Alexco Resource Corp.
Q1 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

Good day ladies and gentlemen and welcome to the Alexco Resource Corp. 2017 Q1 Conference Call. Today's conference is being recorded. And at this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. It is now my pleasure to introduce your host, Mike Clark. Please go ahead, Mr. Clark.

[Mike Clark:]

Good morning. Today is Thursday, May 11, 2017 and I'd like to welcome you to Alexco Resource Corp's March 31, 2017 first quarter conference call. This conference call is being web cast live and can be accessed at the company's web site at www.alexcoresource.com. You may sign up on the Alexco's website to receive feature 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 will be recorded and archived on the company's web site under events and web casts. Giving presentations on today's call will be Clynt Nauman, Chairman and Chief Executive Officer; Brad Thrall, President; and myself Mike Clark, Chief Financial Officer. We'll have an opportunity for 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 on Alexco's SEDAR filings. It should also be noted that past performance discussed in this conference is not indicative of future results. So now, I'd like to turn the call over to Clynt Nauman.

[Clynt Nauman:]

Thanks Mike and good morning to everybody. Thanks for joining us today to review the first quarter 2017. I would have to say at the outset that this call catches us at arguably the most notable transition our business has undertaken over the last several years. As most of you know, we put in three years of steady and systematic surface exploration work through the bottom of the cycle, and have been rewarded with a discovery of more than 23 million ounces of indicated silver, at an average indicated resource grade of 800 grams per ton silver, or higher. Almost all of this resource is relatively shallow and with thicknesses that would meet minimum mining requirements. With the recent publication of our updated PEA, we see a project where those ounces can potentially be transferred from the resource statement to the income statement. And in my view, that our mission for the next couple of years. We are transitioning from an explorer-developer to a developer and potential producer, and in this office, as we speak, we have reorganized our management, we are unbundling our AEG business and we are bulking up our science, engineering and operating team to solely focus on moving Keno Hill back towards production. We have a very robust project, an experienced team of people and a plan that will move our company up the value curve over the next several quarters. All that being said, I am going to start off by briefly discussing the highlights from the first quarter and then give some guidance on our plans for 2017. Brad Thrall, our President will discuss the 2017 operation spool-up and operation underground plan to Keno Hill. Mike Clark will walk us through a summary of the financials. We released our financial results on Monday, outlying a net loss of C$932,000, which included C$1.6 million of non-cash costs for the quarter ended March 31, 2017. Some of the other highlights during the quarter, include as follows; firstly, we announced an updated mineral resource estimate for the Bermingham deposit, expanding the indicated mineral resources from 5.2 million ounces to 17.3 million ounces, while inferred mineral resources increased from 0.7 million ounces to 5.95 million ounces of contained silver. Most notably, our indicated resource at Bermingham now stands at more than 850,000 tons at 628 grams per ton silver, a grade that's some 20% higher than our large Flame and Moth deposit. Even more important, the potentially mineable portion of the Bermingham Deposit currently included in the mine plan is 220,000 tons of 1,276 grams per ton silver diluted. Secondly, a little later and concurrent with the PEA, we announced an amended silver streaming agreement with Silver Wheaton. This is important, because a new variable production came in agreement, which is based on both monthly silver spot price as well as mill head grade, will substantially improve the efficiency of mine production at Keno Hill, essentially delivering into the production, stokes and areas that would have been uneconomic under the previous fixed payment model. At the end of the day, this will increase the total payable silver output over the mine life. Not only that, but the new Silver Wheaton formula acts as a downside hedge for Alexco, while also ensuring both partners share on the upside benefits. By way of example, our PEA pricing in the C$18 to C$19 range, and assuming average production grades of 843 ounces per ton silver, results on average production payment from Silver Wheaton for their 25% silver stream of about US$6.75 per ounce. In today's market, closer to C$16 per ounce silver, and assuming production of the same grade, the production payment increases to approximately US$8 per ounce. Thirdly, the new resources at Bermingham and Flame and Moth, along with the amended silver streaming agreement were incorporated into an update preliminary economic assessment, which outlined an eight year mining plan at an average mill fee grade of 843 grams per ton silver, 3.3% lead, 4.6% zinc and 0.39 grams per ton is gold. Average annualized silver output over the eight years will be 3.5 million ounces payable per year, with the initial three year annualized average silver production being 4.1 million ounces per year. The project's pre-tax and after-tax net present value is C$104 million and C$75 million respectively, using a 5% discount rate. And after tax and pre-tax internal rates of return, 75% and 9% respectively. This is at assumed silver prices of C$18.60 in 2018 and C$19.35 per ounce in 2019 through 2025. The initial capital costs of C$27 million are estimated to achieve commercial production with less than a one year payback. In addition, upon achieving commercial production Alexco has calculated all-in sustaining costs, which in our case, includes contained silver byproduct basis over the life of mine, this cost will be US$13.51 per ounce of silver, and that includes direct operating costs, sustaining capital, the Silver Wheaton stream, corporate G&A and ongoing surface exploration costs. And in addition to that, the all-in sustaining costs in the first full three years, our full three years of production will be approximately US$12.18 per ounce of silver. And just changing gears a little, I should note that AEG had a positive quarter with C$1.9 million in revenues for a gross profit of C$549,000, achieving a gross margin of 28%. The reduction in revenues in this quarter is mostly related to the timing and the type of work related to the Keno Hill cleanup work with the Federal Government of Canada, and also in the wind down of a couple of larger projects in the U.S. Now let's put all in context with what we are planning for the balance of 2017. Clearly, we have a busy year ahead of us. Earlier this week, we announced a C$5 million bought deal flow-through financing with an overallotment of C$2 million which Mike will cover off later in the call. The use of proceeds will be allocated to our service exploration program and certain eligible costs related to the advanced underground exploration program at Bermingham. We have budgeted a C$3.2 million surface exploration program, comprising approximately 12,000 meters of diamond drilling, which will be starting in about three weeks at Keno Hill. Three rigs drilling all the way into September. This program will further explore potentially mineralized structural targets in the immediate vicinity of the Bermingham deposit, as well as complete the drilling of the Bermingham deposit, where we have an undrilled window between the Bear vein discovery and the original defined Bermingham resource. That window is about 200 meters long strike off the Bermingham veined complex with a targeted area that extends at least 300 meters down dip. In addition to that, we have two other nearby targets that we suspect occupy a similar structural setting as a high grade portion of the Bermingham resource. These targets are generally within 400 to 500 meters of the Bermingham deposit, and of course you will remember, that the high grade of the Bermingham deposit outlined in 2016, also remains wide open down dip into the Hector-Calumet stratigraphic section. So hopefully, you will be hearing lots more about all of this, as we progress through the summer. At this point, I am going to turn it over to Brad Thrall to continue with a discussion of the advanced exploration plants at Bermingham and other operations at Keno Hill, 2017. Brad?

[Brad Thrall:]

Thanks Clynt. Good morning everyone. As Clynt mentioned, I am going to walk you through and give a brief overview of the development activities planned through the summer and through the balance of the year at Keno Hill. Advancing an underground exploration decline and drilling program at Bermingham in 2017 is our primary focus. For the advanced exploration program at Bermingham, the plan is to develop a 600 meter or so exploration decline, that will bring us to within 50 to 100 meters of the upper portions of the Bear vein within the Bermingham deposit. It is expected that the commencement of this decline will begin in early July this year, and will take approximately four to five months to complete. Following the completion of this decline, we will then initiate approximately 5,000 meters of infill and conformation drilling underground within the Bermingham deposit, mostly focused on the upper portions of the deposit that are included in the early years of the PEA mine plant. It will take approximately three to four months to complete this underground exploration drilling, which will take us into the first quarter of 2018. In addition, we will also complete further geotechnical and hydrological drilling and investigations underground at Bermingham, that are required for more detailed mine planning and design purposes. This program overall, is estimated to cost approximately $8.7 million, including underground equipment rebuilds and purchases. We are currently in the environmental assessment and permitting phase for this program, and it is expected that all of the authorizations will be in place in order to commence the underground work in early July. We are also currently active and putting in place the necessary surface infrastructure required for this program. The Bermingham underground program will provide additional information to advance our design and studies to a pre-feasibility level study, including updated mine plans and additional detailed information on geotechnical, hydrological and metallurgical designs and updated capital and operating cost estimates. In addition to the underground work in Bermingham, we will continue to make improvements this year and upgrade to the mill, as well as constructing a new water treatment plant in additional water management pond, necessary for production at the Flame and Moth mine. The Flame and Moth deposit is already permitted to be developed under our Quartz Mining License. However, prior to processing ore or discharging water from the Flame and Moth mine, an amendment to the water use license is required, which is granted through the Yukon Water Board. A public hearing for this Water Use License amendment is currently scheduled for May 29 and an amended water use license is expected to be granted within a couple of months after the hearing. This is well in advance of any potential or production scheduled for Flame and Moth. Soon after we start the Bermingham underground exploration program, we will then submit a project proposal for the environmental assessment and permittings for the eventual production and processing of ore from Bermingham. So the guidance I have just provided in terms of permitting is consistent with the schedules and timing disclosed in the March PDA, which targets production to commence in the fourth quarter of 2018, assuming a positive production decision is made. So with that, I am going to turn it back over to Mike Clark, to review the financial numbers, and then we will take any questions that may be out there. Mike?

[Mike Clark:]

Thanks Brad. This financial report is for Alexco's quarter ended March 31, 2017. Note, that we report in Canadian dollars, so all dollar amounts will be in Canadian dollars, unless stated otherwise. For the first quarter of 2017, we reported a net loss of C$932,000 or a loss of C$0.01 per share. These results include non-cash costs totaling C$1.6 million, which is comprised of depreciation and share based compensation expense. This is a 56% decrease in the loss compared to the first quarter of 2016, which incurred a net loss of C$2.1 million and C$0.03 per share. The main difference between the loss in the 2017 period and the 2016 period, relates to an increase in gain on investments by C$2.1 million, offset by increased general administrative expenses. AEG revenues for the quarter were C$1.9 million and a gross profit of C$549,000, achieving a gross margin of 28% compared to revenues in the first quarter of 2016 of C$2.3 million and a gross profit of C$565,000, achieving a gross margin of 24%. The slight reduction in gross profit from the prior year period, was primarily due to AEG currently being in the review stages of the Keno Hill reclamation plant submission, which involves less billable work. This also results in less third party contractors, and so the gross margin percentage increased by 4%. Corporate, general and administrative expenses for the first quarter of 2017 totaled C$2.7 million, including non-cash costs of C$1.1 million. This compares to the first quarter of 2016 costs of C$978,000, which included C$228,000 of non-cash costs. The increase in the 2017 period relates to a C$907,000 increase in share based compensation expense. C$396,000 increase in salaries and contractors, which relates to annual bonuses paid during the quarter, and the C$301,000 increase in professional and advisory fees, primarily related to advisory fees associated with the restructuring of the Silver Wheaton stream. AEG, general and administrative expenses for the first quarter of 2017, totaled C$753,000. This compares to the first quarter of 2016 expenses of C$1 million. The 25% decrease in the 2017 period compared to 2016, is primarily as a result of a C$205,000 reduction in salaries and contractors due to higher employee utilization on billable projects, and also nil share based compensation expense recorded during the 2017 quarter. Mine site care and maintenance costs in the first quarter of 2017 were C$402,000 compared to C$522,000 in the same period for 2016. The 23% reduction in costs is mainly due to lower depreciation charges in the 2017 period. Included in mine site care and maintenance costs is depreciation expense of C$368,000 for the first quarter of 2017 compared to C$411,000 for the first quarter of 2016. Exploration expenditures incurred during the first quarter of 2017 totaled C$885,000. This compares to C$255,000 in the 2016 period. In Q1 of 2017, these expenditures reflect the resource estimation work being completed on the Bermingham and Flame and Moth deposits and the completion of the PEA. Whereas the Q1 2016 work primarily reflected of continued reengineering work being done on the Flame and Moth deposit and the planning for the 2016 drill program. On May 8, 2017, Alexco announced that it entered into an agreement with Canaccord Genuity Corp to issue 2,325,600 flow-through shares at a price of C$2.15 per share on a bought deal basis, for proceeds of C$5 million. In addition, Alexco granted Canaccord an overallotment option to purchase a further 950,000 flow-through shares for proceeds up to C$2,042,000. Fees on the financing will be 6% cash and broker warrants, equal to 3% on the number of flow-through shares sold under the offering. Exercisable at a price of C$2.15 for a period up to two years. The company expects the financing to close by My 30. Alexco's unrestricted cash position at March 31, 2017 was C$20.8 million compared to C$20.4 million at December 31, 2016, while net working capital was C$23.5 million compared to C$23.4 million at December 31, 2016. The unrestricted cash position during the quarter remained relatively unchanged as a result of the company selling investments for C$2 million and the exercise of warrants and options for the proceeds of C$535,000, which was offset by operating overheads and minimal property expenditures on resource estimation work on the Flame and Moth and Bermingham deposits and the completion of the PEA. In addition to unrestricted cash, Alexco also has restricted cash balance at March 31, 2017 of C$7 million, which primarily relates to decommissioning obligations at Keno Hill. Now the operator will provide instructions for the Q&A session.

[Operator:]

[Operator Instructions]. And we will take our first question from Mike Niehueser with Scarsdale Equities. Please go ahead.

[Mike Niehueser:]

Hi. Just a couple of questions. The 12,000 meter drill program, good explanation on where that is. Is that between Bermingham and Hector-Calumet?

[Clynt Nauman:]

Yeah good morning Mike, and that's correct. It's in the Hector-Calumet direction if you like from Bermingham, up to maybe half a kilometer. There is about a kilometer of open ground there, so we are systematically just going to walk towards it. There is a couple of good targets that are adjacent to Bermingham, so that will be the initial thrust of the effort there.

[Mike Niehueser:]

Okay. And the underground, you are looking at 5,000 meters and good explanation there that you are going up. So can I assume that that's to move the ounces that are in infilled to indicated, or is that more for mine development?

[Clynt Nauman:]

Yeah, I mean that's an infilled and exploration program. The average spacing of drill holes within that portion of the Bermingham deposit that's in the current mine plan, is nominally in the 15 to 20 meter range. And we would be intending to close down that spacing to five to 10 meters. So the confidence level is something that will be determined by a third party, presumably. But from our perspective, it just tightens up the drilling, it becomes a much more precise exercise in terms of mine design and potential mine production, as a result in very-very high grade material.

[Mike Niehueser:]

And would you think that between the surface and the underground program, that might lead to an updated resource estimate at Bermingham, and I am sure that will feed into the pre-feasibility study. Will that -- also second question in that, would that study be published or is that an in-house level document?

[Clynt Nauman:]

Well initially we are going into it as an in-house level document. But I can see in that case, where we may end up updating that Bermingham resource for sure.

[Mike Niehueser:]

And with the PEA, 4.1 million ounces over the first three years, and then it falls off a little bit. And I am sure that's -- help me, is that limited by the accuracy or the spacing, the amount of drilling you have. What is your sense about being able to maintain that 4.1 million ounce level or something like it, beyond your three?

[Clynt Nauman:]

Well, obviously we are going to attempt to everything we can to produce the maximum number of ounces. But the 4.1 million payable as an average over the first three years of production, it's because of the very high grade nature of the material that's coming out of Bermingham initially. And obviously, as we do more exploration, we get into that particular deposit, we will have to see how it pans out. But I think the number to focus on is the overall average production of payables over being in the 3.5 million range and with that, very high grade material pushing it up over 4 million, and in fact close to 5 million, in some cases, on the front end of the plan. So looking more than three or four years down the road in terms of trying to predict grades at these types of levels is difficult, and that's why we are undertaking this additional drill program, to make absolutely sure we understand what we are going to be dealing with in the first couple of years, and hopefully beyond that.

[Mike Niehueser:]

Okay. And congratulations on amending the Silver Wheaton agreement. It's kinder with lower grades and a softer silver market. And since that has been published, silver has come off a little bit. I am sure, the summers could be weak as well. But at this current level of a little over C$16, if it was that price at the time you have to make a production decision, is it sufficient for you to move forward?

[Clynt Nauman:]

Yeah. Well the project is well on the money and -- so that production payment as I mentioned from Silver Wheaton, if silver is in the C$18, C$19 range, it's in the C$6.50 to C$7 per ounce type of a range. Silver prices fall around C$16 as they are presently. That production payment moves up to the US$8 to US$8.5 type range. And clearly the formula is doing what it is supposed to do. The impact on the net present value of the project is substantially mitigated in a low pricing environment or a lower pricing environment. But no matter, with all-in sustaining costs in the C$12-C$13 range, the project is well on the money at the present price of silver.

[Mike Niehueser:]

And last question, I will get back in the queue is; no mention of the decline at Flame and Moth. It seems like there is an opportunity not just to go deeper in infill with Bermingham, but the same with Flame and Moth. Where does it fit in with your plans for Bermingham or in the next year?

[Clynt Nauman:]

So there is going to be two or three decision points as we move forward here. The first one, we have already taken, we are going to drive that Bermingham decline, we are going to do the drilling at the Bermingham. At the completion of that work, there will be a decision point to continue with the Flame and Moth decline, so following driving of the Bermingham decline, there will be a decision to drive the Flame and Moth decline. And then once that's driven, there will likely be some additional underground drilling that's done for mining purposes at Flame and Moth, and then there will be a decision to proceed to production. So there is two key decision points out there. They are very normal and routine for this type of a -- moving this type of a project towards production. And don't forget that at Flame and Moth, that the portal has already been established, right; so that decline has essentially been started. It just happens that we are more focused on getting into the Bermingham deposit and taking a look at that first, before we drive that Flame and Moth decline.

[Mike Niehueser:]

Okay. Thanks I will get back in the queue then.

[Clynt Nauman:]

Thanks Mike.

[Operator:]

[Operator Instructions]. We will take our next question from John Tumazos. Go ahead.

[John Tumazos:]

Thank you. Clearly, the silver price at C$16 is a little on the low end. At what silver price range and what time range do you think we are likely to see potential production, or how long will it take to drive into the Bermingham or the other development work?

[Clynt Nauman:]

Thanks John and good morning. As you and I have chatted before, silver price is one thing to keep your eye on, the other of course is the exchange rate. And there is an inverse relationship between the strength of the Canadian dollar appears to be the strength of the Canadian dollar and silver price. So as silver prices have come down, so the exchange rate has also fallen and so the price of silver in Canadian dollars has not changed a lot actually. So when you are a Canadian producer selling a product in the U.S., the FX is an important part of the equation. So as to timing, the Bermingham decline will be driven in 2017, hopefully completed before the end of the year, and assuming that we go straight ahead and drive the Flame and Moth decline, that particular decline plus the underground infrastructure required for production would all be in place probably in the third quarter of 2018, and that would be the point in which you would pull the trigger and put the entire thing back in production.

[John Tumazos:]

So 2019 could be a normal producing year?

[Clynt Nauman:]

That would be our anticipation. Yes.

[John Tumazos:]

Thank you.

[Operator:]

And we will take our next question from Mike Niehueser. Go ahead.

[Mike Niehueser:]

Hi Clynt. In order to go down the decline for the Bermingham, it only requires an amendment to the class 4 mining land use, is that right? License?

[Brad Thrall:]

Yeah Mike, Brad here. I can take that. I mean, we are currently in the environmental assessment process. We would expect to be out of that in the next two weeks, and then yes, we need to amend our class 4 mining land use permit to allow that decline to advance.

[Mike Niehueser:]

Other use license on the Flame and Moth and that hearing is on the 29th and you are expecting answer on that within weeks and months did you say?

[Brad Thrall:]

Yeah. Again the week -- the 29th of May this month, the hearing is scheduled and again, this is a pretty standard process. We have been through it many times and normally you would anticipate a license to be issued within a couple two or three months, after a hearing is complete.

[Mike Niehueser:]

And then once you are awarded that license, you are going to go back again and amend the Quartz Mining License and the Water Use License and you are expecting that by the first half of 2018, is that right?

[Brad Thrall:]

Yes. Again, in order to eventually produce ore from Bermingham and process that ore in the mill, those licenses and permits would have to be amended once again, and we would start that process sometime this summer and they just need to be in place by the fourth quarter or so of 2018, when production would be planned for Bermingham.

[Mike Niehueser:]

Okay. And separate issue, as far as cash goes, you have mentioned in the release that you have enough money to do exploration, overhead other types of things through 2018. But also, you got the mill that's already built there. I know you are going to have to do some work on it. Initial capital costs were estimated at C$27 million. I am assuming that you are going to have to raise cash at some point, before you commence production. Do you have an idea of timing or the amount there that you might be needing to come up with?

[Clynt Nauman:]

Mike, you know -- I guess the first thing is that, we have plenty of cash to service the program as we have it outlined at the present time. One thing to keep in mind, is that, we have a significant number of warrants that are out there, that are currently in the money, and the timing on those is April-May of 2018. So we will look at this, as we proceed along. Certainly, there is an argument that with the present financing, the existing cash that would exercise the warrants that there may be enough capital there to service the entire project. So I am not going to make any kind of statement or prediction on where we are going to stand in terms of financing. I think we wait until we have driven this Bermingham decline. We take a look where we are at, take a look at the markets and that's why we have those decision points in front of us, as we proceed towards production.

[Mike Niehueser:]

Thanks. I forgot you mentioned that on the last call, and I didn't think of that when I was reading the release. Lastly, a couple questions about AEG; are you still -- Brad, are you still looking at a pipeline for the environmental business at Keno Hill to be about C$100 million or I know that you are getting closer to getting started with that. Has that number changed?

[Brad Thrall:]

No. That's generally the range of the project over, say, a 30 year period, again part of that includes some capital in terms of the remediation as well as long term O&M. So again, that project is now moving into the permitting phase in the Yukon, just like all projects need to. So it continues to advance. But that number is generally in that same range.

[Mike Niehueser:]

And you mentioned on the call, you are going to be building another water treatment facility near the Flame and Moth mill? I mean, that's the news to me? I am just wondering if you could give me 25 words on that, a little bit more whether that's related to the permitting or is that related to the Flame and Moth mine and something else?

[Brad Thrall:]

Yeah. That's related to the Flame and Moth mine. As all these mines do, it will make water and that water needs to be treated to certain discharge standards, and those standards will be set by this -- by the water board in this upcoming hearing. So we will need a new water treatment plant and the plan would be to start the construction of that this summer.

[Operator:]

And that concludes today's question-and-answer session. At this time, I would like to turn the conference back to Clynt Nauman for any additional or closing remarks.

[Clynt Nauman:]

Thank you and thanks for joining us today. We remain dedicated to moving this district back into production, and with the recently announced bought deal flow-through financing for proceeds up to C$7 million and with the existing C$20 million of unrestricted cash, we are well funded to carry out a very busy year, with the 12,000 meter surface drilling program, the equipment and mill preparation and the Bermingham advanced exploration decline and underground drill program and all of the pre-feasibility work in 2017. Using a systematic approach, our objective and short term goals remain focused. As I had mentioned a couple of times, moving the district towards production. And as you understand and as Mike was asking, there will be clear project decision points, as we progress with the development. The first being the completion of the Bermingham decline around the end of the year and the decision to launch into the Flame and Moth decline, and then with the completion of the Flame and Moth decline the decision point to proceed to production, which will come in the second half of 2018. As always, we appreciate your support and interest in Alexco. And with that, I will turn it back to Mike to close out the call.

[Mike Clark:]

You've been listening to the Alexco Resource Corp, March 31, 2017 first quarter conference call. We encourage investors to visit Alexco's web site for further information at www.alexcoresource.com. If you have further questions, please call 604-633-4888 or email us at [e-mail]. This concludes today's call. Thank you for joining us and have a good day.