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Spanish Mountain Gold Shares Rise As Investors Await Strategic Review Results

Spanish Mountain Gold (CVE:SPA) shares gained more than 19% Friday, after the gold explorer announced in late January that it hired Rothschild - one of the world's largest independent financial advisory groups - to help review strategic options with the aim of maximizing shareholder value.

Shares of the company were lately up by 4 cents late this afternoon, at 25 cents.

In December, the Vancouver-based company closed a brokered private placement financing, raising a total of $2.7 million, with the funds going toward exploration expenses on the company's Spanish Mountain gold property in British Columbia.

Spanish Mountain late last year announced the results of a preliminary economic assessment (PEA) for the project it has been drilling since 2005, 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.

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.

The company says that 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 2012. For the full life of the mine, cash costs are projected at US$774 per ounce.

"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," president Brian Groves told Proactive Investors at the time.

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 $45 million.

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.

The company says it has a strong cash position with no debt and owns 100 per cent of four gold properties in British Columbia.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.