May 4, 2006
Operator
Good day, ladies and gentlemen, and welcome to the Q1 2006 Hecla Mining earnings conference call. My name is Alexis and I will be your coordinator for today.
Operator instructions. I would now like to turn the presentation over to your host for today's call, Ms.
Vicki Veltkamp. You may proceed, ma'am.
Vicki Veltkamp
Thank you, Alexis. Thanks to the rest of you as well for joining us today.
I'm Vicki Veltkamp, Vice President of Investor and Public Relations for Hecla Mining Company, and this is our Q1 2006 conference call. This call is being webcast live today, so you can access a replay of it, if you wish, at our website.
Our website 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 of 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.
I know it's a busy earnings day today, so we'll keep this brief. Then following their presentation we will have a question-and-answer period.
As you know, 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 to that, 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 against the use of terms such as 'measured', 'indicated' and 'inferred resources' and are urged to consider the disclosures in our SEC filings available on our website. So having said all that, I would like to turn the call over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.
Phil Baker
Thanks, Vicki. Let me add my welcome to Vicki's on today's conference call and since I know there are a number of conference calls back to back I'm going to keep my comments particularly brief.
I do want you to understand that this has been a very good quarter, to the start of what we expect to be a great year for Hecla Mining Company. Our operations delivered great cash flow and earnings while we still were aggressively advancing our exploration program on our five world-class properties.
We think this quarter is evidence that our long-term strategy of diversifying our properties and having an intense focus on those properties is working. Our silver assets delivered great revenue, profits and cash flow with a cash cost per ounce of $2.05.
I submit to you that our silver assets are the best among our peer group. They're low cost and they're growing.
Since these assets are in the US, our net operating loss carry forwards allow all of the gross profit to go to the bottom line. Our gold assets, located in Venezuela, generated good cash flow despite difficult currency restrictions.
Today, we're already reaping the benefit of decisions that we made on the properties in Venezuela and in the US, decisions we made at much lower prices. We're reaping those benefits today.
I think, specifically the Lucky Friday in 2003, we made the decision to develop the next level of the Lucky Friday. That's the reason you're going to see production grow this year over last year and again next year.
I get questions all the time about when we're going to generate earnings, well you see earnings occurring this year and we think you'll continue to see them over the course of the rest of the year. Our Q1 production costs were so low and our bi-product prices that we're receiving are so high that we've decreased our estimate of our silver costs for the year to $2.25.
I think this low cost shows the benefit of the polymetallic ore bodies we're mining. Currency controls are the primary reason for us to increase our cost estimate for gold to a range of $350-375(?)
. On the exploration front, the work we're doing at every one of our properties is good.
Each of them has had very good news this quarter. Each of them has the potential to materially increase the value of Hecla and all of them are more attractive now than they were at the beginning of the quarter.
With that, let me turn things over to Lew and Ron, and then I'll come back with a few more comments on Venezuela.
Lew Walde
Thank you, Phil, and good day to everyone. Earlier in the year we told everyone we expected to produce about six million ounces of silver and nearly 150,000 ounces of gold for 2006.
We're pleased to let you know that we're currently on target to achieve both of these estimates. On the cost side, as we stated, we would produce our silver at a cash cost per ounce less than $3 per ounce and gold, at a cost of around $300 per ounce.
We're definitely on track, in fact exceeding the silver cost estimate. We produced silver at a cost of $2.05 during Q1.
We now expect to produce silver for the full year at a cost below $2.25 per ounce. Over on the gold side, we saw our gold production in Venezuela increase 24% from Q4 2005, which followed up on a 37% increase from Q3 2005.
However, we did see our costs higher and they ended up at $357 per ounce for Q1. Let me dive into some of the reasons for that.
These increases were driven by several factors, including approximately $22 per ounce for a supply inventory obsolescence adjustment, approximately $30-40 for the impacts of currency regulations and also additional royalty and exportation taxes that are directly tied to the increase in the price of gold. Now in our original estimate of cash cost at $300 for the year, we'd assumed that the currency devaluation for the Venezuela boulevard would occur similar to what's happened in the past couple of years.
In fact, this did not occur. We are no longer forecasting a devaluation in 2006.
As Phil mentioned, as a result of these factors we have increased our estimated costs for gold to a range of $350-375 per ounce. While these costs have risen, with the increase in the price of gold our cash flows from the gold segment will continue to be very solid.
My overall interpretation of these changes in the estimate are actually neutral to positive as the lower silver cost negates the impact of the higher gold cost, which again indicates the value of being a diversified producer in both metals. Let's take a second to talk about the metal prices.
For Q1, gold averaged $558 per ounce. Silver was still in single-digits at $9.69 per ounce, zinc was right at a dollar per pound, and lead was $0.56 per pound.
Prices today, with the exception of lead, far exceed the prices from Q1. We expect these prices to positively impact us for the balance of this year.
As I mentioned, silver production of 1.2 million ounces at a cost of $2.05, combined with gold production of 42,000 ounces, which is an increase of 51% in gold production compared to Q1 2005. These factors, combined with average higher metal prices, increased our revenue by 63% and our gross profit by 115% quarter on quarter.
In addition to the significant improvements in the operating performance, we also realized a gain on the sale of investment of $35.6 million, which brought total net income for the quarter to more than $38 million or $0.32 per share, which compares to a loss of $3.3 million in Q1 last year. When we exclude this gain on investment, net income totaled $2.8 million, or $0.02 per share, which represents a $6.1 million improvement quarter on quarter, and a $10 million improvement from Q4 2005.
Phil touched on the investments that we're making in exploration. During the quarter, we spent nearly $5 million to further advance our projects at the Lucky Friday mine, the Greens Creek mine, the Hollister gold project in Nevada, the Hugh Zone in Mexico and at both Block B and La Camorra in Venezuela.
All of these activities are aimed at increasing our reserves, resources and production in the future, we expect that we will be able to continue to provide you updates as the year progresses. As we had stated previously in Q1, we expect to spend about $25 million on exploration pre-development activities in 2006.
We currently expect that these expenditures plus our additional $36 million capital program for the year will be funded via cash flow from the operations. Let me turn for a moment to the balance sheet.
Again, our balance sheet remains very solid, cash and short term investments of $54 million plus an additional $30 million available under a credit facility leaves us well positioned to carry out our activities this year. We've seen our current ratio improve from 2.6 to 1 at December 31st to nearly 3:1 at March 31st, further providing evidence of a strengthening financial position.
To reiterate what Phil has said, we're off to a great start in 2006, we've had excellent Q1 earnings, the balance sheet is strong and production estimates are on track for the year. On the cost side we made adjustments to these estimates, both positive and negative.
We've increased the gold cost by 16% but on the silver side we've reduced these estimates by nearly 25% for the year. This leaves us in a great position to reap the rewards from the current metal price environment.
Now I'll turn it over to Ron, who'll tell you a little bit about North American operations.
Ron Clayton
Thanks, Lew, and good morning or good afternoon wherever you might be. Our silver operations had a good quarter and are right on track to meet our production and cost goals for the year.
Exploration results at operating properties and the exploration projects in Nevada and Mexico continue to encourage us that the likelihood of future production for the company is good. We are continuing to make great progress on our path to increasing production and decreasing cost at the Lucky Friday silver/lead/zinc mine in Idaho.
Silver production was up over the same quarter last year by about 20%. We expect to see another 10-12% increase during Q2 as more production capacity becomes available on the newly developed 5900 level.
We also expect to see an additional 35% increase in silver production in Q3 as production from all four slopes on the 5900 level commences and we reach our milestone annual production rate of four million ounces. We mined more bi-products in Q1 compared to both the fourth and first quarters of 2005, taking advantage of higher lead and zinc prices.
We will continue to take advantage of this opportunity when it makes sense for us. We are beginning to look at the possibility of process improvements to add capacity to our zinc circuit to take advantage of slightly higher zinc rates in the new resource.
We're also very pleased with the diamond drilling completed during the quarter at the Lucky Friday. All five holes drilled are roughly 350 feet below the current resource estimate on the east end of the ore body.
We expect to increase resources substantially again this year at the Lucky Friday. The Greens Creek mine is a joint venture operation with Rio Tinto in Juno, Alaska.
We hold a 30% interest in this mine and while Rio Tinto is the manager, we are very closely involved with the operation of Greens Creek. The mine produces silver, zinc, lead and gold.
Production continues to be slightly below capacity levels while we complete the mine rehabilitation and ground control program that began last fall. This project should be completed during Q2.
I expect silver production to increase approximately 10% in Q2 and another 10% in Q3 as the mine should be back to normal in Q3. Despite the increased cost and lower productivity associated with this project, cash costs continue to be very, very low at a negative $1.28 per ounce this last quarter.
Greens Creek has reserves and resources to support a mine plan with similar production through 2015. We expect to add to that total before year end as a result of the West Gallagher drilling.
We are very excited about the results and the open-ended nature of the mineralization identified to date. The Hollister development block is an underground gold exploration project in Nevada.
Underground development of drill stations is nearly complete. Exploration drilling has begun and approximately 15% of the planned project drilling has been completed.
During the remainder of the year, additional drilling and some drifting along the veins will be conducted. Preparation of the feasibility study has begun.
We expect to complete the study in early 2007 at which time we'll make the decision about whether we will turn this deposit into a goldmine. In Durango and Vactico(?)
drilling continued to identify a mineralized vein on the Hugh Zone during the quarter. We have 31 ore grade intercepts about our ore cutoff net smelter return of $40.
43% of all the exploration holes drilled into the zone have been ore grade. We have drilled intercepts covering approximately 2km of strike length between two major faults.
In additional we think we've identified offsets to the west. We plan to drill more holes in the main Hugh Zone, the offsets to the west and additional targets to the north of the Francine and Hugh in Q2.
We have also identified new targets near existing infrastructure through additional soil geochemistry work. All of the targets are supported by geochemistry, the presence of structure and the presence of a large intrusive identified by geophysics.
We will be following up on this find over the next several quarters. I am confident that it is only a matter of time before we return to production in Mexico.
In summary, Lucky Friday and Greens Creek are performing very well and we are well positioned to take advantage of these high metals prices. In addition, we're reaching into the future with some very good results on our exploration properties.
The combination of these production and exploration results from our operations will continue to translate into a strong financial performance well into the future. Phil?
Phil Baker
Thanks, Ron. The activities we've had in Venezuela have been significantly better than last year with 16,000 more ounces of production and higher grades with some of the ounces coming from Mina Isidora and this improvement has occurred despite conditions getting tougher at La Camorra mine itself, with lower grades and pure headings.
I think we did a good job of recognizing that we're going to be faced with this and blending in the ore from Mina Isidora. Of course, the cost per ounce has gone up and we think it will be what we've described, what Lew described, but with the gold prices at these levels, we're generating strong cash flow for those operations.
We're also getting the local gold sales done. It's been occurring in Q1 and we've been able to do it without any significant discount to the international market.
It's going to take us a few quarters to work off the inventory that we've built up, but we're confident that will happen. On the exploration side in Venezuela, only a limited amount of work was done on Block B.
Frankly, what we focused on was some infill drilling on Mina Isidora. The majority of the Block B work will start this quarter.
The drilling that we did around La Camorra has been very encouraging. Most of the currently planned drilling there will be completed in Q2, but from what we see at this point, we'll clearly do more work beyond that.
On the clerical side in Venezuala nothing's really changed in this part quarter. We're still waiting for clarification from the government of what they're going to do with the regulations.
In the meantime, what we're doing is spending most of our time on things we have in hand and that fit our current operations. The basic story in Venezuela is that we're seeing improvements operationally, we're generating good cash flow and we've got our exploration properties that are moving forward.
We're just watching carefully on what's happening with the government. With that, Vicki, I think we're ready for questions.
Vicki Veltkamp
That concludes our prepared presentation, Operator, could you give the instructions now for the question and answer period?
Operator
Thank you, ma'am. Operator instructions.
Your first question comes from the line of Anthony Sorrentino with Sorrentino metals. You may proceed.
Anthony Sorrentino, Sorrentino Metals
Hello, everyone. Would you go into further detail as to the assay results that you've received at West Gallagher?
Phil Baker
We can talk generally about them. It is fairly complex, Anthony, because you're talking about a very folded deposit and you're talking about assay results not only for silver but gold, lead and zinc.
I will let Ron make some additional comments, but I think the message to take from the assay results that we've seen is that it is consistent with the sorts of grades that we've seen in the other eight deposits that we've been mining over the last 20 years.
Ron Clayton
I guess the only thing I would add to that is we have about 25% of the results back. They're consistent, there are some nice high grades and there are some average grades for the ore bodies that we've seen.
I think the other real encouraging part of this is that it's still open in two of the directions after the drilling, based on the grades and assays we're seeing. So we're expecting more.
Phil Baker
If you look at our press release that we did February 14th, Anthony, it has the grades of the existing proven and probable reserves and one of the things I did when I got the assays is I sat down and looked at each of them and compared them to the reserve grades that we have. They matched up quite nicely.
However, this is early in knowing exactly what the grade would turn out to be from a mining plan. We're encouraged.
Anthony Sorrentino, Sorrentino Metals
OK. What are your plans for accessing the deeper levels of Lucky Friday?
Phil Baker
You're saying below the 5900 level?
Anthony Sorrentino, Sorrentino Metals
Yes, your longer-term plans or at least the options that you might be considering.
Phil Baker
We're in the process of evaluating that. At this point, we have a mine plan that takes us down to… the 6100 level?
Ron Clayton
63.
Phil Baker
The 6300 level. We have drill results at the 6400 and 6900 level and those have all been extremely positive.
We're encouraged by that and so we are starting the engineering process for how we would access that. There's a lot of things to take into consideration and we haven't come to any conclusions on even the direction that we'll go in.
But I think it's fair to say that we don't see any sort of show stoppers at being able to access that material at some point in the future.
Ron Clayton
That's correct. The obvious ones are deepen the silver shaft or sink an internal shaft out in the gold hunter so those are the two obvious things that we're looking at.
The other thing is to continue the exploration there because if the thing gets big enough it may make sense to even look at new infrastructure from the surface.
Phil Baker
That's right. Our exploration program is more aggressive there than it's probably been in decades.
Ron Clayton
Ever, to my knowledge.
Phil Baker
Yes, because we think this thing could get quite big - it has the potential to get quite big.
Anthony Sorrentino, Sorrentino Metals
OK. One final question.
Does San Sebastian have the potential to become Hecla's third silver mine, possibly as large as Greens Creek or Lucky Friday?
Ron Clayton
I think it's too early to make that call. It certainly was in that role and what we've done is stepped up the production from the Lucky Friday to make up some of what it did in the past.
In terms of its productive rate, we really haven't gotten to that stage yet.
Anthony Sorrentino, Sorrentino Metals
OK. When would you be doing a feasibility study at the Hugh Zone?
Ron Clayton
We're completing some drilling in Q2 and we will do an evaluation at that point as to what we have and what our next approach is. We might, at that point, make a decision to do exploration from underground.
We might, be focused more on growing this thing laterally. We don't know where it's going to take us.
All we do know is that it continues to get better than what we had in previous quarters. We have an ore body that's growing and the quality of it is improving.
Anthony Sorrentino, Sorrentino Metals
OK. Sounds good.
Thank you very much.
Phil Baker
Thank you, Anthony.
Anthony Sorrentino, Sorrentino Metals
You're welcome.
Operator
Your next question comes from the line of Pat McCormick with Holton Shappard Capital(?) .
You may proceed.
(Pat McCormick, Holton Shappard Capital?)
Good afternoon. Two things.
I was looking for a comment on first, why do you believe Hecla has significantly lagged the move in the price of the metals and two, what would prevent Hecla and Corelene(?) from merging?
Phil Baker
With respect to the first question, I guess there's two comments. One is, the whole sector for some reason has lagged the movement in the metal.
I don't have a very good answer for why the sector would. We think that, over time, as people realize the earnings driver, this higher metals prices for a company like Hecla that we'll see our stock move pretty dramatically.
We see at $9 silver, the impact on our earnings. Every cent up goes directly to our bottom line.
So you're going to see even better earnings in future periods with this higher metals price. We think you'll see the stock move and with respect to the second question, we really don't comment on any sort of merger or acquisition opportunities.
(Pat McCormick, Holton Shappard Capital?)
OK. Thank you.
Operator
As a reminder ladies and gentlemen, if you would like to ask a question, please press *1 on your touch tone telephone. Your next question comes from the line of Patrick Morton(?)
with RBC Capital Markets. You may proceed.
Patrick Morton(?), RBC Capital Markets
Hi guys. Just wondering if you can comment on the split of cash costs at La Camorra versus Mina Isidora?
Phil Baker
We do not do that sort of evaluation. It becomes pretty arbitrary as to where we're going to allocate costs.
It's just run as one unit.
Patrick Morton(?), RBC Capital Markets
OK. Thanks.
Operator
Your next question comes from the line of John Bridges with JP Morgan. You may proceed.
John Bridges, JP Morgan
Hi, fellas. John Bridges.
I just wondered, there's been a lot of excitement in the last couple of days after the movements in Bolivia. I wonder if you could give us your experiences in Venezuela as they've gone through some sort of similar reorganization of mining and resource rights?
Phil Baker
You know, John, it's still in progress in Venezuela. I'm not able to really provide a roadmap.
I guess I would comment that what seems to have happened in Bolivia seems maybe a bit more radical than what we've seen in Venezuela, but I don't know that for a fact. In our experience, in Venezuela there's been a general desire to maintain people in the mining sector, maybe from the standpoint that they don't have the expertise in Venezuela that you see in other countries.
I think our situation in Venezuela is reasonably good. It's hard to say what will happen in Bolivia.
John Bridges, JP Morgan
I recognize it's a moving target. It's just Venezuela seems to be further along - a few more innings into the game.
It's just giving…
Ron Clayton
It seems to me that things have been quiet for some time in Venezuela. When you talk to government officials, you do not get the impression that they're going to do anything too terribly radical.
They say the things where they want investment in the country. I'm encouraged that, in Venezuela, we think that the ultimate outcome will be one that not only allows us to continue to operate but the opportunity to maybe even acquire additional properties.
John Bridges, JP Morgan
OK excellent. Thanks a lot.
Good luck.
Phil Baker
Thanks John.
Operator
At this time there are no further questions in the queue and I would like to turn the presentation back to Ms. Vicki Veltkamp for closing remarks.
Vicki Veltkamp
Thank you all for joining us today. If you have additional questions, you can contact me, Vicki Veltkamp, at 208 769 4144.
This concludes the Hecla Mining Company's Q1 2006 conference call. Have a good day.
Operator
Thank you ladies and gentlemen for your participation in today's presentation. This now concludes the conference.
You may all disconnect, and have a wonderful day.