Hecla Mining Company (NYSE:HL)
Q3 2006 Earnings Call
November 9, 2006 2:00 PM ET
Vicki Veltkamp – Vice President of Investor and Public Relations
Phil Baker - President and Chief Executive Officer
Lew Walde - Vice President and Chief Financial Officer
Ron Clayton - Vice President of North American Operations
Mike Callahan - Vice President of Corporate Development
Dean McDonald - Vice President of Explorations
Anthony Sorrentino - Sorrentino Metals
Good day, ladies and gentlemen, and welcome to the third quarter 2006 Hecla Mining Earnings Conference Call. My name is Lauren and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]
I would now like to turn the presentation over to your host for today's call, Vicki Veltkamp, Vice President of Investor Relations.
Thank you all for joining us today. I am Vicki Veltkamp, as the operator said, Vice President of Investor and Public Relations for Hecla Mining Company and this is our third quarter 2006 conference call. The call is also being webcast live today so you can access the replay of it also if you wish at our website, and that website is www.hecla-mining.com. On the website you can find the financial results and today's news release, and at the end of that news release is a quantitative reconciliation to GAAP of cash cost per ounce, which is an SEC requirement.
Today's presentation will be made by Phil Baker, Hecla's President and CEO. And he will be joined by Lew Walde, our Chief Financial Officer; Ron Clayton, our Senior Vice President of operations; Mike Callahan, who is our President of Venezuelan operations, and Dean McDonald, our Vice President of Explorations. And then, following their presentations, we'll have a question-and-answer period.
Before we start, I need to let you know that any forward-looking statements made today by our management comes under the Private Securities Litigation Reform Act. It involves a number of risks that could cause actual results to differ from projections. In addition in our filings with the SEC, we are allowed to disclose mineral deposits that we can economically and legally extract or produce and investors are cautioned about our use of terms such as measured, indicated and inferred resources. We urge you to consider those disclosures in our SEC filings available on our website.
Now I'm very happy to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.
Thanks Vicki. Let me add my welcome to Vicki's on today's conference call. I think we've had a comprehensive news release and my colleagues have some interesting things to add. So I'm going to keep my comments short.
Speaking of colleagues, we've added a couple of new executives, Dean McDonald as VP Exploration and Jay Layman, VP Corporate Development. Both men have more than 25 years of international experience and will be focused on the growth aspects of our business.
Dean's going to split his time between our existing exploration programs and generative ones in the Silver Valley in Mexico. And he'll be officed in Vancouver where we expect to add another corporate development person next year. We're doing this because after 20 years of low silver price, there has been in the last three years finally silver exploration that's establishing deposits where we think we might be able to add value to them.
This has been a great quarter for us. Because the earnings were only a penny a share, Vicki elected not to put grade in the headline. But that's how we feel. We see the sell-off of the stock today is inexplicable. And why do I say that? Why do I say the quarter was great and sell-off is inexplicable?
Well, this quarter really provides tangible evidence of how our strategy to grow the company is paying off. Exploration, predevelopment and depreciation, which are the drivers of our earnings, had $48 million of expense year-to-date, but they're really providing us with the base for the future at the cost of current earnings. And that's pretty clear on the exploration front.
We announced a 20% increase in our total silver resource just from the work we've done so far on the Lucky Friday and San Sebastian. And of course, the base metals component is so great that the value of these assets, considering all of the metals, is 50% greater.
Let me say this another way. The work we've done added in this quarter about $100 million silver equivalent ounces in very low political and operating risk North America. No one else in the industry can say that. And that is at prices -- that's using prices that are at a fraction of the current price. For example, we valued zinc at $0.67. And we're not done for the year, because we expect more to come from Greens Creek and other properties, and Ron and Dean will talk more about that.
Depreciation also significantly affects our earnings. Realize, we made the decision to invest in infrastructure when the prices were much lower, particularly the Lucky Friday and Mina Isidora, which is part of the La Camorra unit. We're now depreciating those assets over current mine plans. So when all of the ounces we are discovering ultimately move into these mine plans, you're going to see our depreciation rates decline.
So I guess I would characterize our rates really are higher than the assets ultimately deserved. But that's the cost of being an underground miner, but its part of the hidden value we've been talking about at Hecla over the last couple of years.
We're very excited about our costs being driven so low. You know, our competitors have by-product credits as well, but our silver assets have such fundamental strengths that our cash costs are by far the lowest among the primary producers. So this is shaping up for us to be a great year. We already have more revenue in the first three quarters of the year than we have ever had in a whole year in our 100-year history.
For the year, the Lucky Friday along Greens Creek continues to have a cost structure that's significantly lower than the industry average. And this low cost structure is not surprising given the quality of these US-based assets. Remember, we're the only primary silver company that has any US reserves that go beyond the next few years. Most of the other primarily silver producers have their mines in Bolivia. We also own our reserves and they're not a financial contract or derivative.
La Camorra with Mina Isadora as part of it is producing great cash flow despite all of the issues you hear about Venezuela. And the cash cost and production is within our guidance, and Mike Callahan will have more on this later. But the fundamental thing to realize about Venezuela is we think our past success there really gives us a foundation for continuing to operate successfully in Venezuela. But in this kind of environment we're going to have higher costs than we've had in the past, but we think it will be in line with guidance.
So with those few remarks, let me turn things over to Lew, Ron, Dean, and Mike.
All right, Phil. Thank you. As Phil has already indicated, we continue to invest heavily in our exploration and predevelopment program during the third quarter. And this is, obviously, delivering excellent results in increasing value to our shareholders.
But in addition to it -- in addition to the exploration and predevelopment works, Hecla is generating impressive increases in sales, gross profit and cash flow during the quarter as compared to the same time a year ago. So despite the increased investment in exploration, $5 million more in depreciation, and a foreign exchange loss of $1.3 million, which is included in other operating expenses, Hecla generated income of $900,000 or a penny per share, which compares very favorably to a loss of $8.7 million or $0.07 per share in the same period last year.
Overall, sales increase 66% or $20 million quarter-on-quarter as gold production increased 19% and metal prices increased significantly compared to last year. Hecla's operations performed excellent during the quarter, as our gross profit increased 446% to $14.4 million from $2.6 million last year. This increased gross profit was driven by the higher gold production and more importantly the lower silver cash cost, which decreased 84% quarter-on-quarter from $3.76 to just $0.59 per ounce this quarter.
Hecla silver cash costs, as Phil has indicated, benefit from the higher average lead and zinc prices. You'll realize that these prices have risen further at the start of the fourth quarter. So what does this mean on a cash flow basis for the quarter, Hecla generated $19.3 million in cash before exploration and predevelopment, which again is an increase of 384% compared to the same period last year.
Now, if we turn to the year-to-date results, our net income has totaled nearly $48 million or $0.40 per share, which included a gain on the sale of investment in the first quarter. But in addition to the benefit from these non-recurring items, Hecla has also decreased the cash cost per ounce of silver 54% down to industry-leading $1.48 per ounce in 2006.
Silver production totaled 4 million ounces for the first nine months, which is down slightly from last year due to the completion of mining at San Sebastian in 2005. But on the other hand, our gold production in Venezuela has increased more than 30% or 29,000 ounces for the first nine months of this year. And this is a positive reflection on the benefits of Hecla's new Mina Isidora mine in Venezuela.
Now when you look at the year-to-date cash flow numbers, we've generated over $60 million in cash flow from operations before exploration and predevelopment. Again, this is over a 500% increase over the same period in 2005. This great cash flow is being reinvested in our operations as well as our exploration and predevelopment programs, which are increasing Hecla's resources and ultimately shareholder value. In addition, we've also dramatically increased our cash position this year.
And at the end of the quarter, we have about $85 million of cash and short-term investment. And this cash combined with the undrawn credit facility keeps our financial position in great shape to continue to make the investments that will provide the longer-term growth. Just to reemphasize our commitment to the exploration, you know, in the last quarter, we told you we're going to spend approximately $28 million this year on these activities and we maintain that forecast.
So in summary, 2006 is turning out to be one of the best years in Hecla's history with excellent earnings, low cost production, great progress on our exploration projects and a strong balance sheet, the revenues, gross profit, cash flows all increasing dramatically. This allows us to be well positioned to continue to make the necessary investments in our exploration and predevelopment programs and continue to add value for our shareholder.
Now, I'll turn it over to Ron Clayton.
Thanks, Lew, and good morning, everyone. The overall performance of our operations improved during the third quarter. Some of the highlights are, a throughput at the Lucky Friday continues to increase as most of the stopes on the new 5,900 level are approaching their designed production rates. La Camorra's Mina Isidora in Venezuela has reached designed production levels and is performing well.
Production at Greens Creek has returned to more normal levels. We continue to lower our silver cash cost to a very low $0.59 per ounce, and we were able to hold our cash cost at producing an ounce of gold to $380 despite the challenges in Venezuela and the increasing labor and cost of supplies experienced by the entire industry.
Our very successful explorations programs are generating new resources and reserves, which is allowing us to again investigate ways to increase production and lower cost. Our silver exploration efforts have been extremely successful, resulting in the addition of over 25 million ounces at a discovery cost of less than $0.22 per ounce. We expect this to continue at both the Lucky Friday and San Sebastian.
I'd like to cover a few specifics on each of our operations and projects. At the Greens Creek mines, a significant amount of effort and resources have been applied to rehabilitation of the main haulage drifts and increasing development of [mine reserve]. These efforts have affected production and resulted in lower than normal production rates.
Greens creek, like all the other mining operations, has struggled with increasing costs and the ability to hire an unskilled labor. Despite these issues, the financial performance at Greens Creek has been outstanding, and we're able to return the mine to more normal production levels in the third quarter.
In addition, silver grades improved as a result of increased production from the silver rich 5250 zone. This is particularly significant, since we recently discovered a large extension to this zone, and that zone is likely to play a very important role in the future. We're working with the Greens Creek personnel to explore opportunities to improve production and reduce cost. With discoveries in the West Gallagher and the 5250 zones, we expect this long-lived operation to continue to provide low cost, low risk production well into the future.
Our efforts to advance the Hugh Zone at San Sebastian have more than doubled the resource, bringing our discovery costs to less than $0.75 per silver ounce and less than $0.35 per equivalent ounce. We're preparing a pre-feasibility study that is examining the hydrology of the area, geotechnical conditions, potential mining and development methods, infrastructure, power, metallurgical and processing requirements. Trade-off studies for numerous options are also being included in the analysis.
In addition, a number of other prospects in close proximity have shown encouraging results and the potential for extensions to cross offsetting faults exist. We are therefore also examining in impact of increased size and optimization of future operations on this land package.
Our goal is to develop another long-lived asset that is capable of the low cost, low-risk production that Hecla is known for. We expect this work to continue into the first half of next year and we're extremely excited about the opportunities we see ahead at San Sebastian.
Drifting at the Hollister development block has been completed. Approximately 30,000 feet of the 50,000 foot planned drilling program is done. Results to date have identified some very nice high grade intercepts, but the remainder of the drilling will be required to determine continuity.
However, we believe we're seeing enough continuity at this point that we're encouraging that we will be able to develop a nice, minable resources -- or reserve, excuse me. The major questions that remain to be answered include the capital and operating cost, impact of the poor ground and wet conditions, water management, as well as determining the continuity of the above cutoff grade material contained in the narrow veins.
Crews have been drifting along several of the veins and will conduct some limited test mining over the next couple of quarters. Engineering in support of the feasibility study is in full gear and is progressing well. Drilling will be completed in the first quarter of 2007. Reserve call collisions and finalizations of the feasibility study is expected to be completed in the second quarter.
At the Lucky Friday, we've completed the 5,900 level development work. Productivity from the mechanized stalks will continue to increase as we advance the mining front above and below the main level filler. Mining and processing costs have begun to drop as expected, in spite of the continued pressure of increased labor and supply costs.
Upgrades to the zinc circuit commissioned in the first quarter were originally designed rechecking and reduce freight cost. However, increased zinc, for instance, caused us to rethink our mining strategy and start to carry significant plank and the hanging and footwall of the main 30 bank.
The combination of higher prices and additional capacity in the zinc circuit has allowed us to mine some of the stokes wider to take advantage of the improved economics. This strategy results in a lower silver grade per ton as the additional width grade or higher zinc grade and a lower silver grade. We have not been able to advance stokes as fast along strike, which has resulted in lower total silver ounce produced.
However, the net margin is higher and could be seen in the lower parts per ounce. We will continue to review the strategy to ensure we are creating the best value possible for our shareholders. The significant resource increases have allowed us to begin the engineering and analysis required to optimize the plan and upgrade the significant resources that are not including in the plan to reserves and allow us to include them.
This work is complex, as we will be analyzing options for accessing and ventilating mining levels well blow the currently vast volume. In addition we are looking at ways to significantly increase production. This will require improvements in some of the backbone infrastructure including shafts and license circuit, processing plan facility.
Our goal is to continue to increase the resources and reserves, as well as the production capacity and drive the costs even lower. In addition, we are looking at several exploration targets near the Lucky Friday and are reviewing the data from the star mine to evaluate potential production opportunities.
But it is in a very exciting era of its long and productive life. Our exploration efforts have been hugely successful. Our discovery costs were approximately $0.07 per silver ounce and we expect the success rate to continue. I'm sure you can see why we're very excited about the current performance and the opportunities at the Luck Friday.
With that, I'm going to turn the program over to Mike Callahan, who will give you an update on Venezuela.
The operations in Venezuela really had a strong third quarter. The production of the quarter was almost 39,000 ounces and you'd have to go back to the third quarter of 2002 when we had record production to find a quarter with higher gold production. So it's really a significant quarter for us.
Venezuela is certainly on track to meet or exceed the production estimates that we've set for the year. And Mina Isidora is really the driver of this performance. It's still mentioned we made the decision to build Mina Isidora and invest in there in a lower price environment. And Isidora is now in full production and has proven that the acquisition of Block B was a very strategic acquisition.
The other grades there for the quarter were over an ounce per ton and that's the second quarter in a row that we've seen that level of grade. Isidora is now our leading gold producer in Venezuela and we expect more strong performance from this mine in the quarters to come.
We have a great team here on the ground and they really demonstrate Hecla's skill and the strength that we have in operating these type of deposits. On the exploration side, we continue to be excited about several additional exploration targets on Block B and Dean McDonald is going to talk about that in a moment.
On the political side, the presidential elections in Venezuela are to take place on December 3rd and the race is actually much closer than one would have anticipated a few months ago. Although, we may see some political activities leading up to election date. We certainly don't expect that there's going to have any impact on the operations.
The government at this point has delayed amending the new mining law and they've done that until they can further evaluate comments from the state and regional politicians and from the industry. You know we believe their willingness to take comments from the industry is a good signs, at least is their intent to consider all aspects of the issue. At this point, it's really not clear when they will revisit the amendment or what direction they may take.
And with that, I'm going to turn it over the Dean to talk about exploration.
Well, thank you, Mike. Good morning. This is my first quarterly conference call with Hecla and I'm excited about presenting our exploration results and future exploration potential in the current mines and projects. I'd also like to take a moment to touch a bit on our strategy to enhance genitive exploration side of our business.
But to sum the highlights, as outlined in the third quarter release, there's a 27% growth at the Lucky silver resource with significant lead and zinc by-product. Primarily that growth in the resource took place at depth to the 6900 level.
The western continuation of this mineralized zone will be added to the resource as drilling continues in 2007. So there remains opportunity for near-term resource gains at the Lucky Friday. Even deeper drilling this year to the 7900 level has confirmed the continuation of mineralization in high-grade silver-base metal rich veins and structures.
Drilling in the next few years has the potential to bring 20 million ounces to 40 million ounces of silver depending on the continuity of some of the new structures we've identified. While still on the Lucky Friday, I'd like to mention what I call the gap zone. Below the old gold hunter workings near surface is a 300-foot untested, 3,000 foot untested down dip gap that is along the structural trend of the current workings. Based on reevaluation of the geology, we plan to put a series of holes into this structure in early 2007. If successful, I think we may have opened up a huge window for resource expansion in the Lucky Friday or near the Lucky Friday infrastructure.
In a nutshell, there will continue to be significant gains in the resource at Lucky Friday over the coming years. A project I'm particularly excited about is a regional generative exploration program we've initiated over Hecla's 40 square mile land position surrounding the Lucky Friday mine in the silver valley. It's probably been at least 50 years since any concerted surface exploration work on these properties has been undertaken.
The first step, of course, is to compile this vast data base of exploration and production information, but I think with the use of modern exploration in combination with 3D modeling and GIS programs that we're going to develop some very exciting targets in the near future. These targets, I believe will provide or feed independent of the Lucky Friday underground infrastructure.
Moving south to Mexico, Hecla now has substantial land position at the San Sebastian silver gold property. In addition to the Hugh Zone, we have identified a number of outstanding exploration targets in the area. The very target we refer to is the silver anomaly represents the culmination of a regional solo geochemistry and geophysical survey.
Drilling this quarter we intersected the mineralized structure. Although results are pending, we anticipate a large drill program in 2007 to define this two to three-mile long target. We are also getting ore grade intersections at the St. Jude vein, which runs parallel to the former producing Francine vein and the Hugh Zone.
We're still at an early stage with both of these projects but the proximity to the Hugh Zone I think can contribute to a low-cost, long-lived mine for the San Sebastian target. I probably could go on all morning about projects at San Sebastian, but I would like to move on to the recently acquired Rio Grande project that is north of the famous mine and with 100 miles of our Mill.
Bill consistent a series of high grade veins braches that extend over nine mils surface standpoint of the vein has confirmed high-grade silver and gold. So we’re preparing growth programs to evaluate real grand A in 2007. Finally in Mexico, a general exploration team has been put together who's mandate is to bring new exploration projects into Hecla and build upon our great exploration success and knowledge that we have gathered at San Sebastian. We like Mexico and there are a multitude of opportunities there.
At Greens Creek, the extension of the 5250 zone was a result of reevaluating an older structural interruption. This has opened up the possibility for a long continuation of the ore zone and the identification of other nearby targets. There appears to be more closing potential than was thought, even at the beginning of this year.
At Gallagher zone, we will add resources further extending the mine life at Greens Creek. While exploration has occurred at Greens Creek over the last 30 years, an aggressive five-year exploration program is being proposed for both underground exploration across the Gallagher fault and surface exploration where a number of Greens Creek and, I think, escape-type creek targets have been identified. Ron has updated us on the progress of the infill drilling and feasibility study at the Hollister project.
On surface has updated this on a progress of the in-filed drilling and feasibility at the Hollister project. On surface Hecla sand great Basin gold have begun to evaluate the exploration potential in the rest of the joint venture block. There really is no better address for gold exploration than the Carlin trend and we plan in due course to evaluate a number of near surface epidermal targets and in time lower plate targets at depth.
Venezuela remains an under explored region and Hecla has titled to two outstanding. I recently visited the mines and projects down there and the analogy to the great Canadian gold producing areas like Red Lake and Timmins are striking.
At Block B, drilling programs continued to identify high-grade gold and veins in shear zones near the Isidora mine at Twin Shear and Panama Vein. With these are a whole series of high-grade zones that are open in all directions that will provide, I believe, a long life for Mina Isidora.
At the El Dorado concessions, near mine exploration has shifted to adjacent areas where parallel mineral shear structures have been identified. The drill evaluation of several of those prospective targets is awaiting exploration permits for the new years.
In closing, I'm excited about the exploration opportunities at Hecla and believe exploration will play a significant part in Hecla's aggressive growth strategy. We have some remarkable targets that we will continue to increase reserves and resources at the current mine sites. But we'll also work progressively towards more genitive exploration in key strategic areas.
And with that, I'll pass this back to Phil.
Just a couple of short comments before we open it up to questions. You know, the bottomline is we think Hecla, is in a very unique position at four of our five districts we operate in. We have both near term growth in resources and ultimately production.
You know, what you're seeing at the 5250 Zone at Greens Creek. What you're seeing at the Lucky Friday with the resource growth that we've announced this year and what we're expecting to see happen over the next couple of years. And we have the potential for this exponential growth around the operations, but separate from the current activities.
In a lot of ways, we're like a junior exploration company in that each of these districts has the ability to dramatically change Hecla. You've seen what we think is a small way with the resource growth that we've announced earlier this quarter. And we see it happening in even a bigger way at the Lucky Friday, Greens Creek and San Sebastian. And of course all of this is happening in North America.
And it's being done by a company that's going to generate more than $100 million of cash from our properties that can go into this Company changing exploration. So we couldn't be anymore excited about the quarter, the year, or our future.
And with that, Vicki, I think we're ready for questions.
All right. Operator, if you could give the instructions for the question-and-answer period, please.
Your first question comes from the line of Anthony Sorrentino with Sorrentino Metals.
Anthony Sorrentino - Sorrentino Metals
Anthony Sorrentino - Sorrentino Metals
Hi. I believe that Hecla expects to produce about 6 million ounces of silver in 2006. Would you break this down by mine?
I'm sure, we'll be glad to do that. And Ron, I'll let you do that. But just one comment that I'd like to make is -- one of the things that we are seeing with this higher zinc price is the ability to generate more economic benefit to us by going after some of that zinc. So we'll produce about 6 million ounces. There's a possibility it will be somewhat less than that. But with that, Ron, what's the --
Yes, and Anthony, it's broke down pretty close to even. It's going be -- Lucky Friday is going to do a little bit more than Greens Creek. But I mean we put our share, but it's going to be within 100,000 ounces. So we figure roughly, you know, three and three, or maybe slightly lower than that depending on how we shift to the zinc.
Anthony Sorrentino - Sorrentino Metals
Okay. Fine. And how does the grade of the anticipated additional resource at Lucky Friday compare to the existing resource?
It is lower in silver grade and a little bit higher in zinc grade, and the level -- the lead numbers are pretty close, maybe a tad lower. But the strike length is significantly longer and the widths are a little bit wider. So that's what's causing that grade change. If you bring it back to that same core, the grades would be very similar. So we've just expanded along strike length and depth and width a little bit. Does that make sense?
Anthony Sorrentino - Sorrentino Metals
Anthony Sorrentino - Sorrentino Metals
Fine. And also, what are the grades of the new total resource at San Sebastian?
Well, you know, there it gets a little complicated, because it's broken into five metals. Do you have it --
I have it if you want to give it.
Okay. Go ahead.
Let's see, the silver -- or gold is about 0.4 grams per ton, silver is about 240 grams per ton, lead's about 2.7%, copper about 2%, zinc about 4%.
Anthony Sorrentino - Sorrentino Metals
Okay. Very good. That answers my questions, and congratulations on a great quarter.
There are no further questions in queue.
All right. Thank you for joining us today. This has been the Hecla Mining Company's third quarter 2006 conference call. I am Vicki Veltkamp, Vice President for Investor and Public Relations. If you have other questions, you can give me a call at 208-769-4144. You have a good day.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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