Fortuna falls on positive San Jose prefeasibility (June 14, 2010)

VANCOUVER — A prefeasibility study for the San Jose silver-gold project in Mexico’s Oaxaca state found it could support an underground mining operation producing 20.4 million oz. silver and 163,000 oz. gold over nine years. But investors were less than pleased with the findings and pushed Fortuna Silver Mines’ (FVI-T) share price down 16% on the news.

The study envisaged an underground mining operation and standard flotation processing mill for San Jose. For the first 2.5 years of operation, the mine would process 750 tonnes of ore daily, at which point an expansion would increase throughput to 1,000 tonnes a day. Two years after the first expansion, a second one would lift capacity to 1,500 tonnes per day.

The prefeasibility pegged San Jose with an after-tax net present value of US$36.4 million, using an 8% discount rate, and determined the project could generate an 18% after-tax internal rate of return.

The cost to build the operation would be US$55.7 million, though Fortuna says it will try to reduce that number by relying on mine contractors and acquiring suitable secondhand equipment. Once built, the mine should be able to produce an ounce of silver for US$6.90.

The study defined 3.5 million tonnes in the reserve category grading 205 grams silver per tonne and 1.6 grams gold per tonne. Those reserves stem from a resource that is higher grade: San Jose is home to 2.7 million measured and indicated tonnes grading 295 grams silver and 2.27 grams gold as well as 2.4 million inferred tonnes of 262 grams silver and 2.11 grams gold.

The inferred resources contain 17 million oz. silver and 133,500 oz. gold, based on the 90-gram silver equivalent cutoff, which would significantly extend the mine’s lifespan if converted to reserves. Moreover, a portion of the inferred resource sits in the path of the mine decline, which means it will be mined in the early years of San Jose whether it is upgraded to a reserve rating or not.

“It has been challenging to incorporate into a study of this nature all the areas of opportunity that, in management’s view, make San Jose a robust project,” said Fortuna’s president and CEO Jorge Ganoza in a statement. “The old miner’s adage ‘drill for structure and drift for reserves’ holds true. The limitation to… including only measured and indicated resources for reserve conversion meant that a significant amount of inferred resources located in the upper portions of the mine, where mining takes place in the initial years, are not accounted for in the mine plan.”

The mineralized vein at San Jose will be mined using mechanized cut and fill methods, using backfill from process tailings combined with waste from within the mine and from surface. A single decline ramp will provide access to the mine; to date Fortuna has already developed 1 km of the decline. By the end of the mine’s life, it will likely contain more than 5 km of declines and drifts.

Fortuna will feed the process plant using water from the wastewater treatment facility in the nearby community of Ocotlan de Morelos as well as precipitation captured in a reservoir.

With all the permits needed to start construction at San Jose in hand, Fortuna is finalizing staffing for the construction phase, and has awarded a contract for the project’s engineering, procurement and construction management. The company has also initiated pre-construction activities for the water project, tailings facility and power connection.

And it has all the funding it needs to develop the project. At the end of 2009, Fortuna had $36.8 million in the bank. Then, in March, the company raised another $34.5 million in a bought-deal financing, selling 15 million shares at $2.30 apiece.

The company’s share price had been on a sustained climb since mid- 2009, rising from 80¢ to $2.85. During those last eight months, Fortuna took large strides at San Jose: it regained access to the site after locals barricaded the access road for a month; boosted the project resource considerably; received the final environmental permit for construction and completed the prefeasibility. Fortuna also advanced its operating Caylloma silver- lead-zinc mine in southern Peru, boosting the project’s reserve count, completing a third plant expansion to bring daily throughput to 1,200 tonnes, and commissioning a copper flotation circuit at the polymetallic project. Caylloma produced 1.69 million oz. silver, 11,485 tonnes lead and 12,901 tonnes zinc in 2009.

But the San Jose prefeasibility ended Fortuna’s share price ascent. In the two days following news of the study, Fortuna lost 42¢ or 16% to close at $2.32. At presstime, it shares were trading at $1.98. The company has 110.2 million shares outstanding.