Hecla Mining Co (HL) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third-Quarter 2012 Hecla Mining Company Earnings Conference Call. My name is Deanna and I'll be the operator for today. At this time, all participants are in a 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. Jim Sabala, Hecla's Senior Vice President and Chief Financial Officer. Please proceed.

Thank you, operator. This is Jim Sabala, as she indicated. I'm Hecla's Senior Vice President and Chief Financial Officer. Welcome, everyone, and thank you for joining us for Hecla's third-quarter 2012 financial and operational results conference call. Our news release that was issued this morning before market opened and today's presentation are available on Hecla's website.

On today's call we have Phil Baker, Hecla's President and Chief Executive Officer, myself, Larry Radford, Hecla's Vice President of Operations, and Dean McDonald, our Vice President of Exploration. I'd like to refer you to slide 2.

Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act, as shown on slide 2. Such statements include projections and goals, which are likely to involve risks detailed in our Form 10-K and in our third-quarter 10-Q and in the forward-looking disclaimer included in the earnings release and at the beginning of the presentation.

These risks could cause results to differ from those projected in the forward-looking statements. In addition, in our filings with the SEC, we are only allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of terms such as measured, indicated, and inferred resources and we urge you to consider the disclosures that we make in our SEC filings. With that, I'd like to pass the call to Phil Baker.

Thank you and hello, everyone. I'm glad you could join us. I'm going to provide a brief overview, Jim will speak about the financial results, Larry will cover operations, and dean will provide an update on pre-development and exploration programs. Then we'll have an opportunity for you to ask questions.

First of all, we've made excellent progress at the Lucky Friday Silver Shaft. As expected, the mine should be in production in the first quarter with the ramp up complete about mid-year and full production for 2013 of over 2 million ounces and 2014 should be at normal production levels of about 3 million ounces. Rehabilitation work on the Silver Shaft started in the first quarter of this year and is now complete to approximately 5,700 feet.

We've been doing more than required, replacing corroded steel; in fact, 10 times as much as we allowed for in our plans, so we will not have to do it later in our normal shaft maintenance program. Crews have also installed metal brattices or a steel curtain down the middle of the shaft, so if we choose to, we can install another hoist, which increases workforce efficiency and throughput. Early next year, we expect to replace the controls of the hoist to further improve the shaft.

We know how difficult the shutdown has been for employees and shareholders, so we've worked hard to transform the shut down into something that will be positive for both, long into the future. Today, crews are at work at the 5,900 level developing a bypass around a rock burst that happened in our main haulage line not quite a year ago. The project has 676 feet of development, which will take about 55 days to complete. By year end, we expect the bypass as well as the Silver Shaft to be functional.

It is the completion of these two projects, the Silver Shaft clean down and the bypass, that will allow the mine to go into production. Their completion will also allow work to resume on the #4 Shaft, which starts at the 4,900 level of the mine and go to the 8,800 level, 3,900 feet in length. Deeper access is expected to give the mine decades of future production, production that has higher grades and is in wider stopes and expected to grow production to 5 million ounces by 2017.

We have now recalled all employees necessary to reach full production. I think over 90% have come back to work, which has been very positive development for not only the mine, but also the Silver Valley in Idaho, where the Lucky Friday has the county's largest payroll. I can't express my appreciation enough for the work that's been accomplished at the Lucky Friday this year.

The Silver Shaft has essentially been rebuilt and is in excellent condition and Larry will talk more in detail about the specifics of the work that's been completed to date. But suffice it to say that this rehabilitated Silver Shaft is going to be the life line to carry this great mine into the future.

If you go to slide 4, the advancement at the Lucky Friday is not all of the highlights for us this quarter. At Greens Creek, we had a 19% improvement in silver production from Q2. Silver cash costs were $3.52, slightly higher than Q2 but due to the relatively lower base metals production and by-product credit per ounce, but we still have costs among the lowest of all the silver producers.

This low cash cost has provided strong operating cash flow of $35 million for the quarter and that's after having spent $17 million on exploration and pre-development. I think that exploration has been well spent. Results have been excellent at all of our projects, which Dean will detail more in a moment.

What I want to focus on is Greens Creek, where the underground drilling results have been exceptional. The 200 South and Southwest Bench areas both had intercepts -- two intercepts in excess of 70 feet. If you combine the two areas, they've had 12 intercepts greater than 15 feet that are at least the 0.10 ounce of gold and one of the intercepts had a high of almost a 0.5 ounce per ton gold.

The silver grades in these intercepts are between 15 and 65 ounces per ton, with combined lead and zinc in excess of 15% and in one case, as much as 37%. While Greens Creek has always had stunning drill results, these are truly exceptional and these results are in the table on the next to last page of the release.

However, let me caution you, because the geometry is so complex and requires substantially more drilling and we don't know what this drilling will mean to the ultimate tons and grade and we don't expect this drilling to be reflected in this year's reserves and resources, it's going to be something that will take a number of years to work through. But nonetheless, it's still very exciting and encouraging to see these types of intersections.

In addition to the exploration work, the work on our pre-development projects has gone extremely well. We only started to evaluate these projects five quarters ago and we have already completed the significant rehabilitation at the Star 2000 level and on the equity ramp. Decline development at the Bulldog has already begun and completion is expected in about a year and this decline is expected to be about a $20 million project.

The Hugh Zone economic study at San Sebastian, we've delayed that because of the success that we've had at the Middle Vein. We need to make sure of how and where we locate the Hugh Zone access. We now expect an economic analysis in Q1 of next year.

Given the strength of our balance sheet and the strength of our balance sheet is despite the fact the Lucky Friday has been down, our cash position only declined by $1 million. Given the strength of this balance sheet, our cash flow, and our realized silver prices averaging $35, our Board has declared dividend. The annualized yield on this dividend is 1.4%, which is at the higher end of precious metals companies and it's a distinct advantage our equity has over the silver ETF. With that, I'll turn the call over to Jim.

Thank you, Phil. During the first and second quarters of this year, we've said we expected silver production to increase over the course of this year. I'm pleased to report we saw a 19% higher silver production in the third quarter compared to the second quarter, as shown on slide 6, and 23% higher silver production than reported for the first quarter.

This was the result of in increases in throughput at Greens Creek and in average silver grade mine. During the course of this year, silver production has been steadily increasing at Greens Creek and we expect the fourth quarter to continue that trend to reach our more than 6 million ounce full-year production guidance.

Margins and cash costs also remain very strong, as shown on slide 7. Average third-quarter silver cash costs, net of by-product credits was $3.52 per ounce, compared to $0.67 per ounce during the third quarter a year ago. The higher cash cost per ounce in this year's third quarter was due largely to the increase in silver production and constant base metal production, which means simply less by-product revenues per ounce of silver. With a cash margin of $31.48 per ounce, Hecla remains a leader in cost and margin among all silver producers.

Operating cash flow for the third quarter was $35 million, shown on slide 8, which is in spite of the temporary shut down of the Lucky Friday and our ongoing capital programs there and was adequate to cover our Company-wide capital expenditure program. We look forward to the restart of the Lucky Friday and its contribution to cash flow in 2013 with continued strong silver markets. This strong cash flow has allowed us to invest record amounts at the Greens Creek in CapEx and on our accelerated exploration and development programs.

Despite this increased investment, our cash and equivalents at the end of the third quarter remains a strong $232 million; only $1 million less than Q2, as shown in the chart on slide 9. We fully expect to be able to fund our planned future expenditures through our cash flow, our strong balance sheet, and an untapped $150 million revolving credit agreement. In addition, the Company has no other significant long-term debt.

Slide 10 sets forth our average realized metals prices for the quarter. Average realized silver prices were $35 per ounce compared with average realized prices in the third quarter of last year of $37.02 per ounce. This allowed the Company to pay a cash dividend of $0.0225 per share under our current dividend policy. Gold, zinc, and lead prices were also slightly lower compared to a year ago, with gold averaging $1655 during the third quarter compared to $1700 during the same period a year ago.

For the quarter, we reported $0.01 per share in adjusted earnings per share. Set forth on slide 11 are a number of factors impacting the EPS number, including $6.1 million in suspension-related costs at the Lucky Friday, lower average silver and base metals prices versus 3Q of 2011, exploration and pre-development expense, which is up 47% to $17.1 million compared to a year ago and $9.1 million non-cash loss from mark-to-market adjustments on our long-term hedging portfolio.

A $14,000 tax provision compared to $27.3 million in the same period in 2011, due to higher pretax income in that period, and gains of $5.9 million on provisional price adjustments versus losses of $3.6 million in 3Q of last year. With that, I'd like to turn the call over to Larry for a review of operations during the third quarter. Larry.

Thanks, Jim. Beginning with slide 13, as Phil mentioned, shaft rehabilitation work at the Lucky Friday mine has been going very well. As of today, all cleaning, replacement, and removal of cementitious material has been completed down to approximately the 5,700 foot level. Development crews are now at work on a bypass drift at the 5900 foot level to the north of the Silver Shaft, which will be used when production resumes.

Production is expected to ramp up in the first half of the year to normal operating levels, reaching estimated full year 2013 production of over 2 million ounces of silver. By the end of the year, we expect to return to our full complement of 54 salaried and 200 hourly workers, which is the number of workers needed for full operation. Additional safety training has been given to all employees.

Planning for restart activities have begun on the #4 Shaft project. We expect to resume work on #4 Shaft in the first quarter, following completion of the Silver Shaft work. To date, we have invested approximately $90 million in #4 Shaft with about 45% of the work completed of the estimated $200 million expenditure. The #4 Shaft project is planned to provide access to reserves, resources, and provide additional exploration targets. This major project is expected to be completed in early 2016.

Site upgrade projects have also been ongoing in the third quarter, including tailings dam construction, a reagent application upgrade project in the mill, and design of a new technical services building. Groundbreaking for the new buildings is expected to be in the spring of 2013.

Slide 14 shows photos of the quality and progress of the work that's been accomplished at Lucky Friday. We believe that the shaft has been returned to the same state that the shaft was in when commissioned in 1983. Furthermore, additional features are being added which should only enhance the safety and potentially the productivity of the shaft.

For instance, a metal brattice barrier is being added to separate the west and east halves of the shaft. This addition makes it possible for us to add an additional hoist and to add additional electrical capacity through the shaft. This additional capacity has the potential to increase hoisting capacity. Slide 15 lays out the timeline for benchmarks on the Silver Shaft and the schedule we have met on our way to restarting production in the first quarter of 2013.

Slide 16, at Greens Creek, silver production was up 19% from the second quarter of both 2012 and 2011. Mining costs per ton increased 23% and milling costs per ton decreased by 19% in the third quarter of 2012, as compared to the same period in 2011. Higher mining costs were primarily due to the increased use of contract miners, which is more expensive than internal labor.

Milling costs per ton are down due to higher throughput and a greater availability of hydroelectric power, which is cheaper than diesel-generated power. Our record capital expenditure program at Greens Creek continues to advance, including the 200 South access development, tailings down expansion and definition drilling. The camp expansion is functional and complete.

These investments will help prepare the mine for future resource development and continued low cost production with sustained strong metal markets. I'll now pass the call to Dean for an overview of our exploration and pre-development during the recent quarter.

Thanks, Larry. Exploration and pre-development in the third quarter continued to advance targets at our 100% owned, highly prospective, North American properties. Exploration expenditures for the third quarter were $11.7 million, with the full-year expenditures expected to be approximately $30 million. Pre-development expenditures for the third quarter were $5.4 million, with full-year pre-development expenditures expected to total approximately $23 million.

The ramp-up of pre-development expenditures in the second half of this year includes $7.3 million development of the decline into the Bulldog and investing a further $3 million to improve ventilation and establish new drill platforms at the equity, both in Creede, Colorado.

Some of the most exciting exploration results in the quarter occurred at the San Sebastian property in Mexico. As shown on slide 18, a planned view in the upper left corner shows the close proximity and parallel trend of the Middle Vein to the Francine Hugh Zone Vein trend. Drilling on the Middle Vein in the quarter has defined high grade gold-silver mineralization for up to 3,000 feet along strike and from surface to over 1,000 feet depth.

Recent intersections include 0.36 ounces per ton gold and 39.2 ounces per ton silver over 7.7 feet and 0.52 ounces per ton gold and 121.7 ounces per ton silver over 1.7 feet. Two drills continue to expand the Middle Vein mineralization to the northwest, southeast, and at depth. Due to its proximity, we are evaluating the effect of the Middle Vein on the ramp access to the Hugh Zone.

At Greens Creek in Alaska, shown on slides 19 and 20, we had exceptional drill results on the 200 South and Southwest Bench, where we continued to refine and expand the resources in areas where there is current mine infrastructure. Definition and exploration drilling continued to define overlapping lenses of the 200 South, as shown in slide 19, that separate into a flat-lying zone that is folded to the right or south and a separate steep ore body that extends to the south and at depth, as shown in the cross-section in the right-hand diagram on the slide.

The definition drilling has been concentrated on the two zones just below and south of the current reserve where there is good continuity and broad widths of high-grade mineralization. The exploration drilling is defining extensions to the south in the area of the folded mineralization. The wide high-grade intersections are best developed in the hinge areas of this fold.

Both zones of precious metal-rich veridic ores are open to the south and at depth and will continue to be evaluated in 2013 and beyond. An extensive list of assays is provided in tables at the end of the quarterly press release.

In slide 20, the plan view in the left diagram shows the location of the Northwest-west, Southwest, and Southwest bench ore bodies where we have defined numerous high-grade intersections in the past year and a half. All of these ore bodies are west of the Mackay fault and the open trend of these ore bodies is further to the west. The longitudinal view of these ore bodies in the right diagram shows the Mackay fault in blue and the mineralization trends to depth that is similar to the plunges of the 200 South and 5250 ore trends.

We expect this will be an important area for underground exploration at Greens Creek in the coming years. Surface drilling to the northwest and west of the mine at Killer Creek and West Gallagher, respectively, have intersected interesting mineralization. Copper-bearing stockwork veins is the dominant mineralization at Killer Creek and massive sulfidic zones are present at West Gallagher.

On slide 21, at the Star project in the Silver Valley of Idaho near the Lucky Friday, the plan map in the lower left corner shows the locations of the expanding Moffitt and Noonday mineralization zones. In the upper longitudinal, you can see that recent drilling has extended the Moffitt vein approximately 500 feet down dip, along a strike length of approximately 800 feet and show the mineralized trends to the southeast and at depth.

Drilling at the southeastern end of the Noonday resource, as shown in the lower right-hand diagram, appeared to upgrade the model grades in the previous inferred resource and extend the Noonday resources over 400 feet to the southeast. A recent drill hole of 29.1 ounces per ton silver and 8.9% combined lead-zinc over 10 feet is the highest-grade silver intersection in two years of drilling in the area.

This silver-rich mineralization is open to depth and to the southeast. Southeast extension of the Star 2000 exploration drift and drill station is complete and drilling is expected to begin to evaluate silver-rich extensions to the Noonday, [utilike] and Morning veins.

Finally, on slides 22 to 24, shows some of the activities at San Juan Silver, which includes the advanced stage Equity and Bulldog projects in Creede, Colorado. The Bulldog is an historic mine which produced approximately 25 million ounces of silver before it was closed by its previous owners in 1984 due to lower silver prices. There are currently 37 million ounces of silver resource in the mine and underground exploration platforms are in place for potential future expansion of those resources. At the Equity, we expect to report an initial resource soon after year-end.

The new decline into the Bulldog project, as shown in slide 22, was begun on September 12 and the decline is now advanced over 100 feet. The steel sets, rock bolting, and flash coating shown in slide 23 demonstrate the procedures to ensure long-term stability in the portal area.

As shown in slide 24, major infrastructure projects at the Bulldog site, such as the maintenance and batch (inaudible) shops are completed and operational. The Bulldog environmental assessment work continues with the Forest Service decision expected early in the second quarter of 2013. With that, I'll pass you back to Phil for closing comments.

Thanks, Dean. We believe third quarter was another improving quarter that sets Hecla up for 2013 growth in production and investment in the mines and projects; all which generate shareholder value. We think Hecla's share price doesn't reflect this, but as we continue to execute our plans, we believe that will change. With that, Deanna, you can open the line for questions.

(Operator Instructions) Chris Lichtenheldt, UBS.

On Lucky Friday, with respect to some of these potential capacity increases. I think before the closure, it was operating around 900 tons a day. Do you have some idea of what it might look like, what capacity could be when you get back up and running?

Ultimately, and we would think this would be around mid-year, we will get back to that 900 ton per day, 950 ton per day sort of range, but it will take us the better part of two quarters to build up to that. 200 tons a day is probably not unlikely early on, and then it will build up from there. 700 tons a day maybe in the second quarter. It's a process where we'll build up and there's things we don't know, so we are being a bit cautious. We want to make sure that we start back up and we hit all of our numbers and also make sure we have the operation operating as safely as it can be operated as we start back up.

Okay, that makes sense. You're not really, at this point, focused on trying to stretch beyond 900, 950? You'll get to that point and assess the potential with the work you've done?

There's an optimization study that's going on. Larry, maybe you can talk about that process that we're going through with the optimization.

Sure. One of the things I mentioned, Phil mentioned, is that we've separated the two halves of the Silver Shaft, which can, in the future, allow us to add an additional service hoist and add hoisting capacity. What exactly that means, we are working through that right now. We are developing mine plans around a scenario where we put another service hoist in and we're formulating what the bottlenecks might be; whether they be ventilation, cooling, services, those sorts of things. We're in that process right now.

Okay. Can you just remind us, is the optimization study part of a larger study with respect to everything to the Silver Valley or is that still just a Lucky Friday assessment?

It's primarily a Lucky Friday, but it's not lost on us that there might be an opportunity to do some things with the Star, so there's some interaction that has not yet taken place, but conceivably could take place as we continue to work the study. There's a lot of moving parts in the study. It's not a straightforward thing. There's lots of variables.

Okay. That's helpful. Thanks a lot.

Jeff Wright, Global Hunter Securities.

I understand looking at the slides and going through this, that the #4 Shaft, you're looking to recommence that endeavor in early 2013. Do you have any idea what the CapEx budget for '13 would be, or are you going to wait a little bit longer on that one?

We're not prepared to give the guidance yet on how much capital we'll spend. It just depends on exactly when we get started there and some assessment of the situation. But it is not going to be dissimilar to what we have spent in the past, which what has been, Jim, about $50 million.

Yes.

Call it $50 million for a rough estimate at this point.

Okay. Then secondly, at Greens, it looks like you increased the sustaining capital for the year at Greens Creek. Should we go with that higher run rate going forward for sustaining capital there?

The word sustaining capital is kinds of all in the eye of the beholder.

Yes.

We are, no doubt, have made a conscious decision to increase the level of capital expenditures at Greens Creek to generate returns, reduce risk, extend mine life. We will continue to do that until we sort of work through the list of things that we're able to come up with. When you think about it going forward, can we spend at a similar level that we're spending now in this price environment? Yes, we can, and to the extent it makes sense, we probably will, but we have the human capacity. We have the logistical capacity to do that, and so we will as long as it makes sense.

We're just confident that this mine will -- we will have exploration success, and we're very pleased with the results that we saw from the exploration this past quarter. Underground, we were very pleased with the surface exploration that we have. We don't have anything to announce in terms of more reserves or resources and we won't for some time, but we're confident that it's all moving in the right direction, so it makes sense to make these investments in the mine.

Okay. Thanks.

Anything, Larry, you want to add?

No. There's obviously maintenance capital that will be expended again next year, development capital, and as Phil said, very much targeting and adding reserves to Greens Creek.

Appreciate it. Thanks a lot.

(Operator Instructions) Trevor Turnbull, Scotia Bank.

On the suspension related costs at Lucky Friday, You'd provided a figure for Q3. Do you have a sense of what that might look like for this present quarter?

I'd expect it to be very similar, Trevor. It's been running about $4.5 million a quarter cash. It's been running about $1.5 million of depreciation, and as we indicated, we're going to wrap this effort up, we believe, in the fourth quarter and I'd expect a similar amount.

Only reason it will be slightly higher, I don't have the number right in front of me, but Jim, we have more employees in this fourth quarter, so there is some additional costs associated with that.

Okay.

But it's not going to be materially different.

Yes. Following on a little bit on Chris' question, he was asking, I think, about how many tons a day you were looking for next year. My question is more related to the 2 million ounces or so that you're looking for out of Lucky Friday, and yet you said that you're looking for production to start in Q1. That seems a bit of a slower pace than what the mine had done in the past. Does that mean, given this is a restart, that we should think some of what happens in Q1 is non-commercial production, or is anything coming out essentially going to get run through the income statement like it is commercial production?

I'll let Jim answer the accounting question, as to whether it's commercial or non-commercial. I think we're sort of stuck in putting it as commercial.

The rules are as soon as you start turning your mills, it's commercial production and you have to report it as such. Of course, as we began the ramp-up, some stopes will come on quicker than others so you won't be up to your design capacity initially, so you can expect to have some higher unit costs in the early stage of this.

Okay. That might help explain why you're at a slightly lower annualized production rate, is that there will be a ramp-up we need to think about. You obviously can't just jump right back in at the full production rate?

That's right.

That's right. There's some stop stopes that are in pretty good shape, but there's others that there's going to be quite a bit of rehab that has to be done after it -- in the ramps and everything after it being idled for a year.

Would it be safe to say that with respect to getting the mills turning, that's something you would expect to happen shortly after the new year or is that a little later in Q1?

I think it's later in Q1. We probably will batch material through, and that will be the way to have the milling costs be as low as they can be.

Yes. Okay. Sounds good, guys. Thank you.

John Tumazos, John Tumazos Very Independent Research.

If you could refresh, in the Lucky Friday work that you did in 2012, how much was capital, how much was expensed? Should we think of the 2 million ounces next year being like normal production with the normal contribution margin of at current prices $20 an ounce times two? Or is there a bigger benefit because of disruption in expenses, consultants, and maintenance and all those things in treatment of the remediation?

With respect to your first question, John, the capital versus operating, do you have that, handy?

The capital on our original plan that we put forth and we're tracking against that, John, was $28 million, roughly. In addition, we talked about the P&L impact and the P&L impact of the holding costs was $4.5 million a quarter cash and about $1.5 million depreciation.

With respect to production next year, now, we're going to have that 2 million ounces represents the ramping up of production for 2013. We would expect to produce around 3 million ounces 2014 and beyond until we get deeper in the mine. That's historically what the mine has operated at, is roughly 3 million ounces, a little more than that, but just call it 3 million, and we would expect it to do that.

On the cost side of things, the biggest issue is going to be the cost associated with ramping things up. Once we get into full production, then you'll see us have a cost structure similar to what we've had in the past, plus whatever increases for inflation and additional personnel and any other changes that we've made. It's going to go back to much of what you saw in the past, but we think with a number of improvements to the Silver Shaft.

Thank you.

There are no more questions at this time. I would now like to turn the call back to Phil Baker, President and Chief Executive Officer, for closing remarks.

Thanks very much. I appreciate everyone being on this call on election day in the US, and we're certainly available for any questions you might have. Feel free to call Jim or me, and we'll be happy to answer anything. Thanks very much. Have a good day.

Thank you very much. This concludes today's conference. You may now disconnect and have a great day.