Baker reflects on silver, Hecla's future
Dorothy Kosich
'30-DEC-04 06:00'
SPOKANE, Washington--(Mineweb.com) Hecla Mining President and CEO Phillips "Phil" S. Baker heads a century-old Coeur d'Alene, Idaho-based mining company he feels offers an excellent future as a mid-tier, gold equivalent mining company.
Starting off as an accountant, who rose quickly through the ranks to become CFO, Baker has shepherded major deals for Pegasus and Battle Mountain Gold prior to joining Hecla in 1991.
Some of the projects were not exactly a cinch as Baker can attest. As CFO and heir apparent for Battle Mountain Gold, Baker spent years prowling the halls of Congress, and enduring countless anti-mining tirades from the world's news media, international organizations, and environmental groups for two unpopular mining projects--the New World Project near Yellowstone, and the Crown Jewel project in Washington state.
Baker, however, finally got a break from the anti-mining world stage when he joined Hecla, a 114-year-old company, which is one of the grand ladies of Idaho's internationally renown Silver Valley. Hecla has four silver and gold mines operating in the U.S., Venezuela, and Mexico. The company's estimated production for this year is forecast at 8 million ounces of silver and 215,000 ounces of gold with total average cash costs estimated in the range of $185/oz of gold and less than $2.00/oz of silver.
Despite the fact that Hecla produces both gold and silver, Baker is definitely a silver aficionado. Earlier this month, he organized and hosted a day-long Silver Summit at the Northwest Mining Association (NWMA). Molded in the style of the dynamic individuals at the helm of silver companies in North America, Baker is a 44-year-old, tall, ebullient, personable, bigger-than-life Texan, who actually got his start in his native state's oil and gas industry.
Earlier this month, Baker agreed to an interview with Mineweb that actually spanned several hours of give-and-take discussion. No topic was off-limits or even a sore point or bone of contention, a rare trait when interviewing mining company executives in the wake of Sarbanes Oxley.
SILVER'S FUTURE
Baker feels that those billions of ounces of silver that came onto the market during the days of the Hunt Brothers are largely gone. "Certainly until the end of the decade, the outlook for silver looks tremendous," he predicted.
"Silver is in everything. The reason it's in everything is because it's been so cheap. The silver price is going to have to be at a much higher level for a significant period of time before people will find alterntives. In some cases, there aren't very good alternatives."
Baker feels that technology is leading the way on the use of silver. Even Bill Gates is rumored to have a 10-15% investment in silver, he speculated, meaning that more silver consumption uses are probably on the horizon.
Hecla organized the NWMA Silver Summit because "we want to encourage geologists to look for silver because there is a shortage of good quality silver assets. We're trying to be supportive of the industry," Baker explained.
Baker anticipates that the silver price will trade in a range of $7/oz or plus and may rise as high as $10/oz. However, in managing its operations, Hecla uses a sub-$7 price scenario, according to Baker. "I think the outlook for gold is very good," Baker said. "Again, though, when we budget, we try to force the organization to operate at lower prices."
Meanwhile, Hecla's hedging to acquire La Camorra, Venezuela's largest gold mine in operation, will end this month. To acquire a mine or assure the viability of a project, Baker said Hecla is willing to consider hedging.
HECLA'S OUTLOOK
Baker joined Battle Mountain Gold in 1986, then went to Pegasus, returned to Battle Mountain, and subsequently joined Hecla. He joined Hecla when gold was around $250 to $300 per ounce. At that time, he realized that the company could make money at those prices given the quality of its assets. "That was very, very attractive to me because I believed the prices were going to go up for gold and silver."
Nevertheless, Baker admitted that "it's been disappointing that we haven't seen stock prices grow as much as I thought." He believes that the answer to that dilemma may lie in Hecla's reserve/resource position. In a November news release, he declared that "our emphasis now is on expanding our resource and reserve base, which we expect to grow significantly over the next two to three years, leading to increased production in future years." However, he added, Hecla doesn't expect to yield substantive results until the latter half of the current decade or the beginning of the next decade. "This is not going to do a whole lot for us over the next 18 months."
Unlike a number of other companies, Hecla enjoys a perspective that comes from a century of mining. "You look at all of these promotional companies and they are serving a purpose. But, most of them do not expect to develop these properties and live with them. We're going to develop them and have to live with the decisions that we make, maybe for decades," Baker said.
Hecla ranks at the smaller end of mid-tier mining companies because it is a gold-equivalent basis roughly 350,000-ounce producer. It also means that projects the big major miners will pass on will be far more meaningful to a Hecla. "We'll have the opportunity to pick up more things than other guys will be willing to do and, subsequently, go up the scale," Baker predicted.
However, Baker isn't inclined to have Hecla invest in junior mining companies. First, Hecla can't afford to make that investment. Secondly, "I have not seen that be terribly successful," Baker explained. "There have been a few examples where it has just about put companies under or has put them under."
Nevertheless, Hecla would love to do joint ventures. However, Baker is wary of a commitment made on a contractural basis, rather than by the geology. "We're going to be judicious on entering into ventures and creating these commitment schedules that rule our decisions, rather than geology, " he explained.
Baker explained that "the market understands the difference between a vein miner and these big open pits. But, it's hard for people to make that leap of faith that they're not taking on an excessive amount of geological risk by relying on us finding more ore at depth." he explained.
"At the end of the day, we've recognize that and that's why you're seeing the sort of exploration spending ($25 million in 2004) that we're making. We think over the course of two or three years, we will be able to build up our resource base to a certain degree. It's not going to be magical. It's not going to be a big open pit, the nature of the geometry is such that you're never going to get that," Baker said. "But, maybe we can get a little more in front of us and get people a little more confident that, when we grow our production, it's going to be sustainable."
"With the amount of money that has flown into this industry, people are going to make some big, big mistakes and some assets are going to come very cheap," Baker declared. He feels that Hecla mainly competes with Coeur d'Alene, Cambior, Placer, Goldcorp, Agnico-Eagle, Meridian and Ridgemont in the underground mining category.
"The whole industry is under tremendous pressure to do acquisitions. People are going to do some stupid transactions, I suspect," Baker suggested, adding that Hecla also faces that pressure. "While reserves appear to be an issue on a valuation standpoint--it puts limits on where our stock price will go--we don't have a lot of pressure where people are saying `you are running out of reserves tomorrow.'
"The market seems to have gotten over that. But having said that, they're still not willing to say, `Okay, at the Lucky Friday, you've been doing it for 15 years, you're going to do it for another 20 years. I'm going to value it that way.' That's what we're trying to do with the drilling is to move people along that curve," Baker explained.
Hecla is definitely in an acquisition mode, with its top M&A priority of a larger reserve/resource base. The company also is looking for something "jurisdictionally that gives us a jumping off point to do more," he added. "Hecla did this in the past. They went in and got very discrete assets and they operated those things and that was it. It wasn't a strategic acquisition that says, if I do this, I am now in a strategic position to be able do these other things."
"We're not going to do just one-off transactions," he declared, "it's got to lead someplace."
"Ideally, we'd like to be in a position where we have one or more of these large silver assets that are of high quality. ...There is sort of a spectrum of these things that we would like to have. We want to stay committed to being a silver producer," he added. "We would love to see the company three, four, five times its size."
Baker said he doesn't view Hecla as a potential takeover target. "Having this small resource base is a two-edged sword," he remarked. "It's almost a protection against being taken over. ..There aren't a lot of companies interested in doing the sort of mining that we're doing." Nonetheless, Baker feels Hecla offers an advantage as a vein miner. "What would be nice is if you could take on our vein mines, and throw in a couple of large tonnage mines that we could get maybe similar valuation," he added.
Hecla has been mining in Idaho's Silver Valley for 100 years, and is in litigation with the government over environmental liabilities stemming from historic mining in the entire valley. Meanwhile, the company doesn't seem to attract the attention of the anti-mining NGOs.
Hecla's stock performance declined in early December although metals prices were higher, and more exploration was underway.
Hecla views Venezuela as the place "where we can move and grow the fastest," according to Baker. For instance, Hecla was able to go into production at Mina Isadora in only four years. "There's more of those types of opportunities within the land package that we already have, and we're trying to acquire more land," Baker said. Mexico also offers Hecla a good future in Baker's estimation. "I think some guys are going to break their picks with the ejdios," Baker speculated, suggesting that Hecla's ejido expertise will allow the company to step in.
While China and Asia will be a driver for some time, Baker said Hecla is not actively trying to do something operationally in the area. For now, Hecla is largely sticking to the Americas.
Hecla is looking for both gold and silver properties, which offer both underground and open pit opportunities. "We're not the right guys for earlier staged projects," he explained, adding, however, that exceptions exist in Venezuela, Mexico and Nevada. Hecla is hoping for future projects that are 50,000 to 60,000 ounce of annual gold production, and/or 300,000 to 400,000 ounces of reserves and resources.
Hecla's silver criteria is tougher. The company will consider polymetallic deposits if silver is the predominate metal. "It's got to have cost structure that we think can survive," Baker said. "We realize that we have to look further afield. There are some countries that are not at the top of our list. It's got to be a spectacular sort of deal."
