Clock starts ticking for Geologix

For Geologix Explorations (GIX-T) the clock has begun to tick.

Silver Standard Resources (SSO-T, SSRI-Q) triggered a countdown of 60 days for the company to raise upwards of US$30 million if it wants to acquire the large gold, silver, lead and zinc San Agustin project in Mexico.

Silver Standard immediately accepted the resource estimate provided by Geologix that determined the option price for the project, thus turning the heat on Geologix.

And while Silver Standard could have had the resource estimate audited — thus giving Geologix an extra month to raise the capital – their swift action didn’t catch Geologix off guard.

“We suspected they wanted San Agustin back in the worst way,”  says Dunham Craig, Geologix’s president and chief executive. 

For its part, Silver Standard says the quick acceptance came about because of its comfort level with the accuracy of the estimate and not out of a desire to stick it to Geologix.

While conceding that the US$34.3 million payment the estimate results in was on the lower end of its expectations, Silver Standard’s president and chief executive Bob Quartermain says both the press releases provided by Geologix and its faith in Wardrop Engineering — the firm that did the estimate — allowed it to get a clear idea of what would be coming.

Regardless of its intentions, Silver Standard stands to get the project back free and clear if Geologix can’t come up with US$34.3 million in 60 days.

“It puts considerable pressure on us to raise the funds but that’s okay we’re use to a good challenge,” Craig says from the company’s head office in Vancouver.

The good news for Geologix is that the purchase price came in significantly lower than expected as the company had been preparing the market for a price tag between US$42 and US$55 million.

Staying with the positive, Craig says the company’s hard work at exploring all of its capital raising options is producing some results, with several parties having expressed interest.

“In November we were chewing our nails,” Craig says of the conditions for raising capital, “but in December with precious metal price support, and some of the volatility coming out of the market in the last week or two, there is some good appetite for something that is this fairly priced. So it will just depend on us making the best deal we can for our shareholders.”

To further its cause along, the company has retained CIBC World Markets as its financial advisor.

Craig confirmed past statements that the company’s top choices, in order of appeal, would be: raising the funds through an equity financing, getting private capital to take a silent position or forming a merger or a joint venture. Craig says he considers debt financing to be too high risk and therefore only a final option.

“So many companies got into trouble with debt financing,” he explains. “The philosophy a year or so ago was to do a debt financing to close the deal and then raise equity….we’ve seen since then that the market collapsed and companies were left with having to do really dilutive share issuance to cover a debt call.”

If Geologix can come through, it will be acquiring a rich deposit at a bargain price. Using the company’s updated resource estimate Geologix will be paying just US$4 per gold equivalent oz. in the ground. That number was calculated using four year price averages for gold, silver, zinc and lead.

And paying Silver Standard would give Geologix 100% ownership of the project with a 2.5% net smelter return payable to Silver Standard.

The option payment was calculated on a per ounce basis of gold and silver resources that lie within a pre-determined area at the site. Geologix pays nothing on lead or zinc contained in the area, and nothing on gold, silver, lead and zinc that lie outside of the area.

In its most recent resource update on San Agustin — which lies 85 km outside of Durango in western Mexico — it outlined 122.2 million indicated tonnes grading 0.41 gram gold per tonne, 12.3 grams silver, 0.49% zinc and 0.06% lead. Inferred resources add 92.9 million tonnes grading 0.36 gram gold, 12.5 grams silver, 0.48% zinc and 0.07% lead.

Most of the resource lies in a sulphide zone that holds 100.4 million of the indicated tonnes and 81.1 million of the inferred tonnes. Metal grades are fairly consistent between the oxide and sulphide portions of the deposit, with the oxide zone having a marginally higher silver grade.

The breakdown of the resource estimate submitted to Silver Standard (which is narrower in scope than the company’s own updated resource estimate) put 1.6 million oz. of gold, 48.3 million oz. of silver, 161 million lbs of lead and 1.3 million lbs of zinc in the indicated category.

Of that total 478,017 oz of gold and 12.7 million oz. of silver were subject to payment to Silver Standard.

Another 1.08 million oz. of gold, 37 million oz. of silver, 143 million lbs of lead, and 983 million lbs of zinc were placed in the inferred category.

Of that total 196,634 oz. of gold and 11.4 million oz. of silver are subject to payment.