Hecla Mining Co (HL) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q2, 2007 Hecla Mining earnings conference call. My name is Antoine, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Vicki Veltkamp, Vice President of Investor Relations.

Thank you, all, for for joining us today. As the operator said, I'm Vicki Veltkamp with Hecla Mining Company. We're pleased to be conducting our second quarter 2007 conference call. Our call is being webcast live today at www.Hecla-mining.com. On our website, you can find financial results in today's news release. In that news release we have reconciled the cash costs per ounce calculation as required.

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; Michael Callahan, who is our President of Venezuelan Operations; Dean McDonald, our Vice President of Exploration; our Senior Vice President of Operations, Ron Clayton; and our new Vice President of Corporate Development, Don Poirier. But before we start, I do need to let you know that any forward-looking statements made today by our management team comes under the Private Securities Litigation Reform Act. It involves a number of risks that could cause actual results to differ from projections. In addition in our filings with the SEC we're allowed to disclose mineral deposits that we can economically and legally extract or produce so investors are cautioned about our use of such terms as measured, indicated, and inferred resources and we urge you to consider those disclosures in our SEC filings. Now I'm happy to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Thanks, Vicki. I will make a few comments and then my colleagues will add their take on the second quarter. I view the second quarter really as a continuation of a path that we've been on for some time. We have our silver properties generating great economics with exposure to lead and zinc and giving us the lowest cash costs for silver in our long history. We have exploration that's creating a pipeline of projects that is going to grow production in the future and we continue to focus on assets that are going to make a significant difference to Hecla, hence the reason we sold Hollister. All of this has led to a great quarter with great revenue, earnings and strong cash flow and we're in a position to continue to execute our plans and acquire new assets.

This past month I've spent quite a bit of time on our Silver Valley land package, that's just a little bigger than the island of Manhattan. Then on a gold equivalent basis, it's produced -- call it 30 million ounces from roughly 10 mines. That's as much as some of the great gold camps around the world. We now have a dedicated team in place to explore in an area where the number of drill holes can pretty much be counted on one hand. Exploration drill holes can be counted on one hand. And for the past six months, we've been compiling data and while we're going to continue to do that, we will also start drilling probably starting the middle of the fourth quarter. Hopefully earlier than that, but certainly by then. And the unique thing about this exploration is that the targets are for deposits that are big and robust and with continuity that runs a mile deep. Dean will talk a little more about this.

We also spent time over the past few months reevaluating our environmental liabilities in the Silver Valley and increasing the accrual. Realizing this liability was in some cases created more than 100 years ago and was done under a legal means at that time. In our reevaluation, we've considered ways to materially improve the environment, which we think is going to appeal to the court and to the other stakeholders in the suit. One thing that hasn't changed is that it will be paid out over an extended period of time so we don't anticipate this preventing us from executing our plans and growing. For a long time, we've talked about having diverse set of world class land packages. I think the work in the first half of the year is evidence of that.

First, we have two mines with negative cash costs. I'm not sure if there is another company our size who is generating the margins we are on more than one mine. Second, we have multiple discoveries, the Gap at the Lucky Friday, the 52/50 extension at Green Streak, and most recently Rio Grande in Mexico. So, we're seeing our strategy come to fruition of our properties providing cash flow and earnings that we're able to reinvest in exploration. This is exploration that creates a pipeline of new projects on world class properties, where risks are lower and returns are greater. Let me stop here and I want you to hear what my colleagues have to say. So, Lew, why don't you begin?

Well, thank you, Phil and good day to everyone. As Phil has already mentioned, our silver operations turned out another great quarter, producing gross profit of nearly $24 million on 1.5 million ounces of silver production at a cash cost per ounce of a negative $1.98. This represents the fifth straight quarter that gross profit from our silver operations has exceeded $10 million and the second time that the gross profit has exceeded $20 million out of these five quarters. As we've also discussed in the press release, we also saw the reduced gross profit from our gold operations due to the temporary suspension of operations at our La Camorra unit. We recognize the gain on the sale of Hollister. We also increased the accrual for our future environmental costs associated with Hecla's historical operations in north Idaho. But after all of these items, the net result was very positive with net income of $24.3 million or $0.20 per share. This compares to $9.1 million or $0.08 per share in the second quarter of 2006.

So rather than repeat some other information that's included in the press release, I want to -- I'd like to touch upon a couple of items, including our financial position and what it means for executing our strategy and secondly, to provide a little bit more color on environmental accruals. So, first on the financial position, if you look back the past 18 months, Hecla's financial position has gone through a major transformation. Our cash and investments has increased threefold and now totals more than $180 million. During this time, we've also been debt-free.

What's driven this improvement has been the quality of Hecla's assets. The low-cost nature of these assets and that combined with obviously the improvements in the prices of metals that we produce. During this time, we've also remained focused on increasing value for our shareholders. All of this has been accomplished with only a minor increase in the number of shares outstanding. So, these dramatic increases also bode well for us executing our strategies as a balance sheet and the operating assets allows us to continue to invest in our exploration program, that has, we fully expect will continue to deliver positive results.

Secondly, it also allows us to look at major expansion projects such as that at the Lucky Friday mine. And finally, it provides a financial resources to take on additional opportunities that may arise from our stepped-up efforts on the corporate development front.

Now turning to the issue of the environmental accrual, Hecla has long-recognized that as a very old company, it has exposure to historic environmental issues in north Idaho and during the quarter, the Company increased its accrual for potential future obligations by $44 million. The accrual was primary the result of reassessing the potential outcomes of the basin litigation, updating remediation plans for the upper basin and developing cost estimates associated with the updated remediation plan.

It's very important to keep in mind that despite this accrual, the ultimate timing of any expenditures related to the basin remains unclear. Although it is unlikely that any expenditures will be made over course of a long period of time, such as 20 to 30 years. For many years now, Hecla's been spending money in north Idaho and at other reclamation projects and it's proven to be able to manage a level of expenditure annually to meet its obligations. And given the financial strength of the Company today, and the positive outlook for the future, we believe we will be able to continue to meet our existing obligations and any future potential obligations. So to summarize, the second quarter continued to reflect the quality of Hecla's low-cost operations, the continued strengthening of the Company's financial condition and the focus on our exploration and other growth objectives. Now I will turn it over to Ron, who will discuss our operations.

Thanks, Lew, and good morning, or good afternoon, wherever you might be. The team at Greens Creek continued to turn in a great financial performance during the second quarter. Cash costs were 50% better than the same quarter a year ago at a very low negative $3.45 an ounce. Cash cost per ounce of silver were 230% better during the first half of the year, compared to a year ago. Certainly metal prices have played the biggest role in this improvement. However, the team at Greens Creek produced 23% more silver, 10% more gold, 6.5% more lead, and 7.5% more zinc compared to the first half of 2006.

All mining operations, including Greens Creek, have experienced significant upward pressures on labor and supply costs. The competition for skilled labor is rather fierce. [Real Tennel], the operator of our joint venture has implemented several programs to attract and retain new employees and they are starting to pay dividends. However, we've elected to continue to use a contractor to supplement our workforce and maintain development and production and as a result are incurring higher costs. The long winner and late thaw in southeast Alaska resulted in low lake levels and reduced availability of the less expensive hydropower for the operation. We expect this to level out in the remaining quarters of the year and we expect to see some cost benefits.

Following a long period in survival mode, we've been making significant investments in the Lucky Friday silver mine since 2004. Our investments have resulted in large increases in resources and reserves, increases in production and improvements in cost. 2007 will see the largest single year of cash flow and capital investment since the 1979, '82 time period, during which the Hunt Brothers activity drove silver prices to nearly $50 an ounce and the Over Mile Deep silver shop was constructed.

In addition, we are at the highest employment level of any time in the history of the Lucky Friday. We will execute the most extensive exploration program the operation has ever seen. And we are on track to deliver the lowest annual cash cost per ounce of silver and the most tonnage through the mill in the more than 70-year history of the operation. In the first half of the year, the Lucky Friday team has processed 30% more ore tons and produced 21% more silver, 25% more lead, and 71% more zinc compared to the first half of 2006. The main focus of the capital projects at the Lucky Friday this year include increasing the capacity of the ventilation circuit to position the mine for deeper development and future expansion, engineering and procurement for the new tailings facility to support the extended mine life as well as potential expansion efforts. Improving recovery and the quality of our concentrates at the higher tonnage rates that we've achieved. Completing the design and preparing to begin the excavations to support foreshaft, which will extend the mine life and support expansion. And beginning a comprehensive prefeasiblity study focused on large scale expansion. All of these projects are on or ahead of schedule and within budgeted levels.

Specifically, we expect to complete the basic engineering package for foreshaft this year with the intent of beginning excavations for underground hoist rooms and supporting infrastructure early next year. Detailed engineering will be completed in the first half of 2008 and shaft sinking is expected to begin in late 2008. This shaft will support production of both the 30 vein and the intermediate veins, between the 6200 level and the 8000 level and will also service intermediate vein production between 4900 and 6200.

The expansion prefeasiblity study work is progressing on schedule. I expect this study to be completed by the middle of 2008, at which time a decision to complete detailed engineering for the recommended infrastructure would be made. There are some significant milestones in the study that could allow for early-go decisions on portions of the detailed engineering if results are extremely positive. For example, if the results of the infill drilling and mining method analysis show the ability to mine at a much higher rate, and with little or no increase in dilution, acceleration of the detailed engineering phase would be possible. We are eager to take advantage of opportunities to accelerate this project when warranted.

Finally, I'm extremely proud of the fact that we've been able to attract and retain so many highly qualified professionals. We have some very good opportunities to expand in the Silver Valley and Mexico, as Dean will tell you. And I'm quite sure we have the leaders and the operators to make our growth plans a reality. With that, I will turn it over to Mike Callahan, our President of Venezuelan Operations.

Thanks, Ron. Looking at the gold side, in Venezuela, at our La Camorra unit, we now have all of our feed coming from Mina Isadora, the small miners, and other purchase material. In the process of making this transition, we've reduced the workforce from approximately 900 workers a year ago to about 550 today. As we announced earlier, during the second quarter, a road blockade occurred, which is becoming a common practice in the country. Now, there are two things to keep in mind that are related to this incident.

First, like in many rural areas, employment is the largest issue in this region. Second, we support 12 communities in this region and this was a very small group from only one community. So, the initial demand of the community to the government was for jobs at a closed mine on our block "B" property. The mine is unsafe to rework so the request was denied. The challenge was that the community was demanding to talk to the government and not to us. Once we were able to generate a direct dialogue, we were able to resolve the blockade without providing direct employment or a new commitment. Instead, what we did was put a timeline on the projects we had already proposed to do.

So the positive outcome of this incident is that in the end, Hecla gained tremendous support from local, regional, and national government institutions. It provided us an opportunity to showcase all the community and social programs that we participate in and all the communities and families that benefit from our programs. And interestingly, in the final days, all of the local government institutions were on our side of the table and working with us to convince the community to lift the blockade. Our objective in all of this was to come out in a stronger position than which we entered. We feel we were successful in doing so by improving the support we now have from these institutions. As mentioned in the quarterly news release, due to the events, we have adjusted our goal production estimates to the range of 115 to 120,000 ounces for 2007, with about 95 to 100,000 of those ounces coming from our La Camorra unit. With that, I will turn it over to Dean to talk about exploration.

Thank you, Mike. It's been a busy quarter in exploration with successful programs in Mexico, the Silver Valley, and Greens Creek. Preparations are also under way for the surface drilling to follow-up the exciting drill intersection in the gap zone at the Lucky Friday mine, reported earlier this year.

In Mexico, there are two activities to mention. The Discovery at Rio Grande and at San Sebastian, where the emphasis in the second half of the year is changing to drilling after a huge surface at geocam and geophysics program in the first half. Rio Grande consists of a series of high-grade veins and (inaudible) that extend for over nine miles. What we are finding in early-stage drilling is high-grade silver in [fresnito stell epithermal] mineralization. As some raviner sections from this program can be found in the press release and it is important to note that these veins are open in various directions and will be the focus of a major follow-up drill program in the third quarter. Rio Grande is clearly one of the emerging exploration success stories in Hecla.

While an extensive field program on the San Sebastian property was implemented, drilling was maintained on the St. Jude vein, due to finer resource and incorporate this area into the Hugh Zone prefeasiblity study. Drilling was also initiated at the La Roca prospect, which is an historic center for mercury mining in the region. The significance of these mercury mines is that they can represent the upper expression of precious metal-rich, epithermal systems. Early drilling has intersected mineralized [breches] and veins that will allow us to vector in on the deeper precious metal rich phase of the system.

Due to the broad expanse of this area and the identification of eight primary targets, we are just beginning a concerted drill program that will carry on for the rest of the year. We are now leveraging our strategic land position and knowledge of this Silver Valley of Idaho into a major multidisciplinary surface and subsurface exploration program to provide resource expansion beyond the Lucky Friday mine infrastructure. The integration of surface and sub-surface data into 3D models has defined new exploration targets among three major trends of pass producers and allowed us to unravel some complex fault structures that -- that terminated previous mining.

Where horizontal drifting was the primary exploration tool during the prime of the Silver Valley, we now have new modeling, geophysics and geochemistry techniques. What is truly remarkable in Silver Valley is that the ground, in close proximity, to these past producers, has never had a drill program. We plan to that change that. Drill proposals for the Valley are being finalized and drill contracts are being negotiated for extensive surface programs throughout the area.

Lucky Friday, as previously announced, the first drill hole collared on the 40/50 level and drilled upward into the 250 foot gap area intersected significant multistage mineralization. We are initiating a surface drill program we hope will define a series of veins that represent the full strike extent of the Gold Hunter American Commander mineralization. With this information, we can put the final touches on a major, deep, directional drilling program to fully define the mineralization in the gap zone. I am confident that we will have significant intersections of silver and base metal as we refine our drill targeting.

In addition to the gap work, infill drilling between the 4900 and 5900 levels is upgrading the confidence level of the resource in this area and allowing for detailed mine planning as part of our expansion plans. Drilling under way from the 5900 level is designed to confirm the Western extension of the resource to -- the 6900 elevation. As we have mentioned before, drilling at the Lucky Friday has intersected continuations of this mineralization below 7900 feet.

At Greens Creek, the underground drill program on the 5250 North extension has been able to extend with some spectacular intersections for over 800 feet of strike length and beyond the faulting and sheering constraints earlier proposed. This is enough room to increase the resource 30 to 40% over the current resource and possibly more. The close proximity of the 52/50 zone to underground infrastructure means there is limited development required to put this very high-grade zone into production. After a late start due to high snowfall, surface drilling began on the upper Gallagher zone. Other drill targets this summer include the upper plate north/northwest, west Gallagher and Little Soar, all of these are localized on the same geologic contact as the current mine. Grassroots exploration has also begun on the Western extent of the property as a number of strong silver and base metal anomalies are being investigated.

I am closing in on my first year with Hecla. I believe we have attracted key exploration personnel and had success in advancing Hecla's impressive array of properties in four regions. As we advance these projects, we will continue to look at new exploration opportunities in new jurisdictions. And with that, I will pass it back to Phil.

I'm just -- one comment on Dean's presentation. I think you said 250 feet -- the gap area is 2500 feet.

2500, that's right.

And let me also just make a couple of comments about Corporate Development and then we will go to Q&A. Earlier this we opened a co-corporate headquarters in Vancouver with Dean and that office now has six employees in it, including four geologists. One of the geologists we added was Don Poirier, who is our new VP of Corporate Development. Don has more than, well, not quite 20 years of experience as an analyst so has close connections with the Street in Vancouver.

The team that we have in Vancouver is going to be the primary base for identifying new opportunities and they, of course, will work with the technical team that we have in Coeur d'Alene and north Idaho. We think that Hecla is really in a unique opportunity, in a unique time, for corporate development. You have to remember that most of our assets sit in North America. We have a strong balance sheet and we have a technical team to take projects forward. And there has been exploration in silver, really for the first time over the last four years that are generating opportunities in silver of the size that can make a difference for Hecla and for gold, there is a dearth of companies that are interested in assets that fit our niche as an underground miner. We've already been very active in evaluating and even negotiating acquisitions of some of these types of assets. What we're looking for is adding value and getting incremental growth to our already-growing asset base. With that, Vicki, I think we can take questions.

Okay, could you give the Q&A instructions, please?

Sure. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Anthony Sorrentino of Sorrentino Metals. Please proceed, sir.

Hello, everyone.

Hi, Anthony.

In your press release, you said that the Lucky Friday expansion project would consist of an additional surface shaft, and internal underground shaft, and a new mill. What would you estimate roughly the capital cost of that project to be?

Well, there are three elements to an expansion. Now, one element of that, the underground shaft, what we're calling the foreshaft, is -- is going to happen regardless of whether we expand or not. And -- and, the other two -- other two are -- what the -- the prefeasiblity study is all about. At this stage, it's hard to say what the capital would be when we have done a scoping study. We were anticipating 150 to $200 million of capital would not be unlikely to achieve a doubling of the -- of the production from the Lucky Friday.

Okay, very good. And would you have any rough estimate of what the rate of return would be on such a project?

Yes, when we looked at this previously and I -- this would be with prices as of the end of the year or late last year, the scoping study indicated rates of returns in excess of 20%, maybe 25%.

Okay. And that was based at the lower prices that prevailed at the end of the year?

Yes.

Okay. Okay. Well, that sounds great. Okay, well, thank you very much.

Okay, thanks, Anthony.

You're welcome.

(OPERATOR INSTRUCTIONS) There are no further questions in queue at this time.

All right, well, then this is Vicki Veltkamp at Hecla Mining Company. I'd like to thank you all for joining us again today. I guess our press release is fairly thorough. We had few questions today, but if you do have any more questions, feel free to give me a call at (208)769-4144 and that concludes this second quarter 2007 Hecla Mining Company conference call. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.