"Oops, they did it again"
Two of my favorite companies reported spectacular drill results this week. In each case I had visited the properties and months in advance predicted what they would hit. I am proud to say both write-ups were really good calls on my part. Each of the two companies has brilliant management and I'm just thrilled to be associated with them.
One company reported the results in a simple and easy to understand format and the shares rocketed 40% higher in two days on heavy volume. The other company issued a press release that has to at least tie for the worst written press release I've ever seen. Shares plummeted 20% in two days.
Here it is, dear readers, I'm going to explain this in just as simple a fashion as I possibly can.
If a tree falls in a forest and there is no one around to hear it, does it make a sound?
Almost everyone will say, "yes." But for something to produce sound, there has to be someone to hear it. If there is no one to hear it, there is no sound produced, only vibrations.
A story from a mining company is exactly the same. If you don't tell your story effectively, you don't have a story. In this case, Pediment had a great story and told it well. Southern Arc has a wonderful story but they can't seem to figure out how to tell it. If I wasn't around to keep correcting their blunders, they wouldn't have a story. That may sound egotistical but this is the second time they have failed to do the basic editing of an important press release and they have whacked their shareholders by 15% overnight. That's pretty silly; it takes a 22.5% move higher to make up for it.
After Bre-X, the Canadian government made a decision that they needed to do more to "protect" investors. You should always get nervous when your government wants to "protect" you because they are always going to make things worse, at your expense.
(The Canadian government's $3 billion dollar gun gaggle is a text book case where what was originally a $3 MILLION dollar program designed to keep guns out of the hands of criminals increased a 1,000 fold and all it managed to do was confiscate guns from law abiding Canadians).
So our government friends in Canada came up with a 43-101 and thick books filled with what companies could and couldn't say. And literally, some minion reads every single press release and stamps it with his stamp of approval before a company can release it.
What have they accomplished? Well, Southwestern Resources (SWG) pretty much tells the story. In early July, the CEO resigned, the project manager for the Boka project in China was "dismissed" and as the Globe and Mail put it, "some of the drill samples from the project had been compromised."
In other words, someone was salting the drill results. Image that, a whole hoard of new bureaucrats created in Canada just to enforce the 43-101 standards and someone manages to salt a gold mine. What will they think of next?
Drill results used to be pure fiction but you could at least understand them. They are still just as likely to be fiction until the government can find a sure fire way of keeping people honest but now you can't understand them anymore.
If you were a 17-year-old kid in High School and you connected up with a new girlfriend and your buddies wanted to know what she was like, how would you describe her? Let's say she's ugly, loves sex, is brilliant, would have a perfect body if it weren't for the big boobs and narrow waist, was rich and daddy owns a liquor store.
Well, would you say, "She's ugly?"
I don't think so. If you had any sense at all, you would say all the wonderful things about her and maybe leave out the ugly bit.
Pediment did a great job in their press release that came out on July 30. It starts off, "July 30, 2007 (=When?) Pediment Exploration (=Who?) drills 12.19 m of 19.87 g/t gold within 84.12 meters of 3.79 gold. (=What?)
I did a good job of telling the Las Colinas story in April.
In Gary Freeman's press release, he goes into great detail as to all the drill results released. He has to do that for the 43-101 wonks and it was approved. But he didn't lose track of the fact that the whole purpose of the news release was to tell investors how the company is doing.
Las Colinas is a large, low-grade open pit target. Gary Freeman, President and CEO, and Mel Herdrick, chief Geologist for Pediment would have been thrilled with 84 meters of only 1 gram gold. But I'm going to translate their 43-101 speak into something anyone can understand.
Essentially there are two types of mining. Open pit, which tends to be cheap and underground, which tends to be expensive. And naturally, based on the price of energy and labor, costs vary from country to country.
If you have bulk tonnage, lots of bulk tonnage, you can mine an open pit mine for as little as $6-$10 depending on the location. For underground, you might want to think $30 to $100 depending on the mineral and the variables. So $15 rock might be viable in an open pit but almost certainly not with underground. I like to see 1-gram gold for an open pit and maybe 5 gram gold for underground as sort of a minimum.
But you have to convert the drill results into dollars to understand anything and this is where a wonderful URL compliments of Doug Casey comes into play. If you go here, you can plug in drill results from most precious metals and base metals and it will convert them into a value based on today's price for metals.
I've plugged in the results that Gary Freeman highlighted in the most important title of his release and here's what they mean.
12.19 meters (or 39.39 feet) of 19.87-gram rock works out at $425 gross value per tonne. Now you must understand, if the gold in the rock is worth $425 per tonne, it doesn't actually mean the mining company can recover 100% of the gold. Often recoveries are as little as 75%. So $425 rock might mean $300 to the company. But if your open pit mining costs are $10 and you get $300 per tonne mined, you are wildly profitable over a fairly wide width.
Taking Gary Freeman's numbers one-step further, he reports a total intercept of 84.12 meters (or 273.39 feet) with 3.79 g/t Au. That's almost a football field intercept of $81 rock. If you use $60 to the mining company for mining and milling and $10 for costs, it should be obvious to any reader that the results were spectacular and they were.
On the other hand, Southern Arc reported a 192.25-meter intercept of .36% copper and .74 g/t gold. "From Its Initial Drill Hole At Blongas II (Selodong) Porphyry Target.
Remember the bit about the ugly girl friend? Forget the minor attributes of the new honey, hit your friends with the most important information you want them to think about. When issuing a press release, companies should give investors the very most important information first. If they don't make it past the title, you can't tell them anything else.
The 192.25-meter intercept is within a 407.35-meter intercept. Which is more important, 192.25 meters or 407.35 meters?
I would have said, "Southern Arc drills 605 meter hole with 437 meters mineralized including 407 meters of .25% Cu and .45 g/t Au."
Southern Arc has announced four holes in the last three months. Every hole would have been a company-making hole all by itself. Every press release made the shares go down. On May 10th they announced a 442.9 meter hole with .28% Cu and .42 Au. (And even the wording of the announcement was confusing).
On May 30th they announced a 384.65 meter hole of .3% Cu and .40 Au. It was a world class, 1 in 10,000 hole and the shares took a dive. On June 28th they announced a 363.5 meter hole of .3% Cu and 0.51 g/t Au, the shares went down. The latest results announced two days ago resulted in a 20% decline over two days. The results were brilliant, the reporting was dreadful.
Porphyry systems such as Southern Arc is drilling, are giant but low-grade systems. They form deep in the earth and can be massive, in some cases, billions of tons of mineralization. As Bob Bishop said of Southern Arc months ago, these holes don't occur in isolation. When you get one world-class hole in a porphyry system, you will tend to get more similar holes. SA has drilled four great holes and the market doesn't get it. The tree fell but nobody heard it.
I have mentioned another technique I use, that of cubing holes to figure out the total value indicated by that hole. It's not a perfect way of measuring anything but it does allow a savvy investor a way of comparing one hole to another. It does do a great job of showing how fast tonnage increases with depth of holes.
If you determine the value of a hole and in this case, I'll use SA's announced 192.25 meters of $49 rock. (I'm including $5 for the moly credits and you have to really search their website to figure out every tonne includes about 2 ounces of moly) You come up with about 17.7 million tons of rock indicating a value of the hole of about $867 million dollars. (The hole isn't worth that; it only gives you the ability to compare holes).
When you double the depth of a hole, you increase the cubed tonnage by 8 fold, so a 200-meter hole doesn't indicate half the value of a 400-meter hole, it indicates a value 1/8th of a 400-meter hole. Deep holes are meaningful and all of SA's holes are 1 in 10,000 holes and due to their inability to communicate information, investors just don't get it.
If you cube the 407-meter hole and use a lower rock value of only $35, you come up with 169 million tones of rock and a value of $5.9 billion. That's a giant hole. And in this case, where SA has drilled the latest hole some 600 meters from the last holes, you can start thinking of 600 meters by 600 meters by 300 meters. What they have already done looks like 270 million tonnes of $35 rock. That's giant.
I love Southern Arc and I love their management. I called John Proust. We have talked about this piece and the fact I was going to be very critical. I hate seeing any investor get whacked for any reason. Investing means it's going to happen on a regular basis and I like to think my readers get it. They are mature enough to understand trees don't grow to the moon and not every stock goes up every day. But getting whacked by bad communication is foolish and I hope that Southern Arc will take this criticism in a positive way.
Pediment has done everything right at Las Colinas and the drill results are brilliant. Gary Freeman did a wonderful job of communicating the very real accomplishments of Mel Herdrick. Expect more and better results soon. The stock is a screaming buy even at these prices. It will be millions of ounces of gold. The company has a $45 million dollar market cap and that's tiny.
Southern Arc continues to prove the theory of Hamish Campbell, VP of Exploration. They have giant copper/gold porphyry in Indonesia. Off the record, I personally think the fact that all four holes delivered virtually the exact same grade for both copper and gold proves the system joins up under the surface. That's a giant conclusion; they have 15 porphyry targets and have only drilled 2 of them. If the whole thing is joined up as I believe and Hamish hopes for, it will be a giant mine one day soon.
The press releases really suck. The measure of anything is how it is perceived. If a press release of a great hole drives the stock lower, it's a poorly written press release. This has happened 4 times in a row and that's a pattern. I'm not going to keep writing explanation articles, that's not my job.
Southern Arc has a market capitalization of about $80 million. John told me that he is taking a group of geologists and analysts down soon. When he does, the story is going to get out and the shares will go a lot higher. We are buyers at this price, the company is very cheap.
They do need to work on their press releases, however.
Both companies are advertisers, we own lots of shares in each company and we have many reasons to be biased. You are responsible for your own investment decisions. Do your own due diligence.
Pediment Exploration Ltd
Southern Arc Minerals