Hecla Mining Co (HL) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 Hecla Mining earnings conference call. I'll be your operator for today. At this time, all participants are on a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions).

I will now like to hand the call over to Mr. Don Poirier. Please proceed.

Welcome, Misceal. Welcome, everyone, and thank you for joining us today on our third-quarter conference call. Our call is being webcast today at www.hecla-mining.com. Our news release -- excuse me -- our news release from Monday evening is on the website and there is also a slide presentation available on that website. The presentation can be found by opening the webcast and presentation tab found on the drop-down menu listed in the investor relations tab. The presentation is labeled Q3 2009 Earnings Presentation. On today's call we have senior members of Hecla's management team available. The conference call and presentation and discussion will be made by Phil Baker, Hecla's President and CEO, and he is joined by Jim Sabala, Senior Vice President and CFO, and Ron Clayton, Senior Vice President of operations.

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 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.

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

Hello, everyone, and thanks for joining the call. Let me also mention that Dean McDonald is here with us and so he'll be available for any questions on exploration in the Q&A. If you'll go to Slide 2 that's entitled "Record Revenues and Gross Profit," we're now seeing the impact of acquiring Greens Creek mine 18 months ago, an acquisition that not only doubled our silver production but improved the economics of that production with more byproduct metals. In fact, the most lead and zinc production in our history. We are now not the only the largest producer of silver in the US, but the second-largest producer of zinc and the third-largest producer of lead. And from the time that we made the acquisition we saw the improved economics of our business coming, so when we had our first quarter conference call I expressed optimism that our operating performance was solid, metals prices would improve and our balance sheet would strengthen. And the last two quarters confirm that optimism, with record $95 million of revenue on the back of Q2's $75 million of revenue, which, by the way, that was the previous record revenue, so we now have had two record revenue quarters in a row.

We also had gross profit of $38 million, a 40% margin. Note that the revenue increase over the second quarter going from $75 million to $95 million is the same increase we saw in gross profit, or about $20 million. So all that increase in revenue went to the bottom line, as you can see on the next slide which is Slide 3. That $20 million increase has resulted in the second highest quarterly net income in our history and probably the highest if you take out one-time items. And, finally, another record we established this quarter was the cash flow from operations of $32.3 million, which builds on the Q2 cash flow, which was the fourth best in our history.

So if you now go to Slide 4, as you see this performance is in part so extraordinary because of the metals price increases, but it is really the acquisition of Greens Creek that had increased our volumes that allowed us to generate these records. While we are on this slide let me make a comment on the metals market. As we watch the market we see a large amount of demand for the metals, whether it's from a central bank like India, which I think their purchase of the IMF gold is particularly significant, or a demand from the growing Chinese economy. And so while there will be large volatility in the metals price we believe over the next few years the general direction for all of the metals we produce will be higher and Jim's going to come back to this slide during his comments.

And as Slide 5 shows, with -- this is a margin slide, with metals prices at these levels our margins continue to widen. This quarter we generated almost $14 of margin based on the average market prices. This approaches the sort of margin we had before the financial and metals price meltdown of last year, which is captured in the Q4 '08 margin. I think the slide shows the extraordinary robustness of Greens Creek and the Lucky Friday economics, because with the exception of the pre 2006, the fourth quarter 2008 and Q1 2009, for almost all of the last four years Hecla has generated about $10 of margin per ounce of payable silver and at today's production rate this approaches around $100 million of annual cash flow available from the mines. We generate these margins because of prices, the quality of the assets, and most importantly, the job the teams at Greens Creek and Lucky Friday do. Ron will make a few comments on this in a moment.

With these expanded margins we've increased our exploration spend to about $10 million and began planning work necessary to access the deeper Lucky Friday material. Some of this activity just restarted in the last two months, so expect Dean and Ron to update you in the coming quarters. With these expanded margins we've increased our exploration spend to about $10 million and began planning work necessary to access the deeper Lucky Friday material. Some of this activity just restarted in the last two months, so expect Dean and Ron to update you in the coming quarters.

Jim will make a few comments on the financial results, but I just want to point out that after the quarter end we repaid all of our debt, so now Hecla's is debt free with about $50 million of cash that is growing daily. This puts us in a strong position for exploration and development plans and the acquisition of new assets. So, Jim, please give your thoughts on the financials.

Thank you, Phil. The results reported for the third quarter of 2009 are the result of the accomplishment of a number of strategic goals set forth during 2008 that became reality in 2009. In particular, the acquisition of the remaining 70.3% interest in Greens Creek significantly increased Hecla's leverage to all of the metals it produces. Consequently, as metals prices improved so did the financial performance of Hecla. In particular, we realized silver prices of $16.33 for the quarter compared to $12.30 for the third quarter of 2008. Likewise gold was $999 compared to $848, lead was $1.02, compared to $0.87 and zinc was $0.95 compared to $073. Of course this is reflected in our financial metrics, which include revenues up 39%. Gross profit triples 2008's Q3. Earnings before interest, taxes, depreciation and amortization of $45.3 million, up nearly four-fold from 2008's Q3. Net income applicable to common shareholders of $22.5 million, and record operating quarterly cash flow of $32.3 million.

As a result of excellent operating performance by our managers, production remained strong and costs were low; real low as a result of cost-containment programs and improvement in byproduct credits. At Greens Creek the cost of mining, milling each ton of ore decreased 23% and at Lucky Friday we continue to be able to deliver higher-grade ores to the mill, both resulting in lower per ounce costs. Consequently, our consolidated cash costs were just $0.85 per silver ounce produced for the quarter. This excellent financial performance allowed us to complete the final step of our financial plan. At quarter end we had $85 million of cash, and on October 14th we repaid in full the remaining $38 million of debt incurred to acquire Greens Creek.

And, Jim, that's shown on Slide 9?

Yes. We also took a step to ensure the Company has adequate liquidity to take advantage of any afforded opportunities or to weather any unforeseen storms by putting in place a $60 million three-year revolving credit facility. So as we near the end of 2009 we look forward to 2010, with a strong production base, efficient operations, and extremely strong balance sheet backed with additional liquidity provided by our revolving credit agreement.

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

Thanks, Jim. If you'll look on Slide 8 I'm going to talk primarily to the things that drive the performance depicted on these two graphs.

I think that's Slide 11.

Is it Slide 11?

Yes, it's Slide 11.

Sorry about that. The third quarter saw a continuation of increased tonnage produced at both operations, with Lucky Friday achieving a new quarterly mill throughput record of 960 tons per day and Greens Creek achieving 2,228 tons. Both operations are on pace to achieve annual throughput records. Tonnage, cost metrics, primary development, backfill and diamond drilling have continued to meet or exceed targets at both operations. Increased throughput, grade control improvements and outstanding metallurgical performance at Lucky Friday have increased the feed grades for silver by about 15%, and silver production by 23% over results in the first nine months of 2008. Our ability to sustain higher production rates at Greens Creek have improved throughput and silver production by about 10% compared to a year ago. Early commissioning of Lake Dorothy, coupled with very high precipitation seen in Juno this year, has resulted in Greens Creek receiving higher percentage of hydro power than we expected. As a result, we've seen 75% of the cost savings we expected to get in 2010 and beyond during the first nine months of this year.

While Greens Creek is an interruptible customer, Lake Dorothy is expected to provide the capacity in Juno to supply nearly all of our power from the grid for the foreseeable future. To give you a feel for what this means to the operation, at $2.50 per gallon diesel we can expect additional savings compared to the first nine months of 2009 in the range of about $2.2 million annually, or about $0.30 per silver ounce produced. Coupled with improved prices and reduced expenditures these achievements have resulted in improved financial performance, including, as Jim mentioned, low cash costs of $0.85 per ounce for the combined operations.

With that I'll turn it back over to Phil.

So the message we hope that you're understanding is that Hecla's now an incredibly stronger cash-generating company that's really now in a position to take our internal projects forward as quickly as possible and is looking to apply that knowledge to new assets. So with that, Don, I think we're ready for Q&A.

Thank you, Phil. Misceal, could you please instruct and organize the questions for the next portion of our call?

(Operator Instructions). And the first question comes from the line of Mr. Anthony Sorentino with Sorentino Metals, please proceed.

Hello, everyone.

Hi, Anthony.

Hi. What do you expect exploration spending and capital expenditures to total in 2009?

2009 we'll spend roughly $10 million in exploration and about $32 million in capital.

Okay. And would you have any indication of what those numbers might be for 2010?

We actually are having our budget meetings starting tomorrow, so I don't have a firm number. I think you can expect exploration to be up substantially. I don't know if that means 40% or 70%, but probably something in that range. And then capital, we'll certainly spend in excess of that $30-odd million next year. Exactly how much that is will remain to be seen, and we'll give -- on both of those numbers we'll give firm guidance early next year.

Okay, very good.

We'll get you a range.

Yes, yes. Thank you very much and congratulations on a great quarter.

Thanks, Anthony.

You're welcome.

And the next question comes from the line of Terence Ortslan with TSO Associates, please proceed.

Hi, Terry Ortslan, TSO. Thanks, guys. So just to --

Hi, Terry.

Thank you. Just to follow up on the previous question. Obviously it's been a very difficult period and -- of capital constraints, but coming back to beyond the capital, how much of a development costs increase are you going to be able to see to catch up with the properties of the (inaudible). Obviously that's going to be minimum amount and desirable amount, but I'm just looking for the minimum amount you're going to be increasing it by? Thanks.

When we look our -- at the development work that we've done, we've stayed pretty much in line with what we were anticipating we would need over the next couple of years, so it becomes looking out further than that for expenditures. So I don't see a dramatic increase. We'll certainly see some, but not a dramatic increase with the exception of the deeper Lucky Friday, which that will be a large program to do that development. So order of magnitude that thing is going to cost $150 million, $200 million over a four to five-year period, when we start that. Ron, do you want to add anything?

No, the only thing I would iterate, Phil, is at both properties what would drive more development would be opportunities.

Okay.

Okay, okay. Just coming back to the energy costs you mentioned earlier. What's the sensitivity again to the per ton or per ounce on the different changes in the delta changes in the energy costs please? (inaudible)

Well --

Do you know that off of the top of your head, or do you have some --?

Well, what I calculated is at $2.50 diesel it amounts to about $0.30 per ounce lower than what we've seen year to date in 2009.

Okay. All right.

Problem with giving you sensitivity there is that it -- that savings is based on the difference between grid power and primarily the cost of diesel fuel to generate our own, so it's very volatile -- that calculation's very volatile compared to the diesel price.

I understand. And, finally, on the TCRC, if you want to address those issue, the way the mating season or the -- ]and then probably the time for the outlook for the rest of 2009 and 2010 is becoming evident on the Greens Creek [cons]?

Is it becoming evident? No it's still early to make that estimate as to what's going to happen. As we think about it from a budget standpoint, we will make some guess, but until we get into negotiations we're not really willing to talk much about what those guesses might be.

And will that be, Phil, beginning of the year?

When will that be? Probably not until the start of March timeframe before we really know where we're going to be.

Okay. And thanks, guys. Thank you.

Thank you, Terry.

(Operator Instructions). And the next question comes from the line of Mike Curran with Royal Bank, please proceed.

Good afternoon, gentlemen, just wondering the increased financial flexibility, obviously you've already stated a lousy to get back on track in the organic or internal projects. Are you really at a stage where you can start looking at other opportunities out there external, or are we still a little early to be doing that?

No, no, we're -- Mike, good -- thanks for the question. No, we're certainly looking at external opportunities. We're gearing ourselves up to be able to evaluate those things, so that's -- that has already started.

Great, thank you.

(Operator Instructions). There are no questions at this time.

Okay. Well, thanks everyone for being on the call. It was an excellent quarter . We think we're seeing the results that we were anticipating when we acquired Greens Creek, and we think we're in a position to grow not just Greens Creek and the Lucky Friday and the other exploration properties but to acquire other things.

Apparently we do have another question, so, operator, if you want to let these additional questions come on, that's fine. We can do

And the next question comes from the line of Mr. Chris Lichtenheldt with UBS, please proceed.

Hi, thanks for taking me last minute and first ,congratulations on the quarter. I wanted to ask, the higher-- with the higher throughput rates at both mines now really, particularly the Greens Creek nearly 10% higher than last year, is this the expected run rate going forward?

Yes, I think so. Look, it's plus or minus what may be 50 tons a day, Ron?

Yes, we would like to get a little bit more out of it but we're now in the range of butting up against capacity. So, as Phil said , we might -- we may be able to grab another 50 tons a day over

But you might also -- some things might go wrong and we lose 50.

Right, we're in the range of being out to capacity.

Oka. And same -- any comment for Lucky Friday?

Yes, Lucky Friday is up against the throttle stops.

Okay. Okay, great. That's actually it for me. Thanks.

Okay, thanks, Chris.

And the next question comes from the line of David Christie from Scotia Capital, please proceed.

Good afternoon, guys, just quickly on [great] profiles for next year, do you think we'll be similar to Q3, or will they be varying quite a bit?

There's going to certainly be variability over the course of the year. I'm trying to remember on average. Do you remember, Ron?

On average for next year? Little somewhere maybe a tad at lower at Greens Creek and tad higher in the Lucky Friday.

That's good, that's what I was thinking. As far as Gallagher and things like that, deep parts of Lucky Friday, when do you think you guys are going to start looking at plans to push development and push some plans forward on those things?

We're certainly drilling to see what we got, and that applies not just in the Gallagher, but it applies to the other areas within Greens Creek and it happens over the course of the next really five years. We have a full development plan running out to the current end of the mine life that puts us in the position to drill extensions of this deeper material. Ron, do you want to add?

You also asked Lucky Friday and we are aggressively planning the deep development there.

ANd what kind of form is that taking over the next year?

Well, what we're doing --

I know you're still doing your budget and it's a little early but --?

Yes, what we're going is all of the planning work and the engineering to come up with what our control cost will be and control schedule will be, and we're anticipating in the first half. probably in early in the second quarter. of being in a position to know watt those are, and then at that point we'll make an announcement on moving that project forward. I guess what I can say with a high degree of confidence is the material below us is getting better, and with that we -- the economics of the deeper development is improving and so we're highly confident that we'll end up making a positive development decision, and we're really focused on what it's going to cost and how long it's going to take.

Okay, yes. Well, that's the main reason for the question was that you're getting those high grades of depth there with some pretty good widths, so I thought that you'd be working faster at it and it sounds like you are, so good. Thanks.

(Operator Instructions). The next question is from the line of Steven Butler with Canaccord Adams, please proceed.

Good afternoon, guys.

Hey, Steve.

Congratulations on a beautiful quarter and it's -- in light of the volatility we've seen on other companies' earnings it is a stellar result. The -- as you repaid, Phil, the full-term facility was there also repayment or -- remember I guess the preferred shares that were going to be issued to the banks and the syndicate, has that also dealt with, or was that a meaningful number that's also been eliminated?

It's all been dealt with. They are -- they have converted those into common shares and we're done with the preferreds.

Okay. Is that -- that's a small number of shares and that's obviously subsequent of the fourth quarter, how much equity did that convert into, if you know?

(inaudible) shares?

No, it was --

No, no, I've got the wrong --

Much less than that. It was a couple hundred thousand shares if I recall in aggregate that was remaining.

Okay. Doesn't move the dowel very much, guys, that's good to hear. And the other question I had, as we looked at the production summary totals in the press release, bit puzzled by the fact that you sold 3.1 million ounces of silver and produced only 2.7, that's fine. You had an overage on silver or dramatic under delivery -- undersold amount of silver versus -- excuse me -- of zinc ton produced versus payable tons sold, so what explains that variance/ more silver sold and much less zinc sold versus production?

Well remember, at Greens Creek the silver's going to report to the lead con and so obviously what happened is a shipment of lead went out and a shipment of zinc didn't and is sitting in inventories.

That is exactly right. There's most of the sil -- not most, but the bigger percentage of the silver is in the lead con and we sold more lead con in the quarter and left zinc con in the quarter just because of the way the shipping schedule was working.

Okay.

And that's something that really you have to realize with Hecla now and the smelter contracts that we have, is that we're going to have a lot of swings in working capital, and we've got a lot of money that's tied up in working capital and it's, frankly, just inventories that are sitting there waiting to be shipped and waiting to be paid for. We think it's a good thing that we've got it there ready to go.

Some of that's reflected in the fact that we -- you don't bring a boat into Hawk inlet fill it half full and the logistics and the economics of the shipping demand that you plan that out real carefully and so you try to get the inventories built up to the point where you can get the maximum value out of that shipping.

Right, okay. Thanks Ron, thanks Phil.

Sure.

And the next question comes from the line of [Mr. Donald McGeehan], a private investor.

Good afternoon, gentlemen, and congratulations from a long, long, long- term holder of Hecla. I just have one quick question, you talk in your report about the expanded use of power of generated -- hydro electric power. I wonder if you can expand on that a little bit and to what extent that will cut your operating costs?

Well, Ron in his remarks mentioned, I guess, about a $0.30 per ounce savings over what we -- what it cost us in the first nine months of the year.

Correct.

So that's what we would expect relative to those nine months, and that was at $2.50.

$2.50 diesel.

$2.50 diesel. So it is some savings to us and certainly if you go back to 2008 it's even more, because if you'll remember the price of oil got to $140, and I don't remember where diesel went to, but it was --

It got as high as $4.50 a gallon.

Are you -- as a follow up on that, if I may, are you making any effort to use a futures market with regard to your diesel?

We have not at this point done that. We've looked at it at various times and it's a bit problematic when we had our credit problems of doing anything in that market, and so we will look at how we can lock in our -- the sort of margins we have, whether it's managing the diesel price, or some other exposures that we have.

Well, once again, congratulations --

The only thing I would say is that we did take a look at it and the other issue is how you buy diesel. You've got to look at a contract that has very high correlation and that was one of the problems is making certain that correlation. Now the fact that we're now getting our electricity on hydroelectric, of course, our diesel usage has gone down by an order of magnitude and so any hedging in that remaining exposure wouldn't have any significant impact on the bottom line.

So you're anticipating an increased use of hydro?

With Lake Dorothy coming on line in September, we are estimating that we will get between 95% and 100% of our needs served by the hydro power.

And in 2008 it was --

About half of that, a little better than half of that. Oh, in 2008? No, in 2008 it was about 10%.

Right.

Well, that's marvelous and congratulations once again on a wonderful report.

Thank you.

And the next question comes from the line of David Christie with Scotia Capital, please proceed.

Hi, guys, got a couple more questions. First of all, just on the power thing , not to belabor this, but if Q3 would have been totally hydro power what kind of savings would you have

I didn't do the math compared to Q3, David.

But it would be -- it'd be nominal.

Yes.

Because we got some power anyway from hydro, so look, it'd be pennies.

It'd be pennies. Okay, fine. provisional pricing you mentioned that you may have benefited from provisional pricing in the quarter on some or all metals, I guess. What part of the settlement was settlement char -- or gains and what part was mark-to-market gains? Can you guys break that up for me?

Well, we look --

Cash versus non-cash?

Yes, I don't have cash versus non-cash, but the total impact on the quarter was $9.2 million, David, so that's the amount that our settlements exceeded previously-booked gains that were outstanding at the end of the second quarter.

So that's just settlement gains?

Correct.

So then just mark-to-market on top of it?

No, the mark-to-market is included in that.

Oh, it's in there, okay.

Yes. It's the aggregate of the two because what it is it's repricing all of the receivables at the end of the quarter.

Could I get the mark-to-market part?

Let me take a look at that and we'll have to call you back.

That'd be great.

I want to make certain you and I are talking the same terms.

Okay. And TCRCs do you guys see directions on where we're going for the next year?

Too early to say.

Okay.

And when we're -- look, we won't really talk much about that until we are -- have completed our negotiations.

Good stuff. Thanks, guys.

Thank you .

And the next question comes from the line of [Joseph Tressen] with Pointe Capital, please proceed.

Yes, sir, many of our clients here in Florida have reached geezer status, and wondered if there's anything in your future for possible dividends?

Yes, that's a question that we and the board consider all the time and I guess what I would suggest to you is two things. One is we've had a period of time where we've had financial difficulties that we had to deal with, and so it wasn't appropriate to really do anything with dividends. And then, secondly, we look at the growth prospects that we have with the exploration ground and with the development of the deep Lucky Friday, that we think that's the best place to put that -- those resources.

Understand.

And then I guess I would finally say is that when we do start paying dividends and we have an aim of wanting to be in a position to do that, we want to do it for a long time. We don't want to declare a dividend one year and then have to pull it off the table, so we're going to make sure that we've got an asset base that would allow us to do that regardless of what price environment we are in for the metals we produce.

Sounds sensible. Thank you very much.

You're welcome .

And the next question comes from the line of Peter Abrahamson, a private investor, please proceed.

Thanks, excellent quarter. I have a couple of questions on the mandatory convertible preferred stock. The dividends have been in arrears for about a year on that. With the stock price above, I guess, a 345 level for a period, and the repayment of the debt, I guess the first question is, does the Company plan on catching up and paying out all those dividends in the near future? And then part two would be, would the company anticipate settling those dividends in stock, or can the Company pay cash now that the debt has been repaid?

Both of those questions are ones that we will take up with the board at the next board meeting, which is in December, December -- slightly before the record date, and I just can't tell you how the board will come out on those. I guess from the perspective of management, we certainly would like to not have those preferreds in default, so we'll look at every way in which to change that. But's that's just something that's a board level determination.

Okay, thanks.

You're welcome.

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to turn the call over to Mr. Baker for any closing remarks.

We thank everyone for being on the call. As I mentioned earlier, we think we're well-positioned to take advantage of the great assets that we have internally, and so bring new assets into the mix. And we appreciate the interest that you've shown, and certainly if you have any more questions, feel free to give Don a call, and he can get the rest of us involved to the extent that we need to be. And thank you very much. Have a good day.

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