Alexco Resource : INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Form 6-K

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTH PERIODS ENDED

JUNE 30, 2022 AND 2021

(unaudited)

ALEXCO RESOURCE CORP.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited - expressed in thousands of Canadian dollars)

APPROVED ON BEHALF OF THE BOARD OF DIRECTORS

The accompanying notes are an integral part of the interim condensed consolidated financial statements

ALEXCO RESOURCE CORP.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(unaudited - expressed in thousands of Canadian dollars, except per share and share amounts)

The accompanying notes are an integral part of the interim condensed consolidated financial statements

ALEXCO RESOURCE CORP.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited - expressed in thousands of Canadian dollars)

The accompanying notes are an integral part of the interim condensed consolidated financial statements

The accompanying notes are an integral part of the interim condensed consolidated financial statements

Alexco Resource Corp. ("Alexco" or the "Corporation") was incorporated under the Business Corporations Act (Yukon) on December 3, 2004 and commenced operations on March 15, 2005. Effective December 28, 2007, it was continued under the Business Corporations Act (British Columbia). The Corporation is principally engaged in the exploration, development, and operation of mineral resource properties. The Corporation's mineral resource properties are located in the Keno Hill Silver District in the Yukon Territory of Canada.

Alexco is a public company which is listed on the Toronto Stock Exchange and the NYSE American Stock Exchange (under the symbol AXU). The Corporation's corporate head office is located at Suite 1225, Two Bentall Centre, 555 Burrard Street, Box 216, Vancouver, BC, Canada, V7X 1M9.

Acquisition by Hecla Mining Company

On July 4, 2022, the Corporation entered into a definitive arrangement agreement with Hecla Mining Company ("Hecla"), as assigned and amended (the "Arrangement Agreement") pursuant to which 1080980 B.C. Ltd. ("108"), a subsidiary of Hecla, will acquire all of the outstanding common shares of Alexco that 108 does not already own. Each outstanding common share of Alexco will be exchanged for 0.116 of a share of Hecla common stock. The acquisition is subject to approvals by Alexco securityholders and Wheaton Precious Metals Corp. ("Wheaton"), as well as applicable regulatory approvals and the satisfaction or waiver of customary closing conditions. Refer to subsequent events (Note 20) for further information in relation to Alexco's acquisition by 108.

Liquidity Risk

As at June 30, 2022, the Corporation had cash and cash equivalents, accounts and other receivables, inventories, prepaid expenses and other, and promissory note receivable of $17,319,000 to settle accounts payable and accrued liabilities, current lease liabilities, and revolving credit facility payable of $23,687,000. During the three and six month periods ended June 30, 2022, net cash used in (from) operating activities was $6,281,000 and $13,558,000 (2021 - $(647,000) and $4,033,000), respectively. The Corporation has not achieved positive cash flows from operations during ramp-up at Keno Hill. The Corporation's rate of advance of underground development remained insufficient and its operations ramp-up plan were behind schedule. On June 22, 2022, the Corporation announced that it would temporarily suspend milling operations to focus on advancing underground development at the Bermingham and Flame & Moth mines. Subsequent to June 30, 2022, the Corporation obtained the following additional capital resources as a result of its acquisition by Hecla Mining Company:

On July 19, 2022, Hecla and Alexco completed the US$30,000,000 secured loan facility and an affiliate of Hecla purchased 8,984,100 Alexco shares at $0.50 per share for proceeds of $4,492,050, which resulted in 9.9% of Alexco shares being held by Hecla or its affiliates. An initial amount of US$20,000,000 was immediately drawn on the loan facility and the remainder is available on a revolving basis, with the use of proceeds for working capital and capital expenditures purposes according to a plan jointly approved by Alexco and Hecla. The loan and equity financing are intended to provide Alexco with immediate working capital to continue development work at Keno Hill.

Liquidity risk is the risk that the Corporation will not be able to meet its obligations associated with financial liabilities. The Corporation has a planning and budgeting process in place. The Corporation maintains an internally generated cash flow forecast, which is based on its most recently published technical report and is updated based on actual performance and future expected performance at Keno Hill. Significant assumptions used in preparing the forecast include, but are not limited to, production volumes, development rates, operating costs, development costs, and commodity prices. Adverse changes to these assumptions could affect the Corporation's available liquidity and its ability to meet its obligations associated with financial liabilities.

Management believes that the additional capital resources obtained subsequent to period-end provides sufficient liquidity to meet its ongoing obligations and support its operating requirements for a period of at least 12 months from June 30, 2022. If the Corporation is unable to achieve its development targets or the acquisition by Hecla is not completed, resulting in the requirement to repay the secured loan facility, then the Corporation will be required to obtain additional funding to repay the loan and continue development at the Keno Hill Silver District.

COVID-19

In March 2020, the World Health Organization declared a global pandemic related to COVID-19. The impacts on global commerce have been far-reaching. There is ongoing uncertainty surrounding COVID-19 and the Corporation notes that COVID-19 pandemic risk remains a risk to development activities at Keno Hill.

These interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. These interim condensed consolidated financial statements follow the same accounting policies and methods of computation as compared with the most recent annual consolidated financial statements, being for the year ended December 31, 2021, which were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS"). Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the Corporation's most recent annual consolidated financial statements. These interim condensed consolidated financial statements were approved for issuance by the Board of Directors on August 11, 2022.

These interim condensed consolidated financial statements have been prepared on a going concern basis, under the historical cost method, except for those assets and liabilities that are measured at revalued amounts or fair values at the end of each reporting period. All figures are expressed in Canadian dollars unless otherwise indicated.

There are no IFRS's or International Financial Reporting Interpretations Committee interpretations that are not yet effective or early adopted that are expected to have a material impact on the Corporation.

The preparation of the interim condensed consolidated financial statements requires management to select accounting policies and make judgments and estimates that may have a significant impact on the interim condensed consolidated financial statements. Estimates are continuously evaluated and are based on management's experience and expectations of future events that are believed to be reasonable under the circumstances.

The following significant judgments were considered by management in the preparation of the interim condensed consolidated financial statements. All other significant judgments and estimates applied in the preparation of the interim condensed consolidated financial statements for the three and six month periods ended June 30, 2022 are consistent with those applied and disclosed in Note 5 to our consolidated financial statements for the year ended December 31, 2021.

Impairment and impairment reversals of mineral properties, plant and equipment

The Corporation reviews and evaluates the carrying value of each of its mineral properties, plant and equipment for impairment and impairment reversals when events or changes in circumstances indicate that the carrying amounts of the related asset may not be recoverable or previous impairment losses may become recoverable. The identification of such events or changes and the performance of the assessment requires significant judgment. Furthermore, management's estimates of many of the factors relevant to completing this assessment are subject to risks and estimation uncertainties that may further affect the determination of the recoverability of the carrying amounts of its mineral properties, plant and equipment.

As at June 30, 2022, indicators of impairment were identified, and the carrying value of the Keno Hill cash generating unit ("CGU") was compared with its recoverable amount. The recoverable amount of the Keno Hill CGU was determined by management based on the fair value less costs of disposal ("FVLCD") method using the implied value of Alexco based on the agreed transaction value with Hecla (Notes 1 and 20). Management assessed that the Keno Hill CGU carrying value exceeded its FVLCD and a write-down of mineral properties, plant and equipment was recognized on the interim condensed consolidated statements of income (loss) and comprehensive income (loss). Refer to Note 6 for further discussion on the significant judgements and estimates used in this assessment.

During the three and six month periods ended June 30, 2022, the Corporation recognized a write-down of $nil and $1,308,000 (2021 - $nil and $nil), respectively, of ore in stockpiles and concentrate to their net realizable value.

During the three and six month periods ended June 30, 2022, the Corporation capitalized to mineral properties, plant and equipment depreciation and depletion of $693,000 and $1,420,000 (2021 - $378,000 and $1,224,000), respectively.

During the three and six month periods ended June 30, 2022, the Corporation exercised buyout options on certain mining equipment leases, resulting in transfers from right of use assets to plant and equipment of $946,000 and $1,995,000 (2021 - $nil and $nil), respectively.

Sale of McQuesten Mineral Property Rights

Effective May 24, 2017, and as amended on July 8, 2019, the Corporation entered into an option agreement for Banyan Gold Corp. ("Banyan") to buy up to 100% of Alexco's McQuesten property. In three stages, Banyan may earn up to 100% of the McQuesten property, by incurring a minimum $2,600,000 in exploration expenditures (incurred), issuing 1,600,000 shares (issued), pay in staged payments a total of $2,600,000 in cash or shares and grant Alexco a 6% net smelter return ("NSR") royalty with buybacks totalling $7,000,000 to reduce to a 1% NSR royalty on gold and 3% NSR royalty on silver. Banyan satisfied the first stage of the option agreement, earning 51% of the McQuesten property. On April 29, 2022, the Corporation sold to Victoria Gold Corp. ("Victoria") all of its rights, benefits and interests in and to the remaining option consideration payable to Alexco by Banyan under the option agreement with Banyan in exchange for 447,142 shares of Victoria. On May 4, 2022, the Victoria shares were sold for net proceeds of $6,000,000, after selling costs and commissions.

Write-down of mineral properties, plant and equipment

As at June 30, 2022, the Corporation's net assets exceeded its market capitalization. Furthermore, on June 22, 2022, the Corporation announced that it would temporarily suspend milling operations to focus on advancing underground development at the Bermingham and Flame & Moth mines. Management considered these to be indications of impairment, and as such, carried out an assessment comparing the carrying value of the Keno Hill CGU with its recoverable amount. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Keno Hill CGU includes the assets and liabilities related to the Bermingham, Flame & Moth, and Lucky Queen mineral properties, and the Keno Hill District Mill, all within the mining operations reporting segment.

In performing this assessment, management was required to make significant judgments with respect to the allocation of assets and liabilities to the Keno Hill CGU. By their nature, such estimates are subject to risks and significant uncertainty. The recoverable amount of the Keno Hill CGU was determined by management based on the FVLCD method using the implied value of Alexco based on the agreed transaction value with Hecla. According to the terms of the transaction, each outstanding common share of Alexco will be exchanged for 0.116 of a share of Hecla common stock. Based on the results of this assessment, the Corporation recognized a write-down of mineral properties, plant and equipment on the interim condensed consolidated statements of income (loss) and comprehensive income (loss) totaling $97,048,000, attributed as follows:

In addition, management performed an assessment of its exploration and evaluation assets, which are each separately assessed for impairment. Management has concluded that no impairment indicators exist as at June 30, 2022.

During the six month period ended June 30, 2022, a portion of the embedded derivative related to the Wheaton silver purchase agreement ("SPA") was settled. The embedded derivative asset was calculated based on the discounted future cash flows associated with the difference between the original US$3.90 per ounce production payment Wheaton would pay for each payable ounce delivered under the SPA and the amended production payment under the amended SPA (amended March 29, 2017 and subsequently on August 5, 2020) which varies depending on the silver pricing curve (Note 15). The fair value of the embedded derivative asset was estimated based on the discounted future cash flows using a probability-based dynamic valuation model resulting in a fair value adjustment for the six month periods ended June 30, 2022 of $643,000 (2021 - $2,808,000).

The Corporation's lease liabilities are primarily for mining equipment leases related to heavy machinery and equipment dedicated to development and operations at Keno Hill. The weighted average incremental borrowing rate for lease liabilities as at June 30, 2022 was 8.18%.

The Corporation's undiscounted lease payments consisted of the following:

On September 23, 2021 and subsequently on January 18, 2022, the Corporation and its offtaker amended the existing offtake agreement to allow for an unsecured revolving credit facility (the "Facility") for up to US$10,000,000. The Facility allows the Corporation to request prepayments, in US$1,000,000 increments, which are repaid in five monthly instalments against future deliveries of concentrate or in cash. The interest rate on drawn amounts is equal to the three month London Interbank Offered Rate ("LIBOR") + 7.05%. The standby fee on undrawn amounts is 1.5% per annum, payable quarterly. In March and April 2022, the Corporation received prepayments totaling US$10,000,000. As at June 30, 2022, the Corporation has repaid US$2,500,000 of the Facility payable and incurred interest and standby fees of $378,000.

LIBOR settings are currently scheduled to cease publication after June 30, 2023. The Corporation and its offtaker will use an agreed industry standard alternative benchmark interest rate and expect to transition to the alternative rate as widespread market practice is established.

The Facility payable balance is summarized as follows:

Subsequent to period-end, during July 2022, the Corporation repaid the entire outstanding balance of the Facility payable.

Shareholders' Equity

The Corporation is authorized to issue an unlimited number of common shares without par value.

The following share transactions took place during the six month period ended June 30, 2022:

Equity Incentive Plans

The Corporation has three equity incentive plans consisting of a share option plan (the "Option Plan"), a restricted share unit plan (the "RSU Plan"), and a deferred share unit plan (the "DSU Plan") (collectively the "Equity Incentive Plans"). The maximum aggregate number of common shares issuable under the Equity Incentive Plans cannot exceed 10% of the number of common shares issued and outstanding from time to time, subject to the following requirements for each plan:

As at June 30, 2022, a total of 8,374,018 share options, 1,075,502 RSUs and 894,000 DSUs were outstanding under the Equity Incentive Plans and a total of 901,272 share options, 3,806,229 RSUs and 1,181,000 DSUs remain available for future granting.

During the three and six month periods ended June 30, 2022, the Corporation recorded total share-based compensation expense of $630,000 and $1,242,000 (2021 - $362,000 and $784,000), which related to the Equity Incentive Plans, of which $143,000 and $330,000 (2021 - $80,000 and $243,000) was recorded to mineral properties and $487,000 and $912,000 (2021 - $282,000 and $541,000) has been charged to income.

Share Options

Generally, share options have a maximum term of five years, and vest one-third on each of the first, second, and third anniversary dates of the grant date. The exercise price may not be less than the immediately preceding five-day volume weighted average price of the Corporation's common shares traded through the facilities of the exchange on which the Corporation's common shares are listed.

The changes in share options outstanding are summarized as follows:

During the three and six month periods ended June 30, 2022 and 2021, there were no share options granted.

Share options outstanding and exercisable at June 30, 2022 are summarized as follows:

During the three and six month periods ended June 30, 2022, there were no share options exercised. The weighted average share price at the date of exercise for share options exercised during the three and six month periods ended June 30, 2021 was $3.36 and $3.65, respectively.

Restricted Share Units

Time-based RSUs vest one-third on each of the first, second, and third anniversary dates of the grant date. Performance-based RSUs vest at the end of the third year of the grant date and the number of units to be issued on the vesting date will vary from 0% to 200% of the number of performance-based RSUs granted, depending on the achievement of performance criteria.

The changes in RSUs outstanding are summarized as follows:

During the three and six month periods ended June 30, 2022 and 2021, there were no RSUs granted.

The weighted average share price at the date of vesting for RSUs during the six month period ended June 30, 2022 was $2.23 (2021 - $4.23), respectively.

Deferred Share Units

Only directors of the Corporation are eligible for DSUs and each DSU vests immediately and is redeemed upon a director ceasing to be a director of the Corporation. During the three and six month periods ended June 30, 2022 and 2021, the Corporation did not grant any DSUs. As at June 30, 2022, there were 894,000 fully vested DSUs outstanding.

The Corporation recorded revenue for the three and six month periods ended June 30, 2022 and 2021 as follows:

The Corporation recorded cost of sales for the three and six month periods ended June 30, 2022 and 2021 as follows:

The Corporation recorded general and administrative expenses for the three and six month periods ended June 30, 2022 and 2021 as follows:

Financial Assets and Liabilities

The carrying amounts of the Corporation's financial assets and liabilities is as follows:

The fair value of the embedded derivative asset related to the Wheaton SPA was estimated based on the discounted future cash flows using a probability-based dynamic valuation model resulting in a fair value adjustment during the six month periods ended June 30, 2022 of $643,000 (2021 - $2,808,000). The model relies upon inputs from the current mine plan less payable ounces already delivered. The model is updated quarterly for the Corporation's credit spread, Wheaton's credit spread, risk-free yield curve, silver price forward curve, historical silver price volatility, mineral reserves and resources and the production profile. Management estimates mineral reserves and resources and production profile, based on information compiled and reviewed by management's experts. Payments from Wheaton are inversely related to the silver price; if, for example, silver prices were to increase or decrease from the current spot and forward prices as at June 30, 2022 by 10% per ounce and all other assumptions remained the same, the approximate derivative asset value would be $20,577,000 and $26,479,000, respectively.

Provisionally priced trade receivables consist of amounts receivable under the Corporation's offtake agreement. Changes in the fair value of these receivables are recorded as other revenue within mining operations revenue at each period end using quoted forward metal prices obtained from futures exchanges.

Investments in marketable securities consist of investments in publicly traded companies. Changes in the fair value of these investments are recorded through other comprehensive income (FVTOCI) using quoted prices obtained from securities exchanges.

The carrying amounts of all of the Corporation's other financial assets and liabilities, carried at amortized cost, reasonably approximate their fair values due to their short-term nature.

Supplemental cash flow information for the three and six month periods ended June 30, 2022 and 2021 is as follows:

The Corporation had two operating segments during the three and six month periods ended June 30, 2022 and 2021. The first operating segment is mining operations, which includes the production of silver, lead and zinc concentrates, underground mining development, and exploration and evaluation activities. The second operating segment is reclamation management services, which is focused on the clean up of historical liabilities of the Keno Hill Silver District through ERDC under a contract with the Federal Government of Canada. The Corporation's executive head office and general corporate administration are included within 'Corporate and Other' to reconcile the reportable segments to the consolidated financial statements. An operating segment is a component of an entity that engages in business activities. Operating results are reviewed by the chief operating decision maker, Alexco's Chief Executive Officer, with respect to resource allocation and for which discrete financial information is available.

Segmented information as at and for the three and six month periods ended June 30, 2022 and 2021 is summarized as follows:

The remuneration of directors and those persons having authority and responsibility for planning, directing and controlling activities of the Corporation for the three and six month periods ended June 30, 2022 and 2021 was as follows:

As at June 30, 2022, the Corporation's contractual obligations are as follows:

On July 4, 2022, the Corporation entered into a definitive arrangement agreement with Hecla, as assigned and amended, pursuant to which 108, a subsidiary of Hecla, will acquire all of the outstanding common shares of Alexco that 108 does not already own (the "Arrangement"). Each outstanding common share of Alexco will be exchanged for 0.116 of a share of Hecla common stock implying consideration of US$0.47 per Alexco common share and a premium of 23% based on the companies' 5-day volume weighted average price on the NYSE and NYSE American on July 1, 2022. In addition, Hecla agreed to (i) provide an interim secured loan facility of up to US$30,000,000 to ensure the development and exploration at Keno Hill continues to be advanced and (ii) subscribe for an additional 8,984,100 common shares of Alexco bringing its ownership share in Alexco to 9.9%.

Hecla also entered into an agreement with Wheaton to terminate its silver streaming interest at Alexco's Keno Hill property in exchange for US$135,000,000 of Hecla common stock, conditional upon the completion of the acquisition of Alexco discussed above.

On July 19, 2022, Hecla and Alexco completed the US$30,000,000 secured loan facility and an affiliate of Hecla purchased 8,984,100 Alexco shares at $0.50 per share for proceeds of $4,492,050, which resulted in 9.9% of Alexco shares being held by Hecla or its affiliates. An initial amount of US$20,000,000 was immediately drawn on the loan facility and the remainder is available on a revolving basis, with the use of proceeds for working capital and capital expenditures purposes according to a plan jointly approved by Alexco and Hecla. The loan and equity financing are intended to provide Alexco with immediate working capital to continue development work at Keno Hill.

The transaction will be implemented by a Court-approved plan of arrangement under the Business Corporations Act (British Columbia) and requires the approval of: (i) 66 2/3% of the votes cast by the holders of Alexco's common shares, (ii) 66 2/3% of the votes cast by the affected securityholders of Alexco voting as a single class, and (iii) a majority of the votes cast by the holders of Alexco's common shares after excluding any votes of Hecla and other persons required to be excluded under Canadian Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, all at a special meeting to be held on August 30, 2022.

The Alexco-Hecla and Wheaton-Hecla transactions are each subject to applicable regulatory approvals and the satisfaction or waiver of customary closing conditions. The agreement provides for customary deal-protection provisions, including a non-solicitation covenant on the part of Alexco, a right for Hecla to match any superior proposal and a termination fee of US$10,000,000, payable by Alexco to Hecla, under certain circumstances.

The special meeting of securityholders of Alexco will be held on August 30, 2022, with the acquisition expected to close on September 7, 2022. The Meeting Materials have been filed by Alexco on SEDAR and EDGAR and are available under Alexco's profile at www.sedar.com and on EDGAR at www.sec.gov.

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