20-F 1 tv515162_20f.htm FORM 20-F

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

 

FORM 20-F

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For fiscal year ended December 31, 2018

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to ______

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report:

 

Commission file number: 000-22216

 

 

NorZinc Ltd.
(Exact Name of Registrant as Specified in its Charter)

 

British Columbia, Canada 1400 N/A
(Province or other jurisdiction of incorporation or organization) (Primary Standard Industrial
Classification Code)
(I.R.S. Employer Identification No.)

 

650 West Georgia Street, Suite 1710 
Vancouver, British Columbia, Canada V6B 4N9 
(604) 688-2001
(Address and Telephone Number of Registrant’s Principal Executive Offices)

 

CT Corporation System, 111 Eighth Avenue, New York, NY, 10011, (212) 590-9070

(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Shares, no par value

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of December 31, 2018: 369,663,942 common shares

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ¨            No x

 

If this is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Yes ¨            No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x            No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x            No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of "large accelerated filer", “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer  x Emerging growth company x  

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standardsprovided pursuant to Section 13(a) of the Exchange Act. ¨

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board  x Other ¨

  

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

 

¨ Item 17          ¨ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨         No x

 

 

 

 

 

 

CONTENTS

 

Forward-Looking Statements 4
   
Resource and Reserve Estimates 4
   
Measurement Conversion Information 5
   
Glossary of Names and Terms 5
   
National Instrument 43-101 Definitions 6
   
Part I 7
   
Item 1. Identity of Directors, Senior Management and Advisers 7
   
Item 2. Offer Statistics and Expected Timetable 7
   
Item 3. Key Information 7
A. Selected Financial Data 7
B. Capitalization and Indebtedness 7
C. Reasons for the Offer and Use of Proceeds 7
D. Risk Factors 8
   
Item 4. Information on the Company 22
A. History and Development of the Company 22
B. Business Overview 29
C. Organizational Structure 30
D. Property, Plant and Equipment 31
   
Item 4A. Unresolved Staff Comments 80
   
Item 5. Operating and Financial Review and Prospects 80
A. Operating Results 80
B. Liquidity and Capital Resources 82
C. Research and Development, Patents and Licences, Etc. 83
D. Trend Information 83
E. Off-balance Sheet Arrangements 83
F. Tabular Disclosure of Contractual Obligations 83
   
Item 6. Directors, Senior Management and Employees 85
A. Directors and Senior Management 85
B. Compensation 86
C. Disclosure of Corporate Governance Practices 97
D. Employees 104
E. Share Ownership 105
   
Item 7. Major Shareholders and Related Party Transactions 105
A. Major Shareholders 105
B. Related Party Transactions 106
C. Interests of Experts and Counsel 106
   
Item 8. Financial Information 106
A. Consolidated Statements and Other Financial Information 106
B. Significant Changes 107
   
Item 9. The Offer and Listing 107
A. Offer and Listing Details 107
B. Plan of Distribution 107
C. Markets 107
D. Selling Shareholders 107
E. Dilution 107
F. Expenses of the Issue 107

 

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Item 10. Additional Information 108
A. Share Capital 108
B. Memorandum and Articles of Association 108
C. Material Contracts 109
D. Exchange Controls 110
E. Taxation 111
F. Dividends and Paying Agents 120
G. Statements by Experts 120
H. Documents on Display 120
I. Subsidiary Information 120
   
Item 11. Quantitative and Qualitative Disclosure About Market Risk 121
   
Item 12. Description of Securities Other Than Equity Securities 122
   
Part II 122
   
Item 13. Defaults, Dividend Arrears and Delinquencies 122
   
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 122
A to D. 122
E. Use of Proceeds 122
   
Item 15. Controls and Procedures 122
A. Disclosure Controls and Procedures 122
B. Management’s Report on Internal Control over Financial Reporting 123
C. Attestation Report of Registered Public Accounting Firm 124
D. Changes in Internal Control Over Financial Reporting 124
   
Item 16. [Reserved] 124
   
Item 16A. Audit Committee Financial Expert 124
   
Item 16B. Code of Ethics 124
   
Item 16C. Principal Accountant and Fees and Services 125
   
Item 16D. Exemptions from the Listings Standards for Audit Committees 125
   
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 125
   
Item 16F. Change in Registrants’s Certifying Accountant 125
   
Item 16G. Corporate Governance 125
   
Item 16H. Mine Safety Disclosure 125
   
Part III 125
   
Item 17. Financial Statements 125
   
Item 18. Financial Statements 125
   
Item 19. Exhibits 125
   
Signatures 189

 

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Forward-Looking Statements

 

This Annual Report (“Annual Report”) contains forward-looking statements that are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and under Canadian securities laws that involve a number of risks and uncertainties. Such statements are based on the Company’s current expectations, estimates and projections about the industry, management’s beliefs and certain assumptions made by it. We use words such as “expect,” “anticipate,” “project,” “believe,” “plan,” “intend,” “seek,” “should,” “estimate,” “future” and other similar expressions to identify forward-looking statements. The Company’s actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.

 

Statements about the Company’s planned/proposed Prairie Creek Mine operations, which includes future mine grades and recoveries; the Company’s plans for further exploration at the Prairie Creek Mine and other exploration properties; future cost estimates pertaining to further development of the Prairie Creek Mine and items such as long-term environmental reclamation obligations; financings and the expected use of proceeds thereof; the completion of financings and other transactions; the outlook for future prices of zinc, lead and silver; the impact to the Company of future accounting standards and discussion of risks and uncertainties around the Company’s business are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, the Company's actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. You should not place undue reliance on these forward-looking statements.

 

Information relating to the magnitude or quality of mineral deposits is deemed to be forward-looking information. The reliability of such information is affected by, among other things, uncertainty involving geology of mineral deposits; uncertainty of estimates of their size or composition; uncertainty of projections relating to costs of production or estimates of market prices for the mineral; the possibility of delays in mining activities; changes in plans with respect to exploration, development projects or capital expenditures; and various other risks including those relating to health, safety and environmental matters.

 

The Company cautions that the list of factors set forth above is not exhaustive. Some of the risks, uncertainties and other factors which negatively affect the reliability of forward-looking information are discussed in the Company's public filings with the Canadian securities regulatory authorities, including its most recent Annual Report, quarterly reports, material change reports and press releases, and with the United States Securities and Exchange Commission (the “SEC”). In particular, your attention is directed to the risks detailed herein concerning some of the important risk factors that may affect its business, results of operations and financial conditions. You should carefully consider those risks, in addition to the other information in this Annual Report and in the Company's other filings and the various public disclosures before making any business or investment decisions involving the Company and its securities.

 

The Company undertakes no obligation to revise or update any forward-looking statement, or any other information contained or referenced in this Annual Report to reflect future events and circumstances for any reason, except as required by law. In addition, any forecasts or guidance provided by the Company are based on the beliefs, estimates and opinions of the Company’s management as at the date of this Annual Report and, accordingly, they involve a number of risks and uncertainties. Consequently, there can be no assurances that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. Except as required by law, the Company undertakes no obligation to update such projections if management’s beliefs, estimates or opinions, or other factors should change.

 

Resource and Reserve Estimates

 

This Annual Report on Form 20-F includes resource and reserve information that has been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of United States securities laws. The terms “mineral reserve”, “proven mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) - CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as amended. These definitions differ from the definitions in SEC Industry Guide 7 under the United States Securities Act of 1933, as amended (the “Securities Act”). Under SEC Industry Guide 7 standards, a “final” or “bankable” feasibility study is required to report reserves, the three-year historical average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority.

 

In addition, the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are historically not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into reserves. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of “contained ounces” or “contained metal” in a resource is permitted disclosure under Canadian regulations; however, the SEC Industry Guide 7 historically only permits issuers to report mineralization that does not constitute “reserves” by SEC Industry Guide 7 standards as in place tonnage and grade without reference to unit measures.

 

U.S. Investors should note that the mineral reserves of the Prairie Creek Mine are reported in accordance with Canadian regulatory standards and MAY NOT qualify as mineral reserves that comply with the standards set forth in SEC Industry Guide 7.

 

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Measurement Conversion Information

 

In this Annual Report, metric measures are used with respect to mineral properties described herein. For ease of reference, the following conversion factors are provided:

 

1 mile = 1.6093 kilometres

1 metric ton (tonne) = 2,205 pounds

1 foot = 0.305 metres

1 troy ounce = 31.103 grams

1 acre = 0.4047 hectare

1 imperial gallon = 4.546 litres

1 long ton = 2,240 pounds

1 imperial gallon = 1.2010 U.S. gallons

 

Glossary of Names and Terms

 

“Deposit” — A mineralized body which has been physically delineated by sufficient drilling, trenching, and/or underground work, and found to contain a sufficient average grade of a commodity, metal or metals to warrant further exploration and/or development expenditures. Such a deposit does not qualify as a commercially mineable ore body or as containing reserves of ore, unless final legal, technical, and economic factors are resolved.

 

“Ore” — A natural aggregate of one or more minerals which, at a specified time and place, may be mined and sold at a profit or from which some part may be profitably separated.

 

“Reclamation” — The restoration of land and the surrounding environment of a mining site after the metal is extracted.

 

“Ton” — Short ton (2,000 lbs.). 1 Ton equals 0.907185 Metric Tons.

 

“Tonne (t)” — Metric ton (1,000 kilograms). 1 Tonne equals 1.10231 Tons.

 

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National Instrument 43-101 Definitions

 

National Instrument 43-101 requires mining companies to disclose reserves and resources using the subcategories of proven reserves, probable reserves, measured resources, indicated resources and inferred resources. Mineral resources that are not mineral reserves do not have demonstrated economic viability.

 

A “mineral reserve” is the economically mineable part of a measured or indicated resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A mineral reserve includes diluting materials and allows for losses that may occur when the material is mined. A “proven mineral reserve” is the economically mineable part of a measured resource for which quantity, grade or quality, densities, shape and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit. A “probable mineral reserve” is the economically mineable part of an indicated mineral resource for which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit.

 

A “mineral resource” is a concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the earth’s crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge. A “measured mineral resource” is that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity. An “indicated mineral resource” is that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed. Mineral resources that are not mineral reserves do not have demonstrated economic viability. An “inferred mineral resource” is that part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.

 

A “feasibility study” is a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production. A “preliminary feasibility study” or “pre-feasibility study” is a comprehensive study of the viability of a mineral project that has advanced to a stage where the mining method, in the case of underground mining, or the pit configuration, in the case of an open pit, has been established, and which, if an effective method of mineral processing has been determined, includes a financial analysis based on reasonable assumptions of technical, engineering, operating, economic factors and the evaluation of other relevant factors which are sufficient for a qualified person, acting reasonably, to determine if all or part of the mineral resource may be classified as a mineral reserve. “Cut-off grade” means (a) in respect of mineral resources, the lowest grade below which the mineralized rock currently cannot reasonably be expected to be economically extracted, and (b) in respect of mineral reserves, the lowest grade below which the mineralized rock currently cannot be economically extracted as demonstrated by either a preliminary feasibility study or a feasibility study. Cut-off grades vary between deposits depending upon the amenability of ore to mineral extraction and upon costs of production and metal prices.

 

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Part I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

  

This Annual Report relates to the results of operations and financial condition of NorZinc Ltd. (formerly Canadian Zinc Corporation) and its subsidiaries, and is intended to be read in conjunction with the accompanying audited consolidated financial statements and notes thereto of the Company for the years ended December 31, 2018 and 2017 (the “Annual Financial Statements”) and other corporate filings, including the Management’s Discussion and Analysis for the year ended December 31, 2018 all of which are available under the Company’s profile on SEDAR at www.sedar.com.

 

Please see the section, “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions used to develop the Company’s forward-looking information.

 

The Annual Financial Statements include the accounts of NorZinc and its wholly owned subsidiaries and have been prepared in accordance with IFRS as issued by the International Accounting Standards Board. The Company reports its financial information in Canadian dollars and all monetary amounts set forth herein are expressed in Canadian dollars unless specifically stated otherwise.

 

On September 6, 2018, Canadian Zinc Corporation (“Canadian Zinc” or "CZN”) and NorZinc completed an internal corporate reorganization by way of a statutory arrangement (the “Arrangement”) under the Business Corporations Act (British Columbia). Pursuant to the Arrangement, shares of CZN were exchanged for shares of NorZinc, on a one-for-one basis, with no impact on shareholder’s ultimate economic interest and shareholders of Canadian Zinc became shareholders of NorZinc and Canadian Zinc became a wholly-owned subsidiary of NorZinc. The Arrangement was completed to facilitate future project financing of the Prairie Creek Project. The Arrangement leaves all the Prairie Creek property, assets, agreements and permits in place in the wholly-owned subsidiary. The common shares of NorZinc commenced trading on the Toronto Stock Exchange (“TSX”) in September 2018, under the symbol “NZC” and on the OTCQB under the symbol “NORZF” and the former shares of Canadian Zinc were delisted from trading.

 

As a result of the Arrangement, the Company is considered to have continued CZN’s mineral properties exploration and development business and has recorded the assets and liabilities of the CZN operations at book value. The Annual Financial Statements reflect the operations of CZN until September 6, 2018 and that of the Company thereafter. Reference in this Annual Report to “the Company” refers to “CZN” prior to September 6, 2018 and in this Annual Report, the terms “the Company” or “NorZinc” or “NZC” refer to NorZinc Ltd. and all its subsidiaries together, unless the context otherwise clearly requires.

 

A. Selected Financial Data

 

The following table sets forth selected financial data of the Company. This selected financial data is derived from the Company’s audited financial statements and notes thereto, as at December 31, 2018, 2017, 2016, 2015 and 2014. The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, which differs in certain respects from U.S. GAAP. The selected financial data provided below is not necessarily indicative of the future results of operations or financial performance of the Company. The Company has not paid any dividends on its common shares and it does not expect to pay dividends in the foreseeable future. The selected financial data set forth below should be read in conjunction with “Item 5 – Operating and Financial Review and Prospects”, and the financial statements and the notes thereto and other financial information which appear elsewhere in this Annual Report.

 

Selected Financial Data

(CDN$ in thousands, except share and per share data)

   Year ended December 31, 
   2018   2017   2016   2015   2014 
Amounts in accordance with IFRS:                         
Net loss  $(11,619)  $(11,074)  $(5,077)  $(8,262)  $(12,434)
Basic and diluted loss per share   (0.04)   (0.04)   (0.02)   (0.04)   (0.06)
Total assets   17,846    21,565    18,497    11,183    21,899 
Net assets   14,546    5,667    15,899    8,907    17,045 
Share capital   134,536    114,618    114,618    104,028    104,028 
Reserves   17,295    16,715    15,873    14,394    14,270 
Dividends declared (per share)  $0.00   $0.00   $0.00   $0.00   $0.00 
Weighted average number of common shares outstanding – basic and diluted   315,435,463    266,111,543    238,480,985    218,047,709    192,465,968 
Number of common shares outstanding   369,663,942    266,111,543    266,111,543    218,047,709    218,047,709 

 

In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian dollars (“CDN”).

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

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D. Risk Factors

 

The following is a discussion of those distinctive or special characteristics of NorZinc Ltd. (“NorZinc” or the “Company” or “NZC”), its operations and its industry which may have a material impact on, or constitute risk factors in respect of, the Company’s future financial performance. Though the following are major risk factors identified by management, they do not comprise a definitive list of all risk factors related to the Company’s business, financial condition and/or operating results.

 

The Company may be unable to continue as a going concern.

 

NorZinc has a history of losses with no operating revenue other than minor interest income. The Company has not achieved profitable operations, has an accumulated deficit since inception and expects to incur further losses in the development of its business. NorZinc does not currently generate any cash flow from its operations and will need to generate additional financial resources to fund its corporate administration costs and working capital, to continue the development of the Prairie Creek Project and to put the Prairie Creek Mine into production.

 

The development of the Prairie Creek Mine will require substantial additional financing. The 2017 FS estimated that the additional capital required to install the planned new facilities and to bring the Prairie Creek Mine into production will aggregate $253 million, plus a contingency of $26 million for a total of $279 million. Working capital required upon commencement of production is estimated to be $36 million.

 

Supported by the results of the 2017 FS, NorZinc will continue to evaluate all alternatives and possibilities for raising the senior financing to complete the development and construction necessary to put the Prairie Creek Mine into production. The Company is currently evaluating various opportunities and seeking additional sources of financing. However, the ability to raise financing may be impacted by conditions beyond the control of the Company, including future projections of commodity prices, uncertainty in the capital markets and the lack of investor interest in the resource sector.

 

The ability of the Company to continue as a going concern and to carry out its planned business objectives, including the successful development of the Company’s Prairie Creek Property will depend upon the Company’s ability to obtain financing through private placement financing, public financing, the joint venturing of projects, bank financing or other means. There is no assurance that the Company will continue to be able to obtain additional financial resources or that such additional financing will be available to the Company on a timely basis or on acceptable terms. There are no assurances that the Company will be successful in obtaining the required financing and/or achieve positive cash flows or profitability. These conditions indicate the existence of material uncertainties which cast significant doubt about the Company’s ability to continue as a going concern.

 

The Company has a history of losses and cannot provide assurance of profitable operations.

 

The Company has incurred cumulative losses since inception of $137,285,000 through December 31, 2018, which includes $89,885,000 of exploration and development expenditures on the Prairie Creek Property and $7,406,000 on the central Newfoundland properties all of which has been expensed in accordance with the Company’s accounting policies. There can be no assurance that the Company will be able to operate profitably during future periods. If the Company is unable to operate profitably during future periods, and is not successful in obtaining additional financing, the Company could be forced to cease its exploration and evaluation programs and mine development activities as a result of insufficient cash resources.

 

The Company’s operations are subject to permitting requirements that the Company may not be able to comply with in the future.

 

The operations of NorZinc require licences and permits from various governmental and regulatory authorities. NorZinc holds all necessary licences and permits under applicable laws and regulations for the operation of the Prairie Creek Mine. NorZinc believes that it is presently complying in all material respects with the terms of its current licences and permits. However, such licences and permits are subject to change in various circumstances. There can be no guarantee the Company will be able to maintain all necessary licences and permits as are required to explore and develop its properties, including the Prairie Creek Property, commence construction or operation of mining facilities or properties under exploration or development.

 

The Company must obtain various regulatory approvals, permits and licences relating to the Prairie Creek Property and there is no assurance that such approvals will be obtained. No assurance can be given that new rules and regulations will not be enacted or made, or that existing rules and regulations will not be applied, in a manner which could limit or curtail production or development.

 

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Regulatory approvals and permits are currently, and will in the future be, required in connection with NorZinc’s operations. To the extent such approvals are required and not obtained; NorZinc may be curtailed or prohibited from proceeding with planned exploration or development of its mineral properties or from continuing its mining operations.

 

Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

 

Amendments to current laws, regulations and permits governing operations and activities of mining and exploration companies, or more stringent implementation thereof, could have a material adverse impact on NorZinc and cause increases in exploration expenses, capital expenditures or production costs or require abandonment or delays in the development of mining properties.

 

The Prairie Creek Project has, on numerous occasions, experienced significant delays in obtaining permits and licences necessary for the conduct of its operations. If at any time permits essential to operations are not obtained, or not obtained in a timely manner, or are cancelled or revoked, there is a risk that the Company may not be able to operate a mine at the Prairie Creek Property.

 

The Company’s operations are subject to environmental and other regulatory requirements that the Company may not be able to comply with in the future.

 

NorZinc’s activities are subject to extensive federal, provincial, territorial and local laws and regulations governing environmental protection and employee health and safety. NorZinc is required to obtain governmental permits and provide bonding requirements under federal and territorial water and mine regulations.

 

All phases of NorZinc’s operations are subject to environmental regulation. These regulations mandate, among other things, the maintenance of water and air quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner, which will require stricter standards and enforcement, increased fines and penalties for non-compliance, and more stringent environmental assessments of proposed projects. United Nations proposals for a global treaty on mercury, intended to result in reduced global emissions of mercury, may place restrictions on the production, use and international movement of mercury and mercury-containing wastes which may, if adopted, result in restrictions on shipment of concentrates or other mineral products containing by-product or trace mercury. There is no assurance that future changes in environmental laws or regulations, if any, will not adversely affect NorZinc’s operations.

 

Environmental laws and regulations are complex and have tended to become more stringent over time. These laws are continuously evolving. Any changes in such laws, or in the environmental conditions at the Prairie Creek Property, could have a material adverse effect on NorZinc’s financial condition, liquidity or results of operations. NorZinc is not able to determine the impact of any future changes in environmental laws and regulations on its future financial position due to the uncertainty surrounding the ultimate form such changes may take. The Company does not currently consider that its expenditures required to maintain ongoing environmental monitoring obligations at the Prairie Creek Property are material to the results and financial condition of the Company. However, these costs could become material in the future and would be reported in the Company’s public filings at that time.

 

The Prairie Creek Project is located in an environmentally sensitive and remote area in the Mackenzie Mountains of the Northwest Territories, within the watershed of the South Nahanni River. The South Nahanni River is considered to be of global significance, is highly valued as a wilderness recreation river and is a designated World Heritage Site. The South Nahanni River flows through the Nahanni National Park Reserve.

 

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The Prairie Creek Property is encircled by the Nahanni National Park Reserve; however, an area of approximately 300 square kilometres immediately surrounding the Prairie Creek Mine is specifically excluded from the Park. In 2009 “An Act to Amend the Canada National Parks Act to enlarge Nahanni National Park Reserve of Canada” was enacted, which also authorized the Minister of Environment to enter into leases, licences of occupation or easements over Nahanni Park lands for the purposes of a mining access road leading to the Prairie Creek Mine area, including the sites of storage and other facilities connected with that road. The Company has obtained permits from the Parks Canada Agency for the purposes of accessing the Prairie Creek Mine area. There can be no guarantee the Company will be able to maintain all necessary permits on acceptable terms.

 

Although NorZinc makes provision for reclamation costs, it cannot be assured that such provision is adequate to discharge its obligations for these costs. As environmental protection laws and administrative policies change, NorZinc will revise the estimate of its total obligations and may be obliged to make further provisions or provide further security for mine reclamation costs. The ultimate amount of reclamation to be incurred for existing and past mining interests is uncertain.

 

Existing and possible future environmental legislation, regulations and actions could cause additional expense, capital expenditures, restrictions and delays in the activities of the Company, the extent of which cannot be predicted.

 

Failure to comply with applicable environmental and health and safety laws can result in injunctions, damages, suspension or revocation of permits and imposition of penalties. There can be no assurance that NorZinc has been or will be at all times in complete compliance with all such laws, regulations and permits, or that the costs of complying with current and future environmental and health and safety laws and permits will not materially adversely affect NorZinc’s business, results of operations or financial condition. Environmental hazards may exist on the properties, including the Prairie Creek Property, on which NorZinc holds interests which are unknown to NorZinc at present and which have been caused by previous owners or operators of the properties.

 

The Company is exposed to various levels of political, legislative, and other risks and uncertainties that may impact its continued operations or financial position.

 

The Company conducts its operations in Canada and specifically in the Northwest Territories and the province of Newfoundland and Labrador. The Mackenzie Valley in the Northwest Territories of Canada is in an area which is claimed by the Dehcho First Nations as their traditional territory. The Dehcho have not settled their land claim with the Federal Government of Canada. The Dehcho and the Federal Government both claim legal title to this territory and legal title to the land remains in dispute. The Company’s operations are potentially subject to a number of political, legislative and other risks. NorZinc is not able to determine the impact of political, legislative or other risks on its business or its future financial position.

 

NorZinc’s operations are exposed to various levels of political, legislative and other risks and uncertainties. These risks and uncertainties include, but are not limited to, cancellation, renegotiation or nullification of existing leases, claims, permits and contracts; expropriation or nationalization of property; changes in laws or regulations; changes in taxation laws or policies; royalty and tax increases or claims by governmental, Aboriginal or other entities; retroactive tax or royalty claims and changing political conditions; government mandated social expenditures; governmental regulations or policies that favour or require the awarding of contracts to local or Aboriginal contractors or require contractors to employ residents of, or purchase supplies from, a particular jurisdiction or area; or that require that an operating project have a local joint venture partner, which may require to be subsidized; and other risks arising out of sovereignty or land claims over the area in which NorZinc’s operations are conducted.

 

The mineral exploration, mine development, and proposed mining, processing activities of NorZinc, and the anticipated production, transportation and sale of mineral concentrates are subject to extensive federal, territorial, international and local laws, regulations and treaties, including various laws governing prospecting, development, production, transportation taxes, labour standards and occupational health, mine safety, toxic substances including mercury, land use, water use and other matters. Such laws and regulations are subject to change and can become more stringent and costlier over time. No assurance can be given that new laws, rules and regulations will not be enacted or that existing laws, rules and regulations will not be applied in a manner which could limit or curtail exploration, development, mining, processing, production and sale of concentrates. Amendments to current laws and regulations governing operations and activities of exploration and mining, or more stringent implementation thereof, could have a substantial adverse impact on NorZinc.

 

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In relation to Northwest Territories specifically, a number of policy and social issues exist which increase NorZinc’s political and legislative risk. The Government of Canada and Government of the Northwest Territories are facing legal and political issues, such as land claims and social issues, all of which may impact future operations. This political climate increases the risk of the Government making changes in the future to its position on issues such as mining rights and land tenure, which in turn may adversely affect NorZinc’s operations. Future government actions cannot be predicted but may impact the operation and regulation of the Prairie Creek Mine. Changes, if any, in Government policies, or shifts in local political attitude in the Northwest Territories may adversely affect NorZinc’s operations or business.

 

The Government of the Northwest Territories is developing a new Mineral Resources Act and is considering making it a legal requirement for proponents who intend to undertake resource development activities in the Northwest Territories to enter into impact benefit agreements with affected Aboriginal groups.

 

In 2016, the Government of Canada announced the introduction of a national pan-Canadian framework that includes a national floor price on carbon which, if implemented, will increase the cost of power supply to the Company’s projects. The Government of the Northwest Territories has committed to meet the federal benchmark for carbon pricing by 2019 and plan to introduce a territorial carbon tax effective July 1, 2019 based on $20 per tonne increasing annually to $50 per tonne by 2022, subject to certain adjustments and/or credits for large or small emitters, and on aviation and heating fuel.

 

On May 30, 2018 Environment and Climate Change Canada (ECCC) published the amended Metal and Diamond Mining Effluent Regulations (MDMER). The amendments include many changes that came into force on June 1, 2018 and new requirements for effluent and water quality monitoring which will come into force on January 1, 2019. The new MDMER regulations impose lower, more stringent, effluent discharge limits for arsenic, copper, cyanide, lead, nickel and zinc, as well as introduce limits for un-ionized ammonia. The new regulations also amend the environmental effects monitoring performance measurement and evaluation requirements, which stipulate that mine effluent not be acutely lethal to Daphnia magna.

 

In February 2018, the Government of Canada tabled Bills C-68 and C-69 in Parliament that if enacted will replace the Canadian Environmental Assessment Act 2012 with an Impact Assessment Act and amend the Fisheries Act and the Navigation Protection Act (becoming the Canadian Navigable Waters Act). Although the Canadian Environmental Assessment Act does not impact the Prairie Creek Project, as the legislative and regulatory framework and regulations in the Mackenzie Valley are governed by the MVRMA, the proposed new legislation is reflective of current federal government policies and may lead to changes in the MVRMA. The key changes proposed to the environmental and regulatory system include shifting from environmental assessment to impact assessment which would look at all of a project’s impacts, including environmental, health, social and economic impacts. The proposed legislation is intended to provide more transparency and certainty that decisions would be based on robust science, evidence and Indigenous traditional knowledge, more and earlier opportunities for meaningful participation by Indigenous peoples and more Indigenous leadership of and partnership in project review. Bill C-68 would change the Fisheries Act from prohibiting serious harm to fish, to “prohibiting works, undertakings and activities that result in the death of fish or the harmful alteration, disruption or destruction of fish habitat”. An amendment to Bill C-68 introduced in the House of Commons expands what is considered fish habitat, by declaring that characteristics of water flow could be deemed to be fish habitat.

 

NorZinc’s exploration, development and production activities may be substantially affected by political and legislative factors beyond NorZinc’s control, any of which could materially adversely affect NorZinc’s financial position or results of operations. The occurrence of these various factors and uncertainties cannot be accurately predicted. The Company is not able to determine the impact of these risks on its business.

 

Company operations and project costs may be negatively affected by Aboriginal land claims and treaty rights.

 

Relations between the Company and potentially impacted aboriginal groups have the potential to delay or halt regulatory approval processes and project development or construction and increase project costs, which may negatively affect the economics of the Prairie Creek project.

 

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The Canadian courts have confirmed that the Crown has a duty to consult with Aboriginal people, and to accommodate if necessary, when its decisions or actions may adversely affect Aboriginal rights and interests or treaty rights. Crown consultation has the potential to delay regulatory approval processes. In certain cases, respecting Aboriginal rights may mean regulatory approval may be denied or the conditions in the approval make the project economically challenging or not feasible. In addition to the potential impacts of such claims, development and construction may be inhibited, delayed or stopped which could result in, among other things, a significant increase in costs and/or cost overruns, delays, reduced support of the federal or territorial governments or challenges to, or the revocation of, regulatory approvals or permits and/or the need for additional regulatory processes, any of which could materially impact the overall feasibility or economic benefits of the Prairie Creek Project which, in turn, could have a material adverse effect on the Company and its business.

 

The Prairie Creek Mine is located on land claimed by NDDB of Nahanni Butte as their traditional territory. The NDDB is a “band” pursuant to the Indian Act RSC 1985 and is part of the Dehcho indigenous group. The members of the Dehcho are Aboriginal people within the meaning of Section 35 of the Constitution Act, 1982. The Federal Government has recognized that the inherent right of self-government is an existing Aboriginal right recognized and affirmed by Section 35 of the Constitution Act, 1982.

 

The Dehcho have not settled their land claim with the Federal Government. The Dehcho and the Federal Government of Canada both claim legal title to this territory, the Dehcho by virtue of historical occupation and the Federal Government under Treaty 8, signed in 1900, and Treaty 11 signed in 1921 and 1922. The Federal Government and the Dehcho First Nations disagree on the interpretation of Treaties 8 and 11 and legal title to the land remains in dispute. Canada maintains that under the Treaties the Dehcho extinguished ownership of their traditional lands. The Dehcho have threatened to take the Federal Government to court, or to the United Nations, over the key issue of sovereignty.

 

Since the mid-1990s the Dehcho and the Federal Government and the Government of the Northwest Territories have been engaged in ongoing land settlement negotiations in what is referred to as the “Dehcho Process” whereby the Federal Government and the Government of the Northwest Territories have agreed to negotiate with the Dehcho First Nations on a government to government basis in order to set out land, resources and governance rights to apply in the Dehcho territory.

 

In 2001, the Federal Government and the Dehcho First Nations entered into a Framework Agreement dated May 23, 2001. The Framework Agreement contemplates providing a structure for the negotiation of the Final Agreement. However, all negotiations are without prejudice to the legal position of the parties and nothing in the Framework Agreement is to be interpreted as creating, recognizing or denying rights or obligations of any of the parties. The Federal Government and the Dehcho agreed that it is desirable that the negotiations proceed at a pace which allows for the people of the Dehcho territory, and particularly the Elders, to remain fully informed and involved in the process.

 

The Framework Agreement provides that no new water licences or land use permits will be issued under the MVRMA within the Dehcho territory except after written notice to the Dehcho First Nations and after a reasonable period of time for the Dehcho to make representations with respect to the application for such licence or permit. Canada also agreed not to issue any new prospecting permits under the Canada Mining Regulations in the Dehcho territory without the support of the affected Dehcho First Nation.

 

Canada also agreed that the Final Agreement will ensure that a major mining project that requires any authorization from Canada, and that will impact on the Dehcho, shall be subject to negotiation with the Dehcho of an agreement relating to that project. A major mining project is defined as a project related to the development or production of minerals that will employ an average of 50 persons annually for the first five years in the Dehcho territory and for which more than $50 million will be expended in capital costs. The Company believes that the Prairie Creek Project is currently the only such major mining project in the Dehcho territory.

 

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Negotiations in the Dehcho Process continued intermittently since 2006.

 

A draft bilateral agreement was tabled and discussed in 2014. The draft agreement provided for land selection, the completion of a Dehcho Land Use Plan and the structure and responsibilities of a Dehcho Resource Management Authority. It was reported in January 2015 that the Government of the Northwest Territories offered the Dehcho First Nations land selection of 37,500 square kilometres of their traditional territory, with only surface rights, as well as a generalized interest in the subsurface equivalent of approximately 18% of the Dehcho Settlement Area. The Company understands from media reports that a revised draft bilateral proposal was tabled by Canada and the Government of the Northwest Territories in May 2018. It was reported that the new offer outlines two options. One has a $113 million cash settlement, with 48,000 square kilometres of surface and subsurface resource royalty rights, but no resource revenues from Crown land in the Mackenzie Valley. The other option is the same cash settlement, but with a smaller land offer of 42,000 square kilometres of surface and subsurface rights, and a small share in mineral royalties from development on Crown land in the Mackenzie Valley. It was reported that the governments’ latest land claim offer was rejected by the Dehcho First Nations General Assembly in July 2018.

 

The outcome of the Dehcho Process negotiations is expected to be a Final Agreement that will provide, amongst other things, for the implementation of a Dehcho government within the Dehcho territory. It is expected that the negotiations towards a Dehcho Final Agreement will take many years to complete.

 

The Company cannot predict the impact, if any, that the Dehcho Final Agreement, if eventually approved and signed, may have on the Prairie Creek Mine or the permitting thereof.

 

A key feature of devolution was the establishment of an Intergovernmental Council which was established by the Northwest Territories Intergovernmental Agreement on Lands and Resources Management signed between the Government of the Northwest Territories, Inuvialuit Regional Corporation, Northwest Territory Métis Nation, Sahtu Secretariat Incorporated, Gwich’in Tribal Council and the Tłįchǫ Government as part of the Devolution Agreement which came into effect on April 1, 2014. The Intergovernmental Agreement allows for other Aboriginal organizations to become a party and the Government of the Northwest Territories is continuing discussions with the Dehcho First Nations and the Akaitcho Territory Dene First Nations about signing onto the Devolution Agreement and becoming members of the Council.

 

NorZinc is not able to predict future government actions or determine the impact, if any, on its business or operations if the Dehcho First Nations sign on to the Devolution Agreement and becoming members of the Intergovernmental Council, or if the proposed Northwest Territories Minerals Resources Act is enacted. There can be no assurance that these laws and regulations will not change in the future in a manner that could have an adverse effect on the Company’s activities and/or its financial condition. Amendments to current laws and regulations governing operations and activities of exploration and mining, or more stringent implementation thereof, could have a substantial adverse impact on NorZinc.

 

The Company’s operations may be negatively affected by Aboriginal disagreement regarding Impact and Benefit Agreements

 

The Company has instituted policies to promote the achievement of participative and mutually beneficial relationships with the Aboriginal groups affected by the Prairie Creek project and is committed to working with such groups so they may realize benefits from the project and its operation.

 

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Notwithstanding that the Company has entered into agreements with Aboriginal groups respecting the Prairie Creek Project, the issues are complex and the impact of Aboriginal relations on operations and development initiatives is uncertain. There is no guarantee that the Company will be able to satisfy the concerns of the Aboriginal groups and attempting to address such concerns may require significant and unanticipated capital and operating expenditures. Future disagreements with Aboriginal groups could result in legal challenges by Aboriginal groups alleging breach of contract. If successful, such claims could require the Company to pay unanticipated compensation or damages to one or more Aboriginal groups.

 

The Company’s continued operations depend on international market prices of metal and the marketability of minerals.

 

The market price of metals is volatile and cannot be controlled. Metal prices have fluctuated widely, particularly in recent years. If the price of metals and minerals should drop significantly, the economic prospects for the Prairie Creek Project could be significantly reduced or rendered uneconomic. There is no assurance that, a profitable market may exist for the sale of metals, including concentrates, from the Prairie Creek Project. Factors beyond the control of the Company may affect the marketability of metals or concentrates produced.

 

Factors tending to affect the price of metals include:

 

The relative strength of the U.S. dollar against other currencies;
Government monetary and fiscal policies;
Expectations of the future rate of global monetary inflation and interest rates;
General economic conditions and the perception of risk in capital markets;
Political conditions including the threat of terrorism or war;
Speculative trading;
Investment and industrial demand; and
Global production and inventory stocks.

 

The effects of these factors, individually or in aggregate, on the prices of zinc, lead and/or silver is impossible to predict with accuracy. Fluctuations in metal prices may adversely affect NorZinc’s financial performance and results of operations. Further, if the market price of zinc, lead and/or silver falls or remains depressed, NorZinc may experience losses or asset write-downs and may curtail or suspend some or all of its exploration, development and mining activities.

 

Furthermore, sustained low metal prices can halt or delay the development of new and existing projects; reduce funds available for mineral exploration and may result in the recording of a write-down of mining interests due to the determination that future cash flows would not be expected to recover the carrying value.

 

Metal prices fluctuate widely and are affected by numerous factors beyond NorZinc’s control such as the sale or purchase of such commodities by various central banks and financial institutions, interest rates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, global and regional supply and demand, and the political and economic conditions of major mineral and metal producing countries throughout the world.

 

Future production, if any, from NorZinc’s mining properties is dependent on metal prices that are adequate to make these properties economic. The prices of metals have fluctuated widely in recent years, and future or continued serious price declines could cause continued development of and commercial production from NorZinc’s properties to be impracticable. Depending on the price of metal, cash flow from mining operations may not be sufficient and NorZinc may never commence commercial production and may lose its interest in, or may be forced to sell, its properties.

 

In addition to adversely affecting NorZinc’s reserve or resource estimates and its financial condition, declining commodity prices can impact operations by requiring a reassessment of the feasibility of a particular project. The need to conduct such a reassessment may cause substantial delays or may interrupt operations until the reassessment can be completed.

 

The marketability of concentrates is affected by numerous other factors beyond the control of the Company, including quality issues, impurities, deleterious elements, government regulations, royalties, allowable production and regulations regarding the importing and exporting of concentrates, the effect of which cannot be accurately predicted.

 

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It is expected that the zinc concentrates to be produced from the Prairie Creek Mine will contain relatively high levels of mercury. United Nations proposals for a global treaty on mercury, intended to result in reduced global emissions of mercury, may place restrictions on the production, use and international movement of mercury and mercury-containing wastes which may, if adopted, result in restrictions on shipment of concentrates or other mineral products containing by-product or trace mercury.

 

The Company has signed non-binding Memoranda of Understanding (MOUs) with Korea Zinc and Boliden for the sale of its zinc concentrates (and with Korea Zinc for lead concentrates). The MOUs set out the intentions of the Company and each of Korea Zinc and Boliden to enter into concentrate sales agreements for the concentrates to be produced from the Prairie Creek Mine on the general terms set out in the MOUs, including commercial terms which are to be kept confidential. The Boliden MOU expires on June 30, 2019 and discussions have commenced with Boliden on the extension or revision to this MOU. Since signing the MOUs almost three years ago, more concentrates with elevated levels of mercury are being produced and processed, laws around the world for mercury production continue to change, and technology regarding the safe removal of mercury has improved. In view of this, the Company is initiating an updated study to analyze the current market. Based on the current development timeline for Prairie Creek the first concentrate will be produced in 2022.

 

The actual sales agreements will likely provide that treatment charges will be set annually at the annual benchmark treatment charges and scales, as agreed between major smelters and major miners. Based on the current MOUs, payables and penalties will be negotiated in good faith annually during the fourth quarter of the preceding year, including industry standard penalties based on indicative terms and agreed limits specified in each MOU. Treatment and refining charges, including deductibles and penalties, vary with smelter location, and individual smelter terms and conditions. The economic model used in the 2017 FS has been prepared assuming average blended indicative treatment charges and penalties, however, no smelter or concentrate buyer has contractually committed to the assumed treatment charges or penalties. There can be no assurance that the assumed terms will be available to the Company.

 

The Company may be adversely affected by exchange rate fluctuations.

 

Currency fluctuations may affect the costs that NorZinc incurs at its operations. Zinc, lead and silver are sold throughout the world based principally on the U.S. dollar price, but operating expenses are incurred in currencies other than the U.S. dollar. Appreciation of the Canadian dollar against the U.S. dollar increases the cost of production in U.S. dollar terms at mines located in Canada.

 

The Company’s exploration efforts are speculative in nature and may be unsuccessful.

 

Mineral exploration and mining involves a high degree of risk.

 

There is no assurance the Company’s mineral exploration activities will be successful. Few properties that are explored are ultimately developed into producing mines. In exploring and developing its mineral deposits the Company is subjected to an array of complex economic factors and technical considerations. Unusual or unexpected formations, formation pressures, power outages, labour disruptions, flooding, explosions, cave-ins, landslides, environmental hazards, and the inability to obtain suitable or adequate machinery, equipment or labour are other risks involved in the conduct of exploration and development programs. Such risks could materially adversely affect the business or the financial performance of the Company.

 

There is no certainty that the expenditures made by NorZinc towards the search and evaluation of mineral deposits will result in discoveries of commercial quantities of ore. The exploration for and development of mineral deposits involves significant risks which even a combination of careful evaluation, experience and knowledge may not eliminate. Major expenses may be required to locate and establish mineral reserves, to develop metallurgical processes and to construct mining and processing facilities at a particular site. It is impossible to ensure that the exploration or development programs planned by NorZinc will result in a profitable commercial mining operation. Whether a mineral deposit will be commercially viable depends on a number of factors, some of which are: the particular attributes of the deposit, such as size, grade and proximity to infrastructure; metal prices which are highly cyclical; and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in NorZinc not receiving an adequate return on invested capital.

 

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A specific risk associated with the Prairie Creek Property is its remote location. Mining, processing, development and exploration activities depend, to one degree or another, on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important factors, which affect capital and operating costs. Unusual or infrequent weather phenomena, government or other interference in the maintenance or provision of such infrastructure could adversely affect NorZinc’s operations, financial condition and results of operations.

 

Mining operations generally involve a high degree of risk. NorZinc’s mining operations will be subject to all the hazards and risks normally encountered in the development and production of minerals, including unusual and unexpected geologic formations, seismic activity, rock bursts, cave-ins, flooding and other conditions involved in the drilling and removal of material, any of which could result in damage to, or destruction of, mines and other producing facilities, damage to life or property, environmental damage and possible legal liability. Mining and milling operations are subject to hazards such as equipment failure or failure of retaining dams around tailings disposal areas, which may result in environmental pollution and consequent liability.

 

The Company’s estimate of mineral reserves and mineral resources may be incorrect.

 

There is uncertainty in the estimation of mineral reserves and mineral resources.

 

The figures for Mineral Reserves and Mineral Resources contained in this document are estimates only and no assurance can be given that the anticipated tonnages and grades will be achieved, that the indicated level of recovery will be realized or that Mineral Reserves and Mineral Resources can be mined or processed profitably. There are numerous uncertainties inherent in estimating Mineral Reserves and Mineral Resources, including many factors beyond NorZinc’s control. Such estimation is a subjective process, and the accuracy of any reserve and resource estimate is a function of the quantity and quality of available data and of the assumptions made and judgments used in engineering and geological interpretation. In addition, there can be no assurance that mineral or metal recoveries in small scale laboratory tests will be duplicated in larger scale tests under on-site conditions or during production.

 

Inferred mineral resources do not have demonstrated economic viability. Due to the uncertainty, which may attach to inferred mineral resources, there is no assurance that inferred mineral resources will be upgraded to measured and indicated mineral resources as a result of continued exploration.

 

Fluctuation in metal prices, results of drilling, metallurgical testing and production and the evaluation of mine plans subsequent to the date of any estimate may require revision of any such resource or reserve estimate. The volume and grade of resources mined and processed, and recovery rates may not be the same as currently anticipated. Any material reductions in estimates of Mineral Reserves or Mineral Resources, or of NorZinc’s ability to extract these Mineral Reserves or Mineral Resources, could have a material adverse effect on NorZinc’s results of operations and financial condition.

 

Mineral reserve and mineral resource estimates are imprecise and depend partly on statistical inferences drawn from drilling and other data which may prove to be unreliable. Future production could differ dramatically from reserve or resource estimates for many reasons including the following:

 

Mineralization or formations could be different from those predicted by drilling, sampling and similar examinations;
Declines in the market price of metals may render the mining of some or all of NorZinc’s Mineral Reserves or Mineral Resources uneconomic;
Increases in operating mining costs and processing costs could adversely affect reserves or resources; and
The grade of reserves or resources may vary significantly from time to time and there can be no assurance that any particular level of metal may be recovered from the reserves or resources.

 

Any of these factors may require NorZinc to reduce its Mineral Reserve or Mineral Resources estimates.

 

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The Company’s insurance will not cover all potential risks associated with the operations of a mining company.

 

The Company is not insured to cover all potential risks.

 

NorZinc’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, ground or slope failures, cave-ins, changes in the regulatory environment and natural phenomena such as inclement weather conditions, floods and earthquakes. Such occurrences could result in damage to mineral properties or production facilities, personal injury or death, environmental damage to NorZinc’s properties or the properties of others, delays in mining, monetary losses and possible legal liability.

 

Although NorZinc maintains insurance to protect against certain risks in such amounts as it considers reasonable, its insurance will not cover all the potential risks associated with the Company’s mining operations. NorZinc may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards as a result of exploration and production is not generally available to NorZinc or to other companies in the mining industry on acceptable terms. In particular, the Company is not insured for environmental liability or earthquake damage.

 

NorZinc might also become subject to liability for pollution or other hazards which may not be insured against, or which NorZinc may elect not to insure against, because of premium costs or other reasons. Losses from these events may cause NorZinc to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.

 

The Company cannot guarantee that it has or will continue to have good title to its mining properties.

 

Title to the Company’s mineral properties may be challenged or defective. Aboriginal groups may raise title disputes in relation to land claims and any impairment or defect in title could have a negative impact on the Company.

 

Mining leases and surface leases issued to the Company by the Government have been surveyed but other parties may dispute the Company’s title to its mining properties. The mining claims in which the Company has an interest have not been surveyed and, accordingly, the precise location of the boundaries of the claims and ownership of mineral rights on specific tracts of land comprising the claims may be in doubt. These claims have not been converted to lease, and are, accordingly, subject to regular compliance with assessment work requirements. Failure to comply strictly with applicable laws, regulations and local practices relating to mineral right applications and tenure, could result in loss, reduction or expropriation of entitlements.

 

While the Company has investigated its title to all its mining leases, surface leases and mining claims and, to the best of its knowledge, title to all properties is in good standing, this should not be construed as a guarantee of title and title may be affected by undetected defects. The validity and ownership of mining property holdings can be uncertain and may be contested. There are currently a number of pending Aboriginal or Native title or Treaty or traditional land ownership claims relating to Northwest Territories. The Company’s properties at Prairie Creek are subject to Aboriginal or Native land claims. Title insurance generally is not available, and NorZinc’s ability to ensure that it has obtained secure title to individual mineral properties or mining concessions may be severely constrained. NorZinc’s mineral properties may be subject to prior unregistered liens, agreements, transfers or claims, including Native land claims, and title may be affected by, among other things, undetected defects. No assurances can be given that there are no title defects affecting such properties.

 

The Company is dependent on certain key executives and the loss of any of these executives may adversely impact operations and directors or officers of the Company may have conflicts of interest.

 

The Company is dependent on certain key executives and the loss of these executives may adversely affect corporate activity and results of operations.

 

NorZinc is dependent on the services of key executives, including its President and Chief Executive Officer, its Vice President of Exploration and Chief Operating Officer and its Chief Financial Officer. Due to the relatively small size of the Company, the loss of these persons or NorZinc’s inability to attract and retain additional highly skilled or experienced employees may adversely affect its business and future operations.

 

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Certain of the directors and officers of the Company also serve as directors and/or officers of, or have significant shareholdings in, other companies involved in natural resource exploration and development and consequently there exists the possibility for such directors and officers to be in a position of conflict. Any decision made by any of such directors and officers involving NorZinc will be made in accordance with their duties and obligations to deal fairly and in good faith with a view to the best interests of the Company and its shareholders. In addition, each of the directors is required to declare and refrain from voting on any matter in which such directors may have a conflict of interest in accordance with the procedures set forth in the Business Corporations Act (British Columbia) and other applicable laws.

 

To the extent that such other companies may participate in ventures in which NorZinc may participate, the directors of NorZinc may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. In the event that such a conflict of interest arises at a meeting of the Company’s directors, a director who has such a conflict will abstain from voting for the approval of such participation or such terms.

 

From time to time several companies may collectively participate in the acquisition, exploration and development of natural resource properties thereby allowing for their participation in larger programs, permitting involvement in a greater number of programs and reducing financial exposure in respect of any one program. It may also occur that a particular company will assign all or a portion of its interest in a particular program to another of these companies due to the financial position of the company making the assignment. Under the laws of the Province of British Columbia, the directors of the Company are required to act honestly, in good faith and in the best interests of the Company. In determining whether or not NorZinc will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider the degree of risk to which the Company may be exposed and its financial position at that time.

 

Acquisitions by the Company may not produce desired benefits.

 

From time to time, NorZinc undertakes evaluations of opportunities to acquire additional mining assets and businesses. Any resultant acquisitions may be significant in size, may change the scale of NorZinc’s business, and may expose NorZinc to new geographic, political, operating financial and geological risks. NorZinc’s success in its acquisition activities depends on its ability to identify suitable acquisition candidates, to acquire them on acceptable terms, and integrate their operations successfully with those of NorZinc. Any acquisition would be accompanied by risks, such as a significant decline in metal prices; the ore body proving to be below expectations; the difficulty of assimilating the operation and personnel; the potential disruption of NorZinc’s ongoing business; the inability of management to maximize the financial and strategic position of NorZinc through the successful integration of acquired assets and businesses; the maintenance of uniform standards, control, procedures and policies; the impairment of relationships with employees, customers and contractors as a result of any integration of new management personnel; and the potential unknown liabilities associated with acquired assets and business. In addition, NorZinc may need additional capital to finance an acquisition. Debt financing related to any acquisition will expose NorZinc to the risk of leverage, while equity financing may cause existing shareholders to suffer dilution. There can be no assurance that NorZinc would be successful in overcoming these risks or any other problems encountered in connection with such acquisitions.

 

The competitiveness of the mining and resource industry in all its phases may impact the development of the Company.

 

The mining industry is competitive in all of its phases. There is aggressive competition within the mining industry for the discovery and acquisition of properties considered to have commercial potential. NorZinc faces strong competition from other mining companies in connection with the acquisition of properties, mineral claims, leases and other mineral interests as well as for the recruitment and retention of qualified employees and other personnel. Many of these companies have greater financial resources, operational experience and technical capabilities than NorZinc. As a result of this competition, NorZinc may be unable to maintain or acquire attractive mining properties on terms it considers acceptable or at all. Consequently, NorZinc’s operations and financial condition could be materially adversely affected.

 

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The Company cannot guarantee maintaining an effective system of internal control to accurately report financial results or prevent fraud.

 

The Company is subject to Canadian regulations regarding internal controls over financial reporting and there are no assurances that the Company will be able to continue to comply with heightened regulatory requirements. Due to its size, its limited staff resources and financial constraints, the Company is exposed to certain potential deficiencies in its internal controls over financial reporting. If the Company is unable to maintain the adequacy of its internal control over financial reporting, as such standards are modified, supplemented, or amended from time to time; the Company may not be able to ensure that it can conclude on an ongoing basis that it has effective internal controls over financial reporting. The Company’s inability to satisfy the requirements Canadian regulatory requirements on an ongoing, timely basis could result in the loss of investor confidence in the reliability of its consolidated financial statements, which in turn could harm the Company’s business and negatively impact the trading price or market for its equity securities. In addition, any inability to implement required new or improved controls, or difficulties encountered in their implementation, could impact the Company’s operating results or cause it to be unable to meet its reporting obligations. Future acquisitions (if any) may provide the Company with challenges in implementing the required processes, procedures and controls in the acquired operations.

 

No evaluation can provide complete assurance that the Company’s internal control over financial reporting will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be reported. The effectiveness of the Company’s controls and procedures could also be limited by simple errors or faulty judgments. In addition, as the Company continues to develop, the challenges involved in implementing appropriate internal controls over financial reporting will increase and will require that the Company continue to enhance its internal controls over financial reporting. Although the Company will be required to devote substantial time and will incur substantial costs, as necessary, in an effort to ensure ongoing compliance, the Company cannot be certain that it will be successful in continuing to comply Canadian regulatory requirement for disclosure controls and procedures.

 

Information technology systems disruption could jeopardize the Company’s operations.

 

The Company relies on information technology systems and networks in the operation of its business. The Company could be materially and adversely affected in the event that its information technology systems or networks are compromised. This information technology infrastructure may be subject to security breaches or other cybersecurity incidents or may be compromised by natural disasters or defects in software or hardware systems. The consequences of the Company’s information technology systems being compromised include material and adverse impacts on the Company’s financial condition, operations, production, and reputation.

 

Conditions resulting from climate change may restrict or prohibit mining operations.

 

Experience in recent years would indicate that winter seasons in the north of Canada have been getting somewhat shorter and a little warmer. The Company identified some climate change risks from reliance on a winter-only access road and with a large volume of concentrates to transport out from, and supplies to bring in to, the Prairie Creek Mine site, so the decision was taken to propose construction and operation of the ASR. Constructing and operating the ASR could be impacted by potential climate change. Natural thaw of discontinuous permafrost could lead to soil instability and potentially slope failures and ongoing road maintenance may be required to address zones of thaw and settlement, as well as local soil movement or erosion.

 

Extreme weather events (such as increased frequency or intensity of storms, increased snow pack, or unusually warm or shorter winter seasons) have the potential to disrupt operations at the Company’s projects. Extended disruption to road access due to extreme weather could delay or increase the cost of construction or operation of the Company’s projects, or otherwise adversely affect the Company’s business.

 

The Company may be adversely affected by global financial conditions.

 

Securities of junior and small-cap companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include macroeconomic developments in North America and global and market perceptions of the attractiveness of particular industries.

 

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The share price of NorZinc is likely to be significantly affected by short-term changes in metal prices. Other factors unrelated to NorZinc’s performance that may have an effect on the price of its shares include the following: the extent of analytical coverage available to investors concerning NorZinc’s business may be limited if investment banks with research capabilities do not follow the Company’s securities; lessening in trading volume and general market interest in the Company’s securities may affect an investor’s ability to trade significant numbers of common shares; the size of Company’s public float may limit the ability of some institutions to invest in the Company’s securities; and a substantial decline in the price of the common shares that persists for a significant period of time could cause the Company’s securities to be delisted from an exchange, further reducing market liquidity.

 

As a result of any of these factors, the market price of the Company’s shares at any given point in time may not accurately reflect NorZinc’s long-term value. Securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. NorZinc may in the future be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert management’s attention and resources.

 

Shareholder dilution will impact the proportionate ownership of a shareholder and may impact the price of the Company’s securities.

 

As of the date of this Annual Report, there were 370,898,330 common shares outstanding and the Company had 14,610,000 share purchase options and 9,925,647 share units outstanding. The exercise or payout of all the existing share purchase options, warrants and share units would result in a percentage ownership dilution to the existing shareholders.

 

The Company requires capital and is subject to financing risks.

 

Additional financing may be needed for business operations which may lead to dilution of the Company’s current shareholders. The Company has used equity financing in order to meet its needs for capital and may engage in equity financings during future periods. Subsequent issuances of equity securities or securities convertible into or exchangeable or exercisable for equity securities would result in further percentage ownership dilution to existing shareholders and could depress the price of the Company’s shares.

 

The Company has not paid any dividends and is unlikely to do so in the future.

 

The Company has no earnings or dividend record, and has not paid dividends on its common shares since incorporation and does not anticipate doing so in the foreseeable future. The Company's current intention is to apply any future net earnings to increase its working capital. Prospective investors seeking or needing dividend income or liquidity should, therefore, not purchase the Company's common shares, or securities convertible into common shares. The Company currently has no revenue and a history of losses, so there can be no assurance that the Company will ever have sufficient earnings to declare and pay dividends to the holders of common shares.

 

Enforcement of foreign judgments against the Company may not be possible.

 

The Company is organized under the laws of, and headquartered in, British Columbia, Canada, and none of its directors and officers are citizens or residents of the United States. As such, it may be difficult or impossible for an investor to (i) enforce in courts outside the United States judgments against the Company and its directors and officers obtained in United States courts based upon the civil liability provisions of United States federal securities law, or (ii) bring in courts outside the United States an original action against the Company and/or its directors and officers to enforce liabilities based upon such United States securities laws.

 

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As a result of the Company’s foreign private issuer status, the Company’s shareholders may have less complete and timely data.

 

The Company is a “foreign private issuer” as defined in Rule 3b-4 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”). Equity securities of the Company are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the Exchange Act pursuant to Rule 3a12-3 of the Exchange Act. Therefore, the Company is not required to file a Schedule 14A proxy statement in relation to the annual meeting of shareholders. The submission of proxy and annual meeting of shareholder information on Form 6-K may result in shareholders having less complete and timely information in connection with shareholder actions. The exemption from Section 16 rules regarding reports of beneficial ownership and purchases and sales of common shares by insiders and restrictions on insider trading in the Company’s securities may result in shareholders having less data and there being fewer restrictions on insiders’ activities in the Company’s securities.

 

The Company’s “Passive Foreign Investment Company” status may have adverse tax consequences for U.S. investors.

 

Because the Company is an exploration stage company and its only material revenues consist of passive investment income on its cash investments, U.S. shareholders of common shares should be aware that the Company believes it was classified as a passive foreign investment company (“PFIC”) during the tax year ended December 31, 2018, and based on current business plans and financial expectations, the Company anticipates that it may be a PFIC for the current tax year and may be a PFIC in future tax years. If the Company is a PFIC for any year during a U.S. shareholder’s holding period of the common shares, then such U.S. shareholder generally will be required to treat any gain realized upon a disposition of common shares, or any “excess distribution” received on its common shares, as ordinary income, and to pay an interest charge on a portion of such gain or distribution, unless the shareholder makes a timely and effective "qualified electing fund" election (“QEF Election”) or a "mark-to-market" election with respect to the common shares. A U.S. shareholder who makes a QEF Election generally must report on a current basis its share of the Company's net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. shareholders should be aware that there can be no assurance that the Company will satisfy the record keeping requirements that apply to a qualified electing fund, or that the Company will supply U.S. shareholders with information that such U.S. shareholders require to report under the QEF Election rules, in the event that the Company is a PFIC and a U.S. shareholder wishes to make a QEF Election. Thus, U.S. shareholders may not be able to make a QEF Election with respect to their common shares. A U.S. shareholder who makes a mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the common shares over the taxpayer’s adjusted tax basis therein. This paragraph is qualified in its entirety by the discussion below under the heading “Certain United States Federal Income Tax Consequences.” Each U.S. shareholder should consult its own tax advisors regarding the PFIC rules and the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares.

 

The Company’s securities may be subject to penny stock regulations that require abiding by specific criteria in matters such as financings.

 

The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market.

 

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The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade the Company’s securities.

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

Background

 

The principal business activity of the Company and its wholly-owned subsidiaries Canadian Zinc Corporation and NorZinc-Newfoundland Ltd., is the exploration and development of natural resource properties. The Company’s key project is the wholly-owned Prairie Creek Project. The Company also owns projects in Newfoundland that host several zinc-lead-copper-gold-silver deposits.

 

The Company’s registered and records office is located at Suite 1710, 650 West Georgia Street, PO Box 11644, Vancouver, British Columbia, Canada, V6B 4N9. The Company currently exists under the Business Corporations Act (British Columbia) and its common shares are listed on the Toronto Stock Exchange under the symbol “NZC” and on the OTCQB under the symbol “NORZF”.

 

The Company is considered to be in the exploration and development stage given that its exploration properties are not yet in production and, to date, have not earned any significant revenues. The recoverability of amounts shown for exploration and evaluation assets on the Company’s balance sheet is dependent on the existence of economically recoverable mineral reserves, obtaining and/or maintaining the necessary permits to operate a mine, obtaining the financing to complete development and construction and future profitable mine production.

 

Technical Information

 

All scientific and technical information in this Annual Report has been reviewed and approved by Alan Taylor, P.Geo., Vice President of Exploration and Chief Operating Officer of the Company, a qualified person for the purposes of National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”).

 

For additional information regarding the Company’s Prairie Creek Project, please see the technical report entitled “Technical Report – Prairie Creek Property Feasibility Study NI 43-101 Technical Report” dated effective September 28, 2017 (the “Prairie Creek Technical Report”), by H.A. Smith, L.P. Staples, S. Elfen, G.Z. Mosher, F. Wright and D. Williams on the Company’s profile at www.sedar.com or on EDGAR at www.sec.gov.

  

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For additional information regarding the Company’s LeMarchant deposit, including the key assumptions, parameters and methods used to estimate the updated mineral resource estimate, please see the technical report entitled “NI 43-101 Technical Report and Updated Mineral Resource Estimate on the LeMarchant Deposit South Tally Pond Property, Central Newfoundland, Canada” prepared by Michael Cullen, Matthew Harrington and Michael J. Vander, dated effective September 20, 2018.

 

Mineral resources that are not mineral reserves do not have demonstrated economic viability. Inferred mineral resources are considered too speculative geologically to have economic considerations applied to them that would enable them to be categorized as mineral reserves and there is no certainty that all or any part of an inferred mineral resource will ever be upgraded to a measured or indicated mineral resource or to a mineral reserve.

 

General Development of the Business

 

Prairie Creek Project

 

Ownership, Reserves and Existing Infrastructure

 

The Prairie Creek Project is an advanced-stage, permitted, partially developed zinc-lead-silver property, located in the Northwest Territories, Canada (the “Prairie Creek Property”, “Prairie Creek Project” or “Prairie Creek Mine”). The Prairie Creek Property is subject to a 1.2% net smelter return royalty.

 

The Prairie Creek Mine contains a Proven and Probable Reserve of 8.1 million tonnes grading 8.6% Zn; 8.1% Pb and 124 g/t Ag, which ranks Prairie Creek amongst the highest grade base metal deposits in the world. These reserves are based upon a Measured and Indicated Resource of 8.7 million tonnes grading 9.5% Zn; 8.9% Pb and 136 g/t Ag, and represent an initial mine life of 15 years at 1,600 tonnes per day mining.

 

Prairie Creek also hosts an additional Inferred Mineral Resource of 7.0 million tonnes grading 11.3% Zn, 7.7% Pb, and 166 g/t Ag, which has the potential, through further exploration and development, to be upgraded to the Reserve category and thus potentially significantly increasing the initial 15-year mine life.

 

The Prairie Creek Mine has extensive infrastructure in place including five kilometres of underground workings on three levels, a 1,000 ton per day mill, a fleet of heavy duty and light duty surface vehicles, three surface exploration diamond drill rigs, camp accommodation, maintenance and water treatment facilities and a 1,000 metre long gravel airstrip.

 

NorZinc’s primary objective is to bring the Prairie Creek Mine into production at the earliest opportunity and in pursuit of that objective to secure the necessary senior financing to complete the development and construction of the Prairie Creek Project. As the Prairie Creek Mine is the flagship property of the Company, its development is integrally linked to the financing of the Company.

 

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2017 Feasibility Study

 

The Company completed a Feasibility Study (“2017 FS”) in 2017, the results of which are set forth in the Prairie Creek Technical Report which contemplates a mine life of 15 years resulting in $3 billion in net revenue and $1.3 billion in earnings before interest, taxes, depreciation and amortization (“EBITDA”) over the life of the mine and pre-tax Net Present Value (“NPV”) of $344 million, using an 8% discount rate, with an Internal Rate of Return (“IRR”) of 24% (post-tax NPV of $188 million and an IRR of 18%) and using base case metal price forecasts of US$1.10 per pound for zinc, US$1.00 per pound for lead and US$19 per ounce for silver with a foreign exchange rate of CA$1.25=US$1.00 and treatment charges of US$172/tonne for zinc concentrate and US$130/tonne for lead concentrates.

 

Using the base case metal prices and an exchange rate of CA$1.35=US$1.00 would increase the pre-tax NPV8% to $500 million and the IRR to 29.5%. Using a zinc price of US$1.20 per lb., with all other base case inputs and a foreign exchange rate of CA$1.25=US$1.00 increases the pre-tax NPV8% to $410 million and the IRR to 26.2%. Using a zinc price of US$1.20 per lb., with all other base case inputs and a foreign exchange rate of CA$1.375=US$1.00 increases the pre-tax NPV8% to $574 million and the IRR to 31.9%.

 

The 2017 FS indicated average annual production over the first 10 years of operation (including the start-up year) of 64,800 tonnes of zinc concentrate and 71,600 tonnes of lead concentrate containing a total of 95 million pounds of zinc, 105 million pounds of lead and 2.1 million ounces of silver in both zinc and lead concentrates. Pre-production capital costs, including provision for a new All Season Road (“ASR”), were estimated at $279 million, including contingency, with payback of less than five years.

 

The 2017 FS contemplated a 2.5 year construction period, commencing with a winter road construction as the initial phase of the ASR construction.

 

The All Season Road

 

Regulatory Approval

 

On September 12, 2017, the Mackenzie Valley Environmental Impact Review Board (the “Review Board”) recommended approval of the proposed All Season Road for the Prairie Creek Mine. The Review Board issued its Report of Environmental Assessment and Reasons for Decision for the Prairie Creek All Season Road Project for the Prairie Creek Mine (the “EA Report”) and submitted the EA Report to the Federal Minister of Crown-Indigenous Relations and Northern Affairs. The Review Board recommended that approval of the All Season Road be granted subject to implementation of the measures described in the EA Report, which it considers are necessary to prevent significant adverse impacts on the environment and local people.

 

On October 9, 2018, the Minister of Crown-Indigenous Relations, on behalf of the Responsible Ministers, issued a decision adopting the Review Board’s recommendation that the All Season Road for the Prairie Creek Mine be approved, subject to the same conditions as the EA Report. The full texts of the correspondence related to this process may be viewed on the public registry website of the Review Board.

 

The Environmental Assessment (“EA”) of the ASR was completed in 2018. With the Company’s submission of the requested Post-EA Information Package in February 2019, subsequently deemed complete in March 2019, the ASR permit has now entered the final permitting stage jointly with the Mackenzie Valley Land and Water Board (“Water Board”) and Parks Canada (jointly “MVLWB & Parks”), with a permit expected to be received in the third quarter of 2019. The permit is expected to incorporate the recommended mitigation measures included in the EA Report.

 

The construction schedule of the ASR requires an initial Phase 1 winter road be established in order to gain initial access to the project site and, at the same time, provide required geotechnical data to finalize the ASR route design. Due to local terrain challenges, small sections of the Phase 1 road would be constructed using non-typical methods of winter roads. The ASR will follow the general alignment of the previously permitted winter road, while reflecting the terrain, site characteristics, and road specifications suitable and preferred for an all season road.

 

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Indigenous Agreements

 

The Nah?a Dehé Dene Band (“NDDB”) of Nahanni Butte is the nearest community to the Prairie Creek Mine, located approximately 90 kilometres southeast of the mine site. The mine site and route of the ASR are within NDDB’s Traditional Territory. The Łíídlįį Kų́ę́ First Nation (“LKFN”) of Fort Simpson are the largest community within the Dehcho Region, Fort Simpson is located about 185 kilometres east of the mine site.

 

In 2011, the Company signed an Impact Benefit Agreement with the NDDB (the “Nahanni IBA”), and subsequently signed a similar agreement with the LKFN (the “LKFN IBA”) for the development of the Prairie Creek Mine, which contemplated access to the mine via a winter road only. In both agreements, NDDB and LKFN agreed to support the Company in obtaining all necessary permits and other regulatory approvals required for the Prairie Creek Mine Project.

 

Recognizing the ASR may have additional potential impacts and effects on both groups as compared to a winter-only road, the Company initiated consultation discussions with both groups.

 

In January 2019, the Company signed a Traditional Land Use Agreement (“TLUA”) with the NDDB for the construction and operation of the ASR. The Company is also finalizing negotiations for a Road Benefit Agreement (“RBA”) with the LKFN.

 

As part of the EA Report engagement, the NDDB and LKFN entered into an agreement with the Company which provides for the negotiation of an Environmental Management Agreement (“EMA”). The EMA is intended to be a formal mechanism, tested in other projects, to, in addition to regulatory instruments, provide for Indigenous participation in environmental management, and to ensure that the mitigative measures and environmental protection commitments in the EA Report are appropriately implemented. It will also involve Dene participation in the environmental management of the road, a cornerstone of which is a Dene-led independent monitoring program. This agreement will also provide for Dene communities’ review, participation and oversight of environmental monitoring of the ASR during permitting, design, construction, operation and closure phases, and the implementation of the mitigation measures contained in the EA Report.

 

The Dene communities and the Company intend the EMA to provide for a consultative and cooperative approach to environmental management of the ASR that will establish the appropriate responsibilities of the NDDB, LKFN and the Company in the development, project design, ongoing review and monitoring, as well as modification of follow-up programs to mitigate potential effects on the environment and to provide transparency and oversight to local communities.

 

These aforementioned agreements, both completed and near completion, provide assurance the Prairie Creek Mine has strong local Aboriginal support as the ASR moves through the final stage of permitting.

 

Timing

 

NorZinc plans to construct the ASR over three calendar years. Prior to construction activities, the Company plans to conduct field investigations and prepare site plans (including detailed road design) and award construction contracts. Dependent on the permitting and financing timeline, construction of the ASR is planned to commence from a winter road in early 2020 and continue into 2022, in parallel with continuous and ongoing site construction and project development.

 

2018 Operations

 

The Prairie Creek Project site was re-opened at the beginning of June 2018 and closed at the end of October 2018. Work was initially focused on normal care and maintenance activities, including re-initiation of treatment of mine water discharge, building maintenance and mobile equipment repair. Much additional work was carried out relating to the upgrade of the reagent storage pad area and repackaging all the mill process materials stored at this pad and in the main yard. Repackaging and reorganization of stored mill process reagents was completed by the end of the summer.

 

Two airlifts of diesel fuel and freight were completed in July and August 2018. A helicopter supported program in undertaking further geotechnical studies and additional base line environmental studies, including archeology, along the ASR route was completed in August.

 

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A further assessment of site equipment and infrastructure was undertaken to better estimate costs of rehabilitation along with advancing basic engineering in preparation for construction and planning for 2019. During September and October, engineering investigations focussed on the assessment of, and proposals for the rehabilitation of certain site facilities in anticipation of early construction, including site cranes, accommodation, the mill roof and some electrical facilities.

 

The Company is now considering refurbishing some of those items in the 2019 site season prior to main construction activities planned for 2020. An upgrade of the communication infrastructure was also completed along with the repair of mobile equipment.

 

Other 2018 Permitting Activities

 

The Company made various applications to the Water Board for extensions or amendments to a number of existing licenses and land use permits, including the following:

 

(i)The Company successfully applied to amend exploration Water Licence MV2001L2-0003 so that the zinc compliance levels reflect the levels prescribed in the federal Metal and Diamond Mining Effluent Regulations.

 

(ii)The Company extended by two years the terms of Land Use Permit MV2013C0002 (issued in April 2013 for a term of five years, which permits exploration drilling anywhere on the extensive Prairie Creek Property, and which expired on April 24, 2018) and Land Use Permit MV2008D0014 (issued in June 2013 for a term of five years, which permits operations at the Prairie Creek Mine, and which expired on June 16, 2018).

 

(iii)The Company applied to extend the term of Water Licence MV2008L2-0002 by 25 years and consideration of the application is pending, subject to NZC's completion of engagement with Indigenous groups.

 

The Company also plans to make the following applications:

 

(i)Amendment to exploration Water Licence MV2001L2-0003, which will expire on September 9, 2019 to extend the term.

 

(ii)Replacement of underground exploration Land Use Permit MV2012C0008 which will expire on May 10, 2019 and which is not extendable as it has already been extended by two years.

 

(iii)Replacement of Land Use Permit MV2008D0014, which will expire in June 2020, and which is not extendable as it ahs already been extended by two years.

 

Financing Initiatives – RCF Provides $20 Million Equity Financing

 

In December 2017, the Company entered into a financing agreement (“Project Bridge Loan”) with Resource Capital Fund VI L.P. (“RCF VI”) pursuant to which RCF VI provided an interim non-convertible project loan in the amount of US$10 million for the ongoing development of the Prairie Creek Project, focused on further engineering work to improve project confidence while the Company completes the senior project financing package and establishes the construction and development management team. The Company also entered into an investor agreement (the “Investor Agreement”) with RCF VI which contained various rights granted to RCF VI, including among other things: a period of exclusivity to work with the Company to define the terms of RCF VI’s future participation in the project financing of the Prairie Creek Mine, on terms and conditions to be agreed by the Company and RCF VI; participation rights in favour of RCF VI to maintain its pro rata shareholding interest in the Company for as long as it remains a significant shareholder; the right to nominate one member to the board of directors of the Company; and certain project oversight rights.

 

On May 14, 2018, the Company entered into an equity financing agreement with RCF VI CAD LLC (“RCF VI CAD”), a subsidiary of RCF VI, pursuant to which RCF VI CAD agreed, subject to shareholder and regulatory approvals, to purchase $20 million in units, each unit consisting of one common share and a half share purchase warrant, at $0.20 per unit, with each full warrant exercisable to purchase one share at $0.25 per share on or before December 31, 2018 (the “Units”). The use of proceeds was agreed to include repayment of the US$10 million Project Bridge Loan, the ongoing development of the Prairie Creek Project and general working capital. At the Company’s Annual General and Special Meeting of Shareholders held on June 27, 2018, the shareholders voted in favour of the equity financing with RCF VI CAD.

 

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On July 10, 2018, the Company closed the $20 million financing and issued 100 million units to RCF VI CAD at a price of $0.20 per Unit. The proceeds from the equity financing were used in part to repay the US$10 million Project Bridge Loan to RCF VI and are being directed to ongoing development of the Prairie Creek Project, including additional engineering and permitting work to improve project confidence, and general working capital.

 

In conjunction with the closing of the financing, the existing Investor Agreement with RCF VI was amended and restated to include RCF VI CAD and to provide for the right of RCF VI CAD to nominate additional members to the board of directors and to provide certain other project oversight rights, among other things, and RCF VI transferred its holdings in NorZinc to RCF VI CAD. As a result of the financing, RCF VI CAD holds approximately 41% of the issued shares of the Company on a non-diluted basis.

 

The Company is working with HCF International Advisers (“HCF”) as financial advisers to facilitate the raising of project debt financing of up to 70% of the capital expenditures required for the Prairie Creek Mine. A temporary slowdown was placed on project debt financing discussions in June 2018, due to the extended time of approving the ASR, but discussions have recommenced. The market for project lending is currently reasonably strong, however, as described in the Risks section, equity markets for junior base metal companies are currently at recent historic lows. The Company is assessing various options for financing the development of Prairie Creek, these include alternative project financing, discussions with strategic investors, governmental supported funding, leases and other financing mechanisms.

 

Newfoundland Properties

 

Overview

 

The Company holds four, high-grade zinc-lead-copper-gold-silver volcanogenic massive sulphide (“VMS”) deposits consisting of Lemarchant, Boomerang-Domino, Long Lake and Tulks East. Three of these have resource estimates and Tulks East has a historical resource. All of these deposits have excellent potential for expansion. NorZinc intends to focus its exploration on priority targets at these four established deposits with the aim of increasing the resource base.

 

The Company’s exploration strategy in Newfoundland is to continue to build on its existing polymetallic resource base with the aim of developing either a stand-alone mine, similar to the past-producing mines at Buchans and Duck Pond, or a number of smaller deposits that could be developed simultaneously and processed in a central milling facility.

 

Since acquiring the Newfoundland assets, the Company has completed 47,000 metres of drilling on its properties and increased indicated resources by almost 40%. The majority of the claims have reached their 20th year of ownership, at which time assessment and license costs increase by 80%. As part of the exploration process and claim evaluation, the Company, in January 2019, allowed claims that are not proximal to the established resources or part of the 2019 plan to expire.

 

Mineral Resource Estimate Update

 

On September 20, 2018, the Company reported an updated Mineral Resource Estimate for the 100% owned Lemarchant zinc-lead-copper-gold-silver VMS deposit. The Lemarchant deposit is located 20 km from Teck’s past-producing Duck Pond copper-zinc mine.

 

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A summary of the new Mineral Resource Estimate at a cut-off grade of 4% Zinc Equivalent (“ZnEq”) appears in Table 1 below. Table 2 presents the deposit’s calculated contained metal based on the Mineral Resource Estimate.

 

Table 1: Lemarchant Deposit Mineral Resource Estimate at 4.0% ZnEq Cutoff (Effective September 20, 2018)

 

Category  Tonnes  

Zn

(%)

  

Pb

(%)

  

Cu

(%)

  

Au

(g/t)

  

Ag

(g/t)

  

ZnEq

(%)

  

BaSO4

(%)

 
Indicated   2,420,000    6.15    1.60    0.68    1.22    64.04    12.40    23.53 
Inferred   560,000    4.68    1.08    0.45    1.06    44.67    9.31    13.11 

 

Table 2: Mineral Resource Estimate Contained Metal

 

Category 

Zn

(M lbs.)

  

Pb

(M lbs.)

  

Cu

(M lbs.)

  

Au

(K oz)

  

Ag

(M oz)

  

Barite

(tonnes)

 
Indicated   328.1    85.3    36.3    0.95    5.0    570,000 
Inferred   57.8    13.3    5.6    0.19    0.8    73,000 

 

1.Resource tonnages have been rounded to the nearest 10,000. Totals may vary due to rounding.
2.Price assumptions used were in USD $1.10/lb Zn, $1.00/lb Pb, $3.21/lb Cu, $1351/oz Au, and $19/oz Ag.
3.Metal recoveries used were 91.46% Zn, 82.42% Pb, 79.50% Cu, 84.23% Au and 68.22% Ag and are based on the 2017 Central Milling Facility Assessment prepared by Thibault & Associates Ltd.
4.ZnEq% = Zn% + ((Pb% * 22.046 * 0.8242*1.00) + (Cu% * 22.046 * 0.795 * 3.21) + (Ag g/t/31.10348 * 0.6822 * 19) + (Au g/t/31.10348 * 0.8423 * 1351))/(1.10 * 22.046 *0.9146)
5.BaSO4 % (Barite) is not included in the ZnEq% calculation
6.A full block grade cut-off of 4.0 % ZnEq was used to estimate Mineral Resources
7.Assay composites (1 meter) were capped at 36% Zn, 14.5 g/t Au, and 550 g/t Ag in the Mineralized domains, at 2.2% Cu, 4.6 g/t Au and 105 g/t Ag in the Upper Footwall domains, at 4.8% Zn and 8 g/t Ag in the Lower Footwall Domains and at 2% Zn, 5.2 g/t Au, and 48 g/t Ag in the Mudstone domains.
8.Results of an interpolated Ordinary Kriging bulk density model have been applied
9.Mineral Resources are considered to reflect reasonable prospects for economic extraction in the foreseeable future using conventional underground mining methods
10.Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability.
11.This estimate of Mineral Resources may be materially affected by environmental, permitting, legal title, taxation, sociopolitical, marketing, or other relevant issues.

 

The updated Mineral Resource Estimate was prepared for the Company by Mercator Geological Services Limited of Dartmouth, Nova Scotia. The updated Mineral Resource estimate for Lemarchant has an effective date of September 20, 2018 and is based on information provided from 165 drillholes, totaling 52,952 metres, completed between 1991-1993 and 2007-2017. Between 2013 and 2017, NorZinc completed 91 drillholes and 8 drillhole extensions for 28,455 metres, all of which post-date the last NI 43-101 Mineral Resource Estimate prepared for the deposit in 2012.

 

As a result, the updated Mineral Resource Estimate set out in Table 1 incorporates significant new exploration information in the geological interpretation and grade estimation, providing a more refined resource model in known areas as well as expanding the resource base in new areas. The Mineral Resource Estimate is based on 2 adjacent zones of VMS style mineralization, the Main Zone and Northwest Zone.

 

Corporate Matters

 

Executive Changes

 

On May 16, 2018, the Company hired Don MacDonald, formerly CFO and Acting CEO of KGHM International, as President of the Company, effective May 16, 2018 and as Chief Executive Officer effective June 27, 2018. Mr. MacDonald is a CPA, CA with Bachelors and Masters degrees in engineering and has been involved in the financing, development and/or operation of over 20 mines in North and South America over his career.

 

On June 27, 2018, John Kearney retired as Chief Executive Officer, while continuing as the Chairman of the Board, and Don MacDonald was appointed as Chief Executive Officer of the Company.

 

Reorganization

 

At Canadian Zinc Corporation’s Annual General and Special Meeting of Shareholders held on June 27, 2018, the shareholders voted in favour of a statutory arrangement to reorganize the Company into a separate publicly-listed holding corporation, named NorZinc Ltd., and a directly held, wholly-owned, operating subsidiary retaining the name Canadian Zinc Corporation. The Arrangement, which became effective September 6, 2018, leaves all the Prairie Creek property, assets, agreements and permits in place in the wholly-owned subsidiary. The shares of CZN were exchanged for shares of NorZinc, on a one-for-one basis, with no impact on shareholder's ultimate economic interest.

 

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The objective of the Arrangement was to structure the assets of the Company to facilitate future project financing of the Prairie Creek Project. Discussions to date with financial institutions have confirmed that the opportunity of raising project debt financing to complete the development and construction of the Prairie Creek Mine would require that the Prairie Creek Project be held in a separate stand-alone entity, and that the public parent company be structured to act as project sponsor. Management determined that the Arrangement, which left all the Prairie Creek property, assets, agreements and permits in place, held in a wholly-owned subsidiary, was the most efficient way to accomplish this objective.

 

At the end of its most recently completed financial year, the Company’s structure includes a wholly-owned subsidiary, Canadian Zinc Corporation, which in turn has a wholly-owned subsidiary, Paragon Minerals Corporation (“Paragon”), which is organized under the laws of Canada and a wholly-owned subsidiary Messina Minerals Inc. (“Messina”), which is organized under the laws of British Columbia. In January 2019, the Company amalgamated Paragon and Messina into one entity, renamed the entity NorZinc-Newfoundland Ltd., and transferred ownership from CZN to NorZinc.

 

Marketing

 

The Company has retained Cliveden Trading AG to advise on current and future market conditions for zinc and lead concentrates. NorZinc has signed non-binding Memorandum of Understanding (“MOU”) with each of Korea Zinc Company (“Korea Zinc”) and Boliden Commercial AB (“Boliden”) for the sale of the Company’s planned zinc concentrate production (and with Korea Zinc for planned lead concentrate production) confirming the marketability of both concentrates. The planned zinc concentrate production will contain, to varying degrees, relatively high levels of mercury. Since signing the MOUs almost three years ago, more concentrates with elevated levels of mercury are being produced and processed, laws around the world for mercury production continue to change, and technology regarding the safe removal of mercury has improved. The Boliden MOU was to expire on December 31, 2018 and has been extended to June 30, 2019. The Company is continuing discussions with Boliden on the further extension and possible addition of lead concentrate to the Boliden MOU.

 

B. Business Overview

 

NorZinc’s focus for 2019 is to continue the development of the Prairie Creek Project and advance the Prairie Creek Mine towards production.

 

The business of mining for minerals involves a high degree of risk. NorZinc is an exploration and development company and is subject to risks and challenges similar to companies in a comparable stage and industry. These risks include, but are not limited to, the challenges of securing adequate capital, exploration, development and operational risks inherent in the mining industry; changes in government policies and regulations; the ability to obtain the necessary permitting; as well as global economic and zinc price volatility; all of which are uncertain.

 

In particular, the Company does not generate revenue. As a result, the Company continues to be dependent on third party financing to continue exploration and development activities on the Company’s properties, maintain capacity and satisfy contractual obligations. Accordingly, the Company’s future performance will be most affected by its access to financing, whether debt, equity or other means. Access to such financing, in turn, is affected by general economic conditions, the price of metals, exploration and development risks and the other factors described in the section entitled "Risk Factors" in this Annual Report.

 

At December 31, 2018, the Company had cash and cash equivalents and short-term investments totaling $9.3 million and a working capital balance of $8.3 million. The long-term price outlook for zinc and lead remains positive. Supported by the robust economics indicated by the 2017 FS, NorZinc will continue to pursue all alternatives for raising the senior financing necessary to complete the development and construction of the Prairie Creek Mine.

 

At the Prairie Creek Mine Site, various care-and-maintenance programs were completed over the summer of 2018. Further de-risking programs will continue in 2019 and include detailed engineering and design of the mine facilities, assessment of, and proposals for, rehabilitation of certain site facilities in anticipation of construction, including site cranes, accommodation, the mill roof and some electrical facilities. The Company will be considering refurbishment of some of those items in the 2019 summer season, prior to main construction activities planned for 2020.

 

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On the permitting and environmental side, the Company received a positive recommendation of the EA Report by the Responsible Ministers in October 2018 and has now moved from the EA process to the permitting phase for the issue of the land use permits for the ASR by the MVLWB & Parks. The regulatory phase is expected to be completed in the third quarter of 2019.

 

The Company concluded an important TLUA agreement with NDDB and is negotiating the RBA agreement with LKFN, all the while continuing engagement with both Indigenous groups on the implementation of various mitigation measures recommended by the Review Board in the EA Report of the All Season Road to seek agreement on the incorporation of Dene traditional knowledge and the inclusion of both Indigenous groups in environmental monitoring.

 

A temporary slowdown was placed on project debt financing discussions in June 2018 production due to the extended time of approving the ASR, but discussions have recommenced with a target for financing in the latter part of 2019. The Company is assessing various options for financing the development of Prairie Creek, these include alternative project financing, discussions with strategic investors, governmental supported funding, leases and other financing mechanisms.

 

C. Organizational Structure

 

At the end of its most recently completed financial year, the Company’s structure includes a wholly-owned subsidiary, Canadian Zinc Corporation, which in turn has a wholly-owned subsidiary, Paragon Minerals Corporation (“Paragon”), which is organized under the laws of Canada and a wholly-owned subsidiary Messina Minerals Inc. (“Messina”), which is organized under the laws of British Columbia. In January 2019, the Company amalgamated Paragon and Messina into one entity, renamed the entity NorZinc-Newfoundland Ltd., and transferred ownership from CZN to NorZinc.

 

The following chart shows the intercorporate relationship between the Company and its subsidiaries as at December 31, 2018:

 

 

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The following chart shows the intercorporate relationship between the Company and its subsidiaries subsequent to December 31, 2018:

 

 

D. Property, Plant and Equipment

 

The Company’s key property is the 100%-owned Prairie Creek Mine, an advanced-staged, permitted, partially developed zinc-lead-silver property, located in the Northwest Territories, Canada (the “Prairie Creek Property”, “Prairie Creek Project” or “Prairie Creek Mine”).

 

The Company also owns an extensive mineral land package in central Newfoundland covering three large VMS projects with known mineral deposits and excellent exploration potential, including the South Tally Pond Project, which hosts the Lemarchant deposit; the Tulks South Project, which hosts the Boomerang and Domino deposits and the Hurricane and Tulks East prospects; and the Long Lake Project.

 

Prairie Creek – the Company’s Principal Property

 

The original discovery of mineralization on the Prairie Creek Property was made in 1928 at the showing known as the “No. 5 Zone.” In 1958, a limited mapping program was undertaken by Fort Reliance Minerals Ltd. The claims lapsed in 1965 and were restaked by the prospector and subsequently conveyed to Cadillac Explorations Ltd. (“Cadillac”) in 1966. Cadillac also acquired a 182,590 acre prospecting permit.

 

In 1980, an independent feasibility study was completed for Cadillac by Kilborn Engineering which resulted in a decision to put the property into production. In December 1980, Procan Exploration Company Ltd. (“Procan”) (a company associated with Herbert and Bunker Hunt of Texas) agreed to provide financing for construction, mine development and working capital necessary to attain production based on the Kilborn feasibility study. Between 1980 and 1982, extensive mine development took place. Cadillac acquired a 1,000-ton per day mill concentrator and transported it to the minesite. The mill was erected and a camp established. Two adits and extensive underground workings were developed. During this time the winter road connecting the mine to the Liard Highway was constructed and over 500 loads of supplies were transported to site. Construction activities continued until May 1982 and were almost complete when they were suspended due to lack of financing. Subsequently, Cadillac went into bankruptcy in May 1983 and site maintenance and operations were taken over by Procan.

 

Between 1991 and 2004, the Company acquired a 100% interest in the Prairie Creek Property and carried out multiple exploration programs on the Prairie Creek Property. Between 2001 and 2017, the Company, along with technical consultants, prepared increasingly more detailed technical reports.

 

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2017 Technical Report on Principal Property – Prairie Creek, Northwest Territories

 

 

 

 

The information relating to the Prairie Creek Property in the following sections of this Annual Report has been extracted from the 2017 Technical Report effective September 28, 2017, filed on SEDAR on October 31, 2017, and filed on EDGAR on November 6, 2017 prepared by QPs, as defined by NI 43-101, H. A. Smith, P.Eng. of AMC Mining Consultants Ltd., L. P. Staples, P. Eng. Of Ausenco Engineering Canada Inc., S. Elfen of Ausenco Engineering Canada Inc., G. Z. Mosher, P. Geo. Of Global Mineral Resource Services Ltd., F. Wright, P. Eng. Of F. Wright Consulting Inc., and D. Williams, P. Eng. of Allnorth Consultants Limited.

 

For readers to understand the technical information in this Annual Report they should read the 2017 Technical Report (available on SEDAR at www.sedar.com and EDGAR at www.sec.gov under the Company's profile) in its entirety, including all qualifications, assumptions and exclusions that relate to the technical information set out in this Annual Report. The 2017 Technical Report is intended to be read as a whole, and sections should not be read or relied upon out of context. The technical information in the 2017 Technical Report is subject to the assumptions and qualifications contained in the 2017 Technical Report. The 2017 Technical Report assumes construction being in 2018.

  

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The Company has included these website addresses in this Form 20-F Annual Report only as inactive textual references and does not intend them to be active links to these websites. The contents of these websites, and information accessible through them, do not form part of this Annual Report.

 

“Introduction

 

This Technical Report on the Prairie Creek Property, NWT, Canada (the Property), has been prepared by AMC Mining Consultants (Canada), Ltd. (AMC) of Vancouver, Canada, in conjunction with Ausenco Engineering Inc. (Ausenco), Vancouver, with contributions by Global Mineral Resource Services Ltd., Allnorth Consultants Limited and F. Wright Consulting Inc., on behalf of Canadian Zinc Corporation (CZN) of Vancouver, Canada in accordance with the requirements of National Instrument 43-101 (NI 43-101) “Standards of Disclosure for Mineral Projects”, of the Canadian Securities Administrators (CSA) for Filing on CSA’s “System for Electronic Document Analysis and Retrieval” (SEDAR).

 

This report discloses the results of a Feasibility Study (“2017 FS”) based on the 2015 Mineral Resources, updated Mineral Reserves, updated metallurgy test work, ongoing optimization and other engineering studies completed since the Prefeasibility Study 2016 (“2016 PFS”) AMC Report dated 30 September 2016.

 

Economic summary

 

This Feasibility Study indicates a base case Pre-Tax Net Present Value (“NPV”) of $344M using an 8% discount rate, with an Internal Rate of Return (“IRR”) of 23.8%, and a post-tax NPV of $188M with an IRR of 18.4%. Corresponding pre-tax and post-tax payback periods from mill start-up are 4.4 and 4.6 years respectively. The Base Case metal price assumptions used in the model are: Zn US$1.10/lb., Pb US$1.00/lb., Ag US$19.00/oz., with a foreign exchange rate of C$1.25=US$1.00.

 

The pre-tax and post-tax net present values and internal rates of return, at 5% and 8% discount rates, are illustrated in the table below at a Canadian / US dollar exchange rate of C$1.25=US$1.00, except where noted. The table also illustrates the sensitivities of the Prairie Creek Project to zinc, lead and silver prices and to the Canadian / US dollar exchange rate.

 

Table ES.1.1 Economic sensitivities of the Prairie Creek Project

 

Metal prices   Pre-tax   Post-tax 1 
Zinc / lead US$/lb.   Silver US$/oz  

Undiscounted

$M

  

NPV

(5%)

$M

  

NPV

(8%)

$M

   IRR %  

Undiscounted

$M

  

NPV

(5%)

$M

  

NPV

(8%)

$M

   IRR % 
 0.80    17.00    139    10    (39)   5.5    75    (29)   (68)   3.3 
 0.90    18.00    452    211    120    14.4    282    109    43    10.6 
 1.10/1.00    19.00    899    497    344    23.8    562    291    188    18.4 
 1.20/1.00    19.00    1,033    582    410    26.2    644    344    230    20.4 
 1.10    20.00    1,077    614    437    27.3    671    364    247    21.3 
 1.20    21.00    1,390    815    596    32.7    863    489    346    25.7 
 1.30    22.00    1,703    1,017    755    37.7    1,053    612    444    29.8 
 1.10/1.00 2    19.00 2    1,208    696    501    29.5    752    416    287    23.1 
 1.20/1.00 2    19.00 2    1,355    789    574    31.9    842    473    332    25.0 
 1.10/1.00 3    19.00 3    589    298    188    17.4    371    166    88              13.2 

 

Using the base case metal prices and exchange rate of C$1.375 = US$1.00 would increase the pre-tax NPV8% to $500M and the IRR to 29.5% relative to the base case. Using a zinc price of US$1.20 per lb., with all other base case inputs and a foreign exchange rate of C$1.25 = US$1.00, the pre-tax NPV8% would be $410M with an IRR of 26.2%. Using a zinc price of US$1.20 per lb., with all other base case inputs and a foreign exchange rate of C$1.375 = US$1.00 would increase the pre-tax NPV8% to $574M and the IRR to 31.9% relative to the base case. Using the base case metal prices and exchange rate of C$1.125 = US$1.00, the pre-tax NPV8% would be $188M with an IRR of 17.4%, and the post-tax NPV8% would be $88M with an IRR of 13.2%

 

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During the first 10 years of concentrate production the 2017 FS indicates average annual production of approximately 65,000 tonnes of zinc concentrate and 72,000 tonnes of lead concentrate, containing an average of approximately 95 million pounds of zinc, 105 million pounds of lead and 2.1 million ounces of silver.

 

The 2017 FS indicates average annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) during the first 10 full years of production as $111M per year, and cumulative EBITDA of $1,294M over the projected LOM of 15 years, using base case metal prices.

 

Location, ownership, and history

 

The Property consists of two surface leases and 12 mining leases totaling 7,487 hectares in area. The Property is situated in the Northwest Territories approximately 500 km west of Yellowknife in the Mackenzie Mountains at an elevation of 850 m above mean sea level. The Property is surrounded by, but is not included in, the Nahanni National Park Reserve (NNPR).

 

Year-round access to the Property, at this time, is provided by aircraft utilizing a 1,000 m gravel airstrip immediately adjacent to the camp. The Property has also, in the past, been accessible by a winter road that extended 180 km from the Property to the Liard Highway 7; most of this access road route is now planned to be all season and will be constructed to support full-time operation of the mine.

 

The Prairie Creek Property contains a high-grade, silver-lead-zinc-copper vein, and other lead-zinc deposit types that have been explored since the early 1900s and were developed by Cadillac Explorations Limited (Cadillac) from 1966 to 1983. The Cadillac Mine was targeting silver production and was developed and fully permitted. A processing plant, along with other surface infrastructure, was built in the early 1980s. A sudden decline in metal prices resulted in the closure of the Mine in 1983 prior to commencement of production. San Andreas Resources Corporation exercised its option on the Property in the 1990s and, through a series of agreements, together with a name change to Canadian Zinc Corporation in 1999, established an increasing interest in the Property, culminating with the acquisition of a 100% interest in the Property and mine site in 2004, now referred to as the Prairie Creek Mine.

 

Geology and mineralization

 

The Property is located within a westward-thickening wedge of sedimentary carbonate rocks of mid-Proterozoic to mid-Jurassic age that was deposited along the paleo-continental margin of western North America (Mackenzie Platform). The Prairie Creek Embayment paleo-basin is interpreted to have developed as a half-graben controlled by a north-trending fault with down-drop to the west.

 

In the immediate area of the Property, north-south trending faulting and folding is apparent. The most significant fold structure is the fault-bounded, north-south doubly-plunging Prairie Creek anticlinal structure, which is the host to the Prairie Creek mineralization.

 

Four styles of base metal mineralization have been identified on the Property: quartz vein, stratabound, stockwork and Mississippi Valley-type. Only the first three styles have been found in potentially economic quantities to date. Base metal mineral showings occur along the entire 16 km north to south length of the anticline, covered by the main group of mining leases.

 

The most significant style of mineralization is the quartz vein-type, on which the underground workings have been developed, containing the bulk of the currently defined Mineral Resource. The Main Quartz Vein (MQV) has been exposed in detail by underground development and diamond drilling over a strike length of 2.1 km (Main Zone). The MQV trends at an azimuth of approximately 20º and dips between vertical and 40º east, with an average dip of 65º. The MQV consists of massive to disseminated galena and sphalerite with lesser pyrite and tennantite-tetrahedrite in a quartz-carbonate-dolomite sheared matrix. The galena and tennantite-tetrahedrite also carry economically significant silver values. This vein style of mineralization has been located, through surface trenching, throughout the entire 16 km length of the mining leases.

 

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Stockwork (STK) mineralization occurs as a series of narrow, massive sphalerite-galena-tennantite veins striking at about 40º azimuth that occupy tensional or dilatant-type fractures within a structural offset translation zone of the MQV. This mineralization has developed in sub-vertical tensional openings formed obliquely to, but also related to, the initial primary fault movement along the main vein structure. STK has been exposed in both diamond drilling and underground development.

 

Stratabound Massive Sulphide (SMS) mineralization occurs intermittently at the base of the trend of the Prairie Creek vein system over a strike length of more than 3 km. SMS mineralization occurs as semi-massive sphalerite-galena-pyrite replacement located close to both the vein system and the axis of the Prairie Creek antiform, but has not yet been intersected by underground development. The MQV structure carries fragments of the SMS indicating the vein mineralization to be younger in age.

 

Mississippi Valley-type (MVT) lead-zinc mineralization is exposed on the Property within surface showings of rock formations marginal to the basin and consists of cavity-filling type breccias in dolostone with host fragments rimmed with colloform sphalerite-marcasite-galena healed with carbonate. This type of mineralization does not form part of the current resource.

 

Exploration and data management

 

CZN, including its former entity as San Andreas Resources Corporation, has been involved with mineral exploration activity across the Prairie Creek Property since 1992. Somewhat limited exploration drilling had occurred and most of the existing underground development had been undertaken prior to CZN’s initial involvement. From 1992 to the end of 2015, CZN completed 296 surface and underground exploration diamond drillholes with an aggregate length of 78,587 m. In addition, 1,032 underground channel samples forming 365 composites from the three existing underground levels have been collected and analyzed.

 

The main exploration and underground development work has been focused on the Main Zone mineralization, where approximately 80% of the total drilling has been carried out.

 

Mineral Resource estimate

 

The most recent Mineral Resource estimation was undertaken by AMC and announced in a press release dated 17 September 2015. It followed completion of the successful 2015 underground exploration program at Prairie Creek and resulted in an increase in Measured and Indicated Mineral Resource tonnages of 32%. Upon further review of the Mineral Resource, and since there were no changes to the database within the resource area, the same Mineral Resource Estimate was used as the basis for the 2017 FS.

 

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A single block model was created to encompass the three mineral domains: MQV, STK, and SMS. The summary results of the Mineral Resource estimate for the three zones combined, at a cut-off of 8% Zn Equivalent (ZnEq), are shown below.

 

Table ES.1.2 September 2015 Mineral Resources Prairie Creek Mine

 

Mineral zone  Classification  Tonnes (t)   Silver (g/t)   Lead (%)   Zinc (%) 
  Measured   1,313,000    211    11.5    13.2 
Main quartz vein (MQV)  Indicated   4,227,000    168    11.6    9.2 
   Measured & Indicated   5,540,000    178    11.6    10.2 
   Inferred   5,269,000    199    8.7    12.9 
  Measured   169,000    116    5.3    12.6 
Stockwork (STK)  Indicated   1,953,000    61    3.5    6.6 
   Measured & Indicated   2,122,000    66    3.6    7.1 
   Inferred   1,610,000    70    4.6    6.2 
  Indicated   1,042,000    54    5.2    10.8 
Stratabound (SMS)  Measured & Indicated   1,042,000    54    5.2    10.8 
   Inferred   170,000    60    6.3    11.2 
  Measured   1,482,000    200    10.8    13.2 
Total  Indicated   7,222,000    123    8.5    8.7 
   Measured & Indicated   8,704,000    136    8.9    9.5 
   Inferred   7,049,000    166    7.7    11.3 

Mineral Resources are stated as of 10 September 2015.

Mineral Resources include those Resources converted to Mineral Reserves.

Stated at a cut-off grade of 8% ZnEq based on prices of US$1.00/lb for both zinc and lead and US$20/oz for silver.

Average processing recovery factors of 78% for zinc, 89% for lead, and 93% for silver.

Average payables of 85% for zinc, 95% for lead, and 81% for silver.

ZnEq = (grade of Zn in %) + [(grade of lead in % * price of lead in US$/lb * 22.046 * recovery of lead in % * payable lead in %) + (grade of silver in g/t * (price of silver in US$/Troy oz/ 31.10348) * recovery of silver in % * payable silver in %)] / (price of zinc in US$/lb*22.046 * recovery of zinc in % * payable zinc in %).

$ Exchange rate = 1 C/US.

Numbers may not compute exactly due to rounding.

 

The September 2015 Prairie Creek Mine Mineral Resource estimate was completed by Gregory Z. Mosher, P.Geo, Qualified Person, as defined by NI 43-101, of Global Mineral Resource Services Ltd.

 

Mineral Reserve estimate

 

The 2017 FS has a new Mineral Reserve estimate of 8.1 million tonnes of Proven and Probable Reserves at a combined grade of 16.75% Pb and Zn plus 124 g/t Ag, which represents a 6% increase in Mineral Reserve tonnage compared to the 2016 PFS.

 

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The increase is due to marginally lower Zinc Equivalent cut-off grades, reflecting the final 2016 PFS operating cost estimate, a small increase in projected Zn prices and further optimization of the stoping design. The 2017 Mineral Reserves have slightly lower average metal grades than those estimated in the 2016 PFS, but increased overall metal content. The estimation of Mineral Reserves by AMC is shown in Table ES.1.3.

 

Table ES.1.3 August 2017 Mineral Reserves Prairie Creek Mine

 

Mineral zone  Classification  Tonnes (t)   Silver (g/t)   Lead (%)   Zinc (%)   ZnEq (%) 
  Proven   1,524,171    161.43    8.90    10.22    26.84 
Main quartz vein (MQV)  Probable   4,190,187    144.76    9.96    8.20    25.70 
   Total   5,714,358    149.21    9.67    8.74    26.00 
  Proven   188,173    108.19    4.84    11.56    21.22 
Stockwork (STK)  Probable   1,188,366    63.81    3.54    6.86    13.46 
   Total   1,376,539    69.88    3.72    7.50    14.52 
  Proven   -    -    -    -    - 
Stratabound (SMS)  Probable   980,566    54.90    5.06    9.64    17.97 
   Total   980,566    54.90    5.06    9.64    17.97 
  Proven   1,712,344    155.58    8.45    10.36    26.22 
Total  Probable   6,359,119    115.78    8.00    8.17    22.22 
   Total   8,071,463    124.22    8.10    8.64    23.07 

The Mineral Reserves are as of 2 August 2017, and based on a design cut-off grade of 11% ZnEq for longhole open stoping (“LHOS”), 11% ZnEq for mechanized drift-and-fill (“DAF”), an incremental stoping cut-off grade of 10% ZnEq, and 6% ZnEq cut-off grade for development ore. Cut-off grades are based on a zinc metal price of US$1.00/lb., recovery of 75% and payable of 85%; a lead metal price of US$1.00/lb., recovery of 88% and payable of 95%; and a silver metal price of US$18/oz, recovery of 92% and payable of 81%. Exchange rate used is C$1.25= US$1.00. Average planned dilution, unplanned dilution and mining recovery factors of 13%, 11% and 95%, respectively, for LHOS; and 18%, 6% and 98%, respectively, for DAF are assumed.

 

The August 2017 Prairie Creek Mineral Reserve estimate was prepared by H. A. Smith, P.Eng., Qualified Person, as defined by NI 43-101, of AMC Mining Consultants (Canada) Ltd.

 

These Mineral Reserves are based upon a Measured and Indicated Resource of 8.7 million tonnes grading 9.5% Zn; 8.9% Pb and 136 g/t Ag, and represent an initial mine life of 15 years.

 

Prairie Creek also hosts an additional Inferred Mineral Resource of 7.0 million tonnes grading 11.3% Zn, 7.7% Pb, and 166 g/t Ag, which has the potential, through further exploration and development, to be upgraded to Measured or Indicated Mineral Resources and increase the initial 15 year mine life.

 

Mining

 

The mine will be an underground operation, based primarily on the MQV and mining an average of 1,600 tonnes per day at steady state, over a 15-year mine life (16 years including development prior to mill start-up). During full production, approximately 584,000 tonnes of ore per year will be mined.

 

Adits were previously driven on three levels: the 970 mL, the 930 mL, and the 883 mL, totaling approximately 5 km of underground workings. Access for mining will be through an enlarged 883 mL portal and adit, with secondary access through the 930 mL. The 970 mL penetrates the topmost limits of the MQV only and is not part of the current mine plan. As mining on the MQV progresses to depth, ore mined will be supplemented by ore from the STK and SMS deposit zones.

 

Mining in the MQV and STK zones will be by longhole open stoping (LHOS) with paste backfill. Mechanized drift-and-fill (DAF) will be used for the SMS ore, also with paste fill. The plan and objective is to use 100% of flotation tailings as backfill.

 

Ground conditions in existing development underground are generally good and the existing workings have stood unsupported for over thirty years with minimal bolting. CZN commissioned a geotechnical program at the end of 2013, including mapping and examination of drill core. This program and subsequent assessment in both PFS and FS studies indicated that the ground is amenable to longhole open stoping, with the results of the assessment being used for rock support design.

 

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The 2017 FS mine plan envisages slashing out of some of the existing development and establishing two spiral ramps to access deeper levels. Major goals in development and production sequencing are to access higher grade sulphide ore as early as practicable, while minimizing development costs as much as possible.

 

The 2016 PFS targeted both the higher grade oxide above the 883 mL and the higher grade sulphide below this horizon, which in turn had lower recoveries. The new mine plan increases the mining rate to 1,600 tonnes per day, versus 1,350 tonnes per day in the 2016 PFS. The existing 883 mL adit will be enlarged to 5 x 5 m and access to the ore below the 883L will be via the twin ramps. A single ramp will provide access to the ore above 883 mL.

 

Priority will be given to ramp development to establish dewatering sumps in advance of mining. Ore drifts will be driven on the MQV north and south from the ramp access points to the strike limits of the ore body. Stoping will begin at the ore limits and retreat to the ramp access points. Pre-production development is anticipated for approximately 15 months prior to mill start-up. This work will be performed by a contractor. On completion of the contracted scope of work, CZN will have the option of taking over the work itself or continuing with contract mining.

 

Managing groundwater will be a key aspect of the operation. At peak levels, it is estimated that the mine will produce up to 200 L/s of water, but with the majority of this water to be collected through advanced dewatering boreholes and pumped to surface, and avoiding any contamination from mine workings. All water discharged from the mine will either be sent to the mill as process water, pumped into the existing impoundment pond that was originally planned for tailings storage and which will now be modified into a two-cell water storage pond, or directly treated in a new water treatment plant.

 

CZN anticipates that, because of the high concentrate mass pull, even with 100% disposal of tailings underground as paste fill, some shortfall in backfill volume will occur. Any shortfall will be made up with Dense Media Separation (DMS) float material or waste rock. When no stopes are available for backfill, filtered tailings will be stored in an active tailings building or in an adjacent passive stockpile. Development waste and DMS float material will be stored in a newly created waste rock pile north of the plant site away from the Prairie Creek floodplain.

 

The mine will be ventilated by an exhausting type ventilation system. The primary exhaust fans will be located on 930 mL, one adjacent to the 930 portal and the other at the base of the existing raise to surface. Fresh air will be drawn entirely through the 883 portal where a duplex propane and liquified natural gas (LNG) fired mine air heating system will be installed to heat the air during the winter months. The planned airflow through the mine is 142 m³/s, with fresh air being distributed through the ramps and exhausting to internal return air raises feeding up through to the 930 mL exhaust fans. For level ventilation, fresh air will be delivered along each ore drive by auxiliary fan and duct installations. The exhaust air raises will be fitted with ladderways to serve as the second means of egress through to the 930 mL, where egress will be through the 930 mL portal.

 

Metallurgy and processing

 

Metallurgical tests conducted to date on MQV and SMS material have proved positive, as have initial metallurgical tests on STK material. Reasonably good metal recoveries have been achieved with both sulphide and oxide material with a cyanide-free reagent suite. A new metallurgical testing program was completed in 2017, focusing on MQV material, which had a lower oxide component than historical samples, and demonstrated improved recoveries and metallurgical performance based on a simplified process flow sheet, part of which is incorporated into this study.

 

According to the test results on MQV composited material only, the overall average grade of the blended lead sulphide / oxide concentrate is anticipated to be 65% lead, with an approximate 90% average recovery of lead in the plant feed. The zinc sulphide concentrate is estimated to be 59% zinc, with an approximate 90% recovery of zinc in the plant feed. An average of 86% of the total silver values in the plant feed is estimated to be recovered within the lead and zinc concentrates. Impurities of antimony, arsenic and mercury are expected to report to both concentrates.

 

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A processing plant / concentrator was substantially constructed prior to project shutdown in 1982, together with a 1.5 million tonne capacity tailings impoundment, power plant, and water treatment plant. CZN plans to rehabilitate and upgrade the processing plant and site infrastructure.

 

The current crushing facilities have a 1,750 tpd capacity, with an installed jaw crusher, short-head cone crusher, double-decked screen, and conveyor systems feeding an 1,800 t fine ore bin.

 

A new dense media separation (DMS) plant, with a nominal feed rate of 1,600 tpd, will be installed downstream of the crushing circuit and is expected to reject an average of approximately 25% of the feed as waste with minimal metal losses. The milling circuit is designed for 1,200 tpd at nominally 80% passing 156 μm. The ROM ore is expected to be softer initially and then harder as the mine develops deeper and an increase in the Bond Work Index is anticipated. As such, a new secondary ball mill (200 kW tire mill) is planned for installation, costed as sustaining capital after 5 years of operation. Precise timing of this additional milling power will need to be optimized based on the work index progression over time and other economic factors.

 

The ground material will be subjected to three stages of sequential flotation: lead sulphide flotation followed by zinc sulphide flotation and lead oxide flotation. Each flotation circuit will consist of rougher flotation and multiple-stage cleaner flotation to upgrade the rougher concentrates to marketable grades. The existing regrind ball mill will be refurbished and utilized to further grind the lead sulphide rougher flotation concentrate in order to maximize grade of the final lead sulphide concentrate. The rougher tailings from the lead oxide flotation plant will be discharged as final tailings to the tailings thickener (new equipment) before being pumped to the paste plant. The lead sulphide and lead oxide flotation concentrates will be pumped to the lead dewatering system, while the zinc sulphide flotation concentrate will be sent to the zinc dewatering system. Both dewatering systems will consist of conventional thickening and pressure filtration circuits. The dewatered concentrates will be temporarily stored in the on-site storage facility prior to being loaded for transport to off-site smelters.

 

The process plant will require new equipment including modernization of the electrical system, addition of a thickener, new flotation cells to complement the existing cells, a concentrate storage and loadout facility and an on-stream analyzer and control system. The new DMS circuit will be added to the north side of the mill and a reagent mixing area and concentrate storage and loadout facility will be added to the south side of the mill building. A new lead oxide circuit will be added to the eastern side of the mill building and will also include space to store reagents. A new paste backfill plant is proposed to be built to the south of the mill building along with an active tailings storage facility.

 

Site infrastructure

 

In 1982, the mine was fully permitted and construction almost complete, but never achieved production. The existing site infrastructure is substantial and these facilities will be utilized and upgraded as necessary. This includes upgrading the mill building, administration building, workshops, sewage treatment plant, diesel storage tank farm, warehouses and part of the accommodation facilities. New facilities needed for operations will include the DMS plant, a paste backfill plant, tailings stockpile shed, LNG facility, water treatment plant, lead-oxide building, heated warehouse and concentrate load-out facility.

 

Four new 2.77 MW dual-fuel powered low-speed power generator units will provide power and heat for the site. These power generator units will be located within the existing mill powerhouse after removal of the obsolete units currently in place, to provide the installed power of 11.1 MW with an expected running load of 6.7 MW. The energy source for the power generation will be provided by a combination of Liquified Natural Gas (LNG) from the newly installed site LNG storage / vaporization facility and diesel fuel from the existing diesel storage tank farm adjacent to the mill. The FS incorporates a turn-key type power-by-the-hour operation proposal received from the Northwest Territories Power Corporation. The new generators will be outfitted with glycol heat recovery systems in order to maximize energy efficiency. The waste heat from the generators will be used to heat the surface facilities.

 

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Tailings from the mill will be placed permanently underground as paste backfill, produced in a new 55 m3/hr paste backfill plant, and augmented by DMS reject material in the event of any volume shortfall. An active stockpile of tailings will be stored in a building with heating capability next to the paste backfill plant to provide feed to the plant. An adjacent outdoor area will accommodate any additional tailings on a temporary basis. The majority of DMS reject and mine development material will be placed in a newly created waste rock pile facility located north of the mill off the Prairie Creek floodplain and accessed by trucks on a reconstructed internal site road. Although the waste rock is classified as non-acid generating due to its high content of carbonate material, appropriate precautions will be taken to prevent and mitigate any leaching that may occur from surface run-off through the waste rock pile.

 

A 150-person camp and cookhouse exists on the site, but most of the buildings have deteriorated beyond economical repair. They will be demolished and will be replaced by a modular camp adjacent to the upgraded administration building complex to be used during construction and operations. A portion of the existing accommodation camp will be salvaged and upgraded for re-use during construction.

 

The site water management plan for the Prairie Creek Mine proposes the reconfiguration of the present tailings impoundment pond into a two-celled water storage pond connected to the mine and mill via piping and to a new water treatment plant. An exfiltration pipe below the bed of Prairie Creek will discharge treated waters and site run-off that collects in the final site pond. Water treatment rates will be based on a load-based water management system incorporating real-time flows measured in Prairie Creek upstream of the site regulated by the existing Water Licence.

 

Access road and transportation plan

 

The construction of the process plant and site infrastructure will be initially serviced via a winter road. Site production operations will be supported via an all season road, which has the following benefits but an increased capital cost:

 

Decreased working inventory.
More timely delivery of product and consistent supply of materials.
Lower logistical risk of transporting concentrate and supplies.
A smaller trucking fleet throughout the year.
Facilitates the use of alternative energy sources such as LNG.

 

The all season road will reduce energy costs and also enable the consideration of more environmentally friendly alternative energy sources. Local gas fields in the area are producing LNG at this time, which provides an opportunity to reduce reliance on diesel fuel for power generation. An all season road would also have environmental and safety benefits, in that, spreading out the trucking schedule over the full year would avoid high or congested traffic in winter months, therefore lowering the risk of accidents or spills. On 12 September 2017, the Mackenzie Valley Review Board concluded the Environmental Assessment (EA) of the proposed All Season Road to the Prairie Creek Mine by recommending approval to the Federal Minister of Crown-Indigenous Relations and Northern Affairs subject to the implementation of measures described in the EA report.

 

The current transport logistics system envisages shipping mineral concentrate over an all season road from the mine site in 20 tonne bulk containers. This would involve the creation of a bulk handling load-out facility at the mine and transport by B-line trucks, each carrying two containers along the all season road and highway to Fort Nelson. Containers would be offloaded from the trucks at Fort Nelson and loaded onto four-container-capacity rail flat-cars for transport by CN Rail to the port of Vancouver for shipment to smelters overseas. Inbound freight will be trucked as backhaul over the same route. A marshalling area will be developed in Fort Nelson near the rail siding.

 

Concentrate marketing

 

The Prairie Creek Project will produce three types of concentrate: zinc sulphide, lead sulphide and lead oxide. CZN plans to combine the two lead concentrates into one concentrate at the mill site.

 

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Canadian Zinc has signed a Memorandum of Understanding (MOU) with each of Korea Zinc and Boliden for the sale of zinc and lead concentrates. The MOUs set out the intentions of CZN and each of Korea Zinc and Boliden to enter into concentrate sales agreements for the concentrates to be produced from the Prairie Creek Mine on the general terms set out in the MOUs, including commercial terms which are confidential.

 

The sales agreements will account for all of the planned production of zinc concentrate and about half of the planned production of lead concentrate for the first five years of operation at the Prairie Creek Mine. The sales agreements will provide that treatment charges will be set annually at the annual benchmark treatment charges and scales, as agreed between major smelters and major miners.

 

Payables, penalties, and quotational periods will be negotiated in good faith annually during the fourth quarter of the preceding year, including industry standard penalties based on indicative terms and agreed limits specified in each MOU.

 

Treatment and refining charges, including deductibles, payable and penalties, vary with smelter location and individual smelter terms and conditions. The Economic Model used in the 2017 FS has been prepared assuming average blended indicative treatment charges of US$172 per tonne for zinc sulphide concentrates and US$130 per tonne for lead concentrates, with industry standard penalties, including mercury penalties of US$1.75 for each 100 ppm above 100 ppm Hg per tonne of concentrate.

 

Project execution

 

The mine start-up schedule is significantly influenced by the seasonal weather conditions in the Northwest Territories. Target start-up for commencement of production / milling operations at Prairie Creek Mine is 1 August 2020, with commissioning of the mill for three months prior to this date. The first year of the path to production project schedule mostly comprises detailed on-site and off-site engineering design, initial site / portal preparation, and the completion of permitting and design of the all season road. Later during the first year, procurement of long-lead items would be completed in order to have the required equipment and supplies available to be brought in on the winter road of the second year; thereby to commence main construction, begin mine development, further prepare the site and advance the all season road. The third year would involve continuing mine development, completing site construction, continuing construction of the all season road and commissioning the mill to production. It is projected that a pre-production on-site workforce will peak at approximately 211 people in August of 2019 (Project Year -01).

 

Mobilization to site will initially be by winter road and air, concurrent with construction of the all season road. The subsequent shipment of concentrates and production supplies will be on the all season road.

 

Permitting, environmental, and community

 

The Prairie Creek Mine is located in an environmentally sensitive watershed of the South Nahanni River and proximal to the Nahanni National Park Reserve (NNPR). As a result, particular attention has been paid by the Company and by regulators to potential impacts on water quality that may be caused by Project construction and operations.

 

CZN currently has a number of permits and licences for both exploration and mine operations issued by the Mackenzie Valley Land and Water Board (MVLWB) under the Mackenzie Valley Resource Management Act. In addition, CZN has a Land Use Permit (LUP) and Water Licence from Parks Canada for the portion of an operations winter road that crosses the NNPR.

 

The main Licence is the Type “A” Water Licence (MV2008L2-002), which was issued by the MVLWB on 8 July 2013 and permits CZN 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. Other Land Use Permits and Water Licences provide for winter road, mine site and transfer related facilities.

 

Water Licence MV2001L2-0003 and LUP MV2012C0008 allow CZN to continue with underground exploration prior to operations. LUP MV2012C0002 provides for surface exploration and diamond drilling at sites throughout the Prairie Creek property.

 

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A Land Use Permit and Water Licence for an all season road were applied for in April 2014 to the MVLWB and Parks Canada and were referred to EA with the Mackenzie Valley Review Board. On 12 September 2017 the Mackenzie Valley Review Board recommended to the Federal Minister of Crown-Indigenous Relations and Northern Affairs that the Project proceed to permitting subject to implementation of measures described in the Report of Environmental Assessment.

 

Prior to the main operating licences being issued in 2013, CZN had been involved in numerous regulatory processes to obtain various Land Use Permits and Water Licences for normal-course exploration and development at the Prairie Creek Mine site.

 

Innovative water management practices are necessary at the Prairie Creek Mine during operations due to the seasonal nature of the discharge and the receiving environment upstream of a national park. The volume of water for discharge will vary seasonally, being greatest in summer. Flows in Prairie Creek are also variable, being very low in winter and fluctuating in summer. Therefore, storage of water in a large pond on site will be maximized in winter, and treated water discharge will be proportionately tied to creek flows to minimize receiving water concentrations, meet Water Licence limits and protect the ecosystem downstream. A variable load discharge (VLD) approach to water management was developed and accepted during the regulatory process. A Water Licence to operate the mine was issued in 2013 by the MVLWB. The Water Licence will regulate discharge by ‘end-of-pipe’ effluent quality criteria as well as by VLD to meet receiving water objectives during operations. Real-time flow measurements upstream in Prairie Creek are planned in order to track the allowable load for discharge. A seasonal schedule for treated mine and mill water discharge will apply based on the site water balance; although the actual discharge rates will be based on the daily on-site analysis of treated water sentinel parameters, and on flows in Prairie Creek, which may vary on an hourly basis. Discharge via exfiltration trench below the bed of Prairie Creek will promote mixing and attenuation of parameter concentrations to meet site specific water quality objectives.

 

In June 2009, the NNPR was expanded to include the entire watershed of the South Nahanni River. However, the Prairie Creek site and a 300-km2 surrounding area were excluded from the Park. An amendment to the Canada National Parks Act provided for a right of access through the expanded Park into the Prairie Creek area. Recognizing the need to work closely together, in 2008 CZN and Parks Canada entered into a MOU that formalized the intent of both parties to work collaboratively, within their respective areas of responsibility, authority and jurisdiction, to achieve their respective goals of an expanded NNPR and an operating Prairie Creek Mine. The MOU was renewed in 2015 for another five years.

 

CZN has completed a detailed socio-economic assessment in support of the Project. The study concluded that the Prairie Creek Mine will be a relatively modest project in a region of the NWT that has limited economic prospects. The majority of the economic and social benefits will be generated through the participation of local labour and businesses in the area, including the communities of Nahanni Butte, Fort Simpson, and Fort Liard.

 

In 2011, Canadian Zinc signed Impact and Benefits Agreements with each of the Nahanni Butte Dene Band and Liidlii Kue First Nation (Fort Simpson), both in the Dehcho Region. Later that year, CZN negotiated a Socio-Economic Agreement with the Government of the Northwest Territories (GNWT), covering social programs and support, commitments regarding hiring and travel, and participation on an advisory committee to ensure commitments are effective and are carried out.

 

Employment

 

Over the course of the construction path to mill production, projected to be initiated in 2018 (Y-02) and to extend into 2020 (Y01), a maximum of approximately 211 people is expected to be employed on site during 2019 (Y-01).

 

During steady state operations the mine will employ a total of approximately 330 people on-site working in two alternating shifts on a two-week-in / two-week-out basis, including truck operators, with half of the employees being on-site at any one time. An additional 33 personnel, mostly related to trucking, will be employed off-site in the Fort Liard and Fort Nelson areas. Personnel will work a regular rotation on site, with rest periods off site, with transport by charter flights to the existing on-site 1,000 m gravel airstrip. CZN’s hiring policy and commitments under its signed Impact and Benefits Agreements are to give preference to qualified local community residents, followed by northern residents. Training programs will be organized to further promote and maximize local aboriginal employment.

 

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Project Metrics

 

Table ES.1.4 Project metrics – Prairie Creek Mine

 

  Concentrates
Mine and mill parameters  Type 

10 yr W. Avg.

Tonnes

  Average grade  Payability
Total ore mined (million tonnes)  8.07  Zinc concentrate  64,800  Zinc: 59%  Zinc: 85%
Mining rate (tonnes / day)  1,600        Silver: 136 g/t3  Silver: 70%
Milling rate (tonnes / day) post-DMS  1,200  Lead concentrate  71,600  Lead: 62%  Lead: 95%
LOM (years)  15        Silver: 800 g/t  Silver: 95%

Mine and mill statistics

Metal 

10 yr ore grade (weighted

average)

 

Ore grade LOM (weighted

average)

 

Mill recoveries LOM

(weighted average)

 

10 yr average annual

contained metal

Zinc  8.50%  8.70%  83%  95M lbs4
Lead  9.30%  8.10%  88%  105M lbs4
Silver  139 g/t  124 g/t  87%  2.1M oz4
Project assumptions base case         
Zinc price  US$1.10/lb  Treatment charges  Exchange rate  C$1.25:US$1.00
Lead price  US$1.00/lb  US$172/tonne Zn Con  Discount rate  8%
Silver price  US$19.00/oz  US$130/tonne Pb Con      

Operating and capital costs

Operating costs2  LOM $/t ore mined  Capital costs  $M
Mining  58  Pre-production capital  253
Processing  47  Contingency  26
Site services  19  Total pre-production capital  279
G&A  30  Sustaining capital  117
Total on-site costs  154  Working capital  36
Transportation1  69      
Total operating costs2  223      

1 Includes truck, rail, handling and ocean shipping 3 Subject to a deduction of 3 oz. per tonne of concentrate
2 Does not include treatment, refining charges, royalty 4 Total metal contained in both lead and zinc concentrates

Economic results (LOM)  Pre-tax  Post-tax
Cash flow undiscounted ($M)  899  562
NPV @ 8% ($M)  344  188
NPV @ 5% ($M)  497  291
IRR (%)  23.8  18.4
Payback period (years from first revenue)  4.4  4.6
Average annual EBITDA ($M)  81   

 

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Capital cost estimates

 

The general breakdown of the Pre-Production Capital cost estimate for the Prairie Creek Project is indicated in the following table:

 

Table ES.1.5 Capital cost estimate – Prairie Creek Mine

 

   Project year     
Description (costs in $M)  -02   -01   01   Total cost 
Mine development   2.6    13.6    21.5    37.7 
Site preparation   4.3    12.5    2.6    19.4 
Mill process plant   9.0    18.9    3.2    31.1 
Paste tailings plant and process   2.9    16.6    3.4    22.9 
Indirects including EPCM   10.9    7.8    5.1    23.8 
Other site infrastructure   6.7    7.7    1.5    15.9 
All season road   13.0    41.6    13.9    68.5 
Owner’s costs   6.8    15.3    11.5    33.6 
Total (excluding contingency)   56.2    134.0    62.7    252.9 
Contingency   5.5    12.3    8.2    26.0 
Total pre-production capital   61.7    146.3    70.9    278.9 

 

Pre-Production Capital cost refers to capital costs incurred until the first processing of mined ore, and has been estimated at a total of $252.9M, excluding contingency, and $278.9M including a contingency of $26.0M.

 

Based on proposals received, several capital items will be supplied on a lease-to-purchase basis, including the accommodation camp, paste plant, flotation cells and thickeners. The lease costs of such items incurred during the pre-production period are included in Pre-Production Capital costs, and lease costs incurred after production start-up are included in Sustaining Capital costs.

 

Contingency for the process plant and site infrastructure portion was estimated using a Monte Carlo simulation model with an overall contingency of 13.2% based on 80% confidence level. Mine development costs are largely based on contractor quotes for the detailed scope of work, but with an overall 13.0% contingency allowance. The all season road estimation used an overall contingency of 8.0% and owner’s costs were assigned a contingency factor of 10.0%. The overall Project contingency is 10.3%.

 

Sustaining capital over the life of the mine has been estimated at $117M and relates largely to ongoing mine development as the mine is expanded to deeper levels, ongoing maintenance of the all season road, and includes leasing costs of capital items in the amount of $11M.

 

Working capital of $36 million is estimated to be required over the first six months subsequent to the start of commercial production.

 

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Operating cost estimates

 

The breakdown of the Operating Cost Estimate for the Prairie Creek Mine, on a Canadian dollar per tonne mined basis, is shown in the following table.

 

Table ES.1.6 Operating cost estimate – Prairie Creek Mine

 

Total operating cost  ($/t mined) 
Mining   58.23 
Milling / processing   46.76 
General and administrative   30.32 
Site services   18.55 
Sub-total   153.86 
Transportation1   68.73 
Total   222.59 

1. Includes truck / rail / handling / shipping.

 

Mining operating costs for the first two years of operation are largely based on contractor quotes. Operating cost estimates for mining beyond the contractor period have been developed from first principles and using direct supplier quotes.

 

The mining contractor quotes for the first two years of operation, based on a detailed scope of work and schedule, provide a high level of confidence in the estimated mining costs. The indicative proposal from the Northwest Territories Power Corporation to supply turnkey type power generation provides further support in the key area of power costs.

 

The following list summarizes key project assumptions used to develop the operating costs, which are in 2017 constant dollars:

 

All electrical power will be produced by generators operating on LNG and provided by Northwest Territory Power Corporation on a flat rate for the life of mine and using an estimated LOM power cost of $0.25/kWhr for the main power generation.
A delivered price of diesel of $0.82/L and LNG of $15.50/GJ was used to estimate power costs other than for the main generator supply.
Mill, surface and G&A operating costs are generally deemed to be steady-state per tonne milled LOM, based on recent labour and materials costs.
Manpower costs for road maintenance and concentrate haul are included in total transport costs.

 

Economic analysis

 

The Base Case economic model has been developed using long-term metal price assumptions of US$1.10/lb zinc, US$1.00/lb lead, US$19.00/oz silver and an exchange rate of C$1.25:US$1.00. Determination of metal prices for use in the 2017 FS has included consideration of consensus price forecasts published by Consensus Economics Inc. as at September 2017, and a review of market commentary published by various services, including the International Lead and Zinc Study Group, CRU, Metals Bulletin Research, Wood Mackenzie, and other industry sources as discussed in Section 19. Current metal prices, rolling three-year averages, and prices used in recent similar mining project studies were also considered for the Prairie Creek economic evaluation.

 

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A sensitivity analysis was conducted on the Project model to evaluate its robustness against variations in financial parameters, specifically Base Case metal prices +/- 10% and the Base Case foreign exchange rate +/- 10% and +4%. The financial analysis centering on the Base Case, showing average annual EBITDA, NPV (at 8% and 5% discount rates), IRR and payback periods, on a pre-tax and post-tax basis is presented in the following table.

 

Table ES.1.7 Financial analysis – Prairie Creek Mine

 

Metal price scenario1  90%   100%   110% 
Average Annual EBITDA ($M)   59    81    103 
Pre-Tax Cash Flow Undiscounted ($M)   546    899    1,251 
Pre-Tax NPV @ 8% discount ($M)   166    344    523 
Pre-Tax NPV @ 5% discount ($M)   270    497    724 
Pre-Tax IRR   16.5%   23.8%   30.2%
Post-Tax Cash Flow Undiscounted ($M)   345    562    779 
Post-Tax NPV @ 8% discount ($M)   74    188    301 
Post-Tax NPV @ 5% discount ($M)   148    291    433 
Post-Tax IRR   12.4%   18.4    23.7%
Post-Tax Payback Period (years from first revenue)                           5.7                            4.6                            4.0 

 

Exchange rate scenario2  C$1.125:US$1.00   C$1.30:US$1.00   C$1.375:US$1.00 
Average annual EBITDA ($M)   62    89    100 
Pre-Tax Cash Flow Undiscounted ($M)   589    1,022    1,208 
Pre-Tax NPV @ 8% discount ($M)   188    407    501 
Pre-Tax NPV @ 5% discount ($M)   298    577    696 
Pre-Tax IRR   17.4%   26.2%   29.5%
Post-Tax Cash Flow Undiscounted ($M)   372    638    752 
Post-Tax NPV @ 8% discount ($M)   88    228    287 
Post-Tax NPV @ 5% discount ($M)   166    341    416 
Post-Tax IRR   13.2%   20.3%   23.1%
Post-Tax Payback Period (years from first revenue)   5.5    4.4    4.1 

1. Metal prices varied plus / minus 10% and exchange rate unchanged.

2. Exchange rate varied plus / minus 10% and plus 4%, and metal prices unchanged.

 

A ‘stressed case’ sensitivity analysis using assumed metal prices of US$0.80/lb for zinc and lead and US$17/oz for silver, and an exchange rate of C$1.40:US$1.00 indicates a pre-tax NPV8% of $104M and IRR 14% (post tax NPV8% of $32M and IRR 10%). Using the average metal prices for the three years ended 30 June 2017 of US$0.98/lb for zinc, US$0.88/lb for lead and US$16.82 for silver, and an exchange rate of C$1.27:US$1.00 indicates a pre-tax NPV8% of $161M and IRR 16% (post-tax NPV8% $71M and IRR 12%).

 

Recommendations

 

As a result of the feasibility study assessment, AMC recommends the following:

 

Early completion of engineering and mine development programs to facilitate achievement of scheduled access development, initial dewatering and first ore.
Completion of permitting of the all season access road.
Study of opportunities for enhanced mine operation through use of automation and advanced technology.
Further underground paste backfill strength and flow property studies.
Additional study of paste binder requirements and backfill methodology.
Further hydrology study to enhance understanding of water ingress to the mine and optimize dewatering strategy and water treatment.

 

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Selection of appropriately qualified and experienced mining contractor for the pre-production phase and the first phase of production operations.
Completion of a detailed trade-off study further examining the economic merits of recovering lead oxide and oxide recovery at low grades.
Further detailed mine design and schedule to optimize grades, and balance ore and tailings stockpile requirements.
Detailed design of key underground infrastructure including magazines, dewatering and sump set-ups, service bays, main fan and heating set-ups, electrical infrastructure.
Finalization of arrangements for active and passive tailings stockpiles.
Ordering of key long-lead items for underground operation including main fans and heaters.

 

Ausenco recommends the following in the execution phase of the project:

 

Further investigation of the use of LNG (liquefied natural gas) for heating of buildings and underground mine.
Further investigation of the use of excess heat from generators to supplement underground heating.
Investigation of the use of used construction equipment and mobile equipment for operations.
Optimization of the paste plant design, to include best use of recent test results.
Complete detailed engineering and IFC drawings to support the procurement and construction of the process plant and site infrastructure.
Completion of early works site activities including removal of existing generators from the power house, repair of the mill roof, initial work on the water storage pond and waste rock pile, site clearance of derelict buildings, equipment and scrap material.
Selection of appropriately qualified and experienced contractor(s) to construct the surface works.
Selection and engagement of appropriately qualified and experienced contractor(s) to carry out the construction of the process plant and site infrastructure.

 

Total associated preliminary cost estimate for the above recommendations from AMC and Ausenco is $18.2M, of which the majority is included in the FS Capital Cost estimate.

 

Conclusions

 

The Prairie Creek Property contains a high-grade, silver-lead-zinc-copper vein along with other lead-zinc deposits and deposit types.

 

The 2017 FS indicates a Mineral Reserve of 8.1 Mt and an LOM from mill start-up of 15 years at a steady-state production rate of 584,000 tpa.

 

Mill start-up is projected for August 2020, with a pre-production period during which detailed engineering, mill and camp refurbishment, underground development from existing workings, and construction of key surface infrastructure items, including a paste plant and all season road, will take place.

 

The 2017 FS indicates a base case Pre-Tax Net Present Value (“NPV”) of $344M using an 8% discount rate, with an Internal Rate of Return (“IRR”) of 23.8% and a post-tax NPV of $188M with a post-tax IRR of 18.4%. The Base Case metal price assumptions used in the model are: Zn US$1.10/lb., Pb US$1.00/lb., Ag US$19.00/oz., with a foreign exchange rate of C$1.25=US$1.00.

 

The development of the Prairie Creek Mine is projected to offer significant economic advantages on a wider scale. Canadian Zinc has indicated that there is broad support among aboriginal organizations and communities in the Dehcho region for the direct benefit and economic stimulus that the mine would bring to this region of the Northwest Territories. Its envisaged operation presents a significant opportunity for potential enhancement of the social and economic well-being of the surrounding communities. During construction there will be approximately 211 jobs, and during steady state operations over the life of the mine there will be approximately 330 direct full-time jobs. In addition, the Project offers other potential indirect business and employment opportunities, related to transport, supply of the mine site and environmental monitoring and management.

 

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The Prairie Creek Mine is shown to be a viable project, based on the Mineral Reserves, mine plan, and production and economic parameters determined within the 2017 FS. AMC recommends that Canadian Zinc advance the Project to the next stage, which will include: detailed design and planning of the required services, construction of the all season road, refurbishment of the mill, ordering the long-lead equipment for power generation, portal refurbishment, access widening, and development of ramp declines and underground infrastructure in preparation for ore production and processing.”

 

 

 

The information relating to the Prairie Creek Property in the preceding sections has been extracted from the 2017 Technical Report dated September 28, 2017 (filed on SEDAR and EDGAR).

 

 

 

Environmental Assessment and Permitting

 

All Season Road Permit

 

In 2014, the Company made applications to the MVLWB and Parks Canada for permits to construct, maintain and operate an all season road from the Mine to the Liard Highway. The MVLWB subsequently referred the applications to the MVRB for environmental assessment.

 

Following the environmental assessment process, in September 2017, the Review Board recommended approval of the proposed All Season Road for the Prairie Creek Mine. The Review Board issued its Report of Environmental Assessment and Reasons for Decision for the Company’s Prairie Creek All Season Road Project for the Prairie Creek Mine and submitted the Report to the Federal Minister of Crown-Indigenous Relations and Northern Affairs.

 

The Review Board recommended the approval of the Prairie Creek All Season Road be made subject to implementation of the measures described in the Report, which it considers are necessary to prevent significant adverse impacts on the environment and local people.

 

The full text of the Report of Environmental Assessment and Reasons for Decision (331 pages plus appendices), together with all proceedings, transcripts, technical reports and detailed information on the environmental assessment of the Prairie Creek Mine All Season Road EA1415- 01[2014] are available on the website registry of the Review Board at http://reviewboard.ca/registry/project.php?project_id=680, under the file of Canadian Zinc Corporation.

 

In its Report, the Review Board has prescribed mitigation measures, many of which build on the Company’s commitments made during the EA, intended to mitigate the potential adverse impacts on the environment, improve monitoring and managing the potential impacts and which will also address any public concern related to these impacts.

 

The Review Board has recommended the creation of an Independent Technical Review Panel, to ensure that the road is designed to a standard that is highly protective of people and the environment. Some of the Review Board measures also include requirements that the Company negotiate with traditional knowledge holders from Nahanni Butte Dene Band and other First Nations about ways to avoid impacts on heritage resources and to conduct systematic wildlife monitoring and adaptive management using traditional knowledge.

 

With these and other measures to reduce or avoid identified impacts, the Review Board concluded that the Project will be improved, and meaningful actions will mitigate the significant impacts that would otherwise occur.

 

During the summer of 2017, three separate field programs relating to the All Season Road were completed. The programs were part of the Company’s further commitments to the route assessment made during the environmental assessment process and included center-line survey location for the road route and additional baseline environmental studies including, bird, wildlife and vegetation studies. The helicopter supported programs were carried out from bases at both the mine site and at the community of Nahanni Butte.

 

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On January 18, 2018, the Minister of Crown Indigenous Relations and Northern Affairs Canada, invoked a two-month extension to the timeline for the Minister’s decision on the Report of Environmental Assessment for the Prairie Creek All Season Road, originally due by February 12, 2018 to allow the federal and territorial governments to complete aboriginal consultations.

 

In connection with such consultations, on January 19, 2018, INAC provided the Company with certain information requests identifying specific issues raised by Indigenous groups that need further clarity through proponent engagement, so the Responsible Ministers can be confident that the Crown has discharged its legal duty to consult by meaningfully consult with potentially impacted Indigenous groups.

 

INAC requested the Company to engage the Nahanni Butte Dene Band, Liidlii Kue First Nation and the Dehcho First Nations, as recommended by the Review Board, to gain an understanding of the Indigenous groups’ concerns, discuss and determine how the Indigenous groups will be included in monitoring and discuss the Indigenous groups’ requests for support to participate in implementation of the measures recommended by the Review Board and the commitments made by the Company in the environmental assessment process.

 

On June 11, 2018, the Company submitted its formal replies to the Minister of Crown-Indigenous Relations and Northern Affairs to address all five information requests related to the implementation plans for various mitigation measures and proponent commitments contained in the EA Report. As requested in the Minister’s information requests, the Company continued working with the local Dene communities to address the implementation of various measures recommended by the Review Board. Key concerns which the Company and local Dene communities are addressing collaboratively include (a) sharing and incorporation of Dene knowledge and values into project design, (b) ensuring the Dene communities will be partners in environmental, wildlife and cultural monitoring of the All Season Road, and (c) addressing the Dene communities’ requests for support to participate in implementation of the measures recommended by the Review Board and the commitments made by the Company in the environmental assessment process.

 

On July 23, 2018, the Company received a letter confirming the positive decision of the Federal Minister of the Crown-Indigenous Relations and Northern Affairs Canada to resume the decision phase for The Company's Prairie Creek All Season Road Environmental Assessment.

 

On October 9, 2018, the Minister of Crown-Indigenous Relations, on behalf of the Responsible Ministers, issued a decision adopting the Review Board’s recommendation that the All Season Road for the Prairie Creek Mine be approved.

 

The full texts of the Minister’s letter and information requests, together with subsequent correspondence and the Company’s replies to the information requests, may be viewed on the public registry website of the Review Board www.reviewboard.ca.

 

In February 2019, the Company submitted a post-EA project information package, including an updated Project Description Report, and entered the ASR permit drafting and issuance phase, conducted by MVLWB & Parks. MVLWB & Parks are reviewing the project information package for adequacy, prior to distributing the package and receiving input from territorial and federal agencies, and local communities. The permit issued by MVLWB & Parks is expected to incorporate the recommended mitigation measures included in the EA Report and based on the schedule outlined in the MVLWB & Parks notice to the Company, the permit is expected to be completed in the third quarter of 2019.

 

The ASR follows the general alignment of the previously permitted Winter Road, while reflecting the terrain, site characteristics, and road specifications suitable and preferred for an all season road. The construction schedule of the ASR requires an initial Phase 1 winter road be established in order to gain initial access to the mine site and, at the same time, provide required geotechnical data to finalize the ASR route design. route design. Due to local terrain challenges, small sections of the Phase 1 road would be constructed using non-typical methods of winter roads and these are described in the submitted project information package.

 

NorZinc plans to construct the road over three calendar years. Prior to construction activities, the Company plans to conduct field investigations and prepare site plans (including detailed road design) and award construction contracts. Dependent on the permitting and financing timeline, construction of the All Season Road is planned to commence from a winter road in early 2020 and continue into 2022, in parallel with continuous and ongoing site construction and mine development.

 

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On January 16, 2019, the Company signed a TLUA with the NDDB for the construction and operation of the ASR. Previously in 2011 NorZinc signed the Nahanni IBA and the LKFN IBA for the development of the Prairie Creek Mine, which contemplated access to the mine via a winter road only. In both agreements, NDDB and LKFN agreed to support the Company in obtaining all necessary permits and other regulatory approvals required for the Prairie Creek Mine Project. In 2014 the Company decided all year round access via an ASR would be economically preferable to winter road only access, and the Company commenced the EA preparation process.

 

The NDDB of Nahanni Butte is the nearest community to the Prairie Creek Mine, located approximately 90 kilometres southeast of the mine site. The mine site and route of the ASR are within NDDB’s Traditional Territory. The Company recognized that the ASR may have additional potential impacts and effects on the NDDB, compared to a winter-only road, and recognition of this is established within the TLUA. The TLUA combined with the Nahanni IBA provides assurance the Prairie Creek Mine has strong local Aboriginal support as the ASR moves through the final phase of permitting.

 

In addition to the TLUA, the Company is negotiating a Road Benefit Agreement with the LKFN of Fort Simpson, NWT. Fort Simpson is the largest community within the Dehcho Region, located about 185 kilometres east of the mine site.

 

As part of the EA Report engagement, the NDDB and LKFN entered into an agreement with the Company which provides for the negotiation of an EMA. The EMA is intended to be a formal mechanism, tested in other projects, to, in addition to regulatory instruments, provide for Indigenous participation in environmental management, and to ensure that the mitigative measures and environmental protection commitments in the EA Report are appropriately implemented. It will also involve Dene participation in the environmental management process of the road, a cornerstone of which is a Dene-led independent monitoring program. This agreement will also provide for Dene communities’ review, participation and oversight of environmental monitoring of the ASR during permitting, design, construction, operation and closure phases, and the implementation of the mitigation measures contained in the EA Report.

 

The Dene communities and the Company intend that the EMA will provide for a consultative and cooperative approach to environmental management of the ASR that will establish the appropriate responsibilities of the NDDB, LKFN and the Company in the development, project design, ongoing review and monitoring, as well as modification of follow-up programs to mitigate potential effects on the environment and to provide transparency and oversight to local communities.

 

Negotiations of both agreements are well advanced and draft agreements have been compiled.

 

Type “A” Water Licence for Operating

 

The Company has secured a Type “A” Water Licence and all necessary associated Land Use Permits, through the regulatory process established under the MVRMA, that permit development and subsequent mine operation and production at Prairie Creek.

 

LUP “MV2008D0014” permits the Company 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. This LUP permit has been extended and will expire on June 16, 2020.

 

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Environmental Matters

 

Impact Assessment

 

The Company’s Developer’s Assessment Report (DAR) submitted to the Review Board in March 2010 outlines the Company’s assessment of any potential environmental impact that operating the Prairie Creek mine may have on the region.

 

In December 2011, the Review Board concluded, pursuant to paragraph 128 (1) (a) of the Mackenzie Valley Resource Management Act, that the proposed development of the Prairie Creek Mine as described in the Report of Environmental Assessment, including the list of commitments made by the Company 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 Company Developer’s Assessment Report (DAR) submitted to the Review board in April 2015 outlines the Company’s assessment of any potential environmental impact that Prairie All Season Road may have on the region.

 

In September 2017, the Review Board issued its Report of Environmental Assessment and Reasons for Decision for the Company's Prairie Creek All Season Road Project for the Prairie Creek Mine. The Review Board recommended the approval of the Prairie Creek All Season Road be made subject to implementation of the measures described in the Report, which it considers are necessary to prevent significant adverse impacts on the environment and local people. In its Report, the Review Board prescribed mitigation measures intended to mitigate the adverse impacts on the environment, improve monitoring and managing the potential impacts. With these and other measures to reduce or avoid identified impacts, the Review Board concluded that the Project will be improved, and meaningful actions will mitigate the significant impacts that would otherwise occur.

 

Human Environment: The Prairie Creek Mine is a relatively modest project that is proposed for a region of the Northwest Territories that has limited other confirmed economic prospects. The real economic and social impact of this project will be generated through the participation of local labour and business in the area, including the communities of Nahanni Butte, Fort Simpson and Fort Liard. Participation will come in the form of direct employment, direct supply of goods and services, and spin-off activities. There will be a period of adjustment as people and communities integrate into the wage economy. The rise in financial wealth and all that it affords will more than offset this initial adjustment period. For those living in the project area, an operating Prairie Creek Mine offers an opportunity for a generation of employment, and will result in a population that is better educated, better trained and better able to cope with, adapt to, and capture new opportunities in the future.

 

Access road operations are expected to increase traditional land use in the area since a re-aligned access road will afford easier access to hunting areas and trap lines. However, a cooperative effort is required to control road access because unauthorized use poses risks to safety and to wildlife from hunting pressures.

 

Water Quality: Recent studies show that the historical discharge of untreated mine drainage has had no significant impact on downstream water and stream sediment quality, or aquatic life. This suggests Prairie Creek is not particularly sensitive to discharges from the Mine. Nevertheless, the Company's water management strategy for operations will minimize the potential for impacts.

 

Predictions show that the planned discharge from the Mine during operations will not cause metal concentrations in Prairie Creek to exceed the targets when creek flows are in the normal range year round. The Company will monitor flows in the creek, and if flows are found to be lower than normal, the discharge will be temporarily adjusted so that the targets are not exceeded. This will mean no impacts on Prairie Creek water at the Mine, or 7 kilometres downstream at the new Nahanni National Park Reserve boundary.

 

After mine closure, there will be no drainage from mine portals because the Mine and access tunnels will be completely filled. However, bedrock surrounding the Mine workings is expected to allow the passage of groundwater. This water will contain metals, mostly from mineralization considered uneconomic and not mined, and to a lesser extent from the backfilled waste mixture. A small quantity of seepage from the covered Waste Rock Pile is also possible.

 

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It is believed that the natural zinc concentrations that existed in Prairie Creek before any mine development potentially exceeded the water quality target during winter months when creek flows were lower than normal.

 

Predictions for Prairie Creek after mine closure suggest all metal concentrations will remain within the water quality targets when creek flows are in the normal range year round, but if creek flows are lower than monthly in winter, zinc concentrations could be similar to those predicted to have potentially occurred before mine development. Post-mine predictions also indicate higher cadmium concentrations in winter if creek flows are unusually low. However, cadmium is not stable in the natural environment and disappears quickly because of various natural reactions. Therefore, the target for this metal is unlikely to be exceeded. As such, it is likely that no additional impacts on water quality will occur after mine closure compared to pre-mine conditions.

 

Following Technical Sessions held during October 2010 related to the Prairie Creek Environmental Assessment the Mackenzie Valley Review Board issued a Second Round of Information Requests and the Company received 54 Information Requests from seven agencies. The majority of requests related to further details of the proposed operating mine water quality and management.

 

In order to adequately address the Information Requests the Company needed to generate water products that would be representative of the proposed Prairie Creek operations. This required the collection of local Prairie Creek Mine site source water products and included the collection of a 285 kg bulk mineralization composite rock sample from various underground headings, over 200 litres of minewater and water directly from Prairie Creek itself. SGS Canada Inc., of Vancouver completed a Locked Cycle Test utilizing the collected rock and water samples in a laboratory bench scale study. The mill process flow sheet used in the Locked Cycle Test had been previously determined through numerous metallurgical studies. Both concentrates and waste products, including tailings and water, were generated from this laboratory scale milling process.

 

SGS-CEMI labs completed further primary treatment tests on both the process water and minewater. Further analysis related to effluent discharge of the proposed Prairie Creek Mine was completed by Hatfield Consultants of Vancouver. These included development of proposed site-specific water quality objectives, definition of an internal dilution zone and development of proposed Effluent Quality Criteria. Additional toxicity studies were completed, on the product effluent using both fish and organic growth to determine discharge toxicity levels and impact assessment related to aquatic sensitivities. These studies resulted in developing a more detailed water treatment scheme and water management system for the proposed Prairie Creek site.

 

The original proposal to use an end of pipe-type design to disperse mine effluent did not produce satisfactory mixing condition within the Prairie Creek dilution zone. Additional investigation of outfall effluent discharge design by Northwest Hydraulic Consultants was completed and a new exfiltration trench has been proposed and at the outfall location into Prairie Creek. In addition a downstream mixing analysis of the outfall water with Prairie Creek flows was also completed with the use of proprietary HEC-RAS hydraulic modeling software.

 

The Company and the Department of Aboriginal Affairs and Northern Development proposed differing approaches to site specific water quality objectives for Prairie Creek.

 

The “Reference Condition Approach” (“RCA”), recommend by AANDC, is a method of determining site specific water quality objectives (“SSWQO”) for the environment, which are in turn used to create effluent quality criteria that are meant to regulate end-of-pipe water discharge into the environment.

 

The Company believed that technical solutions acceptable to all parties had been identified for most issues raised in the EA. However, there remained a difference in approach between the Company and AANDC regarding the methodology used to select site specific water quality objectives relating to the treated water discharge from the Prairie Creek Mine. CZN and AANDC agreed to collaborate to move forward in a timely manner to further discuss the issues and seek to reach a mutually acceptable solution and approach. In a letter issued July 15, 2011, the Review Board encouraged the parties to complete the meetings and report preparation prior to the deadline established for final submissions.

 

During August and September, 2011, the Company met numerous times with interested parties to further collaborate on water quality objectives. A number of additional components, including enhanced water storage and treatment, were suggested to further add to site contingency factors. Progress was made in resolving certain issues in order to move forward with the broad development of a framework for selecting Site-Specific Water Quality Objectives prior to the filing of Final Submissions by the parties and by the Company on September 16, 2011.

 

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To achieve its proposed water quality objectives, the Company made commitments to enhance its water treatment plant, increase water storage capacity and construct an improved mine effluent outfall for discharge into Prairie Creek.

 

The Review Board addressed the issue of the Reference Condition Approach in its EA Report under a section entitled “3.1.3 Site specific water quality objectives.” The Review Board reviewed the submissions from all parties regarding the differing approaches to establishing SSWQOs.

 

The Review Board is of the view that the implementation of either approach to site specific water quality objectives is not likely to significantly impact water quality in Prairie Creek in the area of the mine site, in Prairie Creek at the Nahanni National Park Reserve boundary or in Prairie Creek at its confluence with the South Nahanni River.

 

The Review Board concluded that either approach to SSWQOs would produce a result that was not likely to have any significant adverse impacts on the environment. The Review Board specifically left the issue of what SSWQOs would be used to establish EQCs to the Mackenzie Valley Land and Water Board, stating at page 30, “The Review Board will not provide a recommendation on effluent quality criteria because it is the responsibility of the Mackenzie Valley Land and Water Board.” The Review Board recognizes that the Mackenzie Valley Land and Water Board will decide the limits to protect water quality that are appropriate for this project and setting.

 

The Review Board provided a suggestion to improve the monitoring and management of potential impacts from the development of the Prairie Creek Mine. It noted that construction of a second water storage pond may address a broader range of risks and result in better water management on site and improved water quality in Prairie Creek. The Review Board suggested that the Water Board consider this during the licensing phase.

 

The main purpose of a Water Licence is to regulate the discharge of water to the environment via the application of licence terms and conditions and the establishment of effluent quality criteria. CZN proposed a water management plan that includes real-time flow monitoring of the Prairie Creek stream, and discharge of treated mine water and treated process water according to a ‘load-based’ approach. In this approach, the volume and the blend of discharge (comprised of treated mine water and treated process water) are varied according to the actual flow volumes in the receiving stream. In so doing, site-specific water quality objectives can be met, and there is no significant negative impact on the receiving environment.

 

The Water Board accepted the site-specific water quality objectives derived by the Company. 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 the Company, will be a more protective and practical way of controlling effluent discharge from the mine to Prairie Creek. The Board recognized 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.

 

In 2012 Environment Canada initiated a 10 Year Review process of the Metal Mining Effluent Regulations (“MMER”). The review is focused on proposed amendments to MMER that would include more stringent effluent limits and, among other proposals, make changes to the Environmental Effects Monitoring program. Environment Canada proposes to establish BATEA based (best available technology economically achievable) effluent limits as a means to promote continuous improvement in the sector. On May 13, 2017, the proposed Regulations Amending the Metal Mining Effluent Regulations, were published in Canada Gazette Part 1. The proposed Amendments would impose more stringent limits for arsenic, copper, cyanide, lead, nickel, and zinc, as well as introduce limits for un-ionized ammonia. Several amendments are proposed to improve the efficiency of the environmental effects monitoring performance measurement and evaluation requirements. The proposed Amendments would require that mine effluent not be acutely lethal to Daphnia magna whereby a first acute lethality failure for Daphnia magna would not result in a loss of the authority to deposit, while subsequent failures would. The proposed Amendments would come into force on the day on which they are registered, which is expected to take place in 2018.

 

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Fish: Bull trout and mountain whitefish are found in Prairie Creek near the Mine, however numbers are low. Spawning trout have been found in Funeral Creek, a tributary of Prairie Creek upstream of the Mine. No evidence of spawning has been found downstream of the Mine. Based on the water quality predictions, mine operations should have no impact on fish. Water quality after Mine closure may cause limited impacts in the immediate vicinity of the Mine site when Prairie Creek flows are less than normal winter levels. These impacts may have occurred naturally before the Mine existed.

 

Air: New power generators and an incinerator will limit the release of exhaust gases. Humid conditions will naturally control dust. Any impacts will be limited to the Mine area.

 

Wildlife and Vegetation: Impacts to wildlife from Mine operations are expected to be limited and largely avoidable. Dall’s sheep lamb on high ground in the area in the spring and could be disturbed by air traffic. Flight path management will be adopted. There is a potential for mortality of Dall’s sheep, woodland caribou and wood bison associated with access road use. A wildlife sighting and notification system will be adopted, in addition to the posting of speed limits. Grizzly bear-human encounters are possible at the Mine site and programs to limit any attraction of bears will be implemented, along with training to respond appropriately to bear encounters. No significant impacts on vegetation are expected because of the relatively small areas of disturbance relative to the large areas of vegetation types.

 

Terrain and Stability: No large-scale landslide features are evident near the Mine and access road, and the risk of major slope failure appears to be small. Small-scale slope failures and mudflows are possible along the access road east of the Mackenzie Mountains, particularly where permafrost might exist in lowland areas. Impacts can be minimized by good drainage and avoiding removal of the vegetation layer during annual road construction. Engineered structures (the Water Storage Pond and Waste Rock Pile) have been designed to be stable during earthquakes. Dykes protecting the site during major floods were designed and built properly. Maintenance repairs have been made to the armour rock on the dykes.

 

Accidents and Malfunctions: The majority of Mine activities, and all those associated with chemicals, fuel and hazardous material, will take place within a dyke-protected area, isolated from Prairie Creek. Any spills or contamination can be contained on site, and discharge of site water to the environment can be stopped temporarily. The potential for spills or leaks along the access road will be minimized by controlling road use and using industry-standard containers for transport and storage. Winter conditions will assist in the containment of any spills until a response team can complete a clean-up. The bags of concentrate being transported will be frozen, but road bed tests will be made along the route to make sure material is not being lost.

 

Cumulative Effects: Very little other activity is or will likely be occurring in the area during Mine operations that could cause cumulative effects. If the Mackenzie Gas Pipeline construction occurs during the life of the Mine, there will be significant regional disruption, but this is unlikely to significantly affect the Mine because the pipeline will require short-term skilled labour. Unauthorized use of the access road would raise safety and wildlife concerns. the Company is hoping to control access, and will closely monitor road activity.

 

Climate Change: Climate change is not expected to significantly affect the Prairie Creek Mine itself. Experience in recent years would indicate that Winter seasons in the north of Canada have been getting somewhat shorter and a little warmer. Climate change may alter the pattern of stream flows somewhat. It is planned that the Mine will discharge mine water to the receiving stream environment, which will be contingent on adequate water flow in the receiving stream and the rate of discharge will be managed and controlled using on-site water storage, thereby compensating for any potential flow variations.

 

The Company identified some climate change project risks from reliance on a winter-only access road and with a large volume of concentrates to transport out, and supplies to bring in to the mine site, each year, the decision was taken to propose construction and operation of an all season road. Constructing and operating the All Season Road will need to consider potential climate change. Natural thaw of discontinuous permafrost can be anticipated, which could lead to soil instability and potentially slope failures. Road investigation and design will account for these possibilities as much as possible and ongoing road maintenance may be required to address zones of thaw and settlement, as well as local soil movement or erosion.

 

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Monitoring and Reporting: Significant monitoring of the Mine site, access road and the environment will occur during and after the Mine’s life. Monitoring programs will include water, soil and air quality, hydrology, wildlife, harvesting, aquatics, traffic and access control. The Company expects individuals from local communities to be involved in this monitoring, both as employees and independent monitors. The Company hosted two environmental monitor training courses at the Mine site for local Indigenous people in order to develop a labour pool for future monitors. The Company undertakes to share the monitoring results with local communities and regulatory agencies. It is contemplated that the NorZinc-Parks Canada-Dehcho First Nations Technical Committee will become a more public, inclusive Advisory Committee that will meet three times per year in the region. It is expected that the Advisory Committee will be a forum for review of Mine and access road environmental performance and to discuss and address any concerns. Monitoring data will be presented and discussed, with consideration of adjustments to programs as appropriate. Data from independent monitoring will be compared to project monitoring, and any significant differences discussed. At one of the meetings each year, regulators will be invited and compliance with permits will be considered. The Company will produce annual monitoring and permit compliance reports.

 

Acid Rock Drainage

 

The mineral resources at the Prairie Creek Mine are hosted in carbonate rocks. The low sulphide values and high excess neutralization potential of the host rocks (and tailings products) indicate that these materials will pose no long-term hazard to the environment through sulphide oxidation processes.

 

Rescan Environmental of Vancouver, B.C. undertook a detailed analysis of the acid generating characteristics of all dominant rock types at the Prairie Creek Mine in 1994. The results indicated an overwhelming dominance of acid neutralizing minerals, with acid neutralizing carbonate minerals exceeding the total capacity to generate acidity by an average factor of almost 200. Initial analysis of flotation tailings generated from metallurgical test work has indicated a similar excess of neutralization potential. The Company does not anticipate the potential for any acid rock drainage impacts.

 

Mesh Environmental Inc. (“Mesh”) undertook a follow-up study during 2005/06, with the objectives of significantly expanding Rescan’s 1994 rock sample dataset and incorporating analyses on mineralized rock samples, tailings and concentrates. Sample collection was completed by Mesh at the Mine Site during September 2005. A total 66 samples were included in Mesh’s characterization program.

 

A total of ten process waste samples, including mill rock, flotation feed, tailings and concentrate samples from tests performed in 2005 were provided by SGS Lakefield Research Limited in Lakefield, Ontario (ISO 9001-2000 accredited). So-called mill rock is wall rock dilution that will be separated from mineralized material in the processing plant.

 

Static laboratory geochemical characterizations were carried out by Mesh, including acid-base accounting (“ABA”), along with: total inorganic carbon and multi-element ICP analyses on all samples; and mineralogy, expanded ABA (pyritic sulphur, siderite correction, acid-buffering characterization curves) and grain size analyses on a sub-set of samples. The following conclusions were made:

 

·All the host rock units are non-potentially acid generating (“non-PAG”), due to generally low amounts of contained sulphur (less than one percent of total sulphur) and the substantial effective buffering capacity provided by reactive carbonates, the latter reflecting the carbonate-rich nature of the host rock material (which conclusion is supported by the behavior of mixed waste rock that has been exposed on surface at the Mine Site for 25 years, which waste rock does not demonstrate acidic pH values and remains classified as non-PAG as a result);

·Main Zone vein- and stratabound-mineralization are classified as potentially acid generating due to an abundance of sulphide mineralization (although Mesh’s kinetic test data to December 2006 suggests that it may take a substantial amount of time for acidity to be generated, due to the significant amount of buffering capacity available from the carbonate host rocks);

 

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·the two mill rock samples produced as by-products from Main Zone vein mineralization and overbreak are non-PAG and contain relatively low sulphur values (approximately 0.3 percent, or less);

·the final composite tailings samples are classified as non-PAG and contain sufficient buffering capacity to maintain neutral conditions under laboratory conditions;

·tailings supernatant is alkaline (pH 10.7 to 10.9), with total solids in solution of five to 500 milligrams and relatively high sulphate concentrations of 170 to 230 milligrams per litre, respectively, over the two hour test period;

·sulphide concentrates are classified as potentially acid generating due to slightly elevated pyritic sulphur content and very little neutralization capacity;

·as a result of substantially higher neutralization potential, oxide concentrates are classified as non-PAG (oxide zinc concentrate) and as having uncertain acid generation potential (oxide lead concentrate).

 

Hazardous Materials

 

Hazardous and toxic waste materials have been stored at the Prairie Creek Mine site, including sodium cyanide and PCB’s that remained from Cadillac’s operations in the early 1980s. Diesel fuel is also stored on site. All such substances are or were stored in a secured manner and are regularly inspected by government agencies.

 

A disposal project for the cyanide commenced in 2007 and in July 2008, following receipt of the necessary regulatory approvals, the repacked sodium cyanide drums were transported to Cyanide Destruct Systems in Barrie, Ontario and the repackaging waste was removed to Earth Tech’s Swan Hills Treatment Centre in Alberta for destruction and disposal.

 

In 2010, a program was undertaken to remove, by airlift, all PCB (polychlorinated biphenyls) contaminated material that had been stored in a dedicated safe facility on site since 1982. The Company contracted Hazco Environmental Services to repackage, remove and transport the PCB material off-site to be disposed of, by incineration, at the certified Earth Tech Swan Hills disposal facilities in Northern Alberta.

 

An inspection of the Prairie Creek Mine site by Government of the Northwest Territories (GNWT) Lands Inspectors in August 2016, in connection with existing Surface Lease 95F-10-005 identified the condition of drums containing sodium xanthate as a concern. In the Inspection Report dated September 30, 2016 Lands Department, GNWT, directed CZN that all compromised drums be replaced with sealable containers or removed from site. A letter from GNWT dated August 21, 2017 required CZN to repack leaking and/or compromised xanthate drums with approved packaging in accordance with applicable federal and territorial legislation and regulations. In September 2017, all xanthate drums were over packed into the soft over pack bags. In October 2017, GNWT noted some outstanding issues, including the ‘certification’ of the Reagent Pad (where the xanthate is stored). In November 2017, CZN described the process and details of the over packing and provided the relevant information to ‘certify’ the Reagent Pad. CZN believes it has addressed and satisfied the issues raised in the Inspection Reports and subsequent letters and has complied with all requests and directions of GNWT regarding the sodium xanthate and the Surface Lease.

 

Endangered Species

 

The federal, provincial, and territorial government signatories under the Accord for the Protection of Species at Risk (1996) agreed to establish complementary legislation and programs that provide for effective protection of species at risk throughout Canada. Under the Species at Risk Act (S.C. 2002, c.29) (SARA), the federal competent ministers are responsible for the preparation of recovery strategies for listed Extirpated, Endangered, and Threatened species.

 

The Committee on the Status of Endangered Wildlife in Canada (“COSEWIC”) lists only two species in the area of the Prairie Creek Mine: the Grizzly Bear (Ursus arctos) and the Wolverine (Gulo gulo), both of which are listed in the Special Concern category. In areas removed from the minesite, COSEWIC lists the Peregrine Falcon (Falco peregrinus anatum), the Woodland Caribou, Boreal population (Rangifer tarandus caribou) and the Wood Bison (Bison bison athabascae), each of which are considered threatened. No rare or highly valued species of vegetation or plant communities have been identified in the area. COSEWIC does not list any plant species as endangered, threatened or of special concern in the area of the Prairie Creek Mine.

 

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Detailed field studies of wildlife populations and wildlife habitat in the area of the Prairie Creek Mine and the access road were conducted by Beak Consultants Inc. in 1980-81 and again by Rescan in 1994. None of the listed species and no critical habitats, such as denning or nesting areas, were identified in the area of the Mine. Grizzly bears and wolverines have been observed or encountered only very infrequently in the area surrounding the mine over the past 20 years.

 

Specific surveys of potential Peregrine falcon nesting habitat have identified no nesting sites in the area of the minesite.

 

Wood bison were re-introduced into the Nahanni Butte area, 90 kilometres to the southeast of the Prairie Creek Mine, in 1980 with additions to the herd made in 1989 and again in 1998. Potential impacts to these populations are primarily transportation related, in this case primarily in the area of the Liard Highway, and can be mitigated through standard road safety practices.

 

In 2011, Environment Canada published a proposed recovery strategy on the Boreal population of Woodland Caribou (Rangifer tarandus caribou), referred to as boreal caribou, which were assessed in May 2002 as ‘Threatened’ by the Committee on the Status of Endangered Wildlife in Canada (COSEWIC). [Environment Canada. 2011. Recovery Strategy for the Woodland Caribou, Boreal population (Rangifer tarandus caribou) in Canada [Proposed]. Species at Risk Act Recovery Strategy Series.] The long-term recovery goal for boreal caribou is to achieve self-sustaining local populations throughout their distribution in Canada to the extent possible.

 

Boreal caribou are primarily threatened by a reduction in the availability and suitability of habitat necessary to carry out the life processes necessary for their survival and reproduction. They require large range areas comprised of continuous tracts of undisturbed habitat rich in mature to old-growth coniferous forest, lichens, muskegs, peatlands, and upland or hilly areas. Large range areas with suitable quality habitat allow boreal caribou to disperse across the landscape when conditions are unfavourable (e.g. natural wildfire disturbance, anthropogenic disturbance) and to maintain low population densities throughout the range to reduce the risk of predation. Threats, primarily habitat alteration (i.e. habitat loss, degradation, and fragmentation) from both anthropogenic and natural stressors, and predation have resulted in local population declines throughout their distribution.

 

Boreal caribou are distributed broadly throughout the boreal forest region, including in the Mackenzie Mountains of the Northwest Territories. In 2010, the Company completed two wildlife surveys with Golder & Associates and Parks Canada, by fixed wing airplane, along the proposed winter road route to the Prairie Creek Mine in order to further assess the wildlife population, with an emphasis on caribou. Caribou populations and potential caribou habitat have been identified in areas removed from the Prairie Creek Mine to the north and east in the Mackenzie Mountains. Potential impacts to these populations are primarily transportation related and can be mitigated through standard road safety practices.

 

In September 2014, the Company completed helicopter-supported environmental field studies along the proposed route of an all season road. Environmental studies included a caribou occupancy wildlife survey, habitat data collection at fish-bearing stream crossings.

 

During the summer of 2017, three separate field programs relating to the All Season Road were completed. The programs were part of the Company’s further commitments to the route assessment made during the EA process and included additional baseline environmental studies including, bird, wildlife and vegetation studies.

 

Nahanni National Park Reserve / Parks Canada Memorandum of Understanding

 

The South Nahanni River is highly valued as a wilderness recreation river and is used for canoeing trips during the summer months. These wilderness adventure tours are supported by a number of outfitting companies from as far away as Ontario.

 

The Nahanni National Park Reserve was created in 1972, following a canoe trip down the river by then Prime Minister Pierre Elliot Trudeau, specifically for the purpose of setting aside the South Nahanni River for wilderness recreational purposes. Exploration activity at Prairie Creek had been ongoing for many years prior to 1972 and underground development was well advanced at that point in time.

 

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Parliament formally established Nahanni National Park Reserve of Canada in 1972, legally protecting it as Canada’s 26th National Park under the Canada National Parks Act. It was established as a National Park Reserve in view of the fact that there were outstanding land claims in the area. It will only become a fully-fledged National Park once an agreement has been reached with the Dehcho First Nations.

 

The NNPR is considered to be of global significance. In 1978, it was the first area added by UNESCO to its list of World Heritage Sites. There are only 13 sites in Canada designated as World Heritage Sites, eight of them being National Parks. Nahanni received this designation because of the geological processes and natural phenomena in the area. In UNESCO’s view, NNPR is special because it is an unexploited natural area. The presence in this area of three river canyons cutting at right angles to the mountain ranges, with walls of up to 1,000 metres high, Virginia Falls which falls over 90 metres, hot springs, sink holes and karst topography are considered a special combination.

 

In considering and approving the nomination of NNPR for World Heritage Status, the World Heritage Committee stated that “it would be desirable to incorporate the entire upstream watershed in the World Heritage Site.” In 1977, the Minister responsible for Parks Canada directed Parks Canada to examine the possibility of expanding NNPR to include more of the head waters of the South Nahanni and the karst terrain. Several studies were conducted to assess this potential.

 

In June 2009, new legislation was enacted by the Canadian Parliament entitled “An Act to amend the Canada National Parks Act to enlarge Nahanni National Park Reserve of Canada” to provide for the expansion of Nahanni National Park Reserve. Nahanni National Park Reserve was expanded by 30,000 km2, making it the third largest National Park in Canada. The enlarged Park covers most of the South Nahanni River watershed and completely encircles the Prairie Creek Mine. However, the Mine itself and a large surrounding area of approximately 300 km2 are specifically excluded from the Park and are not part of the expanded Park.

 

The exclusion of the Prairie Creek Mine from the NNPR expansion area has brought clarity to the land use policy objectives for the region and will facilitate various aspects of the environmental assessment process. The Government’s decision on the expansion of NNPR reflects a balanced approach to development and to conservation which allows for mineral resource and energy development in the Northwest Territories and at the same time protects the environment.

 

Section 7(1) of the new Act amended the Canada National Parks Act to enable the Minister of the Environment to enter into leases or licences of occupation of, and easements over, public lands situated in the expansion area for the purposes of a mining access road leading to the Prairie Creek Area, including the sites of storage and other facilities connected with that road. Heretofore, an access road to a mine through a National Park was not permitted under the Canada National Parks Act, and the Act was amended solely for Nahanni National Park Reserve and specifically for the purpose of providing access to the Prairie Creek Area.

 

On July 29, 2008, Parks Canada Agency (“Parks Canada”) and the Company entered into a MOU with regard to the expansion of the NNPR and the development of the Prairie Creek Mine, whereby:

 

·Parks Canada and the Company agreed to work collaboratively, within their respective areas of responsibility, authority and jurisdiction, to achieve their respective goals of an expanded Nahanni National Park Reserve and an operating Prairie Creek Mine.

·Parks Canada recognized and respects the right of the Company to develop the Prairie Creek Mine and was to manage the expansion of Nahanni National Park Reserve so that the expansion did not in its own right negatively affect development of, or reasonable access to and from, the Prairie Creek Mine.

·The Company accepted and supported the proposed expansion of the Nahanni National Park Reserve and will manage the development of the Prairie Creek Mine so the mine does not, in its own right, negatively affect the expansion of the Nahanni National Park Reserve.

 

The 2008 MOU was intended to cover the period up to the development of the Prairie Creek Mine (Phase I).

 

In February 2012, the Company and Parks Canada signed a renewed Memorandum of Understanding regarding the operation and development of the Prairie Creek Mine and the management of Nahanni National Park Reserve. The MOU, which was valid for three years, replaced the previous MOU signed between the Parties in 2008.

 

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In November 2015, the Company and Parks Canada signed a Memorandum of Understanding Phase III regarding the operation and development of the Prairie Creek Mine and the management of Nahanni National Park Reserve. The Phase III MOU, which is valid for five years from November 2015, renews the previous MOUs signed between the Parties in 2008 and 2012.

 

In the renewed MOU:

 

·Parks Canada and the Company agree to work collaboratively, within their respective areas of responsibility, authority and jurisdiction, to achieve their respective goals of managing Nahanni National Park Reserve and an operating Prairie Creek Mine.

·Parks Canada recognizes and respects the right of the Company to develop the Prairie Creek Mine and has granted Land Use Permit 2009 – L02 to provide road access through the Park to the Mine area.

·The Company acknowledges the cooperative management relationship Parks Canada shares with the Dehcho First Nations in the management of Nahanni National Park Reserve. This includes recognition of the 2003 Parks Canada - Dehcho First Nation Interim Park Management Arrangement and the role of the cooperative management mechanism –Nah?a Dehé Consensus Team.

 

In the MOU Parks Canada and the Company agreed to make every reasonable effort to address issues of common interest and build a strong working relationship, including convening a Technical Team, including representatives of the Dehcho First Nations, which will better identify, define and consider issues of common interest, including, among other things, development of the access to and from the Prairie Creek Mine through Nahanni National Park Reserve and operation of the Prairie Creek Mine.

 

The Parties also agreed to share with one another and the Technical Team any existing technical and scientific information relevant to a discussion and analysis of issues of common interest to the Parties. The parties have agreed to make reasonable efforts to be timely in regards to permit requests being submitted, with ample time for review and consultation, such review and consultation will occur without unreasonable delay.

 

The MOU is an expression of the mutual intentions of the parties and is not legally binding on them or enforceable against them. The MOU does not create any new powers or duties or alter or affect any rights, powers and duties established by law, including by the Parks Canada Agency Act and the Canada National Parks Act, or result in the Parties relinquishing any right, jurisdiction, power, privilege, prerogative or immunity.

 

To the extent that the Prairie Creek Mine is subject to regulatory or government processes, including hearings, Parks Canada reserves the right, while recognizing the intent of the MOU, to participate in any such process and take such positions as it sees fit and the MOU does not, and is not intended to constrain Parks Canada from doing so, subject only to the understanding that in doing so Parks Canada will not object to or oppose, in principle, the development of the Prairie Creek Mine.

 

Environmental Obligations

 

The Company recognizes liabilities for statutory, contractual, constructive or legal obligations, including those associated with the reclamation of exploration and evaluation assets, when those obligations result from the acquisition, construction, development or normal operation of the assets. Initially, a provision for a decommissioning liability is recognized at its present value in the period in which it is incurred, which is generally when an environmental disturbance occurs or a constructive obligation is determined. Upon initial recognition of the liability, a corresponding amount is added to the carrying amount of the related asset and the cost is amortized as an expense over the economic life of the asset using the unit of production method. Following the initial recognition of a decommissioning liability, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the current market-based discount rate and the amount or timing of the underlying cash flows needed to settle the obligation. Changes to estimated future costs are recognized in the statement of financial position by either increasing or decreasing the decommissioning liability and the decommissioning asset.

 

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Reclamation and closure costs for the Prairie Creek Property have been estimated based on the Company’s understanding of its current obligations under its existing surface leases, land use permits and class “B” Water Licence for reclamation and closure of the Prairie Creek Mine site as it now exists with the current infrastructure and assuming a mine life of 15 years. These reclamation and closure costs have been measured based on the net present value of the best estimate of future cash expenditures.

 

The Company’s undiscounted decommissioning liability for the Prairie Creek site, as it currently exists, is calculated as at December 31, 2018 to be $2,838,000 (December 31, 2017 - $2,782,000), being the estimated future net cash outflows of the reclamation and closure costs, including a 25% contingency and inflation rate of 2% per annum, required to satisfy the obligations, settlement of which will occur subsequent to closure of the mine estimated to be 2037. The discounted decommissioning liability is calculated using a risk free rate of 2.13% per annum (December 31, 2017 – 2.22%).

 

Various assumptions are used in determining the liability including current mine plans, future retirement costs and estimates of resources. The estimates used require extensive judgment as to the nature, cost and timing of the work to be completed and may change with future changes to cost structures, environmental laws and requirements and remediation practices employed. Management evaluates the decommissioning liability estimates at the end of each reporting period to determine whether the estimates continue to be appropriate. Other than specific environmental matters discussed in this Annual Report, the Company is not aware of any material environmental matter requiring significant capital outlays in the immediate future.

 

The Company currently holds a surface lease, issued by the Minister of Aboriginal Affairs and Northern Development Canada, which limits the use of the land for mine site care and maintenance purposes only and establishes the Company's current responsibility for abandonment and restoration in accordance with an abandonment and restoration plan attached as a schedule to the surface lease. The Company applied to the Minister of Aboriginal Affairs and Northern Development Canada for a new surface lease for production to replace the existing care and maintenance surface lease. Following the devolution of lands and resource management in the NWT from the Government of Canada to the GNWT in 2014, the application for a new surface lease will be processed by the Government of Northwest Territories.

 

In September 2013, the Company was issued with the Type “A” Water Licence MV2008L2-002 by the Mackenzie Valley Water Board. The Licence is subject to numerous conditions, including the requirement to post and maintain security, in stages, with the Minister of Aboriginal Affairs and Northern Development Canada totaling $13.07 million, on a schedule of $3 million within ninety days of the effective date of the licence, $5 million prior to extracting waste rock from the underground mine and $5.07 million prior to commencing milling.

 

In June 2013, the MVLWB issued Land Use Permit MV2008D0014 which permits the Company 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. This permit is subject to numerous conditions including the requirement to deposit, in stages, with the Minister of Aboriginal Affairs and Northern Development Canada security of $3 million within ninety days of the issue of the permit and additional $1 million prior to the commencement of construction upgrades to the mill.

 

In June and December 2013, the Company filed requests with the MVLWB for amendments to the timing schedules of the various security deposits to be provided to the Minister of Aboriginal Affairs and Northern Development Canada under the Type “A” Water Licence and the Land Use Permit. The Department of Aboriginal Affairs and Northern Development Canada has confirmed to the MVLWB that the Board’s assessment of the Company’s liability for the site and cost of closure and reclamation is not applicable until a new surface lease for production replaces the existing care and maintenance surface lease.

 

In August 2014, CZN submitted an amended development schedule for the Prairie Creek Mine to the MVLWB and this was followed up by an application to the MVLWB in October 2014 requesting that the Water Licence be held in abeyance until more certainty develops around the actual commencement of construction and the mine development schedule.

 

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In June 2015, the Mackenzie Valley Land and Water Board approved the Company’s application that the Type “A” Water Licence be held in abeyance until more certainty develops around the actual commencement of construction and the mine development schedule and also approved the Company’s applications for amendments to the timing schedules of the various reclamation security deposits to be provided under the Water Licence and the Land Use Permit. The Company, accordingly, deposited a total of $1.55 million as security with the Government of the Northwest Territories in August of 2015 to increase the financial assurance relating to current reclamation and closure obligations of the Prairie Creek Mine site as it now exists with its current infrastructure under the Company’s existing surface leases, land use permits and Type “B” Water Licence.

 

The Company also holds various land use permits, water licences and construction permits from the MVLWB and Parks Canada with the requirement to post security for future reclamation in the total amount of $3.33 million, to be posted prior to construction of infrastructure or commencement of operations. The Company has previously posted reclamation security deposits in support of current reclamation obligations in the amount of $525,000 and now has a total of $2.075 million posted. The Company does not anticipate any requirement to post additional funds until project construction is initiated.

 

First Nations Indigenous Groups

 

The Prairie Creek Mine is located on land claimed by the NDDB of Nahanni Butte as their traditional territory. There is no other existing land occupation, or commercial land or water based activities in the vicinity of the Prairie Creek Mine. Similarly, no traditional use or trapping activity has been observed in the minesite area in recent history. There is no permanent road access into the Prairie Creek Property, other than the existing Winter Road which was established in 1981. Regular access is by air only to a private airstrip controlled by the Company.

 

The Nahanni Butte (Nahaahdee) Dene Band is a “band” pursuant to the Indian Act RSC 1985 and is part of the Dehcho Indigenous group. The members of the Dehcho are Aboriginal people within the meaning of Section 35 of the Constitution Act, 1982.

 

The Dehcho are a distinct group of Aboriginal people, whose ancestors were among the South Slavey people of the Dene Nation of what is now the Northwest Territories, and the Metis people within the Dehcho territory. The Dehcho have had their own system of laws, religion, economy, customs, traditions and language since time immemorial. Many Dehcho people continue to rely heavily on the land, water and resources within Dehcho territory for sustenance, social and ceremonial purposes. The Dehcho territory has an area of approximately 210,000 km2 and has a native population of approximately 3,500 as estimated by the NWT Bureau of Statistics in July 2017.

 

The Dehcho Aboriginal communities hold collective Aboriginal title and rights and treaty rights to Dehcho territory and hold other Aboriginal rights as a collective in relation to their land and governance over the land and the Dehcho people.

 

Until 2017, the NDDB were members of the Dehcho First Nations (“DFN” or “DCFN”) but in 2017 served notice that they were withdrawing from the DFN.

 

The DCFN is an organization representing the Dene and Metis peoples in the Dehcho territory of the Northwest Territories which comprise nine individual member communities around the southwest NWT who work together to protect and promote their shared interests. The DCFN is incorporated as a society under the laws of the Northwest Territories to provide leadership, governance, administration and program delivery to their member communities. The DCFN is a governing body of the Dehcho people lands, and is one of seven local government administrative regions in the Northwest Territories which administers oversees a number of programs and services for its member communities including those relating to health, employment, education, and land and resource management.

 

In the Mackenzie Valley, land is owned, or managed, controlled and administered by different governments or landowners. Land can be either Crown or Commissioner’s land administered by land managers, or privately owned.

 

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In the Northwest Territories, private lands are owned largely by First Nations with settled land claims. There are currently three major landowners in the Mackenzie Valley - the Gwich’in, Sahtu and Tlicho. It is anticipated that as claims are settled in the Dehcho region, more private lands will be created and Aboriginal groups will become recognized landowners in their respective regions.

 

The Federal Government has recognized that the inherent right of self-government is an existing Aboriginal right recognized and affirmed by Section 35 of the Constitution Act, 1982. The Federal Government first attempted to negotiate land claim settlements in the Northwest Territories, with the Dene/Metis in the late 1980s without success. Subsequently, settlement agreements were reached first with the Gwich’in and Sahtu Dene/Metis people and later with the Tlicho in 2005. The Dehcho have not settled their land claim with the Federal Government. The Dehcho and the Federal Government of Canada both claim legal title to this territory, the Dehcho by virtue of historical occupation and the Federal Government under Treaty 8, signed in 1900, and Treaty 11 signed in 1921 and 1922. The Federal Government and the Dehcho First Nations disagree on the interpretation of Treaties 8 and 11 and legal title to the land remains in dispute. Canada maintains that under the Treaties the Dehcho extinguished ownership of their traditional lands. The Dehcho have threatened to take the Federal Government to court, or to the United Nations, over the key issue of sovereignty.

 

Since the mid-1990s the Dehcho and the Federal Government and the Government of the Northwest Territories have been engaged in ongoing land settlement negotiations in what is referred to as the “Dehcho Process.”, whereby the Federal Government and the Government of the Northwest Territories have agreed to negotiate with the Dehcho First Nations on a government to government basis in order to set out land, resources and governance rights to apply in the Dehcho territory. The objective of negotiations is to complete a Dehcho Final Agreement which clarifies and builds upon existing Treaties by implementing a Dehcho government which will make laws and deliver programs and services; be a public government based upon Dehcho laws and customs and other Canadian laws and customs; and be the primary government for the delivery of programs and services to residents of the Dehcho territory. The Final Agreement will also describe intergovernmental relationships and jurisdictions, provide for certainty and clarity of rights respecting land, resources and governance and provide for the use, management and conservation of land, water and other resources, including wildlife, fish and their habitat in the Dehcho territory.

 

Early negotiations proved very slow in part because the Dehcho initially rejected the land selection process by which other land claim disputes have been typically settled in the North. Under the typical system, the Federal Government and First Nations select by negotiation particular areas of land in the area under dispute. Once selected the Government makes a financial payment and the claim is settled. However, the DCFN have been holding out for full constitutional, legal and governmental control over their entire region, where effectively the laws of Canada would no longer apply, and this has led to lengthy and difficult negotiations.

 

The DCFN’s position is that the Mackenzie Valley Resource Management Act cannot and should not apply within Dehcho territory; that the legislation was enacted without the participation of, or any consultation with, the DCFN; and was imposed on the Dehcho territory against DCFN wishes. The DCFN have stated that the Final Agreement must, among other things, include a new resource management regime in Dehcho territory other than the Mackenzie Valley Resource Management Act.

 

In 2001, the Federal Government and the Dehcho First Nations entered into a Framework Agreement dated May 23, 2001. The Framework Agreement contemplates providing a structure for the negotiation of the Final Agreement. However, all negotiations are without prejudice to the legal position of the parties and nothing in the Framework Agreement is to be interpreted as creating, recognizing or denying rights or obligations of any of the parties. The Federal Government and the Dehcho agreed that it is desirable that the negotiations proceed at a pace which allows for the people of the Dehcho territory, and particularly the Elders, to remain fully informed and involved in the process.

 

As contemplated in the Framework Agreement, an Interim Measures Agreement, also dated May 23, 2001, was executed between the parties to provide for interim arrangements pending the negotiation and signing of the Dehcho Final Agreement.

 

Under the Interim Measures Agreement, the Governments and the Dehcho agreed to develop a land use plan for the Dehcho lands outside Nahanni National Park Reserve and for that purpose to establish a Land Use Planning Committee. The purpose of the Land Use Plan is to provide for the conservation, development and utilization of the land, waters and other resources in the Dehcho territory, taking into consideration the principles of respect for the land, as understood and explained by the Dehcho Elders, and sustainable development.

 

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Under the Interim Measures Agreement, Canada and the Dehcho agreed to negotiate for the purpose of identifying lands to be withdrawn from disposal and mineral staking and Canada agreed to withdraw from disposal, by Order in Council under the Territorial Lands Act, the lands identified in this process.

 

The Interim Measures Agreement specifically provides at sections 19 and 23 that land withdrawn from disposal under the Agreement shall be subject to the continuing exercise of existing rights, titles, interests, entitlements, licences and permits and that the provisions of the Agreement shall not effect access to or across withdrawn lands.

 

The Agreement also provides that no new water licences or land use permits will be issued under the Mackenzie Valley Resource Management Act within the Dehcho territory except after written notice to the Dehcho First Nations and after a reasonable period of time for the Dehcho to make representations with respect to the application for such licence or permit. Canada also agreed not to issue any new prospecting permits under the Canada Mining Regulations in the Dehcho territory without the support of the affected Dehcho First Nation.

 

The parties also agreed to enter into negotiations for the purpose of concluding an Interim Resource Development Agreement with the objective of fostering resource development in the Dehcho Territory and to accrue benefits from Canada to the Dehcho First Nations. An Interim Resource Development Agreement was signed on April 17, 2003 under which Canada agreed to provide to the Dehcho First Nations a percentage of Federal resource royalties collected from the Dehcho area of the Mackenzie Valley.

 

Canada also agreed that the Final Agreement will ensure that a major mining project that requires any authorization from Canada, and that will impact on the Dehcho, shall be subject to negotiation with the Dehcho of an agreement relating to that project. A major mining project is defined as a project related to the development or production of minerals that will employ an average of 50 persons annually for the first five years in the Dehcho territory and for which more than $50 million will be expended in capital costs. The Company believes that the Prairie Creek Project is currently the only such major mining project in the Dehcho territory.

 

The Interim Measures Agreement also provided that the Dehcho may propose protected areas for land withdrawal or permanent protection under the Northwest Territories Protected Areas Strategy. The parties also agreed to negotiate an interim management arrangement respecting the management of Nahanni National Park Reserve.

 

The Interim Measures Agreement was made without prejudice to the legal position of the parties and nothing in the Agreement is to be interpreted as creating, recognizing or denying rights or obligations on the part of the parties.

 

In 2003, Canada and the Dehcho agreed to an interim withdrawal of lands covering an area of approximately 80,000 km2 for a period of five years. The withdrawal was confirmed by Order in Council dated August 13, 2003. The areas of the withdrawn lands do not include the Prairie Creek Mine but include all of the Company’s Mining Lease 2854 and part of Mining Leases 2931, 3314 and 3313. The withdrawn land also includes an area over which part of the Company’s road to the Prairie Creek Property passes. However in accordance with Sections 19 and 23 of the Interim Measures Agreement such withdrawal is subject to the continuing exercise of existing rights, titles, interests, entitlements, licences, permits, reservations, benefits and privileges and does not affect access to or across withdrawn land.

 

In August 2003, a Memorandum of Understanding respecting the expansion of Nahanni National Park Reserve dated 24 June 2003 was signed between the Dehcho and the Parks Canada Agency, whereby as part of the Dehcho Process, Parks Canada and the Dehcho agreed to work co-operatively towards completion of a feasibility study towards the addition of the identified lands to the Nahanni National Park Reserve and to recommend an amendment to the Canada National Parks Act for a new boundary for the expansion of the Nahanni National Park Reserve and, as part of the Dehcho Final Agreement, moving the Nahanni National Park Reserve to full National Park status under the Canada National Parks Act.

 

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At the same time in August 2003, an Interim Park Management Arrangement for the Nahanni National Park Reserve was signed between the Dehcho and Parks Canada Agency designed to give the Dehcho a greater role in the Park management process. A Consensus Team was established, comprising three appointees of Parks Canada and four from the Dehcho First Nations (two from Nahanni Butte) to address, amongst other things, making recommendations in respect of impacts of land and resource uses in areas outside Nahanni National Park Reserve.

 

Under the Arrangement the Dehcho and Parks Canada agreed that while the current jurisdiction of Parks Canada is restricted to Nahanni National Park Reserve, the ecological integrity of the Park Reserve depends on the ecological integrity of the South Nahanni River watershed as a whole. The Prairie Creek Mine is located within the watershed of the South Nahanni River.

 

The Interim Park Management Arrangement is a statement of interests only and is not legally binding. Nothing in the Arrangement obliges Canada to act in a manner inconsistent with federal or territorial legislative or regulatory jurisdictions or authorities and the Nahanni National Park Reserve shall be administered and managed in accordance with the Canada National Parks Act.

 

During 2005, negotiations on the Dehcho Process broke down because of issues surrounding the proposed Mackenzie Valley gas pipeline. In June 2005 the Dehcho First Nations entered into a Settlement Agreement with Canada [represented by the Minister of Indian Affairs and Northern Development] to settle Court actions which had been commenced by the Dehcho in the Northwest Territories Supreme Court and in the Federal Court against Canada and the Mackenzie Valley Environmental Impact Review Board arising out of disputes concerning the Mackenzie Gas Project. In the Settlement Agreement Canada and the Dehcho agreed to resolve issues related to the participation of the Dehcho in the environmental and regulatory review of the Mackenzie Gas Project and which they agreed to facilitate.

 

The Settlement Agreement recites that Canada and the Dehcho have differing views as to the existence and scope of the rights of the Dehcho First Nation(s) recognized by Section 35 of the Constitution Act 1982, and the nature and extent of Canada’s requirements to consult with the Dehcho First Nations. In the Settlement Agreement the parties agreed to take all reasonable steps to negotiate the terms of the Dehcho Final Agreement which would include agreement to establish a Dehcho Resource Management Authority (“DCRMA”) which will be a body of public government. The Final Agreement will describe the legal capacity, structure, accountability, rights, powers, privileges and responsibilities of the DCRMA; source(s) of the DCRMA’s powers, privileges and responsibilities; relationship of the DCRMA to the Mackenzie Valley Resource Management Act, and rules regarding conflict of laws and the priorities of laws. For greater certainty, the Final Agreement may provide for a standalone DCRMA harmonized with the Mackenzie Valley Resource Management Act. The Settlement Agreement provides that the Final Agreement will provide for the circumstances in which laws within the jurisdiction of the Dehcho First Nations, any successor organization, or any government established pursuant to a Final Agreement, will take priority over the laws of Canada in the event of a conflict. The parties agreed to negotiate a Final Agreement in accordance with the Dehcho First Nations Framework Agreement.

 

In the Settlement Agreement, the parties agreed to implement a Land Use Plan that is approved by the Dehcho First Nations, approved the Minister of Environment and Natural Resources of the Northwest Territories, and favourably considered by the Minister of Indian and Northern Affairs, Canada, as soon as possible after the Plan’s completion.

 

In the 2005 Settlement Agreement the parties affirmed the Interim Resource Development Agreement dated April 17, 2003 and agreed to take immediate steps to establish a working group comprised of the parties to the Dehcho First Nations Interim Measures Agreement for the purposes of ensuring that the issues arising from the implementation of the Resource Development Agreement are addressed in a timely manner. The parties also agreed that once an Agreement in Principle is ratified, the resource royalty sharing formula set out in the Interim Resource Development Agreement will be replaced with any Resource Revenue Sharing Formula agreed to in the Agreement in Principle.

 

The Settlement Agreement further provides that, except for certain specified articles of the Agreement, the Settlement Agreement is not legally binding and is intended as an expression of goodwill and as a political commitment.

 

Negotiations under the Dehcho Process continued during 2006 with Canada presenting a formal comprehensive offer of land selection, local governance provisions and financial compensation but this offer was rejected by the Dehcho First Nations. The Dehcho First Nations are insisting on the approval of a Land Use Plan (see below).

 

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The Dehcho Land Use Planning Committee, was formally established in February 2002 under the authority of the Dehcho Interim Measures Agreement with the responsibility to prepare a land use plan for the Dehcho territory. The land use planning process is a community driven process where the goals and values of the residents of the Dehcho guide the development of the Plan. The Dehcho Land Use Planning Committee works closely with other planning partners such as governments, public agencies, non-government organizations and businesses to fulfill its mandate.

 

Land use planning boards are responsible for preparing comprehensive land use plans for their respective settlement areas. These plans guide the use of Crown, settlement, and other private lands and provide direction for the conservation, development and use of land, waters and other resources. Essentially, the land use planning boards create plans which lay out the permitted and prohibited uses of all land within a settlement area. They develop land use plans for their regions and recommend approvals, exceptions and amendments to related plans.

 

A Land Use Plan is a public document that sets aside different areas for different uses, and describes what activities are permitted or not permitted in specified areas. The land use plan applies to both Crown and settlement lands. It does not apply to lands within municipal boundaries or lands within national parks or historic sites.

 

Once the land use planning board has adopted a Land Use Plan, it must submit the plan to the First Nation of the settlement area, the Territorial Minister and the Federal Minister for approval.

 

The mission statement of the Dehcho Land Use Planning Committee is to develop a land use plan as a management tool to determine what type of land use activities should occur and where they should take place. The plan will balance economic, social, environmental and cultural needs and interests. The plan will be guided by the principals of sustainable development and respect for the land as understood and explained by the Dehcho Elders. The planning area excludes municipal areas and Nahanni National Park Reserve.

 

The purpose of the Land Use Plan is to promote the social, environmental, cultural and economic well-being of residents and communities in the Dehcho territory, having regard to the interests of all Canadians. The Plan shall provide for the conservation, development and utilization of the land, waters and other resources in the Dehcho territory.

 

The Dehcho Land Use Planning Committee includes representatives of the Dehcho First Nations, the Government of the Northwest Territories and Government of Canada. As outlined under the Dehcho Interim Measures Agreement the DCFN appointed two members while the two Governments each appointed one member. Upon the recommendation of the Dehcho Land Use Planning Committee, the parties to the Interim Measures Agreement appoint a fifth member as Chairperson.

 

Once approved, the Land Use Plan will provide legally binding direction to regulatory agencies and decision-makers in their assessment of development projects, protected areas proposals and other land uses.

 

The Land Use planning process considered the traditional use and occupancy information that was gathered to determine the Interim Land Withdrawals, along with other information on the natural resources and the economic and social needs of the communities. In turn, the Plan will guide the revision of the Interim Land Withdrawals based on the new information that has been gathered. Representatives of the Planning Committee visited the Prairie Creek Mine site in September 2004.

 

The Company made a detailed submission to the Dehcho Land Use Planning Committee and participated in the planning process. The Company commented on each draft of the Plan as such draft was produced and participated in various Public Forums. The Company had concerns about the latest draft of the Land Use Plan (November 2005 – Revised February 2006) and recommended that the draft in its current form not be approved. The Department of Indian Affairs and Northern Development has also expressed concern to the Committee (January 2006).

 

The draft Land Use Plan was approved by the General Assembly of the Dehcho First Nations in May 2006 and submitted to the Minister for consideration. The Minister did not accept the Plan arguing that it incorporated too much land to be preserved from development. In April 2007, the Federal Government and the Dehcho First Nations entered into an agreement to form a new Committee with representatives from all sides to negotiate a new revised plan. The Company understands that negotiations on a draft Land Use Plan are continuing intermittently.

 

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Negotiations in the Dehcho Process continued intermittently since 2006 with no apparent progress reported.

 

In 2008 the Acho Den Koe First Nation (“ADK”) of Fort Liard withdrew from the Dehcho First Nations and in 2014 negotiated and signed an Agreement in Principle with the Governments of Canada and the Northwest Territories.

 

Under the Agreement-in-Principle, Acho Dene Koe First Nation will select approximately 6,474 square kilometers of treaty Settlement Lands to provide Acho Dene Koe First Nation the opportunity to realize the goal of self-government over their traditional territory.

 

On April 1, 2014 Bill C-15 -The Northwest Territories Devolution Act came into law providing for the devolution of lands and resource management from the Government of Canada to the Government of the Northwest Territories. Devolution in the NWT represents the transfer of decision-making and administration for land and resource management from the Government of Canada to the Government of the Northwest Territories. The territorial government is now responsible for the management of onshore lands and the issuance of rights and interests with respect to onshore minerals and oil and gas.

 

Following devolution the DCFN and the Government of the Northwest Territories agreed to establish a bilateral process to explore new and innovative solutions to break the log-jams at the main negotiations.

 

A draft bilateral agreement was tabled and discussed in 2014. The draft agreement provided for land selection, the completion of a Dehcho Land Use Plan and the structure and responsibilities of a Dehcho Resource Management Authority. It was reported in January 2015 that the GNWT offered the Dehcho First Nations land selection of 37,500 square kilometres of their traditional territory, with only surface rights, as well as a generalized interest in the subsurface equivalent of approximately 18% of the Dehcho Settlement Area. The GNWT stated that the offer to the Dehcho First Nations is consistent with previously settled claims in the Mackenzie Valley. It was reported in local media that the GNWT offer is not acceptable to the Dehcho and the DCFN have called for a mediator to work through the dissensions and come to an agreement. It has been reported that the DCFN are reportedly seeking 50,000 square kilometres of land, with surface and subsurface rights.

 

In September 2017, the Dehcho First Nations asked Canada and the GNWT to return to the negotiating table to complete an agreement on lands and governance as soon as possible to complete the work that began in 2001 and suggested that the parties engage the services of a mediator at the negotiating table to speed up the process. Negotiations had been stalled since April 2017 when the two governments asked the DFN to clarify its positions on the role of the GNWT in Treaty negotiations, and on the development of an integrated system for managing and protecting natural resources in the NWT.

 

The outcome of the Dehcho Process negotiations is expected to be a Final Agreement that will provide, amongst other things, for the implementation of a Dehcho government within the Dehcho territory. It is expected that the negotiations towards a Dehcho Final Agreement will take many years to complete.

 

During 2017 the Naha Dehe Dene Band gave notice to Canada and to the GNWT that it was withdrawing from the Dehcho First Nations and would seek to negotiate a land claim settlement agreement on its own.

 

The Company cannot predict the impact that the withdrawal of the Naha Dehe Dene Band from the Dehcho First Nations, and from the Dehcho Process, or the impact, if any, that the Dehcho Final Agreement, if eventually approved and signed, may have on the Prairie Creek Mine or the permitting thereof. The Company believes that the separate goals of the Dehcho First Nations in achieving political sovereignty and economic self-sufficiency, whilst protecting the environment, are compatible with the development and operation of the Prairie Creek Mine.

 

On January 18, 2018, the Minister of Crown Indigenous Relations and Northern Affairs Canada, invoked a two-month extension to the timeline for the Minister’s decision on the Report of Environmental Assessment for the Prairie Creek All Season Road, originally due by February 12, 2018 to allow the federal and territorial governments to complete aboriginal consultations.

 

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In connection with such consultations, on January 19, 2018, INAC provided the Company with certain information requests identifying specific issues raised by Indigenous groups that need further clarity through proponent engagement, so the Responsible Ministers can be confident that the Crown has discharged its legal duty to consult by meaningfully consult with potentially impacted Indigenous groups.

 

INAC requested the Company to engage the Nahanni Butte Dene Band, Liidlii Kue First Nation and the Dehcho First Nations, as recommended by the Review Board, to gain an understanding of the Indigenous groups’ concerns, discuss and determine how the Indigenous groups will be included in monitoring and discuss the Indigenous groups’ requests for support to participate in implementation of the measures recommended by the Review Board and the commitments made by the Company in the environmental assessment process.

 

On June 11, 2018, the Company submitted its formal replies to the Minister of Crown-Indigenous Relations and Northern Affairs to address all five information requests related to the implementation plans for various mitigation measures and proponent commitments contained in the EA Report. As requested in the Minister’s information requests, the Company continued working with the local Dene communities to address the implementation of various measures recommended by the Review Board. Key concerns which the Company and local Dene communities are addressing collaboratively include (a) sharing and incorporation of Dene knowledge and values into project design, (b) ensuring the Dene communities will be partners in environmental, wildlife and cultural monitoring of the All Season Road, and (c) addressing the Dene communities’ requests for support to participate in implementation of the measures recommended by the Review Board and the commitments made by the Company in the environmental assessment process.

 

On July 23, 2018, the Company received a letter confirming the positive decision of the Federal Minister of the Crown-Indigenous Relations and Northern Affairs Canada to resume the decision phase for The Company's Prairie Creek All Season Road Environmental Assessment.

 

On October 9, 2018, the Minister of Crown-Indigenous Relations, on behalf of the Responsible Ministers, issued a decision adopting the Review Board’s recommendation that the All Season Road for the Prairie Creek Mine be approved.

 

The full texts of the Minister’s letter and information requests, together with subsequent correspondence and the Company’s replies to the information requests, may be viewed on the public registry website of the Review Board www.reviewboard.ca.

 

In February 2019, the Company submitted a post-EA project information package, including an updated Project Description Report, and entered the ASR permit drafting and issuance phase, conducted by MVLWB & Parks. MVLWB & Parks are reviewing the project information package for adequacy, prior to distributing the package and receiving input from territorial and federal agencies, and local communities. The permit issued by MVLWB & Parks is expected to incorporate the recommended mitigation measures included in the EA Report and based on the schedule outlined in the MVLWB & Parks notice to the Company, the permit is expected to be completed in the third quarter of 2019.

 

The ASR follows the general alignment of the previously permitted Winter Road, while reflecting the terrain, site characteristics, and road specifications suitable and preferred for an all season road. The construction schedule of the ASR requires an initial Phase 1 winter road be established in order to gain initial access to the mine site and, at the same time, provide required geotechnical data to finalize the ASR route design. route design. Due to local terrain challenges, small sections of the Phase 1 road would be constructed using non-typical methods of winter roads and these are described in the submitted project information package.

 

NorZinc plans to construct the road over three calendar years. Prior to construction activities, the Company plans to conduct field investigations and prepare site plans (including detailed road design) and award construction contracts. Dependent on the permitting and financing timeline, construction of the All Season Road is planned to commence from a winter road in early 2020 and continue into 2022, in parallel with continuous and ongoing site construction and mine development.

 

On January 16, 2019, the Company signed a TLUA with the NDDB for the construction and operation of the ASR. Previously in 2011 NorZinc signed the Nahanni IBA and the LKFN IBA for the development of the Prairie Creek Mine, which contemplated access to the mine via a winter road only. In both agreements, NDDB and LKFN agreed to support the Company in obtaining all necessary permits and other regulatory approvals required for the Prairie Creek Mine Project. In 2014 the Company decided all year round access via an ASR would be economically preferable to winter road only access, and the Company commenced the EA preparation process.

 

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The NDDB of Nahanni Butte is the nearest community to the Prairie Creek Mine, located approximately 90 kilometres southeast of the mine site. The mine site and route of the ASR are within NDDB’s Traditional Territory. The Company recognized that the ASR may have additional potential impacts and effects on the NDDB, compared to a winter-only road, and recognition of this is established within the TLUA. The TLUA combined with the Nahanni IBA provides assurance the Prairie Creek Mine has strong local Aboriginal support as the ASR moves through the final phase of permitting.

 

In addition to the TLUA, the Company is negotiating a Road Benefit Agreement with the LKFN of Fort Simpson, NWT. Fort Simpson is the largest community within the Dehcho Region, located about 185 kilometres east of the mine site.

 

As part of the EA Report engagement, the NDDB and LKFN entered into an agreement with the Company which provides for the negotiation of an EMA. The EMA is intended to be a formal mechanism, tested in other projects, to, in addition to regulatory instruments, provide for Indigenous participation in environmental management, and to ensure that the mitigative measures and environmental protection commitments in the EA Report are appropriately implemented. It will also involve Dene participation in the environmental management process of the road, a cornerstone of which is a Dene-led independent monitoring program. This agreement will also provide for Dene communities’ review, participation and oversight of environmental monitoring of the ASR during permitting, design, construction, operation and closure phases, and the implementation of the mitigation measures contained in the EA Report.

 

The Dene communities and the Company intend that the EMA will provide for a consultative and cooperative approach to environmental management of the ASR that will establish the appropriate responsibilities of the NDDB, LKFN and the Company in the development, project design, ongoing review and monitoring, as well as modification of follow-up programs to mitigate potential effects on the environment and to provide transparency and oversight to local communities.

 

Negotiations of both agreements are well advanced and draft agreements have been compiled.

 

Naha Dehe Dene Band - Nahanni Butte

 

The Prairie Creek Mine is located 90 kilometres from the nearest settled community of the Naha Dehe Dene Band at Nahanni Butte, located at the confluence of the South Nahanni and Liard Rivers, 146 kilometres downstream of the minesite. The population of Nahanni Butte is approximately 90 people.

 

In October 2008, the Company and the Nahanni Butte Dene Band entered into a MOU, to establish a mutually beneficial, co-operative and productive relationship. In the MOU, the Band agreed to maintain close communication links with the Company, participate in good faith in current and pending environmental assessment and regulatory processes, and not to oppose, “in principle,” mining operations at Prairie Creek. The Company has agreed to apply best efforts to employ Band members and to assist the Band and its community to benefit from business opportunities associated with the exploration and development of the Prairie Creek Project. The MOU also provides for the subsequent negotiation of an Impact Benefits Agreement regarding mining operations. Nothing within the MOU is intended to define, create or extinguish any rights of the Band or the Company and the MOU is not legally binding on the parties.

 

The Company continued discussions and engagement with the Band throughout 2009 and 2010, specifically regarding their Traditional Knowledge and alternate routes for the access road to Prairie Creek, taking into consideration the expressed preferences of the community of Nahanni Butte. The Band outlined their concerns with the project and the Company’s responses to date include investigation of road realignment options and surveys of specific locations along the access road for heritage resources.

 

In January 2011, the Company signed the NAH?A DEHE DENE PRAIRIE CREEK AGREEMENT (the “Nahanni Agreement”) which provides for an ongoing working relationship between the Company and the Nah?a Dehe Dene Band (Nahanni Butte Dene Band) that respects the goals and aspirations of each party and will enable the Nahanni community members to participate in the opportunities and benefits offered by the Prairie Creek Project and confirms their support for the Prairie Creek Mine.

 

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The Nahanni Agreement provides a framework such that training, employment and business contracts are made available to Nahanni to ensure maximization of benefits from opportunities arising from the Prairie Creek Project in a manner that will be to the mutual benefit of both parties.

 

The Nah?a Dehe Dene Prairie Creek Agreement provides for a positive and cooperative working relationship between the Company and Nahanni Butte in respect of developing and operating an environmentally sound mining undertaking at Prairie Creek, which will not have significant adverse environmental effects on the ecological integrity of the South Nahanni River or the Nahanni National Park Reserve.

 

During 2017 the Naha Dehe Dene Band gave notice to Canada and to the GNWT that it was withdrawing from the Dehcho First Nations and would seek to negotiate a land claim settlement agreement on its own in respect of its traditional territory.

 

On January 16, 2019, the Company signed a TLUA with the NDDB for the construction and operation of the ASR. Previously in 2011 NorZinc signed the Nahanni IBA and the LKFN IBA for the development of the Prairie Creek Mine, which contemplated access to the mine via a winter road only. In both agreements, NDDB and LKFN agreed to support the Company in obtaining all necessary permits and other regulatory approvals required for the Prairie Creek Mine Project. In 2014 the Company decided all year round access via an ASR would be economically preferable to winter road only access, and the Company commenced the EA preparation process.

 

The NDDB of Nahanni Butte is the nearest community to the Prairie Creek Mine, located approximately 90 kilometres southeast of the mine site. The mine site and route of the ASR are within NDDB’s Traditional Territory. The Company recognized that the ASR may have additional potential impacts and effects on the NDDB, compared to a winter-only road, and recognition of this is established within the TLUA. The TLUA combined with the Nahanni IBA provides assurance the Prairie Creek Mine has strong local Aboriginal support as the ASR moves through the final phase of permitting.

 

Liidlii Kue First Nation

 

In June 2011, the Company signed an Impact Benefits Agreement (“LKFN Agreement”) with the Liidlii Kue First Nation (“LKFN”) of Fort Simpson. The Liidlii Kue First Nation is the largest member of the Dehcho First Nations. The LKFN Agreement is similar in many respects to the above mentioned Nahanni Agreement entered into with the Nahanni Butte Dene Band. The LKFN has agreed to support CZN in obtaining all necessary permits and other regulatory approvals required for the Prairie Creek Mine Project. The Agreement is intended to ensure that CZN undertakes operations in an environmentally sound manner. LKFN will appoint a qualified Monitor to monitor environmental compliance and to monitor impacts of the Mine on the environment or wildlife and to work with CZN to prevent or mitigate such impacts.

 

The LKFN Agreement provides a framework such that training, employment and business contracts, and some financial provisions are made available to the LKFN to ensure maximization of benefits from opportunities arising from the Prairie Creek Project in a manner that will be to the mutual benefit of all parties.

 

The Company is in communication with LKFN to seek to clarify the LKFN Agreement and potentially for a supplemental agreement concerning the All Season Road to the Prairie Creek Mine.

 

Following receipt of a consultation letter dated September 12, 2017 from the Canadian Northern Economic Development Agency (CanNor) and the Government of Northwest Territories to the LKFN to determine whether the environmental assessment process for the Prairie Creek All Season Road addressed any concerns of the LKFN regarding potential adverse impact of the road on established or asserted Aboriginal and/or Treaty rights, the LKFN submitted a reply dated October 20, 2017 in which they suggest that the Company must demonstrate in advance of receiving any regulatory approvals that it has the capacity to fully implement the measures proposed by the Review Board, particularly in respect of the measures which propose the direct participation of LKFN and other affected First Nations in monitoring the impacts of the road, participating in Indigenous knowledge studies, informing further technical design of the road and informing adaptive management processes in respect of the project. LKFN submits that the Company should be required to enter into legally binding agreements with LKFN and other affected First Nations (either individually or collectively) in advance of any permitting to establish that the necessary funding commitments are in place.

 

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In January 2018, in connection with the Report of Environmental Assessment for the Prairie Creek All Season Road, INAC provided the Company with information requests identifying specific issues and concerns raised by LKFN that need further clarity through engagement. INAC directed the Company to engage the Liidlii Kue First Nation and the Dehcho First Nations to gain an understanding of the Indigenous groups’ requests, discuss and determine how the Indigenous groups will be included in monitoring and discuss the Indigenous groups’ requests for support to participate in implementation of the measures recommended by the Review Board. The various measures principally relate to the sharing and inclusion of Dene traditional knowledge and values, how Indigenous groups will be included in environmental monitoring of the Project and the implementation of related measures.

 

As part of the EA Report engagement, the NDDB and LKFN entered into an agreement with the Company which provides for the negotiation of an EMA. The EMA is intended to be a formal mechanism, tested in other projects, to, in addition to regulatory instruments, provide for Indigenous participation in environmental management, and to ensure that the mitigative measures and environmental protection commitments in the EA Report are appropriately implemented. It will also involve Dene participation in the environmental management process of the road, a cornerstone of which is a Dene-led independent monitoring program. This agreement will also provide for Dene communities’ review, participation and oversight of environmental monitoring of the ASR during permitting, design, construction, operation and closure phases, and the implementation of the mitigation measures contained in the EA Report.

 

The Dene communities and the Company intend that the EMA will provide for a consultative and cooperative approach to environmental management of the ASR that will establish the appropriate responsibilities of the NDDB, LKFN and the Company in the development, project design, ongoing review and monitoring, as well as modification of follow-up programs to mitigate potential effects on the environment and to provide transparency and oversight to local communities.

 

In addition to the TLUA with the NDDB, the Company is negotiating a Road Benefit Agreement with the LKFN. Negotiations of both agreements are well advanced and draft agreements have been compiled.

 

Socio-Economic Agreements

 

In August 2011, the Company signed a Socio-Economic Agreement with the Government of the Northwest Territories related to the planned development of the Prairie Creek Mine. The Socio-Economic Agreement establishes the methods and procedures by which the Company and the GNWT have agreed to work together to maximize the beneficial opportunities and minimize the negative socio–economic impacts arising from an operating Prairie Creek Mine. The Socio-Economic Agreement defines hiring priorities and employment commitments and practices during the construction, operation and closure of the Prairie Creek Mine and across the entire spectrum of project-based employment. The Company has targeted employment levels of at least 60% Northwest Territories residents and 25% Aboriginals. The Company has agreed to implement policies to maximize business and value-added opportunities for businesses in the Northwest Territories. The Company will use its best efforts to ensure that purchases of goods and services through or from Northwest Territories businesses will be at least 30% during construction and at least 60% during operations.

 

In August 2011, Human Resource and Skills Development Canada, a federal department of the Government of Canada, approved a commitment of $3 million over a three-year period to fund "More Than a Silver Lining" (“MTSL”), a program to provide Aboriginal participants with training-to-employment opportunities in a variety of mining-related occupations at the Prairie Creek Mine. In addition to the funding from the Government of Canada, the program received an additional $1 million from the Company, the GNWT and the communities of Nahanni Butte, Fort Simpson, Fort Liard, Trout Lake and Jean Marie River. The MTSL training program’s total cost was $4.3 million. The program was solely focused on the workforce needs of the Prairie Creek Mine.

 

The MTSL program delivered 19 training projects in the Dehcho Region over the three year period ending in 2014. Of the 19 training projects, six were facilitated by the Company at the Prairie Creek Mine. Over the course of three years approximately 300 local individuals were assessed for participation in the training programs with 250 people actually participating, of which approximately 70 are reported to have returned to employment and others have moved on to higher education.

 

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In August 2012, the Company and the GNWT Department of Transportation signed a Collaboration Agreement to ensure effective co-operation related to the public transportation infrastructure that will support the Prairie Creek Mine project and will help ensure that both public needs and mine activities are supported.

 

The Company plans to use the existing Northwest Territories public transportation system to bring goods, fuel and equipment by road to the Mine and to transport its mineral products from the Mine to world markets. As part of this Collaborative Agreement, to assist in priority setting, CZN will provide reports to the Department of Transportation on its anticipated road transportation requirements for the construction and operation of the Prairie Creek Mine which will help the Department of Transport to plan future work on these roads to maintain and enhance these roads effectively and the Department agreed to work closely with the Company to ensure public safety by identifying areas of Highway 7 and the Nahanni Butte access road that require enhancement or upgrading.

 

In February 2017, the Company entered into an agreement with the Northwest Territories Power Corporation to examine and develop an electrical power strategy for the Prairie Creek Project. The process will examine the method best suited to delivering power and the potential integration of energy alternatives such as Liquefied Natural Gas. NTPC is a wholly owned subsidiary of NT Hydro, which is 100% owned by the Government of the Northwest Territories.

 

Newfoundland Properties

 

The Company owns a land package in central Newfoundland that includes three VMS projects, each with defined deposits, which are being explored by the Company. Key deposits on each project are listed below: 

 

South Tally Pond Project - Lemarchant deposit; Indicated Mineral Resource of 2.42 million tonnes grading 6.15% zinc, 0.68% copper, 1.60% lead, 1.22 g/t gold and 64.04 g/t silver plus an additional Inferred Mineral Resource of 0.56 million tonnes grading 4.68% zinc, 0.45% copper, 1.08% lead, 1.06 g/t gold and 44.67 g/t silver (Mercator Geological 2018);

 

Tulks South Project - Boomerang-Domino deposit: Indicated Mineral Resource of 1.36 million tonnes grading 7.1% zinc, 3.0% lead, 0.5% copper, 110 g/t silver and 1.7 g/t gold plus an additional Inferred Mineral Resource of 0.69 million tonnes grading 6.5% zinc, 2.8% lead, 0.4% copper, 95 g/t silver and 1.0 g/t gold (Snowden 2007); and the Hurricane and Tulks East prospects; and

 

Long Lake Project - Long Lake deposit: Indicated Mineral Resource of 0.48 million tonnes grading 7.8% zinc, 1.6% lead, 0.97% copper, 49 g/t silver and 0.57 g/t gold plus an additional Inferred Mineral Resource of 78,000 tonnes grading 5.7% zinc, 1.2% lead, 0.7% copper, 34 g/t silver and 0.48 g/t gold (SRK, 2012).

 

The Company holds four, high-grade zinc-lead-copper-gold-silver VMS deposits being Lemarchant, Boomerang-Domino, Long Lake and Tulks East. Three of these have NI 43-101 compliant resources and Tulks East has a historical resource. All of these deposits which have excellent potential for expansion. NorZinc intends to focus its exploration on priority targets at these four established deposits with the aim of increasing the resource base.

 

Since acquiring the Newfoundland assets, the Company has completed 47,000 metres of drilling on its properties and increased indicated resources by almost 40%. The majority of the claims have reached their 20th year of ownership, at which time assessment and license costs increase by 80%. As part of the exploration process and claim evaluation, the Company has reduced claims that are not proximal to the established resources or part of the 2019 plan.

 

On December 5, 2017 Glencore Canada Corporation and Ontario Teachers' Pension Plan announced the formation of BaseCore Metals LP, a 50:50 joint venture limited partnership focused on base metals streams and royalties. Under the agreements for BaseCore Metals, Glencore contributed a portfolio of selected existing royalties on producing and development stage properties in North and South America, including the Antamina and Highland Valley mines, as well as 2% NSR royalties on the Company's Tulks South, South Tally and Long Lake properties in Newfoundland.

 

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South Tally Pond Property

 

The South Tally Pond VMS Project is located 110 kilometres southwest of the town of Grand Falls-Windsor, NL and 35 kilometres south of the community of Millertown, NL. The South Tally Pond Property covers 261 km2 and is immediately adjacent to Teck Resources Limited’s former Duck Pond Cu-Zn mine and mill complex. The Lemarchant deposit is a significant precious metal-rich copper-lead-zinc VMS discovery with a potential opportunity to develop into a viable economic resource.

 

The Property consists of five, contiguous 100% controlled properties or blocks including the Harpoon Block, Gills Pond Block, Higher Levels Block, South Tally Pond Block and the South Tally Pond Extension Block. The aggregate land position comprises 8 map-staked mineral licences (856 claims) covering 21,400 hectares immediately southwest of the former Duck Pond Mine. The Harpoon Block is subject to a 2% net smelter return royalty to the property vendors of which 50% is purchasable by Paragon.

 

The South Tally Pond project area has been explored intermittently since the late 1960’s for precious metal-rich polymetallic volcanogenic massive sulphide deposits. The bulk of the historic exploration work in the area was completed by Noranda and its various partners between 1973 and 1998. This exploration work resulted in the discovery of the Duck Pond and Boundary deposits. In addition, Noranda discovered numerous other prospects including the Lemarchant, Rogerson Lake, Bindon’s Pond, Higher Levels, Spencer’s Pond and Beaver Lake Prospects through geochemical and geophysical surveys. Each of these areas has seen limited to no drilling.

 

The South Tally Pond Project is underlain by rocks of the Victoria Lake supergroup which consists of a structurally complex, composite collage of bimodal Neoproterozoic to Ordovician arc-related magmatic and sedimentary rocks. The Victoria Lake supergroup hosts numerous base metal-bearing VMS deposits, showings and extensive alteration zones, and several gold deposits and showings. This mineralization is distributed throughout all of the lithotectonic assemblages, including the Tally Pond Volcanic Belt, that comprise the supergroup. The Tally Pond Volcanic Belt consists of Cambrian-aged volcanic, volcaniclastic and sedimentary rocks that extend from Victoria Lake northeast to Burnt Pond. The South Tally Pond Project is situated in the same volcanic belt and to the immediate southwest of Teck Resources Limited’s Duck Pond Copper Zinc Mine (5.1 million tonnes averaging 3.6% Cu, 6.3% Zn, 1.0% Pb, 64 g/t Ag and 0.9 g/t Au for both the Duck Pond and Boundary deposits).

 

The Lemarchant Deposit area is underlain by a north-striking sequence of bimodal submarine volcanic rocks (rhyolites and basalts) of the Tally Pond Volcanic Belt. The mineralization is hosted within a 4,000 metre long and 700 metre wide sequence of highly altered felsic volcanic rocks. Polymetallic sulphide mineralization is hosted in moderate to intensely altered rhyolite breccias, massive flows and lesser tuffaceous horizons. The footwall to the semi-massive to massive sulphide mineralization is characterized by a well-developed, barium-enriched base metal stringer system, with moderate to intense quartz-sericite-chlorite to quartz-chlorite alteration. On several sections the footwall alteration zone is cut-off by a frequently recognizable, east-verging thrust fault (Lemarchant Fault) that potentially repeats the mineralized horizon at depth in the minimally tested Lower Felsic Block. The Lower Felsic Block represents an area of high exploration potential that warrants aggressive follow-up drilling.

 

A winter diamond drill program on the South Tally Pond property was completed in March 2013. A total of 11 drillholes (3,370 metres), including two drillhole extensions, were completed at the Lemarchant deposit. Two drill programs were completed at the South Tally Pond VMS project in 2014 wherein a total of 5,104 metres was completed to further evaluate the Northwest zone at the Lemarchant deposit.

 

A winter diamond drill program on the South Tally Pond copper-lead-zinc-silver-gold project was completed in March 2014. Six drillholes, totaling 2,350 metres were completed at the Northwest mineralized zone located 250 metres northwest of the drill-defined Lemarchant Deposit. The 2014 winter drilling program successfully extended the Northwest zone mineralization which remains open for further expansion.

 

A fall diamond drill program was completed in December 2014. Six drillholes and two drillhole extensions totaling 2,754 metres were completed at the Northwest zone, located 250 metres northwest of the drill-defined Lemarchant Deposit.

 

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The drilling programs conducted in 2013 and 2014 on the South Tally Pond Property were mostly outside the resource area and the drilling results were not considered material to the previous resource estimates.

 

In 2016 and 2017, the Company resumed its diamond drilling exploration programs at the South Tally Pond and Tulks South projects. The drilling at South Tally Pond project was designed to continue to test for mineralized extensions to the Lemarchant deposit and initial drill testing of three high priority base metal prospects located in the Lemarchant area, including Lost Pond, Spencers Pond and Lake Ambrose West. Drilling at Tulks South was aimed at expanding the Boomerang-Domino deposit and testing three priority target areas within the horizon that hosts the Boomerang-Domino deposit, up to 2.0 km along strike of the deposit.

 

During 2017, the Company completed 15,264 metres of drilling in 56 drillholes and 3 drillhole extensions over three drilling campaigns at the Lemarchant deposit. The 2017 drill program focused on the expansion of the Lemarchant deposit’s two mineralized zones, the Main Zone and Northwest Zone, and to test several priority geophysical targets located to the immediate south and north of the Lemarchant deposit.

 

The 2017 drilling intersected significant extensions of base metal massive sulphide mineralization, both up-dip and immediately along strike of the currently defined Lemarchant Main Zone. The Lemarchant Main Zone massive sulphide mineralization now extends an additional 80 metres up-dip and over a 250-metre strike length (from sections 100+75N to 103+25N). The vertical depths of the mineralized drill intercepts range from 120 to 170 metres. Drilling at the Lemarchant Northwest Zone, located 250 metres northwest of the Main Zone extended the mineralization along strike by up to 50 metres to the north and south.

 

On September 20, 2018, the Company reported an updated NI 43-101 Mineral Resource Estimate for the 100% owned Lemarchant zinc-lead-copper-gold-silver VMS deposit. The Lemarchant deposit is part of NorZinc’s land package in Newfoundland, and is located 20 km from Teck’s past-producing Duck Pond copper-zinc mine.

 

A summary of the new Mineral Resource Estimate at a cut-off grade of 4% Zinc Equivalent (“ZnEq”) appears in Table 1 below. Table 2 presents the deposit’s calculated contained metal based on the Mineral Resource Estimate.

 

Table 1: Lemarchant Deposit Mineral Resource Estimate at 4.0% ZnEq Cutoff (Effective September 20, 2018)

 

Category  Tonnes   Zn
(%)
   Pb
(%)
   Cu
(%)
   Au
(g/t)
   Ag
(g/t)
   ZnEq
(%)
   BaSO4
 (%)
 
Indicated   2,420,000    6.15    1.60    0.68    1.22    64.04    12.40    23.53 
Inferred   560,000    4.68    1.08    0.45    1.06    44.67    9.31    13.11 

 

Table 2: Mineral Resource Estimate Contained Metal

 

Category  Zn
(M lbs.)
   Pb
(M lbs.)
   Cu
(M lbs.)
   Au
(K oz)
   Ag
(M oz)
   Barite
(tonnes)
 
Indicated   328.1    85.3    36.3    0.95    5.0    570,000 
Inferred   57.8    13.3    5.6    0.19    0.8    73,000 

 

1.Resource tonnages have been rounded to the nearest 10,000. Totals may vary due to rounding.
2.Price assumptions used were in USD $1.10/lb Zn, $1.00/lb Pb, $3.21/lb Cu, $1351/oz Au, and $19/oz Ag.
3.Metal recoveries used were 91.46% Zn, 82.42% Pb, 79.50% Cu, 84.23% Au and 68.22% Ag and are based on the 2017 Central Milling Facility Assessment prepared by Thibault & Associates Ltd.
4.ZnEq% = Zn% + ((Pb% * 22.046 * 0.8242*1.00) + (Cu% * 22.046 * 0.795 * 3.21) + (Ag g/t/31.10348 * 0.6822 * 19) + (Au g/t/31.10348 * 0.8423 * 1351))/(1.10 * 22.046 *0.9146)
5.BaSO4 % (Barite) is not included in the ZnEq% calculation
6.A full block grade cut-off of 4.0 % ZnEq was used to estimate Mineral Resources
7.Assay composites (1 meter) were capped at 36% Zn, 14.5 g/t Au, and 550 g/t Ag in the Mineralized domains, at 2.2% Cu, 4.6 g/t Au and 105 g/t Ag in the Upper Footwall domains, at 4.8% Zn and 8 g/t Ag in the Lower Footwall Domains and at 2% Zn, 5.2 g/t Au, and 48 g/t Ag in the Mudstone domains.
8.Results of an interpolated Ordinary Kriging bulk density model have been applied
9.Mineral Resources are considered to reflect reasonable prospects for economic extraction in the foreseeable future using conventional underground mining methods
10.Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability.
11.This estimate of Mineral Resources may be materially affected by environmental, permitting, legal title, taxation, sociopolitical, marketing, or other relevant issues.

 

NorZinc contracted Mercator Geological Services Limited of Dartmouth, Nova Scotia to update the Lemarchant Mineral Resource Estimate on completion of the 2017 drill programs. The updated Mineral Resource estimate for Lemarchant has an effective date of September 20, 2018 and is based on information provided from 165 drillholes, totaling 52,952 metres, completed between 1991-1993 and 2007-2017. Between 2013 and 2017, NorZinc completed 91 drillholes and 8 drillhole extensions for 28,455 metres, all of which post-date the last NI 43-101 Mineral Resource Estimate prepared for the deposit in 2012.

 

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The updated Mineral Resource Estimate set out in Table 1 incorporates significant new exploration information in the geological interpretation and grade estimation, providing a more refined resource model in known areas as well as expanding the resource base in new areas.

 

The Mineral Resource Estimate is based on 2 adjacent zones of VMS style mineralization, the Main Zone and Northwest Zone. Additional information regarding the Mineral Resource Estimate methodology can be found in the Technical Report filed on October 24, 2018 on SEDAR.

 

Barite Metallurgical Study

 

In 2018, NorZinc contracted Thibault & Associates Inc. of Fredericton, New Brunswick to complete an initial barite metallurgical test program aimed at assessing the ability to produce a high grade barite (BaSO4) concentrate from the Lemarchant deposit

 

The bench scale flotation tests indicate that a commercially proven flotation reagent scheme can achieve a selective barite flotation. The results of the open circuit testing demonstrate that a concentrate grade of up to 97.75% barite may be a technically viable product from the Lemarchant deposit. Measures to improve the dynamics of the barite flotation have not been completed and locked cycle metallurgical testing is recommended to further define the copper, lead, zinc and barite concentrate grades and quality.

 

Qualified Persons

 

The resource mineral estimate was prepared by Mr. Matthew Harrington, P. Geo. and Mr. Michael Cullen, P. Geo., of Mercator Geological Services Limited, based in Dartmouth, Nova Scotia, Canada. Both are Independent Qualified Persons as defined by NI 43-101. 

 

Tulks South Property

 

The Boomerang, Domino and Long Lake base and precious metal-rich VMS deposits are situated near the Company’s South Tally Pond project in central Newfoundland.

 

NI 43-101 mineral resource estimates include:

 

·Boomerang deposit: Indicated mineral resource of 1.36 million tonnes grading 7.1% Zn, 3.0% Pb, 0.5% Cu, 110 g/t Ag and 1.7 g/t Au; and Inferred mineral resource of 0.28 million tonnes grading 6.7% Zn, 2.9% Pb, 0.4% Cu, 96.5 g/t Ag and 1.3 g/t Au;
·Domino deposit (adjacent to Boomerang): Inferred resource estimate: 0.41 million tonnes grading 6.3% Zn, 2.8% Pb, 0.4% Cu, 94 g/t Ag and 0.6 g/t Au.

(See Messina Minerals Inc. Technical Report, dated August 1, 2007, Tulks South Property, Central Newfoundland, Canada filed on SEDAR.)

 

The Boomerang deposit has some of the highest grade characteristics in the region. Exploration upside and resource expansion potential is believed to exist from numerous identified targets at surface and along strike to the northeast of the Boomerang deposit.

 

The Tulks South Property is located in the Buchans-Victoria Lake area in the Central Mobile Belt of the Dunnage tectonostratigraphic zone of the Appalachian Belt. The Dunnage tectonostratigraphic zone comprises ophiolitic island arc and back arc rocks. The Buchans-Victoria Lake area is host to numerous polymetallic (Zn-Pb-Cu-Au-Ag) volcanogenic massive sulphide deposits; including the historic Buchans area polymetallic deposits and the recently producing Duck Pond copper-zinc mine.

 

The current Technical Report dated August 2007, is intended to disclose recently updated Mineral Resources at the Boomerang and Domino deposits, and exploration results at the Tulks East B Zone and the Hurricane Zone. The Property also includes historic zinc resources at the Tulks East A Zone, Tulks East B Zone, Skidder, and Long Lake Main Zones. Since the previous Technical Report, the Company has undertaken additional Mineral Resource delineation drilling, Mineral Resource estimations, exploration drilling, metallurgical test work, and environmental base line studies on the Property.

 

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At a 1% Zn cut-off grade, Indicated Mineral Resources at Boomerang are reported as 1.4 Mt at 7.1% Zn, 3.0% Pb, 0.5% Cu, 110.4 g/t Ag, and 1.7 g/t Au. Inferred Mineral Resources at Boomerang are reported as 278 kt at 6.7% Zn, 2.9% Pb, 0.4% Cu, 96.5 g/t Ag, and 1.3 g/t Au at the same cut-off grade.

 

At Domino, adjacent to the Boomerang deposit, Inferred Mineral Resources at a 1% Zn cut-off grade are reported as 411 kt at 6.3% Zn, 2.8% Pb, 0.4% Cu, 94 g/t Ag, and 0.6 g/t Au.

 

In 2014, the Company undertook a diamond drill program on its Tulks South property, focused on expanding the mineral resource at the Boomerang-Domino deposit, extending the nearby Hurricane prospect mineralization and testing for extensions to the mineralization at the Tulks East prospect (2,000 metres). Following completion of the drill program at Tulks South, the drill was mobilized to the Long Lake project where a 2,712 metre wide spaced drill program was successful in extending the copper-lead-zinc massive sulphide mineralization. both up- and down-dip and along strike and showed a marked increase in the copper, lead, zinc, silver and gold grades to the west of the defined Main Zone deposit.

 

During 2017, the Company completed 4,981 metres of drilling in 14 drillholes at the Boomerang-Domino massive sulphide deposit and at three priority target areas located up to 2.0 km along strike of the Boomerang-Domino deposit.

 

Drilling at the Boomerang-Domino deposit (6 holes, 1,709 metres) successfully extended the Boomerang base metal mineralization up-dip by 50 metres in one drillhole. The remaining drillholes intersected up to 1 metre thick massive pyrite intervals with weak to anomalous base metals along the projected Boomerang horizon.

 

Drilling along strike of the Boomerang Domino deposit at the Zinc Zone (3 holes, 1,291 metres), Telephone Hill (3 holes, 1,131 metres), and Hurricane prospects (2 holes, 836 metres) intersected variable altered, favorable felsic volcanic footwall stratigraphy with local, weakly anomalous base metal mineralization.

 

Central Milling Facility Research Collaboration Project

 

In 2015, the Company entered into a collaboration agreement with Buchans Minerals whereby the two Companies share research data on their respective central Newfoundland Zn-Pb-Cu-Ag-Au deposits. The intent and objective of the research is to determine the technical and economic viability of developing the companies' deposits into producing operations by utilizing a central milling facility. The concept is based on the potential that collectively, the satellite deposits can be economically mined, pre-concentrated, trucked and then milled simultaneously or sequentially through a central mill.

 

The collaborative research program, partially funded by the RDC through the GeoEXPLORE Industry-led program, initially examined seven VMS deposits located in central Newfoundland. Four of the deposits are held the Company (Lemarchant, Boomerang-Domino, Tulks East, and Long Lake) and three of the deposits are held by Buchans Minerals (Bobbys Pond, Daniels Pond and Tulks Hill). The seven deposits have demonstrated resources of various sizes and quality, are all located near the communities of Millertown and Buchans, NL and within trucking distance (30-90 km) of the recently closed Duck Pond Cu-Zn Mine. Individually at this time, the various deposits are not large enough to support stand-alone operations, but could potentially be developed with improving economic factors and by utilizing a central mill facility.

 

The research project was subsequently focused on four key NI43-101 compliant Zn-Pb-Cu-Ag-Au VMS deposits located on the south side of Red Indian Lake in the Victoria Lake district of central Newfoundland. Two of the deposits are held by the Company (Lemarchant, Boomerang-Domino) and two of the deposits are held by BMC (Bobbys Pond, Daniels Pond). In June 2016, the research program was extended to include the Lundberg Cu-Pb-Zn-Ag deposit (100% held by Buchans).

 

The Lundberg deposit is a large, near-surface and potentially open-pitable resource located on the north side of Red Indian Lake near the town of Buchans. The key rational to include the Lundberg deposit was to fully assess all the known deposits in the district and to determine if it could enhance the economics of a central milling facility and the future development of this region’s mineral resources. The additional tonnage contribution from the Lundberg deposit to a central milling facility could add considerably to its useful life.

 

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Research Study Methodology

 

To evaluate the potential for centralized milling of some or all of these deposits, the study included bench scale testing for process development, preliminary mine plan development, and using a conceptual economic model to assess the economics of various processing scenarios.

 

The bench scale test work was undertaken by Thibault & Associates Inc. of Fredericton, New Brunswick, to characterize each deposit with respect to DMS and flotation for production of copper, lead and zinc concentrates. The use of DMS was considered as an opportunity to reduce transportation costs by rejecting waste at the mine site before trucking to the central milling facility. The bench scale flotation testing was completed in order to develop a common flotation flowsheet with flexibility for processing of the five different deposits involved, and improve grades, recoveries and operating costs defined by previous test programs.

 

The metallurgical test program, completed by Thibault & Associates Inc. was based on an assessment of pre-concentrating the ore prior to flotation using DMS technology and the development of a process compatible with the metallurgical characteristics of the five deposits under development.

 

Dense Media Separation - The bench scale DMS test program was completed to assess the amenability of mineralized samples from the deposits to physical upgrading (pre-concentration) at each site. Use of DMS processing technology would provide a potential means of reducing transportation costs from mine site to the milling facility and to maximize head grade and reduce downstream processing costs.

 

Results from pre-concentration of the samples by DMS (prior to flotation) was determined to be technically viable for semi-massive and stringer sulphide samples from Lemarchant (footwall), Bobbys Pond and Lundberg. An economic assessment of processing ores with DMS technology is in progress to determine if there is a net benefit in reducing the mass of ore to be processed compared to the loss of payable metals to the waste product. Results of the DMS testing are provided below.

 

Sample  Overall Metal Recovery to Sinks + Fines at 70% Mass Recovery 
   Cu (%)   Pb (%)   Zn (%)   Au (%)   Ag (%) 
Lemarchant (footwall)   94.6    97.7    95.4    97.4    96.4 
Bobbys Pond SMS Comp   98.3    98.6    99.1    95.6    95.6 
Lundberg Y1-3   98.3    96.6    96.5    89.6    95.3 
Lundberg Y4-8   94.7    94.2    93.9    84.8    90.1 

 

Sample  Overall Upgrade Ratio (Sinks + Fines Relative to Feed) 
   Cu   Pb   Zn   Au   Ag 
Lemarchant (footwall)   1.35    1.4    1.36    1.39    1.38 
Bobbys Pond SMS Comp   1.40    1.41    1.42    1.37    1.37 
Lundberg Y1-3   1.40    1.38    1.38    1.28    1.36 
Lundberg Y4-8   1.35    1.35    1.34    1.21    1.29 

 

Common Flotation Flowsheet - Initial bench scale batch flotation tests were designed to compare two flowsheet options: 1) a bulk Cu/Pb-Zn flotation flowsheet and 2) a sequential Cu-Pb-Zn flotation flowsheet using various reagent schemes and alternative grind specifications.

 

Results from the initial bench scale testing indicate the sequential Cu-Pb-Zn flowsheet provided the best overall performance for the four deposits tested. Subsequent testing of the Lundberg Deposit samples indicates it is also amenable to the sequential Cu-Pb-Zn flotation flowsheet with improved grade and recoveries over previous Lundberg metallurgical testing. 

 

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Bench Scale Batch Flotation Testing - the bench scale metallurgical test work was aimed at assessing the amenability of the mineralized samples from the five deposits to a common flotation flowsheet. The test work serves as a first stage evaluation of developing a common process flowsheet.

 

The results from the bench scale batch flotation tests confirmed the production of selective zinc, lead and copper concentrates at marketable grades.

 

The grade and recovery of concentrates for each deposit have been defined in the following table. These are based on bench scale batch flotation tests (as an open circuit without recycle) and process simulation of the sequential flowsheet mass balance relative to the test program, and are not representative of lock cycle or pilot testing of the proposed flowsheet.

 

  Cu Concentrate  Pb Concentrate  Zn Concentrate
Deposit  (Grade/Recovery)  (Grade /Recovery)  (Grade /Recovery)
Boomerang  25.7% / 63.4%  55.4% / 71.2%  49.8% / 91.7%
Lemarchant (massive sulphide)  33.7% / 78.1%  69.4% / 82.4%  60.8% / 90.7%
Lemarchant (footwall)  31.0% / 90.1%  No concentrate  59.8% / 96.9%
Bobbys Pond  30.9% / 83.8%  76.5% / 69.3% 1  64.8% / 93.1%
Daniels Pond  18.1% / 54.6%  74.0% / 76.8% 1  61.0% / 90.1%
Lundberg Y1-3  30.1% / 86.2%  72.1% / 83.1% 61.1% / 78.7%

 

1 Lead grade defined by the test program with added cleaning of the lead concentrate to reduce zinc and iron.

 

The results of the bench scale test program have indicated an improved grade and recovery relationship for the production of Cu-Pb-Zn concentrates using a sequential flotation flowsheet. The test results confirm that selective zinc, lead and copper concentrates at marketable grades can be produced using a common flotation flowsheet. The positive results from the metallurgical test program strongly support the development of the sequential flotation technology for processing of the deposits using a centralized processing facility.

 

Conceptual Economic Assessment

 

The DMS and metallurgical test programs were followed-up by Thibault & Associates with a Process Simulation and Cost Assessment model (order of magnitude conceptual assessment) to evaluate and identify the key factors impacting the operating economics of a centralized processing concept for the production of the base metal concentrates from the five base metal deposits.

 

Multiple conceptual economic scenarios at three potential sites were developed to simulate the proposed centralized milling concept. the Company and Buchans provided preliminary mine plans, mining costs and operating costs for each of their respective deposits. Thibault & Associates Inc. combined the mining inputs with a process simulation and costing model to develop a conceptual economic model for the project, which was used to evaluate various process options.

 

The variables assessed included the different potential mill sites, with or without DMS, new or used process equipment, mining rate, and processing feedstock composition for each deposit. Lundberg, being the largest but lowest grade deposit, was considered the main plant feed and Lemarchant, Boomerang, Daniels Pond and Bobbys Pond were treated as satellite deposits.

 

Highlights of Results of Research Program:

 

·Pre-concentration of the samples by bench scale DMS testing (prior to flotation) was determined to be technically viable for the Lundberg deposit, Bobbys Pond samples and the semi-massive and stringer sulphide sample from the Lemarchant Footwall.
·Metallurgical test results strongly support the development of a sequential flotation flowsheet for the processing of all five deposits using a centralized processing facility.
·Bench-scale flotation test programs indicated improved grade and recovery relationship for the production of copper, lead and zinc concentrates using a common sequential flotation flowsheet rather than a bulk flotation flowsheet.

 

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·Test results and METSIMTM metallurgical simulations confirm that selective zinc, lead and copper concentrates at marketable grades can be produced using a sequential flotation flowsheet.
·The process simulation and cost assessment results (conceptual economic modeling) provided key information on which to base future studies and development plans, including the ongoing exploration programs that are critical to expanding the deposits and advancing the viability of developing the central Newfoundland deposits through a centralized milling facility.

 

The metallurgical research study demonstrated that the ore from the Company’s Lemarchant and Boomerang-Domino deposits can be successfully processed in a central mill using a sequential flotation flowsheet, and that selective zinc, lead and copper concentrates at marketable grades can be produced from these deposits.

 

The positive results of the research project provide valuable direction to guide future exploration on the Company’s central Newfoundland deposits and the conceptual economic modeling provided key information on which to focus future economic studies and development plans for advancing the development of these deposits through a centralized milling facility

 

It was recommended that further review of the satellite deposits should be undertaken to examine the potential to increase minable resource size, run of mine ore grades and mine production rates, and to evaluate alternative cost effective mining methods.

 

Central Newfoundland Exploration Work 2016-2017

 

The Company undertook ground geophysical surveys including magnetics, gravity, electromagnetics (“EM”) and borehole EM on a number of high priority Cu-Pb-Zn-Ag-Au target areas on its South Tally Pond and Tulks South properties in the autumn of 2016.

 

This geophysical program at the South Tally Pond project focused on the Lemarchant North, Spencers Pond and Lost Pond target areas with the aim of defining new drill targets. Magnetometer surveys were carried out in all three areas and merged with historical magnetic survey data where available. Plate modeling of the surface EM data outlined conductive trends in all three areas and identified new drill targets.

 

At Lemarchant North, the target area is immediately north of the Lemarchant deposit where the surface EM survey outlined a north trending, moderately east dipping conductor over a 600 m strike length. The conductive trend is interpreted to be related to near surface mudstone horizon based on several drillholes previously completed along the first 200 m of the conductor, but which has not been drill tested over the entire conductor length.

 

At Spencers Pond, two near surface, parallel conductive trends that dip moderately to the northwest have been identified over a 600 m strike length. Two shallow, historic drillholes were previously drilled in this area, one of which intersected pyritic, graphitic mudstone with a similar hydrothermal geochemical signature to that which overlies the Lemarchant deposit.

 

At Lost Pond, the surface EM survey outlined two conductive trends over an approximately 800 m strike length that dip moderately to the northwest. Three historic drillholes in the more northern of the two conductive trends intersected graphitic mudstones with similar hydrothermal geochemical signatures to that which overlie the Lemarchant deposit.

 

In 2017, the Company resumed its diamond drilling exploration programs at the South Tally Pond and Tulks South projects. The drilling at South Tally Pond project was designed to continue to test for mineralized extensions to the Lemarchant deposit and initial drill testing of three high priority base metal prospects located in the Lemarchant area, including Lost Pond, Spencers Pond and Lake Ambrose West. Drilling at Tulks South was aimed at expanding the Boomerang-Domino deposit and testing three priority target areas within the horizon that hosts the Boomerang-Domino deposit, up to 2.0 km along strike of the deposit.

 

South Tally Pond Project

 

During 2017, the Company completed 15,264 metres of drilling in 56 drillholes and 3 drillhole extensions over three drilling campaigns at the Lemarchant deposit. The 2017 drill program focused on the expansion of the Lemarchant deposit’s two mineralized zones, the Main Zone and Northwest Zone, and to test several priority geophysical targets located to the immediate south and north of the Lemarchant deposit.

 

   2017 Winter Program   2017 Summer Program   2017 Fall Program 
   Drillholes   Metres   Drillholes   Metres   Drillholes   Metres 
Lemarchant Main Zone   9 + 3 Ext.    2,693    23    4,780    3    618 
Lemarchant NW Zone   1    377    4    1,460    5    2495 
South Target             6    1,479           
North Target             5    1,363           
TOTAL DRILLING   10 + 3 Ext.    3,070    38    9,082    8    3,113 

 

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The 2017 drilling intersected significant extensions of base metal massive sulphide mineralization, both up-dip and immediately along strike of the currently defined Lemarchant Main Zone. The Lemarchant Main Zone massive sulphide mineralization now extends an additional 80 metres up-dip and over a 250-metre strike length (from sections 100+75N to 103+25N). The vertical depths of the mineralized drill intercepts range from 120 to 170 metres. Drilling at the Lemarchant Northwest Zone, located 250 metres northwest of the Main Zone extended the mineralization along strike by up to 50 metres to the north and south.

 

The Lemarchant drill program included initial drill testing of previously defined EM geophysical anomalies at the North and South Lemarchant target areas, located approximately 500 metres along strike of the Lemarchant deposit. Drilling intersected similar stratigraphy to that seen at the Lemarchant deposit with significant metalliferous (pyrite-pyrrhotite) mudstones at the mafic to felsic volcanic transition. No significant mineralization was intersected in these initial drillholes, but the presence of metalliferous mudstones is encouraging.

 

For full results with drill hole location maps and key sections provided on the NorZinc website.

 

A ground EM geophysical program was completed in mid 2017 at the South Tally Pond project with the aim of defining new drill targets. The geophysical program was focused on three priority target areas located immediately south (South Lemarchant target area), south-east and east of the Lemarchant deposit. Each area is associated with airborne EM conductors that remained untested by drilling. A total of 16.5 line-kilometres of time domain electromagnetic survey was completed on 21 grid lines in the 3 areas.

 

Two priority base metal prospects, Lost Pond and Lake Ambrose West located 6.0 km north and 4.5 km northwest of the Lemarchant deposit, respectively were drill tested in 2017.

 

·Thirteen drillholes, totaling 3,559 metres were completed at the Lost Pond prospect and intersected a thick sequence of variably altered mafic-felsic volcanic rocks over a 400-metre strike length with thick intervals of pyrite-rich to graphitic mudstone horizons containing anomalous base metal mineralization. The metalliferous mudstone horizons, are geochemically similar to those that overlie the Lemarchant deposit, and suggest a favourable hydrothermal depositional environment for massive sulphide development.

 

·Three drillholes, totaling 909 metres were completed at the Lake Ambrose West prospect and intersected felsic to mafic volcanic stratigraphy with a local pyritic, graphitic mudstone horizon intersected in two of the drillholes. The mudstone horizon is associated with elevated base metal mineralization with the lithogeochemistry suggesting a more distal hydrothermal depositional environment.

 

As part of the Mineral Resource Estimate update, a geological structural study of the Lemarchant deposit was completed by Mercator and Terrane Geoscience Inc. The structural study will be incorporated into the Lemarchant geological model and will be utilized to target other areas of potential mineralization including faulted offsets adjacent to the Lemarchant deposit.

 

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Tulks South Project

 

During 2017, the Company completed 4,981 metres of drilling in 14 drillholes at the Boomerang-Domino massive sulphide deposit and at three priority target areas located up to 2.0 km along strike of the Boomerang-Domino deposit.

 

Drilling at the Boomerang-Domino deposit (6 holes, 1,709 metres) successfully extended the Boomerang base metal mineralization up-dip by 50 metres in one drillhole. The remaining drillholes intersected up to 1 metre thick massive pyrite intervals with weak to anomalous base metals along the projected Boomerang horizon.

 

Drilling along strike of the Boomerang Domino deposit at the Zinc Zone (3 holes, 1291 metres), Telephone Hill (3 holes, 1,131 metres), and Hurricane prospects (2 holes, 836 metres) intersected variable altered, favorable felsic volcanic footwall stratigraphy with local, weakly anomalous base metal mineralization.

 

The drilling programs conducted in 2017 on the Tulks South Property were mostly outside the resource area and the drilling results are not considered material to the previous resource estimates.

 

Vatukoula Gold Mines plc

 

In 2009, the Company acquired an interest in Vatukoula Gold Mines plc (“Vatukoula”), a UK company which owns and operates the Vatukoula Gold Mine in Fiji. As at December 31, 2016, the Company did not hold any shares of Vatukoula (December 31, 2015 - 12,573,380 shares). In January 2016, the Company liquidated its marketable securities and sold 12,573,380 shares of Vatukoula to Zhongrun International Mining Co. Ltd., the major shareholder of Vatukoula, for cash of $936,000.

 

Item 4A. Unresolved Staff Comments

 

Not applicable.

 

Item 5. Operating and Financial Review and Prospects

 

A. Operating Results

 

Financial Results for the Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017

 

This review of the results of operations should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2018 and 2017 and other public disclosure documents of the Company.

 

For the year ended December 31, 2018, the Company reported a net loss and comprehensive loss of $11,619,000 compared to a net loss and comprehensive loss of $11,074,000 for the year ended December 31, 2017.

 

Included in the loss for the year ended December 31, 2018, were exploration and evaluation expenditures of $5,893,000 compared to $8,723,000 for the previous year and share-based compensation charges of $677,000 in the current year versus $842,000 in the comparable year. The Company also recorded a loss on currency translation of $556,000 and accrued interest of $679,000 in the year ended December 31, 2018 compared to a gain on currency translation of $148,000 and accrued interest of $28,000 in the year ended December 31, 2017. The Company also recorded a tax deduction recovery in the amount of $267,000 in the year ended December 31, 2017 with no comparable amount in the current year. The tax deduction recovery was in respect of flow-through shares previously issued.

 

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Exploration and Evaluation Costs

 

For the year ended December 31, 2018, the Company expensed $5,835,000 on its exploration and evaluation programs at Prairie Creek compared to $5,542,000 for the year ended December 31, 2017. The Company was engaged in mine planning and feasibility studies in the comparative year as well as permitting for the All Season Road in both years.

 

For the year ended December 31, 2018, the Company also expensed $58,000 on its exploration and evaluation properties in central Newfoundland compared to $3,181,000 in the comparative year. The Company concluded a multi-phase exploration program in 2017 and spent 2018 compiling a technical report released in the latter part of the year.

 

Revenue and Investment Income

 

The Company does not generate any cash flows from operations. To date the Company has not earned any significant revenues other than interest and related investment income. Investment income for the year ended December 31, 2018 was $173,000 versus $68,000 for the comparative year. The increase is attributable to the overall increase in amounts available for investment during the current year versus the comparative year.

 

Administrative Expenses

 

The Company recorded administrative expenses (excluding share-based compensation and depreciation) of $3,940,000 for the year ended December 31, 2018 versus $1,914,000 for the comparative year. The increase is predominantly due to increased management costs and professional fees in the current periods. Increased management costs include salary increases and a retirement allowance for the former CEO and increased professional fees include corporate reorganization costs and executive recruitment fees.

 

Share-Based Compensation

 

The non-cash expense, share-based compensation, was estimated to be $677,000 for the year ended December 31, 2018 versus $842,000 for the comparative year. The decrease is due to the decreased amount of stock options issued throughout both years.

 

Other Income (Expenses)

 

The Company recorded a loss on foreign currency translation and accrued loan interest in the amount of $556,000 and $679,000 respectively, for the year ended December 31, 2018 compared to a gain on foreign currency translation and accrued loan interest in the amount of $148,000 and $28,000 respectively, for the year ended December 31, 2017. The foreign currency translation loss was recorded to revalue the US dollar loan to Canadian dollars upon repayment and as at the end of December 31, 2017. The accrued loan interest was in respect of the Project Bridge Loan with RCF VI as outlined in Note 9 of the Company’s Annual Financial Statements.

 

Financial Results for the Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

 

This review of the results of operations should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2017 and 2016 and other public disclosure documents of the Company.

 

For the year ended December 31, 2017, the Company reported a net loss and comprehensive loss of $11,074,000 compared to a net loss and comprehensive loss of $5,077,000 for the year ended December 31, 2016.

 

Included in the loss for the year ended December 31, 2017, were exploration and evaluation expenditures of $8,723,000 compared to $2,428,000 for the previous year.

 

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The net loss in the year ended December 31, 2017 included a gain on foreign currency translation and a tax deduction recovery of $148,000 and $267,000 respectively with no comparable gain or recovery in the comparable year. The net loss in the year ended December 31, 2017 included a gain on changes to the decommissioning provision of $3,000 compared to a gain of $64,000 in the comparative year of 2016.

 

Excluding the gain on foreign currency translation, the tax deduction recovery and the gain on changes to the decommissioning provision, the Company recorded a loss of $11,492,000 for the year ended December 31, 2017 compared to a loss of $5,141,000 the previous year.

 

Exploration and Evaluation Costs

 

For the year ended December 31, 2017, the Company expensed $5,542,000 on its exploration and evaluation programs for Prairie Creek Project compared to $1,857,000 for the year ended December 31, 2016. Mine planning and feasibility studies costs amounted to $3,162,000 in 2017 compared to $331,000 for the previous year.

 

For the year ended December 31, 2017, the Company also expensed $3,181,000 on its exploration and evaluation properties in central Newfoundland compared to $571,000 for the comparative year. A multi-phase drill program began in the final quarter of 2016 and continued to the end of 2017.

 

Revenue and Investment Income

 

The Company does not generate any cash flows from operations. To date the Company has not earned any significant revenues other than interest and related investment income. Investment income for the year ended December 31, 2017 was $68,000 versus $60,000 for the comparative year. The increase is attributable to the overall increase in amounts available for investment during the current year versus the comparative year.

 

Administrative Expenses

 

The Company recorded administrative expenses (excluding share-based compensation and depreciation) of $1,914,000 for the year ended December 31, 2017 compared to $1,621,000 for the comparative year. The slight increase is predominantly due to increased salary costs in the current year.

 

Share-Based Compensation

 

Share-based compensation was $842,000 for the year ended December 31, 2017 versus $1,104,000 for the comparative year. The decrease is due to not issuing RSUs in 2017 (2016 - 1,900,000) to senior officers; the issuance of DSUs (in the amount of 662,440 in 2017 and 376,034 in 2016) to independent directors; and not issuing of stock options in 2017 (2016 - 5,200,000) to directors, officers and employees.

 

Other Income (Expenses)

 

The Company recorded a gain on foreign currency translation and a tax deduction recovery in the amount of $148,000 and $267,000 respectively for the year ended December 31, 2017 with no comparable gain or recovery in the year ended December 31, 2016. The foreign currency translation gain was recorded to revalue the US dollar loan to Canadian dollars as at December 31, 2017. The tax deduction recovery was in respect of flow-through shares previously issued.

 

B. Liquidity and Capital Resources

 

At December 31, 2018, the Company had a positive working capital balance of $8,327,000 which included cash and cash equivalents of $9,253,000 and short-term investments of $32,000. The Company is debt free, having repaid the Project Bridge Loan, including accrued interest, in full on July 10, 2018.

 

At December 31, 2017, the Company had cash and cash equivalents of $12,979,000, short-term investments of $31,000 and a positive working capital balance of $11,791,000. The Project Bridge Loan was classified as a long-term liability at December 31, 2017.

 

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Accounts payable and accrued and other liabilities at December 31, 2018 were $1,396,000 compared to $1,647,000 as at December 31, 2017.

 

Cash inflows from financing activities totaled $6,168,000 for the year ended December 31, 2018 compared to $12,538,000 for 2017, due to the Company’s financing activities in the third quarter of 2018 and the fourth quarter of 2017. During the third quarter of 2018, the Company closed a $20 million equity financing with RCF VI CAD and issued capital stock for a net inflow of $19,839,000 which was offset by the loan repayment of $13,107,000, loan interest of $546,000 and the cancellation of shares in the amount of $18,000.

 

The Company has no operating revenue other than interest income, with a history of reported losses, largely attributable to exploration and development expenses. The ability of the Company to carry out its planned business objectives is dependent on its ability to raise adequate financing from lenders, shareholders and other investors.

 

In particular, the development of the Prairie Creek Mine will require substantial additional financing. The 2017 FS estimated that the additional capital required to install the planned new facilities and to bring the Prairie Creek Mine into production will aggregate $253 million, plus a contingency of $26 million for a total of $279 million. Working capital required upon commencement of production is estimated to be $36 million.

 

Accordingly, additional financing will be required to continue the development of the Prairie Creek Project and to put the Prairie Creek Mine into production. There is no assurance that such financing will be available on a timely basis or on acceptable terms. If the Company is unable to obtain adequate additional financing, the Company will be required to curtail operations, exploration and development activities. These conditions indicate the existence of material uncertainties which cast significant doubt about the Company’s ability to continue as a going concern. This is discussed in more detail in Item 3 D “Risk Factors” section of this Annual Report.

 

C. Research and Development, Patents and Licences, Etc.

 

The Company is a mineral exploration company and does not carry on any research and development activities.

 

D. Trend Information

 

As the Company is an exploration company with no producing mining properties, information regarding trends in production, sales and inventory are not meaningful.

 

E. Off-balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table reflects the Company’s aggregate contractual commitments as of December 31, 2018:

 

(thousands of Canadian dollars)

  Payment due by period 
Contractual Obligations  Total   Less than 1 year   1-3 years   3-5 years   More than 5 years 
Operating lease obligation (1)  $454   $153   $301   $-   $- 
Decommissioning provision (2)   2,838    -    -    -    2,838 
Annual fees and taxes (3)   750    75    150    225    300 
Total Contractual Obligations  $4,042   $228   $451   $225   $3,138 

 

(1)Represents obligations under operating leases for office space and equipment.
(2)The decommissioning liability obligation represents undiscounted costs which are anticipated to be predominantly incurred at the end of the life of the Prairie Creek Mine, which is estimated to be 2037. The liability is supported by a letter of credit deposited with the GNWT secured by a pledge of restricted cash.
(3)Includes the annual fees related to the Company’s mining leases, surface leases and mineral claims which total approximately $45,000 per annum and property taxes of approximately $30,000 per annum.

 

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During 2017, Canada Revenue Agency (“CRA”) performed an audit of the tax filings of the Company for fiscal years, including 2013, 2014 and 2015, and denied certain expenditures which the CRA determined did not qualify for flow-through treatment related to the flow-through subscription agreements dated August 20, 2013 and issued reassessments disallowing $1,138,896 of flow-through exploration expenditures, representing approximately 28% percent of the $4,005,200 expenditures renounced to subscribers. The Company strongly disagrees with the determination and reassessments and has filed objections disputing the reassessments and is awaiting CRA’s reply. In the flow-through subscription agreements dated August 20, 2013, the Company agreed that in the event CRA reduces the amount renounced it will indemnify and hold harmless the subscriber and pay the amount of any tax payable as a consequence of such reduction. The Company has not recognized the potential indemnity claim as a liability as it does not consider it probable that there will be an amount payable relating to this matter. The full amount of the potential indemnity is estimated at approximately $700,000.

 

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Item 6. Directors, Senior Management and Employees

 

A.Directors and Senior Management

 

Name, Province or State and
Country of Ordinary Residence
and Position Held with the
Company

 

 

Age

 

Principal Occupation During Preceding Five Years

  Date First Became
Director of the
Company(5)
             

John F. Kearney (4)

Ontario, Canada

Chairman and Director

 

 

68

  Chairman of NorZinc since 2003; President and Chief Executive Officer of NorZinc from 2003 to 2018; Chairman of Labrador Iron Mines Limited since May 2007; Chairman of Conquest Resources Limited since 2001; Chairman of Anglesey Mining plc since 1994.   November 2001
             

Robert J. (Don) MacDonald

British Columbia, Canada

Chief Executive Officer, President and Director

  64   President of NorZinc since May 2018 and CEO since June 2018; Acting CEO of KGHM International from October 2016 to March 2017; CFO of KGHM International from 2010 to 2017.   June 2018
             

Dave Nickerson (1) (2) (3)

Northwest Territories, Canada

Director

 

  74   Professional Engineer, Mining consultant, previously Chairman of Northwest Territories Water Board; Member of Parliament, Member of NWT Legislative Assembly; Government Minister.   March 2004
             

Anita Perry (3)

Alberta, Canada

Director

  60   Vice President, Communications and External Affairs, BP Canada since 2005.   November 2018
             

Malcolm J.A. Swallow (2)

British Columbia, Canada

Director

  68   Professional Engineer, BC (Mining Engineering); Director, Silvercorp Minerals Inc. from 2015 to 2017.   June 2016
             

Ian Ward (1) (3)

Ontario, Canada

Director

  72   Professional Engineer (Ontario), Metallurgical Consultant. From 2010 to 2015 was Senior Advisor and Vice President of Metallurgy and Processing for Kinross Gold Corporation, and prior thereto Senior Vice President, Project Development for Mustang Minerals Corp. and previously President and Principal Metallurgist with Micon International Limited.   June 2016
             

John Warwick (1) (2) (4)

Ontario, Canada

Director

  65   Financial Consultant (CFA) and special advisor to Paradigm Capital Inc; Director Sherritt International Corporation since 2017. Prior to 2018, Member of the Finance and Audit Committee of the Board of Governors of the Shaw Festival. Prior to 2015, Managing Director, Investment Banking, founding partner and Head of Corporate Finance of Paradigm Capital Inc.   June 2016
             

Alan B. Taylor (3)

British Columbia, Canada

Vice President, Exploration, Chief Operating Officer

  62   Vice President, Exploration of NorZinc since 1999, director of NorZinc from 2014 to 2018 and Chief Operating Officer of NorZinc since March 2004.   N/A
             

Trevor L. Cunningham

British Columbia, Canada

Chief Financial Officer, Vice President Finance and Corporate Secretary

  50   Chief Financial Officer and Vice President Finance of NorZinc since January 2011; Chartered Professional Accountant, Certified Management Accountant.   N/A

 

 

(1)Member of the Audit Committee.
(2)Member of the Compensation Committee.
(3)Member of the Health and Safety Committee.
(4)Member of the Nomination Committee
(5)All Directors are elected annually to hold office until the Company’s next Annual Meeting of shareholders.

 

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B. Compensation

 

Compensation Discussion and Analysis

 

Objectives of Executive Compensation

 

The Board has appointed a Compensation Committee which has responsibility for determining compensation for the directors and senior management. Since June 2016, the Compensation Committee consisted of John Warwick, Malcolm Swallow and Dave Nickerson (all considered independent directors).

 

In 2018, the Compensation Committee conducted a review of the Company’s compensation for Named Executive Officers (“NEO” defined below under the heading “Summary Compensation Table”) and directors. The Committee hired Willis Towers Watson (“WTW”), a global compensation consultant, to compare the Company’s current levels of compensation with a large basket of organizations or a “Peer Group” in the same industry and of similar size and stage of development. Using this information, the Compensation Committee recommended appropriate compensation adjustments for executive officers and directors. This recommendation was approved by the Board of Directors.

 

The Committee also recommended instituting a formal method of evaluating performance involving the use of key performance indicators for executive officers. This formal method was implemented for 2018 performance with regard to the CEO and will be fully implemented for all senior officers with regard to 2019 performance.

 

The general compensation philosophy of the Company for executive officers, including for the CEO, is to provide a level of compensation that is competitive within the North American marketplace and that will attract and retain individuals with the experience and qualifications necessary for the Company to be successful, and to provide longer-term incentive compensation, such as the grant of stock options, which aligns the interest of executives with those of shareholders and encourages senior management to have a direct and identifiable impact on the performance of the Company and to develop and implement a long-range strategy.

 

The Company is primarily engaged in the exploration and development of its Prairie Creek property located in the Northwest Territories, Canada. The Company is considered to be in the exploration and development stage, given that its Prairie Creek property is not in production and, to date, has not earned any significant revenues and does not generate revenues from operations. Accordingly, the Company is reliant upon funding from capital raising activities. Therefore, the use of traditional performance standards, such as corporate profitability, is not considered to be appropriate in the evaluation of corporate or executive performance, and the Board of Directors has to consider the financial situation of the Company in a wider context and involving the ongoing status of the Prairie Creek Project, when setting its executive compensation levels.

 

Historically, the compensation of executive officers of the Company has been comprised primarily of cash compensation and the allocation of incentive stock options and restricted share units. In establishing levels of remuneration and in granting stock options and restricted share units, the Compensation Committee, having taken into consideration the financial position of the Company, takes into consideration the executive's performance, level of expertise, responsibilities and length of service to the Company, as well as comparable levels of remuneration paid to executives of other companies of comparable size and development within the industry. When determining an element of compensation to be paid to a particular NEO, the Compensation Committee takes into account the amount of each other element of compensation that has been paid to that NEO. Interested executives do not participate in reviews, discussions or decisions of the Compensation Committee or the Board of Directors regarding this remuneration. The Compensation Committee’s responsibilities and composition are described below under the heading “Corporate Governance Disclosure – Compensation Committee.”

 

Goals and objectives for the Company are typically set through discussions at Board meetings, and senior management will then work to achieve these goals and objectives. Follow-up on progress would typically take place at subsequent Board meetings. The Board did not set formal, person-specific, performance goals for the Named Executive Officers, except for the CEO, for 2018 but did set specific primary and secondary corporate objectives. Awarding additional compensation upon successful completion of corporate objectives is entirely at the discretion of the Compensation Committee. Given the size of the Company, this is considered appropriate to effectively manage the business and allow the Named Executive Officers to move the business forward.

 

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In addition, to the WTW report the Company reviews compensation levels within the industry primarily through the use of third-party “Compensation Reports”, which are available through certain consulting firms. These reports typically include information for larger mining companies and assist the Compensation Committee in determining approximately the salary levels and other benefits in place across the industry.

 

The Compensation Committee relies on the general knowledge and experience of its members, and recommendations from senior management, in reviewing appropriate levels of compensation for executive officers and the implementation of, or amendment to, any other aspects of compensation that the Compensation Committee may review from time to time. All Compensation Committee members have relevant general, but not direct, experience in executive compensation and compensation policies and practices in the junior mineral resources business gained through current and prior experience in business, the minerals industry and government. Neither the Company nor the Compensation Committee currently has nor at any time prior to 2018 had any contractual arrangement with any compensation consultant.

 

The Compensation Committee is responsible for considering the risks associated with the Company’s compensation policies and practices and has not identified any specific risks associated with the Company’s compensation policies and practices that are reasonably likely to have a material adverse effect.

 

Because of the current scale and scope of the Company’s operations, and the limited number of senior management and employees, and the oversight by the Board of all significant activities, including risk management, the Compensation Committee does not believe that the Company’s compensation policies and practices would encourage any executive officer to take inappropriate or excessive risk.

 

The Company has not prohibited its executive officers or directors from purchasing financial instruments that are designed to hedge or off-set a decrease in market value of any securities of the Company granted as compensation or held, directly or indirectly, by an executive officer or director.

 

Base Salary

 

The Company traditionally provided executive officers with base salaries which represent their minimum compensation for services rendered during the fiscal year. Salary levels are based upon the executive’s experience, responsibilities, performance, and time commitment. Base salaries are usually reviewed annually by the Compensation Committee.

 

In August 2015, having regard to the financial position of the Company and in light of continued uncertainty in the capital markets and the current lack of investor interest in the resource sector, the Board implemented cost reduction measures which included a change in the composition of the remuneration of each of the CEO, COO, and CFO which involved a reduction in the cash component of base salary combined with the grant of Restricted Share Units.

 

In August 2016, having regard to the improved financial position of the Company the Compensation Committee again reviewed the base salaries of the CEO, CFO, and COO and recommended the cost reduction measures be removed along with appropriate increases in base salary in line with industry standards. In addition, the CEO, COO and CFO were granted restricted share units under the Company’s RSU Plan.

 

In respect of 2017, the Compensation Committee reviewed the base salaries of the CEO, CFO, and COO and did not recommend any adjustments to the base salaries which had been revised in mid 2016.

 

In the latter half of 2018, the Compensation Committee with the aid of WTW reviewed the base salaries of the executive officers and recommended an appropriate increase in base salary in line with the indicated Peer Group and in line with industry standards.

 

Restricted Share Units

 

In 2014, the Company adopted a Restricted Share Unit Plan (the “RSU Plan”) for the benefit of the Company’s employees, directors and consultants. The RSU Plan is intended to assist the Company in the recruitment and retention of highly qualified employees, directors and eligible consultants by providing a means to reward performance, to motivate participants under the RSU Plan to achieve important corporate and personal objectives and, through the proposed issuance by the Company of Common Shares under the RSU Plan, to better align the interests of participants with the long-term interests of Shareholders.

 

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The Board uses Restricted Share Units (‘‘RSUs’’) issued under the RSU Plan as part of the Company’s overall executive compensation plan. Since the value of RSUs increase or decrease with the price of the Common Shares, RSUs reflect a philosophy of aligning the interests of executives with those of the Shareholders by tying executive compensation to share price performance. In addition, RSUs assist in the retention of qualified and experienced executives by rewarding those individuals who make a long-term commitment.

 

The RSU Plan is administered by the Compensation Committee. Each RSU awarded conditionally entitles the participant to receive one Common Share (or the cash equivalent) upon attainment of the RSU vesting criteria. The maximum number of Common Shares which may be reserved, set aside and made available for issuance under the RSU Plan is a variable number equal to 3% of the issued and outstanding Common Shares of the Company as of the date of the grant on a non-diluted basis.

 

In 2016, in recognition of the completion of the 2016 Preliminary Feasibility Study and the completion of the June 2016 financing of $10.2 million, the Company granted a total of 1,900,000 RSUs to senior officers. The RSUs granted were subject to a ten to eighteen month vesting period; a payout date of 2.5 to 3 years; an expiry date of 5 years.

 

In respect of 2017, in recognition of the completion of the 2017 Feasibility Study, the completion of the Environmental Assessment of the All Season Road, the completion of an extensive exploration drilling program in Newfoundland, and the successful negotiation of the of US$10 million bridge loan, subsequent to year end, the Company granted a total of 2,300,000 RSUs to senior officers. The RSUs granted were subject to a twelve-month vesting period, a payout date of 2 years, and an expiry date of 5 years.

 

In respect of 2018, in recognition of the completion of a $20 million equity financing, the corporate reorganization and change of name to NorZinc and the receipt of a positive decision from the Canadian Federal Government with regard to the Prairie Creek All Season Road Environmental Assessment, subsequent to year end, the Company granted a total of 2,609,000 RSUs to three executive officers. The RSUs granted vested immediately, subject to a payout date of 12 months, and an expiry date of 5 years.

 

Stock Options

 

The grant of stock options to purchase common shares of the Company, pursuant to the Company’s stock option plan is an integral component of executive officer compensation packages. The Company's stock option plan is administered by the Board of Directors, with option grants being recommended by the Compensation Committee to the Board. The stock option plan is designed to give each option holder an interest in preserving and maximizing shareholder value in the longer term, to enable the Company to attract and retain individuals with experience and ability, and to reward individuals for current performance and expected future performance. Previous stock option grants are considered when reviewing executive officer compensation packages as a whole.

 

In 2016, 3,750,000 (2017– nil) stock options were granted to officers and directors of the Company. No stock options were exercised by officers or directors in 2017 or 2016.

 

In 2018, 4,360,000 stock options were granted to officers and directors of the Company. No stock options were exercised by officers or directors in 2018.

 

In respect of 2018, in recognition of the completion of a $20 million equity financing, the corporate reorganization and change of name to NorZinc and the receipt of a positive decision from the Canadian Federal Government with regard to the Prairie Creek All Season Road Environmental Assessment, subsequent to year end, the Company granted a total of 4,050,000 stock options to executive officers. The stock options granted are exercisable at $0.10 per share with a 5-year term and vest quarterly over 2 years.

 

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Other Incentives

 

The Company is implementing a formal annual incentive bonus plan. Any award of a bonus to executive officers remains entirely at the discretion of the Board of Directors based upon recommendation by the Compensation Committee. In considering the payment of a any bonus to executive officers, the Compensation Committee takes into account the individual performance and efforts of the executive during the year, the progress made by the Company in furthering its business plan and the overall economic climate. Subsequent to the fiscal 2017 year end, the COO was awarded a cash bonus of $50,000 primarily in recognition of the successful completion of the 2017 FS and the completion of the Environmental Assessment of the All Season Road. As discussed above, in respect of 2018, subsequent to year end, the executive officers were awarded cash bonuses.

 

The Company's health benefit plan is available to all full-time employees. The benefit plan is designed to protect the health of all employees and their dependents, and to provide coverage in the event of disability or death.

 

Perquisites and personal benefits provided to executive officers reflect competitive practices and particular business needs. They are not considered a material component of the executive compensation program.

 

The Company does not directly link executive compensation to total cumulative shareholder return, as the Company is not in active operations. Instead, the goals of the Company at this point in time are more qualitative and geared towards successfully progressing the development of the Prairie Creek Mine. The Compensation Committee does, however, consider the financial position of the Company and the general economic situation when assessing compensation.

 

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Summary Compensation Table

 

The following table sets out all annual and long term compensation for services in all capacities to the Company for the three most recently completed financial year ended on December 31, 2018, in respect of each of the individuals comprised of each CEO and the CFO (who acted in such capacity for all or any portion of the most recently completed financial year), and each of the three most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, (other than the CEO and the CFO), as at December 31, 2018 whose total compensation was, individually, more than $150,000 for the financial year and any individual who would have satisfied these criteria but for the fact that individual was neither an executive officer of the Company, nor acting in a similar capacity, at the end of the most recently completed financial year (collectively, the "Named Executive Officer" or "NEOs").

 

                 

Non-equity incentive plan

compensation

($)

             

Name

And

Principal

Position

  Year 

Salary

($)

  

Share-

based

awards (1)

($)

  

Option-

based

awards (1)

($)

  

Annual

incentive

plans

  

Long-

term

incentive

plans

  

Pension

value

($)

  

All other

compensation (2)

($)

  

Total

Compensation

($)

 
                                    
Don MacDonald  2018   225,000    146,900    236,000    68,055     Nil     Nil     Nil    675,955 
President, CEO and Director (3)  2017   Nil    Nil    Nil    Nil    Nil    Nil    Nil    Nil 
   2016   Nil    Nil    Nil    Nil    Nil    Nil    Nil    Nil 
                                            
Alan B. Taylor  2018   222,500    58,000    40,000    73,500     Nil    Nil    Nil    394,000 
COO, Vice President,  2017   200,000    75,000    Nil    50,000     Nil     Nil     Nil    325,000 
Exploration  2016   141,667    165,000    172,692    Nil     Nil     Nil     Nil    479,359 
                                            
Trevor L. Cunningham  2018   217,600    56,000    36,000    57,500    Nil    Nil    Nil    367,100 
CFO, Vice President,  2017   197,600    60,000    Nil    Nil    Nil    Nil    Nil    257,600 
Finance  2016   155,438    132,000    129,519    Nil    Nil    Nil    Nil    416,957 
                                            
Michael Vande Guchte  2018   177,500    Nil    6,000    15,000    Nil    Nil    Nil    198,500 
Vice President Exploration  2017   175,000    60,000    Nil    Nil    Nil    Nil    Nil    235,000 
(Newfoundland)  2016   123,958    Nil    86,347    Nil    Nil    Nil    Nil    210,305 
                                            
John F. Kearney  2018   87,500    Nil    Nil    Nil    Nil    Nil    400,000(5)   487,500 
former President and CEO (4)  2017   175,000    150,000    Nil    Nil    Nil    Nil    Nil    325,000 
   2016   131,250    330,000    172,692    Nil    Nil    Nil    Nil    633,942 

  

(1)The value of share-based and option-based awards represents the grant date fair value of the RSUs or stock options awarded. The share-based awards granted are subject to an immediate to 18 month vesting period; a payout date of 2 to 3 years; an expiry date of 5 years; and are assigned a fair value based on the share price at time of issuance.

 

(2)Perquisites have not been included, as they do not exceed 10% of total salary for the financial years presented.

 

(3)On May 16, 2018, Don MacDonald was appointed as President of the Company and on June 27, 2018 also appointed CEO and a director but was not compensated for services in his director capacity.

  

(4)On June 27, 2018, John Kearney resigned as CEO and his compensation as a director for the latter part of 2018 is disclosed in the following “Director Compensation” section.

 

(5)A retirement allowance of $350,000 was paid out upon retirement and a further $50,000 was paid out on January 1, 2019.

 

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Outstanding Incentive plan awards

 

The following table shows all awards outstanding to each Named Executive Officer as at December 31, 2018.

 

    Option-based Awards  Share-based Awards

 

Name

   Number of
securities
underlying
unexercised
options
(#)
    

 

 

Option
exercise
price
($)

  

 

Option
expiration date

   

 

Value of
unexercised
in-the-money
options (1)
($)

 Number of
shares or
units of
shares that
have not
vested
(#)
    Market or
payout value
of share-
based awards
that have not
vested (2)
($)
    Market or
payout value
of vested
share-based
awards not
paid out or
distributed (2)
($)
 
Don MacDonald    2,500,000    0.20   May 16, 2023
   

Nil

 Nil    Nil    Nil 
Alan B. Taylor    1,000,000    0.35   August 10, 2021
   

Nil 

 Nil    Nil    80,000 
Trevor L. Cunningham    750,000    0.35   August 10, 2021
   

Nil

 Nil    Nil    64,000 
Michael Vande Guchte    500,000    0.35   August 10, 2021
   

Nil

 Nil    Nil    32,000 

John F. Kearney (3)

   1,000,000    0.35   August 10, 2021   Nil  Nil    Nil    160,000 

 

(1)Calculated based on the difference between the market value of the shares underlying the option-based awards at the end of the most recently completed financial year, which was $0.08, and the exercise or base price of the option-based award.

 

(2)Calculated based on the market value of the shares underlying the share-based awards at the end of the most recently completed financial year which was $0.08.

 

(3)On June 27, 2018, John Kearney resigned as CEO and his compensation as a director for the latter part of 2018 is disclosed in the following “Director Compensation” section.

 

Incentive plan awards – value vested or earned during the year ended December 31, 2018

 

 

Name

 

Option-based awards –
Value vested during the
year (1)

($)

  Share-based awards – Value
vested during the year (1)
($)
  

 

Non-equity incentive plan
compensation – Value earned during
the year (2)
($)

Don MacDonald  Nil  Nil   Nil
Alan B. Taylor  Nil   40,000   Nil
Trevor L. Cunningham
  Nil   32,000   Nil
Michael Vande Guchte
  Nil   32,000   Nil

John F. Kearney (3)

  Nil   80,000   Nil

 

(1)The value of vested options or share-based awards represents the aggregate dollar value that would have been realized if any of the options granted had been exercised on the vesting dates. The dollar value of vested options is the difference between the market price of the underlying securities at exercise and the exercise price of the options on the vesting date.

 

(2)The Company does not have a formal bonus plan tied to set targets. Any bonus payments are entirely discretionary and are reviewed by the Compensation Committee as part of an overall review of performance for the year.

 

(3)On June 27, 2018, John Kearney resigned as CEO and his compensation as a director for the latter part of 2018 is disclosed in the following “Director Compensation” section.

 

Stock Option Plan

 

Under the Company’s stock option plan (described below), options to purchase common shares of the Company may be granted to employees, officers and directors of the Company or subsidiaries of the Company and other persons or companies engaged to provide ongoing management or consulting services for the Company or any entity controlled by the Company. In determining the number of common shares of the Company subject to each option granted under the plan, consideration is given to the present and potential contribution by such person or company to the success of the Company and the appropriate number and percentage of options that should be awarded and held by each party granted options relative to the total number of shares issued and stock options granted.

 

At December 31, 2018, there were 9,460,000 stock options outstanding, representing approximately 2.6% of the Company's issued and outstanding common shares as of December 31, 2018. At the Annual General and Special Meeting held on June 27, 2018, shareholders approved the amendment of the Company’s stock option plan to increase the number of Common Shares reserved for issuance under the Stock Option Plan by 10,800,000 common shares to 18,300,000 common shares.

 

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The purpose of the Company’s equity compensation plans is to attract and motivate directors, officers and employees of and service providers to the Company (collectively, the “Optionees”) and thereby advance the Company’s interests by affording such persons with an opportunity to acquire an equity interest in the Company through the stock options.

 

Restricted Share Unit Plan

 

The RSU Plan is administered by the Compensation Committee of the Board or such other Committee of the Board as may be designated by the Board (the “Committee”). Employees, directors and eligible consultants of the Company and its designated subsidiaries are eligible to participate in the RSU Plan. In accordance with the terms of the RSU Plan, the Company, under the authority of the Board of Directors through the Committee, will approve those employees, directors and eligible consultants who are entitled to receive RSUs and the number of RSUs to be awarded to each participant. RSUs awarded to participants are credited to them by means of an entry in a notional account in their favour on the books of the Company. Each RSU awarded conditionally entitles the participant to receive one Common Share (or the cash equivalent) upon attainment of the RSU vesting criteria. The Committee may impose additional conditions to any particular RSU award.

 

RSUs Outstanding

 

During the year ended December 31, 2018, the Company issued 2,300,000 (2017 – nil and 2016 – 1,900,000) RSUs to senior officers and employees which remained outstanding at December 31, 2018. The RSUs granted are subject to an eleven month vesting period; a payout date of 2.0 to 2.5 years; an expiry date of 5 years; and are assigned a fair value based on the share price at time of issuance.

 

Subsequent to year end, the Company granted a total of 2,689,000 RSUs to senior officers with immediate vesting; a payout date of January 1, 2020; and an expiry date of 5 years.

 

Maximum Number of Common Shares Available for Issue Under the RSU Plan

 

The maximum number of Common Shares which may be reserved, set aside and made available for issuance under the RSU Plan is a variable number equal to 3% of the issued and outstanding Common Shares of the Company as of the date of the grant on a non-diluted basis. In addition, the maximum number of Common Shares issued to insiders under the RSU Plan, together with any Common Shares issued to insiders pursuant to any other security-based compensation arrangement of the Company within any one year period, will not exceed 10% of the total number of outstanding Common Shares.

 

Deferred Share Unit Plan

 

Administration of Plan and Eligible Participants

 

The Deferred Share Unit Plan (the “DSU Plan”) is used for the benefit of the Company’s non-executive directors. The Board may award Deferred Share Units (‘‘DSUs”) under the DSU Plan to a non-executive director (each a “Participant”) in such number as the Board deems advisable to provide the director with appropriate equity-based compensation for the services he or she renders to the Company.

 

DSUs Outstanding

 

During the year ended December 31, 2018, the Company issued 1,912,803 (2017 – 662,440 and 2016 - 376,034) DSUs to directors. As at December 31, 2018, a total of 3,036,647 DSUs remain outstanding. The DSUs are fully vested upon issuance; subject to the plan are paid out upon retirement and are assigned a fair value based on the five day volume weighted average share price upon issuance.

 

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Maximum Number of Common Shares Available for Issue Under the DSU Plan

 

DSUs may be granted in accordance with the DSU Plan, provided the aggregate number of DSUs outstanding pursuant to the DSU Plan from time to time does not exceed 2% of the issued and outstanding Common Shares from time to time. The DSU Plan provides that the maximum number of Common Shares issuable to insiders (as that term is defined by the TSX) pursuant to the DSU Plan, together with any Common Shares issuable pursuant to any other security- based compensation arrangement of the Company, will not exceed 10% of the total number of outstanding Common Shares.

 

Equity Compensation Plan Information

 

The following table sets out certain details as at December 31, 2018 with respect to compensation plans pursuant to which equity securities of the Company are authorized for issuance:

 

 

 

Plan Category

 

 

Number of securities to
be issued upon
exercise of outstanding
options, warrants and
rights(1)

(a)

  

 

Weighted-average exercise
price of outstanding options,
warrants and rights(2)

(b)

  

 

Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))

(c) 

 
Stock Option Plan   9,460,000   $0.26    8,840,000 
Deferred Share Unit Plan   3,036,647    n/a    4,356,631 
Restricted Share Unit Plan   4,200,000    n/a    6,889,918 
Total   16,696,647    n/a    20,086,549 

 

(1)Represents the number of common shares reserved for issuance upon exercise of outstanding options, RSUs and DSUs.

 

(2)Since RSUs and DSUs do not have an exercise price, they have not been factored into the weighted average price calculation.

 

Pension Plan Benefits

 

The Company does not provide any form of group pension plan benefits to employees, officers or directors.

 

Termination and Change of Control Benefits

 

Except as otherwise disclosed herein, the Company has no compensatory plan or arrangement in respect of compensation received, or that may be received, by a Named Executive Officer in the Company's most recently completed or current financial year to compensate such NEO in the event of the termination of employment (whether voluntary, involuntary or constructive), resignation, retirement, a change of control of the Company or a change in responsibilities of the NEO following a change in control.

 

The Company entered into an Employment Agreement dated May 4, 2018 with Mr. Don MacDonald, Chief Executive Officer, for his continuing services as an officer of the Company (the “MacDonald Agreement”). Certain provisions in the MacDonald Agreement deal with events around termination of employment or resignation following a change of control of the Company, which is defined as the acquisition by any entity, directly or indirectly, of not less than fifty percent (50%) of the outstanding voting securities of the Company or the votes attached to those securities that are sufficient, if exercised, to elect a majority of the Board of Directors (a "Change of Control"). Should Mr. MacDonald’s employment with the Company be terminated without cause, Mr. MacDonald is entitled to receive an amount equal to 75% of his then current annual salary upon termination during the first full year of employment, or 100% of his then current salary during the second full year of employment, or 200% of his then current salary subsequent to the second full year of employment. In the event of a Change of Control and subsequent termination by the Company without cause, or resignation of Mr. MacDonald, within 3 months of the Change of Control, Mr. MacDonald is entitled to receive an amount equal to 200% of his then current annual salary.

 

A summary of the potential payments to Mr. MacDonald, assuming the applicable resignation or termination had occurred on December 31, 2018, is: termination without cause - $270,000; termination without cause or resignation following a change of control - $720,000.

 

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The Company entered into an Employment Agreement dated effective January 1, 2010 with Mr. Alan Taylor, Chief Operating Officer, for his continuing services as an officer of the Company (the “Taylor Agreement”). Certain provisions in the Taylor Agreement deal with events around termination of employment or resignation following a change of control of the Company, which is defined as the acquisition by any entity, directly or indirectly, of not less than fifty percent (50%) of the outstanding voting securities of the Company or the votes attached to those securities that are sufficient, if exercised, to elect a majority of the Board of Directors. Should Mr. Taylor’s employment with the Company be terminated without cause, Mr. Taylor is entitled to receive an amount equal to his then current annual salary upon termination, and a further amount equal to 50% of the initial termination pay amount on the first anniversary of his termination. In the event of a Change of Control and subsequent termination by the Company without cause, or resignation of Mr. Taylor, within 12 months of the Change of Control, Mr. Taylor is entitled to receive an amount equal to twenty-four months of his then current annual salary.

 

A summary of the potential payments to Mr. Taylor, assuming the applicable resignation or termination had occurred on December 31, 2018, is: termination without cause - $367,500; termination without cause or resignation following a change of control - $490,000.

 

The Company entered into an Employment Agreement effective January 17, 2011 with Mr. Trevor Cunningham, CFO, for his continuing services as an officer of the Company (the “Cunningham Agreement”). Certain provisions in the Cunningham Agreement deal with events around termination of employment and change in responsibilities amounting to constructive dismissal following a Change of Control. If Mr. Cunningham’s employment is terminated without cause, Mr. Cunningham is entitled to receive twelve months' termination pay at his then current annual salary. In the event of a Change of Control and subsequent termination or constructive dismissal within 12 months of the Change of Control, Mr. Cunningham is entitled to receive, in addition to termination pay, a further amount equal to six months' termination pay at his then current annual salary.

 

A summary of the potential payments to Mr. Cunningham, assuming the termination had occurred on December 31, 2018, is: termination without cause - $230,000; termination without cause following a change of control - $345,000.

 

Director Compensation

 

The following table shows director compensation for each director, other than directors that are also Named Executive Officers, for the year ended December 31, 2018.

 

 

Name

 

Fees
earned

($)

  

Share-
based
awards (1)

($)

  

Option-
based
awards(2)

($)

 

Non-equity
incentive plan
compensation

($)

 

Pension
value

($)

  

All other
compensation

($)

 

Total

($)

 

John F. Kearney (3)

   10,625    24,610   14,400  Nil   N/A   Nil   49,635 
Dave Nickerson   13,125    34,050   12,000  Nil   N/A   Nil   59,175 

Anita Perry (4)

   2,935    15,300   12,000  Nil   N/A   Nil   30,235 

Jean-Charles Potvin (5)

   12,500    18,750   Nil  Nil   N/A   Nil   28,750 
Malcolm J.A. Swallow
   12,500    34,050   12,000  Nil   N/A   Nil   56,050 
Ian Ward
   12,500    34,050   12,000  Nil   N/A   Nil   56,050 
John Warwick
   12,500    34,050   12,000  Nil   N/A   Nil   56,050 

 

(1)Upon issuance, the DSUs are fully vested and are assigned a fair value based on the five day volume weighted average share price. Subject to the terms and conditions of the DSU Plan, DSUs are paid out upon retirement.

 

(2)The value of option-based awards represents the grant date fair value of the stock options awarded.

 

(3)On June 27, 2018, John Kearney resigned as CEO and his compensation as CEO for the first half of 2018 is disclosed in the preceding “Compensation Discussion and Analysis” section.

 

(4)Anita Perry was appointed as a Director effective November 8, 2018.

 

(5)Jean-Charles Potvin resigned as a Director effective November 8, 2018.

 

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Prior to the fourth quarter of 2018, the Company paid each director, other than directors that are also Named Executive Officers, an annual fee of $10,000 and granted Deferred Share Units valued at $25,000 (payable quarterly and pro-rated for partial months served).

 

In the fourth quarter of 2018, the Compensation Committee conducted a review of the Company’s compensation for directors. The Committee, with the assistance of WTW, compared the current level of compensation for directors with other similar organizations in the mining industry. Using this information, the Compensation Committee recommended appropriate compensation adjustments for directors. It was agreed that annual cash compensation be changed from an annual fee of $10,000 to an annual fee of $20,000. It was also agreed to award annual retainers to directors that chaired a meeting such that the Chairman of the Board would receive an additional annual retainer of $10,000, the chairs of the Audit and Compensation Committees would receive an additional annual retainer of $5,000 and all other committee chairs to receive an additional annual retainer of $2,500. All annual cash compensation to be paid quarterly. Additionally, the Compensation Committee recommended an annual award to all directors, save for the Chairman, of Deferred Share Units valued at $18,000 ($21,600 to the Chairman) and incentive stock options valued at $12,000 ($14,400 to the Chairman). This recommendation was approved by the Board of Directors.

 

Share-based awards, option-based awards and non-equity incentive plan compensation

 

The following table shows all option-based and share-based awards outstanding to each director, other than those that are also Named Executive Officers, as at December 31, 2018.

 

    Option-based Awards   Share-based Awards 

 

 

Name

   

 

 

Number of
securities
underlying
unexercised
options

(#)

    

 

 

Option
exercise
price

($)

  

 

 

Option expiration
date

 

 

 

Value of
unexercised
in-the-money
options (1)

($)

   

 

Number
of
shares
or units
of
shares
that
have
not
vested

(#)

  

Market or
payout
value of
share-
based
awards
that have
not
vested

($)

   

 

Market or
payout value
of vested
share-based
awards not
paid out or
distributed (1)

($)

 

John F. Kearney (2)

   360,000    0.10   December 5, 2023  Nil   Nil   Nil   21,825 
Dave Nickerson
   

200,000

300,000

    

0.35

0.10

   August 10, 2021
December 5, 2023
  Nil
Nil
   Nil
   Nil
   56,502 

Anita Perry (3)

   300,000    0.10   December 5, 2023  Nil   Nil   Nil   14,400 

Jean-Charles Potvin (4)

   200,000    0.35   February 7, 2019  Nil   Nil   Nil   26,751 
Malcolm J.A. Swallow
   

200,000

300,000

    

0.35

0.10

   August 10, 2021
December 5, 2023
  Nil   Nil   Nil   41,151 
Ian Ward
   

200,000

300,000

    

0.35

0.10

   August 10, 2021
December 5, 2023
  Nil   Nil   Nil   41,151 

John Warwick