Alexco Resource Corp. (NYSEMKT:AXU)
Q2 2014 Earnings Conference Call
August 15, 2014 11:00 am ET
Vicki Veltkamp - VP, Investor Relations
Clynton R. Nauman - President and CEO
David Whittle - CFO and Company Ethics Officer
Greetings and welcome to the Alexco Resource Corp. Second Quarter 2014 Conference Call and Webcast. (Operator Instructions) I will now like to turn the conference over to your host, Vicki Veltkamp, Alexco Resources Corporation. Please go ahead.
Good morning, everyone. Today is Friday, August 15, 2014. I’d like to welcome you to Alexco Resource's second quarter 2014 conference call. This conference call is being webcast live and can be accessed at the Company’s Web-site at www.alexcoresource.com.
You may also sign up on the Alexco Web-site to receive future news releases and other event updates as they’re issued, and you’ll find Alexco’s news release with quarterly financial results there. And also 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.
Giving presentation on today’s call will be Clynt Nauman, President and Chief Executive Officer of Alexco Resource, and David Whittle, Alexco’s Chief Financial Officer. But something a little bit different today, because we have not filed our final prospectus regarding the bought deal, we have been advised not to expand on our comments today. So I'm afraid we will not be having our normal question-and-answer period at the end of the call.
Before we do get started, I need to remind you that some statements 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 that 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.
And so now, I’d like to turn the call over to Alexco’s President and Chief Executive Officer, Clynt Nauman.
Clynton R. Nauman
Thank you, Vicki. This is Clynt Nauman, and I just wanted to welcome everybody and thank you for joining us today as we review our progress during the second quarter of 2014. As you've likely seen in our news release that was issued yesterday, we incurred a net loss of $1.7 million during the second quarter of 2014. This includes a non-cash loss of about $1 million for various reasons which David will explain. But on a cash basis we are actually outperforming our expected burn rate while we work on getting the permits in place to position the Company for initial development and eventual production of Keno Hill.
Be aware that we are also running a pretty robust summer exploration program, currently with three surface drill turning on a profit. The favorable cash variance in terms of burn rate is due primarily to the contribution of our Alexco Environmental Group which has reduced our net burn rate to about $200,000 per month.
Our current cash position as of the end of the second quarter was $6.3 million with net working capital of close to $12 million. This position will be boosted at the end of the month with the closing of the bought deal financing with net proceeds of about $7 million, financing that we announced a couple of weeks ago. Although the bought deal actually occurred after the second quarter, let me talk about it here for just a moment.
With that financing, we will issue about 7 million shares. As you all may know, I am Alexco's single largest individual shareholder, so I wasn't thrilled with the price at which we issued those shares, and I'm sure you can understand that. Nevertheless, the financing was in the best interest of the business and it additionally further positions the Company to make near-term decisions on initiating development at Flame & Moth. [A bulk of] (ph) that treasury, it enables us to plan with confidence for the next 12 months or more, and in effect it protects the business in the medium-term.
Similarly, it's no secret that in order to trigger the amendment to the Silver Wheaton silver streaming agreement, we will need to raise additional cash, and this financing reduces the immediate pressure to do that. A smaller financing with a minimum dilution seemed the most prudent defensive measure to take at this point.
So in my view, this financing is another event in a series of significant milestones that we have achieved in our march towards rejuvenation of silver mining operations in the Keno Hill silver district in the Yukon, which will return us to the position of Canada's only primary silver producer. As I said, these past few months have been key in giving us the tools necessary to convert our focus to getting back into development.
Just to recap, don't forget about the most important milestone we achieved in June, namely our amended silver streaming agreement with Silver Wheaton. On our last conference call and webcast with you on June 17, we covered the details of that amendment agreement and you can still access that webcast and the accompanying slides on our Web-site if you're interested in reviewing the details.
But to describe it briefly, the aim of the amended agreement is to provide us with downside protection in the more challenging silver markets while also retaining our upside leverage to the price of silver. This gives us a solid basis to achieve our objective of sustained silver production at Keno Hill during most commodity cycles. The amended agreement works by adopting a variable production payment linked to the spot price of silver as opposed to a fixed US$3.90 per ounce payment from Silver Wheaton to Alexco for 25% of our silver production from Keno Hill.
The maximum production payment per ounce from Silver Wheaton would come when the price of silver is US$19.45, at which time the production payments from them to us would be US$18 per ounce, a great improvement over the previous US$3.90 per ounce. To implement the amended silver stream, we would need to pay Silver Wheaton US$20 million, of which US$5 million will be contributed by Silver Wheaton through participation in an equity raise.
I'll leave it at that for now, since we had a much more fulsome explanation during the previous webcast. I'm going to update you on the progress with development and exploration in a moment, but first of all I'd like to ask our CFO, David Whittle, to go over the second quarter numbers with you. David?
Thanks, Clynt. This financial report is for Alexco's second quarter of 2014. Note that we report in Canadian dollars, so all dollar amounts we talk about today will be in Canadian dollars unless stated otherwise. Our net loss for the quarter was $1.7 million, or $1.8 million before the recovery of deferred income taxes. Included within that $1.8 million are non-cash costs of $766,000 for depreciation and another $218,000 for share-based compensation.
Mining operations results were nominal as we wrapped up the last of our concentrate final settlement invoices in April following the cessation of shipments last October. AEG revenues for the quarter were $3.1 million with a gross profit of $917,000, for a margin of 27%. Margins remained solid, though down a little compared to prior quarters, due primarily to a transition to lower margin phases of a significant project we are working on in the U.S. and to an increase in lower-margin components of the closure reclamation plan work that was being carried out within the Keno Hill District for the government of Canada.
Care and maintenance cost for the Bellekeno mine and mill site totaled $752,000 for the quarter. However, that figure includes non-cash charges of $549,000 in depreciation and another $5000 in share-based comp.
Alexco's cash position at June 30 was $6.3 million and our net working capital totaled $11.7 million, inclusive of $4.3 million in underground long-hole stope ore inventory, with the decrease from the first quarter primarily reflecting our exploration expenditures on the ongoing summer drilling program.
I'll now turn the call back to Clynt.
Clynton R. Nauman
Thanks, David. I just want everybody to know that we've made really good progress since last four quarter goal of resuming production, and I'm especially excited to begin focusing on the start of development at Flame & Moth. So, we are progressing in several areas of upside but much of it is still preliminary to giving the ultimate go decision on development.
In terms of – we should talk about exploration a little bit – our exploration group has been doing the usual outstanding job with this year's program in the Keno Hill Silver District. In fact, they've been working faster and more efficient than usual, and the good news is that we've been able just recently to significantly increase our surface drilling program from the original planned 10,500 meters of surface drilling to approximately 14,000 meters, and it's possible that we will increase beyond that, and this is all within our previously estimated budget of $5 million, which of course reflects the flow-through undertaking we raised last year.
We anticipate that we can continue to be drilling on the surface through September and almost certainly into October, and there we have done a fair amount of work at Birmingham up to this point. Our focus going forward is going to be the Flame & Moth southwest area where we are now drilling more than 0.5 kilometer away from the Flame & Moth resource.
So to-date, we've drilled about 10,000 meters through the end of July and into August and about 70% of that in the general Flame & Moth area, what we call the Flame & Moth exploration [car-door] (ph), and of that about 40% is in the Flame & Moth resource area itself, southwest of the existing resource. Remember that the Flame & Moth resource is about 1.4 million tons with around 520 grams per ton silver, and of that 1.4 million tons, about 600,000 tons is included in the current mine plan with a mill hit deliver grade of about 700 grams per ton silver.
The balance of the surface drilling has primarily been focused at Birmingham where we have a current silver resource of about 5 million ounces. It will be very interesting to see how the drilling program at this location pans out. I'm quite hopeful that there will be some interesting results from this and other locations.
In terms of results from all this drilling, I expect to see them to start dribbling in over the next month or two and we'll release them as they become available. I'm hoping that there's going to be lots to talk about.
And just to mention Alexco Environmental Group briefly, don't forget that Alexco is a silver mining company with two businesses, we have our exploration and development of precious metals business and we have a separate environmental remediation business. The Alexco Environmental Group, or AEG as we call it, has become an increasingly important and profitable business unit which has transitioned from being subsidized at times from Alexco Resource to now contributing cash. And as I mentioned earlier, that is important in terms of lowering our burn rate as we progress into the development stage for Flame & Moth.
You heard David earlier give us the revenues and margins for AEG and we see continued growth of that arm of our business and we hope to see that continued growth in the future. AEG currently has offices in Denver, Vancouver, Whitehorse and Toronto with a variety of projects in both the U.S. and Canada. In terms of the actual business, we continue to have new opportunities which arrive at our door, both in Canada and the U.S. So expect that AEG will continue to thrive and grow.
And then just to reiterate Vicki's comment, there will be no question and answer period on this call as we have not – there has been no final prospectus filed at this point, and so we cannot accommodate that Q&A session, and I apologize for that. So with that, I'd like to hand it back to Vicki.
[No question-and-answer session]
Thank you, Clynt. Since there is no Q&A period, I just need to tell you that you've been listening to the August 15, 2014 Alexco Resource second quarter conference call. We encourage investors to visit Alexco's Web-site for further information at www.alexcoresource.com and we certainly appreciate your support and interest in Alexco. So this concludes today's call. Thank you for joining us and have a good day.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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