Hecla Mining Co (HL) 2014 Q1 法說會逐字稿

Great day, ladies and gentlemen and welcome to the first-quarter 2014 Hecla Mining Company earnings conference call. My name is Katina and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Mike Westerlund, Vice President of Investor Relations. Please proceed.

Thank you, operator. Welcome, everyone and thank you for joining us for Hecla's first-quarter 2014 financial and operations results conference call. The financial results news release that was issued yesterday after markets closed along with 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 2. Such statements include projections and goals, which are likely to involve risks detailed in our most recent Form 10-K and 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. Hello, everyone. We are really pleased with the first quarter. Despite lower prices, this is one of the top five quarters Hecla has had in its history if you consider a number of different metrics. We've had almost 500 quarters, so it really is an amazing quarter for us. So why is this quarter one of our best and is that performance sustainable? First, the quarterly performance comes out of a philosophy that we started implementing in 2008 with the acquisition of Greens Creek in silver Venezuelan assets, with the investment we made in the Lucky Friday and Greens Creek over the past four years and with the acquisition of Casa Berardi. We want mines that have long lives, low cost, predictable performance and manageable jurisdictions so that we can invest our people and our money in making the mines better and bigger generating long-term returns for our shareholders.

In this quarter, we are reaping the benefit of some of that investment with significant growth in production, revenues, cash flow and adjusted net incomes and the silver cash costs after byproducts credits per ounce is significantly lower. In fact, it is almost half of what we had a year ago. With the consistent performance of Greens Creek and the Lucky Friday at full production, silver production is up 31% over the first (technical difficulty), gold is up 238% with our third full quarter of Casa Berardi production. These production increases, despite significantly lower metals prices, have resulted in a 65% increase in revenues.

Silver cash costs after byproducts is $3.83 per silver ounce and most of the revenue and cost improvements that flowed into operating cash flow, and that is almost 3 times last year's. And not only is it reflected in cash flow, but when we focus on our fundamental earnings, we see adjusted net income applicable to common shareholders up about 45%.

So in this first quarter, we achieved an increase in revenues, margin, cash flow, earnings even though prices declined and we were still able to invest in growth with internally generated funds. Let's go to slide (technical difficulty) are we going to be able to continue to increase revenues, margins, cash flow, earnings and still invest in growth and the short answer is yes. Even with the low prices, 2014 should significantly improve on 2013. We are maintaining our production guidance from January and are updating our cash cost guidance to $6.50, down from $7 and this is driven by Greens Creek whose cost is projected to be $5 per silver ounce, down from $6, while we have increased Lucky Friday's guidance $0.75 based upon our first quarter's experience.

With adjusted EBITDA of $41 million in the first quarter and exploration capital expenditures of about $34 million, we are in very good position for the spending this year to be less than adjusted EBITDA. We also have optimization programs at Casa Berardi that Larry is going to talk about. We see $140 million of potential benefit from these programs or about 20% of what we paid for the mine. While some of this benefit might be realized this year, it primarily is expected to start in 2015. These types of improvements will help make this quarter's performance sustainable well into the future.

We have added production on a silver equivalent basis to our guidance because so many companies now report that and we want to give you a sense of Hecla's scale. If you consider all metals, we will produce on a silver equivalent basis about 29 million ounces, so we've grown dramatically. This is double what we produced in 2012, a third more of what we produced last year. And since our business primarily has fixed costs, more production materially improves Hecla's economics. And I think Jim's presentation on the Q1 financial review is going to show that and so, Jim, why don't you take over.

Thank you, Phil. This quarter is the strongest financial performance out of the past five despite lower prices. Slide 6 demonstrates that. Compared to the first quarter of 2013, all of our key metrics have materially improved. The results have come about as a result of achieving goals, more consistent operations at Greens Creek, getting Lucky Friday back to full production and integrating and optimizing the operations at the newly acquired Casa Berardi mine.

Slide 7 shows the driver of our financial metrics production. Silver production increased by 31% over the first quarter of 2013 and gold production more than tripled to 46,000 ounces. Phil also mentioned earlier our results were achieved despite metals prices being significantly lower than the previous quarter as shown on slide 8. First quarter-over-quarter realized silver price was down 31%, gold down 20%, zinc 3% and lead 8%. So it is truly remarkable to have one of Hecla's best quarters with this kind of price reduction.

With the acquisition of Casa Berardi and the rampup to full production at the Lucky Friday, we continue to diversify our revenue stream. Production now comes from three separate geographic areas and from four products. In the first quarter, 41% of our revenue came from gold, 31% from silver, 17% from zinc and 11% from lead. We continue to actively hedge our base metals production. Currently, we have approximately $180 million of lead and zinc hedged out over the next three years. We have hedged about one-third of our forecast zinc production for the next three years and about half of our lead production.

Focusing on our margins, you can see on slide 10 that our silver business continues reporting even stronger margins. Strong efficiencies reported at Greens Creek, combined with the rampup of Lucky Friday production, resulted in cash costs after byproduct credits per silver ounce produced of $3.83 per ounce resulting in an 81% gross margin or just over $16 for the silver business. Likewise, at Casa Berardi, we realized $1,298 per ounce for gold revenues and cash costs after byproduct credits of $886 per gold ounce resulting in a $412 gross margin, or 32%.

There is no doubt about it that 2013 and 2014 have been a period of volatile precious metals prices. One of Hecla's strengths is its historic ability over the long term to manage periods of both very good and very poor metal prices. This is due to the combination of consistent production and the low cash costs achieved at each of our properties. As you can see on the cash bridge on slide 11, we met our goal to have predevelopment, exploration and CapEx expenditures within the $41 million of adjusted EBITDA. If metals prices soften further in the coming quarters, we could expect to further reduce discretionary expenditures and modify our business plan as necessary to provide the appropriate level of liquidity within the business.

And this is set forth on slide 12 where we finished the quarter on the back of strong operating results with the contribution of three long-lived mines and excellent liquidity. We have $208 million in cash and cash equivalents and consequently, if you include our unused revolver, we have a total of over $300 million in liquidity available to the Company. And with that, I'd like to turn the call over to Larry Radford now for a review of operations during the first quarter. Larry?

Thanks, Jim. You can see on slide 14 that the unit costs at Greens Creek were quite low, $16 per ton less than a year ago and cash costs after byproduct credits of $1.58 per ounce. It is important that you don't just take the first-quarter cash costs and straight-line them for the year. The significant drop in the cash costs over Q1 2013 is principally due to the availability of lower-cost hydroelectric power that has resulted from higher water levels in the dam than in other years. The mine is currently running on hydroelectric power, though we anticipate moving to diesel power by mid-summer, which should push up cash costs after byproduct credits to be in line with our annual guidance of $5 per ounce. Planned expansion at the Greens Creek tailings facility continues to work its way through the permitting process.

On slide 15, you can see the quarterly rampup back to full production at Lucky Friday and the corresponding reduction in the costs over the past five quarters since the mine restarted. We have increased Lucky Friday's full-year cost per ounce by $0.75 to approximately $9.75 per silver ounce after byproduct credits to bring our full-year expectation in line with our first-quarter result of $9.60.

On #4 Shaft, on slide 16, we have excavated below the 6,500 level and are over 2,000 feet deep. We believe the project risks have declined significantly with the focus primarily on the sinking of the shaft and development of operating stations outfitting the shaft with steel and services and commissioning. The higher risk projects such as design, fabrication, procurement, commissioning of the centralized refrigeration plant and hoist room construction are complete. We are on track for completion of this $215 million budgeted project in Q3 of 2016. The #4 Shaft project is designed to access higher grade ores zones, potentially increasing silver production at Lucky Friday to the 5 million ounce per year rate as soon as 2017.

On slide 17, you can see Casa Berardi's production and cost. This brings the mine production to about 94,000 ounces of gold production since we acquired the mine. Since then, we have been busy integrating the asset by rebuilding the long-term mine plan, improving the ground control program to improve safety performance, ensuring consistent operations and optimizing our cost per ounce margin. I think we have come a long way so far and we are now moving beyond integration and into optimization.

The advanced engineering work to optimize Casa Berardi operations is detailed on slide 18 and targets increasing metallurgical recoveries, better controlling dilution and reducing the amount of development necessary to maintain production. Let's look at these projects for a minute. We are working to increase metallurgical recovery by adding a flash flotation circuit, grinding the concentrate and then leaching it. The target is an 8% improvement in recovery on two ore zones. With about $15 million of required capital, this project is worth about $70 million life of mine.

Due to permitting, the investment and benefit should occur in 2015. The second optimization project is to reduce development costs by reducing the drift cross-section. Basically what we are doing is having dedicated loading bays so we can reduce the size of ramp and drift cross-sections throughout the mine, reducing waste and improving stability. Every 1% reduction in waste is worth about $3.5 million life of mine, so our goal of reducing waste by 10% could result in a $35 million pickup to our life of mine.

The third project is a reduction of dilution. Basically the mining method at Casa has changed over the years as the ore zones narrow going to more longitudinal, long-hole stoping, which can have large dilution variability. The dilution depends on the stability of the hanging wall, the length of the stope cut and the thickness of the vein and the irregularity of the mineralized zone. We plan to optimize dilution by reviewing our minimum mining widths and reviewing our blasting practices. We are targeting a 5% reduction in dilution, which could mean $35 million in savings life of mine.

These initiatives should positively impact revenue, cash cost, as well as reduce capital with an expected benefit of $140 million over the life of the mine. Additional information on these programs can be found in the April 9, 2014 Investor Day presentation on the Company's website.

On slide 19, you can see some images from the shaft deepening project at Casa. The project that was originally started by Aurizon to deepen the West Mine Shaft by 340 meters requires approximately another 38 meters of shaft construction and shaft loading facilities to be completed. This project is expected to provide additional access to the 118 ore zone and to enable deeper exploration. We continue to expect the shaft work and loading pockets to be finished late in the third quarter. I will now turn the call over to Dean for exploration and predevelopment.

Thanks, Larry. During the first quarter, we had active drill programs underground at Greens Creek, Casa Berardi and Lucky Friday and on surface at San Sebastian. There has been considerable success in drilling high grade intersections at the three mines and a table of recent intersections can be found at the end of the Q1 press release.

At Greens Creek as shown on slide 21, we continue to define high grade precious metal rich deep 200 South trend at the south end of the mine that should allow us to add resources to the mine plan. In the next two quarters, we plan to resume exploration at the South end where mineralization remains open and to the North to evaluate a gap along the trend as shown in the slide where there are good opportunities to find similar high grade mineralization and link 200 South to other mineral trends.

We have been very active at Casa Berardi with extensive definition and exploration drill programs as shown on the longitudinal section in slide 22. Definition drilling programs have upgraded and expanded resources in the 113, 118, 124 and 127 zones and we are encouraged because many of these areas are expected to host new reserves once mine plans are updated. Exploration drilling is defining new mineralization that is along the [down plan] trend of the 124 and 140 zone resources. So we continue to be encouraged about the potential in the one mile gap between the West and East mines.

Slide 23 is a plan view of the San Sebastian project in Durango, Mexico. First, engineering studies are evaluating a low capital approach to develop the middle vein, which is in the black oval on this slide. I think we could have some news in this work in the next two quarters. In addition, we have been completing an extensive surface trenching and shallow drilling program that identified strong gold, silver anomalies to the north of the current middle vein resource. We believe these anomalies may represent the location of the offset mineralized veins that were truncated by the San Ricardo fault.

Finally, in addition to work on San Sebastian, we are advancing other predevelopment projects during the quarter with permitting, metallurgical test work and mill design and mine optimization as the principal activities. I will now pass the call back to Phil for some closing comments.

Thanks, Dean and I have just got a couple of closing things to say and then we will open it up for questions. We really have done what we have said we would do. We have transitioned Greens Creek into a very strong and consistent silver producer. We brought the Lucky Friday back to full production and seen its costs fall dramatically. We have integrated Casa Berardi into Hecla and are continuing to find ways to improve the mining performance further and by thoughtfully reducing our capital predevelopment and exploration spending, we are operating within adjusted EBITDA, which should allow us to maintain our financial strength.

This quarter's strong performance was in a weak metals price environment, but it is not going to always be that way. We see demand from the growing middle class of China and India. It grew 26% alone in China last year. History has shown us that as a country's middle class gets wealthier, it consumes even more precious metals. Metals demand is leading the West in the factors that will determine its price or going with it. It's going to the East, it is going to Asia. I don't know if it is next week or next year, but the prices will move higher at some point and when that happens, Hecla will, like it has in the past, we think lead precious metals equities higher. In the meantime, we are going to focus our energy on making our good assets even better.

One other point before I end. Larry mentioned that we had the Investor Day in Toronto and New York. We did record that. It is available on our website for the next couple of months and I just would encourage you to access that archived information. And with that, Katina, we will open the line for questions.

(Operator Instructions). John Bridges, JPMorgan.

Good morning, Phil, Jim. Congratulations. I just wondered with respect to the #4 Shaft, you say the full budget is $200 million something. You're 60% away along there, but you'll only finish the project in 2016. Where does the shaft capital finish and the capital development into the ore body begin? What sort of capital -- what sort of additional development capital will you need to actually access the ore body?

Well, we are spending $215 million for the capital that is associated with the shaft and the level developments and that is going to be completed in the third quarter of 2016. The focus is now just in those limited areas. Jim and Larry, do you guys want to add anything to that?

Included in the $215 million is the centralized refrigeration plant, which will cool the mine down to the 8,000 foot level. In terms of connecting the shaft to the mine, the two principal operating stations are at 6,500 and 7,500. We have already connected at 6,500. So these connections are being made as we sink the shaft and that connection at 6,500 now will proceed deeper and we will eventually connect that to 7,500. So that is ongoing development in the mine.

It is just our normal sustaining development that goes laterally, John.

Okay, fine. That answers the question. I thought there might have been a lump of capital development coming through as well. Great. So just looking to San Sebastian, and there seems to be a bit more activity going on there. Have you become more comfortable with that, now you feel you may have picked up the veins on the other side of the fault?

No, that is not what is driving the activity. What is really driving it is a plan that we are looking at that would be very, very low capital. It is basically evaluating if we can do what we did back in 2001 where we opened up some pits and we ran material through an existing mill. We are looking at that same approach now. So what we might find on the other side of the San Ricardo fault would be upside on top of that. And so if we lift these pits, if we can make that work, we can then use the cash flow from that program to really pay for the development in the mill that we would build for the underground portion of the mine. It is going to take us another quarter or maybe two to come to a conclusion if that is going to be feasible.

Okay, okay, that's encouraging. That fits within the new royalty tax schedule and --?

Yes, yes, that goes into the evaluation.

Okay, excellent. Well done, guys. Thanks a lot.

Garrett Nelson, BB&T Capital Markets.

Good morning. Could you talk a little bit about your zinc and lead hedging strategy and whether you have any plans to change that in light of the deficits a lot of people are expecting in those markets? Obviously, Hecla's primary leverage is to silver and gold, but, as you know, last year, about one-third of total revenue came from zinc and lead. I know you are fairly well hedged through 2015, but maybe looking out to 2016 and beyond, would you consider leaving more time to unhedge so you could potentially benefit from higher prices?

So we currently are 30% of the mix delineated production for zinc is hedged and 50% of the next three years lead is hedged and of course, as we progress, as time goes on, we deliver into those contracts and there is more hedging in the earlier periods than in the later ones. So that is going to -- those hedges will come off relatively quickly and they are (technical difficulty).

Hello? Yes, sorry. I think I lost you there for a second.

Yes, Phil, if you are on the phone, we have lost you.

It appears Mr. Baker's line has disconnected.

Okay, I will pick up where Phil left. I think where he was at was, of course, our portfolio is front-end-loaded in 2014 and 2015; it is just the way the hedging program works. If you take a look at 2016, we've only got about 9% of our zinc hedged, a little bit more in lead. We are about 43%. We have got the disclosure in our 10-Q. The way we manage the program is we keep our eye on the market and we adjust our quantities going forward depending on our perception. And so when we see times of rising prices or constricting supply, we will modify our targets upon when we will begin to enter hedging. So that is a long-winded way of saying yes, we follow the projections. We follow the expectations for the market and we adjust our hedging strategy accordingly.

Okay, that's great. Jim, just a housekeeping question. On the full-year tax rate, could you help us out with what we should be modeling for the final three quarters?

We are expecting that 25% to 30% rate for the remainder of the year.

Okay, great. That is all I have. Thanks a lot.

Anthony Sorrentino, Sorrentino Metals.

Good morning, everyone. I see that you are planning $150 million in CapEx in 2014 and $18 million in predevelopment and exploration expenditures in 2014. Would you be able to give a breakdown of those amounts by property?

Sure. The total for the Greens Creek mine is $35 million to $40 million. Casa Berardi is around $50 million. Lucky Friday is around $55 million and any remainder would be miscellaneous capital that we have. And in terms of exploration and predevelopment --.

So Jim, I am back on. I don't know what happened. Go ahead and --.

Okay. And in terms of exploration and predevelopment, as I indicated, it is about $17 million. Do you want to go through the breakdown, Dean?

Sure. Anthony, in terms of exploration, Greens Creek will be $3.5 million to $4 million, Casa Berardi about $3 million, Mexico $2.3 million and then the remainder of exploration spread around in Quebec in addition to Casa Berardi about another $2 million. On the predevelopment side, most of that predevelopment expense, or about $1.3 million, is at San Sebastian and some of the things we talked about in the call and the remainder is at the Bulldog in Creede, Colorado.

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

Thank you, Anthony.

[Tony Starks], [Stark Enterprises].

Yes, hello. I am calling in regards to ask regarding the higher expenses at Casa Berardi in the first quarter of 2014 compared to the last quarter of 2013. I would just like to get a general idea of what maybe pushed that cost up?

I'm sorry, what pushed what cost -- what are you referring to?

The cash cost at the Casa Berardi, for the cash cost of the gold ounces? (multiple speakers)

We didn't operate Casa in the first quarter of 2013, so if you go to our press release --.

No, no, no. I am saying they were higher in the first quarter of 2014 compared to the last quarter of 2013.

Oh, just a very slight difference in the number of ounces that were produced. So there is almost no difference between the two periods.

Yes, I was asking if I could get an explanation what pushed up the cash cost. They were about $50 or $60 more. If it was energy --?

It is the $1,000 less ounces of production and it was the cost of heating -- the propane costs were much higher in the first quarter of 2013 than they were -- or 2014 -- than they were in the fourth quarter of 2013. So it is those two factors that caused that slight increase in the cost per ounce.

Would you anticipate them going down throughout the next three quarters or would they generally stay about the same?

Our guidance is $900 an ounce. So we would expect on average it to come to $900 an ounce.

Okay, got it. My other question was regarding the amount of M&A going on in the industry and just the consolidation that is going on, would you consider teaming up with a bigger mining company or private equity if the right offer came on the table?

Look, we consider all sorts of ways to continue to grow the business. We are fortunate in that we have internal growth without having to acquire assets in order to achieve growth. But we are mindful of opportunities and we are always looking for innovative ways to get those assets. An example of that would be in acquiring Aurizon. We went to the bond market and did this $0.5 billion bond offering and used that rather than primarily our shares. So yes, we are open to all sorts of alternatives.

Yes, what I was leaning towards more was if there was an offer to acquire Hecla or to team up with another joint venture that had more capital or expertise.

We are always looking for what will give shareholders long-term value. So you have to consider any alternative. So yes, you consider that relative to the alternative of continuing down the path that we are on.

All right. Well, that is pretty much it. Thank you and once again, thanks for a great quarter and thank you for answering my questions.

Sure thing.

(Operator Instructions). Joseph Reagor, ROTH Capital Partners.

Good morning, guys. I have a few follow-on questions, some of the things other people brought up. The first one being, at Lucky Friday, you said the total number is $215 million. What has been spent to date on that?

I think it is, what, about $135 million, Jim?

Yes.

Okay, so about $80 million --.

So $135 million.

Yes. And that will be spread over the next three years with the majority, with a larger percentage being this year and next year and with the thing being done in 2016, it's significantly smaller.

Okay. Then moving over to San Sebastian, you said they are examining a small footprint for potential production there using an existing mill. Is this a mill you guys own that is in a neighboring area or is this a shutdown mill that you could pull mill through or (multiple speakers)?

The latter. It is either a mill that is shutdown or one that is operating that has capacity there. So there is more than one that is available.

Okay. But it would probably -- it would be some form of either toll milling or purchase and use agreement?

Or leasing, or leasing it.

Or a lease agreement, okay. And then lastly, just looking at the overall economics and the market conditions, have you guys given any thought to potentially -- I know the dividend isn't much, but spending it at all seems a bit pointless at the moment. I mean given that the EPS adjusted to only $0.01 for the quarter, it doesn't really justify a dividend or is that something you guys are not examining at this time?

No, we are not examining it at this time. There certainly are investors that can only invest in the Company if we pay a dividend, so that one penny a share is something that we can handle and we don't think it prevents us from doing any of the things that will allow us to grow and it allows some shareholders to own the shares. So we think it is worth doing.

Okay. So it is being done more for a strategic reason than for distribution of capital?

Yes, yes, I think that is right. Certainly when you have the silver price go up and it triggers the additional dividend, the silver price-linked dividend, then that is really a return of capital.

And is there any thought to adjust the pricing on the link there because I mean it's --?

We are not considering it at this time, changing it.

Thank you.

Sure thing. Good to talk to you.

Okay, well, I think that's all of the questions, Katina, so we will end the call here. I will just close by saying we think that this quarter is really the culmination of work that we have been doing for almost the better part of a decade now in changing the direction of Hecla and having us focused in on these assets that can see the sort of improvement that we are seeing with Greens Creek, Lucky Friday and Casa. We look forward to the rest of this year being able to demonstrate that strong performance. So thanks for being on the call and if you have any questions, please give Mike or me a call. Thanks a lot.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.