Hecla Mining Co (HL) 2005 Q3 法說會逐字稿

Welcome to the third quarter 2005 Hecla Mining earnings conference call. [OPERATOR INSTRUCTIONS] At this time, we'll turn the call over to your host, Miss Vicki Veltkamp, Vice President of Investor and Public Relations. Please proceed.

Thank you, Jean. Thanks to all the rest of you, as well, for joining us today. As the operator said, I'm Vicki Veltkamp, Vice President of Investor and Public Relations for Hecla Mining Company, and this is our third quarter 2005 conference call. This 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 the website you can find the financial results and today's quarterly news release. And at the end of the news release is 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. He'll have help from Lew Walde, our Chief Financial Officer, and Ron Clayton, our Vice President of North American operations. Following their presentation, we'll have a question and answer period.

As you know, any forward-looking statements made today by our management comes under the Private Securities Litigation Reform Act and involves a number of risks that cou -- could cause actual results to differ from projections.

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

Thanks, Vicki. Good afternoon, ladies and gentlemen. Let me -- I guess good morning, actually. Let me add my welcome to Vicki's. This third quarter for Hecla has been -- has been very difficult. We've had lower production, higher costs and political uncertainty in Venezuela, and all of these have contributed to a quarter that was poorer than what we wanted. And I want to address these difficulties head-on because, as I've talked about for a year now, Hecla is in a transition that began in 2003. So I don't want you to lose track that the operational aspects of the trend -- transition are almost complete. In fact, the third quarter should be the operational low point, allowing us to return to our position as a low-cost gold and silver miner in the near future.

We've had this trend of higher costs and lower production, particularly for gold, for about a year now. And in this quarter, we saw these cash costs continue to rise. Now, some of this was expected. We knew grades and tonnage would be lower and unit cost would be higher. But there's a number of things that we didn't anticipate, and I'm sure -- I'm not sure that we actually could have anticipated them, like the cost of inputs like steel, cement and, particularly for Greens Creek, the cost of diesel being significantly higher. And even a quarter ago, not withstanding that we had identified and told you labor issues were a big uncertainty for our La Camorra operation, we didn't anticipate the change in the union and the difficulties that would cause. And I'll talk more about that later, after Lew and Ron make their presentations.

Now we've been in transition at the Lucky Friday, going from the 4,900 level to the 5,900 level, going from a two million ounce silver producer to a four million ounce producer. And in this transic -- transition, we've had some surprises. Frankly, we've had a number of very positive surprises, but they've tended to be long-term and improve the fundamentals of operation. The bad ones, like the lost ventilation bore hole, slowed down development and increased our costs in the short-term. And we, nor did our partner, Rio Tinto, did not expect the deterioration of some of the underground intersections of the ramp at Greens Creek, and we would have to defer resources to fix them. But this transition's almost complete. Both the Lucky Friday and Mina Isadora will be in full production by mid-year 2006, with the next three quarters having more production than this just completed quarter. Our expectations the next three quarters we'll have more production, so stay -- stay tuned for that.

Let me shift gears a little bit and focus on the political situation in Venezuela. I know that investors are very concerned over what Venezuela's policy is going to be toward investing in the mining sector. And I can't tell you, specifically, what that policy will be. We're all going to have to wait for the official announcements. But when we talk to high government officials and we hear what they say and we consider what they are trying to accomplish, frankly we're not fretting over what they are going to do. Why are we so sanguine on the issue? It's because we think we fit exactly what the government wants to see happen.

Let me give you a little background. In the six years we've been talking to the government officials about the mining sector, their biggest concern has continually been how to deal with the small miners who operate illegally, without proper titles or permits, and create health and environmental concerns, and just the general lawlessness in the region. And the announcements by the government in September were done at that time in direct response to problems that had risen between the government and small miners. So where does Hecla fit in? Well, we recognized that there was a problem with the small miners a number of years ago, and it created a lot of different issues, including issues specifically for us. And we came to the conclusion that what we needed to do was help fix the problem. You know, frankly, this is what Hecla has done in all of the communities that we've been in in our 114-year history.

So, what have we done to help fix the problem? Well, the first thing we've done, we've provided jobs. We employ about 1,000 people, making us the largest employer in the region. And then we make contributions to infrastructure, things to help the schools, power, water, that sort of thing. So there's nothing new here. I mean, we've done that, really, everywhere we've gone. But what is new and ties directly into the government strategy is our small miner program. We have helped legalize the small miners. We've provided them with capital. We've helped with safety and geology. We've transferred technology, so they can improve pro -- productivity And then, finally, we've bought their ore at a fair and transparent price.

Working with these small miners, solving a long term problems for the government, really give us confidence that we're going to be okay in Venezuela. In fact, we think we have a competitive advantage there and, as things settle out, we could in a thoughtful way continue to grow there. Specifically, something that came up this quarter wer -- was the tax matter in Venezuela. And what this actually relates to is the new union that we have not really understanding accounting because they've confused cash costs with profitability and -- and have asked the [ceniac] to -- to review our books, and we're more than happy to see that happen.

Now, before I turn it over to Lew, I want to switch gears again and just comment for a moment on silver ETS in general without commenting on any specifically, since they're in registration -- there's one in registration with the SEC. And the bottom line is that Hecla Mining Company fully supports any investment vehicle that increases the availability to silver in the marketplace. Right now, it's very hard for investors to invest in the physical silver. So a silver ETS helps fix that problem and we are supportive of that. Now, there's other things that need to be done to help investors invest in silver, like fixing the capital gains rate, but we can talk about that in the future.

So let me stop here and turn things over to Lew to review our financial statements. And then I'll come back after Ron talks to talk more about Venezuela. Go ahead, Lew.

All right, thank you, Phil, and welcome to everyone. For the third quarter of 2005, Hecla recorded a loss 8.7 million or $0.07 per share, compared to a loss in the third quarter of last year of 11.4 million or $0.10 per share. While we've continued to advance our expiration and predevelopment projects, we did see gross profits from both gold and silver operations decline compared to last year's third quarter.

First let's take a look at the gold side. We did incur our first negative gross profit since 2000 -- since the second quarter of 2000. We realized a loss of 700,000, which compared to a gross profit of 1.9 million in the third quarter of last year. While the gold price is higher this quarter, our gold production declined and our gold cost increased. For the quarter, gold production decreased 18% to 36,000 ounces, as gold production from La Camorra was hampered by the strike followed by the work slow-down that persisted throughout the quarter. This resulted in about 18% fewer tons being processed in Venezuela. Another major factor that impacted gold production was a lower gold ore grade, which was 17% lower than last year. So these factors, along with rise in input cost, increased our cash operating cost to $381 per ounce in the third quarter, compared to $211 per ounce last year.

Now we turn to the silver side. Our performance was very solid, as we saw total silver production increase 6% to 1.8 million ounces from 1.7 million million ounces in the third quarter last year. While our production increased, our cash cost did also increase to $3.76 per ounce, compared to $2.32 per ounce last year. Like other mining companies, we've been faced with rising input cost, including fuel, steel and cement costs.

I'll take a second here to give you an example of a cost factor that impact us during the third quarter. We're all familiar with the rising prices of fuel. We all pay for that at the pump. But at Greens Creek mine, our diesel fuel cost on a per ounce basis increased $0.75 per ounce at the Greens Creek mine in the third quarter compared to last year's third quarter. We're doing what we can to decrease these costs, as noted in the press release. Efforts are currently underway for Greens Creek to begin receive electrical power from Alaska Power and Light in 2006 for at least a portion of the mine's power requirement. It''as also been nice to recently see the price of oil drop, which will also benefit us.

Turning to other highlights on the income statement, we -- continue to -- our focus on exploration and predevelopment activities, where we invested 7.6 million in the third quarter, compared to 6.2 million in 2004. We also saw decrease provisions for environmental matters of 7.7 million, primarily due to an increase in 2004 for the Couer d'Alene basin litigation and the Grouse Creek property.

Now turning to the first nine months of 2005, Hecla reported a loss of 18.6 million or $0.16 per share, compared to a loss of $13.8 million or $0.12 a share for the first nine months of last year. Before the impact of noncash preferred stock dividends in 2004, the net loss totalled 2.9 million. Now this change in net income between periods is explained essentially by the same reason that we discussed on the quarter, plus the impacts of the strike at San Sebastian, where production was -- has been limited to three months in 2005, combined with the 32% lower ore grade at La Camorra and the increased exploration and predevelopment activities of $6.2 million year-on-year. So for the first nine months, Hecla's produced nearly 100,000 ounces of gold at a cash cost of $330 per ounce and silver production total 4.7 million ounces at a ca-- cost of $3.28 per ounce.

Now when we turn to the cash flow statement for a moment, our cash flow used by operations for the first nine months of 2005 totaled 9.9 million, which compares to cash flow generated from operations of 17.3 million last year. This variance in operating cash flow is primarily driven by the lower operating income, which included 19.2 million for exploration predevelopment expense in 2005. On the capital side, our three development projects, the Lucky Friday expansion, the shaft at La Camorra and our new mine in Venezuela, Mina Isadora, along with other sustaining capital, totaled #31 million in the first mine months of 2005. We would expect to spend $10 to $15 million in additional capital during the fourth quarter, as we continue to move the Lucky Friday and Mina Isadora development forward.

Just looking at our - at the financial condition at the end of the quarter, the Company remains debt-free and our cash and short-term investment position stands at 42.8 million. We've also positioned ourselves to take -- take advantage of potential growth opportunities by filing a $275 million universal shelf registration statement with the SEC. And we also entered into a $30 million revolving loan facility during the quarter.

So, now I would like to turn it over to Ron, who will tell you a little bit about our operations and activities in the U.S. and Mexico, as well as our exploration activities on these properties.

Thanks, Lew and good morning. The Greens Creek silver zinc lead mine in Juno, Alaska has been a key component of Hecla's production profile for a number of years. The continuing exploration success we have seen, particularly in the West Gallagher, will ensure that Greens Creek continues to add to our profitability well into the future. However, as Lew mentioned, we are facing a number of issues that have increased our operating cost. First, we ex -- we have experienced several ground falls over the last year.

Many of the key openings at Greens Creek have been in service for as much as 15 years now. Individually, none of the falls caused major safety issues or resulted in significant economic impact. However, in reviewing the incident, it became apparent that some of the major haulage ways were in need of a more aggressive maintenance and rehabilitation program. We began installing new ground support in all of the major intersections and other par -- areas of potential geologic risk during the third quarter. This more aggressive program will continue through the first half of next year, at which time we expect to be able to a program dominated by monitoring and less aggressive maintenance. Unfortunately production and costs have been -- both been negatively affected. But we expect, once this program is complete, that we should see some benefit to both production and cost.

The cost in some cases and in some cases availability of supplies along with the competition for man power, has had a major impact in operating costs at all of our operations.. The folks at all of our mines are working hard to minimize the impact of these pressures. For example, as Lew mentioned,Greens Creek generates all of its power currently with diesel generators. Alaska Electric Light and Power recently installed an under-waterline to Admiralty Island, as part of the Alaska state program to extend power to the outlying villages on the island. We're currently installing the equipment required to take advantage of the power AELP can sell us, and although the current generating capacity will not meet all of the needs at Greens Creek, we should begin to see some significant reductions to our power cost late this year. AELP is also planning additional hydrogeneration in the future, which could further benefit the operation. And our discussions and arrangements with them are in place to take advantage of that opportunity, should it reveal itself.

Exploration at Greens Creek during the third quarter focused on two general areas. Several surface targets defined by earlier work were drilled. The argillite phyllite contact that hosts all of the deposits at Greens Creek was identified and mineralized in several of the drill holes. Although ore grade material was not encountered in the drilling conducted this season, the potential for additional ore bodies continues to be good, so long as mineralization exists along this contact. The underground program continued to focus on the West Gallagher, where mineralization was encountered in most of the holes drilled. Further definition of this target will continue through the remainder of this year and into next year. I expect that a resource estimate will be completed in 2006, and I expect that the West Gallagher will likely become the next new ore body at Greens Creek.

Activities at the Lucky Friday silver mine in Mullan, Idaho continue to focus on development and installation of infrastructure on the 5,900 level and definition drilling focused on the intermediate veins. The ventilation raise has been completed and cooling equipment is on site and will be installed during the fourth quarter. Several ore passes are under construction and an additional ventilation raise will be excavated in early next year. The first stope will begin production in the first quarter. The mill grades are near -- mill upgrades are nearing completion. The new crushing circuit was commissioned at the end of Octobener -- October and is functioning well. The remainder of the upgrades will be commissioned in December. We expect to see reduced concentrate freight cost, higher zinc concentrate grade, and slightly higher recoveries next year, as a result. The project is on target to meet our schedule and budget.

Several of you had the opportunity to join us for a tour at the Lucky Friday in September. The team at the Lucky Friday and I thoroughly enjoyed your visit, and feedback we received from you was extremely positive and much appreciated. Things continue to go well at the Lucky Friday.

At the Hollister development project, an underground gold exploration project in Nevada, ramp development continued during the third quarter. Ground conditions have improved, allowing for higher advance rates. We are approaching the area of the veins, drilled from the surface, and, in fact, have intersected massive white core with banded cores and stock work along the strike projection of the Guenevere vein. Ramping is nearly complete and evacuation of the drill lateral will begin soon. Underground drilling will commence in January. We anticipate completing the feasibility study by the end of 2006.

In Mexico at the -- the Don Surgio mine at San Sebastian was exhausted during the third quarter, as scheduled. The Francine was exhausted earlier in the year. Gold and silver production [Dania Mill] will be completed in the month of November, as we scheduled. The operations will be placed on care and maintenance status, while we continue to explore our 200 square mile concessions. Exploration at San Sebastian continues to produce positive results, both on the Hugh Zone drilling and with regard to our earlier stage programs. We are quite excited that the Hugh Zone was expanded significantly with the successful drilling completed in the third quarter. We are currently drilling the last hole in that program, and based on the continued success and the fact that the ore body remains open in both directions along strike and at depth in some areas, we expect to drill additional holes before the end of the year.

Recent drilling has intersected a previously unknown vein containing classic Francine cores veining along with some intrusive class containing abundant sulfites. The intrusive class are mineralized, implying that the intrusive, which we have not yet located, may be mineralized. We think the potential for a large [porfre]-type system in the immediate area is good. Shallow reconnaissance drilling on earlier stage geochemical anomalies has encountered veining in all 18 holes drilled to date. While most of the intercepts have been narrow, several have reached minable widths of one to two meters and contain mineralization similar to that encountered in the Francine.

We have dedicated a great deal of resources into understanding the geology of this district in order to make our drilling as effective as possible. In reality, we've only been exploring this property for two years. Yet we've alre -- we're already starting to see good results. More importantly, we are just beginning to see the real potential the San Sebastian concessions have.

With that, I'll pass it back to Phil for Venezuela.

Thanks, Ron. Now we have a lot of happening in Venezuela. The shaft is now fully operational and we're starting to see the benefits of that in the fourth quarter. We continue to see an increase in production from Mina Isadora and, of course, the grade of that deposit's around an ounce per ton. And, in fact, for October we produced about half of what we produced in all of the third quarter. In November, we're having a very good start. So -- and I talked about the labor situation, how are we dealing with that? Well, we're working with the union to get higher productivity. It's in the best interest in both the Company and the union to get back to the productivity levels we had a year ago. I think they understand that, but as a new union, implementation has been difficult. But we are -- we are making progress, more slowly than we would like. We also are relying more and more on Mina Isadora. And, realize, Mina Isadora has a different union than the La Camorra mine.

Okay, I dealt with why the tonage is off. I mean, it basically has to do with worker productivity. Let's talk about grade. The mine La Camorra mine has historically produced gold at two-thirds to three-quarters of an ounce. Where we're mining now, we're seeing closer to half an ounce. It's still very attractive grades and shen combined with Mina Isadora, it's going to allow us to have the lower cost. We've seen a strengthening in the Venezuelan currency and the imposition of new exchange control regulations, something we highlighted as a risk to our cost structure earlier in the year. And, of course, this has increased our costs. And we're going to be faced with this problem until there's a devaluation. This generally happens once a year. It's going to provide some relief and I expect it will happen sometime next year.

I have to just restate that, as I've talked about in previous calls and when I'm making presentations, about how exciting it is to be in the world's most underexplored gold-producing greenstone belt. It is like the Canadian and West African greenstones. It's a district that has produced highly economic million-ounce ore bodies. but unlike those districts, it is virtually unexplored. And so the challenge Hecla has is to continually priot -- prioritize between targets that can turn into ounces in the next few years. and those prospects that will deliver quantum leaps in our resource base over a significant period of time. And as we're drilling the targets, we have to take the time to do and evaluate what the geology is telling us.

Now at Block B we've had two separate programs. Really three, but I'm going to focus on two of them. One has been the continued drilling of the Twin/Conductora Shear. Remember, this is the discovery of a system that was unknown in this historical district because it didn't outcrop. Basically, anything that didn't outcrop in Venezuela has not been discovered. And that drilling has gone well with good grade material and the deposit remains open. We now have enough material identified to take the next step of evaluating how we're going to deal with it. How we can move the project forward, given the grade that we have.

The other program is drilling these other noncropping outcropping targets. Along the Chili Trend we put holes that -- in that prove that the shear exists, and we've even had one narrow, high-grade intercept. This program is in evaluation as to how to continue. At La Camorra, itself, our focus has been on the work necessary to generate the targets on that big land package. I mean, it's a land package that I think is about four times the size of what we have at Block B. Most of that work is now done, and we're awaiting for the permits. And finally, we mentioned this La Fe project. It's just one of a number of projects that we have that we think can replicate La Camorra and it just serves to highlight the sort of investment that we're making in the country. There is more to be said, but I think, Vicki, we should go ahead and take questions now.

All right, Jean, if you could introduce the question-and-answer period, please.

[OPERATOR INSTRUCTIONS] We'll take our first question from Mr. Anthony Sorrentino or Sorrentino Metals.

Good morning, everyone.

Hi, Tony.

Hi. To put things into perspective, for 2006 would you be able to give us a rough idea by property which properties will be producing more, which ones less, which ones about the same as what you expect to produce in 2005?

Sure. I can do that roughly. We are in the budgeting process, so we're not yet prepared to put out estimates. But I think you'll see Greens Creek to be about the same. You'll see Lucky Friday increase. You'll see La Camorra unit increase.

Phil, Greens Creek could be slightly lower.

Okay.

Wouldn't be a lot, but --

Okay. With regard to exploration, do you believe that the Hugh Zone is the underground feeder system at the San Sebastian property?

Let me let Ron answer that question.

I think it is a little early to say that definitively, but it is pretty likely that it is. And the nature of the sulfide minerals, the zinc, the copper is implying that it has a -- a intrusive nature to it. So I think that is a good assumption.

Okay. Fine. All right. Thank you very much.

Thanks, Tony.

You're welcome.

[OPERATOR INSTRUCTIONS] There seem to be no questions at this time.

All right. Well, thank you, everyone --

I apologize. Anita [Soniette] from Merrill Lynch has joined the queue. I do apologize.

I have a question. Based on the nine months actual results in 2005 guidance, it appears to be looking for Venezuela to show a sharp decline in gold cash costs in Q4 '05 for the [inaudible]. Can you explain why there is going to be such a large decline in cash costs?

Yes, I mean it's essentially a function of bringing material up the shaft. It is a function of the improved productivity that we have already seen in October and into November. It is a function of even more material coming out of Mina Isadora. So you put all of those factors together and you'll see a dramatic increase in -- decrease in the cash cost. And because we're going to have more ounces coming out.

Okay.

It is not the cost of the inputs. Those, you know, are projected to be very similar to what we've had over the last nine months. It is productivity. It is number of ounces coming out of the ground.

Okay. Thank you very much.

I'll take our next question from Barry Cooper of CIBC.

Yes, a question probably for Ron here. With respect to Lucky Friday, recoveries for zinc are at 45%. Where can you get that to, because unlike most operations, that one seems awfully low, relative to what I would have expected?

Yes, consistently we have not paid a lot of attention to the zinc. It's been a pretty small player here. The -- one of the things that has happened in the gold hunter is that zinc has become more prevalent and a bigger player in the game. I can't remember exactly what -- what we're projecting there, but to expect something in the 50 to 55% range would be fairly common out there for this type of flow circuit.

Okay.

And I'm not uncomfortable with those kind of numbers.

Right. Okay. Then, Phil, you didn't come out and say this but, you know, I would say that you indirectly did. You implied that you would put more investment into Venezuela. Do you think that's the right thing to be doing at this point in time?

Well, I mean, we're doing it selectively, Barry, things that we see as being very, very perspective. And then, frankly, if we're going to do something more significant, we're looking for ways to increase everyone's comfort that it's well spent. The bottom line, though, Barry, is that we do not feel that Venezuela is really materially changed what it is looking to -- for foreign investment to do in that region. So we think what we do, how we're operating -- well, they told us. They said you guys are the poster child of investment in the mining sector in Venezuela. And we want others to come in and invest in the same way and conduct themselves in the same way this you guys have done.

So we think that -- once everything settles out, we think that because of our history there and the country that there's going to be opportunities for us. I mean, there's ground we've been interested taking advantage of and exploring or producing from that, frankly, the title issues have been so difficult we haven't been able to do anything. Well, with this change in their structure there, their scheme, there might be the opportunity to do things on that ground. We're going to be -- we're going to be cautious. We understand the markets, the unsettled feeling the market has toward Venezuela. and we've got to respect that.

Okay. So just basically, if I were to paraphrase it, you're a lot more comfortable with it than what the market seems to be worried about at this point in time?

I think that is a fair paraphrase.

Right. Okay. Thanks a lot.

[OPERATOR INSTRUCTIONS] At this time, I'm showing no questions. I'll turn the call back over to the presenters for closing remarks.

Well, thank you all. This has been the Hecla Mining Company third quarter 2005 conference call. If anyone has any further questions, please feel free to call me, Vicki Veltkamp. My number is 208-769-4144. So thanks to call of you for joining us today and have a good day.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect your phone lines.