Hecla Mining Co (HL) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q4 2003 Hecla Mining earnings conference call. My name is Jean (ph); I will be your conference coordinator today. At this time, all lines are in listen-only mode. After our presentation, we will (indiscernible) questions. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the call over to your host, Vicki Veltkamp, Vice President of Investor and Public Relations.

Thanks for joining us today. I am Vicki Veltkamp. This is the Hecla Mining Company year-end 2003 conference call. This call is being webcast live today, so welcome to all of you on the Internet as well. You will be able to access a replay of this, if you wish, at our website at www.Hecla-mining.com. At that Website, you'll be able to find the financial results in today's news release, and at the end of that new release, you will find a quantitative reconciliation to GAAP of cash cost per ounce, which is now an SEC requirement.

Today's presentation will be made by Phil Baker, Hecla's President and CEO, with help from Lew Walde, who is our Vice President and CFO, and Tom Fudge, Hecla's President of Venezuelan Operations. Ron Clayton, who is our Vice President of North American Operations is away for a family emergency, so Phil Baker will be updating you on those operations. This will then be followed by a question-and-answer period that you can participate in, and any forward-looking statements made today by our management come under the Private Securities Litigation Reform Act of 1995 and involve a number of risks that could cause actual results to differ from projections. And now I'd like to turn this over Hecla's President and Chief Executive Officer, Phil Baker.

I want to put this year in context for you. 2003 is a continuation of probably the three best consecutive years in the Company's history. I say they are the best years because it is a continuation of setting new records in both production and cost; it's a continuation of improving our cash flow and improving ongoing earnings. 2001, 2002 are years that had the highest gold production at the lowest costs in history of the Company. 2002 we had the most silver production in our history. And in 2003 we replicated that with even more production -- 9.8 million ounces of silver -- at the lowest cash costs in our history, $1.43 per ounce.

A year ago, I said that 2002 was arguably one of the five best years in the history of the Company. Yet in 2003, our net income before environmental accruals was 90 percent higher than what we had last year. 2003 was a year where for most of the year the silver price was about $1.65 below where it is today. It was just incredible, the sort of performance that we were able to have. If you look at the quality of our assets, what you see is that we spent $5 million more on exploration and still these assets were able to generate $5 million more cash flow. So if you look at the revenue line, you see that there was $10 million more revenue generated and all of that either went to exploration or cash flow from operations.

What I really would like for you to take away from this call is the fact that we are able to provide consistent performance from these assets. And we think that we have a foundation that is going to provide for more of that in the future. We in fact expected 2004 to have it be very similar to 2003, with about 9 million ounces of silver production at a cash cost of less than $1.75 per ounce. So at today's prices, we will generate $5 an ounce of cash margin. For gold, we expect about 215,000 ounces of total production, having a cash cost of about $185 per ounce. This cost is a little higher than in 2003 and Tom will explain why.

Before I turn the call over to Lew and Tom, I want to provide a little bit of an overview on exploration and capital. We spent $9 million in exploration this year. We have made a change in how we are reporting exploration by separately reporting predevelopment expenditures, which are expenditures that are related to infrastructure that will be used should we develop the assets. We have a good year with exploration replacing and continuing to grow reserves, but we did have some disappointments. The deep drilling at La Camorra shows the difficulty of trying to explore small targets significantly below where we are working. However, we think we have a handle on some changes that are happening in the ore body that will improve the likelihood of that deep drilling success. The bottom line is that La Camorra is a complex geologic environment and has provided over ten years of production, and we are really just in the infancy of exploring it. So we are going to be there for years to come.

We think that what we have done, though, in 2003 has positioned us to grow reserves and resources in 2004 and 2005 in order for us to see significant expansion in production in 2005 and '06. Of course, our deposits are primarily high-value, low tonnage underground deposits. So you're not going to see our reserve and resource base grow dramatically, but we think you will continue to see Hecla generate deposits that provide exceptional returns. When we look at our land positions, we see that they are just too prospective (ph) not to continue to have success. In fact, one of the real big successes of 2003 was the fact that our Mina Isidora property is an example of how we are able to generate significantly higher returns than other people in the industry. We are expecting to see more than a 50 percent return on investment there.

Let me move to capital spending for a moment. It is going well. The pace of work in the fourth quarter in Venezuela increased significantly. We had the shaft at La Camorra under construction. We have the sampling plant for purchasing small minor ore completed -- or just about completed. And we are already starting to do some work on Mina Isidora. Tom will talk about all these things in a moment. Before he does that, though, let me ask Lew to talk about the financials.

As Phil said, Hecla had another solid quarter as we continued to realize the benefits from being a diversified precious metals producer. Silver operations performance during the fourth quarter was a dramatic improvement over 2002, while our gold operations continued to perform quite well. This is evidenced by the 41 percent increase in gross profit quarter-on-quarter and equally significant increase in operating cash flows. Silver operations led the way with a 53 percent increase in revenue and a 90 percent increase in gross profits. These gains are associated with increased metal prices and increased production of the silver, gold, lead and zinc at these silver operations.

During the quarter, silver operations produced at a record low cash cost per ounce of $1.15 per ounce. And Mexico at San Sebastian, costs were actually a -94 cents per ounce, where they benefited from the excellent production and increased byproduct credits from gold and the rising gold price. At Greens Creek, for the first time that I can ever recall, Greens Creek's total cash cost per ounce were under $1, and ended the quarter at 98 per ounce. Over on the gold side, we did see a lower ore grade at La Camorra during the fourth quarter compared to 2002, and as a result, our production was off from the '02 levels.

The lower ore grade, reduced production, some increased variable production taxes, which are tied to the price of gold, and costs associated with integrating a new property acquired near Mina Isidora contributed a higher cost per ounce in the fourth quarter, which totaled $181. Despite the lower production and higher costs, gold operations still provided more than 2.6 million in gross profit during the quarter.

On an overall basis, the Company reported net income of 2.2 million, a 16 percent increase over 2002 net income of 1.9 million (indiscernible) the quarter. Also during the fourth quarter, we did exchange approximately 38 percent of the outstanding preferred stock into common stock, and as a result, we are required to recognize a non-cash dividend of 10.2 million during the fourth quarter. This dividend increased our loss applicable to common shareholders to 8 million, or 7 cents per share. It is really important that we emphasize the fact that the dividends do not have any impact on our cash balance, nor do they impact the total equity section of our balance sheet.

Shifting to the annual results for 2003, Hecla recorded income before environmental accruals of 17 million and a 48 percent increase in gross profit when compared to 2002. Silver production led the way again, increasing 13 percent, while we produced silver at a record low cost of $1.43 per ounce. There was solid production in the gold sector, where we saw cash costs of $154 per ounce. These two factors, combined with the higher average metal prices, led to the outstanding performance during 2003.

We also benefited from a couple of other factors in '03. We received a $4 million settlement from Zemex during early January associated with the failed sale of (indiscernible) Clay (ph) a couple years ago. Also, increased interest associated with our increased cash balances. These positive factors were offset somewhat, though by the increase in exploration that Phil talked about -- the 5.2 million -- and that money, of course, is being spent to continue investing and growing the Company's production profile. We also saw an increase in our tax expense of about $4 million in 2003. We also recognized $23.1 million in environmental accruals this year, primarily for the Coeur D'Alene Basin litigation and our closed Grouse Creek mine. After the impact of the environmental accruals and the effects of preferred dividends, the loss applicable to common shareholders totaled 18 million, or 16 cents per share, in '03 compared to 14.6 million, or 18 cents per share, in 2002.

Taking a look at the cash flow, our cash flow from operations increased over 28 percent from 2002, and this was despite the fact that our working capital requirements increased nearly $12 million during 2003. At the end of the year, our cash and short-term investments stand at more than $123 million. Debt is very modest at 4.7 million, leaving our balance sheet in excellent shape.

To summarize, Hecla's financial and operating performance for 2003 has been excellent, with visible benefits of being a diversified producer of both gold and silver. Our operations are performing well; the balance sheet is strong, which leaves your company in an excellent position to advance towards its longer-term objectives of increased production. Now I would like to turn it over to Tom Fudge, our Vice President of Operations, who will tell you about our operations and activities in Venezuela.

I apologize if this line is not really clear, but I am calling in from Venezuela today. The fourth quarter was a very busy one for Hecla in Venezuela. We implemented plans to support our growth goals. During the quarter, we acquired rights to a small mining lease adjacent to our Mina Isidora discovery, undertook construction of a crushing and sampling plant for our custom milling business, and expanded our exploration reach at La Camorra and in the Block B lease. These growth-related activities contributed to nonrecurring operating costs, as well as additional administrative costs during the quarter, as Lew noted earlier.

By the end of 2004, we will be supplying ore to our La Camorra processing plant from at least two additional sources (technical difficulty) the La Camorra mine. For the year, we expect to produce 140,000 ounces of gold from all sources at a cash cost of around 185. Our custom milling business will buy ore from a variety of small miners. We currently have seven sources lined up and over 2,000 tons stockpiled. The small miners are an integral part of the Venezuelan gold mining industry, and by providing them a fair, transparent and environmentally responsible outlet for their production, we will be addressing several social, political and environmental issues, as well as providing additional feed information for our own operations.

Although the cash cost per ounce for custom milling will be higher than feed from our own mines, it is expected to be very profitable. And since there are very few capital or exploration costs associated with this business, the total cost per ounce is very competitive. With the price of gold up, we can afford to bring in some higher cost materials and maintain or even increase our margins.

We expect to get the go-ahead from our Board of Directors on our next high-grade mine in Venezuela, Mina Isidora, sometime this year. This ore would be trucked to La Camorra and be part of the La Camorra unit production for the year. We can get development ore into the pipeline fairly quickly due to the acquisition of an adjacent lease with an existing small shaft that will be used for development and test mining. In 2003, our highly successful Block B exploration program converted the Mina Isidora resource into probable reserves and has moved on to three other targets on the lease, one of which, Cinco de Julio (ph) has ore-grade intercepts that will be further investigated during this year.

Our exploration results at the main and the Betzy veins at La Camorra were not as fruitful in 2003, but we have only completed one-quarter of our deep drilling program. The deep exploration plan uses directional drilling to target areas 300 to 400 meters below the current level of mine development. This can extend our knowledge of the resource three to five years beyond what our definition drilling is capable of doing. The definition drilling is used to prove up reserves and is constrained by mine development activities. In 2003, the combination of mine development, definition drilling and structural geologic study and the deep drilling brought to light potential shifts in the projections of the B, B1 and Betzy ore chutes, so our geologic model is evolving all the time, as it must in a mining operation.

This year ended -- the year 2003 ended before we could follow up with sufficient drilling on any projections to include those in our year-end reserve update that has just been released. As a result, our estimated grade for La Camorra has been reduced by about 24 percent, which in my opinion may prove to be too conservative an adjustment as I look at some of the drilling and development results we have had in December and January. We have several thousand meters of drilling planned at La Camorra in the first six months of 2004, and I have to say I'm very excited about our opportunities to grow production in Venezuela and we will keep you updated on our progress. I would like to turn the discussion over to Phil, who is sitting in for Ron on the North American operations.

If you can put him on mute again, operator. I can't say enough about the outstanding performance that we have had at San Sebastian. At the beginning of the year, our team saw that if we were not going to get better performance from mining, we were going to have some significant problems. We were going to have a lot more dilution, we are going to probably not have enough development, and probably the most important thing was we were going to have an unsafe work environment. So the guys there, without having to spend a lot of money, they went to self-mining, and you can see the result that we have had this year -- property generated almost $20 million in cash flow; had significantly better grade; it had a successful and innovative startup of the Don Sergio vein; a new tailings facility that improved upon what the previous owner had and protects the environment. The continuing challenge for this property is to find new resources, and the prospects look good on a vein we call Andrea. The thing we have to realize is that we're really only in the third year of a district exploration program; and yet, we have already had three years of positive cash flow that has given us triple-digit returns. We have already had success on every -- we have now had two new discoveries on that property. Compared to the industry norms, we have done a phenomenal job here and in fact, I think if you compare it to any industry, the sort of returns that we're generating are phenomenal. We risk not finding more or fast enough to avoid a break in production, but that is a risk we're willing to take given how prospective the district is. In 2004, we think you'll see more of the same sort of cost performance we saw in 2003, with more than 3 million ounces of production.

If we go to '02 Hollister, this is a property that we are still working through the permitting requirements. However, we are very confident that the permits will come soon. We have already awarded the earthworks and the building and equipment necessary for construction is already in Winnemucca ready to go. And so we are moving as quickly as we can, because we think the exploration here is going to be successful enough to prove (indiscernible) an ore body that is going to make a good mine in Nevada to really feed those hungry mills that some of the majors have. And it is going to be an ore body that is going to generate very good returns for shareholders.

Going to Greens Creek, Rio Tinto is still doing just an outstanding job there. And it is a challenging ore body to mine and mill. When you see how the cost of this operation has declined over the years, you have to be impressed with what has been accomplished there. The exploration is going to be stepped up in 2004. We will concentrate more on finding new ore bodies away from the current ore body than ever before, and we will focus on following up the good results we had across the Gallagher (ph) Fault. Production in 2004 will be about 3.5 million ounces at a similar sort of cost.

I would like to finish up my comments with Lucky Friday. And the Lucky Friday has just been such a tremendous operation for Hecla over the years. Some thought it was finished, that we were going to have to close it down. But we kept it open, essentially trading dollars over the last couple of years. We tried out new things and we knew we had to figure out a way to operate in a different way in order to develop deeper into the deposits. Our guys did that, so we made a development decision in the fourth quarter that is going to allow us to get back to fill production. We have already begun preparing the 5900 station and the 5970 loading pocket, and we will be drifting in the second quarter. Production in 2004 will be more than 2 million ounces at a similar cost to 2003.

And I guess the last thing I would like you to walk away with is that the Lucky Friday is an example of what Hecla is really about. We have innovation, we are determined, we are hard-working, smart miners. As a result of these features of Hecla, these characters (ph) of Hecla, the shareholders of Hecla are going to get an outstanding return in a rising silver price environment with a very small capital investment of $8 million. We think this is something that is unique in the industry and it's something that is unique about Hecla, with not only the Lucky Friday but all of our operations. With that, Vicki, let me turn it back to you.

I think we are ready for the question-and-answer period now.

(OPERATOR INSTRUCTIONS) Geoff Stanley of BMO Nesbitt Burns.

A couple of questions. I suppose the first, most obvious question is the $10 million charge in the P&L for preferred stock dividends -- can you just do me a favor and walk me through the accounting issues associated with that? Secondly, significant decrease in reserve grade at La Camorra, but at higher tons. Wondering if you can let us know whether that is as a result of exploration success finding a whole bunch of new mineralization or whether it is a reassessment of -- at using a different methodology or just what the dynamic was there.

I will let Lew answer the question on the preferreds, but let me just preface what he says by saying that the accounting for this is kind of unusual.

I sensed that that would be the case, but --.

We just followed the rules here, but notwithstanding that we are exchanging these shares and we think ultimately providing a benefit to all shareholders, we have to declare a phantom dividend to the preferred shareholders. Go ahead, Lew.

I suppose we could spend a good half an hour or more on this topic. But essentially -- let's just take an example. Say we exchange a preferred share at 7.5 to 1. The stated conversion rate on those preferreds 3.2. So in essence, you look at it and say, okay, you gave 7.5 and it was really 3.2. So you provided the preferred holder with 4.3 more shares than originally contemplated in the original document. Essentially, that component multiplied by the share price at the time of conversion is considered to be a dividend.

Okay. That is in essence the reason for it. Okay. It came as a little bit of a surprise.

There is no impact on shareholders' equity, there is no impact on net income. This is simply on earnings for common shareholders. We disagree with the accounting, but it is the way the rules work. It makes sense in the case where you have an in the money conversion. It doesn't make sense when you have got a home (ph) convert like this.

Yes. Understand, very good. And La Camorra?

On the reserve grade, if I can go to Tom Fudge and let Tom talk about the reserves that we have.

The biggest thing that happened at La Camorra as far as the change in reserve grade is the probable reserves that get converted from probable to proven as we develop the mine, this year -- in years past we have generally seen a positive variance. This year we saw a negative variance. And the drill-indicated probable reserves didn't turn into as much proven reserve as we have experienced in the past, and we made some adjustments for that. As I have indicated, we have had some -- we have to start that whole process back in October, November kind of time frame in order to get through everything that has to be done. I am encouraged by some of our recent results that we weren't able to include in the reserve calculations, and we will see how it goes. But it is still a three-quarter of an ounce ore body, so it's pretty darn good.

We have also have had exploration success and it is roughly at that same sort of grade -- two-thirds of an ounce sort of ore body.

Very good, thank you.

George Topping of Sprott Securities.

For one, the La Camorra, previously, you have given guidance that over the next few years or so you would look at doubling gold production from Venezuela. It that still the case?

Absolutely. What we think is it that with what we have done in 2003 and where we're going in 2004 and 5, that '05 and '06 is when you will start to see production increases.

Okay. With the exploration results at (indiscernible) that have been disappointing, are you still hopeful that you will find ore at depth or is it looking increasingly unlikely that the ore continues to depth?

We are very confident that we will find additional ore at depth. What we are finding is that it is -- the direction of the ore body is different than what we had projected. We had really found it was almost -- I don't know what the rake was, but it was almost vertical. And what we are now finding is that it is moving more to the East. Tom, do you want to add anything to that?

No, I think that pretty well sums it up. We have seen some structural shifts there and we're trying to chase it down. There are -- a lot of the indicators that the ore body persists at depth are still there, but it takes a while to get enough drill density in there to say really have it.

We do have an ore-grade hole down to -- is it 800 meters?

Actually, we have an ore-grade hole as deep as -- yes, it's at -850 and we have some higher grade holes at -700 horizon right now too.

Is it the (indiscernible) still to sink down a shaft?

Yes, in fact we have started shaft development at La Camorra.

So the disappointment is not going to change that in any way?

No.

On the Hollister (indiscernible) switch over to the U.S. The permits you are seeing, Phil, to go shortly -- is that a couple of weeks, a couple of months, or -- ?

We would expect the permits to be out -- it could be weeks, could be months. Unfortunately, we are as the mercy of the regulatory authorities.

Which department is holding it up right now?

It is sitting in the BLM -- the Bureau of Land Management, and there isn't anything unusual with what is going on at this stage. In fact, I think we are really just going through the final dotting of the i's and crossing of the t's, and we are not expecting any sort of major stumbling block at this point. Otherwise, George, we would not have already contracted the earthworks and started moving equipment in place.

Finally, given the revival of the mining industry, are you seeing any cost pressures there from the figures previously released?

probably You're talking about our estimates --?

Yes.

For Hollister? In terms of -- our expectation -- and I think we have said this before -- our expectation is that Phase 1 will likely cost more than we had anticipated, but really not so much because of changes in the industry. It is really as we have learned more about the deposit. But we are very confident that we will be able to bring this thing in a fashion that we will be able to generate return for ourselves, and at the same time we're not taking a whole lot of risk. We are still talking about a project that is in the $20 million to $30 million range for us, and would give us a good stream of production there in Nevada, and not having to build a mill. That is probably -- once you get past the ore body, that is the next biggest factor on why this is so attractive to us, is the ability to develop this thing and then send the feed to the majors.

Very good, thank you.

Mike Curran of CIBC World Markets.

I just had one balance sheet question; then maybe a couple asset questions. Just looking at your interest income, I see at the end of Q3 you guys were posting around 7 million of interest income. And then I look at the year end and you are down to 2.5 million. Can you walk me through what happened there?

We have actually moved -- if you take a look at the income statement, there was a category below the operations line called miscellaneous income expense net. We have essentially moved that line item up into the operating section to a line item called other operating expense and income. And then the interest income line that is there today used to be interest income and other income. And so the noninterest income components like the Zemex litigation that we referred to earlier was also moved up into that line. So there is a couple of things that have just gotten moved up above the line or (indiscernible) included income from operations.

The reason we have done this is based on some comments from our auditors on what the SEC is thinking with respect to income from operations.

Talking about La Camorra reserves, am I reading correct if I am saying that your proven improbable reserves at La Camorra now are 550 and about -- and that 327 from Mina Isidora is part of that 550?

That is right.

So you are down to a couple hundred thousand ounces at the main La Camorra.

That is correct.

The other question I had was on San Sebastian. I mean, you were pretty close this past year in terms of the silver and the gold, so obviously, you had a little more gold and that was why you have the negative cash costs. I mean, if I look at sort of what I am thinking for this year and next year, once again you're going to have more gold income than silver. Any thoughts of switching it over and reporting cash cost as gold or and using the silver as a byproduct, or are you going to keep it as a silver with the negative cash costs?

In looking at the exploration potential long-term, we think this is a silver district more than it is gold.

So you will keep it silver, then. Great.

Mike Jalonen of Merrill Lynch.

A couple of questions. On San Sebastian, you sort of cryptically alluded to, I guess -- I don't want quote you, but it sounds like you are saying you could let it not be a mine for a little while while you focus on exploration because your reserve life is basically one year now, and the reserve (indiscernible) is well below the (indiscernible) grade. So just wondering -- I know you're doing exploration, but what would be the plan for San Sebastian if the exploration didn't turn up anything in the very short term?

We think we have a couple of years in front of us there in any case, when we look at our mine plans. And then there are areas that we are mining that are outside the mining plant even today. So at this point, we have not really done any planning for what we might do should we run out of ore. Then when we look at Andrea, we have actually put a mine plan around Andrea, and it justifies going in and doing a whole lot more work. So there's going to be two types of programs in 2004. One is to prove up Andrea and the other is on the district end of the things. We think, with any luck, that we will have the life extended from Andrea.

Is Andrea in the resource at all at this point?

Not at this point.

You have a mine plant conceptually around it, but no resource.

We just do not have enough drilling.

I guess because it is not here you can't really way what size it is, then obviously?

No, we are not talking -- Mike, we have not found anything that is going to give us a five-year mine life. Everything that we are finding is adding -- just like Don Sergio -- is adding a half-year to a year and a half to the mine life. And that is the same sort of thing that Andrea would provide. What we are doing essentially is buying time in order to continue to do the district exploration work.

Sounds like you have a couple -- two or three years left without any success at exploration on it?

It would be closer to the two than the three.

What is your capital spending budget for '04 and broken down by assets (ph). Maybe it's in here -- I didn't see it.

No, it is not, but Lew can provide you with that.

We should be near probably around $40 million total budget for 2004, obviously spending capital. Lucky Friday, Greens Creek, sort of sustaining capital up there. San Sebastian, there's another (indiscernible) there and a small piece of equipment for a couple of million. So those three properties, probably 10, $11 million. Down at La Camorra with the shaft project, total capital at La Camorra around 15 million. Then the other projects in Venezuela, assuming Mina Isidora development decision is approved by the Board, we could see spending another 18 million or so down there.

Nothing at Hollister?

Hollister --

It's not a capital project, but the amount that we would expect to spend on Hollister is 8 or $9 million.

That will be expensed?

Yes.

That's not 12 to 15 million of exploration expense?

No, no, that's why we -- that's the specific reason why we've now got two categories, exploration and predevelopment expense. So we will put that in predevelopment expense because, of course, the ramp that we are developing there we will use for production. Of course, it won't have any cost on the balance sheet, but we will have expensed everything.

Let me get this straight. So 12 to 15 million will be exploration excluding Hollister?

That is right.

That will go through the income statement, and then another 8 or 9 million of predevelopment to go through the income statement?

That is correct.

One last question, with the higher (indiscernible) prices, what does your tax situation look like? We've seen everybody's taxes starting to rise.

Well, ours is as well. In the U.S., we have a big off-balance sheet asset of -- we have an NOL of $300 million, so we're actually scratching our heads trying to figure out some way to start to utilize that. We have NOLs in both Mexico and Venezuela that we are using. At this point, we conceivably could be taxable in Mexico in 2005.

2005. As far as cash, taxes, 2005 for Mexico. In Venezuela, a little bit different animal there with the recent announcement that they've lifted the -- or adjusted the exchange rate from 1600 to 1920, that actually provides us with some tax deductions. But at this gold price, we could potentially be taxable in the end of 2004, early 2005. It really depends on a lot of factors down there, and it is hard to predict.

I notice you booked 1.2 million of taxes in '03.

That is right.

It won't be taxable in '04?

Yes, I mean there is some tax associated with certain things.

We have intercompany loans and you have withholding taxes and those sorts of things, Mike.

Thanks for that. I'll let someone else answer a question. Phil, if you use those U.S. NOLs, you can find new (indiscernible); they're really profitable.

Terence Ortslan of TSO & Associates.

Phil, the custom milling in Venezuela 2000 tons, that's obviously a very small number. Is there any potential to expand that?

Yes, we think there is. Tom, why don't you respond to that? If you can unmute Tom for a moment, operator.

Yes, that 2000 tons is strictly what we have stockpiled right now waiting to be processed. We actually think we are going to be able to custom mill somewhere between 3 and 4000 tons a month.

This should be profitable to the bottom-line, obviously.

It will be.

Phil, coming back to the operations, your treatment and freight charges, I guess one will offset the other one. What are your (indiscernible) for 2004 in terms of treatment and freight as you combine that for different operations?

Treatment and freight charges are going to, I think, largely are going to go up. And it is primarily at Greens Creek because of just the cost of freight worldwide. The Chinese are consuming so much freight capacity. So we expect it to go up. I do not off hand can tell you what we are budgeting.

The only other comment I would make, most smelter contracts like we have at Lucky Friday and Greens Creek, there are priced escalator provisions in those contracts, so as some of the metal prices increase, there is additional treatment charges associated with that.

But having said that, our $1.75 that we have given you for our silver cash cost estimate, that is inclusive of our expectations of freight and treatment charge increases.

You mean your base charges probably will come down, but price escalation probably takes some of it away. And the freight, I guess you are the most exposed at Greens Creek (indiscernible), right?

Absolutely.

Finally your DD&A for 2004 should be around $20 million or so?

Actually, it will probably go up slightly with -- we alluded to the reserve at La Camorra. So with the reduction in ounces there, that rate loss should go up. So the total will be probably be a little closer to 25 million or so.

And let me (indiscernible) again, from Mike's question. Forty million would be the capital cost; 12 to 50 million would be exploration, on top of the 8 to 9 million for preproduction numbers -- is that right?

That's right.

Thanks.

(OPERATOR INSTRUCTIONS) Mike from Merrill Lynch.

I guess I just reread an old (indiscernible) -- actually, December. And I noticed your forecast -- or management's intent was to get up to a half million ounces by '08.

Yes.

I guess you are really spending aggressively on exploration, which is great, but you have all of that cash, though, and you have, from my point of view, a nice valuation. I don't know -- you probably disagree.

Yes.

Any thoughts on the acquisition market for other companies, properties etc.?

We are certainly looking at things and would very much like to expand our expertise to other assets, and we think that there is not -- the competition level with respect to those assets are not as great. But having said that, you have to come to an agreement with the seller; and so far we have not been able to do that. But we are actively looking. For the first time, I think, in a long time we have got a VP of Corporate Development that is focused simply on this, and has been for the last four or five months now. So stay tuned.

We are not going to do something that is going to dramatically change the nature of what we're trying to do, which is generate returns on invested capital. We can't guarantee that we can acquire something and have returns on the acquisition, but in terms of cost structure the assets will have and the returns that we would expect them to have on new capital invested, we would try to stay consistent with what we are doing now.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) I'm showing no questions at this time.

Thank you very much, everyone. This has been the Hecla Mining Company year-end 2003 conference call. We will let you go now and have a very good day.

Ladies and gentlemen, thank you for joining us on the conference call. You may now disconnect.