Hecla Mining Co (HL) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the fourth-quarter 2010 Hecla Mining earnings conference call. My name is Gina, and I will be your for coordinator 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 presentation over to your host for today, Melanie Hennessey, Vice President of Investor Relations. Please go ahead.

Thank you Gina. Welcome, everyone, and thank you for joining us for Hecla's fourth-quarter and year-end financial and operations results.

Our news release, which was issued yesterday after market close, and fourth-quarter presentation are available on the Hecla website.

On today's call, we have Phil Baker, Hecla's President and CEO. He is joined by Jim Sabala, Senior VP and CFO, and Dean McDonald, who is VP of Exploration.

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 CEO. Mr. Baker?

Hello everyone. Thanks for joining the call. I'm going to provide a brief overview of the year's and quarter's results. Jim is going to speak about our financial results, followed by Dean, who's going to talk about the reserves, resources, and exploration. I'll close with an update on the #4 shaft, give you a little bit of information about our 2011 guidance, and then we'll answer questions.

But before I start, though, speaking about the year's results, I want to talk about the CERCLA or Superfund litigation which led us to postpone the earnings release and conference call. If you'll look at Slide 4, the CERCLA litigation has been ongoing since 1991, 20 years now, and it relates to mining activity from 1891 to the 1950s, activity that was fully legal at the time but CERCLA just imposes liability.

In 2001, Hecla was found to have some liability and the case has been on hold as a result of our CERCLA's bankruptcy. There's been a number of attempts at negotiation over the years, and we think having the opportunity to settle this litigation is an important milestone for the Company, given the long-standing nature of the litigation and the unquantifiable nature of it.

As a result of the current settlement negotiations, Hecla has increased the accrual by $193 million, which contemplates resolving all claims. The previous accrual we had excluded things we could not estimate. This accrual is based on agreement of financial terms that will be incorporated into a comprehensive settlement that includes nonfinancial terms that have not been negotiated.

So we can't be assured that the agreement will be finalized, but we are far enough along in the process that we needed to increase the accrual. Terms have Hecla paying $102 million in cash and another $55 million in either cash or stock in 2011, payments in 2012 and '13, and then $65.9 million that will have to be paid by August of 2014, earlier if our outstanding warrants are exercised ahead of August of 2014. So we have warrants that are $65.9 million, the same amount that has to be paid by August of 2014, whose strike price is about $2.50. If those warrants are not exercised, then Hecla is going to pay the difference. But as this was put together, those warrants, the value of those warrants, the proceeds from those warrants, was a piece of the financial terms. So far, about $9 million worth of the warrants have been exercised, $5 million as of year-end.

As we've emphasized, a final settlement has not been reached and there can be no assurance that it will be. So as you can appreciate, negotiations are an ongoing and sensitive matter. So the only additional comments I have on the matter are that, while the cost is significant, we believe the terms are consistent with our current operating capital and exploration plans. I'll talk about that guidance in a few minutes, that we believe we'll be able to do under the terms of these financial terms.

The financial terms will also allow us to continue to add opportunities to further grow. In fact, we think will facilitate future potential transaction. We hope that we'll be able to settle this litigation in the second quarter.

So given that we are in negotiations, if you have any questions, you primarily should refer to our press release and 10-K.

So let's talk about the year. If you look at Slides 5 and 6, it was an excellent year with silver production just as we expected with about 10.6 million ounces. It was slightly lower than last year because of lower silver grades at both mines. Fourth-quarter silver production was higher over the same quarter in the prior year with 2.7 million ounces due to record tonnage milled at both Greens Creek and Lucky Friday. Production of lead and zinc achieved record levels in 2010. Additional operating slides are provided in the appendix for both Greens Creek and Lucky Friday.

Key drivers for the reduction in cash cost per ounce of silver of negative $1.46 for the year are higher metals prices increase byproduct production. The increase in cash costs of negative $0.14 per ounce of silver for the quarter is due to lower byproduct credits. These low costs reflect the quality of the assets and the capabilities of our operating team, both operating teams. When you combine that with the realized silver price of $22 for the year and $32 for the quarter, Hecla generated $198 million in net cash flow and $86 million of that happened in the fourth quarter. That is the most cash flow in our 120-year history by a wide margin.

With that, I'm going to turn things over to Jim.

Excellent metals prices across all four metals that we produce contributed significantly to our 2010 results. On Slide 7, we present realized prices for the year. You can see that our realized silver price is up by 45% and realized gold price is up by 25% over 2009. Zinc and lead prices in 2010 were up, also up by 7% and 11% respectively over the full year 2009. We've also provided realized metal prices for the fourth quarter in the appendix of the presentation.

The biggest jump was the increase in silver price of 74% in the fourth quarter, in comparison to the same quarter a year ago. As a consequence, on Slides 8, you can see that we've continued to see expansion in our record margins that we are achieving. We continue to experience the lowest per ounce cash costs in the industry. Our per-ounce cash costs were negative $1.46 for the year and negative $0.14 in the fourth quarter. Cash costs are down year-over-year due to the high metals prices and increased byproduct production. While costs for the fourth quarter are up slightly when compared to the same period of the prior year, this is primarily the result of lower relative byproduct credits on a per-ounce basis.

However, the benefits of higher metals prices far outstrip the costs associated therewith and our margin increasing to $32.65 per ounce of silver produced from $22.46 per ounce just last year, and $13.72 for the entire calendar year of 2009.

During the fourth quarter of 2010, results were impacted by four items as set forth on Slide 9. First, Phil mentioned the (inaudible) accrual of $193.2 million due to the financial terms of a potential settlement of environmental obligations in the basin. This brings our total accrual in the matter to $262.2 million, matching the net present value of the negotiated financial terms. The increased accrual from $65 million in the third quarter to $262 million at year-end is based on potential settlement that includes all basin claims in the litigation.

Second, a $20.8 million loss associated with long-term base metal hedging contracts. As base metals have continued to improve, we've continued selling into the strong market, so you can expect to see additional activity in future periods. Non-cash loss is due to the intricacies of accounting for derivatives. You'll see some movement on our profit and loss statement, but we've actually reduced the risk in our business by establishing a stable cash flow target and price which assists in good, stable, long-term performance.

Third, as a result of the expense of the environmental obligations accrual, we recorded a tax benefit of nearly $79 million, which is the expected reduction in future net income tax payments that will result from the related expense.

Finally, we reported $88 million associated with lifting the valuation allowance of our existing deferred tax asset. This is due to our expectation that higher metals prices and company profitability will continue into the future which will allow us to realize the benefit of those accumulated tax attributes.

[To remove] the impact of these unusual items, as demonstrated on Slide 10, net income applicable to the shareholders [that] have been $30.6 million for the fourth quarter of 2010 compared to $25.5 million for the same period of 2009. For the full year 2010, it would've been $82.6 million compared to $51.1 million for the full year of 2009.

On Slide 11, we see the benefits of lower operating costs and very strong metals prices. Hecla reported operating cash flow of nearly $198 million in 2010, a 66% increase over that reported for 2009, with fourth-quarter operating cash flow alone of $85.8 million. This has allowed us to continually accumulate funds in the treasury, which is set forth on Slides 12 and 13. After an excellent year of cash flow generation, Hecla was able to fund all capital requirements and increase cash available in the treasury to $284 million. The Company has no significant debt outstanding and a $60 million undrawn letter of credit available -- excuse me, line of credit available. Therefore, total liquidity stands at $344 million, which we expect will be sufficient to continue the capital projects that we have on our plate, fund exploration expenditures, fund the environmental settlement previously discussed, and pursue other new business opportunities.

With that, I'll now turn the call over to Dean.

During 2010, $20 million was spent on Hecla's four district-size land positions, including $4.6 million in the fourth quarter. This work resulted in the expansion of our reserves and resources, as shown in Slide 14, and advanced a number of key exploration projects.

In 2010, Hecla was able to replace the mined ore and increase silver reserves to 140 million ounces. However, the most positive news is a 17% increase in resources to 248 million silver ounces with comparable increases in gold, zinc and lead. This is the fifth straight year that resources have been increased significantly at Hecla.

Lucky Friday added 4 million silver ounces of reserves and 17 million silver ounces of resources. As I've described in earlier conference calls, drilling continues to expand and refine the high-grade central and eastern areas of the 30 vein, now down to 8100 level. This is illustrated in Slide 15, which is the longitudinal of the 30 vein where the net smelter return values have been contoured.

Not only has the resource boundary been extended to the 8100 level and defined to the east where the 30 vein remains high-grade, but intermediate veins such as the 50, 70, 90, 110 and 120 [need] more prominence with mining with -- in their sections of high-grade silver and base metals to the east.

Drilling commenced in the fourth quarter from the 4050 level near the top of the mine to expand the reserves and resources above the level to the mineralized veins identified in the gap drilling program from surface. At Greens Creek, we continue to refine and expand the two lower limbs of the Northwest West zone located in the upper left corner of the 3-D view of Greens Creek on the diagram on the left of Slide 16. We keep on extending resources of the carbonate barite rich ores of the 200 South, which is shown in the lower portion of that same diagram.

If you refer to the exploration press release, you'll see a list of very impressive assays from both of these zones. Many post [210] resource estimation. In the diagram on the right in Slide 16, you can see, in [plan] view, where the reserves and resources were added in 2010 and the projected locations for 2011 drilling. We have been able to add 24 million ounces of silver resources in the past year at the 200 South, 5250 South and Gallagher zones. All of these zones are open along strike and could provide additional reserves and resources in the future.

A look at the cross section of the 200 South in Slide 17, where 85% of the resources were added in 2010, shows a folded orebody with two distinct limbs and a possible third limb. Since the thickness and grade of the limbs remain robust, future drilling could extend the resource to the south and infill drilling convert much of this new resource to reserve.

The San Juan joint venture property in Creede, Colorado is traversed by a series of regional mineralized veins shown in Slide 18 that have posted more than 84 million ounces of historic silver production. Recent surface drilling has focused on the shaded areas in the diagram along the Bulldog, amethyst and equity vein trends.

In the north-central part of the property, identified by the star, represents where the amethyst vein intersects the equity structure. Drilling has intersected a broad zone with multistage quartz and rhodochrosite-bearing veins (inaudible) with zones of sulfides containing gold, silver and base metals. A cross section of this mineralization along the plane of the equity structure in Slide 19 shows the broad mineralized zone and some of the essays from the initial drilling into the structure. High-grade gold and silver intersected in the veins are very significant, as this is the deepest precious metal intercept of a major vein structure to date in the north part of the district. These intersections are well below the historically perceived bottom of the precious metal horizon in the Creede district. This may indicate a very large vertical dimension of over 1500 feet for gold-bearing mineralization. The mineralization is also open along strike and may extend for a significant distance along the amethyst and the equity structures.

In 2011, the exploration budget is $27 million, a 33% increase over 2010, and the breakdown in project areas and strategy are described in the exploration press release.

With that, I will pass you back to Phil for further comment.

Let me add that I think our exploration program this year had very good results, defining significant resources at Greens Creek and Lucky Friday. Dean didn't get a chance to talk about the Noonday, moving that from a target to a resource in one year, and then this discovery of the amethyst equity intersection at San Juan.

There is little doubt that much of this exploration will eventually turn into production, and that's how a mining company provides real value. In 2005, we started exploration in infill drilling at Lucky Friday that has defined the largest reserve and resource in the mine's history. We are now starting to work to turn the deep potential into growing production.

If you go to Slide 20, you'll see the installed hoist that is a mile underground. So this is the new hoist that's related to the #4 shaft. It took the better part of 18 months to engineer, procure, excavate and install this hoist that will provide the conveyance 4000 feet deeper.

If you go to Slide 21, you can see the duct work that goes into the hoist room. So far, we've spent about $50 million and we have about $150 million more to spend over the next four years, which includes about $45 million this year.

Go to Slide 22. When the shaft development is complete, we will have an 18-foot diameter concrete-lined shaft, and you can see the picture of that. That will match up with the silver shaft to surface. That is what we are currently using to get to surface. So these two shafts will match up. As a result of this new shaft coming off the 4900 level, production will increase 60% and unit cost per ounce should decline. We would expect later this year for the Board to make a final decision on completing the #4 shaft. But you can see we are well along on the way.

So what are we expecting for 2011? Look at Slide 23. Silver production should be between 9 million and 10 million ounces, slightly lower than 2010 due to lower silver grades, along with a bit higher zinc and lead ore grades, which are all linked just to the sequencing at Greens Creek and Lucky Friday. Silver production is expected to increase in 2012 as grades increase at both properties. This has all been anticipated for a number of years.

We think total costs will be $0 per ounce of silver produced at recent metals prices, so about $13.50 gold and $1.05 lead and zinc. Capital expenditures in 2011 are expected to be approximately $100 million. There are a number of new projects that we are considering that might see that increase somewhat. We'll keep you informed as we make decisions on those things. We expect $27 million in exploration expenditures for the year.

So with that, Gina, I'll open the line for questions.

(Operator Instructions). John Bridges, JPMorgan.

Good morning everybody. Congratulations on the results, and especially on the litigation. You mentioned transaction opportunities. What sort of -- could you elaborate a little bit on that?

There really isn't anything specific that I can elaborate on, but we are obviously looking for how we can further grow the Company, and we will try to develop new opportunities. We do think that, by resolving the litigation, that that's going to help our ability to add new assets to the Company.

Sorry about that, I just had to ask it. Then you talk about production moving up in 2012, but you don't give us an indication as to what you think you'd be doing -- 10% higher, something like that?

Look, we're going to be in the 9 million to 10 million ounce range. We would expect to be back in sort of the 10 million to 11 million ounce range in 2012 and sort of steady-state until we complete the #4 shaft. Then as we get into deeper material that is higher grade at the Lucky Friday, you'll see production there increase about 60%, adding a couple million ounces of very low cost production once that's done. But that's going out 2015, 2016.

That was very helpful. Thanks a lot.

Chris Lichtenheldt, UBS Systems Canada.

Good morning guys. In 2011, can you give a rough sense of contribution from each mine? Is most of the reduction at Greens Creek or is it kind of mixed?

It's primarily at Greens Creek. We'll see about 6 million ounces from Greens Creek, 6 million-plus and about 3 million-plus from the Lucky Friday.

Great, thanks. In this quarter, if I'm not mistaken, if I look at the absolute costs, it looks like costs are a bit higher at the mines. Is that -- can you discuss what's causing that or is that just general inflation?

When we -- if you're looking at our cost per ton, that's probably the best thing to look at.

Yes, that's primarily what I'm looking at. That and I make some other adjustments, but yes, basically that looks like it's up a little bit, at least at Greens Creek. Another way to look at it is obviously per-ounce costs are higher despite much better base metal prices. So I'm wondering what's behind that.

I think the biggest factor at Greens Creek is power. We've had a -- we had a dry year, so we've had to generate more power through diesel than getting off the grid. So that would be the biggest driver. At the Lucky Friday, we have variable pay that's tied to the silver price. When we entered into the new contract with the union -- there's a six-year contract in May, and so their pay that's associated with higher silver prices kicked in with that new contract, and so they got a bit more pay from that. Anything else, Jim, that you can think of?

On the total bottom-line cash cost, of course we've got some revenue related items. In your smelter contracts, you have escalators. Also there's a divergence in the industry, but at Hecla we have full absorption costing at the mine level, so things like mine license taxes, which are driven by profitability, are in full cost per ounce. A lot of companies don't do that. So those would be the biggest items.

Yes, so if you have higher prices, we're going to have higher costs is what it comes down to. But the growth on the revenue side is higher than the growth on the cost side.

Right, that's always a good thing. So when you look at the guidance that you provided for 2011, I'll probably be able to back into it, but are you essentially assuming similar costs on a per-ton basis in 2011 as you experienced in the fourth quarter, or a bit of a reduction given your lower assumed gold price at least, your metal prices?

Look, prices are not that much -- are not that different for 2011 than what we saw in the fourth quarter. So you'll see cost per ton pretty similar to that.

Great. Just maybe one more quick question. I know you don't provide grade guidance for all the metals at the mines, but based on today's metal prices or even fourth quarter, do you have a sense of what your revenue mix will look like? Because you said silver grades down a bit, base metals up a bit. Do you know how that shakes out?

Yes, we will still see -- if you look at the fourth quarter, I think we had -- in fact, I think it's in the appendices, Slides 30 and 31 (inaudible) I'll let you comment on (inaudible). Slides 30 and 31, you can see that the split was in revenue by metal for the year and for the quarter. You'll see silver go down slightly, but it's not going to be much different than what you saw for 2010. It'd certainly be higher than what we had for the average for 2010, lower than what we had in the fourth quarter.

So much of that is driven by the relative price performance of the metals more than the grade, I think. If you look at fourth quarter, we were at 66% precious metals. A lot of that is due to just the way that silver has performed and continues to perform. And so my best guesstimate going forward would be a similar mix, absent a change in relative importance in the metals.

So it's similar even though grades at Greens Creek and (inaudible) are probably a bit higher relative to silver, pretty close.

Right. It will be better than what it was for the whole year, but poorer than what it was or less than what it was in the fourth quarter.

That's helpful. Then just the last quick question, I know you had the conversion recently. I'm just trying to make sure I have the right diluted share count number. In the income statement, the weighted average I think was $2.50-something for the year, and then in your reconciliation section, you showed $2.95 per fully diluted. Is that the right number now, or I just want to make sure I have the right one.

Jim, go ahead.

Outstanding shares on the filing of the K -- and these are primary shares -- are 279 million. The only thing we have in addition to that is there are options of $1.3 million outstanding at year-end, and then there were the warrants which were outstanding at year-end of $24.5 million. So total fully diluted share count is right at 305 million shares.

Okay, perfect. That's it for me. Thanks a lot.

Steve Butler, Canaccord Genuity.

Good morning guys. The completion of the #4 shaft, it says 2014. Is that sort of an early or maybe towards the latter part of the year, Phil, on the completion of shaft #4 and the project for the expanded level of production?

The current plan is the fourth quarter, and probably the latter half of the fourth quarter.

I've asked before. Just clarify maybe what are you looking at in terms of throughput tons per day? Is it all grade, or can you really do better than 1000, or is it tons per day from the deeper part of the mines sustainably out there in 2015 and beyond? What's your throughput assumption?

The long-term throughput assumption is 375,000 tons per year. That compares to the 350,000 tons that we have -- roughly that we've done in the last couple of years. So it's only a modest increase. We, in fact, have an optimization study that's underway to see how much more we can do, because 2010 was interesting because not only did we do the most tons, but we also had about a mile worth of development that was done (technical difficulty) [#4] shaft as well as all of the equipment and personnel that we had to do in relation to that project. So, we think there is the opportunity to do somewhat more than 375,000 tons, and we hope to get a handle on what that number is this year.

Okay. Thanks. The last question for you, Jim, vis-a-vis the settlement number that appears to be headed towards a total of undiscounted $263 million or so. You of course spoke to a tax benefit, if you will, in the quarter. How should we look at this settlement on an after-tax basis? There obviously will be a future shelter on Lucky Friday unless it's both Lucky Friday and can use it in Greens Creek. I don't know. I assume it might be simply Idaho. Is there a tax shelter life of mine here that we should employ to Lucky Friday? How would you help us with respect to tax guidance implications?

I think in the past, I said that one of the things we could expect from both a provision and a cash standpoint is about a 30% effective rate. The payments on the settlement, the big tax benefit applies at the corporate level, since this is a corporate obligation and the federal taxes are the largest. The settlement is deductible as paid. And so when you look at the stream of payments, you get a benefit of nearly 40% in the year that it's paid. My best estimate -- and this of course is highly dependent on bottom-line profitability, which at today's prices we certainly see it occurring -- would be about a $50 million benefit in 2011, $7.5 million in '12, $4.5 million in '13 and $18.6 million in '14. So if you took a 30% tax rate and then reduced it by those amounts, you're going to be as close as I am.

Steve, realize that in the US system, we consolidate all of the activities of the Company into one consolidated return. So it's not related to any one property. And yes, I'll leave it at that.

Sure, fair enough. Thanks guys.

[Alex Sharink], BMO Capital Markets.

Hi guys. I just have a quick question about the G&A expense during the quarter. It was fairly high sequentially. Is that kind of a run rate we should be looking at going forward into 2011?

The quarterly G&A expense gets tied to variable pay. That would've been the largest item that would've come through in the fourth quarter. Jim, anything else that comes to mind?

Nothing that comes to mind. The only comment I would make is if you look at the last two years historically, we have been right around that $18 million number, and that's (inaudible) to expect. We'd expect some seasonal variability. Usually the first and the fourth quarters are a little higher, but when you look at our run rates and our budgets, we're very close to that $18 million number.

[Thomas Adams], Private Investor.

Hello people. I am a shareholder here in California. My question to you is, on these accruals, is that a set-aside contingency that was taken from the cash position of the Corporation already, and how does it affect your current cash position?

No, it is an accrual. Our cash is what our cash is. It will be paid out according to the terms that we've provided. Jim, anything to add?

Yes. The only thing I would add is if you take a look at the disclosure we have in the 10-K, it will provide you so more information and specificity. The settlement is funded out over between now and 2014.

The second thing is the warrants that are outstanding, we are assuming now that those will exercise since they are deep in the money. That would increase our cash balance by $60 million-ish. So I think it's our opinion right now that when you look at our operations going forward, what we have on the till, what we have coming in through the exercise of the warrants, this is a settlement that Hecla can afford to pay over time. It reduces our exposure to that historic litigation that's been going on 20-some years. So, we feel it is best in the long-term interest of the Company to do so.

The last point I'd make is that it is not finalized. So we accrue it, we plan for it, and we hope to have a final agreement. So that's what we'll be working towards.

One last -- one second and last question. Your forward derivative contracts, they are not in the futures market, or organized futures market. They're like a bank forward selling, is that what they are?

They are an over-the -- what's called an over-the-counter contract.

(Operator Instructions). (technical difficulty)

Well, we thank everyone for attending the call. We realize that we put this out on short notice, but we thought it was important to get this news out as quickly as we had it all put together. So thanks. If you have any questions, feel free to give Melanie a call.

Ladies and gentlemen, that concludes our presentation for today. Thank you for your participation. You may now disconnect. Have a great day.