Geologix’s Loss Is Silver Standard’s Gain

Unable to get its hands on the money it needed to make a final payment on the San Agustin poly-metallic deposit, Geologix Explorations (GIX-T, GXEXF-O) must walk away from a project it has spent most of its resources on over the last two years.

The company couldn’t drum up the US$34.3 million it needed to pay Silver Standard Resources (SSO-T, SSRI-Q) as the final condition to earn a 100% interest in San Agustin, in Mexico, leaving the project and all the information Geologix has compiled on it, to be handed over to Silver Standard free of charge.

And while the collapse of credit markets has injured so many exploration juniors, Geologix among them, Silver Standard stands as a rare beneficiary.

Under a 2006 option agreement for San Agustin, Geologix was to issue 1 million shares to Silver Standard, spend $2 million on exploration, and make a final payment based on delineated resources in a predetermined area of the project.

The deadline for the final payment — triggered by the completion of a resource estimate in early December 2008 — was Feb. 10.

A lack of credit and poor equity options left Geologix to try and find a partner that would finance the development of San Agustin with Geologix at the helm.

But despite having several unnamed companies perform due diligence on the project, in the end, none stepped up to the plate.

Geologix tried to have Silver Standard extend the deadline for the payment, arguing that it needed more time to refine some metallurgical tests and to secure long-term land-access agreements with the locals, but to no avail.

Silver Standard’s immobility on the issue likely came as no surprise to Geologix, given the pressure Silver Standard applied to the company in December.

The option agreement between the two companies called for Geologix to deliver a resource estimate on a specifically defined area to Silver Standard by early December 2008.

Once delivered, Silver Standard had one month to audit the report, and then if approved, Geologix would have 60 days to raise the money required to earn into the project. The amount of money to be paid by Geologix was determined by metrics based on the ounces in the ground as laid out by the resource estimate.

But even though that estimate produced a much lower payment than Silver Standard expected — it was estimated to be between US$45 million and US$55 million but came in at just US$34 million — Silver Standard said it would forgo the audit and accepted the report, immediately starting the 60-day clock on Geologix.

That buzzer has now sounded and things have ended disappointingly for Geologix. But it has all played out exceptionally well for Silver Standard, as it has basically received a free resource estimate on what has shaped up to be a very large deposit.

Geologix’s most recent resource estimate put 122.2 million tonnes grading 0.41 gram gold per tonne, 12.3 grams silver, 0.49% zinc and 0.06% lead in the indicated category. That works out to 1.61 million oz. gold, 48.3 million oz. silver, 161 million lbs. lead and 1.3 billion lbs. zinc.

San Agustin is located 85 km north of Durango City, in Durango, Mexico.

The day after Geologix announced it was unable to raise the money, Silver Standard announced it had submitted a preliminary prospectus that would give it the option to raise up to US$150 million over the next two years. Those funds would, no doubt, come in handy towards the development of San Agustin.

As for Geologix, the company says it will focus on its claims that lie near San Agustin.

“The company does retain mineral rights on the adjacent Consejo and El Carmen claims where, from our mapping, sampling and geophysics, we consider significant exploration upside exists.” Dunham Craig, Geologix’s president and chief executive said in a statement.

For the period ending Sept. 30, 2008, Geologix had $8.7 million in cash on its balance sheet.

At presstime, Geologix shares were trading for 13.5¢, down 44% since the news was announced. Silver Standard shares have gained slightly over that period, trading at $23.77 at presstime.