What’s Southern Arc worth?
October 28, 2010
Well, that’s an easy question to answer. Today, the market says it’s worth $1.40. With a fully diluted share count of about 85,000,000, that makes for a market capitalization of $116,466,067.
Now let’s work backwards to figure out what the market says the Company has in the ground. Assumption number one is that ounces of gold in the ground are fairly valued at $150 each. I know there is much variability around this figure, with some much lower, and others much higher. If you think this estimate unreasonable, save your time and read no further.
I’ve just taken my In Situ Valuation Calculator, found at: http://www.grahamanalytics.com/Toolbox/insitu_valuation.htm and plugged in a few numbers, as follows:
- The market capitalization, based on share price of $1.40, at $116,466,067.
- Fully diluted share count, at 85,000,000.
- Canadian/American exchange rate, today at 1.02.
- Tonnage of 69,000,000. This is just a plugged figure, in combination with the grade (see next line) and value per ounce to yield the market capitalization dictated by current share price.
- Grade of gold at .35 grams per tonne. This is just a plugged figure, in combination with the tonnage (see previous line) and value per ounce to yield the market capitalization cited above. It also happens to be what I think resides in Selodong on West Lombok, and I should add, for a much greater tonnage.
- As mentioned, the assumed value per ounce of $150.
Important to note that, aside from the assumed value per ounce, these figures all flow backwards from the given market capitalization. In other words, there’s no disputing them. They are residual from the calculation. The tonnage and grade figures really don’t matter, since the target of my calculation is simply ounces of metal in the ground. As you can see from the table, below, the current market capitalization suggests that the entire company holds just 776,440 ounces of gold equivalent across all of its properties.
Note that I use the term ‘gold equivalent’. Consider Selodong, alone, where by my calculations, the copper is worth more than the gold in the ground. Looking at the holes drilled there to date, I guestimate the grade of copper to be in the range of .235%. Sticking with the market capitalization as a constant, I’ve added the copper, valued for the sake of this illustration at $0.40 per pound. To maintain the market cap as a constant, the tonnage has to be scaled back to just 31,000,000. For the record, that’s about 1/17th of what I think could be there. No matter. At the same time, the presence of copper in the calculation forces the gold content back to less than 350,000 ounces, as shown below.
Okay now, here’s the thing. 350,000 ounces of gold is the worst case scenario I see for the Taliwang property on Sumbawa… worst case scenario. And in the grand scheme of the Company’s portfolio of properties, Taliwang is barely on the radar screen, though not without value.
The bottom line here is that the market is currently assigning a value for the whole Company at a level one might assign for just one of its minor properties.
Value for Sabalong, just joint ventured with Vale, the second largest mining company in the world… nil.
Value for East Elang, also just joint ventured with Vale… nil. As previously discussed, I don’t see a major stepping into a property without seeing the potential for at least a gold equivalent of 5 million ounces. Remember that Newmont has estimated 1.5 billion tonnes of ore for its adjoining property, Elang Dodo (half again as big as its world class mine at Batu Hijau, just down the road on the same island), and has indicated that this discovery crosses the property line on to Southern Arc’s East Elang. In what proportion is yet to be determined. What’s wrong with this picture?
Value for all of West Lombok (Selodong, Mencanggah, and Pelangan – with 15+ porphyry formations and 20 km of proven epithermal strike length)… nil. As I see it, the delay in issuance of the West Lombok IUP (mining license) is seriously containing interest on the sidelines. Some don’t believe it’s coming. Others are happy to wait, paying more later for something on the rise, rather than sitting on dead money for an indeterminate period of time. In any event, once that IUP is issued, we may see a release of value in the market’s perception of this Company’s worth.
350,000 ounces of gold? Hmmm…
The gap between what the market sees in the worth of this company and what I see defines both my risk and my opportunity. Nature of the beast. If the market is correct, I’m out of pocket. If I’m correct…
Do you think John Proust was looking at this same gap when he and his fellow Board members decided this week to announce a Shareholder Rights Plan for Southern Arc?
Works for me.
Best,
Kevin Graham