Hecla Mining Co (HL) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Hecla Mining Company first quarter 2010 financial results. My name is Noellia, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's conference. (Operator Instructions)

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

Thank you. 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 is also a slide presentation on the same website that will lead you through. On today's call, we'll have Phil Baker, Hecla's President and CEO, and he's joined by Jim Sabala, our Senior Vice President and CFO, Dean McDonald, Vice President of Exploration, Scott Hartman, Vice President of Operations, and Mike Dexter, General Manager, Lucky Friday Mine.

Before we get started, I need to remind you that any forward-looking statements made today by the management 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 you to Phil Baker, Hecla's President and Chief Executive Officer.

Thanks, Don, and we do have on the line today Scott Hartman, who is our Vice President of Greens Creek operations, and Mike Dexter who is the Vice President of the Lucky Friday. So they will be available to answer your questions. Thanks for joining the call. If you go to slide three that's entitled First Quarter Highlights, this first quarter is another strong quarter setting or approaching a number of new records because of the quality of the mines and our people. We're on track to produce at least ten million ounces with very low costs given our lead and zinc by-product production and the increased throughput of both mines. Of course, the Lucky Friday has a history of being a great operation having mined its ten millionth ton over the past 68 years, and this quarter despite increases in receivables, capital expenditures, and exploration spending, we still increased the Company's net cash position $11 million for the quarter.

So if you turn to slide four, Low Cash Costs, High Margin. This shows the strength of the margins our mines generate, and this chart shows the past nine quarters. So over two years, the salmon color is our cash cost, which if not the lowest in our industry is close to it. The blue bar is the margin which is calculated by subtracting our cash cost from the average market price. So the last bar on the chart shows the first quarter of 2010 where we generated almost $20 per ounce of margin, and seven of these last nine quarters we've had double digit margins with three quarters above $19 of margin. A key driver of that margin is our extremely low unit cost. You could see it on a per ounce basis here. How the cash cost has gone from $7.49 in Q4 '08 to negative $2 the last quarter of '09 and to negative $3 this quarter. So if we continue to see prices in the range that we're in now and are able to maintain our costs where we have them, I would expect to see operating cash flow in excess of $150 million for the year.

Now, there's a lot of factors that go into the margin generation -- grades, by-product volumes, and prices. And one is our throughput that drives our cost per ton, so go to slide five, High Throughput at Both Operations. In Greens Creek, the mill capacity and the right balance of recoveries to the final product we make is about 2,300 tons per day. So what we're trying to do in the mine is balance development, backfilling and production so we can consistently produce at 2,300 tons per day year in and year out. And we're not there, and it's not an overnight process to get there. And this year, we're trying to average about 2,200 tons per day. And so this quarter we're spot on, and with that, milling and mining costs were about $64 per ton -- about $3.50 per ton improvement over last year's first quarter. And at the Lucky Friday, we've been constrained by mill capacity. So over the years, we've made investment to eliminate the bottlenecks, and we've made tremendous progress evidenced by this new record at over 1,000 tons her day. We're not projecting to stay at this level, but stay tuned, because we are looking for how we could make it sustainable.

I want to take a couple of minutes to focus on the lower grade at Greens Creek. So go to slide six, Greens Creek Operating Strategy. Grades getting lower at Greens Creek have been an issue since the late '90s when Rio and Hecla recognized that for this mine to be successful, we would have to operate at lower and lower grades. So the strategy has been to increase throughput. Back in the late '90s, throughput was 1,500 tons per day, and the silver grade was 23 ounces per ton. Today, we're at that 2,200 tons at a grade of ten ounces. To achieve this throughput, mining methods have changed. We now have an ever larger percentage of our production from long [hold] mining and relatively higher base metal-rich ore bodies. This strategy has resulted in the longer life of the mine. It was originally scheduled to close almost 15 years ago (dropped audio) and higher returns. Looking at the rest of the year, silver grade will increase and will average close to our reserve grades. So we're right on track.

At the Lucky Friday, I want to talk about the deep development. So if you'll go to slide seven entitled Lucky Friday Deep Development. Four years ago, we began evaluating how to best access ore below the 6,500 level. We did an extensive drilling program, discovering that the grade of the metals generally increase as we go deeper. And we've talked a lot about that over the course of the last few quarters. And we also engineered a number of options -- a new shaft from surface extending the existing silver shaft, ramping down from the silver shaft, and an internal shaft, and considered lots of permutations of those options. After a hiatus in 2008 and early 2009, we concluded that the internal shaft was the right approach and started moving forward, buying long lead time gear, beginning basic excavation, and engineering the scope and schedule. To date, we've spent about $15 million on a project that we expect to cost between $150 million and $200 million and take about five years to complete. We are still evaluating and engineering various aspects of the project such as refrigeration and what the ultimate depth will be.

The slide that you see here shows the shaft going to a depth of 7,800 feet, but we're currently evaluating if we can take the shaft as deep as 8,800. Once we have the project adequately scoped out and scheduled, then we will make a development decision. I expect it will be later this year. In the meantime, we will continue to move the project forward and will keep you informed. I'm going to turn the call over to our team. Let me start with Jim to talk more about the financials.

Thank you, Phil. As set forth on slide eight, revenues were $79.9 million, or 146% of 2009's level of $54.7 million. In addition, gross profit rose to $27.5 million in the first quarter of 2010, a 178% increase over the $9.9 million reported for 2009's comparable period. This is primarily due to a significant increase in metals prices, or those realized for the first quarter of 2009. And as set forth on slide nine during the first quarter of 2010, realized prices averaged $16.92 for silver, $1,107 for gold, $0.93 for lead, and $0.96 for zinc, compared to prices for silver, gold, lead, and zinc of $13.92, $938, $0.61 and $0.63 in 2009, respectively.

As noted on slide ten, the first quarter of 2010 was again a very profitable period for Hecla Mining Company, and we continue to show improvement over the previous year. During the first quarter of 2010, we reported net income of $21.8 million, nearly triple the level of the first quarter of 2009 of $7.3 million. Income applicable to common shareholders after payment of preferred stock dividends was $18.4 million, or $0.08 per basic and $0.07 per diluted share, compared to $3.9 million, or $0.02 per share in 2009's comparable period. And with regard to cash flow and liquidity, during the first quarter, operations generated $19.3 million of operating cash flow compared to a negative operating cash flow of $0.5 million for the same period of 2009. This is in spite of significant working capital variations during the quarter. During the year, accounts receivable increased by $12.2 million which is a reflection of higher metals prices and also the timing of concentrate shipments from our operations at Greens Creek.

Capital expenditures were $8.3 million, so operating cash flow less CapEx was approximately $11 million. Hecla remains debt-free and currently has $116 million of cash on the balance sheet. In addition, during the second quarter, we would expect that the outstanding Series Four warrants will be exercised which will, in addition to cash flow from operations, provide an additional $45 million of cash into the Company's treasury. We expect to use these funds to continue to invest in our current properties and to pursue other opportunities.

I'd like to cover a few items impacting Q1 results at this time, as set forth on slide 11 which reconciles our first quarter GAAP results to adjusted net income which removes the effect of certain items. During the quarter, we recorded a deferred tax benefit of $6.1 million associated with the reduction of the valuation allowance carried against the deferred tax asset. This is the direct result of our estimated ability to utilize net operating loss carryforwards in future years and as a reflection upon our increased profitability due to higher consensus long-term metal prices. Currently, we carry an expected net deferred tax asset of $51.8 million.

During the quarter, we also realized a reduction in revenues of approximately $3 million related to adjustments to prior provisional settlements. Commencing with the second quarter of 2010, we have begun a program to hedge our provisional settlements, thereby reducing the impact of provisional price settlements versus final settlements upon the subsequent quarter's P&L. During the quarter, we made provisions foreclosed operations of $2.4 million related to our environmental obligations in Idaho related to settlement of the costs with the EPA for work in the box at that site. And finally in the first quarter of 2010, we reported a gain on the sale of shares of the non-affiliated mining investment of approximately $0.5 million. Therefore eliminating all of the aforementioned reconciling items and adjusted net income applicable to common shareholders would be $17.2 million. or $0.07 per diluted common share.

Last quarter, I made the comment that Hecla finished 2009 in the best shape it has ever been in. The trend continues. The Company is profitable, has $116 million in cash, and no bank debt. We continue to have a $60 million revolving credit facility which remains undrawn. And in recognition of an improvement in Hecla's financial position this agreement was extended so that it has a full three-year term, and both the spread and committment fee for the facility were reduced by approximately one third. This liquidity, combined with increasing cash flows expected during the second quarter from both operations and the exercise of the Series Four warrants, provides a solid basis for us to pursue our growth strategies. And with that, I'd like to turn the call over to our Vice President of Exploration, Dean McDonald. Dean?

Thank you, Jim. During the first quarter, $3.4 million was spent on exploration with drill programs underway at Greens Creek, Lucky Friday, and Mexico, with preparations for drilling in the Silver Valley and Creede, Colorado in progress. It has been an active quarter for underground exploration at Greens Creek as shown in the planned view of Greens Creek in figure 12, with drill programs refining and expanding the Northwest Zone Resource as shown in the upper left corner and extending resources in the 200 South, 5250 South, and Deep 200 South as shown in the lower portion of the figure. Completion of the 1147 drift extension farther south will provide an excellent platform to drill additional southern extensions of the high grade deep 200 South and 5250 South ore bodies later in the year.

As I've described in earlier conference calls, drilling continues to expand the resources east of the current reserves at Lucky Friday with two drills active. The longitudinal of the Lucky Friday extension shown in figure 13 outline the two areas east of the current resource that is the focus of recent drilling. From the 6,400 to 6,800 levels, the 30 vein continues to show high grades, but we're also seeing significant results with high grade intersections from the 580 and 90 veins. To the east below 7,000 level, the 30 vein is narrow but high grade, and the 80 and 90 veins appear strong with good width and grade.

As shown in figure 14, the western edge of the 30 vein reserves terminate against the silver fault, but drilling in 3D modeling in 2009 defined a potential extension of the 30 vein system to the west across the fault. As modeled, the 30 vein extends toward the Star Morning area and may correlate with the past producing [U-like] vein. If this interpretation is correct, there is a potential for 4,000 strike length and 8,000 feet of dip length of the veins that remain untested. One of the 2010 surface drilling programs in the Silver Valley this year will evaluate this [U-like] 30 vein trend. As shown on the longitudinal in figure 15, seven diamond drill holes totaling 13,600 feet are proposed to evaluate this trend between the Elk and Silver faults from surface. Five additional holes will test the Gettysburg and [Lucretia] targets that are link veins and parallel the original Lucky Friday vein structure. One additional hole tests the western extension of the Gold Hunter vein zone east of the silver fault. Drill results from this program will be used to guide further surface and underground drilling of this large target area.

In Mexico, drilling in the first quarter concentrated on the Zapata Norte and Mala Noche veins. These two veins are parallel and similar in appearance to the past producing precious metal rich Francine and Don Sergio veins. Drilling is still in progress and assays are pending.

Drilling will start on private land at the San Juan Silver joint venture project in Creede, Colorado in the early part of May. We anticipate final approvals of our environmental assessment and five-year plan of operations by the Forest Service in the second quarter. And with that, I'll pass you back to Phil for concluding remarks.

So before we take questions, I just have a final comment. Greens Creek and Lucky Friday are truly extraordinary US mines because of the fact that they are long-lived, low cost, and growing. They generate significant growth that gives Hecla the cash flow, and we continue our reserve and production growth. And that's both internal and external growth. So Don, with that, we can take questions.

Thanks, Phil. Noellia, can you provide instructions to the participants on the call to ask questions? Thank you.

Thank you. (Operator Instructions)

It's Don Poirier. Can you bring up that first question, please?

Thank you. Your first question comes from the line of Anthony Sorrentino with Sorrentino Metals.

Hello, everyone.

Hello, Anthony. Are you there, Anthony? Hello?

I believe we've lost that call. Can we proceed with the next call? I expect he will call back in.

Your next question comes from the line of John Bridges.

Hello, John.

Hello. Good morning, everybody. Congratulations on the results.

Thank you.

I was just wondering -- when was it -- last year, or the year before, we had this big run-up in concentrate cost charges -- that sort of thing. Have these things been coming back to ease your cost pressures? What are the trends you're seeing in that part of the cost structure?

I'll let Jim answer that, but let me just say that we had a run-up in costs -- smelter costs in 2008. They came off in 2009, and we're on track with where we expected things to be for 2010. Jim, you can add.

The only thing I'd comment, John, is we're actually right in the middle of those negotiations so I don't want to comment on specifics. But I would say this, is we certainly, based on the feedback we've had heretofore, don't expect to see any dramatic changes one way or the other from what we experienced in 2009.

Okay, so pretty much steady as she goes?

Pretty much steady as she goes with maybe a little bit of benefit.

You said something -- sorry I had to jump off partway through the call -- but you said something about the project in Colorado. Could you give us a bit more detail on that?

Sure. Dean, if you would?

Certainly, John. With the San Juan Silver joint venture, that's the Creede district in Colorado which we essentially control. The drilling -- and these are vein type deposits. The initial drilling we can drill off patented private ground, and the snows have retreated so that we will be able to start drilling in the first week of May. And that's initially drilling on extensions of past producers -- the amethyst vein and some of the others. As the snow retreats at elevation, we'll bring a second drill in, and then upon receiving approvals from the Forest Service, we'll add a third drill later in -- and likely in June.

And local support for the project continues?

It's very strong.

John, you couldn't have it be stronger.

Are they raising municipal debt to help you yet?

Are they raising what?

Municipal debt to help you.

We don't need any.

Oh, that's right. You're making lots of money at Lucky Friday. Well done. Congratulations.

Thanks, John.

Your next question comes from the line of Steven Butler.

Hello, Steve.

Good afternoon. Dean, the [You-like] vein, I'm not sure who named that one, but I guess historically it's a long time ago. What was the historical production on the [U-like] vein? Looking at that cross-section on slide 14. Maybe my color blindness is coming through, but it sounds like was that [U-like] vein mined only on the western or opposite side of the Elk fold? Is that correct? And what was the if you have the historical production from [U-like]?

Yes. Steve, the U-like, and I wasn't the clever guy to name it, really was a fairly minor producer. The historic production is probably less than one million tons but of very good grade. And your eyesight site is good in that production did terminate against that Elk fault. When -- in reviewing the historic information for whatever reason there's no information to show us that they did much assessment to where that vein went beyond the fault. And so what we suspect is that based on elsewhere in the Elk fault, there was some offset. Mostly down-dip offset. And so that's where we're comfortable with that correlation within a broad sense, the 30 vein.

Right, and sorry, Dean, have you done exploration on the other side of the silver fault to trace the potential for 30 vein to extend beyond that silver fault as well, is that the idea? Or is it more still a hypothesis stage?

Well, we have drilled on 5,900-6,000 level. Unfortunately, the drill platforms there are at a difficult angle, but we did cross the silver fault and identified some veining, broad intense alteration zones. We would be able to say that with certainty that that was the 30 vein we intersected, but we certainly feel that it's one of -- be it the 30, 40, or 50 vein series.

Right, okay.

So that's really the basis for the offset that we're projecting at this point.

Okay. Jim, a question for you. I guess we can glean it from the financials as much as anything by looking at the build-up in receivables. So in the quarter, was it -- was it particularly Greens Creek? Or both mines were where there was a build-up in concentrates not effectively sold if you will. So is there still some built-up inventories, is that the idea? And particularly, in Greens Creek?

It's Greens Creek, Steve. The shipments that go out of there are pretty lumpy. They are in large boats. Lucky Friday ships literally every day. We tend not to see the variations that we do at Greens Creek.

Right. Because your pre-working capital cash flow of $34 million versus $19 million net -- we wouldn't expect all of that to come through gloriously in the second quarter? You're always going to have some amounts, but could there be set up for a decent shipment -- quarter in Q2?

There could be. The incremental increase was, as I indicated, $12 million. And if you looked in terms of volumes, it's 370,000 ounces of silver, 4,000 ounces of gold, 2,100 tons of lead, and 5,800 tons of zinc. So to the extent that we can get that material out plus our production in subsequent quarters, it will bring that working capital down, certainly.

Right, okay. Thanks.

Thank you.

Your next question comes from the line of Chris Lichtenheldt with UBS.

Hello, Chris.

Hello. How are you doing?

Good.

Just first a couple of questions on the Lucky Friday, the potential for the extension that you addressed a little bit in the release. You talk about a grade potentially 14 ounce per ton silver, and I notice that's a little bit higher than what you have in the reserve grade right now. Can you describe what work needs to be done in order to establish that grade in the reserve grade? Or even the resource grade? And potentially how long that 14 ounce per ton level could be maintained if you go ahead with it?

Chris, if you look at our reserve table, certainly in our Annual Report, it breaks it into proven and probable. And the probable reserves are the reserves that fall into material that we're talking about and that probable grade is 13.9.

Right, I mean there's only 1.5 million tons or so of that probable. But is that just because you don't have access to fully drill that out, but that is the material that you're looking at?

Yes, and as you go deeper, we just don't have the platforms to move the deeper materials from resource into reserves.

Right, okay. But that resource is the grade that is noticeably lower. I'm just trying to understand where the 14 ounce -- ?

Yes. Remember we have multiple veins that are in the mineralized material and other resource category. So everything from the five vein through the 120 vein. And those veins all run different grades, different thicknesses, but the 30 vein consistently runs in that 13 ounce per ton sort of grade.

Okay, and do you have a sense of how long the 30 vein could carry you?

Well, we know we can go down to the 8,000 foot level, and if you look at that slide seven, is it? If you look at slide seven, you can get an idea of what's happening. The current reserves goes down to about the 7,000 foot level. So everything from 7,000 down to 8,000 is in the resource, and we're seeing this taking us out to 2028, 2030 going down to that level.

On the 30 vein?

Yes, all on the 30 vein.

Right, okay. Great. That's helpful, thanks. And then can you give any sense of what cost per ton might look like as you move down? Do you expect it to move up noticeably?

The cost per ton is going to be similar to what we have now with the exception of the hoisting from the shaft which is going to be pretty minimal.

Okay.

Handling and the hoisting.

You don't have a number on that yet though probably, is that right?

Well we do, I just don't have it at hand.

Okay, great. I think that's it for Lucky Friday. Just wanted to ask about Greens Creek. You talked about the grade probably coming in around reserve grade ultimately. I noticed in the first quarter, the base metal grades were noticeably better than reserve grade. Will that last? Or should those come down then through the year? As silver grade [moves up]?

We would expect those would come down somewhat. Scott, can you provide any color on where the grade goes for 2010 on the base metals?

Well, it will come down from the levels that we saw during the first quarter, but we're still expecting to outperform our budget anyway, year-to-date.

Okay.

For the complete year 2010, and to be honest with you, I don't have that number right in front of me. But it's going to be a favorable variance for the year as well.

Okay, thanks, and just I guess last question on that. During the first quarter, you probably mined in terms of value, more base metal than precious. Have you contemplated hedging any of that in order to accentuate the exposure you have to silver and gold? Or what are your thoughts on that?

Yes, in fact, as Jim mentioned, we have already hedged the metal-related provisional payments, and we have lines in place -- relationships established with counterparties to hedge out further than that. So we're in a position to do hedging going out two to three years for about 50% of our base metals production. Jim, do you want to add anything?

No.

Okay, so that's something you're contemplating, and what would -- ?

No, we've already started hedging the provisionals, and we are in progress hedging out further. It's not something that we're rushing into. We will layer in hedges over the course of weeks, months, quarters to get to that 50% level.

I see, okay. That's it for me. Thanks a lot.

Thank you, Chris.

(Operator Instructions) Your next question comes from the line of David Christie with Scotia Capital.

Good morning. Just a couple quick questions. First, I'll go back to the hedging comment for a minute. So you've hedged out the provisional pricing for the concentrates that you haven't settled yet, right?

What percentage have we hedged, Jim?

All 95% of the provisional stuff scheduled is for settlement in Q2.

And that's the base metals component component.

So that's the metals that you were listing earlier, like the whatever it was -- 370,000 ounces of silver?

No, we haven't hedged the precious. It's hedged -- .

Just the base metals?

And it's more than that. It's the things that are in the pipeline to be settled. So it's 95% of our total quarterly production, in effect, for base metals.

So it's the mark-to-market part of it, right?

Exactly.

And how much of your revenue this quarter was mark-to-market numbers? We know that $3 million was a settlement adjustment for provisional pricing from last quarter.

I don't have that exact number because we don't break it down in metals, but it typically runs about 45% of our aggregate revenues.

Can I get the numbers -- someone send it to me the difference? Because you had the $3 million that you said was provisional pricing adjustments which I assume is settlement losses, right?

That's right.

And I just wanted to know what the actual mark-to-market amount was.

Well, the mark-to-market from the previous quarter was $3 million.

But that's the amount that was settled, right?

No, it's the total aggregate mark-to-market including what's settled and what's exposed at the end of the quarter.

Okay, could you break out the difference between the two things for me?

I think we can do that.

Perfect, and on the exploration at Lucky Friday. What's the current mining width, or the vein ar 30 that you're mining right now?

Roughly -- Mike Dexter, are you mining nine feet?

On the 30 vein, it varies greatly from a narrow width of seven feet to, in places, it's over 20 feet wide. But generally, it's between seven and ten.

I was just wondering, Dean, what you thought of the results from the drill holes there at depths, especially the one at 7,200 feet there.

Well, what we're finding overall is that with the 30 vein, particularly at depth, it's narrowing down to probably on average two-2.5 feet. But at the same time, we're seeing grades in excess of 80 ounces per ton silver, combined lead zinc in excess of 20%. So with the 30 vein, although it's narrowing, the grades are certainly compensating for that.

And that's to the east that you're referring to.

And that's to the east.

Outside the resource boundary.

That's right.

So did you hear that, David?

Yes, I've got it. And how is the rock quality when you move into the narrower veins? Are you getting more shearing around the vein or anything?

It's not noticeably different than what we would see at 6,500 level or shallower. We're still seeing the same alteration, and certainly, the fabric of the rock hasn't changed dramatically.

Okay, that's good. And one more question, on the grade, the silver grade for the quarter at Greens Creek was lower. I think you commented on it. Do we expect it to be up more like in the 12 grams per ton range for the rest of the year?

We will for the year average what -- roughly 12 ounces, a little less than 12 ounces per ton, is that right, Scott?

Yes, that's correct.

And Lucky Friday, it seems to be fairly even with what it was last year, sort of 10.5-11 kind of thing?

Yes, and we don't anticipate that changing.

Okay, perfect. Thanks.

Thanks, David.

At this moment, I'm showing there are no questions in the queue.

I guess, Operator, we will conclude the call for today, and we appreciate everybody joining us for the first quarter financial results and conference call. Please feel free to call me, Don Poirier, for any additional questions. My phone number is area code 208-769-4141. Thank you.

Thanks.

Ladies and gentlemen, this concludes today's presentation. Thank you for your participation, and you may now disconnect. Have a great day.