Dissident shareholder takes on Selwyn Resources

Souring markets and commodity prices are making it tough on just about everyone in the mining industry and proxy fights are becoming  just another part of the landscape.

The most recent contest pits Samara Capital against Selwyn Resources (SWN-V) and its management’s plans to restart the ScoZinc mine in Nova Scotia.

Samara Capital, which owns about 2% of Selwyn’s outstanding shares, is urging shareholders to vote for its slate of directors—Benedict Cubitt, Justin Oliver and Jeremy Link—and to sell the zinc-lead mine and distribute the cash to shareholders.

“The ScoZinc project has a negative net present value if current zinc and lead prices are used in the assumptions,” Ben Cubitt noted on behalf of Samara Capital in a press release yesterday. “Given the poor financing environment for junior mining companies and the lack of confidence in Selwyn management, Samara believes the appropriate course of action is to return the majority of the proceeds from the sale of the Selwyn project to shareholders and to put the ScoZinc project up for sale.”

In March Selwyn agreed to sell its 50% interest in the Selwyn project—a zinc and lead project in eastern Yukon that straddles the border with the Northwest Territories— to its Chinese joint-venture partner, for $50 million in cash. (Joint-venture partner Chihong Canada Mining is a wholly owned subsidiary of Yunnan Chihong Mining Ltd., a fully integrated zinc and lead mining and smelting company based in China’s southern Yunnan province.

That transaction is expected to close in June and Selwyn plans to use the funds, after the repayment of the company’s outstanding debt, to finance the restart of mining and milling operations at the past-producing ScoZinc mine. If all goes according to plan, the mine could be in full production as early as the second quarter of 2014.

“They want to divvy up the cash and liquidate the company,” Harlan Meade, Selwyn’s president and chief executive says in an interview. “They say it’s uneconomic at current metal prices. We do not dispute that you would get a negative internal rate of return at $0.84 zinc, but it is important to note that about 10% of mine production has a higher cost of production than the current price. If prices stay where they are now we expect to see a reduction in mine supply of zinc and lead that will lead to higher zinc and lead prices before too long.”

Meade argues that by some forecasts of mine production, between 10% and 15% of the world’s total zinc production will run out by 2015-2016, and that the ensuing metal shortage should send zinc prices higher.  “We wouldn’t even be in production until the second quarter of 2014 at the earliest,” he adds.

Meade also notes that while a recent preliminary economic assessment of the ScoZinc mine outlined a mine life of about eight years, with a little more drilling and permitting, the mine life could be extended to 12 years. “This is a significant deposit,” he says. “We’re pretty confident with our base case economics.”

Cubitt of Samara Capital declined to be interviewed on the matter but in an email response to questions noted that the mine would not be a viable concern at forecast prices for the next six years.

“If you look at zinc and lead futures prices on the London Metals Exchange all the way out to 2020, and you use those prices in your assumptions for Scozinc, you still get a negative net present value,” he wrote.

But Meade rebuts the comment in a subsequent email: “A futures curve is just that, it is what people are prepared to pay today for zinc and lead in the future. Such curves for base metals are almost always in backwardation and therefore future prices are very different than forecast future metal prices.”

Meade also contends that the base case of US$1.10 per lb. zinc and US$1.20 per lb. lead for the first five years of operations starting from 2014 used in the preliminary economic assessment of the project in November 2012 are roughly in the midpoint of metal price forecasts from fifteen different banks and brokerage houses.  

Selwyn’s annual general and special meeting of shareholders is scheduled for Apr. 22.

Once known as the Gays River deposit, the Scotia mine was initially discovered by Cuvier Mines and Esso Minerals in 1973. Esso developed the mine in 1978-1979. Initial production targeted the high grade zinc-lead mineralization by underground methods. But production stopped in 1981 due to water problems.

Mining resumed in 1988-1989 after Seabright Resources/Western Miner dewatered the former Esso underground workings and operations continued until 1991. During that time 187,000 tonnes grading 7.47% zinc and 3.50% lead were recovered.

The mine eventually ended up in the portfolio of HudBay Minerals for a time, but was sold in 2006 to Acadian Mining, which re-engineered the mine as an open-pit operation. According to Selwyn’s literature, Acadian spent $28.9 million on exploration and the refurbishment of facilities, including the $7.5 million acquisition cost. Production was resumed in mid-2007 but ceased in 2009.

Selwyn acquired the mine and 12,256 hectares of mineral claims in the Windsor Basin from Acadian in February 2011 and re-estimated the mineral resources.

The main deposit has measured and indicated resources of 5.18 million tonnes grading 3.39% zinc and 1.81% lead for 387 million lb. contained zinc and 206 million lb. contained lead. Inferred resources add 765,000 tonnes grading 3.48% zinc and 2.50% lead for 59 million lb. zinc and 42 million lb. lead.

The Northeast deposit has measured and indicated resources of 1.59 million tonnes grading 4.35% zinc and 2.32% lead for 152 million lb. contained zinc and 81 million lb. lead. Inferred resources add 1.74 million tonnes grading 2.70% zinc and 1.86% lead for 106 million lb. contained zinc and 73 million lb. lead.

The Getty deposit has measured and indicated resources of 3.13 million tonnes grading 2.09% zinc and 1.69% lead for 144 million lb. contained zinc and 116 million lb. lead. Inferred resources add 680,000 tonnes grading 1.95% zinc and 1.88% lead for 29 million lb. contained zinc and 28 million lb. lead.

The PEA outlined capital expenditures of $31.5 million, including a $1.1 million contingency and $3.3 million in working capital, to restart the mine and mill.

At 2,500 tonnes per day, unit operating costs for the first five years would be $52.89 per tonne milled and $42.31 per tonne milled for the life-of-mine.

The PEA also envisioned an after-tax internal rate of return of 57.8%, an after-tax net present value at an 8% discount rate of $56.1 million, and an average of $24.8 million a year for the first five years in earnings before interest, taxes, depreciation and amortization.

The mine plan in the PEA did not include the Getty deposit, north of the main pit. The company believes that the addition of the Getty deposit and expanded mineral resources in the northeast and underground deposits could add more than three years to the current mine life.