Production keeps climbing for Fortuna Silver

VANCOUVER — Record silver and gold production that beat its own guidance enabled Fortuna Silver Mines (FVI-T, FSM-N) to achieve record revenues in 2012, which leaves the company well positioned to complete a planned expansion at its Mexican mine this year while drilling for new reserves at both of its silver operations.

Fortuna operates two silver mines. The Caylloma mine in Arequipa, Peru, is a low-cost underground mine that has tapped into epithermal vein deposits, which have churned out silver, lead and zinc since 2006. In September 2011 Fortuna commissioned its second operation, the San Jose mine in Oaxaca, Mexico. San Jose is also an underground mine tapping into epithermal veins, though at San Jose the veins also carry gold.

Together, the two mines produced 3.99 million oz. silver and 20,699 oz. gold in 2012. With those results Fortuna bested its own guidance, producing 8% more silver and 19% more gold than the company forecast. It cost Fortuna US$5.96 to produce each ounce of silver, net of by-product credits.

These ounces brought in revenues totalling US$161 million, which translated into a net income of US$31.5 million. The income helped boost Fortuna’s cash position to US$64.7 million and its working capital level to US$87.4 million. The company expects silver and gold production totals to increase again in 2013.

“In 2013 we will continue to focus on maximizing the production and cash flow of our current mines and explore our commanding land tracts in Peru and Mexico, while selectively evaluating external growth opportunities,” said Fortuna president and CEO Jorge Ganoza.

For 2013 the company anticipates organic silver and gold production growth of 10% and 13%, respectively.
Most of that growth will occur when Fortuna completes the planned expansion of its San Jose mill from a daily 1,000 tonnes to 1,500 tonnes. The project is expected to cost US$14 million, and the company plans to commission the expanded operation in the third quarter.

Fortuna also expects its average silver production cost to decline. Costs per tonne would climb 10% at Caylloma, but at the larger San Jose operation costs are expected to fall by 5.5%. The net effect should be an average silver production cost of US$5 per oz. in 2013, down 16% relative to last year.

Earlier in March Fortuna updated the reserve-and-resource counts at Caylloma and San Jose. Reserves shrank at both mines as a result of mining, but exploration success at Caylloma boosted resources there, while recent drilling successes at San Jose bode well for resource and reserve increases in the future.

Caylloma is home to 4.3 million proven and probable tonnes grading 130 grams silver per tonne, 0.37 gram gold per tonne, 1.52% lead and 2.15% zinc. Resources stand at 1.6 million measured-and-indicated tonnes grading 79 grams silver, 0.33 gram gold, 0.79% lead and 1.43% zinc, plus 6.6 million inferred tonnes at 101 grams silver, 0.27 gram gold, 1.84% lead and 2.58% zinc.
It was the inferred resource number that saw the biggest change, climbing 104% in terms of tonnes, as a result of a large drilling campaign at the Animas Northeast and Nancy veins.
Fortuna plans to continue drilling the sites in 2013 to upgrade these inferred resources to reserve status, while also drilling exploratory holes in the northern part of the property.
At San Jose, proven and probable reserves stand at 3.3 million tonnes grading 190 grams silver and 1.58 grams gold, for a contained metal count of 20.4 million oz. silver and 169,500 oz. gold. Resources total 56,000 measured-and-indicated tonnes grading 74 grams silver and 0.61 gram gold, plus 4.3 million inferred tonnes at 185 grams silver and 1.57 grams gold.
The San Jose resource numbers did not increase much, but that is because Fortuna hit into new mineralization at the property after the estimate’s cut-off date. In early February the company announced a series of high-grade intercepts from holes probing for northern and depth extensions of the high-grade Trinidad system.
Drilling continues in this area, and Fortuna expects to include the new area in its upcoming 2013 resource, reserve and mine-plan updates.
Fortuna’s news of record revenues had little impact on its share price, which fell a cent to close at $4.41. The company has a 52-week share price range of $3.03 to $6.19, and has 125 million shares outstanding.