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Hecla Mining (NYSE:HL)
Q2 2021 Earnings Call
Aug 05, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and thank you for standing by. Welcome to the Q2 2021 Hecla Mining Company earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Anvita Patil. Thank you.

Please go ahead.

Anvita Patil -- Investor Relations

Thank you, operator, and welcome, everyone. Thank you for joining us for Hecla's second-quarter 2021 financial and operation results conference call. I'm Anvita Patil, Hecla's assistant treasurer. Our financial news results 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-Q and 10-K 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 also found in those documents.

With that, I will pass the call to Phil Baker.

Phil Baker -- President and Chief Executive Officer

Thanks, Anvita. Good morning, everyone, and thanks for joining our call. Hecla this quarter has delivered a near-record results on many fronts. We reported our second-highest revenues, gross profit, cash flow from operations and adjusted EBITDA in our history, and as we capitalize on the higher commodity prices with our continued strong production and focus on cost management.

We reported record realized silver margin of $19.60 per ounce of silver, as silver was our dominant revenue contributor at 40% for the quarter. At Greens Creek and for the company, we've now lowered our cash cost and all-in sustaining cost guidance again for the year, and Lauren's going to speak to that in a minute. Our financial position continues to strengthen and along with it, our financial flexibility. Our cash position has increased almost two and a half times from the prior year to $181 million as a result of our free cash flow generation.

Our financial strength is not new to this quarter and even for the past few years. This is now our 39th consecutive quarter of paying a dividend. And dividend that we just announced that we'll pay in September will make it 10 years. And we have now returned the shareholders $72 million in common dividends.

And in the first six months of 2021, we paid 16% of our free cash flow in dividends. And as the silver price increases, shareholders have the ability to participate in the incremental free cash flow generation with our silver-linked dividend and at the same time, we'll be maintaining our minimum dividend payment. Now on the next slide, I want to take a moment to talk about ESG because we published earlier this quarter our 2020 sustainability report, which is entitled small footprint, large benefit. And if you haven't taken a look at this, I would encourage you to do so.

Key understanding Hecla's ESG, and this is on the next slide is the fact that our mines are very small, underground mines that had been the economic generator or driver of communities for generations. And when I say small mines, I mean, small tonnage. The large companies in our industry will mine as many tons in a day as we do in a year. When I say economic drivers for communities, we've been the largest private employer for 30-plus years at all three of our operations because we're small we use very little energy and most of it is hydro.

So our greenhouse gas emissions are extraordinarily low and I think the best in the industry. I know that in 2020 we produced almost 2.5 times more silver equivalent ounces per ton of emissions compared to peers. And the amount of water we use per silver equivalent ounces is 63% of what an average person in the United States consumes in a day. So when it comes to the environmental impact of Hecla, think small.

But when you think about the social impact, think big, as the largest private employer in small towns with jobs that exist for generations. We just -- earlier this summer we had a summer intern who started with us and that's -- he's the fifth generation to work at Hecla. So shout out to Scott Hogamier and his son. And the jobs that we provide are jobs that provide more than a living wage.

These are jobs that sustain and build communities. And particularly during the pandemic, the Alaska Chamber recognized this and named our Greens Creek operation as the Large Business of the Year for the leadership work that we did in 2020 during the pandemic. And it's not just providing jobs, we support communities and special needs through multiple programs that we partially fund through our charitable foundation. Looking at safety, our culture is safety culture, has gone across all of our operations with Casa Berardi being awarded, Quebec/Maritime mine safety award.

This is the first time in that mine's 30-year history to win the award. Finally, the metals that we mine are essential in this transformation to renewable energy and Hecla produces 40% of the United States' silver and our Montana assets host America's third-largest undeveloped copper deposit with significant silver resources, both metals that are keys to green energy. And with that, I'm going to pass it over to Russell to talk about the financial condition of the company.

Russell Lawlar -- Senior Vice President and Chief Financial Officer

Thanks, Phil. Turning to Slide 7, propelled by a strong production in sales from our silver mining with higher prices, silver accounted for 40% of our revenues in the second-quarter, followed by gold at 37%, while zinc and lead were 23%. Our operations produced 3.5 million ounces of silver at an all-in sustaining cost of $7.54 per ounce, resulting in a record margin of $19.60 per ounce. With production continuing to increase at Lucky Friday, Hecla accounted for more than 40% of the U.S.

silver production in 2020. Gold production totaled 59,000 ounces at an all-in sustaining cost of $1,419 per ounce for a cash margin of $406 per ounce. With these margins on both silver and gold, we expect to see continued strong free cash flow generation. As we turn to Slide 8, starting in the upper left-hand corner, we ended the quarter with $181.5 million in cash, an increase of $41.7 million over the first quarter of 2021.

Moving to the right with our increasing cash position, we delivered a net debt-to-adjusted EBITDA ratio of 1.2 times, well below our target of two times, while providing liquidity position of $411 million. In the bottom left, you can see that our realized silver margins have continued to increase as costs are controlled and byproduct credits drive the all-in sustaining costs down. Margins are now twice what they were a year ago and similar to the first quarter. This margin combined with positive working capital management translates into free cash flow.

This is reflected in the chart at the bottom right quadrant, which shows over the past 15 months we've generated a total of free cash flow of $175 million and if current prices continue we expect to continue our free cash flow generation aided by low cost and high margins. With that, I'll pass the call to Lauren to go through operations.

Lauren Roberts -- Senior Vice President and Chief Operating Officer

Thanks, Russell I'll start on Slide 10. At the Greens Creek mine, we produced 2.6 million ounces of silver and 12.9 million ounces of gold at an all-in sustaining cost of $0.68 per ounce for the quarter. The mine generated $63.5 million in free cash flow in the quarter, the fourth highest since Hecla acquired full ownership of the mine, as it continues to benefit from higher silver, lead and Zinc prices. In the trailing 15 months, Greens Creek generated $255 million in free cash flow by operating safely and consistently throughout the pandemic.

Our workforce is nearly 90% vaccinated and we are taking measured steps to return to normal operations. We are lowering further the cash cost and all-in sustaining cost guidance due to byproduct credits, lower production costs and more favorable smelter terms. Updated cash cost guidance for Greens Creek is lowered to negative $1 to $1 per ounce and all-in sustaining costs are lowered to $3.25 to $4 per ounce. We also are increasing gold production guidance to 43,000 to 45,000 ounces due to higher than modeled grades.

Moving to Slide 11, Lucky Friday now is operating at historical production rates after a successful ramp-up in 2020. The mine produced 913,000 ounces of silver and generated positive free cash flow of 14 million in the quarter. We are tightening the cash cost guidance for the mine to seven $7.50 to $8.50 per ounce and all-in sustaining costs are estimated at $14.25 to $16.25 per ounce. And we remain on track to increase metal production to approximately 5 million ounces in 2023.

No significant planned outlays required to achieve this goal as the increase is driven by improving grade, as we mine deeper. We continue to test and optimize a new mining method, which better manages the seismicity and has the potential to increase productivity at the mine. Year-to-date, approximately 75% of the production has come from the new method as with any change in method, there is a learning curve, but we were really encouraged by the results today. At the Casa Berardi mine shown on Slide 12, we produced 31,300 ounces of gold in the second-quarter at an all-in sustaining cost of $14.34 per ounce.

Our focus on optimizing production has delivered results as we continue to see higher throughput availability and recovery in the mill. While our production stayed strong, we saw higher costs in the second-quarter due to cost associated with the increased volume, contractor costs related to maintenance and optimization activities in the mill and higher underground mobile maintenance costs. We are increasing our production guidance to 128,000 to 132,000 ounces of gold for the year. And our updated cash cost guidance for the mine is $1,000 to $1,125 per ounce.

All-in sustaining costs are expected to be in the range of $1,200 to $1,325 per ounce. We remain focused on reducing and optimizing cost at the mine after seeing the positive results on optimizing production and throughput. In the trailing 15 months, Casa Berardi has generated a positive free cash flow of $68.4 million and our ongoing business improvement activities are expected to reduce costs and increase cash flow further over the next two years. With that, I would like to return the call to Phil.

Phil Baker -- President and Chief Executive Officer

OK, let's go to Slide 14. And this takes the cost and production guidance that Lauren went through mine-by-mine and shows what it is on a consolidated basis for 2021 to 2023 as far as production. So you can see how we've increased the gold production guidance to 191,000 to 198,000. We've lowered our consolidated silver cash cost and all-in sustaining costs, guidance.

And so now the cash cost guidance between $1 and $2, and the all-in sustaining costs are estimated to be $9 to $11 per ounce of silver. So at current prices we would expect to generate roughly $15 per ounce of free cash flow from our silver operations. We're also increasing our gold cash costs and all-in sustaining cost at Casa Berardi slightly as Lauren mentioned. Our capital expenditures are expected to increase slightly, and that reflects the repurchases of royalties that were outstanding in Nevada and at Casa Berardi operations.

These were put in place before Hecla owned them these assets. And we did that in the second quarter. Earlier in the quarter, we announced an increase in our exploration expenditures to $40 million and pre-development to $8.5 million. We will update our exploration activities in early September.

And before I open the line for questions, I just want to thank our employees for the commitment to safe operations they've had during this pandemic and being able to deliver very strong operational and financial results. And so with that operator, I'd like to open the line for questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Heiko Ihle with H.C. Wainwright.

Heiko Ihle -- H.C. Wainwright & Co., LLC -- Analyst

Hey, Phil and team, thanks for taking my questions. I hope you guys are all staying safe and well.

Phil Baker -- President and Chief Executive Officer

We are.

Heiko Ihle -- H.C. Wainwright & Co., LLC -- Analyst

Good. In the release, you talked about the lower treatment charges and you're one of the first to really put it black on white like that. That's nice to hear miners talk about it, but it leads to just sort of a follow-up from an analyst's point of view. In your all-in sustaining reconciliation, it looks like your TCs had gone from $23.2 million in Q4 2020 to $15.5 million in Q1 2021, and now $13.6 million.

I assume the answer is yes, but just to make sure, are you seeing the same thing going forward in Q3 and beyond? Or are there actually even more improvements? I mean, these are very stark differences.

Phil Baker -- President and Chief Executive Officer

I'll let Russell answer your question.

Russell Lawlar -- Senior Vice President and Chief Financial Officer

Yes, Heiko. Essentially what happened is a lot of our concentrated business sold at benchmark terms, and that gets negotiated on an annual basis. The treatment charge, especially for zinc concentrate dramatically decreased from last year to this year. And so you're seeing a large change most notably at Greens Creek because it has quite a lot of zinc concentrate and concentrate is exposed to the zinc concentrate benchmark term.

So I would say for the rest of the year, we'll likely see it kind of like what we've seen for the first half of the year with the exception. If you recall, in the first quarter we highlighted, there was one shipment that was made at kind of better-than-normal terms. And so we highlighted that a quarter ago so that kind of folks don't carry that benefit forward. But I would suggest we'll see the treatment charges kind of continue as if kind of the Q2 2021 rate essentially.

There are also some concentrate parcels that are sold outside of the benchmark so it can -- we can move a little bit based on that, but that's kind of around numbers that should be roughly what we see in the future.

Heiko Ihle -- H.C. Wainwright & Co., LLC -- Analyst

Got it. That actually helps you given that Q2 was lower, right?

Russell Lawlar -- Senior Vice President and Chief Financial Officer

Well, yes. I mean, there's factors such as the concentrate mix that shifts zinc versus lead, et cetera. So there's factors there too and that should be good.

Phil Baker -- President and Chief Executive Officer

And you can get a pretty good feel in the second half of the year from just looking at our guidance.

Heiko Ihle -- H.C. Wainwright & Co., LLC -- Analyst

Yes. Fair.

Phil Baker -- President and Chief Executive Officer

And it's in the reconciliation.

Heiko Ihle -- H.C. Wainwright & Co., LLC -- Analyst

Yeah. Nevada seems to make a pretty decent progress with Hatter Graben at Hollister and then the exploration that you're doing at Midas. Any idea how much money you've invested in the area this year thus far? And is there a breakdown of the money that has been spent in Nevada that you're willing and able to provide even just a little bit of granularity?

Phil Baker -- President and Chief Executive Officer

Well, yes, we can -- Russell can -- he has done a little bit of work on that recently. So go ahead, Russell with what you were talking to me about.

Russell Lawlar -- Senior Vice President and Chief Financial Officer

Yes. Essentially from Nevada -- the perspective of Nevada, we're essentially becoming cash flow neutral I would say from the operational perspective. We've invested obviously at Hatter Graben, the development and the exploration, and I'm thinking about maybe a quarter to a third of that is sort of the $40 million that we've guided here would probably spend in Nevada. And so we will -- from an operational perspective, we'll kind of cover the costs that we have as well as some of the exploration costs that we will invest in Nevada from that perspective.

Phil Baker -- President and Chief Executive Officer

So the point is Heiko with that cashflow negative that we generated early on in Nevada, we have recouped that with the exception of the expenditures that we're now making in expiration and the ramp development. So we're pleased with how things have developed in Nevada.

Heiko Ihle -- H.C. Wainwright & Co., LLC -- Analyst

OK. And I promise Russell didn't make me ask that question because he just worked on it. Just so you know. OK, I'll get back in queue.

Thank you, guys.

Phil Baker -- President and Chief Executive Officer

Thanks, Heiko.

Operator

[Operator instructions] Your next question comes line of Mike Jalonen with Bank of America.

Mike Jalonen -- Bank of America Merrill Lynch -- Analyst

Well, good morning, Phil and Russell. And I just had a question. Phil, great news on Greens Creek, workforce nearly 90% vaccinated. And what about Lucky Friday and Casa Berardi, what are their rates at?

Phil Baker -- President and Chief Executive Officer

They're quite a bit lower in the case of Casa we're in the process of vaccination. It's really about the availability of the vaccine in Quebec. And so that's they're working, they're above 50% with fully vaccinated and it's increasing. In the case of the Lucky Friday, it's not dissimilar to the national average, the U.S.

national average.

Mike Jalonen -- Bank of America Merrill Lynch -- Analyst

Is that around 50%?

Phil Baker -- President and Chief Executive Officer

Yeah. When you consider vaccinations and people that have had COVID.

Mike Jalonen -- Bank of America Merrill Lynch -- Analyst

Oh, what kind of steps is Hecla taking to encourage Lucky Friday employees to get vaccinated?

Phil Baker -- President and Chief Executive Officer

Well, it's a, it's been an ongoing education process, that's the primary thing that we're able to do. And then, we have all the protocols that people have to take and until we have a further vaccination, it's really difficult to remove those protocols. And that's one of the reasons why at Greens Creek, I think the vaccination rate is so high, as we had this quarantine period that people were required to get through with the vaccination rate as high as it is, we're not having to do the same quarantine. Lauren, anything you want to add to this?

Lauren Roberts -- Senior Vice President and Chief Operating Officer

I would say at Lucky Friday, Mike we've done some work to encourage folks just through making vaccinations available at the mine site. We've had anybody who does get vaccinated, gets a little bit of a trinket and appreciation. So we've gone through those steps. But I would also say and reiterate what Phil said, it's pretty consistent with certainly the Idaho average rates.

And we really haven't seen any spike or material impact from it, because of the controls we've put in place and we would anticipate that to continue going forward.

Mike Jalonen -- Bank of America Merrill Lynch -- Analyst

OK. Well, thank you for that and good luck.

Lauren Roberts -- Senior Vice President and Chief Operating Officer

All right. Thanks, Mike.

Operator

There are no further questions. I'll turn the call over to Phil Baker.

Phil Baker -- President and Chief Executive Officer

OK. Well, thanks very much. I just want to remind folks that we have available -- the ability to do one-on-one call with us. So hopefully you saw that in the press release and that's open to just shareholders, analysts, just anyone that's interested in Hecla, we'd be happy to have these one-on-one calls.

And so I look forward to hearing from you and if it doesn't work out for today, you can certainly talk to Russell and we can set something up for some time next week. So thanks, everyone. Have a good day.

Operator

[Operator signoff]

Duration: 23 minutes

Call participants:

Anvita Patil -- Investor Relations

Phil Baker -- President and Chief Executive Officer

Russell Lawlar -- Senior Vice President and Chief Financial Officer

Lauren Roberts -- Senior Vice President and Chief Operating Officer

Heiko Ihle -- H.C. Wainwright & Co., LLC -- Analyst

Mike Jalonen -- Bank of America Merrill Lynch -- Analyst

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