Hecla Mining Co (HL) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Hecla Mining earnings conference call. My name is Erica, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Don Poirier. You may proceed.

Welcome, everyone, and thank you for joining us today on our fourth quarter and year-end conference call. Our call is being webcast today at www.Hecla-mining.com. Our press release from yesterday is available on the website, and there is also a short slide presentation posted to the same site that we will use as part of this call, to assist you in understanding some of the information that will be discussed.

On today's call, we will have Phil Baker, Hecla's President and CEO; and he is joined by Jim Sabala, our Senior Vice President and CFO; Ron Clayton, Senior Vice President of Operations; and Dean McDonald, Vice President of Exploration.

Before we get started, I need to remind you 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 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. Investors are cautioned about our use of such terms as measured, indicated, and inferred resources, and we urge you to consider those disclosures that are provided in our SEC filings.

It gives me great pleasure to introduce Phil Baker, Hecla's President and Chief Executive Officer.

Thanks, Don. Hello, everyone, and thank you for joining the call. The fourth quarter and the first six weeks of this year have been very tough, as Hecla took steps to get out of the crisis mode. When we cut the deal to acquire Greens Creek a year ago, we didn't anticipate the credit crisis, dramatic reduction in base metals prices, and the run-up in costs.

We might have been able to handle one or even two fundamental changes in the world, but all three forced us to take the dramatic action of raising the equity capital necessary to restructure the debt. With 70% of the debt paid off and the remaining $113 million now due over the course of 2010 and 2011, our debt is no longer capturing the same management attention it has for the past six months. Jim will talk more about this.

Our focus now is on running the business -- getting the production and costs to where we think they should be. Please see the slide comparing the cost per ounce with our peers.

And like everyone in the sector, our costs have stepped up dramatically, but Hecla still has the lowest cost structure. And with our reduction in force and other steps we have taken to increase utilization and create lower costs, we expect to see our costs lower in 2009 than what we had in the fourth quarter. I've asked Ron to talk more about costs.

So I want to focus for a moment on revenue, and please see the next slide that shows the sensitivity to our metals price. Despite having sold our Venezuelan gold asset, Hecla is still exposed to gold and we expect to produce 55,000 to 60,000 ounces this year. And given the strength of gold this year, I'm not sure if the market recognizes it.

If you have the prices that we have today, if those had been applied in the fourth quarter, we would have had $10 million more revenue in the quarter; the same thing applies to silver. At today's silver price, there would have been $8 million more revenue for the quarter. Both of these would have gone straight to the bottom line.

We, of course, also have exposure to zinc and lead prices. As the release outlines, our realized price last quarter was $0.19 and $0.26 less than the market average for zinc and lead, respectively, as a result of the provisional price adjustments for the dramatically declining prices. Stable prices would have added another $5 million for the quarter.

Two milestones I'd like to point out. First, 2008 is the 50th year Hecla has owned and operated the Lucky Friday. We had higher costs for the quarter and the year than we would have liked, but I'm confident, just like in the past, you will see us change that.

Second, this is the most silver reserves and resources in the Company's 118-year history. In the last 25 years, reserves have been as little as 19 million ounces, if you go back to 1987. It just so happened the year Hecla acquired its initial interest in Greens Creek; but because Lucky Friday and Greens Creek districts are so geologically rich, the mines have been producing and the exploration discovering new ounces that have not been identified. Dean will talk to you about why we think we'll find a lot more in our four districts.

But first, what I'd like to do is turn things over to Jim to talk about the financials. Jim?

Thank you, Phil. First, I'd like to report on the progress we have made in changing the Company's financial structure, as we deal with the most challenging financial markets experienced in over 50 years. For reference, I'll refer you to the fourth slide in the presentation.

We have strength in the balance sheet, increasing liquidity, and reducing debt. Late in the fourth quarter and early in the first quarter, we raised a total of $91 million. In connection with these transactions, we have repaid $40 million of the outstanding bridge loan and $8 million of the term loan. As a result, our total debt under the credit agreement now stands at just $113 million compared to $380 million just seven months ago -- quite an accomplishment, given the volatile markets we are experiencing.

We have restructured our credit agreement. Under the revised amortization schedule, $60 million will be repaid in 2010 and $53 million in 2011. That gives us the time for base metals markets to recover to more normal levels.

We have slashed discretionary costs. In 2009, exploration will be $7 million compared to nearly $23 million in 2008. In addition, capital expenditures will be reduced to $33 million in 2009, down from $69 million in 2008. And we are focusing on reducing all other operating costs, and in January, implemented a reduction in force program across the Company.

With that, I'd like to turn to our results for the fourth quarter and the full year 2008. Some of what I will discuss is on the fifth slide.

During the fourth quarter, we reported a loss of $37.3 million compared to net income of $8.2 million in 2007's comparable period. The loss for the year was $66.6 million compared to income of $53.2 million in 2007. The loss applicable to common shareholders after preferred stock dividends was $80.2 million or $0.57 per share for 2008 compared to income of $52.2 million or $0.43 per share in 2007.

2008's results acted by a number of unusual items. First, lower lead and zinc prices, and higher smelter treatment charges, and increased costs in coals, a negative provisional price adjustment of $25.7 million; higher interest expense associated with the debt used to acquire the remaining Greens Creek interest; a one-time increase in the cost of sales of $17 million related to the purchase of Greens Creek; losses associated with divestiture; and operation and sale of our Venezuelan assets that totaled nearly $30 million; and a reduction in the value of our deferred tax assets of a net amount of $3.6 million during the year.

Silver production increased 54% in 2008 to 8.7 million ounces compared to 5.6 million ounces in 2007. And our cost per ounce was $4.20 per ounce compared with a negative $2.81 in 2007, which is the result of increased input costs and the lower by-product credits previously noted.

As mentioned, we entered 2009 on strong footing. We had cash on hand at the end of the year of $36.5 million. We have reduced and restructured our debt. We have reduced discretionary costs and will continue to aggressively attack operating costs. With that, we expect 2009 production levels to continue to increase, reaching a level of 10 million to 11 million ounces in 2009.

And with that, I'd like to turn the call over to Ron Clayton.

Thanks, Jim, and good morning. During 2007, and particularly in 2008, we experienced an unprecedented rise in cost of materials in our industry, driving the cost per ton at our mines up, as shown on slide six. In fact the highest prices we paid for critical supplies, such as diesel fuel, steel for grinding and ground support, cement for backfill occurred in September and October of last year. Diesel prices exceeded $4 a gallon delivered to our mine sites during that period.

While the increase in labor costs were much less dramatic, we did see increases. Fortunately, a significant component of our compensations gains are profits and silver price-driven. As prices and profit declined, so did our labor costs. We began to see some benefit from cost reduction efforts we've made in concert with our vendors. This is particularly evident on the Greens Creek portion of slide number six. Most notably, diesel fuel has dropped about 40% from the peak. These efforts will continue.

The Lucky Friday graph does not show the great progress that was achieved at the mine during the fourth quarter. Cost improvements on a unit basis were offset there by reduced mill production, which was a result of some start-up upsets in our new water treatment plants. Ten days of mill production were lost, resulting in significant broken or being stockpiled underground. The costs late in the quarter were below the average for the quarter.

Greens Creek saw the benefit of more hydro power than we expected, further reducing the power costs. Over the last several years, we have invested at both operations to revitalize the infrastructure and improve processes, so that we can take maximum advantage of our production capacity. This has, and will continue, to help drive costs down and margins up, particularly at Greens Creek.

Moving on to slide seven. As prices increased, the three-year average for all of the metals in our products has tended to trail, and the result has been the actual realized prices have been significantly higher than the prices used in the reserve in resource estimations. This has allowed us to mine lower grades profitably and increase the MPV of our operations during high price periods.

As prices have decreased, we've adjusted our operating criteria to ensure that we continue to get profitable and the highest possible margin material into the mills. The adjustment to metal prices is part of the reason you see the silver grade change in the graphs on slide seven. The graph of the byproducts grade in price would appear very similar to the silver graph presented here.

Adjusting our cut-off strategy to meet price and cost changes has been key to maximizing margin at our operations, and it is particularly important to Lucky Friday, where we have been operating near mill capacity for a couple of years.

The Greens Creek mill has some excess capacity above what we've been able to historically do with the mine production. Improvements over the last year to ensure adequate skilled and trained employees, equipment availability, development and backup performance, has allowed us to consistently achieve a 2,100 ton per day production rate over the last several quarters, for the first time since 2004. We expect economies of scale to help further reduce unit costs and expect to continue to try to push the tonnage up at Greens Creek.

Moving on to slide eight. Capital expenditures over the last couple of years are shown here. This investment in our operations has paid off in terms of increased production rates at both operations, increased reserves and resources, and longer mine lives. This also allows us to slow the capital spending in these difficult economic times without damaging the long-term viability of either operation.

With that, I'll turn the call over to Dean McDonald.

Thank you, Ron. As Phil mentioned earlier, 2008 has been a record year in adding to our total silver reserves and resources. There has been a spectacular increase of 80.5 million ounces or a 76% increase in silver compared to the previous year. Hecla now has 133 million ounces of silver reserves and 192 million ounces of resources, with substantial increases in lead and zinc.

In addition, we added 400,000 ounces of gold reserves. Most of this increase is due to our acquisition of the remaining interest in the Greens Creek mine, but successful exploration and definition drilling at the Lucky Friday mine also contributed, by adding more than 10 years of production to the mine life at the current mining rate. It was a phenomenal year at Lucky Friday, so I want to focus a few moments on what has led to this significant expansion and upgrading of the reserves and resources.

When we look at slide nine, which is the longitudinal of the Lucky Friday, the hotter colors represent higher grade in thickness of the resource, and we can see the significant expansion of the red high-grade zone from 2007 to 2008. Reserves are up 26% from last year, with major gains in the 30 vein from 5,900 to 6,200 levels; the 90 vein below and above 5,900 level; and the 110 vein between the 4,800 to 5,100 levels. In the 2008 longitudinal, these gains are defined by the bright red area on the right side above the 6,300 level, which is marked on the diagram.

Mineralized material is up by 55%. On slide nine of the longitudinal, the large reddish area below the 6,300 level reflects the significantly improving grades of the 30 and 40 veins, and the coalescing of those veins into larger, high-grade structures. Recent drilling has also shown there is potential to expand the resource further to the East and at depth.

Lucky Friday is but one of four major districts that we have the dominant land position. Exploration is occurring at all four that we expect to add resources. But more importantly, these are places we believe have the potential to find that new ore body that can change the Company.

The most exciting exploration news from Greens Creek is that we continue to see growth of the northeast contact area. Surface drilling has now traced mineralized mine contact for over 2,000 feet along the strike to the south, and this is tracing towards known mineralization at the mine. At the San Juan joint venture in Colorado, 3D modeling of the Bulldog A vein has confirmed much of the historic 1980's home stake reserve. This is the first time the Creed Mining District has been consolidated, and we believe we are making progress in defining a plus 100 million ounce silver resource.

The integration and refinement of regional and detailed exploration data at the Silver Valley of Idaho and in Mexico continue to improve our targeting in a number of prospective areas, with excellent resource potential.

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

Thanks, Dean. The message we hope that our press release and this conference call gives you is that we think the future looks bright. I'm sure that you'll have some questions that you want to ask to test that thought. So Don, why don't we ask the Operator to start the Q&A.

Thank you very much, Phil. Erica, can you please instruct and organize the questions for the next portion of our call?

Yes, sir. (Operator Instructions). Anthony Sorrentino, Sorrentino Metals.

I know a few months ago, I believe you hired a consultant from the Alvarez Company. I just wanted to know what his role has been and what his recommendations have been at the Company.

Yes, the role that Stan Speer with Alvarez has played has been really in restructuring the debt with the lenders. And these whole series of amendments that we had, he's been engaged in all of those discussions. And the other thing that we are having them do is look at all of our cost information and help us look for ways to lower our costs. And we're making a lot of progress on that front. I mean, we think there's a lot more room to go. So, that's the two things that they've been involved in.

Okay. And talking about cost, is there any possibility of your being able to lower your smelter and treatment charges in the near-term?

We are -- in fact, Ron and I are at the Zinc Conference and, in fact, having discussions with the smelters on the upcoming year for those charges. And it's too early to say where those are going to come out. We certainly have an expectation to see those lowered. But it's still early days. It's something that will likely take another number of weeks before those -- the new terms get finalized. Ron, do you want to add anything to that?

Probably the only thing I would add, Phil, is the general consensus out there is the trend is going to be down a little bit, the lower TCs. So, favorable in [our direction].

Yes. Good for us.

Okay, great --

And that is -- I appreciate you pointing that out, Tony, or asking that question, because that is certainly one of the things that affected us in 2008 negatively.

Okay, well, that's good to hear that they're trending down. All right. That's all I have for now. Thank you very much.

Steven Butler, Canaccord Adams.

Ron, you had mentioned the talk about the fall from the peak in oil prices. In fact, I think you mentioned about $4 a gallon during the period. I assume that's a Q4 number. And maybe where are diesel prices today for the Company? And do you have a sensitivity for us, roughly, in terms of $1 a gallon of diesel per ounce of silver or some kind of sensitivity, or at least direction as to where your guidance is for 2009 in terms of fuel price assumption? Thanks, guys.

Off the top of my head, I cannot remember the sensitivity numbers. So we're going to have to look that up for you, unless Jim or Phil can remember what the calculation is. But we kind of were anticipating that the numbers would come down. And they have, in fact, come down probably more than we expected.

So we've been -- particularly in the last, say, 30 days, we've been paying sub-$2.50 a gallon for diesel fuel. So it's down even more -- well, in that 40% range that we were talking about. I don't know for sure where it's going to go, but I suspect it will -- it probably isn't going to grow a whole lot from that point.

Ron, as far as the costs we had, it was $4-plus and now down, as you say, in the sub-$2.50. So we have seen just a dramatic move in that. And Jim, do you recall --?

Well, I was trying to recall our usage. I believe it's about 600,000 gallons a month, Ron?

It's 550,000 gallons a month at Greens Creek, and yes --

So you can just apply a $1 delta to that for 12 months and divide it by our production guidance, and it will give you the sensitivity.

Okay.

Yes, and actually, probably 600,000 is a good aggregate number for Lucky Friday and Greens Creek together, just talking about the total ounces.

Okay. And then in terms of -- will that fuel ease a little bit? I suppose over time, it depends upon connection or greater connection to the steep grid in Alaska.

Yes. We would expect to see a little relief in the fourth quarter of this year. And then probably 2010, we'll see dramatically more utilization and hydro power as the dam gets completed.

Okay. That's it. And congratulations and nice look at the reserves at Lucky Friday.

Yes, the reserves are very -- they're very -- it's very exciting, that -- the change in reserves there.

Thanks very much, guys.

(Operator Instructions). Borden Putnam, [MRDI] Capital.

I want to echo what Steve said about your reserve report. That's pretty impressive. Especially --

Well, you foresaw it.

Well, yes, it's exciting to see it come in. Ron, a quick bookkeeping thing for you. It looks like your slide on page seven is a little shifted for Lucky Friday. I couldn't figure out what was wrong with it until I caught it. It looks like the dates have shifted to the right, so they're not aligned with the proper period. Because you're missing -- if you look at Greens Creek, you show a 2009 average for the last bar, and that's not labeled Lucky Friday.

All those labels should be shifted one bar to the left.

Yes, I just figured that out. Because I was going to ask you about the increase in grade at Lucky Friday, which is why I noticed this. How did you achieve that? And is it sustainable? What can you tell us about that, as far as the silver grade rising from -- what was it? 9.7 to 10.5.

Yes. What's driving it, Borden, is just change in the cutoff strategy just a little bit. So, they're not -- they're kind of leaving off some of the stuff on the edges that was making money at higher base metal prices and isn't making money now.

And the other thing that they're doing is, is that -- if they've got a round that they're going through that was -- would pay for its trip through the -- up the shaft and through the mill, at the higher price environment, we were putting it in the mill. [In this] price environment, we're finding other things to do with that tonnage, like use it for prep rock in the overhand stopes and backfilling it, rather than taking up the capacity with it.

As long as we can keep the mill full with that strategy, then it makes sense. Even though it may have some slight negative impact on overall MPV, in the short-term, it's a hell of a lot better cash generator.

Yes, I appreciate that. So this is exactly the thing we talked about a couple of years ago, standing in that crosscut. You were showing how you were able to, on the fly basically, without changing your long-term mine plan, you were able to really make judgment calls at the stope level to optimize cash flow. And I guess I should have thought about that, because you're obviously not going to take some of the base metal rich areas and it's going to focus on the silver. That's a great answer.

That's exactly what's going on.

On the mining costs per ton -- still at Lucky Friday -- I was a little surprised, even though the tonnage was down a little bit, is that truly -- going from $75 a ton to $88, roughly -- is that really solely attributable or mostly attributable to the lack of material through the mill? So it will come down as your mill throughput goes back up?

Yes, in the fourth quarter, we actually had 10,000 tons set, broke on the ground that we paid for but we couldn't bring out to get to the mill. And of course, the one difficult issue with the Lucky Friday in that regard is, is that we're running that thing right up against the throttle stops. So it's squeaking that extra 10,000 tons through the mill now is going to take months.

Okay --

Which is a -- now that we have it broken, that's a good thing that -- you know, but --

Yes, you've already paid for it, right?

Yes, we paid for it in the fourth quarter, is what it comes down to.

Made the fourth quarter look a lot worse than it really was. It was actually a pretty good quarter.

Well, but the grade I liked a lot. And that -- yes, I think we talked about that, so that's -- that actually is encouraging.

On Greens Creek, the grade came down a bit, but so did the costs. Is this some of your long-hold mining method coming through?

Yes.

Excellent. What's that north and west (multiple speakers) --?

North and West-West, Borden.

Okay. And what proportion of your feed is that now, Ron? And where will it be for 2009?

Well, for a longer-term, you can figure that that's going to run about 30% of the feed. As we've ramped it up, it's been up and down a little bit, but it's been anywhere as little as 10 and as high as about 35.

Okay, great.

You know, kind of a target number should be around 30%.

Okay. Last couple for Jim, and I'm sorry to be dominating here for second beat. Jim, I was surprised at the G&A number. It's really anomalously low. Can you assure me on why that happened?

There was a large adjustment in the fourth quarter, due to the incentives compensation, which is tied to the share price. And so when you revalue the options down to the existing share price, it resulted in a pretty good credit to G&A.

Yes, let me clarify that a little. It's not tied to the share price. It was tied to performance objectives. And so, as we made that adjustment, we saw that come off.

Okay. Last thing again, Jim, a small bookkeeping thing. I was looking at the cash flow statement, and I've gone over mine time and time again, and I've -- let me pull up yours on the Web to make sure I'm looking at it right. I've got two things open.

It doesn't add up. The operating cash flow, the financing cash flow and investing cash flow -- if you take those bottom line numbers, I come up with a 3 in the units place and you report a 5. In other words, your total net decrease or increase in cash is [42645] and I'm coming up with [42643]. And I don't know where -- it doesn't look like a rounding thing.

Okay. Let me take a look at it, Borden. Obviously that's a lot of detail and we get a red face if that doesn't add up. But let us take a look at it.

And I don't mean to embarrass you. I just was curious. I'd looked at it a lot last night and couldn't figure it out. But it's not worth spending a lot of time on right here. Thanks, Jim.

I appreciate it, Borden, and we'll take a look at it.

Thanks, guys.

(Operator Instructions). And we have no further questions in queue. I would now like to turn it over to Mr. Don Poirier for closing remarks.

Thank you, Erica. We appreciate people joining us today for our fourth quarter and year-end conference call. Feel free to call me, Don Poirier, for any additional questions at area code 208, my number is 769-4141. This concludes our call for today. Thank you.

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