Last week, Geologix delivered what the market and investors had been anticipating for several weeks, and though some onlookers grew anxious with the slight delay, it appears it was well worth the wait. On November 6th, the Company released the results of a much anticipated new NI 43-101 compliant resource estimate from its San Agustin project in Durango, Mexico. The new estimate brings the project’s resource up to over 210 million tonnes with 2.7 million ounces gold, 85.6 million ounces silver, 304 million pounds lead, and 2.3 billion pounds of zinc (Indicated and Inferred) in contained metals. These numbers certainly elevate the San Agustin project into the top tier of advanced-stage exploration projects in Mexico.
A Growing Resource:
Delineating a resource of this scale is impressive for any junior company, but perhaps more remarkable is how quickly and systematically the Geologix team expanded this project. Two years ago when Geologix first optioned the San Agustin from Silver Standard Resources, the project hosted an admirable but unimpressive resource of just over 400,000 ounces gold equivalent, and prior operators seemed to have exhausted the project’s potential. The technical-savvy minds at Geologix, however, saw the potential for something more and in just over 20 months as operator brought about a tenfold increase in the project’s resource - from the 400k to over 5.0 million ounces gold equivalent announced in June 2008. Less than five months later, management has done it again, doubling the Indicated tonnage and bringing the total gold equivalent resource up to today’s 8.7 million ounces.
Furthermore, a mere 20% of the project area has been drill tested to date, so there are multiple key target areas yet to be tested for additional mineralization. It’s easy to see why management believes there’s significantly more to this deposit than the current estimate reports, and that ongoing exploration and drilling could lead to yet another resource expansion.
Understanding the Resource:
The experienced Geologix team is made up of individuals who have not only made previous discoveries and advanced projects, but have successfully taken projects through to profitable production. This is not an overly promotional “pump and dump” group. They know the appropriate “acid tests” necessary to determine the project’s realistic potential before expending excessive capital. To date, even under the conservative parameters, the Company is optimistic about the potential for an eventual profitable large-scale mining operation at the San Agustin. I’m told based on the level of interest being expressed (on a possible deal at San Agustin), it appears the majors agree.
Following the latest resource announcement, some onlookers questioned the metal prices used in the estimate, which were four year averages (this is the criteria imposed by regulators for all NI 43-101 reporting). It’s worth noting that the Company conducted internal studies aimed at assessing the Project’s sensitivity to metal prices. In the internal studies, the Company used 7 year trend prices, increasing the price of gold and silver and reducing the price of zinc. The results clearly indicated that the Project’s viability is not significantly impacted by fluctuations in metal prices.
A rough estimate based on the numbers given in the latest resource report indicates the Project’s NPV (Net Present Value) could be upwards of $1.6 billion (before capital cost and expected discounts). The Company has a high degree of confidence it can expand this significantly.
The Final Hurdle:
With this latest resource estimate now completed, the next hurdle for Geologix is the outstanding option payment due to Silver Standard in the coming months. Though the actual dollar amount remains unknown, it’s widely believed to be in the tens of millions of dollars. I am, of course, very confident in the competence of this experienced management team and board of directors, and believe that the question is not “if” a deal will be completed, but “how. ”
The Company’s leverage lies in the underlying value of the San Agustin project. The appetite for large-scale gold and silver projects like the San Agustin, with economically viable ounces in the ground, should provide leverage in structuring a deal. To put the “price tag” in perspective, it’s worth noting that Geologix only pays for a portion of the overall gold and silver, and pays nothing for lead and zinc. So, even if the purchase price is as high as $50 million, this equates to a mere $5.81 per ounce of gold equivalent. For most companies, the cost to find a deposit is somewhere between $35 and $100 per ounce.
Goldcorp, for instance, paid top dollar for reserves during the merger with Glamis. The payback for Goldcorp, however, came from doubling the reserves at Penasquito which in the end made the original cost seem like a bargain. Geologix’s San Agustin project which is untapped at depth and open in three directions certainly appears to have the necessary upside potential.
Getting Across the Finish Line:
So, how will Geologix get over the hurdle of the final option payment and guide the Company across the finish line in a manner that best serves the company and its shareholders?
With the latest resource estimate now completed and the internal sub-set resource related to Silver Standard’s gold and silver resource expected soon, the Company is becoming better equipped to engage in more detailed negotiations with interested parties. In these volatile and uncertain markets, the Company is looking to explore a number of scenarios and position itself to strike with the best deal at the appropriate time. Current options being explored include, but are not limited to, equity financing under favorable terms, possible private equity stake in the project, merger with a cash rich junior, or a joint venture/earn in arrangement with a major mining company.
In today’s uncertain markets, I believe all of the above noted options have merit, and I anticipate management to successfully secure the deal that gives Geologix and its shareholders the greatest value and leverage from this significant property asset.
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