AN INTERVIEW WITH DAVID COFFIN
EDITOR OF THE HARD ROCK ANALYST
We are here with David Coffin of the Hard Rock Analyst and
it looks like East Asia is starting to attract a little more atten-
tion largely through his efforts.
David Pescod: I guess Dave, someone has to ask the silly
question first…how come more brokers and analysts aren’t
following this story?
David Coffin: The appropriate answer is that you need to
ask them, but I think it’s a matter of the company has had a
large institutional share holding base and has done only one
placement recently, most of which went to a single public
company. There has probably been some concern that there
would be some selling from that placement which just came
free (it was a $0.51 placement and the warrants are priced at
$0.75). The other point is they haven’t had a lot of people on
site to look at the deposit and do the final confirmation that
analysts like to do before recommending a stock.
D.P: Why don’t you give us a background on this project
because it looks like there is quite a number of small plus
some very big deposits grouped together in Sumatra?
D.C: Sumatra is a northwest trending belt of volcanic and
intrusive rocks with highly mineralized sections along pretty
much the length of the island, and beyond. There are sepa-
rate belts in Java and the other islands, a number of which I
have visited in the past. What distinguishes north Sumatra
in particular from most of Indonesia is that historically there
have been some terrorist activities in an attempt to move the
northern end of the island into a separate state. What East
Asia did was come in and pick up a bunch of projects after
the politics changed; the politics changed for two reasons.
One was unfortunately a natural disaster – the tsunami that
hit the island a few years back - and the other has been a
basic change of heart in Jakarta. There have been important
moves to de-centralize the Indonesian government and give
greater autonomy to areas like Ache. Recognizing the
changed climate, these guys went in and picked up this
ground. Its highly prospective and was recognized as such
because there was a several year exploration window in the
1990’s when people were in working in the area and Miwah
had been drilled.
So the data was there, and for a number of the other pro-
jects that they picked up in Sumatra, so really what they did
was be smart about recognizing the change in the geopoli-
tics and going in and acquiring ground ahead of the crowd.
D.P: There are a number of deposits in this area, correct?
And is there not production already on this island?
D.C: Oh definitely. There’s at least one plus 5 million
ounce deposit already in production. There are also a num-
ber of smaller ones. These epithermal systems can be rela-
tively small – relatively small meaning a few million ounces,
but quite high grade. What they are dealing with is slightly
different. It’s more analogous to the Pierina deposit in
Peru; in fact it is very analogous to the Pierina deposit in
Peru. And the other thing that they have picked up is a sec-
ond (these are epithermal gold deposits we are talking
about) deposit on Sumatra that they have already drilled
and has a different configuration but is looking like a one to
two million ounce deposit. The third set of projects is large
scale porphyry targets, some of which have had work in the
past and others of which have never been drilled. If any of
these work out they could potentially be the large 10 to 20
million ounce bulk tonnage gold-copper deposits.
D.P: If you could take a look at the different projects they
have and how big you think their size might be?
D.C: There is one other project in Indonesia that is on a
separate island plus the smaller project on Sumatra that
they’ve drilled. Based on last year’s drill results, which
unfortunately they were delivering into a market that was
falling apart, these probably represent at this point one and
a half to two million ounces. Both are quite open to expan-
sion when they get back to testing them. Based on the
previous guesstimates, and they were based on limited
drilling but a lot of surface sampling, the Main Miwah zone
is a target in the five million ounce scale. I’m talking guess-
timates and that’s not meant to be an accurate number, but
it has a solid basis from existing results and target scale.
On top of that, their own work has located the South Miwah
mineralization which they’ve only put a couple of drill holes
on – it’s hard to put a precise target scale in it. But what it
does have definitively from the surface sampling and the
initial drilling are areas of quite high grade at surface. It
could be at the same scale roughly as the Main Miwah
zone. It certainly is too soon to say that, but what it should
do at a minimum is a significant amount, and significant to
me is in the ½ million ounce range, of higher grade material
plus whatever is there once they get a proper test of it. So
you are looking at a company which in three projects, and
again these are not official numbers these are my guessti-
mates, that already has the feel of being in the 8 to 10 mil-
lion ounce class amongst three projects, and with a big
lump of that being at Miwah.
D.P: Am I also correct that they also have a few additional small projects in the area?
D.C: They have a few additional small projects only in the sense that there has been limited work on them. The por-phyry projects are large-scale. There simply isn’t enough work to quantify them in terms of their real potential.
Within that region system is the largest gold/copper mine in the world that belongs to Freeport McMoran, and Newmont also has a significant producer in Indonesia. So these are projects with good potential
D.P: Canaccord is using this rule of thumb that to value gold companies these days, they give it $70.00 an ounce in the ground. So how can you use that to come up with potential targets for East Asia?
D.C: If you did the math on $70.00, what I just described would be in that $8.00 target range. Our take is that the $70.00 number is valid and partially that is based on what the market is telling us. When you actually sit down and figure out the value of a specific project, it’s not an exercise of using a rule of thumb, it’s an exercise of CAPEX and operating costs.
In other words, working through what the actual bottom line would be. So in a nutshell, higher quality ounces are going to be worth more and the bigger a deposit is, because it brings in bigger players, are also generally worth more.
In both cases, Miwah fits the bill. If my assumption of a five million plus ounce deposit, that puts it in line for all of the players in the business. The grade so far, given that it should be a very simple process to extract the gold, puts it in the high-quality category.
D.P: You have been following this story firsthand for a while, what kind of an investor should be looking at this, because it still sounds speculative even though you previously had a target of $5.00 to $12.00, but now seem to be focusing on the $8.00 number?
D.C: We are not going to get overly focused on the $8.00 – those are conceptual targets. We pretty much save our targeting for producers where it is a nuts and bolts exercise. The type of investors that should be looking at this are
a: people who want to be in gold;
b: are looking for something that has speculative upside and
c: are willing to take some risk.
We are comfortable with Indonesia. I have worked there in the past so I have stayed on top of the political changes and I am comfortable. That doesn’t mean that the market will get comfortable, nor can you ever assume anywhere that adverse changes won’t come.
Indonesia is still in a political process whereby it has democratized – the
democracy that has been established there is real, but you still have bureaucratic issues to deal with. It can take quite a while to get things done sometimes because the bureaucracy set a pace based on when it was a dictatorship which I don’t think they have worked through yet. It doesn’t mean it never gets done, but it can make timing difficult and when people are looking at valuations, they are going to fit that in as one of the parameters. I am saying the quality is
there and the scale is there, others will argue and reasonably, but yes then you have to apply a discount because it is in Indonesia and people aren’t sure what to think of the place. I do think that will change by the way – I think a “I” is going to be added to the BRIC countries and that will be for Indonesia.
D.P: I guess the question is, if you could only buy one stock these days, would it be East Asia?
D.C: It would be East Asia, which doesn’t preclude me from liking others, but on the basis of what I can see – the fact that they are working actively and its current valuation, yes it would be East Asia.
The timeframe for significant lift with the gold price taking a big jump on the announcement that India bought half of the IMF gold sale could be soon – the EAS volumes have stayed up and I think it is a matter of working through enough volume and it could pop up as it
did from the $0.50 level or $0.40 level where we started. It was a matter of some accumulation on volume and then it popped and I think the same thing will probably happen again. How quickly? I am not going to try and guess that, but there will be a shift in the market in January (there always is) and I think between now and then, but if not then cer-
tainly early year. At which point I will put in my wine order!
D.P: Thank you very much Mr. Coffin!
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