Hecla Mining Company (HL) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 and 2017 Hecla Mining Company Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to Mr. Mike Westerlund, Vice President of Investor Relations. Sir, the podium is yours.

Thank you, operator. Welcome everyone and thank you for joining us for Hecla's fourth quarter and year end 2017 financial and operations results conference call. Our reserves and results as news release issued last week, our explanation news release that was issued on Monday and the financial results news release that was issued this morning before market open along with today's presentation are available on our website. On today's call, we have Phil Baker, President and CEO; Lindsay Hall, Senior Vice President and Chief Financial Officer; Larry Radford, Senior Vice President, Operations; and Dean McDonald, Senior Vice President, Exploration. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and constitute forward-looking information under Canadian securities law, as shown on Slide 2. Such statements include projections and goals which are likely to involves risks detailed in our Form 10-K, Form 10-Q, and in the forward-looking disclaimer included in the earnings and exploration releases and at the beginning of the presentation. These risks could cause results to differ from those projected in the forward-looking statements. In addition, during this call we may disclose non-GAAP financial measurements. You could find reconciliations of these measurements to the nearest GAAP measurements in the accompanying presentation which is available on our website at www.hecla-mining.com. Finally, in our filings with the SEC, we are only allowed to disclose mineral deposits that we can reasonably expect to economically and legally extract or produce. Investors are cautioned about our use of terms such as measured, indicated, and inferred resources, which are not reserves, and we urge you to consider the disclosures that we make in our SEC filings. I will now pass the call to Phil Baker.

Thanks, Mike, good morning everyone. You might turn to Slide 3 if you have the deck available to you. 2017 was one of the most satisfying years for me and my 14 years at Hecla as the CEO. First, we posted our second higher silver production in our 127 year history and our third highest gold production. Second, we had slightly negative cash cost on a per silver ounce basis which is only happened three times before in Hecla's history, helping us add 21 million to the balance sheet. The thirdly and perhaps most importantly, we recorded the highest levels of silver, gold and lead reserves in our history. And I think this is remarkable achievement that had record reserves in three of our metals that we produced especially when you consider that we used price assumptions that are below spot and among the lowest in the industry. For silver, we used $14.50, and why do I think this is still important. Well, low cost reserve growth extends mine life and what that does, it allows us to increase throughput and make productivity improvements at our long lived operations, which will realize value for years. And we have time to also learn how to find even more ore and how to operate it even better. All of this means our risk profile can be lower than other operators. That means our properties can make more cash flow for more years. Now, Larry is going to give you an update on innovating our mines to make these productivity improvements and Dean is going to talk about the progress we've made at San Sebastian to not only extend the life of that mines oxide production but how we have now added to the already known polymetallic resource. We have development that is now close enough to do a bulk sample later this year. We think this mine is on path to maybe currently have a polymetallic stream of production with the oxide in the near future. Lastly at the Lucky Friday, there has been some progress on the strike. We have an agreement for binding third-party arbitration with the United Steelworkers, but it has to be ratified by the union membership. If they vote in favor in early March then three arbitrators will decide by early may whether Hecla's current offer or the terms of the expired 2010-2016 labor agreement, which we have modified by changes tentatively agreed to will be imposed for a period of three years. We are not happy about having to resort to a third-party to reach a resolution. We see this is an opportunity to have it resolved. Now looking forward to 2018 on Slide 4, we expect Greens Creek, Casa Berardi, and San Sebastian to continue their strong performance and hopefully the Lucky Friday will return to work. And once we have certainty on the Lucky Friday, we'll amend the outlook. Now, we expect silver production to be about 10 million ounces, gold production about 220,000 ounces, our equivalent production is about 35 million ounces for silver and 0.5 million ounces for gold. We see production increasing as 2018 progresses with the first quarter being the lowest of the year and this is just due to mine scheduling. For silver, we estimate a cash cost after by-product credits for silver ounces of about $2.25, slightly higher than 2017 primarily due to fewer ounces, as we transition underground at San Sebastian. And all-in sustaining costs to $12.75 primarily because more capital at Greens Creek, as we plan for its longer mine life. For gold, the estimate cash cost after by-product credits of $800 per gold ounce, about the same as last year all-in sustaining costs of $1,100. We estimate the capital investment will be comparable last year at around 100 million. We expect to increase exploration spending between 7 million and 14 million over last year, reflecting the continued growth in targets of Hecla's operations and number of our exploration properties. At this point about 9 million of the total is not yet allocated as we wait for results. We're now also guiding on R&D and expect to invest about 15 million this year with the largest project being fabrication of the Remote Vein Miner at the Lucky Friday. So with that introduction, let me turn it over to Lindsay.

Thanks, Phil. 2017 was a good year as shown on Slide 6 despite decreased silver and gold production. Metal prices increased over 2016 and cash cost after by-product credits for silver and gold ounce declined and lead negative in the case of silver, all contributing to increasing our cash position by 21 million year-over-year. We delivered strong cash flows in 2017. On Slide 7, you can see the standout performer was Greens Creek which generated a 101 million of cash flow followed by San Sebastian at 51 million and Casa Berardi at 19 million. All of these numbers net of capital expenditures. While Lucky Friday consumed about 16 million of cash given that was not in operation for most of the year. Silver operations continued to deliver strong cash margins of 100% of sales through the year or $17.25 per ounce, given the cash costs were basically zero. The gold cash margin is 65% of sales and $441 per ounce. We had a good fourth quarter financially but there're a couple of things I want to draw you attention to on Slide 8. Firstly, the income tax provision for the fourth quarter was 38 million and for the full year was 20 million. The tax provisions result in part from changes arising from the U.S. tax reform that was enacted before year end, plus the usual revaluation of the Canadian deferred tax asset as well as the current income and mining taxes in Mexico. The long term implications of the U.S. tax reform for us are positive given the Alternative Minimum Tax provision has been removed and the overall corporate tax rate was lowered to 21%. Secondly, we had hedging losses of 4.7 million for the quarter and 21.3 million mostly unrealized for the year in our zinc and lead hedge book due to the rising base metal prices. Remember, our strategy is not to try and time the market rather than locking healthy prices in the base metals to stabilize our revenue stream year-to-year, and we continue to take out contracts of what are above 10-year highs for zinc and 7-year highs for lead. Turning to balance sheet, our leverage ratio of debt to EBITDA remained about the same as last year at 1.3 times. We're able to maintain that ratio because we live within our means. While EBITDA decreased due to Lucky Friday, we still generated free cash flow thereby reducing the net debt denominator. We have 300 million of liquidity including the undrawn 100 million line of credit while our only debt outstanding come due in 2021, so I feel good about our financial position. So in summary, we had a great 2017 and are very excited about the potential for 2018 and beyond. I will now pass the call to Larry to talk about our operations.

Thanks, Lindsay. Let's start with a look at our improvements in safety. On Slide 10, we have a chart showing the overall safety performance over the past five years in which the all injury frequency rate has declined 55%. This is a statistic that we are very proud of and frankly we will work hard to reduce again this year. Also of note, Casa Berardi recently reached 1 million man hours without loss time accident. This is an incredible improvement from 2013 when we acquired the mine. Our Lucky Friday supervisory staff is also to be commended having operated the mine since the strike began without an accident. Greens Creek as can be seen on Slide 11 had another strong year producing over 8 million ounces of silver at a cash cost after by-product credits of $0.71 per silver ounce, contributing to this performance was record throughput of 2301 tons per day. I wanted to give you an update on some of our innovation initiatives at Greens Creek on Slide 12. You can see a tablet showing the status of all the mines fans, we have installed 14 variable frequency drives on fans with plans to install more in 2018 with about 40 fans still in manual mode. With the ventilation on demand system recognizes when men or machines enter or leave an area and adjust the fan speed accordingly, the fan then set either high or lows speed setting based on equipment type. When miners out of the heading for 10 minutes the fan automatically turns off. We expect by running the fans at an average lower speed when the stopes are inactive that we will save about $23,000 per fan per year. So if all the fans are switched over, this is a savings of about a $1 million per year. Also on the innovation front, we have one LHD capable of operation fee surface with the second one arriving in the second quarter. Moving onto Casa Berardi on Slide 13, this mine just keeps getting better and better. The 157,000 ounces of gold produced was the highest since we acquired the mine. This record production is primarily due to throughput as shown on Slide 14. The mill operated at an average of 3,764 tons per day in the fourth quarter of 2017, and 3,551 tons per day for the year which is 825 tons per day more than 2016 and approximately 1,350 tons per day greater than throughput of acquisition. In 2017, open pit feed accounted for 38% of the mill feed. We have run the mill at over 4,000 tons per day on a spot basis. We continue to steady increase in throughput further, but are careful to watch the recoveries to ensure that it does not come at a loss of ounces. We have commissioned our first autonomous truck as seen here on Slide 15 running on the 985 level. And the operator on surface opens the shoots to fill the truck then the truck goes to the shaft loading pocket downs to cell and then returns to the shoot to be loaded again. Other than stopping for fuel and maintenance, this truck should operate 24 hours a day. Moving onto San Sebastian on Slide 16, you can see that produced 3.3 million ounces of silver and 25,000 ounces of gold in 2017 at negative cash cost after by-product credit. Looking forward, we expect to underground off-site production as shown on Slide 17 to be ramped up in the second quarter, and we are using the stockpiled material to supplement production utilities ramped up. We also plan to restart limited open pit production from the North Vein in the second quarter. We expect cash cost after by-product credits to be higher this year because of increased costs from being mainly in underground mine and because of lower grades. We also expect to collect and process of both samples from the polymetallic Hugh Zone, an area that Dean will talk about in a moment. In 2018, San -- I am sorry, in 2018, San Sebastian has generated over a $150 million of free cash flow in the past two years. We expect the oxide underground will -- while making cash -- I am sorry, we developed the oxide underground while making cash from the open pits and we expect to develop the sulfide underground while making cash from the oxide underground, working our way possessively deeper. I want to commend the salaried man and Lucky Friday -- the salaried men and women at the after Lucky Friday on Slide 18 who have been working very hard during the strike maintaining the mine, doing some mining and development work, and most importantly doing it safely. Looking forward at the union membership ratifies the agreement to go to binding arbitration in March we would expect the arbitrators rule in by May. If all goes well, we would expect the mining start off shortly thereafter and the subsequent ramp up gold production extend into the fourth quarter. The ramp up is expected to include the return of our employees, training and infrastructure upgrades. The restart strategy will incorporate the implementation of Remote Vein Miner, the fabrication of which is proceeding as planned and we expect this machine will arrive in late 2019. I invite listeners to read the cover story in the January edition of Mining Engineering Magazine which features plans for this innovative and exciting piece of machinery. I'll now hand it over to Dean.

Thanks, Larry. Last week, we announced the highest levels of silver, gold and lead reserves in our 127 year history while keeping reserve price assumptions steady. Successful surface drilling in Casa Berardi defined new reserves, containing 248,000 gold ounces in the proposed 160 and 134 zone open pits. In combination with gains in gold reserves at Greens Creek and San Sebastian, total gold reserves reached 2.3 million ounces, an increase of 13% from last year. Silver reserves at Greens Creek and Lucky Friday increased and stayed stable at San Sebastian. Hecla continued with aggressive drill programs in the fourth quarter following success at San Sebastian, Casa Berardi and Greens Creek. A list of drill intersections is provided in the appendix of the exploration release, which was issued on Monday. This will give you insights into the high-grade resources we are confirming and expanding and that we're getting a good start in replacing reserves and resources. As you can see from Slide 20, Hecla reserve price assumptions of 1,450 per silver ounce and 1,200 per gold ounce are some of the lowest commodity prices used in the industry. On Slide 21, you can see that over the past 11 years, we have consistently replaced or grown silver reserves from 50 million to 177 million ounces in addition to the 138 million ounces of cumulative production over that time. This means we have actually added 263 million silver ounces in the past 11 years, with only 22% from the Greens Creek acquisition. At San Sebastian as shown in Slide 22, we have clearly defined mineralized structural trends providing multiple opportunities to find new high-grade resources to extend the cyanide circuit milling, but also to identify deeper polymetallic mineralization to potentially justify a separate sulfide flotation circuit. You can see the current Middle, North and Francine Vein pits in yellow outlines, the surface projection of the new Middle Vein reserve, the new underground ramp under development in black, and the green ellipsis where drilling is defining new reserves and resources. Let's highlight some of the recent drilling successes. Slide 23 shows a longitudinal section of the Francine Vein. The expansion from drilling of the polymetallic or historic Hugh Zone has occurred rapidly as continuous high-grade mineralization extends 500 feet both West and East of the Hugh Zone resource as defined by the hatch pattern in the center of the diagram. High-grade polymetallic mineralized pods containing precious metal and substantial quantities of base metals, zinc, lead and copper are shallower to the West and closer to underground development. Additionally, we've expanded the mineralized zone 2,000 feet to the West of the Hugh Zone resources and are working to define a continuous polymetallic mineralized zone of over 5000 feet of strike length. The longitudinal section of the Middle Vein in Slide 24 shows 8,000 feet of continuous oxide mineralization, but particularly exciting is the new high-grade polymetallic resources of the 97 zone that have been defined to the West in slightly below this oxide mineralization as noted in the black ellipse. Drilling has defined high-grade areas, new, the new underground ramp development, but also shows the potential to standalone the apparent horizontal control of this mineralization represented by the large red ellipse. This is similar to what we have drilled in parallel Francine Vein where a horizontal layer of polymetallic mineralization is below the oxide mineralization. There's a good chance that step out drilling will continue to expand this resource in several directions. At Casa Berardi, we had considerable drilling success again along in the main trends, particularly near surface as shown on Slide 25. And we expect this to continue into 2018 potentially adding reserves and resources. The red arrows in the longitudinal projection -- longitudinal projective the extension of many mineralized zones, down plunge throughout the mine and showed the significant potential to extend the mine life. Underground drilling were on multiple high-grade lenses of the 118 and 123 zones expanded reserves and resources down plunge and extended resources below the current workings. This year we plan to evaluate high-grade shoots identified by earlier surface drilling below the open pit areas including the 124, 134, 146 and 160 zones. The planned view of the Casa Berardi mine as shown on Slide 26, shows the current and proposed open pits in yellow and the areas of recent surface drilling in green ellipses. We confirmed the continuity and expanded near-surface mineralization of the 124, 134 East Mine Crown pillar in 160 zones defining their open pit potential. We're now drilling on new near-surface resources to the West at the Northwest, Southwest area that includes the West pillar resource. So far we have intersected broad zones of mineralization that look promising. In addition, we have made a priority to explore from surface to Casa Berardi Fault Corridor on our extensive property. We've commenced drilling of the Casa West, which is west of the mining lease and [indiscernible] prospect to the northeast of the mine. At Greens Creek as shown on Slide 27 definition and exploration drilling continue to have success at the East Ore and West zones which are higher in the mine and in time will become part of the life of mine plan. Lower in the mine we are adding two resources along some existing trends in the Southwest Gallagher and Deep 200 South zones. Elsewhere in the Company, we have resumed drilling of high-grade mineralized shoots at the Heva project along the Cadillac break in Quebec And with that, I'll pass the call back to Phil.

Thanks, Dean. I started the call commenting on how the year was a record a near record performance in so many important categories, and this is on top of what we did in 2016 where we also set a lot of records. And I hope you get a sense from our presentation that we think 2018 can be another great year just like '16 and '17 where we generated both growth and returns for our shareholders. So, with that operator I'd like to open the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of John Bridges from JP Morgan. Sir your line is now open.

I was just wondering some mining companies are forecasting sort of zero tax rates going forward, so admittedly probably have bigger NOLs. I just wonder what sort of tax rate we should assume going forward? And if we're trying to build up the tax rates, as a composite tax rate, what rate should we use for the U.S., Mexico and Canada?

Okay, I'll let Lindsay answer specifically, but it is very true that the tax reform act with the removal of the alternative minimum tax now allow tax preferences that were lost under that Alt Min system are now available to us. So we would expect zero U.S. taxes, but -- and Canadian taxes will be with the -- our Canadian operations, we would not expect significant taxes. I mean really the only place that we have tax liability that is significant, is really Mexico and I don't know what that rate would be Lindsay. Do you have on top of your head?

Yes, John with the mining tax Mexico run around 40% with mining tax included as well as the income tax. And if it helps you those for 2017, I'm talking about total expense John on the income statement for mining, the mining tax was around -- income tax in Mexico for us about 13 million and the mining tax in Mexico is about 3.7. So you got about 17 million of expense in the '17, so your view of Casa Berardi run at 40% and that would be the total tax provision.

I mean the San Sebastian, that's a down downturn.

Yes, where as in Canada, we'll have -- again it's 40%, lot of it is deferred because we have loss carry forwards up in Canada and the mining tax in Canada in '17 was around 5 million -- 4 million.

How long will those carry forwards last for in Canada?

Pardon me.

How long will the carry forwards last for in Canada?

Not that long, I think I got another year or so.

And then just -- that's a quick follow-up. In Mexico great to hear about the base metals you are finding, some of those things are relatively narrow 2-3 meters. What sort of scale of reserve do you need to create standalone sulfide operation?

Well, look, we are evaluating the ability the ability to use existing mills in the area. And with that, that really does make this something that conceivably could move into production rather quickly because there are mills with available capacity. So, we are really focused on that as well as putting ourselves in a position to do the cross cut into the Hugh Zone and do a bulk sample. Larry, you have anything to add?

Yes, just to add that -- pardon me -- I'm just getting over cold a bit. We have roughly about six years of resource in the Hugh Zone and so it's really the amount to do the cost of haulage and rental of a mill versus standalone. And we are really looking at -- we need about nine years of life before we really contemplate a standalone mill.

And our next question comes from the line of Brett Levy from Seelaus & Co. Your line is now open.

It looks like you guys are generating good free cash flow. Can you talk a little bit about any potential plans you might have in the capital market? And then also in the M&A area, what your priorities are whether it's more reserves or producing mines, more towards gold or silver or another metal? Just I mean -- your strong performance gives you a variety of options that I'm just wondering kind of what you are thinking about in terms of some of your priorities?

Glad to do that Brett. With respect to the capital markets, we are certainly engaged in following where the markets are, we looked at doing a refinancing of our existing bonds earlier in 2017. We will certainly keep an eye on that market and see if there's an opportunity to at some point to do something. But fundamentally you're right, our operations have the ability to carry the debt that we have, and we have this long mine life that really gives us a lot of flexibility to decide when and how we change our capital structure, we're also very engaged with our banks and we had done an extension I guess of that revolving facility last year. And so we think we're in good shape from a capital structure standpoint, but just looking for ways maybe to optimize it. With respect to M&A, look we're always in the M&A market looking at opportunities, we're very focused on silver and gold. Frankly, there's more gold opportunities than there're silver and that's just a reflection of the really the lack of exploration that's happened in silver over the course of the last 30 years. So, we look at both and I would suggest to you that we're not going to go too far I feel from the jurisdictions that we are in. So, having said that I think you can see that we're not in a position where we feel like we have to do M&A transactions, but we're prepared to do that and we are -- you can see the sort of money that we are investing in exploration and the success that we've had with that, the growth that we've had. And we have a large resource base that we're trying to move forward with Rock Creek and Montanore, so -- but we are always engaged in the M&A market, we don't try to make a view that albeit this is great prices to do a transaction these are bad prices to do a transaction, no, we really look at the quality of the asset, and if it has that long lived characteristic and low cost we'll capture the various price cycles that emerge.

And our next question comes from the line of Heiko Ihle from H.C. Wainwright. Your line is now open.

So, you're calling for a 155,000 to 160,000 ounces of gold now at all-in sustaining costs of 1,100 bucks, we were at I believe it was 1,170 something in 2017, 1,240 in 2016. Just sort of besides the increase in size and scope, walk me through some of the other changes that you're still making at the sites to do some more better returns on this because I am quite impressed with this? I mean I think we spent in all-in sustaining cost that is going down year-over-year.

Look, I think the most important thing is to continue to drive the throughput at the mines from both the surface and to give the underground the flexibility of operations where it can -- it has more places to go in order to manage it efficiently. And then improving recoveries, those are really the keys and I think as we continue to find more material, it really increases the opportunity maybe to increase the throughput. But focusing on those things, Larry what would you like to add?

Yes, we're just -- we have been able to run the mill at kind of its upper end, and by doing so, we now all know where we start to see a solution or solid losses. So now where we have enough data we can start to really optimize Casa Berardi in terms of what's the right throughput what are the right cut off grades both open pit and underground. And then delving it down a little bit more granular, the underground where as I mentioned earlier, we are setting it up so that it's getting more automated every day. Much of the ore now is going down to the 985 or it's going with an automated truck, as I mentioned to the shaft. Once it gets through the shaft, the shaft has been automated and this was done by and large with in-house resources there we didn’t bring in great contractors and do this. So, we are getting a lot of automation wins without a lot of expense. And then the open put, one of things that we have in front of this to actually clawback some more costs is doing contractor versus owner fleet analysis. And this is real early days, but by next year we want to have that analysis done and understand, if we can reduce our cost in the open pit.

And then just for some help with our modeling here. You guys saw a bunch of base metal over this contract, can you just remind me how long and what pricing they are hedged? I mean in the release you have the 2018 to 20 settlements i.e., given that 2020 already has fairly low numbers. I assume that’s a far out as it goes would be -- would that be an accurate assumption there was nothing in 2021 and beyond?

That’s right, there is -- that’s far others it goes because there is a -- it's just a lack of liquidity go beyond sort of two to three years.

So what detail assumed at some point at in time during calendar 2018 I should see 2020 fully set up?

Yes, look over the course of 2018, you will see more in 2020 -- '19, and you will see more in 2020 and we just continue to layering positions. We have a pretty disciplined program where we limit the amount of hedging that we could do on any given day, any given week, any given month, but there is a expectation that as the price reaches targets that we had that we are going to be putting in positions. And it's not a view that we are taking on the metal's price, it's really a way of protecting those revenue streams, giving us as a visibility in those revenue streams. And so, yes you will see us continue to put in positions.

Our next question comes from the line of Cosmos Chiu from CIBC. Your line is now open.

Phil, maybe first off on San Sebastian here. I'm just looking for maybe bit more guidance in terms of how to model the asset on a go forward basis, understanding that 2018 is a bit of a transitional year as we go underground. There's about two years where the reserves are right in terms of the oxides. How does that sort of fit in like how should we look at it?

Look, I am going to -- I can see this -- I am looking at Larry there's a whole stack of papers that he has, because really this is -- this is you know San Sebastian has been a just in time mine since we started it up, restarted it and we're still in that mode. The good news about it, the sulfides is there's the potential that be able to really model the thing out for a number of years. So it does change the game, if this bulk sample turns out right, but our expectation is to do the bulk samples this year and with that we'll have we'll be able to really put together what this thing is going to look like. But Larry what guidance do you think we can give at this point?

Well, we've given our production guidance for 2018, so we're looking at…

It's all coming from the oxides and that…

Yes, that's all oxide underground, and so '18 we're looking at about 16 ounces per ton silver and 0.1 ounce per ton gold, and then…

For this first modeling, the polymetallic, it's…

Yes, polymetallic, you can read our resource online. I invite you to do that. I am going to switch from imperial to metric here, but the Hugh Zone it's roughly 200 gram silver, 1.7% copper, 2.4% lead, and 3.3% zinc, so we're -- that's the ballpark we're talking about.

And when you think about the sort of the tonnage right that we'll ultimately mine this at. What would you -- what range should besides be thinking in terms of?

I don't see our tons per day moving around a lot, we're still going to be between 400 and 500 tons per day whether you know so in any given mill I should say. So right now, the [indiscernible] mill we're running at roughly 450 metric and it's going to change units…

Back to imperial, okay.

No, it's a good a metric, about 450 metric tons per day, it's what we're in the [indiscernible] mill at and we should run that into sometime in the 2020 at that rate.

And that's oxides.

It's all oxides, yes, that's all oxides, and that will switch here to sulfide and…

Yes just stay with the sulfide.

Stay in metric, so, the Hugh Zone or the poly -- let me describe the polymetallic a little bit. The Hugh Zone, Hecla was known about for while since…

Since decade.

Decade, yes, and there're some new polymetallic finds right off the Middle Vein. Actually, it's just very west of where we're mining oxides now. So we haven't put that into any plan yet and we probably will. as we finish up the drilling. The Hugh Zone, we're looking at five or six years of production and ideally, and as Phil intimated, this is kind of moving pretty fast and we need to finish up our own models before we provide something to the market that -- ideally we would get the Hugh Zone online concurrently with the oxide say in 2019, so that we are producing both oxide and sulfide same time. And ideally, we will keep backfilling the oxide feeds so that we keep going.

Yes, this is Dean. Just a quick comment because we have been talking about critical mass with the polymetallic, the resource that shown in the latest reserve and resource statements, on the polymetallics side really includes that Hugh Zone resource, longitudinal it shaded in. It does not include some of the new discoveries the polymetallics and the Middle Vein or the extensions to the Hugh Zone. We are modeling that up now. And so, one would anticipate a larger quite a bit larger resource with the polymetallics on the oxide into the spectrum we had drilled out to the east what we refer to as the East Francine and east middle, and that carries a resource about 2 million silver ounces. We've now infill drilled that we've modeled it and so we will be looking at the economics of that. So that is the possibility for a future oxide production.

And let me just give you a little bit of history as to San Sebastian and the Hugh Zone the polymetallic. 2005, we had identified this resource and why haven’t done anything with it was because it was too deep relative to the workings that we had and when we look at our plans that was just too much capital involved to access it. And at that time we were really viewing things where we needed to build a mill. And we just said that’s too much risk that we are taking with too much capital and taking too long to get a return on it. So what's happened since then is we've gotten deeper with the underground workings that we are doing off the Middle Vein that allows us really to almost be to the top of the Hugh Zone. So now willing to the capital outlays that we have in the maker so much less and we have come to the conclusion that there is mills that we can use in the area and we will just do that rather than build our own mill. So this thing has changed dramatically the economics of it have improved dramatically and then on top of all that the expiration is finding more mineralization. So it's not been in our plans and I'm sure it hadn’t been in years and other investors and so part of what we're trying to do is to just alert people that that's going to change its going to change very rapidly just like the oxide did it at San Sebastian.

So Phil I guess it sounds like we have a good number in terms of guidance for the oxides in 2018. It's definitely the oxide is going to continue to 2019. There is good potential here coming from the sulfides and there is exploration potentially of both the oxide and the sulfides. And so on that, where should we expect a bit more detail in terms of the plans for sulfites?

Certainly, I would not expect -- I guess what I'll say is that we will keep you updated as the quarter goes. But I think it's probably the second half of the year and maybe even towards the end of the year before we're able to give the future plans because as I said it's -- this is sort of just in time stuff. We would expect over in the third quarter to do this bulk sample. So and we're trying to do it sooner than that but we would expect by the third quarter to do the bulk sample and so on the back of that we'll be able to build our plans.

And then you're talking about timing here and maybe switching gears a little bit. It sounds like there's progress being made on Lucky Friday here, and Phil you mentioned about the vote coming out in March and then arbitration in May as well, if all things sort of go well. What kind of restart at Lucky Friday could you be looking at in terms of timing?

It's a better quarter to see the thing and restart maybe quarter and a half. Is that fair Larry?

Yes, as I said earlier, we would expect full ramp up in Q4 assuming May arbitration was successful and it's an assumption that that's the best we have right now. We will take advantage of any restarts to do some infrastructure, upgrade. There's a loading pocket in silver shaft that will recur probably with the contractor. And there're emergency egress shaft was commissioned in 1960 and we'll do some electrical upgrade there. So it's a good opportunity actually when we restart the mine to do some of that work.

Let's not get ahead of ourselves. Really, there has to be a ratification by the membership of this path and then -- but if they should do that then we clearly will either have the old contract or the contract that will be back at work.

And Phil, is it just a simple majority that you're looking for?

I don't know what their rules are.

And maybe one last question from me, more on the technology here. The Remote Vein Miner that you're putting in place or assembling at this point in time, I guess more specifically for Lucky Friday, right now. How is it different than some of the remote control mucking machines that we see underground these days? And I guess the other part of the question. Can this machine be used at Casa Berardi? Can it eventually be used at Greens Creek?

So, this machine is a mining machine not a mucking machine. It actually eliminates, replaces, drilling blast. So, it cuts the rock. It's taking tunnel boring technology.

So, it's a TVM?

Yes, to cut the rock, but the difference is it's in the stope, right. This isn't for development, that's not say couldn't be used for development, that is what we're designing it for is to do the stope is actually mine the stope. As far as this application other places probably it definitely would not have an application either at Casa or at Greens Creek, but it conceivably could have an application at other types of operations that have the geometry that the Lucky Friday has, and there's probably some epithermal vein systems that could -- that it could fit. Larry?

Yes, I mean it's you have to have the right rock conditions in terms of rock hardness.

Hardness, so -- okay?

Hardness and abrasion, those are the two things that really determine whether cutting technology is worth or now. Interestingly, the Colorado School of Mines has a test facility, so we sent down very large slabs of rock have them cut them and Lucky Friday is quite amenable to this technology. If you think of perhaps the tunnel boring machine and how those work and how they turned side to side if you will in a circle let's say it’s a clockwise. Well, this cutting machine will turn in the long access of the machine. So, I invite everybody to look at January's Mining Engineering, it’s a great article and really -- by the way this isn’t first machine in the world, this will be number two. Anglo Platinum has one running in South Africa now.

So, this is going to replace your drill jumbo? This is going to replace your explosive…

We will test it to see if that will replace that.

So could it potentially replace your LHDs as well?

No, no.

Is there a conveyer behind it? No, okay.

There is a conveyer behind it and right now it's contemplated to that, that conveyeral discharge into LHD. It's worth mentioning the principal goal of this exercise is to it's actually as the name implies run everything remotely outside of the stope.

And what drives that more than anything is safety. It's trying to manage the stress of the Lucky Friday. And so by having machine cut rather than drill and blast, there is better ability to manage it. And then by not having to have someone there at the phase that makes it safer.

I'll read the magazine, the article. I think Mike has sent it to us. So I'll come back later on, if I have any other questions. But it sounds really interesting.

No, it is. And it's just an example of the sort of things that Hecla is trying to do sort of across our business, and we are able to do that frankly because of the margins that we have and the mine life that we have.

And our next question comes from the line of Ryan Thompson from BMO. Your line is now open.

Cosmos kind of asked my question already, but can you just talk about the key differences between, if we assume that this dispute goes to arbitration, the key differences between the two sort of contracts, and how we should think about that from cost perspective?

Well, there is two key difference and there is a number of key differences, but the starting point really is schedule, the new contracts essentially puts the mine on 364 day a year schedule while the old one had a number of things that where they didn't have to work. And so, there's maybe a 10% difference in the number of available days with all, the whole mine working. The second one is where people work and the ability to determine the headings that people are in. The old system allows the most senior miners to make that determination. The new system allows management to make it. And that new system frankly is the system that you use at all mines that we're aware of and really in the U.S. and Canada, so we're not asking, we're not trying to do something exotic. But from a cost perspective, we're not making giving any guidance what improvements we might have in this but I think over time we'll see improvements but it's primarily because it's scheduled.

And how confident are you that the union workers will actually ratify the decision to go to arbitration?

We don't have a view as to whether they will or won't, it's up to them and we understand that and we'll accept whatever decision they make.

And just one sort of last one kind of circling back to the talk on the rock cutting technology, like if you went to the old south CBA agreement, is there any impact on the ability to implement that technology or cannot be done regardless?

No we can do it.

And our next question comes from the line of John Tumazos from John Tumazos Very Independent Research. Sir, your line is now open.

Phil, I am a shareholder and love everything you're doing and I am frustrated the stock market does [indiscernible] as much as I do. Do you expect to have a patient strategy of market recognition where it say gradually the Lucky Friday strike settles, silver rebound, Montanore and Rock Creek get permitted, you have different advances such as your three exploration assets releases the other day, or might you do something to try to trigger a faster recognition like a share buyback or selling one asset to focus on others and buying some stock or something like that?

I think it's more of the former John then the latter. But look we're always evaluating how we can deliver value to shareholders, so we don't view the other the second approach as being out of hand, so but more likely the former.

The market seems to not understand the several things that you've going on. Doesn't seem to digest everything in terms of…

I think that's the fair comment and we have nominated -- I think it really start with reserves, the fact that we calculate our reserves at so much lower of a price and if you think about it ever -- the most marginal ounce we have is going to have $2, $3, $4, $5 of margin relative to peers, and the market doesn't seem to pay enough attention to that, so the quality of our assets and the life that they have allow us to do the technology that we're doing to generate. You think the fan it's just fan at Greens Creek a $1 million a year that’s going to be over the next 10-15 years is a huge benefit to shareholders that the market doesn’t seem to pay much attention. But I think overtime they will and we will keep adding.

And our next question comes from the line of Trevor Turnbull from Scotiabank. Your line is now open.

I'll try and keep my questions brief. I just had a couple of different ones. One last thing to touch on with respect to the arbitration that’s coming up, I was just curious was this kind of a mandated outcome or is this something one or the other of your parties proposed that you go to arbitration?

Well, it was a function of this unfair labor practice hearing that it was -- it evolved as a potential solution because realized that there is no money that's involved in this hearing that we had about the implementation that we made of the new contracts. So we did that March 12 I guess and on March 13th they went on strike. And so you know I guess I would just characterize the judge is having encouraged us to try to come to some solution and the arbitration it's less than a perfect solution because its either going to go one way or the other but at least its resolved. So for everybody it just seems like that that's the best way to go to just for the third-party pick one or other.

It seems like a pragmatic way to forward anyway. I had another quick question when you mentioned M&A you always keep your eyes open more opportunities showing up in gold. What type of opportunity would meet your criteria though on the silver side? You said there just isn’t a lot out there and I would concur but just curious what would catch your attention on the silver side in the M&A space? Are you talking anything from production or new discovery to development stage, as it kind of belong that spectrum or?

Yes, we are capable of doing anything along the spectrum. But fundamentally, we are looking for things that have had the potential for long-lime lives general cost. And if it doesn’t have that then it's not something that we are really going to focus much attention on.

And then finally, I am changing the subject to one more time kind of housekeeping question with respect to CapEx sustaining. I think you gave some consolidated figures, but can you break that down a bit? We are just trying to get a better handle on where the CapEx is going this year?

So I think the probably best place to go would be Page 25 of the press release which gives you the calculation of our cash costs and all in sustaining cost guidance and it has sustaining capital by mine in there.

And does it also breakdown just non sustaining budgets from new CapEx?

We basically put everything in sustaining.

And then on the subject of CapEx, Larry was mentioning that if everything were to work out with arbitration such that you're headed back to operations. Do you take advantage to do some work there at Lucky Friday, any sense of some of that stuff he was talking about the electrical on the egress, the loading pocket, what kind of number that would be?

Any guess Larry do you remember?

It's just a vague recollection that I think it's in order $2 million.

Our next question comes from the line of Matthew Fields from Bank of America. Your line is now open.

I was looking at Page 25 of your press release and I noticed that there's no Lucky Friday CapEx in the guidance. As far as in that $2 million of sort of improvement you're ramping up let's say from May to December. Can we expect some augmentation to your $95 million to $105 million CapEx guidance for 2018?

Yes, you certainly could expect that and in order of magnitude I would say it's under $10 million, but Larry is that right or am I…

If we do go back to work how much capital would you expect that we would spend at the Lucky Friday in 2018?

Full year, it's -- so right now full year would be about $18 million.

So I'd say it's somewhere less than 10 million, do you think that's right or, call it roughly 10?

I mean we're just shooting from the hip not know exactly and go back to work. By the way, you asked question about how much the waste upgrade in the loading pocket?

Trevor did.

I am sorry, Trevor did. Let me give look to precise answer. That's -- so, there's an emergency generator, we will get installed as well and that is little under -- it's about $8 million total.

So, 10 million plus 8 million for '18?

That would be -- no that -- the 10 million is all inclusive.

So roughly $10 million if we go back to work.

So, including of augmentation plus 2 million of regular for 10 in total?

Yes, so what we're saying is that, if we run in a full year we would have spent 17 million to 18 million and we're just proportioning out that 10 million.

So, some of those expenditures that you're talking about would fall into 2019 as well or?

So the hoist upgrade and the loading pocket work are ongoing now. The fabrication has been done. We're spending money on that now, actually might even spend a bit in 2017. So, no, we've been pushing that work for just in the anticipation that we need the all the fabrication complete by the time the mining starts.

Okay, so I heard a lot of numbers, maybe we can take this offline.

Yes, but think of it in -- I am going to be surprised just knowing the timing of things, I'd be surprised if we're able to spend much more than $10 million in capital at the Lucky Friday in 2018. So at this point that's the number I'd use.

Okay and then switching over to the future. I saw the update on Rock Creek and Montanore, it sounds like Rock Creek is kind of in the pole position in terms of timing. I know there is a long way to go, but can you maybe give us a sense of when we are getting close enough in terms of permitting, feasibility studies, engineering to where you think we could see some actual construction dollars being spent?

Look, it all depends on when the decision comes out and can see and then depends on whether we are allowed to go forward or if there's an injunction. If there is -- if the decision comes out in the course of the next few months and there is no injunction then you can see us doing some work like this year, if not then its 2019 event. We have not projected any expenditure for that in the guidance that we have given, so we are just waiting to see what the results will be. Having said that, we're getting geared up to be able to move quickly, if we are given the authorization to do so. [Indiscernible] team in place to manage that.

And our last question comes from the line of Lucas Pipes from B. Riley. Your line is now open.

Most of my questions has been asked and answered. I wanted to follow up on the M&A side and if there is maybe a specific geography that you would be more focused on that others? And then also, if you look at the evaluation spectrum across the industry and introducing evaluation from asset levels versus the corporate level, how would you say this back up?

So, Lucas, are you still online?

I'm here, can you hear me?

Yes, so repeat the second part, second question.

So from the second part of the question was in regard to evaluations, obviously, there are asset level evaluations out there and then we have corporate evaluations be it for Hecla or some of your peers in the public markets. And I was curious, how those evaluations compared from your vantage point?

So, to the first question on the M&A, the jurisdictions, first the jurisdictions that we are in, right. We have lots of knowledge. We have infrastructure. We have the ability to leverage what we have. Secondly, [indiscernible] jurisdictions I mean specifically The Abitibi, Alaska, Idaho, Durango, Mexico and sort of [indiscernible] two of those areas. But then beyond that, we certainly are looking at those jurisdictions where there are, good geology where you have the potential for those long live low cost mines. And so, it includes Nevada and other places in Canada, British Columbia, the Yukon and other places in Mexico, Ontario. So, those I would say take 90% of our attention and then there's the occasional thing that is in other parts of the world that we go, again its worthwhile us taking the time to evaluate. With respect to the evaluation question, look, we clearly believe the market undervalues long lived low cost assets. And if you look at those companies that have been most successful, it's been companies that have had that characteristic. I hope it's not out of school to mention another company, but I have a lot of respect for Agnico Eagle and they've built off of LaRonde, which had that characteristic. And then they have added assets to that over the course of the last 17 years. And so, we view that the market does not put the right value on that type of assets, so when we do our math we see a lot more value in Helco than where the market has put us. With respect to competitors to the extent they have those set of assets, we think they are compelling competitors to the extent they don't. I know from my experience in the industry that you get down forced into doing things that you might not want to do because your mine lives aren't long enough to take the time to -- and care to do things in a methodical way or. Anything Lindsay you want to add to that.

No, I think that's nailed it.

Okay, thanks very much. Well we've gone longer than we typically do. We appreciate the interest and if you have any more questions, feel free to give Mike or I a call. Thanks very much. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect. Everyone have a great day.