Straight and to the Point
November 12, 2010
Today, the Company announced that it has relinquished two minor properties on Java, Tirtomoyo and Karang Tengah. They just didn’t make the cut. Just three sentences, the release contained only 100 words and was straight and to the point. Here’s the thing. The point here is not the relinquishment, though that was the context providing the stage for the real message. Here’s the real point, and you don’t have to look so far between the lines to catch it. The final sentence reads:
“Southern Arc’s focus over the next 12-18 months will be to fast-track its Lombok and Sumbawa properties to NI43-101 resource status, while at the same time pursuing other mineral opportunities in Indonesia.”
Here are my takeaways from this morning’s release:
- Preparing for the big game, SA has swept away minor distractions in the Java properties and will concentrate on advancing the Lombok and Sumbawa properties.
- There are three properties on Sumbawa. Sabalong and East Elang have already been JV’d with Vale, but are not likely to see resource estimates as early as 18 months from now. That leaves Taliwang. So, the Company will either be JV’ing Taliwang on a ‘fast-track’ or will be advancing it by itself. With Lombok as the current flagship property, I don’t see Southern Arc pouring its own money into Taliwang, nor raising new money on its own for Taliwang. Lombok is the flagship and must stand first in line for new investment. If Taliwang were to be sold outright, the point about advancing it to a compliant resource status would not apply. So, that leaves Taliwang as another JV, using other people’s money to advance the property to a resource estimate. In my book, this would be a good thing. Again, this is just my simple logic bringing me to a plausible conclusion. We’ll see.
- For Lombok to advance to a compliant resource estimate, somebody’s got to cough up some serious cash. It’s a big property, with little work, to date, on either Pelangan or Mencanggah. To achieve NI43-101 resource status, a lot of holes will need to be drilled. This, of course, begs the question, ‘who’s going to pay for this?’ As always, we’ll have to wait and see. Suffice to say that the Company is bold in declaring such an ambitious objective.
- Knowing how conservative John Proust is in what he says, he must be very confident in this outcome. In Indonesia, as anywhere else, one can only be confident in naming timelines when one is fully in control of contributing factors. This announcement suggests to me that Mr. Proust expects a resolution to the IUP matter on West Lombok very shortly. The hints and winks and nudges are very clear in this announcement that this is the case. Not even close to subliminal. Take the bureaucratic delays out of the picture and the Company is finally in control of its own destiny, on its own timelines. Again, we’ll have to wait and see.
- Assuming that my interpretation is anywhere near accurate, the other remaining question on Lombok is: Will Southern Arc advance this property on its own or will they JV the property, as per Sabalong and East Elang, letting someone else pay the fare? John Proust certainly doesn’t need, nor ask for, my advice, but here’s my take, worth what you’ve paid for it. Selodong is well along the line toward a resource estimate, and would probably not take a great deal of time to get there, with sufficient resources. Pelangan has a number of shallow holes. Mencanggah has no holes. I’m of a mind that Mencanggah is viewed as the real prize on Lombok (stay tuned for that story to roll out), but that the Company has been waiting for the IUP to be in hand before scratching below the surface. No point in shining a light on a prize before you have the rights to open it up. Understanding that you cannot sever a property within one IUP, and that there’s only one IUP application for West Lombok, the Company cannot sell off or joint venture Selodong, which may, on its own, be an attractive prospect for one or more suitors. At the same time, if you have to deal the whole, I’d hate to see Pelangan and Mencanggah parceled off in a package with Selodong at this juncture. You’d have to be giving them away, sight virtually unseen. As exciting as it might be to have a major drilling the heck out of West Lombok, I think it’s too early to do so in a way that maximizes shareholder value. My preference would be to deal any and every current property, with the exception of West Lombok, holding on until Pelangan and Mencanggah have been pushed a little further down the line. Let’s talk about this again in 12-18 months when the Company has NI43-101 resource estimates. Then we can talk more seriously about dealing West Lombok. Gold’s run is not even close to its parabolic conclusion. Another year, hungry majors will still be looking to replenish reserves. That picture appeals to me in a big way. In the mean time, turn a bunch of drills and make some noise in the market.
- The foregoing, of course, means that the Company will need to find some cash to fund this ambitious undertaking. How much, and at what level remains to be seen. In light of recent share price gains, one has some hope for minor dilution. This noted, if the Company can position itself to advance the Lombok prospects ambitiously, as described, while the Sumbawa properties are humming along on someone else’s ticket, I won’t complain about dilution. Drills turning – share price will rise.
- The final words in the release, “while at the same time pursuing other mineral opportunities in Indonesia” remains intriguing for me. We’ve seen this before. Could be a throwaway line. Could be something else.
There – I’ve written more than 800 words about a 100 word news release. Sometimes, there’s a story behind a story. I see this as one of those occasions.
As always, time alone will tell.
Best,
Kevin Graham