Hecla Mining Company (HL) Earnings Call Transcript & Summary

Okay. Good morning, everyone. This morning, we have Hecla Mining for a fireside chat. Good timing for that, I think, given the recent strong performance in the silver price and gold price for that matter. And here this morning, we have Phil Baker, President and CEO. Phil?

Steven, great to be with you. I'm actually speaking to you from Belize. I am here with my sons, celebrating my -- son's getting married in a month. So good to be with you. I appreciate being able to do this remotely like this.

Yes. Congratulations. Phil, let's just kind of dive right into it with some Q&A. And just to start off, can you kind of run through some key accomplishments at Hecla in the last couple of years? And what your key goals are for kind of the next 2-year time frame?

Steven, when I think about the last few years at Hecla, and I think about the future, the thing I'm really struck by is the growth that we have had. It wasn't too many years ago, we were at roughly 12 million ounces of silver. This year, we will be at 17 million ounces, and I would expect in the next couple of years for us to be at 20 million ounces of silver. And that clearly puts us among the 2 or 3 largest silver producers in the world. You really have just Fresnillo and Pan Am that are larger producers than we are. And so it's really that growth, and it's growth and really great places, great assets, high-quality, high-margin growth. And at the same time, we've been able to maintain our gold exposure. We have our mine in Quebec. And so we're able to grow the silver, maintaining our gold and I think really provide a unique investment vehicle for investors interested in silver.

Okay. And obviously, investors do have a handful of silver stocks to choose from. What do you think differentiates Hecla from those other silver miners?

It's really a lot about being a U.S. and, soon to be, a Canadian producer. We produce about 40% of all the silver that is mined in the United States. There's not many things in the world that one company produces 40% of something from the U.S. And I think we will probably, year after next, maybe produce 40% of all the silver produced in Canada as well. These 2 countries -- when you think about things from an ESG perspective, these 2 countries really have the best ESG environment of all the places that you can produce silver. If you think about where else people mine silver, it's Mexico, it's Peru and it's China. That makes up over half of all of the silver production in the world. So it's that. It's where we operate. It's the assets that we have. All 3 of our silver assets and our gold asset are all long-lived assets, and they've been around for a long time. Each of them are in areas where there's been multi-generations of activity -- mining activity that has gone on. And it's really, really important because you really develop the relationship with the communities. I mentioned ESG on a sort of a countrywide basis. But if you think about it on a community basis, you really build the relationships in the communities and you really have acceptance and buy-in of the activities of the company. And most of these places, we are the largest private employer in the community. So we really make a big difference. And the assets are of extremely high quality. The most recent asset we've acquired in the Yukon is probably the highest-grade silver asset in the world. In Greens Creek, Lucky Friday have been around for such a long time because they are such high-quality assets, high-grade assets, and they're long lived. As I said, very long lived. But to put -- be more specific, these are 10-, 15-plus year assets, and these are assets that have been in production, in the case of our mine in Idaho, 80 years, in the case of our mine in Alaska, 30 years. So very long-lived, low cost, great jurisdiction and growing. That differentiates us from really our peers.

Okay, great. But let's dive in a little bit into those assets. You mentioned Greens Creek, this has been your cash flow engine over the years and remains among the lowest cost primary silver mines in the world. You made a number of kind of incremental improvements to the mine since the 2008 acquisition of the remaining 70% of the project. Can you talk about some of those improvements?

Sure. Let me just tell people where Greens Creek is. It's actually in Southeastern Alaska. It is in this capital of Alaska, Juneau. It actually is located in that municipality. It was put into production, the development happened in the late 80s. It was a joint venture by Rio, what became Rio, and Hecla. And to be frank, we struggled with it early in its history. And some of these great assets take a lot of effort in order to make them successful, and Greens Creek is one of those. But when you have success at a great asset like that, you have extraordinary success. So since 2008, when we were able to acquire the 70% that Rio owned, the biggest thing we've done has been to drive the throughput up. It has been just a continual incremental improvement in the amount of throughput. And then on top of that, even with more tons going through the mill, we've been able to increase the recoveries and increase them substantially. So we've taken this mine from being a sort of a 6 million to 7 million-ounce producer to an 8 million to 9 million-ounce producer. And now we're at sort of a 9 million to 10 million-ounce producer. And as a result of that, we've had extraordinary amount of free cash flow generation from the mine. I think since we have operated it, I want to say, it's produced about $1.2 billion of free cash flow. It has been an extraordinary asset for Hecla, but it's not over. It's -- the future of the mine is continue to drive incremental improvements in the mine. I wouldn't anticipate large increases in the production of the mine, but I would expect to see better costs, better margins as we implement lots of new technologies, as we improve the -- continue to improve the recovery. Just over the last couple of months or I guess, it'd be about 6 months, we've made some changes to our gravity circuit, where the amount of gold that's being reported to -- from gravity has increased about 35%. That's huge in terms of the sorts of recoveries that we get from gold, which, by the way, let me just say, in addition to silver, we do produce about 45,000 to 50,000 ounces of gold. We produce lead and zinc. We are the third -- as a company, we're the third largest producer of zinc in the United States, primarily as a result of Greens Creek. We're also the third largest producer of lead. That's really more due to the Lucky Friday, but Greens Creek does produce some lead as well. So really exciting what has happened at Greens Creek, and we're still on a path of continuing to improve that operation, looking at how to implement autonomous activities in the operation as we get deeper and further away from the [ portal ].

Okay. Great. So what do you see as kind of the ultimate upside in production there at Greens Creek?

Look, I, again, continue to think of it as a sort of 8 million-, 9 million-, 10 million-ounce producer for the next 15-plus years. Continue to think of it as having the same sort of strong underlying cash flow. And as -- maybe we'll talk about later, we expect silver prices to do extraordinarily well. And Greens Creek will not just generate the sort of cash flows that we've seen in the last few years, but you could see doubles and tripling of that sort of cash flow because every incremental dollar goes right to the bottom line.

Okay. So whereas Greens Creek has been kind of a steady producer, Lucky Friday has...

It's been a growing producer. It's been growing producer.

Yes. But in contrast to that, I guess, is the Lucky Friday, which has really seen some improvement over the last 3, 4 years. You've gone from 3.6 million ounces in 2021, 4.4 million in 2022. And now you're projecting just under 5 million in 2023. Can you talk about how this increase in production has come about? And talk a little bit about the new mining method that you've pioneered for this asset.

Well, Steven, the new production -- the increased production really becomes a function of a change in the work rules that we've had at the Lucky Friday. We had a period of time where there was a strike with the Union, and the Union went on strike, and what it was all about was work rules, was how do you operate. And we went from really a minor sort of managed mine to a management-managed mine. It was quite a struggle to get there. We got there. And what it allowed us to do is to continue to implement a solution to a problem that we identified. Well, frankly, it's been around for the existence of the mine. And that is this mine is quite deep and the seismicity is pretty -- it's as seismic as you get in a mine. And so over the years, Hecla has developed new technologies that has made this mine better. Last time we had a major change in the way we mined was in the late '80s. So for the last 40 years, we -- that has been a relatively successful way of mining at the Lucky Friday. But in 2015, we had an aha moment, where we said, "Geez, this is getting more difficult, and so what do we do?" And so we started down a path of doing a continuous miner, where we were taking out small bits of rock at a time, so that you didn't have the energy going into the rock that could create these seismic events. In that process, we actually came up with a drill-and-blast mining method that we call the UCB mining method. And that's Underhand Closed Bench. And essentially, what we do is we have a top cut that is under engineered fill that we then drill, what you might consider, long holes, and we do it over a distance of about 300 feet. And because of the blasting technology, we're able to be assured of the blast and we're able to be assured that we're getting the fragmentation that we need. And what happens is when we do this blast, which is 10,000 tons at one time, this material swells up into that open cut, and then we're now emptying that open cut, we then go and empty the next cut after we have backfilled with the [ pace ]. So we have an engineered [ paced ] above our head. And then I was at NIOSH, which is the old Bureau of Mines at their laboratory in Spokane, Washington. We were looking at the fill and how do we improve the fill. So we're constantly looking at how to improve. But in any case, we then will mine that second cut and backfill it, and then we will have a -- we'll repeat the process. The result of all this is that the mine is able to operate now at -- we should be at 1,200 tons a day compared to 800 tons a day with the old mining method. And I think we're going to be on a path, which allows us to get to 5 million ounces. But I think we're on a path to be able to further increase that throughput maybe 200 or 300 tons more. And if you get that, you're talking about almost double. All of this causes more ounces. We think incremental cost will decline because it's task-based mining where we have better utilization of our workforce, and you're going to see even better margins come out of this mine in the future. So really excited about the potential of this being as much of a cash flow driver with fewer ounces as Greens Creek. I hope that explanation was somewhat clear as to how the new mining method works. It's a little hard to think about it in just space, but I hope that was helpful.

Yes. No. I mean, I guess the proof is in the pudding, and that's been a big improvement over the last couple of years. And just remind us...

It's continuing -- and it's continuing to improve. That was my point on looking at the backfill. We're continuing to look at incremental technological improvements. I mean we're looking at what is the material that you put into that backfill that will allow it to set up -- set a faster setup with less steel. We actually put in rebar in that material, is there a way to put even less in there? So it's a lot of fun being able to make these incremental improvements.

And if memory serves, you still have a bit of capacity in the plant. Is that correct or can you put [ above ] 5 million ounces?

Yes, we can certainly do the 5 million ounces. Probably the biggest issue is on the filter and the load-out facility in the short term. Longer term, it's probably about grinding to do more. We are in the process of doing two major changes at the Lucky Friday. One is we are putting in a service hoist. So realize that for Lucky Friday, which I forgot to mention, is in Idaho, and it's really in the place where Hecla started. We've operated it for 80 years, but it is at the very bottom of the mine, we are almost 2 miles below the surface. So we have a shaft that is a 1 mile-long deep shaft that we go down, we have a tunnel that takes us 1 mile into the mountain, and then we have another shaft that takes us the rest of the way to the bottom of the mine, which we're probably [ 28 ] to 30 years before we reach the bottom of the mine. But what we're -- the 2 projects that we're doing that are quite important, one is putting in a service hoist, which is a hoist that's for men and materials -- men and women and materials. And so that the main hoist can just muck the material to the surface. And that will allow us to consistently do the sort of 1,200 tons or more in that shaft. The second thing that we're doing is we're disconnecting the mine from the mill. The way things have been set up in the past is, there's a very small set of ore bins that allows you to have basically a day's worth of material from the mine to the surface before it goes in the mill. Well, at these new rates that we're running at, we need more capacity. So we're building a bunker that will actually give us multi-days and conceivably even more than that, depending on ultimate -- as we expand the size of the bunker, we could really give ourselves quite a bit of flexibility. So that's -- those are important things that we're doing at the moment. All low capital. One of the things to remember about our assets, because they have been around for such a long time, we have lots of capital that's been invested over the course of their lives.

Great. And Phil, you mentioned earlier, labor relations. I think this is important for this operation to run continuously. And you recently signed a longer 6-year contract with the Union -- agreement with the Union. That obviously suggests much better relations with the workers. What has driven these improved relations?

Well, the biggest thing has been the realization that the new method of mining is safer. It is -- allows -- and the way the contract is set up, it allows employees to have more control over their future. The way the old method worked the more -- the most senior miners determined where they worked and who worked with them. So they had a lot of control over things. Now, it is based upon the individual saying, "I want to improve my skills and I can move up from -- on a tech level and get more money, get paid more." And so that has been one of the reasons. The other is this new mining method has really created a great deal of excitement at Lucky Friday. I've never seen the morale as high as it has been at the Lucky Friday ever since these guys came back from the strike. So it's been a 3-year positive atmosphere there. And the outlook looks really good. And people -- what they've said is we want to be assured that we can work. And so let's center into a 6-year deal that gives us the assurance. When that was proposed to me, I was concerned that it was going to be a big increase. We were in an inflationary environment. But fortunately, it -- the average increase is about 2.5% over the 6 years. So it's well within what we were prepared to do.

Okay. That's interesting. Obviously, this is a key topic in the mining industry right now, just given the cost pressures and lately the wage -- kind of wage inflation cost pressure we've seen. So it's about 2.5% over the life of the 6 years?

Each year. The average per year is 2.5%, and we certainly experienced quite a bit of wage pressure a year ago, not as much now. There is still the way -- there's no doubt there's inflationary pressure on wages. And there's no doubt that there's inflationary pressure across the board, but it all has certainly moderated from where it was a year ago.

Okay. And you're seeing that at your other assets as well?

Yes, yes. Certainly the Abitibi where Casa Berardi is, that's certainly more pressure than what we have in other places. But no, it certainly has come down.

Okay. Let's shift gears and talk about Keno Hill. This is your new acquisition. It's expected to restart in mid-2023. And I think this is a key catalyst for Hecla. Can you give us an update on how that's progressing?

Yes. So it's going very well. We became the owner of it in September of last year. So we're very new on the -- in the portfolio. And as you said, we will be in production in the third quarter of next year. The expectation is that we'll produce 2.5 million ounces of silver. We'll put lower-grade material in first. That lower-grade material will come from Flame & Moth, which is -- it's almost double the grade of Greens Creek and Lucky Friday, to give you a sense. And then we'll put in the higher-grade material from Birmingham, and that's how we get to the 2.5 million ounces, notwithstanding, it's -- we don't get to full production. So it's sort of 400 tons a day till the end of the year. And so it's going well. I'm actually on my way up there next week to do another visit. It's -- we're just in the development phase of trying to get enough advance in front of the stopes to where we have flexibility. At the end of the day, for these mines, as I mentioned at the Lucky Friday, we've created flexibility or we're creating flexibility. Same thing at Keno. We'll have material that we can -- come from 6 different working areas in both the Birmingham and the Flame & Moth, which, by the way, the Keno sits in the Yukon. It is in a historic mining area. The relationship that we have with the First Nations is good. There is other mining that they have in their territory. And so I'm very optimistic for sort of a long future. At this point, we've got about 8 years in front of us. So it is shorter lived, but we're just at the start of the exploration. And if there's anything that people should have taken note of about Keno at the -- in our most recent earnings release, it is the drill results at Keno, really quite remarkable, 3 places that we drilled and success at all 3 with extraordinarily high-grade material.

And timing-wise, when can we expect that first production?

In the third quarter. I'm not going to give -- be more specific than that. We will certainly try to run the mill to sort of work through the kinks because, yes, this mill has operated in the past, but we've made modifications to it, and so we want to make sure that it's running consistently. And then as I said, it will take the better part of the -- it will probably be as late as November or December before we're up to full production. We're going to produce 2.5 million ounces, so it's going to produce half as much as the Lucky Friday in its first year of being a Hecla asset. And then next year, it should produce sort of 4 million or 5 million ounces.

Is this where you see kind of your strong reserve upside in terms of your assets [ reserve ]?

Look, I think there's lots of potential -- sorry, I think there's lots of potential at all of the assets. But certainly, this is the one that has had the least work done on it. And it is an 80-square-kilometer -- square kilometers, square miles, I don't remember, land position that is really =people in Canada in the mining business, they all know Keno Hill. So it's a historic well-known district that has not had really any work done on it, modern work done on it in the last 30, 40 years.

I mean that makes sense, given your -- the predecessor company that ran it was a bit cash strapped. They probably...

Yes, that's right. But in fairness to them, they did two things that were great. One was they solved the environmental issue. So they worked out an arrangement with the federal government, and we're implementing that, and it is a fair arrangement for both the taxpayers of Canada as well as for Hecla. Because what happens is we get paid to clean things up, but if we decide to have an area that's for mining, we have to reimburse the government for what they -- for the cost and -- plus interest for what's been done. So that works out quite well. And then it is this just really untouched, about 200 million-ounce district.

Just switching gears, I want to touch on Casa Berardi. This is your only primary gold mine. And the near-term outlook feels relatively high, all in sustaining costs, expectations close to 2,000. So clearly, this higher gold price is going to help keep this operation free cash flow neutral. But can you talk about how Hecla will look to improve this, going forward?

Sure. I was actually there about 3 weeks ago. And I guess the thing I was struck by is we are moving from being from -- we were primarily underground, then we've been sort of underground and open pit, small open pit, where we're going to be primarily open pit. And there's a transformation that needs to happen at the property. I was just struck by the size of the equipment, struck by the number of pieces of equipment that we're having to be operated. And so we are very focused on how do you make this transition. And so just expect that. Expect the transition. We'll continue to explore underground, but there's no doubt that we will have more of our production come from the surface. Unfortunately, with the permitting, we're having to go to the next pit that we go to will be the lower-grade West Mine Crown Pillar pit, which, by the way, Casa sits in the Abitibi. It is north of [ Lazare ], north to the [ Rouyn-Noranda ], north east of Val d'Or, it's on the Casa Berardi break. And we have 37 square -- we have 37 kilometers of strike on the Casa Berardi break. And so we think there's lots of exploration potential and particularly underground exploration potential, and that's where we're focusing our exploration. But there is no doubt that we are in a transition to the open pit. So stay tuned. We're going to continue to try to modify things in order to make this operation better than what it has been. And it's been a good cash flow producer for us, but I think we're going to have to make some investment in it.

Okay. Great. And just -- I just want to talk a little bit about jurisdiction. You operate obviously in high-quality jurisdictions, Canada and the U.S. basically only right now. And you do have a strong silver growth profile. What are your thoughts on maintaining this jurisdictional profile? Would you look elsewhere to kind of maintain this?

So with respect to gold assets, if we were to develop or grow or acquire gold assets, we have a number of them within our portfolio. That's only in the U.S. and Canada. We are not prepared to go outside the U.S. and Canada for gold. For silver, it's different. We are -- silver deposits are so rare, notwithstanding gold is the -- considered the rare element, it is really difficult to have silver assets of size. So we are certainly prepared to go outside the United States and Canada. Obviously, if we can do something in Canada or the U.S. like we did with Alexco and acquiring Keno Hill, that's going to be our first choice, but we're certainly prepared to go to these other places. And we think we have the scale in the U.S. and Canada to be able to take on a little bit of political risk in other places. Having said that, we're not in any hurry to go to these other jurisdictions. We're just prepared to.

Okay. And obviously, this is an interesting topic because M&A has been heating up. We just saw Friday, the Pan American buying most of Yamana's assets that closed on Friday. What are your thoughts in general on M&A and consolidation in the silver space?

We're -- the silver space is already small. I mean you look at the number of choices of the companies you can invest in. So there's not a lot of room to do a whole lot of M&A. And certainly, we're looking at assets that we can acquire to add to our portfolio, but we don't have to do anything. I mean, we have within the portfolio growth -- as I said, we should get to 20 million ounces over the next couple of years. I would anticipate that we have projects that will become -- will finally reach a point that we can advance them to the development stage from the exploration or permitting stage. So we'll have those assets. But we're certainly on the lookout for other things to bring into the mix.

Okay. You do also own those -- the Montana assets. I think you are the...

That's exactly what I was thinking about.

Right. And those are, I think, the third largest undeveloped copper deposits in the U.S. Can you give us an update on that and where you stand on that?

Sure. And that's -- it's got the equivalent amount of silver, in addition to the copper. So yes, those sit in Montana as the crow flies, they are, I don't know, 50, 80 miles from the Lucky Friday. So quite close. They're in our backyard. We actually have lots of employees, who are from Montana that would love to work at those properties. What we have done, we've been on a permitting path in our predecessor companies because we acquired these assets 6, 7 years ago. And we continued down the permitting path they were on because they had been on it for such a long time. But we eventually concluded that it was -- and the path they were on was to get a permit to mine. And we finally concluded, look, we're having a continuous do loop, is there another way to do this. And we concluded there was and that was to actually ask for a permit that is only exploration, only the infill drilling to develop the mine plan. And so that's what we're -- that's the path that we're on. We have been on that for the better part of the year. Give us another -- we have to work with the Forest Service, give us another maybe later this year, early next year to see this thing submitted. And the threshold requirements for going forward are substantially lower. And so we think we can get underground. So we'll be developing the drift. We'll be putting the drill stations in and doing the infill drilling. Could be as soon as 2 or 3 years from now.

Okay. Is it fair to say that Montana is a more difficult jurisdiction to permit in than Idaho?

No, it's really -- to the extent you're talking about states, it's not as -- the issue is federally. It is -- you have to deal with the Forest Service, and you have all of the requirements. So no, it's pretty similar.

Okay. And just -- we're almost at our time here. I want to get your thoughts on the outlook for silver since that's very topical right now.

It's -- look, this is, in my view, the greatest place silver has been and certainly the last few hundred years and maybe longer. And the reason I say that is, you have all of the elements that have caused interest for gold and for silver as a monetary metal to be in place. So I won't talk about that, because what you have in addition to that for silver is a metal that is part of this energy transition. Silver is a fundamental metal. It should be mentioned with cobalt, it should be mentioned with copper, lithium, all these other metals, nickel. It should be mentioned because in order to have the photovoltaic power generation, which is clearly viewed as the most -- as the key renewable, you need silver. And you need silver in those photovoltaic cells. It takes 0.5 million ounces of silver to -- for every gigawatt of photovoltaic energy that you install, 0.5 million ounces. And so the growth has been extraordinary for silver for photovoltaic. And it looks like it's going to go even stronger. And so we're very excited about where silver is as this transition metal.

Right. And this is a reminder, anyone on the line who wants to ask a question can type it into the chat, I can bring it up. Just checking now, looks like there are no questions right now. I don't -- I guess we covered it at all.

Well, you never cover it all, but what -- what I will suggest is that if people do have questions, certainly reach out to Hecla at our website. Anvita is on the call, one of my colleagues. She's our VP of Investor Relations and our Treasurer. And she and her team would be happy to answer questions. I'm happy to answer questions. Maybe not this week, but I'm happy to answer anything. And in particular, people want to delve into silver, because there is a lot to say about where silver is, not just for photovoltaics, but also for EVs. It's like these other metals, the need of silver in an electric vehicle is, I don't know, 50% more than it is in internal combustion. So there's a lot more to say.

Is that -- just want to touch on that a bit. Is that just a function of the fact that EVs require a lot more circuitry and then there's a lot of silver in the circuitry?

Yes. Yes. So what people don't realize is that silver is the most conductive metal, more conductive than gold, more conductive than copper. And so as a result, silver is in your washing machine as -- on those electric contacts, they have just a little bit of silver.

Yes. Okay. Great. Well, I really appreciate you taking the time out of your holiday to join us today. I think that we covered everything off really well, and that was really good.

All right. Well, I appreciate it, Steven. Thanks for the opportunity. Thanks for the coverage.

Yes, no problem.