Hecla Mining Co (HL) 2010 Q3 法說會逐字稿

Good day ladies and gentleman. And welcome to the Third Quarter 2010 Hecla Mining Earnings Conference Call. My name is Marissa and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions). I would now like to turn the conference over to Melanie Hennessy, VP of Investor Relations. Please go ahead.

Thank you, Marissa. Welcome everyone and thank you for joining us for Hecla's third quarter financial and operation results. Our news release which was issued yesterday after market close and third quarter presentation are available on Hecla's website.

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, Dean McDonald, Vice President of Exploration, Mike Vector who is the Vice President and General Manager at the Lucky Friday Operation and joins us from site, and George Sturgis, the Vice President of Project Development.

Before we get started I need to remind you that any forward-looking statements made today by the management team comes under the Private Securities Litigation Reform Act. It involves a number of risks that could cause results to differ from projections. In addition to our filings at the SEC, we are allowed to 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 I have the great pleasure of introducing Phil Baker, Hecla's President and Chief Executive Officer.

Thanks Melanie. Hello everyone. Thanks for joining the call. I'm going to provide a brief overview of our Q3 performance. Jim will speak about our financial results, followed by Dean who will give us an update on exploration. I'm going to close with an overview of the #4 Shaft Project and open the door for questions.

If you will look at slide 4, we had another solid quarter producing 2.7 million ounces, slightly higher than the second quarter and then changed with the when compared to the same period a year ago. Both operations performed well on all measures -- throughput, recovery, cost per ton and grade. At Greens Creek, the grade is increasing in the second half of the year as we expect. The Greens Creek product 1.9 million ounces of silver. And you will continue to see over the fourth quarter a similar grade that we have had this quarter.

Lucky Friday saw slightly lower grades, producing 800,000 ounces of silver, which is within what we expected. And the two mines are on track to produce 10 million to 11 million ounces this year.

We had another quarter with negative cash costs of $1.01 which Jim will discuss in greater detail. These low costs reflect the quality of the assets and the capabilities of our operating team. When you combine that low cost with the third quarter (inaudible) silver price of $21.45 per ounce, Hecla generated $42 million in cash flow from operating activities for a total of $115 million year-to-date. The operations have generated more cash just in the first 9 months than all of 2009. And 2009 was our previous record in our 120 year history for cash flow from operations. So, quite an accomplishment this year.

Our cash position is now $217 million when combined with our cash flow generation from the mines. It is going to allow us to pursue opportunities and grow our business. So with that I will turn it over to Jim.

Thanks Phil. During the third quarter of 2010 the company continued the trend started in 2009 of reporting solid operating and financial results. We continued to deliver a plan with regard to production, profitability, and other key benchmarks.

The particulars are noted on slide five, the company continues to be the lowest-cost silver producer in North America with total cash costs of negative $1.01 per ounce.

In the third quarter we reported adjusted net income of $29.6 million and net income applicable to common shareholders of $16.4 million or $0.06 per share. We achieved cash flow from operating activities during the quarter of $419 million and finished the period with an exceptional balance sheet with $217 million in cash and no debt.

I will cover these items additionally on succeeding slides.

On slide 6 is a snapshot of production for the quarter. As you can see, silver production is solid at 2.7 million ounces which represents a 9% increase in quarterly production over that reported for the first quarter of this year and a 3% increase (technical difficulty). Gold production is up 7% from the corresponding period of last year. And zinc and lead production were up 3% and 11% respectively over last year's comparable quarter.

Of course good prices don't hurt either. (Technical Difficulty) metals prices and you can see that our realized [silver] price was up 31%, the realized gold price was up 29% from last year's comparable quarter. Zinc and lead prices were down marginally by 2% and 6% respectively.

On slide 8 we show we continue to see expansion in our record margins that we are achieving. As previously discussed, we continue to experience lowest cash costs per ounce in the industry. Our cash costs were negative $1.01 for the third quarter. While they were up slightly from the previous quarter, that is primarily the result of an increase in certain price related operating costs such as labor costs which are subject to silver price premium participation, profit sharing, mine license taxes, and to additional smelter costs through price participation clauses.

However, the benefits of high metals prices far outstrips the costs, the margin increasing $22.46 per ounce of silver produced compared to $20.78 just last quarter and $13.72 for the entire calendar year of 2009.

All of this results in higher revenues and pre-tax income. On slide 9 we show that revenue increased 22% from the third quarter of 2009 to the third quarter of this year. Income before income taxes increased to $27.9 million compared to $26.5 million in last year's corresponding quarter. And this is in spite of a mark-to-market adjustment for certain base metals contracts of $13.2 million which I will discuss in more detail shortly.

On and adjusted net income basis, adding back the loss on the derivative contracts, pre-tax income would have been $41.1 million for the three months.

During the quarter we recorded a tax provision of approximately $8.1 million compared to $0.6 million in last year's third quarter. An increased tax provision is due to the fact that higher prices have resulted in the utilization of alternative minimum tax loss carry forwards. The combination of this utilization plus the benefit we received from percentage depletion for regular income tax purposes results in the increased tax provision for AMT purposes.

On a comparative basis, while net income applicable to common shareholders at $16.4 million is lower than reported for the third quarter of 2009 of $22.5 million, it can be directly attributed to two items which is the [already] mentioned loss of non-cash mark-to-market derivative contracts and the increased tax provision. I will have more to say on these items in subsequent slides.

On slide 10 and 11 we set forth a few other financial metrics. In the third quarter we saw operating cash flow as previously mentioned of $41.9 million, a 30% increase over 2009's third quarter level. That brings the 9-month cash flow to $115 million, a 122% increase over the 2009 level.

During the quarter we had capital expenditures in our operations of $23.2 million which is higher than normal due primarily to the Lucky Friday #4 Shaft Project of $11.4 million.

For the quarter, other sustaining capital in $11.8 million and exploration was $6.9 million. Consequently, based on operating cash flow during the quarter of approximately $42 million, the company was able to completely fund its capital expenditures and increase cash available in the treasury to $217 million. The company has no significant debt outstanding and a $60 million line of credit available. Therefore total liquidity available for investment stands at $270 million.

I mentioned that I wanted to talk about a couple of other items which are the Base Metals Hedging Program, and I am using that term "hedge" in the economic sense, not the accounting definition, and income taxes.

We announced last quarter that we are going to do some additional hedging which is designed to reduce fluctuations in cash flow due to changes in base metals prices. This will have the effect of allowing us to fund the Lucky Friday expansion program out of operating cash flow. The program consists of two components. First is a short-term program designed to manage the exposure in the time and sale and final settlement of concentrate shipments. Under that program we sell lead and zinc upon shipment for the same [quotational] period as the underlined forward sales contract, thereby reducing the gain or loss associated with such price movements.

During the quarter, the program was 94% effective which means we were able to isolate 94% of all price movements and any gains or losses related to the difference between provisional sales and final settlements are offset by the corresponding contract.

Our second program is longer dated and is designed to reduce price volatility on future lead and zinc production with our goal being ultimately to reduce exposure of up to 50% of production of those metals over a 2 to 3 year timeframe. As noted above, the contracts are mark-to-market through earnings each period. We commenced that program in April and the second quarter reported a mark-to-market gain of approximately $2 million.

During this quarter we saw base metals prices rebound and as a consequence reported a mark-to-market loss of $13.2 million. At the end of the third quarter, the company had ended into financially settled forward contracts, a (technical difficulty) dated program, totally 25,750 metric tons of zinc to be delivered between now and early 2012 at an average price of $0.94; 17,650 metric tons of lead to be delivered between now and late 2011 at an average price of $0.92. As base metals prices have continued to improve, we have continued selling into the strong market. So you can expect to see additional activity in future periods.

When prices rally, you will see mark-to-market net losses and when prices retreat you can expect to see mark-to-market gains for this portfolio.

A key component in this program is that due to the intricacies of accounting for derivatives, you will see some movement on our P&L, but we have actually reduced risk in the business by establishing a stable cash flow target and price which assists in providing good stable long-term performance.

Lastly I will talk a little bit about income taxes which I alluded to earlier. As indicated during the quarter the company reported income taxes of approximately $8.1 million which includes approximately $6.3 million of tax liabilities paid in cash which was higher than previously expected. This is the direct result of the higher prices we were seeing which is causing the company to be in the position of an alternative minimum tax payer for 2010.

For the fourth quarter we would expect to see a tax provision on the income statement of, again, around 28% of pre-tax income. And we expect our Q4 tax payments to be approximately $6 million.

Moving into 2011, we would again expect to see the tax rate hover plus or minus between 25% and 28% and would expect our cash taxes to also approximate that rate. And with that I would like to turn the call over to Dean McDonald to talk about exploration.

Thank you, Jim. During the third quarter, $6.9 million was spent on exploration and it is anticipated we will spend $20 million this year. This exploration is strategically focused on drilling activities on Hecla's district-size land positions. These activities include underground and surface drilling at Greens Creek, continued expansion of Lucky Friday resource to depth and to the east. Drilling underground rehabilitation and sampling at the Noonday Vein west of the Lucky Friday. Drilling of the Equity Bulldog and Amethyst Veins at the San Juan joint venture property in Creede, Colorado. And drilling of the Pedernalillo project in Mexico, in combination with 3D modeling of the past producing Andrea and Don Sergio Veins to define a near surface mining area.

It has been an active quarter for underground exploration at Greens Creek with drill programs, refining and expanding the Northwest West zone resources located in the upper left corner of the 3D view of the Greens Creek slide 13.

As listed in the assay table in the press release, we have some very impressive intersections, not only in the Northwest West zone, but we have also been successful in extending resources in the 200 South and 5250 zones which are shown in the lower portion of slide 13. Additional drilling along strike of these zones could provide new reserves and resources.

During the quarter two drill rigs were active on surface at the Northeast contact, East Ridge and Little [Sword] targets in the central part of the Greens Creek property. Drilling intersected a number of mineralized mine horizons and assays are pending.

As I have described in earlier conference calls, drilling continues to expand the resources east and at depth of the current reserves and resources at the Lucky Friday mine. As you can see from slide 14, the rapid expansion of the Lucky Friday resource in the last three years. When you look at the MSR by fitness contours, where hotter colors represent higher values, the 2009 resource appears to show a decline in grade at depth. However this is simply a reflection of the lack of drilling.

Recent drilling in the central resource down to 8,000 feet continues to intersect a wide and high grade 30 Vein.

To the east of the current resource, below the 7,000 level, the 30 Vein is narrow but high grade and the 40, 90 and 110 Veins appear strong with good width and grade. As described in the last conference call, the intermediate Veins at this depth are now crossing more confident rock which allows the development of wider Veins. We anticipate additions to the Lucky Friday resource both at depth and to the east.

Drilling in the Silvery Valley of Idaho is concentrated along mineralized structures east and west of the Lucky Friday mine as shown in slide 15. Silver bearing mineralization has been intersected along the (inaudible) 30 Vein trend to the west, but particular emphasis in the last quarter has been on the Noonday and Noonday split which are just south of the past producing Star-Morning mine.

In the 3D view of the Noonday Vein shown in slide 16, drilling is targeting the [uptick] continuation of mineralization above stopes that were last mined in the late 1980s. All of the holes in this program, as shown by pierce points in the model, have intersected goods silver base metal mineralization. Due to these intersections, ramp access was reopened and detailed underground sampling has been completed in order to estimate a resource on the Noonday North split and Noonday Veins by yearend.

At our San Juan joint venture property in Creede, Colorado, recent surface drilling locations are shown in slide 17. In the central part of the property, drilling has intersected both the east and west strands of the Amethyst Vein which represent 5-foot and 30-foot wide zones of veins and [branches] respectively. Drilling at the North Amethyst site intersected a multi-stage quartz vein with fine grain pyrite and black sulfites which may represent the west strand. And the mineralized buggy quartz pyrite zone is interpreted to be the east strand.

And the West Equity site, we have cored into a very significant 300-foot wide hydrothermal vein and branches zone with bands of galena sphalerite and pyrite and fine grain black sulfites within rhodonite and rhodochrosite bearing veins.

Although assays are pending, this style of mineralization is a positive sign since this was commonly observed in the Amethyst Vein during historic mine production.

In Mexico, drilling in the third quarter shifted to the Pedernalillo target area which is shown in slide 18. And where veins similar to the nearby past producing Don Sergio and Andrea veins have been intersected.

The Don Sergio mine averaged 16 grams per ton gold and 93.6 grams per ton silver during production in 2003 and 2004. And some near-surface un-mined areas have drill intersections up to 120 grams per ton gold in core. The Andrea Vein has zones averaging 7 grams per ton gold and 60 grams per ton silver with localized areas that ran up to 12 grams per ton gold and 200 grams per ton silver.

Initial modeling suggests an economic target may be developing near-surface in this area. A follow-up drill program at Pedernalillo is advancing as we speak. And with that I will pass you back to Phil for further remarks.

Thanks Dean. Melanie introduced Mike and George and I have asked them to join us today because Mike has been the GM at the Lucky Friday for the past decade which has been a period of intense change. I think that he now has this operation prepared for the next change that will come as a result of the development of the #4 Shaft.

And George has been working on shafts and other major construction projects for the past 30 years, including the development of the Silver Shaft. If you go to slide 19 you will see that Silver Shaft in the picture. It is the green line that is on the left hand side of that picture. I'm going to talk more about the picture in a moment, but first, we are just very excited about this project and its economics. We issues a press release Monday providing some specifics of the project's very strong economics. Using a relatively low price deck of $15 silver and $0.80 of lead/zinc, the internal rate of return pre-tax is 20%. If you consider the $50 million of sunk costs, the IRR is still 15%. And because the operating costs are so low, even at $11 silver it generates an 11% return. The returns are strong because silver production increases 50% from 3 million to 5 million ounces.

When the shaft is complete which is expected in 2014, production will ramp up to full capacity after a year of sub-level development at the 6,500 level. And you can see that 6,500 level on the picture.

The capital expenditures for the project is going to be between $150 million and $200 million. And $50 million will already be spent by yearend. Now we have approached this project incrementally for a number of reasons including the need to engineer and organize the building and the infrastructure of a new mine inside one that is operating at full capacity. We wanted to methodically build and test the process for dealing with the additional men, materials and waste rock that has to go to the surface through that Silver Shaft.

So that line that you see to the left in that picture, everything has to go up and down via that shaft. And of course we are operating at full capacity. And after working the better part of a year, we think George, Mike and their teams have a firm handle on it and have substantially reduced the risks of either production interruptions or slowdown of construction.

Now we are still indicating a $150 million to $200 million range of CapEx pending the completion of engineering studies, feasibility and advisability of constructing the shaft to an ultimate depth of 8,800 feet. If we proceed with the ladder, the CapEx would be on the higher end of our range. If we don't and everything goes perfect, if we don't use the escalation contingency which is 20% of our total cost, we will be at the lower end. We are currently 9% under budget and of course we are very early in this project.

Now the key drivers for the increase in silver production and reduction in costs are at 35% increase in the silver ore grade and a throughput increase from 350,000 tons to 375,000 tons. The total cash costs for the first five years would be less than $4 per ounce and with the addition of the #4 Shaft, the life of mine would extend we think well beyond 2030.

If you turn to slide 20, we provided you some highlights on the project itself. There will be an 18-foot diameter shaft that will be approximately 3,000 to 4,000 deep. And then there will be more than twice as much off-shaft development that is going to include access to the shaft, the primary stations on four levels, two new levels and related sub-levels, bins and waste removal. All of this is included in this capital estimate that we provided. The study is underway to determine the feasibility of constructing the shaft through to the 8,800 level. There are a number of issues including substantially more refrigeration as we go below 7,500. These aren't insurmountable but require steady to get it right.

And as I said a moment ago, we have been methodically, been aggressively moving the project forward, including excavation of the hoist room. And if you look at the picture at the top of the slide, it is a sizable space that has dimensions of about 61-feet long, 50-feet wide and 30-feet high. And that represents about a quarter of the oft-shaft development.

The team has done a good job with the excavation of the hoist room with, slightly ahead of schedule and the foundations for the main production hoist are currently under construction.

Finally, I expect the Board approval no later than mid-2011 but the project in the meantime will be moving ahead incrementally. We know the economics support the project and the work we are doing is substantially reducing the project risks and I think ultimately will result in a better facility that maximizes the ore body by going as deep as possible without impacting production.

Now if you will turn to side 21, the #4 Shaft is a big part of our organic growth strategy and we are going to continue to develop both Greens Creek and the Lucky Friday operations to extend mine life. Our cash position combined with the cash flow generation gives us flexibility to look at M&A opportunities and we are certainly doing that. We are focused mainly on precious metals assets in the Americas and we are looking for advanced projects and operating mines.

Moving to slide 22, we continue to reiterate our silver production guidance of 10 million to 11 million ounces and given the strength of the base metals prices we have seen year-to-date, we are updating our cash cost guidance to a negative $0.50 per ounce. This assumes that we will be averaging $1,100 per ounce gold and $0.80 per lead and zinc in the fourth quarter, so there is an opportunity to be even lower than that.

And with that I would like to open the line for questions.

(Operator Instructions). You do have your first question from the line of Anthony Sorrentino from Sorrentino Metals. Please proceed.

Good morning everyone.

Hi Anthony.

If you decide to complete the #4 Shaft project at Lucky Friday, could you give us some idea of what the production profile would be at Lucky Friday? Would it be linear or would it be kind of steady in the first year or two and then have a sharp increase by 2014?

Well, what happens Anthony is between now and 2014 we have the actual construction of the shaft and all of the oft-shaft development. We then have a period of about a year where the focus of the work is on the sub-level development of the 6,500 and then the following year which would be 2016 is when we will see production ramping up to the 5 million ounces. And we would expect that to be producing at that level for a substantial length of time after that.

So by 2016 you are at that full 5 million ounces.

Okay, and you are at about 3 million ounces now and you said you are going to do what you can to make sure that existing production would not be impacted by loss of efficiency and productivity?

Yes, and I think we have a great handle on that. Mike and George and their people have been working with having the two activities happening concurrently for the most part of almost all of this year. So we really do have things working well. So I am not anticipating either production being interrupted or shaft development being delayed as people get in the way of one another. We are avoiding that.

Okay, very good. And with regard to exploration, would you expect to significantly add to your resources at Greens Creek and Lucky Friday based on year-to-date exploration results?

I will let Dean make a few comments, but certainly at the Lucky Friday we have seen a substantial increase in the resource over the course of the last three years. And drilling tends to come or increases in resources tend to come in big chucks really at both operations, these underground operations that you tend to have step out drilling and then infill and grow the resource and reserves that way and it takes a bit of time to develop drill stations to get there.

So Dean, do you want to add anything?

Yeah, Anthony, the quick answer is, yes, I would anticipate growth in the resources both at Greens Creek and Lucky Friday. We are in the process, some of the assays that you may have seen in the press release are just coming in the door and there are quite a few more assays yet that we anticipate to show good, strong mineralization.

So the reality is we are going to be modeling new resources probably till the end of the year. And so I can't give you any sense of magnitude of the resource additions, but I'm certainly very confident that we will have some good high grade resources added.

Okay, very good. Thank you very much.

Thanks Anthony.

You're welcome.

And your next question comes from the line of John Bridges from J.P. Morgan. Please proceed.

Hello everybody.

Hi, John.

Hi. Maybe I am demonstrating my accounting deficits here, but I'm wondering if you could sort of walk us through the big production and the big prices that you reported this quarter. Presumably you have been putting down pipeline material?

I'm not sure -- do you have?

Yeah, John. If you look at the key factors in terms of pulling down pipeline factors in our 10-Q and also our press release, we have got it. And you can see that we did have a little bit of inventory shift during the quarter. I think we had about 2.8 million ounces of silver sales versus the production of 2.7. But other than that, this is just normal inventory fluctuations.

Right, right. But your production is in the concentrates so normally you only sell about 90-something percent of that?

It is just depending on the lumpy shipments as they go out of Greens Creek. And 2.8 million ounces of sales versus 2.7 million ounces of production is a pretty normal number. And I don't have it in front of me, I think it was last quarter it was just the opposite by 100,000 or 200,000 ounces.

Right, and the price of silver you have got was significantly above the average for the quarter?

Yeah, again it is dependent upon the lumpy shipments out of Greens Creek, number one. And number two, it is also based on the fact that while we hedge provisional sales of lead and zinc, we do not hedge the precious metals. And during the quarter we had just over $6 million of adjustments to previous provisional sales or precious metals. So that adds to the realized price for the quarter.

Okay, that is helpful. And then perhaps the shipments were skewed towards the end of the period when the prices were higher?

That's correct.

It's good the ships were available for that. Dean, you were talking about San Juan and finding right across [sited] in those veins. That's the manganese mineral, isn't it?

It is --

Does it create issues with respect to penalties on your concentrate?

We haven't gotten to that part yet, John. We are still waiting for assays.

I'm sorry. I look forward to the answers next quarter then, maybe.

Developing the mill, okay.

Thanks a lot guys, well done.

Thank you, John.

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

Good morning.

Hi Wayne.

On page 22 you sort of outline your M&A approach but could you maybe expand on that a little bit. You said precious metals. Would you venture into gold or do you want to stick pretty much with silver? And how far would you go? You mentioned the Americas, I assume that is North and South. Would you go to Turkey or [Trinidad]? Could you put a little more meat on the bones here?

Sure. We have always had gold exposure and I expect we always will. When we look at opportunities that can use our underground mining expertise, we see a number of gold opportunities, and we see those in Canada and the US and to a degree and Mexico. So for gold opportunities, we consider underground opportunities in those jurisdictions.

With respect to silver, we are looking at things in North and South America, Central America. We are not looking at things otherwise.

And what stage? Would you want something that is close to production or in production or exploration stage? What is sort of your ideal target?

We are spending $20 million on exploration on our four properties which we think -- we have four district-size properties, pretty unusual for a company our size -- and it extensive of land packages in the sort of geologic environments that they are in. So when we look at opportunities, they are later stage. We are not engaging really in early stage exploration.

Great, thank you.

Sure.

(Operator Instructions). And your next question comes from the line of Chris Lichtenheldt from UBS. Please proceed.

Hi, good morning everyone.

Hi Chris.

I think my question was largely answered but I just wanted to double check. You had $6.1 million in positive pricing adjustments in the quarter that went through your revenue. So that would have been pretty much all related to silver, is that right?

Silver and gold, both.

Silver and gold, right. Great. Then just a couple of questions about the Lucky Friday expansion. The $50 million you said you will spend by the end of 2010, how much of that will end up being spent in 2010, do you know?

Do you have that? That was for the quarter lump. Do you have that forecasted in there?

I guess I am just trying to get to figure out how much this CapEx might look like in the fourth quarter or not.

Mike or George, do you guys, or I guess Mike, do you remember what your capital is for the fourth quarter?

Yeah. We end the year up at $57.1 million and 4Q is about $19 million. And #4 Shaft is about $14 million of that number.

Okay, that's great. Thanks. And in the press release you talked about the expectation for cash cost to be under $4 for the first two years. Can you just let me know what the base number price is you are assuming in that?

Yes, that is the $0.80 lead and zinc.

So the $0.80. Great, I think that is -- no, actually I will ask one follow-up. On the M&A discussion you mentioned gold potentially in Canada, US and then for silver you are looking right through South America. Is there any particular reason why you are not considering gold outside of North America but you are for silver assets?

It is primarily the opportunities that we see for gold in those jurisdictions that would be attractive to us -- they are available. They exist in those jurisdictions. And to the extent that we are going further afield and taking on additional risks, we would prefer to do that on silver assets.

Okay, that's helpful. Thanks a lot.

Sure thing.

Ladies and gentleman, at this time we conclude the question and answer portion of today's call. I would like to turn the call over to Mr. Baker, the President and CEO for closing remarks. Please go ahead Mr. Baker.

Thanks for joining us on the call and if you have any questions feel free to give Melanie a call. Thank you.

Ladies and gentleman, that concludes today's presentation. Thank you for your participation in today's call; you may now disconnect. Have a great day.