Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hecla Mining Company third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Anvita Patil. Please go ahead.
Thank you, operator, and welcome everyone. Thank you for joining us for Hecla's third quarter 2022 financial and operations results conference call. I'm Anvita Patil, Hecla's Vice President of Investor Relations and Treasurer. Our financial results news release that was issued this morning, along with today's presentation, are available on Hecla's website. On today's call, we have Phil Baker, Hecla's President and CEO, Lauren Roberts, Hecla's Senior Vice President and Chief Operating Officer, and Russell Lawlar, Hecla's Senior Vice President and Chief Financial Officer. Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and involve risks as shown on slides two and three in our earnings release and in our 10-K and 10-Q filings with the SEC. These and other risks could cause results to differ from those projected in the forward-looking statements.
Reconciliations of non-GAAP measures cited in this call and related slides are found in the slides or news release. With that, I'll pass the call to Phil.
Thanks, Anvita. Good morning, everyone. Thank you for joining our call. With this being the first conference call since the September seventh closing of the Alexco transaction, I want to start with a few comments on Keno Hill. You know, the week after the closing, I, along with Lauren and our Chief Administrative Officer, Mike Clary, went to site. We went to Mayo, which is the local town, and to Whitehorse. This visit was timed around the biweekly shift change, which allowed us to meet, I'd say about 140 of the 170 employees. The enthusiasm of the workforce was palpable. The crews are excited to have resources and plans that allow them to be successful. We're going to have our challenges, but I think we're starting at a very good place.
We also met with the Yukon federal and community leaders. There's a recognition that Keno Hill is a high-profile project for the Yukon, and that's important for the. This project is important for the success of mining development in the Yukon. I'm confident that we're going to receive all the support that these folks can give. Lauren's going to go into our performance and plans for the rest of the year, operationally. Now, the third quarter marked another strong operational performance from all of our mines, where we actually achieved new records at each of them. At Greens Creek, we've been working to increase throughput, and we've begun to see the results where we produced a quarterly record of about 2,500 tons per day at throughput.
At the Lucky Friday, we produced in excess of 1 million ounces for the second consecutive quarter, all while executing a very significant capital plan, which is going to allow us to further increase throughput and reliability. Casa Berardi also continued to achieve new monthly throughput records, one of the months during the quarter. With Keno Hill expected to be in production next year, Lucky Friday's growth and Greens Creek's consistent performance, we now expect to produce in the range of 17 million-20 million ounces of silver by 2024. This production will not only be the largest producer of silver in the United States but will also be the largest in Canada. Despite Hecla being a 130-year-old company, we believe we are the fastest growing established silver producer.
While we are investing our business with large capital programs at each of the mines and at Keno Hill, we ended the quarter with a very strong balance sheet, which we're committed to maintain. Russell will talk more about that. Strong operational performance in the year has allowed us to increase our silver production guidance while maintaining our operating and capital cost guidance despite adding Keno Hill. Lauren, why don't you give some insights into our operations?
Thank you, Phil. I'll start on slide six. Greens Creek produced 2.5 million ounces of silver in the third quarter, 2.5% higher than last quarter. The mine produced approximately 2,400 tons per day, and the mill achieved a new all-time throughput record of 2,500 tons per day. Lower lead grades resulted in the deferral of a silver concentrate shipment to the fourth quarter. The impact of the deferral is lower revenue and cash flow in the third quarter, as well as lower cost of sales because the costs related to the shipment were recorded in inventory. In the fourth quarter, there will be a higher cost of sales with offsetting revenues and cash flows of approximately $ 18 million as the inventory charges are reversed.
Cash costs and all-in sustaining costs for the third quarter increased to $2.65 per ounce and $8.61 per ounce respectively, driven by lower byproduct production, lower byproduct prices, and tight labor market that required the use of some contractors, primarily in maintenance. Greens Creek is positioned for another strong year and generated $86 million in free cash flow for the first nine months of the year. Despite the deferral of the silver concentrate shipment to the fourth quarter, the mine was free cash flow positive in the third quarter.
For the fourth quarter, we expect similar operational performance with a slight decline in production due to approximately 8% lower silver grades related to the mining sequence. We are affirming our cost guidance for the mine and expect the mine to meet the increased production guidance of 9.3 million-9.6 million ounces of silver for a solid finish to 2022. Moving to slide seven, Lucky Friday silver production exceeded 1 million ounces in the last two consecutive quarters. For the first nine months of the year, the mine produced 3.2 million ounces of silver, which already is 90% of last year's production. Cash costs for the quarter were $5.23 per ounce, higher than the second quarter of 2022 due to lower byproduct credits driven by lower lead and zinc prices.
All-in sustaining costs for the quarter were $15.98 per ounce due to planned higher sustaining capital spend. Significant sustaining capital projects in the quarter included work to raise the tailings facility and infill drilling to support the accelerated UCB production pace as we target more than 5 million ounces a year in production. Also in the third quarter, due to a multi-week shutdown at the Trail smelter, a 2,000 dry metric ton silver concentrate shipment containing approximately 216,000 ounces of silver and 2.9 million pounds of lead was deferred to the fourth quarter. The deferral had an impact of $6 million on the mine's revenues. The mine had negative free cash flow of $4.5 million for the quarter, primarily due to the deferral.
Year to date, the mine has been free cash flow positive, generating $8 million net of our investments to grow production. We are affirming production and cost guidance for the mine, but are lowering capital guidance to $56 million-$58 million due to the timing of some capital expenditures. The quarter continues to highlight the UCB mining method's success in managing seismicity and improving productivity at the mine. With grades getting better at depth and increased throughput, the mine is set to produce more than 5 million ounces per year in the near future, and we believe this mine's best decade is ahead of it. Turning to slide eight, Casa Berardi produced just over 33,000 ounces, in line with the second quarter.
All-in sustaining costs increased to $1,738 per gold ounce due to higher sustaining capital expenditures associated with a design change in the expansion of the tailings storage facility and increased exploration spending. Casa Berardi's costs remain more exposed to inflation than our other mines due to the absence of any significant byproducts and the relatively larger volumes of material mined and processed. Casa Berardi remains an important part of our operating portfolio with a large underexplored land package. The operation provides us gold production and scale, and our exploration is focused on adding higher grade underground material. Recent drilling results have shown good continuity of high-grade zones along the 113 and 118 sector. Casa Berardi generated positive free cash flow for the quarter as well as for the first nine months of the year.
We are affirming our production on cost guidance and are lowering our capital guidance slightly to $42 million-$45 million, as some capital projects will be completed in 2023. We completed the acquisition of Alexco in early September. From day one, our focus has been on development, and the advance rate has increased by 40% since acquisition. At the end of October, we had completed about 30% of the total development required prior to starting the mill. We expect the advance rate to continue to improve as we embed mining practices or receive more equipment. By the end of 2022, we expect to have completed about 40%-50% of the development required to start the mill.
We are incurring around $4 million a month of cost, so in the fourth quarter we expect the capital spend at Keno to be in the range of $10 million-$12 million. We anticipate achieving full production run rates in 2023, with a mill start in the second half of the year yielding about 2.5 million ounces of silver. We'll give a more detailed production and cost guidance for 2023 later this year or early next. Slide nine highlights some of the work we have planned at the Bermingham deposit, where the focus will be on the Bear Zone. The white highlighted development is what we plan to complete this year, and the red arrow shows about where we expect to be when we begin stoping.
Moving to slide 10, this image shows our work plans in the Upper Lightning Zone of the Flame & Moth deposit. As on the previous slide, the white highlighted development shows the plan we expect to complete this year, and the red arrows show where we expect to be when we start stoping. With two deposits and multiple production horizons in each, we'll have a high level of flexibility to meet production demands. This has been a major issue for Keno Hill in the past that we intend to solve. While our immediate focus is on these two deposits, let me end with a comment on exploration that gives us confidence in the potential of the district. Drilling on the underexplored Coral-Wigwam target, which is about 1.3 km from Bermingham, yielded a 101-ounce drill hole intercept over 7.3 true ft.
These are early days in the exploration program, but nonetheless very encouraging and quite exciting. With this, I'll pass the call to Russell.
Thank you, Lauren. Turning to slide 12, third quarter revenues were $146 million, 30% from silver, 42% from gold, with zinc and lead at 28%. Our revenues decreased approximately $45 million from the prior quarter, primarily due to the deferral of Greens Creek's and Lucky Friday's silver shipments to the fourth quarter, as Lauren has described. These deferred shipments had an impact of approximately $24 million on revenues, and we also saw lower prices across all four metals. As we indicated on last quarter's call, we are investing our cash in our operations for future production and cash flow growth.
Due to the revenue reduction, capital spend of more than $37 million for the quarter, transaction costs incurred from the Alexco acquisition, refinancing of our revolving credit facility, and working capital changes related to the deferral of revenues, as well as interest payments of $18 million in the third quarter, our free cash flow for the quarter was negative $62 million. Even with relatively lower silver prices and a reduction in both the byproduct prices and production, we continue to see solid cash flow and margins from our silver assets, where we had a consolidated all-in sustaining cost of just over $10 per ounce year to date with a margin of more than $11 per silver ounce. Free cash flow generation from our three operations for the first nine months of the year was approximately $98 million.
As we look to the remainder of the year, we anticipate maintaining a cash balance in excess of $100 million while keeping to our prudent financial policy of maintaining a net leverage ratio of less than 2/1. Turning to slide 13, we've seen inflationary environment of earlier this year continue into the third quarter, where prices of key inputs continue to remain elevated around 15% higher than at the beginning of the year. We are continuing to experience a tight labor market, especially as we recruit for experienced miners and skilled trades such as mechanics and electricians. At our silver operations, we have seen our byproduct credits, which provide some offset against inflationary pressures decline, primarily due to the decline of byproduct prices.
We are focused on managing our cost structure and reaffirming our cost guidance even after we've seen prices of byproducts come down. We remain confident that we can execute our mining and development plans at our operations, even in this current tight labor and inflationary environment. With that, I'll pass the call back to Phil for his closing remarks.
Thanks, Russell. We'll go to slide 14, which just gives you a view of our guidance for production and for costs. What you'll see is our production guidance. We announced earlier in the month or late last month that we were increasing our production guidance at Greens Creek because of its strong operating performance year to date. You know, as Russell has described, we have this inflationary pressure, but we're able to affirm our cost guidance and we're also maintaining our capital guidance because we're lowering capex at Lucky Friday and Casa to offset the development expenditures that we have at Keno, the $10 million-$12 million that we mentioned.
Other thing I just want to mention while I'm on the guidance is really a call-out to our employees for our safety performance. Our all injury frequency rate for the first nine months of the year was 1.32, and that's 37% lower than the U.S. average, and it's an improvement of 19% over the same period from 2021. Thanks to all the Hecla employees for this achievement. I wanna end with a number that caught our attention, and this is on slide 15. India imported 200 million ounces of silver in the first eight months of 2022. The silver bullion market is about a billion ounce market. That's 20% of global demand for silver that they imported over the first eight months.
Now, India's increased silver imports are a key factor that caused the silver in the London vaults to be at the lowest level since 2016. Silver buying in India was muted during COVID. This is more than double last year's imports, three times the 2020 levels, and about the same as 2019. The message is India, Indians are back buying silver for jewelry and silverware, because that's about 3/4 of the silver purchases are for that purpose. Where it's really coming from is millennials and the Gen Z population in India are more keen on silver jewelry than gold jewelry, due to changing fashions or the desire for the ability to change their jewelry frequently, and the ability to have lightweight jewelry that complements a more professional look.
Anvita is Indian, and she said to me that her younger cousins who are in India have expressed a preference for silver jewelry for daily work wear. Typically, when you hear us talking about silver, you hear us talking about the use of silver for energy transition, and we still think that's the future for silver. We do view this increased demand in India as providing a great base to the silver price. Finally, I want to emphasize our commitment to silver. While we believe in gold and see a need to have gold operations, and we'll probably even grow our gold operations, we have been a silver company for 130 years, and we think the future could not be brighter for the metal, and we see more upside relative to gold.
We're working hard to increase our exposure to silver. Since I've been at Hecla, we've gone from 6 million-7 million ounces of production to 10 million-12million, and now we're heading to 17 million-20 million, and all of that production is in the U.S. and Canada. We expect in the next year or two for our silver revenue to exceed gold and probably go over 50% of our total revenues even at the current gold-silver ratio, which we expect to improve. This will put us in a unique position, especially since other silver companies are seeing a decline in their silver exposure. With that, Regina, I'd like to open the call for questions.
At this time, if you'd like to ask a question, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again. Our first question will come from the line of Michael Siperco with RBC Capital Markets. Please go ahead.
Thanks, very much, operator. Thanks for taking my call. I know we'll get more on Keno Hill as time goes on, and thanks for the update today. Can you go into any more maybe surprises that you've had since taking over, good or bad? Anything that we should be watching for in terms of the update or the startups? Anything along those lines?
I guess I'll let Lauren give his views, but the first thing I'll say, Michael, is that if you think about the due diligence process we went through, we had 63 days of people on site, you know, before this transaction was ever announced. I think we knew everything that you could know at that time. From my perspective, not a huge number of surprises. Lauren, anything that really sticks out to you?
I guess the one thing that sticks out to me, and it's positive, excuse me, folks, is the reception that we received, how welcoming the entirety of the workforce right down to the miners have been to us. I think it just gives us a great platform to start from. We knew we would be well received there, but I don't think any of us recognized how well received we'd be.
Yeah. The food was pretty good at the camp.
Yeah. Yeah, you would definitely need to go on some kind of exercise program if you were there for very long.
That's good to hear, I guess. Okay. I guess maybe a couple more from me and I'll hand it over. Maybe a similar question on CapEx at Lucky Friday. A number of big projects you've highlighted as being on the go there. With the lower CapEx now in 2022, should we be expecting more or less a deferral of that CapEx into 2023? I know you're going through the budgeting process, but should we be thinking about a similar type of number in 2023 as we saw in 2022, or has any thinking changed along those lines?
No, it's just a deferral into 2023. You know, relative to where we were going to be for 2023, which of course is not disclosed, we will be slightly higher with this deferral. You know, part of it is, we're deferring it for operational reasons. Some work was slower to get done, and rather than trying to push through that work in the winter, and this is on the bunker, we're gonna wait until the spring to complete it. Lauren, anything to add?
No, that's exactly correct. We did an analysis of the potential benefit of working through winter versus the cost and determined it wasn't worth the risk of working through winter on that particular project. We're buttoning up, putting it to bed by roughly the end of November. We'll come back to it early in April. It was a project that we could defer some spending on and made the decision to do so. The real game-changing capital project at Lucky Friday is the service hoist, and it is on schedule and going great. I was at Lucky Friday this week and got to tour. The building is up, the hoist is in place. It's being wired, and we're preparing the shaft to receive the guides for the service hoist. That project's going really well.
The other thing, Michael, is there is equipment that's slow to come, and that's part of the deferral from 22 to 23. You know, so we will make those expenditures, and that's not just at the Lucky Friday, that's across the company.
Got it. Thanks. Okay, maybe switching gears quickly to the byproduct credits and the zinc and lead production. Have you considered breaking out lead and zinc guidance more than you do for some more predictability? I know it's the nature of the beast to an extent. Is it just too hard to really predict on a quarter-by-quarter basis what those credits will be from Greens Creek and Lucky Friday?
You're the first person to ask for that in 20 years, so we'll consider it.
Okay. I'll take that under advisement. Maybe just one other silver question. You brought up demand in the physical market. I suppose we're still seeing a spread between that physical, more retail-focused silver price and the spot price. Maybe narrower now that we've bounced up off the $18 level over the last few weeks, months. I suppose two questions. Are you seeing the same thing? Assuming that you do you see any opportunity to exploit that spread, or do you just see it as a maybe a positive sign for future silver prices?
Well, it's really a sort of wholesale to retail purchase of silver. If you look at 1,000-ounce bars, there's not that big of a spread. The spread really is at the retail level of the 1-ounce and, you know, coins and medallions and the like, and the 100-ounce bars. You know, we produce. The final product we produce at our silver mines is a concentrate. We don't have, you know, physical metal to you know, try to do something at a retail level. We're not intending to try to do that, at least at this point.
Sorry, go ahead.
You could conceivably toll the material. We haven't really ever seriously considered that.
All right. I mean more as a view on the market. Not to suggest you start producing coins or rounds, but do you see that retail spread as being indicative of anything that you would see in the broader market, in the broader silver market?
Well, I think it's not dissimilar to what we've seen in India with an increase in demand. You know, it provides that fundamental underlying demand that supports the price, makes it going down in a significant way really hard for it to do and, you know, gets you more risk to the upside.
Okay. Very good. Thanks for my questions. I'll pass it on.
Your next question will come from the line of Lucas Pipes with B. Riley Securities. Please go ahead.
Thank you very much, operator. Good morning, everyone. My first question, Phil, is on the cost side. Great to see that cost guidance is flat this year, and I wondered if you could expand on that a little bit. Are we seeing inflationary pressure subsiding, or is this really more testament to your cost management? Thank you for your perspective on that.
It's certainly not subsiding yet. I don't think it's increasing, but we're continuing to have this inflationary pressure. I mean, you know, I'll just use diesel as an example. You know, the price of diesel is significantly higher than it was, and we're just very focused on managing, you know, our costs and, you know, the best way of doing that to an extent on a per ounce basis is increasing throughput. I'll let Lauren and Russell add any comments.
Yeah. I think the denominator is key, and so we've been driving to generate more metal, more revenue. You know, we had some visibility that there was going to be an inflationary period and did some budgeting accordingly. I think it exceeded our expectations in many cases, but we did protect ourselves a bit during budgeting.
Yeah, I think Phil, you got it. You know, it's certainly not subsiding. But I think as we've moved through the year and you take into account the budgeting changes that Lauren has mentioned, I think that the cost guidance, what you've seen is that we've been able to take in the inflation into account essentially. But it's still, you know, high compared to what we've seen in the past.
That was very helpful. Thank you. As a quick follow-up on this point, are you seeing areas where costs are coming down, or conversely, what are the key pressures today that are still running through the system? Thanks.
Well, yeah. We are seeing some cost reductions on some of the materials, but it's not dramatic. It is at the margin and not particularly meaningful. The more important thing is that they're not going up at the rate that they were.
I agree. They tend to be the, you know, the, coming off of an inflationary period, the costs tend to be fairly sticky, and they lag the change in the broader market, by at least a quarter.
You know, the other thing to remember is where are our costs and, you know, labor is almost 40% of our costs. We've had increases during the course of the year. We think we're at or above market, and so that gives us a little bit of room to wait for the market to catch up to where we have our labor expenditures. These other items, while the costs might be, and I'll look at consumables at 18%, might be significant in the aggregate 18%, each individual cost is actually quite small as a percentage of our total.
Very helpful. Thank you. My second theme I wanted to touch on is the reshuffling within your CapEx guidance. Not huge numbers, but what are some of the things you're saving at Lucky Friday and Casa Berardi, and I'm sure you had thoughts about why you had it in the budget in the first place, so would appreciate what the trade-offs are.
Yeah. Lucas, it's really just a deferral. It's as I said a moment ago, you know, some of it is just operational benefit to wait. In some cases, you know, the suppliers have not been able to deliver the equipment. Frankly, almost every year, our guys are very excited and ambitious, and they will project projects that they just don't have the time to actually get to. Lauren?
No. We see it every year. We tend to forecast our capital expenditures higher than they materialize, but we generally come pretty close to budget, which will be the case this year.
Got it. Is it reasonable to assume there's a catch-up then next year if this is deferral, or would you say it's kind of this happens on an ongoing basis, so it wouldn't be a kind of catch-up?
We would hope that we'll catch up in 2023 with the expenditures that we defer into that, 'cause it's primarily equipment and a couple of major-
It's largely growth, right? Assuming the projects are executed the way we expect them to be, we should catch up.
Yeah. It's like you said, these are projects we wanna do. These are projects that we want to do, so.
Should we assume higher CapEx for 2023 directionally?
We haven't given guidance on 2023. We're still in the budgeting process, so let me hold off doing that until we're ready.
Fair enough. Phil and team, really appreciate the update and continued best of luck.
Thank you.
Thank you.
Your next question will come from the line of Heiko Ihle with H.C. Wainwright. Please go ahead.
Hey guys, this is Marcus Giannini calling in for Heiko. Thanks for taking our questions. You've seen about $3.6 million at Keno in the quarter, and you're expecting $10 million-$12 million of spend in Q4, which gets us from 30%-50% of development complete. How long do you think we can trend line that figure of 20% costing about, you know, $10 million-$12 million? And then, I guess while you're at it, you know, how much are inflationary impacts hitting you in that area specifically?
Well, you know, it's hard to say specifically, but, you know, we certainly feel the same inflationary pressures we do elsewhere. The real concern is the fact that diesel costs have gone up. As far as the assumption, look, I think if you're assuming that we'll spend sort of at that same level during the course of next year, you know, sometime we'll turn on the mill probably in the third quarter. You know, maybe we'll be able to advance to the second depending on how well the development goes. Certainly we will be in full and consistent production by the end of the year. That is our objective. You know, everything else that we can do that gets us ahead of that is upside for us.
At the end of the year, early next year, we will give, you know, guidance, specific guidance on Keno as well as on the other properties. Things to add?
Yeah, we expect the development rate to increase over time. It's just learning curve. It's learning the ground and also getting some of the equipment that we have on where it will help accelerate the development rate. I would expect the capital expenditure for development to escalate with the development rate in proportion to the development rate. I guess the other thing is we have some capital construction to do, which is a seasonal thing. As we hit April/May timeframe, you'll see some of that spending increase.
Yeah, I think in general you should look at Keno Hill. You'll probably see a bit of a ramp up in costs, kind of similar to what Lauren is mentioning, but the lion's share of it is generally a fixed cost. You know, the cost that we've said, kind of that monthly spend is about what they incur or we incur up there. As it relates to inflationary pressures, keep in mind, we're looking at this from the lens of, we just closed the acquisition in September. Is inflation high? Yeah. But the changes took place really earlier in the year. I think it's kind of from a baseline perspective, we had that already in our thought process.
Okay. Gotcha. Yeah, that's really helpful. For my next question, it's already been touched on quite a bit with Lucky Friday and Casa and, you know, the CapEx being deferred to 2023. I guess ask about equipment availability, you know, what types of items are you guys having difficulty sort of procuring on that front?
Mechanics.
Yeah. The biggest challenge is filling the mechanical trades ranks. In terms of equipment, it's sort of a mixed bag. You know, you can't even really point to one manufacturer being slower than another. Even within a single manufacturer, you know, the delays may be incurred at a particular facility, which means it might be one class of machine, whereas we don't have trouble getting another class of machine. It's really an odd mixed bag there. It's difficult to say that there's a trend other than the industry is strong and there's demand for equipment.
Okay. Fair enough. Yeah, that's it for me. I'll hop back in queue. Thanks, guys.
Your next question will come from the line of Joseph Reagor with Roth Capital Partners. Please go ahead.
Hey, Phil and team. Thanks for taking the questions. A lot of stuff I wanted to touch on was already hit on, but just kinda wanna follow up a little bit on Keno Hill and make sure I fully understand it. Once you guys start the mill up, we should expect the development capital to trail off, correct?
What will happen is there'll be a split in the development capital between continuing to advance the primary development, that ramping system that you saw on that slide with the green. You know, maybe call it maybe half of the expenditures will be related to that sort of development, and the other half will be related to up-stope access development.
Stoping.
Stoping, so.
Okay.
Recall that, these are mines with more than 10 years of life, so there's a lot of development remaining to be done there.
Yeah. Yeah, fair enough. Okay. Looking at Casa, you know, this quarter costs or total costs exceeded revenue. I know that there's some accounting stuff behind that. You know, any concerns about the inflation there and, you know, kind of a weak gold environment and putting you guys in a position at some point that, you know, if gold doesn't recover from this level that, you know, you guys have to reconsider whether or not to continue operating the mine?
Well, I think that's probably too strong to say continuing the mine. It really is a question of how much capital investment you can make. Because we do have the objective of you know trying to have all of our mines be cash flow positive. We've really had that as a mantra for some time. While we are willing to have periods of time for them to you know need capital infused, you know these are operating mines that should be able to you know be cash flow positive and generate returns you know for the overall corporation. Are we looking at ways of improving the performance at Casa? Yeah. Absolutely, all the time. So yeah. Lauren, anything to add to that?
We're always looking to optimize plans and based on the cost structure, inflation, metal price. We're always optimizing both the underground and the open pit plans. The open pit plans are really the bigger lever, I would say, because of the volumes of material. From a cost perspective, that's the bigger lever. The lever on the revenue side is the underground mine, so we're always balancing those things.
You know, fundamentally, we think we have this 37-km strike on the Casa Berardi break that is very, very prospective. It is very underexplored, and that's where the grade comes from. You know, you're gonna see us continuing to explore, continuing to look for that higher grade material. You know, the drilling that we're doing in the 113 is interesting. There's some high grade that we've seen, but. If you'll recall, going back a decade, that was, the 113 was the real high-grade material that that drove the value of the mine. If we can find some more of that material, it's a whole different proposition at Casa Berardi.
Okay. Fair enough. Just on inflation, I guess maybe you guys can attempt to quantify, you know, what part of the inflation you've seen you feel will be, you know, sticky versus what part you think might have some kind of pullback as the world normalizes again at some point in the future. You know, is it, is it 50/50, 60/40? You know, how do you feel about that?
Look, labor will be sticky. Contractors will vary. Diesel will vary. The others will be slow to move, but they will vary. You know, the steel, that sort of items, the consumables.
Okay. With labor-
Labor, once labor goes up, it's hard to have it come down.
Yeah. Okay. All right. Fair enough. I'll turn it over. Thanks for answering the questions.
Sure.
Your next question will come from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.
Thank you. I wanna congratulate you on your 10%-15% rate of cost growth. I keep a log of three dozen companies where the seven-quarter cumulative cost increase is 41% or 6% per quarter. Nevada Gold Mines's open pit mining cost per ton rose 50% cumulatively over seven quarters or 7% per quarter. Phil, I want you to tell us how you're gonna keep doing so well. Particularly, is 1 million ounce a level where Lucky Friday tops out, and is 2,500 tons a day a level where Greens Creek tops out? Can those productivity gains continue and help you keep costs under control?
At Greens Creek, our objective is to try to get to 2,600 tons. To put that into perspective, we were around 2,100 tons a day when we started operating the mine. That's a big increase, and it's mostly cut and fill mining and you know, my hat is off to the performance that those guys had, because we've been at 2,500 tons a day for this year. You'll see us try to continue to increase the throughput. At the Lucky Friday, you know, we've gone to this new mining method. It's much more productive, much safer and you know, I think that the ability to increase the throughput there, you know, we've already demonstrated. We've gone from 800 tons a day to 1,100.
We're on a path to 1,200. Lauren won't like this but, you know, I think there's more beyond that.
There's always more. It's just what the curve looks like.
That's really the, you know, trying to increase productivity. i.e., not add additional people to the extent you can avoid that, but, you know, improve the productivity per person. There are some technologies that we're certainly looking at that we think will be constructive. But I will tell you that we are on the cutting edge of technology when we look at some of the stuff we're trying to do at Greens Creek, for example, with automated haul trucks. You know, our vendors say we are, you know, there at the forefront of what anyone's able to do. Lauren, why don't you add to my comments?
Yeah. I think the key really for us is to get the very most we can get out of the capital we've already invested. In some cases, we make additional investments where we see incremental opportunity. It's very much a denominator game, and so being efficient and moving more times and more metal with the same or slightly increased resources, it's a winning combination for us.
Just a comment on, you know, you mentioned Nevada Gold Mines, and the thing to remember is we have small underground mines, which is a huge advantage in this inflationary environment because we just don't have the amount of cost per ton, I mean, in aggregate, not per ton, but in aggregate. So, you know, a move in the diesel price for them is much more meaningful than it is for us.
Phil, could you run through what the natural bottlenecks or limiting factors are at Greens Creek, Lucky Friday, and Casa Berardi, tailings, mill capacity, shaft hoisting, underground mining? Which are the limiting factors in each site?
Sure. Why don't we together start with the Lucky Friday?
Sure.
The Lucky Friday, you know, fortunately has had a large amount of capital, and that's true for all the mines, a large amount of capital that's been put into the mine. We are clearly able to get to 1,200 tons a day without reaching any bottlenecks. Now that's true because of the service hoist that we're putting in. Otherwise, the hoist we have would have been the bottleneck to get to that 1,200 tons a day. When we get to 1,200 tons a day, it starts to become the mill. At the Lucky Friday, you know, continually have to expand tailings facilities at the Lucky Friday, and we're fortunate in that we now have a land package that allows us to have tailings for as far out as we can really see.
You know, I think we're in pretty good shape at the Lucky Friday. To get beyond 1,200 tons a day becomes about the mill.
We'll chase bottlenecks around there, but most of them can be resolved with modest investment. You know, the Hollywood problem would be if we put another zone into production and meaningfully needed to change what was happening in the mill. But even so, it would be just expanding the grinding circuit. Not a huge investment.
At Greens Creek, I mean, the real issue we thought was the mill, but we keep increasing the throughput of the mill and with very small adjustments. As I said, we've gone from 2,100 to 2,500, and we think we'll be able to get to 2,600 without any meaningful investment. We're now in a position where the mine itself is the bottleneck. Part of the issue with the mine is the length of the haulage that we have. If you go to the 200 South, that is about a 40-minute haul from the bottom of the mine, maybe even 50 minutes. That's a lot of time, you know, and a lot of people that have to be engaged in that activity.
That's one of the reasons why we're trying to figure out if there's an automated solution or a quasi-automated solution to try to improve the haulage. You know, the backfill is, and delivering of the backfill throughout the mine is a bottleneck. You know, I don't think there's gonna be much issue as far as getting to the 2,600 tons a day. Lauren, anything to add?
No, I agree.
Of course, tailings at Greens Creek, and we're in the process of permitting the next tailings, even though we just completed the permitting on the last tailings, what, two years ago, I guess. We see it as about a 10-year process to permit and construct tailings, I guess eight years. We're well on track for that. At Casa, you know, we've been able to increase the throughput of the mill. We doubled it. We were at 2,000 tons, roughly we're at 4,000 tons. Growing that mill production is not really the, you know, what we're focused on. It's really about improving the grade of the material that comes into the mill. We've looked at ore sorting there.
We've looked at, but you know, fundamentally, it becomes finding more higher grade underground material.
Thank you for the rundown.
Sure thing, John.
Our next question is from the line of Lucas Pipes of B. Riley Securities. Please go ahead.
Thank you very much for taking my follow-up. I want to ask another question on cash costs. With the diesel price increases this year, can you speak a little bit to the trade-off of surface versus mill utilization there and any light you could shed on underground versus surface costs and how that might help how mix might help to optimize costs at the site going forward? Thank you for your perspective on that.
Lucas, you broke up a little bit, but I think what you're asking is sort of the relationship between the underground production and the surface production. Generally speaking, we'd like for it to be about 50/50. But it all depends on what the grade is of the underground. You know, that's what we try to get to. It's difficult because of the amount of development that you need to do for these relatively small stopes. I don't remember those numbers, but it's pretty challenging development rate to be able to access the stopes.
Yeah. That's correct. It's. Again, I think the way to think about the underground is right now we need to turn around 140- 150 stopes a year underground to sustain the target production rate to the mill. Our operating philosophy there has been to maximize the throughput and reliability of the mill, which we have achieved, and then feed the mill the best possible grade, so underground preferentially backed up by open pit, but always keep the mill full. That's been the operating philosophy.
When you think about this mine over the long term, you know, where this mine will generate a huge amount of cash flow is when you stop development and you stop, you know, laying back the open pits and all you're doing is mining the ore, then this thing becomes a huge cash flow generator. We're trying not to get to that point. We're trying to continue to extend the mine life, generate free cash flow in the meantime, generate returns to us in the meantime.
Very helpful color. Again, best of luck, and thanks for taking my questions.
Good. Thank you.
Our next question will come from the line of Jeff McKelvey with Individual. Please go ahead.
Hello. Thank you for taking my call. Good morning. My question was, what are some of the current and looming challenges for Hecla Mining as you move forward?
Well, look, the issue that we have, as do most companies, both mining and otherwise, is people. You know, we are, you know, on a continual recruiting effort. We have more, much more, focus on them than we've ever had in our history. It's really about getting the people that you need. You know, if you think about mining engineers that are coming out of school, it's you know, super small number compared to what it was 10 years ago, 20 years ago, 30 years ago. So maybe you have to repurpose other engineers from other disciplines. It's that is the big challenge for us and for the industry.
Yeah, that makes sense. Thank you so much. Thank you.
You're welcome.
Our next question comes from the line of Jasper Wyk with [Walpow]. Please go ahead.
Thank you for taking my question. You guided for $42 million-$45 million in capital expenditures for Greens Creek. You have so far barely spent $25 million, despite the fact that you usually underspend in the winter months. Is this due to timing of the payments, or are you, as for Keno and Lucky Friday, deferring some expenditures to 2023?
Yeah, no, the back-weighting of the capital at Greens Creek relates largely to equipment that we've seen delayed that we've ordered. That would be sort of the largest item. Anything else?
No. We've wrapped up our capital construction for the year. It's done and completed as expected. It really is the equipment.
Okay. Thank you. Congrats on the encouraging drilling results at Keno Hill. I wonder at what time, at what point in the future are you looking to put out a resource update?
We're evaluating, you know, our resources at all of our properties. We do that every year, and you'll see something in early 2023. You know, having said that, we do not have the opportunity to do the infill drilling at Keno that is gonna be required for a significant update in the resource to reserves or conversion of resource to reserves. It might be really until the end of 2023 before you see, you know, a significant move in those resources or reserves. Remember, we have in front of us, you know, 37 million ounces of reserves that Alexco had.
That's at least an eight-year mine life, and we're pretty confident that Bermingham deep material will eventually convert, which would, you know, take this out to a plus 10-year mine life if it does.
Thank you. One last follow-up question on Keno Hill. Keno Hill is a small mine, and you have previously, as the Alexco management did, talked about increasing the throughput to 550 tons per day. Is that something that you want to initiate as soon as possible once Keno Hill is up and running? Or how do you view that? Have you just thought about expanding beyond that throughput level?
Yeah. The first step is to get into full and consistent production, and then we'll look at, as we do at all of the mines, increasing the throughput from there. 400 tons a day is the first objective.
Okay, great.
Our final question will come from the line of Sean Wondrack with Deutsche Bank. Please go ahead.
Hi, good morning.
Good morning.
I was curious, on slide 13, you sort of show the components of production costs. The one bucket, other, is 24%. Is there any way you could give us a little more detail surrounding what's in that bucket, please?
Yeah, sure. I think power. We realize that we're on hydro at all of our mines. That's a component of that.
That's the largest component.
I think power is.
A third of that total. Yeah, that's probably correct. As well as, you know, as I sat there and thought about that same box, you know, the other one that sticks into my mind is something like the lease for the building, Greens Creek, right? That's an expense that would fit into that into that bucket as well. It's things along those lines that don't really fit into the rest of the pieces of the pie, but sometimes can be relatively large, like power.
Right. How has your hydro power expense sorta been over the course of this year? Has it been up or down or stable?
It's stable.
Yeah.
You know, that's one of the advantages that we have, both in terms of the cost of power, it's quite low, and in terms of the inflationary pressure on power.
Right. Oh, that's helpful. It's nice to see, I think you've reached 1.9x net leverage now. Are you trying to remain or right around the 2x leverage target? Is there anything religious about sort of remaining around there, or would you potentially take this lower as your production increases and your free cash flow begins to churn?
You know, we would like to see it get lower, but we're committed for it not to get higher.
Understood. Okay. Thank you very much.
Along those lines, we were at 1.1 just coming in at the end of last year, right? We've seen it significantly lower. But to Phil's point, we're committed to remain prudent with our balance sheet and keep it less than two to one.
Okay. Thank you.
Thanks. All right. Well, we appreciate everyone participating in the call. What we would remind you that if you would like to have a one-on-one call with us, those are available. We've blocked out time. Just reach out according to the instructions on the press release. Otherwise, we look forward to speaking to you again either toward the end of this year or early next year. Appreciate it. Thanks, everyone.
Ladies and gentlemen, that will conclude today's meeting. Thank you all for joining. You may now disconnect.