VANCOUVER – There are over 40 million ounces of indicated silver resource sitting alongside a modern mill at Alexco Resource's (TSX: AXR) historic Keno Hill property in the Yukon but, with the price of silver struggling to stay above US$20 per oz, the question is how to make money mining it.
It's a question that's been pondered before in the storied mining camp, which produced more than 217 million oz of silver between 1913 and 1989.
A few years ago Alexco thought it had the answer. Between 2008 and 2010 it built the first new mine and mill at Keno Hill in decades, reaching production in early 2011. Over the next 32 months the Bellekeno operation churned out 5.6 million oz of silver, 45 million lb of lead, and 16 million lb of zinc.
Then a falling silver price derailed the new mine. In the first half of 2013 silver prices lost as much as 40% to fall below US$20 per oz in midsummer. A week later Alexco announced its intention to suspend Bellekeno over the winter, giving the silver market time to improve and the company time to figure out a new plan for Keno Hill.
There are a lot of components to integrate into that plan.
There are five defined deposits at Keno Hill. Three beg to be mined: Bellekeno is a developed underground mine, Lucky Queen is partially developed, and Flame and Moth has recently become the largest and easiest to develop due to its shallow depth and proximity to the mill.
Despite an abundance of resource, when Bellekeno was in operation, it alone couldn't satisfy the mill. Bellekeno maxes out at roughly 250 t/d. The mill can process a daily 400 tonnes.
Alexco faced other struggles in containing its unit costs at Bellekeno. With no experienced underground miners available locally, the contract mine operator had to hire workers from across Canada and fly them in for every two-week shift. It was this combination of limited mill feed, expensive labour, and low silver prices that made the mine untenable.
So what is the best way out of this dilemma?
"For the longest time we proceeded on what seemed the most logical plan: put Bellekeno back into production immediately, since it's just sitting there on care and maintenance, and then work away at developing Flame and Moth," Alexco president and CEO Clynton Nauman said during a conference call. "But we know that Bellekeno was never designed to produce more than 250 tonnes per day, and so in a low silver price environment that would put us exactly where we were in early 2013: our unit costs would be high due to the low throughput and we would be simply trading dollar for dollar."
It was only when Nauman and his team focused on the core of the problem – insufficient throughput – that they saw the solution. Keno Hill needs another mine.
"The main key is that we need to operate the mill at Keno Hill at capacity right from the get-go," Nauman said. "We've been pretty vocal about the fact that those underlying costs are high, which means your margin for profitability is small when you're operating at 200 to 250 tonnes per day. That's what drives us towards the 400 tonne per day project. That metric was the cornerstone for the various production options that we considered."
A new preliminary economic assessment (PEA) outlines one way that could happen. Alexco would start by spending $25 million to develop a new underground mine at Flame and Moth. The near surface deposit only requires 700 metres of underground development and a 100 metre raise before mining could begin.
"That work would start early in 2014," Nauman said. "Later in the year we would begin to recommission the Bellekeno mine and have it ready to simultaneously go into production along with Flame and Moth. This is the profile required to achieve a mill feed of more than 400 tonnes per day as quickly as possible."
As planned, it would take nine months and a total of $53.7 million to get both Flame and Moth and Bellekeno into operation, including a few mill upgrades. In the third year of operations mining at Bellekeno would taper off; a new mine at Lucky Queen would replace the lost feed. Throughout its 5.5 year mine life the operation would be anchored by 320 to 370 daily tonnes of output from the Flame and Moth mine, which would provide 73% of the 406 t/d mill feed.
"With 23 million ounces of silver already indicated in resource, the Flame and Moth deposit is the third largest silver deposit discovered at Keno Hill in the last 50 years and it remains open," Nauman said. "In my view, when ultimately delineated, this deposit will become a cornerstone asset of the district and has the potential to anchor production well into the 2020s."
The operation would process a total of 806,900 tonnes of "ore" grading 745 g/t Ag, 0.4 g/t Au, 2.7% Pb, and 4.7% Zn. That represents only a bit more than half of the indicated resources at Bellekeno, Flame and Moth, and Lucky Queen, which is why Nauman described the PEA plan as "pretty conservative".
The mine as envisioned in the PEA carries an after-tax net present value of $29.6 million and generates a 39% after-tax internal rate of return, enabling capital payback in 3.5 years. Those numbers are based on a 5% discount rate and metal prices of US$24 per oz of silver, US$0.95 per lb of lead, US$0.85 per lb of zinc, and US$1,300 per oz of gold.
Those economics also take into account Alexco's deal with Silver Wheaton (TSX:SLW; NYSE:SLW). In 2008 the streaming company provided US$50 million to help build Bellekeno, which was a $61-million project. In exchange Silver Wheaton has the right to buy 25% of the payable silver produced from the Keno Hill district for $3.90 per oz.
All of the regulatory requirements for mining activities at Bellekeno and Lucky Queen are already in place (Alexco previously drove a decline to within a few hundred metres of the deposit at Lucky Queen). Permitting for development and production at Flame and Moth is underway. Alexco is very familiar with how to get permits in the Yukon, and permitting Flame and Moth will represent the company's ninth time through the environmental assessment process.
Nauman stressed that these Keno Hill plans are a work in progress. The PEA represents one viable option, but other options are under consideration and plans could change if the markets move.
"One thing I like about this overall strategy is the optionality that we retain," Nauman said. "If there is – and god speed the day – a spike in the silver price, we could move relatively quickly to put Bellekeno back into production. At Lucky Queen there's a couple hundred metres of development to finish up to put that deposit online. And we also have Onix, which is essentially developed. It's a zinc-based resource that would be very interesting if there's a zinc price increase."
Alexco continues to work on ways to reduce its costs at Bellekeno, one of which will be a shift to owner operated mining. The company already owns the underground mining fleet, but had used a contractor to operate the machines.
Located 330 km north of Whitehorse, the project is connected to the Yukon's power grid and is road accessible. There are some 35 historic mine sites within the 234 km2 property.
In 85 years of production the Keno Hill district produced 5.3 million tons (4.8 million tonnes) of ore carrying average grades of 1,390 g/t Ag, 5.62% Pb and 3.14% Zn. During Bellekeno's last full quarter of production the mill processed 283 tonnes of ore per day. Head grades averaged 751 g/t Ag, 7.1% Pb and 4% Zn.
On news of the PEA, Alexco's share price gained a penny to close at $1.32. In February, shares were worth $4.60. Alexco has 63 million shares outstanding.
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