There’s an old saying about throwing the baby out with the bath water. In the worst junior resource market in my 30 years in and around Wall Street, some juniors have had tremendous gains on their ultimate goal of being a producer while their share price has gone completely in the other direction. Geologix Explorations is a prime example of this. With what I believe was one of the most important milestones for the company just announced, I spoke with CEO Dunham Craig about it and where GIX stands.
Geologix just achieved a major milestone in releasing the results of the Prefeasibility Study for its Tepal Project near the western coast of Mexico, in Michoácan State. The full Study will be published shortly, but the extensive details released so far include some very attractive fundamentals. Dunham, would you mind summarizing the Study’s highlights?
According to the Study’s estimates, Tepal’s NPV, post tax and using a 5% discount, will be $421 million, providing an IRR of 28%. Post tax at a 0% discount, the NPV would be $925 million, providing an IRR of 36%. The Project’s estimated payback period is 2.7 years pre-tax and 3.2 years post-tax. I should note that all these calculations are based on four year trailing average metal prices of $1390/oz for gold, $26/oz for silver, and $3.44/lb for copper. We think four years is a reasonable base case scenario, but visitors to our website will find that our most recent investor presentation also provides details on what these calculations look like when based upon both three and five year trailing averages.
Those are certainly enticing numbers. What do the supporting production metrics look like?
Over an anticipated 11.5 year mine life, Tepal is expected to generate total payable production of 503 million lbs of copper, 1.16 million ounces of gold, and 2.95 million ounces of silver. Over the mine’s first seven years, the annual expectation is for 116,000 ounces of gold and 49 million lbs of copper. On an equivalency basis, our annual production would total about 240,000 ounces of gold or 90 million lbs of copper. The cash cost of production for these metals, net of byproduct credits, should be about $170/oz for gold and $0.62/lb of copper.
Those equivalency numbers bring to mind the question of distinction. Do you think of yourself as a copper company that also produces gold, or a gold company that also produces copper?
We have silver in there too, to a lesser extent! That’s a good question, and one that we have discussed at length among our management team. In our opinion, though, we really do fit the rare profile of a dual metal producer… our production is mixed fairly evenly between gold and copper. We provide those equivalency numbers not to define ourselves, but to aid in comparisons to traditional single metal mines. In our opinion, the definition isn’t as important as the manner in which producing even quantities of both copper and gold provides our business case with a measure of a hedge against a drastic movement in the price of a single metal.
Fair enough. What about capital costs? The PFS suggested a figure that seems surprisingly low.
Our pre-production capital cost is expected to be about $353 million, a number that includes a contingency of roughly 10%. That number is low, when presented in standard peer comparisons. However, those comparisons fail to take into account one of Tepal’s greatest advantages – its location. Infrastructure is excellent, with power nearby and a quality paved access route just 8 kilometres away. We’re very proximate to a supportive community that boasts a source of well-educated labour. The proposed site is flat and ideal for construction. Perhaps most importantly, we’re just three and a half hours away from major port facilities capable of shipping out our exceptionally clean concentrate. All of these location factors have helped contribute to that low capital cost.
I should add that we’re very confident in the $353 million figure. During the preparation of the Prefeasibility Study, we elected to perform a redesign of our mill process plant, a decision that delayed the Study’s completion by several months. We made use of this delay by acquiring specific quotations for all of the project’s equipment, construction, and supply costs… we went right down to the hard hats here. Obtaining these quotations has served to greatly increase the accuracy of our capital estimates.
Alright, so you’re standing confidently behind that $350 million number. While it’s very reasonable, this market has proven to be challenging for those seeking capital. What avenues are you pursuing to raise those funds, and what kind of timeline are you working with?
We’re already in active discussions with a number of groups regarding financing. These groups include a consortium of metal traders and streamers, smelters, equipment financiers, and commercial bank syndicates. We’re trying to move quickly, ideally achieving initial financing within the next few months. However, we prefer to avoid any financing option that would cause further dilution for our existing shareholders, and we won’t rush into anything that we believe doesn’t provide us with the best possible cost of capital.
We believe Tepal possesses several advantages that will assist us in this objective. Firstly, its product – copper, gold, and silver – can be easily sold into liquid markets. Second, mexico is a nation that historically given great support to new mining developments. Thirdly, Tepal’s concentrate will be remarkably clean, a characteristic that is currently in high demand. Fourthly, the after-tax payback period of 2.7 years is very attractive relative to an 11.5 year mine life. And last, but certainly not least, the mining and processing design we are using has been done around the world for 50 years. Our operation will be low-risk, which provides lenders with an additional degree of comfort.
So financing could be as soon as a few months away. What about other milestones in the near future?
Well, we expect permitting to be complete by the end of the year. We’ve completed our Environmental Impact assessment. and that takes the relevant authorities about six months to review. So that should wrap up prior to the conclusion of 2013. We’re also hoping to complete Feasibility Study within that timeframe… we’ve already begun the process.
And then construction shortly afterwards, I assume. Do you think you’ll make it to that point, or is a buyout a possibility?
Well, we have an open door, and we’ll certainly entertain offers. What we won’t consider, however, is a proposal that attempts to take advantage of current market conditions. We believe Tepal is a special project with exceptional potential, and we’re fully prepared to realize that potential and proceed through to production. That has been our goal since we acquired the property, and it hasn’t changed.
Thank You Dunham.