Fortune favours a bold Fortuna Silver

Earlier this year Fortuna Silver Mines (FVI-T, FSM-N) bought a 55% stake in the Taviche Oeste concession surrounding its San Jose silver mine in Oaxaca, Mexico, from Pan American Silver (PAA-T, PAAS-Q) for US$4 million, with an option to pick up the remaining 45% stake for US$6 million and a 2.5% net smelter return royalty once a production decision is made.

Now this price seems like a bargain as Fortuna intercepts high-grade silver and gold mineralization over wide widths at the Trinidad North discovery, many of them on the Taviche Oeste concession. The mineralization also remains open to the north and at depth.

Highlights from the most recent exploration drilling include 736 grams silver per tonne and 4.76 grams gold per tonne over a true width of 19.3 metres in hole 288, and 1,240 grams silver and 6.94 grams gold over a true width of 5.9 metres in hole 295.

Jorge Ganoza, Fortuna’s president and CEO, commented in prepared remarks that the new zone at Trinidad North has consistent grades and thicknesses that are “comparable with the best silver deposits in the world.”

Nicholas Campbell, an analyst at Canaccord Genuity, says the Trinidad North discovery “could be a game changer” for San Jose.

“While the acquisition of the Taviste Oeste concession in January 2013 perhaps wasn’t the acquisition that investors were looking for, the $10-million price tag now looks like excellent value given the subsequent discovery of Trinidad North,” he says in a research note. “From our perspective, the potential to organically grow its annual production to more than 9 million equivalent oz. by developing Trinidad North is completely overlooked in the shares of Fortuna.”

Campbell also pointed out that drilling so far has outlined a 200-by-200-metre mineralization zone beyond the limits of the current resource, and that an initial resource estimate is anticipated in the second half of this year “with the potential for initial production by late 2014.”

“Given the grade,” Campbell continues, “Trinidad North has the potential to boost annual production from San Jose to 6.5-plus million  equivalent oz. silver, from 5 million currently.”

Campbell has a “speculative buy” rating on the stock and a price target of $6.25 per share.

Other mining analysts covering the company believe Fortuna’s future at San Jose looks bright too, including Benjamin Asuncion of Haywood Securities and Andrew Kaip of BMO Capital Markets. Kaip has a target price of $4.50 per share.

At press time in Toronto the junior silver producer — which also owns the Caylloma silver-lead-zinc mine in Peru, a 1,250-tonne-per-day underground operation that produces a silver-lead and silver-copper-zinc concentrate — was trading at $2.97 per share within a 52-week trading range of $2.65 to $5.85. The company has 125 million shares outstanding.

“Results from the released drill holes returned a weighted-average grade of 547 grams silver and 3.3 grams gold over an average true width of 3.7 metres, which is appreciatively above the San Jose reserve grades of 190 grams silver and 1.58 grams gold,” Kaip says. “Exploration results from the drilling program, along strike of the Trinidad vein, have returned encouraging grades and are within reach of current underground mine development.”

In March Fortuna updated its reserves at San Jose, which has proven and probable reserves of 3.3 million tonnes grading 190 grams silver and 1.58 grams gold, and inferred resources of 4.3 million tonnes averaging 185 grams silver and 1.57 grams gold.

Currently Fortuna is moving ahead with preparing underground access at 1,300 metres to test for extensions of the Trinidad North discovery, which reaches depths below 1,000 metres.

The company also told shareholders that it is on track with the mill expansion from 1,000 tonnes per day to 1,500 tonnes per day at San Jose in the second half of 2013.

“The principal driver of near-term growth comes from plans to expand San Jose, which, in addition to steady production from Caylloma, places Fortuna on the path to deliver 4.4 million primary oz. silver production, or 6.9 million equivalent oz. silver production in 2013,” notes Haywood’s Asuncion.

He notes that at full design capacity, the 1,500-tonne-per-day underground mine would produce a silver-gold concentrate of 2.7 million oz. silver at a cash cost of US$2.80 per silver in 2014.

The company is developing the underground mine at San Jose in preparation for expanded production at the mill, and Fortuna expects to increase reserves this year from an underground infill program that has three drill rigs turning.

This year’s exploration program includes 20,000 metres of exploration drilling that will target the northern and southern extensions of the Trinidad vein system, as well as more drilling on other targets over the 644 sq. km San Jose property.

And Fortuna certainly has the funds to spend on exploration and development. At the end of March the junior held $68 million in cash and a $40-million untapped credit facility. During the first quarter Fortuna reported net income of $6.7 million on sales of $40.7 million.

San Jose was commissioned at 1,000 tonnes per day in the third quarter of 2011.