Hecla Mining Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hecla Mining Company First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

Envita Patel, Vice President, Investor Relations and Treasurer, you may begin your conference.

Speaker 1

Good morning, Rob, and thank you all for joining us for Hecla's Q1 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 Lawton Roberts, Hecla's Senior Vice President and Chief Operating Officer and Russell Lawler, 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 23, in our earnings release and in our 10 ks and 10 Q filings with the SEC.

Speaker 1

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.

Speaker 2

April 16 marked the 15th anniversary of Hecla's purchase of Rio Tinto's interest in Greens Creek. And Greens Creek has been our foundational asset. It's really what's allowing us to be the fastest growing established silver producer. With that acquisition of Greens Creek that we made those years ago, we made a commitment to primarily focus our efforts in Tier 1 jurisdictions. Now we are the largest producer of silver in the U.

Speaker 2

S. And soon in Canada. But Hecla is not just about jurisdictions, although I'm going to come back to jurisdictions at the end of our prepared remarks. Hecla is about creating real value on a per share basis by exploring, innovating and executing on our large property positions. And it all starts with Greens Creek, which has provided us stability, cash flow and about 30% of our production growth over the last 15 years.

Speaker 2

Its employees have done and Greens Creek's success is allowing Hecla to invest in the Lucky Friday and Keno. Investment in Lucky Friday has allowed its production growth in the last 5 years to go from less than a 1000000 ounces to more than 4,000,000 with more growth on the horizon. And substantial growth over the next few years will be primarily from keynote that should produce more than 2,500,000 ounces this year and about 4,000,000 ounces next year. Since 2008, production has about doubled and is expected to be 17,000,000 ounces this year and then we expect to increase to about 20,000,000 ounces by 2025, which we project will be our sustained production profile for the foreseeable future. Not only have we seen our production grow and expect that growth to continue, we've also been growing our reserves.

Speaker 2

In fact, from 2008 to 2022, our silver reserves have increased by a factor of 5. And most importantly, production reserve growth over the past 15 years has created value on a per share basis. This is shown on the graph on the right. Our average silver equivalent production and equivalent reserve per share has increased almost two times since 2008. This reserve growth is due to a core tenant of our strategy and that's to acquire large land packages in good jurisdictions.

Speaker 2

And we continue to execute on this with the announcement of the ATEC Resources acquisition, which brings us a huge land package of more than 650 Square Miles in the Yukon that's near Keno. We expect the transaction to close in the Q3. April of this year also marks the 10th year of our acquisition of Casa Berardi, which when we acquired it was solely an underground mine. And the transition to a combination of underground and open pit operations in 2016 and now we're starting that transition to only being an open pit mine. This will require investment over the next few years.

Speaker 2

The investment amount will depend on how long we continue mining underground and the margins it generates. But what this will lead to is mining higher grade open pit materials in a few years. This higher grade ore is in the permitting pipeline and the reserve grades are almost 70% higher than the current operating pit. And the same rationale for why we bought Casa Berardi still holds. We have exposure to great geology, large land package, significant infrastructure, dore production and exposure to gold whose volatility is less than silver.

Speaker 2

As we turn to Slide 5, I will narrow our focus from the strategy we've been implementing over time to some of the details of the Q1. The key takeaways are, it was a strong operational quarter with free cash flow generation from the silver mines that we're on track to achieve our production and cost guidance and strong safety performance across the company. Greens Creek achieved record quarterly throughput, breaking the record set just last quarter and turned in very strong silver and gold production, record gold production in fact. At Lucky Friday, we achieved our safest quarter when at full production, which is an extraordinary feat considering the 80 plus years Lucky Friday has been operating. And this safety record was achieved while silver production exceeded 1,200,000 ounces.

Speaker 2

This is the 3rd time the mine has achieved that in the last 4 quarters. And the development at Keno Hill is on track for a mill startup in the Q3 with production expected to exceed 2,500,000 ounces. Lauren is going to talk more about these properties in just a couple of minutes. This operational performance has translated into financial performance. For 2 consecutive quarters now, silver is now our leading source of revenue due to significantly more silver production.

Speaker 2

And the cash flow generation of both Greens Creek and Lucky Friday was more than $31,000,000 each and combined for 69,000,000 Our capital allocation priority is investing in our mines to grow profitable production. So this quarter, we invested $17,000,000 each in Keno and Casa and $14,000,000 in the Lucky Friday. Green Street will see relatively more capital in the coming quarters. However, what is most important is our commitment to keeping our employees safe, and we have our lowest all injury frequency rate in our history. 2019.

Speaker 2

As in 2012, we implemented the National Mining's core safety program. We expect to release our 2022 sustainability report Our Annual Shareholder Meeting on May 23 and given our high grade underground operations, we are net 0 in 2022 on Scope 12 carbon emissions, which were offset with UN certified credits. By the way, the annual meeting will be both in person and webcast, so I hope you'll listen in. And with that, I'll pass the call over to Russell to talk about our financials.

Speaker 3

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 $620,000,000 in free cash flow. This has been driven by silver mines, which generate margins even at low silver prices.

Speaker 3

Looking at the chart on the left side of the slide, in the Q1, we had a margin of 13 point $0.66 which is 60% of the realized silver price. Over the past 3 years, the margin has been between 44% 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 $65,000,000 of free cash flow.

Speaker 3

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 reserves. 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 Q1 revenue profile Earnings balance sheet. During the quarter, our silver operations generated the 2nd highest revenue and gross margin in our company's history.

Speaker 3

Total revenues for the Q1 were $200,000,000 with silver the highest contributor of all metals at 38%, followed by gold at 35% and 27% from base metals. Revenues increased over the 4th quarter due to higher realized prices and although we had more silver production, We saw lower volumes of silver sold in the Q1 relative to the Q4. This was due to our shipping schedule where the 4th quarter had higher silver ounces sold as a silver concentrate shipment from Greens Creek was deferred from the 3rd to the 4th quarter. Adjusted EBITDA for the last four quarters was $221,000,000 maintaining our leverage ratio at 1.9 times, which is below our target of a maximum of 2 times. As we go through this period of investment at Keno Hill and Casa Berardi, 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 the target of around $100,000,000 We sold 2,100,000 shares under our ATM program during the quarter amounting to $11,900,000 to maintain this targeted cash balance and ended the quarter with $96,000,000 in cash on the balance sheet and $240,000,000 of liquidity.

Speaker 3

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 costs 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 Loren will discuss that in more detail. And with that, I'll turn the call to

Speaker 4

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 Q4 and I'm pleased to report that the Q1 achieved yet another record 2,591 tons per day. We expect the mine will produce 2,600 tons per day by the 4th quarter.

Speaker 4

Silver production was 2,800,000 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 Q1. Looking forward, we expect silver grades to be more in line with the model and we reiterate our 2019 guidance. All in sustaining costs for the quarter were $3.82 per silver ounce, a decline over the 4th quarter due to lower fuel prices and consumption because hydropower availability was higher during the quarter. Capital spending of $6,600,000 was lower than quarter end primarily due to the timing of equipment deliveries, which are expected in the Q2.

Speaker 4

The mine generated $37,000,000 in free cash flow, adding another strong financial quarter to its long history of free cash flow generation, which is nearly $1,900,000,000 since the mine started operations in 1989. The mine is on track to achieve its production guidance of 9000000 to 9,500,000 ounces of silver and AISC of $6,000,000 to $6.75 per ounce for the year. When we required the remaining 70% of the mine in 2,008, throughput was just over 2,000 tons per day and silver recoveries were about 70%. Today, with our incremental improvements, throughput has increased by 30% and silver recoveries have improved 12 percentage points. All of this was achieved with very modest capital investments supported by our culture of continuous improvement.

Speaker 4

This prepared mine is the 11th largest silver producer in the world. I want to congratulate the team on delivering excellent results at this truly world class asset. Turning to Slide 11, Lucky Friday produced 1,300,000 ounces of silver at an AISC of $10.69 per ounce in the Q1. This quarter marked the 4th consecutive quarter of silver production exceeding 1,000,000 ounces and a new safety record with an all in frequency rate of 0.62

Speaker 2

as of

Speaker 4

the end of April. Group had increased by 5% to 10.59 tons per day compared to the 4th quarter and the mine is on track to achieve our target run rate 425,000 ore tons per year in the 4th quarter. Capital at the spending at the mine was $14,700,000 as we focus on 2 key projects, the service hoist and the core SOR bunker, which we anticipate completing by the Q4. The service hoist is expected to debottleneck our production hoisting capacity, while the coarse ore bunker will decouple the mine in the mill by adding the capacity stockpile ore for multiple days. Both projects are critical in achieving our production goals.

Speaker 4

Free cash flow generation for the quarter was 31,000,000 reflecting the receipt of $6,700,000 in January from a December 2022 concentrate sale. We are reiterating the production and cost guidance 2023 with 4,500,000 to 5,000,000 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 startup in the 3rd quarter with about 75% of the preproduction development completed.

Speaker 4

Capital spend at the mine was $17,000,000 for the quarter with significant progress made on mine development, underground infrastructure construction and mobile equipment purchases. Work is gearing up for the surface construction season as well with the camp expansion and secondary crushing circuit modifications preparing to start. These two projects will position us to achieve and sustain the full permitted capacity of the mine. Initial or fee for the mill recommissioning is being stockpiled

Speaker 2

and the Flaman Moth in

Speaker 4

Birmingham deposits. Because of the high grade ore we expect to mine in the 4th quarter, production is expected to exceed 2,500,000 ounces of silver. Anticipate the mine could produce up to 4,000,000 ounces of silver in 2024. Turning to Slide 13, Casa Sobrati 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.

Speaker 4

Production costs declined compared to the 4th quarter due to lower tonnage, consumables and reduction in contractor costs. However, the cash costs and all in sustaining costs per ounce increased due to lower production. The mill continues to perform strongly, marking another record for the 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.

Speaker 4

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 a transition from an underground operation to a full open pit operation.

Speaker 4

The mine became a combination of underground and surface operations beginning in 20 16 with the addition of the EMCP pit followed by the F-one hundred and sixty pit in 2020. Higher grade open pit ore with reserve grades 70% higher than the current F-one hundred and sixty 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 serviced operation, mine will need capital investments in fleet and infrastructure, which we expect to be in the range of $100,000,000 to $120,000,000 exclusive of stripping. The Casa Berardi mine has a substantial reserve and significant exploration potential on a large land package on the Casa Berardi break. As we go through this period of investment and discovery, Casa Berardi remains key in our mine key mine in our portfolio that gives us gold exposure and diversification from the concentrate market.

Speaker 4

I will now pass the call back to Phil.

Speaker 2

Thanks, Lauren. 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. And our long Term growth is embedded with our Montana properties that are the 3rd largest undeveloped copper deposit in the U.

Speaker 2

S. With more than 1,400,000 tons of copper and 330,000,000 ounces of silver. And that brings me to Slide 15. I suspect that many of you don't know what HR1 means. If you do, you might be too into American politics.

Speaker 2

For 3 years, I was Chairman of the United States National Mining Association, and that's the U. S. Mining Industries lobbying group. So tells you is the priority of Congress. The last two Congresses had the House controlled by Democrats and their HR1 was voting rights legislation, which was never passed.

Speaker 2

The 115th Congress, which the Republicans controlled, their HR1 was Tax Reform, which passed. You might recall that that was in 2017, that was sort of the primary success of that Congress. The current 118 Congress HR1 is permitting reform. Exactly 1 year ago on this call, I told you that attitudes were changing in the U. S.

Speaker 2

Toward mining and permitting reform with the recognition of the need for metals for the energy transition and for national security. HR1 far exceeds where I thought we would be today. What are some of the important elements to mining investors of HR1? Well, first, it establishes a lead agency for NEPA review. It allows the project sponsor to prepare the EIS, so we can move much faster.

Speaker 2

EIS documents are limited to 300 pages. There's a 120 day limit on appeals from the NEPA process and 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 has enacting the bill as a pillar of the debt ceiling negotiations that were happening last night. So do I think that HR1 will pass the Senate get signed by Biden?

Speaker 2

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. And 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.

Speaker 2

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, execution that Hecla is the company that we are today. And with that, Rob, I'd like to open the call to questions.

Operator

Question. And your first question comes from the line of Heiko Ihle from H. C. Wainwright and Company. Your line is open.

Speaker 5

Hey there, thanks for taking my questions.

Speaker 2

Sure thing Heiko. You got a

Speaker 5

decreased G and A costs of $2,300,000 You attribute this to higher incentive compensation in the Q4 of 2022. Can you maybe trend line the rest of the year for us quarter by quarter for G and A?

Speaker 2

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

Speaker 3

I would expect G and 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 having to accrue in the 4th 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 and A from that.

Speaker 3

And so you saw the Q4 go up a little bit, but Those folks are still on staff. So I would expect, the G and A to roughly be what it is throughout the year.

Speaker 5

Got it. And while we're asking

Speaker 2

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

Speaker 5

Well, let's hope there's a $500,000,000 in incentive comp. 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. Well, I'll just Comment by saying

Speaker 2

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 had are Really looking forward to producing more tonnes and believing that the mill Can manage more tons. This is significantly more tons. We were 2,000 tons a day when we acquired the mine.

Speaker 2

We're headed towards 2,600 tonnes a day. So it is incremental improvements. It's a very focused effort. But Loren, maybe you have some more insight.

Speaker 4

Yes, absolutely. And thank you for the question, Heiko. We're on pace to achieve 6 100 tonnes

Speaker 6

a day by the end

Speaker 4

of the year and that's just sort of a linear progression quarter by quarter from where we are today to 2,600 tonnes 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. And what we find is that we are able to utilize more of the horsepower in the grinding circuit to increase throughput.

Speaker 4

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.

Speaker 5

Yes. And then just a quick one. You talked about selling some shares under your ATM or rather 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're cheap and easy way to raise some funds.

Speaker 5

But is it fair to say that this is your preferred way to do it in the future?

Speaker 2

No, our preferred way is just generating free cash flow, Heiko. 2019. Okay. Finally, with the $25 Silver price. That's pretty nice silver price in my estimation, not that it can't go higher.

Speaker 2

I certainly hope it will. But we generate a lot of free cash flow at these sort of prices. You get below $20 and it's frankly, we have a choice. We either spend less, borrow more or use the ATM. But having said that, we'll maintain the strength of the balance sheet.

Speaker 5

And you've been very successful with that in the past. And on that note, I'll go back in queue. Thank you.

Speaker 2

Thanks, Heiko.

Operator

Your next question comes from the line of Michael Ciperico from RBC Capital Markets. Your line is open.

Speaker 7

Great. Thanks and thanks for taking my questions. First one, great quarters from Greens Creek and Lucky Friday. So of course, let me ask a bit about Casa Berardi. Understanding what you've said about the transition there and the guidance you've provided.

Speaker 7

Can you maybe expand a bit and I'm not sure how to ask this exactly, but can you expand on What the range of investment could be high and low over the next couple of years and what that's contingent on and maybe if possible, could you tell us what your vision of the mine is or what production and cost could look like once this transition period is over.

Speaker 2

Sure. The transition period will require A Fleet of Mining Equipment that allows us to mine the West Mine Crown Pillar Pits and the Principal And sort of the unique thing that we're doing is mining the 160 pit to allowed that to be the tailings disposal or storage facility. And so we're going to tried to and we're still working through this, but we're going to try to accelerate the mining of that pit so that It is ready for to accept the tailings when we get to those other pits. So What we've indicated is we're thinking in order of magnitude $100,000,000 to $120,000,000 of Capital over the next couple of years for equipment and things that we need to make this transition. And then once we have made the transition, then you'll see the higher grade production from the West Minecrumb pillar pit and the principal.

Speaker 2

Where those costs will come out, I'm not absolutely sure, but I do know that they'll be substantially lower than where they are now Just because you will at that point no longer have the underground infrastructure that you'll be Operating, although we will continue to explore, we still have very high hopes for exploration success underground. But the focus will be on the surface and on the open pit. So you look at our technical report and what you'll See is substantial free cash flow generation toward the latter end of the mine as these pits are fully functioning. Lorne, anything to add to that?

Speaker 4

I would just say that we've been the long term operating concept with the open pits is to fully utilize the investments that we've made in the mill over the last several years. And As you've seen the mill throughputs and recoveries have steadily increased at the operation and we intend to operate at the full permitted limit of the mill and then deliver the best ore we can to the mill.

Speaker 2

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

Speaker 4

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.

Speaker 2

Okay. 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.

Speaker 7

Right, right. No, understood. So maybe if I could just follow-up and am I understanding 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 and immediate in a shorter time period. Is that fair to say?

Speaker 2

Yes. Look, we're willing continuing to generate the margins out of the underground. We still have that optionality. We can go either direction. We're evaluating what's the best course of action for the mine over the long term.

Speaker 2

We just like what we've done at the Lucky Friday, we are certainly willing to say It's that we need to make investments in this and recognize that it's not able to cover the investment that we're making, I. E. It has negative cash flow. We had a number of years at Lucky Friday like that. We're now reaping the benefits of that today.

Speaker 2

We're prepared to see the same thing at Casa Berardi. But so we haven't prejudged At this point, we haven't prejudged in any way which direction we should go. We're still working through that.

Speaker 7

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?

Speaker 2

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

Speaker 7

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.

Speaker 7

What do you see as the opportunity here? What 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?

Speaker 2

Look, the short term plan is to put it into the company, do a full assessment once we acquired it. Frankly, this happened faster than we had. While we always were interested in this, this has happened faster than what we had anticipated. You had the suggestion by Vic Gold. And so we reacted to that.

Speaker 2

So we don't have any immediate identifiable actions that we're going to take other than doing a complete evaluation and determining what to do over the coming years. The good news is we The amount of money that has been spent allows us to be deliberate in advancing it. We really don't start seeing Need to Spend Money Until Almost 2,040. We're not going to wait that long, obviously, but We don't have pressure on us to advance it quickly.

Speaker 7

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

Speaker 2

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

Speaker 7

Got it. Very quickly and then I'll pass it on. Just following up on the question about the ATM and the use in the quarter. Was can you say if the priority was really keeping the cash level at around $100,000,000 on the balance sheet or more broadly, I guess can you you sort of answered the question, but was that really the focus of using the TM rather than dipping into the credit facility?

Speaker 2

Yes, that's right.

Speaker 7

Okay. Okay, fair enough. Okay. Thanks very much for the answers. I'll pass it on.

Operator

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

Speaker 8

Thank you very much, operator. Good morning, everyone. 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.

Speaker 8

So I wondered if with the transition to surface mine, maybe the asset is less important in your portfolio. Thank you very much.

Speaker 2

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.

Speaker 2

It has been in different times periods, if not The largest cash flow generator, then the 2nd 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

Speaker 3

to have this

Speaker 2

now. 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. I can just view it as something that we will sort of work through It's End of Its Life, which we expect to be much longer than what we have in reserves.

Speaker 8

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

Speaker 2

Sure. So we're working to be at 425,000 ton a year run rate at the end of the year, that's 1200 tons a day. Yes. And 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.

Speaker 2

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 1200 tons a day. That's not the objective at the moment. Objective is to get to 1200 tons, but maybe over time we'll be able to do more than that. Lauren?

Speaker 4

No, I don't disagree with Bill. 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 toward this 425,000 tonne a day a year sorry, 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. And one of those is the hoisting system.

Speaker 4

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'll 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.

Speaker 8

Got it.

Speaker 2

And Lucas, I'm not so concerned about Mill Limitations. Those on a relative basis are easier to deal with.

Speaker 8

Phil, can you remind us what the current capacity is of the mill and how you may address bottlenecks at the mill when the time comes.

Speaker 2

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

Speaker 4

Yes, I mean the nameplate capacity was it's long in the rearview mirror. What will limit throughput there will be our grinding capacity and we will push the throughput until we That have reached the maximum grinding capacity of the plant. And at that point, we'll have to think about what we do. But as Phil said, those this is they're relatively modest investments to do. But let's one step at a time, let's hit the 425, we'll get there this year and then we'll see where we go from there.

Speaker 8

Excellent. Thank you. And speaking of grinding forward, HR1 fill, what do you think it would mean in terms of total permitting time in the U. S. I've seen figures around 15 years or so on average to get a mine permitted now.

Speaker 8

What do you think than that effect would be if HR1 were to pass.

Speaker 2

Jeez, I haven't even sort of considered that it actually passing as drafted. But I guess I would suggest to you that you have a permitting system that Is really locked into a judicial do loop. And what this does is unlock that judicial do loop. I think it will be significantly faster and more certain. And that's the message I'm really trying to give to investors is the U.

Speaker 2

S. Is on a path that is There's only a few other countries that probably would be on the same path of improved environment for mining.

Speaker 8

I will recommend mining engineering degree for my children we're talking right now, but I appreciate that very much. Phil, to you and the team continued best of luck.

Speaker 3

Thanks Lucas.

Operator

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

Speaker 9

Thank you. Congratulations at 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, etcetera.

Speaker 9

How do they keep it in such good shape?

Speaker 2

So John, you might recall that they We started operating the mill a year ago for a relatively short period of time. I don't remember if it was a month or 2 months, but it was they did operate it and it was functioning. In the meantime, since we have owned it, we have Made a number of modifications, nothing that is I would characterize as Complete change, but just improve some design of different things and try to improve its ability to be maintained as it operates at full capacity because it's never really done that. It's never really operated at that 400. Yes, on a consistent basis that that 440 tonnes per day.

Speaker 2

So They've done a good job. We have made these modest investments and you'll see us testing it over the coming months to make sure that the modifications we made are functioning properly and I Feel pretty good about it. Lauren and I were just been there recently. Anything you want to add, Lauren?

Speaker 4

I would say, John, the Alexco guys did a really good job of mothballing the mill and keeping it in good working order. Even during diligence, We were pleased with what we saw in terms of the condition of the plant. So the things Phil is talking about are incremental improvements that Like you would expect 130 year old operating company to bring to a mill and that's exactly what we're doing. They're focused on improving reliability throughput and Recovery. So but all relatively modest.

Speaker 4

The facility was in good order and we're doing some fine tuning.

Speaker 9

I can ask another one. In the cash flow statement, there is a $4,500,000 reference adjustment

Speaker 3

The mining costs were above the cost of gold in the 1st couple of months of the quarter. And so you just we took a net realizable adjustment to that inventory during those quarters.

Speaker 2

Is the other one, it is No, no, no, no.

Speaker 3

No, no, nothing at Greens Creek. There's also mining and stockpiling in Nevada, which potentially would have been a small adjustment in there, but it's mostly Casa Berardi and it's mostly in January, February. The prices came back up in March and so we did not have that issue in March.

Speaker 9

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 US17 $1,000,000 in the first quarter where cash balances fell 9. You issued $12,000,000 in stock and maybe I want to add back the $4,000,000 distributed to shareholders to get to $17,000,000 consumed, which is different than your $68,000,000 free cash flow by $85,000,000 I'm trying to figure out how you get to it. If I ignore all capital spending that's 54,000,000 The provision for income taxes was only 3, interest expense was 10,000,000 or 11,000,000 So I'm just trying to figure out the definition of free cash flow.

Speaker 2

So John, we've got We're doing a calculation of free cash flow by mine and then we're also doing a the cash flow statement shows us on a consolidated basis. So when you look at Greens Creek and the Lucky Friday, those two mines by themselves generated free cash flow of $69,000,000 When you then look At the company, there's all of the G and A, there's all of the other expenditures that go into operating cash flow on the statement of cash flows. And so when we say what our free cash flow is as a company, What we're doing is subtracting capital expenditures from that number. And that's what we're doing at each property as well. So we're taking and that's as far as we go.

Speaker 2

We're not making any and Other Adjustments. Russell, any debt?

Speaker 3

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 Excluding that? 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.

Speaker 9

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

Speaker 2

No, it's the same. It's the cash

Speaker 9

of my operating activities was $40,600,000 for the whole company.

Speaker 3

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

Speaker 9

Thank you for that explanation.

Operator

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

Speaker 6

Hey, Phil and team. Thanks for taking the questions. 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 0 or negative. Is there any consideration to finding a way to reduce the debt and therefore, maybe remove $40,000,000 a year in interest expense.

Speaker 2

I mean, the short answer is when we look at our capital allocation, number 1, we're going to invest in the mines. Number 2, we're going to explore. Number 3, we are probably adding assets to the company. And the number 4 would be debt reduction. So to the extent, Joe, you see $25 silver prices plus, then you the debt reduction starts to enter into the picture.

Speaker 2

One of the things I think we should mention is that one of the rating agencies Justin upgraded us by from B plus to BB- So We will have the opportunity to refinance that debt. And when we do, we would hope That we would have a lower coupon than what we currently have. So that's another way of reducing Debt interest expense. We do think that long term as we plan to develop the Montana properties and we think that's more likely given the crude permitting environment that we're seeing in the U. S.

Speaker 2

That we're going to want to access the debt markets. We don't want to have to do and we want to use the long term bond market. We don't really want to do equity nor do we want to do bank debt. We would prefer to do the long term bond. So it's important that we stay in that market.

Speaker 2

So it is a priority is getting better ratings so We get a lower coupon, but ultimately we do want to be in the bond market. Anything Russell or Envita that you guys want to add to that?

Speaker 3

Just the only thing I would add is that reduction of debt is in the conversation as it relates to capital allocation, but it has to be the most compelling use of that capital and investment in Casa Berardi, investment in Keno Hill and other thing in exploration etcetera are the things that we're investing in right now. As we see significant amounts of cash, then we would look to do some of that or if we see something some dislodgement in the debt market where we could do something better than we do now then we would look at that. But So it's certainly on our minds, but right now the capital allocation strategy is investment in our business.

Speaker 6

Okay. Kind of 2 follow ups to that and you guys just kind of led me into what was going to be my next question, which is the debt is not the majority of it is not due to 2028. When would you look to refinance that? And then the second thing is, as you guys look at acquisitions, expansions, etcetera. What do you guys consider to be most important metrics for making those decisions.

Speaker 6

Is it ROI? Is it production growth? Is it NPV? What's the metric that you guys are really focused on?

Speaker 2

Well, let me start with that question. As you can see with what we've done with ATAC, what we're really focused on is geology and the ability of a property to have be of size that it has the opportunity to operate for a substantial period of time and Keno falls in that category. It's 88 square miles. It's got a long history. We would prefer to buy assets that have infrastructure that's already built in.

Speaker 2

But in the case of ATAC, There's something that we think over time that will be developed and the prospects are so compelling that it's the sort of thing that we want to focus on and it's in the right jurisdiction. That's really what drives us when we're looking at things to acquire. Anything else that I sort of lost track of the first part of the question.

Speaker 8

The first

Speaker 3

part of the question had to do with the debt and when we would look to refinance. And my answer to that would be, we're continually have our eye on the debt market and when it makes sense for us to do so and when it 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.

Speaker 2

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

Speaker 6

Okay. Fair enough, guys. I'll turn it over. Thanks for the answers.

Speaker 2

Thanks, Joe.

Operator

And we have a follow-up question from the line of Michael Cyperko from RBC Capital Markets. Your line is open.

Speaker 7

Thanks. Thanks again for indulging. 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.

Speaker 7

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?

Speaker 2

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. It should be in that range that's in the and it's in the guidance.

Speaker 7

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

Speaker 6

Yes, we are. Okay.

Speaker 7

Okay, great. Thanks for the follow-up.

Operator

And Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation and you may now disconnect.

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Earnings Conference Call
Hecla Mining Q1 2023
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