Hecla Mining Company (HL) CEO Phil Baker on Q1 2019 Results - Earnings Call Transcript

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About: Hecla Mining Company (HL)
by: SA Transcripts
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Earning Call Audio

Hecla Mining Company (NYSE:HL) Q1 2019 Earnings Conference Call May 9, 2019 11:00 AM ET

Company Participants

Mike Westerlund - Vice President of Investor Relations

Phil Baker - President and CEO

Lindsay Hall - Senior Vice President and Chief Financial Officer

Larry Radford - Senior Vice President and Chief Operating Officer

Dean McDonald - Senior Vice President, Exploration

Conference Call Participants

Jake Sekelsky - ROTH Capital Partners

Heiko Ihle - H.C. Wainwright

Cosmos Chiu - CIBC

Mark Mihaljevic - RBC Capital Markets

John Bridges - JPMorgan

Trevor Turnbull - Scotiabank

Adam Graf - B Riley

Matthew Fields - Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen. And welcome to the First Quarter 2019 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 be given at that time. [Operator Instructions] As a reminder this conference call maybe recorded.

I would like to introduce your host for today's conference Mr. Mike Westerlund, Hecla's Vice President of Investor Relations. Sir, you may begin.

Mike Westerlund

Thank you very much, Crystal. Good morning, everyone, and welcome, and thank you for joining us for Hecla’s first quarter 2019 financial and operations results conference call. Our financial results news release that was issued this morning before market opened along with our exploration release issued yesterday and today’s presentation are available on Hecla's website.

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

Any forward-looking statements made today by the management team come under the Private Securities Litigation Reform Act and constitute forward-looking information under Canadian securities law, as shown on Slide 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 and exploration releases and at the beginning of the presentation. These risks could cause results to differ from those projected in the forward-looking statements. In addition, during this call, we may disclose non-GAAP financial measurements. You can find reconciliations of these measurements to their nearest GAAP measurements in the accompanying presentation, which is available on our Web site at www.hecla-mining.com.

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

With that I will pass the call to Phil Baker.

Phil Baker

Thanks Mike. Hello, everyone. I want to start by talking about each of the operations for just a moment. Greens Creek started 2019 strongly because of higher grades and recoveries. This is expected as our new mine plan is outlined in our technical reflects these higher grades. This will continue for at least the new few years Hecla's best assets getting better. And because of Green Creek's excellent performance, the quarter was largely in line with what we expected revenues, cash flows and our ending quarterly cash balance. Lucky Friday did well producing as much silver in the quarter as it did all of last year. San Sebastian well down from last year was expected. While Casa Berardi was expected to produce less, we also had a combination of some now resolved issues in the middle that Larry is going to talk about.

So let's talk about Nevada. When we think about why we bought the Nevada assets, the thesis for the acquisition largely holds true. Number one, we bought the land position, and we bought it for the land position of 110 square miles of property that is hosted three one-ounce headgrade mines in some of the best gold country in the world. Number two, we bought it for the Hatter Graben, a very exciting and potentially large gold deposit adjacent to the Holister mine that will start drilling by year-end. And number three, we bought it thinking we could get consistency and development and production at Fire Creek to increase the throughput and lower the cut off to make the mine the cash flow provider of Nevada.

The first two reasons remain as applicable today as they were when we acquired it, but we clearly have not been able to make this progress Fire Creek. A year ago, when doing the due diligence, we recognized certain problems with Fire Creek dealing with the tough material, managing water equipment availability, getting enough development to have consistent production, lack of characterization of all types. And while we made progress in dealing with the issues we saw, the short answers is it's not been enough. The advance rate has increased, but the mill tonnage decreased by a similar percentage in the last quarter. And while we done things to manage the water, the amount of water is increased making the conditions worse. This has limited our access, and while they are not in insurmountable, and now large amount of dollars that will require quarters to construct some infrastructure and get some permit limits change.

Characterization of ore types has taken certain areas out of the plan so we determine the best way to process them. We still believe in the potential of Fire Creek that given the ongoing challenges were evaluating if there's a better way to afford since our original plan is not making enough progress fast enough. So over the next few weeks or months where we are reviewing the Nevada operations to determine how we can improve the economics in both the short and the long-term. This process is really maintaining our discipline and allocation. We're really just asking the question are we going to get the return for the investment we’re making. Since we don’t know the outcome of the review, we’re suspending guidance until we do. I’m going to stop there on Nevada because Larry and Lindsay will both have more to say.

Let me just mention on Wednesday, we did issue our exploration update, which detailed new underground discoveries at Casa Berardi, and more oxide discoveries near services at San Sebastian and Dean is going to provide more detail out on this in a moment.

Let me pass this on to Lindsay for a financial review.

Lindsay Hall

Thanks, Phil. With the three months ended March 31, 2019, we reported a net loss applicable to common shareholders of $25.7 million or $0.05 per share compared to net income of $8.1 million for the same period last year. The variance in net income of $33.8 million is primarily the result of the gross loss or operating losses in both Nevada and at Casa Berardi. In Nevada, our operations cost of sales and other direct production cost of $23 million plus depreciation expense of $8.3 million exceeded sales revenue of $17.6 million amounted to a gross loss of $13.8 million. We're expecting more ounces to be sold from a combination of ore stock piles and through mining, costs have the production cost. So that shortfall shows up in a gross profit or loss line of being consistent.

At Casa, about 60% of the $15.4 million negative variance in gross profit quarter-over-quarter was anticipated due to low -- mining lower grades this year than last, and the other 40% of the variance was due to lower ounces being produced and sold because of temporary issues associated with the mill, which have now been revolved as Phil noted.

Companywide cash costs after byproduct credits for silver ounce was $2.26 and the all-in sustaining cash costs after byproduct credits was $9.34, an increase from $5.66 in the same period of 2018. Both in line with our expectations where as the cost of gold and the all-in sustaining cash costs for gold after byproduct credits was $1,277 and $1,760 per ounce higher than our expectations due to the previously discussed issues at Casa and [indiscernible].

Turning to cash flow statement. Cash provided by operating activities amounted to $20 million, which was slightly higher than the first quarter last year. We invested $33 million at our mine sites so we have the net use of cash before financing activities of $13 million resulting in approximately $12 million of cash on hand at the end of the quarter and nothing drawn on a credit revolver. The spend in Nevada was higher than anticipated, but was offset by under spending of our other mining operations. As we have stated, we are maintaining our companywide spend estimates, so we will be reviewing the Nevada operations and forecasted capital needs as well as our forecasted spending throughout the rest of our operations in order to meet that estimate.

You also noted in our disclosures that we obtained from the credit revolver banking syndicate some additional headroom under our covenants for the second and third quarters to ensure we have flexibility, while we address the needs of our Nevada operations.

On Slide 7, as always, you can see that we maintain a diversified revenue stream with gold at 50%, silver at 29%, lead and zinc at a combined 21%. Green Creek continues to be development of supplier revenue and cash flow.

In closing, our high yield notes are not callable without costs and can be refinanced at any time. We're mindful of our leverage ratios, the refinancing options available to us, and the need to generate profitable earnings and positive cash flows. And that is why we are proactively reviewing our Nevada operations.

I will now pass the call over to Larry to talk about the operations.

Larry Radford

Thanks, Lindsay. I would like to begin with the challenges that we had in the first quarter and then move on to what went well. To begin with I wanted go into a bit more detail on the challenges in Nevada that we've mentioned. Although the production was close to our forecast, our forward-looking estimates shows lower production in Fire Creek due to some definition drilling showing stokes following the low cut off grade and some development being delayed actually due to water inflow. Although the aggregate development rate remains on target for Fire Creek for the years you can see on Slide 9, a few headings are behind the schedule. To compensate for these issues mining previously developed remnants stopesat the Midas mine as resumed.

Nevada costs were considerably higher than what we forecasted as noted earlier. To this end, we have -- we will have our development contractor demobilized by next week. In addition, we have put together revised mine plan, which incorporates a higher cut off grade and reduce this development. Another challenge that we realized in the first quarter is that ore in the northeast section of the mine was determined to be refractory. This ore was never in the 2019 production estimate. An investigation is underway to determine how much of this ore we will encounter in the future and what our options are processing the ore. On the plus side development of Hatter Graben is on track taking into account that the access road washed out in the spring flood and no access was available for about a week. You see our progress on Slide 10.

Finally on Nevada, as mentioned, we are considering all options at this point, many of which were listed on Slide 11. At the planning of the mine this dynamic and several mines plan permutations are under consideration. In the first quarter, Casa Berardi was challenged by lower mill throughput and lower recovery than expected. And I want to provide a little bit more color on these issues. The lower recovery was compensated by grade, which was 11% higher than projected. The lower recovery was principally due to the failure of a gearbox on one of the CIL leach tank and this gear box has been replaced. There was a lesser effect of some more having a higher than expected level of Image result for arsenopyrite. The lower than expected throughput was principally due to the change of the mill pressure with the higher capacity pressure December, which caused some downstream sizing issues. The issues were largely corrected in the month of April and throughput improved in the last week of April with a one-day record of 4,351 metric tons on April 28. We also received permit approval to raise the annual throughput at Casa Berardi from 1.4 million metric tons to 1.6 million tons. This permit approval list our tons per day limit to 4,718 metric tons per day. The ore that was expected to be processed in the first quarter but wasn't processed in the stockpile. To recover the throughput, we are soliciting coach for pre-crushing of ore. In 2017, we conducted the pre-crushing test of demonstrated 20 ton per hour increase in throughput. This pre-crushing will occur in the second half of the year. The overall trend at Casa Berardi is increasing throughput as you can see in Slide 12. Additions to the mile to ramp-up throughput to the higher permitted level are at being analyzed and will likely be considered as part of the 2020 capital budget.

Moving on to San Sebastian on Slide 13. This story is unfolding as we had expected. Cash flow is flat as we can continue to develop the Middle Vein and finish finished tailings construction. Cost per ounce is expected to fall as the year progresses. With combination of lowering costs as development is ramping down and because of some recent drilling success, we now see our ore production in the Q4 of 2020. Not bad for a mine that was originally projected in the PEA to run out of ore by mid 2017.

Moving to Luck Friday, production at Luck Friday was up 74% over the prior year period mainly due to an increase in limited production by our salaried staff. We're pleased with the impact of this production is having obligation to cash burden and are especially pleased with the safety record of our salaried staff with zero long-term injuries and zero restricted work injuries in the past two years. Slide 14, you can see a recent photo showing the progress Epiroc is making on fabricating and assembling the remote vein miner at its facilities in Sweden. Machine is expected to be tested in Epiroc's test mine in 2019 and delivered Idaho in the first half of 2020. As Phil noted, Green Creek had an excellent quarter and continues to impress with higher grades and higher recoveries.

Slide 15 shows the increase in monthly silver recoveries. The mine produced 2.2 million ounces of silver at a cost of sales of $54 million and a cash cost after by-product credits of $0.49 per silver ounce. The all-in sustaining cost after byproduct credits was only $3.24 an ounce. We are working the new mine plan, which was featured in our recent technical report, pulling revenues forward and reducing development. The higher precious metal grades means higher cash flow, but we are also seeing lower base metal grades, which could impact timing of shipments as we work to produce the precious metals rich lead, zinc and both concentrates. I will now pass the call over to Dean.

Dean McDonald

Thanks, Larry. Hecla continued with aggressive drill programs in the first quarter at our mines where we are confirming and expanding resources with the potential for increasing reserves in the future. A list of drilling sections is provided in the appendix of the exploration release, which was issued on Wednesday. As we said in the beginning of the year, drilling will focus on defining and expanding resources and reserves underground at Casa Berardi, near surface oxide resources at San Sebastian and at Fire Creek and Hollister and Nevada. I will outline in the next few slides the success we've had on all of those fronts. At Casa Berardi we had considerable drilling success along the main trends as shown in Slide 17, particularly for high-grade underground resources in the 118 to 128 zones in the West Mine on the left side of the image and expansion of the 148, 152 and 160 zones in the East Mine.

Strong drill results are showing that a series of new mineralized zones may ultimately connect the West and East Mines with semi-continuous mineralization, which is one of our original presumptions when we acquired the mine in 2013. As shown on Slide 18, there are now a series of planned pits along the Casa Berardi defamation zone. But as the red arrows show the projections of high-grade shoots, there is clearly an opportunity to find new underground resources, particularly in the East Mine when access was reestablished last year. At San Sebastian, underground drilling is upgrading a number of zones along the Francine Vein to potentially add to near-term oxide production.

As shown in Slide 19, surface drilling is pushing hard to extend near surface oxide mineralization along the El Toro Vein, which is about a mile and a half southwest of the current mine. The longitudinal shows the vein has a mineralized strike length of 5,000 feet and localized high-grade pods are located between the surface and 450 feet of depth. It is evident, we urgently need to upgrade resources of Fire Creek to move into the mine plans and identify new resources. Slide 20 shows the location of spirals two, three and four where we are accelerating our efforts to define new vein extensions. This drilling is planned to be in combination with surface drilling that we expect to initiate later in May to evaluate the Zeus, Guard Shack, Far View and South Notice targets.

The Hollister Mine is shown in Slide 21. The identification of high-grade veins at the west end of the Gloria vein resulted in the acceleration of drilling to define potential near-term production. And exploration drilling has identified a series of new veins to the north. This is just the beginning. The most important drilling is planned to start later in the year when the development drift will provide drill platforms , so we can drill to the east of the known resource at Hollister, then across the Clementine fault, and confirm and expand the resource in the Hatter Graben to the east. Overall, we are off to a good start, but there's still lot to do.

Now I will now pass the call back to Phil.

Phil Baker

With that, operator, we'll open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Jake Sekelsky from ROTH Capital Partners. Your line is open.

Jake Sekelsky

With Nevada operations now under review, I mean, I'm just trying to get a handle on the magnitude. It sounds like it's centered more around Fire Creek. Is that fair to say? And I guess, if so, you still expect to move forward with Hatter development as planned?

Phil Baker

Well, just realized that we view this as one integrated operation Fire Creek, Hollister and Midas. And so there's some combination of those that are necessary to run it all together. Having said that, we'll certainly consider if there's any adjustment we should make at one and not the other. And we'll just see where that takes us. With respect to Hatter, it's a key element of the reason we acquired Klondex. So at least personally, I'm going to be reluctant to stop driving that decline in any way. We really do need to get in there and do the drilling to see what we have there.

Jake Sekelsky

Understood. That's helpful. And then just looking at San Sebastian, do you guys have any information on the timing of the book sample? And when we should expect to see some results from net studies in the [indiscernible]

Phil Baker

Yes, we would expect by the start of the fourth quarter. We'll have that book sample done and evaluated.

Operator

Thank you. Our next question comes from Heiko Ihle from H.C. Wainwright. Your line is open.

Heiko Ihle

Quick clarification that's builds a little bit on what Jake was saying. I may not even get any answer to this at all. Can you provide some details on your anticipated cash needs for the model operations for the year? I mean, it sounds like quite a bit it's going to stop. Any idea how much money you're going to have to ship that way this year?

Phil Baker

The answer is on the go forward basis is really the reason for doing the review. We want to make sure that we're getting a return for that investment. And so I can't tell you the objective will be -- I mean, when we started this process, the acquisition, the objective was to try to have Nevada be cash flow neutral. And so that's the direction we'll still try to move in.

Heiko Ihle

Fair enough. Building on that, you had a link on your homepage interview, what happens when the gold-silver ratio hits 85 and Phil, you were obviously in the interview. And just conceptually, I mean, would you be more interested in focusing on goals going forward? What it would be through acquisitions or giving them extra -- giving the gold assets extra focus and the more capital to the gold heavy asset such as Casa? I mean, in the interview, you mentioned the long mine life. So it sounds like this is to a certain extent already happening again given the answers you put into that interview and the West Mine to Casa?

Phil Baker

Well, look, we're going to be opportunity-driven when you look at the assets we have. We will see what the results that we get. Having said that, we're certainly very optimistic with respect to silver, and the fact that silver will outperform gold and gold silver ratio will come more in line with what you've seen historically. So we're not going to really change our -- we're not going to pivot to be more gold focused. We're going to continue to have a balanced view and we're going to continue to be driven by what the mines, the properties that we have the opportunities that they present.

Heiko Ihle

Going by what you just said and speaking just from M&A, and the answer well might be we aren't looking for anything given those recent developments. Lot of your mines, and specifically looking at Green Creek and Casa here, I mean, do you serve these assets with terrific cash cost right? And then looking at your acquisitions such as Klondex, there are more like fix hoppers and at the time of acquisition they had really high cash costs. Can you maybe just provide some color on your current fertile rates for IRR discounts to NAV or current cash costs that you're looking for when you face perspective M&A? And again the answer might be we aren't going to do anything period.

Phil Baker

I think it's more in the latter category. That's not say we won't do anything I think it's just unlikely that we'll do very much -- frankly we're disappointed in where our share price is. And that makes it problematic to envision using those shares to acquire something else. So it's -- I guess it'll be surprises if there is something, but that sounds it will be. But it's certainly not the next thing we expect to do.

Operator

Thank you. Our next question comes from Cosmos Chiu from CIBC. Your line is open.

Cosmos Chiu

A few questions from me here. Maybe first off on the convenient that you have on that line of credit. Lindsay, I know you mentioned that they been relaxed. I didn't -- I was able to find it in the press release. Could you maybe help me out, so I guess the two are senior leverage, which is currently at 2.5 or used to be at 2.5 interest coverage of three? How have those been relaxed?

Phil Baker

I think it's in the financial statements Cosmos, but I think it's second quarter goes -- and its debt interest that -- debt-to-EBITDA that has been relaxed primarily and it moves from -- moves to 5 in the second quarter to 4.5 in the third quarter, then back down before in the 2020. So …

Cosmos Chiu

Okay. But not the interest coverage ratio, because I think you're getting pretty close on that as well or to Lindsay

Lindsay Hall

It's just on the debt-to-EBITDA ratio that we -- just wanted a bit of comfort in the room that give us some flexibility.

Cosmos Chiu

And do you anticipate needing to draw on that line of credit because I believe, nothing is drawn right now, but do you anticipate needing to draw on that in the next two quarters?

Lindsay Hall

Well, we use the revolving credit to provide working capital. Remember Greens Creek is -- we shipped the ore and its two or three months before where we've gotten final payment on those shipments. So that facility has been used and will continue to be used for that purpose. Will we be drawing over quarter-end? I think it's likely that we will. And so we want to just make sure that we're in compliance with all covenants.

Cosmos Chiu

And maybe on that senior secured debt, actually not -- maybe first on the acquisition of Klondex. When it first happened, when you made the acquisition at Klondex, one of the rationales behind it was the ability to generate cash and then hence it's going to help you with the credit rating and improvement in your credit rating. And I think, in the end, there was a bit of an improvement at that point in time. Now with the suspension of the guidance, how has that changed?

Lindsay Hall

So, no, I think we'll go visit the rating agency, certainly from where we're at when we anticipated acquiring Klondex. We thought we'd have some cash flow to use that cash flow in Nevada to develop Hatter Graben. So, obviously, 2019 is off the mark from where we're at with the rating agencies. But as far as the rating agencies, we gave them life of mine plans and everything. And what they said at the time when we visited them, they like the acquisition, but is subject to execution risk about integrating these assets into the Hecla portfolio. And certainly what they've said is, certainly, in 2019 hurting us a bit in terms of the integration of these assets, but they look to reporting periods in there. They're looking to what Klondex and the Nevada operations can mean to us over the next five or 10 years. So we'll go back and visit them, but they will be reporting back of whatever we say. But they look to reporting cycles rather than just the short-term one or two quarters.

Phil Baker

And they didn't. What did they do when we -- they didn't upgrade us.

Lindsay Hall

Yes, they gave us a bit of an upgrade.

Phil Baker

Okay.

Lindsay Hall

But they look for long-term cycle. They've been more interested in our success of Hatter, and what are you going to do to -- may be short-term but more interest in the long term.

Cosmos Chiu

And on that, going back to the first part of my question here, as you mentioned Lindsay earlier, the $500 million in senior secured debt, now, there is an opportunity for you to refinance. I think the time has come where you can refinance without any penalties. And I think we've talked about this in previous conference calls as well. You were hoping to get a refinance soon and maybe even around this time. Again, given what has happened to Klondex and the guidance suspension, has that timeline changed?

Phil Baker

Well, first realize, it's not a -- it's not secured and it's not -- it's an unsecured.

Cosmos Chiu

Okay.

Phil Baker

$500 million. I think we'll see, I mean, clearly, we think we need to work through what we're going to do in Nevada. But it's the opportunity to do something has now arrived. We would expect to still do something within the next year before the deck is current. That would be my expectation. Lindsay, anything to add?

Lindsay Hall

What I'm referring to the high-yield markets come back a bit, it's backed up maybe in the last week or so. But you know what we're going to give up in Nevada issue, but it's not a issue, but look at -- make some decisions on Nevada and it's really how much we want to invest in Nevada to have through the mine long-term. And thus ensure that around quickly and that will bode well for us and determine what that means to us and we'll be ready to go to the market. I mean we're, this is -- on the Nevada issue, we're going to deal with on a comp basis. And I don't see that necessarily getting in the way of us refinancing the bonds when we choose to do so. But the market is open as you said Cosmos.

Cosmos Chiu

Yes. And I'm glad you brought up the idea the Nevada issues, I guess you do have comprehensive review and now you're looking at targeting some kind of report or completion by Q2. But my question is, I thought one of the key issues here at Nevada was needing to improve up the reserve resources. I'm trying to understand what the ounces you have? And from that perspective, that was dependent on getting the Spirals down there, getting the drill platforms, getting the drills going and that could take time. So I guess my question is you're targeting a completion in Q2. But are we going to be able to get some kind of fulsome answer when that report comes out? Or was that going to be a comprehensive report? Just given that, once again, it could take some time to really figure out what you have in terms of ounces down underground?

Phil Baker

I guess the timing of it is weeks or months. So whether that's Q2 or not, I don't know, I sort of anticipate that it will be. But -- and what --- when you say comprehensive, we'll take it as far as we need to take it to make decision on what changes we need to make. Whether we're able to determine every element of how we go forward, I'm not sure. And we'll just see where it takes us. But the main point is the way we've been doing things has not generated the results that we are looking for. And so we're going to reevaluate in how to proceed.

Cosmos Chiu

And then -- just maybe one follow-up question on that. In terms of -- I think Larry, you talked about the different alternatives that you're looking at in terms of this comprehensive review. And I'm using comprehensive because I think that's the word you used in the MD&A. And the last one would be essentially stopping production at Fire Creek. I'm just wondering, it all given -- while you've talked about in terms of water issues and it'll has production become a distraction from that perspective. And would that in terms of stopping all production at Fire Creek, would that be the best alternative?

Larry Radford

We don't know yet.

Phil Baker

Right Larry

Lindsay Hall

Yes, I'm not sure what distraction means but -- we're studying many things, as I mentioned, the water issues, alternatives for processing and those sorts of things. And it's going to take a bit of time to understand those. And so if the best outcome is to stop production to have time to truly understand what we have in front of us. And that could be an outcome, but it's not the only outcome that we could possibly have.

Cosmos Chiu

And maybe one last question from me. In terms of back to accounting here, in terms of the suspension of the guidance at the Nevada, could this potentially trigger some kind of review of a potential write down?

Phil Baker

Yes, certainly we will come to a determination as to whether we have a triggering event. And if we do, is there an impairment that's required, Lindsay?

Lindsay Hall

Yes. No. Go through the study like Phil says, trigger event causes us to reforecast the cash flows of all the operating entities and what not. So we will look at that. The impairment test itself is done as straight forward as one would think in terms of the -- there's different pockets to rvaluate depletable properties, and that's not so much the property plant equipment institute exploration. So when you're talking about Fire Creek and you narrow down and you look at the purchase price, this really is the depletable side, perhaps the Fire Creek assets around $46 million. That's the rollout of the reserves over the next three to four years that we're going to mine. Those are the things would -- that we'd be sensitive too in terms of evaluating those cash flows coming from that two to three-year period that we generated some $46 million of value that would be maybe something we look to. But again, we will look at that. We haven't finalized the purchase price itself. And it is something we're working toward diligently on, but it could result in impairment, but we're not there yet.

Operator

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

Mark Mihaljevic

I guess to kick it off. Can you just walk me through some of the metrics you're looking for from this comprehensive review? And kind of these -- are you looking at this as a cash flow exercise as your primary focus versus the long-term value, and into some of the metrics you're looking for when you're evaluating the choices?

Phil Baker

I think, clearly the biggest drivers to try to have Nevada not -- not requires much investment into it. That's -- that's the first target. But we don't want to do that in a way that destroys long-term value. So it's going to be a balancing between those two things. And really looking at the various issues that we have how can those be resolved? Larry, anything to add to that?

Larry Radford

I think you covered

Mark Mihaljevic

Okay. Again, kind of following up to that, you mentioned the potential for third-party processing and something you guys had previously thought about or talked about, just want to get an update on where you are in that process and whether we could actually get an announcement with this Q2 review? Or is that something that you will evaluate its potential and then kind of leave as an opportunity?

Phil Baker

It's possible. We -- there are certainly places that you can take the ore. And so we're contemplating that. If you do that -- presumably what it's going to do is reduce the cost of processing overall. And therefore make the -- they improve the economics. But we don't know -- that's -- that will be dependent upon the negotiations with potential third-party processors. So we don't know how long that might take.

Mark Mihaljevic

Can you just give a little more detail on where you are with those negotiations? Have you actually started conversations? Is that something -- advanced …

Phil Baker

Yes. We have.

Mark Mihaljevic

Okay. And then …

Phil Baker

We have had serious conversations and where -- it's certainly a potential outcome that's feasible.

Mark Mihaljevic

Okay. And then I guess following up, obviously with silver prices where they are in Nevada, kind of at best getting to cash neutral. How else would you change your spending profile in a weak metal price environment? And are you kind of comfortable just spending as you are at the other assets right now?

Phil Baker

Yes. We're looking to spend within the guidance that we gave. So that's the starting point. We will evaluate if we need to do any more than that, but that's where we are at this point.

Operator

Thank you. And our next question comes from John Bridges from JPMorgan. Your line is open.

John Bridges

Just wondered if you could give us a bit of color on what the problems actually are at -- in Nevada? We heard about the water, you're waiting on some permits, is that part of it? And you say you've demobilize the contract. Does that mean that you stopped advancing the exploration terminals, which were related to the upbeat comment that you've been giving as on exploration success? I'm just a bit confused here.

Phil Baker

Sure. With respect to the water, what it has done is its limited places that we're able to go in the mine. Because we cannot deal with the water fast enough to be able to effectively move forward so our advance rate really slows down in our ability to mine in those areas slows down. That's primarily Spiral for that it has sort of lock this out. With respect to -- anything to add on that and then we'll talk about the contractor.

Larry Radford

Well, we are working on expanding our permitted water discharge limit. And some of the ores -- I'm sorry, some of the water is pretty innocuous. So we're analyzing if there is a simple inexpensive. Right now we're using reverse osmosis, which is slow and expensive and very sensitive to fines. We're looking at an alternative process, which could increase or discharge without a lot of expense. There's a lot of work going on behind the scenes on the water. Do you want me to go on the development or --

John Bridges

Yes, go ahead.

Larry Radford

As far as development, Hatter Graben was always our own people and that remains in our own hands. As -- the only work that was dedicated to the contractor was the development of Portal 2 at Fire Creek, and we'll take that on, we have taken that on with our own employees.

John Bridges

So the essential development work is carrying on?

Larry Radford

It's carrying on. But it's also under review as we discussed.

John Bridges

Okay. And so, what is different from the original plan? Is it the water thing which presumably you have a sort of -- is that a catalyst for some sort of clarity on the situation? Or is the gold -- how is the cash flow, what sort is leading to this difference in the cash flow?

Phil Baker

I think, certainly water is a big element of it, and it's not a huge amount of water, but it's enough where there is an adequate infrastructure to deal with it. And it has grown from where it was when we were doing the due diligence. So that would be number one. And number two, we have not seen the relative productivity that we were anticipating we would be able to achieve. And that's part of the reason for removing the contractor. We think maybe there is an opportunity there to improve productivity per dollar spent. That's really what it comes down to as we're not getting enough tons moved for the dollars that we're spending. I mean, if you go in and you look quarter-on-quarter, it's in the amount of tons that we're moving is pretty consistent fourth quarter to first quarter and we would have thought we would had better performance than that. Larry, what do you want to add?

Larry Radford

Yes. There's certainly been challenges with the definition drilling. There is inferred material that we're trying to upgrade and some of it didn't get upgraded.

Phil Baker

Yes. That's true. I mean we've had just some surprises with some of the inferred what vein 30 --

Dean McDonald

Vein 39.

Phil Baker

39. We had this area that we thought was going to be upgraded and it turned into dusters.

Larry Radford

So one would expect that with inferred material, you'd win some, lose some, but we haven't had too many winners on that conversion.

John Bridges

Okay. So how does that -- how do your contractors benchmark against your own employees? And is one of the plan is to bring in sort of your own team and build a more productive team there?

Larry Radford

Well, we have enough equipment. I’d like to say the Portal 2 heading is only one heading out of many. We have enough equipment to take it on. We have enough miners to take it on our current development plan. And it's really -- it's really a function of just cash flow and prioritization of exploration headings. And that will be part of this review that -- As Phil said, we anticipate in -- we anticipate pushing Hatter Graben forward.

John Bridges

Okay. So this really circles back to the refi issue and not wanting to protect cash flows while you work on the refi?

Phil Baker

Well, yes, and remember our assumption on the acquisition was that we were going to be able to improve productivity, lower the cut-off grade and be able to increase the through -- or be able to increase the throughput so then lower the cut-off grade and have more material available to us. So that's not -- that hadn't happened. And we're working through, okay. What do we need to do given that hasn't happened? And we were not able to have a plan that shows that it will happen. And -- because the objective has always been to try to have Nevada be cash flow neutral or just slightly negative. Well, it's been more net more than slightly and we're just not going to continue to move forward under that -- under that plan if we can't get it closer to neutral. Anything to add Larry? Okay.

Operator

Thank you. Our next question comes from Trevor Turnbull from Scotiabank. Your line is open.

Trevor Turnbull

I think, John's questions, kind of got to the heart of it, and I was going to ask where did the opportunities that you saw with Klondex, a company that was struggling to a degree and obviously under-funded in some respects. Where do those opportunities kind of turn into this need for a comprehensive review? And if I understand, it sounds like, in some respects it was -- it was the water, which didn't -- wasn't anticipated to be the hurdle that it is. You've talked a bit about the contractors. And I'm just curious with respect to the contractors. When you look at the acquisition, were you factoring in that you could do better on the contractors in terms of cost and productivity or did the contractors just seem to cost kind of got away from them so that they weren't? Or I'm just wondering was it -- the cost could get away or were you actually factoring in some better productivity and costs that just didn't come to fruition?

Phil Baker

It's the latter. We absolutely thought we could operate more effectively. I'll use an example. One of the things that we came in and we identified pretty quickly was the need to -- in these areas where we're in tough. And we have this road problem where they were getting bogged down trying to get to that material. We identified putting in the synthetic liner and building the road bed. That made a big difference, but it didn't make as much as we were anticipating. And we still had problem with dealing with the ribs in the back and some of the problem of getting the advance rate that we were looking for. And then you couple that with the fact that this -- these inferred areas did not upgrade as we were anticipating that they would upgrade. And so, those two things costs -- you had more costs and you had less revenue is really how it came out. Larry?

Larry Radford

Yes, I mean to be fair to the contractor, there was -- there have been periods where they've had to grout the water, which is basically not advancing when you're grouting. And but nonetheless, when we look at it on a per foot basis, the contractors performance has not been -- we inherited this contract from Klondex. It's not where we want it to be and it's time to get control of it.

Trevor Turnbull

Okay. It seems that in maybe hindsight that those were kind of too somewhat aggressive or wishful thinking that you could get contractors to kind of be more productive. I understand if it was your own crews maybe versus the other owner crews?

Larry Radford

It was ours as well Trevor, wasn't just contractor. We haven't seen the productivity from ours as much as we thought we would.

Trevor Turnbull

The other question, I guess goes to the infill drilling or definition drilling. Again that seems a bit aggressive to think that inferred was going to kind of come through for you. What if you kind of wipe that out of the future plan, which is probably too punitive, but assuming that inferred is just not going to upgrade at all -- kind of what is that -- I guess that just takes it right back to the reserve life, but how much is in the -- how much is kind of in your internal mine plan that is over and above the actual reserves?

Phil Baker

Look, Trevor, the reason we're going to the review is really to answer those, what you're getting at with those questions. So I don't -- I don't have an answer that would be meaningful at the moment. But we will and over the course of the next few weeks or months to really answer that question. I just don't know.

Trevor Turnbull

But can you tell us how much you kind of had planned up to this point? Were you looking at [indiscernible]

Phil Baker

We realized that the reserve is only provides for about a year and a half of mine life. Remember, that's -- it's quite small. And so the -- in the acquisition, we have always believed that the key to this acquisition is exploration success, it's drilling. And we think -- and that hasn't changed any. We still believe that we're in the place that we need to be. It's just we're not seeing the results out of Fire Creek, but hoping we would have in the early stages of this. And we still need to -- we need a plan that can allow us to get to those areas like Spiral 9, 10, 11 to be able to do the drilling that needs to be done. Dean, anything you want to add to that?

Dean McDonald

No. Just the fact that really the exploration aspect of the drilling has only started, right. I mean Fire Creek, we've really done no underground exploration drilling. Exploration drilling from surface will start in a few weeks. We did drilling at -- what I'd call exploration drilling at Hollister. We will put more once that Hatter Graben development has advanced. So that upside that we anticipate, we really haven't started to evaluate that. And so, I believe the good news is coming.

Trevor Turnbull

Okay. And maybe one I have got you, Dean, just a bit of an clarification or some more color. Larry mentioned some refractory type or poor recovery? Or if you go back to like the 2015 tech report that would have been done by Klondex, there was a reference in there to some earlier network, going way back to 2011 in which there were a few assays that showed poor recoveries, just very low recoveries, not a lot of them, but a couple. Is that kind of similar situation where -- when you talk about refractory you're just seeing very low recoveries on stuff that otherwise you would have thought was going to get treated the same way?

Dean McDonald

Well, what we're seeing is that the type one ore, which historically is what's been mined. Those are very discrete veins. The host rock is dominantly basalt, and so we continue to drill that type of ore. But what we're starting to see is -- call it a mixed store, we're now getting into or at least in areas where the basalt is mixed with other volcanics. And so what happens is that the tenor of the mineralization changes. It's less discrete veins. It's more clay alteration, a bit amorphous sulphides. And so that's the area that we're coming to terms with in terms of recoveries continuity of grade. And so, it's in that transition zone in the rock type and in the style of mineralization that we're coming to terms with. And that's probably what was referenced in that technical report that you mentioned.

Trevor Turnbull

Okay.

Phil Baker

And so we're having to figure out where that is and then to the extent we have found out -- found where that is and how do we process it.

Operator

Thank you. Our next question comes from Adam Graf from B Riley. Your line is open.

Adam Graf

Just one more question on Nevada. I think we've beaten that horse. But just in regards to the Hatter Graben and water, were your plans are for development of Hatter Graben, obviously very long way from the Portal there. Have you guys in the drilling or in prior exploration there? Is there any water at Hatter? And how far along are you guys as far as crossing the faults to get over to the Hatter?

Phil Baker

So we have a geotechnical hole that's in the process of being drilled as we speak. I think it's what 1,500 feet long. Is that right?

Larry Radford

Yes, that right.

Phil Baker

And so far so good. Let's see -- if you look at the slide, is there -- can we tell them how far -- it is a series of fault, and, yes, there is a series of faults that we have.

Adam Graf

Yes.

Phil Baker

Shown better in the exploration press release diagrams, but

Larry Radford

But short answer is we've crossed some minor faults without any major problems for some bigger faults ahead of us as far as water it's been nothing serious that we've seen. And in the exploration holes that have been previously drilled, there are no indications of water. I think we tried to put in a [indiscernible]

Phil Baker

Yes. We did.

Larry Radford

We didn't get that actually -- there was a problem with the hole, I think. So I didn't mentioned it. But as Phil mentioned, right now we're were either drilling or going to be drilling very soon geo-technical hole that's actually in parallels the drift that we're excavating right now. So but there's been nothing really that indicates anything, but maybe some small perched water at this point.

Adam Graf

And then just quickly any update on Lucky Friday negotiations and/or progress on the Nevada, sorry, the Montana assets that you guys own?

Phil Baker

So on the Lucky Friday negotiations, there's been meetings that have occurred over -- a meeting that has occurred in the last, I guess three weeks. This is the first meeting in seven months. So we're pleased to be at the table and we have another meeting scheduled. So there certainly are discussions. The problem is it's a binary issue, you either have the -- we have the ability to put people where we need to put them, when we need to put them or we don't. And so it's a difficult one to come to a compromise. But we're hopeful and we're glad that we're in negotiations with them. With respect to Montana, it's -- we're just continuing to go through the process. We still need to come back with new biological reports. And I say we -- the government still needs to do that. So we are waiting for those to be finalized. The other things that are in litigation those will take the -- justice grinds very slowly in the United States. And so we're still grinding through that process and it's just really slow.

Adam Graf

Phil, what's the annual spend more or less in Montana?

Phil Baker

It's a few million dollars outside of the Troy reclamation. And that program will be completed this year of the -- during the cover of the tailings facility. The tailings facility will be closed this year.

Adam Graf

And just one last thing on Montana, the previous deals that the prior owners had on those assets with streams and what not? Have those all been canceled or up for -- will be up at some future time for renegotiation?

Phil Baker

With respect to -- there were, of course, two different companies with one company, there was a stream, the stream still exists; with the other company, there was not any. And is there a renegotiation? No, none, that's planned. But that certainly is always something to consider.

Operator

Thank you. Our next question comes from Matthew Fields from Bank of America Merrill Lynch. Your line is open.

Matthew Fields

Just thinking about -- I know you said you want to turn Nevada around. And then you will, trying to focus on refinancing. It seems like a lot of lifting to do and hoping that the market is there for you when it's all said and done. Do you think that it's important to open up Lucky Friday and have another cash generating asset as you try to approach the market, so you have three cash assets instead of two?

Phil Baker

Look, the message I have given pretty consistently is the core assets are Greens Creek and Casa. And both of those assets have improved. And so we think that's what the market should be focused on with …

Matthew Fields

So way home you spent over $200 million on the 4 shaft and a non-core asset?

Phil Baker

At the moment, it's not in the same category as Greens Creek and Casa. We spent that money to set that mine up for the long term, and we need to have a new relationship with the workforce. So we're going to see that through because it's a mine that will operate. We think it -- certainly 20, 30 more years we think could be even longer than that. So it's important to get the right relationship with the workforce. So we'll do that. So it's non-core in the sense that it's not generating the cash flow for investors today. The other thing that we'll be doing, of course, is that we've been making the investment on the remote vein miner. And we'll see that coming to site at the beginning of next year.

Matthew Fields

And then just some quick math on my part. If you are assuming you're cash flow neutral in 2Q, you got to produce about $20 million or more of EBITDA, otherwise you'll bust through your 4.5 times leverage covenant on your revolver. Are you confident that you will have access to that revolver after June 30th?

Phil Baker

Yes, the answer is yes.

Lindsay Hall

Yes, of course.

Phil Baker

And that's why we made the changes to make sure we would have access.

Operator

Thank you. And that does conclude our question and answer session for today's conference. I now like to turn the conference back over to Phil Baker for any closing remarks.

Phil Baker

Okay. Well, thanks very much for participating in the call. If you have any further questions, please reach out to Mike or I. Have a good day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a wonderful day.