Alexco CEO on restructured Wheaton Precious Metals deal

VANCOUVER — Alexco Resource (TSX: AXR; NYSE-MKT: AXU) is considering restarting production at its Keno Hill silver mine, 330 km north of Whitehorse, Yukon. The company suspended operations in late 2013, as rising unit costs and falling silver prices squeezed profit margins.

Since then, Alexco has been exploring and expanding in-situ resources, and recently passed a few milestones that may allow for a restart within two years.

The company’s priorities included restructuring a silver-purchase agreement with Wheaton Precious Metals (TSX: WPM; NYSE: WPM) that dates to 2008. Alexco traded 25% of life-of-mine silver produced across the 230 sq. km Keno Hill land package in exchange for US$50 million and US$3.90 per oz. delivered.

Alexco’s milling facility at the Keno Hill operation in the Yukon. Credit: Alexco Resource.

The companies revised the stream agreement in March, with Wheaton now set to pay a percentage of the spot silver price that increases with lower mill head grades and silver prices, and decreases with higher head grades and silver prices.

For example, at a silver price of US$16 per oz. and a head grade of 700 grams silver per tonne, Wheaton would pay 66% of the spot price,  or US$10.50 per ounce.

“We’re talking about a downside hedge. The concern for both companies is getting Keno Hill back into production and keeping it there through the normal price cycle,” Alexco president and CEO Clynton Nauman says during an interview.

“We devised a schedule wherein they pay higher amounts as prices decline, and vice versa. We bracketed it in terms of both silver price and grade, which was also important because the grade element allows us to optimize the mine plan. Both companies benefit on the upside, and [Wheaton Precious Metals] is protected on the downside.”

A recently-installed portal at the Flame & Moth deposit. Credit: Alexco Resource.

Alexco has seen recent exploration success at the project. Nauman points out that the company has outlined “20 million oz. at an average grade of 800 grams [silver] per tonne” over the past three years.

The two major additions include: the Bermingham discovery, which hosts 858,000 indicated tonnes grading 628 grams silver, 2.4% lead and 1.7% zinc; and the Flame & Moth deposit, where indicated resources total 1.7 million tonnes at 498 grams silver, 1.9% lead and 5.3% zinc.

Alexco also released a Keno Hill preliminary economic assessment (PEA) that takes into account the new stream agreement and resource estimates. The company figures it will require $27 million in upfront capital to get back into production.

The operation would produce 3.5 million oz. silver per year at all-in sustaining costs of US$13.51 per oz. over an eight-year mine life. Payable production is anticipated to total 25.1 million oz. silver, 77 million lb. zinc and 67 million lb. lead.

“We were producing at materially higher average costs when we were forced to suspend production,” Nauman says. “We won’t be contract mining this time around, but the biggest thing is the increase of throughput in the mill because there are lots of tonnes and grade. Plus allowing us to bracket by grade was a deliberate move by Wheaton Precious Metals after a close inspection of our mine plan. It’s in their best interest to see that we’re successful.”

Two drill rigs operate at the Bermingham target. Credit: Alexco Resource.

Keno Hill’s economics outline a $79.4-million, after-tax net present value at a 5% discount rate, and a 78% after-tax internal rate of return. The model assumes a US$18.60 per oz. silver price in 2018, and a US$19.35 per oz. price from 2019 through 2025.

The company’s mill has a nameplate capacity of 408 tonnes per day and would use crushing, grinding, differential flotation and dewatering processes to produce lead and zinc concentrates.

Alexco will need to obtain a water-use licence from Yukon regulators for mining and processing at Flame & Moth, which is scheduled to provide 67% of life-of-mine mill feed.

Alexco announced a $9-million, flow-through private placement in May to fund more surface drilling and development of an exploration decline at Bermingham.

The Bermingham deposit typically occurs in “structurally complex zones as discrete veins” with a 5- to 10-metre-wide “structurally damaged vein margin.” The veins show heavily disseminated to massive mineralization, while mineralization in the vein margins is reportedly “more stringer-like.”

The company is optimistic that knowing more about the project’s structural geology will unlock more discoveries.

The flotation mill at Alexco Resource’s dormant Keno Hill silver mine, 330 km north of Whitehorse, Yukon. The mill was commissioned at 407 tonnes per day and can produce
lead and zinc concentrates. Photo by Matt Keevil.

“The ways the tectonics have worked at Keno Hill allowed us to lock in the structural setting that gives rise to these bigger, higher-grade ore deposits,” Nauman says. “We’ve developed targeting to combine these old faults that have movement. It’s also important when it comes to rock type.”

Alexco has planned a 12,000-metre surface drill campaign, plus the 600-metre decline at Bermingham for another 5,000 metres of delineation drilling at the deposit. The combined initiatives will cost nearly $12 million.

Alexco has traded within a 52-week range of $1.47 to $3.31 per share, and closed at $1.66 at press time.

The company has 101.2 million shares outstanding for a $168-million market capitalization, and reported cash and equivalents of $30 million.