Good day, ladies and gentlemen, and welcome to the first quarter 2019 Hecla Mining Company earnings conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Mike Westerlund, Hecla's Vice President of Investor Relations. Sir, you may begin.
Thank you very much, Crystal. Good morning, everyone, welcome. Thank you for joining us for Hecla's first quarter 2019 financial and operations results conference call. Our financial results news release that was issued this morning before market open, along with our exploration release issued yesterday and today's presentation are available on Hecla's website. On today's call, we have Phil Baker, President and CEO, Lindsay Hall, Senior Vice President and Chief Financial Officer, Larry Radford, Senior Vice President and 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 two.
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 can find reconciliations of these measurements to their 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 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.
With that, I will pass the call to Phil Baker.
Thanks, Mike. Hello, everyone. I want to start by talking about each of the operations for just a moment. Greens Creek started 2019 strongly because of higher grades and recoveries. This is expected as our new mine plan that is outlined in our technical report reflects these higher grades. This will continue for at least the next few years. Hecla's best asset is getting better. Because of Greens Creek's excellent performance, the quarter was largely in line with what we expected, revenues, cash flows, and our ending quarterly cash balance. Lucky Friday did well, producing as much silver in the quarter as it did all of last year. San Sebastian, while down from last year, was expected. While Casa Berardi was expected to produce less, we also had a combination of some now-resolved issues in the mill that Larry's going to talk about. Let's talk about Nevada.
When we think about why we bought the Nevada assets, the thesis for the acquisition largely holds true. Number one, we bought it for the land position of 110 square miles of property that has hosted three one-ounce head grade mines in some of the best gold country in the world. Number two, we bought it for the Hatter Graben, a very exciting and potentially large gold deposit adjacent to the Hollister mine that we'll start drilling by year-end. Number three, we bought it thinking we could get consistency in development and production at Fire Creek to increase the throughput and lower the cutoff to make the mine the cash flow provider of Nevada. The first two reasons remain as applicable today as they were when we acquired it, but we clearly have not been able to make this progress at Fire Creek.
A year ago, in doing the due diligence, we recognized certain problems with Fire Creek, dealing with the tough material, managing the water, equipment availability, getting enough development to have consistent production, lack of characterization of ore types. While we've made progress in dealing with the issues we saw, the short answer is it's not been enough. The advance rate has increased, but the mill tonnage decreased by a similar percentage in the last quarter. While we've done things to manage the water, the amount of water has increased, making the conditions worse. This has limited our access, and while they're not insurmountable and not a large amount of dollars, they will require quarters to construct some infrastructure and get some permit limits changed. Characterization of ore types has taken certain areas out of the plan till we determine the best way to process them.
We still believe in the potential of Fire Creek, but given the ongoing challenges, we're evaluating if there's a better way to go forward since our original plan is not making enough progress fast enough. For the next few weeks or months, we are reviewing the Nevada operations to determine how we can improve the economics in both the short and the long term. This process is really maintaining our discipline in capital allocation. We're really just asking the question, are we going to get the return for the investment we're making? Since we don't know the outcome of the review, we're suspending guidance until we do. I'm gonna stop there on Nevada because Larry and Lindsay will both have more to say.
Let me just mention on Wednesday, we did issue our exploration update, which detailed new underground discoveries at Casa Berardi and more oxide discoveries near service at San Sebastian. Dean's gonna provide more details on this in a moment. Let me pass this on to Lindsay for a financial review.
Thanks, Phil. For the three months ended March 31st, 2019, we reported a net loss applicable to common shareholders of $25.7 million or $0.05 per share compared to net income of $8.1 million for the same period last year. The variance in net income of $33.8 million is primarily the result of a gross loss or operating losses in both Nevada and at Casa Berardi. In Nevada, our operations cost of sales and other direct production costs of $23 million
Plus depreciation expense of $8.3 million exceeded sales revenue of $17.6 million, amounting to a gross loss of $13.8 million. We were expecting more ounces to be sold from a combination of ore stockpiles and through mining to offset the production costs. That shortfall shows up in the gross profit or loss line of the income statement. At Casa, about 60% of the $15.4 million negative variance in gross profit quarter-over-quarter was anticipated due to mining lower grades this year than last. The other 40% of the variance was due to lower ounces being produced and sold because of temporary issues associated with the mill, which have now been resolved, as Phil noted.
Company-wide cash costs after by-product credits per silver ounce was $2.26, and the all-in sustaining cash costs after by-product credits was $9.34, an increase from $5.66 in the same period of 2018, both in line with our expectations, whereas the cost of gold and the all-in sustaining cash costs for gold after by-product credits was $1,277 and $1,760 per ounce, higher than our expectations due to the previously discussed issues at Casa and at Nevada. Turning to cash flow statement, cash provided by operating activities amounted to $20 million, which was slightly higher than the first quarter last year. We invested $33 million at our mine sites. We had a net use of cash before financing activities of $13 million, resulting in approximately $12 million of cash on hand at the end of the quarter and nothing drawing on the credit revolver.
The spend in Nevada was higher than anticipated but was offset by underspending at our other mining operations. As we have stated, we are maintaining our company-wide spend estimates. We will be reviewing the Nevada operations and forecasted capital needs, as well as our forecasted spending throughout the rest of our operations in order to meet that estimate. You will also note in our disclosures that we obtained from the credit revolver banking syndicate some additional headroom under our covenants for the second and third quarters to ensure we have the flexibility while we address the needs of our Nevada operations. On slide seven, as always, you can see that we maintain a diversified revenue stream with gold at 50%, silver at 29%, lead and zinc at a combined 21%. Greens Creek continues to be the dominant supplier of revenue and cash flow.
In closing, our high-yield notes are now callable without cost and can be refinanced at any time. We're mindful of our leverage ratios, the refinancing options available to us, and the need to generate profitable earnings and positive cash flows. That is why we are proactively reviewing our Nevada operations. I will now pass the call on to Larry to talk about the operations.
Thanks, Lindsay. I'd like to begin with the challenges that we had in the first quarter and then move on to what went well. To begin with, I want to go into a bit more detail on the challenges in Nevada that we've mentioned. Although the production was close to our forecast, our forward-looking estimate shows lower production from Fire Creek due to some definition drilling showing stopes falling below cut-off grade and some development being delayed, principally due to water inflow. Although the aggregate development rate remains on target for Fire Creek for the year, as you can see on slide nine, a few headings are behind schedule. To compensate for these issues, mining of previously developed remnant stopes at the Midas mine has resumed. Nevada costs were considerably higher than what we forecasted, as noted earlier.
To this end, we will have our development contractor demobilized by next week. In addition, we have put together a revised mine plan, which incorporates a higher cut-off grade and reduces development. Another challenge that we realized in the first quarter is that ore in the northeast section of the mine was determined to be refractory. This ore was never in the 2019 production estimate. An investigation is underway to determine how much of this ore we will encounter in the future and what our options are for processing the ore. On the plus side, development of Hatter Graben is on track, taking into account that the access road washed out in the spring flood and no access was available for about a week. You can see our progress on slide 10.
Finally, on Nevada, as mentioned, we are considering all options at this point, many of which are listed on slide 11. The planning of the mine is dynamic, and several mine plan permutations are under consideration. In the first quarter, Casa Berardi was challenged by lower mill throughput and lower recovery than expected, and I want to provide a little bit more color on these issues. The lower recovery was compensated by grade, which was 11% higher than projected. The lower recovery was principally due to the failure of a gearbox on one of the CIL leach tanks, and this gearbox has been replaced. There was a lesser effect of some ore having a higher than expected level of arsenopyrite. The lower than expected throughput was principally due to the change of the mill crusher with a higher capacity crusher in December, which caused some downstream sizing issues.
The issues were largely corrected in the month of April, throughput improved in the last week of April with a one-day record of 4,351 metric tons on April 28th. We also received permit approval to raise the annual throughput at Casa Berardi from 1.4 million metric tons to 1.6 million tons. This permit approval lifts our tons per day limit to 4,718 metric tons per day. The ore that was expected to be processed in the first quarter but wasn't processed is in stockpile. To recover the throughput, we are soliciting quotes for pre-crushing of ore. In 2017, we conducted a pre-crushing test that demonstrated a 20 ton per hour increase in throughput. This pre-crushing will occur in the second half of the year. The overall trend at Casa Berardi is increasing throughput, as you can see in slide 12.
Additions to the mill to ramp up throughput to the higher permitted level are being analyzed and will likely be considered as part of the 2020 capital budget. Moving on to San Sebastian on slide 13. This story is unfolding as we had expected. Cash flow is flat as we continue to develop the middle vein and finish tailings construction. Cost per ounce is expected to fall as the year progresses. With the combination of lowering costs as development is ramping down and because of some recent drilling success, we now see oxide ore production into Q4 of 2020. Not bad for a mine that was originally projected in the PEA to run out of ore by mid-2017. Moving to Lucky Friday. Production at Lucky Friday was up 74% over the prior year period, mainly due to an increase in limited production by our salaried staff.
We are pleased with the impact that this production is having on reducing the cash burden and are especially pleased with the safety record of our salaried staff, with zero long-term injuries and zero restricted work injuries in the past two years. Slide 14, you can see a recent photo showing the progress Epiroc is making on fabricating and assembling the Remote Vein Miner at its facilities in Sweden. The machine is expected to be tested in Epiroc's test mine in 2019 and delivered to Idaho in the first half of 2020. As Phil noted, Greens Creek had an excellent quarter, it continues to impress with higher grades and higher recoveries. Slide 15 shows the increase in monthly silver recoveries. The mine produced 2.2 million ounces of silver at a cost of sales of $54 million and a cash cost after byproduct credits of $0.49 per silver ounce.
The all-in sustaining cost after byproduct credits was only $3.24 an ounce. We are working the new mine plan, which was featured in our recent technical report, pulling revenues forward and reducing development. We are also seeing lower base metal grades, which could impact timing of shipments as we work to produce the precious metals rich lead, zinc, and bulk concentrates. I will now pass the call over to Dean.
Thanks, Larry. Hecla continued with aggressive drill programs in the first quarter at our mines, where we are confirming and expanding resources with the potential for increasing reserves in the future. A list of drill intersections is provided in the appendix of the exploration release, which was issued on Wednesday. As we said in the beginning of the year, drilling will focus on defining and expanding resources and reserves underground at Casa Berardi, near surface oxide resources at San Sebastian and at Fire Creek and Hollister in Nevada. I will outline in the next few slides the success we've had on all of those fronts.
At Casa Berardi, we had considerable drilling success along the main trends, as shown in slide 17, particularly for high-grade underground resources in the 118-128 zones in the west mine on the left side of the image, an expansion of the 148, 152, and 160 zones in the east mine. Strong drill results are showing that a series of new mineralized zones may ultimately connect the west and east mines with semi-continuous mineralization, which was one of our original presumptions when we acquired the mine in 2013. As shown on slide 18, there are now a series of planned pits along the Casa Berardi deformation zone. As the red arrows show the projections of high-grade shoots, there is clearly an opportunity to find new underground resources, particularly in the east mine, where access was reestablished last year.
At San Sebastian, underground drilling is upgrading a number of zones along the Francine vein to potentially add to near-term oxide production. As shown in slide 19, surface drilling is pushing hard to extend near-surface oxide mineralization along the El Toro vein, which is about a mile and a half south-southwest of the current mine. The longitudinal shows the vein has a mineralized strike length of 5,000 feet, and localized high-grade pods are located between the surface and 450 feet of depth. It is evident we urgently need to upgrade resources at Fire Creek to move into the mine plans and identify new resources. Slide 20 shows the location of spirals 2, 3, and 4, where we are accelerating our efforts to define new vein extensions.
This drilling is planned to be in combination with surface drilling that we expect to initiate later in May to evaluate Zeus, Guard Shack, Far View, and South Notice targets. The Hollister mine is shown in slide 21. The identification of high-grade veins at the west end of the Gloria vein resulted in the acceleration of drilling to define potential near-term production. Exploration drilling has identified a series of new veins to the north. This is just the beginning. The most important drilling is planned to start later in the year when the development drift will provide drill platforms, so we can drill to the east of the known resource at Hollister, then cross the Clementine fault and confirm and expand the resource in the Hatter Graben to the east. Overall, we are off to a good start, but there's still lots to do.
I'll now pass the call back to Phil.
With that, operator, we'll open the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star followed by the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question, please press star and then one now. Our first question comes from Jake Cikowski from Roth Capital Partners. Your line is open.
Hey, guys. Thanks for taking my questions.
Sure, Jake.
With Nevada operations now under review, I'm just trying to get a handle on the magnitude. It sounds like it's centered more around Fire Creek. Is that fair to say? I guess if so, do you still expect to move forward with Hatter development as planned?
Well, just realize that we view this as one integrated operation, Fire Creek, Hollister, and Midas. There's some combination of those that are necessary to run it all together. Having said that, we'll certainly consider if there's any adjustments we should make at one and not the other, we'll just see where that takes us. With respect to Hatter, it's a key element of the reason we acquired Klondex. At least personally, I'm going to be reluctant to stop driving that decline in any way. We really do need to get in there and do the drilling to see what we have there.
Understood. That's helpful. Then just looking at San Sebastian, do you guys have any information on the timing of the bulk sample and when we should expect to see some results from the met studies and tests at the [Exxon mill]?
Yeah, we would expect by the start of the fourth quarter, we'll have the bulk sample done and evaluated.
Great. That was all from me. I'll hop back in the queue. Thanks.
Okay. Thanks, Jake.
Thank you. Our next question comes from Heiko Ihle from H.C. Wainwright. Your line is open.
Hey there. Thanks for taking my questions.
Sure, Heiko.
Hey, quick clarification. This builds a little bit on what Jake was saying. I may not even get any answer to this at all. Can you provide some details on your anticipated cash needs for the Nevada operations for the year? It sounds like quite a bit is going to stop. Any idea how much money you're going to have to shift that way this year?
The answer on the go-forward basis is really the reason for doing the review. We want to make sure that we're getting a return for that investment. I can't tell you the objective when we started this process, the acquisition, the objective was to try to have Nevada be cash flow neutral. That's the direction we'll still try to move in.
Fair enough. Building on that, you had a link on your homepage to an interview, "What happens when the gold-silver ratio hits 85?" Phil, you were obviously in the interview. Just conceptually, would you be more interested in focusing on gold going forward, whether it be through acquisitions or giving the gold assets extra focus and more capital to the gold-heavy assets such as Casa? In the interview, you mentioned a long mine life, so it sounds like this is to a certain extent already happening, again, given the answers you put into that interview and the west mine at Casa.
Well, look, we're going to be opportunity driven. When you look at the assets we have, we'll see what the results that we get. Having said that, we're certainly very optimistic with respect to silver and the fact that silver will outperform gold, and this gold-silver ratio will come more in line with what you've seen historically. We're not going to pivot to be more gold-focused. We're going to continue to have a balanced view, and we're going to continue to be driven by what the mines, the properties that we have, the opportunities that they present.
Fair enough. Going by what you just said, speaking of some M&A, the answer might well be we're looking for anything given the recent Nevada developments. A lot of your mines, I'm specifically looking at Greens Creek and Casa here, these are assets with terrific cash costs, right? Then I look at your acquisitions such as Klondex, that are more like fixer-uppers, and at the time of the acquisitions, they had really high cash costs. Can you maybe just provide some color on your current hurdle rates for IRR discounts to NAV or current cash costs that you're looking for when you face prospective M&A? Again, the answer might be we aren't going to do anything, period.
I think it's more in the latter category. That's not to say we won't do anything. I think it's just unlikely that we'll do very much. Frankly, we're disappointed in where our share price is, and that makes it problematic to envision using those shares to acquire something else. I guess I'd be surprised if there is something, but that's not to say there won't be. It's certainly not the next thing we expect to do.
Okay. Fair enough. Thank you.
Okay, thanks, Heiko.
Thank you. Our next question comes from Cosmos Chiu from CIBC. Your line is open.
Hi, thanks, Phil, Lindsay, Larry, Dean, and Mike. A few questions from me here. Maybe first off on the covenants that you have on that line of credit. Lindsay, I know you mentioned that they've been relaxed. I wasn't able to find it in the press release. Could you maybe help me out? I guess the two are senior leverage, which is currently at 2.5, or used to be at 2.5, interest coverage at three. How have those been relaxed?
Yeah, I think it's in the financial statements, Cosmos, I think it's second quarter and its debt to interest, that debt to EBITDA that has been relaxed primarily, it moves to 5 in the second quarter, to 4.5 in the third quarter, back down to 4 in the-
2020.
Okay. Not the interest coverage ratio? I think you're getting pretty close on that as well, aren't you, Lindsay?
It's just on the debt-to-EBITDA ratio that we just wanted a bit of comfort and room.
Okay.
Give us some flexibility.
Do you anticipate needing to draw on that line of credit? Because I believe nothing is drawn right now, but do you anticipate needing to draw on that in the next two quarters?
Well, we use the revolving credit to provide working capital. Remember, Greens Creek, we ship the ore, and it's two or three months before we've gotten final payment.
On those shipments. That facility has been used and will continue to be used for that purpose. Will we be drawn over a quarter end? I think it's likely that we will. We want to just make sure that we're in compliance.
with all covenants.
Yeah. Thanks. Maybe on that senior secured debt. Actually, no. Maybe first on the acquisition of Klondex. When it first happened, when you made the acquisition of Klondex, one of the rationale behind it was the ability to generate cash, then hence, it's going to help you with a credit rating and improvement in your credit rating. I think in the end, there was a bit of an improvement at that point in time. Now with the suspension of the guidance, how has that changed?
No, I think, Cosmos, we'll go visit the rating agencies. Certainly, from where we're at when we anticipated acquiring Klondex, we thought we'd have some cash flow to use that cash flow in Nevada to develop Hatter Graben. Obviously, 2019 is off the mark from where we're at with the rating agencies. As far as the rating agencies, we give them life of mine plans and everything, what they said at the time when we visited them, they liked the acquisition, it's subject to execution risks about integrating these assets into the Hecla portfolio. Certainly, what they've said is certainly in 2019 hurting us a bit in terms of the integration of these assets. They look to reporting periods in there. They're looking to what Klondex and the Nevada operations can mean to us over the next five or 10 years.
We'll go back and visit them, we'll be reporting back on whatever we say. They look to reporting cycles rather than just a short-term one or two quarters.
What did they do when they didn't upgrade us?
Actually, they gave us a bit of an upgrade.
Okay.
Moody's stayed the same. They look for the long-term cycle. They'll be more interested in our success at Hatter and what are you going to do to, maybe short-term, but more interested in long-term.
On that, going back to the first part of my question here. As you mentioned, Lindsay, earlier, the $500 million in senior secured debt. There's an opportunity for you to refinance that because I think the time has come where you can refinance without any penalties. I think we've talked about this in previous conference calls as well. You were hoping to get it refinanced soon, and maybe even around this time. Again, given what has happened to Klondex and the guidance suspension, has that timeline changed?
Well, first, realize that it's not secured, it's an unsecured.
Okay. My bad.
$500 million.
I think we'll see. Clearly, we think we need to work through what we're going to do in Nevada. The opportunity to do something has now arrived. We would expect we would still do something within the next year before the debt goes current. That would be my expectation. Lindsay, anything to add?
No. What you're referring to, the high-yield market's come back a bit. It's backed up maybe in the last week or so. You know what? We're going to deal with our Nevada issue. Not an issue, but look at making decisions on Nevada. It's really how much we want to invest in Nevada to grow the mine long term, and we'll turn that around quickly, and that'll bode well for us in determining what that means to us and be ready to go to the market. This is the big issue we're going to deal with on a prompt basis, and I don't see that necessarily getting in the way of us refinancing the bonds when we choose to do so. The market is open, as you said, Cosmos.
Mm-hmm. Yeah. I'm glad you brought up the idea of the Nevada issues. I guess you're doing a comprehensive review now. You're looking at targeting some kind of report or completion by Q2. My question is, I thought one of the key issues here at Nevada was needing to prove up the reserve resources and trying to understand what the ounces you have. From that perspective, that was dependent on getting the spirals down there, getting the drill platforms, getting the drills going, and that could take time. I guess, my question is, you're targeting a completion in Q2, but are we going to be able to get some kind of fulsome answer when that report comes out?
Is that going to be a comprehensive report, just given that, once again, it could take some time to really figure out what you have in terms of ounces down underground?
Yeah, I guess the timing of it is weeks or months, so whether that's Q2 or not, I don't know. I sort of anticipate that it will be. When you say comprehensive, we'll take it as far as we need to take it to make a decision on what changes we need to make. Whether we're able to determine every element of how we go forward, I'm not sure, and we'll just see where it takes us. The main point is the way we've been doing things has not generated the results that we're looking for, we're going to reevaluate how to proceed.
just maybe one follow-up question on that in terms of, I think, Larry, you talked about the different alternatives that you're looking at in terms of this comprehensive review. I'm using comprehensive because I think that's the word you used in the MD&A, and the last one would be essentially stopping production at Fire Creek. I'm just wondering, given what you've talked about in terms of water issues, has production become a distraction from that perspective? In terms of stopping all production at Fire Creek, would that be the best alternative?
We don't know yet. Right, Larry?
I'm not sure what distraction means, but we're studying many things, as I mentioned, the water issues, alternatives for processing, those sorts of things, and it's going to take a bit of time to understand those. If the best outcome is to stop production to have time to truly understand what we have in front of us, then that could be an outcome, but it's not the only outcome that we could possibly have.
maybe one last question from me in terms of back to accounting here. In terms of the suspension of guidance at Nevada, could this potentially trigger some kind of review of a potential writedown?
Yes, certainly we'll come to a determination as to whether we have a triggering event, and if we do, is there an impairment that's required. Lindsay?
Yeah, no. Go through the study, like Phil said, trigger event causes to reforecast the cash flows of all the operating entities and whatnot. We will look at that. The impairment test itself is not as straightforward as one would think in terms of the, there's different pockets to evaluate, depletable property, that's not so much the property, plant, and equipment, in situ exploration. When you're talking about Fire Creek and you narrow down and you look at the purchase price, it's really the depletable side of perhaps the Fire Creek assets around $46 million. That's the rollout of the reserves over the next three or four years that we're going to mine. Those are the things we'd be sensitive to in terms of evaluating those cash flows coming from that two or three-year period that we generated some $46 million of value.
That would be maybe something we'd look to, again, we would look at that. We haven't finalized the purchase price itself, and it is something we'll work diligently on. It could result in an impairment, but we're not there yet.
Mm-hmm. Thanks. Those are all the questions I have. Thanks again, Phil, Lindsay, Larry, Dean, and Mike.
Okay.
Thank you. Our next question comes from Mark Mihaljevic from RBC Capital Markets. Your line is open.
Hey, thanks, and good morning, everyone.
Good morning.
I guess to kick it off, can you just walk me through some of the metrics you're looking for from this comprehensive review and kind of, are you looking at this as a cash flow exercise as your primary focus versus the long-term value and just some of the metrics you're looking for when you're evaluating the choices?
I think clearly the biggest driver is to try to have Nevada not require as much investment into it. That's the first target. We don't want to do that in a way that destroys long-term value. It's going to be a balancing between those two things. Really looking at the various issues that we have, how can those be resolved? Larry, anything to add to that?
I think you covered it.
Okay.
Okay. Kind of following up to that, you mentioned the potential for third-party processing, it's something you guys had previously thought about or talked about, just want to get an update on where you are in that process and whether we could actually get an announcement with this Q2 review, or is that something that you'll evaluate as potentials and then kind of leave as an opportunity?
It's possible. There's certainly places that you can take the ore, we're contemplating that. If you do that, presumably what it's going to do is reduce the cost of processing overall and therefore improve the economics. We don't know. That will be dependent upon the negotiations with potential third-party processors, we don't know how long that might take.
Okay. Just give a little more detail on where you are with those negotiations. Have you actually started the conversations? Is that something-
Yes, we have
that's advanced?
Yes, we have.
Okay.
We have had serious conversations, and it's certainly a potential outcome that's feasible.
Okay. I guess following up, obviously, with silver prices where they are in Nevada, kind of at best getting to cash neutral, how else would you change your spending profile in a weak metal price environment, and are you kind of comfortable just spending as you are at the other assets right now?
Yeah, we're looking to spend within the guidance that we gave. That's the starting point. We will evaluate if we need to do any more than that, but that's where we are at this point.
Okay, thanks. That's it for me.
Okay. Appreciate it, Mark.
Thank you. Our next question comes from John Bridges from J.P. Morgan. Your line is open.
Morning. Hello, everybody.
Hi, John.
Just wondered if you could give us a bit of color on what the problems actually are in Nevada. We heard about the water. You're waiting on some permits. Is that part of it? You say you've demobilized the contract. Does that mean that you've stopped advancing the exploration tunnels which are related to the upbeat comment that you've been giving us on exploration success? I'm just a bit confused here.
Sure. With respect to the water, what it has done is it's limited places that we're able to go in the mine, because we cannot deal with the water fast enough to be able to effectively move forward. Our advance rate really slows down, and our ability to mine in those areas slows down. That's primarily Spiral 4 that it has sort of locked us out. With respect to Anything to add on that? We'll talk about the contractor.
Well, we are working on expanding our permitted water discharge limit. Some of the water is pretty innocuous, we're analyzing if there's a simple, inexpensive Right now we're using reverse osmosis, which is slow and expensive and very sensitive to fines. We're looking at an alternative process which could increase our discharge without a lot of expense. There's a lot of work going on behind the scenes on the water. Do you want me to go in on the development or-
Yeah, go ahead.
As far as development, Hatter Graben was always our own people, and that remains in our own hands. The only work that was dedicated to the contractor was the development of Portal 2 at Fire Creek, and we'll take that on. We have taken that on with our own employees.
The essential development work is carrying on.
It's carrying on, but it's also under review, as we discussed.
Okay. What is different from the original plan? Is it the water thing? Is that a catalyst for some sort of clarity on the situation, or is the gold? How is the cash flow, what's leading to this difference in the cash flow?
I think certainly water is a big element of it, and it's not a huge amount of water, but it's enough where there isn't adequate infrastructure to deal with it, and it has grown from where it was when we were doing the due diligence. That would be number one. Number two, we have not seen the relative productivity that we were anticipating we would be able to achieve. And that's part of the reason for removing the contractor. We think maybe there's an opportunity there to improve the productivity per dollar spent. That's really what it comes down to, is we're not getting enough tons moved for the dollars that we're spending. If you go and you look quarter on quarter, the amount of tons that we're moving is pretty consistent fourth quarter to first quarter, and we would have thought we would've had better performance than that.
Larry, what do you want to add?
There's certainly been challenges with the definition drilling. There's inferred material that we're trying to upgrade, and some of it didn't get upgraded.
Yeah, that's true. We've had just some surprises with some of the inferred, what, Vein 30.
Vein 39.
39. We had this area that we thought was going to be upgraded, it turned into dusters.
One would expect that with inferred material, you'd win some, lose some, we haven't had too many winners on the conversion.
Okay. How do your contractors benchmark against your own employees, is one of the plans to bring in your own team, and build a more productive team there?
We have enough equipment. Like I say, the portal 2 heading is only one heading out of many. We have enough equipment to take it on. We have enough miners to take it on our current development plan. It's really a function of just cash flow and prioritization of exploration headings, and that'll be part of this review. As Phil said, we anticipate pushing ahead at Robin #4.
Okay. This really circles back to the refi issue, not wanting to protect cash flows while you work on the refi?
Yeah. Remember, our assumption on the acquisition was that we were going to be able to improve productivity, lower the cutoff grade, and be able to increase the throughput to then lower the cutoff grade and have more material available to us. That hadn't happened. We're working through, okay, what do we need to do given that that hasn't happened and we're not able to have a plan that shows that it will happen. The objective has always been to try to have Nevada be cash flow neutral or just slightly negative. It's been more than slightly, we're just not going to continue to move forward under that plan, if we can't get it closer to neutral.
Okay.
Anything to add, Larry? Okay.
Okay. Thanks for the color. Good luck, guys.
Okay. Thanks, John.
Thank you. Our next question comes from Trevor Turnbull from Scotiabank. Your line is open.
Yeah. Thanks, guys. I think that John's questions kind of got to the heart of it. I was going to ask, where did the opportunities that you saw with Klondex, a company that was struggling to a degree and obviously underfunded in some respects, where did those opportunities kind of turn into this need for a comprehensive review? If I understand, it sounds like in some respects it was the water, which wasn't anticipated to be the hurdle that it is. You've talked a bit about the contractors, I'm just curious with respect to the contractors, when you looked at the acquisition, were you factoring in that you could do better on the contractors in terms of cost and productivity?
I'm just wondering, did the cost get away or were you actually factoring in some better productivity and costs that just didn't come to fruition?
It's the latter. We absolutely thought we could operate more effectively. I'll use an example. One of the things that we came in and we identified pretty quickly was the need to, in these areas where we were in the tuff, and we had this road problem where they were getting bogged down trying to get through that material. We identified putting in the synthetic liner and building the roadbed. That made a big difference, but it didn't make as much as we were anticipating, and we still had problem with dealing with the ribs in the back and some of the problem of getting the advance rate that we were looking for. You couple that with the fact that these inferred areas did not upgrade as we were anticipating that they would upgrade.
Those two things caused, you had more costs and you had less revenue, is really how it came out. Larry?
Yeah. To be fair to the contractor, there have been periods where they've had to grout the water, which is
Basically not advancing when you're grouting. Nonetheless, when we look at it on a per foot basis, the contractor's performance has not been We inherited this contract from Klondex. It's not where we want it to be, and it's time to get control of it.
Okay. It seems that in maybe hindsight, that those were kind of too somewhat aggressive or wishful thinking that you could get contractors to be more productive. I'd understand it if it was your own crews maybe versus the other owner crews.
Well, it was ours as well, Trevor. It wasn't just the contractor. We hadn't seen the productivity from ours as much as we thought we would.
Yeah. The other question, I guess, goes to the infill drilling or definition drilling. Again, that seems a bit aggressive to think that inferred was going to kind of come through for you. If you kind of wipe that out of the future plan, which is probably too punitive, assuming that inferred is just not going to upgrade at all, I guess that just takes it right back to the reserve life. How much is in your internal mine plan that is over and above the actual reserves?
Look, Trevor, the reason we're going to do the review is really to answer what you're getting at with those questions. I don't have an answer that would be meaningful at the moment, we will in over the course of the next few weeks or months to really answer that question. I just don't know.
Can you tell us how much you had planned up to this point? Were you looking for 60%?
Well, realize that the reserve only provides for about a year and a half mine life. Remember, it's quite small. In the acquisition, we have always believed that the key to this acquisition is exploration success. It's drilling, that hadn't changed any. We still believe that we're in the place that we need to be. It's just we're not seeing the results out of Fire Creek that we were hoping we would have in the early stages of this. We still need a plan that can allow us to get to those areas like Spiral 9, 10, 11, to be able to do the drilling that needs to be done. Dean, anything you want to add to that?
Just the fact that really the exploration aspect of the drilling has only started.
Right.
In Fire Creek, we've really done no underground exploration drilling. Exploration drilling from surface will start in a few weeks. We did what I call exploration drilling at Hollister, and we'll clearly do more once the Hatter Graben development has advanced. That upside that we anticipate, we really haven't started to evaluate that. I believe the good news is coming.
Maybe while I've got you, Dean, just a bit of a clarification or some more color. Larry mentioned some refractory type or poor recovery ore. If you go back to, like, the 2015 tech report that would've been done by Klondex, there was a reference in there to some earlier network going way back to 2011, in which there were a few assays that showed poor recoveries, just very low recoveries. Not a lot of them, but a couple. Is that kind of similar situation where when you talk about refractory, you're just seeing very low recoveries on stuff that otherwise you would have thought was going to get treated the same way?
What we're seeing is that the type 1 ore, which historically is what's been mined, those are very discrete veins. The host rock is dominantly basalt. We continued to drill that type of ore. What we're starting to see is, call it a mixed ore. We're now getting into, or at least in areas, where the basalt is mixed with other volcanics. What happens is that the tenor of the mineralization changes. It's less discrete veins. It's more clay alteration, a bit amorphous sulfides. That's the area that we're coming to terms with in terms of recoveries, continuity of grade. It's in that transition zone, in the rock type and in the style of mineralization that we're coming to terms with, and that's probably what was referenced in that technical report that you mentioned.
Okay.
We're having to figure out where that is, and then to the extent we have found where that is, then how do we process it?
Got it. Okay. That's all I had. Thanks, guys.
Okay.
Thank you. Our next question comes from Adam Graf from B. Riley. Your line is open.
Good morning, guys. Thanks.
Hello, Adam. Welcome to your first conference call in a long time with us.
Thank you. Can you guys hear me all right?
We can.
Great. Just one more question on Nevada. I think we've beaten that horse. Just in regards to the Hatter Graben and water, where your plans are for development of Hatter Graben, obviously, very long way from the portal there. Have you guys, in the drilling or in prior exploration there, is there any water at Hatter? How far along are you guys as far as crossing the fault to get over to Hatter?
We have a geotechnical hole that's in the process of being drilled as we speak. I think it's, what, 1,500 feet long. Is that right?
Yeah, that's right.
So far so good. Let's see. If you look at the slide, can we tell them how far it is? There's a series of faults.
Slide 21?
Yeah, there's a series of faults that we have.
Yeah. Shown better in the exploration press release diagrams, but.
Yeah. Short answer is we've crossed some minor faults without any major problems. There's some bigger faults ahead of us. As far as water, there's been nothing serious that we've seen. In the exploration holes that have been previously drilled, there was no indications of water. I think we tried to put in a piezometer.
Yeah, we did.
We didn't get that actually. There was a problem with the hole, I think, it didn't actually get put in.
That's right.
As Phil mentioned, right now, we're either drilling or going to be drilling very soon a geotechnical hole that actually parallels the drift that we're excavating right now. There's been nothing really that indicates anything but maybe some small perch water at this point.
All right, great. Just quickly, any update on Lucky Friday negotiations and/or progress on the Nevada, sorry, the Montana assets that you guys own?
On the Lucky Friday negotiations, there's been meetings that have occurred over a meeting that has occurred in the last, I guess, three weeks. It was the first meeting in seven months. We're pleased to be at the table, and we have another meeting scheduled. There certainly are discussions. The problem is it's a binary issue. We have the ability to put people where we need to put them when we need to put them, or we don't. It's a difficult one to come to a compromise. We're hopeful, and we're glad that we're in negotiations with them. With respect to Montana, we're just continuing to go through the process. We still need to come back with new biological reports and I say we, the government still needs to do that. We're waiting for those to be finalized.
The other things that are in litigation, those will take the Justice grinds very slowly in the U.S., we're still grinding through that process. It's just really slow.
Phil, what's the annual spend, more or less, in Montana?
It's a few million U.S. dollars outside of the Troy reclamation. That program will be completed this year of doing the cover of the tailings facility.
Just one last thing.
The tailings facility will be closed this year.
Just one last thing on Montana. The previous deals that the prior owners had on those assets with streams and whatnot, have those all been canceled or will be up at some future time for renegotiation?
With respect to, there were, of course, two different companies. With one company, there was a stream. The stream still exists. With the other company, there was not any. Is there a renegotiation? No, none that's planned, but that certainly is always something to consider.
All right. Excellent. Thank you very much, guys.
Okay, Adam. Thank you.
Thank you. Our next question comes from Matthew Fields from Bank of America Merrill Lynch. Your line is open.
Hey, guys.
Hi, Matthew.
Just thinking about, I know you said you want to turn Nevada around, and then you'll try to focus on refinancing. It seems like a lot of lifting to do and hoping that the market is there for you when it's all said and done. Do you think that it's important to open up Lucky Friday and have another cash-generating asset as you try to approach the market. So you have three cash-generating assets instead of two.
Look, the message I have given pretty consistently is the core assets are Greens Creek and Casa, and both of those assets have improved. We think that's what the market should be focused on.
Wait, hold on. You spent over $200 million on the #4 shaft on a non-core asset?
At the moment, it's not in the same category as Greens Creek and Casa. We spent that money to set that mine up for the long term, and we need to have a new relationship with the workforce. We're going to see that through, because it's a mine that will operate, we think it, certainly 20, 30 more years, we think could be even longer than that. It's important to get the right relationship with the workforce. We'll do that. It's non-core in the sense that it's not generating the cash flow for investors today. The other thing that we'll be doing, of course, is we've been making the investment on the Remote Vein Miner, and we'll see that coming to site at the beginning of next year.
Okay. Just some quick math on my part. If you, assuming you're cash flow neutral in 2Q, you've got to produce about $20 million or more of EBITDA, otherwise you'll bust through your 4.5 times leverage covenant on your revolver. Are you confident that you'll have access to that revolver after June 30th?
Yeah, the answer is yes.
Yes, of course.
That is why we made the changes, is to make sure we would have access.
Okay. Good luck.
Okay. Thanks, Matt.
Thank you. That does conclude our question and answer session for today's conference. I'd now like to turn the conference back over to Phil Baker for any closing remarks.
Okay. Well, thanks very much for participating in the call. If you have any further questions, please reach out to Mike or I. Have a good day.
Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.