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Hecla Mining Company (NYSE:HL)

Q3 2009 Earnings Call

November 3, 2009 1:30 PM ET

Executives

Don Poirier - Vice President - Corporate Development

Phillip S. Baker Jr. - President, Chief Executive Officer, Director

James A. Sabala - Chief Financial Officer, Senior Vice President

Ronald W. Clayton - Senior Vice President - Operations

Analysts

Anthony Sorrentino – Sorrentino Metals

Terene Ortslan - TSO & Associates

Michael Curran - RBC Capital Markets

Chris Lichtenheldt - UBS

David Christie - Scotia Capital

Steven Butler - Canaccord Adams

Donald Mcguyen (ph) - Private Investor

Joseph Shrekman (ph) - Point Capital

Peter Abrahamson - Private Investor

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Hecla Mining Company earnings conference call. I will be your operator for today. (Operator’s Instructions) I would now like to hand the call over to Mr. Don Poirier.

Don Poirier

Thanks. Welcome, everyone, and thank you for joining us today on our third quarter conference call. Our call is being webcast today at www.hecla-mining.com. Our news release from Monday evening is on the website and there is also a slide presentation available on the website. The presentation can be found by opening the webcast and presentation tab found on the dropdown menu list in the investor relations tab. The presentation is labeled Q3 2009 Earnings Presentation.

On today's call we have senior members of Hecla's management team available. The conference call and presentation and discussion will be made by Phil Baker, Hecla's President and CEO, and he is joined by Jim Sabala, Senior Vice President and CFO and Ron Clayton, Senior Vice President of Operations.

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.

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

Phillip S. Baker Jr.

Hello, everyone, and thanks for joining the call. Let me also mention that Dean McDonald is here with us so he'll be available for any questions on exploration in the Q&A.

If you'll go to slide two that's entitled record revenues and gross profit, we're now seeing the impact of acquiring Greens Creek mine 18 months ago, an acquisition that not only doubled our silver production, but improved the economics of that production with more byproduct metals, in fact, the most lead and zinc production in our history. We are now not only the largest producer of silver in the US, but the second largest producer of zinc and the third largest producer of lead. And from the time we made the acquisition we saw the improved economics of our business coming. So when we had our first quarter conference call, I expressed optimism that our operating performance was solid, metals prices would improve, and our balance sheet would strengthen.

The last two quarters confirmed that optimism with record $95 million of revenue on the back of Q2 $75 million of revenue, which by the way, that was the previous record revenue so we now have had two record revenue quarters in a row.

We also had gross profit of $38 million, a 40% margin. Note that the revenue increase over the second quarter going from $75-$95 million is the same increase we saw in gross profit or about $20 million. So all that increase in revenue went to the bottom line as you can see on the next slide which is slide three. That $20 million increase has resulted in the second highest quarterly net income in our history and probably the highest if you take out one-time items.

And finally another record we established this quarter was the cash flow from operations of $32.3 million which builds on the Q2 cash flow which was the fourth best in our history.

So if you now go to slide four, as you can see this performance is in part so extraordinary because of the metals' price increases, but it's really the acquisition of Greens Creek that had increased our volumes that allowed us to generate these records.

While we're on this slide let me make a comment on the metals market. As we watch the market we see a large amount of demand for metals whether it's from a central bank like India which I think their purchase of the IMF gold is particularly significant, or demand from the growing Chinese economy. And so while there will be large volatility in the metals price we believe over the next few years the general direction for all the metals we produce will be higher. And Jim's going to come back to the slide during his comments.

And as slide five shows and this is the margin slide, with metals prices at these levels our margins continue to widen. This quarter we generated almost $14 of margin based on the average market prices. This approach is the sort of margin we had before the financial and metals price meltdown of last year which is captured in the Q4 '08 margin. I think these slide shows the extraordinary robustness of Greens Creek and the Lucky Friday economics.

Because with the exception of the pre-2006, the fourth quartet 2008, and Q1 2009, for almost all of the last four years, Hecla has generated about $10 of margin per ounce of payable silver. And at today's production rate this approach is around $100 million of annual cash flow available from the mines. We generate these margins because of prices, the quality of the assets, and most importantly, the jobs the teams at Greens Creek and Lucky Friday do. Ron will make a few comments on this in a moment.

With these expanded margins we have increased our exploratory spending to about $10 million and have begun planning work necessary to access the deeper Lucky Friday material. Some of this activity just restarted in the last two months so expect Dean and Ron to update you in the coming quarters.

Jim will make a few comments on the financial results, but I just want to point out that after the quarter end, we repaid all of our debt, so now Hecla is debt free with about $50 million of cash that is growing daily. This puts us in a strong position for exploration and development plans and the acquisition of new assets, so Jim, please give your thoughts on the financials.

James A. Sabala

Thank you, Phil. The results reported for the third quarter of 2009 are the results of the accomplishment of a number of strategic goals set forth during 2008 that became reality in 2009. In particular, the acquisition of the remaining 70.3% interest in Greens Creek significantly increased Hecla's leverage to all the metals it produces. Consequently, as metals prices improve, so did the financial performance of Hecla. In particular, we realized silver prices of $16.33 for the quarter compared to $12.30 for the third quarter of 2008. Likewise, gold was $999 compared to $848, lead was $1.02 compared to $0.87, and zinc was $0.95 compared to $0.73.

Of course, this is reflected in our financial metrics which include revenues of 39%. Gross profit triples 2008's Q3. Earnings before interest, taxes, depreciation, amortization, are $45.3 million, up nearly fourfold from 2008's Q3. Net income applicable to common shareholders of $22.5 million and record operating quarterly cash flow of $32.3 million.

As a result of excellent operating performance by our managers, production remains strong and costs were low, real low, as a result of cost containment programs and improvement in byproduct credits.

At Greens Creek the cost of mining-milling each ton of ore decreased 23% and at Lucky Friday we continue to be able to deliver higher grade ores to the mill, both resulting in lower pronounced costs. Consequently, our consolidated cash costs were just $0.85 per silver ounce produced for the quarter. This excellent financial performance allowed us to complete the final step of our financial plan. At quarter end we had $85 million of cash and on October 14th we repaid in full the remaining $38 million of debt incurred to acquire Greens Creek.

Phillip S. Baker Jr.

And Jim, that's shown on slide nine.

James A. Sabala

Yes. We also took a step to assure the company has adequate liquidity to take advantage of any afforded opportunities or to weather any unforeseen storms by putting in place a $60 million three-year revolving credit facility. So as we near the end of 2009, we look forward to 2010 with a strong production base, efficient operations, and extremely strong balance sheet backed with additional liquidity provided by our revolving credit agreement.

And with that I'd like to turn the call over to Ron Clayton.

Ronald W. Clayton

Thanks, Jim. If you look on slide 11 I’m going to talk primarily to the thing that drives the performance depicted on these two graphs. The third quarter saw a continuation of increased tonnage produced at both operations with Lucky Friday achieving a new quarterly mill throughout record of 960 tons per day and Greens Creek achieving 2,228 tons per day. Both operations are on pace to achieve annual throughput records.

Tonnage, cost metrics, primary development, backfill, and diamond drilling, have continued to meet or exceed our targets at both operations. Increased throughput, grade control improvements, and outstanding metallurgical performance at Lucky Friday have increased the feed grades for silver by about 15% and silver production by 23% over results in the first nine months of 2008.

Our ability to sustain higher production rates at Greens Creek have improved throughput and silver production by about 10% compared to a year ago. Early commissioning of Lake Dorothy coupled with very high precipitation seen in Juno this year has resulted in Greens Creek receiving a higher percentage of hydro power than we've expected. As a result we've seen about 75% of the cost savings we expected to get in 2010 and beyond, during the first nine months of this year.

While Greens Creek is an interruptible customer, Lake Dorothy is expected to provide the capacity in Juno to supply nearly all of our power from the grid for the foreseeable future. To give you a feel for what this means to the operation, at $2.50 per gallon diesel, we can expect additional savings compared to the first nine months of 2009 in the range of about $2.2 million annually or about $0.30 per silver ounce produced. Coupled with the improved prices and reduced expenditures, these achievements have resulted in improved financial performance including, as Jim mentioned, low cash costs of $0.85 per ounce for the combined operations.

With that I'll turn it back over to Phil.

Phillip S. Baker Jr.

So the message we hope that you understand is that Hecla's now an incredibly stronger cash generating company that's really now in a position to take our internal projects forward as quickly as possible and is looking to apply that knowledge to new assets. So with that, Don, I think we're ready for Q&A.

Don Poirier

Thank you, Phil. Operator, could you please instruct and organize the questions for the next portion of our call?

Question-and-Answer Session

Operator

(Operator's Instructions) And the first question comes from the line of Anthony Sorrentino with Sorrentino Metals.

Anthony Sorrentino – Sorrentino Metals

Hello, everyone. What do you expect exploration spending and capital expenditures to total in 2009?

Phillip S. Baker Jr.

2009 we'll spend roughly $10 million in exploration, about $32 million in capital.

Anthony Sorrentino – Sorrentino Metals

Okay. And would you have any indication of what those numbers might be for 2010?

Phillip S. Baker Jr.

We actually are having our budget meetings starting tomorrow so I don't have a firm number. I think you can expect exploration to be up substantially. I don't know if that means 40% or 70%, but probably something in that range. And then capital, we'll certainly spend in excess of that $30 odd million next year. Exactly how much that is will remain to be seen and we'll give on both of those numbers, firm guidance early next year. So I hope that gives you a range.

Anthony Sorrentino – Sorrentino Metals

Okay very good. Yes, thank you very much and congratulations on a great quarter.

Operator

And the next question comes from the line of Terene Ortslan with TSO & Associates.

Terene Ortslan - TSO & Associates

Hi, thanks guys. Just following up on the previous question, obviously it's been a very difficult period of capital constraint. Coming back to beyond the capital, how much of a development cost increase are we going to be able to see to catch up the properties up to speed? Obviously there's going to be minimal amount and a desirable amount, but I'm just looking for the minimum amount that you're going to be increasing it by. Thanks.

Phillip S. Baker Jr.

When we look at the development work that we've done, we've stayed pretty much in line with what we were anticipating we would need over the next couple of years so it really becomes looking out further than that for expenditures. So I don't see a dramatic increase. We'll certainly see some, but not a dramatic increase, with the exception of the deeper Lucky Friday which will be a larger program to do that development.

So order of magnitude, that thing is going to cost $150-$200 million over the 4-5 year period when we start that. Ron, do you want to add anything?

Ronald W. Clayton

No. The only thing I would iterate, Phil, is that both properties, what would drive more development would be opportunities.

Terene Ortslan - TSO & Associates

Okay. Just coming back to the energy costs you mentioned earlier, what's the sensitivity again to the — is it per ton or per ounce in the changes in the delta or changes in the energy cost, please of Greens Creek?

Phillip S. Baker Jr.

Do you have that off the top of your head or do you have something?

Ronald W. Clayton

Well, what I calculated is at $2.50 diesel it amounts to about $0.30 per ounce lower than what we've seen year to date in 2009. The problem with giving you sensitivity there is that that savings is based on the difference between grid power and primarily the cost of diesel fuel to generate our own. So it's very volatile, that calculation, compared to the diesel price.

Terene Ortslan - TSO & Associates

I understand. And finally, on the TCRC, if you want to address those issues I think the way, I think the (inaudible) season and then probably the time of the outlook for 2009 and 2010 is becoming evident on the Greens Creek.

Phillip S. Baker Jr.

It's becoming evident — no, it's still early to be able to make that estimate as to what's going to happen. As we think about it from a budget standpoint we will make some guess, but until we get into negotiations we're not really willing to talk much about what those guesses might be.

Terene Ortslan - TSO & Associates

And when would that be, Phil, beginning of the year?

Phillip S. Baker Jr.

Probably not until the start of March timeframe before we really know where we're going to be.

Terene Ortslan - TSO & Associates

Okay. Thanks, guys. Thank you.

Operator

And the next question comes from the line of Michael Curran with RBC Capital Markets.

Michael Curran - RBC Capital Markets

Good afternoon, gentlemen. Just wondering the increased financial flexibility? Obviously you've already stated lousy to sort of get back on track in the organic or internal projects. Are you really at a stage where you can start looking at other opportunities out there external or are we still a little early to be doing that?

Phillip S. Baker Jr.

No, Mike. Thanks for the question. We're certainly looking at external opportunities. We're gearing ourselves up to be able to evaluate those things so that has already started.

Michael Curran - RBC Capital Markets

Great. Thank you.

Operator

There are no questions at this time.

Phillip S. Baker Jr.

Okay. Well, thanks everyone for being on the call. It was an excellent quarter. We think we're seeing the results that we were anticipating when we acquired Greens Creek and we think we're in a position to grow not just Greens Creek and Lucky Friday and the other exploration properties, but to acquire other things.

Apparently we do have another question so operator if you want to let these additional questions come on, that's fine. We can do that.

Operator

And the next question comes from the line of Chris Lichtenheldt with UBS.

Chris Lichtenheldt - UBS

Hi. Thanks for taking me last minute, and first, congratulations on the good quarter. I wanted to ask, did the higher throughput rates at both mines, particularly the Greens Creek nearly 10% higher than last year, is this sort of the expected run rate going forward?

Phillip S. Baker Jr.

Yeah. I think so. Look, it's plus or minus what maybe 50 tons a day. Ron?

Ronald W. Clayton

Yeah. We would like to get a little bit more out of it, but we're now in the range of butting up against capacity so as Phil said, we may be able to grab another 50 tons a day over the —

Phillip S. Baker Jr.

But some things might go wrong where you lose 50 so —

Ronald W. Clayton

Right. We're in that range of being at the capacity.

Chris Lichtenheldt - UBS

Okay. And same comment for Lucky Friday?

Ronald W. Clayton

Yeah. Lucky Friday is up against the throttle stops.

Chris Lichtenheldt - UBS

Okay. That's actually it for me. Thanks.

Operator

And the next question comes from the line of David Christie with Scotia Capital.

David Christie - Scotia Capital

Good afternoon, guys. Just quickly, on grade profiles for next year, do you think we'll be sort of similar to Q3 or will they be varying quite a bit?

Phillip S. Baker Jr.

Yeah. There's going to certainly be variability over the course of the year. I'm trying to remember on average — do you remember, Ron?

Ronald W. Clayton

On average for next year, a little similar — maybe a tad lower at Greens Creek and at a tad higher at Lucky Friday.

David Christie - Scotia Capital

That's good. That's sort of what I was thinking. And as far as Gallagher and things like that, deep parts of Lucky Friday, when do you think you guys are going to start looking at plans to push development and push some plans forward on those things?

Phillip S. Baker Jr.

We're certainly drilling to see what we got and that applies to just to the Gallagher, but it applies to the other areas within Greens Creek and it happens over the course of the next really five years. I mean, we have a full development plan running out to the current end of mine life that puts us in a position to drill extensions of this deeper material. Ron, do you want to add?

Ronald W. Clayton

You also asked about Lucky Friday and we are aggressively planning the deep development there.

David Christie - Scotia Capital

And what kind of form is that taking, do you think, for the next year? I know you're still doing your budget and it's a little early, but —

Phillip S. Baker Jr.

Yeah. What we're doing now is all the planning work and the engineering to come up with what our control cost will be and control schedule will be and we're anticipating in the first half probably early in the second quarter of being in a position to know what those are and then at that point we'll make an announcement on moving that project forward.

I guess what I can say with a high degree of confidence is the material below us is getting better and with that the economics of the deeper development is improving and so we're highly confident that we'll end up making a positive development decision and we're really focused on what it's going to cost and how long it's going to take.

David Christie - Scotia Capital

Okay. That's the main reason for the question was that you're getting those high grades that's up there with some pretty good wits, so I thought that you’d be working faster at it and so it sounds like you are so, good. Thanks.

Operator

And the next question comes from the line of Steven Butler with Canaccord Adams.

Steven Butler - Canaccord Adams

Good afternoon, guys. Congratulations on a beautiful quarter, and in light of the volatility we've seen on other companies’ earnings it's a stellar result. As you repaid, Phil, the full term facility, was there also repayment or — remember there were, I guess, preferred shares that were going to be issued to the banks and the syndicate. Was that a meaningful number that's also been eliminated?

Phillip S. Baker Jr.

That's all been dealt with. They have converted those into common shares and we're done with the preferred.

Steven Butler - Canaccord Adams

Okay. That's a small number of shares and that's obviously a subsequent until fourth quarter, but how much equity does that turn into, if you know?

James A. Sabala

It was a couple hundred thousand shares, if I recall, in aggregate that was remaining.

Steven Butler - Canaccord Adams

Okay. Doesn't move at all very much, guys. That's good to hear. And then the other question I had as we looked at the production summary totals in the press release, I'm a bit puzzled by the fact that you sold 3.1 million ounces of silver and produced only 2.7. That's fine, you had an overage on silver, but you had a dramatic under delivery or undersold amount of zinc tons produced versus payable tons sold. So what explains that variance, more silver sold, much less zinc sold for production?

Phillip S. Baker Jr.

Well remember at Greens Creek the silver's going to report to the lead con and so obviously what happened is a shipment of lead went out and as shipment of zinc didn’t and is sitting in inventory.

Ronald W. Clayton

That's exactly right. The bigger percentage of the silver is in the lead con and so we've sold more lead con in the quarter and less zing con in the quarter just because of the way the shipping schedule is working.

Phillip S. Baker Jr.

And that's something that one really has to realize with Hecla now and the smelter contracts that we have is we're going to have a lot of swings in working capital and we've got a lot of money that's tied up in working capital and it's frankly just inventories that are sitting there waiting to be shipped and waiting to be paid for. We think it's a good thing and we've got it there ready to go.

Ronald W. Clayton

Well, and some of that's reflected in the fact that we — you know, you don't bring a boat into (inaudible) inlet and fill it half full. So the logistics of that and the economics of the shipping demand that you plan that out real carefully and so you try to get the inventories built up to the point where you can get the maximum value out of that shipping.

Steven Butler - Canaccord Adams

All right. Thanks, Ron. Thanks, Phil.

Operator

And the next question comes from the line of Donald Mcguyen (ph), a private investor.

Donald Mcguyen - Private Investor

Good afternoon, gentlemen. Congratulations from a long, long, long term shareholder of Hecla. I just have one quick question; you talk in your report about the expanded use of hydroelectric power. I wonder if you can expand on that a little bit and to what extent that will cut your operating costs?

Phillip S. Baker Jr.

Well, Ron in his remarks mentioned, I guess, about a $0.30 per ounce savings over what it costs us in the first nine months of the year. So that's what we would expect relative to those nine months and that was at $2.50 diesel. So it is some savings to us and certainly if you go back to 2008 it's even more because if you'll remember, the price of oil got to $1.40 and I don't remember where diesel went to, but….

Ronald W. Clayton

We got as high as $4.50 a gallon.

Donald Mcguyen - Private Investor

As a followup on that if I may, is are you making any effort to use the futures market with regard to your diesel?

Phillip S. Baker Jr.

We have not at this point done that. We have looked at it at various times and it's a bit problematic when we had our credit problems of doing anything in that market and so we will look at how we can lock in the sort of margins we have, whether its managing the diesel price or some other exposures that we have.

Ronald W. Clayton

The other thing I would say is we did take a look at how we buy diesel. You've got to look at a contract that has very high correlation and that one of the problems is making sure that we had correlation. Now, the fact that we are now getting our electricity on hydroelectric, of course our diesel usage has gone down by an order of magnitude and so any hedging in that remaining exposure wouldn’t have significant impact on the bottom line.

Donald Mcguyen - Private Investor

So you're anticipating an increased use of hydro?

Ronald W. Clayton

With Lake Dorothy coming online in September, we are estimating that we will get between 95%-100% of our needs served by the hydro power.

Donald Mcguyen - Private Investor

And in 2008 it was?

Ronald W. Clayton

About half of that, a little better. Oh, in 2008 it was 10%.

Donald Mcguyen - Private Investor

Well that's marvelous. Congratulations once again on a wonderful report.

Operator

And the next question comes from the line of David Christie with Scotia Capital.

David Christie - Scotia Capital

Hi, guys. Got a couple more questions, first of all just on the power thing, not to belabor this, but if Q3 would have been totally hydro power, what kind of savings would you have had?

James A. Sabala

I didn't do the math compared to Q3 data —

Phillip S. Baker Jr.

But it would be nominal because we got some power anyway from hydro. So I mean look, it'd be pennies.

David Christie - Scotia Capital

It'd be pennies, okay fine. Provisional pricing, you mentioned that you benefited from provisional rising on the quarter on all metals, I guess. What part of the settlement were settlement gains and what part was mark to market gains? Can you guys break that up for me cash versus non cash?

Phillip S. Baker Jr.

Yeah. We look at them — I don't have cash versus non cash, but the total impact on the quarter was $9.2 million, David, so that the amount that our settlements exceeded previously booked gains that were outstanding at the end of the second quarter.

David Christie - Scotia Capital

So that's just settlement gains?

Phillip S. Baker Jr.

Correct.

David Christie - Scotia Capital

And so then mark to market on top of it?

Phillip S. Baker Jr.

The mark to market is included in that.

David Christie - Scotia Capital

Oh it's in there, okay.

Phillip S. Baker Jr.

Yeah. It's the aggregate of the two because it's reprising all the receivables at the end of the quarter.

David Christie - Scotia Capital

Could I get the mark to market part?

Phillip S. Baker Jr.

Let me take a look at that and we'll have to call you back. I want to make certain you and I are talking the same terms.

David Christie - Scotia Capital

Okay. And TCRCs, do you guys see direction on where we're going for the next year?

Phillip S. Baker Jr.

It's too early to say. Look, we won't really talk much about that until we have completed our negotiations.

David Christie - Scotia Capital

Good stuff. Thanks, guys.

Operator

And the next question comes from the line of Joseph Shrekman (ph) with Point Capital.

Joseph Shrekman - Point Capital

Yes. Many of our clients here in Florida have reached geezer status and wondered if there's anything in your future for possible dividends?

Phillip S. Baker Jr.

That's a question that we and the board consider all the time and I guess what I would suggest to you is two things; one is, we've had a period of time where we've had financial difficulties that we had to deal with and so it wasn't appropriate to really do anything with dividends.

And then secondly, we look at the growth prospects that we have with the expiration ground and with the development of the deep Lucky Friday that we think that's the best place to put those resources.

And then I guess I would finally say that when we do start paying dividends, and we have an aim of wanting to be in a position to do that, we want to do it for a long time. We don't want to declare a dividend one year and then have to pull it off the table. So we're going to make sure that we've got an asset base that would allow us to do that regardless of what price environment we are in for the metals we produce.

Joseph Shrekman - Point Capital

Sounds sensible, thank you very much.

Phillip S. Baker Jr.

You’re welcome.

Operator

And the next question comes from the line of Peter Abrahamson (ph), a private investor.

Peter Abrahamson - Private Investor

Thanks, excellent quarter. I have a couple questions on the mandatory convertible preferred stock. The dividends have been in arrears for about a year on that. With the stock price above a $3.45 level for a period and the repayment of the debt, I guess the first question is does the company plan on catching up and paying out all those dividends in the near future, and then part two would be would the company anticipate settling those dividends in stock or can the company pay cash now that the debt has been repaid?

Phillip S. Baker Jr.

Both of those questions are ones that we will take up with the board at the next board meeting which is in December, slightly before the record date. And I just can't tell you how the board will come out on those. I guess from the perspective of management we certainly would like to not have those preferred in default so we'll look at every way in which to change that, but that's just something that's a board level determination.

Peter Abrahamson - Private Investor

Okay. Thanks.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to turn the call over to Mr. Baker for any closing remarks.

Phillip S. Baker Jr.

Well, we thank everyone for being on the call. As I mentioned earlier, we think we're well positioned to take advantage of the great assets that we have internally and to bring new assets into the mix and we appreciate the interest that you've shown and certainly if you have any more questions feel free to give Don a call and he can get the rest of us involved to the extent we need to be. And thank you very much. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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