A Win-Win For Geologix And Silver Standard

Lately, in the market, there has been a lot of confusion surrounding Geologix Explorations’ option payment to Silver Standard Resources. So much so in fact that last week Geologix’s chief executive Dunham Craig hosted an open conference call to deal with any and all questions on the central issue: what’s happening at the San Agustin property. Minews, being curious, joined in, and has resolved to clear up the confusion.
Most of the questions that Dunham Craig has to field, he says, go something like this: “why is Geologix still drilling when the resource estimate and the resulting payment to Silver Standard has yet to be finalized?” When one takes a quick look at the explanation of the option agreement on the San Agustin page on Geologix’s website, it is easy to see why the market may be confused. Geologix’s payment due to Silver Standard for each ounce of gold and silver is not calculated based on “the property” – as the website vaguely states – but instead on defined areas within Main Zone, Zone 2 and Zone 4 (marked in red on Geologix’s latest corporate presentation).
These areas were drilled extensively and yielded an impressive June 2008 resource estimate of approximately 1.6 million ounces of gold and 42 million ounces of silver. Since lead and zinc were never a part of the initial agreement with Silver Standard, all lead-zinc tonnage discovered on the property “can be thought of as a bonus.” The June estimate, Mr. Craig states, was “effectively the maximum resource that could be used, because virtually all of the 15,000 metres of drilling required by the initial agreement had been met”. Mr. Craig believes that the payment to Silver Standard will be capped in the range of C$60 million. This approximation was echoed by Silver Standard’s chief executive Robert Quartermain in a later conversation. The exact payment amount, though, will be finalized towards the end of September, when an updated resource estimate is to be released.
To finance the purchase, Geologix is presently evaluating a number of options – the first of which is a joint venture with a few choice suitors. In August, the company hosted three separate tours of San Agustin. There are four more booked for September. All this fishing, Mr. Craig says, would be so much more effective if the company’s resource estimate could break through three million ounces of gold and 100 million ounces of silver – at those levels, Mr. Craig believes that Geologix would become a juicy target for larger companies.
With these levels in its sights, and fully aware that an increased resource makes the C$60 million cash payment to Silver Standard look digestible, Geologix has been actively working to increase San Agustin’s resource. And while we won’t know the full results from the latest phase of the drill programme until the end of September, the aim is to expand the deposit perimeter and depth, and to locate feeder zones. So far, the new drill holes have increased Zone 2’s width to 600 metres and, encouragingly, with the edges not yet defined. Drilling also seems to indicate that Zone 4 and the Main Zone may join together. After encountering encouraging intercepts, including 36.05 metres grading 0.73 grams gold per tonne, 161.67 grams silver per tonne, 1.18% lead and 0.45% zinc from 22 metres depth, the company also believes it has identified a higher grade structural feeder zone. Other strong results include: 154 metres grading 0.33 grams gold per tonne, 13.57 grams silver per tonne, 0.11% lead and 0.70% zinc. If Silver Standard’s own La Pitarrilla Project, located just to the north of Geologix’s property, can be seen as a hint as to San Agustin’s potential, then Geologix should not have a problem increasing its resource.
La Pitarrilla is one of Silver Standard’s premier properties. In May, Minews reported that recent drill results from the property had pushed Pitarrilla into a ranking up there with the largest silver discoveries of the last decade. Well, things have gotten even better for Silver Standard: in the process of preparing a pre-feasibility study on the deposit the company determined that the silver-equivalent cut-off may have understated the silver and base metal resources. As a result, resources at Pitarrilla have been increased by another 9.5 per cent. The total measured resource now stands at 159.9 million ounces of silver, while indicated resources total 483.7 million ounces, and inferred resources total 82.3 million ounces. The pre-feasibility study is expected to be out sometime in the next quarter.
Silver Standard’s chief executive Robert Quartermain is a strong believer in the region and is looking forward to being able to review San Agustin’s updated resource estimate next month. “It appears that San Agustin,” Mr. Quartermain says, “will be beneficial to both Silver Standard and Geologix”. Silver Standard receives a healthy profit for its initial investment and Geologix gets a very promising deposit. At the very least, he says, it “certainly warrants a closer look when the estimate is published next month.”