Hecla Mining Co (HL) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hecla Mining Company's quarterly conference call. [Operator instructions]. I would now like to turn the presentation over to your host for today's call, Ms. Vicki Veltkamp with Hecla Mining Company. Please proceed, ma'am.

Thank you, Steven and thank you to all the rest of you for joining us today. I am Vicki Veltkamp, Vice President of Investor and Public Relations for Hecla Mining Company. And this is our second quarter 2005 conference call. The call is being webcast live today so you can access a replay of this if you wish at our website, which is www.hecla-mining.com. At that website you can 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 costs per ounce, which is now an SEC requirement. Today's presentation will be made by Phil Baker, Hecla's President and CEO. He'll have help from Lew Walde, our Chief Financial Officer and Ron Clayton our Vice President of North American Operations. Those of you that join us frequently for this call know that we usually have Ian Atkinson, our Vice President of Exploration and Strategy, but today, unfortunately, he happens to be home ill. Following that presentation, we'll have a q & a period. Any forward-looking statements made today by our management comes under the Private Securities Litigation Reform Act and involves a number of risks that could cause actual results to differ from projections. Now I'd like to turn this call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Thanks, Vicki. Good afternoon, ladies and gentlemen and let me add my welcome to Vicki's.

This is -- second quarter is a continuation of a transition of Hecla Mining Company that began all the way back in 2003. Transition has two elements. The first element is operational, and we're in the final stages of that. It's going to allow us to maintain our position as a low cost gold and silver producer. Now we've had a trend of higher costs and lower production, particularly for gold, and in this quarter we saw gold cash costs rise to a level we haven't seen in a decade. As I said last quarter, we recognized that we would have higher costs back in 2003. So when we were in that low price environment, silver averaged about 485, gold about 363, we made the decision to make investments that would allow to us continue with low-cost operations. So we're investing in three major projects that transitions our operations. The shaft at La Camorra; Mina Isadora, that will be operated as part of the La Camorra Unit; and the Lucky Friday 5900 development. The shaft is operational today and will be fully integrated over the quarter with full benefits received in the fourth quarter. Mina Isadora is already contributing about 20% of La Camorra's quarterly production. You're going see that steadily increase. The Lucky Friday 5900 level will be fully operational by the end of the year. It's already performing exceptionally well and the future for the Lucky Friday, is frankly, terrific. I think Ron will make a few comments about that.

So, were we surprised by this quarter's results? Not really. With the exception of the strike at San Sebastian, which was not resolved until June, we knew that until this transition was complete, we were going to have higher costs and lower production. Of course, the San Sebastian strike certainly had an additional impact over the last three quarters. So for the year we're still on track to hit our full year silver production target of about 6 to 7 million ounces at a cost of around 250. We now think that gold production will be about 170,000 ounces at a cost of 240 per ounce. The construction of the shaft at La Camorra and the lower grades are causing us to change this estimate. I'll talk more about La Camorra and Venezuela a little later.

I said there are two elements to the transition. The second is a focus on exploration. Never has Hecla had such great exploration opportunities. We are in five separate world class districts. Any one would be about as good as Hecla has ever had in our 114 year history. We have five great districts. We also, for the first time, have the financial and human resources to take advantage of the opportunity, and we have to take advantage of it. The opportunities themselves demand it. Our resource base requires it. And while we see it as a long-term undertaking that requires patience and consistency and we certainly see it affect our earnings, we expect growth in resources reserves and ultimately production from this investment. This quarter we had excellent results in four districts we're drilling. From the drilling across the Gallagher fault at Greens Creek, to the additional ore at the S vein at Mina Isadora we've had some encouragement everywhere that these districts are going to add ounces over the long haul. Ron will talk more about it later, but the Lucky Friday, where we've been mining more than 45 years, we are finding more ore deeper and laterally. Let me stop here Vicki, and I'm going to turn things over to Lew to talk about the financials.

Thank you, Phil. During the second quarter, as Phil has mentioned, we continue to focus on our objective to grow, investing $6.7 million in exploration and predevelopment expense. These expenditures combined with our lower production of silver and gold compared to the second quarter 2004 led to a loss for the quarter of 6.4 million or $0.05 per share. This compares to income realized of 2.6 million or $0.02 per share in the second quarter of 2004. While we saw great performance at the Greens Creek mine and the Lucky Friday mine, both providing increases in silver production during the quarter, the strike at San Sebastian, which, as Phil mentioned, was resolved in June, limited our silver production, resulting in an overall decrease in silver production for the quarter of 20% and also impacted the gross profit from this segment.

Our gold production also decreased during the quarter, again, due to the strike at San Sebastian and also due to lower grades at La Camorra. When we look at La Camorra and the ore grade it did improve from the first quarter of 2005, however it was about 25% lower than the second quarter of 2004. In addition to the lower grade, we also -- the tonnage at La Camorra was slightly down due to the impacts of the shaft construction. These two factors resulted in a 26% decline in gold production at La Camorra which, combined with the challenges of working around the shaft construction also increased gold cash costs per ounce to $317 per ounce compared to $162 per ounce in '04. With the shaft coming online and expectations that grade will improve in the second half of the year, we do foresee these cash costs improving.

I mentioned the exploration -- the investment in exploration between our exploration activities and the predevelopment expenditures at Hollister, we saw these costs increase 2.5 million quarter on quarter. As I mentioned we spent 6.7 million during the second quarter and we expect to see a similar pace of exploration spending for the remainder of 2005.

If we look at the first six months of 2004, Hecla recorded a loss of 9.8 million, compared to a loss of 2.4 million for the first half of '04. Before the impact of some noncash dividends in 2004, net income totaled 8.9 million during that period. The change in the net income between these periods is explained really by the same reasons I just discussed on the quarter, including the impact of the strike at San Sebastian, where production was limited to less than one month this year and a 37% lower ore grade at La Camorra, as well as increased investment in exploration and predevelopment. For the first six months Hecla produced 62,000 ounces of gold at a cash cost of $307 per ounce, and silver production totaled 2.9 million ounces at a cost of 259 per ounce.

Taking a turn to the cash flow statement, our cash flow provided from operations totaled $800,000 during the quarter, while we've used cash for the first six months of this year of 6.3 million. Now, this is down from last year's cash flow that was generated of about 16.5 million, but again, the variance is from the factors that we've already talked about, the operations and the increase in exploration.

On the investment side our three development projects along with sustaining capital expenditures totaled $24 million in the first half of the year. We expect to see similar levels of capital spending for the second half of the year as we continue to move these projects forward.

On the balance sheet, we remain debt free and our cash and short term investment position stands at 52.4 million at the end of the quarter.

Now I'll turn it over to Ron, who will talk about our operations and activities in the U.S. and Mexico, as well as our exploration activities.

Thanks, Lew. In Mexico the labor strike at the Velardena mill in Durango was settled on June 3rd. The Velardena mill and the Don Sergio mine were in full operation by June 10th. With the help of the Governor of the State of Durango and the Mexican National Undersecretary of Labor, we were able to reach an agreement with the union that will allow us to economically complete mining and processing of our current resources. The agreement also sets the stage for a profitable future in Mexico once additional resources are discovered. The Francine vein has been exhausted and the Don Sergio vein will be exhausted in the next couple of months. Processing is expected to continue through the end of November, and we expect to meet the production targets we set for the year.

Drilling in the Hugh zone has continued to provide positive results. The Hugh zone is located beneath the Francine vein, which has been a major source of production at San Sebastian. Last year positive drill results allowed us to include approximately 479,000 tons as other resources. Drilling during the second quarter appears to have continued to expand this resource. The ore body remains open to expansion down dip and a long strike in both directions. Ten holes will be drilled during the third and fourth quarters and we expect to re-evaluate the project feasibility at year end.

We began drilling the geo chemical anomalies to the west and the north of the Francine vein during the second quarter. We've intersected buried veins that are mineralized in each of these areas drilled to date. The veins may represent the strike extension of the Francine, Professor and North veins over a distance of nearly 1.8 kilometers to the west of the current mine. Additional drilling is in progress. I'm convinced that we will be able to develop additional production form our concessions at San Sebastian in the near future.

At Greens Creek silver mine, our joint venture with Kennecott in Alaska, crews once again turned in another great performance. Cash costs were a very low $1.11 per ounce -- silver ounce, and silver grades continued to be high at 17.7 ounces per ton as a result of increased production from high grade ore zones.

On the exploration front, most of the effort was dedicated to drifting across the Gallagher fault. This work will develop additional platforms to pursue the ore body to the west of the fault. Drilling from surface into the area west of the Gallagher intercepted mineralization further to the west than previous drilling. In addition to the potential to extend the mine life, this discovery raises the potential for additional ore bodies at higher elevations to the west of the Gallagher fault. Underground drilling will recommence in the third quarter and we continue to be very excited about the potential of this area.

At Hollister, we are earning into a 50/50 joint venture with Great Basin Gold on this gold exploration project in Nevada. We've advanced the decline approximately 2200 feet. Ground conditions and advance rates improved in June but have since worsened once again slowing progress on the exploration decline. We expect to begin underground drilling late in the fourth quarter. The feasibility study is expected to be complete in 2006 and will include 5600 feet of development to construct drill platforms, 55,000 feet of underground diamond drilling and 800 feet of exploration drifting on veins.

The Lucky Friday silver mine in Idaho produced more ounces at slightly lower cost than the same period a year ago, chiefly due to production from other veins parallel to the Main 30 vein. In addition, we produced approximately 55,000 ounces from the initial drifting on the 30 vein from the new 5900 level. Production from the 5900 level is treated as a credit to capital cost and is not reflected in the cash cost calculations.

Development of the new mining area on the 5900 level is on schedule. However, the raised borehole that was to be part of the primary ventilation circuit failed when it intersected a hidden geologic fault structure. A new ventilation raise is being excavated using an [alamact] raise system which will allow ground support to be installed in short intervals. This could have a slight impact on the development schedule going forward.

We began development on vein in May as planned, and a steady increase in millfeed through the remainder of this year and the first half of 2006 is planned. Production from the first stall will begin in the third quarter with development complete in 2006.

Construction of the mill improvement project began in July as expected and will be completed by year end. The primary objectives of this project are to improve the grade of the concentrates and reduce freight costs. Minor improvements in recovery and throughput are expected as well. The project is on schedule and on budget.

As we reported in the release, we continue to see ore grade mineralization in our latest drilling below the resource that was reported in January. In addition, we have found additional ore long strike at the 5300 elevation during the second quarter. This extension of the existing stopes is confirming the extensions along strike and below the current mining revealed by drilling earlier this year. Our drilling success coupled with the success we have had exploiting the intermediate veins have resulted in a number of opportunities to improve the cost and production profiles at the Lucky Friday, while extending the mine life. We have begun work to analyze the production capacity and depth capabilities of our existing infrastructure and identified methods and costs of taking advantage of the additional resources. This process will go well into next year. But I'm extremely excited about the opportunities that we're seeing at the Lucky Friday for more economic and longer term future. With that I'll turn it back over to you, Phil.

Thanks Ron. We have a lot that's happening in Venezuela. I have spent three of the last seven weeks in country seeing the shaft go into production, the status of our two accesses in the Mina Isadora, getting updated on exploration and having a firsthand review of the political and labor situation. The bottom line in Venezuela is that we think we are in a position for us to have a good second half of the year and for next year to be even better.

So let me take a few moments and talk about the personnel changes in Venezuela. After the better part of four years of working in some capacity in Venezuela and the last two as president, Tom Fudge is making a change and is going be pursuing other interests. In anticipation of this, we've had Russ Alley who's been our GM at San Sebastian in Venezuela for the most part since February, full time since April. And of course we've had Dave Howe, who's been the operational leader in Venezuela for the last six years. These guys are going to continue on.

What we're going to be doing is looking for a new President and will likely be a Venezuelan with a focus on the political and government relations. And we think these changes are going to be good for our future in Venezuela. We think it's going to help us deal with the operational and governmental challenges. Like anywhere, we've got a lot of them in Venezuela. In the mean time, we continue to have an excellent team of long-term government and public affairs consultants and in-country experts in place, people that we've worked with over the last five years.

Now, at La Camorra, operationally, the ramp is now about 700 meters below the surface and it takes about two hours for a truck to haul from the bottom of the ramp to the surface and back. The inefficiencies of this are enormous. So we put in the shaft. This, of course, dramatically increased the waste that we had in developing the shaft so our development and stoke prepping fell behind and grades fell over the course of the last half of the -- first half of this year, particularly the first quarter. The second quarter, you saw grades were about 30% higher and it's going to be higher in the third quarter as we increase our development. Over the second half of the year, we'll start to see costs benefits from the shaft.

The shaft increases our flexibility dramatically. It has the capacity to haul all of the ore in a shift or shift and a half. This means that by year end if we choose to, we cannot only move them up to the surface via the shaft, but also men and materials. All of these trucks that have been hauling to surface can be redirected to further development at depth. And between this and Mina Isadora, what we're trying to do is build excess capacity in the La Camorra unit so we can manage our production and costs better.

What are the risks with the -- with where we're going with La Camorra? The risk that Hecla faces is the same risk others are facing in the industry right now, and that's dealing with labor. Over the past three years Venezuela has had laws that's made it difficult to terminate employees. And over time, this has taken a toll on having a productive work force. It emboldens the unions to be more aggressive, making it more difficult to operate. So like the rest of the industry that's managing labor issues, we have to do the same thing. It's going to be one of our biggest challenges to having operating success.

I can't overstate how exciting it is being in what we consider the world's most underexplored gold producing green stone belt. Like the Canadian and West African green stones, this district has produced highly economic million ounce ore bodies, but unlike those, there has virtually been no exploration. The challenge Hecla has is to continually prioritize between targets that can be turned into ounces in the next few years and those prospects that can deliver quantum jumps in our resource base. Because both were so good, it's causing us to do a lot in Venezuela. We are basically trying to do both as best we can. But it involves spending quite a bit of money and having quite a few resources -- human resources directed to it.

The deep directional drilling that we've been doing for a time now is to try to determine the future of La Camorra. The hole we mentioned in the press release, that 38 grammer (sic), is twice as deep as our shaft. We have other ore grade holes as we have throughout the deposit. We also have low and no grade holes. So we know there's deep mineralization, but it's going to take a lot more holes and patience to determine if we have something mineable at this depth. But we're very encouraged.

On block B at Mina Isadora, we continue to add spectacular grade intercepts. A 1.2 kilo per ton intercept as we are slowly expanding this deposit. At this point we don't think there's a lot of potential downdip to the west. But once we get the ramp down there in a year's time we will conduct underground drilling to further define the limits of the ore body and there is potential. At this stage, we are very early in the life of this underground deposit and we think we're going to find more ore as our knowledge increases.

Now, work on the Twin Conductora sheer has continued to be successful and realize this is a different style deposit. We have more low-grade material, but on much wider structures. There's a kilometer potential strike length we need to test. This deposit could allow us to prove up a lot more ounces, a lot earlier in development than other targets that we've been drilling and what we've done historically. Speaking of other targets we've identified targets to drill hopefully before the end of the year on two of the main geo chemical trends that we have within block B.

Of course we also are continuing to add to our land package with the Guariche property now under a definitive agreement. This doubles our land package and it's part of our strategy to have a stake in what we consider to be the three best green stone districts in Venezuela. So that's Guariche, that's the El Dorado district where La Camorra is, that's El Callao, where block B is. It's remarkable that a company our size can control such prospective exploration ground. If it weren't for the operating success that we've had in Venezuela and our ability to operate there, we wouldn't have this ground. It wouldn't be possible for us to be able to control such great ground. Vicki, I could go on, but why don't we take questions now.

Thank you, Phil. Operator, could you go ahead and give the instructions for the question and answer session now please.

[Operator Instructions] And our first question comes from Geoff Stanley at BMO Nesbitt Burns.

Good afternoon.

Hey Geoff.

Perhaps a couple of questions for you to start off with. Second quarter loss -- the second half looks like it's going to be a lot better. Assuming similar commodity prices and, roughly the same exploration spending, when do you expect to return to profitability?

Well, I would say over the second half of the year, it's very tough to see us profitable because of the level of exploration expenditure that we're making. We're going to be very close. We have the potential to be very close. But with the level of exploration, I just don't see that being likely at current commodity prices.

If I'm reading it correctly you expect to be approaching break even by year end or thereabouts?

That's right.

Okay. And perhaps a question for Ron. San Sebastian looks to have enormous potential. Clearly having some exploration success at the moment. What kind of timetable do you have for getting it back up and running again? What are the key thresholds? For example, what kind of reserve or resource do you need before you press the button on it? How does it all look like it's going to pan out if everything goes to plan?

Sort of depends on which area comes in first. The Hugh zone we really need to probably double what we put in at the start of the year, in terms of tons, at similar grades. And it will be the end of the year before we really know for sure if that potential is there through this drilling. And then that's a fairly lengthy development project, because the top of it is 100 meters below the bottom of Francine. It's roughly 300 meters to the top of it, depth. There's quite a bit of development there. You're looking at a two or three year project. If we were able to prove something up that is at a shallower depth, along strike of the Francine, you could see something sooner than that. But those targets are much less developed than the Hugh zone. I didn't give you a very specific answer, but you're looking at a couple years, probably.

Those targets are the ones to the east and to the west.

Right.

Okay. Those are the [Exploro] and the geochem targets that you've recently been [multiple speakers] looking --?

That's right.

The nice thing about those is you'd be able to process those through the existing mill. While the Hugh zone's got sulfide material in it so there would have to be some upgrades to the mill. That wouldn't be the critical path of the project.

Are you switching your emphasis a little bit to chase those targets harder?

We're chasing all of those targets pretty hard.

All right. Very good. I'll leave you with it and let someone else ask a question.

Thanks, Geoff.

Our next question comes from Anthony Sorrentino of Sorrentino Metal.

Hello, everyone.

Hi, Anthony.

Hi. In Venezuela, you're bringing Mina Isadora into production, and from what you said it sounds like the production there is basically going to help to offset production declines at La Camorra. Where in Venezuela do you see the potential for increased production over the next year or two?

Well, Anthony, one of the things that we decided, and this would be over a year ago, was to grow our reserve resource base before we try to push the production levels up. We -- what we don't want to do is to have these short mine lives and always be scrambling to maintain our production. So, over the next couple of years the focus that we have is on growing the reserve resource base and maintaining a strong level of production. We have the potential at both La Camorra and at Block B to see deposits develop that could cause us to make a decision to expand the mill at La Camorra or even build a mill in El Callao. That's going to take some time before we come to those conclusions, though. So the objective we have over the next year to two years is not production growth. It's resource reserve growth.

Okay. Would you give a breakdown of what you expect exploration and capital spending to be by property in 2005?

Yeah. I'm sorry.

Anthony, this the Lew Walde. I'll walk you through the capital. Really for the balance of 2005, looking at the Lucky Friday project, we're probably looking in the range of 6 to 7 million on that project for the balance of this year. Probably near about 4 million up at Greens Creek and then between La Camorra and Isadora probably in the 14 to $15 million range per capital on those projects.

And then as far as exploration goes, it's about a million for Greens Creek; about half a million for the Lucky Friday; about 4 million for Mexico; about 6 million for the Venezuelan properties. Then we have another 2 million that we haven't allocated to any of our properties yet. A large portion of that is going to go to Mexico, is our expectation. There will be some portion that will go to Venezuela.

Okay. And would you have anything to tell us with regard to progress concerning acquisitions?

Oh, Anthony, we are continually looking at where we can add value. Where there's synergies, where there's the opportunity for the combination of assets to turn out to be more than what they have separately. We're looking for places where we can take our mining expertise. One of the advantages that Hecla has is that we've got a team of people, in fact, we're going to have a little reception tomorrow where we're awarding service awards to people. The number of people that we have with 10, 20, 25, 30 years of time with the Company and experience is pretty remarkable. We think this is a competitive advantage that we have that we're going to be able to apply to some assets that we know people are having trouble with. So that's a long way of not answering your question, and I realize that, but we are working at where we can make acquisitions. We're not going to make acquisitions simply for the sake of getting bigger.

Okay. Very good. All right. Thank you very much.

Thank you. Talk to you later.

Okay.

Our next question comes from Barry Cooper of CIBC.

Good day. Couple questions for Ron. At Hollister, these ground conditions that you're encountering here, just how has that changed your expectations on cost per foot of advance there, vis a vis what you were expecting at the start.

The cost per foot of advance has almost doubled what we expected. And the advance rates are about half.

Okay. And what is that cost per foot then?

It's averaging nearly 800 bucks a foot.

Okay. On average that seems common down there when the ground conditions in Nevada don't behave themselves sort of thing. Then on your cost per ton at La Camorra, they went up fairly substantially in the second quarter, and yet I thought most of the first quarter issues were a problem there. Obviously that contributed to higher cost per ounce. Anything unusual as to why that went up? Because your tonnage throughput was the same and everything. I would have thought that most of the damage would have been done in Q1 rather than Q2.

Yeah. Barry, this is Lew Walde. One of the factors that Phil had mentioned was some of the tonnage for the quarter coming out of Mina Isadora and those tons, which were some of the initial tons, were very high cost tonnage, which had some impact on the quarter's cost per ton.

So what would have been the split at La Camorra proper versus the other one?

Do you have that in that budget? Just a second, Barry. Do you have it there?

They're doing some math. Do you have any other questions?

No. That was about it. Unfortunately, I don't have another one lined up here to keep you talking.

All right. Well, I tell you what. We'll try to answer it before the end of the call.

Okay. That sounds great.

Okay.

Our next question comes from Mike Curran of Royal Bank.

Good afternoon, guys and gals. Maybe you could give us a breakdown of how you see the 6.5 to 7 million ounces of silver? Because I'm definitely getting -- I'm light on my numbers and I'm trying to figure out where I'm light.

Okay. Ron, do you want to go ahead and --

Yeah. I'm going to have to -- here it is.

Both at Greens Creek and Lucky Friday you're looking right around 3 million ounce range and at San Sebastian 600, to 700,000 ounces. Lucky Friday, you have between 3 and 3.25. Greens Creek a little over 3. And about 700,000 or so from San Sebastian.

Great, It was Lucky Friday. That's where I was light. Perfect.

Okay. Anything else, Mike? Guess not.

Operator, are there any further questions?

[Operator Instructions]

Okay. You don't have the -- Barry, we will call you back with the answer to your question. With that, there are no further questions --

There are no further questions. That concludes the second quarter 2005 Hecla Mining Company conference call. If anyone has any further questions feel free to call me, Vicki Veltkamp, at 208-769-4144. Thank you all for joining us today and have a good day. Good-bye.

Ladies and gentlemen, this concludes the conference. You may now disconnect.