Fortuna Silver boosts reserves, earnings

Fortuna Silver Mines (FVI-T) has added significant tonnage to its overall resource holdings and plans more exploration for the year ahead.

In total, the company increased reserve tonnes by 4.8% and contained silver by 3.7%, which is on top of the 675,000 tonnes it replaced from production at its operating Caylloma silver-lead-zinc mine in southern Peru.

The company also boosted its total measured and indicated resources by 750% in tonnage and 1,790% and 1,550% in contained silver and gold, respectively.

After replacing production tonnes and adding 3% in reserve tonnes and 2% in contained silver, the Caylloma mine now hosts 4.1 million tonnes of 155 grams silver per tonne, 0.36 gram gold per tonne, 1.63% lead and 2.4% zinc for 20.6 million oz. silver and 47,300 oz. gold. Contained gold at Caylloma actually decreased by 34% but the company maintains that gold is not of material significance to the operation.

At Fortuna’s advanced-stage San Jose silver-gold mine in Oaxaca, Mexico, reserves total 3.8 million tonnes grading 202 grams silver and 1.58 grams gold for 24.5 million oz. silver and 191,600 oz. gold. The company is advancing its San Jose project towards production, with a 1,000- tonne-per-day operation expected to start in the third quarter, then ramping up to 1,500 tonnes per day in 2013.

Measured and indicated resources at Caylloma stand at 1.9 million tonnes of 122 grams silver, 0.31 gram gold, 0.88% lead and 1.44% zinc, while at San Jose, the indicated resource stands at 376,000 tonnes of 243 grams silver and 2.12 grams gold. Roughly 830,000 tonnes of the Caylloma resource, however, is oxide and is not amenable to process at Fortuna’s existing plant.

For 2011, Fortuna plans to spend $12.5 million on exploration to grow the company. Company president and CEO Jorge A. Ganoza Durant explained the basic strategy in a recent conference call.

“The programs are geared to exploring new areas where we can establish new anchor zones for production, where we can build reserves and resources that can be brought to production on a fast-track basis,” Ganoza Durant said.

The company is also looking at acquiring new properties, especially in Peru and Mexico, with multiple confidentiality agreements signed. Ganoza Durant adds that the company is interested in “post-discovery, predevelopment opportunities, just like San Jose was in 2005.”

Ganoza Durant notes that with strong reserves the company is well-positioned to seek growth.

“We have growth ahead of us, backed by a solid base of reserves,” Ganoza Durant said.

Both mines also have significant inferred resources. Caylloma hosts 3.3 million inferred tonnes of 119 grams silver, 0.35 gram gold, 1.05% lead and 2.02% zinc, while San Jose hosts 3.1 million inferred tonnes of 222 grams silver and 1.8 grams gold.

Along with increased reserves, the company has reaped significantly higher earnings, thanks largely to the stronger silver price.

In 2010, the company recorded net income of US$12.9 million, compared with US$620,000 in 2009, while sales topped US$74 million in 2010 compared with US$51.4 million the year before.

Silver sales in 2010 were up 13% to 1.9 million oz., while silver prices were up 38% over the year before. Zinc and lead sales decreased by 7% and 11% respectively, but prices rose 31% and 25% respectively.

Fortuna Silver shares recently closed at $5.92, with 123 million shares outstanding.