Hecla Mining Company (HL) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Hecla Mining Company Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Westerlund. Please go ahead.

Thank you, operator. This is Mike Westerlund, Hecla’s Vice President of Investor Relations. Good morning and welcome everyone, and thank you for joining us for Hecla's second quarter 2020 financial and operations results conference call. Our financial results news release that was issued this morning before market open, along with today's presentation are available on our website. On today's call, we have Phil Baker, President and CEO; Lindsay Hall, Senior Vice President and Chief Financial Officer; Lauren Roberts, Senior Vice President and Chief Operating Officer; Kurt Allen, Director of Exploration; and Keith Blair, Chief Geologist. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks shown on Slides 2 and 3 in our earnings release and in our 10-Q and 10-K filings with the SEC. These risks could cause results to differ from those projected in the forward-looking statements. Reconciliations of non-GAAP measures cited in this call and related slides and cautionary language for our use of the term resource, instead of reserves are also found in these documents. With that, I will pass the call to Phil Baker.

Thanks Mike. Good morning, everyone. And thanks for joining the call. I’m going to speak to Slide 4. It's become clear that we've been – we will be operating in a new normal, which is in reaction to this pandemic, and we're prepared for it. We have plans and practices that help protect the workers, the communities, and our operations. As you see from the second quarter results, we've been able to adjust quickly. And my thanks go out to all of my colleagues at the mines and in our offices who have made the quarter what it is. So despite COVID-19, we're producing more silver at higher prices than we did last year or in the first quarter of this year, enabling us to generate 24% higher revenues, $27 million of free cash flow and combined with, being declared an essential business, we were able to repay $160 million of our revolver. Now I'm going to let Lindsay and Lauren focus on the quarter and I'm just going to really focus on two things: first, on the silver price, and second, on the uniqueness of Hecla as an investment. So first on prices, gold and especially silver prices are markedly higher. And we think the higher prices are inevitable given the backdrop of the continued monetary stimulus from negative real rates, the trillions of dollars of physical stimulus, the weakness of the U.S. dollar and growing political uncertainty. And so we haven't seen the gold prices at these levels. But we have seen silver and I think that's important to remember. What is clear is that when the gold prices go up significantly, silver goes up even more. And we saw this number of times in 1979-1980, 2005 to 2008, 2009 to 2011 and then again 2015-2016. And of course, we're starting to see it again in 2020. And generally, the bigger the moves are in the gold price, gold/silver ratio declines by at least half. And the ratio had a high of 124 so seeing the gold/silver ratio of 16 would be consistent with past experience, suggesting that silver price approaching $35 with the gold price where it is, is reasonable. And remember $35 is the price that we saw in 2010, 2011, 2012 when the price of gold was $1,500 to $1,800. If the gold price goes higher, expect the silver price to move even more relative to gold. So while the silver price has gone parabolic, this reaction is not unreasonable as it tries to catch up the gold like it hasn't in the past. There's lots of reasons to expect silver to have gone up and to go up even more relative to gold. On to the second thing I want to cover. And I think that everyone will agree that most governments are not going to go back to pre-pandemic normal. Their policies are going to change as a result of the pandemic. They're going to seek additional revenues, which will be a negative. Labor relations are going to be more regulated, which is a negative and the supply chain in the U.S. will likely be shortened, which for us will be a positive. So we're company mines will never be more important than, so in making these comments about Hecla. What I'm trying to emphasize is the forward-looking that we're doing, we're not just thinking about the coming few quarters. We're thinking about the course of the next few years, when we think we're going to continue to see the strong silver price. And I think it's not recognized that Hecla produces about a third of all the silver mine in the U.S. There are only five companies that are relevant silver producers in the U.S. and no one buys two of them for their silver production, they're big diversified miners. The remaining, while we produce almost three times as much silver from our U.S. mines as the next largest primary silver producer does. And when the Lucky Friday reaches full capacity, we should produce more than 40% of all U.S. production. It's also not well known that the United States is the 10th largest producer of silver in the world, producing about 4% of the world's total. The U.S. is one of seven countries that produce roughly this 4% to 5%. And it's such a small percentage because more than 50% of all silver production comes from three countries, Mexico, Peru, and China. And Mexico dominates with 40% more silver mine than Peru, and two-thirds more than China but – all but one of our 10 primary silver peers operate in either Mexico and/or Peru. And so Hecla is a unique investment because of its scarcity. It's scarce because not very much of the world's silver is mined in the U.S., only 4% scarce because if an investor once exposed to the U.S. mine silver, there's really only one relevant option. The option is not tenuous, we have a third of the U.S. production it's growing. The mine lives that we have are low costs that are competitive, even – and in fact, they're among the best, even when the U.S. dollar is strong. So should the dollar continue to weaken as we've recently seen, the relative cost structure will improve. The capital for our mines have largely been invested over the course of the last 30 to 75 years, they've been in operation so future capital requirements are modest. There's scarcity of an investment – the Hecla is a scarce investment because we have by far the largest silver reserve and resource in the U.S., some of which are new projects that will allow us to grow our silver production in the future. And finally, with the company's long-life 130 years old next year, we’re scarce because we have tax losses that assure our cash flow from – in the future is not going to be diverted into government coffers. The combination of all this, makes Hecla a unique opportunity for silver investors. Over the years, I've talked about the brand value of Hecla as an investment vehicle. I think I may have mentioned to many of you have running into people who say the silver price runs of 2009 or 1979 that they invested in Hecla. I would say that was the brand value, but I realized that, that was not the whole story, it was really about the fact that the position that Hecla has as the dominant producer of silver in the U.S. And so with those two things, I'll pass the call onto to Lindsay and Lauren for them to talk about the quarter.

Thanks, Phil, and good morning, everyone. I'll start on Slide 6. As Phil noted, we have a strong second quarter ending with some $76 million in cash and $50 million drawn on the revolving line of credit. As you recall at the outset of the pandemic, we do drew down on our revolving line of credit to ensure we have adequate liquidity until we could determine how that pandemic was going to affect the operations at our mine sites. Without risk now being essentially managed, we plan to repay the balance of the revolver before the end of the year. In July, Investissement Quebec again invested in us by subscribing for a private placement of C$50 million Canadian notes. They have been a great partner and we value our relationship with them. One of the uses of the funds might be to make open market purchases of our eight year bonds, when it makes sense, as Investissement Quebec funds come at a lower interest rate than the bonds. With an improving net debt-to-EBITDA ratio of 2 times, and the bonds and the IQ notes – repayment terms well into the future, we are very comfortable with our balance sheet. As a leading silver producer in U.S. with a diverse asset and commodity mix, we've also been able to benefit from the substantial strong gold and increasingly strong silver prices with the gold making up 48% and silver 33% of our total revenues this quarter. This along with the ability to produce silver and gold, the cash costs, which were substantially lower than the realized metal prices, positions the company to capture the significant margin available to us, particularly in the rising commodity environment we find ourselves in today. Turning to Slide 7. We see the free cash flow generation for the quarter is $26.7 million, I've highlighted Lucky Friday only to emphasize that these are quarterly costs in excess of revenues that as the mind reaches full production by year end should be eliminated. Lastly, we provided information on our active hedging programs in the press release in the queue today. Traditionally, we have hedged future production of our base metals and that program has been beneficial for us in the past, and we'll continue to do so in the future. Beginning in June of 2019, we’ve started purchasing put contracts for a portion of our future gold and silver production, when prices were much lower than they are today. The puts are purchased to provide a floor price for those gold and silver ounces. But importantly, they allow us to capture all the upside of the actual gold and silver prices above the floor price, which goes without saying is very positive in this environment. The outlays to buy the puts on a quarterly basis, amounts to approximately $4 million to $5 million, these amounts are included in the loss gain on derivative contracts line in the income statement. So I'm very happy with the financial progress we made this quarter. And now, I'll turn it over to Lauren to talk about the operations. With that, over to you, Lauren?

Thank you, Lindsay. First and most gratifying is that our safety record continues to be exemplary, despite the distractions caused by the pandemic as you can see on Slide 9. We currently have an all injury frequency rate of 1.19, which is a 74% decline over the past six years and 26% over last year. At Greens Creek on Slide 10, we have gone 470 days without a reportable injury, which is a record for the mine in its 30 years of operation. Early in our response to the COVID-19 threat, we started a 14 day quarantine for everyone going onto Admiralty Island in hotels we rent for this purpose. Access to reliable rapid testing allowed us to shorten the quarantine period to one week, during which two tests are administered. Residents at June are allowed to quarantine at home, these changes reduce the stress on our employees and their families while maintaining a high level of protection. The situation is dynamic and we will modify our procedures and response to changes as required. Production grades continue to be strong and operations are good. The process team has done a remarkable job, are gaining most of the loss throughput from the SAG motor failure in the first quarter. Mine operations and technical services are pulling together to adjust the plan as circumstances change and the results show it. I could not be more pleased with however, when it's come together in the face of the pandemic and I want to congratulate everyone on their job well done. At Casa, the mine returned to normal operations quicker than many expected, leading to strong production and cash flow generation this quarter. Unlike Greens Creek, Casa is not a camp job, although there are unique complications from COVID-19 in a camp setting, the day-to-day grind of managing it with a resident workforce drawn from many communities must not be underestimated. I visited Casa after the government mandated shutdown, and I can tell you that the way they are managing the COVID-19 thread is remarkable, my hat is off to the Casa team. With the mine back in production, I'm pleased to note that our improvement efforts, including in the mill are proceeding well on many fronts. This is not a short-term exercise, but instead it is an opportunity to make meaningful improvements that will benefit the operation for years to come. These improvement can be especially beneficial during times of high metal prices like we’re seeing now. Stay tuned, we'll have a lot more to say on this in coming quarters. The Lucky Friday ramp up continues slightly later than planned and we are on Slide 12 now. We have about 96% of the expected workforce in place, and through June, we’re a little ahead on tons. It's easy to overlook that this has been accomplished after a three year long strike, it's remarkable. And I can tell you from my business to the mine, the changes are real and meaningful. The number two shaft hoist upgrade was completed on budget during the quarter, this was a very complicated project, relying on multiple contractors from two countries and it was executed on plan during the pandemic, well done to the project team. With this work behind us, we remain on plan to achieve our full production rate by the end of the year. The RVM project is proceeding slowly due to travel restrictions and reduced work week in Sweden brought about by COVID-19. Acceptance testing in Sweden will continue until the machine meets our requirements. In the meantime, we are pursuing additional initiatives to increase productivity at the mine, and I expect we will have more to say on this topic in the coming quarters. We've made solid progress in Nevada, as we work to find ways to improve it. As you can see on Slide 13, we have collected 16,000 of the targeted 30,000 tons for the Type 2 ore bulk test sample with third-party, recall that this test is expected to be self-funding. So far, ground conditions, water inflow, productivity and unit costs are all better than plan the ore appears to be more structurally controlled and less disseminated than modeled, which is good from a mining point of view and the grades are in line with what was expected. Initial metallurgical composites conformed to our contract with the third-party and we look forward to seeing how the material performance in their plants, so far, so good. We plan to idle the Midas mill for the balance of 2020, any Type 1 ore we produce can be processed by our third-party agreement. We'll keep the mill on hot standby, should circumstances change. At San Sebastian, the mining is expected to stop in the third quarter and milling in the fourth quarter. We continued to study potential opportunities to return to production, but regardless of the outcome expect there to be a GAAP in production there. The low capital investment strategy we use at San Sebastian has given us significant operational flexibility, since we acquired it in 1999. We have generated substantial cash flows here, and I expect that Kurt Allen and his exploration team will find additional minable veins in the future. It's a great land package in the right postal code and we have the right team looking for more. In closing, I would like to say that I'm very proud of the teams that all of our operations. Our people once again have demonstrated how they are true professionals, managing the risks of the pandemic and ensuring we protect one another and our communities. I'll now return the call over to Phil Baker.

Thanks, Lauren. Before we go to questions, I just want to acknowledge that this is Mike's last conference call with Hecla. He's leaving after almost eight years of running Investor Relations, Mike is our friend and we wish him well in what he's doing and sure he'll have the news on that in the near future. With that operator, you can open the line for questions.

[Operator Instructions] Your first question today comes from the line of Heiko Ihle with H.C. Wainwright. Please proceed with your question.

Hey guys. It’s Heiko from Wainwright. How is everybody doing?

Good.

Hey. Thanks for taking my questions, and more of an common, I think it's pretty cool and pretty unique, how you have a COVID emergency response plan right on your website, right on the whole page of your website there, well done. On your derivative contracts and using current spot pricing, what do you think the current impact is going to be for the remainder of the year? And if you would be so kind, just break it out by quarter?

Well, I don't know, if we can do that off the top of our head, Heiko, but certainly with respect to the puts, there's no impact there. So it's really – you're really talking about the – with respect to lead and zinc.

I'll try the question differently. If I use the $14 million that you had this quarter, and I just trend line that, how far off am I going to be?

Well. Lindsay, do you have a way of answering that question, because…

Yes. Heiko, as a $14 million out of say, half of that is reversal on the puts from the first quarter, because as you know with the puts, if the actual price is below the strike price of the put, it's in the money, obviously with the prices rising that goes away so we have to reverse that $6 million that we recorded on the puts in the first quarter, because they're in the money, now they’re out of the money. So that out of the $14 million, half of it goes away because that's just the reversal of the put, as you know, as prices dropped, nothing happens for the value of put. The other amount we say in that $14 million basically, Heiko is, there's $4 million or $5 million a quarter of buying the puts. So we bought a few more puts maybe after June 30th, but that $14 million essentially goes away and it'll come back into blind if we buy more silver and gold puts, but at these prices, we're watching the market carefully, so that we can't trend line that. And then on the base metal hedging, which we do, that's really built into the sales line already. So there's really nothing going on there in terms of a mark-to-market on any of our derivative programs, getting away with us. And we show you the queue, the small liability – immaterial liability that sets up – set up on the balance sheet on the mark-to-market on those financially forward base metal contracts that haven't settled yet, but the offset is in the sales line anyways. So you can't trend line $14 million, obviously.

That's helpful. And then just a clarification, the Remote Vein Miner that – Vein Miner that you have for Lucky Friday, that's stuck in Sweden. You talked about – in the release, you just talked about it on this call without the – you can't really oversee it, all I could stuff. Assuming you don't receive it as you have planned and it's not operational by call it January 1st or whatever day you actually need it by. Would it impact your fiscal 2021 outlook? Or could you simply use the old equipment, the pre-strike equipment to get towards the prior production rates?

Yes. So the RVM remember is a test where our plans have always been to mine the way we have mined with modifications that we think could improve it, same equipment, same people. The RVM would be able to increase throughput. And so we'll continue to advance the RVM in Sweden, and then when it's ready to go, we'll bring it over and then we'll test it at the Lucky Friday, but it's not fundamental to production in 2021 or anytime in the future, it's never been in our plans. So the delay is not holding us up at all, it's upside. Lauren…

Got it. That’s what I was looking for.

Good morning, Heiko, for you, it’s Lauren. Yes. I think exactly what Phil said our 2021 plan and long-term plans don't rely on the RVM. It should be viewed strictly as upside optionality on productivity and also on safety as the machine is remote, but we're not dependent upon it. To your question about how we're monitoring it. We have weekly calls, we get video updates. So we're staying engaged as you'll appreciate, it's not quite the same as being on the ground, but we are engaged and progress is being made.

Very helpful. Thank you all. Stay safe.

Thanks, Heiko.

Your next question comes from the line of Matthew Fields with Bank of America, New York. Please proceed with your question.

Hey everyone. Congratulations, Mike. Good luck in your next – in your future endeavors. I’m just wondering why – your bonds are trading at a pretty significant premium to par. Why would you pay a premium to retire eight year debt with five year debt at a reasonably similar rate? I just – help me…

So let me just interrupt you, Matt. We'll buy bonds back when it's appropriate and buying it at such a high premium is not appropriate. So we won’t do that until the conditions are right.

And I know the use of proceeds in the indenture for the new Quebec that is for Casa Berardi investment and general corporate purposes. But I didn't see a limitation on how much it can be either or is there no limitation on how much can be CapEx and how much can be other?

We do make a commitment to an amount of capital at Casa to spend a certain amount of capital at Casa, which is consistent with our plans. So we're not doing anything that we had not planned to do. Lindsay, anything to add?

Yes. No, Matt, there's no restrictions on the C$50 million.

Okay. And it looks like your RP basket under that indenture makes you can do kind of whatever you want with those proceeds too?

Yes. Correct.

Okay. All right, thanks very much. And good luck. And thanks again, Mike, for all your years here.

Your next question comes from the line of Trevor Turnbull with Scotiabank. Please proceed with your question.

Yes, thanks guys. And just as mentioned, just wanted to say thank you as well to Mike Westerlund, you become part of the company that we're so used to dealing with. It's going to be very different to hear, have to talk to somebody else. So my question for Phil was kind of following up on your opening comments about the silver and gold price outlook. And I was just wondering how Hecla might benefit from the rise in bullion from the project perspective. Generally, underground mines don't have the sensitivity to metal prices that you get in the way with open pits. And I just wondered if Hecla might have opportunities from a development perspective due to these higher prices. For example, like in Nevada, is there a way to look at anything differently perhaps in the way they're developed, is there even open pit opportunities versus some of the underground stuff? And then on the open pits, you do have up at Casa and where you had them in the past at San Sebastian or are things starting to open up due to these metal prices that otherwise hadn't been an opportunity, call it a year ago?

Yes. So Trevor, look, we're going to generate a lot more free cash flow. You look at the sort of margins that we have. So with those margins, with that cash flow, it allows us to make more investment as well as do other things with it. We'll do exploration. We have a dividend policy that the existing policy that we're coming close to being in a position where it will start to pay out. So there's a number of different uses for that additional margin that we have. And part of that is going to be developing the large inventory of assets that we have Nevada, Quebec, Washington State, Colorado, British Columbia, San Sebastian, Durango, Mexico. So yes, the answer is yes, we've got lots of things in front of us.

And again, like you used to mine down San Sebastian kind of more open pit style. Is there anything there that just kind of economically stopped working and kind of come back to life or is it that more dependent on exploration first?

There's more exploration that we think we should do but yes, the El Toro vein, it could – well, that whole area to the South. Kurt, why don't you comment on that?

Yes, from the El Toro vein to the West and the East, there's certainly a lot of potential for additional veins. As you probably saw in the press release, the short vertical, reverse circulation drilling that we're doing. We've identified a new vein there. And it's going to take some work to get it all figured out and continue to build the resources there.

Okay, great. Thanks guys.

And I will now turn the call back to Mr. Baker for closing remarks.

Okay. Well, thanks everyone. I'll just remind you that if you'd like to have a conversation with Lindsay, Lauren or me. We've set up an opportunity for calls for tomorrow morning. You can find that in our press release and we would encourage you to reach out to us then, for those calls or you can certainly call Mike or I directly. So thanks very much. Be safe. Have a good day.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.