Gone are the days of the entire province of British Columbia being seen as Canada’s largest National Park. Friendlier treatment of miners has led to a more bullish tone in BC, with the added confidence of a government willing to welcome more mines. The current BC Liberal Party government announced earlier this year a target of creating up to eight new mines in the province by 2015.
Premier Christy Clark indicated this sentiment by stating, “Long-term growth in our mining industry will translate into strong economic growth for our communities, First Nations and the province, and thousands of well-paying jobs that will benefit families in British Columbia.”
But before any mines are built, there are many hoops to jump through and a lot of factors to consider. Take for example, Spanish Mountain Gold [SPA:CA], which is in the process of checking off the boxes on the To-Do list, in order to meet its goal of one day opening up its own mine within the central heart of British Columbia.
This week, on its Spanish Mountain Project, the company released a brand new Preliminary Economic Assessment (‘PEA’) that replaces the previous one put out in 2010. Thanks to a significant amount of infill drilling (two full drill programs since the initial PEA), there have been a few scopes of change since the last one, and this allows the company to prep for further economic studies with more relevant economics.
Within the newly minted PEA are some highlights of note that include a focus on the pivotal first three years of production. Over a 15-year mine life, the project is expected to produce an average of 197,000 ounces per year of Au. But the first three years of production will yield a higher grade, at 0.70 g/t Au, for an average of 268,000 ounces per year. These initial years will also be cheaper to produce, with cash costs averaging US$526 per ounce, compared to US$774 per ounce over the rest of the life of the mine (‘LOM’).
In total, spanning the entire LOM, the project is expected to produce a total of 2.8 million ounces of gold and an additional million ounces of silver.
Arguably more important than perhaps the latest PEA, though, may be the relationships that the company has fostered with the local communities, including with three separate Aboriginal bands, all of which have signed agreements. Technically speaking, in Canada, only the government is obligated to consult with Aboriginal communities first, but Spanish Mountain is part of a new wave of companies that are reaching out ahead of time and going beyond the minimum requirements by a long shot.
Spanish Mountain’s President and CEO, Brian Groves, has shown a solid commitment to making time for face-to-face meetings with the locals with whom his company is engaged Along with offering employment opportunities for locals to get involved with the exploration process, Groves and his team have done a good job of educating the community and guiding them towards realistic expectations. It’s easy for those unfamiliar with the sector to jump to the conclusion that a mine is immediately on the horizon., especially when they see so many drills turning. Though the goal is to get to the finish line and bring a mine into production, complete with jobs for everyone in the vicinity, there are still plenty of steps along the way that need to be taken before construction can begin.
So while it’s a responsible action to pass along as much education as possible, and to temper expectations, Spanish Mountain also has much to learn. Though there are already established mines nearby in operation (Mount Polley, operated by Imperial Metals [III:CA], and Gibraltar, owned by Taseko Mines [TKO:CA]), the management team at Spanish Mountain recognizes that they are still exploring in someone’s backyard and that they can learn a lot from their neighbours and keep everyone happy.
LOW COST, LOW STRIP RATE
Upon first glance, the grades presented at Spanish Mountain are reasonably low-at a rate of 0.48 g/t. The company is first to admit this fact, but low grades don’t necessarily mean that the project is uneconomic, especially given the secure jurisdiction, and the bargains available on the other costs involved.
First off, we know with the Bond Work Indicies (BWI) that Spanish Mountain (with a 13 BWI) is quite low, meaning they’ve got quite soft rock to work with. Soft rock means it’s far easier to mine and process. The resource is sediment based, which tend to be huge deposits, but in this case it’s a low grade with a huge bulk tonnage.
Next, we also know that the project will involve a low strip ratio of 1.3:1 for the first 3 years, and only 2:3 for the rest of the life of the mine. Again, the lower the strip ratio, the cheaper the mining operation as well, and given that the life of the mine is pegged at 14.4 years, the added savings in terms of strip ratio will make a big difference in the last half of the mine’s life.
Lastly, the location itself is very conducive to a large-scale operation with cost savings in many places. Already the area has proven its ability to handle the operations at Mount Polley and Gibraltar, but the Williams Lake area still has an unemployment rate above 10%, which presents a willing workforce that wants to see this mine happen. Infrastructurally speaking, the location could not be better, with paved roads within 5km of the property, nearby powerlines, and a nearby water supply. Power is a major incentive in this region given its bargain basement pricing of $0.04/KWh. Compared to Quebec and Ontario where it’s not unheard of to shell out $0.10-$0.12/KWh for power, this region of BC is one of the most affordable places in North America to draw off the grid. The company expects to only have to build about 30km of powerlines to connect to the area’s substation.
Should the company get to its 2016 production target, it would see the mine jump immediately to 30,000-40,000 tonne/day. Given that there are higher grade pockets clost to the surface, when assessing starter pit scenarios, it’s believed that payback time is greatly reduced. In 2010 the payback period was pegged at 4.1 years, but with the most recent PEA, that number has changed to closer to 3 years, and that’s with today’s gold prices, which could very realistically be increased between now and 2015.
Looking up and down the company roll call, there are a lot of faces there is an apparent Placer Dome influence on the company. Brian Groves was with Placer Dome for part of his career, as was CFO Larry Yau.. Completing the rest of the team are COO Morris Beattie, and a very accomplished Board that includes prominent investors and authors Jim Rogers (Spanish Mountain being the only public company whose Board he is a part of), and Don Coxe.
These last two figures bring some added advantages that other companies not be able to reap. Each of them are capable of bringing access to capital when it comes time to raise funds for construction, as well as bringing in excellent connections among institutions. The investment community likes these two, a lot, and the added credibility should help along the way, not only to the North American audience, but also to investors in Asia as well, especially among a sector that hasn’t had the best reputation as of late.
With 35% of the company’s shares held by insiders and management, there is an added buffer between the company and any unforeseen hostile/unwanted buyouts en route to the next stage of development.
THE BOTTOM LINE
Spanish Mountain has situated itself nicely within the heart of BC. Having already established positive relationships with the local communities and governments, it’s hard to see any hiccups in the community relations department.
Yes, it’s low grade, but what the Spanish Mountain project lacks in grade, it makes up for in infrastructure, location and many other factors that shave down the costs to make it more economically sound. As well, it cannot be ignore how LARGE the deposit is. At 3.2m measured &indicated, and 3.65m inferred, the Spanish Mountain Project is one of the biggest deposits held by an independent junior in North America. This points to the company’s potential attractiveness to a major down the road.
The goal for the company is to produce over 200,000 oz Au per year for 14+ years from an open pit mine with a low strip ratio. The deposit still has a large inferred resource of 3.65m ounces which can be reclassified to Measured & Indicated further on in the development, which could allow for a push back of the pit walls in order to further increase the life of the mine.
One last thing to consider when looking at Spanish Mountain is the value per ounce calculation. Compared to other projects at a similar level, Spanish Mountain’s Measured & Indicated $15 AMC/oz, and $7 AMC/oz is among the lowest of its class. Most importantly, this tells us that the company is likely quite undervalued at this time, which is something everyone wants to hear.
G. Joel Chury
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