Hecla Mining Company (HL) Q1 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Alexco Resource Corp 2019 First Quarter Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions]. I would now like to turn the conference to Alexco's Director of Investor Relations, Kettina Cordero. Please go ahead.

Good morning. Today is Thursday, May 09, 2019. This call is being webcast live and can be accessed from website at alexcoresource.com. An archive of the call will be available later today on our website in the events and webcast section. Our website also contains our most recently issued releases and our financial statements for the quarter ended March 31, 2019, as well as our 43-101 compliance technical report supporting the Keno Hill pre-feasibility study. Today, our Chairman and CEO, Clynt Nauman will discuss our most recent quarterly results. After his presentation, our CFO, Mike Clark will join him for the question-and-answer period. Before we get started, I need remind everyone that some statements made today may constitute forward-looking information within the meaning of applicable securities laws. Please note that past performance discussed today not indicative of future results, and our business involves a number risks that could cause results to differ from projections. Investors are encouraged to review these disclosures and discussions pertaining to risks, which can be found in Alexco's most recent news releases and SEDAR filings. I will now turn the call over to Clynt Nauman.

Thank you, Kettina. Before I start today -- and welcome to everybody this morning. Before I start, I just wanted to indicate that we're going to try and ensure what not the format on these calls, so in subsequent calls hopefully. So let's talk for me and more time for your questions and comments. So with that, on April the 29, 2019, we discussed the positive results from our PFS for expanded silver production at Keno Hill. And yesterday, we filed the 43-101 compliance technical report, detailing the same results on SEDAR. The PFS is the combination of work that we've been carrying out for over a year and certainly brings us closer to our goal of transitioning from mine production to becoming Canda's only primary silver producer. To recap, the PFS outlines and operations that is right-size for Alexco and will mine four deposits to produce 1.18 million tons of ore at an average grade of 804 grams per ton sliver plus lead and zinc over an eight year mine life. Annual production will be approximately 4 million ounces of silver contained in high quality lead and zinc concentrates. The PFS estimated initial capital cost were modest $23.2 million, including $5.3 million of working capital. Over the expected eight year mine life, average NSR per ton of ore is expected to be about 554 dollars per ton and direct operating costs around $312 per ton. The all-in sustaining costs are estimated between $10.5 and $11.5 per ounce in U.S. dollars. At a 5% discount, the projects' pretax MPV is about $136 million and after tax about $101.3 million with the after tax return IRR at 74%. I'll discuss the next steps at Keno Hill in a moment, but first let me review the other highlights from the first quarter. We recorded a total of $1.2 million on net income in the first quarter before tax expenses of $1.8 million, but including $3.5 million net non-cash adjustment, which primary relates to $5.5 million gain on the embedded derivative from the Wheaton stream. We finished the quarter with $6.4 million in cash and cash equivalents, and net working capital of $7.1 million. And subsequent to the quarter end, we completed $3.5 million flow-through financing to add to that balance. We extended the availability period of the draw down on the Sprott credit facility to late August of 2019 by issuing 171,480 common shares to Sprott. On the environmental side of the business, AEG generated $7.2 million of revenues and $1.5 million of gross profit, or 20% gross margin. Subsequent to quarter end, AEG and a JV partner JDS Energy and Mining, entered into an agreement to acquire the Mount Nansen project from the Canadian Federal Government. This is a significant project from the Canadian Federal Government that’s expected to last over 10 years. And also subject to quarter end AEG entered into a secured revolving line of credit with BMO for up to $4 million. This line of credit carries an interest rate of 5.7% on drawn funds. As part of the Mount Nansen agreement, we were able to utilize the landing capacity of the LOC to post $1 million letter of credit. Now let’s look forward to the rest of the year. With respect to permitting, as we’ve said before following the filing of PFS, we'll continue our disciplined approach at Keno Hill, while we wait for the new Bermingham water license. When the water license is complete, we’ll be fully authorize for mining and processing operations in each of the core deposits in our mine plan and we estimate it will take us about five to seven months after making a production decision begin producing a high quality concentrate and start generating positive cash flow. We expect that Bermingham’s new water license will be issued during the third quarter of 2019. In meantime, we’ve started to mobilize our teams to start surface related capital work, primarily in and around the Bermingham portal. In June, we’ll begin 7,500 meter surface diamond drilling program to test the deeper targets around Bermingham, and the targets we identified during our 2018 exploration campaign. We expect to continue drilling through September, and I look forward to updating on our drilling campaign results as it become available. We have the financial resources to achieve our goals and continue generating value. At the end of the first quarter, as I mentioned, we had about $7.1 million in working capital plus $3.5 million from flow through. Financing which all of which will be applied to exploration and development work. We also have the Sprott facility, $15 million U.S., which remains undrawn. In addition, we continue to receive renewed interest from offtakers to work with us to establish preproduction facilities once we make the production decision, which as I said before, follows on the heels of obtaining the final water license amendment, which will allow us to mine and process Bermingham ore. We continue to evaluate these and other options with a firm goal of generating maximum value for our shareholders. One other important before I finish up here is that, an aspect of our plan going forward is that we’re going to look seriously at what’s required to convert additional resource to reserve. And in doing that, identify a long-term operating capacity that lists life of mine silver production from the 30 million ounces in the current plan to something beyond that. We certainly have the ounces available on our resource statement, and we have the infrastructure to support a larger longer mine life. So we’ll be focused on that once we hit the production strides. And with that, operator, I’ll ask you to open the Q&A session.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Jake Sekelsky with ROTH Capital Partners. Please go ahead.

It looks like you’ve broken up the development work in two separate phases, which frankly I think makes a ton of expense. Can you maybe just quantify the capital thoughts breakdown associated with each respective phase?

So just off the top here, there's about $18 million PP&E capital type expenditures that we have on the books. As you know, we are still waiting for that final amendment for production and especially processing Bermingham. And then amendment to the water license is probably going to be delivered in the third quarter. So what we have done is we’ve divided our development strategy into two pieces. Phase one is primarily surface related works, so there’s a significant amount of work that needs to be done on the surface at a total cost of somewhere between $8 million and $9 million. And that work comprises work in and around the Bermingham portal, hole work, mill work, some work around the camp. And those types of things, not to forget about some of the long lead time capital equipment like electrical equipment, for example, waiting to put a substation in place at Birmingham. So all of that work would be in phase one. And phase two, we will simply classify as the underground work. And it would be similarly in that $9 million range. So I do it in my head is about $8 million on the surface, $9 million to $10 million underground to hit the production stride for cash self sufficiency. So that’s the way we have it broken up and hopefully timing wise, it works out here. So that’s what we’re thinking.

And looking at the exploration program that I think you mentioned is going to be underway in June. When should we start to see results? And do you hope or expect to issue another updated resource prior to potentially entering production next year, assuming the amendment comes-in and a positive production decision is made?

I haven’t given serious thought to updating the resource. The work that we’re going to do, the surface exploration work we’re going to do is going to be initially focused in and around the Birmingham deposit. And there's certainly work that we’ll be doing initially to look at potential extensions of what’s called the northeast side and that was a recently discovered zone. And the current mine plan remains open both long strike and down dip. And there that’ll be some of the early holes that we drill. So if there was going to be any resource adjustment it would probably term from that work. And more important work exploration wise is going to be the deeper exploration drilling at Birmingham, which is going to test the deeper portions of this system where we should see higher base metals, and we should see some indication as to whether or not this 40 million ounce deposit in all categories, primarily in the indicated category, whether this 40 million ounces silver deposit can be something that’s much larger. So that’s going to be the focus of exploration. There’s another part to your question too, Jake, which I don’t want to overlook. And that is, once we hit the production stride, we’re going to be very serious about looking at what it's required to convert additional resources, especially additional resources at Bermingham to reserve. And we have about 800. We've got about 20 million ounces of silver resource at Bermingham that's better than 800 grams that's not in the current mine plan. It has potential -- and some of it has potential to be in the mine plan if we start looking at different efficiencies and capacities at Keno Hill. And that would certainly open the way to a new resource calculation. I can't give you any timing on that, but we are very serious about continuing and ramping up that asset to look at how to bring more of those ounces into our existing 30 million ounce mine plan.

And then just lastly on AEG, I mean the business is obviously performing well and continues to secure additional contract. And revenues are up almost three-folds from this time last year. I'm just wondering if you expect those levels you saw in Q1 are they consistent going forward, or was Q1 back this year is more of a one off type payment?

No, I think that we would expect that the run rate at AEG is going to be consistent with what you see in the first quarter, so continuing growth for sure.

Our next question comes from the line of Mike Kozak with Cantor Fitzgerald. Please go ahead.

First, just on the environmental group and that Mount Nansen deal, I mean when you are doing the remediation there. How exactly do you get paid? Is it like a cost plus model? Is there a fixed cost component per year? Or is this something else?

It's a fixed price arrangement within certain parameters, and we will be operated over probably eight to 10 years as a two stage closing attached to it and the actual final closing on this arrangement isn’t until we acquire a water license to perform the work that's required. And that's out there sometime in 2020 that's about all we can say about the project at the present time. We're aware that the Federal Government of Canada has made an announcement that they have come to an arrangement with Alexco and JDS Mining and Energy, and we're just proceeding as was negotiated.

And then when this transaction is completed, or maybe even is right now, you guys get the surface right's and the mineral rights?

I mean similar to Keno Hill, I mean the joint venture will own the assets and the liabilities at Mount Nansen subject to an indemnification from the federal government of Canada, so the mineral rights come with that.

Our next question comes from Mike Niehueser with Scarsdale Equities. Please go ahead.

Couple of questions, I'll try not to cover similar topics but there's two things. I will start with your last comment about looking at enlarging and lengthening mine lives at Keno Hill. And there was already a substantial amount of non-reserves there. Is it going to be a complicated process to be able to move that into reserves and into the mine plan that you’ve already identified?

I don’t think it’s going to be a complicated process. It’s going to be a detailed process for certain that it will key off of existing mine plans and development plans, which have been carefully thought through. So we don’t sterilize any of this potential additional resource that would convert to reserve. It is a multi-faceted type of approach, because personally I’m convinced that at 400 or 430 tonnes per day, given the resource that we have here, the tonnes and the ounces that are available in the district. I do not think that longer-term that that capacity is the correct capacity to be operating this district at. So that’s the bigger question. And the driver underneath this all, as you know, Mike, is the fixed cost in an operation like this in the north in Canada, are reasonably high. Doesn’t mean to say that we are not comparative, we are because of the superior grades that we have. But if we can lift those throughputs and not comprise on the grade, we can lower our cut off. And that’s simply allows for a lot of that material to come into the mine plan. So the thing that I focused on and I’d like you to focus on is that there is a 100 million ounces in this district in all categories. We have 30 million of those in the current mine plan. We have another 20 million ounces that are undiluted grades above our existing proposed feed grade here. So there is clear obvious opportunities to change the profile of development in this district. Meantime, I just don’t want to lose side of the fact that we design this existing plan that’s in the PFS to be right size for Alexco; its high grade; its low capital; its large return and its economic in today's environment. So that overall -- that’s my plan if that gets to your question.

Well, it leads to the next one is that if you’re able to bring additional resources into reserves at Bermingham. Does that imply that a greater percentage of the ore will come from Bermingham relative to Flame & Moth and the other mines? And does the actual mine itself have the capacity that -- I'm just thinking of coordination running into people. Do you have the ability to take more ore out, or will you be relying on higher grades to boost production out of the existing resource?

So I would not write-off other deposits. I mean Flame & Moth is wide open. We are taking a much greater proportion of the resource at Flame & Moth out of the ground versus say Bermingham, and there is good reasons for that. So the upside at Bermingham would be just mining of the incremental ounces that are in or around the existing mining areas that haven’t made it into the current mine plan simply because we kept raising to cut off grade until we got something that made sense for us to meet the parameters we were looking for. So can we mine more from Bermingham? Yes, we can. Will the ratio between Bermingham feed and feed that comes from elsewhere in the district change? I don’t know the answer to that. But certainly, I mean you have the optionality at Bermingham at the present time to assume that if there are no other deposits that come on stream, you certainly have that up sight capacity at Bermingham. One other point I want to make is that the development plan that we have in place here is very conservative. In that about 75% of the mine development that’s required at Bermingham is going to be in place in the first 18 months to maybe two years at Bermingham. So you’re going to have a mine that has all the primary haulage and development in place right upfront in the mine plan. And that’s going to give us additional ability to be able to access some of this other ore that we know is there that will come into the plan as we lift the throughout and flow lower those costs.

Okay, that then answers that question. And also with regards to Flame & Moth, that wasn’t [indiscernible] to be dismissive. But something that never gets mentioned, which I'm interested in is the deeper potential at Flame & Moth, but regarding the deeper potential at Bermingham under the northeast zone. When you look at the cross section, there a vacant space between the northeast zone itself and where the start of the Hector-Calumet formation starts. And so I'm wondering and wanted to get your view on being able to expand the northeast zone down to the Hector-Calumet, and if you’re going to be penetrating the Hector-Calumet. Are you going to be teasing that or are you going to be looking to see what the first couple of drill holes look like, just because we’ve been talking about the Hector-Calumet as long as it's been in Alexco. So can I get you to talk about the potential underneath the northeast zone?

I mean, simply stated, we’re going to walk it down there. There are going to be holes that are being drilled underneath that northeast zone. We’re going to walk it down into the Hector-Calumet's stratigraphy, and we're going to drill some wider spread tolls in that broad area of rock that we would identify as Hector-Calumet type stratigraphy, that sits 50-100 meters below the northeast zone. So the answer is, yes. We’re going to walk it down there. And we’ll see what we find. There’s certainly no question that there’s huge amount of fluid flow through those rocks all duration wide zones of altered and rock that's mineralized at various levels. So it’s a pretty exciting program. We’ll see what comes out of it. We’re in the right place, and that’s address wise.

Well, that’s why I asked about haulage, because if you bring the rest of the resources into reserves and move over and fully exploit the northeast zone it ought to be something. But moving on, on AEG, I just want to say it’s really impressive to be able to get an operating line, a working capital line. And I think that’s just one more step and milestone in AEG becoming a self-supporting unit. Do you have any comment on that?

We’ve been working at that for the last 12 months or so. So trying to get AGE setup with its own balance sheet and that line is part and parcel of that transition. I also should mention that we have invested a significant amount of money in that company. We’re growing out the workforce there to 70, 80 people now, six to seven offices. So that company is pretty much stood up. And we’ll be forging its way forward on the back of its own balance sheet.

And as far as the margins drop this quarter for AEG, you mentioned because your projects in Colorado. But is that a new margin going forward that we should expect, or is that just a one-off?

My view on that, and I’m not the expert, but for sure. We’ve been doing a lot of construction work. So, the business itself is one where we can devise innovative solutions for environmental problems around large Brownfield properties. We are able to put those solutions together, test them with the bench, scale or over the pilot scale, design and build and operate. What we are finding in this business is that our margins are much better, or they are better or more robust in the initial conceptual and design phases and operating phases than it is in the construction phase. And so what happened or what’s been going on at AEG in the first quarter of 2019 has been construction on a couple of different, fairly significant construction -- couple of different projects and that carries with it a lower margin. So it’s an interim issue.

With regards to that and your acquisition of Contango Strategies, was that expertise that enhanced what you had at AEG? Was that brought to bear that allowed you to be able to complete the Mount Nansen deal?

That was part of it. The technology and R&D expertise that’s in the company, curtsey of the Contango acquisition, has brought to us a number of projects in British Columbia actually in the passive remediation business. So, it’s been instrumental and expanding to the business of the company, and it’s been incremental in the negotiation identification of things like Mount Nansen.

Can you -- what -- I'm not familiar with Mount Nansen. Can you describe what’s public about that project, and what environmental problems they have?

I’m not the expert either, Mike. It’s historically mined gold deposit that was in the oxide facies mine down into the sulfide facies, and created a fairly significant tailings repository, which has subsequently caused problems. So, it's a gold focused or was a gold focus property. And there are other gold exploration companies in and around that particular property at present time.

So the assignment there for the clean-up at Mount Nansen is primarily a earthmoving water treatment reclamation and closing?

That’s correct. Yes, that’s correct.

And mentioned, I think there is a quote in the press about that there is no exploration plans for Mount Nansen. Is the land package large enough that -- I’m assuming they’re not going to putting in commercial building like you did with -- like they did in Denver with the Globeville smelter, but it would be an exploration upside. Is it a large enough land package that it would accommodate other Greenfield or Brownfield exploration?

I mean it's certainly a large enough hand package. Let me tell you that we’re totally focused on the remediation and closure aspects of this property. We have not given any thought at all to any other use to the asset at this point.

And so the value of taking this on, at least at day zero here is being able to add a large significant important project in Yukon that will lift the profile of AEG and the remediation industry. Is that the priority?

Yes, it's a long live project. So it’s an excellent project, both for our operations and the Yukon and for the deployment of the expertise that we have in AEG across the business. And also in combination with JDS Energy and Mining who are well recognized as superior operators in the north.

And JDS is a pretty sizable operator, I think…

That’s correct.

Well, I think it’s interesting that in the Globeville smelter case, you were a important piece but were getting your foot in the door on this business, and now you’re a 50-50 partner on something. So I think that’s impressive, and congratulation on that. Last question and I’ll get off the call is, I think Keno Hill was purchased for less than $1 million. Is that level of what’s happening here, or does AEG going to have to take out that too with the other partner to acquire the project to clean it up?

No, I think someone there -- it was Mike Kozak might have asked the question earlier. There is no overt payment for the Mount Nansen property. On the other hand, it is a project where there are milestones, which need to me met in order to receive payment for accomplishment of the work. So it's structured slightly differently than Keno Hill, and it’s all about performance and efficiency and offsetting the liability.

Well, I apologize for the redundancy in the question. Any red flags or yellow flags on the horizon for completing permitting, or bringing Keno Hill back into operation?

None that we see, the issue is the backlog in the water licensing areas or departments in the Yukon.

This concludes the question-and-answer session. I will now turn the conference back over to Ms. Cordero.

Thank is Clynt. Let me just say that in winding up this call that over the next weeks that we'll mobilizing our teams to Keno Hill. Our phased approach will allow us to remain on track for production provided with the Bermingham's new water license that issued in Q3. And in the meantime, we'll continue working with Yukon Water Board to achieve this objective. Until then, I look forward to updating you on our exploration campaign to expand Bermingham at depth and test other targets in the Silver District. And in closing, I'd like to remind our shareholders that we'll hold our AGM on June 06, 2019 here in Vancouver. Details of the AGM and meeting materials can be found on our website. We encourage all shareholders to vote, and you can contact Kettina if you have any questions on how to vote your shares. As always, we appreciate your continued support and interest in Alexco. And I'll now turn it back to Kettina to close up the call.

Thank you, Clynt. We'll remind our listeners that our new releases, regulatory filings and AGM materials are available on our website at alexco.com. A replay of this call will be available in the events section later today. If you would like to sign up to receive updates on Alexco, please visit the contact section of our website. And if you have further questions, please contact me at kcordero@alexcoresource.com. Thank you for joining us and have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.