Fool Exclusive: The Growing Fortune of Fortuna Silver Mines

The monumental ruins of Monte Alban -- standing silent sentry over Mexico's bustling Oaxaca Valley below -- will remind all who care to listen that this place has seen it all before. But despite a rich and ancient history of gold and silver production, the area has never seen the likes of the Fortuna Silver Mines' (NYS: FSM) brand-new San Jose silver and gold mine.

San Jose entered commercial production just a few short months ago, so when I visited the mine a couple of weeks ago, I was pleased to encounter so many indications of a well-honed operation this early in the ramp-up process. With San Jose poised to drive the bulk of Fortuna's looming production growth, this timely status check provides further confirmation of Fortuna's convincing position of strength among the emerging mid-tier miners of silver.

Overachieving underground
The signs of Fortuna's success underground are evident even before passing through the ramp portal to begin the gradual descent into the orebody. A 40,000-ton stockpile of lower-grade development ore offers a first indication of how quickly underground development has progressed here in the early going. At the plant's crushing circuit, roughly 7,000 tons of the mine's high-grade bounty had been positioned to feed the enclosed processing plant its initial daily ration of about 1,000 tons per day.

Of course, the ideal scenario for any newly commissioned mine is to experience no hiccups at all -- just as San Jose has enjoyed thus far -- but a stockpile of ore is like a defensive buffer that helps to insulate investors from any minor setbacks that can arise during ramp-up. Fools may recall that I highlighted a large leach-pad stockpile at Minefinders' (ASE: MFN) Dolores mine as a boost to that mine's ramp-up process back in 2008. In an industry fraught with unforgiving challenges, gaining a bit of a head start in the form of ore stockpiles can yield a meaningful de-risking effect for investors.

I found the rate of progress underground at San Jose particularly noteworthy in the context of an uncompromising commitment to building safe and high-quality installations. The main ramp at San Jose is large, well-lit, and even partially paved. Roof supports are systematic in their deployment, and ventilation is well maintained. Comprehensive signage at every production stope guides workers with visual representations of the targeted material and the geotechnical plan for extraction.

On the roof overlaying a layer of backfilled material, Fortuna's systematic use of bolts and roof straps shows that rapid underground development has not come at the expense of mine safety. The photo also provides a glimpse of Fortuna's clever mining method, whereby alternating angles of approach to the orebody permit efficient sequencing of backfill, drill-and-blast, scaling, roof support, and ore extraction moving upward through 50-meter sublevels.

Given that San Jose's underground labor force is composed primarily of contract workers, I was also impressed by what appeared to me an effective orchestration of disparate activities throughout the extensive underground workings. Through multiple mine tours, I have gained an appreciation for the daunting logistics involved in effective coordination and oversight of underground mining activity. As a result, I find myself adopting a more forgiving stance toward isolated shortfalls like those experienced this year at two of the mines I visited: Brigus Gold's (ASE: BRD) Black Fox mine complex and Great Panther Silver's (ASE: GPL) Guanajuato complex. Accordingly, when a nascent operation like Fortuna's San Jose mine approaches a profitable ramp-up stage without any hiccups to report, that's a milestone that deserves recognition.

I consider the quality of the overall operation well-reflected as well in the uncommon installations presently under construction. Fortuna is building a cozy-looking cafeteria underground, and a small mechanical workshop where basic vehicle maintenance can proceed without expending the lost-time or fuel required to send them back to the surface.

In the details of the San Jose mine plan, like this workshop where basic vehicle maintenance underground will save time and money, I find further corroboration of Fortuna's commitment to running a top-notch silver mining operation.

Oaxaca's modern silver bonanza
Of course, you can't have a quality silver mine without some quality silver ore, and Fortuna has found that in spades at San Jose. The mine's 24.5 million ounces of silver reserves log in at a healthy average grade of 202 grams per ton, but that's just a start. Based upon my lengthy conversation with one of the project geologists -- who proudly demonstrated a stack of maps detailing his team's advanced interpretation of the deposit -- I am convinced that San Jose will enjoy steady conversion of resources into reserves and extend its mine life beyond the eight-year span presently seen. In addition to the down-dip extensions of the deposit that remain to be tested, Fortuna already boasts an inferred resource of 22 million ounces of contained silver (and 178,000 ounces of gold) to which the planned underground workings will provide easy access once chunks of that resource are converted to reserves.

High-grade ore samples collected from breccia at the 1350-level of San Jose's Bonanza vein, within a resource block (block "A") that is slated to enter production well into 2012.

As a long-term investor, I get particularly excited when I begin to pair the exciting growth prospects of the San Jose operation with the district-scale opportunities that the company may already possess within its 58,000-hectare of claims in the area. The prospective nature of the area does not appear to be lost on major producer Pan American Silver (NAS: PAAS) , as evidenced by the block of claims the company staked clear-around the San Jose mine and the San Ignacio exploration target. Not to be outdone, however, Fortuna returned the favor by staking claims to surround Pan American's holdings in turn. If Pan American encounters economic mineralization within its claims, I suspect that a joint venture with Fortuna would offer the best means of deriving value from such finds.

This claims map shows the layout of Fortuna's impressive district-scale land package sprawling 58,000-hectares just south of Oaxaca. Note that the San Jose mine (marked by the red star) and nearby San Ignacio exploration target are fully surrounded by claims held by major silver producer Pan American Silver (the portion shaded in gray), but that Fortuna's claims then completely surround Pan American's holdings in turn.

In the area surrounding Pan American's claims, Fortuna has already uncovered some very interesting gold-in-soil anomalies that form the basis of the Taviche and El Rancho exploration targets to the east of San Jose. I detected some particular excitement when that El Rancho target came up in discussion during my tour. Fools may recall that I liked what I heard from Endeavour Silver (NYS: EXK) management with respect to prospectivity of its La Joya vein in Guanajuato during my tour of that mine in October, and early exploration of that structure has already vindicated that excitement.

Ancient roots for Oaxacan silver and gold
Perhaps it stems from my prior background in anthropology, but I am utterly fascinated by the unique combinations of factors that cause certain areas to host differing degrees of mineral exploitation over time. More often than one might presume, those factors have little or nothing to do with how much gold or silver may actually be in the ground! We know that Oaxaca has been a source for gold and silver for centuries. The remarkable artifacts interred by Mixtec inhabitants of Monte Alban before 1500 A.D. are considered some of the finest examples of gold- and silversmithing in all of Mesoamerica. When the conquistador Hernan Cortes asked the Aztec Emperor Montezuma to show him where the Aztecs found their gold, the entourage returned from the Oaxaca region with samples of gold plucked from several rivers. And scores of artisanal-scale historical mine workings dot the region here just as they do farther north along the nation's pronounced western mountain chain.

But as near as I can tell, historical mining activity in the region never materially rebounded from disruptions associated with the Mexican Revolution of 1910 to 1920. As the first modern silver-mining operation of any significant scale in the region, Fortuna's commanding position -- within an area of silver-rich Mexico that may have been overlooked for reasons having nothing to do with the underlying mineral geology -- is a strategic element of the story that I find particularly intriguing from an investment perspective.

I have much more to share from my recent tour of Fortuna's San Jose mine, and I encourage readers to bookmark my article list here -- or follow me on Twitter -- in order to catch the next installment. In the meantime, to convey my strongly bullish outlook on the shares, I have added the stock to my CAPS portfolio, and invite my readers to follow suit. And as Fortuna's growth spurt proceeds mightily into 2012, I am more confident than ever in my selection of the Global X Silver Miners ETF (NYS: SIL) -- which holds some 1.3 million shares of Fortuna -- as my top ETF for 2012.

At the time thisarticle was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of Brigus Gold, Endeavour Silver, and Great Panther Silver. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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