Southern Arc Minerals Inc.(SA.V)
Questions and Answers
September 18 2007
Friends,
Rather than wrapping myself entirely around everything I saw and heard during my recent site visit, perhaps it will serve to first provide the answers to some of the questions I asked on a more or less random basis. I am gathering a big picture perspective which I will certainly share in bits and pieces before long, but sense that you'll be well pleased to have some nitty gritty answers into which you can dig your teeth. To this end, I will begin here. My only caveat is that these are my recollections of answers, sometimes written down immediately, sometimes late at night after retiring from long days. Unless you see quotation marks, these are my words, as best representing the content of answers as I recall them. Parenthetic references are my own words added here for clarity.
In a number of cases, you'll find attribution unclear between Hamish Campbell (Vice President Exploration) and Mike Andrews (Director). I spent significant one-on-one time (hours) with each, along with a late evening sitting after dinner with the two of them in a gazebo overlooking the beach (and drinking one or two beers… okay, maybe three… but no more than four). In any event, they are both highly respected geologists, and I expect their answers to these questions would be consistent (though they do spar on a playful basis, as like professionals tend to do with one another).
Q1: What's the minimum in necessary ore to justify an economically feasible mine at Selodong (which is pronounced half-way between Suh-low-dong and Slow-dong, in both cases with the accent on the 'low')?
A1: "100 million tons" (porphyry) at Copper/Gold "grades of .35/.45". (John Proust, President)
Q2: Does SLD006 end at, near, or in a NW trending fault?
A2: "Yes". (Hamish Campbell)
Q3: Paint the picture of what you see in tonnes and grades in Selodong – best case/worst case/most likely.
A3: Understandably (and expected) no one would touch that one with a ten foot pole. At least not on a direct basis. Implicitly, it's clear that there is real hope for something bigger than even I would have guessed.
Q4: Of the 15 porphyry targets, how many do you see as reasonably hoped to be connected?
A4: "Between 10 and 14". (I think Hamish Campbell but it could have been Mike Andrews I cannot remember)
Q5: Assuming a 'palm' where do you currently hypothesize the centre to be?
A5: Too soon to say with any certainty. "We're still early in building the 'model' of the deposit". (Hamish Campbell)
Q6: What in the GRS consulting report gave you enhanced confidence in the 'fingertip/palm' theory?
A6: The "relationships of data identified across porphyries". Reference to "mag highs". (Hamish Campbell)
Q7: Can you give some sense of the probabilities of the 102 m. and 105 m. intersects in SLD001 and SLD004 with 1.04 and 1.05 g/t AU and .50-.60% Cu?
A7: (not statistically but) "very encouraging" (Hamish Campbell)
Q8: Could you offer examples of proven fingertip/palm mines.
A8: "Grasberg plus a number in the Philippines" (list promised to follow). (Mike Andrews)
Q9: Could you please characterize the nature and scope of any continuing assignment to the Australian consultants, GRS?
A9: Their "assignment is completed". "The final report was just received yesterday" (September 10th). It will "help to continue to build a model of the deposit" based on all data provided, including "handheld magnetometer readings". (Hamish Campbell)
Q10: Why are you drilling next in Blongas I, rather than closer to the centre of the collection of porphyry targets?
A10: (My words here) We're concentrating now on extending from what we've already identified. John Selamat (SA geologist) was wandering through the hills to the north, and discovered numerous outcroppings of attractive stockworks. This leads us to wonder if we've got an even bigger connection than we thought previously. (Hamish Campbell, paraphrased)
Q11: Why are you downplaying the Molybdenum from Selodong? No mention of it in the News Releases.
A11: "Assay results for Molybdenum have not yet been received. They'll be coming soon." (Not laying great hopes for grade of moly at this point. The significance of moly is not so much in its grade, but in its role as a signpost. The presence of moly is associated with that of other metals, and hence is one more in a collection of indicators, as the model is continually fleshed out.) (Hamish Campbell)
Q12: What are the costs to mine?
A12: (Answer was interrupted by other activities, but was expressed as a large range in per pound of Copper ("11 cents to 45 cents"), by way of examples from other mines. Didn't follow up for clarity of answer based on per tonne. My bad.) (Hamish Campbell)
Q13: Is there any consideration given to barging ore to an expanded Batu Hijau facility?
A13: "No, not at all. This property would warrant a facility of its own." (I think this was Mike Andrews, but could have been Hamish Campbell)
Q14: The quartz diorite in Montong Botek appears to be a favoured host for good grades. Is there a chance that this would be a standalone deposit with viability?
A14: "Structural preparation is the key factor, not the host." (Hamish Campbell or Mike Andrews)
Q15: How excited do you get over rock chip samples?
A15: "We prefer 3 metre channel samples". (Hamish Campbell or Mike Andrews)
Q16: Can you say when you expect infill drilling to commence and where?
A16: It's early to say where, but as for timing, "possibly, but not likely before the Spring". (Hamish Campbell or Mike Andrews)
Q17: When would you hope for a completed NI 43-101?
A17: "Add six months to the previous answer." (Hamish Campbell or Mike Andrews)
Q18: As for CoW negotiations, what can you say about the start and finish, and the process between the two?
A18: (Answers come from one-on-one with Hamish early in the visit, and from his briefing on the final morning) There will be two CoWs. One for Sumbawa and one for Lombok. The one for Sumbawa is about to begin negotiations. 29 representatives from three levels of government have already been named, with three people named to represent SA. This process is expected to take between 3-4 months. (I think I heard that) this is the first new CoW to be negotiated in a decade, as an extension from the 7th generation version of CoWs (noting that there are majors also now pursuing the CoW negotiating process). This refers to different iterations of contracts, from their inception in the 1960s. It's being referred, then, as a 7+ generation CoW. Approximately 90% of the details of this contract are taken as a given, with the balance representing a 'tweaking' of the remaining details. A CoW, once signed, should be good for about 30 years. It was stressed that since these CoWs were initiated in the 1960s, the government has never (stress never) reneged on a contract. These contracts, for good or bad, protect the company (or the government) from changes in legislation. For example, if general mining taxes are changed after a CoW has been finalized, such a change (up or down) would not affect the CoW.
The government negotiating team for the Lombok CoW (except for local representatives) will be comprised largely of the same people as for the Sumbawa CoW. The Lombok CoW negotiations are expected to begin in 4-6 weeks, and to catch up to and be signed at the same time upon completion with the Sumbawa CoW. One will determine the outcome of the other.
It is important to note the importance of SA's socialization process here. The Company has taken great pains to ensure good relations with local communities in which it operates. Employment is rotated to include all surrounding communities, sharing in the opportunity for raised standards of living. The running of a well of water to a neighbouring village from an SA drill hole (that struck water) is a good example of the Company's sense of citizenship. As we traveled by truck through various villages and rural areas, we were roundly greeted by, 'Hi Mister' and smiles and waves. Others have not historically taken this need for local buy-in into account, and have paid the price, in varying degrees.
Q19: How would you characterize the political risk and the general political environment, with respect to comparison countries?
A19: (Answers come from conversations with each of John Proust, Hamish Campbell, and Mike Andrews, along with Hamish Campbell's final day briefing) The national government is stable, with two more years in its mandate. The president is eligible for two five-year terms, and is expected to be confirmed for his second term. Every country has political risk. Indonesia is no different. This said, the government is on record as supporting the development of mining in Indonesia, and is eager to move forward on this front. Like in any other country, there are nuances in how things happen, so cultural sensitivity is an obvious asset. Whereas other (major) mining firms have been refused exploration rights, and/or had the processes prolonged into several months before approvals have been granted, SA has enjoyed approvals regularly within days of application. Southern Arc is invested in Indonesia. The significance of this acculturation is not to be underestimated.
Q20: Does sea level pose any impediment to mining at depth in Selodong?
A20: None envisioned. (Hamish Campbell or Mike Andrews)
Q21: What do you think of Serengeti?
A21: "I like this one more." Bob Bishop (I trust I don't have to say who he is.) "SA is a huge target play."
Q22: After Selodong, which prospects most intrigue you?
A22: Elang, Pelangan, and Mencanggah. (Hamish Campbell and Mike Andrews)
Q23: What would you estimate as the minimum time to take Selodong to a mine?
A23: "The normal average would be 8 years from first stepping on a property. The best case would be 4 years from stepping on the property. Conservatively, Selodong could still be as much as 6 years away." (Hamish Campbell or Mike Andrews)
Q24: Could you describe all potential business outcomes under consideration for SA?
A24: SA is not a mining company. It is an exploration company, interested in finding and developing properties with a minimum of 1 million ounces of gold (equivalent?). This means any combination of joint ventures, sales of smaller potential prospects, to a complete sale of the Company (this final option not a likely outcome anytime soon). (John Proust) In other words, anything is possible. Not likely for SA to be a standalone mine operator, though.
Q25: What's holding share price down?
A25: "Short-term traders." Steadily, shares are transferring into stronger hands. This process will continue and stabilize, allowing share price to rise on the merits of the Company's performance. (John Proust)
Q26: What do you foresee for an upcoming share offering, in structure, timing, framework, and price?
A26: Too soon to say. Expressions of interest are steadily coming in. Could be restricted to one major party, looking to buy a small share of the Company. Could be otherwise. Hoping to pin this down within 60 days. (John Proust)
Q27: What events do you see as precipitating strong upward share price movement?
A27: Continued good drilling results. The potential buy-in by a major would add significant credibility. The continuing concentration of shares in friendly hands. Finalization of the CoW. "Once the CoW is done, watch for a big move." (John Proust)
Q28: What's the current burn rate for the Company and what would the addition of one drill rig do to that monthly expense?
A28: In Indonesia, US$215,000 per month. Total Company, CDN$250,000. Additional drill rig would add between $75,000-$100,000 per month. (Hamish Campbell and John Proust)
Q29: What are your hopes for stepping up the drilling program.
A29: Very soon. Hope (stress hope) to add one more rig within weeks, as it comes available, and perhaps (stress perhaps) a second by New Year. (Hamish Campbell and John Proust)
Q30: How deep do these kinds of porphyry formations normally run?
A30: It would be common to see this kind of formation run to depths of 1,000 metres or more. (Mike Andrews)
Q31: What would you estimate as the cost to build a facility for Selodong?
A31: "$1 Billion" (John Proust, Hamish Campbell, and Mike Andrews)
Q32: If estimates of up to 3 billion tonnes at $35/tonne are accurate for Selodong, that would be $600 per share at 40% of in situ. What am I missing here?
A32: "If you can get 10%, run to the bank with it." (Bob Bishop). I guess that means $150 per share. (Kevin Graham)
Q33: Some people are predicting gold prices at US$2400. What do you think?
A33: "Adjusted for inflation, gold should now be over $2200, so I don't have a problem with predictions for $2400." (Bob Bishop)
Q34: Where are we now in Jim Collins' flywheel metaphor?
A34: "People are seeing progress. Momentum is growing. It's starting to come together nicely." (John Proust)
Q35: What do you anticipate as required in infill drilling to take Selodong to the proven resource stage?
A35: 100,000+ metres, at $205 per metre. $20 million. (Hamish Campbell). "It would probably take $6-8 million to take us to a scoping study." (John Proust)
Q36: Could you please describe the significance of topographical features in guiding your efforts?
A36: The nature of the intrusions lead us eventually to the ridges. Starting with the streams below, we take readings of samples, wander upstream, take more readings, and continue either further up the streams, or turn to go up the hills to the ridges, depending on what the readings tell us. (Mike Andrews)
Q37: What risks do you see for SA in comparison to that faced by Newmont in having to relinquish key properties?
A37: "None." (John Proust or Hamish Campbell or Mike Andrews)
Q38: Is there any advantage to mining at Selodong over Batu Hijau coming from the available workforce on the island of Lombok?
A38: "Not even thinking that far ahead." John Proust
Q39: Other than drilling, what are 'reliable' indicators of mineralization at depth?
A39: Suggestive, rather than indicative, magnetics, grades nearer the surface, and intra-data relationships. (Hamish Campbell or Mike Andrews)
Q40: Any thoughts on a move to the TSX?
A40: "Not yet. Maybe in 12 months. It's in the corner of my eye." John Proust
Q41: A while ago, there was some talk on the Board about potential risk to SA in the form of fine print in future deals with majors. What assurance can you offer on this?
A41: No such risk exists. Well aware of the problems others are having. Does not see this affecting SA at all. (John Proust)
Q42: What do you see as the likely tonnes processed per year at Selodong?
A42: Perhaps 200,000 per day, over 15-20 years. (John Proust or Mike Andrews or Hamish Campbell)
Q43: If SA chooses to go it alone in mining at Selodong, what skill set will be new and needed at the senior management level?
A43: "This will not happen. I do see the potential to be adding a Director, though." John Proust. (At this point, I asked if he was looking for volunteers, raising my hand only half in jest. Alas, no offer was forthcoming.)
Q44: What IRR is likely to be applied in viability calculations? 15%? 12%
A44: "Not sure. Thought less." (John Proust and Mike Andrews)
Q45: If a starter pit is justified in Selodong, say at Montong Botek, would it be possible to back the truck up to neighbouring properties in Lombok which would not, on their own, be economically viable, and to cart near surface ore there to a processing facility at Montong Botek?
A45: "Yes, no problem." (Hamish Campbell or Mike Andrews)
Q46: Roughly what proportion of shares/warrants are in what you might term "friendly hands"?
A46: "50% by about 25 people" John Proust (I guess that's why John doesn't see much risk for a hostile takeover.)
Q47: When would you hope, if at all, to enter into 'serious' discussions with potential joint venture partners?
A47: (I think the discussion was interrupted at this time, but my sense from various conversations, nothing explicit, was that early conversations are already under way, but that no such arrangement is imminent, as in days. Could be the 60 day horizon, referred to above.)
Q48: Given that 'the market is always right', in view of what you know now, including reference to levels of uncertainty, what do you feel share price should be at now?
A48: "$3.00 minimum." (John Proust)
Q49: Some have posed that SA has been drilling to achieve maximum intersections based on Newmont's prior drilling, rather than extending estimates. How would you answer that suggestion?
A49: "Not true. We have a competent team. While drilling has been conducted to confirm Newmont's prior results, we have extended estimates already. Our philosophy is to 'grow on what you know'." (John Proust) "People don't understand the difference between geologic holes and intersect holes." (Mike Andrews) (Mike then went on to explain that, while lower grade holes tell the marketplace only that they are lower grade holes, the results may, and often do, tell geologists a great deal of valuable bits of information, further guiding their subsequent activities).
Q50: Much has been made of your regular recent purchases at market. Suggestions are that you are both trying to support the share price, and to accumulate shares. How do you answer these suggestions.
A50: "I'm accumulating shares when the opportunity arises. People often ask me, 'how much is enough?' My answer is, 'I'll let you know when I get there.'"
Q51: (To Mike Andrews and Hamish Campbell, seated across the dinner table from me on the evening of the 12th) Suggestion has been made that I'm reading too much between the lines to say that your last News Release reports a connection between Blongas II and Blongas I. Am I reading too much into this?
A51: (They both emitted a 'huh' sound in response to this question, looked at each other, and then at me, saying) "How much more clear do we have to be? You don't need to read between the lines." (Mike Andrews) "I guess people will believe what they want to believe." (Hamish Campbell). (Folks, they're connected.)
Q52: Can you keep a straight face and say that you have reason-based hope for Selodong to be one of if not the largest among copper/gold porphyry deposits in history?
A52: (Here's where Mike Andrews hesitated for a moment, looked down at the drill core, then slowly raised his eyes across the table to mine, and unable to restrain a smile said) "Yes." (In other words, he couldn't keep a straight face. He then went on.) "Kevin, I'm just over the moon on Selodong… over the moon. I'm over the moon on Selodong."