Hecla Mining Company (NYSE:HL) Q1 2023 Earnings Call Transcript May 10, 2023

Hecla Mining Company misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.03.

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hecla Mining Company First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Anvita Patil, Vice President, Investor Relations and Treasurer. You may begin your conference.

Anvita Patil: Good morning, Rob, and thank you all for joining us for Hecla’s First Quarter 2023 Financial and Operations Results Conference Call. I’m Anvita Patil, Hecla’s Vice President of Investor Relations and Treasurer. Our financial results news release that was issued this morning, along with today’s presentation, are available on Hecla’s website. On today’s call, we have Phil Baker, Hecla’s President and CEO; Lauren Roberts, Hecla’s Senior Vice President and Chief Operating Officer; and Russell Lawlar, Hecla’s Senior Vice President and Chief Financial Officer. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks as shown on Slides 2 and 3 in our earnings release and in our 10-K and 10-Q filings with the SEC.

These and other risks could cause results to differ from those projected in the forward-looking statements. Reconciliations of non-GAAP measures cited in this call and related slides are found in the slides or the news release. With that, I will pass the call to Phil.

Phillips Baker: Thanks, Anvita. Good morning, everyone. Thanks for joining our call. I’m going to start on Slide 4. April 16th marked the 15th anniversary of Hecla’s purchase of Rio Tinto’s interest in Greens Creek. And Greens Creek has been our foundational asset. It’s really what’s allowing us to be the fastest-growing established silver producer. With that acquisition of Greens Creek that we made those years ago, we made a commitment to primarily focus our efforts in Tier 1 jurisdictions. Now we are the largest producer of silver in the U.S., and soon in Canada. But Hecla is not just about jurisdictions, although I’m going to come back to jurisdictions at the end of our prepared remarks. Hecla is about creating real value on a per share basis by exploring, innovating and executing on our large property positions.

And it all starts with Greens Creek, which has provided the stability cash flow and about 30% of our production growth over the last 15 years. Its employees have done a phenomenal job of continuously improving, making Greens Creek a longer lived, lower cost, more productive mine. This is real value to shareholders. And Greens Creek’s success is allowing Hecla to invest in the Lucky Friday and Keno. The investment in Lucky Friday has allowed its production growth in the last 5 years to go from less than 1 million ounces to more than 4 million with more growth on the horizon. And substantial growth over the next few years will be primarily from Keno that should produce more than 2.5 million ounces this year and about 4 million ounces next year.

Since 2008, production has about doubled and is expected to be 17 million ounces this year, and then we expect to increase to about 20 million ounces by 2025, which we project will be our sustained production profile for the foreseeable future. Not only have we seen our production grow and expect that growth to continue, we’ve also been growing our reserves. In fact, from 2008 to 2022, our silver reserves have increased by a factor of 5. And most importantly, production reserve growth over the past 15 years has created value on a per share basis, and this is shown on the graph on the right. Our average silver equivalent production and equivalent reserve per share has increased almost 2x since 2008. This reserve growth is due to a core tenet of our strategy, and that’s to acquire large land packages in good jurisdictions, and we continue to execute on this with the announcement of the ATAC Resources acquisition, which brings us a huge land package of more than 650 square miles in the Yukon that’s near Keno.

We expect the transaction to close in the third quarter. April of this year also marks the 10th year of our acquisition of Casa Berardi, which — when we acquired it was solely an underground mine, and the transition to a combination of underground and open pit operations in 2016, and now we’re starting that transition to only being an open pit mine. This will require investment over the next few years the investment amount will depend on how long we continue mining underground and the margins it generates. But what this will lead to is mining higher grade open pit materials in a few years. This higher grade ore is in the permitting pipeline and the reserve grades are almost 70% higher than the current operating pit. And the same rationale for why we bought Casa Berardi still holds.

We have exposure to great geology, large land package, significant infrastructure, dore production and exposure to gold whose volatility is less than silver. As we turn to Slide 5, I will narrow our focus from the strategy we’ve been implementing over time to some of the details of the first quarter. The key takeaways are: it was a strong operational quarter with free cash flow generation from the silver mines that we’re on track to achieve our production and cost guidance and strong safety performance across the company. Greens Creek achieved record quarterly throughput, breaking the record set just last quarter and turned in very strong silver and gold production — record gold production, in fact. At Lucky Friday, we achieved our safest quarter when at full production, which is an extraordinary feat considering the 80-plus years Lucky Friday has been operating.

And this safety record was achieved while silver production exceeded 1.2 million ounces. This is the third time the mine has achieved that in the last 4 quarters. And the development of Keno Hill is on track for a mill start-up in the third quarter, with production expected to exceed 2.5 million ounces. Lauren is going to talk more about these properties in just a couple of minutes. This operational performance has translated into financial performance. For 2 consecutive quarters now, silver is now our leading source of revenue due to its significantly more silver production. And the cash flow generation of both Greens Creek and Lucky Friday was more than $31 million each, and combined for $69 million. Our capital allocation priority is investing in our mines to grow profit production.

So this quarter, we invested $17 million each in Keno and Casa and $14 million in the Lucky Friday. Greens Creek will see relatively more capital in the coming quarters. However, what is most important is our commitment to keeping our employees safe, and we have our lowest all-in — all injury frequency rate in our history because in 2012, we implemented the National Mining’s core safety program. We expect to release our 2022 sustainability report at our Annual Shareholder Meeting on May 23rd and give our high grade — and given our high-grade underground operations, we are net zero in 2022 on Scope 1 and 2 carbon emissions, which were offset with UN certified credits. By the way, the Annual Meeting will be both in-person and webcast, so I hope you’ll listen in.

And with that, I’ll pass the call over to Russell to talk about our financials.

Russell Lawlar: Thanks, Phil. I’ll start on Slide 7. One of the most impressive characteristics of our mines is their ability to generate free cash flow. Since 2020, our 3 mines have generated more than $620 million in free cash flow. This has been driven by our silver mines, which generate margins even at low silver prices. Looking at the chart on the left side of the slide, in the first quarter, we had a margin of $13.66 and which is 60% of the realized silver price. Over the past 3 years, the margin has been between 44% and 64%. Not many companies have silver mines that are this consistent. However, this cash flow hasn’t only been generated at our silver mines, over the same period, Casa Berardi has generated more than $65 million of free cash flow.

This cash flow generation allows us to consistently invest capital into our mines, and ensure we maintain healthy exploration budgets. This has always been a core strategy where we add value by reserve life extensions and conversion of mineral resources to reserve. Last year, we further invested this free cash flow into our operations with the result of the double-digit production growth that Phil discussed, with the acquisition of Keno Hill and the subsequent investments we’ve made there. This leads me to Slide 8, where I’ll discuss our first quarter revenue profile and balance sheet. During the quarter, our silver operations generated the second highest revenue and gross margin in our company’s history. Total revenues for the first quarter were $200 million, it was silver the highest contributor of all metals at 38%, followed by gold at 35% and 27% from base metals.

Revenues increased over the fourth quarter due to higher realized prices. And although we had more silver production, we saw lower volumes of silver sold in the first quarter relative to the fourth quarter. This was due to our shipping schedule where the fourth quarter had higher silver ounces sold as the silver concentrate shipment from Greens Creek was deferred from the third to the fourth quarter. Adjusted EBITDA for the last 4 quarters was $221 million, maintaining our leverage ratio at 1.9x, which is below our target of a maximum of 2x. As we go through this period of investment in Keno Hill and Casa Berardi, our net leverage target will remain at less than 2x, and we’ll take the necessary steps to keep adequate cash on our balance sheet with a target of around $100 million.

We sold 2.1 million shares under our ATM program during the quarter, amounting to $11.9 million to maintain this targeted cash balance and ended the quarter with $96 million in cash on the balance sheet and $240 million of liquidity. Before I pass the call to Lauren, I’d like to briefly discuss what we are seeing on inflation. While we are seeing inflationary pressures on fuel, steel, ground support and other key inputs stabilized quarter-over-quarter, labor cost and demand for skilled labor remains high across all our operations. The effects of inflation and labor costs are more pronounced at Casa Berardi. And with that, I’ll turn the — Lauren will discuss that in more detail. And with that, I’ll turn the call to Lauren.

Lauren Roberts: Thanks, Russell. I’ll start on Slide 10. Greens Creek, our flagship mine, reported another strong operational quarter with robust free cash flow generation. It was just in February this year that we reported the mine had record throughput in the fourth quarter, and I’m pleased to report that the first quarter achieved yet another record of 2,591 tons per day. We expect the mine will produce 2,600 tons per day by the fourth quarter. Silver production was 2.8 million ounces and gold production set a record of 14,885 ounces due to higher grades mined, increased throughput and better recovery. We experienced significant positive model variance for silver in the first quarter. Looking forward, we expect silver grades to be more in line with the model, and we reiterate our silver production guidance.

All-in sustaining costs for the quarter were $3.82 per silver ounce, a decline over the fourth quarter due to lower fuel prices and consumption because hydropower availability was higher during the quarter. Capital spending of $6.6 million was lower than planned, primarily due to the timing of equipment deliveries, which are expected in the second quarter. The mine generated $37 million in free cash flow, adding another strong financial quarter to its long history of free cash flow generation, which is nearly $1.9 billion since the mine start of operations in 1989. The mine is on-tack to achieve its production guidance of 99.5 million ounces of silver and AISC $6 to $6.75 per ounce per the year. When we require the remaining 70% of the mine in 2008 throughput was just over 2000 tons per day and silver recoveries were about 70%.

Today, with our incremental improvements, throughput has increased by 30% and silver recoveries have improved 12 percentage points. All of this was achieved with very modest capital investments supported by our culture of continuous improvement. This prepared mine is the 11th largest silver producer in the world, and I want to congratulate the team on delivering excellent results at this truly world-class asset. Turning to Slide 11. Lucky Friday produced 1.3 million ounces of silver at an AISC of $10.69 per ounce in the first quarter. This quarter marked the fourth consecutive quarter of silver production, exceeding 1 million ounces and a new safety record with an all-in frequency rate of 0.62 as of the end of April. Throughput increased by 5% to 1,059 tons per day compared to the fourth quarter, and the mine is on track to achieve our target run rate of 425,000 ore tons per year in the fourth quarter.

Capital at the spending at the mine was $14.7 million as we focus on 2 key projects, the Service Hoist and the Coarse Ore Bunker, which we anticipate completing by the fourth quarter. The Service Hoist is expected to debottleneck our production hoisting capacity, while the Coarse Ore Bunker will decouple the mine in the mill by adding the capacity to stockpile ore for multiple days. Both projects are critical in achieving our production goals. Free cash flow generation for the quarter was $31 million, reflecting the receipt of $6.7 million in January from a December 2022 concentrate sale. We are reiterating the production and cost guidance for 2023 with 4.5 million to 5 million ounces of silver at an all-in sustaining cost of $8.50 to $9.50 per ounce.

The team continues to do a phenomenal job. And as we look forward, we are more convinced than ever that this will be the best decade in the mine’s 80-year history. Moving to Slide 12. At Keno Hill, we remain on track for mill start-up in the third quarter, with about 75% of the preproduction development completed. Capital spend at the mine was $17 million for the quarter with significant progress made on mine development, underground infrastructure construction and mobile equipment purchases. Work is gearing up for the service construction season as well with the camp expansion and secondary crushing circuit modifications preparing to start. These 2 projects will position us to achieve and sustain the full permitted capacity of the mine. Initial ore feed for the mill recommissioning is being stockpiled from the Flame & Moth and Bermingham deposits.

Because of the high grade ore, we expect to mine in the fourth quarter, production is expected to exceed 2.5 million ounces of silver. We anticipate the mine could produce up to 4 million ounces of silver in 2024. Turning to Slide 13. Casa Berardi produced approximately 25,000 ounces of gold for the quarter at an all-in sustaining cost of $2,392 per ounce. Production was lower as expected due to lower underground tonnage and grades while the cost per ounce was higher. Production costs declined compared to the fourth quarter due to lower tonnage, consumables and reduction in contractor costs. However, the cash cost and all-in sustaining cost per ounce increased due to lower production. The mill continued to perform strongly, marking another record for quarterly throughput.

These mill improvements are a result of the investments we completed in 2021 and ongoing continuous improvement efforts by our processing team. Smaller underground stopes, more demanding stope preparation and lower grades have resulted in significant cost pressures, which were compounded further by inflationary pressures in 2022. These changes are leading to a reevaluation of the underground cutoff grade and mine plans, work will complete over the next several quarters. Since 2018, underground grades declined by 30%, which was anticipated as the higher grade zones were depleted. While our exploration has remained focused on underground targets, we have not yet seen significant exploration success. Underground exploration will continue with the aim of identifying higher-grade zones.

However, with the decline in underground grades and inventory, the mine is beginning to transition from an underground operation to a full open pit operation. The mine became a combination of underground and surface operations beginning in 2016 with the addition of the EMCP pit followed by the F160 pit in 2020. Higher grade open pit ore with reserve grades 70% higher than the current F160 pit is in the permitting pipeline and expected to be in production in 3 to 4 years. As Phil mentioned, during this period of transition to a fully surface operation, the mine will need capital investments in fleet and infrastructure, which we expect to be in the range of $100 million to $120 million exclusive of stripping. Casa Berardi mine has a substantial reserve and significant exploration potential and a large land package on the Casa Berardi break.

As we go through this period of investment in discovery, Casa Berardi remains our key mine in our portfolio that gives us gold exposure and diversification from the concentrate market. I will now pass the call back to Phil.

Phillips Baker: Thanks, Lauren. And we are reiterating our production and cost guidance for the year, as shown on Slide 14. Our silver production growth, which is sustainable beyond 2025 is based on Hecla having some of the best silver mines in the world with their low-cost structure and long reserve lives located in Tier 1 jurisdictions. This is the foundation that allows us to continue to grow, innovate and create value for our shareholders. And our long-term growth is embedded with our Montana properties that are the third largest undeveloped copper deposit in the U.S. with more than 1.4 million tons of copper and 330 million ounces of silver. And that brings me to Slide 15. I suspect that many of you don’t know what H.R.1 means.

If you do, you might be too into American politics. For 3 years, I was Chairman of the United States National Mining Association, and that’s the U.S. mining industries lobbying group. So I learned the significance of H.R.1 as the first bill of the new Congress. And whether it passed or not, necessarily the important thing, but what it tells you is the priority of Congress. The last 2 congresses had the House controlled by Democrats and their H.R. 1 was voting rights legislation, which was never passed. The 115th Congress, which the Republicans control, their H.R.1 was tax reform, which passed. You might recall that, that was in 2017, that was sort of the primary success of that Congress. The current 118th Congress, H.R.1 is permitting reform.

Exactly 1 year ago on this call, I told you that attitudes were changing in the U.S. towards mining and permitting reform with the recognition of the need for metals for the energy transition and for national security. H.R.1 far exceeds where I thought we would be today. What are some of the important elements to mining investors of H.R.1? Well, first, it establishes the lead agency for NEPA review. It allows the project sponsor to prepare the EIS so we can move much faster. EIS documents are limited to 300 pages. There’s a 120-day limit on appeals from the NEPA process. And the remand of a NEPA decision requires imminent and substantial environmental harm. These are all very, very significant reforms to permitting. And to show you how far the attitude has changed, Republicans has enacting the bill as a pillar of the negotiations that were happening last night.

So do I think that H.R.1 will pass as soon as it gets signed by Biden? No, I don’t. But it is further evidenced that the attitude among policymakers in the United States is positively changing and makes likely permitting reform in the next few years. And more importantly, it’s in star contrast to other jurisdictions. In Mexico, the largest producer of silver in the world, with their new law creates barriers to mining and mining exploration. There are just too many to mention. While Hecla is willing to invest in other jurisdictions, including Mexico, I am convinced that our strategy of primarily growing in the United States and Canada is the best long-term option for Hecla and our shareholders. And finally, I want to congratulate and thank all Hecla employees across all our sites.

It’s because of their dedication to safety, the environment, innovation and execution that Hecla is the company that we are today. And with that, Rob, I’d like to open the call to questions.

Q&A Session

Operator: [Operator Instructions]. And your first question comes from the line of Heiko Ihle from H.C. Wainwright & Company.

Operator: Your next question comes from the line of Michael Siperco from RBC Capital Markets.

Operator: Your next question comes from the line of Lucas Pipes from B. Riley Securities.

Operator: Your next question comes from the line of John Tumazos from Very Independent Research.

Operator: And your next question comes from the line of Joseph Reagor from Roth MKM.

Operator: And we have a follow-up question from the line of Michael Siperco from RBC Capital Markets.

Operator: And there are no further questions at this time. I will now turn the call back over to management for some final closing remarks. And ladies and gentlemen, this does conclude today’s conference call. We thank you for your participation, and you may now disconnect.