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Site Visit: Fortuna Silver’s San Jose Mine in Oaxaca, Mexico

Simon Russell, SilverSeek.com Mining Analyst
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Tuesday, April 9th

Recently I visited Fortuna Silver Mines Inc.’s (NYSE.FSM, TSX.FVI, BVL.FVI, and FSE.F4S.F) San Jose mine in Oaxaca, Mexico, where their $9 million construction project is increasing the mill’s capacity from 1,000 tpd to 1,500 tpd of ore. Fortuna built this state of the art mine from the ground up, starting as an exploration project in 2006 and successfully advancing through the permitting and construction phases. The company declared commercial production in September 2011 on time and on budget.

Last year the San Jose mine produced 1.9 million ounces of silver and 17,900 ounces of gold. Their mill expansion project is expected to be completed in the beginning of the third quarter of this year, after-which the mine’s annual production will ramp up to approximately 3.2 million ounces of silver and 23,000 ounces of gold.

Prior to building San Jose the company first brought their Caylloma mine in Peru back into production in the last quarter of 2006. This year Caylloma is forecasted to produce 2.0 million ounces of silver and 2,700 ounces of gold, plus a significant amount of lead and zinc. Once the San Jose mill expansion is completed in mid-2013, Fortuna’s two mines are expected to achieve a consolidated annual production rate of 5 million ounces of silver and 26,000 ounces of gold.

The company’s professional approach to stakeholder engagement and sustainable development are an important component of their success. While emerging as a profitable low-cost silver miner, Fortuna has also become an outstanding example of Corporate Social Responsibility (CSR) for the minerals industry in-general.

San Jose Mine

Fortuna’s San Jose mine is located in southern Mexico, as shown in the adjacent map from Fortuna Silver Mines Ltd. The mine is approximately 50 km south of the city of Oaxaca, which takes about an hour to drive by paved road.

The state of Oaxaca is at the southernmost part of the Mexico Silver Belt. Although some metal was produced here during the Spanish-colonial era, the only other modern gold and silver mine in this state today is Gold Resource Corporation’s (GORO.NYSE) El Aguila, which is located about 70 km southeast of San Jose. The successful development of these two new mines within recent years is a good indication that this region is underexplored and has a lot of potential.

Geologically, the San Jose ore deposit consists of intermediate-sulfidation epithermal veins that are hosted in volcanic rocks. Today mining occurs along two adjacent veins that dip near-vertical, called Trinidad and Bonanza. These veins were enriched by multiple mineralizing events over time so they have relatively high silver and gold concentrations.

At the core shed we saw an impressive drill intercept that was recently announced in the company’s February 4, 2013 news, where hole SJO-261 cut two veins at a depth of 549.55 meters:

· True width 10.7 m of 241 g/t silver and 1.57 g/t gold

· True width 2.4 m of 1,370 g/t silver and 7.89 g/t gold

This photo shows the second vein intercept in hole 261 at a depth of 549.55 meters. The silver mostly occurs as black sulfide mineral Argentite (Ag2S).

There are no significant amounts of base metals in this core so it appears likely that the high grade gold and silver mineralization should continue going deeper into the vein system.

The company has essentially consolidated the entire Taviche mining district within their 64,400 hectare claim block, and their geologists have identified numerous new exploration targets with potential to become deposits similar to the San Jose mine.

Fortuna initially acquired an interest in San Jose as a 76/24 Joint-Venture with Continuum Resources Ltd in late 2006, and eventually bought-out Continuum’s minority interest in March 2009. Then in February, 2013 they acquired a 55% interest in the adjacent Taviche Oeste concession from Pan American Silver (PAAS.NASDAQ, PAAS.TSX), with an option agreement to purchase the remaining 45% interest upon announcement of a production decision. The Taviche Oeste concession is subject to a 2.5% NSR royalty.

The San Jose underground mine is applying the modern “drift and fill” mining method with rubber-tired heavy equipment. After the ore is removed from the vein, the drifts are backfilled with waste rock and cement. Thus the mine’s design involves a ramp system that spirals downwards underneath the mined out areas.

“Mineros” in the above photo are working an especially high grade vein with a jackleg drill. However, most of the headings are mined with single and double-boom “jumbo” drills. Ore from this mine’s 6 or more active headings can be blended prior to feeding into the mill so as to help maintain a steady head grade and production targets.

As part of the expansion project a new foundation is currently being prepared for the second 700 tpd ball mill and there is plenty of space inside the existing building for additional flotation cells.

The following photo shows the San Jose processing plant with its three crushers on the left, and ore being conveyed into the mill building to the right. The mill’s water tanks are far right. Trees have been planted in the foreground as landscaping. The company’s nearby greenhouse is producing seeds native to this region for reclamation.

The tailings dam is also in the final stage of being expanded prior to increasing production, as seen in the photo below. In the background heavy earth-moving equipment is building onto the dam, which is then being covered by the impermeable liner. Water in this pond is clean and has a near-neutral pH, as verified by the ducks and storks on man-made sand bag islands in the foreground.

Sustainable Mine Development

San Jose is located in a semi-arid environment where the people’s main livelihood is agriculture. Consequently, it is essential that the company do everything possible to protect the regions aquifer, especially by minimizing their use of wells. For example, an important source is grey water from a municipal treatment plant, and then water in the tailings pond gets re-cycled back to the mill.

While looking for alternative sources the company noticed that the nearby town of Ocotlan de Morelos’ abandoned waste-water treatment plant was overflowing and subsequently causing health and social problems. Ultimately Fortuna signed a 15-year renewable agreement with the Municipality of Ocotlan to refurbish and manage the plant in exchange for industrial water. The treatment plant sources about 20% of the water supply for the mill, which gets transported to the property by a 15 km water pipeline. The town uses water from the plant to irrigate parks and soccer fields, and for use in public toilets. Additional information about the Ocotlan water treatment project is provided as a Case Study within the Sustainability section of Fortuna’s website.

Because mining is not as common in Oaxaca as it is in Mexico’s northern and central states this project has encountered a few growing pains over the years. However, the company is proactive and professional about educating the local stakeholders on how modern mines can operate responsibly and benefit the community with jobs, benefits, etc. This is an ongoing process that requires transparency and takes time, but it is obvious that many positive results are now being realized for their efforts.

For example, the workforce at San Jose is approximately 25% female, which is remarkable considering that people here typically get married as teenagers. It is also common for children to work with their family on subsistence farms or construction projects instead of attending school.

One way this silver mining company helps the community is by providing a free daycare center for everyone. This enables parents to seek employment at the mine or elsewhere nearby, plus offers educational opportunities for the children. Fortuna’s daycare facility at San Jose is in compliance with all of the government’s standards, including check-in procedures, shatter-proof glass, fire-proof doors, etc.

The small local sewing business that makes uniforms for the mine’s employees is another example of how this project benefits the community. This business association was founded independently by a group of local women who also make traditional Oaxaca style clothing, as shown in the following photos.

To help this group establish their business the mine provided a demand for workers uniforms, new sewing machines and training, plus management advice. Recently they have started to sell these work uniforms in Sonora as well. Since their business is expanding they purchased land adjacent to this shop, which they are currently renting, and have begun building a larger workshop.

When visiting the mine and neighboring pueblo of San Jose del Progreso it is obvious that through the process of building a profitable mine here Fortuna’s management team has risen to the challenge and become a leader in Corporate Social Responsibility (CSR).

Management & Corporate Structure

The Management Office of Fortuna’s Silver Mines Inc. is located in Lima and their Corporate Office is in Vancouver. Shares of the company’s stock is publicly traded on exchanges in the US, Canada, Peru, and Germany (NYSE.FSM, TSX.FVI, BVL.FVI, and FSE.F4S.F respectively).

The CEO of Fortuna is Jorge A. Ganoza, a fourth generation Peruvian miner who earned his geological engineering degree in the USA from the New Mexico Institute of Mining and Technology. Fortuna’s Chairman of the Board is Simon Ridgway, who is an accomplished prospector and financier, and has been inducted into Casey Research’s Explorer’s League.

At the mine we met the company’s VP of Operations Manuel Ruiz-Conejo. Mr. Ruiz-Conejo is a mining engineer from Lima who has held various management and executive roles at many of Peru’s most significant mines throughout his 25 years in the industry, including community relations.

Fortuna Silver Mines Inc.’s market cap is approximately $500 million, since their shares are trading around $4.00 and they have 125.2 million shares issued and outstanding. The company has 131.3 million shares fully diluted, no hedging, no debt, $64.7 million in cash and a $20 million undrawn credit facility.

The company’s production results from 2012 were announced in their January 14, 2013 press release, which showed substantial growth over the previous year. The company’s cash cost net of by-products is $5.96 per ounce of silver, which makes them one of the lowest cost producers in the industry.

As of the end of the fourth quarter 2012 Fortuna has a cash position of $64.7 million, and production will be increasing with completion of the San Jose mill expansion at the beginning of the third quarter this year. The company will also be exploring numerous prospective targets in Peru and Mexico over the coming months with a 51,000 meter drill program. By having established working relationships with their neighboring communities, Fortuna is on track to continue growing shareholder value for the foreseeable future.

 

Legal Notice / Disclaimer: Fortuna Silver advertises on SilverSeek.com. The author and members of the GoldSeek group may or may not own shares in the company described by this report.

Simon Russell is a mining and geological engineer with over 10 years of diverse industry experience. His background includes hydrology and environmental engineering, exploration geology, underground contract mining, mine engineering, project management, and mine investment analysis. He has worked for many different types of mineral projects across the western United States and internationally for investors, consulting firms, and both major and junior resource companies. Mr. Russell is not an investment advisor and this is not intended as investment advice.

 

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. GoldSeek.com, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; GoldSeek.com makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of GoldSeek.com only and are subject to change without notice. GoldSeek.com assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

 

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