Hecla Mining Company (NYSE:HL) Q4 2023 Earnings Call Transcript
Hecla Mining Company (NYSE:HL) Q4 2023 Earnings Call Transcript February 15, 2024
Hecla Mining Company isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Jeannie and I will be your conference operator today. I would like to welcome you to the Q4 2023 Hecla Mining Company Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Anvita Patil. You may begin your conference.
Anvita Patil : Good morning, Jeannie, and thank you all for joining us for Hecla’s Fourth Quarter 2023 Financial and Operations Results Conference call. I'm Anvita Patil, Hecla’s Vice President of Investor Relations and Treasurer. Our financial results news release that was issued yesterday, along with today's presentation are available on Hecla’s website. On today's call we have Phil Baker, Hecla’s President and Chief Executive Officer; Russell Lawlar, Hecla’s Senior Vice President and Chief Financial Officer; and Carlos Aguiar, Hecla’s Vice President of Operations. Phil and Russell will make most of the presentation. Carlos, who's at Keno Hill, will make a couple of comments. All of them will be available to answer questions.
Any forward-looking statements made today by the management team comes under the private securities litigation reform act and involve risks, as shown on slide two, in earnings release and in our 10-K and 10-Q filings with the SEC. These and other risks could cause results to differ from those projected in the forward-looking statements. Non-GAAP measures cited in this call and related slides are reconciled in the slides or the news release. I want to remind you, if you would like to have a call with the management, you can do so by using the link under the section, virtual investor event, in earnings release that was issued yesterday. I will now pass the call to Phil.
Phillips Baker : Thanks, Anvita. Good morning, everyone. Thanks for joining our call. I'm going to start on slide three. 2023 was a year that was marked by wins and faced with challenges. Some of the challenges were expected, some not. So let me first start with the successes we achieved. We reported the second highest reserves in our history. Our silver reserves have increased almost 40% over the past 10 years, and we've accomplished this by not only replacing 130 million ounces of silver production, but adding 65 million ounces through the drill bit, primarily at the Lucky Friday and Greens Creek, and most recently by our acquisition of Keno Hill. We've also had a successful year in exploration with some spectacular results at Keno and Greens Creek.
We recorded our second highest revenue in silver production, and this was achieved despite Lucky Friday not being in production for five months. Both Greens Creek and Lucky Friday recorded their lowest all injury frequency rate of all time, and we continue to be rewarded for the innovative culture we've created at our long legacy of 133 years. We received a patent on the Underhand Closed Bench mining method. Now in terms of challenges, this year it was really marked by three events; the unexpected fire at the Lucky Friday, our decision to pivot to a surface only operation at Casa, and to prioritize safety over production at Keno, which has resulted in slower than expected ramp up of the mine. Now, the Lucky Friday is already back in production, and we expect to ramp up to full production by the end of the first quarter.
Our decision in late August to transform Casa to a full open pit operation by mid-‘24 was a recognition that we needed radical change, and we prioritized margin over volume, and our execution of this strategy is already yielding results. At Keno Hill, exploration drilling has highlighted the potential and the opportunity of this mine. And while our ramp up at Keno Hill has gone slower than expected, we firmly believe that by focusing on safety and the environment and getting the mine to Hecla standards is critical, if we're going to be successful and provide that long-term value that Keno has the potential to provide. Now, we've navigated through the challenges of 2023, and we entered 2024 with four operating mines that will give us significant growth over the next three years.
So I'm going to talk about exploration and operations after Russell talks about the financial and technical reports, and Carlos makes a few comments. Russell.
Russell Lawlar : Thanks, Phil. I'll start on slide five. By several measures, 2023 was a very good year. We generated $720 million in revenue. Silver contributed 39% of our revenue, which is more than any other metal, demonstrating Hecla as a true silver company. We continue to have very strong margins from our silver operations, with a margin of 50% of the average realized price of silver for the year. As expected, and as we reported in the last quarterly call, we did see our net leverage ratio tick up from 2.2x last quarter to 2.6x this quarter. This is primarily due to Lucky Friday not being in production for the last five months of the year. Our goal remains to manage the net leverage ratio to be less than 2x. I'll now turn to slide six to discuss the company's priorities with its free cash flow as well as liquidity.
On the previous slide, I mentioned the strong margins we see at our silver operations. These margins equate to significant free cash flows, with 12 months of production at Greens Creek and six plus months at Lucky Friday. These operations generated $155 million in free cash flow. With this cash flow and using our balance sheet, we've made some strategic investments for production growth, the $64 million investment at both Keno Hill and Casa Berardi. In 2024, we anticipate seeing strong free cash flow generation from Lucky Friday and Greens Creek, and relatively small investments at Keno and Casa, as well as we expect $50 million from the insurance on the Lucky Friday fire. Our priorities will be continued investment in the long-term production growth of our assets, which include development and exploration in all of our mines, but will also be prioritizing delevering our revolver debt.
We have full access to our revolver and can access the accordion if necessary. We expect to have adequate sources of cash flow to not only finance our production growth, but also reduce the revolver debt. Our belief is revolvers are meant to provide liquidity when needed, which ours has, but are best undrawn. As we turn to the next couple of slides, I'll walk through some of the highlights of the technical reports. On slide seven is the summary of the technical report for Keno Hill. This report confirms the value which we've had the opportunity to capture at Keno Hill. The mine projects to have 55 million ounces of silver in reserves, at a reserve grade of more than 26 ounces per ton, with an expected reserve life of 11 years and an undiscounted cash flow of $420 million.
After tax cash flows discount of 5% is just over $300 million at $22 silver. This report demonstrates the value of reserves at Keno Hill, which is only partially why we made the strategic acquisition. Phil will speak to this later in the presentation, but the value that we expect to be added at Keno Hill through the drill bit and our exploration success confirms the significant exploration potential. Turning to slide eight, we've owned the Casa Berardi mine for more than a decade, and it's been a good mine over that time. However, when we acquired it back in 2013, we realized then that there was the potential for significant value in the open pits, which were anticipated to start production later in the mine life. We see that value crystallizing as we work through the 160 pit and move our way toward the west mine crown piller and principal pits, where we anticipate seeing this mine generate substantial free cash flows.
However, it's not all investment in the property until then. Based on this report, we anticipate seeing the cash flow from the property be slightly negative this year, turn positive next and be significant in 2026, which should return a large portion of our investment of the past couple of years, prior to taking a production pause while accommodating a permitting time frame for the higher grade pits. In 2027 we expect to process the stockpile followed by a production gap of three years when the higher grade pits start production. The revised technical report anticipates a mine life of 14 years, returning an undiscounted cash flow of nearly $600 million and a discounted cash flow of almost $350, which demonstrates the value this mine brings to the Hecla portfolio.
Turn to slide nine and I'll turn the call to Carlos.
Carlos Aguiar : Thanks Russell. I will make only a few comments since I'm outside and remote from Phil and Russell. First, on safety, we have a strong overall safety record, off of one of the mines suspected by [inaudible] have done. Green's Creeks, all of injury frequency rate was 0.29 and Lucky Friday 0.66, both the lowest in their history. Casa Berardi was not where it should be, but had lots of changes. Keno’s safety was unacceptable. For all the operations we have started a safety program that is focusing more on leading indicators like near misses, risk assessments, interactions and inspections. We expect to make all four operations safer from [inaudible]. All four operations started this year strong. Lucky Friday restarted as planned in the first week of January and Keno Hill is safer and therefore is beginning to ramp up faster.
Greens Creek got the weather events behind it and Casa Berardi’s continued the good performance of the last few months. What a difference we will have this year by having all four properties operational. With that, I will pass it on to Phil, starting on slide 10.
Phillips Baker : Thanks Carlos. We've labeled Greens Creek on this slide, the foundation of Hecla's future. Since as we grow, Greens Creek will continue to be the foundation providing stability and consistency in our cash flow and production well into the future. The mine reported a strong year, which could have been even better without the weather reducing 12 days of production in the fourth quarter. Now we expect the mine to have another consistent year in 2024 with production expected to be about 8.8 million to 9.2 million ounces. So a little less silver and also produce a little less gold due to mine sequencing, where we're mining lower grades, but we will produce a bit higher zinc, the zinc grades are a bit higher. So the cost per ounce will be higher.
We also are increasing the capital, replacing some mobile and mill equipment as risk mitigation is operating at around 2,600 tons per day, it becomes particularly important. At this higher throughput, we really need everything to be more reliable, because there's not really an opportunity to catch up if we have an upset. And like we've done at Greens Creek for 30 years, we still see opportunities to have lower costs, that you know these investments to allow us to have lower costs, and also increased recoveries with some of the investments. Slide 11 shows our planned ‘24 surface and underground exploration programs, which will be testing multiple targets with significant potential to add resources. When Greens Creek started, the mine had a mine plan of seven years and now 37 years later, the mine plan is 14 years.
This past year's underground exploration had good success in seven of the eight zones drilled with four of those zones in the fourth quarter. So we're very excited about this year's program that coordinates the drilling underground with the surface drilling in the East Ore, the Upper Plate and the Gallagher. We will also drill in the land package we recently acquired, that's the Mammoth claims. We've had an interest in acquiring these claims for at least 20 years. And then at Cliff Creek which has been known to be a very prospective area, but it's – as it's called Cliff Creek, it's almost inaccessible. We started mapping this past year, but had logistical issues. But we noted what we need to do and we have a contractor who we think he’s going to be able to do it.
So our focus is not just on expanding high-grade mineralization, but it's also in making new discoveries, new discoveries at Cliff Creek potentially and Mammoth claims. Now, Greens Creek is a premier silver mine. It's actually the 11th largest in the world, and I just want to congratulate the team on delivering excellent and consistent results and giving it a great future, because this is truly a world-class asset. So let's turn to slide 12. And if Greens Creek is the foundation of Hecla's future, Lucky Friday is the pillar of near-term growth. The value, consistency, culture and leadership that Lucky Friday brings, makes it our second cornerstone asset. If you put this together with Greens Creek, these two mines make us the largest silver producer in the United States.
The mine restarted in early January, as Carlos mentioned. Production should be about 5 million ounces. Cost per ounce should be similar to Greens Creek. Capital will be about 15 million less this year than last year, and that's about the same as what we had in 2022. Despite a 19-year mine plan, we are focusing on the potential to expand the mine to the east at the current elevation. So we are doing drilling and exploration to the east. Now, there's lots of unknowns, but success could mean more production and lower costs. And with the mine already stabilized, we're starting to work on small improvements to allow higher throughput, like the five new cyclones that we're putting in at the mill, which will be installed in June. Now I'm going to move to slide 13.
At Keno Hill, we're struck by two things. First, the ore body is growing with a similar or better quality. And I'm going to take a minute to talk about exploration that makes me say that. I'll do that in a couple of minutes. First though, I want to talk about the second thing we're struck by, which is the safety and environmental performance that's not met our standard. Fixing them is not an overnight exercise, and given the long life that we see, we are laser-focused but patient on improving it. On safety, it means changing people's attitudes and habits, and where we can, engineering out risks. So we've taken many of our senior people from our corporate technical team and also at the Lucky Friday and have them rotating site. Basically what they are doing is mentoring the Keno team.
And then an example of engineering out the risk, we've budgeted a cemented tailings backfill plant for Birmingham to enable it to mine and underhand mining, which would be safer than the way we're mining now. For the environmental issues we have at Keno, we're doing studies to make the site meet our standards. So one of the things that's come out of these studies is putting in a new water filtration plant at Birmingham, which we'll build this year, that will cost maybe $3 million to $5 million. Now at this point, we're not giving guidance as to when we'll be in production and reporting unit costs. We want to make sure that we have the safety and the environmental issues right, without the pressure of having the combined production targets with costs.
What I can say is, though, that we think we're going to produce about 3 million ounces of silver. We expect to spend about $15 million to $17 million a quarter, and then we'll be $30 to $34 million of capital. So 2024 at current prices should be a small investment year that we do make at Keno. But given the exploration potential and the long mine plan, now's the time to get it right. Similar to what happened at Greens Creek, almost 40 years ago. So speaking of Greens Creek, what we've decided to do is to try to create more value by having Greens Creek and Keno try to implement as many synergies as possible. They are actually only two hours apart, and it's a seven-hour drive between the two sites once you get to Skagway, which is a short 40-minute flight.
Now, many of the supplies for Keno actually go by Greens Creek to Skagway, and then they get trucked to Keno. So what we're going to do is, we're going to promote Brian Erickson, who's our VP and GM at Greens Creek, and Kim Campbell, our Greens Creek controller, to provide leadership to both operations. Brian, in addition to having had the job as Greens Creek's GM over the last two decades, has led various departments. He's headed up mining, he's done surface ops, he's done maintenance. And Kim has led purchasing, warehousing, accounting and a number of other functions. So we don't know exactly what the synergies will be or what their value will be, and we'll try to outline that over time. But given the maturity of the systems that we have at Greens Creek, this really should accelerate Keno into becoming a strong cash flow generating mine.
So now let me go to the exploration at Keno and this is on slide 14. Our drilling programs continue to provide quite remarkable mineralized drill hole intercepts from both underground definition and surface exploration drilling. And I'm only going to talk about Birmingham this morning, but realized that there are a series of other targets at Keno that some of which we will drill this next year, that will actually get more drilling than or as much drilling as Birmingham will get from surface.
-: And if you look at the leftmost image, that's the AA-Prime in the upper corners. And the Bear zone has three veins, the main vein, the footwall vein and the Bear vein. And what I want to draw your attention to is the 54 ounce over 39.5 feet, that is the transverse vein between the main and the footwall vein. This is the widest, highest grade intercept that we're aware of. We had a similar grade intercept a quarter earlier, just not quite as wide. Looking back at the BB-Prime image that's in the middle, there's a red star, that it’s the high grade mineralization that's more than a thousand feet deeper than in previous drilling. The longstanding view is that Keno's potential was only in the top 300, 400 feet from the surface.
We now have evidence that the high grade mineralization can be hosted, the full depth of the one kilometer favorable basal quartzite host rock unit. And so these two holes I really think are emblematic of the potential of Keno. Now turning to slide 15, last year we concluded that we could not generate enough margin mining two separate underground deposits in open pit, like I said at the beginning of our remarks. We just had too many people. We actually had 1,100 people between employees and contractors. And there just wasn't enough value in the rock to operate the mine that way. So we made the decision to simplify the operations by shutting down the underground. And so our team has really very successfully implemented the change. 2024 will have about 0.5 year of underground operations as we mine out the already developed scopes and then we'll have only surface tons coming out of the 160 pit.
Then go to slide 16, and what this shows is our production costs and capital guidance. Our 2024 silver production guidance shows an increase of about 15% to 20%. This year 30% by 2026. Silver cost guidance is slightly higher than ’23, cash costs are at $3 to $3.75, AISC between $13 and $14.50. So we still have substantial margin at current and even lower prices and proves that we're really the low cost leader in the industry. Gold cost guidance is lower. Capital guidance is lower as well as we've completed and seen the benefits of the major projects such as the service hoist and the ore bunker at the Lucky Friday. Before I open the call to questions, I want to leave you with the increasing role that silver is playing in solar and the energy transition.
And on slide 17, you'll see some of the key numbers that highlights this. 2023 was the 22nd year in a row that renewable capacity set a new record. So it's just continued to grow year after year. And 75% of this renewable capacity in 2023, the additions were solar. Just in the United States, solar capacity has expanded by 44% a year on average since 2009. Now it takes about a $0.5 million ounces of silver per gigawatt of solar that's installed. So in 2023, silver demand in solar increased by about 50 million ounces to 190 million ounces, and that's a 12% growth rate in the last 10 years. So to put this 50 million ounces in context, that's the equivalent of five new Green Streets or 10 new Lucky Fridays. So not likely to happen that we're going to have production that's going to increase at the same pace that this demand for silver for solar is growing at.
So that means we're going to have to rely upon above ground silver. In order to get that, I think you're going to need higher prices to meet that demand. So with that, Jeannie, I'd like to open the call to questions. Jeannie, I'd like to open the call to questions.
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