Hecla Mining Co (HL) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to your second quarter 2006 Hecla Mining earnings conference call. At this time all lines are in listen-only mode and towards the end of the conference call we'll be taking questions. If you need operator assistance while on the call please key star 0. At this time I'll turn your call over to your host Ms. Vicki Veltkamp, Vice President of Investor Relations. Please proceed.

Thank you for joining us today everyone. I am Vicki Veltkamp, Vice President of Investor and Public Relations for Hecla Mining Company and this is our second quarter 2006 conference call. This call is also being webcast live today so you can acc -- also access a replay of it if you wish at our website, which is www.hecla-mining.com. And on the website you can find the financial results and today's news release. 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 be joined by Lew Walde, our Chief Financial Officer; Ron Clayton, our Vice President of North American Operations; and Mike Callahan, who is our President of Venezuelan Operations. There will be a question-and-answer period following their presentation.

I need to let you know that 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 in our filings with the SEC we are allowed to disclose mineral deposits that we can economically and legally extract or produce and investors are in caution -- cautioned about our use of terms such as measured, indicated and inferred resources and we urge you to consider those disclosures in our SEC filings available on our website. Now I'm happy to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Thanks, Vicki, I'm glad you got all those regulatory statements out of the way. Let me add my welcome to Vicki's on the conference call today. I think we've had a comprehensive news release and my colleagues I've asked them to make some comments and they're going to add some color to that news release, so I'm going to keep my comments short. But I think the one thing I do want you to know that this is a very exciting year for Hecla. The $96 million of revenue is over 85% of the total revenue we generated last year and we're on track to have the most revenue in the history of the Company. And this revenue stream is coming from what we consider to be very high quality assets that in some cases we made the decision to invest in back when prices were significantly lower. And it's that investment decision that we made then that we're reaping the benefit of now with the higher prices that we're seeing and I want to commend our employees at the Lucky Friday and the Mina Isidora for the excellent effort they had in bringing these mines into production of expanding them in the case of the Lucky Friday. This is a time when you see massive overruns in our industry, you see projects taking significantly longer and our guys have done an excellent job of bringing these -- the on line. Both mines over the second half of the year will be in full production. Both are contributing even now to these record revenues and the great earnings and cash flow that we've seen.

Now, the Lucky Friday along with Greens Creek, have a cost structure that's significantly lower than the industry average. This low cost structure is not surprising given the quality of these assets and I want you to remember that Hecla is the only primary silver Company with U.S. reserves that goes beyond the next few years. Most of our competitors have their mines in Bolivia and we also own our reserves. We're not -- they're not a financial contract. They're not a derivative. At La Camorra, with the Mina Isidora being part of that unit, it's producing great cash flow despite all of the issues you hear about in Venezuela and Mike's going to talk more about that later but we think our past success in Venezuela is really the thing that gives us the foundation for having future success there. It's recognized in Venezuela and -- and -- and we are confident that we'll have a successful operation, successful activities in the country.

So what are we doing with the benefits these investments have created? What are we doing with the benefits of the cash flow that we're generating? Well, what we're really doing in a way that you haven't seen Hecla do before is reinvesting that in order to create new and future wealth by our exploration in predevelopment program that's in five world class mining districts. It's our view that the discovery of -- or expansion of new ore bodies is what creates fundamental value for shareholders and we're committed to that. I think you've seen that over the course of the last few years. You're going to see that going forward. I'm not going to steal Ron and Mike's thunder but every property has some success that will add to our reserves and resources and that's the name of the game. As a mining company is finding more ore and putting it into production and that's what we do, that's what we're good at. And with the exception of Venezuela, everything that we're doing is in very politically stable locations.

The last thing I want to mention before turning it over is that -- is the -- the announcement of Dean McDonald to our management team. Dean is an explorationist that's not only going to lead our efforts on our existing exploration projects but also a generative program that's under way. And what he will do is continue to apply the science that we've been very focused at applying over the last few years in order to increase our odds of success and minimize the sort of expenditures that we have to make. And I can tell you that he's very excited about the -- the projects, the prospects that we have. So with that, let me turn its over to Lew.

Thank you, Phil. Second quarter proved to be an exceptional one for Hecla. We saw major increases in sales, the gross profit, net income, cash flow and our financial position. So let's start with the sales. Sales increased 32 million or 125% as compared to the second quarter 2005. These increased sales are driven by improving gold production, the reduction of gold inventory held in Venezuela to meet a requirement to sell 15% of the production locally and of course one of the biggest benefits for us, as well as for every other producer, was the increases in the metal prices of gold, silver, lead and zinc.

On the production side, we saw our silver production decrease 175,000 ounces or 12% quarter on quarter, but at the same time we also saw the silver cash cost per ounce decrease to $1.98 per ounce compared to 2.59 in 2005. On the gold side, production increased 8,000 ounces or 25 -- 24% as production from Mina Isidora was added where we saw slight declines in the production from the La Camorra mine. Overall, this is our fourth quarter in a row where we've seen increased production coming out of Venezuela. The solid performance of these operations combined with the increased revenue helped to push our gross profit up to 17.7 million, a 400% increase over the same period last year. We also sold our Noche Buena property in Mexico and recognized a gain of 4.4 million during the second quarter and all these factors led to net income of 9.1 million or $0.08 per share compared to a prior year loss of 6.4 million or $0.05 per share.

Also to note in the financials is the adoption of FAS-B 123(R), the expensing of stock options which Hecla adopted in 2006. We recorded a charge of 1.2 million associated with the granting of stock options during this quarter.

Turning for the -- to the six months year-to-date period, Hecla's recorded net income of 47 million or $0.40 per share, this first six months includes the gain on the sale of investments from the first quarter of 36.4 million, but in addition to these benefits from these non-recurring items, Hecla has also seen its silver cash cost decrease from $2.59 per ounce to $2.01 per ounce so far this year. This was despite a slightly lower silver production during the first six months. While we've seen our silver decrease our gold production has increased dramatically, up more than 36% or 22,000 ounces from the first half of 2005.

I mentioned that our cash flows were also significant in this quarter. In fact our cash flows from operations were exceptional, totaling 28.8 million. And again, this cash flow is generated from the solid performance from our operations and has now put us in a position at the end of June 30th of a balance sheet with cash and short term investments of nearly $81 million. This cash balance, combined with $30 million of undrawn capacity on a credit facility keeps our financial position in excellent shape to continue to make our investments into our fu -- in our future. In fact, given these exper -- given the exploration results to date combined with our solid financial position, we're going to increase our exploration spending by $3 million for the year from a prior estimate of 20 -- $25 million and have exploration totals around $28 million for the -- for the period of 2006. Significant amount of this increase is going to come in the second half of the year so we can -- you can expect to see slightly higher costs in the second half as compared to the first half of this year.

At the same time we've also, Phil mentioned, about the capital projects that we've been working on and getting those completed. We previously provided guidance of spending 36 million on capital for the year, we're actually reducing that now down to -- to $33 million, with some of those reductions coming from the projects at Mina Isidora in Venezuela.

Turn for a minute to our production estimates. Earlier in the year we told you that we were going to produce around 6 million ounces of silver and 150,00 ounces of gold in 2006. We also stated that we would produce the silver at a cost of 2.25 per ounce and gold at a cost in the range of 350 to $375 per ounce. Continue to be on track on the gold production and our silver and gold cost estimates. However, although we still expect to be in the range of 6 million ounces of silver it may be slightly lower primarily due to lower production coming from Greens Creek.

So to summarize, we're off to a great start in 2006. We've hit -- seen excellent earnings and a great balance sheet. We have seen significant improvements in revenue, gross profit, cash flows, and we're generally on track with our cost and production estimates. We continue to make significant investments in our future with exploration and predevelopment which are designed to enhance shareholder value. Now I'm going to turn it over to Ron who'll talk about our North American operations.

Thank you, Lew. Good morning. The overall picture for our North American operations during the second quarter was good. Silver production remained stable and cash costs went down despite a difficult quarter at Green Creek. Fortunately, the performance at the Lucky Friday helped to offset the short term production short fall at Greens Creek. This highlights the significance of having two mature producing mines in a politically stable setting like the United States. Greens Creek is a joint venture underground operation in Juneau, Alaska. Hecla owns 30%. Kennecott , a subsidiary of Reno -- Rio Tinto is the operator and the mine produces silver, sink zinc, gold and lead in concentrates. Production during the quarter was less than anticipated. The ore tonnage shortfalls were due to several issues underground including mine labor shortages in a tight market, continued emphasis on mine infrastructure rehabilitation and less production than expected from long hole stopes which was due the timing of development and sequencing of stopen. Ore grades lagged below expectations as a result. A mining car and tractor has been on site since November of last year to accelerate development and open access to a number of ore headings to improve production. We expect the problems to be resolved over the next two quarters.

Despite the production short falls, Greens Creek continued to produce silver at a very low cash cost of negative $2.28 per ounce. The tie in to line power supplied by Alaska Electric Light and Power was completed in July and the operations will take 25 to 30% of our total power requirements for the remainder of the year from this source. This will help further reduce production costs at Greens Creek. Drilling, 1,000 feet up depth from currently producing stopes in the 5250 zone has identified additional ore grade mineralization. Reinterpretation of the geology in this area earlier this year challenged the conventional thinking that the updip area was not prospective. This discovery has the potential to add significantly to the life of the mine. In the West Gallagher zone, drifting to establish additional drill platforms has been underway during the first half of the year. We expect to begin the next phase of the drilling program in the third quarter, and we will add resources in this area by year-end.

The Lucky Friday Mine produces silver, leed and zinc in concentrates from an underground mine in northern Nevada -- Idaho. We were able to complete development to all four of the new stopes on the 5900 level as scheduled. The last two actually began production in July. All four stopes are expected to ramp up to full capacity during the next quarter and we will continue to mine from narrow parallel veins on the 4900 level. Silver production increased 18% from the first quarter and 16% compared to the second quarter of last year. Cash cost dropped approximately 7% from the first quarter despite the labor and supply cost pressures that all mines are experiencing. We expect to continue this improvement in throughput and costs throughout the remainder of the year. Drilling at the 6400 level and the 6900 level, 500 and 900 feet below our newest production level continues to show ore grades in vein width very similar to our current production areas. In addition, we have recently intersected the veins at the 7750 level, 1,850 feet below the new 5900 level. Assays are pending, but similar mineralization was encountered. Operations and exploration at the Lucky Friday are both pointing to a long and bright future.

In Nevada, we continued the drilling and feasibility study program at the Hollister Development Block. Hollister is a gold expiration and feasibility project. We are earning into a 50-50 joint venture with Great Basin Gold. We completed the east drill lateral in the second quarter and expect to complete the west lateral in the fourth quarter. We've completed approximately 30% of the drilling and recently added a second drill. We expect drilling to be completed in December and the feasibility study to be completed in the second quarter of next year. Eye drifting on the Guinevere vein has returned encouraging results in terms of ground conditions and vein character. Drilling has generally delivered results similar to our expert -- expectations for width, grade and variability based on the previous drilling. Feasibility study is progressing well, the major topics being studied include permitting for production, pull processing at existing facilities in northern Nevada, ore transportation, mine planning, power options an water handling. Feasibility study will also include additional mining along veins during the remainder of the year. We continue to be very optimistic about the potential for this exploration project.

In Mexico, we continue to intercept ore grade mineralization in Hugh Zone. We are currently updating the resource estimate and expect that we will approximately double the current resource which was completed at the end of 2004. We are conducting hydrology and geotechnical studies as well as revising the engineering work and development plans in order to update the scoping study which was previously completed in 2005. We expect this work to guide the decision to embark on a full feasibility study. The feasibility study would include significant underground development to establish underground drilling platforms that would be designed to upgrade the inferred resource to reserves and establish economic viability.

In summary, overall we had a good quarter in the North American operations. We advanced the 5900 level to production at the Lucky Friday, we had continued success in our drilling programs at Greens Creek, Lucky Friday, Hollister and in Mexico, we made good progress on the feasibility study at Hollister and the scoping study in Mexico. Looking forward, we expect production to continue to increase at Lucky Friday and to improve at Greens Creek in the coming quarter and we expect to add resources to our resource base at Greens Creek, Lucky Friday and in Mexico before the year-end and at Hollister early next year. Our extensive expiration programs over the last several years are delivering good results. With that I'll pass the program along the Mike Callahan.

Thanks, Ron. In Venezuela we saw some very good performance from the operations in the second quarter. Production from Venezuela totaled 38,399 ounces, which is the highest quarterly production since the third quarter of 2002. In addition to solid production, we generated over $20 million of operating cash flow from Venezuela, this quarter and that's a record for the Company since entering Venezuela in 1999. During the quarter we were able to liquidate our inventory of gold designated for local sales and we established a market for these local sales going forward.

The strong performance this quarter was in large part due to the impact of Mina Isidora ramping up to full production. The ore grades we saw at Isidora, at over an ounce per ton, really demonstrate the geologic potential of our Block B land package and why we have continually been excited about bringing this mine on line. We expect Mina Isidora to be in full production during the third quarter and to continue to be a solid performer for us for many quarters to come.

On the exploration front, our program is providing some pretty exciting results. On Block B, we drove our first hole in the area of the old Panama mine and intercepted 0.4 meters of 363 grams per ton. We're currently following up on this intercept with another hole that's going to be placed about 100 meters below the first one and we're also evaluating a structure both to the east and to the west.

Over at La Camorra, we have a couple of new discoveries. First, we've identified the southern vein system, which consists of five structures that parallel the Betzy vein and we've seen grades as high as 24 grams per ton in this system. The potentially even more interesting, we've identified on surface what we're calling a northern vein which is located about 150 meters from the main vein. What's exciting about this structure is that our deep drilling program intersected a structure in the foot wall of the main zone between 850 and 1,000 meters below surface with nice grades up to 25 grams per ton. These deep holes are now interpreted to be the lower extensions of the northern vein that we've traced on surface. So these are just further examples of why we think so highly of the potential to grow in the districts we are in down in Venezuela.

On the political side, the government received comments from the industry and local government officials regarding the proposed amendments to the mining law. Based upon these comments, the government has now announced they plan to postpone amending the mining law until they can further evaluate these comments and at this point it's really unclear what direction they're going to take.

Despite the challenges that exist, Hecla's been in Venezuela now for over six years and it's been consistently successful in managing its operations, as well as the business and the political environment that we're in. During the first few years, Hecla generated strong cash flows in Venezuela that were used to develop and expand other operations. Over the past couple of years, Hecla's really been an investor in Venezuela, exploring, expanding operations in developing Mina Isidora. Now we're in a period of generating strong cash flows again while still supporting a significant exploration program. During all of these periods, there's been a variety of statements and concerns about what the -- the current administration might do to the mining industry. Yet we just completed one of the best quarters in our history of operating in the country and we see some very exciting exploration opportunities in front of us. Now I'm not suggesting it's not challenging to work there, but as Phil mentioned, I think Hecla has continued to demonstrate to the Venezuelan government and to the market its ability to operate professionally and successfully. This professionalism and our technical expertise along with the support that we provide to the community and the small miner programs has allowed Hecla to earn the respect of the Venezuelan government and we are recognized as a good citizen and a good partner for Venezuela. We certainly expect that there'll be new challenges going forward, but we're going to approach these in the same manner that we've used to achieve the success that we've enjoyed in the past. And with that, I guess I'll turn it back to Phil for -- Vicki.

Operator, I now's the -- the time for your to give the instructions on the question-and-answer period.

(OPERATOR INSTRUCTIONS) We'll take our first question from Anthony Sorrentino of Sorrentino Metals.

Hello, everyone.

Hi, Anthony.

You had said that your exploration and pre-development budget has been increased by about $3 million to perhaps as high as $28 million. Where will you be spending the additional $3 million?

Roughly a million of it gets spent in Venezuela and the remainder is I guess another million is in Hollister and then the final million is down in Mexico.

Okay.

That's right -- roughly -- roughly that amount.

All right. It was mentioned on the call that you might at some point have a full feasibility study in Mexico. Do you have any idea when that would be?

That's probably, what, 18 months to -- before we see that finished, Ron?

Yes. We -- we wouldn't start it before sometime next year because the scoping study won't be updated probably near the end of the year, and then -- then that program would take between 18 months and two years to complete.

Just realize when we say a feasibility study, what we're -- we're talking about all of the work necessary to come up with the feasibility of developing this thing, which would involve going underground.

Go underground and put platforms in for tight space drill.

The issue we have for us in Mexico is where's the best opportunity with the total land package that we have there. We have a lot of interesting targets, a lot of things that are happening there and -- and we're going to have to make a decision as to where to make -- to spend our -- our investment dollars. So we haven't come to a conclusion as to what we'll do. But it's exciting because there are, at this point, two very interesting things and I think we'll probably see a third before the end of the year.

Absolutely.

So it's not foregone conclusion which direction we're going to go in. We've got a lot of good choices.

Okay. And one other question concerning Lucky Friday. You're working on the 5900 level now and you've done some exploration to the 6400 and 6900 levels. Do you feel fairly confident that the continu -- continuity of the ore continues down to those levels?

Go ahead, Ron.

Everything that we're seeing in the drilling is as -- similar to what we saw when we were making the leap from 49 to 59. So the answer is yes. I mean, we're seeing the same kind of continuity examples that we -- we would see that would encourage us that it's there.

In that most recent hole, Ron, how much deeper is that than the 6900?

Well, it's another -- it's another 1,000 feet.

1,000 feet, so and the con -- in what we see there --

The character of the zone is the same. I don't have any assays back on the one that went through at 7750. And it actually the way the hole goes through probably goes down as deep to as 8,000 as it crosses the zone. and the mineralization and the character of that 150 foot wide ore zone is the same.

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

Thank you.

You're welcome.

We'll take our next question from Mike Jalonen of Merrill Lynch.

Hi, Phil.

Hi, Mike.

Very good news on the exploration side. Good to see. I just had a couple questions on Greens Creek, just wondering what kind of grades you're getting from the drilling thicknesses of the grades and thicknesses comparable to what was based on the reserves? That's my first question.

Yes, go ahead, Ron.

In the -- in the West Gallagher it's -- it's similar, maybe slightly lower on the silver. In 5250 it -- it is very similar to what we've been mining there.

Will there be a lot of development costs to get over these zones? I haven't been in a mine and I guess I'll miss the trip in a few weeks unfortunately.

The -- the -- the 5250 zone is -- is right in the middle of all of the infrastructure.

And West Gallagher is actually higher up and better than the 200 south development.

Right, so, it is a little bit of ways to the way. But nothing -- nothing unusually significant. It would be normal sustaining capital kind of development.

Okay. I guess just when you say open ended resource, how much would that add to mine life potentially or is it hard to say at this point?

Boy -- it is going to be significant to us.

Okay.

Remember, we already have mine life that goes well into the next decade and -- and like the Lucky Friday, both places seem to have the potential to maybe go into the decade beyond that. And beyond. Particularly at the Lucky Friday, you can clearly see that at the Lucky Friday. We're -- we're telling -- we have the sense that employees that are joining the Company now at the Lucky Friday could work their whole career there. Ron is shaking his head yes.

Potentially that's the case.

That sounds -- I saw the mine last year it was very impressive. I guess just moving to Hollister, I see your partner put out a -- some sort of feasibility study on Hollister today. Did you guys see that?

My understanding of what they have is not a feasibility study. I think they've -- they've -- in fact, let me see. Where is that? They've described it as a preliminary assessment.

So, what do you think of it?

Well, it's something that they need to do based on their requirements to be listed on the Johannesburg exchange. They asked us for information which we gave them with respect to the cost per ton. They -- they used the information from -- from their -- their resource I guess it goes back to 2002 and they came up with -- with their numbers. We -- we of course have not made the same sort of assessment, Mike. We're -- we're in the midst of gathering information to put together this feasibility study. This is -- this is based on a resource. We don't really try to do -- put economics around a resource. We try to move things into a reserve category and then -- and then we're putting the economics around it. So, I guess we don't have much to say about it other than it's something they needed to do.

The $55 per ton mining cost is your number or their number?

We would -- we would agree with that number.

Seems kind of low for a narrow vein mine unless it's not narrow vein. Like at Red Lake for example or much higher cost.

Ron do you want to --

Mike, that's -- that's our early estimate and for the mining only part of the cost, at least with the information we have now we think that's reasonable.

Okay. All right. Well, thank you.

Thanks a lot, Mike

(OPERATOR INSTRUCTIONS) We'll stand by to see if there's any last questions in the queue. We have follow-up question from Mr. Jalonen.

I'm back, Phil. Thought I'd put Mike Callahan to work. Just that Mike made an interesting comment about Venezuela. In parties that reviewed the -- what the government's going to do with the mining act and then you said you don't know which way they're going to go. Maybe you could elaborate more on that, Mike? If you had anything to say.

Yes, really all they're doing at this point is they've -- they've proposed some amendments, Mike, and then they've gone out to the communities and to local government officials and to the industry and asked for comment and essentially they're taking into account those comments and based upon what they've seen, they put out a release -- or a statement the other day saying that they're going to extend the period to evaluate this. So I don't really -- you can interpret that however you want.

Okay.

But at least -- I interpret it positively in the sense that they asked for comments, they received them and they've changed whatever it is they're going to do. I mean -- so they're hearing something from industry, from the local miners, which -- so -- so view it positively. The outcome that's going to happen there, we don't know but we still have a high degree of confidence that we'll be able to manage our way through it. But -- but we can't -- we can't assure you of that but that -- that's our impression.

I was just watching some of the developers trade today who were in Venezuela with development projects and their share prices are flat or down so it's not because of what you said, just uncertainty down there.

We're an operator down there and we -- we've had this -- this long -- six years now of adding jobs and taxes and everything else in the local community and we have a fair degree of support for -- for that. And our -- our -- our situation is -- is a bit different in that -- that we've already made the investment and we're -- we're continuing to employ people and move things forward. Some of the other people that are -- that are coming in, the tenure of their positions, maybe there's more uncertainty with respect to those. I don't know.

Okay. Well, thank you for that.

Sure, Mike.

We'll take our next question from Miss Heather Douglas of BMO Capital Markets.

Hi, everyone, good afternoon.

Hi, Heather.

I was hoping I could ask a couple of follow-up questions about Hollister. And just what -- what metallurgical work have you been doing? Because I was in -- the preliminary assessment they put out they also reported better recoveries than previously indicated. And I was wondering in terms of the toll treating if you've already started discussions with -- with plants in the area?

Well, Ron can answer that but yes, we have started -- started doing some work metallurgically, we're still early days on the metallurgical work. Ron?

Yes, we -- we've had discussions with almost everybody in northern Nevada or are in the process of having that and most of the newer metallurgical work has been in plant tests to see if the different oper -- operations that would -- we would entertain an arrangement with can -- can handle it and what kind of recovers they can get. I'm -- I have some difficulty responding to the first comment about better because I don't remember what was in the 43101 that -- that they have. But I guess the best way to say that is we don't anticipate recoveries being a difficult issue as long as the toll miller can recover and or will pay for silver.

And the -- the co -- the new numbers are like 95% gold and 90% silver, I believe and the previously the silver recovery was only 55 or 60.

Yes.

Something like that. So that -- that helped the economics of it.

The -- the silver recovery, depending on what plant you go to could be everything from 90% to not getting paid for it at all. So that's still preliminary.

Okay. So it will depend on where your -- where you end up taking it.

That's correct.

Okay. Good, thank you.

I'm showing no questions at this time. I'll turn the call back over to the presenters for closing remarks.

Well, thanks everyone for participating in the call. It is been a very gratifying quarter for a -- for a year that we think is -- is going to be a record year for Hecla and we think that the market has not really recognized the sort of earnings and cash flow generation power that Hecla has, nor has it recognized the exploration potential that we have. So, we're hoping that we're -- we're starting to see that -- that change with what we've been able to do this quarter. Thank you very much.

If you have additional questions today you can contact me, Vicki Veltkamp, at 208-769-4144. And that concludes the Hecla Mining Company second quarter 2006 conference call. Have a good day.

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