Selwyn sells stake in zinc-lead project

The huge Selwyn lead-zinc project in eastern Yukon Territory is one of the latest on a growing list of resource developments attracting mega-investments from Chinese companies to Canada.

Selwyn, perhaps the largest undeveloped zinc-lead deposit in the world, is located in the heart of the Yukon's mineral-rich Selwyn Basin. After an aggressive multi-year exploration program, junior miner Selwyn Resources Ltd. attracted a C$100 million investment in June 2010 from Yunnan Chihong Zinc & Germanium Co. Ltd., a fully integrated mining and smelting company based in southern China.

Chihong, working through its Canadian subsidiary Chihong Canada Mining Inc., formed a 50-50 partnership with Selwyn Resources and established a joint venture to develop the Selwyn project through completion of a bankable feasibility study.

Nearly three years later, Selwyn Resources is preparing to sell its remaining 50 percent interest in the project to Chihong for C$50 million in cash. The move will put Chihong in the driver's seat for future development of the Selwyn Project, and make it the second Chinese company to gain control of a major mine project in the Yukon in recent years.

Yukon officials have actively encouraged Chinese investment in the territory's mining industry in the past decade with good results.

In July 2008 Jinduicheng Molybdenum Group Co. Ltd. and Northwest Nonferrous International Investment Company Ltd. purchased all of the public shares of Yukon Zinc Corp., owner of the high-grade polymetallic Wolverine underground mine located in southeastern Yukon. Wolverine began production of zinc-silver-copper-lead-gold concentrates in 2012.

Among other Yukon deals, Hunan Nonferrous Metals Corp. purchased a sizable stake of Vancouver, B.C.-based North American Tungsten Corp. Ltd., which operates the Cantung tungsten mine southwestern Northwestern Territories in 2008. N.A. Tungsten is also developing the Mactung Project, which hosts one of the world's largest undeveloped high-grade tungsten skarn deposits in MacMillan Pass on the Yukon-Northwest Territories border.

Yukon Territory Economic Development Minister Currie Dixon, for example, visited Beijing and Hong Kong on a trade tour in January to help promote Asian investment in the territory's mineral resource projects.

"With tremendous economic growth in Asia, there is increasing demand for natural resources, which makes it a logical trading partner for Yukon. Asia offers a potential source of investment as well as a promising market for our natural resources," Dixon said in announcing the trip.

Chinese investment in Canada

The interest by Chinese investors in Yukon projects is part of a more widespread trend in Canada.

Foreign direct investment from China hit an all-time high in 2012, with most of that money going to purchases of Canadian natural resource companies and projects, according to economists tracking the trend.

An estimated C$25 billion poured into Canada from China in 2012, of which the purchase of Nexen Energy by Chinese state-owned CNOOC accounted for C$15.1 billion. And money from the Asian country is likely to keep pouring into Canadian resource projects, according to Guy Saint-Jacques, Canada's ambassador to China.

While the Chinese have already staked out a significant share of Canada's energy sector, observers say the Asian country's companies - both state-owned and private sector - are just getting started when it comes to investing in Canada's mining and forestry industries.

Saint-Jacques told an Alberta audience in February that Canadian mining exports to China already eclipse Canada's entire exports to Germany.

"As exploration activity and mineral production are intrinsically linked, the Canadian mining industry could see a dramatic expansion in the years to come," said MAC President and CEO Pierre Gratton. "While some volatility is anticipated, the larger determinant in capitalizing on the opportunities before us is to ensure the industry has access to the right investment and regulatory environments it needs to support development."

In looking to 2013, the MAC report stressed that despite challenges, the Canadian mining industry's economic prospects are strong. "Regardless of concerns over the growth rates of China and other emerging markets, it is widely held that growth, even if at a moderately reduced pace, is likely to remain strong over the long term," Gratton said.

Deal reflects market reality

Selwyn Resources March 4 reported entering into an asset and share purchase agreement with Chihong Canada Mining Ltd. and Selwyn Chihong Mining Ltd., the joint venture entity, to sell the Selwyn's remaining interest in the project.

Selwyn President and CEO Harlan Meade, Ph.D., said the decision to sell the company's 50 percent stake in the project "reflects the realization of the large capital requirements that will be needed to advance the Selwyn Project to production and the associated risks to Selwyn shareholders, including but not limited to, the potential for significant dilution of shareholders' equity in the Selwyn Project."

"At a time of reduced industry interest in undeveloped mineral deposits, Selwyn is satisfied that the timing of this transaction and the purchase price negotiated are in the best interests of the shareholders," Meade added.

After completion of the transaction, Selwyn Resources will have no further interest in the Selwyn project, and the JV agreement will be terminated.

Completion of the transaction is subject to certain conditions, including Selwyn shareholder approval, approval of the board of directors of Yunnan Chihong and certain Chinese governmental approvals. Chihong Canada has entered into support and voting agreements with certain significant shareholders of Selwyn. Such shareholders hold, in aggregate, about 41 percent of Selwyn's outstanding common shares.

If all conditions to closing are satisfied, including the receipt of Selwyn shareholder approval and the necessary regulatory approvals, it is anticipated that the transaction will be completed by early June.

Chihong advances cash deposit

Chihong Canada provided a deposit of C$5 million cash as an advance of the purchase price. A second deposit of C$5 million cash will be paid on or about April 9, provided Selwyn is not in default of any of its obligations and covenants required to be performed under the purchase agreement. Chihong Canada will pay the remaining C$40 million of the purchase price at closing of the transaction.

If the transaction does not close, the deposits must be refunded to Chihong Canada, except where the failure to close the transaction is the result of the failure of Chihong Canada to comply with the terms of the purchase agreement, or obtain its necessary parent and Chinese governmental approvals for the transaction.

The refund of the deposits, if necessary and if not promptly paid in cash, will be carried out by Chihong Canada converting the outstanding deposit amount into a corresponding increase in its interest in the joint venture.

If the entire C$10 million of deposit funds are converted, Chihong Canada's interest in the joint venture would increase to 60 percent, and Selwyn's interest would decrease to 40 percent.

The completion of the transaction is subject to certain conditions, including the following:

Approval of the transaction by at least 66 2/3 percent of the votes cast by Selwyn shareholders at an annual and special meeting of shareholders expected to be held in late April 2013;

Approval of the board of directors of Yunnan Chihong Zinc & Germanium Co., Ltd. (parent company of Chihong Canada) and certain Chinese governmental approvals;

Holders of no more than 10 percent of the issued and outstanding Selwyn common shares having exercised dissent rights in respect of the transaction;

Approval of the TSX Venture Exchange; and

The fulfillment or waiver of certain customary closing conditions set out in the purchase agreement.

Covenants, representations, warranties and indemnities

Selwyn and Chihong Canada also agreed to certain customary covenants relating to obtaining the approval of requisite regulatory authorities and the shareholders of Selwyn.

Under the purchase agreement, Selwyn will not solicit alternative proposals, and Chihong Canada has 10 business days to match any alternative proposals that constitute a "superior proposal" under the terms of the purchase agreement.

Chihong Canada is also entitled to a C$2.5 million termination payment in the event that Selwyn accepts a superior proposal, makes a "change in recommendation" with respect to the transaction, breaches a representation or warranty or commits a breach of the purchase agreement.

Any superior proposal must provide for the repayment to Chihong Canada of the deposit funds and the payment to Chihong Canada of the termination payment payable under the purchase agreement.

The purchase agreement also contains limited representations and warranties relating to the company, the company's joint venture interest and Chihong Canada. For a period of 12 months after completion of the transaction, Selwyn has agreed to indemnify Chihong Canada against all losses suffered by Chihong Canada due to any warranties or representations made by Selwyn under the purchase agreement being untrue or due to a breach by Selwyn of any term, agreement or covenant in the purchase agreement.

Selwyn said it plans to apply the net proceeds from the sale of its interest in the joint venture, after repayment of debt, toward restarting the ScoZinc Mine in Nova Scotia and for general corporate purposes. The completion of project financing and the achieving of production at the ScoZinc Mine will fulfill Selwyn's longer term objective of becoming a producing mining company over the intermediate term. Selwyn said the sale of its interest in the Selwyn project is seen as the reasonable best alternative for achieving this goal and addressing current obligations to creditors.

Liquidity and capital resources

In April 2012 Selwyn entered into a C$10 million debt facility with Waterton Global Value, L.P. from which it has drawn down the full C$10 million available under the Waterton Facility. After making the second C$1.5 million principal repayment to Waterton on Jan. 2, the company has been taking steps to preserve a level of cash flow sufficient to maintain current operations. As previously disclosed, without securing additional financing, the company would not have sufficient working capital to fund operations.

In late December and early January, Selwyn negotiated a term sheet with a potential lender for a bridge financing facility and was working towards closing. The funds from the bridge facility would have been used to extinguish the Waterton Facility and would have provided additional working capital. The repayment terms of the bridge facility would have provided the company with an extended time period for repayment, and thus increased financial flexibility. After extensive due diligence and the completion of full loan documentation, the potential lender advised Selwyn that it no longer wished to complete the transaction.

The company said its liquidity position has deteriorated as a result of various factors, including an inability to secure additional sources of financing to fund its future obligations under the JV agreement or for the restart of its ScoZinc Mine in Nova Scotia, and its obligation to make payments under the Waterton Facility.

Selwyn said that absent the transaction, and in light of current equity market conditions, it is unlikely that the company would be able to raise the funds necessary to maintain operations and achieve its objectives, and as a result, there has been significant doubt cast on the company's ability to continue as a going concern. In addition, absent the transaction, Selwyn also would need to raise funds to meet any required commitments to complete the pre-development program objectives under the terms of the JV agreement. A failure to raise such funds would result in a dilution of its 50 percent interest in the joint venture.

Current status of Selwyn Project

On Nov. 19 Selwyn announced that the joint venture's management committee had confirmed a plan and budget for the completion of a feasibility study based on the revised 3,500-metric-tons-per-day mining and milling plan.

The company expects work on the feasibility study will be completed by early April, with finalization of the study expected in May.

Earlier, Selwyn had provided investors with guidance on the main parameters of the planned mine, mill and infrastructure development.

The key remaining activities are finalization of the mine design and production schedule, which was to be undertaken by the joint venture staff working with Tetra Tech mine group based in Denver; and secondly, completion of the final phase of metallurgical test work that is focused on evaluation of opportunities to reduce energy requirements of the fine grinding in the re-grind circuit and improvements in lead recovery.

With completion of these sectors, surface facilities will be finalized and the joint venture company had planned to file a project report with the Yukon Environmental and Socioeconomic Assessment Board and commence the environmental assessment process for the project and project infrastructure.

A geotechnical report was completed that indicates more favorable ground conditions than had previously been determined in the initial proposed mining areas. AMEC reviewed geotechnical drill-hole data for the XY Central and Don deposits and evaluated ground conditions in recently re-opened underground development that was completed in 1981 (at XY Central deposit) by previous operators. With this new information, the increase in stope spans was confirmed, and the mining plan has been modified and the production plan formalized.

As of March 4, there remained about C$2.97 million of cash in the JV account into which Chihong Canada contributed C$100 million when the joint venture was established.

Upon completion of the remaining JV expenditures, Chihong Canada will have earned a 50 percent interest in the joint venture.

The company expects that, under the terms of the JV agreement, Selwyn will be required to contribute additional funds to the joint venture in order to complete the pre-development program objectives.

The company also expects that, in the interim period until the transaction is completed, it will be able to use the deposit funds to satisfy its required contributions toward pre-development program objectives.