Selwyn Resources (SWN.V) - valuation improves despite unfavourable moves in metal prices

Update by Objective Capital , Aug 03, 2010 download full report
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Key Points:

• Selwyn is poised to close its joint venture with Yunnan Chihong
  Selwyn Resources anticipates closing its joint venture with Yunnan Chihong Zinc and Germanium in August. Under the proposed terms of the arrangement, Selwyn Resources will transfer title to the property to a new entity, Selwyn Chihong Mining Ltd (SCML). In return, Yunnan Chihong will contribute C$100m to SCML. Selwyn and Yunnan Chihong will each own a 50-percent interest in SCML. Further, Selwyn Resources anticipates receiving approximately C$9m as reimbursement of project expenses since July, 2009.

• A full feasibility study is under way at Selwyn
  Selwyn has engaged Wardrop to conduct further work and exploration at the Selwyn project. This programme is expected to lead to a NI 43-101-compliant feasibility study that should be complete Q2 2011. The move to full feasibility results in increased confidence for a favourable production decision, and hence an improved valuation.

• Metallurgical testing has improved expectations for metal recoveries
  Selwyn engaged G&T Metallurgical Services to conduct further metallurgical testing, which was completed this spring. Processing of a 6.6-tonne batch of high-grade material taken from the XY Central zone resulted in increased recovery rates for both zinc and lead. Based on this work, we have increased our expected recovery rate for zinc from 83 percent to 85 percent, and for lead from 65 percent to 69 percent. This in turn results in a significant increase in our valuation.

• Decreased metals prices have a modest negative impact on our valuation
  Since our initiation note of March 2010, prices of both zinc and lead have declined by over 10 percent. Nevertheless, our model anticipates little long run change in prices from values contained in our initiation note. The Canadian dollar has strengthened by approximately 5 percent against the U.S. dollar, which decreases anticipated revenues by a comparable amount. These changes only partially counter the increase in revenues anticipated from the higher metal recovery rates.

• Our basic mine model remains unchanged
  We continue to hypothesise a Selwyn mine will draw upon nearly 50 million tonnes of mineralisation averaging 9.4 percent zinc and 3.3 percent lead. We anticipate mining will commence in late 2014 with a milling capacity of 8,000 tonnes per day. We further assume capital spending will commence in late 2011 and will total C$850m. Our anticipated operating costs are C$60 per tonne initially, escalating for inflation at a nominal rate thereafter.

• Our valuation of Selwyn Resources increases to C$0.43 per share
  Based on recent developments, our base-case valuation of Selwyn Resources increases from C$0.34 per share to C$0.43 per share. Our more optimistic assessment, based on higher confidences of exploration success, increases to C$0.74 per share. Assuming success at all stages through feasibility and permitting, our base-case and optimistic assessments increase to C$1.19 and C$1.93 per share respectively.