EX-99.1 2 tv500075_ex99-1.htm EXHIBIT 99.1

Exhibit 99.1

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED

JUNE 30, 2018 AND 2017

(Presented in thousands of United States dollars, unless otherwise stated)

Fortuna Silver Mines Inc.

Condensed Interim Consolidated Income Statements

(Unaudited - Presented in thousands of US dollars, except per share amounts)

	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Sales (note 20)	$	73,666		$	63,911		$	144,108		$	128,745
Cost of sales (note 21)		42,274			41,700			81,379			79,351
Mine operating income		31,392			22,211			62,729			49,394

Other expenses (income)
Selling, general and administration (note 22)		8,040			5,852			14,935			11,197
Exploration and evaluation		284			63			353			152
Share of loss (income) of equity-accounted investee		46			(24	)		(195	)		41
Foreign exchange (gain) loss		(465	)		1,095			1,711			3,227
Other expenses		1,115			1,011			1,125			1,007
		9,020			7,997			17,929			15,624

Operating Income		22,372			14,214			44,800			33,770

Finance items
Interest income		(923	)		(516	)		(1,562	)		(800	)
Interest expense		514			457			990			936
Other finance cost (note 15)		-			-			465			-
Accretion of provisions		194			162			372			325
(Gain) loss on financial assets and liabilities carried at fair value		(2,497	)		(605	)		(2,869	)		1,017
		(2,712	)		(502	)		(2,604	)		1,478

Income before taxes		25,084			14,716			47,404			32,292

Income tax
Current income tax expense		12,218			8,798			21,964			16,801
Deferred income tax expense (recovery)		1,715			(2,980	)		535			(6,406	)
		13,933			5,818			22,499			10,395

Net income for the period	$	11,151		$	8,898		$	24,905		$	21,897

Earnings per share (note 19)
Basic	$	0.07		$	0.06		$	0.16		$	0.14
Diluted	$	0.07		$	0.06		$	0.16		$	0.14

Weighted average number of common shares outstanding during the period (000's)
Basic		159,679			159,223			159,658			156,544
Diluted		160,194			159,523			159,975			156,976

The accompanying notes are an integral part of these financial statements.

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Fortuna Silver Mines Inc.

Condensed Interim Consolidated Statements of Comprehensive Income

(Unaudited - Presented in thousands of US dollars)

	Three months ended June 30,					Six months ended June 30,
	2018		2017			2018			2017
Net income for the period	$	11,151	$	8,898		$	24,905		$	21,897

Items that will remain permanently in other comprehensive income:
Change in fair value of marketable securities, net of $nil tax		-		-			(69	)		-
Items that may in the future be reclassified to profit or loss:
Change in fair value of marketable securities, net of $nil tax		-		(62	)		-			186
Change in fair value of hedging instruments, net of $nil tax		286		26			180			180
Total other comprehensive income (loss) for the period		286		(36	)		111			366
Comprehensive income for the period	$	11,437	$	8,862		$	25,016		$	22,263

The accompanying notes are an integral part of these financial statements.

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Fortuna Silver Mines Inc.

Condensed Interim Consolidated Statements of Financial Position

(Unaudited - Presented in thousands of US dollars)

	June 30,		December 31,
	2018		2017
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	102,455	$	183,074
Short term investments (note 5)		95,886		29,500
Accounts and other receivables (note 7)		30,353		36,370
Inventories (note 8)		17,328		17,753
Derivative assets (note 9)		1,934		140
Marketable securities		-		556
Income tax receivable		145		130
Prepaid expenses		2,662		3,231
Assets held for sale		1,869		1,701
		252,632		272,455
NON-CURRENT ASSETS
Mineral properties and exploration and evaluation assets (note 10)		303,658		296,612
Plant and equipment (note 11)		134,120		133,664
Investment in associates (note 6)		3,970		2,694
Other non-current receivables		3,571		1,223
Deposits on non-current assets (note 12)		23,196		-
Total assets	$	721,147	$	706,648

LIABILITIES
CURRENT LIABILITIES
Trade and other payables (note 13)	$	33,828	$	41,476
Current portion of closure and rehabilitation provisions (note 16)		2,411		1,656
Income taxes payable		13,335		14,237
Current portion of finance lease obligations		-		906
Derivative liabilities (note 9)		-		2,328
		49,574		60,603
NON-CURRENT LIABILITIES
Credit facility (note 15)		39,603		39,871
Other liabilities		224		1,356
Closure and rehabilitation provisions (note 16)		11,393		12,577
Deferred tax liabilities		29,191		28,657
Total liabilities		129,985		143,064

EQUITY
Share capital (note 18)		419,350		418,168
Reserves		17,506		16,015
Retained earnings		154,306		129,401
Total equity		591,162		563,584

Total liabilities and equity	$	721,147	$	706,648

/s/ Jorge Ganoza Durant		/s/ Kylie Dickson
Jorge Ganoza Durant		Kylie Dickson
Director		Director

The accompanying notes are an integral part of these financial statements.

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Fortuna Silver Mines Inc.

Condensed Interim Consolidated Statements of Cashflows

(Unaudited - Presented in thousands of US dollars)

	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
OPERATING ACTIVITIES
Net income for the period	$	11,151		$	8,898		$	24,905		$	21,897
Items not involving cash
Depletion and depreciation		11,947			11,299			22,591			22,037
Accretion of provisions		194			162			372			325
Income taxes		13,933			5,818			22,499			10,395
Share based payments expense, net of cash settlements		1,112			697			(2,040	)		(3,046	)
Share of loss (income) of equity-accounted investee (note 6)		46			(24	)		(195	)		41
(Loss) gain on disposal of mineral properties, plant and equipment		(8	)		445			(8	)		439
Loss on debt modification		-			-			465			-
Unrealized foreign exchange (gain) loss		(376	)		1,347			548			799
Unrealized (gain) loss on financial assets carried at fair value		(2,787	)		(196	)		(4,153	)		1,081
Other		1,208			974			1,416			561
		36,420			29,420			66,400			54,529
Accounts and other receivables		(2,232	)		1,246			5,003			(5,227	)
Prepaid expenses		282			(9	)		569			573
Inventories		213			(1,079	)		(586	)		(1,826	)
Trade and other payables		(5,592	)		(5,262	)		(7,046	)		(4,228	)
Rehabilitation payments		(97	)		(149	)		(200	)		(235	)
Cash provided by operating activities		28,994			24,167			64,140			43,586
Income taxes paid		(7,518	)		(11,849	)		(22,698	)		(22,056	)
Interest paid		(359	)		(455	)		(738	)		(905	)
Interest received		772			146			1,540			266
Net cash provided by operating activities		21,889			12,009			42,244			20,891

INVESTING ACTIVITIES
Purchases of short term investments		(96,032	)		(65,844	)		(142,328	)		(149,434	)
Redemptions of short-term investments		45,669			20,900			74,401			36,600
Investments in marketable securities		(624	)		(1,094	)		(624	)		(2,233	)
Purchases of mineral properties, plant and equipment		(16,263	)		(11,480	)		(27,468	)		(20,742	)
Deposits on long term assets, net		(21,063	)		(1,613	)		(23,196	)		(3,630	)
Proceeds from sale of assets		8			-			8			15
Changes in long term receivables		(2,073	)		-			(2,348	)		-
Cash used in investing activities		(90,378	)		(59,131	)		(121,555	)		(139,424	)

FINANCING ACTIVITIES
Transaction costs on debt modification (note 15)		-			-			(792	)		-
Proceeds from issuance of common shares		396			-			396			76,409
Share issuance costs		-			(49	)		-			(5,023	)
Repayments of finance lease obligations		(363	)		(529	)		(906	)		(1,057	)
Cash provided (used in) by financing activities		33			(578	)		(1,302	)		70,329
Effect of exchange rate changes on cash and cash equivalents		(72	)		(417	)		(6	)		(186	)
Decrease in cash and cash equivalents during the period		(68,528	)		(48,117	)		(80,619	)		(48,390	)
Cash and cash equivalents, beginning of the period		170,983			82,211			183,074			82,484
Cash and cash equivalents, end of the period	$	102,455		$	34,094		$	102,455		$	34,094

Cash and cash equivalents consist of:
Cash	$	22,219		$	18,054		$	22,219		$	18,054
Cash equivalents		80,236			16,040			80,236			16,040
Cash and cash equivalents, end of the period	$	102,455		$	34,094		$	102,455		$	34,094

The accompanying notes are an integral part of these financial statements.

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Fortuna Silver Mines Inc.

Condensed Interim Consolidated Statements of Changes in Equity

(Unaudited - Presented in thousands of US dollars, except for share amounts)


	Share capital				Reserves
	Number of common shares		Amount		Equity reserve			Hedging reserve			Fair value reserve			Foreign currency reserve		Retained earnings		Total equity

Balance at January 1, 2018		159,636,983	$	418,168	$	14,726		$	147		$	27		$	1,115	$	129,401	$	563,584
Total comprehensive income
Net income for the period		-		-		-			-			-			-		24,905		24,905
Other comprehensive income		-		-		-			180			(69	)		-		-		111
Total comprehensive income		-		-		-			180			(69	)		-		24,905		25,016

Transactions with owners of the Company
Exercise of warrants (note 18b)		85,184		793		(396	)		-			-			-		-		397
Shares issued for share units		78,150		389		(389	)		-			-			-		-		-
Share-based payments (note 17)		-		-		2,165			-			-			-		-		2,165
		163,334		1,182		1,380			-			-			-		-		2,562

Balance at June 30, 2018		159,800,317	$	419,350	$	16,106		$	327		$	(42	)	$	1,115	$	154,306	$	591,162

Balance at January 1, 2017		146,978,173	$	343,963	$	14,865		$	(222	)	$	334		$	1,115	$	63,096	$	423,151
Total comprehensive income
Net income for the period		-		-		-			-			-			-		21,897		21,897
Other comprehensive income		-		-		-			180			186			-		-		366
Total comprehensive income		-		-		-			180			186			-		21,897		22,263

Transactions with owners of the Company
Issuance of common shares		11,873,750		69,783		-			-			-			-		-		69,783
Exercise of stock options		133,060		718		(198	)		-			-			-		-		520
Exercise of warrants		238,515		2,167		(1,084	)		-			-			-		-		1,083
Share-based payments (note 17)		-		-		280			-			-			-		-		280
		12,245,325		72,668		(1,002	)		-			-			-		-		71,666

Balance at June 30, 2017		159,223,498	$	416,631	$	13,863		$	(42	)	$	520		$	1,115	$	84,993	$	517,080

The accompanying notes are an integral part of these financial statements.

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Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

1. Reporting Entity

Fortuna Silver Mines Inc. and its subsidiaries (the "Company") is a publicly traded company incorporated and domiciled in British Columbia, Canada.

The Company is engaged in precious and base metal mining and related activities in Latin America, including exploration, extraction, and processing. The Company operates the Caylloma silver, lead, and zinc mine (“Caylloma”) in southern Peru and the San Jose silver and gold mine (“San Jose”) in southern Mexico, and is developing the Lindero Gold Project in northern Argentina.

Its common shares are listed on the New York Stock Exchange under the trading symbol FSM, and on the Toronto Stock Exchange under the trading symbol FVI.

The Company’s registered office is located at Suite 650, 200 Burrard Street, Vancouver, Canada, V6C 3L6.

2. Basis of Presentation

Statement of Compliance

These unaudited condensed interim consolidated financial statements (“interim financial statements”) were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of interim financial statements, including IAS 34 -Interim Financial Reporting. They do not include all the information required for full annual financial statements. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2017, which includes information necessary for understanding the Company’s business and financial presentation.

The same accounting policies and methods of computation are followed in these interim financial statements as compared with the most recent annual financial statements, except for the adoption of new standards effective as of January 1, 2018 (Note 3). The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not effective yet.

On August 7, 2018, the Company's Board of Directors approved these interim financial statements for issuance.

Presentation and Functional Currency

These financial statements are presented in United States Dollars (“$” or "US$"), which is the functional currency of the Company. Reference to C$ are to Canadian dollars. All amounts in these financial statements have been rounded to the nearest thousand US dollars, unless otherwise stated.

Basis of Measurement

These consolidated financial statements have been prepared on a historical cost basis, except for those assets and liabilities that are measured at fair value (Note 24).

3. Significant Accounting Policies and Changes to Accounting Policies

IFRS 15, Revenue from Contracts with Customers

The Company has adopted IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) as of January 1, 2018. The Company elected to apply IFRS 15 using a modified retroactive approach by recognizing the cumulative effect of initially adopting this standard at the date of initial recognition. Comparative information has not been restated and continues to be reported under IAS 18 Revenue (“IAS 18”). The Company has concluded that there was no cumulative effect adjustment required to be recognized at January 1, 2018. The details of the accounting policy changes and the quantitative impact of these changes are described below.

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Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

Concentrate Sales

The Company earns revenue from contracts with customers related to its concentrate sales. Revenue from contracts with customers is recognized when a customer obtains control of the concentrate and the Company satisfies its performance obligation. The Company considers the terms of the contract in determining the transaction price, which is the amount the entity expects to be entitled to in exchange for the transferring of the concentrates. The transaction price of a contract is allocated to each performance obligation based on its stand-alone selling price.

The Company satisfies its performance obligations for its concentrate sales based upon specified contract terms which are generally upon delivery to the customer at a specified warehouse or upon loading of the concentrate onto a vessel. The Company typically receives payment within one to four weeks of delivery.

Revenue from concentrate sales is recorded based upon forward market price of the expected final sales price date. IFRS 15 does not consider provisional price adjustments associated with concentrate sales to be revenue from contracts with customers as they arise from changes in market pricing for silver, gold, lead and zinc between the delivery date and settlement date. As such, the provisional price adjustments are accounted for as derivatives and presented separately in Note 20 of these financial statements.

The Company has concluded that there were no significant changes in the accounting for concentrate sales as a result of the transition to IFRS 15, as the timing of control of the concentrate passing to the customer and the treatment of provisional pricing adjustments are unchanged from policies applied prior to the adoption of IFRS 15.

IFRS 9 Financial Instruments

The Company has adopted IFRS 9 Financial Instruments (“IFRS 9”) as of January 1, 2018. Prior periods were not restated and no material changes resulted from adopting this new standard. IFRS 9 introduced a revised model for classification and measurement, and while this has resulted in several financial instrument classification changes, as presented in Note 24, there were no quantitative impacts from adoption.

The details of accounting policy changes as a result of the adoption of IFRS 9 are described below:

(a) Classification and measurement of financial assets and financial liabilities

IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates the previous IAS 39 categories for financial assets held to maturity, loans and receivables and available for sale.

Under IFRS 9, a financial asset is measured as either: amortized cost; fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). All non-derivative financial liabilities are measured at amortized cost. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated, and instead the hybrid financial instrument as a whole is assessed for classification.

A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:

it is held within a business model whose objective is to hold assets to collect contractual cash flows; and

its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:

it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

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Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

On initial recognition of an equity investment that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income (OCI). This election is made on an investment-by-investment basis. All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL.

The following accounting policies apply to the subsequent measurement of financial assets:

Financial assets at FVTPL - These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in profit or loss.

Financial assets at amortized cost - These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.

Equity investments at FVOCI - These assets are subsequently measured at fair value. Dividends are recognized as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Gains or losses recognized on the sale of the equity investment are recognized in OCI and are never reclassified to profit or loss.

Upon adoption of IFRS 9, the Company made an irrevocable election to present in other comprehensive income subsequent changes in the fair value of its investments in marketable securities, which is substantially consistent with the accounting treatment prior to adoption. These financial assets are classified as FVOCI.

The original measurement categories under IAS 39 and the new measurement categories under IFRS 9 are summarized in the following table:

	Original (IAS 39)	New (IFRS 9)
Financial assets
Cash and cash equivalents	Loans and receivables	Amortized cost
Term deposits	Loans and receivables	Amortized cost
Other receivables	Loans and receivables	Amortized cost
Marketable securities	Available for sale	FVOCI
Trade receivables from concentrate sales	FVTPL	FVTPL
Interest rate swap asset	Fair Value (hedging)	Fair Value (hedging)
Financial liabilities
Trade payables	Other liabilities	Amortized cost
Payroll payable	Other liabilities	Amortized cost
Share units payable	Other liabilities	Amortized cost
Credit facility	Other liabilities	Amortized cost
Other payables	Other liabilities	Amortized cost
Metal forward sales and zero cost collar contracts	FVTPL	FVTPL

(b) Impairment of financial assets

IFRS 9 introduces a new three-stage expected credit loss model for calculating impairment for financial assets. IFRS 9 no longer requires a triggering event to have occurred before credit losses are recognized. An entity is required to recognize expected credit losses when financial instruments are initially recognized and to update the amount of expected credit losses recognized at each reporting date to reflect changes in the credit risk of the financial instruments. In addition, IFRS 9 requires additional disclosure requirements about expected credit losses and credit risk.

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Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

For our trade receivables, we apply the simplified approach for determining expected credit losses which requires us to determine the lifetime expected losses for all our trade receivables. The expected lifetime credit loss provision for our trade receivables is based on historical counterparty default rates and adjusted for relevant forward-looking information, when required. We did not record an adjustment relating to the implementation of the expected credit loss model for our trade receivables.

The Company has elected to adopt the new general hedge accounting model in IFRS 9. This requires the Company to ensure that hedge accounting relationships are aligned with its risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness.

The Company has established a strategy, in accordance with its current risk management policies, to use interest rate swaps to hedge against the variability in cash flows arising from changes in USD LIBOR based floating interest rate borrowing relating to its credit facility.

As per IFRS 9, hedging relationships that qualified for hedge accounting in accordance with IAS 39, that also qualify for hedge accounting in accordance with IFRS 9 (after taking into account any rebalancing of the hedging relationship on transition), are regarded as continuing hedging relationships. Hence, the original hedge relationship continues from the trade inception date of the interest rate swap to the maturity date of the interest rate swap associated with the hedged exposure, unless the hedging relationship is required to be terminated earlier.

Management qualitatively assess that the changes in value of the hedging instrument and the hedged item will move in opposite directions and will be perfectly offset. As both counterparties to the derivative are investment grade, the effect of credit risk is considered as neither material nor dominant in the economic relationship. The hedge was highly effective at transition date under IFRS 9. The portion of the gain or loss on the hedging instrument that is determined to be effective will be recognized directly in other comprehensive income while the amount that is determined to be ineffective, if any, will be recorded in the profit or loss during the life of the hedging relationship.

New Accounting Standards Issued but not yet Effective

In 2016, the IASB issued IFRS 16 Leases (“IFRS 16”), which requires lessees to recognize assets and liabilities for most leases. Application of the standard is mandatory for annual reporting periods beginning on or after January 1, 2019, with earlier adoption permitted. The new standard is likely to result in increases to both the asset and liability positions of lessees, as well as affect the reported depreciation expense and finance costs of these entities in the statement of profit or loss. The Company is currently evaluating the impact the new standard will have on its financial results.

4. Use of Judgements and Estimates

The preparation of these interim financial statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities at the balance sheet date and reported amounts of expenses during the reporting period. Such judgements and estimates are, by their nature, uncertain. Actual outcomes could differ from these estimates.

The impacts of such judgements and estimates are pervasive throughout the interim financial statements and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and are accounted for prospectively.

In preparing these interim consolidated financial statements for the three and six months ended June 30, 2018, the Company applied the critical judgements and estimates as disclosed in note 4 of its audited consolidated financial statements for the year ended December 31, 2017.

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Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

5. Short Term Investments

	June 30,		December 31,
	2018		2017
Term deposits and similar instruments	$	95,886	$	29,500

The term deposits have maturities in excess of 90 days and less than one year on the date of acquisition.

6. Investment in Associates

On May 18, 2018, the Company exercised its share purchase warrants to purchase 5.3 million common shares of Prospero Silver Corp. (“Prospero”). Upon the exercise of these warrants, the Company held a 20% interest in Prospero and determined that it had the ability to exercise significant influence over Prospero. Accordingly, the Company commenced accounting for its investments using the equity method as of May 18, 2018.

Investments in associates as at June 30, 2018 were comprised of:

			Proportion of ownership held						Market Value ($C)
Name	Principal Activity	Incorporation and principal place of business	June 30, 2018			December 31, 2017			June 30, 2018		December 31, 2017
Medgold Resources, Corp.	Acquisition and exploration of resource properties	Canada - Serbia		22	%		22	%	$	8,700	$	3,200
Prospero Silver Corp.	Acquisition and exploration of resource properties	Canada - Mexico		20	%		15	%	$	1,500	$	696

The Company is related to Medgold by virtue of a director in common.

The following table shows the activity as at June 30, 2018:

	Medgold			Prospero			Total
Medgold shares and warrants presented as marketable securities, January 1, 2017	$	1,579		$	-		$	1,579
Fair value adjustments prior to February 7, 2017		(65	)		-			(65	)
Cash paid upon exercise of warrants		1,372			-			1,372
Share of Medgold's net loss		(192	)		-			(192	)
Balance at December 31, 2017		2,694			-			2,694
Prospero shares and warrants presented as marketable securities, January 1, 2018		-			556			556
Fair value adjustments prior to May 18, 2018		-			(99	)		(99	)
Cash paid upon exercise of warrants		-			624			624
Share of net income (loss)		207			(12	)		195
Balance at June 30, 2018	$	2,901		$	1,069		$	3,970

7. Accounts and Other Receivables


	June 30,		December 31,
	2018		2017
Trade receivables from concentrate sales	$	26,515	$	34,250
Advances and other receivables		1,140		1,249
Value added taxes recoverable		2,698		871
Accounts and other receivables	$	30,353	$	36,370

Page | 10

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

The Company's trade receivables from concentrate sales are expected to be collected in accordance with the terms of the existing concentrate sales contracts with its customers and no amounts were past due at June 30, 2018 or December 31, 2017.

8. Inventories

	June 30,		December 31,
	2018		2017
Concentrate stockpiles	$	2,719	$	2,594
Ore stockpiles		3,430		4,144
Materials and supplies		11,179		11,015
Inventories	$	17,328	$	17,753

During the three and six months ended June 30, 2018, the Company expensed $41,846 and $80,319 (three and six months ended June 30, 2017 – $41,127 and $78,599) respectively, of inventories to cost of sales.

9. Derivative Assets and Derivative Liabilities

	June 30,		December 31,
Assets	2018		2017
Interest rate swap	$	110	$	140
Commodity derivative contracts		1,824		-
Derivative assets	$	1,934	$	140

Liabilities
Interest rate swap	$	-	$	-
Commodity derivative contracts		-		2,328
Derivative liabilities	$	-	$	2,328

(a)

Commodity derivative contracts

As at June 30, 2018, the Company has zero cost collars for an aggregate 2,400 tonnes of lead with a floor price of $2,300 per tonne and a cap price of $2,689 per tonne, maturing between July and November 2018 and zero cost collars for an aggregate 8,600 tonnes of zinc with a floor price of $2,800 per tonne and a cap price of $3,300 per tonne, maturing between July 2018 and June 2019.

The zinc and lead contracts are derivative financial instruments and are not accounted for as designated hedges. They were initially recognized at fair value on the date on which the related derivative contracts were entered into and are subsequently re-measured to estimated fair value. Any gains or losses arising from changes in the fair value of the derivatives are credited or charged to profit or loss.

(b)

Interest rate swap

In January 2018, the Company entered into an interest rate swap ("Swap") for a term of four years in connection with the amended credit facility (Note 15) to hedge the variable interest rate risk on the Company’s Amended Credit Facility. The fixed interest rate on the Swap is 2.61% and the floating amount is based on the one-month LIBOR rate. The Swap is settled on a monthly basis, with settlement being the net difference between the fixed and floating interest rates. The Swap has been designated as a hedge for accounting purposes.

During the three and six months ended June 30, 2018, the Company recognized an unrealized loss of $105 and unrealized gain of $286 (three and six months ended June 30, 2017 – gains of $26 and $180), related to the changes in the fair value of the swaps through other comprehensive income. The Swap was determined to be an effective hedge for the period ended June 30, 2018.

Page | 11

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

10. Mineral Properties and Exploration and Evaluation Assets

	Depletable						Not depleted
	Caylloma			San Jose			Lindero			Other			Total
COST
Balance, January 1, 2018	$	112,669		$	164,198		$	140,154		$	4,150		$	421,171
Additions		4,332			6,438			7,185			1,704			19,659
Disposals		-			-			-			(170	)		(170	)
Change in rehabilitation provision		(96	)		(302	)		(124	)		-			(522	)
Balance, June 30, 2018	$	116,905		$	170,334		$	147,215		$	5,684		$	440,138

ACCUMULATED DEPLETION
Balance, January 1, 2018	$	61,053		$	63,506		$	-		$	-		$	124,559
Depletion		3,655			8,266			-			-			11,921
Balance, June 30, 2018	$	64,708		$	71,772		$	-		$	-		$	136,480

NET BOOK VALUE, June 30, 2018	$	52,197		$	98,562		$	147,215		$	5,684		$	303,658


	Depletable						Not depleted
	Caylloma			San Jose			Lindero		Other			Total
COST
Balance, January 1, 2017	$	100,630		$	151,259		$	130,590	$	1,844		$	384,323
Additions		10,599			13,888			9,234		2,508			36,229
Change in rehabilitation provision		1,448			(931	)		301		-			818
Disposals		-			-			-		(202	)		(202	)
Reclassifications		(8	)		(18	)		29		-			3
Balance, December 31, 2017	$	112,669		$	164,198		$	140,154	$	4,150		$	421,171

ACCUMULATED IMPAIRMENT
Balance, January 1, 2017	$	31,900		$	-		$	-	$	-		$	31,900
Impairment reversal		(31,900	)		-			-		-			(31,900	)
Balance, December 31, 2017	$	-		$	-		$	-	$	-		$	-

ACCUMULATED DEPLETION
Balance, January 1, 2017	$	42,059		$	46,829		$	-	$	-		$	88,888
Impairment reversal		13,038			-			-		-			13,038
Depletion		5,956			16,677			-		-			22,633
Balance, December 31, 2017	$	61,053		$	63,506		$	-	$	-		$	124,559

NET BOOK VALUE, December 31, 2017	$	51,616		$	100,692		$	140,154	$	4,150		$	296,612

Page | 12

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

11. Plant and Equipment


	Machinery and equipment			Buildings and leasehold improvements		Furniture and other equipment		Transport units		Equipment under finance lease			Capital work in progress			Total
COST
Balance, January 1, 2018	$	62,217		$	131,738	$	6,315	$	1,163	$	7,295		$	12,921		$	221,649
Additions		537			790		864		307		-			8,400			10,898
Change in rehabilitation provision		(79	)		-		-		-		-			-			(79	)
Disposals		(386	)		-		-		-		(31	)		-			(417	)
Reclassifications		9,415			7,452		131		37		(7,264	)		(9,771	)		-
Balance, June 30, 2018	$	71,704		$	139,980	$	7,310	$	1,507	$	-		$	11,550		$	232,051

ACCUMULATED DEPRECIATION
Balance, January 1, 2018	$	27,570		$	52,353	$	3,890	$	662	$	3,510		$	-		$	87,985
Disposals		(386	)		-		-		-		(30	)		-			(416	)
Reclassifications		3,152			538		35		37		(3,762	)		-			-
Depreciation		3,258			6,397		317		108		282			-			10,362
Balance, June 30, 2018	$	33,594		$	59,288	$	4,242	$	807	$	-		$	-		$	97,931

NET BOOK VALUE, June 30, 2018	$	38,110		$	80,692	$	3,068	$	700	$	-		$	11,550		$	134,120

	Machinery and equipment			Buildings and leasehold improvements			Furniture and other equipment			Transport units			Equipment under finance lease			Capital work in progress			Total
COST
Balance, January 1, 2017	$	57,685		$	132,067		$	15,848		$	1,095		$	7,810		$	941		$	215,446
Additions		2,978			276			726			108			-			10,812			14,900
Change in rehabilitation provision		312			-			-			-			-			-			312
Disposals		(3,461	)		(1,184	)		(3,006	)		(110	)		(515	)		(730	)		(9,006	)
Reclassifications		4,703			579			(7,253	)		70			-			1,898			(3	)
Balance, December 31, 2017	$	62,217		$	131,738		$	6,315		$	1,163		$	7,295		$	12,921		$	221,649

ACCUMULATED IMPAIRMENT
Balance, January 1, 2017	$	3,776		$	16,154		$	2,365		$	-		$	475		$	-		$	22,770
Disposals		(1	)		-			-			-			(75	)		-			(76	)
Impairment reversal		(3,775	)		(16,154	)		(2,365	)		-			(400	)		-			(22,694	)
Balance, December 31, 2017	$	-		$	-		$	-		$	-		$	-		$	-		$	-

ACCUMULATED DEPRECIATION
Balance, January 1, 2017	$	17,864		$	33,479		$	6,748		$	576		$	3,146		$	-		$	61,813
Disposals		(2,549	)		(448	)		(1,507	)		(101	)		(440	)		-			(5,045	)
Reclassifications		3,907			-			(3,920	)		13			-			-			-
Impairment reversal		2,449			6,484			1,253			-			251			-			10,437
Depreciation		5,899			12,838			1,316			174			553			-			20,780
Balance, December 31, 2017	$	27,570		$	52,353		$	3,890		$	662		$	3,510		$	-		$	87,985

NET BOOK VALUE, December 31, 2017	$	34,647		$	79,385		$	2,425		$	501		$	3,785		$	12,921		$	133,664

Page | 13

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

12. Deposits on Non-Current Assets

As at June 30, 2018, the Company has provided advances of $22,458 (2017 – nil) to contractors related to the construction of the Lindero project and $738 on other capital projects at the San Jose Mine.

13. Trade and Other Payables

	June 30,		December 31,
	2018		2017
Trade accounts payable	$	13,331	$	13,576
Refundable deposits to contractors		863		686
Payroll payable		11,135		13,894
Mining royalty		557		1,023
Value added taxes payable		219		1,285
Interest payable		159		137
Due to related parties (note 14(a))		15		-
Other payables		159		411
		26,438		31,012

Deferred share units payable		4,829		5,094
Restricted share units payable		2,561		2,679
Performance share units payable		-		2,691
Total current share units payable		7,390		10,464

Total trade and other payables	$	33,828	$	41,476

14. Related Party Transactions

In addition to the related party transactions and balances disclosed elsewhere in these financial statements, the Company entered into the following related party transactions:

(a) Purchase of goods and services

During the three and six months ended June 30, 2018 and 2017, the Company entered into the following related party transactions with Gold Group Management Inc. and Mill Street Services Ltd., companies with directors in common with the Company.


	Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017
Personnel costs	$	21	$	33	$	93	$	104
General and administrative expenses		14		39		159		131
	$	35	$	72	$	252	$	235

The Company has outstanding balances payable with Gold Group Management Inc. of $15 as at June 30, 2018 (December 31, 2017 - $nil). Amounts due to related parties are due on demand and are unsecured.

(b) Key management personnel


	Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017
Salaries and benefits	$	1,102	$	1,731	$	1,937	$	2,568
Directors fees		101		138		369		237
Consulting fees		36		33		70		67
Share-based payments		2,331		690		3,578		781
	$	3,570	$	2,592	$	5,954	$	3,653

Page | 14

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

15. Credit Facility

On January 26, 2018, the Company entered into an amended and restated four-year term credit facility with the Bank of Nova Scotia (“Amended Credit Facility”). The Amended Credit Facility consists of a $40,000 non-revolving credit facility, which has been fully drawn and an $80,000 revolving credit facility, which has not been drawn. The interest rate on the Amended Credit Facility is on a sliding scale at one-month LIBOR plus an applicable margin ranging from 2.5% to 3.5%, based on a Total Debt to EBITDA ratio, as defined in the Amended Credit Facility. The Amended Credit Facility is secured by a first ranking lien on the assets of Minera Bateas S.A.C. ("Bateas"), Compania Minera Cuzcatlan S.A. de C.V. ("Cuzcatlan"), Mansfield Minera S.A. ("Mansfield") and their holding companies. The Company must comply with the terms in the Amended Credit Facility relating to among other matters reporting requirements, conduct of business, insurance, notices, and must comply with certain financial covenants, including a maximum debt to EBITDA ratio and a minimum tangible net worth, each as defined in the Amended Credit Facility. The Company is in compliance with all of the covenants as at June 30, 2018.

The amendment to the credit facility was accounted for as a modification under IFRS 9 and a loss of $465 was recognized in other finance cost in the consolidated income statement.


Balance January 1, 2018	$	39,871
Amortization of transaction costs		9
Balance immediately prior to modification		39,880
Loss on modification		465
Transaction costs paid		(792	)
Balance post modification		39,552
Amortization of transaction costs		51
Balance, June 30, 2018	$	39,603

16. Closure and Rehabilitation Provisions

	Closure and rehabilitation provisions
	Caylloma Mine			San Jose Mine			Lindero Gold Project			Total
Balance January 1, 2018	$	9,624		$	4,100		$	509		$	14,233
Changes in estimate		(175	)		(268	)		(140	)		(583	)
Accretion expense - capitalized		-			-			16			16
Effect of foreign exchange changes		-			(34	)		-			(34	)
Net change in capitalized estimate		(175	)		(302	)		(124	)		(601	)
Incurred and charged against the provision		(159	)		(41	)		-			(200	)
Accretion expense		208			164			-			372
Balance June 30, 2018		9,498			3,921			385			13,804
Current portion		2,290			121			-			2,411
Non-current portion	$	7,208		$	3,800		$	385		$	11,393

Closure and reclamation provisions represent the present value of rehabilitation costs relating to mine and development sites. There have been no significant changes in requirements, laws, regulations, operating assumptions, estimated timing and amount of closure and rehabilitation obligations during the three and six months ended June 30, 2018.

Page | 15

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

17. Share Based Payments

During the three and six months ended June 30, 2018, the Company recognized $2,031 and $2,984 (three and six months ended June 30, 2017 - $546 and $627, respectively) of share-based payment expense related to the outstanding restricted, performance and deferred share units.

For the three and six months ended June 30, 2018, the Company recognized a share-based payment expense of $381 and $705 related to stock options (three and six months ended June 30, 2017 – $46 and $196).

(a) Deferred share units

	Number of Deferred Share Units			Fair Value
Outstanding, December 31, 2016		883,068		$	4,992
Grants		91,108			429
Change in fair value		-			(327	)
Outstanding, December 31, 2017		974,176			5,094
Grants		101,612			482
Units paid out in cash		(225,724	)		(1,251	)
Change in fair value		-			504
Outstanding, June 30, 2018		850,064		$	4,829

(b) Restricted share units

The following table summarizes the activity of the cash and equity settled restricted share units:

	Cash Settled						Equity Settled
	Number of Restricted Share Units			Fair Value			Number of Restricted Share Units
Outstanding, December 31, 2016		1,337,720		$	4,489			-
Grants to officers		15,748			74			390,751
Grants to employees		38,037			181			-
Units paid out in cash		(406,022	)		(2,114	)		-
Forfeited or cancelled		(5,007	)		(5	)		-
Change in fair value and vesting		-			1,310			-
Outstanding, December 31, 2017		980,476			3,935			390,751
Grants to officers		16,129			76			417,135
Grants to employees		57,150			271			4,895
Units paid out in cash		(390,057	)		(1,891	)		-
Units paid out in shares		-			-			(78,150	)
Forfeited or cancelled		(3,029	)		(15	)		-
Change in fair value and vesting		-			310			-
Outstanding, June 30, 2018		660,669		$	2,686			734,631
Current portion				$	2,561
Non-current portion					125
Outstanding, June 30, 2018				$	2,686

During the three and six months ended June 30, 2018 the Company issued 4,895 and 422,030 equity settled restricted share units with a grant date fair value of $27 and $2,004, respectively (three and six months ended June 30, 2017 - nil and 390,751 units with a fair value of nil and $1,845, respectively).

Page | 16

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

The following table summarizes the activity of the cash settled performance share units:

	Cash Settled						Equity Settled
	Number of Performance Share Units			Fair Value			Number of Performance Share Units
Outstanding, December 31, 2016		885,535		$	3,545			-
Units paid out in cash		(332,076	)		(1,770	)		-
Forfeited or cancelled		-			-			-
Change in fair value and vesting		-			916			-
Outstanding, December 31, 2017		553,459			2,691			-
Grants		-			-			1,002,166
Units paid out in cash		(553,459	)		(2,596	)		-
Forfeited or cancelled		-			-			-
Change in fair value and vesting		-			(95	)		-
Outstanding, June 30, 2018		-		$	-			1,002,166

During the six months ended June 30, 2018 the Company issued 1,002,166 equity settled performance share units with a grant date fair value of $4,751 (six months ended June 30, 2017 - nil).

(d) Stock options

The Company’s Stock Option Plan, as amended and approved from time to time, permits the Company to issue up to 12,200,000 stock options. As at June 30, 2018, a total of 1,574,403 common shares were available for issuance under the plan.

	Number of stock options			Weighted average exercise price
				Canadian dollars
Outstanding, December 31, 2016		844,993		$	4.19
Exercised		(307,160	)		3.39
Forfeited		617,694			6.35
Outstanding, December 31, 2017		1,155,527			5.56
Granted		648,502			6.21
Outstanding, June 30, 2018		1,804,029		$	5.79

Vested and exercisable, December 31, 2017		537,833		$	4.64
Vested and exercisable, June 30, 2018		846,680		$	5.27

The assumptions used to estimate the fair value of the stock options granted during the six months ended June 30, 2018 were a risk-free interest rate of 1.79%, expected volatility of 68.16%, expected life of three years, expected forfeiture rate of 5.57%, and an expected dividend yield of nil. The fair value, as determined using the Black-Scholes Option Pricing Model, was C$2.69 per option granted in the period.

18. Share Capital

(a) Authorized share capital

The Company has an unlimited number of common shares without par value authorized for issue.

Page | 17

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

(b) Warrants

	Number of warrants			Weighted average exercise price
				Canadian dollars
Outstanding, December 31, 2016		582,977		$	6.01
Exercised		(238,515	)		6.01
Outstanding, December 31, 2017		344,462		$	6.01
Exercised		(85,184	)		6.01
Outstanding, June 30, 2018		259,278		$	6.01

19. Earnings per Share

	Three months ended June 30,				Six months ended June 30,
Basic	2018		2017		2018		2017
Net income for the period	$	11,151	$	8,898	$	24,905	$	21,897
Weighted average number of shares (000's)		159,679		159,223		159,658		156,544
Earnings per share - basic	$	0.07	$	0.06	$	0.16	$	0.14


	Three months ended June 30,				Six months ended June 30,
Diluted	2018		2017		2018		2017
Net income for the period	$	11,151	$	8,898	$	24,905	$	21,897
Weighted average number of shares ('000's)		159,679		159,223		159,658		156,544
Incremental shares from options		357		276		213		371
Incremental shares from share units		103		-		71		-
Incremental shares from warrants		55		24		33		61
Weighted average diluted number of shares (000's)		160,194		159,523		159,975		156,976
Diluted earnings per share	$	0.07	$	0.06	$	0.16	$	0.14

As at June 30, 2018, there were no anti-dilutive options or warrants excluded from the above calculation (2017 – nil).

20. Sales

(a) By product and geographical area

	Three months ended June 30, 2018
	Peru			Switzerland		Mexico			Total
Silver-gold concentrates	$	-		$	51,807	$	-		$	51,807
Silver-lead concentrates		10,569			-		-			10,569
Zinc concentrates		13,143			-		-			13,143
Provisional pricing adjustments		(694	)		830		(1,989	)		(1,853	)
Sales to external customers	$	23,018		$	52,637	$	(1,989	)	$	73,666

	Three months ended June 30, 2017
	Peru			Switzerland		Mexico			Total
Silver-gold concentrates	$	-		$	-	$	44,999		$	44,999
Silver-lead concentrates		8,747			-		-			8,747
Zinc concentrates		11,801			-		-			11,801
Provisional pricing adjustments		(694	)		-		(942	)		(1,636	)
Sales to external customers	$	19,854		$	-	$	44,057		$	63,911

Page | 18

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

	Six months ended June 30, 2018
	Peru			Switzerland			Mexico			Total
Silver-gold concentrates	$	-		$	88,220		$	10,474		$	98,694
Silver-lead concentrates		21,683			-			-			21,683
Zinc concentrates		26,931			-			-			26,931
Provisional pricing adjustments		(820	)		(764	)		(1,616	)		(3,200	)
Sales to external customers	$	47,794		$	87,456		$	8,858		$	144,108

	Six months ended June 30, 2017
	Peru		Switzerland		Mexico		Total
Silver-gold concentrates	$	-	$	-	$	86,725	$	86,725
Silver-lead concentrates		19,118		-		-		19,118
Zinc concentrates		20,881		-		-		20,881
Provisional pricing adjustments		656		-		1,365		2,021
Sales to external customers	$	40,655	$	-	$	88,090	$	128,745

(b) By major customer


	Three months ended June 30,					Six months ended June 30,
	2018			2017		2018		2017
Customer 1	$	52,637		$	-	$	87,456	$	-
Customer 2		23,018			16,338		47,794		32,062
Customer 3		-			21,004		-		44,184
Customer 4		-			23,053		-		43,906
Customer 5		(1,989	)		3,516		8,858		8,593
	$	73,666		$	63,911	$	144,108	$	128,745

The Company is exposed to metal price risk with respect to our sales of silver, gold, zinc, and lead concentrates. A 10% change in metal prices from the prices used at June 30, 2018 would result in a change of $5.6 million to sales and accounts receivable from concentrate sales which are marked-to-market at the end of each reporting period.

21. Cost of Sales


	Three months ended June 30, 2018						Six months ended June 30, 2018
	Caylloma		San Jose		Total		Caylloma		San Jose		Total
Direct mining costs	$	8,439	$	15,454	$	23,893	$	17,139	$	29,861	$	47,000
Salaries and benefits		1,625		1,465		3,090		3,242		2,893		6,135
Workers' participation		591		2,029		2,620		1,140		2,973		4,113
Depletion and depreciation		3,157		8,713		11,870		6,458		15,977		22,435
Royalties		58		743		801		121		1,575		1,696
	$	13,870	$	28,404	$	42,274	$	28,100	$	53,279	$	81,379

	Three months ended June 30, 2017						Six months Ended June 30, 2017
	Caylloma		San Jose		Total		Caylloma		San Jose		Total
Direct mining costs	$	9,695	$	15,136	$	24,831	$	17,572	$	29,179	$	46,751
Salaries and benefits		1,589		1,377		2,966		2,978		2,588		5,566
Workers' participation		227		1,581		1,808		549		2,726		3,275
Depletion and depreciation		2,742		8,448		11,190		4,986		16,822		21,808
Royalties		236		669		905		484		1,467		1,951
	$	14,489	$	27,211	$	41,700	$	26,569	$	52,782	$	79,351

Page | 19

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

22. Selling, General, and Administration


	Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017
Selling, general and administrative	$	5,012	$	4,714	$	10,299	$	9,584
Workers' participation		616		442		946		790
		5,628		5,156		11,245		10,374
Share-based payments		2,412		696		3,690		823
	$	8,040	$	5,852	$	14,935	$	11,197

23. Segmented Information

The following summary describes the operations of each reportable segment:

Bateas – operates the Caylloma silver, lead, and zinc mine

Cuzcatlan – operates the San Jose silver-gold mine

Mansfield – construction of the Lindero Gold Project

Corporate – corporate stewardship


	Three Months Ended June 30, 2018
	Corporate			Bateas			Cuzcatlan			Mansfield			Total
Revenues from external customers	$	-		$	23,018		$	50,648		$	-		$	73,666
Cost of sales		-			(13,870	)		(28,404	)		-			(42,274	)
Selling, general, and administration		(5,250	)		(908	)		(1,882	)		-			(8,040	)
Other expenses		(150	)		2			(662	)		(170	)		(980	)
Finance items		(354	)		2,719			347			-			2,712
Segment (loss) profit before taxes		(5,754	)		10,961			20,047			(170	)		25,084
Income taxes		(1,468	)		(3,817	)		(7,567	)		(1,081	)		(13,933	)
Segment (loss) profit after taxes	$	(7,222	)	$	7,144		$	12,480		$	(1,251	)	$	11,151

	Three Months Ended June 30, 2017
	Corporate			Bateas			Cuzcatlan			Mansfield		Total
Revenues from external customers	$	-		$	19,854		$	44,057		$	-	$	63,911
Cost of sales		-			(14,489	)		(27,211	)		-		(41,700	)
Selling, general, and administration		(4,061	)		(641	)		(1,150	)		-		(5,852	)
Other income (expenses)		2			(11	)		(2,136	)		-		(2,145	)
Finance items		(165	)		655			12			-		502
Segment (loss) profit before taxes		(4,224	)		5,368			13,572			-		14,716
Income taxes		(280	)		(1,767	)		(3,771	)		-		(5,818	)
Segment (loss) profit after taxes	$	(4,504	)	$	3,601		$	9,801		$	-	$	8,898

Page | 20

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

	Six months ended June 30, 2018
	Corporate			Bateas			Cuzcatlan			Mansfield			Total
Revenues from external customers	$	-		$	47,794		$	96,314		$	-		$	144,108
Cost of sales		-			(28,100	)		(53,279	)		-			(81,379	)
Selling, general, and administration		(9,311	)		(1,986	)		(3,638	)		-			(14,935	)
Other expenses		(51	)		(15	)		(2,758	)		(170	)		(2,994	)
Finance items		(1,171	)		3,207			568			-			2,604
Segment (loss) profit before taxes		(10,533	)		20,900			37,207			(170	)		47,404
Income taxes		(1,654	)		(7,328	)		(12,248	)		(1,269	)		(22,499	)
Segment (loss) profit after taxes	$	(12,187	)	$	13,572		$	24,959		$	(1,439	)	$	24,905

	Six months ended June 30, 2017
	Corporate			Bateas			Cuzcatlan			Mansfield		Total
Revenues from external customers	$	-		$	40,655		$	88,090		$	-	$	128,745
Cost of sales		-			(26,569	)		(52,782	)		-		(79,351	)
Selling, general, and administration		(7,375	)		(1,298	)		(2,524	)		-		(11,197	)
Other income (expenses)		(31	)		(44	)		(4,352	)		-		(4,427	)
Finance items		(513	)		(913	)		(52	)		-		(1,478	)
Segment (loss) profit before taxes		(7,919	)		11,832			28,380			-		32,292
Income taxes		(315	)		(3,318	)		(6,762	)		-		(10,395	)
Segment (loss) profit after taxes	$	(8,234	)	$	8,514		$	21,617		$	-	$	21,897

	June 30, 2018
	Corporate		Bateas		Cuzcatlan		Mansfield		Total
Total assets	$	27,807	$	166,550	$	329,410	$	197,380	$	721,147
Total liabilities	$	55,576	$	31,886	$	36,456	$	6,067	$	129,985
Capital expenditures	$	1,070	$	5,537	$	8,264	$	17,693	$	32,564

	December 31, 2017
	Corporate		Bateas		Cuzcatlan		Mansfield		Total
Total assets	$	82,978	$	156,513	$	316,692	$	150,465	$	706,648
Total liabilities	$	57,889	$	35,169	$	48,441	$	1,565	$	143,064
Capital expenditures	$	540	$	13,184	$	22,577	$	10,757	$	47,058

Capital expenditures for the three and six months ended June 30, 2018 were $21,152 and $32,564, respectively (three and six months ended June 30, 2017 - $10,952 and $20,742, respectively).

24. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (an exit price), regardless of whether that price is directly observable or estimated using another valuation technique.

The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (interest rate, yield curves), or inputs that are derived principally from or corroborated observable market data or other means. Level 3 inputs are unobservable (supported by little or no market activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.

Page | 21

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

The following sets up the methods and assumptions used to estimate the fair value of Level 2 and Level 3 financial instruments.

Financial asset or liability	Methods and assumptions used to estimate fair value
Trade receivables	Trade receivables arising from the sales of metal concentrates are subject to provisional pricing, and the final selling price is adjusted at the end of a quotational period. We mark these to market at each reporting date based on the forward price corresponding to the expected settlement date.

Interest rate swaps, and metal contracts	Fair value is calculated as the present value of the estimated contractual cash flows. Estimates of future cash flows are based on quoted swap rates, futures prices and interbank borrowing rates. These are discounted using a yield curve, and adjusted for credit risk of the Company or the counterparty.

Marketable securities – warrants	The Company determines the value of the warrants using a Black-Scholes valuation model which uses a combination of quoted prices and market-derived inputs, such as volatility and interest rate estimates. Fair value changes on the warrants are charged to profit and loss.

During the period ended June 30, 2018, and 2017, there were no transfers of amounts between Level 1, Level 2, and Level 3 of the fair value hierarchy. The following tables show the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. Fair value information for financial assets and financial liabilities not measured at fair value is not presented if the carrying amount is a reasonable approximation of fair value.

Page | 22

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

	Carrying value										Fair value
June 30, 2018	Fair value through OCI		Fair value through profit or loss		Amortized cost			Total			Level 1		Level 2			Level 3		Carrying value approximates Fair Value
Financial assets measured at Fair Value
Trade receivables concentrate sales	$	-	$	26,515	$	-		$	26,515		$	-	$	26,515		$	-	$	-
Interest rate swap asset		110		-		-			110			-		110			-		-
Metal forward sales contracts		-		1,824		-			1,824			-		1,824			-		-
	$	110	$	28,339	$	-		$	28,449		$	-	$	28,449		$	-	$	-

Financial assets not measured at Fair Value
Cash and cash equivalents	$	-	$	-	$	102,455		$	102,455		$	-	$	-		$	-	$	102,455
Term deposits		-		-		95,886			95,886			-		-			-		95,886
Other receivables		-		-		1,140			1,140			-		-			-		1,140
	$	-	$	-	$	199,481		$	199,481		$	-	$	-		$	-	$	199,481

Financial liabilities not measured at Fair Value
Trade payables	$	-	$	-	$	(13,331	)	$	(13,331	)	$	-	$	-		$	-	$	(13,331	)
Payroll payable		-		-		(11,135	)		(11,135	)		-		-			-		(11,135	)
Share units payable		-		-		(7,515	)		(7,515	)		-		(7,515	)		-		-
Bank loan payable		-		-		(39,603	)		(39,603	)		-		(40,000	)		-		-
Other payables		-		-		(989	)		(989	)		-		-			-		(989	)
	$	-	$	-	$	(72,573	)	$	(72,573	)	$	-	$	(47,515	)	$	-	$	(25,455	)

Page | 23

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)


	Carrying value															Fair value
December 31, 2017	Available for sale		Fair value through profit or loss			Fair Value (hedging)		Loans and receivables		Other liabilities			Total			Level 1		Level 2			Level 3		Carrying value approximates Fair Value
Financial assets measured at Fair Value
Marketable securities - shares	$	555	$	-		$	-	$	-	$	-		$	555		$	555	$	-		$	-	$	-
Marketable securities - warrants		-		1			-		-		-			1			-		1			-		-
Trade receivables concentrate sales		-		34,250			-		-		-			34,250			-		34,250			-		-
Interest rate swap asset		-		-			140		-		-			140			-		140			-		-
	$	555	$	34,251		$	140	$	-	$	-		$	34,946		$	555	$	34,391		$	-		-

Financial assets not measured at Fair Value
Cash and cash equivalents	$	-	$	-		$	-	$	183,074	$	-		$	183,074		$	-	$	-		$	-	$	183,074
Term deposits		-		-			-		29,500		-			29,500			-		-			-		29,500
Other receivables		-		-			-		1,251		-			1,251			-		-			-		1,251
	$	-	$	-		$	-	$	213,825	$	-		$	213,825		$	-	$	-		$	-	$	213,825

Financial liabilities measured at Fair Value
Metal forward sales and zero cost collar contracts	$	-	$	(2,328	)	$	-	$	-	$	-		$	(2,328	)	$	-	$	(2,328	)	$	-	$	-
	$	-	$	(2,328	)	$	-	$	-	$	-		$	(2,328	)	$	-	$	(2,328	)	$	-	$	-

Financial liabilities not measured at Fair Value
Trade payables	$	-	$	-		$	-	$	-	$	(13,576	)	$	(13,576	)	$	-	$	-		$	-	$	(13,576	)
Payroll payable		-		-			-		-		(13,894	)		(13,894	)		-		-			-		(13,894	)
Share units payable		-		-			-		-		(11,720	)		(11,720	)		-		(11,720	)		-		-
Finance lease obligations		-		-			-		-		(906	)		(906	)		-		-			-		(906	)
Bank loan payable		-		-			-		-		(39,871	)		(39,871	)		-		(40,000	)		-		-
Other payables		-		-			-		-		(1,671	)		(1,671	)		-		-			-		(1,671	)
	$	-	$	-		$	-	$	-	$	(81,638	)	$	(81,638	)	$	-	$	(51,720	)	$	-	$	(30,047	)

Page | 24

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

25. Supplemental Cashflow Information

The changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes were as follows:

	Bank Loan			Finance lease obligation			Interest rate swaps
As at January 1, 2017	$	39,768		$	3,034		$	253
Amortization of transaction costs		103			-			-
Principal payments		-			(2,128	)		-
Interest accrued		-			-			(25	)
Change in fair value		-			-			(368	)
As at January 1, 2018		39,871			906			(140	)
Transaction cost		(792	)		-			-
Loss on debt modification		465			-			-
Amortization of transaction costs		59			-			-
Principal payments		-			(906	)		-
Settlement of the swap		-			-			140
Change in fair value		-			-			110
As at June 30, 2018	$	39,603		$	-		$	110

26. Contingencies and Capital Commitments

(a) Bank letter of guarantee

The Caylloma Mine closure plan was updated in March 2017, with total undiscounted closure costs of $9,230 consisting of progressive closure activities of $3,646, final closure activities of $4,971, and post-closure activities of $613. Pursuant to the closure regulations, the Company is required to place the following guarantees with the government:

2018 – $4,990

2019 – $6,928

The Company has established a bank letter of guarantee in the amount of $4,990 (December 31, 2017 – $4,990), on behalf of Bateas in favor of the Peruvian mining regulatory agency, in compliance with local regulations and to collateralize Bateas’ mine closure plan. This bank letter of guarantee expires on December 31, 2018.

(b) Other commitments

As at June 30, 2018, the Company had capital commitments of $87,419 for civil work, equipment purchases and other services at the Lindero Gold Project expected to be expended within one year (December 31, 2017 - $407 Lindero, $2,544 other).

II.

In June 2018, the Company committed to fund an aggregate of $1,500 towards development projects in the Caylloma community under certain terms and conditions. The Company is to provide five equal installments of approximately $300 (1 million Peruvian Soles) starting in July 2018 and in six month intervals thereafter.

III.

Operating leases includes leases for office premises, computer and other equipment used in the normal course of business.

Page | 25

Fortuna Silver Mines Inc.

Notes to Condensed Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited - Presented in thousands of US dollars – unless otherwise noted)

The expected payments due by period, as at June 30, 2018 are as follows:

	Less than
	1 year		1 - 3 years		4 - 5 years		Total
Office premises	$	618	$	1,111	$	473	$	2,202
Computer equipment		274		269		49		592
Total operating leases	$	892	$	1,380	$	522	$	2,794

Peru

The Company has been assessed $1,750 by SUNAT, the Peruvian tax authority, including interest and penalties of $573, for the tax years 2010 and 2011. The Company is appealing these assessments and has provided a guarantee by way of a letter bond in the amount of $838.

No amounts have been accrued as at June 30, 2018 and December 31, 2017 with respect to these tax assessments as the Company believes it is more likely than not that the Company’s appeal will be successful.

(d) Other contingencies

The Company is subject to various investigations, royalties and other claims, legal, labor, and tax proceedings covering matters that arise in the ordinary course of business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably for the Company. Certain conditions may exist as of the date the financial statements are issued that may result in a loss to the Company. None of these matters is expected to have a material effect on the results of operations or financial conditions of the Company.

Page | 26