Fortuna falls on positive San Jose prefeasibility (April 27, 2010)

Vancouver – A prefeasibility study for the San Jose project in Mexico found the silver-gold deposit could support an underground mining operation producing 20.4 million oz. silver and 163,000 oz. gold over nine years but investors were less than pleased with the findings and pushed Fortuna Silver Mines‘ (FVI-T) share price down 16% on the news.

The study investigated an underground mining operation and standard flotation processing mill for San Jose. For the first 2.5 years of operation the mine would process 750 tonnes of ore daily, at which point an expansion would increase throughput to 1,000 tonnes a day. Two years after the first expansion a second expansion would lift capacity to 1,500 tonnes per day.

The prefeasibility pegged San Jose with an after-tax net present value of US$36.4 million, using an 8% discount rate, and determined the project could generate an 18% after-tax internal rate of return.

To build the operation is expected to cost US$55.7 million, though Fortuna says it will try to reduce that number by relying on mine contractors and acquiring suitable second-hand equipment. Once built, the mine should be able to produce an ounce of silver for US$6.90.

The study defined 3.5 million tonnes of proven and probable reserves grading 205 grams silver per tonne and 1.6 grams gold per tonne at the project in Oaxaca, Mexico. Those reserves stem from a resource that is considerably larger and higher grade: San Jose is home to 2.7 million measured and indicated tonnes grading 295 grams silver and 2.27 grams gold as well as 2.4 million inferred tonnes averaging 262 grams silver and 2.11 grams gold.

The grade decreased because inferred resources are inadmissible in a reserve calculation, so to keep the mineable tonnage reasonable Fortuna lowered the global reserve cut-off grade to 90 grams silver equivalent. The resource estimate had used a cut-off grade of 150 grams silver equivalent.

However, the reserve does not quite tell the story at San Jose. The excluded inferred resources contain 17 million oz. silver and 133,500 oz. gold, based on the 90-gram silver equivalent cut off, which would significantly extend the mine’s lifespan if converted to reserves. Moreover, a portion of the inferred resource sits in the path of the mine decline, which means it will be mined in the early years of San Jose whether it is upgraded to a reserve rating or not.

“It has been challenging to incorporate into a study of this nature all the areas of opportunity that, in management’s view, make San Jose a robust project,” said Fortuna’s president and CEO Jorge Ganoza in a statement. “The old miner’s adage ‘drill for structure and drift for reserves’ holds true. The limitation to…including only measured and indicated resources for reserve conversion meant that a significant amount of inferred resources located in the upper portions of the mine, where mining takes place in the initial years, are not accounted for in the mine plan.”

The mineralized vein at San Jose will be mined using mechanized cut and fill methods, using backfill from process tailings combined with waste from within the mine and from surface. A single decline ramp will provide access to the mine; to date Fortuna has already developed 1,000 metres of the decline. By the end of the mine’s life it will likely contain more than 5 km of declines and drifts.

Fortuna will feed the process plant using water from the waste water treatment facility in the nearby community of Ocotlan de Morelos as well as precipitation captured in a reservoir.

Fortuna has already acquired all of the permits needed to commence construction at San Jose, is finalizing staffing for the construction phase, and has awarded a contract for the project’s engineering, procurement, and construction management. The company has also initiated preconstruction activities for the water project, tailings facility, and power connection.

And the company has all the funding it needs to develop the project. At the end of 2009 Fortuna had $36.8 million in the bank. Then, in March, the company raised another $34.5 million in a bought deal financing, selling 15 million shares at $2.30 a piece.

The company’s share price had been on a sustained climb since mid-2009, rising from 80¢ to $2.85. During those last eight months Fortuna took large strides at San Jose: the company regained access to the site after locals barricaded the access road for a month, boosted the project resource considerably, received the final environmental permit for construction, and completed the prefeasibility. Fortuna also advanced its operating Caylloma mine in southern Peru, boosting the project’s reserve count, completing a third plant expansion to bring daily throughput to 1,200 tonnes, and commissioning a copper flotation circuit at the polymetallic project. Caylloma produced 1.69 million oz. silver, 11,485 tonnes lead, and 12,901 tonnes zinc in 2009.

But the San Jose prefeasibility ended Fortuna’s share price ascent. In the two days following news of the study Fortuna lost 42¢ or 16% to close at $2.32. The company has 110 million shares outstanding.