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Hecla Mining Company (NYSE:HL)

Q2 2008 Earnings Call

August 5, 2008 10:00 am ET

Executives

Vicki Veltkamp - VP of Investor and Public Relations

Phil Baker - President and CEO

Ron Clayton - SVP of Operations

Jim Sabala - SVP and CFO

Dean McDonald - VP of Exploration

Analysts

Barry Copper - CIBC World Markets

John Bridges - JPMorgan

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2008 Hecla Mining's Earnings Call. My name is Emmanuel and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to your Vicki Veltkamp, Vice President of Investor and Public Relations. Please proceed, ma'am.

Vicki Veltkamp

Thank you all for joining us today. I am Vicki Veltkamp, as the operator said. This is the Hecla second quarter conference call 2008. Our call is being webcast live at www.hecla-mining.com, and on our website you can find today's news release. Today's presentation will be made by Phil Baker, Hecla's President and CEO. He is joined by Ron Clayton, our Senior Vice President of Operations; Jim Sabala, our Senior Vice President and CFO and Dean McDonald, our Vice President of Exploration.

Before we start I do need to let you know 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 actual results to differ from projections. In addition to our filings with the SEC, we are allowed to disclose mineral deposits that we can economically and legally extract or produce, so investors are cautioned about our use of such terms as measured, indicated and inferred resources and we urge you to consider those disclosures and our SEC filings.

Now I am happy to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker. Phil?

Phil Baker

Thanks Vicki. Let me add my welcome to Vicki. This has been a transforming quarter for Hecla. We closed the acquisition of Greens Creek and sold Venezuelan interest. The acquisition has been 20 years in the making, the sale of the Venezuelan interest occurred quite quickly as the result of not being able to operate for almost a 130 days out of the past year. While our almost 10 years in Venezuelan were good for Hecla leading now allows us to focus on Greens Creek, the Lucky Friday and the next generation of operations.

With this transformation has come a lot of complicated accounting, loss on the sale which are classified as discontinued Ops and closing this sale did not takes place until at the quarter end. The foreign exchange losses increased cost of sales from revaluing inventory purchased price allocation. I know Jim and the accounting team has worked long and hard getting this output together.

I hope in all this accounting complication the reason we did the transaction to grow low cost production with a long-lived mine has not been lost. In fact, this quarter's production is the most in the quarter since 2003 and you will see quarterly increases in the next year and we expect to see another 25% increase in production on top of the 60% increase that we will see this year.

As we talk about the last quarter, we are experiencing the same cost pressures as the rest of the industry, higher diesel cost, increased consumables, toughest smelters terms. We do not see this abating in the near-term but Hecla is better positioned to manage this with increasing production, Greens Creek's Northwest West stopes has opened up. The US dollar cost operations helped us manage our cost and increasing by-products and hopefully prices.

Mining higher margin material in the well established and located operations we have. We recognized we have to be very focused on cost management, something we find at Hecla for the past 10 years and specifically at the Lucky Friday for the past 50 and Greens Creek for 20.

From our properties we expect to see more cash flow in the second half of the year and Ron and Jim will talk more about production and cost.

Exploration results for the quarter could be very significant in number of areas, but let me just mention two, Greens Creek with results to confirm the excellent potential to grow the resource base and thus the mine life. We have a mine plan that is currently 10 or 11 years and that is growing through exploration.

At the Lucky Friday we have seen a number of things in the drilling that are interesting, the collapsing of veins that gives better geometry and grades with the opportunity for further discoveries to the east and we have seen mineralization across a fault to the west that is been our limitation to the west and Dean's going to talk about these results and a number of other exciting things in Exploration.

I should also mention capital expenditures were moving forward tailing expansions at both mines that were provided adequate tailing facilities through their mine life, in the case of Lucky Friday significantly beyond. However, we are examining where we might be able to reduce capital expenditures as a way of helping to take out the bridge financing. Whereas the bridge, we are still considering our options in the unsettled market more to say before the end of the quarter.

With that I am going to turn things over to Jim who will give you some insights on our financial performance and position. Jim?

Jim Sabala

Thank you, Phil. It is still reported Hecla made tremendous progress in transforming itself with the acquisition of the remaining 70% of the Greens Creek and the sale of our interest in Venezuela. These transactions resulted in a number of unusual or one-time items; however, both of these transactions yield significant benefits to the company's long-term financial, production and risk profile.

With regard to Venezuela, we recorded a loss in the discontinued operations of $19.3 million, which included foreign exchange losses associated with moving approximately $35 million of cash back to the United States. This cash, along with the $20 million of cash consideration we received on the sale will be important to Hecla, as it will allow us to make additional investments in our mining properties, and alternatively to reduce bank debt associated with the acquisition of Greens Creek.

In addition, we wrote down the remaining book value of the Venezuelan assets. Thereby incurring a loss on impairment of $11.4 million, which recognizes the $25 million of total consideration we received early in the third quarter.

As I am sure you are all aware, the financial reporting for a significant acquisition such as Greens Creek is indeed a complicated matter. On the date of acquisition, we were required to allocate the purchase price to report all assets at fair market value on the date of purchase. In connection with this process, concentrate inventories which were reported at their market value, and resulted in an increase in their valuation of approximately $17 million.

During the quarter, this $17 million in addition to the historical costs of $10 million were charged against operation, which results in a higher than normal cost of production, and a lower than normal gross margin for the quarter. Now that this item has worked its way through the revenue cycle, we would expect margins to return to normalized levels.

During the quarter, we also had two additional items I would like to mention. First, we sold the stock position in Great Basin Gold that we received in connection with the sale of the Hollister project. This resulted in a one-time gain of $8.1 million. In addition, the company recognized non-cash stock option expense associated with its executive compensation program, which added $2.9 million of expense.

Outside of the company's normal operations, the largest single expense item we have is exploration expense, and the company continues to aggressively invest in the future of the company's properties. During the quarter, exploration expense was $7.3 million compared with $3.2 million in 2007's comparable quarter.

Lastly interest expense increased to $5.8 million from just $100,000 in 2007's comparable quarter. This expense was associated with the company's bank facility, which was used to acquire the Greens Creek mine. As a result, the company reported a net loss of $40.1 million or $0.35 per share compared with previous quarter's net income of $28.2 million or $0.20 per share.

Cash operating costs were $3.43 compared to a negative $1.98 per ounce in 2007's comparable period. The primary reason for the increase is due to increased smelting and refining costs along with general escalation in most basic materials used in our production processes, both factors that are impacting the entire industry.

While our per ounce cash operating costs have increased given the underlying price realized for our products. The company will receive significant increased operating cash flow generation in subsequent periods as a result of the acquisition of Greens Creek.

With that I would like to turn the presentation over to Ron Clayton who will discuss the operating matters in further detail. Ron?

Ron Clayton

Thanks Jim and welcome. Today I would like to focus my comments on production, operating costs and safety. During the second quarter, we produced 1.6 times the silver, 3 times the gold, 1.5 times the lead and 2.6 times the zinc compared to the same quarter of 2007. These increases are primarily the result of the Greens Creek acquisition. Although zinc production at Lucky Friday has more than doubled this year and recoveries to payable concentrates on all three metals are higher as a result of our capital improvements.

One of the things you will see in our press release is the production or grades of both mines year-to-date and during the second quarter were lower than the same period a year ago. Primarily as a result of higher metals prices that allow us to mine and process lower grade material to profit. This material must be mined and might otherwise be placed in a waste facility. So this has the effect of enhancing the MPV of the ore body and extending the mine life.

Improved metallurgical performance in the mill has enhanced us even further at the Lucky Friday. The benefit of this is that we have been able to maintain a higher revenue per ton even though the increased cost of smelting and refining have offset much of the price increases compared to a year ago.

Production at Greens Creek improved in the second quarter as we continue to work to increase our rates of development and backhaul placements, reduce our manpower shortages and work to lower costs. The transition to Hecla operations has gone smoothly and we now have the key leaders in place. The team is made up of a combination of the Greens Creek team that was in place prior to the sale and Hecla people from other locations and is working well.

I am sure you have seen industry cash cost per ounce increase over the past year and we have suffered the same impacts for the same reasons as everybody else. Growing supply costs have negatively impacted our operating costs at all of our operations. Over the last year we have seen the cost of supplies like explosives, rise by more than 33%, diesel fuel is up over 70% and ground support materials are more than 20% higher.

In addition increases in smelting terms and concentrate freight have negatively impacted the net smelter returns. For example, when we compare Lucky Friday's cash cost per ounce of silver from second quarter of last year to second quarter of this year, the impact of the treatment and freight alone was more than $3 ounce. The Greens Creek in the same period those increases in cost have more than $5 an ounce impact.

Now we can not do anything about the price of diesel until we go to hydropower at Greens Creek in a year or so, and the smelter contracts are soft for 2008. We can and will manage our mines. We at Hecla have managed our operations for many years to maximize the cash margin that we generate. We will continue to do that and as costs have increased and metal prices have changed, we will continue to change our mining plans where we can to maximize the cash flow our operations generate and add the most value available.

In spite of rising costs, Lucky Friday was able to deliver more cash flow and very similar operating income as the same quarter in the first six months of 2007. As you have seen in the press release, the financial performance of Greens Creek was negatively impacted by the one-time items associated with the purchase. We expect to see continued improvements. Both of these mines are world-class ore bodies, and our operations and people are first grade. A recent example of this as our operations continue to perform well on the safety front, with both US operations remaining in the top S line [ph] as measured by the Mine Safety and Health Administration.

I am also happy to report that our underground and surface mining rescue teams competed both regionally and nationally during the quarter with outstanding results. Hecla team has won nearly every event at the Central Mine Rescue competition that included teams from Alaska, Idaho and Washington State.

With that I will introduce Dr. Dean McDonald who will provide and update on our exploration programs. Dean?

Dean McDonald

Thank you, Ron. Activities and results from exploration in this quarter are prelude to increasing resources by year-end and broadening exploration activities in our strategic plan packages.

Underground exploration drilling at Greens Creek continues to expand the Gallagher zone, which now extends for over 900 feet. Another program will follow up high-grade interceptions in the Southwest zone.

As is happened in the past, we anticipate the underground exploration well at least in part replace this year's production.

On the other hand, surface drilling is about finding new zones. Work has begun on the mine contact rocks recently discovered northeast of the current mine workings. Early results show that the contact rocks extend at least 800 feet and are open in all directions. This is very exciting because mineralization has been observed at the contact, and our goal is to now define a new extensive area of mineralized mine contact.

Assay results are still coming in from the surface directional drilling program on the Gap zone in the 2500 foot area above resources currently defined at the Lucky Friday extension. Once all the results have been received, we will assess how we plan to advance this area.

3D modeling of the past producing Star Morning complex just west to the Lucky Friday mine is completed, allowing the identification of numerous drill targets. We will be evaluating the targets from surface and underground this quarter, with drilling possible next year. Drill programs are also being prepared for targets east to the Lucky Friday, including the Vindicator and pilot areas.

Drilling in the second quarter at the Lucky Friday mine has shown that quite remarkably there is potential to expand resources in all directions, both east and west along strike, and above and below the current resource. Drilling to the east within the 5900 to 6400 levels show the 90 vein is gaining prominence with narrower 5, 30, 40, and 41 veins extending along strike.

Drilling to the west, past a fault that defined the western limit of the resource has shown that the mineralization has been offset by the fault and extends further to the west, possibly as far as the Star Morning complex. At depth, where there are indications the 30 and 40 veins may coalesce to form wider zones with higher grades than currently in the reserve.

In Mexico, we continued to be impressed with the exploration potential at the 5511 square-mile San Sebastian property. Most recently a 2.5 kilometer long vein and stockwork zone was discovered on surface of Peñascote which is northeast of the La Roca Prospect. As we followed up this discovery, three new vein systems were discovered, one Columbia Northeast of Peñascote that have been mapped for over four kilometers of strike length and intense of trenching and sampling program is in progress and we anticipate the identification of a number of drill targets.

We are also continuing to move the drilling forward at La Roca in the northeastern part of the San Sebastian property and Rio Grande, which is 50 kilometers south of San Sebastian. At the San Juan joint venture in Colorado, all permits from both the state and force service have been received and drilling has begun. Drilling will start from the margins of previously defined resources along the Bulldog vein and begin to evaluate the over 30 miles of projected vein structures on the property, so look for news early next year on a resource estimate there.

With that I will pass you back to Phil.

Phil Baker

Thanks, Dean. Vicki, let's go and take some questions.

Vicki Veltkamp

Operator, would you give the instructions for the q-and-a period please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Barry Cooper with CIBC. Please proceed.

Barry Copper - CIBC World Markets

Yes, good morning everyone. I was wondering can you just rubble off what you are realized prices were for commodities that you produced?

Phil Baker

Garry, it is actually in our press release on page 6. For the second quarter 17, 17.

Barry Copper - CIBC World Markets

Those are the average metal prices not the realized price so…

Phil Baker

Oh, I am sorry. Our realized prices were not significantly different. Jim do you have those numbers or we need to get back to Garry.

Jim Sabala

We will need to get back to you Garry, but I would say that all of the company's products are priced at the average and they are delivered consisting throughout the program with, the exception being a little bit inventory change at Greens Creek. So they will be very close to those average prices.

Barry Copper - CIBC World Markets

You have no provisional pricing whatsoever?

Jim Sabala

We do but again it is the pricing is dependent again on the delivery of the material and the material occurs consistently throughout the quarter. When it’s provisionally...

Barry Copper - CIBC World Markets

The prices certainly did not?

Jim Sabala

Yes, and during this quarter I could tell you that silver and gold prices went up to the extent that lead and zinc went down, and so the difference between provisional pricing and revenue pricing was very small.

Barry Copper - CIBC World Markets

How did the gold go up was it much higher in Q1 than it was in Q2?

Jim Sabala

When you looked at the total of the two precious metals, precious metals offset the base metals.

Barry Copper - CIBC World Markets

Okay. Your outlook on that.

Jim Sabala

We will get to those specifics Garry.

Barry Copper - CIBC World Markets

Okay, it is Barry.

Jim Sabala

Okay.

Barry Copper - CIBC World Markets

Fair enough, fine. Good enough thanks.

Phil Baker

Sure.

Operator

Your next question comes from the line of John Bridges, please proceed.

John Bridges - JPMorgan

Hi, hello everybody. Just wondered on the labor front you may have mentioned of it, could you give us an update as to how you are managing the tight labor situation?

Phil Baker

Well sure and Ron I will ask you to jump in just a moment. We are very fortunate John that we have a very stable workforce at both the Lucky Friday and Greens Creek. If you look at the turnover rate at Greens Creek and its actually down this year from last year and last year it was down from the previous year, in the single-digit numbers. I think this year's may be 7% or 8%.

So, we have been fortunate in that regard. The other thing is, we are just and the reason we have been so fortunate is that we are in places that people want to live. Large percentage, I think 70%, 80% of our workforce at Greens Creek are from Alaska and just about all of our employees in the Lucky Friday live right there or in many cases they are from the Silver Valley of Idaho. So, it has not been as much of a challenge as I expected it might be for some other company. Ron, do you want to add anything?

Ron Clayton

Yes. For us John the real issue is the key skilled positions. When you are sure, one or two there, it makes a big difference. So, at the Lucky Friday for the last five or six years, we have had a real aggressive training program. Training to train local; particularly local young folks that are interested in coming to work and learning, training them to be skilled miners. Greens Creek is now doing the same thing and has been for about a year and both those programs are getting very good results. So, that is our way of combating that and then trying to stay competitive on every front with our packages.

John Bridges - JPMorgan

With respect to that what is the inflation rate are you seeing in labor packages?

Ron Clayton

Actually, labor has not been as much as the supply side of it. I can not give you a number right now off the top of my head. I can go chase that down. However, the labor increases have been significantly lower than what we are seeing on the supply side.

John Bridges - JPMorgan

Okay, great. On the zinc market in general, I know you are not a research organization, but from your interaction with the industry, what do you see going on there? Do you see the weakness in the zinc market as being abnormal and it is going to come back or is it just extra supply that is coming into the market?

Phil Baker

John, the view that we have is it is a temporary advance we have had. The mines that have gone back into production that filled the gap and those mines are not going to be operating for very long, or at least that additional production is not going to be operating for very long. So we do see it coming back. We do see the fundamentals for zinc continuing to be strong, with the basic industrial development that you see in China, and India, and the rest of the world. Ron, do you want to add anything?

Ron Clayton

The only couple of items that I would add there is that we have had seen a little bit of a downturn in the economic growth. Just because of the credit markets and things like that. That will have an impact going forward which will match up with the things that Phil described, some of the production coming after the market and the demand going up a little bit.

As an additional point, you can expect something real somewhere in the lead market, because the demand for lead is really not changing very much. Over the years it has had a nice steady growth and will continue to with the third-world countries bringing on more uses of lead-acid batteries, but the supply is very much tight at the zinc market. So as the zinc supply reduces a little bit, the lead supply is going to reduce as well.

John Bridges - JPMorgan

Right. Okay, good luck. Thank you very much for the nice clear disclosure of your abnormals this quarter.

Phil Baker

Sure John.

Operator

(Operator Instructions) There are no questions in queue at this time.

Vicki Veltkamp

Well do you have any additional comments today?

Phil Baker

Let me just say that this was certainly a quarter that changes the company. It was a quarter that has had these abnormal items and we are looking forward to the things in future quarters that are not having so many things that the accounting staff has to deal with. We thank you very much for joining the call today and certainly if you have any questions you can give Vicki a call and we will be happy to answer.

Vicki Veltkamp

That is fine, my number is 208-769-4144 and feel free to give me a call if do you have additional questions. Thank you for joining us today on the Hecla Mining Company second quarter 2008 conference call. That concludes our call. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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