Hecla Mining Co (HL) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Hecla Mining earnings conference call. [OPERATOR INSTRUCTIONS] At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. As a reminder, Ladies and Gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Vickie Veltkamp. You may proceed, ma'am.

Thank you, and thanks to the rest of you as well for joining us today. I am Vickie Veltkamp, Vice President of Investor and Public Relations for Hecla Mining Company and this is our first quarter 2006 conference call. The call is being webcast live today so you can access a replay of it if you wish later at our website and our website is www.Hecla-Mining.com. At the website, you could find the financial results and today's news release.

At the end of the news release is a quantitative reconciliation of 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 and he will have help from Lew Walde, our Chief Financial Officer and Ron Clayton our Vice President of North American Operations. And I know it's a busy earnings day today so we'll keep this brief and following their presentations 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 could cause actual results to differ from projections and in addition to that in our filings with the SEC we are only allowed to disclose mineral deposit that we can economically and legally extract and produce and investors are cautioned against the use of terms such as measured, indicated and inferred resources and are urged to consider the disclosure in our SEC files available on our website.

So, having said that I would like to turn the call over to Hecla Mining Company's President and Chief Executive Officer , Phil Baker.

Thanks, Vickie let he add my welcome to Vickie's on today 's conference call and since I know there are a number of conference calls back to back I'm going to keep my comments particularly brief. But I do want you to understand this has been a very good quarter to the start of what we expect to be a great year for Hecla Mining Company. Our operations delivered great cash flow and earnings while we still were aggressively advancing our exploration program on our five world class properties. And we think this quarter is evidence that our long term strategy of diversifying our properties but having an intense focus on those properties is working.

Our silver assets delivered great revenue, profits and cash flow with a cash cost per ounce of $2.05. And I submit to you that our silver assets are the best among our piers group. They're low cost and they're growing and since these assets are in the U.S. Our net operating loss carry forwards allow all of the gross profit to go to the bottom line.

Now, our gold assets located in Venezuela generated good cash flow despite difficult currency restrictions. Today we're already reaping the benefit of decisions that we made on the properties in Venezuela and in the U.S, Decisions we made at much lower prices, that we're getting those benefits today and I think specifically the Lucky Friday In 2003, we made the decision to develop the next level of the Lucky Friday. It's the reason you're going to see production grow this year over last year and again next year. I get questions all the time about when we're going to generate earnings. Well you see earnings occurring this year, and we think you'll continue to see them over the course of the rest of the year.

Our first quarter production costs were so low and our by-product prices that we're receiving are so high that we've decreased our estimate of our silver costs for the year to $2.25. I think this low cost shows the benefit of the poly metallic ore bodies we're mining. Currency controls are the primary reason for us to increase our cost estimate for gold to arrange at 3.50 to 3.75. On the exploration front, the work we're doing at every one of our properties is good. Each of them has had very good news this quarter. Each of them has the potential to materially increase the value of Hecla, and all of them are more attractive now than they were at the beginning of the quarter.

Let me with that, let me turn things over to Lew and Ron and then I'll come back with a few more comments on Venezuela.

Thank you, Phil and good day to everyone. Earlier in the year we told everyone that we expected to produce about 6 million ounces of silver and nearly 150,000 ounces of gold for 2006. We're pleased to let you know that we're currently on target to achieve both of these estimates. Now on the cost side, as we stated, we would produce our silver at a cash cost per ounce less than $3 per ounce and gold at a cost of around $300 per ounce and we're definitely on track, in fact, exceeding the silver cost estimate. We produced silver at a cost of $2.05 during first quarter and we now expect to produce silver for the full year at a cost below $2.25 per ounce.

Over on the gold side, we saw our gold production in Venezuela increase 24% from the fourth quarter 2005 which followed up on a 37% increase from the third quarter of 2005. However, we did see our costs higher and they ended up at $357 per ounce for the first quarter. So let me dive in as some of the reasons for that. These increases were driven by several factors including approximately $22 per ounce for supply inventory obsolescence adjustment and approximately 30 to $40 for the impacts of currency regulations and also additional royalty and exploitation taxes that are directly tied to the increase in the price of gold.

Now our original estimate of cash cost at $300 for the year we would assume the currency devaluation for the Venezuela Bolivar would occur similar to what's happened in the past couple years. In fact this did not occur and we are no longer forecasting a devaluation in 2006. So as Phil mentioned as a result of these factors we've increased our estimated cost for gold to arrange a $350 to $375 per ounce. And while these costs have risen, with increase in the price of gold our cash flow from the gold segment will continues to be very solid.

So my overall interpretation of these changes in the estimate are actually neutral to positive as a lower silver cost negates the impact of the higher gold cost which again indicates the value of being a diversified producer in both metals. Let's take a second to talk about the metal prices. For the first quarter gold averaged $558 per ounce, silver was still in single digits at $9.69 per ounce, and zinc was right at $1 per pound and lead was $0.56 per pound. Prices today with the exception of lead far exceed the prices from quarter one and we expect these prices to positively impact us for the balance of this year.

As I mentioned silver production of 1.2 million ounces at a cost of $2.05 combined with gold production of 42,000 ounces which is an increase of 51% in gold production compared to the first quarter 2005. These factors combined with average higher metal prices increased our revenue by 63% and our gross profit by 115% quarter on quarter. So in addition to the significant improvements in the operating performance, we also realize a gain on the sale of investment of 35.6 million which brought total net income for the quarter to more than $38 million or $0.32 per share, which compares to a loss of 3.3 million first quarter of last year. So when we exclude this gain on investment, net income totaled 2.8 million or $0.02 per share which represents a $6.1 million improvement quarter on quarter and a $10 million improvement from the fourth quarter of 2005.

Phil touched upon our investments that we're making in exploration, during the quarter we spent nearly $5 million to further advance our projects at the Lucky Friday Mine, the Greens Creek Mine, the Hollister Gold project in Nevada, the Hugh Zone in Mexico and at both Block B and La Camorra in Venezuela. All of these activities are aimed at increasing our reserves , resources and production in the future, and we continue or expect that we'll be able to continue to provide you updates as the year progresses.

As we had stated previously in the first quarter, we expect to spend about $25 million on exploration and predevelopment activities in 2006. We currently expect that these expenditures plus our additional $36 million capital program for the year will be funded via cash flow from the operations.

So let me turn for a moment to the balance sheet. Again our balance sheet remains very solid. Cash and cash in short-term investment to $54 million plus an additional $30 million available under credit facility leaves us well positioned to carry out, our activities this year. We've seen our current ratio improve from 2.6 to 1 at December 31, to nearly to 3 to 1 at March 31, further providing evidence of a strengthening financial position. So to reiterate what Phil said and we are off to a great start in 2006.

We've had excellent first quarter earnings. The balance sheet is strong and production estimates that are on track for the year and on the cost side, we've made adjustments to these estimates both positive and negative. We've increased the gold cost by 16% but on the silver side, we've reduced these estimates by nearly 25% for the year. And this leaves us in a great position to reap the awards from the current metal price environment.

Now I'll turn it over to Ron to tell you a little bit about North American Operations.

Thanks, Lew, and good morning or good afternoon wherever you might be. Our silver operations had a good quarter and are right on track to meet our production and cost goals for the year. Exploration results at operating properties in the exploration projects in Nevada and Mexico, continue to encourage us the likelihood of future production for the Company is good.

We are continuing to make great progress on our path to increasing production and decreasing cost at the Lucky Friday Silver Lead Zinc Mine in Idaho. Silver production was up over the same quarter last year by about 20%. We expect to see another 10-12% increase during the second quarter as more production capacity becomes available on the newly developed 5900 level. Also expect to see an additional 35% increase in silver production in the third quarter as production from all four strokes on the 5900 level commences and we reach our milestone annual production rate of 4 million ounces.

We've mined more by-products in the first quarter compared to both the fourth and first quarters of 2005, taking advantage of higher lead and zinc prices. We will continue to take advantage of this opportunity when it makes sense for us. We are beginning to look at the possibility of process improvements to add capacity to our zinc circuit to take advantage of slightly higher zinc grades in the new resource. We are also very pleased with the diamond drilling completed during the quarter at the Lucky Friday.

All five holes drilled are roughly 350 feet below the current resource estimate on the east end of the ore body and we expect to increase resources substantially again this year at the Lucky Friday. The Greens Creek Mine is the joint venture operation with are [Riotendo] in Juneau, Alaska. We hold a 30% interest in this mine and while [Riotendo] is the Manager we are very closely involved with the operation at Greens Creek. The mine produces silver, zinc, lead, and gold.

Production continues to be slightly below capacity levels while we complete the mine rehabilitation and ground control program that began last fall. This project should be completed during the second quarter. I expect silver production to increase approximately 10% in the second quarter and another 10% in the third quarter as the mine should be back to normal in the third quarter.

Despite the increased costs and lower productivity associated with this project, cash costs continue to be very very low at a negative $1.28 per ounce this last quarter. Greens Creek has reserves and resources to support a mine plan with similar production through 2015. We expect to add to that total before year-end as a result of the West Gallagher drilling. We are excited about the results and the open ended nature of the mineralization identified to date. The Hollister Development Block is an underground gold exploration project in Nevada. Underground development of drill stations is nearly complete.

Exploration drilling has begun and approximately 15% of the planned project drilling has been completed. During the remainder of the year, additional drilling and some drifting along the veins will be conducted. Preparation of the feasibility study has begun. We expect to complete the study in early 2007 at which time we'll make the decision about whether we will turn this deposit into a gold mine.

In Durango, Mexico, drilling continues to identify mineralized-- , excuse me, to identify mineralized vein on the Hugh Zone during the quarter. We have 31 ore grade intercepts above our ore cutoff net [inaudible] return of $40. 43% of all of the exploration holes drilled into the zone have been ore grade and we have drilled intercepts covering approximately 2 kilometers of strike length between two major faults and in addition we think we've identified offsets to the west. We plan to drill more holes in the main Hugh Zone, the off sets to the west, and additional targets to the north of the Francine and Hugh in the second quarter.

We have also identified new targets near our existing infrastructure through additional soil geochemistry work. All of the targets supported by geochemist are are all of the targets supported by the presence of structure and the presence of a large intrusive identified by geophysics. We will be following up on these this find over the next several quarters. I'm confident that it is only a matter of time before we return to production in Mexico.

In summary, Lucky Friday and Greens Creek are performing very well and we are well positioned to take advantage of these high metals prices. In addition, we're reaching into the future with some very good results on our exploration properties. The combination of these production and exploration results from operations will continue to translate into a strong financial performance well into the future. Phil?

Thanks, thanks, Ron. The activities we've had in Venezuela have been significantly better than last year with 16,000 more ounces of production and higher grades with some of the ounces coming from Nina Isadora and this has occurred, despite conditions getting tougher at La Camorra mine itself with lower grades and pure headings and I think we did a good job of recognizing that we were going to be faced with this and blending in the ore from Nina Isadora.

Now, of course the cost per ounce has gone up and we think that it will be what we've described, what Lew described, but with the gold prices at these level were generating strong cash flow for those operations, and we're also getting the local gold sales done. It's been occurring in the first quarter and we've been able to do it without any significant discount to the international market. And it's going to take us a few quarters to work off the inventory that we've built up but we're confident that will happen.

Now on the exploration side in Venezuela, only a limited amount of work was done on Block B. Frankly what we focused on was some in field drilling on Nina Isadora, and the majority of the Block B work will start this quarter. The drilling though that we did around La Camorra has been very encouraging, most of the currently planned drilling there will be completed in the second quarter, but from what we see at this point we'll clearly do more work beyond that.

On the political side in Venezuela, nothing has really changed in this past quarter. We're still waiting for clarification from the government of what they're going to do with the regulations and in the meantime what we're doing is spending most of our time on things we have in hand and that fit our current operations. So the basic story in Venezuela is that we're seeing improvements operationally and we're generating good cash flow and we've got our exploration properties that are moving forward and we're just watching carefully what's happening with the government.

And with that, Vickie I think we're ready for questions.

That concludes our prepared presentation. Operator, could you give the instructions now for the question and answer period?

Thank you, ma'am. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Anthony Sorrentino with Sorrentino Metals. You may proceed.

Hello, everyone.

Hi, Anthony.

Would you go into further detail as to the results that you've received at West Gallagher?

Yes. We can talk I guess generally about them. It is fairly complex, Anthony, because you're talking about a very folded deposit and you're talking about as a results not only for silver but gold, lead, and zinc. I will let Ron make some additional comments but I think the message to take from the essay results that we've seen is that it is consistent with the sorts of grades that we've seen in the other eight deposits that we've been mining, you know, over the last 20 years.

Yes. I guess the only thing I would add to that is that you know, we have about 25% of the results back and they're consistent and I mean there's some nice high grades and there's some average grades for the ore bodies that we've seen, and I think that the other real encouraging part of this is that it's still open in two of the directions after the drilling based on the grades that we're seeing and so we're expecting more.

If you look at our press release that we did February 14, Anthony, it has the grades of the existing provable and probable reserves and one of the things I did when I got the assay is I sat down and looked at each of them and compared them to the reserve grades that we have, and you know, they matched up quite nicely; however, this is early in knowing exactly what the grade would turn out to be from a mining plan, but we're encouraged.

Okay. What are your plans for accessing the deeper levels of Lucky Friday?

You're saying below the 5900 level?

Yes. Your longer term plans or at least the options that you might be considering.

Well we're in the process of evaluating that. I mean, at this point we have a mine plan that takes us down to what, the 6100 level?

63.

6300 level and we have drill results at the 64 and the 6900 level and those have all been extremely positive and we're encouraged by that and so we are starting the engineering process for how we would access that. There's a lot of things to take into consideration and so we haven't come to any kind of conclusions or even on the direction that we'll go in; but, I think it's fair to say that we don't see any sort of show stoppers at being able to access that material at some point in the future.

That's correct, and the obvious ones are deep in the silver shaft or sink an internal shaft out in the Gold Hunter so those are the two obvious things we're looking at and the other thing is to continue the exploration there because, if the thing gets big enough it may make sense to even lock at new infrastructure from the surface.

Right.

Yes, and that's right. So, you know, our exploration program is more aggressive there than it's probably maybe been in decades.

Ever to my knowledge.

Yes. Because we think this thing could get quite big. It has the potential to get quite big.

Okay. And one final question, does San Sebastian have the potential to become Hecla's third silver mine possibly as large as Greens Creek or Lucky Friday?

I think it's too early to make that call. I mean it certainly was in that role and what we've done is stepped up the production from the Lucky Friday to make up some of the or some of what it did in the past, but in terms of it's productive rate, we really haven't gotten to that stage yet.

Okay. When would you be doing a feasibility study or pre- feasibility study at the Hugh Zone?

You know, we're completing some drilling in the second quarter and we will do an evaluation at that point as to what we have and what our next approach is. I mean we might at that point make a decision to do exploration from underground. We might be focused more on growing this thing laterally. We don't nowhere it's going to take us. All we do know is that it continues to get better than what we had in previous quarters. We have an ore body that's growing and the quality of it is improving.

Okay. Sounds good. Thank you very much.

Thank you, Anthony.

You're welcome.

Your next question comes from the line of Pat McCormick with Holt and Shepherd Capital. You may proceed.

Good afternoon.

Hi.

Two things I was looking for a comment on the first why do you believe Hecla has significantly lagged the move in the price of the metals? And two, what would prevent Hecla and [inaudible] from merging?

Well, with respect to the first question, two comments. One is the whole sector for some reason has lagged the movement of the metal and so I don't have a very good answer for why the sector would. We think that over time as people realize the earnings driver, this higher metals prices for a company like Hecla that will see our stock move pretty dramatically, you know, we see it [inaudible] silver the impact on our earnings, every cent up goes directly to our bottom line and so you're going to see even better earnings in future periods with this higher metals price. So we think that you'll see the stock move and with respect to the second question, we really don't comment on any sort of merger or acquisition opportunities.

Okay, thank you.

Sure.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your touch tone telephone. Your next question comes from the line of Patrick Morton with RBC Capital Markets. You may proceed.

Hi, guys. Just wondering if you could comment on the split of cash costs at La Camorra versus Nina Isadora?

We do not do that sort of evaluation because it becomes pretty arbitrary as to where we're going to allocate costs. So it's just run as one unit.

Okay, thanks.

Sure.

Your next question comes from the line of John Bridges with JP Morgan. You may proceed.

Hi, John bridges.

Hi, John.

Hi. I just wonders there's been a lot of excitement in the last couple of days after the movements in Bolivia. I wonder if you could sort of give us your impressions of what your experiences in Venezuela as they've gone through, some sort of similar reorganization of mining and resource rights?

Well, you know, John, it's still in progress in Venezuela , so I'm not able to really provide a road map. I guess that I would comment that what seems to have happened in Bolivia seems more radical than we've seen in Venezuela but I don't know that for a fact. And I mean and our experience in Venezuela is theres been a general desire to maintain people in the mining sector, maybe from the standpoint that they don't have the expertise in Venezuela that you see in other countries, you know, so I think our situation in Venezuela is reasonably good and it's hard to say what will happen in Bolivia.

I recognize it's a moving target but Venezuela seems to be further along, a few more innings into the game so it's just giving better guidance.

Yes, you know, and it seems to me that things have been quiet for some time in Venezuela. When you talk to government officials, you do not get the impression that they're going to do anything too terribly radical. They say the things where they want investment in the country, so I'm encouraged that in Venezuela we think that the ultimate outcome will be one that not only allows us to continue to operate but the opportunity to maybe even acquire additional properties.

Okay, excellent. Thanks a lot. Good luck.

Thanks, John.

At this time, there are no further questions in the queue and I would like to turn the presentation back to Ms. Vickie Veltkamp foreclosing remarks.

Well thank you all for joining us today and if you have additional questions, you can contact me, Vickie Veltkamp at 208-769-4144 and this concludes the Hecla Mining Company first quarter 2006 conference call. Have a good day!

Thank you, Ladies and Gentlemen. For your participation in today's presentation. This now concludes the conference. You may all disconnect and have a wonderful day!