Alexco Resource Corporation (NYSEMKT:AXU)
Q4 2013 Earnings Conference Call
March 26, 2014 11:00 AM ET
Vicki Veltkamp - VP, IR
Clynton Nauman - President and CEO
David Whittle – CFO
Brad Thrall - COO
Mike Niehueser - Beacon Rock Research
Greetings and welcome to the Alexco Resource Corp. Year-End and Fourth Quarter 2013 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the web conference over to Ms. Vicki Veltkamp, Vice President of Investor and Public Relations. Thank you Ms. Veltkamp, you may now begin.
Thank you, [Manny]. Good morning everyone. Today is Wednesday and March 26, 2014. I'd like to welcome you to Alexco Resource's year-end and fourth quarter 2013 conference call. This conference call is being webcast live, can be accessed at the company's website at 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 financial results there. And 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.
And giving presentations on today's call will be Clint Nauman, President and Chief Executive Officer of Alexco Resource; and David Whittle, Alexco’s Chief Financial Officer. Then following their presentations, we will open it up for a question-and-answer period and we will have Brad Thrall, our Chief Operating Officer with us then as well.
But before we get started, I need to remind you once again 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 necessarily indicative of future results.
And with that, I’d like to turn the call over to Alexco's President and Chief Executive Officer, Clint Nauman. Clint?
Thank you, Vicki. And hello to everyone and thank you for joining us today as we review our 2013 year-end and fourth quarter results.
As you’ve likely seen in our news release issued yesterday, we showed a net loss of about $1 million in the fourth quarter of 2013. Since we are not producing any silver during the planned interim suspension of operation to that Bellekeno silver mine in the Yukon, that fourth quarter loss approximately equates the care and maintenance costs for the company of around $300,000 a month, which is in the ballpark of what we expected to see. And so we are pretty much tracking along the burn that we planned and that we had previously talked about as we move forward with our overall interim suspension and planning processes.
Our balance sheet is in pretty good shape. We have no debt, plenty of cash on hand to execute our planned exploration programs this summer. Meantime, we have been busy working on lowering our fixed mining costs, looking into lowering our fixed mining costs and milling costs and moving into a position to make a final decision on going forward with our production plans and we will talk a little bit more about that a little later.
David will get into the details about the year-end financial numbers, but you’ll remember earlier in the year we recorded a non-cash write-down of about $50 million for impairment of assets. This is a similar process that many mining operators faced in 2013 due to the approximately 30% decrease in silver price in the last 12 months, and that write-down does not -- does not include in that write-down, our net loss for the year was a little over $4 million or $0.07 a share.
Outside of our continuing exploration success of Flame & Moth, the bright spot of 2013, without a doubt, was the growth and performance of our subsidiary, the Alexco Environmental Group or AEG as we call it. That business had more than tripled its gross profit compared to last year on the doubling of revenue.
A couple of important things happened in 2013 for AEG, one of which was executing a revised and restated agreement with the Government of Canada. That’s what we call the amended and restated subsidiary agreement which is an agreement between Canada and directly with ERDC which is a wholly owned sub of Alexco, which sets out in detail how the final cleanup of Keno Hill will unfold, timelines, commercial arrangements et cetera.
From a business perspective, the new agreement amounts to a very sizable committed backlog – backlog of work for AEG. But the agreement allowed us to recapture a couple of million retroactive fees which also contributed to our 2013 revenue.
AEG also grew its client base in the U.S. market and we are working on a couple of large projects in Colorado right now, including developing and managing the water system, managing ground water and remediating contaminated soils at the old ASARCO Globeville smelter, just north of Downtown Denver. That’s a very cool project and it’s giving our AEG people a chance to use and demonstrate the viability and robust nature of our proprietary water treatment methods.
Similarly, we have taken on board a large in-pool mine treatment project for Cotter Corporation at the old Schwartzwalder uranium mine near Boulder, Colorado.
Overall, we have been maintaining very good margins in the AEG business and even if you discount the amended agreement revenues, the retroactive adjustments, AEG achieved the gross margin of more than 42% in 2013.
Total 2013 revenue for AEG was over $16 million, and although this is certainly a forward-looking statement, I’d expect revenues to be in the same range or better in 2014. I will talk to you in more detail about the progress we’ve made with our preliminary economic assessment for the Eastern Keno Hill Silver District a little later in order to – we’re doing that in order to move towards restarting production of the Keno – at Keno Hill.
And I want to talk to you about our 2014 exploration program that I am convinced will add value – continue to add value at Keno Hill.
But first, let’s turn it over to our CFO, David Whittle to go through the financials. David?
Thanks, Clint. This financial report is for Alexco’s fiscal year ended December 31, 2013. Note that we report in Canadian dollars, so all dollar amounts we talk about today will be in Canadian dollars unless stated otherwise; and by tons we mean metric tons.
For the full year, we saw overall consolidated revenue of $59.4 million and a net loss of $50.5 million or $0.81 a share. These results include impairment charges totaling $46.2 million after tax, most of which pertain to our mining assets.
On an adjusted basis, excluding the effect of these impairment charges, we recorded a net loss for the year of $4.3 million or $0.07 a share compared to net income of $3.4 million or $0.06 per share in 2012.
Our total revenue this year from Bellekeno mining operations were $43.1 million compared to $76.7 million last year. The decrease is primarily related to lower silver prices realized this year of US$23.94 per ounce compared to $31.54 last year, and of course, to the suspension of mining operations at Bellekeno implemented as of September, which shortened the 2013 operating period to only 245 days. With that, our mining operations essentially broke even this year at the gross operating level booking a gross loss of $29,000 compared to a gross profit in 2012 of 15 million.
Given the sharp decline in silver prices and in light of our decision to suspend mining operations at Bellekeno, in the second quarter 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 were in production or development. As a result, we recorded an impairment charge against the mining properties and equipment of $55.3 million before tax, $44.4 million after tax. $22.5 million of the pre-tax amount was allocated to Onek, reducing its carrying value to a relatively nominal $800,000. As Onek is a zinc dominated, lower silver grade resource that is hit particularly hard in the current pricing environment. The remainder was allocated primarily to Bellekeno and Lucky Queeen pro-rata relative to the carrying amounts with about $3.5 million allocated to our mining plant and equipment, including mill facilities.
In the second quarter, we also recorded an impairment charge of $1.8 million in respect of our long term equity investment in Americas Bullion Royalty Corp. formerly Golden Predator which was bumped up to $2.2 million by year end. However, while the mining operations faced challenging conditions during the year, within the Alexco Environmental Group, our environmental services business, as Clint has noted, we experienced by far and away our strongest year ever.
AEG booked revenues for the year of $16.3 million and a gross profit of $8.8 million, compared to revenues last year of $8 million and a gross profit of $2.9 million. One thing that helped this year as Clint has already noted was the signing of the amended and restated agreement with the federal government of Canada, otherwise called the ARSA. As a result, included in this year’s results are retroactive fees of total $2 million as well as an $850,000 reversal of a contract loss provision previously booked on the arrangement with the fed.
But even excluding the impacts from the signing of ARSA, AEG revenue was still over $14 million and gross margins this year were 42.5% compared to 40.3% in 2012. The ARSA was a help on this front as it’s providing us with stronger margins on work performed for the federal government from 2013 onwards, but we saw a solid performance across the board within AEG and particularly on our projects in the U.S. serviced out of our Denver office.
Alexco’s cash position at December 31 was $8.6 million and our net working capital totaled $15.3 million, essentially unchanged from the third quarter where we ended with cash of $7.9 million and net working capital of $15.4 million.
I will now turn the call back over to Clint.
Thanks, David. If you have any specific questions about the financial results, we'll take those at the end of the call.
Just to talk a little bit about the PEA. When we last spoke to you in December which was when we released -- just prior to that that we released the preliminary economic assessment, which contemplated the incorporation of a new Flame & Moth discovery into our operating plan for Keno Hill. At that time, we had been focusing on optimizing – I think we said at that time that we had been focusing on optimizing that plant and during that – during the interim period, we clearly reconfirmed that one of the most important factors in lowering our overall cost per ounce of silver at Keno Hill will be to fully utilize our mill capacity of about 400 tons per day of ore.
And the best way to do this is to bring Flame & Moth into production along with restarting the Bellekeno mine. After buttoning up Bellekeno for the winters, the mine was left with inventory in place and also well positioned for restart, including restart of underground mining activity.
And during these operations in the third quarter, both the mine and mill were operating pretty efficiently with a noticeable trend in decreasing cost and increasing mill throughput. Our cash costs in the third quarter of $12.93 per ounce of silver are reflective of the continuing trend of lower cost and with increasing throughput, which was 320 tons per day in the third quarter.
On an all in sustaining cost basis, calculations were about US$18.20 per ounce of silver in Q3, including the absorption of suspension costs but immediately offset by reduced sustaining capital exposure. All of this lends confidence to our current all-in sustaining cost target before consideration of the Silver Wheaton stream of about $16 per ounce.
And just to remind you, the reason for the interim suspension was not mining or metallurgical issues, it was rather due to Bellekeno’s lack [of size] [ph] to produce the volumes to fill the mill which along with the collapsing silver market and Yukon related underlying fixed costs had the effect of squeezing our margins to the point that we were essentially trading dollars which of course is reflected in the financials that David was just talking about.
We don’t quite have all the components in place yet to make a final go decision to restart operations at Keno Hill where we made quite a lot of progress.
In terms of moving forward, we now have a specific budget for the initial development of Flame & Moth and are down to getting equipment – down to a level of getting equipment quotes so that we can be ready to pull the trigger when as appropriate.
We know we need about 1200 meters of development at Flame & Moth which includes a ramp and a raise in order to start production. We’ve also done several studies on driving the ramp at different rates by using different equipment rather – versus using our own equipment and some of those will turn - look promising.
We’re also monitoring the labor markets and we know that there is professional and operator expertise available, especially underground experienced miners. That said, we have not made any commitment at this point but are simply increasing the focus on the components that will be important if we make a decision to proceed.
We are also well into the permitting process at Flame & Moth but we are paying very close attention to what I call a moving [inaudible] requirement in the Yukon. Nothing has changed in the legislative or regulatory requirements for permitting in the Yukon. But what appears to have changed is the interpretation of the regulations which has resulted in what we call mandate creep. In other words, it’s the tendency for the various governments of province and individual screening and authorization boards to be stepping over their individual jurisdictional boundaries. And that fuzziness of technical requirement at each step is affecting the timing and flow of the permitting process.
The good news is the industry has made potential uncertainties now in at the highest levels in government and there seems to be an urgency to ensure any issues that result. Having said all of that, there isn’t anything dramatic in the Flame & Moth permitting situation that should throw up any significant permitting obstacles. We after all have been through this process 3 times for mining related projects and 6 times for environmental projects at Keno Hill.
According to the PEA, to achieve commercial production at Flame & Moth and turn the project to positive cash flow overall requires about $20 million to $25 million. But the cost to develop the Flame & Moth deposit and to have it “production ready” is about half of that. The remainder is working capital build-up, ramp-up and re-commissioning. Our overall goal, when we go back online, as I have said many times is not to be a swing producer, meaning that we would operate only when silver price is high. I would like to get our fixed cost operating structure low enough and our volume high enough that our breakeven level could be as low as $16 an ounce.
And I think it may be possible with the initiatives that we have been talking about and a couple more things that we are working on.
On a side note, that important to our development plan, we are happy to announce that Silver Wheaton has agreed to push out the deadline of 30 day 400 ton per day mill test to the middle of 2015. We will continue to have an open dialogue with Silver Wheaton on that and other things as the plant comes together.
Now just in terms of exploration. Just a note that we have begun to mobilize for our 2014 season at Keno Hill and in fact, I think we started drilling – we will start drilling today as we speak. We have an approximate $5 million exploration program planned around 10,000 meters of surface drilling using 3 rigs. We have a new rig on the way from Calgary which will be capable of pre-coloring holes in and around the Flame & Moth area. This will improve efficiencies especially in areas where we’re dealing with lots of surface water and permit for us.
As I mentioned, the plan at this point includes more than 10,000 meters of surface drilling primarily on targets related to the Flame & Moth corridor, and then in the 5000 meters, the milling – the drilling is likely to be directly related to the southwest extensions to the Flame & Moth deposit itself where we demonstrated last year that mineralization extends at least an additional 220 meters to the south of the existing resource. That will give us an overall apparent strike lengths on the Flame & Moth deposit of about 900 meters.
And we have embarked upon an initial exploration to the Northeast along the trend of the Flame & Moth deposit and it will be Northeast to the mill where we had no information due to cover but know the major mineralized structures will extend. That should be pretty interesting actually. This combined with the discovery of the Flame & Moth West zone and further testing of that will start to fill in some of the puzzle pieces that we are growing in the Flame & Moth corridor. These initial holes I was talking about are about a kilometer north of the existing Flame & Moth deposit and I think you can think of the Flame & Moth corridor as of a box of about 2 kilometers long and 1 kilometer wide within which we have explored – barely explored the southeast corner or about 20% so far.
Further, we are confident that these same structures are the ones that host the Sadie Ladue deposit which is about another 6 kilometers to the northeast with the meeting [ph] area is being entirely covered by colluvium and glacial features.
We haven’t forgotten about Bermingham where we see some opportunity to add ounces as well. We expect to be able to trace the Bermingham extensions towards the old HECA mine. And we also have some new ideas at Bellekeno. We are certainly in the upper areas of mine, we have significant potential as well as down plunge from the southwest zone.
Don’t forget that this district, the Keno Hill District has given up of about 60 million ounces of resource in that first 7 years of exploration, not bad considering the site with nothing but a room full of data. Our discovery rates have climbed year over year and our discovery costs are now down to less than $1 per ounce, actually $0.60 in the last year or two.
But despite that and a multitude of other targets available, nothing is going to distract our attention from trying to unlock the value in the Flame & Moth corridor as we move into the 2014 exploration season.
As I mentioned, we have had great success in adding silver ounces to our resource at Keno Hill and every ounce we add has a potential to extend the operating life and sustainability of the property.
With that, I’ll turn it back to Vicki and the moderator for Q&A.
Thank you, Clint and thank you, David. Operator, could you now give the instructions for the question and answer period?
(Operator Instructions) Our first question is from Mike Niehueser of Beacon Rock Research.
Mike Niehueser - Beacon Rock Research
Hi Clint, just to update on the permitting for Flame & Moth. Given the close proximity of the planned portal for the Flame & Moth mine to the mill, what conceivable issues could the people that are in charge of have with permitting the mine that’s already located within steps of operating facility in a brownfield area?
Thanks, Mike. I’m going to turn this over to Brad who is up to his eyeball in the permitting process.
Thanks, Clint. I think, Mike, there is probably two broad issues that we will need to address in terms of Flame & Moth. One is the Flame & Moth will require an expansion of the dry stack tailings facility. It should be fairly straightforward. We do again manage our tailings by dewatering them and then depositing them on an engineered dry stack facility. So that will require an expansion, which again will involve certain engineering and environmental baseline data.
And the other thing associated with Flame & Moth will be dewatering, water management and discharge so that would again be somewhat of a new activity that is [it doesn’t occur in a day] [ph] within the mill area but besides that, you are correct. It’s pretty straightforward. It’s a 3.9 meter diameter portal and decline about 50 meters away from the mill, all of the surface facilities would already be in place and be shared by common infrastructure. But again we are going to need to address as we have in the past water discharge criteria and tailings management.
Mike Niehueser - Beacon Rock Research
Have you had any issues with the dry stack and I saw pictures at the last conference of – actually looks like you’re re-planning part of the tailings area – the stack area?
Correct, Mike, we have progressive reclamation that is underway at the dry stack. In terms of performance of the dry stack, it’s operating better than actually expected or originally designed. So certainly no concerns or on the performance side. Again we will need to expand that area, roughly the same size that’s already in place.
Mike Niehueser - Beacon Rock Research
And a question about drilling in this year, I imagine you’re going to drill as long as the budget and the season allow you to do that, what would be considered a success at the end of the year, would it be further [defining] [ph], increasing the resources and as far as increasing the resources, are you going to plan to come out with a restated resource statement at the end of the year or is there any news regarding restated resources around the district?
Yes, it’s a good question, Mike. Clearly we are going to spend a significant amount of time looking between the existing resource and about 200 meters to the south where we know that the deposit remains open. Our intended process there is to get enough holes in that area to be able to add to the Flame & Moth resource. And yes, we have been, and this would be certainly a blue sky statement but we have been contemplating that we would update the Flame & Moth resource at the end of this year or early next year as a result of the presumed blue sky success of the program that we are undertaking in 2014. I just want to emphasize that we are going to be spending a lot of time and asset in that corridor. I am very confident with the discovery of the deposit such as Flame & Moth that there’s going to be other mineralization and in fact, we have already identified some of that in that corridor and it’s important to be able to find it and to delineate it as quickly as possible so that we know that we are scaling future concepts in the right area.
Mike Niehueser - Beacon Rock Research
One more question if I could. Glad to see there is dialogue continuing at Silver Wheaton and apparently with the fed as well. Is there any visibility on further reclamation of the value tailings or other types of reclamation for the district? That’s my last question.
Thanks, Mike. No, all the options are still open. In terms of reclamation in the district, they are going through on the reclamation and closure site what’s called an option selection process, and any option for any of the features in the area remain open, somewhat defined but open at this point.
(Operator Instructions) Okay. It appears we have no further questions at this time. I would like to turn the floor back over to management for any additional remarks.
Thank you for joining us today. You can probably tell that we have a few more pieces of the puzzle to put together before where we want to be. We’re jumping to the beat to get going. I strongly believe there is great value at Keno Hill for the long run, and as I said in news release, once we achieve the goals of restructuring about the fixed cost framework of the operations and third party contracts along with conducive market conditions, our objective is to be able to announce the restart of capital development work at Flame & Moth. And as always, we appreciate your support and with that, I will turn it back to Vicki to close the call.
And you've been listening to the March 26, 2014 Alexco Resource year end and fourth quarter 2013 conference call. We encourage investors to visit Alexco's website for further information at www.alexcoresource.com. If you have further questions you can call 604 633-4888 or e-mail us at firstname.lastname@example.org. And this concludes today's call. Thank you for joining us. And have a good day.
And dear ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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