Hecla Mining Co (HL) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 and 2017 Hecla Mining Company Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Mr. Mike Westerlund, Vice President of Investor Relations. Sir, the podium is yours.

Thank you, operator. Welcome, everyone, and thank you for joining us for Hecla's Fourth Quarter and Year End 2017 Financial and Operations Results Conference Call. Our reserves and resources news release issued last week, our exploration news release that was issued on Monday, and the financial results news release that was issued this morning before market opened along with today's presentation are available on our website. On today's call, we have Phil Baker, President and CEO; Lindsay Hall, Senior Vice President and Chief Financial Officer; Larry Radford, Senior Vice President, 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, Form 10-Q, and in the forward-looking disclaimer included in the earnings and exploration releases and at the beginning of the presentation. These risks could cause results to differ from those projected in the forward-looking statements. In addition, during this call we may disclose non-GAAP financial measurements. You could find reconciliations of these measurements to the nearest GAAP measurement in the accompanying presentation which is available on our website at www.hecla-mining.com.

Finally, in our filings with the SEC, we are only allowed to disclose mineral deposits that we can reasonably expect to economically and legally extract or produce. Investors are cautioned about our use of terms such as measured, indicated, and inferred resources, which are not reserves, and we urge you to consider the disclosures that we make in our SEC filings.

I'll now pass the call to Phil Baker.

Thanks, Mike. Good morning, everyone. You might turn to Slide 3, if you have the deck available to you. 2017 was one of the most satisfying years for me in my 14 years at Hecla as the CEO. First, we posted our second highest silver production in our 127-year history and our third highest gold production. Second, we had slightly negative cash cost on a per silver ounce basis, which has only happened 3 times before in Hecla's history, helping us add $21 million to the balance sheet. But thirdly, and perhaps most importantly, we recorded the highest levels of silver, gold and lead reserves in our history. And I think this is a remarkable achievement to have record reserves in 3 of our 4 metals that we produce, especially when you consider that we used price assumptions that are below spot and among the lowest in the industry. For silver, we use $14.50. And why do I think this is so important?

Well, low-cost reserve growth extends mine life, and what that does is allow us to increase throughput and make productivity improvements at our long-lived operations, which will realize value for years. And we have time to also learn how to find even more ore and how to operate it even better. All of this means our risk profile can be lower than other operators, it means our properties can make more cash flow for more years.

Now, Larry is going to give you an update on innovating our mines to make these productivity improvements, and Dean is going to talk about the progress we've made at San Sebastian to not only extend the life of that mine's oxide production, but how we have now added to the already known polymetallic resource. We have development that is now close enough to do a bulk sample later this year. We think this mine is on a path to maybe concurrently have a polymetallic stream of production with the oxide in the near future.

Lastly, at the Lucky Friday, there has been some progress on the strike. We have an agreement for binding third-party arbitration with the United Steelworkers, but it has to be ratified by the union membership, if they vote in favor in early March, then 3 arbitrators will decide by early May whether Hecla's current offer or the terms of the expired 2010-2016 labor agreement, which we've modified by changes tentatively agreed to will be imposed for a period of 3 years. While we're not happy about having to resort to a third-party to reach a resolution, we see this as an opportunity to have it resolved.

Now looking forward to 2018 on Slide 4, we expect Greens Creek, Casa Berardi and San Sebastian to continue their strong performance and hopefully, the Lucky Friday will return to work. And once we have certainty on the Lucky Friday, we'll amend the outlook. Now we expect silver production to be about 10 million ounces, gold production about 220,000 ounces, our equivalent production is about 35 million ounces for silver and 0.5 million ounces for gold. We see production increasing as 2018 progresses with the first quarter being the lowest of the year, and this is just due to mine scheduling. But for silver, we estimate a cash cost after by-product credits per silver ounce of about $2.25, slightly higher than 2017, primarily due to fewer ounces as we transition underground at San Sebastian. And all-in sustaining cost of $12.75, primarily because of more capital at Greens Creek as we plan for its longer mine life.

For gold, we estimate cash cost after by-product credits of $800 per gold ounce, about the same as last year and all-in sustaining cost of about $1,100. We estimate the capital investment will be comparable last year at around $100 million. We expect to increase exploration spending between $7 million and $14 million over last year, reflecting the continued growth and targets at Hecla's operations and a number of our exploration properties. At this point about $9 million of the total is not yet allocated as we wait for results. We're now also guiding on R&D and expect to invest about $15 million this year with the largest project being fabrication at the Remote Vein Miner at the Lucky Friday. So with that introduction, let me turn it over to Lindsay.

Thanks, Phil. 2017 was a good year as shown on Slide 6, despite the decreased silver and gold production. Metal prices increased over 2016 in cash costs after by-product credits per silver and gold ounce declined and went negative in the case of silver, all contributing to increasing our cash position by $21 million year-over-year. We delivered strong cash flows from 2017. On Slide 7, you can see the standout performer was Greens Creek, which generated $101 million of cash flow, followed by San Sebastian at $51 million and Casa Berardi at $19 million. All of these numbers net of capital expenditures, while Lucky Friday consumed about $16 million of cash given that it was not in operation for most of the year. Silver operations continued to deliver strong cash margin of 100% of sales through the year or $17.25 per ounce, given that cash costs were basically zero. The gold cash margin is 65% of sales or $441 per ounce. We had a good fourth quarter financially, but there are a couple of things I want to draw your attention to on Slide 8.

Firstly, the income tax provision for the fourth quarter was $38 million and for the full year it was $20 million. The tax provisions result in part from changes arising from the U.S. tax reform that was enacted before year-end, plus the usual revaluation of the Canadian deferred tax asset, as well as the current income and mining taxes in Mexico. The long-term implications of U.S. tax reform are -- for us are positive given the alternative minimum tax provision has been removed and the overall corporate tax rate was lowered to 21%. Secondly, we had hedging losses of $4.7 million for the quarter and $21.3 million mostly unrealized for the year on our zinc and lead hedge book due to the rising base metal prices. Remember, our strategy is not to try and time the market but rather to lock-in healthy prices in the base metals to stabilize our revenue stream year-to-year. And we continue to take out contracts and what are about 10-year highs for zinc and 7-year highs for lead.

Turning to the balance sheet, our leverage ratio of debt to EBITDA remained about the same as last year at 1.3x. We are able to maintain that ratio because we live within our means, while EBITDA decreased due to Lucky Friday, we still generated free cash flow, thereby reducing the net debt denominator. We have $300 million in liquidity including the undrawn $100 million line of credit, while our only debt outstanding comes due in 2021. So I feel good about our financial position.

So in summary, we had a great 2017, and are very excited about the potential for 2018 and beyond. I will now pass the call to Larry to talk about our operations.

Thanks, Lindsay. Let's start with a look at our improvements in safety. On Slide 10, we have a chart showing the overall safety performance over the past 5 years in which the all-in -- all injury frequency rate has declined 55%. This is a statistic that we are very proud of and frankly, we will work hard to reduce again this year. Also of note, Casa Berardi recently reached 1 million man-hours without a lost-time accident. This is an incredible improvement from 2013, when we acquired the mine. Our Lucky Friday supervisory staff is also to be commended, having operated the mine since the strike began without an accident. Greens Creek as can be seen on Slide 11, had another strong year producing over 8 million ounces of silver at a cash cost after by-product credits of $0.71 per silver ounce. Contributing to this performance was record throughput of 2,301 tons per day. I wanted to give you an update on some of our innovation initiatives at Greens Creek on Slide 12. You can see a tablet showing the status of all the mines fans, we have installed 14 variable frequency drives on fans with plans to install more in 2018 with about 40 fans still in manual mode. The ventilation on demand system recognizes when men or machines enter or leave an area and adjust the fan speed accordingly. The fan is then set to either high or low-speed setting based on equipment type. When the miner is out of the heading for 10 minutes, the fan automatically turns off. We expect by running the fans at an average lower speed, when the stopes are inactive that we will save about $23,000 per fan per year. So, if all the fans were switched over, this is a savings of about $1 million per year.

Also, on the innovation front, we have one LHD capable of operation from the surface with a second one arriving in the second quarter. Moving on to Casa Berardi on Slide 13, this mine just keeps getting better and better. The 157,000 ounces of gold produced was the highest since we acquired the mine. This record production is primarily due to throughput, as shown on Slide 14. The mill operated at an average of 3,764 tons per day in the fourth quarter 2017 and 3,551 tons per day for the year, which is 825 tons per day more than 2016 and approximately 1,350 tons per day greater than the throughput at acquisition.

In 2017, open pit feed accounted for 38% of the mill feed. We have run the mill at over 4,000 tons per day on a spot basis. We continue to study increasing throughput further, but are careful to watch the recoveries to ensure that it does not come at a loss of ounces.

We have commissioned our first autonomous truck, as seen here on Slide 15 , running on the 985 level. An operator on the surface opens the chutes to fill the truck, then the truck goes to the shaft loading pocket, dumps itself and then returns to the chute to be loaded again. Other than stopping for fuel and maintenance, this truck should operate 24 hours a day.

Moving on to San Sebastian on Slide 16, you can see it produced 3.3 million ounces of silver and 25,000 ounces of gold in 2017 at negative cash costs after by-product credit.

Looking forward, we expect underground oxide production, as shown on Slide 17, to be ramped up in the second quarter and we are using the stockpile material to supplement production until it is ramped up. We also plan to restart limited open pit production from the North Vein in the second quarter. We expect cash costs after by-product credit to be higher this year because of increased costs from being mainly an underground mine and because of lower grades. We also expect to collect and process a bulk sample from the polymetallic Hugh zone, an area that Dean will talk about in a moment -- in 2018. San Sebastian has generated over $150 million of free cash flow in the past 2 years. We expect the oxide underground will, while making cash -- I'm sorry, we developed the oxide underground while making cash from the open pits and we expect to develop the sulfide underground while making cash from the oxide underground, working our way progressively deeper. I want to commend the salaried man and Lucky Friday -- the salaried men and women at the Lucky Friday on Slide 18, who have been working very hard during the strikes, maintaining the mine, doing some mining and development work and most importantly doing it safely,

Looking forward that the union membership ratifies the agreement to go to binding arbitration in March, we would expect the arbitrators ruling by May. If all goes well, we would expect the mine to start up shortly thereafter and the subsequent ramp-up to full production will extend into the fourth quarter. The ramp-up is expected to include the return of the hourly employees, training and infrastructure upgrades. The restart strategy will incorporate the implementation of the remote vein miner, the fabrication of which is proceeding as planned and we expect this machine will arrive in late 2019.

I invite listeners to read the cover story in the January edition of Mining Engineering magazine, which features plans for this innovative and exciting piece of machinery.

I'll now hand it over to Dean.

Thanks, Larry. Last week, we announced the highest levels of silver, gold and lead reserves in our 127-year history while keeping reserve price assumption steady. Successful surface drilling at Casa Berardi define new reserves containing 248,000 gold ounces in the proposed 160 and 134 zone open pits. In combination with gains in gold reserves at Greens Creek and San Sebastian, total gold reserves reached 2.3 million ounces, an increase of 13% from last year.

Silver reserves at Greens Creek and Lucky Friday increased and stayed stable at San Sebastian. Hecla continued with aggressive drill programs in the fourth quarter following successes at San Sebastian, Casa Berardi and Greens Creek. A list of drill intersections is provided in the appendix of the exploration release, which was issued on Monday. This will give you insights into the high-grade resources we are confirming and expanding and that we are getting a good start in replacing reserves and resources.

As you can see from Slide 20, Hecla reserve price assumptions of $14.50 per silver ounce and $1,200 per gold ounce are some of the lowest commodity prices used in the industry.

On Slide 21, you can see that over the past 11 years, we have consistently replaced or grown silver reserves from 50 million ounces to 177 million ounces in addition to the 138 million ounces of cumulative production over that time. This means we have actually added 263 million silver ounces in the past 11 years, with only 22% from the Greens Creek acquisition.

At San Sebastian, as shown in Slide 22, we have clearly defined mineralized structural trends, providing multiple opportunities to find new high-grade resources to extend the cyanide circuit milling, but also to identify deeper polymetallic mineralization to potentially justify a separate sulfide flotation circuit. You can see the current middle, north and Francine Vein pits in the yellow outlines, the surface projection of the new Middle Vein reserve, the new underground ramp under development in black and the green ellipses where drilling is defining new reserves and resources.

Let's highlight some of the recent drilling successes.

Slide 23 shows a longitudinal section of the Francine Vein. The expansion from drilling of the polymetallic or historic Hugh Zone has occurred rapidly as continuous high-grade mineralization extends 500 feet both west and east of the Hugh Zone resource as defined by the hatch pattern in the center of the diagram. High-grade polymetallic mineralized pods containing precious metal and substantial quantities of base metals, zinc, lead and copper are shallower to the west and closer to underground development. Additionally, we have expanded the mineralized zone 2,000 feet to the west of the Hugh Zone resources and are working to define a continuous polymetallic mineralized zone of over 5,000 feet of strike length. The longitudinal section of the Middle Vein in Slide 24 shows 8,000 feet of continuous oxide mineralization. But particularly exciting is the new high-grade polymetallic resources of the 97 zone that have been defined to the west and slightly below this oxide mineralization as noted in the black ellipse. Drilling has defined high-grade areas near the new underground ramp development, but also shows the potential to expand along the apparent horizontal control of this mineralization represented by the large red ellipse. This is similar to what we have drilled in the parallel Francine Vein, where a horizontal layer of polymetallic mineralization is below the oxide mineralization. There is a good chance that step-out drilling will continue to expand this resource in several directions.

At Casa Berardi, we had considerable drilling success again along the main trends, particularly near surface as shown on Slide 25 and we expect this to continue into 2018, potentially adding reserves and resources. The red arrows in the longitudinal projection -- longitudinal project the extension of many mineralized zones down-plunged throughout the mine and show the significant potential to extend the mine life. Underground drilling along multiple high-grade lenses of the 118 and 123 zones extended reserves and resources down-plunged and extended resources below the current workings. This year we plan to evaluate high-grade chutes identified by earlier surface drilling below the open-pit areas including the 124, 134, 146 and 160 zones. The plan view of the Casa Berardi mine, as shown on Slide 26, shows the current and proposed open pits in yellow and the areas of recent surface drilling in the green ellipses. We confirm the continuity and expanded near surface mineralization of the 124, 134, East Mine Crown Pillar in 160 zones defining their open pit potential. We are now drilling on new near surface resources to the west at the northwest-southwest area that includes the west pillar resource. So far, we have intersected broad zones of mineralization that look promising.

In addition, we have made it a priority to explore from surface the Casa Berardi Fault corridor on our extensive property. We have commenced drilling of the Casa West, which is west of the mining lease and the (inaudible) prospect to the northeast of the mine. At Greens Creek, as shown on Slide 27, definition and exploration drilling continue to have success at the east ore and west zones, which are higher in the mine and in time will become part of the mine plant. Lower in the mine, we are adding 2 resources along some existing trends in the southwest Gallagher and deep 200 south zones. Elsewhere in the company, we have resumed drilling of high-grade mineralized chutes at the Heva project along the Cadillac Break in Quebec.

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

Thanks, Dean. I started the call commenting on how the year was a record or near record performance in so many important categories. And this is on top of what we did in 2016, where we also set a lot of records. And I hope you get the sense from our presentation that we think 2018 can be another great year, just like '16 and '17 where we generate both growth and returns for our shareholders.

So with that, operator, I'd like to open the line for questions.

(Operator Instructions) And our first question comes from the line of John Bridges from JPMorgan.

I was just wondering some mining companies are forecasting sort of 0 tax rates going forward. So, admittedly, they probably have bigger NOLs than you had. I just wonder what sort of tax rate we should assume going forwards. And if we're trying to build out the tax rate, so composite tax rate, what rate should we use for the U.S., Mexico and Canada?

Okay. I'll let Lindsay answer specifically, but it is very true that the tax reform act with the removal of the alternative minimum tax now allow tax preferences that were before lost under that [augment] system are now available to us. So, we would expect 0 U.S. taxes, but -- and Canadian taxes will be with the -- our Canadian operations, we would not expect significant taxes. I mean really the only place that we have tax liability that is significant is really Mexico and I don't know what that rate would be. Lindsay, do you have that on top of your head?

John, the mining tax, Mexico will run around 40% with the mining tax included as well as the income tax. And if it helps you, those are for 2017, I'm talking about total expense, John, on the income statement for mining. And the mining tax was around -- income tax in Mexico for us is around $13 million and the mining tax in Mexico is about $3.7 million. So, you got about $17 million of expense in the '17. So, your view of Casa running at 40% and that'd be the total tax provision. For San Sebastian. [multiple speakers]. Whereas in Canada, we'll have -- again it's 40%, lot of it is deferred, because we have loss carry-forwards up in Canada. And the mining tax in Canada in '17 was around $5 million, excuse me, it was about $4 million.

How long will those loss carry-forwards last for in Canada?

Pardon me.

How long will the carry-forwards last for in Canada?

Not that long. I think I got another year or so.

And then just perhaps a quick follow-up in Mexico. Great to hear about the base metals you are finding. Some of those things are relatively narrow, 2 meters to 3 meters. You know what sort of scale of reserve do you need to create standalone sulfide operation?

Well, look, we're evaluating the ability to use existing mills in the area, and with that, that really does make this something that conceivably could move into production rather quickly, because there are mills with available capacity. So, we're really focused on that, as well as putting ourselves in a position to do the cross-cut into the Hugh Zone and do a bulk sample. Larry, anything to add?

I just add that,, pardon me, I'm just getting over a cold, but we have roughly about 6 years of resource in the Hugh Zone. And so it's really easy math to do the cost of haulage and rental of a mill versus standalone and we are really looking at -- we need about 9 years life before we really contemplate a standalone mill.

And our next question comes from the line of Brett Levy from [Seelaus and Company].

It looks like you guys are generating good free cash flow. Can you talk a little bit of any potential plans you might have in the capital markets and then also in the M&A area, what your priorities are whether it's more reserves or producing mines, more towards gold or silver or another metal? Just I mean, your strong performance gives you a variety of options and I'm just wondering kind of what you're thinking about in terms of some of your priorities?

Glad to do that, Brett. With respect to the capital markets, we are certainly engaged in following where the markets are, we looked at doing a refinancing of our existing bonds earlier in 2017. We'll certainly keep an eye on that market and see if there's an opportunity to -- at some point to do something. But fundamentally you're right, our operations have the ability to carry the debt that we have. And we have this long mine life that really gives us a lot of flexibility to decide when and how we change our capital structure. We're also very engaged with our banks and we had done an extension, I guess, of that revolver facility last year. And so we think we're in good shape from a capital structure standpoint, but just looking for ways maybe to optimize it. With respect to M&A, look, we're always in the M&A market looking at opportunities. We're very focused on silver and gold. Frankly, there is more gold opportunities than there are silver and that's just a reflection of really the lack of exploration that's happened in silver over the course of the last 30 years. So, we look at both, and I would suggest to you that we're not going to go too far field from the jurisdictions that we're in. So having said that, I think you can see that we're not in a position where we feel like we have to do M&A transactions, but we are prepared to do that where you can see the sort of money that we are investing in exploration and the success that we've had with that, the growth that we've had. And we have a large resource base that we're trying to move forward with Rock Creek and Montanore. But we're always engaged in the M&A market, we don't try to make a view that -- this is great prices to do a transaction, these are bad prices to do transaction, we really look at the quality of the asset, and if it has that long live characteristic and low cost, we'll capture the various price cycles that emerge.

And our next question comes from the line of Heiko Ihle from H.C. Wainwright.

Hey, congratulations on Casa Berardi, I mean as someone who was following the site back when it was still [horizon], I'm still very impressed that everything you are doing there and everything that's happened to the operation. So you are calling for 155,000 ounces, 160,000 ounces of gold now, all-in sustaining cost of $1,100 bucks. We were at -- I believe it was $1,170 something in 2017, $1,240 in 2016, just sort of -- besides the increase in size and scope, walk me through some of the other changes that you are still making at the site to juice more better returns out of this, because I'm quite impressed with this, I mean it's [3%] all-in sustaining cost, that it's going down year-over-year?

I think the most important thing is to continue to drive the throughput at the mine from both the surface and to give the underground the flexibility of operations where you can -- it has more places to go in order to manage it efficiently, and then improving recoveries, those are really the keys, and I think as we continue to find more material, it really increases the opportunity maybe to increase the throughput, but focusing on those things, Larry, what would you like to add?

Yes. We're just -- we've been able to run the mill at kind of its upper end, and by doing so, we now know where we start to see the solution or solids losses, and so now we have enough data, we can start to really optimize Casa Berardi in terms of what's the right throughput, what are the right cut-off grades both open pit and underground. And then dialing it down a little bit more granular, the underground, where -- as I mentioned earlier, we're setting it up so that it's getting more automated every day. Much of the ore now is going down to the 985 where it's going with an automated truck, as I mentioned to the shaft, once it gets to the shaft, the shaft has been automated. This was done by and large with in-house resources, we didn't bring in big contractors to do this. So we're getting a lot of automation wins, without a lot of expense. And then the open pit, one of the things that we have in front of us to actually claw back some more cost is doing contractor versus owner fleet analysis, and this is real early days, but by next year we want to have that analysis done and understand if we can reduce our costs in the open pit.

Got it. Okay. And then just for some help with our modeling here. You guys have a bunch of base metal derivative contracts, can you just remind me how long and at what pricing they are hedged, I mean, in the release, you have the 2018 to 2020 settlements i.e., given that 2020 already has fairly low numbers, I assume that thus far all this it goes would be -- there would have been accurate assumption, there is nothing in 2021 and beyond?

That's right. That's as far out as it goes because there is a -- there's just a lack of liquidity to go beyond sort of 2 years to 3 years. So [multiple speakers]

So, would it be fair to assume that at some point in time during calendar 2018, I should see 2020 fully set-up?

Yes. Over -- look over the course of 2018, you'll see more in 2019, and you'll see more in 2020. And we just -- we continue to layer-in positions, we have a pretty disciplined program where we limit the amount of hedging that we could do on any given day, any given week, any given month, but there is an expectation that as the price reaches targets that we have that we're going be putting in positions, and it's not a view that we're taking on the metals price, it's really a way of protecting those revenue streams giving us a visibility in those revenue streams, and so, yes, you'll see us continue to put in positions.

Our next question comes from the line of Cosmos Chiu from CIBC.

Phil, maybe first-off on San Sebastian here, I'm just looking for maybe a bit more guidance in terms of how to model the asset on a go-forward basis. Understanding that 2018 is a bit of a transitional year as you go underground, there's about 2 years’ worth of reserves right now in terms of the oxides, how does that sort of fit in, like how should we look at it?

Well, look, I'm going to continue -- there's -- I'm looking at Larry, there is a whole stack of papers that he has -- this is -- San Sebastian has been a just in time mine, since we started it up -- restarted it, and we're still in that mode. The good news about the sulfides is there is the potential that we would be able to really model the thing out for a number of years. So it does change the game if this bulk sample turns out right. But our expectation is to do the bulk sample this year and then with that, we'll have, we'd be able to really put together what this thing is going to look like, but Larry, what guidance do you think we can give at this point?

Well, we've given our production guidance for 2018. So we're looking at --

That's all coming from the oxides.

Yes. That's all oxide underground and so '18, we're looking at about 16 ounces per ton silver and [0.1] ounce per ton gold, and then --

But as far as modeling the polymetallic at this point --

Yes. Polymetallic, you can read our resource online -- invite you to do that. I'm going to switch from imperial to metric here, but the Hugh Zone is, it's roughly 200 gram silver, 1.7% copper, 2.4% lead, and 3.3% zinc, so that's the ballpark we're talking about.

And when you think about the sort of tonnage rate that we will ultimately mine this at -- what would you -- what range should these guys be thinking in terms of?

Yes. I don't see our tons per day moving around a lot. We're still going to be between 400 tons and 500 tons per day, whether -- so in any given mill, I should say, so right now the Velardena mill we are running at roughly 450 metric tons, I'm going to change units [multiple speakers] about 450 metric tons per day is what we're running the Velardena mill at and will -- we should run that into -- sometime into 2020 at that rate.

And that's all oxides.

That's all oxides, now we will switch here to sulfide and [multiple speakers]

Yes. Just stay within those metrics.

Stay in metric. So the Hugh Zone or the poly -- let me describe the polymetallic a little bit, the Hugh Zone Hecla has known about for a while since a decade, and there are some new polymetallic finds, right off the Middle Vein, actually just very west of where we're mining oxides now. So we haven't put that into any plan yet, and we probably will as finish up the drilling. The Huge Zone, we are looking at 5 or 6 years of production and ideally and as Phil intimated, this is kind of -- this is moving pretty fast and we need to finish up our own models before we provide something to the market, but ideally we would get the Hugh Zone online concurrently with the oxides, say, in 2019, so that we're producing both oxide and sulfide at the same time, and ideally, we'll keep back-filling the oxide feed, so that we keep going.

Yes, this is Dean, just a quick comment, because we've been talking about critical mass with the polymetallic. The resource that's shown in the latest reserve and resource statements. On the polymetallic side really includes that Hugh Zone resource, longitudinal, it is shaded in, it does not include some of the new discoveries of polymetallics in the Middle Vein or the extensions to the Hugh Zone. We're modeling that up now and so one would anticipate a larger -- quite a bit larger resource with the polymetallics. On the oxide end of the spectrum, we have drilled out to the east, what we refer to is the East Francine and East Middle and that carries a resource of about 2 million silver ounces. We've now infill drilled that, we've modeled it, and so we'll be looking at the economics of that, and so that is a possibility for future oxide production.

And let me just give you a little bit of history as to San Sebastian and the Hugh Zone, the polymetallic, 2005 we had identified this resource and why haven't we done anything with it, it was because it was too deep, relative to the workings that we had and when we looked at our plans there was just too much capital involved to access it. And we -- at that time, we were really viewing things where we needed to build the mill and we just said, jeez, that's too much risk that we're taking with too much capital and taking too long to get a return on it . So, what's happened since then is we've gotten deeper with the underground workings that we're doing off the middle vein that allows us really to almost be to the top of the Hugh Zone. So, now the capital outlays that we are having to make are so much less and we've come to the conclusion that there's mills that we can use in the area and we'll just do that rather than build our own mill and so this thing has changed dramatically, the economics of it have improved dramatically. And then on top of all that, the exploration is finding more mineralization. So, it's not been in our plans and I'm sure it hadn't been in yours and other investors. And so part of what we're trying to do is to just alert people, but that's going to change, it is going to change very rapidly just like the oxide did at San Sebastian.

So, Phil, I guess, it sounds like we have a good number in terms of guidance for the oxides in 2018. It's definitely the oxide is going to continue to 2019. There is good potential here coming from the sulfides, and there's exploration potential at both the oxides and the sulfides. And so on that, when should we expect a bit more detail in terms of the plans for the sulfides?

We're -- certainly, I would not expect, I guess what I'll say is that we'll keep you updated as the quarter goes, but I think it's probably the second half of the year and maybe even towards the end of the year before we're able to give the future plans, because as I said, it's -- this is sort of just in time stuff. We would expect over in the third quarter to do this bulk sample. So -- and we'll try to do it sooner than that, but we would expect by the third quarter to do the bulk sample. And so on the back of that, we'll be able to build our plans.

And then talking about timing here , I may be switching gears a little bit, it sounds like there's progress being made on Lucky Friday here. And Phil, you mentioned about the vote coming up in March and then the arbitration in May as well. If all things sort of go well, what kind of restart on Lucky Friday could you be looking at in terms of timing?

It's like better quarter to see the thing, restart may be quarter and a half. Is that fair, Larry?

Yes, as I said earlier, we would expect full ramp-up in Q4 assuming May arbitration was successful, that's an assumption, but that's the best we have right now. We will take advantage of any restart to do some infrastructure upgrade. There is a loading pocket in the silver shaft that we'll repair probably with a contractor and there -- our emergency egress shaft was commissioned in 1960 and we'll do some electrical upgrade there. So it's a good opportunity actually when we restart the mine to do some of that work.

But let's not get ahead of us. There has to be a ratification by the membership of the -- of this path and then -- but if they should do that, then we clearly will either have the old contract or the new contract, but we'll be back at work.

And Phil, is it just a simple majority that you are looking for?

I don't know what their rules are.

Okay. And maybe one last question from here, more on the technology here, the remote vein miner that you're putting in place or assembling at this point in time. I guess more specifically for Lucky Friday right now, how is it different than some of the remote control mucking machines that we see underground these days? And I guess the other part of the question is can this machine be used at Casa Berardi, can it eventually be used at Greens Creek?

So, this machine is a mining machine, not a mucking machine. It actually eliminates, replaces drill and blast and so it cuts the rock, it's taking tunnel boring technology.

So it's a TBM?

Yes, to cut the rock. But the difference is, it's in the stope, right, this isn't for development, that's not to say it couldn't be used for development, but it is, what we're designing it for is to do the stope, is to actually mine the stope. As far as its application at other places, probably it definitely would not have an application either Casa or Greens Creek, but it conceivably could have an application at other types of operations that have the geometry that the Lucky Friday has and there's probably some epithermal vein systems that it could fit. Larry?

Yes, I mean it's -- you have to have the right rock conditions in terms of rock hardness and abrasion, those are the 2 things that really determine whether cutting technologies work or not. Interestingly, the Colorado School of Mines has a test facility. So we sent down very large slabs of rock, had them cut them and Lucky Friday is quite amenable to this technology. If you think of perhaps a tunnel boring machine and how those work and how they turn side to side, if you will, in a circle, say, clockwise, while this cutting machine will turn in the long access of the machine. So, I invite everybody to look at January's Mining Engineering, it's a great article and really by the way this isn't the first machine in the world. This will be #2, Anglo Platinum has one running in South Africa now.

So, this is going to replace your drill jumbos, this is going to replace your explosives with your handful...

We will test it to see if it will replace that .

Okay. Could it potentially replace your LHDs as well?

No.

Is there a conveyor behind it? No?

There's a conveyor behind it and right now it's contemplated that that conveyor will discharge into an LHD. It's worth mentioning the principal goal of this exercise is to actually, as the name implies, run everything remotely outside of the stope.

And what drives that more than anything is safety. It's trying to manage the stress of the Lucky Friday. And so by having machine cut rather than drill and blast, there's better ability to manage it and then by not having to have someone there at the face that makes it safer.

Great, thanks. I will go -- I will read the magazine, the article, I think Mike has sent it to us. So, I'll come back later on if I have any other questions, but it sounds really interesting.

No it is, it's -- and it's just an example of the sort of thing that Hecla is trying to do, sort of, across our business and we're able to do that frankly because of the sort of margins that we have and the life -- the mine life that we have.

And our next question comes from the line of Ryan Thompson from BMO.

Cosmos kind of asked my question already. But can you just talk about the key differences between if we assume that this dispute goes to arbitration, the key differences between the 2 sort of contracts and how we should think about that from a sort of cost perspective?

Well, there is 2 key differences -- I mean there's a number of key differences, but the sort of starting point really is schedule, the new contracts, essentially puts the mine on at 364-day-a-year schedule, while the old one had a number of things that were -- where they didn't have to work and so there is maybe a 10% difference in the number of available days with all -- the whole mine working. The second one is where people work and the ability to determine the headings that people are in. The old system allows the most senior miners to make that determination. The new system allows management to make it. And that new system frankly is the system that we used at all mines that we're aware of in -- really in the U.S. and in Canada. So, we're not asking. We're not trying to do something exotic. But from a cost perspective, we're not making -- giving any guidance on what improvements we might have missed, but I think over time we will see improvements, but it's primarily because of schedule.

Okay, and how confident are you that the union workers will actually ratify the decision to actually go to arbitration?

We don't have a view as to whether they will or won't. It's up to them and we understand that and we will accept whatever decision they make.

Okay. And just one sort of last one, kind of circling back to the talk on the rock cutting technology, this like if you went to the old filed CBA agreement, is there any impact on the ability to implement that technology or can that be done regardless?

No, we can do it.

And our next question comes from the line of John Tumazos from John Tumazos Very Independent Research.

Phil, I'm a shareholder, and love everything you're doing and I'm frustrated the stock market doesn't like it as much as I do. Do you expect to have a patient strategy of market recognition, where say gradually the Lucky Friday strike settles, silver rebounds, Montanore and Rock Creek get permitted, you've different advances such as your 3 exploration asset releases the other day. Or might you do something to try to trigger a faster recognition like a share buyback or selling one asset to focus on others and buying some stock or something like that?

I think it's more the former, John, than the latter, but look, we are always evaluating how we can deliver value to shareholders. So, we don't view the other -- the second approach as -- being out of hand. So -- but more likely the former.

The market seems to not understand the several things that you have going on, doesn't seem to digest everything and try to...

I think that's a fair comment and I'm like that -- I think it really starts with reserves, right? The fact that we calculate our reserves at so much lower of a price. I mean we -- if you think about it every -- for the most marginal ounce we have is going to have $2, $3, $4, $5 of margin relative to peers and the market doesn't seem to pay enough attention to that. So, the quality of our assets and the life that they have allow us to do the technology that we're doing to generate. You think about the fans, just the fans at Greens Creek, $1 million a year that's going to be over the next 10, 15 years is a huge benefit to shareholders that the market doesn't seem to pay much attention to, but I think over time they will and we'll keep at it.

And our next question comes from the line of Trevor Turnbull from Scotia Bank.

I'll try and keep my questions brief, I just had a couple of different ones. One last thing to touch on with respect to the arbitration that's coming up. I was just curious, was this kind of a mandated outcome or was this something one or the other of your parties proposed that you go to arbitration?

Well, it was a function of this unfair labor practice hearing that it was a -- it evolved as a potential solution, because realize that there is no money that's involved in this hearing that we had about the implementation that we made of the new contract. So we did that March 12, I guess, and on March 13, they went on strike and so I guess I would just characterize the judge as having encouraged us to try to come to some solution and the arbitration is, it's less than a perfect solution, because you either going to go -- it's either going to go one way or the other, but at least it's resolved. So for everybody, it just seems like that's the best way to go to just let a third party pick one or the other.

Yes. It seems like a pragmatic way to move forward anyway. I had another quick question, when you mentioned M&A, you always keep your eyes open, more opportunities showing up in gold. What type of opportunity would meet your criteria though on the silver side, you said there just isn't a lot out there and I would concur, but just curious kind of what would catch your attention on the silver side in the M&A space? Are you talking anything from production or new discovery to development stages, is it kind of along that spectrum or?

Yes, look, we're capable of doing anything along the spectrum and -- but fundamentally we're looking for things that have the potential for long mine lives and low costs. And if it doesn't have that, then it's not something that we're really going to focus much attention on.

Great. And then finally, I -- a change in the subject one more time kind of a housekeeping question with respect to CapEx sustaining. I think you gave some consolidated figures, but can you break that down a bit, we are just trying to get a better handle on where the CapEx is going this year?

So I think the -- probably the best place to go would be Page 25 of the press release, which gives you the calculation of our cash cost and all-in sustaining cost guidance, and it has had a sustaining capital by mine in there.

Okay. And does it also breakdown just non-sustaining, but just new CapEx?

Basically, we put everything in sustaining.

Okay. And then on the subject of CapEx, Larry was mentioning that if everything were to work out with arbitration such that you are headed back to operations, he would take advantage to do some work there at Lucky Friday, any sense of some of that stuff he was talking about the electrical on the egress, the loading pocket, what kind of CapEx number that would be?

Any guess, Larry, do you remember?

This is just a vague recollection, but I think it's a -- in the order of $2 million.

Our next question comes from the line of Matthew Fields from Bank of America.

I was looking at Page 25 of your press release, and I noticed that there is no Lucky Friday CapEx in the guidance. Aside from that $2 million of sort of improvements, if you're ramping up, let's say from May to December, can we expect some augmentation to your $95 million to $105 million CapEx guidance for 2018?

Yes. You certainly could expect that. Order of magnitude, I would say it's under $10 million, but Larry, is that right, or am I -- if we do go back to work, how much capital would you expect that we would spend at the Lucky Friday in 2018?

Full-year -- so right now full year would be about $18 million.

So, I said that it's somewhere less than $10 million, do you think that's about right or -- ?

Yes.

Call it roughly $10 million.

I mean, we're just shooting from the hip, not knowing exactly when we can go back to work. By the way, you asked a question about how much the hoist upgrade in the loading pocket.

Trevor did.

Oh sorry, Trevor did. Let me give a little more precise answer -- that's -- so there is an emergency generator, it will get installed as well, and that is -- so it's a little bit under, it's about $8 million total.

So, $10 million plus $8 million for '18 [multiple speakers]

No that -- the $10 million is all inclusive.

So, it's a roughly $10 million, if we go back to work.

So $8 million of augmentations plus $2 million of regular for $10 million total?

Yes. So what we're saying is that, if we would run a full-year, we would have spent $17 million to $18 million, and we're just proportionate of that, $10 million.

So some of those expenditures that you're talking about would fall into 2019 as well or --

So the hoist upgrade and the loading pocket work are ongoing now, the fabrication is being done. We are spending money on that now, actually, we might have even spent a bit in 2017. So no, we are -- we've been pushing that work for just in the anticipation that we need the -- all the fabrication complete by the time that the mine restarts.

Okay. So, I've heard a lot of numbers, maybe we can take this offline.

Yes. But think of it -- I'm going to be surprised just knowing that the timing of things, I'd be surprised if we're able to spend much more than $10 million in capital at the Lucky Friday in 2018, so that's -- at this point that's the number I would use.

Okay. And then switching over to sort of the future, I saw the updates on Rock Creek and Montanore, it sounds like Rock Creek is kind of in the pull position in terms of timing, I know there's a long way to go, but can you maybe give us a sense of sort of when we're getting close enough in terms of permitting for feasibility studies, engineering to where you think we could see some actual sort of construction dollars being spent?

Look, it all depends on when the decision comes out and can see, and then depends on whether we're allowed to go forward or if there is an injunction. If there is, if the decision comes out in the course of the next few months and there's no injunction, then you could see us doing some work late this year, if not, then it's a 2019 event. We have not projected any expenditures for that in the guidance that we've given, so we're just waiting to see what the results will be. Having said that, we are getting geared up to be able to move quickly if we are given the authorization to do so. We have a team in place to manage that.

And our last question comes from the line of Lucas Pipes from B. Riley.

Most of my questions have been asked and answered. I wanted to follow-up on the M&A side and if there is, maybe a specific geography that you would be more focused on than others. And then also if you look at the valuation spectrum across the industry, and I'm sure you're seeing valuations on an asset level versus a corporate level, how would you say they stack up?

So Lucas, are you still on the line?

I'm here. Can you hear me?

Yes. So repeat the second part -- second question.

So the second part of the question was in regards to valuations. Obviously, there are asset level valuations out there and then we have corporate level valuations be it for Hecla or some of your peers in the public markets, and I was curious, how those valuations compare from your vantage point?

Okay. That's great. So to the first question on the M&A, the jurisdictions, first, are the jurisdictions that we're in, right? We have lots of knowledge, we have infrastructure, we have the ability to leverage what we have. Secondly, and when I say jurisdictions, I mean specifically at the Abitibi, Alaska; Idaho; Durango, Mexico; and sort of Zacatecas, that's sort of those areas. But then beyond that, we certainly are looking at those jurisdictions where there are good geology where you have the potential for those long-lived low-cost mines, and so you include Nevada and other places in Canada, British Columbia, the Yukon, other places in Mexico, yes, Ontario. So those, I would say take 90% of our attention, and then there is the occasional thing that is in other parts of the world that we go -- it's worthwhile us taking the time to evaluate. With respect to the valuation question, look we clearly believe the market undervalues long-lived low-cost assets. And if you look at those companies that have been most successful, it's been companies that have had that characteristic. I hope it's not out of school to mention another company, but I have a lot of respect for Agnico Eagle, and they've built off of LaRonde, which had that characteristic and then they've added assets to that over the course of the last 17 years. And so, we view that the market does not put the right value on that type of asset, so when we do our math, we see a lot more value in Hecla than where the market has put us. With respect to competitors, to the extent they have those sort of assets, we think they are compelling competitors. To the extent they don't, I know from my experience in the industry that you get forced into doing things that you might not want to do, because your mine lives aren't long enough to take the time to -- and care to do things in a more methodical way or -- anything Lindsay, you want to add to that?

No. I think that's nailed it.

Okay. Thanks very much. Well, we've gone longer than we typically do. We appreciate the interest and if you have any more questions feel free to give Mike or I a call. Thanks very much. Have a good day.

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