Fortuna Silver Mines Inc.

Fortuna Silver Mines Inc. is engaged in the acquisition, exploration and development of silver-gold and base metal properties in Latin America. The company was incorporated in British Columbia on September 4, 1990, as Jopec Resources Ltd. and on February 3, 1999, its name was changed to Fortuna Ventures Inc. Subsequent to its most recent acquisition in June 2005, Fortuna Ventures Inc. changed its name to Fortuna Silver Mines Inc.

The company’s principal assets are the Caylloma silver mine in Peru and the Tambor gold project in Guatemala. Fortuna expects to be producing silver at a rate of two million ounces per year in 2006.

On June 8, 2005, Fortuna announced that it had signed a purchase agreement to acquire 100% of the Caylloma silver mine in Peru. The Caylloma acquisition includes a National Instrument 43-101 compliant resource estimate of seven million ounces silver in proven and probable reserves, plus 14 million ounces silver in inferred resources, for a total resource of 21 million ounces of silver. The acquired assets also include a 600 tonne-per-day processing plant and more than 8,000 hectares of mining concessions. Furthermore, all the required permits and infrastructure are in place to restart production at the mine. This acquisition was completed on June 27, 2005.

With a 400 year history and over 250 million ounces of silver mined to date, Caylloma ranks among the most prolific silver producing mines in Peru. Caylloma is comprised of at least 30 vein systems, hosted by Miocene volcanics in a highly prospective regional caldera setting. Veins consist of banded quartz, rhodonite and calcite, carrying ruby silvers, tetrathedrite, galena and sphalerite. The veins are 1 to 4 km in length, up to 20 metres wide and carry grades averaging 10 to 15 ounces per tonne silver.

Located approximately 225 km by road from Arequipa, the second largest city in Peru, the mine lies within 60 km of four other operating silver and gold mines which are owned by local companies. The district is connected to the national power grid and has all the required infrastructure and services in place to support mining operations.

During the most recent year of operation at Caylloma in 2002, 2.6 million ounces of silver were produced. Operations were temporarily halted in 2003 due to depressed metal prices and to revamp the Caylloma mill. At the same time, a major exploration program was undertaken in the area of the mine which resulted in the discovery of significant silver and base metal resources.

Under the terms of the purchase agreement between the company and two private Peruvian companies, namely, Compania Minera Arcata S.A. and Compania Minera Ares S.A.C., Fortuna has acquired all of the shares of a company that owns the Caylloma assets and liabilities for a purchase price of US$7.55 million plus 10.803% of the fully-diluted capital of Fortuna. More specifically, the company paid US$100,000 at the signing of the agreement, a US$2.95 million interest bearing convertible promissory note is payable by the six month anniversary of the completion date, US$4.5 million is payable on the first year anniversary of closing, and the vendors will also receive 10.803% of the fully-diluted outstanding capital of the company. Furthermore, a 2% net smelter returns royalty payable to the vendors will accrue after 21 million ounces of silver have been recovered from the property.

Fortuna plans to carry out a US$10 million financing to pay the deferred cash portion of the purchase price and for the working capital required to re-open the mine. This financing will be completed at prices and on terms in the context of the market at the time. Furthermore, the agreement with the Caylloma vendors requires that on completion of the US$10 million financing, the vendors will own shares and warrants equal to 10.803% of the company on a fully-diluted basis.

In conjunction with the Caylloma acquisition, Fortuna has completed a private placement of 1.5 million units sold at $0.70 per unit. Each unit consists of one common share and one warrant to purchase an additional share at $0.75 for a period of one year. The gross proceeds arising from this financing totalled $1.05 million.

In December 2004, Radius Gold Inc. (RDU:TSX-V) and Fortuna reached an agreement for the further advancement of the high-grade Tambor gold belt located in central Guatemala. Fortuna has agreed to spend US$4 million over four years to earn a 60% interest in the project and will spend a minimum of US$250,000 per year. Once Fortuna has earned its 60%, Radius has the right to claim 51% of the project by matching Fortuna's US$4 million expenditure.

Fortuna will also pay Radius the sum of US$50,000 on the six month anniversary of the agreement. The Tambor gold properties host an orogenic lode gold system, discovered by Radius in 2000 and advanced by Gold Fields Ltd. (GFI:NYSE), which completed extensive trenching and drilled over 60 holes on the property. This exploration work defined at least 13 gold occurrences over a 25 km belt of prospective geology, highlighted by two major parallel goldin- soil anomalies over a 7 km strike length that remains to be drill tested. According to the independent resource estimate prepared by Chlumsky, Armbrust and Meyer LLC, Tambor contains 216,200 ounces of gold in inferred resources and 57,800 ounces in indicated resources.

Fortuna’s 2005/2006 work program at Tambor will include core drilling of roughly 3,000 metres around the known gold zones at Laguna North and Guapinol South to increase confidence in the resource and extend known mineralized zones, core drilling of roughly 3,000 metres to test high-priority soil anomalies and geological targets which were not previously tested.