Fortune aims for near-term cash flow at Revenue

VANCOUVER — According to president Robin Goad, Fortune Minerals’ (TSX: FT; US-OTC: FTMDF) acquisition of the fully permitted Revenue silver-gold-lead-zinc mine in southwestern Colorado is poised to take the company into an “entirely new tier.” Fortune struck a preliminary agreement to buy the asset in May, and on Oct. 1 closed the deal that may see it soon become a producer with positive cash flow.

Fortune has actually been operating at Revenue, located 9 km southwest of the town of Ouray. for five months, after it picked up a 12% interest in the May agreement. During this grace period the company worked  to improve the mill infrastructure and devise plans to resume mining operations, even as it finalized the financial details.

In October Fortune received a US$25-million installment from a previously reported US$35-million production prepayment facility from New York-based Lascaux Resource Capital, with a second tranche totalling US$10 million expected to close shortly.

The facility is to be repaid from a fixed schedule of metal shipments from Revenue, plus interest over five years. With the capital influx, Fortune now has a 100% stake in the mine.

“Looking at our share price right now we feel it would be really destructive to finance completely out of equity. We looked at a lot of alternatives, including streaming, royalties, joint ventures and anything we could do to secure the money without hurting shareholder value,” Goad says during an interview, noting that Lascaux could receive more than a quarter of Revenue’s production depending on how payments are structured over the next five years.

“To get things done in today’s world you have to think outside of the box, Goad says. “We’ve always been a company that’s been successful raising money in tough markets because we’ve gone about securing money in a creative way.”

The purchase agreement for Revenue has been tweaked since May: Fortune has paid the private vendors US$15.5 million from the first Lascaux tranche, and has agreed to pay another US$3 million upon receipt of the second tranche, as well as 17.7 million shares. (Under the old agreement, Fortune made an initial US$14-million cash payment, with aggregate deferred payment obligations of US$34.5 million to US$36.8 million.)

Resources at Revenue have been delineated in two of eight known veins: Yellow Rose and Virginius. Polymetallic epithermal mineralization at the project is found in quartz veins hosted primarily in San Juan volcanic rocks.

Veins range up to 1.8 metres thick, and have been mined and drilled over a vertical extent of 914 metres. Virginius has been mapped at surface over 1,220 metres, while Yellow Rose has been traced for 4,900 metres to the property boundary.

According to updated resource estimates, Yellow Rose hosts 288,000 measured and indicated tonnes grading 293 grams silver per tonne, 0.99 gram gold per tonne, 1.8% lead and 1.7% zinc. Contained metals are pegged at 3.27 million oz. silver, 10,500 oz. gold, 11.3 million lb. lead and 10.8 million lb. zinc.

Meanwhile, Virginius holds 440,530 indicated tonnes of 764 grams silver, 1.25 grams gold, 4.3% lead, 0.3% copper and 1.4% zinc for 13.1 million contained oz. silver, 21,000 contained oz. gold, 41.8 million contained lb. lead, 2.4 million contained lb. copper and 13.3 million contained lb. zinc. Inferred resources add 584,130 tonnes of 423.3 grams silver, 1.08 grams gold, 3% lead, 0.1% copper and 0.99% zinc.

“The first thing we looked at was: ‘where is the upside on this project?’” Goad says. “We saw all kinds of opportunity. We’re comfortable that the resources are there, and we also have a lot of material in surface and underground stockpiles that are not contained in any estimate. In addition, we have eight veins intersected by underground workings, and only two of those have resources. The six remaining veins have drill intercepts or evidence of mineralized material that hasn’t been quantified, but we know there is continuity.”

Though Fortune reckons Revenue’s current resources could support a 13-year mine life, the company focused on a smaller US$26-million operation in a preliminary economic assessment (PEA) released in late July. The study is based on only 806,000 tonnes grading 414 grams silver, 0.57 gram gold, 2.3% lead and 0.9% zinc.

This operation would feature an eight-year mine life and produce 1.86 million oz. silver annually at cash costs of US$6.62 per oz., net of by-product credits. The plan  results in after-tax net present value (NPV) of US$59 million at a 6% discount rate, along with a 73.2% internal rate of return (IRR). The PEA assumes optimistic metal prices of US$1,350 per oz. gold, US$22 per oz. silver, US$1 per lb. lead and US$1 per lb. zinc.

“We’re now a producing company with an asset that has more than a decade of longevity,” Goad continues. “We’ve had a history of being opportunistic in picking up assets at the bottom of the market, and the current climate definitely had an impact on the Revenue deal. On the commodity issue, it is important to note that this has historically been one of the highest-grade silver producers in North America, so it has a built-in ability to withstand lower prices.”

After the dust settles on the Revenue deal, Fortune should have US$7 million in working capital to get the mine running smoothly at its 400-tonne-per-day capacity. Several improvements are underway, including: upgrades to ventilation; improved access to surface stockpiles for more mill feed; and modifying the crushing and grinding circuits, and installing a thickener to expand tailing-filtration capacity.

Fortune shares have traded within a 52-week window of 20¢ to 46¢, and closed at 23.5¢ at press time. The company has 195 million shares outstanding for a $45-million market capitalization.