Alexco Resource Corporation (NYSEMKT:AXU)
Q3 2013 Earnings Conference Call
November 15, 2013 11:00 AM ET
Vicki Veltkamp - VP, IR
Clynton Nauman - President and CEO
David Whittle - CFO
Mike Niehueser - Beacon Rock Research
Greetings and welcome to the Alexco Resource Corp. Third Quarter 2013 Teleconference. 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. Thank you miss, you may now begin.
Good morning everyone. Today is Friday, November 15, 2013 and I'd like to welcome you to Alexco Resource's third quarter conference call for this year. The conference call is being webcast live and can be accessed at the Company's website, which is 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 also find Alexco's news release with quarterly and year-end production and 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 in yesterday's news release.
And giving presentations on today's call will be Clint Nauman, President and Chief Executive Officer of Alexco; and David Whittle, our Chief Financial Officer. Following their presentations, we will open it up for question-and-answer period and Brad Thrall, who is our Chief Operating Officer, will join us for that.
But 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 those 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.
So with that I’d like to turn the call over to Alexco's President and Chief Executive Officer, Clint Nauman.
Thank you Vicki and hello everybody, thank you for joining us today. We’ve had a pretty busy time since we last spoke to you. As you seen yesterday that we had a solid operating quarter even though we only operated the Bellekeno mine during July and August that of the Q3. Most of September was spent marching up and preparing the site and facilities for winter suspension of operations at Keno Hill. And this is not a small undertaking given that we wanted to phase down the operations and have that accomplished on a carefully prepared plan such that facilities were closed up in a condition which will offer efficient re-commissioning and startup.
I have to say that our people did a heck of a job during this period. Not only did they operate the facilities extremely efficiently but the property and the shutdown protocols were strictly adhered to and the properties lift an excellent condition for an efficient restart when the time comes. They did a sterling job.
During the third quarter, as a result of the combination of efficient operations at Keno Hill and solid results from our environmental business unit, we recorded net income of 2.2 million or $0.04 per share on 23.4 million of consolidated revenue even though our mine operations incurred a short operating quarter and a lower silver price.
In terms of the mining operations, during the quarter we concentrated on southwest and 99 ore production at Bellekeno in areas previously threat for long haul production. For sure most of the investment at Bellekeno went into ore production with sustaining capital taking a back seat as is normal in a shutdown situation such as this.
Given that focus however the mine was left with inventory in place and well positioned with restart including restart of underground development activity. Even with the adjustment to plan we produce more than 450,000 ounces of silver nearly as much as production in the full second quarter. And by processing extra inventory our payable metal volume was nearly 600,000 ounces of silver.
You may wonder why we chose to suspend operations over the winter when we can show a profit in these conditions. The answer is that under normal conditions we would have had additional capital expenditures and at these silver prices we’re just too close to the margin on an all in sustaining cash cost per ounce basis.
Additionally as previously noted, though profitable at the mine level a good part of our income also came from our environmental business during the quarter in addition to the mining business. We are now moving ahead with our plan to look at ways to reduce their underlying fixed cost on a long term basis in order to be a sustainable silver producer and not a zinc producer in the Keno Hill district. We’ll do all of that during this interim suspension of operations.
Importantly during the third quarter, we were able to process an average of 321 tons per day through the mill that's a record for us, 13% increase over the second quarter and I believe it shows that the mill can continue to operate efficiently at ever increasing throughput so long as we have the oil feed.
We closed off Keno on a sustaining basis, it is only 250 ton per day mine during this down time, we are looking at ways to increase the volume of throughput by additionally putting some of our other discoveries into production namely the Flame & Moth deposit. That will create a long-term sustainable feed that would fill the mills 407 ton per day nameplate capacity and go along ways to accomplishing our goals of cutting our underlying fixed cost of production per ounce and per ton.
We've also been working on continuing to prepare a preliminary economic assessment on the Keno Hill District as we know it today to incorporate Flame & Moth and Lucky Queen into a new operating plan as well as Bellekeno. And when that's completed we'll have a restructured plan and more clarity on what our specific and initial steps are going forward.
One thing for sure we'll be continuing our very successful exploration program at Keno Hill. Even today we're actively assembling our plans for 2014 exploration season surface exploration season with a great success in adding silver ounces to our resource at Keno Hill and every ounce we had has the potential to extend the operating license sustainability of the property so we are going to go forward with exploration hopefully with the same success as we've had in the past.
For the cash resources the networking capital on hand at the end of the third quarter we would anticipate having sufficient capital to carry on our exploration programs handle the [indiscernible] maintenance site and run the environmental business and corporate offices and administration. At the present time our budgets and plans extend towards the end of 2014. Of course, as you can imagine our long-term objectives and plans for the development and further exploration of our properties would more than likely require additional funding at some point to fully unlock the value we have in the ground at Keno Hill.
I'll make some more comments on operations and exploration but first I am going to turn this over to our CFO, Dave Whittle, to give you some specifics on the quarterly and the first and other numbers. David?
Thanks Clint. This financial report is for the third quarter of Alexco 2013 fiscal year. Note that we report in Canadian Dollars so, all Dollar amounts we talk about today will be in Canadian Dollars unless otherwise stated; and by tons we mean metric tons.
For the third quarter, we saw overall consolidated revenue of $23.4 million and net income of $2.2 million or $0.04 a share. We saw a solid results from the Bellekeno mine this quarter notwithstanding that we completed the suspension for winter in early September and we saw very solid results from the Alexco Environmental Group.
Our total revenue this quarter from Bellekeno mining operations were 17.0 million compared to 17.3 million in the same quarter last year. While those two revenue numbers are broadly comparable, underlying them is the fact the average sliver price we booked was $22.06 compared to $34.18 last year. Lead and silver prices were actually quite similar. Offsetting the decline in silver prices we had significantly higher sales volumes of silver and lead.
Mining and milling operations at Bellekeno ceased an nearly September but it wasn't until October 11 that we completed the final delivery of concentrates to the smelter. As we shift not only our production for the third quarter, but we delivered all our stores being in transit concentrate inventory as well. Note that we will record some additional concentrate sales revenue in the fourth quarter relating to those October deliveries as well of course as the revenue impact of final pricing settlements occurring over that quarter.
Cash cost per ounce in the third quarter was $12.93 marginally lower than the $13.10 that we saw in the immediately preceding second quarter. We mined -- we processed 22,520 tons in Q3 but over an operating period of only 64 days due to the suspension of operations for a mill throughput of 321 tons per a day our best ever quarterly throughput might. While we did enjoy an economy of scale benefit from that higher throughput it was largely offset by the fact that we undertook relatively little sustaining development activity as we executed the suspension plan. And as a high fixed cost operation not meant to lower proportion of the fixed cost were absorbed by sustaining development and they ended up at our production cost instead.
We noted well that our general and administrative costs are notably lower this quarter compared to last year and in part this can be attributed to the effect of cost reduction initiatives we implemented earlier this year. However a good part of the reduction is because last year's third quarter G&A was elevated by a one time employee severance cost. We do anticipate we'll see further reduced G&A cost from Q4 on now that the mine suspension is in place.
Results from the Alexco Environmental Group were very strong this quarter with AEG generating gross profit of $4.2 million. That result was bolstered to the tune of $2.4 million by signing of an amended and restated subsidiary agreement with the federal government of Canada. This is the agreement that spells out how we interact with government in our activities in the Keno Hill district.
It provides indemnification we have from Canada against the district's historical liabilities and it also provides the framework for how AEG is performing environmental services to the government and the contractor to remediate those liabilities. The Amended and Restated Agreement or ARSA for short firmed up and clarified some operational parameters between us and the [indiscernible] but it acknowledged as well the job of executing on this project was more complicated than had been originally anticipated when it first signed back in 2006. The original deal called for certain planning phase cost to be cost shared by Alexco and the government but the ARSA now provides that Canada will cover a significantly higher share of those planning phase cost and retroactive 2009.
As a result in this third quarter, we were able to build an additional 1.5 million in retroactive fees and also we are able to reduce by $850,000 contract loss provision we previously booked against that planning phase. But even when you factor out the positive impact of the signing of the ARSA, AEG still turned in a strong quarter booking gross margins of a very healthy 38%.
Alexco's cash position at September 30, was 7.9 million and our net working capital was $15.4 million. Receivables are a bit elevated compared to normal at September 30 due to the timing of certain of AEG 's billings as well as the receivable for the 1.5 million in retroactive fees, under the ARSA and because of the increased receivable related to concentrate sales as we push through the final concentrate deliveries running through late September.
No collection issues are anticipated with respect to those receivables and we've in fact collected two thirds of the balance through today. I'll now turn the call back to Clint.
Thanks David. If you have any specific questions about the financial results, we'll take those at the end of this call.
As David noted, we only operated 64 days out of 90 days in the third quarter due to buttoning up the facilities for the interim suspension of operation.
Despite that, we produced 452,000 ounces of silver so operationally things were certainly trending in the right direction -- are certainly trending in the right direction. We also marched with our other mine inventory for example the [indiscernible] ore piles et cetera and put it through the mill as we prepared for winter suspension making our payable metal more than 596,000 ounces of silver in the third quarter. So the performance by the mine, mill and operators during the third quarter was very, very, very good.
Overall, the average grade of silver during the third quarter was about 40 grams per ton lower in the second quarter at 717 grams per ton and brings our year-to-date heat grade to 705 grams per ton about where we had expected at the beginning of the year.
Notably our recoveries of ore metals were up in Q3 by at least 3% from the previous quarter, recoveries were 96% for silver, 95% for lead and lead concentrate and 60% for zinc and zinc concentrate.
For the quarter we saw the Bellekeno mine and mill process more than 20,000 tons. As I said earlier average mill throughput during the third quarter was 321 ton per day compared to 283 ton per day in the first quarter, a 13% increase and a 44% increase over average mill throughput in the first quarter of this year. The mill has been keeping up with the mines for the past year and is being operating increasingly well.
The other effort during the quarter was to put the mine and mill on tier maintenance we've accomplished that pretty seamlessly and with a great care to detail as the whole thing can be started up again without undue concern. The mill is being completely planes and equipment is expected to be ready for the winter layover camp is being shut down and winter arise our underground equipment is being serviced and parked [indiscernible] hearings have been shock treated for the technical stability and I also would say that our long standing and robust underground support program has paid dividends on the safety side and since inception we are very happy and proud of our enduring good safety record at this mine.
Our environmental compliance has also been good and remains in excellent shape. We will have three or four people at the site, at the mine site in Keno Hill at all times over the winter to do the water monitoring, mine inspections, ensure security et cetera while attending to all of the other care and maintenance activities.
So we are finally in good shape to focus on optimization issues putting together new mine plans, in some cases redesigning in others to ensure that we have a district operating plan that will reliably achieve and maintain 400 tons per day when we return to operations.
The increased throughput will have a significant impact on direct operating cost which combined with our work on underlying third-party agreements should see Keno Hill return to production with a significantly changed operating profile.
Just a few worlds on the exploration side. This is of course the area of focus in the shorter term in terms of planning for 2014. Although, we have not put our 2014 exploration and budget in place yet I expect that we'll have a very strong exploration program during the coming year.
We have funds available for exploration from the flow through funding that we did earlier this year so we're able to plan a good program to continue building on the past year success. This is where we can get a big bang for a buck. Since 2008 we figure this costs us about $0.60 per ounce to add silver to us over inventory or $0.60 per ounce discovery cost if you like. We can't buy an existing deposit for that kind of money so I am convinced we need to continue to build the value at Keno Hills through our exploration programs.
Just to recap and wave the flag a little. In September we issued a news release about our continuing success of Flame & Moth exploration drilling carried out at Flame & Moth during the summer. 2013 confirmed that further 200 meter -- more than 200 meter extension to the mineralized Flame & Moth deposit to the Southwest of the currently defined resource and we therefore extended the entire deposit to more than 900 meters in strike length. The deposit remains open down plunge to the southwest and down dip while this particular structure is host to deposit continues to the northeast where we need to do a lot more work.
In addition, results from 2013 surface drilling at Flame & Moth West which was originally called The Bulldozer prospect is approximately one half kilometer west of Flame & Moth deposit and we had discoveries over were turning up to 28, 29 ounces per ton [indiscernible] meters, but on a separate, but probably related structure within the structural complex.
This confirmation of the Flame & Moth West discovery indicates the presence of a locally mineralized north-northeast, south-southwest trending corridor, mineralized corridor, perspective over at least two kilometer in the immediately Crystal Lake area that may extend a further six kilometers northeast to the original Sadie Ladue deposit.
As far as the Alexco Environmental Group is concerned, you heard David give you some numbers on how well the Environmental Group is doing. I just want to say that our environmental subsidiary continues to grow and provide us with cash flow. They continue pick up new projects, we now have offices in Denver, Toronto, Whitehorse in Vancouver. Our environmental work has expanded from permitting and ad hoc consulting, primarily the north to engineering and project based operations in the U.S. For sure this business is currently firing on all cylinders and we look forward to continued success in the future.
And with that I'll turn it back to Vicki.
And I will turn it over to the operator to give instructions for the question and answer session, operator.
Thank you. We will be now conducting a question-and-answer session. [Operator Instructions]. Our first question is coming from Mike Niehueser of Beacon Rock Research. Please proceed with your question.
Mike Niehueser - Beacon Rock Research
When you take that out it kind of seems to have impacted the numbers overall but given a start-up again how confident are you with the Flame & Moth and Bellekeno being able to fit the 400 ton per day capacity level?
I would have to say that you know I am very confident that the 400 tons a day is going to be achievable with the combination of Bellekeno and Flame & Moth and of course Lucky Queen. In fact I think the bulk of the capacity there is going to be achievable from Flame & Moth alone.
It is a bigger more continuous deposit as we have previously described its spec, it's close to the surface, it's close to the mill and it has all the attributes, the metallurgy looks to be very good and has all the attributes of a deposit that is going to be able to supply a significant volume of material to the mill over quite a period of time.
Mike Niehueser - Beacon Rock Research
I guess a lot is going to be up to the PEA, but you don't really have an idea of cost or timing or what's going to be required with Flame & Moth as far as permitting and other capital improvements. Could you give us an idea of what the picture looks like right now?
We are already in the permitting process for Flame & Moth. We're hoping that you know over the course of 2014 that permitting will be complete. Don't forget that we have a number of other permits in this district, Flame & Moth sits right next to the mill in an area that essentially we already has certain environmental criteria test throughout the licensing and permits.
The additional facilities that would be required are not particularly [indiscernible] there will be things like maintenance facilities, local maintenance facilities, maybe water treatment plants, the normal sort of ancillary facilities that you'd have associated with the new deposit and it is important to remember there's only a couple of hundred meters from the surface in a decline to get into that particular deposit. So no the facility is required are not onerous. They're very typical for these types of operations and I would expect that most of the capital investment is going to go into mine development.
Mike Niehueser - Beacon Rock Research
And one last question if I could. Regarding AEG with all the different kind of truncated quarter for production and the different changes with the government with AEG, do you see a run rate of cash flow provided by AEG to cover operations G&A, those kinds of things for beyond 2014 if need to be?
The most important thing in the agreement is that our participation in this permitting and preparation phase for the heavy lifting on the reclamation has dropped from a 35% participation rate to a 5% to 10% participation rate. So we'll have a lot less demand on that site, we would expect that the work is going to continue at about the same level as it has in the past. And so yes, there will be increased cash on that.
I also say that we are not standing still on the environmental side. There are other projects and other opportunities coming in the door, I won't say though that the entire group is operating if not at then very close capacity at the present time.
Thank you. [Operator Instructions]. We are showing no additional questions in queue at this time. I would like to turn the floor back over to management for any additional or closing comments.
Thanks for joining us today. We are in a transition period as I have explained. We will keep you posted as we go along. My goals remains the same as I have expressed to you before is to produce our underlying fixed cost, work on reducing our underlying fixed cost at Keno Hill in order to be a long-term sustainable silver producer and to continue to increase the value of the Keno Hill district through our exploration programs. As always we appreciate your support and with that I'll turn it back to Vicki to close out the call.
And you've been listening to the November 15, 2013 Alexco Resource third quarter conference call. We encourage investors to visit Alexco's website for further information and again that www.alexcoresource.com and if you have further questions you can call 604 633-4888 or e-mail us at firstname.lastname@example.org and that concludes today's call. Thanks for joining us. Have a good day and a good weekend.
Ladies and gentlemen thank for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.
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