Aug 12, 2017
Executives
Lisa May - Director of Investor Relations Clynt Nauman - Chairman and CEO Brad Thrall - President and COO Mike Clark - CFO & Company Ethics Officer
Analysts
Mike Kozak - Cantor Fitzgerald Mike Niehueser - Scarsdale Equities
Operator
Good day and welcome to the Alexco Resource Corp. 2017 Q2 Conference Call.
Today's conference is being recorded. At this time, all participants are in a listen-only mode.
Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce your host, Lisa May.
Please go ahead.
Lisa May
Thank you. Good morning everyone.
Today is Friday, August 11, 2017 and I'd like to welcome you to Alexco Resource Corp's June 30, 2017 second quarter conference call. This conference call is being webcast live and can be accessed at the company's Web site at www.alexcoresource.com.
You may sign up on the Alexco Web site to receive feature news releases and other event updates as they are issued. You will also find Alexco's news release with quarterly financial results there.
This conference call will be recorded and archived on the company's Web site under events and webcasts. Giving presentations on today's call will be Clynt Nauman, Chairman and Chief Executive Officer; Brad Thrall, President; and Mike Clark, Chief Financial Officer.
We'll have an opportunity for a question-and-answer period after our presentation. Before we get started, I need to remind you that some statements made today 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. It should also be noted that past performance discussed in this conference call is not indicative of future results.
So now, I'd like to turn the call over to Clynt Nauman.
Clynt Nauman
Thank you, Lisa, and thank you everybody for joining us today for the review of our 2017 second quarter. First of I’d like to welcome and introduce you to Lisa May, Alexco’s new Director of Investor Relations.
We’re excited to have Lisa join the Alexco team and I’m sure over the coming weeks, you’re all going to get to know Lisa well. I’ll start up by saying that we’re making good progress in moving the Keno Hill Silver District back towards production.
It is our sole focus we are steadily scaling up all aspects of the district and to-date everything is going to plan. As you know, we have a financially robust project with infrastructure already in place silver grades that are unparalleled in our sector, a short runway to production and a growing team of a company’s professional, of accomplished professionals and operators.
Add that to our ongoing exploration programs and I expect to see the company move steadily up the value curve over the next year or so. With that said, on this call today, I’ll briefly discuss the highlights from the second quarter and then give updates on 2017 and some guidance on our plans for the next 12 months.
Brad Thrall, President of Alexco will discuss the operations, development and underground plans at Keno Hill. Mike Clark will follow and walk us through a summary of the financials.
On that note, we released our financial results yesterday, outlining a net loss of approximately C$2.7 million for the quarter ended June 30. The loss includes approximately C$1.4 million in non-cash cost.
Some of the highlights during the quarter include firstly closing and flow-through financing for gross proceeds of just over C$9 million, and secondly commencing a 12,000 meter surface exploration program in the immediate vicinity of the previously outlined Bermingham deposit. And thirdly just to note that AEG had another positive quarter with C$2.5 million in revenue, gross profit of about C$900,000 and margins of about 36%, gross margins.
The profitability has improved from the prior year, primarily as a result of the use of less third-party contracts. It’s worth highlighting that we continue to consider options to optimize our environmental business potentially restructuring the company to allow AEG to take advantage of new opportunities without necessarily leveraging of Alexco’s balance sheet.
As mentioned in May, we completed a C$9 million flow-through financing which Mike will provide details on and those proceeds are being used with an ongoing service program in addition to certain eligible cost related to the advanced underground exploration program at Bermingham. We budgeted C$3.2 million for our 2017 service exploration program comprising 12,000 meters of diamond drilling and that started in early June.
We have three rigs running and we anticipate drilling into September. To-date we have drilled about 25 holes and we are likely to drill somewhere between 45 and 50 holes for all’s said and done.
The program will further explore potentially mineralized structural targets in the immediate vicinity of the Bermingham deposit as well as complete the drilling of now in Bermingham deposit, where we have a couple of undrilled windows. And those windows are between structures that we had identified in 2016.
And the other important thing about those windows is that they are well within reach of the projected underground workings at Bermingham and they may add valuable resource that would be relatively close to potential future operations. Additionally, we’ve had a couple of other, we have a couple of other nearby targets that we suspect to occupy a similar structural setting as the high grade portion of the Bermingham resource and those targets are generally within 400 to 500 meters of the Bermingham deposit and generally towards the Hector-Calumet deposit which is about a kilometer away.
At this point, I’m going to turn it over to Brad Thrall to continue with the discussion of the advanced exploration plans at Bermingham and other operations for the next 12 months. Brad?
Brad Thrall
Thanks Clynt. Well good morning everyone.
As Clynt mentioned, I’ll walk you through a brief overview of the development activities, currently underway and plan for the next 12 months at Keno Hill. As Clynt mentioned, advancing an underground exploration decline and drilling program at the Bermingham deposit in 2017 is our primary focus at Keno Hill.
We have already started the necessary surface infrastructure and construction of facilities that are required for this program and that will allow us to start advancing the exploration decline underground once an amendment to our Class IV Quartz Mining License permit is in hand. This amendment is expected within a matter of days.
Upon receiving the amended Class IV permit, we will then commence a 600-meter exploration decline that will bring us to within 50 meters or so of the upper portions of the Bear vein that is within the Bermingham deposit. It is estimated to take approximately four months to complete this decline.
Following the completion of the decline, we would then initiate approximately 5,000 meters of infill and confirmation drilling in the Bermingham deposit, mostly focused on the upper portions of the deposit that are included in the early years of the PEA mine plant. It will take approximately another four months to complete this underground exploration drilling.
In addition, we will complete further geotechnical and hydrological drilling and investigation underground at Bermingham as required for more detailed mine planning and design purposes. This overall program that I’ve described is estimated to cost approximately C$8.7 million including underground equipment rebuilds and purchase.
The Bermingham underground exploration program will comprise infill drilling to confirm the location, geometry and grade of the mineralization with the objective of upgrading the existing inferred resources to indicate it and upgrading the existing indicated resources to measure resource status through completion of more closely space drilling that will also increase the confidence in the geological model. In addition, it will also provide additional information to advance our mine design and studies to a pre-feasibility level study.
In addition to the underground work at Bermingham, we will continue to make improvements and upgrades to the mill, as well as begin construction on the water treatment plant and a new water management pond for the Flame and Moth mine. The Flame and Moth deposit is permitted to be developed under the Quartz Mining License.
However, prior to processing ore or discharging water from the Flame and Moth mine, an amendment to the Water Use License is required and that is granted through the Yukon Water Board. A public hearing for the Water Use License amendment was held at the end of May of this year and an amendment to this water license is expected to be granted in the coming weeks.
Soon after we start the Bermingham underground exploration program, we’ll then submit a project proposal for environmental assessment and permitting for the eventual production and processing of ore from Bermingham. So the guidance I’ve just described on permitting is consistent with the schedules and timing disclosed in the March 2017 PEA, which targets production to commence in the fourth quarter of 2018.
So with that, I’ll turn it back over to Clynt to summarize what are we working towards for the next 12 months. Clynt?
Clynt Nauman
Thanks Brad. And this is a good time to sort of lay out the runway here -- outlining the key decision points along the way to potential production.
So as Brad mentioned, subject to the receipt of an amended Class IV permit we’ll be commencing the 600-meter exploration decline of Bermingham within the next few days and that will take an estimated four months to complete. This will comprise the first phase of the redevelopment program, once the Bermingham decline is completed near the end of this year, we’ll make a decision on phase II which will involve proceeding from Bermingham to the Flame and Moth decline and beginning the material recommissioning activities at the mill.
The 965-meter decline of Flame and Moth is expected to take approximately 7 months to complete and the estimated cost of that is C$10.6 million. Remember that our estimated total capital investment to achieve production is about C$27 million, including approximately C$1.5 million to C$2 million spend to-date in 2017.
Back to the Bermingham decline when it’s completed, we’ll launch a 5,000-meter C$2 million underground infill drilling program 30 to 40 holes that will take approximately 4 months to complete. For those underground drilling results and results from our 2017 surface exploration program, we intend to prepare a pre-feasibility level of study, which should be complete in the second quarter of 2018, whether that is an internal document or published is yet to be decided.
If all of that goes ahead of plan and is completed on time, we would expect to have the Flame and Moth decline completed in the pre-fease study completed in the second half of 2018 and that would put us in a position to make a formal production decision with market conditions, results and finances taken into consideration. The transition from the formal production decision to actual production would be in the order of 3 to 4 months.
Now current with all the said activity, we’ll be completing the permitting process for production from the Bermingham deposit simply amending our existing Quartz Mining Licenses and Water Use Licenses. We expect this process to take 12 to 18 months.
Just to be totally clear, once the Bermingham process is complete -- permitting process is complete we will be fully authorized for mining and processing operations from each of the Bellekeno, Flame and Moth, Lucky Queen and Bermingham deposit. At this point, I’m going to turn it over to Mike Clark to review the financial numbers and then we’ll take any questions that maybe out there.
Mike?
Mike Clark
Thanks Clynt. Good morning everyone.
This financial report is for Alexco’s quarter ended June 30, 2017. Note that we report in Canadian dollars, so all dollar amounts will be in Canadian dollars unless stated otherwise.
For the second quarter of 2017, we reported a net loss of C$2.695 million or a loss of C$0.03 per share. These results include non-cash cost totaling C$1.4 million which is comprised of depreciation, share-based compensation expense and one-time advisory fees related to the amended share purchase agreement with Wheaton Precious Metals.
This is a significant increase in loss compared to the second quarter of 2016, which incurred net income of C$152,000 or a C$0.00 per share, the main difference between the loss in the 2017 period and the income in the 2016 period is due to the change of C$1.9 million related to 2016 [ph] period incurring a loss on investment of C$289,000 compared to the 2016 period having a gain of C$1.6 million on investment. Also the 2017 period issued 250,000 shares with the deemed value of C$500,000 for advisory fees related to the amended share purchase agreement with Wheaton Precious Metals.
And finally, an increase in share-based compensation expense in the amount of C$208,000 for the 2017 period. AEG revenues for the quarter were C$2.5 million and the gross profit of C$913,000 achieving a gross margin of 36% is compared to revenues in the second quarter of 2016 of C$2.8 million and a gross profit of C$710,000 achieving a gross margin of 25%, 11% increase in gross profit from the prior year period was primarily due to AEG relying unless third-party contracts are performing more work in-house.
Corporate general and administrative expenses for the second quarter of 2017 totaled C$2.23 million including non-cash cost of C$1.27 million. This compares to the first quarter -- for the second quarter of 2016 cost of C$1.2 million which included C$320,000 of non-cash cost.
The increase in the 2017 period relates to a C$480,000 increase in professional fees and advisory fees, primarily related to fees associated with restructuring of the Wheaton Precious Metals stream and also a C$208,000 increase in share-based compensation expense. AEG general and administrative expenses for the second quarter of 2017 totaled C$746,000 compared to a second quarter of 2016 expense of C$700,000.
6.5% increase in the 2017 period is primarily as a result of C$116,000 increase in business development expenses primarily related to pursing environmental projects in the U.S. Mine site care and maintenance costs in the second quarter of 2017 were C$447,000 compared to C$477,000 in the same period of 2016.
6% reduction in cost is mainly due to a lower depreciation charge in the 2017 period. Included in mine site care and maintenance cost is depreciation expense of C$353,000 in the second quarter of 2017 compared to C$405,000 in the second quarter of 2016.
Exploration expenditures incurred during the second quarter of 2017 totaled just under C$1.8 million, compared to just under C$1.1 million in the 2016 period. Both periods these expenditures primarily reflect the surface exploration programs at the Bermingham deposit with 2017 being higher due to the three drills being utilized compared to two drills in that same period in 2016.
On May 30, 2017, Alexco completed a financing and issued just over 4.25 million shares -- flow-through shares at a price of C$2.15 per share for aggregate proceeds of just over C$9 million. The total share issue cost associated with this financing were C$715,000, which included 126,174 broker warrants exercisable at a price of C$2.15 per share for a period of up to 2 years.
Alexco’s unrestricted cash position at June 30, 2017 was C$26.5 million compared to C$20.4 million at December 31, 2016. While network and capital with C$26.8 million compared to C$23.4 million at December 31, 2016.
The unrestricted cash position during the quarter increased as the result of the financing offset by minimum property expenditures on the surface exploration program, fixed asset additions and corporate overheads. In addition to unrestricted cash Alexco also had a restricted cash balance at June 30, of C$6.9 million, which primarily relates to decommissioning obligations at Keno Hill.
Now I’ll pass it back to Lisa.
Lisa May
Thanks Mike. Operator, would you now please provide instructions for the Q&A session.
Operator
Of course. [Operator Instructions] And we will hear first from Mike Kozak with Cantor Fitzgerald.
Mike Kozak
Yes. Hi, guys.
So my first question is the exploration decline at Bermingham is going to take four months, but it will terminate 50 meters above the Bear vein if I heard you right, are you able to continue with underground mine development after month for or will that have to wait until the amendment of the mining license and the water license?
Clynt Nauman
Thanks for that Mike. This is Clynt.
No that was, we can continue there without any problem. From a design perspective, we’re just looking at the stand-off that we need to ring-off those drill holes so that we can ensure that we have covered the potential production blocks if you like for the first couple of years.
So, that’s just generally the way it was designed and laid out.
Mike Kozak
Got it. Okay.
And then, just I missed it, I think was that did you say C$8.7 million for the decline at Bermingham and then C$10.6 million to Flame and Moth?
Clynt Nauman
Yes. That’s correct that includes equipment rebuilds and purchases for the underground work.
Mike Kozak
Got it. And then, my last one is, production decision Clynt, I think you said kind of pending market conditions, I mean roughly kind of what Canadian dollar and what silver price would be kind of the like go or no-go level?
Clynt Nauman
Well, I mean it’s a review; there is a couple of things that play into this Mike as I’m sure you are aware. I mean we’re convinced that the bottom is hand in the silver market, the sentiment in the market may not be as enthusiastic or strong as it -- it has been at some point in the past.
When you are looking at the sort of consolidation and then building a price scenario. So, I mean we want; we’re convinced that we’re in that on that part of the curve.
We would like to see a little more enthusiasm in the market. But that being said, if silver is trading in the -- pick a number 16, 17, 18 dollars an ounce and the Canadian dollar is still hovering, in the 77, 80 cent type range.
And then in this project is well in the money. And that being said, our decision to proceed to full acreage production of course would be, a diligent and well discussed decision with the Board and I don’t want to preamp that.
But, the economics from that perspective are pretty clear.
Mike Kozak
Yes. Got it.
Thanks very much guys.
Operator
Now we’ll take a question from Mike Niehueser with Scarsdale Equities.
Mike Niehueser
Hey, Clynt. Good morning.
The, you are more than halfway through your surface program. Last year you were really on a tear and really extended well under the year, because the productivity, it seems that kind of potential with costs and productive drilling to have a similar kind of success or are you going to keep within 12,000?
Clynt Nauman
That’s good question Mike. First of all in the productivity, I mean because of the success that we’ve had in terms of the surface drilling program, we have continued to ratchet that -- ratchet it down our budgeting numbers, meaning that we can get more, more meters drilled for less money as we become more efficient.
That trend as continued into 2017 and we are drilling for maybe 5% to 10% less than we had anticipated in the budget. And we’d probably -- I think, we’d probably wait until early September, before we make any decision on whether or not to continue to drill.
Now that being said, don’t forget that, we are sort of in this pre-production or development mode. So, we’re using those exploration drills off and on for other work, meaning that for example we drag the drill over to Lucky Queen, drilled a couple of holes over there to get more metallurgical samples for pre-fease and various other things like that, that we’re doing in addition to the -- in addition to the exploration work.
So, it’s pretty busy, I don’t want to pre-judge it, we are operating ahead of budget, we are more efficient and we’ll make a decision probably in September as to just how far we’re going to push that program.
Mike Niehueser
Okay, thanks. Following up on the last call, I was missing what it was going to cost to do the declines at Bermingham and Flame and Moth.
And mentioned in the release that you got sufficient cash for operating in other types of efforts to the end of -- I think 2018, prior call mentioned that you thought that you might have enough money coming in through warrants depending on stock price and such, do not have to go for additional equity to bring Keno Hill back into production. Are you optimistic, you might be able to get there without financing or, I know that the stock price is right financing within maybe your [resistible] [ph], but do you have feeling about adequacy and the treasury and capital structure to be able to bring up the production?
Clynt Nauman
Not really at this point. I mean we’ve got plenty of runway here.
And we’re just getting started on this program. So, I wouldn’t anticipate, looking seriously their options until probably the first quarter of next year.
And I think beyond that, I really wouldn’t want to speculate on what that, what circumstances might be. You are correct, I mean there is a lack of warrants out there, and I think there is going to be plenty of enthusiasm going into the end of 2017 as we start to put this entire picture together including the additional exploration work that we are doing in 2017.
Mike Niehueser
And lastly, could you elaborate on [indiscernible] consider for AEG and that’s my last question.
Clynt Nauman
Well, with the AEG question is, one that’s driven both by the fact that the mining portion of our company is obviously consolidating and growing. And AEG is a growing company and we’re looking for a solution here, where Alexco of course maintains its equity in the company and to maintain some equity in the company and -- but that’s not necessarily exposed to the liabilities that the business such as AEG may incur or may have to take on -- from a balance sheet perspective in order to execute on some of these larger projects that we’re looking at in the United States and in Canada.
But beyond that, I really don’t want to speculate and but that sort of some of the logical and rationale behind the decisions that we’re trying to sort of find our way through here.
Mike Niehueser
Okay. Thank you.
Operator
[Operator Instructions] With no additional questions in our queue today. I’ll turn the call back over to Clynt Nauman, for any additional or closing remarks.
Clynt Nauman
Thank you all for joining us today. We remain dedicated to moving the Keno Hill Silver District back towards production.
We’ve got a busy year underway here with the 12,000 meters surface exploration program and commenced under the advanced underground exploration program at Bermingham, which is slated to start the underground working side in the immediate future here meaning within the next week or so. And we have these number of these other mill [Technical Difficulty] underway.
Given a strong cash position, because more than enough to meet our needs in 2017 and as explained there will be a clear project decision point as we progress with the development, the first being with the completion of the Bermingham decline on the underground drilling around the end of the year or in the first quarter and the decision to launch into the Flame and Moth decline and then with the completion of the Flame and Moth decline the decision point to proceed to full production which will come in the second half of 2018. As always we appreciate your support and interest in Alexco and with that, I’ll turn it back to Lisa to close out the call.
Lisa May
Thanks Clynt. You’ve been listening to the Alexco Resource June 30, 2017 second quarter 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 extension 108 to reach the Investor Relations line or email me directly at [email protected].
This concludes today’s call. Thank you for joining us.
Have a great day.
Operator
Once again ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation.
You may now disconnect.