Clock Starts Ticking For Geologix

The countdown has begun for Geologix Explorations (GIX-T, GXEXF-o).

The company has 60 days to raise upwards of US$30 million to acquire the San Agustin gold, silver, lead and zinc project in Mexico from Silver Standard Resources (SSO-T, SSRI-q).

Under a 2006 deal between the companies, Geologix agreed to issue 1 million shares to Silver Standard and spend $2 million on exploration at the large project, including 15,000 metres of drilling. Silver Standard triggered the countdown to the final condition of the deal — a payment based on delineated resources in a predetermined area of the project — by accepting a resource estimate provided by Geologix .

And while Silver Standard could have had the resource estimate audited — thus giving Geologix an extra month to raise the capital — the company’s 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 reflects its comfort level with the accuracy of the estimate, and not a desire to stick it to Geologix.

At US$34.3 million, the payment based on the resource was on the lower end of Silver Standard’s expectations, says president and chief executive Bob Quartermain, but press releases provided by Geologix gave it a clear idea of what would be coming. And Quartermain has faith in Wardrop Engineering — the firm that did the estimate.

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

“It puts considerable pressure on us to raise the funds, but that’s okay — we’re used to a good challenge,” Craig said 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 of 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.”

The company has retained CIBC World Markets as its financial adviser.

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, a last resort.

“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 it would have 100% ownership of the project, with a 2.5% net smelter return royalty payable to Silver Standard.

The option payment was calculated on a per ounce basis of gold and silver resources that lie within a predetermined 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. That works out to 1.61 million oz. gold, 48.3 million oz. silver, 161 million lbs. lead and 1.3 billion lbs. zinc.

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.

Of the indicated resource estimate submitted to Silver Standard (which is narrower in scope than the company’s own updated resource estimate), 478,017 oz. gold and 12.7 million oz. silver are subject to payment to Silver Standard.

Of 1.08 million oz. gold, 37 million oz. silver, 143 million lbs. lead, and 983 million lbs. zinc in the inferred category, 196,634 oz. gold and 11.4 million oz. silver are subject to payment.