Good day, ladies and gentlemen, and welcome to Hecla Mining Company Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will follow at that time. I would now like to turn the conference over to your host, Mike Westerlund, Vice President of Investor Relations.
You may begin, sir.
Thank you, operator. Welcome, everyone, and thank you for joining us for Hecla's Nevada operations review conference call. Our news release that was issued this morning before market open is available on Hecla's website. On today's call, we have Phil Baker, Hecla's President and CEO Lindsay Hall, Senior Vice President and CFO Larry Radford, Senior Vice President and Chief Operating Officer and Dean McDonald, Senior Vice President, Exploration. Due to time constraints, this call will be limited to thirty minutes, which just leaves time for a few questions.
So if you do join the Q and A, I'd appreciate if you just keep your yourself limit yourself to one question each, please. As a reminder, 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. Such statements include projections and goals, which are likely to involve risks detailed in our Form 10 ks, Form 10 Q and in the forward looking disclaimer included in our Nevada operations press release. 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 measure in this morning's press release, which is available on our website at www.heclamining.com. With that, I will pass the call to Phil Baker.
Thanks, Mike. I'd like to reemphasize the cautions on forward looking statements that Mike made. This call will have many forward looking statements that are subject to the cautions found in our 10 ks and 10 Q, but especially in this morning's news release. I urge all investors to read those cautionary statements about the risks involved with those forward looking statements. Before I go to our go forward plan in Nevada that we announced today, I want to talk about the approach we have taken so far.
You might recall, we said our strategy was to develop and drill Fire Creek, but that development in drilling did not lead to the ounces and cash flow we expected. This has led us to reevaluate our plan in Nevada because we expect our assets to operate on a cash positive basis. Clearly, this one has not. We are choosing to take a slower, more considered approach to Nevada to study the ore bodies, do exploration drilling so that the cash consumption is expected to be significantly lower and our future activities have a higher chance of success. Consistent with this strategy today, we announced that we are focusing on mining at Fire Creek and pausing most of our development activities in Nevada, given the cash outflow the mines have had since acquisition.
With the limited development we plan at Fire Creek, we expect to mine all of the development ore available for near term production, primarily off of Spiral 2 by early twenty twenty. Production is stopping from Hollister and is planned to continue at Midas only until year end as we consolidate the workforce into Fire Creek. The steps we are taking have caused us to demobilize contractors, which we've now completed and lay off about 25 of the Nevada workforce, which is being done today at a cost less than $1,000,000 With this plan, we expect to produce about 60,000 ounces of gold for the year in Nevada, about 10,000 in Q2, 38,000 in the second half of the year. We anticipate costs in Q2 will be up the same in Q1 due to layoffs just happening, but should improve in the second half of the year. In fact, in the second half, we expect cash and all in sustaining costs to be plus or minus $1,000 per ounce after byproduct credits.
So this brings the total year estimate to $1,200 cash cost and $1,700 all in after byproduct credits. Over the second half, we believe we'll generate about $7,000,000 of free cash flow in Nevada at current prices using this strategy. I've described this as a pause. I use that term because at Greens Creek, which is one of our cornerstone mines, we had a pause in the past. We with Kennicott, which became part of Rio, constructed the mine, and after three years of operating it at a loss, we had to shut it down to do more drilling, metallurgy and logistics.
After about two years, the mine came back online and within two years started generating free cash flow, which continues to this day. In fact, there's been about $1,800,000,000 generated since that time. We think the Nevada assets can be profitable over the long term, but we have to take a similar approach as we did at Greens Creek. We will continue to work on how we should mine and process these ore bodies. There's a lot of resource and mineralization that is relatively high grade, but the current cost per ton and development costs are too high.
So we are going to be focused on the goals we started with, which was to improve the processes, lower the cutoff grade, to move known resources into reserves, to improve the rate of development so we can have enough working faces and identify the ore so we can process it with better recoveries. We are approaching it on a slower pace so we have better control over the spend. We plan to continue to advance the work on permitting and hydrology. At Fire Creek, the water discharge in the first five months of this year is over two times what it was over the same period last year. We currently have consumptive water rights for about 160 gallons per minute out of the mine and are working on strategies to higher flows up to about 400 gallons per minute based on our recent work in Spiral 4.
We are continuing to seek third party processes for total milling of our ore. We believe our material is a good fit for nearby mills and that we can utilize existing facilities, potentially allowing us to reduce the transportation and milling costs. We we have a successful three year history of doing this in Mexico, and we think we can use the same approach here. Finally, and maybe most important, we plan to continue surface exploration activities at both Hatter Grab and Fire Creek, which gives us significant information which should aid in the expected restart of development at either project. Exploration has always been a key part of our decision to acquire these properties.
There's more than a 110 square miles with a history of three mines with one ounce head grades. Our experience tells us that we are in one of the best places to find and operate a high grade long term mine. When we get to the end of mining primarily off of Spiral 2 in 2020, as we expect, we will see where we go from there. If the things we are working on come together, then we would then mine off spirals four and three. We also look at how we can do enough development to drill the highest priority targets like Hatter Graben.
So what went wrong? As we previously described, we expected the selling of the indicated resources to result in higher grades, as was historically the case on the project, and that an increase in development will allow an increase in throughput lowering the cutoff grades. This hasn't proven to be the case in the new areas of the mine. And we're seeing more refractory ore and poor ground conditions than initially encountered. While we recognized some of these issues, as is typical with any acquisitions, we could we believed we could bring improvements and still do.
But these issues were more challenging and take more time and study than we thought. While we will assess whether we have a triggering event to determine impairment at the end of the second quarter, I don't currently anticipate that the potential impairment would be large. Why do I say this? Because the acquisition decision ultimately was made mainly on the exploration potential that we saw in each of the properties, not the existing reserves. That has not changed.
What has changed is mining at Fire Creek, which had very little reserves. We have not finished evaluating how we can approach Fire Creek with the improvements that we think can be done. So what's the impact of the changes we are making in Nevada and elsewhere in Hecla? First, our expectation was that Nevada would be about 18% of our 2019 revenue. We now think it's about 14%, so not a huge change.
We are now reducing our annual company wide estimates for capital expenditures by $1,212,000,000 dollars exploration by $9,000,000 and G and A and other expenditures by $4,000,000 So we estimate this will improve our cash flows by $25,000,000 in 2019. Given the long lives of our mines, we can afford to spend less on exploration over the next year. Nevada is the place with the primary reduction, but we still expect to spend $3,000,000 there split almost equally between Fire Creek and Hatter Graben in the form of surface drilling. The capital expenditure reductions are primarily in Nevada, but we expect there will also be less a little less at each of the other operations. While we have cut back, we still have room to reduce costs more if necessary.
The $25,000,000 reduction in expenditures should help us in our goal to operate at close to a cash neutral basis during this time of relatively weak prices. We've talked about our ability to pull levers to throttle back on our activities if needed, and we're taking specific actions to do just that. And this should help us with our line of credit covenants, but I'll talk more about that in a moment. Financial step we have taken is buying puts on about 93,000 ounces of gold at at $1,318 and 2,900,000 ounces of silver at $14.73 to assure Hecla's revenue stream for the next four months. Buying a clip gives us a floor on the price we can expect, but we still maintain all the upside other than the transaction costs.
So from an investor perspective, we're lowering risk and still getting exposure to the upside, which we believe could be significant. Think of it as insurance. We're considering putting more production in place for the rest of the year and part of next year. This gives us confidence in the prices we receive and reduces the risk in meeting our other meeting our revolver covenants. And speaking of revolver covenants, some market observers have expressed concern for our ability to meet that.
And we take that seriously, and it's one of the reasons why we've taken these steps operationally and financially. While we think Hecla will be in compliance with our revolver covenants, we are in discussions with our revolver lenders who have been very supportive. The lenders have reviewed our plans, and I believe they'll modify the revolver to assure Hecla's access to capital we might need in current and projected price environments. We expect our financial position to improve, particularly in Q4. We will continue to draw down and repay the revolver to fund working capital expenses.
But when we look forward to our expected cash flow, we expect borrowings at the end of Q2 and Q3 to be about the same. But by the end of the year, we expect to only have a small amount drawn on the revolver or possibly even none. I think many of you have heard me say that when I came to Hecla eighteen years ago that I was struck by the financial flexibility the company had to manage cash generation. I expect that we will see that flexibility over the next eighteen months. We think Hecla can be cash flow positive over the 2019 and possibly generate as much as $50,000,000 of free cash in 2020 at current prices.
We believe that cash generation can quickly change our debt to EBITDA ratios as commonly calculated. We're working towards a goal of 3.75 by year end and to be around three times by the 2020 or close to where Heckel was prior to the Nevada acquisitions. In 2021, our bonds come due, and last month was our first opportunity to call the bonds at par. Over the past four months, we have met with a number of bond funds, some more than once, to determine the level of interest. We hope over the second half of the year to demonstrate HEPLISA's cash flow generation potential, which we believe will help the potential refinance of the bonds.
However, the bond market doesn't have enough appetite to place all the bonds or if the coupon is too expensive and we would decide to refi, then heck, we would have a number of potential options. For the last few months, we have had a number of financing discussions for transactions in the 150,000,000 to $230,000,000 range, which include a non amortizing loan at Greens Creek level secured by those assets, our gold loan primarily on Casa Berardi or base metal streams on 30% of Greens Creek's base metals. We also considered bank debt or even sell some of our noncore assets such as HivaHosco or Republic property where there's been some interest. The point is that with the quality of our assets and the jurisdictions they are in, we believe we have a number of viable options in addition to the bond market that could materially change how much we need to refine the bond market and at what price. And we had a year until the debt is current on our balance sheet and almost two years till the bonds come due.
So we have some time, we will investigate the options before we make a decision. Before we take questions, one comment on the share price. Our impression is that there has been an overreaction to the issues with Nevada and the implications they have for the company. We believe that the Nevada issues are short term, and the steps we are taking combined with the quality of our assets should maintain and improve the balance sheet. With that, operator, we're ready to take our first question.
Thank you. And our first question comes from Heiko Al from H. C. Wainwright. Your line is now open.
Hey, thank you guys for taking my question. I know we're pressed for time, so I'll keep it brief. But, Phil, you
want to just sort of
walk us through what you're seeing with the debt refinancing kind of rates you're getting quoted, the investor appetite? Just maybe a little bit more color, that would be great.
Sure. Hi, Ted. Well, with the bonds being able to be called at par as of the May 1, we've started an outreach program over the course of the last sort of three or four months. And surprisingly, the level of interest has been quite high. We've had a significant number of meetings, a number of meetings with funds that have quite a bit of capacity to invest a large amount of of money and we've had meetings with them more than once.
And so when we we when we consider that, we we think we are in a position that's unlike some others that have come into the market, because our assets are located in jurisdictions, that that they want. We have these high quality assets in the case of Greens Creek and Casa that have extraordinarily long lives. In case of Greens Creek, an extraordinarily low cost. So we sort of tick all the boxes for them. In in terms of, you know, what the pricing might might be and what the tenor would be, that's that's something for another day.
I'm I'm I'm not prepared to to say what those might be because we we just don't have enough visibility at this time. But I think the main thing to realize is we have bit of time to consider the the best way to approach that market, And we'll take the time to make sure that we're putting our best foot forward in that sort of transaction.
Very helpful. Thank you.
Sure thing, Hakan.
Thank you. And our next question comes from Trevor Turnbull from Scotiabank. Your line is now open.
Yes. Hi, Phil. Hi, Trevor. I just had a question with respect to it's a little bit backward looking, but with respect to the dewatering, I just wonder I know that you were a bit handcuffed in your ability to operate and do exactly what you wanted to do because of the low discharge ability at first. And I know that's in the works to get that raised.
But if you had unfettered dewatering and discharge capability, do do you think you would have been able to achieve your goals at Fire Creek, you know, using the plan that Larry had the way you were you were approaching it? Do you do you think the dewatering was one of the biggest factors in not being able to achieve what you needed?
You know, I'm gonna let Larry answer it. But before I before I do, let me just say that, from my perspective, you know, the dewatering is just one of the issues. It's not the the only one, and it really relates mostly to Spiral four. And it's it's when we look forward, we say, our plan is not gonna gonna be what we thought it could could be. And and and, Trevor, the thing that's been the surprise is the rate of increase that we've had.
I mean, it has literally doubled. I was in a meeting yesterday, and the guys gave the discharge numbers, and it's over the first five months, it's literally doubled. I think it's gone from 29 gallons per minute to 63 or some something that order of magnitude. 23 to 69, that order of magnitude. So so it is it is been something that we were we were not anticipating, but but it's not been the only issue.
Larry, why don't you add to my comments?
Well, the as Phil has mentioned in the south side of the mine, is considerable amount of water encountered in spiral forward and tightened areas and it precluded us from moving forward in those areas. As I said before, there's there were a couple of things that affected 2019. One is, although development in the aggregate is on track, or was on track, development in certain areas was hampered by conditions, principally water. And so that was a factor. And then as I said before, some of the definition drilling that we did, it wasn't huge but certainly impacted that was negative it turned out negatively for us and took some of the ounces that we had planned for 2019 offline.
And as we get out further from the core of the ore body in the future, we need to understand metallurgy better. We're working on that and looking at options for potential alternate processing.
Okay. And I know you guys are looking, I think, take it up to 400 gallons a minute. What's the timing on or what's your anticipation of kind of getting to that permitted level? I'm talking about the permitting process Yes.
It's still a work in progress, and we were meeting yesterday on that. And I don't think the timelines have been sort of finalized by by any means. We we have to make the decision if we'll spend the the the dollars associated with it. Larry, what what would you add?
Well, there's a permit in process now that'll take us from 100 gpm up to about 160. We think that'll happen very quickly. And we also think that we've found an inexpensive process to add to the existing reverse osmosis process. Some of the water in the mine is quite innocuous. It's if you get it separate from from the the sumps basically, if you can get it right out of the rock, it's actually quite easy to treat or seems to be.
And so we've we've we've found a Greenstone process as it's called. It's simple. It's easy to add. It's inexpensive. And we are looking to bring in a 100 GPM unit to to base almost double where we are today.
That's pretty simple, we think. Get up around 400, we're talking permits. Our environmental team is looking at a non consumptive water right, which is the first step. And that may take some time. We're just starting that process now.
Okay. And then two real brief follow ups, and that's all I have. But if you were, say I guess the question is, at what level of dewatering could you kind of turn this into a dry mine as opposed to kind of still needing to supplement things with like the geomembranes to clean it up? Would there be a point of dewatering where you actually just got dry drifts and you don't have kind of that sloppier stuff that you've been mitigating with the geomembrane?
You want me to answer that?
Yes, go ahead, Larry.
The water that we've encountered is perched water basically, so it will drain down. But what happens is as we expand north and south, we open up more perched water area. So we believe that we have a model I should say that indicates that about 400 GPM will be the peak. And yes, I mean, so I mean, we're not talking a lot of water, right? I mean, we're in the Barrick Arena in Nevada, it's tens of thousands of gallons per minute.
We're talking hundreds.
Yes. And then the very last thing, is there any sort of temporary, like, surface storage for water such that you don't actually need to discharge? Is there a place where you could just pull mine out of the water, store it, and, you know, kinda wait for for eventual treatment and discharge down the road?
Yeah. We've got we've got two places that we're looking at.
Okay. That's all I have. Thanks, guys.
Uh-huh. You're welcome.
Thank you. Your next question comes from Matthew Fields from Bank of America Merrill Lynch. Your line is now open.
Hey. What what's the revolver balance right now? I know it's 85,000,000 as of the date of the October.
It's I I don't know, but I I know it's less than that. It's no more than that. Lindsay, do you know?
No. It's about that. So
Okay. And then how much did buying all those puts cost?
2 and a half million.
Okay. Great. And then my last question is, equity consensus has your EBITDA at about 120,000,000 but your new CapEx guidance is about, what, 138 Yep. And your exploration is, you know, about 16. You know?
I'm I'm just saying, how are you gonna reduce your debt load if you're spending more than your, you know, your EBITDA and then you've got interest and yeah. Like, how how are you gonna reduce where where is this cash coming from?
I there's, I think, an underestimate of the EBITDA by the market.
Okay. All right. Good luck.
Okay. Thanks, Matt.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Phillips Baker for any further remarks.
Okay. Well, thanks very much for coming on a call at the at the last moment like this. We appreciate you taking the time and sharing the interest. And to the extent you have any questions, please feel free to give Mike or I a call. Very much.
Have a good day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.