Fortuna Mining Corp (FSM) 2011 Q4 法說會逐字稿

Greetings and welcome to the Fortuna Silver Mines 2011 year-end financial results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Carlos Baca. Thank you, Carlos. You may begin.

Thank you. Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our 2011 year-end financial and operations results call. Unlike previous opportunities, we are hosting the call from Shanghai, Lima and Boston. So please bear with us if any communication glitch occurs.

Thank you, again, everyone, for joining us. I would now like to turn the call over to the President and CEO of the Company, Mr. Jorge Ganoza.

Thank you, Carlos. Good morning. I am joined on the call today by Luis Ganoza, our CFO. I will initiate the conference, and with the assistance of Luis, we will be giving a summary analysis of our operation results, corporate update and financial results for the quarter and year-end 2011. Once concluded, we will address your questions.

I want to begin by touching on three non-financial but sensitive recent developments disclosed on our year-end MD&A. First is the tragic accident occurred at the Caylloma mine on February 26, which claimed the life of Mr. Sixto Chambilla Apaza, a driller working for one of our mine contractors. This is the first fatal accident in six years of our operations history at Fortuna. The accident remains under investigation by local authorities, but the Company has produced an internal report, and the recommendations from the internal report management is implementing Companywide measures to ensure additional safeguards are in place against violations of safety regulations and procedures which led to this accident.

As tragic as this accident is, it does not represent a risk to our continuous operations at the Caylloma mine. The Company is working closely with our contractor to ensure the family of Sixto has all the required moral and financial support at a trying time like this.

Second, the Company is in the process of construction of a new tailings facility at the Caylloma mine. This facility is scheduled to be concluded and in operation by late June or early July of this year. Although the environmental study for this new facility has been approved since June of 2011, and the construction and operations permit applied for in May of 2011, this final permit has not been granted to date. Although the Company is working closely with the new governmental authorities and expects to receive the permits on time, management believes it appropriate to disclose the risk of [having late] to obtain the permit before commissioning in June of 2012, which could lead to a subsequent temporary stoppage of operations.

We have not received any material observations to our permit application and expect a prompt resolution on the part of the Peruvian authorities.

As a backup plan, the Company is exploring alternatives plans for temporary tailings disposal.

And third, local violence in the vicinity of San Jose del Progreso, Oaxaca, Mexico, location of our San Jose mine, has claimed the life of two community members on January 18 and March 15 of this year. Although it is our policy not to comment on rumors or unfounded news reports, we feel compelled to issue a categorical denial in response to media articles in directly relating Fortuna to this violence. Fortuna and any of its subsidiaries is in no way linked or condones acts of violence.

The Company achieved two significant milestones during 2011. On September 1 we declared the start of commercial operations at the San Jose mine. Construction took place over 16 months and required $55 million. We can report that operations were achieved within scheduled time and budget. And on September 19, the Company shares begin trading on the New York Stock Exchange.

During the year, Fortuna produced 2.49 million ounces of silver, up 30% from the 1.9 million ounces produced in 2010 and in line with budget. This was on the back of 5% higher contribution from the Caylloma mine with respect to 2010 and a gradual ramping contribution from the San Jose mine in the second half of the year.

Gold production in 2011 was 7,000 ounces or 174% higher compared to 2010. Silver in the year accounted for 65% of revenue. Gold contributed 6% of revenue, less 15% and [same 14%] of revenue. Realized silver price for 2011 was $31 round with an average price of $35 for the year.

On January 26 the Company issued production guidance for 2012, indicating plans to produce 3.7 million ounces of silver and 17,000 ounces of gold in the year. Once the San Jose mine achieves optimum design capacity at 1500 tons per day planned for mid-2013, the Company will target consolidated annual production rates of approximately 5 million ounces of silver and 26,000 ounces of gold.

Consolidated cash costs for the quarter averaged $5 per ounce of silver net of [like] products compared to a negative $6.30 per ounce net of like products in Q4 2010. The strong increase is mainly explained by the increase of the cash costs per ounce at Caylloma from negative $6 to $6.60, driven mainly by a sharp increase in byproduct trades as a result of lower production of base metals in a negative price environment for lead and zinc for the year.

The better figure to analyze costs in this particular case is cost per tonne for the year. Caylloma cash costs for 2011 was approximately $69 per tonne compared to $58 per tonne in 2010, an increase of 18% driven mainly by inflationary pressures and an extension of our working area in the mine.

For 2012 cash cost per tonne is estimated at $87 per tonne, an increase of -- a projected increase of approximately 26% compared to 2011.

Midsized underground mines in Peru are experiencing average inflation of approximately 30% year on year.

During 2011 the Company secured its capital projects totaling $66 million, including San Jose construction. The Company has budgeted capital projects amounting to $56 million for 2012. These projects will have a direct and positive impact on efficiency gains, cost reduction and long-term sustainability of our operations.

At the San Jose mine, main projects include investments for plant expansion to 1500 tonnes per day and an off-site dore bar production facility. At the Caylloma mine, main projects include the new tailings facility, a debottlenecking of energy transmission, underground infrastructure and material upgrades to plant and camp infrastructure. The bigger impact of these infrastructure projects will start to be felt in 2013.

During 2011 our exploration teams executed drill programs for approximately 26,000 meters in Peru and Mexico. The highlight of our exploration and new product generation programs in 2011 was the signing of an option agreement to acquire 100% of the Mario Project located in Central Peru. Mario is a positive recovery stage project with distinctive potential for both mineable epithermal gold and silver mineralization in addition to high grade replacement-style silver plus base metal mineralization. Our first-phase drill program at Mario is carrying into the first quarter of 2012.

At our mines in Peru and Mexico, exploration work was focused not only on the replacement of resources and reserves with the objective of maintaining a minimum life of mine of eight years at each operation, but also on the exploration of new high-grade silver mineralized deposits in the 90,000 hectare concession package that we control around our operations. The results of this work will be incorporated into our annual resources dimension in mid-2012.

For this year we are executing exploration budgets totaling $15 million allocated to Brownfields explorations and new business opportunities in the Americas versus a budget of $12.8 million in 2011. The 2012 budget includes over 35,000 meters of planned drilling.

Moving forward, the Company remains adequately funded to meet its capital projects with approximately $56 million in cash and short-term investments as of December 31, 2011.

I will now let Luis Ganoza take you through the financial statements. Luis, please?

Thank you, Jorge. For the fourth quarter of 2011, Fortuna recorded a loss of $1.76 million, driven mainly by two items of a non-cash nature. The first was an impairment of $1.89 million related to the Taviche processing plant acquired in 2007 nearby the San Jose mine.

The second one is related to the income tax provision of $6.2 million recorded for the quarter, which contains a deferred tax portion of $4.3 million. This large deferred tax expense is brought about by the volatility of the exchange rate in the face of a new methodology under IFRS to calculate deferred tax and a large tax shield in Mexico coming from the construction of the San Jose mine, which are the source of our deferred taxes.

These two items represent approximately a $5.8 million reduction in our bottom line.

Our sales for the fourth quarter were $31 million, 30% above the same period in 2010. In our mine operating income line item, however, we saw a reduction of 6% with respect to 2010, and our gross margins over sales came down from 59% to 43%. This decrease in absolute terms in the face of the added contribution from San Jose can be better understood by two separate factors at work. The first factor is a negative price adjustment of $2.3 million recorded in the October-December 2011 period, which was a sharp fall in silver prices compared to a positive adjustment of $1.8 million in 2010 for a total difference of $4.1 million.

The second factor is a reduction in cash margins at Caylloma. Here, our NSR, or net smelter return, value for [Racastan] is at pretty much the same levels as in Q4 2010, whereas the cash costs has risen by 23%. The theme on our NSR has been a reduction in base metal hedge rates and base metal prices compensated by higher silver credits.

All of this has represented a reduction in contributions to mine operating income from Caylloma of $6.1 million in the quarter, which was above the added contribution from San Jose for the same period of $5.4 million.

On the side of San Jose, margins were affected by a slow pickup in head rates upon startup, and commercial terms yielding around 81% of realized prices on silver for the year 2011.

Also, weighing on our results is the accumulation of [3,332] tonnes of inventory at San Jose at year end with an approximate value of $4.4 million.

So where do we stand with respect to Caylloma margins moving forward at today's NSR level and cash cost per tonne of around $85, which is above Q4 2011 and is in the range of what we are expecting to see for 2012. Gross cash margin is around $100 per tonne or 58% of the NSR value. This corresponds to cash costs per ounce net of [outer] upgrades of close to $6.8. For San Jose, we expect gross cash margins in 2012 close to 65% or around $130 per tonne at current prices, corresponding to cash cost per ounce net of byproduct credits of $2.4.

Now for the year ended 2011, we recorded net income of $19.53 million, an increase of 22% over 2010. Sales increased 49%, driven by higher silver prices and the added contribution from the San Jose mine. Mine operating income increased 55% to $60.97 million, and gross margins over sales increased slightly from 53% in 2010 to 55% in 2011.

The higher contribution to the jump in mine operating income was the improved results year over year in Caylloma, which added [$15] million to mine operating income, along with higher margins on the back of higher silver prices, higher silver sold, and in spite of lower base metal credits and the increased cash cost per tonne of 18% year over year.

Selling and G&A for the year was $19.84 million, an increase of $8.9 million over 2010. Now, this increment can be broken down into two main items -- higher share-based payments of $5.2 million compared to 2010 and higher G&A of $3 million compared to the same year. The high increase in share-based payment is explained by a net credit of $0.4 million recorded in 2010, which was in turn related to a $2.4 million reversal of stock option grants and share-based payments in 2011 of $1.7 million related to one-time events. The increase of $3 million in G&A is explained by the commencement of operations in San Jose and by higher corporate G&A of $2.3 million.

On a yearly basis, this puts our consolidated G&A, excluding share-based savings, between $16 million and $17 million, where $6 million of this corresponds to amounts recorded at our operating subsidiary.

The income tax provision recorded for the year was $18.8 million, of which the current portion was $14.6 million. All-in-all, it will result in for the fourth quarter of 2011 for the reasons previously explained weighed on our yearly results and determined earnings per share of $0.16 compared to $0.15 in 2010.

Cash flow from operations before changes in working capital and after income taxes paid for 2011 was $38.3 million compared to $24 million in 2010, a significant increase of 60%. For the same measure, cash flow per share resulted in $0.31 in 2011 compared to $0.24 in 2010.

Thank you and back to you, Carlos.

Thank you, Luis. Well, I want to thank you all again for joining us. I would like to turn the call over to any questions you might have. So, please?

(Operator instructions). Heiko Ihle, Euro Pacific Capital. Please proceed with your question.

Just a few, couple of quick things. With the Caylloma mine, I was under the impression that this should not be a liability on your Company, and you have sort of set it.

On your press release, though, it states that you want to ensure both grieving families receive all possible emotional, moral and financial support, and you sort of said the same thing earlier on the call as well. Should we model in any sort of payments that may go to the contractor or that the contractor will pass on to the guys handling it, anything like that in 2012?

Thanks for your question. The contractor -- the victim of this tragic accident, the family, is insured by law, and insurance is already taking -- being executed, life insurance. And there is a payment to the family on the order of 75% of Sixto's salary compensation going to the family on a regular basis. This is part of the insurance coverage that every worker has, that we demand every worker for our contractors has.

So what we are following up on with the contractor is that, while all this paperwork takes place, the family has the adequate financial support. And there is no need on our part to -- you know, a contingency for this, or at least none that we recognize at this moment.

Fair enough. And then also on San Jose, you took out production related to depletion at the mine. So obviously you came up with a lower number for resources. Should we expect to see an updated NI 43-101 at some point in time later this year?

Yes. Our resource estimations and reserve estimations are done -- have a closing date as of June/July of every year. And with what we do at the end, this resource and subsequent reserve estimations are the basis for our annual budgets. What we do in December is a reconciliation for the six months, for the second half of the year, and then published results.

So for this year, we will be conducting a new geologic model and a new globe model and a new research estimation and subsequent reserve estimation for San Jose, which will likely be publishing towards the end of the year.

Sounds good, sounds good. And finally, this is more of a statement rather than a question. I personally think it's sort of sad to see the type of violence that we are seeing around San Jose, all the negative press releases, etc. And Oaxaca has long been known to be very economically challenged. I mean, I was just looking -- average income $3400, human development index comparable to Africa of 0.71; I mean horrendous. And I would personally believe that the mine should provide long-needed employment and other infrastructure support in the area. And, again, this is just my personal opinion. But I hope eventually the community is going to realize that the mine should be quite beneficial for them, longer-term.

I would like to stress that the federal government and the state government in Oaxaca, which was newly elected, the Governor Gabino Cue, is fully supportive of a continued development of the industry. We have a large base of support for activities in the community of San Jose and in surrounding area. And, more importantly, we interact in a very open and transparent manner with all stakeholders. And that is the policy of the Company, and we continue to work under that.

So thank you for your comments.

Nicholas Campbell, Canaccord Genuity.

A couple of questions. So can you give me or can you give us an idea in terms of the total cash costs per tonne at San Jose that you're projecting in 2012 and how you expect the offsite leaching project to be reflected in terms of reducing the operating costs after that is completed?

With respect to cash costs, there per tonnes at San Jose, looking to 2012, we are expecting $69 to $70 per tonne, which at current prices and based on, again, expected second -- silver/gold credit, in terms of cash flows per ounce net of byproduct rates, it is around $2.00 to $2.50 per ounce.

Okay. And how do you expect that to get -- how much are you going to save by having the offset leaching project completed?

Sure. We, in net terms, that is net of the margin of incremental costs of the facility, the benefit is in the range of $2 per ounce. So we should see a net decrease in our cash costs per ounce of around $2. And that is based -- let me emphasize that that is based on the commercial terms that we have been able to obtain for our San Jose concentrate in 2012, which is significantly better with respect to what we saw in 2011.

In 2011 we were realizing, as I mentioned, around 81% of silver price, whereas for 2012, based on new commercial terms, we are realizing around 91%. So that is always subject to change. Of course, it's a volatile market on its own. And so in the lower range, the benefit of the red lines will yield around $2 per ounce.

Okay. You don't have that on a per tonne basis?

On a per tonne basis, I mean in terms of NSR, we are -- that's an increment of around 12% in value per tonne of rocks.

What I'm trying to get is -- I mean, obviously, there's a cost associated with the treatment charges associated with the concentrate. So you are going to be replacing that cost with the cost associated with the offset leaching operation. So I'm trying -- is there a cost benefit associated with that in addition to a revenue benefit?

You mean a cost benefit outside of basically getting rid of treatment charges and the refining charges?

No, I mean what is the net benefit associated with getting rid of the TCs and RCs for the San Jose concentrate, offset by the incremental costs associated with doing the offset leaching process?

Again, I think the better way to express the benefit is in terms of the reduction of our cash cost per ounce, and again, in net terms, it would be a reduction of around $2 per ounce in our cash costs.

Now, I can talk to you about it off-line. It's fine; it's just because the cost per ounce, if you are using byproduct credits, it's going to depend on your gold price assumption when you are doing that. So that (multiple speakers) perhaps for modeling.

Sure, sure, sure. (multiple speakers)

That's fine. We can move on. We can move on from that. When do you think the leaching process will be completed?

In terms of timing you mean, I'm sorry?

Yes.

The timing for the -- we are advancing with the site selection and the EPCN for this project, Nick. So we believe that a realistic date is probably around end of first quarter of next year. Certainly during the first half of next year, this project should be operational.

Okay. Great.

The construction of the project is not a key thing, but the permitting and the environmental permitting is what will take time here.

Okay. And going forward do you think -- you mentioned sort of $16 million to $17 million in G&A. Is that a good number to use going forward for you guys?

Yes, yes. As you know, what we regard as G&A at operating subsidiaries is shown in our consolidated G&A line item. So that's around $6 million, as I mentioned. And in terms of actual corporate G&A moving forward, I would estimate it is in the range of $10 million. So that puts us in the $16 million, $17 million range, I mentioned.

Okay. And at Caylloma, are you going to be moving forward with an expansion to 1500 tonnes per day assuming that you get approval for your tailings?

The plant is already operating at a he nominal capacity of roughly 1300 tonnes per day. We are almost concluded with the detailed engineering for improvements in milling infrastructure and crushing infrastructure at the plant. And in the design, we are accommodating the flexibility to increase an additional 15% where we are, which will take us to 1500 tonnes per day. The mine is already in a capacity to source that kind of throughput. So this is a product that we are going to be building and implementing through this year. And, again, we will see the benefits of this towards the first half of 2013.

Okay. All right. That sounds good. All right. I think that's pretty much it. When should we see some regional exploration results from San Jose?

Our crews are working. We have been -- again, we have an aggressive program this year. We have already defined targets for some 15,000 meters of drilling. We are not currently drilling. The program we are drilling in Caylloma and in Mario but not yet in San Jose. We are dealing with a restaffing of the project right now on the geologic side, on the exploration team.

We are bringing a new manager for the project. He is joining this week. It is his first week. So he's going to take the reins of the program.

I mean through the year we expect will be advancing with the program. We have multiple targets we are going to be testing. Some of them in immediate continuity of existing resources and others in the greater land package, which, as you know, amounts to roughly 58,000 hectares here. We expect that through the year we will be reporting. But we are not currently drilling, and we are advancing with the target generation.

Chris Thompson, Haywood Securities.

Just a couple of quick questions. Concerning the ramping up, I guess, to 1500 tonne a day from San Jose, are you guys ahead of the game on this? I mean I have your model, I think, as achieving that towards the end of next year. What's the status of at the moment?

That is our conservative scenario. It is we are -- the long lead item here is the new ball mill for San Jose. We already launched a search for a secondhand ball mill. The delivery of a new ball mill, as you know, in this environment can take as much as a year.

So we are already permitted for the expansion. We are in the process of granting the detailed engineering, but a lot of this relies on our ability here to find a new ball mill, a secondhand ball mill that is acceptable to us or putting an order for a new one. So we are in the middle of that.

I believe third quarter of 2013 is the most conservative scenario, and our expectation is that we can see the plant upgraded to 1500 tonnes per day around midyear or a bit sooner.

We are going to be finetuning on that date as we advance with engineering and we place the orders for the equipment. And all that is work that has been already launched. So we will be reporting accordingly on the back of that.

But the mine, on the side of the mine, the mine is not an issue. The mine's development continues to advance well, and we continue to deepening -- with the deepening of the main decline opening new faces and giving the mine lots of flexibility to achieve 1500 tonnes per day by the end of the year, first quarter of 2013. So our long lead item here is on the parts of the ball mill and plant infrastructure.

Great. Thanks. Just a quick comment, I guess, or, rather, question regarding the TC/RCs at Caylloma. Percentage-wise, how are they going to compare, I guess, with -- that is, for last year, for this year? Hello?

I'm sorry. Yes, as far as Caylloma goes, in terms of treatment and refining charges affecting both our concentrates, realized treatment price was 92%.

Now, we have seen a deterioration in the refining and treatment charges of silver and lead, which is where we get value for silver in our sales. And we are going to -- we expect to see a realized price of -- down below, in the range of around 88%. So there is a slight deterioration in terms of a realized silver price as far as Caylloma gold.

We are looking to -- into opportunities to offset that. One is activating the proper circuit, which is today on standby. And that could allow us to report the silver, a large portion of the silver to the copper concentrate, where we are seeing today opportunities to reduce refining charges. So that's something we are working towards the second half of the year and could help us offset this trend we are seeing in the lead concentrate or the way the silver is paid in the lead concentrate.

Great. Thanks. And just a final quick question relating to metallurgical recoveries. What should we be using, what do you think is optimal in the silver, I guess, as far as Caylloma and San Jose for this year?

For this year at San Jose, we are working to achieve a design parameter of 88% for silver and 90% recovery for gold. That's for this year. We are already within 95% of that target, and really we see no limitation, no technical limitation to achieve that. It's just a matter of our team in the plant at San Jose continued working to finetune and conclude with the final balancing of the mill and flotations here. So I believe that 88%, 90% is, we believe, it is achievable, and that's what we are budgeting with.

For Caylloma we budgeted 82% silver recovery for the year, and our recoveries are currently below that. But, bear in mind, that we are balancing the lower recoveries with higher head grades for silver than we originally budgeted for. And the reason is that the mine is seeing higher -- the level 6 where we find the oxides, which is near surface, level 6 is the uppermost level we have in the Caylloma, in the Animas Vein of the Caylloma mine, where we have mixed sulfide-oxides.

Here we have broad areas of mineralization that favors large stoves where we achieve high degrees of mechanization. But the ore, again, has a significant content of oxides.

So we are balancing the lower recoveries by also feeding higher silver head grades, and we are finding a stable situation there where we are achieving our silver production targets.

So, even though we are facing lower recoveries, we are mining higher head grades in the budget for real, you know.

So right now we are seeing recoveries around 80% on average. But, right now, because of the contribution of these broad zones on the near surface, it's a bit of a moving target recovery, you know, between 80% and 82%. Again, bear in mind, that we are increasing head grade as well.

Brian Quast, CIBC.

I just want to get a bit more clarity on the dore production out of San Jose. You mentioned that you haven't necessarily selected a site for that yet. So permitting is yet to commence, I guess, is probably one way to put it. Would you be looking just within Oaxaca there, or are you looking to go into a different state where perhaps the permitting may be a little easier?

That's precisely right, Brian. We are looking for a site in a neighboring state. Actually, we are looking at Puebla. We already are in direct communication with authorities in Puebla working closely with them to select a site that is best suited for a project like this.

This is not a large project. We will be treating anywhere between 20 to 50 tonnes of silver/gold concentrate per day, and those tailings from the leaching of the concentrate, once cyanide is treated out, will go back to the mine site.

So it is not a big plant. We don't see that as a big issue. But we'll probably need something somewhere around 3 hectares at the most. And we are in this process of site location, no? Our senior corporate manager for projects was on site last week looking at some alternatives. So we're moving forward with that at an accelerated pace.

So roughly for those that are somewhat geographically challenged in Mexico, as I am, what type of distance are we talking about going from San Jose to your proposed location or one of your proposed locations in Pueblo?

It's measured in 300, 400 kilometers at the most. Right now we are trucking concentrates over 1,000 kilometers.

Okay, so I guess that you've obviously made the determination that the smelter terms that you're getting on that precious metals concentrate are inferior to trucking the concentrate 300 kilometers there, trucking the tailings 300 kilometers back, plus whatever it costs to treat it.

How do you see the smelter terms? I mean, they're affecting the entire industry. But for particularly the type of concentrate that you have at San Jose, how do you see those smelter terms shaping up over the next year or two? Obviously, you've made a decision on San Jose that would indicate that you don't think they're going to come down any time soon.

Well, there are two challenges here. Number one is the actual terms but don't -- there is also the challenge of locating a product like that, it's looked at as a complex product these days, as crazy as it might sound. You know, high grade ore concentrates carry 7 kilos of silver and [65] 70 grams of gold. And it's viewed as a complex product. So location of -- finding a buyer for the product is not that easy. So there is a challenge there.

And second, treatment charges are around $400, give and take, and refining charges can range up to close to $3.50, $4. So we can materialize significant savings that can measure close to $1 million a month under certain price scenarios.

Okay, and then just one more quick one to wrap it up there from my point of view. Can you give us some sort of a picture how much of your capital budget is surrounding that leach plant?

The budget for the leach plant -- it's at a prefeasibility stage but the budget right now is $12 million.

Perfect. Thanks very much, guys.

Andy Showpeg, a private investor.

Thank you very much. I do have several. Luis, first for you. On the share-based cost, when I had a chance to quickly review the MD&A, there's a reference to deferred stock units and restricted stock units as being the factor in that increased share-based cost. Will this continue to have a similar impact in 2012?

Yes. With respect to the --

Is it about $4.4 million?

No. With respect to the RSUs and DSUs, we have, for the year, accrued a total amount of around $3 million. And I would say that what we should see in 2012, based just on the fact that there were -- a significant portion was a non-current item, let's say, should be in the range of $600,000 for 2012.

In other words, it would be substantially less of an impact on the D&A than what we have seen in 2011?

Yes, yes, it should be. Yes, it should be. And this was the reason just mentioned.

Okay. Jorge, I'd like to ask you a little bit more about Caylloma. Because I do have some concerns here. When I looked at the outlook page in the MD&A, it's clear that you are forecasting about flat ounces of silver, 2 million for 2012; but once again, a further decline in both the zinc and lead production, which would lead me to believe that the byproduct credits again will be significantly reduced. That would more likely than not add to your cash per ounce of silver.

Can you comment a little further about this? Because it does appear to me that the Caylloma operating mine profits will experience some further pressure here in 2012. I'd like to have a little better understanding of what we should expect. You've already told us the cost per ton were likely be up about 26%, if I heard correctly, earlier.

Well, yes, thank you for the question. Yes, Caylloma is at a steady state right now. I mean, we expect increases in production are going to be in the range of 10% as we conclude the infrastructure investments particularly this year.

With respect to statement of production, yes, it's going to be impacted this year again. For 2012, we expect similar grades as we've seen towards the end of 2011. What we are doing is basically favoring silver output under any circumstance, no? And sometimes as the mine moves through different parts of the reserve, this takes a toll on base metal grade.

Yes, I understand. I guess the offset to this is that the overall percentage of silver and gold ounce production or revenue from that production will continue to rise in 2012, as lead and zinc represent a declining proportion of your revenues?

Well, what we expect is a stabilization in 2012. What you've seen in the fourth quarter is basically what we're projecting moving forward to 2012 in terms of production. No I mean, you see our production guidance and --.

Well, what I see on the outlook page is a flat production ounces in silver of 2 million versus about the 2 million in 2011, and gold basically similar, and zinc and lead down. And I'm wondering how much that's going to impact the further reduction in zinc and lead will impact the byproduct credits on the silver/gold production?

Yes, I mean, it will have an impact, no doubt. And I mean I think the numbers are transparent. And yes, we are exposed to that and what we are doing again is just basically favoring a sustained Caylloma at about 2 million ounces of silver. And that, as we can see here, is taking a toll on base metal credits. And yes, that will have an impact on our cash costs per ounce estimations or realization on terms of cash costs per ounce. And in terms of cash costs per ton, of course, it has nothing to do. But yes, no, on the income side it will have an impact.

Okay. I'll come back to Luis for a second on the tax situation. Clearly, there were some one-time occurrences here that significantly boosted the overall tax provision for 2011 and in the fourth quarter. Can you comment at all about where you expect the overall tax provision to come in for 2012 based on where we are today?

Yes, definitely you comment on rather than the income tax provision what we expect to see as current taxes. And that is in the range of $8 million to $10 million, mainly associated with Caylloma or exclusively for 2012, associated with Caylloma as we do not expect to see current taxes for 2012 in San Jose.

With respect to our overall income tax provision, you have to bear in mind there is a deferred tax component. And as I mentioned, just the reality of IFRS today is that there is added volatility related to exchange rates in the deferred tax calculation. (multiple speakers).

Will we see that effect each quarter now under the IFRS in terms of --?

We are certainly subject to experience that volatility. Sure enough this time we went -- we saw that adversely affecting us. It can go both ways. But it ultimately has to do again was just the fact that, given the recent construction in San Jose, we have -- it's a bit of a technicality around this, but we just have huge differences between our accounting base and our tax base, given the tax shield that are allowed under local law. So that's giving rise to the big tax -- deferred tax expense that we're seeing. Right?

Okay, but the current taxes associated with Caylloma are expected to be in the $8 million to $10 million range for 2012?

Yes, for our forecast for the year in terms of prices, which is $30 silver, $1600 gold, relatively conservative prices, yes, that is correct.

Okay, and nothing at San Jose? All right, thank you.

Graeme Jennings, Cormark Securities.

Just wanted to go back to the tailing facility. So what you're saying you have six months capacity at current throughput rates right now before you need to bring this new facility on in June. And then also after this, is there a critical date when you'll know if you don't have these permits by? Will you have to either imply you have to maybe shut down or an alternative source arrangement?

These permits are long overdue. Remember that Peru underwent a change in government just recently in July of 2011. So that prompted, of course, changes at the ministry level. And we have been battling with that change process within the government. We expect a proper solution. We're working closely with authorities and we are monitoring the situation closely. Right now we are working under a plan that we will get our permits on time. But at the same time, we are working on alternate solutions. One of them, for example, is the redirecting higher portions of the tailings toward the mine fill. And the measures like that will buy us time.

But certainly it is -- as I said it earlier, we believe within the realm of possibility, there is a risk that if these permits are not granted, we could face a temporary stoppage. We currently find it a low risk, but a risk nevertheless. So we felt compelled to disclose. And we have fluid and constant weekly communications with the legal department of the nation's mines, which is how we're seeing these, because there are no material observations, only observations to local ties, total parcels in some areas -- nothing material. So we're just working through the local bureaucracy and trying to get the permit through.

And so -- that sounds great. So when -- so how much capacity do you have now? I mean, can you gently stack this stuff until August, so to speak or --?

As things being as they are today, we have capacity until July.

And then the new tailing plant has -- will have capacity for 17 years?

It is a stage growth. We have changed the time, and right now the predicted capacity is for nine years, although this is stage growth for nine years. So right now to keep the process simple, we have an initial capacity on the first phase for close to two years.

Okay, that makes sense. Okay, great. And then what about the first exploration results from Mario?

We are getting results. Our exploration team, our Vice President of Exploration had a project review meeting yesterday. I don't have the latest report yet, but I have the indication that they want to extend the drill program to test some new areas that have come through for geologic marketing and evaluation. So that's an ongoing project and we expect to release results as soon as we have something more comprehensive, you know?

Great. And do you have a budget for exploration budgets set yet for Mario then for this year?

We have two budgets for Mario. One is sort of a carryforward from the first phase that started last year. And second is our contingency budget of $4 million, but that is depending upon positive efficiency (technical difficulty) which should take place by the start of next quarter.

Okay, great. Thank you.

Andrew Kaip, BMO.

Jorge, most of my questions have been asked. I just got a follow-up or a clarification. Can you remind us what your guidance for 2012 cash costs on a byproduct basis are for San Jose?

Our cash costs per ounce for San Jose for 2012 is (technical difficulty) [$5.23].

$5.25?

$5.23. Net of byproduct gold.

All right. And then just one other question, and this is just a follow-up with the number of questions that have been asked regarding the San Jose leaching facility. Are you -- given the concerns within the concentrate market, specifically with respect to concentrates that are very similar to what you're producing in San Jose, are you building in excess capacity at that plant, so that you might be able to do some spot contract work in addition to processing your own concentrates?

That's interesting that you mentioned it, because we have been approached -- actually during the PDAC, we've been approached by a group that would be interested in using spare capacity of the facility. It's not something that was contemplated under the original design, but as we have advanced with detailed engineering of this, what we will likely do is structure this in a modular way so we can grow modularly. No? And we don't face bottlenecks in case we tried to expand it.

And that is something we'll do anyway on the view that San Jose has a large and inferred resource. And as we have done with conversion of that resource, there will be opportunities to expand San Jose beyond 1,500 tons per day. We need to put numbers behind that idea. That is a concept right now. But I mean all of our plant infrastructure has been designed and constructed. We've got the scene in mind, no? Modular expansion.

No, that's good. And just finally, with respect to the Caylloma first stage of construction of your new tailings facility, can you give us a sense of how long it's going to take you to complete that first stage and have that facility operational?

The pump, the tailings pump is concluded. The building of the pump to hold the tailings for the first half-year is basically done.

What we are waiting for right now is the new tailing site is located a few kilometers from the plant. So it is roughly around 5 kilometers from the plant -- don't quote me exactly on that distance, but it's about 5 kilometers. So what we are waiting -- we're working on the pipeline and we're waiting on the delivery of the pumps. No? So basically all earthworks, the major earthworks, the aligning -- all of that work is concluded. We're just waiting for the delivery of the pump and finishing with the pipeline, infrastructure, basically.

So conceivably once that permit -- once those pumps are in place, permits received, you can begin using it very quickly?

Yes, yes. This is not a project that will be challenging to commission in any way. It is very standard technology; it's very standard tailings facility; very standard -- well, the pumps do have -- are taking a bit longer than we expected originally. There have been some delays from the suppliers that we're trying to overcome, but everything right now is within schedule for delivery of this commissioning in early June.

Okay, great. And that's it, thanks very much.

Thank you.

David Zurbuchen, National Augment.

I'd like to go back to San Jose and talk about these new commercial terms and expectations for 2012 and beyond, hopefully. It was mentioned that you expected to move silver price received from around low 80's to low 90 percentile. What are your expectations for gold?

Yes, with respect to -- just to provide a bit more clarity, with respect to silver, what we have seen is improvement in terms of the actual payable silver out of a contained mill and concentrate, and reduced refining charges.

In the case of gold, we've actually seen a reduction in terms of payable metal, so that does imply a slight decrease in terms of a realized price from around 81% in 2011 for gold to 79% in 2012, based on our contractual commercial terms for this mill.

Okay, now I guess I was actually calculating something closer to the low 70's for gold in 2011, but maybe it's just a matter of timing. I don't know if you experienced any poor sales timing in 2011 that brought the average down.

Let me just provide, just for clarity, so this is just a matter of how you choose to express the realized price, but what we are selling a concentrate in both payment and treatment charge. So when we look for purposes of estimating or calculating the realized silver price for both metals is to allocate the treatment charge to the gold. Right? So that's where that lower realized price for gold is coming from.

Okay, well, I guess maybe I think this will help clear it up a bit. So beyond the actual discount of the average metal prices on the spot market, I'm also seeing a fairly significant refining charge of about $1.7 million. And I don't see a breakout of actually the sales at Caylloma versus San Jose, but I was calculating something close to maybe $12 million at San Jose.

So to have a refining charge of $1.7 million and [$12-million-ish] of sales on top of the 20% discount to spot on silver and gold, it seems really significant. Obviously, that's probably why you're moving forward with the plans to produce Dore, but I'm trying to get an estimate of what those refining charges might look like in 2012.

Sure. In 2011, refining charges for silver in Cuzcatlan I think we mentioned before were in the range of [$3.80] per ounce; whereas for 2012, we have been able to bring them down to $1.50 per ounce. And for gold, there's not that much of a difference, the refining charges of $25 comparing -- in 2011 compared to $10 in 2012. That's as far as the silver/gold concentrate from San Jose.

For the sales as also as I mentioned, in 2011, we were still seeing refining charges for the silver and the lead concentrate of $1.20; whereas 2012, it has pretty much doubled. So that is related to, basically, the items you described.

Okay, but I guess correct me if I'm wrong, are the refining charges additive to the -- you receive a discount on top of that refining charges, correct? So what could we expect to see in terms of refining charges in 2012? Are you saying the $1.50 per ounce on top of the roughly 10% discount you're expecting on the spot price?

I'm sorry, but I'm not quite getting your question. I mean, in terms of cash costs and reconciliation of cash costs in the MD&A, what you see for -- both for Caylloma and for San Jose is refining charges strictly related to silver. So the amounts you see both for the quarter and the year for both mines are directly out of the figures per ounce that I was just describing.

The realized price I've been referring to is based on not only refining charges, but also premium charges and the actual payable metal. Hopefully, that helps clarify things a bit.

Okay. I guess regarding the Dore facilities, the leaching facility, do you have any expectations for incremental dollar per ton costs of trucking the concentrate to the facilities and then the tailings back? Or is it too early at this point?

And as the site is not defined as early, but anyhow the distance -- Luis, if you could confirm the distance right now to Manzanitas is (inaudible) or 1,000 kilometers, right? Luis?

Jorge, please, I got cut off there for a moment. Can you repeat the question?

The distance we are trucking to Manzanitas from San Jose is over 1,000 kilometers.

Yes. Yes, it is. Yes, it is. So --

The net effect in any case is going to be cost reduction on transport, which is not a material costs due to the fact that it is not a high tonnage and it's very high value product.

Okay, so really the cost savings are primarily going to be seeing those refining charges and the discounts --?

Basically, yes. The cyanide consumption of the product is low, around 14 kilos, 17 kilos per ton of concentrate, which for this kind of product is low. Remember, there's only about 20 tons per -- 20 to 50 tons depending -- that's where we're building. So the operational cost is relatively low for a plant of this nature. The transport cost is going to be low and savings on the refining charge, treatment charges are going to be the bulk of the savings.

Okay, and the $12 million cost -- that's all in? Or is that just this year and there's more budgeted for 2013?

No, that is a prefeasibility project right now. That is a project at prefeasibility level. We're working with the engineering firm to try to materialize some opportunities to bring costs down. So we're working fast trying to fast-track this project as much as we can, but you know, we need to first to run we need to finalize site selection and launch a permitting process.

Okay. And will we see a technical report with those economics laid out once the site has been finalized?

No, this is not a -- although an important project, it's not a material project that would require a technical report. We can certainly show the technical information on a product like this, if you wish.

Okay. All right, well, that's it for me. Thanks a lot.

Thank you.

(Operator Instructions). Shannon Young, FSRN.

The issue of pipelines and pumps was mentioned in relation to the San Jose mine. And how is that mine currently accessing water?

Could you repeat the final part of your question, please?

How is the San Jose mine currently accessing water?

Yes, thanks for your question. The San Jose mine has two sources of water in the [arena] at this time. One is the capture of rainfall, seasonal rainfall in a water reservoir. Now, this water reservoir is a dual tailings water reservoir that we built onsite.

So we used -- we recycled 100% of the water of the project. This is a project that has 0 effluent discharge. And we have a second source of water which is not implemented yet, which revolves around a social program, a social project that we did in conjunction with the town of Ocotlan, located some 13 kilometers away from our site, where we gained working with the community, with local authorities.

We did a giant project by which we took over a sewage facility of the town, which was abandoned, an abandoned sewage facility. We revamped the sewage facility to an investment of $1 million. And we operate the sewage facility at 0 cost for the town of Ocotlan. And then we used the residual water from the treatment of sewage and send it to the site to contribute to a water project. This only source is about -- once it's operational, it will source about 20% of the water. So that's all the water the project consumes.

I don't know if that answers your question.

Well, my understanding -- I have a few questions about San Jose, but my understanding was that the pipeline that's supposed to come from Ocotlan has been detained for quite a while and it's not operational. So then (multiple speakers) --

Yes, that is correct. That is correct.

And during the dry season -- sorry, go ahead.

Go ahead, go ahead.

And the seasonal rain waterfall, I mean, during the dry season, where -- if the pipeline from Ocotlan is not operational and the dry season is current in Oaxaca, where is the mine getting water right now?

The tailings, the dual tailings and water facility was designed taking into consideration the driest years on record in the Ocotlan Valley. So that facility has been built with a size to hold enough year-on-year precipitation as to be sustainable.

Now, there is always a risk with 100-year events and things like that, that could affect our water balance. Yes, there is a risk. And that's why this 20% source of additional water from the tailings facility is important for us.

We have negotiated with several communities now to lay the pipe -- now I have to say that our pipe goes parallel within the boundaries of a national highway. And really the official permits we require come from the Highway Authority in Mexico. We obtained that. And also, we have negotiated with -- for about 11 kilometers of the 13 kilometers that we need to get to the site.

There's a community of Magdalena where we have not been able to reach an agreement yet. We are in dialogue with them with the assistance of local government in Oaxaca, to find a win-win solution to this project and secure that 20% source of alternative water, as well.

Okay. My next question has to do with the social context of the mine's operation. Fortuna Silver has denied any link to the murders of two known opponents of the San Jose mine, yet many local residents in San Jose blame the mining project for creating a risk in the community, and even say that local officials allegedly linked to the mining project have used violence to quell opposition to the mine.

Reactions to the recent murders have been that of demonstrations in Oaxaca. They've included calls for the federal government to revoke the mining permits. Is this situation expected to affect the planned expansion of the San Jose mine? And does this situation create a risky climate for investors?

Well, I'd have to say that we are saddened, of course, by the tragic events that have taken place in the community of San Jose and in Oaxaca in general. Bear in mind that when we got to San Jose, there was a mine in operation already, but the mine belonged to a local Mexican group. Mining in San Jose is not new. There is a history of mining in San Jose and a history of continued mining operations in San Jose, although a small operation, but continued mining operations for at least 15 years.

So with that background, what we are aware of is a long, historic conflict in San Jose that is the cause of local struggle. This is not unusual in Oaxaca, which is a state marked by local political dispute and land struggle.

We have the support and commitment of the state authorities as we comply with all the laws, and with the local authorities and other stakeholder groups. We comply with the laws with best international practices. And we categorically deny any involvement of the Company or its subsidiaries in acts or even condoning any such violence.

It is a challenging social political context in not only San Jose but all through Oaxaca. And I'm sure you know something about Oaxaca and you know that the state -- not only Oaxaca but Mexico is under a spiral of violence, and Oaxaca is not immune to that. And especially here, where there is a history of struggle and political conflict.

What we can do is continue to conduct ourselves to the utmost transparency and respect to local communities, comply with the law. And that is what we will continue to do.

Okay, thank you.

Ben Asuncion, Haywood Securities.

Just one last quick question here. With respect to operating costs at both San Jose and Caylloma, so if I got this right, based on some of the initial comments from the call, was San Jose your expectations or $69 to $70 per ton milled? Is that correct?

Yes.

Okay. And so that number is comparable then to the 47 that was delivered in Q4?

Yes.

Okay, could you give me some insight as to the increases this TCRCs and other things that are baked into this cost or --?

No. This is basically due to the fact that much of the ore processed was -- came from our stockpiles that just for accounting purposes they're 0 costs and came from development throughout the construction phase.

Okay. And now I know that this information is a little dated, but if I were to go back to, I think, back in June, you gave a five-year outlook here for the mine. And I remember cash -- or operating costs here within the range of sort of mid-40's. Is the $69 to $70 -- I'm assuming this is based on a 1,000 ton per day rate -- how much of this cost will subside as we get into the 1,500 ton per day rate?

We expect to see the advantage of our comment of scale and the operational efficiency to a larger mechanized operation, and a modest reduction to date in terms of cash costs. We -- San Jose and then today, it has only a very recent history of costs. And we are seeing several aspects of -- the sources of difference with respect to the original feasibility study.

So I think we will all be more comfortable as we go into 2012 to provide an accurate forecast as to what sort of cost reductions are achievable to our 1,500 tons per day. I don't know if Jorge has any further comments on that.

Yes. No, basically, with San Jose, we need to see this first quarter and even the second quarter to get more stability on costs and update our projections the real figures. Again, as with any startup, you start seeing a lot of distortion from the contribution of the development of material to production, and costs that are not stabilized yet. So we will be updating our figures this first half of the year with real figures.

Okay. All right. And then I guess with respect to both operations, can you give me a sense of if we're looking, let's say, at $70 per ton baseline at San Jose, what's the implication of all the TCRCs in terms of where that will bring your total cost per ton?

Yes, I assume your question refers to the cost -- treatment refining charges being included in cost, in the cash costs measure of -- just in terms of the way the treatment and refining charges are presented.

In -- for Fortuna, we expressed our percent [of our] revenue net of treatment and refining charges. And therefore, you will not find it in the costs. So this cash cost per ton figure does not include treatment and refining charges.

Okay. All right, yes, I guess I was just asking initially about those costs, going back through our numbers based on what some of the forecasts were. But so we'll sit tight for the next few quarters, and hopefully, a better sense of visibility going forward. That's all for me. Thanks, guys.

Thank you.

There are no further questions at this time. I would like to hand the floor back over to management for closing comments.

Well, I'd like to thank everybody for their questions and joining us this morning.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you.