Fortuna commissions San Jose

What a difference a year makes. 

When The Northern Miner first visited Fortuna Silver Mines‘ (FVI-T, FSM-N) San Jose silver-gold project here in October 2010, the surface infrastructure consisted largely of flat expanses of dusty brown dirt.

Now, Fortuna has filled those spaces with a brand new crusher, processing plant, offices, lab, mess hall and power substation that together form the surface of its commissioned San Jose mine. 

The ramp-up at San Jose marks the second time Fortuna has developed a mine, with its Caylloma silver-lead-zinc mine in Peru operating since 2006.

Fortuna declared commercial production on San Jose in early September after finishing the US$55-million mine on time and on budget. It brought the mine online at 1,000 tonnes of ore per day under the amount budgeted for 750 tonnes, and has already put significant infrastructure in place for 1,500 tonnes per day.

The new mine should add 520,000 oz. silver and 4,600 oz. gold to the company’s bottom line this year, while a full production year in 2012 should bring 1.7 million oz. silver and 15,000 oz. gold at an estimated cost of US$5.04 per oz. silver, net of by-products. In 2012 the rising company should produce 3.7 million oz. silver, 18,000 oz. gold and 40 million lbs. of combined lead and zinc.

But just as importantly as meeting budget and production targets, Fortuna has apparently opened the mine with substantial community support in a region not especially friendly to mining. The company looks to have secured that support through education and inclusion. Fifty percent of its staff are locals, and most food, uniforms and casual labour are locally sourced.

A shining example of the company’s local outreach is a water purification plant in Ocotlan that it refurbished and upgraded. The plant is designed to recover water that will supply 20% of the mine’s demand, but it has the added benefits of reducing contamination to the environment from untreated sewage, supplying water to the local community and providing free fertilizer for farmers. 

“We’re very proud of what we’ve done here,” Carlos Baca, Fortuna’s investor relations manager, says. 

While visiting the site, Baca pointed to the company’s education and outreach program in action as – entirely unplanned, Baca assures – a few dozen school children from the area visited the plant on a field trip. The students learned how the plant works, its benefits and, indirectly, of the benefits of Fortuna, while every student left with a plant from the company’s greenhouse next to the facility.

Improved community relations in Oaxaca, which has seen little to no modern mining, however, come slowly. The company has come a long way since a blockade stopped work on the San Jose project back in 2009 for two months, but it still encounters resistance. Fortuna is, for example, still working to secure land access from the nearby community of Magdalena so it can fill in a 2-km gap in the water pipeline from the filtration plant to the mine. For now the company is trucking the water for the last stretch, and has an alternative route if needed, but it hopes to reach a deal with the community. 

The company has also taken the local community into account with the mine design. The crusher, for example, is sunken into the ground with grass-covered earthen embankments built up to minimize noise.

“This is an area that is not familiar to mining, so we want to minimize disturbance,” Baca says.

The unfamiliarity with mining and other heavy industries has also led to a substantial safety campaign.

The local subsidiary’s motto is “You are the richness of Cuzcatlan,” emphasizing the importance of its employees, while the company has also enlisted the children of the miners to paint safety murals that adorn the entrance and ramp down into the mine. Fortuna notes that is has had no fatalities after more than 1.6 million man-hours of work on the project.

As to the mining itself, ramp-up has gone smoothly. When The ‘Miner was on site, Fortuna was metres away from punching down to the 1350 level and the A, B, C and D production blocks, where the higher-grade resource sits. 

The company is using mechanized cut and fill at San Jose as it mines through the 3.8 million tonnes of probable reserves grading 202 grams silver per tonne and 1.58 grams gold per tonne, for 24.5 million oz. silver and 191,600 oz. gold. Inferred resources, of which significant amounts are incorporated into planned production blocks, stand at 3.1 million tonnes grading 222 grams silver and 1.8 grams gold for an additional 22 million oz. silver and 178,000 oz. gold.

Reserves provide a nine-year mine life, while a 2010 prefeasibility, using US$15 per oz. silver and US$900 per oz. gold, put the after-tax net present value with an 8% discount rate at US$36.3 million and the after-tax internal rate of return at 17.8%.

The company hopes to add resources and reserves once it gets an underground drill operating on site and explore the deeper sections of the deposit, as well as secondary veins between the high-grade Bonanza and Trinidad veins.

“That’s what I need to drill,” Richard Niels, a geology superintendent at San Jose, says. “And the only way you can reach those structures is from underground. 

Niels points to the 143 zone, which sits in a different volcanic unit than the main deposit, as an example of a target that holds a lot of potential.

“The 143 is my favourite area, because I’d like to see it blossom at depth,” Niels says. “It’s sitting in the footwall of the Trinidad structure . . . but it’s never been understood.” 

Besides the addition of an underground drill, mine development will also go smoother once the company has its on-site lab running fully. The lab was operating during the visit but not at full capacity, and Neils and his team have been relying on outside assay labs and simple rock analysis for grade control. 

Once fully operational, the lab will cut down sample-testing time from two-to-three weeks to a day.

The company is working to complete a backfill plant, which will use a combination of straight fill and cement to make a more stable and predictable backfill. Fortuna also hopes to upgrade to 20-tonne trucks from the 11-tonne one it uses now, but it is waiting for the contractor to make the switch.

With mine development taking up most of its time and resources in recent years, Fortuna had done little regional exploration. But with $6 million set aside for drilling targets around San Jose this year – on top of the $6 million it’s spending in Peru – the company expects to have a better handle on what its 580-sq.-km San Jose property holds. 

So far the company has not released any results from the exploration program, encompassing the San Ignacio target just south of the mine, as well as the Taviche and El Rancho targets 15 km east, and it doesn’t plan to until all the results are in and studied.

“The reason that we’re not putting out results,” Baca says, “is [because] this is a big macro program on brownfields. We need to understand what we’re doing. Until we interpret what we’ve
received, we can’t post results, otherwise they’re out of context.”

The regional exploration program is designed to find more deposits that can supply the existing mill, but the real question hanging over Fortuna is where and when it will find its next major development project. The company secured favourable terms for underappreciated assets at Caylloma and San Jose, but finding those elusive projects is no easy task and Fortuna is not the only one looking. 

Fortuna will likely stick to Mexico and Peru, where relationships and connections helped
secure its current operations. It has not ruled out picking up
a project elsewhere in Latin America. 

In May the company opted for an earlier-stage acquisition in Peru called Mario that pr
ovides upside until it makes a bigger acquisition. Located in Junin, central Peru, the 38.5-hectare project has seen several phases of exploration yielding results, including: 19 metres grading 265 grams silver, 0.55 gram gold, 2.57% lead and 12.61% zinc; 72 metres averaging 44 grams silver and 0.97 gram gold; and 14 metres grading 303 grams silver, 2.92 grams gold, 3.96% lead and 11.05% zinc. 

Fortuna is acquiring the property from Australia-focused Crocodile Gold (CRK-T), which found itself with a Peruvian project when it merged with Franc-Or Resources in 2009 and never drilled it. To acquire 100% of the project, Fortuna has to pay US$4 million within two years, while the property is subject to a total of 3.5% in net smelter return royalties payable to three companies. 

The company notes that the Mario property covers highly prospective silver-gold-base metal mineralization occurring as massive sulphide replacement bodies, veins, mantos, hydrothermal breccias, disseminations and skarn-type bodies, and that it is located in central Peru’s highly prospective metallogenic province.

But while the Mario project is intriguing, Fortuna’s operating mines are what has kept the company’s stock price afloat in these uncertain times. Fortuna’s share price peaked at $7.22 on September 21 before tumbling with the rest of the market to as low as $4.42, but then regained ground quickly. The company’s share price recently closed at $5.91 with 124 million shares outstanding.