Hecla Mining Company (HL) Earnings Call Transcript & Summary

We're very pleased to host Phil Baker, the President and CEO of Hecla Mining; and Russ Lawlar, the CFO. They just reported earnings last week and the Alexco acquisition a few weeks ago. Phil, tell us about all the developments.

John, thanks very much. I appreciate the opportunity to be here and presenting to your friends and mine. The headline of this presentation is that we're the United States' largest silver producer. And I guess that's something I can't overemphasize the fact, that we produce 40% of all the silver mined in the United States, and that's growing. And that's what the real message of my presentation is going to be, is the fact that we are a growing silver miner, and I would -- I believe we're the fastest-growing silver miner and the investable silver miner. So let me just mention that I will make forward-looking statements and they are subject to the cautions that you'll see here on this slide and on the next slide. And you should look at our 10-Q and 10-K for further cautions in the forward-looking statements that I'll make. So Hecla, we're really on a remarkable growth path. We are likely to see about at least a 30% increase in our production, maybe as much as 50%, over the course of the next few years. Why do I say that? I say it because we have 3 things happening simultaneously. The first thing we have is the Lucky Friday. And it's -- as we go deeper in the Lucky Friday, the grade goes up. And because we have devised a new mining method, we're able to mine it more productively. Second, we're making this acquisition of Alexco. We would expect that to close before the end of the quarter. And we would expect to see that in production before the end of 2023. And then third, we've got Greens Creek. And Greens Creek, while it's been a fantastic asset, we think we can make it even better by increasing the throughput. And that's something we've done in the past, and I think we'll successfully do it in the future. Some things for investors to remember is that where you mine is important. If you're in a risky jurisdiction, no matter how good the deposit you have, that deposit is at risk. The economics of what you're doing is at risk. We have our mines in Alaska, Idaho, Quebec and, what we hope will, in the Yukon. And these are mines that have very long mine lives. Our 3 operating properties, mine lives in excess of 10, 15 years. And these are mines that have been operating 30 years in the case of Greens Creek in Alaska and Casa Berardi in Quebec and 80 years in the case of Lucky Friday, and my expectation is they could mine for another 30 and 80 years. We have a very large reserve base. And that reserve base is very, very high grade. And high grade solves a lot of problems. And it allows you to mine less material, have less of an environmental impact and gives you the opportunity to really drive your cost down. Final thing I'll say as an introduction is the brand value that Hecla has. We're a 130-year-old mining company. We've been on the New York Stock Exchange over 50 years. Our balance sheet is very strong, with a couple of hundred billion dollars' worth of cash on the balance sheet plus access to a revolving credit facility of over $100 million. So we have the ability to finance the things that we're doing. And we make a point of giving -- making returns to shareholders in the form of dividends. We've been paying a dividend since, I don't know, about 2011 or so. In 2012, we've been -- we had a dividend that is linked to the silver price. And so as the silver price goes up, we give shareholders more of the cash flow that we generate. And the average free cash flow yield has been about 14%. So let me just go into some of these items in a little more detail, the first one being the production that we have from the United States. In 2021, we produced almost 13 million ounces of silver. That represents 40% of all the silver produced in the U.S. And U.S. produces about 4% of the world's silver. Canada produces about 1%. We would anticipate, with Alexco, we have the potential to be a 40% producer of all the silver produced in Canada as well. So let me talk about each of the mines, and I'll start with Greens Creek. First point to make is that Greens Creek, since 1997, so 10 years after it first went into construction, it has been a free cash flow generator every year since then. It's generated about $1.2 billion, $1.3 billion of free cash flow and its existence. As you can see over the last, what, that's 6 quarters, it's generated $266 million of free cash flow. It produces silver. It's the largest silver producer in the United States, but it also produces gold, zinc and lead. As a result of this mine and the Lucky Friday, we're not only the largest silver producer, but we're the third largest zinc producer and the third largest lead producer. You can see in our guidance that we expect to produce almost 9 million ounces. We expect the cash cost to be close to 0, the all-in cost to be somewhere around $7. Point I made earlier was that we're going to increase the throughput of the mine. You can see, since 2008, when we became the operator of the mine, we've increased throughput about 15%. What we're looking to do over the course of the next few years is to increase throughput another 5% and maybe up to 10%. So not a big jump. But as you increase throughput, more ounces, lower cost per ounce. Lucky Friday. Lucky Friday is on a new path for this mine. It's been around for 80 years. It's going to have its best time in front of it. It is a free cash flow generator. That's one of the things we try to do with each of our operations is we try to make sure that they're each generating free cash flow. And it's done a good job as we're ramping up with this mining method. And I'm -- so I'm going to talk about the new mining method, which is called the Underhand Close Bench. It is a mining method that we have. We think we'll be able to get a patent on the mining method. It is a unique way of mining these ore bodies. Guidance this year. We expect to be a little over 4 million ounces. Last year, we were a little over 3 million ounces. The year before, we were about 2 million ounces. So we're having this growth. And we're seeing the cost -- cash cost somewhere around $3 and our all-in cost around $11. So the mining method, before we talk about that, you need to understand what the ore body looks like. This is actually an image that shows the ore body -- a long section of the ore body. And the distance from one side to the other is about 0.5 mile. And the distance from here to here is about 1.5 miles. And this is the area that we have mined over, what, the last 20-plus years. And we will ultimately mine these areas that you see at the top. But the focus for the next 20 years is going to be going deeper. And as we go deeper, the grade of the ore body increases. So you can see from this point to this point, there's 1,000 feet with the silver equivalent grade of 35 ounces that's a huge increase over what has typically been mined at the Lucky Friday. And that's why production is going up. It's really all about grade. But in order to mine safely and productively, we've had in the past, with our cut-and-fill method, we've only been able to access the stopes about 75% of the time. So 25% of the time, we have shut the mine down in order to manage seismicity because we're so deep underground. Realize the bottom of the shaft is almost 2 miles below the surface. So what we have done is we've come up with this new mining method, the Underhand Close Bench. And the way this mining method works is that we are on the cut that we have at this level. We are underneath cemented backfill. So we have an engineered back over our head. So we're -- it's very safe where nothing is going to -- there's not going to have any seismicity above your head. And so what we're doing is we're drilling vertical holes instead of horizontal holes. Typically, you are drilling horizontal holes and you're moving 8 feet at a time. What we're doing now is we're drilling the long holes. So this is similar in some with -- in the way the blasting is done similar to long-hole mining. But we're drilling these long holes, and we're doing it over a distance of about 300 feet. And then we blast it all at one time. And what that does is it induces the seismicity to happen on the blast. So 96% of the seismic activity that occurs now occurs within a millisecond of this blast. This mining method would not have been possible 15 years ago because we didn't have -- John, am I coming through okay? John, can you hear me? Hello? John, I'm going to assume that it's -- I just saw you again. So you move. Can you hear me, John?

Yes. For maybe 45 seconds, your streaming froze. If you have any other windows open or teenager streaming video, you might want to control.

I'm here in the office.

Okay. We're good.

Okay. So let me go -- make sure I'm making this clear. So what happens is we are blasting these vertical holes, and we're blasting over a 200- to 300-feet length. And we're inducing the seismicity on the blast. So what that means is that we no longer have to close the mine down, close stopes down for 25% of the time, that we're able to operate on a 24/7 basis. So this is blasted. Then what happens is this mucker comes in. And when it blasts, it actually swells up. You can see here how it swells up. It actually goes all the way to the roof of that cut. And we muck that out. We then fill it, engineered backfill. We then muck the next level and we do it one more time and then we repeat the cycle. So the productivity of this is remarkable with what we're doing. So that's the Underhand Close Bench method. We think it's a result of the higher grade and the Underhand Close Bench that this mine is in a place that's never been before. What this chart shows is the silver production by decade. And you can see that roughly speaking, about 25 million ounces, 26 million ounces per decade. This coming decade, we're going to be double that. So the value of this mine and its ability to generate free cash flow is unlike any other time that it's ever had in its 80-year history. So that's Lucky Friday. So that's -- so Greens Creek, Lucky Friday are the 2 key things that are going to drive silver growth. And then there's Alexco. But before talking about Alexco, let me mention Casa Berardi, it's our gold asset in Quebec. We're producing around 130,000 ounces. Cash costs are relatively high, $1,300. All-in costs are up to $1,700. It's a free cash flow generator. And what's the -- how does this mine improve? It improves really by the exploration that we're doing there and getting higher grade. In the meantime, we'll continue to operate this generating free cash flow, looking for that higher grade material. So let me go to Keno Hill and this Alexco transaction. And in taking this on, we looked at this and we -- whenever we're evaluating things, we think about it in terms of a number of key ingredients that an asset needs to have. And that's whether it's our own asset or something that we're going to acquire. And I'll just go down the list here. Highly prospective top-rating mining jurisdictions. So like I talked about before, where your mining matters. The grade of the deposit. The life of the deposit. Under the technical report that Alexco did about 18 months ago, the mine life is about 8 years. That's a good start and we think that we'll be able to make it longer. The ability to increase throughput or lower cost, we think we'll be able to do that over time. Infrastructure, no significant capital outlay. This is -- this -- there's an existing mill. This is road access. There's power lines. There's infrastructure that makes this a very viable operation. 88 square mile land package. Significant exploration potential. And then finally, being in a place where you have sort of the stewardship of our environment and the community. Where we operate, we operate for generations. And so it's really important that we are taking care of the environment and the good parts of the community. So here's a picture of that 88 square mile land package. Over 200 million ounces have come from this land package at a 40-ounce per ton average grade. So super high-grade historic district. And very little work has been done on this in modern times. And the reason for that was there was an environmental issue that Alexco saw. That's one of the big values that Alexco brought to this, was coming to an agreement with the Canadian government on how to clean this up and do it in a way that would not burden the operating company. And so they've solved for that and looking forward to basically what happens is the government pays us for the work that we do clean things up outside the small areas that we will disturb for mining. So it has been a very successful arrangement that Alexco has had with the government. So what are we going to do when we -- when this deal closes and that we expect to close before the end of the third quarter is we're going to -- we're focusing on the development. So we're going to do close to 1,200 meters of development. And the infill drilling, we'll drill maybe 4,000 meters of infill and definition drilling in order to be able to improve the mine plan and to have a consistent level of production. So we'll do this on the Bermingham. And we'll do it on the Flame & Moth. And reserves that Alexco has identified on Bermingham is about 18 million ounces, on the Flame & Moth is about 15 million ounces. And it all sits in this area. So all of this, the Bermingham Deep is an inferred resource that we will, over time, drill and move into -- hopefully into a reserve. And that will extend that mine life that I talked about earlier. So our -- so you have those operations, those 4 operations. At this point, we're only providing guidance with respect to the 3 we own. And with that, we would anticipate our silver production to grow by 15% by 2024, and that's really about the grade at the Lucky Friday that drives that. You can see where our -- on a consolidated basis, where our costs will be. Cash cost of $0.75, so call it, $1 to $2. All-in costs, call it about $11. We're going to spend about $150 million, $160 million of capital. We've increased the capital because we're able to move some things from 2023 into 2022 in order to advance things faster, particularly at the Lucky Friday. We certainly have had some inflationary pressure. And we've identified new things that we should do in order to improve the productivity and reduce the risk, particularly at Casa Berardi. Last couple of things I'll mention is the financial strength that we have. Over the first half of the year, we generated close to $400 million of revenue, cash flow from operations of $78 million, free cash flow of $22 million. We have that almost $200 million of cash on the balance sheet and liquidity. We do have debt that's outstanding. That debt is long term. It's a high-yield bond. We have been in the high-yield bond market now since 2013. We think with the mix of assets that we have, U.S. assets, long-term assets, assets that have multi-metals, we think it's appropriate for us to have this type of debt. We don't like bank debt. We don't like project debt, but we do like high-yield bonds that gives us access to another source of capital. And we would anticipate that over the long term, that we'll be in this market continuously. We view this as a permanent source of capital. Our operations generate great margins. So here it is, here's the margins that the silver assets generate. You can see just this past year -- past quarter rather, $12 an ounce of margin for every ounce that we produce. And you can see the free cash flow that we generate. As a company, we've had $238 million of free cash flow since Q2 2020. We have had inflationary pressure, and you can -- we're providing some insight into what's driven the inflationary pressure. The biggest thing has been diesel. And the biggest impact that we have on with diesel is at Casa Berardi, where we have both underground and open-pit operations. And then I mentioned the dividend. And with the cash flow that we generate, we want to return -- provide a return to shareholders, and we do it in 2 ways. We give a base dividend and then we give a dividend that's linked to the silver price. So with where the silver price is today, for every ounce we produce, we're giving $1, in fact, to shareholders and generating a 5% return to shareholders on the ounces that we produce. And in summary, story at Hecla is really about the growth that we have, the growth that's in safe jurisdictions, growth that is with operations that are strong sort of in every environment because of the high-grade nature of them and growth that is sustainable. We'll get to this 17 million to 20 million ounces and we'll be able to sustain that. If you go back and look at our history over the last 20 years, we've gone from 5 million ounces of production annually to about 8 million ounces of production in the second half of the first decade of this century. So this past decade, we've gone to 12 million, 13 million ounces. And we've been able to maintain that. Now we're going to go to 17 million to 20 million ounces and I would anticipate that we'll be at that level for some time unless we grow from there, which obviously we'll be working to do. So John, I'll stop there and I've gone a little longer than what you had asked me to do, but happy to take questions you might have.

We're doing just fine, Phil. The question box is empty. Anyone in the call that wants to submit a question is welcome. Phil's slides are archived on the 2022 PDF slide tab of our website, www.veryindependentresearch.com. The same URL will work for replays as well as for the live presentation. And we archive all the URLs and slides on our website for a year. So Phil, let's talk a little bit about the history of Alexco's operations. They've been idle for almost a decade. When was the last year they produced silver?

Geez, I want to say it's about 2014 Alexco produced some silver. They had to run for about 3 years. The issue that Alexco had was, among other things, is they had a stream with Wheaton Precious Metals. And that stream was 25% of the silver that they produced. The result of that was that roughly half of the free cash flow went to Wheaton. And so that was one of the conditions that we had in acquiring Alexco, was reaching an agreement with Wheaton to either eliminate or reduce the stream. And ultimately, we agreed to an elimination of it.

Now it's really critical. So the mines only ran for about 3 years under Alexco paying the Wheaton stream?

Correct.

Could you refresh us when the Keno Hill district operated? Was it from 1900 to 1950?

Roughly that time frame. I think it might have been a little -- started a little later, but not much.

Now Alexco, since it idled in 2014, did it do drilling every year? Or did it do drilling occasionally?

I'm not sure if they drilled every year. I kind of doubt that they did, but it's possible. Certainly, the other thing that Alexco did besides deal with the environmental liability is they found these deposits. The -- let me go back to this slide. So Hector-Calumet is the primary historic producer. But Bermingham, Flame & Moth, Bellekeno, these are all discoveries made by Alexco. This is not -- they're not just taking something that someone else discovered and building on it. They actually have made new discoveries. And remember, this is 88 square miles. So these look like they're really close together, but they're quite a distance apart. And what they have done is they figured out the correct structural interpretation to understand structurally where you have the best chance of finding another deposit. So that was the huge success they've had. But realize they've had a limited exploration program. The program has been near surface and it's been near infrastructure. So there's a huge opportunity across this larger land package. So John, you're frozen again. I saw your screen move. So John, I saw you move again. Can you hear me now? Can't hear me? Can you hear him?

I can hear you now, Phil.

Okay. Great.

My Internet provider faded twice. Both of those interruptions were on my end and not your end, I apologize.

No worries.

I was about to boot up my WiFi hotspot from my cellphone for backup.

That's crazy.

I don't have Verizon. I have a company called Spectrum, it's the only provider here.

Okay.

So apologies to everyone.

So you have that large land package. And while there hasn't -- there probably hasn't been drilling every year, they did the hard work of figuring out the structural interpretation. So great job by the guys at Alexco which, by the way, the lion's share of the employees at Alexco will be retained by Hecla. In this time of having a shortage of workers, we're very excited about bringing people over. The General Manager at the site will continue to be the GM and we have a whole slew of employees that work for him, and then the hourly guys, all those people we're anticipating will continue. And then in the corporate office, there's a large percentage of those folks that will continue.

So Phil, Greg Johnson, one of the NovaGold founders has a company in metallic ventures in the neighborhood. And Tara Christie has Banyan Gold. She is the spouse of John McConnell of Victoria Gold.

Maybe you put it the other way around. He's the spouse of her.

Something like that. So there's these neighboring companies that also promote the trend. It sounds like the 88 square miles in the existing deposits that Alexco was gradually drilling are enough to keep your plate full for the first couple of years.

Look, I think it will be longer than the first couple of years. Having said that, we're in the district and we'll want to continue to grow. And whether we go beyond this will be a function of what's available and what it costs. So time will tell. But we don't need to do anything other than this.

Could you talk a little bit about the productivity gains from the new mining method at Lucky Friday and how many tonnes per day you were doing 2 years ago and how many tonnes per day you're doing this year and how many tonnes per day you might do in a couple of years forward and how much of the output gain is from tonnes per day the new mining method, the widening structure at depth and how much is from the higher grade of depths?

Well, the historic throughput of Lucky Friday has been something less than 800 tonnes a day, 750, 780 tonnes a day. And there had been occasions where the mine has run at a higher rate. You can go back to 1999, 2000. And the price of silver was so low that the mine tried to offset that by running at a significantly higher rate. And it had various areas to mine. It had where we're mining today, and it had -- I'll go to that screen. It had where we're mining today. It had this area up here. But then it also had another area, the original Lucky Friday vein area. So we know we have the capacity to hoist. We know we have the capacity to mill at a higher rate. And so with this new mining method, we're now just mining just in this one area, just in this -- on this one vein. And we would anticipate that we're currently around 11 -- call it, 1,000 tonnes a day, where it would anticipate that we'll get to 1,200 tonnes a day over the course of the next year or so. And then where we can go beyond that as far as tonnage is unclear, but there certainly is the capacity of the infrastructure that probably go as high as 1,400, maybe even 1,500 tonnes a day. What that all means is more ounce production. But the first thing that happens is ounce production goes up because of the grade. And you can tell that by not the most recent technical report that we have, which is based upon the new mining method, but the previous one, which was the old mining method. And with that method, we got to 5 million ounces a year. So with the new mining method, we're getting to 6 million ounces a year. But we think we'll have a better cost structure, better economics and, more importantly, a safer operation and an operation that we think can continue to grow in terms of its productivity, which we could not have done with the old method because we had to let the rocks rest because we didn't know when the seismic events were going to happen. Now we know when they're going to happen, we're controlling that and it's allowing us to envision this 1,200 tonnes a day and potentially more.

So how long did you have to pause to let the rocks rest after you blast the mine?

Well, I don't know specifically. But generally speaking, the stopes were shut down a quarter of the time. So 25% of the time no one was allowed in the stope. Now different parts of the ore body would have more seismicity than other parts. So each stope was different as to the need to let it pause. But on average, it was 25% of the time. So out of every 4 weeks, 1 week it was shut down. Sort of think about it that way. Out of every 12 months, shut down for 3 months.

So did the workers move from stope to stope?

Generally speaking, they did, but on a limited basis because we had a system in the past that allowed them to basically bid for an area that they would work. Sort of like a flight attendant bids for which flights they want, they got to pick which areas they wanted to mine. We've -- that was what the strike was about, is we needed to be able to move people more freely and put people where we needed them. And that was ultimately resolved and we entered into a new arrangement about 3 years ago.

Tell us about the productivity changes at Greens Creek in Alaska.

Well, if you go here. I mean, what it's been is really about getting more tonnes through the mill. I can tell you that when we took it over, it was about 1,900 tonnes a day. We ultimately moved it up to about 2,300 tonnes a day. And now we're looking at the ability to try to move it to 2,500, maybe even 2,600 tonnes a day. So stay tuned with this because despite how good this mine has been, we think it can be even better. It's been an extraordinary mine. I mean you can see here the cash flow generation that this mine has had. And it had a rough start. That's something people have to understand about mines is that they're a complex dance, and particularly these underground mines, it takes some time to get resolved. But when you do, these things can go on for generations.

Phil, I guess, since 2016, we've acquired Horizon to get Casa Berardi...

2013.

2013, excuse me. Klondex and now Alexco. We didn't have any discussion about the Nevada division. I know you are shipping some ore, I think, to Barrick to treat the refractory ore?

Yes. So Nevada Gold Mines, we were shipping to them. And that's all gone on pause, as we announced a year ago. Our focus is strictly on exploration. Having said that, we are mining a little bit and stockpiling it before we let some of the old workings at Fire Creek flood. They will have -- the newer workings will continue to maintain, waiting for the opportunity to mine those and put that material through an autoclave or a roaster.

So you're going to go back after it floods?

No, no. There's different areas of the mine. So there's -- so what we're doing is we're mining those areas that we want to allow to flood so that we don't sterilize that material. And so we'll stockpile that material till the time comes that there's capacity in the autoclaves. Remember, i-80 is -- they've acquired the autoclave from Nevada Gold Mines and they're in the process of rehabilitating that facility. And so there's going to be the need for feed in Nevada in a few years. And so we want to be in a position to be able to deliver material.

So you might have another alternative that might be at a different rate to treat your materials? Is that what you're suggesting?

Well, just higher recovery, right? So the recoveries that we get out of our own mill are inadequate given the complexity of the metallurgy. While if you go into the autoclave, you can get close to 90% -- certainly over 90%. If you go into a roaster, you're over 75%. So both of those are options for us and we want to leave that optionality open to us.