Hecla Mining Co (HL) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Hecla Mining earnings conference call. My name is Mashala and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instructions) At this time, I would like to turn the call over to Don Poirier , Vice President of Corporate Development. Please proceed,

Thanks, Mashala. Welcome everyone, and thank you for joining us today on our second quarter conference call. Our call is being webcast today at www.hecla-mining.com. Our news release from earlier today on the website and there is also a slide presentation available on the website. The presentation can be found by opening the webcast and presentation tab found on the drop down menu found on the investor relations path. The presentation is labeled Q2 2009 Earnings Presentation. 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 of Exploration. Before we start, 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 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. With that, it gives me great pleasure to introduce Phil Baker, Hecla's President and Chief Executive Officer.

Thanks, Don. Hello, everyone. Thanks for joining the call. If you'll please go to slide two, 90 days ago, we had our first quarter conference call where I expressed optimism that our operating performance was solid. Metals prices would improve on our balance sheet and strengthen. The second quarter more than confirms the optimism. We had record silver production of 3 million ounces, a record $75 million in revenue for the quarter. Very low cash costs of $3.38 giving us about $10 of margin per ounce, which you can see in slide two. Quarterly cash flow that is the fourth best in our history generating over $200,000 per day of cash flow from operating activities and a balance sheet that's flush with cash relative to the debt we have. As you can see the next slide, which is slide three, this performances with metal prices that are good, but not great. But the acquisition Greens Creek allows our volumes to grow so much so that we have so much more revenue and cash flow. And Greens Creek is operating superbly. We increased the 10-inch throughput while keeping the mine in balance with our planned development and backfill. We also have lowered our costs.

At the Lucky Friday, higher grade has been the key. As we've talked about in the past, as the price of metals change, we change our mining widths and lengths of our stopes. We're mining less material that was outside of our plants, so we are closer to our reserve grade. Ron will talk more about the two properties, but let me say for him that the workforce at the two mines is doing an excellent job. Please move to slide four. Over the past five years, we have increased our exploration acquisition activity. As a result, total silver resources of more that 2.5 times where they were in 2003. And I think you will see more growth in resources at all four of our land packages as we over the second half of the year spend substantially more on exploration. The Lucky Friday drilling and resource modeling continues to increase the grade even 60% higher, improving the economics of the deeper material and substantially adding to the resource. Greens Creek in mine exploration appears to be expanding the ore zones. The surface program is now testing at the northeast mineralized contact. It's going to have strike length and grade. If it does, then this could be a completely new ore zone. Dean will make a few comments on our exploration.

Now slide five, the next slide shows why for the last year, the primary concern was our balance sheet and destressing it. That's now done, but our debt is now 10% of our peak debt load last year and about two-thirds of our cash position. It's no longer an issue for us or an impediment to growing. Finally, let me comment on silver and the other metals we produce. The first half of the year, prices have been in pretty stable trading range, one that generates substantial cash flow for Hecla, maybe $15 million to $20 million per quarter on average. And I say average because we expect lower cash flow in the third quarter due to timing of Greens Creek's shipments and increased exploration. However, we could have a record-breaking fourth quarter. But the point is we generate substantial amount of cash flows at currently prices and with essentially no debt, our flexible exploration programs and low operating costs make it where we can survive lower price environments and can easily generate two to three times cash flow with higher prices, and we think prices will go up, either as a result of the economic recovery or inflationary pressure, or both.

A word on share price performance. Over the past three months, we have been one of the better performing silver companies. Of course, this comes on the back of substantial under performance caused by the balance sheet stress. The share price turnaround is probably resolving these balance sheet issues, and there may be some realization that Hecla is by far the largest US silver producer and the second largest zinc and third largest lead producer. We think the understanding of how strong our cash flows are and the growth from our exploration is going to move the stock much further. So with that, let me Jim to give thoughts on the financials.

Thank you very much, Phil. During the second quarter of 2009, we continued to build upon the foundation of a plan implemented in the two previous quarters. Each item included an important part of the strategy to make Hecla a strategic force within the silver space. In particular, we completed an equity offering raising $57.4 million which, when combined with the significant improvement of operating cash flow, allowed us to reduce our debt to just over $38 million, a far cry from $380 million less than a year ago. Silver production increased by 24% quarter-over-quarter and by 4% when compared to the last quarter, which demonstrates continuous improvement in achieving our plan. Cash cost per ounce declined to $3.38 per ounce compared with $3.43 per ounce in the prior year's comparable period in spite of lower lead and zinc prices which impact by product credit This also represents a significant improvement over Q1 2009 cash costs of $4.67 per ounce. G&A was reduced by 15% as a result of general belt tightening implemented in the first quarter.

During the quarter, we had two abnormal items I should mention. First, we took a noncash impairment charge of $3 million on shares we own in the company that purchased our Venezuelan interests in 2008. And second, we incurred interest costs of $1.75 million in connection with the closeout of an interest rate hedge mandated by our credit agreement. When we repaid the loan, we reduced the hedge position, hence the charge. Absent these two items, earnings before taxes and preferred dividends would have been $7.6 million. This all adds up to a dramatic improvement in overall company liquidity and cash flow. At quarter end, we had $57 million in cash and $38 million in debt, thereby turning the corner into a net cash position. Operating cash flow was $19.6 million for the six months, but more amazingly, $20 million for the quarter in spite of increases in accounts receivable and decreases in accounts payable. These results are directly the result of operational improvements and financial restructuring completed over the first half of 2009. Consequently, we are excited as we look forward to the second half of this year. The combination of good operating results, increased financial flexibility an improved metals markets put Hecla in an excellent position to pursue additional growth opportunities. And with that, I'd like to turn the call over to Ron Clayton to talk about our operating performance. Ron?

Thanks, Jim, and good morning or afternoon, wherever you might be. As Jim and Phillip both said, operationally, we had an extremely strong quarter. We continue to focus on filling the processing plants with the highest value rock available, maximizing the metal recovery to concentrate and doing this in the safest, most environmentally sound and cost effective way. Looking to slide nine, at Greens Creek, we continue to push the mining rate and mill throughput up to the mill capacity up to 2,300 tons a day. We've been able to achieve higher mining rates by successfully putting the people and facilities in place to maintain their required development and backfill rates that will sustain this production level. The chart shows the average milling rate for the second at 2,254 tons per day for Greens Creek. The mine actually achieved a production rate of 2,354 tons per day. This allowed us to maintain our stockpile and better blend the mill feed, which in turn is beneficial to the metallurgical performance. The higher tonnage rate, coupled with the better that expected availability of hydro power during the quarter helped to drive the unit cost for mining and milling to the lowest point we've seen in the last few years.

At Lucky Friday, we have been running the mill at capacity since early 2007, so the focus there has been on keeping the mill full, maximizing the operating time and grade delivered to the mill and the value of the concentrate produced. Unit costs for the first half of 2009 remain below those experienced in 2008. However, milling costs were up slightly in the second quarter compared to the first quarter this year due to the highest reagent cost associated -- or higher reagent costs associated with operating two new water treatment plants. We've experienced some difficulty in consistently meeting our new discharge limits for lead and are working under a compliance order with EPA to consistently achieve the permit level. In addition, we're working diligently to optimize the treatment plan operations and lower the operating costs for those plants. We also accelerated some expense development in one stoping area to allow us some additional operating flexibility.

Looking forward at both sides, we'll continue to push the mill throughput and operating time, improve the metallurgical performance and the quality and quantity of our concentrates and drive our costs down. Moving on to the next slide, you can see from these graphs that our focus on grade control has been successful in implementing the silver grade to our plants. This is more apparent at Lucky Friday as the mill is being fed at capacity. While these graphs show only the silver grade, lead and zinc grades are up at Lucky Friday again in the second quarter as well. Mill feed grade is only part of the story, though. At both operations, we are producing higher quantities of metal at lower total cash cost, which is the bottom line measure at the production and grade control strategies at both mines.

Moving to the next slide, you can see that we've done a good job of managing capital through the difficult times. Capital projects in 2009 have focused on sustaining the operations in construction or expansion of tailings facilities. The tailings facilities at both sides are multiyear projects that will be completed in 2010. Recently, we've restarted the deep development analysis at Lucky Friday with the goal of a feasibility study for development and associated infrastructure in the first quarter of next year. This project has the potential to deliver higher metal production at lower costs due to the higher grades and wider vein widths. This potential is supported by the highest density of drilling the mine has ever achieved in advance of development and production.

In summary, we had a very good quarter at both operations with record metal production and very low cash costs per ounce of silver. I expect to continue the production performance and improving trend as we review and update our plans for the future. With that, I'll turn the program over to Dean McDonald with an update on exploration.

Thank you, Ron. Exploration expenditures in the second half of the year will materially increase to $7 million or $8 million in addition to the $2.2 million spent in the first half. There will be a continuation of underground exploration programs at the mine along with surface drilling programs at all four of our land packages.

As I have described in earlier conference calls, drilling continues to refine and expand the high grade central and eastern 7,100 to 7,500 level areas at the Lucky Friday mine. And deeper exploration drilling is defining mineralization down to the 8,000 level. Our preliminary evaluation indicates grades for all metals are significantly higher than those in our current mine plan in the key 6,600 to 7,500 level. Resource estimates incorporating drilling for the past year through to June are being completed, with revised reserves expected at year's end to be an important component of our mine life extension plans.

At Greens Creek, underground exploration continues in a systematic way to define, evaluate and extend ore grade mineralization based on stratographic and structural projections of the known Greens Creek ore zones. A recently completed resource study by independent consultant, EMEX services and mine staff identified potential resources at Greens Creek as seen on the plan map in slide 12 with arrows showing the projection of potential mineralized horizons. As you can see on the slide, there are excellent exploration opportunities in close proximity to mine infrastructure, and we plan to sequence target evaluation of this area over a five year period. Drilling of the newly discovered northeast contact zones shown in slide 13 will occur from two understood ground platforms to the south and on surface to the north. In the slide, color and drill traces of the proposed surface holes are shown in green and the proposed understood ground holes are in blue. Surface drilling has now traced mine contract rocks for over 2,000 feet along strike, and this is tracing towards known mineralization at the mine. The objective in the northeast contact drilling is to extent the previously defined mineralized contact along strike and identify new zones of mineralization or deposits.

Work at the San Juan silver joint venture in southern Colorado during the second quarter included completion of the Bulldog resource models where Hecla has defined an inferred resource of $37 million silver ounces with base metals. This will give us a substantial base to build up our project with partners Emerald Mining and Leasing LLC and Golden Eight Mining LLC. We also submitted the long-term exploration plan of operation to the Forest Service that allows for a five year exploration plan of all the primary and secondary mineralized structures identified in the district to date. Finally, drilling on a northern extension of the Bulldog vein and the Midway target will commence in the third quarter. At the Silver Valley in Idaho, drilling is being initiated on the deep Vindicator silver based metal vein target that is east of the Lucky Friday mine infrastructure. In Mexico, drills be turning on the shallow oxidized, potentially bulk tonnage silver mineralization at [Panuscote] and the deeper silver/gold epithermal veined El Garrote target areas. Both targets are within the very extensive and prospective Saladillo project in Durango, Mexico. With that, I'll pass you back to Phil for concluding remarks.

The message that we hope you're getting is that the company has restrengthened itself. We're strong now operationally, exploration-wise and financially, and our focus again is on growth. And with that, Don, you can open it for questions. Thanks. Mashala, could you please instruct and organize the questions for the next portion of our call?

(Operator Instructions) Your first question comes from the line of Anthony Sorrentino with Sorrentino Metals. Please proceed.

Hello everyone.

Hi, Anthony.

Hi. .You had said that exploration spending will now total about $9 million or $10 million this year, I believe. How would that breakdown by property?

Dean, I guess I'll let you answer the question, but I can tell you that the Mexican property, San Juan silver, the two of those will probably have $1 million, maybe $1.2 million, $1.3 million split pretty equally between the two, and I don't remember the breakdowns on the other two.

Yes, Anthony. At Greens Creek, we anticipate spending $3.4 million. At Lucky Friday, $1.35 million and at the Silver Valley $920,000. That's in addition to the San Juan and Mexico that Phil mentioned.

Okay. And what would you expect capital expenditures to be for all of 2009?

Order of magnitude about $34 million, maybe $36 million.

Okay.

You'll see it go up in the third quarter which is, as you would have seen on the slide Ron had, it's just the nature of this surface work that we're having to do on these two tailings facilities.

Okay. All right. Thank you, and congratulations from getting out from under the debt restrictions.

Thank you, Tony

Okay.

And your next question comes from the line of Steven Butler with Canaccord Adams. Please proceed.

Good morning, guys, or afternoon, I should say. Morning for you. A question for you, Dean. On Lucky Friday, can you just remind us, or me at least, what's the limit of the your reserves in terms of depth -- level of depth at Lucky Friday and your resources level of depth ?

The reserve -- this is Ron Clayton. The reserves actually go down to a little bit below 6,200 and then there's also a block that's above 5,800 that goes as high as 5,300. So we're mining up and down from 59. And the the resource goes down to about, yes, 7,900.

Okay, so resources already you guys calculated inclusive of some of these section higher grade at depths, correct?

Yes, although the grades are increasing dramatically with the drilling that's been done in the last year.

Will you have -- will infilling drilling then perhaps be potentially moving your grade higher on your block models and resource models?

Not potentially, it will.

It will.

Okay.

And I also expect the tonnage to go up a little bit. But the tonnage change isn't going to be anywhere near as dramatic.

What are you thinking of in terms of scoping? Are we talking internal wins as an option for deepening the level below? Where's the current shaft level get down to again? Can you guys remind me there?

6,200 is the bottom of the silver shaft.

Okay. So would you be looking at internal wins?

Yes, there's a couple options that we're looking at and have looked at. But they are variations on internal win, and variations on ramp access with conveyors or trucks or electric trucks or stuff like that.

Okay.

So those are the primary things. There are some other things that we're looking at that may or may not come to the top of th heap like conveyors and -- We're trying to look at the different options to make sure that we pick the best one.

Right, and, Ron, while I have you on the floor, basically, you talk about a bit in the release about hydro electric power. Obviously, I guess you had pretty good access to the grid power. How does that change as you into the second half? Sounds like you'll have a little less draw. Maybe that's seasonality, or -- what percentage of your hydro or your power needs was courtesy of the Alaskan grid this quarter?

Okay. The power that we're going to get is really dependant upon when the power company finishes their new hydro project, Lake Dorothy. And we expect that to be completed in time for us to go back on full grid power in November. We did not expect to be on full grid power for most of the first half of this year, which we were. We are currently on grid power only for Hawk Inlet, which is the camp area. So the mining and milling processing part is not on grid power. We don't expect to go back on grid power there until November. After that, we would expect that something in excess of 90% of our power needs, at least for the next few years, will be grid power.

Okay. So in Q2, Ron, how much of the mill was on grid power?

Right now -- in Q2? All of it.

All of it.

All of that, okay.

Basically, we were on grid power for all of Q2 for everything.

And Q1?

Pretty much most of Q1.

Okay, fine. The -- Dean, coming back to Greens Creek, looks to be some interesting plans there. Where is your greatest sense of optimism on the several zones mentioned in the release 52-50 200 cells, deep cells 200 and/or the northeast? Maybe you can rank them or at least, where do you expect to perhaps have most joy?

Well, the areas that the exploration group at Greens Creek, are most excited about are in what's called the (inaudible) area, which is the southwest and southwest-west. The other areas -- the other trends -- and if you go to slide 12 is the southern extents of the 52-50. We are now positioning an underground development program to extend the mineralization there and then the deep 200 south. So in terms of rating them, those are certainly -- the southwest-west, the 52-50, the deep 200 south, those would rank very high. And then of course, the Gallagher zone to the very southwest.

Okay. And's there's a bit more speculative potential then on the northeast contact or to talk about potential of 2,000 feet of potential strike. I know the contacts seems to be there, but -- and drilling has determine the potential for mineralization. Is that the idea?

Certainly. And, as I had mentioned earlier, the indications are that this mine contact that we identified northeast of the current workings, we're seeing that horizon with some mineralization tracing towards the main ore bodies. And so the underground drilling that I mentioned to the south will hopefully provide us the information that will link existing mineralization to this newly identified horizon. The drilling to the north is really attempting to find out if we're looking at a brand new mining center.

Okay.

And let's be clear. We're at the early stages of exploration here. There's -- we don't have anything other than the mine contact that's going to identify it. So we're a long way from knowing what we have here, Steve.

But what excites us Steve though, is this was an area that we felt there was no exploration potential, because we thought it was in the hanging wall of the mine horizon . Because of the complicated folding, it's really opened up a brand new area for us that has

And sorry, not to belabor the point, but is that surface exploration, surface mapping that's shown that contact to exist, or it was actually confirmed by drilling?

No. It was -- in fact, the surface mapping indicated it was all hanging wall rock, the arge lie. It was primarily a geochem program that led us to put some drill holes in about 18 months ago.

Okay: very good. Thanks for that. And, Jim, briefly I'll let you go. I won't hog the puck here, but on the Greens Creek that you saw a fairly big -- can you just elaborate briefly, Jim, on the change in product inventory. Explain that 4 point -- it's a big number, $4.4 million, which obviously, hence the income statement in the quarter.

Sure. It's strictly a function of timing of the deliveries of metal and when they settle. We ship at Greens Creek maybe two to three times a quarter, and it's dependent on barges being able to get into the facility and that sort of thing. So it's strictly just timing when the boats go out.

So that's ascribing the relevant costs to that silver that was shipped and/or shown as produced.

That's correct.

Okay. And how does it look for Q3? I think you talked, Phil or Jim, about a bit of seasonally low point maybe in Q3? Is that a normal seasonal low for silver shipments from Greens Creek?

Go ahead Jim.

Yes, it's just again, just strictly a case of timing and when we think we have enough volume to order a boat and get it into the Hawk Inlet and get it back out. So it doesn't go quarter by quarter, year after year; it's really dependent on our shipping and production schedule.

Okay. Thanks, guys.

Thank you, Steve.

And the next question comes from the line of Mike Curran with Royal Bank. Please proceed.

Hi, just touching on what Steve just mentioned. The surface drilling at Greens Creek, I was just wondering, how deep are those holes targeting the northeast contact?

Yes Mike, they're going to vary from 1,200 to 2,000 foot holes.

Great. Thanks.

Thank you, Mike.

And your next question comes from the line of Mike Jalonen from Banc of America. Please proceed.

Phil, I guess Merrill Lynch is gone.

(laughter) I was just thinking that, Mike.

Just calling, something you said there Phil, tweaked my interest. You mentioned earlier in your opening statement that your improved financial condition is no longer an impediment to growing. Just wondering what you can define what you think the growing is. I assume the scoping study on Lucky Friday and exploration at Greens Creek. Would there be, like, acquisitions in there, Phil? Because I look at your balance sheet, and it's great you're now in net cash, but compared to a lot of your precious metal peers out there, your balance sheet is still -- they have a lot more cash than you do. So it would be a very competitive environment for acquisitions, I guess I'm getting at.

Yes, first of all, our interest is on this assets that we have. That's the starting point. And you can see the enthusiasm in which we are increasing the level of expenditures in the second half of the year to do that exploration. You can see the efforts that we're putting in to reevaluate how we attack the deeper Lucky Friday, and we think both of those things are going to give us growth in our resource space and ultimately, production. On the acquisition side of things, we're going to look at things and we're going to look at them selectively. I guess I would suggest to you, Mike, that our cash flow generation changes our balance sheet pretty quickly. We saw that in the second quarter. The second quarter was the fourth best quarterly cash flow we've ever had. I think you're going to see more of that in the near future. So, I think we'll be able to be competitive. We certainly have a niche as with the underground mining expertise that we have. We'll try to work from that. And we'll look at things, and we'll try to do something that makes sense in order to see things grow. We're not going to just stand still.

Okay. Just one more question. There is some discussion on Lucky Friday with the scoping study for 2010. How long could you mine Lucky Friday now without going deeper? Like how long would the current reserves go for? Sound like you're getting excellent grades there, so maybe some upgrade effect even to help out.

Certainly there's infrastructure that we'd have to put in for refrigeration and ventilation to go deeper. And we currently would think we could do to sort of the 2,015, '16, '17 sort of range. .But the material that we're seeing is so much better deeper, what we would like to do is put in a substantial amount of new infrastructure in order to get to the material. It's -- the economics of it we think is going to be so attractive relative to what we are mining that it makes a lot of sense to try to move it as quickly as we can. Ron, you want to add anything?

No. You hit it right on.

Okay. Thank you, and good luck.

Thanks a lot, Mike.

And we've got a follow-up question from the line of Steven Butler with Canaccord Adams. Please proceed.

Guys sorry, the reference to $7 million to $8 million for the rest of the year, will that be exploration that will be fully expensed?

That's right.

Okay, thank you. That's it.

(Operator Instructions)

All right. Well, if there are no other questions, I'll just close things by saying thanks for participating in the call. I hope you see that Hecla is a very different company than we were evan a quarter ago, and we are poised for growth. So thanks very much.

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