By Tim Wood –
NEW YORK (ResourceInvestor.com) — Investing in mining and exploration companies is made a lot simpler by following some basic rules. The first rule is ‘know thy management’; does management have a track record of making returns, and are the returns reasonably balanced between insiders and investors.
As in all aspects of life, exploration success is neither egalitarian nor equitable. The majority of geologists do not find much in their lives. The few who do score a big strike often do so more than once.
Ditto the financing and strategy side of the business. Some people are just a whole lot better than others at convincing people to fund their activities, or at trading assets.
So it was not difficult for Fortuna Ventures [TSXv:FVI], soon to be Fortuna Silver Mines, to snag our attention since Simon Ridgway of Radius Gold [TSXv:RDU] is a director. Ridgway has made a few truckloads of cash for investors thanks to his generative exploration ken and rainmaking abilities. That’s handy when combined with a strong vested interest in a company like Fortuna.
Fortuna has a joint venture with Radius on the latter’s Tambor Gold project in Central Guatemala. Fortuna has taken over from Gold Fields [GFI] which departed its Tambor joint venture in 2003 because its early assessment could not delineate a project that would meet the criteria of a major producer.
However, it’s not Guatemala, but Peru that holds the most medium-term potential for Fortuna.
Caylloma Silver Mine
The company is in the process of finalizing a deal to acquire the entire high grade Caylloma Silver Mine in southern Peru from the Hochschild family. The mine is about 5 hours north east of the town of Arequipa.
With the market turning up again recently, Fortuna managed a preliminary fund raising of C$1.05 million from insiders, and will need a further $10 million later this year. That will go toward paying the Hochschild group to turn over Caylloma.
Caylloma was put on care and maintenance in 2003 for lack of investment Fortuna president Peter Thiersch told Resource Investor in a telephone interview.
Thiersch was appointed to his position in December 2004 with 20-years of experience as an exploration geologist under his belt.
Fortuna is undertaking a modest recapitalization in the circumstances. Stockholders, currently at 8.9 million shares fully diluted, are being asked to consider increasing the capital stock to about 30 million shares (depending on the price of the next placement) to buy 7.1 million ounces of silver reserves and a further 14 million ounces of inferred resources, all of which are code compliant.
Value in the ground
Including first year capital expenditure ($3.5m) the total expected outlay for Caylloma is about $11.7 million so Fortuna is paying $1.64 per reserve ounce full diluted. If you wash the dilution of the warrants with the cash likely to be received from them then it’s about $1.25/oz on a see-through basis.
Assigning just one quarter of the resources to possible mineable status and adding them to the reserves has Fortuna paying just $1.09 or 83 cents per ounce respectively for the whole lot.
That’s well below the silver sector weighted average market capitalisation per reserve ounce which is around $4/oz at the moment. For Fortuna’s immediate peer group – Endeavour Silver, First Majestic, and First Silver (all in Mexico) – the weighted average is almost $3/oz
Adjusted for its anticipated future financing, Fortuna would sport a projected fully diluted market capitalisation per reserve ounce of $2.70-90. There is presently C$2.21ps of in situ metal value based on reserves only, C$3.31ps with the addition of one quarter of the resource ounces.
Of course, it’s not just silver. There are some healthy credits available from polymetallic veins which carry good concentrations of lead, zinc and copper; even a small amount of gold. There is almost $30 million worth of zinc in resources awaiting extraction. Grossed up with the silver, that provides an in situ value of C$3.46 at current metal prices.
Buying metal cheaply is all very well, but what’s the use if it stays in the ground and never becomes cash?
Mining the cash
Nothing is guaranteed, but the prospects for conversion to cash at Caylloma look pretty good. The mine has all the necessary permits and centuries of history so there are no greenie assaults looming, or locals fearing displacement. There is an existing mining camp in good order that carries international certification and plenty of serviceable plant and equipment ready for use. Mining costs, ore handling and metallurgy are also well known so that further reduces the risk of an unfortunate surprise.
Thiersch said production is slated for mid-2006 with peak production forecast at 2 million ounces a year from a 600 tonne per day plant. Before that can be achieved, 3,000 meters of underground development and some plant upgrades have to be completed. A parallel zinc recovery plant is in the works as part of the redevelopment, and which would boost production rates and justifies pricing in the zinc resources.
The reserve rock is worth $109 per tonne at current silver and zinc prices, and $122/t if all metals are credited. That leaves a healthy margin on top of estimated mining costs of $40/t.
Total cash costs are pegged at about $3.50/oz taking all in costs to a rounded $5/oz. With silver currently trading at $7.39/oz, the potential cash flow is about $8.8 million a year, or C$0.37 cents per fully diluted share.
If you take a cynical approach and cut the silver producer average cash flow multiple two thirds, then Fortuna still carries an imputed price of C$2.45ps. That aligns well with the silver reserve value per share which is expected to grow through exploration and acquisition.
Production is one thing, but investors need more than three years of production in reserve. Thiersch is obviously confident that the resource base can be expanded, and Fortuna certainly has enough of the district staked for its account to assume that is more than blue sky promotion.
$700,000 is going to be spent on 5,000 meters of surface drilling in the first year. Thiersch said there is a possibility of acquiring some more properties soon. The concession Fortuna will be working over 8,000 hectares with 30 veins identified so far.
The stock is presently halted and is expected to resume trading in Canada next week.
Source: Resource Investor