Hecla Mining Co (HL) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 Hecla Mining earnings conference call. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. [Operator Instructions]. I would now like to turn turn the presentation over to your host for today's call, Ms. Vicki Veltkamp, Vice President of Investor and Public Relations. Please proceed, ma'am.

Hello everyone and thank you for joining us today. This is Hecla Mining Company's first quarter 2005 conference call. The call is being Webcast live today and you can access a replay of it if you wish at our website, which is www.Hecla-mining.com. Also at the website you can find our financial results in today's quarterly news release, and at the end of the news release, the quantitative reconciliations to GAAP of cash costs per ounce; which is required by the SEC.

Today's presentation will be made by Phil Baker, Hecla's President and Chief Executive Officer; and he'll have help from Lew Walde, our Chief Financial Officer; Tom Fudge, Hecla's President of Venezuelan Operations; Ron Clayton, our Vice President of North American Operations; and Ian Atkinson, our Vice President of Exploration and Strategy.

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. So now, I'd like to turn this over to Hecla Mining Company's President and Chief Executive Officer, Phil Baker.

Thanks, Vicki. Good afternoon, ladies and gentlemen, let me add my welcome to Vicki's. The first half of this year is the final stages of a period of transition for Hecla Mining Company that began in 2003. This transition is going to allow us to maintain our position as one of the lowest cost gold miners and continue our position as the lowest cost silver miner in the industry. I know we've had a trend of higher costs and lower production, particularly for gold, over the last few quarters. In this quarter, we saw gold cash costs rise to the level we haven't seen in a decade. But we recognized that this would occur way back in 2003, so back then, in a very low price environment, silver averaged about 485 and gold 363. We made a decision to invest in order to ensure our low cost operations.

So are we surprised by this quarter's results? Not really. We had hoped we could integrate the shaft waste a little better and we hoped the strike at San Sebastian would be resolved by now; but we recognized those risks when we estimated our production and cost targets. So, notwithstanding the lower volumes this quarter, we are still on track to hit our full-year production targets of about 6 to 7 million ounces of silver, and 190,000 ounces of gold. In fact, we're starting to think we can still hit those production levels, particularly silver, even without San Sebastian production.

Silver costs should be around 250, maybe a little lower. Gold costs are a little more uncertain. Our target is to be in the $180 per ounce range and we think with we can get there if everything goes right, but if not, then we'll be in the $200 per ounce range.

Let me focus for a moment on La Camorra. Our ramp is now 650 meters below the surface. It takes about two hours from a truck to haul from the bottom of the ramp to the surface and back. Air quality has needed to be improved so we had to put in the shaft. This, of course, dramatically increased the waste, so development and stoke prepping fell behind. With the slashing of the shaft completed, and its startup by the end of the quarter, the worst is behind us. We now expect to slowly see grades improve as we increase our development. And over the second half of the year, we will have production benefits from the shaft.

In addition, Mina Isidora's incline shaft could produce a couple of thousand tons a month of one ounce ore over the second half of the year. So we feel confident that we are at the low point at La Camorra. In fact as we look to 2006, our flexibility will improve dramatically, having ore from both Mina Isidora and La Camorra.

Now the Lucky Friday 5900 development is also a decision we made in 2003 to-- to take forward, and it's on track for production in the second half of the year. This will largely fill in for the pause in production from San Sebastian and it will also lower the Lucky Friday costs.

So we're about a quarter of the way into our 40 to $47 million capital program. The second quarter will spend disproportionately more to finish the shaft in the Lucky Friday 5900 development. The rest of the year we will complete Mina Isidora, make some improvements on the Lucky Friday mill, and we're cashed up and have enough operating cash flow to complete these projects. With these investments, Hecla is in a position to maintain its low cost production for the remainder of the decade.

But that's not the whole story, because we feel that our exploration and predevelopment is going to allow us to build off this base. As is our pattern, this quarter, we spent less on exploration than last quarter. However, it was more than a quarter -- than the quarter a year ago. And what we did is we used -- as we've done in the past, we've used this first quarter to digest the information we'd accumulated. So we're on track to spend $23 million on exploration and predevelopment. I suspect we'll end up spending more if our cash flow and balance sheet will allow it.

Now let me talk a little bit about Hollister. It's an exploration project in Nevada that we're earning into. We've been unable to agree with Great Basin Gold on the meeting of certain terms like estimate. When we went into the project, there were estimates of schedules and budgets and, obviously, it's taken longer and it's cost more. We believe the agreement provides a mechanism for changing these estimates, GBG doesn't. So we think a Nevada court can resolve this issue by year end. With that, let me turn it to Lew to review our financial statements.

Thank you, Phil. For the first quarter 2005, financial statements for Hecla are not as strong as previous quarters; however, we continue to make solid progress advancing our key development activities, which are designed to increase production in the future, and to deliver positive results for our shareholders. So, during the first quarter, Hecla recorded a net loss of 3.3 million, compared to income of 6.2 million in the comparable period last year. The net loss compared to income this year is driven by three primary factors. And I'll review each of those.

First, the strike at Velardena, the mill in Mexico, continued throughout the quarter; resulted in no sales or throughput from the San Sebastian mine. Although we continued to mine there and stockpile ore the strike did not allow us to process any of that ore. When you look back to 2004 first quarter, the mine produced 850,000 ounces of silver and more than 11,000 ounces of gold at a cash cost of a negative $.44 per ounce. So the difference in contribution between this quarter compared to last year is more than $6 million.

The second factor driving the performance for the quarter, as Phil had mentioned, was a lower grade at La Camorra. We saw gold grade decrease from 0.8 ounces per ton to, you know, 0.45 ounce per ton this year. This resulted in a decrease in production of about 16,000 ounces, or roughly 42%. This impacted our revenues by a total of about $7 million for the quarter. The grade also impacted our cash costs, which increased from $142 per ounce to $294 per ounce. Although the grade was lower, Phil has already mentioned, that we do expect the grade to improve for the balance of the year. We also expect to see benefits on the cost side, once the shaft comes online, at the end of this quarter.

Finally, the third item that really impacted us during the quarter, again, part of our growth strategy, was our level of exploration and predevelopment expense. Exploration increased about $400,000 for the quarter-on-quarter, while our predevelopment expense increased 1.8 million as we continued to advance the underground ramp at the Hollister project in Nevada.

I've mentioned to you the strike in Mexico; however, when we look at the other two silver operations, the Lucky Friday mine and the Greens Creek mine, their performance was excellent. We were able to produce 1.4 million ounces of silver at a cash cost of $2.60 per ounce from these two mines. This represents a 15% increase in silver production and a 5% decrease in cash costs. And although we saw increased input costs such as diesel fuel, steel and cement, increased silver production and favorable by-product credits allowed us to reduce our silver cash costs. To reiterate what Phil has mentioned, when we look ahead, although we did have lower production in the first quarter, we still believe we can achieve the year-end projections of 190,000 ounces of gold and 67 million ounces of silver.

So let's move on to the cash flow statement. Cash flow used by operations during the quarter totaled 7.1 million, which compares to cash flow generated from operations last year of 4.9 million. Now, this variance is primarily driven by the change in the operating income that we've discussed, offset partially by some benefits coming from reduced working capital requirements. We talked earlier about our development projects which is allowing us to grow our production in the future. These development projects along with sustaining capital expenditures totaled 9.8 million in the first quarter of 2005. We expect that for the year, we will spend between 40 to $47 million on capital.

Again at the end of of the quarter, the Company remains debt free and our cash and short-term investment position totals more than $63 million, which is more than adequate for us to carry out our plans. Now, I'd like to turn it over to Ron Clayton who will tell you more about our operations and activities in the United States and Mexico.

Thanks, Lew. I'll start with Mexico. The labor strike at the Velardena mill in Durango, Mexico continues to be unresolved. The strike started on October 15th. The mine continued to operate and ore was stockpiled for later processing until April 4. At that time, the union moved to illegally block access to the mines and our administrative offices. The Francine vein has been exhausted and the Don Sergio vein has about two to three months of ore remaining to be mined. The key focus for the national labor union is organization of the mine workers at San Sebastian. The national union is using the mill, which is unionized, and the mines, which are not, as leverage to achieve their goals. None of our employees have participated in the action at these mines. The state of Durango has filed criminal charges regarding the union action and is awaiting a judicial response.

We continue to work with the Governor of Durango, the National Ministry of Labor, our employees, and other local government entities; as well as the union to come to a resolution. We expect to process the stockpiles once the dispute is resolved and remain optimistic that the steps that are being taken will allow us to resume production. However, we are not willing to sacrifice long-term security for short-term benefit. While this process has required more time than we would like, we expect to reach a resolution that will allow us to successfully and profitably exploit our current and future resources in Mexico.

On the exploration front, drilling in the Hugh Zone has continued to provide positive results. The Hugh Zone is located beneath the Francine vein which has been the major source of production at San Sebastian. Positive drill results allowed us to include approximately 479,000 tons at a grade of 0.02 ounces per ton gold and 8.6 ounces per ton silver, 2.7% copper, 5.4% lead and 6.7% zinc in the other resource category at year end. Four additional intercepts drilled in the first quarter appear to be ore grade and are likely to expand the resource. The ore body remains open to expansion, down dip, and a long strike in both directions. Additional drilling is planned and we expect to re-evaluate the project feasibility at year end.

We continue to advance our other high priority targets and develop new targets at San Sebastian. We plan to begin drilling several additional targets in the next two quarters. I'm convinced that we will be able to develop additional production from our concessions at San Sebastian.

At the Greens Creek silver mine, our joint venture with Kennecott in Alaska, crews once again turned in another great performance. Cash costs were a very low $1.05 per silver ounce. Silver grades were considerably higher than previous quarters, at over 21ounces a ton, as a result of increased production from the lower southwest and west bench ore zones. On the exploration front, drilling to the west of the Gallagher fault continues to intercept mineralization; 27 of 51 holes have intercepted mineralization in the same rocks and contact that host all of our ore bodies at Greens Creek. This discovery raises the potential for additional discoveries at higher elevations to the west of the Gallagher fault. Greens Creek is currently driving drift across the Gallagher to establish platforms for additional drilling; which is expected to begin in the third quarter. We're quite excited about the future of this area.

In Nevada, we are earning into a 50/50 joint venture with Great Basin Gold at the Hollister gold exploration project. The land access issues were resolved last September and we were able to begin construction construction of the surface support facilities in October. This allowed us to collar the portal in December and begin excavation. The winter weather has hampered the schedule somewhat, but the surface construction is 95% complete. We've advanced the decline approximately 1,000 feet. Ground conditions have been more difficult than expected and have slowed progress underground. We expect to begin underground drilling in the fourth quarter as planned, however. The feasibility study is expected to be complete in 2006 and will include 5,600 feet of development to construct drill platforms, 55,000 feet of underground diamond drilling, and 800 feet of exploration drifting on veins.

The lawsuit we filed in Elko County in April is expected to resolve the contractual agreements between Hecla and Great Basin Gold regarding our earning agreement. We do not expect this action to hamper progress on this important exploration project.

At the Lucky Friday silver mine in Idaho we produced more ounces at a slightly lower cost than the same period a year ago, chiefly due to production from other veins parallel to the main 30 vein. We began production from these additional narrow veins last year and, while they are often characterized by short ore chutes, crews have developed a mining method which has made production from this area profitable. Development of the new mining area on the 5,900 level is on schedule and budget. We expect to begin development on vein in May which will start a steady increase in mill feed through the remainder of the year. Production from the first stope will begin in the third quarter with development complete in early 2006. We expect to produce 3 million ounces this year and 4 million annually in 2006 and beyond.

Engineering and procurement activities on the mill improvement project have begun. Construction is expected to begin in the third quarter and be complete by year end. The primary objectives of this project are to improve the grade of the concentrates and reduce freight costs. Minor improvements in recovery and throughput are expected as well.

Exploration activities in the first quarter were targeting extensions along the strike of the main vein. Mineralization was encountered in both holes suggesting the potential for additional ore chutes, but the vein width was below minimum mining width. Exploration along strike and down dip will continue throughout the year. Ian will add further comments regarding North American exploration activities that I'm sure will help you understand why I'm so optimistic about adding life to each of the operations and projects. But first I'd like to give you Tom Fudge who will update you on our activities in Venezuela.

Okay, Ron, thanks. Activities in Venezuela during the first quarter were dominated by a development to the La Camorra shaft and the new Isidora mine; as well as exploration in our two mining districts. As Phil noted earlier, handling of shaft development at La Camorra did impact our stope development sequence; part of the reason for the lower grade during the first quarter. And grade is the reason for the higher cost per ounce. If you look at costs on a per ton basis, you'll see it's in line with our average for the last three years; which is pretty amazing considering that the mine is 700 feet deeper than it was three years ago, and currently requires a 10 kilometer round trip for trucks to bring ore to the surface.

Commissioning is scheduled to start in a couple of weeks and once the shaft is fully operational, it'll help reduce operating costs by as much as $20 per ounce. As an example, hauling ore through the shaft will save us $0.5 million a year in truck tire costs alone. Ore grade will increase during the balance of the year and will average 0.6 ounces per ton by the end of the year, same as the reserve grade. Had we been able to mine reserve grade during the first quarter, La Camorra cash costs per ounce would have been well below $200.

As we've previously discussed, the La Camorra mine increases in depth more than 200 feet per year. Currently the shaft is 2,000 feet deep. But the installed hoist plant has the capacity to go as deep as 3,500 feet. And the shaft system includes unique, one-of-a-kind features to greatly simplify deepening of the shaft. We are positioning ourselves to go deeper, and extend laterally around this ore body, that will reach its one millionth ounce of production in the coming months; not only with capital investments but also with exploration, which is currently focused on existing ore grade intercepts at a depth of more than 2,500 feet, and on the Isbelia vein which is just over 2,000 feet north of the La Camorra shaft. When Phil said we're at our low point, he was talking financially not about the final depth of the mine.

Over in the El Callao district, on our Block B lease, significant progress was made in development of Mina Isidora. The Valle Norte ramp advanced over 1,200 feet during the quarter, bringing the project total to more than 2,600 feet. We've reached the S vein zone and have about 2,500 feet of pre-production development remaining, putting us on schedule for commercial production in the first quarter of 2006.

Our other access to the Isidora ore body, the historic Pozo de Agua incline shaft, started development of high grade ore on the seven level during the first quarter. Development ore hoisted at Pozo de Agua has increased each month this year and we're forecasting more than 20,000 ounces of production from this access in 2005.

Mina Isidora is a very high grade ore body averaging right around one ounce per ton. It also requires very close spaced sampling to accurately predict the nature of the ore. During the first quarter, we continued with the definition drilling program to upgrade areas of inferred resource to ore grade classification. One of those drill holes returned an interval containing more than 35 ounces per ton over a width of 2.25 feet. This from an area closer to our current development, yet outside of our existing reserve envelope. Needless to say, we're concentrating more drilling in this area and are encouraged by the opportunity to add reserves and possibly production in 2005.

I really can't say enough about the prolific opportunities in Block B, La Camorra and Venezuela in general. However, now I'll turn it over to Ian Atkinson, our Vice President of Exploration and Strategy, who'll give it a try. Ian?

Thanks, Tom. As Phil and Lew have already indicated, we're continuing to focus on growing the Company through exploration. We had six drills active in the first quarter and expect this to double in the second quarter. Our news release and Ron and Tom have already provided you with some specifics on exploration results. What I'll do is expand on their comments and talk about what else we will be looking at with our exploration program for the balance of the year.

We currently plan on spending in excess of $14 million in exploration this year, which does not include the predevelopment expenditures at Hollister and Noche Buena. While not all of the funding has been allocated at this time, I expect we'll be expending 7 to $8 million in Venezuela, 5 to $6 million in Mexico, 0.5 million to $1 million at the Lucky Friday, and about $1 million for our portion of the work at Greens Creek. Tom has already discussed our drilling in Venezuela, which has been focused on expanding the reserves at Mina Isidora and testing the Chile East zone on our Block B probably in El Callao. We've also been testing the resource limits at depth of La Camorra and drilling the Isbelia structure to the north of the mine.

In addition to this work we've also been developing other targets on our three highly-prospective but under-explored land packages in Venezuela; and they are, of course, the Block B property in El Callao, our Eldorado Block around the La Camorra mine, and our recently acquired Guariche property.

At Block B, we'll start drilling the Twin Conductora structure again later this month. We discovered the structure by drilling in the second quarter of 2004. The Twin Conductora structure is a newly identified shear zone within the Block B property, which is open down dip and down plunge to the east. The structure is host to a large mineralized zone with a minimum strike length of 1,700 meters and a minimum vertical extent of 400 meters with gold values ranging from three grams to over 42 grams per ton, and widths from a meter to over 20 meters. The significance of the discovery of the Twin Conductora structure is that it outlines a previously unidentified shear structure and a new style of mineralization on the Block B concession. This creates a number of opportunities for us and it opens up other under-explored areas on the property, for this style of mineralization. And in addition, the association of the gold mineralization with sulfides offers the opportunity of identifying other similar targets using geophysical methods.

We've also been carrying out basic mapping, soil geo cam, and ground geophysics over the Block B property and this work is outlining additional priority targets. A good example of this is the Chile Sosa Mendez trend, which is an untested structural corridor that extends for over two kilometers to the east of the Chile mine. This is just one of a number of targets that we are developing in what is a highly prospective package of ground that has not been subjected to modern day exploration. We are applying a similar systematic approach to our work on the Eldorado Block that surrounds our La Camorra mine, where we are developing a number of new targets that will be drill tested later this year.

We have recently acquired property in the Guariche gold district, which is another green stone belt that lies approximately 100 kilometers to the west of La Camorra. The district has all the characteristics associated with the high grade vein mineralization in the El Callao district, yet the area's seen very little exploration in the past and we think it's got tremendous potential.

Move on now to Mexico, Ron's already discussed the drilling on the Hugh Zone, the new silver resource that we discovered deeper on the Francine vein. Over the last one to two years, we've also been carrying out geological work and systematic soil geo cam and geo physics on our large land holdings around the San Sebastian mine. This is outlining a number of other targets in this relatively new and under-explored gold silver district in Mexico. We will start drilling some of these targets later this month and are very optimistic about the results. At the start of the year, we also added to our land position around our San Sebastian operations with the acquisition of the Lo Rocha concessions. Lo Rocha is an historic mining district that lies to the northeast of San Sebastian, which was surrounded by our concessions in the area. This acquisition consolidates our land package in the area and it has excellent potential for both silver and gold mineralization. We're currently carrying out work that will define targets for trenching and drilling later this year.

In the U.S. Ron has already talked about the progress that we are making on the decline at Hollister, where we expect to start drilling from underground in the fourth quarter of this year. And so we'll not have any results to talk about until then.

As Ron has also indicated, we started our exploration drilling at the Lucky Friday mine to test the easterly projection of the deposit. The two holes we've completed to date have both intersected mineralization 800 and 1,350 feet to the east of the deposit. Although there are no minable veins, the results do show that the mineralized system persists for some distance to the east in an area where we have-- we had very few, if any, drill holes. We'll be continuing to drill-- to drill this target and other targets like this throughout the year.

Even though the Lucky Friday mine has been producing for a number of years, we still have a number of targets to test on the property. We've developed a variety of targets and concepts that range from surface grass roots targets to follow-up previous significant drill intercepts, and also testing some geologic concepts in the immediate mine area. We plan to test a number of these opportunities over the next few months.

At Greens Creek, we continue the underground drilling to further test the mineralized zone that we discovered to the west of the Gallagher fault. Whereas Ron's already indicated, we've had some exciting results. The work we've done to date indicates that we've at least two mineralized zones in this area that dip shallowly to the southwest and the zones are still open to the west and south. The real thing is the discovery of the mineralized mine-- of the mineralized mine stratigraphy, at relatively shallow depths, on the west side of the Gallagher fault opens up a large area of untested prospective ground for future exploration. And any success in here can probably be easily accessed from the current mine infrastructure. As you can tell, we'll be continuing with an aggressive exploration program throughout the year at all of our properties. We expect to spend approximately $23 million in exploration and pre-development expenses. And this number may well end up being higher with the targets that we're identifying. On that note, I'll pass you back to Phil for some closing comments.

Thanks, Ian. We're continuing to move our projects and the Company forward. We've had challenges like the strike and the impact of the shaft on operations at La Camorra, but it's-- but it's not affected the fundamental direction we're going in. And I think this is one of the advantages that Hecla has at being a multi-mine company, we can take a number of projects forward and yet still have the Company move forward. With that, Vicki, I think we're ready for Q&A.

Thank you. Operator, would you go ahead and give the instructions for the question-and-answer session now please?

[Operator Instructions]. Geoff Stanley, BMO Nesbitt Burns.

A couple of questions. Firstly, just wondering if you can tell us whether the-- the mineralization, or the material that's been mined at San Sebastian has actually been capitalized or whether you've been expensing that as-- as you've mined it? Is that inventory on the balance sheet or has it gone through the P&L already?

It is-- let me just answer it real quick. It is inventoried. So you-- you'll see it on our balance sheet in the annual report.

Very good. G&A appears to have kicked up a little bit, certainly relative to-- to revenues. Wondering if you can give us a little bit of guidance on the overall expectations for-- for G&A expense this year? Was there anything anomalous in the first quarter? Or, you know, is that kind of what we can expect going forward?

Lew will -- I'll let Lew answer it specifically, but one of the things, Geoff, that we've done is added some additional people to the organization. I guess there's probably four or five people that we've added over the course of the last year and, as a result of that, you've seen G&A costs go up. Lew?

Yes, Geoff, we also incurred, you know, costs related to Sarbanes-Oxley compliance during the first quarter that were probably higher than normal. I think when we look for the full year, we're, you know, probably comparable to last year, maybe slightly higher. But --

Yes, the full year is around $9.5 million. One of the things that we've also done with our incentive programs, Geoff, is enter into long-term incentive plans that attempt to put some long-term goals out there, and so we accrue for that, you know, obviously on a quarterly basis.

Okay. Just also wondering with respect to La Camorra, the -- having the shaft in service towards the end of next quarter, what the actual impact should be in terms of total cash costs and grades. I'm wondering if you can give us anything a little more numerical than the guidance you've given so far.

Yes, I'll let Tom answer that. But when we say-- it'll be this quarter, this second quarter, that we should see it in service.

And obviously, it'll-- it'll have a minimal impact in this quarter, but --. Next quarter should be better, right?

In fact, no impact really this quarter other than the fact that we're done slashing -- we're done moving waste. Tom?

Yes, Geoff, what's going to happen is-- the biggest impact the shaft had on grade was simply in having to move the-- the waste around to handle it and keep that development on schedule. It did impact where we could prep some of our stopes, and what our mining sequence was, so in the first quarter, we ran a grade of about-- what was it-- 0.455 ounces per ton. By the end of the year we expect to be up to 0.6 ounces per ton. So obviously that means in the second, third and fourth quarters we're going to be running a little above 0.6, we're going to be 0.62, 0.65, depending on where we are in the mine at the time.

And we also expect our -- as Phil indicated, we-- we're still targeting around $180 per ounce. Some of that is going to be dependent on a few unknowns with the currency exchange mechanisms in Venezuela. So we still think we're going to be down around $200 an ounce, in that neighborhood, or better, by the end of the year.

Okay. That implies some pretty significant improvement over that period. Just exactly what-- what are the implications of the regulations regarding foreign currency requirements there and just give us an update on that, that'd be useful?

Well, I mean the -- what the requirements say is that when you export product, that you have to export it in the-- U.S. dollars, or -- in U.S. dollars. And then you have to translate those U.S. dollars into-- into B's, and it's roughly about a 20% impact on our-- on our costs, if we end up having to do it that way. But there's another -- a number of mechanisms that are being considered as to how you would export your product, and we just haven't -- we just don't know where we're going to come out on those, as to whether we'll have that additional cost or not. Tom, do you want to anything add anything, or Lew?

I think basically, that's it. We have not yet shipped any -- or, you know, made any exports under the new regulations and so we haven't closed any of those. And we're taking a bit of a wait and see approach to find out how others handle this, and there's a bit of conflict between the regulations put out by CADIVI and the currency laws under the central bank. So it's one of those things where there's multiple opinions on how it could be --

Right, so we don't want to be the first guys to try to figure it out. So we're following.

Anthony Sorrentino of Sorrentino Metals.

In-- in Mexico, are you considering any options or alternatives should the labor situation not be resolved by the time you identify and develop a new deposit?

Well, when you say consider other options, I mean we think that we will ultimately get this resolved with the union. I mean because it is very -- at the very soonest that we would develop the new deposit is probably 18 months, two years away. So-- so we think this is going to get resolved much sooner than that. But one of the things, Anthony, we're not going to do is enter into an arrangement with the union that's going to jeopardize the ability to-- to develop the new deposit. You want to add anything?

And that may include some other alternatives to what we're currently doing.

There's a limit as to what I want to say publicly because, you know, we are in negotiations with the union.

Right. And at Mina Isidora, how much more drilling do you have to do of the S vein to upgrade inferred resources to indicated resources?

Well, in reality, this is Tom, Anthony, that drilling will never end. We've got, you know, -- we've got an opportunity more than double the current reserve in the S vein alone, just within the known envelope, by-- by additional drilling. And of course, every drill hole teaches us something new. And as we've gotten on the vein, it teaches us more as well. So we're-- we're very optimistic that, while we have 350,000 ounces in proven or probable categories at Mina Isidora, we're going to mine substantially more than that.

Mike Jalonen, Merrill Lynch.

I just thought I -- going to the Hollister situation there, both you guys at Great Basin are being quite, I guess, terse on what's going on. Am I to read that if you were to lose, that you -- the earning agreement would cost you more because you spent some money that you think should be part of it and they think shouldn't be part of it, during the permitting part or is that how I should read it?

No, I think, you know, it really becomes a question as to-- as to who bears the risk of the fact the cost has increased, I think is probably the best way to characterize it. And you know, if -- the overall cost of the project has not increased that much. I mean it's basically, what, about 3, $4 million more, Ron?

That's correct.

On a 21, $22 million starting point. That's going through Phase II. That's the full earn-in. So it's -- the overall cost has not increased that much, but the way this -- these earning arrangement works, is you have two phases of it. At the end of the first phase, we have the ability to pay the difference between 22 million and what we've spent on phase 1. The argument that GBG is making is that they're having to bear the risk of that additional 3 to $4 million; and frankly, that was how the deal was, in our opinion, that's how the deal was struck to begin with. So-- so we're going to the courts and, you know, we're having the courts try to work this out and try to do it well in advance of the actual earn-in. The termination date, when we have to earn in, which is 2006 sort of time frame.

Just play devil's advocate, if one side lost, from this court, would the aggrieved party then go to the next level, appeal it, and just continue it along? Or would it just be stopped there? Are both parties going to be happy at that point?

You know, Mike, I don't know. You know, we'll have to determine that when we get there, I guess. I would-- I would hope that -- this is not that big of an overall project, I would hope that we would be able to, you know, move forward.

Barry Cooper, CIBC World Markets.

A question here, I think for Tom or if Ian wants to step in, it has to do with the S vein at Mina Isidora. Is it possible here that, you know, this is one of these structures that you will just never get stuff into reserves because of the nature of the ore body, and it's probably going to boil down to one of those, well, we've drilled it for the structure but we've really got to mine it for the grade? Because you're never ever going to really know what you have there, unless you just spent a whack of money drilling it on really closed face drilling?

Well, Barry, that's a very insightful comment. And it comes down to the old argument between mining engineers and geologists over whether you should drill it or drift on it. And we're getting ready to have that argument again. And I don't know that we're going to resolve it conclusively for worldwide mining this time, either. That's not a-- that's not a bad characterization that you gave it.

But having said that, we do have a reserve, Barry, so it's a question of how much bigger will it get relative to the reserve that's outlined. Ian?

I mean, that's right, part of the 350,000 ounces that we published is in the S vein. It's just that the drill spacing in some of it wasn't good enough for us to move it into-- into the reserve category, so we're filling in, we've done 17, I think, out of 25 planned holes from surface, and now the ramp's down there as well. As Tom said, we will actually be able--we're-- the ramp's down and 70 meters from the vein so we'll be able to drift on it; as well as drill some of it from underground which obviously is going to be faster and cheaper.

What kind of drill spacing do you need on this to put it into say a reserve category?

20 meters. 20 by 20.

And I guess then the obvious question you might ask is, how much are you prepared to spend on drilling on a per ounce basis in order to do that, I guess would be the question?

Well, when you get 1,200 gram drill intercepts, we'd spend a reasonable amount of get some more of those.

But presumably for every 1,200, there's also a bust.

Yes, there is, yes.

What would be the hit ratio of your holes in here? Is it 30%, 60%? And you're familiar, obviously the background in Timmons and what not, where you talk about when people got a hit ratio of around 40%, they kind of felt that that was good enough, they were comfortable with that.

Yes, and this is-- it is a typical green stone or -- deposit, no different in the dome and those statistics that you've seen, Barry, where six out of 10 holes hit ore and four are always busts; and out of the six that hit mineralization, three to four of those may be ore grade.

Right, right. So that's the kind of ratios that you're seeing there then?

Right, that's right.

[Operator Instructions]. Michael Vint, CIBC World Markets.

Just a question on your reserves. In your Q4, you stated that you had 465,000 ounces of silver at San Sebastian, and now, you're stating you're going to produce 600,000 ounces. Was there a switch in cut-off or some low grade stockpiles added there?

The only material in the reserves at San Sebastian at year-end and we are still mining from that resource that is increasing the stockpile that then becomes a reserve, because you've actually got it out of the ground.

Okay. And the other one was with Lucky Friday, there was, in your annual, you mentioned that this 5900 level that would access 28 million ounces of silver, and that would -- are you converting all your resources over right now? Or is this something separate? Because your resources now are 26 million, I think.

There's 84 million in resource.

At Lucky Friday?

Yes.

So in your annual, you've got 11 million reserve, 9 million unmeasured and indicated, and 27 inferred is what-- what's written in your annual.

Right. And then there's other mineralized material that we can't report.

Oh, right, okay. So that's-- that's what the 28 million is referring to.

Right.

Okay. And one more question on La Camorra. Is the shaft going to increase production at La Camorra?

No. No, we-- all we're looking to do is to maintain our cost profile with the shaft. You-- you just have to envision this 10 kilometer haul out of this thing, and it's just amazing we've been able to keep the costs where we have.

What's going to be your ore production for the year then there? Still around 200,000 tons?

Yes, in short tense, it'll be around 200,000 on the La Camorra mine itself.

So to get to that 140,000 ounces, how much would be coming from Isidora? I'm just trying to figure out that 0.65. It just doesn't seem to add up.

Sure. About 20 to 25,000 ounces would come from Isidora.

Right. About 110.

All right. Well, that's a lot more than what I -- you had mentioned 2,000 a month at a gram.

At an ounce.

Oh at an ounce, okay. But that's still only --

Yes. We have some more capacity. I mean it just-- we've got material that's going to come from the incline shaft that we have at Mina Isidora. We -- and that's all that I'm talking about at this point. But Tom is looking at the potential of getting some more through the ramp as well. Even this year. But -- and that could be on top of roughly 20,000 ounces.

Mike Jalonen, Merrill Lynch.

Just, I guess, more of a bigger picture question. It's -- I guess the M&A market for gold has gone stone cold in the last few months, even the rumors are getting tired, I was wondering if you've got your eye out or are you just focused more internally?

No, I mean, we--what we're looking for are things that we can add value to. You know, as I mentioned, we have upped the number of people that we have here in the office. We have -- I wouldn't say we have excess engineering capacity; in fact I've got guys that are shaking their heads. I mean relative to a lot of our competitors, we do have, you know, more experienced people that we think we can apply to new opportunities, and so we're looking for those things. But it's got to be something where our skill set we think can be additive to what other people are doing.

I just noticed your cash position went down by like 18 million in the quarter from year end and, I guess, a lot of other mid-tiers have a lot more money than you guys; so I just wonder if that would be a barrier to doing something in your view.

Well, you know, we're -- we will complete our capital program this year, and then going forward, we really don't have, at this point, any major capital programs. So we'll be generating quite a bit of cash flow. But yes, I mean, are there things that we would not be able to do unless we had more capital on the balance sheet? Sure.

And at this time, have you no further questions. Ladies and gentlemen, this concludes your question-and-answer session for today. I would now like to turn the conference back over to Ms. Vicki Veltkamp for closing remarks. Please proceed.

Well, thanks for joining us, everybody. This was the Hecla Mining first quarter 2005 conference call. And that's the end of the call. Have a good day.

Ladies and gentlemen, this does conclude the conference for today. You may now disconnect. Have a great day.