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Fortuna reports new development in dispute over San Jose royalty

Kitco News

(Kitco News) - Fortuna Silver Mines, Inc. (NYSE: FSM; TSX: FVI) Wednesday reported an escalation in a dispute over a royalty involving the San Jose mine, saying that Mexican authorities have threatened to cancel the mining concession if the company does not make a payment by mid-March.

Fortuna said it would make a payment, if necessary, but will continue to dispute the claim.

BMO Capital Markets said the disputed amount – US$30 million -- not including the value-added tax – amounts to around 19 U.S. cents per share, or around 4.7% of Tuesday’s closing price. However, the company said its cash balance is sufficient to cover the payment should Fortuna lose the court fight.

“Today's update is the first we have heard of this dispute, so we expect the stock may underperform on the news,” BMO said.

Fortuna’s update listed a timeline for the dispute, reporting that in 2017, the Mexican Geological Service (SGM) advised the company that a previous owner of one of its San Jose mineral concessions had granted SGM a royalty of 3% of the billing value of minerals from the concession. Fortuna has argued that no royalty is payable, supported by legal opinions from three independent law firms. So in 2018, Fortuna initiated administrative and legal proceedings against the Direccion General de Minas (DGM) to remove reference to the royalty on the title register.

“The company has recently received notice from the DGM seeking to cancel the mining concession if the royalty, in the Mexican pesos equivalent of US$30 million plus VAT (being the amount of the claimed royalty from 2011 to 2019) is not paid before March 15, 2020,” Fortuna said Wednesday. “The company will be initiating legal proceedings to contest the cancellation procedure and also to stay the cancellation process.”

If not successful in canceling the DGM action or winning a stay of execution, Fortuna may be required to pay, or post a bond or other security, up to the amount claimed in order to preserve the mining concession, Fortuna said. If it does so, Fortuna would immediately proceed with dispute proceedings.

“If the company is required to pay the royalty or post security, it will do so from available working capital,” Fortuna said. “The company remains adequately funded to meet its capital requirements for the completion of the Lindero Project and to fund sustaining capital expenditures at its operating mines.”

Fortuna reported earlier this month that the San Jose mine produced 7.9 million ounces of silver in 2019.

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