Hecla Mining Company

You spent almost $14 million on exploration in the quarter. You said that at least part of it was related to less COVID limitations, which makes perfect sense. But I mean, you still increased expenditures by about 50% since Q2. I just went through your September 14th exploration release again, and there you were stating that you were planning on replacing your reserves by the end of the year. That all said, walk me through your plans for 2022. And while you likely can't give me actual numbers, just sort of philosophically maybe walk me through your thoughts of expiration expenditures over the next several quarters, ideally by quarter if you can.

Well, Heiko, as you mentioned, realize we're still in the budgeting process for the coming year. So I'm not going to be able to give you quarterly information. But what I can suggest to you is that we'll have a level of expenditure that will be similar to this year. And the reason for that is we see huge opportunities at really each of our operating properties. And then we have a suite of almost 10 other properties that we see the need to explore because of the potential that they have to create real value for shareholders. And it just sort of applies across the board. So I'm not going to really go through any particular property But in the time I've been at HECLA, I've not seen us have this inventory of exploration opportunities. Having said that, we are judicious on the use of this capital. It's hard to come by. We have lots of competing interests for the capital, both expiration and operations-wise and acquiring additional assets. So it is a competitive process for the use of it.

That's a good answer, more or less what I was looking for. By the way, just to clarify, you're saying the same as this year, not the same as this quarter, correct?

Correct. I mean, I would anticipate, you know, our guidance is right at $40 million. I would expect this to be something similar to that in 2022. And we have the capability to do it, and we have the opportunity.

Makes sense. Okay. And then just one quick clarification. I've asked something somewhat similar a few quarters ago, but the numbers are just even more extreme now. You have essentially the equivalent of a quarter sales in cash on the balance sheet. You have more than twice that in available liquidity. And I guess where I'm going with this is when is enough enough?

Okay. Look, Heiko, if you look at us historically, we have viewed the need to have the balance sheet be relatively conservative. So levels of cash on the balance sheet of a couple hundred million dollars or more is something that we will likely have. Will we have double that? Probably not. We probably will have enough opportunities of where to deploy the capital that it won't grow to that sort of level. But you conceivably could if you look at the strength of these operations and if you have the right metals price.

Thank you so much. I'll get back to you.

Thanks, Aiko.

Thank you. Your next question comes from the line of Lucas Pipes from B. Riley of Securities. Your line is now open. Thank you very much, and good morning, everyone.

Bill, relative to my expectations for Q3, Greens Creek was a little weaker, and I just wondered Are you able to provide a bit more color? What happened? Maybe it was just my estimate that was too aggressive, but what's your take on Greens Creek and the outlook for Q4 next year? Thank you very much.

Sure, Lucas. As we tried to indicate, what we had was a shortfall in the number of workers, and it's really as a result of really the quality of these guys and their ability to move to different positions with different entities. It's a fly-in, fly-out operation for the most part for at least a large portion of the workforce. And so we had people that left, and we hadn't had the opportunity to replace them. We have now done that through two ways. One is recruiting more people, but we've also changed the schedule. And so you'll see things go back pretty much to normal. But I think it's going to be an ongoing challenge that we and everyone has. I mean, it's just a fact. In every business, there seems to be a shortage of people. We're quite competitive, and we have a great operation. We have a great culture there where people want to come to the mine, and so I don't think we'll have any long-term issues. Lauren, anything you want to add to that?

Phil, I'd just reiterate that, you know, we're all enjoying the mining sectors. We're all enjoying elevated metal prices and skilled trades, skilled miners are in high demand. And, you know, we should expect some turnover as a result, but I think it will be manageable for us.

And to follow up on this, is the competition coming from within the mining sector, or is it the broader economy where electricians can find a lot of work?

It depends on the skill set that the person has. Certainly for miners, it's within. For electricians, for mechanics, it's both within and without.

And... When it comes to retaining skilled labor, I assume labor rates will go up. And as we look out to 2022, is there a ballpark kind of cost inflation figure that we should be penciling in to account for this?

I think there's some increase that you'll see, but it is, frankly – You know, when you think about the fact that we spend an aggregate about half a billion dollars, a little more than that, it's really quite small, the impact that that will have on our cash flow. Lauren, anything to add?

I don't think we should anticipate across-the-board increases. We're being very focused on staying competitive in certain areas, so that helps to mitigate the cost exposure.

The other thing is I think we just have a compensation structure that's quite competitive, and there's a fair amount of pay that people get that is based on performance, and the mine has had very good performance, Greens Creek in particular, but we see that happening with CASA, with the improvements that we've made at the Lucky Friday with the new mining method, and as a result, As these mines are more productive, there is more opportunity for this incentive pay to pay out.

Very helpful. Thank you for that discussion. Switching topics, there's been a couple of headlines regarding smelter accountants on the back of high energy prices. And I wondered, are you seeing that impact you? If so, where would this be showing up operationally and ultimately maybe in the numbers? I would be keen to hear your perspective on this.

I guess the first thing I'd say is that we have frame contracts for our concentrates, so we don't have a concern for not having a home for the concentrates, which could be a concern. We have a small amount that we sell spot, but it's a very desirable concentrate, so no concern there. I think... Long-term, it's hard to say what the balance is, but long-term, it's a net benefit for us to have this sort of consistent production that we have in these contracts. Russell, anything you want to add?

Just to confirm kind of what Phil has already said, we have long-term customers that we've been dealing with for many, many years, and as a result of that, we haven't really seen any change in or a risk of us not being able to sell our concentrate as a result of the increase in power costs. What we did see, obviously, was the change in the prices of the underlying metals, which certainly was beneficial to us. But we didn't see the other side of that being the risk of, you know, a lack of a place to send the concentrate.

And the other thing to remember, Lucas, is that we sell all of our concentrates into Asia or North America.

Got it. Got it. Very helpful. Maybe one follow-up on this. In the industry, what's the take on this issue? Is it viewed as a kind of temporary energy crunch, or are folks maybe positioning themselves structurally to take into account a maybe less certain offtake environment?

Yeah, we were at the virtual Isaac conference and talking to our customers, and some of whom have these operations that were shut down, and that was the question we were asking them. And fundamentally it becomes a question of how Europe deals with getting the energy costs down. And it sure seems that they will have to do that. The impact of having such high energy costs is – um so difficult for that ultimately for that economy that um you know i think i think it it will it will eventually reverse but um uh there's a lot of politics that come into play as well got it thank you uh one last question for for me phil just from lucky friday wanted to uh circle back on the seismicity and and uh you know not just just

You know, I wanted to get your take. This has obviously been something you've been talking about for some time, and it sounds very encouraging, but just thought if you were able to elaborate on your prior comments and your outlook on Lucky Friday with controlling the price in the city going forward. Thank you for your perspective. Sure.

Sure. So so absolutely. The lucky Friday's biggest impediment to production is seismicity. Roughly 20% of the stokes available time is not available because we're having to manage seismicity. And so with this new mining method, we think we can change that number dramatically. Most important point is we're not going to have workers that are in these headings that have the potential for a seismic event or at least the same level of potential for a seismic event. And so we're very, very encouraged by the safety improvements, substantial improvement in the safety of the mind, particularly of a catastrophic safety event. So that's number one. And then as we fine-tune this, and fine-tune is maybe too strong of a description of where we are at this point, but as we improve it, we think there's the potential for maybe productivity improvements. Lauren, what would you like to add?

I'd just reiterate that being able to utilize the headings more than 80% of the time is a clear and obvious benefit in addition to the safety. And as we become more efficient with the method, we may be able to improve the productivity. So I think the three things taken together are very promising.

You know, and you look at the Lucky Friday and with the reserve and the resource that it has and the exploration potential that it has both down dip and on strike, and within sort of a two or three mile range around this infrastructure, the potential, this has... Being able to manage the seismicity has a huge, huge value benefit for the mine and the company.

Thank you. And then a quick follow-up on this. When it comes to the new mining technique, kind of what do you benchmark against? And then are you developing this expertise mostly in-house, or do you have consultants that you've brought in who are helping you on that learning curve?

Well, look, sort of the way this became apparent to us was as we were trying to advance the RVM and try to reduce the seismicity associated with this, we came to the conclusion that we could test this and potentially have this UCB method be an alternative or in addition to and we've decided that it's an alternative to the rvm and and we have had some assistance in some areas but for the most part it's been homegrown and i wouldn't say most part it's 95 percent homegrown certainly there's there's elements of drilling and blasting that we've uh we've brought uh people and the contractors that have helped us with that. But I'm very optimistic that Lauren's team and with help from others that we're going to really advance this and realize this is a patented mining method. It's patent pending, but we have applied for that because it is quite unique what we're doing. Lauren?

No, I think the only thing I would follow up with, Phil, in answer to Luca's question about benchmarking, I think really the only thing you can benchmark the new method against is the previous method at the Lucky Friday because the Lucky Friday really is a unique setting for from a geotechnical perspective. So to benchmark this against other mining methods I think is probably not a very productive exercise, but going forward we'll be benchmarking against our ability to produce in that mine from the previous method.

And you can expect, Lucas, over the course of the next sort of six months, we will provide quite a bit of detail and insight into how the method works and what the cycle is and how it changes the design of the mind, because all of those things have come into play and all of them are in process. We have been in a full-on test of this for over a year now, or I guess right at a year, And as Lauren said, 87% of the tons have come from this method. So we're not suggesting something to you that is at great risk. In fact, we've really taken the risk out of it over the course of the testing period that we've had.

Very helpful. Really appreciate all the color, and Phil and team, best of luck.

Okay. Well, thank you, Lucas. We're excited about it.

Thank you. Your next question comes from Michael Superco from RBC Capital Markets. Your line is now open.

Thanks very much, guys. Maybe drilling down a little bit on Greens Creek, can you talk about how things are looking quarter to date? Are you fully staffed at this point? Is throughput looking better? Are you accessing those higher grade areas or is it still too early to provide details beyond what's implied by the revised guidance?

Short answer to all that is yes. So you've seen our guidance so you can sort of do the math as to what we would expect the fourth quarter to look like. We fully believe we'll be in that range. We did change our schedule. The schedule had been in the process of being changed during the course of the quarter. That has, I think, fully implemented now, this schedule change, Lauren.

With the crews that we've made that transition to.

Right, right. Yeah, so it's not everyone that has, right, right. And then, you know, as far as hiring, yeah, we have the full contingent. We don't have budget, but because we always budget more employees than we need, and so we still have more hiring that we'll be doing, but we don't see any impediment at this point to reaching the guidance that we've provided.

So would it be fair to say that October looked better than September, August? Yes. Okay. Yes.

Okay. So we're mining it. So the issue was we were not mining in the 200 south. The 200 south is about an hour and 40-minute round trip.

Oh, yeah, it's 45 minutes one way with a loaded truck on the bottom.

Yeah. So we... We are able to mine there. We have the personnel. We were short 25% of the workforce, of the mining workforce, the crews that would be doing this work. So it was a major impediment, and it didn't become apparent to us until well into the quarter.

Right, right. Makes sense. Good to hear about getting better. And then maybe following up on the last question or part of the last question, And you've touched on it a bit on the call, but I didn't see the word inflation in your results. Obviously, that's been an ongoing theme for most of your peers. You benefit somewhat from not having a big cap expend ahead of you, obviously. But can you talk about what you're seeing at the mine level on the cost side in terms of labour, materials or any other impacts that you might be getting visibility on or that we might need to watch into 2022?

So the short answer, Michael, is that about 50% of our costs are labor, about 10% energy, and nothing else is double digit. So as I said, the energy costs are stable. The labor costs, we would anticipate inflation in certain categories of labor, but not across the board. And then with respect to everything else, yeah, there's going to be a little bit of inflation. But it's not the same sort of impact for us that you have for, you know, these larger economies of scale type operations. You know, remember these mines, you know, Cassa's 4,500 ounces a day. uh... you know two thousand tons a day twenty two hundred times a day at greens creek uh... you know a thousand tons a day lucky for a really really small uh... operations uh... so the inflationary pressure is really more on the labor side and i think that will be largely a trailing factor compared to the uh... the other uh... the other consumables lauren anything to add i think it you know for us it's

Our energy is essentially a fixed cost because of the hydropower. Labor will see some variation in some categories, and then it's kind of a mixed bag. We've been working to renegotiate contracts, and in many cases we've driven our consumable costs down. But in some areas they go up, steels up, cements up.

And you think about contractors, cost of contractors has absolutely increased.

Because of the good performance of the sector and there's a lot of work.

And you think of drilling and it's the same thing in assays. So there's no doubt, Michael, there's cost pressure, but on a relative basis it's muted for us.

And that actually, that last point was going to be my follow-up on the exploration side in terms of your program for this year and especially into next year, realizing that you're budgeting and can't get specific, but are you seeing impacts in terms of rig availability, contractor availability, and I guess those cost pressures as well?

So the good news is, given that the two programs are relatively, will be the same, um most of those rigs that we had in you know this year we will have next year um is there increased cost pressure absolutely so we won't get as much footage but that also becomes a design issue of how long of holes will we do So we're trying to manage that. I think we'll still get very good results even with the cost being higher.

Got it. Makes sense. And maybe finally for me, in terms of Rock Creek and Montenor, I know you've stated that you'd provide next steps early next year. I don't mean to jump the gun here, but can you maybe walk us through at a high level what that process is from here and how we should think about how they slot into the portfolio from your perspective?

Sure. I don't think anything has dramatically changed in that we still think that Rock Creek and Montenor are in production end of this decade, early the next decade. So we had taken into account the fact that it's a legal process, not a regulatory process that we're really in. And so you have to react to the decisions that the judge makes. um and and you know earlier this year the judge made a decision that um remanded or set aside the record of decision the biological opinion on rock creek so that's one project montanor is a separate project and what we have done or what we are in the process of doing is evaluating how to advance montanor and Rock Creek, but particularly Montnord because it's really the next one up so that we satisfy the decision that the judge, and it's the same judge that the judge made on Rock Creek. And so we're working through that, and that's really all I can say at this point.

Okay, great. Thanks for the answers. Much appreciated. Thank you.

Sure, Michael.

Thank you. And we have a follow-up question from Lucas Pipes from B. Riley Securities. Your line is now open.

Thank you very much. My follow-up question on Rock Creek and Montenor was just asked, but since I'm on the line, so I'll ask you a high-level question. So it's macro-related, but, you know, gold prices hanging in there. despite, in my opinion, really high inflation readings, but they're not breaking out. And I wondered, how do you look at the investor backdrop? Are there discussions about how to engage with investors in this environment? It seems to me like there's a disconnect between what I'm seeing on the macro side and how the group is trading. So I would appreciate your thoughts on that.

Sure. Well, I guess the first thing I'll say is that the equity investor is a price follower of the commodity. And so the ability to see for the equity investor to have an impact on the general view of gold is limited. You know, certainly sometimes you'll see the equities outrun the commodity, but we're not seeing that at this point. I think there is, you know, as I talk to investors, there's a general view that's similar to yours, but there just has to be more of a generalist interest in the commodity itself. And that hasn't come yet. I think it will come. Everything that you're saying about inflation is absolutely true, and you start to look at where real rates are given that inflationary level, and there really should be quite an interest in precious metals. I don't know, Russell, if you had anything to add to that.

The only thing I would add is certainly gold, I think it's got a lot of things in the macroeconomic environment to support it. Silver on the other side of that, which obviously being the largest silver producer in the U.S., we're highly leveraged to silver. We see that really being supported similar to gold, but then you also get the industrial demand as well. From the perspective of our portfolio, certainly we take a look at that, and we take a look at what's going on in the macroeconomic environment, and we feel quite good about the outlook.

Yeah, so that's a great point, Russell. You think about silver, and you think about this. You had the Biden administration that said they want half the vehicles to be electric by 2030, and we want to reduce the coal prices. power generation, and those two things require, as well as everything else, requires more silver in solar voltaics and wind energy and other things, so do in the electric vehicles itself. So you look at the outlook for silver, and it's not like the demand that we've had in the past. It is order of magnitude higher than what we've had previously. And it's just unlike any time in the history of the metal. You can go back to the early 1900s, and that was the last time you had a change in technology that caused demand for the metal in the same way that we're having with this energy change.

Very helpful. Again, really appreciate it, and best of luck.

Thanks, Lucas.

Thank you. Again, to ask a question, please press star 1 on your telephone keypad. And there are no further questions at this time for senators. Please go ahead.

Okay. All right. Well, thank you very much. I'll just leave you with, again, the invitation to take us on one-on-one. There's four tracks. You'll find the link on page eight of the press release. We encourage you to click on that link and set up a meeting with us. So thanks very much. Have a great day.

Ladies and gentlemen, that concludes Q3 2021 Hekla Mining Company earnings conference call. You may now disconnect. Thank you for your participation.