Hecla Mining Company (HL) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Hecla Mining Company First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the conference over to your host for today Mr. Mike Westerlund, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator. Welcome everyone and thank you for joining us for Hecla’s first quarter 2015 financial and operations results conference call. The financial news release that was issued today before the market opened along with today’s presentation, are available on Hecla’s website. On today’s call, we have Phil Baker, Hecla’s President and CEO; Jim Sabala, Senior Vice President and Chief Financial Officer; Larry Radford, Hecla’s 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 and constitute forward-looking information under Canadian Securities law as shown on slide two. Such statements include projections and goals which involve risks detailed in our most recent Form 10-K, Form 10-Q and in the forward-looking disclaimer included in the 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.

Thanks Mike, hello everyone. We have seen relative outperformance of our shares this year, as you can see on slide three. As of a couple of days ago, we were up 13% compared to silver which are at 6% and selection of intermediate peers which are 1% and the selection of junior silver companies which are down 12%. So why this outperformance by Hecla? If you go to slide four, we believe the market’s recognition of four characteristics that Hecla has caused our stock to outperform. First, I cannot overstate how well Greens Creek has performed since we acquired it and turned into a Hecla mine. Our investment and de-risking of the mine has paid significant dividends and as it has been the production and cash flow engine for Hecla for most of seven years. The thing that has changed in the past year is the addition of The Lucky Friday and Casa Berardi. With the second quarter earnings release last year, there has been solid performance from the Lucky Friday and Casa is slowly becoming a Hecla mine. And if you look at the top left quadrant on slide four, you can see how our silver equivalent production has increased to 142% since 2012. Secondly, our mines continue to show cost performance with the combination of cost management and the benefit of polymetallic orebodies. This is demonstrated by the strong margins we earn on our silver production which was 68% in 2013 and increased to 74% in 2014 despite the lower realized price. The third reason I think our shares have outperformed is the success we have had in growing our reserves despite declining prices. As you can see on the bottom right quadrant, this year’s silver reserves were up 2% over last year to a 173 million ounces and up 239% over 2006. The 173 million ounces that we had is the most in our 125-year history and it’s the ninth year in a row that we’ve had record reserves. Few precious metals companies have been able to increase reserves in this market. And then finally, we continue to show discipline in managing the business. On the bottom left quadrant, you see our liquidity is essentially unchanged since 2012 despite significant drop in the metals’ price and significant capital programs. I think Hecla is pretty unique among precious metals companies to be advancing both sustaining growth capital programs and new exploration while maintaining our liquidity. So unlike many companies who have already reduced capital expenditures and have throttled their business back, we’ve been able to maintain our financial strength while we’re continuing to spend on our capital and exploration programs. Let’s go to slide five. Our significant growth potential is why we have no plans to throttle our business back. The advancement that we’ve made this quarter at San Sebastian and the potential acquisition of Revett now gives us a growth pipeline that should provide us growth over the short, medium and long-terms. At San Sebastian, given the small but extremely high grade material, some of which is as high as 1 ounce gold equivalent, we may be in a position to mine this orebody by the beginning of 2016. Because we have mined there before, we have all major permits in hand. So, the gating item is negotiating arrangements to run the San Sebastian material through third-party mill. And we are already in discussions and feel confident that we will work out a deal for one or more mills to process it for us. This could allow us to begin production and generate cash flow within a year. How much? Well, we can already see how we could produce at least 3 million silver equivalent ounces with less than $10 million in capital and by utilizing tax loss carry forwards, this property could generate more than $30 million in free cash flow. To put that in a context, that’s almost half of what Greens Creek did in 2014. These would be extraordinary returns in this price environment and provide cash flow to help us maintain our capital and exploration programs. This is really only the first part for San Sebastian. We’re continuing the PEA that we talked about before that is looking at how we turn this into a long-term mine. We expect its completion during the third quarter. Then beginning in 2017, mid-2017, we expect to see higher grade ore from the Lucky Friday as a result of the anticipated completion of the 4 Shaft Project which is about 80% done now. That could increase production by 60% of the Lucky Friday to 5 million ounces a year. What is particularly important about this growth is that it comes as a result of higher grades rather than additional tonnage which means that cash costs after byproduct credit per silver ounce should decline. And then in the longer term, we have the potential acquisition of Revett and its Rock Creek project which is expected to close later in the second quarter. This has the potential to add substantial silver production. Now, this is a long-term project that could take 10 to 15 years or longer to get to production and requires substantial permitting efforts. But we think we are up to the task given our excellent long-term operating record at Greens Creek which is in a national monument, the fact that Rock Creek is in our backyard as well as our financial technical expertise. So we have now have a potential growth pipeline over the short, medium and long-term. In the meantime, we are still working to make to Casa Berardi’s operations as steady and predictable as our other two mines. Larry will talk more about this but we have also viewed turning Hecla into a -- turning Casa rather into a Hecla style mine will take a few years. With its resource base and exploration potential, we think Casa will be a major cash flow generator in the future. We have already seen Casa improve in Q2 and are maintaining our guidance for the year. I will now pass the call over to Jim.

Thank you, Phil. Slide seven shows the driver of the financial metrics, production. Silver production increased by 16% over the first quarter of 2014 as a result of higher grades at both Greens Creek and Lucky Friday. Gold production was 41,000 ounces which is 12% lower than reported in Q1 2014 due to lower recoveries at Casa Berardi which is being addressed, as Larry will further discuss. The reduction in operating cash flow is mainly due to lower metal prices and normal working capital fluctuations, the largest of which is the shipment of zinc concentrate at Greens Creek that will be realized in the second quarter and is worth about $4 million. The decline in adjusted EBITDA is also principally due to lower metals prices. During 2015 three of the four metals we produced, experienced lower prices compared to the previous year’s quarter. The realized silver price was down 14%, gold 6% and lead 13% while zinc was up 4%. As you can see on slide eight, we have production from four products from three separate geographical areas. In the first quarter, 36% of our revenue came from gold, 37% from silver, 16% from zinc and 11% from lead. We are beginning to see improved price movement in both lead and zinc. Zinc has moved up to $1.08 range and lead to $0.94 from averages of $0.94 and $0.82 respectively in the first quarter. The improved prices of these byproducts is expected to help maintain our low cash cost per ounce for future periods. We have hedged a portion of our base metals production as you can see on slide nine, and have not entered into any recent positions given the lower price for both lead and zinc over the last couple of quarters. This is typical for us, as prices rise we hedge, as they fall back, we typically do not. Currently we have approximately $133 million hedged over the next three years which is about one-third of our forecast lead and zinc production that leaves two-thirds of our lead and zinc production open to benefit from the stronger prices I mentioned earlier. As you can see on slide 10, our silver business continues to report strong margins. Efficiencies at Greens Creek combined with solid production from Lucky Friday resulted in cash cost after byproduct credits per silver ounce produced of $4.93, resulting into 71% gross margin or just over $12 per ounce for the silver business. At Casa Berardi, we realized $1,222 per ounce for gold revenues and cash cost after byproduct credits of $974 per gold ounce, resulting in a $248 gross margin or 20%. There is no doubt about it that 2014 and 2015 have been a period of challenging precious metals prices. One of Hecla’s strength is its historic ability over the long-term to manage periods of both very good and very poor metal prices. This is due to the combination of consistent production and low cash cost after byproduct credits per ounce of our properties. As you can see on the cash bridge on slide 11, our predevelopment exploration and CapEx did not exceed $35 million of adjusted EBITDA. If metals prices soften further in the coming quarters, we would expect to reduce discretionary expenditures and modify our business plan as necessary to provide the appropriate level of liquidity. As shown on slide 12, we finished the quarter on the back of strong operating results with the contribution of three long lived mines and excellent liquidity. We have a $196 million in cash and cash equivalents. Consequently, if you include our unused revolver, we have a total of almost $300 million in total liquidity available to the company. And on slide 13, you can see a summary of our balance sheet. We are comfortable with our level of debt, debt which is long-term and has no maintenance covenants and a low interest rate. The net debt-to-adjusted EBITDA is within our target of 3 times and the net debt-to-capitalization of just 17% of our capital structure is well within our target of 33%. And with that, I would like to turn the call over to Larry now for a review of operations during the first quarter. Larry?

Thanks Jim. Greens Creek continues to be the cash flow engine of the company. You can see on slide 15 that the cash cost after byproduct credits of $3.23 per ounce continues to be quite low. It did increase from the prior year period in part due to lower byproduct revenues. Silver production was consistently strong from higher silver grades as a result of normal mine sequencing and higher silver and gold recoveries. Changes made to the flotation circuit in the fourth quarter of 2014 have resulted in higher silver recovery, the changes involve taking flotation concentrate in the first flotation sale directly to the final product, something that we call catch and release flotation, which frees up downstream grinding and flotation capacity. The mill operated 2,172 tons per day during the first quarter of 2015. The mine continues to run on hydro power and the outlook is positive for the remainder of the year, although always dependant on the weather. Construction of the plant expansion of the Greens Creek tailings facility has begun. The total capital budget is expected to be $18 million in 2015. On slide 16, you can see the steady production and cost performance that we have come to expect from Lucky Friday. The mine produced 837,000 ounces of silver at a cash cost after byproduct credits of $9.05 per ounce. On 4 Shaft on slide 17, we have excavated below the 7,500 level and are beyond the 7,650 level which is actually approaching 2 miles of total depth. The project is now budgeted at $225 million and we expect completion in Q3 of 2016 which is scheduled to be followed by lateral development at the 7,500 level. This should enable access to higher grade ore zones, potentially increasing silver production at Lucky Friday to around 5 million ounces per year as early as 2018. On slide 18, you can see Casa Berardi’s production and costs. Production was affected by several factors and we expect it to improve in the balance of the year. The main variance relative to the first quarter of 2014 was a metallurgical recovery. In the full year 2014, we’ve set a substantial amount of ore from the new 118 Zone and recognized that the pockets of ore contain high levels of arsenopyrite, making recovery difficult. At that time, we estimated the mill modifications to better treat this ore at 18 million. But as we treated more of this ore, we realized that these pockets were sporadic and so we decided to forego the added capital and instead started an initiative to better identify this type of ore. At the end of the quarter, several weeks of this ore field was encountered. We’re in the process of adopting X-ray fluorescence technology to better identify this ore. Better prediction should allow us to better blend ore and adjust reagent dosing. In April, we have already seen improvement in recovery. There were a couple of one-off items also during the quarter including a two-day power outage in the mine which resulted in lower tonnage than expected but we don’t expect these to be repeated in the second quarter. We continue to expect Casa to reach its target of 130,000 ounces of gold for the year at a cash cost after byproduct credits of $825 per gold ounce. I will turn the call over to Dean for exploration and predevelopment.

Thanks Larry. During the first quarter, we had active exploration drill programs underground at Greens Creek and Casa Berardi and on surface of Casa Berardi and San Sebastian. At all three locations, we continue to have strong results that should translate into new reserves and resources. And highlights are optimism for our operations and at the San Sebastian project as we advance towards production decision. A series of tables are provided at the end of the Q1 press release that show a succession of impressive intersection at each of these sites. Slide 20 shows the plan view of veins at the San Sebastian project and outlined within the orange colored ellipse, the area where recent exploration drilling has been focused. We continue to intersect high grade southeast extensions to the East Francine, middle and north veins that contain near surface mineralization that may be suitable for open pit mining. At the East Francine Vein, we have expanded the area of near surface supergene enrichment and potentially added new resources at depth that could be accessed from the underground workings of the past producing Francine Vein. Recent drilling of the middle vein has identified a new zone of high grade near surface mineralization to the southeast of the San Ricardo Fault that remains open. Deeper drilling of the north vein southeast of the fault has intersected strong continuous mineralization and current drilling is defining the vein towards surface. On slide 21, you can see from a 3D schematic that the veins tend to flatten near surface which is encouraging for an open pit mining scenario. Included in the 16.2 million ounces of indicated resources within 325 feet of surface that we reported in January of this year, are several pockets of very high grade supergene and oxide mineralization on the East Francine and middle veins that could enable us to bring this into production in the near term. Slide 22 shows a preliminary concept of how mine at San Sebastian could be laid out with the series of small pits initially targeting very high grade material. In-fill and combination drilling programs have been initiated and mine scheduling is in progress. Results from these programs and recent exploration success may modify these plans but I want to give you an idea of the size and relative location of proposed pits. These proposed pits are not large but nor do they need to be as the target material is very high grade. As Phil noted, all major mining permits are in hand and the gating item is securing a third-party mill to process the material. We are looking at several options now and securing one or more of these mills could advance the timelines to start mining. The objective remains to generate cash flow soon without requiring a large amount of capital. We are very excited with the advances we have made at San Sebastian and the prospects for this to become a mine in the next year or so. Definition and exploration drilling program during the quarter at Greens Creek are shown in plan views on slide 23. Definition drilling shown in the left diagram continues to refine resources in the lower Northwest West 9A and northwest west 9A and Deep 200 South zones. Drilling inspections include 27.9 ounces per ton silver, 0.2 ounces per ton gold, 5.2% zinc, and 2.3% lead over 22.9 feet in the Northwest West zone and 67.8 ounces per ton silver, 0.04 ounces per ton gold, 3.8% zinc and 2.2% lead over 11.7 feet in the Deep 200 South. Shown in the diagram on the right of the slide, exploration drilling on an upward trend of the 200 South intersected mass of Southwest, down dip of the Southwest bench mineralization, suggesting a large area to the west is prospected for extensions of known mineralization. At the Gallagher Fault, a zone of mineralization of more than 500 vertical feet has been defined. Finally with Casa Berardi shown by the longitudinal section on slide 24, we have up to seven drills operating underground and we are encouraged by the progress and upgrading resources in the 118, 123 and 124 zones and identifying new mineralization in the 117, 124 and Southwest zones. A particular note on slide 25 is that the exploration drilling has recently discovered extensions to the 124 zone to the east near surface and the 117 and 100 zones at depth. Drill intersections of the 114 and 100 zones are 0.4 ounces per ton gold over 14.8 feet and 0.28 ounces per ton gold over 21.4 feet respectively. Discoveries like these give us optimism that we will be able to extend Casa Berardi’s life mine in the coming years. And with that I will pass back to Phil for some closing comments.

Thanks Dean. And we are in a strong position in our industry. Our high quality assets give us flexibility to continue to invest in our mines, making them more consistent, safer and longer lived. We currently have the financial strength to potentially make acquisitions and investments as we see opportunities. And we now have the strongest growth pipeline we’ve had in years. We expect near term silver growth from San Sebastian, growth in the mid-term from Lucky Friday and potential growth in the long-term upon closing the Revett acquisition. This quarter’s strong performance was in a weak metals price environment and it’s not going always be that way but in the mean time we’re going to focus our energy on making our good assets even better and advancing our growth initiatives. So with that, operator, we would like to have the line opened for questions.

My question is just your comments about how quickly you could get San Sebastian to become an operating mine, permits are in hand, you’re approaching, it seems like a rational low CapEx kind of approach. Could you talk about when the CapEx decision would be made there; what is the bottleneck, it sounds like you need to get the third-party milling contracts done; and what kind of order of magnitude CapEx we could expect and what kind of expected production we could see by year-end, next year and then on an annualized basis? Thanks.

I guess what I will start with is that the gating item for us is the mill, getting access to a mill that will allow us to process material. And we’re in -- we’ve identified a number of mills that could work and we’re in discussions with those parties. And how long that will take is unclear, but I assume it would be a number of months and we would have that resolved. Once we do that, then there is a bit of capital that we need to spend and the capital would certainly be less than $10 million. And then we’re off to the races. This is near surface material; it’s -- we’ll use a contract miner; we’ve identified some contractors to be able to mine the material and so we will start that. In terms of the amount of production, it’s going to be a short lived project, something order of magnitude a year to two years. It’s really filling the gap for 2016, 2017 as the Lucky Friday goes to this higher level of production in the second half of ‘17, ‘18. So, that’s the objective that we have. I will stop there and see Jim if you have something you want to add or Larry?

The only thing I would add Phil, is when we talk about a couple of years, that’s mining this high grade area that is right after surface. And of course Hecla has done business in this district in the past. We know that the orebodies continue and vein type systems at depth. And so a key part of the program will be continuing to explore the extent of those veins to come up with a longer term mine plan. But right now, our focus as Phil has indicated, would be on those high grade near surface areas for the first couple of years.

Okay.

Larry, anything to add? Let’s just see if these guys have anything they want to add, Larry?

Yes, it’s important to highlight that we’re actually doing the mine planning now. Actually we have AMC in Vancouver is doing mine planning as part of the PEA exercise. And what Phil is referring to is the open part of the mine planning. But there is clearly an underground element as well and we’re in that process. We got to finish the work.

The only other thing to add Jorge is that we have four drills operating there now. Two of them are in an in-fill but the other two we continue to find near surface oxide mineralization along strike. Our drilling in advance of that drilling shows that these veins continue for significant distances. So, over that two to three-year period, I would anticipate we’re going to keep finding more mineralization, both at surface and at depth.

Okay, but just to try to get an order of magnitude, you’re talking around 1 million to 2 million ounces of silver per year over sort of two years, and what kind of payback are you kind of talking?

Probably closer to 3 million ounces, may be more, but certainly 3 I think is a conservative estimate over a couple of years, per year. Jim, anything?

Yes, that 3 million would be equivalent because there is a substantial gold credit here.

Yeah.

And the payback there or could you give us any color on what kind of unit?

Look, I would think that we're talking in excess of $30 million of free cash flow. We have 70 million of NOLs in Mexico that we will be utilizing, so there is going to be minimal tax loss here. So it's, it looks very, very attractive.

Great, thank you.

Thank you. Our next question comes from the line of John Bridges of JP Morgan. Your line is open, please go ahead.

Just wondered the metallurgy at Casa Berardi, how big do you think that's going to be? Revett produced a separate concentration and adulterated that, when they had the preferred refractory. What sort of, what are the options there?

Go ahead Larry.

Yeah the change that we contemplated was that of flotation circuit, it's not a whole ore flotation, just a take off circuit, and that flotation concentrate would be reground and put to an intense of leach. We believe now that this is such a small part of the sedimentary part of the ore body that it's not worth 20 million that we estimated to put this in. We don’t believe that a large part of the ore body and our challenge now is really to identify exactly how much it is and to better handle it.

Okay, okay, great. And then moving on the, how do you see that developing, the permitting process though probably be quite extended, so what sort of hoops have to jump through and do you see any sort of potential issues?

I guess the first thing I would say John is that the Revett team I think has done a very good job of advancing the permitting and in dealing with the community that built great relationships with the folks in the community and there is actually a significant amount of support for the project in the local community, and we will just be continuing the process that they have begun. They actually got their decision to be able to take this forward in 2009 and then it was subject to lawsuits. And so there has been revision that they have made as a result of the lawsuits and that should be the final supplemental IS should be coming out some time within the next year or so. We're anticipating that there will be additional permitting that we'll need to do and additional work and we are prepared to do those things. We think with the experience that we have in Juneau at Admiralty Island with the bear population there it's analogous to what that needs to be done at Rock Creek. And so we think we will be able to show the ability to properly manage things and be able to build even more support than Revett has had. Having said that we think it's going to be a long process. So we are not envisioning this being a producing asset for the better part of 10 to 15 years. But we do think we will make steady progress on it.

Okay, looks very interesting. Congratulations on results and best of luck.

Hey, thanks John.

Thank you. And that does conclude the question-and-answer period. I would like to turn the conference back over to Mr. Phil Baker for any closing remarks.

Thanks very much for participating in the call. If you have any questions, please feel free to give Mike Westerlund a call or me a call. Thanks very much. Have a good day.