Spanish Mountain aims for improved project economics

Vancouver-based explorer Spanish Mountain Gold (SPA-V) is on track to release updated economics for its Spanish Mountain gold project 70 km northeast of Williams Lake, B.C., by October.

The company pushed back the date on its pre-feasibility study after discovering the Phoenix gold zone 2 km west of its current deposit, but finished up infill drilling at its Main and North zones in time to release an updated resource for the project on July 24.

Spanish Mountain had considered incorporating Phoenix into its upcoming feasibility study to boost resources, but the new gold discovery could be placed on the backburner until feasibility is completed over the next three months.

“We’re focused on delineation drilling at the main resource more than expansion of the Phoenix zone,” president and CEO Brian Groves comments during a phone interview. “We think it is a far more judicious use of our cash at this point to deliver the updated economic study. Since we could only drill Phoenix to an inferred level, we wouldn’t be including it in the study, anyway. Our mine plan could likely accommodate Phoenix as it stands, so we have that available whenever we want to pursue it.”

Spanish Mountain has hit long, low-grade gold intercepts at Phoenix that are typical of the project. The company announced its new discovery in late 2012, with highlights of 93 metres grading 0.6 gram gold per tonne in hole 30, 55 metres of 0.82 gram gold in hole 23 and 56 metres of 0.5 gram gold in hole 21.

According to Groves, the company determined it was more important to hit a resource threshold he describes as necessary to solidify the Spanish Mountain deposit as “viable and economic.” This threshold hovers around 3 million oz. gold, and Spanish Mountain achieved its goal when it released a resource update on July 24.

Spanish Mountain’s Main and North zones hold 216 million measured and indicated tonnes averaging 0.46 gram gold and 0.68 gram silver, for 3.2 million contained tonnes gold and 4.8 million contained tonnes silver. Spanish Mountain’s gold cut-off is a low 0.2 gram gold.

“I think some of the blowback on low-grade, high-tonnage deposits has a lot to do with companies operating in energy-intensive environments,” Groves explains when asked about the cut-off. “If you’re in a lower-cost energy jurisdiction like B.C., it lowers your operational costs dramatically. From our perspective people have to look at the overall economics over the grade. We’re using a pretty aggressive cut-off grade, but I think we need to focus on how great the infrastructure is in the area, especially in regards to cheap hydroelectric rates.”

An updated economic study on the project remains integral, especially since Spanish Mountain’s preliminary economic assessment from 2010 looks fairly dated. At the time, the company used a US$1,100 per oz. gold price in its models, as well as lower input costs that have risen over the past two years.

In November 2010, the project was expected to cost US$490 million in initial capital expenditures and carry a pre-tax net present value of US$205 million with a 14.7% internal rate of return at a 5% discount rate. Groves says the company figures costs have jumped between 15% and 18% since the last study, though he also speculates the updated model could conservatively use a gold price around the US$1,250 per oz. level.

The company should benefit from strong infrastructure in an area that already boasts productive mines, including Imperial Metals’ (III-T, IPMLF-O) nearby Mount Polley copper-gold operation. Spanish Mountain’s site allows for all-weather road access, grid power access at around 4¢ per kilowatt hour and potential labour pools in nearby Williams Lake and surrounding communities.

“We know that the biggest drivers in cost escalation in some of the more recent capital expenditure overruns are the basic stuff like steel and concrete,” Groves comments. “We are in an area with above-average unemployment, and that may present some real opportunities in terms of labour availability, but if there is one thing that keeps me awake at night, it’s the question of where we find highly qualified people to operate a mine.”

Fortunately for Groves, those concerns look to be at least two years away, with Spanish Mountain targeting a production date in mid-2015. In the meantime the company will have its hands full with further metallurgical studies — looking to improve a 90% recovery rate — and engineering work. Groves says the company will be looking at potential project financing following the prefeasibility stage.

“It will really come down to the trade-off between debt and equity when it comes to project development,” he comments. “We know the European lenders are still very much in play on the debt side, and I think we’re seeing some recent capital raisings where those lenders are quite conspicuous. Once we have the updated study in hand, we’ll start addressing the best split for eventual financings.”

Spanish Mountain will have to watch its equity dilution when considering financing options, with 166 million shares outstanding. Trade velocities have slowed considerably for the company, which averages around 89,900 share volumes per day and has been in the 40¢–50¢ range since mid-March.

Groves says that Spanish Mountain has US$6 million in the bank, which could see it through the remainder of the year. Company shares stayed relatively flat following news of the updated resource, closing at 40¢ on July 27.