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Alexco Resource Corp
Symbol AXR
Shares Issued 93,642,119
Close 2017-03-29 C$ 2.21
Market Cap C$ 206,949,083
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Alexco amends Ag purchase deal, releases Keno Hill PEA

2017-03-30 02:16 ET - News Release

Mr. Clynton Nauman reports

ALEXCO AND SILVER WHEATON AMEND SILVER PURCHASE AGREEMENT AND ALEXCO ANNOUNCES POSITIVE PRELIMINARY ECONOMIC ASSESSMENT FOR EXPANDED SILVER PRODUCTION AT KENO HILL

Alexco Resource Corp. has amended the silver purchase agreement with Silver Wheaton Corp. In addition, Alexco announces the release of an independent technical report dated March 29, 2017, with an effective date of Jan. 3, 2017, entitled "Preliminary economic assessment of the Keno Hill silver district project, Yukon, Canada."

Highlights of the amended SPA:

  • The per-ounce production payment on streamed silver changes from $3.90 (U.S.) per ounce of silver delivered to Silver Wheaton to a percentage of the spot silver price that increases with lower mill silver head grades and lower silver prices and decreases with higher mill silver head grades and higher silver prices.
  • The increased production payments in lower silver price and/or lower silver grade environments increases the flexibility of Alexco to process lower-grade ore and sustain mining operations during periods of lower silver prices and does so without limiting the upside opportunity of either Alexco or Silver Wheaton in higher price and grade environments.
  • The variable production payment will increase overall mining efficiency of the typically high-grade silver deposits in the Keno Hill silver district (KHSD) while also accommodating lower-grade deposits or discoveries, which might otherwise be uneconomic.
  • As consideration, Alexco has agreed, subject to Toronto Stock Exchange and NYSE MKT approval, to issue Silver Wheaton three million common shares of Alexco.

Alexco president and chief executive officer, Clynton Nauman, commented: "The amended SPA is an exceptional outcome for Alexco. Most importantly, it places the Keno Hill silver district clearly on a path toward redevelopment and ultimately a production decision. Furthermore, we appreciate the endorsement of Silver Wheaton through its strategic shareholding in Alexco, an endorsement which we believe reflects confidence in a future of sustained silver production at Keno Hill, as well as recognition of the proven exploration upside and highly prospective nature of the district."

"We have long felt that Keno Hill is one of the most prospective silver districts in the world, and the success Alexco has had with Flame and Moth and, more recently, Bermingham confirms our view," said Randy Smallwood, president and chief executive officer of Silver Wheaton. "We believe that the amendments we have made today will be mutually beneficial to both Silver Wheaton and our partner Alexco and will result in silver once again being mined from Keno Hill."

Highlights of the PEA:

  • Alexco's project pretax and after-tax net present value is $104.3-million and $79.4-million (5-per-cent discount rate), respectively, and pretax and after-tax internal rate of return is 89 per cent and 75 per cent, respectively, at assumed silver prices of $18.60 (U.S.) per ounce in 2018 and $19.35 (U.S.) per ounce in 2019 through 2025.
  • At current spot metal prices and the U.S./Cdn foreign exchange rate (March 29, 2017), the project has a pretax and after-tax NPV of $121.1-million and $90.5-million (5-per-cent discount rate), respectively, and a pretax and after-tax IRR of 92 per cent and 78 per cent, respectively.
  • Average annualized mill throughput is 143,000 tonnes per year over an eight-year period at an average feed grade of 843 grams per tonne silver, 3.3 per cent lead, 4.6 per cent zinc and 0.39 gram per tonne gold.
  • Payable production is anticipated to be a total of approximately 25.1 million ounces of silver, 77.3 million pounds of zinc, 67 million pounds of lead and 4,870 ounces of gold over an eight-year mine life. Average annualized payable silver production is 3.5 million ounces per year, with the initial three years of annualized payable silver production averaging 4.1 M ounces per year.
  • Initial capital costs of $27-million are estimated to achieve production and positive cash flow with less than one-year payback.

In addition, upon achieving commercial production, Alexco has calculated all-in sustaining costs (contained silver, byproduct basis) over life of mine to be $13.51 (U.S.) per ounce of silver (including direct operating costs, sustaining capital, the Silver Wheaton stream, corporate general and administrative, and continuing surface exploration costs), and AISC over the first full three years of production to be $12.18 (U.S.) per ounce of silver.

Mr. Nauman commented: "The results reflected in this PEA are the culmination of three years of work conducted during a period of low silver prices and suspended operations, a period during which we continued systematic exploration and infill drilling to add approximately 900,000 tonnes of potentially mineable material at the Flame and Moth and Bermingham deposits containing more than 23 million ounces of silver at an indicated resource grade of approximately 800 g/t silver. It goes without saying that we intend to continue our exploration efforts in 2017 alongside increased surface and underground activity as we prepare the district for a production decision."

Preliminary economic assessment

The updated PEA includes current mineral resource statements for the Bermingham, Flame and Moth, Bellekeno, Lucky Queen, and Onek deposits. The PEA also reflects the amended SPA variable production payment imputed on the basis of the assumed pricing model. The PEA was compiled by Roscoe Postle Associates Inc. with contributions from a team of qualified persons, and assesses expanded operations for production of silver, lead, zinc and gold in the KHSD.

Key PEA metrics (and assumptions) are found in the attached table.

                                KEY PEA METRICS
Consolidated mine production                      1,021,000 tonnes
Consolidated production grade                     843 g/t Ag, 0.4 g/t Au, 3.3 per cent Pb, 4.6 per cent Zn
Mill throughput LOM (tonnes per day)              Average annual 390 tpd
Mill recoveries LOM                               Average Ag 97 per cent, Au 70 per cent, Pb 94.7 per cent, 
                                                  Zn 88 per cent
Concentrate produced (dry metric tonnes)          49,243 DMT Pb con, 83,453 DMT Zn con
Total payable metal production                    Ag 25.1 M oz, Au 4,870 oz, Pb 67.0 M lb, Zn 77.3 M lb
Production cost (mining, milling and G&A)         $325 per tonne of ore
Net smelter return per tonne of ore (after
incorporation of amended SPA)                     $565 per tonne of ore
Total capital (life of mine)                      $102.5M, including $55.4M underground development
Initial capital to achieve positive cash flow     $27M
Net cash contribution pretax                      $139.7M
IRR pretax                                        89 per cent
NPV pretax (5 per cent)                           $104.3M
Net cash contribution after tax                   $107.7M
IRR after tax                                     75 per cent
NPV after tax (5 per cent)                        $79.4M
Prices (2018 to 2025) used in PEA                 Ag $18.60 (U.S.)/oz initially then $19.35/oz long term, SLW Ag 
                                                  average $6.16 (U.S.)/oz, Pb $1 (U.S.)/lb initially then 94 cents/lb
                                                  long term, Zn $1.20 (U.S.)/lb initially then $1/lb long term,
                                                  Au $1,300 (U.S.)/oz, U.S.-dollar/Canadian-dollar 0.76 initially
                                                  then 0.79 long term

The 1,021,053 tonnes of the consolidated mine production includes 2 per cent from inferred mineral resources. Readers are cautioned that mineral resources are not mineral reserves and do not have demonstrated economic viability. Furthermore, the PEA is preliminary in nature. It includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves. There is no certainty that the PEA will be realized.

The PEA contemplates the sequential development and production from four mines over a nine-year period, beginning with an advanced underground exploration program at Bermingham and followed in late 2017 by underground development of the Flame and Moth deposit. Commencement of development and construction remains dependent on a number of factors, including receiving all appropriate permits and regulatory authorizations and Alexco's expectations regarding market prices for silver, lead and zinc, as well as the U.S.-dollar/Canadian-dollar exchange rate and the availability of development capital. Additionally, a production decision, which is made without a feasibility study of mineral reserves demonstrating economic and technical viability, carries additional potential risks, which include, but are not limited to, the risk that additional detailed work may be necessary with respect to mine design and mining schedules, metallurgical flow sheets and process plant designs, and the inherent risks pertaining to the inclusion of approximately 2-per-cent inferred mineral resources in the mine plan.

Mining

The PEA lays out a mine plan centred on Flame and Moth production, which provides 67 per cent of total LOM mill feed. Supplemental mine production is sourced from the Bellekeno deposit early in the production period followed by the Bermingham mine and Lucky Queen mine production later in the period. The LOM production schedule includes an annualized average of 390 tonnes per day over an eight-year period. Nominal production rates are 250 tpd for Bellekeno, 130 tpd for Lucky Queen, 140 tpd for Bermingham, and 260 tpd for Flame and Moth. Mining methods are predominantly mechanized cut and fill with a trend toward long-hole and drift-and-fill mining methods in areas of increased deposit thickness.

Processing and infrastructure

The Keno district mill facility has a nameplate capacity of 408 tpd and employs conventional crushing, grinding, differential flotation and dewatering processes to produce a Pb concentrate, a Zn concentrate, and a filtered tailings product for storage in an established dry stacked tailings facility or used underground as backfill. Ag and Pb minerals are recovered together in the Ag-Pb bulk concentrate and Zn minerals in a separate Zn concentrate.

Prior to resumption of plant operations, an additional 1.8-metre-by-three-metre, 130-kilowatt ball mill (purchased, on site) will be installed to provide expanded grinding capacity ahead of the flotation circuit. Locked and open-cycle flotation tests on all deposits plus prior operating performance results indicate that average lead concentrate grades during commercial production will be in the order of 65 per cent Pb and 17,000 g/t Ag.

Capital costs

Initial capital costs of $27-million are estimated to achieve production and positive cash flow. The primary components of this include approximately $12-million of the initial capital to establish access and underground infrastructure at the Flame and Moth deposit and $8.7-million to complete the advanced exploration program at Bermingham, including underground equipment rebuilds and purchase.

Other

All of the regulatory approvals required for mining and processing activities associated with the Bellekeno and Lucky Queen deposits are currently in place. With the exception of the water use licence, all of the regulatory approvals required for mining and processing activities associated with the Flame and Moth deposit are currently in place. Preliminary mine planning has been completed for the Bermingham deposit, and permitting for the advanced underground exploration phase of the project is under way.

Silver Wheaton amended silver purchase agreement

On March 29, 2017, the corporation and Silver Wheaton entered into an amendment agreement to the silver purchase agreement, originally dated Oct. 2, 2008, as follows:

  • Silver Wheaton will continue to receive 25 per cent of the life-of-mine payable silver from the KHSD. The production payment (originally $3.90 (U.S.) per ounce) will be based on monthly silver head grade and monthly silver price.
  • The actual monthly production payment will fall within a defined grade and pricing range governed by upper and lower numeric criteria (ceiling grade/price and floor grade/price) pursuant to the formula found in the attached formula table.
  • The 400 tpd mine and mill completion test date is extended to Dec. 31, 2019.
  • The Silver Wheaton area of interest remains one kilometre around existing Alexco holdings in the KHSD.

                       FORMULA
(Ceiling grade-deemed           (Ceiling price-deemed 
shipment head grade)            shipment silver price)     Market
------------------------   X    ---------------------   X   price
(Ceiling grade-                        ceiling price-
floor grade)                              floor price)

For clarification, using the PEA's average feed grade of 
843 grams per tonne and today's approximate silver spot 
price of $18 would result in the production payment from 
Silver Wheaton.

(1,400 g/t-843 g/t)     ($25 (U.S.)-$18 (U.S.))
-------------------  X  -----------------------  =  0.406 X $18 (U.S.) = $7.31 (U.S.) per ounce Ag
(1,400 g/t-600 g/t)     ($25 (U.S.)-$13 (U.S.))      (Cdn equivalent -- $9.78 per ounce Ag)

Floor grade equals 600 g/t Ag.
Floor price equals $13 (U.S.) per ounce silver.
Ceiling grade equals 1,400 g/t Ag.
Ceiling price equals $25 (U.S.) per ounce Ag.
Deemed shipment head grade equals calculated monthly mill silver head grade.
Deemed shipment silver price equals average monthly silver price.
Market price equals spot silver price prior to day of sale.

As consideration of the foregoing amendments, the corporation has agreed, subject to TSX and NYSE MKT approval, to issue three million shares to Silver Wheaton with a fair value of $4,934,948 (U.S.). The volume-weighted average trading price of the corporation's common shares for the five days prior to March 29, 2017, was $2.20 on the TSX.

Fort Capital Partners has acted as a financial adviser to Alexco in connection with the restructuring of the SPA.

National Instrument 43-101 and qualified persons

The technical information in this news release has been reviewed and approved by Torben Jensen, PEng, of RPA, an independent qualified person as defined in National Instrument 43-101 (standards of disclosure for mineral projects).

The PEA was compiled by RPA with contributions from a team of qualified persons as defined by NI 43-101 as follows:

  • Torben Jensen, PEng, and R. Dennis Bergen, PEng, of RPA;
  • Jeff Austin, PEng, of International Metallurgical and Environmental Inc.;
  • Gilles Arseneau, PhD, PGeo, of SRK Canada Inc.;
  • David Farrow, PrSciNat, PGeo, of Geostrat Consulting Inc.

All mineral resources are classified following the Canadian Institute of Mining, Metallurgy and Petro definition standards for mineral resources and mineral reserves (May, 2014), in accordance with the CIM Estimation of mineral resources and mineral reserves best practice guidelines and with NI 43-101 guidelines. The PEA is available under Alexco's profile on SEDAR.

About Alexco Resource Corp.

Alexco owns the Bellekeno silver mine, one of several mineral properties held by Alexco which encompass substantially all of the historical KHSD located in Canada's Yukon Territory. Employing a unique business model, Alexco also provides mine-related environmental services, remediation technologies, and reclamation and mine closure services to both government and industry clients through the Alexco Environmental Group, its wholly owned environmental services division.

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