All Systems 'Go!'
February 12, 2011
For those who may not have had access to the line-by-line transactions for Southern Arc yesterday, here's essentially what happened. One seller, RBC, carried the day through to its conclusion by way of a machine-driven order. Every five minutes, and I mean precisely to the second, every five minutes, the order was to sell 800 or 900 shares into the bid. Very early, it became clear to any buyers that this was going down, so buyers backed off, waiting for lower prices.
We'll never know for sure who the seller was nor their reasoning. This is one possibility, but the one I subscribe to as the most plausible explanation. One of the participants in the $27 million bought deal financing, or someone who still hopes to partake in the over-allotment of 15%, already owns shares and doesn't really want to add significantly to their current position. Seeing $1.60 shares available in the placement, they've decided to unload whatever they can above $1.60, knowing that they'll be able to replace sold shares in the offering. From their perspective, everything they can sell above $1.60, up to the quantity they held in the first place, is a profit opportunity.
This arbitrage process can and will likely continue up to the closing date (February 23rd). It may also be the reason for the seemingly perpetual availability of 200-250 thousand shares between the market and $2.00. Anyone holding shares and able to replace them at $1.60 would consider the trade. This may, in fact, result in a depressed share price as some of those 200-250 thousand shares drop on the Ask toward the $1.60 level in the days leading up to the closing of the financing.
What we don't know, at the same time, is the potential for new buyers (either those sitting on the sidelines, or those participating in the financing but learning that they won't be getting as many shares as requested - and there will be a few of those) to enter the picture, driving share price up in advance of the closing.
This dynamic is unpredictable. Just as the efforts to suppress share price pre-financing were only modestly successful (owing to the support and interest of longstanding shareholders), efforts to assume new positions may push through some of the overhang. We don't and can't know. I won't be surprised to see share price rise before the closing date. I also won't be surprised to see share price decline to a level close to the offering price as participants squeeze the last few pennies out of this arbitrage opportunity.
This very short-term dynamic is of no consequence to me, only a passing curiosity. What happens after the closing date will be of greater interest, as we will see a level playing field for the first time. The Company has built a strong governance and management team and continues to add bodies where appropriate. They've secured a good collection of highly prospective properties - no one-trick pony here. They've secured permits on all properties, extending out 25+ years. Three properties joint ventured with two major mining companies. Finally, they've arranged financing (with reportedly in the range of 90% to institutional investors) to take them out two years of exploring on their flagship property with a fast-track objective to produce a compliant resource estimate.
They're also in a position to consider new potential Indonesian properties as may come available. Remember that this Company is a prospect generator, always on the lookout for new opportunities. This generative process will continue as current properties continue to be dealt or partnered with majors.
While we can debate all day about the pricing of the offering (I still say that NO WARRANTS is the proper headline for this one), the truth of the matter is that Southern Arc is now in the position that we've all been waiting for over the last number of years. With a current plan to drill more than 200 holes on Lombok in the next twelve months (not to mention work funded by the JV partners on Sumbawa), we're going to be seeing a steady flurry of drilling results, beginning (I'm guessing) by mid-April.
These results will be batched so as to make sense in drawing a picture of each specific area, so don't expect to be seeing single hole news releases. At the same time, with six drills turning by the end of March, there will be no shortage of releases in the months to follow. See the Company’s new Corporate Presentation. This is the one made to 50 groups in 45 presentations on the recent road trip.
What happens in the next couple of weeks is, as I say, of no consequence. What happens after that, principally, will be a function of what the drill bit says. For that, we'll just have to wait and see. This is a wait I can take, however, as Southern Arc now has command of its own destiny. No longer waiting for IUPs, whatever goes right or wrong for SA is entirely on the plate of its field and management team. Knowing a bit of the personalities, self-determinism is a welcome opportunity indeed. The games now at work in the marketplace are just short-term noise, to be ignored.
All the pieces are now in place to move this Company forward.
That's really all that counts.
Best,
Kevin