Alexco Resource Corp.
Q3 2014 Earnings Call Transcript

Published: 14 Nov 2014

[Operator:]

Greetings. And welcome to the Alexco Resource Corporation Third Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Vicki Veltkamp, Vice President for Investor Relations. Thank you, Mr. Vicki Veltkamp. You may begin.

[Vicki Veltkamp:]

Good morning, everyone. Today is Friday, November 14, 2014. I’d like to welcome you to Alexco Resource's third quarter 2014 conference call. This conference call is being webcast live, it 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 and you’ll find Alexco’s news release with quarterly financial results there. And for a limited time, a recording of this conference call will be available by telephone and the instructions on accessing that are also in yesterday’s news release. Giving presentation on today’s call will be Clynt Nauman, President and Chief Executive Officer of Alexco Resource; and David Whittle, Alexco’s Chief Financial Officer; and also Brad Thrall, our Chief Operating Officer will be joining us for the question-and-answer period after the presentation, if you have any questions. Before we do get started, I need to remind you that some statements made today by the management team 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. And 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 Alexco’s President and Chief Executive Officer, Clynt Nauman.

[Clynt Nauman:]

Thank you, Vicki. Hello, everyone. And thank you for joining us today as we review our progress during the third quarter of 2014. During the third quarter, first, on an income basis, we showed a small net loss, so that loss was primarily attributable to non-cash items. I think it’s noteworthy that the gross profit from AEG sub, our environmental company, essentially covered the entire overhead of our group, with the Keno Hill site care maintenance cost of about $800,000, of which about $600,000 is non-cash, essentially falling to the bottomline in the quarter. On a cash basis, our burn was almost entirely due to ongoing exploration expenditures, net of the money we raised in the summer of course. Overall, and to my mind, our cash management is in line with our expectations, if not a little better. David will talk more specifically about the financials -- the third quarter financials in a few moments. On other front, we made solid progress and I am sure, you have seen some of that in our recently issued news releases. As you know, our ultimate goal is to continue unlocking the value of the prolific Keno Hill Silver District both by identifying and increasing our silver resource through exploration and by putting the district back into production by our plan of developing the Flame & Moth deposit and bringing Bellekeno back online. Decisions to accomplish this will be measured, disciplined and in context with the market. Clearly, there are headwinds in both the commodity and capital markets in the short-term. But it turns out our timing during this period of operations suspension and restructuring has been good in the sands that we are not dipping into our silver resource and the ground in the current silver price environment. So let me touch on the some of the progress that we have made in the meantime. We are very pleased to have been able to extend the payment deadline for the amendment to our Silver Wheaton Silver Purchase Agreement. Silver Wheaton has been a good partner throughout a work at Keno Hill and we appreciate that they recognize the challenges of working in these current market conditions. As you know, when we return to our operation, this amended agreement will give us meaningful downside protection in lower silver price environment, such as we have now. Remember that the amount Silver Wheaton paid us for the ounces they receive from Alexco is tied to the silver price, essentially lowering our operating costs and preserving margins during periods of lower silver prices. The original deadline for us to implement that amendment was this December 31st. We are pleased they agreed with us that the current is one that we would consider accessing at this point in time in order to make the $20 million payment to Silver Wheaton, which is necessary to put the amendment in place. Instead, we have pushed that out to the end of December 2015, which gives us another 14 months to decide whether and when to adopt that amended agreement. If we do not elect to implement the amendment, the current streaming agreement will stay in place. Part of the amended timeline also includes the push to December 31, 2016, for the completion of the 400 tonne per day throughput test. All of this is good news for us, because it gives us further flexibility and timing of any future financing, development and production decisions. Another fact, to increasing our current flexibility is a bought deal financing which completed in August for net proceeds of $7.2 million. At the end of the end of the third quarter, we had cash and cash equivalents of $10.6 million and net working capital of $18 million. I have to tell you at the time we did the financing I wasn’t very excited about issuing 10% more of our shares as the interim price of our stock which was about a $0.15 per share. But looking back, it was a good decision and again helps us with our flexibility in making decision going forward and gives us the wherewithal to comfortably continue our planning and development process. An important source of value for us has been the Alexco Environmental Group or AEG, as we call it. It has continued to grow. We now have offices in Vancouver, Denver, Fort Collins, Toronto and Whitehorse. AEG has become an increasingly profitable business unit, a unit which has transitioned from being subsidized at times in the past by Alexco Resource, which are now contributing cash and significantly offsetting our burn rate, while our mining operations are suspended. A couple more highlights during the last few months had to do with moving forward with our permitting process with Flame & Moth, as well as some of the significant exploration success at Keno Hill. I’m going to talk in more detail about those in a bit. But before getting into operations and exploration review, I’m going to turn it over to David Whittle, for a more detailed look into third quarter financial results. David?

[David Whittle:]

Thanks Clynt. Just a reminder, this financial report is for Alexco’s third quarter for 2014. Note that we report in Canadian dollars. So all dollar amounts we talk about today will be in Canadian dollars unless otherwise stated. Our net loss for the quarter was $667,000, or $827,000 before the recovery of deferred income taxes. Included within that loss, are non-cash costs of $675,000 for depreciation and $224,000 through share-based compensation, meaning that our net results were actually slightly positive on a cash basis. Net cash flows from operating activities as per the statement of cash flows were negative $235,000 due to working capital timing differences. These results of course do not include the cost of our exploration activities, which are capitalized and not charged to income. The 2014 exploration program has run on a budget of $5 million for the full year, of which about $2.5 million was spent in this third quarter as summer is the exploration high season. This exploration program has been fully funded by the flow through capital we raised that we completed in April 2013 and by the end of this year, we will full satisfy the expenditure obligation under that raise. AEG revenues for the quarter were $4.7 million, with a gross profit of $1.8 million, for a margin of 39.5%. This is pretty consistent compared to the third quarter of last year when we booked revenue of $4.9 million, a gross profit of $1.8 million and a gross margin of 37.9%, ignoring certain one-time gains we reported in that quarter from a favorable contract renegotiation. Care and maintenance cost for the Bellekeno mine and mill sites totaled $807,000 for the quarter. However, as Clynte has noted, that figure includes non-cash charges of $625,000 for depreciation and share-based comp. As Clynte has also noted, in August, we closed the bought deal financing under a short from prospectus. It yielded net cash proceeds of $7.2 million. Conditions were challenging in the precious metals market these days as you well know, but this financing leaves the company with a strong treasury to weather the downturn. Alexco’s cash position at September 30th was $10.6 million and our net working capital totaled $18 million, inclusive of $4.3 million in underground long-hole stope or inventory. The decrease from second quarter after allowing for their August financing is due primarily to expenditures on the ongoing exploration program. I will now turn the call back to Clynt.

[Clynt Nauman:]

Thanks David. If you have any specific questions about the financial results, we’ll take those at the end of the call. I’d like to take a moment here to publicly thank David for his outstanding contributions towards helping to build this company over the past seven years as Alexco’s CFO. You probably saw in the news release that David has decided to move on to other things and will be leaving us in December. I just want to say that we are grateful for his dedication and sincerely wish him success in whatever he does next. Meantime, in December, we will be welcoming a new CFO, Mike Clark, who will be joining us then. Mike has good experience in the mining sector as a CFO and we are looking forward to working with him. Turning back to things going on at Keno Hill, I’m happy to report that progress in terms of the permitting, as we move forward in considering our options for Flame & Moth. Remember that the overall plan here is to return to production with a combination of mill feed from Flame & Moth and Bellekeno, and later to add production from the high grade Lucky Queen mine. In 2014, we have been continuing to collect data in and around Flame & Moth. It surfaced facilities in place, drilling holes for both geotechnical and exploration purposes, and generally doing all of those things, which will ultimately help us to optimize our future capital and operating costs. We have been doing all of these while working on a permitting process that will give us maximum flexibility moving forward. The key to that flexibility, the authorizations that we need to mine and process materials from Flame & Moth alongside supplemental production from Bellekeno and Lucky Queen mines, which were already fully permitted. We crossed the major hurdle about a week ago when we received a Decision Document from the Government of Yukon, a document which is a necessary step toward amending both our Quartz Mining Licence and our Water Licence to eventually include Flame & Moth production in our operations. The permit process to get us to this point has been quite involved. We have to complete an environmental re-assessment under the YESAA process, which is the Yukon Environmental and Socio-economic Assessment Act. The resulting report from that assessment is called, the Evaluation Report and this was finally issued in early October and recommended Flame & Moth be allowed to proceed under certain conditions, and then that document, Evaluation Report, and the recommendations contained in it were reviewed and modified by the Yukon Government, which has now issued its Decision Document. This whole process done almost a year ago, but at this point we announced we now confidently expect an amendment to our Quartz Mining Licence will include the conditions in the Decision Document. And this document will be used to amend our Water Licence to include Water Use to amend our Water Licence to include Flame & Moth. It sounds competitive. But on the relevant question of where we are today, the simple answer is that we are very close within days of we are having the authorization required to drive the initial cost of the decline to access the Flame & Moth deposit, perhaps the first 500 meters. However, after carefully watching the circumstances unfolded mentor Capstone Mine, we are of the opinion that we need to also have an amendment to our Water Licence to be able to complete the decline into the old deposit, further 500 odd meters of development, where there is a likelihood that we will need to handle water. A Water Licence amendment was always part of the process necessary to authorize production from Flame & Moth. So application for amendment to our Water Licence was submitted as soon as we had the Evaluation Report from Elsa. At the end of the day, it’s generally good news and we are comfortably on track with our permitting process. We are also putting the final touches on Updated Preliminary Economic Assessment for the Keno Hill District. This updated PEA will simply consolidate the various technical reports on district and update the original 2013 PEA titled, 'UPDATED PEA for the Eastern Keno Hill Silver District Project -- Phase 2. This consolidated document has been requested by the BC Securities Commission. We prefer we file a single consolidated technical report for the entire Keno Hill District rather than separate reports for each deposit or project within the district as we presently do. Further to that and in context with new results and information collected in 2014, we are considering advancing the economic analysis to a prefeasibility study in 2015, no current decisions yet, but we will certainly let people know once we have a plan. And finally today, I guess my favorite subject more exploration success in the Keno Hill District. By all measures our 2014 exploration program will be a resounding success, even though we don’t have all the results in yet. But one thing, we are able to drill about 80% more meters than we anticipated for the same costs, the $5 million a day we’re talking about. This came about through a combination of efficiencies and re-negotiated drilling contracts and we ended up drilling more than 18,000 meters by the seasons end. We reported some results earlier this month in a news release about Birmingham and that would throw some pretty interesting results. The best [indiscernible] ever drilled in the Keno Hill District came from this year from Birmingham assaying over 5600 grams per ton or about 6.5 meters -- 6.4 meters or about 125 ounces per ton silver. Of course that’s just one hole. But if you read the press release, you will see that we had a number of holes with very high-grades at Birmingham, the best exploration season to-date on that target for sure. You probably heard me say in the past that Bermingham is a complicated deposit. Well, we started to crack that nut and it’s genuinely becoming more predictable. But if I can make a blue sky statement here, it appears that our inner sets are thicker and higher grade as we chase this thing to the law, still relatively shallow depths. Ultimately, it’s leading us towards some very distinctive stratigraphy, rocks that host the Hector-Calumet deposit which is next door to Bermingham. You will remember about 96 million ounces of silver were extracted historically from Hector-Calumet at a grade of about 35 ounces per ton. Obviously, we are continuing to synthesize the Bermingham results and ponder how we best continue to walk this mineralization to more -- even more conducive stratigraphy. We’ll be calculating a new interim resource of Bermingham from work completed in 2014, in early 2015. And notably this interim resource will likely not include the influence of a higher grade results that we received this year as we simply did not drill enough holes to support a resource in that particular area as we walk this deposit to the north -- on the north east. Meanwhile we did a considerable amount of drilling in Flame & Moth this season as well. And we’re still compiling the results of that. We will be releasing that information as it becomes available at the course of the winter. And we expect to release a new resource calculation for the district including Flame & Moth early next year. But what I can say is that with the combination of more information for Flame & Moth and the necessity to amend that WUL license. We have a window here to further optimize our plans and are actively pursuing that process. So we’ll end on that note and take your questions now if there are any.

[Vicki Veltkamp:]

Operator, could you please given the instructions for the question-and-answer period now.

[Operator:]

[Operator Instruction] Our first question comes from the line of Hieko Ihle of H.C. Wainwright. Please state your question.

[Hieko Ihle:]

Sorry if I’m muted. Hey guys. Congratulations on the quarter and obviously congratulations to be outstanding in your projects.

[Clynt Nauman:]

Thanks, Hieko.

[Hieko Ihle:]

Can you just walk us through the 2015 exploratory budgets given current metal prices. You said right now, just sort of walk us through what you see in terms of the impact of another $2 decrease versus $2 or $5 increase price over that you would say specifically?

[Clynt Nauman:]

Thanks for that question, Hieko. Just, I guess, taking them in order. Clearly, we are not going to walk away from a plus 100 ounce a hole at Bermingham, especially as we --- as we have a fairly predictable trend developing with that mineralization. We have not made any decisions on what kind of exploration program we’re going to operate in 2015. But clearly we are looking at our options. The best option for us would be to drill about another 5000 meters at Bermingham and maybe other places in the district you want to drill. And we would think that given that we are able to cut our U.S. exploration very substantially this year. Doing that work could be done for probably less than $2 million. But like I say, we haven’t made any firm decisions. We do know that we need to continue especially with the success that we’ve had. And then on the question, I think the other question was what happens if the silver price goes up $2 or $5. I would say that just before this call started, we were looking at the silver price. It’s tremendously volatile today. And I’m not sure exactly what that tells you but we do know that in looking at the silver markets over the last 10 years or so that when silver reaches the bottom, it’s 50th V-shaped bottom that it recovered generally 35% of its value in less than six months. And that’s happened numerous times in the last 10 years. That’s not a prediction of what’s going to happen in the future course. We have been putting some sword into what happens if there is a significant rebound. And I still stand by my original statements. I think that between the $12 price and say $15 or $16 price, I don’t think that Keno Hill moves board in a meaningful way between $16 and $20. I think it’s a risk-weighted decision as to whether or not to put that district back in production above $20 in our arena. We have taken another look at our all-in -- protected all-in sustaining cost for 400 tonne per day operation. And we believe those cost are in the $15 to $15.5 range at the present time and that’s without any optimization that we intend to look out pretty closely here over the winter. So I’m not sure if that answers your question but those are my thoughts.

[Hieko Ihle:]

That’s pretty well. Here is the question, you guys have that one-time payment coming up, perceivably before anything big move forward. And in the prolonged silver price [parameter] [ph] the way we have it right now. I mean, as this agreement will start probably quite a bit higher than what it is right now. Have we ever considered walking up the facility and say, hey, listen, can we maybe touch as one-time payment or can we renegotiate. I know you guys just expanded it but just in addition to that?

[David Whittle:]

Well, Hieko, I mean, I think that we’re extremely happy that the Silver Wheaton was very cooperative when we were talking about extension of the payment period. I mean, it is since being an option and I would just -- I’m not going to ask for the question directly, I would just ask you to consider there is 14 months between now and when that payment is due. So in this business, that’s a long time.

[Hieko Ihle:]

Yes. Excellent. Thank you guys so much. Congratulations again and David, all the best of luck to you.

[David Whittle:]

Thanks, Michael.

[Operator:]

Our next question comes from the line of Mike Niehueser, Scarsdale Equities. Please state your question.

[Mike Niehueser:]

Hi, Clynt. Mike Niehueser. So could you -- I just need you to talk about AEG for a little bit about what you see that business doing in the next year or couple years? What are the constraints, what are the geographies maybe you are limited to? Do you need capital? You see that as a growth adding additional cash flow that might be able to look toward exploration outside of just overhead?

[Clynt Nauman:]

Yeah. Thanks, Mike. I mean, I’ll start off with this question and then I’m going to hand it over to Brad, because earlier this year Brad set-up and has been responsible for getting some independent structure into that business. It has some back office systems in place now. It is essentially a standalone subsidiary house within our public company. Clearly, results in terms of the margins that we’re able to maintain in that business, the rate at which that business is growing. It has attracted the fair amount of attention. And we would see continued growth in the business. Although, I would note that the business is pretty much operating at capacity at the present time and you’re right that further growth in that business or step change in the revenue profile of that business will take a little additional capital. So, maybe Brad, do you want to just talk about what we see, what we might see in front for that business.

[Brad Thrall:]

Yeah. Perfect. I think, certainly, looking towards the next year or two, Mike, and everyone. Again, AEG really operates -- has kind of two separate divisions within AEG. One is our billable fee based consulting business and the other is more of the project driven business. I think, like the Globe Smelter project that were just on the down hills completion site in Denver. So certainly, on the billable side of the business, we’ve always enjoyed steady growth. It’s not a highly capital intensive business on that side. It requires first people, an addition of people. So I would look forward in the next couple of years and see kind of a continued steady increase and what you’ve seen over the last couple of years. Again the predominance of that business is the closure work that we do for the Government of Canada at Keno Hill. And we start to look out over the next 10 years or so. That’s a pretty significant backlog of work that’s ahead of us at the Keno Hill closure site. Over on the project side, there are a number of opportunities. Our -- jurisdictionally we’ve really just have been focused in Colorado on the project site. The gold project has been very successful with about the $10 million project. We are nearing completion in the next four to five months. At the end of the day, we are going to enjoy 35% to 40% margins on that project. But we feel continue to grow that side of the business. I think we’ll require some capital more in the forms of security and performance security type of arrangement. So, again, looking forward, I think, you are going to see at least some steady growth that you -- that we’ve reported as in the last couple of years.

[Mike Niehueser:]

Brad, do you see that your expertise or your product has a niche that is exploitable in the industry or is it too crowded to get maybe just above average growth? And what’s the real market potential for AEG, how competitive it is?

[Brad Thrall:]

Well, I think, certainly, we have a pretty unique niche in our technology. We’ve gained a lot of creditability with the regulators certainly in the United States on some of the things that we’ve been able to do on the treatment side. We are able to, I think, execute projects and obtain permits and injection permits and those types of things much quicker than anybody else because of our demonstrated success. So, I mean, we continue to be focused on a market where there is environmental challenges that we can uniquely solve and manage. And we are clearly focused on better participating on the back ends of these projects. Certainly it’s one thing to have technology and project success and have good margins like we’ve enjoyed. But we do recognize that there is quite of opportunities on these projects, whether it be real estate, whether it be mineral properties, mineral resources in the ground, those types of things. And so we are going to focus moving forward on how we can better participate on the back end of these.

[Mike Niehueser:]

Clynt, there is a couple questions on Bermingham, is very complex broken up by falls with the deliverables you have at Bermingham, I know you can’t make a forward-looking statement about how big that’s going to be. But can you give us an idea of how open that mineralization maybe before it gets cut-off by folding?

[Clynt Nauman:]

Mike, the mineralization has a clear trend and that wasn’t initially apparent to us because of the complex field of geology. What appear though, as we sort of walked through the north and we walked out 400, 500 meters so far, the mineralization is becoming more predictable. We are not running into as much complexity in terms of the geology. And about another a similar distance and frontier, will be end of the stratigraphy, which hosts the Hector-Calumet deposit So it’s most extreme and under the bluer sky conditions, there is about a kilometer of open ground to the north of Bermingham all the way over to the Hector-Calumet historical deposit and about half of that in the other directions to the Southwest. So lots are open ground, but we would be very careful to approach it systematically and simply continue walking that mineralization along. Just making sure we totally understand the geology and the nature of the mineralization, but clearly walking towards rocks, which historically have been the most productive rocks in the district.

[Mike Niehueser:]

It’s almost like direct shifting ore but the -- how -- I think you mentioned 5,000 years of drilling. Will we see a resource estimate out of that in 2015 and will that be included in the pre-TA or the pre-feas?

[Clynt Nauman:]

Yeah. The next go around would be -- I think it’s going to be pre-feas. We will include results from some of the drilling at Bermingham this year. We’ve got about 5 million ounces on the books of Bermingham and old categories. And we will have a new resource calculation in early 2015. Later in 2015, if we continue to drill there, we’ll certainly put in more holes around these very high grade areas that we have. And I would think by later 2015, we’d be incorporating that also in the Bermingham resources. So it is a matter of incrementally increasing the resource, as well as walking that mineralization along towards Hector-Calumet.

[Mike Niehueser:]

Thank you. And on permitting, I think, I heard that you went to Ottawa and gave testimony on YESAA, which is the federal law regarding permitting. Could I hear you talk about now where that is in the legislative process and how that might impact Yukon with this? Like as I said, its complex and there is amendments on amendments. And whether the Yukon Government will avail itself of any upside there?

[Clynt Nauman:]

Yeah, Mike. I mean, the simple answer to that question is the Bill S-6 is called which are the amendments to the Yukon Environmental and Socio-economic Assessment Act. Those amendments have cleared to Senate in Canada, and they’re on the way to the House for deliberation. I am not qualified to speak exactly where they are in that process. They were hoping to be through the House process and have those amendments clear by early January, actually 2015. And yes, the amendments, especially the timelines and some of the language around the new assessments or re-assessments will definitely be beneficial to the industry as a whole. And from Alexco’s perspective, we had the 10-month experience getting through the assessed or in a district where we’ve been assessed numerous times before. And these amendments if and when enacted should shorten up that timeline quite considerably. So they will be beneficial. They need to make it thorough the federal process. And then of course, there will be rules and other protocols established to ensure that they are implemented at the local level.

[Mike Niehueser:]

So hopefully, I’ll be there for Birmingham when that moves on and into place. And lastly, I just want to compliment management for being a buyer of shares at this level. And thank you David for all your good work. That’s it. Thanks for your time, Clynt.

[Clynt Nauman:]

Thanks Mike.

[David Whittle:]

Thanks Mike.

[Operator:]

Management, there are no further questions at this time. Would you like to make on any closing remarks?

[Clynt Nauman:]

Thank you, Operator. And thanks to everybody for joining us today. It’s been a pretty dismal price environment for silver companies as of late as you know. We are fortunate to have laid the groundwork to give ourselves some flexibility during this period, and we know a lot of these -- a lot of values sitting at Keno Hill and it’s our intention to unlock that for the benefit of our shareholders. I might be into this business long enough to know that we are on the downside of a cycle and the cycles will always turn and we’ve -- and of course, we’re looking forward to that. In the meantime, we have accomplished a lot of work in the last few months. We’re being fluid with our plans as we continue to expand our data on Flame & Moth in order to make the best decisions. As always, we appreciate your support and interest in Alexco. And with that, I’ll turn it back to Vicki to close the call.

[Vicki Veltkamp:]

And you've been listening to the November 14, 2014 Alexco Resource third quarter conference call. We encourage investors to visit Alexco's website for further information and again that address is www.alexcoresource.com. And if you have further questions, you can call 604-633-4888 or e-mail us at [e-mail]. This concludes today's call. Thank you for joining us and have a good day.

[Operator:]

This concludes today's conference. Thank for your participation. You may disconnect your lines at this time.