Yukon Zinc plans to axe royalties to discoverers of Wolverine deposit

Twenty years ago, Mark Baknes pulled a rock core out of the ground in the Finlayson district of southeast Yukon and knew his life had changed. He could see the zinc, lead, and copper in the rock with his naked eye.

Twenty years ago, Mark Baknes pulled a rock core out of the ground in the Finlayson district of southeast Yukon and knew his life had changed.

He could see the zinc, lead, and copper in the rock with his naked eye. Gold and silver were harder to see, but he guessed they were there, too.

This was the kind of jackpot that most prospectors only dream about. And he’d hit it on the first core he drilled.

“It was astonishing, really,” he said. “It’s a kind of Cinderella-like story, to hit it on the first hole.”

That mineral discovery led to one of the largest staking rushes in Yukon history since the Klondike Gold Rush. It was by far the largest discovery of Baknes’ career.

And 15 years later, it gave rise to Yukon Zinc’s Wolverine mine. The mine went into production in 2011, only to close in January 2015 due to low metal prices.

Now, Yukon Zinc is trying to do away with royalty payments to Baknes and the owners of the company he worked for, David Caulfield and Henry Awmack, to make the mine more attractive to potential investors.

“It just doesn’t seem fair,” Baknes said. “Prospectors go out there and they toil at this stuff and it really is a total dream that you might find this stuff. Right now, we have poor metal prices… and we’re being asked to fix that with our royalties, which really isn’t fair.”

Baknes, Caulfield, and Awmack had an agreement with Yukon Zinc for royalties equal to 0.555 per cent of the net revenue from the sale of gold and silver from the mine, to be divided equally between them.

They began receiving royalty payments when Yukon Zinc went into operation in 2011. In 2013, when production was at its highest, each man received $128,577 from the precious metal royalty.

But on Jun. 25, 2015, after Yukon Zinc received creditor protection for $646 million of debt, the company issued letters to the three men explaining that the royalty payments would be discontinued. It is also trying to disclaim royalties to two mining investment companies.

Yukon Zinc’s legal counsel explained in a letter to the men’s lawyer that “in order to enhance the prospect for profitable future operations at the mine, the company is seeking to eliminate as many of these overhead expenses as it can.” It also stated that “disclaimer and termination of all royalty agreements… may be necessary to complete a favourable transaction” with potential buyers or investors.

But Baknes and his colleagues say they were counting on that money to help them during retirement. All three are now in their fifties, and as independent consultants, they have no pensions. Baknes owns a rural property on Vancouver Island he was hoping to develop when he didn’t have to spend as much time working.

“I want to have a little farm here that actually produces something,” he said. “What that money was going to allow me to do was give me a little bit of time… so that I could establish this farm.”

Baknes said he’s had to return to work as a geologist since the Wolverine mine ceased production and royalty payments dried up.

“To be honest, I’m getting a bit tired,” he said. “It’s a long, hard career. You spend a lot of time away from home. It takes a toll on family.”

Caulfield, too, was hoping to spend more time with his family. He said he has an adult son with a developmental disability who requires full-time care. When he’s away working, his wife provides most of that care.

“She’s going to have to be there having to deal with him 24/7 while I’m away,” he said. “I’ll do whatever I have to do. That’s the way it is. It’s just going to mean that I’ve got to be on the road… and I’ve done that for 30 years.”

He said the royalty payments would have helped provide for the care of his son in the years to come.

Caulfield’s total income was about $380,000 in 2013, including the royalty payments. But he expects that to decline to roughly $50,000 in 2016 unless he goes back to work.

Baknes said he doesn’t believe the amount of money being paid to him and his colleagues makes the mine less viable.

“I know the money that I’m making is not going to make a difference,” he said.

But for him and Caulfield, the larger issue is the precedent this case could set for the industry. Mineral discoveries like this one are incredibly rare, and they said what drives prospectors is the possibility they could one day earn royalties from a deposit that is successfully mined.

“It’s really important that royalty stays,” Caulfield said. “Because otherwise why do people go out and do the work that they do?”

He worries that, if this disclaimer goes ahead, other mining companies in financial difficulty could follow suit. And that could put a damper on mineral exploration.

Creditor protection does allow companies to break contracts if it will help them restructure, according to Jonathan Williams, the geologists’ lawyer. However, he believes his clients have an “underlying right in the land” that should prevent Yukon Zinc from being able to disclaim their royalties.

He also said contracts cannot be broken if doing so would cause economic hardship, which he argues would be the case for Baknes and his colleagues.

“It’s unlikely they’ll be able to generate a lot of revenue between now and their retirement,” he said. “Frankly, I think it’s very unfair what they’re trying to do here.”

Chris Stocco, a vice-president in the deals practice of PricewaterhouseCoopers, the company monitoring Yukon Zinc, said this case may be the first of its kind in Canada. He said it’s particularly unusual to see royalty disclaimers issued to individual people.

“This is the first time I’ve seen something like this,” he said. “It hasn’t been done before and there’s a question of whether it can be done. The story has yet to be written on this.”

Stocco approved Yukon Zinc’s decision to issue the disclaimer notices, but he said the monitor has no position on the matter. He said he wanted the issue to be resolved in court.

Alex Wu, a spokesperson for Yukon Zinc, said he could not comment on something that hasn’t happened yet.

“This agreement is still in place,” he said. “There’s an intention to have this terminated, but it has not happened at this point.”

Baknes, Caulfield, and Awmack are scheduled to challenge the disclaimers in the B.C. Supreme Court on August 14. That is also the deadline for Yukon Zinc to present its restructuring plan to the court.

Contact Maura Forrest at

maura.forrest@yukon-news.com

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