Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The surge in gold prices has spawned a modern-day “gold rush” in British Columbia, Alaska and the Yukon. Where gold panners once searched for nuggets in the frigid waters of northern streams, junior exploration companies are drilling, sampling and pushing ahead with development of new mines.
One company that appears to be on the move to becoming that next big producer is Spanish Mountain Gold Ltd. (SPA-V).
The company released a preliminary economic assessment (PEA) on November 24 and metallurgical work is approaching pre-feasibility, says CEO Brian Groves, who gave an update on the project at last week’s Roundup event in Vancouver.
Located about 70 kilometres northeast of Williams Lake near the village of Likely, the Spanish Mountain property is within the Quesnel Terrane geological formation. The disseminated and vein-controlled gold mineralization is contained within several statigraphically and structurally controlled zones.
The deposit was first traced to the discovery in 1921 of placer deposits above Cedar Creek. Exploration has until recently focused on vein-hosted occurrences; in the late 90s, attention turned to bulk-mineable deposits.
About $50 million has been spent exploring the property, with 428 diamond drill holes completed between 2004 and 2009. According to the PEA, the deposit contains measured and indicated resources of 77.374 million tonnes of gold graded at 0.53 g/t, and 39.531 million tonnes of gold graded at 0.47 g/t, assuming a 0.2 g/t gold grade cutoff.
The mine plan envisions an open-pit design using conventional trucks and shovels. It would produce an average 213,800 ounces of gold per year at cash costs of US$570/oz. for its first five years of operation, and 172,400 ounces at US$625/oz. throughout its 10-year mine life. The strip ratio is 1.97:1. The gold would be processed using conventional grinding and flotation methods.
The PEA says the project has the potential to yield a pre-tax net present value of $209 million at a discount rate of 5%, with an internal rate of return of 14.7%.
Spanish Mountain is looking at an initial capex budget of $382 million, or $460 million over the 10-year course of operations.
“It’s a manageable size with potential to generate significant cash flows of $100 million a year,” says Groves.
Importantly, Groves noted that the PEA used a “very conservative” gold price of $950/oz. for the pit shell. If the gold price is bumped up to $1100/oz, it would increase the mine life by three years. New PEA numbers using the higher gold price should be available by the end of February.
Taking a lesson from the Canadian government’s recent rejection of Taseko Mines’ Prosperity project, Spanish Mountain Gold has revised its tailings management plan so that no bodies of water or streams will be impacted by mine waste — a decision that will add $11 million to the capex budget, Groves said.
Spanish Mountain Gold is working towards pre-feasibility in the second quarter of this year and feasibility in the second half of 2011. The company’s stock closed at 61 cents on the TSX-V at the end of Friday’s trading.
