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Hecla Mining Company (NYSE:HL)
Q4 2018 Earnings Conference Call
Feb. 21, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter in 2018 Hecla Mining Company's Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. Instructions will follow at that time. If anyone should need operating assistance at any time, please press * and then 0 on your touchtone telephone.

I would now like to turn the conference over to your host, Mike Westerlund, Vice President of Investor Relations. You may begin, sir.

Mike Westerlund -- Vice President of Investor Relations

Thank you very much. Welcome, everyone, and thank you for joining us for Hecla's Fourth Quarter and Yearend 2018 Financial and Operations Results Conference Call. Our Reserves and Resources news release issued last week and the Financial Results news release issued this morning before market open, along with today's presentation, are available on our website.

On today's call, we have Phil Baker, President and CEO; Lindsay Hall, Senior Vice President and CFO; Larry Radford, Senior Vice President, Operations; and Dean McDonald, Senior Vice President, Exploration.

Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and constitute forward-looking information under Canadian securities law, as shown on slide two. Such statements include projections and goals, which are likely to involve risks detailed in our Form 10-K, Form 10-Q, and in the forward-looking disclaimer included in the earnings and exploration releases and at the beginning of the presentation. These risks could cause results to differ from those projected in the forward-looking statements.

In addition, during this call, we may disclose non-GAAP financial measurements. You can find reconciliations of these measurements to the nearest GAAP measurements in the accompanying presentation, which is available on our website at www.hecla-mining.com.

Finally, in our filings with the SEC, we are only allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of terms such as measured, indicated, and inferred resources, which are not reserves, and we urge you to consider the disclosures that we make in our SEC filings.

I will now pass the call to Phil Baker.

Phil Baker -- President and Chief Executive Officer

Thanks, Mike. Yeah, good morning, everyone. There's a couple of things I want to highlight for you this morning before turning the call over to the team for specifics. We're gonna start on slide three.

The first thing is that our best minds are getting even better. We set records for the highest level of silver, gold, and lead reserves in our history, and it was done with a drill bit, not through acquisitions. By the way, our zinc reserves would have also been a record, but fell 3,010 short. Realize these reserves were done with some of the lowest price assumptions for calculating reserves in the industry, and ours still went up significantly. And price assumptions matter. It means our least profitable ounces have more margin. So, when you consider reserves, remember that not all ounces are created equal. We have high margin ounces largely in Alaska and Quebec, great margins in great jurisdictions.

In addition, we also had the most measured and indicated resources in our history, as well as the most inferred. My expectation is for more reserve increases in the future. Particularly notable was Greens Creek, with about 15 to 20% increase in reserves of all metals, and an extension of the reserve mine life to around 2030. If you consider the reserves, the mine life could be five to 10 years longer. This mine produces about half our revenues, and over the last 10 years, a billion dollars of free cash flow. My expectation is that over the next couple of decades, it might produce maybe $2 billion of free cash flow. Greens Creek is a remarkable mine, but sometimes I think the market has just taken it for granted.

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

Greens Creek and Casa together generated about 85% of our revenue, all of our free cash flow, and are getting better and longer-lived. They're also the model at what we're trying to do at our three other operations -- San Sebastian, Lucky Friday, and Nevada. I just came back from Nevada and want to share with you a few of my observations. It reminds me in many respects of where we were when we acquired Casa -- more questions than answers, lots of work that we have to prioritize, people that we have to determine their capabilities -- and like Casa, we've made significant progress. Much of it will not be visible to you in many statistics yet. But Larry's gonna talk to you about the progress we've made in development. It's been significant, but we are still trying different ways of dealing with different conditions in the mine. So, while we're in a hurry to get to a steady state, we will take the time necessary to figure out the challenges of these mines so our Nevada operations will never value for the long term.

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

So, go to slide four, where we provide our estimates of production costs, capital, exploration, and R&D for 2019. Greens Creek and San Sebastian have similar production profiles in 2019, as in 2018. We expect silver cash costs to be only $1.10 an ounce, and all-in costs less than $11.00. Casa Berardi production estimates are a little lower than last year due to lower grades, causing cost to be slightly higher. Estimated Nevada gold production is higher with a full-year of production and considerably lower costs. The gold side of the business is expected to have cash costs per ounce of $8.75, and all-in costs of $12.50.

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

So, I'm gonna pass the call over to Lindsay.

Lindsay Hall -- Senior Vice President and Chief Financial Officer

Thanks, Phil, and good morning, everyone. Turning to slide six, we reported a net loss applicable to common shareholders of $27 million, or $0.06 per share, with almost all the loss occurring during the last quarter; and an adjusted net loss of $0.11 per share. Adjusted EBITDA was $212 million versus $232 million in 2017. Gold cash costs and all-in sustaining cash costs, both after by-product credits, came in at $871.00 and $1,226.00 per ounce respectively; while silver cash costs and all-in sustaining cash costs after by-product credits were $1.08 and $11.44 per ounce. We're happy with our costs at our operating units, other than Nevada operations, which we reported higher costs, while we worked through what we believe are transitional issues.

Slide seven shows our revenue streams that are nicely diversified, with gold at 53%, silver at 24%, zinc at 17%, and lead at 6%. Greens Creek again continues to be the dominant source of revenues, contributing 47% of our total revenues. We realize that it has a more silver/gold ratio, the revenue of the two metals would almost be equal.

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

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

On a consolidated basis, we generated $94 million in cash from operating activities, and invested $137 million at our mine sites. Of that $137 million, $36 million was invested at our Nevada operations, and included approximately $14 million to complete a new Tailings dam and to upgrade the CIL circuit in the mill to improve recoveries. We have a goal of financial discipline in which each of our mines should produce free cash flow. And clearly, that didn't happen with our Nevada operations that we acquired effective July of last year. We expect in 2019, the Nevada mining operations will be cash flow positive, but we'll invest those cash flows and more in exploration around the various Nevada mine sites and the development of the Hatter Graben decline. As to the other mine sites, we have no major capital initiatives planned for 2019.

Moving to the balance sheet, at yearend, we had approximately $275 million in liquidity, which includes a $250 million line of credit which was undrawn at yearend, and $27 million in cash on hand. Our debt consists of $500 million in bonds, which are repayable in 2021, and $31 million owed to Ressources Quebec, also due in 2021. The bonds are callable at par on May 1st of this year. We continually monitor the capital markets, and while we're able to refinance the bonds today, it would be at rates higher than the current bond's existing rate of 6.875%.

We will continue to focus on turning our Nevada operations into a cash flow generator, building up expected cash balances and being patient about refinancing of our bonds. We have other methods available to us to reduce our total interest expense, such as using term bank debt, so if the high-yield market continues to be pricey for single-B debt issuers, then we may use these other methods in accommodation with new bonds being issued to reduce future interest expense payments. Also, I'd point out, in the back of our release, our calculated net debt to last 12 months' EBITDA was 2.4, which would typically be representative of a higher credit rating than we currently are assigned.

So, in summary, we had a good 2018 and are very excited about the potential for 2019 and beyond. But now I'll pass it on to Larry to talk about the operations.

Larry Radford -- Senior Vice President, Operations

Thanks, Lindsay, and good morning. To start with, I want to highlight that our all injury frequency rate for 2018 declined 28% companywide, as you can see on slide 10. This is a statistic that we are very proud of, and frankly, we'll work to reduce it again this year.

Also of note, Casa Berardi recently reached one million man hours without a lost time accident. This is an incredible improvement from 2013, the year that we acquired the mine. Our Lucky Friday supervisory staff is also to be commended, having operated the mine since the strike began without an injury.

I also want to highlight the good work done at Greens Creek on slide 11, which, as Phil notes, is our most important mine, that generates about half of our cash flow. With the big jump in reserves that we have recorded and the resulting three years or so of mine life addition, the team is working hard on a new technical report. With the revised mine plan reducing the development in the next few years, moving the highest margin material from the end of the mine life to the next few years, we should see a significant increase in the value of the mine.

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

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

The record production is primarily due to throughput, as shown on slide 14. The mill operated at an average of 3,515 tons per day in the fourth quarter 2018, and 3,769 tons per day for the year. Casa milled 825 tons per day more than 2016, and almost 2,000 tons a day greater than when the mine was acquired. In 2018, open pit feed accounted for 46% of the mill feed. We have run the mill at over 4,000 tons per day on a spot basis. We continue to study increasing throughput even further.

Casa Berardi was our second-highest cash flow generator in 2018, and a technical report is also being put together for it, reflecting the significant increase in surface reserves in what could be the fifth surface pit, called the West Mine Crown Pillar Pit.

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

Fire Creek, we have done a review of equipment and are adding equipment from Midas and from buying some new equipment. We've added two trucks, two large loaders, one jumbo, two bulkers to the Nevada fleet for costing a total of about $6 million, with the expectation that the upgrade will increase productivity. The implementation of Shot Creek at the end of the development process is resulting in better ground conditions, as expected, which should minimize the need to go back in and rehab development repeatedly, as was the case under prior management.

The CIL plant upgrade is complete, and the mill is now able to process Hollister ore. We have exceeded our annual development target of 35 feet per day in January, as shown on slide 16, and the goal will be to maintain this level and increase it where possible, because this should open up additional headings and increase production.

We have wrapped up Fire Creek manpower for -- underground manpower for 76 to about 110 through transfer of Midas and Hollister miners. Our contractor has brought in a road header at Fire Creek, and it is easily cutting the soft cup material, which is helping to speed up development, and we are considering a wider application of this type of machine. We're planning to increase Fire Creek throughput midyear to about 520 tons per day from 340 tons per day, which was the fourth quarter average, which means that the goal production will be weighted toward the second half of the year. The increased development is an important step for Dean's group, as we have worked to do on definition drilling to upgrade resources, and exploration to discover additional resources.

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

I'll hand it over now to Dan.

Dean McDonald -- Senior Vice President, Exploration

Thanks, Larry. Last week, we announced the highest levels of silver, gold, and lead reserves in 128-year history. Total gold reserves reached 2.85 million ounces, an increase of 26% from last year, mostly due to increases in open pits at Casa Berardi as a result of successful surface drilling. Silver reserves grew up 8% to 191 million ounces, primarily from Greens Creek, due to a combination of good drilling results, advanced resource modeling techniques, and improved smelter terms. The increase in resources is also important, because this suggests the potential for increasing reserves in the future.

We continued with aggressive drill programs in the fourth quarter, following successes at Casa Berardi, Nevada, Greens Creek, and San Sebastian. A list of drill intersections is provided in the Appendix B of the Exploration release on February 14th, giving insights into the high-grade resources we are confirming and expanding.

As you can see from slide 19, Hecla reserve price assumptions of 1,450 per silver ounce and 1,200 per bold ounce are some of the lowest commodity prices used in the industry, and have been for many years. On slide 20, you can see that over the past 11 years, we have consistently replaced or grown silver reserves from 130 to 191 million ounces, in addition to the 142 million ounces of cumulative production over that time. This means we have actually added a total of 200 million silver ounces in the past 11 years, with no contributions from acquisitions.

At Casa Berardi, we had considerable drilling success again along the main trends, particularly near surface. And this has resulted in the new West Mine Crown Pillar Pit, as shown on the left-hand of slide 21; and expanded East Mine Crown Pillar and principal pits with a total of 442,000 ounces of new gold reserves added during the year. There are now a series of pits along the Casa Berardi definition zone. Underground exploration was also successful. The red arrows show the projections of high-grade shoots that will be evaluated in the coming year, particularly in the East Mine, where access was reestablished last year. A closer look at the West Mine Crown Pillar Pit in the cross-section on slide 22 shows the convergence of several broad mineralized lenses near surface, providing the critical mass for a potentially very economic open pit, and the possible exploitation of zones with underground mining in the future.

At Greens Creek, there was significant growth in reserves. As shown on slide 23, definition and exploration drilling continued to add reserves higher in the mine at the East Ore and Upper Plate Zones. Lower in the mine, we were adding to reserves and resources along some existing trends in the Gallagher Deep 200 South and Lower Southwest Zones. Three drills will be operating underground all year in these areas, with the goal of defining additional reserves.

In 2018, very little exploration occurred on the Nevada projects until the Klondex acquisition was completed. It is evident that we urgently need to upgrade resources to move into the mine plans and identify new resources. Slide 24 shows how significantly we are accelerating our efforts for both underground and surface drilling, with more crews, more drills, more technology, and increased budgets in 2019. The upper diagram on the right shows the location of underground definition and exploration drilling at Fire Creek. Intense underground drilling is planned for Spirals 2, 3, 4, and 9, and the Titan Zone to upgrade resources that can lead to near-term reserves. Exploration of the Spiral 9 and North Zone provides the opportunity to extend some of the known mineralization trends. This drilling is planned to be in combination with surface drilling that will be initiated in April, and we'll evaluate the Zeus Guard Shack and South Notice targets.

Lower in the diagram on the right shows the drills at Hollister are working to define the mineralization trends in West Gloria, Central Hollister, and Guinevere for near-term mining. The development advancing to the east toward the Hatter Graben provides underground drill platforms for the drilling of targets in the East Clementine area and into the Hatter Graben late in the year. Surface drilling is planned to begin in April, with the goal of extending the Hatter Graben resource to the east.

At San Sebastian, as shown on slide 25, mining studies are being completed on the Professor East Francine veins and the polymetallic mineralization of the Francine vein. While at the same time, surface drilling is focused on defining new near surface oxide mineralization along the West Francine and Esperanza veins. Recently, we have successfully identified new oxide veins at the El Toro target, and are pushing hard to define a new oxide source with further drilling. The emphasis of exploration in 2019 is to rapidly advance our opportunities in Nevada, define new oxide mineralization at San Sebastian, and continue the drilling successes at Casa Berardi and Greens Creek.

And with that, I'll pass the call back to Phil.

Phil Baker -- President and Chief Executive Officer

Thanks, Dean. We're gonna go ahead and just go straight to questions, Operator.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * and then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To limit background noise, we ask you to mute your line once your question has been stated.

And our first question comes from Cosmos Chiu from CIBC. Your line is now open.

Cosmos Chiu -- CIBC -- Analyst

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

Phil Baker -- President and Chief Executive Officer

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

Larry Radford -- Senior Vice President, Operations

Certainly operationally, the biggest challenge is getting the development caught up. Despite ground conditions, which are challenging, we are on an acceleration track. And Cosmos, for just a comment on the reserves -- and we hit them pretty hard. Clearly, there was mine depletion. There was no drilling in the first half of the year. And so, there really wasn't time to refine and identify new reserves. But the other thing, we knew that there was a challenge in reconciling the production grades with the mill. And so, we really relooked at the modeling. We narrowed the vein or the size of the vein within the models. And so, we actually -- and changed the capping or top cut. And consequently, that represented about half the reserve losses. We've been very conservative in our modeling in those -- of the existing resources and reserves.

Phil Baker -- President and Chief Executive Officer

Yeah, we want to make sure that we have a base to build from in terms of reserves, in terms of resources. The development we want to -- it's still a work in progress to figure out the development, hence why we're looking at a roadheader to go in and do the development in advance. So, we think there's a lot of different levers to pull before we will optimize this mine, and similar to what we saw at Casa Berardi.

Cosmos Chiu -- CIBC -- Analyst

Mm-hmm. Of course. And Phil and Dean, it's great that you brought up the reserves and resources. Looking at it here, and you talked about Spirals 2, 3, 4, and 9, and a number of different zones -- Vonnie, Joyce, Karen, Honey, and others. I'm just trying to understand what of these new -- what of these zones that you've identified are considered -- categorized as, say, new zones, versus an extension of current mineralization? I think Dean sort of touched on that Spiral 9 looks like it could be an extension in terms of a drilling platform for current utilization. I'm just trying to get a better understanding and trying to gauge the difficulty in terms of adding to reserves and resources based on, are they new zones, or are they extensions, and whatnot.

Phil Baker -- President and Chief Executive Officer

Well, I'll let Dean answer the question.

Dean McDonald -- Senior Vice President, Exploration

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

Cosmos Chiu -- CIBC -- Analyst

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

Phil Baker -- President and Chief Executive Officer

We have not actually made a determination. Our typical schedule is yearend, and I'm not envisioning that we're planning to change that. Or any . . .

Dean McDonald -- Senior Vice President, Exploration

Yeah. At this point, Cosmos, I'd say we'd stay with our traditional schedule. But depending on what transpires, that may change.

Cosmos Chiu -- CIBC -- Analyst

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

Phil Baker -- President and Chief Executive Officer

Yeah, the answer's yes. Some of this would be beyond reserves. As far as what that percentage is, I couldn't tell you. But it's -- does anybody know?

Dean McDonald -- Senior Vice President, Exploration

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

Cosmos Chiu -- CIBC -- Analyst

Okay. But there's some. But a lot of it, the bulk of it, I guess, would be based on reserves.

Phil Baker -- President and Chief Executive Officer

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

Cosmos Chiu -- CIBC -- Analyst

Yeah. Great. And sorry, I lied. Maybe one last question on Fire Creek here. You talk about increasing the under mine, underground throughput from, I think, 350 tons per day to 520 by mid-2019. Is that as simple as, as Larry said, getting ahead on development, getting your 1,200 feet per month in place. Is that really the bottleneck?

Phil Baker -- President and Chief Executive Officer

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

Cosmos Chiu -- CIBC -- Analyst

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

Larry Radford -- Senior Vice President, Operations

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

Phil Baker -- President and Chief Executive Officer

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

Larry Radford -- Senior Vice President, Operations

Yeah. We're still working through that. We're still doing conventional drill and blast, which are typically very short rounds, at Fire Creek, in the ground, since . . . So, we have to have a lot of headings, shootings, and short blasts. And so, there's opportunity there. The roadheader, the first trial, was very successful. It kept the material very well. It left behind a very solid back and rib. And so, we're just -- we're learning as we go. We're injecting -- we have our VP Tech Services onsite pretty much all the time now. We've taken Lucky Friday expertise down, and we're making the improvements that we should be.

Cosmos Chiu -- CIBC -- Analyst

Mm-hmm. Great. Thank you. That's all I have. Thanks a lot.

Phil Baker -- President and Chief Executive Officer

Thanks, Cosmos.

Operator

Thank you. And our next question comes from Matthew Fields from Bank of America Merrill Lynch. Your line is now open.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

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

Phil Baker -- President and Chief Executive Officer

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

Lindsay Hall -- Senior Vice President and Chief Financial Officer

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

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

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

Phil Baker -- President and Chief Executive Officer

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

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

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

Lindsay Hall -- Senior Vice President and Chief Financial Officer

Not much happened in the fourth quarter, Matthew.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

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

Phil Baker -- President and Chief Executive Officer

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

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

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

Larry Radford -- Senior Vice President, Operations

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

Phil Baker -- President and Chief Executive Officer

Okay. Any other question, Matthew?

Operator

Thank you. Your next question comes from Heiko Ihle from H.C. Wainwright. Your line is now open.

Heiko Ihle -- H.C. Wainwright -- Analyst

Hey, guys. Thanks for taking my question.

Phil Baker -- President and Chief Executive Officer

Sure thing, Heiko.

Heiko Ihle -- H.C. Wainwright -- Analyst

Great. I promised myself I wouldn't ask a Casa Berardi question this time for once. So, going over to Nevada, you mentioned the asset should be cash flow positive this year. Are you willing to quantify this just a little bit more, especially given that your all-in sustaining cost estimate there is $1,325.00 an ounce?

Larry Radford -- Senior Vice President, Operations

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

Heiko Ihle -- H.C. Wainwright -- Analyst

Got it. Okay. Fair enough. And then, the decline is about 15% complete, so there's still bunch of work to do, obviously. Speaking of --

Larry Radford -- Senior Vice President, Operations

Yeah, we'll do 5,000 feet of development at Hatter Graben.

Heiko Ihle -- H.C. Wainwright -- Analyst

And speaking of Nevada and following up from the question that Cosmos had asked, I mean, you mentioned the increase in the throughput at Fire Creek from 350 tons per day to 520 tons per day by 2019. You also mentioned that your focus on -- and this is from your lease -- maintaining the development grade and all ground conditions. Am I reading something into here that's not there? Is there something I'm missing? I thought the ground conditions have been in that mine, as the ground conditions at Fire Creek are actually pretty solid. Is there -- are there pockets that need extra ground support? Or again, am I missing something there?

Phil Baker -- President and Chief Executive Officer

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

Larry Radford -- Senior Vice President, Operations

Yeah, it's variable. You can see very good ground conditions for -- we'll get 24 feet a day on a given head-in. And then, at times, we run into altered tufts and very clay-like material that takes short rounds and requires a fair amount of support. And the additional shot treatment. So, it's variable.

Phil Baker -- President and Chief Executive Officer

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

Larry Radford -- Senior Vice President, Operations

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

Heiko Ihle -- H.C. Wainwright -- Analyst

Very helpful. Thank you, guys.

Phil Baker -- President and Chief Executive Officer

Okay, thanks, Heiko.

Operator

Thank you. And our next question comes from Anthony Sorrentino from Sorrentino Metals. Your line is now open.

Anthony Sorrentino -- Sorrentino Metals -- Analyst

Good morning, everyone.

Phil Baker -- President and Chief Executive Officer

Nice to talk to you.

Anthony Sorrentino -- Sorrentino Metals -- Analyst

Yeah, same here. You're estimating 2019 capital expenditures at $150 million and 2019 exploration expenditures at $25 million. Would you break those down by property?

Phil Baker -- President and Chief Executive Officer

Sure. Does someone have it handy, or . . .

Lindsay Hall -- Senior Vice President and Chief Financial Officer

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

Phil Baker -- President and Chief Executive Officer

And Casa Berardi in Mexico were roughly $3 million apiece.

Lindsay Hall -- Senior Vice President and Chief Financial Officer

Yeah, Casa's $3.6 million. San Sebastian's . . .

Phil Baker -- President and Chief Executive Officer

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

Anthony Sorrentino -- Sorrentino Metals -- Analyst

Okay. Very good. Thank you for answering my questions.

Phil Baker -- President and Chief Executive Officer

Sure thing.

Operator

Thank you. And our next question comes from Ajay Lele from Southpaw. Your line is now open.

Ajay Lele -- Southpaw -- Analyst

Hello? Can you hear me?

Phil Baker -- President and Chief Executive Officer

We can.

Ajay Lele -- Southpaw -- Analyst

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

Phil Baker -- President and Chief Executive Officer

Yeah, there's really no change in the percentage of surface and underground planned any time soon. We'll have a number of years of the underground based on the current reserve, and we're adding to reserves periodically. So, those will not change. It's still roughly 50-50, and the grade of the underground's about twice the grade of the open pit -- maybe a little more, not much. The new stuff that we've added from the West Mine is a bit higher-grade than the surface average. So, all in all, our expectation is to sort of maintain the cost structure that you see as we develop both the underground and the surface.

Larry Radford -- Senior Vice President, Operations

Can I add to that?

Phil Baker -- President and Chief Executive Officer

Sure, please.

Larry Radford -- Senior Vice President, Operations

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

Phil Baker -- President and Chief Executive Officer

Yeah, that's right. And that would be increased to how much?

Larry Radford -- Senior Vice President, Operations

Well, we're applying for $1.6 million.

Phil Baker -- President and Chief Executive Officer

So, $0.2 million more?

Larry Radford -- Senior Vice President, Operations

Yeah.

Ajay Lele -- Southpaw -- Analyst

Thanks.

Phil Baker -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Trevor Turnbull from Scotiabank. Your line is now open.

Trevor Turnbull -- Scotiabank -- Analyst

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

Phil Baker -- President and Chief Executive Officer

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

Trevor Turnbull -- Scotiabank -- Analyst

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

Larry Radford -- Senior Vice President, Operations

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

Trevor Turnbull -- Scotiabank -- Analyst

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

Larry Radford -- Senior Vice President, Operations

Yeah, I think that's a good comment.

Trevor Turnbull -- Scotiabank -- Analyst

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

Lindsay Hall -- Senior Vice President and Chief Financial Officer

Over the next sort of four years, 2020 through 2023, the reserve grades will be -- or production grades will be higher than what it has been. I don't off the top of my head have -- I can't remember what that will be. But as a result, we'll have higher ounce production. Larry, generally speaking -- and we'll have the -- in the 43101, you'll be able to see that. But generally speaking, Dean?

Dean McDonald -- Senior Vice President, Exploration

Yeah, and next year. This will not match the technical report exactly because this is more of an internal . . .

Trevor Turnbull -- Scotiabank -- Analyst

This includes inferred and everything.

Dean McDonald -- Senior Vice President, Exploration

Yeah, this is not gonna match the technical report, but it'll give you kind of an idea of where we'll be. We should be, next year, in the 12.5 ounce per ton silver.

Phil Baker -- President and Chief Executive Officer

So, call it an ounce better in the next few years.

Trevor Turnbull -- Scotiabank -- Analyst

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

Larry Radford -- Senior Vice President, Operations

The graphic that we included is just one example. This is the East Ore in the very high end of the mine, where we anticipate when we published our report, that there'll be 15,000 fewer development feed. And a part of it is coming from this section we're showing in the graph, but not all of it. Some of it's just a good rethink of how we're accessing what are complicated ore bodies; these things are geometrically complex. And the more we can come off of the existing access, as we have in this example, the less development we're gonna do. So, 15,000 feet capitalize-wise is no small amount of money. It's actually its quite significant.

Phil Baker -- President and Chief Executive Officer

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

Dean McDonald -- Senior Vice President, Exploration

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

Phil Baker -- President and Chief Executive Officer

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

Larry Radford -- Senior Vice President, Operations

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

Trevor Turnbull -- Scotiabank -- Analyst

Yeah. No, it sounds like it's been a positive result all the way around. That's great. Thanks, guys.

Phil Baker -- President and Chief Executive Officer

Thank you, Trevor.

Operator

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

Phil Baker -- President and Chief Executive Officer

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

Operator

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

Duration: 57 minutes

Call participants:

Mike Westerlund -- Vice President of Investor Relations

Phil Baker -- President and Chief Executive Officer

Lindsay Hall -- Senior Vice President and Chief Financial Officer

Larry Radford -- Senior Vice President, Operations

Dean McDonald -- Senior Vice President, Exploration

Cosmos Chiu -- CIBC -- Analyst

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Heiko Ihle -- H.C. Wainwright -- Analyst

Anthony Sorrentino -- Sorrentino Metals -- Analyst

Ajay Lele -- Southpaw -- Analyst

More HL analysis

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