Hecla Mining Co (HL) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hecla Mining first quarter 2009 earnings conference call. My name is Ann and I will be your coordinator for today's call. (Operator Instructions). As a reminder, this conference is being recorded. At this time all participants are in listen-only mode. We will be facilitating a question and answer session following the presentation.

I would now like to turn the presentation over to Mr. Don Poirier, Vice President of Corporate Development. Please proceed, sir.

Thanks, Ann. Welcome everyone and thank you for joining us today on our first quarter conference call. Our call is being Webcast today at www.hecla-mining.com. Our news release from earlier today is available on the website and there's also a 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 have Phil Baker, Hecla's President and CEO and he is joined by Jim Sabala, Senior Vice President and CFO, Ron Clayton, Senior Vice President of Operations and Dean McDonald, Vice President, Exploration.

Before we get your 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 disclosed 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.

With that, 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. This has been a good quarter. We've had strong operating performance. We had better prices which largely doubled our revenue, and improved balance sheet and continued exploration success at the Lucky Friday. We think this first quarter performance validates our belief that the difficult issues facing the Company in the fourth quarter were temporary.

We believe then and we believe now that the economic environment will favor a US silver Company with high quality assets. US dollar will not continue to be strong with the quantitative easing underway, at least not against silver and gold. Chinese have made clear they believe a change in the global monetary system needs to be contemplated and they're voting with their dollars, doubling their gold reserves This week we've seen the additional stress of the swine flu. We'll see if it is a scare or a real thing but what is clear is the world economy is very fragile and we like the rational for precious metals as a store of value. And we think this first quarter demonstrates that Hecla over time is a way to leverage that value. So let me run through why.

Operating performance improved compared to both a year ago and 2008's fourth quarter. If you'll look at slide two, it shows how silver production has increased due to better grades and additional tons through the mill. At Greens Creek, they have production balanced with development and back-filling to achieve more and consistent feed to the mill, close to 2,100 tons per day. A full mill and lower consumable costs has driven the cost per ton down dramatically. We're working to maintain, maybe improve our through-put.

At the Lucky Friday in addition to increasing through-put and recovery, we've been mining more selectively leaving behind material in the (inaudible) ore body. This increases the grade, improving the mine's economic performance. Ron and Jim will talk more about our solid operating performance.

Before they do, let me say that our workforce is to be commended for their commitment to safety and the improvements made over the last five or six months. We're just seeing the results now, but some of the work has been ongoing for the past year and in some cases for the past few years. Our people have stayed focused and they didn't let the difficulties, both at the properties and corporately of the past few quarters distract them. They've done a good job.

One of the difficulties we've all had to face was volatility in prices and what a difference six months makes. See slide three where we compared the silver price we realized this quarter with the fourth quarter last year. It's almost $4.50 per silver ounce higher. For gold, it was $186 per ounce higher and our realized price for lead is almost twice as high.

Higher prices and additional silver and lead production increased our revenue twice as much as it was in the fourth quarter. And while I know there's a lot of factors that enter into cash flow, these higher prices and improved operating performance gave us an almost 40% increase in cash flow before working capital. Our leverage to prices is pretty dramatic at these price levels.

Probably the biggest issue we had to face has been dealing with the debt we incurred to acquire Greens Creek. If you look at slide four, you can see the dramatic reduction in our outstanding debt. While most of it occurred in the third quarter last year, two months ago we still had $40 million bridge loan that was due and $40 million of principal due in 2008. We took care of these near term issues by issuing equity and restructuring the debt. So today we only have $113 million of term debt and the next principal payment is not due until about a year from now.

We also increased our cash position $26 million, and our working capital is $72 million better. The next step is to consider how to lower the cost of the debt and remove its restrictions. We will try to quickly do so.

Finally, we are continuing to see great success from exploration at the Lucky Friday. Last year as shown in slide five, we saw the Lucky Friday increase resources by 59% and reserves 24% and essentially the same grade. Our new drilling indicates the deposit is getting materially better below the bottom of our current mine plan. Dean has a slide that lays this out and the improvement is dramatic. So although we reduced our exploration program in 2009 to 2002 levels in response to lower cash flows, we expect continued growth and improvement of our resource base because of the work we have done over the past few years that we can harvest this year.

Just a quick comment on the share price. We are disappointed on the under performance of our shares relative to our peers. And there's lots of reasons for it but I think those reasons are behind us. If you look at slide six, Hecla's the only Company in the -- only Company with US silver reserves in mines. All of our major competitors are located outside the US. All are primarily exposed to countries such as Mexico, Bolivia and Argentina that have very different risk profiles from the US. With Hecla's debt crisis behind us, the improved operating performance, the high quality resource growth and finally, the relative risk, both operating and political, we think the share performance should do better both absolutely and relatively to our peers in the future.

Let me ask Jim to give you some further insights.

Thank you, Phil. Much has changed at Hecla compared with the first quarter of 2008. We acquired the 70% of the Greens Creek we did not own, thereby increasing our interest to 100%. In addition we disposed of our interests in Venezuela. And last but certainly not least we dealt with the aftermath of a global recession, market volatility, and loss in macroeconomic liquidity not experienced since the great depression. Our Earnings Release discuss the quarter on quarter performance for the first quarter of 2008 versus 2009. I would like to focus my comments today on the progress made in the first quarter of 2009 as compared to the previous fourth quarter of 2008.

The first quarter of 2009 is characterized by several main events. Significant improvement in operational performance at the Greens Creek and Lucky Friday mines. Significant reduction in per ton operating costs. Improvement in metals prices for all four of our metals as compared with the previous quarter. And the restructuring of our credit facility. During the first quarter, our realized prices for silver, gold, zinc, and lead increased by 48%, 25%, 80%, and 103% respectively as set forth on slides seven and eight.

With regard to operating performance, as set forth on slides nine and ten, during the first quarter we produced 2.9 million-ounces of silver, an increase over quarter four of 13%, while gold production was constant at 18,000-ounces. Lead production was up 6%, to 10,200 tons, and zinc was down 4% to 18,700 tons. With regard to the efficiency or cost of production as set forth on slide 11, our cost per ton mined and milled was down 12% at the Greens Creek Mine and 20% at Lucky Friday, as the cost control initiatives we've previously communicated began to show up in our financial statistics. And as set forth on slide 12, the cost savings combined with higher production levels, and better byproduct prices drove the cash cost per ounce of silver, down to $4.67 per ounce a 38% decrease from the fourth quarter of 2008 level of $7.49.

As mentioned in our press release, there were two factors that also impacted Q1 earnings favorably. One, the sale of a mill in Mexico which resulted in a gain of $6.2 million. And two, the termination of an employee retired medical plan which reduced liabilities by $9 million. Including these items, our EBITDA for the quarter was $31.4 million, compared to a negative $9.4 million in the previous quarter. And, even if these items were excluded, Q1 EBITDA was, [$66.2] million, a $25.6 million improvement over the previously reported quarter. All combined, we reported net income applicable to common shareholders of $3.9 million, compared to a loss of $40.7 million in the prior quarter. So overall, we feel we made significant progress during the quarter by accomplishing the goals of increasing production, lowering operating costs, and improving financial performance.

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

Thanks, Jim and good morning. Last two quarters I've talked about several initiatives that we implemented at our operations to stem the tide of the rising cost trends we experienced in 2000 and particularly in 2008. Graphs on slide 13 show cost per ton for mining and milling in bars measured on the left hand axis and throughput per day as a line graph measured on the right hand axis.

As Jim demonstrated with an earlier slide, operating costs were reduced 20% at Lucky Friday and 12% at Greens Creek over the last quarter. As can you see here, our first quarter results are now back in the range of the cost profile we saw in early 2007. Some of the successful initiatives behind these results include; stabilizing our workforce at the appropriate levels with lower turnover, for the first time in several years, has helped us focus supervision and training on improving efficiencies and increasing production at Greens Creek. The maintenance group there has made tremendous strides in improving availabilities of both mobile and fixed equipment throughout the operation. This has been a key driver in increased through-put and reduced operating costs.

Significant reductions in the cost of diesel fuel and increased availability of hydropower have also been key cost reduction drivers at Greens Creek. Increased through-put and reductions in supply costs coupled with labor reductions have been the key cost drivers at Lucky Friday -- cost reduction drivers at Lucky Friday. I'm pleased with our performance to date and congratulate our operating teams at both mines on the results they've achieved. We have more work to do and I expect to continue these trends.

Slide 14 uses silver grade and price to demonstrate the effects of our grade control practices in responding to changing metal prices. Great control strategies at both operations have been very successful at responding to the dramatic changes we've seen in the prices for our products over the last three years. At Lucky Friday the mill feed grade of silver and lead increased and the zinc grade was maintained, compared to previous quarters. This strategy has enhanced short-term cash flow by utilizing a higher cut-off value. In practice, as long as the mill's being fed at capacity with higher value material, we leave lower value material in place or if it must be mined to access to higher value material, we place it as backfill where possible to minimize the handling costs.

At Greens Creek the mine has not had the ability to produce at the mill capacity level since the mill capacity was increased early in the decade. As a result, the focus at Greens Creek has been to develop and operate more productive long haul stopes where the ore body geometry and grade distribution will allow. Generally this results in lower precious metals grades and higher base metal grades but higher margins. However, we were able to increase the silver grade in the first quarter even with the higher production and we continue to mine above reserve grade for gold and silver and slightly below for lead and zinc.

Over the last several years we've worked at both operations to revitalize the infrastructure and improve operating practices to take maximum advantage of infrastructure capacity. These efforts were targeted at driving costs down, revenues up, and thereby increasing operating margins. At Lucky Friday, the opportunity has been one of quality, and at Greens Creek, quantity. I'll explain this has we move on to slide 15.

Our more recent infrastructure improvements at Lucky Friday have been targeted at increasing the value of our concentrates. To achieve this, we've improved the payable recovery of all three metals reporting to Lucky Friday cons. The payable zinc recovery shown in green on the left hand graph has increased more than 13% since the first quarter of 2007 and more than 20% over the last three years, while the zinc grade has been relatively flat. You can see from the blue line the payable silver recovery has improved about 5% and we are seeing similar improvements in payable lead recovery shown in red. These recovery improvements are a result of infrastructure and operating improvements and are independent of the grade changes. Capital and operating improvements that have driven these results have also reduced concentrate freight costs by rejecting more non paying material details.

The strategy at Greens Creek is a bit different as mill capacity is in excess of what the mine has historically been capable of producing on a sustained basis. The improvements made by the team at Greens Creek over the last several quarters have enabled the operation to consistently achieve a 2,100-ton per day production level. In this case grade control efforts focus on filling the mill with profitable material even if it is near the cutoff value and the metallurgical efforts focus on through-put and concentrate quality.

Our Greens Creek team has been successful in exceeding backfill and development targets required to sustain this production level for the first time in the mine's history. The economies of scale have helped reduce costs and increase concentrate tonnage and net smelter returns. We will continue to strive to drive mine production up.

With that I'll turn the call over to Dean for an exploration talk.

Thank you, Ron. Although there has been a reduced exploration budget for 2009, some important programs continued during the first quarter that will carry on for the remainder of the year.

At the last conference call, we talked about the spectacular increase in the silver resource at the Lucky Friday as shown by the grade by width longitudinal in slide 16 where the hotter colors represent higher grade and thickness of the resource. Drilling continues to refine and expand those high grade central and Eastern areas as 81 holes, 52 holes since our 2008 resource estimate, have now intersected mineralization below the 6,300 level. When you refer to the table in the slide, can you see the 30 vein grades and thickness increasing from 10.3-ounces per ton silver and a 13.9-foot average thickness at the 6,300 to 6,500 levels, to 15.7-ounces per ton silver and a 15.2-foot average thickness at the 6,500 to 7,000 levels. Improving mineralization continues down to the 7,750 level, where we have an average of 19.1-ounces per ton silver and a 16.5-foot average thickness from widely spaced drill holes.

When you look at the longitudinal, you might get the impression that there are hard boundaries to the West and East. But that is not the case, as we will evaluate the post mineral silver fault to the West of the resource where the 30 vein may continue into a 4,000-foot long block that projects to the pass producing star veins. This is a big prospective target that has not been adequately explored due to access, not geology. To the east, a lone intersection of the 30 vein at the 7,400 level, contains one foot at 87.6-ounces per ton silver and 26.3% combined lead and zinc. This is 610 feet East of the resource boundary and suggests there are opportunities to extend the resource to the East at depth.

At Greens Creek underground drilling has focused on refining production and development targets at the West wall, Northwest West, and 200 South zones. But preparations are being made to explore the potential of the Northwest West South, West Gallagher, and the 5250 South extension. Later in the year, drilling of the newly discovered Northeast contact zone will occur from two underground platforms to the South, and on surface to the North. Surface drilling has now traced mine contact rocks for over 2,000 feet along strike and this is tracing towards known mineralization at the mine. We anticipate extending this mineralized horizon over 3,000 feet with drilling this year.

At the San Juan joint venture in Colorado, 3D modeling of a number of the Bulldog and cross veins will add to the 13.2 million-ounces already identified. This is the first time the Creede 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. In Mexico, field crews are sampling some of those priority targets now.

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

Thanks, Dean. The message we hope you're getting is that we have overcome a difficult situation and the future looks good. And before I take questions that will test that thought, let me just say that silver is pretty much traded between $12 and $14 this year and nothing has seemed to move it. My view is that it is only a matter of time before the impact of all the actions being taken by governments around the world will result in an upward revaluation of silver and gold. At the moment there's a struggle by central banks to fight deflation.

If you read Bernanke's own words that is a battle he will not lose. When the log-jam of deflation is overcome, then silver will not just maintain its value as it's been doing over the last few months, but will dramatically rise. In the meantime, Hecla will do what we are best at, not predicting metals prices, but exploring, developing, and mining our assets.

Don, with that, you can have the operator start the Q&A..

Okay, thanks very much, Phil. Ann could you please instruct and organize the questions for the next portion of our call.

Glad to. (Operator Instructions). And our first question comes from the line of Anthony Sorrentino with Sorrentino Metals. Please proceed.

Hello, everyone.

Hi, Tony.

What would you project capital spending to be for all of 2009?

I'll let Jim answer that question.

Yes, for the entire year, Anthony, it's projected to be in about the $32 million to $33 million level.

Okay. And would you give a breakdown of that by property?

I don't have that, Anthony, right at my fingertips. I believe it's about $15 million at the Lucky Friday and the balance at Greens Creek.

Okay. And what options are you considering to access levels below the current working areas of Lucky Friday?

Why don't I ask Ron to talk about that. And Ron, you might give some background as to where we are now and where we're currently projected to go.

The current mine plan that we're working under right now gets -- it goes out to 2015 and gets down to roughly the 6,200 level. That mine plan is based on continuing ramps below 59. From there on, we've looked at a number of different options that range, anything from trying to sink a winds from that rough elevation down to as deep at 8,000. We're looking at a number of other options including ramps, conveyor ramps, those kinds of things and just looking at the trade-offs between capital and operating costs.

Anthony, it's a high class problem to have, to have the material below us increasing in value. It looks like might be increasing in value dramatically. Adds a lot of options for us. Go ahead, Jim.

And Anthony, as a follow-up, it's $11 million at the Lucky Friday and the balance of the number I gave you is at Greens Creek.

Okay. Very good. And like you said, that is a good problem to have, that as you go down deeper when in most cases your cost to mine would become more expensive, it's going to be more than justified by the higher grades and the increased width of the ore.

We certainly hope so.

Okay. Thank you very much.

Thank you.

And the next question comes from the line of Wayne Atwell with Casimir Capital. Please proceed.

Good afternoon.

Hi, Wayne.

Can you tell us what you have in terms of additional cost cutting opportunities?

Sure. Things that are obvious, we of course have done and so the things that we'll be looking at are not I guess I would characterize as being anything of a particularly material amount. When you think about our balance sheet, trying to restructure the debt that we have would be one of the places that we would look to see a reduction in cost. That interest charge is a big number for us over the coming year.

Operationally, I'll let Ron make any comments that he might have. But before he does that, just from a G&A standpoint, we did a reduction in force for G&A and exploration and operations. And I don't foresee doing anything further there that's on a -- that's dramatic. Ron, you want to add anything?

From an operating standpoint, the keys are going to be continuing to try to drive the production up at Greens Creek and that's not going to be an easy task but there's some opportunities there.

So that's up from the 21.

Up from the 2100. And again, that's not something that I expect to see big changes in in the near future, but that's going to be one of the main focuses. And really the other opportunities that we have are just to continue to try to shave on costs of materials and efficiency of use of those materials.

So for example, at Lucky Friday, one of the biggest drivers we're working on is trying to reduce the reagents used in the water treatment plant that we're treating the water for discharge with. So that's an example of things that we're working on, trying to be a little more efficient with explosive uses and things like that. These are the more difficult, but potentially some savings.

Thank you. And what would you like to look like in five -- three to five years? I know have you a number of properties you're working on. Which is the most likely to go into production and as I said, what's your goal? What would you like to look like in three to five years?

Well, in three to five years, there's really four things that I guess I would like to see happen that relates to the four properties that we have at Greens Creek. What we're hopeful for is a discovery of additional mineralization, both within the mine itself and adjacent to it where we can utilize the existing infrastructure. And we have targets and Dean really just talked about one set of targets that we have. Well, I guess that's not true. He talked about some of the targets that we have within the mine and those that are close by. So there what we're looking for is really extension of the mine life.

At the Lucky Friday what we would hope is that in that three to five year time frame, that we would be developing that deeper mineralization that we're identifying with the exploration that we're doing. At our operation, or at our property in southern Colorado, we would like to see the exploration that we're doing and the modeling that we're doing, really result in a development plan and permits to start construction on a facility there. And that's feasible in that three to five year time frame. And then in Mexico, really what we would like to see is a new discovery there. So that's with the existing assets that we have and I guess I would also add that at the -- at Greens Creek, seeing increased tonnage through that property. So that's at our existing properties.

We think, though, that we have skills that we can bring to other assets. And so we are looking at opportunities to bring new assets into Hecla and those aren't just silver assets, Wayne. We also think that we can bring our small tonnage, underground expertise to gold assets. We think there's also smaller open pit gold assets that could fit Hecla and so we'll be looking at those as well.

Great. Thank you. And lastly, do you think you'll be able to rework the terms of your debt and reduce the cost on that?

We're going to be striving to do that. I mean, at some point the answer is we absolutely will be able to. Certainly Hecla looks a heck of a lot better now than we did in the fourth quarter. And so it's a different Company. We think we'll be able to improve that over time.

Great. Thank you.

Sure.

(Operator Instructions). And the next question comes from the line of Mike Jalonen with Merrill Lynch. Please proceed.

Hi, Phil.

Hi, Mike.

Hi. Good stuff this quarter, to say the least. Just had a couple of questions, I guess for your team there, I guess first one for Jim. Just wondering, Jim, I saw your realized prices were above the spot price for the quarter. What was the positive price adjustment for provisional settlements in the quarter? I assume you must have had something.

Well, they go on during the period, Mike. I think the easiest way to have that is you can look at our realized price versus the spot price and that gives you the magnitude of that change.

But they're measured through, what, April 16th was that the --?

No, March 31st is actually the measure date. That is the last day of the accounting period. Just the delta of the prices that we set forth in our key statistics times the volumes sold will give you that number of each of the metals.

Okay, thank you. I guess on the exploration side, with your budget cutback, I was just wondering what the potential to replace reserves at Lucky Friday and Greens Creek are for 2009? Is that still a goal of the Company?

Yes, it certainly is a goal of the Company. I think at the -- at both properties, I think the constraint is going to be the amount of the drilling we do rather than is it there or not. It's going to be able to -- us being able to actually measure it. So while we would hope we would be able to do it, we're not going to be overly concerned if we're not. Clearly, and particularly at the Lucky Friday, we're clearly seeing the mineralization being there.

As a follow-up for you, Mike, the aggregate amount for all the metals was $5.4 million.

Oh, okay. Thank you very much. And last question, Phil. I mentioned, you had a very good quarter. Are you still maintaining your forecast for this year of 10 million to 11 million-ounces of silver and cash costs of $6 per ounce? Obviously, if you annualize your numbers in the first quarter and things looked a lot better than that.

We're still there at this point. Let's take one step at a time.

Okay. Well, thank you and good luck.

Thanks, Mike.

And ladies and gentlemen, that concludes our question-and-answer session. I would now like to turn the call back over to Don Poirier for closing remarks.

Okay. Well, that concludes our call for this quarter. We appreciate people joining us for the first quarter call. Feel free to contact me, Don Poirier, for any additional questions. My phone number is area code 208 and my number is 769-4141. Thank you very much.

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