Earnings Call Transcript - HL Q3 2021

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the Alexco Resource Corp Second Quarter 2021 Conference Call. I would now like to turn the conference over to Rajni Bala, Investor Relations and Communications Lead. Please proceed.

Rajni Bala, Investor Relations and Communications Lead

Thank you very much. Good morning, ladies and gentlemen. Today is Thursday, August 12, 2021. My name is Rajni Bala, and I welcome you to the Alexco Resource 2021 second quarter results conference call. This call is being webcast live and can be accessed through the events and webcasts 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 quarter ended June 30, 2021. All amounts mentioned today are in Canadian dollars unless otherwise indicated. Today, our Chairman and CEO, Clynton Nauman will discuss our most recent results, and 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. Please be reminded that some statements made today may constitute forward-looking information within the meaning of applicable securities laws. Similarly, 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 risk that can be found in our most recent regulatory filings available on our website and on SEDAR and on EDGAR. I will now leave you with our Chairman and CEO, Clynton Nauman.

Clynton Nauman, CEO

Thank you, Rajni, and thank you to everybody who is attending this morning. It’s certainly good to talk to you. There’s a little bit of a change this quarter; my presentation is going to be relatively brief, and I’m not going to reiterate financial results; you have them available from our filings yesterday. Rather, I’m going to give you a few high-level remarks from site operations and then expand in response to any questions that you might have. I think that should be a pretty productive way to execute this discussion. So, the ramp-up of operations at Keno Hill continued during the second quarter, and we’ve been making good progress. I would say that our workforce is settling in; the COVID restrictions, although still rigorous, are not viewed as threatening at the workforce level, which is important. So, operations are hitting more of a routine type of a profile. On the revenue side, we continue to mine ore from our Bellekeno mine. In the last quarter, we mined 6,460 odd tons. The head grade was just over 700 grams per ton in the second quarter, and the year-to-date head grade is a little bit north of 770 grams per ton silver with pretty strong base metal credit. So, this mine continues to overachieve its block model estimates, but at the present time, we are moving into the last hope that we would intend to mine there. And then sure, we’ll be looking to transition and redeploy resources we have in that mine, the Bellekeno mine, to either Flame & Moth or to Bermingham. The one thing I would say about the Bellekeno experience is that we have done a significant amount of long-hauling. For those that are familiar with our technical reports, you’ll know that both the Birmingham and Flame & Moth, we have a long-hauling component. On balance, it’s a subsidiary component; contrary to that, at Bellekeno, we’ve been doing a fair amount of long-hauling, and I would have to say that our experience has been very, very good. We overachieved grades, we haven’t taken a lot of dilution, and we’re using much more sophisticated or advanced long-hauling methods than we used in the past. And the results have been excellent. So just to make that point clear, the Bellekeno experience has been really quite pleasant in terms of operating practices and output, but it’s time to move on. We remain on track to reach the Birmingham and Flame & Moth Ore in the second half of 2021. I would say that at Flame & Moth, which of course, is situated very close to the middle where we are at the first production level at the 835 level, and we’re about to cross-cut to the ore. It’s about 120 meters to the ore and that’s going to open up about 65,000 tons of material. It has a grade of 600 grams to 700 grams in that type of range; it’s at the top of the Flame & Moth Ore body. We anticipate being into that ore body in the latter half of the year. Over Birmingham, in contrast, we are in a drive called the 1150, which is the first production drive as a result of the new reserves and resources that we calculated earlier this year. We’re within meters of the first ore blocks at Bellekeno. The major portion of the Bellekeno deposit that will occupy the production component in 2022 is about 140 meters in front of us down the ramp. That will open up about 60,000 tons of material at close to 1700 grams per ton silver. So we’re within 140 meters of that. Meanwhile, we’re going to be mining at the 1100 level and extracting ore going into the third and fourth quarter. Underground development rates, as we mentioned in that published material, are slower than forecasted, related to crew experience issues, but they certainly are improving. We’re pretty happy with where we’re heading here. At Birmingham, the initial ore production is anticipated, as I mentioned, in the third quarter. Flame & Moth initial ore production is anticipated in the fourth quarter of 2021. Don’t forget that we updated mineral reserves in May of this year; they were increased by about 20% to 1.4 million tons, with an average grade of 804 grams per ton silver, 3.8% zinc, and 2.6% lead. We would anticipate producing more than 35 million ounces of silver over the next eight years. At the mill, we processed nearly 11,000 tons of ore in Q2; that’s 18,000 to 19,000 tons year-to-date with year-to-date head grade of 817 grams per ton silver, 11% lead, and 4% zinc, so very high base metals. The Q2 experience was a 65% increase in throughput over the last quarter, and nearly all of the construction work refitting work in terms of cyclones, a new fine ore feeder, construction of a new building, the second ball mill, and the regrind mills have all been completed and stand ready for scale-up in Q3 and Q4. The experience in the mill has been excellent, and recoveries are on or ahead of our expectations. It’s averaging 93% recovery of silver in Q2, with 94% of the silver reported into the lead concentrate. So, payabilities are high, and that’s good to see. Year-to-date, recoveries are around 91%, with 87% of the silver reporting to the lead concentrate. We’ve seen increasing efficiency and payability as we progress. Additionally, in Q2, as I mentioned before, we released an updated technical report. The mineral reserve increased, and we ended up here with a run rate of 4.4 million ounces of silver per year over an initial eight-year mine plan. Turning briefly to exploration, we will have a lot more to say in a couple of weeks here. The Birmingham Northeast deep exploration program is continuing, using directional drilling technology, with four drill rigs in operation. That’s a 20,000 meter underground program, and we’re about 60% of the way into that particular program, with 11,500 meters drilled to date. Ultimately, we should have more than 50 intercepts through the target zone in this Northeast deeps area under the Birmingham deposit. We are drilling very deliberately to enhance our opportunity to calculate the resource for this deeper mineralization, aiming to go straight to an indicated category. We’re working towards releasing initial drill results in late August. We were hoping to have them available for the second quarter this week, but we had some duplicates and quality issues that we had to retest at the lab which delayed it a couple of weeks, nothing to get excited about. This is very high-grade material to the extent that it is intercepted, so it presents some challenges at the lab. Our objective in 2021 is to include this drilling into a new site-wide mineral resource estimate. Finally, I want to express my sincere thanks to our workforce. We have continued to deliver results in this ever-evolving COVID environment. We’ve made steady and significant progress on delivering Keno Hill back to full production. But make no mistake; we still have hard work ahead of us: maintaining and increasing a full cost of underground development is key, as is the successful recruitment of underground miners and maintenance technicians. We also need to navigate normal short-term supply chain issues faced by many in the business. For us, it’s all about execution, which comes down to underground advance rates and the recruitment of operatives, miners, and mechanics, and being proactive about supply chain challenges. With that, I think I’ve said enough to give you an overview. I’d like the operator to open the call for questions. Thank you.

Operator, Operator

The first question comes from Jake Sekelsky from Alliance Global Partners. Please go ahead.

Jake Sekelsky, Analyst

Hey, guys. Thanks for taking my questions.

Clynton Nauman, CEO

Hi, Jake.

Jake Sekelsky, Analyst

Just looking at the ramp up, heading into the second half of the year, I’m trying to get a sense of the pace we should be modeling for Q3 and Q4. Is there any color that you guys are able to give on how we should kind of be thinking about that curve up to 400 tons a day in the second half?

Clynton Nauman, CEO

Let me take a shot at that. Jake, it’s an evolving issue obviously as we ramp up here. We are fully confident that we will have an opportunity to push that mill up into the higher numbers in the fourth quarter of 2021. And certainly by the first quarter of 2022, you’re going to be modeling a sustained 400 tons per day, four-plus million ounce per year run rate. Hypothetically, if I were working on a model, that’s what I’d be thinking.

Jake Sekelsky, Analyst

Okay. Yes. I understand it’s a moving target, but that was what I was hoping for. So thanks for that. And then just on recoveries, I mean, obviously we saw a significant increase quarter-over-quarter with both silver and zinc. Do you expect these trends to continue higher in the second half as throughput ramps up and your transition to mining Birmingham and Flame & Moth?

Clynton Nauman, CEO

Yes, Brad is the expert here. I will say anecdotally before Brad answers that the mill, Jake, is operating as good or better than we’ve ever seen it operate. But I will turn it over to Brad because you’re correct—the character of the ore that’s going to be coming from Flame & Moth and Birmingham is slightly different. Brad?

Brad Thrall, President

Yes. Thanks for that question, Jake. Yes, our recoveries in Q2 improved over Q1 again about 93% on the silver side, and in the last month or two, June and July, we were just over 94% on silver. I wouldn’t say that it will continue to increase; I think we’ve reached a point of excellent response. But again, we are transitioning from Bellekeno to Birmingham, which is a different ore and will require the regrind mills for the concentrate. So yes, I think the recoveries that you’re seeing right now around 93% to 94% would be our expectation going forward.

Jake Sekelsky, Analyst

Got it. Okay. That’s helpful. That’s all on my end. Thanks again, guys.

Clynton Nauman, CEO

Thanks, Jake.

Operator, Operator

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

Joseph Reagor, Analyst

Good morning, guys. Thanks for taking the questions. Following up on what Jake was asking about the operating rate ramp-up. You guys gave your operating rate in Q2 as 176 tons per day, but that’s for operating days. Should we be assuming a certain percentage of days that the mill will be down as we’re looking at those numbers you gave, or were those numbers based on an expectation of the mill being fully available for the rest of the year?

Clynton Nauman, CEO

Well, once again, I’ll let Brad take that, but that’s a high-level issue. The mill is operating, Joe, in response to the ore that’s being extracted from Bellekeno, and it’s essentially as we expected. I mean, there are runs of a couple of weeks. We are working on optimization and deep bottlenecking type work, so it’s worked out pretty well. You’re going to see ore delivered from Bellekeno initially, followed by Birmingham. There will be a supply of ore that will enable us to operate that mill at a higher throughput; it may not be entirely sustained higher throughput. But Brad, do you want to elaborate on that?

Brad Thrall, President

Yes, I mean, the mill in general, Joe, has been operating on a two-week on, two-week off schedule. That’s mostly dictated by crews and crew rotations. We want to ensure all four of our operating crews have operating time when ore is available. Certainly, that 176 tons per day, that is not any indication of mechanical throughput capacity—we could operate at even higher throughput for a week. So we’re trying to find the right balance of sustained operations for a couple of weeks at a time while being mindful of the feed source from Bellekeno. We’ll likely continue this two-week on, two-week off rotation at the mill into Q4. But as we get closer to the end of the year, we will look to increase the run time at the mill.

Joseph Reagor, Analyst

Okay. Fair enough. On the capital spending front, in the first half of the year, you guys spent around $25 million, based on the cash flow statements. What do you expect for capital spending in the second half of the year?

Clynton Nauman, CEO

There are two pieces to the capital, the way that we look at it, Joe. The first is the PP&E, and to a large extent, that is already invested. So it’s all about working capital, which is based on the fixed underlying costs that the operation is going to continue at about the same level that we have at present, offset of course by revenues returning from the ore being milled. I don’t anticipate significant changes in the underlying costs. The revenue side of the equation is going to be the important piece. Brad, do you want to elaborate on that?

Brad Thrall, President

Yes, I think that’s a fair comment. The vast majority of our PP&E, the mill and site-wide infrastructure projects are essentially complete. Now we are in kind of a normal, I guess, operating burn rate, consistent month in and month out. Now the focus is on increasing revenue to start narrowing that gap.

Joseph Reagor, Analyst

Okay, fair enough. I’ll turn it over. Thanks, guys.

Clynton Nauman, CEO

Thanks, Joe.

Operator, Operator

The next question comes from Nicolas Dion from Cormark Securities. Please go ahead.

Nicolas Dion, Analyst

Hi, guys. Most of my questions have been answered, so sorry to be repetitive. But just to be clear, it sounds like the mill is performing quite well. So it’s really the ramp-up being hindered by underground development rates, and the main issue there is recruitment and retention of labor. Is that all fair to say?

Clynton Nauman, CEO

Yes, that’s pretty reasonable.

Nicolas Dion, Analyst

Okay, great.

Clynton Nauman, CEO

Yes, that’s a fair statement.

Nicolas Dion, Analyst

Okay, thanks.

Operator, Operator

The next question comes from Mike Niehuser from R.F. Lafferty. Please go ahead.

Mike Niehuser, Analyst

Good morning. Thanks for the extra detail on the underground development at Flame & Moth and Birmingham. It sounds like you’re going to be able to seamlessly transition right into Birmingham and Flame & Moth, or do you anticipate there might be a break where the mill might be idle for more than a couple of weeks?

Brad Thrall, President

Not the way that we see it, Mike. We’ve got plenty of ore to continue coming from Birmingham; Bellekeno will provide the supply. We’re at a stage where we expect a continuous supply of ore to the mill. However, the multiple working headings in the plan will be at Birmingham at the deeper level. Those blocks of ore can be expected to be on-stream in the first quarter of 2022. If we can get them sooner in Q4, that’s great. But generally, we are planning for a steady supply to the mill.

Mike Niehuser, Analyst

That does answer it. It really does sound like you’re managing your people during these days of COVID pretty well. One more follow-up about the zinc recoveries; there was quite a jump from the first quarter and much better than the prior operation a decade ago. Is that pretty much from re-grinding the concentrate? Do you think that you’ll be able to maintain those zinc recoveries going forward?

Clynton Nauman, CEO

Yes, Brad can go ahead.

Brad Thrall, President

Yes, I want to take a shot at that. Thanks, Mike. It’s not due to regrinding; it’s essentially from two changes: one is pH control, which is critical in a lead-zinc flotation circuit. I think we have that dialed in pretty well right now. We’ve also made adjustments on some of our reagents on the zinc side. So we’re seeing 75% to 80% recovery on zinc with an excess of 50% concentrate grade. That’s as good as we’ve seen at Keno Hill, and we would expect that to continue going forward, certainly at Birmingham, especially when the regrind mills are functioning.

Mike Niehuser, Analyst

Thank you. One more thing: I wasn’t sure about the answer regarding the new type of ore bodies—Flame & Moth and Birmingham are different than Bellekeno. Do you foresee recovery continuing fairly seamlessly into those ore bodies or do you expect some challenges as you optimize?

Clynton Nauman, CEO

Yes, there may be some learning curves. The reason we are installing concentrate regrind mills is all due to the Birmingham deposit, which has lower base metals than Bellekeno. So those regrind mills are necessary to increase the concentrate grades to meet specifications. While it’s not unusual to have some learning curve, the regrind mills are ready to go, and we’re about 30 days or less away from starting with the Birmingham ore.

Mike Niehuser, Analyst

Well, thank you. The directional drilling seems to be a notable effort, not just for the number of downhole hits but understanding true widths by coming in at different angles. With 11,500 meters drilled, how many opportunities have you had to pierce the target panel? I’m guessing it’s about 25 to 30 hits on target. Is that close?

Clynton Nauman, CEO

Yes, your arithmetic is pretty good, Mike. Last I looked, it was 33. The directional drilling exercise has been important technically; it’s not easy shooting holes from the surface—it’s slow to get around the bends. But we are focused on the end result, which is controlled intersections at measured distances down depth and along strike. From that perspective, it’s meeting our expectations. It is more expensive than we had anticipated but doesn’t mean we’ll end up over budget. We’re collapsing our effort this year into the Birmingham deep zone and expanding—we will be drilling 20,000 meters there, which was originally planned for 25,000 meters, with 5,000 meters reserved for other work in the district. We’ve increased the number of intercepts...or potential intercepts simply because of the information we are seeing as we progress.

Mike Niehuser, Analyst

So with collapsing non-Birmingham deep targets, what would be the gross number of meters or targets solely for the Birmingham deep alone now?

Clynton Nauman, CEO

I think we’re at around 56 or 58, something in that range. It’s about another three quarters of a million dollars reported in that effort.

Mike Niehuser, Analyst

How many—so 58?

Clynton Nauman, CEO

Yes, something in that range.

Mike Niehuser, Analyst

Okay.

Clynton Nauman, CEO

We were originally talking about 45 or 50 holes but have increased it to about 55 to 58.

Mike Niehuser, Analyst

Okay, thank you. The recent increase in reserves is actually in the mine plan now—not to be refigured later this year at the end of this drill program, is that correct?

Clynton Nauman, CEO

Yes, that’s correct. It’s a bit complicated. We redid that primarily because the production level at Birmingham, 1120, was not in the reserves in the original mine plan. With the increase in the silver price, there’s clearly margin in there. So, it’s currently in the mine plan. You can expect another technical report or recalculation of the resources and reserves in the fourth quarter of this year, primarily driven by this deep drilling at Birmingham. If the results from that drilling are encouraging, there’s a high possibility of looking at another report in Q1 2022.

Mike Niehuser, Analyst

I look forward to the first quarter of next year. One last comment: when Brad mentioned burn going forward, I was looking at your cash flow statement from the second quarter, and you actually had a positive operating cash flow, which is interesting for a project still in commissioning and optimization. Congratulations on that; that’s a rare sight. I can’t say that will be the same next quarter. But with no huge adjustments other than a reduction of inventories, congratulations on a good quarter, and I look forward to the exploration results. Thank you.

Clynton Nauman, CEO

Thanks, Mike.

Operator, Operator

The next question comes from Ken Lynn from Lynn Asset Management. Please go ahead.

Ken Lynn, Analyst

Hi, thank you for taking my questions. Most of my questions have been answered. I just want to touch on a couple of points. I’m hearing next year’s zinc smelting charge is already set, and the company is reporting much better terms for next year versus this year. Do you see a similar trend? Can you quantify that?

Brad Thrall, President

Yes, Ken, I’m not sure I have an answer to that regarding the zinc TCRCs at this point. Are you familiar with that?

Clynton Nauman, CEO

Well, we’re currently under an off-take agreement, as you know, and those terms are set through the end of the year. There would be adjustments on an annual basis based on benchmark guidelines. I guess that’s all I can say right now in terms of our smelter treatment charges; they are set, but there’s an annual adjustment built into the contract.

Ken Lynn, Analyst

Okay, great. Thank you. As of now, you haven’t declared commercial production yet, right? You capitalize the expenses right now in accounting. What kind of cash burn, without the exploration and COVID remediation, did you see in the last quarter? What do you see as your projections by the end of the year when you start ramping up production?

Clynton Nauman, CEO

I’ll let Mike take the first part of that regarding the accounting treatment of expenditures at Keno Hill. Then I can elaborate on the second portion.

Mike Clark, CFO

Yes, thanks, Clynton. We early adopted expensing all of our operating costs at the mine. The amounts you see capitalized are more related to the longer-term capital expenditures hitting the balance sheet. Otherwise, all of our operating expenditures are going through the P&L right now.

Ken Lynn, Analyst

Okay, great. Thank you.

Clynton Nauman, CEO

Regarding the burn, it’s straightforward arithmetic; it’s driven by revenue. The underlying costs are typically about $2 million to $3 million more than the revenue we’ve been producing over the last quarter or so. However, the throughput and concentrate side continue to scale up as we head toward the end of the year. I’m not sure if that answers your question, but that’s what we’re anticipating.

Ken Lynn, Analyst

Okay, great. You have a very strong balance sheet right now that can withstand metal volatility. That’s a good move. Just curious—you’re finishing up at Bellekeno, right? Then you’ll redeploy to Birmingham, Flame & Moth. What kind of grade narrative do you see, and do you expect a similar recovery from the mill, if not better?

Clynton Nauman, CEO

As I mentioned before, the output from Bellekeno has averaged around 770 grams. The initial ore at Birmingham and Flame & Moth has a slightly lower head grade. However, as you get into these deeper levels, the head grades will escalate quickly. We expect the 770 year-to-date silver grades to decline slightly in the initial feed from the combined Birmingham and Flame & Moth, and then they’ll climb rapidly as other production levels come on stream.

Ken Lynn, Analyst

Okay, great. Thank you for your questions and answers, Clark. I look forward to your new report with more production and profit.

Mike Clark, CFO

Yes. Thanks, Ken.

Operator, Operator

The next question comes from Martin O’Malley, a private investor. Please go ahead.

Martin O’Malley, Private Investor

Clynt, a couple of times you’ve indicated that you thought Birmingham exploration would be transformational for how people viewed Keno Hill. Do you still feel that way?

Clynton Nauman, CEO

Absolutely. No question. I don’t know how else to answer that. We’ve been lucky enough to stumble onto what a geologist would call an ore deposit profile. We’re drilling holes down about 500 or 600 meters, and we’re right next door to the biggest deposit in the district historically. So yes, it’s a very important discovery for many reasons. I still feel optimistic; I’m the blue-sky guy, don’t forget. But my interest is piqued by the potential outcomes of our work here.

Martin O’Malley, Private Investor

Thank you. You answered my question.

Operator, Operator

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

Clynton Nauman, CEO

Thank you, operator. I look forward to keeping you updated on our progress as we get closer to our 400-ton-per-day target here. I want to thank the shareholders for their continued support and confidence in our team. With that, I wish you safe and confident travels as we move into the future here. Thank you.

Operator, Operator

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