Alexco Resource Corporation (NYSEMKT:AXU)
Q2 2013 Earnings Conference Call
August 15, 2013 11:30 AM ET
Vicki Veltkamp - VP, IR
Clynton Nauman - President and CEO
David Whittle - CFO, and Company Ethics Officer
Brad Thrall - EVP and COO
Christos Doulis – Stonecap Securities
Nicholas Campbell - Canaccord Genuity
Greetings and welcome to the Second Quarter 2013 Alexco Resource 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, Ms. Vicki Veltkamp, Vice President of Investor Relations for Alexco Resource Corp. Thank you. Ms. Veltkamp, you may now begin.
Good morning everyone. Today is Thursday, August 15, 2013 and I'd like to welcome you to Alexco Resource's second quarter conference call for 2013. This conference call is being webcast live and it can be accessed at the company's website. 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 and year-end production and financial results there, and that's www.alexcoresource.com. 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 of Alexco Resource; and David Whittle, our Chief Financial Officer, and following their presentations, we will open it up for question-and-answer period and Brad Thrall, our Chief Operating Officer will join us for that.
But before we get started today, 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 on this conference call is not indicative of future results.
So with part of the business out of the way, I'd like to turn the call over to Alexco's President and Chief Executive Officer, Clynt Nauman. Clynt?
Thank you, Vicki. Hello everyone and thank you for joining us today. As you know and I am very sensitive to, an awful lot has happened since quarterly call webcast at the beginning of May, and we will be talking about some of that today. On the upside, our mine and mill performed increasingly more efficiently going into Q3, and exploration continues to demonstrate a significant potential in the Keno Hill Silver District.
On the downside, much of what has happened in the second quarter, is because of more than the 40% drop in the silver price over the course of the rest of one year. What doesn't kill us makes us stronger, and I believe Alexco is taking the path that will make us stronger and for the longer term.
First, concerning the second quarter operations, as expected, in nearly every way, we improved hugely upon our operations compared to the first quarter of this year, primarily because we have sequenced into higher silver grade areas in the Bellekeno Mine, in the 99 and Southwest zone areas.
Silver production was up 52% in the second quarter, cash costs were down, throughput in the middle was up. I am very pleased with our operational performance during the quarter. In addition, that higher grade trend and increased output continued through July, and is continuing into August. Ironically, and in the phase of our decision to temporarily suspend operations, it now looks like July may have been one of our best production months ever.
However, we are showing a major loss for the second quarter, primarily because we took a non-cash impairment charge at C$46.2 million after-tax, predicated on the dramatic drop in silver price, and because of our previously announced interim suspension of operations. And of course, because of the metals prices, revenues were lower, also impacting the operating income.
For us, based on the silver price, and our decision to suspend operations, and because the silver price continue to drop, until this week anyway, we decided the right and proper thing to do, was to take any impairments that might be forthcoming, especially since our current market capitalization does not mention the value of our properties on our books. I believe that in the long run, we will be ahead of the game for having taken this step now.
We had revenues in the second quarter of about C$14 million, with an adjusted net loss of about C$3 million, and that's just not sustainable long term for a company our size. With the lower silver prices, and with operating costs that are high, we are taking steps to rectify this imbalance. And as I said in the news release published earlier, we operate a business first and a mine second, with revenues down that consistently exceed costs, something has to change.
Over the end of May, following the initial sharp decline in silver prices in April, we reacted quickly and announced that we were implementing cost savings measures. At that time, those measures include the workforce reductions, the capital projects rollback, (inaudible) discussions, deferral of new mine commissioning, and executive salary cutbacks.
We had another drop in the silver price in mid-June. As a result, we announced in July, that we had decided to undergo a temporary and orderly suspension of operations at the Bellekeno mine, prior to the winter season, and winter comes early in Yukon, as you know. We will be shutting down mining, or active mining and by the end of August, we will be milling out our inventory, and then implementing an orderly suspension of operations during September.
But here is the plan, mining is targeted to restart in 2014, depending upon a couple of things. Improvements in the silver markets, and the results of our focused efforts over the winter, to improve the underlying fixed cost structure of the mining district in the Yukon, and I will talk a little more specifically about ways that we think we can do that in a moment.
In the meantime, our exploration programs are continuing as planned, and we are working on baseline engineering and data gathering to initiate permitting of our Flame and Moth discovery for development. An environmental company, AEG, continues to have excellent results, and their work will go on unabated.
With our cash resources and net working capital on hand at the end of the second quarter, we would anticipate having sufficient capital to carry out our currently anticipated exploration development programs, and service the working capital requirements to the mining operations, the environmental business, and the corporate office administration. One things have wound down, we will reevaluate our position, but for the immediate time, our budgets and plans extend well into 2014. That is certainly a forward-looking statement, but that's the plan that we've laid out.
Of course, as you can imagine, our long term objectives and plans for the development and further exploration of our properties, we'd more than likely require additional funding at some point, to unlock the value we had in the ground at Keno Hill.
I will add some more comments on operations and exploration, but first I am going to turn this over to our CFO, David Whittle, to give you some specifics on the quarterly and first half numbers. David?
Thanks Clynt. This financial report is for the second quarter of Alexco's 2013 fiscal year. Note that we report in Canadian dollars. So all those dollar amounts we talk about today, will be in Canadian dollars, unless stated otherwise, and by tonnes, we mean metric tonnes.
For the second quarter, we saw overall consolidated revenue of C$14.2 million and a net loss of C$49.2 million or C$0.81 a share. These results, include impairment charges, totaling C$46.2 million after-tax, most of which is pertained to our mining asset. On an adjusted basis, excluding the effect of these impairment charges, we recorded a net loss this quarter of C$3.1 million or C$0.05 per share, compared to a net loss of C$2.7 million or C$0.04 per share last year. Our total revenues this quarter from Bellekeno mining operations was C$10.9 million, compared to C$17.4 million last year.
The decrease is primarily related to the lower silver prices realized this quarter, of C$20.55 per ounce, compared to C$27.84 last year, a 26% decline. With that, we booked a gross loss from mining operations this quarter of C$3.4 million. In part, because of the hit to revenues from the decline in silver price, but also in part, because cost of sale for this quarter, include production from March, which carried a normally high unit cost.
Given the sharp decline in silver prices from C$28.64 at the start of this quarter, to C$18.86 on June 30, and in light of our decisions so suspend mining operations at Bellekeno for the winter, we undertook an impairment review of our mining assets. In conducting this review, we looked at Bellekeno, Lucky Queen and Onek being our assets that are in production or development.
As a result, we have recorded an impairment charge of C$55.3 million before tax, C$44.4 million after tax. C$22.5 million of the pre-tax amount was allocated to Onek, reducing its [clearing] value to a relatively nominal C$800,000, as Onek is a zinc-dominated lower silver grade resource, that has hit particularly hard in the current pricing environment.
The remainder was allocated primarily to Bellekeno and Lucky Queen pro rata relative to their carrying amount, with about C$3.5 million allocated to our mining plant equipment, including mill facility.
We have also recorded an impairment charge of C$1.8 million, in respect of our long term equity investments, and Americas Bullion Royalty Corp., formerly Golden Predator.
Alexco's cash position at June 30th was C$10.9 million, down from C$13.7 million at March 31, though our net working capital at June 30 was C$15.6 million, largely unchanged from Q1 at C$15.8 million. Before changes in working capital, our cash flows from operations were essentially breakeven, reflecting the impact of the sharply reduced silver prices. Including changes in working capital, our cash flow from operations was negative C$3.5 million, primarily reflecting a C$2.5 million buildup in inventory, as our production returns to more typical levels, following the abnormally low mining volumes that we experienced through the proceeding first quarter.
Investing cash outflows are C$5.7 million, almost all of which was in respect of our mining properties. Bellekeno sustaining development, and underground exploration totaled C$1.4 million; wrap-up development expenditures, in respect of Lucky Queen and Onek totaled C$2.1 million, and the remaining C$1.9 million was in respect of exploration activity, primarily at Flame and Moth.
Offsetting these cash outflows, in April, we completed a C$7 million flow-through common share offering, generating net cash flow used for the company of C$6.5 million. The C$7 million is of course earmarked to fund our surface exploration in the Keno district. But we can spend it any time over 2013 or 2014.
In last quarter's call, we indicated that if silver held at C$24 or above, and assuming we would maintain our planned production volumes, we expected we'd be able to largely maintain our non-flow-through cash treasury over the full course of 2013. As Clynt has already outlined, with silver falling to the C$20 level, it is not possible for us to maintain our treasury, and so we have made the hard but prudent decision to suspend operations at Bellekeno for the winter, and implement across the board, cross reduction measures. Once the Bellekeno suspension process has been completed, we expect our overall cash burn rate to settle in at a rate of roughly between C$0.5 million and C$0.75 million a month.
With that, I will turn the call back to Clynt.
Thanks David. If you have any specific questions about the financial results, we will take those at the end of the call. As we noted in the news release, Bellekeno mine production and grades improved significantly compared to the first quarter of this year, when we were sequencing mining through lower grade areas, more peripheral areas actually up in Southwest zone.
During the second quarter, we began sequencing, as previously planned, into the higher grade central areas of the Southwest and 99 zones, as a result, the average grade of silver increased about 18% from 636 grams per tonne, to 751 grams per tonne in the second quarter.
For the quarter, we saw Bellekeno mine and they will process more than 25,000 tonnes, a 25% increase over the first quarter. Average mill throughput in the second quarter was 283 tons per day, compared to 223 tons per day in the first quarter. The mill has now been keeping up with the mine for the past three quarters, and has been operating pretty well. At this point, it looks like through the month of July, we have improved upon all of those metrics, once again.
So with all this good performance, it has been tough to make a decision for our winter suspension of operations. Although we believe, this leaves us with a good platform for potential restarts next year.
As I said, we intend to continue mining through the month of August, so mining related revenue will continue in July, August, and of course into September, given the transportation lag. We will be implementing an orderly suspension in September. Of course, we have already started on that path, because it's not like flipping a switch, especially as we are determined to execute this shut-in properly, so that we can restart with the minimum amount of problems next year. Certainly if we defer the shutdown, we have been pushing into the winter months, which would have made things much more difficult.
I do want to say at this juncture, that the professionalism of our people on-site, under these circumstances, has been absolutely exemplary, quite outstanding. I am very proud and grateful for the way they have undertaken these tasks, and we are hoping that many of them will come back to us next year, if we can accomplish our goals over the winter.
So let me talk about some of our thinking in terms of restructuring our costs with this winter break. With all of the pieces of the Alexco puzzle, we have a lot of optionality with the company, and in the broader context or the broader strategic context, there are actually three alternatives the way we think about it, available to us at Keno Hill. The first alternative is a status-quo alternative, all mining companies have this alternative, which is basically to adjust cut-off grades and increased mining grades, essentially high grade deposits, or in this case, the Bellekeno deposit.
We can do this, but of course that would impair the resource. It's important to understand though, that even in the status quo alternative, Alexco could react quickly to higher prices, we have one mine either in production or in standby, two mines close to production, and a new undeveloped deposit, an existing mill with (inaudible) infrastructure, all the [premise] in place, but revising the cutoff grade and harping for higher prices is a short term solution in our view.
As a second alternative, which is, what we recall a partial optimization alternative. In this alternative, we would modify the underlying fixed costs relative to the existing mineable deposits, and we would defer development of a new larger deposit, specifically the Flame and Moth deposit. This would result in us being profitable at current prices, that is not necessarily sustainable in the long term.
Now better alternative, and the alternative that we think is proper with this district, is what we would call full optimization, and it would be our goal to decrease the underlying cost, and incorporate a broad district approach to developing properties, including Flame and Moth. So that when we restart, we would have a plan and permitting strategy to allow production from Flame and Moth. This alternative provides profitability, long term sustainability, and it sets up the Keno Hill Silver District for the type of operation that it needs to be over the longer term.
The point is, that we are not giving the short term access or anything that just kicks the problem down the road. We want a sustainable resolution to all aspects of the cost and production objectives to ensure that Keno Hill can be developed and sustained as much as possible, isolated from future price volatility. This is a great property. It needs to be configured both in terms of volumes and costs for long term sustainable operations.
To accomplish full optimization, some of the things that we can look at on the cost side would be, for example, transition to self mining. As you know, we are currently using a contract underground miner. I would add though, that we have approaches to the equipment, so we have a situation where we have a contract miner, but we -- as Alexco owns the equipment.
You can look at examining our employee transportation and scheduling costs. We are a Northern operation, we operate in a fly-in, fly-out basis. We believe that there may be smarter things that we can do, in terms of the profile of the workforce and these rotations.
But if we want to go out and restart with an optimized throughput plan in schedule. And we certainly want to add flame of moth to the development schedule, and of course, we have a variety of third party agreements, and we need to review and discuss all of those agreements.
Timing of the resumption of operations depends on accomplishing these goals, and the strength of the silver market. As part of our plan to incorporate a broad district approach to developing the properties, verifying our district-wide preliminary economic assessment continues. Because of regulatory constraints, it's necessary for us to complete new work on old projects within the district at the same time, before releasing new information on any of them. (Inaudible) the process, fairly cumbersome. And it has also been a moving target, with changes necessitated by the rapidly changing silver price, and the change of our circumstances, specifically this interim shut-in, we will be getting the document out at some point, in the third quarter, as we move forward with the planning process, and this was an important document, because it includes a revision of the Bellekeno resources, and also will provide some metrics in terms of the future development and production of Flame and Moth deposit.
General exploration, the 2013 (sic) summer season has just been underway, and primarily been to target priority for holes to better define the limits and extend the mineralization, and add resources to the Flame and Moth deposit, we would have drilled about 2,000 meters to-date. And we need to also, in 2013 to undertake a technical review of all exploration results from prior years, to identify new exploration targets for future drill programs.
We have also initiated a step-out drilling program at what we call the Bulldozer discovery, which was a discovery of 2012, about 0.5 kilometer south of the Flame and Moth, and we have drilled about 1,000 meters in that area currently.
Additionally, baseline geotechnical metallurgical environmental work, as well as preliminary engineering is underway at the Flame and Moth deposit, and this work is expected to include studies at future production options, in context with the existing mine, and other opportunities in the district.
As well, the Bellekeno mines, promising down-plunge Thunder Zone and up-dip 650 Zone are the focus of an underground drilling program which continues as we speak. And we expect good results, which will be even outside of our revised resource at Bellekeno. So we are pretty happy with what we are seeing at the Bellekeno mine.
With that, I am going to turn it back to Vicki to introduce the Q&A session.
Well, thank you Clynt and David, and operator, if you could please give the instructions for the question-and-answer period now?
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Christos Doulis with Stonecap Securities. Please proceed with your question, your line is live.
Christos Doulis - Stonecap Securities
Hey guys, so just on the potential of the (inaudible) at 2014, I totally get it, you need to build this mill at 400 tonnes a day to make things work. What would you envision, is it possible at kind of the throughput level that you would anticipate from Flame and Moth? We are talking about 150-ish tonnes a day to kind of supplement that 250 plus that you can pull from Bellekeno, etcetera?
Christos, this is Clynt. No, the Flame and Moth project is going to have capacity for -- will have the availability for throughput capacity that's much higher than that. The benefits and advantages of that deposit, are the fact that there was mineralization, five, six, seven meters, most people you're familiar with some of the June results here. SO, yeah, it needs to be developed, so that it will be become, in fact the sort of underlying backbone of future production in the districts through, you know, for a quite a number of years going forward, certainly beyond 2020? Okay. So what I am trying to get at, Clynt is do you need to build a separate mill -- like you need to get your capacity up to 600 tons a day and then you consider feeding Flame and Moth in, or call it 300 plus tonnes a day, or --?
No, I think economics would drive you towards making sure that we optimize the capacity of the existing mill. So I think that well, if the focus is to lift production throughput to 400 tonnes per day, which is the nameplate capacity on that mill, and once we reach that point, we can make decisions on how we go forward from there. But the combination of deposits that are available to us, price dependent, Bellekeno, Lucky Queen, possibly Onek, Flame and Moth, will drive the decision as to how much capacity that we might try and sort of eke out of that mill. But at this point, we are totally focused on 400 tonnes a day. It makes a significant difference in the underlying fixed costs or the fixed cost ratios that we have to deal with, in these properties, as you know.
Christos Doulis - Stonecap Securities
Okay. Thank you very much.
Thank you. Our next question comes from the line of Nicholas Campbell with Canaccord Genuity. Please proceed with your question, your line is live.
Nicholas Campbell - Canaccord Genuity
Hi, guys. I am wondering if you could just -- and I might have missed this on the call, and I apologize, but maybe if you could just go through it, where the capital is spent in the quarter?
David, do you want to take that?
Yeah, I have got my notes here. We've spent – investing cash outflows were C$5.7 million Nick. Bellekeno's sustaining development and underground exploration totaled C$1.4 million. We had wrap up development expenditures in respect of Lucky Queen and Onek, and most of it was with respect to Onek totaling C$2.1 million, and that's because we are still doing development work in those groups you want in the early part of Q2, within the payables roll through of that. But you see substantial amounts that are coming through in Q2, but we should be done with that now with the shutdown or curtailment of the development there. The remaining C$1.9 million of mix, that was exploration activity, which is primarily Flame and Moth. We spent about C$300,000 on plant equipment
Nicholas Campbell - Canaccord Genuity
Okay. And what do you think -- what is your budget for your capital programs over Q3 and Q4?
Other than exploration work, budgets are nominal, obviously once Bellekeno suspension kicks in, there will be no sustaining development there; and actually sustaining development right now in Bellekeno is heavily curtailed from what it normally would be. We've got no significant CapEx expenditures beyond that, other than the workload we will do on exploration work.
Nicholas Campbell - Canaccord Genuity
And that's the exploration that you intend, has to be right because of the flow-through private placement?
Yeah I mean -- well we have to do it between now and the end of 2014. We don't have to do it right now, but we need to do it in terms of continuing with the advance of the Flame and Moth.
Nicholas Campbell - Canaccord Genuity
Okay. With that we negotiated agreement that you guys announced on your environmental rehabilitation work, is that going to free up any of the restricted cash that you guys have?
No, we won't free up any restricted cash. The restricted cash there, two tools, one is our regular reclamation security, which is primarily Bellekeno, Lucky Queen and Onek. The other piece is an element that is related to the AEG group or through the job we are doing down in Denver actually. But we have not restricted cash related to the Keno hill district remediation. What it will do, is allow us to retroactively build, we have had a cost sharing arrangement on a particular element of work we are doing, the closure planning work, and we cross share that or revenue shared it on a 65:35 basis. We only bill 35% of our regular scalable amount.
Retroactively, we're going to be able to adjust that upwards to about -- between 85% and 95%. So we are going to get about C$2 million retroactive [filling] wins, if you want to call it that, which will come in within the next month or two. And then financially, we have sitting on our balance sheet, environmental services contract lot provision. There is a rejig of another cost share aspect that -- in the future, we will have to pay or contribute as much to cost as we felt we would, so we will be able to unwind that. But for the moment, that will be a non-cash reversal. But we anticipate that we will have the same level of costs going forward. Those are the remaining financial benefits under that agreement.
Nicholas Campbell - Canaccord Genuity
Okay. That sounds good. And have you guys made any initial estimates on how much it's going to cost to restart Bellekeno once -- in the spring of next year?
Maybe Brad, do you want to take a shot at that?
I think we have some high level cost estimates, as Clynt mentioned earlier, I think we are really focused on putting the mine and the mill in a position, so that restart next year is -- to see what's possible, so I think the primary cost to restart, we'd obviously be looking at working capital requirements over the period before you get cash flow from concentrate sales or there is going to be costs associated with the leased stock and inventory, there is also costs associated with -- obviously recruitment and those types of things. It's not -- the numbers probably in the C$3 million to C$5 million range to initiate production. But again, most of that would be, I would classify it as working capital, which you get back once concentrate sales resume.
Nicholas Campbell - Canaccord Genuity
Okay. And how have your discussions been, you mentioned your employees have been entirely professional, which is great. How have your discussions been with them, in terms of getting them back onsite when you start up again in spring time?
We've not made any -- we are not making any promises clearly, because we need to work our way through these various components that we've described here. So they have -- I think that their conduct has been, as I mentioned exemplary, a number of them have obviously asked us to contact them when we go back in production. But we are not making any promises at this point
Nicholas Campbell - Canaccord Genuity
Okay. Well, thanks a lot guys.
(Operator Instructions). There are no further questions at this time. I'd like to turn the floor back over to Mr. Nauman for any closing comments or remarks you may have.
Thank you very much and I want to thank everybody for their interest in Alexco and for the questions today. As you know, it's a tough right now. We've a lot of work to do. But I'll tell you that somehow -- sometimes the tremendous intrinsic value of the Keno Mill Silver District is going to be unlocked, and that's what we are planning on doing. And as always, we appreciate your support and with that, I will turn it back to Vicki to close out the call.
Thanks Clynt. You have all been listening to the August 15, 2013 Alexco Resource second quarter conference call. We encourage investors to visit Alexco's website for further information; and if you have further questions, please call 604-633-4888 or email us at email@example.com. This concludes today's call. Thank you for joining us and have a good day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!