Alexco Resource Corp.
Q2 2019 Earnings Call Transcript

Published: 14 Aug 2019

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Alexco Resource Corp., 2019 Second Quarter Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]I would now like to turn the conference over to Alexco's Director of Investor Relations, Kettina Cordero. Please go ahead.

[Kettina Cordero:]

Thank you, operator, and good morning, everybody. Today is Wednesday, August 14, 2019, and I welcome you to the Alexco Resource 2019 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 new releases and our financial statements for the quarter ended June 30, 2019, as well as our 43-101 compliance technical report supporting the Keno Hill pre-feasibility study. Today, our Chairman and CEO, Clynt Nauman will discuss our most recent quarterly results. After his presentation, Alexco’s CFO, Mike Clark; and Alexco’s President, Brad Thrall will join him for the question-and-answer period.Before we start, I’ll remind everyone that some statements made today may constitute forward-looking information within the meaning of applicable securities laws. Please note that past performance discussed today is not indicative of future results, and our business involves a number risks that could cause results to differ from projections. Investors are encouraged to review these disclosures and discussions pertaining to risks that can be found in Alexco's most recent regulatory filings available on our website and on SEDAR and EDGAR.I will now turn the call over to Clynt Nauman.

[Clynton Nauman:]

Thank you, Kettina, and welcome, good morning and good afternoon to everybody. Before I review our performance, I'd like to draw your attention to the fact that effective Monday, August 12, Alexco changed its trading symbol on the TSX from AXR to AXU, so that our shares now trade under the same trading symbol on both the TSX and the NYSE American.Now let's review the highlights from the second quarter. We reported a total net loss of $1.5 million or approximately $0.01 per share. We finished the second quarter with $11.8 million in cash and cash equivalents and working capital of $50.5 million. The recent split between cash and the working capital balances as a result of AEG’s growth and revenues which has resulted in higher receivable balances.On March 28, we announced the results of an independent pre-feasibility study for expanded silver production at Keno Hill and we filed that PFS on May 8. On April 23, we completed a private placement of $1.8 million flow-through shares at a price of C$1.90 for gross proceeds of $3.5 million. And on June 7, we completed a bought deal public offering for 6.5 million shares at a price of US$1 for aggregate gross proceeds of US$6.5 million or C$8.6 million.In late June, we initiated a $2.2 million surface exploration diamond drilling program that will comprise approximately 20 holes in a minimum of 7,500 meters to test targets in the vicinity of the Bermingham deposit, including the deep holes we have discussed previously and also along with other targets in the Galena Hill area.Interestingly, most of these new targets were identified during last year's aerial geophysical survey, which was completed to better understand the continuation of the Hector-Calumet-Bermingham mineralization trends and identify blind targets and other blind mineralized structures with signatures, signature similar to that of Bermingham. That signature is of course a geophysical signature.We commenced construction of key service infrastructure as outlined in the PFS. During the quarter, we focused on installation of underground production-related portal infrastructure at Bermingham and other infrastructure and services including upgrades to the existing haul roads from Bermingham, construction or the water treatment ponds and construction of a coarse ore storage facility at Bermingham.Our environmental business, AEG generated $8.7 million in revenues and $2 million in gross profit for a margin of 23%, gross margin that is. And during the quarter, AEG incurred an operating loss before taxes of $161,000 excluding non-cash costs of $138,000.AEG and joint venture partner, JDS Energy and Mining, entered into an agreement to acquire the assets of the Mount Nansen site from the Government of Canada. AEG and JDS each owned 50% of the Mount Nansen Remediation Limited Partnership, which was entered into as an agreement with the Government of Canada to remediate environmental contamination from previous mining activities at Mount Nansen. More details related to the terms of this agreement with the Government of Canada will become available as the project moves through the closing process.Our subsidiary, Elsa Reclamation and Development Company, ERDC continued in the environmental assessment process for the Keno Hill closure plan. The plan currently in the seeking views public comment period under [indiscernible]. And finally, AEG entered an agreement with the Bank of Montreal for a revolving line of credit up to C$4 million. AEG was able to utilize the LOC to post a $1 million letter of credit for the Mount Nansen project.On the permitting front, the application for the renewal of the Water Use Licence for the Keno Hill Silver District completed the technical adequacy phase in July, and a 30-day public comment period has been advertised by the Government of the Yukon. Public comment period is scheduled for completion on August 20.We have updated our target date for receipt of the amended Quartz Mining Licence to Q3 2019 and receipt of the amended Water Use Licence to Q4 2019. Now that we have completed the technical adequacy process for the Water Licence renewal, we’re on a clear timeline for the completion of this final license process.With respect to production decision, we continued to move forward in a disciplined two phase approach, primarily to mitigate the risk of any further delays in the permitting process.Phase I started in June with a number of service infrastructure projects as I mentioned, including completing the multi-plate portal cover at Bermingham, construction of a coarse ore pad and water treatment ponds at Bermingham along with upgrading the existing haul road from Bermingham mine to the Keno Mill. These are things I mentioned previously obviously.Phase II, however will commence when the timing and certainty of the amended Water Use Licence is clear along with a positive production decision and this phase will consist of underground development with full production at Bellekeno, Flame & Moth and Bermingham along with mill commissioning.Phase II including ramp up is expected to take approximately four months to six months to complete before shipping a concentrate product. We have the financial resources to complete our 2019 exploration program on current surface infrastructure projects. We continue to receive renewed interest from off-takers to establish preproduction facilities, once we made a production decision and we are evaluating other options to procure the remaining resources necessary to [put in] a little back into production. We are doing this while generating maximum value for our shareholders.In addition, we have a $15 million U.S. Sprott credit facility, which remains undrawn. The drawdown availability period for this facility expires on August 23, 2019 and we are currently contemplating alternatives for extending this facility.With that short description, I would now ask the operator to open the question-and-answer period. Thank you.

[Operator:]

Certainly, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mike Niehueser of Scarsdale Equities. Please go ahead.

[Mike Niehueser:]

Hi. Good morning, Clynt. The stock is up quite a bit this morning. I've just wondered if you had any comments on the reason for the move.

[Clynton Nauman:]

Mike, I don't know anything more about that move than you do. There's certainly nothing internal to the Company that is other than normal course. And so I can only assume that we have more buyers than sellers.

[Mike Niehueser:]

Okay. Well thank you. It sounds like with the adequacy phase passed on the Water Use Licence that you're not anticipating any further delays beyond the guidance that you're given for the fourth quarter. Is that pretty much correct?

[Clynton Nauman:]

Yes. I’ll let Brad take that. He's been intimately involved in this process obviously.

[Brad Thrall:]

Yes. Mike, Brad here. Yes. I mean, the process going forward now is like Clynt mentioned on the August 20, the public comment period will end. Beyond that, there likely will be a hearing that it's fairly normal for a Class A license to have a hearing. We would expect that sometime in probably mid to late September. And then once the hearing is completed, it's generally one to two months to have at least a draft license issue. So yes, I think at this point, we certainly have a clear path now to the conclusion of this process.

[Mike Niehueser:]

Well that's the critical path permitting item. But it mentioned that there is an additional amendments with a Quartz Mining License. Is there any chances that that could be delayed where that could become the critical item?

[Brad Thrall:]

No, Mike, our experience certainly to-date is that I mean there are generally no kind of timing issues with the Quartz Mining License. I think that's well in hand. So we would expect again that the QML to be issued sometime in the third quarter. And then the Water Use Licence in the fourth quarter.

[Mike Niehueser:]

And if we get at this current price level and exchange rate, what you know about off-takers and so forth? Is it likely that we would have a positive production decision at the end of the year?

[Michael Clark:]

Mike here, I mean, as you mentioned that the water licence is the key issue here. Once we have certainty on the water licence and the conditions that are attached to that, none of which we expect to be unusual. Then the Company is certainly going to make a decision one way or the other. And I don't think that we can speculate on what the market is going to look like at that point. But all the indications at present time that the sentiment has changed in the market something that we were looking for obviously. And so we're pretty optimistic looking forward here.

[Mike Niehueser:]

It seems like it’s – with your knowledge of this business that the permitting should be pretty well understood. Are the delays we've seen a matter of issues that the government has had or is it a matter of their bandwidth?

[Brad Thrall:]

Well, maybe I can jump in again, Mike on that again because I've been fairly involved in this process. I mean as you know things are fairly active in the Yukon. There are a number of other larger applications within the process.So again, the delays I think that we've have communicated are certainly not specific to any issues with our application or our project. It's simply a renewal of existing facilities as well as the addition of Bermingham. So again, there's a lot of activity in the Yukon and I certainly think that the Water Board staff is trying their best to respond to the timelines with the resources that they do have.

[Mike Niehueser:]

Well, so have been a long time and coming, and it just seems like it's very close. As far as exploration drilling goes, it looks like about half the holes are going to be to expand and demonstrate the potential of the Northeast Zone at Bermingham. And the other holes are those following up on strides across the Brefalt zone or Brefalt fault, and in Galena Hill, are those building upon by the most recent drill program or those more speculative or exploration type holes?

[Clynton Nauman:]

Yes. I mean, good question. So the drill program is really – there's two pieces to it. One is the deep drilling at Bermingham. I mean those holes we're launching them, offer the surface. We are drilling 600, 700, close to 800 meters. I mean, these are big speculative drill holes being drilled well underneath the Bermingham deposit for all the reasons that I have previously described.So those holes progressed relatively slowly, but we do get there eventually and that deep drilling program is coming to a close in terms of the previously designed holes. And where we go from that from here, we have yet to decide.The other portion of the program is shallower holes around the Northeast Zone at Bermingham, as you mentioned. But we also have – we have a couple of 3,000 meters of drilling that will be deployed in at least three other places where we see indications structurally and stratigraphically of similar settings that we have at Bermingham on Galena Hill.And we've actually been confident enough here that we mobilize for a short period of RAB drill to drill some shallow overburden holes to pin down some of the geophysical signatures we were seeing along the extrapolated trends of the mineralization that we know is present at these three sites. So that's where the rest of the shallow drilling is going to go.As far as the other side of Brefalt that once again did the long-hole targets for the most part. And so we're continuing to evaluate those. We certainly have great information with geophysics, indicating where to be drilling on the other side of the fault.But there are significant shallow opportunities on the Eastern side of the fault versus Western side of the fault. So we elected to drill on the Eastern Bermingham, Hector-Calumet, this year, continue to do our homework and launch off on the other side of the Brefalt at some point either later this year, possibly, but almost certainly next year. So, did answer your question?

[Mike Niehueser:]

Yes. One last, one more question. With the run rate for AEG, it looks like it's going to be $25 million to $30 million for the next 12 months. Is that likely to fall off if its project related or do you think you could build on that?

[Clynton Nauman:]

No. Not at all, Mike. I mean the contractual backlog in that business continues to grow. So that run rate I would regard as sort of a base load run rate going forward, you are aware or must be aware that we are plowing money into that business, trying to grow the business to meet the demand that's out there, increase the capacity. And we certainly expect growth in that business.

[Mike Niehueser:]

Well, it seems like your technology and your patents are becoming more accepted at a faster rate. I’m just wondering if you have the bandwidth, just the scale of that business that I would assume it would be important to improve margins. That really is my last question, Clynt.

[Clynton Nauman:]

Yes. And there's no doubt, we're running to catch up Mike, in that business. There's more business coming in the door than we can deal with. We're being pretty selective in terms of the projects and then we get into, they're mostly bigger projects at this point. I mean, you can see the effect of that and working capital. And so we're bringing a little more targeted, but we're very deliberately growing that business. And yes, it has established a reputation for excellence and accomplishment, especially in dealing with some of the more difficult environmental issues in and around mines and industrial sites.

[Mike Niehueser:]

Well, thank you very much.

[Operator:]

[Operator Instructions] Our next question comes from Mike Kozak of Cantor Fitzgerald. Please go ahead.

[Michael Kozak:]

Yes. Good morning, guys. Thanks for hosting the call. Just a couple of questions from me. First question on Clynt, you kind of touched on this in your opening comments. But the availability date on that Sprott facility, I think you were saying it expires the next week.Presumably, you'll be able to extend that again, like you have before. But putting that aside, I was just kind of – if you could give more color on your discussions with off-takers. If they were presumably going to provide some sort of working cap facilities, that's something that you would wait on a till after you've made a go ahead decision or something that you could do kind of in the shorter-term here?

[Clynton Nauman:]

Yes. Okay. Let me stop with that one. Mike or Brad might want to chime in. But on the Sprott facility, as I mentioned, I mean there's a discussion going on obviously. And I wouldn't speculate where that's going to go, but I mean, you have the dates correctly identified.With the off-takers, they're going to wait, and they typically would want to be lost money in and for one of a better term. And so they will definitely wait until we've made a production decision and we likewise would not entertain any proposal from an off-taker unless we had made that decision. So yes, that's where we stand with those guys. I will reiterate though that there is that there continues to be high interest in this product.

[Michael Kozak:]

Got it. Thanks. And then my last question, I think in your press release, you're going to start to see revenues from the remediation of Mount Nansen. And I think you said in Q1 of next year. My question was, I think a 10-year contract, broadly speaking, and how do those cash flows look? Are they relatively consistent, quarter-over-quarter? Are they lumpy or the way to towards the back end of that contract? I mean how should we just think about modeling in those revenues?

[Clynton Nauman:]

Well, Brad was very instrumental in securing that. That works from the government of Canada, so I'm willing to take that.

[Brad Thrall:]

Yes. Thanks, Clynt. Yes, Mike, that contract, it's a milestone based project, which means, we don't get paid or receive revenue until we reach certain milestones. So but most of these milestones are fairly large type of, I guess revenue payments, if you will.So over the next, I would think year, perhaps you can call it and lumpy. There's a couple of larger milestones in the first quarter and second quarter of next year. So that's what you're seeing right now is a lot of upfront. I guess investment in that project, in order to reach those first couple of milestones.So – but once the permitting process is complete, we estimate about a four-year period to do all of the engineering, the care and maintenance and once that's complete, then it's fairly steady. I guess revenue once you're in that care and maintenance period.

[Michael Kozak:]

Got it, okay. That's very helpful. All right, thanks. Thanks guys. That's it for me.

[Operator:]

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

[Clynton Nauman:]

Okay, thank you. And just by way of closing remarks, I just want to say that over the next several months, we'll complete a 2019 Surface Exploration program and Phase I of the development plan of Keno Hill. We expect to disclose results from our surface drilling towards year-end and by that time we should have more clarity on the Water Use Licence and be positioned for the production decision we've been talking about here.I do believe the rise in precious metals we're observing in the last month or so are sustainable, especially in the phase of continuing trade tensions between the U.S. and China and the prospect of negative interest rates. This makes for a strong case for Keno Hill and the significant operations and exploration potential at holes.I look forward to updating you on our progress as we look to become Canada's only primary silver miner and deliver on our goal of maximizing value for our shareholders. As always, thank you for your continued support and interest in Alexco.And with that I'll turn it back to Kettina to close the call.

[Kettina Cordero:]

Thank you, Clynt. We remind our listeners that our news releases and regulatory filings are available on our website at alexcoresource.com. A replay of this call will be available in the events section later today. If you would like to sign up to receive updates on Alexco, please visit the contact section of our website, and if you have further questions, please contact me at [e-mail]. Thank you for joining us and have a great day.

[Operator:]

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