Hecla Mining Company (HL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Hecla Mining Company. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Mr. Ted Crumley, Chairman. Sir, you may begin.

Good morning, ladies and gentlemen. I'm Ted Crumley, Chairman of the Board of Directors of Hecla Mining Company. On behalf of the directors and management of Hecla Mining, I welcome you to our 2020 Annual Shareholder Meeting. And at this time, I call the meeting to order. At Hecla, safety is a core value. We start each of our meetings with a safety share. So it's appropriate for us today to provide our shareholders and guests participating in the meeting with a safety share at this time. By meeting virtually today, we are providing access and participation, but importantly keeping the participants safe during this COVID-19 pandemic. This is an example of what we do at Hecla and we consider safety in all aspects of our business. This annual shareholder meeting is being held pursuant to the bylaws of the company and written notice to all shareholders. We are pleased to hold our annual shareholder meeting virtually as we aim to increase access and to keep everyone safe. We anticipate holding future annual meetings as we have in the past in person as we have in the past years. Shareholders may submit at any time during the meeting in the field provided in the virtual meeting screen and will be answered with Mr. Baker's presentation -- after Mr. Baker's presentation. So please review the rules of conduct and procedures posted on the virtual meeting screen. After introducing the directors in attendance and dealing with a few procedural matters, we will take up the items to be acted upon today. First, I would like to take the opportunity to introduce the current directors who are not standing for the election who are in attendance today. Catherine Boggs. Cassie served as General Counsel at Resource Capital Funds until her retirement in February 2019. She served as Senior Vice President Corporate Development at Barrick Gold Corporation. She is a past Board Member and President of the Rocky Mountain Mineral Law Foundation. She has over 38 years' experience as an attorney having practiced law in several U.S. and overseas jurisdictions. She has served on Hecla's Board for the past 3 years. George Nethercutt has extensive political background including as a U.S. congressman. His focus was on natural resource policy, mining legislation and environmental policy on public lands. He also worked in the U.S. Senate in Washington D.C. focused on oil and gas natural resources, mining and commerce. He served as chief of staff to a U.S. Senator from Alaska where he worked on such issues as agriculture, fisheries, timber and mining. His prior consulting business consisted of representing clients with mining and natural resource issues. George has over 40 years of political experience and has served as a director of Hecla for 15 years. Steve Ralbovsky was a partner with PricewaterhouseCoopers for 27 years until his retirement in June of 2014. He has extensive background as a certified public accountant where he is specialized in the mining industry with an emphasis on global mining tax and a royalty policy. He is the founder and principal of Wolf Sky Consulting, a tax consulting firm. Steve has over 39 years' experience in accounting and has served as a director of Hecla for 4 years. Terry Rogers served as Senior Vice President and Chief Operating Officer of Cameco Corporation until his retirement in June of 2007. He is a former president of Kumtor Operating Company. Terry has over 30 years' experience in the mining industry. He holds a Chartered Director designation from the Directors College and has served on Hecla's Board for 13 years. Chuck Stanley, Charles Stanley, served as Chairman, President and chief executive officer of QEP Resources until his retirement in January 2019. He is a former Chief Operating Officer and Director of Questar Corporation. Chuck is a geologist with an extensive background in natural resources. He has over 35 years' experience in the natural gas industry. Chuck has served as a Director of Hecla for 13 years. I'm Ted Crumley. I retired from Officemax Corporation 15 years ago, where I served as Executive Vice President and Chief Financial Officer as well as Senior Vice President. I worked over 30 years in various positions, including Senior Vice President and Chief Financial Officer with Boise Cascade for its products company, and I have been on Hecla's Board for 25 years and have served as Chairman for the past 14 years. I will introduce the directors who are up for election in just a moment. Also attending this meeting today is Steven O'Donnell, Jon Heideman and Bethany Pussell (sic) [ Bethany Russell ] of BDO USA LLP, our independent auditors. The inspectors of election today appointed for this meeting are Broadridge Financial Solutions; Tami Whitman, Hecla's Assistant Corporate Secretary; and Jeanne DuPont, Hecla's Corporate Communications Coordinator. I will now ask our secretary, Michael White, to provide the information on the meeting and the mailing of proxy materials, record date and quorum. Michael?

Thank you, Ted, and good day, everyone. I have an affidavit of mailing from Broadridge Financial Solutions certifying the providing of the notice of this meeting and the notice of Internet availability of proxy material sent to shareholders of record as of March 24, 2020, all of which Broadridge commenced distributing to shareholders on April 9, 2020. The Board of Directors has set March 24, 2020 as the record date for this shareholders' meeting. We have a list of shareholders as of the record date available on the virtual meeting web portal. A duplicate list has been on file at the company's corporate offices in Coeur d'Alene, Idaho for the last 10 days and was available for inspection by any shareholder, anytime during usual business hours. I have been advised by the inspectors of election that as of the record date of March 24, 2020, there were outstanding and entitled to vote a total of 523,247,297 shares of Hecla common stock. I have been informed by the inspectors of election that there were in excess of 397 million shares of stock represented by proxy or approximately 76% of all shares entitled to vote at this annual meeting. The shares so represented exceed 50% of the total shares entitled to vote at this meeting and thus, constitute a quorum.

Thank you, Michael. On the basis of the report of the secretary and the inspectors of election, I find that proper notice has been given and a quorum is present. Accordingly, this meeting has been properly convened. And now the order of business today, there are 3 matters to be voted upon: election of new directors, Mr. Baker and Mr. Johnson; ratification of the appointment of BDO USA, LLP as the company's independent registered public accounting firm for 2020; and an advisory vote on executive compensation. Information involving these 3 matters is set forth in greater detail in the proxy statement. All Hecla shareholders are entitled to vote at this meeting and have the ability to do so online. If you are a shareholder entitled to vote and have not yet voted or if you want to change your previously cast vote, please do so via the web portal used to access this meeting. Please remember that if you've already voted by proxy, it is not necessary to vote again. After voting has been completed on all matters on the agenda, we will close the polls and the inspectors of election will provide the secretary with their preliminary report. At this time, I would like to introduce the 2 directors standing for election. Phillips Baker, Phil Baker has served as CEO over the past 17 years and President for 18 years of Hecla. He has served on the Board of other publicly held mining and natural resource companies and holds legal and accounting degrees. Phil has over 34 years of experience in the mining industry and has served 19 years as a Director of Hecla. George Johnson served as Senior Vice President of Operations of B2gold Corporation until his retirement in May 2015 and has served as a Director of B2gold Corporation since March 2016. He is a mine engineer and has held executive positions with other mining companies over the years, including Vice President Metal Mining for Hecla until 1999. He has 45 years of foreign and domestic experience in underground and open-pit mining construction and operations management. He has served as a Director of Hecla for 4 years. If elected, their terms will expire in 2023 or until their respective successors are elected. No other nominations were received prior to the deadline established in the company's bylaws, therefore, no additional nominations may be made at this meeting, and I declare the nominations to be closed. The next item to be voted on is the ratification of the appointment of BDO as the company's independent registered public accounting firm for 2020. The Board of Directors recommends the ratification of appointment of BDO to serve as the company's independent registered public accounting firm and to audit the company's financial statements for the calendar year ending December 31, 2020. The third item is a proposal asking shareholders to approve an advisory resolution on the calendar year 2019 compensation of the named executive officers. All of this is described in our proxy statement. This proposal is advisory. Although nonbinding, the vote will provide information to our Compensation Committee and to the Board of Directors regarding investor sentiment about our executive compensation philosophy, policies and practices, which our Compensation Committee and our Board of Directors will be able to consider when making future executive compensation decisions. [Voting]

At this time, we will now hear a presentation by the company's President and CEO, Mr. Baker. As a reminder, questions that have been submitted regarding the company's business will be answered at the end of Mr. Baker's presentation. Phil?

Thanks, Ted. Let me and Hecla's management team add our welcome to Ted's. We look forward to the annual meeting every year to see some of our 70,000 shareholders, many of you are long-time holders, and we hope we can meet once again in person next year. The name of my talk is titled, the more things change, the more they stay the same. So that's on Slide 1. Because of the impact of government policy on silver and gold markets, it's why I've entitled that. I think we're going to see a repeat of what easy money government spending does like what we saw in the 2000 to 2011 period. And my comments will in no way be a criticism of the actions taken by the Fed Congress or the administration. Before I talk about silver and gold markets, I will start with the discussion of our COVID-19 response and end with a checklist for investing in mining companies. And after I'm done, Ted and I will take questions that you'll send via the link that he mentioned. So please go to Slide 2 because I want to emphasize the safety culture that Ted mentioned in the safety share. This slide shows our all-in frequency rate. This year, it's among the best of the best. 0.92 might not mean much to you. So another way of saying it is that we've had 1 accident for every -- or injury for every 100 employees who have worked for a year. I'm so proud of our improvement over the last 5 years, and so far this year, Greens Creek and Lucky Friday have had no incidents. We want them to stay that way, and we want all the other mines to not have another injury for the remainder of the year. In this presentation, I'm definitely going to make forward-looking statements. So look at the cautionary statements that are found on Slide 3 and in our 10-K and other filings. Slide 4 orientates you as to where Hecla's operations are and the characteristics that make us unique. Let me just mention a few. Hecla is the largest silver producer in the U.S., the fifth largest gold producer in Québec. So that's why I'm going to focus on what's happening to gold and silver. We are in the best jurisdictions, have long reserves and low-cost, debt due in 2023 and 2028, cash on the balance sheet and brand value that's going to allow us to outperform when silver takes off. Looking at Slide 5. For us, January 31 set off the COVID-19 alarm bells. President Trump closed the U.S. to travel that day from China due to the novel coronavirus. We were preparing to refinance our bonds with the maturity a little more than a year away, up to that point we were debating if we should advance our earnings or go-to-market the second week of February or keep our normal schedule and go the last week of February when BMO and JPMorgan both had conferences in Miami. It would make it a very efficient way to meet investors. While we didn't have any idea of how bad the virus would get, we knew that was going to slow down China and international travel restrictions would not be good for the high-yield market. So we went as soon as we could to take the first steps at fortifying our balance sheet by issuing $475 million of 7.25% notes due in 2028. We also expanded and extended our revolving credit facility of $250 million and a 2023 maturity. Finally, about the middle of March, we drew $210 million down on the revolver. We did this because we didn't know how things would go. We have for the past year been on a heightened alert on the volatility of the gold and silver price. And COVID-19 just heightened that. We are unwilling to sell the upside, so we strategically put in contracts that assure us the next few quarters of the lowest price that we will receive. So basically, we bought insurance. If prices don't fall, then all we lose is our premium. And for the last 10 years, we have consistently sold lead and zinc forward to give us about 6 months to 1 year of visibility on our base metals revenue. Why have we been doing this for the last 10 years? Because we experienced the big downdraft in 2008, and we're ready should that happen in 2020. We faced pandemics before, of course, but none that have been like this. So the first steps we took were to protect the workforce by canceling our participation in that big mining conference known as PDAC at the end of February. By March 10, the pandemic plans across the company had been implemented. As the virus progressed and government orders were issued, we increased our response to reaching where we are today with daily monitoring of temperatures and health questionnaires, social distancing and even 14 days of quarantining at our facilities in Juneau before we allow them to go to Greens Creek to work for 28 straight days. We quickly reviewed our supply chains, made sure we had very strong inventory of supplies. And we have a charitable foundation that we've had in place for 13 years that we've donated over $3 million in communities that we operate in. So what we did was we committed very targeted contributions of $125,000, most to food banks and masks to help with people dealing with the effects of the virus. We're the largest private employer in Juneau and the Silver Valley. We have lots of support from people there but with that comes responsibility. Finally, we engaged with government authorities to explain how we can operate safely and how we are in the front of the supply chain, so we're an essential business. That engagement worked. We've lost only about a week or 2 of production on a consolidated basis because we are one of only a couple of mining companies whose operations are primarily in the U.S. and Canada. So the impact has been less on us than on other companies. So Hecla was well prepared, reacted quickly and successfully operating in this pandemic and ready for higher gold and silver prices that I believe are coming. And the rest of the presentation is going to explain why I see the price as so much higher. So going to Slide 6. Higher prices will be a function of 2 things: easy money and public debt. First, easy money is evidenced by the Fed's balance sheet. In absolute terms, it's about 7x what it was in 2008 and 2x what it was just 3 months ago. Another way of measuring it as a percentage of GDP. 2008, it was 8% of GDP; today, 31%, assuming GDP doesn't decline. As Chairman Paul said, we printed it, and they're going to keep printing it. What maybe gets more attention is the government's deficit spending passed by Congress as shown on Slide 7. The CARES Act and other legislation added $3.3 trillion to already $1 trillion deficit. Democrats have passed another $3 trillion spending bill. And going forward, it doesn't matter who's in office, there's just going to be more deficit spending. So easy money and deficit spending creates the perfect environment for a gold bull market. Slide 8 shows the 6 bull markets we've had in gold for the last almost 50 years. So much to talk about this on this slide, but let me just focus on 2 of the bull markets. The first is the one I've circled showing the 2000 to 2011 bull market. While I think we are in another broad 11-year bull market or more or less for the future, it might be within that 2000-2011 period, 3 very strong ones like the ones that happened from 2001 to 2004 and then the one from 2008 to 2011. All I know is the super easy money and extraordinary deficit spending we saw then as being replicated but at a multiple. On the last slide, we'll look at how Hecla has performed at that time when we had this -- the bull market of 2000 to 2011. Now if you look to the right of that circle, the bull market you see is the current one we're in. For the past 4 years, as Slide 9 states, the gold price has risen from just over $1,000, so about a 70% increase. One of the drivers has been ETFs. See the chart on the left, the gold price tracks the growth in the ETF. But as much as the price has increased, it has fallen behind recent ETF growth primarily because it's growing so fast, 31% in just the last 11 months, 15% in the last 4. It will be 100 million ounces in the ETFs by the end of the month. So shown on Slide 10, gold is outperforming other metals. Note that silver is lumped in with base metals as of 10 days ago. That's changed, and I'll talk about silver in a moment. On Slide 11, as of a week ago, gold is outperforming every asset class for treasuries. Gold has had a good run and future significant increases seem likely. So what about silver? And what's the outlook for what people call poor man's gold. So go to Slide 12. Here, you see the ratio of gold to silver. On the top is the ratio over the last 300 years with most of it at a ratio of 16:1. On the bottom is the ratio for the last 60 years. Lots of things to consider. But I want to draw your attention that it's pretty rare for the ratio to go above 80, 3 or 4 times in the last 80 years. Most of the time, it's been between 80 and 60. And of course, it got as high as 123 in the last couple of months. So if it returns to normal, which seems likely looking at its relationship in the past, that would suggest that silver price today should be around $21 to $28. Starting on Slide 13, let's look at the silver market fundamentals, which is 1 billion-ounce market with 20% of the supply from recycling and 80% from mine production. Slide 14 focuses on that mine production. 2019 was the fourth year in a row mine production decline. Lots to mention, but I'll limit it to the fact that the 2 biggest producing countries, Mexico and Peru declined despite their cost advantage as their currency weakened against the U.S. dollar. Second thing to note is that the increase in the U.S. this past year came mostly from Greens Creek. Slide 15 shows that 73% of the mine supply comes as a byproduct to copper, gold, lead and zinc. So that silver bar that you see at the bottom, that's the primary silver mines. The rest is all as a byproduct. Many base metal mines were on the verge of closing before the COVID-19 and treatment charge increases that we've seen in 2020. So there's even more pressure on these base metals. But the risk is not just other commodities. Slide 16 shows that 50% of the production comes from 4 countries: Mexico, Peru, China, Bolivia, countries whose economies sometimes get determined by something other than economics. And I'm not going to have time to go into this later. So let me just say that the most important issue for an investor to consider in investing in a mining company is jurisdiction. When I came to Hecla 20 years ago, our most important asset was Venezuela. For a decade, we were the largest gold miner in the country. And at the urging of your Board, Hecla got out. You know the rest of the story. And I'm convinced with COVID-19 policies and some of these major producing countries are going to impact the production of silver. Let's go to Slide 17, on demand. First, about 50% of demand is industrial consumer products with investment in jewelry, each at 25%. Investment demand in ETFs -- is in ETFs in coins and bars. The pie chart on the right breaks down the industrial. As the economy grows, this demand will grow. If you look at the ETF chart on the left, the silver price has stayed flat despite the growing investment. And in the last 11 months, the ETF has grown 31%, which is the same amount as gold, but without the increase in price. Until last week, the price really didn't change. So on Slide 18, let me come back to that last bull market for gold I'd circled on the slide earlier, that period from 2000 to 2011. Gold was up 500%, silver even more. And within the bull market, you had these periods of time when the performance of silver and gold were stunning. So how did Hecla perform during this time? Before I answer that, I'd like to go to Slide 19 to provide that checklist for investing in precious metals companies that I mentioned at the beginning. The list is simple, just 6 questions. Where -- first, where are the company's mines? If they're not in a country where the rule of law is firmly established, I'm convinced it will not last. Mining minerals, particularly gold and silver, is considered everywhere a national patrimony that is easily taxed or taken. Hecla is primarily in the U.S. and Canada. There are not many other mining companies our size that can say that. Second, what is their mine life? I can assure you that anything less than 10 years results in destroying value decisions. Hecla's major mines are more than 10 and likely more than 20. Third, what is their cost structure? They need to have low-cost regardless of the strength or weakness of the currency, tax regime, fuel prices or byproduct prices. Hecla's silver assets are best-in-class and gold assets are in the middle of the pack but are improving. Fourth, what debt do they have? When is it due? And what are the covenants? Investors just -- can't just consider if a company has debt or not. With no debt, they probably have historically issued lots of equity and will do so again. Probably, their operations are not robust enough due to one of the first 3 items that are on this checklist to attract debt capital. They might be in the wrong jurisdiction. Hecla has debt mostly due in 2028 with essentially no meaningful covenants. Fifth, can they find more? Hecla has found more and keeps finding more. In fact, recently, Hecla has had the most gold and silver reserves in our 129-year history. And lastly, do they have capital projects that is going to overwhelm them? Hecla's annual capital requirements will be similar to what we've had in the past for the foreseeable future. And if we need to make reductions, we can without tripling the country. So go to Slide 20, and here's the answer to Hecla's performance in the last bull market. In 2002, when the metals started increasing, Hecla increased fivefold, making it the best-performing stock on the New York Stock Exchange that year. After 2008, a fourfold increase over 2 years. So if you're a shareholder of Hecla, I hope it gives you confidence in your investment. And if you'd like to learn more, I hope that you'll reach out to Mike Westerlund or I for a call. And with that, Ted, I want to thank everyone, and I'll turn it over to you for any questions we might have.

Okay. Thank you, Phil. I believe that there were a couple of questions that came in. That you should have there -- that should have been forward to you.

Okay.

The first one is what is the status of the remote mining machine?

Sure. So we had the Remote Vein Miner and it's in testing in Sweden. We will continue to test it to -- until reaches our -- the level of performance that we think it needs to have. Remember, it is just a test. This is an opportunity to improve the productivity at Lucky Friday, but it's not how we plan the business. It's a way to add additional upside to it. And we would expect that with this COVID-19, things will be slowed down. In Sweden, they're only working a couple of days a week. So it's definitely on a slowdown, what the -- when it will be ready to come will depend on how the testing goes.

Good. There's another one, Phil, that's very -- you touched on in your talk, but it's -- how has the COVID-19 impacted Hecla's mines and how has Hecla dealt with these impacts on its workforce and the local communities?

Well yes, I think I've answered that with my presentation. But I'll just really thank the efforts of our people. They have taken very seriously their responsibilities to have the social distancing to all the hygiene efforts. And I think it's a reflection of the safety culture that we have that we've been able to do it so successfully.

Yes, absolutely. absolutely. The next one is up. Congratulations on your recent bond refinancing. How is Hecla's liquidity position now?

So we're in very good shape liquidity wise because we also increased the size of our revolver, and we extended its maturity. As I mentioned in the -- in my presentation, we drew down $210 million into the revolver at the early stage of the virus really before it had any effect on us, but we wanted to make sure we had the liquidity. That was in addition to the cash that we already had on hand. So we're in very good shape.

Good. The next one is just, again, I think you've touched on these in your talk, but how the Lucky Friday ramp-up is going?

The ramp-up is going well. We're on track with what we would expect. We have had some delay in the work that we were planning on the 2 shafts because we weren't able -- have not been able to bring in people from outside the U.S. to do that work. And so as a result, we'll do it, we think, sometime in the next 90 days. Remember that when we do that work, we'll have a 21-day shutdown of the mine.

Yes. And this last one, Phil that I have, is personal to you. It says, Phil, you're one of the longest-serving CEOs in the gold and silver mining space. What is the most important lesson you have learned and what are the challenges going forward? I guess, it's something I would ask you.

I think -- well, I appreciate the question, and I appreciate that I've had the opportunity to serve at Hecla for these -- all these years. I certainly didn't anticipate that would be the case. It's -- I just get more excited every day, and particularly in this environment where I think that there's an extraordinary opportunity for the prices to rise dramatically. But the thing I'll go to that is the most significant for me is the safety, sort of where I started with the presentation. It's just outstanding that we're seeing such great safety performance. We're seeing our people coming to work, no one getting injured, people going home safely. And it applies not just to the mines, it's also here in the corporate office. And it's also with people taking it home. We're just struck by the impact that we're having on people's lives where they're doing things at home in a safer way than they would have done otherwise.

Yes. That's a great story. That's all the questions that I have that came in so far, Phil. So I think unless you have something else you want to add, we will move on.

No. No, Ted. Go forward.

Okay. Thank you. Since everyone has had the opportunity to vote, the polls are now closed. Michael, would you please report on the propositions voted on by the shareholders today?

Yes. Thanks again, Ted. The inspectors of election have delivered their preliminary report, and the results are as follows: As to proposition 1, each of the 2 nominees for Director positions received more than 95% of the vote cast in favor of his election and has been elected as a director of the company to serve for a 3-year term that will expire in 2023. With regard to proposition 2, the ratification of the appointment of BDO as the company's independent registered public accounting firm for 2020, it received more than 97% of the votes cast in favor, and the appointment has been ratified. And lastly, as to proposition 3, the resolution on the advisory basis for the compensation of our named executive officers for calendar year 2019 received 72% of the vote cast in favor of the proposal and has been approved. So all 3 have received approval. We will file the final report of the inspectors of election with the records of this meeting. We expect the report on the results of the voting on a Form 8-K to be filed with the SEC within 4 business days of this meeting.

Thank you, Michael. This concludes the Annual Shareholders' Meeting for Hecla mining company. I want to thank all of you today for attending the meeting and also your continued support of Hecla Mining. Given all the circumstances currently going on the world, I hope you all have a great day and be safe. The meeting is now terminated.