St. LOUIS () -- Fortuna Silver Mines [TSXv:FVI] reported an increase of 50% in resources at its 100%-owned Caylloma silver mine in southern Peru, scheduled to start production in Q3, and still the market seems hesitant. The company's stock closed out unchanged on Monday after the news. What gives?
"If I had to point to one reason, it is probably the large stock overhang from the financings done last year combined with a lack of investor enthusiasm," said Tom Szabo, Editor of SilverAxis.com.
On Monday, Fortuna announced that it had increased Measured and Indicated pure silver resources, inclusive of reserves, by 50% to 10.5 million ounces at Caylloma.
According to the table below, Caylloma now hosts an estimate of about 5 million ounces silver in Proven and Probable reserves, roughly 5.5 million ounces in M&I resources and 14 million ounces silver in Inferred resources.
The metal prices were used in the resource and reserve estimation: $8/oz silver, $500/oz gold, $800/tonne lead and $1,803/tonne zinc.
According to Szabo, some of the original publicity on Caylloma touted the deposit as an elephant. These results, while good, may be a let down based on some of the early expectations, he said.
"Like most miners, Fortuna management may not understand the phrase 'underpromise and overdeliver,'" said Szabo, adding that many shareholders could have been uncertain of just how much silver (and base metals) Caylloma really had.
According to the company's website, Caylloma has 7 million ounces in the P&P category as opposed to the 5 million ounces of reserves noted above.
On March 31, 2006, Durant reported that Fortuna was still on track to produce the first silver at Caylloma, with milling of ore expected to start by the third quarter of 2006. Peak production is forecasted at 2 million ounces a year. The mine has a reserve life of 4 years, 10 years including inferred resources.
Regardless, the company's share price has been on a downward trend since late May. Szabo noted that Fortuna issued a lot of shares and warrants in last few years and "this has probably been flowing into the market."
Most recently, Fortuna granted incentive stock options to company directors and officers to purchase up to 995,000 shares exercisable for 10 years at a price of $1.66 per share. However, this is peanuts compared to the private placement completed five months ago.
On March 24, Fortuna announced that it had completed a private placement of 12.7 million units at a price of $1.50 per unit to raise $19.05 million. Each unit consisted of one common share and one-half of a common share purchase warrant. Each whole warrant entitles the holder to purchase one additional common share of the company for two years at a price of $1.85.
Before that, in October of 2005, the company completed a $10.2 million financing with brokered and non-brokered placements, totalling 16 million units at a price of $0.75 each. Each unit amounted to one common share and one transferable warrant exercisable two years at a price of $1.00 in the first year and $1.25 in the second year.
And a month before that, Fortuna completed another private placement of 9.6 million units at a price of $0.75 each to raise $7.2 million. Each unit consisted of one common share and one common share purchase warrant, exercisable for two years at $1.00 in the first year and $1.25 in the second year.
"Some investors may be worried about the pace of share dilution," said Szabo. "This may continue for a while as we are talking a lot of shares were issued."
Szabo said the newly issued shares have to find "strong hands" who believe in the company and not simply early investors looking to make fast profits off a private placement.
Szabo said the recent management change could be a contributing factor to investors' hesitation in the company.
Jorge Ganoza Durant, a geological engineer with 12+ years of experience, became president earlier this year, replacing Peter Thiersch, a geologist with 20+ years of experience.
Jorge Durant graduated from the New Mexico Institute of Mining in 1994. His most recent position before joining Fortuna was conducting business development for Radius Gold [TSXv:RDU], where he spearheaded the company expansion into Nicaragua.
Just last month, the company appointed Luis Ganoza Durant to the position of Chief Financial Officer. His credentials show a BSc in Mining Engineering from the Universidad Nacional de Ingenieria in Peru, an MBA from ESAN (a Tier 1 Latin American Business School) and an MSc in Accounting and Finance from The London School of Economics.
"The general impression in the mining analyst community seems to be wariness and 'let's wait to see what these guys can deliver,'" said Szabo.
Mining companies in Peru have experienced recent geopolitical tension as Venezuela and Bolivia have once again made expropriation a real concern when doing business in Latin America, according to Szabo.
"While any concern over the future of mining in Peru is probably unwarranted at this time given the country's long history of stable mining policy, investors are likely to be worried anyway," said Szabo.
In speaking with Resource Investor, Jason Hommel, Editor of Silver Stock Report, agreed that investors are nervous about South America due to Bolivia and Venezuela, but "Peru also has political problems of its own."
At present, mining companies in Peru are trying to finalize a windfall profits tax to pay for local Peruvian social programs. Various miners met on Monday in an attempt to finalize the proposal; the results have yet to be announced.
Many investors were undoubtedly watching the presidential elections in Peru last month as well.
Venezuelan President Hugo Chavez had strongly endorsed Peru's leftist presidential candidate Ollanta Humala. However, Alan Garcia, a centre-left leader was declared the victor on July 28.
"Although the election of Alan Garcia is widely seen as a forestalling of the spread of aggressive socialism in Peru, he is left-leaning and isn't exactly a Vicente Fox," said Szabo.
Share Price Activity
Fortuna Silver closed on Tuesday up one cent at C$1.56 on the TSX Venture Exchange. On Monday, the stock was unchanged at $1.55, still down considerably from the 52-week high of C$2.53 hit in March.
"If you look at the price performance of many mining companies, you will note that after the initial enthusiasm (newness) wears off, there is often a long period of price retracement and consolidation," said Szabo.
"Depending on internal and external factors, this could last months or even years," he concluded.