Pelangan and Mencanggah: IF A=B and IF B=C, then…
April 14, 2011
Steve Garwin is Southern Arc’s lead technical advisor. A structural geologist, his doctoral thesis focused on Newmont’s world-class billion tonne Batu Hijau mine, located just one island to the east of Lombok. This is no coincidence to his involvement with Southern Arc. He worked at Newmont for ten years, including two years in Nevada as their Chief Geologist. He’s worked Southern Arc’s West Lombok property extensively over the past number of years, and continues to work with the Company as the team advances into its extensive drilling program.
I introduce Garwin here only to share something he said to me at the core shack table in Toronto at the recent PDAC event. I’m paraphrasing only slightly here because, while I didn’t write down or record what he said at the time, his words stuck with me. Without quotation marks, then, here’s what he said: The West Lombok property is a textbook case in geology. Everything we see follows a pattern.
The logical response to that statement is: What do you see and what are you looking for on West Lombok? What follows is by no means a definitive statement of what is there. Rather, it’s a ‘what IF’ train of thought that leads to what I see and what I think Southern Arc is chasing. That is my objective for this article.
Let’s address this in progressive narrowing of perspectives. From the wide angle view, this part of Indonesia is a series of island arcs formed by volcanic response to the subduction of the Australian plate under the Eurasia plate. See the clear offshore trench just to the south in the image below. This is the point of subduction. The hydrothermal process that results from the volcanic event(s) enables the precipitation of minerals that would otherwise remain buried too deep for economic exploitation. That’s the quick ‘big picture’.
Hydrothermal activity, like any other, follows the path of least resistance. With linkages to each other, shattering rock and bubbling through fault zones, two types of mineralization come about. Characterized by low grade and high tonnage, porphyry deposits are of particular interest to major mining companies. One such Indonesian property, as noted above, is Newmont’s Batu Hijau mine on neighbouring Sumbawa. Another is Freeport’s Grasberg mine on Papua New Guinea. Grasberg is the world’s largest gold mine and third largest copper mine. This is elephant country. Epithermal deposits are of higher grade but smaller tonnage. Host rock, structure, temperature at point of precipitation, all these and more variables affect the ultimate formation of mineral deposits (but hey, I’m an English major... look it up.). On an iterative basis, hydrothermal events can intensify or diminish the presence of target minerals. Post-mineralization events can obscure or mask otherwise clear indicators typically available to explorers. Erosion at the surface can be a blessing when it uncovers high-grade ore, or a curse when it has been at work for too long, removing the target altogether.
Dropping one more level inside, West Lombok offers all of the above. The property is comprised of a 13 km. long northwest trending structural corridor (fault system) that follows roughly parallel to the plate subduction described above. The property is home to three key prospects, Pelangan, Mencanggah, and Selodong.
The property has recently been issued its mining license (IUP). For more than a few of my friends who hold shares of Southern Arc, the agonizing four-year wait for this IUP has seen these three prospects live up to their acronym. But, let’s not go there.
The property is viewed as one large system. Selodong, in the southeast part of the property, has seen the most erosion, removing most of the overlying epithermal mineralization, and leaving exposed a number of underlying porphyry targets. Post-mineralization activity has complicated the study of this prospect, leaving 12 of the 14 identified targets yet untested. Work to date, however, already suggests the potential for a viable satellite pit at Montong Botek/Blongas. Pelangan, to the far northwest of the property, has seen the least erosion, and is a current area of focused Phase 2 drilling activity (3 rigs). Mencanggah is the middle prospect, both in location and in degree of erosion. It is thought that Mencanggah may also host the big prize for Southern Arc on the West Lombok property. Phase 1 drilling has just been mobilized (3 rigs).
Today, my focus is on the Pelangan and Mencanggah prospects. I’d like to shine a light on what I think the Company is chasing there. What follows are my words, my musings, my ‘what-ifs’. Any errors in assumption, fact, or extrapolation are mine.
Looking to the map, below, we see a collection of parallel and near-parallel red streaks. Trending to the northwest, these represent mineralized structural breccias (MSBs). These are high sulphidation epithermal vein structures, spanning through Mencanggah and Pelangan. In part, these structures have been mapped from outcroppings on the ridges as they rise to the surface. They are also mapped from surface sampling, channel cuts, and trenching. Itinerant mining by locals has also pointed the way to some of these vein structures. Drilling will ultimately brush the final strokes on this picture.
The strong, consistent parallel formation in Mencanggah is suggestive (to me, anyway) of an intact system, not having been interrupted by post-mineralization activity, at least not at the surface. Drilling will tell the tale at depth.
In the map, below, you’ll see the big space between Pelangan and Mencanggah, without any indications of MSBs. This is not because they’re not there. It’s just that this space has not yet been mapped. It is my anticipation that we’ll see a continuation of the vein structures in this area. More on this space to come, but let’s return there shortly.
Now seems a good time to talk about the scale of these two prospects. The Company has, so far, mapped more than 23 km. of proven strike length in the MSBs. This is absolutely huge. It’s a district.
Southern Arc’s market cap: $177 million.
While drilling has yet to confirm the extent of mineralization, some contextual comparison may add value. Andean Resources, at the time it was taken over by Goldcorp last December, had identified just 3.2 km. of strike on its property in Argentina. Goldcorp has since raised the resource estimate from 3.1 million ounces of gold to 4.3 million ounces, so its decision to pay $1,000 per ounce in the ground may yet prove a good one.
Let me head off the naysayers right now by acknowledging that Southern Arc’s Pelangan/Mencanggah prospects are not Andean. There is no resource estimate here. Phase 2 drilling has just begun at Pelangan and Phase 1 is just now underway at Mencanggah.
Remember. I’m not trying to say what ‘is’ here. What I’m hoping to do is to paint a picture of what ‘could be.’ Of course, ‘IF’ is the biggest word in the English language. I could wait until the drilling program proves or disproves what I’m seeing, but that would only be a boring post-mortem. No fun at all. I’d rather try to understand what the geologists are chasing before the fact, so as to bring the potential into greater focus before the fact (or myth) is ultimately revealed. You’re going to see an abundance of that word ‘IF’ in what follows. You’ve been warned.
Back to Andean. Before the $3.5 Billion takeover, the weighted average grade of gold for the Andean resource was estimated at 5.7 gpt. Interesting… the first deeper Phase 2 drill hole at Southern Arc’s Pelangan prospect, reported in January, showed an intercept with precisely that: 5.7 gpt. I know, it’s just one hole, but not bad for the first kick at the can, eh? What about width and depth? Well, Andean’s Eureka vein looks to be about 10 metres in average true width. Working backwards from its average grade of 12.25 gpt, and strike length of 1.5 km., I get an average depth of about 100 metres. Total vertical extent estimated at some 200 metres. The Bajo Negro vein shows strike length of 1.2 km., average depth of 160 metres (total vertical extent of 300 metres), true width of 3.9 metres, and average grade of 8.74 gpt. The third early vein system was of a significantly lower grade (1 gpt) so I won’t get into comparisons here.
Suffice to say that, IF Southern Arc’s Pelangan Phase 2 drilling program can continue to show grade (5.7 gpt) and width (5.7 metres, true width) at depth (PLD003 is targeted immediately below the referenced hole, PLD002, down dip by another 150 metres), some serious eyebrows are going to get raised on the sidelines. PLD002 intersected mineralization at 120 metres. Mineralization begins at the surface. Let me repeat that. Mineralization begins at the surface. Let’s see here. 120 plus 150 equals 270. Okay, we’ll see, but I’m listening. Pelangan’s strike length is now over 5 km., and surface mapping continues. I’m confident that this strike length will more than double in the months ahead. Remember that Pelangan is the smaller (much smaller) prospect of the two, with Mencanggah already holding some 18 km. of proven strike.
Just for the sake of a minor diversion, let’s remember from whence Mike Andrews has come, before assuming the role of President and COO of Southern Arc. He guided Kingsrose Mining’s Way Linggo project (just a hop and a skip over to south Sumatra) from discovery to production. With a total expenditure under $30 million, this project is pouring gold. An underground mine, Way Linggo is just 300 metres in length, 150 metres in depth, and 4.7 metres in thickness. When I wrote it up a year ago (Don’t miss the Youtube link there. It provides an excellent visual of what a vein structure looks like.), the average grade of gold was 8.44 gpt, and the resource was estimated at 181,000 ounces of gold and 2.8 million ounces of silver. Grade has improved at depth (as with Pelangan) and there’s probably in the range of 250,000 ounces in the resource estimate now.
Market capitalization: $468 million. Southern Arc’s market cap: $177 million. Huh?
The key for Way Linggo (and for Southern Arc) is that, once you’ve got a viable resource by which to justify production, you have a basis for self-financed exploration in surrounding areas. According to Mike, “I suggest that the phase 1 drilling at Pelangan, and the two deeper holes PLD001 and PLD002, have enhanced the potential of what was seen at surface. I am really looking forward to geology and assays from the ongoing Phase 2 at Pelangan and the Mencanggah drilling.” As plain from the map, above, these structures travel in clusters. Mike Andrews figures there’s potential (that means another IF, I’m afraid) for literally dozens of Way Linggos on West Lombok. D’ya think Mike is getting any ideas here? As shown in the Way Linggo example, it doesn’t take much to get started.
Fully permitted, extremely low labour costs, open pit mining, ready made port adjacent to the property, easy access, and no forestry issues make West Lombok an attractive consideration. Ask Bob Gallagher, current President and CEO of New Gold and former VP at Newmont responsible for the development of its Batu Hijau mine, why he’s joined Southern Arc’s Board of Directors. Ask Bob Parsons, until recently a member of the Board of Directors for East Asia Minerals why he’s chosen to join Southern Arc’s Advisory Board. Does the term, ‘no brainer’ come to mind?
Raja is the vein of current drilling activity at Pelangan. IF continuity of grade and width (in comparison to PLD002) are confirmed at depth (just to be conservative, let’s go with 150 metres in depth, rather than the reported vertical extent of 300 metres) and along its 1 km. strike, my back-of-envelope calculation yields 391,717 ounces of gold for Raja alone. Valued at $500 per ounce (one-half of the $1,000 per ounce paid for Andean), the small Raja vein on its own adds $1.79 per share value, fully diluted. Remember that the Raja vein represents only a fifth of what’s been identified in MSBs in Pelangan, and only 1/30th of what I think will eventually be counted in strike length for Pelangan and Mencanggah combined. In the end, at current gold prices, a fully defined resource should catch something in the range of $250 per ounce, but you can be sure that the final resource count will not be based only on the small Raja vein. Much much more to be seen here.
Southern Arc’s market cap: $177 million.
Let your imagination take over for a moment here.
Here’s where it seems fit to say that what they’ve found on the surface at Mencanggah looks even better than what they’ve found on the surface at Pelangan. Two-metre trenching at 239 gpt Au certainly catches my attention. How do you spell ‘bonanza grade’?
Phase 2 drilling at Pelangan and Phase 1/Phase 2 drilling at Mencanggah are scheduled to include more than 25,000 metres into the epithermals over the next 12 months.
IF Phase 2 at Pelangan continues to confirm or enhance Phase 1 at Pelangan; and,
IF Phase 1 at Mencanggah matches closely with Phase 1 at Pelangan...
Well, you know what they say: IF A=B and B=C, then A=C.
You can run the numbers for yourself at:
http://www.grahamanalytics.com/Toolbox/block.htm
Just plug in: grade of gold; strike length; depth; and width, and see how many ounces you’ve got. Play with it some, varying your factors. Then punch in what you think a major would pay for the ounces in the ground, the number of shares, fully diluted, and the exchange rate (today, it’s 0.96) and see what it’s worth per share. I’m too embarrassed to say what I get. Let me know what you come up with. Remember, this is just ‘what IF’ stuff at work here.
At the same time, this exercise will become progressively more meaningful with each new piece of drilling news. Don’t fool yourself. The majors left on the sidelines while Southern Arc drills out this property will be punching the numbers into very sophisticated models. They’ll know what’s there long before the NI43-101 report is released. I’ve heard suggestion that this Company won’t be around to produce a compliant resource estimate. I wouldn’t say so, but again, we’ll see.
Southern Arc’s market cap: $177 million.
You know, there’s something I forgot to say about Pelangan and Mencanggah. Remember that big open space between the two prospects. There’s a big hill there. Aeromagnetic survey work done perhaps a dozen years ago by Newmont leave the Company describing this 4 km. by 2.5 km. footprint as: “Undeveloped targets showing localized porphyry alteration signatures and coincident magnetic anomalism associated with favourable structural intersections.” Early to say anything of great significance, of course, but the area of this footprint is 22 times the area of Grasberg’s alteration signature footprint. This space is ‘prospective’ for multiple porphyry targets and these are likely to be on the scale of 500-1000 metres in diameter… each! Batu Hijau has a diameter of 800 metres; Grasberg – 600 metres. Oktedi – 800 metres. Lots of work to be done here. I believe this space between Pelangan and Mencanggah is one of the topics Steve Garwin was talking about when he described West Lombok as a textbook case in geology.
Without drilling, this is still just one more opportunity for pleasant thoughts when your head hits the pillow. The Company has plans to conduct a new aeromagnetic survey over the entire property this year. With significant advances in related technology, the Company wants to have the best available data before they drill into new porphyry targets.
I’m not even going to get to the page that says West Lombok is just one of four of Southern Arc’s current properties in Indonesia, and that the other three have already been joint ventured through to and including Bankable Feasibility Studies, fully funded by two partners among the largest miners in the world, Vale and Newcrest. Let’s just leave that as a footnote to this story.
The flow of news for Southern Arc is just about to begin. With Phase 2 drilling at Pelangan and a combination of Phase 1 (50-60 metres) and Phase 2 drilling at Mencanggah, there will be plenty to talk about in the weeks and months ahead. I anticipate as many as 30 drill holes per month to be released. I won’t bore you with my calculation for this, other than to say that it’s based on no more than six rigs on site. I expect new rigs to be added as the drilling program hits full stride. I will be surprised IF we don’t see up to 10 rigs working these two prospects by the Summer months. I should also say that this does not include any drilling on the joint venture properties, expected to commence in Q3.
Southern Arc’s market cap: $177 million.
Call me foolish. Call me irresponsible. Call me crazy. There is no shortage of crazy and irresponsible fools out there, ready to pick numbers out of the big blue sky, but without a mechanism by which to explain any logical train of thinking. My own mechanism may be full of IFs, but there it is for all to see. One by one, the IFs will all fall away. Fact and myth will be separated and revealed as each new veil is lifted on an evolving picture. Call me what you will now, but promise you’ll come back in 12-18 months and let history have the final say.
With respect,
Kevin