A Perfect Port for a Perfect Storm
I wrote the following short segment after the verdict of the court in Indonesia in the criminal case against Newmont.
I suspect the world's financial system is on the verge of a perfect storm.
The US dollar, reserve currency to the world since the Bretton Woods agreement of 1944, is poised on the edge of a precipice. Once it drops through 80, kiss the dollar good bye. There will be no support and no limit to how low it can drop.
M-3 is going up at a 12% rate and inflation seems out of control. We are a couple of months before the peak driving season and gasoline is already at a record high price.
The Dow and S&P are about to collapse and it's only a question of what happens first. The financial system falls apart because of a crashing dollar and idiotic sub-prime lending or the stock market tanks.
Various gold "Gurus" try to guess what the price of gold could go to in a time of disaster. They have it exactly in reverse. Gold isn't going up, the dollar is going down. One day there will be no cellar, it's going straight to nothing. Big deal, all fiat currencies do the same thing in time.
Bush's exercise in democracy in the Middle East is falling apart. It appears that only poor George and his pooch don't get it. It was an illegal war to begin with and it's turned into the mother of all Civil Wars. Unless and until we bail out of Iraq, it will continue to get worse.
If Bush set out to destroy the United States as a world power, he couldn't have been more successful. If he allows the religious nuts in Israel and the US to goad him into another illegal war in Iran, he will destroy both the US and Israel.
In a perfect storm you need to locate the perfect port. I've found one. In Indonesia. It's called Southern Arc. (SA-V)
At any gold show, one of the most common questions concerns government confiscation of gold. Every speaker has been asked at one time or another if he thinks it's possible for the US government to confiscate gold.
Here's my response; there is no central source of information about gold ownership so confiscation is impossible. But concern about potential government actions is perfectly valid. While it is probably impossible for the government to confiscate gold, it could, with a few strokes of a pen, make ownership or transfer of gold illegal.
I read something written this week between David Galland and Doug Casey of Casey Research and they, too, agree it would be easy for the government to make selling gold illegal. Totalitarian governments will not allow any form of real money to compete with their used toilet-paper currency.
So while you have little fear of the government confiscating your gold, there is a very real chance that they could make it illegal to buy or sell. And investors need to figure out for themselves how they feel about that.
If you want to have the safely of owning gold, you may well need to think long and hard about just how you do it. What happened during the 1930s when gold ownership was made illegal in the United States gives us our first clue.
In 1929, when the stock market crashed, so did the gold stocks. And they will again, just as they did in late February, this year. At the crash low, Homestake Mining went to about $7 before climbing 871% to a peak in January of 1936 just above $68.
If you want to own gold in a Perfect Financial Storm, you may want to have access to a Perfect Port in the form of a gold stock. I found one recently. It's called Southern Arc.
There are a dozen or more factors in the selection of a perfect gold stock. One overrides all the rest. It has to be so absurdly cheap that anyone at all would agree it's cheap.
I made a 10-day trip to Indonesia and China six weeks ago and saw several companies. A Director of the company, Doug Leishman, had brought one to my attention while I was in Vancouver in January. It impressed me so much that I put it high on my list of companies to visit soon.
I'm going to say so many nice things about the company that I should start by being critical so I will retain some credibility. If you go to their website and try to figure out what they are doing, it's a disaster.
They have 6 major projects in Indonesia. While they make the perfectly valid point that they are the leading junior in advancing gold projects in the country, the discussion of the various projects is so complicated that I had no sense of what they were doing and I've been to Indonesia to see at first hand their work. You lack that ability.
So the company should at the very least redo the website so it communicates their very real value. When they talk about their projects it's so technical that only the three people in the world who speak an obscure dialect of Sanskrit will be able to understand what they are trying to say.
And they have done next to nothing in the way of promotion. Basically, any company worth owning is worth promoting and any company not worth owning is not worth promoting. So when management fails to promote, they may as well hang an anchor around their necks and try swimming. Southern Arc is so wonderful that they need to be shouting the story from the very mountaintops. But their failure is your opportunity.
Let me give you an idea of what they have in their hands. On their home page, they say, "Southern Arc's intention is to advance properties that hold the potential of becoming one million ounce gold resources." Ho, ho, ho and a bottle of rum. Here's the real story.
Newmont originally owned the property I went to visit on Lombok Island. Newmont put about $16 million dollars into exploration during the 1990s into what Southern Arc now calls West Lombok. Let's compare West Lombok where I visited to a Newmont mine now in production that Newmont was also working on during the 1990s.
One of Newmont's more profitable mines, Batu Hijau, located one island to the east of Lombok, claims some 7.65 million ounces of gold and 7.19 billion pounds of copper. At a capital cost of $2.5 billion, the mine went into production in 2000. Production is anticipated until 2025. Production is about 720,000 thousand ounces of gold yearly and 575 million pounds of copper. It's gold-rich copper porphyry. That's why majors love porphyries, they are big and don't cost much to mine.
Newmont shelved the West Lombok property in 1996 in the wake of disastrous metal prices as Batu Hijau was consuming both their money and energy. Southern Arc made an agreement with Newmont in 2005 and picked up 95% of the property and $16 million dollars worth of Newmont data in return for granting Newmont a 2% NSR.
Newmont was developing Batu Hijau as the same time as they were advancing West Lombok in the mid-1990s. It would probably cost $30 million in today's dollars to get the same level of work Newmont completed on West Lombok. So basically Southern Arc picked up $30 million dollars worth of exploration for the cost of putting it into their database. If the project is worth mining, the 2% cost is pennies and if it isn't worth mining, it cost them nothing.
I think I must be the only investor who has actually looked at the data. While there are half a dozen named areas of interest in the West Lombok project, one stands out like an elephant standing in the Jell-O. That's the Selodong gold-rich porphyry copper system. In mid-April, Southern Arc reported initiating a major drill program.
Remember, SA bought the drill and exploration data from Newmont in exchange for a 2% NSR in the property. Newmont drilled some 7,856 meters of diamond core during the mid-1990s. Take a gander at the results from drill hole SGD001. That's 366.2 meters of .24% copper and .37 gpt gold. (And almost 2 ounces of moly to the ton, about $3.50 in credits but that doesn't show in that press release)
When I go visit a company, believe it or not, I don't want to see every inch of drill core or even every property. I want to see something, which reflects real value to me as an investor so I can tell the story to you. With the advent of 43-101, all mining companies are forced into giving investors far more information than they can possibly cope with.
Here's how to understand drilling data. I use a URL to a page that Doug Casey came up with called Calculator: "What's that Rock Worth?" To use it, go here and click on the URL in the middle right of the page. Here's a picture of the numbers I came up with.
The first thing I do when I want to understand the significance of any drill hole is to figure what a ton of rock is worth based on today's prices. So I filled in the figure of .37 grams gold per ton, giving a value per ton of $8.23 today. Then I fed in a figure of .24% per ton of copper (about 4.8 pounds) giving a per ton rock value for copper of $19.15 and I added $3.50 for moly. I figure the rock in that 366.2 meters is worth about $31 per ton.
I cubed the hole. That's a theoretical cube. If you drill 366.2 meters, pretend it is a cube. To determine the total tonnage of that hole, multiply 366.2 times 366.2 times 366.2 and figure a rock density of 2.5 so multiply by 2.5 and then times 31 for value. I come up with a number of $2.9 billion dollars for the one hole. And folks, that makes Southern Arc undervalued by a mile.
Batu Hijau is a gold-rich porphyry copper system. That's the ideal today; they are giant systems, rich in gold and copper and can be mined cheaply.
I think Southern Arc is sitting on one at Selodong, the numbers already show a giant system. Consider that one property Batu Hijau Junior. With all the data available, it's nearly impossible to realize that one good drill hole has the potential to be a company-making hole.
You can ask yourself, why did Newmont give up the property and the answer is simple. Batu Hijau has a cash cost of $.53 for copper and about $150 for gold. In 2000 with $.65 copper and $252 gold, even Batu Hijau didn't look all that hot. But with $3.62 copper and $691 gold, Southern Arc is literally sitting on a gold mine.
Newmont didn't need to advance West Lombok. They took a systematic approach to exploration and drilling. Majors do that; they have to think of mining in terms of decades. They didn't need to drill any company making holes. I think Newmont was either the 2nd or 3rd largest gold company in 2000. Discovery of a major gold-rich porphyry copper system in Indonesia wouldn't change their stock by a dime.
Southern Arc on the other hand. . . They could use a company-making hole. When I was visiting West Lombok, I was very interested in just how soon they would be drilling deep holes. They have dozens of shallow holes. If the gold/copper ore which we could see as we drove all over the property actually joints up beneath the surface, Southern Arc has a giant porphyry on their hands and the market will reflect it. Their April 10th press release gave the answer. They have started drilling.
We were talking about 600 meter deep holes and any intercept of over 200 meters would be a strong indication of a giant system. Greater than 400 meters of similar grades to SGD01 or SGD-02 (.5 gpt Au and .25-.35 Cu) would drive the stock price through the roof. The company told me it would take about a month for drill results to be released. So any time after about May 10th or so, things could get real interesting for Southern Arc.
When I made my trip to Lombok in mid-March, SA-V was about $.30 Canadian a share. With around 54 million shares outstanding, that gives Southern Arc a market cap of about $16 million. That's about what Newmont spent in exploration on the property almost 15 years ago. I think you can see how undervalued the company is based on the one property alone.
In theory, when a mining company advances a project, they get a certain return on their investment. Here's how I would work the math; $16 million dollars exploration in 1995 would probably cost $30 million today. $30 million in exploration today should have a minimum, based on the quality of the property, of a five-fold return. So a reasonable rate of return would be $150 million dollar market cap for $30 million in exploration. And SA was selling for $16 million six weeks ago. That's absurd.
But let's compare some real world numbers. Palmarejo (PJO-V) drilled off a 3 million ounce gold project in Mexico for a cost of $2 an ounce or $6 million in exploration. PJO now has an $810 million dollar market cap. Novagold spent $10 million US on their Donlin Creek deposit to develop 28 million ounces of gold. They now have a US market cap of $1.5 billion. These guys got a great return on investment. You can expect exactly the same from Southern Arc.
I've been on dozens and dozens of property visits. Almost without exception, the companies give out too much data. I'm not smart enough to understand all the subtleties of 6 major projects in Indonesia and neither are you. I want to see at least one company making potential project. But the more the merrier simply isn't true. PJO gets full value for their single gold project but Novagold gets maybe 25% of what their projects are really worth.
I went on a tour to Peru in January for a company well worth ignoring and I have. I visited far too many meaningless projects and I left the country knowing less about the company than I did when I arrived. The tour was a disaster and you haven't read a report on my site because all I would tell you to do it dump them until management figures out what business they really want to be in. But my tour to Southern Arc was the opposite. It was wonderful
Their VP of Exploration, Hamish Campbell, met me in Jakarta and we flew together to Lombok. I stayed in a wonderful and unique hotel near the project and ate with Campbell's crew. We drove all over the project the next day. They gave me what I needed to know and not a drill result that I didn't.
We could have covered more about the other 5 properties but Doug Leishman covered them in Vancouver. I was just really impressed with everyone I met working for Southern Arc. They were knowledgeable and helpful. Everyone contributed to my visit and I can't thank them enough. It was the best tour I have ever been on.
I won't even comment much on the other 5 projects. They all have world class potential but I think Selodong is the magician that is going to put the rabbit into the hat. Results will begin to flow in beginning about the 10th of May. You will want to have a position before then, I don't think you will be able to afford it after the results come out.
I have participated in a Private Placement in the company. And we have bought a major position in the company paying up to $.48 a share. The stock closed at $.35 on Friday and it's going to be a cold day in hell before you find a bargain like that again.
I love the company, I love the management. I love the price of the stock and I love 600-meter drill holes. On the other hand, the website needs work. I am about as biased as you can get. I can only hope they get some other newsletter writers down to see the projects; it's a story well worth telling.
The following quote is just too beautiful not to post.
That quote came from a book by Lee Iacocca. It can be found at Amazon.
My only problem with the quote is that I wish he didn't beat around the bush so much. I wish he would just come out and say what he really means.
How is it that we have allowed this tiny group of criminals to steal our country, destroy all vestiges of our reputation and make war criminals out of all of us?
Anyone not part of the solution is part of the problem. I'm doing my part and you need to do yours. The criminals in Washington can steal this country only if you let them.
Southern Arc Minerals