With a project that President and CEO Dr. Harlan Meade reckons has the potential to be the biggest zinc mine in the world, Selwyn Resources has now acquired a second mine. The reason it’s done that, he says, is for it to act as a catalyst for a revaluation of the company by demonstrating that it is committed to becoming a zinc producer.
President and CEO Harlan Meade at the World Resource Investment Conference in Vancouver, June 2011
Largest Undeveloped Zinc Project
The company’s core property is the Selwyn project, which Harlan describes as “the largest undeveloped zinc project in the world and getting bigger by the day”. It is, he believes, so big that people find it difficult to attribute a true value to it. “Let me put it into perspective,” he says. “Right now, if you invest $1 in Selwyn, you’re getting something like 700-800 pounds of zinc. If you go and invest in our peer group, you’re getting 80 pounds of zinc per dollar. If you look at the producers, you’re getting 3-5 pounds per dollar. That’s a huge discrepancy, so the sooner we become producers, the sooner we’ll revalue.”
Selwyn Resources has now acquired 100% of ScoZinc Ltd. shares, meaning it is the owner of the Scotia mine in Nova Scotia, which is currently not in production. This is something, however, that Harlan expects to put right quickly: “We have a restart plan and we will invest approximately $30 million in the restart over the next 6-9 months. It should be in production in the first quarter of 2012, so it’s not very far away.”
“It’s very hard to buy zinc assets and find something where you can get good value. For a very modest investment, we see ourselves getting something between $20 and $30 million of cash flow a year. That will mean that the asset should be valued at around $150 million and we bought it for $10 million.”
Cash Flow Generator
Aside from being good value for money, ScoZinc will provide a second mine that will quickly convert the company into a producer and generate cash flow at the same time. This, in Harlan’s opinion, will change analysts’ and investors’ views of Selwyn Resources: “Analysts will have to start valuing us on the basis of cash flow. At the time that cash flow happens, we will have also put…
Resumption of production of ScoZinc Project
out a bankable feasibility study on the Selwyn project. It will have the information to determine future cash flows and so we can get a combination of current cash flow and discounted future cash flow. That’s going to result in a major revaluation of this company.”
Any change of view will, Harlan believes, have two positive effects on Selwyn Resources. It will increase the value of the company and will make it easier to obtain project finance.
Selwyn Resources’ shares were trading in the 16-19 cents range last fall, went up to 39 cents after a marketing effort and then fell back to 25 cents after a financing and market correction. The current price is around 27 cents but Harlan sees the potential for a much higher figure: “Today, our market cap’s around $80-90 million. We think that with this zinc acquisition, we should be $350-400 million twelve months from now. That means our cost of equity capital when we go for project financing for the Selwyn project will be a lot less dilution for shareholders.”
“This is truly a strategic acquisition because it’s going to act as a catalyst for revaluation. The cash flow is going to be very important because any lender is going to ask if you have to go back to the equity market and raise more stock.”
Big Financing
With cash flow being generated, the need to come back to the market will be lessened. After a financing in May 2011,that raised $13 million, Harlan reckons the next equity financing will be “the big one for the project financing for the Selwyn project”. This financing will be largely to cover the capital expenditure to build the Selwyn mine, with no final figure yet available.
Harlan says: “Most people would figure it at somewhere between $800 million and $1 billion. When you look at the capital numbers, the real issue is how much metal you’re getting for every dollar you invest in the CapEx. I think we’ll see, no matter whether it’s $800 million or $1 billion, there’s a lot of metal to be produced. This will be the fourth or fifth largest zinc mine in the world and that’s just stage one. If you can build the fourth ranked producer in a major metal for $1 billion, that’s pretty good.”
He is quite relaxed about raising the money because Selwyn Resources is considering a dual listing on the Hong Kong Stock Exchange along with its current TSX Venture listing. Commitment from Chinese banks and a joint venture with a Chinese company means the necessary connections for Hong Kong listing are there. The company has already been in talks with leading investment banks and expects to select two to lead the equity portion of the finance plan soon.
Further Exploration
A lot of drilling has been undertaken at Selwyn to further define the resource and carry out further exploration. Harlan remarks: “I think it’s in our interest to spend some money and see if this is going to dwarf anything in the world that’s ever been known. With that in hand, it probably means we’re not going to do a lot else.” Most things go into Selwyn by aircraft, although there is a winter road and plans to upgrade to all-season use. With construction of the mine due to start mid-2012, this is a priority.
The last 6-9 months have been spent building a management team and Harlan believes the recruitment process is almost complete. As a result, he thinks everything is in place to move the company quickly into production at the Scotia mine and then at Selwyn. This can only have a positive effect on the company’s valuation and Harlan reckons this will be boosted further by an upward movement in zinc prices: “With the recent softening of zinc prices, we saw some production fall off but we’re going to rebound this market a lot faster than people think. If copper went from 70 cents to $4 and stayed there and the supply chain for zinc is a lot worse than copper, I think zinc can go from 50 cents to $2 and stay there. And that’s where we’re heading sooner than you think.”
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