Zinc Market Update - Yukon Zinc Corporation

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Zinc Market Update - Yukon Zinc Corporation

Yukon Zinc Corporation

Building the Yukon’s Next Major Zinc-Silver Mine

Zinc Market Update

Selwyn Resources Ltd.

Developing a World Class Zinc-Lead Deposit

February 24, 2007


Trading Symbol: YZC Toronto Stock Exchange Venture

Trading Symbol: SWN Toronto Stock Exchange Venture

ZINC MARKETS – A BRIGHT FUTURE!

February 24, 2007

Following several decades of underperformance, zinc outperformed in 2006. In many sectors, concerns remain over zinc

as smelters warn their customers that they will not be able to meet all the demand. Destocking by the Chinese in Q4 in

response to high zinc prices and end of the VAT rebate tax, has taken some of the steam out of the price rise and

squeezed some hedge funds long on zinc. The chronic outlook for zinc supply reflects the serious underinvestment that

has occurred in new mine capacity and exploration. Today there are few large quality projects to provide the new supply

required to meet increasing demand and replace depleted mines.

This overview on zinc has been assembled from a large number of information sites that are believed to be reliable;

however, the companies make no representations as to the correctness of the information herein, and the reader should

use this information for general purposes only and seek advice from its investment advisors as to the details of zinc

markets. This overview is intended to provide readers with useful information on the usage, supply, production and

consumption of zinc.

Zinc Market Highlights

After a dramatic decline in LME zinc inventories in first 11 months of 2006 stocks rose slightly in December in

January, due to destocking by Chinese smelters, to end the year down 309,000 tonnes. Inventories are expected

to decline at a more gradual rate in 2007.

Dramatic growth of zinc consumption in Asia is underpinning the reshaping of the zinc industry. Zinc consumption

in Asia increased 35% in 2003 through 2005, led by China with a stunning 27.8% growth in 2004 followed by 17.8% in

2005 (ILZSG Aug 2006); Macquarie, Dec 2004). China’s apparent demand decreased from 12.1% YOY increase for the

first 9 months 2006 to 5.5% YOY increase due to the increase in zinc exports in Q4 to take advantage of the very high

prices.

China became a net exporter of zinc refined metal in December and January. This dramatic change reflects a

reversal from being a net importer since 2004.

Zinc prices increased sharply from a low of

US$0.33/lb in 2002 to a high of US$2.09 on Nov. 24,

2006. Prices declined from their peaks to US$1.38 on

Feb 08, 2007 and have recovered to the $1.60 range,

and are expected to trend higher as inventories continue

their decline, albeit at a slower rate.

Zinc concentrate remains in tight supply, particularly

in the Pacific Region. The shortfall in concentrates has

contributed to reduced smelter production and

aggressive search for feed with a resultant sharp decline

of treatment terms including a significant increase in zinc

price participation levels. With increasing smelter

capacity additions, concentrate supply will continue to be

a concern.

Teck Cominco is forecasting mine production to increase by 5.7% in 2006 and about the same in 2007. Although

Western World production increases have been modest, production in China grew by 15% (250,000tpa) in first half of

2006, due mainly to small mine production. Supply disruptions and delays in mine startup continue to affect supply.

701 – 475 Howe St., Vancouver, BC Canada V6C 2B3

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World Mine Production – Struggling to Keep Up With Demand

New mine supply is the key to the zinc markets over the next few years! The zinc mine market is highly fragmented with

266 zinc mines; however, only 19 produce more than 100,000 tpa of zinc (1997 figures). These 19 mines provide almost

half of the world’s zinc production. Despite the need for consolidation in the zinc industry, similar as to what has occurred

in copper, nickel and iron, it has not happened due to lack of profitability in zinc mining during the past several decades.

New supply during 2005 and 2006 has largely come from increased mine output and restarts; however several new mines

are scheduled for start up in 2007 and 2008. It is after 2008, that supply becomes a serious concern.

kt Zn

16000

14000

12000

10000

8000

6000

4000

REQUIREMENT FOR NEW MINE

PRODUCTION

2000

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Pacific Region Mine Supply

Probable B Projects

Probable A Projects

Highly Probable New Mines

Mine Production Capability

Requirement for Zinc Mine Production

Brook Hunt Jan 2007

Mine production increased at approximately

2.3% per annum in 2004 and 2005, which is

close to the 20-year average growth rate.

However, with increased metal prices,

production is expanding with an increase of

5.7% forecast in 2006 and 6.5% in 2007

(TeckCominco July 2006).

Despite these increases, the Brook Hunt July

2006 supply chart indicates that mine

production is expected to decrease significantly

starting in 2008 due to a paucity of new mine

startups and depletion of reserves at several

major mines between 2010 and 2012 such as

Brunswick (255,000tpa) in Canada, Broken Hill

(145,000tpa) and Golden Grove (135,000tpa) in

Australia. The Supply Gap commencing in

2008 is a major problem for the industry. The

29 probable projects will provide 2 million

tonnes of new production at their peak in 2010;

not enough to offset mine shutdowns and

annual demand growth.

Key to meeting rapidly growing demand in

Asia, as they continue to expand

infrastructure and undergo rapid economic

expansion, is mine production within the

Pacific Rim region. Transporting of

concentrate and metals from the Atlantic

Region is expensive.

2006 forecast mine production in the main

Pacific Region is dominated by: China

(2,658,000t), Australia (1,475,000t) and

Peru (1,184,000t) and Mexico (457,000t)

(Brook Hunt June 2006). Importantly,

China’s mine production is significantly less

than 2006 smelter capacity of 3,236,000

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

China

2006 Global Mine Production Capability (kt Zn)

Brook Hunt July 2006

Australia

Peru

Asia

CIS

Canada

USA

Eire

Mexico

Other Latin America

Africa

Other W. Europe

E. Europe

Perhaps the biggest surprise in mine production is the increase in Chinese production by approximately 250,000 tpa

(154,000t in first 7 mths) due almost entirely to small mine production. Many of these mines were shut down when China

joined the World Trade Organization in an undertaking to improve mine safety. The sustainability of this small mine

production, which is forecast to increase by the same amount in 2007 is a major market uncertainty. Elsewhere in the

World, mining projects have been delayed due to rapidly increasing capital and operating costs and financing and

materials delays. If we are to learn from copper, then production disruptions due to mine failures and strikes will add to the

troubles of supplying zinc.

Zinc Market Update

Yukon Zinc Corporation www.yukonzinc.com | Selwyn Resources Ltd. www.selwynresources.com

2


New Mines, Restarts and Expansions

The following table provides a summary of announced new mines and restarts. The new mine production for 2007 and

2008 is forecast at about 1,114,000 tpa; enough to meet forecast demand growth of 600,000 tpa for both 2006 and 2007.

Restarts would add an additional 495,000 tonnes in 2006 to 2008; Almost all of the new mines excepting San Cristobal in

Peru are underground mine with long lead times for development.

Announced New Mines

Start Production

Zinc

Lead

Source

>10,000tpa

tpa

tpa

Lanping, China Late 2005 140,000

Taxco, Mexico 2006 16,000 Brook Hunt June 2006

Nevos Corvos, Portugal Early 2007 25,000 Brook Hunt June 2006

Jaguar, Australia Mid 2007 25,000 Brook Hunt June 2006

Serbia, Yugoslavia 2007 41,000 Brook Hunt June 2006

Sulphur Springs, Australia Late 2007 40,000 Brook Hunt Mar 2006

Duck Pond, NFLD Canada Late 2006 34,500 Macquarie

San Cristobal, Bolivia Late 2007 250,000 75,000 Brook Hunt June 2006

Duddar, Pakistan Late 2007 55,000 Brook Hunt June2006

Cerro Lindo, Peru Mid 2007 85,000 6,000 Brook Hunt Nov 2005

Scotia, Canada Mid 2007 18,000 8000 Brook Hunt Nov 2006

Rapu Rapu, Phiillipines 2007 14,000 Brook Junt Mar 2006

Aljustrel, Portugal Mid 2007 80,000 18,000 Brook Hunt Nov 2005

Farallon Mexico Mid 2008 45,000 3,000 Brook Hunt Jan 2007

Perseverance, Canada Q3 2008 228,000 Macquarie Sept 2006

Rasp, Broken Hill Australia 2008 25,000 14,000 Brook Hunt Sept 2006

Jaingxi, China Mid 2008 35,000 12,000 Brook Hunt Jan 2007

Balken, Sweden 2008 24,000 Brook Hunt June 2006

Dairi, Indonesia Mid 2008 90,000 50,000 Macquarie Aug 2006

Subtotal 2007 and 2008 1,114,000 186,000

Development Projects

Perkoa, Burkina Faso Late 2009 65,000 Brook Hunt Jan 2007

Dugald River, Australia Early 2010 190,000 20,000 Brook Hunt Sept 2006

Mehdiabad, Iran Indefinite delay (450,000) (110,000) Brook Hunt Nov 2005

Woodlawn Australia 2009 25,000 9000 Brook Hunt Nov 2006

Binani, Rajasthan 27,000 13,000 Brook Hunt Sept 2006

Wolverine, Canada Q1 2009 54,000 5,800 Yukon Zinc Jan 2007

Talvivaara, Finland Mid 2009 65,000 Brook Hunt Dec 2006

Fiftieth Anniv October, Russia 2009 Brook Hunt Nov 2006

Penasquito, Mexico Mid 2008 75,000 40,000 Brook Hunt Nov 2005

Gamsberg, S. Africa After 2010 300,000 Macquarie Mar, 2006

Khandiza,Uzbekistan 2008 45,000 17,000 Brook Hunt Nov 2005

Expansions, Restarts, Reductions 846,000 99,000

Balmat, USA Restart Mid 2006 35 mths ramp up to 54K Brook Hunt Nov 2005

Caribou, Canada Late 2007 50K 20,000 Brook Hunt Sept 2006

Tumurtin, Mongolia 2007 Increase 36K to 60K

Kassandra, Greece 2006 24mth ramp up to 30K Brook Hunt June 2006

Gordonsville Tennesse Q1 2008 50,000 Brook Hunt Jan 2007

Fankou, China

Increase150K to 180K

Cozamin, Mexico Restart late 2006 1.75K

El Monte Mexico 17K 35K Brook Hunt Nov 2006

Montana tunnels, USA Feb 2007 26K 9K Brook Hunt Dec 2006

Lennard Shelf, Australia Early 2007 70-80K TeckCominco Apr 2006

Salair, Siberia Restart Oct 2006 8.5K Brook Hunt Mar 2006

Helyer, Australia

2-yr Tailings

27K 7,000

reprocessing

Sasa, Macedonia Expansion Increase 6.65K to 19K 26,000

Langlois, Canada Restart Mid 2007 54K Brook Hunt Nov 2005

Black Mountain-Deeps expansion, Expansion 2005 Increase 28.2K to 45K

Namibia

Subtotal 2006 and 2007 Restarts

495,000

& Expansions

Endeavor, CBH Resources,

Mine failure Oct

80K 48,000 Brook Hunt Dec 2006

Australia

2005 and restart

Antamina, Peru

Reduction followed

by Expansion

330K in 2007 and 325K in

2008

Brook Hunt Jan 2007

Zinc Market Update

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3


Zinc Usage and Consumption

Zinc Usage Increases

As the world continues to industrialize, the consumption of

zinc is increasing: 47% is used for galvanized steel, 19% for

brass, and 16% for zinc alloys. Zinc usage is dependent on

construction (48%) and automobile industry (23%).

Zinc Consumption Growth

New and increased use of zinc is being promoted by several

world zinc producer organizations. Promising new uses

include zinc-air batteries for cars and buses, zinc input into

fertilizers, and new usage in the construction industry as the

preferred anti-corrosion material.

Between 1960 and 2001 world zinc consumption grew at an

average annual growth rate of 2.0%. Since 2001 world zinc

consumption has grown annually by 3.6% in 2002, 3.9% in

2003, 7.2% in 2004, 3.6% in 2005 and 6.4% in 2006 (Brook

Hunt Jan 2007). They fore cast demand growth of 5.5% for

2007 which is similar to TeckCominco forecasts 0f 5.4% for

2007 or approximately 600,000tpa.

Leading the way on increased consumption is China with

demand up 12.1% for the first 9 months of 2006 (Macquarie

August 25, 2006)

Increasing Zinc Recycle

Usage

Galvanizing, 47%

Brass, 19%

Sector

Construction, 48%

Transport, 23%

Zinc Base

Alloys, 16%

Other, 4%

Infrastructure, 9%

Machinery, 10%

Compounds, 7%

Semi-

Manufacturing,

7%

Consumer Durables,

10%

The amount of zinc from recycling varies

around the world, with about 25% recycle

in the developed world. Increasing

galvanized steel production is producing

more zinc furnace dust from steel mills for

re-smelting. Galvanized steel waste

provides approximately 35% of all recycled

zinc. Recycled brass accounts for 25% and

recycled zinc diecast parts and smelting

and galavanizing residues the remainder.

Zinc recycle is highest for automobiles at

30% decreasing to 3% for steel used in the

construction sector (IZA 2006). The lifecycle

for cars is about 10 years compared

to construction materials at 35 years.

3500

3000

2500

2000

1500

1000

500

0

China

Global Slab Zinc Consumption Forecast 2006 (kt Zn)

W. Europe

Asia excl Japan

North America

Japan

Latin America

CIS and Others

Oceania

E. Europe

Africa

Brook Hunt July 2006

High zinc prices have had little effect on continuous galvanized steel production, but are having an impact on other

galvanizing (16%) and die casting (13%) sectors. Historically it takes 12 to 24 months for the die casting industry to

switch over to substitute metals aluminum ($2450/t) and magnesium ($1825/t); but in the short term it simply squeezes

some fabricators over others having lower production costs. The risk of substitution is small as transition costs are high

and switching to magnesium would put significant price pressure on magnesium price. The substitution risk remains

small.

Zinc Market Update

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4


Zinc Metal Production ~ The China Story

Zinc Smelting Capacity

World smelting capacity increased 3.3%

during the period 1993 to 2002, capacity

primarily due to smelter expansions in

China and Korea. These increases are a

direct response to increasing zinc

consumption in the Asia/Pacific region.

World smelting capacity is expected to

increase to 10.9Mt in 2006 and increase

9.7% in 2007 and thereafter at about 2%

per year (Brook Hunt 2006). Smelting

capacity in Asia provided for 58% of global

capacity in 2005, and planned expansions

are almost entirely in Asia. China is the

dominant zinc refiner in the world.

3500

3000

2500

2000

1500

1000

500

0

China

Other W. Europe

Global Smelter Production Capability - 2006 (000 t/a)

Canada

Latin America

South Korea

Other Asia

Japan

CIS

Spain

Australia

E. Europe

Africa

Germany

USA

Brook Hunt July 2006

China Dominates New Refined Zinc Production

Current distribution of zinc smelting capacity generally matches geographic distribution of metal consumption. China has

expanded its zinc smelter capacity 38% in 3 years from 2.3Mt annually in 2003 to a forecast 3.2Mt in 2006 in zinc smelter

capacity, in balance with forecast demand. China now comprises 30% of global smelting capacity. Smelters in China have

recently experienced temporary shutdowns (Lanping140,000 tpa in Nov 2006-April 200&) due to power and supply

shortages, resulting in shortfalls relative to smelting capacity. Nonetheless, China increased production by 13.7%

(209,000 tonnes) in the first 7 months of 2006.

China continues as a net importer of both zinc metal and concentrates, with the latter increasing 47% YOY to 419,000

tonnes in 2006: however, due to Q4 large increase in export of refined metal it became a net exporter of 7 tonnes in 2006

compared to a net importer of 271,000 t in 2005. The shift is in part due to decreased zinc usage growth as Chinese

government slows down industrial development; but largely due to destocking to take advantage of high zinc prices and

premia in US and Europe, and end of VAT tax rebate in Q4.

Supply Demand Outlook

Brook Hunt forecasts supply balance

beginning 2008. This forecast is highly

dependent on new mine production,

that sees 2,458,000 tonnes of new

mine production in 2007 and 2008;

actually earlier to achieve full benefit of

production impact on 2008 production.

The list of new mine and restarts total

close to 1.1million tonnes; however,

after that there is a paucity of projects

to fill the supply gap. After 2008 the

pipeline of new projects is minor and

timelines for development uncertain.

Global (kt)

Brook Hunt January 2007 Forecast

2006 2007 2008

Global Mine

10,549 11,834 13,007

Production

Global Metal

10,701 11,867 12,774

Production

Global Demand 11,335 11,958 12,491

Concentrate

Market balance

Refined Implied

Surplus/Deficit

30 118 97

-601 -36 294

Given the experience in project delays for other metal mines it is unlikely that all of the mines in the earlier table will

start on time, and it is probable mine and/or smelter disruptions will further hinder mine/metal supply and create market

pressures and increase premia.

Zinc Market Update

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5


Outlook: Chinese Consumption Re-balancing the Zinc Market

From 1990 through 2000, China accounted for 63% of

metal supply growth, resulting in massive exports that

undermined the price of zinc.

Zinc metal exports from China declined to 465,900

tonnes in 2003 and 223,900 tonnes in 2004. With these

declines, China became a significant net importer of

zinc. Concentrate imports were 419,000 tonnes in 2006

compared to 284,000 tonnes in 2005. Increasing

smelter capacity will ensure that China remains a net

importer of concentrates for several years to come. The

tightness of concentrate supply has however benefited

from the resumption of many small zinc mines in 2006

that added approximately 250,000 tonnes of new

concentrate supply.

With rapid increase in zinc consumption, China became

a net importer in 2004 and 2005 was expected to

continue in 2006. However, in response to high prices

and removal of VAT tax rebate, China dumped

inventories in Q4 and ended the year as a net exporter

of refined metal; but remained a net importer of zinc.

In 2006, zinc demand in China was forecast to exceed

mine production by 540,000 tonnes annually; however,

destocking led to an actual deficit of 320,000 tonnes.

Not withstanding the Q4 2006 destocking of zinc, the

net importing of zinc by China is expected to continue

as mine production increases are not keeping up with

annual increase in demand in China of approximately

300,000t per annum.

Zinc Supply Shortfall Set To Eliminate LME Zinc Inventories In 2007

Inventories of LME Zinc in Decline

During the 2002-2004 period of excess supply and low

demand, LME inventories together with hidden

inventories (producer inventories and unsold zinc

concentrate at mine sites) built up to approximately

1,500,000 tonnes.

From the mid 2004 peak of 730,000 tonnes, LME

stocks have fallen to low of 80,000 tonnes before

bumping up to 100,000 tonnes in January 2007. Rapid

decline in LME inventories and the elimination of

hidden inventories reflects approx. 500,000 tpa deficits

in 2004 and 2005. It is widely expected that LME

inventories will be depleted by mid 2007, as the deficit

for 2006 was approximately 332,000 tonnes (ILZSG,

Jan 2007).

Zinc Market Update

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6


Much of the remaining inventories reside in New Orleans warehouse, which material is slowly becoming available as

metal ingots are refurbished following flooding in hurricane Katrina. In Europe, inventories are particularly tight and zinc

stocks in warehouses are largely diminished. Much of the remaining metal is subject to cancelled warrant delivery; the

tightness of supply has resulted in premia for zinc nearing all time highs in Europe and North America. Around the world,

smelters such as Teck Cominco are cautioning customers that they may need to ration zinc in the coming months.

Zinc Price Retreats from New High

In mid May 2006, zinc price on the LME rose to an all

time high of US$1.82/lb before correcting to US$1.33/lb

in late June. The zinc price recovered in fall 2006 and

made a new high of US$2.09’lb in late November

before profit taking set in and price declined to

US$1/38/lb, setting a base for a new rally.

The rise in zinc prices corresponded to a decline in

LME inventories to 84,825 tonnes in early December

before rising to 100,325 tonnes by mid January.

Inventories are expected to decline slowly as the

rebuilding of inventories occurs in the next few

months, and by mid year inventories on the LME

are expected to reach historic lows.

Zinc prices are expected to continue to strengthen as

LME inventories are essentially eliminated. Where the

price is headed is the focus of much speculative attention. The balance of supply and demand going forward is dependent

on whether economic demand continues strong and the production response to higher zinc prices. Given the inadequate

level of expected new mine development, the key to higher zinc prices appears to be continued strong demand for zinc.

With the depletion of LME inventories, zinc would be expected to retest its recent high of US$2.09/lb and test new ground

in the second half of 2007. The outlook for future zinc price is made even more attractive when one considers that the

supply gap could exist for more than five years; with 2008 being the year most likely to get near supply balance. A supply

deficit of this duration for a major commodity is highly unusual. Of course metal prices will continue to be subject to the

value of the US dollar, with devaluation supporting higher commodity prices; and economic activity will continue to impact

demand fundamentals.

Forward Prices ~ Key to Mine Development

The tightness in zinc markets and the outlook for

continuing depletion of LME inventories has

resulted in a continued strengthening of forward

prices. With the decline in Cash price in early

December 2006 the 27 mth LME price declined

from US$1.50/lb to US$1.10/lb in January 2007.

The banks require unhedged zinc to be priced at

long term prices (currently US$0.55 per pound) for

the purposes of determining cashflow for use in

determining project debt capacity. As most zinc

mines have minimal by-product credits to hedge,

the attractiveness of the forward zinc price curve

will determine the extent of bank project financing

of projects. In the absence of effective hedging, few

new zinc projects will get financing and the supply

problem will continue indefinitely or until zinc mines

can be financed by other means. The recent rise in

27 month LME price for zinc is encouraging for

financing Wolverine.

6 month, 1 yr 2 yr 3 yr

backward avgs

for cash zinc price only

LME Zinc Cash and Forward Prices

(as of June 26 2007)

4/7/04

6/7/04

8/7/04

10/7/04

12/7/04

2/7/05

4/7/05

6/7/05

8/7/05

10/7/05

12/7/05

2/7/06

4/7/06

6/7/06

8/7/06

10/7/06

12/7/06

2/7/07

4/7/07

6/7/07

8/7/07

Zinc Market Update

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Metalprices.com

LME Cash

15 M th

27 Mth

`

$2.20

$2.10

$2.00

$1.90

$1.80

$1.70

$1.60

$1.50

$1.40

$1.30

$1.20

$1.10

$1.00

$0.90

$0.80

$0.70

$0.60

$0.50

$0.40

7


Economic Outlook: The Final Piece Of The Puzzle

The outlook for economic recovery on a global basis is continuing with the world economy experiencing its third year of

5% GDP growth. Economic recovery in Europe and Japan is improving after many years of lagging the rest of the world,

while North America experiences a mild slow down. The star performer remains China at 10% GDP growth for 2006,

followed by Korea and Taiwan also with strong industrial growth. World GDP growth is forecast at 4.5% for 2007 and 2008

(Brook Hunt Dec 2006). Importantly, inflation remains under control: all of this is very positive for industrial production and

metals consumption.

The OECD indicator after moving downwards in early

part of 2006 has now turned up signaling a rebound in

global economic growth which is expected to continue

until at least the end of 2007. The strong growth in

Asia continues to buoy up slower Western World

growth.

• United States ~ US GDP grew 2.9% in

Q3, down significantly from 3.5% in Q2

2006 as US economy slowed. This

slowdown is reinforced by lowest

Purchasing Managers Index since April

2003: however, the US OECD leading

indicator suggests that economy may

rebound in second half of 2007.The

USGS leading indicator continue weak

suggesting reduced metal demand as

industrial growth lingers.

• Japan ~ Japanese GDP grew at 2.7% in

Q3 2006 up from 2.5% in Q2. Industrial

production also increased in Q3

suggesting continued modest growth.

Macquarie Feb 12. 2007

• Europe ~ The Eurozone GDP grew at 2.7% in Q3, unchanged from Q2, 2006. Germany, with a 2.8% increase in

GDP in the third quarter, had its fastest ever growth rate in five years. France enjoyed modest consumer growth

and industrial production with a 1.9% increase in Q3 GDP.

• China ~ GDP grew 10.8% YOY November 2006 as industrial production grew at 16.8% y-o-y Nov 2006.

Inflation remained in control with approximately 2.0% Y-o-Y. China continued its tightening efforts to slow

growth, with a recent increase in interest rates. A 31.8% increase in production of automobiles Y-o-Y

November 2006 was very positive for the consumption of zinc and lead.

THE CONTINUED MODEST GROWTH IN NORTH AMERICAN AND EUROZONE ECONOMIES,

TOGETHER WITH RAPID GROWTH IN ASIA, IS PRODUCING STRONG GROWTH IN

CONSUMPTION AT A TIME OF GENERALLY LOW METALS INVENTORIES. RECENT METAL

PRICE INCREASES APPEAR TO BE FACTORING IN THIS OUTLOOK CONTINUING.

Zinc Market Update

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8


Future Supply Gap in Zinc

The current accepted forecast of a significant

‘supply gap’ was first put forward by Teck

Cominco (Jan, 2003). The chart aptly illustrates a

large supply gap commencing in 2004 and

increasing as old mines are depleted and a

paucity of new mines in the development

pipeline. The graph illustrates the coming supply

problem caused by under investment in zinc

during the last several decades.

The earlier table of new mine announcements

provides an update of new mine production from

which to determine supply shortfall. For the

purposes of looking forward the 2.5% growth

curve provides a reasonable reference point

although recent growth has averaged 5.5% per

annum. The strong intermediate term economic

outlook reinforces the demand forecast for

increasing zinc consumption and increase in the

magnitude of the supply gap.

The supply gap is large, but how bad is it For an insight into this question, one should perhaps heed recent statements

by Andy Roebuck of Teck Cominco (Feb 2006) who stated the loss of 1.4 M tonnes of current zinc production by 2011.

Most likely new

supply scenario

Teck Cominco forecasts loss

of 1.4M tones of current

production by 2011

Although most focus is on new mine supply it is

instructive to consider the current reserve base

of existing mines to determine their production

life based on current reserves.

The curves below for 2005 Western World

Production (about 80% of Global Production)

provide an aging curve for current operating

mines that illustrates the very short reserve life

of most mines. The charts indicate that, without

expansion of reserves, Western World mine

production could decline by nearly half, or

approximately 4M tonnes by the end of 2015.

Obviously, the increase in zinc price will extend

the mine life through reserve expansion; but

there are limits to these additions without major

investment and exploration success.

# of Zinc Mines

60

50

40

30

20

10

0

# Mines

Cumul. % of Prodn

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Cumul % of Prodn

# of Prodn

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

% of Prodn

Cumul. % of Prodn

20

20

Imputed Mine Life (yrs)

Imputed Mine Life (yrs)

Zinc Market Update

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9


Pacifica’s World Class Zinc-Lead Project

The Selwyn Project is a giant zinc-lead

stratabound deposit in sedimentary rocks in the

Selwyn Basin in the eastern Yukon. Pacifica

acquired the Howard’s Pass Joint Venture

lands from Placer Dome and a subsidiary of US

Steel in April 2005 and resumed exploration

after more than 20 years hiatus; except for a

brief period of exploration activity in 2001.

Exploration in the 1970’s defined an Indicated

resource of 115.4M tonnes grading 5.2% zinc

and 2.0% lead and 367M tonnes of Inferred

resources at a similar grade. The aggregate

resource contains 55 billion pounds of zinc and

20 billion pounds of lead Placer (1981).

Drilling in 2005 and 2006 discovered six new

zones of mineralization. The continuity of

mineralization between the numerous zones

indicates that the deposit is more than 37

kilometres long, occurring as a gentle to

moderate dipping folded sheet of mineralization

amenable to both open pit and underground

mining. Pacifica published a NI-43-101

compliant resource of shallow mineralization

containing an Indicated resource of 33.5 M tonnes grading 5.52% zinc and 2.10% lead and an Inferred resource of 112.9M

tonnes grading 5.40% zinc and 2.14% lead. Surrounding this mineralization is 220 M tonnes of potential. The 2006 drilling

expanded all of the previous zones and has defined new resources in the Don valley; a new resource inventory is in progress.

Extension to high grade resources below the XY open pit is changing the possible production plan, and creating an opportunity

to add higher grade underground ores to the open pit ores during early mining. The discovery in deep drilling of high grade

mineralization in Don Valley and Anniv zones expands the potential for significant tonnages of higher grade mineralization.

The current Selwyn Project development plan proposes open pit mining at up to 20,000 tonnes per day. Run-of-mine ores

would be crushed and processed through a Dense Media Separation (DMS) plant to provide an effective 40 to 50% upgrade

before grinding and flotation to produce concentrates. In addition, the 2006 drilling is focused on defining sufficient high grade

mineralization beneath the XY zone to support underground mining at up to 1,500,000 tpa. Annual production would be in the

range of 280,000 tpa zinc and 100 tpa lead in concentrates and rank fifth in world mine production.

Zinc Market Update

Yukon Zinc Corporation www.yukonzinc.com | Selwyn Resources Ltd. www.selwynresources.com

10


Yukon Zinc’s Wolverine Project is Well Positioned to Supply Asian Market Zinc Demand!

The Wolverine Project, in Yukon, Canada is an exceptionally high grade deposit and is a significant new zinc-silver mine in the

making. In addition to estimated production of approximately 53,450 tonnes of zinc annually, it will have significant byproduct

production: 4,933,000 ounces of silver, 20,200 ounces of gold, 4,680 tonnes copper and 5,860 tonnes of lead.

The contained selenium in concentrates represents approximately 15% of current world production. Selenium is currently in

severe supply shortfall and the price had increased ten-fold to a high of US$64 per pound before correcting to the current US$27

per pound. Discussions with refiners indicate no simple solution to the supply shortfall. Annual selenium production is about

2600 tonnes with a demand forecast for 2005 and 2006 of 3000 tonnes (Mining Journal Jan 2005).

It is expected that smelting companies in China, Japan and Korea will continue to be aggressive in sourcing new concentrate

supplies. The latter is an opportunity for the Wolverine Project to secure a portion of the required mine development financing.

Interestingly, both Korea and China have recently indicated interest in investing in foreign projects to secure concentrate supply,

and China has consumed all of the available selenium for purchase.

World Trade Flow of Zinc Concentrates

The Yukon Silver-Zinc Project is well positioned to supply zinc concentrate to the growing markets in China, Japan and Korea. A

review and optimization study of the May 2006 feasibility study is complete and a production decision is planned for 2007.

Yukon Zinc received its Quartz License approval December 2006 and has recently filed its detailed plans regarding water usage

and disposal in support of its Type A Water License application with the Yukon Water Board. The Quartz Mining License

provides the regulatory approval to begin construction of a mine at Wolverine. Initial l construction activities of the road will be

the pioneering of the access road over an approximate length of 24 km, departing from km Post 190.0 of the Robert Campbell

Highway to the Wolverine mine site.

Russia

Alaska

Canada

Proposed Rail Link

China

1

2 3

USA

Korea

Japan

Marine Connections

1) Alaska Ports Access:

Seward, Whittier, Anchorage

and Port MacKenzie

2) Yukon Ports Access:

Skagway and Haines

3) British Columbia Ports Access:

Kitimat, Prince Rupert

and Stewart/Hyder

ALCAN RaiLink Inc.

Zinc Market Update

Yukon Zinc Corporation www.yukonzinc.com | Selwyn Resources Ltd. www.selwynresources.com

11

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