A devastating one-two punch has Yukon Zinc Corp. reeling, its directors scrambling to control the damage as its share price plummets.
Once considered one of the territory’s most viable mining plays, it now looks like construction of the company’s much-hyped Wolverine Mine, located north of Watson Lake, is going to be delayed at least a year.
That’s because its share value took two consecutive crushing hits over the past couple of weeks.
First, upon the release of the company’s long overdue feasibility study on May 9th, two large investors dumped millions of company shares, causing a panic among the other investors.
Yukon Zinc, which was trading at a year high of $1.01 on the Toronto Stock Exchange venture index, plummeted to $0.45 in just 24 hours.
Then, several days later, as management and shareholders struggled to understand what had happened, the company discovered a serious computational error in its feasibility study.
After fixing the mistake, the company found its projected mining costs were going to be 25 per cent higher than anticipated.
They are now pegged at $35.18 per tonne, up from $24.93.
That means the project will cost an average of $5.5 million a year more than originally stated in the study.
This news walloped the stock again, sending it to $0.24 on May 16th.
“We got a bad market, a panic stock and then we get more bad news,” said Yukon Zinc CEO Harlan Meade from Vancouver.
“It’s like a triple whammy.”
Bewildered investors called from around the world, demanding to know what was going on.
“I’m completely disgusted with the handling of the situation,” said one investor during an emergency conference call on Thursday morning.
“To lose 75 per cent of the share price is just poor management,” he said. “The shareholders have lost a ton of money.”
The original plan to start construction on the mine in July is no longer possible, said Meade.
Building plans will be postponed until investor confidence is restored and Yukon Zinc is satisfied with the feasibility study.
A new start date has been set for spring 2007, with actual mining work to begin spring 2008.
“We’re stepping back now and having a really hard look at all of this,” said Meade.
The completion of the feasibility study was necessary in order to start serious discussions with metal traders and concentrate buyers and smelters.
But it fell far short of investor expectations in terms of revenue and recovery earnings, according to local stockbroker Ivan Jacobson of Canaccord Capital.
“I think they had it over-hyped,” said Jacobson. “They were promising (shareholders) more, or were indicating it was going to be a lot better than what the feasibility study finally came out as.”
Meade admitted there was an unexpected difference between Yukon Zinc’s mineral resource predictions and the numbers that appeared in the study.
Zinc concentrate recovery levels dropped from 88 to 80.5 per cent of the mined ore product.
“The recoveries issue was certainly a surprise to the shareholders and was a surprise to us,” said Meade, explaining that a new independent engineer who inspected the metallurgy for compliance with national mineral project standards was not comfortable with previous estimates.
The result was a loss of 60,000 tonnes of mineral resource and a slight increase in grade.
While this is a significant shortfall, it in no way justifies the amount of share dropping that took place, said Meade.
He accused two particular investors, who he said took turns selling all their shares during the last half hour of trading and then continued to do the same thing first thing the next morning, on May 10th.
At least 25 million of the 57 million shares sold came from one firm.
This caused a flurry of day traders to rapidly buy and sell shares over a two-day period.
“It looks very engineered, and you can speculate as to the reasons, but I’m not going to go there,” said Meade, noting he knew who the culprits were.
“My friends in the industry who want to know, they’ll find out who they are and certainly we know a lot of people and a lot of people aren’t going to like what happened to us,” he said.
“There will be future consequences, but these guys will continue to operate that way; they’ll say they were justified by the results of the feasibility study.
“You can’t win a pissing match with a skunk.
“Certainly when we do get around to project financing and they want in to the deal, then good luck — it’s not going to happen.”
When it was discovered May 15th that an individual from one of the engineering-consulting firms hired by Yukon Zinc had made a data inputting error, management halted the stock to prevent unfair trading.
Trading resumed on May 17th following a news release that laid out what had happened.
“It was just a very simple mathematical error, but it was one that was found at the worst of all possible times,” said Meade.
No insiders profited from the recent events, he said.
“I know that none of our management team and none of our directors have traded anything within the last 30 days,” he said. “Certainly management didn’t benefit by any part of this, in fact we lost tremendously.
“I don’t know what I lost, but I know it’s a big number — in the millions of dollars — and I don’t take kindly to that, and I’m certainly keenly motivated to get it back.”
Yukon Zinc’s board of directors were comforted that many of the discarded shares had been picked up by “high-net-worth individuals” from Canada’s biggest brokerage firms.
“That tells me that the stock is moving from weaker hands into stronger hands. At some point we’ll benefit from that,” said Meade.
“We also heard from a lot of shareholders who are going to stay with us, and I know, from the number of phone calls I got, that a lot of them said, ‘You know, this just isn’t right, but I’m going to take advantage of it and I’m going to add to my position.’”
And that’s what Meade did Thursday morning. He bought even more shares for himself at the new low price.
“I know a bargain when I see it,” he said.
The Wolverine open-pit mine will produce zinc, copper and lead. The metals will be sold mostly to metal markets in Asia.
The project has been touted as being highly profitable because of the high silver and gold recovery within the other mineral concentrates.
Reserves provide for 10 years of mining. This could be extended four more years with additional drilling into other potential resources, according to the study.
On Tuesday, zinc was selling for US$1.59 a pound.
Yukon Zinc will spend the next few months undertaking a thorough review of the feasibility study.
It will also try to get mineral recovery levels back to what was determined on earlier test work and look at increasing mill throughput from the currently stated 1,250 tonnes per day to somewhere between 1,400 and 1,500 tonnes.
There are still some noteworthy obstacles to overcome before construction can begin, said Jacobson.
“They’ve got all kinds of permits to go through and they’ve got to put a road into it,” he said.
“And maybe the bank won’t give them any money because maybe this feasibility shows that it’s not all that robust.”
As of Tuesday afternoon, Yukon Zinc’s shares were trading for $0.35.
While the battered company continues to lick its wounds, Meade is staying positive.
“We still have our core asset, our title is intact, our project is intact; nobody can take away from what I think is fairly attractive economics,” he said.
“But it’s still painful at the bottom.”