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Edited Transcript of HL earnings conference call or presentation 21-Feb-19 3:00pm GMT

Q4 2018 Hecla Mining Co Earnings Call

COEUR D'ALENE Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Hecla Mining Co earnings conference call or presentation Thursday, February 21, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dean W. A. McDonald

Hecla Mining Company - SVP of Exploration

* Lawrence P. Radford

Hecla Mining Company - Senior VP & COO

* Lindsay A. Hall

Hecla Mining Company - Senior VP, CFO & Treasurer

* Michael Westerlund

Hecla Mining Company - VP of IR

* Phillips S. Baker

Hecla Mining Company - President, CEO & Director

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Conference Call Participants

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* Anthony Sorrentino

* Cosmos Chiu

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst

* Heiko Felix Ihle

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Trevor Turnbull

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter and 2018 Hecla Mining Company Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to your host, Mike Westerlund, Vice President of Investor Relations. You may begin, Sir.

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Michael Westerlund, Hecla Mining Company - VP of IR [2]

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Thank you very much. Welcome, everyone, and thank you for joining us for Hecla's fourth quarter and year-end 2018 financial and operations results conference call. Our reserves and resources news release issued last week and the financial results news release 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 CFO; 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 involve risks detailed in our Form 10-K, Form 10-Q, and in the forward-looking disclaimer included in the earnings and exploration release 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 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 the SEC filings.

I will now pass the call to Phil Baker.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [3]

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Thanks, Mike. Yes, good morning, everyone. There is a couple of things I want to highlight for you this morning before turning the call over to the team for specifics.

We're going to start on Slide 3. The first thing is that our best mines are getting even better. We set records for the highest level of silver, gold and lead reserves in our history. And it was done with a drill bit, not through acquisitions. By the way the -- our zinc reserves would have also been a record, but fell 3,000 tons short.

Realize these reserves were done with some of the lowest price assumptions for calculating reserves in the industry and ours still went up significantly. And price assumptions matter. It means our least profitable ounces have more margin. So when you consider reserves, remember that not all ounces are created equal. We have high margin ounces largely in Alaska and Quebec. Great margins in great jurisdictions.

In addition, we also had the most measured and indicated resources in our history as well as the most inferred. My expectation is for more reserve increases in the future.

Particularly notable was Greens Creek with about 15% to 20% increase in reserves of all metals and an extension of the reserve mine life to around 2030. If you consider the resources, the mine life could be 5 to 10 years longer. This mine produces about half our revenues and over the last 10 years $1 billion of free cash flow. My expectation is that over the next couple of decades it might produce maybe $2 billion of free cash flow. Greens Creek is a remarkable mine, but sometimes I think the market has just taken it for granted.

Also notable is Casa Berardi, which produces about 35% percent of our total revenues, adding about 400,000 gold ounces of gold reserves on surface with the new West Mine Crown Pillar pit. A 28% increase in reserves. This pit is only slightly lower grade than our highest grade pit and I suspect it will get bigger as we do the work to steepen the pit walls and do more definition drilling.

Greens Creek and Casa together generated about 85% of our revenue, all of our free cash flow and are getting better and longer lived. There are also the model at what we're trying to do in our 3 other operations, San Sebastian, Lucky Friday and Nevada. I just came back from the Nevada and I want to share with you a few of my observations.

It reminds me in many respects of where we were when we acquired Casa, more questions than answers, lots of work that we have to prioritize, people that we have to determine their capabilities. And like Casa, we made significant progress. Much of it will not be visible to you in many statistics yet but Larry is going to talk to you about the progress we've made in development. It's been significant. We're still trying different ways of dealing with different conditions in the mine. So while we're in a hurry to get to a steady state, we will take the time necessary to figure out the challenges of these mines so our Nevada operations will deliver value for the long term.

Before I move on to the 2019 outlook I want to point out the photo that's on the right side of that PowerPoint slides. It's from Sandvik's magazine called Solid Ground in which Alain Grenier, GM of Casa Berardi Mine and the rest of the Casa Berardi team is featured. The article centers on the successful operation of the 2 Sandvik 40 ton autonomous haul trucks. And it's on our website if you'd like to read it. By the way there are also 2 other cover stories from 2018 that are on our website, one from SME and the other from CIM.

So go to Slide 4 where we provide our estimates of production cost, capital exploration and R&D for 2019. Greens Greek and San Sebastian had similar production profiles in '19 as in '18. We expect silver cash cost to be only $1.10 an ounce and all-in cost less than $11. Casa Berardi production estimate is a little lower than last year due to lower grades, causing cost to be slightly higher.

Estimated Nevada gold production is higher with a full year of production and considerably lower cost. The gold side of the business is expected to have cash cost per ounce of $875 and all-in cost of $1,250.

We estimate $150 million for capital, which is similar to last year, about $25 million exploration expenditures, a reduction of $10 million. When you add it all up at today's prices, we expect Hecla to generate free cash.

So I'm going to pass the call over to Lindsay.

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Lindsay A. Hall, Hecla Mining Company - Senior VP, CFO & Treasurer [4]

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Thanks, Phil, and good morning, everyone. Turning to Slide 6. We reported net loss applicable to common shareholders of $27 million or $0.06 per share with almost all the loss occurring during the last quarter. And adjusted net loss of $0.11 per share. Adjusted EBITDA was $212 million versus $232 million in 2017.

Gold cash costs and all-in sustaining cash cost both after by-product credits came in at $871 and $1,226 per ounce respectively. While silver cash cost and all-in sustaining cash cost after by-product credits were $1.08 and $11.44 per ounce.

We're happy with our cost at our operating units other than Nevada operations which we reported higher cost while we work through what we believe are transitional issue.

Slide 7 shows our revenue streams that are nicely diversified with gold at 53%, silver 24%, zinc at 17% and lead at 6%.

Greens Creek again continues to be the dominant source of revenues, contributing 47% of our total revenues. Realize that if we had a more normal silver gold ratio the revenue of the 2 metals would almost be equal.

Moving to Slide 8. Revenues for the year totaled $567 million versus $578 million last year. We had record gold sales of 248,000 ounces at a slightly higher realized gold price this year with our acquisition of our Nevada operations effective July 23 contributing towards that record offsetting the reduced silver production and sales primarily at San Sebastian and lower silver prices realized this year.

Earnings from mine operations amounted to $79 million, which is $73 million lower than last year. This reduction is not surprising as it's primarily due to completing open pit mining at our San Sebastian operation in 2017 and moving to an underground operation in 2018 where the grades are lower and the mining costs are higher. Lower other expenses including taxes offset lower operating profit, resulting in a net loss of $27 million, which was similar to that of 2017.

On a consolidated basis, we generated $94 in cash from operating activities and invested $137 million at our mine sites. Of that $173 million $36 million was invested at our Nevada operations and included approximately $14 million to complete a new tailings dam and to upgrade the CIL circuit and the mill to improve recoveries.

We have a goal of financial discipline in which each of our mines should produce free cash flow. And clearly, that didn't happen with our Nevada operations that we acquired effective July of last year.

We expect 2019 -- we expect in 2019 that Nevada mining operations will be cash flow positive, but we'll invest those cash flows and more in exploration around the various Nevada mine sites and the development of the Hatter Graben decline. As to the other mine sites, we have no major capital initiates planned for 2019.

Moving to the balance sheet. At year-end, we had approximately $275 million in liquidity, which includes a $250 million line of credit which was undrawn at year end and $27 million in cash on hand. Our debt consists of $500 million in bonds, which are repayable in 2021 and $31 million owed to resources Quebec also due in 2021. The bonds are callable at par on May 1 of this year. We continually monitor the capital markets. And while we are able to refinance the bonds today, it would be at rates higher than the current bond's existing rate of 6.875%. We will continue to focus on turning our Nevada operation into a cash flow generator, building up expected cash balances and being patient about refinancing of our bonds. We have other methods available to us to reduce our total interest expense such as using term bank debt. So if the high-yield market continues to be pricy for single B debt issuers then we may use these other methods and accommodation with new bonds being issued to reduce future interest expense payments. Also, I'd point out in the back of our release our calculated net debt to last 12 months EBITDA was 2.4, which would be typically be representative of a higher credit rating than we currently are assigned. So in summary, we had a good 2018 and are very excited about the potential for 2019 and beyond. I will now pass it on to Larry to talk about the operations.

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [5]

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Thanks, Lindsay, and good morning. To start with, I want to highlight that our all injury frequency rate for 2018 declined 28% companywide as you can see on Slide 10. This is a statistic that we are very proud of, and frankly, we'll work to reduce it again this year. Also of note, Casa Berardi recently reached 1 million man-hours without a lost time accident. This is an incredible improvement from 2013, the year that we acquired the mine. Our Lucky Friday supervisory staff is also to be commended, having operated the mine since the strike began without an injury. I also want to highlight the good work done at Greens Creek on Slide 11, which as Phil notes is our most important mine that generates about half of our cash flow. With the big jump in reserves that we have reported and the resulting 3 years or so of mine life addition, the team is working hard on a new technical report. With the revised mine plan reducing the development in the next few years and moving the highest margin material from the end of the mine life to the next few years, we should see a significant increase in the value of the mine.

Greens Creek, as can be seen on Slide 12, had another strong year producing over 8 million ounces of silver at a cash cost after by-product credit of $0.66 per silver ounce. Contributing to this performance was record throughput of 2,301 tons per day.

Moving on to Casa Berardi on Slide 13. This mine just keeps performing better and better. The 157,000 ounces of gold produced was the highest since we acquired the operation. Fourth quarter production level was a bit lower than the previous quarter in part due to the removal of the primary crusher and replacement with a higher capacity crusher which took about 1 week.

Record production is primarily due to throughput, as shown on Slide 14. The mill operated at an average of 3,515 tons per day in the fourth quarter 2018 and 3,769 tons per day for the year. Casa milled 825 tons per day more than 2016, and almost 2000 tons per day greater than when the mine was acquired.

In 2018 open pit feed accounted for 46% of the mill feed. We have run the mill at over 4,000 tons per day on a spot basis. We continue this steady, increasing throughput even further. Casa Berardi was our second highest cash flow generator in 2018 and a technical report is also being put together for it reflecting the significant increase in surface reserves in what we -- what could be the fifth surface pit called the West Mine Crown Pillar Pit.

Let's move on to Nevada on Slide 15 where most of our focus is this year. We have a plan to turn around the assets and we are working that plan. In 2018, the focus was on getting the operation back on track in terms of understanding ground conditions and Fire Creek and getting the team organized. We have come a long way in this regard. Our strategy is simple, develop and drill. We believe that the grades can be improved through new discoveries and resource conversion. And ore production can be ramped up by opening up more working zones.

Fire Creek, we have done a review of equipment and are adding equipment from Midas and from buying some new equipment. We have added 2 trucks, 2 large loaders, 1 jumbo, 2 bolters to the Nevada fleet for costing a total of about $6 million with the expectation that the upgrade will increase productivity.

The implementation of (inaudible) Creek into the development process is s resulting in better ground conditions as expected, which should minimize the need to go back in and rehab development repeatedly as was the case under prior management. The CIL plan upgrade is complete and the mill is now able to process Hollister ore (inaudible).

We have exceeded our annual development target of 35 feet per day in January as shown on Slide 16. And the goal will be to maintain this level and increase it where possible because this should open up additional headings and increase production.

We have wrapped up Fire Creek manpower from for underground manpower from 76 to about 110 through transfer of Midas and haulers for miners. Our contractor has brought in a roadheader at Fire Creek and it is easily cutting the soft tough material which is helping to speed up development and we are considering a wider application of this type of chain.

We're planning to increase Fire Creek throughput mid-year to about 520 tons per day from 340 tons per day which was the fourth quarter average, which means that the gold production will be weighted towards the second half of the year. The increased development is an important step for Dean's group as we have work to do on definition drilling to upgrade resources and exploration to discover additional resources.

San Sebastian on Slide 17. We are now collecting the bulk samples sulfide material. And we should have it run through a third-party mill for testing by the end of second quarter. We currently have oxide material to take us well into 2020 and Dean's group has a priority of finding more oxide ore. I'll hand it over now to Dean.

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Dean W. A. McDonald, Hecla Mining Company - SVP of Exploration [6]

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Thanks, Larry. Last week, we announced the highest levels of silver, gold and lead reserves in our 128-year history. Total gold reserves reached 2.85 million ounces, an increase of 26% from last year, mostly due to increases in open pits at Casa Berardi as a result of successful surface drilling.

Silver reserves grew by 8% to 191 million ounces, primarily from Greens Creek due to a combination of good drilling results, advanced resource modeling techniques and improved smelter terms. The increase in resources is also important because this suggests the potential for increasing reserves in the future. We continued with aggressive drill programs in the fourth quarter following success at Casa Berardi, Nevada, Greens Creek and San Sebastian. A list of drill intersections is provided in the Appendix B of the exploration release on February 14, giving insights into the high-grade resources we are confirming and expanding.

As you can see from Slide 19, Hecla reserve price assumptions of $14.50 per silver ounce and $1,200 per gold ounce are some of the lowest commodity prices used in the industry and have been for many years.

On Slide 20, you can see that over the past 11 years we have consistently replaced or grown silver reserves from 130 million to 191 million ounces in addition to the 142 million ounces of cumulative production over that time. This means we have actually added a total of 200 million silver ounces in the past 11 years with no contributions from acquisitions.

At Casa Berardi we have considerable drilling success again along the main trends, particularly near surface. And this has resulted in a New West Mine Crown Pillar Pit as shown on the left hand of Slide 21 and expanded East Mine Crown Pillar and principal pits with a total of 442,000 ounces of new gold reserves added during the year. There are now a series of pits along the Casa Berardi deformation zone. Underground exploration was also successful. The red arrow show the projection of high-grade shoots that will be evaluated in the coming year, particularly in the East Mine where access was reestablished last year.

A closer look at the West Mine Crown Pillar Pit in the cross section on Slide 22 shows the convergence of several broad mineralized lenses near surface providing the critical mass for potentially very economic open pit and the possible exploitation of zones with underground mining in the future.

At Greens Creek, there was significant growth in reserves. As shown on Slide 23 definition and exploration drilling continue to add reserves higher in the mine at the East Ore and Upper Plate zones. Lower in the mine we are adding to reserves and resources along some existing trends in the Gallagher, Deep 200 South and Lower South West zones. Three drills will be operating underground all year in these areas with the goal of defining additional reserves. In 2018 very little exploration occurred on the Nevada projects until the Klondex was completed. It is evident that we urgently need to upgrade resources to move into the mine plans and identify new resources.

Slide 24 shows how significantly we are accelerating our efforts for both underground and surface drilling with more crews, more drills, more technology and increased budgets in 2019. The upper diagram on the right shows the location of underground definition and exploration drilling at Fire Creek. Intense underground drilling is planned for spirals 2, 3, 4 and 9 and the tightened zone to upgrade resources that can lead to near term reserves. Exploration of the Spiral 9 in North Zone provides the opportunity to extend some of the known mineralization trends. This drilling is planned to be in combination with surface drilling that will be initiated in April and will evaluate the Zues (inaudible) and South Notice targets.

Lower in the diagram on the right shows the drills at Hollister are working to define the mineralization trends in West Gloria, Central Hollister and Gwenivere for near-term mining. The development advancing to the east towards the Hatter Graben provides underground drill platforms for the drilling of targets in the East Clementine area and into the Hatter Graben late in the year. Surface drilling is planned to begin in April with the goal of extending the Hatter Graben resource to the east. At San Sebastian, as shown on Slide 25, mining studies are being completed on the Professor, East Francine Veins and the polymetallic mineralization of the Francine Vein. While at the same time surface drilling is focused on defining new near-surface oxide mineralization along the West Francine and Esperanza Veins. Recently we have successfully identified new oxide veins at the El Toro target and are pushing hard to define a new oxide source with further drilling.

The emphasis of exploration in 2019 is to rapidly advance our opportunity in Nevada, define new oxide mineralization at San Sebastian and continue the drilling successes at Casa Berardi and Greensfield. And with that, I'll pass the call back to Phil.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [7]

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Thanks, Dean. We're going to go ahead and just go straight to questions, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Cosmos Chiu from CIBC.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [2]

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If I may, my questions are mostly on Fire Creek here. I understand that Fire Creek and the entire sort of Nevada complex is still a work in progress. Certainly in 2018 a transitional year there were some disappointments with the decrease of reserves beyond what was produced. I'm just trying to get a better understanding in terms of what has been the biggest surprise to you at these Nevada assets in terms of reserves, in terms of production as you know ownership has handed -- since ownership has been handed over to Hecla.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [3]

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Well I'll start and then I'll let Larry and Dean jump in. But I think the biggest surprise and the disappointment was the Klondex didn't follow the budget that they had presented to us. And so, as a result, the amount of development that was done was significantly less than it was supposed to be done. And so, as a result, it really has caused the staff to really focus and reestablish the mine. That's probably the biggest thing from my perspective. Larry?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [4]

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Certainly operationally, the biggest challenge is getting the development (inaudible) despite ground conditions which were challenging, we are on an acceleration track.

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Dean W. A. McDonald, Hecla Mining Company - SVP of Exploration [5]

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Cosmos, for just a comment on the reserves, and we hit them pretty hard. Clearly, there was mining depletion, there was no drilling in the first half of the year, and so there really wasn't time to refine and identify new reserves. But the other thing, we knew that there was a challenge in reconciling the production grades with the mill and so we really relooked at the modeling. We narrowed the vein or the size of the vein within the models. And so we actually -- and changed the capping or top cut. And consequently, that represented about half the reserve losses. We were very conservative in our modeling of those -- of the existing resources and reserves.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [6]

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Yes, we want to make sure that we have a base to build from in terms of reserves, in terms of resources, the development we want to -- it's still a work in progress to figure out the development, hence why we're looking at a roadheader to go in and do the development advance. So we're not -- we think there is a lot of different levers to pull before we will optimize this mine and similar to what we say at Casa Berardi.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [7]

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Of course. And Phil and Dean, it's great that you brought up the reserves and resources. You knowing, looking at it here, and you talked about Spirals 2, 3, 4 and 9 and a number of different zones Vonnie, Joyce, Karen Honey and others. I'm just trying to understand what of these zones that you have identified are considered categorized as say new zones versus an extension of current mineralization. I think Dean sort of touched on that. Spiral 9 looks like it could be an extension in terms of a drilling platform for (inaudible) mineralization. I'm just trying to get a better understanding and trying to gauge the difficulty in terms of adding to reserves and resources based on are they new zones, are they extensions and what not?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [8]

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I'll let Dean answer the question, I...

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Dean W. A. McDonald, Hecla Mining Company - SVP of Exploration [9]

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Yes, well, Cosmos, it is really all of the above. They are clearly extensions to the existing, you mentioned Vonnie and Joyce, the veins that have been key producers in the past. There are extensions to the north and south. And in fact, there may be opportunities up (inaudible). But as you go to the north (inaudible) what's referred to as -- let me step back. So for those zones we know they're there, there has been some preliminary drilling to define them. And now we're getting the development in place to drill them off. From an exploration point of view, particularly to the north you have Spiral 9, you have the North zone that the North zone is really a northern extension of the known veins we're seeing in the Titan zone a series of new veins there and then in Spiral 9. Surface drilling to the northwest with Zeus I think are defining some new veins that certainly look encouraging. You know, we're going to need to drill them out. But I do see kind of near term upgrading, expansion and long trends. And then with Spiral 9, Zeus and others things are going to come in the next few years.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [10]

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Great. And then maybe that leads into my next question here in terms of timing. When would you be ready to potentially put out a reserve resource update? Again there are in the end some market concerns in terms of the low ounces on core reserves at this point in time. Again understanding that Nevada is still a work in progress and all the other issues that we had talked about in the past or just now, but I'm just wondering, when would you be ready to potentially put out a new reserve resource?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [11]

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We have not actually made a determination. Our typical schedule is year-end and I'm not envisioning that we're planning to change that in any...

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Dean W. A. McDonald, Hecla Mining Company - SVP of Exploration [12]

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Yes. At this point, Cosmos, I'd say we'd stay with our traditional scheduled, but depending on what transpires, that may change.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [13]

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And maybe one last question on Fire Creek here. We've been given the production guidance for 2019 for Nevada as a whole, as a complex, but I'm just wondering how much of the 69,000 ounces in reserves for Fire Creek have you sort of incorporated into that 2019 guidance? Have you incorporated anything beyond reserves into that guidance?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [14]

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Yes. The answer is yes. Some of this would beyond reserves. As far as what that percentage is, I couldn't tell you, but it's -- and I'll let -- does anybody know?

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Dean W. A. McDonald, Hecla Mining Company - SVP of Exploration [15]

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I don't know that.

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Lindsay A. Hall, Hecla Mining Company - Senior VP, CFO & Treasurer [16]

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Yes. I don't know the exact number on that.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [17]

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Okay. But there is some -- but -- a lot of it, the bulk of it I guess will be based on reserves.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [18]

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Yes. Well, it is a combination. I mean, we -- and this was part of the calculus we did in acquiring this is that you have to convert, inferred into reserves. And frankly, what happens is going to be similar to what we've seen at other mines where we are producing mineralization that maybe doesn't even make a category. And we certainly see that at Greens Creek a lot. We don't see any -- that this would be any different than that.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [19]

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No, great. And sorry, I lied, maybe one last question on Fire Creek here. You talk about increasing the undermine -- underground throughput from I think 350 ton per day to 520 by mid-2019. Is that as simple as Larry said getting ahead on development, getting your 1,200 feet per month in place. Is that really the bottleneck?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [20]

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It's a key -- the key to expanding throughput is in expanding development without a doubt. Obviously, we need to also drill ahead of ourselves, get our definition drilling in place, confirm the stokes before we dive into them. All of that is driven by developer.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [21]

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And you're happy with the 1,200 feet per month level Dean or Larry?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [22]

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Yes. I mean, we exceeded it in January. We're a little bit behind in February only because we're driving raises right now, so we're doing less capital -- lateral footage. But we see this as staying on plan. It was a matter of injecting more miners and more machines and that's on track. And now we actually have some opportunity to improve our actual cycle at the face. That's the next challenge that we will take on.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [23]

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And I just wanted to just make sure that people understand, you're still trying new things and you don't have a standard development plan yet for cycle yet, you're still working through that?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [24]

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Yes, we're still working through that. We're still doing conventional drilling blast which are typically very short rounds at Fire Creek at the ground (inaudible). So we have to have around a lot of headings, shooting, short blasts. And so there's opportunities there. The roadheader, the first trial was very successful. It kept the material very well and left behind very solid back and rib. And so we're just -- we're learning as we go. We're injecting. We have our VP tech services on site pretty much full time now. We've taken Lucky Friday expertise down and we're making improvements that we should be.

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Operator [25]

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And our next question comes from Matthew Fields from Bank of America Merrill Lynch.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [26]

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So back since you've issued the bonds in 2013 in your EBITDA reconciliation you've added back or taken away as is the case, the gains or losses unrealized on derivative contracts. So for the first 9 months to date that was basically a $40 million hit in your EBITDA because you've gained that in your income statement. But all of a sudden, for the fourth quarter, most of that's gone away. So it looks like you only take away about $8 million instead of $40 million. So you're -- looks like you're inflating your EBITDA by about $32 million. Can you help me understand why that's not the case?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [27]

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Well, the first thing I'd say is that the derivatives contracts that we had, we closed out in the third quarter and generated $35 million, $32 million of cash from those contracts. So we have not -- when the price of zinc and lead fell and we were able to generate that cash and so we were monetizing that hedge. So we've done that. Now prices have come back up for zinc and lead and so we're putting new positions in place. So to the extent that prices continue to rise, we'll have that -- that number will grow as we put in more contracts and to the extent those go underwater. But Lindsay, anything to add to that?

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Lindsay A. Hall, Hecla Mining Company - Senior VP, CFO & Treasurer [28]

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Yes. Matthew, maybe you're saying we deducted $40 million and arriving at adjusted net income, we picked that gain out. Then we include in our EBITDA calculations. That's still alluded to, the cash we received on the -- closing out the hedges, much the same. We were kind of following our covenants which allow it, so.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [29]

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Right. But the first 9 months of 2018, basically you add back -- you take away $40 million and then all of a sudden that disappears in the full year. I'm just...

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Lindsay A. Hall, Hecla Mining Company - Senior VP, CFO & Treasurer [30]

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You're talking about income statement or balance sheet or cash flow? Pardon me.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [31]

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Income statement is for the first 9 months you've gained $40 million on derivatives, that shows up in the full year income statement as well. But in the EBITDA...

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Lindsay A. Hall, Hecla Mining Company - Senior VP, CFO & Treasurer [32]

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Yes. Not much happened in the fourth quarter, Matthew.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [33]

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Right, agreed. In the EBITDA reconciliation, when you look at your third quarter release that entire $40 million from the income statement was taken away. But now all of a sudden on the fourth quarter report only $8 million is taken away.

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Lindsay A. Hall, Hecla Mining Company - Senior VP, CFO & Treasurer [34]

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Yes, I think what you're saying, maybe in the third quarter we didn't add back the cash gains on the passed out hedges, right? Is that what you're alluding to? We'll look back and check that but...

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [35]

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Yes, but if I look at the cash flow statement, it looks like you've only gained -- monetized $15 million. So there's a lot of -- there are some screwy numbers going on and just maybe we can take this offline because it -- you reported $156 million of EBITDA for the first 9 months, $28 million in the fourth quarter and somehow that's supposed to add up to $211 million. I'm happy to take this offline.

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Lindsay A. Hall, Hecla Mining Company - Senior VP, CFO & Treasurer [36]

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Yes. Let's take it offline. I might argue, they're not screwy numbers. They're just accounting and cash flows being mixed so we'll deal with it.

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Operator [37]

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And our next question comes from Heiko Ihle from H.C. Wainwright.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [38]

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I promised myself I wouldn't ask (inaudible) question this time for one. So going over to Nevada. You mentioned the assets should be cash flow positive this year. Are you willing to quantify this just a little bit more especially given that your all-in sustaining cost estimate there is $13.25 an ounce?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [39]

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No, what we've said is that the operations will be cash flow positive with the exception of the exploration and the development for the Hatter Graben. So when you look at -- so basically we're saying that we're right at positive cash flow from Nevada. And if you look at the all-in sustaining cost, you see that.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [40]

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Got it, okay. Fair enough. And then the declines, well, 15% complete, so there's still a bunch of work to do obviously. Speaking about (inaudible).

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [41]

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Yes, we're going to do -- we'll do 5,000 feet of development at the Hatter Graben.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [42]

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And speaking of Nevada and following up on the question that's Cosmos have asked, I mean you mentioned increase in the throughput of Fire Creek from 350 tons per day to 520 tons per day by 2019. You also then state you're focused on, and this is from your release, maintaining to develop and rate in all ground conditions. Am I reading something into here that's not there? Or is there something I'm missing? (inaudible) the ground conditions at Fire Creek are actually pretty solid. Is there -- are there pockets that need extra ground support? Or again am I missing something here?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [43]

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Yes, well you remember, we - when we first bought it we talked about the fact that we had this (inaudible) that created road conditions that we had to come in with a synthetic liner and build a road base. Well that's - so we dealt with the road conditions. But you have that same condition on the back and on the ribs. And so that's what Larry is alluding to with the shot creating that we've had to do. And that's why we're contemplating the road header going through the soft material. Larry?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [44]

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Yes, it's a variable. You can see very good ground conditions for (inaudible) 24 feet a day in a given heading. And then at times we run into altered tuffs and very clay-like material that take short rounds and requires a fair amount of support. And the addition (inaudible) so it's variable.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [45]

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And then you have -- and then you also have the introduction of water into this tuff which -- if you think about -- if you look at those pictures of the road, you get a sense of how soupy it becomes and difficult to operate in. And so we're trying to figure out the best way to deal with the changing ground conditions. And so that's why I have –- continuing to make a point that we're experimenting, we're trying new things. I'm more interested in Larry coming to a series of standards depending on the ground conditions rather than just being so worried about getting the development, but Larry (inaudible).

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [46]

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Yes, you mentioned water, there's perched water in certain pockets. And we're looking at a bit more of a mobile watering plant so that we're not managing the water underground. So yes, we've shown, as Phil alluded we've shown photos of some of the poor conditions and what we're doing to manage them. We've got the right team there. I mentioned the roadheader, it's actually a very small roadheader that we're trialing right now. And if it continues to perform as well as it seems to be, we may go all in for a large roadheader, I mean a really large roadheader and really jack up the advance rate.

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Operator [47]

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And our next question comes from Anthony Sorrentino from Sorrentino Metals.

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Anthony Sorrentino, [48]

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You're estimating 2019 capital expenditures at $150 million and 2019 exploration expenditures at $25 million, would you break those down by property?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [49]

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Sure.

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Dean W. A. McDonald, Hecla Mining Company - SVP of Exploration [50]

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Well, I'll talk about the exploration. So that $25 million, Anthony, the half of it will be Nevada and the remainder will be split between Casa Berardi, San Sebastian, and Greens Creek. There'll be very little exploration outside of those four areas.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [51]

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And Casa Berardi and Mexico are roughly 3 million (inaudible).

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Dean W. A. McDonald, Hecla Mining Company - SVP of Exploration [52]

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Yes. Casa is 3.6. San Sebastian is 3.4.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [53]

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And as far as the capital goes, it's about $12 million for the Lucky Friday, about $50 million each for Greens Creek and Nevada. And then about $40 million for Casa Berardi.

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Operator [54]

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And our next question comes from [AJ Laylay] from [South Pal].

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Unidentified Analyst, [55]

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I just wanted to ask about the Casa Berardi medium-term cost outlook as you move from underground what looks like into more of an open pit mine plan for your recent reserve announcement?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [56]

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There's really no change in the percentage of surface and underground planned anytime soon. We'll have a number of years of the underground based on the current reserve and we're adding to reserves periodically. So those will not change. It's still roughly...

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [57]

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50-50.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [58]

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50-50. And the grade of the underground is about twice the grade of the open pit, maybe a little more, not much. The new stuff that we've added from the West Mine is a bit higher grade than the surface average. So all-in-all, our expectation is to sort of maintain the cost structure that you see as we develop both the underground and the surface.

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [59]

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No, can I add?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [60]

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Sure, please.

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [61]

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So all of that is premised on a permit limit at 1.4 million tons, metric tons per year. And we are going to apply for an addition to that. Should we successfully raise the permitted limit and make some adjustments in the mill, then we could increase the amount of open pit feed going into the mill.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [62]

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Yes, that's right. And what -- with the increases to how much?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [63]

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Well, we're applying for 1.6 million.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [64]

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So 0.2 million more?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [65]

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Yes.

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Operator [66]

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And our next question comes Trevor Turnbull from Scotiabank.

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Trevor Turnbull, Scotiabank Global Banking and Markets, Research Division - Analyst [67]

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I just had one quick question, very simple question with respect to Nevada. Is there any chance you're going to have a site visit this year? It might make it simpler to understand some of the stuff that's been discussed on the call so far.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [68]

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Yes, I'm sure we will have one this year. We haven't made any specific plans at the moment. I want Larry and his team to have the opportunity to get their SOPs for the development in the different conditions resolved before we start bringing people onto the site. So while we're still in this learning phase, it's probably better to wait.

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Trevor Turnbull, Scotiabank Global Banking and Markets, Research Division - Analyst [69]

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Okay. My other questions were really more for Larry with respect to Greens Creek. Larry and Dean. I guess the first thing, you've got some exploration and potential reserve additions coming at Greens. Can you give us a sense, Dean, what that's going to look like in terms of the reserve grade you've got there at Greens Creek? I think you're on the order of what 400 grams silver now. Are these areas likely to be consistent with that and kind of maintain a similar level of silver?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [70]

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Yes, Trevor, so last year, and I think in ounces per ton. But last year our reserves was -- were 11.8 and we're at 11.5 this year. My expectation is that you're going to see that 11.5 to 12 with potential resources converting to reserves. We are exploring upper plate, it's narrower but very high grade. The same is true for East Ore. And both of those areas are higher up in the mine. And Deep 200 South is overall more precious metal rich so that you will see with a couple of these areas higher grade precious metals than the reserve grade and slightly lower base metals. But that's going to fluctuate. Overall, I don't see huge changes in the grade, the reserve grade overall.

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Trevor Turnbull, Scotiabank Global Banking and Markets, Research Division - Analyst [71]

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So maybe the better way to think about it really given all the base metals is that NSR is unlikely to change a whole lot in terms of the value per ton of the stuff you're looking at versus what you've already got?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [72]

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Yes, I think that's a good comment.

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Trevor Turnbull, Scotiabank Global Banking and Markets, Research Division - Analyst [73]

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So I guess what I'm also wondering is you talked about certainly on the slide in the Presentation looking to move some high-grade material forward in the mine plan. And it feels like you've been just kind of a little ahead of reserve grade recently. Are you looking to kind of still kind of maintain that? Or are you looking for a pretty significant bump in the grade you are moving forward? And I guess my question really is trying to get at, are you going to kind of be above the reserve grade in aggregate there for a few years and then kind of by -- to what degree such that I kind of understand, to what degree it might dip below reserve grade going forward?

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [74]

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Well, I know over the next sort of 4 years, 2020 through 2023, reserve grade will be -- or production grade will be higher than what it has been. I don't off the top of my head have, I can't remember what that will be. But as a result, we'll have higher ounce production. Larry did -- generally speaking -- and we'll have -- in the 43-101 you will be able to see that. But generally speaking...

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [75]

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Yes, in next year this will not match the technical report exactly because this is more of an internal...

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [76]

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This includes inferred and everything.

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [77]

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Yes, this is not going to match the technical report, but it'll give you a kind of -- an idea of where it will be. We should be next year in 12.5 ounce per ton silver.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [78]

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So call it an ounce better and for the next few years.

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Trevor Turnbull, Scotiabank Global Banking and Markets, Research Division - Analyst [79]

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Yes, a healthy 10% or so better than where it's been. And then Larry I guess also just referring to that Slide 11 in the deck. You show the old design with the ramp. Looks like you've been able to get away without having to put in that ramp which is obviously a huge savings and you've gotten to this what looks to be a much more simplified design. I'm just curious, it looks almost too good to be true that you could get rid of all that development and do what you need to do using existing workings. Can you just explain a little bit about how that came to pass that you could eliminate all that development and still achieve what you needed to?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [80]

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The graphic that we included is just one example. This is East Ore and the very high end of the mine. We anticipate and we published in our reports that there will be 15,000 fewer development fee. And a part of it is coming from the section we're showing in the graph but not all of it. Some of it is just a good rethink of how we're accessing what are complicated ore bodies. These things are geometrically complex. And the more we can come off of existing access as we have in this example the less development we're going to do. So 15,000 feed capitalized is no small amount of money, it's actually quite significant.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [81]

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But to the point, I think some of this has come as a result of being able to take more data and build a clear picture of where these ore bodies are. I think that -- I don't mean to give a advertisement for leapfrog, but I think it's been very helpful. Dean?

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Dean W. A. McDonald, Hecla Mining Company - SVP of Exploration [82]

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As you know, the geometry of the ore bodies at Greens Creek are challenging, particularly when you're trying to model using leapfrog primarily. We've been able to create wireframe models of the ore bodies that incorporate not only the drilling but all the underground sampling and really been able to develop I think a lot more realistic 3D model. And I think that's contributing as well to mine planning and optimizations. It's that historically Greens Creek had a lot of mining ore zones outside of the modeling which of course causes adjustments and time delays. I think we're doing a much better job of recreating that geometry in our models now.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [83]

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And so as a result of that, you know where to put the development. And we're -- we can be much more efficient with what we're -- how we're designing it. So Larry?

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Lawrence P. Radford, Hecla Mining Company - Senior VP & COO [84]

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Yes, just a last thought is that the prior mine plan we had 15 foot high cuts and there were horizontal cuts. And so as we designed them, we -- as soon as you got towards the fringes and it's no longer paid you just cut off the [stove]. We've now adjusted our centerlines more to the actual geometry of the ore bodies and it's made for, well, more ore and more efficient development.

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Trevor Turnbull, Scotiabank Global Banking and Markets, Research Division - Analyst [85]

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Yes -- no, it sounds like it's been a positive result all the way around. That's great.

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Operator [86]

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Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Phillips Baker for any further remarks.

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Phillips S. Baker, Hecla Mining Company - President, CEO & Director [87]

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The only thing I'll say is, I know it's a busy day for you guys with lots of calls, so feel free later in the day to give Mike or I a call and I'll be happy to answer any more questions that you might have. Thanks very much. Have a good day.

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Operator [88]

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