Annual Message to Shareholders
May 14, 2018
As we roll into the summer of 2018, Alexco remains focused on its mission of transitioning from an explorer – developer to a developer – producer at its wholly owned Keno Hill Silver District in Yukon, Canada. As I reflect upon 2017, I am confident it will stand out as a pivotal year on our journey toward reclaiming our franchise of Canada’s only primary silver producer. We are not there yet, but we are working diligently to position the Company to be able to confidently make the final production decisions. Certainly our enthusiasm is buoyed by our view of the silver and base metal markets which we believe have been consolidating and locally strengthening even in the face of what some would say are serious macroeconomic headwinds. Some of Alexco’s more notable achievements in 2017 include:
- The completion of a positive Preliminary Economic Assessment (“PEA”) identifying a 8 year mine life with over 1 million (“M”) tonnes of mine production at an average diluted grade of 843 grams per tonne (“g/t”) silver, 3.3% lead, and 4.6% zinc. Capital costs to achieve production and positive cash flow are $27 M with payback at less than one year. Importantly, the technical information in the PEA document will be expanded, updated and refined in the form of a Pre-Feasibility Study in 2018.
- The amendment of the silver purchase agreement with Wheaton Precious Metals Corp., which introduces a variable production payment based on monthly silver prices and monthly silver head grades at the mill. This innovative arrangement is both a downside hedge as well as a new formula to increase our overall mining efficiency.
- In May we closed a $9 M flow-through financing to fund our 2017 and 2018 exploration program.
- A +13,000 meter (“m”) surface drilling program in the vicinity of the Bermingham deposit confirmed our belief that high grade silver mineralization may extend well beyond the potentially mineable portions of the deposit, a thesis that will be further tested in 2018.
- In August we were successful in amending our Class IV land use permit, a prerequisite to initiating underground activity to establish and drive an approximate 550 m decline to the top of the Bermingham deposit. At the time of writing this letter, we have substantially completed the decline.
- A further permit submission was made in November for environmental assessment and amendment of existing authorizations to permit the eventual production and processing of ore from the Bermingham deposit. This is the final production-related authorization required for the Bermingham deposit and once complete, the Company will be fully permitted to extract and process ore from any combination of the Bellekeno, Lucky Queen, Onek, Flame & Moth and Bermingham deposits.
- Alexco Environmental Group (“AEG”) turned in strong revenue performance and margins in 2017, with revenues of $10.7 M and gross profit of $4 M for a gross margin of 37%.
Clearly 2017 was a year of fairly wide ranging achievements, essentially putting the building blocks in place for a return to production.
We continue to believe Alexco is in a unique situation, with our operations located in one of the safest and mining friendly jurisdictions in the world, all the mining infrastructure including the mill already in place, thus allowing us to move into production relatively quickly and at a very modest capital cost. We have the additional benefits of an expanding silver resource inventory and an enviable discovery record in one of the highest-grade silver districts in the world. Indeed, since 2013, our exploration focus has been on discovery and immediate follow-up drilling to outline potentially mineable mineralization. Using this method, we have found an indicated ~44 million ounces of silver resource in two separate deposits, Flame & Moth and Bermingham, with average grades of 498 g/t silver and 628 g/t silver, respectively. This year, our planned 15,000 m surface drill program will remain in the vicinity of the Bermingham deposit as we concentrate on new “Bermingham-like” targets and deeper areas of potential mineralization.
Underground work at the Bermingham deposit was also a primary focus in 2017 with the initiation of the ~550 m exploration decline. This decline was substantially complete in early May and we are currently initiating a 5,000 m underground infill and confirmation drilling program which will be focused predominantly on the very high grade upper portions of the deposit that are currently included in the early years of the mine plan. The program will utilize two drills and has a projected timeline of approximately two months.
With substantial completion of the Bermingham decline, we will be moving our mining crews to the Flame & Moth decline and begin development of an approximate 530 m decline to reach the first production level of the Lightning zone approximately 50 m below surface. This is a noteworthy event as the decline at Flame & Moth is the final underground access to be driven prior to ore deposit development for production purposes. It is also important to note that an ongoing engineering optimization plan is investigating increased efficiencies of our underground work, as well as establishing milestones to guide our progress toward a final production decision.
Along with the engineering work previously referenced, a pre-feasibility study is ongoing and we expect to complete near the end of Q3. This study will provide a more detailed mine plan with updated reserves and resources including results from the 2017 surface exploration program in addition to the upcoming underground drilling program at Bermingham. This study will better position us to make a formal production decision before the end of the year.
Our 100% owned subsidiary environmental business, AEG, remains an important and growing part of our business model. Once again it turned in strong revenue performance and margins in 2017, with revenues of $10.7 million and gross profit of $4 million achieving a gross margin of 37%. We continue to view AEG as a complementary component to our mining business and in late 2017 completed a restructuring process to better enable AEG to take on larger, brownfield reclamation and cleanup projects. In April 2018, AEG’s US subsidiary, Alexco Water and Environment Inc. (“AWE”), signed a significant Master Services Agreement to become the Operator of Responsible Charge for the Schwartzwalder Mine and the former Cañon City Uranium Mill located in Colorado. This high profile cleanup project will take 10+ years to complete and is expected to generate revenue in excess of US$20 M for AEG. Securing this long-term arrangement supports our growth strategy for our environmental business in addition to confirming the technical skill and capacity of the team.
In closing, let me emphasize my confidence in our business growth moving forward. At a market level, we are seeing greater interest in the Alexco story fueled by fundamentals that are unique in the silver space at a time when silver appears to be strengthening. With that said, we remain steadfast in our approach to move forward in a disciplined and thoughtful manner, being diligent with our resources. The theme for the remainder of 2018 is one of transition and transformation; moving from a developer to a producer with an abundance of silver resources in addition to unparalleled exploration potential.
We appreciate the support of both our long-term shareholders as well as newcomers to the Company. Your confidence in our people, our objectives and our shared goal of becoming Canada’s only primary silver producer is valued.
Clynton R. Nauman
Chairman & Chief Executive Officer
Alexco Resource Corp.