Hecla Mining Co (HL) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hecla Mining Company first-quarter 2004 conference call. My name is Stephen (ph) and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Ms. Vicki Veltkamp. Please proceed, ma'am.

Thank you. And thanks to all of you for joining us today. I am Vicki Veltkamp. I am the Vice President of Investor and Public Relations for Hecla, and this is our first-quarter 2004 conference call. Will also be talking about a development decision in Venezuela and other exploration results released just yesterday. By the way, this call is being webcast live today, so welcome to all of you on the Internet as well. You be able to access a replay of this, if you wish, at our website at www.hecla-mining.com. At that website, you will be able to find the financial results in the quarterly news release that we put out last week. And at the end of that news release, you will find a quantitative reconciliation to GAAP of cash cost per ounce, which is now an SEC requirement.

Today's presentation will be made by Phil Baker, Hecla's President and CEO; with help from Lew Walde, who is our Vice President and CFO; Tom Fudge, Hecla's President of Venezuela Operations; and Ron Clayton, our Vice President of North American Operations. Then we will have 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 that I've said all that, I'd like to turn it over to Hecla's President and Chief Executive Officer, Phil Baker.

Thanks, Vicki. Good afternoon, everyone. Welcome to our conference call. As I have done in all our previous calls, I want to put this quarter in context for you. This is the ninth straight quarter that Hecla has had more than 2 million ounces of silver production. Seven out of the last eight quarters, our silver cash costs have been below $2 per ounce. Eleven out of the last 12 quarters, Hecla has had more than 50,000 ounces of gold production. Quarter-on-quarter, Hecla's gross profit increased more than 90 percent. We think reserves have increased by about one-third at La Camorra's Mina Isidora and about 15 percent for the Company in just three months, with resources increasing a similar amount. With the exception of a year ago, when we had two onetime positive events, this is the most quarterly net income Hecla has had in over two decades. And finally, this is the third year out of the last four that Hecla has made a development decision on a new mine. And we think we are going to do that again next year.

The reason I give you these statistics is to emphasize the point that performance has only gotten better, notwithstanding that when we look to the future, we see performance improving even more. We think those that understand we are going to be a 4 to 500,000 ounce gold producer in the next four years with a resource base to match, and continue to be the low-cost growing silver producer will understand the true value of Hecla.

We have been saying for a couple of years that our mining districts will deliver more reserves and resources than we have currently and will also generate returns on investment. These districts are definitely doing that. We are seeing that right now. Mina Isidora, as I said, has grown by about a third, we think with over 400,000 ounces of reserves and about a half million ounces of total resources. We are expecting this deposit to continue to grow even before we begin mining. At La Camorra itself, we are probably adding as much as we are mining, and Tom's going to talk about both those operations and all the other activities we have in Venezuela.

What we have at San Sebastian is significantly better than what we thought even a year ago. Our understanding now is leading us to drill targets where we are having immediate results. And Ron will talk about this and our Noche Buena project, which is also in Mexico.

I guess now let me turn it over to Lou, but before I do, let me just make one comment and that is we cannot be more excited about the results that we are getting, both operationally and exploration. And let me turn it over to Lou, who can go through the impact of those results on our financial statements.

Thank you, Phil. And to reiterate what Phil has already said, Hecla had an outstanding first quarter. In fact, Hecla saw 39 percent increase in revenues and more than 90 percent increase in gross profit quarter-on-quarter. Revenue gross profit increases were driven by significantly higher precious and base metals prices, including silver, which increased 43 percent and averaged $6.71 per ounce in the first quarter compared to $4.59 in 2003.

These increases resulted in a bottom line of 6.2 million for the first quarter. Although that is slightly less than the 6.7 million realized in the same period last year, when you consider the first quarter of last year benefited about $5 million from a litigation settlement and the adoption of a new accounting standard, the first quarter of this year was outstanding. Actually, when you exclude these nonrecurring factors, Hecla's net income increased 261 percent quarter-on-quarter.

If we turn to the gold side of Hecla's operations, Hecla increased its gold production quarter-on-quarter by 5 percent from roughly 53,000 ounces last year to nearly 56,000 ounces in 2004. This gold production increase was driven by the outstanding performance at the La Camorra mine, where the gold grade averaged 0.84 ounce per ton in the first quarter, which was slightly higher than the 0.82 ounce per ton in the first quarter of 2003, but significantly higher than the 0.65 ounce per ton that the Company realized in the fourth quarter of last year. While (ph) La Camorra's production increased, they also continued to deliver low-cost production, with cash cost at $142 per ounce.

Switching over to the silver segment, silver production totaled nearly 2.1 million ounces, and was slightly off from the 2.4 million ounces produced in the first quarter of 2003. This was principally driven by lower ore grades at our silver operations. But when you look at the count (ph) cost side, silver cash cost per ounce decreased by 14 percent, from $1.67 in 2003 to $1.43 for the first quarter of this year. This continues to maintain Hecla's position as the lowest-cost primary producer of silver.

Phil has talked about exploration, and we also continue to spend money on exploration. In fact, we spent approximately 33 percent more during the first quarter of this year as compared to last year. We expect that those expenditures will continue at the higher levels for 2004. We're seeing great results from these exploration expenditures.

Also during the first quarter, the Company exchanged approximately 307,000 shares of its preferred stock into 2.4 million shares of common stock. This leaves just a total of 158,000 shares of preferred stock outstanding. (indiscernible) you become familiar with, as a result of these exchanges, Hecla had to record a total non-cash preferred stock dividend of 11.2 million for the first quarter, which results in a loss applicable to common shareholders for the quarter of $5 million. On a go-forward basis with the reduced preferred stock outstanding, the total annual dividend requirement has been reduced to $0.5 million.

Turning just for a moment to Hecla's balance sheet, the balance sheet is in great shape, with cash and short-term investments of nearly $120 million and total debt at a very modest 5 million. With the strong balance sheet, we are very well positioned to carry out our growth strategy.

When we look at the performances for the first quarter, we also need to look at the cash flows. The cash flows generated during the first quarter totaled 4.9 million, which was a slight increase over the 4.8 million that was generated in the first quarter of 2003. When you factor in the nonrecurring litigation settlement in 2003 and an approximate $3.2 million increase in working capital as compared to the first quarter of 2003, this cash flow performance is outstanding. And we continue to have excellent operating performance, as well as improved metal prices, and that's going to continue to drive our cash flow upwards.

To summarize, we are very pleased with our progress during the first quarter. We have seen excellent financial, operating and exploration performance. We remain focused on continuing with our objectives of growing our low-cost production profile. Now I will turn it over to Tom Fudge, who will talk about our Venezuelan operations.

Thanks, Lou. We had a great operating and production results in Venezuela during the first quarter. And overall, we advanced our growth goals nicely, with significant exploration finds in Block B and La Camorra, plus the decision to proceed with developments at the Mina Isidora mine in the Block B lease area of the El Callao mining district. From the La Camorra unit, we produced 37,500 ounces of gold from ore grading 0.84 ounces per ton. This increased production compared to the previous, or fourth, quarter is primarily the result of developments in the main zone of La Camorra mine, where 90 meters of two-ounce per ton ore was developed on a -453 level and another 87 meters of ounce-and-a-half per ton ore was developed on the -466 level of the B1 vein.

La Camorra mine produced 36,887 ounces at a cash cost of about 127 an ounce on a stand-alone basis. The remaining ounces were produced from other sources, including our startup custom milling business. Overall, our average cash cost per ounce is a very respectable $142 per ounce, and our total cost was $234 per ounce. While not quite on pace to exceed 2002's record production, we have had a good start and expect to exceed 2003's production by at least 10 percent.

As most of you are aware, one shipment of gold containing a little over 5000 ounces has been administratively detained in Venezuela. This event started in February when the National Guard initiated an investigation of the entire Venezuelan gold mining sector by detaining Dore, or unrefined gold, (indiscernible) Hecla and two other gold producers. An administrative misunderstanding related to some of the export documents combined with the desire to generate some news led to the shipment being held in the Venezuelan Central bank vault pending final verification of the necessary authorizations and permits. That verification has been completed. The court has released the gold to Hecla for export, pending a mandatory period to allow for the filing of contradicting evidence. As of this date, no conflicting evidence has been filed and we expect the gold to be released for export soon.

Our exploration efforts during the first quarter paid major dividends in both Block B and the La Camorra mines. Diamond drilling on two of our priority targets in Block B we're doing in Panama not only produced a number of ore-grade intercepts, but also discovered a previously identified vein, now called the Conta Quora (ph). (indiscernible) results include nine intercepts, ranging from 12 to 34 grams of gold per metric ton, with true width of 1.5 meters or more, including one intercept of 34.3 grams over 4 meters -- that's an ounce over more than 13 feet -- and another intercept of 12.4 grams over 13 meters -- that is over 42 feet.

At La Camorra, our drilling programs have discovered 100 meter strike length in the main zone, with four intercepts averaging about an ounce per ton of gold over a 2 meter width. And this area is more than 200 meters below -- almost 700 feet -- our deepest development length. And while it's too early to say for sure, we are very confident that we will have more proven and probable reserves at the end of 2004 than we did at the start of the year.

The decision to approve the development of Mina Isidora by the Board of Directors last Friday represents a major milestone in our plan to double our gold production during the next four years. Through the dedicated teamwork of Hecla geologists, engineers, accountants, technicians, managers, etc., from Couer D'Alene to El Callao, this opportunity has moved from drill targets to permitted development project in a matter of 18 months. And it will be a producing mine within three years of the signing of the Block B lease agreement with CVG Mitterman (ph). I just want to say well done to all the men and women who explored, designed, permitted and managed this product. Their efforts will provide our shareholders with another high-return investment that will produce more than half a million ounces from the known resource over the next eight years, with the potential to have significant reserves in the coming years. With that, I'd like to turn things over to Ron Clayton for a review of the North American operations.

Thanks, Tom. Good afternoon. The North American operations had another very exciting quarter. I will start with the Hollister development project in Nevada. We've completed all of the NEPA process there and received our letter of authorization from the BLM to start work. We have all the state and local permits necessary and we are in the process of getting the contractors and equipment in place to get started with the project, and we are working with our partners to finalize the paperwork on some of the land issues so that we can begin drifting (ph) very soon.

We expect to start that this quarter and be drilling sometime late in the fourth quarter on this exploration project, with the feasibility study scheduled for late 2005. We are very excited about the potential for this project to add production and reserves to Hecla's portfolio.

The guys at Greens Creek had an excellent, excellent first quarter -- extremely low cash costs, even in the face of increased diesel and shipping costs putting some upward pressure on their operating cost. In addition, they have made some very good improvements in their metallurgical performance, which also helped with the cash cost and the production. We completed the permitting at the (indiscernible) facility and began construction there. That facility will have capacity in excess of the current life-of-mine plan. And the expiration programs we got started in the first quarter, which is a little bit earlier than we normally do, and we are beginning to follow up on the intercepts that we got last year. So we are real excited about the opportunities at Greens Creek to expand that mine life.

At the Lucky Friday, the 5900 development project started on schedule. We've completed all the level preparatory work, and about 10 percent of the drive out to the 5900 level ore has been completed so far. We again, as a reminder, expect production late in the fourth quarter of 2005, with full production in the first quarter of 2006. In addition to that at the Lucky Friday, we during the first quarter took a look at some of the stopes that were not profitable at much lower silver prices, and put a couple of those stopes back into production. This has improved our cash flow and our profitability, but it had some negative pressure on our cash cost. We think that's the right thing to do at these silver prices and expect to continue to do that into the second quarter.

We've also expanded the ore chute that we've been mining, about 100 feet, which is about a 5 percent increase in the strike length. It has some very positive implications for us below us and on the 5900 project and the grade is very good. So we will be following that up in the next couple of quarters. In addition, last year and during the first quarter, we had some great success mining some of the parallel narrow veins, and we intend to add a couple more stopes in that area during the remainder of this year.

As we mentioned in our press release, we are going to begin to do some drilling and work to upgrade the feasibility and resource work at Noche Buena. We think at these prices, Noche Buena has the capability of adding to our production portfolio and our resources.

San Sebastian had another great quarter in terms of their cash cost. We mined and process more tons than we did in the first quarter year ago. That's a result of putting the Don Sergio into production. The silver grade was lower than it was a year ago, but that again is associated with the plan to put the Don Sergio on production, which contains more gold and less silver than the Francine does, so we are right on track there.

Our mining costs were up a little bit in the first quarter, chiefly due to some higher development costs associated with poor ground conditions at Don Sergio. We expect that cost to come back down in the near future as we get into a little bit better ground. Overall, I'm extremely pleased with the operating performance of Don Sergio and Francine.

As you've seen in our press release, our characterization study has culminated in some significant improvements in our understanding of the known deposits in Mexico that we have on our properties. We have significantly improved the quality and detail of the exploration targets. We are starting to target our drilling based on multiple pieces of evidence, and we expect us to improve our drilling success rate and our finding cost. As we mentioned in the press release, it's already had extremely positive results beneath the Francine Vein. We think we've identified a new ore chute or several chutes, which have a little bit different character than what we've seen in the Francine itself.

We are really excited about the grades and the things that we are finding there, and this has some extremely positive implications to the target types that we are now looking for in that area. We expect to be drilling several new targets before the end of the year. This is truly a world-class mining and exploration district, and we think these results are going to lead us to many years of successful mining here. With that, I will turn it back over to Phil.

Thanks, Ron. This idea of San Sebastian being a world-class mining district absolutely is, and we are just in the very early stages of it. Realize that we have only been looking at this property for the last three years -- four years now. Our understanding is just beginning to -- we are just beginning to get a grasp on what we have there. And it's very exciting to see the immediate results. And we think the positive things that are happening at a place like Lucky Friday, where notwithstanding we've been there for 40 years, almost 50 years now, we are seeing an extension of that ore body. One hundred feet represents something between 5 and 10 percent of the total strike length.

And we are still in very good ore; you can see as continuing to move on that level. That's a mine that we have been at for that length of time, you can imagine our excitement with the sort of results that we are seeing at San Sebastian.

So just across the board, at every operation we see reasons for expecting things to be even better than what we've seen over the course of the last three or four years. With that, let me turn it over to Vicki.

Operator, I think we are ready for the question-and-answer period.

(OPERATOR INSTRUCTIONS) Mike Jalonen.

Good exploration results here. Just looking at the press release. press release. And just wondering -- I had two questions on that press release. First, on Mina Isidora I notice you gave sort of a five-year plan, the mining continues through 2012. You appear to be mining upwards of 200,000 ounces above the proven and probably reserves of 421,000 ounces. Just wondering what the thought process there is for the forecast?

We certainly have resourced beyond the 400,000 ounces. We've given grade in tons. And then we also have areas that are not yet in the resource category that we would expect to see converted. And then you go on top of that, if you have that press release, if you look at the area that is to the Southwest, that's all open. We certainly have reasons to think that the mineralization is going to continue. Tom, do you want to add anything?

No, not really. We have been very pleased with the additions we have been able to make to the reserves and resources there so far this year and we're not done yet. The life-of-mine plan currently just contains those resources we've identified and we think excellent opportunities (multiple speakers).

Mike, it's pretty remarkable -- you have more, broader background, but it sure seems like we've been very successful at adding to the resource space very quickly here. Drill results have been remarkably positive.

Okay. Thanks for that. Skipping to the Francine Vein, these deep feeder zones. You said three or five holes had ore grade intercepts that were mined. Maybe just an example or two of how thick these were, what the grades were.

If you look at the attachment -- do you have that?

I just have the actual press release, so I don't have that.

We can get it to you. We will send it to you. We have a long section that shows where the holes are and the grades. But for example, we have one that's 18-gram gold equivalent over 2.9 meters. That's the best hole.

Are you going to chase that down or -- feeder zones are usually pretty narrow.

Well, to the west, we have a hole that is, I guess, roughly 500 -- almost 600 meters to the west that's 11 grams gold equivalent over a meter. And then we have a hole in between that's I guess roughly 500 meters, maybe a little less than that, that's over seven grams. So We are seeing much better results than we would have guessed. Ron, do you want to add anything?

Yes, I do. Mike, the drilling that we've done so far and with what we're looking at, the concept of this constantly narrowing feeder zone is not what we're applying to this. We believe that this has very widespread strike length, as evidenced by those three holes. And so we are thinking another sizable body here.

Certainly, Mike, we think that there could have been stacking or multiple epithermal episodes here.

I'll pick up the long section. Thank you for that.

Anything else, Mike?

No, that's perfect. Thank you, Phil, and (multiple speakers)

Mike Curran.

Good afternoon. Just again on San Sebastian. Just remind me -- you are not currently mining any sulphides, are you? It's all oxides that you are processing right now. Is that true?

Ron, there certainly is some sulphide.

There is some sulphides in the ore body that we are mining right now.

You're not recovering any base metals or anything like that, are you?

No.

When you say significant base metal credits (ph), are we talking several percent of copper or zinc?

Yes, and again, I think those numbers are included in that long section.

I haven't seen that long section either.

So, Mike, some of the percentages -- the best one we have is 16 percent zinc.

Oh, okay.

It's got some significant base metal in some of the intercepts. So we may well be looking at some additions to our (indiscernible) facility if this pans out.

Can you just remind me what the status of Don Sergio is. Are you pulling ore from there yet or no?

Absolutely. We started pulling ore back in December. So yes, it's right on track. The way we've scheduled this out, it actually comes up to full production later this year, but it's producing significant amounts of metal.

Exciting stuff, Mr. Curran. I encourage you to look at that long section.

That infamous long section that you guys have been the only ones who have seen.

There should be a little box, even on your Yahoo! news release, on the front page to the left-hand side that you should be able to click on and then pull up. There are actually a couple of PowerPoint slides that should be attached to that. But I will get back to both the Mikes (multiple speakers).

Anything else, Mike?

No, that's it for now.

Thanks a lot.

Mike Jalonen.

High, Phil. I'm back. I guess it's the Mike and Mike show today. La Camorra, the grade appears to be well above reserve grade -- correct me if I'm wrong. I'm just wondering what the -- it sounds like you had a high-grade section in your mine there, so is that going to continue or the grade will come back to reserve grade?

It's going to bounce around, Mike. We certainly have had some portion -- and I'll let Tom guesstimate what it might be -- but some portion of what we've mined that is outside the reserves. I mean, it's not even in -- that area that is in B-1, we have an area that's been known as the Gap, and that Gap has in the past been sterile and it's not anymore. In fact, we've run into very, very high grade material they are. Tom.

therefore I think you explained it pretty well. Let's see -- in the first quarter, have roughly 37,000 ounces produced from the mine (ph) and 7000 of those ounces are 1/8, something like that -- were from completely outside of the reserve. So we actually probably added more ounces to the proved and the follow reserves than we mined during the quarter. This area, the Gap that Phil is referring to, it's also positioned such that we had a few wide-spaced holes in there that we thought confirmed the absence of high-grade mineralization. Fortunately, we were wrong.

But it's also positioned such that it's not an easy thing to drill from our access ramp. And so while we would love to pepper it with holes and be able to know exactly how far it extends down, we just don't at this point in time. But nor do we see any reason for it to go away. It fits in with some new structural models that are evolving as well from La Camorra. So for right now, we anticipate being able to outperform reserve for the next quarter or two.

That's good news. One last question, Phil. Thanks for that answer, by the way. You mentioned cryptically you are going to make a development decision on another project in '05. Just wondering which one that one is.

I mean, that could be Hollister. That could be Noche Buena. It could be something else that we're exploring in Block B. It could be something else at San Sebastian. I mean, it's too early to say. But those are certainly the places where we're aggressively doing work and -- I mean, there is not any reason to think that one or more of those might not reach a point of being able to make a decision on.

This Noche Buena thing, we would expect this time next year, maybe a little longer, to be in a position to make a decision there. And while that won't be a barn burner in terms of cost, it would be a lot of nice ounces, and in the right price environment, it could be quite attractive for us. And we own it. We have 100 percent of it and there's no royalties or anything else on that.

We will stay tuned. Thanks again.

Okay.

Operator, are there any further questions?

It appears there are no further questions at this time.

Thank you, everyone, for joining us today. That was the Hecla Mining Company first quarter 2004 conference call. That's the end of this call and have a good day. Thank you.