Fortuna Silver Mines* (FVI : TSX : $2.23), Net Change: -0.09, % Change: -3.88%, Volume: 2,292,860
Keeping the Faith. Fortuna plummeted after reporting the results of the pre-feasibility study for the San Jose project in Mexico.
The pre-feasibility study outlined capex of US$55.7 million for an operation that could produce an average of 2.3 million
ounces of silver and 18,000 ounces of gold over a nine-year mine life (3.4 million ounces of silver-equivalent). Average life-of-
mine operating costs are estimated at US$6.90 per oz of silver equivalent. The mine plan calls for throughput of 750 tpd at the
start of the mine life, ramping up to 1,000 tpd by 2014 and 1,500 tpd by 2016. While capex was slightly higher than Canaccord
Adams Mining Analyst Nicholas Campbell’s previous estimate of US$50 million, lower-than-expected silver and gold grades
and a more gradual ramp-up in throughput over the life of the mine had a more significant impact on his discounted cash flow
valuation. Effectively, much of the production growth to come from the development of San Jose has been pushed back in the
mine life. However, Campbell highlights that while pre-feasibility study for the San Jose project fell short of expectations, this
does not imply that the project is uneconomic. Through the development of San Jose, Fortuna should grow its annual production
to roughly 4.0 million silver-equivalent ounces by 2012, and to more than 6.0 million silver-equivalent ounces by 2016. San
Jose also considerably increases Fortuna’s leverage to higher precious metal prices and its exploration leverage to a mine-life
extension and diversifies its cash flows over multiple operations. Campbell lowered his target price to reflect less robust
economics at San Jose but reiterates that Fortuna remains a compelling growth story that is attractively valued relative to other
junior precious metal producers. He notes that junior precious metal producers are currently trading at 1.28x P/NAV (5%, spot)
and 12.7x 2011E CFPS. For comparison, Fortuna is trading at 0.79x P/NAV (5%, spot) and 8.5x 2011E CFPS. Therefore, he
believes that the pullback in the shares of FVI in response to the San Jose pre-feasibility study is an over-reaction that represents
a good opportunity for investors to build a position. Fortuna is fully financed to advance the San Jose project through to
production and, over the next 12 months. Campbell expects Fortuna’s share price to outperform to reflect the growth associated