Hecla Mining Co/De/ Q2 FY2024 Earnings Call

Good morning, and thank you all for joining us for Hecla's second quarter 2024 results conference call. Our earnings release that was issued yesterday, along with today's presentation, are available on our website. On the call is Cassie Boggs, Interim President and Chief Executive Officer; Russell Lawlar, Senior Vice President and Chief Financial Officer; Carlos Aguiar, Vice President of Operations; and Kurt Allen, Vice President of Exploration. At the conclusion of our prepared remarks, we will all be available to answer your questions. 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 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 want to remind you, if you would like to have a call with management, you can do so by using the link under the section Virtual Investor Event in our earnings release that was issued yesterday. I will now pass the call to Cassie.

Thanks, Anvita. Good morning everyone. The quote goes, 'there's nothing permanent except change,' and Hecla has seen its share of change over the years. But not only has Hecla survived these changes, it's also grown and thrived during these changes. This period of change and transition is not new to Hecla, and we've embraced it with the opportunities it presents. Let me begin on Slide 3. Hecla's origins began all the way back in October 1891 in the Silver Valley of Idaho, about 50 miles east of where I'm sitting this morning. Since that time, the Company has not just withstood but thrived across macroeconomic events such as the Great Depression, the Great Financial Crisis of 2008, along with two world wars, the pandemic, and multiple other events over this time. Hecla has also withstood other more specific events, such as the 1910 Fires, which burned across much of Northern Idaho and Western Montana, and the low metal prices of the early 2000s. Our most valuable asset that has allowed Hecla to grow and thrive is our people. Hecla would not be the company it is today if it were not for the hard work, determination, and commitment to our core values of safety and environmental stewardship of those who go to work at our operations and elsewhere each and every day. Second is the quality of our assets, the solid foundation of long reserve lives, low cost silver operations with great geologic potential in the best mining jurisdictions. While each of our mines has its own specific qualities, there are some characteristics that transcend the portfolio. The first to highlight is the jurisdiction. All of our operating mines are in the U.S. or Canada. Second, each of our operating mines has a reserve mine life of more than a decade, and in the case of Lucky Friday, nearly two decades. Especially on the silver side of our business, we have a competitive cost advantage with Greens Creek and Lucky Friday and our low cost structures drive margins and meaningful free cash flow generation. I'll pass the call to Russell and Carlos shortly, and each will go through the results of the quarter in more detail. But I'd like to take a moment to note that Hecla had a great second quarter in which strong operational performance delivered record revenues and the second highest silver production in our 133-year history. There are three key messages we'd like to drive home. First, we're on the path of free cash flow generation, especially in this metal price environment, with our Lucky Friday and Greens Creek mines generating strong free cash flow. Second, we're deploying our free cash flow by investing in our operations, especially Keno Hill where we have seen remarkable success. But more work is needed to daylight the long-term value in this highly prospective geologic district. And third, we're committed to deleveraging our balance sheet as we started to pay down our credit facility. I want to take a moment to emphasize the long-term value we see at Keno Hill, delivery of which is relying on improving safety, environmental processes, mining practices, and investments in infrastructure. Our investment in Keno Hill is not different from our investments at Lucky Friday or Greens Creek in their early years. Both these operations today are free cash flow engines of Hecla. Keno Hill, with its exploration potential, has parallels to both Lucky Friday and Greens Creek. Back in the 2000s, silver was below $5 per ounce, but Lucky Friday's resource potential was significant. We embarked on a drilling program in 2005 and increased our reserves by more than 300% over a period of seven years. The geologic potential of the mine drove investments in the Number 4 shaft and other infrastructure like the service hoist and the coarse ore bunker. We recall our innovation of the UCB mining method as a pillar of our production growth, our free cash flow generation, and the bench strength and experience of the team, our culture, and our people. I want to also speak briefly about the recent developments in Yukon. We've offered our assistance to the First Nation of Na-Cho Nyäk Dun and the Yukon government to help with the cleanup activities arising from the heap leach failure at Victoria Gold's Eagle mine. We're committed to Yukon and continue to be available where possible to assist during this time of crisis. And finally, I just want to bring people up to speed on the status of our executive search for a new CEO. The search is going very well, and we've had a very robust response. We've identified a number of very qualified candidates who are very interested in the position, and we're confident that out of this wide-ranging pool, we will find the right person to lead Hecla in the future. I'll now turn the call to Russell.

Thank you, Cassie. I'll start on Slide 5. One quarter ago, we laid out a scorecard with our capital allocation priorities for 2024. I'm happy to report that we continue to make significant progress against these priorities of paying down our revolver and investing in our operations. While all four of our operations generated free cash flow, the lion's share came from Greens Creek and Lucky Friday. During the first half of this year, Greens Creek and Lucky Friday generated $100 million in free cash flow, with $67 million in the second quarter, including $18 million of insurance receipts. Continued investment in Keno Hill is a high priority, both in the mine as an asset, but also in our workforce and mining and environmental and infrastructure procedures to ensure the safe and stable operations of Keno Hill over decades to come. Our investments in processes of safety and environmental procedures have started to produce tangible results. However, this is a journey, not a destination, and we plan to continue our investment here. Keno Hill had a record quarter, producing over 400 tons per day and over 900,000 ounces, which is incredible progress. Although we're encouraged by this progress, we've not yet declared commercial production as we want to ensure these levels are sustainable. Carlos will discuss some of these details later in the presentation. Another priority is deleveraging the balance sheet and reducing our revolver borrowings. In the second quarter, we reduced our net debt by $25 million and ended the quarter with a revolver draw of $62 million with cash of nearly $25 million on hand. Our net leverage ratio improved with record adjusted EBITDA, which increased 25% over the first quarter. With expected production and current prices, along with the remaining $14.8 million of insurance proceeds from our Lucky Friday claim, we anticipate we'll be able to reduce our net leverage ratio to below 2x by the end of the year and pay our revolver down over the next 12 months. Our realized price of silver also triggered a higher dividend payment this quarter, adding $0.01 per share to the minimum dividend component. This larger dividend payment highlights our unique silver-linked dividend policy, which provides additional exposure and leverage to silver prices. Moving to Slide 6. Strong operational performance coupled with a favorable metal price translated into free cash flow for the quarter of $28.3 million, which was primarily driven by cash flow from our operations of $61 million, but also aided by cash received from our property insurer of nearly $18 million. As I highlighted in the prior slide, our priority remains on continued investment in our operations while also paying down the revolver. The chart on the slide shows the sources and uses of cash during the quarter. We invested $50 million in capital at our operations, of which $26 million related to growth, while we also paid $78 million on our revolver and exited with an improvement in our net debt of $25 million. As we move to Slide 7, I'll speak more about some of the financial highlights from the quarter. In the second quarter, our revenues were dominated by silver at 46% of our sales, followed by gold at 34% and a nice byproduct credit which equated to 20% of total revenues. Not only did silver dominate our revenue profile, we also achieved a margin of 58% of our all-in sustaining cost per ounce of silver, which in turn drove our free cash flow generation and partial paydown of the revolving credit facility. Our net leverage ratio improved to 2.3x, and as noted, we expect we will achieve our target of less than 2x by the end of the year. With that, I'll pass the call to Carlos.

Thank you, Russell. I will start on Slide 9, Greens Creek flagship mine's consistent performance. Greens Creek delivered another strong and consistent quarter producing 2.2 million ounces. Mill throughput for the quarter was 2,481 tons per day and was lower due to the completion of multiple mill maintenance projects including installation of the new primary screen, relining of the grinding circuit, draw magnet installation among others. Silver grades were lower in the quarter as mine grades reverted to mine plan. Cash costs and all-in sustaining costs for the quarter declined to $0.19 per ounce and $5.40, respectively, driven by lower treatment and refining charges, higher by-product credit, and lower sustaining capital due to delays in equipment purchases. The mine generated $34 million in free cash flow from the quarter and has generated $72 million during the first half of the year. We expect the mine to continue its strong performance in the second half and are lowering its cash cost and all-in sustaining cost guidance to reflect its strong performance year-to-date and expected higher by-product credits. Capital guidance is also reduced due to the timing of equipment purchases and some capital projects. Greens Creek is a premier silver mine, the 11th largest in the world, and the team continues to do an excellent job in delivering consistent results safely every quarter. Lucky Friday is on track to achieve 5 million ounces in 2024. Turning to Slide 10, Lucky Friday's operational performance established new records in the mine's 80-year history. The mine produced a record 1.3 million ounces of silver, achieved record mill throughput of 1,181 tons per day, and delivered record sales. Cash costs for the quarter were $5.32 per ounce. All-in sustaining costs for the quarter were $12.74 per ounce, both lower than the first quarter of 2024. Cost per ounce have exceeded our guidance for the first half of 2024 because of higher labor and contractor costs, additional costs related to mitigation work done in the Number 2 shaft which is the secondary escapeway, and higher profit sharing under our collective bargaining agreement due to strong financial performance. Capital investment at the mine was $11 million in significant sustaining capital projects in the quarter, including repairs to the Number 2 shaft, engineering, design, and initial construction of the surface cooling project, and equipment processes. This record operational performance with strong metal prices drove free cash flow generation of $33.7 million in the second quarter, including insurance proceeds of $17.8 million. The mine is on track to be a 5 million ounce producer this year. We are increasing cost guidance for the mine to reflect higher costs incurred in the first quarter and expect that higher profit sharing costs. The UCB mining method and our capital investments in the mine, like the service hoist which de-bottlenecked our hoisting capacity and the ore bunker which added capacity to stockpile ore for multiple days, are instrumental in Lucky Friday's strong operational performance, and we expect this to continue. Most importantly, this quarter's performance was a testament to the excellent team we have at Lucky Friday.

Thank you, Carlos. Slide 13 shows plan maps of our underground and surface diamond drilling target areas at Keno Hill. Underground drilling is focused on extending mineralization and resource conversion in both the Bermingham Bear Zone and the Flame & Moth zone veins and continues to intersect high-grade silver mineralization over significant widths, which highlights the potential for strong silver mineralization within the district. High-grade intercepts in both zones including 35.4 ounces per ton silver over 20.2 feet in the Bear Zone and 28.6 ounces per ton silver over 22.3 feet in the Flame & Moth zone should positively impact resource models and are providing more geological information and confidence to our resource base. Three surface drills are also active on the property, testing multiple targets including the Bermingham Deep, the Bermingham Townsite, Elsa17-Dixie, and Silver Spoon target areas that have potential for the discovery of additional large high-grade silver deposits. New exploration intercepts continue to add to our understanding of the structural geology of the target areas and demonstrate the mineral potential of this highly prospective district. With that, I'll pass the call back to Cassie.

Thanks, Kurt. I'll speak to our guidance on Slide 14. Our silver production and consolidated cost guidance is affirmed. With Casa Berardi's underground being extended to the end of the year, we are increasing our gold production guidance. Capital guidance is higher because of Keno Hill as Carlos described. I'd like to wrap up our prepared remarks with a few thoughts on silver. The International Energy Agency released its mid-year electricity update in July. Global electricity demand is expected to grow 4% in 2024, that's the highest since 2007. Renewable energy sources are expected to set a new record with their share of electricity generation increasing to 35%, and solar is expected to meet half of the demand of renewable sources. Silver is a key component in solar technology and as such, silver demand in solar is expected to increase by 40 million ounces this year. That's the equivalent of four new Greens Creeks and eight new Lucky Fridays. Before we open the call to questions, I just want to congratulate all the Hecla employees for their commitment to our values of safety and environmental stewardship. Their dedication to Hecla every day makes Hecla the company it is. And with that, Ellie, I'd like to open the call to questions.

Thank you very much, operator. Good morning, everyone. This is Nick Giles on for Lucas. Guys, congrats on the quarter. Really nice to see such strong cash flow. Russell, maybe my first question is for you. Strong progress on the net leverage. What's your appetite for further paydown beyond the targets that you outlined? I believe you said below two times by the end of the year. Is there a target beyond that, or will that be strong enough for now? Thanks very much.

Yes, thanks for the question, Nick. As it relates to deleveraging from the revolver, our plan will be to ensure that we invest in our operations and put up the capital in what's necessary, as well as the exploration programs, some of which Kurt just highlighted at Keno Hill. But we do anticipate that we would generate free cash flow on top of that, and we'll allocate that capital to the revolver. Clearly, once it gets to zero, then we'll look to build the cash position back to levels that we've seen in the past, right. If you go back and you look in the past three to five years, we've had cash balances between $100 million and $200 million. We wouldn't be concerned if we had a cash balance of that. And then, we would talk further about further allocation of capital at that point.

Makes sense. You guys have made some real progress on the cost front as well. I know some higher labor costs at Lucky Friday. Can you just add some additional color on where you may still be seeing some inflation, where you've seen the most relief? Any other color would be appreciated.

You know, I would suggest - I'll let Carlos speak as well, but from the cost inflation standpoint, yes, I don't think that we've seen anything specific to speak to. What we have seen, and we did note it both in the comments we made, but also in the earnings release, as at Lucky, you've seen the performance of Lucky Friday, and the performance of Lucky Friday has been very, very strong. As we see the performance of Lucky Friday, there's a profit-sharing component within the collective bargaining agreement. And so as we make more money at Lucky Friday, clearly we allocate some of that to the profit sharing. Maybe Carlos, you have some details of those underlying costs that you want to highlight?

Well, it's - the rates are normal from the previous year. I can say 5% to 7% in most of the mining supplies. And of course, execution of projects involves costs we are seeing, those increments. The number of contractors that are executing projects introduces additional costs.

Additionally, I think, as has been the case since I've been in the industry, finding good electricians, mechanics and miners is hard. In certain cases, we do have to supplement our workforce with contractors for some of those skills. We continually work to build out our workforce such that those are employees on our payroll versus contractors, and we'll continue to do that.

Hi there. Thank you guys for taking my questions and congratulations on a pretty strong quarter there.

Thanks, Heiko.

Yes. There was a sentence in the report related to Keno Hill, and I'll quote you there, that you expect cost investment at the mine will remain at current levels as more work is required to deliver long-term value. Any thought process on longer-term cost development for the site? I mean, earlier on this call you had mentioned that you've seen, your words, tremendous success at the site. When should we see meaningful cost improvements? Is this a second half of next year kind of thing, especially since you just increased capital investment guidance for the site?

Yes. Yes, Heiko. The way that we see it, and you can look at it and we lay out in our earnings release, those kind of five quarters of progress. You can see clearly that the investment that we've made has been able to increase the production, the tons milled, all of that. With that increase in production - we anticipate, we actually see the cost going up as well. That's what we're trying to make clear. Once we get to a sustainable level of production, which some of that comes with the capital that we're putting in now, but we'll continue to put in. Carlos can speak to some of those specific projects. We would anticipate those costs coming down. But first order of business is instilling a safe operating culture at the mine and environmental excellence. Then, we go on to production. We've really made a lot of progress in those areas. And now we're going to go on to, in addition to all of those things, we're going to go to a cost optimization mode. But we do clearly need to make sure that the mine is sustainable before we go on to that. Carlos, is there anything you'd like to add?

Well, the second half of the year is when, as we say during the presentation, we started the Flame & Moth deposit back to production again. We are going to supplement the production from Bermingham, having two mines running. The execution or the construction of the batch plant for tailings, which is going to make a huge impact next year. Once we modify the mining method to underhand, and then the dry-stack tailings, which is the next stage, we are going to add additional capacity. The three pieces of investment in the second half of the year are going to be significant and will impact the near future of the mine site.

Perfect. You prefaced my follow-up question. I'm going to put a different one out there. Given the progress on the issue discussed earlier this call, is it fair to say that you expect to announce the new CEO by the end of this quarter?

You know, this is Cassie. Our progress - we are really making good progress on finding a new CEO. I can't really commit to a time on that, but we're moving very expeditiously. Sometimes these things take longer than you expect, sometimes they happen very quickly. We've had tremendous response in terms of people interested in it. So, I'm confident that we will find the right person as soon as possible.

Hi, guys. Thanks for taking the questions. Following up on the Keno Hill questions. It sounds like, you know, your view is to invest today, and the mine will repay you in the future. But under what scenarios would you cut the losses and move on from the mine?

I would say, as we think about the operations. In Cassie's opening remarks, she made this comment that Lucky Friday is a good example of a mine that in the early 2000s had great geological potential. Silver prices were low. The mine was not making money back then. If we had cut our losses and walked away at that point, you could see our portfolio would have been cut by one-third at least from or one-fourth, I guess, from operating assets. Free cash flow this quarter rivaled Greens Creek. The geologic potential at Keno Hill is significant. We have 11 years of reserves, and we believe that the mine has a bright future ahead of it. We also believe that it's going to take a lot of work. So, we do believe in the mine. I wouldn't speculate about what specific actions would cause us to do that.

Yes. And I would just add that as Russell said, both Lucky Friday and Greens Creek have shown us that these are long-term commitments. We're planning on being in the Yukon for a long time. So, we're committed to making this project work, and we're confident we can get there.

Okay. Fair enough. And then, kind of a big picture question. In the post-Phil era, is there any large philosophical changes we should expect? I know you guys mentioned how you're a North American-focused company, and within the last 18 months, Phil had made some comments about potentially investing in South America. Have there been any big picture changes in the way you think about things?

Sure. This transition has allowed us to reset and review our position, and for the time being, we're executing on our strategy to maximize the value of our North American assets. We've got some great assets, and we believe there's more value in all of them. That said, that doesn't mean we won't ever look at opportunities outside of North America, but we are not going to be doing that, at least in the near term.

Hi, thanks for taking my question. Maybe just sticking with the Keno Hill theme, can you remind us what are the main criteria you're looking for before declaring commercial production, and maybe what that timing looks like?

As it relates to what the specific criteria are, it would be a sustainable rate of production that would be somewhere in the range of 75% of our permitted production, which you'd look at our earnings release and say we're there. In addition to that, getting the capital in place that allows that to go on sustainably. What we're not looking to do is have a production quarter like we did this quarter, which was actually very, very positive, and then not be able to sustain it. We want to ensure that we are able to sustain this over time. In terms of timing, again, I'd prefer not to speculate on that. What we've tried to do in the release is provide what the expectations are from an economic basis of the Keno Hill mine. We guide those operational costs, capital, both sustaining and non-sustaining, and the production. We try to give the market all of the metrics needed to calculate those things, but we don't want to add unnecessary burden or pressure on our operators. Those guys are right now working to instill a safety culture as we've talked about and environmental excellence. We don't want to add another metric, but we also want to give the market what's needed for a better understanding of the economics of that mine.

Okay. That makes sense. Thanks for that. On the cost guidance increase at Keno, can you give a bit more color on whether it's driven mostly by the higher activity and production, or are there some CapEx items or other stuff that wasn't previously included in that cost guidance?

Well, it's both. As we say, we are building our team. We are establishing a safety culture. We're doing environmental upgrades, and we are executing capital projects. We are expanding the camp too. We had a really significant group of people working around to improve the place, and that's why we are estimating those costs.

Okay. That's helpful. Thanks a lot and I'll pass it on to the next caller.

Thanks, guys. Just following up on the cost questions, we've seen quite an improvement in the income statement, ramp up in suspension costs coming down nicely. Is that where we're seeing the transition of some of that flowing through the operating costs line, specifically at Keno Hill, as that's ramping up? If that is the case, can you give us a sense of how we should be thinking about that ramp up in suspension cost expense on a go-forward basis? Should we expect that to stabilize around $5 million, or will it actually be getting into the zero territory in the not-too-distant future?

Thanks, Mike. Yes. So the way that the ramp-up in suspension costs, that line item on the income statement works for an operation that's in ramp-up like Keno Hill, is that we'll allocate, we expend a certain amount of costs during the quarter, and we'll allocate the amount that equals revenue to the cost of sales. If you look at our earnings release, you can see that our revenue in Q2 '24 was $29 million. We allocated $29 million of cost to cost of sales for Keno Hill. That's both cash and non-cash. So you end up with a zero gross profit, and then the remainder goes to the ramp-up in suspension costs. As you see improvements at Keno Hill, you should see the ramp-up in suspension costs come down. The other thing you'll see is in Q1, we had a bit of Lucky Friday costs in there for January. So that's come off in Q2 and caused that improvement. At some point, I expect that this line item will go away for Keno Hill. That will be when we declare commercial production or it makes a total gross profit. What you'll see is suspension costs related to Nevada and Mexico will remain in that line item, and those are roughly $3 million or so for Nevada, a quarter. We continue to try to work those costs down, though, as we transition more from Nevada to just being an exploration project.

All right. That's a great color. Thanks so much.

This concludes our question-and-answer session. I'd now like to hand back over to Cassie Boggs for final remarks.

Thanks, everyone. We appreciate you calling in and we very much appreciate you listening to us. We look forward to this next quarter and having another great quarter. Thanks.

Thank you, everyone, for attending today's call. You may now disconnect. Have a wonderful day.