Alexco Resource Corp.
Q2 2015 Earnings Call Transcript

Published: 12 Aug 2015

[Operator:]

Greetings. And welcome to the Alexco Resource Corp Second Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Vice President of Investor Relations. Thank you. You may begin.

[Vicki Veltkamp:]

Good morning, everyone. Today is Wednesday, August 12, 2015. And I would like to welcome you to the Alexco Resource's second quarter 2015 conference call. This conference call is being webcast live right now, 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 the quarter financial results there as well. For a limited time, a recording of this conference call will be available by telephone, the instructions for that are in yesterday's news release. Giving presentations on today's call will be Clynt Nauman, our President and Chief Executive Officer; and Mike Clark, Alexco's Chief Financial Officer; and then you will have an opportunity for a question-and-answer period after their presentations. Before we 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 these 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. And so with that, I would like to turn the call over to Alexco's President and Chief Executive Officer, Clynt Nauman.

[Clynt Nauman:]

Thank you, Vicki. And welcome everybody to the Alexco quarterly call. We released our financial results yesterday outlining a net loss of $1.9 million of which more than $650,000 consisted of non-cash items such as depreciation and share based compensation. During the first quarter of this year, the consolidated loss for the company was $0.5 million and the primary reason for the increase in loss during the second quarter is due to AEG earning less profits and the company realizing a smaller foreign exchange gain in the second quarter. More importantly, we are holding our own in terms of cash position despite this difficult market. At the end of the second quarter, we had about $7.5 million the unrestricted cash, which is slightly more than we had at the end of the first quarter. Be aware that we are focusing on additional ways to conserve cash so that we continue to as much flexibility as possible during this supermarket downturn. It probably goes without saying that Alexco’s high grade, Keno Hill Silver property that with our assets and infrastructure, our expression results, environmental subsidiary and other assets we have much more value - our value is much higher than the market of course is recognizing at the present time. And once the market turns around I believes that we will have some of the best leverage to silver of anybody in [snack] (Ph) bracket has to continue adding value to our properties through expression and by optimizing the Flame & Moth development plan being - pull the trigger to return to production when the time is right. That’s the best way I can think off to reward shareholders for the long-term, simply stated as my view to Alexco is gold and silver that was a profitable and growing wholly owned environmental subsidiary environmental business. In the interest of cash preservation, we did further rationalize our planned expression program this year, mainly, because I think we are unable to achieve the goals we have set for the program by gold and fewer more strategically relied located at drill holes. Our primary goal was to follow upon the very promising high grade drill holes from Bermingham that we reported last year. You would remember that last November we reported that we drilled best hole ever at Keno Hill, which returned about 165 ounces per ton of silver over a true width of 6.4 meters at Bermingham. So although our original budget for 2015 for exploration was in the range of $2 million, I cut that back a little to $1.6 million and about 3000 meters of drilling and we concentrated on understanding the geology and upside related to this very high grade discovery which was an out layer actually in 2014. As of June 30, we drilled the total of 1355 meters with about 1000 of drilled at Bermingham, we drilled a few meters over it Bellekeno North East just to complete some work over there. And as of today the surface drilling at Keno Hills is essentially complete and so once we received those assays back the exploration team will begin compiling the aggregate of information from Bermingham for 2014 and 2015 where were leased and discussion and I think that’s probably going to be the fourth quarter of this year to be a safe commitment maybe it will be before, but I think it’s going to the fourth quarter. So the exploration program was certainly highlighted of the second quarter, not only because of the drilling program, but because the new resource estimate we put out on April. If you take a look at the April 30 news release, you will remember that we have increased our indicated silver resource by 17% at Flame & Moth to about 27 million ounces of silver and then you add inferred resources of another 4 million ounces to that. There is also 37% increase in resource at Bermingham in that same news release to over a 5 million indicated announces that of course will be recalculated based on the success or otherwise of the current drill program. For the whole district, we now have about 55 million ounces of indicated sliver resource plus another 12 million in the inferred category and an additional 5 million or so ounces in the historical category of the resource. This is a very respectable one and I think growing number. In other areas of cash preservations selling in a few months we are also be getting back on office expenses as our office lease comes to an end and we moved space better configured for a smaller group for the time being. We are also looking a number of other areas including care maintenance of Keno Hill, professional fees, consultants; G&A et cetera to continue to decline in 2016. It’s good to remember that a large share of our G&A costs are generated by our income and cash producing electrical environmental groups subsidiary that company has five offices now in Canada and the U.S. and bought in on revenues are $2.6 million in the second quarter. The revenues is less than the comparable period a year ago as result of Globeville Smelter Project in Colorado transitioning to more of a monitoring project rather than an active remediation project. Our AEG team did some great work at Globeville and this month the owners of the Globeville property are having a high profile groundbreaking ceremony including many dignitaries from Denver and State of Colorado to celebrate the completion of the clean up and mark the fact that this valuable real estate is fully restored and ready for commercial development. AEG’s revenue would tend to be cyclical, this projects like Globeville come and Go and in fact, AEG experienced slower profits than it might have in the first six months, because some work originally scheduled in Canada was delayed into the second half of this year. So business development is an ongoing focus for our growing team at AEG, we have also hired additional professional staff at AEG in order to keep more work in house as apposed to contracting out to third-parties which hurts our gross margins. We have developed a strong client base within the mining industry in the last several years and AEG has also been to establish new lines of business related to industrial sites, soil remediation, border treatment and historical mine pool treatment. All of these activities take advantage of the technical application of technologies, which Alexco owns. Meanwhile, remember that AEG remains committed to the ongoing environmental care maintenance program and reclamation and closure projects at Keno Hill under its long-term contract with Canada. That arrangement with Canada allows us to look well into the 2020 with this business and will underpin future growth in the business. Also during the second quarter, we paid attention to moving forward with our plans to restarting mining operations at Keno Hill as work are continued on our reengineering and optimizing of the mine plans Flame & Moth, which will incorporate the current mineral resource that we updated in April. We are now doing more detailed geotechnical review of the mine plan with SRK Consulting this is pretty gritty work to be sure but its work, which may significant improve stopping and sustaining development cost. We are still anticipating completion of [indiscernible] in third quarter of 2015, the Flame & Moth economic model will then be updated using current consensus pricing and updated estimated costing. Once that’s completed, a new optimized multiple mine economic model will be developed incorporating Flame & Moth, Lucky Queen and Bellekeno deposits. On the environmental permitting front, we are continuing the process with the Yukon Water Board on the Water Use License for Flame & Moth; this will be an amended license for that particular deposit. And I think that we can expect the public hearing to be set the fourth quarter of 2015 pretty much along the lines that we had anticipated a little bit behind for sure, but we are not unhappy with the progress especially since this is going along at this point in the cycle. At this point, I am going to turn it over to Mike Clark to review the financial numbers and then we will take any questions that may out there. Mike?

[Michael Clark:]

Thanks Clynt. This financial report is for Alexco’s second quarter ended June 30, 2015. Note that we were reporting Canadian dollars unless otherwise stated. For the second quarter of 2015, we saw revenue of CAD2.6 million and the net loss of CAD1.86 million or a loss of $0.03 per share. Including this loss is approximately CAD650,000 of depreciation and other non-cash cost. AEG revenues for the second quarter were CAD2.6 million with the gross profit of CAD579,000 for a margin of 22% compared to AEG revenues in the second quarter of 2014 of just over CAD3 million and a gross profit of CAD812,000 for a margin of 26.5%. The decrease in gross margin from the prior period is the result of AEG outsourcing a significant amount of specialty work to external consultants, which incurs lower margins, we also had a ramp up of business development efforts at AEG for project related work and also one of AEG’s major projects the Globeville Smelter Project completing active remediation and pacing to monitoring status, which incurs lower revenues and profits. General and administrative expenses for the second quarter of 2015 totaled just over CAD1.9 million compared to the Q2 2014 cost of CAD2.3 million. G&A expenses decreased for the 2015 period compared to the 2014 period mainly due to a reduction in salaries, consultants, professional fees, investor relation activities and share based compensation expenses. Also, note that approximately 45% of G&A includes overheads related to the various offices and employees of AEG. Mine site care and maintenance cost at Keno Hill in the second quarter of 2015 were CAD575,000 compared to CAD752,000 in the same 2014 period. Note that the mine site care maintenance is mainly comprised of depreciation expense, which was CAD428,000 in 2015 period and CAD549,000 in the 2014 period. Exploration expenditures incurred during the second quarter of 2015 totaled CAD756,000, the nature of the majority of expenditures of 2015 drilling program at Bermingham and Bellekeno North East and also work on re-engineering and optimizing the mine plan for Flame & Moth, which is incorporating the current mineral resource analysis April 30, 2015. Alexco’s cash position at June 30, 2015 was $7.5 million compared to $7.2 million at March 31, 2015. While net working capital was $9.6 million compared to $10.9 million at March 31, 2015. The increase in cash and cash equivalents in the second quarter of 2015 is mainly attributed to the collection of certain accounts receivable in the second quarter offset by overhead cost and some lower profits in AEG. In addition, Alexco has restricted cash on the balance sheet at June 30 of CAD9.1 million, which as Clynt mentioned, there is approximately CAD4 million related to the Globeville Smelter project that we will be submitting documents shortly for the release of a portion of those funds. Now I’ll pass the call back over to Vicki.

[Vicki Veltkamp:]

Thanks, Mike for that. All right, operator, now we’re ready for you to give the instructions for the question-and-answer period.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Niehueser with Scarsdale Equities. Please go ahead with your question.

[Mike Niehueser:]

Hi, Clynt

[Clynt Nauman:]

Hi, Mike.

[Mike Niehueser:]

Can you give any guidance for the AEG for the balance of 2015 and 2016, do you sense that it’s going to remain stable or is it going to be a dip following completion globe or what are your thoughts?

[Clynt Nauman:]

I think that it’s only a matter of time before we generate and start working on other projects in the U.S., which you’re going to replace the Globe projects I mean. So the dip is currently sort of exacerbated by the fact that you have got Globeville winding down plus it’s a very big project in the North of Canada that we’re involved in that was delayed from a permitting perspective, which is just getting cranked up at the present time. So I see it as temporary and recovery to sort of a stable net income run rate at sort of a baseline that we were able to achieve in 2014. That would be my perspective.

[Mike Niehueser:]

You mentioned in the release automation of some of your facilities, are your operations at the Keno Hill, do you get to keep the benefit of that automation or you have to pass those margins along to your client?

[Clynt Nauman:]

No, that’s to our account and the way that most of these arrangements are set up especially with the Government of Canada is that any of these innovations or efficiencies that we bring to this project then we get to receive the benefit. So it is kind of interesting that we are running water treatment plants in simple areas both in the United States and in Canada and although it’s little scary most of those plants can actually be controlled by professional people from their cell phones. They can see online what’s going on at any of these plants at anytime. So it’s a huge step forward, reduction in labor and increase in margins in that part of business.

[Mike Niehueser:]

Well, it is kind of scary. I was wondering if that incident in Colorado at that gold mine if that further helped your environmental business, because I know you have a concentration of people in Colorado.

[Clynt Nauman:]

Yes. And there is a lot of sensitivity around that particular disaster or that release, I will say that for that particular mine and in that particular area, our people had actually talked to some of the regulatory folks about that issue sometime ago indicating that the Alexco technology has the ability to be able to render benign some of those metal contaminants that we released from that particular mine. And so at the end of the day, I think that although it’s a high profile and tragic circumstance that Alexco has the technology, it has the experience and the proven execution of being able to resolve those problems before they get to be the huge issue that is now.

[Mike Niehueser:]

Certainly with your whole high profile success is not bad timing there. Is there anything in Keno Hill with your agreement there that’s going to be a catalyst for either firming up additional business or might see more work come out of Keno Hills as far as reclamation goes?

[Clynton Nauman:]

The Keno Hill closure project is moving along as sort of predetermined part towards licensing. There has been lots of consultations, stakeholder meetings et cetera and the actual clean up will be a combination of in situ remediation, which of course is our specialty and active water treatment plants. So I do think it’s going to be a trophy project for us, it’s going along extremely well and I anticipate that it will proceed as per expectation and move into the licensing and environmental assessment process here in the short-term.

[Mike Niehueser:]

And when does the CAD3.3 million become unrestricted related to the Globe Smelter?

[Clynton Nauman:]

Let’s we have to submit certain documentations to the authorities in Colorado and we will be doing that in the next one to two months, I can’t guarantee the performance on the other side, but certainly that documentation we will complete and submit it in the short-term.

[Mike Niehueser:]

And lastly before I go back in to queue, with the drilling that you did up at near Bermingham there is a little bit of distance between that and Hector-Calumet. I’m just wondering what the purpose of the goal of this year’s drill program was, whether it was to infill to prove up more ounces or whether it was to test some of those potential targets in between Hector-Calumet and Bermingham. Thank you.

[Clynton Nauman:]

Yes, and I would say Mike that the works that we did at Bermingham was mostly focused, it has been mostly focused around the area where we had that extremely high-grade thick intercept last year. And that is stepping out towards Hector-Calumet, but we very carefully manage that program. So as to understand the importance and the extent of the mineralization that was intercepted in 2014. So, to answer your question it is towards Hector-Calumet is not a large step, but the holes are drilled in a pattern in an areas such that if there is any [indiscernible] the mineralization we should be able to recognize it.

[Mike Niehueser:]

Thank you, I will get back in the queue.

[Clynton Nauman:]

Thanks.

[Operator:]

Thank you, our next question comes from the line of Chris Potter with Northern Border Investments. Please go ahead with your question.

[Chris Potter:]

Hey, Clynt?

[Clynton Nauman:]

Hey Chris.

[Chris Potter:]

Kind of follow-up on Mike’s line of questioning. I’m just curious how you think about the environmental business on a longer-term basis, three, five, seven years out, how much potential work there is out there and whether or not we can think about this as a kind of stable to growing business over a longer time period.

[Clynton Nauman:]

Yes, well that’s exactly the point Chris, it is stable business, there is a CAD100 million of contractual backlog in that business. It maintains significant margins, we’re operating that business right now, and then add capacity which is one of the reasons for the gross margins have, although they’re still robust have contracted somewhat primarily because 20%, 30% of the work, it comes in the doors going down the road to third-party consultants or subs and we don’t get the benefit of that. So we are actively as we speak bulking up the professional ranks of that company and I see it as a growing business going forward, no question. And I think that we have the capacity and the intelligence in that business to continue to grow as it has in the past. I think it’s a fairly, it’s not a sexy business as we all know but it makes money, there is a lots of work out there, it’s become well branded because of our success primarily in the U.S. And as Keno Hill moves along and more people show up internationally it’s looking what we’re doing there. I think it’s going to be a very, very interesting business and I would not overlook the strategic part of that whereby at the end of the day remember, Keno Hill was an opportunity that came as a result of our environmental expertise and I’m sure it’s going to be others out there. So I’m quite bullish about it, and I intend to continue to try and make it grow along the path, it’s been growing in the past.

[Chris Potter:]

Great. That’s very helpful. Thanks, Clynt. End of Q&A

[Operator:]

Thank you. We have no further questions over the phone line at this time. I would like to turn the floor back over to management for closing remarks.

[Clynt Nauman:]

Okay. Well, thank you everybody for joining us today. We remain dedicated to objectives of conserving cash, reducing costs, working on third-party agreements, expanding our resources, optimizing our underground development plans and overcoming any remaining hurdles, which may stand in the way of a restart of operations at Keno Hill. Meantime, we're clearly a call on the price of silver. With a rich silver property, great exploration potential and an income producing environmental subsidiary. As always, we appreciate your support and the 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 second quarter 2015 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 e-mail us at [e-mail]. This concludes today's call. Thank you for joining us and wish you to have a good day. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.