Wolverine feasibility bites Yukon Zinc

Vancouver — Shares of Yukon Zinc (YZC-V, YZCCF-O) shed more than half their value in heavy trading after the company released a newly completed feasibility study for the Wolverine zinc-copper-lead-silver-gold mine project in the Finlayson Lake district, 135 km southeast of Ross River, Yukon.

The feasibility study concluded that Wolverine could produce zinc for life-of-mine cash costs of US18 per lb., net of byproduct credits, under a “base case” mining scenario that incorporates metal prices below current levels. But after taking into account capital costs, the reserve base, lack of infrastructure, and various royalties, among other things, the project economics are significantly less robust than the “current prices” model, which is based on spot market prices for metals as of April 28, 2006.

The study, by primary consultant Hatch, concluded that an underground mine at Wolverine could produce 33,342 tonnes zinc, 3,577 tonnes copper, 3,399 tonnes 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.

Yukon Zinc recently completed a $19-million test-mining and definition drilling program at Wolverine, and based on these results, proven and probable mining reserves stand at 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. Further 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 pretax internal rate of return of 37.2% (29.8% after tax) and a payback period of 2.4 years.

The base case model uses metal prices of US74 per lb. for zinc, US$9.18 per oz. silver, US$1.10 per lb. copper, US45 per lb. lead and gold at US$480 per oz. The pretax rate of return drops to 3% (2.5% after tax) while the payback period increases to 8 years.

The “moderate prices” and “forward hedge prices” models provide internal rates of return of 15.7% (12.3% after tax) and 10.5% (8.1% after tax), respectively, with respective payback periods of 4.9 and 4 years. A zinc price of US$1 per lb. was used in the “moderate prices” assumption, compared with US93 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 $25 million for the base case assumption, increasing to $85 million for the current prices model.

Royalties

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, ATNAF-O) 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 higher than US$5, rising to 10% once prices exceed US$7.50 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.

The proposed mine would employ drift-and-fill as the main stoping method; paste backfill would be the primary fill system and one way to address poor ground conditions in portions of the deposit. On the milling side, test work has demonstrated that dense media separation (DMS) would be an effective preconcentration step before standard flotation to provide reasonable metal recoveries and salable concentrates. Under this scenario, 1,400 tonnes of run-of-mine ore would be reduced to 1,250 tonnes per day of upgraded feed to the mill.

Estimated life-of-mine operating costs total $100.51 per mined tonne, and $116.29 per tonne milled. The company and Hatch have identified areas of potential savings to projected capital costs, such as measures to reduce the considerable internal dilution included in resources, and the use of refurbished rather than new equipment.

Yukon Zinc has hired a manager of procurement and contracts for development of the project, and pending receipt of the mining licence, plans to begin road construction and earthworks this summer, with subsequent construction expected to peak in the second quarter of 2007.

The company has 245.8 million shares outstanding (290.2 million fully diluted) and at presstime traded at 47, down from $1.01 before the feasibility study was released.