Alexco Resource Corp.
Q3 2018 Earnings Call Transcript

Published: 16 Nov 2018

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Alexco Resource Corp 2018 Q3 Conference Call. [Operator Instructions] I would now like to turn the conference over to Alexco's Director of Investor Relations, Lisa May. Please go ahead.

[Lisa May:]

Good morning. Today is Wednesday, November 14, 2018, and I would like to welcome you to Alexco Resource Corp's third quarter ended September 30, 2018 conference call. This conference call is being webcast live and can be accessed at the company's website at alexcoresource.com. You may sign up on the Alexco website to receive future news releases and other event updates as they are issued. You will also find Alexco's news release with quarterly financial results there. This conference call is been recorded and archived on the company's website under Events and Webcasts. Giving presentations on today's call will be Clynt Nauman, Chairman and Chief Executive Officer; Brad Thrall, President; and Mike Clark, Chief Financial Officer. We will have a question-and-answer period after our presentations. Before we get started, I need to remind you that some statements made today may contain forward-looking information. Our business involves a number of risks that could cause results to differ from projections, and investors are urged to consider those disclosures and discussions pertaining to risks that can be found in Alexco's SEDAR filings. It should also be noted that past performance discussed in this conference call is not indicative of future results. With hat I'd now like to turn the call over to Clynt Nauman.

[Clynt Nauman:]

Thank you Lisa and thanks everybody for joining us today to review our 2018 third quarter results and in addition to get an overview of the remainder of 2018 and beyond. We continue to move forward with our focus of putting the Keno Hill Silver District back into production and thereby completing a transition from explorer and developer to developer producer. Our execution strategy remains consistent, disciplined to ensure risks both internal and external and managed in a measured way, executing each step in a safe and effective manner and continuing to emphasize prudent and intelligent exploration strategies. It is by using this approach that we believe that we are moving the company steadily up the value curve even amidst a challenging market -- that we find that we currently find ourselves in. I am certain that you're as frustrated as we are just to see our share price drop to low as we haven't seen since 2016. We attribute this steep decline to a number of factors including the depressed overpriced and remember after all we were highly leveraged to silver price, general market malice and a large estate sale over the past couple of months. Another factor that could be contributing is the perceived lack of confidence in the Yukon permitting process as a result of moving golf post and changing timelines. As your CEO, I want to assure you that nothing has changed in our business. In fact it continues to strengthen in all areas internal to the company. From a broader perspective we strongly believe Alexco is exceptionally well positioned and has a unique opportunity. Our operations are located in one of the safest and fastest growing jurisdictions in the world. We have relatively new existing mining infrastructure including a 400 tonne per day conventional floatation mill and for a positive production decision we have the ability to move to production in a relatively short time frame at relatively low cost. Add to that a robust project with best in class production silver grades and the prospect of continued and significant exploration upside and I think you can understand our enthusiasm and confidence in the longer term future of our company. On the call today I will briefly highlight the results on 2018 then give some guidance on our plans for the next 12 months. Brad will discuss operations and development and progress of our underground work and Michael will walk us through a summary of the financials. We released our financial results on Tuesday yesterday outlining a net loss of $1.5 million. So that was for the quarter at the end of September 30th. The operating highlights during Q3 included firstly we ended the quarter with cash and networking capital of 14.1 million this is more than enough cash to get us to production decision and beyond and secondly our environmental business recognized revenues of 4.7 million in the third quarter for a gross profit of 1.7 million achieving a gross margin of 36% the gross profit being about 10% increase over the same period last year. Other highlights in the quarter included the issues or the accomplishment of completing the Bermingham decline and transitioning our underground efforts over to Flame & Moth which we continued to advance in the third quarter and by October 31, we had advanced the ramping system approximately 450 meters surpassing our original 2018 targets by almost 50%. During the quarter Alexco also completed an underground and surface in-fill and extension drilling campaigns at the Bermingham deposits. In total and completed by early October, our expiration program achieved nearly 20,000 meters of drilling and comprising more than 15,000 meters in surface and over 4200 meters in the underground programs. Initial drilling results from Bermingham which incorporated underground and surface trailing were announced in August and September and culminated with the announcement of an updated and expanded mineral resource estimate with the Bermingham deposit. The indicated mineral resource is nearly doubled the size from 17.3 million ounces to 33.3 million ounces of contained silver and at an average silver grade of 628 grams per tonne while inferred resources increase from 5.4 million ounces to 10.4 million ounces of contained silver at an average grade of 526 grams per tonne. That makes Bermingham in all categories one of the larger or largest deposits in the Keno Hill Silver District. In October we revised at the previously anticipated timeline to complete the currently active water use license process which includes authorization for water use and waste -- their position from the Bermingham deposit. We were advised that process will be delayed into the end of the second quarter 2019. This is a delay of approximately five months from our original target timeline for receipt of the renewed water use license. As a result of the permitting delay we are taking advantage of the added time to do further work on the pre-feasibility study. The expanded Bermingham resource especially at the grades we are seeing warrants further careful thought on the overall mining strategy given the availability of feed sources we now see at Bermingham Flame & Moth, Lucky Queen and Bellekeno. Taking the extra time at this juncture to allow the company to work with [indiscernible] Consultants to optimize mine design and to take advantage of all the additional changes and work that into an overall mining strategy for the district including the fact that we were working closely at the scalability of the district at 400 tonnes per day and beyond. Now let's put all that in context that we have completed in the previous quarters and discuss to work outline for the range of 2018. The culmination of all previously mentioned work is essentially the pre-feasibility study the result of which is now expected to be published in the first quarter of 2019. As you know this will provide a detailed mind plan with updated reserves and resources for all deposits in the mine plan. It will identify engineering improvements both underground and surface and that will reestimate remaining capital and operating costs as we close in on a production decision. At this point I'm going to turn over it over to Brad Thrall to continue with the discussion on the advance exploration define Flame & Moth deposit and other operations updates. Brad?

[Brad Thrall:]

Thanks, Clynt and good morning everyone. As Clynt just summarized this past quarter has been another very busy time at Keno Hill for the number of activities in and accomplishments over the past three months. In early September we completed our underground definition drilling program at the Bermingham decline where we completed just over 4200 meters of underground drilling. The majority of these results of this underground program were included in the new Bermingham expanded resource that we announced in September and is currently being incorporated into the pre-feasibility study mine planning process that Clynt just previously discussed. Our surface exploration program was completed in mid-October, we drilled over 15,000 meters from surface. As we discussed in our previous call the Bermingham decline was completed in mid-May of this year where we completed 590 meters of development which represents approximately 78% of the development required at Bermingham to reach the first ore stopes. Following completion of the Bermingham decline we redeployed our mine development crews and team in mid-May and continue to the ramp development at the Flame & Moth mine. As you recall we had previously collared the Flame & Moth portal and completed approximately 20 meters of the initial development last year. We are very pleased with the progress that Flame & Moth completing 450 meters of decline development including the primary ramp sumps and remark base and this has exceeded our 2018 plans and objectives that we laid out at the start of the year. During the quarter we had approximately 60 employees and contractors working at Keno Hill and with all of this activity I'm proud that our safety record continues to be excellent as we are over 5.5 years without a lost time accident at Keno Hill. At Flame & Moth we have just over 330 meters remaining of infrastructure development in order to reach the first ore level access at the lightning zone. A 100 meter ventilation raise to surface is also required before commercial production can be achieved. Completion of the main [ph] ramp development and infrastructure is pending completion of an optimized mine plan as part of the pre-feasibility study. On the Bermingham permitting front we achieved our first milestone with the issuance of a positive decision document by the Yukon government as a decision body in late July. With the ESSA process complete we are in the process of renewing our Type A water license to include processing ore from the Bermingham deposit as well as extending the term of the water license for all of our deposits out to the year 2033. We submitted our water license renewal application in August of this year and we were declared administratively adequate in late October. We are currently in the technical adequacy phase of this process. Based on the progress to-date and in discussions with the Water Board staff we currently anticipate a public hearing for the water license renewal is achievable in late Q1, 2019 with a license renewal and authorization for production at Bermingham in late Q2, 2019 and finally we're also making steady progress in the pre-feasibility study for Keno Hill, metallurgical testing has been completed including a lock cycle test with blended composites of Flame & Moth and Bermingham. Detail mine engineering and planning is advancing using both our in-house engineers as well as third party consultants. The pre-feasibility study will be published in Q1. 2019 and will include a new resource statement for Keno Hill as well as optimized mine plans and updated economics. So at this point I'm going to turn it back over to Clynt.

[Clynt Nauman:]

Yes. Thanks Brad and as you hear we will continue to advance this project in a judicious manner. With that said you know the market has proven challenging for us and other developers, lenders lack lustre and interest at best. We remain optimistic that the market will improve but as we move closer to a production decision we remain diligent at understanding the impact of silver price, currency exchange, smelter demand and other factors all of which have an impact on the overall value of our project. As you heard Brad said in terms of permitting in particular on our last conference call we indicated that we had concluded the environmental assessment process for the Bermingham deposit and received a decision document as Brad mentioned. At that point we were confident that the issuance of the required amendment or renewal of Alexco's will use license would be delivered in the first quarter of 2019. We were only recently advised in late October that the issuance would now appear to be delayed into the second quarter, late in the second quarter of 2019. Well there appears to be no problem other than backlog this delay is proof frustrating to say the least. Alexco continues to perform at a high level internally to achieve a timelines we present to the market. With that said we remain confident in the process and we're hopeful that the approval process is occurring at its most rapid pace. As a reminder once the Bermingham water license is complete we will be fully authorized for mining and processing operations from each of the four deposits in the existing mine plan. So just to be clear this is how we see our timeline today. In Q1 we will publish the results of our PFS study with the PFS in hand we'll be in a position to make a production decision. At the end of Q2 and based on guidance we currently have from authorities in the Yukon we expect to receive renewed water use license. Once we have the water use license we will be in a position to proceed to production based on this timeline. With respect to service expiration we strongly believe it continues to add significant value for our shareholders. In the current market we remain confident that increasing ounces in the ground is one of the best ways to create value for our shareholders. Our ongoing discovery remains low and of our entire land package less than 15% has been explored. So there's potential for substantial value to be unlocked as we continue this exploration. This year 15,000 metre plus surface exploration drill program resulted in a new resource estimate for Bermingham and also identified a new target areas in the vicinity of the Bermingham deposit. As I had mentioned previously we also had initiated on previous calls we also initiated a new program of deeper drilling in the vicinity of the Bermingham deposit drilling, 10, which we very quickly determine from initial observations that the geological characteristics and the mineralisation were consistent with a larger fluid feeding system and so we are considering a much larger deeper joint campaign in the Bermingham area in 2019. Remember the historic [indiscernible] mine is just a short 1 kilometer northeast of Bermingham and produced 96 million ounces of silver and reported grade of about 1100 grams per ton silver. And don’t forget the remaining results from this year service expiration drilling is expected to be released in the fourth quarter of 2018 or depending upon lab turnaround may be the first into the first quarter of 2019. Just a note on AEG, it had another successful quarter, the added capacity of the acquisition of Contango continues to pay dividends with respect to new clients and contracts which has had a direct impact on revenues and gross profit. During the year we made an effort to bulk up on our professional and support staff at AEG in anticipation of continuing growth in the business. Financially Alexco remains in strong position, as I mentioned we had $14.1 million in cash at September 30, we have an unused $15 million credit facility and we have keen interest from off-takers in terms of working capital and pre-production facilities if required once we make a production decision. We will continue to evaluate these and other opportunities as we move forward with the execution of our plan. At this point I'm going to turn it over to Mike Clark to review the financials and then we'll take any questions that may be out there. Mike?

[Mike Clark:]

Thanks, Clynt. This financial report is for Alexco's quarter ended September 30, 2018. Note that we are reporting Canadian dollars, so all dollar amounts will be in Canadian dollars unless stated otherwise. So the third quarter of 2018 we reported a net loss of $1.5 million for a loss of $0.01 per share. Loss before taxes for the quarter included non-cash income adjustments totaling $714,000. This compares to a 2017 Q3 net loss of $2.3 million for a loss of $0.02 per share. The decrease a net loss in the 2018 period compared to the 2017 period was mainly attributed to the corporation's fair value gain on the embedded derivative of just over $1.9 million which related to the Wheaton streaming agreement, I will remind you that this is a non-cash adjustment. AEG revenues for the quarter were $4.7 million and the gross profit was $1.7 million achieving margin of 36% compared to revenues in Q3 of 2017 of $3.8 million and a gross profit of $1.5 million achieving a margin of 41%. This increase in gross profit during the 2018 period was primarily due to services provided to U.S. customers that utilized a higher portion of internal labor. Mine site care and maintenance costs in the third quarter of 2018 total $651,000 compared to $421,000 for the same period in 2017. The increase in costs is mainly due to site based expenditures and mill maintenance and refurbishment initiatives related to future commissioning of the mill and related plant. Included in mine site care and maintenance costs for the 2018 and 2017 third quarters is depreciation expense of $322,000 and $327,000 respectively. Corporate, general and administrative expenses in the third quarter of 2018 or $1.7 million compared to $1.6 million for the third quarter of 2017. The increase in the 2018 period primarily as a result of an increase in non-cash share based compensation expense and increased overheads associated with increased activity levels. Environmental services general and administrative expenses in the third quarter of 2018 totaled $1.3 million compared to $694,000 in the third quarter of 2017. The increase in AEG, general and administrative expenses is attributable to the additional overheads associated with the operation of the Contango business and along with additional staff and support functions added in Q3 as AEG expands to meet the increased project demands. During the quarter the company recorded a gain on embedded derivatives in the amount of $1.9 million, the embedded derivative assets relates to the precious metal streaming agreement and that is based on variable payments tied to silver price and mining grade at Keno Hill. This is a non-cash adjustment and it's based on dynamic valuation models that it's updated each quarter with a number of inputs including silver price which in this quarter is the main driver for this gain. During the third quarter of 2018 the company inherited $6.5 million on mineral property expenditures which includes $2.5 million on development at Flame & Moth, $2.1 million at Bermingham primarily on drilling, surface and underground and another $1.6 million on surface drilling of new targets. As Clynt mentioned we have a credit facility was brought private resources lending for up to $15 million. As of today's date no amounts have been drawn down on this credit facility and this disability has a drawdown availability period until February 23, 2019 which can be extended by a further six months by issuing a 171,000 shares of Alexco. At September 30, 2018 the corporation had cash and cash equivalents of $14.1 million and net working capital of $14.1 million compared to cash and cash equivalents of $17.9 million and networking capital of $18.7 million at December 31, 2017. In addition the corporation's restricted cash and deposits was $2.6 million at September 30, 2018 compared to the $7.1 million at December 31, 2017.

[Lisa May:]

Thank you, Mike. Operator will you provide instructions for the Q&A session please?

[Operator:]

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

[Jake Sekelsky:]

Just a few things on my end. On the permitting timeline at Bermingham can you just provide a bit more color surrounding the delay, I mean is there a general backlog in the Yukon? I would imagine with the amount of activity in the area over the last year this might be the case for other projects in the area and not just specific to Keno Hill? So any color there would be helpful.

[Brad Thrall:]

Yes, Jake. I think that the permitting process in the Yukon again this delay really has nothing specific to do with Keno Hill or Alexco as you recognize that there is a substantial increase in activity in the Yukon. There's major mine construction underway , some of those projects are in the process as well for major amendments to their license. So again there's there is a significant backlog and we just I think find ourselves in the queue of these other projects at a time when again there's a lot of projects a strain on resources I think would be the term that at the water board level. Again as you know I think nobody knows this process better than Alexco in terms of how to navigate through the Yukon permitting process so again just confident that this is not a Yukon or this is not an Alexco, Keno Hill issue. We just find ourselves at the time of a lot of activity.

[Jake Sekelsky:]

And on the mean exploration front, it sounds like you're still committed to it despite silver prices remaining under pressure which isn't all that surprise given the success you've had this year. Is there any budgets or plans for 2019 with respect to exploration just across the district as a whole?

[Clynt Nauman:]

Yes, Jake I'm absolutely convinced that we add value by continuing to drill and add [indiscernible] to our inventory and at this juncture it is clear to us that there is a fairly significant area of ground that has not been tested adjacent and down plunge, down dip of Bermingham especially the northeast portion of Bermingham. That area will require a dedicated drilling campaign and I would think at this juncture we are fully committed and determined to execute that in 2019. It's really a matter of whether we do it sooner or later and so I would say you know continuing to do exploration at least at the $1 million - $2 million level for sure.

[Operator:]

Our next question comes from Kevin MacKenzie of Canaccord Genuity.

[Kevin MacKenzie:]

Two quick questions from my end. I just want to get into to project CapEx based on the CapEx that was outlined in the 2017 PEA, what do you guys think you'll spend towards by the end of this year?

[Clynt Nauman:]

Kevin, I think that I mean we will see where we're at the end of the year but you know I think that number is probably around $70 million in that kind of range at this point.

[Kevin MacKenzie:]

Okay, that's for 2017 and 2018 now?

[Clynt Nauman:]

No that’s against the original capital what has been invested in 2017 and 2018, advancing those declines we've been talking about.

[Kevin MacKenzie:]

Okay. Next one, assuming the water permits come into place here at the end of Q2, when can we expect to be commissioning the mill, would it be late 2019?

[Clynt Nauman:]

I think it depends upon when you make that production decision and it also depends upon our view of how rapidly our application is proceeding through the waterboard. So in theory you know market conditions considered along with the other factors that we mentioned you know you could make a decision to proceed to production once you have the PFS in hand and you know what you're -- you have definition on your development plan and CapEx. You could proceed with that work prior to getting that license that water use license and be in a position when the water use license is issued to proceed to the production phase shortly after probably in Q3 and certainly by Q4.

[Kevin MacKenzie:]

Okay. And just lastly, could you just highlight we were expecting this PFS late October, what were some of the optimisation specifics that you are going to be looking at here in the next quarter relative to the document that you were set to release?

[Clynt Nauman:]

Yes so that’s pretty straightforward one, midstream during the development phase for the for the PFS we essentially doubled the size of the Bermingham deposit, remember it went from 800,000 tonnes of better than 600 grams to 1.6 million tonnes of better than 600 grams so you have a much larger deposit, the grade hasn't changed. The grade distribution has changed by virtue of the fact that you have added significant additional ounces to the deposit. I mean this deposit is now in our 33 million ounces in the indicated category and another 10 in the inferred category. So there are a number of ways to attack a deposit like that and balance it up with other production from other deposits in the district namely the Flame & Moth deposits. So that's where the optimization and trade off work is going on. You're dealing with a lot more tonnes, a lot more ounces and try to figure out how to optimize that entire plan over an extended mine life. So that's where the extra work is going at present time.

[Kevin MacKenzie:]

And then just last one here, just getting back to the resource that was issued, is there any insight as to what's driving the lower base metal grades?

[Clynt Nauman:]

You know that's a really good question. The simple answer as far as I'm concerned is that the Bermingham deposit has all the earmarks of the top of an ore body where it was actually boiling and streaming off you know that has not been seen elsewhere in the Keno Hill district, all of the other ore deposits was essentially put down on the service or cropped out in the subsurface on the overburden such as the Flame & Moth. So one would expect the type of ratios you see here very strong silver grades relatively lower based metal grades would be technical of the top of these types of systems where this is one definitely boiled numerous times in the subsurface and one would expect that as you proceed further down in that system. You're much more likely to see stronger base metals. So my speculation is that it's a zonation issue and that's just what we see. It is interesting though that you know the metallurgical characteristics is such that you know much of this silver is very high grade deposit, it does occur or does report to the lead concentrate so that adds to the attractiveness of the product that we're producing. So in a long winded way that's my answer. You are looking at the top of the ore body that typically have lead based metals, ore based metals as you proceed deeper in the system.

[Kevin MacKenzie:]

Maybe just one more quick one here. The met work that you guys have done are you going to release those results or will that just be wrapped up into the PFS?

[Brad Thrall:]

They'll certainly be wrapped up into the pre-feasibility study you know there is some additional optimization that we will likely do again because we do have some additional time in the pre-feasibility studies and our initial work was based on a kind of a 70

[Operator:]

Our next question comes from Mike Niehueser of Scarsdale Equities.

[Mike Niehueser:]

Just a follow up Brad on that last question, are you -- as you're kind of working back the different blends of Bermingham and Flame & Moth, are you seeing any issues arising where you're not able to blend those ore from those two deposits?

[Brad Thrall:]

No, but again if you kind of backup our original mine plan for the PEA like I was just talking about Mike about it, 260 tonnes per day at Flame and about 140 tonnes per day at Bermingham with this much larger resources Clynt has discussed those ratios made change. There's a lot more tonnes at Bermingham now that were not previously in the mine plan. So we may be looking at different blends perhaps a 50/50 type blend but certainly all the work we've done to-date doesn't indicate any issue in terms of those types of ratios having an effect on the on the overall recovery. So again the work to-date simply confirms our assumptions in the PEA.

[Mike Niehuese:]

So the blending is really a matter of just production from each mine rather than what is the best recovery, that's what I think?

[Brad Thrall:]

That's exactly right.

[Mike Niehuese:]

Okay, and it also looks like you know maybe that you have potential in the size of the decline with Flame & Moth to fully supply the mill and with the increase in the Bermingham resource is there an opportunity to actually look at a scenario where you might increase the capacity of the mill and if so would that affect permitting?

[Brad Thrall:]

Yes, I think that's what Clynt alluded to earlier. I mean right now as you know our permits authorize 400 tonnes per day of milling capacity so that will at least in the PFS that will be the initial base assumption and early on. As we run through these optimizations yes there clearly is an opportunity to have a bigger mine plan with higher throughput but that will require going back through the permitting process starting the ESSA and reassessing different plans. So that's not on the table today. Again the base case at the PFS will be what we're currently permitted for but we'll certainly be looking at what the opportunities are for a bigger throughput.

[Mike Niehuese:]

Do you perceive that you could incorporate that into an operating mine if you start commissioning the mine and finishing off the work you need to do in early 2019 to start production and then tack on a higher capacity grinding or what have you with hold at the project?

[Brad Thrall:]

Again I mean there's plenty of capacity in the mill already for more than 400 tonnes per day on the grinding side. I think as we've talked about before we have added additional grinding capacity already so in terms of mill capacity again it's not -- the issue is not mechanical capacity in the mill, it's really a permit driven constraint in terms of increasing production in the future.

[Mike Niehuese:]

Right, I forgot. It seems like it could operate up to 600 if you're really shaking at. Jake asked a question about costs remaining capital expenses, I'd like to ask the same question in different ways. With the mill about 65% done and the Bermingham decline down about 78% and 330 metres left at Flame & Moth with the vent raise about how many -- what's the remaining cost to complete those items?

[Brad Thrall:]

Again I don't think we're going to have a definitive number there Mike until we complete this pre-feasibility study because the assumptions and the pre-fees may not be exactly what they were in the PA in terms of upfront equipment requirements for the mine if we are looking at you know changing those ratios at Bermingham, but I mean just to give you a sense I mean our cost at Flame & Moth this year were running about $6800 a meter and that includes support costs so you can kind of do the math if there's you know 350 meters or so of decline left to reach the ore at those types of numbers. I mean obviously there's a lot of other PP&E capital that's going to go on top of that but we really need to see what this optimize and this update and PFS mine plan looks like before we can really recast the capital.

[Operator:]

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

[Clynt Nauman:]

Thank you all for joining us today. We remain dedicated to moving the Keno Hill Silver District back to production and continue to execute our plan to achieve that goal. We have achieved a number of milestones this quarter and I will highlight again the importance of the upgrade an expanded Bermingham resource which validates the size and grade of that particular deposit in addition to the value of continued exploration and the overall potential of the Keno Hill Distract. We have several important milestones upcoming with the completed PFS as we have discussed making the production decision receiving that one license and ultimately proceeding to production. At best repeating, our goal is to be in production in the second half of 2019 and everything within our control is being designed to meet that goal. Our cash position and funding alternatives give us plenty of runway to reach that production decision point and with market conditions considered and a clear focus on project decision points along the way we remain steadfast on being in production in 2019. And as always we appreciate the support and interest in Alexco. Thank you.

[Operator:]

You've been listening to the Alexco Resource Corp September 30, 2018 third quarter conference call. We encourage investors to visit Alexco's website for further information at alexcoresource.com. If you have further questions please call my direct line at 778-945-6577 or email me directly at [e-mail]. This concludes today's call. Thank you for joining us and have a good day.