Alexco Resource Corp.
Annual Report 2013

Plain-text annual report

ANNUAL FINANCIAL REPORT DECEMBER 31, 2013 ALEXCO RESOURCE CORP. Building a Sustainable Future In Silver   Alexco Resource Corp. Management’s Discussion and Analysis For the Year Ended December 31, 2013 General This Management’s Discussion and Analysis (“MD&A”) of Alexco Resource Corp. (“Alexco” or the “Corporation”) is dated March 25, 2014 and provides an analysis of Alexco’s consolidated financial results for the year ended December 31, 2013 compared to those of the previous year. The following information should be read in conjunction with the Corporation’s December 31, 2013 consolidated financial statements with accompanying notes, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. All dollar figures are expressed in Canadian dollars unless otherwise stated. These documents and additional information on the Corporation are available on the Corporation’s website at www.alexcoresource.com and on the SEDAR website at www.sedar.com. Except where specifically indicated otherwise, the disclosure in this MD&A of scientific and technical information regarding exploration projects on Alexco’s mineral properties has been reviewed and approved by Alan McOnie, FAusIMM, Vice President, Exploration, while that regarding mine development and operations has been reviewed and approved by Scott Smith, P.Eng., former Bellekeno Mine Manager, both of whom are Qualified Persons as defined by National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”). Selected Financial Information Selected financial information from the Corporation’s three most recently completed financial years is summarized as follows: (expressed in thousands of dollars, except per share amounts) For the year ended December 31, 2013 For the year ended December 31, 2012 For the six month transitional year ended December 31, 2011 Revenue from mining operations Gross profit (loss) from mining operations Revenue from environmental services Gross profit from environmental services Revenue from all operations Gross profit from all operations Net income (loss) Adjusted net income (loss)1 Earnings (loss) per share – Basic Diluted Total assets Total long-term liabilities Dividends declared 43,114 (29) 16,319 8,849 59,433 8,820 (50,450) (4,313) ($0.81) ($0.81) 131,213 26,114 Nil 76,725 15,034 7,983 2,886 84,708 17,920 3,420 3,420 $0.06 $0.06 212,300 49,355 Nil 38,639 9,869 3,876 279 42,515 10,148 1,723 1,723 $0.03 $0.03 210,668 57,997 Nil 1 Adjusted net loss excludes amounts recorded with respect to impairment charges, and is a non-IFRS measure with no standardized meaning prescribed under IFRS. See page “Non-IFRS Measures – Adjusted Income (Loss)” on page 17. - 1 - Overall Performance Overall, Alexco reported a loss before taxes of $62,079,000 and a net loss of $50,450,000 for the year ended December 31, 2013, for a basic and diluted loss of $0.81 per share, on total revenues of $59,433,000. Included in these results are impairment charges on mining assets and investments totaling $57,126,000 before taxes. Excluding the effect of these impairment charges, the adjusted loss before taxes is $4,953,000 (see “Non-IFRS Measures – Adjusted Loss” on page 17), compared to income before taxes of $7,979,000 in 2012, with the difference due primarily to the effect of reduced silver production in the first quarter of 2013, combined with significantly lower silver prices in 2013 and the resultant suspension of Bellekeno mining operations effected as of early September 2013. Revenues from mining operations at Bellekeno in 2013 totaled $43,114,000, yielding a gross loss of $29,000. Metal prices for revenue recognized during 2013, weighted by dollar of revenue recognized, averaged US$23.94 per ounce for silver, US$0.98 per pound for lead and US$0.88 per pound for zinc, compared to US$31.54, US$0.95 and US$0.89 respectively in 2012. Silver prices for revenue recognized in the first, second and third quarters of 2013 were US$28.70, US$20.55 and US$22.06 respectively, reflecting the sharp reduction in silver prices experienced through 2013. Bellekeno mining and milling operations were suspended in early September 2013 in light of the reduced silver price environment, and the 2013 results accordingly reflect only 245 days of mining operations. Average mill throughput for the year was 271 tonnes per day (“tpd”) compared to 260 tpd in 2012. Total mine output during the year was 65,206 tonnes, compared to mine output of 86,354 tonnes in 2012. Total production during 2013 was 1,408,164 ounces of silver, 10.3 million pounds of lead and 3.4 million pounds of zinc. Cash costs of production in 2013 were $14.00 per ounce of payable silver (see “Non-IFRS Measures – Cash Costs of Production Per Ounce of Payable Silver” on page 16), compared to $11.89 in 2012. Sharp and significant declines in precious metal prices occurred over the course of the second quarter of 2013, with silver declining from US$28.64 at the beginning of the quarter to $18.86 at June 30. At the end of May 2013, following an initial sharp decline in silver prices during April, the Corporation announced it was implementing cost savings measures, including workforce reductions, a capital projects roll-back, vendor discussions, deferral of new mine commissioning and executive and board remuneration cutbacks. A second sharp decline in silver prices then occurred in mid June. As a result, the Corporation announced in July that it was beginning preparations to undergo a temporary and orderly suspension of operations at the Bellekeno mine prior to the onset of winter, and mining and milling operations subsequently ceased by early September. In December 2013, Alexco completed an NI 43-101 compliant preliminary economic assessment for certain of its holdings in the eastern portion of the Keno Hill Silver District (“EKHSD” and the “EKHSD PEA”) (see news release dated December 5, 2013 entitled “Alexco Releases Positive Preliminary Economic Assessment for Expanded Silver Production from Eastern Keno Hill Silver District, Yukon”). The EKHSD PEA is focused on production from the Flame & Moth deposit and consolidates supplemental production initially from the Bellekeno deposit and subsequently from the Lucky Queen deposit. It reflects one of a number of production strategies considered, and work remains ongoing to optimize the plan inputs. It is anticipated that one of the most significant factors that may lead to an improvement in the underlying fixed cost structure of the Keno Hill District mining operations will be an increase in mill throughput to full capacity of 407 tonnes per day. The Corporation’s environmental services business, the Alexco Environmental Group (“AEG”), recognized revenues of $16,319,000 in the year ended December 31, 2013 for a gross profit of $8,849,000, compared to revenues of $7,983,000 and a gross profit of $2,886,000 during 2012. In July 2013, an amended and restated Subsidiary Agreement (“ARSA”) was executed with the Government of Canada. As a result of that execution, included in 2013 revenues is $1,983,000 in retroactive fees, and included in cost of sales is an $850,000 reduction in the Corporation’s environmental services contract loss provision. The additional improvement in AEG revenues is attributed primarily to growth in AEG’s client base within the US market. Excluding the impacts from the execution of the ARSA and from changes in the estimate of the environmental services contract loss provision, in 2013 AEG achieved a gross margin of 42.5%, compared to 40.3% in 2012. The Corporation’s cash and cash equivalents at December 31, 2013 totaled $8,610,000 compared to $23,088,000 at December 31, 2012 and $7,922,000 at September 30, 2013, while net working capital totaled $15,316,000 compared to $25,727,000 and $15,356,000 for the same dates respectively. The decrease in cash and net working capital since 2012 primarily reflects the impact of substantially reduced cash inflows from Bellekeno mining operations due to the decline in silver prices, as well as capital expenditures primarily in the first half of the year on underground rehabilitation and access development activities at the Lucky Queen and Onek deposits, exploration in the Keno Hill District, the buy- - 2 - out of certain mining equipment from the contract miner at Bellekeno and the purchase of settlement shares in connection with annual grantings of awards under the Corporation’s restricted share unit plan, offset by net cash proceeds of $6.5 million from the issuance of flow-through shares in April 2013. Cash and net working capital were slightly increased over the fourth quarter, reflecting the cash-flow positive wind-up of Bellekeno mining operations, the one-time benefits realized from the execution of the ARSA, and profitable operations at AEG in general. Results of Operations Keno Hill Silver District All of the Corporation’s mining, development and exploration activities have been conducted on its Keno Hill Silver District properties. The Keno Hill Silver District is located in Yukon Territory approximately 330 kilometers north of Whitehorse in the vicinity of the villages of Mayo and Keno City and lies within the traditional territory of the First Nation of Na-Cho Nyak Dun (“FNNND”). The Corporation is party to a Comprehensive Cooperation and Benefits Agreement with the FNNND, setting out common understandings, obligations and opportunities arising from all of the Corporation’s activities within the Keno Hill District including exploration, care and maintenance, District closure activities and mine production. The Corporation’s various Keno Hill mineral properties comprise mineral rights spanning approximately 24,600 hectares, which contain numerous occurrences of mineral deposits and prospects including more than 35 historical silver mines. The Keno Hill District’s historical mines produced variously from approximately 1918 through 1988, with the Yukon Government's published Minfile database reporting that District production from 1941 totaled more than 217 million ounces of silver with average grades of 40.52 ounces per ton silver, 5.62% lead and 3.14% zinc. Historical mine operations closed down in 1989 when the former owner, United Keno Hill Mines Limited, put the District on care and maintenance in the face of rising costs and environmental regulatory pressures. The majority of the Corporation’s mineral rights within the Keno Hill District were acquired in 2006 by way of a purchase of assets from the interim receiver of United Keno Hill Mines Limited and its subsidiary, UKH Minerals Limited (collectively, “UKHM”). The Corporation’s mineral interest holdings in the Keno Hill Silver District comprise a number of deposits, including but not limited to Bellekeno, Flame & Moth, Lucky Queen, Onek, Silver King, Bermingham and Elsa Tailings. Bellekeno Mine As announced in the news release dated January 6, 2011 entitled “Alexco Achieves Commercial Production at Bellekeno”, the Corporation declared commercial production to have been achieved as of January 1, 2011 at its Bellekeno underground mine and ore processing complex. Mining was being accomplished by a mining contractor, using both mechanized and conventional cut-and-fill and long-hole mining methods of ore extraction. As noted above, Bellekeno mining and milling operations were suspended in early September 2013 as a consequence of the reduced silver price environment. - 3 - The following is a comparative summary of operating statistics for Bellekeno for the years ending December 31, 2013 and 2012: Ore tonnes mined Ore tonnes processed Mill throughput (tonnes per day) Grade of ore processed: Silver (grams per tonne) Lead Zinc Recoveries: Silver Lead in lead concentrate Zinc in zinc concentrate Concentrate production Lead concentrate: Tonnes produced Concentrate grade: Silver (grams per tonne) Lead Zinc concentrate: Tonnes produced Concentrate grade: Silver (grams per tonne) Zinc Production – contained metal Silver (ounces) Lead (pounds) Zinc (pounds) Sales volumes by payable metal Silver (ounces) Lead (pounds) Zinc (pounds) Recognized metal prices2 Silver (per ounce) Lead (per pound) Zinc (per pound) 20131 2012 65,206 66,297 271 705 7.7% 3.8% 94% 92% 61% 7,796 5,458 60% 3,450 360 45% 1,408,164 10,324,978 3,443,855 1,456,925 10,930,186 3,190,850 US$23.94 US$0.98 US$0.88 86,354 94,810 260 760 9.6% 4.8% 93% 90% 56% 13,000 4,965 63% 5,685 413 45% 2,150,959 18,183,755 5,676,284 2,033,821 17,207,146 4,771,416 US$31.54 US$0.95 US$0.89 Cash costs of production3 Per ounce of payable silver produced $14.00 $11.89 Notes: 1. The year ended December 31, 2013 represents a shortened operating period encompassing 245 days. 2. Recognized metal prices represent average metal prices for revenue recognized over the period, weighted by dollar of revenue recognized. 3. See “Non-IFRS Measures – Cash Costs Production Per Ounce of Payable Silver” on page 16. Cash costs of production for 2013 were $14.00 per ounce of payable silver (see “Non-IFRS Measure – Cash Costs of Production Per Ounce of Payable Silver” on page 16), compared to $11.89 in 2012. The increase in cash costs per ounce was due primarily to reduced mine production and lower grades in the first quarter due to sequencing of mining through lower-grade peripheral areas in the SW Zone, resulting in fewer production ounces to absorb the high fixed- cost structure of the mine. Additionally, cost-per-ounce gains during the third quarter from a 27% increase in production throughput relative to the first two quarters of the year were largely offset by lower absorption of fixed costs by reduced sustaining development activity in that quarter as well as costs associated with the orderly suspension of operations. - 4 - Revenue recognized from sale of concentrate in 2013 totaled $43,114,000 compared to $76,725,000 in 2012, reflecting the decrease in silver prices, the shorter 2013 operating year and slightly lower production grades. Revenue from sale of concentrate is recognized based on the estimated prices for contained payable metal on which final settlement will be determined, net of smelter treatment and refining charges, with changes in such estimated prices through to final settlement recorded as an adjustment to revenue during the period of change. The average metal prices for revenue recognized over 2013, weighted by dollar of revenue recognized, were US$23.94 per ounce for silver, US$0.98 per pound for lead and US$0.88 per pound for zinc, compared to US$31.54, US$0.95 and US$0.89 respectively in 2012. Onek and Lucky Queen In May 2013, the Corporation received an executed Type A Water Licence amendment from the Yukon Water Board, the final permit necessary to enable the Corporation to process mill feed from the Onek and Lucky Queen mines (see news release dated May 20, 2013 entitled “Alexco Receives Water Licence Amendment”). However, in light of the decline in silver prices and the decision to suspend mining operations at Bellekeno, plans for initiation of production from Onek and Lucky Queen have been deferred. Eastern Keno Hill Silver District As noted under Overall Performance, in December 2013 Alexco completed an NI 43-101 compliant preliminary economic assessment for certain of its holdings in the EKHSD (see news releases dated December 5, 2013 entitled “Alexco Releases Positive Preliminary Economic Assessment for Expanded Silver Production from Eastern Keno Hill Silver District, Yukon” and dated December 12, 2013 entitled “Alexco Files Eastern Keno Hill Silver District Technical Report”). The EKHSD PEA is focused on production from the Flame & Moth deposit and consolidates supplemental production initially from the Bellekeno deposit and subsequently from the Lucky Queen deposit. It reflects one of a number of production strategies considered, and work remains ongoing to optimize the plan inputs. It is anticipated that one of the most significant factors that may lead to an improvement in the underlying fixed cost structure of the Keno Hill District mining operations will be an increase in mill throughput to full capacity of 407 tonnes per day. The EKHSD PEA outlines a project with an initial nine-month construction period followed by a 5.5 year period of silver production anchored by the Flame & Moth deposit. It provides for an annual delivery of an average of 3.1 million ounces of payable silver, 6.8 million pounds of lead, 6.6 million pounds of zinc and 1,050 ounces of gold from approximately 150,000 tonnes per year of consolidated mine and mill production. The after-tax internal rate of return is 38% and the after-tax net present value at a 5% discount rate is $29.6 million, with a 3.5 year payback period. In order to fund the $45.3 million initial capital program envisioned in the EKHSD PEA, an initial investment of approximately $25 million will be required with the balance forecast under the EKHSD PEA to be funded from operating cash flows. Roughly half of the $45 million capital program will be deployed to drive an initial decline and raise and establish underground infrastructure at the Flame & Moth deposit. Approximately 17% or 163,000 tonnes of mineable resource, primarily at Bellekeno and Flame & Moth, has been eliminated from the PEA mine plan and remains to be considered should underlying costs and obligations be further optimized. The consolidated mine production under the EKHSD PEA is primarily derived from indicated mineral resources, though approximately 6% is derived from inferred mineral resources. Readers are cautioned that mineral resources are not mineral reserves and do not have demonstrated economic viability. Furthermore, the PEA is preliminary in nature; it includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves; and there is no certainty that the PEA will be realized. The EKHSD PEA reflects the resource estimate for Flame & Moth announced in January 2013, incorporating drill results from the 2012 exploration program (see news release dated January 31, 2013 entitled “Alexco Expands Flame & Moth Indicated Resource to 22.9 Million Ounces of Silver; Resource Grade Increased, Deposit Remains Open”) and comprising 1,378,000 tonnes indicated grading 516 grams per tonne silver, 1.72% lead and 5.70% zinc plus another 107,000 tonnes inferred grading 313 grams per tonne silver, 0.86% lead and 4.21% zinc. The Flame & Moth resource model comprises the north-northeast striking, moderately southeast dipping Flame Vein that is divided into two segments by the northwest striking Mill Fault. The structure hosting the Flame Vein mineralization is characterized by broad structural zones, ranging between 2 meters and 33 meters in true thickness. The mineralization comprises multiphase quartz and siderite veining up to 11.7 meters true width developed within the host fault structure, and locally contains massive galena, sphalerite, pyrite, and pyrrhotite with associated silver - 5 - sulphosalts, arsenopyrite and chalcopyrite. Gold is locally present at grades up to 6.85 grams per tonne. The resources as currently defined have a surface trace of approximately 600 meters drilled to a depth of 350 meters from surface. Further surface drilling was carried out at Flame & Moth during summer 2013, and confirmed a further 220 meter extension of the mineralized Flame Vein to the southwest of the currently defined resource (see news release dated September 18, 2013 entitled “Alexco Extends Flame & Moth to More Than 900 Meters in Strike Length; Silver Grades to 28.8 Ounces per Ton Over 5.6 Meters”). The deposit remains open down plunge to the southwest, and the hosting structure to the northeast. In addition, results from 2013 surface drilling at the Flame & Moth West prospect (previously called the Bulldozer prospect), approximately one-half kilometer west of the Flame & Moth deposit, returned up to 28.7 ounces per ton silver over 0.85 meters true width on a separate but probably related structure. This confirmation of the 2012 Flame & Moth West discovery indicates the presence of a locally mineralized NNE-SSW trending corridor that is prospective over two kilometers in the immediate Christal Lake area and that may extend a further six kilometers northeast to the Sadie Ladue deposit. The EKHSD PEA also reflects an updated resource statement for Bellekeno, incorporating a combination of original resource data, new drilling carried out in 2011 and early 2012, underground production data, and revised pricing and recoveries. The current resource estimate for Bellekeno, depleted for production through September 2013, comprises 262,000 tonnes indicated grading 585 grams per tonne silver, 3.5% lead and 5.3% zinc plus another 243,000 tonnes inferred grading 428 grams per tonne silver, 4.1% lead and 5.1% zinc. The resource estimate for Lucky Queen reflects that announced in July 2011 (see the news release dated July 27, 2011 entitled “Alexco Announces Initial Resource Estimates for Lucky Queen and Onek”) and comprises 124,000 tonnes indicated grading 1,227 grams per tonne silver, 2.57% lead and 1.72% zinc plus another 150,000 tonnes inferred grading 571 grams per tonne silver, 1.37% lead and 0.92% zinc. Other Keno Hill District Properties With respect to Alexco’s Elsa tailings project, where approximately 9.5 million ounces of silver have been defined within approximately 2.5 million tonnes of historical Elsa tailings (see the news release dated May 6, 2010 entitled “Alexco Announces Initial Elsa Tailings Resource Estimate, Keno Hill”), the completion of engineering and initial economic analysis work has been deferred given the current reduced silver price environment. Environmental Services Under AEG, the Corporation operates an environmental services business providing a range of services to the mining industry and other clients. Through its wholly owned subsidiaries, Access Mining Consultants Ltd. (“Access”), Alexco Resource U.S. Corp. and Elsa Reclamation & Development Company Ltd. (“ERDC”), the Corporation provides a variety of mine and industrial site related environmental services including management of the regulatory and environmental permitting process, environmental assessments, remediation solutions and reclamation and closure planning. The Corporation also owns certain patent rights allowed and pending related to mine reclamation and closure processes including the in situ immobilization of metals in groundwater, soils, waste stacks and pit lakes. AEG recognized revenues of $16,319,000 in the year ended December 31, 2013 for a gross profit of $8,849,000 compared to revenues in 2012 of $7,983,000 and a gross profit of $2,886,000. As part of the Corporation’s acquisition in 2006 of the UKHM mineral rights in the Keno Hill District, ERDC entered into an agreement (the “Subsidiary Agreement”) with the Government of Canada and the Government of Yukon (collectively, “Government”). Under the Subsidiary Agreement, ERDC was retained by Government as a paid contractor responsible on a continuing basis for the environmental care and maintenance and ultimate closure reclamation of the former UKHM mineral rights. The Subsidiary Agreement provided that ERDC share the responsibility for the development of the ultimate closure reclamation plan with the Government of Canada, for which it would receive fees of 65% of agreed commercial contractor rates, and this plan development is currently ongoing. Upon acceptance and regulatory approval, the closure reclamation plan will be implemented by ERDC at full agreed contractor rates. During the period required to develop the plan and until the closure plan is executed, ERDC is also responsible for carrying out the environmental care and maintenance at various sites within the UKHM mineral rights, for a fixed annual fee adjusted each year for certain operating and inflationary factors and determined on a site-by-site basis. Under the Subsidiary Agreement, the portion of the annual fee amount so determined which was billable by ERDC in respect of each site reduced by 15% each year until all site-specific care and maintenance activities were replaced by closure reclamation activities; provided however that should a closure reclamation plan be prepared but not accepted and approved, the - 6 - portion of annual fees billable by ERDC would revert to 85% until the Subsidiary Agreement was either amended or terminated. ERDC receives agreed commercial contractor rates when retained by government to provide environmental services in the Keno Hill District outside the scope of care and maintenance and closure reclamation planning under the Subsidiary Agreement. In July 2013, the Corporation executed an amended and restated Subsidiary Agreement, the ARSA, with the Government of Canada. Recognizing that developing the closure reclamation plan is more complicated than originally anticipated, the ARSA provides for the Government of Canada to contribute a higher proportion of closure plan development costs than provided for under the Subsidiary Agreement, retroactive to 2009. As a result, included in revenues for AEG for 2013 is $1,983,000 in one-time retroactive fees. Going forward, ERDC will receive 95% of agreed commercial contractor rates for ongoing development of the closure reclamation plan. Furthermore, with respect to care and maintenance activity during the closure planning phase, the original reducing fee scale is replaced by a fixed fee of $850,000 per year, representing approximately 50% of estimated fully-billable care and maintenance fees. As a result, included in AEG cost of sales is an $850,000 reduction in the Corporation’s environmental services contract loss provision, partially offset by a $107,000 increase due to an extension of the estimated date by which the care and maintenance phase will end to August 2018. Beyond the retroactive fees from the ARSA, the additional improvement in AEG revenues is attributed primarily to growth in AEG’s client base within the US market. Excluding the impacts from the execution of the ARSA and from changes in the estimate of the environmental services contract loss provision, in 2013 AEG achieved a gross margin of 42.5% compared to 40.3% in 2012, in part reflecting the higher margins realized in 2013 on closure reclamation planning activity as a result of the ARSA. General, Administrative and Corporate General and administrative expenses in 2013 totaled $12,471,000 compared to $16,657,000 in 2012. Included in expenses in 2012 was $0.8 million in severance costs related to the departure of an executive officer of the Corporation. The balance of the reduction in general and administrative expenses reflects the impact of cost reduction measures implemented over summer 2013, as well as the reduction in Bellekeno mine site overhead costs following the suspension of operations in early September, partially offset by costs attributed to workforce reductions implemented at the end of May 2013. Severance costs related to the suspension of operations as of September 2013 were nominal as the planned nature of the suspension meant working notice could be given to affected staff. Outlook In light of the decision to suspend production from Bellekeno, the full-year 2013 production guidance previously provided was withdrawn following the third quarter of 2013. Re-start of mining operations is dependent on a number of factors, including sustained improvements in silver markets and the effectiveness of cost structure reduction measures. One of the most significant factors that may lead to an improvement in the underlying fixed cost structure of the Keno Hill District mining operations is an increase in mill throughput to full capacity, and the Corporation will therefore continue to optimize and advance the EKHSD PEA. Bringing Flame & Moth into production is a key aspect of the plan, and the permitting process for development of the Flame & Moth deposit was initiated in December 2013. With respect to the economic climate and prices for silver, lead and zinc, being the primary metals found in the Bellekeno resource in particular and within the Keno Hill District historically, prices for silver declined significantly during the year, while those for lead and zinc were somewhat more stable and range-bound. Both gold and silver prices experienced a sharp and significant decline in mid April 2013, with spot silver prices falling from US$27.40 to US$23.54 in the span of a single day. A second significant decline in silver prices then occurred in mid June with spot prices falling to lows of less than US$19 per ounce, and for the last four months of the year silver ranged between roughly US$19.50 and US$22. Lead and zinc were relatively more stable, oscillating in ranges of roughly US$0.90 to US$1.00 for lead and US$0.80 and US$0.90 for zinc. As at the date of this MD&A, prices are approximately US$19.93 per ounce silver, US$0.93 per pound for lead and US$0.88 per pound for zinc and the Canadian-US exchange rate is approximately US$0.89 per CAD. Consensus investment analyst forecasts over the next two years for silver average US$21.00 to US$21.50 per ounce, for lead average in the range of US$0.95 to US$1.00 per pound, and for zinc average in the range of US$0.93 to US$1.00 per pound, with the Canadian-US exchange rate forecast to average in the range of US$0.90 to US$0.91 per CAD (see “Risk Factors”, including but not limited to “Potential Profitability Of Mineral - 7 - Properties Depends Upon Other Factors Beyond the Control of the Corporation” and “General Economic Conditions May Adversely Affect the Corporation’s Growth and Profitability” thereunder). Alexco’s exploration plans for 2014 are currently budgeted at approximately $5 million and mobilization is currently underway. Exploration totalling at least 10,000 meters of surface drilling will be focused on better defining the potential limits of mineralization and adding immediate resources at the Flame & Moth deposit, and further defining the nearby Flame & Moth West discovery. Additional surface exploration work at Bellekeno and Bermingham is also under consideration. With respect to AEG, the Corporation remains engaged in the on-going environmental care and maintenance program and reclamation and closure projects at Keno Hill under its contract through ERDC with Canada and in accordance with the ARSA, and continues to service its private sector client base in the Yukon through Access. AEG intends to continue expanding its environmental services activities, throughout northern and eastern Canada, in the United States and elsewhere throughout North and South America. AEG has developed a strong client base within the mining industry in the last several years, and has also been able to establish new lines of business related to industrial site soil remediation, water treatment and historical mine pool remediation. Results of Operations – Fourth Quarter In the three months ended December 31, 2013, Alexco reported a loss before taxes of $505,000 on total revenues of $5,163,000. This compares to income before taxes of $737,000 on total revenues of $20,309,000 for the three months ended December 31, 2012. Mining operations revenue in the three months ended December 31, 2013 totaled $665,000, yielding a gross profit of $200,000, compared to revenues in the same period in 2012 of $18,897,000 and a gross profit of $3,043,000, with the difference due to the fact that the Bellekeno mine suspension was effected in early September 2013 and hence fourth quarter 2013 results reflect primarily the final concentrate deliveries completed as of mid October, plus the effect of price adjustments through final concentrate settlement periods. Metal prices for revenue recognized during this three month period, weighted by dollar of revenue recognized, averaged US$19.63 per ounce for silver, US$0.95 per pound for lead and US$0.88 per pound for zinc, compared to US$30.71, US$1.01 and US$0.91 respectively in the three months ended December 31, 2011. Revenues from AEG in the fourth quarter of 2013 totaled $4,498,000 for gross profit of $2,418,000, compared to revenues in 2012 of $1,412,000 and gross profit of $888,000. Included in the 2013 fourth quarter revenue is $483,000 in one-time retroactive fees billed pursuant to the ARSA, with the additional improvement in AEG revenues attributed primarily to growth in AEG’s client base within the US market. General and administrative expenses in the fourth quarter of 2013 totaled $2,939,000 compared to $4,169,000 in 2012. The decrease in part reflects a $0.5 million recoverability provision booked in 2012 against AEG trade receivables, with the remainder reflecting the Bellekeno mine suspension and the effect of 2013 cost cutting initiatives. - 8 - Summary of Quarterly Results Key financial information for the most recent eight quarters is summarized as follows, reported in thousands of Canadian dollars except for per share amounts: (unaudited) Period 2012-Q1 2012-Q2 2012-Q3 2012-Q4 2012 Total 2013-Q1 2013-Q2 2013-Q3 2013-Q4 2013 Total Revenue Gross Profit (Loss) Net Income (Loss) Basic Earnings (Loss) per Share Diluted Earnings (Loss) per Share Expenditures on Mineral Properties 24,745 19,565 20,089 20,309 84,708 16,715 14,161 23,394 5,163 59,433 7,214 1,744 5,031 3,931 17,920 839 (928) 6,291 2,618 8,820 1,340 (2,666) 5,265 (519) 3,420 (2,332) (49,205) 2,219 (1,131) (50,450) $0.02 $(0.04) $0.09 $(0.01) $0.06 $(0.04) $(0.81) $0.04 $(0.01) $(0.81) $0.02 $(0.04) $0.09 $(0.01) $0.06 $(0.04) $(0.81) $0.04 $(0.01) $(0.81) 6,459 9,377 10,012 8,179 34,027 7,040 4,945 1,935 439 14,359 Note: Sum of all the quarters may not add up to the yearly totals due to rounding The strong revenue in 2012-Q1 reflects significantly increased sales volumes of payable metals at Bellekeno following record production in the quarter before, while the increased gross profit from 2012-Q1 reflects the impact of unit costs of production at the Bellekeno being notably lower for the same reason. The gross profit from 2012-Q2 reflects the impact of significantly increased unit costs from reduced head grades and mill throughput as well as reduced base metal credits from lower realized lead and zinc prices. The revenue and gross profit of 2013-Q1 reflect the adverse impact of reduced mine production and head grade for the quarter at Bellekeno due to the effect of sequencing constraints which resulted in mining from lower-grade peripheral areas of the mineable resource. The revenue and gross loss of 2013-Q2 reflect the impact of significantly lower realized silver prices. The revenue and gross profit of 2013-Q3 reflect the benefits recognized following the execution of the ARSA. The revenue and gross profit of 2013-Q4 reflect the suspension of Bellekeno mining operations as of September 2013, as well as further benefits recognized from the execution of the ARSA. The net income of 2012-Q1, and to a lesser extent 2013-Q1, reflect costs associated with the Corporation’s annual cash bonuses and incentive share option awards to its employees, including resultant share-based compensation expense recognitions of $1,284,000 and $1,088,000 respectively. The net income of 2012-Q3 includes the $6,346,000 gain, pre-tax, on the Corporation’s sale of its remaining interest in the Brewery Creek property. The net income of 2012-Q4 reflects higher overhead costs due to development and permitting efforts regarding Onek and Lucky Queen and the finalizing negotiations pertaining to the pending amendment to the Subsidiary Agreement, offset by favourable foreign exchange gains. The net loss of 2013-Q2 reflects the impact of impairment charges recorded in respect of Keno Hill district mining assets as well as the Corporation’s long-term investment in Americas Bullion Royalty Corp. The mineral property expenditures in 2012-Q1 through 2012-Q3 reflect the 2012 exploration program as well as expenditures on rehabilitation and access development at the historical Lucky Queen and Onek mines. The mineral property expenditures in 2013-Q2 reflect reduced expenditures on both exploration and on Bellekeno sustaining development, plus remaining development costs at Onek. The expenditures in 2013-Q3 and 2013-Q4 reflect further reductions in both exploration and Bellekeno sustaining development in light of implemented cost reduction measures and the suspension of Bellekeno mining operations as of September 2013. Liquidity and Capital Resources At December 31, 2013, the Corporation had cash and cash equivalents of $8,610,000, and net working capital of $15,316,000. The Corporation faces no known liquidity issues in any of its financial assets. Cash generated from operating activities was $3,407,000 for the year ended December 31, 2013 versus $14,057,000 for 2012, reflecting the impact of sharply reduced silver prices and the suspension of Bellekeno mining operations as of September 2013. Accounts receivable, inventories and accounts payable are all significantly lower, also reflecting the suspension of mining operations. Cash used in investing activities was $22,639,000 for 2013 versus $33,270,000 - 9 - for 2012. While exploration and evaluation expenditures were consistent with the prior year, expenditures on mining operations properties were significantly reduced, to some extent because the 2012 expenditures include rehabilitation and access development activity at the Onek and Lucky Queen mines, and otherwise due primarily to decreased Bellekeno sustaining development expenditures in 2013 leading up to the suspension of mining operations in September. Purchases of property, plant and equipment were significantly reduced in 2013 for the same reason. Under the silver streaming interest held by Silver Wheaton Corp. (“Silver Wheaton”), Silver Wheaton is purchasing from the Corporation an amount of refined silver equal to 25% of the payable silver produced by the Corporation from its Keno Hill District mineral properties, if and when such payable silver is delivered to an off-taker and as the Corporation is paid for such payable silver. Silver Wheaton has paid the Corporation advance amounts totaling US$50 million, the last of which was received in January 2011, and for each ounce of silver purchased must pay the Corporation an additional cash amount of the lesser of US$3.90 (increasing by 1% per annum after the third year of full production) and the prevailing market price at the time of delivery. Contractually, the balance of advance payments received is reduced on each silver delivery by the excess of the prevailing market value of the silver at the time of delivery over the per-ounce cash amount paid by Silver Wheaton at the time of delivery. After the initial 40 year term of the streaming interest, the Corporation is required to refund the balance of any advance payments received and not yet reduced through silver deliveries. The Corporation would also be required to refund the balance of advance payments received and not yet reduced if Silver Wheaton exercised its right to terminate the streaming interest in an event of default by the Corporation. The Corporation will be required to refund a pro-rata portion of the balance of the advance payments not yet reduced to the extent the Bellekeno mine has not achieved production throughput of 400 tonnes of ore per day over a 30 day period by June 30, 2015, as extended pursuant to an amendment entered into effective March 11, 2014. The maximum amount of any such refund is US$9,750,000. Commencing January 2014, and ending the earlier of June 30, 2015 and the completion of the 400 tonnes per day throughput test, as extended by the same amendment, the Corporation may be required to sell more than 25% of the payable silver produced, depending on the extent by which the 400 tonnes per day test has not yet been met. In support of its rights under the silver streaming interest, Silver Wheaton holds a security interest in substantially all of the Corporation’s plant and equipment and mineral properties located within the Keno Hill District. Effective April 23, 2013, the Corporation issued 2,100,000 flow-through common shares on a private placement basis at a price of $3.35 per share for aggregate gross proceeds of $7,035,000. Net cash proceeds from the issuance were $6,483,000, after issuance costs comprised of the agent’s commission of $472,000 and other issuance costs of $80,000. As a consequence of its commitment to renounce deductible exploration expenditures to the purchasers of the flow-through shares, as of December 31, 2013 the Corporation is required to incur further renounceable exploration expenditures totaling $5,008,000 by December 31, 2014. With its cash resources and net working capital on hand at December 31, 2013, and assuming no re-start of mining operations, the Corporation anticipates it will have sufficient capital resources to carry out all of its currently-anticipated exploration and development programs, and service the working capital requirements of its mine site care and maintenance, exploration activity, environmental services business and corporate offices and administration, for at least the next 12 month period. However, as noted elsewhere in this MD&A, re-start of mining operations is dependent on a number of factors, including sustained improvements in silver markets and the effectiveness of cost structure reduction measures, and the uncertainties around the achievement of these factors are significant. Furthermore, a re- start of mining operations is likely to require additional capital investment. And in the longer term, following a re-start of mining operations, as non-renewable resources mines by their nature have a finite life. Because of these factors, combined with its long term objectives for the exploration and development of its mineral properties, the Corporation is likely to require additional funding. Historically, the Corporation’s main sources of funding have been from mining operations and equity issuances, though all sources of finance reasonably available to it will be considered, including but not limited to issuance of new capital, issuance of new debt and the sale of assets in whole or in part, including mineral property interests. There can be no assurance of a re-start of mining operations or continued access to finance in the future, and an inability to generate or secure such funding may require the Corporation to substantially curtail and defer its planned exploration and development activities. - 10 - The following table summarizes the current contractual obligations of the Corporation and associated payment requirements over the next five years and thereafter: Contractual Obligations (expressed in thousands of dollars) Payments Due by Period Total Less than 1 year 1 – 3 years 3 – 5 years After 5 years Operating leases Purchase obligations Decommissioning and rehabilitation provision (undiscounted basis) $ 788 370 $ 425 170 $ 363 200 $ Nil Nil $ Nil Nil 4,780 24 1,261 1,279 2,216 Total $ 5,938 $ 619 $ 1,824 $ 1,279 $ 2,216 Share Data As at the date of this MD&A, the Corporation has 62,573,898 common shares issued and outstanding, including shares held by the Corporation’s restricted share unit plan trustee. In addition, there are outstanding incentive share options for a further 4,211,163 common shares. Use of Financial Instruments All of the Corporation’s cash and cash equivalents at December 31, 2013 were held in the form of demand deposits. The Corporation’s restricted cash and deposits were held in the form of term deposits and demand deposits. The Corporation’s other financial instruments were its trade and other accounts receivable, including embedded derivative, its accounts payable and accrued liabilities, and its long-term investments in common shares and warrants of Americas Bullion Royalty Corp (“AMB”). At December 31, 2013, a total of $4,173,000 of the Corporation’s restricted cash and deposits represent security provided to regulatory bodies under safekeeping agreements in accordance with its various operating permits. This security is in respect of mine-site reclamation at certain of the Corporation’s mineral properties, and is releasable back to the Corporation as and when reclamation activities are completed. A further $4,992,000 (US$5,000,000) represents security provided in the first quarter of 2012 to support certain cost performance commitments under an AEG remediation contract. The balance of the Corporation’s restricted cash and deposits represent security provided in respect of certain long-term operating lease commitments. Though all term deposits held at December 31, 2013 are included in long term restricted cash, as individual financial instruments they carried initial maturity periods of one year or less. They have been classified as investments held to maturity and accordingly are carried at amortized cost using the effective interest method. All term deposits held are high grade, low risk investments, generally yielding between 1% and 2% per annum, and their carrying amounts approximate their fair values given their short terms and low yields. The carrying amounts of the Corporation’s trade and other accounts receivable and accounts payable and accrued liabilities are estimated to reasonably approximate their fair values, while the carrying amount of the long-term investments in common shares and warrants of AMB are marked to fair value at each balance sheet date. The fair values of all of the Corporation’s financial instruments measured at December 31, 2013, other than cash and cash equivalents and the common shares of AMB included in long-term investments, constitute Level 2 measurements within the fair value hierarchy defined under IFRS, including the embedded derivative in accounts receivable related to sales of concentrate for which final settlement has not yet occurred. The fair value of cash and cash equivalents and the common shares of AMB constitute Level 1 measurements. The fair value of the investment in warrants of AMB at December 31, 2013 was estimated using the Black-Scholes option pricing model, assuming a risk-free interest rate of 1.10% per annum, an expected life equal to full remaining term, an expected volatility of 103% and no expected dividends. Substantially all of the Corporation’s cash, demand deposits and term deposits are held with major financial institutions in Canada. With respect to these instruments, management believes the exposure to credit risk is insignificant due to the nature of the institutions with which they are held, and that the exposure to liquidity and interest rate risk is similarly insignificant given the low-risk-premium yields and the demand or short-maturity-period character of the deposits. - 11 - The Corporation’s accounts and other receivables at December 31, 2013 total $4,929,000, of which $56,000 relates to sales of concentrates, including the embedded derivative, with the balance comprised primarily of AEG trade receivables and goods and services tax refunds receivable from government. The Corporation’s maximum credit risk exposure in respect of its receivables is represented by their carrying amount. All of the Corporation’s concentrate is sold to one customer, Glencore Ltd., Stamford (“Glencore”), a branch of a wholly owned subsidiary of the Swiss-based international natural resources group Glencore International AG. All receivables relating to sales of concentrate are due from Glencore, and are accordingly exposed to credit risk that is highly concentrated. Management closely monitors the financial status of Glencore as publicly reported, and as at the date of this MD&A considers the credit risk under these concentrate receivables to be insignificant. Management actively monitors exposure to credit risk under the Corporation’s remaining receivables as well, particularly AEG trade receivables, and considers the risk of loss to be significantly mitigated due to the financial strength of AEG’s major customers which include government organizations as well as substantial corporate entities. As at December 31, 2013, AEG trade receivables are recorded net of a recoverability provision of $485,000. The embedded derivative within accounts receivable relating to sales of concentrate is generally exposed to market risk from prices for payable metals, primarily silver, lead and zinc. However, as at December 31, 2013, final pricing had been established for all concentrate sales not yet fully settled, and accordingly there was no remaining exposure to metal price market risk at that date. The prices of silver, lead and zinc are affected by numerous macroeconomic factors such as interest rates, exchange rates, inflation or deflation, global and regional supply and demand and general worldwide political and economic conditions, as well as fluctuations of the value of the US dollar given the price of each of these metals on the world market is widely quoted in that currency. Management monitors these various factors as part of its overall capital management activities, including tracking published analyst commodity price forecasts. In situations of significant anticipated volatility in metal prices or where warranted by unique project-specific circumstances, management may consider hedging the metal prices to which it is exposed. However, it is the Corporation’s primary policy that it will not hedge the metal prices to which it is exposed, particularly that for silver. Substantially all of the Corporation’s property, plant and equipment and mineral properties are located in Canada; all of its mining operations occur in Canada; and a significant majority of AEG’s revenues are earned in Canada. However, the Corporation’s sales of concentrate are effected in US dollars, as are a portion of AEG’s revenues, and receivables arising therefrom are accordingly denominated in US dollars. Also, while a significant majority of the Corporation’s operating costs are denominated in Canadian dollars, it does have some exposure to costs, and therefore accounts payable and accrued liabilities, denominated in US dollars. Consistent with its primary policy, the Corporation has not employed any hedging activities in respect of the prices for its payable metals. The Corporation has also not employed any hedging activities in respect of its exposure to fluctuations in the value of the US dollar. Off-Balance Sheet Arrangements The Corporation has no off-balance sheet arrangements. Related Party Transactions The Corporation had no related party transactions during the year ended December 31, 2013. Critical Accounting Estimates The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts and the valuation of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the period reported. Management uses its best estimates for these purposes, based on assumptions that it believes reflect the most probable set of economic conditions and planned courses of action. - 12 - The critical accounting estimates used in preparing the Corporation’s financial statements are listed below. Future Commodity Prices and Foreign Currency Exchange Rates Management’s estimation of future commodity prices and foreign currency exchange rates is an important component of several estimates and assumptions management must make in preparing the financial statements, including but not limited to estimations and assumptions regarding the evaluation of the carrying amount of mineral properties and other assets, the estimation of decommissioning and rehabilitation provisions, the estimation of revenues and the value of the embedded derivative related to sales of concentrate, and the estimation of the net realizable value of inventories. Management bases its estimates of future commodity prices and foreign currency exchange rates primarily on consensus investment analyst forecasts, which are tracked and updated as published on generally a quarterly basis. Estimates are made by management regarding year-by-year prices and rates looking forward approximately three to four years, as well as for long-term prices and rates. With respect to estimates of future commodity prices and foreign currency exchange rates used in preparing the financial statements as at December 31, 2013, management has determined its best estimates of pricing for silver ranging from near-term US$21.00 to US$21.50 to long-term US$21.50 to US$22.00 per ounce; for gold ranging approximating US$1,275 per ounce near-term up to US$1,300 long-term; for lead ranging from near-term US$0.95 to US$1.00 to long-term US$0.95 up to $1.05 per pound; for zinc ranging from near-term US$0.93 to US$1.00 to long- term US$1.00 up to US$1.15 per pound; and for the Canadian dollar ranging from near-term US$0.90 to US$0.91 to long term US$0.92 to US$0.93. Commodity prices and foreign currency exchange rates are by nature difficult to predict and highly volatile, responding to changes in domestic, international, political, social and economic environments (see “Risk Factors”, including but not limited to “Potential Profitability Of Mineral Properties Depends Upon Other Factors Beyond the Control of the Corporation” thereunder). Although management makes its best estimates of these prices and rates at each reporting period, such estimates are nonetheless subject to a significant amount of inherent uncertainty. Changes in such prices and rates over time could result in material adjustments in the future to other estimates and assumptions on which they are based, and material variances of actual results from prior estimates and assumptions. Mineral Resources The Corporation estimates its mineral resources based on information compiled by appropriately qualified persons relating to estimated and complex geological and engineering data including the size, depth, shape and nature of the deposit and anticipated plans for mining, as well as estimates of commodity prices, foreign exchange rates, future capital requirements and production costs. These mineral resource estimates are used by the Corporation in many determinations required to prepare its financial statements, including evaluating the recoverability of the carrying amount of its non-current non-financial assets; determining rates of depreciation, depletion and amortization; determining the recognition in income each period of the amount of deferred advance payments received under the silver streaming interest; and estimating amounts of deferred income taxes. Although management makes its best estimates of the Alexco’s mineral resources, such estimates are nonetheless subject to a significant amount of inherent uncertainty. It is possible that changes in such estimated resources over time could result in material adjustments in the future to determinations on which they are based. Impairment of Non-Current Non-Financial Assets The Corporation records its interests in property, plant, equipment, mineral properties and intangible assets at cost, less related depreciation, depletion and amortization. Management reviews and evaluates the carrying value of each of its non-current non-financial assets for impairment when events or changes in circumstances indicate that the carrying amounts of the related asset may not be recoverable. If the recoverable amount, being the higher of the asset’s “fair value less cost of disposal” (“FVLCD”) and “value-in-use”, is less than the carrying amount of the asset, an impairment loss is recognized and the asset is written down to recoverable value. As at June 30, 2013, the carrying amount of the Corporation’s net assets exceeded its market capitalization, which was considered an indicator of potential impairment of the carrying amount of its non-current non-financial assets. In addition, sharp and significant declines in silver prices occurred during the three months ended June 30, 2013, and in July the Corporation announced a plan to suspend Bellekeno mining operations over the coming winter in light of the low silver price environment. As a result, the Corporation carried out a review of the carrying amounts of the non- - 13 - current non-financial assets in its mining operations segment, which segment was determined to be a cash generating unit (“CGU”) for this purpose. In carrying out this review, the Corporation was required to make significant judgments, including with respect to the allocation of assets to the mining operations CGU, as well as the selection and application of appropriate valuation methods. The Corporation was also required to make significant estimates and assumptions, including with respect to mine plan tonnages and grades, capital and operating costs, future commodity prices, foreign currency exchange rates, discount rates and net asset value multiples. Recoverable amount was determined based on estimated FVLCD, which for the mining operations CGU was determined to be greater than value in use. FVLCD for the mining operations CGU was determined based on the net present value of after-tax future cash flows expected to be generated within that unit. In addition, a net asset value multiple was applied to take account of certain additional value factors, particularly additional exploration potential and the benefit of optionality to the prices of silver, lead and zinc, being the main production metals of the unit. Factors were also applied for the expected benefit of potential operating cost optimizations. In making these determinations, metal prices over the next approximately four years were assumed to range from US$21.00 to US$23.50 for silver, US$0.93 to US$1.05 for lead and US$0.85 to $1.05 for zinc, and foreign currency exchange rates to be approximately US$0.96 per Canadian dollar, based on then-current consensus investment analyst forecasts. Expected future cash flows were discounted using a real after-tax rate of 10%, representing the time value of money and estimated risks specific to the assets under review. This estimate of FVLCD is categorized as Level 3 in the fair value hierarchy. Based on the results of its review, the Corporation recognized an impairment loss at June 30, 2013 against the mining operations CGU totaling $55,341,000 before taxes, of which $51,840,000 was attributed to mineral properties and $3,501,000 to property, plant and equipment. As at December 31, 2013, no new indicators of potential impairment have been identified with respect to the Corporation’s non-current non-financial assets. Exploration and evaluation assets are each separately assessed for impairment, and are not allocated by the Corporation to a CGU for impairment assessment purposes. As at June 30, 2013 and December 31, 2013, and pursuant to IFRS 6 Exploration For and Evaluation Of Mineral Resources, no indicators were identified which suggested the carrying amounts of the Corporation’s exploration and evaluation assets may exceed their recoverable amount. Management’s estimates of many of the factors relevant to completing these assessments, including commodity prices, foreign currency exchange rates, mineral resources, and operating, capital and reclamation costs, are subject to significant risks and uncertainties that may affect the determination of the recoverability of the carrying amounts of its non-current non-financial assets. Although management has used its best estimate of these factors, it is possible that material changes could occur which may adversely affect management’s estimate of these recoverable amounts. Decommissioning and Rehabilitation Provision The Corporation’s decommissioning and rehabilitation provision represents the present value of expected future expenditures on reclamation and closure activities associated with its property, plant, equipment and mineral properties. The Corporation prepares estimates of the timing and amount of expected cash flows associated with these reclamation and closure activities, retaining independent advisors where considered appropriate. The present value of the expected future expenditures is determined using a risk-free pre-tax discount rate reflecting the time value of money and risks specific to the liability. A decommissioning and rehabilitation provision is generally recognized at the time that an environmental or other site disturbance occurs or a constructive obligation for reclamation and closure activities is determined. When the extent of disturbance increases over the life of an operation, the provision is increased accordingly. At December 31, 2013, the Corporation’s decommissioning and rehabilitation provision totaled $3,803,000 relating to reclamation and closure activities to be performed at the end of the life of the Bellekeno, Lucky Queen and Onek mines, including site reclamation and facilities removal and post-closure monitoring. The provision has been determined by management based on the evaluations and estimations prepared internally and used in support of the determination of the reclamation security posting requirements under the operating permits issued for the mines by the Yukon Government. - 14 - Management’s determination of the Corporation’s decommissioning and rehabilitation provision is based on the reclamation and closure activities it anticipates as being required, the additional contingent mitigation measures it identifies as potentially being required and its assessment of the likelihood of such contingent measures being required, and its estimate of the probable costs and timing of such activities and measures. The making of such evaluations and estimates is subject to significant inherent uncertainty. The future cash flows required to settle the obligation may therefore vary materially from those anticipated by the provision currently recognized in Alexco’s balance sheet, and periodic re-evaluations of that provision may result in material changes to its balance. Changes In and Initial Adoption of Accounting Standards and Policies New and Revised Accounting Standards Adopted The following new and revised standards and amendments are effective for annual periods beginning on or after January 1, 2013, and accordingly have now been adopted by the Corporation. The adoption of these standards and amendments has had no significant impact on the Corporation’s consolidated financial statements. IFRS 10 Consolidated Financial Statements requires an entity to consolidate an investee when it has power over the investee, is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation – Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements. IFRS 11 Joint Arrangements requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities – Non-monetary Contributions by Venturers. IFRS 12 Disclosure of Interests in Other Entities establishes disclosure requirements for interests in other entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries forward existing disclosures and also introduces significant additional disclosure that address the nature of, and risks associated with, an entity’s interests in other entities. IFRS 13 Fair Value Measurement is a comprehensive standard for fair value measurement and disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosures. IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine sets out the accounting for overburden waste removal (stripping) costs in the production phase of a mine. Stripping activity may create two types of benefit: (1) inventory produced, and (2) improved access to ore. Stripping costs associated with the former should be accounted for as a current production cost in accordance with IAS 2 Inventories. The latter should be accounted for as an addition to or enhancement of an existing asset. Accounting Standards and Amendments Issued but Not Yet Adopted IFRS 9 Financial Instruments was issued in November 2009 and addresses classification and measurement of financial assets. It replaces the multiple category and measurement models in IAS 39 Financial Instruments – Recognition and Measurement for financial assets with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent that they do not clearly represent a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely. - 15 - Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss are generally recorded in other comprehensive income. IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments – Disclosures, including added disclosures about investments in equity instruments measured at fair value in other comprehensive income, and guidance on financial liabilities and derecognition of financial instruments. In December 2011, amendments to IFRS 7 were issued to require additional disclosures on transition from IAS 39 to IFRS 9. In November 2013, IFRS 9 was amended to include guidance on hedge accounting and to allow entities to early adopt the requirement to recognize changes in fair value attributable to changes in the entity’s own credit risk, from financial liabilities designated under the fair value option, in other comprehensive income (without having to adopt the remainder of IFRS 9). In July 2013, the IASB tentatively decided to defer the mandatory effective date of IFRS 9. The IASB agreed that the mandatory effective date should no longer be annual periods beginning on or after January 1, 2015 but rather be left open pending the finalization of the impairment and classification and measurement requirements. The Corporation has not yet determined what the impact will be on its financial statements from the adoption of IFRS 9. Non-IFRS Measures Cash Costs of Production Per Ounce of Payable Silver Cash costs of production per ounce of payable silver is a key financial measure that management uses to assess performance, and is a metric commonly used in the mining industry and investment community to compare costs on a per unit basis. However, this measure does not have any standardized meaning prescribed by IFRS, nor is there a standardized method of calculating it within the industry. This measure therefore may not be comparable to similar measures presented by other companies, nor should it be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Alexco determines cash costs of production per ounce of payable silver for a period based on all costs absorbed into the cost of concentrate inventory produced during that period, plus estimated charges for transportation and smelter treatment and refining, less the estimated value of contained by-product metals, but excluding charges for depreciation, depletion and share-based compensation. Cash costs of production per ounce of payable silver are reconciled to financial statement cost of sales for the years ending December 31, 2013 and 2012 as follows (dollar amounts in thousands, except cost per ounce amounts, and denominated in Canadian dollars): - 16 - Payable silver ounces produced 1,319,041 2,009,703 2013 2012 Cost of sales Add: Change in concentrate inventory Attributed transportation, treatment and refining charges Subtract: Depreciation, depletion, share-based compensation and net silver streaming interest costs Cash costs of production before by-product revenue Subtract attributed by-product revenue: Lead Zinc Gold $ 43,143 $ 61,691 (3,940) 5,104 (13,414) 30,893 (9,506) (2,455) (464) (221) 7,841 (24,665) 44,646 (16,045) (4,196) (502) Cash costs of production net of by-product revenue $ 18,469 $ 23,903 Cash costs of production per ounce of payable silver before by-product revenue Subtract attributed by-product revenue: Lead Zinc Gold Cash costs of production per ounce of payable silver net of by-product revenue Adjusted Income (Loss) $23.42 $22.22 (7.21) (1.86) (0.35) (7.99) (2.09) (0.25) $14.00 $11.89 Adjusted loss excludes amounts recorded with respect to impairment charges, and within this MD&A is provided before tax, net of tax and on a per-share basis. These measures are used by management to facilitate comparability between periods, and are believed to be relevant to external users for the same reason. They are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. - 17 - These adjusted loss measures are reconciled to financial statement loss measures for the years ending December 31, 2013 and 2012, and the six month transitional year ended December 31, 2011, as follows (dollar amounts in thousands, and denominated in Canadian dollars), with adjusted loss per share calculated using the same weighted average number of shares outstanding as used for the financial statement measure: Income (loss) before taxes Subtract: Write-down of mineral properties Write-down of property, plant and equipment Write-down of long-term investments Adjusted income (loss) before taxes 2013 2012 2011 $ (62,079) $ 7,979 $ 4,496 51,840 3,501 1,785 (4,953) - - - - - - 7,979 4,496 Net recovery of (provision for) income taxes, excluding deferred tax effect of above-noted write-downs 640 (4,559) (2,773) Adjusted net income (loss) $ (4,313) $ 3,420 $ 1,723 Adjusted earnings (loss) per share (basic and diluted) $(0.07) $0.06 $0.03 Controls and Procedures Disclosure Controls and Procedures The Corporation’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Corporation’s disclosure controls and procedures. Based upon the results of that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this MD&A, the Corporation’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Corporation in reports it files under applicable securities legislation is recorded, processed, summarized and reported within the appropriate time periods and forms specified in those rules and include controls and procedures designed to ensure that information required to be disclosed by the Corporation in reports it files under applicable securities legislation is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal Control Over Financial Reporting The management of Alexco is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and the Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the accounting principles under which the Corporation’s financial statements are prepared. It includes those policies and procedures that: (i) (ii) pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, the transactions related to and dispositions of Alexco’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Alexco receipts and expenditures are made only in accordance with authorizations of management and Alexco’s directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Alexco assets that could have a material effect on Alexco’s financial statements. - 18 - Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Alexco’s internal control over financial reporting as at December 31, 2013, based on the criteria set forth in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that Alexco’s internal control over financial reporting was effective as at December 31, 2013. The effectiveness of Alexco’s internal control over financial reporting as at December 31, 2013 has been audited by PricewaterhouseCoopers LLP, Alexco’s independent auditors. There has been no change in the Corporation’s internal control over financial reporting during the Corporation’s fiscal year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Risk Factors The following are major risk factors management has identified which relate to the Corporation’s business activities. Such risk factors could materially affect the Corporation's future financial results, and could cause events to differ materially from those described in forward-looking statements relating to the Corporation. Though the following are major risk factors identified by management, they do not comprise a definitive list of all risk factors related to the Corporation's business and operations. Other specific risk factors are discussed elsewhere in this MD&A. Exploration, Evaluation and Development Mineral exploration, evaluation and development involves a high degree of risk and few properties which are explored are ultimately developed into producing mines. With respect to the Corporation’s properties, should any ore reserves exist, substantial expenditures will be required to confirm ore reserves which are sufficient to commercially mine, and to obtain the required environmental approvals and permitting required to commence commercial operations. Should any mineral resource be defined on such properties there can be no assurance that the mineral resource on such properties can be commercially mined or that the metallurgical processing will produce economically viable and saleable products. The decision as to whether a property contains a commercial mineral deposit and should be brought into production will depend upon the results of exploration programs and/or technical studies, and the recommendations of duly qualified engineers and/or geologists, all of which involves significant expense. This decision will involve consideration and evaluation of several significant factors including, but not limited to: (1) costs of bringing a property into production, including exploration and development work, preparation of appropriate technical studies and construction of production facilities; (2) availability and costs of financing; (3) ongoing costs of production; (4) market prices for the minerals to be produced; (5) environmental compliance regulations and restraints (including potential environmental liabilities associated with historical exploration activities); and (6) political climate and/or governmental regulation and control. The ability of the Corporation to sell, and profit from the sale of any eventual production from any of the Corporation’s properties will be subject to the prevailing conditions in the marketplace at the time of sale. Many of these factors are beyond the control of the Corporation and therefore represent a market risk which could impact the long term viability of the Corporation and its operations. Figures for the Corporation's Resources are Estimates Based on Interpretation and Assumptions and May Yield Less Mineral Production Under Actual Conditions than is Currently Estimated In making determinations about whether to advance any of its projects to development, the Corporation must rely upon estimated calculations as to the mineral resources and grades of mineralization on its properties. Until ore is actually mined and processed, mineral resources and grades of mineralization must be considered as estimates only. Mineral resource estimates are imprecise and depend upon geological interpretation and statistical inferences drawn from drilling and sampling which may prove to be unreliable. Alexco cannot be certain that: reserve, resource or other mineralization estimates will be accurate; or   mineralization can be mined or processed profitably. - 19 - Any material changes in mineral resource estimates and grades of mineralization will affect the economic viability of placing a property into production and a property’s return on capital. The Corporation's resource estimates have been determined and valued based on assumed future prices, cut-off grades and operating costs that may prove to be inaccurate. Extended declines in market prices for silver, gold, lead, zinc and other commodities may render portions of the Corporation’s mineralization uneconomic and result in reduced reported mineral resources. Keno Hill District While the Corporation has conducted exploration activities in the Keno Hill District, other than with respect to Bellekeno, Lucky Queen and Flame & Moth, further review of historical records and additional exploration and geological testing will be required to determine whether any of the mineral deposits it contains are economically recoverable. There is no assurance that such exploration and testing will result in favourable results. The history of the Keno Hill District has been one of fluctuating fortunes, with new technologies and concepts reviving the District numerous times from probable closure until 1989, when it did ultimately close down for a variety of economic and technical reasons. Many or all of these economic and technical issues will need to be addressed prior to the commencement of any future production on the Keno Hill properties. Mining Operations Decisions by the Corporation to proceed with the construction and development of mines, including Bellekeno, are based on development plans which include estimates for metal production and capital and operating costs. Until completely mined and processed, no assurance can be given that such estimates will be achieved. Failure to achieve such production and capital and operating cost estimates or material increases in costs could have an adverse impact on the Corporation’s future cash flows, profitability, results of operations and financial condition. The Corporation’s actual production and capital and operating costs may vary from estimates for a variety of reasons, including: actual resources mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; short- term operating factors relating to the mineable resources, such as the need for sequential development of resource bodies and the processing of new or different resource grades; revisions to mine plans; risks and hazards associated with mining; natural phenomena, such as inclement weather conditions, water availability, floods and earthquakes; and unexpected labour shortages or strikes. Costs of production may also be affected by a variety of factors, including changing waste ratios, metallurgical recoveries, labour costs, commodity costs, general inflationary pressures and currency rates. In addition, the risks arising from these factors are further increased while any such mine is progressing through the ramp-up phase of its operations and has not yet established a consistent production track record. Furthermore, mining operations at the Bellekeno mine project were suspended as of early September 2013 as a result of sharp and significant declines in precious metals prices during the second quarter of 2013. Re-start of mining operations is dependent on a number of factors, including sustained improvements in silver markets and the effectiveness of cost structure reduction measures, and the uncertainties around the achievement of these factors are significant. Employee Recruitment and Retention Recruitment and retention of skilled and experienced employees is a challenge facing the mining sector as a whole. During the late 1990s and early 2000s, with unprecedented growth in the technology sector and an extended cyclical downturn in the mining sector, the number of new workers entering the mining sector was depressed and significant number of existing workers departed, leading to a so-called “generational gap” within the industry. Since the mid 2000s, this factor was exacerbated by competitive pressures as the mining sector experienced an extended cyclical upturn. Additional exacerbating factors specific to Alexco include competitive pressures in labour force demand from the oil sands sector in northern Alberta and the mining and oil & gas sectors in British Columbia, and the fact that Alexco’s Keno Hill District is a fly-in/fly-out operation. Alexco has experienced employee recruitment and retention challenges, particularly with respect to mill operators in 2011 and through the first three quarters of 2012. There can be no assurance that such challenges won’t continue or resurface, not only with respect to the mill but in other District operational areas as well including mining and exploration. Furthermore, any re-start of mining operations will necessitate the re-hiring of mine and mill personnel. Permitting and Environmental Risks and Other Regulatory Requirements The current or future operations of the Corporation, including development activities, commencement of production on its properties and activities associated with the Corporation's mine reclamation and remediation business, require - 20 - permits or licenses from various federal, territorial and other governmental authorities, and such operations are and will be governed by laws, regulations and agreements governing prospecting, development, mining, production, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. Companies engaged in the development and operation of mines and related facilities and in mine reclamation and remediation activities generally experience increased costs and delays as a result of the need to comply with the applicable laws, regulations and permits. There can be no assurance that all permits and permit modifications which the Corporation may require for the conduct of its operations will be obtainable on reasonable terms or that such laws and regulations would not have an adverse effect on any project which the Corporation might undertake, including but not limited to the Bellekeno mine project. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions 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. Parties engaged in mining operations or in mine reclamation and remediation activities may be required to compensate those suffering loss or damage by reason of such activities and may have civil or criminal fines or penalties imposed upon them for violation of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of mining companies and mine reclamation and remediation activities could have a material adverse impact on the Corporation. As well, policy changes and political pressures within and on federal, territorial and First Nation governments having jurisdiction over or dealings with the Corporation could change the implementation and interpretation of such laws, regulations and permits, also having a material adverse impact on the Corporation. Such impacts could result in one or more of increases in capital expenditures or production costs, reductions in levels of production at producing properties or abandonment or delays in the development of new mining properties. Environmental Services A material decline in the level of activity or reduction in industry willingness to spend capital on mine reclamation, remediation or environmental services could adversely affect demand for AEG's environmental services. Likewise, a material change in mining product commodity prices, the ability of mining companies to raise capital or changes in domestic or international political, regulatory and economic conditions could adversely affect demand for AEG's services. Two of AEG’s customers accounted for 44.1% and 24.6%, respectively, of environmental services revenues in the 2013 fiscal year. The loss of, or a significant reduction in the volume of business conducted with, either of these customers could have a significant detrimental effect on the Corporation’s environmental services business. The patents which the Corporation owns or has access to or other proprietary technology may not prevent AEG's competitors from developing substantially similar technology, which may reduce AEG's competitive advantage. Similarly, the loss of access to any of such patents or other proprietary technology or claims from third parties that such patents or other proprietary technology infringe upon proprietary rights which they may claim or hold would be detrimental to AEG's reclamation and remediation business. The Corporation may not be able to keep pace with continual and rapid technological developments that characterize the market for AEG's environmental services, and the Corporation's failure to do so may result in a loss of its market share. Similarly, changes in existing regulations relating to mine reclamation and remediation activities could require the Corporation to change the way it conducts its business. AEG is dependent on the professional skill sets of its employees, some of whom would be difficult to replace. The loss of any such employees could significantly affect AEG’s ability to service existing clients, its profitability and its ability to grow its business. Potential Profitability Of Mineral Properties Depends Upon Factors Beyond the Control of the Corporation The potential profitability of mineral properties is dependent upon many factors beyond the Corporation’s control. For instance, world prices of and markets for gold, silver, lead and zinc are unpredictable, highly volatile, potentially subject to governmental fixing, pegging and/or controls and respond to changes in domestic, international, political, social and economic environments. Another factor is that rates of recovery of mined ore may vary from the rate experienced in tests and a reduction in the recovery rate will adversely affect profitability and, possibly, the economic viability of a - 21 - property. Profitability also depends on the costs of operations, including costs of labour, materials, equipment, electricity, environmental compliance or other production inputs. Such costs will fluctuate in ways the Corporation cannot predict and are beyond the Corporation’s control, and such fluctuations will impact on profitability and may eliminate profitability altogether. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for development and other costs have become increasingly difficult, if not impossible, to project. These changes and events may materially affect the financial performance of the Corporation. First Nation Rights and Title The nature and extent of First Nation rights and title remains the subject of active debate, claims and litigation in Canada, including in the Yukon and including with respect to intergovernmental relations between First Nation authorities and federal, provincial and territorial authorities. There can be no guarantee that such claims will not cause permitting delays, unexpected interruptions or additional costs for the Corporation’s projects. Title to Mineral Properties The acquisition of title to mineral properties is a complicated and uncertain process. The properties may be subject to prior unregistered agreements of transfer or land claims, and title may be affected by undetected defects. The Corporation has taken steps, in accordance with industry standards, to verify mineral properties in which it has an interest. Although the Corporation has made efforts to ensure that legal title to its properties is properly recorded in the name of the Corporation, there can be no assurance that such title will ultimately be secured. Capitalization and Commercial Viability The Corporation will require additional funds to further explore, develop and mine its properties. The Corporation has limited financial resources, and there is no assurance that additional funding will be available to the Corporation to carry out the completion of all proposed activities, for additional exploration or for the substantial capital that is typically required in order to place a property into commercial production. Although the Corporation has been successful in the past in obtaining financing through the sale of equity securities, there can be no assurance that the Corporation will be able to obtain adequate financing in the future or that the terms of such financing will be favourable. Failure to obtain such additional financing could result in the delay or indefinite postponement of further exploration and development of its properties. General Economic Conditions May Adversely Affect the Corporation’s Growth and Profitability The unprecedented events in global financial markets since 2008 have had a profound impact on the global economy and led to increased levels of volatility. Many industries, including the mining industry, are impacted by these market conditions. Some of the impacts of the current financial market turmoil include contraction in credit markets resulting in a widening of credit risk, devaluations and high volatility in global equity, commodity, foreign currency exchange and precious metal markets, and a lack of market liquidity. If the current turmoil and volatility levels continue they may adversely affect the Corporation's growth and profitability. Specifically: • • • • a global credit/liquidity or foreign currency exchange crisis could impact the cost and availability of financing and the Corporation’s overall liquidity; the volatility of silver and other commodity prices would impact the Corporation’s revenues, profits, losses and cash flow; volatile energy prices, commodity and consumables prices and currency exchange rates would impact the Corporation’s operating costs; and the devaluation and volatility of global stock markets could impact the valuation of the Corporation’s equity and other securities. These factors could have a material adverse effect on Alexco’s financial condition and results of operations. - 22 - Summary of Resources The following table sets forth the estimated resources for the Corporation’s mineral properties: Category1,2,11 Property Tonnes Ag (g/t) Au (g/t) Pb (%) Zn (%) Contained Ag (oz) Indicated Inferred Bellekeno Deposit4 Lucky Queen Deposit5 Flame & Moth Deposit6 Eastern Keno Hill Silver District3 Onek7 Bermingham8 Total Indicated – Sub-Surface Elsa Tailings9 Total Indicated – All Deposits Bellekeno Deposit4 Lucky Queen Deposit5 Flame & Moth Deposit6 Eastern Keno Hill Silver District3 Onek7 Bermingham8 Total Inferred 262,000 124,000 1,378,000 1,764,000 585,000 257,000 2,606,000 2,490,000 5,096,000 243,000 150,000 107,000 500,000 236,000 102,000 838,000 585 1,227 516 576 194 460 479 119 303 428 571 313 446 203 372 369 n/a 0.2 0.4 n/a 0.7 0.1 n/a 0.1 n/a n/a 0.2 0.3 n/a 0.4 0.1 n/a 3.5% 2.6% 1.7% 2.0% 1.2% 2.0% 1.9% 1.0% 1.4% 4.1% 1.4% 0.9% 2.6% 1.1% 1.1% 2.0% 5.3% 1.7% 5.7% 5.4% 13.7% 2.1% 6.9% 0.7% 3.9% 5.1% 0.9% 4.2% 3.7% 11.5% 1.8% 5.6% 4,933,000 4,891,000 22,859,000 32,683,000 3,648,000 3,800,000 40,131,000 9,526,000 49,657,000 3,338,000 2,753,000 1,081,000 7,172,000 1,540,000 1,220,000 9,932,000 Historical Resources Silver King10 - Proven, probable and indicated - Inferred Notes: 98,998 22,581 1,354 1,456 n/a n/a 1.6% 0.1% 0.1% n/a 4,310,000 1,057,000 1. All mineral resources are classified following the CIM Definition Standards for Mineral Resources and Mineral Reserves (December 2005), in accordance with the CIM Estimation of Mineral Resources and Mineral Reserves Best Practice Guidelines and the guidelines of NI 43-101. 2. Mineral resources are not mineral reserves and do not have demonstrated economic viability. All numbers have been rounded to reflect the 3. 4. 5. 6. 7. 8. 9. relative accuracy of the estimates. The Eastern Keno Hill Silver District property is comprised of three deposits: Bellekeno, Lucky Queen and Flame & Moth. The resource estimates for the Eastern Keno Hill Silver District are supported by disclosure in the news release dated December 5, 2013 entitled “Alexco Releases Positive Preliminary Economic Assessment for Expanded Silver Production from Eastern Keno Hill Silver District, Yukon” and by a technical report filed on SEDAR dated November 15, 2013 entitled “Updated Preliminary Economic Assessment for the Eastern Keno Hill Silver District Project – Phase 2, Yukon, Canada”. The resource estimates for the Bellekeno deposit are based on a geologic resource estimate having an effective date of May 31, 2012. The Bellekeno indicated resources are as at September 30, 2013, and reflect the geologic resource less estimated subsequent depletion from mine production. The resource estimates for the Lucky Queen deposit have an effective date of July 27, 2011. The resource estimates for the Flame & Moth deposit have an effective date of January 30, 2013. The resource estimates for Onek have an effective date of July 27, 2011, and are supported by disclosure in the news release dated July 27, 2011 entitled “Alexco Announces Initial Resource Estimates for Lucky Queen and Onek” and by a technical report filed on SEDAR dated September 8, 2011 entitled “Technical Report on the Onek Deposit, Onek Property, Keno Hill District, Yukon”. The resource estimates for Bermingham have an effective date of June 27, 2012, and are supported by disclosure in the news release dated June 28, 2012 entitled “Alexco Announces Initial Resource Estimates for Flame & Moth and Bermingham” and by a technical report filed on SEDAR and signature dated August 8, 2012 entitled “Technical Report on the Bermingham Deposit, Bermingham Property, Keno Hill District, Yukon”. The resource estimate for the Elsa Tailings has an effective date of April 22, 2010, and is supported by the technical report dated June 16, 2010 entitled “Mineral Resource Estimation, Elsa Tailings Project, Yukon, Canada”. 10. Historical resources for Silver King were estimated by United Keno Hill Mines Limited, as documented in an internal report entitled “Mineral Resources and Mineable Ore Reserves” dated March 9, 1997. The historical resources were estimated based on a combination of surface and underground drill holes and chip samples taken on the vein and calculated using the polygonal (block) method and the 1997 CIM definitions for resource categories. These estimated historical resources include a total of 55,674 tonnes classified as proven and probable reserves and 43,324 tonnes classified as indicated resources, plus an additional 22,581 tonnes classified as inferred resources. Though believed by Alexco management to be relevant and reliable, this estimate of historical resources has not been verified by Alexco, pre-dates NI 43-101 and is not compliant with NI 43-101 resource categories. Verification of the estimate would require new drill holes into a statistically significant number of the historical resource blocks and/or a combination of on-vein sampling. A qualified person has not done sufficient work to classify this estimate of historical resources as current, nor is Alexco treating this historical estimate as a current mineral resource. 11. The disclosure regarding the summary of estimated resources for Alexco’s mineral properties within the Keno Hill District has been reviewed and approved by Scott Smith, P.Eng., Bellekeno Mine Manager with Alexco and a Qualified Person as defined by NI 43-101. - 23 - Cautionary Statement Regarding Forward-Looking Statements This MD&A contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of applicable Canadian securities laws (together, “forward-looking statements”) concerning the Corporation's business plans, including but not limited to anticipated results and developments in the Corporation’s operations in future periods, planned exploration and development of its mineral properties, plans related to its business and other matters that may occur in the future, made as of the date of this MD&A. Forward-looking statements may include, but are not limited to, statements with respect to future remediation and reclamation activities, future mineral exploration, the estimation of mineral reserves and mineral resources, the realization of mineral reserve and mineral resource estimates, future mine construction and development activities, future mine operation and production, the timing of activities, the amount of estimated revenues and expenses, the success of exploration activities, permitting time lines, requirements for additional capital and sources and uses of funds. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects”, “anticipates”, “plans”, “estimates”, “intends”, “strategy”, “goals”, “objectives” or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be “forward-looking statements”. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements. Such factors include, but are not limited to, risks related to actual results and timing of exploration and development activities; actual results and timing of mining activities; actual results and timing of environmental services operations; actual results and timing of remediation and reclamation activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of silver, gold, lead, zinc and other commodities; possible variations in mineable resources, grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining industry; First Nation rights and title; continued capitalization and commercial viability; global economic conditions; competition; and delays in obtaining governmental approvals or financing or in the completion of development activities. Furthermore, forward-looking statements are statements about the future and are inherently uncertain, and actual achievements of the Corporation or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to those referred to in this MD&A under the heading “Risk Factors” and elsewhere. Forward-looking statements are based on certain assumptions that management believes are reasonable at the time they are made. In making the forward-looking statements included in this MD&A, the Corporation has applied several material assumptions, including, but not limited to, the assumption that: (1) the proposed development of its mineral projects will be viable operationally and economically and proceed as planned; (2) market fundamentals will result in sustained silver, gold, lead and zinc demand and prices, and such prices will not be materially lower than those estimated by management in preparing the December 31, 2013 financial statements; (3) the actual nature, size and grade of its mineral resources are materially consistent with the resource estimates reported in the supporting technical reports; and (4) any additional financing needed will be available on reasonable terms. Other material factors and assumptions are discussed throughout this MD&A and, in particular, under both “Critical Accounting Estimates” and “Risk Factors”. The Corporation's forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made and should not be relied on as representing the Corporation's views on any subsequent date. While the Corporation anticipates that subsequent events may cause its views to change, the Corporation specifically disclaims any intention or any obligation to update forward-looking statements if circumstances or management's beliefs, expectations or opinions should change, except as required by applicable law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements. Cautionary Note to U.S. Investors – Information Concerning Preparation of Resource Estimates This MD&A 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 NI 43-101 and the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) – CIM Definition Standards on Mineral Resources and Mineral - 24 - Reserves, adopted by the CIM Council, as amended. These definitions differ from the definitions in the United States Securities and Exchange Commission’s (“SEC”) Industry Guide 7 under the United States Securities Act of 1933, as amended. Under SEC Industry Guide 7 standards, mineralization cannot be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally extracted at the time the reserve determination is made. As applied under SEC Industry Guide 7, 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 all necessary permits and government authorizations 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 normally not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that all or any part of a mineral deposit 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” in a resource is permitted disclosure under Canadian regulations; however, the SEC normally 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. Accordingly, information concerning mineral deposits contained in this MD&A may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder. - 25 - MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING To the Shareholders of Alexco Resource Corp. The accompanying consolidated financial statements of the Corporation were prepared by management in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and within the framework of the summary of significant accounting policies in the notes to these financial statements. Management is responsible for preparation and presentation of the consolidated financial statements, Management’s Discussion & Analysis (“MD&A”) and all other information in the Annual Report. All financial and operating data in the Annual Report is consistent, where appropriate, with that contained in the consolidated financial statements. A system of accounting and control is maintained in order to provide reasonable assurance that the assets are safeguarded and that transactions are properly recorded and executed in accordance with management’s authorization. The system includes established policies and procedures, the selection and training of qualified persons, and an organization providing for the appropriate delegation of authority and segregation of responsibilities for a Corporation of the size of Alexco Resource Corp. The Board of Directors, based on recommendations from its Audit Committee, reviews and approves the consolidated financial statements, MD&A and all other financial information contained in the Annual Report. The Audit Committee meets with management and the Corporation’s independent auditors to ensure that management is performing its responsibility to maintain financial controls and systems and to make recommendations to the Board of Directors for approval of all financial information released to the public. The Audit Committee also meets with the independent auditors to discuss the scope and the results of the audit and the audit report prior to submitting the consolidated financial statements to the Board of Directors for approval. The Corporation’s independent auditors for the years ended December 31, 2013 (“2013”) and December 31, 2012 (“2012”) have been PricewaterhouseCoopers LLP, Chartered Accountants. An integrated audit of the Corporation’s consolidated financial statements for 2013 and 2012 and internal control over financial reporting as at December 31, 2013 has been completed by PricewaterhouseCoopers LLP in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). The auditor’s report to the shareholders of the Corporation outlines the scope of their audit and their opinions on these consolidated financial statements for 2013 and 2012 and internal control over financial reporting as at December 31, 2013. “Clynton R. Nauman” (signed) Clynton R. Nauman President and Chief Executive Officer March 25, 2014 “David E. Whittle” (signed) David E. Whittle Chief Financial Officer MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Alexco Resource Corp. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and the Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It includes those policies and procedures that: (i) (ii) (iii) pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, the transactions related to and dispositions of Alexco’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Alexco receipts and expenditures are made only in accordance with authorizations of management and Alexco’s directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Alexco assets that could have a material effect on Alexco’s financial statements. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Alexco’s internal control over financial reporting as at December 31, 2013, based on the criteria set forth in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that Alexco’s internal control over financial reporting was effective as at December 31, 2013. The effectiveness of Alexco’s internal control over financial reporting as at December 31, 2013 has been audited by PricewaterhouseCoopers LLP, Alexco’s independent auditors, as stated in their report which appears on the following page. “Clynton R. Nauman” (signed) Clynton R. Nauman President and Chief Executive Officer March 25, 2014 “David E. Whittle” (signed) David E. Whittle Chief Financial Officer Independent Auditor’s Report To the Shareholders of Alexco Resource Corp. We have completed integrated audits of Alexco Resource Corp.’s December 31, 2013 and December 31, 2012 consolidated financial statements and its internal control over financial reporting as at December 31, 2013. Our opinions, based on our audits are presented below. Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of Alexco Resource Corp., which comprise the consolidated balance sheets as at December 31, 2013 and December 31, 2012 and the consolidated statements of comprehensive income, cash flows and shareholders’ equity for the years ended December 31, 2013 and December 31, 2012 , and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards also require that we comply with ethical requirements. An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion on the consolidated financial statements. PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7 T: +1 604 806 7000, F: +1 604 806 7806, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Alexco Resource Corp. as at December 31, 2013 and December 31, 2012 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Report on internal control over financial reporting We have also audited Alexco Resource Corp.’s internal control over financial reporting as at December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s responsibility for internal control over financial reporting Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over Financial Reporting. Auditor’s responsibility Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our audit opinion on the company’s internal control over financial reporting. Definition of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 2 Inherent limitations Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Opinion In our opinion, Alexco Resource Corp. maintained, in all material respects, effective internal control over financial reporting as at December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by COSO. Chartered Accountants Vancouver, British Columbia March 25, 2014 3 ALEXCO RESOURCE CORP. CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31 (expressed in thousands of Canadian dollars) ASSETS Current Assets Cash and cash equivalents (see note 7) Accounts and other receivables (see note 8) Inventories (see note 9) Prepaid expenses and other current assets Non-Current Assets Restricted cash and deposits (see note 10) Long-term investments (see note 11) Property, plant and equipment (see note 12) Mineral properties (see note 13) Intangible assets 2013 2012 $ 8,610 4,929 5,260 437 19,236 $ 23,088 9,797 8,700 542 42,127 9,460 539 25,810 75,847 321 8,934 2,699 30,860 127,221 459 Total Assets $ 131,213 $ 212,300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable and accrued liabilities (see note 15) Income taxes payable (see note 25) Environmental services contract loss provision (see note 16) Deferred revenue (see note 17) Flow-through share premium pending renunciation (see note 20) Non-Current Liabilities Environmental services contract loss provision (see note 16) Deferred revenue (see note 17) Silver streaming interest (see note 18) Decommissioning and rehabilitation provision (see note 19) Deferred income tax liabilities (see note 25) Total Liabilities Shareholders’ Equity $ 2,220 21 1 172 1,506 3,920 $ 15,596 151 408 245 - 16,400 112 1,234 18,190 3,803 2,775 30,034 1,359 1,732 28,082 4,087 14,095 65,755 101,179 146,545 Total Liabilities and Shareholders’ Equity $ 131,213 $ 212,300 COMMITMENTS (see note 32) SUBSEQUENT EVENTS (see notes 18 and 21) APPROVED ON BEHALF OF THE BOARD OF DIRECTORS “Terry Krepiakevich” (signed) Director “George Brack” (signed) Director The accompanying notes are an integral part of these consolidated financial statements ALEXCO RESOURCE CORP. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31 (expressed in thousands of Canadian dollars, except per share and share amounts) Revenues Mining operations Environmental services Total revenues Cost of Sales (see note 22) Mining operations Environmental services Total cost of sales Gross Profit (Loss) Mining operations Environmental services Total gross profit General and administrative expenses (see note 23) Mine site care and maintenance Foreign exchange losses (gains) Write-down of mineral properties (see note 14) Write-down of property, plant and equipment (see note 14) Loss on impaired long-term investments (see note 11) Operating Income (Loss) Other Income (Expenses) Investment income Finance costs Gain on sale of mineral property (see note 13(d)) Derivative loss (see note 11) Income (Loss) Before Taxes Income Tax Provision (Recovery) (see note 25) Current Deferred Net Income (Loss) 2013 2012 $ 43,114 16,319 59,433 $ 76,725 7,983 84,708 43,143 7,470 50,613 (29) 8,849 8,820 12,471 1,210 (182) 51,840 3,501 2,160 71,000 (62,180) 246 (47) - (98) (62,079) 231 (11,860) (50,450) 61,691 5,097 66,788 15,034 2,886 17,920 16,657 - 324 - - - 16,981 939 748 (46) 6,346 (8) 7,979 449 4,110 3,420 23 (32) - Other Comprehensive Income (Loss) Items that may be reclassified subsequently to net income (loss) – Cumulative translation adjustments Loss on long-term investments (see note 11) Recycle loss on impaired long-term investments to current income (see note 11) (311) (2,062) 2,160 Total Comprehensive Income (Loss) $ (50,663) $ 3,411 Earnings (Loss) Per Share (see note 26) Basic Diluted $(0.81) $(0.81) $0.06 $0.06 The accompanying notes are an integral part of these consolidated financial statements ALEXCO RESOURCE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (expressed in thousands of Canadian dollars Cash Flows from Operating Activities Net income (loss) Items not affecting cash from operations – Deferred revenue Depletion of mineral properties Environmental services contract loss provision Silver streaming interest amount recognized Depreciation of property, plant and equipment Amortization of intangible assets Share-based compensation expense Finance costs, derivative (gain) loss and other Gain on sale of mineral property Write-down of inventory Write-down of mineral properties Write-down of property, plant and equipment Loss on impaired long-term investments Deferred income tax provision (recovery) Expenditures on decommissioning and rehabilitation Changes in non-cash working capital balances related to operations – Decrease in accounts and other receivables Decrease (increase) in inventories Decrease (increase) in prepaid expenses and other current assets Increase (decrease) in accounts payable and accrued liabilities Increase (decrease) in income taxes payable Cash Flows from Investing Activities Expenditures on mining operations properties Expenditures on exploration and evaluation properties Purchase of property, plant and equipment Receipt of proceeds on sale of mineral property Receipt of up-front payment under AEG remediation services agreement Increase in restricted cash and deposits Decrease in restricted cash and deposits Cash Flows from Financing Activities Proceeds from issuance of flow-through shares Issuance costs Proceeds from exercise of share options Purchase of RSU settlement shares Decrease in Cash and Cash Equivalents Cash and Cash Equivalents – Beginning of Year 2013 2012 $ (50,450) $ 3,420 (570) 15,585 (1,653) (9,892) 2,915 137 2,419 (173) - 886 51,840 3,501 2,160 (11,854) 4,851 - 4,868 908 105 (7,195) (130) 3,407 (9,639) (10,429) (2,041) - - (530) - (22,639) 7,035 (552) 140 (1,869) 4,754 (14,478) 23,088 30 21,239 (185) (13,873) 2,807 131 2,992 82 (6,346) - - - - 4,110 14,407 (14) 1,224 (533) (307) (811) 91 14,057 (18,347) (10,163) (4,976) 3,205 1,172 (4,992) 831 (33,270) - - 560 - 560 (18,653) 41,741 Cash and Cash Equivalents – End of Year $ 8,610 $ 23,088 SUPPLEMENTAL INFORMATION (see note 29) The accompanying notes are an integral part of these consolidated financial statements ALEXCO RESOURCE CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (expressed in thousands of Canadian dollars) Common Shares Shares Amount Warrants Share Options and RSUs Contributed Surplus Accumulated Deficit Accumulated Other Comprehensive Income Total Balance – December 31, 2012 60,428,898 $ 155,042 $ - $ 11,113 $ 5,364 $ (24,955) $ (19) $ 146,545 Net income Other comprehensive income Equity offering, net of issuance costs (see note 20) Share-based compensation expense recognized Exercise of share options Share options forfeited Release of RSU settlement shares Purchase of RSU settlement shares - - - - 2,100,000 4,442 - 45,000 - 43,335 - 204 - 164 (445,000) (1,869) - - - - - - - - - - - 2,585 (65) (2,377) (164) - - - - - - 2,377 - - (50,450) - - (213) (50,450) (213) - - - - - - - - - - - - 4,442 2,585 139 - - (1,869) Balance – December 31, 2013 62,172,233 $ 157,983 $ - $ 11,092 $ 7,741 $ (75,405) $ (232) $ 101,179 Balance – December 31, 2011 60,039,064 $ 154,154 $ - $ 8,552 $ 4,739 $ (28,375) $ (10) $ 139,060 Net income Other comprehensive income Share-based compensation expense recognized Exercise of share options Share options forfeited - - - 389,834 - - - - 888 - - - - - - - - 3,514 (328) (625) - - - - 625 3,420 - - - - - (9) - - - 3,420 (9) 3,514 560 - Balance – December 31, 2012 60,428,898 $ 155,042 $ - $ 11,113 $ 5,364 $ (24,955) $ (19) $ 146,545 The accompanying notes are an integral part of these consolidated financial statements ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) 1. Description of Business and Nature of Operations 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 operates two principal businesses: a mining business, comprised of mineral exploration and mine development and operation in Canada, primarily in Yukon Territory; and through its Alexco Environmental Group (“AEG”), an environmental services business, providing consulting, remediation solutions and project management services in respect of environmental permitting and compliance and site remediation, in Canada, the United States and elsewhere. The Corporation is in the process of mining, exploring and developing its mineral properties. The recoverability of the amounts shown for mineral properties is dependent upon the existence of economically recoverable reserves, successful permitting, the ability of the Corporation to obtain necessary financing to complete exploration and development, and upon future profitable production or proceeds from disposition of each mineral property. Furthermore, the acquisition of title to mineral properties is a complicated and uncertain process, and while the Corporation has taken steps in accordance with common industry practice to verify its title to the mineral properties in which it has an interest, there can be no assurance that such title will ultimately be secured. The carrying amounts of mineral properties are based on costs incurred to date, adjusted for depletion and impairments, and do not necessarily represent present or future values. As of September 2013, Bellekeno mining operations were suspended in light of a sharply reduced silver price environment. Despite the suspension and resulting lack of cash flow from mining operations, the Corporation believes that based on its current cash position and cash flows generated from its environmental business it will have sufficient funds to meet its minimum obligations, including general corporate activities, for at least the next 12 months. Alexco is a public company which is listed on the Toronto Stock Exchange (under the symbol AXR) and the NYSE MKT Equities Exchange (under the symbol AXU). The Corporation’s corporate head office is located at Suite 1150, 200 Granville Street, Vancouver, BC, Canada, V6C 1S4. 2. Basis of Preparation and Statement of Compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, and were approved for issue by the Board of Directors on March 21, 2014. These consolidated financial statements have been prepared on a going concern basis under the historical cost method, except for derivative financial instruments, stock-based compensation and certain financial assets which have been measured at fair value. All figures are expressed in Canadian dollars unless otherwise indicated. 3. Summary of Significant Accounting Policies The significant accounting policies used in the preparation of these financial statements are summarized below. (a) Basis of Consolidation The Corporation’s consolidated financial statements include the accounts of the Corporation and its subsidiaries. Subsidiaries are entities controlled by the Corporation, where control is achieved by the Corporation being exposed to, or having rights to, variable returns from its involvement with the entity and having the ability to affect those returns through its power over the entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Corporation controls another entity. Subsidiaries are fully consolidated from the date on which control is obtained by Alexco, and are de-consolidated from the date that control ceases. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) The following subsidiaries have been consolidated for all dates presented within these financial statements, and are wholly owned: Alexco Keno Hill Mining Corp. (formerly Alexco Resource Canada Corp., formerly 650399 B.C. Ltd.), Elsa Reclamation & Development Corporation Ltd. (“ERDC”), Alexco Exploration Canada Corp., Access Mining Consultants Ltd. (“Access”) Alexco Resource U.S. Corp. (“Alexco US”), and Alexco Financial Guaranty Corp. (“AFGC”). All significant inter-company transactions, balances, income and expenses are eliminated on consolidation. (b) Cash and Cash Equivalents Cash and cash equivalents are unrestricted as to use and consist of cash on hand, demand deposits and short term interest-bearing investments with maturities of 90 days or less from the original date of acquisition and which can readily be liquidated to known amounts of cash. Redeemable interest bearing investments with maturities of up to one year are considered cash equivalents if they can readily be liquidated at any point in time to known amounts of cash, the initial period subject to an interest penalty on redemption is less than 90 days, and they are redeemable thereafter until maturity for invested value plus accrued interest. (c) Inventories Inventories include ore in stockpiles, concentrate and materials and supplies. Ore in stockpiles and concentrate are recorded at the lower of weighted average cost and net realizable value. Cost comprises all mining and processing costs incurred, including labor, consumables, production-related overheads, depreciation of production-related property, plant and equipment and depletion of related mineral properties. Net realizable value is estimated at the selling price in the ordinary course of business less applicable variable selling expenses. Materials and supplies are valued at the lower of cost and replacement cost, costs based on landed cost of purchase, net of a provision for obsolescence where applicable. When inventories have been written down to net realizable value, a new assessment of net realizable value is made in each subsequent period. When circumstances that caused the write-down no longer exist or when there is clear evidence of an increase in net realizable value, the amount of the write down is reversed. (d) Property, Plant and Equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment write-downs. The cost capitalized is determined by the fair value of consideration given to acquire the asset at the time of acquisition or construction, the direct cost of bringing the asset to the condition necessary for operation, and the estimated future cost of decommissioning and removing the asset. Repairs and maintenance expenditures are charged to operations, while major improvements and replacements which extend the useful life of an asset are capitalized. Depreciation of property, plant and equipment is calculated using the following methods: Heavy machinery and equipment Land and buildings Furniture and office equipment Computer hardware Computer software Leasehold improvements Roads Camp and other site infrastructure Ore-processing mill components 5 years straight-line 20 years straight-line 5 years straight-line 3 years straight-line 2 years straight-line Straight-line over the term of lease 5 years straight-line 10 years straight-line Variously between 5 and 30 years straight-line Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other gains or losses in earnings. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) (e) Mineral Properties Exploration and Evaluation Properties The Corporation capitalizes exploration and evaluation expenses at cost for expenditures incurred after it has obtained legal rights to explore a specific area and before technical feasibility and commercial viability of extracting mineral resources are demonstrable. All direct and indirect costs relating to the exploration of specific properties with the objective of locating, defining and delineating the resource potential of the mineral interests on specific properties are capitalized as exploration and evaluation assets, net of any directly attributable recoveries recognized, such as exploration or investment tax credits. At each reporting date, exploration and evaluation assets are evaluated and classified as mining operations assets upon completion of technical feasibility and determination of commercial viability. Grassroots exploration expenditures incurred prior to the Corporation acquiring or obtaining the right to acquire a mineral property are expensed. Mining Operations Properties Mining operations properties are recorded at cost on a property-by-property basis. The recorded cost of mining operations properties is based on acquisition costs incurred to date, including capitalized exploration and evaluation costs and capitalized development costs, less depletion, recoveries and write-offs. Capitalized development costs include costs incurred to establish access to mineable resources where such costs are expected to provide a long-term economic benefit, as well as operating costs incurred, net of the proceeds from any sales generated, prior to the time the property achieves commercial production. Depletion of mining operations properties is calculated on the units-of-production basis using estimated mine plan resources, such resources being those defined in the mine plan on which the applicable mining activity is based. The mine plan resources for such purpose are generally as described in an economic analysis supported by a technical report compliant with Canadian National Instrument 43-101 Standards of Disclosure for Mineral Projects. (f) Intangible Assets Customer relationships, rights to provide services and database assets acquired through business combinations, and acquired patents, are recorded at fair value at acquisition date. All of the Corporation’s intangible assets have finite useful lives, and are amortized using the straight-line method over their expected useful lives as follows: Customer relationships Rights to provide services and database Patents 5 years 4 years Over remaining life (g) Impairment of Non-Current Non-Financial Assets The carrying amounts of non-current non-financial assets are reviewed and evaluated for impairment when events or changes in circumstances indicate that the carrying amounts of the related asset may not be recoverable. Non-current non-financial assets include property, plant, equipment, mineral properties and finite-life intangible assets. If the recoverable amount is less than the carrying amount of the asset, an impairment loss is recognized and the asset is written down to recoverable value. The recoverable amount is the higher of an asset’s “fair value less cost of disposal” and “value-in- use”. Where the asset does not generate cash flows that are independent from other assets, the recoverable amount of the cash-generating unit to which the asset belongs is determined, with a ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) cash‐generating unit being the smallest identifiable group of assets and liabilities that generate cash inflows independent from other assets. Exploration and evaluation assets are each separately assessed for impairment, and are not allocated by the Corporation to a CGU for impairment assessment purposes. “Fair value less cost of disposal” is determined as the amount that would be obtained from the sale of the asset or cash-generating unit in an arm’s length transaction between knowledgeable and willing parties. In assessing “value-in-use”, the future cash flows expected to arise from the continuing use of the asset or cash-generating unit in its present form are estimated using assumptions that an independent market participant would consider appropriate, and are then discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset or unit. Where conditions that gave rise to a recognized impairment loss are subsequently reversed, the amount of such reversal is recognized into earnings immediately, though is limited such that the revised carrying amount of the asset or cash-generating unit does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash generating unit. (h) Silver Streaming Interest Advance payments received under the silver streaming interest acquired by Silver Wheaton Corp. (“Silver Wheaton”) have been deferred and are being recognized on a units-of-production-sold basis, as a component of the cost of sales for that production. The amount recognized each period represents the proportion of silver ounces deliverable under the streaming interest on account of silver production sold that period, to the total ounces of silver which at the time are estimated as remaining to be delivered under the streaming interest. Also recognized within cost of sales each period is the actual or estimated market price of the silver ounces delivered or deliverable under the streaming interest on account of silver production sold that period, less the related per-ounce cash amount received or to be received from Silver Wheaton on such delivery. (i) Provisions General Provisions are recorded when a present legal or constructive obligation exists as a result of past events, where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. The expense relating to any provision is presented in profit or loss net of any reimbursement. Provisions are discounted using a current risk-free pre-tax rate that reflects where appropriate the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. Decommissioning and Rehabilitation Provision The Corporation recognizes a decommissioning and rehabilitation provision for statutory, contractual, constructive or legal obligations to undertake reclamation and closure activities associated with property, plant, equipment and mineral properties, generally at the time that an environmental or other site disturbance occurs or a constructive obligation for reclamation and closure activities is determined. When the extent of disturbance increases over the life of an operation, the provision is increased accordingly. Provisions are measured at the present value of the expected future expenditures required to settle the obligation, using a risk-free pre-tax discount rate reflecting the time value of money and risks specific to the liability. The liability is increased for the passage of time, and adjusted for changes to the current market-based risk-free discount rate as well as changes in the estimated amount or timing of the expected future expenditures. The associated restoration costs are capitalized as part of the carrying amount of the related asset and then depreciated accordingly. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) (j) Revenue Recognition All revenue is measured at the fair value of the consideration received or receivable when the amount of revenue can be measured reliably and it is probable that the economic benefits associated with the transaction will flow to the Corporation, and is subject to the provision that ultimate collection be reasonably assured at the time of recognition. Revenue arising from sale of concentrate under the Corporation’s off-take agreements is recognized when the significant risks and rewards of ownership have passed, generally at the time of delivery to the smelter and when title and insurance risk has passed to the customer. Revenue from the sale of concentrate is recorded net of charges for smelter treatment and refining. The exposure to changes in metal prices between initial revenue recognition and final settlement, which could occur up to a number of months subsequent to initial recognition, represents an embedded derivative. This embedded derivative is recorded in accounts receivable and marked-to-market each period until final settlement occurs, with changes in fair value classified as an adjustment to revenue. All amounts received in respect of payable metals within concentrate are accounted for on a co-product basis and are included in revenue. Revenue from environmental services is recognized with reference to the stage of completion, based on an output appropriate to the particular service contract, such as performance of agreed service deliverables, or provision of billable hours under straight hourly bill contracts. Payments received prior to recognition of the related revenue are recorded as deferred revenue. (k) Share-Based Compensation and Payments The cost of incentive share options and other equity-settled share-based compensation and payment arrangements is recorded based on the estimated fair value at the grant date and charged to earnings over the vesting period. With respect to incentive share options, grant-date fair value is measured using the Black-Scholes option pricing model. With respect to restricted share units, grant-date fair value is determined by reference to the share price of the Corporation at the date of grant. Where share-based compensation awards are subject to vesting, each vesting tranche is considered a separate award with its own vesting period and grant-date fair value. Share-based compensation expense is recognized over the tranche’s vesting period by a charge to earnings, based on the number of awards expected to vest. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately. (l) Flow-Through Shares The proceeds from the offering of flow-through shares are allocated between the shares and the sale of tax benefits when the shares are offered. The allocation is made based on the difference between the market value of the shares and the amount the investors pay for the flow‐through shares. A liability is recognized for the premium paid by the investors and is then recognized in the results of operations in the period the eligible exploration expenditures are incurred. (m) Warrants When the Corporation issues units that are comprised of a combination of shares and warrants, the value is assigned to shares and warrants based on their relative fair values. The fair value of the shares is determined by the closing price on the date of the transaction and the fair value of the warrants is determined based on a Black-Scholes option pricing model. (n) Current and Deferred Income Taxes Income tax expense comprises current and deferred income taxes. Current and deferred income taxes are recognized in profit or loss except to the extent that they relate to a business combination or to items recognized directly in equity or in other comprehensive income. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) Current income taxes are the expected taxes payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to taxes payable in respect of previous periods. Deferred income taxes are recognized using the liability method, on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. However, deferred income taxes are not recognized if they arise from initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit nor loss. Deferred income taxes are determined using tax rates and laws that have been enacted or substantively enacted at the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets and liabilities are presented as non-current in the financial statements. Deferred income tax assets and liabilities are offset if there is a legally enforceable right of offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. Deferred income tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the assets can be utilized. (o) Translation of Foreign Currencies The financial statements of each entity in the group are measured using the currency of the primary economic environment in which each entity operates (the “functional currency”). The consolidated financial statements are presented in Canadian dollars. The functional currency of all entities in the Corporation group other than Alexco US is the Canadian dollar, while the functional currency of Alexco US is the United States dollar. The financial statements of Alexco US are translated into the Canadian dollar presentation currency using the current rate method as follows:  Assets and liabilities – at the closing rate at the date of the statement of financial position.  Income and expenses – at the average rate of the period (as this is considered a reasonable approximation to actual rates).  All resulting changes are recognized in other comprehensive income as cumulative translation adjustments. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from the item are considered to form part of the net investment in a foreign operation and are recognized in other comprehensive income. When an entity disposes of its entire interest in a foreign operation, or loses control, joint control, or significant influence over a foreign operation, the foreign currency gains or losses accumulated in other comprehensive income related to the foreign operation are recognized in profit or loss. If an entity disposes of part of an interest in a foreign operation which remains a subsidiary, a proportionate amount of foreign currency gains or losses accumulated in other comprehensive income related to the subsidiary is reallocated between controlling and non-controlling interests (p) Earnings or Loss Per Share Basic earnings per share is calculated by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) Diluted earnings per share is calculated using the treasury share method whereby all “in the money” options, warrants and equivalents are assumed to have been exercised at the beginning of the period and the proceeds from the exercise are assumed to have been used to purchase common shares at the average market price during the period. (q) Financial Instruments Financial assets and financial liabilities, including derivative instruments, are initially recognized at fair value on the balance sheet when the Corporation becomes a party to their contractual provisions. Measurement in subsequent periods depends on the financial instrument’s classification. Loans and Receivables Cash and cash equivalents and accounts and other receivables (other than embedded derivatives) are measured at amortized cost. Where necessary, accounts and other receivables are recorded net of allowances for uncollectible amounts. Financial Assets at Fair Value Through Profit or Loss Derivative instruments, including embedded derivatives included within accounts receivable arising from sales of concentrates, are classified as fair value through profit or loss and accordingly are measured at fair value. Unrealized gains and losses on embedded derivatives arising from the sale of concentrates are recognized as adjustments to revenue. Unrealized gains and losses on other derivatives, if any, are recorded as part of other gains or losses in earnings. Held-to-Maturity Investments Investments, including term deposits not included in cash equivalents, with fixed or determinable payments and fixed maturity and which the Corporation has the intention and ability to hold to maturity are classified as held to maturity and thus are measured at amortized cost using the effective interest method. Available For Sale Financial Assets Investments are designated as available-for-sale and measured at fair value, with unrealized gains and losses recognized in other comprehensive income. If a decline in fair value is significant or prolonged, it is deemed to be other-than-temporary and the loss is recognized in earnings. Available- for-sale investments are recorded as non-current assets unless management intends to dispose of them within twelve months of the balance sheet date. Financial Liabilities Financial liabilities include accounts payable and accrued liabilities, and are measured at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. Impairment and Uncollectibility of Financial Assets At each reporting date, the Corporation assesses whether there is objective evidence of impairment of any financial asset measured at other than fair value, or available for sale financial assets where a decline in fair value has been recognized in other comprehensive income. If such evidence exists, the Corporation recognizes an impairment loss. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) (r) Fair Value Measurement Where fair value is used to measure assets and liabilities in preparing these financial statements, it is estimated at the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Fair values are determined from inputs that are classified within the fair value hierarchy defined under IFRS as follows: Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3 – Inputs for the asset or liability that are unobservable 4. New and Revised Accounting Standards Adopted The following new and revised standards and amendments are effective for annual periods beginning on or after January 1, 2013, and accordingly have now been adopted by the Corporation. The adoption of these standards and amendments has had no significant impact on the Corporation’s consolidated financial statements. (i) (ii) (iii) (iv) (v) IFRS 10 Consolidated Financial Statements requires an entity to consolidate an investee when it has power over the investee, is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under previous IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation – Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements. IFRS 11 Joint Arrangements requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under previous IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities – Non-monetary Contributions by Venturers. IFRS 12 Disclosure of Interests in Other Entities establishes disclosure requirements for interests in other entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries forward existing disclosures and also introduces significant additional disclosure that address the nature of, and risks associated with, an entity’s interests in other entities. IFRS 13 Fair Value Measurement is a comprehensive standard for fair value measurement and disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. Under previous IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosures. IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine sets out the accounting for overburden waste removal (stripping) costs in the production phase of a mine. Stripping activity may create two types of benefit: (1) inventory produced, and (2) improved access to ore. Stripping costs associated with the former should be accounted for as a current production cost in accordance with IAS 2 Inventories. The latter should be accounted for as an addition to or enhancement of an existing asset. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) 5. Accounting Standards and Amendments Issued but Not Yet Adopted IFRS 9 Financial Instruments was issued in November 2009 and addresses classification and measurement of financial assets. It replaces the multiple category and measurement models in IAS 39 Financial Instruments – Recognition and Measurement for financial assets with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent that they do not clearly represent a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely. Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss are generally recorded in other comprehensive income. IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments – Disclosures, including added disclosures about investments in equity instruments measured at fair value in other comprehensive income, and guidance on financial liabilities and derecognition of financial instruments. In December 2011, amendments to IFRS 7 were issued to require additional disclosures on transition from IAS 39 to IFRS 9. In November 2013, IFRS 9 was amended to include guidance on hedge accounting and to allow entities to early adopt the requirement to recognize changes in fair value attributable to changes in the entity’s own credit risk, from financial liabilities designated under the fair value option, in other comprehensive income (without having to adopt the remainder of IFRS 9). In July 2013, the IASB tentatively decided to defer the mandatory effective date of IFRS 9. The IASB agreed that the mandatory effective date should no longer be annual periods beginning on or after January 1, 2015 but rather be left open pending the finalization of the impairment and classification and measurement requirements. The Corporation has not yet determined what the impact will be on its financial statements from the adoption of IFRS 9. 6. Critical Judgements and Major Sources of Estimation Uncertainty The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts and the valuation of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the period reported. Management uses its best estimates for these purposes, based on assumptions that it believes reflect the most probable set of economic conditions and planned courses of action. The estimates management makes in this regard include those regarding future commodity prices and foreign currency exchange rates, which are an important component of several estimates and assumptions management must make in preparing the financial statements, including but not limited to estimations and assumptions regarding the evaluation of the carrying amount of mineral properties and other assets, the estimation of decommissioning and rehabilitation provisions, the estimation of revenues and the value of the embedded derivative related to sales of concentrate, and the estimation of the net realizable value of inventories. Management bases its estimates of future commodity prices and foreign currency exchange rates primarily on consensus investment analyst forecasts, which are tracked and updated as published on generally a quarterly basis. Estimates are made by management regarding year-by-year prices and rates looking forward approximately three to four years, as well as for long-term prices and rates. The most significant judgments and estimates made by management in preparing the Corporation’s financial statements are described as follows:  Mineral Resources The determination of the Corporation’s estimated mineral resources by appropriately qualified persons requires significant judgements regarding the interpretation of complex geological and engineering data including the size, depth, shape and nature of the deposit and anticipated plans for mining, as well as estimates of future commodity prices, foreign exchange rates, capital requirements and production costs. These mineral resource estimates are used in many determinations required ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) to prepare the Corporation’s financial statements, including evaluating the recoverability of the carrying amount of its non-current non-financial assets; determining rates of depreciation, depletion and amortization; determining the recognition in income each period of the amount of advance payments received under the silver streaming interest; and estimating amounts of deferred income taxes.  Impairment of Non-Current Non-Financial Assets The Corporation reviews and evaluates the carrying value of each of its non-current non-financial assets for impairment when events or changes in circumstances indicate that the carrying amounts of the related asset may not be 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, including commodity prices, foreign currency exchange rates, mineral resources, and operating, capital and reclamation costs, are subject to risks and estimation uncertainties that may further affect the determination of the recoverability of the carrying amounts of its non-current non-financial assets. In the preparation of the Corporation’s 2013 second quarter interim financial statements, certain indicators of potential impairment were identified, and a review of the carrying amounts of non-current non-financial assets was carried out as a result. See note 14 for details on the significant judgements, estimates and assumptions applied in carrying out this review.  Decommissioning and Rehabilitation Provision Management’s determination of the Corporation’s decommissioning and rehabilitation provision is based on the reclamation and closure activities it anticipates as being required, the additional contingent mitigation measures it identifies as potentially being required and its assessment of the likelihood of such contingent measures being required, and its estimate of the probable costs and timing of such activities and measures. Significant judgements must be made when determining such reclamation and closure activities and measures required and potentially required. 7. Cash and Cash Equivalents Cash at bank and on hand Short-term bank deposits 8. Accounts and Other Receivables Trade receivables Interest and other Less: allowance for doubtful accounts December 31 2013 December 31 2012 $ 4,855 3,755 $ 2,305 20,783 $ 8,610 $ 23,088 December 31 2013 December 31 2012 $ 3,264 2,150 (485) $ 9,417 1,336 (956) $ 4,929 $ 9,797 ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) 9. Inventories Ore in stockpiles Concentrate Materials and supplies December 31 2013 December 31 2012 $ 4,269 - 991 $ 3,626 3,940 1,134 $ 5,260 $ 8,700 During the year ended December 31, 2013, the cost of inventories recognized as an expense and included in mining cost of sales was $44,714,000 (2012 – $61,351,000), and also included in mining cost of sales were write-downs of lead concentrate inventory totaling $886,000 (2012 – $nil) (see note 22). 10. Restricted Cash and Deposits Non-current: Security for remediation services agreement (see note 17) Security for decommissioning obligations Other December 31 2013 December 31 2012 $ 4,992 4,173 295 $ 4,992 3,190 752 $ 9,460 $ 8,934 (a) Security for decommissioning obligations Of the Corporation’s restricted cash and deposits at December 31, 2013, $4,173,000 (2012 – $3,190,000) comprises security provided to regulatory bodies under safekeeping agreements in accordance with its various operating permits. This security is in respect of mine-site reclamation at certain of the Corporation’s mineral properties, and is releasable back to the Corporation as and when reclamation activities are completed (see note 19). (b) Other The balance of the Corporation’s restricted cash and deposits comprises security provided in respect of certain long-term operating lease commitments. 11. Long-term Investments Common shares Warrants December 31 2013 December 31 2012 $ 525 14 $ 2,588 111 $ 539 $ 2,699 On September 26, 2012, the Corporation completed the sale of its remaining interest in the Brewery Creek mineral property to Americas Bullion Royalty Corp. (formerly Golden Predator Corp.) (see note 13(d)). As part of the consideration, the Corporation received 7,500,000 common shares of Americas Bullion Royalty Corp., ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) and purchase warrants to acquire a further 3,750,000 common shares for a price of $1.15 per share at any time until September 25, 2014. During the year ended December 31, 2013, the Corporation recorded fair value adjustment losses, pre-tax, to both the common shares and the warrants of $2,062,000 and $98,000 (2012 – $32,000 and $8,000) respectively, in other comprehensive income and net income respectively. During the second quarter of 2013, the Corporation also recorded an impairment charge against its common share investment in Americas Bullion Royalty Corp totaling $1,785,000 (2012 – $nil) (see note 14). That amount plus subsequent fair value adjustment losses, in total $2,160,000, has been recycled from other comprehensive income to current income. 12. Property, Plant and Equipment Cost Land and Buildings Camp, Roads, and Other Site Ore Processing Mill Heavy Machinery and Equipment Leasehold Improvements & Other Total December 31, 2011 Additions Disposals $ - 1,205 - $ 4,747 1,120 - $ 25,666 353 - $ 4,660 1,929 (97) $ 1,162 83 - $ 36,235 4,690 (97) December 31, 2012 Additions Write-downs 1,205 159 5,867 190 (390) 26,019 241 (2,628) 6,492 1,267 (483) 1,245 49 - 40,828 1,906 (3,501) December 31, 2013 $ 1,364 $ 5,667 $ 23,632 $ 7,276 $ 1,294 $ 39,233 Accumulated Depreciation Land and Buildings Camp, Roads, and Other Site Ore Processing Mill Heavy Machinery and Equipment Leasehold Improvements & Other Total December 31, 2011 Depreciation Disposals $ - 35 - $ 1,674 577 - $ 1,724 1,770 - $ 2,271 953 (72) $ 891 145 - $ 6,560 3,480 (72) December 31, 2012 Depreciation 35 60 2,251 665 3,494 1,660 3,152 1,006 1,036 64 9,968 3,455 December 31, 2013 $ 95 $ 2,916 $ 5,154 $ 4,158 $ 1,100 $ 13,423 Net book Value Land and Buildings Camp, Roads, and Other Site Ore Processing Mill Heavy Machinery and Equipment Leasehold Improvements & Other Total December 31, 2011 $ - $ 3,073 $ 23,942 $ 2,389 $ 271 $ 29,675 December 31, 2012 $ 1,170 $ 3,616 $ 22,525 $ 3,340 $ 209 $ 30,860 December 31, 2013 $ 1,269 $ 2,751 $ 18,478 $ 3,118 $ 194 $ 25,810 During the year ended December 31, 2013, the Corporation recorded total depreciation of property, plant and equipment of $3,455,000 (2012 – $3,480,000), of which $2,915,000 (2012 – $2,632,000) has been charged to income with $1,997,000 (2012 – $2,356,000) recorded to mining cost of sales, $156,000 (2012 – $86,000) recorded in environmental services cost of sales and $762,000 (2012 – $190,000) reflected under general expenses. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) Of the balance, $448,000 (2012 – $671,000) was related to property, plant and equipment used in exploration activities and has been capitalized to mineral properties, and the difference reflects the changes in depreciation capitalized within opening and ending ore and concentrate inventories for the period. In the second quarter of 2013, the Corporation recorded an impairment charge to property, plant and equipment totaling $3,501,000 (2012 – $nil) (see note 14). 13. Mineral Properties December 31, 2012 Depletable Non- depletable Expenditures Incurred Depletion Recognized Written Down December 31 2013 Mineral Properties Keno Hill District Properties – Bellekeno Lucky Queen Onek McQuesten Silver King Flame & Moth Bermingham Elsa Tailings Other Keno Hill Properties $ 48,002 - - - - - - - - Other Total $ - 15,871 19,120 3,650 6,983 11,374 9,003 858 12,170 190 $ 3,788 2,358 4,200 20 3 3,628 154 26 182 - $ (13,893) - - - - - - - - - $ (20,182) (9,145) (22,513) - - - - - - - $ 17,715 9,084 807 3,670 6,986 15,002 9,157 884 12,352 190 $ 48,002 $ 79,219 $ 14,359 $ (13,893) $ (51,840) $ 75,847 December 31, 2011 Depletable Non- depletable Expenditures Incurred Depletion Recognized Written Down December 31 2012 Mineral Properties Keno Hill District Properties – Bellekeno Lucky Queen Onek McQuesten Silver King Flame & Moth Bermingham Elsa Tailings Other Keno Hill Properties Brewery Creek Other $ 55,551 - - - - - - - - - - $ - 9,201 14,987 3,614 6,900 6,500 6,679 437 9,789 173 190 $ 13,278 6,670 4,133 36 83 4,874 2,324 421 2,381 (173) - $ (20,827) - - - - - - - - - - $ - - - - - - - - - - - $ 48,002 15,871 19,120 3,650 6,983 11,374 9,003 858 12,170 - 190 Total $ 55,551 $ 58,470 $ 34,027 $ (20,827) $ - $ 127,221 ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) December 31, 2013 Cost Accumulated depletion and write-downs Net book value December 31, 2012 Cost Accumulated depletion and write-downs Net book value December 31, 2011 Cost Accumulated depletion and write-downs Net book value Mining Operations Properties Exploration and Evaluation Properties $ 128,440 100,834 $ 27,606 $ 83,103 35,101 $ 48,002 $ 69,825 14,274 $ 55,551 $ 48,241 - $ 48,241 $ 79,219 - $ 79,219 $ 58,470 - $ 58,470 Total $ 176,681 100,834 $ 75,847 $ 162,322 35,101 $ 127,221 $ 128,295 14,274 $ 114,021 During the year ended December 31, 2013, the Corporation recognized depletion with respect to Bellekeno totaling $13,893,000 (2012 – $20,827,000), of which $15,585,000 (2012 – $21,239,000) is included in mining cost of sales and the difference reflects the changes in depletion charge included within opening and ending ore and concentrate inventories for the period. Depletion for Bellekeno in 2013 was based 100% (2012 – 100%) on indicated resources, as defined in Canadian National Instrument 43-101 Standards of Disclosure for Mineral Projects. (a) Keno Hill District Properties The Corporation’s mineral interest holdings in the Keno Hill District, located in Canada’s Yukon Territory, are comprised of a number of properties. The majority of the Corporation’s mineral rights within the Keno Hill District were purchased from the interim receiver of United Keno Hill Mines Limited and UKH Minerals Limited (collectively, “UKHM”) in 2006 and are held by ERDC. As a condition of that purchase, a separate agreement was entered into between Alexco, ERDC, the Government of Canada and the Government of Yukon (the “Subsidiary Agreement”), under which the Government of Canada indemnified ERDC and Alexco from and against all liabilities arising directly or indirectly from the pre-existing condition of the former UKHM mineral rights. The Subsidiary Agreement also provided that ERDC may bring any mine into production on the former UKHM mineral rights by designating a production unit from the mineral rights relevant to that purpose and then assuming responsibility for all costs of the production unit’s water related care and maintenance and water related components of closure reclamation. In addition, the Subsidiary Agreement detailed the basis under which ERDC was retained by the Government of Canada as a paid contractor responsible on a continuing basis for the environmental care and maintenance and ultimate closure reclamation of the former UKHM mineral rights. It provided that ERDC share the responsibility for the development of the ultimate closure reclamation plan with the Government of Canada, for which it would receive fees of 65% of agreed commercial contractor rates, and this plan development is currently ongoing. Upon acceptance and regulatory approval, the closure reclamation plan will be implemented by ERDC at full agreed contractor rates. During the period required to develop the plan and until the closure plan is executed, ERDC is also responsible for carrying out the environmental care and maintenance at various sites within the UKHM mineral rights, for a fixed annual fee adjusted each year for certain operating and inflationary factors and determined on a site-by-site basis. Under the Subsidiary Agreement, the portion of the annual fee amount so determined which was billable by ERDC in respect of each site reduced by 15% each year until all site-specific care and maintenance activities were replaced by closure reclamation activities; provided however that should a closure reclamation plan be prepared but not accepted and approved, the portion of annual fees billable by ERDC would revert to 85% until the Subsidiary Agreement was either amended or terminated. ERDC receives agreed commercial contractor rates when retained by government to provide environmental services in the Keno Hill District outside the scope of care and maintenance and closure reclamation planning under the Subsidiary Agreement. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) In July 2013, the Corporation executed an amended and restated Subsidiary Agreement, the ARSA, with the Government of Canada. Recognizing that developing the closure reclamation plan is more complicated than originally anticipated, the ARSA provides for the Government of Canada to contribute a higher proportion of closure plan development costs than provided for under the Subsidiary Agreement, retroactive to 2009. As a result, included in revenues for AEG for the year ended December 31, 2013 is $1,983,000 in retroactive fees. Going forward, ERDC will receive 95% of agreed commercial contractor rates for ongoing development of the closure reclamation plan. Furthermore, with respect to care and maintenance activity during the closure reclamation planning phase, the original reducing fee scale is replaced by a fixed fee of $850,000 per year, representing approximately 50% of estimated fully-billable care and maintenance fees. As a result, included in AEG cost of sales is an $850,000 reduction in the Corporation’s environmental services contract loss provision. Other Subsidiary Agreement terms unchanged by the ARSA include that ERDC is required to pay into a separate reclamation trust a 1.5% net smelter return royalty, to an aggregate maximum of $4 million for all production units, from any future production from the former UKHM mineral rights, commencing once earnings from mining before interest, taxes and depreciation exceed actual exploration costs, to a maximum of $6.2 million, plus actual development and construction capital. That commencement threshold was achieved during the year ended December 31, 2013, and as at December 31, 2013 a total of $109,000 in such royalties had been accrued as payable. Additionally, a portion of any future proceeds from sales of the acquired UKHM assets must also be paid into the separate reclamation trust. Also substantially unchanged by the ARSA are the pre-existing conditions indemnification and the right to bring any mine into production on the former UKHM mineral rights. The rights of the Government of Canada under the Subsidiary Agreement and the ARSA are supported by a general security agreement over all of the assets of ERDC. The ARSA can be terminated at ERDC’s election should a closure reclamation plan be prepared but not accepted and approved, and at the Governments’ election should ERDC be declared in default under the ARSA. (b) Mining Operations The Corporation’s mining operations reflect production from one mine, Bellekeno, a primary silver mine with lead, zinc and gold by-products. During the second quarter of 2013, both the Lucky Queen and Onek properties were reclassified from exploration and evaluation assets to mining operations assets as a result of the receipt of remaining operating permits, though neither property has as yet been placed into production. From September 2013, Bellekeno mining operations have been suspended in light of a sharply reduced silver price environment, and in the second quarter of 2013 the Corporation recorded an impairment charge to the Bellekeno, Lucky Queen and Onek mineral properties totaling $51,840,000 (2012 – $nil) (see note 14). (c) Keno Hill Royalty Encumbrances As noted above, under the Subsidiary Agreement and unchanged by the ARSA, the former UKHM mineral rights are subject to a 1.5% net smelter return royalty, to an aggregate maximum of $4 million for all production units. Certain of the Corporation’s non-UKHM mineral rights located within or proximal to the McQuesten property are subject to a net smelter return royalty ranging from 0.5% to 2%. Certain other of the non-UKHM mineral rights located within the McQuesten property are subject to a separate net smelter return royalty of 2% under which the Corporation makes an annual advance royalty payment of $20,000 per year. A limited number of the Corporation’s non-UKHM mineral rights located throughout the remainder of the Keno Hill District are subject to net smelter return royalties ranging from 1% to 1.5%. (d) Brewery Creek Effective September 26, 2012, the Corporation completed the sale of the remainder of its interest in the Brewery Creek property to a third party, Americas Bullion Royalty Corp., for proceeds of ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) $3,205,000 cash plus 7,500,000 common shares of Americas Bullion Royalty Corp. and purchase warrants to acquire a further 3,750,000 common shares for a price of $1.15 per share at any time until September 25, 2014 (see note 11), as well as a net smelter return royalty on gold production from Brewery Creek of between 2% and 2.75%. As a result, and including reversal of the decommissioning and rehabilitation provision related to the property (see note 19), a gain of $6,346,000 was included in net income in 2012. 14. Impairment At June 30, 2013, the carrying amount of the Corporation’s net assets exceeded its market capitalization, which was considered an indicator of potential impairment of the carrying amount of its non-current non- financial assets. In addition, sharp and significant declines in silver prices occurred during the three months ended June 30, 2013, and in July the Corporation announced a plan to suspend Bellekeno mining operations over the coming winter in light of the low silver price environment. As a result, the Corporation carried out a review of the carrying amounts of the non-current non-financial assets in its mining operations segment, which segment has been determined to be a cash generating unit (“CGU”) for this purpose. In carrying out this review, the Corporation was required to make significant judgements, including with respect to the allocation of assets to the mining operations CGU, as well as the selection and application of appropriate valuation methods. The Corporation was also required to make significant estimates and assumptions, including with respect to mine plan tonnages and grades, capital and operating costs, future commodity prices, foreign currency exchange rates, discount rates and net asset value multiples. By their nature, such estimates and assumptions are subject to significant uncertainty. Recoverable amount was determined based on estimated fair value less cost of disposal (“FVLCD”), which for the mining operations CGU was determined to be greater than value in use. FVLCD for the mining operations CGU was determined based on the net present value of after-tax future cash flows expected to be generated within that unit. In addition, a net asset value multiple was applied to take account of certain additional value factors, particularly additional exploration potential and the benefit of optionality to the prices of silver, lead and zinc, being the main production metals of the unit. Factors were also applied for the expected benefit of potential operating cost optimizations. In making these determinations, metal prices over the next approximately four years were assumed to range from US$21.00 to US$23.50 for silver, US$0.93 to US$1.05 for lead and US$0.85 to $1.05 for zinc, and foreign currency exchange rates to be approximately US$0.96 per Canadian dollar, based on then-current consensus investment analyst forecasts. Expected future cash flows were discounted using a real after-tax rate of 10%, representing the time value of money and estimated risks specific to the assets under review. This estimate of FVLCD is categorized as Level 3 in the fair value hierarchy (see note 3(q)). Based on the results of its review, the Corporation recognized an impairment loss at June 30, 2013 totaling $55,341,000, attributed as follows: Reporting Segment Impairment Loss Mineral properties: Bellekeno Lucky Queen Onek Property, plant and equipment: Ore processing mill Heavy machinery and equipment Camp, roads and other site Total impairment loss Mining operations Mining operations Mining operations Mining operations Mining operations Mining operations $ 20,182 9,145 22,513 2,628 483 390 $ 55,341 The non-current non-financial assets in the mining operations segment were written down to their recoverable amount of $32,906,000. Consequently, any significant negative change in the key assumptions made in determining the recoverable amount could result in an additional impairment loss. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) In addition, at June 30, 2013 the Corporation recorded an impairment charge of $1,785,000 in respect of its long-term investment in Americas Bullion Royalty Corp. (see note 11), due to a significant and sustained decline observed in its traded market value. As at December 31, 2013, no new indicators of potential impairment have been identified with respect to the Corporation’s non-current non-financial assets. Exploration and evaluation assets are each separately assessed for impairment, and are not allocated by the Corporation to a CGU for impairment assessment purposes. As at June 30, 2013 and December 31, 2013, and pursuant to IFRS 6 Exploration For and Evaluation Of Mineral Resources, no indicators were identified which suggested the carrying amounts of the Corporation’s exploration and evaluation assets may exceed their recoverable amount. 15. Accounts payable and accrued liabilities Trade payables Accrued liabilities and other 16. Environmental Services Contract Loss Provision Balance – beginning of year Increase (reduction) due to changes in loss estimation Reduction due to current period loss realization Balance – end of year Less: current portion December 31 2013 December 31 2012 $ 1,134 1,086 $ 9,958 5,638 $ 2,220 $ 15,596 December 31 2013 December 31 2012 $ 1,767 $ 1,952 (743) (911) 113 (1) 333 (518) 1,767 (408) $ 112 $ 1,359 As described in note 13(a), ERDC is responsible for carrying out environmental care and maintenance at various sites within the former UKHM mineral rights until acceptance and regulatory approval are obtained for the closure reclamation plan, for a fixed annual fee adjusted each year for certain operating and inflationary factors and determined on a site-by-site basis. Under the original Subsidiary Agreement, the portion of the site-by-site adjusted annual fee determination basis which was billable by ERDC reduced by 15% each year until all site-specific care and maintenance activities were replaced by closure reclamation activities. As a result, an environmental services contract loss provision was previously recognized to reflect aggregate future losses estimated to be realized with respect to such care and maintenance activities. During the continual review of this contract loss provision estimate and based on ongoing discussions with Government regarding the process and timing that will be required to obtain acceptance and regulatory approval of the closure reclamation plan, at December 31, 2012 management extended the estimated date by which the care and maintenance phase will end to March 2015, which resulted in an increase of $333,000. At December 31, 2013, this estimated date was further extended to August 2018, resulting in an increase of $107,000 in the fourth quarter of 2013. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) With the execution of the ARSA (see note 13(a)), the original reducing fee scale is replaced by a fixed fee of $850,000 per year, representing approximately 50% of estimated fully-billable fees. As a result, the environmental services contract loss provision was reduced by $850,000 in the third quarter of 2013. All changes in the contract loss provision are recorded within AEG cost of sales for the period in which they occur. 17. Deferred Revenue Deferred revenue – total Less: current portion December 31 2013 December 31 2012 $ 1,406 $ 1,977 (172) (245) $ 1,234 $ 1,732 In January, 2012, Alexco Resource U.S. Corp. (“Alexco US”), a wholly owned subsidiary of the Corporation and a member of AEG, entered into an agreement with a third party customer to provide certain environmental consulting and remediation services. Under the agreement, Alexco US provided certain cost performance commitments, for which an up-front payment of US$1,175,000 (CAD$1,172,000) was received. The Corporation placed US$5,000,000 (CAD$4,992,000) into escrow in support of this cost performance commitment, which amount is recorded in restricted cash and deposits. The up-front payment of $1,172,000 was recorded in deferred revenue and is being recognized in revenue based on the percentage completion of the services under the remediation services agreement. During the year ended December 31, 2013, the Corporation recognized in AEG revenue $374,000 (2012 – $149,000) of the up-front payment. The remaining deferred revenue amounts relate to the care and maintenance phase under the Subsidiary Agreement (see note 13(a)). 18. Silver Streaming Interest Balance – beginning of year December 31 2013 December 31 2012 $ 28,082 $ 41,955 Amount recognized in cost of sales (see note 22) (9,892) (13,873) Balance – end of year $ 18,190 $ 28,082 Under a silver streaming interest held by Silver Wheaton Corp. (“Silver Wheaton”), Silver Wheaton is purchasing from the Corporation an amount of refined silver equal to 25% of the payable silver produced by the Corporation from its Keno Hill District mineral properties, if and when such payable silver is delivered to an off-taker and as the Corporation is paid for such payable silver. Silver Wheaton has paid the Corporation advance amounts totaling US$50 million, the last of which was received in January 2011, and for each ounce of silver purchased must pay the Corporation an additional cash amount of the lesser of US$3.90 (increasing by 1% per annum after the third year of full production) and the prevailing market price at the time of delivery. Under the agreement, the deposit balance is reduced on each silver delivery by the excess of the prevailing market value of the silver delivered over the per-ounce cash amount paid by Silver Wheaton at the time. After the initial 40 year term of the agreement, the Corporation is required to refund the balance of any deposit ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) payments received and not yet reduced through silver deliveries. The Corporation would also be required to refund the balance of advance payments received and not yet reduced if Silver Wheaton exercised its right to terminate the streaming interest in an event of default by the Corporation. The Corporation will be required to refund a pro-rata portion of the balance of the advance payments not yet reduced to the extent the Bellekeno mine has not achieved production throughput of 400 tonnes of ore per day over a 30 day period by June 30, 2015, as extended pursuant to an amendment entered into effective March 11, 2014. The maximum amount of any such refund is US$9,750,000. Commencing January 2014, and ending the earlier of June 30, 2015 and the completion of the 400 tonnes per day throughput test, as extended by the same amendment, the Corporation may be required to sell more than 25% of the payable silver produced, depending on the extent by which the 400 tonnes per day test has not yet been met. In support of its rights under the silver streaming interest, Silver Wheaton holds a security interest in substantially all of the Corporation’s plant and equipment and mineral properties located within the Keno Hill District. 19. Decommissioning and Rehabilitation Provision Balance – beginning of year December 31 2013 December 31 2012 $ 4,087 $ 3,849 Additional decommissioning and rehabilitation obligations incurred Increase (decrease) due to re-estimation Expenditures on decommissioning and rehabilitation obligations Reversal of provision upon sale of Brewery Creek property (see note 13(d)) Accretion expense, included in finance costs - (331) - - 47 714 - (14) (511) 49 Balance – end of year $ 3,803 $ 4,087 The Corporation’s decommissioning and rehabilitation provision consists of costs expected to be required in respect of ongoing reclamation and closure activities at the Brewery Creek property prior to its disposition, and costs expected to be required in respect of future reclamation and closure activities at the end of the life of the Bellekeno, Lucky Queen and Onek mines. These activities include water treatment, land rehabilitation, ongoing care and maintenance and other reclamation and closure related requirements. As at December 31, 2013, the Corporation has provided reclamation security totaling $4,173,000 (2012 – $3,678,000) to the Government of Yukon in the form of term deposits held under safekeeping agreements, which funds are included in the Corporation’s non-current restricted cash and deposits. The total undiscounted amount of the estimated cash flows required to settle the decommissioning and rehabilitation provision is estimated to be $4,780,000 (2012 – $4,585,000), which expenditures are expected to be incurred substantially over the course of the next 15 years. In determining the carrying value of the decommissioning and rehabilitation provision as at December 31, 2013, the Corporation has used a risk-free discount rate of 3.0% (2012 – 2.09% to 3.38%) and an inflation rate of 2.0% (2012 – 2.0%). 20. Shareholders’ Equity Effective April 23, 2013, the Corporation issued 2,100,000 flow-through common shares on a private placement basis at a price of $3.35 per share for aggregate gross proceeds of $7,035,000. Of the gross proceeds, $4,830,000 has been attributed to issued common shares, and the remaining $2,205,000 has attributed to the sale of tax benefits. Net proceeds from the issuance were $6,649,000, after issuance costs comprised of the agent’s commission of $472,000 and other issuance costs of $80,000, less the deferred income tax benefit of such costs of $166,000. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) 21. Share-Based Compensation Incentive Stock Options The Corporation has a stock option plan that was most recently approved by its shareholders on December 16, 2011. Under the plan and at the discretion of the board of directors, the Corporation may grant stock options to directors, officers, employees and consultants. The stock option plan is non-evergreen, meaning options exercised do not become available for re-granting, and requires that the exercise price of options granted not be less than the market price of the common shares at the time of granting. The maximum term of options granted under this plan is seven years, and other provisions including vesting and exercise price are determined at the discretion of the directors at the time of granting. Generally, the Corporation grants options with five year terms, vesting one third upon granting, one third after one year and one third after two years. The stock option plan is non-rolling, with the maximum number of shares issuable set at 5,550,000. As at December 31, 2013, a total of 4,484,995 options were outstanding under the plan, and a total of 1,191,753 options remained available for granting. In addition, as at December 31, 2013 a further 150,000 stock options were outstanding which were originally granted outside of the Corporation’s stock option plan and in accordance with the rules of the Toronto Stock Exchange. The changes in incentive share options outstanding are summarized as follows: Balance – December 31, 2012 Stock options granted Share based compensation expense Options exercised Options forfeited Balance – December 31, 2013 Balance – December 31, 2011 Stock options granted Share based compensation expense Options exercised Options forfeited Balance – December 31, 2012 Weighted average exercise price Number of shares issued or issuable on exercise Amount $5.07 $4.16 - $3.08 $4.30 $5.16 $4.41 $6.91 - $1.55 $6.64 $5.07 4,634,995 $ 11,061 641,500 - (45,000) (1,195,832) - 2,585 (65) (2,377) 4,035,663 $ 11,204 4,292,661 $ 8,552 906,750 - (389,834) (174,582) - 3,462 (328) (625) 4,634,995 $ 11,061 During the year ended December 31, 2013, the fair value of options at the date of grant was estimated using the Black-Scholes option pricing model, assuming a risk-free interest rate of 1.4% (2012 – 1.3% to 1.5%) per annum, an expected life of options of 4 years (2012 – 4 years), an expected volatility of 70% based on historical volatility (2012 – 70% to 71%), an expected forfeiture rate of 4% (2012 – 9%) and no expected dividends (2012 – nil). ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) Incentive share options outstanding and exercisable at December 31, 2013 are summarized as follows: Options Outstanding Options Exercisable Number of Shares Issuable on Exercise Average Remaining Life (Years) Average Exercise Price Number of Shares Issuable on Exercise Exercise Price $1.65 $3.45 $4.16 $4.46 $4.99 $5.19 $5.38 $5.90 $6.92 $7.10 $8.13 292,500 782,996 503,000 111,000 526,500 150,000 50,000 15,000 627,000 974,167 3,500 4,035,663 2.21 3.22 4.06 1.12 0.05 0.77 0.42 0.17 3.07 4.06 4.36 2.82 $ 1.65 $ 3.45 $ 4.16 $ 4.46 $ 4.99 $ 5.19 $ 5.38 $ 5.90 $ 6.92 $ 7.10 $ 8.13 292,500 759,997 75,333 111,000 526,500 150,000 50,000 15,000 394,500 854,834 3,500 $ 5.16 3,233,164 $ 5.10 Average Exercise Price $ 1.65 $ 3.45 $ 4.16 $ 4.46 $ 4.99 $ 5.19 $ 5.38 $ 5.90 $ 6.92 $ 7.10 $ 8.13 The weighted average share price at the date of exercise for options exercised during the year ended December 31, 2013 was $4.22 (2012 – $5.08). During the year ended December 31, 2013, the Corporation recorded total share-based compensation expense of $1,473,000 (2012 – $3,462,000) related to incentive share options, of which $213,000 (2012 – $558,000) is recorded to mineral properties, $1,311,000 (2012 – $2,984,000) has been charged to income, and the balance reflects the changes in share-based compensation expense capitalized within opening and ending ore and concentrate inventories for the period. Subsequent to December 31, 2013, a further 717,000 incentive stock options have been granted under the Corporation’s incentive stock option plan, another 526,500 have expired unexercised and 15,000 have been forfeited. Restricted Share Units (“RSUs”) On December 14, 2012, the Corporation initiated a long-term incentive plan which provides for the issuance of RSUs in such amounts as approved by the Corporation’s Board of Directors. The RSU plan is considered an equity-settled share-based compensation arrangement, and is administered by a trustee. Each RSU entitles the participant to receive one common share of the Corporation subject to vesting criteria, with RSU grants vesting one third per year over a three year period. These RSUs are settled in common shares of the Corporation purchased by the plan trustee through the open market at the time of granting, using funds provided by the Corporation. The Corporation is required under IFRS to consolidate the plan trust, and the outstanding number of common shares reflected in these financial statements is reduced by the number of shares held by the plan trustee for future settlements. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) The changes in RSUs outstanding are summarized as follows: Balance – December 31, 2012 RSUs granted Share-based compensation expense recognized RSUs vested Balance – December 31, 2013 Balance – December 31, 2011 RSUs granted Share-based compensation expense recognized Balance – December 31, 2012 Number of shares issued or issuable on vesting Amount 130,000 $ 52 315,000 - (43,335) - 1,108 (164) 401,665 $ 996 - $ - 130,000 - - 52 130,000 $ 52 A total of 315,000 RSUs were granted in January 2013, with total grant-date fair value determined to be $1,376,000. Included in general and administrative expenses for the year ended December 31, 2013 is share- based compensation expense of $1,108,000 (2012 – $52,000) related to RSU awards. As at December 31, 2013, the plan trust held 401,665 common shares of the Corporation for future settlement of granted RSUs. 22. Cost of Sales The Corporation recorded cost of sales for the years ended December 31, 2013 and 2012 as follows: Mining operations – Inventoried costs – Direct production costs Depreciation, depletion and share-based compensation Inventory write-down Subsidiary Agreement royalty cost Silver streaming interest – Market price of deliverable silver, net of amount receivable on delivery Silver streaming interest amount recognized (see note 18) Environmental services – Direct service costs Depreciation 2013 2012 $ 26,879 17,835 886 109 $ 37,358 23,993 - - 7,326 (9,892) 43,143 7,314 156 7,470 14,213 (13,873) 61,691 5,011 86 5,097 $ 50,613 $ 66,788 ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) 23. General and Administrative Expenses The Corporation recorded general and administrative expenses for the years ended December 31, 2013 and 2012 as follows: General and administrative expenses Depreciation Amortization of intangible assets Business development and investor relations Office, operating and non-operating overheads Professional Regulatory Salaries and contractors Share-based compensation Travel 2013 2012 $ 119 114 628 2,506 1,085 193 5,316 2,060 450 $ 190 146 724 4,899 1,418 257 6,113 2,438 472 $ 12,471 $ 16,657 24. Total Expenditures by Nature The Corporation’s total expenditures by nature, reconciled to total cost of sales, general and administrative and mine site care and maintenance expenses, for the years ended December 31, 2013 and 2012 are summarized as follows: Depreciation and amortization Depletion Business development and investor relations Office, operating and non-operating overheads Professional Regulatory Salaries and contractors Share-based compensation Travel Exploration and evaluation – drilling, assaying and other external costs Mining contractor Concentrate transportation Fuel and energy Materials and supplies Freight Subsidiary Agreement royalty cost Silver streaming interest, net 2013 2012 $ 3,592 13,893 628 7,980 4,519 193 14,870 2,581 1,302 6,667 10,931 3,767 2,587 3,565 1,110 109 (2,566) $ 3,670 20,827 724 13,955 5,036 257 16,536 3,514 1,927 12,696 17,778 6,270 4,709 5,366 1,585 - 340 Total expenditures by nature 75,728 115,190 Adjusted for: Capitalized mine development costs Capitalized exploration and evaluation costs Inventory write-down Impact of change in inventory (3,788) (10,571) 866 2,059 (13,278) (20,749) - 2,282 Total cost of sales, general and administrative and mine site care and maintenance expenses $ 64,294 $ 83,445 ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) 25. Income Tax Expense The major components of income tax expense for the years ended December 31, 2013 and 2012 are as follows: (a) The provision for income taxes consists of: Current Income tax Yukon mineral tax US income tax 2013 2012 $ - 220 11 $ - 448 1 Total current tax provision 231 449 Deferred Income tax Yukon mineral tax Total deferred tax provision (recovery) (10,830) (1,030) (11,860) 3,571 539 4,110 Total income tax provision (recovery) $ (11,629) $ 4,559 (b) The income tax provision differs from the amount that would result from applying the Canadian federal and provincial tax rate to income before taxes. These differences result from the following items: Accounting income (loss) before taxes Federal and provincial income tax rate of 25.75% (2012 – 25%) $ (62,079) (15,960) $ 7,979 1,995 2013 2012 Non-deductible permanent differences Differences in foreign exchange rates Effect of difference in tax rates Change in benefits not recognized Yukon mineral tax Change in estimate Other 464 (90) (2,544) 7,411 (804) (105) (1) 4,331 937 (45) 336 280 846 189 21 2,564 Provision for (recovery of) income taxes $ (11,629) $ 4,559 During the year, the Canadian statutory tax rate increased to 25.75% due to legislated provincial tax rate changes. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) (c) The movement in deferred tax assets and liabilities during the year by type of temporary difference, without taking into consideration the offsetting balances within the same tax jurisdiction, is as follows: Deferred tax liabilities Mineral Property Interest Inventory Property, Plant and Equipment Yukon Mining Tax Other Total December 31, 2011 Credited (charged) to the income statement Charged directly to equity December 31, 2012 Credited (charged) to the income statement Charged directly to equity $ (10,487) $ (733) $ (2,404) $ (733) $ (856) $ (15,213) (7,270) - 62 - (2,439) - (539) - (39) - (10,225) - (17,757) (671) (4,843) (1,272) (895) (25,438) 7,240 - 545 - 2,903 - 1,028 - 632 - 12,348 - December 31, 2013 $ (10,517) $ (126) $ (1,940) $ (244) $ (263) $ (13,090) Deferred tax assets Mineral Property Interest Loss Carry Forward Property, Plant and Equipment Decommissioning and rehabilitation provision Other Total December 31, 2011 Credited (charged) to the income statement Charged directly to equity $ 215 $ 567 $ 2,025 $ 917 $ 1,504 $ 5,228 3,406 - 4,282 - (1,574) - 240 - (239) - 6,115 - December 31, 2012 Credited (charged) to the income statement Charged directly to equity 3,621 4,849 (1,121) - 552 - 451 (6) - 1,157 1,265 11,343 (16) - (602) 165 (1,193) 165 December 31, 2013 $ 2,500 $ 5,401 $ 445 $ 1,141 $ 828 $ 10,315 Net deferred tax liabilities December 31, 2012 December 31, 2013 $ (14,095) $ (2,775) (d) At December 31, 2013, the Corporation has the following deductible temporary differences and unused non-capital losses available to offset future taxable income, but for which no deferred tax asset has been recognized. These amounts relate to subsidiaries that have a history of losses, and there is not yet adequately-convincing evidence that the subsidiaries will generate sufficient future taxable income to enable offset. Unused non-capital losses Mineral property interest Other $ 5,130 21,315 2,385 $ 28,830 ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) The unused non-capital losses for which no deferred tax asset has been recognized expire as follows: 2025 2026 2027 2028 2029 2030 2031 2032 2033 Canada US Total $ - - - - - 43 348 131 1,483 $ - - - 586 780 939 765 55 - $ - - - 586 780 982 1,113 186 1,483 $ 2,005 $ 3,125 $ 5,130 26. Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2013 and 2012: Numerator Net income (loss) for the year Denominator 2013 2012 $ (50,450) $ 3,420 For basic – weighted average number of shares outstanding Effect of dilutive securities – incentive share options For diluted – adjusted weighted average number of shares outstanding 61,968,376 - 61,968,376 60,256,688 800,174 61,056,862 Earnings (Loss) Per Share Basic Diluted $(0.81) $(0.81) $0.06 $0.06 Incentive stock options to acquire 3,743,000 shares were outstanding at December 31, 2013 but were not included in the computation of diluted earnings per share for the year then ended because to do so would have been anti-dilutive given the Corporation recorded a net loss in that year. Incentive stock options to acquire 2,154,000 shares were outstanding at December 31, 2012 but were not included in the computation of diluted earnings per share for the year then ended because to do so would have been anti-dilutive given their exercise price was greater than the average market price of the Corporation's shares over that year. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) 27. Financial Instruments Financial Assets and Liabilities Information regarding the carrying amounts of the Corporation’s financial assets and liabilities is summarized as follows: Loans and receivables – Cash and cash equivalents Accounts receivable other than those arising from sales Fair Value Hierarchy Classification 2013 2012 Level 1 $ 8,610 $ 23,088 of concentrates Level 2 Fair value through profit or loss – Accounts receivable arising from sales of concentrates Long-term investment in warrants Level 2 Level 2 4,873 13,483 56 14 70 5,534 28,622 4,263 111 4,374 Held to maturity investments – Restricted cash and deposits – Term deposits Available for sale – Level 2 9,460 8,934 Long-term investment in common shares Level 1 525 2,588 Financial liabilities – Accounts payable and accrued liabilities Level 2 (2,220) (15,596) $ 21,318 $ 28,922 The carrying amounts of all of the Corporation’s financial assets and liabilities reasonably approximate their fair values. Accounts receivable arising from sales of concentrates includes exposure to changes in metal prices between initial revenue recognition and final settlement, which could occur up to a number of months subsequent to initial recognition. Measurement of such exposure is based on estimated prices for contained payable metal on which final settlement will be determined, with such estimates based on quoted forward prices. All term deposits carried initial maturity periods of twelve months or less and are high grade, low risk investments held with major financial institutions in Canada, generally yielding between 1% and 2% per annum. The fair value of the investment in warrants at December 31, 2013 was estimated using the Black-Scholes option pricing model, assuming a risk-free interest rate of 1.10% per annum (2012 – 1.10%), an expected life equal to full remaining term, an expected volatility of 103% (2012 – 69%) and no expected dividends. Financial Instrument Risk Exposure The Corporation’s activities expose it to a variety of financial risks: market risk (including price risk, currency risk and interest rate risk), credit risk and liquidity risk. Risk management is carried out by management under policies approved by the Board of Directors. Management identifies and evaluates the financial risks in co- operation with the Corporation’s operating units. The Corporation’s overall risk management program seeks to minimize potential adverse effects on the Corporation’s financial performance, in the context of its general capital management objectives as further described in note 28. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) Price Risk Under the terms of the off-take agreements by which the Bellekeno mine concentrates are sold, pricing is based on future metal prices, the final settlement of which could occur up to a number of months subsequent to initial recognition of the sale. Initial recognition of the sale is based on estimated final settlement prices, and the exposure to changes in metal prices between initial recognition and final settlement represents an embedded derivative within accounts receivable arising from sales of concentrate. The Corporation is primarily exposed to changes in the market price for silver, lead and zinc, all of which are actively traded commodities, the prices of which are affected by numerous macroeconomic factors such as interest rates, exchange rates, inflation or deflation, global and regional supply and demand and general worldwide political and economic conditions, as well as fluctuations of the value of the US dollar given the price of each of these metals on the world market is widely quoted in that currency. Management monitors these various factors as part of its overall capital management activities, including tracking published analyst commodity price forecasts. In situations of significant anticipated volatility in metal prices or where warranted by unique project- specific circumstances, management may consider hedging the metal prices to which it is exposed. However, it is the Corporation’s primary policy that it will not hedge the metal prices to which it is exposed, particularly that for silver. As at December 31, 2013, final pricing had been established for all concentrate sales not yet fully settled. Accordingly, as at December 31, 2013, if prices for all of silver, lead and zinc had been 10% higher or lower, recorded revenues would have correspondingly increased or decreased by $nil (2012 – $1,111,000) due to the increase in the value of the embedded derivative at that date. If only the price of silver had been 10% higher or lower, recorded revenues would have increased or decreased $nil (2012 – $942,000). Currency Risk Substantially all of the Corporation’s property, plant and equipment and mineral properties are located in Canada; all of its mining operations occur in Canada; and a significant majority of its environmental services revenues are earned in Canada. However, with the commencement of commercial production at the Bellekeno mine, the Corporation’s exposure to US dollar currency risk has significantly increased as sales of concentrate are effected in US dollars. In addition, a portion of its environmental services revenues, and receivables arising therefrom, are also denominated in US dollars. As well, while a significant majority of the Corporation’s operating costs are denominated in Canadian dollars, it does have some exposure to costs, and therefore accounts payable and accrued liabilities, denominated in US dollars. The Corporation is exposed to currency risk at the balance sheet date through the following financial assets and liabilities, which are denominated in US dollars: Cash and demand deposits Accounts and other receivable Accounts payable and accrued liabilities Net exposure December 31 2013 December 31 2012 $ 3,027 1,129 (512) $ 1,492 4,793 (933) $ 3,644 $ 5,352 Based on the above net exposure at December 31, 2013, a 10% depreciation or appreciation of the US dollar against the Canadian dollar would result in an approximately $364,000 decrease or increase respectively in both net and comprehensive earnings (2012 – $535,000). The Corporation has not employed any currency hedging programs during the current period. Interest Rate Risk The Corporation has no significant exposure at December 31, 2013 or 2012 to interest rate risk through its financial instruments. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) Credit Risk Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its obligations. The Corporation’s maximum exposure to credit risk at the balance sheet date under its financial instruments is summarized as follows: Trade receivables, net of provision – Currently due Past due by 90 days or less, not impaired Past due by greater than 90 days, not impaired Cash Demand deposits Term deposits December 31 2013 December 31 2012 $ 729 1,448 602 2,779 4,855 3,755 9,460 $ 4,390 1,871 2,199 8,460 2,305 20,783 8,934 $ 20,849 $ 40,482 Substantially all of the Corporation’s cash, demand deposits and term deposits are held with major financial institutions in Canada, and management believes the exposure to credit risk with respect to such institutions is not significant. Those financial assets that potentially subject the Corporation to credit risk are primarily receivables. Management actively monitors the Corporation’s exposure to credit risk under its financial instruments, particularly with respect to receivables. The Corporation considers the risk of material loss to be significantly mitigated due to the financial strength of the parties from whom the receivables are due, including with respect to trade accounts receivable as the Corporation’s major customers include government organizations as well as substantial corporate entities. As at December 31, 2013, trade receivables are recorded net of a recoverability provision of $485,000 (2012 – $950,000). Liquidity Risk 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 by which it anticipates and determines the funds required to support its normal operating requirements as well as the growth and development of its mining projects. The Corporation coordinates this planning and budgeting process with its financing activities through the capital management process described in note 28. The Corporation’s financial liabilities are comprised of its accounts payable and accrued liabilities, the contractual maturities of which at the balance sheet date are summarized as follows: Accounts payable and accrued liabilities with contractual maturities – Within 90 days or less In later than 90 days, not later than one year December 31 2013 December 31 2012 $ 2,220 - $ 15,596 - $ 2,220 $ 15,596 Under the agreement with Silver Wheaton (see note 18), as of June 15, 2015, if mining operations remain suspended or the 400 tonne per day throughput test has not yet been completed, the Corporation may be required to refund an amount to Silver Wheaton depending on the extent to which it has achieved such test, the maximum amount of which refund would be US$9,750,000. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) 28. Management of Capital The capital managed by the Corporation includes the components of shareholders’ equity as described in the consolidated statements of shareholders’ equity. The Corporation is not subject to externally imposed capital requirements. The Corporation’s objectives of capital management are to create long-term value and economic returns for its shareholders. It does this by seeking to maximize the availability of finance to fund the growth and development of its mining projects, and to support the working capital required to maintain its ability to continue as a going concern. The Corporation manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its assets, seeking to limit shareholder dilution and optimize its cost of capital while maintaining an acceptable level of risk. To maintain or adjust its capital structure, the Corporation considers all sources of finance reasonably available to it, including but not limited to issuance of new capital, issuance of new debt and the sale of assets in whole or in part, including mineral property interests. The Corporation’s overall strategy with respect to management of capital at December 31, 2013 remains fundamentally unchanged from the year ended December 31, 2012. 29. Supplemental Cash Flow Information Supplemental cash flow information with respect to the years ended December 31, 2013 and 2012 is summarized as follows: Operating Cash Flows Arising From Interest and Taxes Interest received Interest paid Income taxes paid Non-Cash Investing and Financing Transactions Capitalization of share-based compensation to mineral properties Increase (decrease) in non-cash working capital related to: Mining operations properties Exploration and evaluation properties Property, plant and equipment Prepaid expenses and other current assets 2013 2012 $ 265 $ - $ (361) $ 490 $ - $ (352) $ 213 $ 558 $ 2,963 $ 3,210 $ 4 $ - $ (2,373) $ (1,314) $ 313 $ - 30. Segmented Information The Corporation had two operating segments during the years ended December 31, 2013 and 2012, being environmental services carried out through AEG, providing consulting and project management services in respect of environmental permitting and compliance and site remediation and reclamation; and mining operations, including the operating Bellekeno mine, producing silver, lead and zinc in the form of concentrates. The Corporation also had two non-operating segments, being exploration of mineral properties, which includes exploration and evaluation activities; and the corporate segment, which includes the Corporation’s executive head office and general corporate administration and activity. Reportable segments are identified based on differences in products, services and business activities. Inter-segment transactions are recorded at amounts that reflect normal third-party terms and conditions, with inter-segment profits eliminated from the cost base of the segment incurring the charge. During the second quarter of 2013, both the Lucky Queen and Onek property assets were transferred from the exploration segment to the mining operations segment, as a result of the receipt of remaining operating permits. Revenue from non-Canadian customers of both operating segments was derived primarily from the United States. ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) As at and for the year ended December 31, 2013 Environmental Services Mining Operations Exploration Corporate Total Segment revenues – External customers – Canadian Non-Canadian Intersegment Total segment revenues Intersegment revenues eliminated on consolidation Total revenues as reported Cost of sales Depreciation and amortization Share-based compensation Other G&A expenses Foreign exchange gain Investment income Finance costs Derivative loss Write-down of mineral properties Write-down of property, plant and equipment Loss on impaired long term investments $ 10,516 5,803 2,734 19,053 $ - 43,114 - 43,114 $ - - - - $ - - - - $ 10,516 48,917 2,734 62,167 (2,734) 16,319 7,470 141 393 3,187 3 (5) - - - - - - 43,114 43,143 - 464 2,550 (254) 1 47 - 51,840 3,501 - - - - - - - - - - - - - - - - - 735 1,203 5,008 69 (242) - 98 - - 2,160 (2,734) 59,433 50,613 876 2,060 10,745 (182) (246) 47 98 51,840 3,501 2,160 Segment income (loss) before taxes $ 5,130 $ (58,178) $ - $ (9,031) $ (62,079) Total assets $ 12,940 $ 37,417 $ 72,494 $ 8,362 $ 131,213 As at and for the year ended December 31, 2012 Environmental Services Mining Operations Exploration Corporate Total Segment revenues – External customers – Canadian Non-Canadian Intersegment Total segment revenues Intersegment revenues eliminated on consolidation Total revenues as reported Cost of sales Depreciation and amortization Share-based compensation Other G&A expenses Foreign exchange gain Investment income Finance costs Gain on sale of mineral property Derivative loss $ 5,298 2,685 4,011 11,994 $ - 76,725 - 76,725 $ - - - - $ - - - - $ 5,298 79,410 4,011 88,719 (4,011) 7,983 5,097 207 652 2,906 138 (9) - - 57 - 76,725 61,691 - 352 1,717 27 - 46 - - - - - - - - - - - - (55) - - - 129 1,434 9,258 159 (739) - (6,344) 6 (4,011) 84,708 66,788 336 2,438 13,881 324 (748) 46 (6,344) 8 Segment income (loss) before taxes $ (1,065) $ 12,892 $ 55 $ (3,903) $ 7,979 Total assets $ 12,305 $ 87,483 $ 84,405 $ 28,107 $ 212,300 The Bellekeno mine produces a silver-lead concentrate and a zinc-silver concentrate, both readily marketable with no deleterious elements. During the years ended December 31, 2013 and 2012, all of the concentrate produced by the mining operations was sold under off-take agreements to a single customer for smelting and refining. Revenue from mining operations was derived as follows from payable metals contained in concentrate: ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) Silver Lead Zinc Gold 2013 2012 $ 34,668 10,926 2,822 525 48,941 $ 63,731 16,275 4,256 509 84,771 Smelter treatment and refining charges (5,827) (8,046) Reported mining operations revenue $ 43,114 $ 76,725 31. Related Party Transactions The Corporation’s related parties include its subsidiaries and key management personnel. (a) Key Management Personnel Compensation Salaries and other short-term benefits Termination benefits Share-based compensation 2013 2012 $ 2,150 - 1,923 $ 4,038 714 1,738 $ 4,073 $ 6,490 Key management includes the Corporation’s Board of Directors and members of senior management. (b) Other Related Party Transactions During the year ended December 31, 2012, the Corporation rented certain office space under an agreement with Access Field Services, a company owned by certain individuals who were at certain times executive officers of the Corporation and its subsidiary Access. On May 31, 2012, the Corporation purchased the rental office space from Access Field Services for its appraised fair market value of $1,205,000. During the year ended December 31, 2012, through to May 31, 2012, the Corporation incurred rent expenses of $57,127 with Access Field Services. These transactions were in the ordinary course of operations on normal commercial terms. The resulting accounts payable and accrued liabilities were payable under normal third-party trade payable terms and conditions. 32. Commitments As at December 31, 2013, the Corporation’s contractual obligations are as follows: (a) The Corporation has entered into various operating lease contracts for office space, motor vehicles and office equipment. The future minimum payments under these leases as are as follows: 2014 2015 $ 425 363 $ 788 ALEXCO RESOURCE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (figures in tables are expressed in thousands of Canadian dollars, except per share amounts) (b) (c) As a consequence of its commitment to renounce deductible exploration expenditures to the purchasers of flow-through shares (see note 20), the Corporation is required to incur further renounceable exploration expenditures totaling $5,008,000 by December 31, 2014. The Corporation’s other contractual obligations, including with respect to capital asset expenditures, totaled approximately $370,000.  Senior Management Board of Directors Clynton Nauman, BSc (Hons) President & Chief Executive Officer Brad Thrall, BSc, MBA Executive Vice President & Chief Operating Officer David Whittle, CA Senior Vice President, Chief Financial Officer & Company Ethics Officer Alan McOnie, MSc (Geology), FAusIMM Vice President, Exploration Vicki Veltkamp, BA Vice President, Investor Relations James Harrington, MSc President, Alexco Environmental Group Joe Harrington, BSc Vice President Technology & Strategic Development, Alexco Environmental Group George Brack, Chairman of the Board Terry Krepiakevich, CA, ICD.D. Clynton Nauman David Searle, CM, QC Rick Van Nieuwenhuyse, MSc Michael Winn Richard Zimmer, P.Eng., MBA Auditors PricewaterhouseCoopers LLP Vancouver, British Columbia Legal Counsel Fasken Martineau DuMoulin LLP Vancouver, British Columbia Registrar and Transfer Agent Computershare Investor Services Inc. Vancouver, British Columbia CORPORATE HEADQUARTERS Suite 1150 200 Granville Street Vancouver, BC V6C 1S4 Canada Tel: 604.633.4888 Fax: 604.633.4887 Email: info@alexcoresource.com Website: www.alexcoresource.com SHARE LISTING INFORMATION TSX:AXR NYSE-MKT:AXU 

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