Title

Presentation

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

Anvita Patil: Good morning, Regina, and thank you all for joining us for Hecla’s Fourth Quarter 2022 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 this morning, along with today’s presentation, are available on Hecla’s website. On today’s call, we have Phil Baker, Hecla’s President and CEO ; Lauren Roberts, Hecla’s Senior Vice President and Chief Operating Officer; and Russell Lawlar, Hecla’s Senior Vice President and Chief Financial Officer. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks as shown on Slides 2 and 3 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 in the forward-looking statements. Reconciliations of non-GAAP measures cited in this call and related slides are found in the slides or the news release. With that, I’ll pass the call to Phil.

Phillips Baker: Thanks, Anvita. Good morning, everyone. Thanks for joining our call. Hecla is the world’s fastest-growing established silver miner, surprising for a 130-year-old company. And I’m on Slide 4. There are 4 reasons that this is happening. First, Hecla’s commitment to silver. Since our founding, Hecla has always been a silver producer even when other metals and activities provided more margin. When I joined Hecla in 2001, investors and others encouraged us to sell or close our silver assets. But what I saw was that our large resource position can survive the ups and downs of the silver market. And we needed to be committed because the silver market would improve. And of course, it did. And because of silver’s role as an energy metal, we think the silver market will strengthen further.

I’m going to talk more about that at the end of our prepared remarks. The second reason for our industry-leading growth is the foundation that came in 2008 when we purchased the 70% of Greens Creek we didn’t own. This acquisition increased our silver reserves by 2.5x and provided the base and cash flow stream to further invest in the mines and others into that mine and other mines, including the Lucky Friday. And then the third reason is the investment in Lucky Friday has ultimately resulted in a new mining method, the underhand closed bench, or UCB, that is transforming this 80-year-old mine with a safer, more productive mining method that with higher grades allows it to double its historic silver production. And now the fourth reason for the growth is Keno Hill.

In just 4 months since the acquisition, Keno’s reserves are 1/3 higher and we produce about 2.5 million silver ounces this year and in excess of 4 million next year. Looking at the chart on the left, silver reserves are almost 5x where they were at the start of 2008 despite having produced more than 200 million ounces since then. Combining what has been replaced with the increase in reserve, Hecla has added 400 million ounces over the last 15 years. So we have 4 bodies that grow. To grow reserves and production, our strategy since 2008 has focused on large prospective land positions in the U.S. and Canada. And for a long time, the market didn’t differentiate between jurisdictions, but we stayed the course with strategy. And today, whether analyst reviews reflect that the market clearly values being in the best jurisdictions, and we are in the best jurisdictions.

Now looking at the chart on the right, from 2008 to 2012, we produced about 9 million ounces per year. Then we increased the average by about 50%, giving us a decade of about 12.5 million ounces. And now, we’re having another 50% increase in silver production to 18 million ounces. Realize that we only show 3 years because we’ve not put together a long-term plan for Keno. But I expect that we’ll stay at this 18 million ounces or more from these 3 mines for at least a decade. 2022 had the highest production in our history in 2023, ’24, ’25 and I think we’re all going to set new production records for the company. And this growth doesn’t require significant capital investment. Russell is going to talk about how we have the balance sheet and silver margins to achieve this and position us for even more growth.

Russell?

Russell Lawlar: Thanks, Phil. I’ll start on Slide 6. The double-digit production growth we see — we expect to see is being funded by our industry-leading silver margins, which have averaged more than 50% of the realized price of silver over the past few years. The direct result of these margins is the significant free cash flow generation we have seen over the past 3 years where our mines have generated more than $0.5 billion of free cash flow, including Casa Berardi’s contribution of about $85 million from 2020 to 2022. In 2022, we made the decision to deploy this free cash flow in capital projects and larger equipment at the Lucky Friday mine, where we invested approximately $50 million. The acquisition of Alexco in which we’ve made equity investments in the loan earlier in the year of about $35 million and then an additional $20 million in development at the Keno Hill mine after the acquisition.

We also invested $46 million in exploration and predevelopment programs in 2022. We did this while remaining committed to a strong balance sheet. On Slide 7, revenue for 2022 was $719 million, 39% from gold; 34% from silver; and 27% from base metals. Revenue in 2022 declined year-over-year due to lower silver prices and lower gold production with our Nevada operations on care and maintenance. Despite the lower realized prices, free cash flow generation from the 3 mines was approximately $110 million for the year, while our 2022 adjusted EBITDA declined $218 million due to the lower revenue and inflation-driven costs. Our net leverage ratio continued to be below our target of 2x. We ended the year with a strong balance sheet with $105 million in cash.

We also monetized some long-term zinc hedges for approximately $17 million as zinc prices declined in the fourth quarter. Our strong balance sheet gives us flexibility in executing our plans. I’ll now turn the call to Lauren.

Lauren Roberts: Thanks, Russell. I will start on Slide 9. Greens Creek had another remarkable year. The mine produced 9.7 million ounces of silver seeing our guidance. Record throughput of 2,500 tons per day was achieved in the fourth quarter. In the time since we acquired full ownership of Greens Creek in 2008, and the mine’s throughput has increased 20% from 2,000 tons per day to 2,415 tons per day. Equally impressive is that the recovery rate for each metal also increased during this period. Looking forward, we will continue our production ramp-up during the year and expect to achieve 2,600 tons per day in the fourth quarter. Fourth quarter ASIC was higher compared to the third quarter due to higher treatment and freight costs because a silver concentrate shipment was deferred from the third quarter to the fourth quarter, and we conducted some seasonal maintenance activities to prepare for winter.

The mine generated $120 million in free cash flow and nearly $1.9 billion in free cash flow since the mine started operations in 1989. Silver production guidance for 2023 is in line with 2022 at 9 million to 9.5 million ounces silver. Cash costs are expected to be lower at $0 to $0.25 per ounce, while the silver all-in sustaining cost is higher at $6 to $6.75 per ounce primarily due to equipment purchases and increased development as we target 2,600 tons per day. Moving to Slide 10. Lucky Friday reported a record year as the mine achieved operational milestones, including record tons processed and the highest silver production in the past 20 years. We also ratified a 6-year contract with the union, which reflects our strong working relationship and gives us the stability to continue to optimize the mine for further production growth.

Silver production for the year was 4.4 million ounces. The UCB mining method is delivering impressive safety performance and production milestones at the mine. In 2022, we saw a 25% reduction in all incident frequency rate, an 11% increase in ore tons produced and a new all-time record for feet of development by company crews. Mill also is performing extremely well, delivering new all-time quarterly and annual throughput records as well as the largest ever year of zinc production. Just to put things in perspective, there has been a 68% increase in ore production since 2016, which was the last full year of production used in the previous mining method. Mine is expected to produce 4.5 million to 5 million ounces of silver in 2023 at all-in sustaining cost of $8.50 to $9.50 per ounce.

Capital spend for the year will be in the range of $48 million to $51 million related to the remaining growth capital associated with the production expansion and infill drilling to support the UCB production method. 2022 marked many significant milestones to the transformation of this mine which began more than a decade ago with the sinking of the #4 shaft to access the high-grade ore we’re mining today. of this success is coming from our peers as well. Lucky Friday is a recipient of the 2022 Society of Mining Engineers Murray Innovation Award for the pioneering UCB method. As I look ahead, I am more convinced than ever that the best decade of this 80-year-old mine is ahead of it, and I could not be more proud of the team leading this effort, and I am very grateful for the scores of others who have contributed to it over the years.

Turning to Slide 11. Casa Berardi produced approximately 31,000 ounces of gold for the quarter and 128,000 ounces during the year. Mill continues to perform very well, achieving new throughput records. However, challenging underground mining conditions resulted in a high proportion of lower grade open pit ore to satisfy the mill. All-in sustaining cost for the year was $1,825 per gold ounce, exceeding our guidance due to lower metal production and higher production costs, driven by inflationary pressures. Casa Berardi is more exposed to inflation than our other mines because it moves and processes more material than all of our silver mines combined and there is no appreciable byproduct credit. However, even with these challenges in capital investment, the mine was near breakeven in cash flow.

Our 2023 gold production guidance for the mine is reduced to 110,000 to 115,000 ounces of gold. This change reflects adjustments made to cutoff grades for inflation, fewer underground tons and more open pit tons as per the mine plan. All-in sustaining costs from the mine are expected to be $1,975 to $2,050 per ounce, higher than 2022, primarily due to lower gold production and higher sustaining capital associated with the expansion of the tailings facility. Casa Berardi remains an important asset in our portfolio that gives us scale, exposure to gold production, and exploration potential on a large and under-explored land package on the Casa Berardi break. At Keno Hill, we increased reserves by 33% to 49 million ounces of silver at 22 ounces per ton, among the highest in the world.

Keno Hill would be the largest and highest grade primary gold — primary silver mine in Canada. Development at the Birmingham and Flame & Moth deposits are on track with the mill starting in the third quarter and full production of 440 tons per day achieved by year-end. Our guidance for 2023 production is 2.5 million to 3 million ounces of silver at an all-in sustaining cost of $12.25 to $14.75 per ounce. Capital spend for the year is estimated to be $42 million to $44 million as we continue development, receive more equipment and complete our mill and surface infrastructure projects. While we are laser focused on development and getting Keno Hill into full production, our confidence in the exploration potential of this district continues to grow.

Moving to Slide 13. We have significant exploration success drilling 3 of our many underexplored targets. Some highlights from the program include 101 silver ounces per ton over 7 feet at Coral Wigwam, 10 ounces per ton over 11 feet at Hector-Calumet; and 19 ounces per ton over 11 feet at Silver King. These results demonstrate the strong exploration and discovery potential in the district. With this, I’ll pass the call back to Phil.

Phillips Baker: Thanks, Lauren. Just to comment on the exploration at Keno. When we announced the Alexco acquisition, Alexco asks if they should continue to explore, which they had a requirement to do so in either ’22 or ’23 because of funding. And so while, as Lauren said, our first priority was given the mine into full and consistent production, we allowed them to go ahead and continue that exploration program. And then, of course, we continued it once we closed the acquisition. We’re really glad that they went forward with the program because this clearly shows that Keno has the potential to grow dramatically. Now if you’ll turn to Slide 14 for our 3-year production guidance. We expect our silver production this year to increase 18% over ’22 and continue to increase to as much as 20 million ounces in 2025, Keno with production between 2.5 million and 3 million ounces in Lucky Friday.

That 4.5 million to 5 million drives the growth. Our consolidated silver all-in sustained cost is expected to come in approximately $10.25 to $11.50 after by-product credits. So that’s consistent with where we were this past year. At today’s prices, we see about $150 million of free cash flow that we’re going to invest in exploration, pay dividends, maintain our land positions and invest in Casa. As Lauren noted, we’ve made some hard decisions to change our underground mine plant at Casa Berardi, where we’ve increased the cutoff grade, lower gold production, but by mining less marginal material and lowering our costs. So this year’s gold production will be between 160,000 and 170,000 ounces about 110,000 to 115,000 ounces for Casa. And then we’ll have a further decline to about 145,000 ounces next year for the company.

With less production, all-in sustaining costs are expected to increase this year to around $2,000 per gold ounce. So we’re going to make an investment net of about $20 million into Casa, so negative cash free cash flow at Casa. I realize that in the past 10 years, we’ve only had one other year that we’ve had negative free cash flow. So this is just a period of time we’re more going to be investing in the tailings. We’re going to be investing in surface mine infrastructure before we put the higher grade pits into production, which is going to lower the ASIC and the Casa free cash flow generating. We’ve changed the plan at Casa to improve the economics over 5 years, not as good economics currently, but better economics over a longer period of time.

If you look at our total capital for the company, it’s about $200 million, and it’s split pretty evenly among the 4 operations. We also expect to invest more than $30 million in exploration predevelopment with the focus on Greens Creek for us to expand the reserves and resources. Casa Berardi on the underground targets to identify higher grade mineralization and at Keno Hill. And lastly, we’re going to be focused on Keno’s ramp-up, which we anticipate will cost approximately $9 million. So before we end our prepared remarks, I want to leave you all with a number, $1.1 trillion, and this is on Slide 15. The reason this number is significant is it’s the amount that has been invested this past year in fossil fuels and also the same amount has been invested in renewables.

And this is the first time ever this has happened. In the past, fossil fuel investment eclipsed renewables. No more. 2022 is really the tipping point. And since solar represents the fastest growing component of renewables, and it takes 0.5 million silver ounces for every gigawatt of solar panels that are installed, the appetite for silver is going to grow. So finally, I want to mention the remarkable safety performance we had in 2022. Our all-in frequency rate was 1.22 among the lowest in our history. And this operational and safety success is made possible only with the commitment and dedication of our employees. And with that, Regina, I’d like to open the call to questions.

See also 12 Countries that Make the Best Whiskey and 12 Countries that Produce the Most Cars.

Operator: . Our first question will come from the line of Lucas Pipes with B. Riley Securities.

Unidentified Analyst: Yes. Thank you, operator. This is Nick Joe asking a question on behalf of Lucas. Can you speak to the cadence of cost throughout the year that it could be baked into your guidance and if you’re assuming any level of either cost deflation or inflation at any of the 3 primary operations and then specifically, is the lower cost guidance on Lucky Friday, is this fully attributable to the higher production?

Phillips Baker: You can almost every year at Hecla say that we’re going to spend more capital, more exploration in Q2 and Q3 when our operations are in the more favorable weather, that’s not going to change this year. And then with respect to the Lucky Friday ad, it is all about the higher production. Lauren, anything to add on the Lucky Friday?

Lauren Roberts: I think it is the higher production and higher grades that are coming with that’s driving the .

Unidentified Analyst: Got it. Got it. Okay. That’s very helpful. And then just secondly, I wanted to ask about capital returns. You noted in the release that dividends were around 14% of cash flow in 2022. Do you have a target level in mind for 2023?

Phillips Baker: We just have our dividend policy, which we’ve had in place. There’s been a few adjustments to it in terms of the levels since 2011, ’12, I think, is when we first put it in place. And so we have the base dividend that we pay and then we have a dividend that’s tied to the silver price. And I’m not anticipating any changes in that in the near-term. But clearly, as we produce more silver relative to other metals. We clearly will have the ability to raise the dividend over time. But that’s not on the agenda at the moment.

Unidentified Analyst: Okay. Great. Well, appreciate the comments and congrats on the progress so far and continue best of luck. .

Operator: Your next question comes from the line of Joseph Reagor with ROTH MKM.

Joseph Reagor: A couple of things. I guess first thing, just on the income statement. It seems like there was some elevated costs kind of across a couple of categories, G&A, ramp-up costs, and also your closed operations costs. Was there anything in particular that drove that? Or is that just quarterly fluctuation?

Phillips Baker: I think the biggest thing to realize is that with the acquisition of Alexco, we saw an increase in costs associated with that. We brought people into our G&A costs, great group of people to add to the company. And it’s — we’ll see a somewhat higher cost. The other thing is there as a result of meeting a number of targets, there was a higher incentive comp that was accrued that falls into that category. Basically, all of our incentive comp falls into the G&A category. Those will be the biggest drivers. Anything…

Russell Lawlar: In G&A, certainly, that’s it. Ramp-up costs you mentioned, which is just the fact that Keno Hill as we spend money up there developing the capital, there is some ramp-up costs that run through the P&L. And then closed operations, there’s just a true-up of an accrual that we made in the fourth quarter on one of our closed operations, et cetera, noncash .

Joseph Reagor: Okay. Fair enough. And then at Keno Hill, I’m having difficulty kind of getting to the guide on the production compared to the start-up of Q3. Is this suggesting that there’s some high-grade material that’s been stockpiled that’s well above Birmingham’s average or what’s the delta between — if I take, let’s say, 300 tons per day over the last 2 quarters at , I don’t get to your guide or even into a ballpark.

Phillips Baker: So Joe, we don’t have anything stockpiled, but yes, there is higher grade material that is going to be going through the mill first. And it’s just the way the mine plan is. It’s just where Is essentially. We’re hitting that first. And so you will see over time the rate decline. Lauren, anything to add?

Lauren Roberts: That’s the explanation, exactly that.

Joseph Reagor: Okay. And that 2.5 billion is — just to confirm, is silver, not silver equivalent, right?

Phillips Baker: Correct. Just silver. This is — is amazing with the grades that we have and the exploration is finding more of it. So we’re very, very excited with what we’ve got in hand. It is what we thought it would be.

Joseph Reagor: Okay. And then what’s like a normalized expectation for capital spend across the 4 mines once you’re done with some of these extra things you’re doing this year and with the Keno Hill ramp up?

Phillips Baker: Look, I would say order of magnitude, $150 million to $170 million would be sort of normalized. Hopefully, it would be closer to the $150 million, but we’ll certainly have things that we look at and say, “Geez, we can get a better return if we make that investment. So sort of that range. .

Operator: Your next question will come from the line of Jeff Brevik with .

Unidentified Analyst: So one of my questions about Keno Hill has already been answered, but I had one about Casa Berardi. So this year, you will have higher all-in sustaining costs? But what’s the plan? Because in your last technical report, you had — you plan to had a transition to open pit mining — only in open pit mining in 2017, how has that changed? , I mean.

Phillips Baker: Yes. I’m not sure of the year that we had in the plan, but whether it’s exactly that year or it’s a year before a year after, I don’t remember, but that is the plan unless we find more underground high-grade material. We are very encouraged by the exploration that we have, but it’s an ongoing process and it’s hard to get more than 3 or 4 or 5 years of underground reserves in front of us because you just don’t have the development available to be able to put the drill platforms in place. So it’s more of a just-in-time process with respect to the underground.

Unidentified Analyst: I understand. Then do you have any other initiatives because the most part of your all-in sustaining costs are the cash cost. And you said that you will try to find higher-grade materials so that you can increase the production in — well, not this year, but the coming years after that. Have — do you have any other initiatives to decrease operating costs?

Phillips Baker: The biggest initiative is getting to the pits, the higher-grade pits. So the Principal pit and the West Mine Crown Pillar pits are both significantly higher grade than the 160 pit. And so with that, will come more production. And you could see that in the technical report that increased grade that we’ll be buying from those pits. Lauren, anything to add?

Lauren Roberts: So I think that, that captures it, Phil. It’s a timing question. We’re mining the underground material now and the 160 pit, which are developed and ahead of us, we will transition into the 2 larger higher-grade pits as soon as they’re ready.

Phillips Baker: One of the things that we’ve had to deal with is the need for permits for those pits. And as we do the work, we uncover things that we’ve got to get all of the technical data in front of us in order to be able to get the permits for that. That work has been done. And so we’re in the process of getting those permits and that will allow us to open the Principal pit, which is the highest grade of the 2 remaining pits. But remember, we have in front of us more than a decade from those pits once they become operational.

Operator: Your next question will come from the line of John Tumazos with John Tumazos Very Independent Research.

John Tumazos: Congratulations on all the progress, especially in the Yukon. So my question is when will Hecla have the manpower capacity to digest more acquisitions. It’s an unusual time 5% short-term money. A lot of the small preproduction companies can’t raise money at all. And just looking at the last week, Osisko Mining, which has a beautiful 7.4 million ounce deposit is languishing because they issued equity. MAG Silver, which participates in a 20 million-ounce silver mine sold equity and sold down. And the companies that aren’t as big or good as those deposits, there’s just no market for their stock. So you could go on a buying spree and warehouse some deposits for whenever your engineers, your board needed a new project to build.

Phillips Baker: Well, John, I guess I’d make 2 comments. One is as far as the capacity with employees, it depends on what it is you’re acquiring. Something that you’re inventorying does not require much, much support. So those things are relatively easy to do. Things that we would need to develop, obviously, we have to have it compete with things that we already have as well as just acquisitions in general. Remember, we have a half dozen silver projects, plus we have another half dozen gold projects to explore and develop. So we don’t need to add to our inventory. Having said that, John, I would agree with you, we should look and consider what things could be accretive to our capacity, our capabilities and potentially try to bring them into the fold. But we don’t feel compelled to do such. We have growth with what we have. I mean this — the growth that we have in its sustainable growth is something that Hecla’s not had really in its history.

Operator: . Your question will come from the line of Dalton Baretto with Canaccord.

Dalton Baretto: I hate to beat the cash to death here, but I do have a couple of questions. I just want to make sure I fully understand here. So it sounds like you’re just waiting on permits for the Principal pit. When do you expect to get them? And then once you get them, how soon can you be in there?

Phillips Baker: Lauren, do you want to answer the question?

Lauren Roberts: Sure. So we’re in the process of permitting WMC, the West Mine Crown Pillar pit. It’s the next one in sequence. And over the course of this year, we will — the process is not submitting a single permit application. It’s a group of permit applications, some of which are already in and the balance of which will be in by August. Then it takes a little bit of time for that to process, and then we have a reasonable amount of pre-strip and strip that needs to happen. And so this should start delivering ore into the system in about 2027, 2028. And the underground resource on , the current pit we’re mining carry us to that point in time.

Dalton Baretto: So it sounds like it’s reasonably long-dated here. So maybe this one is for you, Phil. Is there a set of conditions under which you would look at putting cash on care and maintenance until you make these investments that you get the permits?

Phillips Baker: With the plan that we have, there’s no need to do that. We’re able to have it with a modest amount of capital injection to put it in a position to continue to operate. That’s part of the reason why we’ve gone to this plan, which slows down the production so that we don’t have to put on care and maintenance. That would be a pretty costly exercise and very disruptive to the workforce.

Lauren Roberts: There’s an incredible amount of activity in Quebec and Ontario and there is a material risk of going into care and maintenance of those people going elsewhere.

Phillips Baker: Absolutely.

Dalton Baretto: That makes sense. And then maybe if I could just ask 1 last one. Can we give an update on what’s going on in Nevada, whether you’re actually making some investments there, whether you’re kind of approaching the how to grab it now. Just anything that’s going on there?

Phillips Baker: Sure. So the was the primary reason for the acquisition in Nevada. And what we have encountered is an influx of water, and we’re having to — that was not anticipated, was not identified. We’re having to do hydrogeology to figure out how much water we have and then a plan for how to deal with that water. So until that happens, and we have to have permits to be able to deal with the water. So until that happens, we’re going slow in Nevada. And we also have lots of opportunities elsewhere to put our exploration dollars. So we’re doing that. We are advancing at Aurora, we’re having to wait until the . What’s the season called that?

Anvita Patil: The season.

Phillips Baker: The season. Until that’s done, which is, I think, in June, and so you’ll see us do some drilling there. But otherwise, we’re evaluating at Midas, we’re evaluating the expiration that we’ve done. We had some great initial results and then we’ve not seen the follow-through. So we’re not going to push things until we are convinced that we have a good plan for the exploration on Midas Fire Creek. So you’re not going to see much expenditures there in 2023.

Operator: We have no further questions at this time. I’ll hand the conference back over to management.

Phillips Baker: Okay. Well, we appreciate you being on the call. I just want to remind you that we have sometimes available with management. If you’d like to have a one-on-one call, you’ll find the information for that on the press release. So thanks very much. Have a great day.

Operator: Ladies and gentlemen, that will conclude today’s meeting. We thank you all for joining. You may now disconnect.