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In the Bull Pen

Bob Moriarty
Sep 2, 2008

The market for mining juniors just went through a wrenching correction. I don't think it's anything more than that; the bull is constantly trying to shake off riders. Every couple of years the bull will go on a rampage designed to break the back of even the most determined gold bug.

I suspect there will be more pain ahead for some companies. Up until 6 months ago everyone had easy access to capital and that's over. Juniors who adhere to the drill-and-print model are going to have to justify their model. Money is going to be a lot harder to get. But juniors who have hoarded their cash carefully will be fine.

I've visited a couple of interesting juniors lately. They aren't production stories; they are in the exploration stage. But management of both companies did a very good job of defining their goals. I think the goals are both realistic and achievable.


My first trip was to Durango Mexico to visit the San Agustin project of Geologix Explorations (GIX). The project was optioned from Silver Standard (SSRI) in a deal that seems complicated at first glance. Geologix gave SSRI 1 million shares with the value being applied to the purchase price. GIX was required to spend $2 million dollars on a 15,000-meter drill program and to calculate a 43-101 resource. That final resource will be released soon. GIX has to pay SSRI in cash and perhaps some shares, $20 an ounce for the gold and $1.00 an ounce for the silver.

Dunham Craig
Geologix Pres/CEO
 Siegfried Weidner
Geologix VP Exploration
Dunham Craig
Geologix Pres/CEO
'resource groupie'

The project is a gold-rich, zinc-silver-lead porphyry. Gold provides about 1/2 the economic mineralization and zinc about 1/3. But Geologix is required to pay for only the gold and silver. And Geologix isn't required to pay for gold and silver outside the original bought resource which is where the bulk of the "blue sky" potential lies. But they are required to pay an NSR on the mineralization outside the bought resource.

Silver Standard would have been a lot better off and Geologix could have focused on expanding the global resource as a primary goal rather than trying to figure out how to pay SSRI the least amount of money if the original deal made more sense. Had SSRI made it a simple 2.5% NSR, they would have made more money.

GIX has completed the 15,000-meter drill program. And is in the process of finishing an updated 43-101 resource on the bought deal portion of the project. They are required to pay SSRI for the gold and silver within four months after completion of the updated 43-101.

Here's how the numbers work out, more or less. In the bought deal portion of the project, there is about 114 million tons of $28 rock. The primary economic mineral is gold followed by zinc, silver, then lead. After the credits for the payments already made to SSRI, GIX needs to fork over somewhere between $55 and $65 million dollars. That gets them a little over 5 million ounces of gold equivalent.

That's a good deal for Geologix because drilling to date has only tested about 15% of the project. As drilling continues and the overall resource expands outside the bought deal portion they should double the total resource shortly and likely increase the resource yet again sometime near year end. So on average, GIX looks like they will be paying about $5 for gold equivalent ounces. On the bought deal portion of the project, there will be no NSR to SSRI; on the portion of the project outside the bought deal area; there will be a 2.5% NSR payable to SSRI.

Geologix has a tremendous competitive advantage in having a geologically similar deposit called the Peñasquito mine nearby. Peñasquito is being put into production by Goldcorp and is located in Zacatecas, on strike and about 300km to the SE of San Agustin.

In a 2006 feasibility study, Goldcorp anticipated a 2.8:1 strip ratio at Peñasquito compared to a 1:1 strip ratio for San Agustin, 74% recovery compared to 85-95% recovery for San Agustin and similar value metal. In simple terms at a nearby similar deposit in the same country and conditions, Goldcorp is spending about $10 a ton to mine $28 rock. GIX should be able to build a spreadsheet and duplicate the actual costs for the Peñasquito model.

Peñasquito is over 2 billion tons of rock. Geologix hasn't even scratched the potential at San Agustin. Until they can get the Silver Standard payoff behind them, they are tied up in financial projects rather than exploration. But the majors have woken up to the fact they have been consuming their young for the last 10 years and need to start buying ounces.

GIX has one of the largest-in-potential gold deposits in the world in one of the most mining friendly environments. Geologix is swinging for the fences but that's the kind of project the big boys want to either buy outright or do a joint venture with. Majors will be looking at Geologix closely.


My next trip was a quick jaunt to Val d'Or in Quebec in the historic Southern Abitibi Greenstone Belt, home of 160 million ounces of gold production. I spent a day with the nice folks from Niogold (NOX).

Niogold holds 90 square km in the Val d'Or camp. There are currently 6 operating gold mines in the district. Contrary to GIX, management of Niogold isn't swinging for the fences but is looking for a nice safe base hit.

The entire Abitibi district is comprised of a couple of hundred miles of Northwest trending shear zones. The overall mineralization is a mesothermal vein system. Mesothermal systems tend to run very deep. Agnico-Eagle's Laronde mine is the deepest mine in North America at over 3000 meters depth.

When I look at a company and its projects, I want management to have a clear view of exactly what it is they are trying to do. President and CEO Mike Iverson explained it to me simply. They want to outline 1-2 million ounces of gold and either sell or joint venture with a major. Since there are literally dozens of similar size mines along the 360km long shear zone they aren't going to have to convince anyone that they have invented the wheel.

I also like a company to have some sort of competitive advantage. Why should an investor put money into them as opposed to the other 2999 juniors out begging for money?

Interestingly enough, I've been to a lot of projects where years after discovery, sometimes even into production, they didn't have a clear idea of the overall structure. With 360km of shear zone in the Abitibi, what makes one area richer than another?

I was very pleased to be briefed by Rock Lefrancois, VP of Exploration for Niogold, that they have come to the conclusion that there are a series of Northeast trending structures crosscutting the main shear zone. Those cross cutting structures tend to be both richer and bigger than just the main shear zone. So that's what they are using for determining drill targets and it seems to be working.

Niogold has outlined a 43-101 resource of 342,000 ounces of gold based on a 42,000-meter drill program. And is in the process of completing an additional 25,000-meter program with 19,000 meters having been completed to date. In addition, there is an additional 170,000 ounces of gold in a historic, non-43-101 resource. We can expect drill results to be released on a regular basis.

Niogold currently has about $4 million in working capital. They are monitoring the market closely to determine if and when they should do another financing. If financing proves difficult, management plans on slowing the pace of development.

I like the depth of management of both companies. They have a clear vision of where they are and where they intend to go. Geologix has all the potential for a major homerun and Niogold has all the potential for an easy base run.

Niogold is an advertiser. We do not own shares in either company and have not been paid to produce this piece.

Geologix Explorations
GIX-V $1.36 (August 29)
51 million shares
Geologix website

Niogold Mining
NOX-V $.26 (August 29)
61.5 million shares
Niogold Mining website

Sep 1, 2008
President: 321gold

321gold Ltd