Keno Hill still promises silver payday

KENO HILL - Here amid hills dusty with glacial silt in the eastern Yukon, miners have tapped rich veins of silver and gold for nearly a century, right up until silver prices tanked in the late 1980s.

In its heyday, the historic Keno Hill silver mining district boasted more than 40 producing mines and at least two bustling villages, Mayo and Keno City. Miners not only grubbed for pay dirt, they made homes in the valleys beneath the mines and raised families while extracting the gray precious metal.

In all, the district has produced more than 217 million ounces of silver, or 5.37 million tons of ore with average grades of 40.52 ounces per metric ton silver, 5.62 percent lead and 3.14 percent zinc, according to Canadian government records. Much of that production occurred during the nearly 40 or so years that the mines operated under one organization known as the United Keno Hills Mines.

Today, Alexco Resource Corp., a mining company with a branch that specializes in cleaning up environmental hazards at abandoned mines that dot the Canadian countryside, is the dominant player in the Keno district.

Alexco is tackling a host of challenges across a 25-kilometer-long expanse of old mining camps, not only exploring for new resources but also battling a substantial and recurring environmental hazard created by acid drainage from the abandoned mines.

When the last of 42 mines shut down in 1989, they were declared abandoned. In 2005, the Canadian government put the district up for sale. Seven companies bid for the properties, and Alexco won the bid acquiring 14,980 hectares, or about nearly 4,400 acres, of mining leases, quartz claims and crown grants. The area came with 35 historic mines boasting a silver resource currently estimated to exceed 1 million tons with grades averaging 31.5 oz/t silver, 3 percent lead and 2.2 percent zinc.

"Our bid addressed care and maintenance," said Robert McIntyre, vice president of business development at Alexco. "It addressed the whole site, and it addressed cleanup. We put down $10 million toward the cleanup even though the government said it is responsible for the cleanup.

In addition to winning the reclamation contract, Alexco won the right to explore the properties for possible future production.

The company is busy pursuing both opportunities at Keno Hill.

Bio-solutions may be answer

"Our goal is to mitigate the risk and unlock value," said McIntyre, during a tour of surprisingly spacious indoor offices in the old mining camp. "We're getting a handle on the clean up. We spent $750,000 in 2007 on care and maintenance. We have 3 1/2 years to get it right."

So far, the company's efforts to tame the beast at the Keno Hill mines have met with only temporary success.

"It's not easy," McIntyre said. "It killed the last two companies that tried to clean up these mines."

The problem is the highly acidic content of water draining from the abandoned mines.

"You might as well call (what we're doing) Tums® for the mountain area," McIntyre said. "We go through one ton of lime a day to boost the PH of the drainage to 7 or 8."

This neutralizes the acid but is only a temporary fix that must be continuously repeated.

Alexco is hoping that one of the technologies developed by its new environmental services subsidiary, formerly Denver-based Greenworld Science, will provide a permanent solution to the Keno Hill district's acid drainage problem.

Greenworld Science holds more than six patents for new cleanup technologies, along with other patents pending,

"We're looking for bio-solutions to reclamation," said McIntyre.

"We've got to get the mountain off the drugs," he quipped. "We need a better approach and a permanent closure plan."

Alexco also must clear away physical hazards at the old mines, including hidden shafts, some of which are 700 feet deep, company officials say.

In addition, the would-be miner must decide what should be cleaned up and what should be preserved at the mine sites.

"One man's garbage is another man's historic site," said Mike Burke, acting director of the Yukon Geological Survey. He cited the old tram lines with their 50-foot timbers that dot the landscape in the Keno Hill district as examples, saying they should be part of a historic preservation effort in the area.

Award-winning work at Brewery Creek

In this aspect of the cleanup, Alexco has an exemplary track record.

The company's senior management team, led by President and CEO Clynt Nauman, has been recognized for its award-winning reclamation and closure performance at the abandoned Brewery Creek gold mine, located in the Tombstone Mountains east of Dawson City.

The company received the Robert E. Leckie Award for Outstanding Reclamation Practices in both 1999 and 2002. In 2003, industry and government representatives also praised Alexco's work at Brewery Creek for leadership and innovation in mine reclamation technology.

At Keno Hill, Alexco can expect multiple payoffs from the cleanup effort. The Canadian government is paying for the actual reclamation work from a multibillion-dollar public fund set aside for the purpose of cleaning up abandoned mines in Canada.

The cleanup at Keno Hill also should speed Alexco toward its ultimate goal of developing new silver production from the property.

After all, the previous mine operation closed in 1989 because of low silver prices, not a lack of resource, McIntyre points out. In fact, in one year of drilling, Alexco has doubled the known resource on the property and discovered a new silver deposit, Silver King East.

Data bonanza

Another payoff for Alexco will come from its successful acquisition of mining records on the property.

When workers were told United Keno Hill Mines had gone belly up in 1989, they stopped what they were doing, packed up their families and drove away. Or that's what appears to have happened, based on what they left behind.

Those who later entered the United Keno Hill offices reported finding half-empty coffee cups on desks and other everyday articles strewn about in the wake of an abrupt departure.

When Alexco got there, reclamation workers discovered desktop computers with intact hard drives sitting at workstations in dilapidated rooms with water dripping from the ceilings.

"We got there just in time," McIntyre recalled.

Alexco rescued what amounted to nearly 100 years of data on the district's mines.

"We found whole rooms of old drilling logs, some 6,000 records," he said. "We digitized the records and made 3-D models. It took us three years."

That amount of data would take a geologist a lifetime to analyze, said the Yukon government's Burke. "To be able to put that into a modern geological aspect and sit down around a computer for a couple of hours and get an understanding that formerly would have taken months is remarkable," he added.

Alexco's success in retrieving the Keno Hill data has propelled the company down yet another avenue of potential mine reclamation services.

"We put in a proposal with the (Canadian) government to digitize the data in the Faro vaults as well," he said. Faro was another large Yukon mine abandoned in the wake of low metals prices in the 1980s.

Exploring old ground for new resources

Exploration drilling, so far, has focused on helping Alexco gain a better understanding of the mineralization in Keno Hill and the surrounding area.

The claims held by Alexco cover 25 kilometers and more than 30 silver producing mines. Also, the company last year acquired a nearby placer gold mine, Spring Mountain, where the previous owner was producing 2,000 oz/t.

"We're focusing on Bellekeno. It had the largest amount of known resource on the property," said Chief Geologist Stan Dodd.

The Bellekeno Mine contains an inferred resource of 537,000 metric tons, containing 1,016 g/t silver, 13.5 percent lead, and 10.7 percent zinc. The resource remains open to the west and down plunge.

Geologically, the Keno Hill District is composed of sedimentary rocks that metamorphosed to quartzite and schist during several tectonic events. The main feature is pervasive faulting where fluids bubbling up from deep underground infiltrated cracks and fissures in the rocks and chemically interacted with them to form silver mineralization, also called galena.

Dodd said one advantage for Alexco is its control over data for the whole district, which helps in being able to understand the area's geology. One reason is the district historically produced two different types of silver cons.

"We like what we see in Bellekeno, so we will spend a lot of time understanding that before we focus on the rest of the district.

Alexco released results in early July of a preliminary economic assessment of the Bellekeno deposit, which outlined a viable project with average annual production of 3.3 million ounces silver, 30.1 million pounds lead and 24.5 million pounds zinc over a 5-year mine life.

Prepared by SRK Consulting (Canada) Inc. with Wardrop Engineering responsible for metallurgy, mineral processing, infrastructure and cash flow analysis, the preliminary economic assessment used a base-case pretax net present value of $87 million at an 8 percent discount rate with a pretax internal rate of return of 55.5 percent and a payback period of

1.6 years. The base case used three-year average prices for silver, lead and zinc and the monetary exchange rate between the United States and Canada.

At current metal prices, the net present value increases to $106.7 million with an internal rate of return of 64 percent. The average Life of Mine net smelter return per metric ton of ore is C$596 against life of mine operating costs of C$206/t of ore, and the average silver production costs on a per-ounce basis, net of by-product revenue, is negative 33 cents per ounce.

To develop Bellekeno, Alexco envisions building a small-scale portable mill designed to process ore at a rate of 400 metric tons per day. This would be a more cost-effective approach for extracting concentrate from a series of small high-grade deposits, McIntyre said.

The National Instrument 43-101-compliant preliminary economic assessment projected a capital cost of C$61.2 million for a mine at Bellekeno with a payback period of 1.6 years. The estimate included C$10 million for development work already being carried out as part of current Bellekeno underground rehabilitation in preparation for advanced underground exploration and definition drilling scheduled for later this year. Another C$12.45 million in sustaining capital would be needed over the 5-year mine life.

Production at Bellekeno also is seen as a potential springboard to additional development.

Different styles of silver ore

But Alexco's geologists say they are puzzled by "metal zonation" they've encountered in the Keno Hill deposits. While some silver ore appears to be enriched with zinc, gold and lead with grades averaging 30-40 oz/t, other mineralization like that at the Lucky Queen appears to be totally different, with wire silver in ore averaging more than 80 oz/t, with intervals of more than 1,000 oz/ton.

"There are lots of different styles of mineralization in the district," said Dodd.

The company has a drilling underway and plans to analyze its results later this year before beginning underground drilling in the fourth quarter.

"With the deeper ore bodies, it's more effective to test them from underground," Dodd said. "We're trying to explore the rest of the district using a systematic approach, starting with Lucky King, Husky and Silver King and then going to Hector-Calumet.

Surface exploration using two diamond drills is ongoing on target, including the historic Onek zinc-silver mine area adjacent to Bellekeno Mine, and the Lucky Queen, Keno 700, and Hector-Calumet historic mine areas.

Alexco received a mining land use permit needed to complete an advanced underground exploration program at Bellekeno, extract a bulk sample from the silver-rich Southwest Zone, and rehabilitate the historic workings in preparation for a production decision in early 2009.

The mining land use permit was secured on schedule, and a second permit, a Type B Water Use License required for mine dewatering, is proceeding as planned, the company said.

A production decision in 2009

Procon Mining and Tunneling Ltd., the contractor engaged to carry out the redevelopment, has been on site since April completing preparatory work including establishing a portal for a 650-meter decline to access the former workings, and progressing underground rehabilitation work in the former primary access way. The new decline, which will take about four months to drive, will intersect the former workings in the area of the 99 Zone, which is centrally located between the silver-lead-rich Southwest zone and the zinc-silver-rich East zone. After connecting the new decline to the former workings, the mine will be dewatered and rehabilitated as appropriate.

Underground definition and exploration drilling is expected to begin in this fall, initially focused on further defining and expanding the silver-lead mineralization outlined in the 99 and Southwest zones where surface drilling in 2007 outlined an inferred resource of 357,800 metric tons containing 1,394 g/t silver, 19.0 percent lead, and 5.5 percent zinc. A bulk sample also will be extracted from this zone to confirm metallurgical recoveries and mining conditions.

Alexco's objective is to obtain sufficient results from the advanced exploration and bulk sampling programs to make a commercial development decision on the Bellekeno Mine in early 2009.

If the project gets the green light, McIntyre said production would begin in 2010.

Between reclamation and ongoing exploration, Alexco currently employs 71 workers at the project. That number would jump to nearly 200 with startup of silver production.

A relatively rapid startup would be possible at Bellekeno because the project has been permitted twice already; Alexco has an in-house permitting group and good relations with local First Nations groups; its environmental arm knows the site well and the company has a mature understanding of the property.

Also, the abandoned mines provide extensive, if somewhat spotty, infrastructure. Some buildings on site are still habitable.

"Typically, a company at this stage would be in a wall tent and here we are, using a curling rink with a cement floor for a core shack," observed Mcintyre during the tour.