Nov 5, 2013
Executives
Mike Westerlund - Vice President, Investor Relations Phil Baker - President and CEO Jim Sabala - Senior Vice President and CFO Larry Radford - Senior Vice President, Operations Dean McDonald - Senior Vice President, Exploration
Analysts
John Bridges - J.P. Morgan Joseph Reagor - Roth Capital Partners
Operator
Good day, ladies and gentlemen. And welcome to the Third Quarter 2013 Hecla Mining Company Earnings Conference Call.
My name is Denise, and I'll be your conference moderator for today. At this time, all participants are in listen-only mode.
Later, we will facilitate a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr.
Mike Westerlund. Please proceed.
Mike Westerlund
Thank you, Operator. This is Mike Westerlund, Hecla's Vice President of Investor Relations.
Welcome everyone and thank you for joining us for Hecla's third quarter 2013 financial and operations results conference call. Our news release that was issued this morning before the market opened and 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 we are likely -- which are likely to involve risks detailed in our 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.
Phil Baker
Thanks, Mike, and hello, everyone. Good morning.
To begin with, I want to remind you all that when -- where we were 21 months ago, I can tell you we were company facing significant challenges. By the way, I apologize for my voice, I have a small cold.
Our Lucky Friday mine had temporarily suspended operations to complete the shaft rehabilitation, likewise our Greens Creek mine made significant investments in infrastructure design to reduce operating risk and that also temporarily impacted silver production. At that time, we told the market that we expected both of these properties to return stronger than ever and I'm pleased to report that they both have.
This quarter the Greens Creek mine produced 1.8 million ounces of silver at a cash cost after by-product credits for silver ounce of just $5. However, that's higher than a year ago.
The increase in this cost is due to the 30% more silver production with the relatively constant by-product production. In fact, by producing more ounces, the primary cost of mining and processing silver has actually decreased by $6.85 or 20% per ounce from last year and this really attribute to our operating folks and their ability to achieve production targets while maintaining a tight cost discipline.
Similarly, we told the market that the Lucky Friday would reach its historical production rate during the second half of this year and I’m pleased to report that we achieved that goal in September. As a result, costs at Lucky Friday are declining and production is increasing, a trend we expect to continue in the fourth quarter.
You can see it in the trend from Q1 to Q3 with silver production increasing from 120,000 ounces to 200 -- to 479.000 and per ounce cost declining from $36.55 per ounce to $16.50 per ounce. October production is on track with historical throughput levels, so we expect continued improvement in Q4.
Finally, when we acquired and financed the Casa Berardi project on June 1, we expect that the property produced 60,000 ounces of gold over of the course of the second half of 2013, with 20,000 ounces coming from the third quarter. We actually produced 23,406 ounces in the third quarter exceeding our goal, despite this we're lowering our estimate for Casa Berardi's 2013 gold production to Hecla by 5,000 ounces to about 62,000 ounces or 32,000 ounces in the fourth quarter and Larry is going to talk more about this in a moment.
While we were doing all of this we continue to maintain our focus on safe and efficient operations. Just last week we received the National Institute for Occupational Safety and Health Mine Safety and Health Technology Innovations Award.
This is a government agency that looks at research in a number of areas related to health and safety. This award recognizes companies that have made extraordinary efforts to apply technology to improve the safety and health of miners.
So while we've been focused on improving our production and reducing costs, at the same time we are focused on continuing to improve the safety of our operations. Now, let’s go to slide four, regarding what you can expect from Hecla the rest of year and in our, you can see it from this slide and in our press release that we expect production and expenditures to be as follows.
Silver production to be near the high-end of our previously communicated guidance of $8 million ounces to $9 million ounces. Cash cost after by-product credit per silver ounces approximately $6.50.
These costs are higher primarily because of more silver production relative to by-product revenue. Gold production from Casa Berardi is expected to achieve 55,000 ounces in the second half of the year, bringing total gold to Hecla since the June 1st acquisition to 62,000 ounces.
Capital expenditures for which we provided guidance of $178 million last quarter are to be further reduced to $163 million for the full year. And additional reduction in exploration expenditures from previously communicated target of $21 million, and similarly we expect pre-development expenditures, which had been reduced to $16 million to be further reduced to $14 million.
At today's prices, we should have more than $200 million in cash on the balance sheet at year end. And despite lower prices and less exploration expenditures, we anticipate strong silver reserve growth at year end.
So we really have made progress in all fronts, both our silver and gold production for the quarter exceeded previously communicated guidance. We thoughtfully reduced our discretionary expenditures of capital, exploration and pre-development and additional $18 million or 8% from last quarter without impacting our production outlook.
And you are going to continue to see us drive goals that focus on safe operations, production optimization and cost control, both operating capital as we move forward. So now let me turn the call over to Jim for the third quarter of financial review.
Jim Sabala
Thank you, Phil. Starting with Slide 6 during the third quarter, total revenues were $107 million, which is 30% higher than the previous year’s third quarter despite lower metals prices primarily due to significantly higher production.
The higher production was driven by a 12% increase in silver production at Greens Creek, the successful ramp up to full production at the Lucky Friday and the full integration of Casa Berardi where gold production for the first full quarter under Hecla ownership exceeded our expectation. The Aurizon acquisition has truly expanded Hecla's precious metals production and created a diversified precious metals company with approximately 73% of our revenue now attributable to silver and gold from our three diversified geographic locations.
Consolidated silver production was 2.3 million ounces and as Phil mentioned we expect to be on the high end of our previously reported guidance of between 8 million to 9 million ounces of silver production for the full year along with approximately 118,000 ounces of gold production, of which 62,000 ounces is expected from Casa Berardi. As you can see on Slide 7, realized silver and gold prices were down 37% and 24% respectively from last year's third quarter and zinc was down 2%, while lead prices increased about 7% from the year earlier period.
In the first nine months of this year, we generated $23.5 million of gains on derivative contracts due in part to our base metal hedging program, which is locked in prices for about half of our zinc and lead production for the next few years. We currently have about $300 million in future base metals revenue, hedged out at three years, increasing the predictability of cash flows.
With this program, we've reduced the risk associated with our base metals production and locked in the equivalent of a full year's operating cost. And I will mention, however, we do not do any long-term hedging with regard to our gold or silver.
We have also removed the volatility of about 95% of all of our metals exposure between the shipment of concentrate and the payment received there of. On Slide 8, cash cost on a consolidated basis after by-product credits per silver ounce were $7.40 compared to the $3.52 per ounce in the last year's third quarter.
And as Phil mentioned earlier, while on the face, this might seem like an unfavorable trend, the increase is really due to two very favorable factors. First, the ramp up of Lucky Friday's silver production which has increased from 120,000 ounces at a cash cost per ounce of $36.55 in the first quarter to 217,000 ounces at a cash cost of $32 in the second quarter to 430,000 ounces at a cash cost of $16.50 in this third quarter.
Lucky Friday hit its stride late in the third quarter and we expect continued improvement in Q4. We also experienced continued very strong silver production at Greens Creek, which is the result of strong silver grades, vis-à-vis our base metal production because of the strong silver production, cash costs before by-product credits actually decreased by $6.85 per ounce, but due to the relatively constant base metal production the per ounce cost after by-product credits increased.
As a result, silver margins on a consolidated basis remain strong is shown on slide eight. Our margins were $14.82 per ounce of silver or 67% during the third quarter.
And Hecla's balance sheet remains very solid with $238 million in cash and equivalents at September 30, which we believe gives us more than enough liquidity to continue to grow Hecla. We also have an undrawn $100 million credit facility.
On Slide 10 showing cash flow, you can see during the quarter that we generated adjusted EBITDA of just over $30 million. During the third quarter, we invested $52.5 million in CapEx at our projects with a total of $116 million in CapEx for the nine-month period.
Full year, we are looking at $163 million for total GAAP expenditures excluding capitalized interest which is 26% below the level we said at the start of this year. The CapEx programs on various projects we began at the start of this year that are designed to reduce risks increase consistency of operations or increase mine life.
We spent $34 million in predevelopment during the quarter and $12.8 million for the nine-month period and we expect the yearly total approximately $14 million or 41% below the level set at the beginning of this year. Exploration expenditures were $5.8 million in the third quarter and $18.5 million for the nine-month period.
For the year, exploration spending is expected to be approximately $21 million or 29% below the level set at the start of the year. As mentioned earlier, we continue to work to reduce discretionary expenditures in the current guidance for capital exploration and predevelopment expenditures, represent additional reductions of 8% from that communicated last quarter and 26% lower than the target set forth just at the start of this year.
We are fortunate because lot of our capital expenditures are largely discretionary as our exploration and predevelopment. We own our projects and do not have minimum investment requirements, so we can link our expenditure level to the amount of operating cash flow we expect to generate.
We did experience a $5.2 million operating cash flow for the quarter but it was due to the fact that we had a Greens Creek concentrate shipment that occurred right at the end of the quarter, which delayed its cash flow until early in the fourth quarter. This is not unusual given the fact that Greens Creek has very large shipments, also impacting cash flow is a buildup in inventory at Casa Beradi post acquisition.
We are currently in the midst of our annual planning process. We expect to provide you our full 2014 guidance early in the new year.
And with that, I’d like to turn the call over to Larry for review of our operations. Larry?
Larry Radford
Thanks Jim. On the operating side, I’m very pleased with how Lucky Friday ramp-up has gone since the mine restarted operations in February.
This year our team has rehabilitated 12 miles of workings, including the installation of 125,000 rock bolts. We continually upgraded the infrastructure as we prepared the mine for operations.
As you can see on Slide 12, all six mining fronts came into operation in the normal operation in mid-September, averaging historical production rates. On Slide 13, you will see that silver production in the third quarter Lucky Friday was 479,000 ounces, up 120 -- 121% from the second quarter as its cash cost, after byproduct credits, per silver ounce declined 49% from the previous quarter.
Lucky Friday is expected to produce around 1.6 million ounces in 2013. Lucky Friday is expected to reach an average cash cost after byproduct credits per silver ounce of approximately $9.50 per ounce in the month of December.
We’ve also recently reached a significant milestone on the four shaft project with the excavation of the shaft station on 5,900 level. This is one of the three shaft stations on four shaft that will allow the loading and unloading of men and materials once the shaft is operational, expected in 2016.
The shaft is engineered to access higher grade ore zones and is expected to allow silver production to increase 5 million ounces in 2017. On Slide 14, Greens Creek had another consistent quarter producing 1.8 million ounces at a cash cost, after by-product credits, per silver ounce of $5.
For the first nine months, production totaled 5.6 million ounces of silver at an average cash cost, after by-product credits, per silver ounce of $4.18. Added production has reduced the cost per ounce before by-product credits by 22% year-to-date as compared to the same period in 2012.
Greens Creek is expected to produce approximately 7 million ounces of silver in 2013. Capital expenditures in the third quarter at Greens Creek were $80 million.
I’m pleased with the CapEx programs and the improvement initiatives at Greens Creek. We have focused on improving safety performance, improving equipment reliability, having a sufficient quantity of equipment to mine efficiently, improving the training of miners, reducing turnover, increasing mine life, better defining the ore body and improving ground control.
These initiatives have been targeted to improve consistency in operations. Also the U.S.
Forest Service has issued a Record of Decision or ROD on the planned expansion of the Greens Creek Tailings Facility. The ROD supports construction of a facility that provides storage capacity that is sufficient for their current mine life.
The ROD is in an appeal period being managed by the U.S. Forest Service, which could last until the end of the year.
On Slide 15, Casa Berardi produced 23,406 ounces of gold in the third quarter at an average cash cost after by-product credits of $1,066 per ounce of gold, or 7% lower than the previous quarter. We still expect Casa Berardi to produce 62,000 ounces this year under Hecla ownership with 55,000 ounces coming in the second half, with an average cash cost after by-product credits per gold ounces of approximately $975 for the fourth quarter.
The mine is undergoing a transition from mining zones west to the West Mine Shaft to the mining zone east of the shaft, bringing the first of these zones, the 118 zone into production could increase gold production as the grades are expected to improve and has the potential to reduce congestion in the mine. Capital expenditures in the quarter were $16.9 million at Casa Beradi.
The project that was originally started by Aurizon deep in the West Mine Shaft by 1,100 feet requires approximately another 150 feet of shaft construction and shaft loading facilities to be completed. This project combine with the 1010 drift is expected to provide access to the 118 zone and to facilitate deeper exploration.
We expect the shaft work to be done this year, loading pockets in the first half of next year and the 1010 drift by year end. Additional mine enhancements includes are now completed and commission concrete plant and a new paste fill facility, which is completed and undergoing commissioning.
The new paste plant shown on Slide 16 should help us cycle the stokes faster by reducing the time that submitted backfill needs to set up. The addition of a paste backfill plant also has the potential to reduce dilution and reduce congestion in the mine.
We have also begun integrating the Casa Beradi technical team with the Hecla corporate technical services team. This integration is focused on rebuilding the long-term mine plan and better structuring the ground control program.
As with Greens Creek and Lucky Friday, the goal is to improve safety performance and show a consistent operation and to optimize our cost per ounce margins. One final note in Quebec is that the proposed new Quebec Mining Act also known as Bill 43 was defeated on October 30th in the Quebec National Assembly.
The bill proposed to change mining royalties to give the programs veto rights over mining, to increase reclamation mining and requires the new projects that proposed processing ores outside of Quebec be supported by feasibility study. I will turn the call over to Dean for exploration and predevelopment.
Dean McDonald
Thanks, Larry. We need positive exploration progress at our three operating mines in Alaska, Idaho and Canada, targeting additional resources and reserves and advance the company’s pre-development projects in Colorado, Mexico and Quebec.
There has been considerable success in drilling high grade intersection at the Casa Berardi, Lucky Friday and Greens Creek mines and a table of recent intersections can be found at the end of the press release. Greens Creek was a particular interest this quarter and I will focus my comments on it.
Starting on the left diagram in Slide 18, a definition drilling program was completed at East Ore at the north end of the mine that is expected to upgrade the current reserve in this area. Definition and exploration drilling of the Deep 200 South has defined three stacked folds of high-grade mineralization, as shown on the right diagram of Slide 18 and represents up to 600 feet of down-dip continuity.
To put both diagrams in context, Deep 200 South currently represents a mineralization of trends that extends over 3,000 feet along strike and over a 1,000 feet of depth. Drilling intersections continue to be outstanding and mineralization remains open to the South as does the 5250 and Gallagher trends as shown in the left figure of slide 18.
We have many years of drilling on all of these targets. One of the exploration projects I am most excited about is the surface drilling in the Killer Creek area.
As shown in the left diagram of slide 19, this target is less than a mile from the current Greens Creek Mine infrastructure and represents a new center of mineralization. A cross section of the Killer Creek area in the right hand diagram shows the broad network of veins that locally grade up to 10% copper and 10.4% combined lead-zinc.
We believe these stockwork veins are characteristics of vent or source area for the mineralizing fluids for the Greens Creek deposit or a completely separate sulfide deposit. The Heva-Hosco property, part of the Aurizon acquisition is located in the prolific Abitibi gold mining district of Quebec and is one of the predevelopment projects shown in slide 20.
A recent drilling program at Heva has dramatically increased resources and the table documenting these changes is on the last page of the release. The Heva project is more free milling then the adjacent Hosco resource and will receive the greater attention as we advance metallurgical and mining studies in the future.
At the San Juan Silver in Colorado, the Bulldog infrastructure advanced with the breakthrough of the new decline into the previous underground workings. We will stop rehab until we are assured of permit and see where metal prices go.
Scoping studies and economic models for the Bulldog continue to be advanced. At St.
Sebastian in Mexico, a resource estimate has been finalized on the middle vein and scoping studies to establish ramp access are underway. This is probably are most advanced project.
We will consider as we did in 2001 if there are low cost ways to get this property into production and where we can carry a portion of the capital for its long-term development. We have advanced all three of our pre-development projects this year and we will evaluate each of them in the context of a larger and more diversified Hecla and determine which of the company’s pre-development projects has the greatest potential to generate value for shareholders relative to our other opportunities.
I will now pass the call back to Phil for some closing comments.
Phil Baker
Thanks, Dean. We have come a long way from where we were at the beginning of 2012.
The Lucky Friday mine production is ramping up and it’s costs falling as expected -- our investment in Greens Creek has resulted in a strong consistent performance of a mine that is world class. We acquired Aurizon and immigration to Casa Berardi is underway where we are starting to see the challenges at the mine becoming an opportunity to deliver the same sort of long-term value the Greens Creek and Lucky Friday provide.
We expect to see production increases in the fourth quarter and costs come down accordingly. And the fourth quarter should be our strongest quarter on all fronts.
The current precious metals price, I am sorry, the current precious metals environment highlights the importance of having a low-cost efficient, long life operations and low political risk jurisdictions. I firmly believe Hecla has among the best suite of assets in precious metal space to weather lower prices, which is why the assets have operated for decades.
But it is not lower prices that we expect. We expect higher prices just in the past as prices rise Hecla will be among the best performing companies on the New York Stock Exchange.
With that, Operator, we will open the line for questions.
Operator
(Operator Instructions) Our first question comes from John Bridges with J.P. Morgan.
Please proceed.
John Bridges - J.P. Morgan
Hi. Good morning, Phil, Jim, Mike.
Interesting your comment on Quebec with respect to the change in or the downing of that law? What were the indications there, where you expecting to go next?
Phil Baker
Well, at this point, the law has been voted down, I think it was -- forget the vote but I think it was 57 to 51 is my recollection. Its sort of back to the drawing board for those guys that proposed it will be at this point don’t know, if there is -- if there will be new legislation that will come forward, we would expect that there is a potential for that and we are monitoring it, but we did not anticipate that there would be a major impact from the legislation forecast.
But it would have hurt the industry in a major way and the industry is already feeling lots of pain. So we are not anticipating any major changes but we are watching it closely.
John Bridges - J.P. Morgan
Okay. Okay.
And then very please to see the drill results coming out of Greens Creek? I was just wondering how Deep -- the Deep 200 was and whether you needed significant new infrastructure to go after that stuff?
Phil Baker
Well, I am going to let Dean answered that, but if, probably if you look back at that cross section, you get some sense of the Deep -- or if you can look at the -- on the press release that actually shows the number of feet where those drill holes are.
Dean McDonald
Yeah.
Phil Baker
Go ahead, Dean.
Dean McDonald
Yeah. John, certainly the development that in place now that we’ve used to drill off the resources is that will be use for production.
We clearly will need to ramp down into some of those areas but we don’t anticipate any significant problems in doing that. So it’s just extending are ramp system?
Phil Baker
Yeah.
John Bridges - J.P. Morgan
How long hole would it be from there back to the portal?
Phil Baker
Well it’s -- if you look at the asset results table, it has the depth from mine portal’s feet and so there is a whole variety of them.
Dean McDonald
I would add that that’s one of the reason why we’re pushing down there now is that is the deepest part of the ore body. So as we know that now so we would like to integrate this ore body into our current mine plan rather than just waiting to the end of the mine life and then having to haul the deepest material.
So that’s one of the reason why we’re pushing this hard now.
Phil Baker
And John, to give you a sense, we’re really looking at end of vertical sense, 800 to 1000 feet depth, vertical depth from the portal area.
John Bridges - J.P. Morgan
Okay, okay. That’s about doable, I guess.
Excellent, well done on the results and look forward to Q4. Thank you.
Phil Baker
Thanks. Shawn.
Operator
Our next question comes from Joseph Reagor with Roth Capital Partners. Please proceed.
Joseph Reagor - Roth Capital Partners
Good morning guys.
Phil Baker
Hi Joe.
Larry Radford
Hi Joseph.
Joseph Reagor - Roth Capital Partners
Hi guys. Couple of quick question for you.
First one is on Casa Berardi, the reduction of the 5000 ounces out of their prior estimate. Should we be thinking of that as more grade related or more tonnage related or combination of the two?
Phil Baker
It’s really a combination of the two and it’s frankly as being cautious with the guidance. We did see better production in Q3 than anticipated but this mine is in many ways like Greens Creek where you have very high grade areas and so you kind of have a lot of variability over short periods of time.
We think over the course of the year, things will even out but we worry about short-term guidance. So it's frankly it has been cautious here.
Larry, anything?
Larry Radford
No, I think you said it well.
Joseph Reagor - Roth Capital Partners
Okay. On G&A expense, the $7.7 million this quarter and you had about $800,000 in additional expense related to the Aurizon transaction.
So we’ve been thinking about that as a fair run rate going forward of the combined company or should we expect that they go up a little bit more and are there any additional Aurizon related costs for Q4?
Phil Baker
Well, I would expect in 2014 for it to go down within our budgeting process as we speak and where there are certainly programs that we have eliminated. And there has been a few folks that were on board during this transition period that we’ll not be with the company in 2014.
So I think there will be a slight reduction. It hasn’t been finalized where the numbers will be but it will be somewhat less than where we are today.
Jim what you want to add to that?
Jim Sabala
Yes, the only thing I add that addresses the G&A portion. The Aurizon transaction cost should be dribbling down to zero now.
Those are just some straggler costs associated that came in after the end of the last quarter.
Joseph Reagor - Roth Capital Partners
Okay, and then just one final one. With the New Mexican mining legislation that’s being put through, how does that impact you guys’ decision and what to do at San Sebastian going forward?
Phil Baker
Well it does -- it certainly impacts it and that’s part of the evaluation that we will make as to moving that project forward. Having said that, it is the most advanced project that we have and there is the potential we’re looking at some ways of doing something as we did in 2001, where we basically had some small pits and use the cash flow from those pits in 2001 to pay for the development of the ramping system.
And we’re looking at potentially doing something like that here but we’re in the early days of that -- that analysis. It’s -- the problem with that is you are in constant construction for an extended period of time.
Operationally that's not where you'd like to be but that might be the best way to improve the NAV of the asset. Again though we’re going to have to weigh that with those additional taxes and so we haven’t come to a conclusion yet, Joe.
Joseph Reagor - Roth Capital Partners
Okay, fair enough. Thanks for the insight, guys.
Phil Baker
Yes, sure.
Operator
At this time, we have no further questions. I would now like to turn the call back over to Mr.
Phil Baker. Please proceed.
Phil Baker
Okay. Well, thanks very much for being on the call, if you do have questions please contact us.
We’re pleased with where third quarter is and we really do feel like fourth quarter will be the best quarter with all the operations operating in there fully. So please call us if you have a question, either Mike or myself.
Thanks a lot.
Operator
This concludes today’s conference. You may now disconnect.
Have a great day.