Alexco Resource Corp.
Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Welcome to the Alexco Resource Corp. 2016 Third Quarter Conference. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Mike Clark. Please go ahead sir.

[Michael Clark:]

Thank you. Good morning. Today is Thursday, November 10, 2016, and I'd like to welcome you to Alexco Resource Corp. September 30, 2016 third 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 feature news releases and other event updates as they are issued. Also on Alexco's website, you will find Alexco’s news release with quarterly financial results there and recording of this conference call. Giving presentation on today's call will be Clynt Nauman, President and Chief Executive Officer of Alexco; and myself Mike Clark, Alexco's Chief Financial Officer. We’ll 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 or 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 and EDGAR filings. It should also be noted that past performance discussed in this conference call is not indicative of future results. So now, I'd like to turn the call over to Clynt Nauman.

[Clynton Nauman:]

Thank you Mike and thank you for joining us today for a review of the 2016 third quarter. We released our financial results yesterday outlining a net loss of $640,000 for the three months ended September 30th. At the end of the day it's a non-cash cost which resulted in this loss. More on that from Mike later. Some of the highlights during the quarter include as follows. We continued and expanded our service expiration diamond drill program at Bermingham deposit and released interim results in September. Ultimately we drove more than 17,000 meters here in 50 holes demobing [ph] just last week. We continued with the keynote mill assessment of maintenance program and completed installation of the Flame & Moth underground portal and drove the first 20 meters of the production ramp at Flame & Moth. In our environmental business AEG it's third quarter had revenues of 3.2 million achieving a gross margin of 22% and finally during the third quarter 3.2 million warrants were exercised for proceeds of $4.6 million. These were $1.40 warrants from our August 2014 financing primarily. In recent weeks the market has been volatile as a result of the U.S. election and concerned what we entered the potential Fed rate interest increase in December. Notwithstanding the volatility I'm quite impressed by the strength in the silver price and certainly in a place which together with forex considerations is helpful to Alexco as we focus in on the various operating options available to us in 2017 and beyond. And I think if we were going to sort of sum up Alexco's progress in the third quarter and going into the fourth quarter it would be "steady as she goes." At the end of the third quarter we had a little over 23 million on unrestricted cash and 25 million in working capital. Given our current cash position we believe Alexco is in a unique position. We have a project that can be moved to production at modest capital cost, we clearly have a new high grade resource developing at Bermingham and beyond that a robust silver resource inventory in the district as a whole. With the flow through the proceeds of $3 million from the December 2015 financing we have completed the service exploration program at the Bermingham deposit. We originally planned an exploration program of 8000 meters in about 20 drill holes with a budget of $3 million, but due to continuing success coupled with impressive improvements and drilling efficiencies we've alternately increased exploration program to 17,000 meters in about 50 holes while limiting cost to approximately 3.3 million. We have also just concluded a series of rotary holes together hydrological information as well as undertaking geotechnical and preliminary metallurgical programs to test the Bermingham mineralization. Initial assay results on 18 of the 50 holes at Bermingham were released in mid-September, the drilling confirmed and expanded the Bermingham high grade zone and included and stepped up 7.5 meters true width of 2.7 kilograms of silver including within that 2.4 meters of 6.4 kilograms per silver per ton from one hole which was drilled about a 100 meters down plunge from the deepest intercept [ph] reported in 2015. Overall all other composite intercepts in this high grade now range between about 500 grams per ton all the way up to 7460 grams per ton silver over composited true thicknesses ranging from 1.3 to 6.4 meters. Final assays from the recently completed drill program are coming in as we speak. So the balance of the drill results from Bermingham are expected this quarter. The drill objectives at Bermingham in 2016 were firstly to increase confidence in field and expand the previously identified zone of high grade silver intercepts to along with trying to achieve sufficient density to prevent resource estimation. Secondly to explore up and down plunge of the high grade zone for possible extensions to other favorable structural stratigraphic positions in which additional mineral deposition may have occurred. Together with a high grade intercepts from 2014 and 2015, the 2016 drilling has so far extended the high grade silver bearing [indiscernible] over leased 250 meters of plunge length and a width of about 40 meters, the zone averages 3 to 4 meters in true width and it's likely more than 7 meters thick and remains open to depth and lot of strike [ph]. Potential linkage to the Hector-Calumet mine about 1 km away also remains to be resolved. Notwithstanding the excitement surrounding the Bermingham discovery it's good to remember that it's still just a discovery and working on a preliminary resources as we speak. But despite all this work I'm sure there will remain a fair amount to do, fair amount of work required to completely derisk this deposit. In the interim and importantly we have continued with the mill assessment and maintenance program at the Keno Hill mill. A mechanical assessment and maintenance of equipment is part of the routine process to maintain the plant equipment in condition where resumption of operations can easily be complete. Furthermore, during the quarter we installed an underground portal entrance with the flag of Flame & Moth drove the first 20 meters of the production ramp. This will allow resumption of development activities to begin at full scale in the future. This ramp will ultimately be driven 750 meters into the upper production levels of the Flame & Moth over deposit. We’re also finalizing the reenegineering and optimization of the mine plan for Flame & Moth and Lucky Queen. The Flame & Moth plan will include an expanded mineral source for April 2015. Finally we’re updating our cost and pricing models as well as watching the commercial smelter markets pretty closely. Once results from this work are compiled the study will move to develop and optimize multi-mine model focused initially on Flame & Moth and Lucky Queen. We plan to provide an updated PEA in December of 2016 which will incorporate the reengineered and optimized mine plans along with an updated mineral resource estimate for Bermingham. I will continue to emphasize that Flame & Moth remains a cornerstone mining asset in the Keno Hill district and I have every expectation that when the optimization project is completed we'll be looking at a further improved project for the longer mine life in the five or six years anticipated under the prior plan. On the environmental permitting front, we’re continuing to process with the Yukon waterboard on the water license, on the amended water license application and we expect a public hearing to occur at the first quarter of 2017. This is the last permit needed for production from Flame & Moth. Although well behind schedule we’re pleased with the results and do not expect any adverse impacts as a result of the slow arrival of these licenses and permits. As part of the course mining license process, we have filed an updated reclamation and closure plans for the Bellekeno deposit which resulted in security increase from $4.3 million to $6.3 million. In July 2016, we purchased the additional $2.1 million increase and are currently working with the Yukon government to substitute a portion of that cash posted in exchange for a pledge of asset. With respect to the Silver Wheaton, we’re continuing to have ongoing discussions to restructure the existing streaming agreement. The one thing I can assure shareholders is that Silver Wheaton’s interest is the same as ours, to get Keno Hill back into production and both parties continue to focus on that. I'm similarly confident that we will come to a suitable arrangement in the not too distant future. Regarding AEG, it had revenues of $3.2 million for a gross profit of $710,000 during the third quarter of 2016. A slight decrease in profitability compared to the 2015 period. Our fee for service in Canada continues a steady trend of profitability. The U.S. operations, in the U.S. operations we did incur some unanticipated project task as well as some costs associated with the obtaining release of the Globeville smelter project performance bond. Couple of highlights from the quarter at AEG include firstly the U.S. Environmental Protection Agency authorized an interim expansion of the Gold King plant to approximately double the water treatment plant capacity as well as other upgrades. The work for this is currently underway. And secondly on the Globeville smelter project the completion report which documents the work completed at the site and the monitoring results were submitted to the State of Colorado in July. The completion report triggered the release of $2.9 million to AEG with a remaining $398,000 being held as a performance bond through an environmental monitoring period which will last for another 18 months or so. I'd like to remind you that AEJ remains committed to the ongoing environmental care and 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 of development of the existing state of the mind reclamation and closure plan for the historic Keno Hill district liabilities. Once this plan has permitted implementation of the plan represents a 2030 year project with AEG as the prime contractor. The arrangement with Canada will underpin future growth at our AEG business. At this point I'm going to turn it over to Mike Clark to review the financial numbers and then we will take any questions that may be out there. Mike?

[Michael Clark:]

Thanks, Clynt. This financial report is for Alexco's third quarter ended September 30, 2016. Note, that we report in Canadian dollar so all dollar amounts spoken about will be in Canadian dollars. For the third quarter we saw overall revenue of 3.2 million and a net loss of CAD640,000 or a loss of $0.01 per share. These results include non-cash cost totaling CAD928,000 which is made up of depreciation expense, share based compensation expense and unrealized loss on warrants held as an investment. This compares to the third quarter of 2015 revenue of 3.4 million and net loss of 2.6 million for a loss of $0.03 per share which includes 1.3 million of non-cash costs. The main reason for the decrease in net loss during the 2016 period relates to a realized gain of 1.3 million on the sale of investments held in marketable securities. The AEG gross profit for the third quarter of 2016 was CAD710,000 for a margin of 22% compared to a gross profit of CAD869,000 for a margin of 25.5% in the third quarter of 2015. The decrease in gross profit from the prior period is mainly attributed to an unanticipated project related costs in the US as well as the costs associated with obtaining the release of the Globeville smelter project performance bond. Corporate general and administrative expenses for the third quarter of 2016 totaled 1.9 million compared to the third quarter of 2015 G&A expenses of 1.4 million. The decrease in G&A relates to a one time write off of receivables recorded in the 2015 period. For the third quarter of 2016 AEG G&A totaled CAD669,000 compared to the 2015 period AEG G&A CAD1.11 million. The reduction in cost is mainly attributed to the improved employee utilization in the fee for service business. Reduced overheads as well as the 2015 period included a write off of receivables. Mine site care and maintenance costs in the third quarter of 2016 were CAD475,000 compared to CAD587,000 in the third quarter of 2015. The decrease in costs is mainly due to continued operating efficiencies while in care and maintenance. The main component of mine site care maintenance cost is depreciation expense which was CAD407,000 for the third quarter of 2016 and CAD444,000 for the third quarter of 2015. Exploration expenditures incurred during the third quarter of 2016 totaled CAD3.40 million compared to CAD865,000 in third quarter of 2015. The exploration expenditures incurred in both periods primarily relates to the drilling exploration programs at the Bermingham deposit with a 2016 drill program being significantly larger. On July 29, 2016 Alexco filed a short form based shell prospects in a Form-F10 which would allow the company to make an offering up to as much as CAD50 million for a period of up to 25 months. Alexco's unrestricted cash balance at September 30, 2016 was $23 million compared to $8.2 million at December 21, 2015 while networking capital was $25 million compared to $12.6 million at December 31, 2015. The increase in unrestricted cash and cash equivalents for the nine months ended September 30, 2016 is mainly attributed to the many non-brokers private placement for gross proceeds of CAD13 million, 5.6 million of proceeds from the exercise of warrants, CAD1.8 million from the sale of marketable securities 3.8 million from the release of performance bonds which was offset by 2.1 million post the security at Keno Hill to 3.3 million spent on the exploration program at Bermingham and general overhead. In addition to under strict cash Alexco also has a restricted cash balance of 6.9 million which primarily relates to the commissioning obligations at Keno Hill. That completes the financial portion of this conference call. Now the operator will provide instructions for the Q&A session.

[Operator:]

[Operator Instructions]. And we will go first to Mike Kozak with Cantor Fitzgerald.

[Mike Kozak:]

First one, do you have a budget for 2017 at Bermingham, yes?

[Clynton Nauman:]

Not at this juncture and the reason is we only just finished our work there last week and so it's going to take three or four weeks yet to get all those results back in to be able to outline what we might be doing in 2017 and I would speculate though that the majority of the work that can be done from the surface is probably complete at Bermingham that would be point one, point two is with the discovery at Bermingham we do know that there are other targets, exploration targets in the immediate vicinity of Bermingham that offer the same type of geology potentially a resort Bermingham. I mean I would expect that we will be at least starting to address some of these other targets next year.

[Mike Kozak:]

Okay. And then my second question is the portal at Flame & Moth you're done the first 20 meters, is there more to do there come spring time or are you kind of done there on development now until a production decision is made?

[Clynton Nauman:]

I mean you know the strategy there was to install that portal, get all the services installed to the portal and to drive far enough in there so that if we in the event that we decide to pull the trigger and advance that decline in the colder weather over the upcoming winter we’re able to do that and not have to fight the weather [indiscernible] portal in the initial part of the decline.

[Operator:]

[Operator Instructions]. We will go next to Mike Niehueser with Scarsdale Equities.

[Mike Niehueser:]

It looks like you're right on top of a decision to resume production. You know with the water license in the first quarter completing the money for the court's [ph] license, the refurbishment of the mill, the 20 meters of the portal. There's really not left to the imagination to actually making a production decision. Does that where you confer that discussions with Silver Wheaton are somehow connected to that in a positive way at least in your estimation?

[Clynton Nauman:]

Yes I mean well there's a number of things that have to come together in order for us to make a production decision, all of the things that you have listed are important along with the market conditions and other transit that are being said and will be said in the industry from the pricing side. So yes I mean you're exactly right, we have made a very deliberate and I think very well justified decision to sort of advance all of these issues on a cost effective basis and we will be sitting at that point at the end of the fourth quarter for sure.

[Mike Niehueser:]

Well things look different here from the states as they do in Canada and even though the Fed might increase rates stronger dollar, I guess I didn't watch in the Canadian dollar drop relative to the U.S. dollar over the last six months or so maybe a different time period but doesn't that have some kind of at least moderately near term or mid-term effect on your calculations for production?

[Clynton Nauman:]

Yes that's fits into my category of market conditions and pricing for sure. Yes, as I've mentioned previously any time the silver prices in the $18 to $20 range and the Canadian dollar as it is today between $0.74 and $0.75 I mean there's no question that potentially these deposits are in the money at Keno Hill.

[Mike Niehueser:]

And did I hear you correctly that you’re going to have the balance of the results for Bermingham by the end of the year and updated PA?

[Clynton Nauman:]

Yes that’s the plan, we realized that we're bookended here pretty quickly. We certainly drilled a lot longer than we had anticipated with good reason and we are trying to get to all of that information compiled as quickly as possible. So yes I have not -- we haven't compromised on trying to meet that year-end date at this point.

[Mike Niehueser:]

Is it too early to include the Bermingham resource estimate if you have one in the PEA or is going to be the PEA strictly be Silver Queen and Lucky Queen and Flame & Moth?

[Clynton Nauman:]

Yes, so the reason for that well the PEA will include two key features, one is the updated multi-mine plan which will be a Keno Flame & Moth and Lucky Queen and the second and perhaps more important reason is to publish a resource for Bermingham, absolutely.

[Mike Niehueser:]

I've heard your presentation at the Silver Wheaton Analyst Day where you were featured as the head, the first near term production company but you -- would you say that the work that you've done at Bermingham is even though it's a great looking resource in that direction. Isn't it incredibly fast and efficient and cost effective relative to other exploration programs in the industry?

[Clynton Nauman:]

Well for sure I mean Bermingham has developed relatively quickly. There's no doubt about that and the question is what are the next steps and from our perspective we believe that at least a serious consideration at Bermingham as the next step is to drive a decline towards the top of that deposit, we know the top of it is around 150, 160 meters from the surface and to continue to derisk and drill that deposit prior to putting together any type of a final sort of extraction program for the mineralization or the ore. So the timeline on which we can get that on is certainly subject to some speculation at this point but you can be sure that if and energy going to be pretty squarely focused on trying to advance that work as quickly as possible.

[Mike Niehueser:]

With Flame & Moth again and how soon do you think that you're going to be in a position to where you have all the factors you need to know to make a production decision and if you do what are the kind of schedule or timing or milestones till you actually resuming production. It seems like it's a pretty short time frame.

[Clynton Nauman:]

Yes, so we need to get all of these issues that we've been talking about all these unanswered questions for the PEA, we need to get those finalized and that document compiled and then we'll be at a bit a point that we can we can make that decision. That being said you know it's two increment to moving forward. One is a sort of a predevelopment period where we have to sort of get our own in-house in order in terms of scaling up for development work and then once the development work starts you know there is seven month odd period of development at Flame & Moth prior to being able to access the ore

[Mike Niehueser:]

And imagine that you don't have to do much of the mill except for the refurbishment or general maintenance that you've been doing. Last question with AEG where you ended your comments. What are some milestones we could be looking for starting to do the work at Keno Hill. It's been out there a long time and this is a large part of the business in the future and a key to AEG but what are the things that we should be looking for in the next year, two years, three years to actually getting to work up there and start to generate some revenues and clean up the district.

[Brad Thrall:]

Maybe I can jump in there Mike, is Brad Thrall here. So the closure plan for Keno Hill which we turned to [indiscernible] reclamation plan. It has reached somewhat of a milestone here just in the last month I would say we are going to deliver our final plans to the Government of Canada. That will now kind of initiated the environmental assessment process in the Yukon which I know of you're familiar with. So it has to go through the [indiscernible] process, and it has go through a water license process, that will take somewhere in the year and half type of timeframe from there it does need final funding so we are on kind of target timeframe sometime in 2019 to have all of that kind of permitting complete funding complete where we could start some of the heavy lifting.

[Mike Niehueser:]

I guess last question if I could just throw this in Clynt. I guess there was an election in the Yukon this week and this is the last question seriously. How does that bode well or positively or negatively for permitting production and other things in Yukon as you see it today? And thank you for entertaining my question.

[Clynton Nauman:]

As far as the Yukon election is concerned I think it's too early to tell. The liberal party which prevailed up there you know is -- we are going to have wait and see how that party organizes itself and what it's objectives are going to be. But I think there is a pretty clear understanding that from all of the political people in the Yukon that mining is extremely important to the future. About the territory and is potentially an underpinning to the economy. So we just have to wait and see. We certainly don’t anticipate any [indiscernible] effects here.

[Operator:]

[Operator Instructions]. And we have no further questions in the queue.

[Clynton Nauman:]

So thank you very much operator and for all of you on the call. Thank you for joining us today. We remain focused on moving the Keno Hill Silver district back into production and pending [ph] final results from the Bermingham drill program or at least of a updated PEA and continuing strength in the silver market we will be well-positioned by year-end to consider redevelopment at Keno Hill. As always we appreciate your continued support and interest in Alexco and with that I will turn it back to Mike to close the call.

[Michael Clark:]

Thanks, Clynt Nauman. You've been listening to the Alexco Resource September 30, 2016 third quarter conference call. We encourage investors to visit Alexco's website 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.

[Operator:]

That does conclude today's call. Thank you for your participation.