Chinese, Griffin battle over Yukon Zinc

VANCOUVER — Yukon Zinc (YZC-V) has meticulously advanced the silver-rich polymetallic Wolverine project in the Yukon for most of a decade without so much as a whiff of a takeover. Now, with the fully permitted project primed for a development decision and metal prices weakening, the company suddenly has two competing bids on the table.

Or as Yukon Zinc’s CFO Robert McKnight puts it, “When metal prices are down, the sharks come out to play.”

On April 21 the company announced its support for a takeover offer from Barbados-based Griffin Mining (GFM-L), a mining and investment company. Griffin is offering one share for every nine Yukon Zinc shares. When Griffin first made the offer, it valued Yukon Zinc shares at 20.6 or a 47% premium; based on the companies’ April 25 closing prices, the offer values Yukon Zinc shares at 19.7, a premium of 23%.

One week later a competing bid arrived. Jinduicheng Molybdenum Group, a Shanghai-traded molybdenum producer with operations in China’s Shaanxi state, and Northwest Nonferrous Investment, the government geological bureau for Shaanxi state, offered 22 per Yukon Zinc share, 22 for options and warrants that are in the money, and a total of $410,000 for those with an exercise price greater than the purchase price in an all-cash deal.

The Northwest cash offer represents a premium of 37.5% over Yukon Zinc’s April 25 closing price and exceeds the effective value of the Griffin offer by roughly 12%.

The prize in the battle is Yukon Zinc’s Wolverine, a development-ready underground mine project. McKnight says that the management team started expecting a takeover last fall, when the project was fully permitted and the company had secured $140 million from Barclays Capital, or roughly half of the debt financing to move it to production.

“We went out in a very tough market to raise the balance of the development capital, $130 million, but the market was spiralling down and it made no sense, so in September we pulled out,” he says. “At that point we felt we were in play as a company.”

Wolverine is in southeastern Yukon, 240 km northwest of Watson Lake and 440 km northeast of Whitehorse. The Robert Campbell highway runs past the project 26 km distant and, in September, Yukon Zinc completed a road to the highway that will serve as the conduit for trucks taking concentrate 860 km to loading facilities in the port of Stewart, B. C.

Wolverine is a classic volcano-genic massive sulphide (VMS) deposit hosted in felsic-volcanic and argillaceous sedimentary rocks. The sulphides occur in two tabular lenses that together hold 5.2 million tonnes of proven and probable reserves grading 9.71% zinc, 284.2 grams silver per tonne, 0.93% copper, 1.37 grams gold per tonne and 1.26% lead.

The development plan for Wolverine foresees an underground mine producing 1,700 tonnes of ore per day. A dense media separation plant will reduce that tonnage to 1,400 tonnes of mill feed by removing less dense waste rock. Conventional grinding and flotation will result in three concentrates: zinc, copper and lead. All three will have silver and gold credits but the copper and lead concentrates will be particularly enriched.

Wolverine is expected to produce 117.8 million lbs. zinc, 10.3 million lbs. copper, 12.9 million lbs. lead, 4.9 million oz. silver and 20,200 oz. gold annually. Capital costs are estimated at $207.5 million. The project’s pretax net present value, using an 8% discount rate and two-year backward average metal prices, is $184.2 million and its internal rate of return is 26.3%.

The reserves currently provide for a 10-year mine life that could be extended by three to four years by infill drilling the remaining inferred resources.

“When we first started at Wolverine, zinc was 45 to 50 per pound,” says McKnight. “It took a year to go underground and confirm the ground conditions. We went all through the feasibility studies then encountered a hiccup and had to redo it. We got Barclays involved for the debt financing. It goes to show what you have to do now to make a mine.”

While Yukon Zinc’s board had unanimously supported the Griffin offer, they were allowed to consider competing offers. Faced with a higher-value deal, the board now intends to accept the Northwest deal and recommend it to shareholders. That leaves Griffin with five business days to decide if it wants to amend its offer or take the agreement’s $2.5-million break fee.

There are no lock-up agreements or additional due diligence conditions associated with the Northwest proposal. Northwest and Jinduicheng are confident, based on discussions with the Chinese state agency that controls investment activities overseas, that all necessary approvals will be obtained without delay and that the requisite financing is in place.

Jinduicheng is Asia’s largest producer of molybdenum and associated products, and reportedly the third-largest in the world. In a recent initial public offering the company raised US$1.2 billion. Northwest claims to be one of the top five of some 100 provincial exploration and mining offices in terms of revenue and technical capacity. It was reportedly the first bureau in China to conduct exploration projects in partnership with companies from Western countries.

As for Griffin, it holds a 60% interest in the Caijiaying zinc-gold-silver- lead mine in Hebei province,

China. If the company wins the takeover battle with an amended offer, Wolverine’s full production in 2009 would bring Griffin’s annual production to 150 million lbs. zinc in concentrates and 4.5 million oz. payable silver, as well as significant copper, gold and lead.

Griffin, through its two Chinese joint ventures, has a controlling interest in mining and exploration licenses covering 67 sq. km in Hebei province. Within this area, Griffin built and commissioned the Caijiaying mine and processing facility and has steadily increased mill throughput. In 2006 the mill processed 301,101 tonnes of ore to produce 20,138 tonnes of zinc in concentrate. Throughput is currentlyclose to500,000 tonnes per year and Griffin aims to increase that to 750,000 tonnes by the end of 2008.

The mine produced its first commercial product in July 2005. Though it only holds 60% of the project, Griffin is entitled to 100% of the net cash flows from Caijiaying for the mine’s first three years.

Continued exploration in the Caijiaying area has revealed higahly prospective indicators for further base and precious metal mineralization. Griffin has made progress in defining a second resource at the Zone II area some 1.5 km south of the mine.

Griffin is awash in cash. For the six months ending June 30th 2007 the company reported an after-tax profit of US$18 million. In August Griffin completed a 68.1-million share placement at 1.10 for gross proceeds of 75 million (US$152 million). The company currently holds in excess of US$200 million cash.