Selwyn Resources: Post Mortem

Previously I wrote that:

  1. Resource Capital would be trying to liquidate its position.
  2. The Yukon project probably isn’t worth that much.

It looks like I was right on the first count as Resource Capital sold in the ballpark of 2 million shares.  I was kind of wrong on the second count.

Last month Selwyn announced that it was selling its 50% stake in the Yukon project for $50M.  (I only read about this now since I received the annual report in the mail today.)  The first 50% was sold for around $100M and the remaining 50% was half-off.  This is actually a pretty good deal for Selwyn considering that it has been unable to release a positive feasibility study and also because it was on the brink of declaring protection from its creditors.  They even saved money on the annual report this year as it is not glossy and promotional.  I did not think that Selwyn would get such a good price (given the circumstances) and was desperately trying to sell my shares.

I’m guessing the reason why Chihong Canada is still interested in the Yukon project is because of its monstrous size.  It could account for a few to several percent of the world’s zinc production if zinc and lead prices go up and the deposit becomes economic.

Current valuation of Selwyn

Rough value = $50M + option value of Nova Scotia/ScoZinc project – ScoZinc liabilities – debt

I don’t think that the ScoZinc project is economically viable from reading the technical report.  The author has to inflate the zinc/lead price assumptions and this is a huge red flag.  Even with the inflated commodity price assumptions, the ScoZinc project was marginally economic.  Factor out the junior promotion factor and I would just make the assumption that the deposit is marginally uneconomic.  Going forward, you can expect Selwyn to explore the areas around the ScoZinc mine to try to make it economically viable.  With so much cash on hand they will likely roll the dice on other exploration projects too… and use that to generate excitement over the stock, go raise capital, etc. etc.  I don’t think that the economics of Selwyn as a company are very good as they burn a lot of money on G&A and stock promotion.

Currently, Selwyn is likely trading at a small discount to liquidation value but it is not enough of a discount for me to be interested.  The only reason why I was interested originally was because this was a very large deposit.

What I could have done better

Part of it is just bad luck.  Zinc prices have gone down a little and the cost of mining has gone up.  The value of the Yukon project did go down by half for reasons outside my control.

However, I should have read the quarterly MD&As on SEDAR as juniors often disclose important information in it.  They will describe their plans for a project and from that information you can infer their confidence in a project.  If they delay a feasibility study, it is usually because the results aren’t good.  If they aren’t spending a lot of money on advancing a deposit (e.g. significantly more than last year), it probably isn’t that good of a deposit.  On the other hand, just because a company spends a lot of money advancing a project doesn’t mean that it is good.  A lot of mining companies will chase projects with low or negative rates of return.  At the end of the day, if I had read the latest MD&A, I may have lost less money on this stock.

How many shares did Resource Capital Fund sell?

I can’t access SEDAR today so here is the next best thing:

http://www.proactiveinvestors.com/genera/files/sponsor_files/swn_2011_04_27_for_web.pdf
http://www.selwynresources.com/en/download_presentation.cfm?doc_ID=31

*Disclosure: Sold my Selwyn shares a long time ago.  Long 1 share.

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