Hecla Mining Co (HL) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to your Q3 2003 Hecla Mining earnings conference call. My name is Jean and I will be your conference coordinator for the day. At this time, all lines are in a listen-only mode. After our presentation, we'll open the call to questions. Should you require operator assistance on this call, key star zero on your tone dial phone and we'll be happy to assist you. I'd like to advise you the conference is being recorded for replay purposes. I'd now like to turn the call over to your host, Ms. Vicki Veltkamp, Vice President of Investor and Public Relations. Ma’am, you may proceed.

Hello everyone, and thank you for joining us today. I am Vicki Veltkamp and this is the Hecla Mining Company third quarter 2003 conference call. This call is being webcast live today, so welcome to all of you as well who are on the webcast. You will be able to access a replay of it if you wish at our website at www.hecla-mining.com. At that Website you will be able to find the quarterly and nine month financial results in yesterday's news release and at the end of that news release, you will find a quantitative reconciliation to GAAP of cash cost per ounce, which now is an SEC requirement. Today's presentation will be made by Phil Baker, Hecla's President and CEO, with help by Lew Walde, our Vice President and CFO, Tom Fudge, Hecla’s President of Venezuelan Operations, and Ron Clayton, Vice President of North American Operations. This will then be followed by a question-and-answer period that you can participate in. Any forward-looking statements made today by our management come under the Private Securities Litigation Reform Act of 1995 and involve a number of risks that could cause actual results to differ from projections. Now I'd like to turn this over to Hecla's President and Chief Executive Officer, Phil Baker. Phil?

Thanks Vicky. Just one thing I will point out is that we are in separate locations. So when questions are asked, just direct them to me, and I'll arrange for one of us to answer the questions. I do want to welcome you to the conference call, and what I'd like to do is put the quarter and what we've done so far this year in a context for you. Because like 2002, 2003 is turning into one of the best years in the history of the company. We had as much net income excluding one-time items this quarter as we've had, with the exception of the first quarter of this year, really at any time in the history of the company. And we've had more than $4 million of gross profit than we did last year. We have our silver operations generating 70% of our gross profit, and 100 times what it was last year. Our silver costs were a phenomenal $1.33 per ounce, due to the great performance at both San Sebastian and Greens Creek. And this cost structure that we have of course is significantly better than any of our competitors. And it continues a trend that we've had of focusing on declining our cost. we did produce less gold than we have in the past at a slightly higher cost, but we expected to do that. And we also expect to see some improvement this quarter.

We've taken an environmental accrual, on the events occurred in our review of Grouse Creek, where we sat down with the Forest Service and initiated a plan for the closure of Grouse Creek, and with that we did an estimate on what it might cost to close the property. And so we're accruing to that estimate. In the Basin litigation which has been ongoing for the last -- since 1997, the judge earlier this quarter made a decision, a decision that we were in general quite happy with. But as a result of that decision we now know that we will have some liability. We spent time over the last month evaluating what our liability might be. And we came up with a range of $18-58 million, with respect to the response cost, the cleanup cost in the basin. And under the accounting literature, because no – no amount was any more certain than the other amount, it caused us to accrue to the lower amount. So that's why we accrued to the $18 million. But we do have a range from $18-58 million. When we look at these environmental accruals, it does not cause us any concern. We see the level of expenditure that we will make for them, for all of our environmental matters, to be consistent with what we've done in the past and what we've indicated the level will be on an annual basis going forward.

We -- just two and a half years ago we had over $69 million in debt. Today we have about $7 million. We've had great, strong cash flows and so we have $114 million of cash on the balance sheet. We've spent $2.5 million on exploration, which is more than we spent in a decade and two times what we spent last year. So again, this has been an outstanding quarter for the company. And again, what I hope you take away from this is our ability to operate assets that will deliver production as we project, and do it at as low a cost as possible.

Before I turn it over to Lew and Tom and Ron, I just want to make a couple of comments about our exploration. We're on track now to spend $12-15 million, probably closer to $12 million than to $15 million. And what our objective is, is to try to grow our resource base enough in order to make decisions to go underground. You’ve seen that earlier happen with Don Sergio, and you're seeing the start of that happening with the decisions -- with the announcements that we've made on Block B and Mina Isidora. We're going to take that information on Mina Isidora and work toward having a development decision quite soon. As you can see from the grades that we see there, it's a very, very attractive, very exciting property. But it is a property that we need to do engineering on and need to determine what the best way is to attack it and extract the most value, generate the best returns on the investment.

Capital spending for us has gone a little bit slower than we had anticipated. We have, however, made the decision to put a shaft in at La Camorra, and that is underway. We've contracted with Red Path and our expectation is by -- certainly by the fourth quarter of next year, we will have an operational shaft. With that, let me turn it over to Lew. And Lew, if you can review the financials for us.

Thank you, Phil. And welcome to everybody on the call. One thing that really stands out in the third quarter is the fact that Hecla's a diversified precious metals company. Not only do we produce gold, but we also produce silver and in fact during the third quarter, the silver was really the shining -- shining star for us. Silver production increased 27% quarter on quarter. And maybe more importantly or equally as important, the total cash cost per ounce of silver decreased from $2.44 in 2002's third quarter to a very low one dollar -- or actually a record low cash cost of $1.33 per ounce. Hecla's gold operations, as Phil mentioned, were slightly lower than the last time -- last year's quarter. For La Camorra produced roughly 27,000 ounces of gold at a cash cost of 161 per ounce.

Now, when we look at the company's gross profit, although gross profit from gold is decreased to approximately $3.2 million this year, compared to $5.7 million last year, however, the overall gross profit for the company increased an incredible 62%. And that's principally due to the phenomenal performance of the silver segment, where gross profits increased nearly 900%. This performance of the silver operations obviously benefited from improving metal prices, combined with the outstanding performance at the San Sebastian mine, which is a silver operation in Mexico. The cash cost per ounce of production at San Sebastian during the third quarter was a negative 22 cents per ounce. This compares to $1.11 in the same period last year. Of course, the San Sebastian mine also produces gold, which is a byproduct credit when we're determining cash cost per ounce there. Well, San Sebastian did great in the silver operation, so did Greens Creek. Greens Creek's silver production increased 26% while at the same time we saw 41% reduction in cash cost from $1.93 to $1.14 per ounce.

After the recognition of the environmental accruals that total $23.1 million that Phil had mentioned, and the effect of unpaid preferred dividends, the company had a loss applicable to common shareholders of about $18.1 million or 16 cents per share during the third quarter, which compared to about a loss of 20 cents per share in the 2002 period. For the first nine months of the year, Hecla's recorded income before the accruals and preferred dividends of $14.9 million, which compares very favorably to the $6.8 million of net income that was realized for the first nine months of last year. Increased silver production of about 17%, decreased silver cash cost of 34%, combined with solid gold production at $145 per ounce, were the main drivers for this remarkable improvement. Hecla's positive operating results have contributed to a 20% increase in the cash flows from operating activities for the 2003 period compared to 2002. This despite significant additions to working capital at some of our operations.

We've seen receivable balances go up, some in part due to the favorable metal price environment. We've also added, you know, necessary working capital for inventory at some of the other operations. So overall, our cash flow has increased 20% despite some significant increases in working capital. And in fact at the end of the year, or at the end -- not at the end of the year, but at the end of the quarter, our total cash balance plus short term investments totaled more than $115 million. In addition to the cash and short term investments, total debt for the company has been reduced further, to only $7.4 million at the end of September. And in fact, in the fourth quarter we anticipate that that debt will be reduced even further by an additional $2.8 million. So by the end of the year your company will virtually be debt-free. And this debt-free position to cash on the balance sheet gives us a very strong balance sheet from which we can move forward with our growth objectives.

In summary, Hecla's financial and operating performance for the third quarter continues to be very positive. We've seen the benefits of diversification in both gold and silver. The balance sheet is strong. The operations are performing well. And the exploration investments are intended to advance the company forward into the future. With that said I'll turn it over to Tom Fudge, our Vice President of Operations, who will talk about Venezuela operations and exploration.

Thanks Lew. This is Tom. Noted in the earnings release, production at La Camorra was down compared to last year's record breaking quarter. However this is expected, as the mine operations advanced through some low grade areas that are less productive areas of the ore body. We anticipate improved grades and production for the next several months, as evidenced by October increased output versus our third quarter's average. We see additional encouragement from our current definition drilling program on the Betsy vein, indicating increased strike length below the current development levels. These results will be incorporated into our year end resource calculations, and I expect the La Camorra mine to be a profitable producer for several years to come. We’re using directional drilling techniques to explore the deep potential at La Camorra, and we completed the pilot hole during the third quarter. This work is going to provide us a platform for 20 to 24 drill intercepts, targeting the down-dip extensions of ore shoots in the main zone in the Betsy vein. To provide some perspective, the La Camorra mine development and resource drilling over the last ten years has identified mineral from the surface down approximately 700 meters. And that contained over 1 million ounces of gold. Our current program will extend our reach by almost 50% and do it within one year, and give us an indication of what to expect over the next five years at the La Camorra operations.

Meanwhile, our exploration workout at Block B has provided us with some very exciting results. And we've advanced things sufficiently that we should be able to include a significant portion of what is now called Mina Isidora as proven and probable reserves by the end of this year. We're very pleased with our progress, especially given the fact that we've own only been drilling there on this resource for one year. Detailed engineering is proceeding for mine development and has been aided by the recent acquisition of a preexisting lease adjacent to the new ore body. Now, this acquisition has the potential to reduce our lead time into development. There is a lot more going on in the company, so I'm going to turn it over to Ron to talk about the other operations at this time.

Thanks Tom and good morning. I think I'll start from the far north, since Tom is talking from the far south. Greens Creek turned in an extremely strong performance during the third quarter. The outstanding cash cost of $1.14 per ounce was a result of several factors, the most important two being high silver grades, 22 ounces a ton, which was driven primarily by increased production from the 200 South ore body, and continued achievement of some targeted efficiency improvements, and the most important of those is mill throughput in excess of 2200 tons per day. Exploration results at Greens Creek have been extremely good this year. The highlight at this point is the 45 ounce per ton silver intercept on the west side of the Gallagher fault. This is virgin ground from a mining standpoint and several additional holes have intercepted the mine host contact in the same area. This leads us to believe the opportunity for additional discoveries at Greens Creek are quite good. As we've mentioned before, the Lucky Friday crew has been working on refining the development plans for the lower Gold Hunter ore body, and that would return the mine to capacity production. The mine is currently producing between 400 and 450 ore tons per day and approximately 2 million ounces of silver annually. Development of another level from the silver shaft to the Gold Hunter deposit would provide additional work places, allowing production to increase to approximately 900 tons per day and 4.1 million ounces per year. Capital requirements would include preproduction drifting, a drill program, installation of minor underground infrastructure for ventilation and services. At this point we are encouraged by the results to date and we expect to complete the planning project very soon.

Moving south to the Hollister project, permitting and design work has progressed quite well during the quarter. Applications for all the major permits are either being reviewed by the agencies, or in the case of the air quality permit, we've already received it. Assuming normal progress through the review and public comment period, we would expect the permits to be in place during the first quarter of next year and be ready to begin the underground exploration project. Finally, the team at our San Sebastian mine and mill in Mexico turned in another outstanding performance. The mine continues to operate well within our expectations for operating cost, delivering total cash cost per ounce of a phenomenal negative 22 cents during the quarter. Diligent mining and low dilution, coupled with gold grades of .32 ounces per ton and silver grades of more than 29 ounces per ton continue to drive the cash cost per ounce to extremely low levels. The preproduction development at Don Sergio is nearly complete, ahead of schedule and under budget. The surface and underground infrastructure are complete, and we are producing development ore from the first level. While it is early, our expectations for tons and grade are being met there. We continue to see encouraging results from drilling below the resources at Don Sergio and at the nearby Andrea. Our structural, geophysical, and geochemical programs conducted during the past couple of quarters are beginning to provide additional target information. We expect to be able to continue to mine profitably in the [Saladio] Valley well into the future. That's it for the North American operations, so I'll turn it back over to Phil.

Thanks Ron. So with that, what you can see is that again we've had a fantastic quarter sort of on all fronts, exploration, operationally, financially. We have faced up to the environment issues that the company has and we don't see any material impact from those things. And we see ourselves in a position to grow and to generate returns for shareholders. So Vicki, I think with that, we can start the Q&A.

Alright, thank you. Operator, could you start the question-and-answer period at this time?

Thank you very much. Ladies and gentlemen, if you have a question or a comment, key star then 1 on your own tone dial phone. If you want to withdraw your question, key star 2. Once again, key star 1 for questions. We’ll pause for just a moment while your questions are collected. And your first question of the day comes from Anthony Sorrentino of Sorrentino Metals. Please proceed, sir.

Hello everyone. With regard to Mina Isidora, how would you go about accessing the deposit and what would you estimate the capital cost to be?

Anthony, this is Phil. I'll start and then Tom, maybe you can fill in. We don't know yet exactly how we're going to access this. We -- as Tom mentioned, we have this incline ramp -- incline shaft that we've acquired that could play some role in what we do. But we probably will, given the size of the deposit, there's about 500 meters from end to end. We probably will have at least two accesses. And because of that, that uncertainty, in terms of the amount of capital, it's not known. But it's not going to be materially more than, say, $25 million or $30 million of total capital. Tom, is all of that accurate?

Yeah, that's pretty much where we are right now. One of the things you have to remember about this ore body is that it's a robust vein, but it's dipping at about 45 degrees. So that gives us some challenges as far as the geometry of the mining layout goes. We are looking at everything from incline shafts to vertical shafts to ramps. We're dialing in on a few specific design items and the information we got from this last round of in-fill drilling has certainly given our engineers a lot of good things to work with so that we can optimize our design before we start breaking ground. And we're expecting to finalize a lot of this over the next couple of months, and see how that fits together for the overall package. But Phil's right, we're looking at a $25 million, $30 million program here.

So Anthony, I think we'll certainly be shooting to have a plan around these ounces in short order. And hopefully it could be as early as the first quarter of next year. But you know, let's wait and see, because of this acquisition of this incline shaft has just happened recently, and as a result, it's -- we're having to figure out how it fits into our plans.

Okay. You said that the ore body is 500 meters by 500 meters. How deep is it?

Well, no. I said it was 500 meters across is the -- in terms of depth, Tom, why don't you deal with that?

Well, the variable topography. But the top of the ore body is about 100 meters below surface. And the bottom of the ore body is about another 250 meters below that, 225 meters as far as elevation goes. So it's not a real deep ore body. And it is open, down plunge, so what we're trying to do is figure out how we can get in there and make the best use of our initial access and understand where we think the ore body is going to go.

Okay. Very good. Thank you and congratulations on another great quarter.

Thanks a lot, Tony.

Again, ladies and gentlemen, that's star one if you'd like to ask a question. Your next question comes from Mike Jalonen of Merrill Lynch. Please proceed.

Hi Phil.

Hi Mike.

I guess going back to Lucky Friday, sounds like it's getting luckier there. Just wondering, I guess following on the question on Block B, Mina Isidora, what – do you have any sort of idea on the capital costs, to reopen it there, cash cost because you’re running right around $5 per ounce year to date, or close to that. $4.75, sorry.

Mike, with respect to Lucky Friday, we are working to -- on a new plan. We have to make a decision soon in order to avoid an interruption in production there to develop that next level. And that would be at the 5900 level. The work that's been done would indicate that there's an opportunity to do something even at today's prices. So we think we'll be able to reduce the operating costs further from what you're seeing today, as we increase the tonnage. I mean, the real key for us is the amount of capital that we have to spend on it. And we have a few ideas on how to reduce that capital in order to allow us to take the thing forward. But Mike, no final decision has been made, and -- but when it is made, we'll certainly inform the market quickly, and you know, hopefully it's something we can get done in the next few months.

How would you go to the higher production rate from 400 to 900 tons per day? I missed that.

Well, I didn't give any specifics on what our tonnage would be. You know, the problem we have today is we're just operating at half the mine's capacity. And basically, we've been looking at ways to extend the mine life, reduce the amount of costs that we have there to stay in business there. But what we're now talking about doing is developing the next level and trying to improve the economics through greater throughput. Ron, you want to add to this?

Yeah, the big trick there is to get that other level developed and add enough workplaces, so we can increase that mine production and then the throughput rate. Also, we're a long ways away from our main haulage level right now with our existing stopes, and so a new level would put us much closer to our infrastructure, which would reduce our costs.

In terms of tonnage, Ron, what would we do?

As I mentioned earlier, we're doing between 400 and 450 tons a day now and the idea would be to get that up to around 900 tons a day.

I guess we've got 60 million ounces of resources there, Lucky Friday, how much of those resources could be accessed by this new level?

That would access roughly 25-30 million ounces of resources.

Would you need to go to another level to get the rest or continue on downward I guess?

Probably would have to develop another level. Ron?

There is a significant portion of resources at the Lucky Friday that are tied up in subsidiary veins adjacent to the main vein that we mine there, and so a good chunk of those is available. And that's one of the things we've been doing in the last year is mining some of those narrower, less continuous subsidiary veins. And they're giving us some good margins. It's a little bit lower tonnage, well, it's quite a bit lower tonnage because they're so narrow, but we're getting some fairly good positive margins out of them. So a lot of that material is included in the resource but is not included in the number that Phil gave you. So that's where a lot of that material is. There's still a little bit of resource left in the Lucky Friday vein itself. And then below.

Oh, okay. Thanks for that. I guess maybe just switching to Greens Creek, I hate to hog the questions but I was noticing that you mined a very good grade there in the quarter, 22 ounces. Your reserve grade is 14.7 ounces and you mined 20 ounces in the same period a year ago. Just wondering are you going to -- I assume you’re going to get to reserve grade eventually.

Yeah, I mean, the reserve grade -- absolutely. We will over time see the grade decline there. And I mean there's two things that we're doing with respect to that. One is we're increasing the -- continually increasing the throughput through that mill. I think ultimately we're going to try to get to, how much, Ron, 2400 ton a day?

24 is the eventual plan.

Yeah, 2400 ton a day, and we’re roughly at 20, 21?

We’re a little over 22, actually for this quarter.

22, so we're going to continue to increase throughput, and then the other thing, Mike, is some success with exploration, to allow us to have additional higher grade ore to blend with the lower grade and with the higher zinc. And then, I guess, finally we are getting some joy out of the zinc price, relative to where it has been recently. But we're still under historic sort of averages. Ron, do you want to add anything?

Just that zinc is a big player there as a byproduct.

How much is every nickel move in the zinc price, how much would that lower or change cost by?

I don't have that one off the top of my head.

Thought I'd throw that out. Just one last question and I’ll let it go. La Camorra has reverse to Greens Creek, much lower grade than reserve grade. Just wondering, Phil, does that mean the grade there will go up over time?

Yeah, we're certainly expecting some increases in the grade at La Camorra. As Tom said, even this quarter, we're seeing some reversals. Tom, what do you want to add there?

Oh, just that we do expect over the next several months to mine more in the 22 to 25 gram range, which would be, you know, 10-15% improvement over the third quarter grade.

Oh, all right, thank you. Thanks Phil, thanks everyone.

Thanks Mike.

Again that's star 1 for questions. It seems there are no questions at this time.

All right, thank you very much. That was the third quarter, 2003 Hecla Mining Company conference call. Thank you all for your time today, and be sure to have a good rest of the day. Good-bye.

Ladies and gentlemen, thank you for your participation in today's call. You may now disconnect your lines.