Hecla Mining Co/De/ Q3 FY2022 Earnings Call

Hello and thank you for joining us. My name is Regina and I will be your conference operator today. I would like to welcome everyone to the Hecla Mining Company Third Quarter 2022 Earnings Conference Call. All lines have been muted to minimize background noise. After the speakers' remarks, we will have a question-and-answer session. I will now turn the conference over to Anvita Patil. Please proceed.

Thank you, operator. And welcome everyone. Thank you for joining us for Hecla's third 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 Slide 2 and 3 in our earnings studies 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 non-GAAP measures cited in this call and related slides are found in the slide on news release. With that, I pass the call to Phil.

Thanks, Anvita. Good morning, everyone. Thank you for joining our call. With this being the first conference call since the September 7 closing of the Alexco transaction, I want to start with a few comments on Keno Hill. The week after the closing, I, along with Lauren and our Chief Administrative Officer, Mike Clary, went to site. We went to Mayo, which is the local town in Whitehorse. This visit was timed around the biweekly shift change, which allowed us to meet about 140 of the 170 employees. The enthusiasm of the workforce was palpable. The crews are excited to have resources and plans that allow them to be successful. So we're going to have our challenges, but I think we're starting at a very good place. We also met with Yukon federal and community leaders. And there's a recognition that Keno Hill is a high-profile project for the Yukon. This project is important for the success of mining development in the Yukon. So I'm confident that we're going to receive all the support that these folks can give. Lauren is going to go into our performance and plans for the rest of the year operationally. Now, the third quarter marked another strong operational performance from all of our mines where we actually achieved new records at each of them. At Greens Creek, we've been working to increase throughput, and we began to see the results where we produced a quarterly record of about 2,500 tons per day at throughput. At Lucky Friday, we produced over a million ounces for the second consecutive quarter, all while executing a very significant capital plan that will allow us to further increase throughput and reliability. Casa Berardi also continued to achieve new monthly throughput records during one of the months of the quarter. With Keno Hill expected to be in production next year, Lucky Friday's growth, and Greens Creek's consistent performance, we now expect to produce in the range of 17 to 20 million ounces of silver by 2024. This production will not only make us the largest producer of silver in the United States, but it will also be the largest in Canada. So despite Hecla being a 130-year-old company, we believe we are the fastest-growing established silver producer. While we are investing in our business with large capital programs in each of the mines at Keno Hill, we ended the quarter with a very strong balance sheet, which we are committed to maintain. Russ will talk more about that. Strong operational performance in the year has allowed us to increase our silver production guidance while maintaining our operating and capital costs guidance despite adding Keno Hill. So Lauren, why don't you give us some insights into our operations?

Thank you, Phil. And I'll start on Slide 6. Greens Creek produced 2.5 million ounces of silver in the third quarter, which is 2.5% higher than last quarter. The mine produced approximately 2,400 tons per day, and the mill achieved a new all-time throughput record of 2,500 tons per day. Lower lead grades resulted in the deferral of a silver concentrate shipment to the fourth quarter. The impact of this deferral is lower revenue and cash flow in the third quarter, as well as lower cost of sales because costs related to the shipment were recorded in inventory. In the fourth quarter, there will be a higher cost of sales with offsetting revenues and cash flows of approximately $18 million as the inventory charges are reversed. Cash costs and all-in sustaining costs for the third quarter increased to $2.65 per ounce and $8.61 per ounce, respectively, driven by lower byproduct production, lower byproduct prices at a tight labor market that requires the use of subcontractors primarily in maintenance. Greens Creek is positioned for another strong year and generated $86 million in free cash flow for the first nine months of the year. Despite the deferral in silver concentrate shipment to the fourth quarter, it was still free cash flow positive in the third quarter. For the fourth quarter, we expect similar operational performance with a slight decline in production due to approximately 8% lower silver grades related to the mining sequence. We're affirming our cost guidance for the mine and expect the mine to meet the increased production guidance of 9.3 million to 9.6 million ounces of silver for a solid finish to 2022. Moving to Slide 7, Lucky Friday silver production exceeded 1 million ounces in the last two consecutive quarters. For the first nine months of the year, the mine produced 3.2 million ounces of silver, which already is 90% of last year's production. Cash costs for the quarter were $5.23 per ounce, higher than the second quarter of 2022 due to lower byproduct credits, driven by lower lead and zinc prices. All-in sustaining costs for the quarter were $15.98 per ounce due to higher sustaining capital spent. Significant sustaining capital projects in the quarter included work to raise the tailings facility and infill drilling to support the accelerated UCB production pace as we target more than 5 million ounces per year of production. Also in the third quarter, due to a multi-week shutdown at the Trail Smelter, a 2,000 dry metric ton silver concentrate shipment containing approximately 216,000 ounces of silver and 2.9 million pounds of lead was deferred to the fourth quarter. The deferral had an impact of $6 million on the mine's revenues. The mine had negative free cash flow of $4.5 million for the quarter primarily due to this deferral. Year-to-date, the mine has been free cash flow positive, generating $8 million net of our investments to grow production. We're affirming production and cost guidance for the mine but are lowering capital guidance slightly to $56 million to $58 million due to the timing of some capital expenditures. The quarter continues to highlight the UCB mining method's success in managing seismicity and improving productivity at the mine. With grades improving at depth and increased throughput, the mine is set to produce more than 5 million ounces per year in the near future and we believe this mine's best decade is ahead of it. Turning to Slide 8, Casa Berardi already produced just over 33,000 ounces in line with the second quarter. All-in sustaining costs increased to $1,738 per gold ounce due to higher sustaining capital expenditures associated with a design change and the expansion of the tailings storage facility as well as increased exploration spending. Casa Berardi costs remain more exposed to inflation than our other mines due to the absence of any significant byproducts and the relatively larger volumes of material mined and processed. Casa Berardi remains an important part of our operating portfolio with a large underexplored land package. The operation provides us gold production at scale. Our exploration is focused on adding higher grade underground material. Recent drilling results are showing good continuity of high-grade zones along the 113 and 118 sector. Casa Berardi generated positive free cash flow for the quarter as well as for the first nine months of the year. We're affirming our production and cost guidance and are lowering our capital guidance slightly to $42 million to $45 million as some capital projects will be completed in 2023. We completed the acquisition of Alexco in early September. From day one, our focus has been on development and the advance rate has increased by 40% since acquisition. At the end of October, we've completed about 30% of the total development required prior to starting the mill. We expect the advance rate to continue to improve as we embed mining practices and receive more equipment. By the end of 2022, we expect to have completed about 40% to 50% of the development required to start the mill. We are incurring around $4 million a month in costs, so in the fourth quarter we expect a capital spend at Keno to be in the range of $10 million to $12 million. We anticipate full production run rates in 2023, with the mill start in the second half of the year yielding about 2.5 million ounces of silver. We'll give more detailed production and cost guidance for 2023 later this year or early next. Slide 9 highlights some of the work we have planned at the Birmingham deposit, where the focus will be on the bearer zone. The white highlighted development is what we plan to complete this year, and the red arrow shows about where we expect to be when we begin scoping. Moving to Slide 10, this image shows our work plans in the upper lightning zone at the Flame & Moth deposit. As with the previous slide, the white highlighted development shows the plan we expect to complete this year, and the red arrows show where we expect to be when we start scoping. The two deposits and multiple production horizons in each will have a high level of flexibility to meet production demands. This has been a major issue for Keno Hill in the past that we intend to solve. While our immediate focus is on these two deposits, let me end with a comment on exploration that gives us confidence in the potential as a district. Drilling in the other exploration hole we were on target, which is about 1.3 kilometers from Birmingham, yielded a 101-ounce drill hole intercept over 7.32 feet. This is early days in the exploration program, but nonetheless very encouraging and quite exciting. With this, I'll pass the call to Russell.

Thank you, Lauren. Turning to Slide 12, third-quarter revenues were $146 million, 30% from silver, 42% from gold, with zinc and lead at 28%. Our revenues decreased approximately $45 million from the prior quarter primarily due to the deferral of Greens Creek's and Lucky Friday silver shipments to the fourth quarter, as Lauren has described. These different shipments had an impact of approximately $24 million on revenues. We also saw lower prices across all four metals. As we indicated on last quarter's call, we are investing our cash in our operations for future production and cash flow growth. Due to the revenue reduction, capital spending of more than $37 million for the quarter, transaction costs incurred from the Alexco acquisition, refinancing of our revolving credit facility, and working capital changes related to the deferral of revenues, as well as interest payments of $18 million in the third quarter, free cash flow for the quarter was negative $62 million. Even with relatively lower silver prices and a reduction in both the byproduct prices and production, we continue to see solid cash flow and margins from our silver assets, where we had a consolidated all-in sustaining cost of just over $10 per ounce year-to-date, with a margin of more than $11 per silver ounce. Free cash flow generation from our three operations for the first nine months of the year was approximately $98 million. As we look to the remainder of the year, we anticipate maintaining a cash balance in excess of $100 million, while keeping to our prudent financial policy of maintaining a net leverage ratio of less than two to one. Turning to Slide 13, we've seen an inflationary environment earlier this year continuing into the third quarter, where prices of key inputs continue to remain elevated, around 15% higher than at the beginning of the year. We continue to experience a tight labor market, especially as we recruit for experienced miners in skilled trades such as mechanics and electricians. At our silver operations, we have seen our byproduct credits, which provide some offset against inflationary pressures decline, primarily due to the decline in byproduct prices. We are focused on managing our cost structure and reaffirming our cost guidance, even after we've seen prices of byproducts come down. We remain confident that we can execute our mining and development plans at our operations even in this current tight labor and inflationary environment. And with that, I'll pass the call back to Phil for his closing remarks.

Thanks, Russell. And so we'll go to Slide 14, which just gives us a view of our guidance for production and for costs. And what you'll see is our production guidance we announced earlier in the month or late last month that we were increasing our production guidance at Greens Creek because of its strong operating performance year-to-date. As Russell has described, we have this inflationary pressure, but we're able to affirm our cost guidance, and we are also maintaining our capital guidance, because we lowered capital expenditures at Lucky Friday and Casa to offset the development expenditures that we have at Keno at $10 million to $12 million that we mentioned. The other thing I just want to mention while I'm on the guidance is really a call out to our employees for our safety performance. Our all injury frequency rate for the first nine months of the year was 1.32. That's 37% lower than the U.S. average and it's an improvement of 19% over the same period from 2021. So thanks to all the Hecla employees for this achievement. I want to end with a number that caught our attention. This is on Slide 15. India imported 200 million ounces of silver in the first eight months of 2022. The silver market is about a billion-ounce market. That's 20% of global demand for silver that they imported over the first eight months. India's increased silver imports are a key factor that caused the silver in the London vaults to be at the lowest levels since 2016. Silver buying in India was muted during COVID, so this is more than double last year's imports, three times the 2020 levels, and about the same as 2019. The message is Indians are back buying silver for jewelry and silverware. About three-quarters of silver purchases are for that purpose. It's coming primarily from the millennials and Gen Z population in India, who seem more keen on silver jewelry than gold jewelry. These changing fashions reflect a desire to change jewelry frequently and to have lightweight designs that complement a more professional look. Anvita is Indian, and she mentioned to me that her younger cousins in India have expressed a preference for silver jewelry for daily workwear. Typically, when you hear us talking about silver, you hear us discussing its use for energy transition, and we still believe that is the future for silver. However, we view this increased demand in India as providing a great base for the silver price. Finally, I want to emphasize our commitment to silver. While we believe in gold and see a need to have gold operations, and we will probably even grow our gold operations, we have been a silver company for 130 years. We think the future could not be brighter for the metal, and we see more upside relative to gold. We are working hard to increase our exposure to silver. Since I've been at Hecla, we've gone from 6 million to 7 million ounces of production to 10 to 12, and now we're heading to 17 to 20. All of that production is in the U.S. and Canada. We expect our silver revenue to exceed gold and likely surpass 50% of our total revenues even at the current gold-silver ratio, which we expect to improve. This positions us uniquely, especially since other silver companies are seeing a decline in their silver exposure. With that, Regina, I'd like to open the call for questions.

Our first question will come from Michael Siperco with RBC Capital Markets. Please go ahead.

Thanks very much, operator. Thanks for taking my call. So I know we'll get more on Keno Hill as time goes on, and thanks for the update today. Can you go into any more maybe surprises that you've had since taking over, good or bad? Anything that we should be watching for in terms of the update or the startup? Anything along those lines?

So I guess I'll let Lauren give his views. But the first thing I'll say, Mike, is that if you think about the due diligence process we went through, we had 63 days of people on site before this transaction was ever announced. I think we knew everything that could be known at that time. From my perspective, not a huge number of surprises. Lauren, anything that really sticks out to you?

Yeah, just one thing that sticks out to me, and it's positive, is the reception we received. How welcoming the entirety of the workforce, right down to the miners, has been to us. It gives us a great platform to start from. We knew we would be well received there, but I don't think any of us recognized how well received.

Phil was pretty good at the camp.

Yeah. You would definitely need to go on some kind of exercise program if you were there for very long.

That's good to hear, I guess. Okay, I guess maybe a couple more for me, and I'll hand it over. Maybe a similar question on topics and Lucky Friday. A number of big projects you've highlighted as being ongoing there. With the lower CapEx in 2022, should we be expecting more or less of a deferral of that CapEx into '23? I know you're going through the budgeting process, but should we be thinking about a similar type of number in '23 as we saw in '22? Or has anything changed along those lines?

So it's just a deferral into '23. Compared to where we were going to be in '23, which, of course, is not disclosed, we will be slightly higher with this deferral. But part of it is we're deferring it for operational reasons. Some work was slower to get done, and rather than trying to push through that work—instead of that, we’ll wait until the spring to complete it. Lauren, anything to add?

That's exactly correct. We did an analysis of the potential benefits of working through winter versus the costs and determined it wasn't worth the risk of working through winter on that particular project. We've decided to button it up by roughly the end of November and will return to it early in April, so it was a project we could defer spending on. The real game-changing capital project that Lucky Friday has is the service hoist, and it is on schedule and going great. Lucky Friday, this weekend, got to tour; the building is up, the hoist is in place, it's being wired, and we're preparing the shaft to receive the guides for the service already. So that project is going really well.

The other thing, Michael, is that equipment has been slow to come. That's part of the deferrals from '22 to '23. We will make those expenditures. And that's not just at Lucky Friday; that's across the company.

Got it. Thanks. Okay, maybe switching gears quickly to the byproduct credits in the zinc and lead production? Have you considered breaking out lead and zinc guidance more than you do for a bit more predictability? I know it's the nature of the beast to an extent, but is it just too hard to really predict on a quarter-by-quarter basis what those credits will be from Greens Creek and Lucky?

You're the first person to ask for that in 20 years, so we'll consider it.

Okay, okay. I'll take that under advisement. Maybe just one other silver question. You brought up demand in the physical market. I suppose we're still seeing a spread between that physical, more retail-focused silver price and the spot price, maybe narrower now that we've bounced up off the $18 level over the last few weeks and months. So I suppose two questions. Are you seeing the same thing? And assuming that you do, do you see any opportunity to exploit that spread or do you just see it as a positive sign for future silver prices?

Well, it's really a sort of wholesale to retail purchase of silver. If you look at 1,000-ounce bars, there's not that big of spread. The spread really is at the retail level on the one-ounce coins and medallions and the like, and the 100-ounce bars. We produce, the final product we produce at our silver mines is a concentrate, so we don't have physical metal to try to do something at a retail level. So we're not intending to try to do that, at least at this point.

Not so much on the—sorry, go ahead.

You could potentially sell the material. We haven't really ever seriously considered that.

All right, I mean more as a view on the market. Do you see that as—not just adjusting to start producing coins around? But do you see that retail spread as being indicative of anything that you would see in the broader market, in the broader silver market?

Well, I think it's not dissimilar to what we've seen in India, with an increase in demand. It provides that fundamental underlying demand that supports the price, making it difficult for it to decrease significantly and provides more risk to the upside.

Very good. Thanks for my questions. I'll pass it on.

Your next question will come from the line of Lucas Pipes with B. Riley Securities. Please go ahead.

Thank you very much, operator. Good morning, everyone. My first question, Phil, is on the cost side. So great to see that cost guidance is flat this year. I wondered if you could expand on that a little bit. Are we seeing inflationary pressures subsiding or is this really more a testament to your cost management? Thank you. Thank you for your perspective on that.

It's certainly not subsiding yet. I don't think it's increasing, but we're continuing to have inflationary pressure. I'll use diesel as an example; the price of diesel is significantly higher than it was. We're just very focused on managing our costs. The best way of doing that, on a per ounce basis, is increasing throughput. I'll let Lauren and Russell add any comments.

I think the denominator is key. We’ve been driving to generate more metal and more revenue. We had some visibility that there was going to be an inflationary period and did some budgeting accordingly. I think it exceeded our expectations, in many cases, but we did protect ourselves a bit during budgeting.

I think, Phil, you've got it. It's certainly not subsiding. I think, as we've moved through the year, we've taken into account the budgeting changes Lauren mentioned. The cost guidance we've been able to account for the inflation. However, it's still high compared to what we've seen in the past.

Very helpful, thank you. And as a quick follow-up on this point. Are you seeing areas where costs are coming down? Conversely, what are the key pressures today that are still running through the system? Thanks for your perspective on that.

Well, certainly we are seeing some cost reductions in some of the materials, but it's not dramatic; it is at the margin, and not particularly meaningful. The more important point is that costs are not increasing at the rate they were.

I agree. They tend to be coming off of an inflationary period. The costs tend to be fairly sticky, and they lag the change in the broader market by at least a quarter.

Another thing to remember is that labor is almost 40% of our costs. Throughout the course of the year, we've had increases; we think we're at or above market. This gives us a little bit of room to wait for the market to catch up for our labor expenditures. While other items, although they might be significant in the aggregate, each individual cost remains relatively small as a percentage of our total.

Very helpful, thank you. And then my second theme I wanted to touch on is the reshuffling within your CapEx guidance. Not huge numbers, but what are some of the things you're saving at Lucky Friday and Casa Berardi? I'm sure you had thoughts about why you had it in the budget in the first place, so what are the trade-offs?

Lucas, it's really just a deferral. As I said a moment ago, some of it is just for operational benefit. In some cases, suppliers haven't been able to deliver equipment, and frankly, almost every year our team is very excited and ambitious. They project projects that they just don't have the time to actually execute.

So we see it every year. We tend to forecast our capital expenditures higher than they materialize, but we generally come pretty close to budget, which will be the case this year.

Got it. Is it reasonable to assume there's a catch-up then next year if this is a deferral, or would you say it's kind of happening on an ongoing basis, so it wouldn't be a catch-up?

We hope that we'll catch up in '23 with the expenditures that we deferred this year because it's primarily equipment and a couple of major projects.

It's largely growth, right. So assuming the projects are executed as expected, we should catch up.

These are projects we want to do.

Okay. So should we assume higher CapEx for 2023 directionally?

We haven't given guidance on 2023. We're still in the budgeting process, so let me hold off on that until we’re ready. Thank you.

Your next question will come from the line of Heiko Ihle with H.C. Wainwright. Please go ahead.

Hey, guys, this is Marcus Giannini calling in for Heiko. Thanks for taking our questions. So you've seen about 3.6 million Keno in the quarter, and you're expecting $10 million to $12 million of spend in Q4, which gets us from 30% to 50% of development complete? How long do you think we can trendline that figure of 20% costing about $10 million to $12 million? And then I guess while you're at it, how much are inflationary impacts hitting you in that area specifically?

It's hard to say specifically that we certainly feel the same inflationary pressures we do elsewhere. The real concern is diesel, specifically, the fact that diesel costs have gone up. As for the assumption, I think if you're assuming that we'll spend sort of at that same level during the course of next year, sometime we'll turn on the mill, probably in the third quarter. Maybe we'll be able to advance to the second depending on how well the development goes. But certainly, we will be in full and consistent production by the end of the year; that is our objective. Everything else that we can do to get ahead of that is upside for us. At the end of the year or early next year, we will provide specific guidance on Keno as well as on the other properties.

We expect the development rate to increase over time. It's a learning curve; learning the ground and also getting some of the equipment we have on work to help accelerate the development rate. I expect that capital expenditure for development will escalate with the development rate. The other point, we have some capital construction to do, which is seasonal. As we hit the April-May time frame, you'll see some of that spending increase.

In general, at Keno Hill, I believe you'll probably see a bit of a ramp-up in costs similar to what Lauren mentioned. But the lion's share of it is generally a fixed cost; the costs that we incur up there.

Okay, got you. That's really helpful. And then for my next question, it's already been touched on quite a bit with Lucky Friday and Casa, with CapEx being deferred to '23. So I guess I'll ask about equipment availability. What type of items are you guys having difficulty procuring on that front?

The biggest challenge is filling the mechanical trade base. In terms of equipment, it's sort of a mixed bag. You can't really point to one manufacturer being slower than another; within a single manufacturer, delays may be incurred at a particular facility, which means it might be one class of machine, whereas we don't have trouble getting another class of machine. It's really an odd mixed bag; it's difficult to say that there's a trend other than the industry is strong, and there's demand for it.

Okay, fair enough. Yeah, that's it for me. I'll hop back in queue. Thanks, guys.

Your next question will come from the line of Joseph Reagor with ROTH Capital Partners. Please go ahead.

Hey, Phil and team, thanks for taking the questions. A lot of stuff I want to touch on was already hit on. But I kind of want to follow up a little bit on Keno Hill and make sure I fully understand. Once you guys start the mill up, we should expect the development capital to trail off, correct?

What will happen is there will be a split in the development capital between continuing to advance the primary development and ramping system that you saw on that slide with the green. Maybe call it half of the expenditures will be related to that sort of development, and the other half will be related to upslope access development and scoping.

Recall that these are mines with more than a 10-year life, so there's a lot of development remaining to be done.

Yeah, fair enough. Okay, and then looking at Casa this quarter, their total costs exceeded revenue. I know there's some accounting stuff behind that; are there any concerns about inflation there and kind of a weak gold environment putting you guys in a position that if gold doesn't recover from this level, you need to reconsider whether or not to continue operating the mine?

Well, I think that's probably too strong to say that continuing the mine is in question. It really is a matter of how much capital investment you can make. We do have the objective of trying to have all of our mines be cash flow positive. We have had that mantra for some time. While we are willing to have periods of time where they need new capital infused, these are operating mines that should be cash flow positive and generate returns for the overall corporation. Are we looking at ways of improving the performance at Casa? Yeah, absolutely all the time. So Lauren, anything to add to that?

We’re always looking to optimize plans. Based on the cost structure, inflation, and metal prices, we're always optimizing both the underground and open pit plans. From a cost perspective, the open-pit plans are the bigger lever because of the volumes of material. The lever on the revenue side is the underground mine. So we’re always balancing those things.

Fundamentally, we think we have this 37-kilometer strike on the Casa Berardi, that is very, very prospective; it is very underexplored. And that's where the greatest gains will come from. We expect to continue exploring and look for that higher-grade material. The drilling we're doing in the 113 is interesting. There's some high-grade material that we've seen. If you'll recall, going back a decade, the 113 was the real high-grade material that drove the mine's value. If we find some more of that material, it’s a whole different proposition at Casa Berardi.

Okay, fair enough. And then just on inflation. I guess, maybe you guys can attempt to quantify what part of the inflation you've seen that you feel will be sticky versus what part you think might have some pullback as the world normalizes again at some point in the future? Is that 50-50, 60-40? How do you feel about that?

Labor will be sticky. Contractors will vary, diesel will vary, and the others will be slow to move, but they will vary too—things like steel and other consumables. Labor goes up, but it's hard to have it come down.

Yeah, okay. All right. Fair enough. I will turn it over. Thanks so much for the questions.

Our next question will come from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Thank you. I want to congratulate you on your 10%-15% rate of cost growth. I keep a log of three dozen companies where the seven-quarter cumulative cost increases 41% or 6% per quarter. And Nevada Gold Mines' open-pit mining cost per ton rose 50%, cumulatively over seven quarters, or 7% per quarter. So Phil, I'm going to ask how you're going to keep doing so well, particularly there’s 1 million ounces. Lucky Friday tops out at this 2,500 tons a day level; where can those productivity gains continue and help you keep costs under control?

At Greens Creek, our objective is to get to 2,600 tons, and put that in perspective, we were around 2,100 tons a day when we started operating the mine. That's a significant increase. It's mostly cut and fill mining, and my hat's off to the performance those guys have had, because we've been at 2,500 tons a day for this year. You'll see us try to continue to increase throughput. At Lucky Friday, we've gotten to this new mining method, which is much more productive and much safer. I believe that our ability to increase throughput will demonstrate that we've gone from 800 tons a day to 1,100, and we're on a path to 1,200. There's definitely more beyond that.

There is always more; it's just what the curve looks like.

The idea is to increase productivity without adding additional personnel whenever possible and improve productivity per person. There are some technologies we’re looking into that we believe will be constructive. We are on the cutting edge of technology, for example, at Greens Creek with automated haul trucks. Our vendors say we are at the forefront of what anyone's able to do.

I think the key is to get the most out of the capital we've already invested. In some cases, we make additional investments when we see incremental opportunity. But it’s very much a denominator game. Being efficient in moving more tons and more metal with those same or just slightly increased resources is a winning combination for us.

Just to comment on your mention of gold mines; where our small underground mines hold a huge advantage in this inflationary environment. The costs for us per ton in aggregate are not comparable to larger operations.

Could you run through what the natural bottlenecks or limiting factors are at Greens Creek, Lucky Friday, and Casa Berardi tailings mill capacity, shaft hoisting underground mining? Which are the limiting factors in each site?

Sure. So why don't we together start with Lucky Friday? Fortunately, it has had a large amount of capital, and that's true for all the mines; a large amount of capital that has been put into the mine. We are rarely able to get to 1,200 tons a day without encountering bottlenecks. This is true because of the service hoist we're putting in. Otherwise, the hoist would have been the bottleneck to getting to that 1,200 tons a day. We reach that 1,200 tons a day; it starts to come in at the mill.

We'll chase bottlenecks around there, but most of them can be resolved with modest investments. The only problem would be if we put another zone into production and meaningfully needed to change what was happening in the mill. It might require expanding the grinding circuit, so not a huge investment.

At Greens Creek, we thought the real issue would be the mill, but we keep increasing the throughput of the mill with very small adjustments. As I said, we've gone from 2,100 to 2,500 tons a day, and we believe we'll get to 2,600 tons without significant investments. We're now at a position where the mine itself is the bottleneck. Part of the issue with the mine is the length of the haulage to 200 South, which is about a 40-minute haul from the bottom of the mine, maybe even up to 50 minutes. That's a lot of time and a lot of people engaged in that activity. We’re trying to find if there's a solution with automation or quasi-automation to improve the haulage. Backfilling is delivering backfill throughout the mine, which is also a bottleneck. However, I don't foresee any major issues in getting to that 2,600 tons a day. Lauren, anything to add?

No, I agree.

In terms of tailings at Greens Creek, we're in the process of permitting the next tailings. We just completed the permitting on the last tailings about two years ago, and we see it as about a 10-year process to permit and construct tailings. We're well on track for that. At Casa, we have been able to double the mill throughput; if we were at 2,000 tons, we're at 4,000 tons. So growing that mill production is not really what we're focused on; it's truly about improving the grade of the material coming into the mill. We've looked at ore sorting there. Fundamentally, we need to find more higher-grade underground material.

Thank you for the rundown.

Our next question is from the line of Lucas Pipes of B. Riley Securities. Please go ahead.

Thank you very much for taking my follow-up. I want to ask another question on Casa. With the diesel price increases this year, can you speak a little bit to the trade-off of surface versus mill utilization there? Any light you could shed on underground versus surface costs? And how that mix might help optimize costs at the site going forward? Thank you for your perspective on that.

Lucas, you broke up a little bit, but I believe you’re asking about the relationship between underground production and surface production. Generally, we'd like it to be about 50-50. However, it depends on the grade of the underground; that’s what we try to achieve. It's difficult due to the amount of development required for these relatively small stopes.

That's correct. Our operating philosophy underground is to maximize throughput and reliability of the mill while feeding it the best possible grade. Therefore, we prioritize underground production, backed up by open pit, while always keeping the mill full.

In the long term, this mine will generate a huge amount of cash flow when we've stopped development and started laying back the open pits. At that point, all we will be doing is mining ore, which will make it a substantial cash flow generator. However, we aim not to reach that point where we're only maintaining the mine life and generating free cash flow in the meantime.

Very helpful color again. Best of luck, and thanks for taking my questions.

Our next question will come from the line of Jeff McKelvey, an individual investor. Please go ahead.

Hello, thank you for taking my call. Good morning. My question was regarding some of the current and looming challenges for Hecla Mining as you move forward.

Well, the issue we have, as do most companies in both mining and other sectors, is recruitment. We are constantly focused on this more than we've ever been in our history. It’s really about obtaining the people you need. When you think about mining engineers coming out of school, the number is significantly smaller compared to what it was 10, 20, or 30 years ago. This means you must repurpose other engineers from different disciplines. That's the big challenge for us and the industry.

Yeah, that makes sense. Thank you so much.

Our next question comes from the line of an unidentified analyst. Please go ahead.

Thank you for taking my question. You guys forecasted $42 million to $45 million in capital expenditures for Greens Creek. Yet thus far, that was down $25 million despite an understanding that we usually see down in the winter months. Is this due to the timing of the payments, or perhaps Casa and Greens Creek and Lucky Friday deferring some expenditures to two different quarters?

The back weighting of the capital at Greens Creek relates largely to equipment. We've had delays on that we've ordered, which would be the largest item. Anything else?

No, we’ve wrapped up our capital construction for the year; it's done as expected. The issue is really with the equipment.

Okay, thank you. Congrats on encouraging results at Keno Hill. At what point in the future are you looking to put out a resource update?

We're evaluating our resources at all of our properties. We do that annually, and you will see something in early 2023. However, we do not have the opportunity to do the infill drilling at Keno that will be required for a significant update from resources to reserves. It may take until the end of '23 before you see a significant move in those resources or in our reserves. Remember, we have in front of us 37 million ounces of reserves that Alexco had. That's at least an eight-year mine life, and we're pretty confident that the Birmingham deep material will convert, which could extend this to over a 10-year mine life if it does.

Thank you. One last follow-up question on Keno Hill. Keno Hill is a small mine. You previously mentioned you planned to increase the throughput to 550 pounds per day. Is that something you want to initiate as soon as possible when Keno is up and running? Or how do you view that, and have you thought about expanding beyond that throughput level?

The first step is to enter full and consistent production. Then we'll look at increasing throughput from there. So the initial objective is to reach 400 tons a day.

Our final question will come from Sean with Deutsche Bank. Please go ahead.

Hi, good morning. On Slide 13, you sort of show the components of production costs. The one bucket 'other' is 24%. Is there any way you could provide us with a little more detail surrounding what's in that bucket?

Yeah, sure; I think power plays a role since we're on hydro at all our mines. That’s a significant part of that. The largest component is probably correct as well as I say, I sat there and thought about that same box; the other one that sticks in my mind is something like the lease for the voting. That's an expense that fits into that bucket too—things along those lines that don't fit neatly into other pieces.

Right. How has your hydro power been over the course of this year? Up, down, or stable?

It’s stable. That’s one of the advantages we have in terms of the cost of power being quite low and also in terms of inflationary pressure.

That's helpful. I see you've reached 1.9 times net leverage now. Are you trying to remain around the 2 times leverage target? Is there anything religious about remaining around there? Or would you potentially take this lower as your production increases and your free cash flow begins to churn?

We would like to see it get lower, but we are committed to not letting it get higher.

Along those lines, we were at 1.1 just coming in at the end of last year, right. We’ve seen it significantly lower, but to Phil's point, we're committed to maintaining prudence with our balance sheet and keeping it less than two to one.

Okay, thank you. Thanks, everyone. We appreciate everyone participating in the call. I would remind you that if you would like to have a one-on-one call with us, those are available. We've blocked out time, so just reach out according to the instructions in the press release. We look forward to speaking to you again, either toward the end of this year or early next year. Appreciate it.

Ladies and gentlemen, that will conclude today's meeting. Thank you all for joining. You may now disconnect.