Earnings Call Transcript - HL Q1 2023

Operator, Operator

Good morning. My name is Rob, and I will be your conference operator today. I would like to welcome everyone to the Hecla Mining Company First Quarter 2023 Earnings Conference Call. Anvita Patil, Vice President, Investor Relations and Treasurer. You may begin your conference.

Anvita Patil, Vice President, Investor Relations and Treasurer

Good morning, Rob, and thank you all for joining us for Hecla's First Quarter 2023 Financial and Operations Results Conference Call. I'm Anvita Patil, Hecla's Vice President of Investor Relations and Treasurer. Our financial results news release that was issued 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 will pass the call to Phil.

Phil Baker, President and CEO

Thank you, Anvita. Good morning, everyone, and thank you for joining our call. I will begin with Slide 4. April 16th marked the 15th anniversary of Hecla's acquisition of Rio Tinto's interest in Greens Creek, which has been our foundational asset. This acquisition has positioned us as the fastest-growing established silver producer. We committed to focusing our efforts in Tier 1 jurisdictions, and now we're the largest silver producer in the U.S. and soon in Canada. However, Hecla is not solely about jurisdictions; it's about creating true value per share through exploration, innovation, and the execution of our extensive property holdings. It all starts with Greens Creek, which has delivered stability in cash flow and accounted for about 30% of our production growth over the past 15 years. The team there has done an excellent job of continuously improving the mine, making it more productive and cost-efficient, which creates real value for shareholders. The success of Greens Creek has enabled Hecla to invest in Lucky Friday and Keno. Our investment in Lucky Friday has spurred production growth from under 1 million ounces five years ago to over 4 million ounces now, with more growth anticipated. We expect substantial growth in the coming years primarily from Keno, which should yield over 2.5 million ounces this year and approximately 4 million ounces next year. Since 2008, our production has nearly doubled, and we anticipate reaching 17 million ounces this year, aiming for about 20 million ounces by 2025, which we view as our stable production profile for the foreseeable future. Alongside our production growth, we have also expanded our reserves. From 2008 to 2022, our silver reserves have increased fivefold, creating value on a per share basis, as highlighted on the graph on the right. Our average silver equivalent production and reserve per share have nearly doubled since 2008. This reserve growth aligns with our strategy of acquiring large land packages in favorable jurisdictions, and we are continuing to execute this strategy with the announcement of the ATAC Resources acquisition, which adds a significant land package of over 650 square miles in the Yukon, near Keno. We anticipate closing this transaction in the third quarter. Additionally, April of this year marks ten years since we acquired Casa Berardi, which began as an underground mine. We are transitioning it to a combination of open pit and underground operations, with a future shift towards exclusively open pit mining. This transition will require investment over the next few years, influenced by how long we continue underground mining and the margins generated. However, this will enable us to extract higher-grade open pit materials in the coming years. The ore in the permitting pipeline has reserve grades nearly 70% higher than the current operating pit. Our reasoning behind acquiring Casa Berardi still stands, as we have access to excellent geology, a large land package, significant infrastructure, dore production, and the stability of gold, which is less volatile than silver. Moving to Slide 5, I will narrow our focus from our ongoing strategy to the specifics of the first quarter. Key highlights include a strong operational quarter, generating free cash flow from our silver mines, staying on track to meet production and cost guidance, and maintaining strong safety performance throughout the company. Greens Creek achieved record quarterly throughput, surpassing its previous record from just last quarter, along with exceptional silver and gold production -- indeed, record gold production. At Lucky Friday, we had our safest quarter during full production, an incredible achievement given the mine's 80-plus year history. This safety record was accomplished while silver production exceeded 1.2 million ounces, marking the third time in the last four quarters we've reached this milestone. Additionally, the Keno Hill development is progressing well, with a mill start-up expected in the third quarter and production anticipated to exceed 2.5 million ounces. Lauren will provide further details about these properties shortly. This operational success has translated into strong financial results. For two consecutive quarters, silver has become our leading source of revenue due to increased silver production. The cash flow generation from both Greens Creek and Lucky Friday exceeded $31 million each, totaling $69 million combined. Our capital allocation strategy prioritizes reinvesting in our mines to enhance production and profitability. This quarter, we allocated $17 million each to Keno and Casa and $14 million to Lucky Friday. Greens Creek will receive a relatively higher amount of capital in the upcoming quarters. It is crucial to emphasize our commitment to employee safety, reflected in our lowest all-in injury frequency rate in our history, achieved since we implemented the National Mining's core safety program in 2012. We plan to release our 2022 sustainability report at our Annual Shareholder Meeting on May 23rd. Given our high-grade underground operations, we achieved net-zero in 2022 regarding Scope 1 and 2 carbon emissions, offset with UN-certified credits. The Annual Meeting will be both in-person and online, and we hope you'll join us. Now, I'll turn the call over to Russell to discuss our financials.

Russell Lawlar, Senior Vice President and Chief Financial Officer

Thanks, Phil. I'll start on Slide 7. One of the most impressive characteristics of our mines is their ability to generate free cash flow. Since 2020, our 3 mines have generated more than $620 million in free cash flow. This has been driven by our silver mines, which generate margins even at low silver prices. Looking at the chart on the left side of the slide, in the first quarter, we had a margin of $13.66, which is 60% of the realized silver price. Over the past 3 years, the margin has been between 44% and 64%. Not many companies have silver mines that are this consistent. However, this cash flow hasn't only been generated at our silver mines, over the same period, Casa Berardi has generated more than $65 million of free cash flow. This cash flow generation allows us to consistently invest capital into our mines and ensure we maintain healthy exploration budgets. This has always been a core strategy where we add value by reserve life extensions and conversion of mineral resources to reserve. Last year, we further invested this free cash flow into our operations with the result of the double-digit production growth that Phil discussed, with the acquisition of Keno Hill and the subsequent investments we've made there. This leads me to Slide 8, where I'll discuss our first quarter revenue profile and balance sheet. During the quarter, our silver operations generated the second highest revenue and gross margin in our company's history. Total revenues for the first quarter were $200 million, with silver being the highest contributor of all metals at 38%, followed by gold at 35% and 27% from base metals. Revenues increased over the fourth quarter due to higher realized prices. And although we had more silver production, we saw lower volumes of silver sold in the first quarter relative to the fourth quarter. This was due to our shipping schedule where the fourth quarter had higher silver ounces sold as the silver concentrate shipment from Greens Creek was deferred from the third to the fourth quarter. Adjusted EBITDA for the last 4 quarters was $221 million, maintaining our leverage ratio at 1.9x, which is below our target of a maximum of 2x. As we go through this period of investment in Keno Hill and Casa Berardi, our net leverage target will remain at less than 2x, and we'll take the necessary steps to keep adequate cash on our balance sheet with a target of around $100 million. We sold 2.1 million shares under our ATM program during the quarter, amounting to $11.9 million to maintain this targeted cash balance and ended the quarter with $96 million in cash on the balance sheet and $240 million of liquidity. Before I pass the call to Lauren, I'd like to briefly discuss what we are seeing on inflation. While we are seeing inflationary pressures on fuel, steel, ground support and other key inputs stabilize quarter-over-quarter, labor cost and demand for skilled labor remains high across all our operations. The effects of inflation and labor costs are more pronounced at Casa Berardi. And with that, I'll turn the call to Lauren.

Lauren Roberts, Senior Vice President and Chief Operating Officer

Thanks, Russell. I'll start on Slide 10. Greens Creek, our flagship mine, reported another strong operational quarter with robust free cash flow generation. It was just in February this year that we reported the mine had record throughput in the fourth quarter, and I'm pleased to report that the first quarter achieved yet another record of 2,591 tons per day. We expect the mine will produce 2,600 tons per day by the fourth quarter. Silver production was 2.8 million ounces, and gold production set a record of 14,885 ounces due to higher grades mined, increased throughput, and better recovery. We experienced significant positive model variance for silver in the first quarter. Looking forward, we expect silver grades to be more in line with the model, and we reiterate our silver production guidance. All-in sustaining costs for the quarter were $3.82 per silver ounce, a decline over the fourth quarter due to lower fuel prices and consumption because hydropower availability was higher during the quarter. Capital spending of $6.6 million was lower than planned, primarily due to the timing of equipment deliveries, which are expected in the second quarter. The mine generated $37 million in free cash flow, adding another strong financial quarter to its long history of free cash flow generation, which is nearly $1.9 billion since the mine began operations in 1989. The mine is on track to achieve its production guidance of 99.5 million ounces of silver and AISC $6 to $6.75 per ounce for the year. When we acquired the remaining 70% of the mine in 2008, throughput was just over 2000 tons per day, and silver recoveries were about 70%. Today, with our incremental improvements, throughput has increased by 30%, and silver recoveries have improved by 12 percentage points. All of this was achieved with very modest capital investments supported by our culture of continuous improvement. This prepared mine is the 11th largest silver producer in the world, and I want to congratulate the team on delivering excellent results at this truly world-class asset. Turning to Slide 11. Lucky Friday produced 1.3 million ounces of silver at an AISC of $10.69 per ounce in the first quarter. This quarter marked the fourth consecutive quarter of silver production exceeding 1 million ounces and a new safety record with an all-in frequency rate of 0.62 as of the end of April. Throughput increased by 5% to 1,059 tons per day compared to the fourth quarter, and the mine is on track to achieve our target run rate of 425,000 ore tons per year in the fourth quarter. Capital spending at the mine was $14.7 million as we focus on 2 key projects, the Service Hoist and the Coarse Ore Bunker, which we anticipate completing by the fourth quarter. The Service Hoist is expected to debottleneck our production hoisting capacity, while the Coarse Ore Bunker will decouple the mine from the mill by adding the capacity to stockpile ore for multiple days. Both projects are critical in achieving our production goals. Free cash flow generation for the quarter was $31 million, reflecting the receipt of $6.7 million in January from a December 2022 concentrate sale. We are reiterating the production and cost guidance for 2023 with 4.5 million to 5 million ounces of silver at an all-in sustaining cost of $8.50 to $9.50 per ounce. The team continues to do a phenomenal job. And as we look forward, we are more convinced than ever that this will be the best decade in the mine's 80-year history. Moving to Slide 12. At Keno Hill, we remain on track for mill start-up in the third quarter, with about 75% of the preproduction development completed. Capital spending at the mine was $17 million for the quarter, with significant progress made on mine development, underground infrastructure construction, and mobile equipment purchases. Work is gearing up for the service construction season as well, with the camp expansion and secondary crushing circuit modifications preparing to start. These 2 projects will position us to achieve and sustain the full permitted capacity of the mine. Initial ore feed for the mill's recommissioning is being stockpiled from the Flame & Moth and Bermingham deposits. Because of the high-grade ore, we expect to mine in the fourth quarter with production expected to exceed 2.5 million ounces of silver. We anticipate the mine could produce up to 4 million ounces of silver in 2024. Turning to Slide 13. Casa Berardi produced approximately 25,000 ounces of gold for the quarter at an all-in sustaining cost of $2,392 per ounce. Production was lower as expected due to lower underground tonnage and grades while the cost per ounce was higher. Production costs declined compared to the fourth quarter due to lower tonnage, consumables, and a reduction in contractor costs. However, the cash cost and all-in sustaining cost per ounce increased due to lower production. The mill continued to perform strongly, marking another record for quarterly throughput. These mill improvements are a result of the investments we completed in 2021 and ongoing continuous improvement efforts by our processing team. Smaller underground stopes, more demanding stope preparation, and lower grades have resulted in significant cost pressures, which were compounded further by inflationary pressures in 2022. These changes are leading to a reevaluation of the underground cutoff grade and mine plans, work will complete over the next several quarters. Since 2018, underground grades declined by 30%, which was anticipated as the higher-grade zones were depleted. While our exploration has remained focused on underground targets, we have not yet seen significant exploration success. Underground exploration will continue with the aim of identifying higher-grade zones. However, with the decline in underground grades and inventory, the mine is beginning to transition from an underground operation to a full open pit operation. The mine became a combination of underground and surface operations beginning in 2016 with the addition of the EMCP pit followed by the F160 pit in 2020. Higher-grade open-pit ore with reserve grades 70% higher than the current F160 pit is in the permitting pipeline and expected to be in production in 3 to 4 years. As Phil mentioned, during this period of transition to a fully surface operation, the mine will need capital investments in fleet and infrastructure, which we expect to be in the range of $100 million to $120 million exclusive of stripping. Casa Berardi mine has a substantial reserve and significant exploration potential and a large land package on the Casa Berardi break. As we go through this period of investment in discovery, Casa Berardi remains our key mine in our portfolio that gives us gold exposure and diversification from the concentrate market. I will now pass the call back to Phil.

Phil Baker, President and CEO

Thanks, Lauren. And we are reiterating our production and cost guidance for the year, as shown on Slide 14. Our silver production growth, which is sustainable beyond 2025, is based on Hecla having some of the best silver mines in the world with their low-cost structure and long reserve lives located in Tier 1 jurisdictions. This is the foundation that allows us to continue to grow, innovate, and create value for our shareholders. Our long-term growth is embedded with our Montana properties that are the third largest undeveloped copper deposit in the U.S. with more than 1.4 million tons of copper and 330 million ounces of silver. And that brings me to Slide 15. I suspect that many of you don't know what H.R.1 means. If you do, you might be too into American politics. For 3 years, I was Chairman of the United States National Mining Association, and that's the U.S. mining industry's lobbying group. So I learned the significance of H.R.1 as the first bill of the new Congress. And whether it passed or not, necessarily the important thing, but what it tells you is the priority of Congress. The last 2 congresses had the House controlled by Democrats, and their H.R. 1 was voting rights legislation, which was never passed. The 115th Congress, which the Republicans controlled, their H.R.1 was tax reform, which passed. You might recall that was in 2017; that was sort of the primary success of that Congress. The current 118th Congress, H.R.1 is permitting reform. Exactly 1 year ago on this call, I told you that attitudes were changing in the U.S. towards mining and permitting reform with the recognition of the need for metals for the energy transition and for national security. H.R.1 far exceeds where I thought we would be today. What are some of the important elements to mining investors of H.R.1? Well, first, it establishes the lead agency for NEPA review. It allows the project sponsor to prepare the EIS so we can move much faster. EIS documents are limited to 300 pages. There's a 120-day limit on appeals from the NEPA process. And the remand of a NEPA decision requires imminent and substantial environmental harm. These are all very, very significant reforms to permitting. And to show you how far the attitude has changed, Republicans have made enacting the bill a pillar of the negotiations that were happening last night. So do I think that H.R.1 will pass as soon as it gets signed by Biden? No, I don't. But it is further evidence that the attitude among policymakers in the United States is positively changing and makes likely permitting reform in the next few years. More importantly, it's in stark contrast to other jurisdictions. In Mexico, the largest producer of silver in the world, with their new law creates barriers to mining and mining exploration. There are just too many to mention. While Hecla is willing to invest in other jurisdictions, including Mexico, I am convinced that our strategy of primarily growing in the United States and Canada is the best long-term option for Hecla and our shareholders. And finally, I want to congratulate and thank all Hecla employees across all our sites. It's because of their dedication to safety, the environment, innovation, and execution that Hecla is the company that we are today. And with that, Rob, I'd like to open the call to questions.

Operator, Operator

And your first question comes from Heiko Ihle from H.C. Wainwright & Company.

Heiko Ihle, Analyst

You got decreased G&A costs of $2.3 million. You attribute this to higher incentive compensation in the fourth quarter of '22. Can you maybe trend line the rest of the year for us quarter-by-quarter for G&A?

Phil Baker, President and CEO

Yes. Off the top of my head, I will pass that on to Russell because I'm not sure.

Russell Lawlar, Senior Vice President and Chief Financial Officer

I would expect G&A would be relatively consistent quarter-by-quarter. What we saw as we came to the end of last year was that, based on performance of last year, we had to accrue in the fourth quarter incentive compensation. So that's why you saw the spike then. We also brought on some folks from the Alexco acquisition into our corporate department. So we saw a bit more staffing in the G&A from that. And so you saw the fourth quarter go up a little bit, but those folks are still on staff. So I would expect the G&A to roughly be what it is throughout the year.

Heiko Ihle, Analyst

Got it. And what we're at...

Phil Baker, President and CEO

And Heiko, it also depends on performance. If we have good performance, which I hope we do, then we'll have more incentive compensation and you'll see it go up as a result of that.

Heiko Ihle, Analyst

Well, let's hope there's $0.5 billion in incentive compensation. Greens Creek had very good throughput in the quarter. Were there any particular efficiencies that you undertook at site to make that happen? Or is there anything undergoing right now? So just maybe help us plan the future there a little bit?

Phil Baker, President and CEO

Well, I will just turn it by saying Greens Creek has done an excellent job of making incremental improvements. We had a very focused effort at looking at how we improve the operation. We were really looking forward to producing more tons and believing that the mill can manage more tons. This is significantly more tons. We were at 2,000 tons a day when we acquired the mine. We're headed towards 2,600 tons a day, so it is incremental improvements. It's a very focused effort. But Lauren, maybe you have some more insight.

Lauren Roberts, Senior Vice President and Chief Operating Officer

Yes, absolutely. And thank you for the question, Heiko. We're on pace to achieve 2,600 tons a day by the end of the year, and that's just sort of a linear progression quarter-by-quarter from where we are today to 2,600 tons a day. And we're doing this with no significant capital investment in the mill. Really, as Phil said, we just took a step back, looked at the mill and our understanding of how the mill operated, and we were willing to challenge conventional wisdom about what could be done. And we developed some interesting concepts, which we then tested through a series of industrial trials. What we find is that we are able to utilize more of the horsepower and the grinding circuit to increase throughput. And we're doing this at the same time that we are improving recovery, which is quite remarkable, really. And just a testament to the team's willingness to look at things with fresh eyes and try something new, and, in this instance, it's been very beneficial.

Heiko Ihle, Analyst

Yes. And then just a quick one. You talked about some of the shares under your ATM or rather a somewhat meaningful amount even. Is it fair to say that this is your preferred funding source for the firm in the intermediate and longer term as well? I mean, I like ATMs. They are cheap and easy way to raise some funds. But is it fair to say that this is your preferred way to do it in the future?

Phil Baker, President and CEO

No. Our preferred method is generating free cash flow. I believe a $25 silver price is quite favorable, and while it can potentially rise further, we do generate substantial free cash flow at these prices. If prices drop below $20, we have options: we can reduce spending, increase borrowing, or utilize the ATM. However, we will ensure the balance sheet remains strong.

Operator, Operator

Your next question comes from the line of Michael Siperco from RBC Capital Markets.

Michael Siperco, Analyst

Great. First, great quarters from Greens Creek and Lucky Friday. Let me ask about Casa Berardi. Understanding the transition and the guidance provided, could you expand on the potential investment range, both high and low, over the next couple of years? What factors will influence this? Also, if possible, could you share your vision for the mine, particularly regarding production and costs once the transition period concludes?

Phil Baker, President and CEO

The transition period will require a fleet of mining equipment to extract resources from the West Mine Crown Pillar pits and the Principal pits. A unique aspect of our plan includes mining the 160 pit to serve as the tailings disposal or storage facility. We are working to accelerate the mining of that pit so it is ready to handle the tailings from the other pits. We project that we will need about $100 million to $120 million in capital over the next couple of years for equipment and necessary resources for this transition. Once the transition is complete, we expect higher-grade production from the West Mine Crown Pillar pit and the Principal pits. While I'm not entirely sure where the costs will land, I believe they will be significantly lower than current levels, mainly because we will no longer be operating the underground infrastructure. We will keep exploring and maintain optimism for exploration success underground, but our primary focus will shift to surface mining and open pit operations. Our technical report indicates that we anticipate substantial free cash flow generation towards the end of the mine's life as these pits become fully operational. Lauren, do you have anything to add?

Lauren Roberts, Senior Vice President and Chief Operating Officer

I would just say that our long-term operational strategy with the open pits is to maximize the investments we've made in the mill over the past few years. As you've observed, the mill throughputs and recoveries have consistently improved, and we plan to operate at the full permitted capacity of the mill and deliver the best ore we can to it.

Phil Baker, President and CEO

And we're still studying as to ways to improve the recovery; maybe mention that the studies that we're doing on the flotation.

Lauren Roberts, Senior Vice President and Chief Operating Officer

Yes. So we've been doing some work on the potential to add a flotation circuit to the mill. And I'll say that the preliminary view of it is for a relatively modest investment, we see a significant increase in recovery. And that is something we'll continue to evaluate over the coming quarters as we work through our long-range plan for Casa Berardi.

Phil Baker, President and CEO

So let me just make one other comment, Michael. Things have not changed fundamentally from what we thought, with the exception of the inflationary pressure that we've experienced in the activity.

Michael Siperco, Analyst

Right. Right. No understood. So maybe if I could just follow up. And am I understanding it right that you don't necessarily want to pull the plug on underground operations today as you continue to explore. In other words, am I understanding this right in saying that you want to keep your options open on the underground as you transition in a more measured way rather than something more drastic and immediate in a shorter time period? Is that fair to say?

Phil Baker, President and CEO

Yes, we are exploring all options to move forward. We can either act quickly or continue generating margins from underground operations, giving us flexibility. We're assessing the best long-term strategy for the mine. Similar to our approach at Lucky Friday, we recognize the need for investment despite the current negative cash flow. We experienced several years of that at Lucky Friday, and we're now seeing the rewards. We are open to the same potential at Casa Berardi. At this point, we have not decided which path to take and are still evaluating our options.

Michael Siperco, Analyst

Is there a point in time, if it's end of year or into next year, where you think you'll have more conviction either way?

Phil Baker, President and CEO

Yes, I'm sure there will be. I don't know when that is or would be able to tell you what we're going to do.

Michael Siperco, Analyst

Okay. Okay. No, fair enough. Switching gears, if I could, to ATAC. Could you give a little bit more color on the transaction, obviously, a well-known land package property over the years? What do you see as the opportunity here? What will you do differently? I know the deal hasn't closed yet, but can you maybe talk in a preliminary way about what your plans might be there?

Phil Baker, President and CEO

The short-term plan is to invest in the company and conduct a thorough assessment once we acquire it. This process has happened more quickly than we expected, although we have always been interested in it. After receiving a suggestion from big gold, we decided to act. Currently, we don't have any specific actions planned beyond completing a full evaluation and deciding on our approach in the coming years. The positive aspect is that the funds already spent provide us with the flexibility to move forward thoughtfully. We don't anticipate needing to spend more money until nearly 2040, though we won't wait until then to take action, but we aren't under pressure to expedite our plans.

Michael Siperco, Analyst

Okay. So you like the property, you're in the neighborhood, and you were motivated to act opportunistically. That's sort of a fair assessment of it?

Phil Baker, President and CEO

Exactly. I mean, look, to be able to pick up the property of this size with the resources that have already been identified, and to have it within 60 kilometers or so of Keno, we thought it was something that we couldn't pass up.

Michael Siperco, Analyst

Got it. Very quickly, and then I'll pass it on. Just following up on the question about the ATM and its use in the quarter. Can you say if the priority was really maintaining the cash level at around $100 million on the balance sheet? More broadly, can you clarify if that was the main focus of using the ATM instead of relying on the credit facility?

Phil Baker, President and CEO

Yes, that's right.

Operator, Operator

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

Lucas Pipes, Analyst

I have another question on Casa Berardi, and I want to take a slightly different direction. Is the asset strategic? You have a reputation for being an excellent underground miner. So I wondered if, with the transition to a surface mine, maybe the asset is less important in your portfolio?

Phil Baker, President and CEO

Thanks, Lucas. Yes, look, from my perspective, the asset is very strategic because of the things I mentioned that it does. It is a gold asset. Gold has less volatility than silver. It has served us very well. It has been, at different time periods, if not the largest cash flow generator, then the second largest. It is dore production. Realize that, as a concentrate producer, we are subject to huge swings in the cost of processing our concentrates. So we think we need to have this. Now, can you go down the line and you grow enough in the silver business, do you necessarily have to have it long-term? I guess maybe you don't. But in the foreseeable future, I think it's a very important asset for us. And I think the exploration potential is so high that it's not an asset that you would want to not have exposure to. So I just view it as something that we will sort of work through, through its end of its life, which we expect to be much longer than what we have in reserves.

Lucas Pipes, Analyst

That's very helpful. Thank you for that color. And then switching to Lucky Friday, you have the bottlenecking projects there later this year. And I wondered what this could mean for the operation in terms of total throughput, total silver production in the years ahead?

Phil Baker, President and CEO

Sure. So we're working to be at a 425,000 ton per year run rate at the end of the year. That's 1,200 tons a day. I'm going to say something and Lauren is going to kick me. Theoretically, you can do more tons than that with the infrastructure that we have in place, at least the underground infrastructure, i.e., the hoisting capacity. So as we continue to improve and optimize our new mining method, I'm hopeful that we'll be able to do more than 1,200 tons a day. That's not the objective at the moment, the objective is to get to 1,200 tons, but maybe, over time, we'll be able to do more than that. Lauren?

Lauren Roberts, Senior Vice President and Chief Operating Officer

No, I don't disagree with Phil. I'm incredibly optimistic about the Lucky Friday and what we're doing there. The team has done really a remarkable job of advancing us towards this 425,000 ton a year objective. And it's in significant measure due to the innovation of the new mining method. But there are a lot of other pieces that have to happen to support the mining rate that the mining method will allow us to do. One of those is the hoisting system. So at the moment, the team is closing in on our throughput target without all of the tools that we intend them to have. And so like Phil, I'm optimistic that once the tools are in place, we can potentially do a bit better. Eventually, we will hit a limitation on what the mill is capable of doing. And at that point, I would expect I'll probably have another conversation with Phil, and we'll see where we go from there.

Lucas Pipes, Analyst

Got it. And on...

Phil Baker, President and CEO

I'm not so concerned about mill limitations. Those, on a relative basis, are easier to deal with.

Lucas Pipes, Analyst

Phil, can you remind us what the current capacities of the mill? And how you may address bottlenecks at the mill when the time comes?

Phil Baker, President and CEO

I don't know. I think the capacity was a lot less than we're actually producing.

Lauren Roberts, Senior Vice President and Chief Operating Officer

Yes, the nameplate capacity is now in the past. Our grinding capacity will limit throughput. We will maximize throughput until we reach the plant's maximum grading capacity. After that, we will need to consider our options. As Phil mentioned, the necessary investments are relatively modest, but let's focus on reaching 425,000 this year first, and then we can determine our next steps.

Lucas Pipes, Analyst

Excellent. And speaking of grinding forward, H.R.1, Phil, what do you think it would mean in terms of total permitting time in the U.S.? I have seen figures around 15 years or so on average to get a mine permitted now. What do you think the net effect would be if H.R. 1 were to pass?

Phil Baker, President and CEO

I haven't really considered it passing in its current form. However, I would suggest that the permitting system is heavily tied to a judicial process, and this would help break that judicial cycle. Therefore, I believe it will be much faster and more certain. The main point I'm trying to convey to investors is that the U.S. is on a path that aligns with only a few other countries that are improving the environment for mining.

Lucas Pipes, Analyst

I will recommend engineering degree for my children who are talkers right now. But I appreciate that very much Phil, and to you and the team, continued best of luck.

Operator, Operator

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

John Tumazos, Analyst

Congratulations on all the progress. Could you give us some background on the good shape of the Keno mill and underground now that you've had possession of it for a little while? It was idle for a long time. They must have kept the equipment dry and kept it from having a lot of freeze-thaw cycles, etc. How are they keeping it in such good shape?

Phil Baker, President and CEO

John, you may remember that the mill began operating about a year ago for a brief time. I can't recall if it was for one month or two, but it was indeed operational. Since acquiring it, we've made several modifications. I wouldn't call these changes comprehensive, but rather enhancements to various designs aimed at improving its maintenance while operating at full capacity, which it hasn't consistently achieved at the potential of 440 tons per day. They've done a commendable job. We've made these minor investments, and you can expect us to conduct tests in the upcoming months to ensure that the modifications are effective, and I feel quite optimistic about it. Lauren and I visited recently. Do you have anything to add, Lauren?

Lauren Roberts, Senior Vice President and Chief Operating Officer

I would say, John, the Alexco team did an excellent job of preparing the mill for future use and maintaining it in good condition. Even during our review, we were satisfied with what we observed regarding the plant's condition. The improvements Phil mentioned are incremental changes that you would expect from a 130-year-old operating company, and that’s precisely what we are implementing. Their focus is on enhancing reliability, throughput, and recovery, which are all relatively modest changes. The facility was well-maintained, and we are making some refinements.

John Tumazos, Analyst

I can ask another one. In the cash flow statement, there is a $4.5 million reference adjustment of inventory to net realizable value. Could you explain that one?

Phil Baker, President and CEO

Yes. Russell?

Russell Lawlar, Senior Vice President and Chief Financial Officer

At Casa Berardi, mining costs exceeded the gold price during the first few months of the quarter, so we made a net realizable adjustment to that inventory during that time.

Phil Baker, President and CEO

Is the other one is the Greens Creek in that as well?

Russell Lawlar, Senior Vice President and Chief Financial Officer

No.

Phil Baker, President and CEO

Okay.

Russell Lawlar, Senior Vice President and Chief Financial Officer

Okay, there's also mining and stockpiling at Nevada, which potentially would have been a small adjustment in there, but it's mostly Casa Berardi, and it's mostly in January and February. The prices came back up in March, and so we did not have that issue in March.

John Tumazos, Analyst

And if I could ask one more. I'm trying to understand the free cash flow definition. As I look at the cash flow statement, the company appeared to consume USD 17 million in the first quarter, where cash balances fell $9 million. You issued $12 million in stock and maybe I want to add back the $4 million distributed to shareholders to get to $17 million consumed, which is different than your $68 million free cash flow by $85 million. I'm trying to figure out how you get to it. If I ignore all capital spending, that's $54 million, the provision for income taxes was only $3 million, and interest expense was $10 million or $11 million. So I'm just trying to figure out the definition of free cash flow.

Phil Baker, President and CEO

So John, we are calculating free cash flow for each mine, while also looking at the consolidated cash flow statement. The Greens Creek and Lucky Friday mines together generated free cash flow of $69 million. However, when we consider the company as a whole, we have to account for general and administrative expenses and other costs that affect operating cash flow on the cash flow statement. Therefore, when we report our free cash flow as a company, we subtract capital expenditures from that figure. This same approach is applied to each individual property as well, and we do not make any further adjustments. Russell, do you have anything to add?

Russell Lawlar, Senior Vice President and Chief Financial Officer

That's correct. What we're trying to delineate there is that Greens Creek, Lucky Friday generate this amount of cash flow that's available for the corporation to utilize for exploration expense or investment in capital at Keno Hill or investment at Casa Berardi or G&A.

Lauren Roberts, Senior Vice President and Chief Operating Officer

Yes, exactly. So, but those mines generate that amount of cash flow for the corporation to utilize and invest back into whichever way it would choose.

John Tumazos, Analyst

And the definition at the mines is different than the financial statements.

Phil Baker, President and CEO

No, it's the same.

Russell Lawlar, Senior Vice President and Chief Financial Officer

I would say the only difference at the mines is we actually do add back the exploration expense because that's an expense that is meant to expand the life of the mine, etc., versus the consolidated exploration expenses included. But otherwise, it's the same calculation. It's just the mine side only.

Operator, Operator

And your next question comes from the line of Joseph Reagor from Roth MKM.

Joseph Reagor, Analyst

So I guess kind of following on some of what John just asked about. Given that the mines are generating free cash flow, but the corporate is bringing it down to zero or negative. Is there any consideration to finding a way to reduce the debt, and therefore, maybe remove $40 million a year in interest expense?

Phil Baker, President and CEO

The short answer is that regarding our capital allocation, we plan to invest in the mines, explore new opportunities, potentially add assets to the company, and focus on debt reduction. If silver prices reach $25 or higher, debt reduction becomes a key focus. It's worth noting that a rating agency has recently upgraded us from B+ to BB-, giving us the chance to refinance our debt. We hope to secure a lower interest rate than we currently have, which would help reduce our interest expenses. Looking ahead, as we develop the Montana properties and considering the improved permitting environment in the U.S., we aim to tap into the debt markets. Our preference is to utilize the long-term bond market instead of raising equity or taking on bank debt. Therefore, achieving better ratings to secure a lower coupon rate is a priority for us. Ultimately, our goal is to be active in the bond market. Russell or Anvita, do you have anything to add?

Russell Lawlar, Senior Vice President and Chief Financial Officer

I would like to highlight that the reduction of debt is part of our discussions regarding capital allocation, but it needs to be the most compelling use of that capital. Currently, we are focusing our investments on Casa Berardi, Keno Hill, and various exploration projects. If we generate significant cash flow, we may consider reducing debt, especially if opportunities arise in the debt market that present better terms than our current situation. However, our primary capital allocation strategy at this moment is to invest in our business.

Joseph Reagor, Analyst

I have two follow-up questions. First, since most of the debt is not due until 2028, when do you plan to refinance it? Secondly, as you evaluate acquisitions and expansions, what metrics do you prioritize in those decisions? Is it return on investment, production growth, net present value, or another key metric?

Phil Baker, President and CEO

Let me address that question. With our work on ATAC, our main focus is on geology and whether a property is large enough to operate for an extended period. Keno fits this criteria at 88 square miles with a rich history. Our preference is to acquire assets that already have established infrastructure. However, we believe there are development opportunities for ATAC over time. The prospects are strong and it's located in a favorable jurisdiction, which is a key factor in our acquisition strategy. I'm not sure I caught the first part of your question.

Russell Lawlar, Senior Vice President and Chief Financial Officer

The first part of the question had to do with the debt and when we would look to refinance? My answer to that would be we're continuing to have our eye on the debt market. And when it makes sense for us to do so and when there's a compelling reason to do it, we will go ahead and do that. What we are doing now, and as Phil had mentioned earlier, with the credit rating that we got the increase of last week, we're continuing to work to increase our credit ratings so that when we do go to the market, then we can do it at a lower coupon than we're paying now.

Phil Baker, President and CEO

And, Joe, so we do stay in contact with the debt market. We've got meetings with debt investors just like we have with equity investors.

Operator, Operator

And we have a follow-up question from the line of Michael Siperco from RBC Capital Markets.

Michael Siperco, Analyst

Just one more question. Just on the guidance for this year and especially the cash cost, AISC guidance for Casa Berardi. Obviously, you were above that in Q1. Can you talk a little bit about what we should expect in the short term? And how you're thinking about that guidance number for the year?

Phil Baker, President and CEO

Yes. I mean, it really becomes a function of the denominator. We would expect more production in the second half of the year than in the first half of the year. So as a result, you'll see the number go down modestly to be in that range that's in the guidance.

Michael Siperco, Analyst

So you're still comfortable with that. I think it's the plus or minus 2,000 AISC number for Casa Berardi?

Phil Baker, President and CEO

Yes. We are.

Operator, Operator

And there are no further questions at this time. I will now turn the call back over to management for some final closing remarks. And ladies and gentlemen, this does conclude today's conference call. We thank you for your participation, and you may now disconnect.