Shares of Yukon Zinc tumble after feasibility study for Wolverine

Vancouver – A newly completed feasibility study has concluded that the Wolverine deposit owned by Yukon Zinc (YZC-V) could produce zinc for life-of-mine cash costs of US$0.18 per lb., net of by-product credits, under a “base-case” mining scenario that incorporates metal prices below current levels. The project is situated in the Finlayson Lake district, 135 km southeast of Ross River, Yukon Territory.

While the Wolverine project offers attractive rates of return at today’s high metal prices, the economics are considerably less robust using the more conservative price assumptions of the “base-case” model, particularly after taking into account capital costs, reserves, and various production royalties, among other factors. Shares of Yukon Zinc tumbled on heavy volume to $0.62 from a recent high of $1.01 after details of the anticipated feasibility study were released.

The study by prime consultant Hatch concluded that an underground mine at Wolverine could produce 33,342 tonnes of zinc, 3,577 tonnes of copper, 3,399 tonnes of lead, 3.8 million oz. silver and 16,043 oz. gold annually in zinc, copper and lead concentrates during its first three years of operation.

The study incorporated results from Yukon Zinc’s recently completed, $19-million test-mining and definition drilling programs at Wolverine. Based on last year’s definition-drill program, Wolverine hosts proven and probable mining reserves of 5.2 million tonnes grading 9.71% zinc, 284.2 grams silver and 1.37 grams gold per tonne, 0.93% copper and 1.26% lead. Additional infill drilling is required to upgrade additional inferred resources of 1.69 million tonnes (at similar grades) in the deeper portion of the deposit.

Existing reserves will allow for a 10-year mine life, with potential for this to be increased by another four years as inferred resources are upgraded into reserves. Capital costs are estimated at $155 million, excluding working capital and before contingency of $19.9 million and $6.2 million of owner’s costs. Sustaining capital is estimated at $26.5 million over the 10-year mine life.

At current spot metal prices, including zinc at a record US$1.46 per lb. and silver at US$13.51 per oz., Wolverine would have robust economics, and provide a pre-tax internal rate of return of 39.6% (31.8% after-tax) and a pay-back period of 2.2 years.

The “base-case” model uses metal prices of US$0.74 per lb. for zinc, US$9.18 per oz. silver, US$1.10 per lb. copper, US$0.45 per lb. lead and gold at US$480 per oz. The pre-tax rate of return drops to 7.1% (5.5% after-tax) while the payback period increases to 6.8 years.

The “moderate prices” and “forward hedge prices” models provide internal rates of return of 18.7% (14.7% after-tax) and 15.2% (11.6%) respectively, with respective payback periods of 4.3 and 3.5 years. A zinc price of US$1 per lb. was used in the “moderate prices” assumption, compared with US$0.93 per lb. in the “forward hedge prices” analysis, with respective silver prices of US$10 and US$11.20 per oz. and gold prices of US$500 and US$640 per oz.

Average annual cash flow in the first three years ranges from an estimated $65.5 million for the “forward hedge prices” assumption, increasing to $97 million for the “current prices” model.

Yukon Zinc owns 100% of the project, subject to various royalties, including a 0.5% Net Smelter Return (NSR) royalty, capped at $500,000, over a portion of the deposit, along with a 1% NSR on one claim covering a portion of the deposit that can be reduced to 0.5% after royalty payments of $500,000. Atna Resources (ATN-T) holds a royalty on gold and silver production, indexed to the price of silver. The royalty doesn’t apply at prices below US$5 per oz., but kicks in at 4% at prices of more than US$5 to US$7.50 per oz., and to 10% once prices exceed US$10 per oz.

The Wolverine mine would be diesel-powered, and a 26-km-long road would need to be built to connect the project to the Robert Campbell Highway. Zinc, copper and lead concentrates containing precious metals would be hauled about 860 km to port facilities in Stewart, B.C.