Alexco Resource Corp.
Q4 2018 Earnings Call Transcript

Published: 14 Mar 2019

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Alexco Resource Corp 2018 Q4 and Year-End 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, Lisa May. Please go ahead.

[Lisa May:]

Good morning. Today is Thursday, March 14, 2019, and I'd like to welcome you to Alexco Resource Corp's September 31, 2018 fourth quarter and year-end 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 and year-end financial results there. This conference call will be recorded and archived on the company's website under Events and Webcasts. Giving presentations on today's call will be Clynt Nauman, Chairman and CEO; and Mike Clark, CEO; Brad Thrall, Alexco's President is also on the call and will be participating in the question-and-answer period after our presentation. 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. I'd now like to turn the call over to Clynt Nauman. Clynt?

[Clynton Nauman:]

Thank you Lisa and thanks everybody for joining us today for a review of our 2018 fourth quarter and year-end results in addition to sketch overview for 2019. A repeated theme throughout our communication over the past year has been transition. Transition from explorer developer to developer producer, transition from a small environmental company doing 10 million in annual revenue to one doing 20 million and a top mine revenue with more than 120 million in contractual backlog, And on the Keno Hill, historical liability clean-up project transitioning from planning of all remediation work to now actually permitting for the district wide clean-up plan. The other major accomplishment in 2018, which comes as a result of exploration work conducted in 2017 and 2018 is the fact that the Bermingham indicated mineral resources were expanded significantly and that feeds into the ongoing work we're doing on the prefeasibility study, which in fact has been our primary focus since last summer. As CEO of Alexco, I feel we've managed to move the company steadily forward with a single primary goal, which is to put Keno Hill -- the Keno Hill Silver District back into production. Our recurring message has been and remains that we are moving towards a production decision in a disciplined manner ensuring that risks are evaluated and managed well, allowing us to execute each step in a safe, effective and measured manner. Alexco is exceptionally well positioned and offers a unique opportunity for investors. Our operations are located in one of the safest jurisdictions in the world. We have relatively new existing -- we have new existing mining infrastructure, which is relatively new including a 400 tonne per day conventional floatation mill and after a positive production decision we have the ability to move to production in a relatively short timeframe at a relatively low cost. Add to that a robust project with best-in-class production silver grades and the prospect of continued exploration upside and I hope you would agree with us and share with us our enthusiasm and confidence in the longer term future of the company. Our call today will be more brief and usual. As you know for the last several months our focus has been on this prefeasibility study which can be published before the end of Q1. The PFS will outline updated economics, remaining capital required to reach production and will also consider scalability of the mill. Once announced, we will hold a conference call to review the PFS and the resulting outcomes in some detail. Today, I'll briefly highlight the 2018 year end and then give some guidance on our plans for the next 12 months. Yesterday we released our financial results outlining a net loss before tax of $8.5 million for the year ended December 31st. This includes $2.6 million non-cash adjustments and our networking capital position at December 31 was $10.2 million. On the environmental side of the business, AEG posted a record year with revenues of $20 million and a gross profit of $6 million for a gross margin of 30%. Our US operations have picked up a number of projects on the AEG side that continue to showcase our expertise in water treatment. Additionally, our Canadian operations have moved into the next phase towards a active remediation of historical clean-up at Keno Hill. Deemed adequate ERDC now moves into seeking views in the information phase of the permitting process in the Yukon. I expect this elevated level of work and profitability will continue into 2019. And just one further note on AEG, Contango Strategies has proven to be an important acquisition for AEG, specializing in biological water treatment systems for mining, oil and gas and industrial operations Contango operates year around environmentally controlled pilot scale facility which allows for development, testing and optimization of technologies such as bioreactors and constructed treatment wetlands. In addition to the facilities, and the technology and certainly the team has expanded AEG’s capacity to deliver for an increased number of clients, especially in Western Canada. On the mining side, 2018 has seen several operating highlights including as you know in September we announced the updated mineral resource estimate for the Bermingham deposit expanding the indicated mineral resources at Bermingham, from 17.3 million ounces to 33.3 million ounces of contained silver at an average silver grade of 628 grams per tonne, while inferred mineral resources increased from 5.5 million ounces to 10.4 million ounces of contained silver at an average silver grade of 526 grams per tonne. In May, we completed 550 meters in the Bermingham underground advanced exploration decline and subsequently completed an underground exploration drill program totaling 4,200 odd meters of underground drilling from the deep part. After completing the 550 meters of underground ramp advance in Bermingham, we completed a targeted 450 meters of underground ramp at the Flame & Moth deposit. Surface exploration in 2018 included about 15,000 meters of surface drilling, including 7,700 meters in a new reconnaissance program and about 3,700 meters in the Bermingham in-fill drilling program as well as about 1,200 meters at the Flame & Moth deposit for metallurgical and geotechnical purposes. Now, let's put all that in the context to the relative work that we’ve completed during the balance of 2018 and what we're currently planning for 2019. As I mentioned, the updated mineral resource estimate of Bermingham was immediately incorporated into the work for the pre-feas study, which is anticipated to be released shortly. And the significant exploration work program from 2018 actually resolved an unused structural deep target zone at Bermingham where over a thickness of about 60 meters we see multiple zones of mineralization. Our exploration of 2019 will continue to explore this as deeper zone in addition to other targets in the nearby vicinity. So from my perspective, when you put all of that in context and we move into 2019 it's all about silver price, the foreign exchange rates, smelter demand, smelter terms and other similar external factors. At our last conference call, we indicated the issuance of the required amendment for the Alexco’s water use license was expected to be delayed until the late -- until late Q2 2019. At this juncture -- and I would emphasize with no formal notice from the water board, we believe it's prudent to update our guidance to Q3 2019 as we continue to see a backlog in the Yukon Water Board System. As a reminder, once the Bermingham water license process is complete, we will be fully authorized for mining and processing operations from each of the four deposits in the existing mine plan. So with all of this said, this is how we see the timeline unfolding. In the remainder of Q1 we will see the results of our PFS and with the PFS in hand will be in a position to make a production decision, planning a clear timeline on the renewal of the water license from Bermingham and market conditions considered. We are still targeting a production decision in the first half of 2019. In a month or two of slippage in the timing of the water use license won’t impact to our ability to either to make a decision or to reach production in the fourth quarter 2019. On the exploration side of Keno Hill, you've all heard me say many times Alexco was built on the backs of the success of our geologists. And this was rewarded in December of 2018 by the Association for Mineral Exploration. We did announce the recipients for the 2018 Celebration of Excellence Award winners, who were Al McOnie, Seymour Iles and Jared Chipman of Alexco who were honored with the H.H. Spud Huestis Award for Excellence in Prospecting and Mineral Exploration. While the award is a pursuit of honor for our team members it also validates one of the Alexco's founding and ongoing principles which is the systematic application of sound and basic exploration practices. We strongly believe exploration continues to add significant value for our shareholders and our ongoing cost of discovery remains very low at $0.55 per discovered ounce and our extensive land package which is less than [15%] explored is rich with potential for further value to be unlocked as we continue exploration. We're currently planning an approximately 10,000 meter surface drill program in 2019 and we'll give you more detail around that probably in May. And just finally, just to say that, we remain in a strong position, 10 million the working capital and unused $15 million credit facilities, that's US$51 million, and continued interest in numerous offtakers in terms of working capital and pre-production facilities, a positive production decision. We continue to develop these and all other opportunities as we move forward with the execution of our plans. At this point, I'm going to turn it over to our CFO, Mike Clark. Mike?

[Mike Clark:]

Thanks, Clynt. This financial report is for Alexco’s period ended December 31, 2018. Note that we are reporting in Canadian dollars. So all dollar amounts will be in Canadian dollars unless stated otherwise. For the full year we recorded a net loss of $8.5 million or a loss of $0.08 per share. Loss before taxes for 2018 was $7 million. This compares to 2017 net loss of $7.8 million and a loss of $0.09 per share and a loss before taxes of $6.3 million. The increase in the net loss in 2018 compared to 2017 was mainly attributed to a non-cash credit facility fee of just under $800,000 which was settled by issuance of warrants, increased mine site, care and maintenance costs of approximately $715,000 related to build and refurbishment and a loss of marketable securities in 2018 for $572,000. This was offset by a $3.1 million fair value gain on the embedded derivative related to Wheaton streaming agreement, and furthermore, in 2017, the corporation incurred a foreign exchange gain of $1 million and gain on investments of $1.3 million. AEG revenues for the year were $19.9 million and gross profit was $6.1 million for a margin of 30%. This compares to revenues last year of $10.7 million and a gross profit of $4 million for a margin of 37%. The increase in gross profit during the 2018 primarily related to new projects from both the Canadian and US customers. And the AEG operating income for the year was about $1.5 million excluding depreciation and amortization. I will now highlight some of the financial results for the fourth quarter. For the quarter ended December 31, 2018, Alexco reported a net loss of $1.8 million on total revenues of $8.9 million, compared to a net loss of $1.8 million on total revenues of $2.5 million in 2017. AEG recognized a gross profit of $2.2 million and a gross margin of 24%, compared to the 2017 fourth quarter gross profit of $993,000 and gross margin of 40%. And higher 2018 period revenue was attributed to commencement of a new project requiring construction of a Water Treatment Plant, which included lower margin work on the front end of the project, which was the primary cause leading to a lower gross margin percentage during the period. Mine site care and maintenance costs in the fourth quarter of 2018 totaled $319,000 compared to $453,000 for the same period in 2017. The decrease in costs is mainly due to the lower depreciation charge in the 2018 period. Corporate general and administrative expenses in the fourth quarter of 2018 totaled $1.7 million compared to $1.9 million in the fourth quarter of 2017. The decrease in the 2018 period primarily relates to AEG restructuring costs incurred in the 2017 period. Environmental Services general and administrative expenses in the fourth quarter of 2018 totaled $1.6 million, compared to $585,000 in the fourth quarter 2017. The increase in G&A in the 2018 period is attributed to approximately 125% expansion of the professional and operating workforce to now 82 employees, which is to meet the increased client based demand and business growth along with additional overheads associated with the operation of the newly acquired Contango business. During the quarter, Alexco incurred mineral property expenditures in the amount of $3.2 million which is primarily related to the Flame & Moth underground development program and the exploration at Bermingham. At December 31, 2018 the Corporation had cash and cash equivalents of $8.6 million and a net working capital of $10.2 million. This compares to cash and cash equivalents of $17.9 million, and net working capital of $18.7 million at December 31, 2017. In addition, the Corporation's restricted cash and deposits at December 31st totaled $2.7 million, compared to $7.1 million at December 31, 2017. Furthermore, the Corporation established a $15 million US credit facility with Sprott for 2018 for the purpose of financing development of Keno Hill. This facility carries an approximate interest rate of 9%. And in February 2019, we extended the drawdown availability period up to August 23, 2019 by issuing 171,000 common shares of Alexco.

[Lisa May:]

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

[Operator:]

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

[Mike Niehueser:]

Hi, Clynt. Congratulations on the record revenues for AEG. A question there, at that elevated amount of revenues for the fourth quarter, can we expect that to be continuous or to grow into 2019? And can you comment on margins as well?

[Clynton Nauman:]

Good morning, Mike. Yes, so we would be pretty really confident that we'll see similar growing revenues at AEG at some of these bigger projects that we’re involved in now continue to spool up, as well as new clients coming on board. And at the gross profit level now, our margin expectation continues to be in the 30% to 40% range. So, yes, it's a real business and it's growing.

[Mike Niehueser:]

So with the increase in staff, with the growth, I'm sure that puts a strain on your working capital, and keep that separate from the mining side of the business, are you able to pass those costs through to customers as in order to fund growth or are you needing to seek other arrangements?

[Clynton Nauman:]

Well, I mean, we do see the growth in our accounts receivable and accounts payable. Pretty obvious on the balance sheet, the increase there. We are focusing on managing of that net working capital. We are seriously considering getting a working capital line in place to support the AEG business but in meantime we're just focused on managing the working capital and continuing to grow the business.

[Mike Niehueser:]

And not a lot of detail on plans for exploration, certainly after the last couple of releases there, great progress I think stepping out around Bermingham across the fault and down toward Elsa. When do you think you might be releasing more information about what your plans are for exploration both around Bermingham and underground for 2019?

[Clynton Nauman:]

I think that we'll have some -- well a couple of answers to that question, one is that, we did a fair amount of airborne geophysics last year. We think that the information that we've gotten from that -- this is detailed close space to airborne geophysics. We think the information that we are gaining from that is going to be pretty important and we'll have the details of the 2019 plan for exploration -- surface exploration probably pretty well nailed down by May. And yes, so we should have provided a little more emphasis on that. I mean we do have a very significant target area as I described at Bermingham, a deeper target there was an open area that’s at least the size of the existing Bermingham deposit that warrants considerable additional drilling. So, in the meantime, you can sort of -- you can put a pin in it terms of the deep exploration drilling, some of the other exploration drilling we do in and around Birmingham and on the other side of the preferred fault. Those details will come later in May before we start drilling again.

[Mike Niehueser:]

Okay. And also just a clarification, did I hear you say that after the release of the PFS on the conference call that you'll be in a position to make a mining decision based on the market influences or is this something that will wait to be after the permitting hopefully by the end of the year?

[Clynton Nauman:]

Well I think the implication I think Mike is that even though we are trying to sort of understand how fast the Yukon Water Board can move in terms of processing, existing workload and move into “our project”, I don't think at this juncture that's going to have a material impact on our production decision or any dimes that we might give in terms of moving to production. I'm not sure if that answers your question but clearly once the PFS is published, we'll providing -- we’ll be providing some indication of how we're going to move forward here.

[Mike Niehueser:]

That does answer it. And just one question about permitting. Are you fairly confident that it will happen in the third quarter? Seems I've lost track of how long we've been at the -- the Yukon has been at permitting this and it seems that this is all brownfield and that you're probably the best permitter and the most reliable environmental company in North America if not the world and just kind of wonder what the problem is with the Yukon?

[Clynton Nauman:]

I'm going to add -- Brad is up in the Yukon as we speak here, so I'm going to let him take a shot at that one.

[Brad Thrall:]

Yes, Mike. I mean -- again I mean as you stated, I appreciate, I think we’re also -- we think we are getting the best experience to get the permitting process in Yukon. We understand it very well both on the mining side as well as the closure side. There's certainly no issue with the project proposal. I think generally what you see right now which has been an ongoing theme for a while is just the continued backlog of work at the Water Board in the process. There are a couple of -- at least one much larger project amendment in front of us and I think that we're being affected by that, which I will continue to -- and we do continue to work very closely with the Water Board staff to move this process along. So -- and again I think our best guidance is the third quarter now, but as Clynt alluded to, it's not going to impact our ability to scale up and make a decision.

[Mike Niehueser:]

Well that's kind of the -- kind of triggers my thought, is that, you're in underground mine, you dry stack your tailings, you've been a prior operator, nothing on the record. And I just wish you well, because there's probably no more deserving project that could be permitted. So nothing personal directed at anybody, but we’d like -- believers in Yukon would like to see it perform. So thank you very much. That's my last question.

[Clynton Nauman:]

Thanks, Mike.

[Operator:]

[Operator Instructions]. This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Nauman.

[Clynton Nauman:]

Well, thank you. Thank you very much. I just wanted to thank you all for joining us today and to reaffirm that we remain focused and dedicated to move in Keno Hill back into production. And once we publish this PFS within the next couple of weeks, we'll be in a much better position to make a production decision based on market conditions, commercial terms and the final permitting progress. These critical decisions we made in our usual deliberate and disciplined manner. And we look forward to the next opportunity to update you on our progress and specifically the PFS results. As always, we appreciate your support and interest in Alexco. And with that, I'm going to turn it back to Lisa to close out the call.

[Lisa May:]

You've been listening to the Alexco Resource December 31, 2018 fourth quarter and year-end 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 e-mail me directly at [e-mail]. This concludes today's call. Thank you for joining us. Have a great day.