Earnings Call Transcript - HL Q4 2022

Operator, Operator

Hello, and thank you for being here. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Hecla Mining Company Fourth Quarter 2022 Earnings Conference Call. I will now turn the conference over to Anvita Patil. Please go ahead.

Anvita Patil, Vice President of Investor Relations and Treasurer

Good morning, Regina, and thank you all for joining us for Hecla's Fourth 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 the news release. With that, I'll pass the call to Phil.

Phil Baker, President and CEO

Thanks, Anvita. Good morning, everyone. Thanks for joining our call. Hecla is the world's fastest-growing established silver miner, surprising for a 130-year-old company. And I'm on Slide 4. There are 4 reasons that this is happening. First, Hecla's commitment to silver. Since our founding, Hecla has always been a silver producer even when other metals and activities provided more margin. When I joined Hecla in 2001, investors and others encouraged us to sell or close our silver assets. But what I saw was that our large resource position can survive the ups and downs of the silver market. And we needed to be committed because the silver market would improve. And of course, it did. And because of silver's role as an energy metal, we think the silver market will strengthen further. I'm going to talk more about that at the end of our prepared remarks. The second reason for our industry-leading growth is the foundation that came in 2008 when we purchased the 70% of Greens Creek we didn't own. This acquisition increased our silver reserves by 2.5 times and provided the base and cash flow stream to further invest in the mines, including the Lucky Friday. And then the third reason is the investment in Lucky Friday has ultimately resulted in a new mining method, the underhand closed bench, or UCB, that is transforming this 80-year-old mine with a safer, more productive mining method that with higher grades allows it to double its historic silver production. And now the fourth reason for the growth is Keno Hill. In just 4 months since the acquisition, Keno's reserves are one-third higher and we produce about 2.5 million silver ounces this year and in excess of 4 million next year. Looking at the chart on the left, silver reserves are almost 5 times where they were at the start of 2008 despite having produced more than 200 million ounces since then. Combining what has been replaced with the increase in reserve, Hecla has added 400 million ounces over the last 15 years. So we have four bodies that grow. To grow reserves and production, our strategy since 2008 has focused on large prospective land positions in the U.S. and Canada. And for a long time, the market didn't differentiate between jurisdictions, but we stayed the course with strategy. And today, analyst reviews reflect that the market clearly values being in the best jurisdictions, and we are in the best jurisdictions. Now looking at the chart on the right, from 2008 to 2012, we produced about 9 million ounces per year. Then we increased the average by about 50%, giving us a decade of about 12.5 million ounces. And now, we're having another 50% increase in silver production to 18 million ounces. Realize that we only show 3 years because we've not put together a long-term plan for Keno. But I expect that we'll stay at this 18 million ounces or more from these 3 mines for at least a decade. 2022 had the highest production in our history, and I think we're all going to set new production records for the company in 2023, '24, and '25. This growth doesn't require significant capital investment. Russell is going to talk about how we have the balance sheet and silver margins to achieve this and position us for even more growth. Russell?

Russell Lawlar, Senior Vice President and Chief Financial Officer

Thanks, Phil. I'll start on Slide 6. The double-digit production growth we expect to see is being funded by our industry-leading silver margins, which have averaged more than 50% of the realized price of silver over the past few years. The direct result of these margins is the significant free cash flow generation we have seen over the past 3 years where our mines have generated more than $0.5 billion of free cash flow, including Casa Berardi's contribution of about $85 million from 2020 to 2022. In 2022, we made the decision to deploy this free cash flow in capital projects and larger equipment at the Lucky Friday mine, where we invested approximately $50 million. We also invested $35 million in equity at Alexco earlier in the year and an additional $20 million in development at the Keno Hill mine after the acquisition. We also invested $46 million in exploration and predevelopment programs in 2022, all while remaining committed to a strong balance sheet. On Slide 7, revenue for 2022 was $719 million, with 39% from gold, 34% from silver, and 27% from base metals. Revenue in 2022 declined year-over-year due to lower silver prices and lower gold production as our Nevada operations were on care and maintenance. Despite the lower realized prices, free cash flow generation from the 3 mines was approximately $110 million for the year, while our 2022 adjusted EBITDA declined to $218 million due to lower revenue and inflation-driven costs. Our net leverage ratio continued to be below our target of 2 times. We ended the year with a strong balance sheet with $105 million in cash. We also monetized some long-term zinc hedges for approximately $17 million as zinc prices declined in the fourth quarter. Our strong balance sheet gives us flexibility in executing our plans. I'll now turn the call to Lauren.

Lauren Roberts, Senior Vice President and Chief Operating Officer

Thanks, Russell. I will start on Slide 9. Greens Creek had another remarkable year. The mine produced 9.7 million ounces of silver, exceeding our guidance. Record throughput of 2,500 tons per day was achieved in the fourth quarter. Since we acquired full ownership of Greens Creek in 2008, the mine's throughput has increased 20%, from 2,000 tons per day to 2,415 tons per day. Equally impressive is that the recovery rate for each metal also increased during this period. Looking forward, we will continue our production ramp-up during the year and expect to achieve 2,600 tons per day in the fourth quarter. Fourth quarter All-In Sustaining Costs (ASIC) were higher compared to the third quarter due to higher treatment and freight costs because a silver concentrate shipment was deferred from the third quarter to the fourth quarter, and we conducted some seasonal maintenance activities to prepare for winter. The mine generated $120 million in free cash flow and nearly $1.9 billion in free cash flow since the mine started operations in 1989. Silver production guidance for 2023 is in line with 2022 at 9 million to 9.5 million ounces of silver. Cash costs are expected to be lower at $0 to $0.25 per ounce, while the silver All-In Sustaining Cost is higher at $6 to $6.75 per ounce, primarily due to equipment purchases and increased development as we target 2,600 tons per day. Moving to Slide 10. Lucky Friday reported a record year as the mine achieved operational milestones, including record tons processed and the highest silver production in the past 20 years. We also ratified a 6-year contract with the union, which reflects our strong working relationship and gives us the stability to continue to optimize the mine for further production growth. Silver production for the year was 4.4 million ounces. The UCB mining method is delivering impressive safety performance and production milestones at the mine. In 2022, we saw a 25% reduction in the all incident frequency rate, an 11% increase in ore tons produced, and a new all-time record for feet of development by company crews. The mill also is performing extremely well, delivering new all-time quarterly and annual throughput records as well as the largest ever year of zinc production. Just to put things in perspective, there has been a 68% increase in ore production since 2016, which was the last full year of production used in the previous mining method. The mine is expected to produce 4.5 million to 5 million ounces of silver in 2023 at an All-In Sustaining Cost of $8.50 to $9.50 per ounce. Capital spend for the year will be in the range of $48 million to $51 million related to the remaining growth capital associated with the production expansion and infill drilling to support the UCB production method. 2022 marked many significant milestones in the transformation of this mine, which began more than a decade ago with the sinking of the #4 shaft to access the high-grade ore we're mining today. Much of this success is coming from our peers as well. Lucky Friday is a recipient of the 2022 Society of Mining Engineers Murray Innovation Award for the pioneering UCB method. As I look ahead, I am more convinced than ever that the best decade of this 80-year-old mine is ahead of it, and I could not be more proud of the team leading this effort, and I am very grateful for the scores of others who have contributed to it over the years. Turning to Slide 11. Casa Berardi produced approximately 31,000 ounces of gold for the quarter and 128,000 ounces during the year. The mill continues to perform very well, achieving new throughput records. However, challenging underground mining conditions resulted in a high proportion of lower grade open pit ore to satisfy the mill. All-in Sustaining Costs for the year were $1,825 per gold ounce, exceeding our guidance due to lower metal production and higher production costs driven by inflationary pressures. Casa Berardi is more exposed to inflation than our other mines because it moves and processes more material than all of our silver mines combined, and there is no appreciable byproduct credit. However, even with these challenges in capital investment, the mine was near breakeven in cash flow. Our 2023 gold production guidance for the mine is reduced to 110,000 to 115,000 ounces of gold. This change reflects adjustments made to cutoff grades for inflation, fewer underground tons, and more open pit tons as per the mine plan. All-in Sustaining Costs from the mine are expected to be $1,975 to $2,050 per ounce, higher than in 2022, primarily due to lower gold production and higher sustaining capital associated with the expansion of the tailings facility. Casa Berardi remains an important asset in our portfolio that gives us scale, exposure to gold production, and exploration potential on a large and under-explored land package on the Casa Berardi break. At Keno Hill, we increased reserves by 33% to 49 million ounces of silver at 22 ounces per ton, among the highest in the world. Keno Hill would be the largest and highest-grade primary silver mine in Canada. Development at the Birmingham and Flame & Moth deposits are on track, with the mill starting in the third quarter and full production of 440 tons per day achieved by year-end. Our guidance for 2023 production is 2.5 million to 3 million ounces of silver at an All-In Sustaining Cost of $12.25 to $14.75 per ounce. Capital spend for the year is estimated to be $42 million to $44 million as we continue development, receive more equipment, and complete our mill and surface infrastructure projects. While we are laser-focused on development and getting Keno Hill into full production, our confidence in the exploration potential of this district continues to grow. Moving to Slide 13. We have significant exploration success drilling 3 of our many underexplored targets. Some highlights from the program include 101 silver ounces per ton over 7 feet at Coral Wigwam, 10 ounces per ton over 11 feet at Hector-Calumet; and 19 ounces per ton over 11 feet at Silver King. These results demonstrate the strong exploration and discovery potential in the district. With this, I'll pass the call back to Phil.

Phil Baker, President and CEO

Thanks, Lauren. Just to comment on the exploration at Keno. When we announced the Alexco acquisition, Alexco asked if they should continue to explore, which they had a requirement to do so in either 2022 or 2023 due to funding. And so while, as Lauren said, our first priority was given to get the mine into full and consistent production, we allowed them to go ahead and continue that exploration program. And then, of course, we continued it once we closed the acquisition. We're really glad that they went forward with the program because this clearly shows that Keno has the potential to grow dramatically. Now if you'll turn to Slide 14 for our 3-year production guidance. We expect our silver production this year to increase 18% over 2022 and continue to increase to as much as 20 million ounces in 2025, with production from Keno between 2.5 million and 3 million ounces and Lucky Friday driving that 4.5 million to 5 million growth. Our consolidated silver All-In Sustained Cost is expected to come in at approximately $10.25 to $11.50 after byproduct credits. So that's consistent with where we were this past year. At today's prices, we see about $150 million of free cash flow that we're going to invest in exploration, pay dividends, maintain our land positions, and invest in Casa. As Lauren noted, we made some hard decisions to change our underground mine plan at Casa Berardi, where we've increased the cutoff grade and lowered gold production by mining less marginal material. This leads to lower costs. So this year's gold production will be between 160,000 and 170,000 ounces, with about 110,000 to 115,000 ounces from Casa. We're anticipating a further decline to about 145,000 ounces next year for the company. With less production, All-In Sustaining Costs are expected to increase this year to around $2,000 per gold ounce. We're going to make a net investment of about $20 million into Casa, which indicates negative free cash flow at Casa. I realize that in the past 10 years, we've only had one other year of negative free cash flow. So this is just a period where we're going to be investing in tailings and surface mine infrastructure before we put the higher-grade pits into production, which is going to lower the the All-In Sustaining Cost and improve the Casa free cash flow generation. We've changed the plan at Casa to improve the economics over 5 years, with less favorable economics currently but better economics over a longer period. If you look at our total capital for the company, it's about $200 million, and it's split pretty evenly among the 4 operations. We also expect to invest more than $30 million in exploration predevelopment, with a focus on Greens Creek to expand the reserves and resources, as well as at Casa Berardi on the underground targets to identify higher-grade mineralization and at Keno Hill. Lastly, we're going to focus on Keno's ramp-up, which we anticipate will cost approximately $9 million. Before we end our prepared remarks, I want to leave you with a number, $1.1 trillion. The reason this number is significant is that it's the amount that has been invested this past year in fossil fuels, which is also the same amount invested in renewables. This is the first time this has happened. In the past, fossil fuel investment eclipsed renewables. No more. 2022 is really the tipping point. Since solar represents the fastest-growing component of renewables, and it takes 0.5 million silver ounces for every gigawatt of solar panels that are installed, the appetite for silver is going to grow. Lastly, I want to mention the remarkable safety performance we had in 2022. Our all-in frequency rate was 1.22, among the lowest in our history. This operational and safety success is made possible only through the commitment and dedication of our employees. With that, Regina, I'd like to open the call to questions.

Operator, Operator

Our first question will come from Lucas Pipes with B. Riley Securities.

Unidentified Analyst, Analyst

Yes. Thank you, operator. This is Nick Joe asking a question on behalf of Lucas. Can you speak to the cadence of costs throughout the year that could be baked into your guidance and if you're assuming any level of either cost deflation or inflation at any of the three primary operations? Specifically, is the lower cost guidance on Lucky Friday fully attributable to the higher production?

Phil Baker, President and CEO

You can almost every year at Hecla say that we're going to spend more capital and more exploration in Q2 and Q3 when our operations are in more favorable weather; that's not going to change this year. And then with respect to the Lucky Friday added guidance, it is all about the higher production. Lauren, anything to add on Lucky Friday?

Lauren Roberts, Senior Vice President and Chief Operating Officer

I think it is the higher production and higher grades that are driving the lower costs.

Unidentified Analyst, Analyst

Got it. That’s very helpful. Then just secondly, I wanted to ask about capital returns. You noted in the release that dividends were around 14% of cash flow in 2022. Do you have a target level in mind for 2023?

Phil Baker, President and CEO

We just have our dividend policy, which we've had in place. There have been a few adjustments to it in terms of the levels since 2011 or 2012, when we first put it in place. So we have the base dividend that we pay, and then we have a dividend that's tied to the silver price. I'm not anticipating any changes in that in the near term. But clearly, as we produce more silver relative to other metals, we will have the ability to raise the dividend over time. But that's not on the agenda at the moment.

Unidentified Analyst, Analyst

Okay. Great. I appreciate the comments and congrats on the progress so far and continue best of luck.

Operator, Operator

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

Joseph Reagor, Analyst

A couple of things. I guess first thing, just on the income statement. It seems like there were some elevated costs across a couple of categories: G&A, ramp-up costs, and also your closed operations costs. Was there anything in particular that drove that? Or is that just quarterly fluctuation?

Phil Baker, President and CEO

I think the biggest thing to realize is that with the acquisition of Alexco, we saw an increase in costs associated with that. We brought people into our G&A costs, a great group of people to add to the company. We'll see a somewhat higher cost. The other factor is that, as a result of meeting a number of targets, there was a higher incentive compensation that was accrued that falls into that category. Basically, all of our incentive compensation falls into the G&A category. Those will be the biggest drivers. Anything...

Russell Lawlar, Senior Vice President and Chief Financial Officer

In G&A, certainly, that's it. The ramp-up costs you mentioned are just the fact that Keno Hill, as we spend money there developing the capital, have some ramp-up costs that run through the P&L. Then for closed operations, there's just a true-up of an accrual that we made in the fourth quarter on one of our closed operations, etc.

Joseph Reagor, Analyst

Okay. Fair enough. And then at Keno Hill, I'm struggling to understand the guidance on production compared to the startup of Q3. Are you suggesting that there's some high-grade material that's been stockpiled that's well above Birmingham's average or what's the delta? If I take 300 tons per day over the last 2 quarters, I don't get to your guide or even into a ballpark.

Phil Baker, President and CEO

So Joe, we don't have anything stockpiled, but yes, there is higher grade material that is going to be going through the mill first. It's just the way the mine plan is. It's just where we are hitting first. And so you will see over time the rate decline. Lauren, anything to add?

Lauren Roberts, Senior Vice President and Chief Operating Officer

That's exactly the explanation.

Joseph Reagor, Analyst

Okay. And that 2.5 million is just silver, not silver equivalent, right?

Phil Baker, President and CEO

Correct. Just silver. This is amazing with the grades that we have, and the exploration is finding more of it. So we're very, very excited about what we've got in hand. It is what we thought it would be.

Joseph Reagor, Analyst

Okay. What's a normalized expectation for capital spend across the 4 mines once you're done with some of these extra things you're doing this year and with the Keno Hill ramp up?

Phil Baker, President and CEO

I would say order of magnitude, $150 million to $170 million would be a sort of normalized figure. Hopefully, it would be closer to the $150 million, but we'll certainly have things that we look at and say, 'Geez, we can get a better return if we make that investment.' So that's the sort of range.

Operator, Operator

Your next question will come from the line of Jeff Brevik with .

Unidentified Analyst, Analyst

One of my questions about Keno Hill has already been answered, but I had one about Casa Berardi. This year, you will have higher All-In Sustaining Costs? What's the plan? Because in your last technical report, you had plans to transition to only open pit mining in 2017. How has that changed?

Phil Baker, President and CEO

Yes. I'm not sure of the year that we had in the plan, but whether it's exactly that year, or it's a year before or a year after, I don't remember. But that is the plan unless we find more underground high-grade material. We are very encouraged by the exploration that we have, but it's an ongoing process and hard to get more than 3, 4, or 5 years of underground reserves in front of us because you don't have the development available to put the drill platforms in place. So it's more of a just-in-time process with respect to the underground.

Unidentified Analyst, Analyst

I understand. Do you have any other initiatives? Most of your All-In Sustaining Costs are cash costs, and you said you will try to find higher-grade materials to increase production in the coming years. Are there any other initiatives to decrease operating costs?

Phil Baker, President and CEO

The biggest initiative is getting to the pits, the higher-grade pits. The Principal pit and the West Mine Crown Pillar pits are both significantly higher grade than the 160 pit. With that will come more production. You can see that in the technical report regarding the increased grade that we'll be mining from those pits. Lauren, anything to add?

Lauren Roberts, Senior Vice President and Chief Operating Officer

That captures it, Phil. It's a timing issue. We're mining the underground material now and the 160 pit, which are developed and ahead of us, we will transition into the two larger higher-grade pits as soon as they are ready.

Phil Baker, President and CEO

One of the things we've had to deal with is the need for permits for those pits. As we do the work, we uncover things that we need to get all of the technical data in front of us to obtain the permits for that. That work has been done, and we're in the process of getting those permits, allowing us to open the Principal pit, which is the highest grade of the two remaining pits. But remember, we have more than a decade of availability from those pits once they become operational.

Operator, Operator

Your next question will come from the line of John Tumazos with John Tumazos Very Independent Research.

John Tumazos, Analyst

Congratulations on all the progress, especially in the Yukon. My question is when will Hecla have the manpower capacity to digest more acquisitions? It's an unusual time, with 5% short-term money. Many of the small pre-production companies can't raise money at all. Just looking at the last week, Osisko Mining, which has a beautiful 7.4 million-ounce deposit, is languishing because they issued equity. MAG Silver, which participates in a 20 million-ounce silver mine, sold equity and sold down. Companies that are not as big or good as those deposits, there's just no market for their stock. You could go on a buying spree and warehouse some deposits for whenever your engineers or board needed a new project to build.

Phil Baker, President and CEO

Well, John, I'd make two comments. One is, as far as the capacity with employees, it depends on what it is you're acquiring. If it's something that you're inventorying, that does not require much support, those things are relatively easy to handle. Things that we would need to develop, obviously, must compete with things that we already have as well as just acquisitions in general. Remember, we have half a dozen silver projects plus another half a dozen gold projects to explore and develop. We don't need to add to our inventory. Having said that, John, I would agree with you. We should look and consider what things could be accretive to our capacity and capabilities and potentially try to bring them into the fold. But we don't feel compelled to do so. We have growth with what we have. This sustainable growth is something that Hecla has not had in its history.

Operator, Operator

Your question will come from Dalton Baretto with Canaccord.

Dalton Baretto, Analyst

I hate to beat the cash to death here, but I have a couple of questions. I want to make sure I fully understand here. So it sounds like you're just waiting on permits for the Principal pit. When do you expect to get them? And then once you get them, how soon can you be in there?

Lauren Roberts, Senior Vice President and Chief Operating Officer

Sure. We're in the process of permitting for the West Mine Crown Pillar pit. It's the next one in sequence. The process is not submitting a single permit application; it's a group of permit applications, some of which are already in, and the balance will be in by August. Then it takes a little bit of time for that to process, and we have a reasonable amount of pre-stripping and stripping that needs to happen. This should start delivering ore into the system in about 2027 or 2028. The underground resource on the current pit we're mining carries us to that point in time.

Dalton Baretto, Analyst

So it sounds like it's reasonably long-dated here. So maybe this one is for you, Phil. Is there a set of conditions under which you would look at putting cash on care and maintenance until you make these investments that you get the permits?

Phil Baker, President and CEO

With the plan that we have, there's no need to do that. We're able to operate with a modest amount of capital investment. That's part of the reason we've gone with this plan, which slows production so that we don't have to put on care and maintenance. That would be a costly exercise and very disruptive to the workforce.

Lauren Roberts, Senior Vice President and Chief Operating Officer

There is a significant amount of activity in Quebec and Ontario, and there is a material risk of going into care and maintenance, leading those people to go elsewhere.

Phil Baker, President and CEO

Absolutely.

Dalton Baretto, Analyst

That makes sense. Lastly, can we get an update on what's going on in Nevada—whether you're making some investments there or approaching how to grab it now—just anything that's going on?

Phil Baker, President and CEO

Sure. The primary reason for the acquisition in Nevada was the opportunity we saw. What we have encountered is an influx of water that was not anticipated or identified, and we're having to conduct hydrogeology to figure out how much water we have and then plan for how to deal with it. Until that happens, we need permits to manage the water, so we are moving slowly in Nevada. We also have many opportunities elsewhere to allocate our exploration dollars. We are advancing at Aurora but need to wait until the season wraps up. You'll see us do some drilling there. Otherwise, we're evaluating Midas; we had some great initial results. However, we haven't seen follow-through, so we won't push until we have a solid plan for exploration on Midas Fire Creek. Thus, you won't see many expenditures in that area in 2023.

Operator, Operator

We have no further questions at this time. I'll hand the conference back over to management.

Phil Baker, President and CEO

Okay. We appreciate you being on the call. I want to remind you that we have time available with management. If you'd like to have a one-on-one call, you'll find the information for that on the press release. So thanks very much. Have a great day.

Operator, Operator

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