Hecla Mining Company (NYSE:HL) Q4 2022 Earnings Call Transcript

Hecla Mining Company (NYSE:HL) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hecla Mining Company Fourth Quarter 2022 Earnings Conference Call. . I would now like to turn the conference over to Anvita Patil. Please go ahead.

Anvita Patil: Good morning, Regina, and thank you all for joining us for Hecla’s Fourth Quarter 2022 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’ll pass the call to Phil.

Phillips Baker: Thanks, Anvita. Good morning, everyone. Thanks for joining our call. Hecla is the world’s fastest-growing established silver miner, surprising for a 130-year-old company. And I’m on Slide 4. There are 4 reasons that this is happening. First, Hecla’s commitment to silver. Since our founding, Hecla has always been a silver producer even when other metals and activities provided more margin. When I joined Hecla in 2001, investors and others encouraged us to sell or close our silver assets. But what I saw was that our large resource position can survive the ups and downs of the silver market. And we needed to be committed because the silver market would improve. And of course, it did. And because of silver’s role as an energy metal, we think the silver market will strengthen further.

I’m going to talk more about that at the end of our prepared remarks. The second reason for our industry-leading growth is the foundation that came in 2008 when we purchased the 70% of Greens Creek we didn’t own. This acquisition increased our silver reserves by 2.5x and provided the base and cash flow stream to further invest in the mines and others into that mine and other mines, including the Lucky Friday. And then the third reason is the investment in Lucky Friday has ultimately resulted in a new mining method, the underhand closed bench, or UCB, that is transforming this 80-year-old mine with a safer, more productive mining method that with higher grades allows it to double its historic silver production. And now the fourth reason for the growth is Keno Hill.

In just 4 months since the acquisition, Keno’s reserves are 1/3 higher and we produce about 2.5 million silver ounces this year and in excess of 4 million next year. Looking at the chart on the left, silver reserves are almost 5x where they were at the start of 2008 despite having produced more than 200 million ounces since then. Combining what has been replaced with the increase in reserve, Hecla has added 400 million ounces over the last 15 years. So we have 4 bodies that grow. To grow reserves and production, our strategy since 2008 has focused on large prospective land positions in the U.S. and Canada. And for a long time, the market didn’t differentiate between jurisdictions, but we stayed the course with strategy. And today, whether analyst reviews reflect that the market clearly values being in the best jurisdictions, and we are in the best jurisdictions.

Now looking at the chart on the right, from 2008 to 2012, we produced about 9 million ounces per year. Then we increased the average by about 50%, giving us a decade of about 12.5 million ounces. And now, we’re having another 50% increase in silver production to 18 million ounces. Realize that we only show 3 years because we’ve not put together a long-term plan for Keno. But I expect that we’ll stay at this 18 million ounces or more from these 3 mines for at least a decade. 2022 had the highest production in our history in 2023, ’24, ’25 and I think we’re all going to set new production records for the company. And this growth doesn’t require significant capital investment. Russell is going to talk about how we have the balance sheet and silver margins to achieve this and position us for even more growth.

Russell?

Russell Lawlar: Thanks, Phil. I’ll start on Slide 6. The double-digit production growth we see — we expect to see is being funded by our industry-leading silver margins, which have averaged more than 50% of the realized price of silver over the past few years. The direct result of these margins is the significant free cash flow generation we have seen over the past 3 years where our mines have generated more than $0.5 billion of free cash flow, including Casa Berardi’s contribution of about $85 million from 2020 to 2022. In 2022, we made the decision to deploy this free cash flow in capital projects and larger equipment at the Lucky Friday mine, where we invested approximately $50 million. The acquisition of Alexco in which we’ve made equity investments in the loan earlier in the year of about $35 million and then an additional $20 million in development at the Keno Hill mine after the acquisition.

We also invested $46 million in exploration and predevelopment programs in 2022. We did this while remaining committed to a strong balance sheet. On Slide 7, revenue for 2022 was $719 million, 39% from gold; 34% from silver; and 27% from base metals. Revenue in 2022 declined year-over-year due to lower silver prices and lower gold production with our Nevada operations on care and maintenance. Despite the lower realized prices, free cash flow generation from the 3 mines was approximately $110 million for the year, while our 2022 adjusted EBITDA declined $218 million due to the lower revenue and inflation-driven costs. Our net leverage ratio continued to be below our target of 2x. We ended the year with a strong balance sheet with $105 million in cash.

We also monetized some long-term zinc hedges for approximately $17 million as zinc prices declined in the fourth quarter. Our strong balance sheet gives us flexibility in executing our plans. I’ll now turn the call to Lauren.

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Lauren Roberts: Thanks, Russell. I will start on Slide 9. Greens Creek had another remarkable year. The mine produced 9.7 million ounces of silver seeing our guidance. Record throughput of 2,500 tons per day was achieved in the fourth quarter. In the time since we acquired full ownership of Greens Creek in 2008, and the mine’s throughput has increased 20% from 2,000 tons per day to 2,415 tons per day. Equally impressive is that the recovery rate for each metal also increased during this period. Looking forward, we will continue our production ramp-up during the year and expect to achieve 2,600 tons per day in the fourth quarter. Fourth quarter ASIC was higher compared to the third quarter due to higher treatment and freight costs because a silver concentrate shipment was deferred from the third quarter to the fourth quarter, and we conducted some seasonal maintenance activities to prepare for winter.

The mine generated $120 million in free cash flow and nearly $1.9 billion in free cash flow since the mine started operations in 1989. Silver production guidance for 2023 is in line with 2022 at 9 million to 9.5 million ounces silver. Cash costs are expected to be lower at $0 to $0.25 per ounce, while the silver all-in sustaining cost is higher at $6 to $6.75 per ounce primarily due to equipment purchases and increased development as we target 2,600 tons per day. Moving to Slide 10. Lucky Friday reported a record year as the mine achieved operational milestones, including record tons processed and the highest silver production in the past 20 years. We also ratified a 6-year contract with the union, which reflects our strong working relationship and gives us the stability to continue to optimize the mine for further production growth.

Silver production for the year was 4.4 million ounces. The UCB mining method is delivering impressive safety performance and production milestones at the mine. In 2022, we saw a 25% reduction in all incident frequency rate, an 11% increase in ore tons produced and a new all-time record for feet of development by company crews. Mill also is performing extremely well, delivering new all-time quarterly and annual throughput records as well as the largest ever year of zinc production. Just to put things in perspective, there has been a 68% increase in ore production since 2016, which was the last full year of production used in the previous mining method. Mine is expected to produce 4.5 million to 5 million ounces of silver in 2023 at all-in sustaining cost of $8.50 to $9.50 per ounce.

Capital spend for the year will be in the range of $48 million to $51 million related to the remaining growth capital associated with the production expansion and infill drilling to support the UCB production method. 2022 marked many significant milestones to the transformation of this mine which began more than a decade ago with the sinking of the #4 shaft to access the high-grade ore we’re mining today. of this success is coming from our peers as well. Lucky Friday is a recipient of the 2022 Society of Mining Engineers Murray Innovation Award for the pioneering UCB method. As I look ahead, I am more convinced than ever that the best decade of this 80-year-old mine is ahead of it, and I could not be more proud of the team leading this effort, and I am very grateful for the scores of others who have contributed to it over the years.

Turning to Slide 11. Casa Berardi produced approximately 31,000 ounces of gold for the quarter and 128,000 ounces during the year. Mill continues to perform very well, achieving new throughput records. However, challenging underground mining conditions resulted in a high proportion of lower grade open pit ore to satisfy the mill. All-in sustaining cost for the year was $1,825 per gold ounce, exceeding our guidance due to lower metal production and higher production costs, driven by inflationary pressures. Casa Berardi is more exposed to inflation than our other mines because it moves and processes more material than all of our silver mines combined and there is no appreciable byproduct credit. However, even with these challenges in capital investment, the mine was near breakeven in cash flow.

Our 2023 gold production guidance for the mine is reduced to 110,000 to 115,000 ounces of gold. This change reflects adjustments made to cutoff grades for inflation, fewer underground tons and more open pit tons as per the mine plan. All-in sustaining costs from the mine are expected to be $1,975 to $2,050 per ounce, higher than 2022, primarily due to lower gold production and higher sustaining capital associated with the expansion of the tailings facility. Casa Berardi remains an important asset in our portfolio that gives us scale, exposure to gold production, and exploration potential on a large and under-explored land package on the Casa Berardi break. At Keno Hill, we increased reserves by 33% to 49 million ounces of silver at 22 ounces per ton, among the highest in the world.

Keno Hill would be the largest and highest grade primary gold — primary silver mine in Canada. Development at the Birmingham and Flame & Moth deposits are on track with the mill starting in the third quarter and full production of 440 tons per day achieved by year-end. Our guidance for 2023 production is 2.5 million to 3 million ounces of silver at an all-in sustaining cost of $12.25 to $14.75 per ounce. Capital spend for the year is estimated to be $42 million to $44 million as we continue development, receive more equipment and complete our mill and surface infrastructure projects. While we are laser focused on development and getting Keno Hill into full production, our confidence in the exploration potential of this district continues to grow.

Moving to Slide 13. We have significant exploration success drilling 3 of our many underexplored targets. Some highlights from the program include 101 silver ounces per ton over 7 feet at Coral Wigwam, 10 ounces per ton over 11 feet at Hector-Calumet; and 19 ounces per ton over 11 feet at Silver King. These results demonstrate the strong exploration and discovery potential in the district. With this, I’ll pass the call back to Phil.

Phillips Baker: Thanks, Lauren. Just to comment on the exploration at Keno. When we announced the Alexco acquisition, Alexco asks if they should continue to explore, which they had a requirement to do so in either ’22 or ’23 because of funding. And so while, as Lauren said, our first priority was given the mine into full and consistent production, we allowed them to go ahead and continue that exploration program. And then, of course, we continued it once we closed the acquisition. We’re really glad that they went forward with the program because this clearly shows that Keno has the potential to grow dramatically. Now if you’ll turn to Slide 14 for our 3-year production guidance. We expect our silver production this year to increase 18% over ’22 and continue to increase to as much as 20 million ounces in 2025, Keno with production between 2.5 million and 3 million ounces in Lucky Friday.

That 4.5 million to 5 million drives the growth. Our consolidated silver all-in sustained cost is expected to come in approximately $10.25 to $11.50 after by-product credits. So that’s consistent with where we were this past year. At today’s prices, we see about $150 million of free cash flow that we’re going to invest in exploration, pay dividends, maintain our land positions and invest in Casa. As Lauren noted, we’ve made some hard decisions to change our underground mine plant at Casa Berardi, where we’ve increased the cutoff grade, lower gold production, but by mining less marginal material and lowering our costs. So this year’s gold production will be between 160,000 and 170,000 ounces about 110,000 to 115,000 ounces for Casa. And then we’ll have a further decline to about 145,000 ounces next year for the company.

With less production, all-in sustaining costs are expected to increase this year to around $2,000 per gold ounce. So we’re going to make an investment net of about $20 million into Casa, so negative cash free cash flow at Casa. I realize that in the past 10 years, we’ve only had one other year that we’ve had negative free cash flow. So this is just a period of time we’re more going to be investing in the tailings. We’re going to be investing in surface mine infrastructure before we put the higher grade pits into production, which is going to lower the ASIC and the Casa free cash flow generating. We’ve changed the plan at Casa to improve the economics over 5 years, not as good economics currently, but better economics over a longer period of time.

If you look at our total capital for the company, it’s about $200 million, and it’s split pretty evenly among the 4 operations. We also expect to invest more than $30 million in exploration predevelopment with the focus on Greens Creek for us to expand the reserves and resources. Casa Berardi on the underground targets to identify higher grade mineralization and at Keno Hill. And lastly, we’re going to be focused on Keno’s ramp-up, which we anticipate will cost approximately $9 million. So before we end our prepared remarks, I want to leave you all with a number, $1.1 trillion, and this is on Slide 15. The reason this number is significant is it’s the amount that has been invested this past year in fossil fuels and also the same amount has been invested in renewables.

And this is the first time ever this has happened. In the past, fossil fuel investment eclipsed renewables. No more. 2022 is really the tipping point. And since solar represents the fastest growing component of renewables, and it takes 0.5 million silver ounces for every gigawatt of solar panels that are installed, the appetite for silver is going to grow. So finally, I want to mention the remarkable safety performance we had in 2022. Our all-in frequency rate was 1.22 among the lowest in our history. And this operational and safety success is made possible only with the commitment and dedication of our employees. And with that, Regina, I’d like to open the call to questions.

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Q&A Session

Operator: . Our first question will come from the line of Lucas Pipes with B. Riley Securities.

Unidentified Analyst: Yes. Thank you, operator. This is Nick Joe asking a question on behalf of Lucas. Can you speak to the cadence of cost throughout the year that it could be baked into your guidance and if you’re assuming any level of either cost deflation or inflation at any of the 3 primary operations and then specifically, is the lower cost guidance on Lucky Friday, is this fully attributable to the higher production?

Phillips Baker: You can almost every year at Hecla say that we’re going to spend more capital, more exploration in Q2 and Q3 when our operations are in the more favorable weather, that’s not going to change this year. And then with respect to the Lucky Friday ad, it is all about the higher production. Lauren, anything to add on the Lucky Friday?

Lauren Roberts: I think it is the higher production and higher grades that are coming with that’s driving the .

Unidentified Analyst: Got it. Got it. Okay. That’s very helpful. And then just secondly, I wanted to ask about capital returns. You noted in the release that dividends were around 14% of cash flow in 2022. Do you have a target level in mind for 2023?

Phillips Baker: We just have our dividend policy, which we’ve had in place. There’s been a few adjustments to it in terms of the levels since 2011, ’12, I think, is when we first put it in place. And so we have the base dividend that we pay and then we have a dividend that’s tied to the silver price. And I’m not anticipating any changes in that in the near-term. But clearly, as we produce more silver relative to other metals. We clearly will have the ability to raise the dividend over time. But that’s not on the agenda at the moment.

Unidentified Analyst: Okay. Great. Well, appreciate the comments and congrats on the progress so far and continue best of luck. .

Operator: Your next question comes from the line of Joseph Reagor with ROTH MKM.

Joseph Reagor: A couple of things. I guess first thing, just on the income statement. It seems like there was some elevated costs kind of across a couple of categories, G&A, ramp-up costs, and also your closed operations costs. Was there anything in particular that drove that? Or is that just quarterly fluctuation?

Phillips Baker: I think the biggest thing to realize is that with the acquisition of Alexco, we saw an increase in costs associated with that. We brought people into our G&A costs, great group of people to add to the company. And it’s — we’ll see a somewhat higher cost. The other thing is there as a result of meeting a number of targets, there was a higher incentive comp that was accrued that falls into that category. Basically, all of our incentive comp falls into the G&A category. Those will be the biggest drivers. Anything…

Russell Lawlar: In G&A, certainly, that’s it. Ramp-up costs you mentioned, which is just the fact that Keno Hill as we spend money up there developing the capital, there is some ramp-up costs that run through the P&L. And then closed operations, there’s just a true-up of an accrual that we made in the fourth quarter on one of our closed operations, et cetera, noncash .