A Pleasant Sunday Afternoon
January 17, 2011
Q1: My back-of-envelope calculations on Selodong suggest the ‘potential’ for 540 million tonnes of ore, with grades of .235% Cu and .35 g/t Au. Without saying anything that would offend regulatory restrictions, are you in a position to comfortably tell me that I should throw away my envelope collection and just stick to my day job?
A1: No. (Mike Andrews)
… and so began a very pleasant Sunday afternoon.
Hopped the train into Toronto yesterday morning, and spent four hours with John Proust, Mike Andrews, and Hamish Campbell. On Friday, they had begun what might well be termed a ‘shouting from the rooftops’ road trip, involving thirty plus presentations in at least ten cities over a two week period. Mike and Hamish flew into Toronto on Saturday. John followed on the redeye, arriving at 6 o’clock Sunday morning. They went straight into a meeting yesterday morning, followed by the afternoon with me, and two more meetings in the evening.
Our session was interspersed with discussions on the tweaking of their presentation, based on initial feedback from earlier meetings. John’s BlackBerry rarely left his hand, taking calls, sending emails, and monitoring incoming messages. Mike and Hamish were trading images and files back and forth on their laptops while we spoke. The threesome’s itinerary over the next two weeks is a continually shifting target, with another city added during our session.
(left to right, John Proust, Chairman and CEO; Mike Andrews, President and COO; Hamish Campbell, VP, Exploration)
A week ago, the Company put out a News Release announcing receipt of the long-awaited IUP for West Lombok. This 25-year mining license frees the Company to explore the three key prospects on Lombok Island (Selodong, Mencanggah, and Pelangan) through the next five years, converting automatically to a 20-year production license with the potential for two 10-year extensions. Field work plans for the next twelve months were detailed in the NR, to include 25,000 metres of drilling on Lombok, employing two drill rigs by end of February and two more by end of March.
Well, this is a small and nimble group. The execution of their plans is somewhat fluid, flexing where appropriate so as to take advantage of new outcroppings, so to speak, as they appear. Case in point. Yesterday, I learned that they now plan for 29,000 metres of drilling on Lombok in the next year. Second case in point. Arrangements are now in place for three rigs (not two) to be on site by end of February and another three rigs (not two) by end of March. To say that these guys are itching to get on with the show would be an understatement.
For more than four years, this Company has been tiptoeing around West Lombok, under the very dark cloud of an unauthorized, but nonetheless existing decree from the former, now imprisoned, provincial governor, rendering all mining activity on Lombok as illegal.
West Lombok is seen by some as even more prospective than neighbouring Sumbawa, home to Newmont’s world-class Batu Hijau mine. My take is that a number of influential groups have been jostling over the past four years in hopes of scooping Southern Arc’s West Lombok property. What better way to accomplish this than to render mining on the island illegal, sever the Company’s legal tenure on the property (since mining would be illegal), make mining legal again, and issue the permit to someone else. This may be no more than my active imagination at work on conspiracy theories… or maybe not.
Witness the almost 2 ½ year delay in the release of drilling results for two holes on the Pelangan prospect:
Q2: Were the Pelangan drilling results held specifically because you had not yet received the IUP?
A2: Yes. (Mike Andrews)
Q3: Were they that good (so as to place the property at risk)?
A3: Yes. (Mike Andrews)
In short, the Company is, with the issuance of the West Lombok IUP, now free with legal tenure to advance this property in full force.
Southern Arc enjoys first-mover advantage in the re-birth of one of the world’s most highly prospective regions. Its operational team (stress that word, ‘team’, including Andrew Rowe, Chief Geologist) is deep in Indonesian experience (collectively, 65 years), matched strongly on the corporate side by John Proust. It holds a diversified portfolio of four properties. Three of these have been joint ventured with two of the largest mining companies in the world (Vale and Newcrest), and will be advanced solely at the cost of the partners through to and including Bankable Feasibility Studies. The securing of these joint ventures should be enough to support the notion that these are three strong prospects. The fourth property, West Lombok, is the flagship of this portfolio. West Lombok has just received a 25-year ticket to ride. My understanding is that the Company has recently received five offers on this property. It has (wisely, in my view) opted to leave suitors drooling on the sidelines over the next year, waiting and watching. In a bull market for gold and copper, those suitors will still be looking to replenish their reserves in another year. In the meantime, Southern Arc will have more chips to bargain with, including an NI 43-101 compliant resource estimate. They have a program laid out to achieve that objective and are taking steps to move into that program aggressively within the next month. I anticipate more than 200 holes being drilled into the Pelangan and Mencanggah prospects over the next twelve months. The only unknown in this picture is funding. The 24 month budget for West Lombok, alone, is $16.4 million, $6.4 million of that in the first 12 months. All I get from John Proust when I raise the topic of funding, however, is a smile. I guess we’ll all just have to watch and see what has him smiling.
Miscellaneous and Randomly Ordered Tidbits
Q4: Have you yet dismissed the ‘fingertip/palm’ concept for Selodong?
A4: No… but you should be thinking about this as many hands extending across one big system. (Mike Andrews)
During the drilling hiatus over the past 2 ½ years, key staff have been seconded to other Indonesian operators (including Mike Andrews’ Way Linggo project on Sumatra. By the way, he is no longer attached to that project, and is dedicating himself now to Southern Arc.), on the condition that they be returned to Southern Arc upon resumption of activity on Lombok. Staff are now back with SA.
The Company will employ a local labour force of about 150-180 unskilled workers, on a rotating basis, thereby bringing the total to a level perhaps two or three times that number.
Pelangan: The system is intact, and that’s very encouraging. “We’ve drilled down 200 metres. It could well run another 100 metres below that.” (Hamish Campbell or Mike Andrews)
Mencanggah: While no drilling has been conducted there yet, they have 2,500 surface samples. In contrast to a porphyry formation, what you see at the surface in epithermal formations is what you see at depth. Much greater reliability in surface sampling. (Hamish Campbell)
Dr. Steve Garwin, described by the Company as perhaps the world’s leading authority on structural geology, will be consulting on site for Southern Arc throughout the next year. He will also be making a presentation to attendees of the Company’s investor session in Toronto on March 6th of this year. He will also be present at SA’s Coreshack table at the PDAC conference that week. A member of the Company’s Board of Advisors, Dr. Garwin wrote his doctoral thesis on none other than Batu Hijau. He worked at Newmont for ten years, two as their Chief Geologist in Nevada.
Forestry permits will not be an impediment to forward movement on Lombok.
There is a genetic relationship ‘across’ the Lombok property.
For a mere $10,000 I can buy my own copy of Micromine software, enabling me to plot drilling results into a 3D picture. Something to consider.
Q5: Mike – tell me about your thinking in advance of taking on the presidency of SA? What did or do you see in this Company?
A5: I see what I’ve always seen. In my joining the Company, what you’re seeing is a formalization and acceleration of what I’ve been doing all along; specifically, explorational geology, now with an enhanced focus on operations.
Major mining companies like high sulfidation epithermal deposits a lot (over low sulfidation epithermal deposits), both in and of their own value, and because they also suggest the potential presence of a nearby porphyry. High sulfidation epithermals sit above porphyries, whereas low sulfidation epithermals are peripheral to underlying porphyries.
Q6: John – Even with the recent implementation of the Shareholders’ Rights Plan, at current share price, do you still see some risk of a hostile takeover bid? In the event of an unsolicited takeover effort, what do you see as the Company’s strongest defence against falling to a lowball bid?
A6: There’s always a risk, but with three properties joint ventured, and a full program to advance the Company’s flagship property, it shouldn’t be difficult to make the case for shareholders to hold. We feel that the Company is greatly undervalued and that the upside from current share price is significant. While this is certainly a strong point, I reckon that the Company’s accentuated attention to shareholder relations may ultimately be the ace to play. This is a Company dedicated to maintaining close contact with its broad base of shareholders. If and when push comes to shove, John Proust and his team have earned a high level of trust by which to make their case.
Sumbawa: While the joint venture with Vale provided for funding to be held until forestry permits were in place, Vale has not waited. Funding has begun and activities are underway on both Sabalong and East Elang. Drilling is expected on Sabalong by end of the first quarter. (Hamish Campbell)
Q7: Do you have any worries about stability in the leadership of Indonesia. SBY (the president) is limited to two terms. Might there be a change in direction vis à vis support of mining investment.
A7: None. SBY is just in the second year of a second five year term. Steps are already underway to prepare for his successor. Support for mining will continue. (Hamish Campbell and Mike Andrews)
Vectoring: Along with drilling results, surface samples, and structural considerations, temperature, texture of rocks, ratios of gold:silver all contribute to the vectoring of drill targets. Geologists are able to read the rocks, for example, to determine at what temperature they were formed. In Pelangan and Mencanggah, they’re looking to follow rocks formed at between 190-220 degrees Celsius, as that’s the range for precipitation of gold in the hydrothermal process there. As another example, the ratio of gold to silver over an area of interest moves according to its relative position to the source at depth. As the ratio of gold to silver rises, you’re getting warmer. Structurally, while the West Lombok system (the fault zone) is generally described as running northwest, within this system, geologists are looking for perpendicular faulting. Think of this as identifying paths of least resistance. Where intersection faulting appears, there is lesser resistance to the upward flow of hydrothermal fluids. Hence, finding and following structural intersections leads to concentrations of target metals.
The total surface footprint of alteration for Grasberg (the world’s largest gold mine and third largest copper mine, located in Indonesia in the province of Papua) has a diameter of 650 metres. While yet undeveloped, between Pelangan and Mencanggah, Southern Arc has identified a number of targets showing localized porphyry alteration signatures and coincident magnetic anomalism associated with favourable structural intersections. Just one of these targets marks a surface footprint of more than 4 km by 2.5 km. Early to draw any conclusions, but intriguing, to be certain. The entire West Lombok property measures 13 km in length along a structural corridor dotted everywhere with promising anomalies.
There are perhaps a dozen more such porphyry targets across the property. (Mike Andrews)
Including Selodong?
No. Outside of Selodong. (Mike Andrews)
With respect,
Kevin Graham