Hecla Mining Company

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Hekla Mining Company earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star then one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to Mr. Mike Westerlund. Please go ahead.

Thank you, Operator. This is Mike Weschel and Hekla's Vice President of Investor Relations. Good morning and welcome, everyone, and thank you for joining us for Hekla'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, Chief Operating Officer, Kurt 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 2 and 3 in our earnings release and in our 10Q and 10K 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 call. I'm going to speak to slide four. What's become clear is that 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 of my colleagues at the mines and in our offices who have made the quarter what it is. So despite COVID-19, we're producing more silver at higher prices than we did last year or 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 $160 million of our revolver. Now, I'm gonna let Lindsay and Lauren focus on the quarter, and I'm just gonna really focus on two things. First, on the silver price, and second, on the uniqueness of HECLA as an investment. So first on price is 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 of physical stimulus, the weakness of the US dollar and growing political uncertainty. And so we haven't seen the gold prices at these levels, but we have seen silver, and I think that's 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. In 1979, 80, 2005 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 are in 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 the gold price where it is, is reasonable. And remember, $35 is a price that we saw in 2010, 2011, 2012, when the price of gold was $1,500 to $1,800. If 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 gold 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. On to 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. Their policies are going to change as a result of the pandemic. They're going to seek additional revenues, which will be a negative. Labor relations are going to be more regulated, which is a negative. And the supply chain in the U.S. will likely be shortened, which for us will be a positive. So where a company mines will never be more important. And so in making these comments about HECLA, what I'm trying to emphasize is the forward-looking that we're doing. We're not just thinking about the coming year. few quarters, we're thinking about the course of the next few years when we think we're going to continue to see this strong silver price. And I think it's not recognized that Heckler produces about a third of all the silver mined in the U.S. There are only five companies that are relevant silver producers in the U.S., and no one buys two of them for their silver production. They're big, diversified miners. The remaining, well, we produce almost three times as much silver from our US mines as the next largest primary silver producer does. When the Lucky Friday reaches full capacity, we should produce more than 40% of all US production. It's also not well known that the United States is the 10th largest producer of silver in the world, producing about 4% of the world's total. The US is one of seven countries that produce roughly this 4% to 5%. It's such a small percentage because more than 50% of all silver production comes from three countries, Mexico, Peru, and China. And Mexico dominates with 40% more silver mine than 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 a unique investment because of its scarcity. It's scarce because... Not very much of the world's silver is mined in the U.S., only 4%. Scarce because if an investor wants exposure to U.S. mined silver, there's really only one relevant option. The option's not tenuous. We have a third of the U.S. production that's growing. The mine lives that we have are low cost, that are competitive. In fact, they're among the best even when the U.S. dollar's strong. So should the dollar continue to weaken as we've recently seen, the relative cost structure will improve. The capital for 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's scarcity of an investment. HECLA is a scarce investment because we have by far the largest silver reserve and resource in the U.S., 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're scarce because we have tax losses that assure our cash flow in the future is not going to be diverted into government coffers. The combination of all this makes HECLA a unique opportunity for silver investors. Over the years, I've talked about the brand value of HECLA as an investment vehicle. I think I may have mentioned to many of you 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 realized that that was not the whole story. It was really about the fact that the position that Hecla has is the dominant producer of silver in the US. So with those two things, I'll pass the call on to Lindsay and Lauren for them to talk about the quarter.

Thanks, Phil, and good morning, everyone. I'll start on slide six. As Phil noted, we have a 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, we drew down on our revolving line of credit to ensure we had adequate liquidity until we could determine how that pandemic was going to affect the operations at our 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 Quebec again invested in us by subscribing for a 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 the funds might be to make open market purchases of our eight-year bonds when it makes sense, as Investment Quebec funds come at a lower interest rate than the bonds. With an improving net debt to EBITDA ratio of two times and the bonds and the IQ notes repayment terms well into the future, we are very comfortable with our balance sheet. As a leading silver producer in the U.S., with a diverse asset and 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 33% of our total revenue this quarter. This, along with the ability to produce silver and gold at 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've highlighted Lucky Friday only to emphasize that these are quarterly costs in excess of revenues, that as the mine 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 will continue to do so in the future. Beginning in June of 2019, we started purchasing foot contracts for a portion of our future gold and silver production when prices were much lower than they are today. The foots are 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. The outlays to buy the puts on a quarterly basis amounts to approximately $4 to $5 million. These amounts are included in the lost 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 Loren to talk about our operations. With that, over to you, Loren.

Thank you, Lindsay. First and 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 Green's Creek on slide 10, we have gone 470 days without a reportable injury, which is a record for the mine in its 30 years of operation. Early in our response to the COVID-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 two tests are administered. Residents of Juneau are allowed to quarantine at home. These changes reduce 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 continue to be strong and operations are good. The process team has done a remarkable job regaining most of the lost throughput from the sag motor failure in the first quarter. Mine 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. At CASA, the mine returned to normal operations quicker than many expected, leading to strong production and cash flow generation this quarter. Unlike Greens Creek, CASA is not a camp job. Although there are unique complications from COVID-19 in a camp setting, the day-to-day grind of managing it with a resident workforce drawn from many communities must not be underestimated. I visited CASA after the government mandated shutdown, and I can tell you that the way they are managing the COVID-19 threat is remarkable. My hat is off to the CASA team. With the mine back in 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 are seeing now. Stay tuned. We'll have a lot more to say on this in the coming quarters. The Lucky Friday ramp-up continues slightly later than planned, and we are on slide 12 now. We have over 96 percent of the expected workforce in place, and through June, we were a little ahead on tons. It's 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 RVM project is proceeding slowly due to travel restrictions and reduced work week in Sweden brought about by COVID-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 16,000 of the targeted 30,000 tons for the Type II ore 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 ore appears to be more structurally controlled and less disseminated than modeled, which is good from a mining point of view, and the grades are in line with what was expected. Initial metallurgical composites conform to our contract with the third party, and we look forward to seeing how the material performs in their plants. So far, so good. We plan to idle the MIDAS mill for the balance of 2020. Any Type 1 ore we produce can be processed via our third party agreement. We'll 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 return to production, but regardless of the outcome, expect there to be a gap in production there. The low capital investment strategy we use at San Sebastian has given us significant operational flexibility since we acquired it in 1999. We have generated substantial cash flows here, and I expect that Curt Allen and his exploration team will find additional mineable 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. Our people once again have demonstrated how they are true professionals managing the risks of the pandemic and ensuring we protect one another and our communities. I'll now return the call over to Phil Baker.

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's our friend, and we wish him well in what he's doing, and I'm sure 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 you would like to ask a question, please go ahead and press star then the number one on your telephone keypad. Again, that's star then one to ask a question. Your first question today comes from the line of Heiko L.A. with H.C. Wainwright. Please proceed with your question.

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

Good.

Hey, thanks for taking my questions and more of a comment. I think it's pretty cool and pretty unique how you have a COVID emergency response plan right on your website, right on the home page of your website there. Well done. On your derivative contract and using current spot pricing, what do you think the current impact is going to be for the remainder of the year? And if you would be so kind, just break it out by quarter.

Well, I don't know if we can do that off the top of our head, Heiko, but certainly with respect to the puts, there's no impact there. So you're really talking about... with respect to lead and zinc?

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

Well, Lindsey, do you have a way of answering that question?

Yeah, Heiko, the $14 million, out of, say, half of that is a reversal on the puts from the first quarter because, as you know, with the puts, If the actual price is below the strike price of the put, 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 that's just a reversal of the put. And as you know, as prices go up, nothing happens to the value of the put. The other amount we say in that $14 million, basically, Tyco is, there's four or five million a quarter of buying the puts. So we bought a few more puts maybe after June 30th, but that 40 million essentially goes away and it'll come back into line if we buy more silver and gold puts, but at these prices, we're watching the market carefully. So you can't trendline that. And then on the base metals 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 show you in the queue the small liability, immaterial liability that's set up on the balance sheet on the mark-to-market on those financially forward base metal contracts that haven't sold yet. But the offset is in the sales line anyway. So you can't trend line 14 million, obviously.

Okay. That's helpful. And then just a clarification, the remote miner that you have for Lucky Friday that's stuck in Sweden, you talk about in the release, you just talked about it on this call. You can't really oversee it, all that good stuff. Assuming you don't receive it as you have planned and it's not operational by call of January 1st or whatever day you actually need it by, Would it impact your fiscal 21 outlook, or could you simply use the old equipment, the pre-strike equipment, to get towards the prior production rates?

Yeah, so the RVM, remember, is a test. Our plans have always been to mine the way we have mined with modifications that we think could improve it. Same equipment, same people. The RVM would be able to increase throughput. So we'll continue to advance the RVM in Sweden, and then when it's ready to go, we'll bring it over, and then we'll test it at the Lucky Friday. But it's not fundamental to production in 2021 or any time in the future. It's never been in our plans. So So the delay is not holding us up at all. It's upside.

Lauren, anything to add? That's exactly what I was looking for.

Good morning, Heiko.

How are you?

This is Lauren. I think exactly what Bill said. Our 2021 plan and long-term plans don't rely on the RBM. 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 updates, so we're staying engaged. As you'll appreciate, it's not quite the same as being on the ground, but we are engaged and progress is being made.

Very helpful. Thank you all. Stay safe. Thanks, Michael. Thank you, Michael.

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

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

So 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 appropriate. So we won't do that until the conditions are right.

And I know the use of proceeds in the adventure for the new Quebec debt is for Casa Berardi investment and general corporate purposes, but I didn't see a limitation on How much can be either or? Is there no limitation on how much can be capped back and how much can be other?

We do make a commitment to an amount of capital at CASA to spend a certain amount of capital at CASA, which is consistent with our plans. So we're not doing anything that we had not planned to do. Lindsay, anything to add?

Yeah, no, Matt, there's no restrictions on the 50 million Canadian.

Okay. And it looks like your RP basket under that indenture makes you, you can do kind of whatever you want with those proceeds too.

Yes. Correct.

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

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

Yeah. Thanks, guys. Just as mentioned, just wanted to say thank you as well to Mike Westerlund. You've become a part of the company that we're so used to dealing with, it's gonna be very different to have to talk to somebody else. So my question for Phil 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 the project perspective. Generally, underground mines don't have the sensitivity to metal prices that you get in the way with open pits. I just wondered if HECLA might have opportunities from a development perspective due to these higher prices. For example, in Nevada, is there a way to look at anything differently? Perhaps in the way they're developed, is there even open pit opportunities versus some of the underground stuff? And then on the open pits you do have up at Casa and where you had them in the past at San Sebastian, are things starting to open up due to these metal prices that otherwise hadn't been an opportunity?

We're going to generate a lot more free cash flow. You look at the sort of margins that we have. So, with those margins, with that cash flow, it allows us to make more investment as well as do other things with it. We'll do exploration. We have a dividend policy that the existing policy that we're coming close to being in a position where it will start to pay out. So, 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 the answer is yes. We've got lots of things in front of us.

And again, like you used to mine down San Sebastian kind of more open pit style. Is there anything there that just kind of economically stopped working and kind of come back to life? Or is it that more dependent on exploration first?

Yeah, there's more exploration that we think we should do. But yeah, that El Toro vein, it could – Well, that whole area to the south. Kurt, why don't you comment on that?

Yeah, from the El Toro vein to the west and the east, there's certainly a lot of potential for additional veins. As you probably saw in the press release, the 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 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 Lindsay, Lauren, or me, We've set up an opportunity for calls for tomorrow morning. You can find that in our press release and we'd encourage you to reach out to us then for those calls. Or you can certainly call Mike or I directly. So thanks very much. Be safe. Have a good day.

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