Alexco Resource Corp. (HL) Earnings Call Transcript & Summary

Good morning, and welcome to the Hecla acquires Alexco Resource Conference Call. [Operator Instructions] Thank you, Anvita Patil, you may begin your conference.

Thank you, operator, and welcome, everyone. I'm Anvita Patil, Hecla's Vice President of Investor Relations and Treasurer. With us today, we have Phil Baker, President and CEO of Hecla. Clynton Nauman, Chairman, President and CEO of Alexco as well as Lauren Roberts, Hecla's Senior Vice President and Chief Operating Officer; Russell Lawlar, Hecla's Senior Vice President and Chief Financial Officer; Robert Brown, Hecla's Vice President of Sustainability and Corporate Development; and Kurt Allen, Hecla's Vice President of Exploration. Before we begin, I would like to remind you that our discussion during this conference call that include forward-looking statements. For a complete discussion of the risks and assumptions, which may affect actual results differing from estimates contained in our forward-looking information, please refer to Pages 2 and 3 of this presentation. I will now turn the call over to Phil.

Thanks, Anita, and good morning, everyone. Thank you for joining us today. We're very excited to discuss the Alexco acquisition. This is a transaction that began as a journey back in 2007 when Don Poirier did our first due diligence on the district. And that was just 2 years after Clynt had arrived at Keno before they started their -- when they started their consolidation of the district and dealing with the environmental matters and then developing the resources. Since that time, we have been engaged with Alexco trying to determine how we could advance the operation, exploration, how we could be a part of this district. And the reason for that is we have seen this district to be similar to the Silver Valley where the Lucky Friday is located because it has the same geologic environment. In fact, it's only -- there's only 3 mining in the world that have the same environment. And you know how productive the Silver Valley has been for silver. And we also have seen it as a smaller version of Greens Creek because its grades are even higher than Greens Creek. And in fact, Keno's silver grade similar to Greens Creek grades when it started 35 years ago. And we believe that the acquisition of Alexco combined with the termination of the streaming arrangement will allow the potential of the district to happen. So I'm going to highlight the key terms of the agreement, walk through the strategic rationale of the deal and briefly describe the asset and how we see development moving forward. So I think this would be Slide 4. So just a few basic thoughts. At Hecla, when we think about what drives our strategy, there's a few key elements. And I'm going to go through these, and they're going to seem a little bit of mom and apple pie, but companies and investors forget them, maybe because they are so simple. The things like does the property have geologic potential beyond what is known is the land position large enough to grow that potential? Is it a jurisdiction that supports mining has rule overall that you can operate in for decades without interruption or unfair taxes or even expropriation? Is their available infrastructure? Is the quality of the known deposits high? And when I say quality, that could be grade, that could can be recoveries, can be dilution of stripping. It's a lot of things that go into that quality. Can the mine have a long mine life so you can learn the geology to find more and have the potential to improve the economics by increasing throughput and we're lowering cost through management innovation? And finally, is their community acceptance? So there's lots of boxes to be checked, but not many assets check all the boxes. And in fact, even assets that Hecla has doesn't currently check all those boxes, but the Keno Hill assets checks them all. And it has from the beginning when we started looking at this so many years ago. It's a very large land package. There's about 88 square miles with significant geologic potential on at least half of that. When you consider that this environment is the same as the Silver Valley where mining has been continuous for almost 150 years, you get a sense of how significant that potential is. It's in the Yukon, which is one of the best mining jurisdictions in the world. And it's probably the highest grade silver deposit in the world and feeding better than Greens Creek is now. And there's an existing reserve that we think will have a mine life in excess of 10 years and could conceivably produce 3 million ounces a year with maybe some years as much as 5 million ounces, depending on grade. There's a 400 tonne a day mill that conceivably could do maybe 500, maybe 550 tonnes if you could have a mine that could produce that many tonnes. And there's potentially some synergies with Greens Creek on transportation and on the smelting side of the business. And the Yukon and the First Nations could not be more supportive because it checks all these boxes. We've always believed this district could be a multi-decade asset that delivers real value to shareholders, provides multigenerational jobs to employees, becomes a foundational business for the community. So from a very high level, that tells you why we have wanted to acquire a Keno. So let me move to Slide 5 to tell you how we are acquiring it. it's going to be a plan of arrangement in the BC loss. So we're going to need 2/3 of the shareholders to approve the transaction. And those shareholders are going to get a 23% premium based upon the 5-day VWAP, and 12% based on U.S. close on Friday. We are providing a $30 million loan in light of the need Alexco has to finance continued development at Bermingham and Flame & Moth. In addition, we're going to subscribe to additional shares, increasing our ownership to 9.9%. And then once we acquire Alexco, we'll terminate the stream with -- in exchange for $135 million in equity. We think with Hecla owning the property, Alexco shareholders will own 3% and Wheaton's will own 5.6%, and that's going to generate very good future returns for them with our ownership of the property. And that's in addition -- and that's because we see the ability to create real value at Keno and that's in addition to the other things that are happening in the rest of Hecla. Finally, I'll mention that we have the typical protections for the deal. We have a $10 million break fee that nonplacement transaction costs and engagement that we've had, but also for the technical assistance that we've been giving Alexco over the past 6 months, we also have a right to match. Bottom line is we and Alexco believe the Hecla operating Keno Hill is really the way to best create value not just for shareholders, but for the employees, for the First Nations and for the community. And so with that, I'd like to turn it over to Clynt to walk through why the Alexco Board unanimously agreed to the Hecla acquisition. And why Alexco shareholders should support it too. Clynt?

Yes. Thanks, Phil. Turning to Slide 6. Just to point to make, the Hecla's technical expertise is an industry leader in high-grade, narrow vein underground silver mining, I think, is going to position Keno Hill to achieve its full potential. You can add to this, Hecla's organizational strength and strong balance sheet, which is available to invest in exploration across the district, which, as you know, has been very successful for Alexco. With Hecla, who shares our commitment to the environment and the community, the acquisition provides a superior opportunity for the first nation of Na-Cho Nyäk Dun and the wider Yukon community. We believe Keno Hill will unlock its full value under a proven operator and the acquisition will deliver long-term value to all Alexco shareholders with continued exposure to silver production without the addition of any jurisdictional risk. Specifically, benefits to Alexco shareholders are significant. The transaction provides an immediate, compelling premium and access to immediate and nondilutive financing for continued development and construction at Keno Hill. As I alluded to before, Alexco shareholders will continue to participate in Keno Hill's upside potential as well as be partners to the largest silver producer in the United States with premier silver mines in Tier 1 jurisdictions. Hecla has a strong history of innovation and developing assets and has the financial capacity to invest in the future potential of Keno Hill, especially now the mine will be unencumbered with the termination of the stream. Alexco shareholders will also have access to significantly greater trading liquidity. And finally, this transaction has received the unanimous support of Alexco's Board of Directors. And with that, I'll pass it back to you, Phil.

And let's move to Slide 7. Let me talk about how we're going to approach advancing Keno. Alexco's current plan is to do development only for the next 6 months or so and while we think that plan could work, we are likely to take the better part of the year or even 18 months of development and equipment acquisition before we put the known reserve, which is 37 million ounces into production. We believe a key to the success of the mine is to have multiple sources of feed from Bermingham and Flame & Moth with an equipment fleet largely dedicated to the areas so we can deal with unexpected conditions. Now the throughput is only 400 tonnes per day, which is less than half of Lucky Friday and quarter of Greens Creek. So getting consistent performance once you have enough levels of development equipment should be achievable. So what we're going to do at Keno, I think you can use Greens Creek and Lucky Friday as examples. At Greens Creek, what we have done since we acquired it in 2008 was increased production and throughput and that increase has come from management of mind that has continually focused on the risks to that continue -- that consistent performance. And we've selectively applied new technologies like automated mucking during shift change. And despite the 40 years of exploration that we previously have had, we've continued to evolve our thinking. And that has allowed us to expand our reserves and resource. And I think that -- I think our reserves are the second highest in the mine's history now. And as a result, of course, we've extended the asset mine life. And realize this mine took 10 years, so Greens Creek took 10 years before it became a positive cash flow mine, and Clynt was the manager that started that success. And since going cash flow positive, Greens Creek has generated over $2 billion of free cash flow. And I think Keno can be a smaller version of this. And then Lucky Friday is another example of our ability to increase value of this mine, which has an 80-year operating history this year. But even with all these years behind it, the best decade for the mine is ahead of it with silver production expected to be roughly double over the coming decade when compared to any of the past decades. We're doing that with a whole new mining method. So providing new thinking, innovation, we've been able to really cause this mine to be something new and special and increase its value. We think we'll be able to do all of that at Keno. So let's turn to Slide 8, where one of the keys to unlocking consistency and innovating performances, exploration success. So looking at the Keno Hill district, it has several large high-grade deposits. Over 200 million ounces has been mined with the Hector-Calumet being about 80 million in the first half of the last century. And this land package is 88 square miles with exploration only near surface. I think it's -- the deepest the exploration has gone is about 250 meters below the surface. And it's -- the exploration has only been on a fraction of the total property. So we're at the very early stages of exploring on this property, much like we were at Greens Creek in the early '90s where -- and we've seen how Green Creek has grown over the years. So if you move to Slide 9, you can see the success that Clynt and the team has had growing reserves and resources with reserve seeing a 22% increase from just the previous year alone. And in January of this year, Alexco announced a 43% expansion of Bermingham indicated resource. And this is the deposit that just has continued to grow. And so when you look at our history of reserve and resource growth, combined with our financial capabilities and you look at the remarkable growth in the reserve and resource at Keno. We think we're well positioned for this thing to continue to expand and grow over the coming decades. And so finally, looking at Slide 10, I think, I don't think Alexco and Hecla could be any more aligned on community, environmental stewardship. Alexco really started as an environmental business that was able to put the land package together and start exploration and then ultimately, development. And Hecla is now 130 years old and we've always met our environmental obligations. And in the communities that we operate in, we're among the largest taxpayers and having been employing generations of families. And in fact, just this year, we had one family who celebrated working -- someone in their family working continuously for over 100 years. And so that's the sort of commitment that we bring to Keno Hill, the same sort of commitment Alexco has had and then all of the commitment that Hecla's had. So Clynton, I and our Board think this is a great transaction for both companies as well as employees and communities, and we hope you think so, too. And so with this, I'll close our prepared remarks, and I'll ask the operator to open the line for questions.

[Operator Instructions] Your first question comes from Trevor Turnbull from Scotiabank.

Phil, congratulations to you and Clynton. It seems like this acquisition is a good fit and very much on point with what you've been doing. I apologize. I got on to the call a little bit late and perhaps you touched on this, but you talked about the capacity of the operation. And I just wondered if you did decide to make any changes to that, is there any permitting you have to think about? And the other question I had was just kind of about environmental. Is there any environmental concerns that you have to think about with respect to the historic operations?

Well, the answer to the second question is, absolutely, there is an arrangement that Clynt set up years ago in 2005, '06 when we went in. And so we have to follow those arrangements, and it's -- it works well for the company. It works well for the government and it works well for the environment where there's work that is actually done and it gets paid for. And to the extent that we go in to an area then -- to mine then that liability with respect to that small area gets transferred over, but otherwise, it's well managed. So -- it is boxed off so that you're not taking that liability on that you don't have responsibility for. With respect to growing the -- getting new permits, I'm not sure what would be required. I don't know if Lauren, if you have -- if you know and if you don't, probably Clynt does.

Yes. I think, Phil, that it would be normal course permitting. There's nothing large with respect to what you have contemplated for the operation.

Go it. And things like tailings capacity, there's plenty of that for the near term and so forth?

Yes.

Yes. And then I guess just my other -- my final question. With respect to manpower and workforce, is there any concerns with getting enough people to work up there? Or is this a type of situation where if you decide to put a little more manpower to work, there's a kind of a waiting pool of good people ready to go to work?

Well, Trevor, I don't think the mining issue is no different than anything else. There's a shortage of people sort of across the board. And certainly, all operations feel it, including ones at Keno Hill. Having said that, there is a cadre of employees that have been there for some time and that want to be there. And they have -- they've been very loyal to Alexco and we think they'll want to work for Hecla. So we think we'll have this continued base. And then obviously, we'll have to bring in people to supplement what's there and as people transition. But -- is it an issue, yes, but is it a problem? No, it's just -- it's one that's an issue that we can manage just like we do at the other operations.

[Operator Instructions] Your next question comes from Joseph Regard from ROTH Capital Partners.

Congrats on the transactions.

Good to talk to you again.

Okay. So just point of clarity. I think you stated that the plan is to take about 18 months before restart rather than the roughly 6 months that Alexco is planning. One, was that the correct time? And then if so, what are you going to do with the additional year?

Yes. So it's going to be somewhere between a year and 18 months and how long it is, will become a function as we develop the detailed plans. But what we want to do is get enough working faces in front of us to where we can have consistent performance. The worst thing you can do in a mining operation is having to take shortcuts in order to maintain the tonnes for the mill. So we're going to get enough development in front of us to avoid that. We'll also be put in a position to do infill drilling, which could conceivably convert material that we -- is otherwise not in reserve. And we think it's investing an additional 6 months to a year to assure ourselves that we've got things in place, all of the underlying infrastructure built is going to be well worth the time. And Lauren, what would you like to add to that?

No, you captured it very well, Phil. It's just a matter of building out infrastructure and development to allow for consistent production through the mill once we turn it on.

Okay. Second thing, Alexco has this revenue stream that they get for essentially environmental work that they do in the region. Is that a business you guys are going to continue? Or is that something you might look to kind of spin out of the transaction?

Well, we'll do the work that we need to do on the property that we have and then to the extent that it's not our core business, and it's then we certainly welcome others focusing on that and carrying that load. Our business is mining precious metals and the base loans that come with them. And we'll do what we need to do and do it well, but we really don't want to expand beyond that.

Okay. And then one final thing, if I could. There's a number of, let's call it, early-stage projects in the region, either immediately next door or within trucking distance. Long term, any thoughts about the possibility of consolidating further? Or do you think there's plenty of exploration upside just on the property you're picking up now?

Well, there is plenty of exploration opportunity on what we're picking up. But the Yukon is a -- just a tremendous province or tremendous area to mine in. There's lots of great exploration work that's going on. There's a lot of expertise that's there. And so we do look at it as a place that we want to grow and continue to add deposits and they might be right next door. They might be some place of further afield, but the Yukon is a place that we've had on our radar for the -- really the past decade as a place that we should be, whether it was with Keno Hill or other deposits.

Your next question comes from Lucas Pipes from B. Riley Securities.

Congrats on the announcement. Sorry if I missed this, but did you share the capital number that would be associated with that 18-month build-out?

Yes, it's going to be order of magnitude, $30-plus million, maybe as much as $50 million depending on new equipment that we might want to bring on. But it's not going to be any more than that.

And that would be separate from the bridge loan or in addition to?

That's inclusive of the bridge loan.

Got it. Got it. Okay. That's helpful. And just between that and then the royalty [indiscernible]. Is there -- are there thoughts about financing that or using cash on hand? And would there be any impact to the dividend from this transaction?

No impact on the dividend and the arrangement with Wheaton, is our equity. This gives them the opportunity to participate in Keno Hill and all the other assets that we have. So we're looking forward to them as a shareholder.

Your next question comes from John Tumazos from John Tumazos Very Independent Research.

Phil, congratulations on the comprehensive transaction to refinance Alexco. The company has never been so well financed before.

Thanks, John.

As you said, the entire district has potential. And the prior company thought they were ready to do backflips when they filled up the 400 tonne a day mill. Do you think 18 months is enough time to reevaluate the district and consider the right scale for Hecla in the Yukon? And could you talk a little bit about the exploration strategy where you're going to look other than the several deposits that Alexco historically has worked?

Well, I think the short answer is 18 months is really about the known reserves and some of the resources associated with that reserve. It's -- that's what -- that's all about is putting in place a plan and having the development and the equipment, the infrastructure in order to execute the plan. So that's what that is about. In the meantime, we'll do the exploration on the land position that Alexco has. But that focus is really going to be building off the success that these guys have had. It's been tremendous. They have in many ways cracked the code as to where to look. There's clearly more potential at depth to realize the deepest that the expiration has gone, has been 250 meters. And that's been as a result of -- there hadn't been a geologic limitation. It's been an infrastructure limitation and the need to have material that could be tracked -- easily tracked to the mill. So there's lots of exploration that needs to be done on the back of what Clynt and his team has already done. And then beyond that, there is the broader exploration to the east and the west of these deposits, and that will come over time. And then beyond that, there is the broader question of other opportunities within the Yukon. And so, John, this is not just an 18-month exercise. This will be, I'm sure, kind of a decade-long exercise much like the way we've approached all 3 of our operating properties. They have long-term potential and we've got a resource base that's large enough to be able to support this long-term view.

Could you compare the Alexco veins, say to Lucky Friday, in terms of typical thickness, typical grade and how much of the revenue would be byproducts?

Yes. I think Lauren would -- are you able to give sort of sense of that?

Certainly, Phil. So I think the way I would think about this, John, is the Lucky Friday is a nice wide vein that goes around 2,500 feet of strike length continuously. So it's a relatively continuous, compact mining horizon. The zones at Keno Hill are -- tend to be shorter strike length. They can be wider or narrower, but also very good grade. And the -- I would say the driver on the value is the silver, although the base metal grades are quite good in some instances as well.

Clynt, anything you'd want to add to that?

No, I think that, that covers it pretty well, Phil.

Okay. Great.

And your next question comes from Dalton Baretto from Canaccord.

Phil, I can't help but notice the similarities in the rationale behind this transaction and the one behind the Klondex acquisition. I'm just wondering what gives you comfort that this won't end up being another Klondex?

Well, the short answer, Dalton, is, I guess, 2 comments I'd make. One is this is -- has a reserve. Remember, the Klondex acquisition was really based on 2 things, the conversion of the inferred to reserve and then that funding the exploration in the district. This -- and that exploration is still ongoing, and the story is yet to be told on the success of the Klondex acquisition. In this case, though there is no reliance on conversion, it is strictly based on the reserves. Remember, there's 37 million ounces of reserve at Keno Hill. And so we have in front of us -- and with the reserve, we have in front of us a 10-plus year mine life. So it's starting from a different starting point.

Okay. Great. And then maybe I can ask -- maybe this one is for Clynt. Can you give me some context around some of the ground condition challenges that you've been seeing to date and maybe some of the water issues?

Well, before Clynt answers, I mean, that's something we certainly have spent a lot of time looking at both ground conditions and water. We -- I mentioned that we've provided technical support to Alexco for the last better part of 4 or 5 months. So we've had our geotechnical engineer there for a significant period of time as well as a number of other employees. So Lauren, maybe if you can start and I'll ask Clynt to add to whatever he might say.

Absolutely. So the ground conditions that we see there are actually fairly typical of this sort of deposit. And then we have extensive experience with the geology. And we've learned over the years some means by which the ground and the [ seal ] conditions, the roadbed conditions can be managed effectively. And we are looking to deploy those same proven techniques and methods that we developed elsewhere at Keno Hill. And I think in the period of time that we were there doing diligence, we were able to observe and provide some pointers and assistance. And I think that we have seen some improvements in how the ground is managed. And we're not overly concerned about it. This is right in our wheelhouse.

Talk a little bit, Lauren, about the water what we -- the issues that Alexco has had and what we'll be doing and this ties into this year to 18-month development.

Right. So the water is pretty consistent with respect to volume. And one of the things that we noticed over the period of time that we were working on the property is that, that amount of volume didn't increase significantly as the development deepened. But as the development deepened, the water followed the development down. And that makes the ground conditions much easier to manage in the regions above the active development. And so that is one of the strategies we'll employ, and that will be to be 2 to 3 sublevels ahead of the mining front with the development in order to pull the water away from the working cases.

Clynt, anything you want to add?

No, I think that, that encompasses it extremely well. Obviously, Hecla's proven experience in and around these types of deposits and in these -- in this type of geology is pretty obvious. I think it's a great fit.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Okay. Well, thanks very much for participating in the call. Obviously, if you have questions, please reach out to Anvita and the rest of us and would be happy to answer them. We are going to be engaged with employees of the Alexco as well as the various constituencies that are affected by the mine, and we look forward to talking to those folks. And please reach out. We're anxious to let you know what we see as the future for Keno Hill because we see it as one of these assets that's similar to Greens Creek, Lucky Friday that we can add real value to over time. So thanks very much. Appreciate you joining us. Have a good day.

This concludes today's conference call. You may now disconnect.