UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
20-F





£               REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE


SECURITIES EXCHANGE ACT OF
1934





OR





T               ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE ACT OF 1934


For the fiscal year
endedDecember 31,
2008





OR





£TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES


EXCHANGE
ACT OF 1934


For the
transition period from
__________   to  ______________





OR





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




Date of event
requiring this shell company report Commission
file number 0-22216





czn logo





(Exact
name of Registrant as specified in its charter)





Not
applicable





(Translation
of Company’s name into English)





British
Columbia, Canada


(Jurisdiction
of incorporation or organization)





650 West
Georgia Street, Suite 1710, Vancouver, British Columbia, V6B 4N9


(Address
of principal executive offices)





Martin
Rip


650 West
Georgia Street, Suite 1710, Vancouver, British Columbia, V6B 4N9
 Tel:
(604) 688-2001
 Fax:
(604) 688-2043


(Name,
Telephone, E-mail and/or facsimile number and Address of Company Contact
Person)





Securities
      to be registered pursuant to Section 12(b) of the Act:
              Not
      applicable


Securities to be
      registered pursuant to Section 12(g) of the Act:
              Common
      Shares without par value
              
              (Title
      of Class)





Securities for
      which there is a reporting obligation pursuant to Section 15(d) of the
      Act:
              Not
      applicable








Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the Annual
Report:





118,969,063
Common Shares, without par value, as at December 31, 2008








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


Yes
      £
            No
      T





If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.





Yes
      £
            No
      T





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


Yes
      T
            No
      £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):





Large
      accelerated filer £
            Accelerated
      filer T
            Non-accelerated
      filer £





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





U.S.
      GAAP £
            International
      Financial Reporting Standards as issued by the International Accounting
      Standards Board £
            Other
      T





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





Item 17 T
            Item 18£





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


Yes £
            No T





1


TABLE
OF CONTENTS





CAUTIONARY
NOTE TO U.S. INVESTORS CONCERNING ESTIMATES OF MEASURED, INDICATED OR INFERRED
RESOURCES





CONVENTION





MEASUREMENT
CONVERSION INFORMATION





GLOSSARY
OF NAMES AND TERMS





FORWARD-LOOKING
STATEMENTS







PART
I




ITEM
1.                     IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS


ITEM
2.                     OFFER STATISTICS AND
EXPECTED TIMETABLE


ITEM
3.                     KEY
INFORMATION


ITEM
4.                     INFORMATION ON THE
COMPANY


ITEM
4A.                  UNRESOLVED STAFF
COMMENTS


ITEM
5.                     OPERATING AND FINANCIAL
REVIEW AND PROSPECTS


ITEM
6.                    DIRECTORS, SENIOR MANAGEMENT
AND EMPLOYEES


ITEM
7.                    MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS


ITEM
8.                     FINANCIAL
INFORMATION


ITEM
9.                     THE OFFER AND
LISTING


ITEM
10.                   ADDITIONAL
INFORMATION


ITEM
11.                   QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK


ITEM
12.                   DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES




PART
II




ITEM
13.                     DEFAULTS, DIVIDEND ARREARS
AND DELINQUENCIES


ITEM
14.                     MATERIAL MODIFICATIONS TO
THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS


ITEM
15.                     CONTROLS AND
PROCEDURES


ITEM
16.                     [RESERVED]


ITEM
16.A                  AUDIT COMMITTEE FINANCIAL
EXPERT


ITEM
16.B                   CODE OF
ETHICS


ITEM
16.C                   PRINCIPAL ACCOUNTANT FEES
AND SERVICES


ITEM
16.D                   EXEMPTIONS FROM THE LISTINGS
STANDARDS FOR AUDIT COMMITTEES


ITEM
16.E                   PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASER


ITEM
16.F                   CHANGE IN REGISTRANT’S
CERTIFYING ACCOUNTANT


ITEM
16.G                   CORPORATE
GOVERNANCE




PART
III




ITEM
17.                     FINANCIAL
STATEMENTS


ITEM
18.                     FINANCIAL
STATEMENTS


ITEM
19.                     EXHIBITS




SIGNATURES







2


Cautionary
Note to U.S. Investors Concerning Estimates of Measured, Indicated or Inferred
Resources





This
Annual Report 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.  Canadian mining terms in this Annual
Report on Form 20-F are defined in accordance with Canadian National Instrument
43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) and the
Canadian Institute of Mining, Metallurgy and Petroleum – CIM Definition Standards on Mineral
Resources and Mineral Reserves, adopted by the CIM Council, as
amended.  These definitions differ from the definitions in the United
States Securities and Exchange Commission (“SEC”) Industry Guide 7 under the
United States Securities Act of 1933, as amended, which permits U.S. mining
companies, in their filings with the SEC, to disclose only those mineral
deposits that a company can economically and legally extract or
produce.  Under SEC Industry Guide 7 standards, a “final” or
“bankable” feasibility study is required to report reserves, the three-year
historical average price is used in any reserve or cash flow analysis to
designate reserves and the primary environmental analysis or report must be
filed with the appropriate governmental authority.





Certain
terms are used in this Annual Report, such as “measured,” “indicated,” and
“inferred” “resources,” which are defined in and required by NI 43-101; however,
these terms are not defined terms under SEC Industry Guide 7 and are normally
not permitted in reports and registration statements filed with the
SEC.





U.S.
Investors should note that Canadian Zinc Corporation DOES NOT currently disclose
any SEC Industry Guide 7 mineral reserves with regard to its mineral deposits at
the Prairie Creek Mine site.





Cautionary
Note to Investors concerning estimates of Measured and Indicated
Resources





This
document uses the terms “measured resources” and “indicated
resources.”  Investors are advised that while those terms are
recognized and required by Canadian regulations, the SEC does not recognize
them.





Investors
are cautioned not to assume that any part or all of mineral deposits in these
categories will ever be converted into reserves.





Cautionary
Note to Investors concerning estimates of Inferred Resources





This
document uses the term “inferred resources.”  Investors are advised
that while those terms are recognized and required by Canadian regulations, the
SEC does not recognize them.  “Inferred Resources” have significant
uncertainty as to their existence, and 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 part of an inferred resource exists, or
is economically or legally mineable.





Accordingly,
information contained in this Annual Report and the documents incorporated by
reference herein contain descriptions of the Company’s mineral deposits that 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.  U.S.
investors are urged to consider closely the disclosure in this Annual
Report.





3


Convention





The terms
“Canadian Zinc,” the “Company,” “we,” “us” and “our” as used in this Annual
Report on Form 20-F, or “Annual Report,” refer to Canadian Zinc Corporation, a
corporation organized under the laws of the province of British Columbia,
Canada, except where the context requires otherwise.





References
throughout this Annual Report to a fiscal year refer to the fiscal year ended on
December 31 of that year.  “Fiscal 2008,” for example, refers to the
fiscal year ended December 31, 2008.





The
Company’s financial statements are prepared in Canadian dollars and in
accordance with Canadian generally accepted accounting principles (“Canadian
GAAP”).  These accounting principles conform in all material respects
to accounting principles generally accepted in the United States of America
(“U.S. GAAP”), except as disclosed in Note 19 to the financial statements for
the fiscal year ended December 31, 2008.  All references to “dollars”
or “$” in this Annual Report are to Canadian dollars (“CDN”) and all references
to “U.S. Dollars” or “US$” are to the currency of the United States of
America.  Solely for the convenience of the reader, this Annual Report
contains translations of certain Canadian dollar amounts into U.S. Dollar
amounts at specified rates.








Measurement
Conversion Information





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





1 mile =
1.6093 kilometres


1 metric
ton (tonne) = 2,205 pounds


1 foot -
0.305 metres


1 troy
ounce = 31.103 grams


1 acre =
0.4047 hectare


1
imperial gallon = 4.546 litres


1 long
ton = 2,240 pounds


1
imperial gallon = 1.2010 U.S. gallons





4


Glossary
of Names and Terms





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





“Net Profits”
--  Profits resulting from metal production from the property, less
deduction of certain limited costs including smelting, refining, transportation
and insurance costs.





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





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





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





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








National Instrument 43-101
Definitions





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





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





A “mineral resource” is a
concentration or occurrence of natural, solid, inorganic or fossilized organic
material in or on the earth’s crust in such form and quantity and of such a
grade or quality that it has reasonable prospects for economic
extraction.  The location, quantity, grade, geological characteristics
and continuity of a mineral resource are known, estimated or interpreted from
specific geological evidence and knowledge.  A “measured mineral resource” is
that part of a mineral resource for which quantity, grade or quality, densities,
shape and physical characteristics can be estimated with a level of confidence
sufficient to allow the appropriate application of technical and economic
parameters, to support mine planning and evaluation of the economic viability of
the deposit.  The estimate is based on detailed and reliable
exploration, sampling and testing information gathered through appropriate
techniques from locations such as outcrops, trenches, pits, workings and drill
holes that are spaced closely enough to confirm both geological and grade
continuity.  An “indicated mineral resource”
is that part of a mineral resource for which quantity, grade or quality,
densities, shape and physical characteristics can be estimated with a level of
confidence sufficient to allow the appropriate application of technical and
economic parameters, to support mine planning and evaluation of the
economic


5


viability
of the deposit.  The estimate is based on detailed and reliable
exploration and testing information gathered through appropriate techniques from
locations such as outcrops, trenches, pits, workings and drill holes that are
spaced closely enough for geological and grade continuity to be reasonably
assumed. Mineral resources that are not mineral reserves do not have
demonstrated economic viability.  An “inferred mineral resource” is
that part of a mineral resource for which quantity and grade or quality can be
estimated on the basis of geological evidence and limited sampling and
reasonably assumed, but not verified, geological and grade
continuity.  The estimate is based on limited information and sampling
gathered through appropriate techniques from locations such as outcrops,
trenches, pits, workings and drill holes.





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





6


CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





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





Statements
about planned/proposed mine operations, anticipated future operating
descriptions included in the Company’s Project Description Report (filed for
permitting requirements), expected completion dates of pre-feasibility or
feasibility studies, future cost estimates, expectations around the process for
obtaining operating permits, the expected completion of
acquisitions/transactions, the impact on the Company of future accounting
standards, discussions of risks and uncertainties, anticipated commencement
dates of mining or metal production operations, projected quantities of future
metal production and anticipated production rates, operating efficiencies, costs
and expenditures, business development efforts, the need for additional capital
and the Company's production capacity are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict.  Therefore, the Company's actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors.  You should not place undue
reliance on these forward-looking statements.





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





The
Company cautions that the list of factors set forth above is not
exhaustive.  Some of the risks, uncertainties and other factors which
negatively affect the reliability of forward-looking information are discussed
in the Company's public filings with the Canadian securities regulatory
authorities, including its most recent annual report, quarterly reports,
material change reports and press releases, and with the United States
Securities and Exchange Commission (the “SEC”).  In particular, your
attention is directed to the risks detailed in “Item 3.D.--Key Information--Risk
Factors” and similar discussions in the Company's other SEC and
Canadian  filings concerning some of the important risk factors that
may affect its business, results of operations and financial
conditions.  You should carefully consider those risks, in addition to
the other information in this Annual Report and in the Company's other filings
and the various public disclosures before making any business or investment
decisions involving the Company and its securities.





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








7


PART
I








ITEM 1.
            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS







A.
            Directors
      and senior management.




Not
applicable.





B.
            Advisers




Not
applicable.





C.
            Auditors




Not
applicable.








ITEM 2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE





A.
            Offer
      statistics.




Not
applicable.




B.
            Method
      and expected timetable




Not
applicable.







ITEM 3.
            KEY
      INFORMATION





A.           Selected
Financial Data





The
following table sets forth our selected financial data of the Company. This
selected financial data is derived from the Company’s audited financial
statements and notes thereto as at December 31, 2008, 2007, 2006, 2005 and
2004.  The Company’s financial statements have been prepared in
accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP;
a discussion of the differences between Canadian GAAP and U.S. GAAP is contained
in Note 19 to the audited financial statements.  The selected
financial data provided below is not necessarily indicative of the future
results of operations or financial performance of the Company.  The
Company has not paid any dividends on its common shares and it does not expect
to pay dividends in the foreseeable future.  The selected financial
data set forth below should be read in conjunction with “Item 5--Operating and
Financial Review and Prospects,” and the financial statements and the notes
thereto and other financial information which appear elsewhere in this Annual
Report.





8


Selected
Financial Data


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





Year
      ended December 31,2008
            
            
            
            2007
            *
            
            
            2006
            *
            
            
            2005
            *
            
            
            2004
            *Amounts
      in accordance with Canadian GAAP:Net
      (loss)
            
            $
            (4,228
            )
            
            $
            (9,483
            )
            
            $
            (7,723
            )
            
            $
            (3,504
            )
            
            $
            (2,909
            )Basic
      and diluted (loss) per share
            
            
            (0.04
            )
            
            
            (0.08
            )
            
            
            (0.08
            )
            
            
            (0.05
            )
            
            
            (0.04
            )Total
      assets
            
            
            29,521
            
            
            
            34,391
            
            
            
            35,272
            
            
            
            21,204
            
            
            
            18,041Net
      assets
            
            
            27,848
            
            
            
            31,909
            
            
            
            33,428
            
            
            
            19,854
            
            
            
            16,638Net
      working capital
            
            
            22,557
            
            
            
            27,432
            
            
            
            29,143
            
            
            
            16,040
            
            
            
            12,758Capital
      stock
            
            
            65,621
            
            
            
            65,964
            
            
            
            59,365
            
            
            
            43,067
            
            
            
            37,790Contributed
      surplus
            
            
            8,354
            
            
            
            7,844
            
            
            
            6,479
            
            
            
            1,479
            
            
            
            36Dividends
      declared (per share)
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Weighted
      average number of common shares outstanding – basic and
      diluted
            
            
            120,440,062
            
            
            
            113,429,078
            
            
            
            94,734,979
            
            
            
            71,378,444
            
            
            
            67,174,891Number
      of common shares outstanding
            
            
            118,969,063
            
            
            
            120,213,962
            
            
            
            107,590,212
            
            
            
            79,747,212
            
            
            
            69,394,942Amounts
      in accordance with U.S. GAAP:Net
      (loss)
            
            $
            (4,228
            )
            
            $
            (10,439
            )
            
            $
            (9,486
            )
            
            $
            (3,504
            )
            
            $
            (2,909
            )Basic
      and diluted (loss) per share
            
            
            (0.04
            )
            
            
            (0.09
            )
            
            
            (0.10
            )
            
            
            (0.05
            )
            
            
            (0.04
            )Total
      assets
            
            
            29,521
            
            
            
            34,391
            
            
            
            35,272
            
            
            
            21,204
            
            
            
            18,041Net
      assets
            
            
            27,848
            
            
            
            31,909
            
            
            
            31,897
            
            
            
            19,854
            
            
            
            16,638Net
      working capital
            
            
            22,557
            
            
            
            27,432
            
            
            
            29,143
            
            
            
            16,040
            
            
            
            12,758Capital
      stock
            
            
            68,340
            
            
            
            68,683
            
            
            
            57,834
            
            
            
            43,067
            
            
            
            37,790Contributed
      surplus
            
            
            8,354
            
            
            
            7,844
            
            
            
            6,479
            
            
            
            1,479
            
            
            
            36Dividends
      declared (per share)
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Weighted
      average number of common shares outstanding – basic and
      diluted
            
            
            120,440,062
            
            
            
            113,429,078
            
            
            
            94,734,979
            
            
            
            71,378,444
            
            
            
            67,174,891Number
      of common shares outstanding
            
            
            118,969,063
            
            
            
            120,213,962
            
            
            
            107,590,212
            
            
            
            79,747,212
            
            
            
            69,394,942




* The
Company’s results for the fiscal years 2004 – 2007 are presented after
restatement for the Company’s 2008 change in accounting policy (under Canadian
GAAP), as described in this annual report, whereby exploration and development
costs are expensed rather than capitalized.





See “Item
5.A.--Operating Results--Comparison of Canadian GAAP and United States GAAP as
applicable to the Company’s operations” for comments on the reconciliation of
Canadian and United States Generally Accepted Accounting Principles in this
Annual Report.





9


Exchange
Rates





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





Since
June 1, 1970, the Government of Canada has permitted a floating exchange rate to
determine the value of the Canadian dollar against the U.S.
dollar.  The high and low exchange rates, the average rates (average
of the exchange rates on the last day of each month during the period), and the
end of the period rates for Canadian dollars, expressed in U.S. dollars, from
January 1, 2004 to December 31, 2008 were as follows:





U.S.
      DOLLARS PER $1.00 (CDN.)Years
      ended December 312008
            2007
            2006
            2005
            2004High
            
            1.0241
            
            1.0852
            
            0.9105
            
            0.8682
            
            0.8504Low
            
            0.7731
            
            0.8435
            
            0.8531
            
            0.7876
            
            0.7165Average
            
            0.9381
            
            0.9303
            
            0.8817
            
            0.8254
            
            0.7684End
      of Period
            
            0.8210
            
            1.0088
            
            0.8581
            
            0.8598
            
            0.8319





The high
and low exchange rates for Canadian dollars, expressed in U.S. dollars for each
of the most recent six months were as follows:





U.S.
      DOLLARS PER $1.00 (CDN.)MonthlyNovember
      ‘08
            
            December
      ‘08
            
            January
      ‘09
            
            February
      ‘09
            
            March‘09
            
            April‘09High
            
            0.8687
            
            
            0.8356
            
            
            0.8485
            
            
            0.8221
            
            
            0.8180
            
            
            0.8382Low
            
            0.7731
            
            
            0.7824
            
            
            0.7889
            
            
            0.7860
            
            
            0.7698
            
            
            0.7930





The
exchange rate on May 22, 2009 was 0.8926.








B.           Capitalization
and Indebtedness





Not
applicable.





C.           Reasons
For The Offer and Use of Proceeds





Not
applicable.


10


D.           Risk
Factors





The
following is a discussion of those distinctive or special characteristics of the
Company’s operations and industry which may have a material impact on, or
constitute risk factors in respect of, the Company’s future financial
performance.  This discussion is also described in Section 4 of the
Company’s Annual Information Form dated March 16, 2009 filed as Exhibit 15.1
hereto and incorporated herein by reference.





Political
and Legislative





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





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





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





In 1998 -
2000 there was a major change to the legislative and regulatory framework and
regulations in the Mackenzie Valley.  There can be no assurance that
these laws and regulations will not change in the future in a manner that could
have an adverse effect on the Company’s activities and/or its financial
condition.





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





As noted
in section “Item 4.D.--Property, Plant and Equipment--11. Environmental
Considerations--Nahanni National Park Reserve/Parks Canada Memorandum of
Understanding” of this Annual Report, in August 2007, the Prime Minister of
Canada visited Fort Simpson to announce the proposed expansion
of


11


Nahanni
National Park Reserve.  The Prime Minister announced that the
Government of Canada had approved an Order in Council (PC-2007-1202 July 31,
2007), withdrawing certain lands for the proposed park expansion.  The
area surrounding the Prairie Creek mine, containing approximately 367 square
kilometres, is not included in the interim land withdrawal area and, as
specified in Schedule 2 to the Order, is specifically excluded and
exempted.  While Canadian Zinc has been assured that its current
rights will be respected, there is a risk that the Park Expansion will
detrimentally impact the existing mining and access rights of Canadian
Zinc.





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





Permitting, Environmental and Other
Regulatory Requirements





The
operations of Canadian Zinc require licences and permits from various
governmental and regulatory authorities. Canadian Zinc believes that it is
presently complying in all material respects with the terms of its current
licences and permits.  However, such licences and permits are subject
to change in various circumstances.  Canadian Zinc does not hold all
necessary licences and permits under applicable laws and regulations for the
operation of the Prairie Creek mine.  There can be no guarantee
Canadian Zinc will be able to obtain or maintain all necessary licences and
permits as are required to explore and develop its properties, commence
construction or operation of mining facilities or properties under exploration
or development, or to obtain them within a reasonable time.





The
Prairie Creek Project is located in an environmentally sensitive remote area in
the Mackenzie Mountains, within the watershed of the South Nahanni River and in
proximity to, but outside, the Nahanni National Park Reserve.  The
Government of Canada has announced plans to expand the area of Nahanni National
Park and the proposed new boundaries will surround, but exclude, the Prairie
Creek Mine.  The Company has experienced long delays in obtaining
permits to date. The Company anticipates continuing difficulties and delays with
its permitting activities and faces ongoing opposition and legal challenges from
certain interests.





Canadian
Zinc’s activities are subject to extensive federal, provincial, territorial and
local laws and regulations governing environmental protection and employee
health and safety.  Canadian Zinc is required to obtain governmental
permits and provide bonding requirements under federal and territorial water and
mine regulations.  All phases of Canadian Zinc’s operations are
subject to environmental regulation.  These regulations mandate, among
other things, the maintenance of water and air quality standards and land
reclamation.  They also set forth limitations on the generation,
transportation, storage and disposal of solid and hazardous
waste.  Environmental legislation is evolving in a manner, which will
require stricter standards and enforcement, increased fines and penalties for
non-compliance, and more stringent environmental assessments of proposed
projects.  There is no assurance that future changes in environmental
regulation, if any, will not adversely affect Canadian Zinc’s
operations.





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





Although
Canadian Zinc makes provision for reclamation costs, it cannot be assured that
these provisions will be adequate to discharge its obligations for these
costs.  As environmental protection laws and


12


administrative
policies change, Canadian Zinc will revise the estimate of its total obligations
and may be obliged to make further provisions or provide further security for
mine reclamation cost.  The ultimate amount of reclamation to be
incurred for existing and past mining interests is
uncertain.  Additional discussion on the impact of reclamation costs
is included in this Annual Report at “Item 4.D.--Property, Plant and
Equipment--11. Environmental Considerations--Environmental
Obligations.”





Existing
and possible future environmental legislation, regulations and actions could
cause additional expense, capital expenditures, restrictions and delays in the
activities of the Company, the extent of which cannot be
predicted.  Before production can commence on the Prairie Creek
Property the Company must obtain regulatory approval, permits and licences and
there is no assurance that such approvals will be obtained.  No
assurance can be given that new rules and regulations will not be enacted or
made, or that existing rules and regulations will not be applied, in a manner
which could limit or curtail production or development.





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





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





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





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





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





Metal Prices and Market
Sentiment





The
market price of metals and minerals is volatile and cannot be controlled. Metal
prices have fluctuated widely, particularly in recent years. If the price of
metals and minerals should drop significantly, as has recently occurred, the
economic prospects for the Prairie Creek Project could be significantly reduced
or rendered uneconomic.  There is no assurance that, even if
commercial quantities of ore are delineated, a profitable market may exist for
the sale of products, including concentrates from that ore.  Factors
beyond the control of the Company may affect the marketability of any minerals
discovered or concentrates produced.  The marketability of minerals is
affected by numerous other factors beyond the control of the Company, including
quality issues, impurities, government regulations, royalties, allowable
production and importing and exporting


13


of
minerals, the effect of which cannot be accurately predicted. Factors tending to
affect the price of metals include:





•
      The relative strength of the U.S. dollar against other
      currencies;


•
      Government monetary and fiscal
policies;


•
      Expectations of the future rate of global monetary inflation and interest
      rates;


•
      General economic conditions and the perception of risk in capital
      markets;


•
      Political conditions including the threat of terrorism or
    war;


•
      Speculative trading;


•
      Investment and industrial demand;
and


•
      Global production and inventory
stocks.





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





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





Metal
prices fluctuate widely and are affected by numerous factors beyond Canadian
Zinc’s control such as the sale or purchase of such commodities by various
central banks and financial institutions, interest rates, exchange rates,
inflation or deflation, fluctuation in the value of the United States dollar and
foreign currencies, global and regional supply and demand, and the political and
economic conditions of major mineral and metal producing countries throughout
the world.  Future production from Canadian Zinc’s mining properties
is dependent on mineral prices that are adequate to make these properties
economic.  The prices of metals have fluctuated widely in recent
years, and future or continued serious price declines could cause continued
development of and commercial production from Canadian Zinc’s properties to be
impracticable.  Depending on the price of metal, cash flow from mining
operations may not be sufficient and Canadian Zinc could be forced to
discontinue production and may lose its interest in, or may be forced to sell,
its properties.





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





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





The
development of the Company’s properties will depend upon the Company’s ability
to obtain financing through private placement financing, public financing, the
joint venturing of projects, bank financing or other means.  There is
no assurance that the Company will be successful in obtaining the required
financing, or if available, that the terms of such financing will be favorable
or acceptable to the Company.





Securities
of junior and small-cap companies have experienced substantial volatility in the
past, often based on factors unrelated to the financial performance or prospects
of the companies involved.  These factors include macroeconomic
developments in North America and global and market perceptions of the
attractiveness of particular industries.  The share price of Canadian
Zinc is likely to be significantly affected by short-term changes in metal
prices.  Other factors unrelated to Canadian Zinc’s performance that
may have an effect on the price of its shares include the following: the extent
of analytical coverage available to investors concerning


14


Canadian
Zinc’s business may be limited if investment banks with research capabilities do
not follow the Company’s securities; lessening in trading volume and general
market interest in the Company’s securities may affect an investor’s ability to
trade significant numbers of common shares; the size of Company’s public float
may limit the ability of some institutions to invest in the Company’s
securities; and a substantial decline in the price of the common shares that
persists for a significant period of time could cause the Company’s securities
to be delisted from an exchange, further reducing market liquidity.





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





The
development and exploration of Canadian Zinc’s Properties, will require
substantial additional financing.  Failure to obtain sufficient
financing will result in delaying or indefinite postponement of exploration,
development or production on Canadian Zinc’s properties or even a loss of
property interest.  There can be no assurance that additional capital
or other types of financing will be available when needed or that, if available,
the terms of such financing will be favourable to Canadian Zinc.





Exploration and
Development





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





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





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





The
development plan for the Prairie Creek Project is based upon a Project
Description Report prepared internally by the Company, with the assistance of
outside consultants, in 2008.  A Project Description Report is not a
Feasibility Study.  The Project Description Report outlined the plan
for the development of the Prairie Creek Project based on the historical
development and existing infrastructure at the Prairie Creek Property
and


15


on the
Resource Estimation in the 2007 NI 43-101 Technical Report.  The
Resource Estimation in the Technical Report does not constitute mineable
reserves.  The historical development was carried out principally in
1980 to 1982 and the infrastructure, including the mill, was constructed in the
same period based on a feasibility study prepared by Kilborn Engineering
(Pacific) Limited in 1980.  The Kilborn feasibility study is outdated
and cannot be relied upon.  The existing infrastructure, including the
mill, buildings, camp etc. is now over twenty-five years old and, although it
has been held under care and maintenance, it has lain idle for more than
twenty-five years and was never operated.  There is significant risk
attaching to the proposed operation of aged equipment.  The Company is
working converting the Project Description Report into a Pre-Feasibility study
utilizing the updated October 2007 Technical Report.





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





Uncertainty in the Estimation of
Mineral Resources





U.S.
Investors should note that Canadian Zinc Corporation DOES NOT currently disclose
any SEC Industry Guide 7 mineral reserves with regard to its mineral deposits at
the Prairie Creek Mine site.





This
document uses the terms “measured resources,” “indicated resources,” and
“inferred resources.”   Investors are advised that while those
terms are recognized and required by Canadian regulations, the SEC does not
recognize them.





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





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





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





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


•
      Mineralization or formations could be different from those predicted by
      drilling, sampling and similar
examinations;


16


•
      Declines in the market price of metals may render the mining of some or
      all of Canadian Zinc’s mineral resources
  uneconomic;


•
      Increases in operating mining costs and processing costs could adversely
      affect mineral reserves or resources;
and


•
      The grade of mineral reserves or resources may vary significantly from
      time to time and there can be no assurance that any particular level of
      metal may be recovered from the mineral
  reserves.





Any of
these factors may require Canadian Zinc to reduce its mineral reserve and
mineral resources estimates.





Insurance and Uninsured
Risks





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





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





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





Key Executives and Conflicts of
Interest





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





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





To the
extent that such other companies may participate in ventures in which Canadian
Zinc may participate, the directors of Canadian Zinc may have a conflict of
interest in negotiating and concluding terms respecting the extent of such
participation. In the event that such a conflict of interest arises at a meeting
of the


17


Company’s
directors, a director who has such a conflict will abstain from voting for the
approval of such participation or such terms.





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





Title Matters





Mining
leases and surface leases issued to the Company by the Federal Government have
been surveyed but other parties may dispute the Company’s title to its mining
properties.  The mining claims in which the Company has an interest
have not been surveyed and, accordingly, the precise location of the boundaries
of the claims and ownership of mineral rights on specific tracts of land
comprising the claims may be in doubt.  These claims have not been
converted to lease, and are, accordingly, subject to regular compliance with
assessment work requirements.





Failure
to comply strictly with applicable laws, regulations and local practices
relating to mineral right applications and tenure, could result in loss,
reduction or expropriation of entitlements.





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





Competition





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





Acquisitions





From time
to time Canadian Zinc undertakes evaluations of opportunities to acquire
additional mining assets and businesses.  Any resultant acquisitions,
such as those discussed in this Annual Report at “Item 4.B.--Business Overview”
may be significant in size, may change the scale of Canadian Zinc’s business,
and may expose Canadian Zinc to new geographic, political, operating financial
and geological risks.  Canadian Zinc’s


18


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





Requirements of the Sarbanes-Oxley
Act





Since
2007, the Company has documented and tested its internal control procedures in
order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 (“SOX”).  As of December 31, 2008, SOX requires an annual
assessment by management of the effectiveness of the Company’s internal control
over financial reporting and an attestation by the Company’s independent
auditors addressing internal controls over financial reporting.





Due to
its size, its limited staff resources and financial constraints, the Company is
exposed to certain potential deficiencies in its internal controls over
financial reporting.  If the Company fails to maintain the adequacy of
its internal control over financial reporting, as such standards are modified,
supplemented, or amended from time to time, the Company may not be able to
ensure that it can conclude on an ongoing basis that it has effective internal
controls over financial reporting in accordance with Section 404 of
SOX.  The Company’s failure to satisfy the requirements of Section 404
of SOX on an ongoing, timely basis could result in the loss of investor
confidence in the reliability of its financial statements, which in turn could
harm the Company’s business and negatively impact the trading price of its
common shares.  In addition, any failure to implement required new or
improved controls, or difficulties encountered in their implementation, could
impact the Company’s operating results or cause it to fail to meet its reporting
obligations.  Future acquisitions (if any) may provide the Company
with challenges in implementing the required processes, procedures and controls
in the acquired operations.  Acquired companies may not have
disclosure controls and procedures or internal control over financial reporting
that are as thorough or effective as those required by securities laws currently
applicable to the Company.





No
evaluation can provide complete assurance that the Company’s internal control
over financial reporting will detect or uncover all failures of persons within
the Company to disclose material information otherwise required to be
reported.  The effectiveness of the Company’s controls and procedures
could also be limited by simple errors or faulty judgments.  In
addition, as the Company continues to develop, the challenges involved in
implementing appropriate internal controls over financial reporting will
increase and will require that the Company continue to enhance its internal
controls over financial reporting.  Although the Company will be
required to devote substantial time and will incur substantial costs, as
necessary, in an effort to ensure ongoing compliance, the Company cannot be
certain that it will be successful in continuing to comply with Section 404 of
SOX.





Dividend Policy





No
dividends have been paid by the Company to date. The Company anticipates that it
will retain all future earnings and other cash resources for the future
operation and development of its business and the Company does not intend to
declare or pay any cash dividends in the foreseeable future. Payment of any
future dividends will be at the discretion of the Company’s board of directors
after taking into account many factors, including the Company’s operating
results, financial condition and current and anticipated cash
needs.


19





History of Losses and No Assurance of
Profitable Operations





The
Company has incurred losses since inception of $46.127 million through December
31, 2008.  The Company’s properties are all in the exploration or
development stages and the Company has no revenues from mining operations since
incorporation.  There can be no assurance that the Company will be
able to operate profitably during future periods.  If the Company is
unable to operate profitably during future periods, and is not successful in
obtaining additional financing, the Company could be forced to cease its
exploration and development plans as a result of lacking sufficient cash
resources.





Shareholder Dilution





As of the
date hereof, the Company had share purchase options outstanding allowing the
holders of these options to purchase 6,740,000 common shares and share purchase
warrants outstanding allowing the holders to purchase 5,882,500 common
shares.  Directors and officers of the Company hold 5,700,000 of these
share purchase options and 1,040,000 share purchase options are held by
employees and service providers of the Company.  None of the share
purchase warrants are held by directors and officers. As of December 31, 2008
there were 118,969,063 common shares outstanding; the exercise of all of the
existing share purchase options and warrants would result in percentage
ownership dilution to the existing shareholders.





Potential Future Equity
Financings





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





Enforcement
of Foreign Judgments





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





Foreign
Private Issuer Status





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





20


General Economic Conditions





The recent unprecedented events in
global financial markets have had a profound impact on the global
economy.  Many industries, including the mining industry, are impacted
by these market conditions.  Some of the key 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 exchange and precious metal markets, and a lack of market
liquidity.  A continued or worsened slowdown in the financial markets
or other economic conditions, including but not limited to, consumer spending,
employment rates, business conditions, inflation, fuel and energy costs,
consumer debt levels, lack of available credit, the state of the financial
markets, interest rates, and tax rates may adversely affect the Company’s growth
and profitability.  Specifically:





·
            the
      global credit/liquidity crisis could impact the cost and availability of
      financing and the Company’s overall
liquidity;




·
            the
      volatility of metal prices may impact the Company’s revenues, profits and
      cash flow;




·
            volatile
      energy prices, commodity and consumables prices and currency exchange
      rates impact potential production
  costs; and




·
            the
      devaluation and volatility of global stock markets impacts the valuation
      of the Company’s equity securities





These factors could have a material
adverse effect on our financial condition and results
of operations.





U.S.
Tax Matters





United States income tax legislation
contains rules governing passive foreign investment companies (“PFIC”), which
can have significant tax effects on US Holders of foreign
corporations.  A US Holder who holds stock in a foreign corporation
during any year in which such corporation qualifies as a PFIC is subject to
United States federal income taxation under one of two alternative tax regimes
at the election of each such US Holder.  The U.S. federal income tax
consequences to a U.S. Holder of the acquisition, ownership, and disposition of
Common Shares will depend on whether such U.S. Holder makes an election to treat
the Company as a “qualified electing fund” or “QEF” under Section 1295 of
the Code (a “QEF Election”) or a mark-to-market election under Section 1296
of the Code (a “Mark-to-Market Election”).  See “Item 10 Additional
Information--Taxation--Certain United States Federal Income Tax Consequences”
for a detailed discussion of material United States federal income tax
consequences for U.S. Shareholders.





Penny
Stock Rules





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


21


compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer's confirmation.  In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction.  These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for the stock that is subject to these penny stock
rules.  Consequently, these penny stock rules may affect the ability
of broker-dealers to trade our securities.  The Company believes that
the penny stock rules discourage investor interest in and limit the
marketability of its common stock in the United States.








ITEM 4.
            INFORMATION
      ON THE COMPANY





A.           History
and Development of the Company





General
Information.The Company was
incorporated in British Columbia, Canada, on December 16, 1965 under the Companies Act of British
Columbia and the name “Pizza Patio Management Ltd.”  The Company
changed its name to “San Andreas Resources Corporation” on August 29, 1991 and
to “Canadian Zinc Corporation” on May 25, 1999.  The Company currently
exists under the Business
Corporations Act(British Columbia).  On June 16, 2004, the
Company’s shareholders adopted new Articles to bring the Company’s Charter
documents up to date and into conformity with the new Business Corporations Act(British Columbia).





The
Company's principal place of business (which is also the registered office) is
located at Suite 1710, 650 West Georgia Street, Vancouver, British Columbia,
Canada V6B 4N9.  The office telephone number is (604)
688-2001.





The
Company’s common shares trade on the Toronto Stock Exchange (“TSX”) in Toronto,
Ontario, Canada, under the symbol “CZN” and on the OTC Bulletin Board in the
United States under the symbol “CZICF.”  Canada is the place of
domicile for the Company.  The Company’s fiscal year end is December
31 in each year.





The
Company is engaged in the business of exploration and, when warranted,
development of natural resource properties.  The Company’s principal
focus is exploration and development the Prairie Creek Property and adjacent
mineral land claims (a zinc/lead/silver property) located approximately 500
kilometres west of Yellowknife in the Northwest Territories,
Canada.





For
the purposes of the United States regulatory requirements and United States
Generally Accepted Accounting Principles the Company is considered to be an
exploration stage enterprise.





Acquisition of
interest in Prairie Creek Property. Pursuant to an August 23, 1991 Option
Agreement, the Company entered into an option to acquire a 60% interest in the
Prairie Creek Property (“Prairie Creek”) from Nanisivik Mines Ltd. (an
unaffiliated third party) (“Nanisivik”).  Subsequently, pursuant to a
March 29, 1993 Asset Purchase Agreement that superseded the Option Agreement,
the Company acquired a 100% interest in Prairie Creek, and a 60% interest in the
plant and equipment,  subject to a net smelter royalty of 2%, in
favour of Titan Pacific Resources Ltd. (“Titan”) with a maximum payout of $8.2
million.





The
purchase price for the mineral interests was $3.25 million paid between 1993 and
1995 in full, in cash and shares.  The purchase price was allocated
$2.75 million to the land and $0.5 million to the plant and
equipment.





In
January 2004, the Company completed an agreement with Titan to purchase Titan's
interest in Prairie Creek.  Under the Agreement, the Company acquired
the outstanding 40% interest in the physical plant and


22


equipment
at Prairie Creek, which it did not already own, and also repurchased the 2% net
smelter royalty interest with a face value of $8.2 million.  The
consideration was the issue to Titan of 300,000 common shares and 250,000 share
purchase warrants exercisable at $1.25 per share until June 22,
2005.  The transaction simplified and consolidated the Company's 100%
royalty free ownership interest of the Prairie Creek Property.








Summary of recent
financing activities. The Company relies on equity financings to fund its
financial commitments.  Over the past five years the following, in
overview, has occurred:





- 2004:
The Company raised $2.4 million through the exercise of share purchase warrants
and employee stock options.


- 2005:
The Company raised $5.4 million through the private placement of shares and the
exercise of share purchase warrants.


- 2006:
The Company raised $22 million (net of share issue costs) through the private
placement of shares and the exercise of share purchase warrants and employee
stock options.


- 2007:
The Company raised $10.2 million (net of share issue costs) through the private
placement of shares and the exercise of share purchase warrants and employee
stock options.








Principal Capital
Expenditures. Prior to fiscal 2008, and as permitted under Canadian GAAP,
the Company capitalized its exploration and development/permitting expenditures
at Prairie Creek.  However, during fiscal 2008, the Company made a
voluntary change in accounting policy, as described in more detail in this
Annual Report at “Item 5.A.--Operating Results--Change in Accounting Policy,”
whereby such costs are now expensed as incurred until such time as mineral
reserves are proven or permits to operate the mineral resource property are
received and financing to complete development has been
obtained.  With regards to plant and equipment, the Company’s
principal capital expenditures during the three most recent fiscal years have
amounted to a total of $977,000, which primarily relates to mobile equipment at
Prairie Creek.





23


B.           
Business Overview





The
Company’s principal focus is the exploration and development of the Prairie
Creek Property, a zinc/lead/silver deposit with adjacent mill and infrastructure
facilities, located approximately 500 kilometres west of Yellowknife in the
Northwest Territories, Canada.





History of
Prairie Creek. The original discovery of mineralization on the Prairie
Creek Property was made in 1928 at the showing known as the “No. 5
Zone.”  In 1958, a limited mapping program was undertaken by Fort
Reliance Minerals Ltd.  The claims lapsed in 1965 and were restaked by
a prospector and subsequently conveyed to Cadillac Explorations Ltd.
(“Cadillac”) in 1966.  Cadillac also acquired a 182,590 acre
prospecting permit.  This permit expired in 1969 and 6,659 acres (210
claims) were selected by Cadillac and brought to lease.





During
1966 to 1969, trenching was carried out on a number of zones and underground
exploration commenced.  The property was optioned to Penarroya Canada
Ltee. (“Penarroya”) in 1970 and the underground development was
extended.  Surface drilling and preliminary metallurgical testing was
also conducted.  Penarroya discontinued their work in late 1970 and
Cadillac resumed full operation of the project.  Cadillac further
developed the underground workings and resampled the crosscuts in
1979.





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





In 1991,
Nanisivik Mines Limited (an unaffiliated third party) (“Nanisivik”) acquired the
property through the bankruptcy proceedings.  Pursuant to an August
23, 1991 Option Agreement, the Company entered into an option to acquire a 60%
interest in the Prairie Creek Property from Nanisivik.  Subsequently,
pursuant to a March 29, 1993 Asset Purchase Agreement that superseded the Option
Agreement, the Company acquired a 100% interest in the Prairie Creek Property,
and a 60% interest in the plant and equipment, subject to a net smelter royalty
of 2% in favour of Titan Pacific Resources Ltd. (“Titan”).  In January
2004, the Company acquired all of Titan’s interest, including the 2% net smelter
royalty, and now holds a 100% interest in the Prairie Creek property, plant and
equipment.





Between
1991 and 2000 the Company carried out various exploration programs on the
Prairie Creek Property.  In January 2001, the Company completed a
Scoping Study designed to outline and guide the re-development of the existing
mine and mill on the Prairie Creek Property.  The preliminary study
indicated the feasibility of a mining and milling operation on the site and
identified a number of different development and production
scenarios.  The operation would utilize the existing mine and mill
infrastructure that had been put in place in 1982, but which had never been
operated.  Indicated capital costs for the new operation were
estimated in 2000 to be $40.5 million, including the construction of an all
weather access road to the site.  The Scoping Study has not been
updated and is now considered to be out of date.  It is now
anticipated that the capital costs to place the Prairie Creek Mine into
production will be significantly higher than indicated in the 2001 Scoping
Study.





In
October 2007, an updated Technical Report (the “Report”) with regard to Mineral
Resource Estimation on the Main Zone at Prairie Creek was independently prepared
by Minefill Services Inc. in compliance with National Instrument 43-101,
following the results of the 2006/2007 underground drilling


24


program.  The
Report verifies and confirms the previous historical resource estimate completed
by MRDI in 1998 and notes significant upgrades in resource
categories.  The Report indicates that the Prairie Creek Property
hosts total Measured and Indicated Resources of 5,840,329 tonnes grading 10.71%
zinc, 9.90% lead, 161.12 grams silver per tonne and 0.326% copper.  In
addition, the Report confirms that there remains a large Inferred Resource of
5,541,576 tonnes grading at 13.53% zinc, 11.43% lead, 215 grams per tonne silver
and 0.514% copper and additional exploration potential.  Cautionary
Note to U.S. Investors: Mineral resources are not mineral
reserves and there is no assurance that any mineral resources will ultimately be
reclassified as proven or probable reserves. Mineral resources which are not
mineral reserves do not have demonstrated economic or legal viability.
U.S. Investors should read the “Cautionary Note to U.S. Investors
Concerning Estimates of Measured, Indicated or Inferred Resources”
above.





Utilizing
the Report, the Company subsequently examined various operating alternatives
including mine planning, processing and tailings disposal
studies.  The work to date, which was undertaken in conjunction with
SNC-Lavalin Inc., has focused on detailed mine planning and scheduling, process
design, including a new dense media separation system, and underground tailings
disposal.  A new bulk sample and representative water samples were
extracted from underground and transported to SGS Lakefield for laboratory and
metallurgical testing to produce representative tailings and process
water.  Detailed transportation studies were also carried
out.





A Project
Description Report (“PDR”) was prepared and filed with regulatory authorities in
May 2008 in support of application for operating permits.  The
PDR  describes in detail the proposed new mining operations at Prairie
Creek and contemplates the construction of new facilities including new
fuel-efficient/low-emission power generating units, a kitchen/accommodation
block, concentrate storage shed, an incinerator, a new engineered waste rock
pile and two new transfer stations along the winter road.





The
Project Description Report, dated May 2008, may be viewed under the Company’s
name on the Water Board’s website at
http://www.mvlwb.ca/mv/registry.aspx.





The
Company is currently working with SNC-Lavalin Inc. and other consultants to
optimize the proposed mine plan incorporating some of the data from studies that
were carried out in 2008 and will work towards updating and converting the PDR
into a Pre-Feasibility Study to be finalized after the current Environmental
Assessment has been completed by the Review Board.





The
indicated capital costs to place the Prairie Creek Mine into production will be
estimated in the Pre-Feasibility study.  The Company currently
anticipates that the capital costs will be in the range of $80 - 100 million,
depending on final project design and conditions in the operating
permits.





Permitting at
Prairie Creek. The Prairie Creek Project is located in an environmentally
sensitive remote area in the Mackenzie Mountains, within the watershed of the
South Nahanni River and in proximity to, but outside, the Nahanni National Park
Reserve.  The Company is required to obtain various permits to carry
on its activities and is subject to various reclamation and environmental
conditions.  Canadian Zinc does not have all of the permits necessary
to operate the Prairie Creek Mine and there can be no assurance that it will be
able to obtain those permits or obtain them within a reasonable
time.  The Company has experienced long delays in obtaining permits to
date.  The Company expects continuing difficulties with its permitting
activities and faces ongoing opposition and legal challenges from certain
interests.





Throughout
the years 2004 through 2008, the Company’s principal focus was its efforts to
advance the Prairie Creek Project towards development, principally in the
permitting process.





In 2001,
the Company applied for two surface exploration drilling permits, an underground
exploration permit, a pilot plant metallurgical permit and a permit for use of
part of the road from the Prairie Creek Property.  Following
Environmental Assessment (“EA”) the two surface exploration land use permits
were issued in 2001.


25


The
underground exploration and pilot plant permit applications were referred for
Environmental Assessment which lasted throughout all of 2001, 2002 and into June
of 2003.  In September 2003, a Land Use Permit and Water Licence for
underground exploration and development and for metallurgical testing in a pilot
plant were issued to the Company by the Mackenzie Valley Land and Water Board
(the “Water Board” or “MVLWB”).  An appeal to the Federal Court (the
“Court”) seeking judicial review of the decision of the Water Board to issue the
Water Licence was filed in October 2003 by the Dehcho First Nations and heard by
the Court in August 2005.  In December 2005, the Court issued its
Judgment directing the Water Board to reissue the Licence containing modified
language which had been agreed between the Company and the Minister of Indian
and Northern Affairs Canada.  The Licence was reissued by the Board in
February 2006.  The Water Licence and Land Use Permit were renewed in
September 2008 for terms of five years and two years respectively.





In 2003,
the Company submitted a separate application for a Land Use Permit for use of
the existing road from the Liard Highway to the mine site and claimed legal
exemption from the EA process.  The claim for exemption was denied by
the Water Board and the Company filed an appeal to the Supreme Court of the
Northwest Territories.  That Appeal was heard by the Supreme Court in
December 2004.  In May 2005, the Court issued its Judgment, ruling
that the proposed development is exempt under the Act from
EA.  Subsequently the Nahanni Butte Dene Band of the Dehcho First
Nations alleged infringement of their constitutional rights and inadequate
consultation.  The Department of Indian Affairs and Northern
Development carried out a Section 35 Consultation with Nahanni and issued its
report to the Water Board in February 2007.  The Land Use Permit was
issued in April 2007 and is valid for a period of five years to April 10,
2012.





In
the spring of 2004, the Company applied to the Water Board for an amendment to
expand the area of the existing surface exploration Land Use
Permit.  The application was referred for EA and this assessment was
conducted by the Mackenzie Valley Impact Review Board (the “Review Board” or
“MVEIRB”) throughout 2005, culminating in a decision dated December 23, 2005 in
which the Review Board recommended to the Minister of Indian Affairs and
Northern Development  that the development proceed to the regulatory
phase of approvals.  On February 3, 2006, the Minister accepted the
recommendations of the Review Board and the application was referred back to the
Water Board to finalize the terms and conditions of the permit.  The
Land Use Permit was issued by the Water Board in May 2006, is valid for a period
of five years, and permits the Company to conduct exploration, including
drilling, anywhere on the Prairie Creek Property.





In June
2007, Canadian Zinc applied to the Water Board for a Class B Water Licence
rehabilitate a portion of the road in the proximity of the mine site and sought
authorization from the Department of Fisheries and Oceans (“DFO”) to carry out
the work.  Also in June 2007, the Company applied to Indian and
Northern Affairs Canada for a quarrying permit to obtain rock to be used in the
road rehabilitation.  The issuance of these permits was delayed as
they were referred to consultation between the Crown and the Nahanni Butte Dene
Band.  The Company received the quarry permit on February 29, 2008,
the Water Licence on March 20, 2008 and the authorization from DFO on July 15,
2008.





In May
2008, the Company applied to the Water Board for a Type “A” Water Licence and
three Type “A” Land Use Permits; one for the operation of the Prairie Creek Mine
and two for Transfer Facilities along the road.  In September 2008,
the Water Board completed its preliminary screening and referred the Land Use
Permit and the Water Licence applications to the Review Board for Environmental
Assessment.





An EA is
the next stage in the regulatory process following preliminary
screening.  The initial phase of the EA consisted of community scoping
sessions and written hearings, submissions and rulings to determine the scope of
the Terms of Reference for the EA.  The Company participated in six
public scoping sessions in several Dehcho communities and in Yellowknife in late
September/early October 2008 to enable discussion and questions to be addressed
to assist in determining the overall scope of the EA.  The Community
public sessions demonstrated that there is considerable local community support
for the Prairie Creek project and there is no significant public concern amongst
the communities.  The Review Board was strongly encouraged to
undertake a very focused and efficient EA. Two clear themes emerged: protection
of water quality is paramount, and, jobs and economic activity are sorely needed
in the Dehcho region.


26


The
Review Board originally proposed a deadline of October 14, 2008, for interested
parties to provide scoping submissions but this was subsequently
extended.  Initially, the Review Board indicated that it anticipated
providing further guidance on how the EA would proceed in the last week of
November 2008.





On
November 6, 2008, the Review Board received a Request for Ruling from Ecojustice
(formerly Sierra Legal Defence Fund) on behalf of Dehcho First Nations and
Canadian Parks and Wilderness Society (“CPAWS”).  The Request for
Ruling concerned the question whether the winter access road, and its use,
should be included in the EA process.  The Review Board subsequently
decided to issue information requests to various parties to ensure that all
potentially relevant materials to assist their decision on the Request would be
available to all interested parties.  The information request was
published by the Review Board on November 26, 2008, and noted two
questions:





(1)
Whether the winter road should be part of the scope of development and subject
to direct impact assessment during the EA; and


(2)
Whether existing mine site infrastructure should be part of the scope of
development and subject to direct impact assessment during the EA.





The
Review Board proceeded to set deadlines for submissions and
responses.  These timelines were further extended to January 19, 2009,
following a Review Board pre-hearing conference on December 17,
2008.  The Review Board considered submissions and responses from
interested parties, including Canadian Zinc which submitted that the winter road
and existing mine site infrastructure should not be part of the assessment and
that the EA should focus on the new developments and the new transfer stations
on the winter road.





On March
5, 2009, the Review Board published its Ruling on the Scope of Development,
finding that “all physical works and activities associated with the winter
access road.....and all physical works and activities associated with the mine
site.....are part of the scope of development for the Prairie Creek Mine
environmental assessment.”





The
Review Board also provided some comments with regard to the scope of assessment,
noting that “In its forthcoming Draft Terms of Reference, the
Review Board will provide its preliminary determination of the scope of
assessment – what issues need to be examined in what level of detail during the
environmental assessment – for review and comment.  The Review Board
reminds all interested parties that while the scope of development defines all
the physical works and activities required to undertake the development, that
does not mean that all physical works and activities are subject to the same
level of assessment.  Depending on their potential for impacts and
subject to Review Board discretion, parts of the scope of development may be
considered very closely, other very little or not at all.





“The
Review Board will give full consideration to historic studies, impact assessment
and operational information about all aspects of the Prairie Creek Mine before
determining whether additional studies are required....The Review Board assures
all interested parties it has no intention of ignoring the wealth of relevant
existing evidence collected on how the existing infrastructure will likely
interact with the environment.





“The
Review Board also notes that the Prairie Creek Mine includes a variety of
existing structures, including the winter access road and much of the mine site
infrastructure.  The Review Board accepts the argument made by
Canadian Zinc and others that conducting an impact assessment on the
construction of facilities, including the road, which have been present on the
land for over 25 years is not likely to generate any useful information even if
it is possible.  The Review Board will not be assessing construction
impacts of already built structures.  The Board has decided that
assessment of these facilities will be restricted to the effects of their
ongoing operation in combination with the effects of other construction and
operations necessary for the operation of the mine.”





The
Review Board indicated that the Draft Terms of Reference would identify the
scope of development in more detail, and allow public comment before finalizing
the scope of development to be assessed in the EA.


27


The Draft
Terms of Reference and a Draft Work Plan were issued on May 11, 2009 with a
stated deadline for submission of comments by interested parties of June 12,
2009.  In its Draft Work Plan the Review Board indicated that it
anticipates concluding its Report of Environmental Assessment by October
2010.





Following
the EA will be a further regulatory stage, managed by the Water Board (with
input from territorial and federal agencies), before permits are
issued.  These permits will include conditions that will require CZN
to meet appropriate environmental guidelines.





Competition.The mineral property exploration and development business, in general, is
intensively competitive and there is not any assurance that even if commercial
quantities of ore are discovered, a ready market will exist for sale of
same.  Numerous factors beyond the Company’s control may affect the
marketability of any mineralization discovered.  These factors include
market fluctuations; the proximity and capacity of natural resource markets and
processing equipment; and government regulations, including regulations relating
to prices, taxes, royalties, land tenure, land use, importing and exporting of
mineral and environmental protection.  The exact effect of these
factors cannot be accurately predicted, but the combination of these factors may
make it difficult for the Company to receive an adequate return on
investment.





The
Company competes with many companies possessing greater financial resources and
technical facilities for the acquisition of mineral concessions, claims, leases
and other mineral interests as well as for the recruitment and retention of
qualified employees.





Seasonality.
The Company’s current operations are not materially affected by seasonal
conditions at Prairie Creek.  However, as Prairie Creek is located in
a remote area which does experience cold winters, the Company has, from time to
time, determined that it would close Prairie Creek for the winter (such as
occurred during the winter of 2008/09).  For a more detailed
description of the climate at Prairie Creek please review the disclosure in
“Item 4.d--Property, Plant and Equipment--2. Location, Access and
Climate.”





Other business
opportunities. From time to time Canadian Zinc undertakes evaluations of
opportunities to acquire additional mining assets and
businesses.  Canadian Zinc believes that, acquisition of suitable
mining assets or businesses using the Company’s funds, could add shareholder
value and diversify the interests of the Company.  Subsequent to March
31, 2009, and as noted below, Canadian Zinc entered into various agreements to
acquire 20.01% of the issued shares of Vatukoula Gold Mines Plc and also entered
into an option agreement to acquire the Tuvatu gold exploration
property.





Acquisition
of Shares of Vatukoula Gold Mines Plc





In April
2009, the Company acquired 347,669,022 shares of Vatukoula Gold Mines Plc
(“VGM”) at a price of £0.0073 per share for total consideration of £2.538
million ($4.597 million).  VGM is a UK company, listed on the
Alternative Investment Market (“AIM”) of the London Stock Exchange, which
currently owns and operates the Vatukoula Gold Mine located in
Fiji.





In May
2009, Canadian Zinc entered into a Subscription Agreement (the “Subscription
Agreement”) with VGM to acquire a further 200,000,000 shares of VGM (the
“Subscription Shares”) for an investment of £1.2 million (£0.006 per share), or
approximately $2.16 million (the “Subscription”).  Completion of the
Subscription is subject to approval of VGM shareholders at an Extraordinary
General Meeting, which is planned to be held in early June 2009, to confer
authority under the United Kingdom Companies Act 1985 to issue the Subscription
Shares without the requirement to first offer them on a pre-emptive basis to
existing shareholders.





Upon
completion of the Subscription, Canadian Zinc will hold a total of 547,669,022
ordinary shares, or approximately 20.01% of the issued share capital of
VGM.  In addition, VGM has agreed that two nominees of Canadian Zinc
will be appointed to the Board of VGM.





The
Company also entered into an agreement granting an option, to Viso Gero Global,
Inc. (“Viso Gero”), an unrelated private company, and exercisable to January 7,
2010, to purchase up to 200,000,000 VGM


28


shares at
a price of £0.01 per share.  Should Viso Gero exercise its call option
to purchase up to 200,000,000 shares of VGM from Canadian Zinc, then, under the
terms of the VGM Subscription Agreement, Canadian Zinc shall be entitled to
subscribe for up to 250,000,000 additional VGM shares so that the total
percentage shareholding held by CZN in VGM remains at 20.01% ("the Additional
Shares").  The subscription price for the Additional Shares will be
95% of the volume weighted average price of VGM shares for the five trading days
prior to the exercise of the Viso Gero Call Option.





The
shares of VGM are being acquired for investment purposes.  Depending
on the performance of the Vatukoula mine and on market and other conditions,
Canadian Zinc may from time to time in the future increase or decrease its
ownership, control or direction over the shares of VGM, through market
transactions, private agreements or otherwise.  Canadian Zinc has
agreed that for a period of nine months from the date of issue of the
Subscription Shares it will not dispose of any of the Subscription Shares
without the prior consent of the Board of VGM, except in certain defined
circumstances





Option
Agreement – Tuvatu Gold Project, Fiji





In May
2009, the Company entered into an option agreement (the “Option Agreement”) on
the Tuvatu Gold Project (“Tuvatu”) in Fiji.  Tuvatu is currently owned
by American Eagle Resources Inc. (“American Eagle”) through its 100% owned
Fijian subsidiary Lion One Limited.  Under the Option Agreement, the
Company has made an option payment of $1.8 million to the majority shareholder
of American Eagle and has the option until October 30, 2009 (the “Option
Period), to carry out further evaluation and exploration of the Tuvatu
property.  The Company has the option, at any time during the Option
Period, to exercise such option to acquire Tuvatu, via amalgamation of American
Eagle with a wholly-owned subsidiary of Canadian Zinc under which 16,250,000
shares of Canadian Zinc would be issued to the shareholders of American
Eagle.  During the Option Period, Canadian Zinc has agreed to maintain
the property in good standing and continue with the current exploration program
at an estimated cost of approximately $500,000.








C.           
Organizational Structure





The
Company has no subsidiaries.








D.           Property,
Plant and Equipment





The
properties of the Company are in the exploration and development stage
only.  The Company has no producing properties and has not had any
revenue from mining since incorporation.  The existing infrastructure,
including the mill, buildings, camp etc. is now more than twenty-five years old
and, although it has been held under care and maintenance, it has lain idle for
twenty-five plus years and was never operated.





Principal Property – Prairie
Creek, Northwest Territories





The
Prairie Creek Property consists of a 100% interest in the mining leases, surface
leases and staked mineral claims described below.





29


1.
            Land
      Tenure





The
Prairie Creek Property is comprised of:





·
            Mining Leases Numbers
      2854, 2931, 2932, 2933, 3313, 3314, 3315, and 3338; (8,749.4 acres),
      expiring from July 13, 2010 to August 5,
2020.




·
            Surface Leases Numbers
      95 F/10-5-5 and 95 F/10-7-4; (325.81 acres).  The Surface Leases
      are held from the Department of Indian Affairs and Northern Development
      and expire March 31, 2012.




·
            Mineral
      Claims:  Four additional mineral claims, referred to as
      the Gate Claims, were staked in 1999 in the vicinity of the Prairie Creek
      Property.  These claims consist of the Gate 1-4 Claims covering
      an area of 9,245.35 hectares.  Sufficient assessment work has
      been filed on these claims to hold them in good standing until July 19,
      2009.  Six additional mineral claims Way 1–6 covering an area of
      10,196.18 acres were staked in 2006 adjacent to existing mining leases or
      mineral claims to enlarge the size of the Prairie Creek property and were
      in good standing until November 11, 2008.  The Company
      determined in November 2008 that it would not renew the Way 1 – 4 claims,
      which were allowed to lapse.  The Way 5 claim is in good
      standing until November 1, 2013 and the Way 6 claim until November 1,
      2009.







All of
the above leases and claims are in good standing at the date hereof, except the
Way 1 – 4 claims, which were allowed to lapse as described above.





The
Prairie Creek Mine is located on land claimed by the Nahanni Butte Dene Band of
the Dehcho First Nations (“DCFN”) as their traditional territory.  The
DCFN are engaged in ongoing land settlement negotiations with the Government of
Canada and the Government of the Northwest Territories in what is referred to as
the Dehcho Process.  [Refer to “Item 4.D.--Property, Plant and
Equipment--12. First Nations”].





In July
2003, as part of the Interim Measures Agreement entered into between Canada and
the DCFN as part of the Dehcho Process, Canada made an interim withdrawal of
certain lands for a period of five years.  Part of the lands withdrawn
under the Interim Withdrawal order include the area represented by the Company’s
Mining Lease No. 2854, a portion of Mining Leases No. 2931, 3313 and 3314 and
part of the area over which the road that connects the Property to the highway
passes.  This Interim Withdrawal was modified in July
2007.  In accordance with Sections 19 and 23 of the Interim Measures
Agreement, such withdrawal is subject to the continuing exercise of existing
rights, titles, interests, entitlements, licenses, permits, reservations,
benefits and privileges and does not affect access to or across withdrawn
land.





In July
2007, Canada made a further Interim Withdrawal of certain lands for the purpose
of the potential expansion of Nahanni National Park Reserve.  The
lands withdrawn cover approximately 28,000 square kilometres and completely
surround but do not include the area of approximately 367 square kilometres
surrounding the Prairie Creek Mine, which by Schedule 2 is specifically excluded
from the Interim Land Withdrawal Order.





In
October 2008, both Interim Land Withdrawals (Dehcho and Nahanni National Park
Reserve) were renewed for a further period of two years and will expire in
October 2010.  See the details in “Item 4.D.--Property, Plant and
Equipment--11. Environmental Considerations--Nahanni National Park Reserve/Parks
Canada Memorandum of Understanding.”




2.           Location,
Access and Climate





The
Prairie Creek Property is situated approximately 500 kilometres west of
Yellowknife, the administrative centre of the Northwest Territories, in the
Mackenzie mountain range that locally has an average relief of approximately 300
metres and comprises low mountains with moderate to steep sides and intervening
narrow valleys.  The Prairie Creek Property is located at an elevation
of 850 metres above mean sea level.  The valleys are well incised and
the area is located within the Alpine forest-tundra section of the boreal
forest,


30


characterized
by stunted fir and limited undergrowth.  The trees, that grow at the
lower elevations, give way to mossy, open Alpine-type country in the upper parts
of the mountains.











Year
round access to the Property is provided by aircraft to a 3,000-foot gravel
airstrip immediately adjacent to the camp.  The Prairie Creek Property
is also accessible by road which extends from the Property to the Liard Highway,
a distance of 170 kilometres and which was originally permitted for use in the
winter months throughout its full length and for year round use for the first 40
kilometres out from the mine site.  The road needs to be
re-established, and the Company successfully rehabilitated approximately 30
kilometres out from the mine site in the summer of 2008.  The Liard
Highway #7 is the major north-south transportation route, which connects Fort
Nelson, British Columbia to Fort Simpson, Northwest Territories.





The
climate is sub-Arctic, being characterized by long cold winters with pleasant
summers.  Snowfall is moderate and only minor difficulty has been
experienced in operating throughout the winter months.





3.
            Geological
      Setting





Regional
Geology.





The 1987
Geological Survey of Canada Memoir 412 by Morrow and Cook provides the best
description of the regional geological setting of the
Property.  Morrow and Cook describe the stratigraphy that accumulated
during Siluro-Devonian time and formed in a paleo-basin adjacent to the ancient
North American Platformal sediments.  The east-dipping Tundra Thrust
(that is located on the Property) and, 30 kilometres to the west, the
west-dipping Arnica Thrust, define the present margins of the Prairie Creek
paleo-basin in which accumulated a thick Devonian sequence of sediments,
including the Cadillac and Funeral Formations.


31


Units within
the Prairie Creek paleo-basin underwent structural deformation in the form of
folds and faults during regional Laramide deformation.  The prevalent
regional structural trend is approximately north-south; the Prairie Creek
paleo-basin is broken into a series of north-south trending, 5 to 20 kilometre
wide fault blocks.





Property
Geology.





Canadian
Zinc’s existing mineral claims and leases overlie two major fault blocks of
sediments: the Prairie Creek Block and western Gate Block.  The
north-eastern part of the Property also includes some of the marginal platformal
sequence of rocks that are relatively undeformed by the faulting and folding
that is apparent within the Prairie Creek paleo-basin sequence.





Marginal Platform. The
northern part of the Company’s claims, from Lease 3313 south to the formerly
held Way 2 mineral claim, straddles the Tundra Thrust, which separates the
Prairie Creek paleo-basin sequence to the west from the platformal series of
sedimentary formations to the east.  The platformal sediments are
relatively undeformed and comprise a stratigraphic sequence starting with the
Road River Formation that is overlain by the Root River, Camsell and Sombre
Formations (listed from oldest to youngest).  Mississippi Valley-type
mineralization is hosted in biohermal reefs of the Root River Formation, or
facies equivalent.





In the
southern part of the Company’s claims, a reverse fault continuation of the
Tundra Thrust separates the Prairie Creek Block from the marginal platform,
approximately two kilometres east of the Mine Site.  The Platformal
sequence in this area is dominated by a thick assemblage of Sombre Formation
dolomites.





Prairie Creek Block. Overall,
the southern part of the Property is outlined by a one to two kilometre wide,
doubly plunging antiform with a north-south trending fold axis that is referred
to as the Prairie Creek Block. It is bordered to the west by the so-called Gate
Fault and to the east by the Tundra Thrust. It is underlain by a conformable
sedimentary sequence including the Lower Ordovician Whittaker Formation
dolomites, Silurian Road River Formation shales and the thinly bedded, limy
shales of the Cadillac Formation. Lower to Middle Devonian Arnica and Funeral
Formation dolomites and limestone overlie this assemblage on the northern part
of the Property.





Structurally,
the longitudinal arch of the antiform occurs approximately five kilometres south
of the Mine Site. A local fault, referred to as the Prairie Creek fault, offsets
the eastern flank of the antiformal fold and juxtaposes Cadillac stratigraphy
against the Road River Formation. Erosion of the antiformal structure has
resulted in windows of older Road River shales, cored by the Whittaker Formation
dolomites. The antiform plunges at about 15 degrees to the north, so the
geological units young in age to the north, which is also the case
underground.





Gate Mineral Claims. The six
contiguous Gate claims (that together define what is termed the Gate Block) are
located to the west of the main mining leases and overlie similar type rock
assemblages to those found on the Prairie Creek Block.  Grassroots
exploration was completed on this ground to test for mineralization similar to
that found in the Prairie Creek Block.





The
geological formations of the Whittaker and Road River Formations are known to
occur within the Gate Block, as relatively flat-lying to gently dipping
units.  Compared to the Prairie Creek Block, there is much more
exposure of the prospective Whittaker Formation in the Gate Block.





Main Zone Geology. The Mine
Site is situated on the western flank of the Prairie Creek antiform, referred to
as the Main Zone.  It is Main Zone mineralization that was and is the
focus for Mine development and exploitation.





The three
levels of available underground development assist in identifying the detail of
Main Zone geology:


32




• 870
metre Level is collared in the Ordovician, Upper Whittaker Formation, which is
the oldest geological formation in the Main Zone area and which forms the core
of the Prairie Creek antiform;


• the
Whittaker Formation is in turn overlain by a large exposure of the carbon-rich
graphitic shales/dolomites of the Road River Formation;


• the
iron-bearing Cadillac Formation shales overly the Road River Formation and are
located immediately adjacent to the Mine Site; and


• the
bluff-forming rocks immediately to the west of the Mine Site are formed by the
cherty Arnica Formation which overlie the Cadillac Formation and form the more
resistant hilltops in the immediate vicinity of the Mine Site.





Property Base
MetalMineralization.





Three
main styles of base metal mineralization have been identified on the
Property:  Vein mineralization (sulphide with secondary oxide),
Stratabound sulphides and Mississippi Valley type sulphides
(“MVT”).  Exploration at Prairie Creek has revealed many base metal
mineral showings along the entire 17-kilometre length of the
Property.  Historical exploration of the property has led to
referencing some of these surface mineral showings by name and some by
numbers.





• Quartz
vein mineralization occurs in a north-south trending, 16 kilometre long corridor
in the southern portion of the Property where the occurrences are exposed on
surface;


• the
mineralized vein showings are referred to as sequentially numbered Zones, some
ofwhich are known to contain sub-surface stratabound
mineralization:


- the
subsurface area above the underground workings is referred to as Zone 3 or the
Main Zone,


-
extending for about ten kilometres to the south of the Mine Site is a
semi-continuous pattern of other vein exposures referred to as Zones 4 to 12,
inclusive,


- a
further expression of vein mineralization, known as the Rico showing, is located
approximately four kilometres to the north of the Main Zone; and


• the MVT
showings in northern section of the Property are developed over a distance of
approximately ten kilometres. They are referred to, from north to south, as the
Samantha, Joe, Horse, Zulu, Zebra and Road showings.





Stockwork
and stratabound mineralization is not exposed on surface; it has only been
intersected in drillholes.  These mineralized bodies have not been
individually named.





VeinMineralization. Vein
mineralization comprises massive to disseminated galena and sphalerite with
lesser pyrite and tennantite-tetrahedrite in a quartz-carbonate-dolomite
matrix.  Secondary oxidation is locally developed to variable levels
of severity, yielding mainly cerussite (lead oxide) and smithsonite (zinc
oxide); minor oxidation only of tetrahedrite-tennantite has been
found.  Silver is present in solid solution with
tennantite-tetrahedrite and to a lesser extent with galena.  Vein
widths vary between less than 0.1 metre and more than five metres; overall
averages indicate a horizontal thickness (i.e. not true thickness) of
approximately 2.7 metres.





The most
extensively developed vein is the Main Quartz Vein which trends approximately
north-south and dips between the vertical and 40 degrees east (average = 65
degrees east).  It remains open to the north and is expected to
continue for a further four kilometres to the south, evidence for which is the
so-called Rico showing.  Diamond drilling to depth has indicated its
transverse continuance, but little information is currently available below an
elevation of 600 metres above mean sea level (i.e. about 250 metres below the
Mine Site elevation).





Vein
mineralization developed within the cherty dolomites of the Ordovician-Silurian,
Upper Whittaker Formation and shaley dolomites of the lower Road River
Formation.  It apparently formed in axial plane of weakness within the
Prairie Creek structural antiform:


33





• it is
thought that the more competent units of the Lower Road River and Whittaker
Formations more readily formed tension features in which vein sulphide
mineralization is hosted; and


• the
rock type changes to a much more graphitic shale in the mid- and upper-parts of
the Road River Formation, which units are less competent and provide a poor host
for the vein-type formation.





For
example, at the end of 930 metre Level the Main Quartz Vein can be seen to
dissipate into the mid- Road River shales.  The vein does not appear
to be well developed in either the upper shales of the Road River and Cadillac
Formations.





Preliminary
structural evidence suggests that the various mineralized vein showings might be
structurally linked, as a series of en-echelon segments comprising a single, but
nevertheless structurally complex, mineralized vein structure.  The
presence of an en-echelon vein structure might go a long way to explaining the
apparent off-sets between the various vein showings.





Towards
the end of 930 metre Level (at Crosscut 30) a series of narrow (average 0.5
metre wide), massive sphalerite-tennantite veins are developed at about 40
degrees to the average trend of the Main Quartz Vein.  This
mineralization is referred to as the (vein) stockwork that is postulated to have
developed in tensional openings formed by primary movement along the main vein
structure.  Oxidation is not apparent; the sulphide mineral
assemblages are reported by the Company to be similar to those outlined for Main
Quartz Vein material.





Stratabound Mineralization.
Stratabound mineralization was discovered in 1992 while drilling to extend Vein
resources at depth.  So far indications of Stratabound mineralization
have been found by drilling along the trend of the Prairie Creek Vein System
over a strike length of more than 3 kilometres.  This type of deposit
has so far been located by drill holes in the Main Zone as well as in Zones 4, 5
and 6.





Oxidation
is low in stratabound mineralized material, the sulphide
mineralization:





•
      is generally fine-grained, banded to semi-massive and comprises massive
      fine-grained sphalerite, coarse-grained galena and disseminated to massive
      pyrite (silver is contained in solid solution within
    galena);


•
contains no tennantite-tetrahedrite and very little copper; and


•
contains only half as much galena as, but substantially more iron
sulphide/pyrite than, typical vein material.





The
majority of stratabound massive sulphides located thus far occur mainly within a
Mottled Dolomite unit of the Whittaker Formation, which the mineralization
totally replaces without any significant alteration.  The stratabound
sulphides are developed close to both the vein system and the axis of the
Prairie Creek anticline; the vein structure cuts through the stratabound
indicating the vein to be younger than the stratabound deposit.  An
apparent thickness of 28 metres of stratabound mineralization has been
intersected in Main Zone drillholes where it occurs approximately 200 metres
below 870 metre Level.





Mississippi Valley Type
Sulphides(“MVT”). The MVT mineralization found on the Property is comprised of
colliform rims of sphalerite, brassy pyrite-marcasite and minor galena, with or
without later dolomite infilling.  The mineralization appears to occur
discontinuously within coarse biohermal reefs of the Root River Formation, and
always at approximately the same stratigraphic horizon.  It appears to
be classic MVT mineralization, insofar as it occurs in open cavity-type
settings.




4. Gate Claims





During
1999, the Gate 1-4 Mineral Claims were staked covering an area of 9,245.35 acres
to the west of the main property adjacent to the existing land
holdings.  A small exploration program on the newly staked mineral
claims consisted of geological mapping, soil and rock sampling over areas that
contain similar geology with that of the Prairie Creek Property.  This
exploration resulted in the discovery of a Vein in outcrop,
with


34


select
samples grading similar with that of the main established Vein at the Prairie
Creek Property.  Also, a large zinc soil anomaly was located over
favourable geology.  A small heli-portable drilling program was
carried out on part of the Gate Claims during 2007, but revealed no significant
mineralization in drillcore.




5.           2001 Scoping
Study





In
2000/2001, the Company completed a preliminary Scoping Study designed to outline
and guide the re-development of the existing mine and mill on the Prairie Creek
Property.





The Study
took six months to complete and included metallurgical testwork, mill re-design,
alternative mining methods, inclusion of paste backfill in the mine design,
capital and operating cost estimates, a review of smelter terms and conditions
for the Prairie Creek concentrates and other operating parameters.  In
connection with the Scoping Study, further metallurgical samples were collected
and the mill equipment was reassessed.  The road access corridor,
tailings pond and the underground workings were re-examined for future
production considerations and capital cost estimates.  The Scoping
Study was prepared in house using consultants and contractors at a cost of
approximately $0.4 million.  The Scoping Study has not been
updated.





The
complete Scoping Study, dated January 29, 2001, has been filed in Canada on
SEDAR, and may be found under the Company’s profile on SEDAR at www.sedar.com
[Technical Reports April 24, 2001].





It
should be noted that the economic assessment in the Scoping Study was
preliminary and based, in part, on mineral resources that are considered too
speculative geologically to have the economic considerations applied to them
that would enable them to be categorized as reserves in accordance with Canadian
National Instrument 43-101.  Mineral resources that are not mineral
reserves do not have demonstrated economic viability.  In addition,
the Scoping Study was preliminary in nature, despite the existing underground
development and the on-site mill, and the assumptions made within the Scoping
Study and its subsequent results may not be attained.





The
Scoping Study outlined the plan for the development of the Prairie Creek Project
was based on the historical development and existing infrastructure at the
Prairie Creek Property and on the Resource Estimation carried out by MRDI Canada
in 1998.  The MRDI Resource Estimation does not constitute mineable
reserves.  The historical development was carried out principally in
1980 to 1982 and the infrastructure, including the mill, was constructed in the
same period based on a feasibility study prepared by Kilborn Engineering
(Pacific) Limited in 1980.  The Kilborn feasibility study is outdated
and cannot be relied upon.  The existing infrastructure, including the
mill, buildings, camp etc. is now over twenty-five years old and although it has
been held under care and maintenance it has lain idle for more than twenty-five
years and was never operated.  There is a significant risk attaching
to the proposed operation of aged equipment.





The
Scoping Study is now considered to be out of date and should not be relied
upon.  The indicated capital costs were estimated in 2000 and are now
outdated.  The Company anticipates that the capital costs to place the
Prairie Creek Mine into production will be significantly greater than estimated
in the 2001 Scoping Study.




6.           2006 - 2008 Work Program and
Exploration Activities





During
2006, the Company undertook a major underground exploration and development
program driving a new decline about 400 metres within the underground mine, from
which a detailed underground drilling program was initiated.  A
surface exploration program was carried out on Zone 5 about five kilometres
south of the minesite.





The 2007
program included the continuation of the underground drilling program which
commenced in 2006.  Underground drilling was carried out from drill
stations at 50 metre intervals along the new decline.  Phase 1 of the
drilling program was completed in early June 2007 and consisted of 41 drill
holes, of which 40 intersected mineralization, totaling 8,217 metres of drilling
from six drill stations.  The results of the Phase 1


35


program
were incorporated into a Technical Report that complies with National Instrument
43-101 standards for determining and defining mineral
resources.  Further details with regard to the Technical Report and
work undertaken in 2007 are detailed in this Annual Report at “Item
4.D.--Property, Plant and Equipment--7. 2007 Resource Estimation.”





Utilizing
the Report, the Company subsequently examined various operating alternatives
including mine planning, processing and tailings disposal
studies.  The work to date, which was undertaken in conjunction with
SNC-Lavalin Inc., has focused on detailed mine planning and scheduling, process
design, including a new dense media separation system, and underground tailings
disposal.  A new bulk sample and representative water samples were
extracted from underground and transported to SGS Lakefield for laboratory and
metallurgical testing to produce representative tailings and process
water.  Detailed transportation studies were also carried
out.





A Project
Description Report (“PDR”) was prepared and filed with regulatory authorities in
May 2008 in support of application for operating permits.  The
PDR  describes in detail the proposed new mining operations at Prairie
Creek and contemplates the construction of new facilities including new
fuel-efficient/low-emission power generating units, a kitchen/accommodation
block, concentrate storage shed, an incinerator, a new engineered waste rock
pile and two new transfer stations along the winter road.





The
Company is currently working with SNC-Lavalin Inc. and other consultants to
optimize the proposed mine plan incorporating some of the data from studies that
were carried out in 2008 and will work towards updating and converting the PDR
into a Pre-Feasibility Study to be finalized after the current Environmental
Assessment has been completed by the Review Board.





The
indicated capital costs to place the Prairie Creek Mine into production will be
estimated in the Pre-Feasibility study.  The Company currently
anticipates that the capital costs will be in the range of $80 - 100 million,
depending on final project design and conditions in the operating
permits.





During
2008, the Company also continued to perform ongoing site maintenance which
included completion of a groundwater well drilling program, engineering
assessments and the removal and destruction of all the sodium cyanide which had
been stored in drums on the property since 1982.





Progress
was made on reopening and rehabilitating part of the road (approximately 30
kilometres) which connects the Prairie Creek Mine to the Liard Highway (a total
distance of approximately 170 kilometres).  A new base for the roadbed
was re-established along the Prairie Creek River, immediately north of the mine
site and to further protect the road bed from any future erosion in proximity to
the Prairie Creek water course.  Work on the road repair project
continued up until the end of October 2008.





In
addition to these activities, memoranda of understanding were signed in 2008
with Parks Canada Agency, the Liidlii Kue First Nation and the Nahanni Butte
Dene Band.  The Company believes that these important agreements will
lead to co-operative and beneficial relationships with these parties and will
assist in advancing the Prairie Creek Mine towards production.





Phase 2
of the underground exploration program commenced in August 2007 with the
completion of a further 200 metre extension of the underground decline to create
additional underground drill stations.  The underground drilling
program from the new drill stations commenced in late September 2007 and
continued until December 2007.  Ten holes totaling 2,407 metres of
coring were completed, all of which intersected mineralization.





Between
July and early September 2007 the Company also carried out a surface helicopter
supported diamond drill exploration program totaling 1,671 metres of core in 12
holes.  This reconnaissance drilling program was targeted in the Gate
Claims, located about 5 kilometres west of the Prairie Creek mine site, and in
Zones 8, 9 and 11 located on the same Prairie Creek geological structure as the
mine site but located 5 – 10 kilometres south of the mine site.  No
significant mineral intersections were encountered.  The data from
this


36


drill
program was incorporated into the Prairie Creek property dataset and will be
used to determine future exploration strategy.





Further
details with regard to the work undertaken in 2008 are detailed in this Annual
Report at “Item5.A.--Operating Results.”





7.           2007 Resource
Estimation





In
October 2007, an updated Technical Report (the “Report”) with regard to Mineral
Resource Estimation on the Main Zone at Prairie Creek was independently prepared
by Minefill Services Inc. (Dr. David Stone and Stephen Godden – Qualified
Independent Persons) in compliance with the standards in National Instrument
43-101, following the results of part of the 2006/2007 underground drilling
program.  This report verifies and confirms the previous historical
resource estimate completed in 1998 and notes significant upgrades in resource
categories resulting from the 2006/2007 underground drilling.





Cautionary Note to
U.S. Investors: Mineral resources are not mineral reserves and there
is no assurance that any mineral resources will ultimately be reclassified as
proven or probable reserves. Mineral resources which are not mineral reserves do
not have demonstrated economic or legal viability. U.S. Investors should
read the “Cautionary Note to U.S. Investors Concerning Estimates of
Measured, Indicated or Inferred Resources” above.








The
Report indicates that the Prairie Creek Property hosts total Measured and
Indicated Resources of 5,840,329 tonnes grading 10.71% zinc, 9.90% lead, 161.12
grams silver per tonne and 0.326% copper.  In addition, the Report
confirms that there remains a large Inferred Resource of 5,541,576 tonnes
grading at 13.53% zinc, 11.43% lead, 215 grams per tonne silver and 0.514%
copper and additional exploration potential.  A summary table is
presented below:





Zone
            Classification
            Tonnes
            Ag
      (g/t)
            Cu
      (%)
            Pb
      (%)
            Zn
      (%)Main
      Quartz Vein
            Measured
            938,624
            211.89
            0.465
            11.63
            13.11Indicated
            2,944,862
            212.39
            0.472
            12.67
            11.16Measured
      + Indicated
            3,883,486
            212.27
            0.470
            12.41
            11.63Inferred
            5,516,297
            215.53
            0.516
            11.46
            13.55Stockwork
            Indicated
            682,165
            50.15
            0.112
            2.68
            5.85Inferred
            4,045
            51.31
            0.126
            2.51
            5.54Stratabound
            Measured
            611,417
            67.60
            -
            6.68
            10.85Indicated
            663,261
            62.00
            -
            5.53
            10.15Measured
      + Indicated
            1,274,678
            64.70
            -
            6.08
            10.49Inferred
            21,234
            55.70
            -
            5.65
            10.49Combined
            Measured
            1,550,041
            154.90
            0.282
            9.67
            12.22Indicated
            4,290,288
            163.30
            0.342
            9.98
            10.16Measured
      + Indicated
            5,840,329
            161.10
            0.326
            9.89
            10.71Inferred
            5,541,576
            214.80
            0.514
            11.43
            13.54


Note:
copper grades for stratabound material were not estimated due to the
consistently low to negligible assay grades reported in the available
database.





The
Resource estimate was determined applying the following
methodology:





·
            One
      metre composites were created from the assay data honoring the geological
      zone codes provided in the dataset.  Classical statistics were
      gathered for silver, copper, lead and zinc,
as


37


·
            well
      as for each of the three mineralized zones considered in analysis (Main
      Quartz Vein, stockwork and
stratabound).


·
            A
      three-dimensional block model was developed; a block size of ten metres
      (easting) by 30 metres (northing) by 30 metres (elevation) was
      used.  Inverse distance weighting with a power of three was used
      for all three mineralized zones; grades were interpolated for silver,
      copper, lead and zinc.


·
            A
      primary search distance of 300 metres was used to enable filling of all
      the blocks in the down-plunge extension of the Main Quartz
      Vein.  The search direction was orientated along a major axis of
      357 degrees and a dip of 65 degrees east (i.e. to conform to the average
      strike and dip of the vein).  The search was horizontal between
      sections 1,055N and 1,825N and plunging at 15 degrees north from sections
      1,825N to 3,155N.


·
            Coded
      composites from the same zone as the block being estimated were selected
      for block estimation.  The minimum length composite selected for
      grade interpolation was 0.3 metres.  The minimum number of
      composites used for the interpolation was one and the maximum was
      ten.  The maximum number of composites per hole was limited to
      three, to thereby provide a more uniform grade
      interpolation.  The resource grades include all intercepts in a
      specific area and had no blocks removed by cut-off grade, which is
      appropriate for the type of massive sulphide, selective mineralization
      considered in analysis.





A
specific cut-off grade was not used in the calculation of the mineral resource
estimate although the Report does anticipate robust project economics, noting
the high-grade mineralization.





The
Company considers that the resource estimates are akin to an “inventory of
mineralization” as, using the techniques noted, the Report did not contemplate
economic parameters in determining the mineral resource
estimates.  Rather, the Report noted that:





“Prairie
Creek is an advanced project for which, in theory at least, modest capital
investment and a Class A Water License only are required to enable production of
Main Zone mineralized material to be started.  This is stated because
of the robust Measured and Indicated resource base that reflects high-grade
mineralization (especially zinc) and the likely limited amount of capital that
is probably required to start the production ramp-up to the target rate of 1,000
tonnes per day.”





“A
definitive feasibility study is probably required for purposes of capital
raising, albeit that robust project economics may reasonably be anticipated by
virtue of:


·
            the
      available resource grades (even when diluted in the normal process of
      stoping, high-grade, run-of-mine mill feed can reasonably be
      expected);


·
            the
      fairly straightforward metallurgical process of co-mingled Main Quartz
      Vein and stratabound material (that yields a lead concentrate [sulphide
      and oxide] with a lead grade of approximately 69 percent at a recovery of
      nearly 89 percent and a silver grade of about 820 g/t at a recovery rate
      of approximately 73 percent, and a zinc concentrate [sulphide and oxide]
      with a zinc grade of nearly 54 percent at a recovery of approximately 86
      percent); and


·
            the
      likely limited amount of start-up capital required for mining and
      processing Main Zinc mineralized material, especially compared to a new
      mine operation.”





See “Item
4.D--8. Project Description Report / Pre-Feasibility Study” for additional
information with regard to more recent metallurgical testing performed on the
mineralization at Prairie Creek.





The
complete Technical Report has been filed on SEDAR, and may be found under the
Company’s profile on SEDAR at www.SEDAR.com
[Technical Report (NI 43-101) October 16, 2007].





38




8.           Project Description Report /
Pre-Feasibility Study





The October 2007 Technical Report
concluded that “Prairie Creek is an advanced project for which, in theory at
least, modest capital investment and a Class A Water Licence only are required
to allow production at the Mine to be started. This is stated
because:





·
            The
      Mine has a robust Measured and Indicated, Main Zone resource base that
      reflects high-grade mineralization (especially
  zinc);


·
            The
      results of the [current] Phase II underground drilling program can
      reasonably be expected to further enhance the amount (tonnes) of Measured
      and Indicated, Main Zone resources;


·
            Much
      of the required surface infrastructure and equipment is already in place,
      or at least only a limited amount of capital is probably required for new
      equipment and for rehabilitating and/or upgrading the existing mine and
      mill facilities; and


·
            Only
      a small amount of additional underground development would probably be
      required to start the production ramp-up to the target rate of 1,000
      tonnes per day.”





The Report also emphasized that
“significant upside resource potential exists over several kilometres to both
the north and south of the Main Zone area: the exploration results indicate the
presence of high-grade, vein type mineralization; and preliminary analysis
suggests that structural continuity of the vein-type mineralization might
exist.  Additional stratabound mineralized bodies might also be
present.”





Extensive metallurgical testing has
been carried out on the mineralization from the Prairie Creek mine over the past
five years.





During
2004 representative bulk samples of vein mineralization were extracted from
various locations within the existing underground workings at the Prairie Creek
mine.  In addition, diamond drill core samples of Stratabound
Mineralization were also collected from this deeper lying deposit which has not
yet been accessed by underground development.  Vein mineralization
type was collected in the upper and lower level of existing developed
underground workings.  It is typically high in zinc, silver and lead
in a mixture of sulphide and oxide minerals.  Stratabound
mineralization contains zinc, lead, silver and iron sulphide
minerals.





The
metallurgical samples were shipped to SGS Lakefield Research Laboratories (“SGS
Lakefield”) where a total of 60 bench scale tests were undertaken over six
months under the direction of the Company’s metallurgical
consultant.  The samples were first assayed for both sulphide and
oxide mineralization and then combined into composite samples to ensure true
representation of the Prairie Creek mineral deposit.  Mineral samples
from two separate zones of vein mineralization (Upper and Lower Zones), and
including both sulphide and oxide mineralization, and from the stratabound zone,
and additional composite samples from all three zones, were tested to develop
and optimize the Prairie Creek mill flow sheet.  The batch and locked
cycle tests provided extensive analytical information and positive metallurgical
results.





During
2006 a new metallurgical bulk sample was collected from multiple headings of the
vein within the existing underground development and also shipped to SGS
Lakefield for further testing and optimization studies.  These samples
were composited and blended to create representative samples of the ore that
will provide feed to a future operating mill.  The metallurgical
program has shown that heavy media separation, demonstrated in earlier tests, is
repeatable and that higher grade concentrates can be produced by processing the
upgraded material.  The work to date, which was undertaken in
conjunction with SNC-Lavalin Inc., has focused on detailed mine planning and
scheduling, process design, including a new dense media separation plant, and
underground tailings disposal.





The main
objective of SGS Lakefield’s metallurgical program was to develop a commercial
process for the beneficiation of Main Quartz Vein material (mixed oxide and
sulphide) and stratabound material (sulphide only).  Within the scope
of SGS Lakefield’s overall metallurgical program, the Company also sought to
confirm whether:


39





·
            Main
      Quartz Vein and stratabound material could be co-mingled in the milling
      process (i.e. vein and stratabound material did not have to be separately
      campaigned through the processing
plant);


·
            Main
      Quartz Vein and stratabound material could, either separately or as
      co-mingled material, be pre-concentrated in a heavy media circuit to
      remove the waste component (limestone, quartz,
  etc);


·
            A
      reagent scheme, that would eliminate the need for cyanide compounds, could
      be developed; and


·
            Separate
      sulpide and oxide, lead and zinc concentrates (i.e. four separate
      concentrates) could be produced with acceptable recoveries and at
      marketable grades.





A series
of laboratory batch and locked-cycle tests were carried out over four main
phases (to August 2007) to enhance metal recoveries and concentrate grades, to
develop an optimum heavy medium pre-conditioning method and to establish an
optimum process flowchart that could be used for purposes of plant engineering
design.  The results proved positive, insofar as the following
conclusions were made:





·
            Stratabound
      material can be successfully co-mingled with Main Quartz Vein material,
      without significant metal losses in final
  concentrates;


·
            Co-mingled,
      run-of-mine mineralized material is very amenable to pre-concentration by
      HLS (which both reduces the quantity of tailings produced and reduces both
      the power requirements and work index for
  milling);


·
            Excellent
      metal recoveries can be achieved in both sulphide and oxide material, with
      a reagent suite that does not include cyanide products;
  and


·
            Marketable
      concentrates can be produced (albeit that penalty elements, including
      antimony, arsenic and mercury, would unavoidably report to the final
      concentrates).





Further
metallurgical test work commenced in 2008 (Phase 5) with the objective of
simulating actual proposed milling operations, as proposed in the Project
Description Report submitted to the Mackenzie Valley Land and Water Board in May
2008.  A representative bulk rock sample of the vein material was
collected from the underground workings at the Prairie Creek mine in
2008.  In addition, and in tandem with this bulk rock sample, a large
sample of representative  mine water was also collected and shipped to
SGS Lakefield to use in the same Locked Cycle tests since the proposed future
operations utilize such water in mineral processing on site.  The
locked cycle test would also generate representative products including
concentrates of lead and zinc, representative tailings product for further paste
backfill characterization studies, and representative mill process effluent
waters which will be further studied to determine the optimum treatment
process.





After
coarse crushing, the bulk sample was initially run through a dense-media
separation (“DMS”) plant resulting in 41% of the waste rejected with minimal
loss of metal value (~5%) to the waste fraction.  The resulting
enhanced feed was then placed into a locked cycle test where concentrate grades
of a blended lead sulphide/oxide and zinc sulphide were
generated.  The overall grade of the blended lead concentrate was 69%
lead with 82% recovery and the zinc sulphide graded 58% zinc with 75%
recovery.





The
generated by-products of DMS reject, tailings and mill water effluent from the
locked cycle Phase 5 tests are currently undergoing further study and
characterization by Golder PasteTec Ltd. and CEMI Labs.





Results
of the Phase 5 locked cycle tests generated simulated results of anticipated
actual operations in the production of mineral concentrates at the Prairie Creek
Mine and, similarly, the by-products generated from these tests will provide the
basis for the development of a sound environmental management program to be in
place during operation of the Prairie Creek Mine.  The Phase 5 test
results showed concentrate grades and recoveries similar to results of previous
metallurgical studies, allowing for variations within the individual bulk
samples, and confirmed anticipated concentrate grades and recoveries under
simulated actual proposed milling operations and using representative actual
mine water.


40


Discussions
with concentrate sales professionals and preliminary discussions with smelters
indicate that the Prairie Creek concentrates will be readily saleable, subject
to the payment of usual penalties for elevated impurity levels, including
mercury, in the Vein zinc and lead concentrates.





A Project
Description Report was prepared and filed with regulatory authorities in May
2008 in support of application for operating permits.  The
PDR  describes in detail the proposed new mining operations at Prairie
Creek and contemplates the construction of new facilities including installation
of new fuel-efficient/low-emission power generating units, a
kitchen/accommodation block, concentrate storage shed, an incinerator, a new
engineered waste rock pile and two new transfer stations along the winter
road.





The
Project Description Report, dated May 2008, may be viewed under the Company’s
name on the Water Board website at
http://www.mvlwb.ca/mv/registry.aspx.





The
Company is currently working with SNC-Lavalin Inc. and other consultants to
optimize the proposed mine plan incorporating some of the data from studies that
were carried out in 2008 and will work towards updating and converting the PDR
into a Pre-Feasibility Study to be finalized after the current Environmental
Assessment has been completed by the Review Board.  The Review Board,
in its Draft Terms of Reference and Draft Work Plan has noted that it
anticipates completing its Report on Environmental Assessment by October
2010.





The
additional capital costs for the proposed new facilities and equipment to place
the Prairie Creek Mine into production will be estimated in the Pre-Feasibility
study.  The Company currently anticipates, based upon the Project
Description Report and preliminary analysis associated thereto, that the capital
costs will be in the range of $80 - 100 million, depending on final project
design and conditions in the operating permits.




9.           Proposed New Mine at Prairie
Creek





On May
28, 2008, the Company applied to the Water Board for a Type “A” Water Licence
and three Type “A” Land Use Permits (“LUPs”); one for the operation of the
Prairie Creek Mine and the other two for Transfer Facilities along the
road.  As described, a Project Description Report was filed with the
Water Board as part of the permit applications.





The
proposed new operation at Prairie Creek utilizes the existing infrastructure and
facilities that were built in the 1980’s and which will be upgraded and enhanced
to meet current-day environmental standards.  The improvements
proposed for specific site facilities will further mitigate the potential impact
the Project may have on the environment.  Specifically, the Company
proposes to place waste rock and tailings underground in a cemented backfill
mix, use the existing large pond for temporary water storage, and place
development waste rock in an engineered facility removed from the Prairie Creek
floodplain.





A summary
of the proposed Prairie Creek mine operations as described in the Project
Description Report follows:





The Mine: All mining will be
performed from underground.  Underground development and workings
(about 5,000 metres) already exist on three levels, including the new 600 metre
decline driven in 2006/07.  Proposed production rates will initially
start at 600 tonnes per day and may build to 1,200 tonnes per
day.  Mining will occur on a year round basis by cut-and-fill
methods.  Mine voids will be backfilled with a mix of flotation
tailings, waste rock aggregate and cement.





The Mill: The Mill, which is
already constructed on site but never operated, will process 600-1,000 tonnes
per day.  Ore will be crushed to a gravel-size and subjected to dense
media separation (“DMS”).  The lighter, uneconomic “gangue” minerals
will create a waste rock aggregate.  Denser material will be processed
further by grinding and flotation to produce concentrates of lead sulphide, zinc
sulphide and lead oxide.  No hazardous chemicals will be used in the
process.


41


Concentrates and Road Haul:
The concentrates will be bagged, stored under cover and trucked off-site on
flat-deck trailers over the winter road.  CZN holds a Type “A” Land
Use Permit for the use of the winter road from the Prairie Creek Mine to the
Liard Highway.  CZN has also applied for Type “A” LUP’s for two new
transfer facilities to be located approximately mid-point along the winter road
and at the junction of the winter road with the Liard Highway.





Environment: Extensive
environmental data has been collected at the Prairie Creek Mine Site over recent
years to update and add to the baseline information that was collected
previously as far back as the late 1970’s.  Sixteen years of water
flow data have been recorded on the Prairie Creek watercourse adjacent to the
Mine Site.  Canadian Zinc now has an extensive database on water
quality, stream flows, local climatic variables, and wildlife in the
area.





Waste Management: All
flotation tailings will be backfilled into the voids in the underground mine in
a mix with the waste rock aggregate and cement.  The flotation
tailings are expected to be non-acid generating with low sulphide content and
excess buffering capacity.  Waste rock from underground development
along with excess waste rock aggregate from the DMS plant will be placed in an
engineered Waste Rock Pile (“WRP”) in the adjacent Harrison Creek
valley.





Water Management: An existing
large pond facility, originally intended in 1980 for tailings disposal, will be
reconfigured, relined and recertified to form a two-celled Water Storage
Pond.  Mine drainage, treated sewage water and WRP runoff will report
to the first cell.  Water for the mill process will be taken from this
first cell.  Excess water from the first cell will overflow into the
second cell.  Used water from the Mill will also report to the second
cell.  The second cell will feed a water treatment
plant.  The treated water will discharge to the existing certified
Polishing Pond and from there into the existing Catchment Pond, before final
discharge to the environment.





Site Infrastructure: The Site
presently contains a near complete mill, three levels of underground workings, a
fuel tank farm, office facilities, accommodation facilities and
workshops.  Existing buildings and structures will be upgraded and
modernized.  New facilities will include fuel-efficient low-emission
power generation units, a kitchen/accommodation block, concentrate shed and an
incinerator.





Socio-Economics and Manpower:
The operation of the Prairie Creek Mine will provide substantial economic
stimulus to the region, and presents a unique opportunity to enhance the social
and economic well-being of the surrounding communities.  There will be
approximately 220 direct full time jobs, half of this number being on-site at
any one time.  Personnel will generally work a three weeks on, three
weeks off schedule (with variations as required).  Canadian Zinc’s
objective is to employ a workforce with a 35% northern content, and a minimum
15% First Nations content.  The Company anticipates that it will
provide assistance through the provision of training programs.  In
addition, there will be many indirect business and employment opportunities,
mostly related to transport, supply of the Mine Site and environmental
monitoring and management.





Mine Closure: At the end of
the Mine’s life, the Site will be reclaimed.  The underground
development will be backfilled.  Bulkheads at strategic points will
help limit the movement of groundwater.  The objective is to create a
complete seal to ensure there is no long term mine drainage.  The WRP
will be covered and sealed with a clay-rich soil.  Site buildings and
infrastructure, if deemed not to have any future use, will be dismantled and the
Site will be returned to its natural setting.





42




10.           Permitting at Prairie
Creek




(a) Regulatory
Framework





At the
time of its construction in 1980 - 1982, the Prairie Creek Mine had been fully
permitted for full scale mining and milling operations.  Permitting
had been undertaken under the regulatory regime of the day, which involved a
comprehensive Environmental Assessment and public review before the Northwest
Territories Water Board.  A considerable number of technical and
baseline studies describing the proposed development and the physical and
biological environment were undertaken at that time.





Water
Licence N3L3-0932 was issued by the Department of Indian Affairs and Northern
Development on July 1, 1982, pursuant to the Northern Inland Waters Act and
Regulations, authorizing the use of up to 1,150 m3/day and
420,000 m3/year of
water from the Prairie Creek Valley Aquifer and setting standards for discharge
of process effluent to Prairie Creek.  Land Use Permit N80F249 was
issued July 2, 1980, for the road connecting Prairie Creek to the Liard Highway,
the first 40 kilometres being permitted for year round use with the remaining
130 kilometres permitted for use in winter months only.  The Land Use
Permit was extended in 1981 and again in 1982 to June 1983.  Surface
Leases were issued for the minesite area and airstrip.  The Water
Licence and Land Use Permit subsequently expired.





In 1998,
a totally new regulatory and resource management scheme was introduced in this
part of Canada.  During the negotiation of native land claim
settlements in the Mackenzie Valley, first with the Dene/Metis in the late
1980’s and then with the Gwich’in and Sahtu Dene/Metis people, the Federal
Government agreed to establish a new resources management system through the
creation of boards with joint membership which reflects First Nations’ desire to
participate more effectively in the regulation of land and water throughout the
Mackenzie Valley.





The Mackenzie Valley Resource
Management Act (“MVRMA”or the “Act”) was enacted in 1998 for a defined
area called the “Mackenzie Valley,” which includes the area where the Prairie
Creek Mine is situated.  Prior to that, the applicable legislation was
the Canadian Environmental
Assessment Act, S.C. 1992 c.37. (“CEAA”).The CEAA no longer
applies in the Mackenzie Valley, except under very specific
situations.





The MVRMA
is a piece of federal legislation that creates an integrated co-management
structure for public and private lands and waters throughout the Mackenzie
Valley in the Northwest Territories.  The Act was proclaimed on
December 22, 1998; however, Part IV, which establishes the Mackenzie Valley Land
and Water Board, was not proclaimed until March 31, 2000.





The
overall legislative scheme of the MVRMA is designed to implement the Gwich’in
and the Sahtu Land Claim Settlement Agreements (collectively the “Comprehensive
Agreements”) by providing for an integrated system of land and water management
in the Mackenzie Valley.  Under the Comprehensive Agreements, Land Use
Planning Boards and Land and Water Boards must be established for the settlement
areas referred to in those Agreements.  In addition, an Environmental
Impact Review Board must be established for the Mackenzie Valley along with a
Land and Water Board for an area extending beyond the settlement
areas.





The Act
established these public boards to regulate the use of land and water, to
prepare regional land use plans to guide development, and to carry out
environmental assessment and reviews of proposed projects in the Mackenzie
Valley.  The Act also makes provisions for monitoring cumulative
impacts on the environment, and for periodic, independent environmental
audits.





These
Boards are charged with regulating all land and water uses, including deposits
of waste, in the areas in the Mackenzie Valley under their
jurisdiction.  As institutions of public government, the Boards
regulate all uses of land and water while considering the economic, social and
cultural well-being of residents and communities in the Mackenzie
Valley.


43


The MVRMA
ensures a greater role for Aboriginal people in land use planning, environmental
assessment, and the regulation of land and water use.  As stated in
the MVRMA, “the purpose of the establishment of boards by this Act is to enable
residents of the Mackenzie Valley to participate in the management of its
resources for the benefit of the residents and of other Canadians” (Section 9.1.
MVRMA).  To reflect the desire of First Nations to be more actively
involved in resource management decision-making, half the members of each Board
are nominated by First Nations, and half by the Federal and Territorial
governments.  Public boards are formed through
nominations.  Under the land claims agreements, First Nations are
entitled to nominate one-half of the members of the board, reflecting the
board’s jurisdiction over all lands including First Nation settlement
lands.  The Federal Government, Territorial Government and First
Nations can each nominate at their own discretion.





The Act
also anticipates amendments to accommodate new land settlements and
self-governments as they are finalized.  As land claims are settled,
the Act provides for additional regional boards to be established in the Dehcho,
North Slave and South Slave regions.  The Dehcho area is not
settled.  Prior to additional regional Boards being established, First
Nations in the Dehcho region were asked to participate in the new system by
recommending members to the Mackenzie Valley Environmental Impact Review Board
and the Mackenzie Valley Land and Water Board.





Under the MVRMA, public boards are
responsible for:





·
            preparing
      regional land use plans to guide the development and use of land, waters
      and other resources [Land Use Planning
Board];


·
            regulating
      all uses of land and water [Mackenzie Valley Land and Water Board
      (MVLWB)]; and


·
            carrying
      out the environmental assessment and review process [Mackenzie Valley
      Environmental Impact Review Board
(MVEIRB)].




Consultation
is the cornerstone of the MVRMA.  Public Boards under the Act have
established their own consultation guidelines.





Each
Board has its own specific jurisdiction.





The Land
Use Planning Board develops and implements a land use plan for the respective
settlement areas in the Mackenzie Valley.





Land and
water boards issue land use permits and water licenses under the Mackenzie Valley Land Use
Regulationsandthe Northwest Territories Waters Act and
Regulations, within the Mackenzie Valley.





The
MVEIRB is responsible for environmental impact review and assessment at a
valley-wide level, including the Sahtu and Gwich’in settlement
areas.





The
public boards perform regulatory functions, such as permitting and licensing,
and conducting environmental reviews, previously undertaken by the Department of
Indian Affairs and Northern Development (“DIAND”) and the NWT Water Board.
Inspection and enforcement continue to be the responsibility of
DIAND.





After
consultation with the Land and Water Board, the Minister of DIAND may give
written policy direction to the Board with respect to the exercise of any of its
functions.  The Minister also approves the issuance of Type ‘A’ water
licenses.  Regarding a Type ‘A’ water license, the Minister may attach
terms and conditions such as provision for a security deposit, a requirement for
water quality and quantity measurements, and a requirement for abandonment and
restoration plans.





DIAND
controls, manages and administers all Crown lands in the Mackenzie Valley under
the authority of the Territorial Lands Act, and
the Federal Real Property
Act.  Aside from managing Crown lands and waters, DIAND is
still responsible for the administration, inspection and enforcement
requirements associated with


44


renewable,
non-renewable and environmental legislation.  This includes the Mackenzie Valley Resource Management
Act, the Northwest
Territories Waters Act, and the Federal Real Property
Act.





DIAND
inspectors are responsible for ensuring compliance with legislation, regulations
and the terms and conditions that are part of permits and licences issued by the
Land and Water Boards.  These responsibilities are exercised by DIAND
under the authority of the Territorial Lands Regulations,
Territorial Quarry Regulations, Canada Mining Regulations and
the Federal Property
Regulations.





Under the
Northwest Territories Waters
Act, S.C. 1992, (C.29) (Waters Act) no person can use water or deposit
waste in specific areas in the Northwest Territories without a license to do
so.  Section 102 of the MVRMA provides that it is the MVLWB which has
the jurisdiction with respect of all uses of water and deposits of waste in the
area for which a license is required under the Waters Act.  The MVLWB
may issue, amend, renew and cancel licenses in accordance with the Waters Act
and exercise any other power of the Northwest Territories Water Board under the
Waters Act.





The
stated objective of the MVLWB is to “regulate the use of land and waters and the
deposit of waste so as to provide for the conservation, development and
utilization of land and water resources in a manner that will provide optimum
benefit to the residents of the settlement areas and of the Mackenzie Valley and
to all Canadians.”  The MVLWB’s main function which is relevant to the
Company, is to issue land use permits and water licences on land in unsettled
land claim areas in the Mackenzie Valley, inclusive of the Dehcho
area.





On
November 7, 2007, the Minister of Indian Affairs and Northern Development
announced the Northern
Regulatory Improvement Initiative and the appointment of a Special
Representative responsible to advance this initiative.  As announced
by the Minister, the Northern
Regulatory Improvement Initiative is a strategy to improve the current
regulatory regime and the overall Northern regulatory environment and to ensure
that regulatory regimes across the North are effective and predictable, and will
better equip the North to develop and benefit from its resources in the best way
possible.  The Minister’s Special Representative was asked to work to
improve existing regulatory regimes across the North, and to submit a report to
the Government of Canada outlining proposed recommendations for advancing the
regulatory regime.





In May
2008 the Minister’s Special Representative for the Northern Regulatory
Improvement Initiative (Neil McCrank) presented his report entitled “Road to
Improvement - The Review of the Regulatory System Across the North” to the
Minister of Indian Affairs and Northern Development.  The Report noted
that there is a need for a restructuring of the regulatory system in the
Northwest Territories, to address the issues of complexity and
capacity.  Two options and recommendations for restructuring were
outlined which would simplify and improve the effectiveness of the system and
there were also 22 recommendations which will bring improvements.





The
report is being reviewed by Government before a decision is taken on which
recommendations will be accepted.




(b) Permitting
Process





All
applications for a land use permit or a water licence in relation to a
development in the Mackenzie Valley are made to the Water Board or one of its
regional boards, as determined by the location of the development.  In
the case of Prairie Creek, being located within the Dehcho First Nations
territory, for which a land claim settlement agreement has not as yet been
reached, applications are processed by the MVLWB.





There are
three stages in the environmental impact assessment process in the Mackenzie
Valley: preliminary screening, environmental assessment and environmental impact
review.  Not all developments will necessarily go through each of the
three stages.  All projects undergo a preliminary screening, after
which it is decided whether a project must proceed to a full environmental
assessment or go straight to the regulatory phase.


45


The
environmental impact assessment process is triggered by an application to the
MVLWB for a water licence.  The application requires the inclusion of
certain baseline and other technical information to allow them to be
appropriately assessed and processed.  Information provided with an
application is used for undertaking a preliminary screening and for regulatory
review of the application.





Preliminary
screening is the first step in the environmental impact assessment
process.  Preliminary screening applications are done by the Water
Board.  It is during the preliminary screening that the Water Board
determines whether there is any public concern related to a proposed project or
if it might have significant adverse environmental impacts.





During
the preliminary screening, a systematic approach is taken to documenting the
potential environmental effects of a proposed project.  Next, the
Board determines whether these effects need to be eliminated or minimized and,
if so, how the project plan should be modified.  In the end, the Board
makes a recommendation on the need for further assessment.





The
legislation requires that the MVLWB conduct a pre-screening of a proposal for
development (s.124).  Where the MVLWB determines that the development
might have a significant adverse impact on the environment, or might be a cause
of public concern, the MVLWB refers the proposal to the MVEIRB for an
environmental assessment (s.125).





Environmental
assessment is the second stage of the environmental impact assessment
process.  Projects may be referred to the MVEIRB by the Water Board
(the preliminary screener), some other government department or agency, the
First Nation qualified to make a referral, or on the Mackenzie Valley
Environmental Impact Review Board’s own motion.





The
MVEIRB is responsible for the environmental impact assessment process throughout
the Mackenzie Valley.  It is the main instrument for environmental
assessment and review, replacing the CEAA in the Mackenzie Valley except under
specific instances.





The
MVEIRB:


·
            Conducts
      environmental assessments;


·
            Conducts
      environmental impact reviews;


·
            Maintains
      a public registry of all preliminary screenings conducted by Regulatory
      Authorities; and


·
            Makes
      recommendations to the Minister of DIAND for rejection or approval of any
      proposal.





Once a
development proposal is referred to the Mackenzie Valley Environmental Impact
Review Board for an environmental assessment, notices are placed in northern
newspapers.  The next step is for the developer to submit a “project
description” to the Review Board.  The project description describes
what the developer plans to do and how it will be carried out.  The
MVEIRB develops a work plan and terms of reference in order to conduct the
Environmental Assessment.





The
public has an opportunity to comment on the project and identify issues which
may require consideration.  Public information submitted to the Review
Board throughout this process, including the project description, and all
technical and public submissions, are placed on a public registry.





The
Review Board has guidelines for how they conduct environmental
assessments.  These guidelines provide information for submissions to
the Review Board, including timelines and opportunities to present information
at any public hearings that may be held.  The environmental impact
assessment process has several points where the local government and other
stakeholders can contribute to and affect the regulatory
process.  There will also be occasions where the local government will
be asked to comment on a proposed development.


46


The
environmental assessment process looks at the same factors considered in the
preliminary screening, as well as addressing potential cumulative effects,
socio-cultural considerations and alternate means of carrying out the project
that are technically and economically feasible and the potential environmental
effects of such alternate means.  If the Review Board determines there
will be significant adverse environmental impact from a project, it has the
choice of referring the development to an environmental impact public review
before a panel.  The Review Board may also recommend measures to
prevent or mitigate these impacts.





The
Environmental Impact Review (“EIR”) stage is a detailed analysis and public
review.  This is normally reserved for development projects where the
environmental impact may be significant and could include public hearings in
affected communities.  An EIR is conducted by a panel consisting of
members of the Mackenzie Valley Environmental Impact Review Board, as well as
any expert members they may appoint.  The panel is required to issue
terms of reference and the applicant must submit an impact
statement.  There must be public notification of the submission of the
impact statement, and public consultation or hearings in communities which may
be affected by the development.  The panel conducts an analysis of the
information received.





Upon
completing the assessment, the MVEIRB submits its Environmental Assessment
Report (“EAR”) to the Federal Minister of Indian Affairs and Northern
Development who is responsible for distributing the EAR to other Ministers with
jurisdiction over the proposed development (s.128).





The
Minister of DIAND, along with the other Responsible Ministers, is required to
make a decision on the EAR.  The Minister may adopt the
recommendations of the Review Board, refer the report back to the Review Board
for further consideration (s.130) or reject the Report and order further
environmental impact review.  Once the recommendations contained in
the EAR are adopted by the Minister, and the other responsible Ministers, those
recommendations are to be included by the MVLWB as conditions of any Water
Licence or Land Use Permit that it issues for that proposed development
(s.62).





When
finally adopted by the Minister the application is sent to MVLWB for issuance of
permits and licenses by the MVLWB in the regulatory phase.  The
regulatory phase is the process of issuing regulatory authorizations once the
development is approved through the environmental assessment
process.  The authorizations include terms and conditions which
reflect the recommendations approved during the EA process, as well as other
standard conditions for carrying out development.





Decisions
of the Mackenzie Valley Land and Water Board are subject to review by the
Supreme Court of the Northwest Territories.





(c)
            “Grandfather”
      Provisions





Part 5 of
the Mackenzie Valley Resource Management Act, S.C. 1998, C.25 requires that any
“proposals for development” comply with environmental assessment process
consisting of a preliminary screening by the regulatory authority and, if
applicable, an environmental assessment and an environmental impact review by
the Mackenzie Valley Environmental Impact Review Board.





However,
Section 157.1 of the Act provides that Part 5 does not apply in respect of any
licence, permit or other authorization related to an undertaking that is the
subject of a licence or a permit issued before June 22, 1984, except the
licence, permit, or other authorization for an abandonment, decommissioning or
other significant alteration of the project.





Section
157.1 of the Act has been considered by the Court of Appeal of the Northwest
Territories in the case North
American Tungsten Corporation Ltd. V Mackenzie Valley Land and Water Board(2003 NWTCA5).  In that case the Court said (at paragraphs 24
to 27):





“24           However,
both the Comprehensive Agreements and the MVRMA also clearly recognize that a
full scale environmental review will not be appropriate in respect of certain
existing


47


permits,
projects and licences. Instead, both reflect some grandfathering of existing
developments is required to balance competing interests. Those interests include
the legitimate goal of protecting land and water resources in the Mackenzie
Valley for the benefit of its citizens, on the one hand, while, at the same
time, exempting from the full force of the new environmental legislation
undertakings developed under an earlier legislative regime. For example, the
Comprehensive Agreements explicitly protect certain mineral interests, and
arguably the rights associated therewith, in existence as of the date of the
settlement legislation.”





“25           This
respect for vested interests is reflected in the MVRMA.  Part 7
contains a number of transitional provisions designed to preserve and protect
the existing rights and interests.  For example, Section 151 provides
that certain existing permits continue in effect despite the implementation of
the new legislation. Section 152 protects all existing rights to the use of any
lands under any lease, easement, or other interest granted under any territorial
law, again despite what would otherwise have been the impact of the new
legislation on such interests....”





“26           Further
confirmation that Parliament did not intend the MVRMA to interfere with existing
rights can be seen in the fact that even pending applications for permits and
licences are to be dealt with under the prior applicable legislation and not
under the MVRMA....”





“27           These
provisions collectively reflect that Parliament did not intend to impose an
entirely new environmental review process on every project in the Mackenzie
Valley irrespective of the status of that project at the time the MVRMA came
into effect. Instead, the MVRMA grandfathered certain projects and provided that
others yet would be dealt with under prior applicable legislation. In
interpreting Section 157.1 therefore, one must recognize that it is designed to
grandfather certain undertakings which predate June 22, 1984. Accordingly, this
section must be interpreted in a manner which best comports with its intended
purpose.”





The
Prairie Creek Project was the subject of both a Water Licence and Land Use
Permit issued prior to June 22, 1984.





In May
2003, the Company applied to the MVLWB for a Land Use Permit for use of the
existing road from the Liard Highway to the Prairie Creek Mine.  The
Company submitted that this development is exempt from the Environmental
Assessment process by virtue of Section 157.1 of the Act.  The
Company’s argument was rejected by the Water Board on June 1, 2004 and the
Company filed an Appeal to the Supreme Court of the Northwest Territories
seeking judicial review of the decision of the Water Board.  The
Appeal was heard by the Supreme Court in December 2004.





In a
written decision dated May 6, 2005, in the case Canadian Zinc Corporation v
Mackenzie Valley Land and Water Board (SCNWT S-0001-CV2004), the Supreme
Court of the Northwest Territories ruled in favour of the Company that its
Winter Road permit application is “grandfathered”and is
therefore exempt from the environmental assessment process under the Mackenzie Valley Resource Management
Act (“MVRMA”).





The
Supreme Court quoted with approval, the earlier 2003 decision of the Northwest
Territories Court of Appeal in the case North American Tungsten Corp. Ltd. v
Mackenzie Valley Land and Water Board. The Supreme Court
found:





“The
reasoning in Tungsten appears to apply squarely to the circumstances of CZC’s
(Canadian Zinc Corporation’s) permit application.  The Court (of
Appeal) referred to the legislative intention that projects which predate June
22, 1984 are to be subjected to a full scale environmental assessment only if
they depart significantly from their approved mode of operation and engage in
decommissioning, abandonment or significant alteration of the
project.  The project, in this case, the operation of the winter
access road, predates June 22, 1984. As


48


found
by the (Water) Board, the permit sought by CZC (Canadian Zinc) is not based on
any intentions to significantly alter that project or to abandon or decommission
it”.





In its
decision the Supreme Court said that the permit sought by Canadian Zinc is
related to the operation of the winter access road, a permit in respect of that
same undertaking had been issued before 1984, and therefore the exemption
provided in Section 157.1 of the MVRMA governs and a Part 5 assessment does not
apply.





(d)
            Recent
      Permitting History at Prairie Creek





In 1992,
the Company was granted an Exploration Land Use Permit by the Minister of Indian
Affairs and Northern Development under the Territorial Lands
Act.  Further baseline studies were undertaken in 1994 in
support of planned re-development and permitting activity at that
time.  A new Exploration Land Use Permit N95F346 was issued by the
Minister in 1995 under the Territorial Lands Act, which included use of a
portion of the winter road.





In 1995,
environmental and geotechnical studies were carried out to facilitate the
pre-production permitting process.  A project description report was
compiled by Rescan Environmental Ltd. and filed with the Northwest Territories
Regional Environmental Review Committee (“RERC”).  This report
contains details of all the environmental work completed at the Prairie Creek
Property.  The report was filed to elicit terms of reference for an
initial environmental evaluation report.  A permit application was
screened in 1995 as a Level 1 screening pursuant to the Canadian Environmental Assessment
Act (CEAA) and it was determined that that project could proceed as it
was not likely to cause significant adverse effects pursuant to section 20(1)(a)
of the CEAA.  A Land Use Permit Application for upgrading the access
road to an all-weather road was also filed with the appropriate government
agency.  While the re-permitting process was subsequently discontinued
in 1995, these studies represent a significant contribution to the environmental
information database in support the Prairie Creek Project.





The
Mackenzie Valley Land and Water Board was created on March 31,
2000.  The MVLWB and its associated regional boards took over
regulatory functions previously performed by the DIAND, the Northwest
Territories Water Board, and the Government of the Northwest Territory’s
Department of Municipal and Community Affairs on Commissioner’s
Lands.





The
Company initiated preliminary discussions with the new MVLWB and regulatory
authorities in Yellowknife in August, 2000 with respect to re-development and
re-permitting of the Prairie Creek Mine.  A follow up presentation was
made to the Governmental Mineral Development Advisory Group (“MDAG”) in November
2000 to elicit specific feedback from each of the regulatory agencies on the
information requirements necessary for them to fulfill their roles in review of
applications for permits and licences for the Prairie Creek Mine.





Since
August 2000, Prairie Creek has undergone five Environmental Assessments by the
MVEIRB and has received five separate Land Use Permits and two Water Licences to
carry out exploration and development at the Prairie Creek Mine and in the
immediately surrounding area, through the new Mackenzie Valley Resource
Management Process.





(e)
            Land
      Use Permit  – Phase 1
Exploration





Canadian
Zinc applied to MVLWB on July 28, 2000, for a Land Use Permit (“LUP”) to carry
out a seven drill hole program  and to access the Sundog (or CAT) Camp
located along the winter road to retrieve fuel and clean up the camp area, which
work was planned for the fall of 2000.  On October 4, 2000, MVLWB
referred the application to the Mackenzie Valley Environmental Impact Review
Board for environmental assessment.  The application was then split
into separate LUP applications with specific reference to the drilling program
and the Cat Camp clean-up.


49


Following
environmental assessment, a LUP was issued by MVLWB on June 14, 2001, which
permitted the seven drill hole program.





(f)
            Sundog
      (CAT) Camp – Clean Up Permit





On May 9,
2001, the Review Board issued its Report to the Minister recommending that the
Cat Camp permit be approved but that the work be done in winter
2001/2002.  Canadian Zinc preferred to do it in the summer season when
the Prairie Creek Camp was open and there would be easier access.  In
June 2001, Environment Canada issued a direction to DIAND to take steps to
prevent the deposit of petroleum products at Cat Camp into the surrounding
environment.  In March 2002, DIAND flew in and incinerated the
fuel.  On June 17, 2002, three months after the fuel was incinerated,
the Minister of Indian Affairs and Northern Development referred the
Environmental Assessment Report back to the Review Board for further
consideration, pointing out that it was no longer possible to carry out the
proposed development work as there was no longer any fuel to be
retrieved.  In July 2002, the Review Board dismissed the
proceeding.





(g)
            Land
      Use Permit – Phase 2 Exploration





On March
5, 2001, the Company submitted a Land Use Permit application for a Phase 2
Exploration Drilling Program and this application was also referred for
Environmental Assessment.  After Environmental Assessment by the
Review Board, on November 30, 2001, the Water Board issued Land Use Permit
MV2001C0022A, valid for a period of five years, authorizing the drilling of up
to 60 exploration holes on the Zone 3 Mining Lease and within 1,000 metres of
the Prairie Creek Mine.  In November 2006, this Land Use Permit was
renewed for a further period of two years to November 30, 2008.  The
Land Use Permit was allowed to expire in November 2008 and was superseded as
described below at “(j)--Land Use Permit – Phase 3 Exploration.”





(h)
            Water
      Licence and Land Use Permit – Underground
  Development





The
Company applied to the Mackenzie Valley Land and Water Board on March 5, 2001
for Type ‘B’ Water Licence and a Land Use Permit (MV2001L2-0003) for underground
decline development and metallurgical pilot plant operation planned for the
Prairie Creek Mine.  The application was distributed to government
agencies, First Nations communities and other organizations in order for the
MVLWB to conduct a preliminary screening as required by Part 5 of the Mackenzie Valley
Resource Management Act.





However
in April 2001, both the Parks Canada Agency and Pehdzeh Ki First Nation referred
the proposal to the Mackenzie Valley Environmental Impact Review Board for
Environmental Assessment pursuant to section 126(2) of the MVRMA.  The
referral to EA occurred prior to the Water Board’s completion of its preliminary
screening of the proposed development.





The
Environmental Assessment was conducted throughout 2001 and into
2002.  The MVEIRB submitted its Report of Environmental Assessment
(“EA Report”) on February 5, 2002 to the Minister of Indian Affairs and Northern
Development.  On September 3, 2002, the Minister requested that, as
per section 130(1)(b)(i) of the MVRMA, the MVEIRB was to give further
consideration to unresolved issues in the EA Report relating to the tailings
containment area and water treatment in general.





Following
further assessment the MVEIRB submitted its Reasons for Decision on April 4,
2003, outlining recommended revisions and additions to the recommendations in
its February 5, 2002 EA Report. On June 16, 2003, the Minister approved the
Reasons for Decision and directed the MVLWB to proceed with the licencing
process.





On
September 10, 2003, the Water Board approved the issue of Water Licence
MV2001L2-0003, and the Land Use Permit MV2001C0023 subject to the conditions set
out therein. The Water Licence contains the terms and conditions that the Board
felt necessary to protect the environment, conserve the water resources
of


50


the
Prairie Creek watershed and provide appropriate safeguards in respect of the
Company’s use of waters and deposit of wastes.





On
October 10, 2003, an appeal to the Federal Court was filed by the Nahanni Butte
Dene Band, Pehdzeh Ki First Nation and the Dehcho First Nations against the
Mackenzie Valley Land and Water Board and the Company seeking Judicial Review of
the decision of the Water Board to issue the Water Licence to the
Company.  The Applicants’ grounds were that the Water Board issued the
Water Licence without including certain conditions included in the
recommendations of the MVEIRB and in the Minister’s approval, and that the Water
Board failed to provide the Applicants with adequate consultation throughout the
Licence process.  Subsequently, both the Attorney General of Canada,
representing the Minister of Indian Affairs and Northern Development and the
Canadian Parks and Wilderness Society, represented by the Sierra Legal Defence
Fund, applied to the Federal Court to be joined as Intervenors in this
Appeal.





The
Judicial Review hearing was heard by the Court in August 2005.  The
Lawyers representing the First Nations had argued that the Water Board had
exceeded its jurisdiction in issuing the Water Licence without including certain
conditions on water treatment which had been recommended by the Mackenzie Valley
Environmental Impact Review Board and approved by the Minister, and that the
Water Board had failed to observe the principles of natural
justice.





In
December 2005, the Court issued its Judgment directing the Water Board to
reissue the Water Licence with the inclusion of additional language which had
been agreed between the Company and the Minister of Indian Affairs and Northern
Development.  On February 6, 2006, the Water Board reissued the Water
Licence incorporating the wording as per the Order of the Federal Court of
Canada.  The Water Licence was valid for a period of five years
expiring September 10, 2008.





In
September 2008, the Water Board granted a two year extension to the Company’s
Land Use Permit to September 9, 2010 and the Water Licence was renewed for a
period of five years to September 9, 2013.





As
contemplated in the Water Licence, the following plans were prepared and have
been approved by the Water Board:  Minewater Treatment Contingency
Plan; Effluent Treatment Options Plan; Abandonment and Reclamation Plan. An
existing Fuel Spill Contingency Plan was revised and approved. A Probable
Maximum Flood calculation was updated and approved, and flood protection
structures and the tank farm facility and associated containment structures were
inspected and approved.





(i)  Land Use Permit – Winter
Road





In May
2003, the Company applied to the MVLWB for a Land Use Permit for use of the
existing Winter Road from the Liard Highway to the Prairie Creek
Mine.  The Company argued that this application is exempt from the
Environmental Assessment process by virtue of Section 157.1 of the Act. [See
“Item 4.D.--Property, Plant and Equipment--10. Permitting at Prairie Creek--(c)
“Grandfather” Provisions.]  The Company’s argument was rejected by the
Water Board on June 1, 2004.  The Company filed an Appeal to the
Supreme Court of the Northwest Territories seeking judicial review of the
decision of the Water Board.  The Appeal was heard by the Supreme
Court in December 2004.





In a
written decision dated May 6, 2005, in the case Canadian Zinc Corporation v
Mackenzie Valley Land and Water Board (SCNWT S-0001-CV2004), the Supreme
Court of the Northwest Territories ruled in favour of the Company that its
Winter Road permit application is “grandfathered”and is
therefore exempt from the Environmental Assessment process under the Mackenzie Valley Resource Management
Act (“MVRMA”).





In its
decision the Supreme Court said that the permit sought by Canadian Zinc is
related to the operation of the Winter Access Road, a permit in respect of that
same undertaking had been issued before 1984, and therefore the exemption
provided in Section 157.1 of the MVRMA governs and a Part 5 assessment does not
apply.


51


This
application for a Land Use Permit for the road was referred back to the Water
Board.  In June 2005 the Nahanni Butte Dene Band wrote to the Water
Board asserting infringement of Aboriginal rights and inadequate consultation
under Section 35 of the Constitution of Canada.  The issue was
referred to the Department of Indian Affairs and Northern Development which
conducted a preliminary assessment and submitted its report to the Water Board
in February 2007.





In April
2007, the Water Board approved the issue of Land Use Permit MV2003F0028 for a
period of five years to April 10, 2012.





(j) Land Use Permit – Phase 3
Exploration





In April
2004, Canadian Zinc applied to the Water Board for an amendment to its
previously approved Land Use Permit MV2001C0022A allowing a 60 hole mineral
exploration program within 1,000 metres of the Prairie Creek Mine site
facility.  The amendment was submitted in order to obtain permission
to drill anywhere on the extensive mineral leases and claims held by Canadian
Zinc at the Prairie Creek Property.  Following a Preliminary Screening
in June 2004, the Water Board referred the proposed development for
Environmental Assessment to the Mackenzie Valley Environmental Impact Review
Board citing “public concern about the cumulative effects of this project on the
South Nahanni Watershed.”





A
detailed Environmental Assessment was carried out throughout
2005.  Five government agencies, two first nations and one
non-governmental organization (CPAWS) participated in the EA, which continued
over a period of about eighteen months.  Canadian Zinc submitted a
Detailed Development Description dated December 2004.  The Review
Board issued its Terms of Reference in April 2005 and held scoping sessions
(public meetings) during March and April 2005 in the NWT communities of Fort
Liard, Fort Simpson and Wrigley.  Canadian Zinc submitted its
Developer’s Assessment Report in May 2005 and Technical Reports were submitted
by the end of August 2005.  A Public Hearing was held in Fort Simpson,
NWT, on October 6, 2005.





The
Mackenzie Valley Environmental Impact Review Board completed its Report of
Environmental Assessment and submitted the Report to the Minister of Indian and
Northern Affairs Canada on December 23, 2005.





The
Review Board concluded that, with the implementation of the commitments made by
Canadian Zinc and three mitigation measures recommended in the Report, the
proposed development was not likely to have a significant adverse impact on the
environment or be a cause for significant public concern.  The Review
Board recommended to the Minister that this development proceed to the
regulatory phase of approvals.





The
Review Board examined the Public Record for evidence of possible significant
adverse impact on the environment, for evidence of cumulative effects from the
development in combination with other past, present and reasonably foreseeable
future developments, and for evidence of public concern.





The
Review Board found that significant adverse cumulative impacts on the
environment can be prevented with adequate environmental
management.  The Review Board also found that the proposed development
was not likely to be cause for significant public concern as long as all of the
Company’s commitments and all of the measures recommended by the Review Board
were implemented.





The
Review Board concluded that some public concern over cumulative effects on the
Nahanni watershed exists but that this concern would be greatly diminished if
the public had assurance that the Company’s commitments, and the additional
mitigation measures recommended by the Review Board, would be effectively
implemented.  The Review Board found that there would not be a concern
if the public is kept up-to-date about the environmental protection measures
Canadian Zinc will be using.  “The best way for the public to receive
this assurance is through an independent community environmental monitor who
reports back to the effected communities”.


52


“The
Review Board is of the view that the full responsibility for monitoring,
evaluation and management should not necessarily rest on the Company
alone.  Expert agencies of government, such as Department of Indian
Affairs and Northern Development, Environment Canada, Department of Fisheries
and Oceans, and Government of the Northwest Territories, should be involved
co-operatively in the design of this comprehensive monitoring
program”.





The
Review Board noted that incremental development in the Prairie Creek area is
likely to continue and is likely to increase rather than decrease in the
foreseeable future.  There has already been considerable development
in the Prairie Creek watershed and development is likely to
increase.  On the other hand, all present and reasonable foreseeable
future developments are by the same developer, are in close proximity, and are
operated, if not as one development, in a co-ordinated and overlapping
fashion.  This provides Canadian Zinc with an opportunity to
effectively manage cumulative effects through responsible environmental
management of its activities in each of the developments in the
area.





The
Review Board recommended approval of the proposed development subject to three
mitigation measures.  The measures are the actions necessary, in the
opinion of the Review Board, to prevent or mitigate adverse impacts on the
environment.  The three measures recommended by the Review Board
are:





·
            Government
      and regulatory authorities are to ensure that all drill waste is disposed
      of in a manner that does not allow any harmful substance to enter surface
      waters.


·
            Canadian
      Zinc shall take every reasonable effort to employ a local person, selected
      in consultation with the Dehcho First Nations, as community environmental
      monitor, who will independently report back to the Dehcho First
      Nations.


·
            DIAND
      shall ensure that a comprehensive program to monitor cumulative impacts on
      fish, wildlife, vegetation and water quality is
    implemented.





In
February 2006, the Minister of Indian Affairs and Northern Development, and on
behalf of the Responsible Ministers with jurisdiction (Environment and Natural
Resources, Government of the Northwest Territories, Fisheries and Oceans, and
the Minister of the Environment on behalf of Environment Canada and Parks
Canada), approved the report of the Review Board.





In May
2006, the MVLWB issued the Land Use Permit for the Phase 3 exploration drill
program, which is valid for five years commencing May 11, 2006.





(k)  Water License and Quarrying Permit –
Road Rehabilitation





In June
2007, Canadian Zinc applied to the Mackenzie Valley Land and Water Board for a
Class B Water Licence (MV2007L8-0026) to rehabilitate a portion of the road in
the proximity of the mine site and sought authorization from the Department of
Fisheries and Oceans to carry out the work.  Also in June 2007, the
Company applied to Indian and Northern Affairs Canada for a quarrying permit to
obtain rock to be used in the road rehabilitation.





In June
2007, the Dehcho First Nations claimed that the rehabilitation work constituted
a significant alteration to the Winter Road project and requested that the
application of the water licence for the proposed rehabilitation work be
referred for Environmental Assessment.  In December 2007, the
Mackenzie Valley Land and Water Board rules that the proposed rehabilitation
work did not constitute a significant alteration.





The
issuance of these permits was delayed as they were referred to consultation
between the Crown and the Nahanni Band.  The Company received the
quarry permit on February 29, 2008 and the Water Licence on March 20,
2008.  The Water Licence is valid for a period of five years expiring
March 19, 2013.  The authorization from DFO was received on July 15,
2008.





53


(l)  Applications for Operating
Licence/Permit





On May
28, 2008, the Company applied to the MVLWB for a Type “A” Water Licence and
three Type “A” Land Use Permits (“LUPs”); one for the operation of the Prairie
Creek Mine and the other two for Transfer Facilities along the
road.  A detailed Project Description Report was filed with the Water
Board as part of the permit applications.





The
proposed new operation at Prairie Creek utilizes the existing infrastructure and
facilities that were built in the 1980’s and which will be upgraded and enhanced
to meet current-day environmental standards.  The improvements
proposed for specific site facilities will further mitigate the potential impact
the Project may have on the environment.  Specifically, the Company
proposes to place waste rock and tailings underground in a cemented backfill
mix, use the existing large pond for temporary water storage, and place
development waste rock in an engineered facility removed from the Prairie Creek
floodplain.





Subsequent
to submitting the applications to the MVLWB, the Company responded to a number
of requests for additional information from the Board.  On July 14,
2008, the MVLWB advised the Company that all applications were deemed
complete.  A subsequent letter from MVLWB, dated July 21, 2008,
indicated that the Board was moving forward with its preliminary screening of
the application and had requested comments from interested parties by August 8,
2008.





The MVLWB
conducted a review of the submissions, and comments of reviewers, and interested
parties, and of the submissions made by CZN.  During the course of the
preliminary screening the MVLWB determined that the land use permit and water
licence applications might have a significant impact on the environment and
might be the cause of public concern.  The concerns were around water
quality, wildlife, damage to landscape, and long term risk of
contamination.  The MVLWB, after completing their preliminary
screening, resolved, on September 17, 2008, to refer the land use permit
applications as well as the water licence application to the MVEIRB for
environmental assessment.





Prior to
the official referral, on August 11, 2008, the Company was informed by the
MVEIRB that Indian and Northern Affairs Canada, under Section 126(2)(a) of the
Mackenzie Valley Resource Management Act, had referred the proposed development
of Prairie Creek to environmental assessment both on its own behalf and on
request from the Nahanni Butte Dene Band as per Article 12 of the Settlement
Agreement between the Dehcho First Nations (“DCFN”) and the Government of
Canada.





An EA,
conducted by the MVEIRB, is the next stage in the regulatory process following
preliminary screening by the Water Board.  The initial phase of the
EA, and the main activities to date, consisted of community scoping sessions and
written hearings submissions and rulings to determine the scope of the Terms of
Reference for the EA.





The
Company participated in six public scoping sessions in several Dehcho
communities and in Yellowknife in late September/early October 2008 to enable
discussion and questions to be addressed to assist in determining the overall
scope of the EA.  The community public sessions demonstrated that
there is considerable local community support for the Prairie Creek project and
there is no significant public concern amongst the communities.  The
MVEIRB was strongly encouraged to undertake a very focused and efficient
EA.  Two clear themes emerged: protection of water quality is
paramount, and, jobs and economic activity are sorely needed in the Dehcho
region.





The
MVEIRB originally proposed a deadline of October 14, 2008, for interested
parties to provide scoping submissions but this was subsequently
extended.  Initially, the MVEIRB indicated that it anticipated
providing further guidance on how the EA would proceed in the last week of
November 2008.





On
November 6, 2008, the MVEIRB received a Request for Ruling (the “Request”) from
Ecojustice on behalf of Dehcho First Nations and Canadian Parks and Wilderness
Society (“CPAWS”).  The Request concerned the question whether the
winter access road, and its use, should be included in the EA
process.  The


54


MVEIRB
subsequently decided to issue information requests to various parties to ensure
that all potentially relevant materials to assist their decision on the Request
would be available to all interested parties.  The information request
was published by the MVEIRB on November 26, 2008, and noted two
questions:





(1)
Whether the winter road should be part of the scope of development and subject
to direct impact assessment during the EA; and


(2)
Whether existing mine site infrastructure should be part of the scope of
development and subject to direct impact assessment during the EA.





The
MVEIRB proceeded to set deadlines for submissions and
responses.  These timelines were further extended to January 19, 2009,
following a MVEIRB pre-hearing conference on December 17, 2008.  The
MVEIRB considered submissions and responses from interested parties, including
Canadian Zinc which submitted that the winter road and existing mine site
infrastructure should not be part of the assessment and that the EA should focus
on the new developments and the new transfer stations on the winter
road.





On March
5, 2009, the MVEIRB published its Ruling on the Scope of Development, finding
that “all physical works and activities associated with the winter access
road.....and all physical works and activities associated with the mine site.....are
part of the scope of development for the Prairie Creek Mine environmental
assessment.”





The
MVEIRB also provided some comments with regard to the scope of assessment,
noting that “In its forthcoming Draft Terms of Reference, the Review Board will
provide its preliminary determination of the scope of assessment – what issues
need to be examined in what level of detail during the environmental assessment
– for review and comment.  The Review Board reminds all interested
parties that while the scope of development defines all the physical works and
activities required to undertake the development, that does not mean that all
physical works and activities are subject to the same level of
assessment.  Depending on their potential for impacts and subject to
Review Board discretion, parts of the scope of development may be considered
very closely, other very little or not at all.





“The
Review Board will give full consideration to historic studies, impact assessment
and operational information about all aspects of the Prairie Creek Mine before
determining whether additional studies are required....The Review Board assures
all interested parties it has no intention of ignoring the wealth of relevant
existing evidence collected on how the existing infrastructure will likely
interact with the environment.





“The
Review Board also notes that the Prairie Creek Mine includes a variety of
existing structures, including the winter access road and much of the mine site
infrastructure.  The Review Board accepts the argument made by
Canadian Zinc and others that conducting an impact assessment on the
construction of facilities, including the road, which have been present on the
land for over 25 years is not likely to generate any useful information even if
it is possible.  The Review Board will not be assessing construction
impacts of already built structures.  The Board has decided that
assessment of these facilities will be restricted to the effects of their
ongoing operation in combination with the effects of other construction and
operations necessary for the operation of the mine.”





The
Review Board indicated that the Draft Terms of Reference would identify the
scope of development in more detail, and allow public comment before finalizing
the scope of development to be assessed in the EA.  The Draft Terms of
Reference and a Draft Work Plan were issued on May 11, 2009 with a stated
deadline for submission of comments by interested parties of June 12,
2009.  In its Draft Work Plan the Review Board indicated that it
anticipates concluding its Report of Environmental Assessment by October
2010.





All
comments and documents can be viewed on the MVEIRB website at http://www.mveirb.nt.ca/registry/index.php.


55


Following
the EA will be a further regulatory stage, managed by the MVLWB (with input from
territorial and federal agencies), before permits are issued.  These
permits will include conditions that will require CZN to meet appropriate
environmental guidelines.





(m)  Permit Delays





Since
August 2000 Canadian Zinc has been working on moving the Prairie Creek Project
through the permitting process. The Mackenzie Valley resource management and
permitting process is very cumbersome, slow and political, and to date has
caused extreme delays to the Company in its efforts develop the Prairie Creek
Property.  Various permit applications have been the subject of five
separate Environmental Assessments and the applications filed in 2008 are now
undergoing Environmental Assessment.  Five Land Use Permits, including
a permit to use the access road in winter months, and two Water Licences have
been issued to the Company since 2001 and two appeals for Judicial Review have
been made to the Courts, in both of which the Company has
prevailed.





In light
of the likely extended timeframe that the permitting process will require, the
Company has determined that it will limit expenditures at Prairie Creek for the
foreseeable future, with the exception of continuing to carry out projects and
studies that will be of assistance for the EA process and also in determining
and refining future anticipated mine plans.  Given the open-ended
nature of the Mackenzie Valley permitting process, the Company cannot, with any
reasonable assurance at this point in time, provide a detailed estimate as to
the likely costs of permitting activities in 2009.  It is likely,
given the Company’s experience to date, that the EA process will extend for a
considerable time.  In its Draft Work Plan issued May 11, 2009, the
Review Board indicated that it anticipates concluding its Report of
Environmental Assessment by October 2010.





When the
Company receives its operating permits, which is not a certain event, additional
finance will be required to bring the mine into commercial
production.  This will be very dependent on future market conditions,
especially with regard to commodity prices, which may impact the Company’s
ability to complete development of Prairie Creek.  The Company is
currently evaluating the cost of the future development required at Prairie
Creek and currently estimates that an additional $80 - 100 million will be
required.  This number, however, is highly uncertain and could
materially change based on final project design, permitting conditions and
economic circumstances conditions at that time.





11. Environmental
Considerations





Nahanni National Park
Reserve / Parks Canada Memorandum of Understanding





The
Prairie Creek Mine, located adjacent to Prairie Creek, is within the watershed
of the South Nahanni River, 32 kilometres upstream of the point where Prairie
Creek crosses the boundary of the Nahanni National Park Reserve (“NNPR”) and 48
kilometres upstream of the point where Prairie Creek joins the South Nahanni
River.  The confluence of Prairie Creek and the South Nahanni River is
65 kilometres upstream of the point where the South Nahanni River leaves the
Nahanni National Park Reserve crossing its downstream boundary.





The South
Nahanni River is 500 kilometres in length of which 300 kilometres are contained
within the Nahanni National Park Reserve.  The watershed of the South
Nahanni River is 37,000 km2, of
which 4,766 km2 are
contained within the Nahanni National Park Reserve.  The watershed of
Prairie Creek above the minesite is 495 km2, or less
than 2% of South Nahanni watershed.  In accordance with the relative
sizes of their respective watersheds, water flow in the South Nahanni averages
75 times that of Prairie Creek and ranges from 50 to 180 times as
much.





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


56


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





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





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





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





In August
2007, the Prime Minister of Canada visited Fort Simpson to announce the proposed
expansion of Nahanni National Park Reserve.  The Prime Minister
announced that the Government of Canada had approved an Order in Council
(PC-2007-1202 July 31, 2007), withdrawing certain lands for the proposed park
expansion.  The area surrounding the Prairie Creek mine, containing
approximately 367 km2, is not
included in the interim land withdrawal area and, as specified in Schedule 2 to
the Order, is specifically excluded and exempted.  Canadian Zinc has
been assured by the Government of Canada and by Parks Canada that the final
boundaries of the expanded park will not include the site of or the access road
to the Prairie Creek mine and that in the proposed expansion of the Nahanni
National Park Reserve the existing mining and access rights of Canadian Zinc to
the Prairie Creek mine will be respected and protected.





In
October 2007, the Nahanni Expansion Working Group undertook a series of open
houses throughout the Dehcho communities to present proposals for developing
boundary options for an expanded park.  In a document dated October
2007, entitled “Expansion of Nahanni National Park Reserve: Boundary Options for
Public Consultation,” Parks Canada proposed three options all of which included
protecting all existing third party rights and tenures.  In addition,
all three options include the understanding that access to the Prairie Creek
Minesite will be provided and will require a right of way or corridor across or
through an expanded park.





On July
29, 2008, Parks Canada and Canadian Zinc entered into a MOU with regard to the
expansion of the Nahanni National Park Reserve and the development of the
Prairie Creek Mine, whereby:





·
            Parks
      Canada and Canadian Zinc agree to work collaboratively, within their
      respective areas of responsibility, authority and jurisdiction, to achieve
      their respective goals of an expanded NNPR and an operating Prairie Creek
      Mine.





·
            Parks
      Canada recognizes and respects the right of Canadian Zinc to develop the
      Prairie Creek Mine and will manage the expansion of NNPR so that the
      expansion does not in its own right negatively affect development of, or
      reasonable access to and from, the Prairie Creek
  Mine.


57


Canadian
Zinc accepts and supports the proposed expansion of the NNPR and will manage the
development of the Prairie Creek Mine so the mine does not, in its own right,
negatively affect the expansion of the Nahanni Park.





Parks
Canada and Canadian Zinc (the “Parties”) have agreed to make every reasonable
effort to address issues of common interest and build a strong working
relationship, including convening a Technical Team, including representatives of
the Dehcho First Nations, which will better identify, define and consider issues
of common interest, including, among other things, access to and from the
Prairie Creek Mine through the proposed expanded Park and the park boundaries
around the Prairie Creek Mine properties.  The Parties have also
agreed to share with one another and the Technical Team any existing technical
and scientific information relevant to a discussion and analysis of issues of
common interest to the Parties.





The MOU,
which is valid for three years is intended to cover the period up to the
development of the Prairie Creek Mine (Phase I) and may be amended or renewed as
agreed by the Parties and may be terminated by either Parks Canada or Canadian
Zinc on not less than three months written notice.  It is contemplated
that the Phase I MOU will be replaced by a further MOU (Phase II) which will
address the operation of the mine and the expanded Nahanni Park.





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





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





The
exclusion of the Prairie Creek mine from the proposed Nahanni National Park
expansion area has brought clarity to the land use policy objectives for the
region.  Canadian Zinc believes that the Prairie Creek mine and the
expanded NNPR can co-exist and that, properly planned and managed, the expanded
Park will not interfere with the operation of the Prairie Creek mine and
similarly that the operation of the mine will not adversely impact upon the Park
or its ecological integrity.





The final
boundaries for the proposed park expansion have not yet been determined. The
senior Mineral Energy and Resource Assessment (“MERA”) Committee is considering
a number of options regarding the proposed park expansion area.





Canadian
Zinc anticipates that the exclusion of the Prairie Creek mine from the proposed
park expansion area will bring clarity to the different policy objectives for
the region. Canadian Zinc believes that the Prairie Creek mine and the expanded
Nahanni National Park Reserve can co-exist and that, properly planned and
managed, the expanded park will not interfere with the operation of the Prairie
Creek mine and similarly that the operation of the mine will not adversely
impact  upon the Park or its ecological integrity.





Endangered
Species





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


58





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





Caribou
populations and potential caribou habitat have been identified in areas removed
from the minesite to the north and east in the Mackenzie
Mountains.  Potential impacts to these populations are primarily
transportation related and can be mitigated through standard road safety
practices.





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





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





Acid Rock
Drainage





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





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





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





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





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





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


59


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





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





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





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





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





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





Mesh
noted that, with regard to the conclusions made in their December 13, 2006
report, the options being considered for waste rock, mill rock and tailings
management include:





•
returning all dewatered tailings, the majority of mill rock and waste rock in
close proximity to mineralized areas to the underground workings, as
backfill;





•
placement of excess mill rock and waste rock in engineered and non-engineered
surface storage facilities; and





•
storage, treatment and additional settling in a polishing pond of tailings
supernatant, prior to its discharge.





Current
planning calls for concentrates to be stored on or near site in sheltered
containers, prior to their removal for off-site smelting.





Hazardous
Materials





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





A
disposal project for the cyanide and PCB’s was commenced in 2007 which involved
repackaging the materials such that they are ready for removal from the site for
ultimate disposal.  This program contracted professional toxic waste
specialists to repack the new containers which were stored under tarpaulins on
the approved chemical storage pad.  In July 2008, following receipt of
the necessary regulatory approvals, an airlift of the repacked sodium cyanide
drums and associated repackaging waste took place utilizing a DHC-5 rear loading
Buffalo aircraft, which shuttled the material from the Prairie Creek mine site
to Fort Simpson.  From Fort Simpson, Hazco Environmental Services Ltd.
transported the cyanide by truck to Cyanide Destruct Systems in Barrie, Ontario
and the repackaging waste was removed to Earth Tech’s Swan Hills Treatment
Centre in Alberta for destruction and disposal.





60


Environmental
Obligations





As at
December 31, 2008, the Company has estimated the present value of expenditures
required for reclamation costs at the Prairie Creek Property to be approximately
$1.162 million ($2.383 million on an undiscounted basis), mostly to be incurred
at the end of the life of the mine. Asset retirement obligations are recognized
in the period in which they are incurred if a reasonable estimate of fair value
can be determined.  The fair value of the estimated asset retirement
cost is capitalized as part of the carrying amount of the long-lived asset when
incurred or revised, and amortized over the asset’s estimated useful
life.  Increases in the asset retirement obligation resulting from the
passage of time are recorded as accretion expenses.  Actual
expenditures incurred are charged against the accumulated
obligation.





Various
assumptions are used in determining the liability including current mine plans,
future retirement costs and estimates of resources.  The estimates
used require extensive judgment as to the nature, cost and timing of the work to
be completed and may change with future changes to cost structures,
environmental laws and requirements and remediation practices
employed.  Management evaluates the asset retirement obligation
estimates at the end of each reporting period to determine whether the estimates
continue to be appropriate.





Other
than specific environmental matters discussed in this Annual Report, the Company
is not aware of any material environmental matter requiring significant capital
outlays in the immediate future.





12.           First
Nations





The
Prairie Creek Mine is located on land claimed by the Nahanni Butte Dene Band of
the Dehcho First Nations (“Dehcho” or “DCFN”) as their traditional
territory.  The Nahanni Butte (Nahaahdee) First Nation is a “band”
pursuant to the Indian Act RSC 1985.  The members of the Dehcho First
Nations are Aboriginal people within the meaning of Section 35 of the
Constitution Act, 1982.





The
Dehcho are a distinct group of Aboriginal people, whose ancestors were among the
South Slavey people of the Dene Nation of what is now the Northwest Territories,
and the Metis people within the DCFN territory.  The Dehcho have had
their own system of laws, religion, economy, customs, traditions and language
since time inmemorial.  Many Dehcho people continue to rely heavily on
the land, water and resources within DCFN territory for sustenance, social and
ceremonial purposes.





The DCFN
is an organization representing all of the Dene and Metis peoples in the Dehcho
territory of the Northwest Territories which comprise thirteen separate
communities.  The DCFN have incorporated a society under the laws of
the Northwest Territories in order to provide leadership, governance,
administration and program delivery to their member communities.  The
DCFN is a governing body of the Dehcho people lands, administers and oversees a
number of programs and services for its member communities including those
relating to health, employment, education, and land and resource
management.





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





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





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


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The
Federal Government has recognized that the inherent right of self government is
an existing Aboriginal right recognized and affirmed by Section 35 of the
Constitution Act, 1982.  The Dehcho are engaged in ongoing land
settlement negotiations with the Government of Canada and the Government of the
Northwest Territories in what is referred to as the “Dehcho
Process.”  The Federal Government first attempted to negotiate
land claim settlements in the Northwest Territories, with the Dene/Metis in the
late 1980’s without success.  Subsequently, settlement agreements were
reached first with the Gwich’in and Sahtu Dene/Metis people and later with the
Tlicho in 2005.  The Dehcho have not settled their land claim with the
Federal Government.  The Dehcho and the Federal Government of Canada
both claim legal title to this territory, the Dehcho by virtue of historical
occupation and the Federal Government under Treaty 8, signed in 1900, and Treaty
11 signed in 1921 and 1922.  The Federal Government and the Dehcho
First Nations disagree on the interpretation of Treaties 8 and 11 and legal
title to the land remains in dispute.  Canada maintains that under the
Treaties the Dehcho extinguished ownership of their traditional
lands.  The Dehcho have threatened to take the Federal Government to
court, or to the United Nations, over the key issue of
sovereignty.  The Dehcho territory has an area of approximately
210,000 km2 and has
a native population of approximately 6,000.





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





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





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





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





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





Under the
Interim Measures Agreement, the Governments and the Dehcho agreed to develop a
land use plan for the Dehcho lands outside Nahanni National Park Reserve and for
that purpose to establish a Land Use


62


Planning
Committee.  The purpose of the Land Use Plan is to provide for the
conservation, development and utilization of the land, waters and other
resources in the Dehcho territory, taking into consideration the principles of
respect for the land, as understood and explained by the Dehcho Elders, and
sustainable development.





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





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





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





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





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





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





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





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





In August
2003, a Memorandum of
Understanding respecting the expansion of Nahanni National Park Reserve
dated June 24, 2003, was signed between the Dehcho and the Parks Canada Agency,
whereby as part of


63


the
Dehcho Process, Parks Canada and the Dehcho agreed to work co-operatively
towards completion of a feasibility study towards the addition of the identified
lands to the Nahanni National Parks Reserve and to recommend an amendment to the
Canada National Parks Act for a new boundary for the expansion of the Nahanni
National Park Reserve and, as part of the Dehcho Final Agreement, moving the
Nahanni National Park Reserve to full National Park status under the Canada
National Parks Act.





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





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





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





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





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





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





In the
2005 Settlement Agreement the parties affirmed the Interim Resource Development
Agreement dated April 17, 2003 and agreed to take immediate steps to establish a
working group comprised of the parties to


64


the
Dehcho First Nations Interim Measures Agreement for the purposes of ensuring
that the issues arising from the implementation of the Resource Development
Agreement are addressed in a timely manner.  The parties also agreed
that once an Agreement in Principle is ratified, the resource royalty sharing
formula set out in the Interim Resource Development Agreement will be replaced
with any Resource Revenue Sharing Formula agreed to in the Agreement in
Principle.





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





Negotiations
under the Dehcho Process continued during 2006, with Canada presenting a formal
comprehensive offer of land selection, local governance provisions and financial
compensation but this offer was rejected by the Dehcho First
Nations.  The Dehcho First Nations are insisting on the approval of a
Land Use Plan (see below).  Negotiations continued intermittently in
2007 and 2008 with no apparent progress reported.





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





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





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





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





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





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





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


65


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





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





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





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





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





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





13.           Nahanni Butte Dene
Band





The
Prairie Creek Mine is located 90 kilometres from the nearest settled community
of Nahanni Butte, located at the confluence of the South Nahanni and Liard
Rivers, 146 kilometres downstream of the minesite.  The population of
Nahanni Butte is approximately 100 people and water for domestic purposes is
supplied by well.  There is no permanent road access into the Prairie
Creek Property, other than the existing Winter Road which was established in
1981.  Regular access is by air only to a private airstrip controlled
by the Company.  There is no other existing land occupation, nor
commercial land or water based activities in the vicinity of the
mine.  Similarly, no traditional use or trapping activity has been
observed in the minesite area in recent history.





On
December 10, 1996, the Company completed the negotiation of the Prairie Creek
Development Co-Operation Agreement with the Nahanni Butte Dene Band (the “Band”)
of the Dehcho First Nations.  The agreement provided that in
consideration for the Band providing support for the project, quiet enjoyment,
access easements, assistance in obtaining permits, potential cost savings as a
result of the Band's involvement, and assembling and providing the Band's
traditional knowledge in support of the project, the Company would:





(a)
            pay
      the Band annually 5% of the profits before tax, after recovery of the
      aggregate costs incurred in establishing access and bringing the
      project  into production;





(b)
            grant
      the Band an option to purchase 10% or 15% of the project for $6,000,000
      or  $9,000,000 respectively subject to adjustment for inflation
      and additional development costs, exercisable within three
      months  following delivery of a Bankable  Feasibility
      Study  and receipt of all major  permits for
      the  project; and


66


give the
Band preferential access on providing contract services; being competitive as to
price, delivery, capability, performance and quality.





Following
commencement of production, the Band and the Company were to jointly fund (a)
the establishment of an education centre to a maximum of $150,000 and annual
operating costs up to $50,000; and (b) a scholarship fund of $20,000 per year,
increasing to $30,000 per year following payback of all capital
costs.  In addition, the project was to contribute $25,000 per year to
a trust on commencement of construction of access to the project, to compensate
traditional harvesters who were negatively affected by the project and the
access.





The
overall intent of the Co-Operation Agreement was to establish and maintain a
positive and cooperative working relationship between the Company and the Band
in respect of the further development and operation of the Prairie Creek Mine,
while at the same time supporting an economically viable and environmentally
sound operation and maximizing economic opportunity and benefits to the Band and
other Dehcho First Nations.  This Agreement foresaw the many benefits
which could accrue to the Band and the DCFN in conjunction with development of
the road and mine, and made provision for maximizing opportunities to realize
these benefits.  To this end, the Agreement provides employment and
contracting opportunities, as well as equity participation for the Band and the
DCFN.





In the
Agreement, the Band proclaimed its support for the Prairie Creek Mine and the
establishment of the access road in recognition of the significant benefits to
the Band and the DCFN communities as a whole, and undertook to assist the
Company in procuring permits, approvals and licences necessary to bring the mine
into production, as well as grants, guarantees or other financial assistance
from Government towards the establishment of the access road.





On
November 28, 1996, the Nahanni Butte Dene Band issued a Band Council Resolution
stating that the Band on behalf of its membership “does fully ratify and endorse
the Prairie Creek Development Co-Operation Agreement” in which the Nahanni Butte
Dene Band proclaimed its support for the Prairie Creek Mine and the
establishment of an all weather access road to the mine in recognition of the
significant benefits to Nahanni Butte and the DCFN communities as a whole. The
Agreement was also supported by the DCFN by Tribal Council
Resolution.





The
Nahanni Butte Dene Band issued a Band Council Resolution on May 18, 2000, in
support of protecting the South Nahanni watershed, stating that “the Nahanni
National Park Reserve was created without the consent or participation of the
Dehcho First Nations” and that the “Final Agreement should provide for the
recognition of Dehcho First Nations jurisdiction over the entire Nahanni
watershed, including the Park or Park Reserve”.





On
January 29, 2001, the Band issued a further Band Council Resolution rescinding
their support for the Protected Areas Strategy for the Nahanni National Park
Reserve watershed.





On
January 17, 2002, the Band issued a further resolution reconfirming their
support for the Prairie Creek Mine Project.





A change
in Band leadership occurred in September 2003 following elections for
Chief.  Thereafter yet another different Band Chief was elected during
2004.





On
October 10, 2003, an appeal to the Federal Court was filed by the Nahanni Butte
Dene Band, Pehdzeh KI First Nation and the Dehcho First Nations, against the
Mackenzie Valley Land and Water Board and the Company seeking judicial review of
the decision of the Water Board to grant a Water Licence to the
Company.  Filing of these proceedings by the Nahanni Butte Dene Band
was in breach of the Co-Operation Agreement.  The Nahanni Butte Dene
Band informed the Company that the Band considered the Agreement
terminated.  Such termination was not in accordance with the
provisions of the Agreement.


67


Canadian
Zinc seeks to consult on a regular basis with the Nahanni Butte Dene Band and
other First Nations and local communities to keep them informed about the
Prairie Creek project and as to opportunities for implementing the provisions of
the Co-Operation Agreement, as the Company moves forward with its plans for
re-development of the property.  In 2004 the Company opened a
Community Liaison and Information Office in Fort Simpson and since 2004,
significantly increased its First Nations and local communities’ information and
awareness programs and activities.





In June
2005, the Chief of Nahanni wrote to the Mackenzie Valley Land and Water Board in
connection with the Company’s application for a Land Use Permit to use the
winter road which connects the mine with the Liard Highway [see “Item
4.D--Property, Plant and Equipment--10. Permitting at Prairie Creek--(i) Land
Use Permit – Winter Road”] alleging infringement of aboriginal rights and
inadequate consultation under Section 35 of the Constitution of
Canada.  The Water Board referred the matter to the Department of
Indian Affairs and Northern Development which conducted a preliminary assessment
which lasted throughout most of 2006.  In February 2007, the
Department issued its report on consultation to the Water Board in which it
concluded that in the Department of Indian Affairs and Northern Development’s
view adequate consultation had taken place and in which it made certain
recommendations.  The Water Board issued the Land Use Permit in April
2007 and included among the Permit terms and conditions those recommendations
from the consultation report that are within the Board’s mandate, including
provisions for the protection of wildlife habitat.





In June
2007, the Dehcho First Nations claimed that the Company’s application for a
Class B water licence to rehabilitate a portion of the road in proximity to the
mine constituted a significant alteration to the Winter Road project and
requested that the proposed rehabilitation work be referred for Environmental
Assessment.  They also alleged inadequate consultation under Section
35 of the Constitution of Canada.  In November 2007, the Water Board
ruled that the proposed work was not a significant alteration to the
project.  The Department of Indian Affairs and Northern Development
conducted a preliminary assessment on consultation with the Nahanni Butte Dene
Band and in March 2008, issued its report to the Water Board in which it
concluded that adequate consultation had taken place.  The Water Board
issued the water licence in March 2008.





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





The
Company believes that the separate goals of the Dehcho First Nations in
achieving political sovereignty and economic self-sufficiency whilst protecting
the environment are compatible.  The Prairie Creek Development
Co-operation Agreement provides for a positive and cooperative working
relationship between the Company, Nahanni Butte and the Dehcho First Nations in
respect of developing and operating an environmentally sound mining undertaking
at Prairie Creek, which will not have significant adverse environmental effects
on the ecological integrity of the South Nahanni River or the Nahanni National
Park Reserve.





14.           Liidlii Kue First Nation
(“LKFN”)





On
October 16, 2008, CZN and Liidlii Kue First Nation of Fort Simpson, Northwest
Territories, entered into a Memorandum of Understanding to formally establish a
mutually beneficial, co-operative and productive relationship with regard to the
exploration and development of the Prairie Creek Mine and to demonstrate that
LKFN and Canadian Zinc intend to work together, as responsible corporate
citizens of the region, in a spirit of co-operation for mutual benefit as well
as social, ecological, cultural and economic well-being.


68




The
Liidlii Kue First Nation of Fort Simpson, Northwest Territories, is a member of
the Dehcho First Nations.  Fort Simpson, located approximately 500
kilometres east of the Prairie Creek Mine, is the administrative centre and main
service centre of the Dehcho region.  Fort Simpson has a population of
approximately 1,200 and the LKFN Band, which is the largest in the Dehcho has
1,175 Members.





The
purpose of the MOU is:


·
            to
      provide a process through which Canadian Zinc, in pursuing its exploration
      and development activities at the Prairie Creek Mine, can consult with and
      accommodate the interests of LKFN with a view to amicably reconciling any
      issues that might arise;


·
            to
      establish a relationship through which LKFN can identify opportunities for
      its businesses and members to participate in Canadian Zinc’s exploration
      and development activities; and


·
            to
      set out the objectives, process and topics for the negotiation of an IBA
      between LKFN and Canadian Zinc, which is specifically intended to cover
      the future operations of the Prairie Creek Mine
  project.





The MOU
provides for implementation of a more formalized structure for communication and
information exchange through, among other things, the appointment of a Community
Information Representative, establishing a Communications Committee and hiring
an Environmental Monitor.





In the
MOU, Canadian Zinc has agreed to make its best efforts to employ LKFN members
and to assist LKFN and its community to benefit from business opportunities
associated with the exploration and development of the Prairie Creek
Project.  Canadian Zinc and LKFN have agreed to use their best efforts
to negotiate an IBA but nothing in the MOU is intended to define, create or
extinguish any rights of LKFN or Canadian Zinc and the MOU is not legally
binding on the parties.





15.           Office
Space





The
Company presently maintains offices in Vancouver, Fort Simpson and Toronto (all
in Canada).  The Company’s head office is located in Vancouver and is
approximately 3,000 square feet in size.  The Company presently leases
office space in the Federal Building in Fort Simpson.  This office is
supported by a Community Liaison Officer and acts as an information source on
Prairie Creek for the local community to access.  In addition the
office can receive any questions, issues or concerns from the community about
the development.  The Company’s Toronto office is maintained for the
use of the Chief Executive Officer.





ITEM
4A.                      UNRESOLVED
STAFF COMMENTS





There are
no unresolved staff comments.





69


ITEM 5.
            OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS





A.           Operating
Results





The following discussion should be read
in conjunction with the audited financial statements of the Company for the
years ended December 31, 2008, 2007 and 2006, and the related notes thereto, and
with the selected data set forth.  The Company’s financial statements
have been prepared in accordance with Canadian GAAP.  Except as
described below under “Comparison of Canadian GAAP and United States GAAP as
applicable to the Company’s operations,” and in Note 19 to the audited financial
statements, there are no material differences, for the purposes of these
financial statements, between accounting principles generally accepted in Canada
and the U.S.  Unless otherwise indicated, all currency is reported in
Canadian dollars.  All items in this section discuss the financial
results of the Company following the change in accounting policy for resource
interests as discussed below.





Overview





SUMMARY
      - Presented in accordance with Canadian GAAP(Thousands
      of dollars, except per share amounts)
            2008
            
            
            2007
            
            
            2006
            *Statement
      of operationsInterest
      income
            $
            899
            
            $
            1,234
            
            $
            948Net
      (loss)
            $
            (4,228
            )
            $
            (9,483
            )
            $
            (7,723
            )Basic
      and diluted loss per share
            $
            (0.04)
            
            $
            (0.08
            )
            $
            (0.08
            )Balance
      sheetCash,
      cash equivalents and short-term investments
            $
            20,948
            
            $
            28,414
            
            $
            29,087Marketable
      securities
            $
            (2,024
            )
            $
            100
            
            $
            250Total
      assets
            $
            29,521
            
            $
            34,391
            
            $
            35,272Total
      liabilities
            $
            1,673
            
            $
            2,482
            
            $
            1,844Shareholders’
      equity
            $
            27,848
            
            $
            31,909
            
            $
            33,428


* See
section below re restatement arising on accounting policy change.





Change
in Accounting Policy





During
2008, the Company commenced its review of the impact of International Financial
Reporting Standards (“IFRS”) on its current accounting policies, which included
an examination of the Company’s current accounting policies under Canadian
GAAP.  In light of this review, the Company determined that it was
appropriate to change its accounting policy for resource interests whereby its
exploration and development costs are to be expensed until such time as either
reserves are proven or permits to operate a mineral resource property are
received and financing to complete development has been
obtained.  Previously, the Company capitalized its exploration and
development expenditures as incurred, which is permitted under Canadian
GAAP.





Management
believes that this revised accounting policy provides a more relevant and
reliable basis of accounting.  Among other benefits, the revised
accounting policy aligns the accounting treatment of these resource interest
expenditures with standards used by producing mining companies in the resource
sector and with global accounting standards (including U.S.
GAAP).  The change in accounting policy has been applied
retrospectively, and the comparative financial statements for 2007 and 2006 have
been restated. The effect of the change was to increase the Company’s
accumulated deficit at January 1, 2006 by $13.490 million and at January 1, 2007
by $19.727 million.  Further impacts of the restatement are noted in
the table below:


70








As
      Previously Reported
            
            Adjustment
            
            RestatedBalance
      Sheet as at December 31, 2007:Resource
      interests
            
            $
            37,797
            
            $
            (32,965)
            
            $
            4,832Other
      long-term assets
            
            
            -
            
            
            425
            
            
            425Future
      income tax liability
            
            
            (3,621
            )
            
            3,621
            
            
            -Share
      capital
            
            
            66,593
            
            
            (629)
            
            
            65,964Deficit
            
            
            (13,609
            )
            
            (28,290)
            
            
            (41,899
            )Statement
      of Operations, Comprehensive Income and Deficit for the year ended
      December 31, 2007:Mineral
      exploration and development costs
            
            
            -
            
            
            (11,050)
            
            
            (11,050
            )Future
      income taxes income
            
            
            -
            
            
            2,487
            
            
            2,487Net
      loss / Comprehensive loss for year
            
            
            (920
            )
            
            (8,563)
            
            
            (9,483
            )Loss
      per share – basic and diluted
            
            
            (0.01
            )
            
            (0.07)
            
            
            (0.08
            )Statement
      of Cash Flows for the year ended December 31, 2007:Operating
      activities
            
            
            (569
            )
            
            (10,109)
            
            
            (10,678
            )Investing
      activities
            
            
            (16,304
            )
            
            10,109
            
            
            (6,195
            )Balance
      Sheet as at December 31, 2006:Resource
      interests
            
            
            26,700
            
            
            (21,885)
            
            
            4,815Other
      long-term assets
            
            
            -
            
            
            395
            
            
            395Future
      income tax liability
            
            
            (1,134
            )
            
            1,134
            
            
            -Share
      capital
            
            
            59,994
            
            
            (629)
            
            
            59,365Deficit
            
            
            (12,689
            )
            
            (19,727)
            
            
            (32,416
            )Statement
      of Operations, Comprehensive Income and Deficit for the year ended
      December 31, 2006:Mineral
      exploration and development costs
            
            
            -
            
            
            (8,027)
            
            
            (8,027
            )Write-off
      of mining equipment
            
            
            (27
            )
            
            27
            
            
            -Future
      income taxes income
            
            
            -
            
            
            1,763
            
            
            1,763Net
      loss / Comprehensive loss for year
            
            
            (1,486
            )
            
            (6,237)
            
            
            (7,723
            )Loss
      per share – basic and diluted
            
            
            (0.02
            )
            
            (0.06)
            
            
            (0.08
            )Statement
      of Cash Flows for the year ended December 31, 2006:Operating
      activities
            
            
            (262
            )
            
            (7,871)
            
            
            (8,133
            )Investing
      activities
            
            $
            (24,231
            )
            $
            7,871
            
            $
            (16,360
            )





71


Net
loss





For the
year ended December 31, 2008, the Company reported a net loss of $4.228 million
compared to losses of $9.483 million and $7.723 million for the years ended
December 31, 2007 and 2006.  The reduced loss in 2008 was primarily
attributable to the completion in 2007 of the Company’s extensive underground
decline development and drilling exploration program at Prairie
Creek.  There were no such programs in 2008.





Mineral
Exploration and Development Costs





For the
year ended December 31, 2008, the Company expensed $3.426 million on its mineral
exploration and development programs at Prairie Creek compared to $11.050
million for the year ended December 31, 2007 (2006 - $8.027
million).  Excluding accretion and depreciation charges relating to
the asset retirement obligation and mining plant and equipment of $248,000 in
the year ended December 31, 2008 (2007 - $220,000; 2006 - $129,000), the
exploration and development expenditures for Prairie Creek amounted to $3.178
million in 2008 compared to $10.830 million in 2007 and $7.898 million in
2006.  Details of the mineral exploration and development costs are
shown in Note 10 to the audited financial statements for the year ended December
31, 2008.





The
overall decrease in expenditures relates to the lower level of activities at the
Prairie Creek Mine following completion, in late 2007, of the underground
decline development and exploration programs which commenced in
2006.  For the year ended December 31, 2008, the Company incurred
drilling and underground exploration costs of $170,000 compared to $6.076
million in the year ended December 31, 2007.  In addition, in April
2008, a cost recovery of $942,000 was received following a final reconciliation
of the 2006/2007 underground contract (see Note 10 to the audited financial
statements as at December 31, 2008).





During
2008, the Company incurred $862,000 (2007 - $694,000) relating to permitting and
environmental matters. These expenditures included costs related to filing the
applications for operating permits at Prairie Creek, as well as liaising with
local communities and Parks Canada, among others.  As described in
this Annual Report at “Item 4.D.--Property, Plant and Equipment--10.Permitting
at Prairie Creek,” the Company considers that it has made continued progress in
this area.  However, the process for obtaining operating permits in
the Mackenzie Valley in general and relating to the Prairie Creek Mine in
particular, has been marked by long delays and this extended process is expected
to continue.  The Company intends to continue to work through the
process for obtaining operating permits in 2009 and expects that there will be
significant costs associated with the process.  Given the open-ended
nature of the permitting process, the Company is not able to provide, with any
reasonable assurance, an estimate as to the total costs for obtaining operating
permits.





The 2007
program included the continuation of the underground drilling program which
commenced in 2006.  Underground drilling was carried out from drill
stations at 50 metre intervals along a new 400 metre internal
decline.  Phase 1 of the drilling program was completed in early June
2007 and consisted of 400 metres of decline development from which 41 drill
holes, of which 40 intersected mineralization, totaling 8,217 metres of drilling
from six drill stations have been completed.  The results of the Phase
1 program were incorporated into a Technical Report dated October 12, 2007 which
was prepared in accordance with the standards in National Instrument 43-101 as
described at “Item 4.D--Property, Plant and Equipment--7. 2007 Resource
Estimation.”





Phase 2
of the underground exploration program commenced in August 2007, with the
completion of a further 200 metre extension of the underground decline to create
additional underground drill stations.  The underground drilling
program from the new drill stations commenced in late September 2007 and
continued until December 2007.  Ten holes totaling 2,407 metres of
coring were completed, all of which intersected mineralization.





Between
July and early September 2007, the Company also carried out a surface helicopter
supported diamond drill exploration program totaling 1,671 metres of core in 12
holes.  This reconnaissance drilling program was targeted in the Gate
Claims, located about 5 kilometres west of the Prairie Creek minesite, and
in


72


Zones 8,
9 and 11 located on the same Prairie Creek geological structure as the minesite
but located 5 – 10 kilometres south of the minesite.  No significant
mineral intersections were encountered.  The data from this drill
program is currently being incorporated into the Prairie Creek property dataset
in order to determine future exploration strategy.





During
2006, the Company expended $7.898 million (excluding amortization and accretion)
on exploration and development on the Prairie Creek Property, the principal
components of which were underground exploration and drilling.  The
Company also expended $205,000 on lease and property abandonment
deposits.  The 2006 programs included sinking a new internal decline
about 400 metres long from the end of the existing workings on the 870 metre
level, from which new drill stations were established at 50 metre
intervals.





During
2006, a new bulk metallurgical sample was collected from multiple headings of
the vein within the existing underground development.  These samples
were composited and blended to create representative samples of the ore that
will provide feed to a future operating mill.





In 2006,
a surface diamond drill exploration program was started in Zone 8 located a
distance of 5 kilometres south of the minesite.  This drill program
totaled 600 m in 2006 and returned significant mineralized intercepts which were
followed up on in the 2007 work program.





Revenue
and Interest Income





The
Company is in the exploration and development stage and does not generate any
cash flows from operations.  For the purposes of the United States
regulatory requirements and United States Generally Accepted Accounting
Principles the Company is considered to be an exploration stage
enterprise.  To date the Company has not earned any significant
revenues other than interest income and related investment
income.  Investment income for the year ended December 31, 2008 was
$899,000 compared to $1.234 million in 2007 and $948,000 in 2006.  The
decrease in 2008 is attributable to the overall decrease in amounts available
for investment during the year ended December 31, 2008 compared to the prior
year.  There has also been a significant decline in interest rates
during the second half of the 2008 fiscal year as a result of the current global
recession which has seen central banks cut rates to historically low
levels.  The increase in investment income for the 2007 year compared
to 2006 arose as a result of higher levels and cash and cash equivalents
following private placements at which common shares were issued.





Administrative
Expenses





Administrative
expenses (excluding stock based compensation and depreciation) for the year
ended December 31, 2008 were $1.445 million compared to $1.724 million in the
year ended December 31, 2007.  The decrease was largely attributable
to lower office and general costs (2008 - $360,000; 2007 - $463,000) due to tax
charges relating to the Company’s flow-through share program in 2007 which were
not incurred in 2008 and the Company’s decision in 2008 to cut-back its
expenditures on investor relations items (2008 - $230,000; 2007 -
$420,000).  The Company’s professional fees costs reduced from
$396,000 in 2007 to $220,000 in 2008 while management and directors fees
increased from $347,000 in 2007 to $566,000 in 2008.  The increase in
management and director fees and decrease in professional fees arose as a result
of staffing increases within CZN that reduced the need to use professional
advisors.





Administrative
expenses for 2007 (excluding stock-based compensation, write-down of marketable
securities (2007) / mining equipment (2006) and amortization) were $1.724
million compared to $1.381 in 2006. The increase was largely attributable to
increased activity in shareholder and investor communications in
2007.





Reclamation
Expenditures





In 2008, the Company incurred $366,000
removing drums of sodium cyanide from Prairie Creek for destruction as described
at “Item 4.D.--Property, Plant and Equipment--11. Environmental
Considerations-


73


Hazardous
Materials.”  In 2007, the Company spent $246,000 (2006 - $Nil) on a
work program to repackage these hazardous materials stored at the Prairie Creek
site in order to facilitate their future removal and
destruction.  These expenditures were applied against the asset
retirement obligation as disclosed in Note 12 to the audited financial
statements as at December 31, 2008.





Other
non-cash expenses





In 2008,
the Company recorded an expense for stock-based compensation of $205,000
relating to the vesting of stock options granted in prior periods to directors,
officers, employees and contractors.  The amount charged in 2007
relating to stock-based compensation was $267,000.  The stock-based
compensation expense for 2007 and 2008 relates to the same grant of stock
options in October 2007 for which the expense was recognized over the vesting
period for the options granted.  The stock-based compensation expense
value was calculated using the Black-Scholes valuation method and assumptions as
described in the “Item 5.A.--Operating Results--Critical Accounting Policies and
Estimates” section to this Annual Report (below).  The assumptions
used in the calculation are described in Note 14(a) to the audited financial
statements at December 31, 2008.  In 2006, the Company recorded
stock-based compensation expense of $1.023 million for stock option
grants.





The
Company expensed depreciation costs relating to mining plant and equipment of
$168,000 (2007 - $143,000; 2006 - $51,000). The increase in depreciation
relating to plant and equipment arose as a result of equipment purchases in
January 2008 that have been amortized during fiscal 2008.





The
Company recorded an unrealized loss on its marketable securities of $38,000 in
the year ended December 31, 2008 (2007 - $150,000; 2006 - $Nil).  All
the Company’s marketable securities were designated as held for trading assets
by the Company upon the adoption, on January 1, 2007, of new accounting
standards relating to financial instruments as described in more detail in “Item
5.A. --Operating Results--Critical Accounting Policies and Estimates” section to
this Annual Report.  The unrealized loss on the marketable securities
is based upon the market value of the shares at December 31,
2008.  Further details relating to the Company’s marketable securities
are included in Note 6 to the audited financial statements for the year ended
December 31, 2008.





Related
      Party Transactions





The
Company’s related party transactions for the year ended December 31, 2008,
consisted of rent for office space paid or payable to corporations with a common
director of the Company in the amount of $19,000 compared to $13,000 in 2007
(2006 - $12,000).  The increase was attributable to increased rent
following relocation of the Toronto office.  Particulars relating to
related party transactions are shown in Note 16 to the audited financial
statements for the year ended December 31, 2008.





Income
Taxes





The
Company is currently not profitable and has recorded a valuation allowance
against its future income tax assets.  Following renouncement of
flow-through share expenditures, the Company recorded future income tax income
as per the reconciliation of income taxes for each of the past three years
below:


74








2008
            
            2007*
            
            2006*Statutory
      tax rate
            
            31.00%
            
            34.12%
            
            35.01%Recovery
      of income taxes computed at statutory rates
            $
            1,311
            $
            4,084
            $
            3,321Permanent
      differences
            
            (64)
            
            (93)
            
            (361)Expired
      losses
            
            (192)
            
            (162)
            
            (55)Other
            
            (118)
            
            281
            
            479Income
      tax rate changes
            
            (403)
            
            (1,612)
            
            (810)Change
      in valuation allowance
            
            (534)
            
            (11)
            
            (811)$
            -
            $
            2,487
            $
            1,763


* See
description above re restatement arising on accounting policy
change.








The
Company follows the guidance prescribed by the Canadian Institute of Chartered
Accountants Emerging Issues Committee Recommendation 146, “Flow-through Shares,”
such that future income tax income is recognized, and shareholders’ equity
reduced, on the day the Company files the tax documents to renounce expenditures
with the tax authorities.  In 2007, $8 million of such expenditures
were renounced and the documents filed in the quarter ended March 31,
2007.  This resulted in the recovery of future income tax income in
respect of the renounced expenditures of $2.487 million and a corresponding
reduction in shareholder equity.  In 2006, the renounced expenditures
resulted in future income tax income of $1.763 million.





Critical
Accounting Policies and Estimates





The
Company’s financial statements are prepared in accordance with Canadian GAAP and
require management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities (if any).  The
Company’s management makes assumptions that are believed to be reasonable under
the circumstances and that are based upon historical experience, current
conditions and expert advice.  These estimates are reviewed on an
ongoing basis for updated information and facts.  The use of different
assumptions would result in different estimates, and actual results may differ
from results based on these estimates.





A summary
of the Company’s significant accounting policies is included in Notes 2, 3 and 4
to the financial statements for the year ended December 31, 2008.  The
following is a discussion of the accounting estimates that are considered by
management to be significant in determining the Company’s financial results and
position:





Resource
Interests





As
described in this Annual Report at “Item 5.A.--Change in Accounting Policy” and
in Note 2 to the audited financial statements for the year ended December 31,
2008, during 2008, the Company changed its accounting policy relating to
resource interests expenditures whereby exploration and development costs are to
be expensed until such time as either reserves are proven or permits to operate
a mineral resource property are received and necessary financing to complete
development obtained.





75


Impairment
of long-lived assets





The
carrying value of resource interests at December 31, 2008 was $5.053 million
(December 31, 2007 - $4.832 million) and for plant and equipment was $661,000
(December 31, 2007 - $448,000).  Long-lived assets are tested for
impairment whenever events or changes in circumstances indicate the related
carrying amounts may not be recoverable.  Impairment is considered to
exist if total estimated future cash flows or probability-weighted cash flows on
an undiscounted basis are less than the carrying amount of the assets, including
resource interests and plant and equipment.  An impairment loss, if
any, is measured and recorded based on discounted estimated future cash flows or
the application of an expected present value technique to estimate fair value in
the absence of a market price.





At
December 31, 2008, management carried out an impairment review and determined
that, notwithstanding the Company’s history of losses, and based upon best
estimates available, no impairment of the carrying value of resource interests
was indicated.





In
assessing the future estimated cash flows management uses various estimates
including, but not limited to, future operating and capital costs as well as
future commodity prices and estimates based upon indicated and inferred
resources.   By their very nature, there can be no assurance that
these estimates will actually be reflected in the future construction or
operation of the Prairie Creek Mine.  The ultimate recoverability of
amounts deferred for resource interests is dependent upon, amongst other things,
obtaining the necessary financing to complete the development of, and obtaining
the necessary permits to operate, the Prairie Creek mine.





The
Company’s impairment review and testing is carried out under Canadian GAAP which
is substantially similar to U.S. GAAP as issued by the Financial Accounting
Standards Board in Statement of Financial Accounting Standards 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.”





Asset
Retirement Obligation (environmental estimates)





Asset
retirement obligations are recognized in the period in which they are incurred
if a reasonable estimate of fair value can be determined.  The fair
value of the estimated asset retirement cost is capitalized as part of the
carrying amount of the long-lived asset when incurred or revised, and amortized
over the asset’s estimated useful life.  Increases in the asset
retirement obligation resulting from the passage of time are recorded as
accretion expenses.  Actual expenditures incurred are charged against
the accumulated obligation.  Various assumptions are used in
determining the liability including current mine plans, future retirement costs
and estimates of resources.  The estimates used require extensive
judgment as to the nature, cost and timing of the work to be completed and may
change with future changes to cost structures, environmental laws and
requirements and remediation practices employed.  Management evaluates
the asset retirement obligation estimates at the end of each reporting period to
determine whether the estimates continue to be appropriate.





As at
December 31, 2008, the Company estimates that the total undiscounted cash flows
required to settle the reclamation and remediation obligations at the Prairie
Creek Property are $2.383 million (2007 - $2.528 million), mostly to be incurred
at the end of the life of the mine.  These cash flows have been
determined to have a present value of $1.162 million (2007 - $1.228 million)
based upon the following assumptions: long-term inflation rate of 2.5%; a
credit-adjusted risk-free discount rate of 6.5%; and a weighted average useful
life production facilities and equipment of ten years.





76


Stock
Based Compensation





The
Company applies the fair-value method of accounting for stock-based compensation
in accordance with the recommendations of CICA 3870, “Stock-based Compensation
and Other Stock-based Payments.”  Stock-based compensation expense is
calculated using the Black-Scholes option pricing model
(“Black-Scholes”).  Black-Scholes requires management to make various
estimates and assumptions that impact the value assigned to the option expense
including the predicted future volatility of the stock price, the risk free
interest rate, dividend yield and the expected life of the
options.  Management has used the following assumptions for its
Black-Scholes calculations:





Years
      ended December 31,2008*
            2007
            2006Dividend
      yield
            N/a
            0%
            0%Risk
      free interest rate
            N/a
            4.07%
            4.02%Expected
      life
            N/a
            5
      years
            5
      yearsExpected
      volatility
            N/a
            89%
            101%


* No
stock options were granted in 2008.  Stock-based compensation expense
during 2008 related to options granted in 2007.





Any
change in the assumptions used could have a material impact on the fair value of
the stock-based compensation value.  In addition, the Black-Scholes
option pricing model was developed for options that have characteristics that
are materially different to the Company’s stock options, and for purposes other
than to determine the fair value to be assigned to stock
options.  Accordingly, the use of a Black-Scholes valuation model may
not always result in the determination of a compensation value that appears
appropriate or reasonable in the circumstances, for example, the model may
determine that a stock option grant at $0.30 per share is of higher value than a
grant at $0.15 per share (where the grant price is assumed to equal market value
and all other factors remain unchanged).





Financial
Instruments





As
disclosed in Note 3 to the audited financial statements for the year ended
December 31, 2008, the Company elected to classify its marketable securities,
short term investments and cash and cash equivalents as held for trading assets,
which requires that gains or losses from changes in fair value are taken
directly to net income, as this was considered the most appropriate
classification.  Should a different classification have been
determined, it is possible that such gains or losses would have been included in
other comprehensive income instead of net income.





The
Company has also included note disclosure concerning some of the risk factors
relating to its financial instruments – see Note 18 to the audited financial
statements for the year ended December 31, 2008.





Changes
in Accounting Policy Including Initial Adoption and International Financial
Reporting Standards (IFRS”)





As noted
in this Annual Report in the section “Change in Accounting Policy,” during the
year ended December 31, 2008, the Company retrospectively changed its accounting
policy for its exploration and development expenditures to align itself with
industry practice, U.S. GAAP and the anticipated future direction of
IFRS.





In
addition, the Company adopted various new accounting standards, as described
below, during the year ended December 31, 2008.





On
January 1, 2008, the Company adopted the recommendations included in the
following Sections of the CICA Handbook: Section 1400, “General Standards of
Financial Statement Presentation,” Section 1535,


77


“Capital
Disclosures,” Section 3862, “Financial Instruments – Disclosure” and Section
3863, “Financial Instruments – Presentation.”  Additional information
on the adoption of these accounting standards can be found in Note 4 to the
audited financial statements for the year ended December 31, 2008.





In
February 2008, the CICA Accounting Standards Board confirmed that the use of
IFRS will be required in 2011 for public companies in Canada (i.e., IFRS will
replace Canadian GAAP for public companies).  The official changeover
date will apply for interim and annual financial statements relating to fiscal
years beginning on or after January 1, 2011.  The Company is currently
assessing the impact implementation of IFRS will have on its financial
statements through, among other items, initial review of IFRS standards
currently in place and a “diagnostic” of the impact on the Company’s current
accounting policies.  However, the financial reporting impact of the
transition cannot be reasonably estimated at this time.  The Company
is also ensuring that certain key individuals involved in its financial
reporting processes, and moving forward, the implementation of IFRS, receive
adequate training in IFRS, primarily through use of available
courses.





Additional
information on the adoption of these accounting standards, and on proposed
future standards, can be found in Note 4(d) to the audited financial statements
as at December 31, 2008.





Recently
Released Canadian Accounting Standards





Recent
accounting pronouncements that have been issued but are not yet effective, and
which may affect the Company’s financial reporting under Canadian GAAP, are
summarized below.





The CICA
has issued several new standards which may affect the financial disclosures and
results of operations of the Company for interim and annual periods beginning
January 1, 2009.  The Company will adopt the requirements commencing
in the interim period ended March 31, 2009.





Section
3064, Goodwill and Intangible Assets





In
February 2008, the CICA issued this new Section 3064 to replace Section 3062,
“Goodwill and Other Intangible Assets” and establish standards for the
recognition, measurement and disclosure of goodwill and intangible
assets.  In addition, the CICA issued amendments to Section 1000,
“Financial Statement Concepts” and Accounting Guideline 11, “Enterprises in the
Development Stage” and withdrew Section 3450, “Research and Development
Costs.”  Furthermore, Emerging Issues Committee (EIC) Abstract 27,
“Revenues and Expenditures during the Pre-operating Period” is no longer
applicable for companies that have adopted CICA 3064.  The mandatory
effective date is for annual and interim financial statements for years
beginning on/after October 1, 2008 (i.e., January 1, 2009).  The
Company does not believe that Section 3064 will have a significant impact on its
financial statements under current operating conditions but could have an impact
on the future accounting treatment of expenditures on mineral property
development once mineral reserves have been proved or an operating permit
received and financing for development obtained (see Notes 3(h) and
3(i)).





Sections
1582, Business Combinations, 1601, Consolidations and 1602, Non-controlling
Interests





In
January 2009, the CICA issued these new sections to replace Section 1581,
“Business Combinations” and Section 1600, “Consolidated Financial
Statements.”  Section 1582 will apply to a transaction in which the
acquirer obtains control of one or more businesses (as defined in the
Section).  Most assets acquired and liabilities assumed, including
contingent liabilities that are considered to be improbable, will be measured at
fair value.  A bargain purchase will result in the recognition of a
gain.  Acquisition costs will be expensed.  Any
non-controlling interest will be recognized as a separate component of
shareholders’ equity and net income will be allocated between the controlling
and non-controlling interests.  These new standards will apply to
fiscal years beginning on or after January 1, 2011.  The Company does
not believe that these new Sections will have an impact on its financial
statements unless the Company enters into a business acquisition subsequent to
January 1, 2011.


78


Comparison
of Canadian GAAP and United States GAAP as applicable to the Company’s
operations.





For the purposes of U.S. GAAP the
Company is considered to be an Exploration Stage Enterprise.  The
Company’s financial statements for the year ended December 31, 2008, have been
prepared in accordance with Canadian GAAP which differs in certain material
respects from U.S. GAAP.  The material differences between Canadian
and U.S. GAAP, in respect of the financial statements for the year ended
December 31, 2008, are summarized as follows:





Balance
      Sheets





2008
            
            
            2007
            *Share
      capital (Canadian GAAP)
            $
            65,621
            
            $
            65,964Increase
      due to future income tax recovery on renouncement of flow-through shares
      (c)
            
            4,250
            
            
            4,250Decrease
      due to flow-through share premium paid in excess of market value
      (c)
            
            (1,531
            )
            
            (1,531
            )Share
      capital (U.S. GAAP)
            $
            68,340
            
            $
            68,683Deficit
      (Canadian GAAP)
            $
            (46,127
            )
            $
            (41,899
            )Increase
      due to future income tax recovery on renouncement of flow-through shares
      (c)
            
            (4,250
            )
            
            (4,250
            )Decrease
      due to flow through share premium paid in excess of market value
      (c)
            
            1,531
            
            
            1,531Deficit
      (U.S. GAAP)
            $
            (48,846
            )
            $
            (44,618
            )





Statements of
      Operations





2008
            
            
            2007
            *
            
            2006
            *Net
      loss and comprehensive loss (Canadian GAAP)
            $
            (4,228
            )
            $
            (9,483
            )
            $
            (7,723
            )Flow
      through share premium reversal (c)
            
            -
            
            
            1,531
            
            
            -Future
      income tax recovery elimination (c)
            
            -
            
            
            (2,487
            )
            
            (1,763
            )Net
      loss and comprehensive loss (U.S. GAAP)
            $
            (4,228
            )
            $
            (10,439
            )
            $
            (9,486
            )Loss
      per share
              -
      basic and diluted (U.S. GAAP)
            $
            (0.04
            )
            $
            (0.09
            )
            $
            (0.10
            )Weighted
      average number of common shares outstanding
              -
      basic and diluted (U.S. GAAP)
            
            120,440,062
            
            
            113,429,078
            
            
            94,734,979





* See
“Item 5.A.--Change in Accounting Policy” for description of change in accounting
policy under Canadian GAAP.





(a) Resource
Interests





During 2008, the Company adopted an
accounting policy, under Canadian GAAP, whereby exploration and development
costs are to be expensed until such time as either mineral reserves are proven
or permits to operate a mineral resource property and financing to complete
development are received.  This change in accounting policy was
adopted on a retrospective basis with restatement of the comparative periods
presented.  Previously, the Company capitalized such expenditures as
incurred which is permitted under Canadian GAAP.  U.S. GAAP requires
that exploration costs relating to resource interests be expensed until there is
substantial


79


evidence
of economically recoverable resources.  Accordingly, there is no GAAP
difference for the years ended December 31, 2008, 2007 and 2006.  For
the purposes of U.S. GAAP, the Company is considered to be an Exploration Stage
Enterprise.





(b) Income
Taxes





Under Canadian GAAP, future income
taxes are calculated based on enacted or substantively enacted tax rates
applicable to future years.  Under U.S. GAAP, only enacted rates are
used in the calculation of future income taxes.  This difference in
GAAP did not result in a difference in the financial position, results of
operations or cash flows of the Company for the years presented in the financial
statements for the year ended December 31, 2008.





(c) Flow-through
Shares





Under Canadian GAAP, no liabilities
are recorded on flow-through shares until expenditures have been
renounced.  Under U.S. GAAP, a liability on flow-through shares is
required at the time such shares are issued for the excess of the shares over
quoted market value.  This liability is reversed and a deferred tax
liability is recognized for U.S. GAAP when the expenditures are
renounced.  Under U.S. GAAP, unexpended flow-through funds as at the
balance sheet date are separately classified as restricted cash.  At
December 31, 2008, there were $Nil in unexpended flow-through funds (2007 -
$Nil).





(d) Newly Adopted Accounting
Pronouncements





Fair
Value Accounting





In September 2006, the Financial
Accounting Standards Board (“FASB”) issued FASB Statement No. 157, “Fair
Value Measurements” (“FAS 157”).  FAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements.  The provisions of FAS 157 were adopted January 1,
2008.  In February 2008, the FASB staff issued Staff Position
No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS
157-2”).  FSP FAS 157-2 delayed the effective date of FAS 157 for
non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).  The provisions of FSP FAS 157-2 are
effective for the Company’s fiscal year beginning January 1,
2009.





In October 2008, the FASB issued FSP
No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active” (“FSP FAS 157-3”), which clarifies the application
of FAS 157 in an inactive market.  The intent of this FSP is to
provide guidance on how the fair value of a financial asset is to be determined
when the market for that financial asset is inactive.  FSP FAS 157-3
states that determining fair value in an inactive market depends on the facts
and circumstances, requires the use of significant judgment and in some cases,
observable inputs may require significant adjustment based on unobservable
data.  Regardless of the valuation technique used, an entity must
include appropriate risk adjustments that market participants would make for
non-performance and liquidity risks when determining fair value of an asset in
an inactive market.  FSP FAS 157-3 was effective upon
issuance.  The Company has incorporated the principles of FSP FAS
157-3 in determining the fair value of financial assets when the market for
those assets is not active.





FAS 157 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value.  The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements).  The three levels of the fair value hierarchy under
FAS 157 are described below:





Level 1 -
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities;


80




Level 2 -
Quoted prices in markets that are not active, or inputs that are observable,
either directly or indirectly, for substantially the full term of the asset or
liability;





Level 3 -
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (supported by little or no market
activity).





In February 2007, the FASB issued
FASB Statement No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“FAS 159”).  FAS 159 permits entities to
choose to measure eligible financial instruments and other items at fair
value.  The provisions of FAS 159 were adopted January 1,
2008.  The Company did not elect the Fair Value Option for any of its
financial assets or liabilities, and therefore, the adoption of FAS 159 had no
impact on the Company’s financial position, results of operations or cash
flows.





(e) New Accounting
Pronouncements





Business
Combinations





In December 2007, the FASB issued
FASB Statement No. 141(R), “Business Combinations” (“FAS 141(R)”) which retains
the requirements that the acquisition method of accounting be used for all
business combinations and for an acquirer to be identified for each business
combination.  Among the significant changes that FAS 141(R) makes to
how the acquisition method is applied include (a) measuring the assets acquired,
the liabilities assumed, and any non-controlling interest at their fair values,
(b) recognizing assets acquired and liabilities assumed arising from
contingencies, (c) recognizing contingent consideration at the acquisition date,
measured at its fair value and (d) recognizing a gain in the event of a bargain
purchase (instead of negative goodwill).  FAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period that commences on or
after December 15, 2008 (i.e., January 1, 2009 for the Company).  The
Company does not believe that FAS 141(R) will have an impact on its financial
statements unless the Company enters into a business acquisition subsequent to
January 1, 2009.





Derivative
Instruments and Hedging Activities





In March 2008, the FASB issued FASB
Statement No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” (“FAS 161”) which requires enhanced disclosures about how and why a
company uses derivative and hedging activities.  FAS 161 is effective
for financial statements issued for years beginning after November 15, 2008
(i.e., January 1, 2009 for the Company).  The Company does not expect
the adoption of FAS 161 to have a significant impact on the Company’s financial
statements.





Hierarchy
of Generally Accepted Accounting Principles





In May 2008, the FASB issued FASB
Statement No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“FAS 162”) which identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of non-governmental entities that are presented in
conformity with GAAP.  FAS 162 is effective 60 days following the
Security and Exchange Commission’s (“SEC”) approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with GAAP.”  The Company does not expect
the adoption of FAS 162 to have an impact on the Company’s financial position,
results of operations or cash flows.





81


B.           Liquidity
and Capital Resources





As at
December 31, 2008, the Company had cash and cash equivalents of $9.225 million,
short term investments of $11.723 and marketable securities of $2.024 million
(for a total of $22.972 million).  The Company also had a positive
working capital balance of $22.557 million.  As at December 31, 2007,
the Company had cash and cash equivalents of $6.919 million, short term
investments of $21.495 million, marketable securities of $100,000 and a positive
working capital balance of $27.432 million.  The Company’s short term
investments consist primarily of Bankers’ Acceptances and Guaranteed Investment
Certificates; the Company does not hold, and has never held, any asset-backed
commercial paper.  The Company’s accounts payable and accrued
liabilities at December 31, 2008 were $511,000 compared to $1.254 million as at
December 31, 2007.  This decrease follows the termination of the
exploration program (in late 2007) and a reduced level of activity at the
Prairie Creek Mine Site during the final quarter of the year ended December 31,
2008.





Canadian
Zinc does not generate any cash flows from operations and has no income other
than investment income.  The Company relies on equity financings to
fund its working capital requirements and planned exploration, development and
permitting activities.





In light
of the current global financial market turmoil and uncertainty, towards the end
of 2008, the Company performed a review of planned programs and activities for
2009 with a view to preserving cash used in operations as much as possible while
still working towards obtaining permits to operate the Prairie Creek
Mine.  Accordingly, the Company has implemented a number of cost
saving measures and continues to review other avenues whereby additional costs
can be saved.  Some of the steps implemented by the Company included
reducing the workforce at the Prairie Creek Mine and ceasing active development
operations at the Mine site to focus on the permitting process and limiting
other expenditures presently deemed non-essential such as a portion of the
investor relations program.





The
Company has reviewed its planned expenditures for 2009 and is confident that it
has capital resources that are adequate to support its current operations for
the next twelve months and short to medium-term plans.  The Company
anticipates that total expenditures will be reduced for 2009 compared to 2008
such that, given current capital resources on hand, the Company can continue to
operate for several years in its current form.  However, the Company’s
expenditures could increase significantly in the short-term due to factors
beyond the Company’s control, such as regulatory matters associated to the
permitting process, and in particular, the possibility that external
consultants’ time may be required.  CZN cannot predict all costs that
may be required as a result of external conditions imposed upon it and these
expenditures could cause the Company’s cash and cash equivalents resources to be
depleted at a faster rate than currently anticipated.





The
Company also entered into transactions, in April and May 2009, to acquire shares
of Vatukoula Gold Mines Plc and an option on the Tuvatu Gold Project, as
described in this Annual Report at “Item 4.B--Business Overview,” which will
lead to an increased rate of cash consumption





Additional
capital will be required in the future to bring the Prairie Creek Mine into
production.  .  If additional capital is needed in the
future to continue operations, the Company will primarily seek capital through
equity financings; however, such financing may not be available to the Company
on acceptable terms or at all due to factors outside the control of the Company,
including the then current condition of the financial markets.  If
equity financing is not available, the Company may consider alternative sources
of financing including debt instruments.  The ability to raise
additional finance may be impaired, or such financing may not be available on
favorable terms, due to conditions beyond the control of the Company, such as
continued uncertainty in the capital markets and depressed commodity prices, or
the conditions imposed upon the Company in its operating
permits.  This is discussed in more detail in the “Item 3.D--Risk
Factors” section in this Annual Report.  The Company currently
anticipates that, depending on final design and operating permit conditions, the
additional capital required to install the planned new facilities and to bring
the Prairie Creek Mine into production will be in the area of $80 – 100
million.


82


In
October 2008, the Company reviewed its current investment portfolio and
strategy.  During this review, it was noted that the rates of return
for Bankers’ Acceptances and Guaranteed Investment Certificates had declined
significantly during the course of 2008.  The Company determined that
it was appropriate to allocate a portion of its investments to equities in order
to seek a better return on its capital resources.  A total of
approximately $2 million was invested in the equity stock of a number of major
mining companies during late 2008.  The Company considers that these
marketable securities, while acquired as part of a medium-term investing
strategy, are highly liquid assets in view of the average trading volumes of
such companies’ shares.  However, CZN’s ability to realize these
investments (and make a gain) is dependent on the performance of the companies’
shares that have been acquired, which is not certain.





Outlook





The
information set forth below consists primarily of forward-looking statements.
You should refer to the information under the caption “CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS” included in this Form 20-F in considering
those statements.





For 2009,
Canadian Zinc’s primary focus will be to move forward in the permitting process
for the operating permits for the Prairie Creek Mine that were applied for in
2008.  This is likely to be a lengthy process, as illustrated in this
Annual Report in the section at “Item 4.D.--Property, Plant and Equipment--10.
Permitting at Prairie Creek.”  This is a key step as the Company moves
the Prairie Creek project towards commercial production.  In light of
the likely extended timeframe that the permitting process will require, the
Company has determined that it will limit expenditures at Prairie Creek for the
immediate future, with the exception of continuing to carry out projects and
studies that will be of assistance for the EA process and also in determining
and refining future anticipated mine plans.  Given the open-ended
nature of the Mackenzie Valley permitting process, the Company cannot, with any
reasonable assurance at this point in time, provide a detailed estimate as to
the likely costs of permitting activities in 2009.





The
Prairie Creek mine site re-opened in mid May 2009 and it is currently
anticipated that the main focus for 2009 will be to continue rehabilitating the
winter road which connect the Prairie Creek Mine to the Liard
Highway.





When the
Company receives its operating permits, which is not a certain event, additional
finance will be required to bring the mine into commercial
production.  This will be very dependent on future market conditions,
especially with regard to commodity prices, which may impact the Company’s
ability to complete development of Prairie Creek.  The Company is
currently evaluating the cost of the future development required at Prairie
Creek and currently estimates that an additional $80 - 100 million will be
required.  This number, however, is highly uncertain and could
materially change based on final project design, permitting conditions and
economic circumstances at that time.





The
Company has utilized a portion of its treasury to take advantage of certain
investment opportunities that presented themselves, as described at “Item
4.B--Business Overview, ” relating to the acquisition of shares in Vatukoula
Gold Mines Plc and an option on the Tuvatu Gold Project.





C.           Research
and Development, Patents and Licenses, etc.





The Company has not engaged in
significant research and development activities during the last three
years.





83


D.           Trend
Information





See “Item
5.A.--Operating Results” and “Item 5.B--Liquidity and Capital Resources” for
discussion of the most significant recent trends in the Company’s business since
the last fiscal year.





Summary Quarterly Results
(Unaudited):


(thousands of dollars except per share
amounts)


Quarter
      ended
            Interestincome$
            Net
      (Loss) $
            Net
      (Loss) per Common Share  $December
      31, 2008
            201
            (1,075)
            (0.01)September
      30, 2008*
            184
            (1,671)
            (0.015)June
      30, 2008*
            218
            (1,131)
            (0.01)March
      31, 2008*
            296
            (351)
            (0.005)December
      31, 2007*
            208
            (2,658)
            (0.02)September
      30, 2007*
            375
            (4,922)
            (0.04)June
      30, 2007*
            331
            (2,510)
            (0.025)March
      31, 2007*
            320
            607
            (0.005)





* The
quarterly results for 2007 and up to September 30, 2008 have been presented
after restatement for the Company’s change in accounting policy as described in
this Annual Report.  Please refer to the section titled “Item
5.A.—Operating Results--Change in Accounting Policy.”





The
Company’s investment income has generally decreased as a result of lower cash,
cash equivalents and short-term investment balances over the past eight quarters
as the Company has funded its activities.  There have been no private
placements since July 2007.  In addition, there has been a significant
decline in the rate of return for such investments as the current global
economic crisis has unfolded.





The
Company’s net loss and expenditures in 2007 were significantly higher than in
2008 as a result of the underground development and exploration work that was
ongoing at Prairie Creek until the end of 2007.  The majority of this
work was completed in the summer months to take advantage of the milder weather
at that time of year.  The income reported in the quarter ended March
31, 2007, relates to the future income tax income arising on renouncement of
flow-through expenditures.





During
the fourth quarter of 2008, the Company was primarily focused on its permitting
activities related to its applications for operating
permits.  Activities at Prairie Creek continued until mid-December
2008 at which time the Mine Site was closed for the winter.  The
Company pursued a number of key studies on operations at the Prairie Creek site
which will be important to the permitting process and the proposed operations
such as a locked cycle metallurgical test, water treatment studies and analysis
of waste tailings product.  The Company also completed its road
rehabilitation work along the Prairie Creek riverbed during the fourth quarter
of 2008.





84


E.           Off-Balance
Sheet Arrangements





Canadian Zinc has no off-balance
sheet arrangements such as guarantees, derivative securities, retained interests
or variable interests that will or could have a material effect on the Company’s
financial condition, interest income and expenses, results of operations,
liquidity, capital expenditures and capital resources.





F.           Tabular
Disclosure of Contractual Obligations





The
following is a schedule reflecting our aggregate financial commitments as of
December 31, 2008:





($’000s)
            Payment
      due by periodContractual
      Obligations
            Total
      (CDN$)
            Less
      than 1 year
            1-3
      years
            3-5
      years
            More
      than 5 yearsOperating
      Lease Obligation (1)
            497
            149
            270
            78
            -Asset
      Retirement Obligation (2)
            2,383
            -
            -
            -
            2,383Total
            2,880
            149
            270
            78
            2,383





(1)
            Represents
      rent obligations under operating leases for office space and
      equipment.


(2)
            The
      asset retirement obligation represents the undiscounted value of total
      payments of $2.383 million which are anticipated to be predominantly
      incurred at the end of the life of the Prairie Creek
  Mine.





The table
above does not include the annual fees related to the Company’s mining leases,
surface leases and mineral claims which total approximately $45,000 per annum
and property taxes of approximately $30,000 per annum.





85


G.
            Safe
      Harbor





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





Statements
about expected completion dates of acquisitions/transactions, feasibility
studies, anticipated commencement dates of mining or metal production
operations, projected quantities of future metal production and anticipated
production rates, operating efficiencies, costs and expenditures, business
development efforts, the need for additional capital and the Company's
production capacity are not guarantees of future performance and are subject to
certain risks, uncertainties and assumptions that are difficult to
predict.  Therefore, the Company's actual results could differ
materially and adversely from those expressed in any forward-looking statements
as a result of various factors.  You should not place undue reliance
on these forward-looking statements.





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





The
Company cautions that the list of factors set forth above is not
exhaustive.  Some of the risks, uncertainties and other factors which
negatively affect the reliability of forward-looking information are discussed
in the Company's public filings with the Canadian securities regulatory
authorities, including its most recent annual report, quarterly reports,
material change reports and press releases, and with the United States
Securities and Exchange Commission (the “SEC”).  In particular, your
attention is directed to the risks detailed in “Item 3.D.--Key Information--Risk
Factors” and similar discussions in the Company's other SEC and
Canadian  filings concerning some of the important risk factors that
may affect its business, results of operations and financial
conditions.  You should carefully consider those risks, in addition to
the other information in this Annual Report and in the Company's other filings
and the various public disclosures before making any business or investment
decisions involving the Company and its securities.





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





86


ITEM 6.
            DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES





A.
            Directors
      and Senior Management




The
shareholders determine, at each annual general meeting, the number of Directors
that will make up the Company’s Board of Directors.  The Directors are
elected by the Company’s shareholders pursuant to the terms of the Company’s
Articles and the terms of its governing legislation, the Business Corporations Act
(British Columbia).  The executive officers are appointed by the Board
of Directors.





The
following sets forth the Directors and officers of the Company at May 12,
2009:





Name,
      Jurisdiction of Ordinary Residence and Position Held with the
      Company
            Age
            Principal
      Occupation During Preceding
              Five
      Years
            Date
      First Became Director of the Company
            Common
      Shares  beneficially owned controlled or directed, directly or
      indirectlyBrian
      A. Atkins
              British
      Columbia, Canada
              Director
            62
            Chartered
      Accountant; Partner at KPMG LLP, Chartered Accountants, from 1978 to 2005;
      Director of North Shore Credit Union; Member of Independent Review
      Committee of Inhance Investment Management Inc.
            June
      2008
            NilJohn
      F. Kearney
              Ontario,
      Canada
              Chairman,
      President, Chief Executive Officer and Director
            58
            Chairman,
      President and Chief Executive Officer of Canadian Zinc Corporation since
      2003; Chairman of Labrador Iron Mines Limited since May 2007; Chairman of
      Conquest Resources Limited since 2001; Chairman of Anglesey Mining plc
      since 1994.
            November
      2001
            1,923,909
      common sharesJohn
      A. MacPherson
              British
      Columbia, Canada
              Director
            65
            Director
      and Chairman of Tower Energy Ltd. until 2007; Private
      Businessman.
            May
      1999
            NilDave
      Nickerson
              Northwest
      Territories, Canada
              Director
            64
            Professional
      Engineer, Mining consultant, Director, Tyhee Development Corp.; previously
      Chairman of Northwest Territories Water Board; Member of Parliament,
      Member of NWT Legislative Assembly; Government Minister
            March
      2004
            17,500
      common sharesAlan
      B. Taylor
              British
      Columbia, Canada
              Vice
      President, Exploration, Chief Operating Officer and
    Director
            52
            Vice
      President, Exploration of Canadian Zinc Corporation since 1999 and Chief
      Operating Officer of Canadian Zinc Corporation since March
      2004.
            March
      2004
            NilMartin
      Rip
              British
      Columbia, Canada
              Chief
      Financial Officer, Vice President, Finance and Secretary (1)
            35
            Chief
      Financial Officer and Vice President Finance of Canadian Zinc Corporation
      since October 15, 2007; Chartered Accountant; former VP Finance and CFO of
      Pine Valley Mining Corporation (February 2005 – June 2007); Senior Manager
      – Grant Thornton LLP (March 2001 – February 2005).
            N/A
            Nil


(1)
Martin Rip was appointed Corporate Secretary of the Company effective March 25,
2008.





As at May 12, 2009, the Directors and
senior officers as a group beneficially own, directly or indirectly,
approximately 1.6% of the outstanding common shares of the Company.





No
arrangement or understanding exists between any Director or member of senior
management and any other person pursuant to which any Director or member of
senior management was elected to such a position with us.





There are
no family relationships among the Company’s directors or senior
management.








87


Cease trade orders,
Bankruptcies.





John
Kearney served as a non-executive director of McCarthy Corporation plc from July
2000 to March 2003. In June 2003, McCarthy Corporation plc proposed a voluntary
arrangement with its creditors pursuant to the legislation of the United
Kingdom.





Martin
Rip served as Chief Financial Officer of Pine Valley Mining Corporation (“Pine
Valley”) which filed for protection under the Companies’ Creditors Arrangement
Act (“CCAA”) on October 20, 2006. Subsequent to filing for CCAA protection, Pine
Valley was suspended from trading on the TSX for failing to meet the minimum
listing requirements. Mr. Rip’s employment with Pine Valley was terminated on
June 29, 2007 as part of the CCAA proceedings.





B.
            Compensation





Compensation
of Executive Officers.





Summary Compensation Table.
The following table (presented in accordance with Canadian National Instrument
51-102F6) sets out total compensation paid in respect of the individuals who
were, at December 31, 2008, the Chief Executive Officer, the Chief Operating
Officer and the Chief Financial Officer of the Company (the "Named Executive
Officers").  No other executive officers of the Company were in
receipt of total compensation in excess of $150,000 during the financial year
ended December 31, 2008.





Name
              And
              Principal
              Position
            Year
            Salary
              ($)
            Share-based
      awards
              ($)
            Option-based
      awards
              ($)
            Non-equity
      incentive plan compensation
              ($)
            Pension
      value
              ($)
            All other compensation
      (2)
              ($)
            Total
      Compensation
              ($)Annual
      incentive plans
            Long-term
      incentive plansJohn
      F. Kearney
              Chairman,
      President and CEO  (1)
            2008
            155,000
              (2)
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            155,000Alan
      B. Taylor
              COO  (1)
            2008
            168,000
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            168,000Martin
      Rip
              CFO
            2008
            144,000
            Nil
            Nil
            Nil
            Nil
            Nil
            Nil
            144,000


(1)
            John
      Kearney and Alan Taylor are directors of the Company but were not
      compensated for services in this
capacity.


(2)
            $30,000
      of the total salary was paid to a private company controlled by John
      Kearney.


(3)
            Perquisites
      have not been included, as the do not exceed 10% of total salary for the
      financial year ended December 31,
2008.





Structure
of Executive Compensation





The
Company does not have a formal compensation plan in place for its Executive
Officers.  The Company is in the exploration and development stage and
does not generate revenues from operations.  Accordingly, the use of
traditional performance standards, such as corporate profitability, is not
considered by the Committee to be appropriate in the evaluation of corporate or
executive performance.





Historically,
the compensation of executive officers of the Company has been comprised
primarily of cash compensation and the allocation of incentive stock
options.  In establishing levels of remuneration and in granting stock
options, an executive's performance, level of expertise, responsibilities,
length of service to the Company and comparable levels of remuneration paid to
executives of other companies of comparable size and development within the
industry are taken into consideration.  Interested executives do not
participate in reviews, discussions or decisions of the Compensation Committee
or the board of directors regarding this remuneration.





While the
Company does not actively benchmark its compensation programs for executive
officers, and the individual components thereof, it does review the compensation
practices of comparable companies to


88


ensure
the compensation that it is paying its executive officers is
competitive.  This has primarily been done through the use of
externally prepared “Compensation Reports,” which are available through certain
consulting firms.  These reports typically include information for
larger mining companies but do assist the Committee and the Company in
determining approximately what salary levels and other benefits are in place
across the industry.





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





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





Other
incentives.  The Company does not have a formal annual
incentive bonus plan in place.  Any award of a bonus to executive
officers is entirely at the discretion of the Board of Directors based upon
recommendation by the Committee.  In considering the payment of a
discretionary bonus to executive officers, the Committee takes into account the
individual performance and efforts of the executive during the year, the
progress made by the Company in furthering its business plan and the overall
economic climate.





The
Company has a health benefit plan that is available to all full-time
employees.  The benefit plan is designed to protect employees’ health
and that of their dependents, and cover them in the event of disability or
death.





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





Defined Benefit or Actuarial
Plan.  The Company does not have a defined benefit or actuarial
plan.





Incentive
plan awards





The
following table shows all awards outstanding to each Named Executive Officer as
at December 31, 2008.





Option-based
      Awards
            Share-based
      AwardsName
            Number
      of securities underlying unexercised options
              (#)
            Option
      exercise price
              ($)
            Option
      expiration date
            Value
      of unexercised in-the-money options
              ($)
            Number
      of shares or units of shares that have not vested
              (#)
            Market
      or payout value of share-based awards that have not vested
              ($)John
      F. Kearney
            1,000,000
              200,000
            0.60
              0.90
            Jan
      14, 2010
              Dec
      13, 2011
            Nil
              Nil
            N/a
            N/aAlan
      B. Taylor
            700,000
              200,000
            0.60
              0.90
            Jan
      14, 2010
              Dec
      13, 2011
            Nil
              Nil
            N/a
            N/aMartin
      Rip
            300,000
            0.94
            Oct
      15, 2012
            Nil
            N/a
            N/a


89


Incentive
plan awards – value vested or earned during the year





The
following table shows all awards outstanding to each Named Executive Officers as
at December 31, 2008.





Name
            Option-based
      awards – Value vested during the year
              ($)
            Share-based
      awards – Value vested during the year
              ($)
            Non-equity
      incentive plan compensation – Value earned during the year
              ($)John
      F. Kearney  (1)
            Nil
            N/a
            NilAlan
      B. Taylor  (1)
            Nil
            N/a
            NilMartin
      Rip  (2)
            Nil
            N/a
            Nil


(1)
            No
      awards vested for John Kearney or Alan Taylor during the year ended
      December 31, 2008.


(2)
            Options
      that vested during the year ended December 31, 2008 were all
      “out-of-the-money” on the vesting date and throughout the
      year.





Stock Option
Plan.





Under the
stock option plan of the Company (the “Stock Option Plan”), options to purchase
common shares of the Company may be granted to employees, officers and directors
of the Company or subsidiaries of the Company and other persons or companies
engaged to provide ongoing management or consulting services (“Service
Providers”) for the Company or any entity controlled by the
Company.  In determining the number of common shares of the Company
subject to each option granted under the Stock Option Plan, consideration is
given to the present and potential contribution by such person or company to the
success of the Company.





Following
amendments made by the Toronto Stock Exchange to its Company Manual effective
January 1, 2005, the Company implemented amendments to its Stock Option Plan to
change the maximum number of common shares which may be made subject to option
from time to time from a fixed number to a rolling maximum of 10% of the
Company's issued and outstanding share capital at the time of
grant.





Pension Plan Benefits. The
Company does not provide any form of group pension plan benefits to employees,
officers or directors.





Termination and
Change of Control Benefits. Except as otherwise disclosed herein, the
Company and its subsidiaries have no compensatory plan or arrangement in respect
of compensation received or that may be received by an executive officer of the
Company in the Company's most recently completed or current financial year to
compensate such executive officer in the event of the termination of employment
(resignation, retirement, change of control) or in the event of a change in
responsibilities following a change in control.




The
Company entered into an Employment Agreement dated effective October 15, 2007
(the “Rip Agreement”) with Mr. Martin Rip for his continuing services as an
officer of the Company commencing on October 15, 2007 in consideration of an
annual salary of $144,000.  Certain provisions in the Rip Agreement
deal with events around termination of employment and change in responsibilities
following a change of control.  Should Mr. Rip’s employment with the
Company be terminated without cause prior to October 15, 2011, Mr. Rip is
entitled to receive six months termination pay at his then current
salary.  If his employment is terminated without cause on or after
October 15, 2011 this amount increases to one year of termination
pay.  In the event of a change of control and subsequent termination
or constructive dismissal within 12 months of the change of control, Mr. Rip is
entitled to receive, in addition to termination pay, a further amount equal to
six months of his then current annual salary.





90


A summary
of the potential payments to Mr. Rip, based on his current salary, are
illustrated below:





Termination without cause prior to
October 15, 2011 - $72,000.


Termination without cause following a
change of control prior to October 15, 2011 - $144,000.





Termination without cause subsequent to
October 14, 2011 - $144,000.


Termination
without cause following a change of control subsequent to October 15, 2011 -
$216,000.





Employment Contracts. The
Company has no contracts with directors or executive officers except for the Rip
Agreement as described above.





Indebtedness of Directors and Senior
Officers. No director or Senior Officer of the Company, or associate or
affiliate of any such director or senior officer is indebted to the
Company.





Director
Compensation





Name
            Fees
      earned
              ($)
            Share-based
      awards
              ($)
            Option-based
      awards
              (4)
              ($)
            Non-equity
      incentive plan compensation
              ($)
            Pension
      value
              ($)
            All
      other compensation
              ($)
            Total
              ($)Brian
      A. Atkins (1)
            10,397
            N/a
            Nil
            Nil
            N/a
            Nil
            10,397Robert
      Gayton (2)
            10,500
            N/a
            Nil
            Nil
            N/a
            Nil
            10,500John
      MacPherson
            16,500
            N/a
            Nil
            Nil
            N/a
            Nil
            16,500Dave
      Nickerson
            18,500
            N/a
            Nil
            Nil
            N/a
            Nil
            18,500Alan
      Savage (3)
            18,500
            N/a
            Nil
            Nil
            N/a
            Nil
            18,500





(1)
            Mr.
      Atkins was appointed as a director of the Company on June 17,
      2008.


(2)
            Mr.
      Gayton served as a director of the Company until June 17,
      2008.


(3)
            Mr.
      Savage resigned from the board on January 29, 2009, subsequent to the year
      reported in the table above.


(4)
            No
      stock options were granted to directors during the year ended December 31,
      2008.




The
Company pays each director, other than directors that are also executive
officers, an annual fee of $10,000 (payable quarterly and pro-rated for partial
months served) plus $500 for each meeting or committee meeting
attended.  The Chair of a committee (i.e. audit or compensation
committee) receives an additional $500 per meeting attended.  An
aggregate of $74,397 was paid to directors for their services as directors
during 2008.





From time
to time, directors may be retained to provide specific services to the Company
and will be compensated on a basis to be negotiated.  There were no
such arrangements in 2008.





91


Share-based
awards, option-based awards and non-equity incentive plan
compensation





The
following table shows all option-based and share-based awards outstanding to
each director, other than those that are also Named Executive Officers, as at
December 31, 2008.





Option-based
      Awards
            Share-based
      AwardsName
            Number
      of securities underlying unexercised options
              (#)
            Option
      exercise price
              ($)
            Option
      expiration date
            Value
      of unexercised in-the-money options
              ($)
            Number
      of shares or units of shares that have not vested
              (#)
            Market
      or payout value of share-based awards that have not vested
              ($)Brian
      A. Atkins
            Nil
            N/a
            N/a
            N/a
            N/a
            N/aJohn
      MacPherson
            400,000
              200,000
            0.60
              0.90
            Jan
      14, 2010
              Dec
      13, 2011
            Nil
              Nil
            N/a
            N/aDave
      Nickerson
            300,000
              200,000
            0.60
              0.90
            Jan
      14, 2010
              Dec
      13, 2011
            Nil
              Nil
            N/a
            N/aAlan
      Savage (1)
            200,000
            0.90
            Dec
      13, 2011
            Nil
            N/a
            N/a





(1)
            Options
      granted to Mr. Savage expired unexercised on April 29, 2009 following his
      resignation as a director on January 29,
2009.




Incentive
plan awards – value vested or earned during the year





The
following table shows all incentive plan awards values vested or earned for each
director, other than those that are Named Executive Officers, during the year
ended December 31, 2008.





Name
            Option-based
      awards – Value vested during the year
              ($)
            Share-based
      awards – Value vested during the year
              ($)
            Non-equity
      incentive plan compensation – Value earned during the year
              ($)Brian
      A. Atkins (1)
            N/a
            N/a
            N/aJohn
      MacPherson (2)
            Nil
            N/a
            NilDave
      Nickerson (2)
            Nil
            N/a
            NilAlan
      Savage (2)
            Nil
            N/a
            Nil





(1)
            No
      awards were granted (or vested) to Mr. Atkins during the year ended
      December 31, 2008.


(2)
            No
      awards vested during the year ended December 31,
  2008.




The
Company has no plans other than the Company's stock option plan previously
referred to herein pursuant to which cash or non-cash compensation was paid or
distributed to directors during the most recently completed financial year or is
proposed to be paid or distributed in a subsequent year.  Directors
are eligible to participate in the stock option plan.  During the
financial year ended December 31, 2008, no stock options were granted to
directors of the Company.





92


C.           Board
Practices





The
Directors hold office for a term of one year or until the next annual general
meeting of the Company, at which time all directors retire, and are eligible for
re-election.  There are three board committees:  the Audit
Committee comprised of Messrs. Atkins, MacPherson and Nickerson; the
Compensation Committee comprised of Mr. MacPherson; and the Health & Safety
Committee comprised of Messrs. Taylor and Nickerson and also the Prairie Creek
Site Managers.  The Audit Committee operates under an Audit Committee
Charter.





Information concerning the length of
each Director’s service is set forth in “Item 6.A--Directors and Senior
Management”.  Except as described in “Item 6.B--Compensation” above,
there are no service contracts with the Company.





Independence of Members of
Board. The Company’s board of directors currently consists of five
directors.  Three of the directors, Brian Atkins, Dave Nickerson and
John MacPherson, being a majority, are considered independent of management and
of any significant shareholder and are considered competent to exercise
independent judgment in carrying out their responsibilities as
directors.  None of these directors have any direct or indirect
material relationship with the Company or have any relationship pursuant to
which they may accept directly or indirectly any consulting, advisory or other
compensatory fees, other than as remuneration for acting in his capacity as a
member of the Board of Directors or any committee thereof.





The
Chairman of the Board, John F. Kearney, is not independent in that he is also
President and Chief Executive Officer of the Company.  Alan B. Taylor
is not independent as he is the Vice-President Exploration and Chief Operating
Officer of the Company.





Until
January 29, 2009, Alan Savage acted as lead director.  No lead
director has been appointed since his resignation from the
Board.  However, the three of the five board members of the Company
are independent and this is considered sufficient at the current time to enable
the Board to carry out its duties and responsibilities.





The
Chairman of each of the Audit Committee and the Compensation Committee is an
independent director, who provides leadership to those committees, and the
Chairman of the Board does not sit on either committee.





Supervision by the Board. The
Chief Executive Officer and Chief Operating Officer report upon the operations
of the Company directly to the Board on a regular basis.  The
independent directors are able to meet at any time they consider necessary
without any members of management, including non-independent directors, being
present.  The Audit Committee is composed of independent directors who
meet with the Company’s auditors, and without management in attendance if
considered necessary or desirable.  The independent directors have
regular and full access to management and are able to meet at any time without
the non-independent directors being present if considered necessary or
desirable.





Board Mandate. The Board does
not have a written mandate. The mandate of the Board is to supervise the
management of the business and affairs of the Company.  As part of its
overall stewardship the Board of Directors assumes responsibility for strategic
planning, identification of the principal risks associated with the Company’s
business and ensuring appropriate management of these risks and making all
senior officer appointments, including responsibility for evaluating
performance, management development and succession planning.





Position Descriptions. The
Board has not developed written position descriptions for the Chair of the Board
or the Chairs of each of the Committees.  The Board is of the view
that the role and responsibilities of the Chair and of the Chairs of the
respective Committees are sufficiently specific that no separate written
position descriptions would be helpful.


93


The
Company does not have an employment contract, or a written position description,
in place with its President and Chief Executive Officer.  The Chief
Executive Officer is responsible for the day to day operations of the Company
and reports directly to the Board of Directors on a regular
basis.  The Board responds to, and if it considers appropriate,
approves with such revisions as it may require, recommendations which have been
brought forward by the Chief Executive Officer.  In addition to those
matters which by law must be approved by the Board, all significant activities
and actions proposed to be taken by the Company including in particular: capital
budgets; financing; property acquisitions or dispositions; senior appointments
and compensation are subject to approval by the Board of Directors.





Orientation and Continuing
Education. The Company does not have a formal orientation or education
program for directors.  New Board members are provided with
information respecting the functioning of the Board of Directors and its
Committees.  In addition, directors receive copies of Board materials,
corporate policies and procedures, and other information regarding the business
and operations of the Company.  Board members are expected to keep
themselves current with industry trends and developments and are encouraged to
communicate with management and, where applicable, auditors and technical
consultants of the Company, and visit the Company’s offices on a regular
basis.  Board members have access to legal counsel to the Company in
the event of any questions or matters relating to the Board members’ corporate
and director responsibilities and to keep themselves current with changes in
legislation.  Board members have full access to the Company’s records
and general industry information and material of interest is circulated to
directors on a regular basis.





Ethical Business Conduct. The
Board assumes responsibility for the Company’s approach to corporate governance
matters.  The Board views good corporate governance and ethical
business conduct as an integral and essential component to the supervision and
management of the Company and to meet responsibilities to shareholders,
employees and other stakeholders.





The Board
has adopted a written code for directors, officers and employees – a copy of
this Code can be found on the Company’s website at www.canadianzinc.com.  The
Code is intended to define the ethical and regulatory standards applicable to
all directors, officers and employees (including contractors) of the Company,
and their family members, and provides guidance as to the following matters
(being a summary and not exhaustive list): Honest and ethical conduct; avoidance
of conflicts of interest, whether actual or potential; full, fair, accurate,
timely and understandable disclosures; compliance with legislation and
regulations; prompt internal disclosure of any violation of the Code; and
accountability for any failure to respect the Code.





The Code
is not considered a comprehensive guide to all the Company’s policies or to
individuals’ responsibilities under applicable laws and
regulations.  The Code is intended to provide general parameters and
expectations of the Company and is provided to all directors, officers,
employees and key contractors when they commence their services with the
Company.





The Board
requires an annual review of the Code, conducted by the CFO.  This
review consists of interviews and queries within the Company, the results of
which are then reported by the CFO at a full meeting of the Board of
Directors.  The form of the review is intended to determine whether
there are any violations of the Code that have not been previously reported and
also to ensure that the Code has been understood by
recipients.  Should any matters come to the attention of the Company
during this review, or at any other time, they are discussed by the
Board.





The Board
conducts periodic reviews of the Company’s corporate governance practices and
procedures in the light of applicable rules and guidelines and the current
status and stage of development of the Company.





Directors
are expected to adhere to all corporate law requirements in respect of any
transaction or agreement in which they may have a material interest. It is a
requirement of applicable corporate law that directors who have an interest in a
transaction or agreement with the Company promptly disclose that interest at any
meeting of the Board at which the transaction or agreement will be discussed and
abstain from discussions and voting in respect to same if the interest is
material. Where appropriate any director having a material


94


conflict
of interest will be expected to withdraw from the meeting and not participate in
the meeting where such matter is being considered so that the remaining
directors may properly exercise independent judgment.





Nomination of Directors. The
Board has not appointed an independent Nominating
Committee.  Nominations, if and when they arise, are generally the
result of formal or informal discussions with members of the Board or
recommendations by members of the Board. Nominations to the Board are
determined, after appropriate review and investigation, by the Board of
Directors as a whole.





Compensation Committee. The
Board has appointed a Compensation Committee which has responsibility for
determining compensation for the directors and senior management.





During
2008, the Compensation Committee was comprised of John MacPherson and Alan
Savage.  On January 29, 2009, Alan Savage resigned from the Board of
Directors.  The Board determined that, as the Compensation Committee
has already provided input to year end matters during November and December
2008, it would seek to revisit the membership of the Compensation Committee at
the board meeting to be held immediately following the upcoming Annual General
Meeting of the Company.





All
members of the Compensation Committee are considered independent.  The
Committee makes recommendations to the Board with respect to the compensation of
the President and Chief Executive Officer.  The Compensation Committee
meets as requested by the Board or the Chief Executive Officer, or as considered
desirable by the Committee.  The Compensation Committee has the
authority to retain independent advisors as it may deem necessary or appropriate
to allow it to discharge its responsibilities. The Compensation Committee has
not retained a compensation consultant or advisor since the beginning of the
2006 financial year, except that a recruitment consultant was retained to assist
in the search for a Chief Financial Officer during 2007.





Assessment. The Board of
Directors continuously reviews on an ongoing informal basis the effectiveness of
the Board as a whole and the effectiveness, contribution and performance of the
Board, its committees and individual directors.  Each year, when it
determines the number of directors to be elected at the annual meeting of
shareholders, the Board considers its appropriate size and composition to
properly administer the affairs of the Company and to effectively carry out the
duties of the Board, given the Company’s current status and stage of
development.





Audit Committee. The Board of
Directors has an Audit Committee, which is responsible for reviewing the
Company’s financial reporting procedures, internal control and management
information systems and external auditors (the “Auditors”).





The Audit
Committee, as at the sate of this Annual Report, is composed of Brian Atkins,
Dave Nickerson and John MacPherson.  The Company considers each member
of the Audit Committee to be financially literate and independent for the
purposes of National Instrument 52-110 (“NI 52-110”).





The
education and experience of each Audit Committee Member is set out
below:





Brian A.
Atkins, CA graduated from the University of British Columbia with a Bachelor of
Commerce and obtained his Chartered Accountant designation from the British
Columbia Institute of Chartered Accountants.  Mr. Atkins joined KPMG
LLP, Chartered Accountants, in 1969 and was admitted as a partner in
1978.  As a KPMG partner, Mr. Atkins provided audit, accounting and
advisory services to a number of public and private companies continually
throughout the period until his retirement from KPMG in September
2005.  Mr. Atkins is currently a director of the North Shore Credit
Union and a Member of the Independent Review Committee of Inhance Investment
Management Inc.  He has a thorough understanding of generally accepted
accounting principles used by the Company in preparing its annual and quarterly
financial statements.  He has a thorough understanding of internal
controls over financial reporting


95


Dave
Nickerson B.Sc., M.Sc.  Mr. Nickerson holds a Bachelors degree in
Mining Engineering from the University of Birmingham and a Masters degree in
Mineral Exploration from Laurentian University and has taken Post-Graduate
Courses in Mineral Development and in Legislation Strategy at McGill University,
Montreal.  He is a Professional Engineer and a member of the
Association of Professional Engineers, Geologists and Geophysicists of the
Northwest Territories.  He was elected as Member of Parliament for
three terms 1979 to 1988, during part of which time he served as a member of the
House Standing Committee on Public Accounts, and as a Member of the Legislative
Assembly of the Northwest Territories 1975 to 1979.  He served as the
Chairman of the Northwest Territories Water Board from 1988 to
1994.  He has served as a director of public companies for a period in
excess of five years.  He has an understanding of the accounting
principles used by the Company to prepare its financial statements and has the
ability to assess the general application of such accounting principles in
connection with the accounting for estimates, accruals and
reserves.   He has experience evaluating financial statements
with accounting issues comparable to the financial statements and issues that
can reasonably be expected to be raised by the Company’s financial
statements.  He has an understanding of internal controls and
procedures for financial reporting.





John
MacPherson has served on the Boards of many public companies as either Chairman,
President or Director for over 38 years.  Having worked in the
investment industry he was licenced to sell securities which required him to
understand and evaluate complex financial reports.  He has an
understanding of the accounting principles used by the Company to prepare its
financial statements and has the ability to assess the general application of
such accounting principles in connection with the accounting for estimates,
accruals and reserves.





There
were several changes to the composition of the audit committee during, and
subsequent to, the year ended December 31, 2008.  Dr. Robert Gayton, a
director of the Company from May 2000, served on the audit committee during
fiscal 2008 until June 17, 2008, when he was replaced by Mr. Atkins, following
his retirement at the Company’s Annual General Meeting.  Alan Savage,
a director of the Company from June 2003 was a member of the audit committee
throughout 2008 until his resignation from the Board of Directors on January 29,
2009.  Mr. Savage was replaced on the audit committee by Mr.
MacPherson.





The
Company's audit committee is governed by a written charter that sets out its
mandate and responsibilities.  The functions of the Audit Committee as
enumerated in its charter are set out below.





“Charter
of the Audit Committee of the Board of Directors”





I.           MANDATE





The Audit
Committee (the “Committee”) is appointed by
the Board of Directors (the “Board”) of Canadian Zinc
Corporation (the “Corporation”) to assist the
Board in fulfilling its oversight responsibilities relating to financial
accounting and reporting process and internal controls for the
Corporation.  The Committee’s mandate and responsibilities are
to:


•           recommend
to the Board the external auditors to be nominated and the compensation of
suchauditor;


•
            oversee
      and monitor the work and performance of the Corporation's external
      auditors, including meeting with the external auditors and reviewing and
      recommending all renewals or replacements of the external auditors and
      their remuneration;


•           pre-approve
all non-audit services to be provided to the Corporation by the external
auditors;


•           review
the financial statements and management's discussion and analysis (MD&A)
andannual and interim financial results press releases of the
Corporation;


•
            oversees
      the integrity of internal controls and financial reporting procedures of
      the Corporation and ensure implementation of such controls and
      procedures;


•           provide
oversight to any related party transactions entered into by the
Corporation.





II.           AUTHORITY
OF THE AUDIT COMMITTEE





The
Committee shall have the authority to:


96





(1)
            engage
      independent counsel and other advisors as it determines necessary to carry
      out its duties;




(2)
            set
      and pay the compensation for advisors employed by the Audit Committee;
      and




(3)
            communicate
      directly with the external
auditors.







III.           COMPOSITION
AND MEETINGS





(1)
            The
      Committee and its membership shall meet all applicable legal, regulatory
      and listing requirements, including those of all applicable securities
      regulatory authorities.




(2)
            The
      Committee shall be composed of three directors as shall be designated by
      the Board from time to time. The members of the Committee shall appoint
      from among themselves a member who shall serve as Chair.  A
      minimum of two members of the Committee present either in person or by
      telephone shall constitute a
quorum.







The
Committee members will be elected annually at the first meeting of the Board
following the annual general meeting of shareholders.





(1)
            Each
      member of the Committee shall be “independent” and shall be “financially
      literate” (as each such term is defined in Multilateral Instrument
      52-110)




(2)
            The
      Committee shall meet at least quarterly, as circumstances dictate or as
      may be required by applicable legal or listing
    requirements.




(3)
            Any
      member of the Committee may participate in the meeting of the Committee by
      means of conference telephone or other communication equipment, and the
      member participating in a meeting pursuant to this paragraph shall be
      deemed, for purposes hereof, to be present in person at the
      meeting.







IV.           RESPONSIBILITIES





(1)
            The
      Committee shall review the annual audited financial statements to satisfy
      itself that they are presented in accordance with applicable generally
      accepted accounting principles (“GAAP”) and report
      thereon to the Board and recommend to the Board whether or not same should
      be approved, prior to their being filed with the appropriate regulatory
      authorities.  The Committee shall also review the interim
      financial statements.




(2)
            The
      Committee shall review any internal control reports prepared by management
      and the evaluation of such report by the external auditors, together with
      management’s response.




(3)
            The
      Committee shall be satisfied that adequate procedures are in place for the
      review of the Corporation’s public disclosure of financial information
      extracted or derived from the Corporation’s financial statements,
      management’s discussion and analysis and annual and interim earnings press
      releases before the Corporation publicly discloses this
      information.




(4)
            The
      Committee shall review management’s discussion and analysis relating to
      annual and interim financial statements and any other public disclosure
      documents, including interim earnings press releases, before the
      Corporation publicly discloses this
information.




(5)
            The
      Committee shall meet no less frequently than annually with the external
      auditors to review accounting practices, internal controls and such other
      matters as the Committee deems
appropriate.




(6)
            The
      Committee shall establish procedures
for




(a)
            the
      receipt, retention and treatment of complaints received by the
      Corporation  regarding accounting, internal accounting controls
      or auditing matters; and


97


(b)
            the
      confidential, anonymous submission by employees of the Corporation of
      concerns regarding questionable accounting or auditing
      matters.


(7)
            The
      Committee shall provide oversight to any related party transactions
      entered into by the Corporation.




(8)
            In
      the event that the Corporation wishes to retain the services of the
      Corporation’s external auditors for tax compliance or tax advice or any
      non-audit services the Chief Financial Officer of the Corporation shall
      consult with the Audit Committee, who shall have the authority to approve
      or disapprove such non-audit services.    The Audit
      Committee shall maintain a record of non-audit services approved by the
      Audit Committee for each fiscal year and provide a report to the Board on
      an annual basis.




(9)
            The
      Committee shall review and approve the Corporation's hiring policies
      regarding partners, employees and former partners and employees of the
      present and former auditors of the
Corporation.




(10)
            The
      Committee shall perform any other activities consistent with this Charter
      and governing law, as the Committee or the Board deems necessary or
      appropriate.







Pre-approval Policies and
Procedures. The Audit Committee has adopted procedures requiring Audit
Committee review and approval in advance of all particular engagement for
services provided by the Auditors. Consistent with applicable laws, the
procedures permit limited amounts of services, other than audit services, to be
approved by the Audit Committee provided the audit committee is informed of each
particular service.  All of the engagements and fees for Fiscal 2007
and 2008 were approved by the Audit Committee.  The Audit Committee
reviews with the auditors whether the non-audit services to be provided are
compatible with maintaining the Auditor’s independence.





Since the
commencement of the Company’s most recently completed financial year (January 1,
2008) there has not been a recommendation of the Audit Committee to nominate or
compensate an external auditor which was not adopted by the Board of
Directors.





D.           Employees





The
average number of employees at the Company for each of the last three years is
summarized in the table below:





TOTALDecember
      31, 2008
            19December
      31, 2007
            18December
      31, 2006
            13





In 2008,
the Company had an average of 19 employees consisting of 11 primarily working on
the Prairie Creek Mine project, 2 Community Liaison Representatives and 6 based
in the Company’s corporate offices.  In addition, the Company utilizes
the services of contractors to assist in certain tasks and
projects.  As at December 31, 2008, the Company had reduced its
employee numbers to 10, being 6 corporate positions and 4 related to community
affairs and the Prairie Creek Mine.





For the
year ended December 31, 2007, the average number of employees at the Prairie
Creek Mine Site was thirteen compared to nine for fiscal 2006. An average of
five full-time employees in 2007 (four in fiscal 2006) were employed in
administrative and management roles at the Company.





98


E.           Share
Ownership





The share
ownership of those persons listed in “Item 6.B.--Compensation” is shown on the
table included in “Item 6.A.--Directors and Senior Management.” Details of all
options to purchase shares of the Company held by directors and officers of the
Company at May 12, 2009, are detailed in the table below.





Name
            Number
      of securities underlying unexercised options
              (#)
            Option
      exercise price
              ($)
            Option
      expiration dateBrian
      A. Atkins
            300,000
            0.23
            Mar
      27, 2014John
      F. Kearney
            1,000,000
              200,000
              500,000
            0.60
              0.90
              0.23
            Jan
      14, 2010
              Dec
      13, 2011
              Mar
      27, 2014John
      MacPherson
            400,000
              200,000
              300,000
            0.60
              0.90
              0.23
            Jan
      14, 2010
              Dec
      13, 2011
              Mar
      27, 2014Dave
      Nickerson
            300,000
              200,000
              300,000
            0.60
              0.90
              0.23
            Jan
      14, 2010
              Dec
      13, 2011
              Mar
      27, 2014Alan
      B. Taylor
            700,000
              200,000
              500,000
            0.60
              0.90
              0.23
            Jan
      14, 2010
              Dec
      13, 2011
              Mar
      27, 2014Martin
      Rip
            300,000
              300,000
            0.94
              0.23
            Oct
      15, 2012
              Mar
      27, 2014








ITEM 7.
            MAJOR
      SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS





A.           Major
Shareholders





The
following table sets forth information regarding the share ownership, excluding
any warrants held, of the Company as of May 22, 2009 of shareholders that are
beneficial owners of 5% or more of the Company’s outstanding common
shares.





Name
      of Owner
            Number
      of Common Shares
            PercentageSprott
      Asset Management Inc.(1)
            17,837,833(1)
            15%


(1)           Based
upon information contained in the most recent Schedule 13G/A form filed with the
United States Securities and Exchange Commission dated February 14, 2009 as
filed on IDEA (formerly EDGAR), adjusted for warrants which have not been
exercised.





As of May
12, 2009, the Directors and Senior Officers of the Company as a group
beneficially own, directly or indirectly, approximately 1.6% of the outstanding
common shares of the Company.





As of
April 30, 2009, approximately 1.9%, or 2.3 million of the Company’s outstanding
common shares were held in the United States by 93 holders registered on the
books of the Company’s transfer agent.





To the
best of the Company’s knowledge and other than as disclosed in this Annual
Report, the Company is not directly or indirectly controlled or owned by any
other corporation, foreign government or any other natural or legal person and
it is not subject to any arrangements the operation of which may at a subsequent
date result in a change in control of the Company.


99


The
Company’s major shareholders as listed above do not have any different voting
rights than those held by any other shareholder of the Company.








B.           Related
Party Transactions





There
were no material transactions in the fiscal year ended December 31, 2008, or
proposed material transactions between the Company or any of its subsidiaries
and:





(a)           enterprises
that directly or indirectly through one or more intermediaries, control or are
controlled by, or are under common control with, the Company;





(b)           associates;





(c)           individuals
owning, directly or indirectly, an interest in the voting power of the Company
that gives them significant influence over the Company, and close members of any
such individual's family;





(d)           key
management personnel, that is, those persons having authority and responsibility
for planning, directing and controlling the activities of the Company, including
directors and senior management of companies and close members of such
individuals' families;





(e)           enterprises
in which a substantial interest in the voting power is owned, directly or
indirectly, by any person described in (c) or (d) or over which such a person is
able to exercise significant influence including enterprises owned by directors
or major shareholders of the Company and enterprises that have a member of key
management in common with the Company, other than rent expense as set out in
Note 16 to the Financial Statements for the year ended December 31,
2008.





C.           Interests
of Experts and Counsel





Not
applicable.





ITEM 8.
            FINANCIAL
      INFORMATION





A.  Consolidated
Statements and Other Financial Information





See Item
17 for the Company’s Financial Statements.





Percentage of Export
Sales.  The Company is currently in a pre-production phase and
accordingly makes no export sales.





Legal
Proceedings.  The Company is not a party, nor has it been a
party in the recent past, to any legal or arbitration proceedings which may
have, or have had in the recent past, significant effects on the Company’s
financial position or profitability. None of the Company’s Directors, members of
senior management or affiliates are either a party adverse to the Company or
have a material interest adverse to the Company in any legal or arbitration
proceeding.





Dividends.  The
Company, to date, has not paid any dividends nor does it plan to pay dividends
in the foreseeable future.





100


B.
            Significant
      Changes





There
have been no significant changes since the date of the financial statements
included in this Annual Report, except as noted at “Item 4.B--Business
Overview--Other business opportunities,” relating to the Company acquiring
shares of Vatukoula Gold Mines Plc and entering into an option agreement for the
Tuvatu Gold Project.





ITEM 9.
            THE
      OFFER AND LISTING





A.           Offer
and Listing Details





Nature of Trading
Market.





The
common shares of the Company trade on the TSX under the symbol “CZN”. The
Company’s common shares also trade on the OTCBB in the United States under the
symbol “CZICF”.





Trading on the TSX. The
following table sets forth the high and low sale prices on the TSX for the
common shares for the last five fiscal years ended December 31,
2008.





Year
      Ended
            High
      CDN$
            Low
      CDN$December
      31, 2008
            0.77
            0.13December
      31, 2007
            1.12
            0.58December
      31, 2006
            1.63
            0.53December
      31, 2005
            0.88
            0.25December
      31, 2004
            2.04
            0.51





The
following table sets forth the high and low sale prices on the TSX for the
common shares for each quarterly period in the two most recent fiscal years
ended December 31, 2008 and the quarter ended March 31, 2009.





Quarter
      Ended
            High
      CDN$
            Low
      CDN$March
      31, 2009
            0.24
            0.165December
      31, 2008
            0.37
            0.13September
      30, 2008
            0.65
            0.30June
      30, 2008
            0.66
            0.35March
      31, 2008
            0.77
            0.49December
      31, 2007
            0.97
            0.61September
      30, 2007
            0.98
            0.60June
      30, 2007
            1.12
            0.69March
      31, 2007
            0.92
            0.58





The following table sets forth the high
and low sales prices on the TSX for the common shares for each monthly period in
the last six months.





Month
      Ended
            High
      CDN$
            Low
      CDN$April
      30, 2009
            0.23
            0.165March
      31, 2009
            0.21
            0.165February
      29, 2009
            0.22
            0.185January
      31, 2009
            0.24
            0.175December
      31, 2008
            0.195
            0.13November
      30, 2008
            0.25
            0.17





101





Trading on the OTC BB. The
following table sets forth the high and low sale prices on the OTCBB for the
common shares for the last five fiscal years ended December 31,
2008.





Year
      Ended
            High
      U.S.$
            Low
      U.S.$December
      31, 2008
            0.80
            0.082December
      31, 2007
            1.05
            0.48December
      31, 2006
            1.32
            0.08December
      31, 2005
            0.75
            0.28December
      31, 2004
            1.60
            0.36





The
following table sets forth the high and low sale prices on the OTCBB for the
common shares for each quarterly period in the two most recent fiscal years
ended December 31, 2008 and the quarter ended March 31, 2009.





Quarter
      Ended
            High
      U.S.$
            Low
      U.S.$March
      31, 2009
            0.199
            0.12December
      31, 2008
            0.40
            0.082September
      30, 2008
            0.63
            0.28June
      30, 2008
            0.65
            0.34March
      31, 2008
            0.80
            0.48December
      31, 2007
            0.99
            0.63September
      30, 2007
            0.94
            0.55June
      30, 2007
            1.05
            0.59March
      31, 2007
            0.77
            0.48





The following table sets forth the high
and low sales prices on the OTCBB for the common shares for each monthly period
in the last six months.





Month
      Ended
            High
      U.S.$
            Low
      U.S.$April
      30, 2009
            0.20
            0.125March
      31, 2009
            0.197
            0.12February
      29, 2009
            0.198
            0.13January
      31, 2009
            0.199
            0.13December
      31, 2008
            0.17
            0.1028November
      30, 2008
            0.224
            0.121





B.           Plan
of Distribution





Not
applicable.





C.           Markets





The
Company's common shares trade on the “TSX" in Toronto, Ontario, Canada, under
the trading symbol "CZN" and CUSIP #136802105.





The
Company's common shares commenced trading on the TSX on December 7, 1993 and
under the name Canadian Zinc Corporation commenced trading June 2,
1999.





In
April 2007, the Company’s shares were admitted for quotation on the OTC Bulletin
Board under the symbol OTCBB-“CZICF”, and are currently also dually quoted on
the OTC Pink Sheets.  Prior to that date, the Company’s common shares
were traded in the United States (Non-NASDAQ Over the Counter Other) by the
National Association of Securities Dealers Quotation System under the symbol
“CZICF”.


102


D.           Selling
Shareholders





Not
applicable.





E.           Dilution





Not
applicable.





F.           Expenses
of the Issue





Not
applicable.








ITEM 10.
            ADDITIONAL
      INFORMATION





A.  Share
Capital





Not
applicable.





B.           Memorandum
and Articles of Association





The
Company was incorporated in British Columbia, Canada, on December 16, 1965,
under the name “Pizza Patio Management Ltd.”  The Company changed its
name to “San Andreas Resources Corporation” on August 29, 1991 and to “Canadian
Zinc Corporation” on May 25, 1999.  On June 16, 2004, the Company’s
shareholders adopted new Articles to bring its Charter documents up to date and
into conformity with the new Business Corporations Act
(British Columbia).





With
respect to directors and officers, the Articles of the Company provide that a
Director or officer who is a party to a material contract or proposed material
contract with the Company shall disclose the nature and extent of his interest
in accordance with the provisions of the Act and shall abstain from voting in
respect thereof.





The
Articles also provide that the Directors may from time to time borrow money on
the credit of the Company; issue, reissue, sell or pledge debt obligations of
the Company, whether secured or unsecured; give a guarantee on behalf of the
Company; mortgage, hypothecate, pledge or otherwise create an interest in or
charge on all or any property of the Company to secure payment of a debt or
performance of any other obligation of the Company.  Variation of
these borrowing powers would require an amendment to the Articles of the Company
which would, in turn, require the approval of the shareholders of the Company by
way of a Special Resolution.  A Special Resolution means a resolution
cast by a majority of not less than three quarters of the votes cast by
shareholders of the Company who, being entitled to do so, vote in person or by
proxy at a general meeting of the Company of which notice as the Articles
provide shall not be less than 21 days notice specifying the intention to
propose the resolution as a special resolution, has been duly given (or, if
every shareholder entitled to attend and vote at the meeting agrees, at a
meeting of which less than 21 days notice has been given), or a resolution
consented to in writing by every shareholder of the Company who would have been
entitled to vote in person or by proxy at a general meeting of the Company, and
a resolution so consented to is deemed to be a special resolution passed at a
general meeting of the Company.





There is
no requirement under the Articles of the Company or in the Act requiring
retirement or non-retirement of directors under an age limit requirement, nor is
there any minimum shareholding required for a director’s
qualification.  Holders of common shares of the Company are entitled
to vote at meetings of shareholders, and a Special Resolution, as described
above, is required to effect a change in the rights of
shareholders.  Holders of common shares are not entitled to
pre-emptive rights.  Holders of common shares are entitled, ratably,
to the remaining property of the Company upon liquidation, dissolution or
winding up of the Company, and such holders receive dividends if, as, and when,
declared by the directors of the Company.  There


103


are no
restrictions on the purchase or redemption of common shares by the Company while
there is an arrearage in the payment of dividends or sinking fund
installments.  There is no liability on the part of any shareholder to
further capital calls by the Company nor any provision discriminating against
any existing or prospective holder of securities of the Company as a result of
such shareholder owning a substantial number of shares.  There are no
limitations on the rights to own securities, including the rights of
non-resident or foreign shareholders to hold or exercise voting rights on the
securities imposed by the Act or by the constating document of the
Company.





The
Company is required to give its registered shareholders not less than 21 days
notice of any general meeting of the Company unless all such shareholders
consent to reduce or waive the period.  In addition, the Company is
obliged to give notice to companies and intermediaries who hold shares on behalf
of the ultimate beneficial owners no fewer than 35 or more than 60 days prior to
the date of the meeting.  The Company then delivers, in bulk,
proxy-related materials in amounts specified by the
intermediaries.  No shares of the Company owned by companies or
intermediaries may be voted at a general meeting of the Company unless all
proxy-related materials are delivered to the ultimate beneficial owners of such
shares.  Such ultimate beneficial owner must then deliver a proxy to
the Company within the time limited by the Company for the deposit of proxies in
order to vote the shares in respect of which such person is the beneficial
owner.





There is
no provision in the Company's Articles that would have an effect of delaying,
deferring or preventing a change in control of the Company and that would
operate only with respect to a merger, acquisition or corporate restructuring
involving the Company (or any of its subsidiaries).





Securities
legislation in the Company’s home jurisdiction of British Columbia requires that
shareholder ownership must be disclosed once a person owns beneficially or has
control or direction over greater than 10% of the issued shares of the
Company.  This threshold is higher than the 5% threshold under U.S.
Securities legislation at which shareholders must report their share
ownership.





C.           Material
Contracts





Other
than contracts entered into in the ordinary course of business and those
disclosed elsewhere in this Annual Report, the Company has not entered into any
material contracts within the past two years.





D.           Exchange
Controls





There are
no governmental laws, decrees or regulations in Canada relating restrictions on
the export or import of capital, or affecting the remittance of interest,
dividends or other payments to non-resident holders of the Company’s common
shares other than withholding tax requirements.  (E.g., Remittances of
dividends to United States residents are subject to a 15% withholding tax (10%
if the shareholder is a corporation owning at least 10% of the common shares of
the Company) pursuant to Article X of the reciprocal treaty between Canada and
the United States.)





Except as
provided in the Investment Canada Act (“Investment Act”), there are no
provisions under the laws of Canada, the Province of British Columbia or in the
Articles of the Company restricting the right of foreigners to hold or vote the
common shares of the Company.  The Investment Act provides for a
review in the case of an acquisition of control of a Canadian business by a
non-Canadian (other that a “NAFTA investor” as defined in the Investment Act),
as described below.  The Investment Act generally prohibits
implementation of a reviewable investment by an individual, government,
corporation, partnership, trust or joint venture that is non-Canadian unless the
minister responsible for the Investment Act is satisfied that the investment is
likely to be of net benefit to Canada.





In the
case of an acquisition of control of a Canadian business by a non-Canadian that
is a WTO investor, the investment would be reviewable if the value of the assets
of the Company equaled or exceeded $312.0 million, the threshold established for
2009.  (In subsequent years, the threshold amount may be increased or
decreased in accordance with the provisions of the Investment Act.)  A
WTO investor is a member of the


104


World
Trade Organization, current members of which include the European Community,
Germany, Japan, Mexico, the United Kingdom and the United States, or a WTO
investor-controlled entity, as defined in the Investment Act.





In the
case of an acquisition of control of a Canadian business by a non-Canadian,
other than a WTO investor, where: (i) in the case of acquisition (for example,
through a share purchase or asset purchase), the assets of the business are $5
million or more in value; or (ii) in the case of an indirect acquisition (for
example, the acquisition of the foreign parent of the Canadian business) where
the Canadian business has assets of $50 million or more in value or if the
Canadian business represents more than 50% of the assets of the original group
and the Canadian business has assets of $5 million or more in
value.  Review and approval are also required for the acquisition or
establishment of a new business in areas concerning “Canada's cultural heritage
or national identity” such as book publishing, film production and distribution,
television and radio, production and distribution of music, and the oil and
natural gas industry, regardless of the size of the investment.





The
Investment Act would not apply to certain transactions in relation to common
shares of the Company, including: an acquisition of common shares of the Company
by any person made in the ordinary course of that person's business as a trader
or dealer in securities; or an acquisition of control of the Company by an
amalgamation, merger, consolidation or corporate reorganization following which
the control of the Company, remains unchanged.





In the
context of the Company, in essence, three methods of acquiring control of a
Canadian business are regulated by the Investment Act: (i) the acquisition of
all or substantially all of the assets used in carrying on the Canadian
business; (ii) the acquisition, directly or indirectly, of voting shares of a
Canadian corporation carrying on the Canadian business; (iii) the acquisition of
voting of an entity which controls, directly or indirectly, another entity
carrying on a Canadian business.  An acquisition of a majority of the
voting interests of an entity, including a corporation, is deemed to be an
acquisition of control under the Investment Act.  An acquisition of
less than one-third of the voting shares of a corporation is deemed not to be an
acquisition of control.  An acquisition of less than a majority, but
one-third or more, of the voting shares of a corporation is presumed to be an
acquisition of control unless it can be established that on the acquisition the
corporation is not, in fact, controlled by the acquirer through the ownership of
voting shares.  For partnerships, trusts, joint ventures or other
unincorporated entities, an acquisition of less than a majority of the voting
interests is deemed not to be an acquisition of control.





In
addition to the foregoing, the Investment Act requires that all other
acquisitions of control of Canadian businesses by non-Canadians are subject to
formal notification to the Canadian government.  These provisions
require a foreign investor to give notice in the required form, which notices
are for information, as opposed to review, purposes.





E.           Taxation





Canadian
Taxation





The
following summary of the material Canadian federal income tax considerations
generally applicable in respect of the common shares reflects the Company’s
opinion to the best of its knowledge.  It is not intended as legal or tax advice to
any particular holder of common stock and should not be so
construed.  Each prospective and current shareholder is urged to
obtain independent advice with respect to the income tax consequences applicable
to him in his own particular circumstances.  The tax
consequences to any particular holder of common shares (the “Investor”) will
vary according to the status of that holder as an individual, trust, corporation
or member of a partnership, the jurisdiction in which that holder is subject to
taxation, the place where that holder is resident and, generally, according to
that holder’s particular circumstances.  This summary is applicable
only to holders who are resident in the United States, have never been resident
in Canada, deal at arm’s length with the Company, hold their common shares as
capital property and who will not use or hold the common shares in carrying on
business in Canada. Special rules, which are not discussed in this summary, may
apply to a United States holder that is a Company that carries on business in
Canada and elsewhere.


105





This
summary is based upon the provisions of the Income Tax Act of Canada and the
regulations thereunder (collectively, the “Tax Act, or ITA”) and the
Canada-United States Tax Convention as amended by the Protocols thereto (the
“Tax Convention”) as at the date of this Annual Report and the current
administrative practices of Canada and Revenue Agency.  This summary
does not take into account Canadian provincial income tax
consequences.  This summary is not exhaustive of all possible income
tax consequences.





Dividends:





In the
case of any dividends paid to non-residents, the Canadian tax is withheld by the
Company, which remits only the net amount to the shareholder.  By
virtue of Article X of the Tax Convention, the rate of tax on dividends paid to
residents of the United States is generally limited to 15% of the gross dividend
(or 5% in the case of certain corporate shareholders owning at least 10% of the
Company’s voting shares).  In the absence of the Tax Convention
provisions, the rate of Canadian withholding tax imposed on non-residents is 25%
of the gross dividend.  If the U.S. resident shareholder is an LLC,
the withholding rate is 25%.  Stock dividends received by
non-residents from the Company are taxable by Canada as ordinary dividends and
therefore the withholding tax rates will be applicable.





Where a
holder disposes of common shares to the Company (unless the Company acquired the
common shares in the open market in the manner in which shares would normally be
purchased by any member of the public), this will result in a deemed dividend to
the U.S. holder equal to the amount by which the consideration paid by the
Company exceeds the paid-up capital of such stock.  The amount of such
dividend will be subject to withholding tax as described above.





Disposition of Common
Shares:





If a
non-resident were to dispose of common shares of the Company to a Canadian
corporation which deals or is deemed to deal on a non-arm’s length basis with
the non-resident and which, immediately after the disposition, is connected with
the Company (i.e., which holds shares representing more than 10% of the voting
power and more than 10% of the market value of all issued and outstanding shares
of the Company), the amount by which the fair market value of any consideration
(other than any shares of the purchaser corporation) exceeds the paid-up capital
of the common shares sold will be deemed to be taxable as a dividend paid by the
purchasing corporation.





Capital
Gains:





An
Investor is not subject to tax under the Canadian Act in respect of a capital
gain realized upon the disposition of a share unless the share represents
“taxable Canadian property” to the Investor.  Generally, a common
share of a Canadian resident corporation listed on a prescribed stock exchange,
such as a common share of the Company, will not constitute taxable Canadian
property to the non-resident holder unless the Investor held the common share as
capital property used in carrying on a business (other than an insurance
business) in Canada, or unless the Investor or persons with whom the Investor
did not deal at arm’s length alone or together held or held options to acquire,
at any time within the five years preceding the disposition, 25% or more of the
shares of any class of the capital stock of the Company.





Where an
Investor is an individual who has ceased to be resident in Canada, and at the
time such Investor ceased to be a Canadian resident elected to have the common
shares treated as taxable Canadian property, the Investor will be subject to
Canadian tax on any capital gain realized on disposition of the common shares,
subject to the relieving provisions of the Treaty described
below.  The common shares may also be taxable Canadian property to an
Investor if the Investor acquired them pursuant to certain “rollover”
transactions.  This would include transactions under Sections 85 and
87 of the Canadian Act, which apply to share for share and amalgamation
transactions.


106


Where a
U.S. resident Investor realizes a capital gain on a disposition of common shares
of the Company that constitute taxable Canadian property, the Treaty exempts
such Investor from liability for Canadian tax in certain
circumstances.  A common share of the Company held by an Investor who
is a resident of the United States for the purposes of the Treaty will generally
constitute treaty-protected property, provided that the value of the common
share is not derived principally from real property (including resource
properties) situated in Canada.  If the U.S. resident Investor is an
LLC, this potential Treaty exemption does not apply.  Notwithstanding
the potential exemption from Canadian tax provided under the Treaty, where an
Investor disposes of shares that are taxable Canadian property, the Investor is
required to file a Canadian income tax return in respect of such
dispositions.





An
Investor whose common shares constitute taxable Canadian property and are not
treaty-protected property, and who disposes of one or more common shares in a
taxation year, will realize a capital gain (capital loss) equal to the amount by
which the proceeds of disposition therefrom exceed (are exceeded by) the
adjusted cost base thereof to the Investor and the Investor’s reasonable costs
of disposition.  The Investor will be required to include one half of any
such capital gain (the “taxable capital gain”) in the Investor’s taxable income
earned in Canada for the taxation year and to pay Canadian income tax
accordingly.  The Investor will be entitled to deduct one half of any such
capital loss (the “allowable capital loss”) against taxable capital gains
included in the Investor’s taxable income earned in Canada in the taxation year
and, to the extent not so deductible, against taxable capital gains realized by
the shareholder in the three previous or any subsequent year, subject to certain
restrictions in the case of a corporate shareholder and subject to adjustment
when the capital gains inclusion rate in the year of disposition differs from
the inclusion rate in the year the deduction is claimed.





Certain
United States Federal Income Tax Consequences:





The
following is a summary discussion of certain United States Federal income tax
considerations, under the law, generally applicable to a U.S. Holder (as defined
below) of common shares of the Company.  This discussion does not
address all potentially relevant Federal income tax matter and it does not
address consequences peculiar to persons subject to special provisions of
Federal income tax law, such as those described below as excluded from the
definition of a U.S. Holder.  In addition, this discussion does not
cover any state, local or foreign tax consequences.





To
ensure compliance with United States Treasury Department Internal Revenue
Service Circular 230, U.S. Holders are hereby notified that (A) any discussion
of  United States Federal Tax issues contained or referred to in this
document is not intended or written to be used or relied upon, and cannot be
used or relied upon by U.S. Holders, for the purpose of avoiding penalties that
may be imposed on them under the United States Internal Revenue Code, (B) the
discussion contained or referred to herein is written to assist U.S. Holders or
investors who are considering investing in the Company and (C) prospective
investors should seek advice based on their particular circumstances from an
independent tax advisor.





The
following discussion is based upon the sections of the Internal Revenue Code of
1986, as amended (“the Code”), Treasury Regulations, published Internal Revenue
Service (“IRS”) rulings, published administrative positions of the IRS and court
decisions that are currently applicable and the Convention between Canada and
the United States of America with respect to Taxes on Income and on Capital
signed September 26, 1980 as amended (the “Canada-U.S. Tax Convention”) any or
all of which could be materially and adversely changed, possibly on a
retroactive basis, at any time.  In addition, the discussion does not
consider the potential effects, both adverse and beneficial, of recently
proposed legislation which, if enacted, could be applied, possibly on a
retroactive basis, at any time.





The
following discussion is for general information only and is not intended to be,
nor should it be construed to be, legal or tax advice to any holder or
prospective holder of common shares of the Company and no opinion or
representation with respect to the United States Federal income tax consequences
to any such holder or prospective holder is made.  Accordingly,
holders and prospective holders of common shares of the


107


Company
should consult their own tax advisors about the federal, state, local, and
foreign tax consequences of purchasing, owning and disposing of common shares of
the Company.





U.S.
Holders as used herein, a (“U.S. Holder”) includes a holder of common shares of
the Company who for U.S. Federal income tax purposes is a citizen or resident of
the United States, a corporation created or organized in or under the laws of
the United States or of any political subdivision thereof and any other person
or entity whose ownership of common shares of the Company is effectively
connected with the conduct of a trade or business in the United
States.  A U.S. Holder does not include persons subject to special
provisions of Federal income tax law, such a tax-exempt organizations, qualified
retirement plans, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, non-resident
alien individuals or foreign corporations whose ownership of common shares of
the Company is not effectively connected with the conduct of a trade or business
in the United States and shareholders who acquired their stock through the
exercise of employee stock options or otherwise as compensation.





Distributions on Common
Shares of the Company:





U.S.
Holders receiving dividend distributions (including constructive dividends) with
respect to common shares of the Company are required to include in gross income
for United States Federal income tax purposes the gross amount of such
distributions to the extent that the Company has current or accumulated earnings
and profits, without reduction for any Canadian income tax withheld from such
distributions.  Such Canadian tax withheld may be credited, subject to
certain limitations, against the U.S. holder’s United States Federal Income tax
liability or, alternatively, may be deducted in computing the U.S. Holder’s
United States Federal taxable income by those who itemize deductions (See more
detailed discussion at “Foreign Tax Credit” below).  To the extent
that distributions exceed current or accumulated earnings and profits of the
Company, they will be treated first as a return of capital up to the U.S.
Holder’s adjusted tax basis in the common shares and thereafter as gain from the
sale or exchange of the common shares.





Dividend
income will be taxed at marginal tax rates applicable to ordinary income while
preferential tax rates for long-term capital gains are applicable to a U.S.
Holder which is an individual, estate or trust.  There are currently
no preferential tax rates for long-term capital gains for a U.S. Holder which is
a corporation.





Dividends
paid on the common shares of the Company will not generally be eligible for the
“dividends received deduction” provided to corporations receiving dividends from
certain United States corporations.  A U.S. Holder which is a
corporation may, under certain circumstances, be entitled to a 70% deduction of
the United States source portion of dividends received from the Company (unless
the Company qualifies as a “foreign personal holding company” or a “passive
foreign investment company”, as defined below) if such U.S. Holder owns shares
representing at least 10% of the voting power and value of the
Company.  The availability of this deduction is subject to several
complex limitations which are beyond the scope of this discussion.





For
taxable years beginning before January 1, 2011, a dividend paid by the Company
generally will be taxed at the preferential tax rates applicable to long-term
capital gains if (a) the Company is a “qualified foreign corporation” (as
defined below), (b) the U.S. Holder receiving such dividend is an individual,
estate, or trust, and (c) such dividend is paid on Common Shares that have been
held by such U.S. Holder for at least 61 days during the 121-day period
beginning 60 days before the “ex-dividend date.”





The
Company generally will be a “qualified foreign corporation” under Section
I(h)(II) of the Code (a “QFC”) if (a) the Company is eligible for the benefits
of the Canada-US Tax Convention, or (b) the Common Shares are readily tradable
on an established securities market in the U.S.  However, even if the
Company satisfies one or more of such requirements, the Company will not be
treated as a QFC if the Company is a PFIC for the taxable year during which the
Company pays a dividend or for the preceding taxable year.  As
discussed below, the Company believes that the Company is not a PFIC (See
“Passive Foreign Investment Company”, below).  The Company can provide
no assurances that it will be a QFC for future taxable years.







108


Distributions Paid in Foreign
Currency


The
amount of a distribution received on the Common Shares in foreign currency
generally will be equal to the U.S. dollar value of such distribution based on
the exchange rate applicable on the date of receipt.  A U.S. Holder
that does not convert foreign currency received as a distribution into U.S.
dollars on the date of receipt generally will have a tax basis in such foreign
currency equal to the U.S. dollar value of such foreign currency on the date of
receipt.  Any subsequent changes in the dollar value of the foreign
currency could cause such a U.S. Holder to recognize ordinary income or loss on
the sale or other taxable disposition of such foreign currency (including an
exchange for U.S. dollars).





Foreign Tax
Credit:





A U.S.
Holder who pays (or has withheld from distributions) Canadian income tax with
respect to dividends received on the common shares or with respect to the
ownership of common shares of the Company may be entitled, at the option of the
U.S. Holder, either to a deduction or a tax credit for such foreign tax paid or
withheld.  Generally, it will be more advantageous to claim a credit
because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer’s income
subject to tax.  This election is made on a year-by-year basis and
applies to all foreign income taxes (or taxes in lieu of income tax) paid by (or
withheld from) the U.S. Holder during the year.  There are significant
and complex limitations which apply to the foreign tax credit, among which is
the general limitation that the credit cannot exceed the proportionate share of
the U.S. Holder’s United States income tax liability that the U.S. Holder’s
foreign source income bears to his/her or its worldwide taxable
income.  In the determination of the application of this limitation,
the various items of income and deduction must be classified into foreign and
domestic sources.  Complex rules govern this classification
process.  There are further limitations on the foreign tax credit for
certain types of income such as “passive income”, “high withholding tax
interest”, “financial services income”, “shipping income”, and certain other
classifications of income.  Dividends distributed by the Company will
generally constitute “passive income” or, in the case of certain U.S. Holders,
“financial services income” for these purposes.  The availability of
the foreign tax credit and the application of the limitations on the credit are
fact specific and holders and prospective holders of common shares of the
Company should consult their own tax advisors regarding their individual
circumstances.





Disposition of Common Shares
of the Company:





A U.S.
Holder will recognize a gain or loss upon the sale or other taxable disposition
of common shares of the Company equal to the difference, if any, between (i) the
amount of cash plus the fair market value of any property received, and (ii) the
shareholder’s adjusted tax basis in the common shares of the
Company.  Preferential tax rates apply to long-term capital gains of
U.S. Holders which are individuals, estates or trusts.  This gain or
loss will be a capital gain or loss if the common shares are a capital asset in
the hands of the U.S. Holder, which will be a short-term or long-term capital
gain or loss depending upon the holding period of the U.S.
Holder.  Gains and losses are netted and combined according to special
rules in arriving at the overall capital gain or loss for a particular tax
year.  Deductions for net capital losses are subject to significant
limitation.  For U.S. Holders which are individuals, any unused
portion of such net capital loss may be carried over to be used in later tax
years until such net capital loss is thereby exhausted.  For U.S.
Holders which are corporations (other than corporations subject to Subchapter S
of the Code), an unused net capital loss may be carried back three years from
the loss year and carried forward five years from the loss year to be offset
against capital gains until such net capital loss is thereby
exhausted.





Other
Considerations:





In the
following four circumstances, the above sections of the discussion may not
describe the United States Federal income tax consequences resulting from the
holding and disposition of common shares of the Company.  However, on
the basis of (a) the number of shareholders of its common shares, (b) the
majority ownership of its shares by Canadian residents, and (c) the majority of
its assets are actively managed (not passively held), the Company believes that
it is neither a “Foreign Personal Holding Company”, “Foreign Investment
Company”, “Passive Foreign Investment Company”, nor a “Controlled Foreign
Corporation”.


109


Foreign Personal Holding
Company:





If at any
time during a taxable year more than 50% of the total combined voting power or
the total value of the Company outstanding shares is owned, actually or
constructively, by five or fewer individuals who are citizens or residents of
the United States and 60% (50% after the first tax year) or more of the
Company’s gross income for such year was derived from certain passive sources
(e.g. from dividends received from its subsidiaries), the Company would be
treated as a “foreign personal holding company.”  In that event, U.S.
Holders that hold common shares of the Company would be required to include in
gross income for such year their allowable portions of such passive income to
the extent the Company does not actually distribute such income.





Foreign Investment
Company:





If 50% or
more of the combined voting power or total value of the Company outstanding
shares are held, actually or constructively, by citizens or residents of the
United States, United States domestic partnerships or corporations, or estates
or trusts other that foreign estates or trusts (as defined by the Code Section
7701 (a) (31)), and the Company is found to be engaged primarily in the business
of investing, reinvesting, or trading in securities, commodities, or any
interest therein, it is possible that the Company might be treated as a “foreign
investment company” as defined in Section 1246 of the Code, causing all or part
of any gain realized by a U.S. Holder selling or exchanging common shares of the
Company to be treated as ordinary income rather than capital gains.





Passive Foreign Investment
Company:





As a
foreign corporation with U.S. Holders, the Company could potentially be treated
as a passive foreign investment company (“PFIC”), as defined in Section 1297 of
the Code, depending upon the percentage of the Company’s assets which are
passive, or the percentage of the Company’s assets which are held for the
purpose of producing passive income.  The Company believes that the
majority of its assets are used in active operations; and that it would not
currently be classified as a PFIC.  Certain United States income tax
legislation contains rules governing PFICs, which can have significant tax
effects on U.S. shareholders of foreign corporations.  These rules do
not apply to non-U.S. shareholders. Section 1297(a) of the Code defines a PFIC
as a corporation that is not formed in the United States and, for any taxable
year, either (i) 75% or more of its gross income is “passive income”, which
includes interest, dividends and certain rents and royalties or (ii) the average
percentage, by fair market value (or, if the company is a controlled foreign
corporation or makes an election, by adjusted tax basis), of its assets that
produce or are held for the production of “passive income” is 50% or
more.  The taxation of a U.S. shareholder who owns stock in a PFIC is
extremely complex and is therefore beyond the scope of this
discussion.  U.S. persons should consult with their own tax advisors
with regard to the impact of these rules.





Controlled Foreign
Corporation:





If more
than 50% of the voting power of all classes of stock or the total value of the
stock of the Company is owned, directly or indirectly, by citizens or residents
of the United States, United States domestic partnerships and corporations or
estates or trusts other than foreign estates or trusts, each of whom own 10% or
more of the total combined voting power of all classes of stock of the Company
or the total value of the stock of (“United States shareholder”), the Company
could be treated as a “controlled foreign corporation” under Subpart F of the
Code.





This
classification would effect many complex results including the required
inclusion by such 10% United States shareholders in income of their pro rata
share:  of “Subpart F Income” (as defined in Section 952 of the Code)
of earnings invested in U.S. property (as defined in Section 956 of the Code);
and of earnings invested in “excess passive assets” (as specifically defined by
the Code) of the Company.  In addition, under Section 1248 of the
Code, a gain from the sale or exchange of common shares of the Company by a U.S.
person who is or was a 10% United States shareholder (as defined in the Code) at
any time during the five years period


110




ending
with the sale or exchange is treated as ordinary dividend income to the extent
of “earnings and profits” of the Company attributable to the stock sold or
exchanged.  Because of the complexity of Subpart F a more detailed
review of these rules is outside the scope of this discussion.  The
Company does not believe that it currently is, or has previously been, a
controlled foreign corporation.  However, there can be no assurance
that the Company will not become a controlled foreign corporation in the
future.





Filing of Information
Returns:





Under a
number of circumstances, United States persons acquiring shares of the Company
may be required to file an information return with the Internal Revenue Service
Center where they are required to file their tax returns with a duplicate copy
to the Internal Revenue Service Center, Philadelphia, PA 19255.  In
particular, under Section 6046 of the Code, any United States person who becomes
the owner, directly or indirectly, of 10% or more of the shares of the Company
will be required to file such a return.





U.S.
holders of shares or prospective investors are strongly encouraged to consult
their tax advisors in connection with their purchasing, holding or disposing of
shares of the Company.  U.S. taxation rules are very complex and are
affected by various factors which may not be properly described
above.





F.           Dividends
and Paying Agents





Not
applicable.





G.           Statements
by Experts





Not
applicable.





H.           Documents
on Display





For
further information with respect to the Company, you are referred to the filings
the Company has made with the SEC.  Statements contained in this
Annual Report concerning the contents of any contract, or any other document,
are not necessarily complete.  If a contract or document has been
filed as an exhibit to any filing the Company has made with the SEC, you are
referred to the copy of the contract or document that has been
filed.  Each statement in this Annual Report relating to a contract or
document filed as an exhibit is qualified in all respects by the filed
exhibit.  The Company is subject to certain of the informational
requirements of the Securities Exchange Act of 1934 and, in accordance with the
Exchange Act, files reports and other information with the SEC.  The
Company’s registration statements, including the exhibits and schedules thereto,
and such reports and other information, can be inspected and copied at the
following public reference facility maintained by the SEC:





Judiciary
Plaza


Room
1580


100 F
Street, N.W.


Washington,
DC  20549





Copies of
these materials can also be obtained by mail at prescribed rates.  You
may also call the SEC at 1-800-SEC-0330.  The SEC maintains a website
that contains registration statements, reports and other information regarding
registrants that file electronically with the SEC at
http://www.sec.gov.





I.           Subsidiary
Information





Not
applicable.








111


ITEM 11.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





A.           Quantitative
Information about Market Risk





Market
risk represents the risk of changes in the value of a financial instrument
caused by fluctuations in interest rates, foreign exchange rates, commodity
prices and equity prices.





Market
Risk





The
Company holds certain marketable securities that will fluctuate in value as a
result of trading on global financial markets.  Furthermore, as the
Company’s marketable securities are also in mining companies, market values will
fluctuate as commodity prices change.  Based upon the Company’s
portfolio at December 31, 2008, a 10% fluctuation in the market price of the
securities held, ignoring any foreign currency risk, would have resulted in an
increase (or decrease) to net loss of approximately $202,000.





Interest
Rate Risk





Included
in the loss for the year in these financial statements is investment income on
the Company’s cash and cash equivalents and short-term
investments.  If interest rates throughout the year had been 100 basis
points (1%) lower (higher) then net loss would have been approximately $255,000
higher ($255,000 lower).  The Company does not have any debt
obligations which expose it to interest rate risk.





Foreign
Currency Risk





The
Company holds certain marketable securities that are denominated in U.S. dollars
and which, as held for trading assets, impact the Company’s net loss as a result
of being marked to market at each reporting period. The Company estimates that,
based upon the securities held at December 31, 2008, and assuming no changes in
number of shares or stock price, for every $0.01 fluctuation in exchange rate
between the Canadian and U.S. dollar, the Company’s net loss would be $16,000
higher (or lower).





Credit
Risk





The
Company considers that the following financial assets are exposed to credit
risk: cash and cash equivalents, short-term investments, marketable securities
and restricted cash.  The total value of these items at December 31,
2008 is $23.186 million.  Credit risk is the risk that one party to a
financial instrument will fail to discharge an obligation and cause the other
party to incur a financial loss.  The Company does not currently
generate any revenues from sales to customers nor does it hold derivative type
instruments that would require a counterparty to fulfil a contractual
obligation.  The Company has never held any asset-backed paper
instruments.  The Company seeks to place its cash and cash
equivalents, short-term investments and restricted cash with reputable financial
institutions.  Accordingly, the Company believes that it is exposed to
minimal credit risks at the current time, although the current concerns
surrounding financial institutions globally have increased the risk of a credit
default by a major bank impacting the Company.  At December 31, 2008,
the Company’s cash and cash equivalents, short-term investments and restricted
cash were invested in four financial institutions.





Liquidity
Risk





Liquidity
risk encompasses the risk that the Company cannot meet its financial obligations
as they fall due.  As at December 31, 2008, the Company had positive
working capital of $22.557 million.  Accordingly, the Company is able
to meet its current obligations and has minimal liquidity
risk.  However, the Company will require significant additional
funding in the future in order to complete the development of the Prairie Creek
Mine site and bring the mine into production.  Accordingly, there is a
risk that the Company may not be able to secure adequate funding on reasonable
terms, or at all, at that future date.


112


B.           Qualitative
Information about Market Risk





The
Company manages its cash and cash equivalents, short-term investments,
marketable securities, common shares, stock options and share purchase warrants
as capital.  As the Company is in the exploration and development
stage, its principal source of funds for its operations is from the issuance of
common shares.  The issuance of common shares requires approval of the
Board of Directors.  It is the Company’s objective to safeguard its
ability to continue as a going concern, so that it can continue to explore and
develop its Prairie Creek project for the benefit of its
stakeholders.  The Company uses stock options primarily to retain and
provide future incentives to key employees and members of the management
team.  The granting of stock options is primarily determined by the
Compensation Committee of the Board of Directors.





In 2008,
the Company reviewed its current investment portfolio and
strategy.  During this review, it was noted that the rates of return
for Bankers’ Acceptances and Guaranteed Investment Certificates had declined
significantly during the latter half of 2008.  The Company determined
that it was appropriate to allocate a portion of its investments to equities in
order to seek a better return on its capital resources.  As at
December 31, 2008, a total of approximately $1.962 million has been invested in
the equity stock of a number of major mining companies.  The Company
considers that these marketable securities, while acquired as part of a
medium-term investing strategy, are highly liquid assets in view of the average
trading volumes of the shares of the companies acquired.





ITEM 12.
            DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY
SECURITIES





Not
applicable.








PART
II





ITEM 13.
            DEFAULTS,
      DIVIDEND ARREARS AND DELINQUENCIES





There has
not been a material default in the payment of principal, interest, a sinking or
purchase fund installment, or any other material default not cured within thirty
days, relating to indebtedness of the Company or any of its significant
subsidiaries.  There are no payments of dividends by the Company in
arrears, nor has there been any other material delinquency relating to any class
of preference shares of the Company.





ITEM 14.
            MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS





A-D.





None.





E.           Use
of Proceeds





Not
Applicable.





113


ITEM 15.
            CONTROLS
      AND PROCEDURES





Disclosure Controls and
Procedures.  The Company’s disclosure controls and procedures
are designed to provide reasonable assurance that material items requiring
disclosure by the Company are identified and reported in a timely
manner.  As of December 31, 2008, an evaluation was carried out under
the supervision of, and with the participation of, the Company management,
including by the Chief Executive Officer and Chief Financial Officer of the
effectiveness of the disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e)) under the Securities and Exchange Act of 1934, as
amended).  Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and procedures as
of December 31, 2008, were effective to give reasonable assurance that the
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is (i) recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms, and
(ii) accumulated and communicated to management, including the Chief Executive
Office and Chief Financial Officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure..





It should
be noted that while the Company's Chief Executive Officer and Chief Financial
Officer believe that the Company’s disclosure controls and procedures provide a
reasonable level of assurance and that they are effective, they do not expect
that the disclosure controls and procedures can prevent all errors or mistakes.
 A control system, no matter how well conceived or operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met.  The Company’s Chief Executive Officer and Chief
Financial Officer have concluded that as of the end of the period covered by
this report our disclosure controls and procedures are effective at that
reasonable assurance level.





Internal Control over
Financial Reporting.  The Company’s management is responsible
for establishing and maintaining adequate internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an
evaluation of the effectiveness of the Company’s internal control over financial
reporting based on the framework in Internal Control – Integrated
Framework issued by The Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).  Based on this evaluation, management
concluded that the Company’s internal control over financial reporting were
effective as of December 31, 2008.





Management
is responsible for designing, establishing and maintaining a system of internal
controls over financial reporting to provide reasonable assurance that the
financial information prepared by the Company for external purposes is reliable
and has been recorded, processed and reported in an accurate and timely manner
in accordance with GAAP.  The Board of Directors is responsible for
ensuring that management fulfills its responsibilities.  The Audit
Committee fulfills its role of ensuring the integrity of the reported
information through its review of the interim and annual financial
statements.  Management reviewed the results of their assessment with
the Company’s Audit Committee.





There are
inherent limitations in the effectiveness of internal controls over financial
reporting, including the possibility that misstatements may not be prevented or
detected.  Accordingly, even effective internal controls over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation.  Furthermore, the effectiveness of
internal controls can change with circumstances.  The Company has paid
particular attention to segregation of duties matters surrounding its internal
controls over financial reporting as the Company has only limited staff
resources at the present time such that “ideal” segregation of duties is not
feasible.  This risk is mitigated by management and Board review where
appropriate.  At the present time, the Company does not anticipate
hiring additional accounting or administrative staff as this is not considered
necessary or practical and accordingly, will continue to rely on review
procedures to detect potential misstatements in reporting of material to the
public.





The
Company’s management, including the CEO and CFO, believe that any internal
controls over financial reporting, including those systems determined to be
effective and no matter how well conceived and operated, have inherent
limitations and can provide only reasonable, not absolute, assurance that the
objectives of the control system are met with respect to financial statement
preparation and presentation.  Because of the inherent limitations in
all control systems, they cannot provide absolute assurance that all control
issues and


114


instances
of fraud, if any, within the Company have been prevented or
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by unauthorized override of the control.  The design of any
system of controls is also based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.  Accordingly, because of the inherent limitations in a
cost effective control system, misstatements due to error or fraud may occur and
not be detected.





Attestation Report of the
Registered Public Accounting Firm.  Ernst & Young LLP, an
independent registered public accounting firm, has audited the financial
statements for the year ended December 31, 2008, and expressed an unqualified
opinion thereon.  Ernst & Young LLP has also expressed an
unqualified opinion on the effective operation of the Company’s internal control
over financial reporting as of December 31, 2008.





The attestation report provided by
Ernst & Young LLP is included with their audit report to the financial
statements for the year ended December 31, 2008 which are filed as an Exhibit to
this Annual Report.





Changes in Internal Controls
over Financial Reporting.  The Company continues to review and
assess its internal controls over financial reporting.  There were no
changes made to the Company’s internal control over financial reporting during
the year ended December 31, 2008 that materially affected, or are reasonably
likely to materially affect, internal control over financial
reporting.





The
Company made certain changes to its systems of internal controls over financial
reporting in 2008 that did not materially affect, and are not reasonably likely
to materially affect, internal control over financial
reporting.  During this process, management identified certain
potential deficiencies in internal control over financial reporting, but none
which were individually or cumulatively considered to be material
weaknesses.  The design of a control system must reflect that there
are staffing and financial resource constraints, and that the benefits of
controls must be considered relative to their costs to the
Company.  Due to the limited number of staff at Canadian Zinc, it is
not feasible or cost effective to achieve complete segregation of incompatible
duties.  These risks are not considered to be
significant.  The Company’s management has taken such action as it
considers appropriate to minimize any potential risks from these deficiencies,
including using outside consultants and advisors when deemed
appropriate.





ITEM 16.
            [RESERVED]





ITEM 16.A
            AUDIT
      COMMITTEE FINANCIAL EXPERT





The Board
of Directors has determined that at least one member of the Company’s Audit
Committee, Brian Atkins, an independent director of the Company, possesses the
educational and professional qualifications as well as the experience to qualify
as an “Audit Committee Financial Expert” as defined in Item 16A of Form
20-F.  In addition, the Company believes that the other members of the
Audit Committee are capable of analyzing and evaluating the financial statements
and understanding internal controls and procedures for financial
reporting.





115


ITEM 16.B
            CODE
      OF ETHICS





The
Company has adopted a Code of Business Conduct and Ethics that applies to all
directors, senior officers and employees of the Company.





Shareholders
may request a copy of the Code of Ethics by written request directed to Canadian
Zinc Corporation, Suite 1710, 650 West Georgia Street, PO Box 11644, Vancouver,
British Columbia, Canada V6B 4N9 or by reference to the Company’s website –
www.canadianzinc.com.





There
have been no waivers or amendments to the Code of Ethics during the year ended
December 31, 2008.





ITEM 16.C
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





Fees
payable for the fiscal years ended December 31, 2008 and 2007 to Ernst &
Young LLP, Independent Registered Chartered Accountants, are detailed
below.





Year
      Ended
              December
      31, 2008
            
            
            Year
      Ended
              December
      31, 2007Audit
      Fees (1)
            $
            
            97,900
            
            $
            
            59,740Audit-Related
      Fees (2)
            $
            
            31,500
            
            $
            
            30,900Tax
      Fees (3)
            $
            Nil
            
            $
            NilAll
      Other Fees
            $
            Nil
            
            $
            NilTotals
            $
            
            129,400
            
            $
            
            90,640







(1)
            “Audit
      Fees” represent fees for the audit of the annual financial statements, and
      review in connection with the statutory and regulatory
      filings.


(2)
            “Audit
      Related Fees” represent fees for assurance and related services that are
      related to the performance of the
audit.


(3)
            “Tax
      Fees” represent fees for tax compliance, tax advice and
      planning.





The Audit
Committee has adopted procedures requiring Audit Committee review and approval
in advance of all particular engagement for services provided by independent
auditors.  Consistent with applicable laws, the procedures permit
limited amounts of services, other than audit, review or attest services, to be
approved by one or more members of the Audit Committee pursuant to authority
delegated by the Audit Committee, provided the Audit Committee is informed of
each particular service.  All of the engagements and fees for Fiscal
2008 and 2007 were approved by the Audit Committee.  The Audit
Committee reviews with the Auditors whether the non-audit services to be
provided are compatible with maintaining the auditor’s
independence.





ITEM 16.D
            EXEMPTIONS
      FROM THE LISTINGS STANDARDS FOR AUDIT
COMMITTEES





Not
applicable.





116


ITEM 16.E
            PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
  PURCHASER





The
Company obtained TSX approval to conduct a normal course issuer bid (the “Bid”)
pursuant to which the Company could purchase up to a maximum of 5,000,000 common
shares in the capital of the Company during the period from May 13, 2008 to May
12, 2009.





During
this one year period, the Company acquired 1,784,500 common shares under the Bid
for a total cost of $390,000.  All shares purchased under the
Company’s normal course issuer bid were cancelled and returned to treasury as
soon as practical after the purchase date.  No insiders of the Company
participated in the Bid.





A summary
of the monthly purchases under the Bid is presented below:





Period
            Total
      number of shares purchased
              (#)
            Average
      Price Paid per Share
              ($)
            Total
      number of shares purchased as part of publicly announced Bid
              (#)
            Maximum
      number of shares that may yet be purchased under the Bid
              (#)May
      2008
            Nil
            N/a
            Nil
            5,000,000June
      2008
            Nil
            N/a
            Nil
            5,000,000July
      2008
            Nil
            N/a
            Nil
            5,000,000August
      2008
            Nil
            N/a
            Nil
            5,000,000September
      2008
            342,500
            0.34
            342,500
            4,657,500October
      2008
            204,000
            0.27
            546,500
            4,453,500November
      2008
            303,500
            0.19
            850,000
            4,150,000December
      2008
            866,000
            0.17
            1,716,000
            3,284,000January
      2009
            Nil
            N/a
            1,716,000
            3,284,000February
      2009
            10,000
            0.20
            1,726,000
            3,274,000March
      2009
            28,500
            0.19
            1,754,500
            3,245,500April
      2009
            30,000
            0.17
            1,784,500
            3,215,500





ITEM 16.F
            CHANGE
      IN REGISTRANT’S CERTIFYING
ACCOUNTANT





Not
applicable.





ITEM 16.G
            CORPORATE
      GOVERNANCE





Not
applicable.





PART
III





ITEM 17.
            FINANCIAL
      STATEMENTS





See
Financial Statements and Exhibits listed in Item 19 hereof and filed as part of
this Annual Report.





ITEM 18.
            FINANCIAL
      STATEMENTS





The
Company elected to provide financial statements pursuant to Item
17.





117


ITEM 19.
            EXHIBITS





FINANCIAL
STATEMENTS





Independent Auditor’s Report on Financial Statements and
      Internal Controls under Standards of the Public Company Accounting
      Oversight Board (United States) March 9, 2009Balance SheetsStatements of Cash FlowsStatements of Operations, Comprehensive Income and
      DeficitStatements of Shareholders’
    EquityNotes to Financial
  Statements





EXHIBITS


Exhibit
      Number
            Description of Document1.1*
            Notice
      of Articles (of Incorporation)1.2*
            Articles
      (Bylaws)4.2*
            Purchase
      Agreement between Titan Logix Corp. and Canadian Zinc Corporation dated
      January 29, 2004.4.3*
            10%
      Rolling Stock Option Plan4.4*
            Employment
      Agreement between the Company and Martin Rip dated October 15,
      2007.4.5*
            Form
      of Option Commitment (Senior Officers) dated October 15, 2007 to acquire
      common shares under the Company’s Stock Option Plan.4.6
            Form
      of Option Commitment (Directors and Senior Officers) dated March 27, 2009
      to acquire common shares under the Company’s Stock Option
      Plan.12.1
            Certification
      of President pursuant to Rule 13a-14(a) under the Securities Exchange Act
      of 1934, as amended12.2
            Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities
      Exchange Act of 1934, as amended13.1
            Certification
      of President Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 200213.2
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to 906 of the Sarbanes-Oxley Act of 200215.1
            Annual
      Information Form as at March 16, 2009 for the Fiscal Year ended December
      31, 2008.15.2
            Management’s
      Discussion and Analysis for the year ended December 31, 2008 dated March
      16, 2009.15.3
            Notice
      of Meeting and Information Circular dated May 12,
  2009.





*These
exhibits were previously filed with the Company’s Registration Statement or a
previous Annual Report on Form 20-F (file no. 0-22216).





SIGNATURES





The
registrant hereby certifies that it meets all of the requirements for filing
this Annual Report on Form 20-F and it has duly caused and authorized the
undersigned to sign this Annual Report on Form 20-F on its behalf.





Dated at
Vancouver, British Columbia, this 26th day of
May, 2009.





CANADIAN
ZINC CORPORATION


“John F. Kearney”


Per:
(signed) John F. Kearney


Title:
President, Chief Executive Officer & Director


118