TORONTO (ResourceInvestor.com) -- What's up, or more correctly down, with shares of Southwestern Resources [TSX:SWG]?
The stock climbed from under C$2 to a record C$21 in January 2004 on the back of the company's Boka gold project in China (all prices adjusted for a 2-for-1 stock split in the summer of 2004), and was rewarded with being added to the S&P/TSX Composite Index. Since then the shares have withered and are currently trading around the C$9 level.
Part of the sell-off can be attributed to the sobering of investors caught up in the enthusiasm of a rising stock. There's also been the widespread sell-off in gold stocks on the Toronto Stock Exchange - the S&P/TSX Capped Gold Total Return Index has fallen 19 per cent since late November.
Yet most of the decline can be attributed to frustration over the slow pace of information being released by Southwestern. In an age where many investors have an attention span measured in weeks, the pace of results coming from Boka must feel more appropriate for the geological time scale.
In September 2002, Southwestern started earning its 90 per cent interest in the Boka gold project, located in China's southern Yunnan Province. Yet difficult ground conditions, specifically the friable nature of the host rocks, and logistical problems with a local contractor caused holdups in drilling. Now the postponement of a preliminary scoping study, originally due last October, is hanging on the stock like a dead weight.
Exacerbating the effect of the delays is Southwestern's relatively small public float - 42.8 million shares outstanding (45.5 million fully diluted), of which management and other insiders hold 24 per cent.
The scoping study was received later than expected as Vancouver-based Hatch Engineering, the firm hired to complete the report, was backlogged with work from firms trying to update projects during last year's rise in metal prices. After receiving the report in December, Southwestern forwarded it to the TSX for regulatory review, where it apparently stalled.
In a report dated March 17, Eric Zaunscherb at Raymond James speculated "there might have been a difference of opinion between the company and regulatory staff as to what is acceptable drill spacing to define an inferred resource."
In response, Southwestern has asked Hatch to expand the study to include a National Instrument 43-101 compliant resource, data on underground mining, processing options and detailed costing.
The best guess now is that the new, expanded report will be available in May or June at the earliest
Yet Zaunscherb wrote "It is crucial to appreciate that the inferred resource and the scale of the resultant operation will be, in our opinion, only a fraction of the ultimate operation at Boka." Paolo Lostritto at Octagon Capital believes the report should define an initial resource of somewhere between 5.4 and 6.5 million ounces.
Management outlined key parameters of the potential operation during the BMO Nesbitt Burns 2005 Global Resources Conference in February. These include a combination of open pit and underground mining, a stripping ratio ranging from 3:1 up to 5:1, a 10,000 to 15,000 tonne per day operation, a 15-year mine life, recoveries of 90 per cent, and production of 300,000 - 350,000 ounces per year at a cash cost of US$116 to US$122 an ounce.
There are presently nine rigs operating at the site, aiming to complete infill drilling of Boka 1, as well as initial drilling on Boka 7. The company will be using a sample preparation facility in Kunming, 110 kilometres to the south, to hopefully quicken the turn around time for receiving assay results.
On April 11, Southwestern released the latest round of drill results. Of the 14 holes reported, two failed to intersect significant mineralization and one was abandoned prior to reaching target depth. The two blank holes were situated within the east-west fault zone that offsets Boka 1 North and South. The results suggest continuity in both the lower-grade envelope and higher-grade, structurally-controlled mineralization.
The property, which covers an area of 163 square kilometers, has indications of hosting a sizeable deposit. Artisanal miners have been active on the property for years, digging over 200 tunnels into the mountainside. This is believed to have allowed Southwestern geologists to get a sense of the deposit's geometry, with speculation the company has turned down joint venture opportunities armed with this knowledge.
Country risk has been cited by some as a factor in the stock's decline, though this didn't slow the shares in 2003. Raymond James' Zaunscherb wrote on March 17 "...Boka is located in Yunnan Province which has special powers relative to other provinces. By virtue of its relatively undeveloped state, Beijing granted Yunnan the freedom to manage and license resource development on its own. Consequently, Boka will be fully licensed by Kunming rather than Beijing - a very attractive element for potential senior partners or acquirers of Boka."
Both Zaunscherb and Lostritto feel Southwestern shares are under-valued with respect to Boka and considerably discount the company's other assets, including three projects in Peru and another China play.
In Peru, the company is working with Newmont [NYSE: NEM] on the 50/50 Liam gold-silver project approximately 190 kilometres northwest of Arequipa. Started in 2003, the project has delineated seven gold-silver zones, the most prominent being Cerro Crespo and Cerro Quescha. The companies are aiming to complete resource calculations on these deposits sometime in 2005. Zaunscherb thinks the property has the potential to host over 4 million ounces of gold.
In January, Southwestern announced it was starting a pre-feasibility study on its fully owned Accha-Yanque zinc project, located 120 kilometres south of Cuzco, including a new NI 43-101 compliant resource calculation.
And in December, the company optioned a 55 per cent stake in its early-stage Antay porphyry copper-gold project to Anglo American [LSE: AAL].
Also in December, Southwestern partnered with Newmont in the search for porphyry copper-gold targets over a 76,000 square kilometer area in Yunnan and Sichuan Provinces, China.
Zaunscherb rates Southwestern stock a 'strong buy' with six to twelve month target of $25, while Octagon Capital's Lostritto has a 'buy' rating with a one year target of $28. These are hefty targets given the share's current price.