Hecla Mining Co/De/ Q2 FY2022 Earnings Call

Good morning, my name is David, and I will be your conference operator today. I would like to welcome everyone to the Hecla Mining Company Earnings Call. Thank you. Anvita Patil, you may begin your conference.

Thank you, operator, and welcome everyone. Thank you for joining us for Hecla's second quarter 2022 financial and operations results conference call. I am Anvita Patil, Hecla's Vice President of Investor Relations and Treasurer. Our financial results news release that was issued this morning, along with today's presentation, are available on Hecla's website. On today's call, we have Phil Baker, Hecla's President and CEO; Lauren Roberts, Hecla's Senior Vice President and Chief Operating Officer; and Russell Lawlar, Hecla's Senior Vice President and Chief Financial Officer. 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 and in our earnings release and in our 10-K and 10-Q filings with the SEC. These and other risks could cause results to differ from those projected in the forward-looking statements. Reconciliations of the non-GAAP measures cited in this call and related slides are found in the slides or the news release. With that, I'll pass the call to Phil.

Thanks, Anvita. Good morning, everyone, and thank you for joining our call. I'm going to start on Slide 4. I'm always a little bemused when someone says that we are in unusual times, but I do think this time is characterized as quite unusual. When we had our conference call three months ago, I spoke about the risks facing the world and Hecla, such as inflation, COVID, the impact of the Russian-Ukrainian war, rising interest rates, and supply chain disruptions, and none of those risks have gone away. Added to the list are increased China-Taiwan tensions and declining metals prices. For Hecla, our realized silver price is 12.5% lower this quarter than it was last quarter. And of course, we have a recession where those prices could go lower. When I look at margins and capital projects across our industry, there is a fair amount of stress for companies with these projects. When we look at our gold mine, we see those margins shrinking as costs rise while gold prices decline. However, for Hecla, when we analyze the quality of our silver mines, the strong production, low costs, and the strength of our balance sheet allow us to focus on how we can grow silver production. I am very confident that lower silver prices will ultimately lead to significantly higher prices. So, that's the context in which we are assessing this quarter and the rest of the year. We are investing in our mines and acquiring new ones because we have the organization and the financial capability to grow production earnings and cash flow, which we believe will benefit our shareholders. What are the drivers of our growth? There are three key factors. Increasing grade at the Lucky Friday, coupled with the new underhand close bench method, or UCB method. The pending Alexco acquisition, and increasing throughput at Greens Creek. First, the Lucky Friday: I've been underground twice this past quarter and I'm really struck by the opportunities the UCB method creates for a safer and more productive environment. We have yet to fully optimize this method. For the past two years, our focus has been on implementing it as quickly as possible due to its safety and productivity benefits. We're making significant investments, including another hoisted service to move people and materials to the main hoist and constructing a new facility that allows material to be stored before it goes to the mill. This infrastructure is vital as we anticipate that the mining rate will exceed the mill's ability to process it. We're also investing in larger equipment. During my last underground visit, I saw six-yard dumps that are 30% larger than the previous ones. All of these investments are yielding results; in fact, the mine tonnes in the second quarter set a new record at Lucky Friday. We are on track for Lucky Friday to become a 5 million-ounce producer next year and close to 6 million the following year, and yet we have not fully optimized the UCB method. Thus, tonnage could continue to increase, necessitating further optimization of hoisting and milling. This is an 80-year-old mine whose best production costs and cash flows are ahead of us. This year, we are essentially making a $60 million investment, with $40 million allocated for the second half of the year - we've already spent $20 million of that total. The second driver of growth is Keno Hill, which is probably the highest-grade multi-million-ounce silver reserve in the world. In connection with that acquisition, we’ve increased our stake by 5% for $4 million, bringing our stake to 9.9%, and we loaned them $20 million in July. We financed this to ensure they focus singularly on development while we've also shifted some equipment from Lucky Friday to expedite the process. Lauren will outline our plan once we take over to develop the mine. The third driver of silver growth is increasing throughput at Greens Creek. We're not talking about large increases but rather incremental improvements of 5% to 10% over the next couple of years. We’re focused on this peak because such productivity gains can lead to very high returns due to low capital requirements built upon an established project. With the Lucky Friday, Keno Hill, and small increases at Greens Creek, we could see our silver production grow sustainably to 17 million to 20 million ounces annually in the next few years. This growth would position Hecla as the fastest-growing silver miner, with about 30% growth in production and potentially make us one of the two or three largest silver mining companies in the world. We're already the largest silver producer in the United States, and I believe we will likely become Canada's largest silver producer. After Russell and Lauren's remarks and before we begin the Q&A session, I'll discuss our capital cost guidance. Let me now pass the call to Russell.

Thank you, Phil. Turning to Slide 6, we saw revenues of over $191 million, with 34% coming from silver, 40% from gold, and lead and zinc contributing about 26%. Greens Creek generated approximately half of the revenue, while Casa Berardi was over 30%, and Lucky Friday just under 20%. We generated $40 million of cash flow from operations and nearly $6 million of free cash flow. We ended the quarter with $198 million in cash and available liquidity of $335 million and a net leverage ratio of 1.4 times, well below our target of 2 times. Turning to Slide 7, I'll elaborate on the margins and cash flow generation of our operations. The green portion of the bars in the chart on the bottom left indicates our quarterly margin, and over the past eight quarters, our silver margin has averaged 60% of the silver price realized. Since June 2020, we've generated about $240 million in free cash flow, which accounts for $88 million invested in exploration and pre-development. Last quarter, we discussed capital allocation, emphasizing that our first priorities are investing capital to derisk the mines, lower costs, or expand resources. That’s exactly our plan with the capital we've accumulated, which will be invested in all our current operating mines, including Keno Hill, to derisk that mine and expand its resources. Due to the investments made in our operations and the current pricing environment, we anticipate that the balance of our cash will decrease in the second half of this year. On Slide 8, while we've not been immune to inflation seen across the industry, our silver mines, being small but high-grade, have seen less impact compared to others in the industry. Initially, we set inflation assumptions at 5% for our guidance earlier this year, but seeing year-to-date, we recognize that key inputs like cyanide have increased by 30%, and steel and ground support costs have risen by 14%. The skilled labor market remains constrained, with wage increases and reliance on contractors. These factors have contributed to overall higher costs of 15% to 20% above our guidance. Although inflationary pressures have some offset due to byproduct credits at our silver mines, Casa Berardi is more exposed to such pressures due to the greater volume of material moved there compared to our other mines. The chart on the right breaks down our production costs, with labor and contractors making up over 50% of the total costs. Fuel is minor since we rely on hydropower, but higher consumables and other costs are leading to the increased cost guidance you've seen in our release this morning. With that, I'll pass the call to Lauren.

Thanks, Russell. I will start on Slide 10. Greens Creek produced 2.4 million ounces of silver in the second quarter, consistent with production in the first quarter. The strong production was driven by higher grades, and coupled with strong byproduct prices, resulted in favorable costs. The cash cost was negative $3.29 per silver ounce, and the all-in sustaining cost was $3.48 per ounce. These results surpassed guidance and generated margins exceeding $12 per silver ounce produced. This best-in-class mine has generated more than $80 million in free cash flow in the first half of the year and $266 million in the past six quarters. With a strong first half behind us, we are affirming our production guidance of 8.6 million to 8.9 million ounces, while reducing our cost guidance. Cash cost and all-in sustaining cost guidance are now expected to be in the range of $0 to $1.75 per ounce and $5.50 to $7.50 per ounce, respectively. On Slide 11, the Lucky Friday mine also had a strong production quarter and achieved two new records. The mill recorded a record quarterly throughput of 1,071 tons per day, and the mine produced a record 102,500 tons of ore in the quarter. Quarter-over-quarter silver production increased by 38% to 1.2 million ounces, while the all-in sustaining cost declined to $9.91 per silver ounce, a reduction of 39% over the first quarter. Lucky Friday continued generating positive free cash flow with $10.4 million for the quarter, marking six consecutive quarters of such generation with a cumulative total of $45 million. We are reiterating our production guidance of 4.3 million to 4.6 million ounces of silver, with cash cost guidance being increased to reflect the consumables associated with higher throughput, inflationary pressure on key inputs, and elevated contractor usage due to the tight labor market. Consequently, we are adjusting our cash cost guidance for the mine to $1.75 to $3.50 per ounce and all-in sustaining cost guidance to $9.75 to $11.75 per ounce. This quarter showcases the success of the UCB mining method in managing seismicity and improving productivity at the mine. This change in mining method underpins our production expansion at Lucky Friday and makes it attractive to invest in new equipment and infrastructure. As we continue to optimize UCB and prepare for higher silver grades as we mine deeper, we believe this mine’s best decade is still ahead. Moving to Slide 12. The Casa Berardi mine produced just over 33,000 ounces of gold at an all-in sustaining cost of $1,641 per ounce. Gold production was 10% higher than the first quarter, attributed to consistent mill performance coupled with higher throughput, recoveries, and grades. The all-in sustaining cost decreased by 9.3% over the first quarter, primarily due to higher production. We reiterate our production guidance of 125,000 to 132,000 ounces of gold, but we're raising our cash cost guidance to $1,207.50 to $1,307.50 per ounce and all-in sustaining cost guidance to $15.50 to $17.75 per ounce. We expect costs in the second half of the year to mirror the first half as we anticipate ongoing labor market issues and inflationary pressures for the remainder of the year. Casa Berardi's costs are more exposed to these headwinds than our silver mines due to the greater volume of material mined and processed, coupled with a lack of significant byproduct credits. The increased all-in sustaining cost guidance also reflects an uptick in capital spending associated with the design change in the planned expansion of the tailing storage facility. Our acquisition of Alexco was announced in July, and we expect the transaction to close in early September. We aim to sustain mill feed at around 400 tons per day and plan ramp-up and development with infill drilling for the Bermingham and Flame & Moth deposits in 2022 and 2023. Slide 13 highlights some plans for the Bermingham deposit, focusing on the Bear zone, with work planned for execution and development footage. Transitioning to Slide 14, this image showcases our plans for the upper Lightning zone of the Flame & Moth deposit. Concurrently, we plan to build supporting infrastructure and work on enhancing the processing facility. With that, I'll return the call to Phil for closing remarks.

Okay. So, Slide 15 is our guidance slide. I think Russell covered the inflationary pressures and Lauren discussed specifics on production and operating cost guidance. Therefore, I will focus on the capital across the company. Though our capital increase is minor in the grand scheme of things, a $15 million to $25 million increase is notable for us as our capital over the past three years has averaged around $107 million, and we rarely increase guidance. Here's why we are increasing it: primarily, we are accelerating expenditures we would have made in future periods. For instance, we’re bringing on an additional drill contractor at the Lucky Friday, allowing us to obtain 18 months' worth of data for mine planning instead of the current 12 months. Ideally, I would like to attain three years of data for accurate investor outlooks. At Greens Creek, we are rehabilitating a bridge that is being moved from 2023 to 2022 to avoid distractions while we increase throughput. Some changes are also due to expansions in scope for risk mitigation; the tailings lift redesign at Casa, which Lauren mentioned, is a prime example. Like the rest of the industry, we are not immune to inflationary pressures on capital. Additionally, Lauren highlighted the development and definition drilling at Keno Hill; some of which is currently funded through our financing to Alexco. We will provide an update on spending through the end of the year post-acquisition closure. Since we possess the financial strength to invest in our business to grow production, reduce risks, lower costs, and generate returns, we will be prepared when metals prices, particularly silver prices, significantly increase. Before we proceed into the Q&A session, I would like to touch on our ESG program. In May, we published our sustainability report, and I encourage you to review it. You'll discover that Hecla contributes to climate change solutions by producing the metals necessary for generating solar energy, among others. We're already net-zero for Scopes 1 and 2 greenhouse gas emissions. I also want to recognize Ted Crumley, our longstanding chairman who recently retired. The board elected Cassie Boggs, who has been on the board for about six years, as our new chair. She brings a wealth of experience in our industry, previously involved with Baker McKenzie and barrick's corporate development team. I'm confident she will provide exceptional leadership. Lastly, I wish to express my gratitude to the Hecla family of employees. It is indeed a family, and earlier this quarter, we recognized a family member who has worked with us for over 100 years. Thank you to all Hecla employees for your commitment and dedication to our safety-first values, which make Hecla who we are. With that, David, I'd like to open the call for questions.

And we'll take our first question from Lucas Pipes of B Riley Securities. Your line is now open.

Thank you very much and good morning everyone. Thank you also for the presentation. When I look at the outlook for the full year across the three operations, it seems like in the cases of Lucky and Casa, you will have fixed cost leverage driving unit costs in the second half. I wanted to ensure I'm not missing anything there. Additionally, could you provide insights on your confidence in achieving higher volumes in the back half? I would appreciate your perspective on that. Thank you.

Before you continue, Lucas, let me clarify your question. Can you please repeat or restate it to ensure we're on the same page?

Sure. When I review the full-year guidance for 2022 presented on Slides 10, 11, and 12, and compare year-to-date production against your full-year forecasts, specifically looking at both year-to-date cost of sales and unit-based figures, it appears that in the cases of Lucky Friday and Casa, the forecasted cost guidance is based on low year-to-date levels, possibly indicating that increased volumes in the back half of the year are driving that. I would like to confirm that assumption and if it's accurate, what factors are you expecting to drive increased volumes in the back half? Aiming at cost absorption, for instance, in Casa.

To address your question, our projection for Casa indeed includes more costs compared to the first half of this year. Overall, all mines will face either similar costs or slight increases. Each mine will see increased throughput, which contributes to overall costs, leading to higher unit costs per ounce. Lauren?

Yes, I'll add to the production side, Lucas. Lucky Friday saw a significant ramp-up in Q2. We expect similar performance in Q3 and Q4, with the second half being more focused on ramping up the UCB method and continuously refining it.

If you double what we produced, you won't quite reach our guidance. So, there will be additional production levels.

Correct. At Casa Berardi, the production in Q4 will significantly weigh in, following an underground mining sequence that accesses some higher-grade stopes.

That's very insightful. On Slide 8, you showcased inflation assumption guidance starting at 5%, yet detailed increases throughout the first half of this year indicated higher rates than originally anticipated. Can you elaborate on the nature of labor-side impact within that increase, please? Is the 10% an annualized rate or indicative of what you’ve seen since January?

The 10% figure takes into account our expectations compared to our initial guidance set at the end of last year and is basically an increase observed since then compared to last year's statistics.

Understood, so you're experiencing continued labor market pressure. Is there further upward pressure anticipated? Where specifically?

Yes, there is indeed continued pressure, reflected in our increased reliance on contractors compared to our original plan.

Precisely, Phil. The competition for skilled trades, especially full cycle miners, mechanics, and electricians, remains aggressive in the marketplace, and we are currently supplementing our workforce with contractors while we seek to hire permanent employees.

Could you elaborate on Hecla's training initiatives that aim to alleviate skilled labor shortages over the coming quarters?

Sourcing qualified employees for the mines remains an ongoing challenge. At Greens Creek, we've maintained robust training programs in partnership with the local college, particularly focusing on diesel training. We're also working with community colleges to attract candidates that we need. Many young individuals have entered the mining sector, but their commitment tends to vary. Is that accurate, Lauren?

Absolutely right, Phil. As for Casa Berardi, we operate in conjunction with local institutions to conduct our stope school, co-funded by government initiatives and various mining companies. We are successfully bringing in candidates for training, and I expect Casa to graduate several individuals from this class. Additionally, we aim to replicate this with mechanics training at Casa. We are actively recruiting young people, but they require in-field training which admittedly takes some time.

The introduction of new technology presents an opportunity, allowing those with less experience to potentially adapt more easily.

Precisely, Phil. Those who embrace new technologies adapt quickly and remain excited about their work, although retention can be an ongoing challenge.

Next, we'll go to Michael Siperco with RBC Capital Markets. Your line is open.

Thanks very much. I wanted to delve into the expanded scope of capital expenditures at Lucky Friday. Could you provide additional specifics regarding the investments involved, particularly the service hoist, and other projects slated for the back half of the year? Will this elevated spending carry into 2023 to support your target of 5 million ounces and beyond?

Yes, the three major projects that come to mind are the service hoist, the ore bunker, and the tailings project; these are largely expected to be completed in 2023. We anticipate maintaining elevated spending next year as well. The question is whether these investments are necessary to achieve the 5 million-ounce target. The answer is that while they may not be absolutely essential, these are strategic investments that include the drill contractor at Lucky Friday which will enhance mining planning data collection, allowing for 18 months’ worth of data instead of the current 12. I would prefer to eventually have a three-year data set, which should provide accurate projections for our investors.

That's precisely correct.

Thank you. Moving on to Keno Hill, it’s been about a month since the deal announcement. Have you gathered any new insights over the last month that may affect your thinking on the work program once the deal closes?

We've had extensive engagement with Keno for a substantial part of this year, particularly during March and April. Therefore, there's not much we were unaware of, and they've been very cooperative, participating in our operational calls. Ultimately, I would say no surprises thus far, and we will assess how swiftly they can advance upon closing of the deal. They do have a shortage of equipment, which may affect the development rate.

There have been no surprises. However, I would highlight the enthusiasm the Alexco team has about joining the Hecla family.

Yes, we believe our workforce at Hecla will be well-received, as our team is committed and enthusiastic about the projects ahead. We are looking forward to having a portion of their team based in Vancouver come aboard.

Next, we'll go to Trevor Turnbull with Scotiabank. Your line is open.

Thank you. I'd like to inquire about the provisional price loss you experienced. I thought you had short-term hedges to guard against significant price fluctuations in provisional pricing. Can you elaborate on your strategies to mitigate commodity price volatility in the short term, as opposed to longer-term hedging?

To clarify, Trevor, we have hedged our exposure at Greens Creek, but we have not hedged at Lucky Friday, where we've experienced changes that necessitate reevaluating our hedging strategies.

Just a housekeeping question then: the $16 million related to this loss, was it included in the $116 million cost of goods sold within your direct production costs?

No, it is recorded as a reduction of revenue.

Got it. Thank you. That is all I had.

Thanks, Trevor.

Hi, Phil and team, thanks for taking my call. Regarding your guidance and the impact of inflation and rising costs, should we interpret this as your current outlook considering further inflation expectations, or primarily a reflection of what you've experienced this year?

We are primarily reacting to the inflation we have experienced and applying it to our outlook for the second half of the year.

Understood. In terms of future cost pressures, do you expect a resolution to cost escalations once external conditions settle, or are you expecting these increases to be sticky?

Cost increases tend to be sticky. That said, we will actively work to reduce costs. We’ve been implementing a program over the past 18 months focused on this, and we expect to execute similar efforts as opportunities arise. We are considering renegotiating long-term contracts with suppliers. Lauren, do you have anything to add?

Direct inputs like reagents, steel, and fuel typically fluctuate with the commodities, but the timing of their price reductions often follows a slower pattern than their increases.

That makes sense. Lastly, can you share your thoughts on the timeline for digesting the Alexco acquisition before considering any new opportunities?

While we're closely engaged with Alexco and prepared for a quick integration due to our extended interaction, there's no urgency to pursue additional opportunities. We recognize ample prospects to optimize our existing assets, and while it will take about a year—by the end of 2023—before we're in production there, we have the bandwidth to explore new opportunities.

Okay. Next, we go to Heiko Ihle with H.C. Wainwright & Co. Your line is now open.

Thanks for taking my questions. You've discussed the impacts of inflation, particularly related to labor constraints at your operations. Can you break down your experiences in filling qualified positions? Is it primarily a financial issue, or is it a more complex dynamic?

Indeed, we have ongoing vacancies that present challenges in filling positions, primarily among mechanics and electricians, as well as skilled miners.

Yes, specifically, the shortage of fully skilled miners is notable.

Our meetings regularly highlight our ongoing shortfalls, indicating constantly evolving staffing needs.

Currently, we face a shortfall of around 28 positions across our mines.

As for where these individuals are, it often relates to competitive job markets elsewhere. At Greens Creek, many individuals fly in, which means they might be going elsewhere for work. At Lucky Friday, demand from other local industries adds to competition. Casa Berardi also competes with other local mines for labor, leading to workforce mobility.

Got it. For mechanics, electricians, and skilled miners, can you quantify labor rates in comparison to 12, 24, or even 36 months ago?

I can’t cite specific figures from memory.

We are implementing incremental adjustments based on market fluctuations, but I don’t have an aggregate figure available.

Labor costs have indeed risen, as we indicated, the 10% increase layered on top of the previous 5% inflation expectations.

Understood. Addressing supply chain uncertainties, you've noted delays in equipment delivery schedules to 2023. What do you attribute those delays to, and what contingency plans do you have in place?

We primarily face reliability issues with our plans; we're still able to achieve our operational goals despite these challenges.

That’s right, Heiko. We maintain standards regarding equipment rebuilds and replacements; if machines do not support production increases, then the impact presents lower availability and heightened hourly operating costs. While costs have risen, we still have machines available that are essential for production expansion at Lucky Friday, as we ordered equipment earlier to stay ahead of potential delays.

The six-yard machines I mentioned before are exceptional as we integrate them into Lucky Friday.

Indeed, those larger machines will greatly enhance operation efficiency.

Thank you for your insights, everyone. I’ll step back and let others ask questions.

I show there are no further questions. I will now turn the call back over to Phil Baker for any additional or closing remarks.

I would like to remind everyone that we are available for one-on-one discussions after this call; please feel free to reach out to Anvita for any information you might need. We look forward to updating you post-acquisition closure, which we anticipate will be in early September, providing you guidance on costs and capital expenditures for Keno Hill for the remainder of the year. Thank you very much, and I look forward to our future conversations.

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