Hecla Mining Co (HL) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2016 Hecla Mining Company Earnings conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Mike Westerlund, Vice President of Investor Relations. You may begin.

Thank you, Operator. Welcome, everyone and thank you for joining us for Hecla's Third Quarter 2016 Financial and Operations Results conference call. Our financial results news release that was issued this morning before the market opened, along with today's presentation, 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, 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 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, in our filings with the SEC, we are 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. Good morning, everyone. Hecla's record-setting third quarter performance is the direct result of our strategy of investing through the downturn. A year ago when we are considering our plans for 2016, the conventional wisdom was to reduce capital spending, sell assets and pay down debt, even if it meant under investing and reducing production.

We stuck to our strategy of continuing to invest, continuing to explore, continuing to generate returns and continuing to grow production. As a result, we've seen the upswing in metals prices when coupled with the production gains generate record sales and significant free cash flow, which in turn has grown our cash position. In addition, we've demonstrated financial discipline by limiting share issuances. So our performance is improving on a per share basis.

Let's focus on some of these key elements. On the top left of Slide 4, you can see that silver production is up 67% quarter-over-quarter. And in the bottom left, you can see gold production is up 19% coming as a result of our strategy of investing and improving the operations of our mines and into new mines in the case of San Sebastian in Mexico.

Starting in the top right quadrant of Slide 5, the production and price growth has translated into 225% increase in operating cash flow over last year's third quarter demonstrating our operating leverage.

Moving to the upper left quadrant, you can see the 82% growth in our trailing 12 month adjusted EBITDA. This is a key credit metric to $234 million, which is almost a record for the Company. Our debt is now about 2 times our 12 month trailing adjusted EBITDA. We are a better credit risk today then we were when we put in our debt.

In the bottom-left quadrant you can see the impact of the strong cash flow, as we've increased our liquidity to $292 million; the highest it's been in over a year. Our strong performance has been noted by the market, and on the bottom right, you can see the outperformance of our share price versus a basket of our peers, while we're up about 207% year-to-date, and they are only up about 113%.

Now, moving to Slide 6, we're pleased to have completed the Montanore Acquisition this quarter. And why are we so excited about it? Well, there's a couple of reasons. First it, defines our silver future because Montanore is the second largest development stage project we've acquired and it's very large.

Slide 6 shows how the resource of each of Montanore and Rock Creek are larger than our Company's entire silver reserve. Second is its location. Montanore is located at 50 miles from our Lucky Friday Mine. And third, we believe we have the in-house expertise and track record to get it permitted. We see tremendous value creation potential here as the project moves from permitting to construction to production.

Now as seen on Slide 7, we've increased our 2016 silver production estimate to 16.25 million ounces. And the cash cost after by-product credits, it's been lower to $4 an ounce. The increase in estimated silver production comes from Greens Creek and Lucky Friday. The lower cost comes as a result of the very profitable San Sebastian mine.

Now for gold we've kept our 2016 production [estimate] unchanged at 233,000 ounces. Our cash cost after by-product credits for gold has increased to $750 an ounce to reflect the expensing of East Mine Crown Pillar stripping. And this is merely an accounting change with a commensurate reduction in pit capital expenditures.

Now this all equates to 44.5 million silver equivalent ounces or 582,000 gold equivalent ounces, if you think from a gold perspective. And this represents the highest production in our 125 year history.

Now because of the returns we can generate in our free cash flow we will continue to spend the $150 million capital and the $19 million in exploration.

I'll now turn the call over to Lindsay for the third quarter financial review. Lindsay?

Thanks, Phil, and good morning, everyone. I'm really pleased with our third quarter results. This is a third consecutive quarter of increasing revenues, net income, operating cash flows and cash balances. Net income per share amounted to $0.07 and we recorded $0.22 per share in operating cash flows after working capital changes.

On Slide 9, you can see our quarter-over-quarter growth of silver production of 67% to 4.3 million ounces in the third quarter. Gold production also increased 19% to 52,000 ounces. Revenue was 71% higher than in the same period of 2015 contributing to record quarterly revenues of $179 million with third quarter operating cash flows amounting to $87 million, a 225% increase over the same quarter in 2015, of which $43 million was reinvested at our operating mines.

Clearly, all four our mines are meeting or exceeding our expectations. The free cash flows being generated allow each mine to use those cash flows to further enhance efficiencies and fund their organic growth opportunities. And then when that is happening, you can sense the real excitement at each of our mines.

Our cash cost after by-product credits per silver ounce of $3.68 is reduced from $7.52 in the third quarter of 2015, mainly due to the addition of low cost production at San Sebastian, but also increased silver production at both Greens Creek and Lucky Friday as a result of mining higher grade material at each mine.

Our gold cash cost after by-product credits was $915 per ounce an increase over the prior year period as a result of expensing stripping costs and other associated contractor costs during the period. As this is first quarter of operations in the East Crown Pillar pit.

When comparing the second quarter of 2016 to the third quarter of 2016, the total dollar spent was roughly the same, but the split between what was capitalized versus expensed was about a $4 million different. That is higher amount being expensed as the pit was in production. That's about a run rate of about $4 million a quarter for stripping costs for the 2016 year.

I'd also like to point out that while the costs were the same, ounces produced were lower leading to the higher cash costs. We expect the cash cost on an annualized basis, after by-product credits to be $750 per gold ounce.

As shown on Slide 10, silver operations continued to deliver strong cash margin in the third quarter of 81% of sales or $15.85 per ounce, an increase of 126% over the third quarter in 2015. In fact you can see the silver margin has increased each of the past four quarters. Whereas looking at the gold margin at Casa you can see the variability in the cash costs, particularly in the third quarter for mining out of the East Mine Crown Pillar pit commence, in addition to our existing underground operations there.

Now looking at the impact that the production of margins have had on cash flow generation at each mine on Slide 11, Greens Creek had a 75% conversion to free cash flow leading the way by generating $42 million of free cash. San Sebastian had a 96% conversion to free cash flow generating $16 million. Year-to-date San Sebastian has generated almost $60 million of cash flows in excess of capital expenditures, which goes a long way to reducing our net debt on the balance sheet.

At Casa $4.5 million of free cash flow was generated, whereas Lucky Friday it would have generated $5 million of free cash had it not been for the $7 million spend on the #4 Shaft.

Turning to slide 12, Hecla offers investors a precious metals revenue stream with 43% of our revenue from silver, 34% from gold, while 13% and 10% of our revenues come from zinc and lead respectively. We also have diversification among four distinct mines in some of the best -- world's best mining jurisdictions with 48% of the revenue coming from Greens Creek and 14% from Lucky Friday both located in the United States, 23% from Casa located in Quebec, Canada with the balance 15% from San Sebastian operating in Mexico.

All things being equal, risk is reduced, when one enjoys the benefits of operating polymetallic mines both open pit and underground in great countries.

Staying on the topic of managing risk along with the diversified revenue streams, adjusted last 12 months EBITDA is up a 100% since the fourth quarter of 2015 to $234 million. With increased adjusted EBITDA, and our cash balance is growing, the balance sheet is just getting that much stronger.

On the right side of slide 13, you can see the 56% reduction in the net debt last 12 months adjusted EBITDA to 1.4 times. Again a debt metric that suggests we have resiliency throughout any commodity price cycles.

The waterfall chart on slide 14 analyzes the change in our cash and short-term investments from the beginning of the quarter to the end of the quarter. On it, you can see our adjusted EBITDA of $75 million, insurance proceeds of $16 million and $42 million of CapEx leaving us with a $192 million in the bank.

I also want to highlight that we receive proceeds from an insurance policy that we will apply towards the reclamation of the Troy Mine. With working capital at San Sebastian now funded, capital Lucky Friday declining, and with higher metal prices, we think we will have continued excellent financial results for the remainder of 2016.

Summing up the year so far, we've had growing cash flows and disciplined investment at our sites leading to a much stronger balance sheet than we started the year with.

With that, I'll turn it over to Larry for a review of the operations.

Thanks Lindsay. As you can see on slide 16, all four of our mines are performing well producing more metals than they did a year ago. Greens Creek had another excellent quarter with silver production up 23% over the prior year period, producing 2.4 million ounces at a cash cost after by-product credits of $4.80 for silver ounce.

The Casa Berardi gold production increased quarter over quarter to 32,000 ounces at a cash cost after by-product credits of $915 per gold ounce, which was higher due to the cost of stripping the East Mine Crown Pillar pit being expensed instead of being capitalized.

Lucky Friday production of almost 900,000 ounces was up 50% over last year and the cash cost after by-product credits of $9.07 per silver ounce was lower than last year, both due to the mining of higher grade material this year.

And finally, San Sebastian produced 1 million ounces of silver at a cash cost after by-product credits of negative $4.03 per silver ounce, and the mine was not in production in the third quarter of 2015.

We hosted an Investor Day in Toronto and New York a couple weeks ago, and if you've not had a chance to view the webcast, I encourage you to listen into it. We explain in detail many initiatives and innovations at each of our mines that I think you will find very interesting.

Now, let's spend a couple of minutes on each operation. In the case of Greens Creek, the higher production was due to higher grades. The silver grade continues to be higher than normal but will become more aligned with life of mine grades in the upcoming years.

Greens Creek continues to generate strong cash flow through improvements made in tonnage and recovery. The top left graphic on slide 17 shows the continual improvement in silver recovery that we have made in the last few years. We are also looking forward to a number of initiatives to make the mine more efficient.

On the top right, you can see a snapshot of a proximity detection system that highlights the location of each person and each machine in the mine, and this system is in place. Using the fiber optic cabling that was installed for the safety initiative, machine controls were established such as the on-off fan control shown in the lower left graphic.

Soon, the two systems will be married in such a fashion that the fans will start and stop based on the entry of people into a given zone. This will reduce electrical demand an important initiative given that as anticipated in our power contract, our unit rate for power increase in September from $0.10 kilowatt hour to $0.16 a kilowatt hour.

In addition, we're pursuing Tele-Remote loading as a means to improve our turnaround of mine phases. The photo on the bottom right was taken from a mine in Sweden and shows autonomous loading from surface allowing the loaders to be operated over 20 hours a day.

At Casa Berardi, the production drop in Q3 from Q2 came from lower grade material and we expect that production increase in the fourth quarter as several high grade stopes come online and the open pit is fully ramped up. We're happy with the progress we're making at the East Mine Crown Pillar pit shown on slide 18, and expect that the open pits will be part of this mine for the rest of its life.

We like the flexibility the pits give us, the ability to optimize the mill to increase production and cash flow. This slide shows the five phases of the East Mine Crown Pillar pit in slide 18 roughly a phase per year.

We received a permit to take the mill from the current 1.1 million metric tons per year to 1.25 million metric tons per year. The increased throughput requires only minimal changes to the plant and we're now seeing days above 3,400 metric tons.

At Lucky Friday, the higher silver production was due to mining higher grade material. We expect the #4 Shaft to be in commissioning by the end of this year.

We're working on the planning for a new mining technique as shown on slide 19 in which we change from 5 cuts having a dedicated ramp to 10 cuts having a dedicated ramp. This should reduce development and allow us to turn the stopes around faster post backfill.

In addition, we're planning to have a single descending front from the 6500 level as opposed to previous plans in which we contemplated a descending front from 6500 and an ascending front from 7500. The benefits we predict include simpler rock mechanics, lower development cost, moving cash flows earlier and avoiding tying up 10 million silver ounces in the Pillar. At today's prices we predict Lucky Friday will be free cash flow positive next year.

And finally, at San Sebastian the grades in production from the Middle and North vein pits have been higher than originally anticipated allowing us to expect continued high grade production in 2017. The mine continues to generate significant free cash flow and, we are focused on how to extend the mine's life past [its] current two year project life, and continue operations uninterrupted.

Slide 20 shows one of the many ways we may do it by going underground. We have secured the mill for 2018 and have identified several pods of high grade in proximity to each other. And we are looking at how we will potentially mine them.

I'll turn the call over to Dean for exploration and pre-development.

Thanks, Larry. So far you've heard Phil, Lindsey, and Larry talk about Hecla's current financial and production strengths. Now I want to focus your attention on the exploration successes at three of Hecla's mean projects.

But in particular recent drill results at San Sebastian, a list of drill intersections for San Sebastian and our other projects are provided in the appendix of the Q3 earnings release. Many of which are high grade and I encourage you to look at them, because they give an idea of where we are headed for future resources.

The San Sebastian property provides many opportunities to find new high grade resources to extend mine life. We have clearly defined mineralized structural trends as shown in Slide 22 consisting of multiple styles of mineralization that are open along strike and at depth.

Because of recent successes and this potential, we will spend about $4.5 million in 2016 which is one of our largest exploration budgets at San Sebastian in recent years. And we would expect to spend similar amounts in 2017 as we aggressively evaluate the potential of the property.

In the plan view of San Sebastian, near pit drilling of the Middle and North veins may expand or even link the current Middle and North vein pits as defined in the green expansion areas once resource models and economic studies are completed. Recent drilling successes at the West, Middle, North, and Western and Eastern extensions of the Francine vein will be discussed in more detail.

Particularly exciting is the recent discovery and expansion of a high-grade resource about 1,200 to 2,400 feet to the West of the Middle vein open pit as shown in Slide 23.

We talked a bit about this last quarter, but recent definition drilling has expanded the high grade zone that is over 1,200 feet in strike length and located about 350 to 800 feet below surface. Intercepts include 0.6 ounces per ton gold, and 149 ounces silver over 4.8 feet confirming the high grade nature of this oxide mineralization.

Once the updated resource is completed in mid-November, this part of the Middle vein will be evaluated for potential underground mining options. And shallower portions of this zone may be amenable to open pit mining.

Another feature shown in this diagram is the mostly horizontal distribution of high grade mineralization as defined by the high net smelter return values. This high grade extends for over 4,000 feet of strike length and varies in depths from 200 to 800 feet from surface.

We continue to evaluate the potential along the trend with step out drilling to the West of the current resource. Recent deeper near-pit drilling of the North vein has defined a new high grade gold rich area as shown in Slide 24 below the current pit. This high-grade zone may be mined in combination with the Middle vein either as part of an open pit or in an underground mining scenario.

Elsewhere in the mine area drilling continues to expand the West Francine vein resource and we recently intersected a mineralized vein breccia we believe to be the Northeastern extension of the East Francine vein.

At Casa Berardi, the targeting by up to seven drills as shown in the longitudinal section on Slide 25. Drilling of the 118 zone now defines a high grade mineralized zone that extends for over 1,000 feet along strike and 2,000 feet down-plunge.

Strong grades identified along the eastern extensions of the 123 zone now cover a down dip area of over 3,500 feet. These lenses are open to the East in the depth and are slated for renewed drilling once the exploration drifts are in place in the next year.

Strong drilling results have upgraded and expanded resources of the 124 zone from surface past the bottom of the proposed principal pit down dip for over 1,800 feet. Near-surface drill intersections stepping West of the 134 zone continue to find high-grade pods that could define individual open pit opportunities or possibly combine with the proposed principal pit to create a single large open pit.

The red arrows in the longitudinal project the extension of many mineralized zones down-plunge throughout the mine and indicate the huge potential at Casa Berardi.

The strong drill results continued in the quarter throughout the mine as shown in Slide 26. Drilling continues to define new high grade resources that are expected to sustain production both underground and surface at Casa Berardi in the coming years.

The emphasis in drilling during the year at Greens Creek has been upgrade with infill drilling some large high grade resource areas to indicated category. Those large resource areas shown in Slide 27 have been intensively drilled and much of the Northwest West and deep 200 South zone resources along with the 9A West and 5250 zone resources should convert into reserves at year-end and extend mine life.

Our drill programs continue to deliver high grade drill intersections and the red arrows define mineralization trends that remain open to identify new resources in the coming years at Greens Creek. The isometric view of Greens Creek shown in Slide 28 shows three trends of mineralization that provide the framework for near-mine exploration targeting from underground and surface.

Two major fault zones divide deposit within three-fault blocks that have all three mineralized trends in each block. From this diagram we can see there remains a number of significant unexplored extensions to these trends as defined by the dash lines.

Significant expansions of the 5250 Northwest West and Gallagher zones remain to be evaluated and other mineralized trends may be identified in the process. Based on this exploration potential we're confident that new reserves will continue to be added for many years at Greens Creek.

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

Thanks, Dean. And we often get asked what we're going to do with the excess cash flow that we're currently generating.

And on Slide 30, you can see that we want to maximize shareholder value by prioritizing our cash investments to generate the highest returns to do that. Our strategy is to invest in the business first, because the returns on investment are the highest of all our options.

For example investing in the surface at Casa is expected to return more than 90% internal rate of return, with startup at San Sebastian's north of 1,000%. The investment and recoveries at Greens Creek yielded an IRR of more than 600% and the list goes on.

We will also look at M&A opportunities to increase the size and scale of the Company. And finally there's debt reduction, share buybacks and dividends. All of these are things that we're considering, but our focus is really on investing consistently with the strategy slide I showed you that beginning of the presentation.

And so with that, Operator, we will open the line for questions.

(Operator Instructions) Chris Terry with Deutsche Bank.

Hi, Phil. Yes, word on a good quarter. Just a few questions from me. On the Casa Berardi costs, I know you're been through the details around the increased stripping program just from an accounting sense going forward. Can you just give a few more details on the expensing versus capitalizing of that operation maybe over the next few years?

Yes. So, just to be clear all that's happened is when we gave our guidance we failed to change the treatment of the stripping of the pit. And we used frankly the Canadian convention of capitalizing the expenditures in doing the guidance. As we prepared the financial statements for this quarter, we realized that for U.S. GAAP treatment is different and you expense it as soon as you start production in the pit.

So that's all that's happened is just there's no additional stripping that we're doing. There's nothing that has changed other than we're moving it from one bucket from a capitalized expense bucket to an operating expense bucket.

With that, I'll let Lindsey or Larry, I guess, Lindsay maybe why don't you start out as to what the impact is going forward.

Yes, I think, Chris, as Phil explained, expense versus capital, same dollars being spent. So in the future, nothing really changes too much. But as you saw this quarter, and you see our annualized cost for 2016 will run in the range of $750.

What is pretty important is that it's a per-ounce calculation that we're talking about going up this quarter. But as you know stripping doesn't necessarily mirror exactly what production of the ounces will be in that particular quarter.

So while we had the same dollars in the third quarter as the second quarter we produced less ounces, and Larry will talk about why stripping just doesn't necessarily fall production of ounces, which is the denominator in this calculation.

Yes, we started ramping up ore -- we started producing ore in July and ramping up through August. We've pretty well all the way ramped up in September. So going into the fourth quarter, I expect full production out of the open pit, so we'll get the benefit of the ounces along with the stripping.

OK. Lawrence Radford^ The stripping costs per year, guys what are we spending on stripping per year, does anybody have that off top their head.

I can give you some pretty rough numbers, next quarter we'll move a total of 2.4 million ounces that are in ways at a cost per tonne of about CAD2 a ton.

OK.

OK, thanks for the extra color there. And then just strategically in terms of M&A. How do you look at Hecla's key advantage in terms of operating versus building or doing both i.e., with M&A, getting into earlier stage projects like you've just done with Montanore or whether you look at companies that are already in operation? How does your team assess what Hecla's best skill set is in terms of those two opportunities?

Well, we clearly have a history of operating mines, right. So there's no doubt that we can come in and we can take mines and make improvements incremental improvements.

We do within the organization have people whose background includes building new mines. So we're prepared to do that, where as you can see with Montanore and Rock Creek, so we think we can do both, but clearly what we have the most history at and the track record on is operating the existing the mines. But we're evaluating both.

Anything new that needs to be built, we will be cautious and make sure that we don't overextend from our capabilities.

Great, thanks for the color.

Heiko Ihle with Rodman & Renshaw.

Congratulations on the [free] cash flow in the quarter. It's nice to see mining companies and mining management teams once again focus on actually creating cash flow rather than just surviving and waiting for prices to rise. At Lucky Friday with the -- with the #4 shaft, can you walk us through the amount of capital still need to be spent? I mean it seems like most of the heavy stuff's already done, I mean the big work is done. But I'm just trying to quantify actual money that still needs to be spent at the site?

I'll let Larry and Lindsey answer that, but in order of magnitude we have spent in excess of $210 million. The remaining $[250] million of the remaining amount is relatively small. The work that's being done at this point is the equipping of the shaft, so it's no longer excavating it's putting the steel and the other components to the shaft into it. Still a lot of work that's involved, but it's not the high capital dollars. Larry you want to add to that?

Just that we're getting towards the end of this project, we expect to begin commissioning in late December and complete the mobilization of the contractor in the first part of the year. So we're nearly at the end of this. Lindsay, you got the actual spend there?

Well, what I'm looking at is the spend for the fourth quarter is similar to the spend in the third quarter.

OK. But I mean the actual contractor charges are fairly consistent month-on-month, and --

But that's just the shaft, though.

No, I think that's all in.

That's all in.

Yes. But -

We'll see if I can dig it out.

We're basically pretty close to our original target for this project.

So if you look at Slide 11, Heiko, the $7 million spend in Q3. So it will be something similar to that in Q4.

OK. That's very helpful and frankly less than we modeled. So, OK, perfect. You mentioned the acquisition of Montanore in the release, obviously that is very small and very long term in the grand scheme of things not that big picture right now.

That said, would you be open to another Casa Berardi, right now? I mean prices obviously are far away from where it used to be, but have they gone up too much too fast? Or you are looking? Or are you always sniffing around? Or just maybe walk us through that. I know it builds on the last guy's question a little bit.

So Heiko, before I answer your question let me just comment on Montanore. I mean we see Montanore and Rock Creek as being tremendous value creators for Hecla right now, despite it's still a number of years of future production, and there are other companies that have projects that are similar stage, and there's a huge amount of value that is attributed to those assets. When we acquired Rock Creek, we were quite quiet about it. We didn't talk too much about it, because we wanted to get Montanore into the fold as well.

Now that we have both these assets in the fold, we're going to be making sure the market recognizes the value that these assets have, because they are consistent with everything that we're trying to do in the Company of having long lived low cost assets, assets that will allow you to invest and improve and grow over time. And so these assets really fit that.

So, first that. The second with respect to acquiring things look, we're always looking at attempting to acquire assets that again fit that strategy of a long lived low cost asset, and prices are certainly something that we look at, but we don't try to time the market.

We don't know if prices are going to be higher, if they're going to be lower, we don't know what the long-term outlook is for prices. But what we do know is if it's long lived and it's low cost, it will be able to survive whatever the price cycle is, and to the extent prices go higher, and then you will reap that benefit. So yes, we are certainly looking considering at new assets similar to the ones that we have.

I'll just conclude with, I've been both to Rock Creek and Montanore, and I agree with your assessment that there is a lot of long-term potential there, so just from firsthand actually being there.

Anthony Sorrentino with Sorrentino Metals.

Yes, glad to be back on. To follow-up a little further on Rock Creek and Montanore, where are you in the permitting process for those two properties?

The permitting process is one that is long and drawn out, but we're happy to say that the previous owners de-risk the projects significantly. So we're getting toward the final stages of that. Having said that that's -- it's probably a few years before in the case of Rock Creek that's done, in the case of Montanore it might be faster than that.

Specifically where we are with Rock Creek is the final EIS has been issued. The final supplemental EIS has been issued a draft of it. There were comments that were provided to the Forest Service. Those are being evaluated and the final is being prepared, and we would expect sometime in the first-half of next year for that to be issued. Montanore could be as soon as that as well.

OK, that's good to hear. As was mentioned earlier, with the commissioning of the #4 Shaft project, what would you expect Lucky Friday silver production to be in 2017?

We haven't given guidance for that. What we have done is discussed how we are changing the design of the mine, and Larry encouraged you to go to our investor day presentation of a few weeks ago. In that change in the design, we're going to do a just a descending front at the Lucky Friday.

And as a result of that, it will take us a bit longer to get to the full length of the high-grade zone at the Lucky Friday, but it will allow us not to leave a pillar. So we'll give more guidance on production for 2017 early next year, but it will be similar to where it was today.

OK. And at San Sebastian, would you be able to estimate at this time the capital cost of transitioning from open pit to underground mining?

No, we haven't done the engineering, but it's not large. There is -- we're talking about a ramping system to take us underground, and that will probably go out of either the current open pits or out of the old workings from when we operated San Sebastian before. So it's not a major expenditure.

OK, very good. All right, thank you very much and congratulations on the great results.

Mark Mihaljovic with RBC Capital Markets.

Thanks and good morning everyone. So, couple of questions for me. Can you just remind me what the timeline for accessing underground mineralization at San Sebastian is?

We haven't announced what that is, but in likelihood before the end of 2017.

Again, how long do you think the dewatering takes?

The dewatering, well, that's assuming we go from the existing workings. Larry, any comment on that, it's not something we really talked too much about.

We haven't talked a lot about it. We are right now dewatering the old underground workings. And then once we get that done, we'll obviously have to do an inspection to understand how much if any of the ground has to be rehab. So there is a lot of work to be done here, before we have a definitive plan as a development plan.

But as Phil mentioned, there is other options. We can ramp down from surface. We can ramp out of the middle vein pit; there are options.

The reason that we like the option of coming off the old workings is that the permit for that underground never expired, and so we consider this a continuation of the old permit. And although there will be some connections to surface one way or the other, and that's certainly going to require a level of permitting. We're crossing our fingers and hoping we can come off the old work and just keep it simple.

Thanks for the color there, guys. So can you give a breakdown of the 4 feet at Casa between open pit and underground, and again how you expect that to evolve going forward as the open pit hits full throughput.

Yes. Larry, let me ask you to answer that question and I'll --

(Multiple Speakers)

For the third quarter, the underground produced about 182,000 metric tons. And the surface was about 52,000 tonnes. The grade from the underground was 5.5 grams per tonne, and the surface material was 2.4 grams per tonne, and the recoveries were fairly close.

That was in a ramp-up mode. The pit can feed about 25,000 metric tons a month. And so, we're actually in like I say, we're in full production now.

So it's a bit of a contest between the underground and open pit to get their feed in the mill. And fortunately in the fourth quarter, we've got some high grade stope. So we'll probably push a bit of the open pit feed into next year.

OK. Thanks for that and I guess sticking with Casa obviously, you moved roughly 7 million or 8 million from what you thought would be capitalized into the expense line, which again we've seen happen at a number of operations in different accounting treatments and no big difference there.

But you did end up keeping the overall capital guidance the same at about 150. So I was just wondering if you had some color on what the incremental capital you'd be spending on.

Yes. It's just a lot of little things, there's nothing in particular. Frankly, we've been going through looking at stuff that we're planning to spend in 2017 and moving that into 2016 and then we'll move stuff from 2018 into 2017, there's not any one sort of large item, it's pieces of equipment.

I can tell you, there's a couple of new loaders that we'll be bringing in, just a variety of things, but nothing - there isn't anything in particular and there isn't any one particular property that's getting the attention. Larry, anything you want to add to that?

No. I think that's a good summary.

Okay. Thanks.

You guys did very well on the unit mining cost at San Sebastian, down to about $60 a ton from over $90 in the previous quarter, so just wondering what's driving that? Is that a lower strip as you move out of the East Francine Vein? And secondly, is that a good run rate going forward?

Yes. The pits at San Sebastian unlike say the East Mine Crown Pillar pit are -- there's no phasing them, they're top to bottom and so you get the heavy stripping up front and as you get deeper it just gets progressively less. So that's a big factor.

Obviously we have the Mexican peso at our -- we've got quite a tailwind. I think the evaluation was in the 25% range, something like that through the course of the year. So we've got a nice tailwind off of that. And candidly we have a very good culture of cost control at San Sebastian. It's by and large the team that we had there when Hecla operated the mine previously and they just have a good culture of watching their expenses.

Eliot Glazer with WMC Smith & Company.

Congratulations on a very nice production job thus far this year. Looking at the fourth quarter and looking at your published numbers it looks like a fourth quarter gold production will be up about 7,000 ounces and silver production about 500,000 ounce, is that correct?

Somebody have those numbers in front of them, does that sound about right? Certainly the gold sounds right, but the silver I'm (inaudible), but we'll look at that. Do you have another question?

Yes. Looking at 2017, we're not being specific just being directional, would expect silver production to be up?

Look, I think from where we are today, my expectation is that silver will be somewhat similar to where we are today. Maybe as we consistently say these mines have a range of production that they can have.

So let's use Greens Creek for an example, we say it's a 7 million to 9 million ounce producing mine, so it will fall somewhere in that range of production. Clearly this year, we have toward the upper end of that range, so it's going to be somewhere in between those two numbers. So when I look at silver I see some variability that's consistent with where we are today, but some variability given each of the mines will produce at a different level.

With respect to gold, Casa will have full production from the open pit. So we see gold production increasing generally.

And then that percentage?

So when you think about it on an equivalent basis, probably similar to where we are to up. And sort of the way we think about things is, we've had this huge increase since 2012. I want to say, it's 4 times, 3.5 call it, of total production today versus where we were in 2012, maybe it's 3 times, 3 to 3.5 times.

So we're now at a place where we're making sure that's sustainable and then the objective will be as we get into the high grade zone Lucky Friday, seeing silver production increase and then as we develop Rock Creek and Montanore, we'll see another big jump in the silver production.

And in terms of gold production looking out over the next couple of years?

Yes, so we're going to see some increase with the pits and then we'll see sort of a consistent production and we'll be looking at, okay, how do we grow that. We don't have this clear plan as to how that grows at this point.

Jessica Fung with BMO Capital Markets.

So a lot of questions have already been answered and I've got a couple more. At San Sebastian, noticing that the grades that you guys are processing have come down in the quarter as expected because obviously you guys are being a little bit more selective. What should we be sort of modeling going forward? Do you expect to continue sort of processing reserve -- around average reserve grades or do you think it could decline through next year?

Well, again we haven't given guidance for next year and frankly we're still working through what next year's going to look like in total. So I can't give you that, but with respect to through the end of this year, I think if you look at our guidance on Slide 7, you can back calculate what we'll have for the rest of the year and where we'll end up next year, that's still a work in progress.

Right, I'm wondering if -- so without being really specific again, at San Sebastian you guys do have a nice diagram of potential pit extensions --

And going to the underground.

Yes, so would that sort of be something that's done in consort towards the end of 2017 or are you thinking maybe you could just mine from the extended pits kind of into 2018 and defer the underground.?

At this point we think we have to do the underground to maintain the production from San Sebastian. Now, we could get some more exploration success and as we develop the reserves, develop the mine plans and we're -- this is just in time mining is what we're doing here and I think it's a fair way to describe it.

Okay and then moving on to Greens Creek, we noticed here this year your base metal grades dipped slightly in the quarter, is this something that you guys are selectively choosing to do or is this part of the mine plan.

This is just more what these various zones have. There's not anything that we're attempting to do with where we're producing the tons. Larry, anything to add there?

No, not really. But we'll see similar grades going forward, Lincoln in particular I'm talking about.

Yes. So over the long-term, generally speaking base metals grades declined slightly and precious metals grades increased slightly.

Okay, perfect. All right, that's it for me. Thank you very much.

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Phil Baker for closing remarks.

Well, we appreciate all the interest in Hecla and let me just reiterate the comment Larry made about our investor day. That was roughly three hours of presentation materials, each of Larry -- the folks on this call presented as well as Luke Russell who gave a pretty detailed report on Rock Creek and Montanore. So I would encourage you to take a look at that and then also feel free to give Mike a call or me and we just appreciate your interest and support. Thanks, very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.