Fortuna Silver: An Emerging Mid-Tier Silver Producer


Fortuna Silver Mines Inc. (TSX.V:FVI) is producing silver profitably from its silver mine in Peru, and will soon begin construction of its second mine in Mexico, making it a mid-tier silver producer with cash flow of over US$ 100 million per year.

Fortuna Silver Mines Inc. (TSX.V:FVI) is producing silver profitably from its silver mine in Peru, and will soon begin construction of its second mine in Mexico, making it a mid-tier silver producer with cash flow of over US$ 100 million per year. But the market isn't properly valuing the company. That, at least, is the confident assertion of Jorge Ganoza, Fortuna's president.

"First of all, the company is now profitable," he said. "Within a relatively short period of time, we have established Fortuna as a junior silver producer, and secondly, we are building and engineering, with the aim of starting construction next year, what will be our second producing mine. This will propel Fortuna into the ranks of mid-tier producer, with revenues on the order of US$100 million per year."

"We are already generating revenue in the range of US$40–$45 million a year, so I think the market is not giving us sufficient valuation for our silver-gold project in Mexico. I believe that as we achieve the milestones at San Jose—the permitting, the engineering, the start of construction, commissioning—then we will see the market value us more appropriately."

"We own 100% of the mines under our control, so we are in control of our own destiny in that regard."

According to the company's most recent financial statements, the company is indeed profitable, reporting net income of CA$1.2 million, or $0.01 per share. But can Fortuna maintain profitability if the price of the metals it produces do not increase over time?

"Even if metal prices were to stay flat, Fortuna would not only remain profitable and grow, the company would flourish," said Ganoza. "At current market prices for the metals we produce, we have excellent margins. We have a margin of 100% over cash costs for the metals we are mining. Our cost of production is US$44 per tonne, and our rock is worth over US$110 per tonne. In silver terms, our cash cost was negative US$2.98 per silver ounce, net of by-product credits. "

Caylloma Mine, Peru

Fortuna continues to grow organically through exploration on its existing holdings, having recently released an updated National Instrument 43-101 compliant resource estimate that featured:
  • Proven and Probable Mineral Reserves are estimated at 4.03 million tonnes averaging 156 g/t Ag, 0.55 g/t Au, 1.70% Pb and 2.58% Zn.
  • Contained silver is estimated at 20.3 million ounces, representing a 304% increase in silver ounces in the Proven and Probable reserve categories over the previous resource and reserve estimate (43-101 Technical Report published October 3, 2006).
  • Inferred Mineral Resources are estimated at 1.3 million tonnes averaging 187 g/t Ag, 0.29 g/t Au, 1.92% Pb and 3.25% Zn.
  • Contained silver in the Inferred Resource category is estimated at 7.7 million ounces.
2008 saw record production from operations. The company's Caylloma silver-lead-zinc mine in Peru achieved a 77% increase in silver production over 2007 with comparable growth projected this year. The company is targeting production of 1.6 million ounces of silver in 2009, at a cash cost of US$1.86 per ounce net of by-product credits.

The silver- and base metal-rich epithermal deposits of the Caylloma Mining District of southern Peru have been worked intermittently since the start of the Spanish colonial period. Located within one of the more important metallogenic provinces of the Andes, past production is estimated at over 200 million of ounces of silver. Fortuna Silver Mines, through its wholly owned Peruvian subsidiary, Minera Bateas S.A.c., controls over 9,000 hectares within the Caylloma Mining District.

The veins range from 1 to 25 meters in width and range up to 4 kilometers in length. Ore grade shoots are generally subvertical in orientation within the plane of the vein, having lengths of tens to hundreds of meters and extending to more than 300 meters in a down-dip direction.

The Caylloma Mine is located 225 road kilometers or approximately 4 hour driving time northwest of Arequipa, Peru in mountainous highlands at an elevation of 4500 meters above sea level. The mine, processing plant and related infrastructure are located in the Caylloma Mining District, 14 kilometers northwest of the town of Caylloma. The mine is connected to the national power grid and water is locally available.

San Jose Mine, Mexico

The 100%-owned San Jose Project is a high-grade silver and gold bearing epithermal vein system located in the state of Oaxaca in southern Mexico. The company is currently working on completing the 43-101 compliant mineral resource estimate.

Current mineral resources are:
  • Indicated category: 1,471,000 tonnes @ 262.6 g/t Ag, 2.19 g/t Au (17.7 M oz Ag Eq.)
  • Inferred category: 3,898,000 tonnes @ 260.6 g/t Ag, 2.57 g/t Au (49.1 M oz Ag Eq.)
Fortuna is also currently in the process of advancing with engineering studies for the development of the San Jose deposit, including mine and processing plant design, tailings dam engineering and the water supply project.

The San Jose Project has an approved Environmental Impact Statement for all its current onsite activities granted by the "Secretaria de Medio Ambiente y Recursos Naturales" (SEMARNAT, Mexican Environment Agency). Fortuna is also negotiating a collaborative agreement with the community.

San Jose will not use cyanide to process its precious metal ore. The metallurgical process will use conventional flotation to recover silver and gold from sulphide ore in the form of a concentrate. This is the process route that was used by previous local operators at San Jose who were in low scale production for many years until Fortuna purchased the mine in October 2006.

On April 28th, the "Comisión Federal de Electricidad" (Mexican Federal Energy commission) approved the feasibility study for power consumption at the San Jose Project, allowing for connection to the national power grid for up to five megawatts.

New Opportunities

"In the meantime we are looking for new opportunities in acquisitions, as well as through the exploration of our present surrounding land holdings," explained Ganoza. "But the exciting short term growth will come from the new mine in Mexico. The project numbers are not reflected in our market valuation."

"We're going to go from the current 1.6 million ounces per year of silver, to over 5 million ounces of silver per year. We have a strong balance sheet with no long term debt and over US$ 30 million in the bank; we expect to finish the year adding to that cash position. Consequently, financing growth should not be an issue."

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