Hecla Mining Company (HL) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and year-end 2020 Hecla Mining Company earnings conference call. [Operator Instructions]. I would now like to hand the conference over to Mr. Russell Lawlar. Thank you. Please go ahead, sir.

Thank you, operator. This is Russell Lawlar, Hecla's Treasurer. Welcome, everyone, and thank you for joining us for Hecla's fourth quarter 2020 Financial and Operations Results Conference Call. Our financial results news release that was issued this morning, along with today's presentation, are available on Hecla's website. On today's call, we have Phil Baker, Hecla's President and CEO; and Lindsay Hall, Senior Vice President and Chief Financial Officer; Lauren Roberts, Hecla's Senior Vice President and Chief Operating Officer; Kurt Allen, Director of Exploration; and Keith Blair, Chief Geologist. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks shown on Slides 2 and 3 of our earnings release and our 10-Q and 10-K filings with the SEC. These and other risks could cause results to differ from what is projected in the forward-looking statements. Reconciliations of non-GAAP measures cited in this call and related slides, and cautionary language for our use of the term resource instead of reserves, are also found in those documents. With that, I will pass the call to Phil Baker.

Thanks, Russell. Good morning, everyone, and thank you for joining us for our call this morning. We recognize there's a number of calls today, so our remarks are going to be brief to allow time for questions. And I'm going to speak to Slide 4. You all recognize the challenges of operating mines in pandemic. Our fast response, and our industry being considered essential in the U.S., allowed us to produce significantly more silver than we guided at the beginning of the year, so 1.4 million more ounces we produced than what we had guided. So, in a pandemic, we had our highest revenues, fourth highest free cash flow, and third highest reserves in our history. Reserves would have been even better if COVID-19 hadn't reduced our drilling by 1/3 and slowed down assay. But COVID didn't slow down our growth in U.S. silver production. We are now producing 50% more than we were 3 years ago. This growing U.S. silver production allowed us to generate $90 million of free cash flow in 2020, and over the last 18 months, we've generated $152 million. We now have $130 million in cash and $380 million in liquidity. Our silver industry-leading dividend policy that ties dividends to the silver price, along with the payment of a minimum base dividend, returned 10% of our free cash flow to shareholders this year. We accomplished this by recording our lowest all-injury frequency rate of 1.22 in our history. And I think our safety culture is a big reason why we've responded so well to the impacts of the pandemic. We've continued to help our communities with testing assistance, contributions from our foundation, and I think our unique Hecla Bucks program, which gives employees vouchers to spend in the local communities. With all that we've had to deal with, 2020 was a remarkable year. And with that, I'm turning the call over to Lindsay to update our financials. But before I do, with Lindsay's retirement in a month, I want to thank him for his leadership, particularly in 2020. We had the need to refinance our debt, which he led. And of course, we've had to deal with the pandemic, which he was instrumental in our success. Lindsay?

Thanks, Phil, and good morning, everyone. Turning on Slide 6, we began 2020 with our refinancing of our senior notes and extending the maturity of our long-term debt to 2028, and ended the year with $130 million in cash, as we generated robust free cash flows of $90 million, aided by strong margins and higher prices. Our adjusted EBITDA of $224 million reduced our net leverage ratio to 1.8, beating our target of less than two, while providing a liquidity position of $380 million. Our operations generated $53 million of free cash flow in the fourth quarter, with Lucky Friday generating positive cash flow of $1.7 million, as the mine achieved full production in the quarter. Turning to the income statement, you will note the 2 expense items for the year, loss on derivatives of $22 million and ramp-up costs of $24 million. Included in that derivative loss is around $15 million for gold and silver puts we acquired to protect against downside price risks. However, based on the strength of our operations, balance sheet, and liquidity, we do not anticipate the need for such a program in the future. In addition, in 2021, our cash care and maintenance costs are expected to be approximately 40% less than the cost incurred in 2020, due to the Lucky Friday mine being in full production. With lower cash inflows -- excuse me, outflows for care and maintenance expenses, and no anticipated outflows for put premium payments and higher silver prices we expect our '21 free cash flow generation to grow from our 2020 performance. Before turning it over to Lauren, I would like to thank Phil and the Board for giving me the opportunity to be Hecla's CFO over the last 5 years. I'd also like to thank the finance team, who supported me. Mindy Lui [ph] has been with me for many years, and [indiscernible] very excited that Russell will take over my responsibilities as CFO. With that, I'll turn it over to Lauren.

Thank you, Lindsay. First and foremost is our focus on safety. Despite the challenging year marred by the pandemic, our teams continued their exemplary safety performance. Our all-injury frequency rate in 2020 was 1.22, which is a reduction of 80% since implementing our revised safety and health management system in 2012. I am very appreciative of the hard work and focus our operation teams deliver on these objectives. At the Greens Creek mine, we produced 2.3 million ounces of silver and slightly less than 11,000 ounces of gold, at an all-in sustaining cost of $12.05 per ounce for the quarter. Fourth quarter was impacted by a significant weather event in December, when Southeast Alaska was battered by high winds and heavy rains that caused significant damage in the surrounding area and communities. The rapid response of our team at Greens Creek to minimize the effects of this significant weather event is a testament to their professionalism and resiliency. 2020 silver production at Greens Creek was 10.5 million ounces at an all-in sustaining cost of $8.57 per ounce. The increase in silver production over 2019 was primarily due to higher grades, and we expect 2021 production and cost guidance to be similar to 2020. Greens Creek's rock-solid performance, combined with these high silver prices, generates very strong free cash flow. In the third quarter, we partnered with a COVID lab to provide real-time testing services for our employees. This service is helping to shorten the quarantine period and reduces the burden on our employees. Lucky Friday achieved full production in the fourth quarter and produced 2 million ounces in 2020, more than doubling the prior year's production. 2021 silver production at the mine is expected to be in the range of 3.4 million to 3.8 million ounces. We anticipate the grades to improve as we mine deeper, increasing the projected production to around 5 million ounces annually over the next 3 to 5 years. No significant planned capital outlay is required to achieve these goals. In addition, we are pursuing various mining method changes and other initiatives to improve safety, while increasing the productivity of the mine. At Casa Berardi, we had a strong fourth quarter with production of 37,600 ounces of gold at an all-in sustaining cost of $1,330 per ounce. For 2020, Casa Berardi produced more than 121,000 ounces, in line with our COVID-adjusted guidance, at an all-in sustaining cost of $1,436 per ounce. Our investments in the mill to improve reliability and recovery are yielding great results, as the mill broke monthly throughput records with greater than 90% availability for 3 consecutive months late in the year. Our ongoing focus to improve productivity and reduce cost is underpinned by multiple factors, and some of those are highlighted on Slide 12. We realized a 10% increase in the underground active time, reduced the equipment maintenance backlog by 2.5 weeks, and launch training for underground operators to increase equipment reliability. These and other efforts increased the high-grade underground ore delivered to the mill by more than 20% in Q4. The team is targeting a 10% reduction in support costs through a combination of restructuring, eliminating non value-adding work and negotiating key vendor contracts, including open-pit contract mining, explosive support services, and similar categories. These efforts are well advanced, and we are starting to see a downward trend in AISC. All these factors, together with the others in the pipeline, our position in Casa Berardi to deliver consistent production at lower costs. Our 2021 guidance for Casa Berardi exceeds 125,000 ounces at a $1,185 to 1,275 per ounce AISC. In the middle of 2019, we concluded that our approach to Fire Creek was not going to get the results we wanted [indiscernible] development to generate free cash flow and to gather the knowledge necessary for the long term. That decision resulted in $38.6 million of free cash flow, with a bit more to come this year, and a bulk sample of refractory ore. Mining the bulk sample was completed in the fourth quarter, with most of the materials shipped to a third-party processor by mid-February. The bulk test demonstrated that larger scale, more productive methods could be applied successfully to this material. Ground conditions were as good or better-than-expected, and water in the test area was managed effectively. Refractory ore is being processed, and while the processing is not yet complete, the recovery information to date is following the grade recovery curve established through bench testing. With the significant increase in metal prices, it is no longer attractive for the processor to displace their own fee. We've initiated discussions with another processor and hope to send around 10,000 tons of stockpiled refractory ore to them for processing in the first half of 2021. Fire Creek is expected to be placed on care and maintenance in the second quarter of 2021, once the previously developed oxide resource is depleted. We remain very excited about our Nevada properties with a quarter of the company's exploration budget being spent on Midas and Hollister's Hatter Graben. Drilling targets at Fire Creek and Aurora may follow, as prospective targets are defined. With that, I would like to return the call to Phil.

Thanks, Lauren. So, on Slide 14, it shows our consolidated production guidance for 2021 to 2023, so this is the first time that we're giving multiple-year guidance. With the consistency of Greens Creek and Lucky Friday in full production, our U.S. silver production is expected to reach roughly 15 million ounces by 2023, which is almost double our 2018 U.S. silver collection. The combination of increasing silver production and higher prices should cause silver to be the biggest revenue contributor, maybe as early as this year. Silver mines have always been our largest cash flow contributor, so that's just going to get bigger. And with that, I'd like to just remind you that we will have one-on-one calls available tomorrow with Lauren, with Lindsay and Russell, and with me from 11:30 to 1:30, and you just need to click the link on our press release. With that, operator, I'd like to open the floor for questions.

[Operator Instructions]. Your first question is from Heiko Ihle of H.C. Wainwright.

Hey, Phil, you spent a decent amount of time talking about free cash flow earlier on this call. I mean, the numbers are clearly impressive, mines are operating well, the silver price is fairly strong. I mean, looking just all in all, life is good. Assuming 2021 goes the way that the last 12 to 18 months went for you, what should we see in regards to incremental CapEx momentum, more esoteric, longer-term projects at your mines, and possibly in regards to larger scale M&A.

Well, look, we've given guidance on our capital spending for the coming year. It'd be about $110 million. We also have $30 million of exploration. I think you can anticipate, as these prices continue, that you won't see a significant difference to those numbers, maybe a slight increase. I wouldn't anticipate anything significant. So, what happens, as our balance sheet gets stronger, we're put in a position to be stronger for larger capital developments in the future, such as Rock Creek and Montanore. As far as M&A goes, I -- it's certainly something that we will always consider, but we don't feel compelled to do any M&A, given the growth profile that we have with our silver duction. We think with the operation of those mines will see that growth, and we are looking at to enhance that. We've got a number of initiatives going on to try to further push the production growth. So M&A is possible, but it's not a priority.

Yes. Fair enough. Completely, completely different question. There's been some stories in the recent news about a remote mine having some extensive travel restrictions added due to COVID. Out of curiosity, what's the contingency planning for Greens Creek, if travel to and from the site were to suddenly have to stop 100%? Is your workforce willing and able to just work longer shifts, extra weeks? How would you cope with something like that, if it were to happen?

Yes, so when COVID started, we actually had longer rotations than what we currently have, and so we could go back to that sort of schedule, if necessary. Having said that, I'm not anticipating that that's going to occur. I think we have demonstrated the effectiveness of our protocols at protecting not just our workforce, but also the community, and we've also provided a lot of support to the community in terms of the testing. We've now brought a lab to Juno and made that available, selectively, to government agencies in Juno. So I'm not anticipating that we're going to have that happen, Heiko, but should it happen, we'll be able to adjust.

Yes. You've clearly done many of the right things, and your stock's almost doubled over the past 12 months. So thanks for these questions. I appreciate it. I'll get back in queue.

Your next question is from Trevor Turnbull of Scotiabank.

Yes. I appreciate you guys putting out the multiyear guidance. I think that actually is very helpful to getting the story out there and giving a bit more visibility longer term. I had a couple of questions. I guess the first one, with respect to Greens Creek, it looks like you've got more silver coming through, maybe a bit less gold. And then, the base metals have been changing a bit in terms of the amounts. Can you just maybe give us kind of -- of an overview of how the metal mix is changing or going to -- we should expect it to change over the next couple of years at Greens Creek?

Well, we certainly are in a period of time when we have higher-grade silver, and we gave that guidance a few years ago that with the change in our mine plan, we're able to access higher-grade silver. So I think you can anticipate the mix to be similar to what you have seen the past year, I'm trying to remember specifically, and I'll let either Lauren or one of my colleagues give the specifics. But I mean, the long-term objective we have at Greens Creek is to increase the throughput there. Lauren's continuing to work on, how do we increase throughput, notwithstanding the fact that we've gone from, I think, about 1,800 tons when we became the operator of the mine, to 2,300 tons now. So, Lauren, I'll throw it to you, and if you don't have that readily available, maybe one of our other colleagues can help us.

Hi, Trevor. Yes, we are mining higher-grade silver zones. Silver is the largest revenue contributor, not the only one, of course, but the largest, and so we focused the overall mine sequence on silver. You mentioned gold. We're actually expecting to see modestly greater gold production over the next several years, as we move into some specific zones that we know have a bit more gold in them. And then, other than that, the contribution of the byproduct metals, zinc and lead, that varies with the pricing of those things. But we consider all of those when we develop our long-range plan, and then, of course, we adjust that annually. And, as Phil says, we're looking at what we can do to put some more tons through that mill. And it's early days, but we're pretty confident we can start creeping the production rate up.

Yes, and maybe -- I've been looking at the numbers quickly, maybe I misunderstood a bit, but I was kind of thinking I would have seen -- well, it seemed like we saw fewer base metal byproducts kind of from Q3 into Q4. But with silver creeping up, I would normally think silver and base metals are going to go hand-in-hand kind of going up together, or is that a bit of a misconception?

In terms of the ore body, the silver is -- follows the lead, and then the zinc is a contributor. So, depending on where we're focusing in order to deliver the highest NSR to the mill, that can vary.

Okay.

And, Trevor, I would just emphasize to you that, quarter-to-quarter, we have huge variability in this mining. And after 20 years of looking at this, it has -- you just don't have that consistency quarter-to-quarter. We seem to average out okay over the course of a year, but I can tell you, monthly, if the variability is huge. And then, with the shipping, our cash flows are particularly large, the variability that we have.

Right. Yes, that's a good reminder not to get too hung up on the quarter-to-quarter swings on the byproducts. The other question I had was just on the Nevada stuff. You've had some interesting exploration, and I was wondering, the stuff that you're working on there around Midas, does that kind of fall under the plan of operations, or is this more greenfields? And I'm asking from a permitting perspective. Is this something that would take a long time if it works out, or is it all kind of already taken care of?

So everything that we've drilled is within the plan of operation. We are modifying the plan of operation because we see this whole [indiscernible] target area, there's a section of that that is not within the plan of operation, and we want to drill in that area. But at this point, it's not slowing us down with what we're doing at the Green Racer center. That's a particularly interesting development.

Yes. And then, just final question out of curiosity, you talked about not being able to send some of the material for processing that you're -- where you have been sending it. I was just wondering, does this mean you have to take it out of state, or are you still looking at options within Nevada?

Well, we are -- we have -- I think there's just a little bit left of the 30,000 tons, which is what we had agreed to, is all going to the third-party processor, so we're doing what we both agreed to. So the 10,000 tons would be additional material that we had mined and a set side. And yes, it is within the state.

Next question is from Lucas Pipes of B. Riley Securities.

This is actually Matt Key from B. Riley, asking a question for Lucas. Thank you for the detailed guidance for 2021. I was wondering if you could give maybe an early read on where you think costs will shake out in 2022, at least directionally, compared to your 2021 guidance. Would those unit costs like kind of naturally trend lower, all things equal, given kind of the higher expected volumes you would expect in that year?

It's Matt. Is that right?

That's correct, yes.

Yes. Matt, I'm not able to give you the visibility with respect to 2022. I guess I would just generally say, if you look at our total costs, those have been roughly the same, call it, $500 million, for better part of 4, 5 years. It's -- when we acquired the Nevada assets, it went up a bit. Depending on the activity we have in Nevada will determine whether it's higher or lower, but I wouldn't anticipate -- and you've got Lucky Friday ramping up, and you've got San Sebastian off, and you've got Nevada off. So we're going to be roughly in that $500 million range, so that's the way to think about it. And that's including everything, right? That's capital, that's operating expense, that's the whole 9 yards. And if you look at our reconciliation, and if you look at it historically, I think you'll find that's a pretty consistent number.

Got it. That's very helpful. All my other questions have been asked already, so I'm going to end it here. Thank you, and best of going forward.

Thanks, Matt, and give Lucas our regards.

[Operator Instructions]. Your next question is from John Tumazos of John Tumazos very independent Research.

Congratulations to everyone on the progress, and have a good retirement, but maybe you don't where you want to retire, I don't want to retire. Anyway, I was looking at your Slide 12 on Fire Creek, and I looked up that you completed the acquisition in July 2018, and I know there were some hiccups at the beginning. So, from June 2019, after 1 year of possession and as the gold price began to rebound, you've had $38.6 million of free cash flow from the Fire Creek part of Klondex?

That's right. So, over the last 18 months, we've had that. How much depreciation, do you have that number, Russell?

Let me look real quick.

We'll look for the answer to that while --

It's really a working acquisition now.

Look, realized that what we did was we stopped development, so we are just harvesting what has been developed. Hence, why we're -- we've -- we expect to go into care and maintenance unless we're able to work out a reasonable third-party processing agreement. It's been cash-flow positive. It's -- that's, I don't know, call it, 5%, 10% of the acquisition cost that we've recovered. But it's -- the focus has always been, at the Nevada assets, the exploration potential, and that hasn't changed. Fire Creek has great exploration potential, Aurora has great exploration potential, but the priority is the exploration at Midas and at Hollister's Hatter Graben. And the aim has always been to try to use Fire Creek to finance that. Well, that didn't occur, but we're hot on the exploration, as we've indicated with the release. Do you have that

Depreciation.

We'll have to get the depreciation number to you, John. We don't have it handy.

I'm sorry to be too bothersome with details. For the 3-year production forecast, in 2023, the silver -- the gold falls a few ounces and the silver, over the course, gains about 1 million-plus ounces. Is that just grades changing from mine to mine?

Well, it's less -- it's not assuming production in Nevada is the biggest component of that. And then the remainder would be grade changing at both Casa and Greens Creek.

Super. It's great to see all that cash.

At this time, there are no other questions in queue. Do you all have any closing remarks?

Yes. I'll just say thanks for coming on the call. We're certainly available if you want calls individually, but the easiest way maybe is to sign up for one of the one-on-one calls with one of us. So, thanks very much. You guys have a good day with all the reporting coming out today. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.