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Alexco Resources: A Problematic Asset (Purchased at a Discount) is Still a Problematic Asset

This morning’s announcement of Hecla Mining's (HL) all-stock deal for Alexco Resources (AXU) should be taken with a sigh of relief from frustrated Alexco shareholders as the problematic Keno Hill property will now become someone else’s money trap (Hecla), while providing an implied modest 23% premium to the pre-announcement, 5 day vwap of Alexco shares. Note that Alexco shares are down by 77% since the recent March 21, 2022 highs as Keno Hill has constantly been plagued by ramp-up delays and missed deadlines for commercial production. We do see some potential synergies with Hecla’s Greens Creek operation (located in Alaska), most immediately on the transport front with Keno Hill located approximately 500 miles north in the Yukon. But that said, the $74M transaction is on paper at least, extremely well priced for an asset which encompasses 88 square miles and boasts a reserve of 37.2M ounces of silver (along with a total M&I resource of 83.0M silver ounces), with grades higher than those at Greens Creek. Regardless however, the key to note is that a problematic asset purchased at a discount …is still just that - a problematic asset. Though our initial thoughts were that of Hecla’s disastrous 2018 purchase of Klondike Mining, the problem with Alexco’s Keno Hill will not be related to resource conversion, but rather will be on the operational and potentially engineering front. Despite intermittent production since the receipt of the water use license (WUL) in 2020 (and with it, a re-start decision) production was always well below nameplate capacity while steady state, 400 tpd commercial production was never achieved.

Make no mistake, a company that slides 77% from the recent March 2022 highs is a company in distress. Just on June 22, Alexco provided an operational update for operations at Keno Hill, highlighted again by a failure to consistently sustain a 400 tpd feed rate (the mill operated for only 16 days in May, with only 9 days at or above the 400 tpd nameplate capacity). Given the imbalance, a decision was made to suspend operations for 5-6 months in order to advance (rework?) the underground development and build inventory at Bermingham and Flame & Moth instead. With likely half a year of delayed production against a negative working capital position and nearly $6.0M payable on a revolving credit facility (LIBOR +7.05%) which normally is repaid against future deliveries of concentrate or settled in cash, a very dilutive equity raise was all but a done deal. Ironically, the heavy dilution will now come to Hecla as they issue $135M in shares to Wheaton Precious Metals (WPM) in order to terminate the silver stream on Keno Hill.

Will Hecla finally have the engineering or operational know-how to finally get Keno Hill into commercial production ? Management did point out that it took Greens Creek 10 years to finally become CF positive and the hope is that Keno Hill (although much smaller) will be handled similarly. Even if Hecla does manage to finally extract value from Keno Hill, it will come at a steep price as a $30M secured loan is being provided to Alexco and the estimate is that potentially another $20M will be required. And don’t expect a turnaround anytime soon, Hecla management expects between 12-18 months of work needed before feeding the mill. It is extremely doubtful that a superior bid will materialize for Alexco. Hecla may have just beaten out McEwen Mining (MUX) for this one (McEwen being another serial acquirer of discounted and questionable assets). Jokes aside, the transaction is expected to close sometime in Q3/2022.

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