Regulatory Filings • Apr 26, 2017
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VIA EDGAR
April 26, 2017
Attention: Craig Arakawa United States Securities and Exchange Commission Division of Corporate Finance Mail Stop 3561 Washington, DC 20549
RE: Fortuna Silver Mines Inc. Form 40-F for the Year Ended December 31, 2015, filed March 29, 2016 Form 6-K furnished November 8, 2016 File No. 001-35297
Dear Mr. Arakawa,
Thank you for the telephone conference on the afternoon of Wednesday April 5, 2017 which was a follow-up to your second comment letter dated February 22, 2017.
During the call you had requested we provide you with:
A quantification of the figures used in our depletion calculations included in our letter dated March 15, 2017. We note these calculations were provided excluding inferred resources from both the numerator and denominator of the Company’s units of production calculation of depletion.
A calculation of depletion of other assets which may also be affected by the use of inferred resources in the calculation, and if immaterial so state. We have provided these calculations using total production over reserves as indicated in item 3 below.
We believe it would be useful to you if we also provided:
On a call on April 19, 2017, you had also requested we provide:
2
The following tables were provided in our March 15, 2017 letter. They outline the amount of depletion expense recorded for the Company’s mining assets with and without the inclusion of inferred resources for the years ended December 31, 2015 and December 31, 2014 and for the nine months ended September 30, 2016:
San Jose
| Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 | |
|---|---|---|---|
| Depletion expense with the inclusion of the portion of inferred resources estimated to be economically extracted | $ 9,711,000 | $ 9,042,000 | $ 9,763,000 |
| Depletion expense based on reserve tonnes without the inclusion of inferred resources in the denominator | $ 14,986,000 | $ 15,381,000 | $ 11,304,000 |
| Difference | $ 5,275,000 | $ 6,339,000 | $ 1,541,000 |
The above figures were calculated as follows:
| Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 | ||
|---|---|---|---|---|
| San Jose Mine | ||||
| As originally reported: | ||||
| Average net book value of the mineral property | A | 105,032,000 | 101,676,000 | 120,373,000 |
| Total production (tonnes milled) for the year | B | 676,959 | 717,505 | 632,432 |
| Average depletion base (tonnes reserves + portion inferred) | C | 7,321,844 | 8,067,970 | 7,797,808 |
| Depletion expense as calculated | A x B ÷ C | 9,711,000 | 9,042,000 | 9,763,000 |
| Depletion without the inclusion of inferred resources | ||||
| Average net book value of the mineral property | A | 95,004,000 | 95,041,000 | 90,452,000 |
| Total production from reserves only (tonnes milled) for the year | B | 568,669 | 609,646 | 472,398 |
| Average depletion base (tonnes reserves only) | C | 3,605,000 | 3,767,000 | 3,780,000 |
| Depletion expense | A x B ÷ C | 14,986,000 | 15,381,000 | 11,304,000 |
3
Caylloma
| Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 | |
|---|---|---|---|
| Depletion expense with the inclusion of the portion of inferred resources estimated to be economically extracted | $ 3,695,000 | $ 4,890,000 | $ 3,141,000 |
| Depletion expense based on reserve tonnes without the inclusion of inferred resources in the denominator | $ 4,766,000 | $ 5,268,000 | $ 4,469,000 |
| Difference | $ 1,071,000 | $ 378,000 | $ 1,328,000 |
The above numbers were calculated as follows:
| Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 | ||
|---|---|---|---|---|
| Caylloma Mine | ||||
| As originally reported: | ||||
| Average net book value of the mineral property | A | 35,899,000 | 38,830,000 | 24,107,000 |
| Total production (tonnes milled) for the year | B | 464,823 | 466,286 | 379,707 |
| Average depletion base (tonnes reserves + portion inferred) | C | 4,515,622 | 3,702,692 | 2,914,524 |
| Depletion expense as calculated | D= A x B ÷ C | 3,695,000 | 4,890,000 | 3,141,000 |
| Depletion expense without the inclusion of inferred resources | ||||
| Average net book value of the mineral property | A | 38,691,500 | 39,733,500 | 25,766,000 |
| Total production from reserves only (tonnes milled) for the year | B | 379,796 | 402,114 | 343,243 |
| Average depletion base (tonnes reserves only) | C | 3,083,000 | 3,033,000 | 1,979,000 |
| Depletion expense | A x B ÷ C | 4,766,000 | 5,268,000 | 4,469,000 |
4
The Company also depletes production buildings and related infrastructure located on mine sites using the units-of-production basis. The calculations provided below show the effect if depletion were calculated using total production over reserves:
San Jose Mine - Buildings
| Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 | |
|---|---|---|---|
| Depletion expense with the inclusion of the portion of inferred resources estimated to be economically extracted | $ 3,464,000 | $ 3,389,000 | $ 3,928,000 |
| Depletion expense based on total production without the inclusion of inferred resources in the denominator | $ 7,112,000 | $ 7,572,000 | $ 8,615,000 |
| Difference | $ 3,648,000 | $ 4,183,000 | $ 4,687,000 |
Caylloma Mine - Buildings
| Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 | |
|---|---|---|---|
| Depletion expense with the inclusion of the portion of inferred resources estimated to be economically extracted | $ 2,060,000 | $ 2,725,000 | $ 1,622,000 |
| Depletion expense based on total production without the inclusion of inferred resources in the denominator | $ 3,195,000 | $ 3,318,000 | $ 2,272,000 |
| Difference | $ 1,135,000 | $ 593,000 | $ 650,000 |
5
| San Jose | Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 |
|---|---|---|---|
| Depletion expense with the inclusion of the portion of inferred resources estimated to be economically extracted | 9,711,000 | 9,042,000 | 9,763,000 |
| Depletion expense based on total production without the inclusion of inferred resources in the denominator | 18,255,000 | 17,436,000 | 15,653,000 |
| Difference | 8,544,000 | 8,394,000 | 5,890,000 |
The above figures were calculated as follows:
| Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 | ||
|---|---|---|---|---|
| San Jose Mine | ||||
| As originally reported: | ||||
| Average net book value of the mineral property | A | 105,032,000 | 101,676,000 | 120,373,000 |
| Total production (tonnes milled) for the year | B | 676,959 | 717,505 | 632,432 |
| Average depletion base (tonnes reserves + portion inferred) | C | 7,321,844 | 8,067,970 | 7,797,808 |
| Depletion expense as calculated | A x B ÷ C | 9,711,000 | 9,042,000 | 9,763,000 |
| Depletion using reserves only | ||||
| Average net book value of the mineral property | A | 88,099,000 | 82,817,000 | 85,736,000 |
| Total production (tonnes milled) for the year | B | 676,959 | 717,505 | 632,432 |
| Average depletion base (tonnes reserves only) | C | 3,267,000 | 3,408,000 | 3,464,000 |
| Depletion expense | A x B ÷ C | 18,255,000 | 17,436,000 | 15,653,000 |
6
| Caylloma | Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 |
|---|---|---|---|
| Depletion expense with the inclusion of the portion of inferred resources estimated to be economically extracted | 3,695,000 | 4,890,000 | 3,141,000 |
| Depletion expense based on total production without the inclusion of inferred resources based on reserve tonnes | 5,853,000 | 6,054,000 | 4,488,000 |
| Difference | 2,158,000 | 1,164,000 | 1,347,000 |
The above numbers were calculated as follows:
| Year ended December 31, 2014 | Year ended December 31, 2015 | Nine months ended September 30, 2016 | ||
|---|---|---|---|---|
| Caylloma Mine | ||||
| As originally reported: | ||||
| Average net book value of the mineral property | A | 35,899,000 | 38,828,000 | 24,107,000 |
| Total production (tonnes milled) for the year | B | 464,823 | 466,286 | 379,707 |
| Average depletion base (tonnes reserves + portion inferred) | C | 4,515,622 | 3,702,692 | 2,914,524 |
| Depletion expense as calculated | A x B ÷ C | 3,695,000 | 4,890,000 | 3,141,000 |
| Depletion using reserves only | ||||
| Average net book value of the mineral property | A | 35,899,000 | 36,312,000 | 21,145,000 |
| Total production (tonnes milled) for the year | B | 464,823 | 466,826 | 379,707 |
| Average depletion base (tonnes reserves only) | C | 2,851,000 | 2,800,000 | 1,789,000 |
| Depletion expense | A x B ÷ C | 5,853,000 | 6,054,000 | 4,488,000 |
7
On a subsequent call on April 19th you requested clarification for the referenced periods of our conversion ratios as per our response letter of January 27th 2017.
Please see the tables below:
San Jose
For San Jose we had previously provided information for the fiscal years 2014 and 2015. Below we provide information for the periods 2013 through 2016.
| Year | Conversion Ratio — Tonnes | Grades | Metal Content | ||
|---|---|---|---|---|---|
| Ag Eq | Ag | Au | Ag Eq | ||
| 2016 | 97% | 112% | 109% | 119% | 108% |
| 2015 | 83% | 115% | 117% | 112% | 96% |
| 2014 | 120% | 99% | 100% | 99% | 119% |
| 2013 | 92% | 100% | 104% | 95% | 93% |
| AVERAGE | 98% | 107% | 107% | 106% | 104% |
The San Jose mine was commissioned in October 2011 and up to 2012 there was very little infill drilling done to have any meaningful conversion data. Hence the first relevant year of conversion data starts in 2013.
Caylloma Mine
For Caylloma we had previously provided information for the periods 2012 through 2015. We are expanding the information provided for the periods 2012 through 2016.
| Year | Conversion Ratio | ||||
|---|---|---|---|---|---|
| Tonnes | Metal Content | ||||
| Ag | Au | Pb | Zn | ||
| 2016 | 93% | 116% | 118% | 81% | 95% |
| 2015 | 65% | 66% | 70% | 112% | 68% |
| 2014 | 79% | 81% | 77% | 81% | 94% |
| 2013 | 81% | 79% | 72% | 89% | 86% |
| 2012 | 87% | 105% | 112% | 107% | 111% |
| AVERAGE | 81% | 89% | 90% | 94% | 91% |
The Caylloma mine was restarted under the current management in the second half of 2006. Prior to 2012 the classification of the mineral resource was performed using a different methodology that did not provide as much control on conversion areas as we are able to achieve today. Since we changed the classification to the more controlled, digitized string method, we have been able to carefully track and monitor the exact areas that have been converted year over year.
8
We thank you for your letter and we trust that these responses will address your comments. If you have further questions, please contact the undersigned at (604) 684-8026.
Yours truly FORTUNA SILVER MINES INC.
Per: /s/ Luis Dario Ganoza
Luis Dario Ganoza Chief Financial Officer
Cc: Audit Committee Tim Holwill, Deloitte LLP Riccardo Leofanti, Skadden, Arps, Slate, Meagher & Flom LLP
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