RE: REVIEW OF THE PRAIRIE CREEK MINE SCOPING STUDY

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1 January 29, 2001 Mr. Malcolm Swallow President & CEO Canadian Zinc Corporation Suite Pender Street Vancouver Canada V6C 1G8 By Fax: Total Number of Pages: 8 Dear Mr. Swallow: RE: REVIEW OF THE PRAIRIE CREEK MINE SCOPING STUDY Micon International Limited (Micon) was retained by the Canadian Zinc Corporation (CZN) to perform an independent desktop review of the Prairie Creek Mine Scoping Study. The scope of the review was to confirm the adequacy and appropriateness of the study content and to highlight any areas of concern regarding the assumptions and methodology used in its compilation. Micon performed a preliminary review of the draft Scoping Study, dated January 5, All of Micon s comments and suggestions regarding this draft were addressed in the final draft Scoping Study, dated January 18, A check was completed on the final draft and the following comments refer to the document dated January 18, 2001, unless noted to the contrary. Micon s review was confined to an examination of the two drafts of the Scoping Study noted above, in its Toronto office and a limited review of reference documentation in CZN s offices. A visit to the Prairie Creek site was not undertaken. A detailed review of reference documentation, such as mineral resource reports, metallurgical testwork reports, independent engineering studies, environmental impact studies, permitting documentation, geotechnical investigation reports, and equipment, supplies and services budget cost estimates did not form part of Micon s scope of work for this review. The results of Micon s review are summarized below. 1

2 RESOURCES Micon has found that the mineral resources section of the final Scoping Study contains the background geological information and descriptions typically present in a scoping study for a mining project. The report contains a table of mineral resources for the project categorized under the Australasian Code for Reporting of Mineral Resources and Ore Reserves (the JORC Code), and a statement reconciling these resources to the Canadian Institute of Mining, Metallurgy and Petroleum standards on Mineral Resources and Reserves - Definitions and Guidelines, as incorporated in National Instrument The resources presented were first reported by CZN in a press release dated December, 1997, when classification of resources and reserves using the JORC Code was acceptable for companies listed on Canadian stock exchanges. The resources were estimated by an independent Canadian-based consultant, MRDI (formerly a subsidiary of Agra-Simons, now Amec Inc.). The final Scoping Study does not discuss the methodology used to estimate the resources. MRDI s report, is appended to the Scoping Study and the resource estimation methodology is contained therein. Micon has not examined or audited the resource estimate, however it has briefly reviewed the MRDI report. MRDI is a reputable firm of consulting geologists and engineers with broad experience in mining projects and the estimation of resources and Micon is generally familiar with its work. MINING The 10-year mining plan for Prairie Creek, as evaluated in the cash flow, Section 22 of the final Scoping Study, is based on the use of 3.97 million tonnes of vein material and 1.34 million tonnes of stratabound material. This is less than half of the total resource but does include inferred material. This is reasonable in a scoping study and provides a guide to the amount of in-fill drilling required prior to preparation of a final feasibility study. CZN's choice of mining methods is considered suitable to the described deposits. The plan to phase out shrinkage stoping in favour of open stoping is based on the expected significant cost advantage. However, the inevitably higher dilution will make the forecast average of 15% dilution very difficult to achieve. In general, dilution rates, including those applied to ore development, are low for shrinkage and high for open stoping. It is proposed to use a contractor to undertake the mining operation and the approach to dilution should be reconsidered if Procon's budget prices for contract mining prove to be achievable. 2

3 The very low capital estimate of $1.2 million for the mine is considered reasonable given the current status of the project and the intention to use a mining contractor. An additional $0.5 million, for contractor mobilization and site redevelopment, may also be capitalized if it results in a tax advantage. The estimated average mining operating cost of $35.31 per tonne of ore lies within the known range of other properties producing 500,000 tonnes per year. The overall operating cost is estimated at $61.99 per tonne of ore. PROCESSING A 1,000 tonnes per day processing plant exists already at the Prairie Creek site. It comprises crushing, grinding, flotation and concentrate dewatering and, although constructed in 1981, was never operated. Testwork conducted by Hazen Research, Camborne School of Mines Associates and South West Metallurgical Services, has indicated that the ore is amenable to gravity concentration which could be used to pre-concentrate the ore prior to flotation. This work indicated that 38% to 60% of the ore feed could be removed as tailings at a coarse grind of minus 1 millimetre, with a loss of only 5% to 10% of the contained metals. The Scoping Study therefore proposes the installation of a gravity pre-concentration circuit in the mill which could increase the capacity of the plant to 1,750 tonnes per day, thereby allowing lower cost, less selective mining and increased output of concentrates. As a result of its review of the crushing and primary grinding unit operations described in the Scoping Study, Micon agrees that no significant additional primary comminution equipment should be necessary in order to achieve the higher throughput. A detailed investigation, incorporating materials handling and confirmation of crushing and grinding work indexes, should be conducted during the next phase of the project. A review of historical and recent bench scale testwork indicates that a differential flotation circuit may be used to produce lead and zinc concentrates, from both the vein and stratabound ore zones, and a copper concentrate from the vein zone, at acceptable grades and with reasonable recoveries. Oxidation in the upper portion of the vein ore body may prove to be problematic, although Micon does not expect this feature to be a major concern over the life of the mine. Results of the gravity testwork indicate that separated products from the gravity circuit could be used as primary feed to the different flotation circuits. This option would significantly reduce problems associated with contamination between the flotation circuits from recycle process water streams. CZN plans to conduct further metallurgical testwork to confirm the flowsheet and to optimize metallurgical performance, in terms of gravity circuit tailings rejection, metal recoveries, product quality, power consumption and reagents. This testwork includes bench-scale lock cycle flotation 3

4 tests and pilot plant tests. The results from these tests will be used not only to optimize the metallurgical performance, but also to confirm the additional equipment requirements. The predicted metallurgical results presented in the Scoping Study are based on testwork results and engineering studies. Micon considers that these metallurgical results and associated operating supplies consumption, for flotation reagents and steel balls, for example, are reasonable assumptions. Use of the coarse tailing product from the gravity circuit in the backfill for the underground mining operation has been proposed. This will significantly reduce the surface tailings dam requirements, as noted below. The pilot plant study will be used to investigate the backfill option further. The methods and assumptions used in estimating the processing costs are reasonable. The power consumption is calculated from the motor list and the unit power cost is based on the estimated delivered cost of fuel and the expected generator efficiency. Consumable costs are based on usage rates derived from metallurgical testwork and supplier quotations. The manpower complement and unit labour rates used in compiling the costs are appropriate for this type of mechanized operation. ENVIRONMENTAL The Prairie Creek mine is located in an area of environmental sensitivity, upstream of the Nahanni National Park Reserve and on lands claimed by First Nations peoples. Apart from the access road, the mine site is expected to remain within the present 20-hectare disturbed area. CZN has made substantial efforts to develop a preliminary design that shows an awareness of the local environmental conditions. Environmental studies have been completed in the past and will be continued in order to prepare an environmentally-acceptable design and to support permitting requirements. Permitting The Prairie Creek mine was fully permitted in 1982 following a comprehensive environmental assessment and public review. This permit has since expired and new permits will be required to support future operations. Discussions with regulatory authorities were initiated in August, CZN plans to apply for a water licence to operate the mine in It is likely that the project will be referred to the Mackenzie Valley Environmental Impact Review Board for an environmental assessment. CZN expects that the entire permitting process will take up to two years to complete, including any requirements for collection of additional data. Micon believes that this schedule, outlined in the final Scoping Study in Section 17.5, Permitting, is reasonable, but recommends that the mine permitting process be initiated as soon as possible in order attain this timing. 4

5 First Nations Participation The Prairie Creek mine is situated on lands claimed by the Nahanni Butte Dene Band (Nahanni) of the Deh Cho First Nations. The Scoping Study indicates that CZN has established and maintained a positive and cooperative working relationship with the Nahanni, and has executed the Prairie Creek Development Cooperation Agreement. Based on this relationship, Micon does not expect that First Nations issues will disrupt development of the mine, despite ongoing land claims negotiations between the Nahanni and the Governments of Canada and the Northwest Territories. Both CZN and the Nahanni will benefit from redevelopment of the Prairie Creek mine. Nahanni National Park Reserve The Prairie Creek mine is located within the watershed of the South Nahanni River and 32 kilometres upstream of the Nahanni National Park Reserve. The Nahanni National Park Reserve was set aside to promote wilderness recreational opportunities. The South Nahanni River has been designated a Canadian Heritage River and World Heritage Site. CZN has clearly indicated in its Scoping Study its awareness of this highly valued natural area downstream of the mine. Preliminary design information contained in the Scoping Study indicates that the Prairie Creek mine will be properly designed and operated from an environmental perspective, and that these sensitive areas will not be significantly negatively impacted by the mining operations. Other Environmental Issues An investigation was conducted in 1994 to assess the acid generating characteristics of the dominant rock types in the area. Although sulphides are present, the host rock has a high excess neutralization and, as a result, acid mine drainage is not expected to be of concern in the tailings. Proper site design and management will alleviate any potential concerns with waste rock and ore handling and storage. CZN proposes to use tailings, combined with rejects from the gravity pre-concentrator, as thickened or paste backfill underground. This is the preferred handling method from an environmental perspective. The existing tailings impoundment designed by Golder Associates and constructed in 1982 may provide another option, should testwork prove backfilling unfeasible. Further detail is required regarding the handling of waste rock, the volumes expected, storage and chemical characteristics. It is still quite early in the project design and, as a result, a firm reclamation plan is not in place. The approach to site reclamation outlined in the Scoping Study is considered reasonable. INFRASTRUCTURE 5

6 The majority of the mine and metallurgical plant infrastructure is in place. A detailed list is provided in Section 15 of the Scoping Study. Additions and improvements to the existing infrastructure described in the Scoping Study include a camp overhaul, inspection and repair of the sewage treatment plant, reconditioning of the site diesel generators, upgrading of the power house controls and power distribution system, a new generator waste heat recovery system, construction of an all-weather access road, and new concentrate handling, storage and shipping facilities. The new all-weather road is the single largest budgeted capital cost item. Other areas described in the Scoping Study include the tailings management facility, airstrip, surface buildings, equipment spares and supplies on site, mobile equipment, maintenance facilities and fuel storage. Micon considers that the evaluation of the infrastructure, assumptions and level of detail are appropriate for the Scoping Study. COSTS Process and Infrastructure Capital Costs The process and infrastructure capital costs are based on budget estimates and quotations from equipment suppliers and engineering consultant companies. The estimates include an allowance for spare parts, freight for supplies and equipment, and engineering, procurement, construction management (EPCM) services, as well as a contingency of 15% of the total installed costs, excluding EPCM costs. The estimate is appropriate for the level of accuracy normally required for a scoping study. Environment Related Costs Preliminary reclamation cost estimates will be prepared as part of the permitting process. As a result, there is no allowance for reclamation costs in the capital and operating cost assessments in the Scoping Study. Ideally, an allowance for reclamation cost would be included at this stage of a project, in order to address close-out of existing facilities and potential closure costs should the project proceed. Concentrate Net Smelter Return 6

7 The predicted quality of the concentrates in the Scoping Study is based on assays of concentrate carried out by G&T Metallurgical of Kamloops. The copper concentrate will contain relatively high amounts of arsenic, antimony and mercury which are considered penalty elements. Mercury will also be present in the vein ore zinc concentrate. The lead and zinc concentrates will likely be of relatively high grade and the copper and lead concentrates will contain significant quantities of silver. The calculated net smelter return (NSR), expressed as a total of gross metal value, is 35.4%, 35.5% and 35.3% for the vein ore copper, zinc and lead concentrates, respectively. The NSRs for the stratabound ore zinc and lead concentrates are 43% and 24.7%, respectively. The assumptions used in calculating the NSR for the concentrates are reasonable and appropriate for this level of study. The calculations assume unit metal prices, percent payable and deductions for treatment/refining charges, freight and penalties for undesirable elements. The prices and factors used in the Scoping Study are based on advice from Neil Seldon of Neil S. Seldon and Associates Ltd. Financial Modelling Micon reviewed CZN's financial model and found no errors that affect the estimated pre-tax project cash flow. On an investment of $40.5 million and long-term average metal prices, in United States dollars, of $0.90 per pound for copper, $0.25 per pound for lead, $0.50 per pound for zinc and $5.50 per ounce for silver, CZN calculated a total pre-tax cash flow of $106.5 million and an internal rate of return (IRR) of 45.7%. The net present value (NPV) of this cash flow, at a discount rate of 10% is $56.7 million. Micon ran an alternate case using prices, in United States dollars, of $0.80 per pound for copper, $0.20 per pound for lead, $0.50 per pound for zinc and $5.00 per ounce for silver, in light of recent metal prices. The result was a total cash flow of $40.4 million, giving a robust IRR of 18.5% and a NPV of $13.0 million at a 10% discount rate. CZN's own sensitivity analyses show that the project cash flow is most sensitive to changes in head grade, about equally sensitive to mill recovery, zinc price and operating costs, and is least sensitive to capital cost. Dilution and grade control, therefore, will require close attention in this project. 7

8 CONCLUSIONS Micon has reviewed the draft and final Prairie Creek Scoping Studies and considers that the principles, methodology and assumptions used in their preparation are appropriate and that the content and level of detail in the final Scoping Study are suitable for a study of this type. We trust that the foregoing review fully meets the requirements of CZN and will be available to discuss any aspect of it with you at your convenience. Yours sincerely, MICON INTERNATIONAL LIMITED Harry Burgess, P.Eng. Vice President 8