Hecla Mining Company Q2 2010 Earnings Call Transcript

Jul.28.10 | About: Hecla Mining (HL)

Hecla Mining Company (NYSE:HL)

Q2 2010 Earnings Call

July 28, 2010 1:30 p.m. ET

Executives

Don Poirier - VP, Corporate Development

Phil Baker - President & CEO

Jim Sabala - SVP & CFO

Dean McDonald - VP, Exploration

Analysts

Anthony Sorrentino - Sorrentino Metals

John Bridges - J.P. Morgan

Steven Butler - Canaccord Genuity

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter Financial Results and Conference Call for Hecla Mining Company. My name is Veronica and I'll be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Don Poirier, VP Corporate Development. Please proceed.

Don Poirier

Thanks Veronica. Welcome everyone. Thank you for joining us today on Hecla's second quarter conference call. Our news release from earlier today and the slide presentation on the quarterly results is available on the Hecla website.

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

Before we get started, I need to remind you that any -- sorry, excuse me -- 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

Thank you, Don. Hello everyone. Thanks for joining the call. If you will go to slide three entitled first quarter highlights. This second quarter was not a very exciting quarter unless you like making money and having robust operations that are flexible enough to deal with what nature throws at them.

And in a minute, I'll talk about how these operations and really, I mean, our people over the last number of quarters have dealt with changes in the mines. We produce 2.6 million ounces this quarter, slightly more than we did in the first quarter, but less than a year ago. However, our level of production is as planned, and we're on track to produce 10 to 11 million ounces.

Again, we had negative cash cost. That happened because of our cash management combined with about 90% lead and zinc. So, we ended up with negative $1.82 cost per ounce. When you combined that with our realized silver price, which was about $19, Hecla generated 54 million of operating cash flow for the quarter, second highest in our history and 73 million year-to-date.

This operating cash flow combined with the exercised warrants gives Hecla 197 million in cash. Finally, Hecla generated 13.7 million of income applicable to common shareholders, a continuation of strong earnings for the past four quarters, and that is despite in outsize tax provision.

Now turn to slide four. Margin in second quarter is greater than $20 per ounce. What this slide shows is the strength of our margins and that we generated this quarter and over the past nine quarters more than two years worth of information. The salmon color is our cash cost which if not the lowest in our industry is close to it. The blue bar is the margin which is calculated by subtracting our cash costs from the average market price.

So the last bar shows that in the second quarter we generated over $20 per ounce of margin. Seven of the last nine quarters, we've had double-digit margins with three quarters above $19. A key driver of that margin is our extremely low cash cost. So we continue to see prices in this range, I will expect we will see operating cash flow in excess of $150 million.

There are a lot of factors that go into the margin generation, but the biggest one is the price of the metals. After that come the three factors we focused a lot of attention on, grade, throughput and cost. Our workforce in operating management team is done a great job of managing and executing.

In the next two slides, look at these three factors by mine. And what I hope you will recognize from these slides is the robustness of these ore bodies that reflect their low risk profile and how well we mange them. So go to slide 5, Greens Creek optimizing mine volume.

At Greens Creek, our mine sequence and mining outside the mine plant has caused us to mine more of the base metals rich ore zones which had lower silver grades. And that's been true at Greens Creek almost since inception grades decline. And on this slide, you certainly see it since 2007. Mines tend to mine the highest grade first. Of course, at Greens Creek because there are so metals not all it decline, in fact zinc grades have been very steady even increasing this year over the last year.

But this decline in silver grade has reflected with a blue line on the right hand graph. So over the years, these grades have declined what we've done is increased throughput as you can see with the red line. This quarter we continue that trend of increasing throughput and at the same time are in higher grade stops than what we had in the first quarter and we expect these higher grades to continue for the rest of the year.

When we combine strong cash management with increasing throughputs, you can see generally declining cost per ton and that's reflected on the graphed on the left hand side of the slide. So now let's go the Lucky Friday on slide six.

Lucky Friday improved productivity. The performance by our team this quarter was great. In fact, their performance has been very good for a long time. You'll notice that on the right hand graph, that throughput declined dramatically in the second quarter represented by the red line. And this is after significant increases in throughput over the last three years. For most of the quarter, throughput was actually higher than the first quarter as they continue to improve performance.

But during the quarter, we had a failure in the exhaust shaft and secondary escape way that required extensive rehabilitation, shutting down the mine for a few weeks. Our team managed to get the rehab done and accelerate the preventative maintenance so it had no impact on our production guidance and only slight impact on cost, you can see the cost impact on the left hand, graph with a slightly higher cost per ton.

This is a great ore body, and an experienced team, and that lets you absorb the unexpected. And this experienced team is now focused on the things that will extend the mine life. So if you go slide seven, capital projects at the Lucky Friday mine; here you'll see some pictures of some of the $12 million in capital we spent this quarter on the future of the Lucky Friday.

On the left is the lateral development we are doing in anticipation of an internal shaft. We still expect the internal shaft cost between a 150 and 200 million, and will take about five years to complete. We are considering taking it as deep as either of this 7800 or the 8800 level, or as much a 4000 vertical feet from where we started.

Though we've not yet finalized the work to make the formal decision, we are moving the project forward incrementally in hope to approve the whole project before yearend. In the picture on the right is the Tailings pond which we need for 2011 production, but as you can see from the size it will hold about a million tons with final design capacity of almost 2.8 million tons or 15 years of capacity.

And it's sided whether it's the opportunity for it to grow further, so the real focus -- so the additional focus of our team at the Lucky Friday is on mine life extension and growth, and I think these guys have done a great job over this past quarter, where we're continuing to really see our operating development plans executed.

So, now let me turn the call over to our team and we'll start with Jim to talk about the financials.

Jim Sabala

Thank you, Phil. During the second quarter of 2010, the Company reported solid operating in financial results. It continues to deliver our plan with regard to production, cash flow, profitability and other key benchmarks. In particular, as noted on slide eight, operating cash flow for the quarter $54 million was the second highest in Hecla's history and represents a nearly three-fold increase over operating cash flow for 2009s comparable period. This allowed Hecla to fully fund its capital expenditures for the quarter which totaled approximately $18 million.

And as set forth on slide nine, at the end of the quarter we had a $197 million of unrestricted cash in the treasury. In addition, we have full access to a $60 million revolving credit agreement, which gives us in total $250 million of liquidity to pursue growth opportunities. As noted on slide 10 with regard to the income statement, income before income taxes was 25.3 million, a nine-fold increase over the 2.8 million reported for the same period of 2009.

This performance was driven by a number of factors including slide 11, which shows quarterly silver production of 2.6 million ounces, in line with our 2010 guidance. Gold production of 17,900 ounces, a 12% increase over 2009s level, lead production of 11,600 tons, a 9% increase over the same level of last year and finally zinc production of 21,600 tons, and a 11% increase over 2009 second quarter production.

Then of course good prices didn't hurt either, as noted on slide 12 for the quarter, silver averaged $18.32 an ounce, compared to $13.73 an ounce in the last year's second quarter. Like wise gold averaged $1196 an ounce, compared to last year's level of $922 an ounce, and base metals prices also increased, with lead prices increasing 29% and zinc prices increasing 37% from the levels experienced in the second quarter of 2009.

Finally, we continue to experience some of the lowest per ounce cash cost in the industry. As set forth on slide 13 during the second quarter of 2010, our cash costs were a negative $1.82 per ounce, compared with $3.38 for the same period of last year, and for the six months cash cost due to the negative $2.41, compared with $4.1 for the first six months of 2009.

As previously noted, these lead the income before taxes of $25.3 million. As a result of this increased profitability we did amortize our deferred tax assets, which contributed to a tax provision of $8.3 million which leads to net income of 17.1 million, compared to income of 2.5 million in 2009s comparable period.

Since I mentioned taxes, I think it's something important to notice the provision is GAAP accounting. With regard to cash taxes, we estimated the actual cash bill for 2010 to be only around 2.5 million related to the alternative minimum tax and we internally have enough NOL carry forwards to offset the regular income tax of approximately four years at current levels.

We did provide 3.4 million for preferred stock dividends as a result income applicable to common shareholders was 13.7 million or $0.06 per share, compared to a loss of $900,000 in the three months ended June 30, 2009. The largest portion of this preferred stock dividends are related to the 6.5% mandatory convertible preferred stock.

These shares become mandatory convertible into the underlying equity in June of -- excuse me January of 2011 as many of you know. So, we look forward to those disappearing in the couple of quarters. We finished the second quarter of 2010 with solid production, very low operating cost, profitability and significant cash flow. Therefore, we believe the company is well positioned as it continues to evaluate the growth opportunities available to it.

With that, I would like to turn the call over to Dean McDonald, Vice President of Exploration. Dean?

Dean McDonald

Thank you, Jim. During the second quarter, 5.8 million was spent on exploration with drill programs underway at the Greens Creek and Lucky Friday mines. The Silver Valley in Idaho, Creede Colorado and Mexico. It's been an active quarter for underground exploration at Greens Creek as shown in the plan view of Greens Creek in slide 14.

With drill programs, we're finding and expanding the Northwest West zone resources as located in the upper left corner of the diagram and extending resources in the 200 South Zone as defined in the lower portion of the figure. Definition and exploration drilling on the Northwest West zone as shown in the cross section in slide 15 continues to refine and expand the two lower limbs of the zone below previous mining.

Recent drill results have outlined mineralized intervals that are particularly rich in precious metals attaining values up to 0.72 ounces per ton gold and 75 ounces per ton silver over good mining wins. Additional drilling along strike could provide new reserves and resources in this area.

In the cross section shown in slide 16, complexly folded [bariatric] ores of the 200 South Zone have been added at depths into the east with multiple lenses. The orange colored lens represents the 2008 resource and the red bodies represent the potential reserves and resource additions from more recent drilling.

These [bariatric] ores have very high grades of gold and zinc, and could expand as we drill along strike to the South. The recent completion of the 1147 drift extension farther south which is the main drill platform in this area, the mine will provide an excellent platform to drill extensions of the high grade 200 south and 5250 South ore bodies to the East later in the year.

Surface drilling as shown in slide 17 started in late May to define the North and Northeast extensions of the recently defined Northeast contact mine horizon to Cub Creek. Drilling on the Killer Creek Gossan has cut wide oxide zones with elevated silver and base metals. And the East Ridge drilling on the defined mine contact will begin later this summer. In all, we anticipate drilling 20,000 feet on surface at Greens Creek by October.

As I've described in earlier conference calls, drilling continues to expand the resources east of the current reserves that the Lucky Friday mine with two drills active. From the 6400 to 6800 levels, the 30 vein continues to show high grades. But we're also seeing significant results with high grade intersections of the 5, 80 and 90 veins. To the east, below the 7000 level, the 30 vein is narrow, but high grade and the 80 and 90 veins appear strong with good width and grade.

Drilling in the Silver Valley of Idaho is concentrated along mineralized structures, east and west of the Lucky Friday mine as shown in slide 18. Silver bearing mineralization has been intersected in structures in the Silver Mountain area, east of the Lucky Friday mine and along the You Like/30 vein trend to the west.

Drill holes testing to Gettysburg and Lucretia targets which are link names that parallel the original Lucky Friday vein structure, have intersected veins and banded mineralization as predicted. A significant number of assays are still pending from this drilling.

In Mexico, drilling in the second quarter moved to the Pedernalillo and Cerro Santiago target areas, were being similar to the nearby past producing Don Sergio mine are present. Initial assay results show interesting gold and silver abundances and drilling will continue on both targets.

Drilling on private land at the San Juan Silver joint venture project in Creede, Colorado began in May. Significantly, no appeals were filed on the five year plan of operations and environmental assessment, and all permits were approved on June 15.

Drill roads and sites have been completed on public land, and drilling is targeting on-strike extensions to the Bulldog and Amethyst Vein structures, which were prolific silver-bearing production veins in the past. Assays are pending on all San Juan joint venture drilling.

And with that I'll pass you back to Phil for concluding remarks.

Phil Baker

So, before we take questions, I've the final comment. At the beginning of the call, I said this wasn't an exciting quarter, and what a change that is for Hecla went double-digit earnings, and our second highest quarterly cash flow are expected. I think, over the rest of the year you will see this same kind of financial performance along with things that will deliver growth.

And we will have results from our four district exploration programs and those are multi-faceted programs at Greens Creek and Lucky Friday, Silver Valley with both underground and surface programs. You will see a decision on the internal shaft of the Lucky Friday that will give access to deeper higher grade material, but that we would expect this to increase Lucky Friday's production to 5 million ounces.

And finally you'll continue to see us looking to acquire new assets that Hecla can apply its development and operating expertise, so that we can generate a growth profile that's consistent with our financial capacity.

So, with that Don, let me turn it over to you.

Don Poirier

Okay, thank you Phil. I'd now like to ask our operator Veronica to provide instructions for people on the call to ask questions.

Question-and-Answer Session

Operator

(Operators Instruction). And your first question comes from the line of Anthony Sorrentino from Sorrentino Metals. Please proceed.

Anthony Sorrentino - Sorrentino Metals

Hello everyone.

Don Poirier

Hi, Anthony.

Anthony Sorrentino - Sorrentino Metals

Hi, how are you?

Don Poirier

Great.

Anthony Sorrentino - Sorrentino Metals

With regard to Lucky Friday, would you go a little further into what the rationale was for deciding on an internal shaft as opposed to other alternatives?

Don Poirier

Sure, Anthony. We spent sometime looking at a number of different alternatives, I don't remember the number it was whether but it was double-digit and ultimately the conclusion was you have an ore body that goes quite deep and by having this internal shaft we can get to a quicker than we would be able to with some sort of ramping system and we can go deeper with that system. I mean, we ultimately, I think we might need to be in a position to go as deep as 10,000 feet. We're contemplating at this point first phase of this shaft going to 8800 but we certainly see that there's no reason this ore body won't continue to deeper than that and so we want to be in position to go deeper.

Anthony Sorrentino - Sorrentino Metals

All right and I would also presume it would probably be less expensive than having an entirely new shaft from the surface.

Don Poirier

Yes, we did consider a new shaft from the surface and that would be quite costly, something that we'll continue to consider in the future particularly with the exploration program that Dean has described that we find material to either the East or the West, I think you can say that we will resurrect that shaft from surface.

Anthony Sorrentino - Sorrentino Metals

All right, and you also mentioned the possibility of acquisitions, what might be the size of possible acquisitions and how would you go about financing them?

Don Poirier

Look, we're considering things that are from quite small to large transactions, the real criteria that we have is that it's -- if it's a gold asset that it be in North America, if it's a silver asset that it have size associated with it and we're considering acquisition opportunities that are from existing properties and back to the late stage exploration early stage development projects.

Anthony Sorrentino - Sorrentino Metals

Great would you finance it with cash, debt, stock or a combination?

Don Poirier

It depends on the size of the transactions, and we'll consider all alternatives that won't prejudge which way we might go.

Anthony Sorrentino - Sorrentino Metals

All right, very good and congratulations on a great quarter. Thank you.

Don Poirier

Thanks Anthony.

Anthony Sorrentino - Sorrentino Metals

You're welcome.

Operator

(Operators Instruction). Your next question comes from the line of John Bridges from JPMorgan. Please proceed.

John Bridges - JPMorgan

Hi everybody.

Don Poirier

Hi John, how are you?

John Bridges - J.P. Morgan

Fine. How was it Italy?

Don Poirier

It was great, thanks.

John Bridges - J.P. Morgan

I was just impressed to hear that you got the Creede permits through without appeals, that very encouraging.

Don Poirier

Well it is and I think in part it's the support that we have from local community as well as the government there, interestingly enough the regional forester is a University of Idaho graduate, you probably didn't know that Jim, the University of Idaho graduate who worked in Nevada for the better part of last 4-5 years and is quiet familiar with mining projects and quite supportive.

John Bridges - J.P. Morgan

That's great, and the progress in Mexico, how do you see that developing? Is that meaningful or just small steps towards development?

Phil Baker

We still at very early stages there, we still have smoke everywhere and I will tell you that Dean -- I'll let Dean speak for himself, but he was quiet enthusiastic about some follow up drilling on results that we've had, Dean do you want to?

Dean McDonald

Well certainly and the other thing to mention about Mexico is that we currently have a significant resource in the Hugh Zone and so what we've been trying to do with exploration at San Sebastian and, you know this a huge property with past production and lot of opportunities, but the intension is really to find something that in combination with the Hugh Zone, we can go into production in that part of the world and we're seeing the classic epithermal veins, we've seen areas of oxidized silver and gold at surface and [Brecht] zones and so and so.

We are certainly in an area that is endowed with a lot of precious metal mineralization and it's really a matter of systematically evaluating that, with the lead off being the Hugh Zone.

John Bridges - J.P. Morgan

Okay great and then coming back to your slide 15, at Greens Creek, as a non-geologist I'm a bit confused because I thought the ore was supposed to be on the contact between the silite and argillite, will that open up a whole new set of targets that it's hanging out there in the silite?

Phil Baker

Well you're correct in that, originally the mineralization formed at the mine contact, sometimes you do see lenses of mineralization in the argillite. What you're seeing in that cross section obviously is mineralization almost exclusively within the silite. What we think has happened there is that the ore bodies has being folded five times and so due to that folding, you do have mineralization remobilize along fractures and take on configurations that you wouldn't anticipate.

So, I think that's what we are seeing, but to your question, are there opportunities beyond the mine contact? I think there are, we're seeing it in some gossanous areas that are within the argillites and we do think that along that mine contact we are going to find mineralization on either side primarily due to this folding and remobilization.

John Bridges - J.P. Morgan

Okay, great, very well, congratulations guys. Well done.

Phil Baker

Thank you, John.

Operator

(Operator Instructions). Your next question comes from the line Martin Tripe. Please proceed.

Phil Baker

Well there, go ahead.

Martin Tripe - Private Investor

Yeah. What's prospects for dividend?

Phil Baker

That something that the Board considers every time we meet we have to decide whether we're going to declare dividend, and they will certainly do that again. As earnings increase, and cash flow increases, it certainly increases the opportunity for dividend, but I'll say that our first priority is on growth and growing particularly at the Lucky Friday and with this exploration programs, but it is something that is fully considered by the Board.

Martin Tripe - Private Investor

Okay, thank you.

Phil Baker

Thanks.

Operator

Your next question comes from the line of Steven Butler from Canaccord Genuity. Please proceed.

Steven Butler - Canaccord Genuity

Phil, I guess you should say chow. Question for you, I guess on influence that you suggest that Lucky Friday potentially could be from a 5 million ounce for your producer. Assuming I guess it eventually most of the production will be dominant from the 30 vein at depths still will be a little current reserve base so, would -- is that predicated on still operating that around 900 tons per day. Is that sort of you guys are still scoping at this internal shaft and still justify both 900 tons per day up to the surface?

Phil Baker

We're already sort of a 1,000 tons a day and our aim would be try to get to 12 maybe 1,300 tons a day, so it is just predicated on that.

Steven Butler - Canaccord Genuity

Okay, so not necessarily a whopping grade increase as opposed to a potential throughput increase so.

Phil Baker

No. it's both. I mean we anticipate grade being about 50% higher for silver than it currently is, and base metals was about third, yeah about third higher around the base metals and then they increased in throughput. And look this we've -- the metal has been the constraint on the throughput.

Steven Butler - Canaccord Genuity

Right.

Phil Baker

We will be working towards as making the shaft to constraint, and we're not there yet.

Steven Butler - Canaccord Genuity

Okay.

Phil Baker

And would be at least until 12, 1,300 tons a day.

Steven Butler - Canaccord Genuity

Okay, and Jim maybe you could elaborate on the hedging approach as we -- maybe just walk me through the math if you will on at the end of the quarter how you would sort of smooth out some of the affects going into Q3. Let's say as, take zinc and lead for an example if you don't mind me working through the math there, and or elaborate on what are your longer dated hedge amounts and prices if you have them on the books?

Jim Sabala

Sure. I'll give it to you in general, and I realize this is fairly complicated. So, if you want a follow-up we can discuss it more offline, but the program is consistent to two components. One is just dealing with the provisional price adjustments which span quarters and the second one is a longer dated program which seeks to put stability under Hecla's earnings and cash flow. And with regard to each of the metals at the end of the quarter, we had settlements awaiting shipment, and we've provisionally placed 7700 metric tons at $0.82, and we do the best we can to match the provisional prices that we book at. You will have a little bit of difference; simply because of the bid ask spread on the contracts. And also we give ourselves a little of cushion, so we don't oversell. So, we typically hedge about 90% of the contained metal.

With regard to lead provisionals at the end of the quarter, we had 2,550 metric tons at $0.80. Now, in terms of our long dated program, our goal there is a little bit different. It's to eventually work up to a point where we would have as much as 50% of our base metal exposure covered at prices acceptable to Hecla. And at the end of the quarter, we have 9600 metric tons of zinc at $0.86 and we had 7150 metrics tons of lead at $0.83.

Steven Butler - Canaccord Genuity

Okay. And what sort of time horizon would we book those over, Jim?

Jim Sabala

Eventually, we would hope to get two to as much as three years in front of us. These particular positions since we just started to program and you have to eventually work them on. Go, through, in case of zinc, and we have got some metal sold into 2Q at 2011, and in the case of lead, Q1 of 2011. But we will see that increased the quantity of metals under those that program over the course of the next year or two.

Steven Butler - Canaccord Genuity

Okay. Thanks very much guys.

Jim Sabala

Thanks Steve.

Operator

Ladies and Gentlemen, there are no further questions. I'll now hand the call over to Phil Baker for closing remarks. Please proceed.

Phil Baker

Thanks very much for joining us on the call. We are pleased with the earnings and the cash flow generation, and with the operating performances as well as the exploration program we had. Please stay tune as we'll continue to give you more information on all these activities. And if you have any questions, feel free to give Don a call. We'd be happy to answer that. Thanks very much.

Operator

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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