Multiple tens of dollars
August 20, 2011
Perhaps I could and should have entitled this piece, “a long walk around the barn” but I opted to catch your attention instead.
Yesterday, I received a very kind note from a lady named Christine. Seems she visits this site “at least once a week… can’t wait to see what you will write next.” She also finds it hard to believe that I call this a hobby. Well, Christine… I look at life as a collection of games, not as a task. This is not to say that I have no objectives, nor that these objectives are not well defined. I’m a big fan of Jack Nicklaus’ visualization technique:
"I never hit a shot even in practice without having a sharp in-focus picture of it in my head. It's like a color movie. First, I "see" the ball where I want it to finish, nice and white and sitting up high on the bright green grass. Then the scene quickly changes, and I "see" the ball going there: its path, trajectory, and shape, even its behavior on landing. Then there's a sort of fade-out, and the next scene shows me making the kind of swing that will turn the previous images into reality and only at the end of this short private Hollywood spectacular do I select a club and step up to the ball."
Or, in my wife’s regular cautionary words to me, “before you do that, Kevin, think first about where you want to be at the end of the story.” I suspect that some of the Southern Arc selling activity in the past two weeks could have benefited from this approach. A friend who holds SA for more than four years told me a year ago, during a big dip in share price, “everything about me says to sell… so I bought more today.” This is counter-intuitive, but reflects the way of the market. When there’s blood in the streets, buy. When everyone else is uncorking the champagne, sell.
To my point, though, there’s a saying that “you are what you think”. For me, this means that, if you can control your thoughts, you can control your destiny. One small step in this direction is captured in a morning greeting. When asked how you are first thing as you arrive at the office, answer, “great, fantastic, wonderful, never better” even though you’re hung over, nearly bankrupt, and going through a painful divorce. By mid-morning, you will be great, fantastic, wonderful, and never better. You are what you think. What you say embeds in your mind, so say something nice and positive and that’s what you will become. Works every time.
For my purposes, knowing where I want to be, I try to manage the framework of my thoughts to take control of the journey to my destiny. How do I do this, and how does it provide the motivation necessary to carry the day? Well, here’s the theory. I love games. I have lived for games since the day I was born. Whenever I play games, I’m loving life. So… I close my eyes enough to cloud the reality of work, and call it a game. If I love games, and can convince myself that work is a game, I can love my work. In fact, I don’t work. I play. Nice theory. Doesn’t always work… or is that play (?), but on balance it helps me to love my life every day. So… if you can figure out what you love most to do, find a way to superimpose it as an overlay to things you don’t so much love to do, and life will be much more tolerable, if not an outright pleasure. If I could only apply this concept to my exercise routine…
Along with the panic-driven selling on August 8th and 9th (what were they thinking?), someone has been tightly bracketing share price in an effort to walk it down for accumulation at lower levels. At various points, I saw as many as 237,000 shares on the Ask, coming from the same three houses. Progressively, these offers were stepped down, sending a message to anyone thinking of buying that, ‘this one’s not going up anytime soon.’ The same houses kept buying and selling back and forth among one another at lower levels, painting a picture of liquidity but at lower prices only. As share price recovered from the mid 80s, up to $1.44, this small group very deftly swirled it down again to $1.10. This event, alone, has placed a sustained dampening effect on share price, with buyers thinking, “Okay, I’ll wait. It might go even lower again.” At the same time, on the dips, the same three houses were picking up third-party table scraps.
What they didn’t account for was the will of another group of third-party players to buy up their blocks on the Ask. On the net side, more shares are being sold than bought by this group. I see no reason to think this trend will reverse itself at these prices. At 3:14 last Wednesday afternoon, a strong message was sent, as a big chunk of that ceiling block was taken out in one fell swoop. Those shares were clearly not intended to be sold, only to provide a psychological block to would-be buyers. Within seconds of the takeout, the rest of the block was removed. Ouch! At these prices, those shareholders who are confident in what they’re holding, and have the means, will accept such blocks as gifts. If the game-players think that there’s no fresh powder to continue clipping their wings, let me say emphatically, “you’re sadly mistaken.” You’re in way out of your league. If you don’t want to lose those shares, don’t put them up for sale. You may be left to play here and there, and may be lulled into a false sense that this game can continue unchecked. Trust me when I say, fresh powder is being lined up at this very moment. When will it be employed? Keep guessing. (1 Thessalonians, 5:2) As another friend said last Thursday, “someone gonna get hurt again.” He was not joking. While this jousting proceeds, the rest of us need only to stay out of the way and enjoy the entertainment of the match. As a passive observer (well, sort of passive, sort of observer), I’ve immensely enjoyed the show. In the words of yet another friend, “if you want to screw with my investment, be prepared to get screwed, but good!” All you’ve seen so far has been a shot across the bow. If that one hurt, you don’t want to see what is being held in reserve. There’s no such thing as Too Big To Fail. You’re not big enough to warrant deployment of the Enola Gay, but its pilot is on call just the same, and getting itchy fingers.
Enough on that. You’ve been warned.
Well now, I’ve told you that story only so I could remind you of the real story. Back to games and sports, ask yourself what your high school coaches used to say when you were faced with adversity. Focus, focus, focus. Keep your eyes on the prize. Big picture. Don’t get distracted. Your opponent will always be trying to take your attention away from the overarching objective. For me, this message came best in wrestling practice. Don’t watch the hands or feet of your opponent. Flail as they may in this direction or that, they can’t follow through without the sternum. Watch the sternum at all times when facing your opponent, and you’ll have the advantage.
Attacks on drilling rigs and silly manipulative games in the market are these flailing arms. In the big picture, even the general market can be seen as secondary to a degree if you know your business and have prepared well for the roller coaster ride. To be specific, Southern Arc has taken what might well be termed a ‘plodding’ mode of progress to this point over the past four years, lining up duck after duck. Without any serious promotion, this Company has successively acquired very highly prospective properties, struck partnerships on three of these with two of the largest mining companies in the world, and held on to its flagship property, West Lombok, in favour of delineating a resource before making a deal. First things first.
The Company continues to build its team. An impressive array of management, field geologists, advisors, consultants, and directors, not to mention relationships at the highest levels of all three tiers of Indonesian government.
The local Regency government is a 10% shareholder in the West Lombok project. Do you think this will not be a key factor in securely advancing your interests as a shareholder?
The Provincial government recently assigned the elite Brimob to provide security of drilling sites against a small group of local thugs. This assignment is not a willy-nilly everyday event. This is serious business. If you haven’t yet done so, you really should Google the Brimob. Check out the YouTube clips, too.
At the Central government level, it has been the ESDM (mining ministry) that has advocated for Southern Arc’s interest over the past number of years as it worked toward issuance of the West Lombok mining license (IUP). The Company has also recently named a close senior advisor to the President of Indonesia to its Advisory Board. Another recent addition to the Board of Directors is the man who oversaw the development of Newmont’s world-class Batu Hijau mine on the neighbouring island of Sumbawa.
I think it safe to say that the plodding stage is now over.
This team-building effort is in sharp contrast to the recent experience of another Indonesian explorer, East Asia Minerals (EAS.V). Director after director has resigned, including the Chair. The President has just been replaced. They’ve recently put out a resource estimate, much touted by high-profile (and I’ve promised myself to be nice here) ‘analysts’ to point to something in the range of 11-15 million ounces of gold… reality being just 2.5 million ounces with a 0.6 g/t cut-off. Now, 2.5 million ounces is nothing to sneeze at here. It’s actually quite good. It’s just not what had been pumped into the expectations of the marketplace. Share price has plummeted this year from over $8.50 to $1.05. EAS drilled out its flagship property under a cloud of uncertainty related to forestry permits, and now finds itself with a compliant resource estimate that underwhelms market expectations, and a suspended program at Miwah. Mere weeks ago, they announced (July 13th) that they were pressing forward in the exploration and development of the Miwah prospect, with this as the primary usage for $10 million raised at $2.90 per share. Days after the management and director changes, and share price wallowing at $1.05, activities at Miwah have been suspended until such time as greater certainty can be attained on the issue of forestry permits. First things must be done first! Over the past two years, share price of EAS has flown to great levels, making the Company the darling of a number of key commentators. Insider selling during this period has been nothing less than staggering (closing in on 4 million shares sold), with next to nothing in insider buying.
Insider transactions represent one of the first places to look when considering an investment!
Mike Andrews, President of Southern Arc, has been a big buyer of SA shares in recent times, including a million dollars’ worth at $1.60 in the February financing, with no warrants attached. He also bought 230,000 shares in the public market this year, at an average price of $1.56. The Chairman of the Company controls more than 10 million shares, fully diluted, and hasn’t sold a single share in the public market in the past two years.
In February of this year, John Proust raised $28 million in a financing at $1.60 and was criticized for raising too much at too low a price. Two months ago, he announced the raising of another $18 million (at $1.70) and a new partnership (in effect) with the Emir of Qatar, who happens to enjoy a close personal relationship with the President of Indonesia (Are you listening here?). More questions were asked about all this new money, and cheap money at that. Where, I ask, are those critics now? It’s only too easy to sit in an armchair on the sidelines, criticizing those with the gumption to step up and carry the ball downfield. Is Southern Arc’s management perfect? Not by a long stretch. Do they make mistakes? Yep! Like everyone else. The important question to be asked and answered, though, is how do they respond when caught in the error. The quick and decidedly strong response to the recent miss-step on drilling site security is, in my mind, a check mark in the ‘win’ column.
We are not what happens to us in life. We are what we do about what happens to us in life. Anticipate where you can, respond where you must, and move on with lessons learned. Good judgment comes from experience. Experience comes from bad judgment. What we’ve got to ask is, in the final tally, do the right moves outweigh the wrong moves?
This Company has a 6,000 metre per month drilling program to carry out, and enough money to drill at this pace for two or three years. That’s where the general market risk, this time, is different from 2008. If the market goes to Hell in a hand basket, Southern Arc will be drilling away, exploring for and delineating a resource, waiting for no one. Share price may suffer along with the rest of the market, but when the market comes back, where do you think the money will flow first? The current drilling program is set with the near-term objective of two initial NI 43-101 compliant resource estimates (Pelangan and Mencanggah) by June 30th next year. In a world where drilling rigs are in scarce supply, the Company’s president, Mike Andrews, is also a principal in a drilling rig company. While eight rigs were vandalized on August 8th, three rigs are already back on site, three more planned for within the next two weeks, and another batch in September. With the close of Ramadan, drilling will resume in full force. So… capacity is there. I’m sure there will be blips in progress, perhaps related to training of staff in such an aggressive program, perhaps in road preparation. Suffice to say, though, that this Company is bent and determined to meet its June 30th objectives and will do whatever it takes to complete the task. The will is there. I’m thinking that this 10-month period will be followed by some serious conversations with the major mining companies relegated to the sidelines. Remember that the Company has received five offers from majors to JV the West Lombok property. I don’t expect that any of those parties have left the scene. I do expect that they’ll all be punching results into their own models as drilling progresses. They’ll know what’s in the ground long before the compliant resource estimates are put out.
On July 8th, I posted an 18-minute video here and was stunned by the overwhelming response. I couldn’t believe how many times I heard the same reaction: “Wow! I get it. Now, I understand.” I had to go back and view it myself to figure out what was new here. After all, I hadn’t said much of anything that I hadn’t said before. What did Marshall McLuhan say? “The medium is the message.” I guess I could write it down until I’m blue in the face, to no avail. In the end, people like to watch TV. You’re probably not even reading this sentence. As much as I keep saying, “turn off the TV”, it just ain’t gonna happen. Well, if you can’t beat ‘em, join ‘em. I mention this video now only to encourage you to view it if you haven’t, and to view it again if you’re feeling nervous about your investment in Southern Arc Minerals.
I mention it also in answer to my title for this piece. Having resisted until now, maybe I’m making the biggest mistake, but I say, “what the Hell, it’s what I think, so here it is, for the first time.” Multiple tens of dollars is my target share price for Southern Arc. Friends with whom I’ve shared this target have strongly urged me not to cross the line and go on record with this. Some of them have much higher targets, but feel I’ll just be exposing myself to attack from the peanut gallery. Do I care about the peanut gallery? Not a whit. Ask me when I see this price being achieved and you’ll come up empty, I’m afraid. I may be stupid, but I’m not crazy… or is it the other way around?
Enough to say that, if the whole world doesn’t melt down before our eyes in the weeks and months ahead, I believe that the time for Southern Arc to make its move is now upon us. For the past three years, I’ve stayed focused in my writings on the fundamentals of this Company. The enduring question in response, however, has always been, “yes Kevin, but what do you think share price will be?” Ultimately, share price is a residual of all the many factors that create a Company. I’m not talking about day-to-day blips that cause spikes or valleys. I’m talking about the building of property, relationships, capacity, and team. As I consider all of these key components, I understand that a company is being built here. A formidable company, no less, and I’m not one prone to hyperbole. While you’ll find my ‘video’ voice to be purposefully matter-of-fact, my assessment of this investment is in no way matter-of-fact. Multiple tens of dollars. I cross the line in saying this now because, as the Company prepares to step fully into growth mode, taking its story to the marketplace, I see heightened games at play, designed to steal our shares from us at regrettably low prices. I’m not telling anyone what to do with their money or their shares. I don’t know your circumstances, or needs, or risk profile. I’m nobody’s financial advisor. What I am saying is, “here’s what I see.” What I am saying is, “in times of volatility, keep your eye on the sternum!”
Finally, with one more play on the collection of body language metaphors, I have a very close friend (40 years next month) who very likely resides in the short list of Southern Arc’s ten largest individual shareholders, not including management… and maybe including management, too. I told him recently that if he didn’t stop buying shares, I’d have to make a Board nomination from the floor at the upcoming shareholder meeting. Don’t worry, John. He’s not interested. In the face of current opportunity (problem is such a depressing word), this fellow is contemplating a serious step up the ranking among shareholders. He doesn’t need the shares, to be certain. His investment in SA, in fact, is a ticket to giving more back to society. A very successful businessman, he’s made his living by looking people in the eye and correctly judging their character. He’s not a ‘high-maintenance’ shareholder, and doesn’t need regular stroking. I don’t think he’s met John Proust more than four times in four years. Yesterday, though, he suggested to me that he’d like to sit down with Proust for a half-hour, and is prepared to fly to Vancouver for that very opportunity. Face-to-face, he’ll look the man in the eye before deciding whether the time is right to make this move. Of interest, both men were chess champions as teenagers. Should be an interesting meeting. Now, you’ll say to me, ‘why doesn’t he just come to the September 22nd meeting?’ Oh, he’ll be there. Trust me, he’ll be there. He’s just not sure that the opportunity now facing him will still be there come September 22nd. In fact, he’s pretty sure that it will not. When we were teens, one of his favourite expressions (bet you didn’t think I’d remember this one, my friend) was, “you snooze, you lose”.
I tell you this little story only as my closing encouragement to attend the September 22nd meeting in Toronto. The online presentation of this meeting will be great for those unable to attend and I certainly would not miss it. From my perspective, though, the real value will be in the after-meeting conversations off to the side or in the corner of the room. Taking the opportunity to stand face-to-face, and to look Company representatives in the eye, cannot be matched as an aid to key investment decisions.
I’ve done my homework. I’ve studied the people and the properties. I say multiple tens of dollars.
What do you say?
With respect,
Kevin Graham