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Hecla Mining Co. (NYSE:HL)

Q2 2009 Earnings Call

July 29, 2009 1:30 pm ET

Executives

Don Poirier – Vice President, Corporate Development/Investor Relations

Phil Baker – President and Chief Executive officer

Jim Sabala – Chief Financial Officer

Ron Clayton – Senior Vice President, Operations

Dean McDonald – Vice President, Explorations

Analysts

Anthony Sorrentino – Sorrentino Metals

Steven Butler – Canaccord Adams

Michael Curran – RBC Capital Markets

Mike Jalonen – Bank of America

Operator

Welcome to the second quarter 2009 Hecla Mining earnings conference call. (Operator Instructions). I would now like to turn the call over to Don Poirier, Vice President of Corporate Development. Please proceed, sir.

Don Poirier

Thanks, [Micheala]. Welcome everyone and thank you for joining us today on our second quarter conference call. Our call is being webcast today at www.hecla-mining.com. Our news release from earlier today is on the website and there's also a slide presentation available on the website.

The presentation can be found by opening the webcast and presentation tab found on the drop down menu in the Investor Relations tab. The presentation is labeled Q2, 2009 Earnings Presentation.

On today's call we have Phil Baker, Hecla's President and CEO, and he is joined by Jim Sabala, Senior Vice President and CFO, Ron Clayton, Senior Vice President of Operations, and Dean McDonald, Vice President, Explorations.

Before we start I need to remind you that any forward-looking statements made today by the management team comes under the Private Securities Litigation Reform Act. It involves a number of risks that could cause results to differ from projections.

In addition to our filings at the SEC we are allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of such terms as measured, indicated, and inferred resources and we urge you to consider those disclosures that are provided in our SEC filings.

With that it gives me great pleasure to introduce Phil Baker, Hecla's President and Chief Executive Officer.

Phil Baker

Thanks Don. Hello everyone and thanks for joining the call. If you will please go to slide two, 90 days ago we had our first quarter conference call where I expressed optimism that our operating performance was solid, metal prices would improve and our balance sheet would strengthen.

This second quarter more than confirms that optimism. We had record silver production of 3 million ounces, record $75 million of revenue for the quarter, very low cash costs of $338 million giving us about $10.00 of margin per ounce, which you can see in slide two, quarterly cash flow that is the fourth best in our history generating over $200,000 per day of cash flow from operating activities and a balance sheet that's flush with cash relative to the debt we have.

As you can see in the next slide which is slide three, this performance is with metal prices that are good, but not great, but the acquisition of Greens Creek allows our volumes to grow so much so that we have so much more revenue and cash flow, and Greens Creek is operating superbly.

We've increased the tonnage throughput while keeping the mine in balance with our planned development and backfill. We also have lowered our costs. At the Lucky Friday higher grade has been the key. As we talked about in the past, as the price of metals change we change our mining widths and lengths of our stopes.

We're mining less material that was outside our plan so we're closer to our reserve grade. Ron will talk more about these two properties, but let me say for him that the workforce at these two mines is doing an excellent job.

Please move to slide four. Over the past five years we've increased our exploration acquisition activity. As a result total sliver resources are more than 2.5 times where they were in 2003, and I think you will see more growth in resources at all four of our land packages as we, over the second half of the year, spend substantially more on exploration.

Lucky Friday drilling and resource modeling continues to increase the grade even 60% higher, improving the economics of the deeper material and substantially adding to the resource. Greens Creek in-mine exploration appears to be expanding the ore zones. The surface program is now testing if the Northeast mineralized contact is going to have strike length and grade. The data from this can be a completely new ore zone. Dean will make a few comments on our exploration.

Slide five, the next slide, shows why for the last year, the primary concern was our balance sheet and de-stressing it. Now, that's now done. Our debt is now 10% of our peak debt load last year, and about two thirds of our cash position. It's no longer an issue for us or an impediment to growing.

Finally, let me comment on sliver and the other metals we produce. The first half of the year prices have been in pretty stable trading range, one that generates substantial cash flow for Hecla, maybe $15 million to $20 million per quarter on average, and I say average because we expect lower cash flow in the third quarter due to timing of Greens Creek shipments and increased exploration.

However, we could have a record breaking fourth quarter, but the point is we generate substantial amounts of cash flows at current prices and with essentially no debt, our flexible exploration programs and low operating costs make it where we can survive lower price environments and can easily generate two to three times cash flow with higher prices. And we think prices will go up, either as a result of the economic recovery or inflationary pressure or both.

A word on share price performance, over the past three months we have been one of the better performing silver companies. Of course this comes on the back of substantial underperformance caused by the balance sheet stress. The share price turnaround is probably resolving these balance sheet issues, and there may be some realization that Hecla is by far the largest U.S. sliver producer and the second largest zinc and third largest lead producer.

But we think the understanding of how strong our cash flows are and the growth from our exploration is going to move the stock much further and so with that let me ask Jim to give us some thoughts on the financials.

Jim Sabala

Thank you very much, Phil. During the second quarter of 2009 we continue to build upon the foundation of the plan implemented in the two previous quarters. Each item provided an important part of a strategy to make Hecla a strategic force within the sliver space.

In particular we completed an equity offering raising $57.4 million which when combined with the significant improvement in operating cash flow allowed us to reduce our debt to just over $38 million a far cry from $380 million, less than a year ago.

Silver production increased by 24% quarter-over-quarter, and by 4% when compared to the last quarter which demonstrates continuous improvement in achieving our plan. Cash cost per ounce declined to $3.38 per ounce compared with $3.43 per ounce in the prior year's comparable period in spite of lower lead and zinc prices which impact by-product credit. This also represents a significant improvement over Q1, 2009 cash costs of $4.67 per ounce. G&A was reduced by 15% as a result of general belt tightening implemented in the first quarter.

During the quarter we had two abnormal items I should mention. First we took a non-cash impairment charge of $3 million on shares we own in a company that purchased our Venezuelan interest in 2008, and second we incurred interest costs of $1.75 million in connection with the close out of an interest rate hedge mandated by our credit agreement; where we repaid the loan, we reduced the hedge position, hence the charge.

Absent these two items earnings before taxes and preferred dividends would have been $7.6 million. This all adds up to a dramatic improvement in overall company liquidity and cash flow. At quarter end we had $57 million in cash and $38 million in debt, thereby turning the corner into a net cash position.

Operating cash flow was $19.6 million for the six months but more amazingly $20 million for the quarter in spite of increases in accounts receivable and decreases in accounts payable. These results are directly the result of operational improvements and financial restructuring completed over the first half of 2009.

Consequently, we are excited as we look forward to the second half of this year. The combination of good operating results, increased financial flexibility and improved metals markets puts Hecla in an excellent position to pursue additional growth opportunities.

And with that I'd like to turn the call over to Ron Clayton to talk about our operating performance. Ron?

Ron Clayton

Thanks Jim, and good morning or afternoon wherever you might be. As Jim and Phil have both said, operationally we had an extremely strong quarter. We continue to focus on filling our processing plants with the highest value rock available, maximizing the metal recovery to concentrate, and doing this in the safest and most environmentally sound and cost effective way.

Looking to slide nine, at Greens Creek we continue to push the mining rate and mill throughput up to the mill capacity of 2,300 tons per day. We've been able to achieve higher mining rates by successfully putting the people and facilities in place to maintain the required development and backfill rates that will sustain this production level.

The chart shows the average milling rate for the second quarter at 2,254 tons per day for Greens Creek. The mine actually achieved a production rate of 2,354 tons per day. This allowed us to maintain a stockpile and better blend the mill feed, which in turn is beneficial to the metallurgical performance.

The higher tonnage rate coupled with the better than expected available of hydropower during the quarter helped to drive the unit costs for mining and milling to the lowest point we've seen in the last two years.

At Lucky Friday, we've been running the mill at capacity since early 2007 so the focus there has been on keeping the mill full, maximizing the operating time and grade delivered to the mill and the value of the concentrate produced.

Unit costs for the first half of 2009 remain below those experienced in 2008; however, milling costs were up slightly in the second quarter compared to the first quarter of this year due to the higher reagent costs associated with operating two new water treatment plants.

We've experienced some difficulty in consistently meeting our new discharge limits for lead and are working under a compliance order with EPA to consistently achieve the permitted level. In addition, we're working diligently to optimize the treatment plant operations and lower the operating costs for those plants.

We also accelerated some expense development in one stoping area to allow us some additional operational flexibility. Looking forward at both sites, we'll continue to push the mill throughput and operating time, improve the metallurgical performance and the quality and quantity of our concentrations and drive our costs down.

Moving on to the next slide, you can see from these graphs that our focus on grade control has been successful in increasing the silver grade to our plants. This is more apparent at Lucky Friday as the mill is being fed at capacity.

While these graphs show only silver grades, lead and zinc grades are up at Lucky Friday again in the second quarter as well. Mill feed grade is only part of the story, though. At both operations, we're producing higher quantities of metal at lower total cash cost, which is the bottom line measure of the production and grade control strategies at both mines.

Moving to the next slide, you can see that we've done a good job of managing capital through the difficult times. Capital projects in 2009 focused on sustaining the operations and construction or expansion of tailings facilities. The tailing facility projects at both sites are multi-year projects that will be completed in 2010.

Recently, we've restarted the deep development analysis at Lucky Friday, with a goal of a feasibility study for development and associated infrastructure in the first quarter of next year. This project has the potential to deliver higher metal production at lower costs, due to the higher grades and wider vein widths. This potential was supported by the highest density of drilling the mine has ever achieved, in advance of development and production.

In summary, we had a very good quarter at both operations, with record metal production and very low cash costs per ounce of silver. I expect to continue this production performance and improving trend, as we review and update our plans for the future.

With that, I'll turn the program over to Dean McDonald with an update on exploration.

Dean McDonald

Exploration expenditures in the second half of the year will materially increase to $7 million or $8 million, in addition to the $2.2 million spent in the first half. There will be a continuation of underground exploration programs at the mine, along with surface drilling programs at all four of our land packages.

As I've described in earlier conference calls, drilling continues to refine and expand the high grade central and eastern 7,100 to 7,500 level areas at the Lucky Friday mine. And deeper exploration drilling is defining mineralization down to the 8,000 level. Our preliminary evaluation indicates grades for all metals are significantly higher than those in our current mine plan in the key 6,600 to 7,500 levels.

Resource estimates incorporating drilling for the past year through June are being completed, with revised reserves expected at year's end to be an important component of our mine life extension plans.

At Greens Creek, underground exploration continues in the systematic way to define, evaluate and extend ore grade mineralization based on stratographic and structural projections of the known Greens Creek ore zones.

A recently completed resource study by independent consultant [AMex Services] and mine staff identified potential resources at Greens Creek, as seen on the plan map in slide 12, with arrows showing the projection of potential mineralized horizons. As you can see in the slide, there are excellent exploration opportunities in close proximity to mine infrastructure, and we plan to sequence target evaluation of this area over a five-year period.

Drilling of the newly discovered northeast contact zone shown in slide 13 will occur from two underground platforms to the south and on surface to the north. In the slide, color and drill traces of the proposed surface holes are shown in green and the proposed underground holes are in blue.

Surface drilling has now traced mine contact rocks for over 2,000 feet along strike and this is tracing towards known mineralization at the mine. The objective in the northeast contact drilling is to extend the previously defined mineralized contact along strike and identify new zones of mineralization or deposits.

Work at the San Juan Silver Joint Venture in southern Colorado during the second quarter included completion of the Bulldog resource models where Hecla has defined an inferred resource of 37 million silver ounces with base metals. This will give us a substantial base to build up our project, with partners Emerald Mining and Leasing, LLC and Golden 8 Mining, LLC.

We also submitted the long-term exploration plan of operation to the Forest Service that allows for a five-year exploration plan of all the primary and secondary mineralized structures identified in the district to date. Finally, drilling on the northern extension of the Bulldog vein and the Midway target will commence in the third quarter.

At the Silver Valley in Idaho, drilling is being initiated on the deep vindicator silver-base metal vein target that is east of the Lucky Friday mine infrastructure.

In Mexico, drills will be turning on the shallow oxidized, potentially bulk tonnage silver mineralization at Penascote and the deeper silver gold epithermal vein El Garrote target areas. Both targets are within the very extensive and prospective [Soledad] project in Durango, Mexico.

With that, I'll pass you back to Phil for concluding remarks.

Phil Baker

The message we that we hope you're getting is that the company has re-strengthened itself. We're strong now operationally, exploration-wise and financially and our focus again is on growth. And with that, Don, you can open it for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Anthony Sorrentino – Sorrentino Metals.

Anthony Sorrentino – Sorrentino Metals

You had said that exploration spending will now total about $9 million or $10 million this year I believe, and how would that break down by property?

Phil Baker

Dean, I guess I'll let you answer that question, but I can tell you that the Mexican property, San Juan Silver, the two of those will probably have about $1 million, maybe $1.2 million, $1.3 million split pretty equally between the two, and I don't remember the breakdowns on the other two.

Dean McDonald

Anthony, at Greens Creek, we anticipate spending $3.4 million; at Lucky Friday, $1.35 million and at the Silver Valley, $920,000. That's in addition to the San Juan and Mexico that Phil mentioned.

Anthony Sorrentino – Sorrentino Metals

And what would you expect capital expenditures to be for all of 2009?

Phil Baker

Order of magnitude of about $34 million, maybe $36 million. You'll see it go up in the third quarter, which is as you would have seen on the slide Ron had and it's just the nature of the surface work that we're having to do on these two tailings facilities.

Operator

Our next question comes from Steven Butler – Canaccord Adams.

Steven Butler – Canaccord Adams

Question for you Dean on Lucky Friday, can you just remind us, or me at least, what's the limit of your reserves in terms of depth, level of depth at Lucky Friday and your resources level of depth? Thanks.

Ron Clayton

This is Ron Clayton. The reserves actually go down to just a little below 6,200, and then there's also a block that's above 5,800 that goes as high as 5,300, so we're mining up and down from 5,900. And then the resource goes down to about 7,900.

Steven Butler – Canaccord Adams

So resources already, I guess guys, calculated inclusive of some of these sects, your higher grade results at depth, correct?

Ron Clayton

Yes. Although the grades are increasing dramatically with the drilling that's been done in the last year.

Steven Butler – Canaccord Adams

Okay, so will in-field drilling then perhaps be potentially moving your grade higher on your block models and resource models?

Ron Clayton

Not potentially – it will.

Steven Butler – Canaccord Adams

Okay, okay.

Ron Clayton

And I also expect the tonnage to go up a little bit but the tonnage changes are not going to be near as dramatic as the grade changes.

Steven Butler – Canaccord Adams

What are you thinking of in terms of scoping and we're talking internal winds, as an option for deepening the level below? Where's the current shaft level get down to, you guys remind me there?

Ron Clayton

Sixty-two hundred is the bottom of the silver shaft.

Steven Butler – Canaccord Adams

Okay, so would you be looking at internal winds?

Ron Clayton

Yes, there's a couple options that we're looking at and have looked at, but they're variations on an internal wind and variations on ramp access with conveyers or trucks, electric trucks, or stuff like that.

But those are the primary things. I mean there are some other things that we're looking at that may or may not come to the top of the heap like conveyers and – we're trying to look at all the different options to make sure that we pick the best ones.

Steven Butler – Canaccord Adams

Right, and Ron while I have you on the floor, basically talk a bit about – in the release about hydroelectric power. Obviously I guess you had pretty good access to the grid power. How does that change as you go into the second half, sounds like you'll have a little less draw? Maybe that's seasonality, or what percentage of your hydro, of your power needs was courtesy of the Alaskan grid this quarter?

Ron Clayton

Okay, the power that we're going to get is really dependent upon when the power company finishes their new hydro project, Lake Dorothy, and we expect that to be completed in time for us to go back on full grid power in November.

We did not expect to be on full grid power for most of the first half of this year, which we were. We are currently on grid power only for Hawk Inlet which is the camp area. So the mining and milling processing part is not on grid power. We don't expect to go back on grid power there until November. After that we would expect something in excess of 90% of our power needs at least for the next few years will be grid power.

Steven Butler – Canaccord Adams

Oh, okay, so in Q2, Ron, how much of the mill was on grid power?

Ron Clayton

Right now – oh in Q2? All of it.

Steven Butler – Canaccord Adams

All of it, okay.

Ron Clayton

Basically we were on grid power for all of Q2, for everything.

Steven Butler – Canaccord Adams

And Q1?

Ron Clayton

Pretty much most of Q1.

Steven Butler – Canaccord Adams

Okay, fine. Dean, coming back to Greens Creek, looks to be some interesting plans there, where's your greatest sense of optimism on the several zones mentioned in the release 52/50 south, Deep south 200 and/or the northeast. Maybe you can rank them or at least where do you expect to perhaps have most joy.

Dean McDonald

Well the areas that the exploration group at Greens Creek are most excited about are in what's called the [Shop] ore area which is the southwest and southwest west. The other areas, the other trends – if you go to slide 12 is the southern extent of the 52/50.

We're now positioning an underground development program to extend the mineralization there, and then the Deep 200 south. And so, in terms of writing them, those are certainly the southwest west, the 52/50, the Deep 200 south, those would rank very high, and then of course the Gallagher zone to the very southwest.

Steven Butler – Canaccord Adams

Okay. And there's a bit more speculative potential then, on the northeast contact or to talk about potential for 2,000 feet of potential strike. I know the contact seems to be there, but – and drilling has to determine the potential for mineralization. Is that the idea?

Dean McDonald

Certainly and as I'd mentioned earlier the indications are that this mine contact that we identified northeast of the current workings, we're seeing that horizon with some mineralization tracing towards the main ore bodies and so the underground drilling that I mentioned to the south will hopefully provide us the information that will link existing mineralization to this newly identified horizon.

The drilling to the north is really attempting to find out if we're looking at a brand new mining center, so –

Ron Clayton

And let's be clear, we're at the early stages of exploration here. We don't have anything other than the mine contact that's been identified, so we're a long way from knowing what we have here, Steve.

Dean McDonald

What excites us, Steve, though, is that this was an area that we felt there was no exploration potential because we thought it was in the hanging wall of the mine horizon because of the complicated folding. It's really opened up a brand new area for us that has potential.

Steven Butler – Canaccord Adams

Sorry, not to belabor the point, is that surface exploration, surface mapping, that's shown that contact to exist, or is it actually confirmed by drilling?

Dean McDonald

No, it was, in fact the surface mapping indicated it was all hanging wall rock, the argillite. It was primarily a geochem program that led us to put some drill holes in about 18 months ago.

Steven Butler – Canaccord Adams

Thanks for that. And Jim, briefly I'll let you go, I won't hog the puck here but on the Greens Creek that you saw a fairly big, can you just elaborate briefly Jim, on the change in product inventory, explain that $4. – it's a big number, $4.4 million, which obviously hits the income statement in the quarter.

Jim Sabala

Sure. It's strictly a function of timing of the deliveries, the metal and when they settle. We ship at Greens Creek maybe two to three times a quarter and it's dependent on barges being able to get into the facility and that sort of thing. So it's strictly just timing when the boats go out.

Steven Butler – Canaccord Adams

So that's ascribing the relevant cost to that silver that was shipped and/or shown as produced.

Jim Sabala

That's correct.

Steven Butler – Canaccord Adams

And how does it look for Q3? I think you talked Phil or Jim about a bit of seasonally low points maybe in Q3. Is that a normal seasonal low for silver shipments from Greens Creek?

Jim Sabala

It's just again, just strictly a case of timing of when we think we have enough volume to order a boat and get it into the Hawk Inlet and get it back out. So it doesn't go quarter by quarter, year-after-year, it's really dependent on our shipping and production schedule.

Operator

Our next question comes from Michael Curran – RBC Capital Markets.

Michael Curran – RBC Capital Markets

Just touching on something Steve just mentioned, the surface drilling at Greens Creek, I was just wondering how deep are those holds targeting the northeast contact?

Dean McDonald

Yes, Mike they're going to vary from a 1,200 to 2,000-foot holes.

Operator

Our next question comes from Mike Jalonen – Bank of America.

Mike Jalonen – Bank of America

Just calling, something you said there Phil tweaked my interest. You mentioned earlier in your opening statement that your improved financial condition is no longer an impediment to growing. So I was just wondering if you could define what you think the growing is. I assume the scoping set in Lucky Friday and exploration of Greens Creek. Would there be like acquisitions in there, Phil, because

I look at your balance sheet and it's great you're now in net cash but compared to a lot of your precious metal peers out there your balance sheet is still – they have a lot more cash than you do, so it would be a very competitive environment for acquisitions I guess I'm getting at.

Phil Baker

Yes, first of all our interest is on the assets that we have. That's the starting point and you can see the enthusiasm in which we are increasing the level of expenditures over the second half of the year to do that exploration. You can see the efforts that we're putting in to re-evaluate how we attack the deeper Lucky Friday and we think both of those things is going to give us growth in our resource base and ultimately production.

On the acquisition side of things, we're going to look at things and we're going to look at them selectively. I guess I would suggest to you, Mike, that our cash flow generation changes our balance sheet pretty quickly. We saw that in the second quarter. That second quarter was the fourth best quarterly cash flow we've ever had. I think you're going to see more of that in the near future.

So I think we'll be able to be competitive. We certainly have a niche as with the underground mining expertise that we have. We'll try to work from that and we'll look at things and we'll try to do something that makes sense in order to see things grow. We're not going to just stand still.

Mike Jalonen – Bank of America

Okay, I guess just one more question. There was some discussion Lucky Friday with the scoping study for 2010, how long could you mine Lucky Friday now without going deeper or like how long will the current reserves go for? It sounds like you're getting excellent grades there so maybe some upgrade effect even to help out.

Phil Baker

Certainly, there's infrastructure that we would have to put in for refrigeration and ventilation to go deeper. We currently think we could go to 2,015, 2,016, 2,017, that sort of range, but the material that we're seeing is so much better deeper what we'd like to do is put in a substantial amount of new infrastructure in order to get to that material.

The economics of it we think is going to be so attractive relative to what we are mining that it makes a lot of sense to try to move it as quickly as we can.

Ron, do you want to add anything to that?

Ron Clayton

No, you hit it right on.

Operator

And we have a follow-up question from Steven Butler – Canaccord Adams.

Steven Butler of Canaccord Adams

Sorry, the reference to $7 million to $8 million for the rest of the year, would that be exploration that will be fully expensed?

Jim Sabala

That's right.

Operator

(Operator Instructions).

Phil Baker

Well if there are no other questions I'll just close things by saying thanks for participating in the call. I hope you see that Hecla's a very different company than we were even a quarter ago, and we're poised for growth. So thanks very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.

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