Hecla Mining Co (HL) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2008 Hecla Mining's earnings conference call. My name is LaManuel, and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Vicki Veltkamp, Vice President of Investor and Public Relations. Please proceed, ma'am.

Well, thank you all for joining us today. I am Vicki Veltkamp, as the operator said, and this is the Hecla second 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's joined by Ron Clayton, our Senior Vice President of Operations, Jim Sabala, our Senior Vice President and CFO, and Dean McDonald, our Vice President of Exploration.

Before we start, I do need to let you know that any forward-looking statements made today by the 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 at 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, and we urge you to consider those disclosures in our SEC filings.

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

Thanks, Vicki. And let me add my welcome to Vicki. This has been a transforming quarter for Hecla. We closed the acquisition of Greens Creek and sold our Venezuelan interest. The acquisition has been 20 years in the making. The sale of the Venezuelan interest occurred quite quickly as the result of not being able to operate for almost 130 days out of the past year. While our almost 10 years in Venezuela were good for Hecla, leaving now allows us to focus on Greens Creek, the Lucky Friday, and the next generation of operations.

With this transformation has come a lot of complicated accounting. The loss on the sale, which are classified as discontinued ops, since closing the sale did not take place until after quarter end, the foreign exchange losses, increased cost of sales from re-valuing inventory purchase price allocation. I know Jim and the accounting team has worked long hours getting this all put together.

But I hope in all this accounting complication the reason we did the transaction, to grow low-cost production with a long-lived mine has not been lost. In fact, this quarter's production is the most in a quarter since 2003, and you will see quarterly increases into next year and we expect to see another 25% increase in production on top of the 60% increase that we'll see this year.

And as we talk about last -- the last quarter, we are experiencing the same cost pressure as the rest of the industry, higher diesel costs, increased consumables, tougher smelter terms. We don't see this abating in the near term, but Hecla is better positioned to manage it with increasing production, Greens Creek's northwest-west [stoke] have opened up. The U.S. dollar cost operations helps us manage our costs, increasing by-products and hopefully prices, mining higher margin material, and the well-established and located operations we have.

We recognize we have to be very focused on cost management, something we've refined at Hecla for the past 100 years and, specifically at the Lucky Friday, for the past 50 and Greens Creek for 20. From our properties, we expect to see more cash flow in the second half of the year. Ron and Jim will talk more about production and cost.

Expiration results for the quarter could be very significant in a number of areas, but let me just mention two. Greens Creek with results that confirm the excellent potential to grow the resource base and thus the mine life. We have a mine claim that is currently 10 or 11 years, and that is growing through exploration. At the Lucky Friday, we've seen a number of things in the drilling that are interesting, the coercing of veins that gives better geometry and grades with the opportunity for further discoveries to the east. And we've seen mineralization across a fault to the west that's been our limitation to the west. And Dean's going to talk about these results and a number of other exciting things in exploration.

I should also mention capital expenditures. We're moving forward with tailing expansions at both mines that will provide adequate tailing facilities through their mine life, in the case of Lucky Friday, significantly beyond. However, we are examining where we might be able to reduce capital expenditures as a way of helping take out the bridge financing.

As far as the bridge, we are still considering our options in this unsettled market and we'll have more to say before the end of the quarter.

With that, I'm going to turn things over to Jim who will give you some insights on our financial performance and position. Jim.

Thank you, Phil. As Phil reported, Hecla made tremendous progress in transforming itself with the acquisition of the remaining 70% of the Greens Creek and the sale of our interests in Venezuela. These transactions resulted in a number of unusual or one-time items. However, both of these transactions yield significant benefits to the company's long-term financial production and risk profile.

With regard to Venezuela, we recorded a loss on the discontinued operations of $19.3 million, which included foreign exchange losses associated with moving approximately $35 million of cash back to the United States. This cash, along with the $20 million of cash consideration we received on the sale will be important to Hecla, as it will allow us to make additional investments in our mining properties, and, alternatively, to reduce bank debt associated with the acquisition of Greens Creek.

In addition, we wrote down the remaining book value of the Venezuelan assets, thereby incurring a loss on impairment of $11.4 million, which recognizes the $25 million of total consideration we received early in the third quarter.

As I'm sure you are all aware, the financial reporting for a significant acquisition such as Greens Creek is, indeed, a complicated matter. On the date of acquisition, we were required to allocate the purchase price to report all assets at fair market value on the date of purchase. In connection with this process, concentrate inventories, which were reported at their market value and resulted in an increase in their valuation of approximately $17 million. During the quarter, this $17 million, in addition to the historical costs of $10 million were charged against operation which results in a higher-than-normal cost of production and a lower-than-normal gross margin for the quarter. Now that this item has worked its way through the revenue cycle, we would expect margins to return to normalized levels.

During the quarter, we also had two additional items I would like to mention. First, we sold a stock position in Great Basin Gold that we received in connection with the sale of the Hollister project. This resulted in a one-time gain of $8.1 million. In addition, the company recognized non-cash stock option expense associated with its executive compensation program, which added $2.9 million of expense.

Outside of the company's normal operations, the largest single expense item we have is exploration expense and the company continues to aggressively invest in the future of the company's properties. During the quarter, exploration expense was $7.3 million compared with $3.2 million in 2007's comparable quarter.

And lastly, interest expense increased to $5.8 million from just $100,000 in 2007's comparable quarter. This expense is associated with the company's bank facility which was used to acquire the Greens Creek mine. As a result, the company reported a net loss of $40.1 million or $0.35 per share compared with the previous quarter's net income of $28.2 million or $0.20 per share.

Cash operating costs were $3.43 compared to a negative $1.98 per ounce in 2007's comparable period. The primary reason for the increase is due to increased smelting and refining costs along with general escalation in most basic materials used in our production processes, both, factors that are impacting the entire industry. And while our per-ounce cash operating costs have increased, given the underlying price realized for our products, the company will receive significant increased operating cash flow generation in subsequent periods as a result of the acquisition of Greens Creek.

And with that, I'd like to turn the presentation over to Ron Clayton, who will discuss the operating matters in further detail. Ron.

Thanks, Jim, and welcome. Today I'd like to focus my comments on production, operating cost, and safety. During the second quarter, we produced 1.6 times the silver, three times the gold, 1.5 times the lead, and 2.6 times the zinc compared to the same quarter of 2007. These increases are primarily the result of the Greens Creek acquisition, although zinc production at Lucky Friday has more than doubled this year and recoveries to payable concentrates on all three metals are higher as a result of our capital improvements.

One of the things you'll see in our press release is the production ore grades at both mines year-to-date and during the second quarter were lower than the same period a year ago, primarily as a result of higher metals prices that allow us to mine and process lower grade material at a profit. This material must be mined and might otherwise be placed in a waste facility. This has the effect of enhancing the MPV of the ore body and extending the mine life. Improved metallurgical performance in the mill has enhanced this even further at the Lucky Friday. The benefit of this is that we've been able to maintain a higher revenue per ton, even though the increased cost of smelting and refining have offset much of the price increases compared to a year ago.

Production at Greens Creek improved in the second quarter, as we continued to work to increase our rates of development and backfill placement, reduce our manpower shortages, and work to lower cost. The transition to Hecla operations has gone smoothly and we now have the key leaders in place. The team is made up of a combination of the Greens Creek team that was in place prior to the sale and Hecla people from other locations and is working well.

I'm sure you've seen industry cash cost per ounce increase over the past year. We've suffered the same impacts for the same reasons as everybody else. Growing supply costs have negatively impacted our operating costs at all of our operations. Over the last year, we've seen the cost of supplies like explosives rise by more than 33%, diesel fuel's up over 70% and ground support materials are more than 20% higher. In addition, increases in smelting terms and concentrate freight have negatively impacted the net smelter returns. For example, when we compare Lucky Friday's cash cost per ounce of silver from second quarter of last year to second quarter of this year, the impact of the [treatment] freight alone was more than $3.00 an ounce. At Greens Creek in the same period, those increases in cost had more than $5.00-an-ounce impact.

Now, we can't do anything about the price of diesel, and so we go to hydropower at Greens Creek in a year or so. Smelter contracts are set for 2008. But we can and will many our mines. We at Hecla have managed our operations for many years to maximize the cash margin that we generate. We'll continue to do that. And as costs have increased and metal prices have changed, we will continue to change our mine plans where we can to maximize the cash flow our operations generate and add the most valuable -- value available.

In spite of rising costs, Lucky Friday was able to deliver more cash flow and very similar operating income as the same quarter in the first six months of 2007. As you've seen in the press release, the financial performance of Greens Creek was negatively impacted by the one-time items associated with the purchase. We expect to see continued improvements. Both of these mines are world-class ore bodies and our operations and people are first rate.

A recent example of this is our operations continue to perform well on the safety front with both U.S. operations remaining in the top echelon as measured by the Mine Safety and Health Administration.

I'm also happy to report that our underground and surface mine rescue teams competed both regionally and nationally during the quarter with outstanding results. [Echo] team's won nearly every event at the Central Mine Rescue Competition that included teams from Alaska, Idaho, and Washington State.

With that, I'll introduce Dr. Dean McDonald, who will provide an update on our exploration programs. Dean.

Thank you, Ron. Activities and results from exploration in this quarter are a prelude to increasing resources by year-end and broadening exploration activities in our strategic land packages. Underground exploration drilling at Greens Creek continues to expand the Gallagher Zone which now extends for over 900 feet. Another program will follow-up high-grade intersections in the southwest zone.

As has happened in the past, we anticipate the underground exploration will at least, in part, replace this year's production.

On the other hand, surface drilling is about finding new zones. Work has begun on the mine contact rocks recently discovered northeast of the current mine workings. Early results show that the contact rocks extend at least 800 feet and are open in all directions. This is very exciting because mineralization has been observed at the contact and our goal is to now define a new extensive area of mineralized mine contact.

Assay results are still coming in from the surface directional drilling program on the Gap zone in the 2,500 foot area above resources currently defined at the Lucky Friday extension. Once all the results have been received, we'll access how we plan to advance this area. 3-D modeling of the past producing Star Morning complex just west of the Lucky Friday mine is completed, allowing the identification of numerous drill targets.

We will be evaluating the targets from surface and underground this quarter, with drilling possible next year. Drill programs are also being prepared for targets east of the Lucky Friday, including the vindicator and pilot areas. Drilling in the second quarter at the Lucky Friday mine has shown that, quire remarkably, there is potential to expand resources in all directions, both east and west along strike and above and below the current resource. Drilling to the east within the 59 to 64 hundred levels, show the 90 vein is gaining prominence with narrower five, 30, 40, and 41 veins extending along strike. Drilling to the west, past a fault that defined the western limit of the resource has shown that the mineralization has been offset by the fault and extends further to the west, possibly as far as the Star Morning complex. At depth where there are indications the 30 and 40 veins may coalesce to form wider zones with higher grades than currently in the reserve.

In Mexico, we continue to be impressed with the exploration potential at the 50 -- 511 square-mile San Sebastian property. Most recently a 2.5 kilometer-long vein and stock work zone was discovered on surface at [Penesquote], which is northeast of the LaRoca prospect. As we followed up this discovery, three new vein systems were discovered, one kilometer northeast of Penesquote that have been mapped for over four kilometers of strike length. An intensive trenching and sampling program is in progress and we anticipate the identification of a number of drill targets.

We also are continuing to move the drilling forward at LaRoca in the north -- northeastern part of the San Sebastian property and Rio Grande, which is 50 kilometers south of San Sebastian.

At the San Juan joint venture in Colorado, all permits from both the state and forest service have been received and drilling has begun. Drilling will start from the margins of previously defined resources along the Bulldog vein and begin to evaluate the over 30 miles of projected vein structures on the property. So look for news early next year on a resource estimate there.

With that, I'll pass you back to Phil.

Thanks, Dean. Vicki, let's go ahead and take some questions.

Yes. Operator, would you give the instruction for the q-and-a period, please?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Gary] Cooper with CIBC. Please proceed.

Yes. Hi. Good morning, everyone. I was wondering, can you just rattle off what your realized prices were for the -- for commodities that you produce?

Gary, it's actually in our press release on page six. And for the second quarter, $17.17.

Those are the average metal prices, not the realized price, though.

Oh, I'm sorry. I'm -- our realized prices were not significantly different. Jim, do you have those, those numbers, or will we need to get back to Gary?

We'll need to get back to you, Gary. But I would say that all of the company's products are priced at the average and they're delivered consistently throughout the program, with the only exception being a little bit of inventory change at Greens Creek. So they'd be very close to those average prices.

You have no provisional pricing whatsoever?

We do. But again, it's -- the pricing is dependent, again, on the delivery of the material, and the material improves consistently throughout the quarter. When it's provisionally --

But the prices -- but the prices certainly didn't.

Yes. And during this quarter, I could tell you that silver and gold prices went up to the extent that lead and zinc went down. And so the difference between provisional pricing and revenue pricing was very small.

How did the gold go up? It was much higher in Q1 than it was in Q2.

When you looked at the total of the two precious metals. Precious metals offset the base metals.

Okay. Well -- okay. You'll have to --

We'll get you those --

-- give me a follow-up --

-- specifics, Gary.

Okay. It's Barry.

Barry.

Okay. Fine. Good enough. Thanks.

Sure.

Your next question comes from the line of John Bridges. Please proceed.

Hi, everybody. Just wanted to, on the labor front, you made mention of it. Could you give an update as to how you're managing the tight labor situation?

Well, sure. And, Ron, I'll ask you to jump in in just a moment. We're very fortunate, John, in that we have a very stable workforce at both the Lucky Friday and Greens Creek. You look at the turnover rate at Greens Creek and it's actually down this year from last year, and last year it was down from the previous year, in the single digit sort of -- sort of numbers. I think this year's may be 7, 8%. So we've been fortunate in that regard.

The other thing is we've just been -- and the reason I guess we've been so fortunate is that we're in places that people want to live. Large percentage, I think 70, 80% of our workforce at Greens Creek, they're from Alaska and just about all of our employees in the Lucky Friday live right there or, in many cases, they're from the Silver Valley of Idaho.

So it hasn't been as much of a challenge as I expect it might be for some other companies. Ron, do you want to add anything?

Yes. For us, John, the real -- the real issue is the key skilled positions. When you're -- when you're short one or two there it's a -- it makes a big difference. So at the Lucky Friday for the last five or six years, we've had a real aggressive training program. They're trying to train local, particularly local, young folks that are interested in coming to work and learning, training them to be skilled miners. Greens Creek is now doing the same thing and has been for about a year. And both those programs are getting very good results. So that's kind of our way of combating that. And then trying to stay competitive on every front with our packages.

And with respect to that, what sort of inflation rate are you seeing in labor packages?

Actually, labor has not been as much as the supply side of it. So it's -- I can't give you a number right now off the top of my head. I can go chase that down. But the labor increases have been significantly lower than what we've seen on the supply side.

Okay. Great. On the zinc market, in general, I know you're not a research organization. But from your interaction with the industry, what do you see going on there. Do you see the weakness in the zinc market as being abnormal and is going to come back or is it just extra supply that's coming into the market?

John, the view that we have, it is a temporary event. We've had some mines that have gone back into production that sort of filled the gap, and those mines aren't going to be operating for very long, or at least that additional production's not going to be operating for very long. So we do see it coming back and we do see the fundamentals for ore, zinc, continuing to be strong with the development of the just basic industrial development that you see in China and India and the rest of the world. Ron, do you want to add anything?

The only couple items that I'd add there is, is that we kind of have seen a little bit of a downturn in the economic growth just because of the credit markets and things like that, and that will have an impact going forward that will kind of match up with the things that Phil described, some of the production coming off of the market and the demand going up a little bit. And just as an addition, you can expect something real similar in the lead market because the demand for lead is really not changing very much over the years. It's had a nice, steady growth and will continue to with a -- with the third-world countries bringing on more uses of lead acid batteries. But the supply is very much tied to the zinc market. So as the zinc supply reduces a little bit, the lead supply is going to reduce as well.

Right. Right. Okay. Good luck, guys. And thanks very much for the nice clear disclosure of your abnormals this quarter.

Sure, John.

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

Phil, do you have any additional comments today?

Yes, let me -- let me just say that this was certainly a quarter that changes the company. It's a quarter that has had these abnormal items and that we're looking forward to the things in future quarters, though, not having so many things that the accounting staff has to deal with.

We thank you very much for joining the call today. And, certainly, if you have any questions, you can give Vicki a call and she'll be happy to answer them.

Yes. My number is 208-769-4144. And feel free to give me a call if you have additional questions.

Thank you for joining us today on the Hecla Mining Company second quarter 2008 conference call. And that concludes our call. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.