Hecla Mining Company (HL) Q3 2022 Earnings Report, Transcript and Summary

Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Hecla Mining Company Third Quarter 2022 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 conference over to Anvita Patil. Please go ahead.

Thank you, operator. And welcome everyone. Thank you for joining us for Hecla's third quarter 2022 financial and operations results conference call. I am Anvita Patil, Hecla's Vice President of Investor Relations and Treasurer. Our financial results news release that was issued this morning along with today's presentation are available on Hecla's website. On today's call, we have Phil Baker, Hecla's President and CEO; Lauren Roberts, Hecla's Senior Vice President and Chief Operating Officer and Russell Lawlar, Hecla's Senior Vice President and Chief Financial Officer. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act, and involve risks as shown on Slide 2 and 3 in our earnings studies 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. Reconciliations of non-GAAP measures cited in this call and related slides are found in the slide on news release. With that I pass the call to Phil.

Thanks, Anvita. Good morning, everyone. Thank you for joining our call. With this being the first conference call since the September 7 closing the Alexco transaction. I want to start with a few comments on Keno Hill. The week after the closing, I along with Lauren and our Chief Administrative Officer, Mike Clary went to site. We went to Mayo, which is the local town into Whitehorse. This visit was timed around the biweekly shift change which allowed us to meet -- I'd say about 140 of the 170 employees. And the enthusiasm of the workforce was palpable. The crews are excited to have resources and plans that allow them to be successful. So we're going to have our challenges, but I think we're starting at a very good place. We also met with the Yukon federal and community leaders. And there's a recognition that Keno Hill is a high profile project for the Yukon. And that's important -- and this project is important for the success of mining development in the Yukon. So I'm confident that we're going to receive all the support that these folks can give. And Lauren's going to go into our performance and plans for the rest of the year operationally. Now, the third quarter marked another strong opera additional performance from all of our mines where we actually achieved new records at each of them. At Greens Creek, we've been working to increase throughput and we began to see the results where we produced a quarterly record of about 2,500 tons per day at throughput. At the Lucky Friday, we produced an excess of a million ounces for the second consecutive quarter, all while executing a very significant capital plan which is going to allow us to further increase throughput and reliability. Casa Berardi also continued to achieve new monthly throughput records, one of the months during the quarter. With Keno Hill expect to be in production next year, Lucky Friday's growth and Green Streets consistent performance, we now expect to produce in the range of 17 million to 20 million ounces of silver by 2024. And this production will not only be the largest producer of silver in the United States, but will also be the largest in Canada. So despite Hecla being 130-year old company, we believe we are the fastest growing established silver producer. While we are investing our business with large capital programs in each of the mines at Keno Hill, we ended the quarter with a very strong balance sheet, which we're committed to maintain. Russ will talk more about that. Strong operational performance in the year has allowed us to increase our silver production guidance while maintaining our operating and capital costs guidance despite adding Keno Hill. So Lauren why don't you give us some insights into our operations.

Thank you, Phil. And I'll start on Slide 6. Greens Creek produced 2.5 million ounces of silver in the third quarter 2.5% higher than last quarter. The mine produced approximately 2,400 tons per day, and the mill achieved the new all-time throughput record of 2,500 tons per day. Lower lead grades resulted in the deferral of a silver concentrate shipment to the fourth quarter. The impact of the deferral is lower revenue and cash flow in the third quarter, as well as lower cost of sales because of costs related to the shipment were recorded in inventory. In the fourth quarter, there'll be a higher cost of sales with offsetting revenues and cash flows of approximately 18 million as the inventory charges are reversed. Cash costs and all in sustaining costs for the third quarter increased to $2.65 per ounce, and $8.61 per ounce respectively, driven by lower biproduct production, lower biproduct prices at tight labor market that require the use of subcontractors primarily in maintenance. Greens Creek is positioned for another strong year and generated $86 million in free cash flow for the first nine months of the year. Despite the deferral in silver concentrate shipment to the fourth quarter, minus free cash flow positive in the third quarter. For the fourth quarter, we expect similar operational performance with a slight decline in production due to approximately 8% lower silver grades related to the mining sequence. We're affirming our cost guidance for the mind and expect the mine to meet the increased production guidance of 9.3 million to 9.6 million ounces of silver for a solid finish to 2022. Moving to Slide 7, Lucky Friday silver production exceeded 1 million ounces in the last two consecutive quarters. For the first nine months of the year, in mine produced 3.2 million ounces of silver, which already is 90% of last year's production. Cash costs for the quarter were $5.23 per ounce higher than the second quarter of 2022 due to lower biproduct credits, driven by lower lead and zinc prices. All and sustaining costs for the quarter were $15.98 per ounce due to plant higher sustaining capital spent. Significant sustaining capital projects in the quarter included work to raise at tailings facility and infill drilling to support the accelerated UCB production pace as we target more than 5 million ounces a year of production. Also in the third quarter due to a multi-week shutdown at the Trail Smelter, a 2,000 dry metric ton silver concentrate shipment containing approximately 216,000 ounces of silver and 2.9 million pounds of lead was deferred to the fourth quarter. The deferral had an impact of $6 million on the mines revenues. The mine had negative free cash flow of $4.5 million for the quarter primarily due to the deferral. Year-to-date the mine has been free cash flow positive generating $8 million net of our investments to grow production. We're affirming production and cost guidance for the mine but are low in capital guidance typically $56 million to $58 million due to the timing of some capital expenditures. The quarter continues to highlight the UCB mining methods success and managing seismicity and improving productivity at the mine. With grades getting better at depth and increased throughput, the mind is set to produce more than 5 million ounces per year in the near future and we believe this mines best decade is ahead of it. Turning to Slide 8 Casa Berardi already produced just over 33,000 ounces in line with second quarter. All and sustaining costs increased to $1,738 per gold ounce due to higher sustaining capital expenditures associated with a design change and the expansion of the tailings storage facility and increased exploration spending. Casa Berardi costs remain more exposed to inflation than our other mines due to the absence of any significant biproducts, and the relatively larger volumes of material mined and processed. Casa Berardi remains an important part of our operating portfolio with a large underexplored land package. The operation provides us gold production at scale. And our exploration is focused on adding higher grade underground material. Recent drilling results are showing good continuity of high-grade zones along the 113 and 118 sector. Casa Berardi generated positive free cash flow for the quarter as well as for the first nine months of the year. We're affirming our production and cost guidance and are lowering our capital guidance slightly to $42 million to 45 million as some capital projects will be completed in 2023. We completed the acquisition of Alexco in early September. From day one our focus has been on development and the advanced rate has increased by 40% since acquisition. At the end of October, we've completed about 30% of the total development required prior to starting the mill. We expect the advanced rate to continue to improve as we embed mining practices or receive more equipment. By the end of 2022, we expect to have completed about 40% to 50% of the development required to start the mill. We are incurring around $4 million a month the cost so in the fourth quarter we expect a capital spend at keynote to be in the range of $10 million to $12 million. We anticipate in full production run rates in 2023 with the mill start in the second half of the year yielding about 2.5 million ounces of silver. We'll give more detailed production and cost guidance for 2023 later this year or early next. Slide 9 highlight some of the work we have planned at the Birmingham deposit, where the focus will be on the bearer zone. The white highlighted development is what we plan to complete this year and the red arrow shows about where we expect to be when we begin scoping. Moving to Slide 10, this image shows our work plans in the upper lightnings zone at the Flame & Moth deposit. As on the previous slide, the white highlighted development shows the plan we expect to complete this year and the red arrows show where we expect to be when we start scoping. The two deposits and multiple production horizons in each will have a high level of flexibility to meet production demands. This has been a major issue for Keno Hill in the past that we intend to solve. While our immediate focus is on these two deposits. Let me end with a comment on an exploration that gives us confidence in the potential as a district. Drilling on the other exploring coal we were on target, which is about 1.3 kilometers from Birmingham. We yielded 101 ounce drill hole intercept over 7.32 feet. This is early days the exploration program but nonetheless very encouraging and quite exciting. With this, I'll pass the call to Russell.

Thank you, Lauren. Turning to Slide 12, third quarter revenues were $146 million 30% from silver 42% from gold with zinc and lead at 28%. Our revenues decreased approximately $45 million from the prior quarter primarily due to the deferral at Greens Creeks and lucky Friday silver shipments to the fourth quarter as Lauren has described. These different shipments had an impact of approximately $24 million on revenues. And we also saw lower prices across all four metals. As we indicated on last quarter's call, we are investing our cash in our operations for future production and cash flow growth. Due to the revenue reduction capital spend of more than $37 million for the quarter transaction costs incurred from the Alexco acquisition, refinancing of our revolving credit facility and working capital changes related to the deferral of revenues, as well as interest payments of $18 million in the third quarter a free cash flow for the quarter was negative $62 million. Even with relatively lower silver prices and a reduction in both the biproduct prices and production, we continue to see solid cash flow and margins from our silver assets, where we had a consolidated all and sustaining cost of just over $10 per ounce year to date, with a margin of more than $11 per silver ounce. Free cash flow generation from our three operations for the first nine months of the year was approximately $98 million. As we look to the remainder of the year, we anticipate maintaining a cash balance in excess of $100 million, while keeping to our prudent financial policy of maintaining a net leverage ratio of less than two to one. Turning to Slide 13, we've seen in inflationary environment of earlier this year continuing to the third quarter where prices of key inputs continue to remain elevated around 15% higher than at the beginning of the year. We are continuing to experience a tight labor market especially as we recruit for experienced miners in skilled trades such as mechanics and electricians. At our silver operations, we have seen our byproduct credits, which provides some offset against inflationary pressures decline, primarily due to the decline of byproduct prices. We are focused on managing our cost structure and reaffirming our cost guidance, even after we've seen prices of biproducts come down. We remain confident that we can execute our mining and development plans at our operations even in this current tight labor and inflationary environment. And with that, I'll pass the call back to Phil for his closing remarks.

Thanks, Russell. And so we'll go to Slide 14, which just gives us an view of our guidance for production and for costs. And what you'll see is our production guidance we announced earlier in the month or late last month that we were increasing our production guidance at Greens Creek because of its strong operating performance year-to-date. And as Russell has described, we have this inflationary pressure but we're able to affirm our cost guidance and we're also maintaining our capital guidance, because we're lowering capital expenditures of the Lucky Friday and Casa to offset the development expenditures that we have at keynote at $10 million to $12 million that we mentioned. The other thing I just want to mention while I'm on the guidance is really a call out to our employees for our safety performance. Our all injury frequency rate for the first nine-months of the year was 1.32. And that's 37% lower than the U.S. average and it's an improvement of 19% over the same period from 2021. So thanks to all the Hecla employees for this achievement. So I want to end with a number that caught our attention. And this is on Slide 15. India imported 200 million ounces of silver in the first eight months of 2022. And the silver market is about a billion announced market. And so that's 20% of global demand for silver that they imported over the first eight months. And India's increased silver important ports are a key factor that caused the silver in the London vaults to be at the lowest levels since 2016. Silver buying India was muted during COVID. So this is more than double last year's imports three times the 2020 levels and about the same as 2019. So the message is Indians are back buying silver for jewelry and silverware. Because that's about three quarters of the silver purchases are for that purpose. And where it's really coming from millennials and Gen Z population in India are more keen on silver jewelry than gold jewelry, these changing fashions with a desire for the ability to change their jewelry frequently. And the ability to have lightweight jewelry that complements a more professional look. And Anvita is Indian and she said to me that her younger cousins who were in India, have expressed a preference for silver jewelry for daily workwear. So typically, when you hear us talking about silver, you hear us talking about the use of silver for energy transition. And we still think that's the future for silver. But we do view this increased demand in India has providing a great base to the silver price. Finally, I want to emphasize our commitment to silver. While, we believe in gold and see a need to have gold operations. And we'll probably even grow our gold operations. We have been a silver company for 130 years. And we think the future could not be brighter for the metal, and we see more upside relative to gold. So we're working hard to increase our exposure to silver. And since I've been at Hecla, we've gone from 6 million to 7 million ounces of production to 10 to 12 and now we're heading to 17 to 20. And all of that production is in the U.S. and Canada. And we expect in the next year or two for our silver revenue to exceed gold and probably go over 50% of our total revenues even at the current gold silver ratio, which we expect to improve. This will put us in a unique position, especially since other silver companies are seeing a decline in their silver exposure. So with that, Regina, I'd like to open the call for questions.

[Operator Instructions] Our first question will come from the line of Michael Siperco with RBC Capital Markets. Please go ahead.

Thanks very much, operator. Thanks for taking my call. So I know we'll get more on Keno Hill as time goes on, and thanks for the update today. Can you go into any more maybe surprises that you've had since taking over good or bad? Anything that we should be watching for in terms of the update or the startup? Anything along those lines?

So I guess I let Lauren give his views. But the first thing I'll say Mike is that if you think about the due diligence process we went through, we had 63 days of people on site before this transaction was ever announced. And so I think we knew everything that you could know at that time. So from my perspective, not a huge number of surprises, Lauren, anything that really sticks out to you?

Yeah, just one sticks out to me and it's positive is the is the reception that we received, how welcoming the entirety of the workforce right down to the miners have been to us. And I think it just gives us a great platform to start from. We knew we would be well received there, but I don't think any of us recognize how well received.

And Phil was pretty good at the camp.

Yeah. You would definitely need to go on some kind of exercise program if you were there for very long.

That's, that's good to hear, I guess. Okay, I guess maybe a couple more for me and I'll hand it over. Maybe a similar question on topics and Lucky Friday. A number of big projects you've highlighted as being on the go there. With the lower CapEx now in 2022, should we be expecting more or less a deferral of that CapEx into '23? I know you're going through the budgeting process, but should we be thinking about a similar type of number in '23 as we saw in '22 or has anything changed along those lines.

So it's just a deferral into '23. And relative to where we were going to be in '23 which, of course is not disclosed, we will be slightly higher with this deferral. But part of it is we're deferring it for operational reasons. And some work was slower to get done and rather than trying to push through that work. And this is on the bunker, rather than trying to push through that work in the, winter. We're going to wait until the spring to complete. Lauren, anything to add?

That's exactly correct. We did a analysis of the potential benefit of working through winter versus the cost and determined it wasn't worth the risk of working through winter on that particular project. So we're buttoning up putting them to bed by roughly the end of November. We'll come back to it early in April. So it was a project that we could defer some spending on and made the decision to do so. The real game changing capital project that Lucky Friday is service hoist and it is on schedule and going great that Lucky Friday, this weekend, got to tour the building is up the hoist is in place. It's being wired, and we're preparing the shaft to receive the guides for the service already. So that projects were really well.

The other thing, Michael is there is equipment that slow to come. And that's part of the deferrals from '22 to '23. So we will make those expenditures. And that's not just the Lucky Friday, that's across the company

Got it. Thanks. Okay, maybe switching gears quickly to the biproduct credits in the zinc and lead production? Have you considered breaking out lead and zinc guidance more than you do for some more predictability? I know it's the nature of the beast to an extent is it just too hard to really predict on a quarter-by-quarter basis? What those credits will be from Greens Street and Lucky?

You're the first person to ask for that in 20 years, so we'll consider.

Okay, okay. I'll take that under advisement. Maybe just one other silver question. You brought up demand the physical market. I suppose we're still seeing a spread between that physical, more retail-focused silver price and the spot price, maybe narrower now that we've bounced up off the $18 level over the last few weeks months. So I suppose two questions. Are you seeing the same thing? And assuming that you do, do you see any opportunity to exploit that spread or do you just see it as a maybe a positive sign for future silver prices?

Well, it's really a sort of the wholesale to retail purchase of silver. If you look at 1,000 ounce bars, there's not that big of a of a spread. Spread really is at the retail level of the one ounce coins and medallions and the like and the 100 ounce bars. So we produce, the final product we produced at our silver mines are is a concentrate. So we don't have physical metal to try to do something at a retail level. So we're not intending to try to do that at least at this point.

Not so much on the -- sorry go ahead.

You could considerably told them the material. We haven't really ever seriously considered that.

All right, I mean more as a view on the market. I mean, do you see that as -- not just adjusting the start producing coins around? But do you see that that retail spread as being indicative of anything that you would see in the broader market, in the broader silver market?

Well, I think it's not dissimilar to what we've seen in India with an increase in demand. And it provides that fundamental underlying demand that supports the price makes this going down in a significant way really hard for it to do and gives you more risk to the upside.

Very good. Thanks for my questions. I'll pass it on.

Your next question will come from the line of Lucas Pipes with B. Riley Securities. Please go ahead.

Thank you very much, operator. Good morning, everyone. My first question, Phil is on the cost side. So great to see that cost guidance is flat this year. And I wondered if you could expand on that a little bit? Are we seeing inflationary pressures subsiding or is this really more a testament to your cost management? Thank you. Thank you for your perspective on that.

It's certainly not subsiding yet. I don't think it's -- I don't think it's increasing. But we're continuing to have this inflationary pressure. I mean, I'll just use diesel as an example. The price of diesel is significantly higher than it than it was. And we're just very focused on managing our costs. And the best way of doing that is, to an extent on a per ounce basis is increasing throughput. So I'll let Lauren and Russell add any comments.

I think the denominator is key. So we've been driving to generate more metal more revenue. We had some visibility, that there was going to be an inflationary period and did some budgeting accordingly. I think it exceeded our expectations, in many cases, but we did protect ourselves a bit during budgeting.

I think just I think, Phil, you got it. It's certainly not subsiding. But I think, as we've moved through the year, and you take into account the budgeting changes that Lauren has mentioned, I think that the cost guidance, what you've seen is that we've been able to take in the inflation into account, essentially. But it's still high compared to what we've seen in the past.

Very helpful, thank you. And as a quick follow up on this point. Are you seeing areas where costs are coming down? And conversely what are the key pressures today that are still running through the system? Thanks, thanks.

Well, certainly we are seeing some cost reductions on some of the materials, but it's not dramatic, it is at the margin, and not particularly meaningful. The more important thing is that they're not going up at the rate that they were.

I agree. And they tend to be the coming off of an inflationary period. The costs tend to be fairly sticky and they lag the change in the broader market by at least a quarter.

And the other thing to remember is where our costs and labor is almost 40% of our costs. And we've had, during the course of the year, we've had increases we think we're at or above market. And so that gives us a little bit of room to wait for the market to catch up for it to where we're kind of our labor expenditures. But these other items, while the costs might be in our look at consumables at 18% might be significant in the aggregate 18% each individual cost is actually quite small as a percentage of our total.

Very helpful thank you. And then my second theme I wanted to touch on is the reshuffling within your CapEx guidance. Not huge numbers but what are some of the things you're saving at Lucky Friday and Casa Berardi and I'm sure you had thoughts about why you had it in the budget in the first place so what appreciate what the trade-offs are?

Lucas, it's really just a deferral. And as I said a moment ago in some of it is just operational benefit. So wait, in some cases the suppliers have not been able to deliver the equipment and then frankly, almost every year our guys are very excited and ambitious. And they will project projects that that they just don't have the time to actually get to learn.

So we see it every year. We tend to forecast our capital expenditures higher than they materialize, but we generally come pretty close to budget, which will be the case this year.

Got it. Is it? Is it reasonable to assume there's a catch up then next year if this is deferral or would you say it's kind of this happens on an ongoing basis, so it wouldn't be kind of catch up?

We will hope that we'll catch -- Lucas, we hope that we'll catch up in '23, with the expenditures that we defer into that, because it's primarily equipment and a couple of major.

It's largely growth, right. So assuming the projects are executed the way we expect it to be, we should catch up. Yeah.

It's like, these are projects we want to do. These are projects that we want to do so.

Okay. So should we assume higher CapEx for 2023 directionally?

We haven't given guidance on 2023. We're still in the budgeting process. So let me hold off doing that until we're ready.

Fair enough. Phil, and team really appreciate the update and continued best of luck.

Thank you.

Your next question will come from the line of Heiko Ihle with H.C. Wainwright. Please go ahead.

Hey, guys, this is Marcus Giannini calling in Heiko. Thanks for taking our questions. So you've seen about 3.6 million Keno in the quarter, and you're expecting $10 million to $12 million of spend in q4, which gets us from 30$ to 50% of development complete? How long do you think we can trendline that figure of 20% costing about, $10 million to $12 million? And then I guess while you're at it how much are inflationary impacts hitting you in that area specifically?

It's hard to say specifically that, we certainly feel the same inflationary pressures we do elsewhere, the real concern is diesel is the fact that diesel costs have gone up. As far as the assumption, look, I think if you're assuming that we'll spend sort of at that same level, during the course of next year and some time, we'll turn on the middle, probably in the third quarter. Maybe we'll be able to advance to the second depending on how well the development goes. But certainly, we will be in full and consistent production by the end of the year. That is our objective. Everything else that we can do that gets us ahead of that is is upside for it for us. And at the end of the year, early next year, we will give guidance, specific guidance on Keno as well as on the other properties. Anything to add?

We expect the development rate to increase over time. It's just learning curve, it's learning the ground, and also getting some of the equipment we have on work to help accelerate the development rate. So I would expect that capital expenditure for development to escalate with the development right in proportion to the development rate. And then I guess the other thing is we have some capital construction to do which is a seasonal thing. So as we hit April-May timeframe, you'll see some of that spending increase.

But I think in general, you should look at it Keno Hill, you'll probably see a bit of a ramp up in costs kind of similar to what Lauren was mentioning. But the lion's share of it is generally a fixed cost that, the costs that we we've said kind of that monthly spend is about what they incur or we incur up there. As it relates to inflationary pressures, keep in mind, we were looking at this from the lens that we just closed the acquisition in September. So is inflation high yeah, but the changes took place really earlier in the year. So I think it's kind of from a baseline perspective. We have that already in our thought process.

Okay, got you. Yeah, that's, that's really helped. And then for my next question, it's already been touched on quite a bit with Lucky Friday and Casa and CapEx being deferred to '23. So I guess I'll ask about equipment availability, what type of items are you guys having difficulty sort of procuring on that front.

The biggest challenges is filling the mechanical trade raise. In terms of equipment is sort of a mixed bag. You can't even really point to one manufacturer being slower than another and even within a single manufacturer, the delays may be incurred at a particular facility, which means it might be one class of machine whereas we don't have trouble getting another class of machine. So it's really an odd mixed bag. It's difficult to say that there's a trend other than the industry of strong and there's demand for it.

Okay, fair enough. Yeah. That's it for me. I'll hop back in queue. Thanks, guys.

Your next question will come from the line of Joseph Reagor with ROTH Capital Partners. Please go ahead.

Hey, Phil and team, thanks for taking the questions. A lot of stuff I want to touch on or was already hit on. But kind of want to follow up a little bit on Keno Hill and make sure I fully understand. Once you guys start the mill up, we should expect the development capital to trail off correct?

What will happen is there'll be a split in the development capital between continuing to advance the primary development that that ramping system that you saw on that slide with the green, and there maybe call it maybe half of the expenditures will be related to that sort of development. And the other half will be related to upslope access development and scoping.

Recall that these are minds with more than 10 years of life. So there's a lot of development remaining to be done there.

Yeah, fair enough. Okay. And then looking at Casa this quarter costs. Their total cost exceeded revenue. I know that there's some accounting stuff behind that. But you any concerns about the inflation there and, kind of a weak gold environment and putting you guys in a position at some point that if gold doesn't recover from this level that you guys have to reconsider whether or not to continue operating the mine?

Well, I think that's probably too strong to say that continuing the mine. It really question of how much capital investment you can make. Because we do have the objective of trying to have all of our mines be cashflow positive. We really have that as a mantra for some time. While we are willing to have periods of time for them to need new capital infused, these are operating mines that should be able to be cashflow, positive and generate returns for the overall corporation. So are we looking at ways of improving the performance at Casa? Yeah, absolutely all the time. So Lauren, anything to add to that.

We're always looking to optimize plans. And based on the cost structure and inflation, metal price, we're always optimizing both the underground and the open pit plans. And the open pit plans are really the bigger lever, I would say, because of the volumes of material. From a cost perspective, that's the bigger lever. The lever on the revenue side is the underground mine. So we're always balancing those things.

And fundamentally, we think we have this 37 kilometer strike on the Casa Berardi, that is very, very prospective, it is very under explored. And that's where the greatest comes from. So you're going to see it's continuing to explore, continuing to look for that higher grade material, the drilling that we're doing in the 113 is interesting. There's some high grade that we've seen. And if you'll recall, going back a decade, that was the 113 was the real high grade material, that drove the value of the month. So we can find some more of that material. It's a whole different proposition at Casa Berardi.

Okay, fair enough. And then just on inflation. I guess, maybe you guys can attempt to quantify what part of the inflation you've seen you feel will be sticky versus what part do you think might have some kind of pullback as the world normalizes again at some point in the future? Is that 50-50 60-40, how do you feel about that?

Labor will be sticky. Contractors will vary, diesel will vary, and the others will be slow to move, but they will vary -- the steel that sort of items, the consumables. One, labor goes up, but it's hard to have it come down.

Yeah. Okay. All right. Fair enough. I'll turn it over. Thanks so much for the questions.

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

Thank you, I want to congratulate you on your 10%-15% rate of cost growth. I keep a log of three dozen companies where the seven quarter cumulative cost increases 41% or 6% per quarter. And Nevada gold mines open pit mining cost per ton rose 50%, cumulatively over seven quarters, or 7% per quarter. So Phil, I'm going to tell us how you're going to keep doing so well. Particularly, there's 1 million out so level, we're Lucky Friday tops out in this 2,500 tons a day a level where greens Greens Creek tops out where can those productivity gains continue and help you keep costs under control.

So at Greens Creek, where our objective is trying to get to 2,600 tons and put that in perspective, we were around 2,100 tons a day when we started operating the mine. So that's a big increase. And it's mostly cut and fill mining. And my hat is off to the performance that those guys had, because we've been at 2,500 tons a day for this year. And so you'll see us try to continue to increase the throughput. At the Lucky Friday, we've gotten to this new mining method, we it's much more productive, much safer. And I think that the ability to increase the throughput there, we've already demonstrated, we've gone from 800 tons a day to 1,100, we're on a path to 1,200. And Lauren, that went like this, but I think there's more beyond that.

There's always more, it's just what the curve looks like.

So that's really, trying to increase productivity. So i.e. not add additional people to the extent you can avoid that, but improve the productivity per person, there's some technologies that we're certainly looking at that we think will be constructive. But I will tell you that we are on the cutting edge of technology, when we look at some of the stuff we're trying to do at Greens Creek, for example, with automated haul trucks. Our vendors say we are -- they're at the forefront of what anyone's able to do. Lauren wanted to add to my comments.

Yeah, I think the key really for us is to get the very most we can get out of that capital we've already invested. And in some cases, we make additional investments where we see incremental opportunity. But it's very much a denominator game. And so being efficient and moving more times and more metal with those same or just slightly increased resources it's a winning combination for us.

And just a comment on you mentioned that a gold mines. And the thing to remember is we have small underground mines, which is a huge advantage in this inflationary environment because we just don't have the amount of costs per ton, in aggregate, not per ton, but in aggregate. And so a move in the diesel price for them is much more meaningful than it is for us.

So could you run through what the natural bottlenecks or limiting factors are if Greens Creek, Lucky Friday and Casa Berardi tailings mill capacity, shaft hoisting underground mining, which are the limiting factors in each site?

Sure. So why don't we together start with the Lucky Friday. So the Lucky Friday, fortunately has had a large amount of capital. And that's true for all the mines a large amount of capital that's been put into the mind. And so we are clear rarely able to get to 1,200 tons a day without reaching any bottlenecks. Now that's true because of the service hoist that we're putting in. Otherwise, the hoist to have would have been the bottleneck to get to that 1,200 tons a day, we get to 1200 tons a day it starts to come in the middle. At the Lucky Friday, we continually have to expand tailings facilities at the Lucky Friday. And we're fortunate in that we've now have a land package that allows us to have tailings for as far out as we can really see. And so I think we're in pretty good shape at the Lucky Friday. We get beyond 1,200 tons a day is really about the comes about the mill.

And we'll chase bottlenecks around there. But most of them can be resolved with modest investment. The Hollywood problem would be if we put another zone in production and meaningfully needed to change what was happening in the mill. But it might even so it would be just expanding the grinding circuit. So not a huge investment.

So that Greens Creek, I mean, the real issue we thought was the mill, but we keep increasing the throughput of the middle and with very small adjustments. And so as I said, we've gone from the 2.100 to 25. And we think we'll be able to get to 2,600 without any meaningful investments. We're now in a position where the mine itself is the bottleneck. And part of the issue with the mine is the length of the haulage that we have to go to the 200 South that is about a 40 minute haul from the bottom of the mind, maybe even 50 minutes. And that's a lot of time, and a lot of people that have to be engaged in that activity. And so that's one of the reasons why we're trying to figure out if there's an automated solution or a quasi-automated solution to try to improve the haulage. We have the backfill is delivering of the backfill throughout the mine is a bottleneck. But I don't think there's going to be much issue as far as getting to the 2,600 tons a day. Lauren anything to add.

No, I agree.

And then of course tailings at Greens Creek and we're in the process of permitting the next tailings even though we just completed the permitting on the last tailings what, two years ago I guess. So we see it as about a 10 year process to permit and construct tailings I guess eight years. And so we're well on track for that. At Casa, we've been able to increase the throughput of the mill. We've doubled it if we were at 2,000 tons roughly we're at 4,000 tons. So growing that mill production is not really the what we're focused on. It's really about improving the grade of the material that comes into the mill. We've looked at ore sorting there we've looked at but fundamentally comes finding more higher grade underground material

Thank you for the rundown

Sure John

Our next question is from the line of Lucas Pipes of B. Riley Securities. Please go ahead.

Thank you very much for taking my follow up. I want to ask another question on Casa. With the diesel price increases this year, can you speak a little bit to the trade off of surface versus mill utilization there? And any light you could shed on underground versus surface costs? And how that might help? How mix might help to optimize costs at the site going forward? Thank you for your perspective on that.

But Lucas, you broke up a little bit but I think it what you're asking is sort of the relationship between the underground production and the surface production. And generally speaking we'd like for it to be about 50-50. But it all depends on what the grade is of the underground that's what we try to get to it's difficult because of the amount of development that you need to do for these relatively small stopes. Remember those numbers, but it's pretty challenging development right to be able to access the stopes.

That's correct. I think the way to think about the underground is, is right now we need to turn around 140 to 150 stopes a year underground to sustain the target production rate to the mill. Our operating philosophy there has been to maximize the throughput and reliability of the mill, which we have achieved. And then feed the mill the best possible grade. So underground preferentially backed up by open pit, but always keep the mill fall. So that's been the operating philosophy.

And when you think about this mine over the long term, where this mine will generate a huge amount of cash flow is when you've stopped development. And you start laying back the open pits and all you're doing is mining the ore then this thing becomes a huge cash flow generator. But we're trying not to get to that point where we're trying to continue to extend the mine life generate free cash flow in the meantime, generate returns to us in the meantime.

Very helpful color again. Best of luck, and thanks for taking my questions.

Our next question will come from the line of Jeff McKelvey, an individual investor. Please go ahead.

Hello, thank you for taking my call. Good morning. My question was, what are some of the current and looming potential for -- current and looming challenges for Hecla Mining as you move forward?

Well, what the issue that we have, as do most companies, both mining and otherwise is people. We are on a continual recruiting effort. We have much more focused than we've ever had in our our history. And so it's really about getting the people that you need. If you think about mining engineers that are coming out of school, it's a super small number compared to what it was 10 years ago, 20 years ago, 30 years ago. So maybe you have to repurpose other engineers from and other disciplines. But that is the big challenge for us and to the industry.

Yeah, that makes sense. Thank you so much. Thank you.

Our next question comes from the line of [Indiscernible]. Please go ahead.

Thank you for taking my question. You guys for $42 million to 45 million in capital expenditures for Greens Creek. But yes, so far that was down $25 million, despite the fact that we usually understand in the winter months. Is this due to timing of the payments or possible Casa and Greens Street and Lucky Friday deferring some expenditures to two different quantities?

The back weighting of the capital at Greens Creek relates largely to equipment. We've had to -- we've seen delayed that that we've ordered. That would be sort of the largest item, anything else?

No, we've wrapped up our capital construction for the year. It's done completed as expected. So be really is the equipment.

Okay, thank you. And congrats on encouraging results at Keno Hill. I wonder what time, at what point in the future are you looking to put out resource update?

Yeah, so we're evaluating our resources at all of our properties. We do that every year. And so you'll see something with the in early 2023. Having said that, we do not have the opportunity to do the infill drilling at Keno that is going to be required for a significant update in the resource to reserves or conversion of resource to reserves. So it might be really until the end of '23 before you see the significant move in those resources in our reserves. Remember, we have in front of us. We have in front of us 37 million ounces of reserves that Alexco had. That's at least an eight-year mine life. And we're pretty confident that that Birmingham deep material will eventually convert, which would take this out to plus 10 year mine life if it does?

Thank you. One last follow up question on Keno Hill. Keno Hill is a small mine. And you have previously as the next commandment that talked about increasing the throughput to 550 pounds per day, is that something that you want to initiate as soon as possible on Keno Hills up and running? Or how to view that and have you thought about expanding beyond the throughput level?

Yeah, the first step is to get into full and consistent production. And then we'll look at as we do it, all the mines increasing the throughput from there. So 400 tons a day is the first objective.

Okay, great.

Our final question will come from the line of Sean [Indiscernible] with Deutsche Bank. Please go ahead.

Hi, good morning. On Slide 13, you sort of show that components of production costs. The one bucket other is 24% is there anyway, you could give us a little more detail surrounding what's in that bucket list?

Yeah, sure, I think power we realize that we're on hydro and all of our mines. So that's a component of that. That's the largest component. I think the [Indiscernible] heard of that, that total pro? That's probably correct, as well as I said, I sat there and thought about that same box, the other one that sticks into my mind is something like the lease for the voting. That's an expense that would fit into that bucket as well. So it's things along those lines that don't really fit into the rest of the pieces of the pie. But sometimes can be relatively large, like power.

Right. And how has your hydro power sort of -- how has that been over the course of this year? They've been up or down or stable?

It's stable. It's stable. Yeah. That's one of the advantages that we have both in terms of the cost of power, it's quite low. And in terms of the inflationary pressure on power.

That's helpful. And then it's nice to see I think you've reached 1.9 times of net leverage now. Are you trying to remain a right around the 2 times leverage target? Is there anything religious about sort of remaining around there? Or would you potentially take this lower as your production increases and your free cash flow begins to churn?

We're would like to see it get lower, but we're committed for it not to get higher.

Understood, understood. Okay. Thanks.

Along those lines, we were at 1.1 just coming in at the end of last year, right. So we've seen it significantly lower. But to Phil's point, we're committed to to remain prudent with our balance sheet and keep it less than two to one.

Okay. Thank you.

Thanks. All right. Well, we appreciate everyone participating in the call. And what we would I would remind you that is if you would like to have a one on one call with us, those are available. We've blocked out time. So just reach out according to the instructions on the press release. And otherwise, we look forward to speaking to you again, either toward the end of this year or early next year. Appreciate it. Thanks, everyone.

Ladies and gentlemen, that will conclude today's meeting. Thank you all for joining. You may now disconnect.