Hecla Mining Co (HL) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hecla Mining Company year-end 2005 conference call. My name is Maria and I will be your coordinator for today. At this time, all participants are in a listen-only mode, and we will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Ms. Vicki Veltkamp. Please proceed, ma'am.

Thank you, Maria, and thanks to all the rest of you as well for joining us today. I'm Vicki Veltkamp, Vice President of Investor and Public Relations for Hecla Mining Company, and this is our year-end 2005 conference call. This call is being webcast live today, so you can access a replay of it, if you wish, at our website. That is at www.Hecla-mining.com.

At the website you can find the financial results and today's news release; and at the end of that news release, is a quantitative reconciliation to GAAP of cash cost per ounce, which is an SEC requirement. Today's presentation will be made by Phil Baker, Hecla's President and CEO. He will have help from Lew Walde, our Chief Financial Officer, and Ron Clayton, our Vice President of North American Operations. Then following their presentation we will 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 could cause actual results to differ from projections. With that said, I would like to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Thanks, Vicki, and let me add my welcome to Vicki's. Now, 2005 was a year of operational challenges that prevented us from making our goals we set out at the beginning of the year. We had less production and higher costs than we wanted. However, we knew it would be a transitional year, positioning us for better production and lower costs in the future.

So significant progress was made on that transition. Development of the 5900 level of Lucky Friday, the ramp at Nina Isidora, the shaft La Camorra, all work that we will start the benefit of in 2006. We have also had significant exploration success that justifies the investment in exploration and predevelopment that contributed to our loss.

Lucky Friday reserve increase, discovery of the Hugh Zone and possibly extensions of the Francine vein, further extension of the bulk tonnage Twin/Conductora Shears, and the very high bonanza grades on the Hollister Development Block.

We have gotten 2006 off to a great start. We sold our interest in Alamos, generating a $36 million gain and $57 million in proceeds. Realized that this investment we made a little over a year ago was made based on the due diligence our technical team made. This was not a blind investment and these are the same people that evaluating not only other acquisitions and investment opportunities, but our own projects. It is on the back of those teams' evaluations that we are making our exploration and capital investments.

So we believe we are going to continue to have great success. Now, the focus of 2006 will be to deliver 6 million of silver production at less than $3 per ounce and 140,000 ounces of gold at less than $300 per ounce. To do this, we have to complete the development work at the Lucky Friday and Mina Isidora, which should happen by mid-year.

We will continue our focused exploration program. Ron and I will have more to say on the exploration in a minute.

Let me make a few comments about the silver price. Over the last 35 days we have seen an extraordinary amount of volatility in the price. Silver has traded in a dollar range between $8.75 and $9.75. We still think, because of its extraordinary physical uses and its value as a precious metal, that we will see double-digit silver prices soon.

Of course with our very low cash costs, we are already seeing in excess of $6 per ounce of cash margin. As you know, we have been using that margin for the expiration and development projects which have impacted our earnings.

By mid-year, with the Lucky Friday and Mina Isidora ramping up to full production, we're looking at a much improved picture. Now let me turn things over to Lew and Ron, and then I will make a few more comments at the end. Lew?

Thank you Phil. We will start off by talking about the fourth quarter for a moment. During the fourth quarter, Hecla realized a loss of $7.4 million, which compares to a loss of nearly $4 million in the fourth quarter of last year. This increased loss is primarily a function of higher gold production costs, and the impacts of increased depreciation charges associated with the newly commissioned shaft at La Camorra. Both of these factors were partly offset by favorable metal prices during the quarter.

On the gold side, for the quarter we produced 42,000 ounces of gold at a cash cost of $363 per ounce, which compares favorably to the 36,000 ounces of gold produced in the fourth quarter of last year, although those ounces were produced at a lower cost of $237 per ounce.

So in addition to the increase in gold production quarter-on-quarter, it's important to realize that gold production in Venezuela also increased 37% to more than 30,000 ounces in the fourth quarter, compared to about 22,000 ounces during the third quarter of 2005, which shows that this operation is improving following a temporary strike and work slowdown at the La Camorra mine during the third quarter.

Shifting to the silver side of our business, silver production totaled 1.3 million ounces, which is the same level as last year, while we saw our cash cost decrease about $1 per ounce from $2.92 to $1.84 per ounce in the fourth quarter of this year.

Talking about these silver costs, two out of three of our silver operations actually had negative cash costs for the quarter, including -$0.66 per ounce, at the Greens Creek mine and -$0.42 per ounce at San Sebastian.

While these two mines had low costs, the Lucky Friday mine experienced higher cost, in part due to lower silver grade during the quarter.

Despite the lower costs and the higher prices in silver, our overall gross profit from this segment was down about $900,000 during the quarter, which was due primarily to increases in product inventory at Greens Creek, where shipments are made on large oceangoing vessels.

Also during the fourth quarter, we continued our investment in exploration and predevelopment, investing nearly $7 million in these activities.

Shifting over to our annual results for 2005, Hecla recorded a loss of $26 million or $0.22 per share, compared to a loss of roughly $18 million or $0.15 per share in 2004. The increased loss resulted from decreased production and higher costs; our increased investment in exploration and predevelopment of about $6 million; and these two factors were partly offset by the favorable prices during the year, nonrecurring environmental accruals in 2004, and a 2004 non-cash preferred dividend of nearly $11 million.

Silver production for the year, Phil mentioned, totaled 6 million ounces at a nice cash cost of $2.96 per ounce. This compares to 7 million ounces in 2004 at $2.02 per ounce. This decreased production and the higher costs are due to limited mining from San Sebastian in 2005, where that ore body was mined out at the end of the year. So this resulted in fewer ounces of silver and less byproduct gold. Also impacting the costs were the impact of rising input costs, such as fuel, cement, and steel.

Switching to the gold, our production decreased from 190,000 ounces to 141,000 ounces in '05. So in addition to the 16,000 ounce reduction in gold production from San Sebastian, we also saw our Venezuela operations' gold production decrease from about 130,000 ounces to just north of 100,000 ounces in 2005.

In Venezuela, the cash cost of gold production increased from $180 per ounce in '04 to $337 per ounce in '05. Take a second just to talk about some of the reasons for that increase.

First of all, we had lower tons in grade. We estimate that this had about a $70 impact on the cost per ounce. But secondly, the impacts of currency regulations and strengthening of the Venezuela currency also impacted the cost; and this impact is estimated at about $30 per ounce.

But much like our silver operations where we saw higher input costs, we also saw that in Venezuela. The impacts of inflation there, we estimate, impacted the cost per ounce by nearly $50 per ounce during 2005. So we can work on the production side; the other two are challenges for us.

During 2006, we do expect to see our performance on the production side improve, and we're projecting about 125,000 ounces of gold production from Venezuela at a cost of below $300 per ounce. Again, these costs will be somewhat dependent upon currency and inflation issues in the country.

Shifting for a moment to the cash flow and balance sheet, for the year our operations actually consumed about $6 million in cash, compared to cash generated in 2004 of about $13 million. The change in cash flow is primarily a result of the operating performance discussed previously, which included our investment of $26 million in exploration and predevelopment. These were partly offset by lower uses of working capital during 2005.

On the capital side, we invested $45 million to advance and complete major projects, including the Lucky Friday expansion, Mina Isidora mine development, and the shaft La Camorra.

We finished the year with cash and short-term investments of $47 million and a nominal $3 million of debt outstanding under our $30 million credit facility. It's important to note that included in that $47 million of cash [in] short-term investments was about $41 million for our investment in Alamos, which during January appreciated an additional $16 million and was sold for net proceeds of $57 million.

This again results in a gain of approximately $36 million which we recorded in the first quarter of 2006. This was a fantastic investment for the Company. Now that the investment has been monetized, it provides us with additional flexibility to continue to mover our development and exploration projects forward.

So in summary, 2005 had its challenges for Hecla. However, we saw improvement during the fourth quarter in Venezuela, and in 2006 we expect to see increasing contributions and production from both Lucky Friday expansion and the Mina Isidora mine. We will continue to have excellent exploration and predevelopment programs that will continue to be advanced during 2006.

So these opportunities, combined with our solid financial position, leaves your Company well positioned to move forward. Now I will turn it over to Ron who will talk about our North American operations.

Thanks, Lew. First, let's talk about Mexico. We completed processing the last ore stockpiles from San Sebastian and Don Sergio mines as scheduled in November. Lower production cost during the quarter and year reflect the fact that a portion of the material processed in the quarter and in 2005 was mined during the fourth quarter of 2004.

The mine equipment, the Velardena mill, and the San Sebastian mine have been mothballed and will remain on care and maintenance status until a decision is made regarding the underground exploration of the Hugh Zone. The Don Sergio mine has been reclaimed.

On the exploration side, diamond core drilling into the Hugh Zone continued during the fourth quarter. We have expanded the strike length of the mineralized zone, both the East and the West. Drilling to the West has also encountered higher level narrow veins that contain less sulfide material and more gold mineralization than encountered in the Hugh Zone. These veins appear to be more characteristic of the Francine vein in the San Sebastian mines, and appear to be offset by post mineral faulting.

While these high-level intercepts contain high precious metal grades, narrow widths, they will not be economic over mining widths. However, encountering these veins raises the possibility that strike extension of both the Francine vein and Hugh Zone have been preserved in downdrop fault blocks to the West of the mine, and the intercepts are the expression (technical difficulty) top of the Francine vein extension.

Follow-up drilling will continue into the second quarter. We plan to update the resource estimate and the scoping study in preparation for a decision regarding underground exploration (inaudible) year.

In Nevada, Hollister Development project is an underground exploration project. We intercepted our first veins in the fourth quarter, and the assays returned spectacular grades over mineable widths. While the development of this project has been hampered by difficult (technical difficulty) conditions and severe weather, the intercepts demonstrate the huge upside this resource may contain.

Drilling will begin next week and should be completed in the third quarter. A resource estimate and complete feasibility study will follow drilling.

At the Greens Creek silver lead zinc mine in Juneau, Alaska, costs during 2005 were impacted significantly by increases in supply and labor costs compared to 2004. The fourth quarter saw some production impact resulting from the decision to institute an aggressive rehabilitation program in the main haulage ways of the mine.

Like many underground mines, the mine life has grown virtually every year and has reached a point that the working life of the original ground support will soon be exceeded. While this program has had a cost impact as well as some minor impact on production, the long-term impacts on cost and production of this program will be positive. The aggressive program will continue through the first half of 2006 (technical difficulty) will return to our normal maintenance program.

We now have over 90 holes drilled into the West Gallagher Zone. Mineralized portions of each hole have been sampled and we're awaiting assays for the majority of the holes. Mineralization appears to be promising and we're expecting Greens Creek staff to complete a resource estimate in 2006.

Additional drilling is also planned in 2006, in several prospects both adjacent to the mine and on the larger (technical difficulty). The opportunity to discover additional [ore] on this land package is very good.

Moving to Idaho at the Lucky Friday silver lead zinc mine, costs were higher in 2005 compared to 2004 as a result of higher supply and labor costs. The 20% increase in ounces produced in 2005 compared to 2004 was a result of the excavating the initial drift across the entire strike length of the [30] vein on the 5,900 level. Most of this production came in the third quarter, and all the revenue derived from this production was accounted for as a credit to capital costs and had no impact on per ounce cost.

The ore grades, width, and strike length seen in the initial drift met our expectations, setting the stage for the ramp up of production in 2006.

Production during the fourth quarter was almost entirely mined from the 4,900 level, where costs are higher and productivity is lower due to the long haulage distance. The first two stopes on 5,900 began production in January, and production revenue will no longer be credited to capital.

Significant capital development will continue on the 5,900 level through 2006. The third and fourth stopes will be developed, and the mine will be in full production in the third quarter at an annual rate of 4 million ounces per year.

Construction of the mill improvement project was completed in December, and the new equipment commissioning is nearly complete. Production was negatively impacted in December and January while conversion to the new equipment and commissioning took place. We expect to see an increase in production and reduction of cost over the next four quarters as development is completed and we begin to (technical difficulty).

On a very positive (technical difficulty) we were able to double the proven and probable reserves at Lucky Friday, including replacement of 2005 production. This was a direct result of the 5,900 level development and drilling.

The increase in metals prices had almost no impact on the increase in reserves. We plan to continue to drill additional resources and upgrade resources (technical difficulty) 2006. While we expect additional increases in both reserves and resources, we would not expect the increases to be as large in 2006 as in 2005. We're looking to a very bright future at the Lucky Friday. With that, I will turn it back over to Phil.

Thanks, Ron. One of the things that I mentioned in the press release is with the amount of reserves and resources that we have at the Lucky Friday today, we now have the same amount of silver as we mined in the past 33 years. So it is amazing, the outlook for the Lucky Friday. It is quite different than I think anyone had two or three years ago.

Let me talk, though, about Venezuela. As Lew mentioned, many things have been difficult in 2005 -- grade, tonnage, labor relations, currency issues inflation. And not all of those issues are going to go away. But we have learned to deal with them. Most important, we have made investments in the last two years that are going to give us operating flexibility, something we did not have in 2005.

During the course of the year we will have a number of stopes to access from both La Camorra and Mina Isidora. This flexibility is really the key to ensure we produce the Company's 150,000 ounces and the La Camorra Unit's 125,000 ounces at a cost of less than $300 per ounce.

We had hoped to get the costs even lower than that, but the strength of the Bolivar and the local inflation rate, we just don't see how are going to be able to do that, unless there is a devaluation of the currency. However, we will look to ways to increase production, which could result in lower costs.

Nonetheless, La Camorra in 2006, like 2005, is going to be a very good cash generator for us, with over $200 per ounce of cash margin.

Now exploration in Venezuela continues to be very exciting. Why is that? It is because we have the best land position in one of the most unexplored greenstone belts in the world. In Block B we are in the heart of the historic 14 million ounce district, and at La Camorra 1 million ounces have been produced.

The challenge Hecla has is to continually prioritize between targets that can turn into ounces in the next few years, and those prospects that can deliver a quantum leap in our resource base. As we drill the targets, it takes time to evaluate what the geology is telling us.

At Block B we have three separate programs. One has been to continue drilling the Twin/Conductora Shear. Remember, this is a discovery of a system that was unknown in this historical district because it did not outcrop. That drilling has gone well, with good grade material and the deposit remaining open. We have enough material identified to take the next step of evaluating how we can move the project forward at its grade.

Another program is drilling other targets generally related to the very high-grade historic mines of the district, Panama and Laguna. The final program is the downdip extension to Mina Isidora.

Now, La Camorra the deep drilling has intercepted ore grade mineralization but at significant widths or strike length. So the focus now is to drill the structure to the west of La Camorra. Upon receiving the permits, we will drill our exploration targets on the grounds that are around the La Camorra concession.

Then finally, we are continuing work on the [Lefay] project, a project we think can replicate La Camorra.

Now let me switch gears from the operations and the exploration and focus on the political situation in Venezuela. I know that investors are very concerned over what is Venezuela's policy toward investing in the mining sector. I can't tell you specifically what it will be. We will all have to wait for the official announcements.

But when we talk to very high government officials, consider what they're trying to accomplish, we're not fretting over what they're going to do. Why is that? It is because we fit exactly what the government wants to see happen.

Let me give you a little background. In the six years Hecla has been talking to 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, frankly, a general lawlessness.

The announcements by the government in September of last year were done at that time in direct response to problems that had arisen between the government and the small miners.

So where does Hecla fit in? We have recognized the problem, and we did that a number of years ago. So our strategy has been to help fix that, which by the way is exactly what we have done in all the communities we have been operating in during our 114-year history.

So how have we helped fix the problem? First of all, we provided jobs. We employ about 1,000 people, making us the largest employer in that region. Of course, we've also made contribution to infrastructure, things to help schools, power, and water. There is nothing new there.

But what is new and ties directly into the government's strategy is our small miner program. We help legalize small miners, provide them with capital, help them with safety and geology. We transfer technology, so they can improve productivity.

Finally, we buy the ore at a fair and transparent price, which, by the way, by us buying the ore, it ends up getting taxed; while with that general lawlessness the government doesn't see any revenue.

So working with the small miners, solving a long-term problem for the government, gives us confidence that we are going to be okay in Venezuela. In fact, we think it gives us a competitive advantage. As things settle out, we think we will have the ability to grow there.

I could go on, Vicki, but I think we should go ahead and take some questions.

All right. Operator, if you would take this opportunity to give instructions for the question-and-answer period, please.

(OPERATOR INSTRUCTIONS) Anthony Sorrentino with Sorrentino Metals.

I see that you plan to spend about $37 million on capital expenditures in 2006. Would that be financed out of cash?

Yes, it will, Tony. We don't have any capital raising requirements.

Okay. Would you give a breakdown of that $37 million by property?

Sure. The Lucky Friday is roughly $10 million; Greens Creek is about 7; the La Camorra and Mina Isidora, the La Camorra Unit is about $17 million, with the majority of that being at the continued development of the ramp at Mina Isidora. And then there is sort of in other places another roughly $3.5 million. Primarily at the Hollister Development Block.

Okay, would you consider any acquisition opportunities in the Silver Valley?

We're looking at things everywhere, Tony. The Silver Valley is a place that we are -- have infrastructure. We're going to be operating the Lucky Friday mine, we think, for another generation. So, yes, we're certainly interested in things to leverage off that infrastructure, that human capital that we have there.

Okay, very good. Thank you very much.

Geoff Stanley with BMO Nesbitt Burns.

A couple of questions, firstly, on the gold sales. Just having a little bit of trouble reconciling your gold sales with production. I am wondering if it again relates back to the sale of gold produced in Venezuela, and what the status is there. Are you holding any inventory in Venezuela (multiple speakers) what I am asking?

Yes, we are holding some gold in inventory in Venezuela. There are currency restrictions that we are looking for ways to maximize the return that we get on those gold sales. It is, geez, how many ounces is it now that we have in inventory as of year-end, Lew?

At the end of the year, it was 8,900 ounces.

Yes.

Okay, and the other question.

Geoff, let me just be clear there is no issue in terms of actually selling those ounces. It is just maximizing the return on those sales.

Okay, fine. So there's no government restrictions or import-export issues or anything like that to deal with?

Well, there are import-export issues to deal with. We could go and sell those ounces, but it would be at a discount that we don't feel like we need to take at this point. So we're looking at ways of maximizing those. Minimizing the discount or even eliminating the discount altogether.

So what do think your chances are of actually obtaining the full spot price on those ounces?

I think -- not exactly the full spot price, but -- Lew, what is your guess on --?

I think we made progress recently; and I would expect that we will be able to get fairly close to that, hopefully by the end of the first quarter, but --.

What percentage, Lew, would you say, what percentage discount would you say that we might be subject to?

I don't think you would see more than 5% discount. That would be a maximum discount.

All right, that's not life-threatening. The other question, there was reference in the quarterly to potential implications for lower-grade material from La Camorra, and its implications for mine planning going forward. It looked like a little warning that you had put in there, that there may be some bumps along the road. I am just wondering if you can elaborate a little bit and give us a good sense of what that actually means.

Geoff, at La Camorra, we continue to have a narrowing of the strike length; and we continue to have, if you will, a lack of flexibility. So that is what we have run into in 2005.

We think that with Mina Isidora, we will be able to manage our way through those sorts of problems. But you know how it is when you are mining; at some point to got to take things as they come.

Yes, you're dealing with mother nature.

Yes. So we have improved our ability to operate with both the shaft and with adding the operations at Mina Isidora. But it is not going to be perfect.

Right. I think you put close to $20 million into that shaft. Are you going to get a reasonable return on that investment? Or is that questionable at this stage?

You know, I think we will get our money back on the shaft. What it really does is it creates a platform like the silver shaft at the Lucky Friday to develop additional reserves in that area. It is basically unexplored ground.

That has been the objective from the beginning. The idea was, let's invest in this shaft, let's put the infrastructure in place, let's put ourselves in a position to do in Venezuela what we have done at the Lucky Friday.

Well, if you can replicate what you did at Lucky Friday, that will be a pretty good result.

No promises on that.

All right, very good. I will leave you with that. Thank you.

(OPERATOR INSTRUCTIONS) Mike Jalonen with Merrill Lynch.

Just following up on Geoff's question, I was noticing the same thing. You're putting $17 million into Mina Isidora, I guess, for -- correct me if I am wrong -- about a 3.5 year reserve life at this point? In La Camorra complex?

Right. At Mina Isidora with what drilling we have done at this point and the mine plan that we have developed, that is what we've got. But we are open downdip; the expectation is that we will add additional material at depth.

Okay.

That has not changed from when we made the first decision to develop the ramp.

Okay.

And there is opportunity along strike there, as well, Phil.

Yes. Remember, these are on echelon veins, and we are just on two of the veins that have been identified that have mineralization. We know there's mineralization on two other veins, but it's too deep.

Remember, this is ore body goes at about a 45-degree angle, and you have got a hillside that is -- I don't know, what degree angle would you say the hillside is, Ron?

Maybe even steeper than that.

So it is very, very deep to try to drill it from surface.

Okay, I guess just moving to Lucky Friday, what would be sort of sustaining capital there? Because you got a nice mine life now, 2013 (indiscernible) maybe another generation of mining analysts to bring there.

Well, clearly, sustaining capital for the next few years is roughly what -- Ron, do you -- I have actually got it here. Some years it is 2 million, some years it is 5 million, 6 million. A lot of it has to do with the tailings facility.

But I think the bigger issue is figuring out how to mine at these deeper depths and what sort of capital that we will have to put in.

We're so encouraged by what we have seen over the past year that that is one of the programs Ron is having these guys start on, is start to evaluate how we proceed from here, sort of looking out 10 years in front of us. Do you want to add anything, Ron?

Yes, the one thing I would add to that is also there are opportunities up above the 4,000 level, between the 4,000 and the 14,000 level that has never been mined. We are fairly excited --.

Or explored.

Or explored for that matter. And there's opportunities along strike here. So one of the other things that we're looking at is that at some point, if you can expand the resource far enough, it may make sense not only to look at what the next 10 or 15 years look like in terms of production at this level, but is there a possibility of even maybe increasing the production level a little bit, reducing cost even further?

So we are just exploring those kinds of things. But now is the time to do that.

Okay. I saw the mine this past year; it is pretty impressive.

I am pretty excited about what is going on up there.

Phil, just going back to Venezuela, I sort of lost track of the government setting up its own mining company to, I guess, assign rights to properties. Did I miss something, or is that being formed yet?

My understanding is the company has been formed, but it hasn't been sort of filled with people yet. It really has not started operating. Nor have they made an extensive formal announcement.

What they have done is talked about what they are doing in the basic industries sector. So they talked about the fact that they're forming a mining company, an aluminum company, and there is a series I think of seven or eight different companies that they're forming.

But they have not gone beyond that at this point, and we're waiting to hear what they're going to say.

How does that affect you guys?

Well, what we're hoping it does is it clears up some of these title issues on ground that we are interested in getting engaged in and exploring. There is ground that we were interested in acquiring but frankly we have backed away from because the title issues were so uncertain.

So if these things go into this national mining company, we think there will be an opportunity to cut a deal. We have been able to do that in the past with this government; Block B is an example of that. We think we will be able to cut a deal that would allow us to go in and explore and ultimately mine.

Okay, well, thank you very much for that. I look forward to seeing more.

There are no more questions at this time. I will now turn the call back over to management.

All right, thank you. This has been the Hecla Mining Company year-end 2005 conference call. For further information or if you have any other questions, you can give me a call, Vicki Veltkamp. My number is 208-769-4144. Thank you all for joining us and have a good day.

Thank you for your participation in today's conference, ladies and gentlemen. You may now all disconnect your lines. Enjoy your day.