Top picks 2012: Fortuna Silver Mines

As production ramps up in Mexico, this miner offers investors an opportunity to profit from rising silver prices.

By MSN Money Partner Jan 11, 2012 11:26AM
Image: Jewelry store (© Baerbel Schmidt/Getty Images/Getty Images)This post is one in a series in which over 50 newsletter advisors share their Top Picks for 2012.

By Tyler Laundon, Small Cap Investor

The Fed's move in early December to essentially backstop the entire global financial system by becoming the lender of last resort is bullish for precious metals over the long term. My favorite way to play this trend is to purchase emerging gold and silver producers. Accordingly, my favorite stock for 2012 is Fortuna Silver Mines (FSM).

The catalyst I've been expecting to move this stock higher is the opening of the company's second major mine -- the San Jose Mine in the silver-rich Sierra Madre Mountains of Mexico. Silver production began there on Sept. 1.

The company's first flagship mine, Caylloma, is located in Peru. It purchased Caylloma in 2005, upgraded the plant, and increased production by 150%. Looking at both mines in the third quarter of 2011, silver production was up by 40% to 660,749 ounces compared to the third quarter of 2010. Most came from Caylloma.

With the average price of silver at $35.16 per ounce, Fortuna's revenues rose 80% in the third quarter. Net income was $10.31 million, a huge improvement over a loss of $770,000 the previous year, and operating income surged to $14.89 million from $1.03 million. The company now sits on $62.73 million in cash. 

Fortuna plans to produce 2.75 million ounces from the San Jose mine in 2012. At last year's average silver price, this would be worth around $100 million for the company. Revenues could more than double over the year, just based on current production plans and stable silver prices. The bottom line is that Fortuna's production growth from the San Jose mine gives investors excellent exposure to silver prices.

Long term, I expect this stock has the potential to double or more as forecast production comes on line. We’re seeing the glory days for silver production in Mexico, and I think we can expect great things to come from Fortuna. (Full disclosure: Tyler Laundon owns shares of Fortuna Silver Mines.)

Steven Halpern's TheStockAdvisors.com​​ offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.
 
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