Southwestern Resources Shares Cheap on Over-Anxious Selling

Ah, the herd mentality. You can just about hear the sound of hooves stampeding for the doors on the news of Canadian miner Southwestern Resources’ (SWGGF.PK) recently discovered errors in resource reporting.

Southwestern Resources shares plummeted last week after the announcement of “discrepancies” in the reporting of assay results on its Boka South gold project.

Comparisons to Bre-X Minerals have been uttered in the media, sending chills down the collective backs of the global resource-investing community.

But to compare Southwestern to Bre-X is both premature and inappropriate. All this has done is caused a buying opportunity for investors not spooked by over-anxious hand-wringing by investment commentators.

Vancouver-based Haywood Securities, who had been recommending the stock to its clients with a target price of $13 per share lowered its forecast to $2.50 a share.

"Despite our three site visits and the complete NI 43-101 compliant resource estimated compiled by Hatch Engineering and SRK Consultants, as well as others, no evidence of any unreliable practices ever surfaced," Haywood declared in a research note published Monday.

As it turns out, the problem stems from a news release issued on February 21, 2007, wherein John Paterson, then CEO and founder of Southwestern, announced the results from 3 drill holes on the company’s Chinese Boka 1 South gold deposit.

“The highlight of the latest drill results was a 15-gram-per-tonne-gold intersection over 30.4 metres in hole B07-234. This intersection included a higher-grade zone of six metres grading 52.7 grams per tonne gold”, it said.

That press release caused the stock to rise by $0.80 by then of the day, and by Monday it had risen %17 to close at an intra-month high of $8.61.

From that point onward, the stock drifted down to its lowest level in 3 and a half years to $5.49 before the problem was revealed in a news story on July 20th.

The company has since been hit with a class-action lawsuit seeking to recover $200-million in damages, and an additional $20-million in punitive damages. It was filed on behalf of Andrew Stastny, an investor who owns 4,000 shares in the mining company, which were bought for between $6.40 and $8.39.

Shares in Southwestern closed at $2.23 on Monday, shearing 184% off the closing value from the pre-scandal close of $6.34.

The reason the shares are cheap is this: there has been an independent resource calculation from an internationally respected firm that unequivocally puts a minimum of 4 million ounces of gold in an inferred resource category.

The report from Canadian-based Hatch Associates was compiled from data provided up to April 27, 2005, easily predating any suspect specimens from the February 2007 announcement.

Furthermore, the company’s project portfolio including two projects in Peru and an additional Chinese project remain unaffected by the issue.

In fact, reading the available information, one would almost be left to conclude that CEO John Paterson’s refusal to answer inquiries from the Board of Directors of Southwestern is more strongly indicative of either ignorance or arrogance on his part, rather than any intentional attempt to mislead.

The company has now undertaken an internal investigation into the compromised results, and CEO John Paterson tendered his resignation while geologist John Zhang was fired.

Southwestern indicated last Thursday that it had detected “deficiencies in its control procedures for its Boka project and believes this resulted in errors in reported assay results."

"We're confident there's a resource. It's just a question of how much gold there is," chairman David Black said during an interview.

A committee of independent directors began a review of the Boka gold project in China`s Yunnan province on July 4 after former chief executive officer John Paterson resigned.

Southwestern Resources Corp. (Southwestern) is an exploration stage mineral exploration company engaged in the identification, acquisition, evaluation and exploration of mineral properties with the potential to host gold, silver and base metals.

Southwestern holds interests in mineral properties in China and Peru. Its principal property in China is the Boka Gold Project in Yunnan Province, which comprises three exploration permits and three mining permits covering 157 square kilometers.

Resource drilling on the Boka Gold Project, as of January 31, 2007, totaled 89,400 meters in 246 holes.

Its principal property in Peru is the Liam Gold-Silver Project located northwest of the city of Arequipa, which comprises 365,000 hectares of exploration concessions.

Southwestern's other Peruvian projects include Accha-Yanque Zinc Project, Pacapausa Project, Tipicancha Project, Antay Copper-Molybdenum Porphyry Project, Millo-Azucar Project and Bambas Copper Project.

SWGGF 6-mo chart