Alexco Resource Corp.
Q4 2019 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Alexco Resource Corp. Fourth Quarter and Year-End 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:]

Good morning. Today is Thursday, March 12, 2020, and I welcome you to the Alexco Resource 2019 year-end 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 year ended December 31, 2019.Today, our Chairman and CEO, Clynt Nauman, will discuss our most recent quarterly and annual results. Our President, Brad Thrall and our CFO, Mike Clark will join him for 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 a 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 on our most recent regulatory filings available on our website and on SEDAR and EDGAR.I will now turn the call over to Clynt Nauman.

[Clynt Nauman:]

Thank you, Kettina, and thank you to everybody who's joining us today.This certainly is an anomalous day to be having this type of a call. So, forgive me if I'm sort of making it up as we go along here. But, before I provide you with an update, it’s only appropriate to comment on the disruption in the market. The rapid spread of the COVID-19 virus has caused us obviously a severe collapse and slowdown of the world's largest economies. And the volatility that we're seeing in my view across all of these markets may have been triggered by the COVID-19 virus, but there are more severe underlying issues that are exacerbating the pain and the volatility.For me, it reminds me of the markets and the way that it seemed to me in the 2008, 2009 period. And there's no doubt that we're going to be going into, in my view, some period of fiscal stimulus. But, I do not think that it's going to be a QE type of a stimulus this time around. It's not going to be the government trying to add reserves for banks and create credit and sort of reinvigorate the credit cycle. It's going to be -- it has to be, in my view, personally in my view, it has to be new money that's going to pay for the current expenditures and it's going to be a shared debasement of the monetary world. And it's the old Ben Bernanke type helicopter money that I think is coming. And for that reason, precious metals are a great place to be.Gold stocks and silver stocks, obviously, I think are trading, obviously in line with the broader market and they will continue to do that on a short-term basis, and we're not immune from that. But, I’d tell you, my view is that at some point, there's going to be a divergence here. And liquidity certainly drives bubble markets, discounted cash flows, determined values and in recessions and depressions.And as the credits continues to unwind, gold and silver’s value in terms of other commodities will continue to rise. And Alexco and other gold and silver companies, in my view, should do well, in that type of environment. So, at this time around, the optimistic view is that it's going to be as good or better than it was before the printing. And it will be printing and direct injection, in my view, this time into the economy. And that's going to cause both gold and silver to rise in real and in nominal terms.And so, I don't -- obviously, we don't feel comfortable in the existing markets. It's volatile, it's painful. But, at the end of the day, I think that we are in the right place at the right time. And it's a matter of just the timing of how this all is going to unfold.However, so moving back to 2019 and regarding the information that we put out yesterday. I’d just like to say that we've continued to focus on moving Keno Hill back into production. We've done this in a disciplined manner, largely driven by our permitting timelines, and all the while we've achieved several milestones that have brought us to this point where we're sitting on the cusp of a production decision.I should summarize some of our achievements in 2019. On the operations front, for example, in March, we announced positive results from an independent prefeasibility study for expanded silver production at Keno Hill. During the year, we completed several surface capital exploration projects around the Bermingham deposit, including the installation of the production related portal, construction of lined treatment ponds, initial construction of a coarse ore storage pad and upgrading the existing haul roads.In December 2019, we received the amended Quartz Mining License, which authorizes development and future ore production from the Bellekeno, Flame & Moth, Lucky Queen and Bermingham deposits. We're now in the final steps of amending and renewing the WUL license for mining related activity across the district. And we completed a public hearing in mid-February, and we expect the license to be issued -- the WUL license to be issued at the end of Q1 or shortly into Q2.As it goes to exploration, in 2019, we completed more than 8,000 meters of drilling and 29, 30 holes across the district. The first phase, just over 5,000 meters was in the Bermingham area in both, the shallower Northeast zone, where we were successful, and you'll see the resources expand there. And also in the Bermingham deep area, where we had several high grade silver intercepts up to 8 point -- more than 8 meters True Width with composite grades of 45 ounces or so. So, that demonstrates that Bermingham is going to have some kind of a deeper extension from what we see and the existing mineral reserves and resources, and could potentially be a bigger deposit than what we see at the present time.Also, on the exploration front, having completed the Bermingham work, we moved around a number of other targets, mostly driven by geophysics actually from the prior year. And that resulted in the discovery of the new Inca vein, which is about 1.5 kilometers from the mill and actually sits between the Bermingham deposit and the District mill.On the financial front in 2019, we reported a net loss of $8.9 million or $0.08 per share, including non-cash cost adjustments of approximately $2.3 million. We finished the year with cash and cash equivalents of $6.8 million on net working capital of $10.1 million. Our restricted cash and deposits at December 31st were $2.8 million.In April, we completed a private placement, the gross proceeds of $3.5 million. In June, we completed a public offering titled with total gross proceeds of $6.5 million U.S. We let the original undrawn $15 million Sprott credit facility, that's $15 million U.S., expire. And now, we have in place an indicative term sheet for a new $15 million credit facility on similar terms to the original that we can trigger when we are ready to make a production decision. On the environmental side of our business, AEG, you would see that that business grew rapidly in 2019, more than $29 million in revenues and $6.1 million in gross profit with the margins of 21%.On February the 14th, we sold AEG to the AEG management’s consideration of $13.35 million cash. We received $12.1 million of cash on closing with the remaining $1.25 million due on February the 14, 2021. Importantly, we have retained full ownership of the Elsa Remediation and Development Company, ERDC, as we call it. And thus, Alexco will execute the cleanup of historical mines in Keno Hill Silver District under the existing contract with the federal government of Canada.We’ll continue to work with AEG, now called Ensero, to utilize their expertise and technology. AEG sale was a strategic decision as AEG had clearly outgrown Alexco and has provided us with significant resources to redirect our mining operations and the renewed focus on moving the Keno Hill back to production.In 2020, we expect to transition once again from explorer to mine operators. We anticipate making a production decision in Q2 subject to granting a WUL license and looking obviously at the market conditions. In the meantime, we are preparing to launch our 2020 exploration program, which will comprise about 11.5 million meters of diamond drilling and rotary air blast drilling. There'll be about 3,500 meters of surface diamond drilling in that 11,500 meters. The Bermingham deep areas will be focused obviously, where we're looking to expand the existing mineral resource. And assuming that we have some success there, we'll have to decide whether or not we want to reinvigorate that Bermingham drill program and start drilling off these deeper extensions.We’ll also focus on the Inca prospect where we expected to define and extend the mineralized zone discovered last year. And as we speak, actually, this month, we're going to complete some additional aerial geophysical work to fill in the gaps from the 2018 program, especially on the eastern side of the district.On the development side, we've been making key hires at site and are ordering long lead time equipment. We're doing this cautiously and prudently. And these items are both for the mill and underground operations and putting us in a position to restart when we make that decision. I will tell you that from a corporate perspective, and we're treating the COVID-19 crisis here extremely seriously. We've implemented appropriate protocols to ensure the safety of our employees and contractors, while we continue to execute business plan.With that, I think that I would open the call to questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jake Sekelsky with Roth Capital Partners. Please go ahead.

[Jake Sekelsky:]

Good morning, guys. Thanks for taking my questions. I just want to say, Clynt, well said, on your market overview. I really think you hit on a bunch of important points there that people should keep in mind during volatility we're seeing right now. Just a few quick specific questions on my end. Are you able quantify the CapEx required for Phase 2 of this development plan, or is that something you should expect to see after you guys make a production decision?

[Clynt Nauman:]

Yes. I think, we'll be more specific on that, Jake, once we make a production decision. Suffice to say that we're into this capitalization program, construction program in Phase 1, in the $3 million to $5 million range. So, that number is coming down. And we'll be more specific on that. But, it's a very manageable -- very manageable number.

[Jake Sekelsky:]

Fair enough. And then, just on the exploration budget that you guys outlined. Are you guys able to give us just a ballpark breakdown or a percentage breakdown of what you expect to allocate towards the Bermingham deep target versus Inca and other regional targets? It seems like the vast majority is going to be funneled towards Bermingham deep?

[Clynt Nauman:]

Yes. So, it's more than 50% will go into the Bermingham deposit. But, it’s a fluid situation. I do think -- we're going to drill some holes there. It’s clearly a blue sky statement. But, I keep saying, this is a 100 million ounce deposit in the Keno Hill Silver District. Bermingham is a good place to be looking for.We do have indications that the deposit is going to be a lot larger than we see at the present time. We're going to be -- we’re going to put half a dozen holes plus or minus in there. And if it really looks like it is going to be a very significant deposit, I think that we’ll probably change course. And we'll have some discussion about whether or not we should launch on an infill program. But keep in mind that based on our initial arithmetic, it’s -- you're talking 30,000-plus-meters of drilling to drill something off at that depth. So, it would be a pretty serious decision.So, I'm not sure if that answers your question. We are very focused on Bermingham. We're not throwing all of our dollars at it. We do think that we can generate other targets and other potential resources, potentially minable resources. And we want to continue doing that from a grassroots type perspective. And that's where we're going to use this wrap drill, so that we can quickly test targets that we used to test this time and drill, and move along from one target to another as outlined by the geophysics in areas of cover where those areas have a geological signature that's similar to Bermingham and other deposits in the district. So, long-winded answer, I don’t know if that captures what you're asking, but that's my thought.

[Jake Sekelsky:]

It definitely does. So, it sounds like if you have some initial success at Bermingham, if it's become a little bit more aggressive there in the second half of the year?

[Clynt Nauman:]

Yes. I think, there'll be a pretty deliberate discussion. That's not an insignificant decision, given the amount of effort and resources that it's going to take. Of course, the price will be more on the investment.

[Operator:]

Our next question comes from Mike Niehueser with Scarsdale Equities. Please go ahead.

[Mike Niehueser:]

Just a couple of questions. The backlog that you have or foresee with ERDC to clean up Keno Hill, is that in Canadian or U.S. dollars?

[Clynt Nauman:]

Well, I mean, it’s Canadian dollars. I mean, we report in Canadian dollars. So, yes, that’s a Canadian dollar number.

[Mike Niehueser:]

That's $100 million Canadian. Also, following up on the compliments for the market comments there. I just know a lot of people that made a lot of money buying Alexco on dips like this and it just seems the decision is pretty clear about going into production, except for the volatility. And just wondering how you're viewing the Canadian dollar is much weaker to the U.S. It probably accounts for the recent decline in the silver price, but lead and zinc is holding in there. And overall, it seems like outside of what's going on in the rest of the world, Yukon pretty stable. And you probably have, unless there's a global meltdown, pretty good position to making a positive mine decision in the next 30 days. Is that a reasonable comment?

[Clynt Nauman:]

I also think it's reasonable to be sort of keeping our eye on the market. I mean, as I mentioned, I do think that gold and silver are going to move with the markets generally. I mean, you’re seeing sort of volatility and collapse that is really significant. So, we're going to be cautious. I am absolutely convinced that we're in the right place, at the right time. It's really a question of when do you see this additional liquidity injected and work its way through the market, and where we're going to be sitting at that time. So, we're going to be like everybody else. We're going to sit, we're going to watch, we're going to move cautiously forward, but certainly not going to divert in the short-term until we see some order in the market and intelligently sort of understand what's happening. So, we’re like everybody else. I'm not sure that answers your question. But, we're moving cautiously forward here. We're watching the markets carefully. And when I say that -- if I'm hedging on my answer, I'm only saying if silver totally collapses along with the markets, there is complete catastrophe here, obviously, we're going to treat that with some seriousness and maybe rethink our plan. But, in the meantime, we're in the right place, in my view.

[Mike Niehueser:]

Well, I just think, the great time to buy when stocks are low. And when I think about the comments you made about the drilling deeper at the Bermingham deep and dilution, I keep staring at your slide in your presentation on the Inca vein, how close that is to surface. And it just seems that if you had to mind your dollars as you wait for a decision and don't want to dilute further even with the flow-through dollars that looks like an extremely attractive target. Is that the correct perception of that? And is that potentially another Bermingham type look alike or a Flame & Moth type look alike?

[Clynt Nauman:]

Well, Bermingham has the big price -- potentially the big price. I do think that the Inca discovery is important. Do I think that it has the type of size that we see or size opportunity that we see at Bermingham? I'm not -- and I don't think we have enough information yet. And I'm not as convinced that it's going to be of that type of size, the tenor of it could be really good. It is a shallow target, it is easy to get to, it does meet our criteria in terms of potentially the target that we follow up with the potential opportunities and it might turn into something that is potentially mineable in the future. It would not be on the front -- the front of the line in terms of mining opportunities. But, from an exploration perspective, there may be a very reasonable resource there that is easy to get. And is -- it's at the right address in terms of accessibility with all the other infrastructure we’re putting in place in the district.

[Mike Niehueser:]

Well, if it's not on the Hector-Calumet, Bermingham trend and it's between that and the mill, it's on a unique trend that is genuinely a new opportunity and I think could add ounces to the front end but the back end of the mine plan, and isn't that what you're looking for at Keno Hill?

[Clynt Nauman:]

Yes, exactly. That's what I'm saying. That's what I'm trying to say.

[Mike Niehueser:]

You are doing great. Thanks for taking the calls. It's a strange day and you did well. And I'm looking forward to April to see the Water Use License approved and finished. Thanks a lot, Clynt.

[Clynt Nauman:]

Thanks, Mike.

[Operator:]

Our next question comes from Leigh Curry with Curry Partners. Please go ahead.

[Leigh Curry:]

Good morning, Clynt. I just want to see if I could get a little bit more of a feel for you on the range of consideration of when the mill might be reopened. You commented on the getting the last apartment and also on the market conditions. We thought to see silver trading in 14 to 19 range over the foreseeable past, and somewhere in there would obviously be what market conditions are. Would we be correct in thinking that if the price of silver goes to 14 or 13, we would definitely not do it? And if it goes back to 19 and 20, we would definitely do it. Can you say anything along those lines?

[Clynt Nauman:]

Thanks for the question. I mean, I think that is a pretty accurate representation. I will say that the other thing that you'll be looking at of course, is the foreign exchange. I mean, the Canadian dollar, at least today -- well, last time I looked, it’s pretty weak. I mean, it's in the $0.72 to $0.73 range. So, I mean, that puts you over at more than $20 in Canadian dollars. And so, that's plenty in today's $15 odd market. So, that's not a bad number for this district. If it goes to $13 and the Canadian dollar strengthens or the U.S. dollar weakens, then it's a completely different story. I agree with that. So, yes, that's the volatility we're dealing with. And that's why I say, we're going to be pretty cautious and watching the market carefully as we move forward.

[Leigh Curry:]

Also in connection with your comments about the coming monetary stimulus and what impact that's going to have, it's sort of a difficult thing to see how the monetary stimulus really helps, the coronavirus in the lower oil price. And what I'm hearing that their considering down in Washington would be to do something very dramatic on the fiscal side, maybe some sort of huge $2 trillion fiscal stimulus that would include tax cuts and big infrastructure rebuilding, immediate 0% loans to all companies that are hurt with bankruptcy from the coronavirus or lower oil prices, a provision of money to people and companies and local governments for any kind of prevention measures, and immediate reimbursement for all medical costs from the actual victims. And I suspect that if anything like this were to happen, we would see the markets and certainly the price of silver goes back up sharply. Anyway, congratulations on the progress that you've made.

[Clynt Nauman:]

Thanks, Leigh. I appreciate the question. And I agree. I mean, that's what I mean when liquidity is going to go directly back into the -- into -- to cover expenses essentially, not necessarily through a QE type mechanism. But, I mean, that's just a thought.

[Operator:]

Our next question comes from Tom Rosenberg, a private investor. Please go ahead.

[Unidentified Analyst:]

Good morning, Clynt. Can you hear me?

[Clynt Nauman:]

I can.

[Unidentified Analyst:]

You can. Good. Yes, my name is Tom and I'm simply a small investor for years. And I've been watching and I know that exploration is a very important part of growth. But I also want to -- wanted to ask you, at what point does your company become a profitable company, helping the shareholder little bit versus more exploration? Is that a fair comment?

[Clynt Nauman:]

Yes. So, we are working towards a production decision. The prior caller, Leigh Curry was asking when that might occur also. And I guess, I didn't quite get to the answer on that. But I mean, if markets are strong, and they're oddly, then we'd be looking forward to production in the latter part of 2020 this year. That's the current track that we're on. But, we're watching the markets pretty carefully. On the exploration front, we have spent a fair amount of effort on exploration. We have a significant number of ounces in this district in all categories. It's more than 100 million ounces of silver now. And, that seems like a lot of silver. We only have a portion of that in our mine plan. We continue to find and put silver on the books for around $0.50. And so, it's -- I mean,, that's a good investment in our view. So, I think that in all likelihood, we'll continue to do exploration, but the focus is certainly going to move from exploration development to development production. And that focus change will be in 2020.

[Unidentified Analyst:]

That answers my question. Thank you very much.

[Operator:]

This concludes the question-and-answer session. I would now like to turn the conference back over to Clynt Nauman, the Chief Executive Officer.

[Clynt Nauman:]

Thank you very much. I want to thank everybody for attending today. It's an interesting time to be invested in Alexco. Obviously, we have a world-class asset here in a tier 1 jurisdiction, we have significant potential to grow our existing mineral resources through continued exploration, and we of course are heading down the road towards a production decision here.So, other than that, I think, we've covered a lot of topics here today. And I certainly appreciate your attention. And I look forward to discussing our progress with you when we report on our first quarter results, which will be in May. Until then, thanks very much and have as good a day as possible in this market. Thank you.

[Operator:]

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