Alexco Resource (AXU) Q4 2020 Earnings Call Transcript

Alexco Resource (AXU)
Q4 2020 Earnings Call
Mar 12, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Alexco Resource Corp. year-end 2020 conference call.

[Operator instructions] And the conference is being recorded. [Operator instructions] I would now like to turn the conference over to Kettina Cordero, director of investor relations. Please go ahead.

Kettina Cordero -- Director of Investor Relations

Good morning. Today is Friday, March 12, 2021, and I welcome you to the Alexco Resource 2020 full-year results conference call. This call is being webcast live and can be accessed through the events and Webcast section of our website at alexcoresource.com. An audio archive of the call will be available later today.

Our website also contains our most recent news releases and our financial statements for the year ended December 31, 2020. All amounts mentioned today are in Canadian dollars, unless otherwise indicated. Today, our chairman and CEO, Clynt Nauman, will discuss our most recent results. He will be joined by our president, Brad Thrall; and our CFO, Mike Clark, during the question-and-answer period.

Please be reminded that some statements made today may constitute forward-looking information within the meaning of applicable securities laws. Past performance discussed today is not indicative of future results, and our business involves several risks that could cause results to differ from projections. Investors are encouraged to review the disclosures pertaining to risks that can be found in our most recent regulatory filings available on our website and on SEDAR and EDGAR. I will now leave you with Clynt Nauman.

Clynton Nauman -- Chairman and Chief Executive Officer

Thank you, Kettina, and thank you, everybody, for attending today. After several years of detailed work and lots of successful exploration, last year, we completed the Keno Hill silver district permitting process and began moving the district back into mining operations. 2020 was pivotal for the company and certainly a challenging year to move a mine into production. For sure, more than one person has commented to me that making a decision to move to production in the middle of a pandemic might have been a dubious decision.

We certainly misread the severity of the second wave in Q4 as borders locked down and isolation requirements were reinstituted. But thanks to the professional and determined attributes of our workforce and response and support from YG, from the Yukon government, we have been successfully navigating the restrictions posed by the COVID-19 pandemic. Our progress is slowed. There are certainly added costs, but we are most definitely moving forward toward establishing ourselves as the only primary Canadian silver miner.

I should start by summarizing our achievements in 2020 before discussing our outlook for 2021 and our expectation for Keno Hill's longer-term future. On the operations front, in February, we sold our environmental business, AEG, to the AEG management for a total consideration of $13.4 million. This allowed us to focus all of our resources to our mining business. In June, following the receipt of the draft water license, we announced our decision to move Keno Hill to production by restarting mining operations at the Bellekeno mine and advancing the Flame & Moth and Bermingham deposits into development and ultimately operation.

By August, we were hard on the recruiting trail and scaling up our surface facilities. And in October, we started drilling and blasting underground ore at Bellekeno. All of our production at Bellekeno is long hole in all blocks which had previously been overcut and undercut. Ore from Bellekeno was stockpiled and used for the initial mill commissioning in Q4 2020.

And just anecdotally, that's why silver grades have certainly exceeded the mine's ore block model grades. And we expect the Bellekeno underground mining operations will extend into Q2 2021, longer than initially anticipated. Underground development at Bermingham and Flame & Moth started in Q3 2020, and production at Bermingham is scheduled to start in Q2 2021, following completion of the new prime reventilation raise, which is about 40% complete as we speak. In Q4, we were faced with the additional COVID-19 restrictions.

And as I previously mentioned, this affected our hiring program. And that, along with slower commissioning of new underground equipment, led us to a decision to temporarily suspend underground work at Flame & Moth and focus all of our efforts, at least temporarily, at Bermingham, along with continuing ore production from Bellekeno, of course. In the district mill, modifications completed in Q4 2020 included the installation of cyclones, a new filter press and modifications to the final feeder. We undertook the initial commissioning runs at the mill in November and processed about 300 tonnes of Bellekeno ore, producing our first concentrate.

Staying with the mill, construction of a new building around the crusher was completed in Q1 2021, and the installation of a new ventilation system in the crushing facility is scheduled for completion in Q2 2021. The mill continues to operate on a 2 and 2 basis as other mechanical adjustments and circuit modifications mainly focused on metallurgical performance are ongoing and continued during this mill commissioning stage. Through the end of February 2021, we have produced a total of more than 2,400 tonnes of ore from Bellekeno with silver grades and recoveries of 956 grams per tonne silver and 92%, respectively. Both of these are above plan.

The first lead-silver concentrate and zinc concentrate shipments were dispatched in January 2021. Since the beginning of the COVID-19 pandemic, we have maintained strict health and safety and social distancing measures and kept our workforce and our community safe. However, as I previously mentioned, the effects of these measures on workforce schedules, recruitment, onboarding and training, especially our new underground equipment, has been slowed by both the COVID-related restrictions and the variable ground conditions primarily attributable to innovated quartzite and schist, which the operator is a steadily gaining experience. We expect that as COVID-19 restrictions ease over the coming months, we'll see further operational improvements.

On the exploration front. Our 2020 surface exploration program confirmed the presence of high-grade silver mineralization first discovered in 2018 below the existing Bermingham deposit. Last year's drilling focused on a structurally controlled sub-horizontal mineralized zone, which has traced over 500 meters along strike and a series of wide step-outs, which results generally in the five- to 18-meter true thickness range in terms of the mineralization, which generally contain between 1,500 and more than 3,000 grams per tonne silver. In total, we completed 7,600 meters focused along the structurally controlled sub-horizontal zone.

And this year, beginning -- as we speak here, we're anticipating about 25,000 meters of directionally controlled drilling to infill the work done in 2020. Finally, in 2020, ERDC advanced the reclamation project to offset historic liabilities in the district. And in July of 2020, the YESAB environmental and socioeconomic assessment board has issued a final decision document on the final valuation report. And ERDC has now entered into the Water Boards -- Yukon Water Boards licensing process to obtain the final water license to authorize the activities necessary to begin the closure of the district's historic liabilities.

After licensing, the reclamation plan will be finalized for submission to the Crown-Indigenous Relations and Northern Affairs Canada for approval prior to execution of the final reclamation plan. On the financial and corporate front, and just to quickly run through some of the metrics in our filings yesterday. For the year ended December 31, 2020, we reported an operating loss of $22.3 million, much of which is due to increased mine-related expense at Bellekeno and upgrades elsewhere in preparation for the commissioning and start-up activity. We finished 2020 with cash and cash equivalents of 23.7 million and net working capital of 15.4 million.

We also ended 2020 with 3.9 million in restricted cash and deposits related to our surety bond. Finally, during 2020, we completed two equity financings for a total of 38.6 million, which, of course, were largely directed to start-up -- which are largely being directed to start-up activity. More recently and subsequent to year-end 2020, we sold our NSR royalty in Golden Predator's Brewery Creek project for 4.5 million in cash. And on January 28, 2021, we issued 2.7 million shares and completed an equity financing for total gross proceeds of 11.7 million, the majority of which will fund our large exploration program this year.

In 2021, we're focused on ramping up to design throughput of 400 tonnes per day through the mill. Thus far, we have been operating the mill on a modified schedule to match ore delivery from Bellekeno and to optimize metallurgical performance of our improved flow sheet, including the modified grinding, classifying and filter circuits. With the ore mill feed transitioning to Bermingham sourced ore in Q2 2021, ore production at Flame & Moth beginning in Q3 2021 and provided that we're not required to further expand our current COVID-19 protocols, we are geared to expect nameplate capacity of 400 tonnes per day through the mill in Q3 of this year. I would say quite confidently that our primary risk in this commissioning and scale-up process is still the COVID risk, meaning that further border and/or site restrictions resulting from any resurgence of the virus will be increasingly difficult for us to handle.

At the same time, we're working on an updated technical report for an updated mineral resource and reserve estimate that we expect to release in Q2 2021. This report will incorporate a modified mine plan based on our operational experience to date, as well as meaningfully improved silver prices since we published our last mine plan in early 2020. Finally and just to reiterate, we are mobilizing our exploration team as we speak, planning to begin immediately to drill off the Bermingham Northeast deep mineralization. We'll be utilizing four drill rigs with directional drilling technology to focus on infill drilling and extension of mineralization with the intention to upgrade the Bermingham mineral resource estimate toward year-end when exploration results will be available.

The restart of operations at Keno Hill has coincided with strong silver prices and puts us in a good position to take advantage of the opportunities existing in our historic silver-rich district and to generate value for our shareholders. We intend to do this by maximizing all of our existing resources, maintaining a laser-like focus on commissioning and scale-up activities to achieve design throughput and a 4 million ounce per year silver run rate while also executing perhaps the most important exploration program we have ever conducted. I look forward to keeping you updated on our progress as we get closer to commercial production, and I thank our shareholders for their continued support and confidence in our team. Finally, I want to reiterate that we owe a debt of thanks to our employees who have soldiered on through pretty rigorous COVID-related operating protocols and also to the Yukon government and health officials who have worked hand-in-hand with us to ensure that we can continue to operate through this challenging period.

And with that, I'd like to ask the operator to open the call for questions.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Jake Sekelsky from Alliance Global Partners. Please go ahead.

Jake Sekelsky -- Alliance Global Partners -- Analyst

Hey, guys. Thanks for taking my question. We saw grades well above plan in the initial material that went through the mill. Was this a one-off? Or should we expect to see elevated grades from Bellekeno through Q2?

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. Good morning Jake, and thanks for the question. Yeah, we're carrying a certain block -- we carry a block model at Bellekeno. It just happens that there's two primary stopes that are being mined there over the course of the next couple of months -- will be completed in the next couple of months.

Certainly, the first one has overachieved its block model grades, and that would not be unexpected in a deposit the style of Bellekeno. We're working pretty centrally located in the deposit. The second stope, you will have to wait until we get it through the mill to see what the grades might be. But yeah, I mean, Bellekeno is going to overachieve both in terms of -- relative to the block model in terms of grade and probably tonnes.

We'll see.

Jake Sekelsky -- Alliance Global Partners -- Analyst

OK. That's helpful. And then, just on exploration. Obviously, it's a big focus this year with the 25,000-meter program in the Bermingham resource update that you mentioned later this year.

How should we be thinking about that updated resource relative to the existing mine plan? I mean do you think we could see an updated mine plan sometime next year after that resource is out?

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. That's a decision that we're going to have to discuss at Alexco, obviously. I'd rather -- I think we'd rather sort of wait and take this step by step. Let's get this drilling done and the resource, assuming that the drilling is successful, get any resource put together in that deeper area.

And then, we'll decide whether or not we should modify mine plan, which is already being modified, as I mentioned, at Bermingham to see whether or not we can accommodate any additional resources should there be any at debt. So yeah, it's a good question. We have not made that decision yet. But I would expect that if the drilling is successful, I mean, we'll be pretty keen to try and figure out what value would be added by incorporation of that additional mineralization.

That makes sense. That's all on my end. Thanks again.

Operator

The next question comes from Joseph Reagor from ROTH Capital Partners. Please go ahead.

Joseph Reagor -- ROTH Capital Partners -- Analyst

Thanks for taking my questions. I guess, first thing, given the impacts of COVID and a little bit of delays there, what should we think about as far as staging of production over the remainder of the year? Is there kind of a range you can give us of what tonnes per day might look like on a quarterly basis?

Clynton Nauman -- Chairman and Chief Executive Officer

It's the -- I mean, Brad might want to chime in here that, I mean, generally, Joe, we're thinking that we're going through this commissioning process, we definitely need to onboard more plant-related or mill-related people and to spool that mill up to a more consistent operating basis. I mean right now, it's operating on a two and two basis. So we -- I mean we would -- I think we'd be reluctant to put specific tonnes and grade in the commissioning process other than our target, which is to achieve 400 tonnes through the mill in Q4 -- in Q3, sorry, of this year. I mean, Brad, do you have anything you want to add to that?

Brad Thrall -- President

No. I think you did -- again, in general, there's -- we have a reasonably sized inventory of ore at Bellekeno. And then, as Bermingham -- we're projected to hit our first ore horizon at Bermingham in Q2. And then, you start to combine those together and then Flame & Moth a little bit later on.

So yeah, it's a gradual ramp-up period. We're continuing to kind of update our schedules and mine plans as we go along here. So I think that's the best we can see it for the moment.

Joseph Reagor -- ROTH Capital Partners -- Analyst

OK. Fair enough. On the note of the ramp-up, is there a certain tonnes-per-day average you need to get to in order to start treating the production as revenue instead of an offset to capex?

Clynton Nauman -- Chairman and Chief Executive Officer

I'm going to ask Mike Clark to chime in on that because I think we are early adopting -- the plan is to early adopt the commercial production, whatever you call it, language. Mike, can you?Michael ClarkYeah. Thanks, Clynt. Joe, yeah, we are planning to early adopt, which means we'll start recognizing revenues immediately and cost of sales.

And so, starting in January 2021, all the revenues from Bellekeno we'll be recognizing. And then, as Bermingham starts up in Q2, followed by Flame in Q3, you're going to start seeing all that revenue hit the P&L immediately with these -- so we won't be offsetting the mineral properties for revenues. Does that answer your question?

Joseph Reagor -- ROTH Capital Partners -- Analyst

OK. Yeah, that makes it a lot easier, too. All right. And then, last thing, remaining capital spend between now and reaching that 400 tonnes per day, what's it kind of look like?

Clynton Nauman -- Chairman and Chief Executive Officer

I don't know, Brad, do you want to take a shot at that?

Brad Thrall -- President

Yeah. Well, there's a couple of different buckets of capital, Joe. I mean we've got our PP&E capital just to finish up most of -- a few of these capital projects, the second grinding mill, a couple of concentrate regrind mills. So I would put that in a bucket of PP&E capital.

And that's a relatively modest number, 1.5 to $2 million, to finish up those projects. But then you obviously have the working capital to continue to -- as we continue to ramp up and reach kind of steady state and positive revenue, I mean, that's a period as well. So I don't want to put a number on that one yet. Again, similar to your previous question, I think we're kind of continuing to undergo our -- kind of our updated, I guess, mine plans.

But again, the PP&E capital is relatively low, but it's the working capital until we get to that positive -- to that point where it's cash flow positive, which is into that Q3 range with all three mines running.

Joseph Reagor -- ROTH Capital Partners -- Analyst

OK. That's fair enough. I'll turn it over. Thanks.

Operator

[Operator instructions] The next question comes from Mike Niehueser from Scarsdale Equities. Please go ahead.

Mike Niehueser -- Scarsdale Equities -- Analyst

Clynt, I agree with the earlier comment about the grades at Bellekeno. I think that was higher than any grades that you published when it was an operation earlier. Just a couple of housekeeping questions to start. Can you say what the approximate cash balance is today for the company?

Clynton Nauman -- Chairman and Chief Executive Officer

Mike, can you answer that?

Mike Clark -- Chief Financial Officer

Yeah. No, we're a little over 30 million.

Mike Niehueser -- Scarsdale Equities -- Analyst

Great. Also, there's a lot of the release talked about COVID. Can you comment on in any cases or how it might compare around the Mayo area or Keno Hill with the rest of Yukon or Canada? Is it just an abundance caution that these things are happening? Or is there something specific with Yukon?

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. Yeah. Thanks, Mike. Brad is well-versed to answer that question.

Brad Thrall -- President

Yeah. Hi, Mike. Yeah, I mean I think in general, the Yukon -- I mean, where the Yukon sits today, there does continue to be a -- the borders are closed. So anybody that comes into the Yukon, even if you're a Yukon resident, you do have to quarantine for 14 days.

To date, there's been 75 cases of COVID in the Yukon. There's no -- currently no active cases. There hasn't been a reported case at any of the three mines, as you know, between Alexco, those two other operating mines in the Yukon. There hasn't been a reported case at all three of those.

And the Yukon is doing pretty well on their vaccination rates. I believe they are leading Canada in terms of the percent of the population. So yeah, all in all, I mean, it's -- there haven't been significant outbreaks. But having said that, yeah, I would characterize the approach by the government and health officials as being very cautious, conservative.

And I don't believe we'll see much movement in the Yukon, certainly until some significant changes across Canada in order to kind of open up travel again.

Mike Niehueser -- Scarsdale Equities -- Analyst

Well, it sounds like everybody is being extra careful, and that's good. Brad, this is probably for you. Clynt mentioned in the press release the word variable ground conditions. And I was just wondering if that was something new at Bermingham or Flame & Moth compared to what's happened at Bellekeno or maybe the historical number.

Brad Thrall -- President

No. I mean I think -- I mean, as you know, I mean, Keno Hill is, I guess, somewhat known for its variable ground. In the development period we're in right now, we go in and out of a quartzite unit into more of a schistiless component unit and back into quartzite. And we -- during that same time period, we've got new miners that we're bringing on and training.

And so it's a process of becoming more experienced with that type of ground. It's very similar to what we experienced at Bellekeno, but that was eight to 10 years ago now. So it is somewhat of a kind of a new learning curve, if you will, between -- across the board on operators and equipment and those types of things. So nothing to be -- that's a surprise to us, and we continue to manage and improve on it.

Mike Niehueser -- Scarsdale Equities -- Analyst

Well, it sounds like you're being careful and deliberate. As far as exploration go, what's the budget for that 24, 25,000 meters at Bermingham Northeast Deep? And is it all going to be infill there? Or is there going to be some expansion deeper or stepping out?

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. I mean, we'll probably spend somewhere between 8, $9 million, Mike. And it is going to be primarily infill drilling. And it will be more focused on the vertical extent of mineralization versus the horizontal extent, which we focused on in 2020.

That being said, we will certainly drill more holes to the Southwest, where we currently understand the mineralization to be. To the Northeast, probably not so much. We know where the Northeast termination or offset of that mineralization is. And it would, in fact, not reappear until we're into "Hector-Calumet proper." So, yeah.

So some extension drilling to the Southwest, lots of vertical -- trying to understand the vertical extent of the mineralization and infilling between those white space holes that we drilled last year.

Mike Niehueser -- Scarsdale Equities -- Analyst

Well, I'm glad you mentioned the vertical because when I look at the cross-section in the most recent release, it seems to -- reading between the lines, you're kind of looking at 100-meter block there of this new panel that's being discovered. And then, when you look at the other geometry of the veins and how they come together, that it kind of pinches out. But I don't know if -- my mind says that's not necessarily so because you're above the Hector-Calumet, which was historically quite thick. But as the -- get to the bottom of the terminus of the scheduled mine plant at Bermingham, you're getting to that area that really has the best silver grades and the highest lead grades.

And I'm just wondering if you're going to be targeting under that area because wondering if that's a shoot or a feeder or something like that.

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. Like I say, I mean, what you're talking about is to the southwest of where we drilled. We feel that there's a certain structural intersection that we have identified -- that the geologists have identified at Bermingham. And we are following that -- the projection of that structural intersection along to the Northeast.

And that structure and dissection persists all the way up through the Bellekeno, the Bermingham deposit itself and is the locus for mineralization. Now that does not mean to say that between that structural intersection and where the existing deposit occurs, there is not more mineralization, for sure. It's just that we know that there are targeted mechanisms as such that the meatier parts of the deposit are traditionally around that structural intersection, and that's what we're focused on.

Mike Niehueser -- Scarsdale Equities -- Analyst

Well, it just seems that you're not near where you can determine that you're closed off at depth and that it's just a matter of drilling and it's getting progressively more expensive. But I just have the sense that you're going to execute a well -- a step-up of operations, but the exploration here this year could be another pivot for you. And that the ending of the year is going to be quite interesting when you look back on the last couple of years. So those are just my questions and comments.

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. Thanks, Mike. I mean, certainly, it's going to be a very interesting year. And it goes back to Jake's question earlier, which was -- OK, so you're assuming that there's mineralization in this new area.

What are you going to do in terms of the mine plan and future development? And those are the things that we at Alexco have to figure out. And I once again go back to the step-by-step progression, which is let's drill it first, figure out what we are looking at and then go the next step.

Mike Niehueser -- Scarsdale Equities -- Analyst

Well, at the bottom of that terminus where you get those really high grades that were discovered, it seems like you can just drift straight over and just pick up that whole panel, but I can't help but think you're going to spiral deeper right there at the terminus as well.

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. We'll see. It's unknown at this point, for sure.

Mike Niehueser -- Scarsdale Equities -- Analyst

Thank you.

Operator

The next question comes from Leigh Curry from Curry Partners. Please go ahead.

Leigh Curry

Good afternoon, Clynt. I just wanted to get a little few more details on the exact impact of the COVID lockdown restrictions. You mentioned that the workers are subject to a 14-day quarantine. Did the workers, mining personnel that are there on site, can they leave? Are they leaving and going vacation and not coming back? Are new ones coming in? And does being -- can working in the mine include being quarantined? In other words, how hamstrung are you?

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. That's a good question, lee, and Brad will answer that.

Brad Thrall -- President

Yeah. Lee, I'll just give you maybe kind of a high level, I mean, summary of all of the protocols and how we currently have to operate. So we are able to bring in employees from outside the Yukon right to the mine site. And they can work, but they must quarantine at the end of their day.

So at the end of a typical 12-hour day, all employees need to go back to the room. They can't leave their room. Meals are brought to them. They can't use the recreation facilities.

We have to keep all of our Yukon employees separated from non-Yukon employees. And that means separate charters to site, separate buses, separate vehicle transportation. We have a full-time nurse on site. So we do daily checks every morning.

We have part of our camp that's been isolated off for an isolation unit in case there is -- anybody even gets a sniffle, we pull them out of the main population. So that's -- it's pretty rigorous, and it's certainly hard on employees to have to kind of live, I guess, if you will, under those types of conditions. And when this was first -- when the Yukon government in early November first reimplemented or reinstituted these travel restrictions, we probably lost a couple of rotations that we had to stand down, if you will, our employees. We just needed time to respond and put new plans together.

So hopefully, that gives you kind of an overview of how we're trying to manage this.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Clynton Nauman for any closing remarks.

Clynton Nauman -- Chairman and Chief Executive Officer

Yeah. Thank you, operator. As I said, we're on our way to commercial production in the second half of this year, and I look forward to reporting on the start of mining operations at Bermingham, Flame & Moth and the mill ramp-up to full capacity. We'll be updating you as we go along.

Until then, thank you, and stay safe.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Kettina Cordero -- Director of Investor Relations

Clynton Nauman -- Chairman and Chief Executive Officer

Jake Sekelsky -- Alliance Global Partners -- Analyst

Joseph Reagor -- ROTH Capital Partners -- Analyst

Brad Thrall -- President

Mike Niehueser -- Scarsdale Equities -- Analyst

Mike Clark -- Chief Financial Officer

Leigh Curry

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