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Why Fortuna Silver Mines Stock Tanked 15% Early Today

By Reuben Gregg Brewer - Apr 26, 2021 at 10:36AM

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The precious metals miner had some good news to report, but it was the kind that often leads to a price drop. Here's a quick look.

What happened

Shares of Fortuna Silver Mines (FSM -9.21%) fell as much as 15% when the opening bell rang on Monday. The company -- a precious metals miner based in Canada with mines in Mexico, Peru, and Argentina -- announced before the market opened that it was making an acquisition. Investors often sell the buyer, given that there are costs involved when one company acquires another, and that's exactly what happened here.  

So what

Fortuna is buying fellow Canadian precious metals miner Roxgold in a stock and cash deal. Roxgold shareholders will receive 0.283 shares of Fortuna for each share of Roxgold they own. In addition, each Roxgold share will bring a cash payment of $0.001 in Canadian currency (it's obviously mostly a stock deal).

Based on the closing prices of Fortuna and Roxgold prior the deal's announcement, that represents about a 40% premium. Roxgold's stock rose in early trading, as you might expect. That said, after the drop in Fortuna's share price, that premium is a bit smaller at this point, with the two stocks now likely to trade in tandem in the future because of the stock component involved here.   

A man standing in mouth of mine with the sun in the background.

Image source: Getty Images.

Scale is important when it comes to mining for gold and silver, and this transaction meaningfully increases Fortuna's production in gold equivalent ounces. At the start of 2021, Fortuna was projecting that it would produce as much as 300,000 gold equivalent ounces this year. This deal could increase that by as much as 50% to 450,000 gold equivalent ounces.

The acquisition also expands Fortuna's reach into West Africa and comes with a number of near-term and potential long-term development opportunities. Although Roxgold is largely a gold miner, Fortuna noted that silver remains an important focus for the company.    

Now what

Fortuna is a $1.2 billion market cap miner. Roxgold is even smaller, at less than $700 million (after the acquisition news). Increased size should make it easier for the combined company to tap the capital markets, but even together they will still be relatively small.

Most investors looking for precious metals exposure would probably be better off sticking with larger names unless the goal is specifically to find a silver miner. Indeed, that remains true even though this deal could prove a long-term positive for Fortuna. 

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