Alexis looks to get back on track

Alexis Minerals (AMC-T) is looking to make a comeback.

After running into a series of obstacles at its Lac Herbin gold mine in Val d’Or, Que., and watching its share price sink as a consequence, the company is eyeing future success on the back of Manitoba’s gold.

Alexis’s Snow Lake project in west-central Manitoba, roughly 700 km north of Winnipeg, certainly has some credentials.

The site was mined by Kinross Gold (K-T, KGC-N) and High River Gold (HRG-T) from 1995 to 2005 and turned out roughly 820,000 oz. gold.

And mining at Snow Lake goes even further into the past than that, as ore was first milled back in 1949. When all of those years are taken into account Snow Lake’s total historic production rings in at 1.44 million oz. gold mined from 12.1 million tonnes grading 4.67 grams gold per tonne.

One benefit for Alexis is that all surface installations remain in place and in good condition, as the mine was rebuilt in 1995 by High River.

“The difference between Snow Lake and other mine development projects is the short time line to production,” says Francois Perron, Alexis’s president and chief executive. “It was simply closed down so all we have to do is renew the permits and we don’t even have to strike any deals with First Nations.”

Perron came on to lead the company at the beginning of the year with the intention of getting Snow Lake into production.

But while having a mill without any permitting headaches is nice, it doesn’t guarantee a profitable mine. What is needed for that is plenty of high grade ore still left in the ground.

And on that front, Perron says Alexis is heading in the right direction. He points out that for roughly $6 million the company was able to increase measured and indicated resources by 279,000 oz. gold and inferred resources by 19,700 oz. gold.

“People often say that when guys have left a mine, there’s not much left in the mine,” he says, “but to find ounces this cheap shows that the project has legs.”

The work done by Alexis brought measured and indicated resources up to 5.7 million tonnes grading 4.14 grams gold for 728,000 oz. gold, while inferred resources now stand at 2.4 million tonnes grading 4.43 grams gold for 336,700 oz.

The project came with proven and probable reserves of 3.48 million tonnes grading 4.04 grams gold for 451,900 oz. gold.

That increase in resources will mix in with a new vision for how to mine it, as Perron wants to alter the plans laid out in a feasibility study released last fall.

That study estimated a capital expenditure of $40 million with sustaining capex on top of that of $35.2 million. The money would restart a mill that could turn out 83,000 oz. gold per year at an average cost of US$640 per oz.

But those numbers will change if Alexis carries through on its latest plan to cut a drift from the main zone into what is known as the Number 3 zone.

Digging the roughly 1.5-km drift would add $5.5 million to the capex but the extra dollars would wind up saving the company $9 per tonne of ore mined, which Perron says, translates into saving of $50 per oz. of gold produced.

Perron concedes that Snow Lake currently lacks the reserves to justify the expenditure, but he says, that changes if the inferred resources at Number 3 are considered.

Those inferred ounces lay in the footwall of the current resources.

Another advantage of the drift is that it would add 2 to 3 years to the mine life, which would mitigate one of the project’s weaknesses: its relatively short mine life of five years.

“With any mining you have problems that come up and to get around them you need flexibility,” Perron says. “By adding the drift, we gain flexibility.”

That flexibility would be found in the better access the drift would give the company to explore and mine other targets between the two zones.

As for Lac Herbin – where Alexis initially said production would come in at 30,000 oz. of gold per year – production is now slated to come in between 9,000 and 11,000 oz. this year and 15,000 to 20,000 oz. in 2012.

“The geology didn’t bear out as expected as veins didn’t carry as far down as we had hoped,” Perron explains.

With less tonnage than anticipated, cash costs at the mine have soared. Alexis now says it will cost roughly US$1,200 to produce an once of gold at the mine.

Perron says that makes the math pretty simple. If gold prices stay above the US$1,200-per-oz. mark, then the mine stays open; if prices fall below that mark, then it closes. With gold prices as high as they are now, Perron expects the mine will turn profitable by the fourth quarter of this year.

Still, his enthusiasm for the mine is measured. “I would view this as a self-funding exploration venture,” he says. “But over time, incrementally, if we keep improving operations there, it can be a good base for us in the Abitibi region.”

It will also play a part if the company is to reach its goal of becoming a 100,000-oz.-per-year producer in the coming years.

If Lac Herbin can produce roughly 20,000 oz. a year at a reasonable profit, and Snow Lake gets to the 80,000-oz.-per-year mark it is slotted to achieve, then Alexis could reach the benchmark in the not-too-distant future.

How far in the future that is, depends greatly on the financing for Snow Lake.

With roughly 580 million shares outstanding, raising more equity isn’t promising. Indeed, such a large share base begs the question as to when a roll back can be expected.

Perron meets the question head on. He says he doesn’t believe the commonly held notion that reverse splits hurt stock prices.

“When they are done by a company with bad fundamentals, then yes, the share price can fall,” he says. “But if the company is going well, it’s not a problem … and when I announce a reverse split it will be because I’ve fixed things.”

Fixing things will largely have to do with raising the debt financing necessary to get Snow Lake into production and then ensuring that an efficient and profitable mine is running.

Perron says he is currently in negotiations for the $50 million in debt the company needs to build Snow Lake.

That capital, however, won’t be enough to cover exploration costs. For that Perron says the company will have to do another flow-through financing next year. He says that no more than 5-10% of the company’s market cap would be issued as new equity.