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Alexco Environmental Group

Chairman's Message

Annual Message to Shareholders

May 23, 2017

Recently Alexco celebrated its ten year anniversary. Looking back, we have never really commented on the road we have travelled since 2006, or our accomplishments and challenges along the way. To do so in the context of where we find ourselves today is interesting. In 2006 we acquired the historic Keno Hill Silver District from the Government of Canada; there were few historic silver reserves – certainly nothing of consequence - but we had lots of exploration ideas, and we also had a mandate from Canada for long-term management and clean-up of legacy environmental problems remaining from more than 60 years of mining in the district. Today we boast more than 58.4 million ounces of in-ground indicated silver resources at Keno Hill including more than 20 million ounces at an average grade of 800 grams per tonne (“g/t”) silver or higher. And on the environmental side, in collaboration with our Federal Government partners, we have reduced metal loading in the central watersheds of the district by more than 90%. Since 2006, we built and operated the Bellekeno Mine in the 2010 – 2013 period producing an average of approximately 2 million ounces of silver a year and in late 2013, in the face of collapsing silver and base metal prices, we made the difficult decision to suspend operations at Bellekeno, at least through what we anticipated to be a short period of low silver prices. In retrospect, it was the correct business decision. Not only have we preserved our high grade silver resources but we have added to our resource base with the discovery of two new deposits, the Flame & Moth and Bermingham deposits, which will underpin future silver production for at least 8 years or more. And we have restructured and renegotiated key agreements to ensure that once we move back to production our operations remain profitable through all phases of a normal silver pricing cycle. Associated with all this but separately since 2006, we have grown our environmental business, AEG, to the point that it has the capacity to operate on a standalone basis across several jurisdictions in Canada and the United States.

Moving from the past to the present, Alexco in 2017 stands at a new and exciting transition point where our profile changes from explorer - developer to that of developer - producer. This is in large part is possible because of what our team at Alexco was able to accomplish during 2016 and in early 2017. Notable achievements included:

  • A 20% expansion of the Keno Hill  district silver resource  (in all categories) to approximately 91 million ounces with 57 million ounces of this total in the indicated category at an average silver grade of approximately 600 g/t for the Flame & Moth, Bermingham, Bellekeno, Silver King and Lucky Queen deposits.
  • The definition of a new high grade zone of mineralization at our Bermingham prospect where we have outlined approximately 169,000 tonnes of 1,296 g/t silver including 49,000 tonnes of 2,543 g/t silver in the Bear vein. This mineralization begins approximately 160 meters (“m”) from surface extending down plunge approximately 270m, where it remains open.
  • In late March 2017, we updated the Preliminary Economic Assessment (“PEA”) for the Keno Hill Silver District incorporating the updated resources at Bermingham and Flame & Moth, amended Silver Wheaton streaming agreement, updated pricing and the inclusion of the Bermingham deposit into the mine plan. The PEA identified a 400 tonne per day operation with an 8 year mine life boasting an average silver head grade of 843 g/t and average silver production of 3.5 million payable ounces per year.

Integral to the updated PEA is the amended Silver Wheaton silver streaming agreement, which replaces the fixed US$3.90 per ounce production payment for the 25% silver stream, with a variable production payment based on a combination of monthly silver spot price and silver head grade at the mill. This new arrangement protects Alexco shareholders from downside pricing risk and acts as a hedge, but allows both partners to share in the upside benefits of higher silver prices and/or higher silver grades. Importantly, the new streaming agreement will increase mining efficiencies as well as overall silver production at Keno Hill.

On the financial side, and as expected given the challenging market conditions, for the full year 2016 we showed a $4.4 million loss, however this included non-cash costs of $3.2 million. Other notable financial highlights in 2016 included:

  • In May we closed a non-brokered private placement for aggregate gross proceeds of $13,007,966.
  • In addition to the financing, we added $6.2 million from the exercise of warrants, $1.8 million from the sale of investments and $3.8 million from the release of a performance bond from Alexco Environmental Group’s (“AEG”) Globeville Smelter Project in Colorado.
  • AEG turned in strong revenue performance and margins in 2016, with revenues of $11.4 million and gross profit of $2.9 million, achieving gross margins in excess of 25%.

Looking to 2017 operations, we are now squarely focused on moving the Keno Hill Silver District back into production. We will do so in a phased development plan with critical path decision points along the way - but in doing so we will also continue our very successful exploration program looking for more Bermingham-style silver deposits. More specifically, our plans for the next 18 months include the following:

  • In June 2017 we will commence a surface exploration program of 12,000m of surface diamond drilling at a budgeted cost of $3.2 million, primarily to further explore potentially mineralized structural targets in the immediate vicinity of the Bermingham deposit.
  • Upon obtaining the amended Class IV permit for Bermingham, we will drive a 600m exploration decline to the Bermingham deposit and follow up with 5,000m of infill and confirmation drilling. We anticipate 5 months to drive the decline and a further 3 months to complete the underground drilling for a total investment of approximately $8.7 million, including infrastructure and equipment costs.
  • As the underground decline at Bermingham is nearing completion, and with appropriate authorizations and approvals in place, we will transition over to the Flame & Moth deposit and commence construction of a 965m development decline in anticipation of a final production decision in the latter half of 2018. Concurrent with development at Flame & Moth, we will complete final permitting for ore production from the Bermingham deposit.

With our current unrestricted cash position of $20 million as of March 31, 2017 and the recently announced flow through financing, we are able to comfortably move forward with all of these development and exploration plans.

In the silver sector Alexco is in an enviable position. We are a primary silver operator in one of the safest jurisdictions in the world; we have all the infrastructure and equipment in place to be able to transition back to mine operations relatively quickly and at modest capital cost. We have the additional benefit of a large in-ground silver resource inventory coupled with an unrivalled exploration discovery record that if continued, will similarly benefit future development and production plans in the Keno Hill Silver District.

In closing, let me emphasize my increasing confidence in the silver markets, but in doing so assure you that we will continue to carefully manage cash deployment while achieving our pathway back to production and growing silver resource base. Finally, for those who been long-term shareholders during these challenging markets, we appreciate your continued support. We also have many new shareholders and appreciate your confidence in our Company. To all of our shareholders, new and long-term, we know that we would not be where we are without you.

Thank you,

Clynton R. Nauman
Chairman, CEO
Alexco Resource Corp.

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