Analyst Report: Fortuna Silver Mines, Inc. (TSX:FVI / NYSE:FSM / BVL:FVI / FSE:F4S)

7/31/2019 Analyst Report: Fortuna Silver Mines, Inc. (TSX:FVI / NYSE:FSM / BVL:FVI / FSE:F4S)

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May 4, 2012

Fortuna Silver Mines, Inc.Overview

Established in 2005, Fortuna Silver Mines is agrowing, low-cost silver producer with twooperating mines in Peru and Mexico. Thecompany is focused on organic growth inproduction and resources, as well as onexploration and acquisition of economic silvermineral assets in Latin America.

Fortuna expects to increase production from anestimated 3.7M oz of silver and 17,400 oz ofgold in 2012 (4.6M silver equivalent oz) to anestimated 5M oz of silver and 26,000 oz ofgold, not including significant lead and zincby-products, by 2014. In 2014, the companyprojects total production of 6.4M silverequivalent oz, a 39% increase. In 2011, thecompanys net realized price per ounce of

silver sold was over $30 USD.

Management

The companys management team has deepregional expertise, exploration savvy andmining industry experience. The companysPresident and CEO, Jorge Ganoza, is ageological engineer with over 16 years ofexperience in exploration and mining inPanama, Guatemala, Nicaragua, Honduras,Mexico, Dominican Republic, Haiti, Peru andColombia. The companys board of directors

is chaired by Simon Ridgway, who is a wellknown prospector and mining financier. Mr.Ridgway and exploration teams under hisguidance have discovered gold and silverdeposits in Honduras, Guatemala, andNicaragua.

The companys Vice President of Exploration,

Thomas I. Vehrs, Ph.D., has over 35 years of

Company Type MiningResources Silver (Gold, Lead, Zinc)Company Stage Junior ProducerSymbol TSX:FVI / NYSE:FSM /

BVL:FVI / FSE:F4SShare Price (CAD) $3.8152-week High/Low $3.50 / $7.58

Market Cap. $477,273,941Shares Out. 125,268,751Fully Diluted 128,957,040Insider Ownership 2%Major Shareholders Sentry Investments (9%),

Sprott Asset Management(8%), Equinox Partners (5%),Van Eck Global (8%), RBC

Asset Management (2%), USGlobal Investors (1%)

HeadquartersAddress

200 Burrard StreetSuite 650Vancouver, BC V6C 3L6Canada+1.604.484.4085info@fortunasilver.comwww.fortunasilver.com

Board of Directors Simon Ridgway, Jorge A.Ganoza, Robert R. Gilmore,Tomas Guerrero, MichaelIverson, Mario Szotlender,Thomas Kelly

CEO Jorge A. GanozaOperating Region(s) Peru, MexicoWorking Capital $56M (12/31/2011) *Burn Rate N/ADebt $0.00Revenues $110,004,000 (2011 annual)Profit/Loss $19,533,000 (2011 net

income)Net Assets $271,606,000 (Total Assets as

of 12/31/2011)* The company also has an undrawn credit facility of $20M.
http://www.heraresearch.com/mailto:[email protected]://www.fortunasilver.com/http://www.fortunasilver.com/mailto:[email protected]://www.heraresearch.com/


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Fortuna Silver Mines, Inc. 2012 Hera Research, LLC

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experience in mineral exploration and mine development, including positions with Gold Fields,Cyprus-Amax, Western States Minerals and Anaconda Minerals. Since 1980, Mr. Vehrs hasworked extensively in Latin America developing and managing exploration programs in Chile,Peru, Bolivia, Colombia, Argentina, Mexico and Central America. The companys VicePresident of Operations, Manuel Ruiz-Conejo is a mining engineer with more than 25 years ofexperience working with polymetallic mines and mine contractors in Peru.

Operating Mines

Fortuna has two operating mines, one in Peru and one in Mexico, as well as explorationproperties.

Caylloma Mine The 100% owned Caylloma mine, located in Arequipa, Peru, is a low-cost, underground operation producing silver-gold-lead-zinc concentrates with an 8 yearlife of mine estimate. The mine and processing plant are currently operating at a rate ofover 1,250 tpd. In 2011, the Caylloma mine produced approximately 2M oz of silver and2,400 oz of gold, along with 23.4M lbs of zinc and 19.7M lbs of lead. The companyscash cost per ounce of silver produced net of by-product credits at Caylloma is effectively

zero (negative $0.59 USD).

San Jose Mine The 100% owned San Jose mine, located in Oaxaca, Mexico, is a low-cost underground operation producing a high grade silver-gold concentrate that begancommercial production in September 2011 at a rate of 1,000 tpd. Processing plant designcapacity is 1,500 tpd and, beginning in 2013, the company expects to produceapproximately 3.2M oz of silver and 25,000 oz of gold annually with a 9 year life of mineestimate. In 2011, after four months of commercial production, the San Jose mineproduced 490,555 oz of silver and 4,622 oz of gold. In 2012, San Jose is expected toproduce 1.7M oz of silver and 15,000 oz of gold. Cash costs of $7.84 USD per silverequivalent oz are expected throughout the life of the mine.

Reserves and Resources

The company has total mineral reserves of approximately 44M oz of silver and 233,200 oz ofgold. The Caylloma mine reserves and resources are Proven and Probable reserves of 20.2M ozof silver and 49,500 oz of gold, Measured and Indicated resources of 8.9M oz of silver and21,800 oz of gold and Inferred resources of 11.8M oz of silver and 37,900 oz of gold. The SanJose mines reserves and resources include Proven and Probable reserves of 23.6M oz of silverand 183,700 oz of gold, Measured and Indicated resources of 2.9M oz of silver and 25,600 oz ofgold and Inferred resources of 22M oz of silver and 178,100 oz of gold.

Exploration Strategy

The companys land holdings include more than 70,000 hectares in Peru and Mexico and in 2012the companys $15 million USD exploration budget will fund 44,000 meters of drilling.

Caylloma Exploration of the 11,000 hectare land package surrounding the Cayllomamine in Peru is ongoing and the company expects to upgrade and expand its reserves andresources in 2012, which will extend the life of the mine.


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San Jose Exploration activities are also underway on the 58,000 hectare land packagesurrounding the San Jose mine. Access to the property surrounding the San Jose mine isexcellent and local infrastructure is good.

Mario The companys 4,900 hectare Mario project in Junin, central Peru lies in asilver-base metal belt. Historical drill intercepts included 8.75 meters of 658 grams per

ton (gpt) silver, 9.15 meters of 560 gpt silver and 13.6 meters of 303 gpt silver, alongwith significant lead and zinc.

Due to the vein structure of its existing deposits, the company plans to maintain its life of mineestimates at 8-9 years through ongoing exploration to (1) replace reserves as they are depletedand to (2) develop complementary near-mine operations (within 50 km of existing processingplants). At the same time, the company is exploring the Mario project and evaluating newproperties.

For the companys existing mines, President and CEO Jorge Ganoza does not believe in addingounces to resource estimates beyond what is needed to maintain an 8-9 year mine life. Mr.

Ganoza explained that We are not in the business of adding ounces if they do not have animpact on mine plans. If I can increase reserves and increment production, it makes sense.

Some companies report large quantities of ounces, but not all ounces are created equal. When

you look at it from an engineering perspective, you may find that many of these resource ounces

will never see the light of day.

Business Plan

The company plans to maintain its 8-9 year life of mine estimates through ongoing explorationwhile increasing production from 4.6M silver equivalent oz in 2012 to 6.4M silver equivalent ozin 2014 (a 39% increase in production over 24 months). The company is evaluating expansion atthe Caylloma processing plant to 1,500 tpd, for which an environmental impact statement (EIS)

has already been approved.

The companys Mario project could eventually become a third mine. Although plans have notbeen finalized, the company hopes to bring a third mine to production by 2016. The company isalso evaluating post-discovery, pre-development properties in Latin America where productioncosts would be below industry averages and where silver would represent more than 50% ofrevenue.

Catalysts

An updated NI 43-101 resource estimate for the Caylloma mine is expected in mid-2012 whileexploration activities continue throughout the year. The San Jose processing plant will be

expanded to a capacity of 1,500 tpd in 2012. In 2013, production ramp-up to 1,500 tpd at theSan Jose mine will be completed and the company will begin construction of an offsite leachingfacility to convert concentrate to dor.

Investment Thesis

The company is profitable and growing in terms of mineral assets, production and revenues. Thecompanys low cash costs suggest that profits will grow in step with increasing production.Production is expected to increase 39% in the next 24 months. The companys share price is


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near its 52-week low. The companys execution has been very consistent. All other things beingequal, the companys share price seems likely to rise from recent lows.

For comparison, First Majestic Silver Corp. (TSX:FR / NYSE:AG) has consistently increased itsmineral assets, production and revenues while developing new mines and maintaining relativelylow production costs. Fortuna Silver Mines is well positioned to become the next First Majestic.

Major Risks

Outside of normal execution and operating risks or exogenous events, the primary risks toFortunas share price have to do with general stock market conditions and the price of silver.

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About This Report

Hera Research is a subscriber-funded research service that does not receive compensation fromresource companies. Hera Research focuses on value investing in companies that produce

natural resources and seeks to identify resource companies whose share prices could gain 100%or more in 18 to 24 months.

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All information contained herein was obtained either from the company or from

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Analyst Report: Fortuna Silver Mines, Inc. (TSX:FVI / NYSE:FSM / BVL:FVI / FSE:F4S)

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