Hecla Mining Co (HL) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter Hecla Mining earnings conference call. My name is Carol, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's presentation. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Ms. Vicki Veltkamp. Ma'am, please go ahead.

Thank you, Carol, and thanks to all the rest of you for joining us today. I am Vicki Veltkamp, the Vice President of Investor and Public Relations for Hecla Mining Company, and as the operator said, this is our second-quarter 2004 conference call. This call is being webcast live today, and you will also be able to access a replay of this, if you wish, at our website at www.Hecla-Mining.com. At that website, you will also be able to find the financial results in today's quarterly news release, and at the end of the news release, the 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, our CFO; Tom Fudge, Hecla's President of Venezuelan Operations; and Ron Clayton, our Vice President of North American Operations. Then we will have a question-and-answer period following that.

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.

And now, I'd like to turn this over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Thanks, Vicki. As is my practice on these calls, let me put the quarter in context for you. This is the 26th straight quarter that we have had more than 1.5 million ounces of silver production. In 8 of the last 9 quarters, we've had our cash costs below $2 per ounce. 11 of the last 13 quarters, we've had more than 50,000 ounces of gold production, and it's the 16th straight quarter that we've had our costs below $200 per ounce. In 9 of the last 10 quarters, we've had positive net income.

This quarter also saw an increase in our exploration spending, and so for the year, we've now spent $6 million as our knowledge has increased. And notwithstanding that we've done this, we generated more than $12 million or right at $12 million of cash flow, and this is the most cash flow we've generated in at least a decade.

The reason I give these statistics to you is to emphasize that we are an operating company. We are not a one-dimensional promotional investment vehicle. We are an operating company that wants to deliver earnings and growth over the long term. We're a company that's focused on establishing ourselves in mining districts that have the potential to deliver long-term value. We are in places where what you see is not what you get; you get more. And that's why in the press release I said that we're in the best position in our history for long-term growth.

Two of our districts, in Venezuela and Mexico, are in their infancy on a relative basis. Really, very little exploration work has been done in either place. And in Greens Creek and the Lucky Friday, where exploration has literally gone on for more than 30 years, these are such great districts that they are still delivering more resources to us.

So let me talk a little bit about the specifics of the quarter. First, we are very pleased with the operational performance in the mines. In very tough conditions, our people have been able to keep our production and costs in line with our expectations. I know that costs have gone up slightly, but margins have gone up even more. So it's appropriate to mine poor-quality material when we can. And I know that silver production has declined, and we expected it to. I will admit that it's declined marginally more than we expected, because at San Sebastian we're mining smaller stokes (ph) that have less continuity; at Greens Creek, we're mining areas where there's more base metal values than silver, than what we had planned; and at the Lucky Friday, we've had some operational constraints underground that have forced us to change our plans.

And as I've said many times, the business strategy that we have has pros and cons. The pros are the potential for lower costs, higher and faster returns. The cons are volatility in production and smaller resource space. We're accepting the pros, and we're trying to minimize the cons. I think if you look at all of our mines, including the Lucky Friday, we're positioned to provide low-cost production and generate double-digit returns on the capital that we're investing. Most companies can't say this about their mines, and Tom and Ron will talk more about these production and costs that we've had.

I know some of you might have had higher earnings estimates for Hecla. We mined lower grades at our silver properties and elected to spend more on exploration, and with our exploration results, we're working to decide how much above our $12 million targeted exploration expenditure we should make. We'll talk more about this in a minute, but we've identified that we can spend maybe $14 to $16 million on exploration this year, so an increase of $2 to $4 million. About two-thirds will be evenly split between San Sebastian and Venezuela, where newly discovered resources can go into production in a matter of months or a few short years. Most of the other third of our exploration will go to Noche Buena in Greens Creek. We expect over half of the remaining exploration we do in 2004 to be in the third quarter, so maybe as much as $6 million. This will obviously put pressure on third-quarter earnings.

We continue to show our ability to operate in Venezuela. While it took some patience, we succeeded in getting the gold back and getting it exported. We're dealing with the local inflation, currency controls and other difficulties that you have in importing equipment. It's a tough environment to be in, but we are by far the largest and most successful gold company in Venezuela. And it's a place that arguably has one of the 10 most prospective geologic environments in the world. And we also expect to continue to be successful at not only mining but exploring, acquiring assets and managing the political landscape.

Moving to the independents-led lawsuit over the Lucky Friday, it's not something that we've really talked much about because we were pretty assured of what the outcome would be, but it is an example of the resolve we have toward litigation. We never doubted what the outcome would be and, given the results, our land position is even stronger than before. And we could've settled this litigation, but we understood that the law and facts -- and decided to come to a conclusion in court. And that's how we're approaching all the litigation that we might be subject to, whether it's private litigation over the Coeur d'Alene basin or anything else. It doesn't mean that we won't settle. If you go back to 2003, you see we settled the Zemex litigation because that was the most pragmatic approach. We'll just take all the facts into account and determine where we should come out.

Probably the biggest highlight for any mining company is the establishment of a new mine. And this quarter, we have done that with the development decision on Mina Isadora. We have gone from the acquisition of a drill target -- not even a reserve or a resource, but just a drill target -- to a 100,000-ounce producer in less than four years' time. Very few companies can do that, given their properties, expertise or their financial capabilities. And I fully expect in the next few years to announce another new mine, given the exploration targets that we have in hand.

So if you understand that we've grown dramatically over the last five years, and we'll grow over the next five years without having to stress our capital structure or take on wobbly risky projects, then I think you are going to begin to understand why we think there's true value in Hecla.

Now, let me turn the call over to Lew to review our financial results.

Thank you, Phil. The second quarter is a continuation of the success that Hecla has had over the last three to four years, with net income of 2.7 million, and an increase of a couple of hundred thousand dollars over the income that we realized in 2003's second quarter. Considerably contributing to the increase were increased metal prices for the period. Those were offset by the increased exploration, as well as higher depreciation charges at our mining operations and the lower silver production during the quarter.

Hecla continues with its aggressive exploration program during this quarter and the first half of the year, with exploration expenditures increasing to $3.5 million compared to $3 million in 2003. As with any growth company, higher investments are required to sustain growth, and with the excellent districts we are located in, exploration will continue to be a major focus for Hecla.

From an operating standpoint, Hecla's gold production increased by 3 percent to 53,000 ounces, and most of that gold production was coming from La Camorra, where they produced at a low cash cost of $162 per ounce, which continues to maintain this mine's low-cost profile. On the silver side, Hecla remains to be the lowest primary silver producer, with cash costs of $1.72 per ounce on production of 1.8 million ounces for the quarter.

After we recognized the undeclared and unpaid preferred dividends on stock, our income applicable to common shareholders totaled 2.6 million for this quarter, compared to 1.8 million last year. Recall during the first quarter that we completed an exchange offer for some of the preferred shares, and today there's only 157,000 shares that remain outstanding. This has lowered the quarterly dividend requirement to $138,000 per quarter, so again an indication of some success on that front.

For the first half of the year, Hecla recorded income of 8.9 million, which was finally down from the 9.3 million in the first half of last year. However, 2003 amounts included $4 million in the litigation settlement from Zemex, and a $1.1 million adjustment for a change in accounting principle. If you exclude those two items, Hecla's net income more than doubled during the first half of this year. Again, this was in part driven by increased metal prices, increased gold production and somewhat offset by the lower silver production.

For the first six months of this year, Hecla produced 190,000 ounces of gold at a very low cash cost of $152 per ounce, while silver production totaled nearly 4 million ounces, at a remarkably low cost of $1.57 per ounce.

We turn now to Hecla's cash flow from operations. Cash flow increased 29 percent in the first half of this year, as compared to the first half of last year. And again, that's primarily driven by the strong operating performance. We talked about the exploration expenditures and our increases there. We're also investing heavily in capital to further our growth strategy. We spent nearly $17.5 million in the first half of this year on capital, which was principally for three growth projects that are underway, which includes the Lucky Friday 5900 development, which should allow that mine to increase its production by twofold sometime late in 2005; construction of a new shaft at the La Camorra mine to allow us to access the lower levels of that property; and, as Phil indicated, we started development on a new mine at Mina Isadora in Venezuela, where production is expected to get underway in 2006.

But despite all these investments in our growth initiatives, Hecla's cash and short-term investment position still stands at $108 million at the end of the quarter. This cash balance, the cash being generated from our operations, is providing the capital necessary to grow and expand the Company's production profile. The Company is nearly debt-free, with only 2.8 million in debt at the end of the quarter.

In summary, Hecla's financial and operating performance for the second quarter continues to be very strong. We have development projects underway, we're located in excellent mining districts and are investing in exploring these districts, and we have an excellent balance sheet. All of these factors position your company to have future success in carrying out its growth strategy.

Now, I'll turn it over to Tom Fudge, who will discuss our Venezuelan operations.

Thanks, Lew. As Phil noted in his opening, we were very pleased with our operating results from the second quarter. In Venezuela, we continue to benefit from high-grade ore development in the La Camorra B1 area, much of which is outside the current reserve envelope, and is serving to add more ounces to our reserves than are actually being mined. We have also had some encouraging definition drilling results in the La Camorra Betzy vein, indicating that the mine grades should continue to outperform 2003's results for the rest of the year. At this point, we anticipate to have more reserves at La Camorra by the end of the year than we started with in January.

We have experienced some increase in costs due to a new labor contract, which includes a wage increase that's in line with Venezuela's inflation. And also, we've had some increased costs due to the increasing depth of the La Camorra mine. One example of increased operating costs associated with depth is the addition of over 1,000 horsepower primary ventilation fans. To address the ventilation and material handling requirements of deeper mining, we're in the process of developing a shaft at La Camorra which will cost approximately $15 million for the first 2,000 feet. While that's a lot of money, unit costs of about $7,500 per foot is at the lower end of industry standards for a hoisting shaft. During the past six months, we decided to make some improvements in the original plan, so that the shaft will provide us the necessary infrastructure to mine up to an additional 1,000 feet below the current mine depth of 2,300 feet.

Our Mina Isadora development project is really starting to take shape. During the last quarter, we completed the portal preparation, took delivery on critical equipment like drill jumbos and scoops, and started training our mine development crews. At the end of July, we started development of the main access ramp, which will enable us to start preproduction development about a year from now, and to achieve full production within two years and sustained production for more than seven years. We anticipate this $30 million project will generate better than a 30 percent return on investment for our shareholders. With over 400,000 ounces of gold that meet this reserve criteria at Mina Isadora, combined with our expectations at La Camorra, we anticipate having the largest amount of proven and probable reserves at the end of 2004 as we've ever had in Venezuela.

Another smaller project in Venezuela, which will generate significant returns on investment, is our custom milling business, where Hecla will provide financial and technical assistance to small miners and buy their production. The cost per ounce of this business will always be higher than processing our own ore, but the social and environmental benefits provided by this program contribute to Hecla's overall acceptance as a positive influence in the Venezuelan gold sector.

With 2.5 million in capital and a further 1 million in working capital invested, we expect to realize 10,000 to 15,000 ounces a year in gold production, and a 25 percent return on invested capital. This business is currently experiencing the higher costs associated with any startup, but has recently passed a milestone of production with commencement of operations at our El Callao sampling plant, where approximately 150 tons per day of small miner ore will be received and sampled before shipment to La Camorra for processing.

Our participation in the small mining sector, along with our community development programs, where we provide leadership training and targeted funds for education, health and living standard improvements, are part of our coordinated efforts to manage the country situation in Venezuela. Our policy is to be proactive and a contributor to our communities and our industry sector, and to communicate those contributions to the right government officials. Our third-party government relations advisers have assisted us in developing our communications program and evaluating the current political situation, in an effort to be proactive where possible. A noteworthy accomplishment to the government relations area this last quarter was the return of a gold shipment that had been held earlier this year for administrative review.

Our exploration efforts continued on several fronts during the second quarter with programs at La Camorra, the El Dorado area and in Block B. Of particular note from the second quarter is a resource in the Block B area with the potential to be our next client in Venezuela. The Twin Shears, as the geologists have labeled this discovery, currently covers a strike length more than a kilometer, with ore grade widths of 5 to 6 meters. This underground target currently has more than 700 meters that meet our criteria for infill drilling, which is the next step in an upgrade towards reserve status. We're very excited about our growth potential in Venezuela and the steps we're making to explore and acquire additional properties there, and stay tuned for more developments on this Twin Shears target.

So witgh that, I'm going to hand it over to Ron Clayton to discuss the North American operations.

Thanks, Tom, and good morning. I'll start with San Sebastian. Although we are seeing lower grades, as we enter into the final year of production from the Francine and Don Sergio veins, San Sebastian continues to be an extremely low-cost producer, at a cash cost of 39 cents per ounce of silver. Cost reductions at the processing plant have helped to offset the increased mining costs, which are primarily a result of higher development costs at Don Sergio, due to the less stable ground conditions in the host rock. Capital expenditures are expected to total approximately 300,000 for the remainder of the year, which will complete the Tailings facility expansion. The exploration program is producing results which I am confident will lead us to the next producing mine within the solid yield concessions.

We have completed the first phase of drilling in the U Zone of the Francine vein. The U Zone has been kneed (ph) and separated from the current production area. A total of 3,324 meters of reverse circulation and 5,219 meters of core have been drilled into the U Zone to date, keeping three drills busy over the last quarter to four months. The zone contains higher base metals than the current production area, and 6 of the first 20 holes appear to be ore grade. We've begun another phase of drilling to further our understanding of this zone.

Cerro Blanco is the large vein structure located northeast of the Francine vein. Drilling will begin during the third quarter. There is anomalous gold and silver at the surface. Based on some of the things we have learned from our characterization of the Francine and Don Sergio systems, we are quite excited about the potential for this area. Significant soil anomalies have also been identified to the north, east and west of the Francine vein, although a report (ph) to identify the sources began in July. We expect to spend an additional 1.9 million on exploration during the last half of the year at San Sebastian.

At Noche Buena, a gold property located in Sonora that we have had since 1996, we're conducting a drilling program to upgrade the resource estimate. We expect to complete a feasibility study and, if warranted, make a production decision during the second quarter of 2005. Expenditures at Noche Buena are anticipated to be about 3 million in the second half of the year. I'm very confident that it's only a matter of time until we discover another economic deposit on our land holdings in Mexico.

The crew at Greens Creek continues to produce silver at a very low cash cost of 54 cents per ounce for the quarter and 77 cents per ounce for the year so far. Drilling costs were higher in the second quarter, due to mechanical problems in the mill, which limited throughput and increased costed. The problems were fixed during the quarter, and the mill has returned to anticipated operating levels and availability. Mining costs decreased as a result of increased mine production during the second quarter, and sales were lower during the quarter as a result of delayed shipment of concentrates.

Mining increased from the lower precious-metal grade central west zone and decreased from the higher precious-metal grade 200 south zone, due to lower productivities in the 200 south zone. This has resulted in lower silver grades but higher base metal grades. Silver grades are expected to increase later in the year, as development into other higher-grade silver zones is completed. Hecla's share of the capital costs for the second half of the year is expected to be approximately 2 million, primarily for the Tailings expansion and equipment replacement.

Underground expiration and drilling to the west of the Gallagher Falls (ph) and the mine area resulted in several interesting intercepts during the quarter. In addition, the surface program has identified mineralization in the new area. Additional work is being conducted to follow up these exciting results. Hecla's share of the exploration program for the second half of the year is approximately $700,000.

At the Lucky Friday, the development drift on the 5900 is more than one-third complete and is under budget and on schedule. Capital expenditures for the remainder of the year are expected to be approximately $3 million. We expect to see limited production from this area during the first quarter of 2005. Silver grade was lower during the first half of the year, due to the lower production from higher-grade intermediate veins above the 4900 level. Production has been limited to allow repair of an ore pass which will be completed in August.

Much of the current production is coming from stokes that are approximately 430 feet below the main 4900 level of haulage. Higher mining costs are a result of the increasing haul distances and depth. We expect this to improve, as production adjacent to the new 5900 level increases in 2005 and 2006. The strike length of the main vein, the 30 vain, has increased approximately 10 percent during the first half of the year. Drilling between the current mining level and the 5900 level to identify strike extensions both to the east and west at depth began in July. We plan to spend about $370,000 on the expiration during the second half of the year to try to further expand the strike length. We're excited about the Lucky Friday's return to a production level of 4 million ounces annually by the last half of 2006.

At the Hollister development project, we've received all the necessary permits required to begin the project. Our team has prepared all the necessary equipment, and has it staged in Winnemucca. Engineering has been completed on all of the required facilities. We are currently completing test excavations for the water infiltration facilities and pipeline, and we're developing the clay source for the waste rock liner. In addition, good packages for the surface construction are being finalized. Once the property access and work authorization is finalized, we expect to spend about $5 million on surface infrastructure and underground development during the remainder of the year. Assuming that the access and authorization issues are finalized, we should begin drilling as early as December.

With that, I'll turn it back over to Phil.

Why don't we take questions, Vicki?

We've tried to be very thorough today, but I understand there may still be some questions. At this time, operator, we would like to open it to the question-and-answer period.

(OPERATOR INSTRUCTIONS). Anthony Barrantino (ph), Barrantino Metals (ph).

With regard to the exploration spending, I believe you said that the total for the year would be $14 to $16 million. Of that, how much would be expense and how much would be capitalized?

That would all be expensed, Anthony.

Okay, it will all be expensed. And would be the total figure for capital expenditures in 2004?

It would be in the range of $45 to $46 million.

George Topping, Sprott Securities.

Could you tell me, on the drilling below the Francine vein, tell me how much deeper are the intersections?

I'll turn that over to Ron. We were, in fact, just talking about that earlier.

They range from about 100 meters below the bottom of the Francine to about 200 or 250 meters below, so far. And it's open down depth (ph).

And of the six holes that hit, are they dispersed or continuous?

We haven't shown continuity yet. That's what we are trying to do, but they are somewhat grouped, but not all in one group.

And the drilling program at Cerro Blanco area -- could you expand on that, how much you're going to spend and how many holes?

The initial program is seven holes, and -- this is a very rough number. Actually, I think I have it here. Let me look it up. I don't have that one perfectly, but it's around $250,000 give or take.

Looking at where you are, what's the exploration at San Francisco? Would you expect that production would end in the third quarter of '05 and then perhaps restart at a later date, or do you think you'll manage to find something to give continuity of production?

We're not sure, but it's more likely the former, that we could have an interruption in production. It's just going to be a function of the sort of success we have on the various programs. If it's in addition to Cerro Blanco and deeper on the Francine vein, there's exploration that we're doing in the vicinity of Don Sergio. So there's a number of things, but it's hard to tell, George, if any of them are going to turn into something that would fill the gap.

(OPERATOR INSTRUCTIONS). Gentleman, at this time, we don't have any further questions in queue. I'm going to turn the presentation back to Vicki Veltkamp for closing remarks. Ma'am?

I'd like to just make one final comment, and that is a question we get quite frequently, particularly given some of the activities by our neighbor here in Coeur d'Alene, is what we're doing on the acquisition front. And I guess what I can tell you is that we have been quite active at looking at things on the acquisition front, but we've been very disciplined in focusing on assets where we think we can add real value, because of expertise we have, or some other place where we have a competitive advantage. And it goes back to this idea that we're an operating company, not really an investment/promotional vehicle. We've looked at things on three continents, and we have enough confidence in the assets that we have in hand and the strategy we have over the long term that we are not looking to necessarily hit the home run on an asset acquisition. Now, having said that, if we can do something at the right price, we will do so. And I would just encourage you to stay tuned on the acquisition front, because we will acquire assets that will add to our asset base.

With that, Vicki, I'll turn it back to you.

This has been the second-quarter and first-half 2004 report for Hecla Mining Company. Thank you all for joining us today, and have a great day. Thank you. Goodbye.

Ladies and gentleman, this concludes today's presentation, and you may now disconnect. Have a great day.