Keno Hill’s deposits set to shine again

SITE VISIT

KENO, YUKON — The term “world class” gets used and abused in the exploration industry, but without doubt the Keno Hill silver district in the Yukon is world class. And that is a statement based on fact. In 1995 the United States Geological Survey published a quantitative analysis of world-class base and precious metal deposits, which found that the richest 10% of silver deposits in the world have a minimum average grade of 360 grams silver per tonne and that world-class silver deposits contain more than 77 million oz.

Keno Hill knocks those numbers out of the park. The district produced 217 million oz. of silver between 1913 and 1989. Grades at the 35 mines averaged 1,390 grams silver per tonne, plus 5.6% lead and 3.1% zinc.

Mining at Keno Hill did not stop because the ore ran out. Instead, falling metal prices and increasing environmental standards in the 1980s forced United Keno Hill Mines into receivership. Burdened by environmental liabilities, the district sat abandoned for almost 20 years.

In 2005, that started to change. That’s when Alexco Resource (AXR-T, AXU-X) was selected as the preferred purchaser of the assets of United Keno Hill. Other companies bid for the package but Alexco offered an unique proposition: it would not only explore and eventually restart mining in the district but would also clean up the site. The government liked the idea, inking a contract that pays Alexco to deal with the old tailings and contaminated sites while indemnifying the company from past environmental liabilities.

It took another two and a half years before the company received all necessary permits and approvals, but by late 2007 Alexco could finally claim sole ownership of United Keno Hill’s land package. Now, three years later, the reclamation work is well underway, drills are hitting mineralization all over the place, and Alexco is producing silver again in historic Keno Hill.

The property

“Everyone else who looked at this property said, ‘Okay, it’s got so many million dollars worth of silver and infinity worth of liability’ and walked away,” said Rob Mc- Intyre, Alexco’s vice president of business development, standing in front of the company’s production-ready adit at Keno Hill.

It took an unique idea for Alexco to win the bidding battle for the Keno Hill property. The site’s three dozen old mines were a tale of environmental woe, with tailings that were not properly contained and old adits leaking zinc-laden water. The court-ordered sale piqued interest from reclamation companies interested in a contract to clean the site up and from exploration companies that wanted to explore its mineral potential, but Alexco says it was the only company that offered to do both. The fact that the offer came from Clynton Nauman, Alexco’s president, helped as Nauman was the only person at the time who had ever cleaned up an old mine in the Yukon. Nauman led the clean up efforts at the old Brewery Creek mine.

The agreement eventually hammered out between Alexco, the federal and the Yukon governments, saw Alexco commit a minimum of $10 million towards reclamation. The company also agreed to pay a 1.5% net smelter return royalty on any future production into a reclamation trust.

The initial deal was announced in early 2006 but it did not close until late 2007. In that time Alexco focused on reclamation, as well as surface exploration. By mid-2008 the company was able to obtain a mining land use permit to start redeveloping the historic Bellekeno mine.

A preliminary economic assessment at the time estimated a capital requirement of US$61.2 million to bring Bellekeno back into production. For that investment Alexco expected to produce 3.3 million oz. silver, 30.1 million lbs. lead and 24.5 million lbs. zinc over an initial five-year mine life. The project carried a pretax internal rate of return of 55.5%.

The company quickly established a portal and started driving a 650-metre decline into the former workings, designed to intersect the old mine near the 99 zone. The 99 zone sits between the silver-lead-rich Southwest zone and the zinc-silver- rich East zone. When the new decline tapped into the old workings, Alexco started the work of dewatering and rehabilitating.

Such work is expensive, and Alexco was in the midst of it when the global financial crisis hit in late 2008. McIntyre says that two things made Alexco’s current success at Keno Hill possible: one was the deal to buy the property free from past environmental liabilities and the other was what happened next.

In October 2008 Silver Wheaton (SLW-T, SLW-N) stepped up and purchased 25% of the life-of-mine silver produced at Keno Hill, with the expectation that production would start at Bellekeno. The deal saw Silver Wheaton commit US$50 million for the right to buy silver at the lesser of US$3.90 per oz. or the prevailing market price. Of the US$50 million payment, US$15 million was made available to Alexco immediately to fund development work at Bellekeno. The remaining US$35 million became available to Alexco once the partners made a development decision.

That development decision came in late 2009, once Alexco produced a development plan incorporating the Silver Wheaton deal. The plan is to start mining at Bellekeno and use cash flow from that operation to fund exploration on the rest of the large land package. Essentially, Alexco is going to start small while it looks for a bigger deposit. The silver-lead-zinc mineralization at Keno Hill comes in epithermal veins within a quartzite host. Quartzite is a perfect host rock for veins because it is brittle; brittle rocks fracture easily, leaving behind lots of spaces to fill. At Bellekeno there are three mineralized zones. Production will start in the Southwest zone, where the main target is the 48 vein, a 5-metre-wide structure that runs, on average, 1,646 grams silver, 5% lead and 8% zinc. The rock is so well mineralized that in the early 1900s miners used to haul it out in sacks to the Yukon River, barge it out to the Bering Sea, and then transport it all the way to a mill in Montana, and the effort still paid.

The Bellekeno operation uses overhead cut-and-fill to mine the ore, which then goes through a mill capable of churning through 400 tonnes of ore daily. For now, Alexco plans to limit throughput to 250 tonnes a day. A conventional flotation facility will then recover zinc into one concentrate and silver and lead into another. Tailings that have the potential to produce acidic or zinc-rich run-off will be sent back underground, while nonacid- generating tails will be processed through a dry-stack tailings facility.

The operation is expected to produce 2.8 million oz. silver annually, contained within 12,000 tonnes of lead-silver concentrate, as well as 8,400 tonnes of zinc concentrate. The zinc and lead credits push the cost of producing an ounce of silver down to $2.96.

And it cost Alexco just under $42 million to bring Bellekeno into production. The operation will employ 120 people.

Currently, the Bellekeno resource is only 401,000 indicated tonnes grading 921 grams silver, 9.4% lead and 6.5% zinc. But Mc- Intyre says the key to success at Keno Hill is to trust in the continuity of mineralization. When United Keno Hill started tapping into Hector Calumet, the vein that eventually produced more than 100 million oz. silver, the company had no idea how large it was — it just identified a small resource and started mining. So Alexco is happy to have proven up to 2 million to 3 million oz. silver prior to the start of mining; the company will just continue exploring for new resources as it goes.

With 35 historic mines on the property, it was quite a task simply deciding where to start. Bellekeno jumped out as a contender because it was one of the last deposits United Keno Hill put into operation before shutting down. The old Bellekeno mine produced 42,000 tonnes grading 1,440 grams silver and left behind lots
of old workings.

In developing the new Bellekeno mine, Alexco certainly took advantage of those old workings. Currently, the mine is split between new and old workings. By the end of the planned operations that ratio will shift to 70% new and 30% old.

“We’re turning money into smoke and noise like you wouldn’t believe around here,” said Mc- Intyre at the site in mid-August. Six weeks later, that effort produced the results investors were waiting for: the completion of mine and mill construction and the initiation of mill commissioning at Bellekeno.

With Bellekeno on the brink of commercial production, Alexco can turn more of its attention to exploration. The goal is to generate a mine pipeline, such that at any given point, the company has several mines in production, several being readied for development, and several going through resource definition.

Exploration

With so many historic producers on the 350-sq.-km property, it is hard to know where to explore first. But results from the company’s 25,000-metre exploration drill program are starting to highlight several exciting new areas at Keno Hill.

Alexco had at least four and as many as seven drills turning at Keno Hill all summer. Two were always working on Bellekeno but the others were probing other areas, such as Lucky Queen, Silver King, Onek, Flame and Moth, Galkeno, and Bermingham.

The most exciting of these is Onek. The company first hit highgrade mineralization at Onek in 2007, when one hole returned 29.45% zinc over 6 metres, but the drive to get Bellekeno into production meant Alexco had not properly followed up on the Onek hit until this year.

Recently, Alexco drilled 20 holes in the area of the historic Onek mine, which is in the eastern part of Keno Hill only 1 km from the Bellekeno mill. The work has outlined an upper zone with highgrade silver and zinc, followed by lower-grade mineralization stretching along 400 metres strike and to 220 metres depth. The zone remains open along strike to the southwest and at depth.

The best result from Onek came from hole 265, which returned 1,518 grams silver, 1 gram gold, 17.93% lead, and 3.15% zinc over 10.4 metres. The intercept started 54 metres downhole. Many other holes returned promising results, such as 7.3 metres grading 834.4 grams silver, 1.19 grams gold, 6.68% lead, and 21.84% zinc in hole 254 and 5.5 metres of 411.5 grams silver, 1.55 grams gold, 3.11% lead, and 21.09% zinc in hole 253.

The 2010 program at Onek focused on confirming and expanding the upper, more silver-rich zone at Onek, as indicated by the historic resource for the old mine. Interestingly, in addition to silver, lead, zinc and gold, Alexco’s drills at Onek also returned significant indium mineralization in several holes, including 8.9 metres of 472 grams indium per tonne in hole 250.

The old Onek mine produced 84,000 tonnes carrying an average grade of 472 grams silver, 5.54% lead and 3.43% zinc. The area also hosts an historic resource of 77,780 tonnes grading 433 grams silver, 4.71% lead and 16.41% zinc.

Onek was not the main focus at the beginning of the year. In fact, Alexco started the 2010 season expecting the area known as Silver King to return the best results. The historic mine at Silver King produced 188,000 tonnes of highgrade silver-lead-zinc ore from the No. 1 and 2 veins. The area also hosted an historic resource, stemming from the untapped No. 5 vein, of 115,970 tonnes grading 1,500 grams silver, 1.4% lead and 0.16% zinc.

Alexco probed the No. 5 vein with 20 holes totaling 4,440 metres this year, with mixed results. Hole 221 returned 1.4 metres of 570 grams silver, 3.69% lead and 0.59 gram gold, but holes 222 and 224, both drilled within 200 metres of hole 221, failed to intersect mineralization. Alexco summed it up well in saying the “silver mineralization on the No. 5 vein is variable both in terms of grade and continuity.”

But a disappointing result in one area hardly matters because the list of exploration targets at Keno Hill is almost as long as the list of historic mines. Alexco’s only drill tested 16 of the 35 historic producers on its property. And on top of that the potential for new discoveries is high, as evidenced by the discovery of the area known as Flame and Moth: construction workers stumbled upon mineralized veins in the bedrock while doing earthworks ahead of building the Bellekeno mill. Surface samples from the exposed mineralization returned assays up to 1,428 grams silver over 2 metres and drills are now testing the area.

And one mineralized zone is less an exploration target than a mill-ready ore dump: the old Keno Hill tailings facility. In May, following a 283-hole sonic drill program, Alexco defined a resource for the historic tailings totaling 2.49 million indicated tonnes of 119 grams silver, 0.12 gram gold, 0.99% lead and 0.7% zinc.

The tailings are just over 2 metres thick, on average, and sit within a few hundred metres of the new mill. In its original deal for the property, Alexco promised to move the tailings to a new, more secure facility. So now the company is conducting metallurgical testwork on the material to see if it can run the tailings through the flotation facility and recover the contained metals, while fulfilling its promise of reclaiming the area. If so, it would certainly be a win-win situation.

For now, Bellekeno is ramping up to commercial production and drills at Onek, Lucky Queen, and Flame and Moth are proving Keno Hill still has a lot left to give. This is one world-class project that has regained its shine.

The recent Yukon investment craze, which coincided with the start of production at Bellekeno, has treated Alexco’s share price very well. A year ago the company’s shares were trading near $3. During most of 2010, its shares were between $3 and $4 but in August they started to climb, reaching $5 in late September. Then the company announced those stellar results from Onek and its share price shot up again, this time to the $6 range. Alexco has 53 million shares outstanding.