Hecla Mining Company (HL) Earnings Call Transcript & Summary

Good afternoon, everyone. And good evening, and some of you good morning, who could be listening to this virtual conference for our next company, which is Hecla Mining. Very pleased to have Phil Baker, President and CEO. Phil is, at this conference, as far as what I saw, of all the presenters, has the second-longest tenure as a CEO. And a lot to be said for that. Done a lot of great things for the company. And Phil's going to speak to a few slides first, which is the deck you see. He'll tell you when he's moving the slides. And then we'll do Q&A. So Phil, I'll turn it to yourself.

Well, thanks, Mike. I was thinking about the fact that we first met in '94, '95 at your Timmons conference. And I can remember you telling me that you had the conference there so that you could really show people mines and let them see what mines really are like. And then, of course, that conference changed. And then over the years, you've had this -- BofA have had the conference in Barcelona and Miami. And now we're doing that conference from home. Really quite a remarkable turn of events. Certainly, the world we met, so many years ago, has changed dramatically. And this conference has changed. And maybe it's changed forever our world. But as much as things have changed, some things have stayed the same. And I think you guys, in your report titled "The Fed Can't Print Gold," has really captured something that hasn't changed. What they suggest in that report seems as inevitable as the change of seasons. All the monetary easing and the all the deficit spending around the world makes the suggestion of a $3,000 gold price target in 18 months seem very reasonable. And the assumption -- I read it closely, and I was interested in seeing that the assumption that you made or the firm made with respect to silver is going to track gold with about the same percentage increase. And I would suggest that that's not only reasonable but it's quite conservative. If you look at the history of big moves in the gold price, what you'll typically see is silver shooting past gold in a major way. And I think there's a good chance of that happening again as the stimulus finally puts the economy into a real startup to build the infrastructure in consumer products. So enough on that. Let me just tell you what I'll talk about before I take your questions. Really 2 themes. First is that we had the preparation and experience to navigate through the pandemic and this ongoing pandemic, the coming months as to whatever things might come down the pipe. I think Hecla is prepared to deal with those. And then, the second thing is that we're a unique investment, really, for 4 reasons. We've got the best jurisdiction. Where you mine matters. We have long mine lives. How long your mines will last is really the second most important thing. We have low cost structure, and we have a fortressed balance sheet. And so let me start with the coronavirus response. But before I do, I'm going to make some forward-looking statements that are subject to the cautions found on Slide 2 and Slide 3. And so if you can turn to Slide 4. In January of this year, the alarm bell just went off when the U.S. closed travel from China due to the virus. And as you know, at that time, we were preparing to refinance our bonds. And the maturity of our bonds at that point was about a year away. And we were debating, do we accelerate everything and go to market the second week of February? Or do we keep our normal schedule, release earnings toward the end of February, and then go to the BMO and the JPMorgan conferences in Miami and market the bonds there? That would've been an efficient way to do it. But we didn't have any idea how bad this virus would be. But we knew that it would slow down China, and we knew the travel restrictions just were not going to be good for the high-yield market. So we took the former course of action: We went as fast as we could to fortify our balance sheet by issuing $475 million of bonds at 7.25, and they're now due in 2028. We also expanded and extended our revolving credit facility. We now have $250 million of availability under that facility, and we extended the maturity to 2023. And then, in the month of March, we actually drew it down $210 million, and we did it just to put cash on the balance sheet. Because at that point, we weren't sure where things would go. The other thing that's been true over the course of the last year is that we've had this heightened -- we've been on heightened alert with respect to the volatility that we see in gold and silver prices. So we've consistently been putting in puts, so buying contracts that give us assurance of the minimum price that we'll receive for the metal. We haven't sold any upside. And then, we've also -- and this goes back 10 years -- we've been selling lead and zinc forward contracts so that we know what price we're going to get for the base metals that we sell. And we did this on the back of 2008, when we saw a big down drop in metals prices. And so we're prepared for what might happen from a price standpoint with respect to the metals. The other thing that's true is that we've faced pandemics before. And we took actions really early. One of the things we did was we canceled our participation at PDAC. Hard to believe that that was just 3 months ago. And then, March 10, we implemented our pandemic plans across the company. And we're now at a point where we feel like we could operate under these conditions sort of indefinitely. We also made sure our supply chain was in place. And then, finally, we made charitable contributions to the communities that we're in to make sure that they have the support they need. We are the largest private employer at our 3 major operations. So I think we're well prepared to deal with the pandemic. We're also well prepared should we see that $3,000 gold and $25 silver. So maybe we can go to Slide 5. If you think about Hecla over the course of its long history, the times when Hecla performed the best as of its shares have been when we've had the high increases in gold and silver. And there's been 3 times that I'm aware of where Hecla has been the best-performing stock on the New York Stock Exchange, bar none; not just metals companies, but companies of all sorts, 1979, 2003 and 2009. And this has really given Hecla some brand value when metals make their dramatic moves, which -- I think that's what's going to happen. And you can see, just versus the GDX in that 2010 time frame, we doubled where that was performing. And so I think we're set up to do it all again because of, first, our mining jurisdictions. We're in Alaska with Greens Creek, we're in Quebec with Casa Berardi, Idaho with Lucky Friday. We are the largest U.S. silver producer. No company produces more silver than we do in the U.S. We're the third-largest gold producer in Quebec. And we have mines that will and have operated for a long time -- 30 years for Greens Creek and Casa, 75 years for the Lucky Friday. And they've been around for such a long time because they are low cost, low capital; and they have high margins. And so we're able to plan for how we operate using really low price assumptions. So we have a lot of capacity to survive should we have some downdraft. We've taken care of the revenue side of things, and then we have the cost structure that can handle that. And so now let me go to the last slide, number 6. And this is just a few comments about the quarter. Except for the buildup that we had in the working capital in the first quarter, as a result in part to the virus and in part to just the timing of some things at Greens Creek, everything was just pretty much as we expected. And then you can also see in the chart on the right how the market, I think, has responded a bit to the fact that we're able to continue to operate. We were able to -- I think we were one of the first companies to come back with reestablished guidance. And so I think we're in great shape. With that, Mike, I'll take any questions you have.

Well, thank you, Phil, for that introduction. And I also encourage the audience to ask questions. Phil, one just came in. Here we go. So you are making a big effort in tech in our past couple of conferences. Actually, we had you on the tech panel last year. How are you efforts going in mining and ore sorting?

So both of those are ongoing efforts. Both of them have their challenges. What I will suggest to you is that when we look at innovation, we think about how we can innovate particular problems that we have. And I'll use, for example, we had this need at Casa Berardi to -- had a long haulage, about 1.5 kilometers, and we had to hoist the material to the surface about a kilometer. And the solution we came up with was, rather than hiring an additional 15 people when we had a shortage of people to hire, we ended up automating that. So we're doing automation to solve specific problems. With respect to the ore sorting, it's still a work in progress trying to make it into something that will be meaningful. The RBM, because of the coronavirus, is probably delayed a bit. But there's other things that we're doing to advance. And we'll have more about that, I think, in the fall. At the moment, we're focusing on communicating what we're doing just to continue to operate with the pandemic.

Okay. There's a second question that came in. Silver is often run as a byproduct of other players. Why is he -- you -- confident that silver prices will run and outpace the growth in gold?

Well, I'm confident because if you look at history, that's what it's done in the past, and history tends to repeat itself. There's no impediments to that. You think about the byproducts that silver is a byproduct of -- in large respect, copper, lead and zinc; and, to a certain degree, gold -- and you think about the closures that you've had in those operations. So you're going to have less supply of silver just naturally because of operations that have been closed. And then you're going to have, at the end of the day, an infrastructure advance as a result of the investment that's being made. So you first have all of the monetary factors and fiscal factors that drive gold will also drive silver. And then you have those factors that drive the rebuilding of infrastructure. And you're already seeing it in China. They've had -- the rebar usage in China, I think, is as high as it's ever been, the highest on record. And so that investment is already happening. And with that will come the need for silver.

Okay. There's another question also, Phil. You're getting more questions than most people. How much do your puts hedges cost? Have you seen material increase in this cost with higher volatility?

The answer is yes. As the volatility goes up, the costs of the puts increases. And so we're very reluctant to have long duration on the puts. And so you will have seen, with our first quarter release, that we have some puts on the gold side but that we have a limited amount of puts on the silver side. So we'll put in puts as we find appropriate. We're not going to spend tens of millions of dollars doing that. We will spend a few million dollars buying that sort of protection.

Well, there's another question. Regarding the low cost structure, where are you on the cost curve? And how has your cost competitiveness changed with an appreciation of so many EM currencies?

Well, that's a fair point, in that lots of our peers -- I mean the disadvantage of being in the U.S. is that our costs are stated in U.S. dollars. And lots of our peers have costs that are stated in their foreign currency that they're operating in, or it drives their cost structure. Having said that, we're fortunate in that we started, on the silver side of the business, with Greens Creek, which has had, and consistently had, in the bottom quartile or the best quartile of costs. And that hasn't changed, even with the increased costs of refining and treatment charges. And the fact is that applies to most of the producers across the industry. So we've got -- we started with a better cost structure than peers. And as a result of that, we've been able to maintain that better cost structure. On the gold side of things, we have the advantage of our gold asset being in Canada and seeing some relief from the lower Canadian dollar. The other thing that's happening is that we have a program that's underway to reduce the costs at Casa Berardi. And we think that over the next 2 years you'll see about a $200 an ounce decrease in the all-in costs at Casa. So the margins there are going to improve because of cost reductions. And then, of course, I would expect higher gold prices as well.

Actually, Phil, in my mind, I was going to ask how the wrap-up at Casa was going, mostly [ and that ] government, as you know, deeming mining essential on April 15. And then, how do you get to a $200 cost saving?

Well, the ramp up is going as planned. We would expect to be back at full production in June, so before the end of the fourth quarter. The guidance that we gave was essentially a 2.5-month or so hiatus in production, a month of actual no production and then 1.5 months of reduced production. And then, how do we lower those costs? It's really all about the mill. The mill was built 30 years ago. It was built to produce about 3,500 tons. We've been at that sort of level and above. And essentially, we've had practices that worked when the mill was operating at 2,000 tons a day but doesn't work at close to 4,000 tons. So it's changing those practices, it's making relatively small capital investments in the mill. And it's just improving availability of the mill. And that's an ongoing effort, and it's going to take the better part of 2 years. But we're pretty confident that we can get there.

That's pretty impressive. And moving over to Lucky Friday. This is a wrap-up year for it. I believe on the Q1 call, you said that Lucky Friday, I believe -- correct me if I'm wrong -- would be at full production Q4 this year. So I'm just wondering how the ramp up will go through the year; what are the milestones you're looking at?

Well, the first milestone was hiring people back. And we've now done that. All of the hourly guys that were on the roles have been offered a job to come back. And those that are coming back are back. And that's about 65% or so of the folks. And so what remains is about 80 people that we're in the process of hiring. And as we hire people, we're able to continue to build out the development. And that's really the bottleneck is having the adequate development in front of us to be able to have full production. And then, the other bottleneck that we have is the backfill in being able to have enough sand to go into the backfill. And so it's a bit of a dance that we do. As you're increasing the number of people, you're able to increase the throughput. And you just can't do it overnight. It takes time to build this out. And we're on track with getting there by the end of the year. And the key thing there is that once this mine gets back into production, remember that the grade of the mine increases about 0.5 ounces, silver grade, about 0.5 ounces a year for the next 5 years. And what it does is it takes the mine from what this year will be about 1.5 million ounces to next year being 3 million ounces, to in 5 years 5 million ounces of production. And so this mine becomes a cash flow generator over that 5 years of, order of magnitude, $100 million to $150 million of free cash flow generation. So it's a meaningful operation to us. And we are looking at ways of significantly improving its productivity. And we'll have more on that later in the year.

Of that $100 million, $150 million, is that annual free cash flow when you're at 5 million ounces a year?

No. When you get to 5 million ounces, order of magnitude, you're looking at sort of $5 costs at 5 million ounces of production. You tell me what silver price you want to use. But if you're at $20, then yes, you're at $100 million of free cash flow.

Wow. I think we need a tour of Lucky Friday once this pandemic winds down.

I think that's a great idea, Mike.

I haven't been there in a while. So I think it's time I head back. Actually, just speaking of that, Lucky Friday is in the United States. Being a Canadian, though, I read your U.S. news quite avidly. And your president wants the country reopened. I'm just wondering if maybe places like Idaho where Lucky Friday reopened too quickly, what protocols are in place to protect your workforce? Maybe that's a bit of an unfair question. But just wondering.

Well, the first thing to realize is that where the Lucky Friday is located, which is Shoshone County, which is about the size of the state of Connecticut, there has been 0 cases. So we're in an environment where the likelihood of a case is pretty -- well, is extraordinarily low. Then, when people arrive at the sites, their temperatures are taken. There's a questionnaire that they do, and then there's social distancing that is maintained as people operate in the mine. Or they have respirators or masks on. Because it's a lead/zinc mine, everybody is fitted for a respirator.

Okay.

The drive has been reconfigured so that people are able to maintain the social distance. So the likelihood of someone coming in with a virus is extraordinarily low. The likelihood of them coming onsite is very, very low; and then of it being transmitted onside is extraordinarily low. So we feel really good about the ability of this mine to operate indefinitely regardless of the pandemic.

Okay. Well, that's great to hear all the protocols. Going back to your Q1 results, I was quite intrigued to read in the press release how Hecla is going to process 30,000 tons bulk sample, [ tied to ] factory or from Fire Creek, at refractory processing facilities [ out of the ] goldmines. And you've got, what, 543,000 inferred ounces. Just wondering like, this could be -- just doing some simple math, Phil -- this could be a big cash windfall for Hecla, if it works out. Just wonder what you thought.

Well, look, that's the aim. And we recognized this, when we got into Nevada, is that this is a potential path that we might have to go down. We've gotten that bulk sample arrangement to allow us to get the data to be able to see, okay, what will the recoveries and how will this be processed. Realize that it's an attractive material to the autoclaves. The sulfide content is, order or magnitude, 7% or so. And so it displaces propane, or whatever the fuel is that they're using. And then, in addition to reducing a cost, there's also a little bit of gold that Nevada Goldmines gets. So we think it will -- we need to test it. We need to make sure that it does what we and they think. But if it's positive, then you'll see us in 2021 -- along with reevaluating how to mine, and we now have finished the hydrology study -- come up with a plan to go forward. And exactly what you've said, there's 0.5 million ounces of inferred that would just need to be developed and drilled out, and then there's a lot more beyond that that has made the inferred category. And particularly, if we can lower the cutoff grade, we've reduced mining costs by using this autoclave. We're reduced mining costs, or milling costs, rather, in 1/2 to 2/3. And so maybe we're going to be able to lower the cutoff grade. In fact, I know we'll be able to lower the cutoff grade. So there's the potential for even more material beyond that 0.5 million ounces.

Okay. Would you first convert the inferreds to a higher quality, like M&I, or even [ proven be profitable ] before you mine it? Or how would that go ahead?

Well, to convert the inferreds, you've got a sill on it above and below. So there's an element of mining that you're going to do, at least as far as the sills go, before you do the conversion. So it's going to be an almost a just-in-time sort of mining arrangement, I suspect.

We've got 2 minutes left. I haven't touched on M&A yet, Phil. And certainly you've built your company, Greens Creek and Casa Berardi, very timely acquisitions. Lately, I'm sure you've noticed there's been a number of intermediates coming together to create mid-tier producers. Just wondering what Hecla's view in all this is. Maybe you're just happy focused on internal?

Well, we're fortunate in that we can just focus on internal. Because you've got the growth that's going to happen in cash flow from Casa. You've got the growth that's happening in the Lucky Friday, both in production and cash flow. You have what we just were talking about in Nevada with the potential for a continuing, call, it 100,000-ounce plus producer. And then we still have what's going on at San Sebastian and [ Jivohasko ], Montana, Creed, Republic. We've got a lot of other things that we can do with the stuff that we have internally. So we don't feel any compulsion to have to do an M&A transaction. It's not to say we won't, but we don't feel like it's required in order for us to really drive value for shareholders.

Okay, well, we're just about out of time, Phil. So I just wanted to thank you and Hecla Mining for participating in our virtual conference. We're hopeful we'll be back in Barcelona next year, May 18 and 20, 2021, with Hecla and yourself there. And otherwise, stay safe.

All right. Thanks, Mike. I appreciate it. See you soon.