Hecla Mining Company (HL) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Hecla Mining Company Second 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, today’s conference call is being recorded. I would now like to turn the conference over to Mike Westerlund, Vice President of Investor Relations. The floor is yours.

Thank you, operator. Welcome everyone and thank you for joining us for Hecla’s second quarter 2015 financial and operations results conference call. Our financial results news release that was issued this morning before the market opened along with today’s presentation, are available on our 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 we make in our SEC filings. With that, I will pass the call to Phil Baker.

Thanks Mike, good morning everyone. I want to begin by talking about our San Sebastian Project. Last quarter I said the gating item on San Sebastian’s path to production was securing a third party mill. We have now secured wanting to completing a PEA that includes the economics of using it. We’ve also identified our key leaders for the project and are working on hiring the next layers of management. This property is well on its way to go into production in 2016. We expect to formally announce the production decision to provide the PEA later this quarter. Now, you may ask why we are so confident, we will be proceeding to production before we have completed the PEA, it’s because the material is near surface and very high grade, the indicated resource is 55,000 tons grading 81 ounces per ton silver equivalent, should be at low capital due to our leasing in the mill. And we’re confident that we will be mining there soon because we’ve mined there before. We know the metallurgy and we know how to operate and stay with Durango in with the local land owners. San Sebastian is being developed to minimize capital and maximize returns. By leasing the Velardeña mill, we expect to invest less than $10 million in capital and initial production costs in the project that we think could generate in excess of 6 million silver equivalent ounces in less than two years from shallow high-grade pits. There is deeper material there as well, and combined with our continued exploration success at surface could see the potential mine life increase. But in this environment, our focus is on profitable high return production. And in this low price environment, San Sebastian differentiates Hecla from other mining companies by providing the opportunity for high margin production growth and significant free cash flow. For perspective, we believe San Sebastian could deliver as much as a quarter of next year’s cash flow from our mines if it goes ahead. And also importantly the cash flow kicks in before the Lucky Friday’s expected production increase in 2018. Now let’s shift gear and look at the macro picture for a moment. As the price of silver and gold has fallen over the past 30 years, we have seen our peers in the precious metals industry cutting back on staff, largely eliminating exploration and development capital which are important investments in company’s long-term future even cutting back on sustaining capital. Basically, we have seen companies starting on a downward spiral. At Hecla, our asset quality allows us to do something different. Over the past year we’ve increased our exploration budget by about $2 million and our pre-development budget by the same amount as we advanced San Sebastian and Greens Creek in Casa Berardi. We have made these investments because we believe we can bring San Sebastian into production that we can materially extend Greens Creek’s mine life and value by drilling the down-dip extensions. In Casa we have discovered materials that can impact this year’s production in the 123 Zone that has been drilled with multiple 1-ounce intercepts. Dean will talk about this and other discoveries that we believe could set the mine up for its long-term success. Our asset quality has also allowed us to increase capital spending at Greens Creek where we are investing in an expanded tailings facility that we expect to use for the next 10 years and at Lucky Friday, where we’re excavating the 4 Shaft which could add decades to the mine life. We made these investments because we see them improving the quality of our mines, our credit quality and the overall strength of our company. We are doing it while maintaining our financial strength ending the second quarter with $192 million in cash and almost $300 million in liquidity and Jim will have more on this. We’ve maintained our operational strength as we focused on further improvements within our mines. The team at Greens Creek has made several changes to the plant increased recoveries about eight recovery points this year. We see the improvement at Greens Creek is permanent. The increase in recovery is particularly important when you consider its impact on the approximately 95 million ounces of reserves remaining in the mine, which even at today’s prices represents over $100 million in value. In the case of the Lucky Friday, the loss of an underground ventilation fan had only a minor impact on its estimated 2015 production because of the measures undertaken by the team there and to the leadership of Larry Radford. He’ll talk more about this in a minute. So, we’re managing our capital and exploration investments prudently and are now entering into our budget cycle where we have the opportunity to scale back our capital and exploration plans as we consider the impact of lower prices. For our expectations this year, as indicated on slide 4, we have already announced an increase in the estimated companywide silver production of 10.5 million to 11 million ounces at a cash cost after byproduct credit of $6 an ounce. Of which Greens Creek silver production should be between 7.7 million and 8 million ounces at a cash cost after byproduct credit of about $3.75. And Lucky Friday should be 2.8 million to 3 million ounces at about $10.75 an ounce. Casa’s estimated gold production is unchanged at 130,000 ounces of gold. The mine is being sheltered from weaker gold prices by the lower Canadian dollar. Our expectations for exploration in pre-development spending, has increased to $24 million largely an effort to build on the recent success the team at San Sebastian’s have had. Now, let me turn the call over to Jim for the second quarter financial review.

Thank you, Phil. The second quarter was an important one for Hecla in-spite of temporary challenges at the Lucky Friday we were able to maintain a production rate that allowed us to increase our estimate for overall 2015 silver production. We maintained our low cost profile, advanced San Sebastian at a point of likely providing a significant cash flow for Hecla in the very near term and continued our five-year path towards the goal of increasing Lucky Friday to 5 million ounces of silver production. On slide 6, we summarized the key financial metrics for the second quarter of 2015 compared to last year. On the top left you can see the benefit of having several producing mines. Our silver production held steady at approximately 2.5 million ounces with an increase in Greens Creek production due to higher grades of recovery mostly offsetting the decreased production at Lucky Friday due to the temporary ventilation issue. In addition, our gold production increased over 44,000 ounces in the second quarter due to improved performance at Casa Berardi. Revenue decreased 11% to $104 million. Adjusted EBITDA decreased 26% to $30 million and operating cash flow increased to $4 million. Operating cash flow increased for two reasons. One, changes in working capital and the impact of the advanced settlement of our financially settled base metals contracts. In the first case, the timing and the customer for our last shipment meant that we received an additional $7.3 million payment rather than showing at accounts receivable at quarter end. I will talk more about the advanced settlement of our hedging instruments in a moment. As shown on slide 7, silver operations continued to deliver a strong cash margin in the first quarter of 66% of sales or $10.71. Our cash cost after byproduct credit spreads of silver of $5.61 is up marginally from $5.34 over Q2 2014 mainly due to lower byproduct revenues and lower Lucky Friday production that remains at the low end of the spectrum for our industry. For the quarter, our realized silver price was down 17%, gold 8%, lead 6% and zinc was up 2%. Hecla continues to offer the investor a diversified revenue stream with 41% of our revenue from gold, 28% from silver, 20% from zinc and 11% from lead. We have realized gains on our in-the-money based metals hedges. And by doing so, we generated an additional $12 million in cash flow. This not a change in strategy, this is merely something we do from time to time to take advantage of a downturn in metal prices. This leaves us with 34 million pounds of zinc hedges remaining down from 101.9 million pounds of zinc at June 30, 2014 and no lead hedges remaining. We think the market for zinc particularly has upside promise as mine closures expected in 2015 and 2016 contract supply. And when the markets for these metals turned, we would expect to add more hedges once again. So, as you can see on slide 9, in spite of the challenging metal price environment, we finished the quarter on the back of strong operating results from all three of our long-lived mines leaving us with $192 million in cash and cash equivalents. Consequently if you include our unused revolver, we continue to have a total of almost $300 million in total liquidity available to the company. On slide 10, is a summary of our balance sheet. We remain comfortable with our level of debt, debt which is long-term, has no maintenance covenants and are low interest. The net debt to adjusted EBITDA is within our target of three times and the net debt to capitalization is just 17% of our capital structure, well within our target of 33%. Now, with that I’d like to turn the call over to Larry, for a review of operations. Larry?

Thanks Jim. On the operating side, you can see on slide 12, Greens Creek had another consistent quarter producing 1.9 million ounces at a cash cost after byproduct credits per silver ounce of $3.30. Decrease in cash cost from $3.52 in the second quarter of 2014 is mainly due to lower operating cost, partially offset by lower byproduct revenues. The mine continues to run on hydro power and the outlook is positive for the rest of this quarter although always dependent on the weather. The big change at Greens Creek is the increased recoveries up 8% or 5 percentage points to 75%. This was due to modifying the floatation circuit in late 2014 seems more efficiently scalp additional lead concentrate directly to the final concentrate. And by introducing carbon-di-oxide for PH control in the lead floatation circuit in April this year. While we’re doing a scalping concentrate grade product, prenup downstream grinding and floatation capacity. Introduction of CO2 into the floatation process manages PH fluctuations caused by cemented back-fill. In addition, we continue to pursue other improvements and I see runway for higher recovery numbers. Construction of the planned expansion of the Greens Creek tailings facility continues to progress. The total capital budget is expected to be $18 million in 2015. Lucky Friday experienced a 27% decrease in production over the first quarter, 25% over the prior year period as you can see on slide 13. This came about as a result of failure of an underground booster fan. We have taken several steps to minimize the impact for example, by extending the work week to 7 days from 6. The replacement fans should be installed early in Q4 and we do have a 15-day scheduled downtime in Q3 for the gold and bull gear replacement which has been scheduled for the past year. Volume is 613,000 ounces of silver as lead to cash cost after byproduct credit per silver ounce of $12.58. On the 4 Shaft on slide 14, we have now excavated to the 7,835 level. The product is budgeted at $225 million and we expect completion in Q4 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. On slide 15, you could see that Casa Berardi produced 30,939 ounces of gold in the second quarter at a cash cost after byproduct credit of $832 per gold ounce. The increase in production from the first quarter contributed to the lower cash cost. We expect stronger production particularly in the fourth quarter with a planned addition of higher grade stocks. I will now turn the call over to Dean, for exploration and predevelopment.

Thanks Larry. During the quarter we had active exploration drill programs underground and on surface at Greens Creek and Casa Berardi and the infill in exploration surface drilling at San Sebastian. At all three locations we continue to have strong results that should translate into high grade reserves and resources. A series of tables are provided at the end of the second quarter press release that shows impressive intersection at each of these sites. Slide 17, shows a planned view of veins at the San Sebastian project, outlined in the purple colored boxes is the location of recent infill drilling on near surface resources of the East Francine and middle veins. This drilling has confirmed the continuity of these high grade veins and upgraded the confidence in resources to measured and indicated categories. These high-grade near surface resources are all oxide or super gene enriched and cyanide soluble, providing good recoveries that are the foundation for the robust economics of proposed production. The yellow oval in the diagram shows the area where recent exploration drilling has been focused as East extensions to the East Francine, middle and north veins continue to be defined. And vein mineralization is open at Long Strike and at depth. Our active exploration program continues with the goal of further increasing the resource and extending the mine life. The longitudinal view of the East Francine vein in slide 18, shows very high NSR values per ton, where the recent infill drilling of the near surface mineralization has been completed to upgrade the resources, and where current drilling may connect the two high-grade zones into one larger open pit. Recent intersections as shown in the press release include some very rich intervals that grade up to 1.2 ounces per ton gold and 360 ounces per ton silver, in vein thicknesses up to 20 feet. This recent infill drilling has confirmed the East Francine to be wider and of comparable grade to the resource released earlier this year. The longitudinal view of the middle vein in slide 19, shows very high NSR values per ton at near surface mineralization where the recent infill drilling has been completed to upgrade the resources for open pit mining and a deeper high-grade resource that could be mined underground in the future. Both the zones consist of either super gene or oxide mineralization that, are cyanide soluble. Recent drilling has confirmed the previous high-grade resource and includes intersections up to 0.6 ounces per ton gold and 160 ounces per ton silver over widths up to 20 feet. A preliminary economic assessment is being completed with the AMC consultants due to design and schedule at combination of shallow open pits as shown in slide 20. As previously mentioned we have secured a local tow mill facility and additional tow milling options are being considered. The Velardeña mill has been idle for several years and requires some rehabilitation and updating to meet our standard for environmental protection and best practices in milling. And we expect this work to begin soon. Watch for the PEA before the end of the third quarter. At Casa Berardi, as shown by the longitudinal section on slide 21, we have up to seven drills operating underground in the west end of the mine, defined by the dashed red box. And we are encouraged by the progress upgrading resources in the 118, 123 and 124 zones and identifying new mineralization in the 100, 117, 123 and 124 zones. A detailed isometric view in slide 22 of the west mine shows the location of recent drilling successes near surface in the 124 zone and with some deeper drill holes in the 100 and 118 zones. Deeper exploration drilling on the 117 zone has defined two distinct parallel zones on either side of the Casa Berardi pulp that contain grades up to 0.64 ounces per ton gold over 17 feet and are open in all directions. However, the most impressive results are in the lower 124 zone, where there have been a series of intersections that have graded from 0.5 to 1.8 ounces per ton gold in width that range from 10 feet to 20 feet, as seen in the table in the diagram. A closer look at the lower 123 zone is provided in slide 23. The cross section on the left side of the diagram shows how the high-grade zones are stacked as multiple lenses. The drill intervals shown are in ounces per ton not grams and represent some of the highest grade consistently drilled at Casa Berardi for a long time. The longitudinal view of these same veins show that the stacked lenses have straight lengths up to 400 feet, but the long dimension is usually down dipped to depth for many hundreds of feet. Some of these lenses of the 123 zone are open at Long Strike and most are wide open at depth. Finally, at Greens Creek, we continue to drill high-grade intersections that should add resources along the Northwest West, 9A, West Wall and deep 200 south zones as shown in slide 24. Exploration drilling has added new high-grade mineralization at the lower Northwest West, upper Southwest and Gallagher Fault Block. In the next quarter, we expect to complete more exploration in definition drilling in these areas and the east ore zone, which should boost resources and reserves along the red arrow trends shown in the diagram and continue to extend mine life. With that, I’ll pass the call back to Phil for some closing comments.

Thanks Dean. I think what we’ll do is go ahead and go to the operator and open the line for questions.

[Operator Instructions]. And our first question will come from the line of Garrett Nelson with BB&T Capital Markets. Your line is now open. Please proceed with your question.

Hi Garrett.

Hi, good morning everyone. I just want to clarify on the 2015 CapEx guidance, has there been any change? It looks like the press release showed $150 million but the presentation showed $145 million.

We’re still projecting $150 million at this point. We are starting our budgeting process for 2016. And what we elect to do in 2016 will affect 2015 slightly. But stay with the $150 million.

Okay. And then, really good job on the cost side at Casa Berardi during the quarter, it looks like cash cost fell by $142 an ounce sequentially. How much of that, if you were to provide a cost bridge, how much of that would be due to the weaker Canadian dollar, was the main driver just higher production and therefore greater fixed cost absorption?

Well, the main driver is going to be the C-Dollar. Jim, do you have any color on?

Sure. What I can tell you is two things, is, at Casa Berardi they’re virtually all Canadian Dollar expenditures. So if you try to change as in whatever your assumption rate is, that will impact the pro rata. And of course the generated volume is a direct item. If we take a look at our cash cost, $832 and we adjusted for both volume and for the change in exchange rate from the quarter last year that would be comparative with last year of around $855. So, we had real benefit of about $23 an ounce from improved efficiency. But going forward, as always volume is king, but any change in exchange rate would be pro rata.

Okay, great. And then, I wanted to ask about the advanced settlement of the zinc and lead hedges. Did you say that provided a $12 million boost to cash flow during the quarter?

Yes.

Okay. That’s all I have. Thanks a lot.

Thanks Garrett.

Our next question comes from the line of John Bridges with JPMorgan. Your line is now open. Please proceed with your question.

Good morning, everybody.

Hi John.

Hi. Yes, the closeout to the hedges preemptively, is that something you’ve done before, I don’t recall you doing it before?

We have on occasion closed out, we closed out more than what we’ve done in the past but we have on occasion closed out hedges.

Okay, yes, interesting move. Congratulations on the discovery at Casa Berardi. Is that some new exploration methodology or was it something you were hoping for along the way or what’s the background?

It’s certainly something we’ve been hoping for along the way. I mean, we have the view that it’s - that this ground is very perspective, it has been under explored and it has not been explored in a systematic way. And so we’ve applied that. But this is, the 123 was a known zone. The 117 is what’s really new I guess. Dean, do you want to add anything?

Sure. John, the 124 zone, we’re following the trend. What we have seen and it’s been an evolution that the veins have become more focused, obviously higher grade with a lot more cohorts. But as Phil mentioned there have been a few other areas, the 117 in particular where we’ve defined our found in our information which is a great host rock for the mine to the North of the Casa Berardi fault. And so that’s something new, it’s something that we systematically have been picking a way at. And so, we’re starting to see good successes on the number of fronts that some are just a long trend and some, like this our information hosted gold are relatively new.

Do you track the ore information?

You can yes, max surveys obviously and what we look at is the actual meg destruction along those trends because that means the fluids have come through and reduced the magnetic signatures. So that’s certainly one of the techniques that we use.

Okay, cool. And then, I was a big confused by the Francine section, you’ve got a lot of underground mines working there. Is that stuff you did the last time you were mining there or?

Yes, that is a joint it’s on the other side of the San Ricardo Fault. So it’s just the angle that you’re seeing that image from. It is not in, it is not where those pits will be. So, the distance is a few 100 meters.

So, you’re really, really close?

Yes, yes. And in fairness we just misinterpreted the San Ricardo Fault and what it did with mineralization and how it’s folded over. And the drilling that we did missed it.

And John, maybe to put it in perspective, if you go to the plan view of San Sebastian you’ll see how the Francine vein which we mined is trending to the Southeast. When you cross the fault, the mineralization offset to the north and completely rotated. And so, that’s why the pit will be quite separate from any of the workings but there was also the reason there was difficulty finding the extension to the Francine vein 10 years ago.

Right. But given all that access and given you’ve now got a whole bunch of excess strike, then, have you sort of scoped out what an underground mine might look like in five, eight years’ time?

We certainly have done a lot of work on an underground mine. But we’ve put that on the backburner with the focus on this open pit for the next few years. And so, the exploration in fact, we’ve limited the depth of the drilling. And so, what you’ll see of the course of the next two or three years is, we’ll continue to focus on the surface but we will at some point shift the exploration focus to the underground and move in that direction. I mean, we, while we were only projecting a couple of years of operation here, there is certainly the likelihood that we’ll find more and be able to move to the underground.

Right, right. And finally, with respect to this new metal, you say you signed it for 18 months?

Well, with an extension beyond that.

The terms are, we’ve got six months to get it ready. We don’t think we’ll need anywhere near that amount of time. Then initially we have it tied up for 18 months of production and the possibility for an additional 6 months beyond that.

Okay, got it. Understood. Okay, well done guys, best of luck.

Okay, thanks John.

Our next question comes from the line of John [indiscernible] with BMO Capital. Your line is now open. Please proceed with your question.

Congratulations guys on the quarter. My question is in regards to the number 4 Shaft at Lucky Friday. I noticed that the previous quarter you were aiming for a Q3 ‘16 completion date. And now that’s been pushed back to Q4 ‘16. I was wondering what’s the reasoning out there?

Yes, the difference, the difference really is the fan, the interruption that we had operationally from the fan at the Lucky Friday. So, and there has been no real change to what we’re scoping to do, we just had to stand down while we had a limitation in the ventilation.

Okay. And will that impact any of the capital cost related to the shaft?

Yes, there is, it’s minor it’s the sort of holding cost while guys were stood down. So, we’re still at that 225 number.

Are you guys looking at anyway to possibly increase the development of the shaft to make up lost time?

We’re always looking at that. But it is a pretty small space that you’re working in. And you’ve really limited in your ability to move it any faster than what we’ve been doing. Our excavation rate is now currently what about 6 feet.

About 6 feet.

Yes, anything you want to add Larry.

No, the completion right now is early October, it’s not like we’ve really lost anything.

Okay. Thank you so much guys.

Sure.

Our next question comes from the line of Joseph Reagor with ROTH Capital Partners. Your line is now open. Please proceed with your question.

Hi Joe.

Hi guys, good morning. Couple of things. One, on the $8.7 million accrual, did that include I guess it was like $600,000 fine you got at Lucky Friday for some stuff from ‘09 to 2014. And on that note, has that issue with the tailings pond 3 been resolved going forward?

I’ll take the first part of it, and the answer is yes. The fines for the Lucky Friday water issues are included in our accruals.

Yes. And then we’ve largely put all that behind us. There are some studies that are going on but yes, no, as far as that tailings pond three and ultimately we’ll be shutting that pond down. We’ve been operating primarily in tailings pond 4 for depositing tails for how long now, Larry, yes, number of years that pond 3 has just been used to manage water. And we’ll be shutting that down over the course of the coming years.

Okay. And then, kind of looking at recovery rates across all the mines, it seems like you’ve seen some improvements over historical recovery rates with silver. But a little bit of a downward trend in some of the base metals and gold. Is that kind of a trend we expect to continue or is that kind of more one-time blips to the grade fluctuations?

Yes, I’ll let - Larry I’ll let you respond.

Yes, that’s kind of a mine by mine thing. Right now Lucky Friday is running the highest recoveries that we’ve ever had. We have to remember that recoveries are always highly labored to grades. So and in particular in Greens Creek and Lucky Friday their levered to silver and lead grades because most of the silver comes out and the lead concentrate. So, you’re going to see fluctuations but Lucky Friday, we’re running as high as we ever have. Greens Creek, we’re running very high as - higher than we ever have. Casa Berardi is a bit lower than you’ve seen historically due to some arsenal high rate and capsulation in the 118 zone. We’re managing that now through blending and proactive reagent addition. And going forward we’re applying extra raft technologies to better identify which ore actually has the in-capsulation.

And Jim, do you want to add?

I think the key is what we’re doing is we’re maximizing the revenue stream from the ore body because the metallurgical changes in effect pull more silver and gold and the payable product. And which is lead, and the price you pay is a little bit less in the base metals, but when you look at on a total revenue basis, it maximizes the value of the material and the value of the mine.

Okay, thanks.

So, we’re maximizing Joe the lead and that the cost of the zinc. So, if that’s what you’re referring to in the recovery zone, the zinc, that’s what that - that’s why.

Okay, thank you.

Sure Joe.

Thank you. [Operator Instructions].

Okay. Well, I don’t think there are any other questions for the line. If you do have a question please feel free to give Mike Westerlund or me a call. We would be happy to answer it. The bottom line is that we are continuing to push forward San Sebastian, Lucky Friday because of the potential that we see at those operations to generate high-value ounces that will enhance our cash flow. And I think that distinguishing Hecla in many respects from lots of other companies in this space. So, with that we’d be happy to take questions offline. Thanks very much.