Hecla Mining Co (HL) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2013 Hecla Mining Company earnings conference call. My name is Denise and I will by your conference moderator for today. At this time, all participants are in a listen-only mode. Later we will facilitate a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. Mike Westerlund. Please proceed.

Thank you, Operator. This is Mike Westerlund, Hecla's Vice President of Investor Relations. Welcome, everyone, and thank you for joining us for Hecla's third quarter 2013 financial and operations results conference call. Our news release that was issued this morning before the market opened and today's presentation are available on Hecla's website.

On today's call we have Phil Baker, Hecla's President and CEO; Jim Sabala, Senior Vice President and Chief Financial Officer; Larry Radford, Hecla's Senior Vice President, Operations; and Dean McDonald, Senior Vice President, Exploration.

Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and constitute forward-looking information under Canadian Securities law, as shown on slide two. Such statements include projections and goals which are likely to involve risks detailed in our Form 10-K, Form 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 will pass the call to Phil Baker.

Thanks, Mike. And hello, everyone. Good morning. To begin with, I want to remind you all that -- where we were 21 months ago. I can tell you we were a company facing significant challenges. By the way, I apologize for my voice, I have a small cold. Our Lucky Friday mine had temporarily suspended operations to complete a shaft rehabilitation. Likewise, our Greens Creek mine made significant investments in infrastructure designed to reduce operating risk. And that also temporarily impacted silver production. At that time, we told the market that we expected both of these properties to return stronger than ever. And I'm pleased to report that they both have.

This quarter the Greens Creek mine produced 1.8 million ounces of silver at a cash cost, after byproduct credits, for silver ounce of just $5. However, that is higher than a year ago. Increase in this cost is due to the 30% more silver production with a relatively constant byproduct production. In fact, by producing more ounces, the primary cost of mining and processing silver has actually decreased by $6.85 or 20% per ounce from last year. And this really is attributed to our operating folks and their ability to achieve production targets while maintaining a tight cost discipline.

Similarly, we told the market that the Lucky Friday would reach its historical production rate during the second half of this year. I'm pleased to report that we achieved that goal in September. As a result, costs at Lucky Friday are declining and production is increasing, a trend we expect to continue in the fourth quarter. You can see it in the trend from Q1 to Q3, with silver production increasing from 120,000 ounces to 479,000, and per ounce cost declining from $36.55 per ounce to $16.50 per ounce. October production is on track with historical throughput levels, so we expect continued improvement in Q4.

Finally, when we acquired and financed the Casa Berardi project on June 1, we expected the property to produce 60,000 ounces of gold over course of the second half of 2013, with 20,000 ounces coming from the third quarter. We actually produced 23,406 ounces in the third quarter, exceeding our goal. Despite this, we are lowering our estimate for Casa Berardi's 2013 gold production to Hecla by 5,000 ounces to about 62,000 ounces or 32,000 ounces in the third quarter. And Larry will talk more about this in a moment.

While we were doing all of this, we continued to maintain our focus on safe and efficient operations. Just last week we received the National Institute for Occupational Safety and Health Mine Safety and Health Technology Innovations Award. This is a government agency that looks at research in a number of areas related to health and safety. This award recognizes companies that have made extraordinary efforts to apply technology to improve the safety and health of mine workers. So while we have been focused on improving our production and reducing costs, at the same time we are focused on continuing to improve the safety of our operations.

Now, let's go to slide four. Regarding what you can expect from Hecla the rest of the year, and in our -- you can see it from this slide and in the press release, that we expect production and expenditures to be as follows; silver production to be near the high end of the previously communicated guidance of eight million to nine million ounces, with cash costs after byproduct credits per silver ounce of approximately $6.50. These costs are higher primarily because of more silver production relative to byproduct revenue.

Gold production from Casa Berardi is expected to achieve 55,000 ounces in the second half of the year, bringing total gold to Hecla since the June 1 acquisition to 62,000 ounces.

Capital expenditures for which we provided guidance of $178 million last quarter, are to be further reduced to $163 million for the full year, an additional reduction in exploration expenditures from previously communicated target of $22 million to $21 million, and similarly we expect pre development expenditures which had been reduced to $16 million to be further reduced to $14 million.

At today's prices, we should have more than $200 million in cash on the balance sheet at year end. And despite lower prices and less exploration expenditures, we anticipate strong silver reserve growth at year end.

So we really have made progress on all fronts, both our silver and gold production for the quarter exceeded previously communicated guidance. We thoughtfully reduced our discretionary expenditures of capital, exploration and pre development an additional $18 million or 8% from last quarter without impacting our production outlook. And you are going to continue to see us drive goals that focus on safe operations, production optimization and cost control, both operating and capital, as we move forward. Now, let me turn the call over to Jim for the third quarter financial review.

Thank you, Phil. Starting with slide six; during the third quarter, total revenues were $107 million, which is 30% higher than the previous year's third quarter despite lower metals prices, primarily due to significantly higher production. The higher production was driven by a 12% increase in silver production at Greens Creek, the successful ramp up to full production at the Lucky Friday, and the full integration of Casa Berardi, where gold production for the first full quarter under Hecla ownership exceeded our expectations. The Aurizon acquisition has truly expanded Hecla's precious metals production and created a diversified precious metals company, with approximately 73% of our revenue now attributable to silver and gold from our three diversified geographic locations.

Consolidated silver production was 2.3 million ounces. And as Phil mentioned, we expect to be on the high end of our previously reported guidance of between eight million to nine million ounces of silver production for the full year, along with approximately 118,000 ounces of gold production, of which 62,000 of ounces is expected from Casa Berardi.

As you can see on slide seven, realized silver and gold prices were down 37% and 24% respectively from last year's third quarter and zinc was down 2%, while lead prices increased about 7% from the year earlier period.

In the first nine months of this year, we generated $23.5 million of gains on derivative contracts, due in part to our base metal hedging program, which has locked in prices for about half of our zinc and lead production for the next few years. We currently have about $300 million in future-based metals revenue, hedged out that three years, increasing the predictability of cash flows. With this program we have reduced the risk associated with our base metals production and locked in the equivalent of a full year's operating costs. And I will mention, however, we do not do any long-term hedging with regard to our gold or silver. We have also removed the volatility of about 95% of all of our metals exposure between the shipment of concentrate and the payment received thereof.

On slide eight, cash costs on a consolidated basis after byproduct credits per silver ounce were $7.40 compared to $3.52 per ounce in the last year's third quarter. And as Phil mentioned earlier, while on the face this might seem like an unfavorable trend, the increase is really due to two very favorable factors. First, the ramp-up of Lucky Friday silver production, which has increased from 120,000 ounces at a cash cost per ounce of $36.55 in the first quarter, to 217,000 ounces at a cash cost of $32 in the second quarter, to 430,000 ounces at a cash cost of $16.50 in this third quarter. Lucky Friday hit its stride late in the third quarter and we expect continued improvement in Q4.

We also experienced continued very strong silver production at Greens Creek, which is the result of strong silver grades vis-a-vis our base metal production. Because of the strong silver production cash costs before byproduct credits actually decreased by $6.85 per ounce, but due to the relatively constant base metal production, the per ounce cost after byproduct credits increased. As a result, silver margins on a consolidated basis remain strong, as shown on slight eight. Our margins were $14.82 per ounce of silver or 67% during the third quarter.

And Hecla's balance sheet remains very solid, with $238 million in cash and equivalents at September 30, which we believe gives us more than enough liquidity to continue to grow Hecla. We also have an undrawn $100 million credit facility. On slide 10, showing cash flow, you can see during the quarter that we generated adjusted EBITDA of just over $30 million.

During the third quarter we invested $52.5 million in CapEx at our projects, with a total of $116 million in CapEx for the nine month period. Full year, we are looking at $163 million for total cap expenditures, excluding capitalized interest, which is 26% below the level we set at the start of this year. The CapEx programs for the various projects we began at the start of this year that are designed to reduce risks, increase consistency of operations or increase mine life.

We spent $34 million in pre development during the quarter and $12.8 million for the nine month period, and we expect the year to total $14 million or 41% below the level set at the beginning of this year. Exploration expenditures were $5.8 million in the third quarter and $18.5 million for the nine month period. For the year, exploration spending is expected to be approximately $21 million or 29% below the level set at the start of the year.

As mentioned earlier, we continue to work to reduce discretionary expenditures and the current guidance for capital, exploration and pre development expenditures represents additional reductions of 8% from that communicated last quarter and 26% lower than the target set forth at just the start of this year. We are fortunate because a lot of our capital expenditures are largely discretionary, as our exploration and pre development. We own our projects and do not have minimum investment requirements, so we can link our expenditure level to the amount of operating cash flow we expect to generate.

We did experience a $5.2 million operating cash flow for the quarter. But it was due to the fact that we had a Greens Creek concentrate shipment that occurred right at the end of the quarter which delayed its cash flow until early in the fourth quarter. This is not unusual, given the fact that Greens Creek has very large shipments. Also impacting cash flow was a buildup in inventory at Casa Berardi, post acquisition.

We are currently in the midst of our annual planning process, and we expect to provide you our full 2014 guidance early in the new year. With that, I would like to turn the call over to Larry for a review of operations. Larry?

Thanks, Jim. On the operating side, I'm very pleased with how the Lucky Friday ramp-up has gone since the mine restarted operations in February. This year, our team has rehabilitated 12 miles of workings, including the installation of 125,000 rock bolts. We continually upgraded the infrastructure as we prepared the mine for operations. As you can see on slide 12, all six mining fronts came in to operation -- into normal operation in mid September, averaging historical production rates.

On slide 13, you will see that silver production in the third quarter at Lucky Friday was 479,000 ounces, up 121% from the second quarter, as its cash cost after byproduct credits per silver ounce declined 49% from the previous quarter. Lucky Friday is expected to produce around 1.6 million ounces in 2013. Lucky Friday is expected to reach an average cash cost after byproduct credits per silver ounce of approximately $9.50 per ounce in the month of December.

We have also recently reached a significant milestone on the #4 shaft project with the excavation of the shaft station on the 5900 level. This is one of the three shaft stations on #4 shaft that will allow the loading and unloading of men and materials once the shaft is operational, expected in 2016. The shaft is engineered to access higher grade ore zones and is expected to allow silver production to increase to five million ounces in 2017.

On slide 14, Greens Creek had another consistent quarter, producing 1.8 million ounces at a cash cost after byproduct credits per silver ounce of $5. For the first nine months, production totaled 5.6 million ounces of silver at an average cash cost after byproduct credits for silver ounce of $4.18. Added production has reduced the cost per ounce before byproduct credits by 22% year-to-date as compared with the same period in 2012. Greens Creek is expected to produce approximately seven million ounces of silver in 2013.

Capital expenditures in the third quarter at Greens Creek were $18 million. I'm pleased with the CapEx programs and the improvement initiatives at Greens Creek. We have focused on improving safety performance, improving equipment reliability, having a sufficient quantity of equipment to mine efficiently, improving the training of miners, reducing turnover, increasing mine life, better defining the ore body, and improving ground control. These initiatives have been targeted to improve consistency in operations.

Also the U.S. Forest Service has issued a Record of Decision, or ROD, on the planned expansion of the Greens Creek tailings facility. The ROD supports construction of a facility that provides storage capacity that is sufficient for the current mine life. The ROD is now in an appeals period being managed by the U.S. Forest Service which could last until the end of the year.

On slide 15, Casa Berardi produced 23,406 ounces of gold in the third quarter at an average cash cost after byproduct credits of $1,066 per ounce of gold or 7% lower than the previous quarter. We still expect Casa Berardi to produce 62,000 ounces this year under Hecla ownership, with 55,000 ounces coming in the second half with average cash cost after byproduct credits per gold ounce of approximately $975 for the fourth quarter. The mine is undergoing a transition for mining zones west of the West Mine shaft to mining zones east of the shaft. Bringing the first of these zones, the 118 zone, into production could increase gold production as the grades are expected to improve and has the potential to reduce congestion in the mine.

Capital expenditures in the quarter were $16.9 million at Casa Berardi. The project that was originally started by Aurizon to deepen the West Mine shaft by 1,100 feet requires approximately another 150 feet of shaft construction and shaft loading facilities to be completed. This project, combined with the 1010 drift is expected to provide access to the 118 zone and to facilitate deeper exploration. We expect the shaft work to be done this year, loading pockets in the first half next year and the 1010 drift by year end.

Additional mine enhancements include the now completed and commissioned concrete plant and a new paste fill facility, which is completed and undergoing commissioning. The new paste plant, shown on slide 16, should help us cycle the stopes faster by reducing the time that cemented backfill needs to set up. The addition of a paste backfill plant has also the potential to reduce dilution and reduce congestion in the mine.

We have also begun integrating the Casa Berardi technical team with the Hecla corporate technical services team. This integration is focused on rebuilding the long-term mine plan and in better structuring the ground control program. As with Greens Creek and Lucky Friday, the goal is to improve safety performance and ensure consistent operations and to optimize our cost per ounce margins.

One final note in Quebec is that the proposed new Quebec Mining Act, also known as Bill 43, was defeated on October 30th in the Quebec National Assembly. The bill proposed to change mining royalties to give the province veto rights over mining to increase reclamation mining and to require that new projects that proposed processing ores outside of Quebec be supported by a feasibility study. I will turn the call over to Dean for exploration and pre development.

Thanks, Larry. We made positive exploration progress at our three operating mines in Alaska, Idaho and Canada, targeting additional resources and reserves, and advanced the company's pre development projects in Colorado, Mexico and Quebec. There has been considerable success in drilling high grade intersections at the Casa Berardi, Lucky Friday, and Greens Creek mines and the table of recent intersections can be found at the end of the press release.

Greens Creek was of particular interest this quarter and I will focus my comments on it. Starting on the left diagram in slide 18, a definition drilling program was completed at East Ore at the north end of the mine that is expected to upgrade the current reserve in this area. Definition and exploration drilling of the Deep 200 South has defined three stacked folds of high grade mineralization, as shown on the right diagram of slide 18, and represents up to 600 feet of down dip continuity.

To put both diagrams in context, Deep 200 South currently represents a mineralization of trends that extends over 3,000 feet along strike and over 1,000 feet of depth. Drill intersections continue to be outstanding and mineralization remains open to the south, as does the 5250 and Gallagher trends, as shown in the left figure of slide 18. We have many years of drilling on all of these targets.

One of the exploration projects I'm most excited about is the surface drilling in the Killer Creek area. As shown in the left diagram of slide 19, this target is less than a mile from the current Greens Creek mine infrastructure and represents a new center of mineralization. A cross-section of the Killer Creek area in the right-hand diagram shows a broad network of veins that locally grade up to 10% copper and 10.4% combined lead-zinc. We believe these stalkward veins are characteristic of event or source area for mineralizing fluids for the Greens Creek deposit or a completely separate sulfide deposit.

The Heva-Hosco, part of the Aurizon acquisition is located in the prolific Abitibi gold mining district of Quebec and is one of the pre development projects shown in slide 20. A recent drilling program at Heva has dramatically increased resources. And the table document these changes is on the last page of the release. The Heva project is more free milling than the adjacent Hosco resource and will receive the greater attention as we advance metallurgical and mining studies in the future.

At the San Juan Silver in Colorado, the Bulldog infrastructure advanced with the breakthrough of the new decline into the previous underground workings. We will stop rehab until we are assured of permits and see where metal prices go. Scoping studies and economic models for the Bulldog continue to be advanced.

At San Sebastian in Mexico, a resource estimate is being finalized on the middle vein and scoping studies to establish ramp access are underway. This is probably our most advanced project. We will consider, as we did in 2001, if there are low cost ways to get this property into production and where it can carry a portion of the capital for its long-term development.

We have advanced all three of our pre development projects this year and we will evaluate each of them in the context of a larger and more diversified Hecla and determine which of the company's pre development projects has the greatest potential to generate value for shareholders relative to our other opportunities. I will now pass the call back to Phil for some closing comments.

Thanks, Dean. We have come a long way from where we were at the beginning of 2012. The Lucky Friday mine production is ramping up and its costs are falling as expected. Our investments in Greens Creek have resulted in a strong consistent performance of a mine that is world class. We acquired Aurizon and the integration of Casa Berardi is underway. And we are starting to see the challenges of the mine becoming an opportunity to deliver the same sort of long-term value that Greens Creek and Lucky Friday provide. We expect to see production increases in the fourth quarter and costs come down accordingly. And the fourth quarter should be our strongest quarter on all fronts.

The current precious metals price -- I'm sorry, the current precious metals environment highlights the importance of having low cost, efficient long-life operations and low political risk jurisdictions. I firmly believe Hecla has among the best suite of assets in the precious metals space to weather lower prices, which is why the assets have operated for decades. It is not lower prices that we expect. We expect higher prices. And just as in the past, if prices price, Hecla will be among the best performing companies on the New York Stock Exchange.

With that, Operator, we will open the line for questions.

(Operator Instructions). Our first question comes from John Bridges with JPMorgan. Please proceed.

Hi, good morning, Phil, Jim, Mike. Interesting comment in Quebec with respect to the change in the downing of that law. What are the implications there? And where do you expect it to go next?

At this point, the law has been voted down. I think it was -- I forget the vote but I think it was 57-51, is my recollection. It is sort of back to the drawing board for those guys that proposed about. We at this point don't know if there is -- if there will be new legislation that will come forward. We would expect that there is the potential for that. And we are monitoring it. But, we did not anticipate that there would be a major impact from the legislation for Casa. But it would have hurt the industry in a major way and the industry is already feeling lots of pain. So we are not anticipating any major changes but we are watching it closely.

Okay. Very pleased to see the drill results coming out of Greens Creek. I was wondering how deep the Deep 200 was? And whether you needed significant new infrastructure to go after that stuff?

Well, I'm going to let Dean answer that. Probably if you look back at that cross section, you get some sense of the deepness of it. Or if you can look at -- on the press release there it actually shows the number of feet where those drill holes are.

Yes.

Go ahead, Dean.

John, certainly the development that is in place now that we have used to drill off the resource is -- will be used for production. We clearly will need to ramp down into some of those areas. But we don't anticipate any significant problems in doing that. It is just extending our ramp system.

How long of a hole would it be from there back to the portal?

Well, it is -- if you look at the assay results table, it has the depth from mine portal feet. And so there is a whole variety of different --

I would add that it is one of the reasons why we are pushing down there now is that is the deepest part of the ore body, as we know it now. So we would like to integrate that ore body into our current mine plan rather than just waiting to the end of the mine life and then having to haul the deepest material. So that is one of the reasons why we are pushing this hard now.

And John, to give you a sense, you know, we are really looking at, in a vertical sense, you know, 800 to 1,000 feet depth vertical depth from the portal area.

Okay. That's about doable, I guess. Excellent. Well done on the results and look forward to Q4. Thank you.

Thanks, John.

Our next question comes from Joseph Reagor with Roth Capital Partners. Please proceed.

Good morning, guys.

Hi, Joe.

Hi, guys. A couple of quick questions for you. First one is on Casa Berardi, the reduction of the 5,000 ounces out of the prior estimate; should we be thinking of that as more grade related or more tonnage related or a combination of the two?

It is really a combination. It is frankly us being cautious with the guidance. We did see better production in Q3 than anticipated. But this mine is, in many ways, like Greens Creek where you have very high grade areas, and so you are going to have a lot of variability over short periods of time. We think over the course of a year, things will even out. But we worry about short-term guidance. So it is -- frankly, it is us being cautious here. Larry, anything to add?

No, I think you said it well.

Okay. On G&A expense, you had the $7.7 million this quarter and you had about $800,000 in additional expense related to the Aurizon transaction. Should we be thinking about that as a fair run rate going forward of the combined company? Or should we expect it to go up a little bit more? And are there any additional Aurizon related costs to fall out in Q4?

I would expect in 2014 for it to go down. We are in our budgeting process as we speak and there is certainly programs that we have eliminated. And there is a -- there has been a few folks that were onboard during this transition period that will not be with the company in 2014. So I think there will be a slight reduction. It hasn't been finalized where the numbers will be, but it will be somewhat less than where we are today. Jim, what do you want to add to that?

The only thing I would add that addresses the G&A portion -- the Aurizon transaction costs should be dribbling down to zero now. Those are just some straggler costs associated that came in after the end of the last quarter.

Okay. And then just one final one. With the new Mexican mining legislation that is being put through, how does that impact your guys' decisions on what to do at San Sebastian going forward?

Well, it certainly impacts it. And that is part of evaluation that we will make as to moving that project forward. Having said that, it is the most advanced project that we have. And there is the potential -- we are looking at some ways of doing some things as we did in 2001, where we basically had some small pits and used the cash flow from those pits in 2001 to pay for the development of the ramping system. And we are looking at potentially doing something like that here. But we are in the early days of that analysis. It is -- the problem with that is you are in constant construction for an extended period of time, and operationally that is not where you would like to be. But that might be the best way to improve the NAV of the asset. Again, though, we are going to have to weigh that with those additional taxes. And so we haven't come to a conclusion yet, Joe.

Fair enough. Thanks for the insight, guys.

Sure.

At this time, we have no further questions. I would now like to turn the call back over to Mr. Phil Baker. Please proceed.

Well, thanks very much for being on the call. If you do have questions, please contact us. We are pleased with where the third quarter is. And we really do feel like the fourth quarter will be the best quarter, with all of the operations operating fully. So please call us if you have a question, either Mike or myself. Thanks a lot.

This concludes today's conference. You may now disconnect. Have a great day.