Hecla Mining Company

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 Heckler Mining Company fourth quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Anvita Patel. Please go ahead.

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 Patel, 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, Hitler's President and CEO, Lauren Roberts, Hitler's Senior Vice President and Chief Operating Officer, and Russell Lawler, Hitler'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-Q 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.

Thanks, Indita. Good morning, everyone. Thanks for joining our call. Hekla is the world's fastest-growing established silver miner, surprising for a 130-year-old company. And I'm on slide four. There are four reasons that this is happening. Heckler's commitment to silver. Since our founding, Heckler has always been a silver producer, even when other metals and activities provided more margin. When I joined Heckler in 2001, investors and others encouraged us to sell or close our silver assets. But what I saw was that our large resource position could 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. And 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 Green Street we didn't own. This acquisition increased our silver reserves by two and a half times 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 the 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 four months since the acquisition, Keno's reserves are a third higher and will 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 five times 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 ore 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 this strategy. And today, whether analyst reviews reflected 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 subproduction to 18 million ounces. Realize that we only show three years because we've not put together a long-term plan for Kino. But I expect that we'll stay at this 18 million ounces or more from these three mines for at least a decade. 2022 had the highest production in our history, and 2023, 24, 25, I think are 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?

Thanks, Phil. I'll start on slide six. The double-digit production growth 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 three years, where our mines have generated more than half a 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 made equity investments in a loan earlier in the year of about $35 million, and then an additional $20 million in development at the Keenot Hill mine after the acquisition. We also invested $46 million in exploration pre-development 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 three mines was approximately $110 million for the year. While our 2022 adjusted EBITDA declined to $218 million due to the lower revenue and inflation-driven costs, our net leverage ratio continued to be below our target of two times. 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.

Thanks, Russell. I will start on slide nine. Greens Creek had another remarkable year. The mine produced 9.7 million ounces of silver, exceeding 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, 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 to 9.5 million ounces of silver. Cash costs are expected to be lower at 0 to 25 cents 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 six-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 feed 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 using the previous mining method. Mine is expected to produce 4.5 to 5 million ounces of silver in 2023, at all-in sustaining cost of $8.50 to $9.50 per ounce. Capital spent for the year will be in the range of $48 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 for the transformation of this mine, which began more than a decade ago with the sinking of the number four shaft to access the high-grade ore we're mining today. Recognition 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, Castleboro already produced approximately 31,000 ounces of gold for the quarter and 128,000 ounces during the year. The 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. Gas sobriety 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 and capital investment, the mine was near break-even in cash flow. For 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 unsustaining costs for 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. Castle Variety remains an important asset in our portfolio that gives us scale, exposure to gold production, and exploration potential on a large and underexplored land package on the Castle Variety 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 silver mine in Canada. Development at the Birmingham and Flamin' 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 to 3 million ounces of silver at an all-in sustaining cost of $12.25 to $14.75 per ounce. Capital spent to the year is estimated to be 42 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 had significant exploration success drilling three 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 of the district. With this, I'll pass the call back to Phil.

Thanks, Loren. Just a comment on the exploration at Keno. When we announced the Alexco acquisition, Alexco asked us if they should continue to explore, which they had a requirement to do so in either 22 or 23 because of political funding. And so while, as Lauren said, our first priority was getting 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 it clearly shows that Keno has the potential to grow dramatically. Now, if you'll turn to slide 14 for our three-year production guidance, we expect our silver production this year to increase 18% over 22 and continue to increase it to as much as 20 million ounces in 2025. Keno, with production between 2.5 and 3 million ounces in the lucky Friday at 4.5 to 5 million drives the growth. Our consolidated silver oil and sustained cost is expected to come in approximately $10.25 to $11.50 after byproduct 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 plan at Casa Berardi. We've increased the cutoff grade, lowered 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 from Casa Berardi. 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 cassettes, so negative cash production. free cash flow with 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 when we're 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 make CASA free cash flow generated. You know, we've changed the plan at CASA to improve the economics over five 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 four operations. We also expect to invest more than $30 million in exploration and pre-development with the focus on Greens Creek for us to expand the reserves and resources Cass Brardy 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 half a 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.

And at this time, I'd like to remind everyone, in order to ask a question, simply press star, then the number one on your telephone keypad. Our first question will come from the line of Lucas Pipes with B. Reilly Securities. Please go ahead.

Yeah, thank you, operator, and good morning, everyone. This is Nick Giles asking a question on behalf of Lucas. Can you speak to the cadence of costs throughout the year that could be baked into your guidance and You know, if you're assuming any level of either cost deflation or inflation at any of the three primary operations, and then specifically, is the lower cost guidance on Friday, is this fully attributable to the higher production? Thank you very much.

Sure. So you can almost every year at HECLA say that we're going to spend more capital, more exploration in Q2 and Q3 when – You know, 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?

I think it is the higher production and higher grades that are coming with depth that's driving the development.

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, you know, around 14% of cash flow in 2022. Do you have a target level in mind for 2023?

We just have our dividend policy, which we 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.

Okay, great. Well, appreciate the comments and congrats on the progress so far and best of luck. Thank you.

Your next question comes from the line of Joseph Rager with Roth MKM. Please go ahead.

Hey, guys. Thanks for taking the questions.

A couple of things. I guess first thing, just on the income statement there, It seems like there was some elevated costs kind of across a couple 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?

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, a great group of people to add to the company, and we'll see somewhat higher costs. The other thing is there was, 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 would be the biggest drivers.

In G&A, certainly that's it. You know, 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 troop of an accrual that we made in the fourth quarter on one of our closed operations. A non-cash troop.

Okay. Fair enough. And then at Keno Hill, I'm having difficulty kind of getting to the guide on the production compared to the startup of Q3. You know, is this suggesting that there's, you know, some high-grade material that's been stockpiled that's, you know, well above, you know, Birmingham's average? Or, you know, like what's the delta between if I take, you know, let's say 300 tons per day over the last two quarters at 1,100 grams, I don't get to your guide? or even into a ballpark.

So, Joe, we don't have anything stockpiled, but yes, there is higher grade material that is going to be going through the mill first. And it's just the way the mine plan is, it's just where the ore is, you know, essentially. You know, we're hitting that first, and so you will see over time the grade decline. Lauren, anything to add?

That's the explanation. Exactly that.

Okay. And that 2.5 is, just to confirm, is silver, not silver equivalent, right?

Correct. Just silver. Okay. This is, you know, Keno is amazing with the grades that we have. And, you know, and the exploration is finding more of it. So we're very, very excited with what we've got in hand. It is what we thought it would be.

Okay.

And then what's like a normalized expectation for capital spend across, um, you know, the four mines once, you know, you're done with some of these, you know, extra things you're doing this year and with the Keno Hill ramp up.

Look, I would say order of magnitude, 150 to $170 million would be sort of normalized. Uh, you know, hopefully would be closer to the one 50, but, uh, you know, we'll certainly have things, you know, that we look at and say, geez, we can get a better return if we make that investment. So sort of that range.

Okay. Thanks. I'll turn it over.

Your next question will come from the line of Jasper Veik with Valpal. Please go ahead.

Hello. So one of my questions about Keno Hill has already been answered, but I had one about Casa, Casa Berardi. So, um, This year, you will have higher oil and saving costs. But what's the plan? Because in your last technical report, you planned to have a transition to open pit mining, only open pit mining in 2017. How has that changed? Sorry, 2017, I mean.

Yeah, I'm not sure of the year that we had in the plan, but whether it's exactly that year or it's a year before or a year after, I don't remember. But that is the plan, you know, unless we find more underground high-grade material. We are very encouraged by the exploration that we have, but, you know, it's an ongoing process and, you know, it's hard to get more than, three or four or five years of underground reserves in front of us, because you just don't have the development available to be able to put the drill platforms in place. So, you know, it's more of a just-in-time process with respect to the underground.

Oh, I understand. And do you have any other initiatives? Because most part of your own standing costs are the cash costs. You said that you will try to find higher-grade materials so that you can increase the production in, well, not this year, but the coming years after that. Do you have any other initiatives to decrease the operating costs?

The biggest initiative is getting to the pits, the higher-grade pits. So the Prince Paul pit and the West Mine Crown Pillar pits are both significantly higher-grade than the 160 pit. And so with that will come more production. And you could see that in the technical report, that increased grade that we mine from those pits. Lauren, anything to add?

So I think that that captures it, Phil. It's a timing question. We're mining the underground material now and the 160 pit, which are developed and ahead of us. We will transition into the two larger, higher grade pits as soon as they're ready.

One of the things that we've had to deal with is the need for permits for those kits. And as we do the work, we uncover things that we've got to get all of the technical data in front of us in order to be able to get the permits for that. That work has been done, and so we're in the process of getting those permits and that will allow us to open the principal pit, which is the highest grade of the two remaining pits. But remember, we have in front of us more than a decade from those pits once they become operational.

Thank you. That was it for me. I will turn the call over. Sure thing.

Your next question will come from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Congratulations on all the progress, especially in the Yukon. Phil, my question is when will HECLA have the manpower capacity to digest more acquisitions? It's an unusual time, 5% short-term money. A lot of the small pre-production companies can't raise money at all. And just looking at the last week, Osisko Mining, which has a beautiful 7.4 million ounce deposit, 10 grams is languishing because they issued equity. MagSilver, which participates in a 20 million ounce silver mine. sold equity and sold down. And the companies that aren't as big or good as those deposits, there's just no market for their stock. So you could go on a buying spree and warehouse some deposits for whenever your engineers are bored and need a new project to build.

Well, John, I guess I'd make two comments. One is, as far as the capacity with employees It depends on what it is you're acquiring. Something that you are inventorying does not require much support. So those things are relatively easy to do. Things that we would need to develop, obviously, we have to have it compete with things that we already have, as well as just acquisitions in general. Remember, we have a half-dozen silver projects, plus we have another half dozen gold projects to explore and develop. So we don't need to add to our inventory. Having said that, John, I would agree with you. We should look and consider what things could be accretive to our capacity, our capabilities, and potentially try to bring them into the fold. but we don't feel compelled to do things. Thank you. We have growth with what we have. I mean, the growth that we have and its sustainable growth is something that HECTA has not had really in its history.

Once again, for any questions, please press star one on your telephone keypad. Your next question will come from the line of Dalton Barreto with Canaccord. Please go ahead.

Thanks. Good morning, Bill and team. Bill, I hate to beat the cast of horse to death here, but I do have a couple of questions. I just want to make sure I fully understand here. So it sounds like you're just waiting on permits for the principal pit. When do you expect to get them? And then, you know, once you get them, how soon can you be in there?

Lauren, do you want to answer the question?

Sure. So we're in the process of permitting WMCP, the West Mine Crown Pillar Pit. It's the next one in sequence. And over the course of this year, the process is not submitting a single permit application. It's a group of permit applications, some of which are already in and the balance of which will be in. by August. Then it takes a little bit of time for that to process. And then we have a reasonable amount of pre-strip and strip that needs to happen. And so this should start delivering ore into the system in about 2027, 2028. And the underground resource and F-160, the current pit we're mining, carry us to that point in time.

Thank you. So it sounds like it's reasonably long-dated here. So maybe this one's for you, Phil. Is there a set of conditions under which you would look at putting cash on care maintenance until you make these investments and you get the permits?

With the plan that we have, there's no need to do that. We're able to have it with a modest amount of capital injection to put it in a position to to continue to operate. That's part of the reason why we've gone to this plan, which slows down the production so that we don't have to put it on care and maintenance. That would be a pretty costly exercise and very disruptive to the workforce.

There's an incredible amount of activity in Quebec and Ontario, and there is a material risk of going into care and maintenance of those people going elsewhere.

Absolutely. That makes sense. Thank you. And then maybe if I could just ask one last one.

Bill, can we get an update on what's going on in Nevada and whether you're actually making some investments there, whether you're kind of approaching the Haunted Graben now, just anything that's going on there?

Sure. So the Haunted Graben was the primary reason for the acquisition in Nevada. And what we have encountered is an influx of water and we're having to, that was not anticipated, was not identified. We're having to do hydrogeology to figure out how much water we have and then a plan for how to deal with that water. So until that happens, and we have to have permits to be able to deal with the water. So until Until that happens, we're going slow in Nevada. And we also have lots of opportunities elsewhere to put our exploration dollars. So we're doing that. We are advancing at Aurora. We're having to wait until the sage grouse. What's the season called? The lecking season. The lecking season. Until that's that's done, which is, you know, I think in June and so you'll see us do some drilling there. But you know, otherwise we're we're we're evaluating it at Midas. We're evaluating the exploration that we've done. We had some great initial results and then we've not seen the follow through, so we're not going to going to push things until we are convinced that we have a good plan for for the exploration on Midas, Fire Creek.

So you're not going to see much expenditures there in 2023. Great. Thank you for that, Phil. That's awesome, man. Okay. Appreciate it, Dalton.

And we have no further questions at this time. I'll hand the conference back over to management.

Okay. Well, we appreciate you being on the call. I just want to remind you that we have some times available with management. If you'd like to have a one-on-one call, you'll find the information for that on the press release. So thanks very much. Have a great day.

Ladies and gentlemen, that will conclude today's meeting. We thank you all for joining.