Hecla Mining Co (HL) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2008 Hecla Mining earnings conference call. My name is Heather and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's conference, Ms. Vicki Veltkamp, Vice President Investor and Public Relations for Hecla. Please proceed.

Thanks to all of you for joining us today. I am Vicki Veltkamp, as the operator said. And this is the Hecla first quarter conference call 2008. Our call is being webcast live at www.hecla-mining.com, and on our website you can find today's news release.

Today's presentation will be made by Phil Baker, Hecla's President and CEO. And he is joined by Ron Clayton, our Senior Vice President of Operations; Jim Sabala, our Senior Vice President; Mike Callahan, Vice President and President of Venezuelan Operations; and Dean McDonald, our Vice President of Exploration.

Before I start we 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 to our filings with the SEC, we are 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. We urge you to consider those disclosures and our SEC filings.

And I'm happy to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Let me add my welcome to Vicki's. This first quarter has been a good one for Hecla. We closed the acquisition of Greens Creek. We began the earn in process on the San Juan joint venture in Southern Colorado. And we produced better earnings and cash flow despite lower production than last year.

We're also announcing a change in senior management. Lew Walde is departing Hecla and Jim Sabala will be taking over the CFO role on the 15th. We wish Lew well after long, dedicated service to Hecla. He was instrumental in the turnaround that we have seen in Hecla over the last seven years.

Jim, whom many of you know, has almost three decades of experience, and with the exciting things in Hecla's future, we're pleased to have him leading the financial team. And Jim will give today's financial report.

A couple of things that I want to talked about. First, I note that some of the estimates of earnings did not include the $3.3 million preferred dividend. That is more than $0.02 a share impact on our earnings. The transition of Greens Creek is progressing. The workforce is very enthusiastic at having Hecla, who they know well as the operator. So over the next four to six months, while we continue to get assistance from Rio pursuant to a transition agreement, we will be focused on getting production to similar levels that you have seen in the past.

I do want to alert you to a tightening of the smelter market that will raise costs for the whole silver mining industry. Hecla is not going to be exempt from that. Since we don't know exactly where the negotiations will end, we have provided an estimate of our costs that we view as adequate. If it changes materially we will let you know. And Ron is going to talk more about this in a moment.

In acquiring Greens Creek we did not maximize the long-term borrowing capacity of the Company, because we do not want to hedge our base metals exposure using mark-to-market accounting. Jim is going to talk about the options we have in taking out the bridge.

Now there has been a lot of news recently in Venezuela, and I guess I would characterize it as continuing to make a difficult situation even tougher. Mike is going to talk more about this, but let me say that Mike and the team we have in Venezuela has done a great job over the last eight years, allowing us to be the largest and most successful gold operator in the country. If anyone can get things to work, it is going to be these guys. But regardless of the outcome of that, our Venezuelan exposure is insignificant next to our other assets.

Finally, with these acquisitions that we have made, Hecla is a new Company. Someone about a year ago said to me only half joking that Hecla should change its name in order to get investor interest. Instead of using this kind of alchemy we have added assets that fundamentally change us, primarily 100% of Greens Creek.

This is an asset we know well, and as reported by the Silver Institute silver survey which came out last week, it is the world's fifth-largest silver mine and the lowest cost primary silver mine. Given the size of Greens Creek, we're a new Company, not a new name. So with that, let me turn it over to Jim.

Hecla completed its first quarter of 2008 with significant progress being made on a number of important objectives. The Company reports net income up 90%, income applicable to common shareholders up 51%, and cash costs per ounce at a negative $1.42 per ounce.

On the transaction front we closed the Greens Creek acquisition and related financing shortly after the end of the quarter. This will yield important and substantial growth in our key financial statistics for subsequent periods

With regard to the first quarter in particular, we reported a net income of $15.5 million compared to $8.2 million for 2007's comparable period. Net income applicable to common holders after the dividend payment Phil has referred to is $12.1 million or $0.10 per common share compared to $8 million or $0.07 in 2007's first quarter. These impressive results were achieved in spite of a few factors that impacted the quarter negatively.

First, we did not record any concentrate shipments from Greens Creek in March due to port congestion at the smelter in Asia. As a result, revenues associated with that concentrate, which have a current market value of approximately $5 million, have been shifted to subsequent quarters.

In addition, the Company continues its aggressive exploration program, with exploration expense increasing 49% to $6.1 million in 2008's first quarter. Results were positively impacted by a tax benefit of $3.9 million related to the expected utilization of past net operating losses. And of course, we continue to realize the benefit of strong metal prices.

Cash operating costs continue to be extremely low at a negative $1.42 for the quarter. However, gold cash costs increased to $642 per ounce as a result of the challenging operating environment in Venezuela.

During the quarter we produced 1.3 million ounces of silver and 21,940 ounces of gold. Both of these statistics will increase commencing in the second quarter as a result of our taking over 100% of Greens Creek, effective on April 16 of 2008.

During the first quarter we generated $11.6 million in operating cash flow compared to $16.4 million in 2007's first quarter. Operating cash flow was adversely impacted by the concentrate shipping issue discussed earlier and other normal working capital variances, which resulted in nearly $10 million buildup of inventories during the quarters. Again, this will reverse in subsequent periods.

As we look forward to the second quarter of 2008, we have one transaction I need to discuss. Near the end of the quarter we sold for $26.2 million common shares we held in Great Basin Gold. This will generate a gain of $7.6 million, which will be reported in the second quarter as the transaction settles early in the second quarter.

I would like to take this opportunity to briefly review the financial aspects of the Greens Creek transaction completed on April 16. As previously announced, the total acquisition cost was $750 million, of which $50 million was paid with 4,365,000 shares of Hecla common stock. Of the remaining $700 million, $340 million came from Hecla's treasury, $140 million was provided by a three-year amortizing term loan, and $220 million was provided by a six month bridge loan.

The interest rate on the term loan has been fixed now at 3.38%, including the spread which is based on Hecla's leverage ratio, and stands at 1.625%. The total interest rate on the term loan is 5%. The bridge loan interest rate floats with LIBOR, and again depends on our leverage ratio that is currently at an all-in rate, including the spread, of 5.8%.

Between now and October 16 we will be evaluating alternatives to retire the bridge loan. Options include asset sales, debt, equity, and combinations of these items. Of course, minimizing shareholder dilution related to this refinancing is our primary objective.

Finally, I would just like to say that it is indeed a pleasure to join the management team at Hecla. It is an exciting time, given the acquisition of the remaining 70% of Greens Creek, which transforms the Company to another level. With that I would like to turn the presentation over to Ron Clayton to report upon operations.

I like to start with a few comments regarding safety. Our operations continue to perform at a level well above our industry peers, and the addition of Greens Creek will enhance our tradition of top safety performance. We have been spending consistently more time and money on safety programs and regulatory compliance.

Compliance with diesel particulate regulations has and will continue to be a challenge for most underground operations. Lucky Friday and Greens Creek have been working diligently on meeting the new diesel particulate standards for more than four years, and have consistently been ahead of the curve, but compliance costs are rising.

Production at Lucky Friday during the first quarter was better than planned in tons mined and processed, and metal production. Metallurgical performance continues to benefit from the investments we made during 2006 and 7, with recoveries to payable concentrate up in all three metals. Lucky Friday is on track to meet or exceed last year's production levels.

Production at Greens Creek was below our plan for the first quarter due to manpower shortages, a power plant generator failure, delays in getting a new ore zone into production, and lower than expected ore grades. The transition to Hecla operations has gone relatively smoothly, but operations during the first quarter were somewhat hampered by distractions related to preparation for the sale. We expect to overcome these issues over the next couple of quarters and get production back on track.

Growing supply costs have negatively impacted operating costs at all of our operations. Diesel fuel is a major culprit, increasing by over $1 a gallon in less than six months. Lucky Friday and Greens Creek utilize diesel equipment fleets underground for ore production and mine development. Greens Creek generates all of this power with diesel generators. Freight costs for supplies brought into the mines and concentrates shipped from each operation have risen sharply.

In spite of these rising costs, Greens Creek and Lucky Friday were able to deliver better financial performance than the same quarter in 2007. Cash operating costs at Lucky Friday were 45% lower than the same quarter in 2007 as a result of higher metals prices and higher zinc production. Greens Creek cash costs were 10% lower as a result of higher metals prices.

Lead and zinc concentrate markets have softened rapidly in the last few months. Rising concentrates supply and tax and price controls on precious metals and concentrates is lowering the demand in China, coupled with the devalued dollar have driven this market change. This will have an impact on most of the silver miners selling into the lead and zinc concentrate markets.

Annual negotiations between miners and smelters are in progress. Based on recent settlements in these markets, we expect smelting and refining costs to crease significantly. As a result of this and the higher energy cost, we provided guidance of higher cash costs per ounce in the press release. We expect this estimate to be adequate, as Phil mentioned, and hope to improve upon it. Nevertheless, our silver cash costs remain among the lowest in the industry, and we have been less impacted by rising costs than many others.

We continue to invest in the future of all of our operations. Greens Creek and Lucky Friday each have sizable capital programs targeted at sustaining low-cost production, as well as improving efficiency and capacity utilization. Major projects at both operations include addition of tailing storage capacity to major mine development projects, equipment replacements in the mines and the processing plants, as well as the expansion feasibility study and the four shaft project at Lucky Friday. We expect each of these projects to provide additional long life and low-cost production, as well as opportunity to improve financial performance.

With that, I will turn over to Dean McDonald, who will give us an update on our exploration programs.

It has been a successful first quarter in exploration with drilling programs at five of our properties. This is the beginning of one of the most aggressive exploration programs in our history and will result in steadily increasing resources at our mines and opportunities for new resources within our large strategic land packages.

Although the turnaround of assay results are low in just about every jurisdiction, we have been able to advance all of the projects in a systematic and cost-effective way. In the Silver Valley of Idaho we continued to refine the 3D exploration modeling of the numerous producing and past producing mines. In the past quarter there has been a dramatic ramping up of activities. These include a major surface directional drilling program on the Gap zone to evaluate the potential for additional silver resources in the 2,500 foot area above where resources are currently defined at the Lucky Friday.

3D modeling of the past producing Star Morning complex just west of the Lucky Friday is being completed. Historic resources have been defined and projections of mineralization trends in both the main structure and subsidiary mineralized splays will provide a number of drill targets for surface and underground drilling.

Drill targets have been defined at the Vindicator property about one mile east of the Lucky Friday.

All of the geological and exploration data on the 11 square miles of [demagassun] exclusivity land package near the Hecla properties has been compiled, and the 3D model of the past producing Golconda mine completed. Some potential resources at the Golconda have been identified, and drill targets are being developed from surface.

At the Lucky Friday mine exploration and definition drilling below the 5,900 level is showing that the limits of the 90, 110, 30 and portions of the 20 vein are extending further to the east than previously anticipated. This deposit keeps blossoming out, extending the strike length to over 2,200 feet below the 5,900 level.

Drilling targeting the 30 vein was completed beyond the western and eastern limits of the current resource from the 6,300 to the 6,700 levels. This drilling has upgraded the confidence level of portions of the 30 vein resources, and has likely added new resources on some of the intermediate veins.

We continue to be impressed with the exploration potential at the San Sebastian property in Mexico. During the first quarter 166 square miles was added to increase our property position to 511 square miles. This concession was added to capture the northwest extensions of the Cerro Blanco vein system, as defined by satellite ASTRA imagery, and the discovery of a northwest trending zone of quartz vein float containing multi-ounce silver. An extensive soil sampling program at San Sebastian defined a new kilometer long northwest trending gold anomaly north of La Jolla and El Gato.

At [Pinosota] an impressive silver arsenic anomaly, including silver values up to 15 grams per ton, is located northeast of La Roca, and indicates there are many new areas yet to explore in this extensive property. As described in our press release, we continue to have drilling success at La Roca in the northeastern part of the San Sebastian property and at Rio Grande, which is 50 kilometers south of San Sebastian, and consists of a series of high-grade Fresnillo-style epithermal vein that extend for over 15 kilometers.

Underground exploration drilling in the Gallagher Zone at Greens Creek has extended the mineralization with four promising intersections that range up to 25 feet in thickness and suggest resource additions are possible. Other definition drilling has added strike length to the 5250 north extension. And good intervals of mineralization have been defined in the uppermost Northwest West Zone.

Service drilling is planned later in May to follow-up last year's intersection of mineralized mine contact rocks northeast of the current mine workings. This target particularly excites us as it could open an entirely new area of perspective ground in close proximity to the underground infrastructure.

Drilling at the Isidora mine in Venezuela has identified high-grade gold shares below the current mine infrastructure. The first hole is proposed to extend in the length a zone of mineralization encountered below the S vein essay have been completed.

The newest exploration acquisition, and one we can't wait to get started on, is the San Juan Silver mining joint venture that represents the consolidation of the Creede, Colorado mining district into a 25 square mile land package. Drilling plans are being fine-tuned, and work has commenced on both the state and four service permits, with initial drilling in late spring likely to commence on privately owned ground.

We believe this land package, with its over 30 miles of projected vein structures, will provide many opportunities to increase the resource and return the Creede mining district to its former glory.

Although Hecla continues to expand on its property holdings in Mexico and the Silver Valley, we are currently developing the mineral deposit database for the Southeastern Alaska, Northwestern British Columbia area in order to take advantage of exploration and acquisition opportunities from our basic Greens Creek. We also continue to evaluate exploration and corporate development opportunities to enhance our broadening activities.

With that, I will pass the microphone to Mike Callahan, who will talk about Venezuela.

There are some exciting things going on there in exploration. Production in the first quarter at La Camorra was just over 17,000 ounces. The grade at Mina Isidora continues to be very high, running just under an ounce per ton. However, productivity was hampered by labor disruption, equipment availability and transportation issues between the mine and the plant.

Although our Venezuela operations contribute a much smaller percentage of our gross profit than they used to, we are very focused on improving their performance. I am sure most of you have read about the challenges the mining industry is facing in Venezuela in recent months. The government has taken an aggressive position towards nationalization and not granting permits for new projects, and has taken a proactive position in resolving disputes between workers and companies, generally favoring the workers. In fact, we are currently facing a work stoppage caused by three workers who were terminated by the labor inspector for conducting activities against the Company.

These work stoppages are extremely common throughout the country, occurring on a daily basis. The increased frequency in part is due to the fact that the government has instructed the National Guard not to interfere in disputes between workers or communities and private companies. So there's very little deterrent to engage in such conduct by these folks.

Much of the activity is related to the fact that there are upcoming elections in November for governors and mayors, and after losing much of their support in the recent referendum to modify the Constitution, President Chavez is focused on regaining support for his party.

As far as MIBAM policy towards mining, we really don't know where it is heading. There has been talk of modifying the mining law for quite some time now, and over the past few years we have seen several versions of proposed legislation, yet nothing has happened. One of the challenges is that the ministers overseeing the mining industry have changed about every 11 months. So about the time they begin to really understand issues, they move on or are replaced.

The consistent theme throughout all of the proposals that we have seen has been the desire to take back concessions that have been idle for many years and to cleanup the environmental damage caused by Artesian mining. We view both of these as very positive, and we support both of these efforts. As far as the recent actions against other mining projects in Venezuela, they really don't affect us directly, as we have all of our permits to mine and process our material.

The gold price in the first quarter averaged $927 an ounce, and our operating cost of $642 generated cash margin of about $285, which was about the price of gold when we acquired the operations and entered into Venezuela. Even with the disruptions that we have experienced, we generated over $3 million of gross profit from our Venezuela operations in the first quarter.

Venezuela continues to be a challenging environment to operate. We have seen many challenges over the past nine years. And as Phil mentioned, we are very fortunate to have a great team of people who have been able to work through all of them. I certainly don't know what curve balls will get thrown at us going forward, but we're certainly going to attempt to manage them in the same way we have done in the past, and I expect to continue to generate cash flow out of these assets.

Phil, with that, I will turn it over to you for closing comments.

Vicki, should we take questions now?

Yes, Heather, would you please give the instructions for the question and answer portion of the call.

(OPERATOR INSTRUCTIONS). Anthony Sorrentino, Sorrentino Metals.

At Lucky Friday, can you give us some idea of when the engineering report for construction of the #4 Shaft might be completed, and also when the prefeasibility study on the viability of expanding production might be completed?

We are -- currently on both of those we are anticipating by year end to have that work done. So in all likelihood it will come out with our earnings release at the end of the year.

Also, at Lucky Friday you mentioned that the -- doing definition drilling as much as 800 feet below the 5,900 level, and could you give us some further idea of what you are finding down there with regard to the continuity of grades and widths?

Ron, is it you or Dean would be the better person to answer that?

Why don't you start, Dean, and I will follow-up.

What we are finding is that the 30 vein, which is the primary producer, continues to have as good or better [widths] and grade as we we go the depth. The other thing that we are finding is that it appears from early drilling that the strike length of the 30 vein is also increasing. But at the same time, we're also saying the evidence of an expansion of the 110 vein, good intersections in the 20 vein. So a number of the veins that we have referred to in the past as intermediate veins are also showing some good strength at depth. Ron, did you want to add to that?

I will add just a touch here. We actually have intercepts down as low as about 7,900 on the 30 vein, so it is fairly extensive in depth. And the grades and continuity on the 30 vein appear to be -- well, the grades appear to be maybe even a little bit better on a limited amount of drilling.

To kind of follow-up a little bit on what Dean said about the intermediate veins, one thing that appears to be happening at depth is that there seems to be maybe a few less of them, but they have better continuity along strike, maybe a little wider and a little better grades. That is kind of just another way of saying what Dean said.

In addition, we are getting ore grade intercepts and widths out to the east -- to the east and beyond the east end of the strike length that we have been mining -- not too far below the 59. So that is all real good news.

It certainly is. Thank you very much.

Michael Curran, RBC.

I think you said at the beginning, but I didn't catch, how many shares did you have to issue to Rio Tinto for the $50 million?

It is a little over 4 million shares, 4.3 million shares.

That's great. Thanks a lot.

Rodney Stevens, Salman Partners.

Just a quick question. Phil, I guess given the recent events going on in Venezuela, have recent events there changed your view in any way of investing further in the country?

No, our view has stayed the same, which has been we have not really put any new dollars in the country for a number of years, because we generate adequate cash flow to do what we need to do down there. That hasn't changed. Suffice to say though we're not looking to change that to where we're putting new dollars in.

(OPERATOR INSTRUCTIONS). Barry Cooper, CIBC.

Just wondering, your costs on a per ounce basis look pretty reasonable; however your cost on a per ton basis have got up fairly significant over the last little while. Just wondering what you're doing to stem that trend, or indeed is that a trend that we should expect to continue?

I'm not sure I would necessarily say that it is a trend that will continue, but we certainly don't see it reversing. In other words, sort of levels that you see on a cost per ton basis, I think you can expect to see those going forward. And if we see higher oil prices and diesel fuel, I think you can expect to see it go up as result of that.

Ron, you want to add to that?

What I would add is I agree 100% with Phil, but we are doing some things like -- and we have been doing this for several -- the last couple of years -- anything we can do to increase efficiencies or recoveries, for example, the things that we have done in the Luck Friday mill to get the recoveries of all the metals up, and it helps on the revenue side at similar cost. Equipment replacements so that we're getting cleaner burning, more fuel efficient equipment where we can. Trying to maximize the utilization of capacity by putting in the additional ventilation and getting ventilation stuff at the Lucky Friday in the right spot, which we just completed that project in this quarter, helps with the compliance costs, but it also helps with being able to maximize the utilization of our milling capacity. Being sure that we're getting the best mix of metals into the mill that generate the highest margins for us. Those are the types of things that we're doing to try to keep the cost down and the revenue up and maximize margins.

What would have been the --?

Barry, just one more thing about the cost, we are of course in the middle of negotiations for smelter terms. As Ron said in his remarks, we would expect to see costs go up as a result of that.

Right, I guess I was just looking, for instance, at Lucky Friday mining cost per ton were up 13% quarter over quarter. What would have been the biggest impact to that?

I will let Ron answer, but two things that stand out is certainly diesel fuel and then labor costs, including we have a profit-sharing plan -- including that with our workforce. Ron?

In addition to the diesel fuel and the profit-share being up because the profits are up there, we also have increasing steel costs. We use an awful lot of steel in our ground support there. We also are seeing some increase in cement costs for our backfill. And then the other thing that is really hit is freight costs, both supplies coming in and concentrates going out.

I think we also had an increase in insurance costs for workers' comp.

Right.

So a lot of that is going to continue into Q2, I suspect, given the trends that we have seen with fuel and steel and whatnot?

That's right. I wouldn't necessarily think that is going to be 10, 15% sort of increases quarter on quarter every quarter, but that is -- certainly the levels that you are seeing today is -- we're not going to see those decline.

Right. Then the difference in the milling costs at La Camorra, is that primarily related to the trucking, because that has gone up like 45% quarter over quarter?

It is trucking, and is also just utilization of the mill itself.

With the tonnage, that being down, you mean?

Yes. Mike, anything else?

Just recall that in the past we were trafficking material from both operations. Now we're just mining material from Mina Isidora, so it is lower tonnage, higher grade materials, so the cost per ton is up.

(OPERATOR INSTRUCTIONS). David Christie, Scotia Capital.

More on Barry's comments there. Do you have any gardens on what you think cash cost per ton will be this year at the three operations? The cost per ounce was sort of a lot of backwards calculation. I would like to sort of know what you're thinking on a cost per ton basis?

We have -- let's see here. I'm looking at our plan. I don't have it broken down on the sheets I have here between mining and milling. Do you have --?

If you have the total that is fine between the two.

Ron or Jim, do you guys have that?

My recollection is that the numbers for Lucky Friday and Greens Creek were pretty similar to what we had in the first quarter going forward.

That is what you sort of budgeted for the year?

Right.

On the smelter treatment terms that you are negotiating, what kind of percentage increase do you think you're going to end up having? Do you have any idea?

We're in that middle of negotiations right now. Sorry, Phil, I jumped in here. But we're the middle of negotiations right now, and I'm very reluctant to say much about that.

The principal smelters are China and Japan?

Korea, Canada, Mexico, Japan. We have a few that we deal with.

As there are no further questions and the queue at this time, I would like to turn the call back over to Vicki Veltkamp for closing remarks.

Thank you, operator. I appreciate everyone being on the call. As we started the call we think this was a good quarter for us, not just for the operating results but for getting Greens Creek -- that transaction negotiated with REO, and then of course early in the second quarter, the closing of it.

Thanks everyone for joining us on the call. And if you have any questions, feel free to call Vicki or myself.

That concludes our call today for the Hecla first quarter 2008 conference call. If you do have further questions, as Phil said, feel free to give me a call, and my number is 208-769-4144. Have a good day everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.