Hecla Mining Company (NYSE:HL) Q1 2024 Earnings Call Transcript

Hecla Mining Company (NYSE:HL) Q1 2024 Earnings Call Transcript May 9, 2024

Hecla Mining Company isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing-by. My name is Rochelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2024 Hecla Mining Company Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Anvita Patil. Please go ahead.

Anvita Patil: Good morning, Rochelle, and thank you all for joining us for Hecla’s First Quarter 2024 Results Conference call. I'm Anvita Patil, Vice President of Investor Relations and Treasurer. Our earnings release that was issued yesterday, along with today's presentation are available on our website. On the call is Phil Baker, President and Chief Executive Officer; Russell Lawlar, Senior Vice President and Chief Financial Officer; and Carlos Aguiar, Vice President of Operations. Phil and Russell will make most of the presentation. Carlos, who's at Keno Hill, will make a couple of comments. We will all be available to answer your questions. Any forward-looking statements made today by the management team comes under the Private Securities Litigation Reform Act and involve risks, as shown on Slide 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. Non-GAAP measures cited in this call and related slides are reconciled in the slides or the news release. I want to remind you, if you would like to have a call with the management, you can do so by using the link under the section, virtual investor event, in our earnings release that was issued yesterday. I will now pass the call to Phil.

Phil Baker: Thanks, Anvita. Good morning, everyone. As you may know, I'm the Chair of the Silver Institute. And I have volunteered for this position because of the world's growing need for silver. And so I'm going to actually start the call talking about silver because I'm just very excited about the role that silver has in the energy transition. And something I didn't really appreciate, which is the silver demand in India. So let's go to Slide 3. I can't overstate how remarkable 2023 was for solar energy and silver. New investment in renewable energy was about $675 billion. And of that, $393 billion or almost 60% was for solar, and that's a 12% increase over 2022, and it's a new annual record. And this investment should continue.

Silver's photovoltaic or PV demand increased to 194 million ounces, and that's per the silver survey that was put out about four weeks ago. And that's about four times more than the demand 10 years ago, and it's -- and photovoltaics now represents 16% of global silver demand. Silver photovoltaic demand had about a 17% annual growth rate over the last five years. And in 2024, there should be another 40 million ounces for Silver. So to put that into perspective 40 million ounce increase is about the same as the total demand that you had for photovoltaics in 2013 and you'd be four new Greens Creek's and eight new Lucky Fridays to meet it. Let's go to Slide 4. About two weeks ago, I attended the India Silver Conference, where I learned five things.

First, India silver demand is pretty consistent at about 17% to 19% of global demand. You had to drop off during the pandemic, but it has since come back. And as global demand grows, so does Indian demand and Indians actually have to pay more for their silver because of 12% duties and taxes that they have. Now that's going down 1% per year until it gets to 3%. So it's going to improve for them. February imports set a monthly record of 77 million ounces. And if you take the first quarter in total, it exceeded all of the silver that was imported for the whole year in 2023. And what might be most surprising of all is the price of silver in rupee terms hit an all-time high in April. And then finally, I learned the policy commitments, the Modi government has made to renewables has really created a very large new market for solar.

And that was a lot of the conversation at the Indian conference was how they move forward with solar. If you put the solar and the Indian demand together, it's about 35% of silver's global demand, and they are both growing. And the three-year deficit is now over 500 million ounces, and I expect more deficit this year and into the foreseeable future. Silver's fundamentals are unlike any time in its history. Now turning to slide 5, let me talk about Hecla and its role with the deficit. With the Lucky Friday back to full production and Keno Hill ramp-up progressing, we are the fastest growing established silver company as a result of innovation and the efforts of our people. If you go back to 2010, we produced a total of 10 million ounces, Greens Creek produced 7 million ounces, Lucky Friday produced 3 million ounces.

This year's guidance is Greens Creek at around 9 million ouncesd, and Lucky Friday at 5 million ounces. That's a 40% increase without considering Keno Hill. And it's not just production growth for the sake of growth, we have maintained a low cost structure, in fact, the lowest in the industry. In 2010, Lucky Friday's cash costs were $3.76 per ounce. We're going to be around $250 to $325 million this year. And this improvement is due to investments that we've made before shaft that patented UCB and innovation that we made, mining method, the service hoist or storage bunkers and lots of other improvements. And over the same period, Greens Creek's costs have also remained consistently low. This year, we expect cash cost to be $3.50 to $4 and basic to be $9.50 to $10.25.

And Greens Creek has had growth in reserves. Since 2010, we've replaced 120 million ounces and added reserves to maintain a 13-year mine plan. When Greens Creek started its operations back in 1989, the mine had a seven-year reserve plan. I think Keno is going to be on the same path as these two mines. Turning to slide 6. There's really three messages for this quarter. First, our silver operations are strong and consistent with Greens Creek delivering a solid quarter and Lucky Friday achieving full ramp-up. Second, Keno Hills ramp-up is going well, and we're seeing incremental and steady improvements in the safety culture, and in engineering risks out of the mine. Third, we see the first quarter as an inflection point with strong free cash flow from our established silver operations, improving performance at Keno and the insurance proceeds, which we will use to delever over the next 12 months.

Finally, we expect to release our 2023 sustainability report at our annual meeting on May 17th. And we are, again, net-zero in 2023 on scopes 1 and 2 carbon emissions, where we utilized UN certified offset credits. And this year, instead of using credits, we are investing in research to sequester carbon in our operations. With that, I'll pass the call on to Russell.

Russell Lawlar: Thanks, Phil. I'll start on Slide 8. In the first quarter, we saw our financials begin to rebound as expected from the effect of the fire at Lucky Friday. We had nearly $190 million in revenue, an increase of 18% from last quarter. While we still invested free cash flow in key operations, we saw an improvement of approximately $30 million from the fourth quarter last year, maintaining our net leverage ratio at 2.7 times. We expect to see the net leverage ratio improved to less than 2 times over the next 12 months as we see the full effect of Lucky Friday coming back into production, as well as the continued ramp-up at Keno Hill. We also saw our positioning in silver continue to improve as 44% of our revenue was generated from silver, an improvement of five percentage points over 2023.

The margin at our silver operations have remained strong during the quarter at 47% of the realized price in silver. We expect the margins and the resulting free cash flow from these operations will continue to improve as we continue to see the effect of Lucky Friday for the remainder of the year. Turning to Slide 9. With Lucky Friday back to full production and the Keno Hill ramp-up going well, I'll speak a little bit about our financial priorities in 2024, which are hinged on the fact we have these great silver assets, which have generated over $600 million in free cash flow since 2020. I expect this free cash flow trend to continue and even strengthen as we see support in the price for silver and see the impact of Lucky Friday being back into production.

This free cash flow will first be invested in our operations, including the ramp-up of Keno Hill. We anticipate we'll spend $190 million to $200 million in capital, lower than last year because of the completion of projects at both Lucky Friday and Keno Hill. We also anticipate spending just over $30 million on both exploration and predevelopment with a plan to continue to add to our existing mineral endowment at our various operations and exploration properties. Our next priority will be to delever the amount drawn on our revolver which we've used for liquidity due to investments made at Keno Hill and Casa Berardi, while the Lucky Friday was out of commission last year. With strong expected EBITDA generation, I expect our net leverage ratio to revert to our target less than two times over the next 12 months.

Aerial view of a gold mine, with its winding roads and pits.

With that, I'll pass the call to Carlos.

Carlos Aguiar: Thank you, Russell. I'm [indiscernible] remarking the rest of the team and I will keep my remarks short. We started the year on a strong note with Lucky Friday achieving full ramp-up, another strong quarter from Greens Creek and Keno Hills improvement on send environmental electrics as we ramp up production. Casa Berardi's transition to often continue and we are focused on creating cost control. We have more work to do as we evaluate pending underground operations. I look forward to having all the 4 operations running at full trouble this year. With that, we'll pass the call to Phil.

Phil Baker: Thanks, Carlos. So I'm going to start on Slide 11 with Greens Creek, which reported another solid consistent quarter with a strong free cash flow generation. The mine produced 2.5 million ounces and the increase in production was driven by higher grades and throughput, and that throughput exceeded 25, 50 tonnes per day. To put that into context, when we acquired operatorship of Greens Creek, we were somewhere around 1,950 to 2,000 tonnes a day. Cost performance is in line with the planned cash cost per ounce worth $3.45. So all-in sustaining costs were $7.16 per ounce. That's lower than in the fourth quarter due to the higher silver production in the by-product credits. Capital spending was lower than planned due to timing of equipment deliveries and less capital development because of unexpected or where ramp was plan.

That's a great problem to have. First, free cash flow generation for the quarter was $20 million lower than the last quarter due to an increase in receivables. So we just have this working capital buildup, which is going to reverse. We're reiterating our production guidance of $8.8 million to $9.2 million ounces and our ASIC guidance of $9.50 million to $10.25 million. Throughput has continued to increase towards the 2,600 tonnes per day, and it requires a significant focus on maintenance. We're expanding our predictive maintenance practices in the middle of the mine to identify problems proactively. This has improved availability, increased college capacity and identified numerous opportunities that the team will focus on. But we are reaching the limit of the what we probably can achieve in terms of tonnage growth without sort of rethinking the kind of investment that we need to make.

Turning to slide 12. Lots of achievements at the Lucky Friday full ramp-up in the first quarter, producing 1.1 million ounces of silver, 1,000 days without a lost time injury, multiple days in March a record mill throughput over 1,300 tonnes per day. And to put that in the context that traditionally, the throughput rate was probably around 850 tonnes. We have completed two critical projects, the service hoist, which increased hoisting capacity about 25% and course ore bunker, which decoupled the mill from the mine with five days of stockpile capacity. And that's a big deal to be able to have those two things decoupled particularly when we're operating at these higher tonnages, the mill can't catch up otherwise. We continue to work on other improvements like grinding classification to increase throughput.

Cash costs in ASIC were $8.55 and $17.36 per ounce, respectively, higher than guidance ranges due to the ramp-up. So that will come down over the course of the year. The mine produced $12 million in free cash flow, including the $17.4 million insurance receipts and is on track to achieve production and cost guidance for the year and be cash flow positive for the year. Turning to slide 13 and this is where I'll spend the majority of the remainder of time. Keno Hill is improving, and we are learning and trying to do everything through the lens of safety and environmental improvement. And we are making it safer. The all injury frequency rate is down 41%, but it is still too high. Like every operation, we have a two-pronged approach where we're trying to change behavior and then we're also engineering and designing out risks.

And for behavior, we initiated a 10-step action plan to implement the best practices in training and reporting investigations of accidents and supervision. The program is about 40% complete and resulted in increased morale and has promoted a culture of transparency. So we actually have had more significant potential incidents, or as many as we had a year ago, but there's been more reporting. And the point of this is the key to a safe site is really having no fear and telling what is really happening. And the team is responding well to that. This is where we're making, I think, great progress. On the design side, we're focused on modifications to environmental controls to bring it to Hecla standards. And our standards in many cases, exceed the legal requirements.

And I'm struck by a comment that Brian Erickson, who's longtime Greens Creek leader. Some of you probably have met him on tours of Greens Creek. And he's now -- well, in June start overseeing but Green Street and Keno Hill and he rattled off a list of things not legally required, but that we need to do in order to meet Hecla standards. Now it's kind of -- like Greens Creek, it's going to be a long process. I mean we're still improving our standards at Greens Creek, a 37-year-old mine. But the geology at Keno and our culture warrants it. So for the next year or so, our focus is on better monitoring, getting more fulsome hydrologic studies, and making the water treatment plant upgrades. And design improvements are also being made operationally to make the mine more predictable and efficient, which makes it safer and more productive.

There are a number of things, but the biggest is the cemented tails batch plant, which is going to allow underhand mining at Birmingham. And whenever you have the challenging ground conditions like we have at Keno, nothing could make it safer or more productive than having miners mining under a constructed back. That's the underhand method allows you to do. This plant is going to be finished by year-end, and full conversion underhand mining will happen by the end of next year. So we're at 277 tons per day, and this is all from the Birmingham deposit, about 30% more than last quarter. We still have too much variability in how much we mine and mill each day, but it's getting a lot better, and we're seeing even more consistency in April and into May.

At the start of my comments on Keno, I said we're learning. And what immediately comes to mind is that, particularly in the shoulder seasons, in order to manage the clay from Birmingham, we need the hard rock from Mammoth deposit to make the crusher run better. So despite Mammoth being lower grade, and when I say lower grade, I think it's like 24 ounces per ton, so it's not super low grade, a portion of our feed is going to come from it in order to make crushing better. And you'll start to see that in the next few months. With 600,000 ounces that we've done this quarter, we're confident we're going to hit our production numbers, reach commercial and full production, probably before year-end, but only if we're making the mine safer and more environmentally compliant.

Now let me go to why Keno's life, we think, is going to be longer than the current 11-year mine life, and it's the exploration results we're seeing. So if you go to slide 14, last quarter I highlighted high-grade intercepts at Birmingham, including one which was 54 ounces per ton over 39.5 feet, as well as an intercept which was 1,000 feet deeper than any previous drilling, and it provided the evidence that high-grade silver mineralization can be hosted within the full depth of the 3,000-foot favorable basal quartzite host rock unit. Now, we've continued drilling, and the results we shared today are just as exciting, where there were two additional intercepts in the footwall vein, one of which was 55.4 ounces per ton over nearly 41 feet, and the second was 51.2 ounces per ton over almost 40 feet.

These are multiples of the sort of widths of what we normally see. These holes are near-existing infrastructure, and they exceed our model's expectations. We also have two surface exploration drills that we've just started targeting the 3,000-foot strike length and 2,000-foot dip length on the Birmingham vein system to test that deeper basal quartzite host. There's also other drilling targets outside of Birmingham to see if we have cracked the code for how this system is in place. We expect to be here for decades to come. Turning to Slide 15, I'll talk about Casa. Casa produced 22,000 ounces and an ASIC of just under $1,900, capital costs of about $13 million. All of this is as expected per our guidance. We did experience lower surface grades, about 10% to 15% lower than previous low-grade quarters, some of it due to processing low-grade stockpiles, and we'll be watching this in the coming quarters.

The mine had $9 million of negative cash flow and this is an improvement over the prior quarter. And this year is an investment year at Casa, but we do expect free cash flow reach the gap in production in a few years. So, the investment we're making this year is as expected. Going to Slide 16, shows our guidance for the year. We're affirming our production and cost guidance and before I open the call for questions, I just want to thank all the Hecla employees across all the sites and ask them to continue to focus on safety, both designing out our hazards and making safe choices. With that, Rochelle, I'd like to open the call to questions.

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