Q2 2020 Hecla Mining Co Earnings Call

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Ladies and gentlemen, thank you to 2020 Hecla mining company at this time, all participants are in listen only mode.

After the speakers presentation, there will be a question answer session.

To ask a question during this time, you'll need to press Star then one on your telephone.

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I would now like Panda conference over to Mr., Mike Westerlund. Please go ahead.

Thank you operator this is Mike Westerlund, <unk>, Vice President of Investor Relations. Good morning, and welcome everyone and thank you for joining us for to correct. The 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 todays call we have.

Well Baker, President and CEO Lindsay Hall, Senior Vice President and Chief Financial Officer, Lorne Roberts Senior Vice President Chief Operating Officer, Chris Allen Director of exploration and Keith Blair Chief geologist any forward looking information made today by the management team come under the private Securities Litigation Reform Act and involve risks shown on slide two.

In three 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.

Thanks, Mike Good morning, everyone and thanks for joining the car call them in a speak to slide four.

Become clear is that we've been we will be operating in a new normal which is in 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 and my thanks go out to all my colleagues at the mines in our offices, who have made the quarter whether it is.

So despite cobot 19 were producing more silver at a higher and higher prices than we did last year in the first quarter. 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 a $160 million of of our revolver.

Now I'm going to let lynsey in Lorne focus on the quarter and I'm, just going to really focus on.

On two things first on the silver price and second on the uniqueness of Hecla as an investment. So so first on prices gold and especially silver prices are markedly higher and we think the higher prices are inevitable given the backdrop of the continued monetary stimulus from negative real rates the trillions of dollars.

As of physical stimulus.

The weakness of the U.S. dollar and growing political uncertainty.

And so we haven't seen the gold prices that these.

These levels.

But we have seen silver and I think thats important to remember what is clear is that when the gold prices go up significantly silver goes up even more and we saw this a number of times 1970 982005 to 2008 2009 to 2011, and then again 2015 16.

And of course, we're starting to see it again in 2020 and generally the.

Bigger the moves around the gold price the gold silver ratio declines by at least half and the ratio had a high of 124, so seeing the gold silver ratio of 60 would be consistent with past experience.

Suggesting that silver price approaching $35 with gold price, where it is is reasonable.

And remember $35 as the price that we saw in 2010 2011 2012, when the price of gold was 1500 1800.

But the gold price goes higher expect the silver price to move even more relative to gold. So while the silver price has gone parabolic. This reaction is not unreasonable as it tries to catch up to go like it has in the past there's lots of reasons to expect silver to have gone up and to go up even more relative to gold.

Onto the second thing I want to cover and I think that everyone will agree that most governments are not going to go back to pre pandemic normal.

You know their policies are going to change as a result at the pandemic, they're going to seek additional revenues, which will be a negative labor relations are going to be more regulated so negative and the supply chain in the us will likely be shorten which for us will be a positive.

So we're a company mines will never be more important than so in making these comments about about hecla.

What I'm trying to emphasizes the forward looking that we're doing we're not just thinking about the coming few quarters. We're thinking about the course of the next few years. When we think we're going to continue to see the strong silver price.

And I think it's not recognize that hecla.

Produces about a third of all the silver mines in the us.

There are only five companies that are relevant silver producers in the U.S and no one vice two of them for their silver production there big diversified miners the remaining well we produced almost three times as much silver from our US mines is the next largest primary silver producer does and when the Lucky Friday reach its.

Full capacity, we should produce more than 40% of all of us production.

It's also not well known that the United States is the 10th largest producer silver in the world producing about 4% of the world's total US is one of seven countries that produce roughly this 4% to 5% and it's such a small percentage because more than 50% of all silver production comes from three countries, Mexico, Peru in China.

And Mexico dominates with 40% more silver mine in Peru, and two thirds more than China, but.

All but one of our 10 primary silver peers operate in either Mexico and or Peru.

And so hecla is unique investment because of its scarcity it scarce because not very much the world silver is mined in the U.S. only 4% scarce because if an investor wants exposure to us mined silver there's really only one relevant option the options not tenuous, we have a third of the US production it's grown.

Fine.

The the mine lives that we have our low cost that are competitive.

Even in fact, there they are among the best even when the U.S. dollar strong so should the dollar continue to weaken as use we've recently seen the relative cost structure will improve.

The capital for the our mines have largely been invested over the course of the last 30 to 75 years they've been in operation So future capital requirements are modest.

There are scarcity of an investment heclas scarce investment because we have by far the largest silver reserve and resource in the us some of which are new projects that will allow us to grow our silver production in the future.

And finally with the company's long.

Life 130 years old next year, we are scarce, because we have tax losses that assure our cash flow through in the future is not going to be diverted into government coffers.

The combination of all this makes hecla unique opportunity for silver investors over the years I've talked about the brand value of Heclas and investment vehicle I think I may have mentioned to many view of running into people, who say the silver price runs of 2009 or 1979 that they invest in hecla.

I would say that was the brand value, but I realize that that was not the whole story. It was really about the fact that the position that hecla has as the dominant producers silver in the U.S.

So with those two things I'll pass the call on to Lynsey and learned for them to talk about the quarter.

Thanks, Phil and good morning, everyone I'll start on slide six.

But still noted we have strong second quarter, ending with some 76 million in cash and 50 million drawn on the revolving line of credit as you recall at the outset of the pandemic reduced redo drew down on our revolving line of credit.

To ensure we had adequate liquidity until we can determine how that pandemic was going to go to affect the operations that are mine sites.

With that risk now being essentially managed we plan to repay the balance of the revolver before the end of the year.

In July investment Qubec again invested in us by subscribing for private placement of 50 million Canadian notes.

They have been a great partner and we value our relationship with them.

One of the uses of funds might be to make open market purchases of our eight year bonds. When it makes sense as investment qubec funds come at a lower interest rate than the bonds.

With an improving net debt to EBITDA ratio of two times and the bonds in the Q notes.

Repayment terms well into the future.

We're very comfortable with our balance sheet.

As a leading silver producer in the us with the diverse asset in commodity mix. We've also been able to benefit from the substantial strong gold and increasingly strong silver prices with gold, making up 48% and silver 30, 33% of our total revenue this quarter.

This along with the ability to produce silver and gold the cash costs, which are substantially lower than the realized metal prices positions. The company to capture the significant margin available to us, particularly in the rising commodity environment, we find ourselves in today.

Turning to slide seven we see the free cash flow generation for the quarter is 26.7 million.

I have highlighted Lucky Friday only to emphasize that these are quarterly cost in excess of revenues that is a mind reaches full production by year end should be eliminated.

Lastly, we provided information on our active hedging programs in the press release in the queue. Today traditionally we have hedged future production of our base metals and that program has been beneficial for us in the past and we'll continue to do so in the future.

Beginning in June of 2019, we started purchasing put contracts for a portion of our future gold and silver production when prices were much lower than they are today.

The puts or purchased to provide a floor price for those gold and silver ounces, but importantly, they allow us to capture all the upside of the actual gold and silver prices above the floor price, which goes without saying is very positive in this environment.

Lays the by the puts on a quarterly basis amounts to approximately four to 5 million.

These amounts are included in the last gain on derivative contracts line in the income statement.

So I'm very happy with the financial progress we made this quarter and now I'll turn it over to learn to talk about our operations without over to you learn.

He Lindsay.

First to most gratifying is that our safety record continues to be exemplary. Despite the distractions caused by the pandemic as you can see on slide nine.

We currently have an all injury frequency rate of 1.19, which is a 74% decline over the past six years and 26% over last year.

At Greens Creek on Slide 10, we have gone 470 days without a reportable injury, which has a record for the mine and its 30 years of operation.

Early in our response to the covert 19 threat. We started a 14 day quarantine for everyone going onto Admiralty Island in hotels, we rent for this purpose.

Access to reliable rapid testing allowed us to shorten the quarantine period to one week during which to tester administered.

Residents Juno are allowed to quarantine at home.

These changes reduced the stress on our employees and their families while maintaining a high level of protection.

The situation is dynamic and we will modify our procedures in response to changes as required.

Production grades continued to be strong and operations are good the process team has done a remarkable job regaining most of the loss throughput from the Sag motor failure in the first quarter.

And operations and technical services are pulling together to adjust the plan as circumstances change and the results show it.

I could not be more pleased with how everyone has come together in the face of the pandemic and I want to congratulate everyone on a job well done.

Our cash the mine returned to normal operations quicker than many expected waiting to strong production and cash flow generation this quarter.

Unlike Greens Creek Casa is not a camp job.

Although there are unique complications from covert 19 in accounts setting the day to day grind of managing it with a resident workforce drawn from many communities must not be underestimated.

I visited Caf after the government mandated shutdown and I can tell you that the way they are managing the covert 19th writers remarkable my hats off to the Caf team.

With the mind Bakken production I'm pleased to note that our improvement efforts, including in the mill are proceeding well on many fronts. This is not a short term exercise, but instead it is an opportunity to make meaningful improvements that will benefit the operation for years to come.

These improvements can be especially beneficial during times of high metal prices like we're seeing now stay tuned we will have a lot more to say on this in coming quarters.

So lucky Friday ramp up continue slightly later than planned and we are on slide 12 now.

We have over 96% of the expected workforce in place and through June or a little ahead on tons.

Easy to overlook that this has been accomplished after a three year long strike, it's remarkable and I can tell you from my visits to the mine the changes are real and meaningful.

The number two shaft hoist upgrade was completed on budget during the quarter. This was a very complicated project relying on multiple contractors from two countries and it was executed on plan during the pandemic well done to the project team.

With this work behind US we remain on plan to achieve our full production rate by the end of the year.

The RPM project is proceeding slowly due to travel restrictions and reduced work week in Sweden brought about by Cobot 19.

Acceptance testing in Sweden will continue until the machine meets our requirements in the meantime, we're pursuing additional initiatives to increase productivity at the mine and I expect we'll have more to say on this topic in the coming quarters.

We've made solid progress in Nevada, as we work to find ways to improve it.

As you can see on slide 13, we have collected 16000 of the targeted 30000 tons for the tight to or bulk test sample with third party.

Recall that this test is expected to be self funding.

So far ground conditions water inflow productivity and unit costs are all better than planned the or appears to be more structurally controlled unless disseminated the model, which is good from a mining point of view and the grades are inline with what was expected.

Initial metallurgical composites conformed to our contract with the third party and we look forward to seeing how the material performance in their plants. So far so good.

We plan to itis idle the Midas mill for the balance of 2020 any type one or we produce can be process fire third party agreement will keep the mill on hot standby should circumstances change.

At San Sebastian mining is expected to stop in the third quarter and milling in the fourth quarter. We continue to study potential opportunities to returned to production, but regardless of the outcome expect there to be a GAAP in production there.

The low capital investment strategy, we use a San Sebastian has given us significant operational flexibility since we acquired at a 90 99.

We have generated substantial cash flows here and expect occurred Allen and as exploration team will find additional minimal veins in the future. It's a great land package in the right postal code and we have the right team looking for more.

In closing I would like to say that I'm very proud of the teams at all of our operations are people. Once again have demonstrated how they are true professionals managing the risk so the pandemic and ensuring we protect one another and our communities I'll now return the call over to Phil Baker.

Thanks, Laurent before we go to questions I just want to acknowledge that this is this is Mike Slessor conference call with Hecla, He's leaving after almost eight years of running Investor Relations.

Mikes, our friend and we wish him well and in what he's doing share he'll have news on that in the near future with that operator, you can open the line.

For questions.

At this time, ladies and gentlemen, if youd like to ask your question. Please go ahead.

And then number one on your telephone.

Again that Star then one asked the question.

Your first question today comes from the line of HEICO Ella with H.C. Wainwright. Please proceed with your question.

Hey, guys, a critical wainwright or whatever but you don't.

Good.

Hey, Thanks for taking my questions on more of a common I think it's pretty cool and pretty unique you have a.

Core with emergency response plan right on your website right on the whole Pedro upside there well them.

Let me do a derivative contracts and using current spot pricing. What do you think the current impact is going to be for the remainder of the year on if you would be so client just break it out by quarter.

Well I don't know if we can do that up top of our head.

Heiko.

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Yes, certainly with with respect to the puts Theres no no impact there. So it's really really talking about.

The with respect to lead zinc.

I'll try to question differently, if I use the 14 million that you had this quarter and I just trend lined up hopeful I am I going to be.

Well it.

Yes, Lenzi do you have a way of answering that question, because yes, HEICO as a 14 million.

Out of say half of that as the reversal.

On the pilots from the first quarter, because as you know with the pilots.

If the actual prices below that the strike price of the pilot it's in the money, obviously with the prices rising.

That goes away. So we had to reverse that 6 million that we recorded on the puts in the first quarter because they're in the money now they're out of the money.

So that out of the 14 half of it goes away because thats. This reversal, we're putting as you know as prices go up nothing happens at a value the put together the other amount we say in that 14 million basically HEICO is there's four or 5 million a quarter.

A buying the pilots.

So we bought a few more puts maybe after June thirtyth, but that $40 million essentially goes away.

And I'll come back into line, if we buy more silver and gold puts but at these prices were watching the market carefully so that you can't trend line that.

And then as on the base metal hedging, which we do that's really built into the sales line already so there's really nothing going on there in terms of a mark to market on any of our derivative programs.

Getting away with us and we should we have the Q the small liability immaterial liability it sets up set up on the balance sheet on the mark to market.

On those financially forward.

Base metal contracts that haven't settled yet.

But the offset is in the sales line anyway. So so.

You can't trend line 14 million obviously.

Okay. That's helpful. And then just a clarification the remote point line, a minor that being minor that you for Lucky Friday that stuck in Sweden, you talk about in the release you just talked about it on this call.

Without the you can't really overseeing all like good stuff, assuming you don't receive it as you have planned and it's not operational by quality January onest or whatever do you actually needed but.

Would it impact your fiscal 2001 outlook or could you simply use the old equipment, the pre strike equipment to get towards the pro production rates.

Yes, so the RV OEM remember is is a test.

Our plans have always been to mine the way, we have mind with with modifications that we think could could improve it.

Same equipment seeing people.

RV, OEM and would be able to increase throughput and.

So we'll we'll continue to.

Advance the RV OEM in Sweden, and then when when it's ready to go will bring it over and then we'll test at the Lucky Friday, but it's it's not fundamental to production in 2021, we're anytime in the future.

Never been in our plans. So so the delay is is not holding us up at all upside.

Lord audit anybody exactly what I was looking for.

Good morning, HEICO various Lauren.

Okay.

Yes, I think exactly what Bill said, our 2021 plan at long term plans don't rely on the RPM it should be viewed strictly as upside optionality on productivity and also on safety as the machine is remote but we're not dependent upon it.

To your question about how we're monitoring it we have weekly calls we get video update so we're staying engaged.

Joe appreciate it's not quite the same as being on the ground, but we are engaged in progress is being made.

Very helpful. Thank you all space.

Thanks, Ike I think you echo.

Your next question comes from the line of Matthew Fields with Bank of America.

Please proceed with your question.

Okay.

Everyone.

Congratulations on line.

Good luck in your next in your future endeavors.

And just wondering.

Why.

Your bonds are trading at a pretty significant premium to par.

Why would you pay a premium to retire eight year debt.

Thats five year debt.

Reasonably similar rate I just help me. So so so let me just let me just interrupt you Matt.

We'll buy bonds back when it's appropriate and buying it at such a high premium is not not appropriate so.

We do that until.

Until the conditions are right.

And I know the use of proceeds.

In the inventor for the new Quebec that is for Casa Berardi investment in general corporate purposes, but I didnt deal limitation on how much can be either or is there are no limitation.

And how much can be capex and how much can be other.

We do make a commitment to an amount of capital at Kassa to spend a certain amount of capital at castle, which is consistent with our plans. So so we're not doing anything.

That we had not planned to do.

Blends anything to add.

Yes, no Matt there is no restrictions on the 50 million Canadian.

Okay.

And it looks like your RP basket under that indenture and make you can do kind of whatever you want those proceeds.

Yes, correct.

Okay, all right. Thanks, very much and good luck in and thanks again for for all your years here.

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

Yes, thanks, guys and.

Just as mentioned.

Just wanted to see thank you as well to my question Linda.

You become part of the company that were so used to dealing with its going to be very different to take your math to talk to somebody else.

Hey, So my question for Phil.

That was kind of following up on your opening comments about the silver and gold price outlook.

And I was just wondering how hecla might benefit from the rise in bullion from that project perspective.

Generally underground mines don't have the sensitivity to metal prices that yet.

In the way with open pits.

And I just wondered if.

Hecla might have opportunities from a development perspective due to these higher prices for example, like in Nevada is there way to look at anything differently, perhaps in the way. They are developed is there even open pit opportunities versus some of the underground stuff and then on them on the open pits you do have up at Casa.

And where you had them in the past at San Sebastian are are things starting to open up due to these metal prices that otherwise hadn't been an opportunity I call it a year ago.

Yes.

[laughter], so great that so that.

[laughter], so travel rating outlook, we're going to generate a lot more free cash flow you you look at sort of margins that we that we have.

So so that with those margins with that cash flow and allows us to.

But.

Make more investment as well as do other things with it will will do exploration, we have a dividend policy it that.

The existing policies that were.

Coming close to being in a position where it will start to pay out.

So there is there's a there's a number of different uses for that.

Additional margin that we have.

And part of that is going to be developing the large inventory of assets that we have Nevada.

Quebec.

Washington State Colorado.

British Columbia.

San Sebastian Durango, Mexico. So so yes. The answer is yes, we've we've got lots of things in front of us.

And and again like.

Thank you used to mine down San Sebastian kind of more open pit style is.

Is there anything near that just kind of economically stopped working and.

Kind of come back to life or is it that more dependent on exploration first.

Yes, there's more exploration that we think we should do but yes that el Toro vein.

It could.

It's it's well that hole that whole area to the south.

Why don't you comment.

Yes from the old El Toro vein to the west and the east.

Theres, there's certainly a lot of potential for additional veins as you probably saw in the press release.

Short vertical reverse circulation drilling that we're doing we've identified a new vein there and it's going to take some work to get it to get to get it all figured out and continue to build the resources there.

Okay.

Great. Thanks, guys.

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

Okay, well thanks, everyone.

I'll just remind you that.

If you'd like to have a conversation with Lynsey Lauren or me, we've set up a opportunity for four recalls for tomorrow morning, you can find that in our press release and would encourage you to to reach out to US then for those those calls.

Or you can certainly call, Mike or directly so thanks very much be safe.

Good day.

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

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