Hecla Mining Co (HL) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter financial results and conference call for Hecla Mining Company. My name is Veronica and I will be your Operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Don Poirier, VP Corporate Development. Please proceed.

Thanks, Veronica. Welcome, everyone and thank you for joining us today on Hecla's second quarter conference call. Our news release from earlier today and a slide presentation on the quarterly results is available on the Hecla website. On today's call we have Phil Baker, Hecla's President and CEO, and his is joined by Jim Sabala, Senior Vice President and CFO, and Dean McDonald, Vice President of Exploration.

Before we get started I need to remind you that many-- sorry, excuse me, 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.

Thank you, Don. Hello, everyone, thanks for joining the call. If you'll go to slide three entitled first quarter highlights, on this second quarter was not a very exciting quarter unless you like making money and having robust operations that are flexible enough to deal with what nature throws at them. And in a minute I'll talk about how these operations, and really I mean our people, over the last number of quarters have dealt with changes in the mines.

We produced 2.6 million ounces this quarter, slightly more than we did in the first quarter but less than a year ago. However our level of production is as planned, and we're on track to produce on ten to 11 million ounces. Again we had negative cash costs. That happened because of our cash management combined with about $0.90 lead and zinc. So we ended up with negative $1.82 costs per ounce. When you combined that with our realized silver price, which was about $19, Hecla generated $54 million of operating cash flow for the quarter, second highest in our history, and $73 million year to date. This operating cash flow, combined with the exercise warrants, gives Hecla $197 million in cash. Finally, Hecla generated $13.7 million of income applicable to common shareholders, a continuation of strong earnings for the past four quarters, and that is despite an outsized tax provision.

Now turn to slide four, margin in second quarter is greater than $20 per ounce. What this slide shows is the strength of our margins that we generated this quarter and over the past nine quarters, more than two years worth of information. 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 costs from the average market price. So the last bar shows that in the second quarter, we generated over $20 per ounce of margin. Seven of the last nine quarters we have had double-digit margins with three quarters above $19. A key driver of that margin is our extremely low cash costs. So if we continue to see prices in this range, I expect we will see operating cash flow in excess of $150 million.

There are a lot of factors that go into the margin generation, but the biggest one is the price of metals. After that, come the three factors we focus a lot of attention on, grade, throughput and costs. Our work force and operating management teams have done a great job of managing and executing, and the next two slides look at these three factors by mine. And what I hope you recognize from the these slides is the robustness of these ore bodies that reflect their low risk profile and how well we manage them.

So go to slide five, Greens Creek optimizing mined volumes. At Greens Creek our mine sequence and mining outside the mine plan has caused us to mine more of the base metals rich ore zones, which have had lower silver grades. And that's been true at Greens Creek almost since inception, grades declined. And on this slide, you certainly see it since 2007. Mines tend to mine the highest grade first. Of course at Greens Creek, because there are so many metals not all have declined. In fact zinc grades have been very steady even increasing this year over last year.

But this declining silver grade is reflected with the blue line on the right hand graph. So over the years as grades have declined what we've done is increase throughput as you can see with the red line. This quarter, we continue that trend of increasing throughput, and at the same time, are in higher grade stopes than what we had in the first quarter, and we expect these higher grades to continue for the rest of the year. When we combined strong cash management, with increasing throughputs, you can see generally declining costs per ton, and that's reflected on the graft on the left hand side of this slide.

So now let's go to the Lucky Friday on slide six. Lucky Friday improved productivity. The performance by our team this quarter was great. In fact, their performance has been very good for a long time. You'll notice that on the right hand graph, that throughput declined dramatically in the second quarter, represented by the red line. And this is after significant increases in throughput over the last three years. But for most of the quarter, throughput was actually higher than the first quarter as they continued to improve performance. But during the quarter, we had a failure in the exhaust shaft and secondary escape-way that required extensive rehabilitation, shutting down the mine for a few weeks. Our team managed to get the rehab done and accelerate the preventative maintenance, so it had no impact on our production guidance and only slight impact on costs. You can see the cost impact on the left hand graph with a slightly higher cost per ton. This is a great ore body and an experienced team and that lets you absorb the unexpected.

And this experienced team is now focused on the things that will extend the mine life. So if you go to slide seven. Capital projects at the Lucky Friday mine. Here you see some pictures of some of the $12 million in capital we spent this quarter on the future of the Lucky Friday. On the left is the lateral development we are doing in anticipation of an internal shaft. We still expect the internal shaft to cost between $150 million and $200 million and will take about five years to complete. And we are considering taking it as deep as either the 7800 or the 8800 level, or as much as 4000 vertical feet from where we'll start it. While we've not yet finalized the work to make the formal decision, we are moving the project forward incrementally and hope to approve the whole project before year end.

And the picture on the right is the tailings pond, which we need for 2011 production, but as you can see from the size, it will hold about a million tons with final design capacity of almost 2.8 million tons, or 15 years of capacity. And it's sited where there's the opportunity for it to grow further. So the real focus-- so the additional focus of our team at the Lucky Friday is on mine life extension and growth. And I think these guys have done a great job over this past quarter, where we're continuing to really see our operating development plans executed. So now let me turn the call over to our team and we'll start with Jim to talk about the financials.

Thank you, Phil. During the second quarter of 2010, the Company reported solid operating and financial results. It continues to deliver on plan with regard to production, cash flow, profitability and other key benchmarks. In particular, as noted on slide eight, operating cash flow for the quarter of $54 million, was the second highest in Hecla's history and represents a nearly three fold increase over operating cash flow for 2009's comparable period. This allowed Hecla to fully fund its capital expenditures for the quarter, which totaled approximately $18 million.

And as set forth on slide nine, at the end of the quarter we had $197 million of unrestricted cash in the treasury, and in addition have full access to a $60 million revolving credit agreement, which gives us in total $250 million of liquidity to pursue growth opportunities.

As noted on slide 10 with regard to the income statement, income before income taxes was $25.3 million, a nine fold increase over the $2.8 million reported for the same period of 2009. This performance was driven by a number of factors, including slide 11, which shows quarterly silver production of 2.6 million ounces in line with our 2010 guidance, gold production of 17,900 ounces, a 12% increase over 2009's level, lead production of 11,600 tons, a 9% increase over the same level of last year, and finally, zinc production of 21,600 tons, an 11% increase over 2009 second quarter production.

And of course good prices didn't hurt either. As noted on slide 12 for the quarter, silver averaged $18.32 an ounce compared to $13.73 an ounce in last year's second quarter. Likewise, gold averaged $1196 an ounce compared to last year's level of $922 an ounce, and base metals prices also increased with lead prices increasing 29% and zinc prices increasing 37% from the levels experienced in the second quarter of 2009.

Finally, we continue to experience some of the lowest per ounce cash costs in the industry. As set forth on slide 13 during the second quarter of 2010, our cash costs were a negative $1.82 per ounce, compared with $3.38 for the same period of last year. And for the six months, cash costs stood at a negative $2.41 compared with $4.01 for the first six months of 2009. As previously noted, this led to income before taxes of $25.3 million. As a result of this increased profitability, we did amortize our deferred tax asset, which contributed to a tax provision of $8.3 million, which leads to net income of $17.1 million, compared to income of $2.5 million in 2009's comparable period.

Since I mentioned taxes, I think it is something important to note is the provision is GAAP accounting. With regard to cash taxes, we estimate the actual cash bill for 2010 to be only around $2.5 million, related to the alternative minimum tax. And we currently have enough NOL carry forwards to offset the regular income tax for approximately four years at current levels. We did provide $3.4 million for preferred stock dividends. As a result, income applicable to common shareholders was $13.7 million, or $0.06 per share, compared to a loss of $900,000 in the three months ended June 30, 2009. The largest portion of these preferred stock dividends are related to the 6.5% mandatory convertible preferred stock. These shares become mandatorily convertible into the underlying equity in June of, or excuse me January of 2011, as many of you know, so we look forward to those disappearing in a couple of quarters.

We finished the second quarter of 2010 with solid production, very low operating costs, profitability and significant cash flow. Therefore, we believe the Company is well positioned as it continues to evaluate the growth opportunities available to it. And with that, I'd like to turn the call over to Dean McDonald, Vice President of Exploration. Dean?

Thank you, Jim. During the second quarter, $5.8 million was spent on exploration with drill programs underway at the Greens Creek and Lucky Friday mines, the Silver Valley in Idaho, Creede, Colorado and Mexico. It has been an active quarter for underground exploration at Greens Creek, as shown in the planned view of Greens Creek in slide 14. With drilled programs, refining and expanding the northwest west zone resources, as located in the upper left corner of the diagram, and extending resources in the 200 South zone as defined in the lower portion of the figure.

Definition and exploration drilling on the northwest west zone as shown in the cross section in slide 15 continues to refine and expand the two lower limbs of the zone below previous mining. Recent drill results have outlined mineralized intervals that are particularly rich in precious metals attaining values up to 0.72 ounces per ton gold and 75 ounces per ton silver over good mining widths. Additional drilling along strike could provide new reserves and resources in this area.

In the cross section shown in slide 16, complexly folded baritic ores of the 200 South zone have been added at depth and to the east with multiple lenses. The orange colored lens represents the 2008 resource, and the red bodies represent the potential reserve and resource additions from more recent drilling. These baritic ores have very high grades of gold and zinc and could expand as we drill along strike to the south.

The recent completion of the 1147 Drift extension farther south, which is the main drill platform in this area of the mine, will provide an excellent platform to drill additional extensions of the high-grade 200 South and 5250 South ore bodies to the east later in the year.

Surface drilling, as shown in slide 17, started in late May to define the north and northeast extensions of the recently defined northeast contact mine Horizon to Club creek. Drilling on the Killer Creek gossan has cut wide oxide zones with elevated silver and base metals. And the Eastridge drilling on the defined mine contact will begin later this summer. In all, we anticipate drilling 20,000 feet on surface at Greens Creek by October.

As I have described in earlier conference calls, drilling continues to expand the resources east of the current reserves at the Lucky Friday mine with two drills active. From the 6400 to 6800 levels, the 30 Vein continues to show high grades. But we are also seeing significant results with high-grade intersections of the five 80 and 90 Veins. To the east below the 7,000 level, the 30 Vein is narrow but high grade and the 80 and 90 Veins appear strong with good widths and grades.

Drilling in the Silver Valley of Idaho is concentrated along mineralized structures east and west of the Lucky Friday mine as shown in slide 18. Silver bearing mineralization has been intersected in structures in the Silver Mountain area east of the Lucky Friday mine and along the You Like/30 Vein trend to the west. Drill holes testing the Gettysburg and Lucretia targets, which are linked veins that parallel the original Lucky Friday vein structure, have intersected veins and banded mineralization as predicted. A significant number of assays are still pending from this drilling.

In Mexico, drilling in the second quarter moved to the Pedernalillo and Cerro Santiago target areas where veins similar to the nearby pass producing Don Sergio mine are present. Initial assay results show interesting gold and silver abundances and drilling will continue on both targets.

Drilling on private land at the San Juan silver joint venture project in Creede, Colorado began in May. Significantly, no appeals were filed on the five-year plan of operation and environmental assessment, and all permits were approved on June 15. Drill roads and sites are being completed on public lands and drilling is targeting on strike extensions to the Bulldog and Amethyst Vein structures, which were prolific silver bearing production veins in the past. Assays are pending on all San Juan joint venture drilling. And with that, I'll pass you back to Phil for concluding remarks.

So, before we take questions, I have a final comment. And at the beginning of the call, I said this wasn't an exciting quarter and what a change that is for Hecla when double-digit earnings and our second highest quarterly cash flow are expected. I think over the rest of the year, you will see this same kind of financial performance, along with things that will deliver growth and we'll have results from our four district exploration programs, and those are multi-faceted programs at Greens Creek and Lucky Friday, Silver Valley, with both underground and surface programs. You'll see a decision on the internal shaft at the Lucky Friday that will give access to deeper, higher grade material that we would expect to increase Lucky Friday's production to five million ounces. And finally, we'll-- you'll continue to see us looking to acquire new assets that Hecla can apply its development and operating expertise, so that we can generate a growth profile that's consistent with our financial capacity. So with that, Don, let me turn it over to you?

Okay, thank you, Phil. I'd now like to ask our Operator, Veronica to provide instructions for people on the call to ask questions. Thank you.

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

Hello, everyone.

Hi, Anthony.

Hi, how are you?

Great.

With regard to Lucky Friday, would you go a little further into what the rationale was for deciding on an internal shaft as opposed to other alternatives?

Sure, Anthony. We spent some time looking at a number of different alternatives. I don't remember the number it was, but it was double digit. And ultimately the conclusion was you have an ore body that goes quite deep and by having this internal shaft, we can get to it quicker than we would be able to with some sort of ramping system and we can go deeper with that system. I mean we ultimately think we might need to be in a position to go as deep as 10,000 feet, where we're contemplating at this point first phase of this shaft going to 8800. But we certainly see that there's no reason this ore body won't continue deeper than that and so we want to be in position to go deeper.

Right. And I would also presume it would probably be less expensive than having an entirely new shaft from the surface?

Yes, we did consider a new shaft from the surface and that would be quite costly. It's something that we are-- we'll continue to consider in the future, particularly with the exploration program that Dean has described. If we find material to either the east or the west, I think you can see that we will resurrect that shaft from surface.

All right. And you also mentioned the possibility of acquisitions. What might be the size of possible acquisitions and how would you go about financing them?

Look, we're considering things that are from quite small to large transactions. We-- the real criteria that we have is that it's-- if it's a gold asset, that it be in North America, if it's a silver asset that it have size associated with it. And we're considering acquisition opportunities that are from existing properties, back to late stage exploration, early stage development projects.

Right. And would you finance it with cash, debt, stock or a combination?

It depends on the size of the, of the transaction. And we'll consider all alternatives, I won't prejudge which way we might go.

All right. Very good and congratulations on a great quarter. Thank you.

Thanks, Anthony.

You're welcome.

(Operator Instructions) Your next question comes from the line of John Bridges from JPMorgan. Please proceed.

Hi Phil, everybody.

Hi John, how are you?

Fine. Fine. How was Italy?

It was great, thanks.

The-- I was impressed to hear that you've got the Creede permits through without appeals, that's very encouraging.

Well it is and I think in part it's a-- it's the support that we have from the local community as well as the government there. Interestingly enough, the regional forester is a University of Idaho graduate, you probably didn't know that, Jim, a University of Idaho graduate, who worked in Nevada for the better part of the last four or five years and is quite familiar with mining projects and quite supportive.

That's great. And the progress in Mexico, how do you see that developing? Is that meaningful, or just small steps towards development?

Look I-- we're still very early stages there. We still have smoke everywhere. And I will tell you that Dean, I'll let Dean speak for himself, but he was quite enthusiastic about some follow-up drilling on results that we've had. Dean, do you want to--?

Well, certainly. And the other thing to mention about Mexico, is we currently have a significant resource, in the Hugh Zone. And so what we've been trying to do with exploration at San Sebastian, and this is a huge property with past production and a lot of opportunities, but the intention is really to find something that, in combination with the Hugh Zone, we can go back into production in that part of the world. And we're seeing the classic epithermal veins. We've seen areas of oxidized silver and gold at surface and (inaudible) zones and so on. So we're certainly in an area that is endowed with a lot of precious metal mineralization and it's really a matter of us systematically evaluating that with the lead off being the Hugh Zone.

Okay, great. And then coming back to your slide 15 at Greens Creek, as a non-geologist, I'm a bit confused because I thought the oil was supposed to be on the contact between the phyllite and argillite. Does that open up a whole new set of targets that it's hanging out there in the phyllites?

Well you're correct in that originally the mineralization formed at that mine contact. Sometimes you do see lenses of mineralization in the argillite. What you're seeing in that cross section, obviously is mineralization almost exclusively within the phyllites. What we think has happened there is that the ore body's been folded five times. And so due to that folding, you do have mineralization remobilized along fractures and take on configurations that you wouldn't anticipate. So I think that's what we're seeing.

But to your question, are there opportunities beyond the mine contact? I think there are. We're seeing it in some gossanous areas that are within the argillites. And we do think that along that mine contact, we're going to find mineralization on either side, primarily due to this folding and remobilization.

Okay, great. Well congratulations, guys, well done.

Thanks, John.

(Operator Instructions) Your next question comes from the line of [Martin Tripe]. Please proceed.

Hello there, go ahead. Martin?

Hello, yes. What's the prospects for a dividend?

That's something that the Board considers every time we meet. We have to decide whether we're going to declare a dividend. And they will certainly do that again. As earnings increase and cash flow increases it certainly increases the opportunity for a dividend. But I will say that our first priority is on growth and growing particularly at the Lucky Friday and with these exploration programs. But it is something that is, it's fully considered by the Board.

Okay. Thank you.

Thanks.

Your next question comes from the line of Steven Butler from Canaccord Genuity. Please proceed.

Well Phil, I guess I should say ciao. Question for you or I guess an inference that you suggest that Lucky Friday potentially could become a five million ounce per year producer assuming I guess that eventually most of the production would be dominate from the 30 Vein at depth Phil, below current reserve base. So is that predicated on still operating that around 900 tons per day? Is that sort of what you guys are still scoping that this internal shaft can still justify about 900 tons per day up to the surface?

Say, look we're already at sort of 1000 tons a day and our aim which would be to try to get to 1200 maybe 1300 tons a day. So it is predicated on that.

Okay, so not necessarily a whopping great increase as opposed to a potential throughput increase, Phil?

So it's both. I mean we anticipate grade being about 50% higher for silver than it currently is, and base metals what is it about a third? Yes, about a third higher on the base metals and then they increased in throughput. And look these-- we've-- the mill has been the constraint on the throughput.

Right.

What we'll be working towards is making the shaft the constraint and we're not there yet, and won't be at least until 1200, 1300 tons a day.

Okay. And Jim, maybe you could elaborate on the hedging approach. As we-- maybe walk me through the math, if you will, on at the end of the quarter how you would sort of smooth out of the some effects going into Q3 on let's say it takes zinc and lead for example if you don't mind maybe working through the math there and/or elaborate on what are your longer dated hedge amounts and prices, if you have them on the books?

Sure. I'll give it to you in general and I realize this is fairly complicated, so if you want to follow up we can discuss it more off line. But the program is, consists of two components. One is just dealing with the provisional price adjustments, which span quarters. And the second one is longer dated program which seeks to put stability under Hecla's earnings and cash flow. And with regard to each of the metals, at the end of the quarter we had settlements awaiting shipment. And we provisionally priced 7700 metric tons at $0.82. And we do the best we can to match the provisional prices than we book at. Now you will have a little bit of difference simply because of the bid ask spread on the contracts, and also we give ourselves a little cushion so we don't oversell. So we typically hedge about 90% of the contained metal. With regard to lead provisionals at the end of the quarter, we had 2550 metric tons at $0.80.

Now in terms of our long dated program our goal there is a little bit different. It's to eventually work up to a point where we'd have as much as 50% of our base metal exposure covered at prices acceptable to Hecla. And at the end of the quarter we had 9600 metric tons of zinc at $0.86 and we had 7150 metric tons of lead at $0.83.

Okay and what sort of time horizon would we book those over, Jim?

Eventually we would hope to get two to as much as three years in front of us. These particular positions, since we just started the program and you have to eventually work them on,go through, in case of zinc we've got some metal sold into 2Q of 2011, and in the case of lead, Q1 of 2011. But we'll seek to increase the quantity of metals under those-- that program over the course of the next year or two.

Okay. Thanks very much, guys.

Thanks Steve.

Ladies and gentlemen, there are no further questions. I will now hand the call over to Phil Baker for closing remarks. Please proceed.

Okay well thanks very much for joining us on the call. We're pleased with the earnings and the cash flow generation and with the operating performance as well as the exploration program we have. Please stay tuned as we'll continue to give you more information on all these activities. And if you have any questions, feel free to give Don a call, be happy to answer them.

Thanks very much. Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.