Alexco Resource Corp.
Q3 2015 Earnings Call Transcript

Published: 13 Nov 2015

[Operator:]

Good day ladies and gentlemen, and welcome to the Alexco Resource Corp Third Quarter 2015 Financial Results Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mike Clark, Chief Financial Officer. Please go ahead Mr. Clark.

[Mike Clark:]

Good morning. Today is Friday, November 12, 2015, and I'd like to welcome you to the Alexco's third quarter 2015 conference call. This conference call is being web cast live and can be accessed at the company's web site at www.alexcoresource.com. You may sign-up on the Alexco website to receive future news releases and other event updates as they're issued. You'll also find Alexco's news release with quarterly financial results there. 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 presentations on today's call will be Clynt Nauman, President and Chief Executive Officer; and myself, Mike Clark, Chief Financial Officer. We will have an opportunity for a question-and-answer period after our presentations. Joining us for the Q&A portion of the call, will be our Executive Vice President, Chief Operating Officer, and President of Alexco Environmental Group, Brad Thrall. Before we get started, I need to remind you that some statements made today by us 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 can be found in Alexco's SEDAR filings. It should also be noted that past performance discussed in this conference call is not indicative of future results. So now, I would like to turn the call over to Alexco's President and Chief Executive Officer, Clynt Nauman.

[Clynt Nauman:]

Thank you, Mike, and thank you all for joining us today, as we review the third quarter of 2015. We released our financial results yesterday and third quarter had outlined a net loss of C$1.6 million for the quarter. Keeping in mind, that this is a comparable loss to the second quarter 2015, but a greater net loss than Q3 2014, as we are pointing out that the underlying reason for the variation is fluctuating quarterly profits coming from AEG. In the case of Q3 2015, AEG had wound down its activity to the Globeville Smelter site in Denver, and was transitioning to EPA's Gold King project in Southern Colorado. The earnings benefit of which, will start to show up in Q4 2015. By the end of the third quarter, we had approximately C$6 million in unrestricted cash and C$11.1 million in working capital, which is comparable to working capital in Q3 2014. Our cash position will improve over the next two to three months, with the anticipated release of approximately C$3.5 million to C$4 million from the Globeville security bond and payment of invoices, following the completion of the initial construction phase of the Gold King project. It probably goes without saying, that Alexco's high grade Keno Hills Silver property, our assets, our infrastructure, exploration results and an environmental subsidiary, AEG, combined in my view, to make our value much higher than the market is recognizing at present time. But I am confident, that once the sector turns, we will have some of the best leverage to silver of anybody in our sector. So our aim is to continue adding value to our properties through exploration, and Bermingham would be a great example here, and by optimizing our Flame and Moth development plan and being raised to pull the trigger to return to production when the time is right. Simply stated, its my view that Alexco is a Call on Silver, but with a profitable and growing wholly-owned subsidiary environmental business. In Q3 2015, Alexco completed a C$1.4 million surface exploration drill program of approximately 2,600 meters, focused on the extension and expansion of the Bermingham Resource. Results from this program surprised even us; as with seven or eight holes, we have initial indication of a steeply plunging zone of mineralization ranging from about 1.5 meters to more than 5 meters [indiscernible], with grades ranging from about 1 kilogram to more than 10 kilograms per ton of silver. This zone is drilled over about 140 meters down plunges, 350 meters wide is open both up-dip and down-dip. It is exactly the type of mineralization that early prospectors were searching for, and also the type of mineralization that led to the discovery of bigger and higher grade silver deposits of Galena Hill in the Keno Hill [indiscernible]. Switching to cash, despite our exploration success, we continue to look for ways to cut costs related to our office space, care and maintenance of Keno Hill, a plethora of other issues where actually costs year-over-year will define about C$0.5 million. Its good to remember, that a large share of our G&A costs are generated by our income and cash producing Alexco Environmental Group subsidiary. AEG has five offices in Canada and the U.S., and bought in revenues of C$3.4 million in the third quarter 2015. The revenue is less than the comparable period a year ago, as a result of the Globeville Smelter project in Colorado being substantially complete, and as we transition to new projects. In respect of Globeville, we are in the process of submitting the final completion documents and anticipate within the short term, the release of a significant portion of the restricted cash from the current security balance of C$4.4 million. Also remember, that AEG's revenue will tend to be cyclical, as projects like Globeville come and go. An anticipation of Globeville coming to an end, and as I described in our last quarterly call, we have ramped up our focus on business development to win more project related work in the U.S. Maybe as a result of this effort, at the end of Q3, AEG was selected as the U.S. EPA as the interim water treatment contracted to design, construct, activate [ph] and operate an interim water treatment plant at the Gold King mine near Silverton, Colorado. This is the site you will have seen on television, or in your newspaper, that our EPA, while excavating in the vicinity of the old [indiscernible] at the Gold King mine, ran into pressurized water from the mine, had ultimately resulted in a spill of about 3 million gallons of contaminated water into the Animas River. The purpose of the recently completed AEG water treatment plant, is to remove more than 85% of the contaminants from the water continuing to flow from the Gold King mine. The Gold King water treatment plant project commenced on October 2, 2015, under an emergency order, and was constructed within 20 days, an operation of the 1,200 gallon per minute interim water treatment facility began on October the 22nd. AEG is currently just winding up a whole week testing period, during which the plant has been optimized and further winterized in anticipation of the harsh conditions expected at 10,500 feet in the San Juan Mountains of Southern Colorado. More recently, we have been advised by EPA, that they want us to continue to operate the plant for the next 10 months, and we are settling in to do that as we speak. No doubt, the success of this high profile project has underscored AEG's technical and operating ability, which we anticipate will lead to other environmental work in the Denver area and elsewhere. Meanwhile, remember that AEG remains committed to the ongoing environmental care and maintenance program, reclamation enclosure projects at Keno Hill, under its long term contract with the Government of Canada. The arrangement with Canada, allows us to look well under the 2020s with this business, and in fact, our work for Canada will underpin future growth of our AEG business. Also in the third quarter, we continue to pay attention to moving forward with our plants for restarting mining operations at Keno Hill, as work continued on reengineering and optimizing the mine plant for the flame and moth deposit, incorporating the expanded mineral resource that we updated in April. We had completed a more detailed geotechnical review of the mine-plan with SRK Consulting, the result of which will be an expansion of longhaul versus cut and fill or drift and fill mining, which should reduce expected operating costs as well as mitigate sustaining development costs. The final economic model will be revised using current consensus pricing, and updated estimated costing. Once results of this were to compile, the study will move to develop and optimize multi-mine model, which should be complete early in the second quarter of 2016. Make no mistake, Flame and Moth remains a cornerstone mining asset in the Keno Hill district, and I have every expectation that when the optimization project is complete, we will be looking at a further improved project, with a longer mine life than the five or six years anticipated in this [indiscernible] smaller resource. On the permitting firm, we are continuing to process with the Yukon Water Board on awarding this license amendment application for the Flame and Moth deposit, and I think we can expect the public hearing to be set for early 2016. While they are well behind our original schedule, we are no unhappy with the progress, especially during this part of the commodity cycle. With respect to the Silver Wheaton amended agreement and the optional C$20 million payment, which we have no intention of paying in this market, will continue to have ongoing discussions with Silver Wheaton. I think its reasonable to say, that Silver Wheaton is interested in the same thing that we are, and that is to find a solution that removes any roadblocks to moving Keno Hill back to production. 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 be out there. Mike?

[Mike Clark:]

Thanks Clynt. This financial report is for Alexco's third quarter of 2015, all amounts are in Canadian dollars, unless otherwise stated. For the third quarter of 2015, the company incurred a net loss of C$1.6 million or a loss of C$0.02 per share. This includes non-cash costs of approximately C$1.3 million. AEG revenues for the third quarter of 2015 were C$3.4 million, with a gross profit of C$869,000 for a margin of 25.5%, compared with AEG revenues for the third quarter of 2014 of C$4.6 million and a gross profit of C$1.8 million for a margin of 39.5%. The decrease in gross margin from the prior period is mainly due to AEG's Globeville smelter project completing active remediation in phasing to monitoring status, with lower revenue and profits. In addition, AEG has ramped up its business development efforts, in an attempt to win more projects related work and has got its specific professional position to begin reducing reliance on third party contractors. General and administrative expenses for the third quarter of 2015 totaled just over C$2.5 million compared to Q3 2014 costs of C$1.9 million. G&A expenses increased for the 2015 period compared to the 2014 period, mainly due to a write-off of receivables. Also note, that approximately 45% of G&A includes overheads related to various offices and employees of AEG. Mine site care and maintenance costs in the third quarter of 2015 were C$587,000 compared to C$807,000 in the same period in 2014. Note that the mine site care and maintenance is mainly comprised of depreciation expense, which was C$444,000 in the 2015 period, and C$635,000 in the 2014 period. Exploration expenditures incurred during the third quarter of 2015 totaled C$865,000. The nature of the majority of these expenditures were related to the 2015 drilling program at Bermingham, and work on reengineering and optimizing the mine plan for Flame and Moth, incorporating the expanded mineral resource from April 30, 2015. Alexco's cash position at September 30, 2015 was C$5.9 million compared to C$7.5 million at June 30, 2015, while net working capital was C$11.1 million compared to C$9.6 million on June 30, 2015. The decrease in cash and cash equivalents in the third quarter is mainly attributed to payments made for the 2015 drill program, advances made for the Gold King project and overhead costs. In addition, Alexco has restricted cash balance at September 30, 2015 of C$8.8 million, of which approximately C$4.2 million relates to decommissioning obligations at Keno Hill, and C$4.4 million of the remaining balance relates to the AEG Globeville Smelter project, of which C$4 million has been reclassified to current assets as the security bond is expected to be released in the short term. This reclassification of restricted cash, partially offset by expenditures during the quarter, is the cause for the increase in working capital from C$9.6 million to C$11.1 million during the quarter. Now the operator will provide instructions for the Q&A session?

[Operator:]

[Operator Instructions]. The first question comes from Mike Niehueser from Scarsdale Equities. Please go ahead.

[Mike Niehueser:]

Hi Clynt, this is Mike Niehueser. A little bit of a history refresher, it seems like you talked about Bermingham about five years ago, and it was going to be really exciting, and then with the gold [indiscernible] you stumbled upon Flame and Moth, and that became a real game changer. Can you help put in perspective how big Bermingham is now, how it could be -- and relative to other silver deposits and Keno Hill and the rest of the world?

[Clynt Nauman:]

Yeah, good morning Mike. Yeah that's a good question. I mean, Bermingham -- Flame and Moth is currently about 1.6 million tonnes, approximately maybe 550 grams per tonne silver. So it’s a relatively large deposit, its shallow, its close to the mills, its four to five meters thick, and it’s a zinc dominated type of a suite of commodities there. It has within it, certain higher grade portions, but it nowhere comes close to what we have discovered at Bermingham. On the other hand at Bermingham, our existing resource is only about 5 million ounces, and remember, Flame and Moth is up to 27 million, 28 million ounces of indicated resource of the present time, more than 30 million in all categories. Bermingham on the other hand is sitting at about 5 million ounces, with an average grade, on the books of say, 400 grams to 500 grams before we started the exploration program this year. We have only just -- or just in the recent few months here, gotten the results back from that exploration program, and with that small program, we have discovered a very high grade portion of -- what I hunk was going to be a portion of a bigger deposit at Bermingham, and the grades range -- you can see these in our various news releases, anywhere from like I say -- a kilogram, all the way up to more than 10 kilograms of silver. So you are talking about silver grades in the range of 80 to 100 ounces, up to more than 300 ounces per tonne. Further to that and in comparison with Flame and Moth, the type of mineralization that we are finding at Bermingham is different, and that it has a lot of silver sulfur salts and native silver associated with it, and its typical of the higher grade portions of the larger and higher grade deposits that were found at Keno Hill. So as I have explained, I think, in the past, that I am reasonably confident that what we have found at Bermingham, the high grade area that we have found at Bermingham, which is open, and we know it stands at least 140 meters up and down, dip or plunge its 30 to 50 meters wide, its two to three meters and up to more than five meters thick, is unlikely to be an isolated part of mineralization. This is a Blue sky statement of course, and requires a significant amount of drilling. But it is very likely, that that very high grade discovery that we have, will be attached or will be expanded directly [ph] to something that's much more significant than it is at the present time. Even taking that into account, just a small zone that we have found at the present time, will have significant impact on the way we look at the future development of Keno Hill.

[Mike Niehueser:]

So with the first grade that you have there, how does the grade compare to what you would have in terms of the silver crunch in per tonne of concentrates you ship? Aren't you getting pretty close to direct shipping ore?

[Clynt Nauman:]

Yeah Mike, I mean, you have done a lot of homework of course, and as you know, the grades of silver that we are intersecting at Bermingham are higher than we would generally ship in concentrate from our conventional flotation mill, which is located close to the Flame and the Moth deposits. So the possibility that -- a portion of that Bermingham deposit or a portion that we have discovered, could be direct shipping ore, is very real, and of course that in itself is a new and definite way to look at future development of that portion of the district.

[Mike Niehueser:]

Well on that subject, you contemplate redoing the CEA with all the drilling and other mine development study that's going on with flame and month. And if so, what time would that be? You might see something like that or not?

[Clynt Nauman:]

Yeah. I mean, that's sort of an active discussion that we are having at present time. Clearly, we are going to have a different mine design, different larger resource at Flame and Moth, and we are doing the engineering for that at the present time. So that's part one. Part two would be, sort of a -- would be a resource calculation at Bermingham, and we are currently discussing what the best way might be, to get that information into some kind of a technical document and out for general distribution. Whether or not we do it in the -- we look to try and get that done in the first to second quarter, but there are some other contingencies out there that we do need to consider before we decide and commit to -- irrevocably to do that.

[Mike Niehueser:]

What about thoughts on additional drilling at Bermingham, even a modest program in 2015?

[Clynt Nauman:]

Yeah. I mean, there is no question that the -- Bermingham is not something you can turn your back on. So it needs to be drilled up-dip and down-dip and we are actively reviewing the alternatives and opportunities we might have to do that.

[Mike Niehueser:]

Okay. Changing the subject a little bit to AEG; with you coming off the high [indiscernible] Globeville Smelter and then checking in [ph] to the Gold King temporary water treatment facility. Seems like with these too high levels in the industries that you are able to bring forward your value proposition from moving from active to passive treatment of water where, it wouldn't be costing tens of millions forever, but you'd actually be able to share or solve mine water issues. And with there being, I don't know, tens of thousands of underground mines in the country, a lot of that -- even a few of those putting water into the rivers than Colorado, is this an opportunity for either you or legislators or somebody to really look at seriously solving water issues in the Western United States?

[Clynt Nauman:]

I mean, that's a pretty sweeping question Mike, there is lots of issues involved in orphaned and abandoned mines, not least of which are regulatory, legal, jurisdictional issues. I mean, our hope is that, we have demonstrated that we can react, we can successfully construct and contain and control a serious environmental problem using technology expertise that we have, and being able to leverage that into other opportunities, I think, is what we would be looking at. So the answer is, in general terms is yes, but just be assured that dealing with orphaned and abandoned mines in any jurisdiction is not necessarily straightforward.

[Mike Niehueser:]

Well it’s a sweeping question, just as I was trying to keep it to a minimum. Or while I [ph] ask a nitpicky question on the finance side, when you mentioned or when -- you mentioned there was a write-off of receivables, what was the extent of that, and is that a rare event?

[Mike Clark:]

Hi Mike. Its Mike Clark here. So we went and reviewed our receivables in AEG and also looked at some withholding tax receivables and determined that from the AEG customer, it was insolvents, and so we decided to write those off, and then there were some withholding taxes that were also written off, and that was a onetime event.

[Mike Niehueser:]

What was the scale or the size of that?

[Mike Clark:]

The total amount was just over C$600,000.

[Mike Niehueser:]

Okay, thank you. I will get back in the queue.

[Operator:]

Okay. The next question comes from Ralph Wagner [ph] from Ralph Investment Management. Please go ahead.

[Unidentified Analyst:]

Yes, good morning. I am one of your shareholders in the past, and two or three questions if I may; first of all, looking all your data and the presentation you made in Colorado at the Gold Show, I still don't get a good handle in terms of the timing of the costs involved to get a new going and what kind of prices [indiscernible] do you require, and also what kind of breakeven or all sustaining costs will you have on that property? I mean, once the mine is working and that mill is working?

[Clynt Nauman:]

Thanks for the question, the short answer is to put Flame and Moth into production is about C$10 million of underground work that needs to get done to open up that deposit. There could be, as much as another C$10 million beyond that, to allow for other infrastructure rehabilitation or reconditioning for operations, working capital scale-up, etcetera. In terms of our all-in sustaining costs, we would anticipate that, in the current market, if we were to go on production at all-in sustaining costs are right around C$14. And of course the C$64 question is, at what price do you pull a trigger on something like this. So my general feeling is that, if the price is still where it is between C$10 and C$14 or C$15 per ounce, then I do not think that, there's something that we would seriously consider. During C$15 and C$20 an ounce, I think its much more of a judgment call, and would certainly be somewhat weighted by the trend of the commodities market generally, if we were fairly certain that the commodity was going to continue to increase or sustain its price, we will be much more likely to make a positive decision to move to production in that range, than not. And if the price of silver is beyond C$20, then, as I say, its sort of a no-brainer in this particular district. I would caution you though, that the discovery of Bermingham is really important, and it may very well change these numbers, and it certainly would be -- to the benefit of -- or at least, if anything, would accelerate the return to production in the district.

[Unidentified Analyst:]

So you were kind of not quite clear; what's the timing? Once you make the decision, let's say, you have C$15 or C$18 silver, as you feel comfortable to go ahead, what timing do we talk about to get things from position date to put it in the mill back in operation?

[Clynt Nauman:]

Yeah. So I should have mentioned that, its about nine months if we were to go back in operation. The development of flame and Moth, to bring that online along with Bellekeno, is about nine months.

[Unidentified Analyst:]

What kind of initial or what kind of steel production would we talk about, in terms of ounces?

[Clynt Nauman:]

At a full run rate, 400 tonnes per day, which you would get to, within 18 months, run rate would be at least 3 million ounces per year, without consideration of anything from Bermingham.

[Unidentified Analyst:]

Other question, when are these warrants or the terms of the warrants; I couldn't find it? You have C$3.9 million warrants. What are the prices and exercise price of timing?

[Mike Clark:]

Standby one sec. This is warrants that you are asking about, is that correct?

[Unidentified Analyst:]

I mean, I couldn't find anything. But then again, I have not actively spent a lot of time with the company. I used to follow you very closely, years ago.

[Mike Clark:]

Hi there, its Mike here. I don't have the warrants in front of me, I think they expire in about a year and a half, and the exercise price is -- I think its about, like C$1.40.

[Unidentified Analyst:]

Okay. Not a hell of a nature hike, in terms of -- money, yeah. Well I mean, obviously then the big decision is, how you're going to finance, since it’s a gold streaming with Silver Wheaton, so you don't have a lot of options. I hate to see the big dilution which is possibly necessary? Have you discussed with someone else or has someone else approached you or talking with you [indiscernible], some other private equity money coming in and they are making some arrangements, as we have seen, several deals being done in Canada?

[Clynt Nauman:]

I mean, we are always looking at our options, and we -- I guess, there is two things I'd like to point out. One is that -- I think that we have done a reasonably good job of looking after our capital structure, and I certainly did not want to abandon that asset. The second thing is that, you should not ignore the fact, that our environmental group is a value building group. I mean, not only is it strategically important, but intrinsically, it has a significant value. And so we are not without options, other than or in addition to capital market options, in terms of moving the company forward.

[Unidentified Analyst:]

Yeah. I live in Boulder, Colorado. I mean, I am familiar, I am glad you got the contract, because I could never understand why the EPA has not given you the contract before and that we are aware of your work and also -- I don't know, I mean, totally confusing to me, why our government is backed under King Mine [indiscernible]? With people like you?

[Clynt Nauman:]

Well, I mean hopefully, we have got that situation somewhat contained for EPA.

[Unidentified Analyst:]

Yeah I hope like -- Mike, and hopefully at least do a lot of other cleaning up mining -- cleaning up lot of properties down here. Anyways, thank you very much. You have done a good job, its [indiscernible] stocks, I have no complaint. Thanks.

[Clynt Nauman:]

Thank you.

[Operator:]

[Operator Instructions]. At this time there are no further questions. Please continue Mr. Clark.

[Clynt Nauman:]

Thank you for joining us again today. We remain dedicated to our objectives of conserving cash, reducing costs, working on third party agreements, expanding resources, optimizing our underground development plans and overcoming any remaining hurdles which may stand in the way of the restart of operations at Keno Hill. Meantime, we are clearly At Call on the price of silver, with a rich silver party, great exploration potential and an income producing environmental subsidiary. As always, we appreciate your support and interest in Alexco, and with that, I will turn it back to Mike to close out the call.

[Mike Clark:]

You've been listening to the Alexco Resource third quarter 2015 conference call. We encourage investors to visit Alexco's web site 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 have a good day.

[Operator:]

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect and have a great day.