Back into Geologix

I was out of Geologix for a couple of days (part of my sacrificial purge) but I decided to jump back in this last week after my thoughts on the liquidity situation crystallized. If we are indeed going to be liquidity driven for a time, then you might as well own the stocks most sensitive to it.

The basic premise behind Geologix remains what it was when I first bought the stock a few months ago:

The PEA that was published on Tepal a few months ago put the NPV5 of the project at $412M based on $1000/oz gold and 2.75/lb copper.  Geologix has $14M of cash on hand.  With 145M shares outstanding, the market capitalization of the company was $28M at my entry price of 20 cents.  That puts half the market cap in cash and the other half in a project with an NPV that is nearly 10x the value of the company.  Something has to give here.

The market capitalization has increased since that time but its still a fraction of the overall NPV of Tepal.  In other words, there remains plenty of room for the speculative elements to move the stock higher.

Tepal remains a fairly high start-up cost, fairly high operating cost, deposit that will only go ahead at a decent copper and gold price.  Thus Geologix is acutely sensitive to the market perception of liquidity (it needs money to build the mine) and the future (Geologix needs high metal prices to make the mine economic).  Whether it all comes together an the mine gets built is anybody’s guess, but so long as the liquidity is a flowin I believe the market will be inclined to look positively on the potential, while ignoring the risk.

New Drill Holes

On February 16th Geolgix announced the results of infill drilling at Tepal.  There were some higher grades in these result (though we are still talking about extremely low 0.7-0.9 g/t grades).  Below is a cross section that identifies a couple of the higher grade holes against the lower grade historic holes.

As you can see from the intercepts, the deposit does hold together rather well across a long length. In addition, the North deposit, where the mining will start, takes well to the shape of a pit.  If it wasn’t that the grades were so low, it would be quite a nice little deposit.

The higher grades in these recent holes do perhaps bode favourably for better economics early on.  That could help the NPV of the project.  As stated by the CEO of Geologix in the news release:

“We are pleased with these latest results as eighty (80) of the last ninety-one (91) holes being reported encountered mineralization equal to, or greater than the Company’s internal North Zone cut-off and represent the final data required to complete the upgraded resource estimation currently being conducted by Micon International Limited. Additionally, multiple holes drilled within the central portion of the North Zone returned intervals of gold and copper grades well in excess of the 2011 Preliminary Assessment North Zone’s mine plan average grade of 0.37 g/t gold and 0.24% copper. These elevated grades found over substantial intersections support the potential for the North Zone to host a sizable higher grade starter pit which could positively impact Tepal’s production profile, specifically within the critical early years of the project’s mine life.”

Bottom Line

I’m still unsure whether Tepal will ever become a mine or not.  It just seems like such a low grade.  It will inevitably put the company on a knife edge between being profitabilty and cost overruns, and wil require an able operator with a strict eye on the budget.  Every mistake will be amplified.  Nevertheless, the mine is not yet built and so that is not really my concern.   In this period of liquidity, I am willing to put some dollars into Geologix on the expectation that the market will push the stock back up to its pre-euro-crisis levels in the 60 cent range.   This does not seem unreasonable given that the case can be made that in a perfect world Tepal would be worth $3 per share.  Its kind of like Greece and the rest of Europe: why worry about tomorrow before its here?