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Executives

Jim Sabala – SVP and CFO

Phil Baker – President and CEO

Larry Radford – VP, Operations

Dean McDonald – VP, Exploration

Analysts

John Bridges – JP Morgan

Jorge Beristain – Deutsche Bank

Jeff Roy – Global Hunter Securities

Steve Butler – Canaccord Genuity

Trevor Turnbull – Scotia Bank

Hecla Mining Company (HL) Q2 2012 Earnings Call August 7, 2012 10:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Hecla Mining Company Earnings Conference Call. My name is Virginia and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today Jim Sabala, Senior Vice President and Chief Financial Officer of Hecla Mining. Please go ahead, sir.

Jim Sabala

Thank you, operator. This is Jim Sabala Hecla’s Senior Vice President and CFO. Welcome everybody and thank you for joining us for Hecla’s second quarter 2012 financial and operations results conference call. Our news release that was issued this morning before market opened and today’s presentation are available on Hecla’s website.

On today’s call, we have Phil Baker, Hecla’s President and Chief Executive Officer; myself; Larry Radford, Hecla’s Vice President of Operations; and Dean McDonald, our Vice President of Exploration.

I’d like to refer you to slide two please. Any forward-looking statements that may be today by the management team come under the Private Securities Litigation Reform Act, as shown on slide two. Such statements include projections and goals, which are likely to involve risks detailed in our various SEC filings and in the forward-looking disclaimer included in the earnings release and at the beginning of the presentation. These risks could cause results to differ from projections.

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

And with that, I pass the call to Phil Baker. Phil?

Phil Baker

Thanks, Jim and hello, everyone. I’m glad you could all join us today. I’ll provide a brief overview of the second quarter highlights. Jim’s going to come back on and speak about our financial results. Larry Radford will provide an overview of operations and Dean will update the exploration and predevelopment programs and then we’ll have a period for questions.

First of all I’d like to make note of the tremendous work that is being accomplished at the Lucky Friday by our workforce there. They’ve really been doing an outstanding job in the rehabilitation work at the Silver Shaft that we expect will lead to reopening of the mine in the first quarter of 2013, as well as future production increases and reserve development.

The current rehab work at the Lucky Friday has exceeded our expectation and been complete through the important 4,900 foot level. This is a key milestone where development crews are now preparing the mine for operations and production. And rehiring of miners has already begun and we expect to be back to the full complement of 200 miners with the completion of the Shaft rehabilitation and resumption of production.

Through the 4,900 level crews have been installing metal brattices along the way, rehabilitating as they go. So this is essentially a new state-of-the-art shaft and this shaft will be positioned for installation of another hoist that will be dedicated to men and materials, which we expect will increase capacity and significantly improve efficiency.

Reaching the important 4,900 level also advances planning for the restart of the work on the #4 Shaft. This is a $200 million project in which we’ve already invested $90 million, which will access deeper, higher grade ore. So we’re pleased to say the least at the great progress at the Lucky Friday and our congratulations to the work crew for their excellent and continued safe work efforts to make this an even better mine.

At our 100%-owned Greens Creek mine in Alaska, we saw improved tonnages during the quarter and cash cost of about a $1 per ounce of silver; providing an excellent $26 per ounce of margin. As expected grades were lower during the quarter than last year, we also used contract mining to catch up development and production that was diverted in the first quarter and part of the second and an intensified ground control program.

Our large CapEx program at Greens Creek is on track and expected to generate returns, reduce risk and prepare the mine for many more years of low cost silver production. An example of this is the major expansion and upgrade of our camp facilities. While we have consumed some cash, it’s been less than expected and our balance sheet remains very strong with $233 million in cash and no significant debt.

Work at our highly prospected exploration and predevelopment projects continue to advance. As has happened in the past, we’re seeing impressive results. Drilling at Greens Creek has seen extraordinary widths and grades in some zones, San Sebastian’s Andrea continues to extend the strike length and the predevelopment projects are moving forward rapidly.

As you might recall, these predevelopment projects started just 15 months ago and we’re making great progress to move these from predevelopment to development. And because of that, we believe we remain on track to increase our silver production by 50% over the next five years from the deeper, higher grade Lucky Friday ores and one or more of these predevelopment projects going into production.

Finally, we’ve also issued our fourth consecutive dividend this quarter for the amount of $2.25 per share.

And with that, I’d like turn the call over to Jim who will review our financial performance.

Jim Sabala

Thank you, Phil. In the second quarter sales were $67 million down from $118 million a year ago and due to the temporary suspension at the Lucky Friday, as well as lower average metals prices. For six months period sales were $158 million compared to $254 million for the same period a year ago.

Similarly, net income applicable to common shareholders for the second quarter was $2.4 million or $0.01 per share compared to $33.2 million or $0.12 per share for the same period a year ago.

Impacting our results were a number of factors. First, the temporary suspension of mining activities at the Lucky Friday Mine, which were suspended in January of this year and expected to resume in the first quarter of 2013. There were $6.5 million in suspension related costs at the Lucky Friday in the second quarter.

Also lower than expected grades at Greens Creek as well as lower average silver and base metals prices compared to the year ago period. At Greens Creek we are seeing positive trends in the third quarter and expect both production and grades to improve in the second half of this year.

We did have a higher exploration and predevelopment expense in our accelerated program, which Phil referred to, which nearly doubled to $10.6 million in the second quarter. For work we’re conducting at Greens Creek, the company’s extensive land possession at San Sebastian and Durango, Mexico, at the San Juan Silver project in Colorado and the Star Mine complex in North Idaho Silver Valley near the Lucky Friday mine. Predevelopment projects and engineering studies also advanced in Mexico, Colorado and the Silver Valley.

In the second quarter, we had a $6.2 million gain on base metals derivative contracts based on forecast production for the second quarter compared to a $600,000 gain for the same period in 2011. We also recorded a $700,000 tax provision compared to $19.6 million in the same period in 2011, as a result of higher pre-tax income in the previous year. Our effective income tax rate is approximately 35% this year compared to 33% in the same period in 2011.

And finally, we did have losses of $1.5 million on provisional price adjustments compared to losses of $7.6 million in the same period of 2011. This includes gains on base metals hedging of $900,000 in the second quarter and $500,000 during the same period a year ago and of course we do not hedge our precious metals.

On slide five, you can see the average realized silvers prices in the second quarter of 2012; we’re down 24% to an average of $27.05 per ounce, compared to the year earlier period, while average gold prices were up just 2%. Base metals prices were also down from the earlier period, with zinc prices down 15% and lead prices down 24% in the second quarter a year ago. And while prices were down, we must still look back and realize that we have very, very healthy prices for our business.

Total revenues of $67 million in the second quarter are broken down on slide six, with silver accounting for 39% of the total, and gold 21% for a combined precious metals total of 60%. All of our production this quarter was at Greens Creek.

Margins and cash costs remained very strong as shown on slide seven. Second quarter silver cash cost net of byproduct credits was a $1.03 compared to $0.52 per ounce a year ago, but still among the lowest in the industry, if not the absolute lowest. The higher cash cost in this year’s quarter were largely impacted by lower grades at Greens Creek and lower metals prices for our base metals byproducts.

Our cash flow includes the impact of normal variation and the timing of shipping of metal concentrate from the Greens Creek Mine. Consequently $24 million of cash flow attributed to second quarter sales was deferred into the first couple of days of the third quarter.

On slide nine, we have our cash position, which remains very strong at $233 million at the end of the quarter. Just last week we reached an agreement with our banks to increase the amount available under our revolving credit agreement to a $150 million from $100 million dollars. We believe this outstanding support we received from our bank group demonstrates the company’s strong financial profile and validates its business plan. We expect to be able to fund our planned future expenditures through our cash flow, our strong balance sheet and the untapped revolving credit agreement. In addition, the company has no significant outstanding debt.

And with that I’d like to turn the call over to Larry for a review of the operations during the second quarter. Larry?

Larry Radford

Thanks Jim. As Phil mentioned at the Lucky Friday Mine, shown on slide 11, we made excellent progress in the restoration work taken place this year and we are fully expecting the mine to resume operations and production by the first quarter of 2013.

To date workers have completed rehabilitation work on the Silver Shaft through the 4,900 foot level according to our plan approved by MSHA. The 4,900 foot level is an important milestone. From the 4,900 foot level we can access the 5,900 foot level and begin constructing the bypass drift around the section of the mainline drift that was closed last year on a rock burst.

To complete this development work 20 additional miners are being rehired and will return to work in August, adding to the 75 hourly employees already working at the mine. We plan to reach the full complement of 201 miners by the end of the year as the mine prepares for resumption of operations in the first quarter of next year. Additional safety training has been given to all employees.

Throughout the second quarter, work through the 4,900 foot level included removal of cementitious material along the main shaft, installation of a new power cable and additional work which is expected to improve the Shaft’s functionality and possibly improve its hoisting capacity. Work along the entire 6,100 foot Silver Shaft is expected to be completed by December of this year.

#4 Shaft planning has resumed, once the Silver Shaft is complete, our contractors, Cementation, will return to shaft sinking. To date, $90 million has been spent on this $200 million project, which is planned to provide access to existing reserves, resources and to provide additional exploration targets. This project is expected to be completed in early 2016.

Site upgrade projects have continued throughout the summer including tailings dam construction, a reagent application upgrade in the mill and architectural drawings for the new technical services building. Ground breaking for the new building is expected in the spring of 2013.

Slides 12 and 13, shows photos of the quality of the work that’s been accomplished, as well as the expected timeline for bringing the mine back into production in early 2013.

At Greens Creek on Slide 14, we continue to make good progress on the capital expenditure programs at the mine. Silver production at Greens Creek was 1.4 million ounces in the second quarter of 2012, compared to 1.5 million ounces in the same period in 2011. In the first six months of the year, the mine produced 2.7 million ounces of silver. Second quarter silver cash cost was $1.03 per ounce, net of byproducts, compared to $0.52 per ounce in the same period in 2011; due in part to lower grades as well as lower average silver and base metals prices and higher mining costs.

Mining costs per ton were up by 23% and milling costs per ton were down by 12% in the second quarter compared to the same period in 2011 The higher mining cost was principally due to the increased use of contract miners while increased availability of hydroelectric power resulted in lower milling costs. The contract miners were used to supplement the production workforce during the period in which Hecla crews were diverted to ground control maintenance.

Ground control maintenance continued through the beginning of April and by the end of April crews had returned to normal production and the normal mining cycle had resumed. We expect production rates to increase throughout the remainder of the year. Additional bolting capacity was added to the mining fleet. Two bolters will be dedicated to ground control maintenance throughout the remainder of 2012.

Record tonnage was noted in May and principally coming from (inaudible). Greens Creek is expected to produce more than 6 million ounces of silver in 2012. As mentioned, we are advancing our large CapEx program at the mine, which includes Deep 200 South access development, fleet replacement and additions, tailings dam expansion and definition drilling. The Cap Expansion is functional and complete, and there’s a photo of it on slide 14. These investments will help prepare the mine for future resource development and continued low cost production.

I’ll now pass the call to Dean for an overview of our exploration and predevelopment during the recent quarter.

Dean McDonald

Thanks Larry. Exploration and predevelopment in the second quarter continued to advance targets at our four highly perspective North American properties. Exploration expenditures for the second quarter were $7.1 million with full-year expenditures expected to be approximately $30 million. Predevelopment expenditures for the second quarter were $3.5 million with full year predevelopment expenditures expected to total approximately $23 million. The ramp-up of predevelopment expenditures in the second half of this year includes $7.3 million development of the decline into the Bulldog Mine and investing a further $3 million to improve ventilation and establish new drill platforms at the Equity mine in Creede, Colorado.

Underground drilling at Greens Creek, shown on slide 16, continues to extend mineralization along trend of the Southwest Bench, Gallagher, 200 South, 5250 and 9a Zones. The most impressive results occur on the Southwest Bench, we’re drilling to find wide, high grade extensions and provided continuity between previously defined resources.

Slide 16 shows the location of the Southwest Bench in the West Central part of the mine. The more detailed diagram on the right side of the slide shows an extension to the current resource boundary on a North-South trending limb and also the definition of new resources on the East-West trending limb. The resource is expected to grow up dip on the North-South trending zone and we anticipate significant resource growth and continued exploration upside on the East-West trending limb.

Highlights from drilling of the Southwest Bench include intercepts for 0.4 ounces per ton gold, 14.8 ounces per ton silver, 10.5% lead and 22.4% zinc over a 58.4 foot interval. Another intersection 0.14 ounces per ton gold, 56 ounces per ton silver, 8.8% lead and 16.6% zinc over 42.6 feet. And 0.11 ounces per ton gold, 3.9 ounces per ton silver, 6.5% lead and 38.1% zinc over 24.6 feet. These are some of the longest, high-grade intersections at Greens Creek in many years. The focus of current drilling at Greens Creek is the 200 South Zone at the south end of the mine where drilling expanded both the upper and lower limbs of a folded ore body.

Drilling from two stations intersected massive base metal and while baritic ore types that vary from 15 to 30 feet in thickness and is expected to extend the current 200 South Resource at least 200 feet to the south. Surface drilling at Killer Creek is 1.5 miles west northwest of the mine portal and has intersected new mineralization near surface that extends in intervals over 300 feet down hole. Assays for this hole are pending, as two drills actively evaluate the potential of the area.

In slide 17, the left hand diagram shows the 3D view of the Equity underground infrastructure at the San Juan silver property in Colorado and the drill pattern from the ramp. The right hand diagram is a longitudinal of the equity vein structure showing drill pierce points and contours of silver equivalent by horizontal width. The higher value contours define a steeply plunging gold/silver-bearing breccia and vein mineralization that narrows from 450 to 200 feet of strike length, from near surface to over 600 feet of continuous down plunge mineralization. This high-grade zone includes intersections of 18.6 ounces per ton silver and 0.15 ounces per ton gold over 11.4 feet, and 26.4 ounces per ton silver and 0.25 ounces per ton gold over 8.8 feet. But a more thorough list of assays can be found in the press release and on the Hecla website.

As you can see in the longitudinal, mineralization weakens in the lower underground drill holes, but deeper drill holes from surface suggests that the breccia and veins broaden again at depths where the vein structure crosses more confident host rocks. Deep holes from surface intersect this trend and define two distinct high-grade veins and structures.

Crews are continuing to rehabilitate underground workings at the Equity, install utilities down the decline, and develop additional drill stations. The deeper drill stations are prepared as the drills will now focus on defining resources along the Amethyst Vein structure. At the nearby Bulldog project, the design of the decline is finalized, the contractor has been chosen and equipment is being mobilized to begin the decline development by September. Commencing development of the underground workings was an important milestone for the Bulldog project. The company now expects to invest a total of $10.6 million at the Bulldog in 2012. This development will provide access to the existing Bulldog underground infrastructure, to allow underground exploration and set-up to reestablish production. Plans to obtain authorizations for future underground exploration activities at the Bulldog are being developed.

On slide 18, the diagram in the left corner is a plan view of the Star 2000 Level that shows the west end of the Star complex in the Silver Valley where there are two drills targeting high-grade northerly and down dip extensions to the Moffitt and North Star Veins. The right side diagram shows this drilling has extended the Moffitt Vein over 400 feet down dip and up to 600 feet to the north along strike from the current resource model.

This drilling also suggests mineralization is open at depth and to the east of depth. Drilling from surface on the Noonday continues to expand that resource to the east and west along strike and confirm an increase in silver lead values to the east.

Rehabilitation of the #5 Shaft at the Star Mine continues where the connection to the Grouse 700 level will provide entry to the upper country levels above the 2000 level to access drill stations to test eastern Noonday extension and provide a secondary surface access. A 750-foot long drift is being excavated on the Star 2000 Level in order to provide a drilling platform to test the eastern extensions of the Noonday and Noonday Split veins.

Slide 19 displays a series of longitudinal sections from 2010 to July 2012 with contours reflecting the gold equivalent grades by horizontal width of the Andrea Vein at the San Sebastian project in Mexico. Step-out holes to the Southeast continue to intersect a dominant vein that could extend the Andrea resource to almost 2 kilometers in strike length and over 500 meters east of the current resource.

Recent intersections include 3.4 grams per ton gold and 391 grams per ton silver over 1.34 meters and 4.8 grams per ton gold and 156 grams per ton silver over 2.5 meters. A complete list is provided in the press release.

An initial mine plan based on the existing mineral resources at the Hugh zone has been completed and a preliminary economic analysis is expected to be completed during the third quarter of this year. A drill program to define the hydrology of the Andrea area has been completed and preliminary mine designs are being reviewed. Condemnation and geotechnical drilling at the proposed site of a tailings pond near San Sebastian has begun.

That is a quick summary of the exploration and predevelopment activities this quarter. And with that, I’ll pass you back to Phil for further remarks.

Phil Baker

Thanks, Dean. Just a couple of quick comments. We clearly have strong momentum going into the reminder of the year, with the work going as planned and the continued re-hiring of workers at the Lucky Friday. We expect MSHA approval for the operations and productions to resume in the first quarter of next year. We made an offer to acquire U.S. Silver and it’s our understanding this morning that the shareholders of U.S. Sliver have approved their plan of arrangement, their merger.

As you know Hecla presumed what we believe is superior offer; however, it was conditional upon the merger not being approved. Consequently, we will be formally withdrawing our offer at this time. But this offer is an example of our belief in the ability Hecla has to operate to discover new deposits and in our belief in the fundamental value of silver and will continue to aggressively pursue such opportunities as U.S. Silver.

For the year, we expect our production to be more than 6 million ounces, we anticipate further advancement of our exploration and predevelopment projects, and those are key for our target of increasing silver production by 50% over the next five years. Our balance sheet remains strong with a very strong cash position, no significant debt, and an untapped and increased revolving credit facility. This strength has enabled us to continue our dividend policy to shareholders and we’re also continuing our share repurchase program which reflects the belief in our underlying cash flow and long-term value of the company. And we fully expect the silver markets to remain strong as the world continues its growth and silver remains a critical and essential part of that growth and a store of value in our modern and changing world.

And with that operator, I would be happy to open the line for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) And gentlemen, your first question today is from the line of John Bridges with JP Morgan.

Phil Baker

Hi John.

John Bridges – JP Morgan

Hi, Phil. Good morning, sorry to hear about the vote. Just wondered will there be a specific expense item in Q3 related to this?

Phil Baker

Yeah, there will be. We have not accumulated all the costs associated with it; it’s a process that’s been going on for only less than a month. So we still haven’t really seen where the costs will be, but yeah we will have an item.

John Bridges – JP Morgan

A couple of million or something like that?

Phil Baker

Yeah, I’ll defer to Jim if he has some sense of what the number is going to be.

Jim Sabala

Yeah, I don’t have one yet for you, John. As Phil indicated, it will be coming in over the course of the next month.

John Bridges – JP Morgan

Okay. You mentioned that you got lucky with the water in, up at...

Phil Baker

Up at Greens Creek.

John Bridges – JP Morgan

Greens Creek with hydropower during the quarter. Is that something that’s going to continue? Is that forecastable or does it come and go?

Phil Baker

Well, look it does come and go but we’ve had a nice rainy year so far this year and so the dams are full. Our expectation is that we’re in pretty good shape for the remainder of the year. But it will be a function of what the weather looks like. If it’s anything like the past than we’re in good shape. Larry, anything to add?

Larry Radford

No, we’re expecting hydro for the rest of the year.

John Bridges – JP Morgan

Okay. Okay, that’s helpful in the models. And then you mentioned the higher contracting costs, costs of contractors. Is this something that will continue through the rest of the year or could you give us a bit more color on that?

Phil Baker

Yeah, sure. Larry will respond to that, but realize that one of the things we did was decide to go in with a very comprehensive ground control program and decided to put additional resources to that and we did that over the course of the first four or five months of the year and then re-diverted those resources to production for this quarter and this past quarter, and Larry talk about the coming quarters what you’re expecting.

Larry Radford

Yeah, the contractor, Tyson, has by and large returned to the deep 200 South project which is capital expense. We will be using them from time to time throughout the balance of the year for production, but not to the extent that we did in the second quarter.

John Bridges – JP Morgan

Is this – is this a serious labor shortage up there or was this just a one-off?

Larry Radford

It was a one-off. We had to catch up some ground control maintenance and we had to divert some of our crews to do that and we supplemented those crews with the contractor.

John Bridges – JP Morgan

Okay. Finally given the delay, is that 200 and something forecast cost for the #4 Shaft at Lucky Friday still a good number?

Phil Baker

At this point John, it’s the best number that we have. We’ll certainly go in and evaluate whether there’s any adjustments that we’ll make both to the shaft as well as to our estimates. Certainly when you mob and demob there’s some costs associated with that. So we’ll have to take that into consideration. And so we’ll come out with something new. But I don’t think that there’s an expectation of some material change in the number at this point.

John Bridges – JP Morgan

Okay. Thanks Phil, thanks Jim, good luck.

Phil Baker

Thank you, John.

Operator

Your next question is from the line of Jorge Beristain with Deutsche Bank.

Jorge Beristain – Deutsche Bank

Good morning, Phil and Jim.

Jim Sabala

Hi, Jorge.

Jorge Beristain – Deutsche Bank

My question is just following up on the Greens Creek hired contractors. Could you quantify how much that increased your costs in cents per ounce in the second quarter?

Phil Baker

Larry and Jim, do you guys have a sense of what that is?

Jim Sabala

I don’t think it was substantial. I don’t have a specific number for you, Jorge. If you look back in our press release at the gross spend of the property, the gross spend was actually well under control and the cost per ounce was driven more by volume considerations and so while it was a factor it wasn’t a huge factor and so I see us recovering from that very quickly.

Jorge Beristain – Deutsche Bank

Okay. And then what is that led to, it seems to have been sort of an impromptu diversion of these contract miners to do the mining, so the Hecla miners could do the ground control. Was there any kind of seismic activity up there? And could you also talk about how this may impact the 2013 volume outlook for Greens Creek?

Phil Baker

Sure. There was no seismic activity. This was an abundance of caution. We just wanted to make sure that we had no, nothing out there that could cause us a problem, so we thought it was prudent to divert the resources to do that. We are certainly working through our 2013 plans, but we don’t foresee anything that will impact our plans for 2013. Larry, why don’t you add to that?

Larry Radford

Yeah. As you say Phil, the Greens Creek Mine is a shallow mine. We’ve never had anything seismic there. We’ve conducted internal reviews of our ground control, we had some external review done as well and decided that we wanted to catch up some areas move them up on the priority list as it was. What we are doing going forward as I mentioned is we’ve added two bolters to our capacity and those bolters will continue through the balance of 2012 and probably into 2013. As Phil mentioned we haven’t finalized our plans for 2013 yet. But going forward we will have dedicated resources to ground control maintenance.

Jorge Beristain – Deutsche Bank

Hey and then just maybe this question for Phil, if we could just talk big picture strategy you guys did show your hand last month in going after U.S. Silver and part of it was that they had a Galena concern capacity. Is this something that you foresee as sort of needed in Hecla’s outlook? You did mention that you still expect to increase your output by about 50% through one of your three development projects. But is that just as a fallback in case one of those projects doesn’t work out, you’d like to kind of bolt on a Galena concerned company, could you kind of talk about what drove that decision?

Phil Baker

Sure. Look Jorge, the Galena Mine is a mine that we know well. We viewed it as a property that we could over time improve. We view it as a property that the operations could carry the exploration and that’s where we really saw that there was some potential was to do some exploration in the property over a sustained period of time. We think that land package deserves that. So we also believe in the long term in silver and the demand for silver and the price for silver, so it was all of those factors, it wasn’t so much, in fact we really didn’t consider the impact on our growth by 50% that would have been on top of that with that production that would come from the Galena.

Now with respect to looking at other things, for all the reasons that we were interested in the Galena, we have interest in other things for similar reasons where we can see exploration potential, where we can see consistent production giving us exposure to silver, we’re actively investigating those opportunities.

Jorge Beristain – Deutsche Bank

Okay. Thank you.

Phil Baker

Sure.

Operator

Your next question is from the line of Jeff Roy with Global Hunter Securities.

Jeff Roy – Global Hunter Securities

Thanks for taking the question. Hi Phil and Jim.

Phil Baker

Hi, Jeff.

Jeff Roy – Global Hunter Securities

Quick question on Lucky Friday. Looks like you recognized about $6.4 million in expense there this quarter on the suspension. Do you think that number is fairly consistent on a quarter basis, third quarter and fourth quarter? Are there any larger expenses or costs associated with the rehabilitation at the tail end of it?

Phil Baker

Yeah, I mean it’s certainly picks up during the course of the year as we add more people and the split between capital and operating – I don’t have off the top of my head. Maybe Jim or Larry knows the answer to that.

Jim Sabala

No. What I would add is of the $6.5 million, about $1.6 million is depreciation for assets that are in place and we are using during this period, so the actual cash portion is less than that. I would expect that to continue through the fourth quarter at about those levels. And then of course in the first quarter we’ll be ramping up towards production and defining between what goes against normal operations and what goes against standby will require a bit more work. But certainly through the fourth quarter I’d see that at these levels.

Jeff Roy – Global Hunter Securities

Okay and then secondly, can you guys comment on the returning workforce in the Silver Valley, do you see significant labor inflation in getting guys to come back or do you have a long list of guys who are ready to return to work?

Phil Baker

Look the largest portion, by far the majority and more of the workforce want to come back to the Lucky Friday. They recognize it as a long-lived mine that it is going to operate for a long time to come and so we’re anticipating maybe not every employee, but boy almost all are going to come back to the Friday.

Jeff Roy – Global Hunter Securities

Okay and internally do you have to do any shuffling, I believe if memory serves me there were some employees that went up to Greens Creek, correct?

Phil Baker

Yeah, we had a couple of guys go up there, we had a couple of guys go over to the Star, we have had a number that have gone to work for us working for Cementation, we even had others go to competitors. And we helped place them there. We wanted to see as many employees working as we could. So we will by the end of August be about half of our normal workforce, not quite half. And I think getting these people back will not be a major issue for us.

Jeff Roy – Global Hunter Securities

Okay. And last question, I know you’d mentioned that the U.S. Silver acquisition was partially predicated on exploration opportunity now that that’s not a possibility, do you think you might want to accelerate exploration on the organic projects either in the Silver Valley or in Colorado in 2013 or is that...

Phil Baker

I think we’re probably doing exploration about as fast as you can do it because we need to develop platforms to be able to get in and explore. We need to be able to access where we have drilled and what it means before we put the next hole in. So I would not anticipate significantly more exploration on our existing properties. We are, however, acquiring new things and we’ve acquired some things and we’re in the process of working on others. And so there’s the potential for us to have other platforms that will put more exploration money into.

Jeff Roy – Global Hunter Securities

Okay. Thanks a lot, talk to you soon.

Phil Baker

Sure. Thank you.

Operator

Your next question is from Steven Butler with Canaccord Genuity.

Steve Butler – Canaccord Genuity

Oh Phil, good morning guys. On the Lucky Friday restart assumption, do you expect the Silver Shaft work to be done by about December Phil? Does it need then an inspection after all the entire shaft maintenance or cleaning if you will is done? In other words is it a planned December inspection by MSHA or could it be potentially any earlier?

Phil Baker

Well, look there is an inspection that will occur down to the 4,900 levels to allow us to access the 4,900 level off that shaft. And so we would expect that to happen in fairly short order which – that’s what opens the 4,900 level up to us allowing us to do the work down deeper, as Larry mentioned down to the 5,900 level, and starting on the bypass work. So what I am saying, Steve is that a portion of it will have already been inspected before we get to December and that’s happening sort of as we speak.

Steve Butler – Canaccord Genuity

So then if it’s happened by that time I guess, Phil, I mean conceivably production could restart very shortly thereafter is that what you are saying?

Phil Baker

Yeah. Exactly, so with the shaft fully cleaned down and ready to go by December, we would expect the inspection of that and that’s why we think we can restart production very early in 2013. We have made a – we are much more confident on our ability to start in early 2013 than we were at the beginning of year, we weren’t sure how long it would take us to do all of this work, it’s – we’re slightly ahead of schedule, so we’re quite confident that we’ll be able to start production up in the early part of the year.

Steve Butler – Canaccord Genuity

Okay. And Dean, question for you on slide 16, where you referred to the Southwest Bench. Okay, remind us if you will, or maybe if you have or not, the approximate ounces or tonnage associated with that Southwest Bench, where you have your resource boundary. Or maybe another way of asking would be the East-West branch what is the vertical extent up or down dip and approximate thickness I guess we can sort of stylize that off the figure but we have implied or suggested strike length of East-West, but I’m looking forward to your comments about it’s up dip, down dip tested extent right now?

Phil Baker

Yeah – we’re – we still have a lot more drilling to go in there, but Dean answer, I guess, as best you can.

Dean McDonald

Sure. Steve, the current resource that we have at Southwest Bench is 0.5 million tons; 0.35 ounces per ton gold, 18 ounces silver, 25% combined lead/zinc. So it’s been one of our higher grade stokes or zones. But what we’re finding now with this drilling on the North-South trending mineralization or the limb is that the current drilling has extended up dip that zone at least 300 feet. And what we see happening is that in fact this Southwest Bench may be connecting up with the Southwest, which was one of the highest grade ore bodies in the history of the mine.

So with regard to that limb we’re seeing significant exploration upside and linkage potentially to the Southwest zone. The other thing and you know how complicated geometrically these ore bodies are, but in fact that North or that North-South limb may in fact be folded over to the West and we really do see a lot of exploration potential West of the Southwest Bench. The East-West ore body, that’s where (inaudible) occur. I am not sure if you’re hearing a clicking sound?

Steve Butler – Canaccord Genuity

I am. I don’t know if it’s on my end or not, but...

Phil Baker

And Steve, just one other point to make about all this is we have a current mine life of around 10 years at Greens Creek, but when we look at exploration like this and what we are doing on the 200 South, we’re confident that we are going to continue to find more high-quality resource that’s going to allow us to further extend the mine life. And that’s important given the capital expenditures that we’re making to really have the infrastructure for that longer mine life.

Steve Butler – Canaccord Genuity

Right. Thanks. And lastly Dean, you said 300 feet up dip, what was the current dip extent of the Southwest Bench? Thanks.

Dean McDonald

Well, Steve of that limb it was about 700 feet...

Steve Butler – Canaccord Genuity

Okay.

Dean McDonald

As we know it and we’ll follow up once we have some development in (audio gap).

Steve Butler – Canaccord Genuity

Okay, thanks guys.

Phil Baker

Thank you, Steve.

Operator

Your next question is from the line of Trevor Turnbull with Scotia Bank.

Phil Baker

Hi Trevor.

Trevor Turnbull – Scotia Bank

Yeah maybe – good morning Phil. Just to maybe stick with a couple of Greens Creek questions. I know you are spending a fair bit of CapEx this year including additional equipment, is any of that going to spill over into 2013 where we’ll see a little bit higher CapEx in 2013 as well?

Phil Baker

We have not worked our plans for 2013. I think the answer is going to be we will continue to make these expenditures that are going to generate returns, reduce risk – like the work that we’ve done on the ground control, it’s been a risk-reducing exercise, things like the new camp facilities, there is more work that we’re going to do there to make the camp facilities even better. So you’re going to have – so we are going to have those expenditures in 2013, but we’ve not finalized what those will be.

Trevor Turnbull – Scotia Bank

But with respect to that equipment that you’ve already ordered you’ll be taking delivery of that I assume this year as opposed to some next year?

Phil Baker

Yeah, some things we’ve accelerated end of this year. Larry, do you want to comment on equipment specifically?

Larry Radford

Well, there is some equipment that’s inbound now for this year. We have ordered some equipment as well that will come into next year. As I mentioned one of the key pieces that we need right now is a bolter which will come in, in the third quarter and that will replace a contract bolter. If we have a bottleneck right now, it’s in our bolting capacity, so that’s the key part.

Trevor Turnbull – Scotia Bank

Okay. And do you have a sense on the geology; I know that sometimes you get into more lead- or zinc-rich as opposed to silver-rich areas, kind of how the back half of the year plays out? Is there going to be one ore type that predominates over another?

Phil Baker

Larry, go ahead.

Larry Radford

The simple answer is the grades go up in the balance of the year. As to the geology, I don’t think there is a huge change.

Trevor Turnbull – Scotia Bank

So that’s more across the board those grades go up, not one to the determent of the other?

Larry Radford

No. It isn’t. Principally the silver grade is going up and just to give you a sense for the zinc grades, yeah, the zinc grades actually do fall off a little bit, but not appreciably.

Trevor Turnbull – Scotia Bank

Okay. I think that’s all I had guys. Thank you.

Phil Baker

Thanks Trevor.

Operator

Ladies and gentlemen this concludes the question-and-question portion of today’s broadcast. I’d like to turn the call back over to management for some closing remarks.

Phil Baker

I just want to thank everyone for participating in the call, and if you have any further questions feel free to give Jim or I a call. Thanks very much, have a good day.

Operator

Ladies and gentlemen, this concludes today’s presentation. Thank you so much for your participation. You may now disconnect. Have a great day.

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