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Hecla Mining Company (NYSE:HL)

Q4 2008 Earnings Call

February 24, 2009, 9:00 am ET

Executives

Don Poirier, VP, Corporate Development

Phil Baker - President and CEO

Jim Sabala - SVP and CFO

Ron Clayton - SVP, Operations

Dean McDonald - VP, Explorations

Analysts

Anthony Sorrentino - Sorrentino Metals

Steven Butler - Canaccord Adams

Borden Putnam - Eastbourne Capital

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008, Hecla Mining Earnings Conference Call. My name is Erica, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's conference, Mr. Don Poirier. You may proceed.

Don Poirier

Welcome everyone and thank you for joining us today on our fourth quarter and year end conference call. Our call is being webcast today at www.hecla-mining.com. Our press release from yesterday is available on the website and there is also a short slide presentation posted to the same site that we will use as part of this call to assist you in understanding some of the information that will be discussed.

On today's call we will Phil Baker Hecla's President and CEO and he is joined by Jim Sabala our Senior Vice President and CFO, Ron Clayton, Senior Vice President of Operations and Dean McDonald, Vice President of Exploration.

But before we start, I need to remind you that any forward-looking statements made today by the management team comes under the Private Securities Litigation Reform Act. It involves a number of risks that could cause results to differ from projections. In addition to our filings at the SEC, we are allowed to disclose mineral deposits that we can economically and legally extract or produce. Investors are cautioned about our use of such terms as measured, indicated, and inferred resources and we urge you to consider those disclosures that are provided in our SEC filings.

It gives me great pleasure to introduce Phil Baker, Hecla's President and Chief Executive Officer.

Phil Baker

Thanks, Don. Hello everyone and thank you for joining the call. The fourth quarter and first six weeks of this year have been very tough as Hecla took steps to get out of the crisis mode.

When we cut the deal to acquire Greens Creek a year ago. We did not anticipate the credit crisis, dramatic reduction in base metals prices and the run up in cost. We might have been able to handle one or even two fundamental changes in the world but all three forces just to take the dramatic action of raising the equity capital necessary to restructure the debt. With 70% of the debt paid off and the remaining $113 million now due over the course of 2010 and 2011.

Our debt is no longer capturing the same management attention it has for the past six months, Jim will talk more about this.

Our focus now is on running the business, getting the production costs to where we think they should be.

Please see slide comparing the cost per ounce with our peers. And like everyone in the sector our costs have stepped up dramatically, but Hecla still has the lowest cost structure and with our reduction in force and other steps we have taken to increase utilization and create lower costs.

We expect to see our costs lowered in 2009, what we had in fourth quarter. I have asked Ron to talk more about costs.

So I want to focus, for a moment on revenue and please see next slide that shows the sensitivity to our metals price. Despite having sold our Venezuelan gold asset, Hecla is still exposed to gold and we expect to produce 55,000 to 60,000 ounces this year.

And given the strength of gold this year I am not sure if the market recognizes. If you, I am happy the prices that we have today, if those had been applied in the fourth quarter, we would have had $10 million more revenue in the quarter, the same thing applies to silver. At today's silver, price there would have been $8 million more revenue for the quarter, both of these would have gone straight to the bottom line.

We of course also have exposure to zinc and lead prices, as the release outlines our realized price last quarter was 19 and 26 and it's less than the market average, for zinc and lead respectively as a result of the provisional price adjustments for the dramatically declining prices. Stable prices would have added another $5 million for the quarter.

Two milestones I would like to point out. First 2008, is the 50th year, Hecla has owned and operated the Lucky Friday. We had higher cost for the quarter and the year than we would have liked. But I am confident, just like in the past you will see us change that.

Second this is the most silver reserves and resources in the company's 118 year history. In the last 25 years reserves have been as little as 19 million ounces, if you go back to 1987.

Just so happened that Hecla acquired its initial interest in Greens Creek, because Lucky Friday and Greens Creek districts are so geologically rich. The mines have been producing and exploration discovering new ounces that have not been identified.

And Dean will talk to you about why we think we will find a lot more on the four districts. But first what I would like to turn things over to Jim to talk about the financials, Jim.

Jim Sabala

Thanks, Phil. First I would like to report on the progress we have made in changing the company's financial structure as we deal with the most challenging financial markets, experienced in over 50 years.

For reference, I will refer you to the fourth slide in the presentation. We have strengthed the balance sheet, increasing liquidity and reducing debt. Late in the fourth quarter and early in the first quarter, we raised a total of $91 million in connection with these transactions we have repaid $40 million of the outstanding bridge loan and $8 million of the term loan.

As a result our total debt under the credit agreement now stands at just $113 million compared to $380 million just seven month ago, quite an accomplishment given the volatile markets we are experiencing. We have restructured our credit agreement, under the revised amortization schedule, $60 million will be repaid in 2010 and $53 million in 2011. That gives us the time for base metals markets to recover to the more normal levels.

We have slashed discretionary costs, in 2009 exploration will be $7 million compared to nearly $23 million in 2008.

In addition capital expenditures will be reduced to $33 million in 2009, down from $69 million in 2008. And we are focusing on reducing all other operating costs and in January implemented a reduction in production program across the company.

With that I would like to turn to our results for the fourth quarter and the full year 2008, some of what I will discuss is on the fifth slide.

During the fourth quarter, we reported a loss of $37.3 million compared to net income of $8.2 million in 2007's comparable period. The loss for the year was $66.6 million compared to income of $53.2 million in 2007. The loss applicable to common shareholders after preferred stock dividends was $80.2 million or $0.57 per share for 2008, compared to income of $52.2 million or $0.43 per share in 2007.

2008's results were impacted by a number of unusual items. First, lower lead and zinc prices and higher smelter treatment charges and increased costs and consumables and negative provisional price adjustments of $25.7 million.

Higher interest expense associated with the debt used to acquire the remaining Greens Creek interest, a one time increase in the cost of sales of $17 million related to the purchase of Greens Creek, losses associated with divestiture, and operational sale of our Venezuelan assets that totaled nearly $30 million and a reduction in the value of our deferred tax assets of a net amount of $3.6 million during the year.

Silver production increased 54% in 2008 to 8.7 million ounces compared to 5.6 million ounces in 2007 and our cost per ounce was $4.20 per ounce compared with a negative $2.81 in 2007, which is the result of increased input costs and the lower byproduct credits previously noted.

As mentioned, we enterted 2009 on strong footing. We had cash on hand at the end of the year of $36.5 million. We have reduced and restructured our debt, we have reduced discretionary cost and will continue to aggressively attack operating costs.

With that, we expect 2009 production levels to continue to increase, reaching a level of 10 million to 11 million ounces in 2009.

And with that, I would like to turn the call over to Ron Clayton.

Ron Clayton

Thanks Jim, and good morning. During 2007, and particularly in 2008, we experienced an unprecedented raise in cost materials in our industry. Driving the cost per ton at our mines up as shown on slide 6.

In fact the highest prices we paid for critical supplies such as diesel fuels, steel for grinding and ground support, and cement for back fill occurred in September and October over the last year.

Diesel prices exceeded $4 a gallon delivered at our mines sites during that period. While the increase in labor cost were much less dramatic. We did see increases. Fortunately, a significant component of our compensation schemes are profit and sliver price driven. As prices and profit declined and so did our labor cost. We began to see some benefit from cost reduction efforts we have made with in concert with our vendors. This was particularly evident on the Greens Creek portion of slide number 6.

Most notably, diesel fuel has dropped about 40% from the peak. These efforts will continue.

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Lucky Friday graph does not show the great progress that was achieved at the mine during the fourth quarter. Cost improvements on a unit basis were offset there by reduced mill production which was a result of some startup upsets in our new water treatment plants.

Ten days of mill production were lost, resulting in significant broken ore being stockpiled underground and the cost late in the quarter were well below the average for the quarter.

Greens Creek saw the benefit of more hydropower than we expected, further reducing power cost. Over the last several years, we have invested in both operations to revitalize the infrastructure and improve processes so we can take maximum advantage of our production capacity.

This has and will continue to help drive cost down and margins up particularly at Greens Creek. Moving on to slide 7, as prices increased the three year average for all of the metals and our products has tended to trail and the result has been that actual realized prices have been significantly higher than the prices used in the reserve and resource estimations.

This has allowed us to mine lower grades profitably and increase the MPV of our operations during high price periods. As prices have decreased we have adjusted our operating criteria to ensure that we continue to get profitable and highest possible margin material into the mills. The adjustment to metal prices is part of the reason you see silver grade change in the graph on slide 7.

The graph of the byproducts grade in price would appear very similar to the sliver graph presented here.

Adjusting our cut off strategy to meet price and cost changes has been key to maximizing margins and our operations as in particularly important to Lucky Friday where we have been operating near mill capacity for couple of years.

And the Greens Creek mill has in excess capacity above what we have been able to historically do with the mine productions. Improvements over the last year to ensure adequate skilled and trained employees, equipment availability, development and back fill performance has allowed us to consistently achieve 2100 ton per day production rate over the last several quarters for the first time since 2004.

We expect economies of scale to help further reduce unit cost and expect continue to try to push the tonnage of a Greens Creek.

Moving onto slide 8, capital expenditures over the last couple of years are shown here. This investment in our operations has paid off in terms of increased production rates of both operations.

Increased reserves and resources and longer mine lives. This also allows us to slow the capital spending in these difficult economic times without damaging long term viability of either operation.

With that I will turn the call over to Dean McDonald.

Dean McDonald

Thank you, Ron. As Phil mentioned earlier 2008 has been a record year in adding to our total silver reserves and resources. There has been a spectacular increase of 80.5 million ounces or 76% increase in sliver compared to the previous year. Hecla now has 133 million ounces of silver reserves and 192 million ounces of resources with substantial increases in lead and zinc.

In addition, we added 400,000 ounces of gold reserves. Most of this increase is due to our acquisition of the remaining interest in the Greens Creek mine but successful exploration and definition drilling at the Lucky Friday mine also contributed by adding more than 10 years of production to the mine life at the current mining rate.

It was phenomenal year at Lucky Friday, so I want to focus a few moments on what has led to this significant expansion and upgrading of the reserve and resources.

When we look at slide 9, which is the longitudinal of the Lucky Friday. The hotter colors represent higher grade and thickness of the resource and we can see the significant expansion of the red high grade zone from 2007 to 2008. Reserves are up 26% from last year with major gains in the 30 vein from 5900 to 6200 levels.

The 90 vein below and above 5900 level and the 110 vein between the 4800 to 5100. In the 2008 longitudinal these gains are defined by the bright red area on the right side above the 6300 level which is marked on the diagram.

Mineralized material is up by 55%, on slide 9 of the longitudinal the large reddish area below the 6300 level reflects the significantly improving grades of the 30 and 40 veins and the coalescing of those veins into larger higher grade structures.

Recent drilling has also shown there is potential to expand the resource further to the east and at depth. Lucky Friday is one of four major districts that we have dominant land position, exploration is occurring at all four that we expect to add resources. But more importantly these are places we believe have the potential to find that new ore body that can change the company.

The most exciting exploration news from Greens Creek is that we continue to see growth of the North East contact area. Surface drilling has now traced mineralized mine contact for over 2000 feet along straight to the South and this is tracing towards known mineralization at the mine.

At the San Juan joint venture in Colorado, 3D modeling of the bulldog A vein has confirmed much of the historic 1980's home state reserve. This is the first time the creek mining district has been consolidated and we believe we are making progress in defining a plus 100 million ounce silver resource.

The integration and refinement of regional and detailed exploration data at the silver valley of Idaho and in Mexico continue to improve our targeting in a number of prospective areas with excellent resource potential.

With that I will pass you back to Phil for concluding remarks.

Phil Baker

Thanks Dean. The message we gave in our press release, this conference call future is that we think the future looks bright. I am sure that you have some questions that you want to ask. So Don why don't we ask the operator to start the Q&A.

Don Poirier

Erica, could you please instruct and organize the questions for the next portion of our call?

Question-and-Answer-Session

Operator

Yes sir. (Operator Instructions). And your first question comes from the lines of Anthony Sorrentino from Sorrentino Metals. You may proceed.

Anthony Sorrentino - Sorrentino Metals

Good morning everyone.

Phil Baker

Hi Anthony.

Anthony Sorrentino - Sorrentino Metals

Hi. I know a few months ago I believe you hired a consultant from the Alvarez Company and I just wanted to know what his role has been in, what his recommendations have been at the company?

Phil Baker

Yeah the role, the role, Anthony, the role of Stan Speer with Alvarez has played has been really in restructuring the debt with the lenders and these whole series of amendments that we have had, he’s been engaged in all of those discussions. And the other thing that we are having them do is look at all of our cost information and help us look for ways to lower our costs and we are making a lot of progress on that front. We think there is a lot more room to go, so that's the two things that they have been involved in.

Anthony Sorrentino - Sorrentino Metals

Okay and talking about costs, is there any possibility of your being able to lower your smelter and treatment charges in the near term?

Phil Baker

We in fact, Ron and I after the zinc conference, in fact having discussions with smelters on the upcoming year for those charges and it's too early to say where these are going to come out. We certainly have an expectation to see those lowered. But it's still early days, it's something that will likely take another number of weeks before those, the new terms get finalized. Ron, do you want to add anything to that.

Ron Clayton

Probably the only thing, I would add Phil is the general consensus out there is the trend is going to be down a little bit, with lower. So it's favorable in that direction.

Phil Baker

Yeah, good for us.

Anthony Sorrentino - Sorrentino Metals

Okay.

Phil Baker

And that is, I appreciate, you pointing out Tony, you are asking that question, because that is certainly one of the things that affected us in 2008 negatively.

Anthony Sorrentino - Sorrentino Metals

Okay well that’s good to hear, that it's there trending down. All right, that’s all I have for now. Thank you very much.

Phil Baker

Thank you

Operator

Your next question comes from the line of Steven Butler from Canaccord Adams. You may proceed.

Steven Butler - Canaccord Adams

Good morning, guys. Good morning, Phil. Ron you had mentioned the fall from the peak in oil prices. And in fact I think you mentioned about $4 a gallon during the period, I assume that's a Q4 number. And may be where are diesel prices today for the company and do you have sensitivity for us roughly in terms of a $1 a gallon of diesel per ounce of silver or some kind of sensitivity or at least direction as to where your guidance is for 2009 in terms of fuel price assumption? Thanks guys.

Ron Clayton

Off the top of my head. I can not remember the sensitivity numbers. So, we are going to have look that up for you unless Jim or Phil can remember what the calculation was. But we are anticipating that the numbers would come down and they have in fact come down probably more than we expected. So, we have been particularly in the last 30 days, we have been paying sub 2.50 a gallon for diesel fuels. So, it's down even more in that 40% range that we were talking about. I do not know for sure where it's going to go. But, I suspect it will probably is not going to grow a whole lot from that point. Jim --

Phil Baker

But, Ron as far as the cost we had, it was $4 plus and now down in the sub 2.50. So, we have seen just dramatic move in that and Jim, do you always --

Jim Sabala

I was kind of recalling our usage. I believe its about 600,000 gallons a month Ron.

Ron Clayton

Its 550,000 gallons a month at if Greens Creek and --

Phil Baker

Sure, say you can just apply a $1 to that for 12 months and divide it by our production guidance and it will give you the sensitivity.

Steven Butler - Canaccord Adams

Okay.

Ron Clayton

Yeah. And actually probably 600,000 is a good aggregate number for Lucky Friday and Greens Creek together. I just do not know about the total ounces.

Steven Butler - Canaccord Adams

And then in terms of will that fuel consumption ease a little bit. I suppose over time it depends upon connection or greater connection to the state grid in Alaska.

Ron Clayton

Yeah. And we would expect to see a little relief in the fourth quarter of this year and then probably 2010 we will see dramatically more utilization of hydro power as that dam gets completed.

Steven Butler - Canaccord Adams

Okay. That's it and congratulations and nice look at the reserves at Lucky Friday.

Phil Baker

That's really exciting at change in reserves there.

Steven Butler - Canaccord Adams

Thanks so much, guys.

Phil Baker

Thank you, Steve.

Operator

(Operator Instructions) Your next question comes from the line of Borden Putnam from Eastbourne Capital. You may proceed.

Borden Putnam - Eastbourne Capital

Hi, good morning.

Phil Baker

Hi, Borden.

Borden Putnam - Eastbourne Capital

Hey, I want to echo about what Steve said about your reserve report that's pretty impressive. Especially you foresaw it, well it's exciting to see it coming. Ron, a quick bookkeeping thing for you it look's like your slide on page 7 is a little shifted for Lucky Friday. I couldn’t see what was wrong with it until I caught it. It looks like the dates have shifted to the right so they are not aligned with the proper period, because you are missing if you look at the Greens Creek you show a 2009 average for the last bar and that's not labeled down?

Ron Clayton

Right. All those labels should be shifted one bar to the left.

Borden Putnam - Eastbourne Capital

Yes, I just figured that out. Because I was going to ask you about the increasing grade at Lucky Friday which is why I noticed this, how did you achieve that and is that sustainable and what can you tell us about that as far as the sliver grade rising from about 9.7 to 10.5?

Ron Clayton

What's driving, Borden its just change in the cut-off strategy just a little bit. So they are kind of leaving off some of the stuff on the edges that was making money at the higher base metal prices and that isn’t making money now. And the other thing that they are doing is that if they got around that they are going through that was would pay for a strip through the up the shaft and through the mill we have the higher price environment and we would put it in mill. In this price environment we are finding other things to do with that tonnage like use it for prep rock in the overhand stopes and backfill on that rather then taking up the capacity as long as we can keep the mill full with that strategy then it makes sense even though it may have some slight negative impact on overall MPV in the short-term, it’s a hell of a lot better cash generator.

Borden Putnam - Eastbourne Capital

Yeah I appreciate that, so this is exactly the thing that we talked about a couple of years ago standing in the cross cut you were showing how you are able to on fly basically without changing your long-term wide plan, you are able to really make judgment call at the stope level to optimize cash flow. And I guess I should have thought about that, because you are obviously not going to take some of the base metal rich areas, then its going to focus on the silver. It’s a great answer.

Ron Clayton

That's exactly what's going on.

Borden Putnam - Eastbourne Capital

On the mining cost per ton still at Lucky Friday I was a little surprised even though the tonnage was down a little bit, has that truly that gone from 75 bucks a ton to 88 roughly, is that really solely attributable and multi-attributable to the lack of material through the mill. So it will come down as your mill through put goes back up?

Phil Baker

Yeah in the fourth quarter we actually had 10,000 tons set for the ground that we paid for but we could not bring out. And of course the one difficult issue was Lucky Friday in that regard is that we are running that thing right up against the throddle stops, squeaking that extra 10,000 tons through the mill now is going to take months.

Ron Clayton

Okay. So now that we have it broken that's a good thing as I think, but.

Borden Putnam - Eastbourne Capital

Yeah you have already paid for it, right?

Phil Baker

Yeah we take for in the fourth quarter is what it comes down to.

Ron Clayton

Maybe fourth quarter looked a little elaborate than it really was it is actually a pretty good quarter.

Borden Putnam - Eastbourne Capital

Well but the great I liked a lot and that, yeah I think we talked about that’s, that actually is encouraging. On the Greens Creek, the grade came down a bit but so did the cost. Is this some of your long haul mining method coming through?

Phil Baker

Yes.

Borden Putnam - Eastbourne Capital

What’s that?

Phil Baker

That was in last Borden.

Borden Putnam - Eastbourne Capital

Okay and what proportion your feet is that now Ron, and where will it be for 2009.

Ron Clayton

Well for a longer term you can figure that that’s going to run about 30% of the feet as we ramp it up it's been, it's been up and down a little bit but it's been anywhere as little as 10 and is high as about 35.

Borden Putnam - Eastbourne Capital

Okay, great.

Ron Clayton

Kind of the target number should be around 30%.

Borden Putnam - Eastbourne Capital

Okay last couple for Jim and I am sorry to be dominating here for second. Jim I was surprised with the G&A numbers. It's really anomalously low. Can you share why that happened.

Jim Sabala

There was a large adjustment in the fourth quarter, due to the incentives compensation which is tied to the share price. And so when you revalue the options down to the existing share price resulted in pretty good credit to G&A.

Phil Baker

Let me clarify, it's not tied to share price, it was tied to performance objectives and so as we made that adjustment and we saw that come off.

Borden Putnam - Eastbourne Capital

Okay, last thing again Jim. Small bookkeeping thing, I was looking at the cash flow statement, and I have gone over mine time and time again, let me pull up yours on the web to make sure I am looking at it right, I have two things open. It doesn't add up the operating cash flow, financing cash flow and investing cash flow if you take those online line numbers, I come with a three in the units and you report a five. In other words your total net decrease or increase in cash is 42,645 and I am coming up with 42,643 and I do not know where, it does not look like a rounding thing.

Jim Sabala

Okay let me take a look at it, Borden, obviously that’s a lot of detail and we’ll get a red face if that does not add up, but let us take a look at it.

Borden Putnam - Eastbourne Capital

And I do not mean to embarrass you, I just was curious, I looked it at lot last night and couldn’t figure it out, but it's not worth spending a lot of time on now.

Jim Sabala

I appreciate it. Borden, we will take a look at it.

Borden Putnam - Eastbourne Capital

Thanks guys.

Phil Baker

Thanks, Borden.

Operator

(Operator Instructions) And we have no further questions in queue. I would now like to turn it over to Mr. Don Poirier for closing remarks.

Don Poirier

Thank you, Erica. We appreciate people joining us today for a fourth quarter and year-end conference call. Feel free to call me Don Poirier for any additional questions at area code 208. My number is 7694141. This concludes our call for today. Thank you.

Operator

Thank you for your participation in today's conference this concludes the presentation you may now disconnect and have a wonderful day.

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