Hecla Mining Co/De/ Q2 FY2023 Earnings Call

Hello and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hecla Mining Company Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Anvita Patil, Vice President, Investor Relations and Treasurer.

Good morning, Regina, and thank you all for joining us for Hecla's second quarter 2023 financial and operations results conference call. I'm Anvita Patil, Hecla's Vice President of Investor Relations and Treasurer. Our financial results news release that was issued yesterday, 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 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. Non-GAAP measures cited in this call and related slides are reconciled in the slides or the news release. I'd like to remind you if you would like to have a call with the management, you can do so by using the link under the section Virtual Investor Event in our earnings release that was issued yesterday. With that, I will pass the call to Phil.

Thanks, Anvita. Good morning, everyone. Thanks for joining our call. This second quarter was a good quarter for safety, production, cash flow, and starting changes at Casa, but maybe the most significant event of the quarter is the restart of the Keno mill. When you combine that with what is happening at Greens Creek and Lucky Friday, I think that Hecla is now in another period of substantial growth in silver production reserves and maybe even faster than what we had over the last five years. If you look at Slide 4, you can see why I’m saying that because what that shows is what we've done over the last five years. The numbers for those five years are pretty remarkable: 27% growth in revenue, 79% growth in silver reserves, 37% growth in production, $0.75 billion of free cash flow from our three mines. It's no longer a question that Greens Creek mill can operate at 2,600 tons per day, or maybe even 2,800 tons per day. It's now more of a question of whether we can maintain mining at that rate or even higher. Lucky Friday, without the service hoist in the bunker, which is in operation this month and the fourth quarter respectively, is already producing about 20% more ore than 18 months ago and is at a 5 million ounce run rate. At the restart of Keno, we are having some teething problems, but if you look, we have an exceptional district given the grade of the ore, the recoveries that we are experiencing, and the remarkable exploration success with the continuous discovery of mineralization. So over the last five years, we had that 37% growth in production, and we expect 40% over the next three years and close to 20% growth just this year. We probably will also see growth in our reserves and more free cash flow generation, and I think all of this should result in positive share performance. Now, Hecla is a silver company with gold exposure, and we believe gold exposure will always be important to our portfolio for many reasons. It gives us diversification from the concentrate market, it hedges against silver's higher volatility, especially during recessions. It gives us scale to grow. These are the reasons Casa Berardi is important to our portfolio. As we've indicated for the last year and a half, Casa has been impacted more than our other sites by inflation, causing underground mining costs per ton to double. Underground grades have declined as we expected, and tailings construction costs are higher because it requires more buttressing. While we are permitting the higher-grade pits, we are moving quickly to mine only the 160 pit. Lauren's going to talk more about Casa in a moment. I think it was a great second quarter, and I think the first half silver production is evidence of the point I started with that our silver production is growing even faster. This quarter, Lucky Friday produced 1.3 million ounces, and four out of the last five quarters, we've produced more than 1.2 million ounces. At that rate, Lucky Friday is close to being the 30th largest silver mine in the world. Just to put that in context, in 2021, Lucky Friday was producing about 40% less than what it's doing now. As I mentioned, we restarted the mill at Keno Hill, and the improvements we completed leading up to the restart are performing well. The secondary crushing circuit modifications are proceeding on schedule. The grades are better than modeled, and we anticipate being at full production by year-end. All this performance was underpinned by Greens Creek's consistent 2.4 million ounces of production and $36 million of free cash flow. Our all-in injury frequency rate was the lowest in the history of the company at 1.18, an accomplishment that reflects our focus on changing behavior and engineering out risk. I think the best example of engineering out risk is the UCB mining method, which puts miners in safer locations, allowing them to perform safer tasks. We will be focused on how low the injury frequency rate can go at the Lucky Friday. Lauren, who is going to retire at the end of the year, will talk more about each property. Silver revenues are growing relative to gold. We are almost at 45% for the quarter, and I think we'll likely have more than 55% of our revenues from silver by the end of the year. The silver operations have good cash flow generation, and if prices strengthen a little, the second half should be even better, and Russell will have more on this. We maintained our consolidated silver production and cost guidance, but we have adjusted the production cost guidance for Casa Berardi and the production based on the impact of the wildfires and the fact that we are moving quickly to open-pit only operations. Now, I’ll pass the call to Russell.

Thanks, Phil. I'll start on Slide 7. Hecla has long been known as a leader among the silver miners and the largest U.S. silver producer. As we look at this slide, it is easy to see why, where over the past six months, the margin at our silver mines was 56%, and they've already produced more than $105 million of free cash flow this year. We are excited to see what Keno Hill will add to this profile. Over the past three and a half years, the Greens Creek and Lucky Friday mines have generated more than $560 million of free cash flow. This has allowed us to invest in exploration to grow our production in silver reserves as well as acquire and invest in Keno Hill, which we anticipate will both add to our production profile and improve our balance sheet and debt metrics. This leads me to Slide 8, where I'll discuss our first quarter revenue profile and balance sheet. Silver accounted for 40% of our revenues in the first half of the year, which continues to show the strength and consistency in our silver mines, with approximately 34% of our revenue coming from gold and 26% from base metals. We ended the quarter with $107 million of cash on our balance sheet and had liquidity of $219 million. We also monetized our zinc hedges for approximately $7.6 million as the zinc price declined to its lowest point in the second quarter since April 2020. The strength of our balance sheet and financial flexibility, with a net leverage ratio of less than 2x, remains one of our most important objectives. As of the end of the quarter, we were slightly higher than our goal. This is primarily due to the suspension of mining operations in June at our Casa Berardi mine due to Canadian wildfires, as well as our continued investment in Keno Hill. I expect that as we come into the third quarter, this will revert to being less than 2x due to the production of both of these mines during the quarter. I'll now turn the call to Lauren.

Thanks, Russell. Let me start by saying it's very satisfying that our succession and development planning have put us in a position to fill the VP ops role and to backfill that vacancy internally. Carlos and Chris have steady hands and will do a great job. As for me, I haven't hung up my spurs just yet. There's a lot to accomplish in the next five months. Greens Creek, our cornerstone asset, turned in another solid quarter with production of 2.4 million ounces of silver and free cash flow of $36 million for a total of more than $73 million in free cash flow for the first half of 2023. Gold production ranged strong at 16,000 ounces due to better grades and plan and improved performance in the gravity circuit. Cash cost for the quarter was $1.33 per ounce, and the AISC per ounce was $5.34. Both metrics are slightly higher than the previous quarter, primarily due to a lower zinc byproduct credit because of the lower zinc price. Capital spending was $8.8 million in the quarter for a total of $15 million for the year. Our expected capital spend at Greens Creek is now between $49 million and $52 million for the year, which is a slight decrease over the previous guidance. We are increasing our gold guidance for Greens Creek and lowering our AISC guidance because of the lower sustaining capital spend planned for the year. Lucky Friday produced 1.3 million ounces of silver at an AISC of $14.24 per ounce in the second quarter. This quarter marked the fifth consecutive quarter of silver production exceeding 1 million ounces, the highest quarterly production in the past 23 years, and a new safety record with an all-in injury frequency rate of 0.52 at the end of June, a remarkable achievement. Capital spending at the mine was $16.3 million as we focused on two key projects, the service hoist, which was completed earlier this month, and the coarse ore bunker, which we anticipate completing by the fourth quarter. The service hoist is expected to debottleneck our production hoisting capacity, while the coarse ore bunker will decouple the mine from the mill by adding the capacity to stockpile ore for multiple days. Both projects are critical to achieving our production goal of 425,000 ore tons per year, the rate we expect to achieve by year-end. Free cash flow generation for the first half of the year was $34 million, reflecting the mine's strong performance during the year. We are reiterating the production guidance but increasing the cash cost guidance for 2023 to $4 to $4.70 per silver ounce and all-in sustaining cost of $11.50 to $13 per ounce. This increase in cost guidance is due to higher labor costs of $2.5 million related to the wage increases in the new collective bargaining agreement, lower zinc byproduct credits because of lower zinc production and prices, and higher sustaining capital related to the timing of mobile equipment deliveries and increased development to achieve our throughput target. Moving now to Keno Hill, we remain on track to achieve full production in the fourth quarter. We restarted the mill in the second quarter using lower-grade stockpiled ore for the startup. The mill produced 184,000 ounces in the quarter while operating with a temporary portable crusher. The next milestone in the mill is to complete the secondary crusher improvements, which we anticipate in the third quarter. We expect capital spend at the mine to be $47 million to $49 million for the year, slightly higher than our initial guidance due to increased development and notable improvements. I’m encouraged by our progress at Keno Hill. While we have a limited sample size, the resource model is performing well through the second quarter. The mill to model reconciliation is showing slightly fewer tons at better grades for the same silver and lead content and more zinc. The improvements we made in the mill prior to the restart, including advancing the level of process control, are performing as expected. Silver recovery has exceeded our target at 94%, and the concentrate quality is very good. We look forward to commissioning the upgraded secondary crushing circuit in the third quarter and expect it to improve the reliability and efficiency of that circuit. In the mine, we are going through the typical ramp-up learning curve. We've learned how to manage the ground in the primary development headings and are now working through the process in the ore headings. The Bear Zone is requiring more shock, which is being incorporated into the mining cycle. Our key underground infrastructure project should be completed in the third quarter, and we look forward to a strong finish for the year. We are reiterating our production and cost guidance at more than 2.5 million ounces and an all-in sustaining cost between $12.25 and $14.75 per ounce. I'm excited about the future Keno and expect the mine can produce up to 4 million ounces in 2024. Casa Berardi produced approximately 19,000 ounces of gold for the quarter at an all-in sustaining cost of $2,286 per ounce. Production was lower due to wildfires in Abitibi, which caused access road closures for the majority of June. As Phil said in his comments, Casa Berardi has experienced declining head grades and increasing cost pressure over the past several years. As noted in our technical report, Casa becomes an open-pit only operation in the future. After careful evaluation, we decided to make some changes now to better prepare for that future. We conducted a stope-by-stope margin analysis of the remaining underground reserves and resources during the quarter. We concluded that the East Mine did not yield attractive economics and closed it. For the West mine, the analysis showed attractive economics until about mid-2024. These changes put more production pressure on the 160 open pit, and we made the decision to begin the process of insourcing the mining there. We authorized the purchase of $16 million in surface mobile equipment, about $12 million of which has been delivered, and we are busy assembling it and training operators. As our crews ramp up and the balance of the equipment is received, we expect to take over all of the open-pit mining by the end of 2024. Much of the waste rock being produced by the stripping is being directed to the construction of tailings Cell 7 this year and through calendar year 2026. We are adjusting our production cost guidance to reflect these changes. Previously, our plans modeled the 160 pit combined with the underground production that would act as a bridge until we get the permits to mine the higher-grade open pits. With the changes I just described, it will not be possible to avoid a production gap, which we estimated at about two years between 2028 and 2030. Once 160 is fully mined, we anticipate permitting it as our long-term tailings storage facility for the higher-grade pits. Until then, we'll build multiple raises on our existing Cell 7 tailings facility. In consultation with our engineer of record and independent review panel, we've determined that increasing the height of the facility will require us to build a substantial buttress for it. That capital has been reflected in our ongoing plans. I think about Casa in three phases. Over the next four years, we'll make some modest investments that are returned in the period to produce the remaining permitted reserves and resources. Then there will be a period of investment while we complete the permitting of the higher-grade pits, invest in the infrastructure and equipment necessary to complete the transition to a fully surface operation, and to expose the first ore. Once the first ore comes, that’s expected in 2030, positive free cash flow generation falls quickly and then builds over the coming years. I want to emphasize Casa’s long reserve life and the significant exploration potential on a large land package on the Casa Berardi break. We are making the right decisions today to put Casa back on the path to free cash flow generation and a brighter future. With that, I'll pass the call back to Phil.

Thanks, Lauren. Turning to Slide 15, we are reiterating our silver production and consolidated AISC guidance. With our changes at Casa, we are revising our three-year gold production and cost guidance for the year. Capital guidance is increasing to $225 million to $235 million, mostly due to the increase at Lucky Friday and at Casa Berardi for the reasons that Lauren has explained. Before I end my remarks, I want to emphasize the critical role that silver plays in the transition to renewable energy. Silver demand in photovoltaic was about 140 million ounces in 2022, and that's about 12% of total silver demand. In 2023, technologies known as TOPCon and HJT are expected to account for 80% of all the new photovoltaic manufacturing facilities. These two technologies use 30% and 120% more silver respectively than the currently widely used PERC technology. Silver demand in solar is set to grow further as the transition to clean energy accelerates. I'm not going to be surprised if we see a 30% to maybe even 40% increase in silver demand for solar this year or next, raising solar to more than 15% of total silver demand. If the economy slows, I’m confident that the commitment to renewable energy will sustain the growth of silver and solar. It seems inevitable that solar will overwhelm other silver demand categories, with maybe the exception of investment demand. With that, Regina, I'd like to open the call to questions.

Our first question will come from Lucas Pamatat with Canaccord Genuity. Please go ahead.

Hey, Phil and team, good morning and thanks for taking my question. Just wondering about Casa Berardi, could you provide more color on how much you expect to invest in those three years that the mine has closed down and over the next 18 months? Because I think you had previously said it would cost $100 million to $120 million to transition to open-pit mining. Just wondering if that number is still valid and if so, how much of that is baked into the CapEx guidance?

Yes. The short answer is that number is still valid, and that was without stripping. If you add the stripping costs, it's on the order of magnitude of $200 million to $250 million. This is out in 2028, 2029, maybe a little bit in 2030. It's not an immediate capital outlay. We are making some relatively small free cash flow of Casa does not cover all of the capital costs that we'll incur this year and next year, but it's a relatively small amount. I think that each year it's $30 million to $40 million. In the following years, it should be free cash flow positive, and we'll return that capital we are investing in 2023 and 2024 over the 2025, 2026, 2027 timeframe.

Got it. Thanks. And just one more for me. You had talked in the past about how you were hesitant to shut down the mine just because of the demand for labor in that area. What are you planning on doing with those employees, or how are you planning on retaining them, I guess?

Well, the need to retain employees is certainly something we want to do since we are the largest private employer in the region. The reality is that the mine has to be economic. We looked very carefully at what stopes we could mine, made the determination of the need to shut down the East Mine. We'll mine the West Mine stopes that are economic, and we'll maintain that workforce through that period. We will move to an open-pit-only operation, so we'll have some of those people transition into those roles. Lauren, would you like to add to that?

We’ve already begun that process of transitioning some of the underground workforce into the open-pit role. A significant number of people that were displaced from the East Mine are going into the new fleet that we purchased to operate the new fleet.

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

Thank you very much, operator. Good morning, everyone. My first question is also on Casa and kind of thinking through the transition there. It was touched on a little bit in the prior question in terms of transitioning labor. Can you frame up what the net impact would be over the coming years and how you would manage that? Is there kind of idle mine costs for the underground works following the exit from underground operations? Just trying to understand if there's anything we need to model longer term as it relates to the underground workings. Thank you very much for that.

So Lucas, before you continue, could you repeat your second question? I'm not sure I understood.

Essentially when you abandon the underground section of Casa, do you just pull the plug and walk away from the underground workings, or do you have remaining costs, maintenance costs for the underground works even as you don’t actively produce underground anymore?

It does not sterilize the underground, and we will need to determine the level of maintenance on the underground. Stay tuned, we'll see where we can add that. But we will attempt to maintain the ability to revisit the mine underground under different price conditions and a different cost environment. Additionally, we'll continue to drive the exploration drift to do further drilling to the west of where we currently operate in the West Mine. So stay tuned for that, and that will occur over the course of the coming year. With respect to the employees, being a large employer, the issue is not going to be having enough employees. It's the fact that we're having to reduce that number, but that will occur over the course of the coming year. I think ultimately we end with what we estimate to be roughly half being retained.

Yes, so in terms of company employees, we started the year with about 650 company employees. We're now down to about 522 just to put things in perspective. Over the course of the year, there aren't many more changes. Honestly, normal attrition; the next change will come with the closure of the West Mine.

Got it. Thank you very much for the detailed responses. For my second question, I do want to stay on the labor topic. In the past, you had mentioned labor constraints, especially on the skilled side. Could you give us an update from Greens Creek, Lucky Friday, Keno, how things are going on the labor front?

Sure, Lucas. We can talk about that in general, and then maybe Lauren, you can add anything specific. But in general, we've done a very good job of attracting the people we need at the mines. I think the turnover rate at Lucky Friday, for example, has fallen to levels we’ve seen in the distant past, around 10% or less. Frankly, the biggest issue we have is with technical people, engineers, and geologists. That’s more of a challenge at the moment. We always have difficulties with mechanics and very skilled miners, but we've done a pretty good job in that area. Still, we have vacancies mainly in technical areas.

Broadly, I would say that it's becoming less difficult to fill those roles over the past year than in the previous two. Not that there isn’t still competition, but we're pretty much at staffing levels everywhere. We’re able to find folks and supplement with skilled trades on contract when we need to, but it hasn’t materially affected the business at this point.

We need schools to produce more engineers and geologists.

I appreciate the color. And I think I mentioned before, I know what degree I'll recommend to my children. Thanks again and best of luck.

Your next question comes from the line of Joseph Reagor with ROTH MKM. Please go ahead.

Hey guys, thanks for taking the questions. Kind of following on the labor question. With the shutdown of the East Mine, will there be any changes in the labor force at Casa in Q3? Also, on that topic with the East Mine, will there be any charges taken for its closure?

The answer is no to both questions. We don't anticipate any additional steps labor-wise, nor is there an impairment charge.

Okay. And then compared to the February 2022 technical report you released on Casa, how different will the mining rates be as you switch to fully open-pit in 2024 compared to what was in that document?

Fundamentally, there are really just two changes to that document. One is the underground production that was shown will not occur past 2024. That was originally set to continue until about 2030. The other change is additional capital that will be reflected. Otherwise, it's the plan we have always had. Lauren, anything to add? Russell?

In terms of the immediate changes with the shortening of the underground, we are accelerating the 160 pit, which is why we purchased the equipment. The acceleration is not massive; we go from approximately 12 million tons moved this year to a little under 20 million next year. That’s not a huge change. In the following couple of years, the rate drops off, and we’ll be fully in-sourced at that time.

Okay. All right. Thanks for the help there. On Keno, it's great to see it started up early. I think you originally targeted Q3. How confident are you in the full-year guidance since you started early? Is there any chance for upside, and are things going smoothly to meet the guidance?

We're confident in the guidance at this point, but it is a startup. It will depend on our ability to put the tons in the mill and what the grade and recoveries will be. We are still learning as we go, but at the moment, there's nothing indicating we need to change.

No further comments, that’s correct.

Your next question comes from the line of Mike Parkin with National Bank. Please go ahead.

Hi, guys. Sorry to beat a dead horse, but I have a couple of questions on Casa as well. You've indicated where you started the year in employment and where you are now. Can you give us a sense as of, say, 2025, how many employees you'd expect to have? Is it still around just over 500 or would it be even lower?

It's sort of in that range, because remember we are insourcing the mining. Work that’s done by contractors will be transitioned to Hecla employees.

Okay. And in terms of your reserves and resources, is there going to be any reclassification of any ounces that fit in the underground categories into potentially open pit?

It will not go into open pit; there will be a reclassification of reserves to resources from underground. However, it's relatively small. My recollection is about 10% or 15% of the total, so it’s not significant.

It's about 1.7 million tons, not a big number.

Okay. In terms of what you're planning to mine with the future open pit, is that reflected in the inferred resources right now?

Yes. It’s in the reserves, and the current 160 pit is around 1.7 grams to 1.8 grams. The Principal and the West Mine Crown Pillar pits are significantly higher grade, and the strip ratio, particularly for the Principal pit, is quite attractive.

Historically, you've had quite an elevated strip ratio. Can you give us just a general sense of what the life of mine average would be?

I don't recall the exact figure, but the Principal is about seven to one, and the West Mine Crown Pillar is a multiple of that, possibly around 22 to one. That's in the technical report, and nothing has changed with respect to the timing of those pits as described in the report. The main change in the report is the underground being shortened and the 160 pit being advanced, along with more capital for Cell 7.

Okay. The decision to move forward with this, is there a minimum IRR threshold that you're using to justify it? At what silver price would that be done?

Well, it's a gold asset. The real decision regarding the big capital outlay is really made 2027, 2028. Between now and then, it is cash flow positive, so you have two years needing capital outlay. We expect it to go forward; however, different conditions could affect decisions in the future. The reason we expect it to continue is the very high-grade open-pit material that's very economic, generating an estimated $1 billion plus or minus free cash flow over time, including the capital. Thus, it's a very economic set of pits.

That’s it from me.

And our next question will come from Heiko Ihle with H.C. Wainwright. Please go ahead.

Hello everyone. Sorry if I ask something that's been asked before; I got on a little bit late. Can you provide some color on the costs of labor, parts, and so on for your new mining operation at the Yukon? By now, you’ll have a pretty decent sample size for what actually transpired versus what you have modeled with output costs. Anything else you think would be good to pass on to the analyst community with starting up operations that you maybe didn't expect?

We've been fortunate in that. We haven't had a huge turnover at Keno. There was a good group of people who wanted to be there, recognizing the sort of grades. We've been fortunate that the turnover rate has not been high, and we've been able to attract technical people to the site. Certainly, the issue is the rotational schedule, requiring basically twice as many people as needed for an operation without that rotation, especially in the Yukon. Compensation-wise, I think we're competitive. I can’t provide exact figures at the moment, but we haven't faced trouble staffing either miners or technical personnel.

The other thing is some other operations have closed down, which has given us many qualified candidates for positions.

That's quite helpful. Thank you. Moving on from that, can you walk us through your exploration plans for the Bear Zone versus the Townsite Zone for the remainder of the year regarding meters, holes, or even budget?

We have many targets, making it challenging. We're moving a drill from those two zones to the Chance Vein, which is further afield. We've been receiving great results. We're figuring out how we might drill in the winter and considering that option. Our total spend in exploration for Keno Hill is $3.7 million. It’s not a huge budget. However, it will expand if we start drilling in the winter, plus we'll begin accessing underground areas shortly. Thus, expect some underground drilling in Q4 from those platforms.

I wasn't going to ask this until you just brought it up, but what is the cost differential between winter drilling and summer drilling approximately?

I can’t provide specifics; other than it's more expensive. The primary issue is managing water since it can reach extreme temperatures. We've experienced this at Casa, where we conduct most of our drilling in winter. Hecla has the skills and experience to do that. It's likely we'll see continued winter drilling.

That will conclude today's conference call. Thank you all for joining. You may now disconnect.