Mar 30, 2017
Executives
Michael Clark - CFO & Company Ethics Officer Clynton Nauman - President & CEO Brad Thrall - EVP & COO
Analysts
Mike Kozak - Cantor Fitzgerald Mike Niehueser - Scarsdale Equities John Tumazos - John Tumazos Very Independent Research
Operator
Good day and welcome to the Alexco Fourth Quarter and Year End Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Mr. Mike Clark.
Please go ahead sir.
Michael Clark
Good morning. Today is Thursday, March 30, 2017, and I’d like to welcome you to Alexco Resource Corp.
December 31, 2016 fourth quarter and year end conference call. This conference call is being webcast live and can be accessed at the Company’s website at www.alexcoresource.com.
You may sign up on the Alexco website to receive feature news releases and other event updates as they are issued. You’ll also find Alexco’s news releases with annual financial results there.
This conference call will be recorded and archived on the Company’s website under events and webcasts. Giving presentations on today’s call will be Clynt Nauman, President and Chief Executive Officer; Brad Thrall, Executive Vice President and Chief Operating Officer; and myself Mike Clark, Chief Financial Officer.
We’ll have an opportunity for a question-and-answer period after our presentations. Before we get started, I need to remind you that some statements made today may contain forward-looking information, our business involves a number of risks that could cause results to differ from projections, and investors are urged to consider those disclosures and discussions pertaining to risks that can be found in the Company’s, Alexco’s SEDAR filings.
It should also be noted that past performance discussed in this conference is not indicative of future results. So now, I’d like to turn the call over to Clynt Nauman.
Clynton Nauman
Thanks Mike. Thank you for joining us today for our review of the 2016 fourth quarter and the 2016 year.
At the outset, I would like to apologize for the delay in filing earnings and related financial statements until yesterday Wednesday instead of Tuesday as previously advised. As we can probably appreciate, based on the news, we were little over ambitious thinking we can put a pin in all moving parts at the same time and we elected to wait until everything was complete so that you can see the whole picture -- a picture which I think is a start of rebranding the Company from explorer developer to developer and hopefully producer.
We released our financial results yesterday outlining a net loss of $4.4 million for the year ended December 31, 2016. At the end of the day, non-cash costs make-up much of this loss and these will be explained later by Mike.
Alexco's unrestricted cash position at December 31st was $20.3 million, while networking capital was $23.4 million because I say it more from Mike a little bit. So what we're planning to do on the scroll is to cover three or four important areas and recent accomplishments at the Alexco, which together will hopefully paint the picture of where we are and where we’re going.
I’ll start with the few 2016 highlights, we’ll move on to a description of the amendment of the silver purchase agreement between Alexco and Silver Wheaton signed yesterday. And at that point, Brad Thrall will pick it up and outline the highlights of our updated PEA also filed yesterday.
And finally, Mike Clark will walk through some reasonable financials. In terms of 2016 highlights, most of you are aware of course that we completed a very successful diamond drill program at the Bermingham deposit last summer, drilling about 50 holes for a total of just over 17,000 meters.
Drill was also extended the previously defined Arctic Zone of silver mineralization and outlined a new zone of high-grade silver beginning approximately 160 meters from surface and extending at least 270 meters down plunge were remained to open. This was a basis for an updated mineral resource and that expanded the indicated mineral resources of Bermingham from 5.2 million ounces to 17.3 million ounces, while inferred mineral resources increased from approximately 0.7 million ounces to 5.5 million ounces of contained silver.
You will be aware of course with some of this mineralization is very high grade, but that’s not necessarily unique at the Keno Hill and its historical perspective. Second point in terms of highlights, as I said earlier on May ’17 and 2016, we closed a non-brokered private placement primarily with Sprott Wealth Management for gross proceeds of just over $13 million, which helped bolster our cash position to an ending balance of 20 million at year-end as previously mentioned.
And lastly in terms of these highlights, AEG had a positive year with over 11 million in revenues, maintaining a gross margin of 25%. The reduction of revenues in 2016 is mostly related to a slower pace of the planning work of the Keno Hill clean up for the Federal Government of Canada and that work is expected to increase in 2017.
And also the lower revenues are related to a smelter completion of construction or remediate work of the Globe and Gold team projects in Colorado. Before moving on to the discussion of Silver Wheaton, I will highlight that in 2017 we’re planning to continue our service exploration program at Bermingham and in the immediate vicinity where we see opportunity to test additional blind structural targets then mimic the Bermingham structural setting.
We’ll drill at least 12,000 meters another $3 million odd and the bulk of the service exploration to be carried out in this summer with result expected no latest than the fall of 2017. So, moving to Silver Wheaton, as you may have seen in the press release filed yesterday, we signed an amendment to a silver purchase agreement with Silver Wheaton.
We believe that this announcement along with the updated PEA represents an exceptional outcome for Alexco and positions the Alexco shareholders about as well as can be expect for long-term success in the Keno Hill Silver District. The new arrangement with Silver Wheaton is innovative.
The Silver Wheaton stream remains 25% of payable silver, but the production payment is Silver Wheaton makes to Alexco for Silver varies on a combination of head grade and silver price, and on this basis in a grade and pricing curve which has both the floor and ceiling in terms of grade and price. The production payment will increase with lower silver head grades and lower silver prices and will decrease with higher silver head grades and higher silver prices.
To put this simply, the structure accommodates continuing production through periods of low prices and meets the additional objective significantly improving mine efficiency as it brings into the mine plants lower grade material they may have been uneconomic under the prior agreement. By way of example at today's spot prices with an average fee grade of 843 grams silver per ton as is reflected in the PDA.
The production payment would be $7.31. But if those head grades fail to say 600 grams per ton, the production payment from Silver Wheaton would be approximately $11 per ounce.
Conversely, if we are mining 1100 gram per ton, material high grade material, the payment is closer to $4 per ounce of silver. Clearly, the arrangement is a catalyst to spare redevelopment and put Alexco on the road to future production at Keno hill.
Finally, this structure not only protects us during periods of lower silver prices, but it does so without limiting the upside opportunity of either Alexco or our Silver Wheaton. We have worked very hard with our partners at Silver Wheaton to device this innovative and flexible structure that will enable sustain production over the long term and we certainly commence Silver Wheaton for their dedication of time and effort to arrive of this mutually beneficial outcome.
To be fair, I think it also points to the resilience of Alexco. At the end of the day, we continued exploration during a period of tough markets and suspended operations and we have been rewarded with about eight years of new mine life primarily in two discoveries Flame & Moth and Bermingham, totaling about 23 million ounces of new silver resource and average grade of around 800 grams per ton.
Just to reiterate and as you have seen in our press release, we have provided the formula for determining production payment that we will receive from Silver Wheaton. While it may appear complex, the resulting production payment is simply a percentage of spot silver price that changes based on silver grade and price.
By focusing on the two key determinates of sustainable long-term production namely price and grade, we believe that we've landed on a formula that provides the flexibility, not only for our existing mines, but also future discoveries at Keno Hill. As consideration for entering into the Amended silver agreement, Alexco has agreed to issue 3 million shares to Silver Wheaton.
We are pleased to welcome Silver Wheaton as a shareholder and appreciate their vote of confidence in Alexco and continue support for Keno Hill. In summary, this amendment is exceptional outcome for Alexco, it is innovation and it is accretive to our shareholders from a net asset value perspective.
It also positions the Keno Hill Silver District clearly on a path toward redevelopment and ultimately a production decision. At this point, I am going to turn it over to Brad Thrall to review the results of the PEA.
Brad Thrall
Thanks, Clynt, and good morning everyone. As Clynton mentioned, I am going to walk through the PEA and just provide a high level overview of some of the more selling points of the PEA that we did file yesterday evening.
The PEA incorporates a multi-mine four mine plant at the Keno Hill district, expands a nine year development on operating period. The time period in the PEA begins in the second quarter of this year 2017 and extends into the fourth quarter of 2025.
During this period, the total ore mine from four separate underground deposits includes 1,020,000 tons of ore at an average head grade of 843 grams per ton of silver, 3.3% lead, 4.6% zinc and about 4.4 grams per ton of gold. The PEA lays out a mine plant and is centered on the production from the Flame & Moth mine, which provides about 67% of the total life of mine [indiscernible] over this period.
Supplemental ore is then sourced from the Bellekeno mine during the first six months of the plan and then followed by Flame & Moth and Bermingham mines operating together over the next five years. Near the end of the mine life, the Lucky Queen mine comes on stream and provides additional mill feed for the remaining two years of the project life.
Prior to a production decision, our plan is to drive 600 meter decline of Bermingham this year and complete in advanced underground exploration program totaling approximately 5,000 units of drilling underground. The nominal production rates for each of these mines are designed around 250 tons per day from Bellekeno, 130 tons per day from Lucky Queen, 140 tons per day from Bermingham and 260 tons per day from Flame & Moth.
Mining methods are predominantly all mechanized cut and fill with the trend toward long-haul and drift and fill mining methods in areas of increased thickness of vein. The life of mine production schedule includes an annualized average production rate of 390 tons per day over an eight year operating period and that results in approximately 3.5 million payable ounces of silver per year.
The total payable production of metal over that project life is approximately 25.1 million ounces of payable silver, 77.3 million pounds of zinc, 67 million pounds of lead and 4,800 ounces of gold. More importantly during the first three years of full production while the Flame & Moth and Bermingham mines are operating together, the production profile includes a 143,000 tons per year of ore processed through the Keno District mill, producing 4.1 million ounces -- payable ounces of silver per year.
The average silver head grade during that first three full years is just over 930 grams per ton. In terms of the overall economics of the project and the PEA, the pre-tax and after tax NPV is $104.3 million and $79.4 million respectively.
And the pre-tax and after-tax IRR is 89% and 75% respectively. These economics are based on silver prices of $18.60.
announce in 2018 and then long-term consensus price $19.35 in 2019 through 2025. Using today approximate spot metal prices and US-Canadian ForEx, the project has a pre-tax and after-tax NPV of $121 million and $90 million respectively and a pre-tax and after-tax IRR of 92% and 78% respectively.
The initial capital cost to achieve production and positive cash flow is estimated at $27 million and this results in less than a one year payback. Operating costs are estimated at $325 per ton of ore and that includes mining, processing and all-site G&A.
There is an additional $100 per ton of ore of capital that accounts for sustaining mine development, capitalized property plants and equipment, underground definition drilling and overall contingency. The net smelter value -- the net smelter returns value of the ore over the life of mine in the PEA is $525 per ton.
As you know, the Keno District mill facility operated successfully for nearly three-year between 2011 and 2013. The milling process including conventional crushing, grinding differential flotation and dewatering processes and produces a lead silver concentrate and a separate zinc concentrate.
These concentrates are then shifted by truck to Port of Skagway in Alaska where they put on an ocean barge for delivery to the smelter. Prior to resumption of milling operations and additional 1.8 by 3 meter ball mill will be installed to provide expanded draining capacity ahead of flotation circuit.
This mill has already been purchased and delivered to the site. All of the surface facilities camp accommodations and infrastructure including the Keno District mill are being actively maintained and will require only normal cost for decommissioning.
In terms of metallurgy, we of course have the benefit of having operated the Keno District mill for nearly three years and have a good understanding and estimate of recovery of lead, silver and zinc. Additional test work has also been completed on the other deposits within the mine plant and they respond well to the current no flow sheet.
Due to the change in the lead-silver ratios in the mill feed, the lead concentrate grades during the commercial production will be in the order of 65% lead and 17,000 grams per ton of silver, which of course is a very valuable product. Once we achieve commercial production, the calculated all-in sustaining costs on a contain silver by product basis will be approximately $13.51 an ounce.
The all-in sustaining costs includes direct operating costs, sustaining capital, the Silver Wheaton stream, corporate, general and administrative costs and ongoing service exploration costs. During the first three-four years of production, the all-in sustaining cost is estimated to be US$12.18 ounce of silver.
In terms of permitting, all of the regulatory approvals required for mining and processes activities associated with the Bellekeno and Lucky Queen deposits are currently in place. With the exception of the Water Use License, all of the regulatory approvals required for mining and processing activities associated with Flame & Moth are currently in place.
We anticipate receiving the water license for the Flame & Moth mine in late Q2 of this year. Permitting for the advanced underground exploration phase of Bermingham is also underway.
So, with this, I’m going to turn over to Mike Clark to review the financial numbers and until we will have questions later on about the PEA, Mike?
Michael Clark
Thanks Brad. This financial report is for Alexco’s fiscal year ended December 31, 2016.
Note, that we report in Canadian dollar so all dollar amounts will be in Canadian dollars unless stated otherwise. For the full year, we reported a net loss of 4.4 million or a loss of CAD0.05 per share.
These results include non-cash cost totaling 3.2 million, which is mostly comprised of depreciation and share-based compensation expense. This compares to the 2015 net loss of 5.5 million or CAD0.08 per share.
The main different between the loss in 2016 and 2015 is a reduction in general and administrative expense and care and maintenance costs offset by less gross profit in the environmental business. For the fourth quarter of 2016, Alexco reported a net loss of CAD1.8 million or CAD0.02 per share on revenues of CAD2.9 million, which compares to a 2015 net loss CAD1.5 million or CAD0.02 per share on revenue of CAD4.1 million.
Alexco environmental group revenues for the year ended December 31, 2016 were 11.4 million on gross profit of CAD2.9 million for a margin of 25%. This compares to revenue last year of CAD14.6 million and a gross profit of CAD3.3 million from margin of 22%.
The increase in gross margin from the prior year was primarily due to AEG reducing third-party work on both external projects and the Keno Hill Reclamation Plan. The reduction in revenue was primarily due to the bulk of the Keno Hill Reclamation Plan being developed in 2015 and then entering the review stage process in 2016, which involves less billable work to be performed by AEG.
Furthermore in the U.S., a decrease in revenue is resulted from the substantial completion of the Globeville project in Colorado in 2015. Corporate general and administrative expenses for 2016 totaled CAD4.5 million including non-cash cost of CAD1 million, which compares to the 2015 cost of CAD4.6 which included CAD550,000 of non-cash cost.
The decrease in 2016 relates to one-time charges in 2015 for severance cost and right-off of receivables for CAD540,000, partially offset with an increase in share-based compensation expense. AEG general and administrative expenses for 2016 totaled CAD3 million, compared to 2015 expenses of CAD3.8 million.
The decrease in AEG general and administrative expenses in 2016 compared to 2015 is a result of higher personal utilization to billable projects as well as continued reduction of overhead expenses. Furthermore, during the 2015 period, the corporate evaluation, the Corporation evaluated certain trade receivables and recorded a one-time right off of CAD103,000.
Mine site care and maintenance costs in 2016 were CAD2 million compared to CAD2.4 million in 2015. The decrease in cost is mainly due to lower depreciation charges in 2016 and it's worth noting included in mine site care and maintenance cost is depreciation expense of CAD1.6 million in 2016 and CAD1.7 million in 2015.
Exploration expenditures incurred during 2016 CAD5.4 million compared to CAD2.7 million in 2015. In 2016, the nature of the majority of these expenditures were related to the 2016 drilling program at Birmingham, Flame & Moth portal development, the reengineering work being done on the Flame & Moth deposit and the lead up work associated with the PEA.
In May 2016, Alexco closed a non-brokered private placement of 10.8 million units of the Corporation at a price of CAD1.23 unit per gross proceeds of CAD13 million. Each unit consisted of one common share and a half warrant with each full warrant entitling the holder to purchase one additional common share of Alexco at a price of CAD1.75 per share for a period of two years.
The warrants included acceleration costs whereby if the closing price of Alexco shares is higher than CAD2.50 for a period of 10 consecutive trading days then the Company has the option to accelerate the expiry of those options to 10 days. Alexco's unrestricted cash position at December 31, 2016 was CAD20.3 million compared to CAD8.1 million at December 31, 2015.
While networking capital was CAD23.4 million compared to CAD12.6 million at December 31, 2015. The increase in unrestricted cash and cash equivalents in 2016 compared to 2015 is mainly attributed to the main non-brokered private replacement for gross proceeds of CAD13 million, CAD6.2 million of proceeds from the exercise of warrants, CAD1.8 million from the sale of marketable securities and CAD3.9 million from the release of performance bonds offset by CAD2.1 million posted a security at Keno Hill, the CAD5 million for exploration expenditures and then general corporate overhead.
In addition to unrestricted cash, Alexco also has restricted cash at December 31, 2016 of CAD6.9 million which primarily relates to decommissioning obligations at Keno Hill. And subsequent to year end, the Company sold marketable securities for further proceeds of CAD2 million.
Now, the operator will provide instructions for the Q&A session.
Operator
Thank you. [Operator Instructions] And we’ll now take our first question from Mike Kozak with Cantor Fitzgerald.
Mike Kozak
Few questions from me. The first one just to understand correctly, so you’re getting kind of more protection on the silver industry, we're getting kind of more protection on the downside in terms of silver price and silver grade, but a north of $25 an ounce regardless of the grade, silver, it doesn’t make any transfer payment to you on the 25%.
Is that -- am I thinking about that right?
Clynton Nauman
Mike, this is Clynt. That is essentially correct.
You need to keep in mind that’s not necessarily a linear relationship, but it is true that once the prices get to be north of 25 bucks that the Silver Wheaton payment is minimal to zero. I would also point out that the difference between say $17 or $18 market that we are in at the present time within after-tax NPV.
I'd say 79 million to 80 million, that after-tax NPV increases by more than 50% and as you trend up towards that $25. So, I guess my -- I guess it might be I don't if it's a glib statement or not, but generally what I would say is lots of money in a project like this with a better than 800 gram head grade to go around, lots of money to grow around, if prices and when prices achieved that level.
Mike Kozak
Right, and then that kind of reason to my second question that is, so with where the silver price is now as we amended stream which is now on better terms in the current silver price environment and now as the PEA is out. Is there a production restart decision that’s can be made in the very short term or is there anything else that you are going to waiting on?
Clynton Nauman
So, here is the plan, we are going to -- we are going to move forward in a very systematic manner. We are dealing with extremely high grade ore underground.
And so, the plan is to drive a decline at Bermingham, get down closer to that ore and untaken underground exploration and infill program of that 5,000 meters as Brad mentioned. From that and following that, we will drive -- we will drive a decline into Flame & Moth will be the same thing there, maybe not to the same extent because we have -- we have got that’s a bigger thicker more consistent ore, not as high grade as Bermingham therefore not requiring the same amount effort.
And it will be as a result of those programs that will lift the entire project to a prefeasibility level, And from there, we’ll make a decision to move to production. But I can assure you that, that we have eyes firmly fixed on the price here, which is to put this district back into production with what is going to be the best-in-class silver project, I think in the same thing.
Mike Kozak
Okay. And then just I think the initial capital for restart, I think you said CAD27 million, I guess CAD20 million in cash now and no debt.
How are you thinking -- are you thinking about some sort of like revolving credit facility or what kind of projects orienting package would you be looking for?
Clynton Nauman
Quite frankly, Mike, I mean we don’t feel pressure at all. We’ve got plenty of cash.
This entire project is not going to be a cash consumer immediately. It’s going to take place over a period of time.
I think we have some very important strategic investors. And so, we are not -- at this point, we’re simply not addressing that question.
Also don’t forget that, we have those warrants sitting out there themselves could be quite valuable.
Mike Kozak
And then just two one or quick one. The total CapEx number for the life of the project, is that include all the capitalized exploration?
Clynton Nauman
No, it does not include the capitalized exploration to service exploration, does not.
Mike Kozak
Okay. And then also on -- just on the recoveries particularly on the lead and zinc, they're way, way up in this new PEA.
Is that purely due to the higher resource grade or is there something else that’s going on there?
Brad Thrall
Yes, Mike, this is Brad. What you see again going forward, the difference with Flame & Moth, Bermingham, Lucky Queen has got a different lead to silver ratio.
So, we’ve undertaken a number of recovery flotation tests over the last couple of years including from Flame, Bermingham and Lucky Queen. And it’s very consistent in that 96%, 97% lead kind of recovery.
So, again because of the lower lead grades we have for very high concentrates, 17,000 or 18,000 grams per ton of silver is concentrate, so it’s primarily again related to these different ratios as we move forward.
Operator
And we'll now take our next question from Mike Niehueser with Scarsdale Equities.
Mike Niehueser
It looks like -- I guess the kind of the stunning thing with the PEA and the amendment of agreement. It seems like it really drastically changes the profile of the projects and district from when you started production at Bellekeno.
Grades are up. Mine life is longer.
Capital costs are lower. Expansion potential is really there.
It just seems to be -- this doesn’t seem to come across in the release what a huge change, this is the plus for the project. Probably, the biggest thing is just the de-risking of it, it doesn’t seem like you’re going to have the bottlenecks and you’re going to be able to meet your production requirement pretty soon.
Can you give expand on that?
Clynton Nauman
I don't know about expand on that. Mike, you’ve done a pretty job there.
I would say that we -- there are lots of things that we could have done with this news release, but in our decision was to remain pretty pragmatic, stick to the facts and just simply light out like it is. I mean I think the numbers and the commentary speaks for themselves and that sort of the way that we have approached it.
And yes, from my -- in my view, we are definitely starting down the track of rebranding the Company. And once again I repeat that I just think that this is a best-in-class project, and it's just a matter of moving systematically forward with it and making the decisions as they come to us.
So, that's the way I feel about it.
Mike Niehueser
Well, it looks like a lot of the big catalyst type of venture going to get pushed as a latter part of this year with getting drill results. Could you walk through the timeline for 2017 as far as -- because I know that you have to permit the Birmingham decline, you have got some changes it sounds like with the decline at the Flame & Moth, you have got the water license.
Could you just go through that just a little slower so we might be able to see what we could look forward to happen in 2017 because it seems like you're going to finish the year with the much different, more higher visibility on the project overall? But it just seems like there is a lot going on with permitting, declines, drilling, underground drilling and other things.
Clynton Nauman
Yes, for sure there is a lot of moving parts here. But the primary things that they will be dealing with -- firstly, they get this Birmingham decline permitted and we are already in that process.
And everything goes according to plan and I would flag the fact that permitting in the Yukon is not nearly a certain as it used to be that -- but we were hoping that and we are going to have the appropriate authorization in place by July or so of this year. And they will launch off on driving that decline in August 2017.
That’s about five month effort to drive that decline. And once it gets down about 600 to 630 meters, we will install a drilling platform and we will start that underground drilling.
That underground drilling will take two to three months nominally, but at the same time as we are doing that and not having major decision yet, but we thought would that we would simply take those development crews move them over the Flame & Moth and start driving that imply. And that would take us into the middle of 2018, meantime you are drilling in Birmingham be complete.
We probably will stop for a month or so at Flame & Moth just to get the additional infield and undercut drilling that needs to get done and be in a position to put buzz of these deposits in production in the third or fourth quarter 2018. That’s a lot of stuff, but I'll tell you that if silver prices increase dramatically then we do have the alternative of accelerating that entire program such that essentially those deep mines will be driven together and going forward on that basis.
So, I am not sure if that answers your question, but that’s sort of what's in back of our heads.
Mike Niehueser
Well, it seems like there is a pretty -- there is a huge opportunity, I don’t know what the probability is, it's always subject exploration risk, but once you could underground both the Flame & Moth and the Bermingham, how much excitement do you think is going to come from the infill or how many surprises or where do you see the opportunity for surprise for deeper Flame & Moth and deeper or laterally at Bermingham?
Clynton Nauman
Well, these are very robust systems clearly with this amount of silver. So, yes, I mean it’s a -- it was Bellekeno then we’ll just have to see what comes out of it.
But the Bermingham deposit is open at depth, the Flame & Moth not so much when exploration perspective starting up because the deeper signs of Flame & Moth want to be tested until we get several years into the mine plant. And I will tell you that that we are focused and this entire plant is driven around looking at the first couple of years, couple of three years of production at Bermingham and Flame & Moth where there is significant opportunity we feel.
So, that’s the way that we are proceeding.
Mike Niehueser
Well also regarding the amendment to the agreement at -- I mean the market likes higher rates, higher grades, but it seems like there is a real protection from flexibility to be to keep from having a high grade to mine to say is the business and your ability to pick out lower grade pause that might be sterilized. It seems to make this a much more flexible, long-lasting, aligned agreement with both the interest at Silver Wheaton and Alexco?
Clynton Nauman
Yes, and that’s exactly the basis that the discussion was undertaken with Silver Wheaton. Looking at discoveries and resources like Bermingham, which is a relatively large resource in the 600 gram range with the smaller areas of very high grade.
And the interest of both Silver Wheaton and Alexco and figuring out, how you design a mine to optimize efficiency within that type of silver mineralization environment. So, this meets that purpose and I cannot understate how important that is in terms of planning and opportunity at Keno Hill and it also extends to the exploration front in that [indiscernible] potential production at Keno Hill, does not have to achieve 700 gram, 800 gram type levels to qualify to be included in the mine plant.
Mike Niehueser
Well also as Brad mentioned, the metallurgy and that is compatible with the Flame & Moth in Bermingham, but you’re adding another ball mill. Is that intended to optimize or is that partially because of that you’re going to blending ore or having different ore coming from different mine?
Brad Thrall
Yes, Mike, this is Brad. Yes, that’s really to ensure that we’ve got upgrading capacity for the life of mine production rate of the 400 tons per day.
So, again the mill operated very well and we had peak production of 350 tons per day or so. So, it’s just relative to ensure that we’ve got an upgrading capacity.
Mike Niehueser
Okay. And on the earlier question you mentioned, you didn’t have any plans to raise additional capital, but it seems like you mentioned on prior calls over the years that the quality of your concentrated high enough that it’s really valued by smelters and I’m just curious if any smelters are coming to you with money, modest amounts of money, we should be sufficient and get to that where you need to be?
Clynton Nauman
Yes. That’s a good point Mike and we do need to put move on here, I can see people in the queue.
So yes, this is a premium product in the market make sure and it’s no surprise that, it will has attractive the attention on various smelters around the world.
Operator
And we’ll now take our next question from John Tumazos with John Tumazos Very Independent Research.
John Tumazos
Thank you. When you ramp up in the second half of 2018 to produce full year 2019, roughly how many tons of that you expect to be doing and ballpark range what would be ounces of silver will be?
Clynton Nauman
John, yes, so it’s starting out year, you hit pretty quickly claim up towards that kilogram type range. And so, your initial annualized production over the first two to three years, which we've published is around 4.2 million ounces per year.
But I can tell you that in that year that you’re talking about, your numbers between 4.5 million and 4.9 million ounces.
Operator
And we’ll now take our next question from Robert [indiscernible] Capital.
Unidentified Participant
Yes, I have one question for you. What is your -- how could you expand production of ton per day production with what you’re anticipating now from a way since you've got a plan or some sort of formulate site that you could expand your tons per day production?
Clynt Nauman
Yes, thanks for the question. I will say that one of the exercise that we have through here was figuring out how sort of optimize throughput for this mill.
There are a lot of tons available that’s true. And certainly tons that are above cut off, that are not included in this particular plan.
And then flipside of that is the mill itself. The mill has a designed nameplate capacity of 408 tons per day and I think that our objective is to just to get up there, see what we can do in terms of optimizing that and increasing throughput.
But yes, there is lots of upside too to increasing the production at Keno Hill. But you need to keep in mind that and then in doing that, we’ll need to go back through the permitting process or significantly expanded production.
Operator
And we’ll now take our next question from Mike Niehueser with Scarsdale Equities.
Mike Niehueser
Yes. Well, Brad is there, can you talk about the plants to grow AEG in the next year or is this pretty much a lot of desperate that you’re doing in regards to, in permitting, regards to the long-term plant for the district?
Brad Thrall
Well, see Mike and certainly, there is going to be a lot of focus on Keno Hill in terms of executing this plant, but certainly one of the growth aspects of AEG is Keno Hill itself. I mean what we call the ESM reclamation plan this is the closure plan for the district I mean that really is reaching a milestone now where we are now entering the permitting process for that.
So, really Keno Hill not only offers growth for Alexco in the mining side, but it really is the next catalyst for the environmental side of the business as we move in this engineering and execution phase over the next couple of years of permitting and funding from the government of Canada. So, that’s like really, really I think one of the bigger growth catalyst for AEG itself as Keno Hill.
Mike Niehueser
And I haven’t heard of the Schwartzwalder plant, is that related to the Gold King project that you went in too or is that somewhere else?
Clynton Nauman
Yes, those are separate Mike, the Schwartzwalder project is just outside of Golden, Colorado. So that’s a contract that we have to operate a couple of water treatment plants and again that suffered obviously from the Gold King plant down in Southern Colorado near Silverton, which we continue and operate that plant on behalf of the EPA.
Mike Niehueser
Is that the one you've been doing for a number of years now?
Clynton Nauman
We are going on a yard our second full year here at Gold King. Again, our contract was just extended for another full year there.
So, we are certainly going to be there for the longer term.
Mike Niehueser
Well, it's turning out to be a longer term contract than you originally anticipated.
Clynton Nauman
Yes, that’s right Mike. The original contract was just a -- was built in 21 days and operate and commission it.
And that's turned into couple of extensions to the longer term operating agreement.
Mike Niehueser
And Clynt, could you talk about McQuesten for a second. It seems like when we looked at that in the past, it was basically gold not silver, it was little bit lower grade, but the fact that this is an option.
Can you talk about the potential of Banyan and whether that is interest in or is just a natural evolution of optimizing Keno Hill?
Clynton Nauman
Yes, it’s the ladder Mike. We have a huge land position at Keno Hill.
We have a list of exploration targets now that we sort of understand what it is that what kind of geological circumstances give rise to these higher grade resources. And McQuesten down the very west end of our landholding is a gold target and well that would be on our list to a long ways down our list.
And the opportunity to be able to put the McQuesten property together with Victoria's Orex property to consolidate that gold target was quite an opportunity, and that’s why we invested in Banyan with the -- at the same time, as they're optioning the property from us and so we will maintain and interest in what's going on that part of the district. So, it’s a scam related gold target at the outset and it will be very interesting to see how it evolves there.
Mike Niehueser
And I guess lastly, you mentioned the prefeasibility study and I think the earlier Bellekeno went into the operation on and Silver Wheaton went along with only the PEA. Is that a significantly higher level of engineering and other types of resource definition work than it was completed earlier or is it just the natural evolution of having to do higher level study?
Clynton Nauman
Yes, I mean it's -- there is -- I just have to repeat that this especially Bermingham is an extremely high grade deposit and its underground. And so, closing down the drill spacing to 10 meters or less is something that you'd normally do with this type of a deposit.
It’s not quite the same as Bellkeno. And for that reason, we will go through the progression prefeasibility level reviews and studies prior to finalizing mine designing and moving forward.
So, yes it is a higher level of confidence and confirmation and it’s absolutely required in my view and dealing with these types of deposits.
Mike Niehueser
And just lastly, just to comment this seems like Yukon is really starting to heat up again after the downturn and with the big companies moving in and so forth. I hope that the permitting regime really grabs the bull by the horns because there is a real opportunity for the area and that’s all I got.
Clynton Nauman
Okay. Thanks Mike.
Appreciate the comments.
Operator
[Operator Instructions] And it appears there are no further questions in the queue at this time. And Mr.
Clynton Nauman, I’d like to turn the conference back over to you for any additional or closing remarks.
Clynton Nauman
Thank you and thank you for joining us again today. We see publication of the PEA and amended silver purchase agreement with Silver Wheaton is the first step to move Keno Hill back to production as we’ve been discussing here.
We are planning a busy year, most importantly driving the Bermingham advanced exploration deep line, initiating an underground infill and exploration drill program, continuing surface exploration. But we’re also collecting additional information from various deposits to support a prefeasibility level study, which is a next step on the road to a final production decision at Keno Hill.
As always, we appreciate your support and interest in Alexco. And with that, I will turn it back to Mike to close the call.
Michael Clark
You’ve been listening to the Alexco Resource Corp., December 31, 2016 fourth quarter and year end conference call. We encourage investors to visit Alexco’s website for further information at www.alexcoresource.com.
If you have further questions, please call 604-633-4888 or email us at [email protected]. This concludes today’s call.
Thank you for joining us and have a good day.