Spanish Mountain Gold (CVE:SPA) has today posted its preliminary economic assessment (PEA) of the project it has been drilling since 2005 in central British Columbia, with the report estimating a pre-tax net present value of US$454 million and an internal rate of return (NYSE:IRR) of 15%.
The Spanish Mountain gold project in BC is projected to have a 15 year mine life, producing an average of 197,000 ounces of gold per year for the first 14 years, with total life-of-mine production of 2.8 million ounces of the yellow metal and one million ounces of silver.
"This PEA demonstrates very positive economics for the project with the potential to produce almost 200,000 ounces per year with a 15 year mine life," says president Brian Groves.
The property, with higher grade gold closer to the surface, has estimated average gold production of 268,000 ounces per year for the first three years of operation, and an average feed grade of 0.7 grams per tonne (g/t) gold.
The grade for the first three years is relatively high , considering the average grade over the 15-year life of the mine is projected at 0.48 g/t gold.
Cash costs of US$526 per ounce for the first three years are also considerably lower than the industry average of $714 per ounce for the first half of this year, says Spanish Mountain. For the full life of the mine, cash costs are projected at US$774 per ounce.
If gold prices remain robust for the first three years of operation, payback will be a lot quicker, the company adds. Payback on the project from the start of commercial production is currently calculated at 4.4 years.
"Due to the nature of the deposit we can benefit from higher grade production over the first few years providing the potential for a reduced payback period," Groves tells Proactive Investors.
"The project itself benefits from excellent location, infrastructure and cheap power leading to favorable mining costs. We believe this PEA provides an excellent foundation as we move the project through to the next stage of full feasibility."
The study analysis was done using a gold price of just US$1,462 an ounce, compared to a spot price of well over $1,700 an ounce, and a silver price of $28 an ounce.
Using a discount rate of 5% and a 40,000 tonne per day scenario, the resulting pre-tax net present value of US$454 million is much higher than Spanish Mountain Gold's market cap of just $55 million - implying a near 9 times multiple - a significant spread.
The NI 43-101 report, which shows the economic viability of building a new gold mine and mill complex at the project, estimated a post-tax net present value of $291 million using the same 5% discount rate, with an IRR of 12%, after tax.
Initial capital costs were pegged at US$755.9 million, including contingency, meaning the project will be easier to finance given comparative projects out there with capex estimates of well over $1 billion.
The total operating cost of $10.68 per tonne milled for the life of the mine is viewed by the company as quite reasonable given the low grade operation, as power in BC is cheap compared to the likes of Ontario.
Indeed, the company is paying 4.4 Canadian cents per kilowatt hour under a contract for the life of the mine, "versus 10 to 12 cents per kilowatt hour in other provinces." The low strip ratio for the first three years, ranging from 0.9 to 1.58, also lends to the lower operating costs.
The infrastructure is also "excellent", says the company, with the project being 2 kilometres away from paved road, and a one hour flight from Vancouver. Many other operating mines are located nearby, including Taseko's Gibralter Mine - the second largest open pit copper-molybdenum mine in Canada.
The gold miner says studies are ongoing with BC Hydro for the construction of a 230kV powerline from the main lines in the area of the McLeese Lake Capacitor Station to the project site.
Spanish Mountain has been drilling on the property since 2005, with gold mineralization identified in an area spanning around 1,300 by 800 metres.
The latest PEA report was based on a measured and indicated resource of 3.18 million gold ounces, and 4.73 million silver ounces, and an inferred resource of 3.65 million gold ounces and 6.62 million silver ounces.
Since the company's last preliminary economic study in 2010, it has completed more than 6,000 metres of drilling, with the prior report being based solely on 1.9 million ounces of gold resource in both categories.
Specifically, Spanish Mountain says that its 2011 and 2012 drill programs have expanded the known mineralization in the North Zone of the property.
Average gold recovery over the life of the mine is estimated at 88%, with silver recovery for by-product silver production at 25%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.