Silver Standard Payout

Sometimes exploration success comes at a price, and this is a fact that the management and shareholders of Geologix Explorations are currently having to face up to. Thanks to its exploration acumen, Geologix has transformed a historical resource of 11.2 million tonnes averaging 0.96 grams gold and 12.86 grams silver in the Main Zone of its San Agustin gold-silver-zinc property in Mexico into a new 43-101 complaint resource estimate containing nearly 1.6 million ounces of gold and over 41 million ounces of silver. Sounds good, so what’s the issue?

Well, under the 2006 deal with Silver Standard Resources, Geologix had to issue one million shares and spend US$2 million on exploration drilling within two years. The junior also had to prepare a resource estimate based on 15,000 metres of drilling and pay Silver Standard based on the amount of contained gold and silver in the estimate. With this in mind, Geologix confined its drilling to only the known Main Zone and to Zone II, in an effort to limit the payout. Still, the new resource came in at nearly 60.8 million tonnes grading 0.49 grams gold and 11.7 grams silver per tonne, with 0.51% zinc in the indicated category, and nearly 53.4 million tonnes running 0.42 grams gold and 14.6 grams silver, with 0.59% zinc in the inferred category.

Based on current metals prices, the option deal calls for Geologix to pay US$15 per ounce of gold, and US$1 per ounce of silver in the measured, indicated and inferred resource categories. That means that about US$23.92 million is payable to Silver Standard for the gold credits, and US$41.69 million is due for the silver credits. In other words, Geologix needs to come up with approximately US$65.61 million to hold San Agustin outright, less a 2.5% net smelter return royalty capped at two million ounces of gold equivalent.

In order to work out a strategy to exercise the option, Geologix appointed Cynthia Thomas, and her company Conseil Advisory Services, as its Financial Advisor. Cynthia has the right background and credentials to complete the job, including a stint as Director, Mining Group, Investment Banking for Scotia McLeod in the late 1990s. She’s also on the board of Victory Nickel. She’s now exploring a wide range of alternatives for funding the exercise price, which may or may not include equity.

Not ones to sit on their hands, and with the San Agustin option agreement drilling now complete, the management of Geologix are moving full steam ahead on expanding the resource base on this low grade but favourably located project. The idea is also to test targets on strike 800 metres northeast, and 200 metres southwest.

So far, the new drill holes have more than doubled the width of Zone II to 425 metres, with intercepts of 312.9 metres grading 0.49 grams gold per tonne, 23.12 grams silver per tonne, 0.15% lead and 0.81% zinc from 44 metres depth. Other strong results from the new round of drilling include: hole 179, which returned 0.24 grams gold, 19.75 grams silver, 0.14% lead and 0.48% zinc over 366 metres from surface in Zone II; and hole 177, which cut 23 metres grading 0.49 grams gold, 27.37 grams silver, 0.16% lead and 0.76% zinc from eight metres depth in a hole in the southwestern corner of the current prospective area.

Meanwhile, step out drilling to the northwest in Zone II returned a 317.75 metre section running 0.32 grams gold and 19.1 grams silver per tonne, plus 0.15% lead and 0.89% zinc, as well as a second zone down to depths of nearly 417 metres averaging 0.5 grams gold, 13.3 grams silver per tonne, plus 1.47% zinc over 58.95 metres.

Overall, company President Dunham Craig likes what he sees. “Phase III drilling continues to expand mineralization beyond the outline used to calculate the June 2008 resource estimate at a rapid rate with no end in sight as drill holes continue to end in mineralization”, he says. “Our deep drilling is now underway and, coupled with the current flank drilling, we expect our second resource estimate this fall to be significantly larger. Considering the project's excellent infrastructure and size increase, we are excited that this is becoming one of the larger polymetallic bulk tonnage projects in Mexico.”

Despite the exploration results, shares in Geologix Explorations are trading in the bottom end of their 52-week trading range at about C$1.55. The problem overhanging its shares, alongside a weak junior market generally, is the payment due to Silver Standard to exercise the option. Based on the results to date and the continuing strength in gold and silver prices, one has to wonder if Silver Standard might instead take a big equity stake in Geologix as payment, or perhaps some combination of cash and stock. The 576 hectare property lies only 85 kilometres north of Durango City and national power lines run six kilometres east of the property. In other words, infrastructure is excellent. Silver Standard chief executive Robert Quartermain is one of the smartest guys in the mining game, so rest assured he is watching and running the numbers as the San Agustin resource grows.