Production is on the up for Fortuna Silver Mines with a second mine in operation now; and with near term plans for expansion Fortuna Silver eyes doubling silver output.
It was El Grito, Mexican independence day, when Mineweb toured Fortuna Silver Mines' (TSX: FVI; NYSE: FSM) new 1,000-tonne-per-day San Jose mine just outside the city of Oaxaca, Mexico, in September. When this correspondent arrived in Oaxaca revelers had convened in squares all over the city to boisterously celebrate this national holiday steeped in patriotic significance. It has been 201 years since Spanish rule ended and 101 years since revolution swept through Mexico, marking the end to dictator Porfirio Diaz's reign in the country in 1910. But national fervour aside, Mineweb was here to see the basis of Fortuna Silver's plans to more than double its overall silver production to about six million ounces silver by 2014.Carlos Baca, Fortuna Silver's manager of investor relations, led the site visit. He, like many of the company's staff, is based in Peru where Fortuna Silver operates the plus 1,000-tonne-per-day Caylloma silver/base metal mine.
Our first stop was a sewage treatment plant just north of the San Jose mine. This may not sound like a particularly enlightening or desirable first stop on a tour of a company's newest mine, but for Baca this stage served as useful way to inoculate fears that can plague mines in districts such as Oaxaca. If there is one limiting factor to growth for a mine in an acutely arid state like Oaxaca, it is water. Mines need lots of it to process concentrate, to fill tailings ponds or merely to wash muddy trucks. That could set a mine such as San Jose on a collision course with Oaxacans who might not take kindly to having a water hog in their backyard. Which was one reason why Baca brought us here to gawk at raw human-borne sewage in giant tanks open to the air on a morning that was quickly heating up as the bright Mexican sun climbed overhead; he was showing us how Fortuna Silver was not headed for disaster with locals over water.
We wore yellow hard hats and Baca explained how this raw sewage treatment plant was a Fortuna Silver project. The facility, before Fortuna Silver arrived on the scene, was in tatters: barely functioning, definitely off-gassing and generally being horrible to live next to. "It was a disaster," Baca says. "The smell was terrible." Nodding vigorously, the sewage plant technicians flanking Baca's side and who oversee the operation did not disagree with that assessment.
But in a run-down sewage plant Fortuna Silver saw opportunity. It paid to revamp the facility, replacing equipment, and now Fortuna Silver pays to operate it, transforming sewage from the community of Ocatlan de Morelos into two usable products: intensely filtered greywater and fertilizer, both of which it offers to locals for free. The company also did it without paying money directly to anybody, a strategy savvy miners follow in other like jurisdictions. As Baca put it, "If I give you money once, what is going to stop you from asking again?"
In opening up the visit at the sewage treatment plant - now a largely odourless facility - Baca was also dispelling any fear Fortuna Silver may might not be able to source water for San Jose. Fortuna Silver, while currently not using greywater from the sewage plant for its mine, plans to do so once it ramps up its mill to 1,500 tonnes per day from the current 1,000 tonne per day capacity. It will build a roughly 15-kilometre long pipeline from the sewage plant to the mine. Then greywater will account for about a quarter of San Jose's water use. And when it does use this water, squeezed from human muck, the perception won't be that it is robbing precious resources from farmers. In fact Fortuna Silver can boast, and Baca did, that unlike unregulated miners in the past, it is making the water cleaner, not dirtier.
THE GUTS OF TRINIDAD
From the sewage treatment plant we drove down the highway to the mine - though calling this bit of pavement a highway is being kind. There is no doubt Fortuna Silver can advertise it has excellent access to its mine and that it is close to other key things such as power and human resources. But the state of the main arteries in Oaxaca speak to the region's poverty. At times paved roads degenerate into mogul sections where so-called "sides of the road" cease to exist. You are zig-zagging amongst other vehicles looking for the right route to take through a field of craters and mounds.
Though this state of the highway does not impact Fortuna Silver's mining operations, it does drive home Baca's description of the area as "very, very poor."
About 15 minutes from the mine we stop by the coreshack to pour over the guts of the Trinidad deposit, which is what Fortuna Silver exploits through the San Jose mine. This coreshack is really a converted residence, the inner sanctum of which is a courtyard overgrown with lush vegetation and by the looks of it what was once a swimming pool. Richard Niels, Fortuna Silver's chief mine geologist and an expat Canadian who has adopted life in Oaxaca, met us here to go over recently drilled core.
Niels was not shy in bringing up his chief worries in making mining, which is in its infancy at San Jose, progress smoothly. An epithermal vein system such Trinidad is a complicated mistress full of twists and turns. Though Trinidad might be fairly typical of a low-sulfidation epithermal system - a vein system that formed close to the Earth's surface at relatively low temperatures - and while Niels called this a "sweet little deposit," that does not mean it is simple to mine.
Two primary aspects to the deposit make Niels' job particularly difficult. First, there are stockwork zones, peripheral to wider veins, that sometimes carry silver-gold mineralization but sometimes do not. Niels used expletives to describe how hard it is to know if the stockwork carries mineralization. As we would see underground later, the difficult task for him in this respect is that there are relatively few visual clues to go by. It is hard to know if you are in or out of ore merely by the look of it.
"You're looking at it, and you're looking at it, and you don't really know," Niels said. Then in the assay lab later on it grades high in silver and gold. This fact of life clearly haunted Niels. His work day is filled with constant spot checking, assaying rock for mineralization and making decisions on the fly about whether something is worth blasting or not.
Second, there is pinching and swelling in the veins. Mineralization at San Jose, as in many other like deposits, formed in areas where there was room for a silver-gold laden fluids to fill. This often occurs where structures - conduits for those mineralizing fluids - intersect. Niels is always on the lookout for these in the deposit. Away from them, he said, "ore peters out as you go along." This means vigilance in directing where you want your miners to blast so as to minimize the amount of waste rock you produce.
SAN JOSE MINE
From the coreshack we move on to the San Jose mine not far down the road. It is a compact operation with new buildings and equipment. Within easy walking distance are tailings ponds, water reservoirs, the main offices, the mine decline and the plant. The last piece of equipment, a slurrying machine, was in the midst of being built (as of late September). Once operating it will send paste fill back into mined out areas underground where Fortuna Silver uses a cut and fill mining method.
All of it, Baca said, sweeping his hand across the mine infrastructure, was built on time and on budget. The cost was $55 million. For that Fortuna Silver got itself a mine and mill that after only a year since construction began is already operating at close to 1,000 tonnes per day.
After a quick safety overview, we piled into pickup trucks and drove underground. The decline down into the deposit is paved in the upper reaches making the descent through the mined-out areas surprisingly smooth. Fortuna Silver is not the first to mine at San Jose, but it is the first to use modern trackless methods. Before it came along in the mid- to late-2000s, mining was a spotty endeavour at San Jose. For decades the mine's chief Trinidad deposit, which hosts a series of epithermal veins and related breccia and stockwork zones, had been mined at a rate of about 100 tonnes per day by a private Mexican company called Minerales de Oaxaca. However Minerales de Oaxaca only targeted ore within a hundred or so metres of surface.
That a lot more lay at depth became clear between the late 1990s and mid-2000s, after drilling by Pan American Silver and Continuum Resources, both of which had optioned the property from Minerales de Oaxaca. Fortuna Silver took over the option, ultimately acquiring full ownership of the mine and surrounding exploration concessions, and showed just how much more mineralization there was. In proving up resources it has outlined a nine-year mine plan that will access ore from four main levels, each a hundred metres apart, and from three sub-levels in between. Probable reserves now stand at 3.8 million tonnes @ 202 g/t silver and 1.58 g/t gold, with additional lead and silver credits.
Underground we got a taste of the mine plan. It is couched in the old adage that there is safety in numbers. Though the complexity of the vein system means there is unpredictability in grade, Fortuna Silver is overcoming that unpredictability by opening up as wide an array of ore stopes from which to mine as possible. With more stopes open to pull ore from Fortuna Silver can blend higher and lower grade material to produce a more predictable concentrate. Thus it can avoid extreme ups and downs in grade that, among other things, can shake market confidence in a mining operation if they are reported quarter after quarter.
We also saw why the San Jose deposit is a "sweet little deposit." To put that in perspective Niels and Baca compare San Jose to Caylloma, Fortuna Silver's mine in Peru. To mine the Caylloma deposit requires a lot more development work than San Jose; 1,000 metres of underground development a month versus 300 metres at San Jose. This is a tightly packaged deposit.
And gross statistics suggest Fortuna Silver is on the right track as it begins to mine San Jose in serious. Its block model - the mine on paper - estimated veins would average six metres @ 300 g/t Ag. But, as Manuel Espinosa, the mine's superintendent, said, "It's easy to put numbers on a piece of paper. It's another thing in reality." Yet reality is nonetheless treating Fortuna Silver well. When they started to open up the ore body it came close to the model: 4.5 metres @ 339 g/t silver. While widths are narrower than envisioned, grades are higher.
Back at surface, we toured the San Jose flotation plant. Fortuna Silver depends on a straightforward flowsheet: crushing, grinding in a 13' by 19.5' ball mill and then flotation with two cleaning cycles. Cornelio Jose Resendiz Mejia, the plant superintendent, guided us around the ball mill, flotation circuit, and computerized control centre. "It's simple," Resendiz declared of the process.
To make a batch of concentrate takes about two and a half hours. Each day this process produces about a 30-tonne truckload of concentrate grading about 7,000 g/t Ag and 75 g/t Au, which Fortuna Silver then sells to Trafigura. That may change next year, however. Baca said they are going to look at building a leaching plant to produce their own doré.
In the weeks that followed Mineweb's site visit, San Jose mine production officially showed up on Fortuna Silver's books through third quarter results. It was a solid production quarter: silver output jumped 42 percent over the year previous and the silver miner said it was on track to produce 2.4 million ounces silver and 7,530 ounces gold in 2011. Including base metal credits, on a silver equivalent basis Fortuna Silver said it will hit about four million ounces this year. Then next year Fortuna Silver expected San Jose to eclipse Caylloma silver production, drawing total production up to just shy of six million ounces silver-equivalent. With a planned expansion at San Jose to 1,500 tonnes per day in 2013, by 2014 Fortuna Silver estimated it will break seven million ounces silver-equivalent.
While mining companies are notorious for making these kind of predictions, ones that are more aspirational than anything else, Jorge Ganoza, Fortuna Silver president and CEO, made the case in a follow-up interview with Mineweb that such growth is "locked-in." Ganoza pointed out that the projection is based on existing reserves. In other words, while Fortuna Silver may find more resources and reserves through ongoing exploration, it does not need to do so to support production goals in the years to come. More than doubling silver production by 2014 would come by exploiting that which Fortuna Silver already knows in the ground. There is no dreaming of ounces to come.
"We are very disciplined in our approach to growth," Ganoza said.
(Disclosure: Fortuna Silver reimbursed travel costs associated with the author's site visit. The author does not own Fortuna Silver shares.)
