SWN.V - Selwyn Resources

[ItsAValueTrap]

I've written about it on my blog ( http://glennchan.wordpress.com/2013/09/06/selwyn-resources-cveswn-update/ ) and have cut and pasted the blog post here:

 

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Selwyn Resources is being taken over by activist investors who will likely liquidate the company.  Originally the proxy argued that Selwyn would be able to distribute a 10 cent/share dividend.  Because Selwyn trades at 0.8/0.85 cents, the return may be attractive.  However, the company burns through a lot of cash and there may be complications to actually liquidating the company.  As well, there is a healthy dose of drama.

 

*Disclosure: I am long Selwyn.

 

The drama…

 

Several months ago, Selwyn announced that it sold its 50% stake in its flagship deposit to its joint venture partner (Yunnan Chihong) for $50M.  This was excellent news for Selwyn because it was about to enter creditor protection.  However, the company also announced that it would use the proceeds of the sale to restart the ScoZinc/Gays River mine.  Major shareholders were opposed to this plan because the ScoZinc mine is uneconomic at current zinc/lead prices.

 

A small Selwyn shareholder (Samara Capital, ?which owns 2%?) sent a scathing letter to the board of directors blasting the decision.  Among other things, it attacked the CEO for running a “management employment agency”.  Personally I think that attack was a little much.  Harlan Meade has reasonable integrity especially compared to all the garbage in the junior mining world.  He has a reasonable level of insider ownership, puts out a lot of technical reports and information on the company’s properties, and has a track record of success (many junior mining CEOs have never found an economic deposit in their professional careers).  In any case, Mr. Meade turned into a complete asshole and now seems to be running Selwyn as a management employment agency.  In response to Samara, management put out an updated PEA on the ScoZinc mine and outlined a liquidation proposal.

 

Then came the annual shareholders’ meeting.  At the meeting, representatives from Selwyn’s major shareholders attended (collectively they have over 50% of the vote).  They wanted Selwyn to commit to distributing the proceeds from the sale to shareholders.  However, Meade apparently blocked their efforts.  See Resource Capital Fund’s press release.  I recommend reading it as it has additional details not printed here.  Shortly after the meeting, Samara issue a press release claiming that it had fired Harlan Meade as the CEO.  Meade wasn’t actually fired and is still currently the CEO.

 

The current situation

 

Dissidents have 3 of the 5 seats on the board of directors and Mr. Meade is still the CEO.  I can’t imagine that Mr. Meade will continue to hold his job much longer given his inappropriate behaviour.  At the current time, I’m not entirely sure what is happening with the company.  It seems that Meade is still running the show and the company is in limbo.  The latest quarterly MD&A and Financial statements suggest that the company hasn’t committed to distributing its cash.

 

The financial statements do show that the company has spent money relating to the fight with dissident shareholders in higher than normal legal fees.  The company has paid out $160k in bonuses to directors.  From the June 30, 2013 MD&A:

 

    In April 2013, the board authorized a bonus payment of $185,000 to directors, including management directors, for their extraordinary effort in unusual circumstances during the past 6 months that included numerous meeting and planning sessions that were called to deal with going concern, filing creditor protection, and negotiate an asset and share purchase agreement with Chihong for the Selwyn Project.

 

April 2013 would be before the dissident shareholders were elected to the board.  It seems that Meade took part in this bonus as he is a management director.  This bonus payment seems particularly egregious to me as the board of directors simply decided to pay themselves more money.  Is this legal???

 

The MD&A also states:

 

    Management has estimated that the monthly cash burn rate is roughly $325,000, which includes the salaries of 11 full time employees at the Vancouver head office and 8 employees at ScoZinc. Based on the monthly estimated burn rate, the funds required to sustain 12 months of operations is $3.9 0 million. At this juncture the board of directors the Company have not made a decision on the amount and timing of any distribution of cash to shareholders. With $36. 01 million of liquid cash ($ 39.6 6 million less $3.65 million of restricted cash), there is sufficient cash to fund operations for the next 12 months , before considering the possible effect of a cash distribution to shareholders , as proposed by the Concerned Shareholders prior to the June 17, 2013 shareholders’ meeting.

 

The burn rate of $3.9M/year is unfortunate.  It translates to around 1 cent/share per year.  I don’t know how much money shareholders might get if the company were liquidated.  Severance (covered by the restricted cash on Selwyn’s balance sheet?), legal fees and professional fees (e.g. for the liquidator) will eat up some cash.  Ideally, the ScoZinc mine would be sold.  Selwyn paid $10M for the mine and invested additional money into it.  Because the mine is uneconomic at current commodity prices, it could fetch less than $10M.

 

Proceeds of $35M would translate into ~8.88 cents/share.

Proceeds of $40M would translate into ~10.15 cents/share.

Proceeds of $56.8M (book value) would translate into ~14.4cents/share.

 

I will be happy to get 9 cents/share, though it’s possible that shareholders won’t even get that much depending on what happens.  My plan is to sell at 9 cents and (re)buy at 8.  I think that the dissident shareholders are all interested in maximizing their IRR so I’m hoping that they will try to return money as quickly as possible.