Hecla Mining Co (HL) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Third Quarter 2018 Hecla Mining Company Earnings Conference Call. (Operator Instructions)

At this time, I would now like to turn the call over to our host, Mr. Mike Westerlund, Vice President of Investor Relations. You may begin.

Thank you, operator. Good morning, and welcome, everyone, and thank you for joining us for Hecla's 2018 third quarter financial and operation results conference call. Our financial results news release that was issued this morning before market opened, along with today's presentation and an exploration release that was issued on the 6th of November, are available on Hecla's website.

On today's call, we have Phil Baker, President and CEO; Lindsay Hall, Senior Vice President and Chief Financial Officer; Larry Radford, Chief Operating Officer; and Dean McDonald, Senior Vice President, Exploration.

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

These risks could cause results to differ from those projected in the forward-looking statements. In addition, during this call, we may disclose non-GAAP financial measurements. You can find reconciliations of these measurements to the nearest GAAP measurements in the accompanying presentation, which is available on our website at www.hecla-mining.com.

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

With that, I will pass the call to Phil Baker.

Thanks, Mike, and good morning, everyone. Excuse me for my rough voice; I had a bit of a cold. I want to start by acknowledging that while gold and silver declined 7% and 14%, respectively, since the beginning of the year, almost all precious metals equities, including Hecla, has -- have declined more. I don't think they should have declined that much, particularly Hecla, because with our strategy of having long-lived, low-cost mines in great jurisdictions, we can stay the course in practically all price environments.

I cannot emphasize how important that is for running a sustainable business. Examples of this are 10 years ago when we acquired Greens Creek and 5 years ago Casa Berardi. Since then, we have diligently improved the economics of these mines by making them more consistent in tonnage and grade and at higher throughput. Casa this year, and particularly this quarter, demonstrates the success of the strategy, and it's also a recognition of our success by the industry, as seen on Slide 3... That's where you'll see an image of CIM, which is the Canadian Institute of Mining, Metallurgy and Petroleum's, September-October cover story describing how our expertise and willingness to bring technology to Casa has made it a leading light for productivity gains in our industry.

This was our playbook at Greens Creek and is what we are doing at the new Nevada operation in San Sebastian and ultimately the Lucky Friday. Like Casa where we have made very small incremental investments over the first 4 years of ownership but a big investment of expertise and management focus, we will be doing the same at these 3 properties.

In roughly 100 days since we started our ownership of the Nevada properties, I'm struck by the improvements we have already made. When I was on the ground a couple of weeks ago, the difference was significant: how we were managing the water; the trucks coming up the ramp in steady succession, making us pull to the side; the daily development advance rate improving by about 50%. As you will see in our estimates, we have elected to take a step back in production to invest a bit more in development to get the mine on track for the second half of next year when we expect to be mining almost 40% more ore tons. We are doing this for a number of reasons. But what has become clear to me is that we run the risk of sterilizing ore if we try to produce too much now. We consciously gave up about 1/4 of our third quarter production because it would have sterilized high-grade mineralization that was not previously known to be above it.

It turns out a stope that was in a configuration that's known at the mine as an upper, which is the highest level expected to be mined in the mine plan, turned out to be in the middle of what looks like to be another 200 vertical feet of mineralization. Much of this would have been sterilized if we had followed the plan. So we're going to take our time, but the time should not require a substantial investment. It just means we make 10% to 15% less production than we thought. Being prudent now should make the Nevada operations better in the second half of 2019 and beyond.

Speaking of 2019, Larry is going to talk about the good work and what has been done to take a great mine like Greens Creek and make it even better. Basically, it's a better mine design that shows increased production while reducing development and overall equipment requirements while likely extending the mine life.

Finally, I want to emphasize something that was in our exploration release: our announcement of the price assumptions we are using in our reserve calculations for 2019. This is a subject that I don't think gets enough attention. The determination of reserves is the start of the value creation process for a mining company. Many companies will use prices that are significantly higher than spot. Our price assumptions are all around spot or lower. These are among the most conservative price assumptions in our industry, if not the most, which means we have the most margin in the ounces we produce.

We've refined our annual production and cost estimates, as you can see on Slide 4. Silver production has tightened around the midpoint of original guidance. On the gold side, Casa is at the upper end, but we lowered the Nevada outlook, as I mentioned, so gold is at the lower end. Cash cost after by-product credits are substantially lower for silver, and all-in costs are slightly lower. Casa has lower cost per ounce -- has lower per-ounce cost with increased production while Nevada is higher because of the lower production. The capital exploration and other expenditures is about the same as we expected.

So now I'll turn the call over to Lindsay for financial review.

Thanks, Phil, and good morning to everyone. We ended the quarter with $60 million in cash and our debt unchanged from previous quarter of $534 million. Also, in early November, our revolver increased to $250 million from $200 million as per our agreement with the banks when we acquired the Nevada operations. We have no intention of drawing down on the line other than for working capital needs, and we don't use the line as a long-term source of borrowing.

As noted in our release today, we monetized our base metal hedges during the quarter, realized some $32 million in cash. It's something we do periodically and has worked out well. For the quarter, we generated $28 million in cash flows or $42 million before working capital changes and expended $40 million at our operating sites on capital additions and development activities. So basically, a flat free cash flow quarter.

I'm quite pleased with the balance sheet. We have completed the purchase of the Klondex assets, and our liquidity is at comparable basis to before the transaction with the same amount of debt outstanding with enhanced opportunities to generate increasing cash flows in time from our Nevada operations. We believe it to be a credit-enhancing transaction, and now we'll get to the business of delivering those cash flows.

On Slide 6, you can see the comparisons between this quarter and last year's quarter of some of our financials. The 3 months ended September 30, 2018, we reported $143 million in sales of products, about the same as a year ago despite lower prices. Cash provided from operating properties is $28 million, about the same as last year. And as one of the measures we watch closely is free cash flow or cash provided by operating activities less capital additions.

For the quarter, we spent $11 million more than we generated and year-to-date only $8 million. That is despite undertaking the most quarterly exploration in our history and absorbing acquisition costs associated with Klondex. Without those, we would have been flat.

Turning to cash cost and all-in sustaining cost after by-product credits. While these costs are higher for silver and gold, it's really a function of transition of both San Sebastian and the Nevada operations. Greens Creek still had an incredibly low cash cost after by-product credits of $1.92, while Casa had the lowest cash cost after by-product credits since we've required the mine.

The all in costs are really an anomaly as they were impacted by a little bit lower production with a little bit more capital at Greens Creek. Like the cash cost, Casa's all in sustaining cost after by-product credits of $896 per gold ounce is the lowest since we acquired it. Casa has had a great quarter and a great year.

At San Sebastian, we have exhausted the high-grade stockpiles from our surface mining, so production has declined, increasing the cost, and until the underground fully comes on -- fully comes on -- I'm sorry.

On Slide 7, turning to diversified revenue. On Slide 7, you can see we maintained the diversified revenue stream, with gold at 55%, silver at 25% and lead and zinc has declined to 20%. Greens Creek continues to be the dominant source of revenue.

In summary, we had a good quarter. We generated good EBITDA despite low metal prices. We have invested in our business and expect this investment will drive cash flows up in the coming quarters.

I will now pass on to Larry to talk about operations.

Thanks, Lindsay. The third quarter was busy with integration of the Hecla Nevada operations following the Klondex acquisition in July. In the background, Greens Creek and Casa Berardi are both having a good year, both in terms of metal production and costs. So I'm just going to focus on these 3 properties. I'll forego with discussing Lucky Friday and simply mention that San Sebastian is in a development intensive phase.

Let's talk about Nevada on Slide 9. Nevada mines have a good safety record, and as safety can translate to productivity, we have a good base to build from. After taking control of Klondex, we quickly confirmed that we have -- what we had concluded in due diligence, which is that the Midas underground lost money. We began the wind down of the underground, buttoning up the mine except for the working phases that were already developed and we transferred men and machines to Hollister and Fire Creek.

As we've said in our last quarterly call, we completed a comprehensive mining plan, which confirmed our premise for the acquisition. Fire Creek and Hatter Graben at Hollister are the keys to unlocking value. And we are dealing with the developments started at Fire Creek. As we began to ramp development back up, we encountered existing foreground conditions, many development phases were in unconsolidated tuff, which is basically clay rich, add a little bit of water and the conditions turn to mush.

We are addressing this. We have provided tools and techniques to manage the conditions. Our Vice President of Technical Services provided techniques for fixing the ramp and drift road base, which I talked about on the last call.

The roadbeds we installed are still in place and holding up, but dealing with the roads is just dealing with what's below your feet. We moved a shotcrete plant from Montana to Nevada. It's now operational and shown at Slide 10. Immediate application of shotcrete to the working back and ribs after blasting is standard in Nevada and Klondex had no onsite [shotcreting] availability.

As frustrating as the poor conditions of the mine were on acquisition, we remind ourselves of 2 things. One, the failure of Klondex provided the opportunity for Hecla to acquire 2 of the highest graded properties on the planet. And second, any review of the exploration potential can only conclude that we're in the right place at the right time.

I will not talk about Hollister other than to say that we project that it will produce for another year without any of exploration success, and we believe that exploration success is probable. We immediately began development of Hatter Graben upon acquisition and we're already developing to the point that we projected to be at the end of the year.

For the future of Fire Creek, we have concluded several things. First that the key to ramping up ore production is in ramping up development. Second, to introduce the resource and the feed grade, we have to open up the ore body north and south on strike. Our plan for development is shown on Slide 11. We have deployed men and machines from Midas to ramp-up the development. We plan to soon be testing a rented road-header in the softer rock types. We used such a machine for our Colorado Bulldog mine development with success.

We project by the middle of next year, we will have recovered the Klondex development deficit and have increased the annualized development rate 30% from 10,000 feet to 13,000 feet and ramp-up the ore production from the mine. We also expect to have drill stations to drill to the west, south and north, potentially opening up new high-grade zones.

And as for the high cost per ounce in the third quarter, one should note that Hecla acquired Klondex towards the end of July. The high cost per ounce reflects low production more than anything. Reducing the cost per ounce means improving production.

That said, cost savings initiatives included the elimination of Klondex corporate G&A and the shutdown of the Midas underground. The higher cost per ounce also reflects the more than 5,000 ounces that came from the Hollister stockpile because these stockpile ounces were bought at fair market value on July 20th and these ounces do not have any margins associated with them which tend to distort the financial results.

Hecla is in the process of creating budgets for 2019 and our goal for Nevada operations is that the operations are cash neutral, including Hatter Graben development and the Fire Creek development ramp-up.

Let's talk about our cornerstone asset, Greens Creek, on Slide 12. In the ongoing 2019 and life-of-mine budget development, high-grade resources and reserves that sit high in the mine are projected to come into production in the next few years, bringing production forward in the life-of-mine plan and cash flow forward as well. These changes are basic blocking and tackling and incredibly impactful to Hecla.

On slide 13, I want to highlight how the new mine plan is improving operations with the East Ore development. You can see how the former mine plant on the left required significant new development to access this ore. And on the right hand, you can see how the new plan capitalizes on existing access.

Changes such as these have removed 15,000 feet of development from the life-of-mine plan. I take my hat off to the mine team for their creativity. This should add significant value to what is already our most important mine.

Casa Berardi is a success story. In 2013, Casa Berardi looked much like Hecla's new Nevada operations on acquisition: changes needed technically, operationally and in terms of leadership. The market considered the underground operation as too low-grade to make money.

Slide 14 shows our improvement over time. Hecla completed the leadership team, completed the shaft deepening project, completed the migration of mining to the eastern ore zones, improved management of the mill and brought the open pit ore into production.

You can see the trend line for monthly milled tons. You can see that when we first acquired Aurizon, we had months with almost no production. We're very proud, or they say in French, fier, of Casa Berardi and how well the operation is now running.

A recent article in CIM magazine, mentioned by Phil earlier, highlighted the automation of the underground. Ore and waste are directed through raises to the 985 level, where an automated truck -- soon to be 2 trucks -- haul rock from the 4 chutes to the shaft pockets and then on to the hoisting system, which has also been automated.

Slide 15 shows the control room for the automated trucks and for monitoring light vehicle status of all machines. Other companies are now visiting Casa Berardi to learn from our advances. Our cost per ounce metrics reflect the ongoing improvements that have been made at the mine. Casa Berardi reflects our belief that Nevada operations will be transformational for Hecla.

I will now pass the call over to Dean.

Thanks, Larry. Hecla continued with aggressive drill programs in the third quarter at our mines and properties and the list of drill intersections is provided in the appendix of the exploration release, which was issued on Tuesday.

We spent $12 million in the third quarter, our highest quarterly ever and had some very strong results at Greens Creek, Casa Berardi and San Sebastian, which are laid out in the release. There's a lot to say about the exploration for each of these and other properties, but I'm going to use my time to talk about our initial exploration activity in Nevada as we continue to accelerate drilling at the Fire Creek and Hollister mines and examine several impressive opportunities on our properties.

As Larry mentioned, underground development is being prioritized at Fire Creek to accommodate increased production and provide drill platforms.

Slide 17, shows the concentration of activity that occurred around Spiral 2. Drilling has not been completed around Spirals 3 and 4 not because of lack of mineralization, but lack of drill platforms. This problem will be corrected in the near future and underground drilling will increase significantly in 2019.

Near Spirals 3 and 4, definition drilling has shown continuity and extended mineralization up tip of current resources. Drill platforms along Haulage 9 and between Haulage 3 and Spiral 2 will be used soon to upgrade and expand a number of very high-grade targets. Our strategy is to give ourselves room to explore, so the development along Haulage 9 is important, as is the surface exploration shown in the next slide, 18. Many areas near Fire Creek mine had active surface exploration programs during the quarter.

On Slide 18, you can see recent drilling results at the Zeus target to the northwest of the mine, which intersected multiple high-grade veins that are extending mineralization to the south. Initial high-grades are spotty, but the structures and alteration are very strong and impressive. Surface drilling will continue and follow-up underground drilling will be reachable from Haulage 9.

There is more on Zeus in the exploration release. Drilling of the guard shack and far view targets are in progress. And further south, an IP resistivity, geophysical survey at South Notice is complete and exploration holes are planned to test the geophysical and gold soil anomalies identified.

The location of drill programs at the Hollister property are shown in Slide 19. Definition drill programs at Central Hollister, East Clementine and Gwenivere veins have confirmed a series of high-grade veins near mine infrastructure that are being incorporated into mine planning and indicate these veins may extend significantly further than anticipated.

Surface drilling at Rowena has identified new veins in a high-grade blanket zone near the end conformity that opens several new targets. To the east across the Clementine fault is the Hatter Graben. Continued drilling of the Hatter Graben is designed to extend mineralization and provide hydrological information critical to the upcoming mine development. Extensive high-grade veins at the west end of the Gloria vein resulted in the acceleration of underground development to provide a drill platform to evaluate this extensive vein network in the fourth quarter.

This is just the beginning. The real drilling will start next year when the development drift will provide drill platforms so we can drill to the east of the known resource at Hollister and across the Clementine fault to confirm and expand resources in the Hatter Graben to the east.

There is a lot more to say about the rest of the programs, but I will let you review our exploration release instead.

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

Okay, thanks, Dean. Before we take questions, I want to point out 5 things that illustrate how we are positioned. First, Greens Creek is a mine that has generated over $1 billion of free cash flow over the past decade and is getting better with higher grades coming in 2019, 2020 and beyond. As Larry said, we see the mine having significantly more value than we thought. I mean, this could be plus 20% more value.

Second, Casa Berardi is realizing the potential we saw in 2013 and is leading the way with many new technologies. Third, San Sebastian, Nevada operations and Lucky Friday all have potential to be consistent and meaningful cash flow contributors for years.

Fourth, our exploration has more potential than any time in the last 20 years and this is after we've added more than 250 million ounces of silver and over a million ounces of gold in the last decade. But it's better now because really it's because we have in Nevada 110 square miles of super high-grade targets that have the potential to be company changing like what you've seen [Coeur d'Alene Lake], like we've not had this before.

Finally, Hecla and the management team has been at this a long time and we understand the risk of debt and we will reduce expenditures as needed to manage it.

With that, we are now happy to open the line for questions. Operator, please do that.

(Operator Instructions) And our first question coming from the line of Jacob Sekelsky with Roth Capital Partners.

You've clearly done a nice job with your base metal hedging program, which showed in this quarter. So well done there. Are there any plans to put another book in place over the next quarter or so or are there more specific levels you're looking for?

We certainly will re-hedge. What levels we re-hedge at will be determined kind of as we go. There is no particular targets that we have. Basically, when we look at our exposure, we see more upside price potential than we do downside. So that's really the way we'd look at it. And when we've monetize this hedge, it's really just moving the revenues forward that we would have received anyway. And we get the opportunity to re-hedge. So we think it's a win-win for us.

And switching over to Nevada, it looks like $7 million was spent on development work there. Is this is a level that you're comfortable with going forward or do you expect this to trend higher over the next few quarters as the Hatter just begins and throughput rents at the Fire Creek?

Well, remember we had the completion of the tailings in Nevada, which is also a portion of the expenditure. But when I think about how much we will spend in a quarter, Fire Creek roughly on development it's roughly $5 million and on Hollister...

So if I can. Hollister is -- the Central Hollister isn't -- we're not looking to do really any --

Yes, there's very little development.

It's very little. But the Hatter Graben should be $8 million or $9 million next year.

Yes. So that's the way to think about it. The tailings dam goes away, the development costs associated with the tailings dam, the construction of that tailings dam. And we now only have Fire Creek and the Hatter Graben in development.

And just lastly, at San Sebastian, when you think you'll see results from the upcoming sulfide bulk sample?

So it will be end of the first quarter, early in the second quarter. So we'll start to deliver the material late in this year. But it's I think 3 or 4 lots that we will do. So it will take a bit of time.

And our next question coming from the line of John Bridges with JPMorgan.

I just wondered -- you point to a 40% increase in throughput in the second half in Nevada. In order for us to have a decent shot at earnings for the first half of next year, what sort of ramp-up do you expect? Is it just going to be flattish until the second half as you continue to invest in sort of strengthening the productive capacity of the mine or will there be some upward trend prior to the second half?

There certainly is an upward trend during the course of the first 2 quarters of the year. So first quarter less than the second quarter. Second quarter less than the third. Or another way of saying it, second quarter is going to be more than the first quarter.

And the changed development plan in Greens Creek, how much is that going to save you next year in terms of cash flow? Will it be a -- what sort of sustaining capital do you expect to...

John, we're still in the budgeting process. But it's not a material change in the capital for next year and it's really is over the course of -- what was planned to be spent over the course of about a 4 or 5 year period that changes. So each year it's incrementally not a huge reduction. I think what's more important is in the aggregate you're doing less development and you're mining areas that are higher grade than -- earlier than what we had originally in the plan. It's really a -- it's quite amazing when you think about a mine that has been around 30 years that the engineering team there would after 30 years figure out a better way of doing the mine design. It's clearly a group of guys and women that are looking at how to do stuff better. As Larry said, he took his hat off to them. I do as well. It's really a great job.

And then we had the elections the other day and they came out against the toughening of the mining rules in Montana. Any sort of -- anything, any takeaways that would affect your longer-term plans there?

No, I -- that's all positive as is in Alaska. There was an initiative that would have really shut down future development of mines in Alaska. And so both of those lost and lost by a pretty wide margin. So it's quite positive.

And our next question coming from the line of Mark Mihaljevic with RBC Capital Markets.

I guess first off, so you say you're going to be developing over to Hatter Graben next year and kind of start exploration along the way. Just trying to get a sense of what the outlook there, assuming things are positive, would be beyond that? Is there something that could actually start to contribute in 2020? Or should we really assume it will take another year of kind of figuring out everything, getting all the near mine development done and then start to contribute in 2021-type thing?

If we're able to see production from the Hatter Graben in 2020, it will be in the latter part of the year.

Yes. Okay, that makes sense. And then so with Hollister kind of wrapping up next year, it'll -- you're comfortable that Fire Creek will carry the load on its own through, call it, 2021. It's basically the last man standing.

What we're anticipating is that Hollister will continue to extend based on the drill results that we're seeing. It's certainly possible that it might not. I mean, it's very, very tight. But that's what we're -- that's what we think will likely happen. And to the extent it doesn't, then we've got a lot of development that needs to happen within the Hatter Graben, and so men and materials would move there. Anything to add, Larry, to the...

That's pretty much it.

Yes. I guess, so kind of thinking about the Nevada operation, it's going to kind of like Casa where you'll get -- the first little bit is really a challenge, and that's kind of what you're working through now, then kind of breakeven for a couple of years and then really start to hopefully see some gravy in 2021-type thing. Is that fair to say?

I think that's -- yes, I think that's right. I think the curve that you're going to look at is very similar to what we saw at Casa. If you look at the first 3 years, the incremental investment that we made was $16 million. It's now cash flow positive and has been. So we're starting to get a return on that acquisition. And the outlook for this is really the best in the life of the mine, going back to the '90s.

That's -- the work at Casa really starting to show and very nice quarter there this time around. And then I guess -- turning to the balance sheet, I guess, you mentioned looking at starting to pay down debt at some point and, I guess, terming the senior notes out as well. Kind of what's the timeline there? Do you kind of just want to wait and make sure to get your feet under you at Nevada and kind of show a couple of good quarters there and then look to term that out? Or how should we look at that?

Well, I think the first thing to realize is if we were to take that -- the debt out today, we would have to pay a premium. We have to take it out 101. So the first thing we're -- when we think about it is we think it's a May event, no earlier than May of next year. So that's been kind of a driver for us. And then secondly, as Lindsay said, we see the -- what we're doing at Nevada and what we're doing at San Sebastian to be credit enhancing. And we think give ourselves some time to show the credit improvements from those properties. I mean, if you think about San Sebastian, we didn't talk about it on the call much and almost at all. But if you think about San Sebastian, if we're successful with this bulk sample, now all of a sudden, you've got San Sebastian with a mine life that's somewhere between 5 and 10 years. And that really helps on the credit -- putting a longer-term facility, extending this bond out to a longer maturity.

Lindsay, anything to add to that?

No, I'll just say this. It's exactly where we thought we would be. We acquired Nevada for the cash flowing potential at Fire Creek. That will start happening. And as San Sebastian will ramp up, that gives us mine life. And when we sat down with the rating agencies to let them know what we're doing with Nevada, they said, "Well, just execute on your plans, and we'll review your credit rating in the spring." That's what we're doing. We're executing on our plans, and we picked up Nevada a little short on development. Larry is picking up the pace. So just let us execute on our strategy, and we'll be back to the rating agencies and see where we're at in the spring. And I feel really good.

I mean, Mark, clearly, we're in an interest rate environment that is rising, which -- that's not great to be in that. But what we're looking at is how do we improve the underlying credit quality to offset that.

Exactly.

No, that all makes sense. And then I guess just touching on that San Sebastian sulfide. If that bulk sample is positive or -- like, how long do you think it would actually take you to turn the thing on? Obviously, you've got the mill kind of ready to go. So is it kind of a 6-month turnaround? Or is that kind of a reasonable expectation?

Roughly, by the end of the year, we would have -- the thing we have to consider is that it doesn't have a copper circuit so we have to add a copper circuit to it. And I don't know how many production you'd want to do until you have that copper circuit. How much value we're -- we would be losing? So that would be part of the evaluation that we would make.

Larry, anything to add?

Yes. There's some development to do as well there. We need a secondary egress and flow-through ventilation. So that will take to the end of 2019.

And our next question coming from the line of Anthony Sorrento (sic) [Anthony Sorrentino] with Sorrentino Metals.

With the promise of the exploration results at the Nevada operations, would you expect exploration spending in 2019 to be greater than it was -- than it's going to be in 2018?

We're in the budget process. I chuckled because Dean is looking at me. That's a question he's -- look, I think, Anthony, we're likely to spend less on exploration overall. If you think about just this quarter, it's $12 million annualized. That's just not a level that we're able to spend in this price environment. We'd love to spend at that sort of level. So you're going to see it certainly decline relative to where we were for the third quarter. And we certainly will prioritize the work in Nevada over some of the other things that we have that are further out, notwithstanding how encouraged we are by some of these things. But generally speaking, I think you're going to see less annual exploration than where we are year-to-date this year. Yes, we got 35 -- $35 million is the guidance that we have and so it certainly is not going to be any higher than that and it will probably be somewhat less.

Yes, of course, I was not expecting 4x the rate of the third quarter. That's what you had pointed out. That's a record level for the company. With regard to the remote mine -- the Remote Vein Miner that's being constructed for the Lucky Friday mine, when would you expect that to be completed?

In 2019 that will be completed. There has been a slight delay, but we'll have that thing completed and we'll have it over in the U.S. second half of the year.

And is it -- how long does it take to install it and to get it running at Lucky Friday?

It's about a 6-month process to get it fully underground. And then there's some development that also has to be done to -- for it to have a place to be...

Assemble.

Assemble, thank you, underground. It's a -- it is a -- how big is the shaft opening at the Lucky Friday?

20, 24.

Well, you got to take -- you got to...

Sort of 18.

Yes, 18 foot. You've got to disassemble this thing and then drop it down that shaft. So we've done those sorts of things before with the #4 shaft, but it is -- it's been constructed -- it's been designed to be able to fit down that shaft.

It's got to go down the compartment switcher about 5 feet by 5 feet. So...

Yes., that's what I was trying to...

Yes.

And our next question coming from the line of Trevor Turnbull with Scotiabank.

When you acquired Klondex, you had outlined certainly the strategic reasons behind it, being high-grade, safety restrictions and the exploration upside. And embedded in all of that certainly is the assumption of sustainable cash flows going forward. And I was just wondering if you could talk a little bit about what you are looking for in terms of kind of the cash cost and the all in sustaining cost levels. And I appreciate you're doing budgets. I'm not really looking for guidance. I'm more looking for kind of the target or the vision that you have for Nevada on a consolidated basis. Kind of where will you be happy to see those cash cost levels and those all in sustaining cost levels kind of come in at?

So we would -- Trevor, what we would -- what we're targeting is to try to get as close to no new investment into those consolidated assets, just like we did it at Casa. Now you don't know where the prices are going to be and so you might have to make some investment that you're not anticipating. But if you do make an investment, it's going to be relatively small. You just don't have a lot of room to do a lot of work. I mean, I can see us making the determination, "Yes, let's put the new piece of equipment in because we're going to get some benefit out of that," and maybe you end up making a few million dollars worth of investments. But essentially this things is going to generate the cash flow necessary for it to do the ramp-up of development in 2019. Is that a fair way of saying it, Larry?

Yes. I guess the way I look at it is, with Klondex, Fire Creek was capable of making about $50 million in free cash flow and we certainly look to it to return to that level. And then Hatter Graben, although we are just really starting the engineering and resources inferred and a lot of work to do there, I would hope that would come in around those levels as well.

But that's not the expectation for '19...

No, no, no.

Yes. I mean, that's where we...

That's generalizing.

Yes. So yes, that's a good way of looking at it is where we expect this thing to get is to the sort of levels that frankly Greens Creek is at on a consolidated Nevada level. I mean, it's quite remarkable the potential that this has.

And that's what I was getting at, not -- certainly, nothing with respect to 2019, looking more out, as you say, beyond the new investment, which I assume includes like getting the decline into the Hatter Graben. But once all that's behind you -- I guess the number I was kind of looking for is reflected in that $50 million in free cash from each of the 2 assets. Or I guess you're saying roughly $100 million for Nevada once you've kind of built it out to a level that's sustainable?

Yes, that's right. And that would probably be before exploration.

And just out of -- I mean, do you have a sense of kind what that -- I could back into it I guess with production. But is that all in sustaining cost under 1,000 or -- is that kind of ballpark?

Yes, probably. It all becomes a questions of what sort of further growth that you want to have on top of that. Because remember what's going to happen, is we're going to get there and then we're going to find new stuff. That's the thing that to me is just so intriguing about this, is how underexplored these areas are. I mean, you think about just Hollister, right. We were involved with Hollister a decade ago. And one of the big issues is access. And with the underground workings that we're putting in, we're going to open up a lot of ground that we didn't have access to from surface. And that's a huge opportunity to find -- and we're even seeing it now on Hollister. We're -- Dean is shaking his head. Why don't you just comment on that?

Sure. Yes. I mean, Trevor, one of the things -- and it's shown in the diagram on Hollister -- is the development which is in progress right now to the east of the Hollister mine. There's still a wide gap between where the current infrastructure is to that Clementine fault, which is the offset fault to the Hatter Graben. And so there's 5 to 1,000 feet of strike length, where the expectation is that we're going to see some more veins, some more high-grade veins. And so we see evidence of that with the current work and there's no reason to think that those veins suddenly die out before they get to the Clementine fault. So that's the Hollister mine to the east. To the west, I mentioned very briefly about West Gloria. But again, a whole series of high-grade veins that appear to be open there.

So the reason I bring that up, Trevor, is that 3 years from now I don't want to say, well, you didn't get to whatever that level is. Because there is just more opportunity that's going to be uncovered as we continue to operate here. This is -- frankly, in the almost 20 year I've been at Hecla, I've never seen us have something that has the opportunity that this has.

And I've sat down and talked about this with Dean. I think I would agree that there's certainly a lot of sustainability and exploration to pursue both at Hollister and even north of Fire Creek. It's just trying to kind of get our head around not just the sustainability of the assets, but also the cash flow -- free cash flow potential on top of that. I guess a little closer in time. Lindsay was mentioning the rating agencies potentially taking a look again in the spring. And given first half of next year, you're certainly going to be spending at Fire Creek and with the Hatter Graben -- I think Mark made the comment earlier that gravy is kind of 2021 or a little bit further out. Are the rating agencies really going to see the kind of cash flow that's going to help them to make any changes as early as next spring? That seems just a bit premature given the investments that you still are kind of lining up to make.

I'm not sure it's necessarily next spring, but I think it is in 2019. Because we're not anticipating the need to make significant contributions into Nevada, right? I mean, we see Nevada being able to largely pay for Hatter Graben, to pay for the development within Fire Creek. I mean, we think we can run it pretty close to cash flow neutral. And that is what we have suggested we would be able to do.

And actually -- no, you've outlined that on the call that you very much expect it to be cash flow -- at the best -- or, sorry, at worst cash flow neutral and be able to pay for these things. I guess I misunderstood. I was thinking the rating agencies were looking for a bump in free cash flow, which would have come through this acquisition. And I just -- I feel like it's going to be a while before they actually see that accretive bump to cash flow given -- while these assets continue to pay for themselves, they're not actually contributing a whole lot more to Hecla at least at this early stage.

Yes, I think what's going to happen is the EBITDA that you're going to see is going to go up and it's going to be on the back of that. It's going to be an EBITDA-to-debt measure. And I mean, we're going to be, roughly speaking, around the 2, 2x. And if we show that consistently, they should be getting more comfortable. We now have more operations. I mean, one of the complaints they had was we didn't have enough operations. Like okay, well, now we got some more and we now have some more EBITDA. So that's what we're sort of hanging our hat on. Lindsay, anything to add to that?

No. I would say when you go the rating agencies, you give them your plans. And what they want -- when they say execution risk -- when we go visit them, say, "So are you meeting your plans you gave us?" "We expect to go in here is the plan we gave you. We are executing on them." And they look through the cycles. And they are really looking for past 2019, 2020. So if you come back to them and you are executing on your plans, that's a big ticket item for them.

And we're going to come in with this -- I can't overemphasize how meaningful this Greens Creek change is. It really -- when we went through this, I was -- my eyes really were opened. To be able to move the grade up, I mean, it's -- nothing has changed other than these guys have developed it better and they've advanced things that we were going to mine at the very end of the mine life of the past. And the mine life is going to actually we think extend. But they moved that up and -- so a big value driver and that's something that we'll be showing -- we're still working on it and we'll give more color to the market as time goes on, but we'll also give it to the rating agencies. And it's meaningful.

Our next question coming from the line of Ryan Thompson with Bank of Montreal.

My question was sort of along the same line as what Trevor was asking, but a little bit more -- can you just talk about the reserve lives at Fire Creek? Obviously, it's on the shorter end of the spectrum right now and you're talking about ramping up throughputs to around 550 tons per day. So I was just wondering if you could make some forward-looking statements on how we can kind of expect the reserve lives to trend and what you are targeting there and maybe just tie that into some of the exploration results that you put out and if you expect drilling in 2019 to add to reserves this year?

Well, I guess the first thing I'd say is with the nature of this ore body, it is very tough to have reserves. Reserves meaning proven and probable and long-lived reserves. Because you've got these panels of mineralization that are -- you don't have the drill platforms in which to do enough definition drilling to actually move them into the reserve category. So if you look at the life of mine that we work with on these assets, that life of mine is going to be based on a fair amount of inferred resources measured, indicated and inferred. And that's just the fact of life with these assets with where they are today. And we understood that when we acquired it. And that will be one of the things that we'll be doing with the development that Larry and Dean talked about, is creating the drill platforms in order to try to move more material from inferred into measured and indicated and into reserves. And so that's a process that we're going to be going through for the next few years. But it is -- well, there's no surprise there. Dean, anything...

Yes, I mean, Ryan, what's somewhat unique about Fire Creek in particular and it applies to Hollister is that conversion of resource to reserve particularly now and in the near term is that it's going to be really about [sieving]. And so it's really going across the areas that have been drilled to upgrade the confidence level. Historically, Klondex has found that that's also upgraded the grade and continuity. So until we get well advanced in development, the reserve is going to rely very heavily on this sieving . And so Larry's group is pushing hard to better define some of those resource areas. At the same time, we're trying to get some drill platforms in so we can get ahead of the game. But in the near term, it's going to be about sieving , maybe even more so than drilling.

Yes. No, that's fair. Larry, anything to add?

No, I guess exactly right.

So is it safe to assume that we'll probably see a dip in sort of reserve tonnage at the end of this year before -- just because you haven't really had the chance to get those drill platforms in and then do the [sieving] work and really expect that tonnage to start picking up more as a 2019 story? Is that safe to assume? Or...

Ryan, we're in the process now of determining that. But that's not -- that's a fair assumption.

Yes. I would say that certainly we are not anticipating any significant increase.

No. That's right.

Could it decline somewhat? Yes, certainly could. We've only had ownership of this for about 100 days. And clearly -- look, Klondex, the guys before us, were struggling. They needed to generate cash flow. So they didn't do the development they needed to do. They didn't sort of set the mine up to grow the reserve base. And we understood all that. None of that is a surprise to us.

And just a quick follow up question on that. So how should I think about -- or how do you guys think about cut-off grades and what sort of grades should we sort of be looking for in the [reserve]?

Look, the cut-off grade is about 0.3, which is -- we look at it as an opportunity, how do we reduce that cut-off grade? And to the extent that we can do that, there is a huge amount of inferred mineralization that is going to be mined. And I can tell you that there's lots of stuff that we're considering on how to do that. Larry...

Yes, the cut-off grade in metric units is about 10 grams and our underground grading at Casa is about 5 grams. So it just screams opportunity.

The underground grade is about --

Yes, the cut-off grade I'm saying at Fire Creek is about 10 and the average grade coming from underground at Casa is 5, 6 grams.

Got it, got it. Right.

So there's got to be an opportunity in there.

And our next question coming from the line of Matthew Fields with Bank of American Merrill Lynch.

I just wanted to address some of the comments you guys made about the bond refis. I understand in wanting to wait until May of '19 when the call protection falls away so you don't have to pay that 1.7 points of call premium. But you guys have made an awful lot of -- sort of waiting for the rating agencies to upgrade you. I mean, the market will pay what the market will pay for a new Hecla bond regardless of what the agencies say. So I don't -- I want to make sure you're not putting yourself into a corner. And if the rating agencies don't upgrade you, you're not going to wait until there's movement there because [you may issue] one bond and...

No, no, we're -- look, we...

You know what I'm saying?

Look, we'll -- yes. No, we're part of the exercises, making sure that we communicate with the bond market as to what Hecla is all about. And so we're certainly trying to do that. And we would appreciate your engagement on that. Because we think we have a great story and we think that Hecla -- I've been in the business for 30 years and there's certainly companies that I think should not have any debt and I've worked for them. But Hecla is a company with long-lived assets that we have and the different metals that we produce that it makes sense for us to have some level of indebtedness. So we're going to understand -- and we understand that if we're going to have that indebtedness, we've got to accept whatever the market is. So we're prepared to do that. We'll not just wait for the rating agencies. That's just one of the factors that we will consider. Lindsay, anything to add?

No. We have some great cash flowing assets, great jurisdictions. We have lots of reserves and resources. That debt creates leverage against that. And we look at ways to reduce the interest cost and that debt. And we'll be patient and mindful of the market.

But if we can't reduce it, we will certainly do the refi and do the best we can.

Would you consider doing a transaction where you upsize a revolver and sort of borrow some on the revolver and do a smaller bond issue to create some pre-payable debt? I think that's been a type of transaction that's been somewhat in vogue in recent re-financings in the high yield market.

I will just say that I'm not a big fan of relying on a revolving credit facility to -- with all the covenant structures that those things have. So while you never say never, I don't think that's likely. Lindsay?

No.

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

This is Matt Barry for Heiko. Do you guys expect any longer-term impact from the new 2019 mine plan at Greens Creek? Or is this only expected to impact the mine for the next 4 years and then things are expected to resume as they were previously planned?

I don't know the answer to that. Do you know, Larry, off the top of your head?

Well, I mean, first of all, I just have to emphasize that we're not sterilizing any ore. We're moving ore -- higher grade ore forward. And without the reserve additions that we're expecting, the amount of metal produced over the life of mine is basically the same. So we're moving high-grade forward in the mine life, very impactful starting in -- a little bit next year, but mostly 2020, and the years that follow -- the few years that follow 2020.

Yes. My recollection is that toward the end of the mine life, the old mine plan had a couple of ounce higher grade.

Yes.

And so we've just moved that forward. And we're anticipating, but we don't have it done yet. We're anticipating that we'll probably extend the mine life with the work that we've done in the last -- so net-net, it's all going to be better. It's going to be more cash flow earlier and it's going to go on longer.

And with a reduction in development. That's about $20 million in savings over life of mine.

By itself, yes.

Yes.

And our last question coming from the line of Lucas Pipes with B. Riley FBR.

This is Matt...

The famous Lucas.

It's actually Matt asking the question for Lucas today.

Oh gosh. Okay. Sorry.

I wanted to follow up on the Remote Vein Miner and I apologize if I missed this earlier. But have you made a definitive decision on whether the Remote Vein Miner will be utilized at Lucky Friday and not Nevada?

No, we haven't.

All right. Okay. Well, thanks, everyone, for joining us on the call. We're happy to take more questions. If you have them, just give Mike or I a call. Thanks very much. Have a good day.

Thank you. And ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Good day.