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Additional information

Additional	Information
Market:	TSX-V
Sector:	Gold Mining
Epic:	TSX-V:FVI
News:	Latest news
Web Site:	Fortuna Silver
Other Articles:	14-01-200907-01-2009

Fortuna Silver's strong balance sheet bodes well for continued growth

by Ian Mclelland

Since formation in 2004, Fortuna Silver Mines Inc. (TSX.V: FVI / Lima Exchange: FVI) has undergone the transformation from would-be producer to producer, and now looks set to substantially build its production profile with a second asset in Mexico.

Fortuna Silver has made the move from explorer to producer when it acquired the Caylloma Silver-Lead-Zinc Mine in Peru from Hochschild Mining (LSE: HOC) in 2005, while it was on care and maintenance. The rest is history, so to speak, as Fortuna moved the mine back into production in October 2006, buoyed by high commodity prices until early 2008. 

However, the company was not immune from the substantial correction in metals in the second half of 2008, and along with its peers, was pulled down on negative sentiment towards the sector. 

This massive correction in the share price doesn't reflect the underlying potential of the company, however.  Fortuna is still ramping up production at Caylloma, which is forecast to produce approximately 1.5 million ounces of silver in 2009 plus lead and zinc.  Assuming US$10/ounce silver, US$1100/tonne zinc and US$950/tonne lead, around 40-45% of total revenues will come from silver, and a tonne of rock will be worth around US$72.  Fortuna is also adding a copper circuit, which will add additional by product credits.

In November Fortuna released third quarter results which highlighted the progress being made at Caylloma. Fortuna reported revenues of C$7.79 million for the quarter and C$22.47 million for the first nine months.  Production throughput increased by 37% over the same quarter in 2007, at 89,827 tonnes of treated ore producing 243,280 ounces of silver, 2,139 tonnes of lead and 2,877 tonnes of zinc. The company also recorded its best recoveries yet, with metallurgical recoveries of 80.07%, 92.19% and 88.11% for silver, lead and zinc respectively. Cash cost per production tonne was US$44.33.  Net loss for the quarter was only C$0.31 million versus C$3.39 million a year earlier.

Fortuna reported revenues of C$7.79 million for the quarter and C$22.47 million for the first nine months, which were down on last year - not surprising on the lower prices realised for zinc and lead in particular.  The good news is that the mine is washing its face despite the savage correction in metal prices. Using the assumed metal price scenario, Caylloma is expected to have approximately US$27 million in revenues for 2009 with a free cash flow of approximately US$2.5 million.  In other words, the mine generates sufficient operating margins as to fund its investment activities for 2009 without requiring corporate funding. The better news is that Fortuna Silver, as of end of September 2008, is sitting on a C$41.2 million cash pile and has no need to come back to the markets in 2009.

Fortuna's solid track record at Caylloma also bodes well for the company's ability to move an operation into production, as it has proved it has the skills and experience to deliver results.

This is largely down to Jorge Ganoza’s, Fortuna Silver's CEO, ability to assemble a competitive and committed group of executives that make up Fortuna’s Management team.  Jorge is a geological engineer, who comes from a Peruvian family with a long history of operating mines in Central and South America.

What Mr. Ganoza understands is that if you want to focus on silver production, there are two countries you need to be looking at - Peru and Mexico - which are the top two silver producers in the world, and conveniently, both countries have a long history of supporting mining.

So it shouldn't come as any surprise that Fortuna's second asset, the San Jose Silver-Gold Project  lies in Mexico. While Mexico is well known for its precious metal mining potential, Fortuna's project lies in a less well known region, the Taviche Mining District in the state of Oaxaca, in southern México. 

Fortuna initially optioned San Jose from Continuum Resources, a fellow TSX company, but recently announced that it was acquiring its smaller partner, taking its equity stake to 100%.  San Jose certainly is shaping up nicely for Fortuna Silver. Drilling results have continued to confirm continuity of the high grade epithermal veins.  Mining operations, according to Fortuna, are likely to commence in late 2010 or early 2011, assuming there are no major hiccups along the way.  The project is on early stages of engineering and the preliminary capital expenditure is expected to be in the region of US$30 million, based on a 1000 tonnes per day operation producing around 5.5 million ounces of silver equivalent ounces per annum.  Widths of the veins, information gathered from over 70,000 meters of drilling and a decline recently put in, suggest the mine will be able to use mechanized mining methods, and Fortuna is looking at bringing in a contractor to operate. 

The three obvious hurdles at San Jose will be securing financing for the mine, sourcing a reliable supply of fresh water and ensuring good support from the local community who aren't as familiar with mine developments as their cousins further north.  

A revised 43-101 resource estimate at San Jose is expected in the second quarter of 2009, which should reflect an upgrade from the inferred to the indicated category.   The San Jose deposit contains approximately 67 million silver equivalent ounces out of which 17.7 million ounces are in the Indicated / Measured category and 49.1 million ounces are in Inferred the category.  

Fortuna Silver does have a fair old whack of warrants outstanding, but they are way out of the money ($2.30) as are a fair few options granted to directors.  Fortunately for shareholders, the company doesn't need the money from the warrants to accomplish its near term objectives.  

Major shareholders include Sprott Asset Management in Toronto and Tocqueville Asset Management in New York City, but overall Fortuna Silver benefits from a substantial private investor following, with around 60% of the company's stock held by retail investors. That equates to decent liquidity, which is good news for investors who like to see clear entry and exit points.

From an outsider looking in, it's hard not to like Fortuna Silver. The company has delivered on its goals, and the balance sheet is in fine order.  Nowadays, cash is king, and this company has plenty, which puts it in an enviable position to many of its peers who are struggling to stay afloat.
 

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