Alexco Resource Corp.
Q1 2015 Earnings Call Transcript

Published: 14 May 2015

[Operator:]

Greetings. And welcome to the Alexco Resource's First Quarter 2015 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. It is now my pleasure to introduce your host Vicki Veltkamp, Investor Relations for Alexco Resources. Please go ahead.

[Vicki Veltkamp:]

Thanks and good morning, everyone. Today is Thursday, May 14, 2015. And I'd like to welcome you to Alexco Resource's first quarter 2015 conference call. The conference call is being webcast live, it can be accessed at the company's website at www.alexcoresource.com. And you may sign-up on the Alexco website to receive future news releases and other event updates as they're issued. And you'll also find Alexco's news release with the quarterly financial results there. For a limited time, a recording of this conference call will be available by telephone and the instructions for that are on yesterday's news release as well. Giving presentations on today's call will be Clynt Nauman, President and Chief Executive Officer of Alexco Resource; and Mike Clark, Alexco's Chief Financial Officer; and then joining us for the Q&A portion of the call will be our Executive Vice President and Chief Operating Officer and President of Alexco Environmental Group, Brad Thrall. Before we get started though, 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. 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. And thank you for joining us today as we review the events from the first quarter of 2015. We released our financial results yesterday outlining a net loss of CAD500, 000 or CAD0.01 a share most of which were non-cash cost. I think the best way to describe the quarter was sort of steady as she goes. It might not look like much is happening, but I can assure you that below the surface it's quite a lot of work progressing on various optimization initiatives, which will help accomplish our goal of moving to Keno Hill Silver District back towards production. Ultimately, we want to be able to do this with improved production cost that would allow us to operate through future silver price cycles rather than being stuck with a swing producer label as arguably, we are at present. With respect to the first quarter, once again the highlights of the quarter were the performance of Alexco environmental group. Our reconciliation of 2014 exploration result into expanded silver resources and planning for further exploration in 2015, all of which we'll talk about in a moment. At cash balance at the end of March was CAD7.2 million as you saw in the news release, that's down CAD1.4 million compared to the end of the previous quarter, but is not indicative of our burn rate. It's as matter of timing, as we had larger than average our accounts receivables outstanding at the end of the quarter CAD4.8 million to be exact, about CAD1.3 million of that was collected in April. Bringing the accounts receivables down to a more normal levels and correspondingly increasing the cash balance to level on par with the end of the previous quarter. So our use of cash for the quarter is well within the bracket we anticipated and previously planned for. In addition, to our ongoing engineering and permitting work at Keno Hill. The highlights of the quarter as I previously mentioned with a recalculation of mineral resources of Flame and Moth in Bermingham as well as the good performance once again from the Alexco Environmental Group. Overall for the Keno Hill Silver District, we increased our silver indicated resource by about 10% to about 55.5 million ounces at this point of contained silver in the indicated category that does not include 4.3 million silver ounces in the historical resources that were identified as Silver King previously or another 12 million ounces of Silver in the inferred category at Keno Hill. So you can do the math, but I'm happy to report that we've achieved a personal goal of mine, which is to reach these number silver ounces on the books in old categories at Keno Hill. And our discovery rates continue unabated. It will take more than a cyclical downturn to convenience me that we're not adding value by continuing to drill at Keno Hill. Back today's reality, 10% or 5 million ounce increase in the indicated silver resource I mentioned previously came from two properties Flame and Moth in Bermingham. And we will go into more detail on that in a few moments. The other highlight I mentioned was Alexco's Environmental Group, AEG. AEG continued its growth in the first quarter reporting all time record quarterly revenues in gross profit with revenues of CAD4.5 million in the first quarter and the gross profit of CAD1.2 million. A gross margin for the quarter at AEG was 26.3% which is as bit less than the previous quarter. But the decrease in the gross margin is partly capacity related with AEG outsourcing some of its work to external consultants and it's also partly cyclical as some of the turnkey projects that we've been working on progressed from engineering and technical type work to actual work on the group, which typically earns lower margins. But we're well pleased with AEG's performance and we're supporting its objectives as business continues to grow. In the meantime, AEG is bringing in cash that offsets our spending, while we focus on moving Keno Hill back towards production. As notable, at one of our major AEG projects is in the final stages of completion and it's already resulted in the release of about CAD500,000 in performance related bonds moving cash from restricted to unrestricted on our balance sheet. We expect to see more of this activity before the end of the year. At this point, I'm going to turn it over to Mike Clark to review the financial numbers for a moment and then I'll return to talk about development progress and our exploration program. Mike?

[Mike Clark:]

Thanks, Clynt. This financial report is for Alexco's first quarter ended March 31, 2015. Note that we report in Canadian Dollars. For the first quarter of 2015, we saw overall consolidated revenue of CAD4.5 million and a net loss of CAD492, 000 or a loss of CAD0.01 per share. Including these losses about CAD800, 000 of depreciation and other non-cash cost. As Clynt said, AEG revenues for the first quarter of 2015 were CAD4.5 million with a gross profit of CAD1.2 million from a margin of 26.4% and AEG continues to contribute cash to offset our administrative expenses for the company as a whole. General and administrative expenses for the first quarter of 2015 totalled over just CAD2.1 million including non-cash cost to CAD300,000 compared to Q1, 2014 cost of CAD2.3 million which included CAD500,000 of non-cash cost. The G&A expenses were similar in both periods as they were both primarily comprised of salaries and contractors [indiscernible] overheads, investor relations professional and regulatory fees. Also note that approximately 45% of G&A includes overheads related to AEG operations. Mine site care and maintenance cost in the first quarter of 2015 were CAD590, 000 compared to CAD740, 000 in the same period 2014. Note that mine site care and maintenance is mainly comprised of depreciation expense which was CAD443, 000 in 2015 and CAD613, 000 in the 2014 period. Exploration expenditures incurred during the first quarter of 2015 totalled CAD303, 000 including non-cash cost of CAD54, 000. The nature of the majority of these expenditures were related to the recalculation of mineral resources at Flame and Moth in Bermingham, which included cost from outside consultants. Alexco's cash position at March 31, 2015 was CAD7.2 million compared to CAD8.6 million at December 31, 2014. While net working capital was CAD10.9 million compared to CAD11.3 million at December 31, 2014. As Clynt mentioned the decrease in cash and cash equivalence in the 2000 period is mainly attributed to increased accounts receivable from CAD3.9 million at December 31, 2014 to CAD4.8 million at March 31, 2015 relating to a timing issue of the collection of receivables from certain AEG customers, which were subsequently collected in April. This brought the accounts receivables balance down to approximately CAD3.5 million in corresponding increased cash to cash balance. In addition, Alexco's restrict cash balance at March 31, 2015 of CAD10.1 million of which approximately CAD4.2 million relates to the decommissioning obligations at Keno Hill and the remaining balance relates to an AEG project that is nearing completion and work until the company will begin to make applications for the release of a portion of those bonds. I'll now turn the call back to Clynt.

[Clynt Nauman:]

Thanks Mike. If you have any specific questions about the financial results. We'll take those at the end of the call. We remain dedicated to our objectives of expanding resources optimizing our underground development plans and working to reduce any remaining hurdles which may stand in the way of a restart of operations at Keno Hill. One of those hurdles we crossed last year, as you remember was the renegotiation of the Silver Wheaton streaming agreement. What we think is an important part of ensuring that we're not a swing producer going forward. Meaning that we're not subject to the variations to the extreme variations in the silver price cycle. However, it's very important for investors to realize that the $20 million necessary to implement this agreement is not an obligation but an opportunity for Alexco and as I've said before we have no intention to raise capital to offset the $20 million in the current market conditions. Rather, be confident that Silver Wheaton's interest same are ours to get Keno Hill back into production. So we continue to be focused on the ways to make that happen. Turning to the development side of Keno Hill. The recalculation expense and expansion of mineral resources at Keno Hill I mentioned earlier. Especially at Flame and Moth requires further engineering review relative to the existing development of mining plants. So our engineering group is in the process of starting a new detailed review of the development and mining options for Flame and Moth in the context of the current silver market. We're not starting out with any preconception, so on where this might take us. But if I were force to give a forward-looking statement today. I would say, we'd have some expectation that the additional resources will help us lower our estimated future operating a development cost. But we'll see, where it all leads us towards the end of summer. On the permitting side, for Flame and Moth, the water license application was submitted last October. We expect the public hearing on that to come up sometime this summer that would be the final step in the process and once completed all our existing licenses would then be amended to accommodate mining and processing of oil from any Flame and Moth as well as Bellekeno, Onek and Lucky Queen. It always moves the, the permitting process always moves a little slower than we'd like. But the process is progressing as expected. My favorite topic is, it is always our exploration program. Even more so because we have been so successful at Keno Hill. I already talked about the 10% increased in silver indicated resource overall in the district. If you saw the quarterly news release. You saw the table that shows, that the increase was made up of 17% expansion of indicated silver resource at Flame and Moth and the 37% expansion at Bermingham. This is very exciting and then arguably makes Flame and Moth the second largest silver deposit discovered in the historic silver district. With 26.7 million ounces have indicated resource and another 4 million ounces of inferred silver resource. And Bermingham which is still in the early stages grew to more than 5.3 million ounces of indicated silver resource. So this year, we're planning an exploration program of approximately 5,000 meters of surface time and drilling primarily to follow-up on the successful results of Bermingham and also possibly to test other tier one targets as time and funding allow. Most of these efforts will be focused at Bermingham. Where last year, we drilled our best hole ever intersecting about .65 meters of more than 5 kilograms of silver. Importantly, this hole is down plunged from the existing recalculated resource that is not part of the retail [indiscernible] resource and indicates a possible trend of high grade silver mineralization toward a stratigraphic horizon, which is been identified as a prolific oil producer in the district. The old Hector-Calumet mine is within the stratigraphic horizon and that mine produced 90 million ounces of silver in its day. We're not planning to do as much Flame and Moth this year for a couple of reasons. First, we have plenty of resource there to go ahead with development and production and second additionally exploration to expand the resource of Flame and Moth will be more efficient from underground, when we can establish drill platforms in the underground workings. I'll end there and be ready to take your questions, if there are any?

[Vicki Veltkamp:]

Operator, would you give the instructions for the Q&A period at this point, please?

[Operator:]

[Operator Instructions] our first question today is coming from Mike Niehueser from Scarsdale Equities. Please proceed with your question.

[Mike Niehueser:]

Clynt, just follow-on the exploration. In the last resource that you came out with there is a big chunk inferred and what I'm wondering, is how easy is that going to be able to upgrade that inferred to indicated?

[Clynt Nauman:]

Our conversion rate, thanks for the question Mike. Our conversion rate is generally being pretty good and just be aware that the inferred category resources are simply mineralized Asian that just has not been drilled to the same intensity as we indicated resource for the most part. At Flame and Moth, a good part of that is quite a ways down plunged of the existing potentially minable part of the resource and at Bermingham it includes that very high grade hole that we drilled last year. So the short answer is, that our success in converting inferred to indicated has been very good in the past.

[Mike Niehueser:]

Will your drill program at Bermingham will that be focused on converted inferred, indicated or you going to be stepping out a little bit along the edges?

[Clynt Nauman:]

It will do both, it will follow the existing indicated and inferred resource down plunge and it will be also step up program to see whether we can identify where these mineralized structures intersect these favourable stratigraphic horizons that we've previously identified.

[Mike Niehueser:]

And also you mentioned Tier one targets and that was kind of new to me compared to the last release through the call. Is tier one, would that be outside of flame and moth and Bermingham or might that be in between Hector-Calumet and Bermingham?

[Clynt Nauman:]

That's a good question, Mike and yes I just used the Tier one term loosely to indicate new targets not generally related to existing resources. But separate and apart from them reaching a ranking that put to that on a high probability for discovery of mineralization. As you know, we've been quite successful in being able to predict where the larger areas of higher grade mineralization occur in the district and this would be a continuation of that program. You know which in the past of course is resulted in discovery of things like Flame and Moth and Bermingham.

[Mike Niehueser:]

With your drill program last year, you were able to drill a lot more meters than you had budgeted. Was that a one-time thing because of cost coming down or do you think you might be able to do more than 5,000 meters within the budgeted amount in 2015?

[Clynt Nauman:]

We're using a productivity and a cost that is closer to the efficiency that we achieved last year, then the cost and efficiencies that we had previously. So think 5,000 meters is a pretty good number and maybe there will be upside, but right now we're going to stick with the 5,000 meters.

[Mike Niehueser:]

And last question and then I'll get off the phone. With AEG, with the uptick in revenues and aggregate gross margin. Is this a trend that we might expect to see continue and you don't talk a whole lot about what the potential is for that to become a great contributor of cash to the company and I'll leave you with that.

[Brad Thrall:]

Hi, Mike. Its Brad here, maybe I can little bit take that question. I think our focus at AEG is probably two fronts on kind of our growth. One is to maintain, I think our performance on what we would call the billable side of the business which is more of the consulting side. But we're also clearly focused in order to continue that growth profile. We certainly need to continue on the project side of the business as we mentioned. One of our major projects in the US is been very successful, but it is on its kind of downhill side. And as far as completion so certainly focused on additional opportunities that we've had on the US project side. So again in order to continue that growth profile, we do need to focus on additional project work in the US.

[Operator:]

Thank you. [Operator Instructions] there are no further questions at this time. I would like to turn the floor back over to management for any further closing comment.

[Clynt Nauman:]

Thank you for joining us again today. We'll keep pushing on with. Remain absolutely convinced of the value of Keno Hill will be unlocked as a result of our ongoing efforts and the resumption of the production will be underpinned by more robust cost drivers with less exposure to sliver pricing wings. That's our light at the end of the tunnel and regardless of current market conditions. I believe we're doing the right things for the business and eventually, we'll be rewarded. Meantime, we're clearly a call on silver. But fortunately we have flexibility that enables us to get through this period. As always, we appreciate your support an interest in Alexco and with that. I'll turn it back to Vicki to close out the call.

[Vicki Veltkamp:]

And you've been listening to the Alexco Resource first quarter 2015 conference call. We encourage investors to visit Alexco's website for further information that at www.alexcoresource.com. 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:]

Thank you. It does conclude today's teleconference. You may now disconnect your lines at this time and have a wonderful day. We thank you for your participation today.