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Alexco Resource: Mine Development Is Affected By COVID-19 Fears (NYSEMKT:AXU)

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Via SeekingAlpha.com

Thesis

The implications of the prevailing COVID-19 pandemic have varied from industry to industry. For the mining industry, they signify that existing miners could continue operations subject to locally-enforced protocols and, of course, depending upon the extent (if any) of the spread of COVID-19 in the respective mining localities. Generally, miners having geographically dispersed operations are better off than those with geographically-concentrated operations.

However, the impact is particularly significant for E&D (read: exploration & development) companies like Alexco Resource Corp. (AXU) which converge their operational focus (and cash inflows) on future development projects like the KHD (read: Keno Hill District). In this article, I will discuss the reasons why AXU is likely to have a rough H1 2020 despite having closed 2019 on a solid track record. Our discussion will include key issues like project permitting status, liquidity concerns, silver prices, as well as the macroeconomic operating environment in the locality (Yukon, Canada). Let’s get into the details.

Figure-1 (Source: Mining Technology)

An investment case in Alexco

AXU’s FY 2019 report (Q1 2020 results are awaited) revealed revenues of CA$29.2 MM, up from CA$19.88 MM last year (up 47% y/y). These revenues were attributable to environmental services provided by AXU’s subsidiary, AEG. The bottom line saw a per-share loss of CA$ 0.08 that remained flat with last year. The balance sheet saw a y/y jump from CA$133 MM to CA$145 MM denoting a significant increase in ‘mineral properties’ and ‘derivative assets’ that were supplemented by a ~CA$10 MM increase in shareholder equity. AXU hosts a couple of promising silver-lead-zinc deposits in the KHD that’s expected to contain a minimum accumulated ‘reserve’ of >30 Moz of silver (excluding reserves for lead, zinc, and gold). A significant proportion of AXU’s 2019 mining CAPEX was incurred on the Bermingham property (Figure-2) which is expected to contain ~11.3 Moz and ~44.7 Moz in reserves and resources respectively. The CAPEX allocation seems appropriate to me considering the fact that Bermingham has the second-best potential in terms of ‘reserves’ and the best potential in terms of ‘resources’ (Figure-3), followed by the Flame & Moth deposits.

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Figure-2 (Source: FS)

Figure-3 (Source: Presentation)

However, FY 2020 did not start on a good note for AXU. The company sold its subsidiary and present cash-cow namely AEG (read: Alexco Environmental Group) to its executive management against total consideration of $13.35 MM (comprising of cash consideration of $12.1 MM and deferred consideration of $1.25 MM). Subsequently, AEG also closed an ~$8.6 MM over-night marketed public offering in an attempt to boost its cash flows to support development CAPEX as well as working capital requirements. Apparently, AXU contemplated that mine development would be completed by the end of the year, and operating cash flows would kick in to substitute the revenue stream previously provided by AEG. However, I believe that the prevailing pandemic has decreased the chances of timely mine development.

AXU’s previous timeline envisaged obtaining the Yukon WUL (read: Water Use License) by Q1 and developing three key deposits/mill ramp-up during H2 2020 (Figure-4).

Figure-4 (Source: Previous article)

However, a recent corporate update announcement has pushed the timeline for obtaining WUL into Q2. AXU has also suspended all underground development activities amid the prevailing COVID-19 uncertainty. In my view, the completion of mine development may well stretch beyond FY 2020 as we are unsure how long this pandemic would haunt the macroeconomic environment.

Given the ongoing uncertainty with the COVID-19 crisis and with a priority for the health and safety of our employees, contractors and the local community, the Company has suspended underground mine development activities and buttoned-up capital investments made to date while continuing to maintain all areas of the site. Mill improvement projects that can be completed with existing Yukon employees will continue and non-essential Keno Hill based employees will work remotely on a number of engineering and project planning requirements. -Corporate Update.

Additionally, AXU has scaled down its previously announced 11,500 meters FY 2020 surface drilling program. The good thing is, the reduced drilling program would focus on high-grade mineralization targets in the Bermingham property and would prove to be a viable decision.

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On a separate note, silver has seen a material downfall from its highs of ~$19/oz witnessed in late February. At present, silver prices are moving within the range of $15-16/oz (Figure-5). In my view, the PM prices would remain volatile during the coming weeks as the equity markets are pumped up following the US Government’s approach to gradually reopen the economy.

Figure-5 (Source: Finviz)

Investor Takeaway

The preceding discussion reveals that AXU has disposed of its existing cash-generating unit namely, AEG. If AXU is unable to close mine development activities by the end of FY 2020 and runs short of meeting its working capital needs and/or CAPEX requirements, it would likely go for raising additional capital in line with its past practice (note that AXU has an unlimited number of shares in authorized capital) instead of utilizing funds from the existing 4 million dollar revolving LOC (read: Line of Credit) from Bank of Montreal. This would result in a mild dilution of shareholder value. A significant threat to AXU’s operations stems from the prevailing uncertainty arising from the COVID-19 outbreak. Since AXU operates in the safe but strictly-monitored jurisdiction (in terms of regulatory enforcement) of Canada, a delay in obtaining a WUL license together with the indefinite suspension of underground mine development could be attributed to the element of ‘uncertainty’ associated with COVID-19. This raises questions about the company’s FY 2020 outlook and warrants caution despite the fact that AXU is currently trading below the mid-point value (at $1.77) of its 52-week range and is technically attractive (Figure-6).

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Figure-6 (Source: Finviz)

In my view, the stock would largely move sideways unless either there’s a material recovery in the prices of silver, removal of uncertainties associated with the prevailing COVID-19 pandemic, or the WUL is provided to AXU.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.




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