Earnings Call Transcript - HL Q1 2022

Operator, Operator

Good day, and thank you for joining us. Welcome to the Q1 2022 Hecla Mining Company Earnings Conference Call. I would now like to pass the call to our first speaker, Anvita Patil. Please proceed.

Anvita Patil, Vice President of Investor Relations and Treasurer

Thank you, operator, and welcome, everyone. Thank you for joining us for Hecla's First Quarter 2022 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 this morning, along with today's presentation, are available on Hecla's website. On today's call, we have Phil Baker, Hecla's President and CEO; Lauren Roberts, Hecla's Senior Vice President and Chief Operating Officer; and Russell Lawlar, Hecla's Senior Vice President and Chief Financial Officer. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks as shown on Slides 2 and 3 in our earnings release and in our 10-K and 10-Q filings with the SEC. These and other risks could cause results to differ from those projected in the forward-looking statements. Reconciliations of non-GAAP measures cited in this call and related slides are found in the slides or news release. With that, I will pass the call to Phil.

Phil Baker, President and CEO

Thanks, Anvita. Good morning, everyone, and thank you for joining our call. Looking at Slide 4, the world is experiencing a combination of risk events that we haven’t seen for quite some time. Inflation is the highest in more than 40 years. You have the Russian-Ukrainian war, $100-plus oil prices, rising interest rates, supply chain disruptions, a shortage of skilled workers, and of course, the continuing pandemic. As we consider these events, we remember that Hecla is a 130-year-old company that has weathered world wars, the Great Depression and recession, the Spanish flu, the 1970s oil embargo. So as we look at today’s challenges, we have the perspective to navigate these times successfully. And why can we navigate them? The first reason is that we operate in the best jurisdictions in the world, namely in the U.S. and Canada. If you look at the specific states and provinces we are in, the Fraser Institute ranks all of them in the top 10 regions for investment. And we are not just in these places; we are the largest silver miner in the U.S. producing about 40% of all the silver mined, and we’re also a substantial gold producer in Quebec. Second, inflationary pressures in cost and capital are impacting everyone. However, our mines are not large consumers of capital, and as mature operations with decades of prior investment, sustaining and even growth capital are modest. We anticipate investing slightly more capital than normal at the Lucky Friday, maybe $20 million more, as we equip our new mining method to optimize it. We will also see some pressure on our operating costs, mostly at Casa Berardi due to the volume of material it mines and processes relative to our other mines. However, we are proactively managing the risk, and we believe we can successfully navigate it. Lauren is going to touch on this later in the call. But probably the most important differentiator of Hecla in costs from other silver producers are the revenues from our byproducts zinc and lead. We are the United States' third largest producer of zinc and lead. The by-product credits from this revenue appear to be offsetting the inflationary pressure. Third, we operate the best silver mines in the world. Our consolidated all-in sustaining costs were less than $8 per ounce, with a 70% margin of about $17 per ounce, so very low cost. Not only that, our silver mines have very long mine lives with more than 14 years, and that doesn’t include resource conversion or exploration potential. And our reserve base is the largest in the United States. Fourth, each mine, again, has generated free cash flow for the quarter. In fact, on a consolidated basis, this is Hecla's eighth consecutive quarter of free cash flow generation. That's $232 million of free cash flow over the last 8 quarters. And when I look back over the last 6 years, we've generated positive free cash flow in all but one year. All of these factors culminated in a strong operational and financial quarter, allowing us to return 21% of our free cash flow to shareholders during the quarter and positioning us for strong performance during these times. With that, I’d like to pass the call to Russell.

Russell Lawlar, Senior Vice President and CFO

Thank you, Phil. Turning to Slide 6, we saw revenues of $186.5 million, 33% from silver, 39% from gold, and zinc and lead at 28%. Greens Creek had about half the revenue, while Casa Berardi was at 33% and Lucky Friday at 20%. Phil mentioned our capital, and I’d like to highlight our limited but consistent capital spend. Over the past 3 years, Hecla averaged $107 million of capital spending. This year, our capital spend guidance is $135 million due to investments at the Lucky Friday. We generated $38 million of cash flow from operations and free cash flow of more than $16 million after our semiannual interest payment on our bonds of $18.5 million. We ended the quarter with $212 million in cash and available liquidity of $445 million. Bolstered by the strong financial performance, our leverage ratio remained consistent at 1.2x, which remains significantly below our target of 2x. Based on these credit metrics, we saw upgrades from the rating agencies. Moody's upgraded us to B1 while S&P upgraded us to B+. Turning to Slide 7, I'll speak more on the margins and free cash flow generation of our operations. The green portions of the bars in the chart on the bottom left represent the quarterly margin. Over the past 8 quarters, our silver margin has averaged 60% of the silver price realized. Since June 2020, we have generated $232 million in free cash flow. And after paying dividends, we’ve increased our cash balance by about $136 million to end the quarter with $212 million. With this level of cash and its growth, I frequently get asked about capital allocation. Our priorities are to make investments that derisk the mines, lower the costs, or expand the resource. After that, we will build a fortress balance sheet and then return capital to shareholders in the form of dividends. Turning to Slide 8. Everyone in the industry is seeing inflationary pressures. Like others in the industry, we are seeing these pressures on various aspects of our costs. For us, the biggest driver is labor at 38% of our total production cost and has increased by 14% over the past year. Other costs that are key, but individually small, have increased by 24% to 56%. Over the same period, our base metal byproduct revenues that our credits to unit costs are up 23%, largely offsetting the inflationary pressure. With that, I'll pass the call to Lauren.

Lauren Roberts, Senior Vice President and COO

Thanks, Russell. I will start on Slide 10. Greens Creek produced 2.4 million ounces in the quarter, which is a result of mining higher grade than we've seen in the prior several quarters. The increase in silver production, combined with stable operating and capital costs, resulted in very favorable margins. The cash cost was negative $0.90 per ounce and the all-in sustaining cost was $1.90 per silver ounce, resulting in a margin of almost $23 per ounce and free cash flow of more than $53 million. One thing I’d like to highlight is that Greens Creek has generated $1.7 billion in free cash flow since 1987. At startup, 35 years ago, the mine had a reserve life of 7 years. Today, the mine has a reserve life of 14 years, and we continue to invest in exploration and definition drilling to extend the mine life. This mine is among the best in the world relating to grade and margin, and it resides in one of the best jurisdictions possible. The Lucky Friday mine produced just under 900,000 ounces during the quarter, which is just slightly less than Q4 production. This quarter marks the sixth consecutive quarter of free cash flow generation since the mine achieved its target throughput in the fourth quarter of 2020. Production at the Lucky Friday was impacted by supply chain disruptions, where several pieces of mining equipment key to executing the plan were delivered late because of shipping import delays. These pieces of equipment are on site and expected to be commissioned during the second quarter. We anticipate receiving additional units later in the year, and we are monitoring delivery schedules closely. Lucky Friday also was affected by a shortage of manpower, which necessitated the use of contractors to fill in the open positions, thus increasing costs during the quarter. We are working hard to build these positions, and with production anticipated to be stronger in the last quarters of the year, the costs should come in line with guidance. At Casa Berardi, we produced just over 30,000 ounces of gold, which was within our plan, but manpower shortages in the underground mine resulted in feeding the plant more open pit ore from the F160 pit. As the grade from the open pit is lower than the underground, this resulted in a higher cost per ounce of production, with the cash cost at over $1,500 and the all-in sustaining cost at over $1,800, both higher than our annual guidance. Looking forward, we are working hard to fill the underground ranks to achieve the target production rate from underground. Development crews now are close to full staffing, and we continue to work on filling out the maintenance crews. As we look forward, we anticipate increasing the tons sourced from the underground mines to return to our planned cost profile. Notwithstanding these challenges, the mine continued to generate free cash flow during the quarter, aided by higher gold prices. Although we believe we can successfully navigate the challenges brought on by inflation and supply chain disruptions, we believe Casa Berardi is the operation most at risk of being affected. In general, this is simply due to the amount of material Casa Berardi mines and processes, which inherently causes it to be more susceptible to the underlying input costs. For comparison purposes, Casa Berardi mines approximately 8 times the volume of rock and processes about 1.8 times the volume of ore as Greens Creek, while having on-site roughly 1.5 times the number of people. All of this in an area that is experiencing incredibly high competition for skilled labor. At this time, we have not adjusted our cost guidance as we believe we can navigate these challenges, but we do anticipate inflationary pressure at this operation. With that, I would like to return the call to Phil.

Phil Baker, President and CEO

Thanks, Lauren. Today marks the 150th anniversary of the U.S. mining law, and I want to take a moment to discuss U.S. policy on mining and the supply-demand situation for silver. The pandemic and the conflict in Ukraine have highlighted the need for increased domestic mineral production. There's a growing recognition that minerals are crucial for energy transformation and national security. For the first time, I've seen six out of nine Democratic senators on the Natural Resources Committee acknowledge the need to improve the permitting process. Senator Ron Wyden emphasized that reducing reliance on foreign minerals is a national security concern as well as an environmental issue. Senator Angus King stated that the permitting process shouldn't be used to hinder projects. I mention this not because I anticipate immediate changes to the environmental laws affecting U.S. mines, but because there's a shift in mindset that I believe will develop over time. This perspective isn't limited to the Senate; President Biden has invoked the Defense Production Act due to the necessity of minerals for national defense and the economy. This enables the Department of Defense to invest in the U.S. mining sector, and we will explore qualifying investments. However, the Biden administration seems somewhat misaligned with the goal of boosting mineral production. I expect news related to mining law today or in the coming days. The law aims to establish land tenure on federal land and includes rules for permitting and environmental standards. The administration is likely to suggest the law is outdated and enables mines to bypass environmental controls, which isn't the case. Legislative proposals may emerge to replace the mining law with new regulations, and hearings will be held in both the Senate and the House on these proposals. There is a divide within the Democratic party between those who understand the necessity of minerals for future energy and national security and those who wish to keep metals in the ground. I believe that the push for a green transition and enhanced national security will ultimately prevail. This means metals like copper, zinc, and silver, in which Hecla has significant resources and is the largest U.S. silver reserve holder, will likely see supportive mining policies. The silver market is already consuming more than what is produced and recycled, with a growing deficit expected to reach about 70 million ounces this year. For context, that’s equivalent to seven Greens Creeks. The U.S. Energy Information Agency predicts solar demand alone will reach 0.5 billion ounces, or half of all current consumption. The demand for electric vehicles is likely to increase even more rapidly. Given that demand has doubled over the last 30 years, it’s reasonable to expect it will double again in the next 30 for silver. This scenario will pressure governments to adopt policies that support mining and will drive prices up to incentivize miners to develop new mines and enhance production. All of this places Hecla and its shareholders in an advantageous position. Now, operator, I would like to open the call for questions.

Operator, Operator

Your first question comes from Heiko Ihle from HC Wainwright.

Heiko Ihle, Analyst

Your CapEx was $21.5 million, obviously, $7 million less, and you attribute this to lower spending at Greens Creek and Casa. We’re in quite an inflationary environment. I think the word inflation was mentioned 8 times in your press release and you mentioned it several times in this call. So I'm just curious, what do you attribute this $7 million in savings to? I guess what I'm asking is, how did you save such a meaningful amount of cash given that you're talking about inflationary pressures with costs in your release?

Phil Baker, President and CEO

The timing of our expenditures is key. We still expect to spend $135 million. We significantly increased our capital spending in the second and third quarters, and we plan to maintain similar levels in the fourth quarter. This aligns with our expectations. It’s not uncommon for us to spend less in the first quarter, with a notable increase during the summer months, especially since Greens Creek is situated in an area where we invest more during that time.

Heiko Ihle, Analyst

Now that answer makes a lot of sense. You talked about that Casa was constrained by a lack of available manpower due to competition for skilled workers, as you mentioned earlier on this call as well. Purely out of curiosity, what positions would you say you have the most challenges filling? And what did you see with wage inflation? And I guess, building on all of that, we’re halfway through Q2; is any of that abating yet in the second quarter?

Phil Baker, President and CEO

Well, there's a general difficulty with skilled positions, especially miners and those who maintain the equipment. I can't predict whether this issue will improve. Lauren, do you have any thoughts on labor challenges?

Lauren Roberts, Senior Vice President and COO

I think the way that we should think of it is, with strong metal markets come high demand for the skilled trades. For us, the biggest impact that we're seeing is in maintenance personnel. It’s by far the most challenging position to fill and keep full, followed secondarily by what we would refer to as full cycle miners and then, to a lesser degree, electricians and some of the other technical trades.

Heiko Ihle, Analyst

Fair answer. And just salary wise, what have you seen?

Phil Baker, President and CEO

Well, regarding wage increases, you can see on our slide that depicts the inflationary pressure. A lot of that is something I don’t recall from that slide. What do we have?

Russell Lawlar, Senior Vice President and CFO

So what we did see, if you look at Q1 of '21 over Q1 of '22, we saw labor go up by about 14%. That’s going to be spread among all of the mines, frankly, just as we try to remain competitive.

Operator, Operator

Your next question comes from Trevor Turnbull from Scotiabank.

Trevor Turnbull, Analyst

Phil, at Lucky Friday, you mentioned that you’re expecting some new equipment deliveries. In light of Heiko’s question, I was wondering if any of this new equipment will help alleviate the maintenance issues at Lucky, or if it's primarily about the need for more skilled maintenance workers, as Lauren indicated.

Phil Baker, President and CEO

Yes, it certainly helps. There’s no question, but it’s just a few loaders that we’re having delivered in larger pieces of equipment than what we’ve had in the past, for the most part. Lauren, anything to add?

Lauren Roberts, Senior Vice President and COO

Yes, it’s exactly what Phil says, Trevor. The new gear is part and parcel to the new mining method, and the 2 units we spoke about were large loaders. They’re larger loaders than what we’ve had in that mine historically. They were pretty key to some of our planning for the year, and I’m happy to report that they are on the ground and in the process of being disassembled, reassembled, and commissioned. We do have some more units coming that also support the mining method. So far, they’re tracking reasonably well for delivery. In addition to supporting the mining method, you raised a very good point that new gear requires less maintenance. Therefore, it should start to help relieve some of the pressure on the maintenance groups.

Trevor Turnbull, Analyst

But you got a lot of gear.

Lauren Roberts, Senior Vice President and COO

Yes, we have a lot of gear. That’s a relevant point because we are reducing the number of total gear when we add the new units, so it should be a virtuous cycle.

Trevor Turnbull, Analyst

Right. You’re going to get more capacity per unit and maybe meet more availability per unit. Therefore, I would assume you could slowly pull some of the amount of maintenance down over time.

Lauren Roberts, Senior Vice President and COO

That is the plan.

Trevor Turnbull, Analyst

And then I just wanted to ask a couple of quick questions on the more development exploration front. First one was at Hatter Graben. You talked about the water inflows. I just wondered if that’s something that can be handled simply with more pumping capacity, or if you also have any issues with discharge limits and have to think about things from a permitting perspective?

Phil Baker, President and CEO

That’s the drivers, the permitting. We do need more permitting capacity, and so that has slowed us down in our ability to dewater it so we can get back underground to do the exploration drilling. It’s just going to take us towards the end of the year to get there.

Trevor Turnbull, Analyst

Okay. And then hopefully somewhere where you don’t have to worry about that anyway, down at San Sebastian. I was looking at the La Roca target you talked about, where you think you may have an entire intact epithermal system. You’ve intersected some stick veins already, but you want to test those a little deeper. When do you think we might see the results of some of that deeper drilling? Is that something we get by the end of the year?

Phil Baker, President and CEO

Yes, I would anticipate that.

Operator, Operator

Your next question comes from Lucas Pipes of B. Riley Securities.

Lucas Pipes, Analyst

Phil, I wanted to also ask about Lucky Friday. You mentioned the equipment and the productivity gains there, but the mine has been improving productivity here for some time. I wondered if you could share your view on how productivity gains will be balanced with inflationary pressures at that operation specifically and as we look out into 2023?

Phil Baker, President and CEO

Okay, Lucas. I guess I’ll let Lauren share some thoughts. I don’t have an immediate response to the question, Lauren. But it just seems to me that as we improve with the new equipment and just the mining method itself is simply more productive. I mean, if you think about historically, the stopes have been shut down 25% of the time for seismicity, and we don’t have that sort of lack of access. That’s going to be helpful. How this all ends up, how good can it get? It’s not clear to me. I think there’s a lot of opportunity to optimize, which has the potential to offset some of the inflationary pressure. But Lauren, what do you think?

Lauren Roberts, Senior Vice President and COO

Certainly. The way I think we should approach this, Lucas, is that as we improve productivity, we have the opportunity to increase production either by delivering more with fewer people, or the same amount with fewer people, or delivering more ore to the mill. Since the mill is not yet at full capacity, the best economic choice for us is to fill the mill. Therefore, as we increase productivity, we’re increasing the feed to the mill. Over the next 18 months, we should see steady increases in the mill throughput until we fill the mill to capacity. Even with that significant increase coming, the volume of material moved at Lucky Friday is quite small. Consequently, the inflationary pressure is muted compared to Casa Berardi.

Phil Baker, President and CEO

So really, while costs will experience inflation, the revenue will increase more.

Lauren Roberts, Senior Vice President and COO

Much more, much faster.

Phil Baker, President and CEO

Certainly, relative to what it would.

Lauren Roberts, Senior Vice President and COO

So we will still face inflation, and we’re mindful of that. However, the increase in the volume of metal produced will far outstrip that.

Phil Baker, President and CEO

I believe we have significant opportunities to refine the method. We have been working on it for a year and a half and it has been very successful, but this is a mining technique that hasn’t been attempted before. While it has achieved success, there is still much for us to learn from it.

Lauren Roberts, Senior Vice President and COO

Over the next year, we’re just now getting all the equipment we desire for this method. We’ve made it work with the gear we had in the ground, which is smaller and older and in some cases, not as fit for purpose. We’re quite excited to see what the future can bring.

Phil Baker, President and CEO

On the equipment deliveries, more are on the way. There’s a whole series of equipment, which is why the total capital for Lucky Friday is around $50 million, with about $20 million of that exceeding our usual spending to support this growth. As a result, more is coming. These were the two key large pieces of equipment that we're starting with the equipment changes.

Lauren Roberts, Senior Vice President and COO

It’s interesting what happened there. The manufacturers had the units ready to ship exactly according to the schedule they gave us. The problem was getting a ship nominated to move them out of the home port facility. There were significant delays, and then when the ship was nominated and the units arrived off the West Coast, it happened at a time when the ports were completely plugged up and we incurred further delays getting them off of a ship. I think that was a bit of an anomaly due to a strange confluence in timing. We do have about 4 more major production units and 4 pieces of support equipment coming this year, as well as some additional units next year. We’re monitoring those. I don’t think we’ll see the same type of unusual shipping problems, but we are starting to feel some pressure for delivery of machines out of the factories.

Lucas Pipes, Analyst

Very helpful. Really appreciate that level of detail. Switching topics. Phil, you spent some time talking about in the prepared remarks the changing attitudes towards mining in the U.S. and maybe a bit more consensus across the aisle. Is it too early for Hecla to take that and feed it into your strategic outlook on how and where you deploy capital? I would appreciate your thoughts on that.

Phil Baker, President and CEO

It definitely motivates us to keep exploring our various properties in the United States, and we're seeing some progress this year. To clarify, I'm not implying that a major shift will happen overnight, but I believe momentum will grow over the next few years. I was taken aback to discover that some proposed solar farms are facing obstacles because the environmental laws are being misused to block these projects, as noted by Senator King. However, there is emerging recognition within a segment of the environmental community for the need to change the permitting and regulatory processes. That said, it’s still in the early stages. I bring it up because it’s encouraging and marks a significant shift. It feels like we’ve reached a turning point due to the pandemic and the situation in Ukraine.

Lucas Pipes, Analyst

I appreciate that. And then, regarding the topic of North American supply and projects in the pipeline, could you give us an update on the Montana assets? What procedurally needs to happen here in the short term to move these projects forward?

Phil Baker, President and CEO

Yes. Recall what we did earlier this year is we changed course. The hang-up for these projects is not with the regulators; it was with the court. We’ve gone ahead to design a path forward that will be difficult for the court to push back on, making it an exploration-only permit. The permits that process inherited required us to have a full plan, which we concluded wouldn’t get through the District Court in Montana. However, the exploration-only plan will allow us to proceed. We can develop a mining plan that is modern. What we can do is develop a mining plan that is better environmentally and do the necessary drilling to confirm the hydrology. We’re in the process with the Forest Service developing all the documents necessary to have the permit. Anticipate that will take us about 18 months to achieve a favorable outcome. After that, if someone brings suit, we will have to deal with it in court. I anticipate you will see changes in the environmental regime if we want to deal seriously with mineral shortages in the United States and for the energy transformation.

Operator, Operator

Your next question comes from Joseph Reagor of ROTH Capital Partners.

Joseph Reagor, Analyst

So most of the topics I wanted to touch on have already been addressed by prior callers. You mentioned that your biggest concern regarding inflation and supply chain issues is related to Casa Berardi. If inflation doesn’t let up and the supply chain issues persist, what’s the order of magnitude of upside in cash costs and operating costs at that mine?

Phil Baker, President and CEO

I can’t speculate on that. However, I would suggest to you that we’re anticipating more production in the last 3 quarters of the year. Therefore, we believe that free cash flow generation will continue to occur at the mine. Lauren, anything to add?

Lauren Roberts, Senior Vice President and COO

Nothing to add, Phil.

Joseph Reagor, Analyst

Okay. Are there any opportunities to lock in some hedging on any of your costs to prevent further impacts of inflation?

Phil Baker, President and CEO

When you think about our costs, it's largely labor. That’s by far about 38% of the total cost. So you can’t hedge that.

Russell Lawlar, Senior Vice President and CFO

Yes. Labor is at 38%. On Slide #8, we called out contractors because that’s a portion as well and that would be one of those areas we look to reduce the number of contractors with employees. We’ve already talked about the tight labor markets but we’ll look to do that. The item that tends to fall out to hedge would be diesel. And we really don’t consume a whole lot of diesel. In this first quarter of 2022, 5% of our costs were diesel or fuel as a whole. As a result, you don’t see much benefit to that. This plays to the fact that, especially for the silver mines, these are small mines. You see a little bit more at Casa Berardi, but frankly not a huge amount more than at Greens Creek as a percentage of cost.

Phil Baker, President and CEO

Remember that most of our power generation is hydropower. For most of the year, in most places, Greens Creek, on occasion, spends time generating power on-site, but that hasn't been very frequent over the last 4 or 5 years. However, there is potential for that. So it is quite difficult to see where we can make cost hedges. What we’ve done is to manage on the revenue side to ensure cash flow generation from lead and zinc. We hedge a portion of that, and we realize benefits from even the higher prices we are seeing. We’re in good shape regarding having revenue offset inflationary pressure.

Russell Lawlar, Senior Vice President and CFO

From Casa Berardi's perspective, we do hedge the Canadian dollar. That provides consistency and a benefit for our costs over the past few years. That includes both direct production costs; we have hedges going out over the next few years, but also in 2022, we have a portion of our capital spend that we've hedged as well.

Joseph Reagor, Analyst

Okay. And then finally, big picture, you have made some acquisitions in the past. The explorers and developers have been under significant pressure on their share prices for over a year now. Are you seeing any opportunities out there where you could be opportunistic and potentially acquire the next Hecla mine?

Phil Baker, President and CEO

We are always engaged in the M&A world. I’ll tell you, Joe, it’s few and far between because it takes two to tango unless you’re willing to do something on a hostile basis, which we’re reluctant to do unless a transaction is announced. We’d prefer to collaborate with other companies, so stay tuned. We’ll continue to be in that market. As things develop, we’ll see where it comes out. We’re fortunate in that we have mine lives that will go on for decades. We have growth occurring with the Lucky Friday from higher grade and growth on top of that from the new productive method. Thus, we don’t feel compelled to acquire things, but we certainly stay in the market to find large land positions with the potential for long-lived low-cost assets. So you have to keep engaged to secure those opportunities.

Operator, Operator

Your next question comes from John Tumazos of Tumazos Very Independent Research.

John Tumazos, Analyst

Phil, I'm worried that our guys in Washington aren’t as smart as the people in China who tightened a year ago, while our guys were saying inflation was transitory. They seem bent on tightening even if a recession has already started. And there’s a lot of evidence of inflation. I look at the Pittsburgh newspaper this morning and the electric utilities raising rates 45% in Western Pennsylvania. That hasn’t hit the CPI yet. Anyway, Phil, if our leadership in Washington tries to fix things and raises rates too much for 12 to 18 months, how much of your silver and gold do you think you can go without selling? Do you think you can hold back selling 5 million or 10 million ounces of silver?

Phil Baker, President and CEO

So the short answer is no, because we don’t actually produce silver bars; we produce concentrate. We don’t have a place to store that concentrate, and we also have frame contracts where we are obligated to deliver. Therefore, we won't be able to refrain from selling silver. As for gold, it's conceivable we could consider doing that. I wouldn't be inclined to pursue that, though. While that option is appealing, we probably will sell what we produce. However, what I’ll suggest is we have low costs and can weather any price declines that may arise from significant interest rates. It is also important to remember that just because we have higher interest rates, it doesn’t necessarily mean lower gold and silver prices. We have seen high metal prices in the past in high interest rate environments.

John Tumazos, Analyst

Why do you think, Phil, that I’m having a hard time understanding why gold is up this year from $1,796 or so last year but silver is down from $25.08? I know we’ve had significant ETF buys on gold; why do you think silver is down? It’s hard for me to grasp.

Phil Baker, President and CEO

John, I don't understand that either. However, I suggest that given the required industrial demand for silver, this will lead to the metal highs rising when circumstances change.

John Tumazos, Analyst

It’s going to be worse than we expect, and then better. I agree, Phil. So Phil, inflation today is partly a monetary phenomenon but partly a structural phenomenon. We have wars; if there are fertilizer shortages, that will result in decreased productivity. Economic disruption from COVID and supply chains leads to lowered productivity. I am very worried that the Fed is trying to solve things with interest rates that cannot be solved with interest rates. Maybe it’s time to resort to some prayers. What else could we do other than to batten down the hatches in case of a severe short-term downturn?

Phil Baker, President and CEO

That’s the most prudent strategy for us to pursue. You would see us pull back on expenditures. We have the ability to do that because we don’t have the same pressures others have. I don’t know if the team has anything to add.

Russell Lawlar, Senior Vice President and CFO

I’d only comment that all of these mines have mine lives stretching decades ahead. In the short term, these operations will endure those environments. The strong balance sheet, highlighted by plentiful cash reserves, allows us to navigate challenges, as does our capacity to reduce expenses. This could be a bump in the road for the company, something we have encountered in the past.

Lauren Roberts, Senior Vice President and COO

John, we’ve spent the last several years reinvesting in our infrastructure at our 3 primary producers. I think those mines are in great condition concerning physical equipment, fixed structures, and facilities. Therefore, we can reduce capital outlay in future years if needed. We invested while the business was good, which remains prudent. Overall, we are well positioned.

Operator, Operator

There are no further questions at this time. I will now turn the call back to Phil Baker for closing remarks. Please go ahead, sir.

Phil Baker, President and CEO

The only thing I'll say is that we do have these time slots available. If you want to have a conversation with one of the executives at Hecla, we pride ourselves on being available to all investors and interested parties. You have the opportunity during these 30-minute slots, my recollection, yes. Please take advantage of them if you have questions that weren’t answered. Thanks very much. Have a great day.

Operator, Operator

And this concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.