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Alexco Resource Corporation (NYSEMKT:AXU)

Q2 2012 Earnings Call

August 8, 2012 11:00 am ET

Executives

Vicki Veltkamp – Investor Relations

Clynton Nauman – President and Chief Executive Officer, Director

David Whittle – Chief Financial Officer, Senior Vice President and Corporate Secretary

Bradley Thrall – Chief Operating Officer and Executive Vice President

Analysts

Lila Murphy – Federated Investors Inc.

Jeff Wright – Global Hunter Securities LLC

Christos Doulis – Stonecap Securities

Mike Niehueser – Beacon Rock Research

Operator

Greetings, and welcome to the Alexco Resource Second Quarter 2012 Financial Results Conference Call. 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 with Alexco Resource. Thank you Ms. Veltkamp, you may begin.

Vicki Veltkamp

Good morning. Today is Wednesday August 08, 2012, and I’d like to welcome you to Alexco Resource’s second quarter conference call. This is for the period ended June 30, 2012. This 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 further news releases and other event updates as they’re issued. And you’ll also find Alexco’s news release with the quarterly 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 also 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; and we also have with us Brad Thrall, Alexco’s Chief Operating Officer, who will participate in the question-and-answer session.

Before we get started, I do 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. It should also be noted that past performance discussed in this conference call is not indicative of future results.

So now I’d like to turn the call over to Alexco’s President and Chief Executive Officer, Clynt Nauman. Clynt?

Clynton Nauman

Thank you, Vicki, and thanks to everybody for joining us today this morning or this afternoon. First of all, let me start by saying that the second quarter of 2012 full operations at the Bellekeno mine is not one that we intend to repeat and we will be talking about that. The write-offs, I’d like to offer you some longer term encouragements and that we have a plan in place that by the end of the year, we should be able to catch up on our earlier expectations stepping up primarily in the fourth quarter. Also we’ve invested a significant amount of cash during the quarter and I will address that as well.

Back to the most recent quarter, the second quarter, as you know, our cash costs were $15.53 per ounce of silver net of by-product credits. This was a full 41% increase compared to the first quarter of this year and even higher than the same period a year ago with cost of $6.30 per ounce in just the commercial operations at Bellekeno.

So let’s look at the reasons for the unit cost increases. A good portion of the approximately $9 per ounce increase compared to the second quarter of last year is due to the lower prices for lead and zinc. That decrease in prices has accounted for – and the base metal prices accounted for about $4 per ounce increase in the cash cost for the second quarter of this year.

Then about $3.50 of increase in the per ounce cash cost of silver compared to the second quarter of last year, is because the remaining areas that had approximately 15% lower ore grades. And as you see in the releases, the ore grades were about 704 grams in this second quarter versus 822 previously. And these lower ore grades had a number of what I would term newly identified knock-on effects in the mill and we’ll talk about that.

The remaining $1.50 an ounce difference is primarily due to increased transportation costs. The mill actually operated quite well during the second quarter given the adjustments to accommodate the lower grades. We processed 17% more tons during the second quarter compared to a year ago, and availabilities remained at 90% or higher even that we experienced some delays from mechanical issues or failures on some floatation cell agitators. The mill also experienced a two-day shutdown because of a major wildfire in the area, and just anecdotally, we’re very proud of how our people handled that temporary evacuation process, both our employees and also supporting local residents in Keno City.

These adjustments in the mill to scale up and scale down in terms of throughput certainly negatively impacted the recovery rates for the quarter. However, the main issue was a period of about a month when head grades were often below 600 grants per ton, the lower head grade having a correlation to lower recovery, which we’re addressing.

In addition, as I mentioned before we did have these account wise potential delays in the lead circle, which impacted lead recovery. We’ve addressed those issues with increased replacements in the space and we don’t anticipate that this will be an issue going forward. Clearly, we need to overcome all of these issues to improve mill throughput to design capacity and we are continuing to put in place the plan and the structure to achieve that.

In the mine, we mined around the periphery of the resource during the second quarter, which resulted in lower grade production and feed as we’ve discussed. And frankly, we probably failed to appreciate the whole significance of lower by-product metals prices on the cash cost grounds ahead of time or the full impact of lower grades that might have on mill recoveries. All of this resulted in splitting the per ton mining and milling costs over fewer ounces forcing the increase in cash costs per ounce.

So those are the reasons for increased costs. So what can we do about it? We are still planning meet our production guidance of 2.2 million ounces of sliver this year. We can do that by assuming reserve grade feed and early processing that 250 tons a day and there were couple things we are doing to ensure that we reach that goal.

First, as planned, we will begin processing more than 9,000 tons of high grade ore, we already have on the ground from our long-hole mining, which we initiated about a month ago. The average grade of this material on the ground and in the mine and in the surface is 800 grams to 900 grams. And so that gives us a head start on catching up here.

And then later this year, we will be back mining in higher grade areas within the existing resource. It’s worth noting actually that in terms of this lower grade material that I was talking about, about 30% of our feed or a little more actually in the second quarter came from outside of the existing resource at Bellekeno. Secondly, the mill is integrated to operate at 250 tons a day, which is generally the rate at which it’s operating now. So we believe that the guidance is achievable.

Well, we don’t expect to see a complete catch-up in the third quarter, we do believe a combination of higher performance in the latter part of third quarter and through the fourth quarter, will provide us with the targeted production. And with those higher volumes of silver ounces, we should see our cash costs coming down. Although our cash costs per ounce were up during the same quarter, our mining efficiencies have actually been improving. It is the grade of the ore during the past quarter that most impacted the cash costs and earnings.

In terms of per ton mining efficiencies, our cost per ton during the second quarter was $235 compared to $255 in the first quarter of this year and an average of close to $300 per ton in the first half, $295 actually in the first half of 2011. So we’ve seen a good steady trend of improvement in the mine. Note that our total mine mill and corporate G&A costs were also lower in aggregate in the second quarter as compared to the first quarter, but the reduction in silver output had a greater impact on unit costs and improvements that we’ve made in overall costs containment.

Our CFO, David Whittle, will have more detail on the financial results in a moment, but when compared to our results from the same period of last year, as you know, these results don’t look wealthy mainly because we had significantly lower metals prices. Let me remind you that silver averaged $27.84 per ounce during the second quarter, while the average was more than $35 per ounce a year ago, more than 20% decrease with zinc and lead following the suit.

Our cash balance continues to be healthy, but it’s down about $10 million from the end of last year. David will be addressing this in detail, but the primary reasons are expanded and I should say, successful exploration program this year as well as our development work on Onek and Lucky Queen. But don’t forget that between those two projects or categories, exploration and mine development we have about on a discretionary budget here more than $25 million. At the present time, at the end of July, our run rate is approximately $20 million expanded or committed on exploration and mine development combined.

Because of the volatility in metals prices and because that volatility has magnified by a small volume high grade operation like us, I do expect to see continued variability in our cash costs quarter-over-quarter, but despite that I also expect to see an improvement over the next couple of quarters by virtue of our high grades even if the by-product metals prices don’t cooperate. But we must also keep in mind that our cost challenges to some extent the same challenges that have put all the mining companies under pressures in terms of labor, consumables and energy cost inflation.

I’ll talk more about the exploration program, which continues to be highly successful, as well as some additional details on our operations, but first, Chief Financial Officer, David Whittle is going to speak more specifically to the financial metrics of the past quarter. David?

David Whittle

Thanks, Clynt. This financial report is for the second quarter of Alexco’s 2012 fiscal year. As we go through this presentation, bear in mind that we report in Canadian dollars, for all dollar amounts we talk about today are in Canadian dollars unless otherwise stated. And any time we talk tons, we’re talking metric tons.

For the three months ended June 30, 2012, we brought in overall consolidated revenue of CAD$19.6 million, resulting in a net loss for the quarter of CAD$2.7 million or CAD$0.04 a share. Last year in the same period, we had revenues of CAD$21.2 million and net income of CAD$838,000 or CAD$0.01 a share.

Our total revenues this quarter from Bellekeno mining operations were CAD$17.4 million compared to CAD$19.5 million last year. While sales volumes by payable metal this quarter were generally increased over the last year, that increase was more than offset by a significantly lower metal prices. With for example, the price of sliver this quarter being over 20% lower than a year ago.

Growth profit at Bellekeno was CAD$817,000 this quarter, compared to CAD$5.8 million in the second quarter of calendar 2011. While over half of that decline is due to lower metal prices that’s already noted, most of the rest is due to abnormally low head grade experienced this quarter, as well as somewhat lower recoveries particularly for lead and zinc.

Head grades this quarter was 704 grams per ton silver, 8.8% lead and 4.9% zinc. While the second quarter last year, we saw grades of 833 grams per ton silver, 10.5% lead and 6.5% zinc. These factors combined to result in a significantly higher cost of sales for the quarter. This is also reflected in higher cash costs of production for payable ounce of silver at CAD$15.53 this quarter versus CAD$6.30 in the comparative quarter a year ago, and CAD$11.01 in the first quarter of 2012.

As Clynt noted, of the over CAD$9 year-on-year increase, more than CAD$5 of that is due to higher per ounce costs for mining, milling and concentrate transport. While a full CAD$4 is due to the reduction in by-product credit from the decline of lead and zinc prices.

Significantly, mining and milling costs on a per ton of ore basis were only marginally higher this quarter compared to the second quarter last year and in fact as Clynt noted have actually steadily improved over most recent two quarters. The difference in the cost profile on a per ounce basis versus a per ton of ore basis, reflects of course this quarter is at normally low head grades and lower recoveries. This quarter’s lower grades are the result of peripheral lower grade ore sequenced for extraction this quarter as we set ourselves up for higher grades and production volumes through the second half of 2012.

Over the first half of this year, several stopes have been prepared for long-hole mining, and at June 30 over 26,000 tons of high grade recourses were held in-situ not yet broken with in these prep stopes. We should start to see the effect on head grades and sales volumes from pulling these long-hole stopes as we progress through the third quarter and more particularly in the fourth.

The Alexco Environmental Group or AEG did well this past quarter. Revenues were CAD$2.2 million compared to CAD$1.8 million in the comparative quarter last year while our growth profit was CAD$927,000 compared to a CAD$909,000 loss in the comparative quarter. About 45% of AEG’s business is connected with remediation work we are doing at Keno Hill under our long term arrangement with the Federal Government of Canada. Most of the work we’ve been doing there last year and still currently is in connection with planning the long-term remediation measures. Under the arrangement, we are doing that planning at roughly breakeven rates, so once the planning is completed and actual remediation begins, we will be doing that work at normal profitable rates. This does of course skew AEG’s overall margin, but AEG continues to generate healthy margins outside of Keno Hill arrangement.

Alexco’s net working capital at June 30, 2012, totaled CAD$32.2 million compared to CAD$43 million at March 31. The decrease is due primarily the planned expenditures in the quarter on surface exploration and development of Lucky Queen and Onek, as well as underground exploration and nominal capital development at Bellekeno combined with a lack of offsetting contribution from this quarter’s operating activity.

As Clynton indicated, our total 2012 exploration and development budget was front-end loaded to the first half of the year, with almost three quarters expended as of June 30. Our capital expenditure rate will be commensurately lower through the second half.

I’ll now turn the call back to Clynton.

Clynton Nauman

Thanks David. If you have any questions about the financial results, we’ll take those at the end of the call. And I want to turn back to operations just briefly.

Looking at the operations, we saw the Bellekeno mine produce over 19,000 tons of ore in the second quarter, generally matching no throughput about 22,000 tons in the quarter. The mill processed about 3,000 tons of stockpiled ore during the quarter. And as we mentioned before we began pulling long-holes early in July. So our underground inventory at the present time is in excess of 9,500 tons actually.

Our average mill throughput during the second quarter was 244 tons per day, well above the 208 tons per day average throughput in the same period a year ago. Silver recovery in the mill was down slightly from a year ago, but lead and zinc recoveries dropped significantly compared to the same quarter last year, this was somewhat a function of the lower grade ore being processed during the quarter.

But we also continue to adjust the water to achieve a proper pH in the mill. And we always give timely focus to the lead concentrate to make sure that most of the silver end up there, because that’s where we get most of our revenue, about 85%, the zinc silicon is probably significant returning only about 15% of our revenue.

Just to update you on development projects. We’ve continued to make progress on those projects. At Lucky Queen we have only about a 100 meters remaining to complete the rehabilitation at the historical drift, and are in position to start driving the ramp to access the mineralization.

At Onek, we’ve installed a portable bench on the surface for the decline and are awaiting the permitting to drive the relatively short drift to reach the silver rich portion of the large zinc dominated deposit at Onek.

We continue to work closely with the regulatory agencies to achieve the necessary permits to put both of these mines into production, but as some of you know from the public record, permitting for mining activity has been slow, which in turn delays our permit modification for process and material from these new deposits. In fact, we expect to find ourselves in a position where we have all the necessary authorizations for mining and extracting ore from these new deposits. But not to be able to process material due to the delay in the water license amendments necessary. This could cause a three month hiatus in our development schedule.

We are in the process of considering this from both the site and permitting process perspective, but we are definitely making progress, and in just the past couple of weeks we have completed the environmental assessment process, what we call the ESA process and we are in the mining related and water license permitting phase as we speak.

We’re also continuing with the Elsa Tailings, the engineering and preliminary economic analysis is nearing completion, and those results as I’ve mentioned before will be available shortly.

In terms of exploration, it’s certainly the good news for the quarter, and we’ve had a significant – we’ve been able to achieve a significant increase in District silver resources, with the addition of an initial resource estimate to each Flame & Moth and Bermingham in the Keno Hill Silver District. This resulted in 52% increase in our combined indicated resources to more than 42 million ounces of silver, including our heard and historical resources we now have a total of about 58 million ounces of silver resource in the District and are well on our way to increasing beyond that. This is a large increase since we started in District a few years ago and I truly expect to see more growth in resource in the future.

Our exploration program is running well ahead of schedule and results from this round of drilling in 2012 should be in the near future. We would hope to do another calculation of resource at Flame & Moth and Bermingham by the end of year, which we would expect would add additional resources.

Flame & Moth, as you know, resides in the large northeast retaining structure where the mineralization is characterized by broad structural zones ranging anywhere from 2 meters to more than 30 meters in true thickness, with a total of 11 million ounces of indicators and 3.9 million ounces of inferred resource defined to-date in this structure.

The mineralization occurs with multiphase quartz and siderite veining up to 11 meters, 12 meters true width and it’s developed within the host fault structure, which contains locally massive galena, sphalerite, pyrite, and pyrrhotite and associated silver sulphosalts. We would say anecdotally that it’s a slightly different type of ore that we have seen elsewhere and we view that favorably. Gold resource at present at Flame & Moth up to 2.1 grams per ton.

Flame & Moth technical report, which is the supporting document for the resource, describing the details of the resource will actually be available online later this week in a next couple of days in fact.

The Bermingham resource model comprise of three veins of which two have been included in the resource estimate the Bermingham Vein and Bermingham Footwall Vein. All three veins occur in the hangingwall of the northwest trending post-mineral Mastiff Fault. The Bermingham resource at present time comprises 3.8 million ounces indicated, and 1.2 million ounces inferred silver and as the Flame & Moth drilling continues.

|The Bermingham Vein and the Bermingham Footwall Vein typically exists within a 5 meter to 10 meter wide structurally-damaged and complex zone containing discrete veins 0.5 meter to 2.5 meters wide over thicker intervals sometimes up to 20 or meters. Similar to Flame & Moth, the technical report describing the Bermingham resource will be available online later this week.

The Flame & Moth estimated resource comprises newly-defined mineralization below and along strike of historical shallow workings and remains open in all directions, and as well as you it’s located optimal to the existing Bellekeno mill. The Bermingham resource similarly was identified below and along strike of historical open pit and underground development and also remains open.

Both areas are the subject of ongoing aggressive exploration in 2012. With continued success in the current 2012 drilling program, adjustments have been made to roughly double the planned drilling at Flame & Moth to approximately 9,000 meters. And the balance of the 23,000 meters of drilling that we plan on the surface will be focused at Bermingham and other significant targets on the Elsa-Husky trend as well as testing of gold mineralization at McQuesten, which is the westernmost property within – contiguous property within Alexco’s Keno Hill land holdings.

Bellekeno mine exploration continues both down dip and down plunge and also along strike of the southwest ore body and result from this work and resource update will be released later this week – later this year, sorry.

With that, I’d like to turn it back Vicki.

Vicki Veltkamp

Okay, thank you Clynt. Operator, at this time, we’d like you to give the instructions for the question-and-answer session please.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Lila Murphy with Federated. Please proceed with your questions.

Lila Murphy – Federated Investors Inc.

Good morning, gentlemen. I have a few questions. First of all, can you tell me how much total capital have you or will you spend in development just at Bellekeno into 2012?

Clynton Nauman

I think that the total capital at Bellekeno is right around CAD$2 million and that would not include all of the exploration work that’s being done.

Lila Murphy – Federated Investors Inc.

Okay. That’s just development at Bellekeno. Okay.

Clynton Nauman

Right, exactly. There is some parallel between developments that’s being done for exploration purposes and that development also been utilized for future production.

Lila Murphy – Federated Investors Inc.

Perfect and thanks. And then what is the average assumed throughput between now and year-end in order for you to get to your full-year guidance?

Clynton Nauman

It’s just 250 tons per day.

Lila Murphy – Federated Investors Inc.

Okay. So is the idea that you will get to 400 tons per day by year-end sort of off the table at this point?

Clynton Nauman

I’m going to let Brad Thrall handle that. He is deeply immersed in the mill at the present time.

Bradley Thrall

Certainly, I think our target and expectation is as we get closer to the end of the year, we will have continuous run rates at that mill, we’ll certainly in excess of 300 tons to 350 tons per day. It’s still a target that we’re trying to achieve, 400 tons, it may not certainly be on a longer-term sustainable basis, we do need the additional ore from Lucky Queen, Onek and Bellekeno combined in order to provide sustained production of 400 tons per day, but I would expect as we approach the fourth quarter, we will have sustained periods of mill throughput and well beyond 300 tons per day. But in order to reach our guidance for the full year, we are planning on 250 tons per day at what we would call more than normal head grades that we’d experienced in the past.

Lila Murphy – Federated Investors Inc.

I see, okay. And in the press release you talked about – you have nearly 26,000 tons of higher grade material prepared for mining for Q3 and Q4, what is the grade of that material?

David Whittle

The average grade is between 800 gram, 900 grams, in that range.

Lila Murphy – Federated Investors Inc.

Okay. So basically closer to reserve grades?

David Whittle

Yes.

Lila Murphy – Federated Investors Inc.

Okay. And finally can you talk further about the water permitting delays?

David Whittle

Let me – Brad is leading the permitting. Yeah, but let me just try and briefly state that permitting in the Yukon is essentially sort of a three-step process, there is an environmental assessment process, that we have completed for both of these new mines; then there is the consideration of the environmental assessment by the Yukon Government essentially, average results and the issuance of courts mining license; and that courts mining license we expect will be issued to us in the very near future here meaning within weeks not months. And that license gives us the ability to move rock to mine or move it to the surface, et cetera. And the third step in the process is what we call a water license. The water license governs our ability to use water and deposit waste to a specifically tailings and we have to get a modification to our existing water license to allow us to process the material from Onek and Lucky Queen through the existing mill, that front water license is compliant for Bellekeno ores, or Onek ores, which are similar to Bellekeno ores and Lucky Queen ores are included in that water license or at least to be modified. Then the water licensing process is itself somewhat or can be somewhat a standard process and so we’re just raising a red flag here that if we are delayed in that process, rather than having that license to process ore from Onek and Lucky Queen by the end of the year, it may be well into the first quarter of next year. That being said, I would also have to say that we are pressing on all front side regulatory, and political to overcome this delay.

Lila Murphy – Federated Investors Inc.

Okay. Thanks. I will hop back in the queue.

Operator

Thank you. Our next question comes from the line of Jeff Wright with Global Hunter Securities. Please proceed with the question.

Jeff Wright – Global Hunter Securities LLC

Hey, good morning Clynt, couple of questions, first off, so you mentioned there is going to be higher grade in later third quarter and fourth quarter, it sounded that the majority of that high grade material that 800 gram and 900 gram raw material would be in the fourth quarter, did I hear that correctly?

Clynton Nauman

I think that we’re saying that, you’re going to see it coming off of the third quarter and into the fourth quarter. But yeah, we are mining from the south west 99 zones, well within the resource and like we mentioned there is a significant amount of that ore already on the ground and we’ll continue to pull those long-hole.

Jeff Wright – Global Hunter Securities LLC

Okay. And then one of the things in the press release talked about mine sequencing, now do you feel in the third you will go back to the normal mine plan and you’ll get back to some normal mine sequencing or do we still out of order for another quarter or so.

Bradley Thrall

I think that the grade majority of the mining is going to be according to the schedule that we had originally established. It is true that we’re – the good news is that we’re finding ores where we didn’t expect this within our model. And so we do have certain stopes and drives in that mine that are operating outside of the original resource, but in good ore. But the majority of the ore is going to come from within the southwest zone as previously planned and should trend towards that to normal reserve grade.

Jeff Wright – Global Hunter Securities LLC

Okay. Another question on Lucky Queen and Onek, what’s the budget through year-end on both those projects before you get to production there?

David Whittle

Originally it was about CAD$8 million per project at July. That cost has gone up slightly at Lucky Queen we’re expecting it to come down, at Onek’s we’re still looking at that CAD$8 million per project type range. That also includes the cost of removing initial ore from both of those mines in the fourth quarter. So that was the original plan and still may be the plan, remember that it’s only the water license that stops from processing the ore. It doesn’t stop us from mining it and piling it up.

Jeff Wright – Global Hunter Securities LLC

Okay. So that – let’s call $16 million number is still good through year end?

Clynton Nauman

I think that’s a pretty good number, yeah.

Jeff Wright – Global Hunter Securities LLC

Okay.

Clynton Nauman

And don’t forget that, we’re 70% of the $25 odd million that could be classified as discretionary expenditure. We’re either at a run rate of 70% of that already spend and/or committed.

Jeff Wright – Global Hunter Securities LLC

All right, excellent. Okay. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Christos Doulis with Stonecap Securities. Please proceed with your questions.

Christos Doulis – Stonecap Securities

Hi, thanks. I just wanted to get a little update on Bellekeno in terms of exploration potential and budget there, that you guys have. Do you guys have a plan to table a new resource for Bellekeno itself in the near future or not?

Clynton Nauman

We do. We should have the resource here. We’ll have the resource in hand pretty quickly and then we have to of course put a mine plan and other economic factors around that. So yes, our plan is to update that resource.

Christos Doulis – Stonecap Securities

Any idea on timing, gentlemen?

Clynton Nauman

I think that we are saying, it’s over the course of the reminder of 2012.

Christos Doulis – Stonecap Securities

Thank you very much.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Mike Niehueser with Beacon Rock Research. Please proceed with your questions.

Mike Niehueser – Beacon Rock Research

Hi, Clynt, Mike Niehueser. Following up on that last question, I didn’t catch up with that, were you talking about the resource at Bellekeno or the resources at the Valley Tailings about upgrading that.

David Whittle

By the term upgrading will be – we’re doing Bellekeno was the answer to the question. And we’ll have those results available in the last half of the year. So it’s little difficult for me to speculate exactly when that’s going to be because even though we had the resource in hand, we still have to get a mining plan around us. So I don’t know exactly what the timing for that’s going to be. I am not confident enough how those are going to be in the third quarter. So I am saying the last half of the year.

Mike Niehueser – Beacon Rock Research

Okay, thanks Dave. I just didn’t hear that. So it’s Bellekeno you’re talking about.

David Whittle

Yeah, yeah, absolutely.

Mike Niehueser – Beacon Rock Research

Now, as far as the – with what’s happened in the last quarter – was that a matter of sequencing or what was the change of the mine plans, did it occur because you were coming into ore that you didn’t anticipate was there and decided to mine there or why is it that you’ve held-off from the higher grade in the second quarter.

David Whittle

Well, I mean there is a number of sort of dynamic factors there, one of which is we wanted to see the mill settle down if you like, able to consistently process 250 tons or more tons per day, day in, day out. And that in addition to the fact that there has been some, I guess opportunity advantages at Bellekeno, as we’ve moved down deeper in the mine in the southwest orebody. And other opportunities to develop long-hole stopes and so we took that opportunity while we were doing that, we were developing those stopes, 30% of that we’re outside of our existing resource and still all the time holding back on those long-holes waiting for the mill to be able to achieve that steady throughput that we’re looking for, so that we can systematically see that long-hole material, don’t forget that once we start those long-holes, we pull an awful lot of material in a short period of time. And in fact in the last, just recently here in the last 30 days we mined more than 12,000 tons in a month, which gives us significant inventory sitting in front of the mill, but also a significant working capital tied up, as you would appreciate.

Mike Niehueser – Beacon Rock Research

So Brad is paying attention to aligning the mined ore from the mill to get into the mill and getting that into production.

Clynton Nauman

Yeah, I mean Brad is very focused on making sure that that mill achieves a steady and increasing throughput towards the design criteria for just 400 tons a day.

Mike Niehueser – Beacon Rock Research

When you talked about Onek and Lucky Queen, you used the word hiatus, the three month hiatus, does that seem that once you are able to get the court license, you mine ore, or you inventory it, but you can’t process it, you get to a point where it is only so much you can do, so you have to basically stop what you’re doing. Is that what you’re talking about and if that occurs in the winter, what kind of signal does that send to the Yukon government about getting that done?

Clynton Nauman

Well, I mean there is a lot of issues there obviously, but you’re correct, we’re faced with the situation of where we will have access both the mineralization, the ore feed for both Onek and Lucky Queen and we’ll have a choice at that point of either continuing to mine one or both of those ore bodies and stop piling the ore, either underground or on the surface. And then waiting for the water license or we would take hiatus in what we’re doing and not begin mining that material, and so we can feed it directly to the mill. I have not made a decision one way or the other yet, as everybody kind of appreciate that, it’s a fairly complex decision for you there. We are making the point that the delay in the water license may cause a hiatus in the development at Keno Hill and the government of Yukon is acutely aware of that and I would have to give them credit and that they, the government of Yukon is working very hard with us to try and overcome that sort of interim hiatus that we are looking at the present time.

Mike Niehueser – Beacon Rock Research

So is that a matter of willingness or capacity?

Clynton Nauman

It’s a matter of regulatory process and you mean, in terms of getting the water license?

Mike Niehueser – Beacon Rock Research

Yeah, on their end.

Clynton Nauman

It’s a matter of regulatory capacity, the water licensing process is essential a federal process, the powder process we are involved in the present time is, it is a territorial process. But they do work hand in hand and we are hopeful that there can be some resolution here.

Mike Niehueser – Beacon Rock Research

So just a couple quick questions, on Flame & Moth, it sounds like that’s going to be taking you further as a priority with exploration, knowing what you know about Onek and Lucky Queen, how does that – what’s you perception on being able to make a mine decision on that and how quickly could that move that into production within whatever range you want to give it?

Clynton Nauman

I mean that’s another, it’s not only these questions, which requires a full discussion, it’s a great discovery, it’s not going to stop with that, we are going to reserve the resource, we need to look at the mining parameters, it’s going to lend itself to much higher volume mining type methods and none of that in my mind to be perfectly saying really matters until we can get that mill operating at a consistent 400 tons per day. So that’s the focus in the short-term. I would raise the flag at Flame & Moth that we would once again be in a permitting process to be able to mine and process that ore and it would be a much more robust process, if you like, because it’s a larger body of mineralization, it will require additional tailings, facilities, et cetera, et cetera. So all of those issues need to come into play and I would think that once we have the resource updated at Flame & Moth by the first or second quarter of next year, we’ll be sitting down to make those decisions.

Mike Niehueser – Beacon Rock Research

And just the last question, if I heard you right, even though the – for all the reasons you’ve mentioned the cost per ounce of silver produce has gone up, the cost per ton mine or process has stayed the same or gone down, is that right?

Clynton Nauman

Decreased, yeah, the trend is correct on the volume side for sure.

Mike Niehueser – Beacon Rock Research

Okay, I’ll get back in the queue. Thank you.

Operator

Thank you. Our next question comes from the line of Kurt Fuller a Private Investor. Please proceed with your questions.

Unidentified Analyst

Good morning. Given the fluctuation in base metal prices, it might be a good idea to consider hedging those prices in the future?

David Whittle

I’ll let David Whittle to handle that.

David Whittle

That’s something that’s always in consideration. The main challenge for us right now is consistency of delivery and predictability of what the base metal flow will look like, and we’ve got a general bias I guess it’s also just a gains hedging, doing those contracts that’s most of the issues we are dropping with, but it certainly something that’s in thought.

Unidentified Analyst

Thank you very much.

Operator

Ms. Veltkamp there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Vicki Veltkamp

Clynt go ahead.

Clynton Nauman

Thanks, Vicki. I’d like to say that we have had some successes, some good successes over the past few years at Keno, for the past six years at Keno Hill, both in exploration and operations, but admittedly this quarter was certainly not one of them.

However we expect to just stick to – we think to be in the district for a long time to fully unlock its value. And as I said in the news release, we’re still in the building phase, we’re building on resources and building new mines. One person, I should mention the one person instrumental in the building phase of this district was Senior Vice President, Tom Fudge, who is leaving us for other opportunities. And I certainly want to thank him for this contributions to the company.

Now, as we move further into operating and production growth phase, Chief Operating Officer, Brad Thrall will be more involved in the day to day operations at Keno Hill.

Finally focus of our company at this time is to achieve design capacity at Bellekeno. We need some clear opportunities for improved performance and that’s what we aim to bring, this is what we aim to bring over the next several quarters. Many of you have similar long-term view, and the same confidence that we do as the potential of this high-grade silver mining district.

So thanks for your time today, and interest, and we appreciate your support and with that, I’ll it back to Vicki to close up the call for today.

Vicki Veltkamp

Thanks Clynn. You’ve been listening to the August 08, 2012 Alexco Resource conference call. We encourage investors to visit Alexco’s website for further information at alexcoresource.com. And if you have further questions please call 604-633-4888 or you can email us at info@alexcoresource.com. This concludes today’s call, and thank you for joining us. Have a good day.

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