Hecla Mining Company's CEO Presents at JPMorgan Small/ Mid Cap Conference (Transcript)

Dec.11.13 | About: Hecla Mining (HL)

Hecla Mining Company. (NYSE:HL)

JPMorgan Small/ Mid Cap Conference

December 11, 2013 09:45 AM ET


Phillip Baker - CEO


John Bridges - JPMorgan

John Bridges - JPMorgan

Good morning everybody. It’s really great to be here in Chicago introducing Hecla Mining and Phillips Baker, CEO of the Company. I am John Bridges from JPMorgan. I cover the precious metal space and Hecla is one of the dions of the silver space. It’s been involved in the business for decades.

Phillip Baker


John Bridges - JPMorgan


Phillip Baker

At least one.

John Bridges - JPMorgan

You must be one of the longest standing listed companies in the U.S. now.

Phillip Baker

Yes. We are -- it’s certainly a little bit -- lots that are a lot older but, we are out there.

John Bridges - JPMorgan

So the company has seen a number of cycles, it knows how to ride their cycles, it knows how to benefit from those cycles, and I would like to invite Phillip come and explain what he sees ahead. Thank you.

Phillip Baker

Thank you John. I am going to talk for 15-20 minutes and then there will be an opportunity to ask questions and I welcome that. Just a little bit about me. I’ve been with Hecla Mining for the past 13 years. I have been in the mining business almost 30 years. I have a financial background, who was the CFO of a couple of mining companies for a better part of 10 years. And I have been the CEO for 10 years at Hecla. Russ Phillips and I were taking just a few moments ago and he was asking me about the commodity cycle and I am struck by being in Chicago as an example of what I would call the infrastructure cycle. You know, you go outside, you look around, you see these huge building and you see the vastness of Chicago and you realize that it sort of came together over a relatively short period of time.

And we have seen that same thing happen in particularly China. I had the good fortune of going to China in 1983. When I went back for the first time in 2005 I didn’t recognize the place as you can imagine. And so what has happened over the course of that period of time is this infrastructure cycle has been put in place in China just like we saw in the United States at the turn of the last century. What happens when the infrastructure cycle ends is you do have a consumer cycle. I mean you think about the last 100 years here in the U.S. that has been what’s driven the economy and that’s what we think will drive the economy in China and other places. And with that comes a significant increase in the consumption of all sorts of things. But what I am most interested in is silver. And what you will see is China and other countries approach the consumption of silver that we had in the west. And that consumption of silver is around half an ounce of silver per capita per annum. That’s what we consume.

In China today they consume about five hundredths of an ounce of silver. So you are going to see that continued growth. So we’re very-very bullish on the long-term outlook for silver. For gold, in fact, if you look at gold over the last three years, the consumption of gold in China has grown about 12 fold. So we are going to continue, we think we'll continue to see and that will certainly add in flow and certainly prices of the metals will come and will go but the long-term trend is for this continued consumption of the metal. So I actually thought the title of this conference think big and buy small was really a fit right in with the view that at least that Hecla has as the big thought is this consumer trend that will happen in the consumption of silver. And we’re glad that we’re part of that.

So I am going to talk about the top ten reasons to invest in Hecla. This is going to be a little bit different way of presenting the company. I will make forward-looking statements however and those are subject to the cautions that we have in our 10-K and 10-Q. So reason number 10, growing reserves in production. If you go back to 2003 Hecla had about 50 million ounces of silver reserves. And we realize this is a company that’s been around for a 122 years. That was our reserve base at the time we had a number of interest in smaller assets and what has happened over that time is we increased our interest in various assets and increased the reserve position. And that 150 million ounces that you see at the end of 2012, despite the fact that the silver prices declined, you will see that go up over the course of the next three to four years as a result of this going deeper in one of our mines and the grades going up in that mine. And I would expect over the next three or four years to see 25 to 75 million ounce increase in that reserve position.

Gold has grown primarily as a result of an acquisition that we made at the beginning, well an acquisition made in 2008 and it will grow some more as a result of an acquisition we made earlier this year. And we have an exploration set of assets that are in Quebec, they are in the silver valley of Idaho, they are in Colorado, there in Mexico. And we think that over time those assets will also increase our reserves and resource position.

Reason number nine, all three of our long-lived assets are in low political risk jurisdictions. So this shows where the mines are, we're in the panhandle of Idaho with Lucky Friday, we’re in the panhandle of Alaska with Greens Creek, and we're right on the border of Ontario in Quebec with Casa Berardi. That’s the mine that we acquired at the beginning of this year. Now when you think about silver production, most of it comes from Mexico, Peru, China; United States is probably about the fifth or sixth largest silver producer, Hecla produces a quarter of that silver production in the U.S. There is not another primary silver producer in the U.S. that has really a significant portion of that production. So we are really the only U.S. silver production. So in just going back, this political risk profile is unique because we have that silver production in the U.S. We also have all of our gold production coming from the US or Canada and that is an unusual thing in the precious metals space to have it come from, those two countries.

Reason number eight, strong record of meeting guidance. We take very seriously of giving our projections as to what we expect we will do and we had a great record of meeting those projections. Scotia did an analysis of silver companies, of gold companies, what they found was that we were among the best in the silver space and we were significantly better than the average gold company.

Reason number seven, we are 122-year-old company and so we have settled legacy liabilities and we rehabilitated the Lucky Friday mine which has really been a mine that’s been a flagship for us. When I say we had these liabilities that we had to settle, as a 122-year-old company, we mined differently 100 years ago. And under the U.S system it didn’t matter that we were following all the rules of the time, there was strict liability imposed upon us environmentally. And so we were in litigation with federal government for 20 years. And that finally was settled in 2011. There was a claim that the government was making against us, that was $4.4 billion. As you can imagine that was very debilitating in terms of growing our company, advancing our company. That is all behind us. We have one payment left to make, which net of taxes $34 million, and that will be made in the middle of this year. So that is now done. The Lucky Friday is a mine that’s operated for 70 years. We were shut down in 2012, rehabilitated our shaft in 2012, we rehabilitated the ramping system, 13 miles of ramping system. We went in and put new bolts, a new mesh throughout the whole mine.

We completely upgraded our mill facility. It is effectively, well it’s a 70-year-old mine, it’s effectively a new operation. And the reason it’s a new operation is because as we go deeper the grade of the ore body goes higher, we'll produce more ounces. We will go from a 3 million ounce producer to a 5 million ounce producer. And we will operate this mine and we think we have a mine plan that goes out over 25 years. We think that we'll operate it at least that 25 years and probably significantly longer.

Reason number six, a diversified metal stream. We produce silver and gold, if you look at this pie-chart, you can see the percentages about the same between the silver and the gold and that of course always depends upon where you are in the price cycle and depends upon where we are within the mines and the grades of the ore that we’re mining, as to how much silver and gold we actually produce. But the thing I really want to point out is this base metals production. Its roughly 28% of the revenue is coming from base metals. We think that’s a great thing to have the base metals revenue.

What we do is we use that as a risk mitigant. We hedge that production. We have about $300 million worth of revenue that we have locked in over the next three years. That’s equivalent to about one year’s worth of operating cost. And what it allows us to do is to have confidence in our operating plans. We think the key thing we can do is to try to reduce risk everywhere we can and this is a key element of doing that.

Reason number five, a strong financial position. At the end of the third quarter we had over $200 million of cash and a $100 million undrawn revolving credit facility. That puts us among the most liquid, having the strongest balance sheets in the space. We also have a $0.5 billion of long-term debt. This is debt that’s due in 2021. We issued that debt in order to acquire the Canadian gold asset. This debt has a coupon of 6 and 7/8. What we are doing is being engaged with the bond market we anticipating keeping this debt as permanent source of capital so I think you can see us in the next five or six years looking for the opportunity to roll this debt over.

Reason number four, strong cash flow flexibility. Now this slide is a little bit complicated, it’s a waterfall slide that shows what’s happened to our cash over the last three, almost four years. We started that period of time with $105 million of cash, we generated about three quarters of $1 billion of adjusted EBITDA. We had these two big categories; one being made up of CapEx, exploration and predevelopment and dividends and a large portion of this is discretionary. Certainly, all of the exploration predevelopment discretionary, we have no obligations to spend money in order to retain ground, dividends are somewhat discretionary we have a policy that the dividend payout changes as the silver price changes and in low silver price environment we only pay about $3.5 million a year of dividends.

And then a large portion of the capital expenditures are discretionary. We made conscious decisions to reduce risk, we made conscious decisions to extend mine life and then there were things that we did that generated returns. Lots of this we have a lot of control over. And that’s the reason this company has been around for a 122 years as we do have assets that you have lots of flexibility.

We also had these one-time expenses. If you take these one-time expenses out over the course of this 3.5 years, three and three quarters years and you take out Casa Berardi acquisition and the cash they provided, we would have free cash flow of about $230 million. And if there is any complaint about the precious metals space it has been that we’ve not generated free cash flow. Well, Hecla has, it’s just we put that to work in taking care of the liabilities getting that behind us.

Now, 2013, we started the year with much higher metal’s prices and when we saw prices come down, we adjusted and what we did was reduce capital expenditures by quarter we could have reduced it more but we came to the conclusion that the cost of establishing, of mobilizing the work we’re doing for the capital expenditures we should maintain that so we did that, we did reduce it by a quarter, we reduced exploration predevelopment by about 40%. For next year we will spend within adjusted EBITDA, that’s the goal that we have. We think we can accomplish that goal.

Reason number three, low cost producer with strong margins. Across the bottom of this slide is our cash cost to production, that’s what these silver bars represent. And generally speaking we would say Hecla is a $5 an ounce silver cost producer. The gold line that you have here is the silver price that we realized and you can see what the margins that we’ve generated. And this ties back to that earlier waterfall slide, shows you the strength of our cash flow.

Reason number two, our newest mine brings gold growth with cost reduction potential and so what we’re talking about here is Casa Berardi. Casa is an asset that’s been operating about seven years; it’s an asset that we actually tried to buy seven years ago. And we were able to buy it at the beginning of this year as a result of a hostile bid on the Company and we were able to reach a deal and we’re able to take the asset. They had a -- Casa's had a difficult time in 2012 and 2013, they started construction of a shaft, deepening of the shaft and they didn’t recognize the impact that would have on current production. And so they surprised the market with reduced production, that was the reason that the hostile bid came in and we’re really the beneficiary of being able to acquire that asset.

We’ve seen production starting to ramp up. It will be a continuous process through this quarter and into the first half of next year they’ll finish the shaft and they’ll finish the pace backfill plant and all of the piping system for that at midway through the next year. And then we see this mine operating at a 125,000 to 150,000 ounces of gold a year, and cash cost of somewhere in the $800-$900 range with the potential to go lower than that because there is high grade ore within the mine. And as we look at the mine plan we have ideas on how to lower the cost of accessing that ore.

And there is also a very good exploration potential. When we looked at this property back in 2007 we thought this fits the sort of assets that Hecla mining has. These are large land positions. There are assets that have good operating properties that will generate good cash flow and they have very good exploration, and that’s exactly what this has. You’ll see Casa be if not the largest amount of exploration spend that we have that will be probably second it is very-very attractive exploration ground. And it’s just a very solid asset, solid grades, it’s not the best asset in the world, it is a solid asset. It is not like -- our number one reason for investing in Hecla is the world class assets that we have Greens Creek and Lucky Friday truly are world class, that’s often times an overused statement but Green Creek particularly fits into that category and the Lucky Friday will as we go deeper in the mine. And it’s a consistent performer. This asset will produce -- produced this past quarter about 1.8 million ounces of silver, the second quarter which was the second largest tonnage in the history of the mine produced 2 million ounces. You can see the cash cost. It’s just a very solid performer.

And we just recently received the record of decision on a tailings facility and with that record decision it allows us to have visibility for our tails going out 20-25 years. So we have a long future in front of us, and we have that long future because of the underground exploration that we have.

Now this is a complicated 3D view of the ore body, it’s actually a number of different types of deposits within the ore body. And I’ll just say that the highest grade material that we’ve seen in the 13 years I’ve been at Hecla have been drilled in the last six quarters and it’s all been in this deep 200 south area almost all of it has been in that area. And we continue to grow that ore body. This mine will operate well beyond the current mine life of about 10 or 11 years.

And over the course of its life it’s been in existence 26 years it’s generated 3 billion in revenue, 1 billion of net income and almost 900 million of free cash flow. And when we look forward to the next 10 years, I don’t see any reason why its performance will be any different than that.

And then the Lucky Friday, we’ve had this shutdown. We’ve got it ramping back up, doubled its production in the third quarter compared to the second. We would expect about a 50% increase in production in the fourth quarter and you’ll see the cash cost go down with that.

Here is a view of the tonnage rates that we’ve had over the last number of months and you can see that we’re at normalized production starting in September. November’s numbers are very much the same as our December’s, it’s just a normalize sort of operation. This is what this thing has done for better part of 50 years now.

And in this mine we’re going deeper. So this silver shaft is a shaft that goes to surface and its one mile deep. This is what we rehabilitated. And this is a 3D, a bleak view of the ore body and a mile away along these levels, these tunnels is the Lucky Friday expansion area. And we’ve been mining in this area for about 10 years, takes about 10 years to mine between those orange lines. We are constructing a shaft to go to 8,800 and the shaft is down to this level right here. And what will happen is as we go down to these levels we’ll access this higher grade material. And the reason I said reserves are going grow is because as we drill, infill drill we’re going to have more tons at a higher grade. So this ore body while it’s been operating 70 years this mine, the best years are in front of it. And when you look at Greens Creek and Lucky Friday I said world class. When you look at them, this is the -- they’re both sizeable, they’re the fifth largest and the 11th largest and they’re both very high grade, much higher grade than our peers, than most of our peers.

So in summary when you look at Hecla you got a company that has these three high grade, low cost, very-very competitive assets, they’re long lived; they’re in low political risk jurisdictions. We’ve got a balance sheet that’s very strong. We’ve got great cash flow that’s coming from these assets. And we have the ability to grow the assets with the exploration that we’re doing. And I didn’t talk about the other properties that we have but the other properties we think can add growth to Hecla as well.

So with that John I’ll be happy to take questions.

Question-and-Answer Session

John Bridges - JPMorgan

Thank you. Okay, let me get the ball rolling. Just an observation really, I was intrigued companies with longevity like yours, have to be buying things when the prices are acceptable. And your Greens Creek asset you bought when Rio Tinto went into trouble in 2008-2009 and then of course costing you just both when they got into some difficulties. So one of the things that we see within this industry is you see a lot of boom and bust type situations where companies find a great deposit and the mine is extracted and then they disappear 10, 15, 20 years later. Hecla has been around for a long time and doesn’t set in the introduction probably has the skills to keep that going for a few generation left next hopefully.

Phillip Baker

And the assets.

John Bridges - JPMorgan

Yes, just like to dig a bit deeper into political risk that to our mind and what we’re seeing at the moment seems to be there's a big driver of relative outperformance and you’re sitting in the U.S. with a toehold in Mexico. What's your sense about that? You’re not thinking of go anywhere else anytime soon?

Phillip Baker

Well, I guess couple of comments. One is we do think that there is a huge amount of value that we have having these U.S. and Canadian assets. I saw an article just recently that pointed out that you had peak gold production in 1997 and it’s been in decline ever since. South Africa has been in decline and where you have seen the growth has been in China and other countries that frankly are difficult places from a rule of law standpoint to have confidence and long term viability of operating these assets. I mean, you really need assets that you can have confidence, you can operate for 20 plus years. So we have a unique situation in having these types of assets, having in the U.S. and in Canada.

But having said that, we do think that we have the ability to take on some political risk and leverage those good assets, good political risk profile we have by taking on very good assets, very good high grade low cost assets and developing countries that don’t have as good a political risk, so we are willing to go into those places. In 1999, we actually acquired an asset that was a turnaround in Venezuela and we were in fact the largest gold producer in Venezuela from 2001 to 2008; 2008 we sold the interest. We made lots of money in a very low price environment and we sold the interest. We can see that it was likely to be expropriated and sure enough the buyer of the asset it was expropriated from them.

So we’re willing to go in those other places. We’re very conscious of what you have to do in going to those places and be successful there, and we’re very conscious to try not to put too many eggs in that high political risk basket. Other questions?

John Bridges - JPMorgan

One topical thing is Mr. Thornton, the new Chairman of Barrick, is saying positive things about hedging or at least he’s not saying negative things and some of the investors have become very uncomfortable. What cycle is viewed on hedging?

Phillip Baker

Look, we believe in hedging our base metals. We believe the majority of our shareholders want exposure to precious metals. We believe we have cost structures and a balance sheet where we don’t have to hedge the precious. So we have no intention of doing that. We don’t have the ability to predict the gold and silver price and so unless you're hedging it to do what we’re doing with base metals I see no reason to do that and giving our ability just to hedge the base metals and assure our plans, there is no reason for us to do anything with gold and silver.

John Bridges - JPMorgan

Have you looked to compare your growth profile in production with the rest of industry? Are you one of the -- you must be one of many handful companies with a growth story?

Phillip Baker

I think so it’s -- I think everybody realizes that the margins are not what they had thought they would be and so that’s all slowed down. We've got in the Lucky Friday an asset that’s going to grow and it really doesn’t matter where the price of silver is, it will have a cost structure that can survive the price. You know realize that a portion of its history has had the silver prices in the $3 to $4 range. I certainly recognized we'd have to change the cost structure if went down to those prices but I am convinced that it’s an asset that could survive that as could Greens Greek.

John Bridges - JPMorgan

I guess people are thinking about what the reserves are going to be priced at in a few months’ time now and some people are perhaps going to be reporting some sharply lower reserves, but given what you’re saying then you should be protected from that?

Phillip Baker

Our reserves are not particularly sensitive to the price of metals. It’s either in or it’s out of the words. Either in the vein that has the ore or it's out. Other questions?

John Bridges - JPMorgan

It’s very early in the morning. And Casa Berardi, you said you looked at that six, seven years ago and then you came back and bought it finally now what’s the attraction of Casa to you?

Phillip Baker

Well, look it’s -- number one it is the as I mentioned before the land position that it has and we think there is lots of potential there and in fact they've proven that there is lots of potential but secondly it uses the same skills that we use at the other mines, so 2,000 ton a day mine, so it’s low tonnage, high value rock it’s complex, there is lots of issues in terms of mining it, we’re able to bring our expertise to the asset. We think we can improve the cost structure of it, we think we can -- we go in and we look at the size of their drifts and we say well why are they that large and we say, well we haven’t that large in order for us to dump, to load the trucks.

And we say, well why don’t just have loading pockets where you have that space and reduce the cross section of all of these openings you have in the mine, reduce the potential instability within the mine, reduce the cost and improve your advance rate and we’re getting there. They had a way of doing things -- we’re sort of fortunate and the prices have declined because it makes it easier to make changes and improve the operation. So we just saw value is what it really what it comes down to. We saw an asset that we can use our skills and improve. It was interesting when they came to visit our properties and they saw how we do paced backfill.

And so whenever you open the -- have an opening underground, it’s going to close and you either fill it or it’s going eventually fail and so you’ll put rock back in there and one of the ways you put it back in as like as a paste as a slurry. And so we’ve been doing this since the 70s, it’s when we first started putting in paste underground and they looked at how we did things and they said, wow we were trying to figure out how to do this. And so it’s a situation where we really think we can take the best skills that we have and they have great skills as well.

These guys are not amateurs. They have been mining in this area of Quebec for over 100 years. There is lots of talent there and we want to take advantage of that as well.

John Bridges - JPMorgan

But you got to speak French to understand that? How is your French?

Phillip Baker

Well, I am from Texas so I barely speak English and they seem to give me a bit of a pass so.

John Bridges - JPMorgan

Excellent and probably finally for me, the dead load you are carrying at the moment is quite high, does that bother you at all?

Phillip Baker

Even though it’s -- again we see this as a permanent source of capital, our after tax cost is about 5%. We know that these assets can generate returns greater than 5%, so we feel very comfortable with that. We're very cognizant thought of it, we’re not going to get ourselves over levered and we will not put ourselves in a position where we have some cleft that we have to deal with. We’re going to be very engaged with the bond market and look for opportunities to put a new debt and take this out.

John Bridges - JPMorgan

And you said to me earlier that the term was such that it took you well beyond any hopefully downturn in the market?

Phillip Baker

Well, look its eight years out and we’ll see cycles in that period of time.

John Bridges - JP Morgan

That’s all for questions.

Phillip Baker

Well, I appreciate your attention and I’ll around for about 30 minutes if you want to ask me some privately. Thanks very much.

John Bridges - JP Morgan

Thank you.

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