Perception versus reality
September 5, 2011
“If only I’d sold at the top, I could now be holding twice as many shares.” If only I had a nickel for every time I’ve heard that one…
Frankly, my dear, I don’t give a damn for coulda, shoulda, woulda and if only. What I didn’t do in the past is irrelevant to me now. It’s gone with the wind, already. Those rivers have already been crossed so why bother?
I must absolutely always return to a ‘go forward’ fundamental perspective in assessing investment potential. Don’t read me wrong. Events along the way are important, both as they impact on assessment of the potential, and as they present opportunities to measure management’s response, capacity, commitment, and skill. These, of course, will in turn play significantly in the assessment of any investment’s potential.
The ‘worry du jour’ among Southern Arc retail shareholders is its current soft share price and by the way, why isn’t management stepping in to support the stock? More on that later.
Here’s the challenge. Anyone with a pair of eyes and access to Level II trading can see that share price lately has been forcefully walked down. Shock and awe! Persistent efforts have been applied to knock the legs out from underneath any impetus for upward movement in share price. This has been going on for several weeks. The gap between the Bid and Ask has systematically been closed to the downside time and again.
Market sell orders against light bidding depth have created a depressing picture for some shareholders. Stop! Read that sentence again, noting the italicised text. Now, understand that this is the objective of your opponent. Manage perception to become your opponent’s new reality, and you win big.
Late last evening, I was on the receiving end of two rooks, a bishop and a queen, all focused on my king’s bishop pawn. I was unable to respond with additional cover, and from the outset had been much intimidated by my opponent’s far greater experience (literally 1,000s of Internet games over the past decade, next to maybe five games in total for me). My opponent’s ill-conceived and (by two moves) premature attack, however, went up in a puff of smoke with the advance of my lowly rook pawn. While possessing of awesome power, queens too early on the scene also make delicious targets. What, on the face, could have been perceived as an untenable position was parlayed with one tiny move on an exposed flank into the complete emasculation of my opponent, the winning of a free bishop, and resignation on the spot. Perception did not match reality. Needless to say, I offered no re-match.
A number of my friends have embraced the arrival of these game-players, rubbing hands together with unanticipated joy at the opportunity to pick up more cheap shares. One suggested to me a week ago that he was in a position to buy everything up to $1.64. Not on your life, I answered. It’s not your job to support share price. The market will do that in due course. Your job is to get as many shares cheap as you can. Be a buyer, if you like, but don’t overpay. By the end of that day, he could have taken it up to $1.85 but wisely opted to follow my advice. He’s still buying shares, but not pushing price.
This opportunity for both game-playing and cheap shares has been created by the confluence of a number of factors.
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Southern Arc is a tightly held, thinly traded stock.
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The general market is in a period of great uncertainty.
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The recent attacks on drilling rigs spooked more than a few people.
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A lack of understanding of this investment by some shareholders leaves them easily swayed.
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Ramadan has delayed the re-commencement of drilling activity. (Give it another week.)
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We’ve just concluded the two slowest weeks of trading in the year
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The recent meltdown of another Indonesian explorer, for reasons entirely unrelated to Southern Arc, has likely had some negative influence.
Generally speaking, people with cash see this as a welcome surprise. Those without cash cannot take advantage, and therefore see it as of no good use. I don’t have the cash, but the recent decline in share price means little to me because I know what I own. Aside from the number of calls and emails I’ve taken on the subject, it really doesn’t affect me other than as a minor annoyance. Everybody holding a stock is happier when share price is up. I’m in that camp, too. At the same time, I was not planning to sell any shares before a resource estimate is published, so what’s the issue here? If nothing stands in the achievement of that resource estimate threshold, for me, nothing’s changed by share price fluctuations.
When people can see that there are manipulative games afoot, and they have told me that they can see these games, my answer is that we’re faced with that same quandary of perception versus reality. Yes, perception is reality, but only to a point. When it’s clear that this perception is being orchestrated in the marketplace, the reality of it is only that share price is being artificially contained. So what? Really! So what? Having watched the interplay in the market, I am firmly convinced that someone is, with great force, trying to break the spirit of the retail shareholder base. Such efforts are undertaken in this marketplace all the time. How far do they think they can push it? Well, every morning for weeks now, a bid from RBC keeps arriving for 110,000 shares at $0.95. Every day! I would not be surprised to learn that there’s a connection between the walk-down and this recurring bid. Maybe I’m wrong. There’s been so many shares bled out in this effort that the perpetrator(s) may think that 50 cents is a reasonable target.
How many games that should have been won have been lost to resignation resulting from premature judgement, as determined by false perception. If by persistent knocking down of share price, these people can create a false perception in the market, huge potential winnings await them.
Here’s Thing Number One, though. What these people don’t understand is that there is a core group of well-heeled shareholders of this stock who would like nothing more than to buy every single share put up for sale at current and lower prices. Here’s why.
The fundamentals of this investment have not deteriorated. In fact, I would argue that the fundamentals are progressively better and show every promise for more of the same. My reality is that I’ve invested in a Company that has:
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a diversified portfolio of highly prospective properties
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three JVs with two of the largest mining companies in the world, fully funded through to and including Bankable Feasibility Studies
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a strong management team with vested interest
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demonstrated a sound corporate strategy
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exceptional governance with increasing depth and breadth
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a key investor in the Qatari government
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connections to senior Indonesian government officials at all three levels
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an equity position by the local government
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ready access to drilling rigs
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… and don’t forget the boatload of cash.
Here’s Thing Number Two. I have invested in potential value, not in fluctuating short-term share price. This potential value is greater now than at any time in the past. This is the only reality that matters to me. I will not be distracted by perpetual perceptual efforts to cloud my thinking. As long as my big picture reality tells me that this is a worthwhile investment with the huge potential I now assign to it, I will not be shaken off by silly games in the market.
For those looking to, or needing to, offload shares now, such is life. For four years, I’ve taken the position that this is an investment, not a trading vehicle for me. I find myself unable to identify with people who trade this stock. Too much stress trying to pick tops and bottoms. I prefer to know what I’ve bought and to sit on it until I’m proven right or have been convinced that I’m wrong. I know what I’ve bought and am more confident in its prospects with each passing day.
So… when people get upset about weak share price… at the same time fully recognizing that this share price is weak in large part because of manipulative games in the market… well, it just doesn’t make any logical sense. To be upset and distracted, rather than to look past the games and stay focused on the investment itself does not pass the Spock test. Keep your eyes on the prize.
To the extent that shareholders don’t know what they own, such games will be met by success. To the extent that shareholders have… you guessed it… turned off the TV and done their own homework, such games will be doomed to fail.
I have no doubt that some weak hands have coughed up shares in recent weeks. Others have been nailed by margin calls, no doubt. In the end, though, as has been argued time and again, the truth machine will be the primary driver of this stock. With a well funded drilling program, the truth machine will have spoken loud and clear by late Spring next year. John Proust is firm with June 30th next year as his hard deadline to produce two compliant resource estimates for West Lombok.
The drilling program there, to date, has already hinted at the presence of at least three Way Linggos. This is from the results of drilling across only 1 of 23 kilometres of strike length identified so far in Pelangan and Mencanggah.
I’m not the least surprised that there are people trying to shake shares free. These are people who have their flunkies posting negative thoughts and price predictions on public discussion forums. Watch and see. If share price continues to wallow, they’re sure to be out with ‘I told you so’ claims. I’d be surprised if this didn’t happen. I take their very presence as an indication of value.
As for management stepping in to support the stock, I’m afraid I don’t see this as their job. Their job is to manage the Company to maximize shareholder value. From everything I see, that’s what they’re doing. I anticipate a number of news pieces out in the coming weeks, and look forward to seeing calmed nerves upon word of substantive progress by the Company. What’s more, with greater than 10 million shares already under his control, how many more can or should John Proust take?
I look forward to hearing about completed aerial surveys and forward movement on Sumbawa properties. I look forward to hearing about extension of strike length and a steady stream of drilling results from Pelangan and Mencanggah. I’m really keen to learn something of the potential to build a mine for the epithermals there.
I spoke with John Proust for a few minutes on Thursday. Well, it was actually more than a few minutes and we covered a goodly amount of territory in that conversation. I asked whether the Company had given any thought to severing the porphyry opportunity on West Lombok from the epithermal opportunity, with an eye to separate deals or becoming a miner of the epithermals, and joint venturing the porphyries. Of key interest to me (and I’m paraphrasing here), the answer was: we have not yet determined the feasibility of that option. Read into that what you will. I’ve spoken in past about what I anticipate to be an interesting dynamic between Mike Andrews and John Proust on the subject of mining epithermals on West Lombok. I now believe that we’re past the point of anticipation and that this conversation has already begun. I also expect that, with a key new investor (this being the effective instrument of a sovereign wealth fund, with the word ‘Mining’ in its newly incorporated parent, yet currently without any active mines), there would be much support for Southern Arc making an early move into production. For me, such an initiative would create a very attractive and very interesting mix of joint ventures, epithermal and porphyry projects, and producer-explorer combinations.
Two monks were traveling in the rain, the mud sloshing under their feet. As they passed a river crossing, they saw a beautiful woman, finely dressed, unable to cross because of the mud. Without a word, the older monk simply picked up the woman and carried her to the other side.
The younger monk, seemingly agitated for the rest of their journey, could not contain himself once they reached their destination. He exploded at the older monk. “How could you, a monk, even consider holding a woman in your arms, much less a young and beautiful one. It is against our teachings. It is dangerous.”
“I put her down at the roadside,” said the older monk. “Are you still carrying her?”
(from Miyamoto Musashi’s The Book of Five Rings)
One monk’s perception does not necessarily match another monk’s reality.
The bottom line is that people are welcome to wrap themselves up in ulcer-inducing stories of vandalism, permit delays, and share price manipulation. None of these stories have diminished my reality nor my perception of it. Share price will find its right level based on appropriate exposition of the fundamentals, moving from here to there with the completion of a systematic drilling program. Bring on the drills, I say.
John Proust is adamantly against making forward-looking statements. On the other hand, I am not. What you read in me is the sum of what I read, both in what I’m told and (importantly) what I’m not told. The space between the lines, the pregnant pause, the “I can’t talk about that, Kevin”… all of these create the colour and texture of what I see and share. Am I accurate or just blowing smoke? While Proust is understandably reluctant to affirm my blatantly forward-looking statements, I am pleased to report that no one on his team has suggested to him that I’m blowing smoke.
All of this leads to my recommendation to Proust last Thursday. Retail shareholders are encouraged not to become caught up in the ups and downs and back and forth of day-to-day share price fluctuations and operations of the Company. ‘Take the long view,’ we’re told. Here’s the challenge in this. When asked for a clear picture of that long view, there is an ever hesitant response, governed both by regulatory restrictions against forward-looking statements and by a preference to under promise and over deliver. Timeline stumbles over the years have certainly reinforced this reluctance. The upshot is that ‘we want you to take the long view, but we can’t say a great deal about what that means.’ In the face of bumps in the road and share price manipulations along the way, it’s easy to understand how people’s perceptions can become sidetracked. Through my regular contact with Company representatives, involving as much implicit as explicit reading, I’ve tried to paint a picture of what the reality of the long view may look like. My recommendation last Thursday was that some thought be given to how, without offending the regulatory bodies, the Company’s own presentation of that long view may significantly narrow (if not entirely eliminate) the gap between the here and now and the ultimate potential value accruing to Southern Arc shareholders. Message received. The ball’s in John Proust’s court.
With respect,
Kevin Graham
P.S.: Confirmed that Mssrs. Gallagher, Shihab, and Al-Shahwani will all be in attendance at the shareholder meeting in Toronto on September 22nd. Be assured that, irrespective of share price at that time, I’ll be there to learn why they’re there. As an opportunity to further narrow the gap, I wouldn’t miss it.