Big Picture… Little Picture – another walk around the barn
November 24, 2010
This is my answer to a fellow’s bulletin board question: Are we looking at 3-5 years before realizing ‘full value’ as an SA shareholder?
On the timing for realization of ‘full value,’ I’m afraid you may not like my answer. As in so many things, the honest answer is, ‘it depends.’ Expect this may ramble a bit (it’s a genetic predisposition, I’m told), so please bear with me.
Your question addresses risk and reward, as it rightfully should. I will respond in these terms from a number of perspectives.
-
Timelines, of course, have been and will continue to be the wild card in this game. Truth be told, we don’t know what the timelines will be and won’t know in some cases until we have already arrived.
-
This said, timelines should be categorized by type. The type we’ve agonized through over the past number of years has been bureaucratic. With that hurdle almost fully cleared now, timelines will be of a type more in the control of property operators. This will include both Southern Arc and its JV partners, variously, as properties move through stages of advancement.
-
John Proust could have ‘risk reduction’ as his middle name. As odd as that may seem for someone operating in this highly speculative market, it’s true that, within this market, his focus is always with an eye to the reduction of risk. His middle name, by the way, is Graham.
-
Southern Arc offers investors good risk reduction in its diversified portfolio of properties. While all hereabouts would agree that West Lombok is its current flagship property, it is also important to acknowledge that the Company has recently inked significant joint ventures with two separate major mining companies. This would suggest (to me, anyway) that the three JV’d properties are nothing to sneeze at. If the Company is able to attract interest from Vale and Newcrest on what most would call secondary properties, one can only imagine what may come of Lombok in due course.
-
Of current properties, three are to be advanced entirely on the ticket of the partners, through to and including Bankable Feasibility Studies. This is not to be underestimated in terms of what it has already achieved for SA. As suggested by others, these three properties have essentially been ‘de-risked’ for Southern Arc. Their advancement through to whatever resource delineation may be achieved is at no cost to the Company. Moreover, should the major partner opt not to pursue a property through to the option stage, it will revert back to SA… at no cost. With little investment to date on these three properties, SA can only be a beneficiary here. Should a property not be large enough for the major to pursue, this does not mean it will not be of appeal to a mid-tier miner. Of course, only time will tell.
-
In the meantime, SA can maintain its focus on the Company’s corporate strategy; namely, to identify, acquire, and advance highly prospective Indonesian properties.
-
This is consistent with the recent relinquishment of the two Java properties.
-
This is consistent with partnering on the advancement of the potential elephants on Sumbawa.
-
This is consistent with holding on to West Lombok until such time as higher value can be shown. Much drilling is planned for Pelangan and Mencanggah. They pretty much already know what they’ve got in Selodong, but need to bring the epithermals up to speed before either partnering or selling off the property. While I would not label the Selodong plans as ‘care and maintenance,’ in relative terms, the focus will be on Pelangan and Mencanggah.
-
During my Friday evening (at Southern Arc’s AGM) conversation with my former professor of strategy, Dr. Chris Bart, he was sharing his thoughts on keys to success. As he noted, for success in real estate, the key is widely agreed to be ‘location, location, location.’ For success in investment, ‘buy low… sell too soon.’ Every field has its simple little key. For success in strategy, he argued, the key is ‘focus, focus, focus.’ My answer to him, for the record, was that success in strategy was best served by management understanding of both the ‘big picture’ and all the ‘little pictures’ that create the big picture, along with a capacity to move seamlessly between the two.
-
When you say, ‘full value,’ I’m compelled to consider the concept of ‘time value of money.’ What’s full value differs for each of us, based on any and all of: personal risk tolerance; alternative investment opportunities; age; personal needs and wants; the marketplace in general; and a whole host of other factors. For you, by way of example: Would $3 per share be ‘full value’?… $5?... $15? Moreover, would $3 by the end of December be ‘full value’ as you consider the notion today? Or would $3 by April 30, 2011 be ‘full value’ as you consider it today? Are you retired… or looking to retire? Are you independently wealthy and happy to sit on Southern Arc until it fully blooms, whenever that may be? You cite kids in college. Of course, that must weigh into the calculation.
-
Some may look at the JV’d properties and say, ‘these will be 7+ years in the realization of full value for SA.’ I heartily disagree. Now, it’s true that, if one or more of the properties bear fruit, and if the Company chooses to stay on for the ride, this would be true. I, for one, cannot imagine, in the event of favourable results in the work funded by a JV partner, that SA would be around to see the first pour of gold. Well, I can imagine it, but don’t expect it. In the first place, I figure the senior partner will, at the first sign of an elephant, make a move to take out the junior partner, SA. Again, the time value of money will bear heavily on that exchange. I do not think there’s a chance that John Proust will not be sitting down at the table, negotiating a buyout of the Company’s interest on such a property. Risk reduction. Risk reduction. Risk reduction. Just as everything has a price and just as the world is a fluid thing, just yesterday, he told me that Southern Arc would NOT become a porphyry miner.
-
I disagree with the notion that the probabilities are high against Southern Arc finding an elephant. We’re pretty much already looking at part of an elephant in East Elang, courtesy of the 1.5 billion tonne beast on the other side of the fence (Newmont’s Elang Dodo). What we don’t know yet is how much of that elephant (toe/leg/torso/trunk) resides on SA’s side of the fence. Time, as always, will yield all.
-
Now, to the epithermals on Lombok. The stated plan of attack is to fast-track Pelangan and Mencanggah to NI43-101 compliant resource status. 12-18 months is the stated time frame. Rumours overseas abound in recent months about multiple majors tromping all over Lombok. Interest is reputed to be high. I don’t know the truth of this matter, but am certain that, if these rumours hold any truth, good results from drilling at Pelangan and Mencanggah will have these majors knocking on John Proust’s door a lot sooner than later. It may never get to the stage of compliant resource status. The sooner the outright sale, the better the price for the acquiring party. To bastardize the Popeye cartoon character, Wimpey, “I will gladly pay you less today for a hamburger on Tuesday.” Majors are desperate to replenish their reserves. With gold nowhere near the top of its run, they’ll still be looking all the way through the proving up of resources on Lombok. Be assured, they won’t want Southern Arc to be able to stand up on the auction block with an attractively defined compliant resource. Be assured that the majors will be punching every drilling result into their own models on a progressive basis. They’ll know what’s there long before the Company issues a compliant resource estimate.
-
General thinking is that there may also be a couple of very large porphyry elephants between Pelangan and Mencanggah. Have a look on the Company website map. http://www.southernarcminerals.com/projects/lombok/west_lombok/maps/index.php?mode=image&imageurl=/_resources/maps/west_lombok/100226-WLombok-AirborneMagRTP.jpg The outline of just one of these suspected porphyries appears to me to have a footprint some 4-6 times that of Grasberg. From where I sit, the Company would do well to drill out what appear to be some very nice epithermals (20+ km. of proven strike length… so far), watch share price rise with results, do another high level financing in a year’s time, and drop the big drill right down the centre of the suspected porphyry… just for fun.
-
Will the entire Company be sold? Could be but I don’t think so. Hard to see a major coming in because of Lombok and wanting to get into bed with the JV partners on three other properties. Of course, they could always pre-deal those properties, I suppose. I see John Proust partitioning off each successive property, including those not yet identified. I see Southern Arc as a project generator, one with the ambition to be involved in a great number of properties, but the common sense to let someone else foot the bill.
-
At the same time, the Company is clearly of a mind that Lombok is worth potentially more than 200 drill holes in the next year. Noting the standard line of ‘drill it and kill it’ they don’t seem to be overly concerned on that front. I think they are confident in what they see and are fully prepared to swing for the fences.
-
So… where does that leave your ‘full value’ question? Unanswered still, I’m afraid. Unanswered for me, too, at present. I don’t know if I’ll ‘sell too soon.’ With a little luck, the ‘selling’ decision will be made by a continuous series of project takeovers, leaving me to sell shares of major mining companies, not of Southern Arc. Only time will tell.
Hope this adds some value for you.
Best,
Kevin