Phillips S. Baker, Jr. - President and Chief Executive Officer
Hecla Mining Co. (HL) 2013 Bank of America Merrill Lynch Canada Mining Conference September 12, 2013 2:00 PM ET
I'd like to introduce Phil Baker, Chief Executive Officer of Hecla Mining. He's been the Chief Executive Officer now for 10 years I believe and with the Company for 12 or 13 and a much longer past in the mining industry. They recently acquired Aurizon Mining, a Quebec based gold mining company, which now gives them possession of the Casa Berardi operating mine and several prospective exploration targets. So Phil, I'll turn it over to you.
Phillips S. Baker, Jr.
I guess I will be making forward-looking statements and they are subject to the disclosures in our 10-K and 10-Q. Please refer to those with respect to those disclosures. You mentioned, I've been with Hecla for 12 years now, and that's true. That's true I have been with Hecla for the last 12 years, and in the last five years, I would characterize the Company as changing itself dramatically, and we have on this slide that it's a new Hecla, and that is a term that gets used and is probably not a very accurate statement, but in this case I think it's very accurate because what you have now with Hecla is a company where the Lucky Friday is coming back into production, full production, you've now got Casa Berardi in the fold, we've made about $325 million worth of investments in the Lucky Friday and Greens Creek over the course of the last 3.5 years, really recapitalizing, reloading those mines for really the next 10, 20, 30 years. You have a company that now has a mixture of gold and silver production. We've been known as the silver producer for 120 years, we've been a gold producer for 30, but now you're going to see a mix of revenue that's about 50-50 between gold and silver, and then our base metals that we produce.
So the Company is different, the asset mix that we have is very different. You've got a company that we think over the course of the next five years will see our silver production increase about 2.5 times. It's going to go from about 6.5 million ounces to about 15 million ounces. You have got a company that now has a growth profile and gold will go from 50,000 to 175,000 to 200,000. So you have a company that's changed with that growth that we have and it's all being built on a financial base that is the strongest that we've had in our history. We ended the second quarter with almost $400 million, or $300 million in cash and $100 million of credit capacity, so $400 million. We ended the quarter with a hedging portfolio that really locks in a large portion of the revenue for our base metals and so protects the costs. And you have a company that has put behind it some of the legacy issues that we've had in the past. So it really is a new Hecla. It really is a Hecla that we think will create value for shareholders and it's a Hecla that has growth, provides growth for shareholders.
Now where are we located? Is there a pointer? No. Alright, so I'll just make reference to the three different types of assets that we have. First we have operating assets, and they are in Greens Creek in Alaska, in the capital of Alaska, Juneau. They are in the Silver Valley of Idaho, the Lucky Friday. And then we of course have Casa Berardi in Quebec. We also have development properties. We have three development properties, in Colorado the San Juan Silver property, we have San Sebastian in Mexico, and then we have Heva-Hosco in Quebec that Aurizon had. And then we have three, four exploration properties, the Silver Valley exploration land package that we have, we have Monte Cristo in Nevada, and then we have a couple of exploration properties in Quebec. So we have three different types of properties, we have a portfolio of properties that provides current cash flow and future growth.
And that growth that we are seeing, I mentioned at the beginning, we're going to go from 6.4 million ounces to 15 million ounces we think by 2017, that's primarily driven by the Lucky Friday coming back into production and putting one of our two silver development properties into production. And the gold production, gold growth comes just as a result of acquiring Casa. So this coming year, 2014, we would expect to produce between 175,000 to 200,000 ounces of gold. And this is sustainable growth. It's built on the back of the investments that we've made in the past. If you look at the silver reserve growth, it's gone from right at 50 million ounces to 150 million ounces of reserves and there's more behind that. You're going to see the Lucky Friday in 2015, 2016 to continue to grow that reserve base as we drill – do the close-space drilling that we need to do, the development drilling. And then the gold reserves is coming really as a result of acquiring Casa, going from 0.8 million ounces of gold to 2.2 million ounces.
Now I talked about our production being 50-50 between gold and silver, we would expect in the third quarter about 35%, 36% each between gold and silver, and then the remaining 28% coming from the base metals. We like having this diverse revenue stream. The stream from the base metals is significant. We produce roughly 60,000 tons of zinc. That actually makes us the second largest zinc producer in the United States. We're the third largest lead producer. That 60,000 tons of zinc is about half of what Lundin produces, to give you the context, it's about three quarters of what HudBay produces. So it is significant.
We have largely hedged that lead and zinc production. We've hedged about 50%, almost 60%, of that production. It's locked in roughly $300 million worth of revenue. That $300 million worth of revenue is effectively a year's production or a year's cost. It's roughly a year's cost of operating Greens Creek, the Lucky Friday and Casa. So we have that revenue locked in, covering our cost of production. It really allows us, it's not that we are taking a view on the metal's price, it really allows us to have confidence in our plan. So when we tell you, this is what we are going to do, we have the financial resources to be able to do it.
We also have changed our policy with respect to hedging the metals when we ship it. In the past, we have taken exposure to the marketplace and so you've seen our realized price vary significantly from the average realized price for the quarter. You're not going to see that anymore. We will follow more closely in line with that.
Strong cash position. If you compare us to our peers, we have the second largest cash, plus we have $100 million of lines of credit in hand. What this does is it really puts us in a position, just like the hedging, to be able to complete the plans that we engage in. Also puts us in a position to bring new assets into the Company.
Our assets generate really strong margins. This slide, it's a fairly complicated slide, but the silver bars across the bottom, that's actually in our cash cost of production going back to 2008. The line is the average realized price that we had for those periods of time. The blue bars that you see here are the margins we've generated, and what you can see is we consistently had 70 plus percent margins since 2008. In 2013, you are seeing our costs are a little bit higher. They are higher because the Lucky Friday is in a ramping-up phase. Haven't produced a whole lot of ounces in the first half of the year, so those ounces we've produced have been very expensive, squeeze the margins. You will see this cost decline over the course of the second half of the year.
Now what does this mean in terms of our cash position, of our cash flow generation? This slide is a waterfall that shows our beginning cash balance at the beginning of the second quarter and our ending cash balance. You can see that when you do all the math, you end up having almost twice as much cash at the end as you had at the beginning, and we generated only $32 million of adjusted EBITDA with a $16 average realized price. And we have lots of flexibility in terms of these expenditures, capital, exploration, pre-development, investment in other companies, and so we have a lot of control over those expenditures.
And what I want now to look at is what's happened over the last 3.5 years, and there's a few things that really stand out. The first thing is, over the last 3.5 years, we've generated almost $0.75 billion in cash flow from our operations. And what we did was we made the decision to invest in capital in these mines. So we have invested $328 million in the mines, significantly more than any other period of time Hecla has been in existence and more capital invested in our mines. We also invested $125 million in our exploration pre-development program, and then we had these other investments. A large portion of these investments were discretionary. And then we also had these one-time expenses, primarily the settlement of litigation that had been going on for 20 years, the litigation where the federal government was claiming $4.4 billion which we ended up settling for $0.25 billion, and after-tax about $150 million. These expenditures, these were one-time expenditures, if you take those off, we would have generated basically $270 million more cash flow over the course of that 3.5 year period of time. And that was a period of time with one year, almost 1.5 years, the Lucky Friday was down. So the point of all this is the sort of cash flow generation that our operations have, number one, and number two, the flexibility we have in the expenditures that we make on capital and exploration.
Now with the lower metals prices and – now from our perspective prices while they are weaker, we have seen them a lot lower and we have operations that can operate in a lower price environment than even this that we're in, but in response to that what we have done is reduce the capital expenditures that we have. This year we'll have it at $178 million. So that's in one year half of what we spent in the last 3.5 years. Exploration and pre-development will be about $38 million. That's about what we spent on average in the last 3.5 years. So we are reducing these, we are not doing a dramatic reduction but we are doing a reduction in response to the lower prices, and we are positioning ourselves for 2014 to spend within cash flow. We would not expect cash balances to decline after these programs.
So we have a strong balance sheet, we have strong cash flow, we also have access to the capital markets. We went to the bond markets for the acquisition of Aurizon. We did a deal in early April. It was about as good a time as you could do it through a transaction when it was priced at 6.875%. There is only a couple of transactions that have been priced better than that. It's also an eight year deal. There's a few of these transactions that have lower coupons that have shorter maturities. We think it's significant to have the debt out to 2021, that's eight years that we have in which to really season the Company, put ourselves in a position to be a continual issuer in the bond market. That's what our plans are, to run the business so that we can go back to that market.
So let's talk about the properties for a few minutes. The Lucky Friday produced about 340,000 ounces in the first half of the year. We'll produce about 1.3 million in the second half. With that few ounces being produced, our cash cost was $33 an ounce. You'll see those cash cost by the end of the quarter, the fourth quarter, be down to $9.50 an ounce with all of the production. We've also restarted the sinking of the #4 Shaft. This is #4 Shaft and I'll show you a slide in a second of where it's located. It is really the future of the Lucky Friday, it's going to put us in a position for this mine to operate for probably at least, we have a mine plan that's 32 years, but it will probably operate another 40 or 50 years as a result of the investment in the shaft. So let's look at that.
The original silver shaft from surface, that was built in the early 80s, only goes down to the 6,100, 6,200 levels. The original Lucky Friday vein, by the way this has been a three-dimensional oblique view of the Lucky Friday, and this is 1 mile from this. But in any case, the focus since 2001 has been strictly on the Lucky Friday. In the early 2000s, we built the 5,900 level and it takes about 10 years to mine that amount of ore. We have begun the #4 Shaft, we're now currently to about right here. We will complete it in 2016, it will go down to about the 8,800 level, and what it does is provide that platform for operating this mine as I said probably for 40 or 50 years. The other thing to note is the grade. This is a NSR color map. The red colors are greater than $250 a ton NSR, the cut-off NSR is $110, you can get a sense of the margins that this mine is going to generate.
Now Greens Creek is a fantastic mine, and in the second quarter of this year, it really exceeded our expectation with the second largest tonnage in the history of the mine. It's a mine that has continually hit at numbers. It's a mine that continually generates significant cash flow. In fact, if you look at this box, there's been $3.9 billion of gross revenues that the mine has generated in its 26 years. 18 of those years were at a price below $10. It has generated $1 billion of net income and it has generated almost $900 million in free cash flow that has gone back to the Company to be used for whatever operations.
When we look forward, we see that operation continuing to provide these sorts of results. And we say that because of the exploration that we've seen. This is a planned view of the operation and we've only highlighted a few zones within that planned view. These zones have had drill results over the last six quarters that have been the best I've seen in the time that I've been with Hecla. So when we look at the future, we see Greens Creek continuing to do what it has done over the last 26 years.
And then we have Casa. We acquired this, this has increased our gold exposure. We'll produce three to four times what we produced in the past. We've only had one month of production. You can see the amount of production and the cost. We would expect the cost per ounce to drop to $900. I think in the future we'll see it below that $900 level. And the mine will produce about 60,000 ounces over the second half of the year.
When we acquired the mine, they were in the midst of the construction of a shaft deepening. They are going to complete that and they are also putting in a pace plan. It really allows us to change the way we operate there with this deepened shaft and new pace plan. And there's lots of potential, and if you look at our drill results from the second quarter, down below the 118 level, grades of over 1 ounce, 1.25 ounce type grades, and we think there's potential in this area and over time you will see us develop platforms to be able to drill there.
So in summary, we think we have in Hecla some spectacular assets, and it all comes – the success of a mining company fundamentally comes based on quality of the assets that we have. So you have two assets in Greens Creek and the Lucky Friday that are among the largest, and if you look at the grades, they are at the top of the heap in terms of the grades that they have. Casa, we think is a good quality asset. It's not of the quality of the Greens Creek and the Lucky Friday, but it's a good quality asset and it's one that we would expect to operate for at least 20 years based on the current mine plan. And we have production that comes from the United States. We produced in fact a third, roughly a third to 25% of all of the silver that's produced in the U.S., and we're one of the few companies whose gold exposure isn't limited to Canada.
Just a couple of comments about silver. We think that Hecla has been a silver producer for 120 years, we think we like being a silver producer, we think we'll continue to be known as a silver producer, and when we think about the future, we look for opportunities to grow our silver production because of the characteristics silver has. It is a metal that gets used in our modern society, and so we're very much focused on silver. And when we say it gets used in our modern society, it gets used not only because of new applications that we have here, but as the world develops. As the world is urbanising, they consume more silver, and this chart shows 1990 GDP per capita, shows South Korea consuming about 0.05 ounces of silver per capita. 2010, they are now consuming 0.45 ounces of silver per capita. That's the direction we think China is going to go in, India is going to go in, the rest of the world will go in as they urbanise.
So finally, I'll close with this slide. We've got a company that has three high quality assets in great jurisdictions. We have four different streams of revenue. We hedge the base metal stream. We've got a workforce that is committed to the Company. In fact, when the Lucky Friday went back into production, 90% of the workforce came back to work. We have strong financial position, very good margins, and free cash flow. So we think we are in a great position as an investment and also in terms of bringing new assets into the Company.
So I will be happy to take any questions.
Are there any questions from the audience? Well, if there aren't, I will ask a question. You put your growth at 15 million ounces but you didn't put a time scale around it.
Phillips S. Baker, Jr.
2017 is the target for that?
Phillips S. Baker, Jr.
Yes, and that's going to be dependent upon – the Lucky Friday piece of it comes as a result of the new shaft that will be completed in 2016. We have to advance either San Sebastian on San Juan to get the other piece of that which is probably about 2 million ounces, maybe 3 million ounces.
And when you think about sort of the long-term split between gold and silver revenue to the Company, are you sort of comfortable where you are now or do you see it going one way or the other?
Phillips S. Baker, Jr.
Well, as a result of growing the silver production, silver will be a larger component of the revenues over time.
Alright, if there aren't any questions from the audience, then please everybody join me in thanking Phil.
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