Oops, they did it again
By Bob Moriarty
Aug 3, 2007
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.
Las Colinas has giant potential,
visually it appears that it may be much larger than the Paredones
Amarillo project owned by Vista.
Pediment has extended the IP
project to the north and northeast where IP appears to be stronger
than in the already drilled areas.
But Las Colinas is the real
deal. It's located in an area that has been mined on a small
scale by local miners for a couple of hundred years. IP has proven
to be the best tool for locating the large near-surface gold
mineralization and it is telling Mel and Gary that the undrilled
areas should be better yet than the areas which already have
a known and measured resource. Pediment is advancing this project;
full speed ahead and I expect it to deliver a mine at the end
of the day. . .
I could see and touch and feel
what Pediment has at Las Colinas. It's one of the sweeter projects
I've seen and it's right at the stage where the company has the
potential for making big waves and catching the fancy of the
investing public.
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
PEZ-V $1.55 Canadian (Aug 1, 2007)
PEZFF-OTCBB29.1 million shares
Pediment website
Southern Arc Minerals
SA-V $1.44 Canadian (Aug 1, 2007)
SOACF-OTCBB 56.4 million shares
Southern Arc website
Bob Moriarty
President: 321gold
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