Gold Dependence And Rising Costs Will Pressure Long Term Earnings Outlook

Catalysts

About Fortuna Mining

Fortuna Mining is a precious metals producer focused on developing and operating gold and silver mines across Latin America and West Africa.

What are the underlying business or industry changes driving this perspective?

• Heavy reliance on elevated gold prices to sustain current free cash flow means that any normalization in bullion prices would compress the economics of Séguéla, Lindero and the upcoming Diamba Sud project, putting pressure on revenue growth and overall earnings.
• Planned production growth from Diamba Sud and the Séguéla expansion concentrates future output and capital in West African jurisdictions where regulatory, fiscal or permitting changes could delay projects, inflate capital intensity and erode net margins.
• Escalating all in sustaining costs at Séguéla, driven by higher royalties and capital intensity and combined with structurally higher stripping ratios at key operations, risks locking in a higher cost base that would narrow operating margins if price tailwinds fade.
• A rapidly expanding project and exploration pipeline across multiple countries increases execution complexity and overhead requirements, raising the likelihood of schedule slippage, budget overruns and higher corporate G&A that would weigh on net income.
• Dependence on continuous exploration success at assets like Séguéla, Diamba Sud and new basin positions to replace depleting reserves heightens the risk that future drill results disappoint, forcing higher sustaining and growth CapEx to maintain production and pressuring free cash flow.

Assumptions

This narrative explores a more pessimistic perspective on Fortuna Mining compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Fortuna Mining's revenue will decrease by 4.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 20.8% today to 42.0% in 3 years time.
• The bearish analysts expect earnings to reach $464.3 million (and earnings per share of $1.52) by about December 2028, up from $261.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.3x on those 2028 earnings, down from 11.5x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 21.5x.
• The bearish analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistently elevated or structurally rising gold and silver prices, supported by macro trends such as deglobalization and ongoing monetary debasement, could sustain or expand Fortuna Mining's already strong margins. This could lead to higher and more durable revenue and earnings than implied in a bearish view and support a higher share price through the cycle.
• The company is demonstrating consistent operational delivery at Séguéla, Lindero and Caylloma with improving safety metrics and debottlenecking projects such as the rock breaker, crusher optimization and a planned solar plant. Together, these initiatives could lock in lower unit costs and higher throughput over time, structurally improving net margins and cash generation.
• A robust pipeline of growth projects, including the Diamba Sud development with a preliminary internal rate of return of 72% at a long term gold price well below current spot, along with exploration success at Sunbird, Kingfisher and across Latin America and West Africa, could drive sustained volume growth and resource expansion that materially lifts long term revenue and earnings.
• Fortuna's strengthened balance sheet, with liquidity of $588 million and a net cash position of $266 million, combined with resumed capital repatriation from Argentina and Côte d’Ivoire, provides ample flexibility for disciplined growth investments and potential shareholder returns such as buybacks. This could reduce execution risk and support valuation multiples and earnings per share.
• Improving political and business environments in key jurisdictions such as Argentina and Côte d’Ivoire, with pro reform and pro investment signals from recent elections and supportive governments, may reduce sovereign risk premiums and fiscal uncertainty. This could enhance project economics, stabilize operating costs and support higher long term net income than a pessimistic scenario would assume.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Fortuna Mining is CA$8.86, which represents up to two standard deviations below the consensus price target of CA$13.3. This valuation is based on what can be assumed as the expectations of Fortuna Mining's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$17.02, and the most bearish reporting a price target of just CA$8.86.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $464.3 million, and it would be trading on a PE ratio of 5.3x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of CA$13.44, the analyst price target of CA$8.86 is 51.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.