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May 4, 2012

Fortuna Silver Mines, Inc.


Company Type Resources Company Stage Symbol Share Price (CAD) 52-week High/Low Mining Silver (Gold, Lead, Zinc) Junior Producer TSX:FVI / NYSE:FSM / BVL:FVI / FSE:F4S $3.81 $3.50 / $7.58

Overview
Established in 2005, Fortuna Silver Mines is a growing, low-cost silver producer with two operating mines in Peru and Mexico. The company is focused on organic growth in production and resources, as well as on exploration and acquisition of economic silver mineral assets in Latin America. Fortuna expects to increase production from an estimated 3.7M oz of silver and 17,400 oz of gold in 2012 (4.6M silver equivalent oz) to an estimated 5M oz of silver and 26,000 oz of gold, not including significant lead and zinc by-products, by 2014. In 2014, the company projects total production of 6.4M silver equivalent oz, a 39% increase. In 2011, the companys net realized price per ounce of silver sold was over $30 USD.

Market Cap. Shares Out. Fully Diluted Insider Ownership Major Shareholders

Headquarters Address

Board of Directors

CEO Operating Region(s) Working Capital Burn Rate Debt Revenues Profit/Loss Net Assets

$477,273,941 125,268,751 128,957,040 2% Sentry Investments (9%), Sprott Asset Management (8%), Equinox Partners (5%), Van Eck Global (8%), RBC Asset Management (2%), US Global Investors (1%) 200 Burrard Street Suite 650 Vancouver, BC V6C 3L6 Canada +1.604.484.4085 info@fortunasilver.com www.fortunasilver.com Simon Ridgway, Jorge A. Ganoza, Robert R. Gilmore, Tomas Guerrero, Michael Iverson, Mario Szotlender, Thomas Kelly Jorge A. Ganoza Peru, Mexico $56M (12/31/2011) * N/A $0.00 $110,004,000 (2011 annual) $19,533,000 (2011 net income) $271,606,000 (Total Assets as of 12/31/2011)

Management
The companys management team has deep regional expertise, exploration savvy and mining industry experience. The companys President and CEO, Jorge Ganoza, is a geological engineer with over 16 years of experience in exploration and mining in Panama, Guatemala, Nicaragua, Honduras, Mexico, Dominican Republic, Haiti, Peru and Colombia. The companys board of directors is chaired by Simon Ridgway, who is a well known prospector and mining financier. Mr. Ridgway and exploration teams under his guidance have discovered gold and silver deposits in Honduras, Guatemala, and Nicaragua. The companys Vice President of Exploration, Thomas I. Vehrs, Ph.D., has over 35 years of
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* The company also has an undrawn credit facility of $20M.

Fortuna Silver Mines, Inc.

2012 Hera Research, LLC

experience in mineral exploration and mine development, including positions with Gold Fields, Cyprus-Amax, Western States Minerals and Anaconda Minerals. Since 1980, Mr. Vehrs has worked extensively in Latin America developing and managing exploration programs in Chile, Peru, Bolivia, Colombia, Argentina, Mexico and Central America. The companys Vice President of Operations, Manuel Ruiz-Conejo is a mining engineer with more than 25 years of experience working with polymetallic mines and mine contractors in Peru.

Operating Mines
Fortuna has two operating mines, one in Peru and one in Mexico, as well as exploration properties. Caylloma Mine The 100% owned Caylloma mine, located in Arequipa, Peru, is a lowcost, underground operation producing silver-gold-lead-zinc concentrates with an 8 year life of mine estimate. The mine and processing plant are currently operating at a rate of over 1,250 tpd. In 2011, the Caylloma mine produced approximately 2M oz of silver and 2,400 oz of gold, along with 23.4M lbs of zinc and 19.7M lbs of lead. The companys cash cost per ounce of silver produced net of by-product credits at Caylloma is effectively zero (negative $0.59 USD). San Jose Mine The 100% owned San Jose mine, located in Oaxaca, Mexico, is a lowcost underground operation producing a high grade silver-gold concentrate that began commercial production in September 2011 at a rate of 1,000 tpd. Processing plant design capacity is 1,500 tpd and, beginning in 2013, the company expects to produce approximately 3.2M oz of silver and 25,000 oz of gold annually with a 9 year life of mine estimate. In 2011, after four months of commercial production, the San Jose mine produced 490,555 oz of silver and 4,622 oz of gold. In 2012, San Jose is expected to produce 1.7M oz of silver and 15,000 oz of gold. Cash costs of $7.84 USD per silver equivalent oz are expected throughout the life of the mine.

Reserves and Resources


The company has total mineral reserves of approximately 44M oz of silver and 233,200 oz of gold. The Caylloma mine reserves and resources are Proven and Probable reserves of 20.2M oz of silver and 49,500 oz of gold, Measured and Indicated resources of 8.9M oz of silver and 21,800 oz of gold and Inferred resources of 11.8M oz of silver and 37,900 oz of gold. The San Jose mines reserves and resources include Proven and Probable reserves of 23.6M oz of silver and 183,700 oz of gold, Measured and Indicated resources of 2.9M oz of silver and 25,600 oz of gold and Inferred resources of 22M oz of silver and 178,100 oz of gold.

Exploration Strategy
The companys land holdings include more than 70,000 hectares in Peru and Mexico and in 2012 the companys $15 million USD exploration budget will fund 44,000 meters of drilling. Caylloma Exploration of the 11,000 hectare land package surrounding the Caylloma mine in Peru is ongoing and the company expects to upgrade and expand its reserves and resources in 2012, which will extend the life of the mine.

Fortuna Silver Mines, Inc.

2012 Hera Research, LLC

San Jose Exploration activities are also underway on the 58,000 hectare land package surrounding the San Jose mine. Access to the property surrounding the San Jose mine is excellent and local infrastructure is good. Mario The companys 4,900 hectare Mario project in Junin, central Peru lies in a silver-base metal belt. Historical drill intercepts included 8.75 meters of 658 grams per ton (gpt) silver, 9.15 meters of 560 gpt silver and 13.6 meters of 303 gpt silver, along with significant lead and zinc. Due to the vein structure of its existing deposits, the company plans to maintain its life of mine estimates at 8-9 years through ongoing exploration to (1) replace reserves as they are depleted and to (2) develop complementary near-mine operations (within 50 km of existing processing plants). At the same time, the company is exploring the Mario project and evaluating new properties. For the companys existing mines, President and CEO Jorge Ganoza does not believe in adding ounces to resource estimates beyond what is needed to maintain an 8-9 year mine life. Mr. Ganoza explained that We are not in the business of adding ounces if they do not have an impact on mine plans. If I can increase reserves and increment production, it makes sense. Some companies report large quantities of ounces, but not all ounces are created equal. When you look at it from an engineering perspective, you may find that many of these resource ounces will never see the light of day.

Business Plan
The company plans to maintain its 8-9 year life of mine estimates through ongoing exploration while increasing production from 4.6M silver equivalent oz in 2012 to 6.4M silver equivalent oz in 2014 (a 39% increase in production over 24 months). The company is evaluating expansion at the Caylloma processing plant to 1,500 tpd, for which an environmental impact statement (EIS) has already been approved. The companys Mario project could eventually become a third mine. Although plans have not been finalized, the company hopes to bring a third mine to production by 2016. The company is also evaluating post-discovery, pre-development properties in Latin America where production costs would be below industry averages and where silver would represent more than 50% of revenue.

Catalysts
An updated NI 43-101 resource estimate for the Caylloma mine is expected in mid-2012 while exploration activities continue throughout the year. The San Jose processing plant will be expanded to a capacity of 1,500 tpd in 2012. In 2013, production ramp-up to 1,500 tpd at the San Jose mine will be completed and the company will begin construction of an offsite leaching facility to convert concentrate to dor.

Investment Thesis
The company is profitable and growing in terms of mineral assets, production and revenues. The companys low cash costs suggest that profits will grow in step with increasing production. Production is expected to increase 39% in the next 24 months. The companys share price is
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Fortuna Silver Mines, Inc.

2012 Hera Research, LLC

near its 52-week low. The companys execution has been very consistent. All other things being equal, the companys share price seems likely to rise from recent lows. For comparison, First Majestic Silver Corp. (TSX:FR / NYSE:AG) has consistently increased its mineral assets, production and revenues while developing new mines and maintaining relatively low production costs. Fortuna Silver Mines is well positioned to become the next First Majestic.

Major Risks
Outside of normal execution and operating risks or exogenous events, the primary risks to Fortunas share price have to do with general stock market conditions and the price of silver. ###

About This Report


Hera Research is a subscriber-funded research service that does not receive compensation from resource companies. Hera Research focuses on value investing in companies that produce natural resources and seeks to identify resource companies whose share prices could gain 100% or more in 18 to 24 months. Hera Research, LLC or its Directors are shareholders of Fortuna Silver Mines, Inc. All information contained herein was obtained either from the company or from other authoritative sources and is assumed to be true and accurate. Hera Research does not issue buy, sell or hold recommendations or set short-term, e.g., 90-day, price targets. Hera Research provides research and does not offer investment or financial advice of any kind.

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