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Thursday, 22 November 2012
Selwyn Resources’ new mine plan for ScoZinc sees improved economics; on path for project financing
Selwyn Resources (CVE:SWN) has revealed today the results of an update to its preliminary economic assessment report for the restart its ScoZinc zinc-lead project in Nova Scotia, which the company says significantly derisks the asset by showing potential for a seven-plus year mine life.
Provided that debt financing for the project can be secured by the first quarter of next year, pre-stripping is expected to begin in the second quarter, with full operation set to start in the fourth quarter of 2013.
"The improved economics are always welcome, but more importantly, the first critical five years of the cash flow model are less variable from what they were before, and this will be attractive to the debt providers from which we are interested in securing capital," CEO Dr. Harlan Meade tells Proactive Investors.
He says that discussions for debt financing have been in the works since September, and now that the final audited cash flow model is in prospective lenders' hands, the company is well positioned to move forward with the process, with a view to completing a financing in the next few months.
"The previous dip in the cash flow model at year 4 is not as severe, and has been pushed out to year 6 - a result of the expansion of in-pit resources, better information and more flexibility."
“Extending mine life and permitting the expansion of the Main pit are key factors in securing the needed debt financing," he adds in a statement.
Indeed, since acquiring the past-producing mine in June last year, Selwyn has invested more than $8 million in infrastructure refurbishment, drilling, permitting and other improvements at the site. It also updated mineral resources at the project, increasing measured resources by 55 per cent and indicated resources by 65 per cent in August of this year.
The new resource provided the basis for a revised mine plan and economic model, which confirmed a "significant" increase in mine life for the Main and Northeast pits at the property. In the updated study, these two conventional pits are to be mined sequentially, based on an average production rate of 877,800 tonnes per year.
At a 2,500 tonne per day mill processing rate, the project pre-tax net present value is now estimated at C$69.3 million, at a discount rate of 8 per cent, with a pre-tax internal rate of return of 63.3 per cent and a payback period of 1.4 years.
After-tax, the net present value is projected at $56.1 million at the same discount rate, with an IRR of 57.8 per cent.
Unit operating costs are seen at $52.89 per tonne milled for the first five years, and at $42.31 per tonne for the life-of-the mine - what Dr. Meade calls an extremely low-cost operating environment, which includes an industrial power rate of 7 cents per kilowatt hour for electricity.
Mine and mill restart capex is estimated at C$31.5 million, including contingency and working capital, with continued optimization studies expected to further reduce cash operating and equipment costs.
Additional drilling at the Northeast and Getty deposits is also expected to expand potentially mineable resources, lower the strip ratio and defer lower grade mineralization to later in the project's life – only improving economics further.
Importantly, earnings before interest, taxes, depreciation and amortization (EBITDA) for the first five years are now projected at C$24.8 million annually, using the base case pricing.
"Every one per cent increase in metallurgical recoveries will add roughly $1 million to annual EBITDA," adds Dr. Meade.
Currently, the projected metallurgical performance, based on historical data, provides for a zinc concentrate grading 57% zinc at 88% recovery, and a lead concentrate grading 71% lead at 85% recovery.
"Similar zinc-lead deposits typically see metallurgical recovery for zinc in the 91 to 93 per cent range, and a little bit less for lead. This means there is opportunity for adding between 2 to 4 million to annual EBITDA or more.
"It is a potentially significant gain for a modest investment." Indeed, metallurgical testwork is planned to investigate process revisions to improve recoveries, with work projected to be wrapped up before the restart of operations.
What's more, the base case economics in the updated PEA were calculated with a zinc price of US$1.10 per pound and a lead price of US$1.20 per pound, with prices of these metals widely forecasted to grow in the coming years.
Wood Mackenzie, the London-based metal consultancy group, has a price forecast of US$1.22 per pound zinc, and US$1.18 per pound of lead for 2014. Significant price escalation is expected over the next several years as zinc and lead supply wanes, rising to US$1.72 per pound of zinc and US$1.57 per pound of lead in 2016.
Meanwhile, direct cash cost of production for zinc at the ScoZinc project is anticipated at a comparatively low 60 Canadian cents per pound, which is planned to be optimized through ongoing studies.
"Selwyn’s timing is also good as zinc and lead prices, as forecasted by Wood Mackenzie, are expected to commence an upwards climb early in 2013, as mine supply begins to tighten. It is a good time to move forward on the ScoZinc project,” Meade says.
Going forward, Selwyn’s CEO says there is no need for a feasibility study to attract banks or make a production decision, as the PEA uses much of the historic operating information, “which is preferable to projected costs that are typical of greenfield project feasibility studies.”
Continuing work will focus initially on metallurgical improvements. This will be followed by bringing in high grade underground resources into the mine plan, which should be completed in the next few months, as well as additional definition drilling in the Northeast deposit to expand mineral resources – with completion approximately 12 months out. "Almost certainly, the latter years of our mine plan will strengthen."
The ScoZinc mine also boasts access to "ample grid power and water supply", with paved roads leading to the property and nearby rail access. The mine also has its own storage and concentrate loading facility at Sheet Harbour, with a capacity of 8,500 tonnes, or 1.5 times the expected shipment size.
Meade says the project has received support from local communities and the Nova Scotia government, with permits in hand for the first five years. Existing permits will need to be updated to reflect a project expansion, including an increase in the size of the Main pit and the start-up of the Northeast pit in order to achieve the full seven plus years projected in the PEA.
In quite a short timeline to production, with most of the time to be spent on removing the overburden prior to mining, staffing of the restart of operations is already in progress. The mine is expected to employ around 120 people by its full projected start in the fourth quarter of next year.
The Gays River deposit at the ScoZinc mine, which holds the Main and Northeast pits, has measured resources of 2.07 million tonnes grading 3.14 per cent zinc and 1.68 per cent lead. Indicated mineral resources comprise 5.77 million tonnes grading 3.30 per cent zinc and 1.69 per cent lead, and inferred mineral resources include nearly 3.7 million tonnes grading 2.35 per cent zinc and 1.51 per cent lead.
The past few months have been quite significant for Selwyn. Earlier this year, Selwyn announced a board shake up, as part of chief executive Meade's mandate to raise working capital to advance the company's business plan and keep it on track.
In fact, on Monday, Selwyn said that its feasibility study for its flagship zinc-lead project in the Yukon is being advanced, and is expected to be completed in late March of next year. The Selwyn project, considered one of the largest undeveloped zinc-lead deposits out there, is run by Selwyn Chihong Mining, a joint venture formed by Selwyn and Chihong Canada Mining. Chihong Canada is a subsidiary of Yunnan Chihong Zinc & Germanium - one of China's largest zinc and lead mining and smelting companies.
Selwyn said that the management committee for the Selwyn project has recently confirmed a plan and budget for the feasibility study, based on the revised 3,500 tonne per day mining and milling plan it announced in August.