Fortuna Silver’s San Jose EIA in Mexico extended by two years instead of 12

Fortuna Silver Mines (TSX: FVI; NYSE: FSM)  announced that Mexico’s environment ministry made a “typographical error” in the environment impact authorization (EIA) renewal of its San Jose mine in Oaxaca and that the EIA was extended for two years instead of 12, as previously announced by the company.  

Fortuna Silver said that its Mexican subsidiary, Minera Cuzcatlan, is working to “reconfirm” the 12-year extension period, and has challenged the government’s decision at Federal Court after receiving the ministry notice on January 28. 

“The delivery of the notice does not jeopardize the operations at the mine,” Carlos Baca, the company’s director of investor relations, told the Northern Miner.  “The court should rule on this in a matter of months. Worst case scenario, we apply again for an extension of San Jose´s EIA.” 

Mexico’s Secretaría de Medio Ambiente y Recursos Naturales (Semarnat) was not immediately available for comment.  

In a press release on February 4, Fortuna Silver said its subsidiary Minera Cuzcatlan had applied for a 12-year extension and that “the term of 12 years is referred to repeatedly in all documentation related to the filing of the application for the extension.” It added that no other period of time was “was contemplated in the documentation or in communication with Semarnat.”  

After initially being denied the permit in November, Fortuna Silver announced on December 20 that it had received a 12-year extension.  

“After continued dialogue and technical evaluation, Semarnat confirmed operations at the San Jose mine are conducted in accordance with all environmental obligations under the EIA,” the company stated in its December 20 press release.  

Mexico did not renew the company’s EIA on November 10 due to a pending evaluation of the mine’s infrastructure and the company’s failure to provide “required documents,” which Minera Cuzcatlan said it had already submitted, the company had said in November.  

Located in the Taviche mining district, the San Jose mine has been producing silver and gold since 2011. In 2020, the mine produced 6.2 million oz. of silver and 37,805 oz. of gold.   

Trevor Turnbull, an analyst at Scotiabank, said it was “disheartening that the authorities seem unwilling to resolve the issue quickly and without the need of a Federal Court ruling.” 

In a research note to clients Turnbull noted that the mine’s local community made “allegations based on environmental and water issues” and called on the government to cancel permits for San Jose.  

“We have visited the operation and do not share the concerns. It is a small footprint underground mine that pipes grey-water from the nearby sewage treatment plant that Fortuna paid to refurbish. This provides about 8% of the mine’s water with rain water collected in the tailings dam and a zero discharge closed processing circuit providing the balance,” wrote Turnbull.  

BMO analyst Ryan Thompson, who follows Fortuna Silver, described the news as “shocking.” “In our view, Semarnat now has a serious credibility issue,” he wrote in a research note.  

“Unfortunately, this latest development will continue to cast a cloud of uncertainty on San Jose. Fortuna’s stock has not recovered since these issues came to light in November. Although we view today’s news as obviously negative, we feel the “San Jose discount” is likely already priced into the stock.” 

Jacques Wortman, an analyst at Laurentian Bank Securities, expects Fortuna Silver’s stock to respond negatively.  

“Based on the most recent reserve estimate, the San Jose mine has roughly four years of mine life remaining … an important consideration is the potential impact on the amended credit facility, which was to increase to US$200M from US$120M with the permit extension,” Wortman wrote in a research note to clients.   

“Recall that the use of proceeds for the increased facility is primarily to complete construction of the Seguela mine in Cote d’Ivoire.”