The Southern Arc forum on Stockhouse (called a BullBoard, perhaps for a very good reason) has gone through some very difficult times of late. A small toxic group has literally hijacked what used to be a very good place for constructive discussion about the Company. A fair number of highly valued regular posters have just walked away in disgust. Knowing that some of this site’s visitors are among those, I share, below (with minor edits), a piece I posted there at 2 a.m. this morning. As always, I look forward to your feedback, for or against.

Kevin

Torochubby,

Thanks very much for steering the conversation back to consideration of the value of our investment in Southern Arc. This Bulletin Board conversation is most fascinating, as it touches all aspects of a good business case study, and captures almost all aspects of human relationship. I say almost all, because we have yet to see murder (tempting though it may be at times) or romance (though some have incorrectly labelled this a love story). Plenty of intrigue and adventure, though, plus, envy, pride, coveting, sloth, wrath… no wait, that’s another list altogether… well, maybe that list works here, too.

Sometimes, such conversations prove more fruitful if structured as a series of decision nodes, as in, “yes, I can accept that possibility… go on” or “no, I don’t think that’s a serious possibility… stop there”. Play along, if you like. See how far you get before dismissing the line of reasoning.

Steps

Can management be trusted? If no, stop now and make your way quickly to the exit. There is no point in looking any further. As I’ve said before, it doesn’t matter if you’re sitting on all the gold (reputed to be) in Fort Knox. If you can’t be trusted, I’m gone. If yes, move forward.
Does management know what it’s doing? If no, same as before. I’ve been accused of being in love with this Company, of holding blind faith in management, of placing too much stress on loyalty, at the expense of good sense. Knowing how some people here have had little exposure to the Company, this is easy to understand. First off, I love my wife. I love my children. I love my extended family and friends. I love many of the people whom I’ve met in the course of my business activities. I even love a number of the people met through this BullBoard… yes, including Goldbaron. I don’t love Southern Arc, and even if hits the big one and makes me wealthy beyond my wildest dreams, I won’t love it. Not my style. As for blind faith, I can see how some who don’t know me, or are not privy to the conversations I’ve had with SA management, might see it this way. I never stop studying this Company, its holdings, its people, and the environment in which it operates. I have challenged management as much as any other, just not in such an abrasive manner as we’ve sometimes witnessed here. As Don Bosch has said many times, you’ll get a lot closer to the truth with civility. While a select few have described me as unquestioning of management, I don’t know whether to laugh or shake my head. Other than Ray, who has his refrain of questions (I love you, too, Ray), I wonder if anyone else posting hereabouts has asked as many questions of management as I have. Now, I expect there are those who will argue that I have not posed the right questions, or done so with enough force. To them, I say, as Torochubby has just posted, go ahead, make the call. Posting questions for management on an anonymous forum, dripping with sarcastic innuendo, doesn’t count. Complaining that management doesn’t put out regular News Releases to keep you appraised doesn’t hold water, either. If you don’t like it, do something about it. Your options include selling your shares (or not buying them in the first place) or picking up the phone to initiate a personal dialogue with management. I suppose you can also offer sustained droning and moaning sounds on an anonymous forum. That’s your legal right and nothing can be done to stop you if that’s your choice. At the same time, I wonder to what end such activity is directed. Finally, let’s not confuse loyalty with giving the benefit of the doubt. In my investments, my loyalty is to my money, all else being equal. I study people for a living, in a manner of speaking. A person need not be perfect to earn this benefit of the doubt. If that were a requirement, nobody would qualify. Judgement on this account ebbs and flows with each new experience. I do not see SA management’s performance as without flaw, not by any means. At the same time, I can say that, on balance, they are exceptional. Both on the financial and geology fronts, I have been very impressed. In finding and forging a place within (and not just with) the local culture in Indonesia, I believe them to be unequalled. In long term strategy, they have been way ahead of the curve. Some might argue that they are way too far in front of the curve, to the point of maybe not being around when the curve ultimately catches up. We’ll see. So… if you feel SA has good management, proceed forward.
Do they have the goods in the ground? Our collective understanding of the geology, to be quite honest, isn’t worth a great deal. In fact, in the department of certainty, we don’t offer much at all. In the department of comfort, some of us have satisfied ourselves that the odds are, in some measure, in favour of this investment. Whether this satisfaction is derived from excessive calculator button pushing, talking to others who may know more than we do, or just plain wishful thinking… it doesn’t compare to the certainty that comes with the combination of technical skill and adequate information. Much has been discussed here on the adequacy of information necessary to take this Company to the next level. To be sure, this discussion is far from concluded. Rather than muddling around with the geology and drill results, trying to make a case, or dismiss a case, for whether or not there is a viable business to be developed here, I’d like to focus on this from a surrogate perspective. Consider that there are multiple majors seriously looking at multiple prospects held by Southern Arc. Now wait a darn tootin’ minute there. Who can say that there are multiple majors seriously looking at multiple prospects held by Southern Arc? For my own purposes, I believe this to be so. You’re welcome to come along for the ride, if you like… or if you disagree with this notion, I’d advise you to stop here and hitch a ride back home. While my limited exposure to the geology and the drilling results tells me that there is lots of metal in the ground, for the purposes of this discussion, all that follows hinges not on my neophyte geologic perspective, but rather on my belief that multiple majors are ‘engaged’.
Consider Southern Arc’s Indonesian properties from the perspective of these majors. Remember, if you don’t think that there are majors looking at SA properties, you can’t read any further. So… my first question is: What’s it take to interest a major mining company in a junior exploration property? I’ve heard conflicting reports on this account, so I’ll confess up front that I don’t rightly know. I’ve heard of one of the majors that they would never consider getting involved without first believing that there is, at a minimum, five million ounces of gold in the ground. I suspect that this report is high, but again, I don’t know. I’ve also heard that the threshold is as low as one million ounces of gold in the ground. Now consider the ‘rumour’ that folks are looking at more than one of SA’s Indonesian properties. If true, depending on how many properties you think this may involve, you can multiply all calculations accordingly. For now, let’s think only about one property – Selodong – and consider it, as Torochubby has done, along the spread from one million to five million ounces of gold. This is based only on the assumption that no major mining company (which you agree, if still reading, to be seriously looking at SA’s properties) would be in the picture if they did not believe that there was a minimum of one million ounces of gold involved.
In my observation (drilling results), Selodong contains gold and copper in a ratio of 1.4. That is to say, the grams per tonne (gpt) of gold is 1.4 times the percentage figure for copper. Some might argue that the gold is as high as .40 gpt. It really depends on how large you see the deposit, and where. Using my 1.4 ratio, that would place the copper at .286%. I’m not going to use these figures, however, opting for the more conservative .33 gpt Au and .235% Cu. Here’s where you get to step off the wagon, or stay on as we head into the sugar bush.
If you’re still on the line, let’s see what these grades would dictate in deposit size in order to generate anything in the range of one million to five million ounces of gold. Pretending the deposit is a cube (which of course it is not, but it works as a calculation tool to understand relative sizes), I turn to my (much and unfairly maligned) online calculator: (http://www.grahamanalytics.com/Toolbox/cubing.htm ). Noting that Selodong’s weighted average specific density figure has been estimated at 2.67 (this could have changed since it was relayed to me), and my calculator uses the more conservative 2.5, I opt for the conservative in this case. To generate one million ounces of gold, using grades of .33gpt/.235%, you’d need just 94,325,515 tonnes of ore. In dimension, if this were a cube, it would measure 335.4 metres on each of three sides, length, width, and depth. Note that, if you accept my ratio of grades, this million ounces of gold would be accompanied by 488,771,236 pounds of copper. I should say that these two collections of in situ metal would be worth, at today’s prices, if they were not in the ground, $952,732,739 and $865,125,087 respectively, for a total of $1,817,857,826. Please note that this is in US dollars. At today’s exchange rate of 1.24, that’s $CDN31.57 per share. Too bad it’s in the ground, eh? I should say that my own current outside estimates for Selodong show a deposit size of some 1750 (North/South) metres by 365 (East/West)metres by 340 (depth) metres. This makes for 542,937,500 tonnes of ore, including roughly 5.7 million ounces of gold and 2.8 billion pounds of copper. I believe this deposit to be open both to the north and to the west. I also believe that whatever first reveals itself in a 43-101 report, if produced before any further drilling takes place, will be significantly below this estimate. I’d place the limit of such a report more in the range of 125 million tonnes to 225 million tonnes of ore. In any event, at the level of five million ounces of gold, we’re looking at 471,580,000 tonnes of ore, including roughly 2.4 billion pounds of copper. For your amusement, at today’s prices, that’s $US 9.088 Billion, or $CDN 158 per share. For the sake of further calculations, my ‘what ifs’ below will centre on three options: at the margins, one million and five million ounces of gold; and in the middle, what’s generated by 225 million tonnes of ore… that would be 2,387,776 ounces of gold and 1,166,178,446 pounds of copper.
How to choose a unit valuation for what’s still in the ground? Not that long ago, folks would not be burned at the stake for using 9% for gold and 6% for copper, that is (using today’s prices) $85.68/oz Au and $0.11/lb Cu. Yesterday… seems so far away… oh how I long for yesterday. Oh well… I guess I am a dreamer, after all. I’ve read that the juniors with proven resources are valued at about one-third of the level for Tier 1 producers ($US200/3=$US66). My figures match up with those cited by Torochubby. For the next stage of my calculations, I’m going to run with a very conservative $20 per ounce. I’ve also heard from a trusted source (not SA) that copper is being valued in a range between a nickel and thirteen cents. Let’s run with a nickel per pound. Decision time again. Read on, or take a pass.
To the right in the first table, below, you’ll see the estimated value of Selodong, in Canadian dollars per share, based on the three varied levels of gold (1 million ounces; 2.4 million ounces; and 5 million ounces), as outlined above. At the minimum level, Selodong contributes $0.77 per share, or a bit more than double the current share price. Remember that this reflects what should be easily accepted as the minimum level of gold content to generate interest from any major mining company, and a minimal valuation of each of the two metals in the ground. At the higher end of metal content, but retaining the lower unit valuation, we’re talking about $3.26, or almost a ten-bagger from current prices. Remember that we’re still only talking about Selodong here. Still with me?

Mtonnes	Au oz Cu lb	$/oz $/lb	$US	$US/share	$C/share
94	1,000,000	20	$20,000,000	$0.28	$0.35
	488,771,236	0.05	$24,438,562	$0.34	$0.42
		Total	$44,438,562	$0.62	$0.77

225	2,387,776	20	$47,755,520	$0.67	$0.83
	1,166,178,446	0.05	$58,308,922	$0.82	$1.01
		Total	$106,064,442	$1.49	$1.84

471	5,000,000	20	$100,000,000	$1.18	$1.47
	2,441,450,605	0.05	$122,072,530	$1.44	$1.79
		Total	$222,072,530	$2.63	$3.26

Now all of this is very restrictive in framework. What I mean to say is that, valuing the explorers at this level is coming at it from the standpoint where you expect the company, or at the least the project, will be sold off to a major. In no manner do I have any expectation that the company will be sold in whole anytime soon. I do not know how Selodong will be monetized. Nor, I expect, does John Proust. All options must still be on the table until a deal is reached. I will say that, perhaps four months ago, I repeated to Mr. Proust my earlier expression of hope that SA does not ‘flip’ Selodong to a major in the current market. I recognize that, at these lower valuation figures ($20 and $0.05), Southern Arc could generate with such a flip a sum of money ranging between US$44 million and US$222 million. Even at the lower level of this range, the company would be well cashed up to pursue exploration and advancement of its other properties. The naysayers would be shut down immediately on the prospects of this company lasting through the current down market. At the higher end, Mr. Proust could live his dream of building a mine (at Pelangan), financing the entirety of its cost internally. My expression of hope was that SA remain engaged in the Selodong project through at least to the next stage of its advancement, in a joint venture relationship with a major. Value to shareholders, on a net present value basis, would likely be many times greater over the longer term of a project like Selodong, if what many of us believe to be there is proven up. Here’s the thing. I also saw a report, generated this month, that suggests that Tier 1 producers are being valued at close to $200/oz, and that’s in US dollars. So, what’s my point? SA is not a Tier 1 producer. What’s the relevance? My thinking tells me that if SA engages in a JV with a major mining company, who can earn in to a level of 65% by funding the ‘proving up’ stage of the project, SA will be the beneficiary of valuation for this deposit at a level of approximately one-third of any deposit shared with a major as the JV partner. Makes sense to me. Happy to hear cogent arguments as to why this doesn’t work. SA does not have to be a ‘producer’ to have its share of the project valued as one (at least on a pro rata basis). Riding the coattails of the major all the way through production works for me. I’ll take the dividends over the next twenty years, and happily so. If followed through to that final stage of taking the metal out of the ground, the valuation to SA shareholders would not be at the US$200/oz level, but rather at the net profit level from a mining operation, contingent on whatever the then-current price of gold is. If gold doubles in price in the next three years, as suggested by MetalsKing (who makes his living in the pricing of metals), SA’s share could range to a level of perhaps one-third of $US1400 (net on a price for gold of $1900), or $466 per ounce. Let’s not forget that the copper here is much depressed from its recent high, and that within 2-5 years, it should recover nicely in line with continued development in China and India. For the moment, however, let’s consider that SA would sell off its interest in Selodong to the JV partner, having followed it through to the stage of fully delineating what’s in the ground. If you believe, as I do, that they’ll be able to prove a much higher deposit over the next two years than they can with current drilling results, you’ll agree that it’s better to stay engaged. So, here’s another table, reflecting the higher prices for both gold and copper. As before, valuations per share to the right.

Mtonnes	Au oz Cu lb	$/oz $/lb	$US	$US/share	$C/share
94	1,000,000	65	$65,000,000	$0.77	$0.95
	488,771,236	0.13	$63,540,261	$0.75	$0.93
		Total	$128,540,261	$1.52	$1.89

225	2,387,776	65	$155,205,440	$1.84	$2.28
	1,166,178,446	0.13	$151,603,198	$1.79	$2.22
		Total	$306,808,638	$3.63	$4.50

471	5,000,000	65	$325,000,000	$3.85	$4.77
	2,441,450,605	0.13	$317,388,579	$3.76	$4.66
		Total	$642,388,579	$7.60	$9.43

If you’re still with me, let’s back off from those prices, and pick something closer to the middle for each metal, say $42.50 Au and $0.09 Cu. This yields the table, below.

Mtonnes	Au oz Cu lb	$/oz $/lb	$US	$US/share	$C/share
94	1,000,000	42.5	$42,500,000	$0.60	$0.74
	488,771,236	0.09	$43,989,411	$0.62	$0.76
		Total	$86,489,411	$1.21	$1.50

225	2,387,776	42.5	$101,480,480	$1.20	$1.49
	1,166,178,446	0.09	$104,956,060	$1.24	$1.54
		Total	$206,436,540	$2.44	$3.03

471	5,000,000	42.5	$212,500,000	$2.51	$3.12
	2,441,450,605	0.09	$219,730,554	$2.60	$3.22
		Total	$432,230,554	$5.12	$6.34

Okay, if you’re still there, here’s the kicker. While Selodong is hot on the plate and has interest coming in from multiple majors, and on its own shows share value (and hopefully price) going much higher at even modest estimates of price and metal counts, I don’t think Selodong will be the first of Southern Arc’s properties to be monetized. If a major is involved on another property, as speculated here by some, and you have accepted my premises and wanderings here (as you must if you’re still reading), you can double each of the figures for gold shown here.
Then there’s Pelangan and Mencanggah, combined with close to 20 km of epithermal veins, and some phenomenal grades so far… and hopefully more reports of the same coming very soon.
Then there’s East Elang, which will most certainly be paired with its neighbouring Newmont/Sumitomo property, Elang Dodo. With Sumitomo already earmarking more than $2 Billion for this project (and it’s not the majority partner), I look to East Elang to deliver some wonderful things to SA shareholders in the years ahead.

Well, if you’re still reading, you’re either very interested in seeing what Southern Arc has to offer… or you can’t follow instructions and have just wasted precious time.

Best regards,

Kevin Graham

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Southern Arc Minerals – Valuations for Selodong