Q1 2023 Hecla Mining Company Earnings Call
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the Hecla mining company first quarter 2023 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 if you'd like to ask.
Question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige star one.
U N V Chip at Hill, Vice President Investor Relations and Treasurer, you May begin your conference.
Good morning, Rob and thank you all for joining us for Hecla's first quarter 2023 financial and operations results Conference call along with our partners Hecla's, Vice President of Investor Relations and Treasurer.
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 Robin Roberts had less senior Vice President and Chief operating Officer, and Russell Waller had less 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 slides two and three in our 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.
Forward looking statements reconciliations of non-GAAP measures cited on this call and related slides are found in the slides or the news release with that I will pass the call to Phil.
Thanks, Anita and good morning, everyone and thanks for joining our call.
I'm going to start on slide four.
In April 16th marked the 15th anniversary of Hecla's purchase of Rio Tinto interest in Greens Creek.
And Greens Creek has been a foundational asset, it's really what's allowing us to be the fastest growing established silver producer.
With that acquisition of Greens Creek that we made those years ago, we made a commitment to primarily focus our efforts in tier one jurisdictions now we are the largest producer of silver in the U S and soon in Canada, but.
But hecla is not just about jurisdictions, although I'm going to come back to jurisdictions at the end of our prepared remarks.
<unk> is about creating real value on a per share basis by exploring innovating and executing on our large property positions and it all starts with Greens Creek, which has provided the stability of cash flow and about 30% of our production growth over the last.
15 years.
And its employees have done a phenomenal job of continuously improving making Greens Creek are longer lived lower cost more productive mine. This is real value to shareholders and Greens Creek success is allowing hecla to invest in the Lucky Friday and keno.
Investment and Lucky Friday has allowed its production growth in the last five years to go from less than 1 million ounces to more than $4 million with more growth on the horizon.
And substantial growth over the next few years will be primarily from keno that should produce more than $2 5 million ounces. This year and about 4 million ounces next year.
Since 2008 production has about doubled and is expected to be 17 million ounces. This year and then and then we expect to increase to about 20 million ounces by 2025, which we project will be our sustained production profile for the foreseeable future.
Not only have we seen our production grow and expect that growth to continue we have also been growing our reserves in fact from 2008 to 2022, our silver reserves have increased by a factor of five and most importantly production reserve growth over the past 15 years has created value on a per share basis and this is shown on the graph.
On the right.
Silver equivalent production and equivalent reserves per share has increased almost two times since 2008.
This reserve growth is due to a core tenant of our strategy and that's to acquire large land packages in good jurisdictions and we continue to execute on this.
With the announcement of the <unk> resources acquisition, which brings us a huge land package of more than 650 square miles in the Yukon, That's near Keano, We expect the transaction to close in the third quarter.
April of this year also marks the 10, 10th year of our acquisition of Casa Berardi, which when we acquired it was solely an underground mine.
And the transition to a combination of underground and open pit operations in 2016, and now we're starting that transition to only being an open pit mine. This will require investment over the next few years the investment amount will depend on how long we continue mining underground and the margins it's generates but what this will lead to.
<unk> is mining higher grade open pit materials in a few years. This higher grade ore is in the permitting pipeline and the reserve grades or almost 70% higher than the current operating pit.
And the same rationale for why we bought Casa Berardi still holds we have exposure to great geology large land package significant infrastructure Dore production and exposure to gold who's volatility is less than silver.
As we turn to slide five.
We'll narrow our focus from the strategy, we've been implementing over time to some of the details of the first quarter. The key takeaways are it was a strong operational quarter with free cash flow generation from the silver mines that we're on track to achieve our production and cost guidance and strong safety performance across the company.
Greens Creek achieved record quarterly throughput breaking the record set just last quarter and turned in very strong silver and gold production record gold production in fact.
Lucky Friday, we achieved our safest quarter when it when at full production, which is an extraordinary feat considering the 80 plus years Lucky Friday has been operating.
And the safety record was achieved.
Silver production exceeded $1 2 million ounces. This is the third time. The mine has achieved that in the last four quarters and the development at Keno Hills on track for a mill startup in the third quarter with production expected to exceed $2 5 million ounces lauren's going to talk more about these properties in just a couple of minutes.
This operational performance is trains related into financial performance for two consecutive quarters now silver is now our leading source of revenue due to significantly more silver production and.
And the cash flow generation of both Greens Creek, and Lucky Friday was more than $31 million, each and combined for $69 million.
Our capital allocation priority is investing in our minds to grow profitable production said this quarter, we invested 17 million each in keno and cancer and $14 million in the Lucky Friday Green Street will see relatively more capital in the coming quarters.
However, what is most important is our commitment to keeping our employees safe and we have our lowest all in.
All injury frequency rate in our history.
As in 2012, we implemented the National Mining's core safety program.
We expect to release, our 2022 sustainability report at our annual shareholder meeting on May 23rd and give our high grade.
And given our high grade underground operations, we are net zero in 2022 on scope, one and two carbon emissions, which were offset with UN certified credits.
By the way the annual meeting will be both in person and webcast. So I hope, you'll listen in and with that I'll pass the call over to Russell talk about our financials. Thanks, Phil I'll start on slide seven.
One of the most impressive characteristics of our minds is their ability to generate free cash flow since 2020, our three mines have generated more than $620 million in free cash flow.
This has been driven by our silver mines, which generate margins even at low silver prices looking at the chart on the left side of the slide in the first quarter, we had a margin of $13 66, which is 60% of the realized silver price.
Over the past three years, the margin has been between 44% and 64% not many companies have silver mines that are this consistent however.
However, this cash flow has not only been generated at our silver mines over the same period, Casa Berardi has generated more than $65 million of free cash flow.
This cash flow generation allows us to consistently invest capital into our minds and ensure we maintain healthy exploration budget. This has always been a core strategy, where we add value by a reserve life extensions and conversion of mineral resources to reserves last year. We further invested this free cash flow into our operations with the result of the double digit.
<unk> production growth that Phil discussed with the acquisition of Keno Hill and the subsequent investments. We've made there. This leads me to slide eight where I'll discuss our first quarter revenue profile and balance sheet.
During the quarter, our silver operations generated the second highest revenue and gross profit margin in our company's history.
Total revenues for the first quarter were 200 million with silver the highest contributor of all metals at 38% followed by gold at 35% and 27% from base metals.
Revenues increased over the fourth quarter due to higher realized prices and although we had more silver production, we saw lower volumes of silver sold in the first quarter relative to the fourth quarter.
This was due to our shipping schedule, where the fourth quarter had higher silver ounces sold as a silver concentrate shipment from Greens Creek was deferred from the third to the fourth quarter adjusted EBITDA for the last four quarters was $221 million, maintaining our leverage ratio at one nine times, which is below our target of a maximum of two times as we go through.
This period of investment of Keno Hill in Casa Berardi, our net leverage target will remain at less than two times and we will take the necessary steps to keep adequate cash on our balance sheet with a target of around $100 million, we sold $2 1 million shares under our ATM program during the quarter amounting to $11 $9 million to maintain this targeted cash balance ended the.
Quarter with $96 million in cash on the balance sheet and $240 million of liquidity.
Before I pass the call to Lauren I'd like to briefly discuss what we are seeing on inflation.
We are seeing inflationary pressures on fuel steel ground support and other key input stabilized quarter over quarter labor cost and demand for skilled labor remains high across all our operations the effects of inflation on labor costs are more pronounced at Casa berardi and with that I'll turn the barnwell.
Oren will discuss that in more detail and with that I'll turn the call tomorrow.
Thanks, Russell I'll start on slide 10.
Greens Creek, our flagship mine reported another strong operational quarter with robust free cash flow generation. It was just in February this year that we reported the mine had record throughput in the fourth quarter and I'm pleased to report that the first quarter achieved yet another record 20 591 tons per day.
We expect the mine will produce 2600 tonnes per day by the fourth quarter.
Silver production was $2 8 million ounces and gold production set a record of 14885 ounces due to higher grades mined increased throughput and better recovery.
We experienced significant positive model variants for silver in the first quarter.
Looking forward, we expect silver grades to be more in line with the model and we reiterate our silver production guidance.
All in sustaining costs for the quarter were $3 82 per silver ounce of decline over the fourth quarter due to lower fuel prices and consumption because hydro power availability was higher during the quarter.
Capital spending of $6 $6 million was lower than planned primarily due to the timing of equipment deliveries, which are expected in the second quarter.
The mine generated $37 million in free cash flow, adding another strong financial quarter to its long history of free cash flow generation, which is nearly $1 9 billion since the mine started operations in 1989.
The mine is on track to achieve its production guidance of nine to $9 5 million ounces of silver and ASIC of six to $6 75 per ounce for the year.
When we required the remaining 70% of the mine in 2008 throughput was just over 2000 tonnes per day in silver recoveries were about 70%.
Today with our incremental improvements throughput has increased by 30% and silver recoveries have improved 12 percentage points.
All of this was achieved with very modest capital investments supported by our culture of continuous improvement.
This prepare mine is the 11th largest silver producer in the world and I want to congratulate the team on delivering excellent results at this truly world class asset.
Turning to slide 11, Lucky Friday produced one 3 million ounces of silver at an <unk> of $10 69 per ounce in the first quarter.
This quarter marked the fourth consecutive quarter of silver production exceeding 1 million ounces and a new safety record with an all in frequency rate of <unk> 62 as of the end of April .
Throughput increased by 5% to $1 59 tons per day compared to the fourth quarter and the mine is on track to achieve our target run rate of 425000 or tonnes per year in the fourth quarter.
Capital spending at the mine was $14 7 million as we focus on two key projects the service hoist and the course or bunker, which we anticipate completing by the fourth quarter.
The service hoist is expected to Debottleneck, our production hoisting capacity, while the course or bunker will decouple, the mine and the mill by adding the capacity to stockpile or for multiple days.
Both projects are critical in achieving our production goals.
Free cash flow generation for the quarter was $31 million, reflecting the receipt of $6 7 million in January from a December 2022 concentrate sale.
We are reiterating the production and cost guidance for 2023 with four five to 5 million ounces of silver at an all in sustaining cost of $8 50 to $9 50 per ounce.
<unk> continues to do a phenomenal job and as we look forward, we are more convinced than ever that this will be the best decade, the mines 80 year history.
Moving to slide 12 at Keno Hill, we remain on track for mill startup in the third quarter with about 75% of the preproduction development completed.
Capital spend at the mine was $17 million for the quarter with significant progress made on mine development underground infrastructure construction and mobile equipment purchases.
Is gearing up for the surface construction season, as well with the camp expansion and secondary crushing circuit modifications preparing to start.
These two projects will position us to achieve and sustain the full permitted capacity of the mine.
Initial ore feed for the mill re commissioning is being stockpiled from the flame and moth in Bermingham deposits.
Of the high grade ore, we expect to buy out of the fourth quarter production is expected to exceed $2 5 million ounces of silver.
We anticipate the mine can produce up to 4 million ounces of silver and 2024.
Turning to slide 13, Casa Berardi produced approximately 25000 ounces of gold for the quarter at an all in sustaining cost of 'twenty $392 per ounce.
Production was lower as expected due to lower underground tonnage and grades while the cost per ounce was higher.
Production costs declined compared to the fourth quarter due to lower tonnage consumables and reduction in contractor costs. However, the cash costs and all in sustaining cost per ounce increased due to lower production.
The mill continues to perform strongly marking another record quarterly throughput. These mill improvements are a result of the investments we completed in 2021 and ongoing continuous improvement efforts by our processing team.
Smaller underground stopes more demanding stope preparation and lower grades have resulted in significant cost pressures, which were compounded further by inflationary pressures in 2022.
These changes are leading to a reevaluation of the underground cutoff grade and mine plans work will complete over the next several quarters.
Since 2018 underground grades declined by 30%, which was anticipated as the higher grade zones were depleted.
While our exploration has remained focused on underground targets, we have not yet seen significant exploration success.
Underground exploration will continue with the aim of identifying higher grade zones.
However, with the decline in underground grades in inventory as the mine is beginning a transition from an underground operation to a full open pit operation.
The mine became a combination of underground and surface operations beginning in 2016 with the addition of the EMC Pea pit followed by the F 160 bps in 2020.
Higher grade open pit ore with reserve grades, 70% higher than the current FY <unk> 60 pit is in the permitting pipeline and expect it to be in production in three years to four years.
Phil mentioned during this period of transition to a fully surface operation the mine will need capital investments in fleet and infrastructure, which we expect to be in the range of $100 million to $120 million exclusive of stripping.
Casa Berardi mine has a substantial reserve and significant exploration potential and a large land package on the Casa Berardi break.
As we go through this period of investment in discovery, Casa Berardi remains key and our main key mine in our portfolio that gives us gold exposure and diversification from the concentrate market.
I will now pass the call back to Phil. Thanks, Lauren we are reiterating our production and cost guidance for the year as shown on slide 14, our silver production growth, which is sustainable beyond 2025 is based on the hecla, having some of the best silver mines in the world with their low cost structure and long reserve lives located in tier one jurisdiction.
This is the foundation that allows us to continue to grow innovate and create value for our shareholders and our long term growth is embedded with our Montana properties that are the third largest undeveloped copper deposits in the U S with more than one 4 million tonnes of copper and 330 million ounces of silver.
And that brings me to slide 15.
I suspect that many of you don't know what H R. One means if you do you might be too into American politics.
For three years I was chairman of the United States National Mining Association and that's the U S mining industry's lobbying group. So I learned the significance of H R. One.
As the first build of the new Congress and whether it passes or not necessarily the important thing, but what it tells you is the priority of Congress.
The last two Congress has had the house controlled by Democrats and their HR, one was voting rights legislation, which was never passed.
The 115th Congress, which the Republicans controlled their HR, one was tax reform, which passed you might recall that that was set in 2017 that was sort of the primary.
The success of.
The Congress.
Current 118th Congress HR, one is permitting reform.
Exactly one year ago on this call I told you the attitudes were changing in the U S towards mining and permitting reform with the recognition of the need for metals for the energy transition and for National Securities HR, one far exceeds where I thought we would be today.
What are some of the important elements to mining investors of HR, one well first it establishes the lead agency for NEPA review.
It allows the project sponsor to prepare the eyes. So we can move much faster.
Documents are limited to 300 pages. There is a 120 day limit on appeals from the NEPA process.
Reman or NEPA decision requires imminent and substantial environmental harm. These are all very very significant reforms to permitting.
And to show you how far the attitude has changed Republicans has enacting the bill as a pillar of the debt ceiling negotiations that where we are.
Turning last night.
So do I think that HR, one we'll pass the Senate get signed by Biden note I doubt, but it is further evidence that the attitude among policymakers in the United States is positively changing and makes likely permitting reform in the next few years and more importantly, it's in Stark contrast to other <unk>.
Restrictions in Mexico, the largest producer of silver in the world with their new new law creates barriers to mining and mining exploration that are just too many to mention.
Hecla is willing to invest in other jurisdictions, including Mexico, I am convinced that our strategy of primarily growing in the United States and Canada is the best long term option for Hecla and our shareholders.
Finally, I want to congratulate and thank all hecla employees across all our sites.
Their dedication to safety the environment innovation execution that Hecla has the company that we are today and with that Rob I'd like to open the call to questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Heiko yield from H C. Wainwright and company. Your line is open.
Hey, there thanks for taking my questions.
Sure thing Heiko.
You've got the grease G&A costs of $2 3 million you attribute this to higher incentive compensation in the fourth quarter of 'twenty two.
Can you maybe trend line the rest of the year for us quarter by quarter for G&A.
Yes.
My head I will pass that on to Russell, because I'm not sure I would I would expect G&A would be relatively consistent quarter by quarter what.
What we saw was we came to the end of last year was that based on performance of last year, we were having to accrue in the fourth quarter incentive compensation. So that's why you saw the Spike then we also brought on some folks from the <unk> acquisition into our corporate departments. So we saw a bit more staffing in the <unk>.
<unk> from that and so you saw the fourth quarter go up a little bit, but those folks are still on staff. So I would expect.
The G&A to roughly be what it is throughout the year.
Got it and while we're at HEICO and HEICO. It also depends on performance. If we have good performance, which I hope. We do then we will have more incentive comp correct and Youll see it go up as a result of that well, let's hope there's a half a billion in incentive comp.
Greens Creek had a very good throughput in the quarter were there any particular efficiencies that you undertook at site to make that happen or is there anything undergoing right. Now so just maybe help us plan the future they are a little bit.
Well I'll just.
Comment by saying.
Greens Creek has done a excellent job of making incremental improvements we had a very.
Focused effort at looking at how we improve the operation.
We had our.
Really looking forward to.
Dusing more tons.
And believing that the mill can can manage more tons. This is significantly more tons. We were 2000 tonnes a day when we acquired the mine where we are headed towards 2600 tonnes. A day. So it is it is incremental improvements it's a very focused effort, but loren maybe you have some some more.
Insight, yes, absolutely.
Thank you for the question Heiko.
We're on pace to achieve 2600 tonnes a day by the end of the year and that just sort of a linear progression quarter by quarter from from where we are today to 'twenty 600 tonnes a day.
And we're doing this with no significant capital investment in the mill.
Really as Phil said, we just took a step back looked at the mill and our understanding of how the mill operated and we were willing to challenge.
Conventional wisdom about what could be done.
We developed some interesting concepts, which we then tested through a series of industrial trials.
And what we find is that we are able to utilize more of the horsepower in the grinding circuit to increase throughput.
And we're doing this at the same time that we're improving recovery, which is which is quite remarkable really.
Just a testament to the team's willingness to look at things with fresh eyes and try something new in this instance, it's been very beneficial.
Yeah.
And then just.
A quick one.
Talked about selling some shares under your ATM or rather a somewhat meaningful amount to even.
Is it fair to say that this is your preferred funding source for the firm in the intermediate and longer term as well I mean, I I like Atms are cheap and easy way to raise some funds, but is it fair to say that this is your preferred way to do it in the future.
Our preferred way is just generating free cash flow.
Okay fine.
And with frankly with the.
$25 silver price, that's pretty nice silver price in my estimation not that it can't go higher I, certainly hope it will but.
We generate a lot of free cash flow at these sort of prices you get below $20 and it's.
Frankly.
We have a choice we either.
Spend less borrow more or use the use the ATM, but.
But having said that we'll maintain the strength the balance sheet.
And you've been very successful at that in the past and on that note I'll go back in queue. Thank you.
Thanks Heiko.
Your next question comes from the line of Michael <unk> from RBC capital markets. Your line is open.
Great. Thanks, and thanks for taking my questions.
First one.
A great quarters from Greens Creek, and Lucky Friday, So of course, let me ask a bit about Casa berardi.
Understanding what you said about the transition there and the guidance you've provided.
Can you maybe expand a bit.
Im not sure how to ask this exactly but can you expand on what the range of investment could be high and low over the next couple of years.
What that's contingent on and maybe if possible could you tell us what your vision of the mine as our production and cost could look like once this true.
<unk> period is over.
Sure.
Transition period will require.
A fleet of of mining equipment that allows us to mine.
The West mine Crown pillar pit and the principal pits and sort of a unique thing that we're doing is mining the $1 60 pit to allow that to be the tailings disposal.
Storage facility and and and so we're going to try to and we're still working through this but we're going to try to accelerate.
The mining of that pit so that it is ready for two.
To accept the tailings when that when we get to those other pits. So so.
What we've indicated is we're thinking in order of magnitude of 100 to 120 million net of capital over the next couple of years for equipment, and then things that we need to make this transition.
And then once we have made the transition.
Then youll see the higher grade production from the West mine Crown pillar pit and and and.
The principle, where those costs will come out I'm not absolutely sure, but I do know that there'll be substantially lower than where they are now.
Just because you will at that point and no longer have the underground.
Infrastructure that you'll be operating although we will continue to explore we still have very high hopes for exploration success underground.
But the focus will be on the on the surface and on the open pit so.
You look at the at our technical report and what Youll see is substantial free cash flow generation.
Toward the latter end of the of the mine as these pits are fully functioning Lauren anything to add to that.
I would just say that we've been the long term operating concept with the open pits is to fully utilize the investments that we've made in the in the mill over the last several years as.
<unk> seen the mill throughput and recoveries have steadily increased at the operation.
We intend to operate at the full permitted limit.
The bill.
Then deliver the best or we can to the mill and we are still studying as to ways to improve the recovery may be mentioned that the studies that we're doing on location. So we've been doing some work on the potential to add a flotation circuit to the to the mill and I'll say that the preliminary view of it is for a relatively.
Modest investment, we see a significant increase in recovery.
And that is something we will continue to evaluate over the over the coming quarters as we work through our Walgreens plan for Casa Berardi.
Okay.
Let me just make one other comment Michael things have not changed.
Fundamentally from what we thought with the exception of the inflationary pressure that we've that we've experienced in the activity.
Right.
No understood. So maybe if I could just follow up.
Am I understanding it right that you don't necessarily want to pull the plug on underground operations today.
As you continue to explore in other words am I understanding this right in saying that you want to keep your options open on the underground as you transition in a more measured way rather than.
Something more drastic and immediate.
A shorter time period does that is that fair to say, yes look but.
We're willing to look at all of the ways that we can take this forward.
We were to do something quickly or something where we're continuing to generate the margins out of the underground.
We have we still have that Optionality, we can go either direction.
We're evaluating what's the best course of course of action for the <unk>.
Mine over the long term.
Yes.
Just like what we've done at the Lucky Friday, we are certainly willing to say that we need to make investments in this and recognize that it's not able to cover the investment that we're making I E. It has negative cash flow. We had had a number of years at the Lucky Friday like that we're now reaping the benefits of that today.
We're prepared to see the same thing at <unk>.
Cassa berardi.
But we so we havent prejudged at this point, we Havent prejudged.
And any way, which direction, we should go we're still working through that.
Is there a point in time is if it's end of year or into next year, where you think youll have.
More conviction either way.
Again I'm sure there will be I don't know when that is.
Would be able to tell you what we're going to do okay.
Okay, No fair enough switching.
Switching gears, if I could to APAC.
Could you give a little bit more color on the transaction, obviously, a well known land package property over the years.
What do you see as the opportunity here, what will you do differently.
No the deal Hasnt closed yet, but can you maybe talk in a preliminary way about what your plans might be there.
But the short term plans to put it into the company.
A full assessment once we acquired it frankly this happened faster than we had while we always were interested in this this has happened faster than what we had anticipated you had the suggestion by big gold.
And so we reacted to that.
So we don't have any immediate.
Identifiable actions that we're going to take other than doing a complete evaluation and determining what to do over the coming years. The good news is we.
The.
Out of money that has been spent allows us to be deliberate and advancing it.
We really don't start seeing.
A need to spend money until almost 2040, we're not going to wait that long, obviously, but we don't have pressure on this too.
To advance it quickly.
Okay. So you like the property you are in the neighborhood.
And you were motivated to act opportunistically.
A fair assessment.
Exactly I mean look to be able to pick up the.
Property of this size with the resources that have already been identified.
And to have it in.
Within 60 kilometers or so.
Of Keno.
We thought it was something that we couldnt.
Asset.
Got it.
Very quickly and then I'll pass it on just following up on the question about the ATM.
And the use in the quarter was was can you say if the priority was really keeping the cash level at around 100 million on the balance sheet or more broadly.
I guess can you can you you sort of answered the question, but was that really the focus of using the ATM rather than dipping into the into the credit facility, Yes, that's right.
Okay.
Okay fair enough. Okay. Thanks, very much for the answers I'll pass it on.
Your next question comes from the line of Lucas pipes from B Riley Securities. Your line is open.
Thank you very much operator, good morning, everyone.
I have another question on Casa Berardi and wanted to take a slightly different direction.
Is the asset strategic.
Reputation for being an excellent underground miners so.
I wonder if with the transition to surface mine, maybe that asset is less important in your portfolio. Thank you very much.
Thanks, Lucas, Yes look from my perspective, the asset is very strategic because of the things I mentioned that it does it is.
As a gold asset gold has less volatility than silver has served us very well it has been.
At different times periods.
The largest cash flow generator than the second largest.
It.
It is dore production.
Realize that as a concentrate producer we are subject to huge swings in the.
And the cost of processing our concentrates so.
We think we need to have this now.
You go down the line and you grow enough in the silver business do you necessarily have to have it.
Long term I guess, maybe maybe you don't but.
In the foreseeable future I think it's a very important asset for us and I think the exploration potential is so high that it's not an asset that you would want to.
To not have exposure to so.
Yes.
Just view it as something that we will sort of work through through its end of its life, which we expect to be much longer than what we have in reserves.
That's that's very helpful. Thank you for that color and then.
Switching to Lucky Friday, you'll have to bottleneck king projects. There later this year.
What this could mean for the for the operation in terms of total throughput total silver production.
And the years ahead, thank you very much.
Sure. So we're working to be a 425000 ton a year.
Run rate at the end of the year, that's 200 tonnes a day.
Now I'm going to say something and Laurent is going to kick me.
We are radically you can do more tons than that with the infrastructure that we have been in.
Place at least the underground infrastructure I E. The hoisting capacity. So so as we continue to.
Improve and optimize our new mining method.
So that will be able to do more than 200 tonnes a day.
That's not the objective at the moment objective is to get to 1200 tons, but maybe over over time, we will be able to do more than that Lauren.
No I don't I don't disagree with Phil I'm incredibly optimistic about the Lucky Friday on what we're doing there.
The team has done really a remarkable job of advancing us towards this 425000 ton a day.
A year, sorry, a year objective.
Yes.
It's in significant measure due to the innovation of the new mining method.
But there are a lot of other pieces that have to happen to support that mining rate that the mining method will allow us to do.
One of those is the hoisting system.
So at the moment the team is closing in on our throughput target without all of the tools that we intend them to have.
So like Phil I'm optimistic that once the tools are in place, we can potentially do a bit better eventually will hit a limitation on what the what the mill is capable of doing and at that point I would expect that will probably have another conversation with bill and we'll see where we go from there.
Got it.
And Lucas I'm, not so concerned about.
Mill limitations those on a relative basis are easier to deal with.
So can you remind us what the.
When capacities of <unk> Mellon and.
How are you may address.
Bottlenecks at the mill when the time comes.
I don't know I think the capacity was a lot less.
And we're actually producing.
The nameplate capacity was its long in the rearview mirror.
What will limit throughput there will be our grinding capacity.
We'll push the throughput until we have reached the maximum grinding capacity at the plant that at that point, we'll have to think about what we do but as Phil said.
This is their.
Relatively modest investments to do.
One step at a time, let's hit the 425 will get there this year and then we'll see where we go from there.
Excellent. Thank you and speaking of grinding forward HR one Phil what do you think it would mean in terms of total permitting time in the U S I've seen figures around.
15 years or so on average ticket of mind permanent now what do you think.
The net effect would be if <unk> were to pass.
Geez, I havent, even sort of considered it actually passing as.
Drafted but.
I would suggest to you that.
You have a permitting system that is really locked into judicial do loop.
And what this does is unlocked that judicial do loop so.
Yes.
I think it will be significantly faster and more certain.
And that's the message I'm really trying to give investors as the U S is.
On a path that is there's only a few other countries that probably would.
We'd be on the same path.
Improved environment for mining.
I will recommend.
Engineering.
Degree for my for my children.
Right now.
I appreciate that very much at filter you enter team continued best of luck.
Thanks Lucas.
Your next question comes from the line of John Tumazos from very independent Research. Your line is open.
Thank you.
Congratulations on all the progress.
Would you give us some background on the good shape.
Keno mill in underground.
Now that you have.
<unk> of it for a little while.
It was idle for a long time.
Just have kept the equipment.
Draw.
Kept it from having a lot of freeze thaw cycles et cetera, how do you keep it in such good shape.
So John .
You might recall that they actually started operating the mill.
A year ago.
For a relatively short period of time I don't remember if it was a month or two months, but it was they did operate it and it was functioning in the meantime, since we have owned it we have made.
Number of modifications nothing that is.
I would characterize as yet.
A complete change, but just improve some design some design a different things and tried to improve its ability to be maintained.
As it as it operates at full capacity because it's never really done that it's never really operated in the debt component yes.
On a consistent basis that that 400.
40 tons per day so.
They've done a good job we have made these modest investments and yields see us testing it.
Over the coming months.
To make sure that the modifications, we made are functioning properly and.
Feel pretty good about it Loren and I would just just been there recently.
<unk>.
Anything you want to add Laurent I wouldn't.
Hey, John .
The <unk> guys did a really good job of mothballing, the mill and keeping it in good working order even during diligence we were pleased with what we saw in terms of the condition of the plant.
So the things Phil is talking about are incremental improvements that you would expect 130 year old operating company to bring to our mill and that's exactly what we're doing there focused on improving reliability throughput.
And recovery, so, but all relatively modest facility was in good order.
We're doing some fine tuning.
I can ask another one.
And the cash flow statement there is a.
$4 $5 million reference adjustment of inventory to net realizable value.
Could you explain that one.
Yes, Russell that was just.
At Casa Berardi.
The mining costs were above the cost of gold in the first couple of months of the quarter and so you just took a net realizable adjustment to that inventory during those quarters is the other one.
Nevada Creek in that as well.
No no nothing at Greens Creek.
Theres also mining and stockpiling in Nevada.
Which potentially would have been a small adjustment in there, but it's mostly Casa berardi and it's mostly in January and February the prices came back up in March and so we did not have that issue in March.
And I can ask one more.
I'm trying to understand the free cash flow definition.
As I look at our cash flows.
The company appeared to consume use 17 million.
In the first quarter.
Where our cash balances fell nine new issued 17 $12 million in stock.
Maybe I just wanted to add back the <unk>.
$4 million distributed to shareholders to get to 17 million consumed.
Which is different than your 68 million in free cash flow by $85 million.
I'm trying to figure out how you get to it if I ignore all capital spending that's $54 million.
Provision for income taxes was only three <unk>.
Interest expense was 10 or $11 million.
So I'm just trying to figure out the definition of free cash flow So Jon we've got.
We're doing a calculation of free cash flow by mine and then we're also doing a.
The cash flow statement shows this on a consolidated basis. So so when you look at Greens Creek and the Lucky Friday, those two mines by themselves generated free cash flow of $69 million.
When you then look at the.
The company theirs.
All of the G&A, there's all of the other expenditures that go into operating cash flow on the on the statement of cash flows and so when we say when our free cash flow as a company what we're doing is subtracting.
Capital expenditures from that number.
That's what we're doing at each property is as well. So we're we're we're taking and that's as far as we go we're not making any other adjustments trust lending.
Correct.
What we're trying to delineate there as that Greens Creek Lucky Friday generate this amount of cash flow that's available for the corporation to utilize for exploration expense or.
Our investment in capital at Keno Hill, or investment at Casa berardi or erosion in that.
Yeah, exactly so but those those mines generate that amount of cash flow for the corporation that utilize in and invest back into whichever way it would choose.
And the definition at the mines.
Different than the financial statements no. It's the same.
Operating activities was $40 6 million for the whole company.
I would say the only difference at the mines as we actually do add back the exploration expense because that's an expense that is meant to expand the life of the mine et cetera versus and versus the consolidated exploration expenses included but otherwise its the same calculation. It's just the mine site.
Thank you for that explanation.
And your next question comes from the line of Joseph Reagor from Roth M. K M. Your line is open.
Hey, Phil and team thanks for taking the questions.
So I guess kind of following on some of what John just asked about.
Given that the.
Mines are generating free cash flow, but corporate is bringing it down to zero or negative.
Is there any consideration to.
Finding a way to reduce the debt.
And therefore, maybe remove $40 million a year in interest expense.
I mean, the short answer is when we look at our capital allocation number one we're going to invest in the mines.
Number two we're going to explore.
Number three we are probably adding assets to the company and the number four would be debt reduction so.
To the extent Joe you see.
Yes.
$25 silver prices plus.
Than you.
Debt reduction starts to enter into the picture.
Okay.
And one of the things I think we should mention is that one of the rating agencies just upped.
Grade us buy from the.
E plus to double B minus so.
We will have the opportunity.
Two to refinance that debt and when we do we would hope that we would have a lower coupon than what we currently have so that's another way of reducing debt that.
Interest expense.
We do think that long term as we plan to develop.
Sure.
The Montana properties.
And we think thats more likely given the improved permitting environment that we're seeing in the U S that we're going to want to access the debt markets. We want to we don't want to have to do and we want to use the long term bond market. We don't really want to do equity nor do we want to do.
Bank debt, we would prefer to do the long term bonds. So it's important that we stay in that market. So it is a it is a priority is getting better ratings, so that we'd get a lower coupon, but but ultimately we do want to be in the in the bond market anything Russell or in Vita that you guys want to add to that.
The only thing I would I would add is that reduction of debt is in the conversation as it relates to capital allocation, but it has to be the more most compelling use of that capital and investment in Casa Berardi investment in Keno Hill and other thing in exploration et cetera.
Are the things that we're investing in right now as we see if we see significant amounts of cash then we would look to do some of that or if we see something some dislodge went in the.
The debt market, where we can do something better than we do now then we would look at that but so it's certainly on our minds, but right now the capital allocation strategy as investment in our business.
Okay.
Two follow ups to that and you guys just kind of led me into what was going to be the next question, which is the debt's not.
The majority of it is not due to 2028.
When would you look to refinance that and then the second thing is as you guys look at.
Acquisition and expansion et cetera.
What do.
Do you guys consider to be most important metrics for making those decisions is it why is it you know production growth is it.
You know NPV.
What's the metric that you guys are really focused on.
Well, let me start with that.
Question.
As you can see with what we've done with APAC, what we're really focused on is geology.
And the ability of a property too.
Have.
B of size that and then it has the opportunity to operate for.
A substantial period of time and Keno falls in that category, It's 88 square miles, it's got a long history.
We would prefer to buy assets that have infrastructure, that's already built built in but.
In the case of <unk>. There is there is something that we think.
Overtime.
That will be developed and the and the prospects are so compelling.
But it's the sort of thing that we want to focus on and it's in the right jurisdiction.
That's that's really what what.
Drives us when we're looking at things two things to acquire.
Anything else that day.
Lost track of the first part of the question first part of the question had to do with the debt and when we would look to refinance and Mike Mike answered for that would be we're continually have our eye on the debt market and when it makes sense for us to do so and win it.
There is a compelling reason to do it we will go ahead and do that well.
We are doing now and as Phil had mentioned earlier with the credit rating that we got the increase of last week.
We're continuing to work to increase our credit ratings. So that when we do go to the market. Then we can do it at a lower coupon than we're paying out.
And Joe So we do.
Stay in contact with the debt market.
We've got meetings with debt investors, just like we have equity investors.
Okay Fair enough guys I'll turn it over thanks for the answers thanks chip.
And we have a follow up question from the line of Michael <unk> from RBC capital markets. Your line is open.
Thanks, Thanks again for indulging just one more question.
Just on the guidance for this year and especially the cash cost guidance.
For Casa Berardi, obviously, you were above that in Q1 can.
Can you talk a little bit about what we should expect in the short term and how youre thinking about that guidance number for the year.
Yes, I mean, it really becomes a function of the denominator.
We we would expect more production in the second half of the year than in the first half of the year. So as a result, you'll see the number go down.
Modestly.
It has to be in that range. That's in the it's in the guidance.
So youre still youre still comfortable with that I think it's the plus or minus 2000, <unk> number for the for Casa Berardi.
Yes, we are.
Okay.
Okay, great. Thanks for the follow up.
And there are no further questions at this time I will now turn the call back over to management for some final closing remarks.
And ladies and gentlemen, this does conclude today's conference call. We thank you.
For your participation and you may now disconnect.
Please wait the conference will begin shortly.
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