Hecla Mining Company (HL) Earnings Call Transcript & Summary

Hello. Good afternoon in Europe, and good morning in North America. This is Mike Jalonen, Bank of America, from the North American precious metals sector. And we're very pleased to have our next company, Hecla Mining. And their President and CEO, Phil Baker. Phil just showed me his 20th anniversary service award from Hecla. So very impressive CEO longevity in this sector. There's only a few, I think maybe the longest Phil would be just Sean Boyd and then you're #2. So congratulations on that length of time as CEO. And for those who don't know, Hecla is a leading global silver producer, and Phil is going to make a presentation first. I will chart the Q&A. So Phil, without further due, thank you for attending our conference and with your presentation.

Well, thanks for the invitation to attend, and it's -- it will be good, the next time to do it in person. What you should see is a slide that calls us the United States leading producer. And so I'm going to have a lot of focus on silver because we are the largest producer in the United States. And I'm going to talk a little bit about our view of silver. I'm going to try to go through these handful of slides pretty quickly so that you and Mike can ask questions. I will be making forward-looking statements that are subject to the cautions found on the the next slides as well as our 10-K and 10-Q. So maybe if we'll move to the slide that gives you an image that shows our 3 key operations the fact that these are U.S. and Canadian operations. I think it's important to remember that from an ESG perspective, where these assets are located. There's -- you think about the culture that you have as well as the regulatory environment and it's quite high among the highest in the world. So you're really in the right jurisdiction for those purposes as well as for risk. You see a lot of impact in other countries of the world as with the change in government. We, of course, had a change here in the United States. And while it goes in a different direction, it's not as jarring as it might be in some other places. We have the 2 largest and highest grade -- 2 of the largest silver mines and the highest grade mines in the world. And silver really dominates the company's reserves, resources, our cash flow, and they're very long-lived mines that have decades in front of us. And it's growing. That production that we have is growing. And also, we'll talk about in a moment just our dividend policy, which is tied to silver, which makes it pretty unique. And the last thing I'll just mention is the brand value of Hecla. I used to talk about that, and people would sort of roll their eyes. But I think more recently, they've seen reasons why it's true that a 130-year old company and a company that's been on the New York Stock Exchange for 50 years that when silver moves, we move more than others. Let's just go to the next slide, which is a slide on ESG. And this is looking at ESG in a different way, and it's focused on the amount of greenhouse gas emissions that we have. But it's looking at it on a per ounce produced basis. First, silver or gold equivalent ounce produced, we think that's what you should really be looking at is how much greenhouse gas emission do you have for the metal that you produce. And what you can see is that we're 2 to 3x our peers in the amount of greenhouse gas emission. Now we just came out last week with our sustainability report and I would just encourage you to go to our website and look at it. It's very comprehensive. It's about 60 pages long with, I think, all the materials that you need to make that evaluation. So going to the next slide. I started the presentation by saying that we're the leading silver producer. We're actually the dominant one because we produce a third of all the silver that's produced in the United States. 1/3, it's hard to imagine many products so that there's 1 company that produces 1/3 of all that's produced. And the next largest is tech, then you go to Coeur. So it's really quite surprising how much larger we are than tech. We're double the size of tech. We're about 4x the size of Coeur and the United States produces roughly 4% of all the silver produced in the U.S. So -- in the world, and we produce. So we produce about 1% of all of the silver produced. And the silver production that we have is really driven. If you look at the next slide, by the 2 key mines that we have, Greens Creek and the Lucky Friday. And what this slide shows is a comparison of -- you might call them silver mines or you might, in the case of Kensington, just call them large mines with a lot of silver as a byproduct. And what you see is that Hecla is as large as a Kensington mine. It's actually larger than Fresnillo and a silver equivalent basis, so the total metal that it produces. But maybe more importantly, we're double the grade of any other of these large silver mines. The other thing that's a bit surprising is how quickly it falls off in terms of size. And this will go to the comments that I'll make about the silver market. Silver is a relatively rare metal to find geologically and this reflects that. The fact that these mines are relatively small. I mean, you get to the Lucky Friday, with the seventh largest. And we're at 150 million silver equivalent ounces. Speaking of the Lucky Friday, the image that you see here is what's known as a lung section. And what this does is it just takes a picture of effectively of the ore body from its side. You're looking -- the length of it, you're looking at from one side to the other is about half a mile. From the top to bottom, you're looking at about -- not quite 2 miles. And this is a part of the ore body at the Lucky Friday that we've been operating for over 20 years. And you can see where we've been mining, where all those sort of -- those lines that you see that are not covered by the colored space. Those lines reflect the ramping system that we had, and it took us 20 years to mine that. So we have in front of us, a 30-plus year mine life. But the more interesting thing is the bright red colors that you see, those very hot colors. That represents very high grade mineralization. And what happens is, as we go deeper in this mine, the grade of the ore body increases. And as a result of that, we're going to see significant growth in our production. In 2020, we produced about 2 million ounces. This year, we'll produce about 3.4 million ounces in 2 years' time. Because of the grade, no more tons, no more work being done, no more costs being done just because of the grade, we'll be at 5 million ounces. And we're looking at new mining methods, 2 different ways. One is a drill and blast method. The other is a mechanical mining method of increasing the number of tons that we produce. So we think we have the potential to take this mine up to 7 million ounces. So from 2 million to 3.4 million to 5 million, with that potential to actually go to 7 million ounces. So this really drives the growth of silver production at Hecla. And as a result, actually increases our dominance in the U.S. silver production. We'll go from 1/3 to maybe as much as 40% of all the U.S. silver production. Now if you go to the next slide, sort of changing gears and just focusing on capital allocation, one of the things that we have been very consistent on is paying a dividend to the shareholders. We put that in place in 2011, and we have consistently paid a dividend since then. And it's our base dividend. But we also have a dividend that's tied to the silver price. Because when silver prices are at these sorts of levels, we generate a significant amount of free cash flow. And we want to give that back to shareholders. And in fact, we increased that dividend level 50% just a few weeks ago when we put out our earnings. So the way to think about this is for every ounce of silver that we produce we're providing a return -- if the price of silver is at $25, we're providing a return to shareholders of 7.4% on the silver we produce. So you could buy an ETF you could buy another silver miner, you could buy the physical, but you're not going to get this return on the silver itself. And of course, as the silver price increases, we actually increased the amount of that dividend and you can see how the yield that you have on the silver price, how that increases. Just 2 more slides I'll go through. And then Mike, I'll ask you to maybe give questions from the audience or questions you have. The first slide is it just talks about our first quarter results, which we put out about a week ago. It was a very good quarter. I went back and looked at the first quarters for the last 30 years, that's pretty amazing to be able to say that you can do that. And what I found was that 20 of those 30 years, the first quarter was the poorest quarter for the year. Well, this has been a very good quarter. We had a record adjusted EBITDA we had a record gross cash margin. We had the second highest sales in the history of the company in the first quarter of this year. And we would anticipate the rest of the year will be -- in the aggregate, stronger, quarter-by-quarter, it changes. But certainly, the remainder of the year, we expect a stronger remainder of the year than what we had just for the first quarter. As a result of the first quarter performance, we lowered our guidance on our costs for silver, all driven from Greens Creek, and that really has to do with the fact that we have higher lead and zinc prices. We have better smelter terms and a change in the way we account for the Alaska mining tax. It's now been moved as an income tax rather than an operating cost. And it's -- we're required to do that under U.S. GAAP. Balance sheet is very strong. We have $140 million worth of cash, $390 million of liquidity. We had $16 million of free cash flow. One of the things I'll comment on is if you look at peers, you see big tax bills that they had, particularly in the first quarter, you don't see that with Hecla. The reason you don't see that is because we are in the U.S. and Canada, and we do have as a 100-year-old company. We have NOLs that protect us against significant tax liability in the U.S.. Talked about the dividend, we did get a ratings upgrade. And our safety record has been exceptional, and we're among the leaders in the whole industry. And by the way, the mining industry in the U.S. was the -- of the 10 major industries that they follow. We went from being the 10th worst -- the 10th least safe industry to the safest of those 10 industries over the last 10 years. And Hecla is among the leaders in the safety statistics. So let me switch gears one more time to the silver market. I've been following silver very closely for the last 20 years that I've been at Hecla. Hecla, of course, has been a silver miner for 130 years. I can remember being in London, talking with an investor who's just recently retired, who said, I'm not going to buy Hecla stock unless you sell all your silver assets and only go into gold. And what he knew and this was roughly 2001, what he knew was that photographic demand for silver had peaked. It peaked in 1999, and it was going to decline and that he didn't anticipate there was anything to replace it. What he didn't realize was there was. And this digitization that we've had out of our economy, silver has played a vital role in that. And now we're moving into a period of time where we not only continue to have that digitization, but we now have this energy transformation. So the same things that drive copper will also drive silver. And we would anticipate that silver demand growth which we've had for industrial demand, so for digitization, for energy demand, will at least grow at the rate that it's grown over the last 10 years, which is 2%. And with that, we'll come roughly another 70 million ounces of silver that will be demanded by the market, which maybe doesn't sound like very much that 7% of the total because the market is a 1 billion-ounce market. But it is a very challenging number for the industry. It's -- our mine, Greens Creek is the largest silver mine in the U.S. and it only produces 10 million ounces. So you're talking about having to have 7 of those Greens Creek mines or Fresnillo is probably the largest silver producer in the world. And then you would need 1.5 more Fresnillo or Codelco produces about 25 million ounces as a byproduct. You'd have to have 3 more Codelcos with byproducts . So it is a challenge to reach that additional 70 million ounces. So I think you hear a lot of people talk about the copper industry and how you're going to have a lack of growth in the middle part of this coming decade. I think the same thing applies to silver. Mike, with that, I'll turn it over for questions.

Well, thank you, Phil, and you're one of the few CEOs who actually talked about -- at least in precious metals, talked about their underlying metals in a very bullish way. It's...

Really?

Sorry?

Really, I'm surprised.

Some of them won't if they produce gold and -- just joking. But here's a couple of questions. Slide 9. The increase in silver production from Lucky Friday, going to 5 million ounces. Is it just grades or you might in more times also? And I'll put an additional rider question on that. How do you get the 7 million ounces?

So go back to Slide 9, if you would, Russell. So Slide 9, getting to that 5 million ounces is only grade. There is no additional times. So to get to 7 million ounces would absolutely require additional tons. How would we get the additional tons? When is the drill and blast method that we're testing as we speak. And basically, we go from a method where we're drilling and blasting horizontally to the ore body. So if you look at that image, we're going from left to right, or right to left, depending on what direction we're coming in. Instead, we turn the drill where we're drilling vertically. We're drilling down and we blast a much larger area, and we then binch it out. We're -- there's lots of things that have happened technologically that particularly in the blasting area that allows us to be a conceivable way to mine this. And what it does is it controls the seismicity of the mine, and that allows us to get to this higher -- and I say controls it. We're able to manage it where we know when the seismicity is going to happen. So it allows us to have a greater mining rate than what we had -- what we're currently able to do. The other way is with a machine that actually just cuts the rock. And so instead of taking out big areas in the mine, big volumes of material, you're taking out a very, very small amount of rock, and that controls the seismicity. Because seismicity is the limiting factor on the mine. It controls how much you can move in this mine because we're so deep.

Okay. And the same person asked the follow-up question. How long do the higher grades persist at Lucky Friday to the sustained production of 5 million ounces?

Well, we're not absolutely sure. We know down to the 7,500 level that we're able to stay at that. So certainly, over the next sort of 15 to 20 years. As we get deeper, the amount of drilling we have is limited. We know it's high-grade there. We just don't know the extent of it. So you have a 15, 20-year window. I would expect that over that period of time, we'll also have a higher throughput rate. So I just would be very surprised to see this mine go below 5 million in the long term.

Okay. Thanks. So going back to your NOLs. As you said, you have significant NOLs, which feed you from U.S. taxes. Highter metal prices now fall, will you -- how fast can you run through these NOLs before it become taxable?

Yes, it depends on how high. So certainly, you can get high enough where you can run through them quite quickly. But at the same time, we have the NOLs, you have a tax system. And even if it gets changed by the Biden administration, that is a favorable tax system. The the deductions that you have available to you are quite favorable. So you have that for the current calculation of the taxes, then you have the NOLs that go on top of that. So how long I'd be surprised if within the decade, we are paying substantial federal taxes. You get to high enough price, that might not be true. But certainly, at the levels that we're at now, absolutely, could easily go a decade.

Okay. Now yesterday, you put out a press release and exploration results in Nevada and Greens Creek, I had a brief glimpse at it. Conference is going on. So -- but high grades in Nevada, and I didn't drill down deep enough on the Green scrip results, maybe you could provide an update, please, on this.

Yes. So in Nevada, what as we were really struck by the fact that this is an area that has had gold mining since 1907. And Franco-Nevada put together the land package in the early '90s. And so -- because it was fragmented, there was no modern expiration that really occurred until 1990. And they immediately found the Colorado Grande, what became known as the Colorado Grande vein. And they immediately went into production on that. So 90 -- they started the expiration in '90. They've made the discovery in '94. They actually started mining in '97. And when they did that, they created an area that they had permits that allowed them to do operations and exploration on. And that permit actually had areas that were that they were not allowed to do things on. Newmont acquired this in 2002, and they retained it until 2014, and they produced about 2.5 million ounces. And that land package, the access never changed in that period of time. So there was never any expiration done beyond what was done on the Colorado Grande area. And Newmont, you might recall in 2013, '14, they sold their low sulfidation thermal systems that they had within the company sort of all around, including this. So point is, no one ever walked the ground. Our guys walked around, they discovered this center with this high grade mineralization. So that means that epithermal system is intact below it. So and it had grade in it, which is -- was really surprising. So we drilled it, and we've had a number of multi ounce, 1-ounce plus. And then we most recently had a 5-ounce plus Intercept, not over a narrow width, we're over 12, 13 feet true width. And we actually think we're in the horse tale of the larger system. And we -- now with the expansion that we have in what's known as APU, we're able to explore there's about a 3.25 mile corridor that we're able to explore. Rio Colorado Grande was within a mile corridor, mile length. So that's the sort of target that we're looking for at Midas. And we're very excited with the initial results that we've had. So that's Midas. The other thing I'll just mention in Nevada is that we are driving the decline in order to do the drilling at Hollister on the Hatter Graben. And you can expect over the latter part of the year, early next year to hear results from that. As far as Green Street goes, there's a mine that's been operating for 30 years. It has produced 332 million ounces of silver, 2.7 million ounces of gold, it's about 5 billion pounds of combined zinc and lead. And we're still discovering more. The focus of the exploration is on the Gallagher, the extension of the Gallagher zone. But we're also doing infill drilling on the other known zones in order to move material from resource into reserves. We've got a roughly 10, 11-year mine life there. That's -- we've had somewhere between a 7 and a 12-year mine life for the last 30 years. We would anticipate that mine operating for another couple of decades.

Okay. Great. And maybe I'll mention your 1 gold operation, Casa Berardi in Northern Québec. That operation is a steady eddy and has done quite well. Just wondering if you can give us an update how are going or is that mine getting impacted by the stronger Canadian dollar?

Well, certainly, it does, but we are hedged, not 100% hedged, but we do have, call it, 60% or so of our cost hedge there for a period of time. Yes, it's been a good mine for us, but we think it can be better. And we have invested a lot of time and energy, not a lot of money, but a lot of time and energy and processes to improve that mine, particularly in the mill, both availability and recoveries. And we've had significant improvements and we think it can improve significantly more. We think this mine can be somewhere between a $25 million and $50 million between between productivity and cost reduction, $25 million to $50 million improvement in our cash flows over what it's -- what we've done in the past. So stay tuned for that. It's -- we think it's a good mine that can be better. And exploration is going very well there.

Okay. Maybe I can talk about the M&A question. Another silver company has bought Jerritt Canyon. And is there -- which kind of surprising, but is there like a shortage of silver assets for sale that the silver companies kind of our going towards gold assets, just sought core mining, make an investment in Victoria gold, say, look, I don't think they produce much silver.

No. Absolutely. That goes to my point earlier about the shortage of the ability to have projects that can meaningfully increase the silver production. I mean, there's some stuff that's hanging out there. They've been there for a long time that are in Argentina, Guatemala, Chile, but there's political issues with those things happening. So the short answer to your question is there is a shortage of silver projects. Fortunately, we have a number of -- the image we showed earlier just showed the operating properties and one other project. But we actually have a very large number of things that are in our inventory that we are advancing some faster than others, but they're all interesting.

Well, you have 2 projects in Montana, that hundreds of millions of ounces of silver. And we only have a minute left. Maybe you could just give us an update on those projects. It's certainly tremendous optionality.

Yes. So it's 300 million ounces of silver, about 3 billion pounds of copper. So it is exactly the metals that the Biden administration wants to have produced in the United States with this build back better program. So we're confident that the -- that we're in the right time politically for the advancement of this. Having said that, it's a legal process and so we're going through the legal process. But what we would anticipate is these mines could be in production around the end of the decade to the beginning of the next decade. We are on a path that we think we can get there.

Okay. Well, Phil, unfortunately, we're out of time, and I want to thank you, and Hecla Mining for presentation and participating in our conference. I hope we could see live at our Miami conference in mid-May 2022. And again, thank you for your participation.

We'll be there. Thanks very much, Mike.

All right. Take care.