Hecla Mining Co/De/ Q1 FY2020 Earnings Call

Thank you for joining us for the Q1 2020 Hecla Mining Company Earnings Conference Call. All participants are currently in listen-only mode. I will now turn the call over to Mike Westerlund, Vice President of Investors Relations. Please proceed, Mike.

Thank you, operator. Good morning, everyone, and thank you for joining us for Hecla’s first quarter 2020 financial and operations results conference call. Our financial results news release that was issued this morning before the market opened, along with today’s presentation are available on Hecla’s website. On today’s call, we have Phil Baker, President and CEO; Lindsay Hall, Senior Vice President and Chief Financial Officer; Lauren Roberts, Senior Vice President and Chief Operating Officer; Kurt Allen, Director of Exploration; and Keith Blair, Chief Geologist. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks as shown on Slides 2 and 3 in the presentation in our earnings release in the 10-Q and 10-K. Reconciliations of non-GAAP measures and cautions for terms like resources are also found in these documents. With that, I will pass the call to Phil Baker.

Thanks Mike. Good morning, everyone. And thanks for joining our call. I’m going to start on Slide 4. I know many calls that you’ve been on with managements have had their participants calling from home. This call is different. While Lindsay is calling from home, the rest of us are in the office and have been; that’s because our office has never closed. Idaho from the beginning said mining is an essential business that needed to continue to operate and we know we can keep people safe if they follow our hygiene and social distancing requirements which our people have done. We’re sitting here in the office with six feet of distance between us. Our mines are also in operation. We currently have four of our five mines operating representing 95% of our production. On Sunday, it will be two months that we’ve had our pandemic plans activated and we’ve not had a case of COVID-19 among our workforce. Greens Creek has for over a month not allowed anyone and I mean anyone on the Island mine that has not been quarantined for two weeks at our separate quarantine facilities. At the other mines, we’ve taken appropriate measures that protect the workforce and the community. Our financial position was significantly improved in the first quarter with the refinancing of the bonds to 2028 and an extension, and expansion of the revolver to 2023 and the $210 million drawdown. In addition, we bought gold and silver insurance puts that assure us of a minimum price with no limit on the upside and forward contracts on our lead and zinc production. So the point of all that is that we’re in good shape. How did we get here? On January 31, alarm bells went off for Hecla, President Trump closed the US to travel from China due to Novel Coronavirus. At that point we were preparing to refinance the bonds with the maturity of those bonds a little more than a year away. We were debating whether we should do our earnings early and go to market the second week of February or keep our normal schedule and go the last week of February when the BMO and JP Morgan conferences were in Miami. It would have been a very efficient way to meet investors. When traveling from China was interrupted. We didn’t have any idea at that point how bad things would get, but we knew that would cause a slowdown in China. International travel restrictions just wouldn’t be good for the high yield market. So we issued our financials at the beginning of February and went to the bond market as soon as we could in order to fortify our balance sheet. You know the results of all that. Now Hecla has faced pandemics before and of course nothing like this one. So the first step we took to protect the workforce was to cancel our participation in PDAC at the beginning of March and restrict travel. I think this is in part the reason we were so aware of the virus; it was because some of our leadership lives in Washington State where the first known case in the United States occurred. So by March 10, we had implemented our pandemic plans across the company. As the virus progressed and government orders were issued, we increased our response to reach where we are today. We also quickly reviewed our supply chain confirming that we had a very strong inventory of supplies and where we were at risk, we either fixed that or figured out how we might work around if we were able to fix it. We also entered into insurance on our silver and gold and sold forward our lead and zinc. Expect us to continue to earn new protections as we go forward. So we’re prepared for the rest of 2020 even if we have a downturn like we had in 2008. And the chart that you see on Slide 4 shows how Hecla has outperformed since we updated our response April 6. Hecla has outperformed GDXJ by 11% and 35% outperformance in gold and silver and I think this outperformance reinforces the importance of the jurisdictions that you operate in. With the US declaring that mining was a critical industry in mid-March, and US mining industries’ excellent record of health and safety allowed states including Alaska, Idaho, and Nevada to declare mining as essential. In Quebec, after weeks they recognized the industry’s ability to mine safely and have let us go back to work. But for most companies that we’re compared to, they have one or more major operations that are currently shut down. Jurisdictions have challenges in normal times. These are not normal times. The restart of operations in difficult jurisdictions is not going to be straightforward and as miners go back to work in various corners of the world, I’m confident we’ll see the difference of having primary operations in the US versus other places in the world. So we go to Slide 5; you can see one immediate difference. Hecla is able to give 2020 estimates since 97% of our operations are in production, and because we have these procedures and processes that limit the risk of the virus at our sites. Lots of mining companies have suspended guidance indefinitely. We are able to update ours. Of course, we do have a caveat: if circumstances change, we’ll respond in ways that protect our workforce and the community. I’m going to focus first on the silver estimates highlighted in silver. We have lowered the production guidance range just slightly and have raised the cost guidance to reflect the change in the cost of smelting, the fact that we have lower lead and zinc prices as by-products, and some increased costs for COVID-19. We’re going to spend a little less capital, about 25% to manage our cash flow. Gold production is highlighted in gold and estimated to be lower because of Casa Berardi being idle for almost a month and then we need about a month to ramp back to full production. The change in production is also due to the virus having a month and a half to two months impact. With the reduction in capital, we should be able to achieve our original AISC guidance. So the aggregate capital and exploration spending is 25% lower as you can see in blue and we’ve spent about 17% of the capital and 22% of the exploration so far. With the slowdown in activities in Q2, we’re confident we can achieve our new guidance. Similar to last year, we see cash flows increasing in the second half of the year, particularly in the fourth quarter with the ramp-up of the Lucky Friday, Casa Berardi reaching full production, and the continued performance from Greens Creek. Finally, we think that we can not only weather the pandemic but we really see an opportunity to change the way we do business. We see the opportunity for improved G&A through less office costs, travel expenses, and other efficiencies that we’ve learned. We think operations in places like ours will become even more attractive to bring in new talent, and our drive to innovate our mines will be enhanced as communication platforms improve. All of this is happening in an environment where the gold price seems to want to break out and we think silver will follow and possibly close the gap. So it’s a really exciting time. And with that, I’ll pass the call onto Lindsay.

Thanks Phil, and good morning, everyone. I’m on Slide 7. We have what I call a good busy quarter following our successful second half of 2019. We ended the year with about $62 million in cash and in early February we used $40 million of that cash to replace our $506 million of bonds due next year with the new eight-year bond maturing in 2028 and in the amount of $475 million. In conjunction with issuing the new bonds, our revolving line of credit of $250 million was refreshed for a new full three-year period and as well we’ve received upgrades from both rating agencies. Our bonds don’t mature for eight years which, in the current climate, the world finds itself in, is reassuring to us. As the leading silver producer in the US with a diverse asset and commodity mix, we have been able to benefit from the substantial increases in price. This along with gold making up 60% of our total revenues for the quarter, positions the company to weather any volatility in the current economic climate that may present. Turning to Slide 8, while operationally the mines performed as planned for the quarter, there were a number of financial impacts that are a normal part of the business that contributed negatively to the reported earnings and cash flows. On Slide 8, you can see that compared to our 2019 first quarter, at Greens Creek, by-product revenues were lower due primarily to lower zinc pricing of $9 million and an increase in treatment charges of $8 million, as the market benchmarks from which most of our TC/RCs are based increased significantly from the previous year’s favorable benchmarks. However, within the treatment charges is about $4 million as a result of a spot customer not performing under our contract that we’re working to recover. Also, as our last shipment of lead at the end of the quarter was provisionally priced at a low price relative to the average for the quarter, we recovered about $3 million when we settled the shipment as we have effectively hedged the price through our put contracts which is sitting as an unrealized derivative gain line item in the income statement that is mark-to-market. So there alone at Greens Creek, there’s a swing of about $20 million of earnings and cash that is part of the normal business that contributed negatively to the quarter. For these reasons, we increased Greens Creek forecast to cash cost after by-product credits guidance for the rest of the year by $1.75 per silver ounce, approximately half due to the product pricing and the other half due to forecast and concentrate treatment charges as well as some additional costs incurred as a result of the COVID pandemic. As a result, for the week of March that we didn’t operate due to the government-mandated closure, we estimate reduced earnings and cash flow by about $3 million. While at Nevada, we had 700,000 ounces of inventory in carbon at quarter end that wasn’t processed, which is worth approximately $7 million, so there’s another $10 million not recorded in the quarter due to the various circumstances. The good news is that these ounces will be produced and sold in the coming quarters so the cash is not lost, but they did affect the first quarter earnings and cash flows. Lastly on Lucky Friday, the cost related to the restart activities amounted to $6.3 million which is in line with our expectations. These costs respectively will be offset with the associated increase in revenues as the mine progresses to full production later in the year. We’re very pleased the strike is over and we can anticipate better performance in 2021 as opposed to the negative cash flows we’ve been experiencing with the mine being on strike for the last two years. Turning to Slide 9. As I stated earlier, we started the year with $62 million of cash and no revolver balance outstanding. At the end of the quarter, we had about $5 million of net cash balance. We used $31 million to reduce leverage as we repaid the $506 million of the outstanding bonds, with that, we issued a new $475 million bond. In addition, we incurred fees in conjunction with the refinancing of about $5.5 million plus another $3 million in doubling up our one month of interest expense due to the refinancing. Cash provided from operations amounted to $4.9 million, which included cash paid for interest on the early redemption of the original bond of nearly $14 million that otherwise would have been paid in the second quarter, while we invested almost $20 million in capital at our mines. To manage the decrease in our cash position, we announced today a reduction of our capital expenditure guidance and exploration expenses by 25% to help ensure we remain at a positive cash flow for the year amid fluctuating prices. All the bonds have been turned out to address liquidity; we drew down $210 million on the revolver during the quarter to increase our cash position at quarter end to $250 million. In these circumstances the world finds itself in currently, liquidity is a must, and drawing under the revolver is simply acting to mitigate risk. We operate in the precious metals business and our operations are performing well. So we take comfort from that. We remain cautious and as we move through this pandemic, we will look to reduce revolver withdrawals to become more certain of the new normal. We’re just being risk-averse. Lastly, we provided full guidance on our active hedging programs in the press release today. We employed puts to set a floor, but it doesn’t cap the upside. And against gold and silver prices for future production and forwards, to hedge future zinc and lead production. We continue to believe strongly that gold and silver can move significantly higher and we want to maintain our exposure to this potential upside. Our hedging program has been beneficial to us over our history of operations and we continue to use hedging to mitigate our financial risk when we believe it is prudent. With that, I’ll turn it over to Lauren.

Thank you, Lindsay. I want to spend a few minutes on each asset to give an update on how we’re faring during the pandemic and to update various projects we have underway. First and most gratifying is that our safety record continues to improve as you can see on Slide 11. We currently have an all-injury frequency rate of 1.14 which shows a 75% decline over the past six years, a remarkable accomplishment. At Greens Creek, we’ve gotten 380 days without a reportable injury, which is a record for the mine in its 30 years of operations. Early in our response to the COVID-19 threat, we started a 14-day quarantine for everyone coming onto Admiralty Island. Everyone goes through this quarantine in one of the two hotels we’re renting, then they go onto the Island for 28 days of work, and then return for 14 days with their family. We believe this significantly reduces the risk of the virus directly impacting our operations. Of course, there are costs associated with this procedure, but they pale in comparison to the potential consequences otherwise. Morale remains good and the site has really come together as a team in the face of this challenge. We’re taking advantage of this time to redouble our safety efforts, clean up the site, and review how we can capture the good aspects we’re seeing for the future. At Casa, the pandemic has impacted operations due to the government shutdown and then subsequent ramp-up as we return to full production. It has cut 16,000 ounces of gold production from this year’s estimate, and the higher costs we estimate relate to the lower production. We missed the last gold pour in March which didn’t allow us to convert our work-in-process inventory into cash flow as expected. Underground mining and milling operations are ramping up and Hecla personnel are at about 85% of normal operating levels. The open-pit contractor is servicing his gear and touching up the roads for the May 13 restart of open-pit mining. Until then, we’ve been processing open-pit ore from a large stockpile so there has been no production impact. But we have reduced our risk profile and deferred some costs. In addition, the pandemic has slowed our initiatives to improve reliability, throughput, and recovery. We plan to resume these in earnest in Q2 and expect to see reductions in cost and increased cash flow when they’re completed. The Lucky Friday ramp-up continues and we’re on Slide 14 now. Members of the workforce who were on strike have been recalled and we need to hire about 80 new employees, about what we expected. In the first quarter, production was low due to the focus on retraining and bringing back the workforce. We see production increasing as the year progresses, particularly in the fourth quarter, we’re not quite halfway through the production cycle. The 5370-loading pocket upgrade was completed on budget and on schedule. The COVID-19 delay in the Number 2 shaft hoist project will take the mine down for about 21 days, and is now forecast to begin in June and conclude in July. Our plans still show us achieving our full production rate by the end of the year. We’ve seen solid progress in Nevada as we work to find ways to improve it. As you can see on Slide 15, we announced an agreement with Nevada Gold Mines to process a 30,000-ton bulk sample at one or more of their refractory gold processing facilities. This gives us the opportunity to test larger scale, long-hole stoping of Fire Creek’s Type 2 refractory ore with the goal of reducing the unit mining cost. It should also establish a recovery rate for Type 2 ore. The Nevada Gold Mines’ processing facilities are larger scale plants with lower unit processing costs than our Midas mill and they’re closer as well, a double economic benefit. We plan to mine the bulk sample over the second half of 2020. This is a low-risk way to explore options to reduce Fire Creek’s cost structure because we expect the bulk sample to be self-funding, and we can stop the work at any time if this proves not to be the case. Most importantly, this bulk test may provide a path to realizing value from the existing approximately 543,000 ton inferred resource which grades about half an ounce per ton of gold and about half an ounce per ton of silver. Results from the recently completed hydrology study also are favorable. They suggest that the existing water rights, water-related permits, and a water treatment infrastructure may be adequate to support a conceptual mine plan being developed for the Type 2 resources. Inflow rates appeared to be manageable through a combination of selective control measures and managing the development rates. This study and the results from the bulk mining and processing test will be used to refine the conceptual mine plan and economic analysis from 2021. At San Sebastian, we continue with the work necessary to make a decision on moving forward with the Hugh Zone. The issue is whether we can produce the saleable third concentrate for copper. What we had hoped would be a quick solution did not yield expected results. More metallurgical testing is underway and we continue to evaluate the proper sequencing for Hugh Zone and El Toro. At this time, we do not believe it will be possible to avoid a gap in production at San Sebastian. In closing, I would like to say how proud I am of the teams at all of our operations. Our people are our greatest asset and once again, they have demonstrated it by how professionally they manage the risks of the pandemic and ensured we protected our people and the communities in which we work. I’ll now turn the call back over to Phil.

Thanks, Lauren. We’re now on Slide 17. For the last 13 years, we’ve had a charitable foundation that has contributed over $3 million to the communities we operate in. We have now committed a new very targeted contribution of $125,000 to Juneau, with most of that going so far to food banks. We’ve done something similar in other locations. We’re the largest private employer in Juneau and the Silver Valley, so we have lots of support but also lots of responsibility. So we’re taking that seriously to support the community. One more note before I take questions: our Annual Meeting is on May 21 and it’s going to be a virtual meeting this year to ensure everyone stays safe and we’ll have a presentation that I think you’ll find interesting, and then we’ll also have a chance for you to have one-on-one calls with the team of managers after the meeting ends. So watch out for our press release with the details on that in the next few days. So with this, I’ll open things up, operator, to questions.

Your first question comes from the line of Jacob Sekelsky with Roth Capital Partners.

It looks like you’re backing down capital spend by both 25% for the year. Can you just give us a bit more on where you see these reductions coming from?

Sure, it’s pretty straightforward. It’s primarily Greens Creek and Casa Berardi that will see these reductions. Lauren, do you want to give him any further indication?

Yes, it’s things that are not impactful over the long run. We might rebuild some more equipment rather than replace units. It’s things of that nature, nothing major. We don’t have any big capital projects underway, so it’s nibbling around the edges in order to sustain our cost guidance.

Okay, that’s helpful. And then just in Nevada, you talked a bit about a gold sampling program that you have going on. Should we expect to see interim updates on that over the next few quarters or the second half, or is this more for internal data collection going into next year?

I think as we formulate our plans and move that forward, we’ll have more information probably at the end of the second quarter. We’ll have an update at the end of the third quarter. I would anticipate that if we move forward with things, we will have some major news on what we’re doing early in the new year. That’s really what we’re trying to set things up for, is to be able to make an economic study of how we move forward on the inferred resources that we have there. As we said when we started this, when we made the pause, we said we’re not going to move Nevada forward quickly until we have a clear plan that we’re confident. Lauren, anything to add?

Phil covered it very well, I think. We will start the mining and that’s really what we’ll be able to report on in the early days. Obviously, the Nevada gold mines plants are large plants and they’ll process our ore in a lot. So it will take us some time to accumulate enough to be processed so I wouldn’t expect to see processing results until later in the year.

Lauren, would you talk a little bit about why Nevada gold would want to do this?

Sure. So Nevada Gold does have a business of supporting other companies in the State of Nevada where they will process ore for independence. But they were quite selective about it, and they’re specifically looking for a couple of aspects. One, they want good grades, and two, they want high sulfur content and we have both of those things. The sulfur content is utilized in their process to displace fuel costs. So it is advantageous to them both in terms of the profit on the processing but also it displaces fuel costs.

Okay, that makes sense. So potentially by Q4 we could see initial preliminary results out of the gold mine program.

At least, a portion of it. We’ll have the mining cost side of it. We probably won’t have the results from the processing until early in 2021.

Okay, that’s fair. It’s good to see you. Looking forward to that. I appreciate it.

Your next question comes from the line of Heiko Ihle with H.C. Wainwright.

Guys, can you hear me all right?

Yes, we can Heiko.

Perfect. Thank you. Sorry I just got kicked out of the call, had to dial back in, so Tyler beat me to it, my apologies. But with Casa Berardi, can you just maybe walk us through the steps that you undertook to restart operations there? How long did everything take? How does it compare to your estimates? Current bottlenecks? And your assumptions on how long it will take to get it resolved?

Sure, Heiko. I’ll make a few comments and maybe Lauren you can run through. The first thing I would tell you, Heiko, is that we were very aware of areas within Quebec that have had the virus and so looked at the workforce and we wanted to make sure that people that were coming back had not been exposed to the virus. We spent some time evaluating that and sort of prioritizing bringing people back. We also made the decision to bring back fewer people initially and sort of ramp them up in order to make sure that we had the social distancing within the facilities and we changed how we - when people would arrive and that sort of thing. And then the final thing I’ll say is that we have a contractor that we have not yet brought back. We’ll bring him back I think the middle of May so we won’t see full production until later in May, maybe early June. Go ahead, Lauren.

Good morning, Heiko. So we’ve been back to add the ramp up here for a little over a week roughly, and so far, it’s going according to plan. As I mentioned, we’re running at about 80% to 85% of our normal Hecla staffing level, included in that number are salaried staff that still are working from home in some cases or working from our Val-d’Or office. But in terms of the operating personnel at the mine site, we’re hitting our marks. We’re on our ramp-up schedule. I would say that looking at the last several days, our run rate through the middle we’ve been hitting our tonnage, but it’s going to be a little bit bumpy as we rotate through crews. Some crews have more people coming back than others and it will take full rotation to get a backup to our full complement of people. And that’s assuming that the government continues to relax restrictions in the manner they have said they will. Because, as Phil mentioned, our workforce comes from a diverse range of communities and some of those communities can’t travel yet. But I would say, so far, it’s going quite well. We’re on a good ramp-up pace and we should be at full production by the end of May.

And we’ve also divided the management team into two groups.

Right, so we’ve kept the management teams segregated. So we’ve got number one and a number two in command for each major group, each major function in the mines and in terms of the staff, half of them are working at the mine and half of them are either from home or the Val-d’Or office. That protects us in the event that we have some kind of outbreak to keep management continuity, but it’s a cautionary measure. So far, we’ve had no events whatsoever.

So the way to think about this is, we had a shutdown for about a month and we’ve got a ramp-up for about six weeks.

In aggregate, Heiko, estimated at six weeks production impact.

Got it. Building on that a little bit. I mean this is the first mine that you covered that’s actually been fully reopened because obviously Mexico is lagging. I’m just trying to get a grasp on how the process is going. And frankly, maybe I’m very jaded living in New York. I mean do you have any issues in getting sanitizers, gloves, sanitation equipment? I mean all the stuff that you need because around here it’s impossible to procure any of that.

Right. Well, I think it’s a demand situation, Heiko. And very early in the process, as Phil mentioned, we took a look at our supply chain and our inventory. One of the things we looked at was our access to PPE and sanitizer. Although we were pretty well stocked in most places, we did beef up orders very quickly and have transferred things around internally from the company because some places have a bit more in one supply than another. We’ve been able to meet the demand, and the supply chain has caught up for us. So we’re not anticipating any issue there.

So Heiko, I have my own personal supply. If you need something, let me know and I’ll send it to you.

FedEx still works here.

You’re an absolute gentleman and I appreciate that. Thank you. And then just last one before I get back in queue. Can you just venture a guess on your G&A savings during Q2 given the stoppage of travel, conference attendance, etc.? And then just extrapolating how meaningful the number is and how sustainable do you think it is? Also, do you have costs for the hotels in Juneau and the quarantine? Is there a number that you can give us or at least an estimate?

Sure. So with respect to G&A, no we’re not able to quantify yet; we’re still working through that. We do think this provides us with some opportunity to reduce travel costs permanently. We also are leasing our office space which comes up in two years. We were already looking at how we might reconfigure our offices in the future; so we’ll certainly consider that, but the impact of that will be a couple of years out. With respect to the quarantine facilities, we have two hotels that we have leased in total, and of course in Juneau; the tourist industry is really hurting so it’s very well received in the community. Our cost of this quarantine activity is, in order of magnitude, about three quarters of a million dollars a month or so, and that’s reflected in our guidance.

Very good. Thank you, guys, so much. Thanks for taking my questions and stay safe.

Thank you. At this time, I would like to turn the conference back to Mr. Phil Baker.

Okay, thanks very much. Obviously, Mike and I are available to answer questions. I hope the thing you took out of this call is the fact we had this material that is an inventory, we have change in treatment charges, some of which is temporary, some which is going to run the rest of the year. We’re essentially in full production with four of our five operations. And like we told you a year ago when we said the second half of the year will be better than the first half of the year, the same story this year and you saw the sorts of results that we had a year ago. So if you have questions, please go a hold of Mike or me. Thanks very much.

Ladies and gentlemen, that does conclude today’s conference call. Thank you for participating. You may now disconnect.