Earnings Labs

Hecla Mining Company (HL)

Q2 2006 Earnings Call· Wed, Aug 2, 2006

$17.73

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2006 Hecla Mining earnings conference call. Operator instructions. At this time I will turn the call over to your host, Ms. Vicki Veltkamp, Vice President of Investor Relations. Please proceed.

Vicki Veltkamp

President

Thank you for joining us today, everyone. I'm Vicki Veltkamp, Vice President of Investor and Public Relations for Hecla Mining Company, and this is our Q2 2006 conference call. This call is also being webcast live today, so you can also access a replay of it, if you wish, at our website which is www.Hecla-mining.com. At the website you can find the financial results and today's news release; and at the end of that news release, is a quantitative reconciliation to GAAP of cash cost per ounce, which is an SEC requirement. Today's presentation will be made by Phil Baker, Hecla's President and CEO. He will have help from Lew Walde, our Chief Financial Officer, and Ron Clayton, our Vice President of North American Operations and Mike Callahan, who is our President of Venezuelan Operations. There will be a question and answer period following their presentations. I need to let you know that any forward-looking statements made today by our management comes under the Private Securities Litigation Reform Act and involves a number of risks that could cause actual results to differ from projections. In addition, in our filings with the SEC we are only allowed to disclose mineral deposits that we can economically or legally extract or produce. Investors are cautioned about our use of terms such as 'measured', 'indicated' and 'inferred resources' and are urged to consider those disclosures in our SEC filings available on our website. Now I’m happy to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Phil Baker

Chief Executive Officer

Thanks Vicki, I’m glad you got all those regulatory statements out of the way. Let me add my welcome to Vicki's on the conference call today. I think we’ve had a comprehensive news release and my colleagues, I’ve asked them to make some comments and they’re going to add, I think, some color to that news release, so I’m going to keep my comments short. I think the one thing I do want you to know is that this is a very exciting year for Hecla. The $96 million of revenue is over 85% of the total revenue we generated last year. We’re on track to have the most revenue in the history of the company. This revenue stream is coming from what we consider to be very high quality assets that in some cases, we made a decision to invest in back when prices were significantly lower. It’s that investment decision that we made then that we’re reaping the benefit of now with the higher prices that we’re seeing. I want to commend our employees at the Lucky Friday and Mina Isidora for the excellent effort they had in bringing these mines into production or expanding them, in the case of Lucky Friday. This is a time when you see massive overruns in our industry, you see projects taking significantly longer and our guys have done an excellent job at bringing these things online. Both mines in the second half of the year will be at full production, both are contributing even now to these record revenues and the great earnings and cash flow that we’ve seen. The Lucky Friday, along with Greens Creek, have a cost structure that’s significantly lower than the industry average. This low cost structure is not surprising given the quality of these assets. I…

Lew Walde

Chief Financial Officer

Thank you, Phil. Q2 proved to be an exceptional one for Hecla. We say major increases in sales, gross profit, net income, cash flow and our financial position. Let’s start with the sales. Sales increased $32 million or 125% as compared to Q2 2005. These increased sales are driven by improving gold production, the reduction of gold inventory held in Venezuela to meet a requirement to sell 15% of the production locally. And of course, one of the biggest benefits for us as well as for every other producer were the increases in metal prices of gold, silver, lead and zinc. On the production side, we saw our silver production decrease 175,000 ounces, or 12% QoverQ, but at the same time, we also saw the silver cash cost per ounce decrease to $1.98 per ounce compared to $2.59 in 2005. While on the gold side, production increased 8,000 ounces, or 24% as production from Mina Isidora was added, but we saw slight declines in production from the La Comorra mine. Overall, this is our fourth quarter in a row where we’ve seen increased production coming out of Venezuela. The solid performance of these operations combined with the increased revenue helped to push our gross profit up to $17.7 million, a 400% increase YoverY. We also sold our Noche Buena property in Mexico and recognized a gain of $4.4 million during Q2. All these factors led to net income of $9.1 million, or $0.08 per share, compared to a prior year loss of $6.4 million, or $0.05 per share. Also to note in the financials, is the adoption of FAS123R, the expensing of stock options which Hecla adopted in 2006. We recorded a charge of $1.2 million associated with the granting of stock options during this quarter. Turning to the six…

Ron Clayton

Management

Thank you, Lew, and good morning. The overall picture for our North American operations during Q2 was good. Silver production remains stable and cash costs went down despite a difficult quarter at Greens Creek. Fortunately, the performance of Lucky Friday helped to offset the short term production shortfall at Greens Creek. This highlights the significance of having two mature, producing mines in a politically stable setting like the United States. Greens Creek is a joint venture underground operation in Juno, Alaska. Hecla owns 30%. Kennecott, a subsidiary of Rio Tinto, is the operator, and the mine produces silver, zinc, gold and lead in concentrates. Production during the quarter was less than anticipated. The ore tonnage shortfalls were due to several issues underground, including mine labor shortages in the tight market, continued emphasis on mine infrastructure rehabilitation and less production than expected from long hole stopes, which was due to the timing of development and sequencing of stoping. Ore grades lagged below expectations as a result. The mining contractor has been on site since November of last year to accelerate development and open access to a number of ore headings to improve production. We expect the problems to be resolved over the next two quarters. Despite production shortfalls, Greens Creek continued to produce silver at a very low cash cost of a negative $2.28 per ounce. The tie into line power supplied by Alaska Electric Light and Power was completed in July and the operations will take 25-30% of our total power requirements for the remainder of the year, from the source. This will help further reduce production costs at Greens Creek. Drilling 1,000 feet up dip from currently producing stopes in 5250 zones has identified additional ore grade mineralization. Reinterpretation of the geology in this area earlier this year challenged…

Mike Callahan

Management

Thanks, Ron. In Venezuela we saw some very good performance from the operations in Q2. Production from Venezuela totaled 38,399 ounces, which is the highest quarterly production since Q3 2002. In addition to solid production, we generated over $20 million of operating cash flow from Venezuela this quarter, and that’s a record for the company since entering Venezuela in 1999. During the quarter, we were able to liquidate our inventory of gold designated for local sales and we established a market for these local sales going forward. The strong performance this quarter was in large part due to the impact of Mina Isidora ramping up to full production. The ore grades we saw at Isidora at over an ounce per ton really demonstrate the geologic potential of our Block B land package. While we have continually been excited about bringing this mine online, we expect Mina Isidora to be in full production during Q3 and to continue to be a solid performer for us for many quarters to come. On the exploration front, our program is providing some pretty exciting results. On Block B, we drilled our first hole in the area of the old Panama Mine, an intercept which is 0.4 meters of 363 grams per ton. We’re currently following up on this intercept with another hole that’s going to be placed about 100 meters below the first one and we’re also evaluation the structure both to the east and to the west. Over at La Comorra we have a couple of new discoveries. First, we’ve identified the southern vein system which consists of five structures that are parallel to the Betke(?) vein, and we’ve seen grades the size of 24 grams per ton in this system. The potentially even more interesting, we’ve identified on the surface what we’re…

Vicki Veltkamp

President

Operator, I think now is the time for you to give the instructions on the question and answer period.

Operator

Operator

Operator instructions. Well take our first question from Anthony Sorrentino, Sorrentino Metals.

Anthony Sorrentino, Sorrentino Metals

Analyst

Hello everyone. You had said that your exploration and pre-development budget has been increased by about $3 million to perhaps as high as $28 million. Where will you be spending the additional $3 million?

Phil Baker

Chief Executive Officer

Roughly $1 million of it gets spent in Venezuela and the remainder… I guess another million is in Hollister and then the final million is down in Mexico. Roughly that amount.

Anthony Sorrentino, Sorrentino Metals

Analyst

All right. It was mentioned on the call that you might at some point have a full feasibility study in Mexico. Do you have any idea when that would be?

Phil Baker

Chief Executive Officer

That’s probably, 18 months before we’d see that finished, Ron?

Ron Clayton

Management

Yes, we wouldn’t start it before some time next year, because the scooping study won’t be updated probably until the end of the year and then that program would take between 18 months and two years to complete.

Phil Baker

Chief Executive Officer

Realize, when we say a feasibility study, what we’re talking about is all of the work necessary to come up with the feasibility of developing this thing, which would involve going underground.

Ron Clayton

Management

We’d go underground and we’d put platforms in for tight space drilling.

Phil Baker

Chief Executive Officer

The issue we have for us in Mexico is where’s the best opportunity with the total land package that we have there. We have a lot of interesting targets, a lot of things that are happening there and we’re going to have to make a decision as to where to make – to spend our investment dollars. We haven’t come to a conclusion as to what we’ll do, but it’s exciting because there are at this point, two very interesting things and I think we’ll probably see a third before the end of the year. So it’s not a foregone conclusion which direction we’re going to go in. We’ve got a lot of good choices.

Anthony Sorrentino, Sorrentino Metals

Analyst

One other question concerning Lucky Friday. You’re working on the 5900 level now and you’ve done some exploration for the 6400 and 6900 levels. Do you feel fairly confident that the continuity of the ore continues down to those levels.

Ron Clayton

Management

Everything that we’re seeing in the drilling is similar to what we saw when we were making the leap from 4900 to 5900 so the answer is yes. I mean, we’re seeing the same kind of continuity examples that we would see that would encourage us that it’s there.

Phil Baker

Chief Executive Officer

That most recent hole, Ron, how much deeper is that than the 6900?

Ron Clayton

Management

It’s another 1000 feet. The character of the zone is the same. I don’t have any assays back on that one that went through at 7750. Actually, the way the hole goes though, it actually probably goes down as deep as 8000 across the zone and the mineralization and the character of that 150 foot wide ore zone is the same.

Anthony Sorrentino, Sorrentino Metals

Analyst

Okay, very good. Thank you very much.

Operator

Operator

We’ll take our next question from Mike Jalonen, Merrill Lynch.

Mike Jalonen, Merrill Lynch

Analyst

Hi, Phil. That’s very good news on the exploration side, that’s good to see. I just had a couple of questions on Greens Creek, I’m just wondering what kind of grades you’re getting from the drilling. What thicknesses are the grades? Are the thicknesses comparable to what was the case in the reserves? That’s my first question.

Ron Clayton

Management

In the West Gallagher, it’s similar, maybe slightly lower on the silver. In the 5250 it is very similar to what we’ve been mining there.

Mike Jalonen, Merrill Lynch

Analyst

Will there be a lot of development costs to get over these zones? I haven’t been to the mine and…

Ron Clayton

Management

The 5250 zone is right in the middle of all of the infrastructure.

Phil Baker

Chief Executive Officer

West Gallagher is actually higher up and better than the 200 south development.

Ron Clayton

Management

Right. It is a little bit wasted away, but nothing unusually significant. It would be normal, sustaining capital kind of developments.

Mike Jalonen, Merrill Lynch

Analyst

Okay. I guess when you say open-ended resource, how much does that add to mine life potentially, or are you not prepared to say at this point?

Ron Clayton

Management

It is going to be significant to us.

Phil Baker

Chief Executive Officer

Remember, we already have you know, mine life that goes well into the next decade and you know, like the Lucky Friday, both places seem to have the potential to maybe go into the decade beyond that. And beyond, and particularly at the Lucky Friday – you can clearly see that at the Lucky Friday mine. We’re telling – we have the sense that employees that are joining the company now at the Lucky Friday could work their whole career there. Ron is shaking his head yes.

Ron Clayton

Management

Potentially, that’s the case.

Mike Jalonen, Merrill Lynch

Analyst

I saw the mine last year, it’s very impressive. Just moving to Hollister, I see your partner put out some sort of a feasibility study on Hollister today. Did you guys see that?

Phil Baker

Chief Executive Officer

My understanding of what they have is not a feasibility study. I think they’ve described it as a preliminary assessment.

Mike Jalonen, Merrill Lynch

Analyst

So what do you think of it?

Phil Baker

Chief Executive Officer

Well you know, it’s something that they need to do. Based on their requirements to be listed on the Johannesburg Exchange. They asked us for information which we gave them with respect to the cost per ton. They used the information from their resource, I guess that goes back to 2002 and they came up with their numbers. We of course have not made the same sort of assessment, Mike, we’re in the midst of gathering information to put together this feasibility study. This is based on a resource – we don’t really try to put economics around a resource, we try to move things into a reserve category and then we’ll put the economics around it. So you know, I guess we don’t have much to say about it other than it’s something they need to do.

Mike Jalonen, Merrill Lynch

Analyst

Well the $55 per ton mining cost is your number?

Phil Baker

Chief Executive Officer

We would agree with that number.

Mike Jalonen, Merrill Lynch

Analyst

It seems kind of low for a narrow vein mine, unless it’s not narrow vein? For example there are other much higher costs.

Ron Clayton

Management

Mike, you know, that’s our early estimate and for the mining only part of the cost, at least with the information we have now we think that’s reasonable.

Operator

Operator

We have a follow up question from Mr. Jalonen.

Mike Jalonen, Merrill Lynch

Analyst

I’m back, Phil. Mike made an interesting comment about Venezuela, where parties have reviewed what the government is going to do with the mining act. Then he said you don’t know which way they’re going to go. I just wondered if you could elaborate more on that, Mike?

Mike Callahan

Management

Yes. Really all they’re doing at this point is, you know, they’ve proposed some amendments Mike, and they’ve gone out to the communities and to local government officials and to the industry and asked for comments. And essentially they’re taking into account those comments and based upon what they’ve seen, they’ve put out a release or a statement the other day saying that they’re going to extend the period to evaluate this, so I don’t really – you know, you can interpret that however you want.

Phil Baker

Chief Executive Officer

I interpret it positively, in the sense that they asked for comments, they received them and they’ve changed whatever it is they’re going to do. So they’re hearing something from industry, from the local miners, so view it positively. The outcome that’s going to happen there, we don’t know. But we still have a high degree of confidence that we’ll be able to manage our way through it. You know. But we can’t assure you that, but that’s our impression.

Mike Jalonen, Merrill Lynch

Analyst

I was just watching some of the developers trade today, who are in Venezuela, (inaudible), their share prices are flat or down. It’s not because of what you said, I guess there’s uncertainty down there.

Phil Baker

Chief Executive Officer

Well you know, we’re an operator down there and we’ve had this long – six years now – of adding jobs and taxes and everything else into the local community and we have a fair degree of support for that. You know, our situation is a bit different in that we’ve already made the investment and we’re continuing to employ people and move things forward. You know, some of the other people that are coming in, the tenure of their positions, maybe there’s more uncertainty with respect to those, I don’t know.

Mike Jalonen, Merrill Lynch

Analyst

Okay, thank you for that.

Operator

Operator

We’ll take our next question from Ms Heather Douglas of BMO Capital Markets.

Heather Douglas, BMO Capital Markets

Analyst · BMO Capital Markets

Hi everyone, good afternoon. I was hoping I could ask a couple of follow up questions about Hollister. What metallurgical work have you been doing because that was in the preliminary assessment that they put out, it also reported better recoveries than previously indicated. I was wondering, in terms of the toll treating, if you’ve already started discussions with plants in the area?

Phil Baker

Chief Executive Officer

Well, Ron can answer that, but yes we have started doing some work metallurgically. We’re still early days on metallurgical work.

Ron Clayton

Management

We’ve had discussions with – almost everybody in Northern Nevada are in the process of having that and most of the newer metallurgical work has been implant tests to see if the different operations that we would entertain an arrangement with can handle it and what kind of recoveries they can get. I have some difficulty responding to the first comment about ‘better’, because I don’t remember what was in the 43 101 that they have. But I guess the best way to say that is that we don’t anticipate recoveries being a difficult issue, as long as the toll miller can recover and/or will (pay per sole?).

Heather Douglas, BMO Capital Markets

Analyst · BMO Capital Markets

The new numbers are I think 95% gold and 90% silver I believe. Previously the silver recovery was only 55-60%, something like that. So that helps the economics of it.

Ron Clayton

Management

The silver recovery, depending on what plant you go to, could be everything from 90% to not getting paid for it at all. So that’s still preliminary.

Heather Douglas, BMO Capital Markets

Analyst · BMO Capital Markets

Okay. So it will depend on where you end up taking it?

Ron Clayton

Management

That’s correct.

Operator

Operator

We are showing no questions at this time. I’ll turn the call back over to the presenters for closing remarks.

Phil Baker

Chief Executive Officer

Thanks, everyone, for participating in the call. It is has been a very gratifying quarter for a year that we think is going to be a record year for Hecla and we think that the market has not really recognized the sort of earnings and cash flow generation power that Hecla has, nor has it recognized the exploration potential that we have. So we’re hoping that we’re starting to see that change with what we’ve been able to do this quarter. Thank you very much.

Vicki Veltkamp

President

If you have additional questions today, you can contact me, Vicki Veltkamp, at 208.769.4144, and that concludes the Hecla Mining Company’s Q2 2006 conference call. Have a good day.

Operator

Operator

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.