Hecla Mining Company (HL) Earnings Call Transcript & Summary

Hello, I'm Phil Baker, President and CEO of Hecla Mining Company. I'm glad to be here and have the opportunity to talk about Hecla. And particularly glad to be here because the thing I hope that you take from this presentation is the place that silver has in the energy transition. It is fundamental to solar energy, and it's the growth that's happened in the demand for silver for solar has been remarkable. I will make forward-looking statements, and they are subject to the cautions that you find on this slide and the next slide and our 10-K and 10-Qs. So Hecla is a 132-year-old company, but we are actually the fastest-growing silver miner in the world. In 2018, we had 10 million ounces of silver production. Last year, we were at 14 million. This year, we should be at 17 million. And certainly, maybe next year, but certainly by 2025, we'll be at 20 million ounces of silver. We produce almost half of all the silver that is mined in the United States. And we should, in 2024, produce probably 40% of all the silver mined in Canada. We've got a very, very large reserve base mines that have extraordinarily long lives and have been in existence for a long time. So our capital intensity is quite low. And we're in the United States and Canada, the best jurisdictions in the world to mine. I'll just mention at this point that the deficit ceiling bill that was just recently passed included permitting changes that's making the United States really the -- it's on a path to being the best place to mine period, and I mean already is the best place from a tax perspective. But with these permitting changes, sort of Phase 1 is actually dealing with the actual permitting. The next legislation, which I expect in the next 2 to 4 years, we'll deal with the judicial review. And when that happens, it will absolutely be the best place to mine. We're a lowest-cost producer, longest-lived assets. We had a long mine life, great safety record. And then finally, we are net zero, and we're able to do that because these mines that you see are actually very, very small tonnage; very, very high grade. And so our carbon footprint from the outset is very small. We're a fraction of other producers. So I said, we've had reserve growth. This gives you the numbers. You can see, 2008, 2012, we averaged about 9.2 million ounces a year. '23 to '25, we'll average at least 18 million ounces a year. And this growth that we've had has been on a per share basis. You can see that both the reserve growth as well as the production growth has been basically 2x on a per share basis. 45% of all the silver produced in the United States. The next largest is Teck, which, of course, is not known for silver production. You have [CORE] mining, that's at 3 million ounces. And then you can see the other 2 companies. So it's really quite surprising how rare it is to have a silver production. Our mines, our Greens Creek mine in Alaska is actually the 11th largest mine in the world -- silver mine in the world, and it's the largest in the United States. Silver comes from really 3 places. It comes -- at least half of all the silver that's produced, it comes from Mexico, Peru and China. United States is about 4% of total worldwide production Canada, about 1%. And we have a large reserve base. And our grades -- and probably the thing that really stands out here is the grade of our deposits. This is on a silver equivalent basis. We don't talk about that very often, but it is useful here to show the comparison of Hecla to the other companies. When you -- since it's on an equivalent basis, what you have to realize is that the Pan American numbers that you see there is really primarily gold. I mentioned that we were low cost. Here, you can see how we were the -- are in the lowest third. And these costs are going to go lower, and I'll explain why in a moment. And then finally, as an introduction, we have the leading dividend policy. And the policy is unique because we have a base dividend that we pay. And then we have a dividend that is tied to the silver price in that -- if it's below $20, we just pay the base dividend. If it's $20 to $25, then effectively, you're getting a 4.4% return on the silver price. So this is a distinction that you'd have from buying an ETF. You actually are getting yield on the silver exposure that you have. And then you can see how it ratchets up as the price of silver goes up. If there's anything that I think could change, it's probably this, and that we will likely increase the amount of the dividend just because we're producing more silver than when we first put this policy in place. And it's been in place since 2010. I guess one more slide, and then I'll go into the mine specifically, and that's ESG. We take that seriously. We've been doing this, really our 130 years, I would certainly say, for the last sort of 40, 50 years, there's been a true commitment to the communities that we have -- that we're in. We are the largest private employer in those communities. We do have the best jobs, largest -- our workforce has the highest salaries in those communities that we're in. And they are leaders in the communities. They're the mayors. They're the school Board, Chairman. They're the Empire at the baseball games. They are truly engaged in the community. And then on top of that, we established a charitable foundation about a little more than 10 years ago. And what that does is it allows us to continue to support the community in times, year in and year out, regardless of how the company is doing. We have funds available to provide support to the community. It's been a very effective program. And then you look at our footprint. Because we're so -- because we have these high-grade low-tonnage underground mines, and because all of them are powered by hydro, our carbon footprint is less than 100,000 tons of CO2 emissions per year. And with it being that small, we take a very small amount of money and we buy carbon credits. And so as a result, we're net zero for -- we're net zero. So Greens Creek. Greens Creek is our flagship mine and has been for its life. It started in 1987. It was a joint venture between us and Rio Tinto. And in that time, you can see the number of tons that it's mined, and the ounce is 345 million ounces, 2.8 million ounces of gold, 4 billion pounds of copper and over 1 billion pounds of lead. So extraordinary mine that has really been the cash flow generator of the company. You can see the cash flow generation of $2.8 billion and the free cash flow of $1.9 billion. And it will -- it continues to be a mine that produces somewhere in the range of $80 million to $125 million, $130 million of free cash flow a year. And nothing seems is going to change with respect to that certainly over the next 10 years with our reserve life that we have. You can see for this year, we're on track to meet the guidance that we provided, 2.7 million ounces in the first quarter and at a cash cost of essentially 0 and all-in sustaining costs, we would expect to be in the 6 to $7 range. So just a great asset, and it's been a great asset for a long time. This shows from 2006 -- the cash flow generation that this mine has had, and it also -- you can also see the growth in production. And that's been the real thing that Hecla has provided. So in 2008, we became the operator of the mine. We bought Rio Tinto's interest. And the real focus we had in order to improve this operation was to increase the throughput. And by doing that, we've been able to lower the grade, and we've been able to extend the reserve life, and we've been able to generate even more free cash flow from the mine. And it's really about that the innovations that we put into the mine. I'll talk more about that with the Lucky Friday. The Lucky Friday is a mine that's been in existence for 82 years. And what we discovered as we have gone deeper in the mine, the seismicity has become the biggest challenge. And so for the last 7 or 8 years, we have worked to deal with the seismicity. And what the seismicity would do, it would cause us to have to shut down parts of the mine while we waited for seismic events to happen. And so we looked at different ways of trying to deal with this. The way we started with was to bring in a mechanical miner to cut the rock. So we were testing that. And the advantage of that is if we were just cutting the rock, then there's -- the energy is not being put into the rock in a rapid fashion, and you could control the seismicity that way. But in working through this, we discovered that we could mine it in a whole new way, drill and blast, which had a lot of advantages over the mechanical mining. And so we invented the underhand closed bench method of mining. And this method of mining, what it does is essentially determine when an earthquake will happen and where it will happen. So essentially, these seismic events are very, very small earthquakes. And with this mining method, we're able to control when the rock closes, when the earth moves. And it will move about a foot, a microsecond after we blast the rock. And then when you do that, you now have a very safe place to operate. You no longer have the risk of seismicity, and you can operate on a 24/7 basis. And so as a result of that, our throughput at the mine has grown dramatically. We were at 800 tons a day. Today, we're almost at 1,200 tons a day. I would expect over the course of the coming years, you'll see further growth in the Lucky Friday as we put in infrastructure that allows us to hoist more material to the surface. And so you're going to see this continue to grow. But at this point, we expect to produce roughly 5 million ounces a year, and we're almost to that rate this year. We're at the very -- just starting to hit that with our guidance. And you can see in the first quarter, 1.3 million ounces. And you can see where the costs are. So relative to the silver price, we have $13 or so of margin. So again, a very highly strong cash flow generating asset. And it's going to be doing this certainly for the next 17 years and even more. And what you can see on this slide is a long section of the ore body. And from the top of that colored section to the bottom is about -- not quite 1.5 miles, and going across that ore body from that colored section is about a half a mile. And it's almost vertical. So it's a -- the geometry of this is very, very conducive to mining. You can see what we've mined since 1997, and that gives you a sense of what we -- the mine life that we have in front of us. And we have a shaft that's in place. So we've put the major infrastructure in place. And at this mine, there's a relatively -- it's a relatively low capital mine for the next -- certainly the next 17 years, really just surface infrastructure that needs to be added in mining equipment. Very high grade. You can see the silver equivalent grade is -- in those dark sections, 35 ounces per ton, and that's what allows between the high grade and the new mining method. That's what allows us to increase the throughput and increase the mining. And here's a slide that shows the actual mining method. And so what we do is we have an upper cut that is below an engineered backfill. And so it's a very safe place to be. There's -- with what you have over your head and you drill vertical holes, about 250, 300 feet at one time. And because of blasting technology that has come into existence in the last 15 years, we're able to do this, where we're able to blast the -- all of that ground at one time. The material swells into that upper cut. We then come and mine that upper cut, then we pace backfill it. So we're again mining under an engineered roof. We will then mine the second cut, do the same thing with the backfill, then we'll mine the third cut. And we're mining all of this in rubilized ore that has no risk of seismicity. So as a result of that, we're able to operate on this 24/7 basis. So we go for the next decade with twice as much silver production as this mine typically has had in -- since 1962. Keno Hill. This is our newest mine. It is in the Yukon. We actually acquired this company in mine last year. But it's one that we have been engaged with and wanting to own since 2007. The company in 2008 entered into a streaming arrangement that really hamstrung the company. It was as a result of that arrangement, they were basically giving half of the cash flow of the mine to the streaming company. And what we did when we acquired the company as we also took out the stream. So note, this mine no longer has a royalty or a stream or any of those sorts of costs associated with it. And we're -- we have spent the last year developing to put the mine in a position to have consistent production. And again, it's a very small mine. This is 400 tons a day, but it's extraordinarily high grade. I was just at the mine last week, and the headings that I was looking at, and there were about 4 headings, were all in the 60- to 100-ounce per ton grade. Now that's not the average grade of the mine, but it's just remarkable how high grade this mine is. And this is a district. It's the second largest district in Silver District in Canada historically, produced over 200 million ounces and has really not been mined or advanced with the exception of what the predecessor company did because of environmental issues. So the biggest thing that company did was they dealt with the environmental issues. They entered into an arrangement with the government. And so those environmental issues have -- are set aside -- they're not a risk that we have to deal with. So that was a very important thing to advance this asset. So you can see the reserve that we have. It's 49 million ounces of reserves. That's 1/3 more than it was when we acquired it in September. So it's -- the reserves are growing rapidly, and I would expect to see them continue to grow rapidly in the coming years. We will, with the start-up of this mine in the next quarter, expect to produce 2.5 million ounces of silver -- and you can see the sort of cost structure that we would expect. And over time, as we continue to increase the throughput, you will see the cost structure decline. The fixed cost at all mines are quite high. So increasing that throughput is always something you're trying to do. So this gives you a long section of the Birmingham portion of the mine. And that area that's in red that circled in red, that development is now done. And so we're able to start in the third quarter operating from that area, and you'll see us be able to operate at this 400 tonnes a day. The other thing I'll just mention is the drilling that we're doing -- it has been very successful. The exploration drilling. There clearly is more mineralization, very close to this existing infrastructure. And you'll see us continue to develop what you're seeing here. We'll be in that Birmingham deep area in the next couple of years. You'll see us continue to develop. But I think this map will look very different 2 or 3 years from now with additional zones that we've -- we're clearly identifying with our exploration. And the Flame -- so that's one of the deposits. The other deposit is the Flame and Moth deposit. And you can see that we're have -- the development that we've done allows us to start to mine that area as well. And then you have Casa Berardi. Casa Berardi is our gold mine. And so we've -- Hecla has been a gold producer really, for the last 40 or 50 years, we've had Casa Berardi for the last decade, and Casa Berardi has been a good asset for us, but it's in a period of transition, and we're transitioning from being -- we started the mine, it was an underground mine. We then transitioned to underground and open pit. Now we're transitioning this open pit only. And so we'll be in that transition for the next 3 or 4 years as we develop the pits. Very long mine life. When those pits are developed. We'll be mining at a 4,000-ton rate, and this mine generates a significant amount of cash flow. So let me change gears and just talk about silver for a moment. So when I started with Hecla, which was 2001 or just a couple of years after this 1999 numbers, total silver demand was roughly 800 million ounces, 900 million ounces. Today, we're at 1.2 billion ounces. But realize that one of the largest components of that demand in 1999 was photographic. And of course, that photographic demand has gone to almost 0. And one would think that your overall demand for silver would have declined. But because of the increase in industrial demand and investment demand, we're at these new highs. And one of the real drivers of that, at least recently, over the last 5 years has been this photographic demand for silver. We now consume 140 million ounces in the photovoltaic sector, and you can see the other uses. The history of silver is quite interesting. Over it's the last 4,000, 6,000 years, it's really been monetary used for silver. And that has been consistent until early 1936 was really the last country that really had the monetary backing of silver. And so since then, it was photographic and then industrial started with the second world war, where the it was recognized that silver had attributes that were better than copper and copper was in short supply because of the second world war. So things started to move to silver, and that has continued and just continues today. Silver is the most conductive metal. So on all of these electronics that you see, it has a little bit of silver in each product. So it's a new world for silver. And it's in a place that has never been before where it has become such an important element for our modern world. So here's where the supply comes from. So the -- I mean, as you can see, the mine supply, that dark blue color has been relatively flat. And that's just because it is hard to have large silver mines. It's hard to grow silver. So really, as mines come on, the old mines go off. And we haven't had the growth that has been able to keep up with the demand. You can also see that the recycling has been very consistent. And if you go back in time, you'll see that it's roughly between 150 million and 200 million ounces a year. It used to be due to photographic. Now it's e-waste. And the price of silver is kind of irrelevant as to the amount of recycling that you have because it really is related to the amount of e-waste that you're able to process. And there's so little silver in that waste that it's not a real driver of processing that material. The other thing to realize is that silver is tied to other metals. It is primarily a byproduct of copper, lead and zinc mines. So the price of those metals are really, really important to the amount of silver that gets produced. And the solar energy requirement, this growth that we have in solar energy for the energy transition is expected to continue to grow. The energy information administration expects solar energy to really represent about 25% of the total energy generated by 2050. Well, to do that, you have to use quite a bit of silver. And just for the United States, you would need 750 million ounces of silver, and that's because it takes about 0.5 million ounces of silver to generate 1 gigawatt of solar capacity. And you can see how the demand for silver is growing because of the photovoltaic growth. While there has been thrifting, you can see on that [goldmine], it's thrifting. It is -- the rate of thrifting has slowed, and you're reaching a point where it's going to be very difficult to thrift much more than where we are today. And you can see how the amount of silver is growing. In fact, it's -- there's more silver that's being used on new technologies, new approaches to photovoltaics than there has been in the past. And with that, I'll just end by saying we -- Hecla is the largest silver producer in the best jurisdictions with the lowest cost and the fastest growing, and would be happy to have you reach out to us at our website or to call us at Hecla Mining Company. So thanks for joining me on this call.