Kalimantan Gold has the value kickers to shine

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KALIMANTAN: With fear rather than greed dominating the collective psyche, the market is throwing up some anomalously low valuations, report from proactiveinvestors.co.uk.

A case in point is Indonesia-focused copper and gold explorer Kalimantan Gold (LON:KLG, CVE:KLG).

It is fully funded for the year and on its current exploration programs has two blue-chip joint ventures and three very good “value kickers”.

Yet a market cap of £9 million is the equivalent of the cash pledged for drilling this year – which means it has already been priced to fail.

This is absurd as the drill rigs have only recently started turning on its two projects on the Indonesian side of the island of Borneo, Kalimantan.

Perhaps the group is still unknown, or maybe investors are keen to avoid the risk posed by working in a country where security of tenure has been an issue.

Whatever the issue, the valuation looks a tad low – even to the most cynical and jaded observer.

For chief executive Faldi Ismail it is hugely frustrating.

“The downside risk is mitigated by having three separate opportunities. How low can we go from here?” he asks.

That is often a dangerous question to ask, particularly in these volatile and erratic markets.

The company’s two projects are the KSK copper property in Central Kalimantan, which has world class potential, and the Jelai gold licence in East Kalimantan.

It is partnered on KSK with a subsidiary of the American goliath Freeport-McMoRan, which must spend a total of US$7 million to earn a 51 per cent stake on the project.

That figure moves to 75 per cent if Freeport funds KSK to the feasibility study stage.

Freeport has also agreed to raise the debt funding required by the AIM and TSX-quoted junior if the project moves into the mine development phase.

If for some reason Freeport walks away, Kalimantan keeps the property and pays out a 1 per cent net smelter royalty (capped at the expenditure amount) if and when KSK is eventually brought into production.

Kalimantan has also managed to look after its interests in negotiating a two-play drilling schedule.

Very deep targets – currently Beruang Tengah and Beruang Kanan – are being drilled to locate the sought-after giant copper porphyry deposits that would interest the mining major.

Additionally, 29 holes are being drilled near surface (down to 250 metres) in a bid to define a “shallow resource”.

This offers a form of insurance if the company were to miss these deep lying elephants.

Specifically, it means Kalimantan would be left with tangible results from the investment – probably an inferred near-surface resource.

Previous drilling on KSK – the company has spent a total of US$16.4 million on 36,000 metres of drilling in the past 15 years – suggests the chances of defining a near-surface deposit are good.

In all, $11 million will be ploughed into drilling KSK (remember Kalimantan’s market cap is just £9m, or US$14m) this year, which suggests Freeport is in earnest.

It is in the right geological neighbourhood – Freeport’s Grasberg and Newmont’s Batu Hijau copper projects are all located on Indonesia’s “ring of fire”.

We should begin to see the results from the drilling on Tengah and Kanan by October, with data from the near-surface exploration starting to dribble out around at that time too, said Faldi.

His best guess is that KSK will have a defined near-surface resource in 12 to 18 months’ time.

However he remarked: “Things can change along the way. If we get some very good results on these deep holes, things will change very quickly.

“If we get 100 million tonnes at 0.8 or 0.9 per cent copper that’s worth quite a bit on the balance sheet.”

On the Jelai gold project it is partnered with Tigers Realm Metals, run by Owen Hegarty and Tony Manini.

The two were founders of Oxiana Limited, which showed it is possible to grow from a relatively modest base into a multi-billion dollar mining group.

Tigers Realm Metals can earn up to 70 per cent of Jelai in return for taking the low-sulphidation epithermal-style deposit to the bankable feasibility stage.

It plans to spend up to $3 million on around 8,000 metres of drilling that it hopes will pave the way and help define a resource of around 1 million ounces of gold.

A total of 126 holes for around 14,000 metres were completed prior to the latest campaign.

It has located seven major veins and numerous subsidiaries with a cumulative strike length of more than five kilometres.

“We know the veins are there,” said Faldi. “Now it is a case of systematically drill testing them.”

There is scepticism in London, at least about investing in Indonesia, a metals rich nation keen to ensure much of this wealth stays in the country.

Worries over security of tenure and permitting tend to be uppermost in investors’ minds.

Pre-election political sabre-rattling hasn’t helped the mood.

It is worth pointing out that Kalimantan has been in Indonesia for the past two decades, so its experience of the people and politics are well seated and broad.

And in fact this counted for a great deal when Freeport decided that Kalimantan should be the operator of the KSK project.

It is unusual for a mining company of this size to hand over the reins to a junior and underlines just how highly it prizes Kalimantan’s on the ground expertise.

Fifteen years of community engagement – spearheading agriculture, fishing and finance initiatives – means the group is well respected by the locals.

This approach has drawn scorn from some quarters of the investment community as the business has spent significant sums on these initiatives, Faldi reveals.

The chief executive is proud that the company operates in such a socially sensitive and responsible way – and it is one of the reasons he joined, he adds.

It also has its benefits when it comes to moving the processes along such as permitting. You don’t get the opposition you might if a massive foreign firm bulldozed its way into town.

“We have worked hard on the community aspect of our business. Had we not done that in our earlier days I guarantee we would not be around today,” said Faldi.

“So when we ask to take a project forward and get the permitting, we actually have the backing of the local people. We have implemented sustainable practices.

“While there are no villages on our concession, there are 31 villages in the vicinity and we work with all of them. We have worked out and identified what their needs are. We have helped provide them with experts to help them do things for themselves.

“So that might be fish farming, rubber plantation, agriculture work, micro-finance and credit, we have provided significant technical training and village institutional strengthening.

“There is a whole stream of things where we have opened doors.

“KLG has pioneered these methodologies. I am not aware of any junior company anywhere in the world that has adopted this participatory approach so early in the exploration phase.

“This approach to mining is very important for the future of mining anywhere in the world today and particularly in Indonesia.”