Hecla Mining Co (HL) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 Hecla Mining Company earnings conference call. My name is Denise and I will be your operator for today. (Operator Instructions).

I would now like to turn the conference over to Mr. Mike Westerlund, Vice President in Investor Relations. Please proceed.

Thank you, Operator. Welcome, everyone, and thank you for joining us for Hecla's fourth-quarter and year-end 2013 financial and operations results conference call. Our reserves and resources news release that was issued yesterday, and the financial results news release that was issued this morning before market open, along with today's presentation, are available on Hecla's website.

On today's call we have Phil Baker, Hecla's President and CEO; Jim Sabala, Senior Vice President and Chief Financial Officer; Larry Radford, Hecla's Senior Vice President, Operations; and Dean McDonald, Senior Vice President, Exploration.

Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and constitute forward-looking information under Canadian securities law, as shown on slide 2. Such statements include projections and goals which are likely to involve risks detailed in our Form 10-K and in the forward-looking disclaimer included in the earnings and exploration releases and at the beginning of this presentation.

These risks could cause results to differ from those projected in the forward-looking statements. In addition, in our filings with the SEC, we are only allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of terms, such as measured, indicated, and inferred resources, 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.

Okay. Thanks, Mike. Hello, everyone. We'll start with slide 4. 2013 has been a transformational year for us, making Hecla a stronger, more diversified precious metals company. We've gone from one operating mine to three; from precious metals generating about two-thirds of our revenue to three-quarters; from revenues having single-digit growth to double-digit for silver, and triple digit for gold; from eight exploration areas to 12; and from limited access to capital to an issuer in the US bond market. So, 2013 was a very big year for us.

Clearly a key goal for the year was to bring the Lucky Friday back into full production, which we achieved in September. Getting the mine back into full production -- development, production, backfill, all in sync and sustainable -- was not a trivial matter. Our team at the mine did a terrific job, with the mine now operating at historic levels of close to 900 tons a day, and it's expected to produce 3 million ounces of silver in 2014.

We wanted to acquire mines that have value, and where we believe that the value proposition can be improved with our ownership. And our acquisition of Aurizon and the Casa Berardi gold mine does just that. Our increase in gold reserves by 190% to 2.1 million ounces is principally due to this acquisition, as is our increasing gold production by 116% this year.

Now, once we acquired Casa, we set a goal of improving its performance, and are pleased to see the team there deliver an increase in production and a sharp decrease in costs in the fourth quarter, which was only our second full quarter of ownership. Now, there's going to be some variability quarter to quarter, but we believe you will see a trend of better performance from the mine, as Larry and his team focus on making improvements in recovery, dilution, and development.

We're working through these key parameters, and see clear opportunities that we expect to be able to articulate in the next quarter or two. We remain very excited about the exploration potential at Casa, as well. We're now getting used to repeated 0.75 ounce-plus drill results.

And I can't say enough about the performance of Greens Creek. For a second year in a row, this mine carried almost all of our operating and capital costs, the acquisition cost, financing, environmental costs, Company-wide. But this did not happen by accident, but because over the past five years we have focused on improving the mine's reliability; and because of a great group of employees who not only increased silver production 16% for the year, setting a record for the highest tonnage production since the mine started in 1989, but they did it with the best safety record since Hecla has operated the mine. Both Larry and I will have more on Greens Creek later.

This year's 13% silver reserve growth, or 20 million ounces, gives Hecla the most silver reserves in its 122-year history. And that's despite a 23% reduction in the assumed silver price to $20. In addition, our gold reserves are also the most in our history. By the way, we used the same price assumptions for reserves and resources, and I just want to point that out, because not all companies are doing that. And the level of resources has held steady despite the lower prices.

And this is the eighth straight year of increasing silver reserves, and this accomplishment is particularly impressive when you factor in how the reduction in metals prices has caused many companies to write down reserves. And Dean will tell us more about this in a moment.

Finally, Hecla, in issuing its first fixed-rate 8-year bonds, increases our financial flexibility by providing us with access to a market that is not open to all mining companies, particularly at our yield and term -- 6 7/8 in eight years. We certainly hope that the debt capital markets is one that we can tap in the future as a seasoned issuer. If we can do this, then this really could be our biggest transformation as a company, because it allows us to grow while minimizing dilution. This long-term, low-covenant debt is part of our strategy to have a significant degree of financial flexibility. And Jim's going to go through the strategy's other components.

Now let's look at slide 5. So what does Hecla look like in 2014? Well, we expect our production and expenditures to be as follows: silver production of 9.5 million to 10 million ounces, at a cash cost after by-product credits per silver ounce, of $7. Of this, we expect 6.5 million to 7 million ounces at Greens Creek, at a cash cost after by-product credits, of approximately $6 per silver ounce; and 3 million ounces from the Lucky Friday, at a cash cost after by-product credits, of approximately $9 per silver ounce. We expect Company-wide gold production of approximately 180,000 ounces, with Casa producing 125,000 ounces, at a cash cost of about $900 per gold ounce.

Capital expenditures, excluding capitalized interest, should be about $150 million, which is about the same amount we had in 2013. And we expect pre-development and exploration expenditures to be combined at $18 million this year, a reduction of about 50% over last year's levels. And finally, we plan on spending within adjusted EBITDA, which should allow us to maintain our strong financial position.

When you look at our growth profile, we expect to produce 17 million silver equivalent ounces in 2014; which, if achieved, is 165% higher than the 6.4 million silver ounces in 2012; which effectively achieves, three years earlier, a silver production goal we set two years ago.

Now I'm going to turn the call over to Jim for the fourth-quarter, year-end financial results and talk about our strategy of maintaining financial flexibility.

Jim?

Thank you, Phil. As Phil indicated in his opening remarks, we had a number of initiatives going on during the course of 2013 to dramatically increase both our silver and gold production. As noted on slide 7, you can see our silver production increased from 1.9 million ounces in the first quarter consistently to 2.5 million ounces in the fourth quarter. This was the result of exemplary performance by our Greens Creek operation and by Lucky Friday coming back onstream.

In addition, our gold production increased 344%, from 13,700 ounces in the first quarter to 47,100 ounces in the fourth quarter, which is primarily the result of our acquisition of Aurizon Gold Mines, Limited, on June 1 of this year. When we acquired Aurizon, we knew there were a number of areas at the mine that we believed we could improve upon. And as a result of the work by the staff at the Casa Berardi mine and the Hecla technical team that has been working nonstop at Casa, we are pleased that we achieved the dramatic production improvements during the course of the year and reduced operating costs, as outlined in our press release this morning.

Now that we have three contributing mines in excellent mining jurisdictions, we see the benefit of our diversification. When you compare our revenue stream for the fourth quarter of 2012 to 2013's fourth quarter, you can see that the base metals have dropped to 27% of revenue from 32% in the previous year; and our precious metals production has increased from 68% of revenues to 73% in 2013. As Lucky Friday continues to contribute for an entire operating year, and as Casa is under full ownership, we would expect this trend to continue.

Likewise, during the course of 2012, we were down to one operating mine. Now we can see that we have three solid performers -- again, all located in North American mining jurisdictions. In addition, we have an active hedging program which seeks to significantly reduce price risks associated with our base metal production.

As shown on slide 9, silver operations continue to deliver among the strongest margins in the industry, with a realized cash margin in 2013 of 68% of our sales, or $14.44. Cash costs remain at the low end of the spectrum for our industry. As a result of the improved performance and additional diversification, we also saw dramatic improvement in quarterly cash flow during the course of 2013.

On slide 10, you can see that we had operating cash flow of $11.4 million in the first quarter. During the second and third quarters, we had negative operating cash flow as a result of costs associated with the acquisition of Aurizon and the initial startup of Lucky Friday. However, in Q4, we achieved nearly $22 million in operating cash flows. These results will always vary quarter by quarter due to the timing of certain working capital adjustments; but as you can clearly see, in spite of decreasing silver prices, the Company reported excellent operating cash flow.

As we have previously communicated, one of our goals during 2014 is to operate within our adjusted EBITDA. During the course of 2013, we were able to reduce our discretionary expenditures and modify our business plan in accordance with changing metals prices. This was one of the reasons why we reported improving results during the year. As prices change, we reduced capital, exploration, and pre-development expenditures.

Slide 11 shows a cash bridge for the fourth quarter, and you can see that we believe we have more room to cut in the event that metals prices would move lower.

So, as depicted on slide 12, we finished the year on the back of strong operating results with the contribution of three long-lived mines and excellent liquidity. We finish the year with $212 million in cash and cash equivalents. In addition, as reported in our press release this morning, we have recently negotiated a new revolving credit agreement with our bank group. The purpose of that amendment was to increase the life of that agreement, and also to reduce both drawn and undrawn pricing, which is the reflection of the Company's strong credit profile. Consequently, we have over $300 million in total liquidity available to the Company.

And, with that, I would like to turn the call over to Larry for a review of operations during the fourth quarter and for the full year. Larry?

Thanks, Jim. On the operating side, I am very pleased with how the Lucky Friday ramp-up has gone since the mine re-started operations in February. Slide 14 shows the quarterly ramp-up in production and the associated cash costs over this period. It is no small feat to bring all six mining fronts into the normal production cycle, and we achieved this in mid-September, averaging historical production rates. And this production rate continued through the fourth quarter until we reached mid-December.

Production went from 120,000 ounces in the first quarter to 220,000 ounces in Q2; 480,000 ounces in Q3; and 770,000 ounces in Q4, for a total of 1.5 million ounces. The ramp-up has not been without its challenges, however, and it was about eight weeks late at year-end beyond where we expected to be, as a result of added state-of-the-art ground support to the rehabilitation, extended downtime in the Silver Shaft hoist rebuild, and delays in gaining access to the very bottom of the mine.

Also, the plant expense -- sorry. During the very cold weather in December, a frozen paste delivery line shut down the mine for 10 days, leading to lower production and higher cost than expected. The cause appears to be a frozen breather pipe which was not installed properly. The issue was rectified, and measures are in place to prevent the pipe from freezing again. The mine reached its year-end goal of cash costs, after by-product credits, per silver ounce of $9.50 in November, a month early.

On the 4 Shaft project on slide 15, we are currently working on the shaft station on the 6500 level, the second of four shaft stations that will allow the loading and unloading of men and materials once the shaft is operational. We are on track for completion of this $215 million budgeted project in 2016. The 4 Shaft project is designed to give us access to higher grade ore zones, potentially increasing silver production at Lucky Friday to 5 million ounces per year as soon as 2017.

On slide 16, Greens Creek had another consistent quarter, producing 1.8 million ounces at a cash cost, after by-product credits, per silver ounce of $5. 2013 production totaled 7.4 million ounces of silver, at an average cash cost, after by-product credits, per silver ounce of $4.42. Capital expenditures for 2013 at Greens Creek were $57.1 million.

I'm pleased with the CapEx programs and the improvement initiatives at Greens Creek. We have focused on improving safety performance, improving the equipment reliability and utilization, improving the training of miners, implementing zone mining, improving mine reviews, reducing turnover, better defining the orebody, and improving ground control. These initiatives have been targeted to improve consistency in operations.

Also, the planned expansion of the Greens Creek tailings facility continues to work its way through the permitting process, and we are happy with our progress to date, including receiving the Record of Decision in December.

On slide 17, Casa Berardi has produced 62,532 ounces of gold since we acquired it on June 1, 2013. During that time, we have been busy integrating the Casa Berardi technical team with the Hecla corporate technical services team. This integration has focused on rebuilding the long-term mine plan, and in better structuring the ground control program to help the mine reach its full potential.

As with Greens Creek and Lucky Friday, the goal is to improve safety performance, ensure consistent operations, and to optimize our cost per ounce margins. You can see the nice ramp-up of 40% from 23,000 ounces in Q3 to 32,000 ounces in Q4. And we are pleased to see a 23% reduction in cash costs over this period. I think the fourth quarter is going to give us a glimpse of the performance we expect the mine will show us going forwards.

We continue to work on our plan to optimize its operations as it undergoes a transition from mining zones west of the West Mine Shaft, to mining zones east of the shaft. We have brought the first of these zones, the 118 zone, into production. Capital expenditures in 2013 were $41.3 million at Casa Berardi.

On slide 18, you can see some images from the shaft deepening project at Casa. The project that was originally started by Aurizon to deepen the West Mine Shaft by 340 meters requires approximately another 50 meters in (technical difficulty) construction, and the shaft loading facilities to be completed. This project is expected to provide additional access to the 118 zone and to enable deeper exploration. We expect the shaft work and loading pockets to be finished late in the third quarter.

The new paste fill facility is undergoing commissioning, and had its first pour on November 5, 2013. This paste plant should help increase the efficiency of operations by allowing the mine to cycle its active stopes faster, as the setup time the paste material requires is much less than the traditional cemented (technical difficulty) approach.

I'll turn the call over to Dean for exploration and predevelopment.

Thanks, Larry. Even with the reduced exploration expenditures in the fourth quarter, we had active programs underground at Greens Creek, Casa Berardi, and Lucky Friday, and on surface at San Sebastian. Those results have been summarized in a standalone press release entitled Hecla Reports Record Silver and Gold Reserves, that contains an extensive Q4 assay table of drilling, that we released yesterday afternoon.

Go to slide 20. As Phil mentioned earlier, we have record high silver and gold reserves this year, up 13% to 170 million ounces in the case of silver, and up 190% to 2.1 million ounces for gold.

On slide 21, you can see the current proven silver reserves at Lucky Friday and Greens Creek are 3.7 million tons at 12.1 ounces per ton silver, or 45 million ounces. Probable silver reserves are 10.5 million tons at 11.9 ounces per ton silver, or 125 million ounces.

Gold reserves from Casa Berardi and Greens Creek include 1.1 million tons at 0.17 ounces per ton gold, or 186,000 ounces of proven gold reserves; and 15.7 million tons at 0.12 ounces per ton gold, or 1.9 million ounces of probable gold reserves.

The largest increase in silver reserves came at Lucky Friday due to the inclusion of definition drilling, which upgraded areas of inferred to indicated resource; and with the advance of mine design and planning at the lower and upper limits of the mine allowed incorporation into the life of mine plan and reserves.

We were also successful in replacing the new reserves with additions to the Lucky Friday resource with exploration drilling and updated 3D resource modeling. The large increase in gold reserves and resources comes mainly from the acquisition of the Casa Berardi gold mine last year.

We are pleased to note that our resource levels remained relatively stable despite lower metal prices [as in] our reserves at Greens Creek and Casa Berardi, as exploration success offset mine production and upgrading of resources to reserves for the year.

Slide 22 is an interesting chart. 10 years ago, we only had 45 million ounces of silver reserves. Today, with just under 170 million ounces of silver reserves and about 100 million ounces of silver mined during that period, this means we have discovered and acquired over 225 million silver ounces during the past 10 years.

Discovery is the first step in creating value for shareholders, and our efforts have done that. I believe we will continue to convert resources to reserves, and find more replacement resources at our operating mines, as well as our pre-development and exploration properties.

And, with that, I will pass the call back to Phil now for some closing comments.

Yes, so let's go to slide 23. Thanks, Dean. Given the year Greens Creek has had, I want to focus on what it has done over its mine life, because it's illustrative of the unique value of Hecla's mines. All three are like Greens Creek in that they have long mine lives with low cost, and can withstand low prices.

Over the past 26 years, Greens Creek's mine life has generally hovered around 7 to 12 years, and today it's just under 10. With increasing resources, we expect it to be longer. With a long mine life and low cost, Greens Creek has been able to generate significant free cash flow -- almost $900 million.

And there's two points I'd like you to take away from this slide. First is just how good Greens Creek is. Second, we believe that Lucky Friday and Casa have a similar value proposition, which is what attracted us to Casa in the first place. If 2014 has lower metals prices, then these mines should generate enough cash flow to maintain production. But if prices increase, as we expect, then the mines will generate significant free cash flow. And, like Greens Creek, as we explore and operate, we expect we will see mine life extensions or better reliability or lower costs. In other words, value for shareholders.

If you go to slide 24, I'll just make a few concluding comments. Hecla really is a transformed company. We are looking forward to a full year of the Lucky Friday and Casa combined with Greens Creek. We have a reserve base that should allow production or margin growth, and we have financial flexibility. And I believe 2014 is going to be a good year for Hecla, whether prices are low or higher. But since the beginning of the year, we have seen metals prices rise; a rise that is more than justified, given the physical demand in the East for precious metals, and all the economic uncertainty in the West. And I hope you are investing in Hecla with all of us.

One more point before I end. We are planning investor days in Toronto and New York in early April, where you can hear from our mine GMs and other technical experts. There's one thing that we've heard from the new employees who were employees from Aurizon, is they are -- how impressed they are with the strength of our operating, exploration, and technical people.

And if -- in these meetings, and the meetings will be webcast as well, I believe -- yes. In these meetings, you'll have a chance to see and hear that for yourself.

And, with that, Denise, if you'll open the line for questions.

(Operator Instructions). John Bridges, JPMorgan.

Morning, Jim -- Phil, sorry. Just wondered, with the increase in the reserves, I know you've toyed with the idea of increasing the size or changing the plant at Lucky Friday in the past. Does the increased reserve facilitate that? And what might the timeline be on working on that project?

Well, John, the first step is going deeper with the 4 Shaft. We are very close to our constraints with respect to ventilation and hoisting up the Silver Shaft, so let's first get the 4 Shaft in place. When we do that, we'll get deeper; we'll be able to process this higher-grade material. And we are working on how we might increase production from the 350,000 or so tons a year to maybe as much as 500,000 tons. But that's -- we are in the early days of that sort of analysis.

Larry, anything to add?

Yes, our current life of mine plan, which the reserves are based on, requires some small modifications -- the addition of a pebble crusher. But, as Phil says, looking to the long-term, we are looking at expansion, and what that will take. In the mill, it would take the addition of a very small SAG mill.

One of the things we are doing to improve hoisting capacity is we've done some of the initial setup for putting in a chippy hoist. We took advantage of when we had the shaft down to brattice the shaft and set up things at surface for a chippy hoist. And so that would be one of the constraints that we have that we've already started to make modifications to be able to address.

And the implication of having a chippy hoist in there?

Basically, you have the dedication of the existing hoist to muck, and you use the chippy for men and materials.

What would that set your capacity up to?

I don't know. Larry, any sense of --?

Well, it will take us up to roughly 400,000 tons a year, but it's a work in progress. It's not an approved project yet, so we are pursuing it as something that we want to get in front of the Board.

I'm not encouraging you to go off on a massive expansion program. I'm just trying to get a sense as to what's possible. And how would work at Lucky Friday, the Star project, whatever, compare to what you're doing at Creede and down in Mexico?

Well, the work at the Lucky Friday is in an existing operation where the capital has been largely sunk, and you've got this big orebody in front of you, and one that seems to be getting larger. In the case of San Sebastian and Creede, the San Juan projects, those are both things that require new capital and a new set of risks. So we are cautious about that. We're moving at a deliberate pace, but we're not going to get ahead of ourselves.

And the real objective we have at San Sebastian is trying to figure out how we might be able to bring that into production with less capital in order to improve its returns. And that's been what the focus has been for the last, I'd say, six months, and that's really what the plan is for 2014. Our engineers -- we're doing some additional surface work to the northeast of the existing middle vein, in Francine veins, where we think those veins have been faulted off.

But we're in the early stages of that to see if we have an orebody that changes what the outlook looks for this. We are very optimistic. But we're just mindful of the fact that metals prices have declined, and we're not going to get ahead of our skis in moving those projects forward. We're going to keep our financial flexibility. We're going to maximize the assets that we have that are operational.

Yes, that's great. I just wanted to gin up the model. And then, finally, maybe the interruption of 10 days in the quarter -- does that mean the pipeline is a bit dry running into Q1? Does that mean Q1 is going to be a bit weaker at Lucky Friday?

Larry, I'll let you --.

Yes, it spilled over into January, so I doubt we're going to make back a shortfall that we had in January. And, certainly, it will affect Q1.

Okay, that's great (multiple speakers).

It's not a real meaningful impact. You're talking 10 days, sort of --.

Yes, and it certainly will not affect our guidance.

Right, for the year.

Okay, perfect. Congratulations on the reserves. Well done, guys.

Okay, thanks.

Trevor Turnbull, Scotia.

I was curious about the reserve additions that you had at Lucky Friday. You had a nice bump in terms of the ounces. And I was reading that this material -- some of the additions seem to be from the intermediate veins. And I was wondering if that's why the grade was off a bit. Is it that those intermediate veins are a bit lower-grade than the 30 vein? Or is there a bit more dilution that you have to factor in? Or how did that work out?

I think it's really both, is I guess the way to characterize it.

Yes, go ahead.

Trevor, you are correct in your assumptions. The intermediate veins, in general, are lower-grade than the 30 vein. The other modification that has occurred in the last year is that we've gone from conventional mining of some of those intermediate veins to mechanized mining, and with that comes additional dilution. So, those are impacting the grade.

And mining those intermediate veins really provides the geotechnical -- effectively a barrier for the stresses on the 30 vein. And so we'll be able to manage the ground much better with that intermediate vein mining that we do. It creates a stress shadow for the 30 vein.

Yes, okay. Understood. I guess the other question is that as you get deeper into the higher-grade material that you're looking to access with the 4 Shaft -- that material, as it gets drilled off -- say, from resources up into reserves -- I'm just wondering how we should think about that kind of resource to reserve conversion in terms of the grade changing. Because it seems like the grade for the measured and indicated and the inferred is a fair bit lower than the reserves.

And if maybe Dean could just explain how, as you tighten up that drilling, do you expect those grades to pop up?

Yes, Trevor, probably the best way to describe it is really separating the 30 vein from the intermediate veins. When we infill drill the 30 vein, the tendency is for that grade to stay, or actually improve, with infill drilling. Sometimes the opposite happens with the intermediate veins, and so that's the dichotomy with our infill drilling. 30 vein often will improve; the intermediates -- it depends on which vein you're dealing with.

The other thing to realize is that that resource -- and I don't have the number right in front of me -- but the resource is largely the intermediate veins rather than the 30 vein. To give you a context, it looks like about 15% or so of the resource is the 30 vein, so the other 70% is those lower-grade, intermediate (technical difficulty). So we think, as we drill the 30 vein, its grade will go up and we'll have those resources in the intermediate veins. Some of which, over time, will be moved into that stress shadow and will go into the reserve. And so that will bring down the future -- the grade of what we add.

And then we'll have those other intermediate veins that will be there for the long-term, either higher metals prices or at the end of the mine life.

Okay. And I guess the last question on grades and resources, just doing a quick scan of Greens Creek and how resources there -- not reserves, but the resource grades -- had really popped up this year, relative to last. And maybe if you just had a comment on that.

Yes, Trevor, where we are adding the most resources are in the deep 200 South and the Northwest bench, and both of those areas have very high precious metals. Northwest bench also carries high base metals. So that change in grade that you're seeing is a reflection of those two zones in particular. (multiple speakers) And both of those zones are open, and we'll be drilling them this year.

So, I haven't had a chance to do the math, but when you look at all of the metals involved, there's a pretty good pickup in terms of the total NSR of those resources, as well as just in the precious metal grades?

Yes.

No, I think there is. And, of course, it becomes a function of what price assumptions you have for the lead and the zinc. If you followed that market, that things look pretty optimistic for higher prices in both those metals.

Jim, you want to add something?

Well, the only thing I was going to add to that is -- the other thing to keep in mind is when we did in our reserve reports -- silver, for example, we did at $20, which is way below the three-year trailing average that a lot of companies are still using. We just felt that that was prudent, given price action that we've seen in the metals.

And so the work that's been done on the reserves and resources becomes doubly underscored when you realize that we handicap the underlying metals prices below the three-year trailing average.

Yes, that's a good point. All right. Thanks, guys.

Andrew Kaip, BMO.

Look, I just have one question. Just on a go-forward basis in 2014, can you give us a sense of where your depreciation is going to be, on a corporate level?

Yes, Andrew, it would be very close to where we were with the fourth quarter. And the reason I say that is because we have Lucky Friday backup at full production; Casa at full production; and Greens Creek. So if you use our Q4 number, that will be a pretty good indicator going forward.

All right, that's great. Thanks very much.

(Operator Instructions). Joseph Reagor, ROTH Capital Partners.

I have two questions for you guys. First one is -- at Casa Berardi, you guys had postponed the expansion there. What's the availability currently at the mill? What percentage are you guys currently using of the capacity?

Go ahead, Larry.

The mill is more than capable of doing 2800 tons a day, so we're way under the mill capacity at Casa. So I think you're referring to the open pit expansion. Is that your first --?

Yes. (Multiple speakers).

Yes, we're currently at, what? 2000 tons a day, roughly?

Less than that, yes.

And 2800 is the nameplate, but there's probably even more capacity above that. And with respect to the pits, we just see that the focus should be on continuing to expand the underground, continuing to see if we can put that higher-grade underground material in. And we are continuing to work on the pits, but it's not the priority. So when you think about Casa, think about it as a 125,000 to 150,000 ounce producer. And when we come to a conclusion as to when to put the pits into production, then we'll give you guidance on adding that to that total.

Okay. Following on that idea, then, is it possible you guys would look outside the Company for local deposits that are high-grade underground sources of ore where you could use to fill the extra, call it, 800 to 1000 tons?

Yes, I think so, but it is pretty remote. And finding things like -- could truck to it. Jim just reminds me, you've got Fayolle.

One area that we're -- in fact, we're drilling there now, is the Fayolle project in northwestern Quebec, about 80 kilometers -- 100 kilometers, as the crow flies, to Casa Berardi. There's a small resource there at this point. That's a possibility. There are some resources in the area around Casa Berardi, but I can't say we're in advanced discussions with anyone.

Yes. It's just not -- frankly, at the moment, it's not the priority. But you bring up a good point as an opportunity for us in the future. We just see a lot of opportunity at Casa to make improvements, and I tried to just highlight for you; we think there's some recovery opportunities. We think there is some improvements on dilution and on development. We don't have those developed far enough to be able to articulate what the impacts will be. But I think -- what -- within the next two quarters, Larry, we should get there.

Okay (multiple speakers).

And we think there is more value there than trying to fill the mill. That's the bottom line.

Okay. And then one other thing. With the Mexican tax law litigation change, you guys have stopped talking about your project down there. Is that still first in the queue for internal growth? Or is there something else that has kind of moved to the top?

Well, I think it is still first in the queue in terms of something completely new. I do, however, think that probably Casa has more opportunity to see some growth with these things I just mentioned; and certainly at the Lucky Friday has the opportunity. We're not discouraged by San Sebastian or any of the other projects that we have, but we are mindful of spending within cash -- or within adjusted EBITDA.

So we've said, let's slow down on those things. We recognize that the hurdle for the Mexican project has risen. So we're looking at -- how do we go in with a lower capital program that can still meet our return needs? But this is not a case where technically we see a problem with -- in fact, I think generally speaking, technically, the project is improving.

Okay. Thanks a lot, guys.

Zach, GMP Securities.

I basically just wanted to jump to the balance sheet, because you've got a couple comments, I think, where you were talking about spending within the adjusted EBITDA. And then you also talked about the financial flexibility that the new bonds gave you. But I guess what I'm just trying to understand is, with the three mines now up and running, what your view is on debt capacity for the business at this point. And then the second, add-on question to that would be the various growth projects you have, under what scenario would you actually look to add more debt?

Well, I'll let Jim take that question.

Sure. Actually -- and I'm going to kick part of it over to Phil. I'll talk about some general rules that we apply in our capital structure, and a little bit on what we would use for acquisition or development. A general rule that we have at Hecla is that our net debt to EBITDA should not exceed 3 times. And we're comfortable within that. If you take a look at the numbers at the back of our press release, we come in at about 2.2 times, I believe, for the last year. So we are well within that. We also try and keep our debt down to no more than one-third of the capital structure.

Now, having said that, that's not when we look at acquisitions and we look at development. We look at the liquidity that's in the Company -- which is high, at $300 million. And given where our coverage is, we have some room, should we so desire -- we're not there yet -- to invest in projects that would bring on additional streams of EBITDA. And those would be one of the tests, is a project has to pack its own load.

And I believe the same thing would apply for acquisitions. While debt might be prudent, it clearly depends upon the earnings capacity of an acquisition, and the risk associated with that earnings capacity. So additional debt is not something that we're going to do willy-nilly without an earnings stream behind it.

Yes, and all that's fair. Look, it has taken a lot of time and effort to get to this point where we think we have this financial flexibility. We're not going to go and hamstring the Company with some extraordinary amount of additional indebtedness and squeeze us.

Jim, did you mention about the hedging that we do?

I didn't; but one of the things we take a look at in our base metals deposit, of course, is we try and take risk out of the model where it's acceptable to our shareholders. And so we have had a project going on in the last couple of years, I guess, where with regard to the base metals portion, we hedge that risk for an extended period of time, up to three years, up to 60% of that production. We haven't gotten near that 60% just because of the way the markets have reacted, but we have done in excess of $250 million of revenue protection there. And that's a program that we feel allows us to have the debt that we have now. And so, again, is just an example of how we approach the balance sheet.

So it seems fair to assume of couple of the projects you have going on -- like the Number 4 Shaft, and maybe some development spending in the San Juan assets -- you'll do that within the means of operating cash flow. It sounds like more debt would come with something perhaps bigger, like an M&A type deal.

Yes, I think that's right; or if we find the ability to advance something beyond what we are currently contemplating. If, for example, at San Sebastian, we have the success to the northeast, then conceivably we could do something with debt on a project like that. But at this point, that's just rank speculation.

And just to follow up on Phil's question, another old rule is, debt financing comes when you have a use of proceeds. I can tell you, as the high-yield market was improving, we had people beating on our door to do high-yield bonds prior to the Aurizon acquisition. And we saw no need to lever up the Company just for the sake of doing that, as we believe there should be a good use of proceeds that would support that before we do it.

Great. This has been very helpful. Thanks, guys.

All right, well, we appreciate everyone being on the call. I think there's some folks that might have some further questions. If you do, please give Mike Westerlund a call, and we'd be happy to answer those questions. Thanks very much. Talk to you folks soon. Bye.

This concludes today's conference. You may now disconnect. Have a great day.