LEMONGA PROSPECT ACTIVITIES IN 2005 AND EARLIER

Southern Arc's first stage of exploration activities at Lemonga, that is, a heli-mag geophysical survey of the complete Taliwang SIPP was carried out in June 2005 prior to a Phase 1 scout diamond drilling program, which was completed in August 2005. The evaluation of the findings, particularly of the Phase 1 drill core assays, suggested there was good incentive to enter into a second stage of exploration activities that included infill and deeper drilling to determine in better detail the three-dimensional definition and extent of the veins and mineralized areas. The Phase 2 drilling work started in mid-December 2005 and was completed in July 2006. This was followed by trenching to further define the extents of the vein complex.

A survey grid (1.7 by 1.2 km) was established by the Southern Arc exploration team over the Lemonga prospect early on in the 2005 exploration program, with surface evaluation activities comprising detailed geologic mapping, outcrop channel sampling, costeaning, infill BLEG sampling and detailed petrological studies. Field checks at the Lemonga prospect, including grid establishment and prospecting, confirmed the presence of a 1.5 km by 1.5 km area of hydrothermally altered andesitic and dacitic tuffs hosting a series of sub-parallel, irregular quartz-sulphide veins traceable along the strike.

Prior to the Phase 1 drilling, surface assay results at Lemonga confirmed the presence of highly anomalous gold (0.31 g/t to 3.23 g/t Au) with anomalous silver and base metal values within the veins. Based on these results, in June 2005 Southern Arc initiated the scout drilling program utilizing a man-portable drill rig with the aim of testing the entire strike length and structural widths of the mineralized zones at Lemonga. Five epithermal veins were identified: Amy, Betty, Cici, Dessy and Evi Veins.

By early August 2005 Southern Arc had completed 16 shallow diamond drill holes spaced at intervals of between 100 meters and 250 meters along the strike of these five veins. All holes were drilled at right angles to the steeply dipping vein structures. Moderate core angles (40 degrees to 50 degrees) indicated that the vein structures are vertical in orientation, but because of the "pinch and swell" nature of veining and limited number of intersections, true vein widths at this stage could not be reported.

Complete details and results of the completed Phase 1 drilling and assay program carried out on the Lemonga prospect are presented in Southern Arc's August 15, 2005 news release.

The immediate conclusions of the Phase 1 [scout] drilling program were that high-grade shoots were detected in the southern portion of the Amy Vein and in the Dessy Vein. The widely-spaced drill holes into the other targets all intersected quartz veins carrying anomalous levels of gold and silver. This prompted Southern Arc to go ahead with the 2006 Phase 2 drilling program to better define the extent and level of mineralization.

An infill BLEG/SS sampling program was also carried out around the Lemonga area. The final results led to the identification of three new anomalous areas for follow-up (see Lemonga, Taliwang maps), one of which was purely based on alteration assemblages (Joroktiram), whereas the other two were based largely on BLEG anomalism. Joroktiram displayed weak but extensive quartz±limonite stockworking in dominantly argillic altered andesites, and warranted a short field program of selective RC and CH sampling.

Further geologic mapping and selective sampling of the breccia zone underlying Olat Beleong, east of Phase 1 drill hole LDG-013, was carried out in September 2005. The consensus on the appearance and origin of the extensive breccia body is that it represents an original capping of dacitic volcanic breccia, hydrothermally altered and re-brecciated, with some silica-quartz rich zones preferentially hosting gold-silver-minor barite mineralization, with adjacent, but non-correlative (in a geochemical sense) base metal anomalous zones. Rare narrow quartz veins/veinlets found within the extension area mostly tend to parallel the strike of the main Lemonga vein set. It is apparent from the map that the southern part of the quartz/silica altered zone requires closure.

Trenching was started in October 2005 with the intent of uncovering the enigmatic wide quartz vein encountered in LDG-16, however it did not reach bedrock and so was deepened. Discussions during a company officers' site visit in September 2005 led to the decision to excavate a long trench between LDG-11 and LDG-12 collars to uncover potential veins/stockworks in the saddle area between the Dessy and Evi veins. Soil cover was not deep in that area. This was complimented by data from the CSAMT ground survey.

Final results from the trenching program over the south Amy vein tended to support what was encountered in drill hole LDG-01. The eastern side of trench 1 over LDG-01 intersected the Amy vein resulting in 9.05m @ 2.45 g/t Au and 48 g/t Ag (incl. 4.0m @ 4.97 g/t Au and 105 g/t Ag on the far eastern side). Trench 2 (20m south of LDG-16), however, proved enigmatic in that only a 2m width of westward-dipping quartz was intersected assaying 0.28 g/t Au and 2 g/t Ag, quite at odds with the wide vein intersection towards the bottom of the drill hole. This area therefore is considered should require further examination. Trench 3 (123m south of T2) returned 1.3m @ 0.32 g/t Au, whilst channel sampling across two quartz veins (possibly a Betty vein split?) in the Orong Bulu stream, a further 95m south (total 238m south of the LDG-16 trace) returned 2m @ 1.14 g/t Au and 13 g/t Ag and 1.9m @ 0.52 g/t Au and 2 g/t Ag, respectively.

Perhaps not surprisingly, the highest values received from the infill BLEG sampling program derived from streams draining the immediate surrounds of the Lemonga prospect. The headwaters of two adjacent streams draining the far NE extension of Lemonga require follow-up (16.1ppb Au and 23.2ppb Au/139ppm Ag). Of particular note are results from three adjacent streams draining the eastern slopes of the breccia body underlying Olet Beleong (the eastern extension of the Lemonga grid). Along with high gold in BLEG values, silver fell into the range of 800 to 1,000ppb, confirming the very high silver content found in certain zones of the Beleong breccia, as noted in drill hole LDG-13. This was also supported by a float chip taken from one of the streams (1.86ppm Au and 125ppm Ag). These results also tend to impose a substantial E-W dimension to the breccia sub-prospect. Scattered anomalies from the south side of the Lemonga prospect appear to be derived from rare narrow quartz veins and veinlets within competent, propylitically altered andesite. A slightly weaker BLEG-only anomaly was found from two creeks (14.1ppb Au/91ppb Ag and 8.1ppb Au/95ppb Ag) draining an area of propylitically altered andesite centered approximately 2 Km NE from Kertasari village.

The petrological report from SKM on 62 core samples taken from the Phase 1 drilling program proved highly encouraging and suggested that at least 450m vertical extent of potential Au-Ag mineralization remains intact largely above the boiling zones of an extensive paleo-hydrothermal up-flow regime. Contouring the fluid inclusion homogenization temperatures on a long section of the Amy vein (see Amy Vein FI Homogenization Temperature Distribution diagram in the Taliwang Geology page) revealed a more or less horizontally stratified temperature gradient reflecting up-flow from beneath the entire sampled vein, also evident in the vector diagram. The pronounced upward-trending "bulge" disturbing the strata in the vicinity of drill holes LDG-01 and LDG-03 intersections possibly reflects locally enhanced structural permeability in that portion of the vein, thus allowing hotter fluids access to higher levels resulting in the higher gold and silver grades returned from those intersections. Certainly the milder bulge around the LDG-05 intersection in the north required further examination by way of drilling. The section displaying Au/Ag ratios does not prove to be as conclusive, but this is probably due to broader geochemical sampling covering different paragenetic sequences (earlier mesothermal versus later epithermal events).

The start of the Phase 2 drilling program over Lemonga was delayed until late December 2005 so that it could be modified primarily to close-in the drill line spacing in the central Amy Vein segment. Southern Arc acquired the Micromine software, which proved effective in the construction of a long section over the Amy Vein in order to more easily determine spaces to infill by further drilling. This in turn prompted a more rigorous demarcation of the vein into three segments of different average strikes and priorities, from south to north:

Ex-Aneka Tambang drill hole collars were relocated prior to the Phase 2 drilling, with the old pads selectively excavated to reveal each hole's azimuth and inclination. As a result of slope collapses and small slides over time, only three collars could be located and measured. All had been drilled at -70 degrees towards a westerly direction and, it can be assumed, due to the pad positions, the remainder had been drilled similarly.