PEA is out on US Gold’s El Gallo silver project

Rob McEwen’s goal of having US Gold (UXG-T, UXG-N) included in the S&P 500 index within four years may seem like a tall order to some, but the industry veteran may just be able to pull it off.

His ambitions include turning the company’s 100%-owned El Gallo project in the foothills of the Sierra Madres in Mexico into one of the 10 largest primary silver producers in the world. And the results of a preliminary economic assessment (PEA) “show that El Gallo is off to an excellent start,” he asserted in a press release Feb. 7.

According to the PEA, El Gallo will produce an average of 5 million oz. silver and 50,245 oz. gold a year over a mine life of six years. Initial capital costs are forecast to come in at US$149 million.

At base case prices of US$18 per oz. silver and US$1,000 per oz., El Gallo’s pretax internal rate of return (IRR) works out to 27%, with a pretax net present value (NPV) at a 5% discount rate of US$155 million. The payback period would be 2.3 years and the cash cost per oz. silver, net of byproduct credits, is estimated at US$5.90 per oz.

Using spot prices of US$28.50 per oz. silver and US$1,350 per oz. gold, the IRR jumps to 65% and the NPV to US$521 million, while the payback period drops to one year and cash costs to US$2.44 per oz. silver.

The PEA was based on a resource estimate released in November 2010 and doesn’t include six new veins that were recently discovered, or extensions of known resources.

Nine drills are currently operating on the property to update the resource estimate and a feasibility study is due by year-end. Baseline environmental studies have started, and the company believes that permitting for full mine operations will be completed at the same time as the feasibility study.

Exploration this year will concentrate on expanding the resource; converting inferred resources to the measured and indicated categories; and delineating gold and silver mineralization on the most-recently discovered veins so that they can be included in the updated resource estimate and feasibility study.

At presstime in Toronto, US Gold was trading at $7.54 per share, within a 52-week low of $2.64 per share on Feb. 25, 2010 and a high of $8.13 on Dec. 31.

The company has 117.7 million shares outstanding.