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Revett Minerals Inc (NYSEMKT:RVM)

Q2 2012 Earnings Call

August 10, 2012 11:30 am ET

Executives

Kenneth S. Eickerman - Chief Financial Officer, Principal Accounting Officer and Controller

John G. Shanahan - Chief Executive Officer, President, Director, Member of Environmental Committee and Member of Safety Committee

Douglas Miller - Vice President of Operations

Analysts

Spencer Lehman

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

Christos Doulis - Stonecap Securities Inc., Research Division

Walt Sosnowski

Operator

Good morning, my name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revett Minerals Inc. Second Quarter 2012 Conference Call. [Operator Instructions] Thank you. Mr. Ken Eickerman, CFO, you may begin your conference.

Kenneth S. Eickerman

Thank you, Melissa, and good day, everyone, and thanks for joining our 2012 Second Quarter Financial Results Conference Call. I am Ken Eickerman, the CFO, and joining me today is our President and CEO, John Shanahan; and Doug Miller Vice President of Operations.

Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to Safe Harbor provisions of the Federal Securities laws. These statements involve risks, uncertainties and assumptions that may cause actual results to differ materially from those anticipated. Listeners to the call are advised to review the risk factors contained in our most recent annual report on Form 10-K for descriptions of risks, uncertainties and assumptions related to the forward-looking statements.

Please note that this call is intended for investors and may not be reproduced by the media in whole or in part without prior consent.

At this time, I would turn the call over to our President and CEO, John Shanahan, who will recap the highlights for the first 6 months ended June 30, 2012. Following his remarks, Doug Miller will provide an update of our operations, and I will walk through the financials. And John will wrap up with the outlook before we finish with your questions. John?

John G. Shanahan

Thank you, Ken. Welcome, and thank you for your participation today. I have a few quick comments, which I would like to make. I hope I'm not going to be stating or restating the obvious. But it may answer a few questions before we get into the Q&A session.

I think firstly, I think we always acknowledge that we do have variations in our production quarter-to-quarter. We are disappointed when we don't hit our objectives. The second quarter was difficult for a number of reasons. The main reason was, of course, the unseasonally high rainfall and snow melt that we had to contend with. The record levels of rainfall in May and early June did hamper us. Now, while the rest of the country seemed to be experienced record heat and battling forest fires, Northwest Montana saw the exact opposite. You may recall from our first quarter investor call, back in April when we did actually discuss the upcoming runoff and our VP of operations, Doug Miller, spoke about the upgrades that we had made and felt that we are in a fairly good position, but we didn't quite expect the deluge that we did get in May and June which hampered us. But we were able to continue productions, to get some production out of the C, A and Lower Quartzite areas.

So I'd like to focus on a couple of positive things that did happen both this quarter and for the first half of the year. We did operate cash flow positively for the second quarter and have continued to operate cash flow positively for a number of quarters. The second quarter of 2012, our cash flow from operations was around $3.5 million. After the first half of this year, it sits at around $11 million, which is very much where it was at this time last year.

We continued to build cash and strengthen our balance sheet. The second quarter was still positive from an EBITDA basis. This was despite what was a quite a spendy quarter with regards to development work at Troy and Rock Creek. I'd also like to point out that during the quarter, we were able to maintain and put to bed the ongoing seconds and final invoices that come in from previous months. I think, as everyone knows, as metal prices decline, and still, $27.50 silver and $3.40 copper are still very good prices, but we've got to go back and re-price and settle those up. So during the second quarter, those happened as well, and we're very much up to date and continue to manage that quite well.

Our production, of course, is a function of access. Not any systemic issues, upgrades or reserves or metallurgical recoveries. In fact, Doug will probably point out a little bit here, some of the areas that we were mined in the second quarter were either right on or below cut-off grade and not held in reserves. So it's due to the experience of our workforce, the development work that has been done at the Troy Mine, our cost structure, we did turn some negatives into a positive.

And I say this with confidence. So far, this quarter, the third quarter now to date, we're back on plan, upgrades are where they need to be and where we want them to be. Without doubt, there will be some other hiccups along the way and operating challenges. But we do have the experienced workforce and committed workforce to get us through.

Troy remains our source of cash flow and our bridge to Rock Creek. We're operating safely, responsibly, but continue to develop and explore and extend the mine life at Troy beyond the transfer 7 year [ph]. It's very important to us and remains our focus.

Sometimes the weather will hinder us. Sometimes it may be mechanical. But the asset is very, very solid, and we continue to do there what we do well. We continue to manage those risks. We do have some hedging in place of $4 copper, there are no hedges on silver, but we do have 25% of our copper sold forward through the end of the year at $4.

Now our second quarter results, of course, are more than just production. Our financial results this quarter reflect some high noncash charges, most notably, the stock-based compensation charges. And I want to be very clear about this. First of all, these charges this quarter relate to our stock-based compensation program for all 200 employees of Revett. And it relates to the bonuses that were awarded or issued for what was a very good year in 2011. But unfortunately, it fell into our second quarter result. But I need to stress this again, it's a non-cash charge. And it's subject to accounting rules. As it stands, if we were to issue these exact same options today, the accounting charge would be about $950,000 rather than the $2 million that we have on our books. But once again, we are bound by accounting rules. But going forward, of course, looking into 2013, I think we're going to find a way to spread that out over the year, so it doesn't all come in, in one particular quarter. But very important here and very clear, this charge does not reoccur again in 2012. The Employee Stock Option Plan, it's an important part of the compensation in our overall operating structure. Each and every employee of Revett is a shareholder through this program. And it's through this program, the way we strongly believe that the interest of our workforce and employees are aligned with our shareholders.

I hope I've covered up some points that are helpful. With regards to Rock Creek, we are working diligently with federal and state agencies on Rock Creek permitting. It is taking longer than expected. But this is the work of the agencies and the timetable is theirs. They are committed, they're working very, very hard, and we understand the desire to make this a complete useful program. We are hoping that by the end of the year, an EIS is delivered to the Forest Service. I think in the next coming months as we to get through the summer, we'll have a much clearer picture and we'll be able to issue press with further news on that.

So with that, I'll now pass you over to Doug Miller, our VP of Operations, for some additional comments.

Douglas Miller

Thanks, John.

First, and just as important as production is our employees' safety. And unfortunately, in the second quarter, we did have 2 lost time accidents, both of these accidents were the result of one incident where we had a lube truck and a bolter, and both men were off a short period of time, and both returned back to work.

As John pointed out, our mill throughput for the second quarter of 2012 decreased approximately 10% as compared to the second quarter of 2011. However, in the first 6 months, production for 2012 was just slightly above production of 2011. As John pointed out, our major issue in the second quarter was the unseasonable spring rains that we had here. For example, one of the nearest community staff [ph] does have weather information. Kalispell Montana had 6.5 inches of rain in the month of June as compared to the normal of 2.5 inches, and we had, certainly, that same type of comparison here.

So this year, unlike most years, our snow melt, spring rains peaks lasted for in excess of a month where typically, we see that peaks run for approximately a week.

We did have the pumping capacity that we haven't had in the past to keep the areas dewatered. Unfortunately, the capacity of our reservoir is underground, which is just a mined out area, was exceeded in June, which resulted in that to overflow, and of course, the C Beds are in the lowest areas, and it did flood out the C Beds, forcing us out of the C Beds and the A Beds for the month of June, which really resulted in that loss of production out of the C Beds and A Beds. Of course, the C Beds are higher grade zones.

As John also pointed out, we were able to offset some of that loss of production out of the C Beds and A Beds by mining in the Lower Quartzite of the South Ore Body. But of course, this is considerably lower grade. As John pointed out, it was not carried in the reserves with our metal prices for reserves. However, the metal prices during that period of time was higher than our reserves, which allowed us to mine that at a profit, although, smaller profit, certainly, than if we were mining in the A and C Beds.

And also, the water inflow had a negative impact in the development of our North C Bed and the I Bed development. Again, because that C Bed is the lowest part, it did flood us out or declined into the North C Beds, which is the same development heading that will be advanced for the I Bed development.

On a positive note, we had a contractor in on the second quarter of 2012 attempting to get through a major structure fault zone into our East Ore Body, that we've had difficulty over the last several months in getting in. The contractor was able to get through that. We're -- just barely gotten through it this past month, and hopefully, things will improve in the East Ore Body. And again, that's some higher grade material, so we can meet our budget in the East Ore Body.

Thank you for your time. And now, I'll turn it back over to Ken Eickerman.

Kenneth S. Eickerman

Thanks, Doug.

As a recap of the second quarter, we did post a loss of $2.2 million, $0.07 a share on revenues of $13.5 million compared to a $7.9 million profit in the second quarter of 2011 on revenues of $18.8 million. The primary difference between the 2 quarters was the low revenues. We had both production, as far as producing copper to be sold, was lower, and pricing, our silver price was much lower in the second quarter of 2012 than it was in 2011.

Our cost of sales increased by about $700,000, compared to second quarter of 2011. The increase is primarily due to -- we did a pay raise for all the workers at the mine at 4%. We also incurred higher treatment, refining and freight costs. One other area, you'll note that showed quite an increase, was our exploration and development spending of $1.2 million for the second quarter. It's much higher than it was the prior year -- the prior year second quarter, but this is as expected. We budgeted these funds. We wanted to expand our exploration program in and around the mine at Troy. And in addition, we knew that the cost for the Rock Creek EIS was going to cost, substantially, more in the second quarter of this year. So these costs, even though they're higher, they are expected.

In addition to the lower revenues, we also took a $2 million charge, again, for the stock-based compensation. Typically, that happens in the -- in prior years, happened in the first quarter, this year, it happened in the second quarter just due to the timing.

The good news is, as our balance sheet continues to get stronger as we have improved our cash and short-term investment position to just over $30 million, which is a 20% improvement since the December 31, 2011. In addition, our working capital has increased to $30.7 million compared to $27.8 million at December 31, 2011. So things are looking good in that direction.

And with that, I'll turn it back over to John for some final comments.

John G. Shanahan

Well, thanks, Ken. I really don't have any final comments. I hope for our participants, this has been informative. And what I'd like to do is pass this to our operator, Melissa, to perhaps take some questions. Thanks, Melissa.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Spencer Lehman from West.

Spencer Lehman

Regarding that bridge to Rock Creek, what milestone do you envision along this permitting process, specifically, that's going to turn on the green light for the project?

John G. Shanahan

Spencer, really, the green light is the revised record of decision that will come from the lead agency that's Forest Service. To get there, there are 2 very important documents. In this case, of course, for us, it's the supplemental EIS, which the Forest Service is currently working on, and the companion document to it is the Biological Opinion. The Biological Opinion is the document that was upheld by the Ninth Circuit Court of Appeals in November of 2010. So clearly, having the SEIS produced, having that go out for public comment and then having that reviewed, and of course, a revised record of decision issued to Rock Creek which is really the green light.

Spencer Lehman

Okay. And you hope or envision that approximately, if you had to bet?

John G. Shanahan

Well, we are hoping, and the latest idea that we have is that the SEIS will be delivered to the Forest Service from the contractor by the end of this year, in December this year. And then it's a matter of them turning it around and getting it out for public comment. I think I'm trying to be very clear on saying that the SEIS is the work of the Forest Service, it's a work of the agencies. And as I may have said during my comments or I did say during my comments, they are very committed to this process. They, like all federal agencies or government agencies, do have some constraints in terms of timing and funding. But they're working very, very strongly and diligently towards it. Their objective, of course, is to make sure that this document is a very strong document, it's a very complete document, it's a watertight document in case it is challenged in the courts again. So I am hoping that we will see that issuance early next year after public comment and back in. What the timing is, of course, I've got to be very careful there because it really is the timing of just how quickly the Forest Service is able to turn that document around, and then once it's gone out for public comment, how quickly they're able to generate a record of decision. Hope that answers your question.

Spencer Lehman

And your business plan is to continue to try to build cash from Troy -- cash flow from Troy, and to -- for your -- so that when that green light comes on, you'll have plenty of cash to initiate the project?

John G. Shanahan

Absolutely. I think we're very focused and I hope for our shareholders and stakeholders, we're very, very clear about it. Our objective is to get to Rock Creek. And our objective is not just simply to get a permit for Rock Creek and put it up for auction, that's not it. Everything that we do at the Troy mine each day is geared about building an experienced workforce, building that social license, building that community, that when it comes time to move to Rock Creek, we have an experienced pool of workers that we can get started there and get off the ground running. I think one of the biggest factors, I think, for a lot of new operations that you have today, of course, is the startup operations. And for us to get through that, of course, is to have an experienced pool of people at Troy that were able to hit the ground running at Rock Creek. That's our objective. It's been our objective for the last 5 years and we aren't going to sway from that. Being the best operator that we could be, every month, every week, and I'm going to say, every day, we're getting towards that goal because we are a better operator, month in, month out. Our workforce is solid, it's experienced, our balance sheet is stronger, our ability to get out and finance and operate Rock Creek is stronger and stronger. So that is our focus. That is the bridge. I don't think anybody involved with it, from Doug Miller, our Board of Directors, has any different view to that. I know that everything that Doug does at the Troy Mine is all about building that experienced workforce and knowledge in the Revett [ph] is unparalleled from a geological perspective and a technical perspective. That's what going to make us successful at Rock Creek.

Spencer Lehman

Right. So even though you can't start digging, there is a certain amount of -- where you can creep up in the process, so

[Audio Gap]

shovel ready when the green light comes on.

John G. Shanahan

That's exactly right. And that's a good way to put it. I mean we are becoming and we are getting shovel ready. So both from a technical perspective, both from a financial perspective, the stronger our balance sheet, [indiscernible] late last year, we were able to procure a $20 million -- actually it was really [ph] an accordion feature -- a $30 million credit facility. That was our way of entering the credit markets with a Tier 1 bank so that we know, through project financing, another way that we're going to be able to develop Rock Creek.

Operator

Your next question comes from the line of Jeff Wright from Global Hunter Securities.

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

A couple operational questions. Looking at mine sequencing, I think you guys mentioned the development of the I Beds would be a little bit, I don't know if delayed or behind schedule. But when do you think that would really start? Do you think that's more of a Q4 or Q1 2013 development kickoff or how are you feeling about that now?

John G. Shanahan

Well, I think we'll still be able to kick off late third quarter of this year. Perhaps, Jeff, what I'll do is pass this over to Doug and he could give you an answer as well.

Douglas Miller

Thanks, John. I think it would be, as John said, late Q3, probably closer to Q1, by the time, we really get started in the advancement of the I Bed development. Again, as I pointed out, a part of the advancement in the I Bed development is the North C Bed development. They are one of the same drifts as it drops down through the cross fault. So in all reality, the development to the I Beds is ongoing today. But we refer it to as the development of the North C Beds.

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

Of the North C Beds. Okay. So, and as you get into further into the North part of the C Bed into that I Bed, do you think that would allow further ore -- greater ore extraction you think you get back up towards 4,000 tons a day, or even higher, or does that actually lower ore extraction and create bottlenecks through the system underground.

Douglas Miller

Well, I won't say that it will go above 4,000 but it will help us open up other headings to maintain the 4,000 tons a day production.

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

Okay. So that's -- was one of the other questions. Kind of jumping around up here, next question I had was on copper hedging. I know the copper hedge expires at the end of 2012. Are you guys looking to extend the hedge at current prices? Or what are your thoughts on the copper going to 2013?

John G. Shanahan

Jeff, I'll take it.

We have that -- we have 25% of our production for copper on it at $4? Our intention at this point is to do more at $4. We believe we're going to see copper prices rebound in the second half of the year, back to that $4 level. So at this point, we don't have any intention of doing anything below $4. At $4, we certainly will do some hedging for 2013, '14 and '15. One of the good things that we have about the structured credit facility, of course, is that we could do some structured hedging, and have a little bit longer term which meets up nicely with the I Bed development. So, I suppose, to answer your question, yes. Our intention is to do -- to layer on hedging out the next 3-plus years, if we possibly can, at $4 and above. Unlikely, that we'll need [ph] Hedging, and I say that at this point, unlikely because it used to [indiscernible] hedging less than $4 because we do believe that we're going to see copper prices back at those levels.

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

Then, a last follow-up question. On the reclamation plan at Troy, I know that's pending. Do you have any update on that? Do you see that being accepted still in 2012 and how would that affect the amount of restricted cash?

John G. Shanahan

Good question, Jeff. The EIS for Troy has been completed. We are now waiting, in fact, with the DEQ -- Montana DEQ for them to issue a record of decision. It was, I'm going to say, they've used the word non-contentious EIS. I think most stakeholders in the community realize that the reclamation plan is a solid plan. What will come from that is a revised bonding calculation. We had not seen that yet and probably won't see that until a record of decision is issued. Now, will we see a record of decision before the end of the year? I believe certainly, we will, and we'll probably see the revised bond calcs before the end of the year. Now in terms of how do we fund that. We have $6.5 million of restricted cash sitting there already. So that's clearly well on the way. But it is common practice for mining companies, particularly, mature and producing companies like ourselves now to post letters of credit rather than cash. We may, and we do have the credit facility to do that, we will look at that option. But just how do we work with the DEQ and what works best for them and for us, is how we'll have to address. I would say, we are still probably a couple of months away from at least knowing what the revised bonding calculations will be. But I can say, the process of the revision of the Troy EIS, which was, once again, a very thorough review, in the end, is very satisfying because it showed just what a clean and efficient -- environmentally efficient operation Troy is. Of course, you get the opportunity to stand back and look at that and realize that, that is exactly the same way that we'll be able to operate Rock Creek. And so, the issues of reclamation are really so minimal. And we feel like we have it very well covered and feel very happy with it. I hope that answered your question on that.

Jeffrey Wright - Global Hunter Securities, LLC, Research Division

And one final question. Due to the flooding issues in the summer, exploration drilling and kind of underground drilling you guys normally do in preparation for the updated resource or reserve calculation at year end, do you think that would be delayed or do you still anticipate a resource number towards year-end or maybe early Q1 to update us on the reserve?

John G. Shanahan

Yes, at the end of each year, of course, we do update our reserves and resource numbers. But Doug, if you'd like to provide an update if you have a minute.

Douglas Miller

Yes, really, the flooding didn't impact our core drilling to identify our reserves. We were, at that time, we were out on the surface drilling, so it didn't impact that. So, yes, we still anticipate updating our reserves year-end.

Operator

Your next question comes from the line of Christos Doulis from Stonecap Securities.

Christos Doulis - Stonecap Securities Inc., Research Division

John, just wanted to get an update on what your kind of budget for exploration was, going forward, at Troy in kind of both H2 2012, and what you think it might be in '13 as well?

John G. Shanahan

Yes. Christos, we are looking at around the, I would say, about of $0.5 million, $0.75 million for the balance of this year. And you should be looking somewhere between $1.5 million and $2 million per year, going forward, for ongoing explorations at Troy, whether it's nearby, in and around account workings or the JF Property or, eventually, or as we move to the South -- to the North and East. But I think, anywhere, if you're looking out for the next 3, 4 years, anywhere between $1.5 million and $2 million, I think is a correct number.

Christos Doulis - Stonecap Securities Inc., Research Division

Okay. And in terms of costs associated with Rock Creek, any thoughts on what you're going to see over the next, call it, 12 months going forward?

John G. Shanahan

No. In terms of operational costs or capital costs, Christos?

Christos Doulis - Stonecap Securities Inc., Research Division

At Rock Creek.

John G. Shanahan

Okay. So, you're talking about now. Once again, at the moment, the main cost factor for us, of course, is the work that a contractor does on behalf of the Forest Service in creating the EIS. I think roughly about $1 million per year is what we're budgeting at the moment for that work. And that does include a number of accompanying studies that go into it. But we are looking at, I would say, $1 million per year, and you can pretty much look at that at $0.5 million for the balance of this year and $1 million per year at [ph] 2013.

Operator

[Operator Instructions] Your next question comes from the line of Walt Sosnowski from SRC Capital.

Walt Sosnowski

Looking forward, in terms of production for Q3, approximately what range of production are you expecting for the third quarter? I'm not looking for a precise number, just an approximate range.

John G. Shanahan

Walt, I think our revised plan, which coincides with our revised guidance, is for 4,000 tons per day, which we believe will be at the grades which stem from working in the C Bed area. So we feel very strongly that we are back on track, and that revised guidance for 1.325 million ounces, which is slightly higher than 2011, I should say, and 10 million pounds of copper, which is slightly lower than 2011, we believe, very strongly that it's achievable.

Walt Sosnowski

And so, the 278,000 production that you did last quarter, the 1.325 million for the year implies that 350,000-plus or minus for Q3 and Q4, would you expect that it's going to be Q3 and Q4 are approximately equal or will one quarter be more than the other?

John G. Shanahan

No, we feel it's straight line. Now, month-to-month, you're going to have slight variations. But there is no planning for September is going to be a great month and October is not going to be so good. It's, at this stage, we anticipate that it's going to be relatively flat line to get us there.

Walt Sosnowski

Okay. So now the weather is behind you, things have normalized, and apart from surprises, would it be safe to assume just flatline the rest of the year?

John G. Shanahan

Yes. Doug, do you have any comments there? But I think we are pretty clear that it is flatline. And there will be some pickups here and there for a day here and a day there. But over the course of the year, we feel like we're going to get there and it will be straight line.

Operator

There no further questions at this time.

John G. Shanahan

Well, thanks, Melissa. And I would, once again, just thank everybody for their participation. I hope through the course of the year, for our investors and interested parties, we are available at the Spokane office. For those who have visited the Troy mine, I think you get to see what we do and how we do it. But we are always available. And clearly, as you all understand, there are rules of selective disclosure. But we are proud of what we do, despite what may look like, rather, a difficult quarter, but frankly, I'm proud of the way that we made the most of it. And I'm looking forward to finishing up the year strongly. 2011 was a very, very good year for us, both cash flow wise, earnings wise and production wise. If you look at our revised guidance numbers, very close to last year. So it was a little bit above, up a little bit below. I know we have a committed workforce. They don't put targets out lightly. When they put out a target, they intend to meet them. I know that firsthand because I do get the pushback from Doug and his team. When I look and say, "We need to revise our guidance, " they tell me, "Hey, this is what we said we would do, " and they're going to drill it down just to get there. So I just appreciate everyone's interest in Revett. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's conference call, you may now disconnect.

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