Selwyn’s boardroom battle hits fever pitch

VANCOUVER — A battle is brewing at Selwyn Resources (SWN-V) that pits the company’s current directors against a large dissident group that wants control not just of boardroom seats, but whether the company should even continue as a going concern.

The battle is nasty, and rather confusing. Denied the right to vote on boardroom changes at a special shareholders’ meeting, the dissident group held their own meeting where they purportedly elected a new board and fired Selwyn’s president and CEO. They even started issuing press releases that appear to come from the company itself. 

The special meeting that kicked off this confusion was held to let shareholders vote on whether to sell Selwyn’s remaining 50% stake in its flagship Selwyn zinc-lead project in the Yukon to China’s Chihong Canada Mining for $50 million. The sale, which shareholders did approve, leaves Selwyn with just one asset: the historic ScoZinc zinc-lead mine in Nova Scotia. 

Today’s brawling is really over what to do with that asset. The current board wants to put the $40 million left from the Chihong deal into restarting the old mine, while the dissident group wants all that cash handed over to shareholders.

For US$31.5 million Selwyn’s board says they can refurbish ScoZinc and turn Selwyn into a producer, with a 2,500-tonne-per-day mine bearing a US$56-million after-tax net present value (NPV) and generating a 57.8% after-tax internal rate of return (IRR). Those base-case numbers use US$1.10 per lb. zinc and US$1.20 per lb. lead for the mine’s first five years of operation, which Selwyn president and CEO Harlan Meade says are the midpoint of metal price forecasts from 15 different banks and brokerage houses. Meade also thinks the zinc market is heading for a supply shortage that will push prices back up.

The dissident group couldn’t disagree more. In an email correspondence with The Northern Miner, Benedict Cubitt of Samara Capital, a Selwyn shareholder and one of the leaders of the dissident group, said ScoZinc generates a negative NPV using any of the zinc and lead prices on the London Metal Exchange futures curve out to 2020. 

In general, the dissidents don’t think there is any money in restarting an old mine. Instead, they want the Chihong money issued to shareholders as a special dividend. After that, the dissident group would want Selwyn to sell either ScoZinc or the entire company, paying out those proceeds to shareholders as well.

They are two starkly different visions for Selwyn’s future, and they have created a spirited exchange that will culminate at the Selwyn annual general meeting on June 17.

The gloves were dropped in mid-April when Samara Capital — which owns 2% of Selwyn’s outstanding shares — put three new directors in the running for Selwyn’s board. The fund’s intentions were clear: it wanted to fill Selwyn’s boardroom with directors opposed to restarting ScoZinc and in favour of transferring the Chihong money to shareholders. The Samara nominees would then “immediately launch a strategic review of the ScoZinc project with the goal of selling the asset and paying out the net proceeds to shareholders, or if possible, selling the entire company.”

Samara proposed its dissident slate on April 17, five days before what was to have been a combined Selwyn (AGM) and special shareholders’ meeting to ratify the Chihong deal, an event scheduled for April 22. However, Selwyn’s board decided five days was not enough time for shareholders to process the Samara situation, and postponed the AGM. They did not cancel the April 22 meeting, but with the AGM matters off the table, the Chihong deal was left as the only matter to discuss. 

Selwyn’s board said it planned to reschedule the AGM. The company also promised to “not use the net sale proceeds to finance any material capital expenditures related to the restart of ScoZinc mine” until the AGM issues were decided. 

The postponement ignited a firestorm. Within hours Selwyn’s largest shareholder, Resource Capital Funds (RCF), issued a release saying it was “extremely disappointed” and “appalled” at the delay in voting on the board of directors. The fund called it a decision that “frustrates [the] will of the majority of Selwyn shareholders and is evidence of the entrenchment by the current board of directors.”

RCF, which holds a 17.1% stake in Selwyn, also made clear that it plans to vote for directors who will distribute the Chihong monies to shareholders.

“[RCF] believes that management and the current board are more focused on protecting their jobs than doing what is right for shareholders,” the fund wrote. “RCF has attempted to engage the board in discussions to dissuade it from its intention to use the Selwyn project proceeds to invest in a risky, speculative new mine, and these overtures have been met with indifference, even though the market apparently agrees with RCF’s analysis. Since the announcement of the sale, the company’s share price has traded below the net realization price, effectively attributing no value whatsoever for ScoZinc.”

But this was nothing compared to what happened next.

On April 22 Selwyn held the special shareholders’ meeting. A large group of shareholders pushed for a motion to reinstate the board elections to the meeting’s agenda. Acting as chairman of the meeting, Meade denied the motion.

“Despite such motions having been supported by shareholders representing more than 74% of the Selwyn shares represented at the meeting, and 49% of the total issued and outstanding Selwyn shares, the chairman refused to allow such motions to be voted upon,” RCF later wrote. Samara Capital proposed a motion to appoint an independent chairman for the balance of the meeting, which was similarly declined by Meade.

Moving on to the business at hand, Meade called for a vote on the Chihong deal. Shareholders approved the sale. For the sitting board, that was all that transpired: after the vote, Meade adjourned the session and they left.

That’s where things got complicated.

Three-quarters of the shareholders at the meeting remained in their seats and attempted to continue the meeting. In fact, they voted on appointments to the board, purportedly electing Samara’s three dissident nominees. 

A week later these new “directors” even appointed a new chairman and a new president and CEO for Selwyn,  fantastically giving Meade the boot. This “board” announced the moves in a press release that appeared to come from the company itself.

Selwyn — in a press release from still-acting president and CEO Meade — made it clear that the Samara-led meeting had no legal effect. Ignoring the invalid board elections, Selwyn’s actual board announced a date for the AGM where it pledged shareholders would elect individually whether to participate in the company going forward to authorize the company to return cash to shareholders. 

Moreover, if investors want cash, Selwyn’s board says the best thing to do is to orderly liquidate the company — as opposed to Samara’s suggestion of a special dividend payment — to ensure funds are distributed equitably and taxes are avoided.

To get all this done, Selwyn’s plans for the AGM start with a shareholder vote on the composition of the board. If the current directors are re-elected, those directors will ask shareholders to vote on a liquidation resolution. 

If the liquidation resolution is passed, the board will “cease to exercise any powers in respect of the company and PricewaterhouseCoopers, as liquidator, will oversee a process of the orderly windup of the company.” If the liquidation resolution is not approved, the directors will turn their attention back to ScoZinc. 

That’s well and good, but Selwyn’s current board will have trouble retaining their seats, as the dissident group claims its support base has climbed to an absolute majority of 50.9%.

The dissidents have in turn attacked Selwyn’s liquidation plan, calling it “ill-advised and self-serving.” In a release, RCF says the liquidation proposal is “solely constructed to ensure that large change-of-control payments to management and employees, totalling approximately $4 million, take precedence over any shareholder distribution.” 

In response, Selwyn says the liquidation resolution has “no bearing” on whether such payments would be made.” If successful at the June 17 meeting, the dissidents will control decisions about the termination of employees and the triggering of any severance payments,” Selwyn said. 

It all adds up to one ugly situation, but that is exactly what slow markets and low metal prices often produce. The possibility that Selwyn shareholders might want their money back is understandable. 

The company bought the Howard’s Pass project in 2005, renamed it the Selwyn project, and spent more than $131 million discovering nine deposits at the large, isolated property in the east-central Yukon. In the course of raising funds to explore the site, Selwyn ended up with 397 million shares outstanding. 

But the company also ended up with a massive deposit. Selwyn now boasts 14 deposits spread over 37 km of strike that carry 186 million indicated tonnes grading 5.2% zinc and 1.79% lead, plus 238 million inferred tonnes averaging 4.47% zinc and 1.38% lead. 

Soon the Chinese decided they wanted in. In August 2010 Chihong, a subsidiary of Yunnan Chihong Zinc and Germanium, bought half of the project for $100 million and formed a joint venture with Selwyn aimed at taking the project to production. 

Zinc prices disagreed. After peaking around US$2 per lb. in 2006, zinc has fallen way off, recently averaging US85¢ per lb. Selwyn’s share price followed that downward path, dropping from the 70¢ range in 2006 to just 5¢ in 2008. SWN shares bumped up to 40¢ after Chihong bought its first half of the company’s flagship project in late 2010, but soon fell again and have sat below 10¢ since mid-2012.

Selwyn shares were worth 8.5¢ at press time. The company has a 52-week trading range of 3¢ to 11¢.