Geologix Explorations Inc. (TSX: GIX) reached a high of $0.66 per share following the release of an updated Preliminary Assessment (PA) for its Tepal project, incorporating the upgrade of its gold-copper resource to 3.9 million gold equivalent ounces, up 62% from 2.4 million gold equivalent ounces, doubling the mine life. The recent volatility in metal prices accounts for the subsequent decline in the stock price, and the resulting potential opportunity.
The economics of a PA may vary by about 30% relative to eventual realities, and further economic studies are likely to reduce uncertainty and risk, leading to a higher valuation. At present, the Pre-Feasibility study is scheduled for completion in mid-2012, and Feasibility study by the end of 2012.
The Tepal project covers about 172 sq km, of which 160 sq km are untested for other resources. The project is located in Mexico which is amenable to mining, and appears to be situated on easy terrain, with good availability to water, power, labor and other infrastructure to construct and operate a mine.
The updated resource estimate included an Indicated resource of 57.8 million tonnes, grading 0.42 g/t gold and 0.24% copper, 800,000 ounces of gold and 311.1 million pounds of copper, or 1.7 million gold equivalent ounces. The resource estimate also included an Inferred resource estimate of 93.2 million tonnes, grading 0.28 g/t gold and 0.20% copper, 800,000 ounces of gold and 414.8 million pounds of copper, or 2.1 million gold equivalent ounces.
The project has potential as a low-cost open pit mine, with near term low-cost heap leaching of gold oxides, followed by gold-copper sulphides processed in a mill flotation facility. In addition to being favorably located, the resource has a low strip ratio averaging 1.4 to one. The resource has an NSR of 2.5%. Altogether, these characteristics suggest the potential for a typical modern profitable low-cost, long-lived mining operation.
The low-grade gold-copper resource totals 3.9 million ounces of gold equivalent, at roughly a gold equivalent grade of 0.83 g/t, or 2.44 million ounces of payable gold equivalent. The mine life was extended from nine to 18 years with the updated PA anticipating average production of 146,200 gold equivalent ounces through the ninth year of production, and 112,400 gold equivalent ounces from year ten to eighteen. At full production the processing facility is expected to process sulphides at a rate of 23,000 tpd, and heap leaching oxides at a rate of 6,700 tpd. The estimated recoveries of metals for the heap leach are 77.3% for gold and 13% for copper, and recoveries for flotation of the sulphides are 62.8% for the gold and 86.6% for copper. Management notes no smelter penalties. A mine of this size is significant, with a poly metallic resource, and low-cost characteristics; despite low grades, the Tepal project appears feasible.
Should current metal prices stabilize, valuations may improve. The base case 5% NPV of $412 million, or $2.83 per share ($1000 gold, $16 silver, and $2.75 copper) seems conservative, especially considering that at current metal prices, the 5% NPV increases to $786 million, or $5.40 per share ($1200 gold, $16 silver, $3.50 copper). The author is bullish on both gold and copper, through to the start of construction, which is scheduled to start in about two years. Of course, the impact of share dilution by funding $312M in initial capital costs should not be ignored. Considering the copper component, we suspect the project will be competitive, with financing options from non-traditional sources. The average price target of analysts is about $1.23 per share, with the highest price target at $1.50 per share, which appears achievable over the next one to two years.
There is clear upside for the stock from this level of development with further advancement. There are a number of positive characteristics for the project as it moves toward feasibility and the project is optimized. The PA does not include the potential inclusion of silver and molybdenum. This could improve economics but may require increasing the cost of the project. As only a small percentage of the project has been tested, there appears to be significant exploration upside. While additional sulphides may extend mine life, additional gold oxides may increase early production, positively impacting economics and repayment of capital estimated at 4.1 years. In addition, it would appear to us that Geologix has a capable management team.
We believe the fundamentals may substantiate a stock price of $1.50 per share, possibly more given higher spot metal prices and improving optimization. While higher stock prices over the company’s life are possible, the greatest appreciation may occur between the present level and the completion of the Pre-Feasibility study in mid 2012 (or the end of seasonal buying of gold in the spring of 2012), and the completion of the Feasibility study and/or permitting at the end of 2012. It is not unusual for stock prices to soften during construction prior to production, or later in production as the resource upside has been captured in the stock price.
The investment horizon of one to two years precedes financing risk affected by the equity markets at the outset of construction. In the meanwhile, considering the project’s grades, the greatest risk may be metal price volatility, which may be mitigated by exploration and locating additional gold oxide resources. These risks are common for all companies in the mining industry, but in the meanwhile there appears to be an opportunity for investors.