contracts are spread evenly over the periods shown below with settlement occurring on a monthly basis.
Settlements throughout January 2010 to June 2010
The following Zinc Option contracts were entered into:
· | 6 Long put options at strike price: | $2,000/t, for the total of 2,100 tons |
Page 3
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
4. Derivatives (continued)
Put and Call Option Commodity Arrangements (continued)
· | 6 Short call options at strike price: | $3,010/t, for the total of 2,100 tons |
The following Lead Option contracts were entered into and outstanding:
· | 6 Long put options at strike price: | $2,000/t, for the total of 1,200 tons |
· | 6 Short call options at strike price: | $2,975/t, for the total of 1,200 tons |
Settlements throughout July 2010 to December 2010
The following Zinc Option contracts were entered into:
· | 6 Long put options at strike price: | $2,000/t, for the total of 3,150 tons |
· | 6 Short call options at strike price: | $3,010/t, for the total of 3,150 tons |
The following Lead Option contracts were entered into:
· | 6 Long put options at strike price: | $2,000/t, for the total of 2,850 tons |
· | 6 Short call options at strike price: | $2,974/t, for the total of 2,850 tons |
The estimated fair value of the outstanding asset in derivative contracts of $3,263 (2009: liability $3,055) was determined with reference to the published market prices for underlying commodities quoted at the London Metal Exchange.
5. | Accounts receivable and prepaid expenses |
June 30, 2010 | December 31, 2009 | |||||||
Trade accounts receivable | $ | 4,360 | $ | 7,154 | ||||
Advances and other receivables | 3,105 | 1,168 | ||||||
Prepaid expenses and deposits | 1,234 | 313 | ||||||
$ | 8,699 | $ | 8,635 |
Accounts receivable and prepaid expenses include prepaid income tax of $12 (2009: $9), $95 (2009: $121) short term portion of the long term receivable, $43 (2009: $34) in guaranteed deposits. Trade accounts receivable includes receivables from the sale of concentrates of $4,360 (2009: $7,154) and are aged as follows:
Page 4
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
5. Accounts receivable and prepaid expenses (continued)
June 30, 2010 | December 31, 2009 | |||||||
0-30 days | $ | 4,137 | $ | 7,154 | ||||
31-60 days | (187 | ) | - | |||||
61-90 days | 410 | - | ||||||
over 90 days | - | - | ||||||
$ | 4,360 | $ | 7,154 |
6. | Inventories |
Inventories consist of the following:
June 30, 2010 | December 31, 2009 | |||||||
Stockpile ore | $ | 245 | $ | 204 | ||||
Concentrate inventory | 797 | 651 | ||||||
Materials and supplies | 2,179 | 1,474 | ||||||
$ | 3,221 | $ | 2,329 |
7. | Long term investment and receivable |
June 30, 2010 | December 31, 2009 | |||||||
Receivables | 27 | 16 | ||||||
$ | 27 | $ | 16 |
8. | Property, Plant and Equipment |
Property, plant and equipment are comprised of the following:
June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Cost | Accumulated Depreciation | Net Book Value | Cost | Accumulated Depreciation | Net Book Value | |||||||||||||||||||
Land | $ | 317 | $ | - | $ | 317 | $ | 316 | $ | - | $ | 316 | ||||||||||||
Buildings | 7,014 | 1,600 | 5,414 | 4,740 | 1,040 | 3,700 | ||||||||||||||||||
Machinery & equipment | 9,847 | 3,311 | 6,536 | 10,152 | 3,023 | 7,129 | ||||||||||||||||||
Equipment under capital lease | 3,739 | 908 | 2,831 | 3,249 | 568 | 2,681 | ||||||||||||||||||
Furniture & other equipment | 1,794 | 583 | 1,211 | 1,627 | 438 | 1,189 | ||||||||||||||||||
Transport units | 428 | 271 | 157 | 430 | 239 | 191 | ||||||||||||||||||
Work in progress | 4,982 | - | 4,982 | 2,027 | - | 2,027 | ||||||||||||||||||
$ | 28,121 | $ | 6,673 | $ | 21,448 | $ | 22,541 | $ | 5,308 | $ | 17,233 |
Page 5
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
8. Property, Plant and Equipment (continued)
Machinery & equipment includes costs of $526 (2009: $526) and accumulated depreciation of $156 (2009: $131) resulting from the estimate for the asset retirement obligation.
9. | Mineral Properties |
Mineral properties are located in Peru and Mexico and are comprised of the following:
June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
Net Book | Net Book | |||||||||||||||||||||||||||||||
Cost | Depletion Write-off | Value | Cost | Depletion Write-off | Value | |||||||||||||||||||||||||||
Caylloma, Peru | $ | 46,164 | $ | 13,682 | $ | - | $ | 32,482 | $ | 42,209 | $ | 11,685 | $ | 160 | $ | 30,364 | ||||||||||||||||
San Jose, Mexico | 45,749 | - | - | 45,749 | 44,745 | - | 1,091 | 43,654 | ||||||||||||||||||||||||
Tlacolula, Mexico | 60 | - | - | 60 | - | - | - | - | ||||||||||||||||||||||||
Predilecta, Mexico | 112 | - | 112 | - | 109 | - | - | 109 | ||||||||||||||||||||||||
$ | 92,085 | $ | 13,682 | $ | 112 | $ | 78,291 | $ | 87,063 | $ | 11,685 | $ | 1,251 | $ | 74,127 |
a) | Caylloma Project, Peru |
For the six months ended June 30, 2010, additions to the Caylloma mineral property includes development and exploration costs of $4,109.
b) | San Jose Project, Mexico |
For the six months ended June 30, 2010, additions to the San Jose mineral property consist of development and exploration costs capitalized of $1,934 and future income tax of $118 related to the acquisition of Continuum. Included in the additions for the San Jose property is $32 relating to the accretion of the payable for the Monte Alban II concession. This property was acquired for a total of $1,900 and consists of a payment of $1,100 made in May 2008 and a future payment of $800 is to be made in May 2012 (Note 12. b)). The present value of the $800 was $589 and this is being accreted monthly with the accretion amount being capitalized to the mineral property.
Also included in additions to the San Jose mineral property is depreciation of equipment involved in construction work of $149 (2009: $220), general and administrative costs to develop the mine of $712 (2009: $1,425), and $1 (2009: $141) received as interest on VAT recovered.
c) | Tlacolula Project, Mexico |
In September 2009, the Company, through its wholly owned subsidiary, Cuzcatlan, was granted an option (the “Option”) to acquire a 60% interest (the “Interest”) in the Tlacolula silver project (“property”) located in the State of Oaxaca, Mexico from Radius Gold Inc.’s wholly owned subsidiary, Radius (Cayman) Inc. (“Radius”) (a related party by way of directors in common with the Company).
Page 6
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
9. Mineral Properties (continued)
c) | Tlacolula Project, Mexico (continued) |
The Company can earn the Interest by spending $2,000, which includes a commitment to drill 1,500 meters within three years, and making staged annual payments of $250 cash and $250 in common stock of the Company to Radius according to the following schedule:
Ø | $20 cash and $20 cash equivalent in shares upon stock exchange approval; |
Ø | $30 cash and $30 cash equivalent in shares by the first year anniversary; |
Ø | $50 cash and $50 cash equivalent in shares by the second year anniversary; |
Ø | $50 cash and $50 cash equivalent in shares by the third year anniversary; and, |
Ø | $100 cash and $100 cash equivalent in shares by the fourth year anniversary. |
Upon completion of the cash payments and share issuances, and incurring the exploration expenditures as set forth above, the Company will be deemed to have exercised the Option and acquired a 60% interest in the property, whereupon a joint venture will be formed to further develop the property on the basis of the Company owning 60% and Radius 40%.
On January 15, 2010, the transaction was approved by the TSX Venture Exchange, The Company has issued 7,813 common shares of the Company, at a fair market value of $2.56 per share and paid $20 cash according to the terms of the option agreement. Included in the cost is future income tax of $11.
d) | Predilecta, Mexico |
During the first quarter of 2010, the Company sold its interest in the Predilecta mineral property, for cash consideration of $13 resulting in a loss of $100.
10. | Accounts payable and accrued liabilities |
June 30, 2010 | December 31, 2009 | |||||||
Trade accounts payable | $ | 3,942 | $ | 2,577 | ||||
Income taxes payable | 2,041 | 2,949 | ||||||
Payroll and other payables | 2,763 | 2,557 | ||||||
$ | 8,746 | $ | 8,083 |
Payroll and other payables includes $1,003 (2009: $1,084) attributable to workers’ participation under Peruvian law.
11. | Related Party Transactions |
The Company incurred charges from directors, officers, and companies having a common director or officer as follows:
Page 7
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
11. Related Party Transactions (continued)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
Transactions with related parties | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Consulting fees 1 | $ | 44 | $ | 34 | $ | 87 | $ | 65 | ||||||||
Salaries and wages 2,3 | 26 | 37 | 55 | 60 | ||||||||||||
Other general and administrative expenses 3 | 39 | 45 | 119 | 66 | ||||||||||||
$ | 109 | $ | 116 | $ | 261 | $ | 191 |
1 Consulting fees includes fees paid to two directors, Simon Ridgway and Mario Szotlender.
2 Salaries and wages includes employees' salaries and benefits charged to the Company based on an estimated percentage of the actual hours worked for the Company.
2, 3 Radius Gold Inc. (“Radius”) has directors in common with the Company and shares office space, and is reimbursed for various general and administrative costs incurred on behalf of the Company.In September 2009, the Company was granted an option to acquire a 60% interest in the Tlacolula silver project located in the State of Oaxaca, Mexico from Radius. Refer to Note 9. c).
Amounts due to/(from) related parties | June 30, 2010 | December 31, 2009 | ||||||
Owing (from)/to a director and officer4 | $ | (2 | ) | $ | (1 | ) | ||
Owing to a company with common directors 3 | $ | 19 | $ | 50 | ||||
$ | 17 | $ | 49 |
4 Owing from a director includes non-interest bearing advances to Jorge A. Ganoza Durant at December 31, 2009 and from Jorge A. Ganoza Durant and Jorge R. Ganoza Aicardi at September 30, 2010, with no specific terms of repayment.
The transactions with related parties are measured at the agreed upon exchange amount, which is the amount of consideration established and agreed upon by the parties. The balances with related parties are unsecured, non-interest bearing, and payable in the normal course of business.
12. | Leases and Long Term Liabilities |
a) | Obligations under capital lease |
The following is a schedule of the Company’s capital lease obligations. These are related to the acquisition of mining equipment, vehicles, and buildings.
Page 8
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
12. Leases and Long Term Liabilities (continued)
a) | Obligations under capital lease (continued) |
Interest | Maturity | June 30, | December 31, | |||||||||||||
Rate | Date | 2010 | 2009 | |||||||||||||
Scotiabank Peru S.A.A. | 8.66 | % | 2010 | 34 | 101 | |||||||||||
Scotiabank Peru S.A.A. | 8.20 | % | 2010 | 103 | 252 | |||||||||||
Scotiabank Peru S.A.A. | 8.49 | % | 2010 | 29 | 57 | |||||||||||
Scotiabank Peru S.A.A. | 8.34 | % | 2010 | 8 | 14 | |||||||||||
Scotiabank Peru S.A.A. | 8.49 | % | 2011 | 66 | 100 | |||||||||||
Scotiabank Peru S.A.A. | 6.75 | % | 2011 | 12 | 16 | |||||||||||
Scotiabank Peru S.A.A. | 6.75 | % | 2011 | 15 | 20 | |||||||||||
Interbank | 4.00 | % | 2011 | 145 | 198 | |||||||||||
Interbank | 9.12 | % | 2011 | 128 | 170 | |||||||||||
Interbank | 9.75 | % | 2012 | 73 | 91 | |||||||||||
Scotiabank Peru S.A.A. | 4.50 | % | 2012 | 435 | - | |||||||||||
Interbank | 9.75 | % | 2012 | 683 | 829 | |||||||||||
Scotiabank Peru S.A.A. | 4.85 | % | 2012 | 59 | - | |||||||||||
Lease payments | $ | 1,790 | $ | 1,848 | ||||||||||||
Less current amount | (1,079 | ) | (1,038 | ) | ||||||||||||
$ | 711 | $ | 810 |
b) | Long term liability |
In May 2008, Cuzcatlan acquired the Monte Alban II concession (Note 9. b)) for which a payment of $800 is due May 2012. This payment is non-interest bearing and all debt relating to the acquisition of the mineral resource property has been recognized as at June 30, 2010. |
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Face value of long term liability | $ | 644 | $ | 970 | ||||
Less: adjustment to amortized cost | - | (225 | ) | |||||
Opening fair value of liability measured at amortized cost | 644 | 745 | ||||||
Cancellation of contract | - | (156 | ) | |||||
Add: accretion to period end | 29 | 55 | ||||||
Liability at period end | 673 | 644 | ||||||
Less: current portion of long term liability | - | - | ||||||
$ | 673 | $ | 644 |
Page 9
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
12. Leases and Long Term Liabilities (continued)
b) | Long term liability (continued) |
Principal minimum repayment terms will be : | ||||
2010 | $ | - | ||
2011 | - | |||
2012 | 800 | |||
$ | 800 |
c) | Contingent liabilities |
The Caylloma mine closure plan was approved in November 2009 with total closure costs of $3,346 of which $1,756 is subject to an annual collateral in the form of a letter of guarantee, to be awarded each year in increments of $146 over 12 years, and is based on the estimated life of the mine.
Banco Bilbao Vizcaya Argentaria, S.A., a third party, has established a bank letter of guarantee on behalf of Bateas in favor of the Peruvian mining regulatory agency in compliance with local regulation associated with the approved Bateas’ mine closure plan, for the sum of $146. This bank letter of guarantee expires 360 days from December 2009.
Banco Bilbao Vizcaya Argentaria, S.A., has also established bank letters of guarantee totaling $54 to provide an annual guarantee associated with an office lease contract and truck rentals. These bank letters of guarantee expire 360 days from June 2010.
13. | Asset Retirement Obligation |
A summary of the Company’s provision for asset retirement obligation is presented below.
June 30, 2010 | December 31, 2009 | |||||||
Asset retirement obligation - beginning of year | $ | 2,529 | $ | 1,066 | ||||
Revisions in estimates | - | 1,286 | ||||||
Accretion expense, included in depreciation, depletion and accretion | 92 | 150 | ||||||
Foreign exchange impact | - | 27 | ||||||
Asset retirement obligation - end of period | $ | 2,621 | $ | 2,529 |
The accretion expense was calculated over the period using a risk free interest rate of 7.46% (2009: 7.46%). The Company had reviewed its reclamation obligations at the property in light of changing regulations and on the basis of further data in respect of the mine life and had made an increase to the estimated amount of the asset retirement obligation of $nil (2009: $1,286).
Page 10
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
13. Asset Retirement Obligation (continued)
In view of the uncertainties concerning environmental reclamation, the ultimate cost of reclamation activities could differ materially from the estimated amount recorded. The estimate of the Company’s asset retirement obligation relating to the Caylloma mine is subject to change based on amendments to laws and regulations and as new information regarding the Company’s operations becomes available.
Future changes, if any, to the estimated liability as a result of amended requirements, laws, regulations, operating assumptions, estimated timing and amount of obligations may be significant and would be recognized prospectively as a change in accounting estimate. Any such change would result in an increase or decrease to the liability and a corresponding increase or decrease to the mineral property, plant and equipment balance.
14. | Share Capital |
a) | Authorized: Unlimited common shares without par value |
b) | Stock Options |
The following is a summary of option transactions:
Weighted Average | ||||||||
Exercise Price Per | ||||||||
Number of Shares | Share in CAD$ | |||||||
Balance, December 31, 2008 | 7,734,000 | $ | 1.87 | |||||
Granted | 2,915,000 | 1.56 | ||||||
Exercised | (389,000 | ) | 0.81 | |||||
Expired | (970,000 | ) | 2.35 | |||||
Forfeited | (1,075,000 | ) | 3.22 | |||||
Balance, December 31, 2009 | 8,215,000 | $ | 1.50 | |||||
Exercised | (384,500 | ) | 0.90 | |||||
Cancelled | (2,665,000 | ) | 1.62 | |||||
Balance, June 30, 2010 | 5,165,500 | $ | 1.48 |
During the period, 384,500 share purchase options with exercise prices ranging from CAD$0.85 to CAD$1.25 per share were exercised.
During the period, 2,665,000 share purchase options with exercise prices ranging from CAD$1.60 to CAD$2.23 were cancelled as shareholder approval was not obtained at the Company’s annual general meeting held on June 23, 2010.
Page 11
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
14. Share Capital (continued)
b) | Stock Options (continued) |
The following table summarizes information related to stock options outstanding at September 30, 2010:
Exercise price in CAD$ | Number of outstanding share options (in 000's) | Weighted average | Weighted average exercise price onoutstanding options CAD$ | Vested share options | Weighted average exercise price on | |||||||||||||||||
$ | 0.80 to $0.99 | 1,976 | 8.1 | $ | 0.85 | 1,976 | $ | 0.85 | ||||||||||||||
$ | 1.00 to $1.99 | 1,940 | 6.1 | 1.59 | 1,940 | 1.59 | ||||||||||||||||
$ | 2.00 to $2.75 | 1,250 | 6.6 | 2.32 | 1,250 | 2.32 | ||||||||||||||||
$ | 0.80 to $2.75 | 5,166 | 7.0 | $ | 1.48 | 5,166 | $ | 1.48 |
The weighted average remaining life of vested options at September 30, 2010 was 6.8 years (2009: 8.3 years).
As at June 30, 2010, 5,165,500 share purchase options have vested.
Subsequent to June 30, 2010 to August 9, 2010, 40,000 share purchase options were exercised at prices ranging from CAD$0.80 to CAD$0.85 per share.
c) | Stock-based Compensation |
The Company uses the fair value based method of accounting for share options granted to consultants, directors, officers, and employees. The non-cash compensation recovery of $2,440 recognized for the six months ended June 30, 2010 is associated with the 2,665,000 share purchase options granted in the fourth quarter of 2009 and cancelled as shareholder approval was not obtained at the Company’s annual general meeting held on June 23, 2010.
The non-cash compensation charge of $360 recognized for the six months ended June 30, 2009 is associated with options granted to a directors, officers, and employees. These compensation charges have been determined under the fair value method using the Black-Scholes option pricing model with the following assumptions:
Six months ended June 30, | |||||
2010 | 2009 | ||||
Risk-free interest rate | n/a | 2.7% to 3.1% | |||
Expected stock price volatility | n/a | 69.9% to 77.9% | |||
Expected term in years | n/a | 5 to 10 years | |||
Expected dividend yield | n/a | 0% |
There were no stock options granted during the six months ended June 30, 2010 and 2009.
Page 12
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
14. Share Capital (continued)
c) | Stock-based Compensation (continued) |
Option pricing models require the input of highly subjective assumptions including the estimate of the share price volatility, risk-free interest rate and expected life of the options. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
15. | Segmented Information |
a) Industry Information
The Company operates in one reportable operating segment, being the acquisition, exploration, development, and operation of mineral properties.
b) Geographic Information
The following is the summary of operations and summary of certain assets on a geographical basis.
Canada | Peru | Mexico | Other | Total | ||||||||||||||||
Three months ended June 30, 2010 | ||||||||||||||||||||
Sales | $ | - | $ | 14,565 | $ | - | $ | - | $ | 14,565 | ||||||||||
Operating (loss) income | $ | 920 | $ | 6,062 | $ | - | $ | (10 | ) | $ | 6,972 | |||||||||
Three months ended June 30, 2009 | ||||||||||||||||||||
Sales | $ | - | $ | 12,862 | $ | - | $ | - | $ | 12,862 | ||||||||||
Operating (loss) income | $ | (660 | ) | $ | 5,063 | $ | - | $ | (48 | ) | $ | 4,355 | ||||||||
Six months ended June 30, 2010 | ||||||||||||||||||||
Sales | $ | - | $ | 32,108 | $ | - | $ | - | $ | 32,108 | ||||||||||
Operating income (loss) | $ | (90 | ) | $ | 14,973 | $ | - | $ | (20 | ) | $ | 14,863 | ||||||||
Six months ended June 30, 2009 | ||||||||||||||||||||
Sales | $ | - | $ | 21,842 | $ | - | $ | - | $ | 21,842 | ||||||||||
Operating (loss) income | $ | (1,666 | ) | $ | 7,072 | $ | (921 | ) | $ | (53 | ) | $ | 4,432 | |||||||
As at June 30, 2010 | ||||||||||||||||||||
Mineral Properties | $ | - | $ | 32,482 | $ | 45,809 | $ | - | $ | 78,291 | ||||||||||
Property, plant and equipment | $ | 10 | $ | 14,539 | $ | 6,896 | $ | 3 | $ | 21,448 | ||||||||||
Total assets | $ | 45,360 | $ | 78,485 | $ | 57,464 | $ | 25 | $ | 181,334 | ||||||||||
As at December 31, 2009 | ||||||||||||||||||||
Mineral Properties | $ | - | $ | 30,364 | $ | 43,763 | $ | - | $ | 74,127 | ||||||||||
Property, plant and equipment | $ | 11 | $ | 12,298 | $ | 4,922 | $ | 2 | $ | 17,233 | ||||||||||
Total assets | $ | 25,120 | $ | 67,978 | $ | 46,614 | $ | 26 | $ | 139,738 |
Page 13
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
15. Segmented Information (continued)
c) | Major Customers |
For both the three and six month periods ended June 30, 2010, there were two customers, each accounting for greater than 10% of total sales, and in aggregate accounted for 100% of total sales of the Company.
For the three and six month periods ended June 30, 2009, there was one customer accounting for 94% and 96% of total sales of the Company, respectively.
16. | Commitments and Contingencies |
The Company has a contract to guarantee power supply at its Caylloma mine. Under the contract, the seller is obligated to deliver a "maximum committed demand" (for the present term this stands at 2,800 Kw) and Bateas is obligated to purchase subject to exemptions under provisions of "Force Majeure". The contract is automatically renewed every two years for a period of 10 years. Renewal can be avoided without penalties by notifying 10 months in advance of renewal date. Tariffs are established yearly by the energy market regulator in accordance with applicable regulations in Peru.
The Company acts as guarantor to capital lease obligations held by two of its mining contractors. These capital lease contracts are related to the acquisition of mining equipment deployed at the Caylloma mine. As at June 30, 2010, these obligations amounted to $1,037 and mature in 2010.
a) | Environmental Matters |
The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the public health and environment and believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.
Estimated future reclamation costs are based principally on legal and regulatory requirements. As of June 30, 2010, $2,621 (2009: $2,529) was accrued for reclamation costs relating to mineral properties in accordance with Section 3110, “Asset Retirement Obligations”. See Notes 12. c) and 13.
b) | Income Taxes |
The Company operates in numerous countries around the world and accordingly it is subject to, and pays annual income taxes under the various income tax regimes in the countries in which it operates. Some of these tax regimes are defined by contractual agreements with the local government, and others are defined by the general corporate income tax laws of the country.
Page 14
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
16. Commitments and Contingencies (continued)
b) | Income Taxes (continued) |
The Company has historically filed, and continues to file, all required income tax returns and to pay the taxes reasonably determined to be due. The tax rules and regulations in many countries are highly complex and subject to interpretation. From time to time, the Company is subject to a review of its historic income tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the interpretation or application of certain rules to the Company’s business conducted within the country involved.
c) | Title Risk |
Although the Company has taken steps to verify title to properties in which it has an interest, these procedures do not guarantee the Company’s title. Property title may be subject to, among other things, unregistered prior agreements or transfers and may be affected by undetected defects.
17. | Capital Disclosure |
The Company’s objectives when managing capital are to provide shareholder returns through maximization of the profitable growth of the business and to maintain a degree of financial flexibility relevant to the underlying operating and metal price risks while safeguarding the Company’s ability to continue as a going concern.
The capital of the Company consists of shareholders’ equity, net of cash. The Board of Directors does not establish a quantitative return on capital criteria for management. The Company manages the capital structure and make adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets.
The management of the Company believes that the capital resources of the Company as at June 30, 2010, are sufficient for its present needs for the next 12 months. The Company is not subject to externally imposed capital requirements.
The Company’s overall strategy with respect to capital risk management remained unchanged during the year.
18. | Management of financial risk |
The Company’s financial instruments are exposed to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk, and price risk. The Company’s Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework and reviews the Company’s policies on an ongoing basis.
Page 15
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
18. Management of financial risk (continued)
a) | Fair value of financial instruments |
The carrying value of cash, short term investments, accounts receivable, accounts payable and accrued liabilities, due to related parties, net, approximate their fair value due to the relatively short periods to maturity and the terms of these financial instruments.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The analysis of financial instruments that are measured subsequent to initial recognition at fair value can be categorized into Levels 1 to 3 based upon the degree to which the fair value is observable.
· | Level 1 - inputs to the valuation methodology are quoted (unadjusted) for identical assets or liabilities in active markets. |
· | Level 2 - inputs to valuation methodology include quoted market prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
· | Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value of measurement. |
The Company has classified the determination of fair value of accounts receivable and derivatives as level 2, as the valuation method used by the Company includes an assessment of assets in quoted markets with significant observable inputs.
Financial assets (liabilities) at fair value as at June 30, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Short term investments | $ | 16,052 | $ | - | $ | - | $ | 16,052 | ||||||||
Accounts receivable | - | 7,465 | - | 7,465 | ||||||||||||
Derivatives | - | 3,263 | - | 3,263 | ||||||||||||
$ | 16,052 | $ | 10,728 | $ | - | $ | 26,780 |
There were no changes in the levels during the period ended June 30, 2010
Financial assets (liabilities) at fair value as at December 31, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Short term investments | $ | 6,034 | $ | - | $ | - | $ | 6,034 | ||||||||
Accounts receivable | - | 8,322 | - | 8,322 | ||||||||||||
Derivatives | - | (3,055 | ) | - | (3,055 | ) | ||||||||||
$ | 6,034 | $ | 5,267 | $ | - | $ | 11,301 |
Page 16
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
18. Management of financial risk (continued)
a) | Fair value of financial instruments (continued) |
Accounts receivable includes accounts receivable from provisional sales. The fair value of accounts receivable resulting from provisional pricing reflect observable market commodity prices. Resulting fair value changes to accounts receivable are through sales. Transactions involving accounts receivable are with counterparties the Company believes are creditworthy.
Derivatives are carried at their fair value, which is determined based on internal valuation models that reflect observable forward market commodity prices. Resulting fair value changes to derivatives are through net gain (loss) on commodity contracts. Transactions involving derivatives are with counterparties the Company believes to be creditworthy.
During the six months ended June 30, 2010, there has been no changes in the classification of financial assets and liabilities in level 3 of the hierarchy.
b) | Currency risk |
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. The Company operates in Canada, Peru, Mexico and Barbados and a portion of its expenses are incurred in Canadian dollars, Nuevo Soles, and Mexican Pesos. A significant change in the currency exchange rates between the United States dollar relative to the other currencies could have a material effect on the Company’s results of operations, financial position or cash flows. The Company has not hedged its exposure to currency fluctuations.
As at June 30, 2010, the Company is exposed to currency risk through the following assets and liabilities denominated in Canadian dollars, Nuevo Soles and Mexican Pesos (all amounts are expressed in thousands of Canadian dollars, thousands of Nuevo Soles or thousands of Mexican Pesos):
June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Canadian | Nuevo | Mexican | Canadian | Nuevo | Mexican | |||||||||||||||||||
Dollars | Soles | Pesos | Dollars | Soles | Pesos | |||||||||||||||||||
Cash | $ | 31,692 | S/. | 1,044 | $ | 14,482 | $ | 21,283 | S/. | 302 | $ | 1,283 | ||||||||||||
Short term investments | 10,800 | - | - | 560 | - | - | ||||||||||||||||||
Accounts receivable | 37 | 1,815 | 25,227 | 5 | 880 | 6,565 | ||||||||||||||||||
Accounts payable and accrued liabilities | (198 | ) | (14,642 | ) | (5,732 | ) | (194 | ) | (17,150 | ) | (623 | ) |
Based on the above net exposure as at June 30, 2010, and assuming that all other variables remain constant, a 10% depreciation or appreciation of the US dollar against the above currencies would result in an increase or decrease, expressed in US dollars, as follows:
Impact to other comprehensive income | $ | 4,486 | ||||||||||
Impact to net income (loss) | $ | (463 | ) | $ | 298 |
Page 17
FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
18. Management of financial risk (continued)
c) | Credit risk |
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company’s cash and short term investments are held through large Canadian, international and foreign national financial institutions. These investments mature at various dates within one year. All of the Company’s trade accounts receivables are held with large international metals trading companies.
The Company holds derivative contracts with financial institutions and in this regard is exposed to counterparty risk. The Company mitigates this risk by transacting only with reputable financial institutions to minimize credit risk.
As at June 30, 2010, the Company has a Mexican value added tax of $990 and Peruvian value added tax of $424. The Company expects to recover the full amounts from the Mexican and Peruvian Governments.
d) | Liquidity risk |
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk by continuing to monitor forecasted and actual cash flows. The Company has in place a planning and budgeting process to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis and its development plans. The Company strives to maintain sufficient liquidity to meet its short term business requirements, taking into account its anticipated cash flows from operations, its holdings of cash, short term investments, and its committed liabilities.
The Company expects the following maturities of its financial liabilities (including interest), operating leases, and other contractual commitments:
Expected payments due by period as at June 30, 2010 | ||||||||||||||||||||
Less than 1 year | 1 - 3 years | 4 - 5 years | After 5 years | Total | ||||||||||||||||
Accounts payable and accrued liabilities | $ | 8,746 | $ | - | $ | - | $ | - | $ | 8,746 | ||||||||||
Due to related parties, net | 17 | - | - | - | 17 | |||||||||||||||
Long term liability | 1,079 | 1,384 | - | - | 2,463 | |||||||||||||||
Total 1 | $ | 9,842 | $ | 1,384 | $ | - | $ | - | $ | 11,226 |
1 Amounts above do not include payments related to the following: (i) the Company's anticipated asset retirement obligation of $2,621 associated with mine closure, land reclamation, and other environmental matters.
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FORTUNA SILVER MINES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
(All amounts expressed in thousands of US Dollars, except for share and per share amounts)
18. Management of financial risk (continued)
e) | Interest rate risk |
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The risk that the Company will realize a loss as a result of a decline in the fair value is limited because the balances are generally held with major financial institutions in demand deposit accounts.
f) | Metal price risk |
The Company is exposed to metals price risk with respect to silver, gold, zinc, lead, and copper sold through its mineral concentrate products. The Company mitigates this risk by implementing price protection programs for some of its zinc and lead production through the use of derivative instruments. As a matter of policy, the Company does not hedge its silver production.
A 10% change in zinc, lead, silver, gold, and copper prices would cause a $477, $507, $942, $59, and $104 change in net earnings on an annual basis.
19. | Supplemental cash flow information |
Three months ended June 30, Six months ended June 30, | ||||||||||||||||||||
Notes | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||
Cash received or paid for interest and income taxes: | ||||||||||||||||||||
Cash received for interest | $ | 49 | $ | 5 | $ | 99 | $ | 67 | ||||||||||||
Cash paid for income taxes | $ | 1,306 | $ | 50 | $ | 1,576 | $ | 143 | ||||||||||||
Non-cash Transactions: | ||||||||||||||||||||
Future income tax liability on Continuum purchase | 9 | $ | - | $ | - | $ | 124 | $ | - | |||||||||||
Issuance of shares on purchase of resource property | 9 | $ | - | $ | - | $ | 21 | $ | 5,194 | |||||||||||
Future income taxliability on Tlacolula property option | 9 | $ | - | $ | - | $ | 11 | $ | - | |||||||||||
Reassessment of asset retirement obligation | $ | - | $ | - | $ | - | $ | 288 | ||||||||||||
Cancellation of Minera Condor liability | $ | - | $ | - | $ | - | $ | 156 | ||||||||||||
Equipment purchased through capital lease | $ | 493 | $ | 1,026 | $ | 490 | $ | 1,127 | ||||||||||||
Purchase of resource property on a deferred payment plan | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Sale of equipment for a long-term receivable | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Fair value of options exercised | $ | 136 | $ | 61 | $ | 256 | $ | 71 |
20. | Subsequent Event up to August 9, 2010 |
In 2010, the Company entered into a credit agreement with the Bank of Nova Scotia for a $20 million senior secured revolving credit facility (“credit facility”) to be refinanced or repaid on or within two and one-half years or before December 2012. The credit facility is secured by a first ranking lien on Bates and its assets and bears interest and fees at prevailing market rates. No funds were drawn from this credit facility during the year.
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