Junior clears hurdles at Prairie Creek

Canadian Zinc Corp. in recent weeks has reported significant progress in wading through the final regulatory and financial obstacles that could potentially bar its path to bringing the Prairie Creek Mine Project into production.

Prairie Creek Mine is an advanced-staged zinc-lead-silver project located 500 kilometers (310 miles) west of Yellowknife in southwestern Northwest Territories. Canadian Zinc is working to develop a 1,000-metric-ton-per-day underground mining operation at Prairie Creek using multiple methods to access readily available ore. Proposed production rates will reach 1,350 metric tons per day.

Thanks to decades of development efforts by the Vancouver-based junior and its predecessors, Canadian Zinc has a majority of Prairie Creek's required infrastructure in place, including a mill, five kilometers (three miles) of underground workings and related equipment, 120-man camp, a heavy-duty and light-duty surface fleet, three exploration diamond drills and a 1,000-meters-long airstrip. The mill, which was almost completely constructed but never operated in the early 1980s, will have a 1,500 tpd crushing capacity, with an installed jaw crusher, short head cone crusher, double-decked screen and a 2,000-metric-ton ore bin.

85 years of exploration

Mineralization was discovered at Prairie Creek in 1928 by Poole Field with limited work conducted on the property until 1966. Intermittent exploration work continued on the property over the next 47 years, including an ill-fated joint venture involving the Hunt Brothers of Texas in the 1980s.

In 1991, Canadian Zinc (then known as San Andreas Resources Corp.) acquired an option for a 60 percent interest in the property from Conwest Exploration Co. Ltd. The company subsequently, acquired the remaining 40 percent ownership interest in the 8,218.3-hectare (20,308 acres) property, which comprises two surface leases, 12 mining leases and one additional mineral claim.

Since 1991, Canadian Zinc has completed surface diamond drilling and an underground exploration program which has greatly expanded the inventory of known resources on the property. In 1992, the discovery of the stratabound-type mineralization in the main zone opened up multiple exploration targets for deposit expansion.

In 1993 and 1994, Canadian Zinc completed initial environmental assessment research, further metallurgical studies in addition to diamond drilling. A drill program in 1995 explored for the extension of the vein to the north on 200-meter step-out sections. All drill holes successfully intersected the vein structure and demonstrated the continuance and strength of the vein, which now has a strike trend length of 2.1 kilometers and remains open at depth and along strike.

Ongoing exploration in the ensuing years continued to expand the area of high-grade mineralization on the property.

High-grade resources

A June 2012 NI 43-101-compliant technical report published an updated resource estimate of 5.43 million metric tons at a grade of 10.8 percent zinc, 10.2 percent lead, 160 grams-per-metric-ton silver and 0.31 percent copper in measured and indicated resources for the project, including a reserve of 5.22 million metric tons averaging 9.4 percent zinc, 9.5 percent lead, 151 g/t silver. The report, prepared by AMC Consultants, also confirms a large inferred resource of 6.24 million metric tons grading 14.5 percent zinc, 11.5 percent lead, 229 g/t silver and 0.57 percent copper and additional exploration potential.

A prefeasibility study completed by SNC-Lavalin in June 2012 estimates the project's capital cost at C$193 million, including a C$33 million contingency, and indicates a pre-tax net present value of C$253 million using an 8 percent discount rate, with an internal rate of return of 40.4 percent and a payback period of three years, using long-term metal prices of US$1/lb zinc, US$1/lb lead and US$26/oz. silver, based on the project's defined mineral reserve.

Pre-production capital costs, excluding contingency, is estimated to be C$160 million of which C$42 million will be incurred in year 1 and C$118 million in year 2.

Average life-of-mine cash operating costs of ore mined (before transportation costs) are estimated at C$144 per metric ton and a LOM sustaining capital of C$11 million.

The PFS also estimated C$41 million in working capital, which includes a C$7 million contingency and the cost and delivery of materials, supplies and fuel for the first season of operation, in addition to the first three months of operating expenditures, with the assumption the concentrate will be sold as produced.

During an estimated 11-year mine life, it is expected that the Prairie Creek Mine will generate average annual production of 60,000 metric ton of zinc concentrate containing 76 million pounds of zinc, and 60,000 metric tons of lead concentrate, containing 90 million lbs of lead. It also is estimated that the two concentrates will contain more than 2 million troy ounces of silver, with the majority of the silver reporting to the lead concentrate.

The study does not take into consideration the project's inferred resources, which are currently too speculative geologically to have economic considerations applied to them; however, if upgraded to measured or indicated resource categories, the inferred resource could add to the mine life.

In November, Canadian Zinc reported results of its 2012 diamond drilling program at Prairie Creek, including completion of 5,629 meters of coring in 12 holes. Exploration focused on two areas: The mine site area, where further shallow testing and extension of the current resources was completed, and at Casket Creek where a deep-hole program continued from the previous year.

The results include assays from drill hole PC-12-216, which returned a grade of 2,059 g/t silver, or 60 ounces per ton silver, over 1.3 meters, the highest-grade silver intercept ever reported from the property. The same hole also returned a combined grade of 51.3 percent lead + zinc over a different intercept of 1.0 meters. Many other intercepts returned multi-ounce silver assays with high lead and zinc values, with Hole PC-12-214 reporting double intercepts of 44 percent and 23 percent combined lead + zinc, and Hole PC-12-215 also reporting double intercepts of 43 percent and 16.2 percent combined lead + zinc.

Canadian Zinc officials said the 2012 drill program close to the Prairie Creek Mine site was designed to fill in a number of open areas and also to test for extensions of the known resource and the drill results continued to confirm the grade and extent of the deposit. The delineation of a new strong coincident EM and gravity geophysical anomaly about one kilometer from the mine site is particularly encouraging and testing this anomaly will be a high priority of the 2013 exploration program," they added.

A new partner

Canadian Zinc May 31 reported success in attracting a partner to help finance construction and startup of the Prairie Creek Mine. The company sold a 1.2 percent net smelter returns royalty on future production from the Prairie Creek Mine to Sandstorm Metals & Energy Ltd. for US$10 million.

Vancouver-based Sandstorm finances resources projects through an arrangement called "commodity streaming." A commodity stream involves Sandstorm making an upfront payment to a resource partner that is in need of capital to build a project, refinance obligations, complete an acquisition or resolve various other concerns. In exchange for the upfront payment, Sandstorm receives the right to purchase a certain percentage of a commodity produced from the project, for the life of the asset, at a fixed per-unit cost. In addition to Canadian Zinc, Sandstorm has inked similar deals with companies developing copper, natural gas and palladium projects.

As part of the agreement, Sandstorm granted Canadian Zinc the option, for a period of 30 months, to repurchase 100 percent of the NSR without premium or penalty for US$10 million, provided the junior enters into a metal stream agreement with Sandstorm under which Sandstorm will provide Canadian Zinc with an upfront deposit of not less than US$90 million to be used to finance part of the capital cost to develop the mine.

"We are very pleased that Sandstorm has committed to participate in the financing of the development of the Prairie Creek Mine and has already made an upfront investment of US$10 million," said Canadian Zinc President and CEO John F. Kearney. "We are also very pleased to have successfully raised US$10 million in a weak market for resource companies and without diluting our share capital."

Sandstorm President and CEO Nolan Watson said, "Prairie Creek is a high-grade project that has significant exploration potential. Canadian Zinc's management team has done an excellent job developing the project, while working towards securing their final permits."

Trevor L. Cunningham, Canadian Zinc's chief financial officer and vice president, finance and CFO, said "the non-dilutive nature of an NSR, or the potential metal stream, is a real positive for our shareholders. As Canadian Zinc moves forward to the construction stage, it is gratifying to have strong financial partners like Sandstorm."

About 200 people are expected to be employed during initial construction at the project. Canadian Zinc's hiring policy is to give preference to qualified local residents, followed by northern residents. Training programs, some of which are currently underway, will be organized to further maximize local employment.

Sandstorm, meanwhile, has entered into a back-to-back agreement with Sandstorm Gold Ltd. whereby Sandstorm Gold has purchased the expected silver revenue in the NSR from Sandstorm Metals for US$3.2 million.

Canadian Zinc also granted Sandstorm a right of first refusal on any future royalty or stream financing for the Prairie Creek project.

Regulatory progress

The Mackenzie Valley Land and Water Board recently completed its regulatory process for the issue to Canadian Zinc of a type "A" water license for the Prairie Creek Mine, and in June, forwarded the license to the federal minister of Aboriginal Affairs and Northern Development Canada with a recommendation that the minister approve and sign the license.

"This Type 'A' Water Licence is the key regulatory permit needed for the construction, development and operation of the Prairie Creek Mine" said Alan B. Taylor, chief operating officer and vice president of exploration for Canadian Zinc.

"The successful completion of the regulatory process is the culmination of many years of effort by the Canadian Zinc team, the Mackenzie Valley Land and Water Board, the various government agencies and all the stakeholders in the region.

The positive recommendation of the Land and Water Board demonstrates that a broad consensus has been achieved through the process and we look forward to receiving the approval of the Minister and the issue of the (water license) in due course."

In its recommendation to AANDC's minister, the Land and Water Board provided some comments on the issues faced and the decisions made in respect of this license.

The board accepted the site-specific water quality objectives derived by Canadian Zinc.

These are almost all more stringent than the country-wide guideline values adopted by the Canadian Council of Ministers of the Environment.

The board also determined, after many months of review and study, that effluent quality criteria using a variable load-based discharge approach, as proposed by Canadian Zinc, will be a more protective and practical way of controlling effluent discharge from the mine to Prairie Creek.

The board said it recognizes that this is a new approach compared to the standard fixed EQC, but believes that practical and effective mechanisms can be put in place to ensure compliance.

Upon receipt of ministerial approval, the new type "A" water license will permit Canadian Zinc to conduct mining, milling and processing activities at the Prairie Creek.

Mine Site, use local water, dewater the underground mine, and dispose of waste from mining and milling.

In January, the board issued a land use permit, which permits the construction, maintenance, operation and use of the winter access road connecting the Prairie Creek Mine to the Liard Highway. This permit allows the outbound transportation of the zinc and lead concentrates produced at the mine, and the inbound transportation of fuel and other supplies during the actual operation of the Prairie Creek Mine.

In June, the board issued another land use permit, which allows Canadian Zinc to extract ore and waste rock from the Prairie Creek Mine, operate a flotation mill concentrator to produce zinc and lead concentrates, create a waste rock facility, and refurbish and develop site facilities in support of the mining operation, along with the eventual closure and reclamation of the mine site.

The board also issued a third land use permit that permits the company to build and operate the Liard Transfer Facility to be situated near the junction of the existing Prairie Creek Mine access road and the Liard Highway. The Liard Transfer Facility is a staging area at the south end of the winter access road designed to temporarily store outbound concentrate and inbound supplies.

Following the approval of the type "A" water license by the minister, and receipt of a final

Land use permit and a type "B" water license from Parks Canada for the portion of the realigned access road within the Nahanni National Park Reserve, Canadian Zinc will have secured all water licenses and land use permits required to operate the Prairie Creek Mine. The company currently holds a land use permit issued by Parks Canada for the use of the original road route through the Nahanni Reserve to resupply the mine site during exploration activities.

Permitting background

The permit applications for the Prairie Creek mine operations have undergone an extensive regulatory, environmental assessment and permitting process which began in June 2008 when

Canadian Zinc applied to the Land and Water Board for a water license and associated LUPs to support a mining operation at Prairie Creek.

Canadian Zinc initiated the regulatory review process in 2008 when its applications were referred to an environmental assessment by the Mackenzie Valley Environmental Impact Review Board, the primary authority responsible for all environmental assessment and review throughout the Mackenzie Valley in the Northwest Territories, and underwent various stages within the EA that included a written hearing, submittal of a developers assessment report, information requests, technical sessions, a community hearing, a two-day public hearing, and final submissions.

On Dec. 8, 2011, the Review Board issued its report of environmental assessment and reasons for decision and concluded that the proposed development of the Prairie Creek mine, including commitments made by Canadian Zinc during the proceedings, is not likely to have any significant adverse impacts on the environment or to be a cause for significant public concern.

The Review Board found that there was broad support among aboriginal organizations and communities in the Dehcho Region for the benefits that the Prairie Creek mine could bring to the Dehcho Region of the Northwest Territories.

A socio-economic agreement signed between Canadian Zinc and the Government of the

Northwest Territories was a key document in the Review Board's findings on impacts of the project on the human environment. In the Review Board's view, the Prairie Creek mine is not likely to have significant adverse impacts on the human environment of the Dehcho Region or the Northwest Territories provided the developer's commitments are followed and enforced and the socio-economic agreement is implemented.

In a decision dated June 8, 2012, the Minister of Aboriginal Affairs and Northern Development, on behalf of the responsible ministers with jurisdiction, including Environment, Fisheries and Oceans, Environment and Natural Resources, Transport Canada and the Government of the Northwest Territories, advised the Review Board of the decision that the ministers would not order an environmental impact review of the proposed development of the

Prairie Creek Mine project, nor would they refer the proposal to the Minister of the Environment for a Canadian Environmental Assessment Act joint panel review.

Meanwhile, the Water Board began the regulatory process in January 2012 for the issue of a type "A" water license and associated land use permits.

After the original applications for the operating permits had been submitted to the Water Board in 2008, the adjacent Nahanni Reserve was expanded in 2009 and now encircles, but does not include, the Prairie Creek Property.

The expanded Park area, however, does include a significant portion of the 185-kilometer (115 miles) Prairie Creek Access Road route.

When the Reserve was expanded, the Canada National Parks Act was amended to enable the Minister of the Environment to enter into leases or licenses of occupation of, and easements over, public lands situated in the expansion area for the purposes of a mining access road leading the Prairie Creek area, including the sites of storage and other facilities connected with that road.

The applications for land use permits, and water licenses relating to the road access became multi-jurisdictional and Canadian Zinc applied to both to the Water Board and Parks Canada for road-related permits and licenses.

The permit applications underwent various stages within the regulatory process and included the submission of a consolidated project description report, information requests, a technical session, written interventions, additional water quality/treatment studies, public hearings in Fort Simpson and Nahanni Butte and closing statements.