COEUR D'ALENE Sep 4, 2015 (Thomson StreetEvents) -- Edited Transcript of Hecla Mining Co earnings conference call or presentation Thursday, August 8, 2013 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Mike Westerlund Hecla Mining Co - VP of IR * Phil Baker Hecla Mining Co - President and CEO * Jim Sabala Hecla Mining Co - SVP, CFO * Larry Radford Hecla Mining Co - VP of Operations * Dean McDonald Hecla Mining Co - VP of Exploration ================================================================================ Conference Call Participants ================================================================================ * Jorge Beristain Deutsche Bank - Analyst * John Bridges JPMorgan Chase & Co. - Analyst * Anthony Sorrentino Sorrentino Metals - Analyst * Trevor Turnbull Scotiabank - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Great day, ladies and gentlemen, and welcome to the second quarter 2013 Hecla Mining Company earnings conference call. My name is Crystal, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question and answer session towards the end of the presentation. (Operator Instructions). I would now like should the presentation over to host for today, Mr. Mike Westerlund, Vice President of Investor Relations. Please proceed, sir. -------------------------------------------------------------------------------- Mike Westerlund, Hecla Mining Co - VP of IR [2] -------------------------------------------------------------------------------- Thank you very much, Operator. This is Mike Westerlund, Hecla's Vice President of Investor Relations. Welcome, everyone, and thank you for joining us for Hecla's second-quarter 2013 financial and operating results conference call. Our news release that was issued this morning before market open and today's presentation are available on Hecla's website. On today's call we have Phil Baker, President and CEO; Jim Sabala, Senior Vice President and Chief Financial Officer; Larry Radford, Senior Vice President, Operations; and Dean McDonald, Senior Vice President, Exploration. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act as shown on Slide 2. Such statements include projections and goals which are likely to involve risk detailed in our Form 10-K, Form 10-Q and in the forward-looking disclaimer included in earnings release and at the beginning of the presentation. These risks could cause results to differ from those projected in the forward-looking statements. In addition, in our filings with the SEC we are only allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of terms such as measured, indicated and inferred resources and we urge you to consider the disclosures that we make in our SEC filings. With that, I will pass the call to Phil Baker. -------------------------------------------------------------------------------- Phil Baker, Hecla Mining Co - President and CEO [3] -------------------------------------------------------------------------------- Thanks, Mike and hello, everyone. I'm particularly glad you all are joining us today to talk about what's been very busy quarter. A lot has happened in the past three months. We acquired Aurizon, we issued eight-year debt, we began operating Casa, saw a really great performance at Greens Creek and made significant progress on Lucky Friday. Of course, we also saw precious metals prices decline dramatically, affecting our realized price for the quarter, and it has prompted measured and sensible cost reductions. On this conference call we will talk about all these things and more, but I want to start with an overriding feature of Hecla. We have the assets, management and balance sheet that can withstand the fluctuations of our market. We see these lower precious metals prices as an opportunity to demonstrate how our long-lived, low-cost assets can deliver strong cash flow which will provide a base for growing our existing assets, acquiring other assets, and other ways of getting shareholders value. We are still on a path of growth, from the Lucky Friday re-start and expansion to completion of Casa Shaft deepening and infrastructure improvements, to the work on San Sebastian, San Juan and Heva, and to acquiring new assets. So let's focus now on the quarter, so see Slide 3. When I look at this quarter, I'm struck by how well we performed despite the weak metal price environment. The acquisition of Casa Berardi is very important to us, and it's going to generate significant cash flow for many years, but as a result of the purchase we incurred several expenses related to the transaction that hit this quarter particularly hard. Specifically, $20 million in acquisition costs and $6.5 million in interest. I recognize that we're going to pay interest quarterly going forward, but I highlight it because we had one month of gold production, offsetting three months of interest cost. We expect these items not to impact us in the same way in the future. In addition, we incurred a $15.1 million provisional price adjustment which is reflecting the sharp decline in silver price on metal shipped in this, and the previous, quarter. We've taken steps to avoid these provisional price adjustments in the future. Absent these items, we actually had a very strong financial quarter, comparable to the second quarter of 2012, despite the weaker silver prices. So let's talk about the quality of our assets. We produced 64% more silver and 68% more gold than last year. This is due to the very strong performance at Greens Creek, the ramp-up of a renewed and reopened Lucky Friday silver mine, and our newly acquired Casa Berardi gold mine acquired June 1 in the Aurizon transaction. Greens Creek had an exceptional quarter, one of the best in its 25 year history, because it processed the second-highest quarterly tonnage, producing over 2 million ounces of silver. That's 48% more than a year ago and 11% more than the first quarter, and it was at an operating cash cost net of byproducts of just $2.71 per ounce of silver, which provides the basis for remarkable margins, an especially important factor in these markets. The Lucky Friday continues to ramp up production after reopening in February. This ramp-up is taken generally the length of time expected as they bring every element of the process into balance -- development, production, backfilling, milling and tailings. We are very much on track for normalized production of $3 million a year, and have a platform for increased production to $5 million a year after 2016 when the 4 shaft is done. Lastly, our new Casa Berardi gold mine, which we acquired in the Aurizon acquisition, contributed only a month's worth of production to the second quarter's 68% increase in Company-wide gold production over the same period last year. You can see how much of an impact on our gold production Casa will have in the third quarter, and particularly the fourth quarter, when we will see higher grades. Larry's going to talk more about all three of these properties in a few minutes. By the end of year we expect all three mines be running at normal production rates, so we have three excellent operating assets that are low-cost, have operated in very low-priced environments and give us a real advantage over producers that have higher cost operations, but we also understand that even with this strong and improving asset base we need to be disciplined and prudent in managing our cash position. At the end of the second quarter our cash and equivalence position was nearly $300 million. We believe we have more than adequate cash to handle the capital projects before us to continue our production growth profile. But with the dramatic reduction in precious metals prices, we've taken a hard look at curtailing expenses and capital programs. We made some significant reductions this year, but we've done it in a thoughtful way, recognizing that the majority of our programs can only be done in the summer and require significant upfront planning and logistics. We didn't want to lose that work so we are completing many projects. Today we are already starting our plans for 2014. Our guide for next year's combined expenditures on capital pre-development and exploration will be to have it fit within the adjusted EBITDA we generate. In other words, we should generate free cash flow in 2014. And we will still continue to advance growth projects like the 4 Shaft at the Lucky Friday. Before I turn the call over to Jim, let me add that the management team at Hecla has a couple hundred years of combined mining experience. We've been through down markets before, and we understand how to manage operations and projects during these periods to maximize value to shareholders. So that I will turn it over to Jim for the second-quarter financial review. -------------------------------------------------------------------------------- Jim Sabala, Hecla Mining Co - SVP, CFO [4] -------------------------------------------------------------------------------- Thank you, Phil. During the second quarter, total revenues were $85 million, which was 27% higher than the previous year's second quarter despite budget lower metals prices. The increase was primarily due to higher production. The revenue breakout by mine and by metal is shown on Slide 5, with approximately 66% attributable to precious metals. For the year, given current metal prices, and with the acquisition of Aurizon, we expect the precious metals component to increase, which will result in about 72% of our metal being attributed to silver and gold for all of 2013. I would point out from the onset that this was not a typical quarter in terms of our earnings, largely due to several large items during the period. As Phil mentioned, not only were there one-time costs related to the Aurizon acquisition of $20 million, but we also incurred three months of interest expense on the notes issued for the acquisition. However, we realized only one month's worth of production from the Casa Berardi mines since the acquisition was completed on June 1. In addition, there were $15.1 million of negative price adjustments on outstanding smelter settlements, which I will discuss in greater detail. Consolidated silver production was 2.2 million ounces of silver, with 2 million ounces coming from Greens Creek, which was 64% higher than the previous year's second quarter and 18% higher than the first quarter of this year. At Lucky Friday, where start up began in February, second-quarter silver production totaled 217,000 ounces, an 80% increase over the first quarter. All previously operating stopes are now production, and we believe we are still on track to produce approximately 1.3 million ounces of silver in the second half at Lucky Friday, and likely on the higher end of between 6 million and 7 million ounces from Greens Creek, for a total of between 8 million and 9 million ounces of silver production Company-wide during 2013. As you can see on Slide 6, realized silver and gold prices were down significantly, about 22 -- excuse me, about 40% and 22%, respectively, from the second quarter of last year, with zinc down 3% while lead prices increased about 7% from the earlier period. Clearly precious metals have been impacted the most this year, with realized silver prices declining more than twice as much as gold on a percentage basis. On Slide 7, we look at the impact of our realized prices more closely. Realize that the decline in base metals was mitigated by two programs. One was our hedges of our forecast long-term base metals production, and two, a shorter-term program locks in provisional pricing. The adjustments related to lead and zinc contained in our concentrate shipments were largely offset by net gains on forward contracts of $0.4 million dollars in the second quarter for those metals. Second quarter realized prices were lower than average metals prices for the quarter as the result of the previously mentioned negative adjustments to provisional settlements of $15.1 million, compared to negative price adjustments to provisional settlements of $1.5 million in the second quarter of 2012. We had a situation like this in 2008 as well, where prices declined rapidly for the time period between the shipment of concentrate and the final settlement, and we had to take a dramatic reduction in the realized price. In addition, this year about 40% of our second-quarter silver production was sold in June at lower prices than the average for the second quarter, which magnified the lower realized price. Our hedging policy for base metals has been very successful. It sets us apart from any other gold and silver companies, and locks in a significant portion of our cash flow. To avoid these provisional price adjustments pertaining to silver and gold, starting in the third quarter, we will now lock in or hedge the provisional price for all metals once the concentrate is shipped. Even with strong current silver prices, silver margins on a consolidated basis as shown on Slide 8 were still $10.70 per ounce of silver or 66% despite the realized silver price of $16.27 per ounce during the quarter. Over the past six years we've seen consistently strong cash margins ranging between 66% and 120%. Cash costs net of byproduct credits on a consolidated basis were $5.56 per ounce, down 21% from the first quarter, as production from the Lucky Friday continues to ramp up. And at Greens Creek, cash operating costs net of byproduct credits averaged a very low $2.71 per ounce of silver. We are anticipating operating cost to decline going forward this year. As Lucky Friday production ramps up, with average Company-wide silver cash costs net of byproduct credits, estimated to be in the $5 per ounce range for the full year, assuming prices at or near the status quo. Hecla's balance sheet also remains very strong, with $296 million in cash at June 30 as shown on Slide 9. This is our highest cash position in over five quarters, and gives us the strength to weather the current metals price environment. We also have available an undrawn $100 million credit facility. On Slide 10, showing a cash flow usage, you can see that during the quarter we generated adjusted EBITDA of $31.5 million. During the quarter we invested $10.7 million in pre-development and exploration spending, as well as $20.3 million on the Aurizon acquisition costs. I highlight this because several of these expenses are specific to Aurizon, and because the exploration and pre-development spending is expected to decline during the remainder of the year as we have trimmed some exploration and expect to conclude some pre-development projects such as completing the Bulldog decline at San Juan Silver. We generated a negative $0.7 million of operating cash flow during the quarter, mainly due to the items described earlier, in addition to lower metals prices. At current metals prices, with production increasing at Lucky Friday, and now coming from Casa Berardi, and operating costs improving, we would expect to see improvement in cash flows as well, especially if metals markets improve. The forecast for capital expenditures in 2013 has been revised downward by 13% to $178 million, excluding capitalized interest. Exploration has been revised downward by 28%, and pre-development by 35%. We are monitoring the metals prices closely, and will manage further expenditures as needed to help ensure positive operating cash flow in 2014. With that I'd like to turn the call over to Larry now for a review of operations during the quarter. -------------------------------------------------------------------------------- Larry Radford, Hecla Mining Co - VP of Operations [5] -------------------------------------------------------------------------------- Thanks, Jim. Starting with Slide 12, the Lucky Friday continues to move to normalized full production with all working areas operational. We had a slight delay during the quarter as we invested in new hoist controls that are state-of-the-art. It is a significantly improved system. July has gone as planned, averaging 760 tons per day. We should reach 900 tons per day by September. We expect the second half of the year to be much stronger than the first, with considerably higher production, about 1.3 million ounces, and lower costs, $9.50 per ounce by the fourth quarter as we reach the normal production rate. In the second quarter, a total of 217,096 ounces of silver was produced, 80% more than the first quarter, at cash costs of $32.19 per ounce. The elevated costs were due to expected start up costs. A total of 23,226 tons of ore were milled during the second quarter. Work continued in the second quarter on the number 4 Shaft project, which is expected to increase production levels beginning in 2017. Greens Creek, as shown on slide 13, had a great quarter. Silver production was 2 million ounces, or 48% higher than last year. The increase was due to primarily to higher tonnage, as Phil said, the second highest in the mine's history, and higher grades. The second half of the year should be more like the first quarter. Mining and milling costs per ton were up 6% and 17%, respectively, in the second quarter compared to last year. The increase in milling costs was due to the use of diesel power generation. We should have a few months of hydroelectric power, and then we should go back to diesel in the fourth quarter. Cash costs net of byproduct credits per ounce of silver increased to $2.71 per ounce, compared to $1.03 per ounce in the second quarter of last year, due primarily to lower byproduct credits as a result of lower byproduct production and lower gold and zinc prices. The production of gold, lead, and zinc were up 13%, 19.5% and 10% over the first quarter, respectively. I think Greens Creek is on track to produce between 6 million and 7 million ounces of silver in 2013. We only had one month of Hecla controlling the operations at Casa Berardi as shown on Slide 14. Production of gold totaled 6,740 ounces at an average cash cost net of byproduct credits of an estimated $1,152 per ounce, because of lower tons in grade due to mine sequencing in June. We will see more of that in the third quarter. It will not be until the fourth that we expect Casa to start getting back to more normalized production, both in terms of tons and grade. We are focused or not the only completing the shaft and phase plan, but in implementing a structured ground control program like we have done at Greens Creek and at Lucky Friday. We plan to initiate surface pit work at Casa Berardi, referred to as the East Mine crown pillar pit project, has been deferred until further engineering studies are completed. We further managed capital expenditures that Jim mentioned, though it is not expected to impact near-term production, and permitting activities are continuing. Casa Berardi is expected to produce approximately 60,000 ounces of gold in a second half of 2013, with about two-thirds of this in the fourth quarter, at a cash cost net of byproduct credits of $900 an ounce, with its expected long-term run rate of 125,000 to 150,000 ounces per year. I will turn the call over to Dean for exploration and pre-development during the second quarter. -------------------------------------------------------------------------------- Dean McDonald, Hecla Mining Co - VP of Exploration [6] -------------------------------------------------------------------------------- Thanks, Larry. As has been discussed on the call, there have been -- there's been a thorough review of discretionary spending at Hecla. These reductions have been conducted in a thoughtful and prudent manner, enabling high-priority exploration and pre-development projects to continue to show steady progress. As outlined in slide 16, exploration expenditures were $6.2 million in the second quarter. The forecast of approximately $29 million for exploration expenditures in 2013 for the consolidated Hecla, which includes Aurizon, has been revised downward to $22 million, a reduction of 28%. The pre-development budget has been revised downward for the consolidated Company by 35% for 2013 to approximately $16 million. These amounts will still allow us to continue to advance our projects. Exploration programs succeed in extending high-grade mineralization at Greens Creek, San Sebastian, Casa Berardi, and Heva and Hosco. In the press release we have provided information on these exploration results, with tables of drill intersections at the end of the release, and I invite you to take a look at them. Pre-development work includes optimization studies and ramp design on the Hugh Zone and Middle Vein at San Sebastian, and the advancement of the decline to the Bulldog Vein at the San Juan Silver project. We will have more to say on these two projects this fall as studies and designs are finalized, so stay tuned. I will pass the call back to Phil now for some closing comments. -------------------------------------------------------------------------------- Phil Baker, Hecla Mining Co - President and CEO [7] -------------------------------------------------------------------------------- Thanks, Dean. As we begin to see and the second quarter, and expect to see through the remainder of year, the acquisition of Aurizon creates a larger, more diversified precious metals producer with operating exploration development assets in mining-friendly jurisdictions. We've created a financially stronger gold and silver growth oriented Hecla, with high cash margins and strong free cash flow expected in the coming years. The second-quarter growth in silver and gold production is a good start, but we do not consider it a representative quarter from a financial standpoint due to all the one-time items. All of our high-quality assets and operations are long-life, and operate in low political jurisdictions, giving investors a more secure risk profile with a very strong, experienced management team that's delivering multiple revenue streams. You know, a theme that we consistently hear in the mining industry is the need to generate real returns that can be realized by shareholders, and we believe the Aurizon acquisition is exactly what the market is asking for. It is an acquisition of an operating asset which should fund its own capital requirements and be free cash flow generating in 2014, so it will be generating returns at that point. It is going to enhance our ability to grow and deliver future returns to shareholders, potentially including the form of dividends. We expect this year to have a much stronger second half in terms of gold and silver production, lower cash costs and further streamlined operations, and let me just stop for a moment and just compliment Scott Hartman and the team at Greens Creek for the great quarter they have -- they've had. I'm not sure they can streamline their operations any more than they have, they've done a great job this past quarter. We remain bullish on the fundamentals underlying the precious metals market, and we are going to closely monitor the markets in terms of our capital expenditures for 2014 in order to generate that free cash flow next year. One final note, we're going to be undertaking a series of marketing trips in the coming months to take the story of the new Hecla to investors and potential investors, and we look forward on our next call with you following the third quarter with our operating mines all running at normal production rates. With that, I will open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you, sir. (Operator Instructions) Your first question is going to come from the line of Jorge Beristain with Deutsche Bank. Please proceed. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [2] -------------------------------------------------------------------------------- Just on slide 14 on the Casa Berardi, you were talking about cash costs. Could you give us some color as to what the all-in sustaining cost would be in terms of sustaining CapEx, SG&A and RD that are associated with that mine? On a per-ounce basis, please? -------------------------------------------------------------------------------- Phil Baker, Hecla Mining Co - President and CEO [3] -------------------------------------------------------------------------------- Sure, I will turn that Jim. -------------------------------------------------------------------------------- Jim Sabala, Hecla Mining Co - SVP, CFO [4] -------------------------------------------------------------------------------- Good morning. With regard to the SG&A relative to mine, that's one of the changes we made when we took over Aurizon, is that all the SG&A that's associated with the Valdor office and the operations there are now included cash cost per ounce, which weren't before, and any SG&A other than that related Aurizon is nominal. In terms of ongoing CapEx, Jorge, we really haven't provided that yet. What we want to do is, we just bought the asset last month. We're going to be evaluating all of the capital programs there, in connection with our normal planning process, and we will provide an updated guidance on that at the end of the year or shortly thereafter. -------------------------------------------------------------------------------- Phil Baker, Hecla Mining Co - President and CEO [5] -------------------------------------------------------------------------------- But suffice it to say, Jorge, it's that we would expect it to be under the current price of gold today. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [6] -------------------------------------------------------------------------------- Could you give us maybe some color as to the ongoing R&D or exploration budget up there? |