* Says San Jose project in Mexico to start in Q3 2011
* Says quarterly zinc and lead production falls
* BMO Capital Markets initiates coverage with "outperform"
July 13 (Reuters) - Canada's Fortuna Silver Mines Inc (FVI.TO) reported a 5 percent increase in quarterly silver production, and said production at its San Jose silver-gold project in Mexico is scheduled to begin in the third quarter of 2011.
The company, which operates the silver-lead-zinc-copper Caylloma mine in Peru, said silver production increased to 470,310 ounces in the second quarter.
However, zinc production fell 16 percent to 6.3 million pounds, and lead production fell 25 percent to 5.0 million pounds in the quarter, the company said.
Copper production fell 10 percent sequentially to 266,331 pounds, Fortuna said.
Separately, BMO Capital markets began coverage of the company with an "outperform" rating, and said Fortuna has a favorable production growth profile through 2012.
BMO analyst Andrew Kaip said once San Jose reaches full production, he expects the company's silver equivalent production to be 7.2 million ounces in 2012.
Shares of the Vancouver, British Columbia-based company were trading up 2 percent at C$2.08 Tuesday morning on the Toronto Stock Exchange. (Reporting by Arnika Thakur in Bangalore; Editing by Anne Pallivathuckal)