Earnings Call Transcript - HL Q2 2020

Operator, Operator

Thank you for joining us for the Q2 2020 Hecla Mining Company Earnings Conference Call. All participants are currently in listen-only mode. Following the speaker's presentation, we will have a question-and-answer session. I will now turn the conference over to Mr. Mike Westerlund. Please proceed.

Mike Westerlund, Vice President of Investor Relations

Thank you, operator. This is Mike Westerlund, Hecla’s Vice President of Investor Relations. Good morning and welcome everyone, and thank you for joining us for Hecla's second quarter 2020 financial and operations results conference call. Our financial results news release that was issued this morning before market open, along with today's presentation are available on our 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 shown on Slides 2 and 3 in our earnings release and in our 10-Q and 10-K filings with the SEC. These risks could cause results to differ from those projected in the forward-looking statements. Reconciliations of non-GAAP measures cited in this call and related slides and cautionary language for our use of the term resource, instead of reserves are also found in these documents. With that, I will pass the call to Phil Baker.

Phil Baker, President and CEO

Thanks Mike. Good morning, everyone. And thanks for joining the call. I’m going to speak to Slide 4. It's become clear that we've been operating in a new normal, which is a reaction to this pandemic, and we're prepared for it. We have plans and practices that help protect the workers, the communities, and our operations. As you see from the second quarter results, we've been able to adjust quickly. My thanks go out to all of my colleagues at the mines and in our offices who have made the quarter what it is. Despite COVID-19, we're producing more silver at higher prices than we did last year or in the first quarter of this year, enabling us to generate 24% higher revenues, $27 million of free cash flow, and combined with being declared an essential business, we were able to repay $160 million of our revolver. Now I'm going to let Lindsay and Lauren focus on the quarter and I'm just going to really focus on two things: first, on the silver price, and second, on the uniqueness of Hecla as an investment. First on prices, gold and especially silver prices are markedly higher. We think the higher prices are inevitable given the backdrop of the continued monetary stimulus from negative real rates, the trillions of dollars of physical stimulus, the weakness of the U.S. dollar, and growing political uncertainty. We haven't seen the gold prices at these levels, but we have seen silver and I think that's important to remember. When the gold prices go up significantly, silver goes up even more. This has been seen several times in the past decades, and it’s starting to be seen again in 2020. The bigger the moves in gold, the lower the gold/silver ratio declines, which suggests that a silver price approaching $35, given the current gold price, is reasonable. Hecla produces about a third of all the silver mined in the U.S. There are only five companies relevant in silver production in the U.S., and Hecla is the only primary silver producer that stands out. The U.S. is the 10th largest producer of silver in the world, producing about 4% of the world's total, and Hecla's position as a dominant producer makes it a unique investment. I'm proud of our long-life operations and our capacity to navigate the future, especially in these uncertain times. I'll pass the call onto Lindsay and Lauren to discuss the quarter further.

Lindsay Hall, Senior Vice President and Chief Financial Officer

Thanks, Phil, and good morning, everyone. I'll start on Slide 6. As Phil noted, we have a strong second quarter ending with about $76 million in cash and $50 million drawn on the revolving line of credit. At the beginning of the pandemic, we drew down on our revolving line of credit to ensure adequate liquidity until we could assess the pandemic's impact on operations. Now that risks are being managed, we plan to repay the balance of the revolver before the end of the year. In July, Investissement Quebec again invested in us by subscribing for a private placement of C$50 million in Canadian notes. They have been a great partner and we value our relationship with them. One potential use of the funds might be to buy back our eight-year bonds when it makes sense, as Investissement Quebec funds come at a lower interest rate than the bonds. With an improving net debt-to-EBITDA ratio of 2 times, and repayment terms well into the future, we are comfortable with our balance sheet. As a leading silver producer in the U.S., with a diverse asset and commodity mix, we've benefited from strong gold and silver prices, with gold making up 48% and silver 33% of our total revenues this quarter. This, along with our ability to produce silver and gold at cash costs substantially lower than realized metal prices, positions the company to capture significant margins in the rising commodity environment. Turning to Slide 7, we see the free cash flow generation for the quarter at $26.7 million. I’d like to highlight that these quarterly costs in excess of revenue at Lucky Friday should be eliminated as the mine approaches full production by year-end. Lastly, we provided information on our active hedging programs in the press release today. Traditionally, we have hedged future production of our base metals, which has been beneficial for us in the past, and will continue to be. Since June 2019, we've started purchasing put contracts for a portion of our gold and silver production when prices were much lower. These puts provide a floor price for gold and silver ounces while allowing us to capture any upside above the floor price, which is very positive in this environment. The outlays for puts quarterly amount to approximately $4 million to $5 million, which are included in the loss gain on derivative contracts line in the income statement. I am very happy with the financial progress we've made this quarter, and now I'll turn it over to Lauren to discuss operations.

Lauren Roberts, Senior Vice President and Chief Operating Officer

Thank you, Lindsay. The most gratifying aspect is our safety record continues to be exemplary, despite challenges posed by the pandemic, as seen on Slide 9. We currently have an all-injury frequency rate of 1.19, representing a 74% decline over the past six years and a 26% decline over last year. At Greens Creek, we have gone 470 days without a reportable injury, which is a record for the mine in its 30 years of operation. In response to the COVID-19 threat, we initiated a 14-day quarantine for everyone going onto Admiralty Island in hotels we rented for this purpose. Access to reliable rapid testing allowed us to shorten this period to one week, during which two tests are administered. This dynamic situation requires us to adapt our procedures as necessary while effectively protecting our employees and communities. I am pleased to report the production grades are strong and operations are stable. Our teams have done a remarkable job recovering throughput lost due to the SAG motor failure earlier this year. At Casa, the mine returned to normal operations quicker than anticipated, resulting in strong production and cash flow this quarter. Unlike Greens Creek, Casa is not a camp job, though there are unique challenges due to COVID-19 in managing a resident workforce. I visited Casa after the government-mandated shutdown and witnessed the impressive management of COVID-19 risks there. Following the restart, we are making significant improvements, particularly beneficial during times of high metal prices. The Lucky Friday ramp-up is slightly behind schedule, but we have about 96% of the expected workforce in place and we are slightly ahead on tons through June, especially after a three-year-long strike. The hoist upgrade was completed on budget, which speaks to our project's team during this challenging time. As we move forward, the RVM project is proceeding slowly due to travel restrictions in Sweden, but acceptance testing is ongoing. In Nevada, we have collected 16,000 of the targeted 30,000 tons for the ore bulk test sample. Ground conditions, productivity, and water inflow have exceeded expectations. We plan to temporarily idle the Midas mill for the remainder of 2020 and will keep it on standby for any Type 1 ore produced. At San Sebastian, we expect mining to cease in Q3 and milling in Q4 while we explore potential opportunities for production return. The flexibility of our strategy here has resulted in substantial cash flows. In closing, I'm very proud of our teams, who have shown professionalism and solidarity throughout this pandemic, protecting one another and our communities. Now, I'll pass the call back to Phil Baker.

Phil Baker, President and CEO

Thanks, Lauren. Before we go to questions, I just want to acknowledge that this is Mike's last conference call with Hecla. He's leaving after almost eight years of running Investor Relations. Mike is our friend, and we wish him well in his next endeavor. With that operator, you can open the line for questions.

Operator, Operator

Your first question today comes from Heiko Ihle with H.C. Wainwright. Please go ahead with your question.

Heiko Ihle, Analyst

Hey guys. It’s Heiko from Wainwright. How is everybody doing?

Phil Baker, President and CEO

Good.

Heiko Ihle, Analyst

Thanks for taking my questions. I think it's cool and unique how you have a COVID emergency response plan right on your website, well done. Regarding your derivative contracts and current spot pricing, what do you think the impact will be for the remainder of the year? And if you would be so kind, could you break it out by quarter?

Phil Baker, President and CEO

I don't know if we can break it down off the top of our head, Heiko, but with respect to the puts, there's no impact there so it's really about lead and zinc.

Heiko Ihle, Analyst

I'll ask the question differently. If I use the $14 million you had this quarter, and trend line that, how far off am I going to be?

Phil Baker, President and CEO

Lindsay, do you have a way of answering that question?

Lindsay Hall, Senior Vice President and Chief Financial Officer

Yes. Heiko, that $14 million was partly a reversal on puts from the first quarter. With prices rising, this reverses the $6 million recorded on the puts in Q1. Out of that $14 million, half goes away due to that reversal. The remaining amount is our quarterly cost of buying puts which amounts to about $4 million to $5 million. Therefore, you can't trend line $14 million effectively.

Heiko Ihle, Analyst

That's helpful. Just a clarification, the Remote Vein Miner stuck in Sweden mentioned in the release. Assuming you don't receive it as planned by January 1st, would it impact your fiscal 2021 outlook?

Phil Baker, President and CEO

The RVM is not fundamental to our production in 2021. The delay won't hold us back. We will continue to mine as we have been, and the RVM will be additional upside when we receive it.

Lauren Roberts, Senior Vice President and Chief Operating Officer

To add to that: our 2021 plans don't rely on the RVM. It is seen as upside optionality for productivity and safety. We're monitoring the situation and staying engaged with regular updates.

Heiko Ihle, Analyst

Thank you all. Stay safe.

Phil Baker, President and CEO

Thanks, Heiko.

Operator, Operator

Your next question comes from the line of Matthew Fields with Bank of America, New York. Please proceed.

Matthew Fields, Analyst

Hey everyone. Congratulations, Mike. Good luck in your future endeavors. I'm wondering why your bonds are trading at a significant premium to par. Why would you pay a premium to retire eight-year debt with five-year debt at a similar rate?

Phil Baker, President and CEO

We'll buy bonds back when it's appropriate, but buying at such a high premium is not appropriate, and we won’t do that until conditions are right.

Matthew Fields, Analyst

I didn't see a limitation on how much can be CapEx and how much can be classified as other?

Phil Baker, President and CEO

We do commit to an amount of capital to spend at Casa, which is consistent with our plans.

Lindsay Hall, Senior Vice President and Chief Financial Officer

No restrictions on the C$50 million.

Matthew Fields, Analyst

Okay. Thank you very much. Good luck and thanks again, Mike, for all your years here.

Operator, Operator

Your next question comes from the line of Trevor Turnbull with Scotiabank. Please proceed.

Trevor Turnbull, Analyst

Yes, thanks guys. I just wanted to say thank you to Mike Westerlund, who has been a vital part of the company. My question for Phil is regarding the silver and gold price outlook and how Hecla might benefit from rising bullion from a project perspective.

Phil Baker, President and CEO

We will generate more free cash flow, which allows for more investments and exploration. We're looking to develop our large inventory of assets in several regions, including Nevada, Quebec, and various projects.

Trevor Turnbull, Analyst

Is there a way to economically develop open-pit opportunities or tap into some previously unexploited areas due to higher prices?

Phil Baker, President and CEO

Yes, there's potential for additional exploration and development, especially in the areas where we have assets.

Kurt Allen, Director of Exploration

There are certainly additional veins to be found in the areas we are exploring, including the El Toro vein.

Trevor Turnbull, Analyst

Thanks, guys.

Operator, Operator

I will now turn the call back to Mr. Baker for closing remarks.

Phil Baker, President and CEO

Thanks, everyone. I encourage you to reach out for further discussions following this call. Have a good day.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.