Yukon Zinc battles loss of confidence

Vancouver-based Yukon Zinc engaged in a struggle to reassure shareholders in May after a feasibility report on its Wolverine property indicated that annual production would be lower than expected. The company's share price fell from $1 to around 50 cents on the Canadian Venture Exchange when the report was released. A conference call with President and CEO Harlan Meade was beset with technical difficulties, causing more frustration among investors as the company failed to mute background noise on the line.

"The trading volume and sell-off is quite puzzling," Meade said in a release May 11, the day after the conference call. "Certainly in management's mind the results of the feasibility study do not justify the magnitude of drop in share price. If one looks at the trading it is clear that one firm has sold 25 million shares of the 57 million shares that traded on May 9th and 10th, strongly suggesting that one or two large shareholders have exited the stock and caused a panic in the market."

Still more bad news came May 16 when Yukon Zinc announced it had found a computational error in the feasibility study, so that after amending the error the mining cost increased from $24.93 to $35.18 per metric ton and overall operating costs per ton mined increased from $90.26 to $100.51. The company's share price plunged again on this news, to around 24 cents.

A second conference call May 18 went more smoothly than the first, at least from a technical point of view. The amount of cash in the company is $5.8 million and there is no debt currently, Meade told investors. "The key to going forward is to determine what cash flow is available to repay debt capital and for a return on equity capital," Meade said. "For the purposes of our discussion, I will assume $100 million in debt capacity for the project." In some scenarios envisioned by the company, it would take about 18 months to repay debt capital, which Meade thinks is a very good outcome.

Wolverine has 10 years of reserves

Mining reserves at Wolverine provide for 10 years of operations that could be extended an additional four years with the conversion of inferred resources into reserves. The capital cost of the planned underground mine is estimated at $155.7 million.

The company had hoped to complete the feasibility study, permitting process and financing for Wolverine in time to begin construction in July. This will now not be possible, Meade said, and the target start-up date has been postponed until spring 2007. "As a junior company we have limited resources and are stretched to undertake and manage all the work included in the feasibility study," Meade said. "We also become very reliant on consultants with potential for continuity breaks. In such an environment we were prone to errors and other shortcomings. Today it is clear that we did not have enough internal horsepower to achieve our goal, and we have learned from this shortcoming."

Yukon Zinc is determined to advance the Wolverine project toward production and has brought in two managers who were previously with Placer Dome to strengthen its team. Lionel Labelle will be Yukon Zinc's new manager of procurement and contracts, and Ruth Castillo will assist him. An important aspect of their job will be controlling the costs at Wolverine. The project will only move forward when investor confidence has been restored and management is satisfied with the feasibility study, according to Meade.

Feasibility study cut amounts in half

The Wolverine deposit is in the Yukon's Finlayson district, 195 kilometers northwest of Watson Lake. According to the feasibility study, average annual metal production in the first three years is forecast at 33,342 metric tons of zinc, 3,577 tons of copper, 3,399 tons of lead, 3.8 million ounces of silver and 16,043 ounces of gold in the zinc, copper and lead concentrates. This is around half the amount of gold and 10,000 tons less zinc than the company had predicted before the feasibility study came out.

The decreased production figures are due to metallurgical recoveries and not due to a decreased resource, according to the company. The feasibility study is being reviewed by Yukon Zinc's management team and it might be possible to produce more metal than the amount currently projected. "Right now those are the numbers we've got, those are the numbers we have to live with," Meade said in the conference call.

The feasibility study envisages that dense media separation will be used as a pre-concentration step, followed by standard flotation to produce saleable concentrates. The dense media separation process uses simple gravity methods to segregate and remove less dense waste materials included in the ore during mining to provide a high-grade feed to the grinding circuit. The waste content of the ore is estimated to be around 18 percent.

Concentrates may draw selenium penalty

The concentrates produced at Wolverine may be subject to a $2.5 million selenium penalty, but Yukon Zinc hopes this can be avoided. "It's our view that with the state of the zinc market and with such supreme shortfalls of zinc concentrate ... smelters aren't going to be very picky about whether there's selenium in it, and our view is that we should be able to negotiate away the selenium penalty, but we won't know that until we're in a position to negotiate definitive agreements," Meade said. "That occurs after we've made a production decision."

Drift and fill mining has been selected as the stoping method at Wolverine, and will be modified to adjust to changing ore widths, according to the feasibility study. Paste backfill will be employed as the primary fill system. The fill will be prepared on surface at the mill and pumped through a piped delivery system for placement in the stopes. Trackless diesel mining equipment will be used, and all drilling will be done using electric-hydraulic units.

Wolverine is located within the traditional territory of the Ross River Dena Council. Yukon Zinc completed a socio-economic participation agreement with the First Nation in July 2005. "It's a good agreement for both the company and them," Meade told investors. "They're also a significant shareholder in the company. Like you, they suffered in the last couple of days, significantly, and they have a vested interest in our success." There are no operating hard rock mines in the Yukon currently, and the development of the Wolverine project would provide a boost to the territory's economy.