Selwyn reduces project scope as capital costs soar in the Yukon

High capital costs have forced Selwyn Resources (SWN-V) to drastically cut planned mine throughput for its Selwyn lead-zinc underground mine in the Yukon as its tries to make the project affordable.

The company, which is developing the Selwyn project with fifty-fifty joint-venture partner Chihong Canada Mining, has dropped the proposed throughput from 8,000 tonnes per day to 3,500 tonnes per day after two years of working on a feasibility study for the higher throughput option. The 8,000-tonne-per-day option was itself a scale down of a 20,000-tonne-per-day open-pit operation the company proposed in 2007, but that was abandoned as zinc prices plummeted.

Modest zinc prices continue to make mine economics challenging, but for the Selwyn project, location is a big barrier. The company has not released official figures but company CEO Harlan Meade said in a phone interview that it would have been reasonable to expect capital costs in the range of a billion dollars for the 8,000-tonne-per-day mine.

“Although the project would generate some reasonable cash flows,” Meade said, “given the magnitude of the capital numbers . . . it would just take too long to pay back the capital.”

Selwyn’s response has been to focus on the high-grade XY Central and Don deposits, which form only a small part of the massive Selwyn project spread over almost 38 km. Billed by the company as the largest undeveloped zinc-lead deposit in the world, the overall Selwyn project hosts 180.7 million indicated tonnes grading 5.25% zinc and 1.83% lead, plus 226.9 million inferred tonnes of 4.44% zinc and 1.37% lead.

In contrast, the XY Central deposit hosts 10.7 million tonnes grading 10.38% zinc and 4.41% lead plus 2.8 million inferred tonnes at similar grades, and the Don deposit hosts 5.3 million indicated tonnes of 9.98% zinc and 3.86% lead, plus 5.3 million inferred tonnes of 7.94% zinc and 2.95% lead. By focusing on these two deposits, and in turn reducing throughput and other costs, Selwyn hopes to get a handle on the project.

“What it came down to in the end was building a reasonably sized initial operation, and using that as the basis for future expansion,” Meade said. “In this investment climate it makes a lot of sense. With half the capex, the financing challenge is much more manageable, especially in the hands of a junior company.”

But the company still faces a number of fixed costs that are well known to any Yukon miner.

“The challenge with the Yukon, as everybody knows, is infrastructure,” Meade said. “Part of that is trucking distances to get to port, and the other part is the straight energy cost.”

Meade is optimistic about energy solutions, including the potential for a liquefied natural gas plant in Fort Nelson that Western Copper and Gold (WRN-T, WRN-X) is studying as a fuel source for its sizeable Casino project. He also noted the huge wind turbines being installed at the Ekati diamond mine in Nunavut as an intriguing alternative to costly diesel.

“It’s no secret that wind farms are a little more expensive than traditional sources of power, but if you don’t have those traditional sources or don’t have the transmission lines to get that power to you, then these other technologies begin to look more interesting.”

Others looking to build a mine in Yukon, such as Victoria Gold (VIT-V) and Golden Predator (GPD-T), don’t have quite the same challenges thanks to better location and simpler recovery methods. Both companies are working on road-accessible, heap-leach operations, with Victoria also benefitting from being connected to the grid and Golden from the significant historical ­infrastructure on-site.

Victoria Gold continues to move its Eagle gold deposit forward, but despite avoiding some capital cost it still has to come up with $400 million to build the mine. The company recently sold off several Nevada property holdings. When the three deals close they could net US$29 million and eventually give the company as much as US$78 million. The company plans to fund $170 million of the remaining capital costs through debt, and about $200 million through a royalty stream, finding a partner, issuing equity, or another suitable option.

Golden Predator hasn’t put out detailed financials on the first smaller phase of mining, but plans to have a feasibility study out on a production ramp-up by year-end.

Western Copper and Gold will also have by year-end an updated feasibility study on its Casino project that will incorporate among other things the planned liquefied natural gas plant. The company’s prefeasibility study released in April 2011 foresees $2.1 billion in capital costs.

Meanwhile Western’s recent spin-out Copper North Mining (COL-V) is advancing its Carmacks heap-leach copper project to production. It plans to prepare a proposal for the Yukon Environmental and Socio-economic Assessment Board in the third quarter, and submit revised mine plans shortly after.

A 2007 feasibility study on Carmacks outlined initial capital costs of $144 million, but the project was disrupted in 2010 by an unexpected rejection by the Yukon Water Board.

As for Selwyn, it too plans to have a feasibility study out on its 3,500-tonne-per-day operation by the end of the year. The joint venture company has $9 million of the $100 million Chihong Canada Mining put up for its stake in the project in 2010, which should carry it through the year. Selwyn is also trying to complete a $30-million debt deal to restart its ScoZinc mine in Nova Scotia, but Meade said both he and lenders would like to wait until zinc prices recover a bit before completing a deal.

Selwyn’s share price dropped 4¢, or 33% to 8¢, on 563,000 shares traded following news of the revised throughput. The company has 391 million shares outstanding, almost 50% of which are held by four outside institutions.