Hecla Mining's (HL) CEO Phillips Baker on Q2 2016 Results - Earnings Call Transcript

| About: Hecla Mining (HL)

Hecla Mining Company (NYSE:HL)

Q2 2016 Earnings Conference Call

August 4, 2016 10:00 AM ET

Executives

Mike Westerlund - Vice President of Investor Relations

Phillips Baker - President and Chief Executive Officer

Lindsay Hall - Senior Vice President and Chief Financial Officer

Lawrence Radford - Senior Vice President, Operations

Dean McDonald - Senior Vice President, Exploration

Analysts

John Bridges - JP Morgan

Chris Terry - Deutsche Bank

Lucas Pipes - FBR & Co

Mark Mihaljevic - RBC Capital Markets

Jessica Fung - BMO Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 Hecla Mining Company Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Mike Westerlund, Vice President of Investor Relations.

Sir, you may begin.

Mike Westerlund

Thank you, operator. Welcome everyone and thank you for joining us for Hecla's second quarter 2016 financial and operations results conference call. Our financial results news release that was issued this morning before market opened, along with today's presentation are available on Hecla's website.

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

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

In addition, in our filings with the SEC, we are only allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of terms such as measured, indicated and inferred resources 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.

Phillips Baker

Thanks very much. Good morning everyone. The second quarter has been a spectacular one for Hecla both in terms of production and financial results. But this second quarter didn’t happen by happenstance. We’ve had a consistent term value for shareholders.

So during the past several years of price weakness, we are one of the few mining companies that did not follow the herd and sell assets, emanate growth capital and under spend sustaining capital, cut exploration almost out of existence, do massive layoffs that experienced hard to replace technical and management people, reduce reserves because they couldn’t hold up under lower prices. Instead what we did was, explore, engineer better processes, operate more efficiently, spend the capital necessary to grow our reserves, despite using the lowest price assumptions in the industry and grow production.

And as you can see on the top left of slide 3, we had a 243% increase in silver reserves since 2006 and below it a 241% increase in gold. Growth in reserves is the foundation for growing production. So this reserve growth has resulted as seen on the top right in a 208 % growth in our silver equivalent production from 2012. Much of that comes this year with a 71% growth in silver production just this quarter. Gold production growth is up 41% over the prior year quarter. The immediate growth this year is the result of bringing San Sebastian into production and realization of potential of Casa Berardi. So the result of the investment is that Hecla now has the strongest reserve and production growth profile among our peers.

We know that our lower cost production we could have grown high return on invested capital and increasing cash flow at almost any price. And as you can see on slide 4, the higher amount of low cost production has led to the higher adjusted EBITDA, which totaled $124 million for the first six months of 2016, and that already eclipses the 116 million of adjusted EBITDA that we had last year. Now, this growth in EBITDA has gone straight to the balance sheet leading to a substantial increase in liquidity over the first quarter as you can see on the right side of the slide. And our strategy has worked for our share price.

Over the past three years, we have outperformed our peers by 55%. The blue line is Hecla up 106% since August 2013, whereas the red line in the average of our peers which was up 51%. Most of the peers’ gains have come this year, and particularly in the last month the sediments has improved, but we believe that our substantial and sustainable growth in production comes at the right time with metals prices rising. The current silver price is about $4 higher than our average for the second quarter and I think it’s about 20% higher than what we had for the first half of the year. If these prices continue our financial results would be even better, and we think our share price should appreciate as well.

So for our expectations as indicated on slide 5, we’ve already announced an increase in the forecasted companywide annual silver production to 15.75 million ounces, and we’ve also lowered our cash cost guidance after by-product credits to $4.75. We have increased our budgeted exploration expenditures by about 27% to 19 million for the year, much of that is directed on our larger drilling program at San Sebastian to follow-up on recent high-grade drilling sections with the gold extending the life of the mine.

I want to welcome Lindsay Hall to the team and this is your first call as part of the team, and I hope there is many more to come Lindsay, so Lindsay why don’t you tell me about the financial results.

Lindsay Hall

Thanks Phil, and good morning to everyone. I must say it’s quite a luxury to arrive as the new CFO of Hecla and report the stellar financial results. The second quarter follows the first quarter of strong operational results from all four of our operations, resulting in our highest quarterly revenue while maintaining our low cost structure, leading to a very strong operating cash flow.

As I’m new here, I thought I’d give you a few comments on what I see at Hecla. I was attracted to the company, because each of its four operating mines are located in the world’s best mining jurisdictions, United States, Canada and Mexico. The company mines both open pits and underground, so it has the expertise to mine different ore bodies.

The grade at Hecla’s operations are much higher than our peers, which gives us the financial flexibility to manage through where there are low prices, and to thrive during the better times in the commodity cycle. Also as a finance person, I was attracted to the balance sheet. An undrawn 100 million revolver, a reasonable level of long-term debt of 500 million due in 2021, and today 159 million of cash in the bank.

Turning to the quarter on slide 7, you can see our quarter-over-quarter performance with the growth of silver production of 71%, to 4.2 million ounces, and our gold production increasing 41% to 63,000 ounces. This coupled with higher commodity prices has resulted in the big pickup in revenue of 64% and operating cash flows increasing to 119% to 67 million for the quarter, of which 42 million was reinvested at our operating site.

Clearly, when Hecla is firing on all cylinders like it is now, and our ability to invest at our mines to further enhance efficiencies and fund the organic growth opportunities, while at the same time increasing cash in the balance sheet creates some real excitement around the company. Our cash cost after by-product credits for silver ounce was 380 is down from 561 in the second quarter of 2015, mainly due to the addition of the low cost production at San Sebastian, but also increased silver production at Greens Creek and Lucky Friday as a result of higher grades at each mine.

As shown on slide 8, silver operations continue to deliver strong cash margin in the second quarter of 78% in sales or $13.46, which was in line with the first quarter and while our gold margin increased to 52%.

Looking at the impact of the production and margins have on cash flow generation in each mine on slide 9, our mines are strong cash flow generators, with both Greens Creek and San Sebastian leading the way, generating about 27 million of free cash flow each. Greens Creek had a 65% conversion to free cash flow, but San Sebastian hit it out of the park with 99% conversion to free cash flow. The initial projection for this mine was to generate $43 million of free cash flow over two years and has more than beat that in six months, generating $48 million in free cash flow. This ability to generate cash flow is why we are very interested in extending this mine’s life.

Moving to Casa Berardi, it’s generated over $11 million of free cash flow and Lucky Friday has generated $3 million of free cash flow before the investment in shaft #4. As you can see in slide 10, Hecla offers the investor truly diversified revenue streams with 44% of our revenue from gold, 38% from silver, 10% from zinc, and 8% from lead. We also have diversification among the four distinct mines with 35% of revenue coming from Greens Creek, 31% from Casa Berardi, 21% from San Sebastian, and 13% from Lucky Friday.

On Slide 11, we show our liquidity trends. We have $159 million in cash, cash equivalents with short-term investments. Consequently, we have a total of almost $260 million in total liquidity available to the company. With working capital of San Sebastian now funded with higher metal prices, we look forward to improving results over the remainder of 2016.

Moving to Slide 12, our capital structure is within our benchmark levels with adjusted EBITDA on a rolling 12 month basis up 38% and our net debt to EBITDA ratio down 33% from the first quarter to two times. For the quarter in six months, the company generated $77 million and $124 million respectively in EBITDA. Looking to the balance of the year, we see growing cash flows combined with disciplined investment of our sites leading to further improving credit metrics.

Lastly before I turn the call over to Larry, I had the opportunity to join Phil, Mike, and Dean on a recent investor tour to Casa Berardi mine in Quebec. I could not have been more impressed with our people at the site. They're operating the mine as if it was their own business and to me that is the real key asset of Hecla. The mine sites are accountable for their own numbers and their own cash flows. We hit the head office [Indiscernible] but clearly they are in charge of their own destinies. When you look at some of the innovations they're putting in place and the pride they take from them, you know that is working well.

With that, I will turn over to Larry for a review of the operations.

Lawrence Radford

Thanks, Lindsay. Greens Creek had another excellent quarter with silver production up 14% over the prior year period producing $2.1 million ounces at a cash cost after byproduct credits of $5.38 per ounce of silver. Higher silver production was due to higher silver grades, which is a function of mine sequencing and continued improvements in silver recovery as seen in the controlled chart on slide 14, where the blue line is monthly silver recovery and the thin black line is the polynomial trend line.

While these recoveries came about substantially because of our new approach to front-end scalping and in controlling pH with CO2 instead of acid, higher grades also played a part in improving silver recovery. Gold production in the second quarter was impacted by a sampling issue, which overestimated gold production in the first quarter and was corrected. Gold guidance for the year has been raised slightly. Silver production at Lucky Friday was a 40% improvement over the prior year period as you can see on slide 15. As a result, the per-ounce cash costs after byproduct credits were lower by 21%.

On slide 16, you can see the shaft sinking team at #4Shaft Bottom, which we reached in May at the 600 levels. The shaft bottom is 9,587 feet below the surface and we are focusing now on installing the permanent steel, electrical and service infrastructure in the shaft. This approximately, 225 million budgeted project is anticipated to be operational in the fourth quarter. The #4 Shaft Project is designed to give us access to higher grade ore zones, once the associated development is completed.

On slide 17, Casa Berardi gold production increased 36% over the prior year period and cash costs after byproduct credits came down significantly. On slide 18, you can see in this controlled chart the continuous improvement in mill tonnage, the blue line, and more importantly the improvement in consistencies month on month. Since 2013 when we purchased the mine, we have increased the tons per day by 38%.

This is the result of numerous improvements and initiatives notably in rock mechanics finishing the shaft deepening, bringing new production zones online, adding depth to the leadership team, reducing reliance on contractors, improving mine planning and more importantly mine plan compliance, changing the shift schedule and numerous continuous improvement and automation initiatives.

For example, we automated the West Mine shaft giving us an extra 15 skips per day, which equates to moving an extra 130 short tons of ore every day. As part of this project, which only costs $200,000 and was done internally, we now have one operator on the surface remotely operating three rock breakers at different levels of the mine, saving on personnel cost. We have automated drills and jumbos, increasing the meters drilled. We have made this at Hecla Mine and are continuing to innovate such as in automating the 985 drift, which is expected to be completed in 2017.

This should help us move ore economically from deeper in the mines, saving on personnel costs. We have also adopted the Avoca mining method in narrow stopes that are traditional longitudinal designs. The advantage of this method is that it allows for backfilling with development waste avoiding the need to oyster waste and doesn't need an initial slot raise, allowing for faster turnaround of the stopes.

But what's really exciting about Casa Berardi is the new East Mine Crown Pillar pit or EMCP pit. You can see the progress with excavation on slide 19. We've encountered orders sooner than we thought and began processing ore on July 22nd.This is an important step forward for the mine because it allows us to fill the mill adding an additional 5,000 ounces of gold estimated this year and about 30,000 ounces a year going forward beginning in 2017. EMCP project is in the old part of our long range plan. It is expected to extend the mine life, increase cash flow and as a project as an internal rate of return of 90%.

Moving to slide 20, both Phil and Lindsay have talked about how well San Sebastian is doing and I wanted to expand on this by looking at its first half performance. The site has entirely exceeding expectations, because that is the best way to describe the mine. It has produced $48 million in free cash flow in the first six months with only about $700,000 in capital. That has produced 2.5 million ounces of silver and almost 900,000 ounces of gold at a cash cost after byproduct credits of negative $3.15 per silver ounce. The head grade is 38.3 ounce per ton silver and 0.294 ounce per ton gold. Our mining costs are lower than we initially expected getting some tailwinds from the value of the peso and through improving operations.

Additionally, our mill recoveries are higher than anticipated. Given this combination of factors, we’re studying in addition to the North vein pit and studying the potential to take San Sebastian underground and we are following the exploration drilling around our existing pits in vein extensions with interest. We have secured an option to extend the rental agreement for the Velardena mill for another 12 months, if our move to convert resources to reserves is successful. Extending mine life at San Sebastian is our focus.

I will now turn the call over to Dean for an update on exploration.

Dean McDonald

Thanks, Larry. So far you've heard Phil, Lindsey, and Larry talk about how well the company is doing today. Now, I want to focus your attention on our future, which is also very bright. Let's spend a minute and look at the exploration success we've had at three of Hecla’s main projects, but in particular I want to dig into the recent drill results at San Sebastian. A list of intersections for San Sebastian and our other projects are provided in the appendix of the Q2 earnings release, many of which are high grade intersections and I encourage you to look at them because they give an idea of where we are headed for future resources.

The San Sebastian property is like a candy store for someone in exploration. There are a lot of potential based on multiple styles of mineralization and many opportunities to find new high grade resources to expand and extend the project. Because of recent successes in this genuine potential, we've added about $2.5 million to the annual exploration budget hear, more than doubling the original budget. In the plan view of San Sebastian shown in slide 22, you can see drilling was focused near the Middle Vein open pit an along northwest extensions of Middle and Francine Veins where we’re having great success. In addition, extensive trenching to the southeast of the East Francine open pit has identified mineralization that is currently being evaluated by drilling.

The longitudinal section of the Middle Vein showed in slide 23, defines the current Middle Vein open pit and shows some new high grading sections to the immediate northwest and southeast of that pit that are similar in nature in grade to what we’re currently mining. These shallow high grade intersections are currently being added to an updated resource model that could lead to an expanded Middle Vein open pit and may also to define some new high grade resources that could be accessed underground.

Particularly exciting is the recent discovery expansion of a high grade resource about 1,200 to 2,000 to the west of the Middle Vein open pit as shown in slide 24. Recent intersections of high grade precious metal, rich oxide mineralization close to surface have been followed by deeper intersections that in some places have grades of more than 2 kilograms of silver or 70 ounces per ton silver, with gold grades up to 0.68 ounces per ton over good width. This is a mostly horizontal zone that has comparable grades at the current east Francine zone and varies in depth from 200 to 500 feet from surface. We’re aggressively drilling this target to the determine the continuity in extent of this resource and potentially defined a new open pit and/or high grade underground zone.

At Casa Berardi, the targeting up to eight drills is shown in the longitudinal section on slide 25. Drilling of the 118 zone now defines a high grade mineralized zone that extends for over a 1,000 along streak. Strong grades identified along the eastern extensions of the 123 zone, now cover a down dip area of over 3,400 feet. These lenders are open to the east and at depth and are slated for drilling once the exploration drifts are in place in the next year. Strong drilling results have upgraded and expanded resources of the 124 zone from the bottom of the proposed principle pits down dipped for over 1,500 feet. Based on surface drilling, both the 124 and 134 zones have localized high grade paths that may define potential open pit opportunities. These robust results from the surface drilling has led to an increase in budget by almost $0.5 million to expand the near surface resources. Strong drilling results throughout the mine continue to define new resources that are expected to sustain production at Casa Berardi in the coming years.

As shown in the plan view in slide 26, definition drilling at Greens Creek upgraded resources at the Northwest West and 9a zones, an exploration drilling to find extensions to the 50 to 50 zone to the south. The emphasis in drilling during the year has been to upgrade with instilled drilling from large high grade resource areas to indicated categories. Those resource areas shown in 27, had been intensively drilled in Northwest West and Deep 200 South resources along with the 9a and West well resources should convert into reserves at year end. Our drilling programs continue to deliver high grade drilling intersections and the red arrows define mineralization trends that remain open to identify new resources in the coming years at Greens Creek.

And so with that I’ll pass the call back to Phil.

Phillips Baker

Thanks, Dean. We believe that our assets and people have put Hecla in the invariable position of sustainability and having the ability to have a long-term focus in times of downturn in the metals prices and then substantial cash flow generation in a rising price environment. We believe metals prices will continue to rise and substantially so, but we’re ready if they don’t.

And with that operator, we’re happy to take questions.

Question-and-Answer Session

Operator

Thank you. [Operation Instructions] And our first question comes from John Bridges from JP Morgan. Your line is now open.

John Bridges

Morning, Phil, Lindsay, everybody. Congratulations on the results, great performance. Just wondering with respect to the better grades that you’re seeing both Lucky Friday and Casa Berardi, can you give us a bit of guidance as to how long you think those high grades are going to sustain for?

Phillips Baker

Well, if you look at our guidance, in the second half of the year we do not show as much production as the first half, so we think you’ll see grades revert to our average that would get us to those levels of production. We occasionally have pleasant surprises and we certainly have experienced that in the first half of this year. Anything you want to add Larry.

Lawrence Radford

I think you said it well, the Casa Berardi grades are not expected to be as high in the second half as we’ve seen. Lucky Friday, in the kind of long-term sense it’s very encouraging that we’re starting to get into the better part of 30 ore body. So overtime you’ll see a gradual improvement of about a half an ounce of silver per ton per year improvement as we go forward.

Phillips Baker

And of course with each of these mines there’s a lot of variability depending on where we’re mining, so quarter-to-quarter you’re going to have variation and that’s just the nature of the mines, we can’t really smooth it out to maintain an average throughout the year.

John Bridges

Yeah, I was just trying to get some idea as to what that variation is, so we can improve the market a little bit.

Phillips Baker

Yeah, I think the best way to do is just to look at what our total guidance is and what backwards.

John Bridges

And then, I see the shaft is finished at Lucky Friday -

Phillips Baker

Yeah, the excavation of it is finished, not the quipping.

John Bridges

Exactly, and then I was wondering, you were talking about doing some things a bit different there in terms of accessing the much high grade materials that’s down there and just wondering if you could refresh our memories, the sort of timeline as to when you’re going to be able to get into that really good stuff.

John Bridges

Well, we’re already at the top of that mineralization. I want to say it’s about 50 feet or so that we’re mining off of each level at this point and as we go deeper it goes from 50 to 900. We are contemplating a different way of mining it to avoid developing a pillar that would be unminable and would leave a lot of reserves and rather resource in that pillar. So we’re still working through that and that’s something that we would expect to have work through by the end of the year, but it should total 9 to 10 million ounces or so that sits in the pillar that we mine according to the current plan. So if we can rework that plan, we’re going to do that - try to be able to extract mineralization.

John Bridges

Sounds like a high value project. Okay, congratulations again on a good quarter. Thank you.

John Bridges

Thanks, John.

Operator

Thank you. Our next question comes from Chris Terry from Deutsche Bank. Your line is now open.

Chris Terry

Hi, guys congrats on putting the company in such a good position at the moment and on the quarter. Just had a question on San Sebastian and talk there of the underground and potentially extending it. What’s the most likely timeline of events, where we can get a little bit more color about that, and just on the current plan, when do you expect production to run into.

Phillips Baker

Well the current plan has its running production in through most of 2017, but with this exploration, I think there is a good opportunity to see us extended, hence why we entered into an agreement to extend our access to the mill. We will over the course of the coming six months, year look at what alternatives that we have for mining, the deeper mineralization will also overtime expand the exploration program from focusing simply on the surface opportunity and going deeper. I mean if you think about how little - all of our focus at this point has been at what we can mine from surface. So there will be a time when the exploration program will shift its focus to the underground. So we think that San Sebastian has a bright future in front of it, at the moment though what we're doing is just focusing on this near surface mineralization that we can open pit.

Chris Terry

Okay, thanks. So no firm timeline vice versa see how it plays out over the next -

Phillips Baker

Yeah, unfortunately we're not able at this point to state what the extension should be. All I can suggest to you is we're doing the things that will allow us to extend the mine life and I feel confident that there will be some level of extension, but we're not able to give good color on that yet, but stay tuned, I’d expect over the second half of the year to be able to state where we will be.

Chris Terry

Okay and just on your growth performance on the cash flow out of that asset year-to-date, has the [indiscernible] exactly to where it was at the start or East Francine fitting was more at the start than what would have initially been anticipated, and what would that mean for 2017.

Phillips Baker

Now we've actually slowed down the mining of the East Francine pit, and so more of that will be mined later. Having said that it's quite small, so it's not like it's something that is huge, but we did slow that down and we have seen better grades come out of the Middle Vein than what we had anticipated. And I think slightly better out that North veins as well.

Lawrence Radford

And gold.

Phillips Baker

Yeah, so you look at everything has, as the slide said everything has exceeded expectations and as a result of that what you see this year where we're not accelerating everything, we're trying to make sure that we extend the mine life, give ourselves the opportunity to find more to further extend the mine life. Larry, anything you want to add.

Lawrence Radford

Yeah, certainly as we've continued to drill., we did an intensive infill drilling campaign and that has shifted our mine plans slightly. As Phil mentioned, we have throttled down East Francine, the higher grade pit for now, it's something that we can turn on and turn off like a valve whenever we choose to. The other pits are up and running. They had a higher stripping ratio, so we hit East Francine pretty hard, getting these other pits stripped and they're producing now. So we've got all three pits ready to produce as we're going to our mine plan.

Phillips Baker

Hey Dean, anything - Dean is actually in Mexico on this call. Anything you want to add, Dean.

Dean McDonald

No, I’d just add that the Middle Vein grades have been very good and I was at the pit yesterday and they will continue to be in the near term. I think the infill drilling and drilling along the extensions of the pits have the chance to lead to expansions of those pits and then this drilling further west along the Middle Vein really is exciting. There are spectacular grades and I think we are seeing some continuity there.

Phillips Baker

Yeah, I guess if I would say anything is there's less that we know than we do know. There's as we continue to do exploration, as we continue to operate, we continue to get pleasantly - we're pleasantly surprised. We continue to find more in the pit. We continue to find more along the veins as we drill, Chris.

Chris Terry

Okay, thanks for all the color on that. Just a final one, I guess in terms of managing the balance sheet going forward, I know that it's in a much stronger position. How do you think about where dividends might look going forward and also how an exploration budget might shape up for 2017?

Phillips Baker

Well with respect to 2017 that process doesn't start until October, so give us a little time to digest what we're doing in 2016, but clearly if we're in a robust cash flow environment, we have lots of targets at all of our properties, plus properties that we have put on ice during this downturn that we will turn back to. So I think you can expect more, more, just as you've seen higher exploration over the second half of the year. I think you can expect that it will be at that level or higher next year. With respect to dividends it's something that the Board considers every quarter, we have a dividend policy. I'm not anticipating any near term change in that policy, but that's really a question that the Board has to answer.

Chris Terry

Thanks very much.

Phillips Baker

Sure.

Operator

Thank you. Our next question comes from Lukas Pipes from FBR & Co. Your line is now open.

Lukas Pipes

Hey good day everybody.

Phillips Baker

Hi, Lukas.

Lukas Pipes

I have a question. Congrats Lindsay on the new role, look forward to your contributions. It was great meeting you last week. And I wanted to maybe touch on the uses of capital kind of you’re ranking more generally. Where does that exploration fit in organic growth, maybe strengthening the balance sheet further versus M&A even how do you kind of look at the landscape in today's environment? Thank you.

Phillips Baker

Sure thing, Lukas. I guess the first thing I'd say is that and I tried to make this at the beginning of the call, we have continue to spend on exploration and continue to spend capital when others had shut that down. So we're not capital starved at our minds. Having said that we will look for the opportunity to improve the reliability of the operations, we will look for the opportunity to improve the returns of the operations. So we will look for opportunities to spend capital, but give us those sort of results. But the key, there's no question that at the prices that we see today in this quarter relative to where we saw in the last quarter that we will have substantial growth in our cash flow and improvement in our balance sheet organically. We don't envision any need to do anything for balance sheet improvement. So I think we're just in a great position. Lindsay, do you want to add anything to that.

Lindsay Hall

I had to say this Lukas that the debt-to-EBITDA is getting down to the truth of balance sheet stronger. I’d much rather give the money to Larry to improve efficiencies and organic growth to grow the EBIT line and do anything on the debt side, so actually really quite pleased about everything that I see on the balance sheet. So that’s the only part I’d add to what Phil said.

Lukas Pipes

That’s very helpful and maybe to follow-up on this last point and I appreciate that you mentioned that 2017 budget is still low [indiscernible] away, but if you could maybe Phil address what sort of cost cutting initiatives you’re working on specifically Lucky Friday and Greens Creek. Very much appreciate kind of what you're looking at on that side of the equation.

Phillips Baker

It's interesting when you think about our business and you think about cost cutting initiatives, it's frankly difficult to believe in lots of real cost cutting taking place. It really becomes a question of improved productivity than lower costs. It's how do you get better tons, how do you get those tons out on a per unit basis less? When I look at the overall spend, I don't see us being able to reduce it substantially, but I do see us having the ability to improve productivity. So going back to what Larry talked about at Casa and the automation that's been done on the shaft, that's just one type of initiative that we're doing. Lucky Friday, we're looking at a number of things for example battery technology at the Lucky Friday. If you have that battery technology and you're able to avoid generating diesel particulates, maybe there's less ventilation that you need and so it's a complex combination of things in order to actually see cost reduced, but it ultimately really comes down to better productivity. Larry, would you like to add?

Lawrence Radford

Certainly, we're not as driven by consumable prices as some of the other companies are. We're a bit more driven by labor. So, getting that labor efficiency is really our focus. We just hired an ex-Barrick professional to spearhead our continuous improvement initiatives, someone that I worked with in Barrick for many years. We have I think an exceptional workforce in terms of experience and expertise and we're very focused on capturing that expertise and levering it to better productivities and we're also looking very much at innovation in terms of automation as Phil mentioned and I mentioned in my comments. Automation is a route for better tons per man shift or man hour metric that we use.

Phillips Baker

Yeah, so when we think about that, sort of the biggest thing we look at is how do we use the shift change, there is about two hours a day that we're not getting as much value out of and so there is a lot of things that we're doing in that regard. Casa that you visited is leading the way in that, but we're doing things at Greens Creek, we’re doing things at the Lucky Friday to try to capture that time that we have no productivity.

Lukas Pipes

Very good. Congrats on the solid results and looking forward to more updates. Thank you.

Phillips Baker

You're welcome. So, the comment on [indiscernible] philosophically, we truly believe that the way to improve the returns at Hecla is productivity, not cost cutting. If you go back and you look at what we've done over the last three years, we haven't announced layoffs, because that's not where we saw value being created. What we have done is we focused on this this innovation. We focused on this continuous improvement. When we had that - we had the guy that was doing continuous improvement workforce that took a job as a Chief Operating Officer of another company and Larry asked a question, “Should we replace him?” And we said, “Yes, we should replace him despite the fact that we were in a lower price environment last year and earlier this year.” So, that's the commitment that we have is improving productivity, improving returns that way rather than trying to sort of save our way into prosperity. Any other questions?

Operator

Thank you. Our next question comes from Mark Mihaljevic from RBC Capital Markets. Your line is now open.

Mark Mihaljevic

Yeah, thanks and nice quarter, guys. So, just I guess now that you're getting into some of those deeper zones at Lucky Friday, I was just wondering how conditions have been - is everything really as you've been expecting or any surprises?

Phillips Baker

Well, look, you have all sorts of surprises, but generally speaking, yeah, it's been very much as expected. I think generally when we tried to load that, when we tried to load the truck, we couldn't fill it up, because the ore was too heavy. We didn't sort of think about that at the first cut that we did. But, Larry, what do you want to?

Lawrence Radford

I don't think I'd characterize anything as a surprise. Certainly, it's a challenging environment in terms of heat and ventilation and ground conditions that it's all being managed and I think I wouldn't say that there are any surprises, no.

Phillips Baker

Yeah, I mean and you think about this, we've been mining in this area since 1970 and, yes, as you go deeper, conditions change, but it's incremental changes. There is not a sort of step function change. So, it's - we have a lot of experience with it.

Mark Mihaljevic

Good. Just kind of following up on that, the mining costs, they have ticked up to around $100 a ton. Is that a reflection of mining in these deeper areas and the added cost of doing that or is it that something we should expect going forward or there have been a few one-offs in there?

Phillips Baker

Look, the cost per ton has - if you go back and you look over the last 10 years, you've seen a dramatic increase in the cost per ton in our industry and the first point is the cost of everything has gone up. I know they say there is no inflation in the economy, but in the mining industry we certainly have experienced it over the last decade. And for us specifically at the Lucky Friday, there has been some incremental increase in the cost per ton period by period, but generally speaking nothing that we haven't expected. Larry?

Lawrence Radford

Yeah, we've benchmarked ourselves against not only at Lucky Friday, but all of our mines against other industry mines, not only in recent history, but over the last decade and our trends are very similar with other mines and mining companies pretty much driven by labor and labor rates and I think like so many other companies, the way to claw that back is through productivity improvements and that's our focus.

Phillips Baker

That’s right. So, Mark, it goes back to the comments that we were making earlier. Let's improve productivity and we can get the G&A cost down.

Mark Mihaljevic

Okay, thanks. That's it from me.

Operator

Thank you. Our next question comes from Jessica Fung from BMO Capital Markets. Your line is now open.

Jessica Fung

Great. Thank you. Good morning, guys. Nice quarter.

Phillips Baker

Hi, Jessica.

Jessica Fung

Hi. Okay, I guess all the big questions have been asked. So, I’ve just got a couple of small ones, San Sebastian, the option to extend the mill through 2018, what are your options beyond that? How does the agreement with the third-party mill work?

Phillips Baker

No, that's it. That's - the option just takes this through 2018 at this point. I mean ultimately what we would like to do is have enough exploration success and figure out operationally how to handle material to build a mill at site. That's really the long-term objective and the cost of trucking that material, trying to remember, it's $11 a ton, yeah. So, it's a fair chunk of change just to transport it. That's not value-added. And so, if we can get enough that's got enough grade, then building a mill there should not be a permitting issue. We have great relationship with the landowners. And so, that's really where we're trying to go with this and we would hope over the next three years we'd be able to figure out how to do it

Jessica Fung

Okay. Got it. And then more broadly on the financial side, we've talked about this before, but remind us what your thinking is in terms of hedging particularly with the zinc prices being as strong as they are this year?

Phillips Baker

Well, first we have begun a hedging program of our Canadian dollar exposure and so we've locked in some - we think some pretty good prices with respect to 2017 and beyond. We have not focused on hedging in 2016, because we just didn't see a lot of risk. So, that's on the Canadian dollar side. On the zinc and lead side, we are at a price level where we're willing to consider some hedging. We do think the outlook for zinc looks very good. So, while we’ll likely put in some hedges, it will likely not be as aggressive this time around as it was when we started the program four years ago until we see somewhat higher prices of zinc.

Jessica Fung

Okay, got it.

Phillips Baker

So, expect some, but not a huge amount I guess is what I'm trying to tell you.

Jessica Fung

Okay. That makes sense. Perfect. That’s it from me. Thank you very much, guys.

Operator

Thank you and I'm showing no further questions at this time. I would now like to turn the conference back over to Phil Baker for any closing remarks.

Phillips Baker

Okay, thank you. We've just had a great second quarter. We're happy to talk about it obviously. So, [Indiscernible] on the call. He is anxious to let you know any further details and certainly you can call me as well. So, you guys, have a great day and we’ll talk to you soon. Thank you.

Operator

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.

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