Hecla Mining Co/De/ Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Hecla Mining Company Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Russell Lawlar, Treasurer of Hecla. Thank you. Please go ahead.

Thank you, operator. This is Russell Lawlar, Hecla's Treasurer. Welcome, everyone, and thank you for joining us for Hecla's third 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 Hecla’s website. On today's call, we have Phil Baker, Hecla’s President and CEO; Lindsay Hall, Senior Vice President and Chief Financial Officer; Lauren Roberts, Hecla’s 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 shown on Slides 2 and 3 in our earnings release and in our 10-Q and 10-K filings with the SEC. These and other 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, Russell. Good morning, everyone, and thank you for joining our call. I'm going to start on Slide 4 and I want to start by commending our management workforce for their resiliency and commitment to operating safely, including the way they've dealt with the exposure to COVID. This resiliency and commitment has really allowed Hecla to deliver very strong operating and financial results this quarter. So strong that in our history, we've never generated as much EBITDA; this was $75 million this quarter. Only four times in our history has the free cash flow been higher. This reflects the quality of our silver mines, particularly Greens Creek. Part of the reason we generated so much free cash flow is that our capital requirements are generally low. So with $50 million of free cash flow, we used that to repay our revolver, put cash on the balance sheet, and we announced a 250% increase in this quarter's dividend. That's a 50% increase in the base and the rest is due to triggering the new level for the silver-linked dividend. Before I hand it over to Lindsay, I want to highlight two of our ESG programs that focus on the social aspect of ESG that supports our communities. Nothing is more important than that support because frankly, Hecla has been part of these communities for decades. The first program is something we call Hecla Bucks, where we support local businesses by giving employees vouchers that they can spend with the businesses that are part of our local business organization, most of them are Chamber of Commerce. This has been a big success by providing an injection of spending into the local economy as they deal with the pandemic. The second program, which we are doing with Core Mining, is bringing a COVID-19 lab that does PCR testing to Juneau. It’s surprising that the capital of Alaska doesn't have adequate testing, but they don’t. When you get tested, the test has to go to the lower 48, which takes three days to know the results. We have brought a lab to Juneau. The decision to test our employees will allow us to shorten our quarantine time, and we are offering key government organizations like first responders the opportunity to get one-day turnaround. This is going to be critical when the legislative session starts in January. I believe we're making a real difference along with being the largest private employer in these communities. And with that, I'm going to pass it over to Lindsay. Go ahead, Lindsay.

Thanks, Phil, and good morning, everyone. Starting with Slide 6. During the third quarter, our assets performed quite well. We recorded approximately $200 million of revenues for the quarter at a realized silver and gold price per ounce of just over $25 and $1,929. We capitalized on the favorable precious metals environment and captured much of the increasing margins this quarter. Led by Greens Creek, we produced consolidated free cash flow of $49.7 million, resulting in our cash position of just under $100 million at the end of the quarter. Solid cash generation and a record high adjusted EBITDA combined to reduce our net leverage ratio to less than two, while providing a liquidity position of nearly $350 million. As Phil mentioned, our silver price-linked dividend was triggered, and our declared quarterly dividend increased by 250%, returning some cash flows to our investors. Turning to Slide 7, all of our assets generated positive free cash flow this quarter with the exception of Lucky Friday, which was expected given its ramp-up activities. The Lucky Friday ramp-up is ahead of schedule, and we expect to see positive free cash flow generation in the fourth quarter. This is financially important to us because in the first nine months of the year, cash flows from Lucky Friday were negative $24 million. Net income for the third quarter was $13.5 million, driven primarily by improved gross profit at all our assets except Casa Berardi, which was impacted by longer than planned mill downtime early in the quarter for major maintenance activities. Combined, our operations generated $53.5 million gross profit with our low-cost profile enabling us to capture growing margins in this rising commodity price environment. Cash provided by operating activities was approximately $74 million for the quarter, and we spent about $24 million in capital expenditures as we continue to invest at our mine sites. With no large capital expenditures in sight, low cash costs, and a positive precious metals environment, we expect to continue to generate significant free cash flows, further deleverage the balance sheet, invest in our assets and exploration properties, while returning an industry-leading silver dividend to our shareholders. With that, I'll turn the call over to Lauren to go through our operations.

Thanks, Lindsay. First and foremost, our safety performance continues to be exemplary despite the distractions caused by the pandemic. As you can see on Slide 9, we have a year-to-date all-injury frequency rate of 1.02, which is a 78% reduction over the past six years and a 14% reduction compared to the same metrics last quarter. I am very appreciative of the hard work and focus from our operations teams that deliver these results. At the Greens Creek mine, we saw silver production of 2.6 million ounces and 13,000 ounces of gold at an all-in sustaining cost of $784 per ounce. As shown on Slide 10, that generates a margin of 223% compared to the realized price of $25.32. As Phil mentioned earlier, we partnered with a COVID lab to provide real-time testing services for our employees. We expect this service to shorten the quarantine period, save money, and reduce the burden on our employees. We envision this being a short-term solution until local testing capacity increases. This will be the first commercial laboratory established in Juneau. While the capacity is dedicated to Hecla, there is room in the agreement to work with local authorities to address community needs as well. I am pleased to announce that ramp-up activities at the Lucky Friday continue to be ahead of schedule, and we anticipate hitting our full production rate in the fourth quarter. At this pace, we expect production in excess of 3 million ounces of silver in 2021. Grade is expected to improve as we mine deeper, increasing the projected production to around 5 million ounces annually over the next three to five years. The best part is that no significant planned capital outlay is required to achieve this goal. In addition, we are exploring various mining method changes and other initiatives to improve safety while increasing the productivity of the mine. At the Casa Berardi Mine, we saw a production of 26,000 ounces of gold at an all-in sustaining cost of $1,868. Lower gold production and higher costs in the quarter were due to planned mill maintenance activities and delayed access to two high-grade underground stopes. Work to improve the reliability of the mill was ongoing throughout the quarter. In July, we took about 12 days to conduct planned heavy maintenance on both of the grinding mills. The work was scheduled for about nine days but ran long primarily due to complications with the in-situ machine work and night shift coverage from some of the support contractors. As you can see on Slide 12, the work was extensive. It included machining to feed in trunnion flange and replacing the trunnion on the SAG Mill, along with replacing Babbitt bearings and seals for both mills, maintaining the gear shaft, and related work best conducted while the mills aren't operating. As we said before, this is not a short-term exercise, but it's an important one to set ourselves up for the future. We have completed the largest jobs and we're starting to see the fruits of our labor. In October, the mill delivered 90% availability, including scheduled maintenance outages. Gold production was also impacted by geotechnical challenges that delayed several high-grade stopes in the West Mine, which will now be produced in the fourth quarter. To mitigate this risk in Q4, we redirected development resources to focus on stope development to have more stopes available to secure the underground production. High grades are also anticipated from the East Mine for the remainder of the year. Stripping is underway and progressing well at the new 160 pit. Initial ore production is expected from the pit late in 2021. Unfortunately, the permits necessary to start were received approximately a month later than expected. We utilized a contractor to strip the extension of the EMCP pit during this period, which resulted in higher operating expenses compared to budget. At San Sebastian, mining concluded in the third quarter, and we anticipate milling to be complete in the fourth quarter. San Sebastian, with its very low capital demand, has been a successful operation for Hecla, and I want to take this opportunity to thank the San Sebastian team for a job well done. In Nevada, we have substantially completed mining of the developed oxide ore and are currently mining the refractory ore bulk sample, which we anticipate delivering to a third party for processing. I'm happy to report that mining has progressed well with ground conditions, water inflow, productivity, and cost all better than planned. The ore is more structurally controlled and less disseminated than the model, which we view as positive. We anticipate recognizing the mined ores produced in 2021 once processed. Both San Sebastian and Nevada provide rich exploration opportunities. I'll now turn the call over to Phil to give more detail on how these exploration programs are progressing.

Thanks, Lauren. We’ve increased our guidance for exploration to $16 million for the year, with about $8 million of that being spent in the fourth quarter. This is about what we intended to spend at the start of the year but backed off due to COVID. In the fourth quarter, we'll spend about $1 million at Casa, $1 million at San Sebastian, and in San Sebastian, we are following up on the new veins discovered with ore-grade mineralization. More than half of the fourth quarter spending will be in Nevada, with the majority at Midas. We can easily drill the Midas targets from surface, which is one of the reasons why it has been prioritized. We have already started drilling to the north and south of the Colorado Grande vein, where most of Midas’ production has come from, and we've expanded the plan of operations to drill the East Graben Corridor, which has never been explored. Looking at Slide 16, this is our update on guidance and presented differently than the press release because here we are comparing the current guidance to what it was before the pandemic. Since our silver assets are in the United States, we've never had to shut them down. With better grades at Greens Creek and strong performance at Lucky Friday, we are producing about 1.5 million more ounces than anticipated at the beginning of the year. Costs are slightly higher because of COVID, but the volume more than covers it. Gold production is about 10,000 ounces less than expected due to shutdowns in Quebec, with costs about $100 per ounce higher, but capital is down for the year, though up from last quarter's guidance. Overall, I am very pleased with the progress we've made this quarter. The results show this. I expect the fourth quarter to be similar to the third quarter, with more gold production and about the same level of silver production. With that, I’d like to open the line for questions.

Our first question comes from the line of Heiko Ihle with H.C. Wainwright. Your line is now open.

Hey guys. Thanks for taking my questions and congratulations on progressing through all this pretty well.

Thanks.

I guess part of that is also common, but just building a little bit on what Lindsay said earlier regarding pricing. I noticed your average gold and silver prices year-to-date through September are $19.72 and $17.45 an ounce as per Page 5 of the 10-Q. Both of those prices are obviously well below what we currently create, even with today's COVID vaccine decreasing prices. You do have some hedging in place. What it is? But just thinking ahead, should we expect more hedging in your future? And building on that, has your willingness to hedge increased given the high volatility we faced this year?

Well, the short answer is, Heiko, we've had a hedging program in place for precious metals, lead, and zinc since 2009, and we've been very consistent with that program. I don't see any major change happening in that program. We've also consistently hedged the shipments when they're leaving Greens Creek to ensure that we don't lose that revenue should we have a drop in the future. The only time we did something different was the purchase of puts for gold and silver. We started that in 2019 in anticipation of the need to do refinancing. We did that refinancing and have not put in any positions since the second quarter of this year. Is it possible that we'll put in more puts in the future? It's possible, but the volatility in precious metals is high, so the cost of those puts is very high. It is not a fundamental piece of our strategy, but if we see it necessary, we will implement it. Given our current financial flexibility with low costs and cash on the balance sheet, we have an undrawn revolver, providing us a lot of flexibility we didn’t have when those puts were established last year.

Great. That makes a lot of sense. I can't help but ask another question related to COVID. Assuming a vaccine starts getting distributed in the next, whatever it is, 90 or 120 days, will this affect your outlook at any of the sites on an asset-by-asset basis? What impact do you think we'll see asset-by-asset?

I don't think there will be much impact from a production standpoint. We have been very successful at implementing effective protocols. I think where we'll see some benefit is a reduction in costs. For example, we won't have to incur all of the quarantine costs we currently go through at Greens Creek. Currently, we have people that must quarantine for a week, and they get paid during that quarantine period, which incurs costs.

No, the most significant cost is at Greens Creek, and there are also some management costs at Casa that would likely reduce once the restrictions are removed, allowing us to capitalize on opportunities more effectively.

And arguably that could help a little bit. Sorry, go ahead.

Yes. No, I just – any other questions, Heiko?

No, that was all mine. Thank you very much. Stay safe.

Thanks a lot. Appreciated.

Our next question comes from Trevor Turnbull with Scotiabank. Your line is now open.

Hi, Phil.

Hey, Trevor.

I just wanted to ask a little bit of a follow-on to what Heiko was asking regarding costs. In your press release, you had a nice breakdown of your 2020 cost outlook, cost of sales by asset in millions of dollars. That's very helpful. So when you look at something like Greens Creek, going forward, you’re budgeting about $215 million this year. I'm just wondering, in a year without coronavirus, what would that number look like? Have you seen about 5% to 10% of your costs attributable to what you've had to do to mitigate the virus? Or can you speak to that 250% number and how it looks going forward?

Sure. Lauren, why don’t you answer that.

Sure. Thanks, Phil. Trevor, at Greens Creek, one way to look at this is about $1 million a month for us to manage COVID the way we're managing it, which are additional costs. At Casa Berardi, it's around $300,000. Overall, there are probably about $1.5 million a month in additional costs. I think these expenses should come out of the cost structure. I would also add that it impacts our operational flexibility. Once the restrictions are removed, we'll be able to capitalize on opportunities more effectively.

Okay. So then just looking at that, if you take Greens Creek, which might have had a normal year other than having to introduce these protocols, are those numbers fairly steady? Are they a good proxy moving forward for run rates?

Yes. In fact, if you go back and look at us historically, the cost structure regarding the dollars we have spent has been fairly consistent in the aggregate, including everything and capital. Russell, can you help me with this?

That's correct.

Okay.

So anticipate it will be something in that range in the future.

Okay. I appreciate you're trying to speak at a high level and not get too granular. But maybe just one last question on this. Looking at your guidance and what's left to spend in Q4, it seems like Lucky Friday is about $17 million or so for Q4. Will that number fluctuate as you reach the full run rate in terms of bringing on more people, or is that a consistent number for Q4?

We have a bit more capital than we would typically have in the quarter, and we have slightly less production than we would typically have. We are still up to historic levels of production, somewhere around 700 tons to 800 tons per day. We can probably get to 800 to 850 tons a day in the future. And we always experience sand cycles where we don't have the availability to do the backfill, which slows down production. We experienced this in the fourth quarter, and it takes time in operations for that to smooth out, but we always face a little of that exacerbated when restarting.

Understood. That's all I had. Thank you, Phil.

Sure, Trevor.

Our next question comes from the line of Mark Mihaljevic with RBC. Your line is now open.

Hi. Thanks. Good morning, guys. Nice quarter for you. Can you walk us through how you're thinking about the longer-term potential at San Sebastian and in Nevada? It seems that you are expanding the exploration programs now. When do you think we could get an update on potential restart plans for those operations, and how are you thinking about them medium-term?

With respect to San Sebastian, we're in an exploration phase much like where we were in 2013 and 2014. We have a base of known resources, but do not see it being economic enough to move what we know forward. We are going to add more to the base. How long that will take is unclear; however, the vertical RC drilling that we do, where we go through the first 10 to 30 meters of topsoil and hit bedrock is identifying veins we weren't able to identify five years ago. These veins discovered in the last quarter and a half make us optimistic about finding more mineralization. We have seen grade hits but we’ve not pieced together an orebody. It should take less time than it did previously to explore there. Regarding Nevada, we haven’t stopped mining. We’re mining the Type 2 ore and have the stockpile ready to ship to Nevada Gold Mines. We anticipate that material will be shipped before the end of the quarter, and we’ll be testing and getting results. There’s continued exploration occurring, with development needed to position us for future exploration at Fire Creek. If we knew the future concerning the Type 2 ore, we’d inform you now, but we need to see the results from processing before making commitments.

That makes sense. Thanks for the color. Just exploring San Sebastian a bit more, how do you see — you're able to bring in initial operations back for very limited capital, but do you think that’s still viable, or is the mill starting to fill up given where the gold prices are? Could the bar be higher since you'd need to invest in infrastructure, or do you think that’s still a preferred alternative?

I think it's very viable. There are a number of mills that need feed. You may double the prices, but we are long way from that point with the mills being filled.

Perfect. At Casa, you had significant maintenance going on during the quarter and some issues with stopes. You commented that changes you've made should provide more consistent throughput and stope availability. With the East Mine now coming online, should we expect a significant inflection in Q4, or is that likely more of a Q1 story? How should we think about that short-term?

We feel confident that we will hit our guidance. We saw a strong October, though an October does not make a year. Let’s give it some time to see the performance and ensure that we’ve made the necessary modifications. Casa has not been a drag on cash flow, but it has inconsistently provided positive cash flow. We believe the modifications might increase the potential for that to happen in 2021, but let's give it some time to prove itself. Lauren, anything to add?

No, Phil, I think you captured it well.

Okay. Finally, regarding Lucky Friday. It’s nice to see the operation ramp up better than expected. How are you thinking about the Remote Vein Miner? Is that still part of the medium-term plan, and what’s the update there?

With COVID, our ability to have personnel on the ground to monitor the work has been limited. Consequently, the amount of activity has decreased. We are not pushing that plan forward until things clear up. So I anticipate that in 2021 that will be completed, and we can test it at Lucky Friday. In the meantime, we are testing alternative mining methods at Lucky Friday that can lead to improvements and will also benefit the RVM when we bring it over. Lauren, anything to add?

No, that’s it.

Yes, perfect. Thanks. That's it for me.

Okay. Thanks, Mark.

Our next question comes from Lucas Pipes with B. Riley Securities. Your line is now open.

Hey. Good morning, everyone. Very good job. I wanted to ask a bit more about the capital allocation policy. It’s great to see the increase in the dividend and the silver price-linked dividend on top of that. Moving forward, how should we think about your capital allocation priorities? Will it focus on returning more capital to shareholders, deleveraging, or is there room for M&A? I'd appreciate your thoughts on this. Thank you.

Sure, Lucas. What you’ve seen over the last quarter and what we've guided for the fourth quarter is what you'll see in the future. We'll put more cash on the balance sheet. If you think back to Hecla over the last decade, we have averaged $150 million to $250 million of cash on the balance sheet. You can anticipate us maintaining something in that range. Our minimum level that we’d like to hold is just above $100 million. We have the revolver undrawn and prefer not to utilize it. We aim for a higher silver-linked dividend, and as Lucky Friday ramps up and Casa improves further, you may see an increase in the dividend yield. We plan to expand exploration spending back to levels we intended at the start of the year. The capital needs across our operations are not substantial, so do not expect a significant increase in capital outlay, and while M&A is always on our mind, we have many internal opportunities at our disposal right now, making it a lesser priority.

Very good to hear. Thank you for that additional context, Phil. You touched on exploration, which is my second question. If you had to rank the exploration opportunities at existing operations or non-developed ones, can you do that? I would appreciate your thoughts.

We face the challenge of having several equally attractive prospects. We're fortunate that exploration at existing operations builds off existing infrastructure. Those are attractive for capital efficiency. Let me let Kurt provide some geological perspective.

From a geological perspective, Nevada ranks high due to its location—whether at Midas, Fire Creek, Hollister, or even Aurora. San Sebastian is located in the heart of the Mexican Silver Belt, and geologically, it's an exciting area with promising finds that will advance us in the future.

Additionally, we're anticipating receiving the authority to go underground at Rock Creek and Montanore. If that happens, you will see us develop the incline to allow for drilling there. While you might not view that as pure exploration since it transitions resources to reserves, it's significant to mention.

That's good to hear and appreciate it. Best of luck and keep up the good work.

Thanks, Lucas.

Our next question comes from an unidentified analyst. Your line is now open.

Hi, Phil, Lindsay, Lauren. I have a question and then two comments. What did you say about CapEx at Casa Berardi? I didn't hear it clearly.

I didn't say anything specific about CapEx at Casa Berardi, but all of our operations have a minimal future capital expenditure structure, including Casa Berardi.

Okay. And two comments: I picked up from a conference call before you, a fertilizer company called Mosaic. They found $100 million of savings within their expenses and got many useful suggestions from their employees. They're not only going to exceed the $100 million, but they think they can find another $200 million for the next two years. My point is to ask your employees at Casa Berardi for ideas— you might be surprised. They reported that these suggestions typically require little to no capital costs. This could be a double win for you guys when these employees are incentivized.

Yes. We do that. We have a very structured program for gathering those suggestions, but we're still halfway through implementing it, and we'll inform everyone of the results either next quarter or midyear next year.

There will be lots of small suggestions, and they don’t need to be massive. They can add up like the people at Mosaic suggested, so you'll be surprised.

Yes. We got that. Thanks.

You're welcome. Thanks, guys.

There are no further questions in queue at this time. I'll turn the call back to Phil Baker for closing comments.

Thanks everybody for participating on the call. This was a very good quarter for the company. I anticipate the fourth quarter to look similar to this quarter. I'll be very pleased to talk to you again at the end of the quarter to share those results. Thanks again for your participation. If you have any questions, feel free to call Russell or me, and we'd be happy to discuss things.

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