Connecting the Dots
June 22, 2011
Last December, I posted a piece called Relationships. Worth a return visit, perhaps. Your call. An excerpt from that piece:
As in all matters important, so in the case of Southern Arc. Relationships rule. Let me say that again. Relationships rule. Think of your own success in business and in pleasure… The number one factor in this success, I would contend, has been the creation, promotion, maintenance, and support of relationships. All the technical skills in the world will take you nowhere if you don’t have anyone on your side. People do not work with people whom they do not like. End of story. Do not underestimate this factor in governing Southern Arc’s successes to date in Indonesia.
Do not underestimate this factor in governing future successes for Southern Arc in Indonesia. This week’s news underscores the Company’s focus on relationships as a critical component of its presence in Indonesia.
This week’s news says much more than is written down in words.
Here’s my take on the recent turn of events.
For the financing finalized in February, John Proust was ruminating on how much he wanted to raise. If I recall correctly, the sum of $45 million was floating about for a time, then moved off the table. There was no shortage of available funds. At $1.60 (no warrants), I believe he could have raised to that level, but chose not to do so at the time. He was emphatic in his description of the need to select the right ‘partners’ for Southern Arc’s next stage. The task was not so much in raising funds, but in partitioning segments to assure the right mix of players being introduced to the game. My thinking (and that’s all it is) suggests to me that this week’s new investor, the State of Qatar, was identified at that time, but not yet ready to commit. These folks are known for conducting due diligence at a level to match that of any major mining company. Time was too short for them to participate in the February placement. Just the same, it was a relationship not to let pass, so the conversation continued. Paths to the finish line are most often not marked by straight lines. Site visits by geologists… frequent flyer points for John Proust… and more conversation… in the end, yesterday’s announcement.
In and of itself, this new investment is significant. I cannot think of another company listed on the Venture Exchange to take on such an investor.
The State of Qatar enjoys high profile, internationally. It’s also the most stable of Middle Eastern countries, controlled by one family since 1825. Ruled by the Emir, Sheikh Hamad bin Khalifa Al Thani, Qatar boasts the highest per capita GDP in the world. Rich in oil, Qatar is also home to 14% of the world’s proven reserves of natural gas, ranking third on that account.
They’ve got money to invest and have committed to a program of diversification through investment.
The State already holds a large stake in the telecommunications giant PT Indosat, and is looking to invest heavily in Lombok tourism through its property arm Qatari Diar (former home to Southern Arc’s new nominee Board member). Late last year, the Qatari government set up a $1 billion fund for investment in Indonesia, primarily targeting mineral resources. I’ll stand to be corrected on this, but I believe Southern Arc is the first such investment for them. No small matter, I think.
Important to note that Qatar Mining Company is not a physical mining company. It’s a newly created investment company. Its participation in this placement through its holding company (Tadeen Cyprus) does not preclude future participation by major ‘physical’ mining companies.
Of great interest to me is the human dynamic that brought the State of Qatar to the table with Southern Arc. We’re back to relationships here, I think.
Here’s the Emir of Qatar:
… and here’s the President of Indonesia, Susilo Bambang Yudhoyono (SBY):
… and here’s the two of them heading for a round of golf with their wives. A very formal game, I take it.
Relations between the two are reported as strong, friendly, and of mutual benefit. Each country is an investor in the other. Each leader has visited his counterpart since 2006.
A number of years ago, SBY appointed Dr. Alwi Shihab as his Special Envoy to the Middle East. Today, the Company announced that Dr. Shihab has been appointed to its Board of Advisors.
A former Cabinet minister (both Foreign Affairs and People’s Welfare), Shihab has held many senior posts in each of government, business, and academia. Two PhDs, one in philosophy, one in religion, he is described by Wikipedia as direct descendant of the prophet Muhammed. A moderate by all accounts, his academic focus has been on cooperation between Islam and Christianity. See his very interesting presentation at Brigham Young University in 2006, entitled, “Building Bridges to Harmony Through Understanding”.
Here he is again, this time with SBY:
I found a piece on the Internet that, translated, describes the two men each as witnesses at a wedding, one for the bride, the other for the groom, son of Aburizal Bakrie, prominent businessman and politician (some say Bakrie is the second most powerful man in Indonesia, others not so harsh in their estimate).
Do not, I repeat, do NOT underestimate the importance and the value of such relationships in the course of events. It is clear that John Proust does not miss the message here. Some operators in the region opt to use their size as an instrument of influence. Others try to create workarounds. Southern Arc has chosen, instead, to embrace the culture of its host country and to engage. This was evidenced by early efforts in socialization in the neighbouring communities to its field operations. It was marked in the inclusion of Regencies as joint venture partners, a first in Indonesia. With today’s announcement, the Company’s commitment to establishing, promoting, and supporting relationships at the highest level within Indonesia is unmistakeable. John Proust and his team are building a company with a formidable foundation. This is not a fly-by-night pump and dump like the many listings littering the Venture Exchange. Look at the stellar collection of appointees over the past year, both to its Board of Directors and Board of Advisors.
On the new investment by the State of Qatar, the money is just one thing. To my way of thinking, the money is nice, but almost incidental to the larger picture. This investment is as much a statement to the investment community. For the larger investor world, it’s a significant validation of what most of us have known for some years. In the meantime, while other junior operators in the region still scramble to be noticed, Southern Arc has, in the last year, joint ventured three key properties with two major mining companies, raised a couple of big buckets of cash, cleared permitting on its flagship property, and bolstered its position with key appointments and a prominent new stakeholder.
Key questions to ask (and answer) include:
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How did Southern Arc come to the attention of the State of Qatar?
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Presuming the answer to 1., above, how did Southern Arc come to reside on the radar screen of higher-ups within the Indonesian government? Remembering that friends don’t leave friends out to dry, such placement must have been in a favourable viewing to have garnered an introduction to friends in the Middle East.
These first two questions are of interest, and likely valuable to my understanding of where the Company is now. At the same time, the next set of questions are more pertinent to the prospects for this investment on a go forward basis.
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What happens next?
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Will we see an acceleration of the Lombok drilling program, and an earlier than projected compliant resource estimate?
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Does this investment by the State of Qatar send a message to other deep-pocketed investors, both in the Middle East and around the world?
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Does today’s high level appointment send a message to those who might seek to discourage Southern Arc? To wit, “don’t mess with Southern Arc!”
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Does this week’s news point to new opportunities for Southern Arc?
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Does this week’s news point to new door-openings as the Company navigates through bureaucratic red tape for future acquisitions and permits?
For as long as I’ve held this stock (just over four years now), the naysayers have always tossed out political risk as the biggest stumbling block for the Company. The geology, well, everybody sees the potential there. Exploration risk is the one thing common around the world. This region is recognized universally as one of the most highly prospective on the planet. Results so far have been very encouraging. The Company has de-risked three of its properties through the joint ventures with major mining companies.
It’s always been the political risk that has held many sitting on the sidelines. Fully funded, newly licensed, regency governments as partners, multiple rigs turning, the State of Qatar holding a 9.99% stake in the Company, and a well placed and highly respected government official on its Board of Advisors, Southern Arc is ready to rock and roll. This collection of recent developments serves to neutralize whatever risk premium was formerly assigned to operating in Indonesia… uniquely for Southern Arc, that is.
This achievement effectively renders the political risk for Southern Arc at a level lower than that of operating even in North America. Governments… multiple governments, all connected by close interpersonal relationships, have a stake in Southern Arc’s success. Match that if you can.
What’s it worth in share dilution to all but eliminate political risk here? If share price is poised to rise as a direct result of this move, who cares about dilution? At the end of the story, price per share is your metric, not the number of shares. The massive reduction in political risk, in one fell swoop, I think, is the real story of the week. For those looking to make a quick flip for a buck on Southern Arc, this may mean little or nothing. For those looking to enjoy a steady rise in share price, as the case for this company is established, promoted, and supported by key relationships, this week’s news can not be topped.
Well, drilling results might do the trick, but that’s a story for another day.
Best,
Kevin Graham