Earnings Call Transcript - HL Q1 2024

Operator, Operator

Thank you for your patience. My name is Rochelle, and I will be your conference operator today. I would like to welcome everyone to the First Quarter 2024 Hecla Mining Company Earnings Conference Call. All lines have been muted to minimize background noise. Following the speakers' comments, there will be a question-and-answer session. I now want to turn the call over to Anvita Patil. Please proceed.

Anvita Patil, Vice President of Investor Relations and Treasurer

Good morning, Rochelle, and thank you all for joining us for Hecla's First Quarter 2020 Results Conference Call. I'm Anvita Patil, Vice President of Investor Relations and Treasurer. Our earnings release that was issued yesterday along with today's presentation are available on our website. On the call is Phil Baker, President and Chief Executive Officer; Russell Lawlar, Senior Vice President and Chief Financial Officer; and Carlos Aguiar, Vice President of Operations. Phil and Russell will make most of the presentation, while Carlos will make a couple of comments. We will all be available to answer your questions. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks as shown on Slides 2 and 3 in our earnings release and in our 10-Q filings with the SEC. These and other risks could cause results to differ from those projected in the forward-looking statements. Non-GAAP measures cited in this call and related slides are reconciled in the slides or the news release. I want to remind you, if you would like to have a call with the management, you can do so by using the link under the section virtual investor event in our earnings release issued yesterday. I may now pass the call to Phil.

Phillips S. Baker, President and Chief Executive Officer

Thanks, Anvita. Good morning, everyone. As you may know, I'm the Chair of the Silver Institute and I've volunteered for this position because of the world's growing need for silver. So I'm going to actually start the call talking about silver because I'm very excited about the role that silver has in the energy transition and something I didn't really appreciate, which is the silver demand in India. So let's go to Slide 3. I can't overstate how remarkable 2023 was for solar energy and silver. New investment in renewable energy was about $675 billion, and of that, $393 billion, or almost 60%, was for solar, and that's a 12% increase over 2022, a new annual record. This investment should continue. Silver's photovoltaic or PV demand increased to 194 million ounces, that’s per the silver survey that was put out about 4 weeks ago. That's about 4 times more than the demand 10 years ago, and photovoltaics now represents 16% of global silver demand. Silver photovoltaic demand had about a 17% annual growth rate over the last 5 years. In 2024, there should be another 40 million ounces for solar. To put that into perspective, a 40 million ounce increase is about the same as the total demand that you had for photovoltaics in 2013, and you would need 4 new Greens Creeks and 8 new Lucky Fridays to meet it. Let's go to Slide 4. About 2 weeks ago, I attended the India Silver Conference where I learned 5 things. First, India silver demand is pretty consistent at about 17% to 19% of global demand. There was a drop-off during the pandemic, but it has since come back. As global demand grows, so does Indian demand. Indians actually have to pay more for their silver because of 12% duties and taxes that they have. Now that's going down 1% per year until it gets to 3%. So it's going to improve for them. February imports set a monthly record of 77 million ounces. If you take the first quarter in total, it exceeded all of the silver that was imported for the whole year in 2023. Most surprisingly, the price of silver in rupee terms hit an all-time high in April. Finally, I learned the policy commitments the Modi government has made to renewables has really created a very large new market for solar. Much of the conversation at the Indian conference focused on how they will move forward with solar. If you combine solar and Indian demand, it represents about 35% of Silver's global demand, and they are both growing. The 3-year deficit is now over 500 million ounces, and I expect more deficits this year and the foreseeable future. Silver's fundamentals are unlike any time in its history. Now turning to Slide 5, let me talk about Hecla and its role with the deficit. With the Lucky Friday back to full production and Keno Hill ramp-up progressing, we are the fastest-growing established silver company due to innovation and the efforts of our people. If you go back to 2010, we produced a total of 10 million ounces: Greens Creek produced 7, and Lucky Friday produced 3. This year's guidance is Greens Creek at around 9% and Lucky Friday at 5. That's a 40% increase without considering Keno Hill. It’s not just production growth for the sake of growth; we have maintained a low-cost structure, in fact, the lowest in the industry. In 2010, Lucky Friday’s cash costs were $3.76 per ounce. We're expecting to be around $250 to $325 million this year. This improvement is due to investments we've made, including the 4 Shaft, patented UCV, and innovations regarding mining methods, the service hoist, storage bunkers, and numerous other improvements. Over the same period, Greens Creek's costs have also remained consistently low. This year, we expect cash costs to be $3.50 to $4, and AISC to be $950 to $1,025. Greens Creek has had growth in reserves. Since 2010, we've replaced 120 million ounces and added reserves to maintain a 13-year mine plan. When Greens Creek started its operations back in 1989, the mine had a 7-year reserve plan. I believe Keno will follow a similar path as these two mines. Turning to Slide 6, there are really 3 messages for this quarter. First, our silver operations are strong and consistent, with Greens Creek delivering a solid quarter and Lucky Friday achieving full ramp-up. Second, Keno Hill's ramp-up is progressing well, and we're seeing incremental and steady improvements in safety culture and mitigating engineering risks out of the mine. Third, we see the first quarter as an inflection point with strong free cash flow from our established silver operations, improving performance at Keno, and insurance proceeds, which we will use to deliver results over the next 12 months reported at our annual meeting on May 17. We are again net zero in 2023 on scope 1 and 2 carbon emissions, where we utilized UN-certified offset credits. This year, instead of using credits, we are investing in research to sequester carbon in our operations. With that, I'll pass the call to Russell.

Russell Lawlar, Senior Vice President and Chief Financial Officer

Thanks, Phil. I'll start on Slide 8. In the first quarter, we saw our financials begin to rebound as expected from the effect of the fire at Lucky Friday. We had nearly $190 million in revenue, an increase of 18% from last quarter. While we still invested free cash flow in key operations, we saw an improvement of approximately $30 million from the fourth quarter last year, maintaining our net leverage ratio at 2.7x. We expect to see the net leverage ratio improve to less than 2x over the next 12 months as we see the full effect of Lucky Friday coming back into production, along with the continued ramp-up of Keno Hill. We also saw our positioning in silver continue to improve, as 44% of our revenue was generated from silver, an improvement of 5 percentage points over 2023. The margin at our silver operations has remained strong during the quarter at 47% of the realized price of silver. We expect the margins and the resulting free cash flow from these operations to continue to improve as we see the effect of Lucky Friday for the remainder of the year. Turning to Slide 9, with Lucky Friday back to full production and the Keno Hill ramp-up going well, I'll speak a bit about our financial priorities in 2024, which hinge on the fact that we have these great silver assets, which have generated over $600 million of free cash flow since 2020. I expect this free cash flow trend to continue and even strengthen as we see support in the price for silver and the impact of Lucky Friday being back in production. This free cash flow will first be invested in our operations, including the ramp-up of Keno Hill. We anticipate spending $190 million to $200 million in capital, lower than last year due to the completion of projects at both Lucky Friday and Keno Hill. We also anticipate spending just over $30 million on both exploration and predevelopment with plans to continue to add to our existing mineral endowment at our various operations and exploration properties. Our next priority will be to repay the amount drawn on our revolver, which we've used for liquidity due to investments made at Keno Hill and Casa Berardi while Lucky Friday was out of commission last year. With strong expected EBITDA generation, I expect our net leverage ratio to revert to our target of less than 2x over the next 12 months. With that, I'll pass the call to Carlos.

Carlos Aguiar, Vice President of Operations

Thank you, Russell. I'm excited to remark on the rest of the team, and I'll keep my remarks short. We started the year on a strong note with Lucky Friday achieving full ramp-up, another robust quarter from Greens Creek, and Keno Hill improving on safety and environmental metrics as we ramp up production. Casa Berardi's transition to open pits continues, and we are focused on maintaining cost control. We have more work to do as we evaluate pending underground operations. I look forward to all four operations running at full capacity this year. With that, I’ll hand the call back to Phil.

Phillips S. Baker, President and Chief Executive Officer

Thanks, Carlos. So going to start on Slide 11 with Greens Creek, which reported another solid consistent quarter with strong free cash flow generation. The mine produced 2.5 million ounces, and the increase in production was driven by higher grades and throughput. That throughput exceeded 2,550 tonnes per day. To put that into context, when we acquired operatorship of Greens Creek, we were somewhere around 1,950 to 2,000 tonnes a day. Cost performance is in line with the planned cash cost per ounce at $3.45, with sustaining costs at $716 per ounce. That’s lower than the fourth quarter due to higher silver production and by-product credits. Capital spending was lower than planned due to timing of equipment deliveries and less capital development because of unexpected issues. The first quarter’s free cash flow generation was $20 million lower than the last quarter due to an increase in receivables, a working capital buildup that is going to reverse. We're reiterating our production guidance of 8.8 million to 9.2 million ounces, with our AISC guidance of $950 to $1,025. Throughput has continued to increase towards the 2,600 tonnes per day, which requires a significant focus on maintenance. We're expanding our predictive maintenance practices in the mill and the mine to identify problems proactively. This has improved availability, increased capacity, and identified numerous opportunities that the team will focus on. However, we are reaching the limit of what we can achieve in terms of tonnage growth without rethinking the investments we need to make. Turning to Slide 12, there were many achievements at Lucky Friday, full ramp-up in the first quarter, producing 1.1 million ounces of silver with 1,000 days without a lost-time injury. March saw multiple days with record mill throughput exceeding 1,300 tonnes per day. Just for context, the traditional throughput rate was around 850 tonnes. We have completed two critical projects: the service hoist, which increased hoisting capacity by about 25%, and the storage bunker, which decoupled the mill from the mine with 5 days of stockpile capacity. This is crucial, especially when operating at these higher tonnages; otherwise, the mill can't catch up. We are still working on other improvements like grinding classification to increase throughput. Cash costs and AISC were $855 and $17.36 per ounce, respectively, higher than guidance ranges due to the ramp-up. That will come down over the year. The mine produced $12 million in free cash flow, including $17.4 million in insurance receipts, and is on track to achieve production and cost guidance for the year and be cash flow positive for the year. Turning to Slide 13, where I'll spend the majority of the remainder of time: Keno Hill is improving, and we are learning and trying to do everything through the lens of safety and environmental improvement. We are making it safer; the all-injury frequency rate is down 41%, but it is still too high. Like every operation, we have a two-pronged approach: we're changing behavior and also engineering and designing out risks. For behavior, we initiated a 10-step action plan to implement best practices in training, reporting, investigations of accidents, and supervision. The program is about 40% complete and has resulted in increased morale and fostered a culture of transparency. We've had more significant potential incidents reported than a year ago, as we’ve encouraged reporting. The key to a safe site is having no fear in reporting what truly happens, and the team is responding well to that. On the design side, we’re focused on modifications to environmental controls to align with Hecla standards, which in many cases exceed legal requirements. I'm reminded of a comment from Brian Erickson, who's a longtime Greens Creek leader and will start overseeing both Greens Creek and Keno Hill in June. He listed many things not legally required that we still need to address to meet Hecla standards. Like Greens Creek, this will take time; we are still improving our standards there after 37 years of operation. The geology at Keno warrants that we pursue similar improvements. In the next year or so, our focus is on better monitoring, conducting thorough hydrologic studies, and upgrading the water treatment plant. Operationally, we are making design improvements to enhance predictability and efficiency, making the mine safer and more productive. Key among these improvements is the cement and tails batch plant, which will enable underhand mining at Birmingham. When dealing with challenging ground conditions, nothing can enhance safety and productivity more than allowing miners to operate under a constructed back, which the underhand method allows. This plant will be finished by year-end, with full conversion to underhand mining expected by the end of next year. We are currently at 277 tonnes per day, all from the Birmingham deposit, about 30% more than last quarter. There's still variability in daily production and milling amounts, but we are seeing consistency improve in April and May. Reflecting on Keno, we are learning. During shoulder seasons, to manage clay from Birmingham, we need hard rock from plume moth deposits to optimize crusher performance, even though Flame and Moth are lower grade. With 600,000 ounces mined this quarter, we are confident in hitting our production numbers and expect to achieve commercial and full production by year-end, provided we prioritize safety and environmental compliance. Now let me go to why we believe Keno's life will extend beyond the current 11-year mine life: our exploration results continue to excite us. On Slide 14, last quarter, I highlighted high-grade intercepts at Birmingham, including one measuring 54 ounces per ton over 39.5 feet, and an intercept 1,000 feet deeper than previous drilling. We've continued drilling and the results we are sharing today are equally exciting, with two additional intercepts in the footwall vein: one registering 55.4 ounces per ton over nearly 41 feet and the second at 51.2 ounces per ton over almost 40 feet. These measurements significantly exceed our models' expectations. Two surface exploration drills have just started targeting 3,000 feet of strike length and a 2,000 foot dip length on the Birmingham vein system, aiming to investigate that deeper basal courtside host. We also explore targets outside Birmingham to assess whether we have unlocked the potential of the system. We expect to remain here for decades to come. Turning to Slide 15, I'll discuss Casa. Casa produced 22,000 ounces at an AISC of just under $1,900, with capital costs of approximately $13 million. All of this is as expected based on our guidance. We experienced lower surface grades, about 10% to 15% lower than previous quarters, partly due to processing low-grade stockpiles, and will monitor this closely in coming quarters. The mine had a negative cash flow of $9 million, though this was an improvement over the prior quarter. This year is an investment year at Casa, but we expect free cash flow to increase before reaching a production gap in a few years. We revised our guidance for the year, affirming our production and cost expectations. Before opening the call for questions, I want to thank all Hecla employees across all sites for their unwavering focus on safety, both in designing out hazards and making safe choices. With that, Rochelle, I’d like to open the call to questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from Heiko Ihle of HC Wainwright.

Heiko Ihle, Analyst

I assume you can hear me okay. Keno Hill, your release mentions that your action plans should be mostly finished by the end of the year. However, you have noted an exception for some longer-term infrastructure projects. For instance, Flint is scheduled to start next month. Building on what you presented on Slide 13 earlier, could you clarify what you mean by that exception? When do you plan to start this, and could you provide an estimate of your spending by quarter? I assume the majority of it will be at the beginning.

Phillips S. Baker, President and Chief Executive Officer

Yes, the guidance we provided for 2024 remains the same. Everything is proceeding as planned. I want to emphasize that transitioning to the underhand mining method will take some time before we are fully operational at Birmingham. Regarding additional capital in 2025, we haven't gone through those plans yet, but I don't expect any significant capital expenditures in any single year. Given our exploration success, the situation is quite dynamic. We are considering permits for a much larger throughput than what we currently have. While we haven't finalized those plans, that's the direction we are heading. Similar to Greens Creek in the early '90s, we aim to achieve rates well above what was initially established.

Carlos Aguiar, Vice President of Operations

I don't remember what it was. And I don't know if Russell... I don't know. I'm not sure what it was.

Phillips S. Baker, President and Chief Executive Officer

This is going to be an evolving mine, and the exploration success we're seeing justifies that. Carlos, do you have anything to add?

Carlos Aguiar, Vice President of Operations

No, that's correct.

Heiko Ihle, Analyst

And then just a quick clarification. You had ramp-up costs of $8.7 million during the quarter at the site. Can you just break that down a little bit? When you say break it down, I mean, it is sort of the stub. So we have our total revenue that we generated. That goes into operating costs and then the stub is what goes into the ramp-up costs. Any color.

Phillips S. Baker, President and Chief Executive Officer

Yes, I can provide some additional information. This quarter, we incurred about $15 million in cash expenses at Keno Hill, while generating approximately $10 million in revenue. We allocated $10 million of the $15 million towards cost of sales due to being in a ramp-up period, where we are not yet earning margin. As revenue at Keno Hill increases, we expect ramp-up costs to decrease. Once we reach commercial or full production, we will allocate all costs to cost of sales.

Carlos Aguiar, Vice President of Operations

And at that point, we would expect we would have a margin as well. We'll determine that we are in commercial production when we are confident we have a stabilized operation. And that's part of the reason for mentioning the underhand method. I don't expect that we'll have to wait until we get all the way there to underhand, but just be aware of that. That's something we'll have to consider.

Phillips S. Baker, President and Chief Executive Officer

Lastly, I would add that it's the same methodology we've used at Lucky Friday. We applied the same approach with Lucky Friday, regardless of whether it was last quarter or previously. In Q1 of 2024, we incurred some ramp-up costs in January, which we've disclosed in our financials, but it's only a couple of million dollars. That line item in the income statement will gradually increase into suspension costs. There is a minimal amount for Nevada and a very small amount from San Sebastian as well.

Heiko Ihle, Analyst

Very comprehensive answer. Good quarter; the stock's reacting well, and I'll get back in queue. Thanks.

Operator, Operator

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

Lucas Pipes, Analyst

Thank you very much, operator. Good morning, everyone. I wanted to first ask about Lucky Friday; just looking at Q1, things are moving in the right direction, but more is still needed for the full year. Could you walk through a checklist of what you expect and what you need to see to meet that full-year guidance?

Phillips S. Baker, President and Chief Executive Officer

I don't think it’s doing anything more than what we did prior to the fire, and we're on track to do that. It will depend on the actual grades we hit as we progress. But we are not anticipating any particular issue with hitting the 5 million ounces target. If there are any problems, it's really about getting the people we need and maintenance; that's our biggest challenge for availability. As the year goes on, we will be in optimization mode, exploring what additional changes we can make beyond our expectations. Carlos, anything you want to add?

Carlos Aguiar, Vice President of Operations

Yes, this is a really exciting time for Lucky Friday. Of course, the termination of the major projects completed last year will be a primary driver for our performance this year.

Lucas Pipes, Analyst

For my second question, I'd like to turn to Casa. You mentioned previously that the free cash flow contribution should pick up considerably in 2026. Can you quantify your expectations around 2025? How about the current higher gold price environment; are you looking at that mine differently from a strategic or operational perspective? I would appreciate your thoughts.

Carlos Aguiar, Vice President of Operations

The best source for our expectations on 2025 and 2026 would be our technical report. I would point you there for your reference. At this stage, we don’t foresee anything dramatically different from our expectations other than we do have higher gold prices. We've seen some lower grades than planned, and we will be monitoring that closely to determine if it’s temporary or a trend. Higher gold prices could possibly allow us to mine a bit more material from underground, but overall, we view Casa as providing diversification and scale, but our primary focus remains on silver. Casa and gold were a means to enhancing our silver opportunities, a purpose it will continue to serve in the future.

Lucas Pipes, Analyst

Phil, you express a lot of excitement and passion about the outlook of the silver market. I’ve heard growth aspirations about Tecla and the S&P 500. As we step back, how aggressive do you intend to be over the next few years in pursuing the silver opportunity? Should the focus be primarily on getting Keno operational, or are you considering pursuing rather aggressively on multiple fronts?

Phillips S. Baker, President and Chief Executive Officer

We certainly have to focus on Keno and get that up and running, as we believe it can be. However, it is a long-term game. While we currently have an 11-year mine life, I have every confidence that we are finding more, and we will end up with a longer mine life than that. We're looking at acquiring new opportunities. We're focused on what's available when it arises and assembling the right projects rather than trying to time anything. If opportunities emerge, and people see the vision of Hecla as a premier silver producer, we want them to collaborate with us to help us achieve those goals. That being said, we are content with our existing portfolio. We have ongoing projects that are silver-based, including Olivia exploration in Montana, which has the potential to fundamentally transform Hecla. We will continue to explore new opportunities while focusing on our current assets.

Lucas Pipes, Analyst

Phil, thank you for your insights and perspective. The entire team, continued best of luck.

Operator, Operator

Again, if you would like to ask a question, your next question comes from Joseph Reagor of Rob MKM.

Joseph Reagor, Analyst

Following up on Heiko's inquiry about the ramp-up and maintenance costs, could you give us guidance on what those may look like over the remaining year and then also in the long term? By the way, what are you referring to when you say maintenance costs? In Q1, the total was $14.5 million between ramp-up costs, which I know you attributed to both Lucky Friday and Keno. Beyond that, what's the ongoing care and maintenance for Nevada and other sites? Can you break that down?

Phillips S. Baker, President and Chief Executive Officer

For Q1, most of that cost, $9 million was related to Keno. There was $2 million at Lucky Friday, and Nevada and San Sebastian accounted for $3 million and $0.5 million, respectively. The $2 million at Lucky Friday relates to just one month. I believe that long-term, it will decrease to just Nevada and San Sebastian numbers. We are actively working to minimize those expenses, seeking to keep them as low as possible.

Joseph Reagor, Analyst

Okay, understood. As concerns progress at Keno, compared to Q4, you are maintaining your guidance for the year. Are there any ongoing issues that might require a significant capital investment to rectify or increase fleet size?

Phillips S. Baker, President and Chief Executive Officer

It will largely be driven by our exploration success and the desire to increase throughput, which could necessitate substantial investment. If we remain at 400 tonnes a day, there isn’t much opportunity for significant capital outlay. However, the exploration we're witnessing is promising; I believe it's going to pay off, and we should continue to improve over time. The top priorities for us remain safety and environmental performance, and we must get those right.

Joseph Reagor, Analyst

Regarding Nevada, I know these assets have been idled for a while. Given the current gold price of over $2,300, is there an opportunity to consider restarting operations there or possibly selling the assets to another company interested in that opportunity? Could you generate value from that?

Phillips S. Baker, President and Chief Executive Officer

Yes, we are evaluating if there’s material in Midas that could be mined at these higher prices. We're also looking into the work necessary to get back underground at Hollister on the Hatter dropping. There’s significant value opportunity if we reboot operations at Midas and Hollister. As for selling, that's always an option. However, we view these assets as having long-term exploration potential that warrants keeping, especially considering so little has been explored in the Eastern Robin corridor and Hollister.

Operator, Operator

There are no further questions at this time. I will now turn the conference back over to Phil Baker for the closing remarks.

Phillips S. Baker, President and Chief Executive Officer

The only closing remark I have is I know this is a busy day with many companies reporting, and I appreciate those who participated in this call. Certainly understand if you want to reach out to Russell or me later. We're happy to answer more questions. We look forward to speaking with you. Thanks for being on the call.

Operator, Operator

That concludes today's call. Thank you all for joining, and you may now disconnect.