Arc Exploration Limited (ASX:ARX) Spec Buy. Indonesian Gold

Transcription

1 Arc Exploration Limited (ASX:ARX) Indonesian Gold Spec Buy Exciting exploration potential. Arc Exploration Limited ( Arc ) is looking to discover major gold deposits in highly prospective areas of Indonesia with similar characteristics to those that host the Gosowong and Batu Hijau mines. Analyst: Imran Valibhoy imranv@wise-owl.com Board of Directors Strong pipeline of drilling activities. Exploration results from Trenggalek and Bima will provide a continuous flow of news over the next few years as developments in the projects progress. Among the Big Boys. The number of major explorers and producers in Indonesia is a reflection of the region s potential. Newcrest s Gosowong and Newmont s Batu Hijau are just some of the successes to date. Chairman Managing Director Director Non Exec Director Bruce Watson John Carlile George Tahija Robert Willcocks Share price leveraged to exploration success. Results from Trenggalek and Bima are expected to be the stock s main driver in Successful results would create an attractive investment case given each project s early stage of exploration. Positive drilling results would lead to detailed drilling of the project in Major Shareholders ANZ Banking Group Ltd 14.28% RAB Fund Limited 10.75% Austindo Nusantara Jaya 7.21% Share Data Sector Materials Share Price $0.036 Shares on issue m Options on issue m Fully Diluted Market Cap $12.48 Avg. Daily Value Traded $25,055 ARX Daily Chart Source Bloomberg Page 1 of 12 Copyright 2010 wise-owl.com please read disclaimer at the end of this document for terms

2 Company Overview Arc Exploration Limited (ASX: ARX, Arc ) is a Jakarta based junior resource exploration company with gold projects in Indonesia. The Indonesian portfolio is comprised of three projects in East Java, East Sumbawa and West Papua. The project in Papua is operated through a strategic alliance with Anglo American Group (Anglo). Goal to find a world class gold project Arc will be exploring for different types of gold deposits in the region ranging from high-grade epithermal veins to bulk tonnage porphyrystyle deposits. The team at Arc has extensive in-country exploration experience. Secret to Success The main strength of Arc lies in management s ability to explore, add value, and work with local communities and authorities to permit tenements in Indonesia. Managing Director - John Carlile s previous experience in establishing Newcrest in Indonesia will prove invaluable in Arc s pursuit of gold projects in Indonesia. The company s strategy is to explore, prove up resources and then farm-out projects to experienced mine operators at the peak of the industry s pre-production value curve as shown below. A: Arc Strategy Profile Company strategy tailored to management s strength and knowledge in minerals exploration Source: Arc Exploration Moving forward, Arc will initially focus on its current projects and simultaneously pursue an aggressive strategy to acquire new exploration tenements. Trenggalek (Arc 95% interest) Trenggalek is Arc s major focus of exploration for Trenggalek is located in East Java with land covering 30,044 hectares. This project is a Joint Venture with P.T. Sumber Mineral Nusantara which holds the new exploration (IUP) licence for this area. Page 2 of 12

3 Regional Setting Trenggalek consists of multiple targets ranging from outcropping goldsilver bearing epithermal vein systems, areas of high-grade vein boulders over possibly soil covered vein systems, to areas of breccia and sinter which may be covering blind vein systems. B: Map of Trenggalek Source: Arc Exploration The characteristics of Trenggalek are quite similar to other prospective arcs in Indonesia that host world-class epithermal gold-silver vein deposits, including Gosowong, operated by Newcrest Mining. The licence area is located in an older segment of the Sunda-Banda Arc which hosts numerous gold, silver and base metal prospects. Australian listed Intrepid Mines is exploring the Tujuh Bukit porphyry copper-gold project, which lies 250km east of Trenggalek and in similar rocks. Trenggalek project characteristics similar to other productive gold vein districts The infrastructure of Trenggalek is highly beneficial for Arc. The district possesses an extensive and well maintained road network providing easy access to the project area which sits in moderately rugged terrain. The project should not be significantly impacted by seasonal weather changes. Exploration Program A 5,000 metre scout drilling program commenced at Trenggalek on 1 February The drilling contract, valued at approximately $1m is being paid for in ARX shares and options to preserve cash. This drilling will test several high-grade vein targets (Sentul, Buluroto, Kojan and Jati) and high-level breccia targets (Dalangturu and Suruh). The program will comprise about inclined holes with about 5-10 holes drilled at each prospect to an average depth of between 50 and 150 m. Large drilling program planned for 2010 Page 3 of 12

4 The Sentul Prospect will be Arc s first focus where the two main northnortheast trending veins, West and East Sentul, have a total strikelength of over 2km and are connected by numerous tension veins. Trench sampling indicate potential for high-grade ore-shoots within the vein structures. Arc expects to initially drill about 1,200 m in holes at Sentul. Surface exploration in the northern half of the licence has identified several new areas of interest with higher grade results ranging from 7 to 46 g/t gold in vein boulder material. The characteristics thus far point towards the potential for multiple blind or shallowly eroded, high-grade epithermal gold-silver vein deposits in this area. The round of scout drilling in 2010 at Trenggalek should help determine priorities for follow up in what looks like a promising gold project in a newly emerging gold district from information gathered to date. C: West Sentul Drilling Scout drilling results so far The first eight holes of the scout drilling program have been completed at Sentul and totalled 924 metres. These holes were drilled in the southern portion of the West Sentul Vein. Best results from these holes include: 1m at 11.7 g/t Au & 18 g/t Ag within 6.65 m at 3.29 g/t Au & 10 g/t Ag from m down-hole in hole 2 1m at 10.4 g/t Au & 21 g/t Ag within 9.40m at 5.27 g/t Au & 18 g/t Ag from 35.1m done-hole in hole 3 2m at 17.2 g/t Au & 13 g/t Ag within 9.65 m at 4.51 g/t Au & 8 g/t Ag from m down-hole in hole 4 1m at 8.1 g/t Au & 23 g/t Ag within 9m at 4.91 g/t Au & 19 g/t Ag from 5.8m down-hole in hole 5 A cross section at West Sentul in diagram C provides an idea on the progress made by Arc to date. These initial drill results are encouraging as they clearly indicate the occurrence of high grade gold vein intercepts within a thick (6-7 m wide) mineralised vein. Furthermore, the vein textures observed in these initial intercepts are considered typical of high-grade epithermal gold-vein systems found elsewhere in the Indonesian arcs. Full results can be found in Appendix A. Drilling will continue at Sentul over the next 2 months to test the two main vein systems and the connecting tension veins, before moving to the next prospect. With Arc having completed just over 18% of the drilling program, this provides ample amounts of exploration upside for the astute investor. Arc will continue drilling in conjunction with its surface exploration activities with the objective of identifying additional prospect areas. Source Arc Exploration Results to date indicate potential for high-grade ore shoots along the vein Page 4 of 12

5 Bima (Arc 95% interest) Bima is a joint venture project with PT Sumber Mineral Nusantara holding a General Survey (KP) licence. The Bima project encapsulates 24,980 hectares of land in East Sumbawa. Arc is currently in the process of converting the project to an Exploration (IUP) licence so that scout drilling can begin. Bima Project is within the same arc as Newmont Mining s Batu Hijau project Source Arc Exploration Sumbawa is situated within a segment of the Sunda-Banda Magmatic Arc which also hosts Newmont s giant Batu Hijau porphyry copper-gold deposit and several major copper-gold prospects on the western side of the island which also extends into East Sumbawa. Initial prospecting has identified a 2km x 1.5km zone of altered and mineralised volcanic rock named the Kowo Prospect. Rock chip sampling over this area has produced up to 0.66 g/t Au with associated silver and highly elevated lead, zinc and barium. A recent 50m x 100m spaced soil sample grid on the northwest side of Kowo has so far defined a coherent gold soil anomaly over a sizeable area of 250 m x 500 m underlain by gossanous volcaniclastic rocks containing a stockwork of quartz-chalcedony-sulphide veins. These early results are encouraging as they confirm the potential for a buried bulk tonnage porphyry copper-gold deposit in the project area. Early encouraging results showing potential for a copper-gold deposit Continued surface evaluation of Kowo and other prospects is planned throughout 2010 with the aim of advancing the project to the scout drilling stage. Page 5 of 12

6 Papua (Arc 20% interest) Arc has formed a strategic alliance with the Anglo American Group (Anglo) to explore for large porphyry copper-gold deposits in West Papua and Papua provinces. The 20% interest is fully funded by Anglo through to a decision on development. Anglo American fully funding the strategic alliance Papua Regional Map Source: Arc Exploration The first project in West Papua is the Aisasjur Project, located at the western end of the Medial Papuan Magmatic Arc that also hosts the copper-gold deposits of Grasberg and Ertsberg which are 500 km to the east. Aisasjur is comprised of three KP licences covering a total area of 60,896 hectares. The porphyry copper-gold deposits being targeted are beneath shallow epithermal-style gold mineralisation. Two programs of scout drilling at Aisasjur have been completed with 13 holes totalling 6,906 metres. Encouraging intersections showing signs of porphyry-style alteration and mineralisation were returned in deeper scout drilling completed to date. Significant intersections include 4 m at 0.37% Cu & 1.06 g/t Au within 26 m at 0.21% Cu & 0.25 g/t Au from 539 m down-hole and 8 m at 0.26% Cu & 1.34 g/t Au within 39 m at 0.17% Cu & 0.4 g/t Au from 681 m down-hole. About Indonesia Indonesia has long been regarded for its oil reserves, but the nation is relatively underexplored for minerals. Accessibility to potential project areas has been an issue for mineral explorers in the past. The majority of the country is covered by rainforest, making certain areas highly inaccessible and difficult to explore. The result has been higher exploration costs, which has deterred investment in the past. Despite these issues, there are a number of major companies operating in Indonesia, including Newcrest Mining and Newmont Mining and Australian explorers including Intrepid Mines, Robust Resources and Hillgrove Resources. A number of well known Australian listed companies operating in Indonesia Page 6 of 12

7 Financial Performance Arc currently possesses a cash reserve of ~$2m after successfully completing a capital raising and a rights issue in November Arc has 346,571,106 fully paid ordinary shares on issue plus options as listed below: ARXOA Listed Options 31 Jan 3.6c: 173,142,774 ARXO Listed Options 30 June 75c: 7,940,729 ARXAK Unlisted Options 6 July 2.5c: 17,775,000 ARXAI Unlisted Options 11 Dec 3.6c: 39,945,191 Cashed up for future exploration and project generation activities The ARXOA series options exercisable at $0.036 on or before January 2011 have the potential to raise approximately $6.2m to fund exploration during 2011/2012. Investment Case This year s scout drilling will provide Arc with a good idea as to the future potential of Trenggalek, which is likely to be tested by more detailed drilling in Bima is expected to come online for scout drilling in 2011 with more detailed drilling planned for The exploration team is also actively pursuing acquisition of a number of new projects. Positive results from any of these programs have the potential to re-rate the stock given the company s modest market capitalisation of $12.48m. Future drilling success should provide a re-rating in the stock Page 7 of 12

8 Risks Exploration Risks The main risk for Arc lies in the drilling of the projects which are still in its early stages with scout drilling at Trenggalek and surface sampling to commence at Bima. Disappointing exploration results would negatively impact the share price as future asset and earnings potential would come under question. However due to nature and style of deposits being explored, persistence may be required. When drilling for vein type systems, differences in widths of these veins, can yield variable results between drill holes. Sovereign Risks New Indonesian mining laws which came into place in January 2009 have created delays in the mining application process. As the laws become more familiar with authorities, processing speeds should improve. Arc doesn t expect to be subjected to such delays as its exploration licenses have already been granted. Commodity Price Risks Due to the nature of Arc s activities and its chief exploration focus on gold, the share price of the company may be significantly impacted by the price of gold. The price of gold and gold futures will have an impact on the intrinsic value of the project once a reserve and resource is determined. Funding Risks Arc does not generate any revenues and therefore relies on external capital or farm out agreements to fund its exploration activities. If for any reason the company cannot raise new funds for further development, its share price is likely to suffer. Page 8 of 12

9 The Bulls & The Bears The Bulls Say Management team with in-depth skills and experience in exploration compliments the company s strategy. Projects in similar regions to other world class deposits such as Gosowong and Batu Hijau. Drilling results to date providing greater confidence in these project s potential. Significantly more exploration upside in store with only 20% of the drilling program completed. Continuous drilling program should provide a consistent flow of news to promote a re-rating in the stock. The Bears Say A lack of proven resources increases the company s risk profile Exploration is still in early stages and a lack of drilling success is likely to have a negative impact on the share price. As the company s major focus is on gold, any adverse price movement in the precious metal may impact the potential asset value of the project. Page 9 of 12

10 Board of Directors & Management Bruce Watson, Non-Executive Chairman Bruce Watson, appointed in 2005 brings extensive corporate and commercial experience as the Company advances major debt and equity funding arrangements associated with the development of the Cibaliung Gold Project in Indonesia. Bruce was also formerly a director of Austindo from 1998 until April 2001 and accordingly has an understanding of the Company and the history of its involvement in Indonesia. His experience and commercial insight derived from his diverse and comprehensive background across the Australian banking and investment community provide Arc with a significant asset. George Tahija, Non-Executive Director First appointed as a Director in 1998, Mr. Tahija is the President Director of the Austindo Group of Indonesia and is also a Commissioner of Freeport Indonesia. Principal businesses of the Austindo Group include the agribusiness, financial services and healthcare. Robert Willcocks, Non- Executive Director Mr. Willcocks is a former senior partner with Mallesons Stephen Jaques and is now a corporate adviser. Mr. Willcocks has represented clients in the energy and mining sectors for more than 30 years. John Carlile, Managing Director John is a geologist with over 30 years experience in the mining industry, primarily in gold exploration and has previously held senior positions in the Asian region with major mining companies including BHP and Newcrest Mining. As exploration manager (Asia) for Newcrest Mining, John was responsible for establishing and managing the company s exploration, acquisition, and corporate activities in Asia that resulted in the discovery of the Gosowong multi-million ounce gold district in Halmahera. John was appointed as Managing Director of Arc in Brad Wake, Exploration Manager Brad is a geologist with 23 years experience in minerals exploration for gold, silver, base metals, tin, and other commodities in eastern Australia and the SW Pacific-Asia region. Brad has more than 10 years work experience in Indonesia. With Aurora Gold Brad was responsible for planning and management of the exploration program that resulted in the discovery the +1 million ounce gold equivalent Toka Tindung epithermal gold-silver vein systems in North Sulawesi. Page 10 of 12

11 Appendix A Drill Results of holes 1 8 from Trenggalek Hole ID From To Interval Au Ag (m) (m) (m) g/t g/t TRDD TRDD TRDD TRDD TRDD TRDD TRDD TRDD Page 11 of 12

12 Analysts Imran Valibhoy imranv@wise-owl.com Sven Restel svenr@wise-owl.com Tim Morris timm@wise-owl.com Wise-owl.com recommendation system Care has been taken to define the level of risk to return associated with a particular company. Our recommendation ranking system is a follows: Spec Buy We forecast strong earnings growth or value creation that may achieve a return well above that of the broader market. These companies also carry a higher than normal level of risk. Buy Companies with Buy recommendations have been cash flow positive for some time and have a moderate to low risk profile. We expect these to outperform the broader market. Hold A sound well managed company that may achieve market performance or less, perhaps due to an overvalued share price, broader sector issues, or internal challenges. Sell Risk is high and upside low or very difficult to determine. We expect a strong underperformance relative to the market and see better opportunities elsewhere. Contact wise-owl.com Level Castlereagh St Sydney NSW 2000 Phone: Fax: Disclaimer This report was produced by wise-owl.com Pty Ltd (ACN ), which is an Australian financial services licensee (Licence no ). Wise-owl.com received payment for the compilation and distribution of this report of A$40,000. Wise-owl.com Pty Ltd has made every effort to ensure that the information and material contained in this report is accurate and correct and has been obtained from reliable sources. However, no representation is made about the accuracy or completeness of the information and material and it should not be relied upon as a substitute for the exercise of independent judgment. Except to the extent required by law, wise-owl.com Pty Ltd does not accept any liability, including negligence, for any loss or damage arising from the use of, or reliance on, the material contained in this report. This report is for information purposes only and is not intended as an offer or solicitation with respect to the sale or purchase of any securities. The securities recommended by wise-owl.com carry no guarantee with respect to return of capital or the market value of those securities. There are general risks associated with any investment in securities. Investors should be aware that these risks might result in loss of income and capital invested. Neither wise-owl.com nor any of its associates guarantees the repayment of capital. WARNING: This report is intended to provide general financial product advice only. It has been prepared without having regarded to or taking into account any particular investor s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. Where applicable, investors should obtain a copy of and consider the product disclosure statement for that product (if any) before making any decision. DISCLOSURE: Wise-owl.com Pty Ltd and/or its directors, associates, employees or representatives may not effect a transaction upon its or their own account in the investments referred to in this report or any related investment until the expiry of 24 hours after the report has been published. Additionally, wise-owl.com Pty Ltd may have, within the previous twelve months, provided advice or financial services to the companies mentioned in this report. Page 12 of 12