Alexco Resource: A Cheap, Unlevered and Near Term Silver Producer

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 |  Includes: AXU, SLW
by: David Segelov

Thesis

Alexco (NYSEMKT:AXU) has by dint of history full ownership over one of the most prolific silver producing regions in Canada. It is funded to get to production and has no debt. AXU is a very clean, simple story, enabling the investor to have full access to a cheap, unlevered silver near-term to be producer. AXU will be producing as a low-cost producer in a well-proven high grade area.

AXU can be divided into two distinct parts:

  1. Consulting and remediation business which does about $6m per year and is profitable.
  2. Exploration and production company in an area which has full ownership of Keno Hill an area roughly 18 miles long by 12 miles wide. The mining is to be done by conventional flotation and the area is on the electric grid.

History of Keno Hill

Keno Hill and its entities were forced into government receivership in 1989. Burdened by environmental liabilities, the property sat abandoned, though significant resources remained at grades far in excess of most of the world's primary silver producers. Keno Hill. According to the Yukon Govt databases 1913 and 1989, the Keno Hill Silver District produced more than 217 million ounces of silver (5.37 million tons) with average grades of 40.52 oz/ton silver, 5.62% lead and 3.14% zinc, making it the second-largest historical silver producer in Canada. The silver grade at Keno Hill is in the top 3% of all global silver producers.

In June 2005, Alexco was selected as the preferred purchaser of the assets of all of the United Keno mines. In December 2007, following receipt of necessary permits and approvals, the Yukon Government approved final close of the purchase agreement, giving Alexco 100% ownership of the assets. Alexco has no liability to the environmental issues (and is being paid by the government to clean it up) and has no undertaking to spend any amount of exploration dollars.

Financing with SLW

In October 2008 AXU signed a deal with Silver Wheaton (NYSE:SLW). The terms were:

  • SLW will purchase 25% of the life of mine silver produced by AXU from its KenoHill District mineral properties, including the McQuesten mine.
  • AXU receives payments totalling $US50m and a payment of the lesser of $3.90 (increasing by 1% per annum after the third year of full production) and the prevailing market price for each ounce of silver delivered.
  • All deposit payments from SLW prior to commencement of production can only be used on the Bellekeno Mine.
  • Once silver is produced, the balance of the $US50m is drawn down over 40 years by the excess of market price of silver and per-ounce cash amount paid by SLW at the time.

Risks in the deal with SLW include - a failure to meet certain Bellekeno mine construction milestones which would enable SLW to terminate and ask for a refund.

In December 2008, SLW funded AXU with a line of $15m. The other $35m will be paid out as infrastructure at Bellenko is completed and when SLW and AXU have all pre-conditions in place to start the processing facility.

The decision to go ahead and fund the $35M is expected in August/September 2009.

Financial Facts

  • Cash stands at 22m. Burn per month is $1.5m
  • Production expected in 2010.
  • Significant interest in the Zinc offsets.
  • All in cash costs expected to be $6-$7 per ounce.
  • August/September final decision by SLW to fund the final $35m
  • Management owns significant equity in the company (>10%).

What Is It all Worth?

Will produce 3.3m ounces of silver, 30m pounds lead and 24m pounds Zinc annually over next 5 years from Bellenko mine.

I have assumed a $6 spread on the 2.4m ounces that are unpledged. This would amount to 15m per year in cashflow or roughly 30c per share. I have assumed the pledged silver acts like debt until it is paid. The off-takes have huge potential to generate cashflow as well.

Valuation

  • Stock Price 1.80
  • Shares outstanding - diluted 49.0
  • Market Cap 88.2
  • Cash + short-term investments 22.0
  • Debt 0.0
  • Enterprise value 68.2