Geologix keeps its simple at Tepal

TEPALCATEPEC, MEXICO — In early 2009 Geologix Explorations (GIX-T) found itself at a turning point. The company had just decided not to exercise its right to buy the San Agustin polymetallic project from Silver Standard Resources (SSO-T, SSRI-Q), leaving it with $17 million in the bank but no project to explore.

Rather than bemoan the loss of San Agustin, the Geologix team decided to see the situation as an opportunity. The recession was forcing many companies to sell assets and, as president and CEO Dunham Craig said at the time, that created “. . . an opportunity not seen since late 2002 and early 2003, where significantly advanced mineral resource assets are available at discounted entry points ahead of what many believe will be a significant commodity bull market.”

So the mission became searching out the right acquisitions. Craig and his vice-president of exploration, Siegfried Weidner, looked at more than 300 projects over the next eight months. By the end of the year, they had inked option agreements for three.

The third project, Tepal, was clearly the flagship. Located in Michoacan state, the project came with an open-pittable porphyry deposit containing 1.2 million oz. gold and 412 million lbs. copper surrounded by, as Craig describes it, kilometres of blitzed rock indicative of a much larger system. Equally importantly, the project is near a highway, grid power, and a rail line running to the largest port in the country, and the surface rights are owned by a few private ranchers, not an ejido.

The Tepal deal only closed in May 2010. In the months since then, the Geologix team has been busy completing a preliminary economic assessment on the current resource and drilling 55 resource expansion holes, the results of which looks set to grow the deposit considerably in an updated estimate due out in a few months.

Craig and Weidner say Tepal is working out well because they were very particular in their project criteria: “We believe in simple projects, because simple projects work. And we believe in gold, copper, and making a profit.”

The project

Tepal is certainly a simple project, from geology and pit design through to metallurgy and infrastructure. The property is located within the Coastal Range of southwest Mexico, south of the Trans-Mexican volcanic belt. Basement plutons, stocks, and plugs intrude weakly metamorphosed sedimentary and volcanic rocks that are part of an accreted Mesozoic island arc assemblage. In places, basalts locally overlie the basement formations.

Mineralization is classic porphyry, comprising structurally controlled zones of stockwork and disseminated copper sulphides accompanied by gold. A north-northwest trending fault runs through the centre of the property and the mineralization outlined to date occurs along a line of three tonalite stocks just west of the fault.

All three stocks are composed of multiple intrusive phases; the porphyry and breccia phases host the highest grades of copper and gold. Generally, the North and South deposits are both zoned, with a gold-rich core transitioning to a copper dominant periphery surrounded by a barren pyritic halo.

The North and South deposits are aligned west of that main north-northwest fault, separated by 250 metres of unmineralized ground. The North zone is 1 km long and averages 300 metres in width; the South zone is rounder, striking for 500 metres and stretching across 300 metres width. To date mineralization has been tracked to 200 metres depth but most holes ended in mineralization, leaving both deposits open at depth. In fact, in many holes the best mineralization came right at the bottom.

The project has been explored intermittently for more than 30 years, starting with Inco in 1972 and followed by Teck Resources (TCK. B-T, TCK-N), Hecla Mining (HL-N) and Arian Silver (AGQ-V). For each, the project did not work out for a different reason: for Teck the grades were too low, Arian was looking for silver, not copper and gold. In addition, Tepal had not been a company’s prime focus, until Geologix.

“We’re the first company to take this project to our hearts — it’s not one of 40 projects for us, it’s our flagship, and that’s why we’ve made the progress we’ve made,” says Craig.

When Geologix arrived at Tepal the team had to make a decision: should they play it safe, drilling within the known mineralization to upgrade the resource, or focus on expansion? Given that half the reason they liked the project was its potential to grow, they decided on the latter.

The current 11,500-metre drill program is focused exclusively on expanding the known resources and loosen testing exploration targets. Stepping out 50 to 150 metres from the edges of the North and South deposits, drills are consistently returning mineralization and both zones remain open in several directions. For example, in the latest set of results hole 20 returned 95 metres of 1.18 grams gold and 0.39% copper, while hole 19 cut 112 metres averaging 0.35 gram gold and 0.21% copper.

The company is also probing a new area to the east, known as Tizate, and says the core looks good, though no results have yet been released. Weidner is confident the company will have a resource defined at Tizate within a few months, around the same time they update the resources at the North and South deposits.

“We haven’t done any drilling within the resource blocks yet because our goal has been to grow this as fast as possible,” says Weidner. “We’re now comfortable there’s no problem increasing the resources.”

Increased resources will improve a preliminary economic assessment that already looks pretty strong. Geologix prepared the assessment based on the existing resource, and used metal prices of US$900 per oz. gold and US$2.75 per lb. copper.

A 23,000-tonne-per-day sulphide processing facility combined with a 10,000-tonne-per-day heap-leach operation at Tepal could produce 68,500 oz. gold and 29 million lbs. copper annually for nine years. It would cost US$286 million to build the mine.

For that investment, Tepal should be able to produce a gold ounce for US$358 and a pound of copper for US$1.09. Those low cash costs lead to a 28% internal rate of return, enabling capital payback in 4.4 years. The project carries a net present value of US$258 million, using a 5% discount.

The reason capital costs are relatively low is that the project topography lends itself well to mine development and the necessary infrastructure is all readily accessible. A paved road passes within a few kilometres of the site and a railhead runs parallel to the road, connecting smelters in the interior to the biggest port in Mexico, at Lararo Cardenas. The mine could connect to a power grid 14 km away and the grid has 25 megawatts of capacity available, which is just right. And the closest town, called Tepalcatepec, is home to a well-educated work force that is keen for jobs closer to home.

The deposit as presently modeled carries a strip ratio of just 0.75-to-1 and nearby there is a natural basin that will work well as a tailings facil- ity. As Craig puts it, “Everything just fits into this property beautifully, like fingers in a glove.”

Metallurgy fits in well too — it is “absolutely dead simple,” according to Weidner. A fairly coarse grind — 134 microns — returns sulphide recoveries averaging 87.4% for copper and 60.7% for gold. The concentrate is also clean, with no smelter penalties. In the oxide heap-leach tests, gold recoveries averaged 78.4%.

Geologix is considering adding another step to the process: sulphidation- acidification-recycling-thickening (SART) technology, which would recover the copper contained in the cyanide-leach solution and allow the mine to recycle cyanide. In SART, sodium hydrosulphide is used to both precipitate copper from cyanide complexes and convert cyanide to hydrogen cyanide gas under weakly acidic conditions. The latter function means the cyanide can
be recycled back into the leach process. And the recovery of copper is beneficial both in itself and because it removes copper from the tailings, reducing toxicity.

“We grind away to people about how good the infrastructure is here, because having been slapped silly through the mine building process I know what capital costs overruns are all about, and I’ve learned that you want a project where the ball rolls downhill, not where you have to push it up,” says Craig.

Craig adds that, after spending six months at Tepal, he feels quite comfortable with the project from a technical standpoint, especially since he is confident the resource will grow considerably. Now the focus has to shift to community relations and permitting.

At Tepal, there are two aspects to community relations. The more direct is the fact that Geologix does not own the surface rights to the project. There are three ranchers who own the land covering Tepal, though one of them owns 95% of it. Craig says that, while surface rights acquisition remains perhaps the biggest risk at Tepal, he is not concerned. The main rancher in question is a business man, who alongside operating his ranch also owns a major slaughter house. He has been very supportive of Geologix’s work — he has not charged them anything for using his land — and Craig says it will simply be a business negotiation.

The other side of community relations is the more general one: that community approval is essential if you want to build a mine. The area around Tepal is agricultural land, Geologix is working to convince the locals that a mine at Tepal would not impact their water quality.

Geologix is still paying for Tepal, having handed over US$2.4 million in 2010. In 2011, the company has to make two more payments: US$1.55 million in February, up to half of which can be in Geologix shares, and US$2.3 million in June. Then the company will own the project outright, aside from a 2.5% net smelter return royalty.

At the end of September Geologix had $3.9 million in the bank. The company has a 52-week trading range of 17.5¢-$1 and 89 million shares outstanding, 108 million fully diluted.