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Peter Spina, Founder, Gold Seek LLC><center><font color= Fortuna Silver Focused on Growth, Targeting 12M Silver Eq. by 2017

By: Peter Spina, Founder

 -- Published: Tuesday, 6 October 2015 | Print  | Disqus 

Silver prices are testing even the most proven and experienced operators, but despite the challenges Fortuna Silver Mines (NYSE: FSM, TSX: FVI) has managed to remain a profitable producer by cutting costs and maximizing efficiencies.


But while low-cost operations are paramount, the company hasn’t abandoned its long-term vision, and continues to devote capital to expanding future mine and mill production. Thanks to past and current investments, the company expects to be producing 12 million silver equivalent ounces, silver and gold only, by 2017.


The company’s stock and profits have been battered along with the rest of the silver producers, but the company has proven it can weather the storm and has positioned itself to be ready to take advantage of any rebound in precious metal prices.


Finding profits


In the second quarter this year Fortuna produced 1.67 million oz. silver and 9,032 oz. gold from its San Jose gold-silver mine in Mexico and its Caylloma silver-gold-lead-zinc mine in Peru. That was a 3% increase in silver production and 6% increase in gold, as the company realizes the benefits of a mill expansion at San Jose.


For the year Fortuna says it’s on track to meet it’s guidance of 6.5 million oz. silver and 35,300 oz. gold for the year.


And while the margins are thin, Fortuna Silver is still managing to eek out a profit. In the second quarter the company pulled in net income of $200,000 on sales of C$38.9 million. That’s down from a net income of $2.9 million in the same quarter last year, due largely to a 17% decrease in the realized silver price.


The first quarter of this year was a fair bit better with earnings of $3.9 million, thanks in part to lower charges on share-based compensation and lower corporate expenses, though that was still down from earnings of $4.9 million the same quarter the year before.


Source: Corporate Presentation


But despite the unavoidable drop in profits due to metal prices, Fortuna is still generating strong cash flow, with $6.8 million in the second quarter and $5.3 million in the first quarter.


Investing in the future


Fortuna is plugging much of its cash flow back into operations at it looks to further increase production, and expand mill capacity at its San Jose mine from the 2,000 tonnes per day achieved last year to 3,000 tonnes per day by mid-2016.

Source: Fortuna Silver’s San Jose Expansion


After the $30-million expansion is completed the company will be in a position to produce an estimated 6.7 million oz. silver and 52,000 oz. gold from the mine in 2017, compared to expected production of 4.6 million oz. silver and 33,300 oz. gold this year, and a long way from the half million oz. silver and 4,500 oz. gold the mine was producing in 2011.


Source: Fortuna Silver’s San Jose Expansion


The company is also investing in the long-term infrastructure around San Jose by switching to dry stack tailings to be commissioned by yearend. The upfront cost of  $32 million for the drying facility and related infrastructure is sizable, but it will allow continued expansion of the tailings facility, and it will also reduce concern about potential environmental contamination.



At the older Caylloma mine there is less slated for capital projects, but the company is still trying to squeeze every ounce of productivity out of the mine. Fortuna is spending $4.5 million to upgrade the processing plant, moving from cyclones to high frequency screens and increasing the flotation capacity. The investment is expected to yield a 2-4% increase in silver recoveries and a 10% increase in throughput.


And while Fortuna is going ahead with its capital programs, it won’t be diluting shares beyond the 129 million outstanding. The company had $110 million in cash at the end of the second quarter, including $40 million in a drawn-down bank term loan, that provides additional financial And just in case the company has another $20 million untapped credit facility if necessary.  


Cutting costs


While the company is investing in increased production, it’s also been working to get costs down.


The company, like much of the industry, has already made significant cuts to all aspects of the operations. Over the last two and a half years the company has reduced corporate staff by 52%, trimmed mine staff by 7%, made cuts to exploration budgets, and optimized its mine plans for the new price environment.


The company has looked wherever it can at cost cuts, like delivering its zinc concentrate from Caylloma to a closer port facility, shaving close to 700 km off the transportation distance.


San Jose’s mining costs are now at $58 per tonne, down from $64 per tonne in the second quarter of 2014, thanks to the higher throughput, a 19% devaluation of the Mexican peso, and lower energy costs.


At Caylloma mining costs came in at US$88 per tonne, a 3% drop from the year before thanks in part to lower head count, lower transportation costs, and a 14% devaluation of the Peruvian nuevo sol.


In the quarter consolidated all-in sustaining cash costs dropped to US$14.47 per oz. Ag, compared with US$17.41 last year.


The costs are well below guidance of $16.61 per oz. for 2015, but that advantage will be short-lived as the company expects to ramp up capital spending in the latter half of the year to between $25 million and $30 million per quarter, with the dry tailings and mill expansion, and sustaining cash costs will come more in line with annual guidance.


But once the capital programs are off the books and the company starts to reap the performance rewards, all-in sustaining capital costs are expected to drop to $10.93 per oz. in 2016 and $10.22 per oz. for 2017.


Expanding Resources


As the company ramps up throughput at San Jose it has also been busy ensuring there’s enough future mill feed to justify the expansion, with a variety of exploration programs on their 64,408 hectares of concessions in the area.


Fortuna has concentrated efforts on the high-grade Trinidad zone that extends north from the main mine, exploring from four underground drill pads.


The most recent results, released in August, included 0.4 meters grading 1,070 g/t Ag and 3.25 g/t Au; 0.3 meters averaging 1,740 g/t Ag and 6.72 g/t Au; and 0.4 meters carrying 1,045 g/t Ag and 23.80 g/t Au as part of a number of narrow, high-grade results.


The company says that the new drill results confirm that the Bonanza and Trinidad veins, and the structurally and spatially related Trinidad North Stockwork Zone, all remain open to the north and to depth along the strike and plunge of the ore shoots. In August Forutna announced that it has identified a new structure, the Ocotlan Vein. It converges with the Trinidad Vein just like the Bonanza Vein converges with Trinidad resulting in the Trinidad deposit. The lateral and depth projections of Ocotlan’s potential structure are currently being drill tested.


Besides the main Trinidad zone the company has also been exploring a mirror system less than 2km west known as the La Noria vein system. The northwest-trending sub-parallel La Noria vein system is connected by several extensional veins to Trinidad. Aura Silver and Intrepid Mines put six holes into the target in 2007, with the best intercept being 0.6 metres grading 66 g/t Ag and 3.49 g/t Au.


Fortuna says the previous drill results were mixed, but in their experience exploring San Jose’s epithermal systems the mixed results can lead to the ore shoots, like the ones that have proven to be rich at Trinidad. The company is working on mapping and plans to drill the area once surface access and environmental permits  are secured.


The company also wants to test the Trinidad North vein further NNW, but the company is still working on securing a surface access agreement with community of Magdalena.


The politics with the local community have been strained at times, and with an election coming Fortuna sees further delays at Madgalena, but it remains a promising prospect for future exploration. But Fortuna can continue exploration from underground drill stations albeit at a slower pace due to development work. Once surface access is secured it will allow for discovery drilling to speed up. The Noria system falls under a different community, so the company expects permitting to be easier.


A little further afield the company has been conducting surface trenching on the Tlacolula prospect, roughly 25 km northeast of the San Jose mine, with some encouraging results on from the outcropping, untested low sulfidation epithermal vein system.


The Güila Vein at Tlacolula returned a channel sample of 6.3 meters grading 2,056 g/t Ag Eq, while the parallel Tlacolula vein, sitting some 500 meters east, showed a 9.6-meter sample grading 301 g/t Ag Eq, and 7.1 meters averaging 151 g/t Ag Eq.


The company is working on permitting for initial drill testing on the Tlacolula prospect, which it is earning a 60% interest in from Radius Gold.


At Caylloma, Fortuna has a more limited exploration budget, but the company did bump estimated spending from $700,000 to $1.7 million this year as it plans more work on high-grade targets identified on the northern part of the Caylloma vein system. The company says the targeted areas are close to operations and would be easy to incorporate into mine plans, and could help with grade issues at the mine.


With Fortuna investing in a variety of exploration programs the company is confident it can continue to increase resources and reserves.


Source: Corporate Presentation


Currently the company’s San Jose mine contains reserves of 3.8 million tonnes grading 233 g/t Ag and 1.81 g/t Au for 28.3 million oz. silver and 220,000 oz. gold. Inferred resources at San Jose stand at 7.1 million tonnes grading 257 g/t Ag and 1.75 g/t Au for a further 59 million oz. silver and 401,000 oz. gold.


At Caylloma reserves stand at 3 million tonnes grading 134 g/t Ag, 0.33 g/t Au, 2.24% Pb, and 3.13% Zn, for 13 million oz. silver and 32,300 oz. gold. Inferred resources include 4.4 million tonnes grading 133 g/t Ag, and 0.59 g/t Au for 18.6 million oz. silver and 83,100 oz. gold.




Times are tough for silver producers, but Fortuna has been a playbook example of what to do in times like these: cut costs, focus on core assets and prepare for the rebound. The management team has succeeded keeping the company out of the red and so is very well-positioned to ride out the lower silver prices.


2016 will see excess cash being generated to an already strong balance sheet.  Fortuna’s President and CEO, Jorge Ganoza stated that the best return of capital remains in organic growth but open to any opportunities which meet their investment criteria. As more value emerges in the silver mining space, Fortuna is in a prime position to acquire assets. That is of course, if an acquisition will “improve the existing asset base”, states Mr. Ganoza. That is a high threshold to meet considering what San Jose brings to the table.


With production and capacity increases underway, Fortuna will emerge stronger than ever during one of the most difficult periods for silver-gold miners.  This is a testament to the Fortuna team as it continues to establish itself as an industry outperformer. Fortuna’s efforts will again reflect itself in its share value when the sector reversal arrives. Until then, silver investors are in a buyer’s market and can accumulate positions at a fraction of the stock price from last year. At these levels the stock remains a low-risk call option.


- Peter Spina, President of


Shares Outstanding

129.1 million

Fully Diluted

132.3 million

Market Capitalization

$290 million



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Peter Spina's experience with the precious metal markets started back in the mid-1990s, which led to the creation of back in 1995. Today ranks in the top three most popular global gold websites and its sister site, ranks as the most visited silver website in the world. Back at the start of the new secular precious metals bull market, Peter established the technically-focused subscription newsletter, Gold Seeker Report, which at the start of 2005 was merged into the more comprehensive Gold Forecaster ( service. In addition to the newsletter and websites, Peter frequently appears in the media including MarketWatch, Reuters, and


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