Hecla Mining Company
Q1 2010 Earnings Call Transcript

Published: 12 May 2010

[Randall Hsu:]

Andy Schopick - Nutmeg Securities

[Operator:]

Good morning. My name is Sarah, and I will be your conference operator today. At this time I’d like to welcome everyone to the Aurizon Mines Limited, first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Mr. David Hall, you may begin.

[David Hall:]

Thank you Sara, and good morning everyone. Welcome to Aurizon’s first quarter 2010 conference call. With me in Vancouver today I have Ian Walton, our Chief Financial Officer; Martin Bergeron, our VP operations; Rodger Walsh, our VP of Corporate Development; Chris McClain our Controller; and Julie Camper, Corporate Secretary. Before we get into the presentation, I’ll ask Julie to read the forward-looking statement disclosure.

[Julie Camper:]

Some of the information that will be discussed on this call maybe forward looking in nature, including information regarding the company’s strategic plans, anticipated production and other estimates and forecasts related to the company’s future operations. All such information expressed as of the date of this presentation, the company’s plans, expectations and belief is based on assumptions that the company believes that are reasonable. However by its very nature, forward-looking information is subject to risks and uncertainties, and on that basis there can be no assurance that such information will prove to be accurate, or that expectations will be achieved, except as required under applicable securities legislation, and the company does not intend and does not assume any obligation to update these forward-looking statements. For a description of the assumptions of which forward-looking information discussed on this call is based and on the applicable risks and uncertainties related to that information. We direct you to our most recent annual information form and our management’s discussion and analysis for the period under discussion, both of which are available on SEDAR and on the company’s website.

[David Hall:]

Thank you, Julie. Now there is a slide presentation that is on our website that I will be going through briefly, and the full MD&A is also on our website at the present time. In terms of the quarter, moving to the slide presentation, we have gold production of a little over 35,000 ounces, cash flow from operations at $9.2 million, earnings of $2.2 million. We ended the quarter and a strong financial position with cash of $114 million, and working capital of $112 million. At Casa Berardi, during the quarter we were successful in extending the mineralization on the 123 South Zone, and at Joanna our drilling was successful in extending the Hosco Zone, both laterally and to-depth in the area of the Hosco pit. Moving on to the details of the gold production itself, as we have indicated at the end of last year and the start of this year, this year Casa Berardi is a transition year where we are going through a lower grade sequence of the mine. We anticipate that the grade on average this year will be roughly one gram per ton less than it was previously. By the end of this year we will be through this lower grade sequence. We will be back into grades more typical of our underground reserve grades, but as we have indicated, for the first part of this year we are in a lower grade sequence. So the grades for the first quarter was 6.79 grams per ton; that’s very close to our plan of 6.86 grams per ton. In terms of our gold production, 35,000 ounces was actually a little ahead of our plan of 34,000 ounces. So basically the mine is performing as anticipate; it’s right on plan, right on target. Moving to the next slide in terms of our mine site costs, they came in right on track; $108 actual compared per ton; these are Canadian dollars per ton, compared to our plan of $109 per ton, and the throughput was increased during the quarter to an average of 1,985 tons per day, and that’s part of our plan as we go through this year as to increase our throughput from an average of about 1,800 tons a day last year, up to 2,000 tons a day this year. So again in terms of our plan the mine is performing well. In terms of the financial results, moving to the next slide, revenues were close to $40 million, earnings of $2 million, $0.01 a share in cash flow from operations, and obviously compared to the previous quarter our comparable quarter last year, those numbers are impacted by (a) the lower grade coming out of the mine; and (b) stronger Canadian dollar, and so that’s what impacts the numbers if you compare them with the comparable quarter last year. Moving on to talk a little bit about the properties in terms of Casa Berardi. We have indicated that our production this year will be somewhere between 145,000 and 155,000 ounces. Once at the cost of $500 an ounce, and we’ve increased our guidance cost number for the year based on the stronger Canadian dollar, and we are assuming now that the Canadian dollar would be at par with the U.S. dollar for the balance of the year, and that cost us to increase our forecast in terms of cost per ounce from $490 to $500 U.S. Once we get through this lower grade sequence this year, we will be confident that (a) we can sustain 2000 tons a day going into 2011; we’re also confident that we’ll be back in material that is more reflective of the reserved grade, and closer to sort of 8 grams per ton; and that would translate into annual production of 170,000 ounces a year, which we think we can attain in 2011 and 2012. In terms of the expiration activity at Casa Berardi, going onto the next slide, very active drilling program going on at the present time; about 11 rigs turning for on surface and seven underground. The areas that we are drilling are outlined in the sketch. In area one, the west and depth extension of the lower inter zone. A fair amount of drilling going on in the area two; (a) from the 810 drift that we completed last year, where we are drilling the down depth extension of the team zone, which is one of our main producing zones, and doing a lot of drilling to upgrade the resources in zones 118 to 120, and simplistically convert that sort of brownish area into red, by moving that into reserves at the end of the year. In area two (b) we are doing drilling from the 810, and later this year from the 550 drift once we extend it by another 500 meters for that blue dotted line, as to test the continuity between the principal area, all the way down to 123 and drilling up the 123 zone. In terms of the principle area, we’ve been doing quite a lot of drilling in actual fact. In terms of the open pit potential on the principle zone, we have a large number of holes. We are waiting for assays on the principle zone, and we should be publishing those hopefully by the end of this month. So we are drilling from the surface there on the principle zone. We are also drilling from the 280 drift, which is that yellow line that runs across the sketch, to drill some of the underground zones to exist in the principle area. Finally, in terms of the East Mine we are doing drilling from the surface to test the depth extension of the East Mine and other targets that we have in that area. Moving onto the next slide, I’ll just highlight some of the results that we put out in the first quarter. This relates to the zone 123 South. This is against the South roles as oppose to the Casa Berardi trough. We started with a resource of about 200,000 ounces at the end of last year, which is shown in the outline you see there; and now we’ve extended that mineralization, both up-dip and down-dip, so we have a mineralized corridor that’s about 900 meters deep and 200 meters that looks like several stack zones within that corridor. So this is an area that we’ll be doing a lot of drilling on between now and the end of the year, to get a better handle on the continuity of the mineralization, and give us the information that we need to update reserve and resource estimates at the end of the year. So our budget for the first half of the year, Casa Berardi in terms of expiration is about $7 million, and we would anticipate it will continue at that pace as we go through the second half of the year. Moving onto Joanna now; again, we’ve been active drilling there in the first quarter of the year, doing infill and step-out drilling, primarily in the area of the Hosco Zone. As we go through the year we’ll be drilling other targets on the Joanna property, primarily the Heva Zone. We’ve also started more detailed metallurgical test work to see if we can replicate the results that we got last year, that were used in the pre-feasibility study. That test work should be finished sometime during the third quarter. We also have geotechnical environmental studies in progress, to give us the information that we need to complete the feasibility study in the fourth quarter of this year. Moving onto the next couple of slides, we are showing here some of the results that we’ve got from the drilling, that we’ve done at Joanna. The first slide shows some drilling that we did at the bottom of the thick outline shown in blue, where we’ve got very good consistency of holes, good continuity of grade and width, similar to what we found within the pit contour. So we are fairly confident that by the time we complete the feasibility study, this pit will be a little deeper and the contour will be a little different, and we’ll be picking up more ounces into reserves. Similarly on the next slide, if you look at some of the drilling that we’ve done laterally on the west and east side of the pit, and indeed potentially there’s a satellite pit 700 meters to the west, again very good grades and rigs, particularly in the satellite pit area where we have values of 3 grams over 29 meters for example, 1.7 grams over 47 meters. So again we are very encouraged with this drilling, and that bodes well for picking up additional ounces into the mine life as we get towards the feasibility study at the end of the year. Moving on to Kipawa, a few words about that. This is a project that we’ve staked pretty very large, about 500 square kilometers. We done early stage work in the last two three years, and now we’re at a point where we defined some targets for gold, and we just started the drill program about a week ago. So we’ll do about 6500 meters of drilling there, plus testing the gold targets that are outlined on the next slide on the sketch of our land position, and this is the property where we’ve had high gold values from till sampling, 6 grams, 7 grams, 8 grams per ton, one as high as 100 grams per ton. So we are quite excited about the potential. We think we now have some ideas where that gold has come from through glaciations from the source, and this drill program is designed to test that. So moving on to the next slide in terms of our priorities and outlook for this year; obviously we want to achieve our production target of 145,000 to 155,000 ounces from Casa Berardi; we are on track to do that, we are right on plan. A lot more drilling so that we can increase our resources, upgrade resources and develop reserves at Casa Berardi. In terms of Joanna, obviously complete our in-field drilling and the metallurgical test work, so that we are ready to complete the feasibility study in the fourth quarter, and we are going to be pretty active in terms of exploration; 3.4 million of Joanna, 7.2 million in the first half of Casa Berardi as I said, and about 1.3 million at Kipawa. Moving onto the next slide, just a summary of the company. I think the strengths that we are building this company on are based on these five elements

[Operator:]

(Operator Instructions) Your first question comes from Bryan Christen – Desjardins Securities.

[Brian Christie:]

Just a quick one David on M&A; I just get a sense, kind of reading between the lines in your release, that you maybe more focused here on development projects as supposed to actually looking to merge with another producer. You want to comment on that?

[David Hall:]

Yes, a couple of comments. I mean I think it’s still sort of a two-thronged approach, where we have been having discussions with various people in terms of existing producers, advanced stage developers, and we still will continue to do that. What had worked against us last year, especially in the case of the advanced stage developers is probably some of the evaluations that were out there, but we haven’t given up on that, we are still working on that. But we also feel that there are some opportunities particularly in Quebec that are open to us, where we can utilize our exploration skill set and ultimately our mine development skill set, plus our financial resources to go in and add value with the drill bits as I said like we have done in the past with Casa Berardi and at Joanna. We are certainly, I wouldn’t discount the first element, but I think at this point we are actively pursuing a second element, because we think there is opportunities to add value by getting in at an early stage and creating value, adding ounces as we go forward.

[Brian Christie:]

Would you look potentially at doing a private placement into some of these companies David or…?

[David Hall:]

Well it’s all driven by the fundamentals of the underlying assets and property in various ways that you can get involved. Obvious they are directly in the property or perhaps participating in the shares of the owners of that property. So we are looking at various situations that may involve that.

[Operator:]

Your next question comes from Cosmos Chiu - CIBC.

[Cosmos Chiu:]

A few questions here; can you remind us of your cash flow and EPS sensitivities to Canadian dollar?

[David Hall:]

I will let Ian answer that.

[Ian Walton:]

I don’t know if I got it, I think it’s [Inaudible] 10% is like $10 million or something.

[Cosmos Chiu:]

It’s okay, you can get back to me afterwards.

[Ian Walton:]

Yes, I’m sorry 10% is the variant. It roughly $10 million on gold price and on the FX it’s actually $15 million, so that’s what it is.

[Cosmos Chiu:]

Okay. In terms of the 42,500 ounces remaining on the core options, you expect to deliver into that evenly in the next two quarters?

[Cosmos Chiu:]

Yes, is it going to be like half in Q2 and half in Q3?

[Ian Walton:]

Yes, I mean. It’s the same amount each month, yes basically yes.

[Cosmos Chiu:]

Okay, and also if I take a calculation, your Q1 production was above 24% of your full year guidance on the lower end of 145,000 ounces. What is the plan to increase production in the coming quarters? Is it higher through put, higher grades or both?

[Martin Bergeron:]

It is both. This is Martin speaking. Yes, we had planned at the beginning of the year that the first half of 2010 would be more difficult with a ramp up in production from 1800 tons per day in January, going up to 2000 sometime during the second quarter. In addition to that grade, for the first six months it’s going to be lower than what we expect for the remainder of a year. So we are still confidence based on the results that we’ve achieved for the first quarter that we are going to be in the middle of our bracket for production of gold for the year.

[Operator:]

Your next question comes from Charles Gibson - Edison.

[Charles Gibson:]

I think my question must have been largely answered by your answers to both Brian and cosmos there. Could I just ask however; I wonder if I could ask you just to clarify on the hedging on the derivatives contracts. You have some derivatives contracts relating to Canadian dollar, U.S. dollar, now do those also relate of the same time to the gold contracts, or are they set. I mean are they internally related with gold contracts is what I’m asking, or when you delivering to them or do they expire at a different time?

[Ian Walton:]

It’s the latter, we’ve got contracts already dependent on the gold contracts.

[Charles Gibson:]

Right, so do they expire at a very different time. I mean you were talking about the gold contracts being fairly evenly spaced over the next two quarters. How does the Canadian and US contracts?

[Ian Walton:]

Well, at the end of Q1 we just have one sort of long contract that comes due at the very end of September, and that’s the $8.1 million US rather roundly point to $1.11 million FX. Last week with the volatility of the current markets, it did put on some additional hedges at that point. So it probably got about roughly 18% of the remaining nine months production, both sales hedged, so roughly 106, 107.

[Operator:]

Your next question comes from Randall Hsu - Fundamental Research.

[Randall Hsu:]

Just another quick question related to earlier contracts. I believe the non-hedging option are expanding this year. I’m just wondering, going forward does the company plan to implement a similar strategy?

[David Hall:]

No, I think on the gold hedges if you want to call them, that was truly related to the pressure depth facility that we put in place, in order to finance the construction at Casa Berardi, and obviously the lender wanted some protection on the downside. So we did a zero cost collar with puts of 500 calls at the prices we’re talking about, and once we deliver the final trench of those calls over the next six months, that will be it and we won’t be hedging our gold production.

[Operator:]

(Operator Instructions) Your next question comes from Andy Schopick - Nutmeg Securities.

[Andy Schopick:]

I also just wanted to ask a follow-up on the hedging and derivatives. Can you give us any sense of what this quarter or even last year’s performance would have looked like, had you not had some option strategies in place and were selling your production at market prices?

[Ian Walton:]

I suppose you can probably derive that from and issue the derivative gain-loss numbers through the period. If you look in the first quarter Andy, 68% of the gold sales were delivered against the gold cost at a price of 903 okay. So you could take whatever price you want, the prevailing market price and workout the difference based on that. Likewise if you look last year, we’ve got tables showing our average realized price, which we would see the impact of deliveries or call options.

[Andy Schopick:]

So could I ask that you just repeat your response to the prior question about the strategy going forward?

[David Hall:]

Absolutely. Our strategy as a company is not the hedge or gold production okay, because we believe that our shareholders and certainly we as managers, want to benefit in upside in gold. However turning the clock back five years, when we were building Casa Berardi we were looking at a CapEx of $100 million Canadian approximately. At that time our market cap was roughly $150 million Canadian. So clearly if we try to do that, raise that capital through our equity markets, it would have been a severe dilution for the shareholders. Consequently what we determined to do was to finance up to $100 million, 25 equity which we did at the $1.35, and $75 million project debt facility. Having said that, obviously the lenders -- and we are going back to when gold was trading at around $500 to $550 an ounce. At that point, obviously the lenders were worried about since gold had just come from $300 an ounce protection on the downside, in case gold went back $300 an ounce. Consequently they asked for some protection on a certain percentage of the production at $500 an ounce. To go and buy the puts that they required at $500 an ounce, would have caused us to raise another $10 million Canadian at $1.35 when equity markets were fairly tough as it was. So we decided not to do that; we decided to finance the cost of those puts by writing an equivalent amount of calls on a one-to-one basis, of a spot price of about $550 US. We got calls that ranged from probably 800, up over to 950 an ounce or something like that, and for the first 18 months of the term of the loan, those calls were above the market price. Its only in the last 18 months that those calls have come into play at being below the prevailing spot pricing and we’ve had to deliver into them. As Ian has said, we are now in the last six months of that call situation, and by the end of September we will have deliver the last balance into that call position, and we won’t be hedging our gold production from that point forward. If we were to do a project debt facility in the future, we now have a revenue stream, we now have the financial capacity to buy puts going forward to protect our lender. So you won’t see anymore hedging, after we deliver into the last ounce in September.

[Andy Schopick:]

In September?

[David Hall:]

Right.

[Operator:]

There are no further questions at this time.

[David Hall:]

Okay. Thank you operator, and thank you everyone. We do appreciate your time and attention, and have a great day. We look forward to speaking to you shortly on the second quarter conference call. Thank you very much, and have a good day.

[Operator:]

This concludes today’s conference call. You may now disconnect.