Selwyn Resources (SWN.V) - tentative agreement to acquire ScoZinc

Update by Objective Capital , Feb 10, 2011 download full report
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Key Points:

• The joint venture agreement with Yunnan Chihong has provided an immediate benefit
  In August, Selwyn and Yunnan Chihong Zinc and Germanium closed their joint venture agreement. Upon closing, Yunnan transferred C$100m into the joint venture company, which will hold title to the Selwyn zinc-lead deposit at Howard’s Pass. All development at Selwyn will take place though the joint venture company. Yunnan Chihong has also reimbursed Selwyn Resources C$12.5m for exploration expenditures incurred after July 2009.

• The Yunnan Chihong partnership enhances Selwyn’s ability to raise cash
  In the longer term, the strategic relationship with Yunnan Chihong will enhance Selwyn’s ability to raise its 50-percent share of capital costs, which we estimate at US$850m. Further, we expect Selwyn will be able to procure approximately two-thirds of its capital requirement through debt financing, a higher proportion than would otherwise be the case. To enhance its ability to raise new equity, Selwyn expects to list on the main TSX exchange later this year, as well as the Hong Kong Stock Exchange.

• The focus at Selwyn has shifted to permitting…
  The Selwyn partners have filed the environmental assessment report and permitting for the project is progressing on schedule. We note with some concern that the Liard First Nation has filed a petition with the Yukon Courts against the Selwyn partners and the Yukon Government, asking the courts to quash Selwyn’s exploration permit and suspend future permits until the environmental review is complete. At this time, Selwyn’s management believes the matter will be successfully resolved with little adverse impact on project timelines.

• …and full feasibility...
  Selwyn and Yunnan Chihong are in the midst of a full, NI 43-101-compliant feasibility study. A draft copy of the report is expected in early spring. Selwyn’s management currently expects the final report will be available in late summer or early autumn.

• …allowing Selwyn to seek new ventures
  Selwyn Resources has just signed a tentative agreement with Acadian Mining Corp. to acquire ScoZinc Ltd for C$10m. ScoZinc owns a 100-percent interest in the Scotia zinc-lead mine in Nova Scotia. If the sale closes as planned, Selwyn anticipates refurbishing the mine and mill with the intent of resuming production in early 2012. At this stage we view the agreement as having a neutral impact on Selwyn’s valuation, but acquisition of the mine offers considerable blue-sky potential.

• An aggressive exploration programme continues at Selwyn
  The Selwyn partners launched another aggressive exploration programme last year. Assays from the XY Central zone are now arriving, with encouraging results. The data to date suggests the high-grade zone at XY Central meets earlier expectations, with potential for some expansion in the stated resource. Assays from the Don zone are expected shortly. Selwyn and Yunnan Chihong continue to employ six drill rigs, which continue to drill at Don.

• Higher metals prices have a modest positive impact on our valuation
  Since our quarterly update of October 2010, prices of both zinc and lead have increased by approximately 10 percent. Nevertheless, our model anticipates little long run change in prices from values contained in our previous note. The Canadian dollar continues to strengthen against the U.S. dollar and is now above parity, which decreases anticipated revenues by approximately 5 percent since our previous update, which cancels the effect of higher metals prices.

• 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 early 2012 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$0.50 per share
  Based on recent developments, our base-case valuation of Selwyn Resources increases from C$0.46 per share to C$0.50 per share. Our more optimistic assessment, based on higher confidences of exploration success, increases to C$0.83 per share. Assuming success at all stages through feasibility and permitting, our base-case and optimistic assessments increase to C$1.36 and C$2.27 per share respectively.