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Alexco Resource Corporation (NYSEMKT:AXU)

Q1 2014 Results Earnings Conference Call

May 16, 2014 11:00 AM ET

Executives

Vicki Veltkamp - Investor Relations

Clynt Nauman - President and Chief Executive Officer

David Whittle - Chief Financial Officer

Brad Thrall - Chief Operating Officer

Analysts

Mike Niehueser - Scarsdale Equities

Chris Potter - Northern Border Investments

John Kratochwil - Canaccord Genuity

Operator

Greetings and welcome to the Alexco Resource’s First Quarter 2014 Conference Call and Webcast. 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 Vicki Veltkamp, Investor Relations for Alexco Resource. Thank you, you may begin.

Vicki Veltkamp

Good morning everyone. Today is Friday, May 16, 2014. I’d like to welcome you to Alexco Resource’s first quarter 2014 conference call. Conference call is being webcast live and 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 as well. And you’ll find Alexco’s news release with quarterly financial results there. For a limited time, a recording of this conference call will be available by telephone. The instructions on accessing that are also on yesterday’s news release.

Giving presentation on today’s call will be Clynt Nauman, President and Chief Executive Officer of Alexco; and David Whittle, Alexco’s Chief Financial Officer. Following their presentations, we’ll open it up for question-and-answer period and then Brad Thrall, our Chief Operating Officer, will join us for that.

Just 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 business out of the way, I’d like to turn the call over to Alexco’s President and Chief Executive Officer, Clynt Nauman.

Clynt Nauman

Thank you, Vicki. And hello everyone and thank you for joining us today as we take a look at our first quarter 2014 results. As you have likely seen in our news release that was issued after market yesterday. We showed a net loss of $1.4 million during the first quarter of the year. And as we continue our planned interim suspension of operations at our Bellekeno silver mine in the Yukon, we’ve been staying on track with our district-wide care and maintenance activities and are initiating summer activities related to portal preparation of Flame & Moth and mill refurbishment as well as containing site cost as we continue to work towards an eventual repositioning of the company with sustainable silver production. And don’t forget that we are up and running with our 2014 surface exploration program at Keno Hill and I will talk a little more on that later.

From my perspective it’s certainly worth pointing out that our environmental subsidiary, the environmental, Alexco Environmental Group continues to performance very well. In fact the cash flow from AEG during the first quarter largely offset our overhead and expenses keeping us well within our estimates for burn rate during the period and during the period that we in fact were not running our mining operations.

AEG had a gross margin of about 32% in the first quarter on revenue of just over $3 million with a gross profit of about $1 million. This is definitely a bright spot in our quarter and AEG remains a strategically important business and as you know it’s a subsidiary business bringing in outside revenues. It also complements there are in mining businesses in the Yukon as we move forward with a permitting process for development projects at Keno Hill.

Due to AEG’s contributions, our cash and cash equivalents decreased by only $200,000 from the beginning of the quarter. We are aware that as we head into the exploration fees in up in the Yukon will be increasing our expenditures in the exploration area. So next quarter you will see more cash going out and coming in due to exploration activities. Nevertheless the AEG cash contribution will remain significant. We are fully funded for our exploration program due to the flow through funding that we took down early in 2013 and at the end of the first quarter we had $8.5 million in cash and cash equivalents on hand with close to $15 million in working capital. Most of the small models the small loss for the quarter consisted of non-cash items that our CFO David Whittle will go into more detail about. And I will talk more about our progress excuse me, and getting closer to production -- in our progress and getting closer to production decision I think look at our 2014 exploration program and what we have been able to do so far in a little bit.

So first I will turn it over to David to go through the financials.

David Whittle

Thanks Clynt. This financial report is for Alexco’s first quarter of 2014 not that we report in Canadian dollars so all dollar amounts we talk about today will be in Canadian dollars unless otherwise stated. As Clynt just noted our net loss for the quarter was $1.4 million or $1.9 million before the recovery of deferred income taxes.

Included within that $1.9 million our non-cash costs of $723,000 for depreciation and $475,000 for share based compensation. One component of the first quarter results is the care and maintenance cost for the Bellekeno mine and mill site, which totaled $740,000 for the quarter, however that figure includes $677,000 in depreciation charges and $9000 in share based costs for a cash outlay in the quarter is only $54,000. On a cash-flow statement basis we generated positive $140,000 in cash flows from operating activities offsetting at $265,000 cash outflow from investing activities primarily focused on exploration and claim on loss development planning.

Exploration outflows in Q1 were minimal as the field seasonally commenced to the latter March and expenditure levels will of course be increased through the balance of the year.

Our current plans are us spending another $4.5 million to $5 million for exploration activities over the balance of 2014, sufficient to cover off our remaining flow through expenditure obligation of $4.5 million.

Alexco's cash position at March 31st was $8.5 million, largely unchanged from December 31. Our net working capital totaled $14.8 million, inclusive of $4.3 million in underground long-hole stope ore inventory only slightly decreased from December 31 net working capital of $15.3 million.

I'll now turn the call back to Clynt.

Clynt Nauman

Thanks David. If you have any specific questions about the financial results, we'll take those at the end of the call.

Let me talk a little bit about district preparation for restart and the especially the PEA that we're working to optimize. Our per is as most of you know, during the first quarter has been to continue working through the critical factors that will result in a decision to restart production at Keno Hill. We're not prepared to give a go for startup yet, but we are continuing to hit in the right direction that will be a little more slowly than I'd like or had hoped. And although we can’t announce any new information right now, be assured that the wheels are turning.

What we want to do is get to a place where our preliminary economic assessment is fully optimized and is sustainable. And we have a project that’s sustainable at low silver prices and significantly better at higher silver prices. I believe this is achievable given the unit cost restructuring we've been working on.

The largest component of lowering our fixed costs of working at the Yukon is to increase our throughput. That means delivering moreover to the middle to achieve design capacity around 400 tons a day. Everything we see confirms the value of developing the Flame & Moth deposit and putting it into production to increase our silver production while ensure that fixed costs are small proportion, a smaller proportion of the overall costs of operating in the district.

So in my calculations we're confident that the increase in throughput will contribute to a 20% reduction in cost per ounce, will also translation to self mining for further 5% to 10% reduction in unit costs along with -- and along with miscellaneous efficiencies we’re aiming for an all in sustaining cost per ounce before factoring the Silver Wheaton and Silver [District] obligation of about $16 per ounce. I just want to underscore that that's before any impact from the Silver Wheaton stream.

So at this point, we've reworked start-up plans, we're looking at schedules and for budgets for putting Flame & Moth into production with supplemental feet initially coming from Bellekeno. There is about 1,100 to 1,200 meters of development to do Flame & Moth which would require about eight to nine months and cost somewhere between $12 million and $13 million. And that will develop Flame & Moth to the point where we would be able to begin extracting ore.

Beyond that during scale up over a period of six month or so, we require about another $12 million in working capital to achieve positive cash flow from the deposit at anything more than $21, $22 per ounce. As you know, we're also advancing the permitting process at Flame & Moth. All of this is to say that of the critical factors necessary to pull the trigger on repositioning the company, they’re all coming along very well.

As I mentioned, we're also taking advantage of the suspension in operations do some preventative maintenance and refurbishment in the mill and we're moving forward with some preliminary modifications for an extended circuit by setting a new ball meal in place that we had on hand since last year. But there are couple of other factors that we have less control over on the timing front and we need those pieces in place as well such as a favorable market for silver projects, for silver itself and looking at third-party agreements, but we think we’ll get to the right combination and in the meantime we appreciate your patience and support.

Now from the exploration perspective, we are clear that of course we’re going to be able to add value at our Keno Hill property during this time by increasing the resource in the ground. And our exploration group is busy already this season.

We’re committed to drill upto 10,000 meters of surface drilling at Keno Hill this year. We’ve identified specifically where 8,000 of those meters will be drilled with the majority of it in and around Flame & Moth. I am holding back on a decision of the remaining 2,000 meters until we start seeing results that will point us in any particular direction.

We started our exploration program much earlier than normal this year. Our plan which was successful was to do some drilling in areas that are normally swampy in the summer and do that while they’re frozen, giving us a better platform from which we can drill. We currently have two drills running and have already drilled about 2,200 meters and six -- nearly seven holes. The placement of those holes has ranged from half to three quarters of a kilometer north of Flame & Moth to half a kilometer west to the Flame & Moth deposit where we’re currently drilling what we call the Flame West Vein.

Of course we have to wait for results from these holes. I think that some of our key drilling now is going to be south of Flame & Moth where we have a real opportunity to expand the Flame & Moth resource and we’re waiting for the spring run-off order to subside before tackling those. We expect to be drilling for quite a while on those southwest extensions where last year we found mineralization extending at least 220 meters beyond the existing resource.

All of this drilling in what we call the Flame & Moth corridor will start to fill in some of the puzzle pieces in this area of mineralization within which we have explored only about 20% so far. So just to recap that this corridor that we think that we are [going to divide] in here is at least 1 kilometer wide and about 2 kilometers long and that’s where we are focusing a great -- well of this drilling at the present time.

I am hopeful that our emphasis this summer will meet to good results at Flame & Moth but obviously that’s a forward-looking statement. So, this is about as it continues to grow, currently clocks in at 23 million, 24 million ounces and I think once it’s in production, it will be the cornerstone of Keno Hill production for some time. That’s why it’s taken on [some] importance in our restructuring exercise.

So with that I would like to turn the call back to Vicki to introduce the Q&A session.

Vicki Veltkamp

Thanks, Brad. So operator, could you now give you instructions for the question-and-answer session period.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conduction a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Mike Niehueser with Scarsdale Equities. Please proceed with your question.

Mike Niehueser - Scarsdale Equities

Hi Clynt. This is Mike Niehueser. Could you go over again what the capital expenditure and working capital requirements, the money you are going to need to be able to restart the mill?

Clynt Nauman

Yes, thanks Mike. So the pieces that in [growth structure] as I see them are firstly as I mentioned is 1,100 to 1,200 meters of development that needs to be done to drive a decline and pull a raise to prepare at least two levels for development in Flame & Moth. That will cost us somewhere between $12 million and $13 million and will take eight to nine months. Beyond that during the scale up or commissioning phase if you like for mining from that deposit is a period of about six months where the working capital requirement will be an additional $12 million.

So that puts us in the range combined of around 25 million bucks and gives us some idea of the schedule. As far as the mill is concerned Brad can talk with more authority on that, but the mill’s in pretty good shape other than the fact that we are going to expand that grinding circuit and with a ball mill that we already have in hand and we will be working on that this summer.

Mike Niehueser - Scarsdale Equities

So what would be -- if Brad come in and talk about the costs of bring in the ball mill and other types of improvements?

Clynt Nauman

Yes, he is on the line here. So go ahead Brad.

Brad Thrall

Yes, hi Mike. We are in the process right now of building some engineering for a number of optimizations within the mill itself, as you may know we did purchase a seven by ten foot ball mill last year as part of our plans to ensure that we have enough grinding being capacity within that mill. So that mill was delivered on site last year. So we will go ahead this year and for the concrete foundation and codings and set that ball mill in place. In addition to that, there are a number of process, circuit modifications within the mill that we've identified previously.

So, all in all we're looking at about a five month program through this summer fairly low capital, mainly because most of these materials have already been purchased. So, I'd anticipate this probably about a $300,000 exercise to the next five months in order to complete some of these improvements.

Mike Niehueser - Scarsdale Equities

That's great. On the same subject, last call we talked about the permitting climate in the Yukon and the portals about 50 meters from the mill and without making discouraging remarks about the permitting process in the Yukon. Could you give us some comments on your visibility?

Clynt Nauman

Yes. Just to give you an update of where we are with Flame & Moth on the permitting. We did enter the YESAB process in December 2013. We were in the first phase what we call the adequacy phase until about mid April here so about a month ago, we've moved out of adequacy and we are now into what we call the seeking due stage. And the significance of that is we now are in a process with our timelines associated with that process.

So, that is moving along I would anticipate we're going to be in this process for another couple of months within YESAB, but at the same time, we're able to start our application process for the water license and the course mining license. I will say that there certainly, I think have been moves in the right direction in Yukon, in the permitting regime, there have been recently announced changes to the Waters Act that do provide firm timelines for adequacy review within the water licensing process. So again that those are certainly changes that industry welcomes and we think we'll have benefit to that moving forward with Flame & Moth.

Mike Niehueser - Scarsdale Equities

Well, I think in the last call you mentioned that at all you've taken a longer time to permit Flame & Moth you did the Bellekeno mine and Keno Hill mill. And the fact that you have permitted, I don't know eight or nine projects there in Keno Hill itself. Is there reasons for confidence other than just been pushing forward and doing the best you can?

Clynt Nauman

Go ahead, Brad.

Brad Thrall

Yes. I would just say I mean I'm not sure with the Flame & Moth hasn't taken longer than Bellekeno originally, because it just entered that. Certainly our experience with previously with Lucky Queen and Onek is it did take as long as Bellekeno. I agree, we've highlighted that the concern that the permitting regime in the Yukon is one that essentially requires going back to the beginning for even Brownfield types of projects. So I can say that there is some, there certainly is movement in the Yukon to accept change, we still have a long ways to go, but things are certainly moving in the right direction I believe in areas.

Clynt Nauman

Hey Mike, if I could just jumping in, there is a couple of things that I'd like to add. First is that there is a group and appointed group in the Yukon Corp, Yukon Mining Advisory Board, it comprises a number of industry and First Nation’s representation giving advice directly to the Minister of Energy, Mines and Resources. That group on an annual basis publishes a report. And the report for 2013 was actually tabled in the legislature yesterday and the focus of that report was sort of a scorecard on the permitting and permitting changes in the Yukon over the last several years. So, it would be worthwhile trying to dig that up. I considerably send you an electronic copy of it and it’d be worth looking it because there are some very constructive suggestions in that report and from our perspective the government is definitely listening to what’s been said there.

That being said I think you also need to step back and look on a larger basis, I would think that globally that although there are some there have been some short-term concerns in the Yukon, it is still one of the better places in the world to be permitting a project.

Mike Niehueser - Scarsdale Equities

Well I apologize for mixing mines that you have at Keno between Onek and Lucky Queen and Flame & Moth, but it’s only 50 meters which is half of run back and all that goes into the [end zone]. So I hope that the changes and the material, I hope the Yukon government is listening. It’s not easy to start a mine and I think that you guys have a solid history. One more question about the Flame Vein West, does that extend off the agreement or the area of interest that has been outlined on for the Silver Wheaton agreement?

Clynt Nauman

Yes, that’s correct. The Flame Vein, the discoveries that we have there are on land that was not part of the land base that form the basis of the Silver Wheaton agreement originally. So that’s land that we subsequently state and falls outside of the existing Silver Wheaton streaming agreement.

Mike Niehueser - Scarsdale Equities

It looks like you are devoting a majority of the effort there, is that both exploration and resource development and if so at what point do you see coming up with a resource for that area?

David Whittle

It is true that we are doing a fair amount of work there, but we’re also looking at the southern South Western extension of the Flame & Moth deposit itself. As a geologist I am actually captivated by this whole concept that there is a large area of land there totally covered never been explored essentially and with all the indications that there is some kind of a mineralizing standard in that area.

The history at Keno Hill is a number of larger deposits of which Flame & Moth is already one generally surrounded by satellitic deposits and most of those one point or other have been mined. So I am very curious geologically on an academic basis to see whether or not this is going to turn out to be the same type of thing. So we try to attack it from all perspectives and from expansion of the existing deposit and also trying to look around within this 1 kilometer by 2 kilometer area to see what other mineralization might be there. So Flame West is definitely a discovery, we don’t know where it goes or how big it is, we’ve only got a couple or three holes in it and it may not be anything of substance, it’s difficult to say at this point. But it is part of a larger area of mineralization that I think is going to be very important.

Mike Niehueser - Scarsdale Equities

One last question. I know that it’s a complex geology up there with [Bellekeno]. You are looking at additional surface drilling at Bellekeno as well as Bermingham and then Flame and West, lot of meters being drilled; are those deep extensive holes or those shallow holes or can you give me an idea about the number of drill holes and what the program will look like in terms of which hope to get out of here?

Clynt Nauman

We are going to focus most of the work in Flame & Moth corridor and we will make a decision later if we are going to move outside of that, we will likely end up with about three drills working probably in the July, August timeframe. And they different holes is about, these are mostly 200, 300 meter holes or nothing particularly deep at this point.

Mike Niehueser - Scarsdale Equities

On surface?

Clynt Nauman

On surface, yes.

Mike Niehueser - Scarsdale Equities

Okay, thank you.

Operator

(Operator Instructions). Our next question comes from the line of Chris Potter with Northern Border Investments. Please proceed with your questions.

Chris Potter - Northern Border Investments

Hey Clynt, you mentioned that you have a plan in place to get your all in costs down to $16 an ounce exclusive of the Silver Wheaton agreement, so what’s that number inclusive of the Silver Wheaton agreement?

Clynt Nauman

Well, at the present time with the 25% stream on that, you can add these types of prices, you can probably add three or four bucks to that.

Chris Potter - Northern Border Investments

Okay, thanks Clynt.

Operator

Our next question is a follow-up question from Mike Niehueser with Scarsdale Equities. Please proceed with your questions.

Mike Niehueser - Scarsdale Equities

Thanks, guys. I have one more question about AEG, that business is -- it seems like it can be lumpy sometimes just from the size of the deals and the time it takes to bringing in. But how sustainable is that? Do you think this is a particularly good quarter or do you hope to repeat it over the next several quarters? Can you give us some guidance on what the pipeline looks like? And that's my last question. Thanks Clynt.

Clynt Nauman

Brad, do you want to take a short at that.

Brad Thrall

Yes, I think certainly, I think in a lot of services businesses and consulting businesses, we do see variability on a month in, month out basis. But certainly our projections and our budgets for 2014 are one of our highest I think years that we're going to anticipate here with there is a lot of work still coming on stream at Keno Hill for the closure planning process that we're involved with, with the federal government. Our backlog of work I think is as high as it’s been in the quite a long time.

But so certainly I think Mike when you look forward for the next year to year and half, we see a continued strong kind of growth. But again, we are in a cycle within the industry, where exploration and development projects are lower I guess in the permitting process right now and that is a significant part of our business.

So, I guess again, yes there is variability, but over the next certainly 12 months to 18 months, we've got a significant backlog.

Mike Niehueser - Scarsdale Equities

Thank you.

Operator

Our next question is from the line of John Kratochwil with Canaccord Genuity. Please proceed with your question.

John Kratochwil - Canaccord Genuity

Hi, Clynt and Dave. I got a couple of questions. First is with respect to portal development at Flame & Moth and then underground development, if timing extends too far, is there some issue with the winter season where you wouldn't be able to development portal if they get into winter or is that something you could be doing say, November, December timeline, January timeline if things get that far back?

Clynt Nauman

Thanks John. I think the answer to that is as I think Mike Niehueser had mentioned is that this portal is just right behind the assay lab. And it's going to be relatively easy to develop. And that are least to straight down and to get ready for drill and blast activities. And that activity is going to take place no matter what this summer and that it was always in our plan. And so that will be, it will be done no matter what. And as for operating into the winter, clearly no problem with that in some respect to be working in a winter than the summer in some of these development projects and this one will be no different.

John Kratochwil - Canaccord Genuity

Okay, okay. Thanks guys. And Dave actually a question just on the way that the exploration expenses are being accounted for. Is that something that’s going to flow into the income statement or is that being capitalized?

David Whittle

That will be capitalized John.

John Kratochwil - Canaccord Genuity

Okay. And….

David Whittle

Pardon me, you'll see it on the capital statement in the investing activities section.

John Kratochwil - Canaccord Genuity

Right, yes. But not on the income statement results.

David Whittle

That's it.

John Kratochwil - Canaccord Genuity

Yes. Okay. That's taken care of most of my questions. Thanks.

Operator

Mr. Nauman, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Clynt Nauman

Okay. Thank you very much everybody for joining us today. One last thing I wanted to mention before we sign off. It is that time of year where we along with others have issued our proxy information and our annual information circular? I just like to take this opportunity to urge everyone to be sure to vote their shares and the sooner is the better. Again we appreciate your support and interest in Alexco.

And with that I’ll turn it back to Vicki to close the call.

Vicki Veltkamp

And you’ve been listening to the May 16, 2014, Alexco Resource first quarter 2014 conference call. We encourage investors to visit Alexco’s website for further information at alexcoresource.com. If you have further questions you can call 604-633-4888 or e-mail us at info@alexcoresource.com. That concludes today's call. Thank you all for joining us today. And have a good weekend.

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