The universe of mining stocks has certainly changed over the past decade. The popularity of pure bullion ETFs, such as the SPDR Gold Shares (ARCA:GLD) and iShares Silver Trust (ARCA:SLV), has given investors the option of bypassing the agonies and ecstasies of individual companies in achieving exposure to precious metals. That said, well-run mining companies can still offer alpha to investors. The question, however, is whether Alexco Resource Corp (AMEX:AXU) deserves to be called "well-run" and whether it can achieve its production and cost efficiency goals.

Capital Budgeting: Learn the processes through which a business determines whether projects are worth pursuing.

Good Assets in a Stable Region
Arguably one of the best factors working in Alexco's favor is that it operates in a known silver production area (the Keno Hill area, along the "Silver Trail" in central Yukon) in a country (Canada) with a consistent and generally pro-mining policy. This is not a company, then, that needs to worry about hacking out roads into a rain forest or having its assets expropriated for running afoul of a tin-pot dictator.

In fact, the area in which Alexco operates produced about 217 million ounces of silver from 1950 to 1990, and it still has silver, lead and zinc yet to give.

Up and Running, but not at Full Stride
Further de-risking the Alexco story is the fact that the company has its Bellekeno mine (and mill) up, running and producing silver. What's more, two additional mines (Onek and Lucky Queen) are supposed to come on line this year.

Unfortunately, the company still has a ways to go to reach its goals. While these are relatively high-grade silver deposits, the company will have to significantly step up its production to reach its goal of 5 million ounces per year of silver in 2015 (production was about one-tenth that amount in the third quarter).

More importantly, at least in the near term, Alexco has much to achieve in its production cost goals. The company (and its sell-side analysts) has talked of a long-term production cost goal of $8 to $9 per ounce, but cash costs have been running higher than that - about $15.50 per ounce in the second quarter of 2012 and then about $10.50 per ounce in the third quarter, with a sizable part of that sequential decline coming from greater use of long-hole methods.

The basic problem now seems to be one of volume. The company's Bellekeno mill is rated at 400 tons per day of throughput, but the company has yet to exceed 300 (it was 270 in the third quarter). At the same time, there has been some variability in ore grades in recent quarters.

Still Time to Work
Ostensibly these are fixable problems, particularly with those two additional mines expected to come into production and more than 30 high-grade targets in the area. The company isn't hurting badly for capital at present, though Alexco did have to strike a bargain with Silver Wheaton (NYSE:SLW) to get the capital to commission Bellekeno. That gives Silver Wheaton 25% of the life of mine production for just $3.90 per ounce (which increases by 1% a year after the third year).

The Bottom Line
Barring a relative collapse in silver prices, the prior resource data on Alexco's properties (coupled with the real-life experience from Bellekeno) suggest a net asset value somewhere between $5 and $6.50 per share for Alexco. Relative to today's sub-$4 price, that's a pretty appealing gap for risk-tolerant investors. At the same time, if Alexco can't deliver the hoped-for ore grades and cost efficiency, this stock could struggle. As investors in junior mining companies already know, that's just part of the "fun" of investing in this sector.

Is Alexco a good stock to buy today? To a large extent, that depends on what you're looking for in an investment. If you just want exposure to silver, the iShares Silver Trust or perhaps even shares of Silver Wheaton are much more effective means to that end. But if you want a company-specific story with the potential for execution upside (and risk to the downside) and alpha generation relative to silver itself, Alexco could be worth a closer look at these levels.

At the time of writing, Stephen D. Simpson did not own shares in any company mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Products

    Learn more about the BioShares Biotechnology Products fund, an exchange-traded fund that is focused on producers of FDA-approved drugs.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Nasdaq Biotech

    Learn more about an innovative inverse-leveraged sector exchange-traded fund, or ETF, the ProShares UltraShort Nasdaq Biotechnology fund.
  6. Chart Advisor

    Value Stocks Offer Stability in a Volatile Market

    With volatility on the rise, investors are turning to segments of strength such as value stocks. We'll take a look at several ETFs that could be worth a closer look.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Market Vectors EM High Yield Bd

    Learn more about the Market Vectors Emerging Markets High Yield Bond ETF, a fund dedicated to subinvestment grade foreign debt issues.
  10. Mutual Funds & ETFs

    ETF Analysis: First Trust Tactical High Yield

    Find out more about the First Trust Tactical High Yield fund, a debt security-focused ETF designed to produce high income.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!