VANCOUVER — Vancouver-based producer Alexco Resources (TSX: AXR; NYSE: AXU) is struggling with declining margins at its wholly-owned Bellekeno underground silver mine in the central Yukon. A recent and steep drop in silver prices has forced the company to outline a potential closure strategy at the site that could come into effect as early as October.
September contracts for silver have dropped from nearly US$30 per oz. in early May to US$19.35 at the time of writing. That’s a tough reality for Alexco, as the company had one of its best quarters at Bellekeno over the past three months.
Alexco produced around 955,800 oz. of silver during the second quarter, which represents a 52% increase compared to the first quarter. Improved performance was a result of a 27% increase in mill throughput quarter-on-quarter to an average of 283 tonnes per day, as well as an 18% increase in grade to an average 751 grams per tonne.
“The second quarter was one of our best quarters since initiation of production in early 2011, as the mine sequenced toward interior portions of the Southwest and 99 ore zones,” commented president and CEO Clynt Nauman, noting that overall tonnes and grade for the first six months were as targeted with approximately 46,000 tonnes milled at an average grade of 700 grams per tonne.
“The contrasting side of this good news is the negative impact the metals prices are expected to have on financial results for the quarter, which all miners are currently experiencing,” he added.
As a result, Alexco has developed a contingency plan to operate through the summer while beginning preparations to undergo what it calls “a temporary and orderly” suspension of operations at Bellekeno before the onset of winter.
The company hopes to avoid selling silver at current market prices, and position its mine for a re-opening following the Yukon winter. Alexco does note, however, that it will require a strengthening of metals markets and lower fixed costs to get Bellekeno back into production. The company was running cash costs of roughly US$16.70 per oz. of payable silver in the first quarter, net of by-product credits.
Alexco hopes to take the winter to “significantly” restructure the underlying fixed costs at its Keno Hill district play, as well as refine plans for a production ramp-up to 400 tonnes per day by 2015. The company will also continue with preliminary economic assessment work on its existing resources at Bellekeno, Onek, Lucky Queen and its new discovery at the Flame & Moth deposit.
Alexco is currently sitting on underground indicated resources totalling 2.6 million tonnes grading 506 grams silver per tonne, 0.4 gram gold per tonne, 2.2% lead, and 7.1% zinc. Keno Hill’s contained silver totals around 41.8 million oz. across Bellekeno, Lucky Queen, Onek, Flame & Moth, and Bermingham.
Alexco began cutting costs at Keno Hill at the end of May. The company decreased its workforce at the site by roughly 25%, while executives were forced to reduce take-home pay by 20%. Commissioning of Alexco’s production-ready Onek silver mine was delayed pending a strengthening of silver prices to levels seen “six to twelve months ago.” The company’s exploration budget remains largely unchanged due to the completion of a US$7-million, flow-through financing in late April.
“This has been a difficult decision, but we feel it is a prudent move to ensure optimization of future production costs, while saving the cost of winter operations,” Nauman commented. “Along with reviewing our fixed costs, we will specifically be looking at our third party agreements with a view to better ensuring the longer term sustainability of the Keno Hill operations.”
Alexco lost 8.8%, or 12¢, following its announcement en route to a $1.24 per share close at the time of writing. The company reported cash and equivalents of US$13.7 million at the end of the first quarter, and generated a net loss of $2.3 million, or 4¢, per share. Alexco maintains 62.6 million shares outstanding for a $77.6 million press-time market capitalization.