Alexco Resource Corp.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Welcome to the Alexco Resource Corp. 2016 First Quarter Conference Call. Today’s conference is being recorded. I would now like to turn the call over to Mr. Mike Clark. Please go ahead, Mr. Clark.

[Mike Clark:]

Good afternoon. Today is Thursday, May 12, 2016, and I’d like to welcome you to Alexco Resource’s March 31, 2016 first quarter conference call. This conference call is being webcast live and can be accessed at the company’s website at www.alexcoresource.com. You may sign-up on the Alexco website to receive future news releases and other event updates as they’re issued. You’ll also find Alexco’s news release with quarterly financial results along with a recording of this conference call giving. Giving presentation on today’s call will be Clynt Nauman, President and Chief Executive Officer of Alexco Resource and myself, Mike Clark, Alexco’s Chief Financial Officer. We will have an opportunity for a question-and-answer period after our presentations and joining us for the Q&A portion of the call will be our Executive Vice President and Chief Operating Officer, Brad Thrall. Before we get started, I need to remind you that some statements made today by us 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. So now, I would like to turn the call over to Clynt Nauman.

[Clynt Nauman:]

Thanks, Mike and thank you all for joining us today for review of our 2016 first quarter. We released out financial results yesterday outlining a net loss of $2.1 million of which $844,000 were non-cash costs. In the first quarter we focused on implementing plans to continue exploration at our high grade Bermingham discovery as well as developing our plan to return to operations in incorporating production from the Bellekeno, Flame & Moth and Lucky Queen silver deposits. Some of the highlights during the quarter have included, firstly we were granted the appropriate amendments to Flame & Moth mining license permit. So we're shovel ready for development of this deposit. Secondly, we confirmed contractual arrangements with our drillers, a couple of drills this season arranged for all of the follow-up tier technical, metallurgical and hydrological work that will be completed at Bermingham this summer. Thirdly, and over it at AEG our environmental subsidiary. The U.S. environmental protection agency extended our AEG operations contract at the Gold King side in Colorado to the end of September 2016 as well as authorizing an interim expansion of the plant to approximately double the water treatment plant capacity to more than 1500 gallons per minute. And finally as you all know in late April we announced a $10 million non-brokered private placement with Sprott, private wealth management. A financing which we subsequently upsized by 3 million for total gross proceeds up to $13 million. For a more general perspective and as we all know in the first four months of 2016 there's been a modest but important upward trend in silver prices and as we have seen there has been a material response in the silver mining sector to the apparent improving conditions. Alexco's share price has risen from $0.47 at the beginning of the year to close a quarter out at a buck and a quarter and as of yesterday a $1.59 per share. I'm cautiously optimistic that we have seen the bottom of the silver markets in 2015 and we'll continue to see improving strength in our sector in 2016. In light of these improvements in the market when the opportunity presented itself in late April for Alexco to raised $10 million which we subsequently increased to $13 million where Sprott Wealth Management while also bringing in a reputable shareholder in the form of Eric Sprott we thought it was prudent to raise the funds and in doing so expand our forward operating flexibility in light of the apparent improving market conditions. At the end of the quarter we had a little over $7 million in unrestricted cash and $10.7 million in working capital. With the recently announced equity financing of up to $30 million our total cash position will increase to be in excess of $25 million including approximately $8.5 million of restricted cash of which $4.2 million is attached to performance bonds which we expect to be retired in the near future. Given all of this we believe that Alexco is in a unique position. We have a project that can be moved from production -- a project that can be moved to production relatively quickly and a modest capital cost and we have a robust silver resource inventory. We have plans in hand to move forward and the market conditions considered. With the flow through proceeds of 3 million from December 2015 financing we will continue with follow up valuation of service exploration at the Bermingham deposit beginning in a couple of weeks. A minimum of 8000 meters of diamond drilling is planned in 25 to 30 holes to test both shallow and deeper extensions of the high grade mineralized arm [ph] as well as the infill the previously outlined high grade area in anticipation of calculating an initial mineral resource for the Bermingham deposit before the end of 2016. The 2016 surface drilling program is expected to run between May and September with results released more or less as we receive but certainly consolidated earlier in the fourth quarter of 2016. We will expand additional funds to gather important geotechnical and hydro geological information as well as undertake a preliminary metallurgical program to test them at Bermingham mineralization. For those not familiar with Bermingham, in late 2015 Alexco announced a discovery of a steeply plunging zone of mineralization ranging from about 0.4 meters to more than six meters spec with grades ranging from 1 to 2 kilograms per ton of silver to more than 10 kilograms per ton of silver. This zone is been drilled over about 140 meters down plunge is thought 30 to 40 meters in striking and has opened both up dip and down dip. This is in an area that our prior historical mining and is about 4 to 5 kilometers away from our existing mill. It is exactly the type of mineralization that the early prospectors Keno Hill were searching for and also the type of mineralization that led to discovery of the bigger and higher upgrade silver deposits in the district. Notwithstanding the excitement surrounding the Bermingham discovery it is wise to keep in mind exactly what it is. It is a discovery far yet from a defined resource. In the interim and importantly we have continued our work to reengineer and optimize the mine plan for Flame & Moth, incorporating the expanded mineral resource that we updated in April 2015. We have completed a detail geotechnical review of the future Flame & Moth mine plan the result of which will be an expansion of long haul versus cotton filled or drift in the mining which should reduce the expected operating cost as well as mitigate sustaining development costs. The Flame & Moth and Lucky Queen deposits economic models are in the process of being revised using current consensus pricing and updated estimated capital and operating costs. Once result from this work are compiled the study will move to develop an optimized multi-mine model which will be incorporated into an updated preliminary economic assessment which is expected to be released in the fourth quarter of 2016. Make no mistake Flame & Moth remains the cornerstone mining asset in the district and I have every expectation that when the optimization project is complete we'll be looking at a further improved project where the longer mine life than the original five or six years anticipated which was based on the former modestly smaller resource. On environmental permitting front we received our amended quotes mining license for the Flame & Moth deposit in February, 2016 and we're continuing to process with the Yukon Water Board and the water use license amended application and I think we can expect to see a public hearing for that license set in the near future. This is the last permit we need for forward-looking statements and now that’s well beyond our original schedule we're pleased with our permitting efforts and have no adverse impacts in terms of results of a slow arrival of these licenses and permits. With respect to Silver Wheaton we’re continuing to have ongoing discussions to restructure the existing streaming agreement. The one thing that I can assure shareholders is that Silver Wheaton's interest is same as ours to get Keno Hill back into production and both parties continue to focus on that. Switching to cash we have continued to look at ways to reduce costs related to office space, care maintenance in Keno Hill, professional fees, consultants and other items and across the company including corporate DNA, A&T [ph], AEG, G&A and care maintenance the company has reduced cost by 13% excluding noncash items. Regarding AEG, it had revenues of 2.3 million for a gross profit of $565,000 during the first quarter of 2016. Our fee for service business in Canada continues to lead the way and steady profitability. Project and turnkey work in the U.S. is much lumpier in terms of revenue and earnings, although our first quarter was slow in the U.S. we expect to see a pickup in project activity over the balance of the year. Some highlights during the quarter for AEG include Beardsley at the Gold King project, the U.S. EPA has recently extended the operations contract with the AEG to the end of September 2016 as well as authorized an interim expansion of the plant to approximately double the planned capacity. Construction related to this expansion is complete. Secondly, on the global smelter project AEG drafted a completion report in the first quarter which outlined all work completed at site and estimates the financial cost of monitoring for the next couple of years and the estimated cost to implement any adaptive management plans. AEG plans to submit a final completion report during the second quarter of this year and that report will support the release of a portion of the respective cash in the next several months which management estimates to be approximately 3.8 million. Meanwhile remember that AEG remains committed to the ongoing environmental care maintenance program and reclamation and closure projects at Keno Hill under it's long term contract with the Government of Canada. AEG is making significant progress on the development of the existing state of the mine reclamation and closure plan for the historic Keno Hill district liabilities. Once this plan is permitted implementation to the plan represents a 30 year project for AEG as the prime contractor. This arrangement with Canada will underpin future growth of our AEG business. At this point I'm going to turn it over to Mike Clark to review the financial numbers and then we'll take any questions that may be out there. Mike?

[Mike Clark:]

Thanks, Clynt. This financial report is for Alexco's first quarter ended March 31, 2016. Note that we’re reporting Canadian dollars so all of dollar amounts we talked about today will be in Canadian dollars unless stated otherwise. For the first quarter we saw overall revenue of 2.3 million and a net loss of 2.1 million for a loss of $0.03 per share. These results include non-cash cost totaling 844,00 which is comprised of depreciation and share based compensation expense. This compares to the first quarter of 2015 revenue of 4.5 million and the net loss of $492,000 for a loss of $0.01 per share. The increase in net loss from the prior period is mainly due to the decrease in gross profit from U.S. projects within AEG. Moreover the company had a $278,000 foreign exchange loss in the 2016 period compared to a $578,000 foreign exchange gain in the 2015 period. The AEG gross profit for the first quarter of 2016 was 565,000 for a margin of 24% percent compared to a gross profit of 1.2 million for a margin of 26% in the first quarter of 2015. The decrease in gross margin from the prior year period is mainly due to the completion of the global smelter project in 2015 as well as the nature of specialized engineering design related to the Keno Hill reclamation plan which required AEG to outsource a significant portion of work to third party contractors during the 2016 period. Corporate general and administrative expenses for the first quarter of 2016 totaled 978,000 including non-cash cost of $228,000 compared to the first quarter of 2015 G&A expenses of 1.2 million which included $202,000 of non-cash costs. The reduction in G&A mainly relates to the less business development, investor relations and corporate overhead costs during the 2016 period. There was virtually no change in the AEG general and administrative expenses for the first quarter of 2016 compared to 2015. Q1 of 2016 AEG G&A totaled just over $1 million including non-cash cost of $135,000 compared to the Q1 costs in AEG G&A of -- in 2015 of $973,000 which included a $106,000 of non-cash cost. Mine site care and maintenance costs in the first quarter of 2015 were $522,000 compared to $590,000 in the first quarter of 2015. The decrease in cost is mainly due to a lesser depreciation charge and lower overheads in the 2016 period. Included in mine site care and maintenance cost is depreciation expense of $411,000 for Q1 2016 and $443,000 for Q1 2015. Exploration expenditures incurred during the first quarter of 2016 totaled $255,000 compared to $303,000 in the first quarter of 2015. The majority of the 2016 expenditures related to the 2016 program at Bermingham. Subsequent to quarter end the company announced that it entered into an indicative term sheet for a non-broker private placement of up to 8.3 million units of the company at a price of a $1.20 per unit for gross proceeds of up to $10 million. Each unit will consist of one common share and one half of one nontransferable warrants each hold such warrants entitling the holder to purchase one additional common share of the company at a price of a $1.75 per share for a period of upto 24 months following the date of issuance. The company has since increased the size of this private placement by upto 2.5 million additional units for gross proceeds of up to $3 million for a total of up to 10.8 million units to raise total gross proceeds of $13 million. Alexco's unrestricted cash position at March 31, 2016 was $7.1 million compared to $8.1 million at December 31, 2015 while working capital was $10.7 million compared to 12.2 million at December 31, 2015. The decrease in unrestricted cash and cash equivalents in the 2016 period is mainly attributed to the G&A cost and mineral property expenditures offset partially by AEG gross profits. In addition, Alexco has a restricted cash balance at March 31, 2016 of $8.5 million of which approximately 4.2 million relates to the decommissioning obligations at Keno Hill and 4.3 million relates to the AEG global smelter project performance bond of which 3.8 million is expected to be released in the next few months. That completes the financial portion of this conference call. Now the operator will provide instructions for the Q&A session.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Mike Niehueser at Scarsdale Equities. Please go ahead.

[Mike Niehueser:]

You mentioned that the Bermingham was still a discovery, but it just seems that given the drill results you're being modest and I'm wondering if the quality of this asset would allow it to accelerate in development just based on the quality of it alone.

[Clynt Nauman:]

Yes. I mean it's certainly a material discovery as we all know but you know it is extremely high grade, it is just a 160 meters from the surface and we really only have 6 to 8 holes in it. And so I think that prudence would demand that we get a lot more information in and around this discovery before we put together a resource. So that's what our plan is in 2016 and hopefully we'll drill a combination of exploration, extension, and infill holes and then I think we'll have plenty of information to state a resource but I mean you are correct, it's a material discovery without doubt. I just want to make sure that it's very high grade and the prudence would demand that we get closer space holes in there before announcing a resource and I would be thinking of something in the 20 to maximum 30 meter range in terms of the spacing on the holes. Does that answer your question?

[Mike Niehueser:]

Yes I got a follow up on that though with raising the money that you just did is there a potential to either accelerate, expanded the drill program, if it takes you someplace especially in this year or to get underground to do a little bit more infill drilling of what you have?

[Clynt Nauman:]

Yes, exactly. As I mentioned the part of this the opportunity that we had in raising that money is to give us flexibility going forward. And I’ve certainly been convinced and mentioning the fact that if this program is successful. I think that the next step is to drive an underground ramp, get down close to this mineralization, continue to drill, maybe get a bulk sample out of it but that's a stamp here that where we’re at the present time but that financing gives us the flexibility to a need to make that decision and to initiate that type of activity if in fact 2016 were supported.

[Mike Niehueser:]

So did I hear you correctly that you're going to consolidate the drill results and the work on Bermingham to come up with potentially come up with a resource in the first quarter of next year, did I hear that correctly?

[Clynt Nauman:]

No, I think that our plan is to produce an updated PEA in the fourth quarter of this year and that will include a modified and optimized multi-mine plan for the original three deposit, Bellekeno, Flame & Moth and Lucky Queen which themselves are significant resources you understand, plus we will include a resource on Bermingham. Just one other follow up thing I want to just raise on Bermingham and that is that it is outside of the areas where we currently have sort of free range in terms of permitting flexibility. It is covered by certain permits that we had in place so we have in place for the past but it will require some permitting work in order to trigger any major additional work that we don't anticipate that to be a barrier at the present time, we're confident that we can move forward but I do need to mention the fact that once we get past this exploration stage of course we need to address the permitting and authorization questions..

[Mike Niehueser:]

You mentioned your possible water permit hearings for Flame & Moth in the near term, does that imply that you could potentially be awarded your water permits once with PEA update.

[Clynt Nauman:]

Yes I would well before that, Mike. I mean we’re preparing to end of the -- sort of the public hearing phase of water use license for Flame & Moth. We don't anticipate any particular issues there so our hope is that in the very near future here meaning measured in weeks to months not years we'll have that water license for Flame & Moth and we will be fully permitted for operations in an expanded sense of the word at Bellekeno, Lucky Queen and Flame & Moth as well as [indiscernible] and if we so choose. So we'll have lots of flexibility by the end of the summer and then shortly after that will have this new PEA with the resource at Bermingham and at that point we will be hopefully making the decisions that are required to move the district forward as a whole.

[Mike Niehueser:]

So you would even hold back from starting to decline at Flame & Moth until you get the PEA and that's when you would make that type of decision most likely?

[Clynt Nauman:]

I think that our discovery at Bermingham is important enough that we should really determine what that discovery is before deciding the overall strategy of moving the district together for the sake of two or three months here over the summer to get that information, I think that's worthwhile thing to do and at that point I mean assuming that there's market support we can make the appropriate decisions.

[Mike Niehueser:]

So you could actually make a decision be in production early in 2017 if everything works in your direction?

[Clynt Nauman:]

Well. I'm not going prejudge what the market is doing. I think it's prudent to undertake this program the way that we're doing it to have the maximum flexibility possible which would give us the ability to make those types of decisions if in fact they're supported in the market.

[Mike Niehueser:]

And on the Gold Hill project that was originally going to be a short term winner only project and now it's extended through the summer months and it's doubled in size. What looked like was temporary seems to be a little bit more sticky and is there a potential even with larger firms clamoring for the business there that you might be sticking around even longer?

[Brad Thrall:]

It's Brad, maybe I can take that. Again the Gold King project is still in what we would call the kind of emergency response phase with EPA s there's still a lot of work that they will be doing to determine what the longer term plans are at Gold King, so you know I would expect this plan to continue to operate you know certainly through the rest of this summer fall into next winter but yes I mean I think you can certainly expect that there are some points, there's going to be a lot of interest in what the longer term plans are for that area.

[Mike Niehueser:]

Well my last question is you know you've mentioned the reclamation of the Keno Hill silver district and you've been at it for years and it seems to be quickening. What are the -- could you give me some idea for the timing of months or years that it will take to be able that work actually to commence and maybe some detail of what needs to take permitting wise or partner wise just some scale of what needs to occur and thank you for taking all my question.

[Brad Thrall:]

Mike, in terms of what we call the existing state of mind reclamation plan, this is the planet that addresses all of the historic liabilities in the district, we're about probably three to four months away from having the final version of that plan accepted by the Government of Canada. It will then go into the environmental assessment process in the Yukon, that's probably going to be about a year long process. From then it needs to get a water license and then from there it needs treasury board approval for the final funding. So we would anticipate all of that would be completed by 2019 at which time we can start major activities at site.

[Operator:]

[Operator Instructions]. There are no further questions at this time. Please continue.

[Clynt Nauman:]

Thank you. I just by way of final comments I just want to thank everybody for joining us again today and in closing let me emphasize my increasing confidence of the silver markets but in doing so I assure you that our Board of Directors and management continue to carefully manage cash outlay while we manage our growth. That said in 2016 we'll take a measured approach to expanded activities at Keno Hill continuing to maintain our plant, equipment and infrastructure, to ensure that it is in satisfactory condition and the company's position to move forward should market conditions continue to improve. As always we appreciate your continued support and interest in Alexco. And with the. I'll turn it back to Mike to close out the call.

[Mike Clark:]

You've been listening to the Alexco Resource March 31, 2016 conference call. We encourage investors to visit Alexco's website for further information at www.alexcoresource.com. If you have any 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.

[Operator:]

This conclude today's call. Thank you for your participation. You may now disconnect.