Hecla Mining Co (HL) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Hecla Mining Company earnings conference call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mike Westerlund, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us for Hecla's first quarter 2020 financial and operations results conference call. Our financial results news release that was issued this morning before market opened, along with today's presentation, are available on Hecla's website.

On today's call, we have Phil Baker, President and CEO; Lindsay Hall, Senior Vice President and Chief Financial Officer; Lauren Roberts, Senior Vice President and Chief Operating Officer; Kurt Allen, Director of Exploration; and Keith Blair, Chief Geologist.

Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks as shown on Slides 2 and 3 in the presentation, in our earnings release, in the 10-Q and 10-K. Reconciliations of non-GAAP measures and cautions for terms like resources are also found in these documents.

With that, I will pass the call to Phil Baker.

Thanks, Mike. Good morning, everyone. Thanks for joining our call. I'm going to start on Slide 4.

I know many calls that you've been on with managements have had all their participants calling from home. This call is different. While Lindsay is calling from home, the rest of us are in the office and have been. That's because our office has never closed. Idaho, from the beginning, said mining is an essential business that needed to continue to operate, and we know we can keep people safe if they follow our hygiene and social distancing requirements, which our people have done. We're sitting here in the office with six feet of distance between us.

Our mines are also in operation. We currently have 4 of our 5 mines operating, representing 95% of our production. On Sunday, it will be 2 months that we have had our pandemic plans activated, and we've not had a case of COVID-19 among our workforce. Greens Creek has, for over a month, not allowed anyone -- and I mean anyone -- on the island mine that has not been quarantined for 2 weeks at our separate quarantine facilities. At the other mines, we've taken appropriate measures that protect the workforce and the community.

Our financial position was significantly improved in the first quarter with the refinancing of the bonds to 2028 and an extension and expansion of the revolver to 2023 and the $210 million drawdown. In addition, we bought gold and silver insurance puts that assure us of a minimum price with no limit on the upside, and forward contracts on our lead and zinc production.

So the point of all that is that we're in good shape. And how did we get here? On January 31, alarm bells went off for Hecla. President Trump closed U.S. travel from China due to a novel coronavirus. At that point, we were preparing to refinance the bonds with the maturity of those bonds a little more than a year away. We were debating whether we should do our earnings early and go to market the second week of February or keep our normal schedule and go the last week of February, when the BMO and J.P. Morgan conferences were in Miami. It would have been a very efficient way to meet investors.

When traveling from China was interrupted, we didn't have any idea at that point how bad things would get, but we knew that that would cause a slowdown in China. International travel restrictions just wouldn't be good for the high-yield market. So we issued our financials at the beginning of February, went to the bond market as soon as we could in order to fortify our balance sheet, and you know the results of all that.

Now, Hecla has faced pandemics before, and of course, nothing like this one, so the first step we took to protect the workforce was to cancel our participation in PDAC at the beginning of March and restrict travel. I think this is -- in part, the reason we were so aware of the virus was because some of our leadership lives in Washington state, where the first known case in the United States occurred. So by March 10, we had implemented our pandemic plans across the company. As the virus progressed and the government orders were issued, we increased our response to reaching where we are today.

We also quickly reviewed our supply chain, confirming that we had very strong inventory supplies, and where we were at risk, we either got that fixed or figured out how we might work around it if we weren't able to fix it. We also entered into insurance on our silver and gold and sold forward our lead and zinc. Expect this to continue into new protection as we go forward. So we're prepared for the rest of 2020, even if we have a downdraft like we had in 2008.

And the chart that you see on Slide 4 shows how Hecla has outperformed since we updated our response April 6. Hecla has outperformed GDXJ by 11% and 35% outperformed gold and silver, and I think this outperformance reinforces the importance of the jurisdictions that you operate in.

With the U.S., it declared that mining was a critical industry in mid-March, and the U.S. mining industry's excellent record of health and safety allowed states, including Alaska, Idaho and Nevada, to be able to declare mining as essential. And in Quebec, after a few weeks, they saw the industry's ability to mine safely and have let us go back to work.

But for most companies that we are compared to, they have 1 or more major operations that are currently shut down. Jurisdictions have challenges in normal times. These are not normal times. The restart of operations in difficult jurisdictions are not going to be straightforward. And as miners go back to work in various corners of the world, I'm confident we'll see the difference of having primary operations in the U.S. with other places in the world.

So if we go to Slide 5, you can see one immediate difference. Hecla is able to give 2020 estimates, since 97% of our operations are in production and because we have these procedures and processes that limit the risk of the virus at our sites. Lots of mining companies have suspended guidance indefinitely. We are able to update ours. And of course, we do have a caveat. If circumstances change, we'll respond in ways that protect our workforce and community.

I'm going to focus first on the silver estimates that are highlighted in silver. We have lowered the production guidance range just slightly and have raised the cost guidance to reflect the change in the cost of smelting, the fact that we have lower lead and zinc prices as byproducts, and some increased costs for COVID-19. We're going to spend a little less capital, about 25%, to manage our cash flow.

Gold production is highlighted in gold and estimated to be lower because of Casa Berardi being idled for almost a month, and then we need about a month to ramp up to full production. The change in production is also due to the virus having a month-and-a-half to 2-month impact. With a reduction in capital, we should be able to achieve our original ASIC guidance.

So the aggregate capital and exploration spending is 25% lower, as you can see in blue, and we've spent about 17% of the capital and 22% of the exploration total so far. With the slowdown in activities in Q2, we are confident we can achieve our new guidance.

So a bit like last year, we see cash flows increasing in the second half of the year, and particularly in the fourth quarter with the ramp-up of the Lucky Friday, Casa Berardi reaching full production, and the continued performance from Greens Creek.

Finally, we think that we can not only weather the pandemic, but we really see an opportunity to change the way we do business. We see the opportunity for improved G&A through less office costs, travel expenses and other things that we've learned. We think operations in places like ours will become even more attractive to bring in new talent. And our drive to innovate our mines are going to be enhanced as communication platforms improve. All of this in an environment where the gold price seems to want to break out, and we think silver will follow and possibly close the gap, so it's really a very exciting time.

And with that, I'll pass the call on to Lindsay.

Thanks, Phil, and good morning, everyone. I'm on Slide 7. We had what I'd call a good, busy quarter following on our successful second half of 2019. We ended the year with some $62 million in cash, and in early February used $40 million of that cash to replace our $506 million of bonds due next year with a new 8-year bond maturing in 2028 in the amount of $475 million.

In conjunction with issuing the new bonds, our revolving line of credit of $250 million was refreshed for a new, full 3-year period, and as well we received upgrades from both rating agencies. Our bonds don't mature for 8 years, which, in the current climate the world finds itself in, is reassuring to us.

As the leading silver producer in the U.S., with a diverse asset and commodity mix, we also have been able to benefit from the substantial increases in price -- gold price, with gold making up 60% of our total revenues for the quarter. This, along with the ability to produce silver and gold at cash costs, which are substantially lower than the realized metal prices, positions the company to weather any volatility the current economic climate may present.

Turning to Slide 8. While operationally the mines performed as planned for the quarter, there were a number of financial impacts that are a normal part of the business, that contributed negatively to the reported earnings and cash flows. On Slide 8, you can see that compared to our 2019 first quarter at Greens Creek, byproduct revenues were lower due primarily to lower zinc pricing of $9 million and an increase in treatment charges of $8 million, as the market benchmarks from which most of our PRCs are based increased significantly from the previous year's favorable benchmarks.

However, within the treatment charges is about $4 million as the result of a spot customer not performing under a contract that we are working to recover.

Also, as our last shipment of lead at the end of the quarter was provisionally priced at a low price relative to the average for the quarter, we recovered some $3 million when we settled the shipment, as we have effectively hedged the price through our put contracts, which is sitting as an unrealized derivative gain line item in the income statement. That is mark-to-market. So there alone at Greens Creek, there was a swing of some $20 million of earnings and cash that is part of the normal business, that contributed negatively to the quarter.

For these reasons, we increased Greens Creek forecasted cash costs after byproduct credits guidance for the rest of the year by $1.75 per silver ounce, approximately half due to the product pricing and the other half due to the forecasted concentrate treatment charges, as well as some additional costs incurred as a result of the COVID pandemic.

At Casa, for the week in March that we didn't operate due to the government-mandated closure, we estimate reduced earnings and cash flow by some $3 million, while at Nevada we had 7,000 ounces of inventory in carbon at quarter end that wasn't processed, which is worth approximately $7 million, so there's another $10 million not recorded in the quarter due to the various circumstances. The good news is that these ounces will be produced and sold in the coming quarters, so the cash is not lost, but they did affect the first quarter earnings and cash flows.

Lastly, at Lucky Friday, the costs related to the restart activities amounted to $6.3 million, which is in line with our expectations. These costs respectively will be presently associated with the increase in revenues as the mine progresses to full production later in the year. We are very pleased the strike is over, and we can anticipate better performance in 2021 as opposed to the negative cash flows we have been experiencing with the mine being on strike for the last 3 years.

Turning to slide 9, as I stated earlier, we started the year with $62 million of cash and no revolver balance outstanding, and ended the quarter with some $5 million of net cash balance. We used $31 million to reduce leverage as we repaid $506 million of the outstanding bonds with that and the issued new $475 million bond. In addition, we incurred fees in conjunction with refinancing of some $5.5 million, plus another $3 million in doubling up on 1 month of interest expense due to the refinancing.

Cash provided from operations amounted to $4.9 million, which includes the cash paid for interest on the early redemption of the original bond of nearly $14 million that otherwise would have been paid in the second quarter, while we invested almost $20 million in capital at our mines.

To manage the decrease in our cash position, we announced a day of reduction of our capital expenditure guidance and exploration expenses by 25% to help ensure we remain at a positive cash flow for the year at these current prices.

So while the bonds have been termed out, to address liquidity, we drew $210 million down on the revolver during the quarter to increase our cash position at quarter end to $250 million. The circumstances the world finds itself in currently, liquidity is a must, and drawing on the revolver is simply acting to mitigate risk.

We operate in the precious metals business, and our operations are performing well, so we take comfort from that. We remain cautious, and as we move through this pandemic, we will look to reduce the revolver draw as we become more certain of the new normal. We are just being risk-averse.

Lastly, we've provided full guidance on our active hedging programs in the press release today. We employed puts to set a floor, but it doesn't cap the upside in gold and silver prices for the future production and forwards to hedge future zinc and lead production. We continue to believe strongly that gold and silver could move significantly higher, and we want to maintain our exposure to this potential upside. Our hedging program has been beneficial to us over our history of operations, and we continue to use hedging to mitigate our financial risks when we believe it is prudent.

With that, I'll turn it over to Lauren.

Thank you, Lindsay. I want to spend a few minutes on each asset to give an update on how we are faring during the pandemic and to update various projects we have underway.

First, and most gratifying, is that our safety record continues to improve, as you can see on Slide 11. We currently have an all-injury frequency rate of 1.14, which shows a 75% decline over the past 6 years, a remarkable accomplishment.

At Greens Creek, we have gone 380 days without a reportable injury, which is a record for the mine in its 30 years of operations. Early in our response to the COVID-19 threat, we started a 14-day quarantine for everyone coming onto Admiralty Island. Everyone goes through this quarantine in 1 of 2 hotels we are renting. Then they go onto the island for 28 days of work, then return for 14 days with their family. We believe this significantly reduces the risk of the virus directly impacting our operations.

Of course, there are costs associated with this procedure, but they pale in comparison to the potential consequences otherwise. Morale remains good, and the site has really come together as a team in the face of this challenge. We are taking advantage of this time to redouble our safety efforts, clean up the site, and review how we can capture the good aspects we are seeing for the future.

At Casa, the pandemic has impacted operations due to the government shutdown and then subsequent ramp-up as we return to full production. It has got 16,000 ounces of gold production from this year's estimate, and the higher costs we estimate relate to the lower production. We missed the last gold pour in March, which didn't allow us to convert our work-in-process inventory into cash flow as expected.

Underground mining and milling operations are ramping up, and Hecla personnel are at about 85% of normal operating levels. The open-pit contractor is servicing his gear and touching up the roads for a May 13 restart of open-pit mining. Until then, we've been processing open-pit ore from a large stockpile, so there has been no production impact, but we have reduced our risk profile and deferred some costs.

In addition, the pandemic has slowed our initiatives to improve mill reliability, throughput and recovery. We plan to resume these in earnest in Q2 and expect to see reductions in costs and increased cash flow when they are completed.

The Lucky Friday ramp-up continues, and we are on Slide 14 now. Members of the workforce who were on strike have been recalled, and we need to hire about 80 new employees, about what we expected. In the first quarter, the production was low due to the focus on retraining and bringing back the workforce. We see production increasing as the year progresses, particularly in the fourth quarter, when not quite half of the production is mined.

The 5370-loading pocket upgrade was completed on budget and schedule. The COVID-19 delay in the #2 shaft hoist project, which will take the mine down for about 21 days, now is forecast to begin in June and to conclude in July. Our plans still show us achieving our full production rate by the end of the year.

We have seen solid progress in Nevada as we work to find ways to improve it. As you can see on Slide 15, we announced an agreement with Nevada Gold Mines to process a 30,000-ton bulk sample at 1 or more of their refractory gold processing facilities. This gives us the opportunity to test larger-scale, long-hole stoping of Fire Creek's Type 2 refractory ore, with the goal of reducing the unit mining costs. It should also establish a recovery rate for Type 2 ore.

The Nevada Gold Mines processing facilities are larger-scale plants with lower unit processing costs than our Midas mill, and they are closer as well, a double economic benefit. We plan on mining the bulk sample over the second half of 2020. This is a low-risk way to explore options to reduce Fire Creek's cost structure, because we expect the bulk sample to be self-funding and we can stop the work at any time if this proves not to be the case.

Most importantly, this bulk test may provide a path to realizing value from the existing approximately 543,000-ton inferred resource, which grades about 1/2-ounce per ton of gold and about 1/2-ounce per ton of silver.

Results from the recently completed hydrology study also are favorable. They suggest that the existing water rights, water-related permits and water-treatment infrastructure may be adequate to support a conceptual mine plan being developed for the Type 2 resource. Inflow rates appear to be manageable through a combination of selective control majors and managing the development rate. This study and results from the bulk mining and processing test will be used to refine the conceptual mine plan and economic analysis in 2021.

At San Sebastian, we continue with the work necessary to make a decision on moving forward with the Hugh Zone. At issue is whether we can produce a salable third concentrate for copper. What we had hoped would be a quick solution did not yield acceptable results. More metallurgical testing is underway, and we continue to evaluate the proper sequencing for Hugh Zone and El Toro. At this time, we do not believe it will be possible to avoid a gap in production at San Sebastian.

In closing, I would like to say how proud I am of the teams at all of our operations. Our people are our greatest asset, and once again they have demonstrated it by how professionally they've managed the risks of the pandemic and ensured we've protected our people and the communities in which we work.

I'll now turn the call back over to Phil.

Thanks, Lauren. And so we're now on Slide 17. For the last 13 years, we've had a charitable foundation that's contributed over $3 million to the communities we operate in. We have now committed a new, very targeted contribution of $125,000 to Juneau, with most of that going so far to food banks, and we've done something similar at other locations.

We are the largest private employer in Juneau and the Silver Valley and in La Sarre, so we have lots of support but also lots of responsibility, so we're taking that seriously to support the community.

One more note before I take questions. Our annual meeting is on May 21, and it's going to be a virtual meeting this year to ensure everyone stays safe. And we'll have a presentation that I think you'll find interesting, and then we'll also have a chance for you to have a call-in with the teams of managers one-on-one after the meeting ends. So watch out for our press release with the details on that in the next few days.

So with that, I'll open things up, operator, to questions.

(Operator Instructions) Your first question comes from the line of Jake Sekelsky with Roth Capital Partners.

It looks like you're backing down capital spend by about 25% for the year. Can you just give us a bit more color on where you see this reduction is coming from?

Sure. It's pretty straightforward. It's primarily at Greens Creek and at Casa Berardi that we'll see these reductions. Lauren, do you want to give him any further indication?

Yes, it's things that are not impactful over the long run. We might rebuild some more equipment rather than replace units. It's things of that nature, nothing major. We don't have any big capital projects underway, so it's nibbling around the edges in order to sustain our cost guidance.

And then just in Nevada, you talked a bit about the bulk sampling program that you have going on. Should we expect to see interim updates on that over the next few quarters or the second half, or is this more for internal data collection going into next year?

I think as we formulate our plans and move that forward, we'll have more information. Probably at the end of the second quarter, we'll have an update. At the end of the third quarter, we'll have an update. I would anticipate that if we move forward with things, we'll have some major news on what we're doing early in the new year. That's really what we're trying to set things up for, is to be able to make an economic study of how we move forward on the inferred resources that we have there.

As we said when we started this, when we made the pause, we said we're not going to move Nevada forward quickly until we have a clear plan that we are confident can work. Lauren, anything to add?

Phil covered it very well, I think. We will start the mining, and that's really what we'll be able to report on in the earlier days. Obviously, the Nevada Gold Mines' plants are large plants, and they'll process our ore in a lot. So it will take us some time to accumulate enough to be processed, so I wouldn't expect to see processing results until later in the year.

Lauren, would you talk a little bit about why Nevada Gold would want to do this?

Sure. So Nevada Gold does have a business of supporting other companies in the state of Nevada where they will process ore for independents, but they're quite selective about it, and they are specifically looking for a couple of aspects. 1, they want good grades, and 2, they want high sulfur content, and we have both of those things. The sulfur content is utilized in their process to displace fuel costs, so it is advantageous to them both in terms of the fact that they make a profit on the processing, but also it displaces fuel costs.

Okay, that makes sense. So potentially by Q4, we could see the initial preliminary results out of the bulk sampling program?

At least, yes, a portion of it. We'll have the mining cost side of it. We probably won't have the results from the processing until early in 2021.

(Operator Instructions) Your next question comes from the line of Heiko Ihle with H.C. Wainwright.

With Casa Berardi, can you just maybe walk us through the steps that you undertook to restart operations there? How long did everything take? How did it compare to your estimates, current bottlenecks and your assumptions on how long it'll take to get resolved?

Sure. Sure, Heiko. I'll make a few comments, and then maybe, Lauren, you can run through it. The first thing I would tell you, Heiko, is that we were very aware of areas within Quebec that have had the virus, and so we looked at the workforce and we wanted to make sure that people that were coming back had not been exposed to the virus. So we spent some time evaluating that and sort of prioritizing bringing people back.

We also made the decision to bring back fewer people initially and sort of ramped them up in order to make sure that we had the social distancing within the facilities, and we changed how we -- when people would arrive and that sort of thing.

And then the final thing I'll say is that we have a contractor that we have not yet brought back, but we'll bring back I think the middle of May, and so it won't be -- we won't see full production until later in May -- maybe early June. Go ahead, Lauren.

So we've been back at the ramp-up here for a little over a week, roughly, and so far it's going according to plan. As I mentioned, we're running at about 80% to 85% of our normal Hecla staffing level. Included in that number are salaried staff that still are working from home in some cases or working from our Val-d'Or office. But in terms of the operating personnel at the mine site, we're hitting our marks. We're pretty much on our ramp-up schedule.

I would say that looking at the last several days of run rate through the mill, we've been hitting our tonnage, but it's going to be a little bit bumpy as we rotate through crews. Some crews have more people coming back than others, and it'll take a full rotation to get it back up to our full complement of people.

And that's assuming that the government continues to relax restrictions in the manner in which they have said they will, because as Phil mentioned, our workforce comes from a diverse range of communities, and some of those communities can't travel yet. But I would say so far, it's going quite well. We're on a good ramp-up pace, and we should be at full production by the end of May.

And we've also divided the management team into 2 groups.

Right. So we've kept the management teams segregated, so we've got a #1 and a #2 in command for each major group, each major function in the mine. And in terms of the staff, half of them are working at the mine and half of them are either from home or the Val-d'Or office. That protects us in the event that we have some kind of an outbreak and that we keep management continuity, but it's a cautionary measure. So far, we've had no events whatsoever.

So the way to think about this is we had a shutdown for about a month, and we've got a ramp-up of about 6 weeks.

In aggregate, Heiko, estimate it at 6 weeks production impact.

Building on that a little bit, I mean, this is the first mine that we cover that's actually been fully reopened, because obviously Mexico is lagging. I'm just trying to get a grasp on how the process is going with the (inaudible). And frankly, maybe I'm very jaded living in New York, but do you have any issues in getting sanitizer, gloves, sanitation equipment, I mean, all this stuff that you need? Because, I mean, around here it's impossible to procure any of that.

Right. Well, I think it's a demand situation, Heiko, and very early in the process, as Phil mentioned, we took a look at our supply chain and our inventory, and one of the things we looked at was our access to PPE and sanitizer, and although we were pretty well-stocked most places, we did beef up orders very quickly. And we have transferred things around internal from the company, because some places have a bit more of one supply than another, and we've been able to meet the demand, and the supply chain has caught up for us, so we're not anticipating any issue there.

So Heiko, I have my own personal supply. If you need something, let me know and I'll send it to you. FedEx is still working.

You're an absolute gentleman, and I appreciate that. Thank you. And then just a last one before I get back in queue. Can you just venture a guess on your G&A savings during Q2 given the essential stoppage of travel, conference attendance, et cetera, et cetera? And then just extrapolating that, I mean, how meaningful of a number is that, and how sustainable do you think it is? And also, do you have the costs for the hotels in Juneau and the quarantine? Is there a number that you can give us, or at least an estimate of sorts?

Sure. So with respect to the G&A, no, we're not able to quantify it yet. We're still working through that. We do think this provides us with some opportunity to reduce travel costs permanently. And we also -- our lease on our office space comes up in 2 years, and we were already looking at how we might reconfigure our offices in the future, and so we'll certainly consider that. But the impact of that will be a couple years out.

With respect to the quarantine facilities that we have, we have 2 hotels that we have -- have leased the total hotels. We have all of it. Of course, in Juneau, the tourist industry is really hurting, so it's very well-received in the community. And our costs of this quarantine activity, order of magnitude is $750,000 a month or so, and that's reflected in our guidance.

Thank you. At this time, I would like to turn the conference back to Mr. Phil Baker.

Okay. Thanks very much. Obviously, Mike and I are available to answer questions. I guess the -- I hope the thing you took out of this call is the fact that we have this material that is in inventory, we have a change in treatment charges, some of which is temporary, some which is going to run the rest of the year, and we're essentially in full production with the 4 of our 5 operations.

And like we told you a year ago, when we said the second half of the year will be better than the first half of the year, same story this year, and you saw the sorts of results that we had a year ago.

So if you have questions, please get a hold of Mike or I. Thanks very much.

Ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect.