Alexco Resource Corp.
Q1 2020 Earnings Call Transcript

Published: 14 May 2020

[Operator:]

Welcome to the Alexco Resource Corp. first quarter conference call and webcast. [Operator Instructions].I would now like to turn the conference over to Kettina Cordero, Director of Investor Relations. Please go ahead.

[Kettina Cordero:]

Good morning. Today is Thursday, May 14, 2020, and I welcome you to the Alexco Resource 2020 First Quarter Conference Call. This call is being webcast live and can be accessed through our website at alexcoresource.com. An archive of the call will be available later today on our website in the Events and Webcast section. Our website also contains our most recent news releases and our financial statements for the quarter ended March 31, 2020. All amounts mentioned today are in Canadian dollars, unless otherwise indicated.Today, our Chairman and CEO, Clynt Nauman, will discuss our most recent quarterly results. He will be joined by our President, Brad Thrall; and our CFO, Mike Clark, during the question-and-answer period.Before we start, I remind everyone that some statements made today may constitute forward-looking information within the meaning of applicable securities laws. Past performance discussed today is not indicative of future results, and our business involves number of risks that could cause results to differ from projections. Investors are encouraged to review the disclosures pertaining to risks that can be found in our most recent regulatory filings available on our website and on SEDAR and EDGAR.I will now leave you with Clynt Nauman.

[Clynton Nauman:]

Thank you, Kettina, and thank you to everybody who's joining us today. I'm going to try and make this an abbreviated discussion or review of the first quarter so that we can move on to the Q&A session to leave plenty of time for that.So in the first quarter, the onset of COVID-19 pandemic and the resulting implementation of measures to protect the health and safety of our employees and our communities has clearly taken priority. And as a result, it has slowed our development at Keno Hill during the first quarter, as you would expect. However, in this environment, we're still able to achieve several milestones and we remain focused on our overall strategy to move Keno Hill back into production.On the financial and corporate front, we reported net income of $12 million in the first quarter or $0.10 per share. The net income comprises an $8 million gain on the sale of Alexco Environmental Group and a noncash $8.1 million gain on an embedded derivative related to the Wheaton Precious Metals stream, which was offset by G&A and mine site care and maintenance.We finished the quarter with cash and cash equivalents of $22.3 million and net working capital of 23-point -- 22 -- sorry, we had cash and cash equivalents of $22.3 million and net working capital of $23.2 million at the end of the quarter. And our restricted cash and deposits ended the period with $3.1 million.With respect to the sale of AEG for $13.3 million cash, it's important to note that Alexco retained the Elsa Reclamation & Development Company which will continue to execute the cleanup of historical mines in the Keno Hill district under its existing contract with the government of Canada.And we also completed a public offering during the quarter, issuing 4.7 million common shares at $1.85 per share for the cash proceeds of $7.8 million.On the operations front, we implemented COVID-19 response and management plan. We suspended underground -- with that, we suspended our underground development plans at Flame & Moth and Bermingham, but we were able to -- we do maintain these mines and other assets across the district in a development or construction-ready mode.During this period, access to Keno Hill has been and continues to be restricted, and a strict protocol for incoming staff from outside the Yukon includes a 14-day mandatory quarantine and health assessment prior to entering site. We have a crew of Yukon-based crew of employees that are continuing to advance key mill refurbishment and surplus capital improvement projects, while the engineering and planning work is being completed remotely by "nonessential workers."And during this period, we've also made several key hires and secured long-term lead items, including mine equipment and other capital structure components that will be deployed across the site.On the exploration front, in early March, we completed a district-wide detailed airborne geophysical program, which was a follow-up from the 2018 and expansion of the 2018 program, which was particularly successful. And so the results from this most recent program will be used for target generation and ranking for longer-term exploration planning in the district.Also our 2020 surface exploration program has been revised with our revision of plans here, and the commencement of that program is being deferred until mid- to late summer. We're hoping in July. The new program will cover at least 4,200 meters of drilling, and we'll focus that at the Bermingham Deep Target to follow-up on wide high-grade mineralization that we discovered at depth last year.On the permitting front, it was on February 19 that we completed the public consultation process for the renewal and expansion of the Keno Hills water license. In the wake of the COVID-19 crisis, services in the Yukon have been operating at a reduced capacity. However, we are confident that the Yukon Water Board will deliver a decision later this quarter, which should clear the way for us to make a final production decision.And finally, as you all know, the unprecedented fiscal stimulus deployed by governments around the globe to fight off the effects of COVID-19 will, in our opinion, inevitably generate currency devaluation and afflict to hard assets. In this environment, precious metals should do well, and we believe that silver, as is usually the case during crises, will outperform gold in the longer run. We remain focused on restarting Keno Hill and continue -- and to continue generating value for our shareholders.As always, I'd like to thank you for your continued support and confidence and look forward to reporting our program -- progress as we become Canada's only primary silver mine.So with that, I'd like to open the call to questions. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from Jake Sekelsky of Roth Capital Partners.

[Jacob Sekelsky:]

Are you able to detail some of the mill refurbishments you completed during the quarter? I'm just trying to get a handle on how far along you are in the phase 1 portion of the two phase ramp out program you've talked about?

[Clynton Nauman:]

Yes. I think I'll let Brad answer that. He's up to speed with everything going on on-site.

[Bradley Thrall:]

Yes. Jake, maybe just step by little background, we still do have about 25 to 30 employees that are based out of Keno Hill working their normal 2-week in, 2-week out rotation. Again, these are all Yukon-based employees. But with respect to the mill, most of the focus has been on 2 of the bigger projects, which is the filter press. And again, this is an additional press to increase our filtering capacity. And then the second major project that's underway that we're making progress on is our concentrate regrind mills. In addition to that, we still have the secondary ball mill. Again, that's on site. But for the most part, over the last, I guess, 6 to 8 weeks, most of the progress has been on the filter press and the regrind mills.

[Jacob Sekelsky:]

Okay. That's helpful. And I guess building off of that. Have there been any backlogs in procuring equipment or any of the long lead items that you might need in the second half of this year?

[Bradley Thrall:]

We did initially see some delays in some equipment from China that, again, back in early March, once this -- once the COVID-19 became pretty obvious, but those have since been lifted. And it seems the supply lines have kind of opened up since then. So we're not seeing any delays there. On the underground mine equipment, we have secured a couple of new loaders, underground loaders. And again, we have not seen any -- I guess, any delays in the supply chain from those.

[Jacob Sekelsky:]

Okay. That's good to hear. And then just lastly, more of a housekeeping item. Is the decision to defer exploration more of an internal decision? Or is exploration restricted by the government right now?

[Clynton Nauman:]

Jake, it was totally internal decision. We just thought it was the prudent thing to do. It's more efficient if we can launch into that program without these restrictions. That being said, if there was -- things continue, we will sequester our drill crews on site, and certainly our drill contractor is prepared to do that. So it's going to get going here. As I said, it will be delayed. We're hoping that some of these restrictions lifted by then. But if they're not, we have a plan in place to mitigate that.

[Jacob Sekelsky:]

Okay. So based on where we are right now, the go-ahead kind of rests with you right now?

[Clynton Nauman:]

Well, no. Well, it's essentially authorized at this point. So yes, our guys are getting the pieces together to launch into that program. We say mid- to late summer. We're hoping it's going to be probably sometime in July, early August.

[Operator:]

Our next question comes from Mike Niehueser of Scarsdale Equities.

[Mike Niehueser:]

Just to follow-up on that. With the phase 1, is that -- I'm trying to get an idea of what that cost -- remaining cost and time to complete that? Is that -- we're about 30 days out from completing that, I'm guessing?

[Clynton Nauman:]

You want to take that one, Brad?

[Bradley Thrall:]

I don't know if the -- I mean there's still a couple of key components, Mike, that we're waiting on final delivery. So I would say right now, the schedule is really driven by the ability of our kind of Yukon-based crews and employees at site to make progress on the work. So certainly, we could ramp-up activities once some of these travel restrictions are lifted. We will not be able to complete all of our, I guess, projects internally without the use of third-party contractors. So again, once we, I think, make the final decision and some of these travel restrictions are lifted and we're able to bring in third-party contractors, we can complete those remaining projects, certainly within kind of a 60- to 90-day period.

[Mike Niehueser:]

Great. Well, that makes sense. What would be the remaining cost to complete the phase 1?

[Bradley Thrall:]

Well, again, I mean I think it's still dependent on how much of your holding costs and sunk cost -- I mean, I'm sure you appreciate we're not necessarily going about this in -- based on the original schedule in terms of some of the restrictions and delay that we have here. We are putting together some optimization plans, kind of reviewing our mine plans, looking at some updated capital costs. I think the best answer is that the cost to -- from now going forward to begin first concentrate production is still pretty consistent with what we published in the pre-feasibility study, which is in that $18 million to $19 million range, to produce first concentrate. But beyond that, I mean, it's a little tougher to give you a lot of detail between phase 1, phase 2.

[Mike Niehueser:]

Yes. Okay. I guess I'm getting at -- congratulations on how things are going with the public process on the permit. If we're able to get to a positive outcome by the end of this quarter, with current metal prices, exchange rates, smelter charges, and where we are in the status of the phase 1 to phase 2, do you think that there's a high degree of likelihood that you're going to have everything you need to make a decision by the end of quarter?

[Clynton Nauman:]

I think -- yes, I'm pretty -- we're pretty confident that once we get that water license, I think that we're -- we have enough of the pieces or close to all of the pieces to be able to make that decision for sure.

[Mike Niehueser:]

Okay. And moving on, well, with what's going on with COVID and assuming that it stays the same or trends forward, would that -- and you are able to get people to site and contractors and so forth. Would you be able to open up the mine and make a positive mine decision with the current guidance you're getting regarding COVID for operating a mine in Yukon? Or is it -- are you being held up do you think by something that's -- something locally or federally that they're going to require?

[Bradley Thrall:]

Well, maybe I can just give you some context, Mike, in terms of what's happening in the Yukon. There have been 11 cases reported in the Yukon, of which 100% of those cases have recovered. There hasn't been a single hospitalization yet in the Yukon. But I think having said that, there -- the biggest, I guess, piece that's in place in the Yukon is the 14-day self-isolation for employees or contractors coming in from outside the Yukon. So we could certainly move forward under those conditions, but it would be certainly costly and more challenging, I believe, in terms of recruitment and just logistics. So I mean, I think that will be one of the bigger decisions that we'll have in front of us whether or not those travel self-isolation restrictions are still in place at the time we push the go button.

[Clynton Nauman:]

Yes. I agree with that, Brad. And so just -- Mike, just to add. In case you're also thinking that maybe there's other protocols in terms of social distancing and other precautions that we have to take or reports that we have to make in terms of our operating protocols, then I think that based on my observation, up to present, I think that it's -- I don't think there's going to be too much of a restriction there. Our underground operations are, for the most part, fully mechanized. And certainly, protocols can be put in place and the processing circuit in the mill to comply with what would -- could reasonably expect -- be expected from a federal mandate or a territorial mandate. You're aware, of course, that there are mines operating at the present time in the Yucon. So I think we're pretty comfortable. But like Brad said, it's that travel restriction. That's the hurdle as far as we're concerned.

[Mike Niehueser:]

Got it. Brad, with regards to the ERDC, what kind of timing guidance could you give regarding the ramp-up of work there with revenues, margins? And how large again is the backlog?

[Bradley Thrall:]

Yes. In terms of ERDC, Mike, just by stepping back a little bit, we have successfully completed the environmental assessment stage of our closure plan. So the -- that plan is now in the hands of the federal government to issue what we call the decision document. We would expect that certainly within the next, I would think, 30 days. And once you have that, then we still have a water license that has to be amended. But in the meantime, we are -- we do have approved plans for later this year, again, dependent on some of the conversation we've just had with some of these travel restrictions and COVID requirements. There are some, I guess, early remediation projects that are scheduled later this year. But again, most of the heavy lifting starts next year with the construction of the water treatment plants and the Valley tailings remediation. And again, that is essentially a $65 million to $70 million construction project over the first 5 years, followed by $30 million to $40 million of long-term monitoring and operation of water treatment plants.

[Mike Niehueser:]

Excellent. If COVID kind of abates or is under control later the summer, Clynt, do you think you might be able to add another drill? Are you prepared in wanting to do that? Or are you pretty much looking at this current cutback program as what we might expect this year?

[Clynton Nauman:]

No, not at all. I mean, I think that -- I certainly feel that if we get some encouragement at Bermingham, I think, we would seriously consider putting an additional effort there. So it's a timing issue. If we are successful early, and by early I would mean, obviously, in the August, September type time frame, then we've got lots of time to expand that program. If we are further delayed, this comes later, then it's less likely we're going to expand that program. So I mean, what we're trying to sort of impart here is that we're going to get at least this 4,000, 4,200 meters done at Bermingham. And we're quite prepared to move on from that. It's all a matter of timing and success in the early holes.

[Mike Niehueser:]

I assume that would be a single rig for that program or am I wrong?

[Clynton Nauman:]

No, we may run two, actually. It's something we're still talking about. The drills of that size, it's not a big deal.

[Mike Niehueser:]

Very good. Great. Just a matter of people and all the other hassles you're going to have and be flexible about. The last question, I was interested that you had a district-wide geophysical program. The last one I think was limited to Galena Hill, but I just would like you to talk about how you're looking at the scope of the district? I mean, that's the first time outside of putting data together over the district, the historic data that you're really looking at a comprehensive look at really a very large land position. And I'm just wondering what the cost, the type of geophysics you're doing. What would you consider a range of outcome and what you'd consider success?

[Clynton Nauman:]

Yes. I mean, the airborne work is a combination of MAG and electrical methods where it's a detailed -- very detailed airborne program. It's not inexpensive. The initial program of Galena Hill cost us maybe $250,000. The one we've just completed right around $300,000. And it will provide us with information to allow us to see in detail the various geological units that are present in the district, and more importantly, the detailed offset of those units, which enables us to pinpoint the structures that -- and not only the structure, but also the orientation of them, which is important in the targeting mechanisms that we're using. So the Inca discovery from last year came directly from the geophysical work. This year's geophysical work covers basically Flame & Moth and out over Keno Hill.So we're pretty interested in what's going to come out of that work. We also did some further work to the West, by the way, back towards from -- back towards Silver King. So we're pretty interested to see what's coming out of this work. I mean, it's been very -- it's turned out to be quite successful. It certainly makes our exploration a lot more efficient. And we have high hopes that it's going to be a great targeting mechanism. More importantly, it allows us to look forward in the district and get a ranking of these targets that we need looking out beyond the first 5, 6, 7 years of reserves and resources that we currently have.

[Mike Niehueser:]

Well, it sounds like there will be no secrets about the district after this. So that should be pretty exciting. When do you expect to wrap that up?

[Clynton Nauman:]

The flying is done. The geophysicals are done. We got it done just before lockdown. So as it turned out, just by coincidence. So now we're just waiting for the data back from the analysts. And it will take us the balance of the summer to stitch to give the details that will come to the -- that will be obvious from that work.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Nauman for closing remarks.

[Clynton Nauman:]

Okay. Thank you, operator. Before closing, I'd like to remind people that are on the call and shareholders that our Annual General Meeting will be held in a virtual-only format on June 4 this year at 1

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.