Southern Arc shifts focus to Japan

In 2005, Southern Arc Minerals (TSXV: SA) became the first Canadian junior exploration company to return to Indonesia after the Asian financial crisis in 1997. The junior acquired two key projects: the West Lombok property on Southwest Lombok Island — which is under a joint venture with an Indonesian company, Genesis Sumber Energi — and the East Elang project on Sumbawa Island, a joint-venture with Vale (NYSE: VALE). East Elang is next to Newmont Mining’s (NYSE: NEM) large Elang copper-gold porphyry.

But in 2012, when the Indonesian government revoked the licence of Churchill Mining’s (US-OTC: CLHMF) East Kutai thermal coal project in Kalimantan, and Intrepid Mines ran into difficulties with its Indonesian partner, which sold the Australian company’s 80%-owned licence to the Tujuh Bukit project in East Java to a separate company, Southern Arc thought it best to hedge its bets.

The Vancouver-based company announced a diversification strategy in December 2012, and in its first deal, acquired a 26.1% stake in Eagle Hill Exploration Corp., which was developing the high-grade Windfall Lake gold deposit between Val-d’Or and Chibougamau, Que. Working with Dundee Corp., Southern Arc advanced Eagle Hill with drilling campaigns and a preliminary economic assessment. In August, Oban Mining (TSX: OBM) acquired Eagle Hill at a 258% premium to market, leaving Southern Arc with a 6% stake in Oban.

The second move Southern Arc made was turning to Japan, where Tertiary volcanic arc terrains host five silver deposits of more than 1 million oz. gold, including Hishikari, one of the world’s highest-grade gold mines. The Hishikari mine, on Kyushu Island, has been in production since 1985. Production to the end of 2010 totalled 6.2 million oz., at average grades of 49 grams gold per tonne.

“It’s incredible, and the deposit has remaining reserves of 4.8 million oz. gold at similar grades,” Mike Andrews, a geologist and Southern Arc’s president and chief operating officer, says in an interview. “They don’t have a mill on-site, a lot of the ore is hand-sorted and the coarse vein material is shipped directly to Sumitomo’s copper smelter, where it is used as flux for their base metal smelting. It shows how phenomenal the deposit is — I have never heard of that anywhere else in the world.”

The other encouraging thing about Japan, Andrews notes, in addition to being under-explored, was that the government had revised its mining laws in 2012, opening up the sector to foreign investment (along with the broader economy), and letting foreign companies own 100% of a Japanese subsidiary, making it an attractive regulatory environment for miners.

Southern Arc set up its subsidiary in June 2012, and began detailed research, based on extensive studies by the country’s own geologists who worked for the government. “We realized that over the years, the government geological survey had developed a comprehensive database of geological data for the whole country, and they were open to giving access. We took advantage of that extensive and detailed geo-scientific database, which helped us pinpoint areas that were compelling.”

In May this year, Southern Arc applied for 38 contiguous exploration licences in northern Hokkaido targeting Hishikari-type, high-grade epithermal gold deposits, in addition to 42 other applications it had already submitted for prospecting rights licences throughout Hokkaido and northern Honshu. At first the company picked licence areas in Hokkaido in the north, because of its low population compared with parts of southern Japan, as well as its history of mining.

“We found the prefecture government welcoming when we made approaches there, and it also had attractive geology,” Andrews recalls. “People always ask me: ‘Why, if the geology is so good, hasn’t there been more interest by mining companies in Japan? The answer is that until recently, Japan has not welcomed foreign investment in general, so it’s been the domain of the big Japanese industrial conglomerates … and a lot of the major conglomerates have been encouraged to take positions in mining projects around the world to secure access for their smelters to ores and concentrates, rather than look inwardly at mining projects. So when they opened up to foreign investment, we said, ‘Wow, this looks fantastic.’”

The first step in the application process is to meet government technical and financial criteria to make sure the mining company can advance exploration on the application area, Andrews explains. Thirty-eight of Southern Arc’s 80 applications have passed this first stage, and the remaining 42 licence applications have been accepted for assessment and processing.

“Once you get to that stage, the area is reserved for you,” he says. “You can start low-impact work such as soil sampling, stream sediments, geological mapping, ground and airborne geophysics. Before starting a trenching and drilling campaign, however, those applications must be converted to exploration licences.”

Southern Arc is assessing the 38 licence application areas to determine whether it wants to apply for full exploration licences, which could take anywhere from six to 12 months. The original 38 blocks are contiguous, forming one area in the Ikutawara district, 20 km southeast of the historic Konami mine, which produced over 2 million oz. gold.

Within Southern Arc’s licence areas, there are 18 historic gold mines, one of which, called “Kitano-o,” produced over 100,000 oz. gold between 1924 and 1945. “The government’s geological survey conducted ground geophysical surveys during the 1990s, and followed up by drilling eight diamond holes under Kitano-o, but there has been no significant further underground exploration carried out at the mine,” he says. “And we have historical data from before the Second World War of one or two of the smaller mines in our area — small artisanal mines that were generally developed from adits into the hillsides. However, some went down a number of levels to depths of 50 to 60 metres below valley bottoms, and historical face sampling from those levels indicate Hishikari-style grades. They’re narrow, but high-grade, low-sulphidation gold veins, and no drilling has been done around any of these, and that’s why we say it’s under-explored.”

Andrews explains that of the 18 historic gold mines on the property, Kitano-o was the only significant producer historically. A lot of the others were small-scale showings, where people had dug tunnels into hillsides. But he says at least one of those operations, the Ryuo mine, was developed on high-grade quartz veins on six levels. He notes that while the company  worked on the geology, it saw that in addition to the high-sulphidation, high-grade vein deposits, there were areas with alteration for high-sulphidation epithermal gold.

Since then, Southern Arc has picked up four areas — three on Hokkaido and one on Honshu, an island farther south — which he says have large alteration systems covering squares of kilometres. Andrews thinks they have the right style of alteration — intense silicification, big-clay mineral alteration zones with clay minerals associated with high-sulphidation and bulk-tonnage deposits — and points out that “there are indications in these four ot
her areas that as well as bulk-tonnage gold deposits, there may be potential for blind, deep-seated porphyry copper mineralization, such as you find in Indonesia and the Philippines. And we’ve picked up four areas to evaluate those styles of mineralization.”

Andrews describes the geology he has seen so far in Japan as “phenomenal,” and says the country is easily as geologically prospective as the Philippines, Indonesia and New Guinea. He also notes that, to his knowledge, Southern Arc is the first foreign mining company to apply for an exploration licence since the country updated its mining laws in 2012.

The mining executive also praises the system for being transparent and straightforward. “The thing about Japan is, that it is very, very well regulated. Regulations are meticulously adhered to and comprehensive,” he says. “The rules and regulations are crystal clear, and they’re followed to the letter, which is refreshing. It’s comparable to places like Quebec and Finland, which are excellent mining jurisdictions.”

Under the Japanese mining code, miners pay a royalty, or “mineral product tax,” of 1% of the value of their metal production, and are also subject to a corporate tax rate of 35.6%. There are no restrictions on exports.