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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Hecla Mining Company Earnings Conference Call. At this time all participants are in listen-only mode. [Operator Instructions].
I would now like to hand the conference over to your speaker today, Mike Westerlund, Vice President of Investors Relations. Thank you. Please go ahead, sir.
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 beginning said mining is an essential business that needed to continue to operate and we know we can 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 any one and I mean any one 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 draw down. In addition, we bought gold and silver insurance puts that assures 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, is that we’re in a good shape and how did we get here?
On January 31, alarm bells went off for Hecla, President Trump closed 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, 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 reaching where we are today. We also quickly reviewed our supply chain confirming that we had a very strong inventory supplies and where we were at risk, we either got that fixed 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 sell forward our lead and zinc. Expect us to continue to earn to new protection as we go forward. So we’re prepared for the rest of 2020 even if we have a down draft 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, they declared 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 be able to declare mining as essential.
In Quebec after weeks they sell the industries’ 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 and difficult jurisdictions are not going to be straight forward and as miners go back to work in various corners in the world. I’m confident we’ll see the difference of having primary operations in the US with 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 and 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 that are 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 rate [ph] above the 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 expiration spending is 25% lower as you can see in blue and we’ve spent about 17% of the capital and 22% of the expiration totaled so far. With the slowdown in activities in Q2 we’re confident we can achieve our new guidance. So a bit like last year, we see cash flows increasing in the second half of the year and 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 cost, travel expenses and other things 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 are going to be enhanced as communication platforms improve. All of this 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 really very 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 on our successful second half of 2019. We ended the year with some $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 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 also have been able to benefit from the substantial increases in price. This along [ph] gold price with gold making up 60% of our total revenues for the quarter. this along with the ability to produce silver and gold at cash cost which are substantially lower than the realized metal prices, positions the company to weather any volatility in current economic climate 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 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 above $4 million as a result of 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 low price relative to the average for the quarter. We recovered some $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 some $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-products credits guidance for the rest of the year by $1.75 per silver ounce approximately half due to the product pricing and their other half due to forecast and concentrate treatment charges as well as some additional costs incurred as a result of COVID pandemic.
As [indiscernible] for the week of March that we didn’t operate due to the government mandated closure. We estimate reduced earnings and cash flow by some $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 of 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 [indiscernible] with the associated increase in revenues as the mine progresses the 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 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. In end of the quarter with some $5 million of net cash balance. We used $31 million to reduce leverage as we repaid $506 million of the outstanding bonds, with that and we issued new $475 million bond. In addition we incurred fees in conjunction with refinancing of some $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 expiration expenses by 25% to help ensure we remain at a positive cash flow for the year [indiscernible] prices.
So all the bonds have been turned out to address liquidity, we drew $210 million down on the revolver during the quarter to increase our cash position at quarter end to $250 million. In these - the circumstances the world finds itself in currently, liquidity is must and drawing under 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 revolve 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 gold and silver prices for the 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 and one of the two hotels we’re renting. Then they go onto the Island for 28 days of work, 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 cost 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% in normal operating levels. The open pit contractor is servicing his gear and touching up the roads for 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 no reliability throughput and recovery. We plan to resume these in earnest in Q2 and expect to see reductions in cost and increase 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 the 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 half as the production is mined. The 5370-loading pocket upgrade was completed on budget and schedule. The COVID-19 delay in the Number 2 shaft hoist project which will take the mine down for about 21 days. Now is forecast to begin in June and to 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 cost in our Midas mill and they’re closer as well, a double economic benefit. We plan on mining 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 self-funding and we can stop the work at anytime, 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 ounce per ton of gold and about half 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 maybe 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. And the issue is, whether we can produce the saleable third concentrate for copper. What we had hoped it will be a quick solution did not yield except more 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 and so we’re now on Slide 17. For the last 13 years we’ve had a charitable foundation that it’s contributed over $3 million to the communities, we operate in. we have now committed a new very targeting contribution of $125,000 to Juno [ph] with most of that going so far to food banks. And we’ve done something similar in other locations. We’re the largest private employer in Juno [ph] and the Silver Valley and then Lasar [ph]. 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. I think you’ll find interesting and then we’ll also have a chance for you to have call in with the teams of managers one-on-one after the meeting ends. So watch out for our press release with the details on that in the next few days.
So with that, I’ll open things up operator to questions.
[Operator Instructions] 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 this reductions coming from?
Sure, it’s pretty straightforward its primarily Greens Creek and Casa Berardi that will see these reductions. Lauren, do you want to give him any further indication?
Yes, it’s thing 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 [ph] 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 second quarter. We’ll have an update at the end of the third quarter. We’ll have an update. I would anticipate that if we move forward with things 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. It can work. 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 earlier days. Obviously, the Nevada gold mines plants are large plants and they’ll process our ore in a lot. So it will take us sometime 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 [ph]. 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 then advantageous to them both in terms of the fact that they make 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, 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. [Indiscernible]. Appreciated.
[Operator Instructions] 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 were - had not been exposed to the virus that 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 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 pretty on our ramp up schedule.
I would say that looking at the last several days or 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 back up to our full complement of people. And that’s assuming that the government continues to relax restrictions in the manner in which 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 up 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 and that we 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 we 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 [indiscernible]. 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 I mean 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 out was our access to PPE and sanitizer. And although we were pretty well stocked in most places. We did beef up orders very quickly and we have transferred things around internal from the company because some places have a bit more in one supply than another. And 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’s still work 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 essential to stoppage of travel, conference attendance, etc.? And then just extrapolating how meaningful the number is that and how sustainable do you think it is? And also just, do you have the costs for the hotels in Juno [ph] and the quarantine, is there a number that you can give us or at least an estimate sorts? Thank you, guys, so much.
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 cost permanently. And we also are leasing our office space, comes up in two years. And we were already looking at how we might reconfigure our offices in the future and so, we’ll certainly consider that. But the impact to that will be a couple of years out.
With respect to the quarantine facilities. We have two hotels that we have leased it, total hotels we have all of it and of course in Juno [ph]. The tourist industry is really hurting so it’s very well received in the community and our cost of this quarantine activity, order of magnitude is three quarters of a million dollars a month or so and that’s reflective in our guidance.
Very good. Thank you, guys, so much. Thanks for my 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, is going to run the rest of the year. And we’re essentially in full production with the 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, same story this year and you saw the sort of results that we had a year ago. So if you have questions. Please go a hold of Mike or I. thanks very much.
Ladies and gentlemen, that does conclude today’s conference call. Thank you for participating. You may now disconnect.