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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. Thank you for standing by. And welcome to the Third Quarter 2018 Hecla Mining Company Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference maybe recorded.
At this time, I would like to turn the call over to our host, Mr. Mike Westerlund, Vice President of Investor Relations. You may begin.
Thank you, operator. Good morning and welcome everyone. And thank you for joining us for Hecla’s 2018 third quarter financial and operations results conference call. Our financial results news release that was issued this morning before market open, along with today’s presentation and an exploration release that was issued on 6th of November, are available on Hecla’s website.
On today’s call, we have Phil Baker, President and CEO; Lindsay Hall, Senior Vice President and Chief Financial Officer; Larry Radford, 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 could involve risks detailed in our Form 10-K, Form 10-Q, and in the forward-looking disclaimer included in the earnings release 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 Web site at www.hecla-mining.com.
Finally, in our filings with the SEC, we’re only allowed to disclose mineral reserves, which are ore 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.
With that, I will pass the call to Phil Baker.
Thanks, Mike, and good morning everyone. Excuse me for my rough voice. I have a bit of a cold. I wanted to start by acknowledging that while gold and silver declined 7% and 14% respectively since the beginning of the year, almost all precious metals equities, including Hecla, have declined more. I don't think they should have declined that much, particularly Hecla, because with our strategy of having long-lived low-cost mines in great jurisdictions, we can stay the course in practically all price environments.
I cannot emphasize how important that is to running a sustainable business. Examples of this are 10 years ago when we acquired Greens Creek and 5 years ago Casa Berardi. Since then, we have diligently improved the economics of these mines by making them more consistent in tonnage and grade and at higher throughput. Casa, this year and particularly this quarter demonstrates the success of the strategy and it is also recognition of our success by the industry as seen on Slide 3.
That's where you will see an image of CIM, which is the Canadian Institute of Mining, Metallurgy and Petroleum's September, October cover story, describing how our expertise and willingness to bring technology to Casa has made a leading light for productivity gains in our industry. This was our playbook at Greens Creek and is what we are doing at the new Nevada operations, San Sebastian and ultimately the Lucky Friday.
Like Casa, where we have made very small incremental investments over the first four years of ownership, but a big investment of expertise and management focus, we will be doing the same at that these three properties. In roughly 100 days since we started our ownership of the Nevada properties, I'm struck by the improvements we have already made. When I was underground a couple weeks ago, the difference was significant; how we were managing the water; the trucks coming up the ramp and steady succession making us pull to the side, the daily development advance rate improving by about 50%.
As you will see in our estimates, we have elected to take a step back in production to invest a bit more in development to get the mine on track for the second half of next year when we expect to be mining almost 40% more ore tons. We are doing this for a number of reasons, but what has become clear to me is that we run the risk of sterilizing or if we try to produce too much now. We consciously gave up about a quarter of our third quarter production because it would have sterilized high-grade mineralization that was not previously known to be above it.
In terms of stope that was in a configuration that’s known at the mine as an upper, which is the highest level expected to be mined in the mine plan, turned out to be in the middle of what looks like to be another 200 vertical feet of mineralization. Much of this would've been sterilized if we've followed the plan. So, we’re going to take our time, but the time should not require a substantial investment. It just means, we make 10% to 15% less production than we thought. Being prudent now should make the Nevada operations better in the second half of 2019 and beyond.
Speaking of 2019, Larry is going to talk about the good work and what has been done to take a great mine like Greens Creek and make it even better. Basically, it's a better mine design that shows increased production while reducing development and overall equipment requirements while likely extending the mine life. Finally, I want to emphasize something that was in our exploration release. Our announcement of the price assumptions we are using in our reserve calculations for 2019.
This is a subject that I don't think gets enough attention. The determination of reserves is the start of the value creation process for a mining company. Many companies will use prices that are significantly higher than spot. Our price assumptions are all around spot or lower. These are among the most conservative price assumptions in our industry, if not the most which means we have the most margins in the ounces we produce. We've refined our annual production and cost estimates as you can see on Slide 4.
Silver production is tightening around the midpoint of original guidance. On the gold side, Casa is at the upper end but we lowered the Nevada outlook, as I mentioned. So gold is at the lower end. Cash costs after byproduct credits are substantially lower for silver and all-in costs are slightly lower. Casa has lower per ounce cost with increased production while Nevada is higher because of the lower production, the capital expiration and other expenditures about the same as we expected.
So now, I’ll turn the call over to Lindsay for financial review.
Thanks, Phil, and good morning to everyone. We ended the quarter with $60 million in cash and our debt unchanged from previous quarters to $534 million. Also, in early November, our revolver increased to $250 million from $200 million as per agreement with the banks when we acquired the Nevada operations. We have no intention of drawing down on the line other than for working capital needs and we don't use the line as a long-term source of borrowing.
As noted in our release today, we monetized our base metal hedges during the quarter, realized that's a $32 million cash, it's something we do periodically and has worked out well. For the quarter, we generated $20 million in cash flows, $42 million before working capital changes and expanded $40 million in other operating sites and capital additions and development activities, so basically a flat free cash flow quarter.
I am quite pleased with the balance sheet. We have completed the purchase of the Klondex assets and our liquidity is at comparable basis before the transaction with the same amount of debt outstanding with enhanced opportunities to generate increase in cash flows in time from our Nevada operations. We believe to get credit enhancing transaction and now we'll get to the business of delivering those cash flows.
On Slide 6, you can see the comparisons between this quarter and last year’s quarter of some of our financials. The three months ended September 30, 2018, we reported $143 million in sales of products about the same as a year ago despite lower prices. Cash provided from operating properties is $28 million about the same as last year and is one of the measures we watch closely as free cash flow or cash provided by operating activities less capital additions.
For the quarter, we spent $11 million more than we generated and year-to-date only $8 million. That is despite undertaking the most quarterly exploration in our history and absorbing acquisition costs associated with Klondex. Without those, we’d have been flat.
Turning to cash costs and all-in sustaining costs after byproduct credits, while these costs are higher for silver and gold, it is really a function of transition at both San Sebastian and the Nevada operations. Greens Creek still had an incredibly low cash costs after byproduct credits of $1.92 while Casa had the lowest cash costs after byproduct credits since we have acquired the mine.
The all-in costs are really an anomaly as they were impacted by little bit lower production with little bit more capital at Greens Creek. Like to cash cost, Casa’s all-in sustaining costs after byproduct credits of $896 per gold ounce is the lowest since we acquired it. Casa has had a great quarter and a great year. At San Sebastian, we have exhausted the high-grade stockpiles from our surface mining, so production has declined increasing the cost and until the underground fully comes on.
On Slide 7 turning to diversified product revenue. On Slide 7, you can see we maintained a diversified revenue stream with gold at 55%, silver at 25% and lead and zinc that declined 20%. Greens Creek continues to be the dominant source of revenue. In summary, we had a good quarter. We generated good EBITDA despite low metal prices. We’ve invested in our businesses and expect this investment will drive cash flows up in the coming quarters.
I will now pass on to Larry to talk about operations.
Thanks, Lindsay. Third quarter was busy with the integration of the Hecla Nevada operations following the Klondex acquisition in July. In the background, Greens Creek and Casa Berardi are both having a good year, both in terms of metal production and costs. So I am just going to focus on these three properties, I’ll forgo discussing Lucky Friday and simply mention that San Sebastian is in a development intensive phase.
Let’s talk about Nevada on Slide 9. Nevada mines have a good safety record, and safety can translate to productivity would have a good base and build from. After taking control of Klondex, we quickly confirmed that we have what we had included at due diligence, which is that the mine has underground loss money. We’ve begun to wind down of the underground, buttoning up the mine except for the working spaces that were already developed and we transferred men and machines to Hollister and Fire Creek.
As we said in our last quarterly call, we completed a comprehensive mine plan which confirmed our premise for the acquisition. Fire Creek and Hatter Graben and at Hollister of the Keystone Lake unlocking value and we’re dealing with the development starts at Fire Creek. As we began to ramp development back up, we encountered existing foreground conditions. Many development phases were in unconsolidated stuff, which is basically play rick, add a little bit of water and the conditions turned a much.
We are investing in it. We have provided tools and techniques to manage the conditions. Our Vice President of Technical Services provided techniques for fixing the ramp and drift road base, which I talked about on the last call. Roads base we installed are still in place and holding up, but dealing with the roads are just dealing with what's below you feet. We've moved the shotcrete plant from Montana to Nevada. It’s now operational and shown on Slide 10.
Immediate application at shotcrete is working back and [12.07] rigs after blasting is Nevada and Klondex had no onsite shotcrete batch in availability. It's frustrating as the poor conditions of the mine were on acquisitions. We remind ourselves of two things. One, the failure of Klondex provided the opportunity for Hecla to acquire two the highest graded properties on the planet. And second, any review of the exploration potential can only conclude that we are in the right place at the right time.
And we will not talk about Hollister other than say that we project that it will produce for another year without any exploration success, and we believe that exploration success is probable. We immediately began development at Hatter Graben upon acquisition and we’re already developing to the point that we projected to be at the end of the year. For future of Fire Creek, we have concluded several things.
First, set the key ramping up before production is in ramping up development. Second, to include the resource and feed grade, we have to open up the ore body north and south on straight. Our plan for development is shown on Slide 11. We have deployed men and machines from Midas to ramp up the development. We plan to soon be testing a rented road header and the softer rock types. We used such machine for our Colorado Bulldog mine development with success.
We project by the middle of next year, we will have recovered the Klondex development of deficit and have increased annualized development rate 30% from 10,000 feet to 13,000 feet, and ramp up the ore production from the mine. We also expect to have real stations to drill to the west, south and north potentially opening up new high grade zones. As for the high cost per ounce in the third quarter, one should note that Hecla acquired Klondex towards the end of July.
The high cost per ounce reflects low production more than anything, reducing the cost per ounce means improving production. That said, cost savings initiatives including the elimination of Klondex corporate G&A and the shutdown of the Midas underground. The higher cost per ounce also reflects more than 5,000 ounces that came from the Hollister stockpile because these stockpile ounces provided fair market value on July 20th.
And these ounces do not have any margins associated with them, which tends to distort the financial results. Hecla is in the process of creating budgets for 2019 and our goal for Nevada operations is that the operations are cash neutral including Hatter Graben development and the Fire Creek development ramp up.
Let's talk about our cornerstone asset, Greens Creek on Slide 12. In the ongoing 2019 in life and mine budget development, high grade resources and reserves that sit high in mine are projected to come into production in the next two years, bringing production forward in the life mine plan and cash flow forward as well. These changes are basic blocking and tackling and incredibly impactful to Hecla.
On Slide 13, I want to highlight how the new mine plan is improving operations with the East Ore development. You can see how the former mine plan on the left requires significant new development to access this ore. And on the right, you can see how the new plan capitalizes on existing assets. Changes such as these have removed 15,000 feet of development from the life of mine plan.
I take my hat off to the mine team for their creativity. This should add significant value to what is already our most important mine. Casa Berardi is a success for us. In 2013, Casa Berardi looked much like Hecla’s new Nevada operations on acquisition. Changes needed technically, operationally and in terms of leadership. The market considered the underground operations is too low grade to make money.
Slide 14 shows our improvement over time. Hecla completed the leadership team, completed the shaft thickening project, completed the migration of mining to the eastern ore zones, improved management of the mill and brought the open pit ore into production. The extended trend line for monthly mill tons.
And two that when we first acquired ore zone, we had much with almost no production, we’re very proud [indiscernible] of Casa Berardi and how well the operation is now running. A recent article in CIM Magazine mentioned by Phil earlier, highlighted the automation of the underground or in ways directed to raises to 95 level where an automated truck soon to be two trucks, whole rock from the four shoots to the shaft pockets and then onto the hoisting system which has also been automated.
Slide 15 shows the control room for the automated trucks and for monitoring live vehicle status of all machines. Other companies are now visiting Casa Berardi to learn from our advances. Our cost per ounce metrics reflecting ongoing improvement that have been made at the mine, Casa Berardi reflects our belief that Nevada operations will be transformational for Hecla.
I will now pass the call over the Dean.
Thanks, Larry. Hecla continued with aggressive growth programs in the third quarter at our mines and properties and the list of drill intersections is provided in the appendix of the exploration release which was issued on Tuesday. We spent $12 million in the third quarter, our highest quarterly ever and had some very strong results at Greens, Creek, Casa Berardi and San Sebastian which are laid out in the release.
There is a lot to say about the exploration for each of these and other properties, but I'm going to use my time to talk about our initial exploration activity in Nevada as we continue to accelerate drilling at the Fire Creek and Hollister mines and examine several impressive opportunities on our properties. As Larry mentioned, underground development is being prioritized at Fire Creek to accommodate increased production and provide drill platforms.
Slide 17 shows a concentration of activity that occurred around Spiral 2. Drilling is not being completed around Spiral 3 and 4, not because the lack of mineralization, but lack of drill platforms. This problem will be corrected in the near future and underground drilling will increase significantly in 2019.
New Spirals 3 and 4 definition drilling has shown continuity and extended mineralization uptick of current resources. Drill platforms along Haulage 9 and between Haulage 3 and Spiral 2 will be used soon to upgrade and expand the number of very high grade targets. Our strategy is to give ourselves room to explore, so the development along Haulage 9 is important as is the surface exploration shown in the next Slide 18.
Many areas near Fire Creek mine had active surface exploration programs during the quarter. On Slide 18 you can see recent drilling results at the Zeus target to the northwest of the mine which intercepted multiple high-grade veins that are extending mineralization to the south. Initial high grades are spotty, but the structures and alteration are very strong and impressive.
Surface drilling will continue and follow up underground drilling will be reachable from Haulage 9. There is more on Zeus in the exploration release. Drilling of the Guard Shack and far view targets are in progress and further south and IP resistivity geophysical survey as self-notice is complete and exploration holes are planned to test the geophysical and gold soil anomalies identified.
The location of drill programs at the Hollister property are shown in Slide 19. Definitions drill programs at Central Hollister, East Clementine and Gwenivere veins have confirmed a series of high grade veins, near mine infrastructure that are being incorporated into mine planning and indicate these veins may extend significantly further than anticipated.
Surface drilling at Rowena has identified new veins and high grade blanket zone near the unconformity that opens several new targets. To the east across the Clementine Fault is the Hatter Graben. Continued drilling of the Hatter Graben is designed to extend mineralization and provide hydrological information critical to the upcoming mine development.
Extensive high grade veins at the west end of the Gloria vein resulted in the acceleration of underground development provide a drill platform to evaluate this extensive vein network in the fourth quarter. This is just the beginning. The real drilling will start next year when the development drift will provide drill platforms, so we can drill to the east of the known resource at Hollister and across of Clementine Fault to confirm and expand resource in the Hatter Graben to the east. There’s a lot more to say about the rest of the programs, but I’ll like to review our exploration release instead.
And with that, I'll pass the call back to Phil for some closing comments.
Thanks, Dean. Before we take questions, I want to point out five things that illustrate how we’re positioned.
First, Greens Creek is the mine that’s generated over a 1 billion free cash flow over the past decade and is getting better with higher grades coming in 2019 and 2020 and beyond. As Larry said, we see the mine having significantly more value than we thought. I mean this could be plus 20% more value.
Second, Casa Berardi is realizing potential we saw in 2013 and is leading the way with many new technologies.
Third, San Sebastian, Nevada operations and Lucky Friday all have potential to be consistent and meaningful cash flow contributors for years.
Fourth, our exploration has more potential than any time in the last 20 years and this is after we've added more than 250 million ounces of silver and over a 1 million ounces of gold in the last decade, but it's better now because really it's because we have in the Nevada 110 square miles of super high-grade targets that have the potential to be company changing like what you have seen at Kirkland Lake, we've not had this before
Finally, Hecla and the management team has been at this a long time and we understand the risk of debt and we will reduce expenditures as needed to manage it.
With that, we are now happy to open the line for questions. Operator, please do that.
[Operator Instructions] Our first question is coming from the line of Jake Sekelsky with Roth Capital Partners. Your line is now open.
You’ve really done a nice job with base metal hedging program which showed this quarter, so well done there. Are there any plans to put another book in place over the next quarter or so? Are there more specific levels you’re looking for?
We certainly will re-hedge, what levels we re-hedge at will be determined, as we go, there’s no particular targets that we have. Basically when we look at our exposure we see more upside price potential than we do downside. So, that's really the way we look at it and we’re -- when we monetize this hedge, it’s really just moving the revenues forward that we would've received anyway and we get the opportunity to re-hedge. So we think it's a win-win for us.
And switching over to Nevada it looks like 7 million was spent on development work there. Is this a level you're comfortable with going forward? Or do you expect this to trend higher over next few quarters as the Hatter just beginning and throughput rents of Fire Creek?
Well, remember we had completions of the tailings in Nevada, which is also portion of the expenditure. But when I think about how much we will spend in a quarter, Fire Creek roughly, on development it's roughly $5 million and on Hollister…
The central Hollister, we are not looking to really…
Yes, there is really little bit room…
Little bit to Hatter Graben should be 8 million or 9 million this year.
So that’s the way to think about it. The tailings dam goes away, the development costs associated with the tailings dam, the construction of the tailings dam and we now only have Fire Creek and Hatter Graben development.
And just lastly at San Sebastian, when you think you will see results from the upcoming so far book sample?
So, it will be end of the first quarter, early in the second quarter. So, we will start to deliver the material in late in this year, but it's I think three or four lots that we will do. So, it will take a bit of time.
Now, next question is coming from the line of John Bridges with JP Morgan. Your line is now open.
Just wondered you point to 42% increase in throughput in the second half in Nevada and in order first to have decent sheltered earnings for the first half of next year. What sort of ramp up do you expect? Is it just going to be flattish until the second half as you continue to investing sort of strengthening the productive capacity of the mine? Or will there be some upward trend prior to the second half?
There is certainly an upward trend during the course of the first two quarters of the year. So, first quarter less than the second quarter, second quarter less than the third. Or another way of saying it, second quarters can be more than the first quarter.
And the changed development plan in Greens Creek, how much is that going to save you next year in terms of cash flow? Will it be -- what's sustaining capital do you expect?
John, we are still in the budgeting process, but it's not a material change in the capital for next year. And it's really as of the course of what was planned to be spent over the course of about 4 or 5 period that change. So each year, it's incrementally not a huge reduction. I think what's more important is in the aggregate, you're doing less development and you are mining areas that are higher grades than earlier than what we had originally in the plan. It's quite amazing when you think about mine has been around 30 years that the engineering team there would after 30 years figure out a better way of doing the mining design. It's clearly a group of guys and get win in that are looking at how to do stuff better. So, as Larry said, he took his hat off to a mine and I do as well. It's really a great job.
And then, we have the elections the other day and they came out against the toughening of the mining rules in Montana. Any sort of anything, any takeaways that would affect your longer term plans there?
No, that's all positive as is in Alaska. There was an initiative that would have really shutdown future development of mines in Alaska and so, both of those lost and lost it by a pretty wide margin. So, it's quite positive.
And our next question is coming from the line of Mark Mihaljevic with RBC Capital Markets. Your line is now open.
I guess first off, so you say you're going to be developing over to Hatter Graben next year and kind of start exploration along the way. Just kind of get a sense of what the outlook there? Assuming things are positive would be beyond that, is it something that could actually start to contribute in 2020? Or should we really assume you know it will take another year of kind of figuring out everything getting all the near mine development done and then start to continue in 2021 type thing?
If we're able to see production from the Hatter Graben in 2020, it will be in the latter part of the year.
Okay, that makes sense. And then so with Hollister are kind of wrapping up next year, it will, you're comfortable that Fire Creek will carry the load on its own through called 2021 it's maybe the last man standing?
What we're anticipating is that, Hollister will continue to extend based on the drill results that we're seeing. It's certainly possible but it might not, I mean it's very-very tight. But that's what we're that's what we think will likely happen. And to the extent it doesn't then we've got a lot of developments that needs to happen within the Hatter Graben and so many materials would move there.
Okay.
Anything to add Larry to that?
Yes, I guess so kind of thinking about the Nevada operation, it's going to kind of look like Casa where you'll get, the first little bits really challenged and that's kind of what you're working through now then kind of break even for a couple of years and really sort of hopefully see some grading in 2021 type thing. Is that fair to say?
I think that's right. I think the curve that you're going to look at look at is very similar to what we saw at Casa. If you look at the first three years, the incremental investment that we made was $16 million. It's now cash flow positive and has been. So, we're starting to get a return on that acquisition and the outlook for it is, is really the best in the life and the mine going back to the 90s.
The working Casa is really starting to show and very nice quarter there this time around. And then I guess turning to the balance sheet, I guess, you mentioned looking at starting to paydown debt at some point and terming the senior notes out as well, what's the timeline there? Do you kind of just want to make sure to get your feet under you at in Nevada and kind of a show couple good quarters there and then look to term that out? Or how should we look at that?
Well, I think the first thing realizes this, if we were to take that debt out today, we would have to pay a premium, we have to take it out one on one. So, the first thing when we think about it is, we think it’s May event, no earlier than May of next year, so that's been kind of driver for us. And then secondly, as Lindsay said, we see the -- what we’re doing at Nevada, what we’re doing at San Sebastian to the credit enhancing. And we think giver ourselves some time to show the credit improvements from those properties. I mean if you think about San Sebastian, we didn’t talk about it on the call almost at all. But if you think about San Sebastian, if we’re successful with this bulk sample, now all of a sudden you’ve got San Sebastian with mine life that’s somewhere between 5 and 10 years and that really helps on the credit putting a longer-term facility and extending this bond out to a longer maturity. Lindsay, do you have anything to add to that?
No, I’ll just say, this is exactly where we thought we’d be. Part of Nevada for the cash flowing potential at the Fire Creek that will start happening, and as San Sebastian will ramp up, that gives this mine life. And when start now with the rating agencies to level know what we’re doing with Nevada, they said just execute on your plans and we will review our credit rating in the spring, that's what we're doing. We’re executing on our plans and we picked up Nevada little short of development and Larry picking up the pace. So, just let us execute on the strategy and we'll be back for the rating agencies and we'll see where we're at the spring in. I feel really good.
Mark, clearly, we are in an interest rate environment that is rising, which is that’s not great to be in that, but what we’re looking at is how do we improve the underlying credit quality to offset that.
And then I guess just touching on that San Sebastian sulphide. If bulk sample is positive, like how long do you think it would actually take you determine the thing on obviously you got the mill kind of ready to go. So is it kind of a six months turnaround? Or is that kind of a reasonable expectation?
Roughly by the end of the year, we would have -- the thing we have to consider is that it doesn't have a copper circuit. So, we have to add a copper circuit it and I don't know how much production you want to do until you have that copper circuit, how much value where we would be losing. So that would be part of the evaluation that we would make. Larry, anything to add?
Yes, there’s some development to do as well there. If we need a secondary [indiscernible] and flow through ventilations, so that will take to the end of 2019.
Our next question is coming from the line of Anthony [Sorenzo] with [indiscernible] Metal. Your line is now open.
With the promise of the exploration results at the Nevada operations, would you expect exploration spending in 2019 to be greater than it was in -- then it's going to be in 2018?
We’re in the budget process I’d chuckle because Dean is looking at me. That’s the next question he is at -- yes, look, I think Anthony we’re likely to spend less on exploration overall. If you think about to just this quarter, its $12 million annualized that’s just not a level that we are able to spend in this price environment, we would love to spend at that level. So you are going to see it certainly decline relative to where we were for the third quarter.
And we certainly will prioritize the work in Nevada over some of the other things that we have that are further out, notwithstanding how encouraged we are by some of these things. But in generally speaking I think you are going to see less annual expiration than where we are year-to-date this year. We have got 35 million -- 35 million is the guidance that we have and so it certainly is not going to be any higher than that and it will probably be somewhat less.
Yes, of course I was not expecting four times the rate of the third quarter. Like you had pointed out that’s a record level for the Company. With regard to the remote mining -- the remote vein miner that’s being constructed for the Lucky Friday mine, when would you expect that to be completed?
In 2019 that will be completed, there's been a slight delay but we will have that thing completed and we will have it over in the U.S. second half of the year.
How long does it take to install and then to get to running at Lucky Friday?
It's about a six month process to get it fully underground and then there's some development that also has to be done to have a place to be reassembled underground. It is a -- how big is the shaft opening at the Lucky Friday?
24.
You had to take…
18.
Yes, 18, so this assembled this thing and then drop it down that shaft. So, we have done those things before with the before shaft, but it's been constructed, it's been designed to be able to fit down that shaft.
It's got to go down in the compartments which are about 5 feet by 5 feet.
Yes, that's what I was trying to.
And our next question is coming from the line of Trevor Turnbull with Scotia Bank. Your line is now open.
When you acquired Klondex, you had outlined certainly the strategic reasons behind it being high grade, safe jurisdictions and the exploration upside, and embedded in all of that certainly is the assumption of sustainable cash flows going forward. And I was just wondering, if you could talk a little bit about what you were looking for in terms of cash cost and the all-in sustaining cost levels? And I appreciate you are doing budgets. I am not really looking for guidance. I am more looking for the target or the vision that you have for Nevada on a consolidated basis. Where will you be happy to see those cash cost levels and those all-in sustaining cost levels come in at?
Trevor, what we're targeting is trying to get as close to no new investment into those consolidated assets just like we did at Casa. Now you know where the prices are going to be and so you might have to make some investments that you're not anticipating, but if you do make an investment it's going be relatively small. You just don't have a lot of room to do a lot of work. I mean I can see as making the determination Yes let's put a new piece of equipment in because we're going to get some benefit out of that and maybe you end up making a few million dollars worth of investments. But essentially this thing is going to generate the cash flow necessary for it to do the ramp up of development in 2019. Is that a fair way of saying it Larry?
Yes I guess the way I look at it is with Klondex, Fire Creek was capable of making about $15 million in free cash flow and we certainly look to it to return to that level, and then Hatter Graben, although we're just really starting the engineering and resources inferred and a lot of work to do there. I would hope that it would come in around those levels as well.
But that's not the expectation for ‘19 at Fire.
No, no.
I mean that's where we…
Generalize.
Yes. So, that's a that's a good way of looking at it is where we expect this thing to get is to the sort of levels that frankly Greens Creek is, is at on a consolidated Nevada level. I mean it's quite remarkable the potential that this has.
And that's what I was getting at, not certainly nothing with respect to 2019. Looking more out as you say beyond the new investment, which I assume includes like getting the decline into the Hatter Graben. But once all that's behind you I guess the number I was kind of looking for is reflected in that 50 million in free cash from each of the two assets or I guess you're saying roughly a 100 million for Nevada, once you've kind of built it out to a level that sustainable?
Yes, that's right. That would probably be before exploration.
And just like, I mean, do you have a sense of kind of what that -- I could back in to what I guess with production, but is that all-in sustaining costs under a 1,000 or is that kind of ballpark?
Yes, it's probably it all becomes a question of what sort of further growth that you want to have on top of that because remember what's going to happen is we're going get there and then we're going to find new stuff. That's the thing that to me is just so intriguing about this is how under explored these areas are. I mean you think about just Hollister right. We were involved with Hollister a decade ago. And you know one of the big issues is access and with the underground workings that we're putting in we're going to open up a lot of ground that we didn't have access to from surface. And that's a huge opportunity that to find more and we're even seeing it now in Hollister where Dean shaking his head. Dean, why don't you just share on that?
Yes. I mean, Trevor, one of the things that and it's shown in the diagram on Hollister is the development which is in progress right now to the east of the Hollister mine. There's still a wide gap between where the current infrastructure is to that Clementine Fault which is the offset fault to the Hatter Graben. And so, there's 5,000 to 1,000 feet of strike length where the expectations is that we’re going to see some more veins, some more high grade veins. And so, we see evidence of that with the current work, and there's no reason to think that those veins suddenly die out before they get to the Clementine fault. So that’s the Hollister mine to the east. To the west, mentioned very briefly about West Gloria, but again a whole series of high grade veins that appear to be open there.
So, the reason I bring that up Trevor is that, three years from now I don't want you to say, well, geez you didn't get to whatever that level is because there is just more opportunity that's going to be uncovered as we continue to operate here. This is frankly in the -- almost 20 years, I've been at Hecla, I have never seen us have something that has the opportunity that this has.
And I just sat down and talked about this with Dean. I think I would agree that there’s certainly a lot of sustainability and exploration to pursue both at Hollister and even north of Fire Creek, it’s just trying to get our head around, not just the sustainability of the assets, but also the cash flow potential -- free cash flow potential on top of that. I guess little closer in time, Lindsay was mentioning the rating agencies, potentially taking a look again in the spring and given the first half of next year you are certainly going to be spending at Fire Creek and with the Hatter Graben I think Mark made the comment earlier that the grade kind of 2021 or little bit further out. Are the rating agencies really going to see the kind of cash flow that's going to help them to make any changes as early as next spring, that seems just a bit premature, given the investments that you still are kind of lining up to make?
I am not sure it's necessarily next spring, but I think it is in 2019 because we’re not anticipating the need to make significant contributions in the Nevada. I mean we see Nevada being able to largely pay for the Hatter Graben, to pay for the development within Fire Creek. I mean we think we can run at pretty close to cash flow neutral and that is what we have suggested, we would be able to do.
And actually no, you've outlined that on the call that you very much expected to be cash flow at the best or sorry at worst cash flow neutral and be able to pay for these things, I guess I misunderstood. I was thinking the rating agencies were looking for a bump in free cash flow which would've come through this acquisition and I just -- I feel like it's going to be a while before they actually see that accretive bump to cash flow given while these assets continue to pay for themselves, they're not actually contributing a whole lot more time to Hecla at least at this early stage?
Yes, I think what's going to happen is, the EBITDA that you’re going to see is going to go up and it’s going to be on the back of that.
Okay.
Right, it's going to be an EBITDA to debt measure. We are going to be roughly speaking around the two, two times. And if we shed that consistently, they should be getting more comfortable. We now have more operations. I think one of the complaints they had was we didn't had enough operations. And like okay, now we have got some more and we now have some more EBITDA so that’s what we are heading ahead on. Lindsay, do you have anything to add to that?
No, I would say, when you go to rating industries you’ve given your plans and what they want, when they execution risk when we go visit them, say, are you meeting and plans you gave us. We expect to go in here the plans we gave you, we are executing on them. And they look through the cycles and they're really looking for out past 2019, 2020. So if you come to them, you are executing on your plans, that’s a big ticket item for them.
And we are going to come in with this. I can't overemphasize how meaningful this Greens Creek change is, it's really -- when we went through this, I was with my eyes really were opened. We would be able to move the grade up. Nothing has changed other than these guys have developed it better and they have advanced things that we were going to mine at the very end of the mine life of the past and the mine life is going to actually we think extend, but they move that up. So, big value driver and that's something that we will be showing. We are still working it and we will give more color to the market as time goes on. But we will also give it to the rating agencies unless meaningful.
Our next question is coming from the line of Ryan Thompson with Bank of Montreal. Your line is now open.
My question was sort of along those same lines as what Trevor was asking but a little bit more. Can you just talk about the reserve life at Fire Creek? Obviously, it's on the shorter end of the spectrum right now and you're talking about ramping up throughputs to around 550 tons per day. So, I was just wondering, if you could make forward-looking statements on how we can expect the reserve life to trend? And what you are targeting there and maybe just tie that into some of the exploration results that you put out, and if you expect drilling in 2019 to add to reserve this year?
Well, I guess the first thing I would say is with the nature of this ore body, it is very tough to have reserves, reserves mean proven and probable and long-lived reserves because you got these panels of mineralization that are -- if you don't have the drill platforms in which to do the next definition drilling to actually move them into the reserve category. So, if you look at the life of mine that we work with on these assets that life of mine is going to be based on a fair amount of inferred resources measured and indicated inferred, and that's just the fact of life with these assets with where they are today.
And we understood that when we acquired it. And that will be one of the things that we will be doing with the development that Larry and Dean talked about is creating the growth platforms in order to try to move more material from inferred and we measured and indicated into reserves. And so, that's a process that we're going to be going through for the next few years. But it is there's no surprise there. Dean, anything do you want to add?
Yes, I mean Ryan. What's somewhat unique about Fire Creek in particular and it applies to Hollister is that conversion resource to reserve particularly now and in the near term is that it's going to be really about selling. So it's really going across the areas that have been drilled to upgrade the confidence level. Historically context has found that that's also upgraded the grade and continuity. So until we get well advanced in development the reserve is going to rely very heavily on this sealing. So you know Larry's group is pushing hard to define better define some of those resource areas. At the same time we're trying to get some drill platforms in so we can get ahead of the game. But in the near term it's going to be about sealing maybe even more so than drilling.
Yes, no, that's fair. Larry, anything to add?
No, exactly right.
So is it safe to assume that we'll probably see a dip in sort of reserve tonnage at the end of this year before just because you haven't really had a chance to get those drill platforms in? And do the [indiscernible] work and really expect that time is just ticking up more at the 2019. So is that fair to assume or…
Ryan, we're in the process now of determining that, but that's not…
Yes, I would say that that certainly we are not anticipating any significant increase. Could it declining somewhat?
Yes, certainly could. We've only had ownership of this for about 100 days. So you know and clearly look, the Klondex, the guys before us were struggling. They needed to generate cash flow. So, they didn't do development they needed to do. They didn’t sort of set the mine up to grow the reserve basin. We understood all that. None of that is a surprise to us.
And just a quick follow-up question on that. So, how should I think about or how do you guys think about cutoff grades? And what sort of grade should we sort of you were referring for you results?
Look, the cut off grade is at that point three, which is we look at that as an opportunity. How do we reduce that cut-off grade and to the extent that we can do that, there is a huge amount of inferred mineralization that is going to be mined, and where I can tell you that there's lots of stuff that we're considering on how they do that. Larry?
Yes, the cut-off grade in metric units about 10 grams and our underground graded cap is about 5 grams. So, it just screams opportunity.
Okay.
Yes, that's kind of upgrade I'm seeing it. Fire Creeks about 10 and the average grade coming from underground at Casa is 56. So, there's got to be an opportunity in there.
Our next question is coming from the line of Matthew Fields with Bank of America Merrill Lynch. Your line is now open.
I was just wondering just some of the comments you guys made about the bond refi. I understand and wanting to wait until May of '19 when the call protection falls away. So you don’t to pay that 1.7 points of call premium, but you guys have made an awful lot of waiting for the rating agencies to upgrade you. I mean the market will pay what the market will pay for a new Hecla bond regardless of what the agencies say. So I don't own and actually you're not putting yourself into a corner and if rating agencies don't upgrade you, you’re not going to wait until the movement there because…
No, no, no…
One behind and…
Yes -- no, we’re -- and part of the exercise is making sure that we communicate with the bond market as to what Hecla is all about and so we’re certainly trying to do that. We would appreciate your engagement on that. Because we think we have a great story and we think that Hecla -- I’ve been in the business for 30 years and there's certainly companies that I think should not have any debt and I worked for the, but Hecla is a company with the long-lived assets that we have and the different metals that we produced that it makes sense for us to have some level of indebtedness so we’re going to understand and we understand that we’re going to -- if we are going to have that indebtedness we got to accept whatever the market is. So, we’re preparing to do that. We’ll not just wait for the rating agencies -- that is just one of the factors that we will consider. Lindsay, anything to add?
No, we had some great cash flowing assets, great jurisdictions. We have lots of reserves and resources that debt creates a leveraging against that and we look at ways to reduce the interest cost and at that end, we will be patient and mindful of market.
If we can't reduce it, we will certainly do the refi and do the investment we can.
Would you consider doing a transaction where you upsize the revolver and sort of borrow, let’s say some on the revolver and do a smaller bond issue to create some pre-payable debt, I think that's been a type of transaction that's been somewhat invoked in recent refinancing in the high old market?
I will just say that I am not a big fan of relying on a revolving credit facility to -- with all the cabinet structures that those things have, so while you never say never I don’t think that's likely. Lindsay?
No.
And our next question is coming from the line of Heiko Ihle with H.C. Wainwright. Your line is now open.
This is [indiscernible] here for Heiko. Do you guys expect any longer term impacts from the new 2019 mind plan at Greens Creek? Or is it only expected impact of mines over the next four years and then things are expected to resume as they were previously planned?
I don’t know the answer to that. Do you know Larry off the top of your head?
Well, I mean, first of all, I’ll just have to emphasize we’re not sterilizing any of ore. We're moving higher grade ore forward and without the reserve additions that we are expecting the amount of metal produced over the life of mine is basically the same. So, we are moving high grade forward in mine life, very impactful starting in little bit next year, but mostly 2020. And the years will follow. The few years will follow 2020.
Yes, my recollection is that and toward the end of the mine life, the old mine plan had a couple ounce higher grade and so we just moved that forward. And we are anticipating, but we don't have it done yet. We are anticipating that we will probably extend the mine life with the work that we've done in the last. So, net-net it's all going to be better, it's going to be more cash flow earlier and it's going to go on longer.
And with the reduction in development that’s about $20 million in savings.
And our last question is coming from the line of Lucas Pipes with B. Riley FBR. Your line is now open.
This is Matt. This is actually Matt, asking the question for Lucas there. I wanted to follow up on the remote vein miner and I apologize, if I missed this earlier. But have you made a definitive decision on whether the remote vein miner will be utilized at Lucky Friday and not Nevada?
No, we had.
Okay, well thanks everyone for joining us on the call. We are happy to take more questions, if you have them just give Mike or I a call. Thanks very much. Have a good day.
Thank you. And ladies and gentlemen thank you for your participation in today's conference. This concludes the program and you may now disconnect. Good day.