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.
Tickers in this Article: AXU, GLD, SLV, SLW

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