Top picks 2012: Fortuna Silver Mines

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.

And 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 at the San Jose mine began on September 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 an average selling price of $35.16 per ounce, Fortuna's revenues rose 80% over the third quarter of last year.

Net income was $10.31 million, a huge improvement over a loss of $770,000 last year, and operating income surged to $14.89 million from $1.03 million. The company now sits on $62.73 million in cash. �

Simple math shows that production should more than double in the fourth quarter of 2011, with San Jose adding over 600,000 ounces to Caylloma's 560,000-ounce production.

Looking forward, in 2012, Fortuna plans to produce 2.75 million ounces from the San Jose mine. At this year's average silver price, this production is worth around $100 million in revenue.

Revenues could more than double in the next year, just based on current production plans and stable silver prices. Assume silver averages $40 per ounce in the future.

Assuming further that Fortuna hits its production guidance revenues will rise by 100% in 2011. In 2012 they will have increased by 300% over 2010 and by 400% in 2014.

These numbers show that Fortuna should enjoy robust revenue and earnings growth, even if silver prices stay flat. 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 forecasted production comes on line.

It appears 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.)