Alexco Resource Corp.
Q2 2020 Earnings Call Transcript

Published: 13 Aug 2020

[Operator:]

Thank you for standing by. This is conference operator. Welcome to the Alexco Resource Corp. Second Quarter 2020 Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will an opportunity to ask questions. [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, August 13, and I welcome you to the Alexco Resource 2020 second 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 June 30, 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.

[Clynt Nauman:]

Thank you, Kettina. The second quarter of 2020 marks a turning point for Alexco, a time when we finally received all of the permits and authorizations required to place our mines back in production. I'm going to keep this report relatively brief, as we're totally in that period where we're starting to spool up activities at site. The operations and achievements are pretty fluid. And it's our intention to have more regular updates coming out over the next -- over the next few months, as we move through our capital construction process. And at the end of the day, I think your time is better spent with me answering your questions. With that said, the following are some of the highlights from Q2. As I mentioned, we received our draft and subsequently final renewed and expanded Water Use License for Keno Hill, which cleared the way for us to make a positive construction decision and take the final steps in our de-risking program as well as secure the necessary funding to fully finance -- finance us through development and preparation for silver production and sales in the fourth quarter of 2020. We're actually well down that track, and generally on schedule and on budget. Fortuitously or not, having made that decision, and then finding ourselves in the middle of an appreciating silver market is a pretty interesting place to be. But make no mistake, our focus remains on the disciplined execution of our plan. Cost we can control, prices we do not control. And let's face it, price is really the return opportunity for our stakeholders, but only if we execute as promised. Talking about pricing though, 2020 has been a year of extreme volatility in the silver markets. As you know, precious metal prices quickly stabilized following the stop -- the sharp decline in March in parallel with the general market downdraft related to the onset of the COVID-19 pandemic. During Q2, we saw a global move towards unprecedented fiscal stimulus and effort to offset the economic damage caused by this protracted crisis. Precious metals have been extremely volatile over the last five months, fluctuating from multi-year lows gold and silver to all-time highs with gold and a strong recovery for silver in August. During this week, we've witnessed some sharp price corrections, both ways, for both metals, but this doesn't change our approach, and our believe that massive worldwide fiscal stimulus will ultimately generate a long-term devaluation of currencies and afflict to hard assets, which bodes-well for precious metals. In this scenario silver, always the laggard should outperform gold and Alexco being one of the few primary silver producers with shares of one of the highest betas to silver is well-positioned to generate significant value for our stakeholders going forward. With that, I'll spend a few minutes to highlight our progress, since our last conference call in May of last year. With respect to COVID-19, as we intensify improved -- our recruitment efforts and increase our workforce, our priority continues to be the wealth and safety of the communities, in which we operate, and our employees and contractors. We continue enforcing the strict prevention measures of our COVID-19 management plan, which is consistent with the guidelines of the Yukon government and the health officials. We will continue to closely monitoring situation with respect to the pandemic and we’ll adjust our plans accordingly. On the financial and corporate front, highlights in Q2 include the following. We reported a net loss of CAD12.2 million or CAD0.10 per share. The net loss is primarily a result of non-cash fair value loss on the embedded derivatives that we deal with associated with a Wheaton and Streaming agreement. We finished Q2 with cash and cash equivalents of CAD17.8 million. And net working capital of CAD24.4 million. And our restricted cash deposits at the end of the period were CAD2.9 million. Subsequent to quarter end on July 7th, we completed an equity financing and issued CAD10.9 million common shares at a price of CAD2.73 per share, our gross proceeds of CAD30 million. With this transaction, we secured the funds necessary to complete our capital development program to bring our mines online. Our cash position as of today is approximately CAD45 million. And we find ourselves with about another CAD20 million of development expenditures, including working capital to be deployed before metal sales begin to offset our cash outflow. Also subsequent to quarter end, we entered into an agreement with Wheaton to amend and restate the streaming agreement, whereby, Wheaton will continue to receive 25% of Keno Hill silver production. But the production payment made by Wheaton will be based on a new, simpler formula that's linked to the silver price alone. And this abandons the concept of a great price linkage with the Wheaton production payment. Overall, this is a good deal for Alexco, as it enhances our downside hitch, while also allowing us to participate in higher silver prices. On the operations front, we're making steady progress towards our goal of concentrate production in Q4, 2020. Our focus is to continue to advance with recruitment and onboarding of Keno Hill operations workforce. The senior management team at Keno Hill is in place. And key supervisors, operators, miners, and certified maintenance trades, continued to be recruited with a current count of nearly 100 employees and contractors onboard at Keno Hill. A majority of the contractors and service providers have partnership or joint venture arrangements in place with the first nation of Na-Cho Nyak Dun, and today, over 90% of Keno Hill employees are from either the Yukon or British Columbia. A new underground mining fleet is started arriving on site and delivery of the remaining equipment is on track to meet our planned production schedule. Underground activities are currently focused on the rehabilitation of the primary ramp and services installation at the Bellekeno mine, and in fact, we're drilling the first long-haul stoke blocks at that mine, as we speak here on the 600 level. To level it more from Bellekeno to the mill is on track for Q4. Initial underground development at Flame & Moth will recommence in the coming days, and is scheduled to reach the initial production levels in Q4. And finally underground development at Birmingham is set to begin in September, reaching initial production levels in early Q1 2021. The district mill upgrades advancing as planned, a second tailings filter press, a second ore mill, two new concentrate regrind mills for lead and zinc concentrate, an improved fine ore feed system, and a crusher ventilation system that includes a new building enclosure around the existing primary crusher, are being installed. This work is on track with mill commissioning and initial concentrate production and sales in Q4. Other surface construction projects, such as the expansion of the Flat Creek camp and the updated administration complex and other maintenance and support facilities are currently underway with completion expected prior to mill commissioning and ramp up of mining operations during Q4. On the exploration front, 2020 Surface Exploration Program, which focuses exclusively on the Birmingham deep target commenced in July, was one drill and approximately 930 meters have been completed to-date. A second drill is expected to be working in the next month or so, and we expect to complete at least 4,200 meters of drilling this year, and the follow-up on the wide -- and this drilling, you know aimed at following up the wide high grade mineralization at depth that we intercepted last year. To close, I will reiterate that we're on track to restart Keno Hill in Q4. Our economics are sound. We have great ore deposits. We have oodles of exploration upside and a whole district at our disposal. Talking around bulk of course, my opinion is that we're winning value proposition in the primary silver space in a rising silver market. Once again, I'd like to thank all of our loyal shareholders for their patience and continued support. And with that, I'd like to ask the operator to open the call for questions. Thank you.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Leigh Curry with Curry Partners. Please, go ahead.

[Leigh Curry:]

Thank you very much. Good afternoon, Clynt. Just wanted to get a feel from you, we haven't talked for a while. Give us a little review on not only how you've indicated some of the things about how COVID impacted the operations. What was the impact and what continues to be the impact on the First Nations on their -- all the people there. And how has that impacted their attitude and morale.

[Clynt Nauman:]

Yes. Good afternoon, Lee. Good to hear from you. I'm going to actually turn that over to Brad Thrall. He has been in much closer contact with the First Nations Groups in the workforce in the more recent past than I have. So, Brad, do you want to answer that for Leigh?

[Brad Thrall:]

Sure. Yes. Thanks, Leigh. Maybe I'll start with just the general; I guess status of COVID in the Yukon in general. There have been really relatively few cases. I think about 15 to be exact, since March. Of those cases, there hasn't been a single hospitalization and everyone is fully recovered, so I mean, I think the Yukon has done a pretty good job in general, in terms of kind of initially locking down. The Yukon now is in what we call Phase 3 or what the regulator's are calling Phase 3, which is opened up some of the travel restrictions. So, in terms of travel there's a bubble jurisdiction now. It includes the Yukon, British Columbia, NWT and Nunavut. So employees and residents within that bubble can travel freely in and out of the Yukon now without an isolation requirement. So that's certainly had a positive impact. In terms of the community, again, we certainly stay in close contact with mail, both at the mayor and council level, but as importantly, the first nation of Nacho Nyak Dun, Chief and Council. And I think really, with respect to the community, it's about trying to keep our employees out of the community. Our camp is about 50 kilometers away, so certainly on our rotation days, we try to limit any interaction. We’re, obviously, doing a lot of online communication these days. We've changed a number of our, I guess, lineup in the way we do business at site, to keep some separation, so, yes, I mean, a lot of, I think, the normal things that that you hear about it at most operations so. So all in all, again, I think, Yukon, it's doing well, but we certainly are not going to let our guard down. And, again, I think your question about the communities is that is, as obviously front and center to how we how we manage our operations.

[Leigh Curry:]

Thank you. It's very good. I'm glad to hear. I wasn't fully aware that the travel in and out without a quarantine was in place for employees of local companies. That's a big plus for you all. And following up on that, how difficult is it for you all to hire labor right now? Is this relatively a good job? What are the ideas and who are we competing with for labor up there?

[Brad Thrall:]

Yes, I can take that as well. No, absolutely I mean, I think, we've had real good success to-date in our recruiting efforts, certainly the Yukon, again it's a small jurisdiction, less than 35,000 people live in the Yukon. So, clearly, I mean it's -- we can supply our entire workforce just from the Yukon. There are two other active mining operations underway as well. So, our recruitment efforts have really been focused on the Yukon and British Columbia, mainly again because of the lifting of the travel restrictions where BC residents, do not have to have to quarantine. We've been very successful, over 90% of our hires at Keno Hill are from those two jurisdictions. We -- so I think we're on good track. And in terms of I mean, recruiting efforts, we're putting a lot of focus and some capital into expanding our camp, bringing some new facilities, a good place to sleep, and a good place to eat are very important in terms of being competitive in the north, with kind of a fly-in, fly-out workforce.

[Leigh Curry:]

Thank you very much and I also want to take this opportunity to congratulate Clynt for his planning prowess and ability that he was able to finalize, all the permits, all the preparatory work that we've been working on for the past several years. To get all that done and just when the price of silver has taken up taken off -- gotten above $25. So, congratulations on your good planning and we didn't realize you were that good of a forecaster of silver prices, Clynt.

[Clynt Nauman:]

Thanks. It was fortuitous. But yes, so, the runway here looks particularly good, but like I say we can only -- with us, it's all about execution, we can control the cost. We can do nothing about prices and as I mentioned the price is for the benefit of the stakeholder. So, yes, we're pretty excited and moving forward as planned. Anyway, well thanks for your comment.

[Leigh Curry:]

I think the shareholders are excited also. Congratulations.

[Clynt Nauman:]

Thank you.

[Operator:]

The next question comes from Alan Mandel with Alan M Trading Company. Please go ahead.

[Alan Mandel:]

Hi. This is Alan Mandel, Alan M Trading company in New York. And I wanted to echo the comments and commendation from our previous caller. Could there be or is, has there been -- given the volatility in the foreign exchange markets. Is there any material impact on the Canadian, USD, any material impact on earnings or could there be due to plan for that?

[Clynt Nauman:]

Yes, that is a very good question. Yes, the answer is yes. We are certainly one of the greatest sensitivities on the financial side. In the operations that we anticipate here is the exchange rate. We are actively investigating and planning to offset that volatility. The actual method by which we do that has not been decided yet. I will point out though, I mean, here we are sitting in an environment with very strong precious metal prices. But the Canadian dollar is still relatively weak. And I'm not sure how to interpret the fact that, you've seen oil prices go from, well, in fact CAD0 to CAD40, and there has not been, what I would anticipate to be a very significant change in the exchange rate. So there's something different going on in the exchange rates. But the answer is yes, we're mindful of exchange rates. It does impact our business. The general wisdom is that precious metal prices and base metal prices appreciate, the Canadian dollar will also appreciate, but margins will be preserved. That does not seem to be the case at the present time. That could be an anomaly and we are, like I say, actively looking at how to preserve margins in a volatile exchange rate environment.

[Alan Mandel:]

Yes. I'm sure it's challenging. Okay. Thank you for the update.

[Clynt Nauman:]

Thank you.

[Operator:]

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

[Clynt Nauman:]

Thank you, operator. In Keno Hill, we have a world-class primary silver historic district in a Tier 1 jurisdiction with significant potential to grow, that's coming online in a strong precious metals environment. We're fully funded production. And we're on track to start concentrate production and sales in Q4. I look forward to reporting on our mill commissioning and mining operations in November, when we discuss our Q4 results, and as we become Canada's only primary silver mine. Until then, thank you, and have a good day, and I turn this back to Kettina to close out the call. Thank you.

[Kettina Cordero:]

Thank you, Clynt. This concludes our call. You may disconnect now.