Singing (and dancing) in the rain

June 29, 2013

On June 20th, you may have seen my thoughts on "the path forward" for Southern Arc Minerals. In that short piece, I said: "… it's a buyer's market. Cash is king. Those with cash can pick up advanced-stage projects for a song… maybe even for a couple of verses to a song."

I also said:

• I'm looking for this Company to diversify my investment by finding projects open to improvement by way of proven skills in developing small scale mines.

• I'm looking for this Company to diversify my investment by finding projects in 'new' jurisdictions where processes through bureaucratic channels do not represent the highest hurdles.

• I'm looking for this Company to diversify my investment by finding projects open to improvement by way of what I would term, 'the deal.'

Well… yesterday, Southern Arc announced an agreement to acquire 26.2% of Eagle Hill Exploration Corporation, operating at the Eastern edge of the Abitibi Gold Belt.

The key project for Eagle Hill is the Windfall Lake Property, consisting of seven distinct gold zones:

The multiples of 'grade x intercept' for this property's holes are very attractive. Even with removal of the 4,180 gram section (0.8 metres), hole EAG13-466 still shows more than 20 grams per tonne over the remaining 11.6 metres. That's a multiple, on its own, of 233. The other two holes highlighted in Southern Arc's news release show multiples of 121 and 236… and these are not alone as successful results. See the Company website for detail.

Metallurgical recovery of up to 97%, given typical good rates of just 75%-85%, is another point in the project's favour.

Existing infrastructure, and ready access to the property represent two more check marks in the win column.

Last Summer, the Company released a compliant resource estimate of 538k ounces of gold (Indicated) and 822k ounces of gold (Inferred). Since then, another 101 holes (29,208 metres) have been completed, confirming "extensions to the main mineralized zones both near surface and at depth below previously known mineralization…" I anticipate we're going to see a significant gain with the next NI43-101 report. With cash in the bank, and a drilling program scheduled to start in September, the upside potential here is meaningful. Love the grades. Love the location (Quebec is one of the world's friendliest mining jurisdictions). Love the history of the belt (with 170 million ounces of extracted gold).

So… you ask – what's wrong with this picture? Why is such a fine and attractive project going nowhere, and importantly, how can Southern Arc take this substantial position at the reported price? Good questions.

See my first paragraph today. Cash is king. With so many Venture listings cashless, several hundreds will disappear or get scooped up in the months ahead. The wind is up and a storm continues to brew. Many will not survive.

Eagle Hill has been doubly exposed. Here's why:

The Windfall Lake Property was previously held and operated by Noront Resources Ltd. While Noront had enjoyed good drilling success at Windfall Lake, and was encouraged enough to invest $15 million+ in an underground decline of over 1,400 metres… they were focused on their high profile Ring of Fire project in the James Bay Lowlands region of Northern Ontario. They assessed priorities and chose the Ring of Fire over Windfall Lake. Retaining a 25% interest in Windfall Lake, in July of 2009, Noront sold a 75% interest in the project to Eagle Hill.

Here's the kicker: Noront also held on to an option to re-acquire Eagle Hill's 75% interest, in the event of Eagle Hill's failure to produce a fully funded bankable feasibility study.

In April of this year, Eagle Hill negotiated a three year extension to the deadline for production of that study. This extension agreement was incentivized by requiring Eagle Hill to make a cash payment of $615,000 to Noront next month (July). At the same time, Noront granted Eagle Hill a 90 day exclusivity period to negotiate the purchase of its 25% interest in the Windfall Lake Property. Failure to make the $615,000 payment would enable Noront immediately to buy back the remaining 75% for $6 million.

Key points to consider:

• Eagle Hill results following the 2009 exchange improved the project's geological picture significantly over what Noront had discovered. Eagle Hill was successful in developing the property to a point of resource definition (see above).

• Eagle Hill, like most explorers these days, has been quickly running out of cash. In a market bone dry for new money, prospects for meeting its current obligations and advancing the property were not promising. Cash is king.

• Like the rest of the market, Noront has also fallen on hard times. Cash is tight all around. Before the 2008 crash, Noront was a billion dollar company. It now sits at a market cap of just over $60 million.

• Just last December, Maudore Minerals Ltd. put a proposal out to merge with Eagle Hill. Maudore had already negotiated, conditionally on this proposal, to take Noront out of the picture by acquiring their 25% for $10 million in cash, plus 3 million Maudore warrants and other conditional consideration, and valued Eagle Hill shares at $0.17. Times, they are a changing… but cash is still king. Eagle Hill rejected the deal. Hmmm…

• Earlier this month, presumably while the Southern Arc/Dundee/Eagle Hill/Noront negotiations were already under way, Ring of Fire operator Cliffs Natural Resources announced suspension of its environmental assessment activities. That move put the kybosh on Noront piggy-backing on Cliffs' planned North-South access road. I'll bet that put some new pressure on Noront to make a deal here. Timing, they say, is everything. Again, cash is king.

• With the just-announced agreement, Noront is out of the picture for just $5 million plus 25 million EAG shares, each now valued at seven and one-half cents.

In short, Eagle Hill was operating with a dagger hanging over its head. No cash in hand and a buy-back option for Noront trapped Eagle Hill in a no-win position. Nobody would fund operations as long as Noront held the trump cards. The most attractive property in the world would be stalled out in the face of such a hurdle. Without taking Noront out, EAG stock was dead money.

When I wrote last week, "I'm looking for this Company to diversify my investment by finding projects open to improvement by way of what I would term, 'the deal.' " I had no idea how right I could be. Good projects always find money. Supply and demand works as an arbiter that defines value. There's no free lunch. If it looks too good to be true, it probably is. If it's such a good project, why hasn't someone else bought it up? These are the questions to be asked and answered about any proposed deal.

I knew John Proust enough, though, to understand that he'd be looking to find good projects (as judged by his resident geological expert, Mike Andrews) that were handcuffed structurally. This deal effectively unlocks Eagle Hill's potential to either win or lose on the basis of the fundamental merits of the project. Creative re-structuring, along with cooperative circumstances in the marketplace, have presented a unique opportunity for everyone to walk away as a winner.

• Noront finds much needed cash to dedicate to its Ring of Fire project.

• Eagle Hill steps out from under the dagger of the Noront buy-back option.

• Eagle Hill can now capitalize on synergy at the leadership level, both in geological expertise and alignment of corporate interests.

• Eagle Hill shareholders are finally able to hope for this Windfall Lake project to be advanced to a point where they will share in its intrinsic value. 75% of something going nowhere because of flawed structure is worth nothing. Eagle Hill is no longer a lame duck but rather a going concern.

• Southern Arc shareholders attain valuable diversification of project risk and political risk.

• Dundee retains (and extends) its interest in the project in an environment of improved corporate structure and shared funding.

I'm intrigued by the Dundee role in this project. Knowing John Proust as I do, I'm guessing he was hoping for a more dominant position in the project going in. Reading the Ned Goodman quotation (and by the way, the very existence of that quotation speaks volumes), I suspect that the negotiations dynamic that ensued was interesting to say the least. Twenty years involved in the Windfall Lake Project and surrounding gold camp, as a multi-billion dollar asset management company, Dundee was not going to take a back seat to anyone. While control is always a key objective, a good partnership can sometimes offer even more. Association with Dundee, I think, will not hurt Southern Arc in this project. I'll be watching the development of this relationship with much interest going forward.

So… on my first three bullet points cited at the top, check, check, and check again.

On the fourth bullet point from June 20th:

• I'm looking for this Company to place its Indonesian properties on a no-maintenance track, funded entirely by OPM.

… I'll be watching with equal interest to see how coming news may lead Southern Arc to a position by which to answer this need. The Company had planned to be out this week with the West Lombok resource estimate. Backing up a step or two to consider the landscape, I suspect that the delay is at least in part a function of last minute negotiations and details attached to the Eagle Hill announcement. It happens. On the resource estimate, I've heard from a friend that he was told by the Company yesterday that they are, "putting the finishing touches on it." Works for me.

We live in interesting times, indeed.

This week, my wife and I attended our daughter's graduation ceremony. Part of the presentation was a musical montage of baby pictures juxtaposed with 'grown up' Grade 8 pictures, captioned with sayings and quotations selected by each of the students. One boy offered: "Run directly toward what you fear… unless you fear bears… never run toward a bear." Cute and good for a chuckle. Another, of the Rose Kennedy variety, was more to my point today. It went like this:

"Life isn't about waiting for the storm to pass. It's about learning to dance in the rain."

With respect,

Kevin Graham

http://www.grahamanalytics.com/CompanyFiles/SA/SA_book/Eagle_Hill/singing_in_the_rain.html