Alexco: Significant Appreciation for Near Term Silver Producer

| About: Alexco Resource (AXU)

I previously wrote about my top silver pick Alexco (NYSEMKT:AXU) on July 15, 2009, when the stock was at $1.80. Nine months later, AXU data is as follows:

  • Price: $3.42
  • Shares Fully Diluted: 57m
  • Market Cap: 194m
  • Debt: 0
  • Cash: 35m (excluding SLW funding)

This stock is positioned for a major re-rating based on the following developments:

a. Now fully funded well into 2012.

AXU has $35m in funding left from Silver Wheaton (NYSE:SLW) till the Bellekeno mine and mill are completed in Q3 2010. This is the money that was exchanged for 25% of the silver production for the whole region at $3.90 per oz.

AXU raised an additional $25m in an equity raise at $3.40. About half will be used to drill out existing mines (Bellekeno, Silver King, Lucky Queen) and half will be allocated to wildcat further on some of the more promising ridges in the region.

Sprott Asset Management has filed as a major holder. Management owns 13%.

b. Will be producing in 2010 - Canada's sole primary silver producer at a low cost.

Keno Hill Silver District in the Yukon in Canada runs 20km by 15km. The first mine will be Bellekeno - a mine with an indicated and inferred resource of 13m oz (note, only 1.1m is inferred). There are at least four other mines with long histories at minimal depth - Lucky Queen, Silver King (5m historical oz), Hector Calumet and Bermingham. All these mines have significant historical resources and great potential.

c. Low cost producer in stable country with a huge margin of safety if silver dips in price.

Due to the lead and zinc content in the rock, AXU estimated that the total by-product credit will amount to $2.00 per oz. This means that cash costs will be around $2 in 2011 at current commodity prices (lead $1 and $1 zinc). Even the deal with SLW looks decent as AXU clears $2 per oz of silver on the $3.90 deal for 25% of production.

AXU has the advantage of being a low cost producer. All in costs (costs of development of mine and mill) should amount to about $6 per oz. Given that SLW has paid for the mine there won't be a cash cost but the $6 all in number gives a sense of the margin of safety should silver prices dip dramatically. AXU has no hedging in place.

The mill is a conventional flotation mill with a 400tpd capacity. It is a central mill and will service all mines as a low cost hub. The mines are within 20km and can ship from anywhere in the district.

d. After three years of digitizing data from past 100 years, AXU has an elephant by the ears.

AXU for the first time has all the data on a region that has historically produced more than 200m oz silver, whereas all the mining was low tech and stopped in the mid-1970's and involved shallow depths and chasing veins. The deepest mine in the area was less than 900 feet.

One press release on December 15, 2009 seemed insignificant on the surface but tremendously thrilling to Alexco. One of the largest mines in the Keno Hill region was a mine called Hector Calumet. Historically, Hector Calumet produced more silver than any other mine in the Keno Hills area - 96m oz with an average grade of 35oz per ton. This mine was operated at a depth of only 900 ft.

Alexco is convinced that there is an "elephant find" in the region and using the digitized data they followed a structure of mineralization that they thought continued from beyond the mine site. Two holes were drilled about 1.5km from Hector Calumet mine. There they found what they think is the ear of the elephant. They found a structural zone 20 meters wide. Only 3 meters were mineralized. However, AXU believes that some of these structures could be fully mineralized at significant width. Within the 3 meter mineralized zone, the silver content was high and varied up to 22.8 oz per ton.

e. Company gave production guidance for the first time.

  • 2010 1.5m oz silver
  • 2011 3.1m oz silver (most Bellenko and some Silver King mine)
  • 2012 5m oz silver (3m oz Bellenko, 1m oz Silver King, 1m oz Lucky Queen)
  • 2013 7m oz silver

None of these numbers factors in new finds. It is merely the mining of the historical mines which is not very risky and well known.

Even without a major find, AXU seems comfortable with projecting a great cashflow.

I have used a silver price of $15 and a cost after off-takes of $2 per oz. This should mean an operating CF of $50m in 2012 without much drama.


The risk with AXU comes down to a simple metric. How quickly can AXU put resources onto its books and at what cost?

Perhaps the classic brownfield exploration company remains FNX (OTC:FNXMF). FNX was able to replace its mining output with reserves at a ratio of 2x. The market was willing to give FNX a very nice multiple on OCF at that rate.

AXU has allocated $12.5m to explore outside of the existing mines, especially focused on the pipe-like structures near Hector Calumet. When I asked AXU about how many resources they can place on their balance sheet for the $12.5m spend, they were confident of about 15m oz. To put that into context, SLW values each oz of silver in the ground that is proven at around $4 per oz + the money they give upfront (sometimes as long as two years). Backing out some of the SLW deals seems to calculate that SLW values each oz of silver at $9 to $12.

So an aggressive drilling progam has the ability to convert $12m of exploration into $150m+ of resource value.

Looking Two Years Out

With the Bellekeno mine operational and Silver King coming into its own, AXU will be spinning off significant cash flow which it will be employing to find resources. If resources can be placed on the books readily and a major deposit found, there is every reason that AXU will trade in line with other silver companies and command an 8x OCF multiple.

Any increase in the long term silver price would have dramatic impact on AXU as a low cost producer.

Disclosure: Author holds a long position in AXU