Selwyn Resources, which sub-titles its corporate presentation "A Giant in the Making", has a simple story. The company is developing the largest undeveloped zinc-lead deposit in the world and has just received C$100m financing through its 50:50 Joint Venture agreement with Chihong Canada, a wholly owned subsidiary of Chinese resources company, Yunnan Chihong Zinc and Germanium Co. Ltd. The Selwyn Project, located in the politically stable Canadian jurisdictions of the Yukon and Northwest Territories, is high grade and has NI43-101 compliant mineral resources with an in-ground value of $53B at current metal prices. The company is currently conducting a bankable feasibility study. If all goes to plan the project could be in production by 2014, a period which could coincide with a tight supply market for zinc due to the anticipated depletion of many large mines.
Selwyn, formerly Pacifica Resources, was spun off from Yukon Zinc Corp, listing on the Toronto Venture Exchange in December 2004 to pursue base metals opportunities on the Pacific Rim. Although it initially held a portfolio of 8 properties it has since spun off most of these into Savant Exploration in order to focus on the Selwyn Project. It also consolidated the district around the Selwyn Project acquiring the adjacent Howard's Pass JV from Placer Dome and Cygnus Mines in 2005 in return for C$10M payable over 7 years, a 1% net smelter royalty and a 20% net profits interest capped at C$10M. The Selwyn Chihong JV now has 100% ownership of 321 square kilometres which extend in a strip for 65km along favourable strata.
The Selwyn Project is located in the Howard's Pass region about 500km south of the Arctic Circle and 350km from Whitehorse, the capital of Yukon. It lies in mountainous terrain at elevations of between 1,100 and 2,000 metres. Access is either by air (helicopter or fixed wing) to one of two airstrips on the project or by a seasonal access road which runs 78km to Tungsten in the Northwest Territories. The project lies in the Selwyn Basin which runs from East Yukon into Alaska and hosts many SEDEX (sedimentary exhalative) deposits including the Red Dog zinc-lead-silver mine, currently the world's largest zinc mine producing about 10% of world production. SEDEX deposits are good news; they typically exhibit significant thicknesses and continuity are characterised by higher-grade core zones and account for over half the world's lead and zinc resources.
Mineralisation was first discovered in the Howard's Pass area in 1972 by Placer who followed up strong lead-zinc anomalies in a stream sampling programme. The companies invested $20M in exploration over 10 years, drilling 210 holes and identifying a historic resource, but they did not pursue the project because of prevailing low zinc prices. Copper Ridge Exploration, in partnership with Billiton, revived interest in the project in 2000, drilling a further 8 holes, but they too walked away due to ongoing low zinc prices and difficulties with a proprietary bioleach process.
Interest was re-stimulated however by rising zinc prices following a 50 year-low in 2002 and Selwyn began its exploration programme in 2005. There is no doubt that the programme to date has been successful. Over the last five years Selwyn's achievements have included:
· Consolidation of the district: along 65km of favourable strata
· The demonstration of a new geological model showing that there is a single mineralised basin: which is much larger than originally described by Placer in the 1980s. Eleven new mineral zones have been discovered which together with the four previously known zones demonstrate continuity in the Selwyn deposit along at least 37.5 kilometres.
· A rapid increase in both the size of the resource and the confidence in the estimates: Selwyn issued five resource estimates between 2006 and 2009 based on the 583 holes/125,000 metres drilled on the property (of which 363 holes totalling 89,000+ metres were drilled by Selwyn).
· The discovery of significant tonnage of high grade mineral resources: which are amenable to underground mining with a total indicated and inferred resource of 42.7M tonnes and an average grade of 9.3% zinc and 3.3% lead.
· The demonstration of mineral potential in a further 250M tonnes: grading 4-5% zinc and 1-2% lead in the down dip and along strike extension of the current indicated and inferred resources.
· An improvement in expected metal recoveries: Recent metallurgical testwork has increased the expected recovery rates to 85% for zinc and 70% for lead. The resultant concentrate would be high grade with no deleterious minerals.
Exploration results to date have thus demonstrated that the Selwyn project is potentially very significant in both size and grade. Political risk meanwhile is relatively low, though it will be important for Selwyn to continue to work closely with local communities and the First Nations. Perhaps the biggest challenges facing Selwyn are infrastructural due to the remoteness of the site and the cost of power.
Selwyn has therefore been investigating some capital investment opportunities to reduce production costs including a 20MW HEP plant with an upstream storage dam and 7MW generator which could produce up to 75% of the estimated annual requirement for energy. It is also evaluating the relative merits of the transport options from the mine looking at road, rail or a concentrate pipeline from the mine to an access point on the Robert Campbell Highway from where the concentrate could be trucked to the port of Skagway. At the moment the pipeline option is the frontrunner as this would reduce both operating costs and the environmental impact of trucking, but the other options are still being reviewed.
Selwyn Chihong JV
The recent partnership with Chihong is an extremely significant milestone. Under the terms of the agreement a 50:50 JV company, Selwyn Chihong Mining Ltd, has been set up into which Selwyn Resources has transferred all its Selwyn Project assets, permits and licences while Chihong has contributed C$100M cash, (and will be reimbursing Selwyn Resources for about C$11M expenditures incurred since the original valuation in July 2009). Chihong is a major Chinese resources company specialising in lead, zinc and germanium. It operates several zinc-lead mines and a zinc-lead smelting facility; its parent company has a market capitalisation of $3bn. Besides the initial investment Chihong will bring much to the table including deep pockets, a potential future market, (Chihong has the right of first opportunity to acquire Selwyn’s portion of the concentrates), and technical and financial expertise.
Indeed the agreement has specifically provided for Chihong to provide assistance towards the preparation of a feasibility study sufficient to meet the needs of the Chinese banks as the banks will be approached to provide a senior project debt facility for the entire project with the aim of maximising the portion of debt financing thereby reducing the need for dilutive equity finance. CEO Harlan Meade sees access to Chinese bank debt as a big positive both as Chinese banks do not normally require any hedging and as in the current climate it is very difficult to obtain bank debt finance.
Sensitivity to the Zinc Price
Future revenues from a mine at Selwyn would, of course, be highly sensitive to the zinc prices; at current prices zinc could account for about three quarters of the revenue. Indeed a report by Objective Capital suggests that if the long run real zinc price were $1/lb instead of the base case assumption of $0.90/lb the valuation of Selwyn would rise by 64% (though conversely if it were $0.80/lb the valuation would fall some 64%). The current price of zinc is $0.97/lb.
Fortunately for Selwyn the fundamentals for the zinc market in 5 years time look promising. On the one hand zinc has a myriad of uses. About 50% of zinc production is used to galvanise steel thereby protecting it against corrosion. The ability to die cast zinc makes it indispensable in many industry and household products. It is also used in brass, construction and chemicals and is an important nutrient. Demand is growing – consultants Brook Hunt are predicting growth of 6% in 2010 - and is expected to continue to grow further as the economy strengthens, driven particularly by Chinese demand in construction, auto production and electric bikes.
Supply meanwhile is not expected to keep pace. At the moment both the zinc and lead markets are over-supplied; stocks have been rising and prices are below the levels at the beginning of the year. However a number of large and medium scale zinc mines are expected to become depleted over the next 5 years and there are a lack of major new mines on the horizon. The lack of new supply could be further exacerbated by difficulties in obtaining permits and finance. The medium to long term outlook for zinc prices therefore is widely expected to be favourable.
The JV agreement requires the partners to use all commercially reasonable measures to bring the Selwyn project into commercial production as soon as possible. The initial mining plan is to develop an underground mining operation at the XY and Don deposits and to process 8,000 tonnes per day generating an annual total in concentrates of 255,000 tonnes of zinc and 65,000 tonnes of lead. A 28,000 metre definition drilling programme is being undertaken at the deposits with the aim of upgrading the inferred resources to measured and indicated resources which would demonstrate sufficient mill feed for 10+ years.
The JV has already approved a budget of $89M for the pre-development program for 2010 and 2011. This will include all studies necessary for the bankable feasibility study and refurbishment to the access road. Key future milestones – CEO Harlan Meade stresses that the timeline for these is aggressive but achievable – include the submission of the project report for environmental assessment in early 2011 and the completion of the Bankable Feasibility Study in mid-2011. It is hoped to receive environmental approvals, water and mining licences and agreement about project finance by 2012. The target date for commissioning the mill is the first quarter of 2014.
Vinata Project, Mexico
Although Selwyn's focus is very much on the Selwyn Project the company announced an agreement with Savant Explorations Ltd in July 2009 to acquire up to 55% joint venture interest in the Vinata silver-zinc-lead project in the prolific Central Mineral Belt in Chihuahua State in northern Mexico. Selwyn also owns an 18% interest in Savant.
Selwyn has been working its way along the development pipeline surely and steadily notching up considerable exploration successes along the way. The project has been demonstrated to be large and include significant high grade resources, the rocks are non acid-generating which will ease environmental requirements, the company is working with local communities and the Kaska First Nations, and the JV with Chihong is a very important step towards completion of the bankable feasibility study and securing the necessary project finance.
A number of infrastructural challenges remain, environmental regulations are stringent in Canada and the success of the project will depend on the ability of the company to implement development plans. The project will also be highly leveraged to the zinc price. The fundamentals for zinc however, while currently in over-supply, seem likely to be favourable by the time the project is commissioned.
Nonetheless if all goes well Selwyn could indeed prove to be a giant in the making. Selwyn's market capitalisation is currently C$55M.