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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Hecla Mining Company Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference maybe recorded.
I would now like to introduce your host for today’s conference, Mike Westerlund, Vice President of Investor Relations. Sir, you may begin.
Thank you, operator. Welcome everyone, and thank you for joining us for Hecla’s second quarter 2018 financial and operations results conference call. Our financial results news release that was issued this morning before market open, along with our exploration release issued on the 7th and 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 Chief Financial Officer; Larry Radford, Senior Vice President and Chief Operations Officer; 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 2. 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’re only allowed to disclose mineral deposits that we can reasonably expect to 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.
With that, I will pass the call to Phil Baker.
Thanks, Mike, hello everyone. We had a good quarter and there is lots to talk about. So, I’ll start highlighting a few items on Slide 3. First, our mines continued their consistent performance as a result of the investments we’ve made. Our silver cash cost, after by-product credits are significantly reduced down over 300% in the last year, and our silver margins remain among the top in the industry and our gold cash costs after by-product credits were down as well.
Earlier this week, we issued our second quarter exploration update and I’m pleased to report that the exploration team has been very successful in discovering high-grade material at Casa Berardi, Greens Creek, and San Sebastian, and if you haven’t had the release, I urge you to do so.
We have completed the Klondex acquisition. We think we have fundamentally improved Hecla by acquiring 110 square miles in one of the top mining jurisdictions of the world. These properties are either on the Carlin or Battle Mountain trends in the Northern Nevada Rift. We also see a team of people that are enthusiastic to change and improve these operations.
I spent last week in Nevada visiting each operation in the Reno and [indiscernible] (0:03:10) offices and I spoke with almost all of the supervisory and management personnel, and these people are very skilled, they know the mining business and they’re very excited to be working for Hecla that’s not focused on production for the sake of production, and the opportunities in resources that we bring. I think we are going to have a good future together.
I know they are impressed with the innovation that we bring to the mine. Larry is going to describe in a minute one of the quick wins we’ve had at – with our implementing some technology to improve the development and it’s a synthetic liner that he’ll talk about that they’ve nick named the magic carpet.
I look forward to harnessing the enthusiasm that they have as we drive the operations forward as we change these operations. While we have liked to have seen the past management of the assets do more development exploration in 2018, we are now the owner and we’re quickly moving forward on them. I’m confident that within 60 days the start of the fourth quarter you will not recognize Fire Creek and Hollister.
We’re changing how the operations in Nevada run. We’re taking people and equipment from the low margin Midas mine and moving them to the high margin Fire Creek and development work at Hollister, so that we can get to the Hatter Graben. When I look at the former Klondex guidance in 2018 at the beginning of the year, it was clear to me that Midas didn’t make very much money.
So, we’ve confirmed that over the last 20 days that we’ve owned the mine and we implemented the winddown of it yesterday. I expect, by September, we will only be mining developed stokes until the end of the year. My trip last week emphasized that these assets could one day be like Greens Creek, Casa, and San Sebastian.
They are going to be able to generate margin and they’re going to have an extended mine life. This should not only improve our equity value, but also our credit metrics and the rating agencies are beginning to take notice of this as exemplified by our bond rating upgrade by S&P.
Now, let me change gears to a long-term project. In Montana, the U.S. Forest Services released the supplemental EIS for Rock Creek. This allows for the evaluation phase to advance. Record of Decision has advanced in late August through September with state approvals expected in the month of two later.
And at Troy, reclamation site we have in Montana, we’re continuing with the long-term reclamation schedule, contrary to how some have portrayed the things there. We are just reducing expenditures there until there is more certainty regarding permitting.
We have also updated our expectation for 2018, which you can see on Slide 4. We’ve improved our cash cost in AISC guidance per silver ounce at both Greens Creek and company-wide. In Nevada, we expect to produce 48,000 ounces to 50,000 ounces over the five months of the year and we’re using five months because the acquisition closed on July 20.
For the Nevada operations, we think the fourth quarter will be stronger than the third quarter. We see the gold production from the Nevada operations in 2019 being considerably stronger once we get to 550 tons per day at Fire Creek and that’s up from 350.
I’ll now pass the call to Lindsay to review our financial performance this quarter. Lindsay?
Thanks Phil. As Phil said, we had good results in the second quarter, as you can see on Slide 6. For the three-months ended June 30, 2018, we reported 147 million in sales of products, a 10% increase over the same period of 2017, as a result of increased gold production at Casa Berardi, positive price movement, better TC-RC terms, partially offset by lower silver production at San Sebastian, which was expected. This led to a second quarter operating cash flow of 30.6 million compared to 7.5 million in the prior year period.
The company-wide cash cost after by-product credits per silver ounce declined 319% from last year to a negative $0.57, and the all-in sustaining cash cost after by-product credits increased to $11.40 on a higher capital investment at Greens Creek. Gold cash cost and all-in sustaining cash cost after by-product credits both declined significantly. Cash and cash like [ph] to investments totaled 245 million at the end of the second quarter ending June 30, 2018.
Moving on to our newly acquired Nevada operations on Slide 7, we are pleased with the positive response from both rating agencies in regards to this acquisition, with S&P upgrading us to B+, one step away from double B. We are confident that we can execute and deliver on our financial plans and they will be recognized by the markets and potentially in the form of a ratings increased to double B, which would put us in a good position to refinance the high-yield notes, particularly by next May when the call premium goes to zero.
We ended the quarter with some 245 million in cash, another positive quarter for cash generation and we used approximately 210 million of our cash to complete the acquisition of the Nevada operations. Hence that’s the reason why we increased our revolving line of credit from 100 million to 250 million, although initially until the banking syndicate completes the paperwork i.e. perfects the leans on the Nevada operations, we’re only able to access 200 million, although I don't expect any problem with perfecting liens on the Nevada assets.
Essentially, we have restored the liquidity we had before we made the acquisition. As is our mantra at Hecla, all operations need to generate positive cash flows in their mine plant and we expect Nevada will be no different. The Nevada assets are basically self-funding. The cash flow from production pays for the 11 million in development and definition drilling expenditures in the last half of the year, and as well 5 million related to the completion of the new tailings facility, plus the CIO plant improvements, both of which have long-term benefits for the operations that Larry will speak to.
Also, we’re pleased with our initial success towards capturing and realizing many synergies of integrating the operations and are working on various plans to achieve their remaining synergies in the months to come in areas such as financial systems, bonding costs or automation obligations, insurance, et cetera, savings that come from being combined at the bigger stronger company such as Hecla. Some of those activities are depicted on Slide 7.
Lastly, on Slide 8, you can see we maintained a diversified revenue stream with gold at 50%, silver at 25%, and lead and zinc at a combined 25%. Greens Creek continues to be the dominant source of revenue for us. So, in summary, we are starting to realize synergies with the acquisition of the Nevada operations. Our credit rating is improving. We continue to generate cash flow from operations, and we have excellent silver cash cost and all-in sustaining cash cost after by-product credits, and therefore are optimistic about the financial for the rest of the year and beyond.
I will now pass the call to Larry to talk about the operations.
Thanks Lindsay. I've been in mining for 35 years and of those 35 years, half of it’s been in Nevada. So, taking personally to be back in the Nevada and I think it’s a great move for Hecla. I want to walk you through some of our thinking for the rest of 2018 on Slide 10. The first priority is to get Nevada operations working as an integrated operation, where we have three mines and one mill.
As a coherent unit, we will move personnel and equipment around under the direction of one Vice President and General Manager, Kevin Shiell, and we'll prioritize the resources in these operations that make the most profit. As such, we’re working on a unified mine plan and expect to ramp-up production at Fire Creek and at the begin development of Hatter Graben.
We are ramping down Midas and moving personnel and machines as appropriate to Hollister and Fire Creek. In the mill, we expect to complete installation of the carbon screens and all the leach tanks providing a robust CIL process capable of processing Hollister ore by the end of the year. We’re also installing sampling equipment in the front-end of the mill to better reconcile each mine to the mill. We continue at the tailings facility construction and we’re targeting year-end for its completion.
At Fire Creek, we need to rehabilitate the existing mine access first, followed by a period of intense development targeting an increase in the development rate of 50%, as it has been underfunded with capital. We then expect to ramp up the tons per day of ore produced from 350 to the target of 550 tons per day, an increase of 57%.
In some areas of the mine, the road conditions are muddy, and our Vice President of Technical Services introduced an engineered roadbase, which includes a new water-wick in geotextile that allows trucks to move through these areas.
On Slide 11, you can see some photos I took last week from the 4 Haulage drift and Spiral 3 areas in Fire Creek. You can see the substantial improvement, this fabric in the aggregate that was imported and improvement that was made for trucks to go through these areas. The mud is only an issue in isolated areas, but conditions would get bad enough if machines will get stuck and would have to get towed-out.
You can see the dramatic improvement from the before and after pictures, which is why the on-site team called it the magic carpet that is over for too earlier. Spent a couple of days of closing. We had moved our [indiscernible] plant from the now closed Troy mine to Fire Creek. We will move [indiscernible] equipment from Midas to Fire Creek, so we can include [indiscernible] Creek in the development cycle, reducing the need to go back and rehabilitate later, which was a problem for Klondex.
Improving the development is key to create value at Fire Creek. Klondex was not able to keep up with the development at 350 tons per day and as we increased throughput to 550 tons per day, we will need to do 15,000 feet of development per year. For reference, this is about half of the annual development at Casa Berardi.
Fire Creek development and definition drilling represents about half of the Nevada assets $20 million capital for the remainder of 2018. Also included is another 5 million or so in the tailings down construction as shown on Slide 12, and another 2 million for completion of the CIL circuit. We expect the dam to be completed in November and fully functioning by December. The previous tailings facility is expected to be full by then.
Outside of Nevada, we also moved 10 million of R&D cost in the capital as the Remote Vein Miner is now under construction in Sweden. And we will invest another 4 million in both Greens Creek and San Sebastian.
On Slide 13, you can see Greens Creek had another excellent quarter, producing 2 million ounces of silver at a cost of sales $48 million, and a cash cost after by-product credits of negative $3.47 per silver ounce. The all-in sustaining cost after by-product credits was $4.43 an ounce. We continue to advance our work to transition the fans to ventilation on demand to utilize the tele-remote LHDs and to implement computer assisted jumbo drilling.
Slide 14, Casa Berardi had a great second quarter. Gold production was up 42,000 ounces, costs were down, capital spending declined as well. The mine is performing well and both grade and throughput were strong. The autonomous truck continues to impress in the 985 Drift as seen here on Slide 15, and if you came to our mine in July you would have seen how well it is operating.
In fact, the performance is already considerably better than we thought it would be as you can see on Slide 16. We can load the truck faster, and it has a much shorter cycle time, a 90% availability, and fuel consumption is down 17%, and we think it will eventually be even higher than that.
In the near-term we’ll complete slashing tight spots in the drift, which should enable the autonomous truck to drive faster. Additionally, we expect to have a second autonomous truck in operation in the fourth quarter. Savings from our running two trucks autonomously should be $3 million to $4 million a year.
At Lucky Friday, we remain convinced that we need a safer way to mine at the mile and a half of depth. Our focus is on preparing for the Remote Vein Miner as seen on Slide 17. What could revolutionize how the Lucky Friday operates, we’re placing drilling glass with a much more efficient cutting technology.
We’re working on an excavating a chamber to be used in 2019 to reassemble the machine at underground once the pieces are sent down the shaft. So, stay tuned on to this. We will have much more to say about it over the next year or so.
At San Sebastian, we’re seeing improved underground mining performance as you can see on Slide 18. To improve the underground mining rate, we invest in development in the first half of the year, which led to a higher all-in sustaining cost, after by-product credits per gold ounce in prior quarters. A reduction in per ounce cost is expected in the second half of the year as underground production continues to ramp up.
We plan on collecting a 12,000-ton bulk sample of the Hugh Zone on the Francine Vein the fourth quarter and then process this material through a third-party mill to test its suitability. If at all we [escorting the plan] we should be advancing the development into this area to ensure secondary access and then mining this area by late in 2019. It could mean another five or more the years of mine life at San Sebastian.
I will now pass the call over to Dean.
Thanks, Larry. Hecla continued with aggressive drill programs in the second quarter at our mines and projects with over 20 rigs on surface, and 12 more underground. A list of drill intersections is provided in the appendix of the exploration release, which was issued on Tuesday. The release also contained an updated reserve and resource table that included the Nevada assets.
The reserves for the Nevada assets have declined from last reporting showing depletion to the end of April. This updated reserve reflects the fact that there was little lateral or sell [ph] development of resources areas, and little if any drilling to improve reserves and resources during the latter part of 2017 and early in 2018. This is something we will work quickly to correct.
Important Greenfield's exploration at the Kinskuch silver gold, silver-base metals project in northern British Columbia, the Little Baldy gold project in northern Idaho, and the Republic gold project in Washington was also initiated in the quarter. The integration of the Klondex exploration group commenced in late July, and we’re actively accelerating drilling at the Fire Creek and Hollister mines.
At San Sebastian, as shown on Slide 20, we’ve clearly defined mineralized structural trends providing multiple opportunities to find new high-grade resources to extend both cyanide circuit milling and a separate recently secured sulfide flotation circuit. You can see the current Middle, North and Francine Vein pits in the yellow outlines, the surface projection of the new Middle Vein reserve, the new underground ramp under construction in black, and the green ellipsis we're drilling is defining potential new reserves and resources.
Let’s look at some of the recent drilling successes. Slide 21 shows longitudinal section of the Francine Vein. Infill drilling to upgrade the resource to indicated category is nearly complete, an underground development for bulk sample is expected later this year. This definition drilling has confirmed over 5,000 feet of strike length of the polymetallic mineralization containing precious metals and substantial quantities of base metals, zinc, lead, and copper.
The substantial oxide resource is being defined to the East of the San Ricardo Fault, on the right of the image as drilling evaluates large gaps between high-grade pods of mineralization.
Mineralization along the Francine Vein now extends over 8,000 feet of strike length and recent drilling has identified near surface oxide mineralization over a thousand feet to the West.
Slide 22 shows both a plan and a longitudinal view of the Casa Berardi mine. We continue to have drilling successes along the main trends, particularly near surface where a series of active, expanding, and proposed open pits are shown in the plan view. Underground drilling along multiple high-grade lenses of the 118 and 123 zones, expanded reserves and resources along strike and extended resources down plunge below the current workings.
Drilling closer to surface has identified the new 125 zone north of the Casa Berardi Fault. The red arrows in the longitudinal project the extension of many mineralized zones down plunge throughout the mine and showed the significant potential to extend mine life. We have recently defined the Lac Germain deposit about 4.5 miles east of the Casa Berardi mine lease along the projection of the Casa Berardi deformation zone.
We are pleased with the results of Lac Germain, particularly because they show that the more than 15 miles of deformation zone identified on the property is likely a focal point for many future discoveries. At Greens Creek, as shown on Slide 23, definition and exploration drilling continue to have success in the upper plate zone, which is higher in the mine and along existing trends in the Gallagher and Deep 200 South zones at the Southern extent of the mine.
In the central part of the mine, both underground and surface exploration drilling have extended the lower south west and 200 south zones to the West. This is significant as these discoveries open up a large new area for possible expansion of resources. I’m very excited about the exploration opportunities in Northern Nevada.
As shown in Slide 24, it’s rare that you can acquire 110 square miles of exploration ground in northern Nevada that lies within and at the intersection of prolific trends or rifts. With these new properties come a talented team of geologists with the significant understanding of the properties, and I look forward to working together to realize the potential of this ground.
Exploration drilling has started in earnest at Fire Creek as shown on Slide 25, and we are currently drilling South of high-grade protection veins in the Guard Shack area. Further South, and IP/resistivity geophysical survey at South Notice is being completed, and exploration holds [ph] our plan to test the geophysical and gold soil anomalies identified. Drilling has begun at the Zeus target in the Spiral 10 area to follow-up on strong results from last year's drilling.
Fire Creek is the most important asset acquired in Nevada and we are aggressively evaluating exploration target dates with the goal of extending mine life. Drilling has been conducted at three main surface targets at the Hollister property as shown in Slide 26. Drilling of vein extensions of the West Gloria and Rowena are designed to extend near-term production.
Drilling of the Hatter Graben has commenced and designed to extend mineralization of this important resource to the West and East. The Hatter Graben is a significant target to help ensure longtime viability of the Hollister mine. This completes the summary of exploration and I’ll pass the call back to Phil for some closing comments.
We’ll just take questions now operator.
Thank you. [Operator Instructions] Our first question comes from Cosmos Chiu with CIBC. Your line is now open.
Hi, thanks Phil, Lindsay, Larry, and Dean. Maybe just some questions here on Nevada, the guidance that you’ve given for 2018 production for Nevada is 41,000 ounces to 52,000 ounces, you know even considering that it is only above five months, it is still less than what Klondex have put out previously, just to confirm the difference is only really due to the ramp down of Midas, is that correct?
That’s not right Cosmos. It’s really a couple of things. One the ramp down of Midas. Two, these guys didn’t do enough development in order to be able to access stopes, you know they are also winning the stopes ahead of sequence. So, we’re having to deal with all of those sorts of issues. It is not anything that we are surprised by and we’re going to move those assets forward in a way that sets them up for a long-term success. We’re not going to just focus on what can we do for the next couple of quarters. That’s really how they were running the mine. Larry, anything to add to that?
It’s really Fire Creek development. Some of the conditions, some of the lack of investment in development, we will rectify that. We will actually accelerate the development in time and some of the stopes – the higher-grade stopes that Klondex had forecasted to come in this year will actually be there first half of next year.
Okay. And then I don't know if you have an answer at this point in time, but in terms of like longer-term, what are you targeting in terms of this Nevada production, previously, again under Klondex it was about 150,000 ounces a year, is that a number that you're trying to get back to or is it still too early at this point-in-time?
You know, Cosmos, I think it is too early, but what I will tell you is, we will be focused more on profitability in margin then we will be on the number of ounces. So, we will be looking for this mine, a group of mines. These operations to generate real returns to us on the investment. Same thing that we’ve done at Greens Creek, same thing that we’ve done at Casa, same thing that we’ve done San Sebastian. We’ll do nothing different. We are prepared to allow this mine to be self-funding and not generate returns immediately, just like you saw us do at Casa, but we’re not going to be focused on anything, but generating margin and extending the mine life.
Yes.
This industry has been too long at just being about production. We’re both about production, mine life, and margins.
Of course. And then maybe in a bit more detail here, you know you talked about moving some of the Midas equipment to Fire Creek and Hollister, is it compatible, is it the same equipment, are you moving jumbos, trucks, scoops, are they the same size?
Absolutely. So, the equipment at one mine is what we needed. The other’s – and well also at, remember the other thing we will be doing at Hollister is we will be moving into a development to the Hatter Graben.
And then in terms of, you know your target right now is to get from 350 tons per day to 550 tons per day of Fire Creek, and you know we heard Larry talk about the increasing the development after the rehab of some of the access, how long is that going to take? And then maybe going back to some other question here, how much more equipment you got to bring to Fire Creek and how is that going to help in terms of this accelerated development to 15,000-feet per year, which to be honest as you said isn't really a lot.
Repeat your question Cosmos, I guess I got sort of lost.
So, I guess, what I'm trying to say is, like the timing in terms of how you can get up to 550 tons per day?
It will happen over the course of the first half of next year. You'll see relatively plateauing stairstep increase in the tons per day, over the course of the first half. It’s a long process.
I know you are just really getting more access, more headings, more stopes, is that really what it is?
Yes, I mean the first order of business is to clean up some of the messes and we need more miners to do that. It’s been a lot of turnover at Fire Creek, so we need to remedy that first. If you think of Fire Creek, it’s been mined and one very central area and it’s been very congested. It’s actually very hard to mine in this little postage stamp area that’s been mined. It’s open at north and south. It is just liking and development. Once we get it cleaned up a bit, we can start developing intensely, and as we opened up on strike, we will open up tonnage, and it also opens up development, I'm sorry exploration and definition drilling platforms. It’s a bit difficult to drill from surface. We’ll get proper drill stations underground once we get the development going.
So, everything sounds like Klondex was really given their financial situation they are really running at hand to mouth, and now you're taking some time to rectify some of these issues?
That’s a fair assessment.
Yes. Maybe switching gears, a little bit, here in terms of Hollister, Hatter Graben, could you maybe remind you what you need to do to access the deposit and essentially what’s already in place and what you need to do?
Well, we need to drive a decline to reach the Hatter Graben. It is about, I guess, horizontally it’s about 1,500 feet, but the ultimate access about 3,000. And it’s 5,000 from, all the way to the surface, but going in from our underground access. So, it’s going to take us couple of years to access the Hatter Graben.
Do you have all the permits in place, do you for – even like say the ventilation shafts and everything else that you need?
Yes, we’ve got everything we need.
Okay. And then maybe one last question here in terms of the Midas mill, you have done some stuff or Klondex previously had done some stuff in terms of the CIL tanks and the carbon filters, could you remind us in terms of what recovery you are at right now and is that, you know what sort of recovery you are expecting to improve to?
Larry, do you want to?
This is for the Hollister ore. Sorry.
Yes, exactly. The Hollister ore is carbonaceous and Klondex has installed enough carbon strings in the – so this a [indiscernible]. Klondex had installed enough carbon streams to get about 24 hours of retention, and we’re seeing recoveries in the 80% range. We are going to complete the installation of all the tanks by the end of the year, which gives about 72 hours of retention and the benchtop testing that Klondex did indicate that that will get to somewhere around 88%, depending on the head grade and when Hollister ore was going down to [indiscernible] which is a CIL plant, that’s about where it was. So, that’s what we’re targeting.
Okay. Maybe one last question for Lindsay here. It will – certainly, you know good news that you’ve had your credit rating improved from B to B+ and potentially to BB later on, what’s the impact on the interest rate? Like, right now with a B+ and what would potentially be the further improvements once you get to BB?
Lindsay, go ahead.
Generally speaking 125 basis points Cosmos. [indiscernible] 125.
Sorry, 125 from where, B+ to BB or from B to B+?
I'm just saying generally moving in from single B to double B 125 basis points.
Okay. Cool. Thank you. That’s all I have.
Thanks Cosmos.
Thank you. And our next question comes from Heiko Ihle with H.C. Wainwright. Your line is now open.
Hi, guys thanks for taking my question. Good quarter.
Thank you.
I want to talk about the increase in the capital expenditures. So, you’re looking at 20 million for Nevada, that’s in the – you're looking at 10 million for the – [indiscernible], so that gets us to 30 million. Then you're looking 4 million to Greens Creek, 4 million for San Sebastian, that’s 38 million, but at the low-point your CapEx is actually going up 45 million. At the midpoint, it’s 42.5 million and at the low point it’s 40 million. So, should we just keep looking at the low-end of the updated guidance or is there something obvious on this thing in the release?
No. Look it’s a range of capital that we have to spend and it’s going to be a question as to whether we can actually get all the work done to spend all the capital that we would like to spend. So that’s why you see that range. As far as where you should assume in the models, you can, any one of them will be, there’s not one that’s a better guess than the other. So, part of it is, we’ve got these new operations and just the timing of everything is a little bit uncertain.
Got it. You allocated 6.8 million for Lucky Friday suspension-related costs in the quarter, which is quite a bit more that you had in Q1 so that’s 5.0 million, any idea where this increase is coming from and any good modelling ideas you have for the remainder of the year assuming as they shut down?
Well, I think as far as thinking forward, I think you're going to see more of our costs associated with the Lucky Friday moving into the development for the Remote Vein Miner it’s – the real focus of the team at Lucky Friday is on the development of the opening necessary to reassemble the RVM underground in order to test it. So, it will likely decline as we move forward. Lindsay, anything to add to that, maybe looking backwards?
No. Heiko, I mean you just commented that the run rate at the suspension cost, the cash cost higher, Lucky Friday I was just looking at, I don't believe that, the run rates can be consistent. So, I will go back and check, but you did comment higher suspension costs to Lucky Friday. The cash run rate is about the same. Quarter-over-quarter, I'm talking about 2018, first quarter second quarter.
Got it. Okay. And then, I don’t know if you are going to answer this, but is there a dollar figure that you want to tackle for the integration of the Nevada assets? I mean, it sounds like, Phil will spend a meaningful amount of time out there on the last couple of weeks as per early on in this call, but besides the time that management is spending there, any idea we're looking for in forward terms and when we expect to see those numbers?
What do you mean in dollar terms, I am not…
Everything from changing the Klondex signs to Hecla signs to, I don't know if there was any severance expenses left to be paid, all of that stuff.
Well that’s all been done in the transition. I mean the people that are – the people that we’ve terminated, the people that are left we’re expecting them to stay on the team. So, we're not anticipating additional payments of that sort going forward, and if there are any they are quite small. There’s actually a big savings that comes from closing out Klondex. I mean basically $15 million a year of G&A is going to disappear. Sorry about that background noise, I’m not sure what that is. I hope you could hear all that Heiko.
Yes, I did. Thank you.
So, think about it as savings relative to what Klondex was spending.
Well, I still think you guys bought those assets from – or these assets for an amazing price. So…
Absolutely.
Perfect. Thank you, guys.
Thanks, Heiko.
Thank you. And our next question comes from John Bridges with J.P. Morgan. Your line is now open.
Good morning Phil, everybody. I wanted to dig into cash flows, your intention is to have the Nevada assets being cash flow neutral to you as soon as possible, when is that aligned to be and then when will they be contributing to the portion of debt that they’ve – that you sort of you’ve taken on in the form or a revolver to run those, just to start with?
Well, I guess two things. One is, the expectation is this year for the five months it will be self-funding. We’re not anticipating needing to contribute additional capital into it. And two, we haven't drawn on the revolver. Our net cash position is positive.
Okay. So, where do you see your balance sheet going over the next couple of years with respect to debt refunding and that sort of thing? Are you expecting an inflow of cash at the very end of 2019, 2020 to help you with refunding from the Lucky Friday restart?
Well, we don't have a date for the restart of the lucky Friday. What I would suggest to you is, each of the mines are cash flow positive and we think they will all grow with the – we think Casa will grow, we think San Sebastian will grow and we think the Nevada assets Greens Creek has been just a great cash flow generator as it is. So, if they can continue to do that, which we expect it will or we're quite happy with that, but each operation should be generating even more cash flow year over year at same prices obviously.
Okay. And then just a practical point, looking at that picture of the continuous miner. how do you support around that? I see a big excavation big void that needs to be supported, how does that look, is that mechanized as well or is that a more sort of labor-intensive thing?
Well, when you think about it, what we're trying to do is keep people out of the stope. So, ultimately, we’re going to try to have a bolting system that’s attached to this that has potentially self-drilling bolts, and then with respect to moving the mark in and out, we envision potentially using automated or tele-remote operated equipment, but we’ve not gotten to that point yet. Larry, what would you like to add to that?
Yes, I mean the photo makes it look quite large, but the machine is actually purpose-built for narrow vein mining. So, it will mine down to 10-feet a web somewhere in that area and it is maybe not evident in the photo, but there is stingers on the top of the machine that is secured to the back. So, it’s a machine that runs on its own without a lot of support. Obviously, it’s got cable behind it, and conveyor [ph] for power and it has got a conveyor at the back that will load whatever we used to hold them material of with. When we saw the machine in South Africa running, they were using and LHD to move material out of the area being mine. Did that answer your question John?
Yes. Sort of. And then how do you intend to use it under hand over hand?
Underhand. We’ll change the mining practice a little bit, but not a lot. It’s – really the change has come around bolting because obviously we won't have a person in there bolting, but interestingly we’re trialing and self-drilling bolts at Lucky Friday right now, they’re working fine, kind of the South African product. And that’s the part that we're going to have to innovate a little bit that we’re making good progress on it.
Well, if you're looking underhand, you're going to be under cemented Phil presumably?
Yes.
Okay. So that solves that one. So, do you think you're going to have the full package ready to go at the end of 2019 or will it be a – this whole period of learning how to work with this machine?
It will be into 2020 when we will have completed all our testing is what I’m anticipating. Is that fair Larry?
Yes, it would be second half of…
So, it started in 2019 and it could be as early as a year from now, but we’re in this current schedule we have it in the fourth quarter that we’re bringing it into the Lucky Friday and then 2020 is testing.
To what extent can you accelerate that by working with the Swede’s in the second half of next year to work up the attachments to this machine?
You know it really is a function of how their testing goes in their own mine. So, they will do that first. They will build it, test it, and depending on how that goes and we’ll be there for the testing. We’ll determine what adjustments need to be made and how quickly it can be disassembled and brought over here to be taken underground. So, that’s why it could be as early as a year from now, and that’s probably the fastest it could get here, but are plans are in the fourth quarter. Really, what’s on the critical path is the development here for it, because we do need to have a space that’s large enough to reassemble it.
Okay. Just a quickie for Lindsay. The TC-RCs, the favorable TC-RCs they are going to continue, they are going to get better, what is the shape of that cross benefit?
What’s your crystal ball Lindsay?
I would say this John. I’m happy with what we’ve got. I’m not sure there’s any more to get. Put it that way.
Okay. That’s helpful, appreciated it. Thanks guys. Good luck.
Thanks, John.
Thank you. And our next question comes from Mark Mihaljevic with RBC Capital Markets. Your line is now open.
Hi, thanks and good morning everyone.
Hi Mark.
I guess, my first question is, obviously, Klondex has done a lot of work on the relations with Shoshone, now just wondering how that's worked through the transition phase? And whether they've had any or whether any red flags have been raised?
We’re certainly maintaining those relationships and Larry and Luke just met with them earlier this week. So, Larry why don't you…
Yes. We certainly are, well we're happy that Klondex put so much effort into maintaining the good relationship with the Shoshone. The team that we’ve retained out of Klondex both operationally, environmentally, relationship with Shoshone, we’ve got a good team that’s one of the reasons we like – we like what we have and yes. Luke, Russell, and Lucy Hill met with Shoshone this week to – one, just to make introductions, but also to try and ensure them our common, maybe it is the right way to put it that Hecla is as committed as Klondex was to maintaining good relations.
Okay. Thanks. And then I guess you mentioned that it could take you a couple of years to get to have a grab and fully ramp or get the access there. So, just wondering are you guys confident in the Hollister outlook kind of in the medium-term, until you get there obviously it was a pretty short reserve life there and if Midas is being scaled back you kind of need that second operation to keep the mill reasonably full. So, kind of how do you look at that over, you know call it 2019, 2020 until you are in the Hatter?
Look, we will focus on margin and if we’re able to extend mine life at Hollister and generate margin we will do that, but we are not going to just do it. Just to fill the mill, we can manage the mill at whatever level of production we have to generate margin. And the reality is, Fire Creek is really the asset that generates the margin and we see that continuing to go forward and we see the most important thing is to increase the tonnage that comes from that asset and put that through the mill.
So that’s the real driver. We are doing work on Hollister. We believe there is the opportunity to further extend Hollister before the Hatter Graben comes in, but that’s not the most important thing. Most important thing is to get the tonnage to the 550 and lower that cut-off and we think – you know remember what the cut-off is about 0.3 ounces per ton. And there’s a lot of material that’s sort of the 0.4 ounce per ton kind of range and in few can lower that cut-off you are making a substantial difference in the economics of Fire Creek and so that’s what we’re focusing on. Larry anything to add to that?
Just Hollister yes. It’s a small reserve, but we believe that the glory of veing extends to the west and we are testing that premise right now with some exploration drilling and contemplating a short drift to the west to open it up a bit. We definitely want to keep Hollister running. It’s actually putting out some very good grade right now. We’ve got some work to do. We certainly want to keep running as we start to Hatter Graben development.
Dean, anything to add?
Yes. Just in addition to what Larry was saying is that, there has been in the past a very strong mineralization at the unconformity, which is above most of the current workings. There is - in the Gwenevere Vein some opportunities to the East because there is an unexplored area between the current workings and the fall that separates that mining from the Hatter Graben and so there are some short-term opportunities to add some resources and potential reserves. So, Hollister is not done in the sense of the mine area, but clearly the Hatter Graben is the price.
Okay. Thanks. And then I guess, it might be a little bit early because you just established the 550 target, but again obviously given the core nature of Fire Creek what’s the potential there to kind of continue to push that throughput beyond that 550 level, would that require a whole new discovery, is it something that you could do if you lower the cut-off and can bring in some of the more what’s down marginally material, but could be accretive in the lower cost environment or kind of what’s just needed on that medium-term outlook there?
Well let me just say that our focus at the moment is to go from 350 to 550. And if we do that that’s going to have a material impact on Fire Creek. I have no doubt that we well, once we get to 550, we will be driving to go further. You look at where we were when we acquired Greens Creek. It was about 1,900 tons per day 1,850, we’re now at 2,300 tons and that was a very established mine. We don't have that here and so we have a huge opportunity, but we need to take it one step at a time. We need to make sure that our objectives are reachable. We certainly think we can reach 550. Going beyond that that day will come, it’s just not today. Anything to add Larry?
Sure. I’ll also add the Casa Berardi. We have doubled the tons mill. But if you look at it, it wasn't just for the sake of making ounces. We have also dropped our all-in sustaining cost. So, it was very purposeful and as Phil said, our goal is margin not just ounces. But for Fire Creek, when we were doing our due diligence, we had an external consultant look at it, and they said, you know increasing tons is just increasingly your extend that you have the same opened up north and south, and it wasn't just the consultant, the on-site management and engineers made the same comments. So, the opportunities there. We also early on looked at dropping the cut-off grade. It requires us to cut cost. So, we’ve got work to do there, but so the kind of short answer to your question is all of the above.
Alright, thanks. And just one final one for me. Just a bit of, if you can give a bit of an update on the Lucky Friday negotiations if you’ve been able to get the steel orders back to the table, and is it something that you guys are hopeful of that there could be a resolution the fall in order to kind of your hopes last into late last year, or is this something that we really should assume is kind of on hold until this remote being mine is brought in?
I think the latter at this point.
Okay. Thanks for the update.
Sure thing.
Thank you. And our last question comes from John Tumazos with Very Independent Research. Your line is now open.
Thank you.
Hi John.
Hi. First one, are there roughly 2 million open pit resources at Fire Creek essentially, irrelevant they are not what Hecla is pursuing?
Look, they are sort of at the end of the mine life something that we would consider because remember they take out all the infrastructure. So, it’s not at the top of mine at this point.
In terms of the balance sheet that you present in the quarters, so was the $130 million premium you paid over Klondex’ book value all go into a property plant and equipment right up without any goodwill?
Yes, so we will allocate that across the assets for Klondex and then to the extent that it’s beyond reserves, which in every mining acquisition it is. We will have a value beyond prudent and profitable. The thing to remember is, we have done acquisitions since 2008 and we have yet to have to impair any of them. We’ve had a really good record of being able to acquire things and prove their value.
Final question, and excuse me if I don't know Klondex, as well as I wish I had. In their final our earnings report, March 31, they’ve reported an $8 million pre-tax loss, but it could be adjusted to $9 million pre-tax profit aside from the inventory write-down, the merger cost and just taking out the admin, is that the right way to look at their results that you’re buying a business and earns a little profit, even if depreciation steps up 50% because PP&E rates [ph] up and even if there is a little bit net lower interest income et cetera, you are beginning financials are earning a tiny amount of money.
Yes, I mean, you could, but they realize we are going to run these mines very different than how they ran them. And so, what we're looking for is to see the best asset ramp up to create the best margin. So, it will look substantially different from what they did and they were in huge financial stress, and so there were things that they just didn't do that we will be doing because it makes sense for the long term.
So, they may not be as good if you send more for exploration and spend more for development [indiscernible]?
Yes, and frankly my expectation is going to be a lot better than what they did, but it will take time to get us there.
Thank you.
Thanks, John.
Thank you. And we do have a question from the line of Lucas Pipes with B. Riley FBR. Your line is now open.
Yes, thank you very much for squeezing me in here at the end. I wanted to ask a little bit about the volatility that we’ve seen in some of your byproduct commodities such as zinc and lead has that changed kind of how you operate on the ground, if I think about Greens Creek for example it is a pretty significant contributor, do you – how quickly do you adjust to these price fluctuations if at all, is it necessary or does it [indiscernible]?
There is some adjustment that’s made, but this is not dramatic. I mean, we’ve identified what is ore and there is enough margin in it that it is ore at a variety of prices. So, we don't see huge changes day-to-day week-to-week, month-to-month, year-to-year over an extended number of years. Yes, there is a change. Larry anything?
Yes. I mean, Phil said it is some more of a long-term impact than a short-term impact. It’s prices and the TCs-RCs that Lindsay covered.
And we also hedge the base metal, so we have a portion of the production that is locked in.
You should think of Greens Creek as a very high grade mine. So, most anything that’s mineralized gets mined, but we can see the potential for an additional year mine life solely based on pricing of byproducts and TC-RC favorable numbers.
Got it. Okay. That’s very helpful. Thank you for that and then just to circle back on Lucky Friday, I caught a little bit there of the previous question, but I'm trying to kind of think about how I best capture the value in my model, is it reasonable to assume a 2019 restart or what’s a good time frame to think about at this point? Thank you.
Sure. Just thinking about the restart of Lucky Friday, the focus that we have is on the RVM and so will the restart of the mine happen before the RVM is tested? Don't know. You know and to be honest with you the biggest value comes from trying to change the mining method there with this RVM. So, that’s where we’re focused.
Got it. Okay. Well appreciate all of that, and thank you very much for squeezing me in here.
Sure thing, Lucas.
Thank you. And we do have a question from the line of Matthew Fields with Bank of America Merrill Lynch. Your line is now open.
Hi, guys. Little earlier in the call Phil had said that, you hadn't drawn on your revolver for the Klondex transaction, but in the press release it says that we borrowed 47 million under the credit agreement [indiscernible]?
Yes. What I said is that, our net is and we have positive cash. So, we have more than $47 million worth of cash on our balance sheet.
Okay. But that was borrowed at the closing of the transaction and you are attempting to pay that down over the course of the quarter?
That’s right, but the net position is positive cash.
Okay. And then back to Lindsay's earlier comments about, you know cheaper interest rates, obviously you're 6.875 [ph] bonds paid 6.875 [ph] no matter what the credit rating is, if you really think that you can get 125 basis points of savings that’s about a little less than 1.5-year payback at this point given the current copper [ph], shouldn't you be in the market right now refinancing those bonds?
Well, right now we’re in the market working on Klondex. So, let us do that. And look, we’re hopeful that with the performance that we see out of our assets that we get a further upgrade in the ratings of the company. So, we will be working on that.
Okay. Thanks very much guys, and good luck.
Okay.
Thank you. This concludes today's question-and-answer session. I will now turn the call back over to Mr. Phil Baker for closing remarks.
Thank you, very much. I just have one thing I’d like to say, and that is, it is just to emphasize that when I look at the Nevada operations I see operations that are going to rapidly change. I’ve been in the business 30 years and frankly this is the most exciting acquisition that I have been associated with, and it’s because of the real opportunity to improve the operations to take the exploration platform that they started and actually advance it. I think you're going to see a completely different set of Nevada assets over the course of the next year or so. And that fundamentally changes Hecla because it will be a big part of our future. With that, we’ll stop. Happy to take questions offline. So, give Mike or I a call and look forward to talking to you. Thanks very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.