Hecla Mining Co (HL) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hecla Mining Company first-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to your host for today, Mr. Mike Westerlund, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator. Welcome, everyone, and thank you for joining us for Hecla's first-quarter 2015 financial and operations results conference call. The financial news release that was issued today before the market opened, 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 involve risks detailed in our most recent 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 Phil Baker.

Thanks, Mike. Hello, everyone. We've seen relative outperformance of our shares this year, as you can see on slide 3. As of a couple of days ago, we were up 13% compared to silver, which are at 6%; a selection of intermediate peers, which are at 1%; and a selection of junior silver companies, which are down 12%. So why this outperformance by Hecla?

If you go to slide 4, we believe the markets' recognition of four characteristics of Hecla has caused our stock to outperform. First, I cannot overstate how well Greens Creek has performed since we acquired it and turned it into a Hecla mine. Our investment in and derisking of the mine has paid significant dividends, as it has been the production and cash flow engine for Hecla for most of seven years. The thing that has changed in the past year is the addition of the Lucky Friday and Casa Berardi.

With the second-quarter earnings release last year, there has been solid performance from the Lucky Friday, and Casa is slowly becoming a Hecla mine. And if you look at the top left quadrant on slide 4, you can see how our silver equivalent production has increased 142% since 2012.

Secondly, our mines continue to show cost performance with a combination of cost management and the benefit of polymetallic orebodies. This is demonstrated by the strong margins we earn on our silver production, which was 68% in 2013 and increased to 74% in 2014 despite the lower realized price.

The third reason I think our shares have outperformed is the success we've had in growing our reserves despite declining prices. As you can see on the bottom right quadrant, this year's silver reserves were up 2% over last year to 173 million ounces and up 239% over 2006.

The 173 million ounces that we have is the most in our 125-year history, and it's the ninth year in a row that we've had record reserves. Few precious metals companies have been able to increase reserves in this market.

And then, finally, we continue to show discipline in managing the business. On the bottom left quadrant, you see our liquidity is essentially unchanged since 2012, despite significant drop in the metals price and significant capital programs.

I think Hecla is pretty unique among precious metals companies to be advancing both sustaining and growth capital programs in new exploration while maintaining our liquidity. So, unlike many companies who have already reduced capital expenditures and have throttled their business back, we've been able to maintain our financial strength while we are continuing to spend on our capital and exploration programs.

But go to slide 5. Our significant growth potential is why we have no plans to throttle our business back. The advancement that we've made this quarter at San Sebastian and the potential acquisition of Revett now gives us a growth pipeline that should provide us growth over the short, medium, and long terms.

At San Sebastian, given the small but extremely high-grade material --some of which is as high as 1 ounce gold equivalent -- we may be in a position to mine this orebody by the beginning of 2016. Because we've mined there before, we have all major permits in hand. So the gating item is negotiating arrangements to run the San Sebastian material through a third-party mill. And we are already in discussions and feel confident that we will work out a deal for one or more mills to process it for us.

This could allow us to begin production to generate cash flow within a year. How much? Well, we can already see how we could produce at least 3 million silver equivalent ounces with less than $10 million in capital. And by utilizing tax loss carryforwards, this property could generate more than $30 million in free cash flow. To put that into context, that's almost half of what Greens Creek did in 2014. These would be extraordinary returns in this price environment and provide cash flow to help us maintain our capital and exploration programs.

But this is really only the first part for San Sebastian. We are continuing the PEA that we have talked about before that is looking at how we turn this into a long-term mine. We expect its completion during the third quarter. Then, beginning in 2017 -- mid-2017, we expect to see higher-grade ore from the Lucky Friday as a result of the anticipated completion of the 4 Shaft project, which is about 80% done now.

That could increase production by 60% at the Lucky Friday to 5 million ounces a year. What is particularly important about this growth is that it comes as a result of higher grades rather than additional tonnage, which means that cash costs after byproduct credit per silver ounce should decline.

And then, in the longer-term, we have the potential acquisition of Revett and its Rock Creek project, which is expected to close later in the second quarter. This has the potential to add substantial silver production.

This is a long-term project that could take 10 to 15 years or longer to get to production and requires substantial permitting efforts, but we think we're up to the task, given our excellent long-term operating record at Greens Creek, which is in a national monument; the fact that Rock Creek is in our backyard; as well as our financial and technical expertise.

So we now have a potential growth pipeline over the short, medium, and long term. In the meantime, we are still working to make Casa Berardi's operations as steady and predictable as our other two mines. Later, we will talk more about this, but we have always viewed turning Casa into a Hecla-style mine will take a few years. With its resource base and exploration potential, we think Casa will be a major cash flow generator in the future. We've already seen Casa improve in Q2 and are maintaining our guidance for the year.

I will now pass the call over to Jim.

Thank you, Phil. Slide 7 shows the driver of the financial metrics: production. Silver production increased by 16% over the first quarter of 2014 as a result of higher grades at both Greens Creek and Lucky Friday. Gold production was 41,000 ounces, which is 4% lower than reported in Q1 2014 due to lower recoveries at Casa Berardi, which is being addressed, as Larry will further discuss.

The reduction in operating cash flow was mainly due to lower metal prices and normal working capital fluctuations, the largest of which is a shipment of zinc concentrate at Greens Creek that will be realized in the second quarter and is worth about $4 million. The decline in adjusted EBITDA is also principally due to lower metals prices.

During 2015, three of the four metals we produced experienced lower prices compared to the previous year's quarter. The realized silver price was down 14%; gold, 6%; and lead, 13%; while zinc was up 4%.

As you can see on slide 8, we have production from four products from three separate geographical areas. In the first quarter 36% of our revenue came from gold, 37% from silver, 16% from zinc, and 11% from lead. We're beginning to see improved price movement in both lead and zinc.

Zinc has moved up to the $1.08 range and lead to $0.94 from averages of $0.94 and $0.82, respectively, in the first quarter. The improved prices of these byproducts is expected to help maintain our low cash cost per ounce for future periods. We have hedged a portion of our base metals production, as you can see on slide 9, and have not entered into any recent positions, given the lower price for both lead and zinc over the last couple of quarters.

This is typical for us. As prices rise, we hedge. As they fall back, we typically do not. Currently, we have approximately $133 million hedged over the next three years, which is about one-third of our forecast lead and zinc production. That leaves two-thirds of our lead and zinc production open to benefit from the stronger prices I mentioned earlier.

As you can see on slide 10, our silver business continues to report strong margins. Efficiencies at Greens Creek combined with solid production from Lucky Friday resulted in cash cost after byproduct credits per silver ounce produced of $4.93, resulting in a 71% gross margin or just over $12 per ounce for the silver business. At Casa Berardi, we realized $1,222 per ounce for gold revenues and cash costs after byproduct credits of $974 per gold ounce, resulting in a $248 gross margin or 20%.

There is no doubt about it that 2014 and 2015 have been a period of challenging 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 low cash cost after byproduct credits per ounce of our properties.

As you can see on the cash bridge on slide 11, our predevelopment, exploration, and CapEx did not exceed $35 million of adjusted EBITDA. If metals prices soften further in the coming quarters, we would expect to reduce discretionary expenditures and modify our business plan as necessary to provide the appropriate level of liquidity.

As shown on slide 12, we finished the quarter on the back of strong operating results with the contribution of three long-lived mines and excellent liquidity. We have $196 million in cash and cash equivalents. Consequently, if you include our unused revolver, we have a total of almost $300 million in total liquidity available to the Company.

Now, on slide 13, you can see a summary of our balance sheet. We are comfortable with our level of debt -- debt which is long-term and has no maintenance covenants and a low interest rate. The net debt-to-adjusted-EBITDA is within our target of 3 times, and the net debt-to-capitalization of just 17% of our capital structure is well within our target of 33%.

So with that, I would like to turn the call over to Larry now for a review of our operations during the first quarter. Larry?

Thanks, Jim. Greens Creek continues to be the cash flow engine of the Company. You can see on slide 15 that the cash cost after byproduct credits of $3.23 per ounce continues to be quite low. It did increase from the prior year period, in part due to lower byproduct revenues. Silver production was consistently strong in the higher silver grades as a result of normal mine sequencing and the higher silver and gold recoveries.

Changes made to the flotation circuit in the fourth quarter of 2014 have resulted in higher silver recovery. The changes involve taking flotation concentrate in the first flotation sale directly to the final product, something that we call catch-and-release flotation, which frees up downstream grinding and flotation capacity.

The mill operated 2,172 tons per day during the first quarter of 2015. The mine continues to run on hydropower. And the outlook is positive for the remainder of the year, although always dependent on the weather.

Construction of the planned expansion of the Greens Creek tailings facility has begun. The total capital budget is expected to be $18 million in 2015.

On slide 16, you can see the study production and cost performance that we have come to expect from Lucky Friday. The mine produced 837,000 ounces of silver at a cash cost after byproduct credits of $9.05 per ounce.

On 4 Shaft on slide 17, we have excavated below the 7,500 level and are beyond the 7,650 level, which is actually approaching 2 miles of total depth. The project is now budgeted at $225 million, and we expect completion in Q3 of 2016, which is scheduled to be followed by lateral development at the 7,500 level. This should enable access to higher-grade ore zones, potentially increasing silver production at Lucky Friday to around 5 million ounces per year as early as 2018.

On slide 18 you can see Casa Berardi's production and costs. Production was affected by several factors, and we expect it to improve in the balance of the year. The main variance relative to the first quarter of 2014 was the metallurgical recovery. In the full-year 2014 we fed a substantial amount of ore from the new 118 Zone and recognized that the pockets of ore contain high levels of arseno-pyrite, making recovery difficult.

At that time, we estimated the mill modification to better treat this ore at $18 million. But as we treated more of this ore, we realized that these pockets were sporadic. And so we decided to forgo the added capital and instead start an initiative to better identify this type of ore.

At the end of the quarter, several weeks of ore feed was encountered. We're in the process of adopting x-ray fluorescence technology to better identify this ore. Better predictions should allow us to better blend ore and adjust reagent dosing. In April, we have already seen improvement in recovery.

There were a couple of one-off items also during the quarter, including a two-day power outage in the mine which resulted in lower tonnage than expected. But we don't expect these to be repeated in the second quarter.

We continue to expect Casa to reach its target of 130,000 ounces of gold for the year at a cash cost after byproduct credits of $825 per gold ounce. I'll turn the call over to Dean for exploration and predevelopment.

Thanks, Larry. During the first quarter, we had active exploration drill programs underground at Greens Creek and Casa Berardi and on the surface at Casa Berardi and San Sebastian. At all three locations, we continued to have strong results that should translate into new reserves and resources and highlights our optimism for our operations and at the San Sebastian project, as we advanced towards a production decision. A series of tables are provided at the end of the Q1 press release that show a succession of impressive intersections at each of the sites.

Slide 20 shows a plan view of veins at the San Sebastian project and, outlined within the orange-colored ellipse, the area where recent exploration drilling has been focused. We continue to intersect high-grade southeast extensions to the East Francine middle and north veins that contain near-surface mineralization that may be suitable for open-pit mining.

At the East Francine vein, we've expanded the area of near-surface supergene enrichment and potentially added new resources at depth that could be accessed from the underground workings of the past-producing Francine vein. Recent drilling of the middle vein has identified a new result of high-grade near-surface mineralization to the southeast of the San Ricardo Fault that remains open. Deeper drilling of the north vein, southeast of the Fault, has intersected strong continuous mineralization. And current drilling is defining the vein towards surface.

On slide 21, you can see from a 3-D schematic that the veins tend to flatten near surface, which is encouraging for an open-pit mining scenario. Included in the 16.2 million ounces of indicated resources within 325 feet of surface that we reported in January of this year are several pockets of very high-grade supergene and oxide mineralization on the East Francine and middle veins that could enable us to bring this into production in the near term.

Slide 22 shows a preliminary concept of how a mine at San Sebastian could be laid out, with a series of small pits initially targeting very high-grade material. Infill and condemnation drilling programs have been initiated, and mine scheduling is in progress. The results from these programs and recent exploration success may modify these plans, but I wanted to give you an idea of the size and relative location of the proposed pits.

These proposed pits are not large, but nor do they need to be, as the targeted material is very high-grade. As Phil noted, all major mining permits are in hand, and the gating item is securing a third-party mill to process the material. We are looking at several options now, and securing one or more of these mills could advance the timelines to start mining.

The objective remains to generate cash flow soon without requiring a large amount of capital. We are very excited with the advances we have made at San Sebastian and the prospects for this to become a mine in the next year or so.

Definition and exploration drilling programs during the quarter at Greens Creek are shown in plan views on slide 23. Definition drilling shown in the left diagram continues to refine resources in the lower Northwest/West, 9A, and Deep 200 South zones.

Drill intersections include 27.9 ounces per ton silver, 0.2 ounces per ton gold, 5.2% zinc, and 2.3% lead over 22.9 feet in the Northwest/West zone; and 67.8 ounces per ton silver, 0.4 ounces per ton gold, 3.8% zinc, and 2.2% lead over 11.7 feet in the Deep 200 South. Shown in the diagram on the right of the slide, exploration drilling on an upward trend of the 200 South intersected massive sulfides down-dip of the Southwest Bench mineralization, suggesting a large area to the west is prospective for extensions of known mineralization. At the Gallagher Fault, a zone of mineralization of more than 500 vertical feet has been defined.

Finally, with Casa Berardi, shown by the longitudinal section on slide 24, we have up to seven drills operating underground. And we are encouraged by the progress in upgrading resources in the 118, 123, and 124 zones and identifying new mineralization in the 117, 124, and Southwest zones.

Of particular note on slide 25 is that the exploration drilling has recently discovered extensions to the 124 zone to the east near surface and the 117 and 100 zones at depth. Drill intersections of the 114 and 100 zones are 0.4 ounces per ton gold over 14.8 feet and 0.28 ounces per ton gold over 21.4 feet, respectively. Discoveries like these give us optimism that we will be able to extend Casa Berardi's life of mine in the coming years.

And with that, I will pass back to Phil for some closing comments.

Thanks, Dean. We are in a strong position in our industry. Our high-quality assets give us flexibility to continue to invest in our mines, making them more consistent, safer, longer-lived. We currently have the financial strength to potentially make acquisitions and investments as we see opportunities.

And we now have the strongest growth pipeline we've had in years. We expect near-term silver growth from San Sebastian, growth in the midterm from the Lucky Friday, and potential growth in the long term upon closing the Revett acquisition. This quarter's strong performance was in a weak metals price environment. And it's not going to always be that way, but in the meantime, we're going to focus our energy on making our good assets even better and advancing our growth initiatives.

So with that, operator, we would like to have the line opened for questions.

(Operator Instructions) Jorge Beristain, Deutsche Bank.

Good morning, guys, and congratulations on the good results.

Thanks, Jorge.

My question is just -- your comments about how quickly you could get San Sebastian to become an operating mine. Permits are in hand; you're approaching, it seems like, a rational, low-CapEx kind of approach. Could you talk about when the CapEx decision would be made there? What is the bottleneck? It sounds like you need to get the third-party milling contracts done. And what kind of order of magnitude CapEx we could expect, and what kind of expected production we could see by year-end next year, and then on an annualized basis? Thanks.

Sure, Jorge. I guess what I'll start with is that the gating item for us is the mill -- getting access to a mill that will allow us to process material. And we are in -- we have identified a number of mills that could work, and we are in discussions with those parties.

And how long that will take it is unclear, but I assume it will be a number of months, and we would have that result. Once we do that, then there's a bit of capital that we need to spend in it. And the capital would certainly be less than $10 million.

And then we're off to the races. This is near-surface material. We will lose a contract miner. We have identified some contractors to be able to mine the material. And so we we'll start that.

In terms of the amount of production, it's going to be a short-lived project. Something -- order of magnitude, a year to two years. It's really filling the gap for 2016/2017 as the Lucky Friday goes to this higher level of production in the second half of 2017/2018. So that's the objective that we have. I will stop there and see if, Jim, if you have something you want to add, or --?

The only thing I would add, Phil, is when we talk about a couple of years, that's mining this high-grade area that is right at the surface. And, of course, Hecla has done business in this district in the past. And we know that the orebodies continue in vein-type systems at depth.

And so a key part of the program will be continuing to explore the extent of those veins to come up with a longer-term mine plan. But right now our focus, as Phil has indicated, would be on those high-grade near-surface areas for the first couple of years.

Okay --

Let's just see if these guys have anything they want to add. Larry?

Yes, it's important to highlight that we are actually doing the mine planning now. Actually, we have -- AMC in Vancouver is doing mine planning as part of the PEA exercise. And the -- what Phil is referring to is the open-pit part of the mine planning. But there is clearly an underground element, as well. And we're in that process. We've got to finish the work.

And the only other thing to add, Jorge, is that we have four drills operating there now. Two of them are in infill, but the other two -- we continue to find near-surface oxide mineralization along strike. Our drilling in advance of that drilling shows that these veins continue for significant distances. So over that two- to three-year period, I would anticipate that we're going to keep finding more mineralization, both at surface and at depth.

Okay. But just to try to get an order of magnitude, are you talking around 1 million to 2 million ounces of silver per year over two years? And what kind of payback are you kind of like --

Probably closer to 3 million ounces. Maybe more, but certainly 3 million, I think, is a conservative estimate over a couple of years per year. Jim, anything?

Yes, that $3 million would be equivalent, because there is a substantial gold credit here.

And the payback there? Or could you give us any color on what kind of unit cost --

Well, look. I would think that we're talking in excess of $30 million of free cash flow. We have $70 million of NOLs in Mexico that we will be utilizing. So there's going to be minimal tax loss here. So it's -- it looks very, very attractive.

Great, thank you.

John Bridges, JPMorgan.

Just wondered -- the metallurgy at Casa Berardi -- how big you think that's going to be? You say you thought about some metallic -- or some changes to the plant, with those be? And then Red Lake produced a separate concentrate, and then full-treated that when they had separate refractory. What are the options there?

Go ahead, Larry.

The change that we contemplated was to add a flotation circuit. It's not a whole-ore flotation, just a takeoff circuit. And that flotation concentrate would be reground and put to an intensive leach.

We have -- we believe now that this is such a small part of the sedimentary part of the orebody that it's not worth the $20 million that we estimated to put this in. We don't believe this is a large part of the orebody, and our challenge now is really to identify exactly how much it is and to better handle it.

Okay. Okay, great. And then moving on to Revett, how do you see that developing the permitting process? The permitting process there would probably be quite extended. What sort of hoops do you have to jump through, and do you see any sort of contentious issues?

I guess the first thing I would say, John, is that the Revett team, I think, has done a very good job of advancing the permitting and dealing with the community. They built great relationships with the folks in the community. And there's actually a significant amount of support for the project in the local community.

And we will just be continuing the process that they've begun. They actually got their decision to be able to take this forward in 2009, and then it was subject to lawsuits. And so there has been revisions that they have made as a result of the lawsuits. And that should be -- the final supplemental EIS should be coming out sometime within the next year or so.

We are anticipating that there will be additional permitting that we will need to do and additional work. And we are prepared to do those things. We think with the experience that we have in Juneau at Admiralty Island, with the bear population there, it's analogous to what needs to be done at Rock Creek. And so we think we will be able to show the ability to properly manage things and be able to build even more support than Revett has had.

Having said that, we think it's going to be a long process. So we're not envisioning this being a producing asset for the better part of 10 to 15 years. But we do think we will make steady progress on it.

Okay. Yes, it looks very interesting. Congratulations on the results and best of luck.

Thank you. And that does conclude the question-and-answer period. I would like to turn the conference back over to Mr. Phil Baker for any closing remarks.

Thanks very much for participating in the call. If you have any questions, please feel free to give Mike Westerlund a call or me a call. Thanks so much. Have a good day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.